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Chimera Investment Corp (NYSE:CIM)
Q4 2019 Earnings Call
Feb 12, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation Fourth Quarter and Full-Year 2019 Earnings Conference Call and Webcast.

[Operator Instructions]

It is now my pleasure to turn the floor over to Emily Mohr of Investor Relations. Please go ahead.

Emily Mohr -- Investor Relations

Thank you, Maria, and thank you everyone for participating in Chimera's fourth quarter and full-year earnings conference call.

Before we begin, I'd like to review the safe harbor statements. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimer in our earnings release, in addition to our quarterly and annual filings.

During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliation to the most comparable GAAP measures. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information.

I will now turn the conference over to our President and Chief Executive Officer, Matthew Lambiase.

Matthew J. Lambiase -- President and Chief Executive Officer

Good morning and welcome to the fourth quarter 2019 earnings call for Chimera Investment Corporation. Joining me on the call this morning are Mohit Marria, our Chief Investment Officer, Rob Colligan, our Chief Financial Officer, Choudhary Yarlagadda, our Chief Operating Officer, Vic Falvo, Chimera's Head of Capital Markets.

I'll make some brief comments, then Mohit[Phonetic] will discuss the changes in the portfolio, Rob will then review our financial results, and afterwards, we'll open up the call for questions.

Before we get started, I'd like to point out that $0.07 of our core earnings in the fourth quarter came from one-time gains on securities that were called away from our portfolio. The gain was a result of legacy non-agency bonds that we wanted to discount getting called away from a sub-par and from prepayment penalties that we received on Ginnie Mae commercial loans.

Non-agency mortgage-backed securities have clean-up calls, which can be exercised when the outstanding loan collateralization in the securitization falls below a certain threshold. As our portfolio of legacy non-agency bonds gets older, the underlying deal factors get lower and it becomes more likely that these clean-up calls will occur. Clean-up calls, however, can also create one-time losses, when interest-only bonds, or IOs, get redeemed sooner than originally expected. Given the low interest rate environment and the strong market for residential mortgage loans, I would expect to see one-time gains or losses in the quarters ahead and we will highlight them in our earnings announcements going forward.

In the fourth quarter, Chimera posted a total economic return of 1.7% and we had a 14.1% total economic return for the full year of 2019. I'm very pleased with these results as we successfully managed our portfolio through a very difficult market, taking advantage of improving conditions now and adding to our portfolio.

As I've discussed on previous earnings calls, repo rates for much of 2019 were elevated, while other interest rates fell. In the fourth quarter, we finally started seeing our repo funding cost decline and it begin to reflect the Federal Reserve rate cuts. The yield curve also steepened in the period, which helped us slow our prepayment expectations and reduced our amortization costs. Lower funding costs and slower amortization contributed to the increase in our net interest margin for the period. Looking ahead, we anticipate the Fed will be on hold and that our funding costs should remain relatively stable at these lower rates. As interest rates fell in 2019, prepayment rates on agency mortgage-backed securities increased. We were successful in redeploying these agency paydowns in some sales as new investments in residential credit. In the fourth quarter, we added $1 billion in seasoned reperforming loans to our portfolio, bringing our total loan purchases for the full year of 2019 to $2.3 billion.

We have a well-established history of issuing mortgage-securitization and the demand for the bonds from our securitization remained strong. In the fourth quarter, we completed five securitizations, totaling $1.8 billion. And for the full year, we completed 10 securitizations. Selling senior notes from our loan securitizations enabled us to lock in term financing and create high-yielding, long-term investments for our portfolio. The sound underlying fundamentals of the US economy such as low unemployment, attractive mortgage rates and the lack of housing supply, makes us believe that residential mortgage credit should continue to perform well.

As we look to the new year, we feel good about our portfolio. The investment team continues to source new loans for purchase, Chimera's existing loan securitizations continue to perform well and funding costs are lower and stable. Beginning in 2020, we will adopt new CECL or current expected credit loss accounting rule, which will reduce some of the yields on our legacy non-agency bonds. However, this is a relatively small part of our balance sheet and we do not feel that these accounting changes will hamper our ability to pay an attractive dividend.

Accordingly, last night, the Board of Directors announced the first quarter dividend of $0.50 per common share and that it expects to pay $2 in common dividends for the full year of 2020. This is the fourth consecutive year that Chimera has announced its intention to pay $2 in annual dividend, which I think, underscores the quality of the portfolio and the stability of the cash flows that we create in securitization. I continue to believe that our balance sheet is well-positioned to benefit from the strong U.S. economy and we are all optimistic of our prospects for the year ahead.

And with that, I'll turn it over to Mohit to talk some about the portfolio.

Mohit Marria -- Chief Investment Officer

Thank you, Matt. 2019 was a volatile year in the fixed income markets. 10-year Treasury notes began 2019, building 2.68%, then fell to a low 1.46% in early September, before rising again in the fourth quarter to end the year at 1.92%. Our short end of the yield curve was also quite volatile. Two-year Treasury notes began the year yielding 2.49% and fell to a low of 1.39%, before closing 2019 at 1.57%.

The two-10-year[Phonetic] U.S. Treasury yield curve was about 15 basis points steeper year-over-year and the Federal Reserve cut overnight funding rates three times for a total of 75 basis points. For much of the year, repo rates were much stickier, have taken a longer time to fall. In recognition of the September, the Federal Reserve began adding liquidity to the repo markets. At year-end, Chimera's average cost of repo borrowing from agency securities was 2.1%, down from 2.28% at the end of the third quarter, and down 45 basis points from 2.55% for the same period in 2018. As there are staggered maturities in the repo financing, rate movements are not immediate, take time to improve.

Based upon current repo rates, so far in 2020, we are constructive on further cost improvements for our agency financing. This year's large drop in interest rate carried over to the mortgage market and U.S. homeowners rushed to refinance their mortgages, housing elevated prepayment rates on agency mortgage pass-throughs.

Through a combination of sales and paydowns, Chimera's agency pass-through ended the year at $6.1 billion, down from $9 billion at the end of 2018. As we have stated in past earnings calls, we view the liquidity offered in agency securities not only as a source of spread income, but also as a source of capital, to redeploy into mortgage credit assets, when attractive investment opportunities are available. We diligently reinvested these agency paydowns into reperforming residential mortgage loans.

For Q4, we settled down about $1 billion in mortgage loans and a total of $2.3 billion in seasoned reperforming loans for all of 2019. Many of these loans have been securitized. And as of year-end, we are carrying $1.2 billion in our loan warehouse, most of which is being held with intent for future securitization. Chimera had a very active fourth quarter in securitizations. We closed five transactions totaling $1.8 billion of underlying loans. Four were reperforming loan deals and one was a prime jumbo loan.

From our warehouse, we securitized $464 million reperforming loans in CIM 2019-R2. This deal was rated by Moody's and DBRS. The loan collateral had a weighted average coupon of 4.6% and a weighted average loan age of 152 months. The average loan size for the R2 deal was 136,000 with an average FICO of 644. Chimera sold $358 million bonds, providing a 2.6% cost of debt.

We continued with our securitized loan portfolio optimization and called CIM 2016-4. The loans were then relevered into $343 million CIM 2019-R3. The deal was unrated and had a weighted average coupon of 6.8% and a weighted average loan age of 161 months. The average loan size of the R3 deal was 72,000 with a FICO of 661. Chimera sold $291 million bonds providing a 2.6% cost of debt. The previous securitization has carried[Phonetic] debt cost of 4.9%. So, through optimization afforded by our call strategy, we saved approximately 225 basis points in refinancing with CIM 2019-R3.

The R3 deal was the second-time relever for our 2014 Springleaf purchase. Our ability to relever these loans have benefited our portfolio, while further reinforcing the proof-of-concept of Chimera's optimization and call strategy. CIM 2019-R4 and R5 were also issued from existing reperforming loans in our warehouse. CIM 2019-R4 was a $321 million non-rated deal. The underlying loans had a weighted average coupon of 6.2% with a weighted average loan age of 158 months. The average loan size on the R4 was 169,000[Phonetic] with a FICO of 621.

Chimera sold $257 million bonds with a debt cost of 2.8% and we also securitized $315 million loans in CIM 2019-R5. This deal was also rated by Moody's and DBRS. The R5 had a weighted average coupon of 5.4% with a weighted average loan age of 152 months. The average balance of the loans was 168,000 and had a FICO of 661. Chimera sold $252 million bonds with a debt cost of 2.8%.

And lastly, for securitizations this quarter, Chimera did a second prime jumbo deal of the year. We issued $338 million in CIM 2019-J2. The deal was new collateral, only two months old, and had a weighted average coupon of 4.1%. The average loan size for the J2 was 766,000 with a FICO of 766. The loans had an average LTV of 70%. The prime jumbo deal is not consolidated on our balance sheet.

2019 was a very strong year for our portfolio. With a combination of securitization, portfolio optimization and capital allocation strategies, we successfully navigated 2019's market volatility and drop in interest rates. Our agency pass-throughs provide a liquid source of capital for loan purchases, our Agency CMBS portfolio performed as expected, and Chimera's mortgage credit financing strategy through securitization has enabled us to lock-in longer-term financing and more consistent spread income for our portfolio.

Market demand for fixed income spread product remains strong in 2020. Notes issued from the CIM shelf have performed well for investors and the CIM shelf is recognized as a consistent issuer of senior mortgage-backed securities. We have loans available in our warehouse for [Indecipherable] of securitizations and we have in excess of $5 billion of existing CIM securitizations that have call dates in the calendar year 2020. As always, we will monitor the CIM deals and as they near their call dates, we will evaluate economic potential for portfolio improvement through our optimization and call strategy.

I will now turn the call over to Rob to review the financial results.

Robert Colligan -- Chief Financial Officer

Thanks, Mohit. I'll review Chimera's financial highlights for the fourth quarter and full-year 2019.

GAAP book value at the end of the fourth quarter was $16.15 per share and our economic return on GAAP book value was 1.7%, based on the quarterly change in book value and the fourth quarter dividend per common share. Our economic return for the year was 14.1%.

GAAP net income for the fourth quarter was $112 million or $0.60 per share and $341 million or $1.82 for the year.

On a core basis, net income for the fourth quarter was $120 million or $0.64 per share and $421 million or $2.25 per share for the year. We had approximately $0.07 of income in the fourth quarter that was derived from securities, primarily held at a discount and were called during the quarter. While this may occur from time to time, we don't expect this level of income every quarter and in some quarters, we could have a loss related to interest-only securities that are called. We will provide details on this income, whenever it becomes material to quarterly earnings.

Economic net interest income for the fourth quarter was $164 million and it was $597 million for the year.

For the fourth quarter, the yield on average interest earning assets was 5.5%, our average cost of funds was 3.1% and our net interest spread was 2.4%. Total leverage for the fourth quarter was 5.5:1, while recourse leverage ended the quarter at 3.4:1. For the quarter, our economic net interest return on equity was 15.3% and our GAAP return on average equity was 10.6%. Expenses for the fourth quarter, excluding servicing fees and transaction expenses, were $18 million, down slightly from last quarter.

That concludes our remarks and we'll now open the call for questions.

Questions and Answers:

Operator

Thank you. The floor is now open for questions.

[Operator Instructions]

Our first question comes from the line of Doug Harter of Credit Suisse.

Doug Harter -- Credit Suisse -- Analyst

Thanks. I was just hoping you could give us a little more detail on that pipeline of potential callable deals? I guess just, how we should think about the pacing of that, over the course of the year? And if the relative cost of fund saving -- how the relative potential cost of fund savings would compare to kind of what you were able to accomplish in the fourth quarter?

Mohit Marria -- Chief Investment Officer

Good morning. This is Mohit, Doug. How are you?

Doug Harter -- Credit Suisse -- Analyst

I'm well.

Mohit Marria -- Chief Investment Officer

As mentioned in the opening remarks, we have eight deals that are callable in 2020, totaling about $5 billion of UPB in terms of loans. The securitized debt issued against those is just over $3 billion. And I think, based on what we were able to achieve in Q4 and the strong bid for the market in Q1, of late, and we'll see if it carries forward for the remainder of the year, it would be a cost savings on the new issued debt of over 150 basis points. So, pretty strong savings on that issuance potentially.

Doug Harter -- Credit Suisse -- Analyst

Great. And then, I guess you were able to buy kind of legacy loans and also jumbo loans in the fourth quarter. I guess, as you look out at kind of the relative attractiveness of those two potential asset classes, I guess, how do they compare today, kind of where do you see the opportunity for incremental capital deployment?

Mohit Marria -- Chief Investment Officer

Sure. Again, I mean, I think we've said on numerous earnings calls that we still find the seasoned reperforming loan space very attractive. Still, given where we could term finance our debt, the back-end equity pieces have double-digit returns, the convexity profile was a lot better than new issue origination. I think, you've seen what happened in 2019 as rates rallied significantly, prepayment both on the agency portfolio picked up significantly. And we've seen some of that on the new issue prime jumbo and investor deals as well. So, we still like the RPL space. We still think there's ample supply coming from the GSEs and some money center banks.

But having said that, we're always evaluating and we want to do new issue business as well. And if the jumbo and investor space looks attractive and the levered returns are accretive, we'd deploy capital there as well. Of the 10 securitizations we did in '19, five were on newly originated collateral and five were on seasoned reperforming deals. So, with a balance of almost 50/50 in even on UPB basis, we're hoping similar success in 2020.

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you, Mohit.

Operator

Our next question comes from the line of Eric Hagen, KBW.

Eric Hagen -- KBW -- Analyst

Hey, guys, good morning. Thanks for the CECL disclosure. I know that it will reduce your forward yields, and I realize that the impact is relatively minor. But is there also a reserve charge that gets reflected in your book value at the time when CECL became active? Or is the only impact, the forward yield adjustment?

Matthew J. Lambiase -- President and Chief Executive Officer

The only impact for us is the forward yield adjustment. I'm sure you're looking at a lot of the banks and maybe some other companies that do have some credit reserve, like a day one credit reserve. Because most of our securities are impacted, which you're right, it's a small corner of our balance sheet that's impacted. Most of them are at unrealized or have an unrealized gain. So, there's no requirement for us to put up any reserves.

Eric Hagen -- KBW -- Analyst

Got it. Okay. Thanks for that disclosure. And then, just the legacy low balance loan trade has, obviously, worked out really well for you guys. Just how big do you think the legacy low balance market is at this point? Or I think a better question is just how active do you think the trading from other asset managers is going to be in that market going forward?

Mohit Marria -- Chief Investment Officer

Hi, Eric. This is Mohit. Yes, we've been able to successfully aggregate a large portfolio of low loan balance. But if you look at some of the stats mentioned on the securitizations on this year, the balances are significantly higher than the $85,000, $90,000 that we were able to aggregate in both in '14 and in '16. The average balance of what we are acquiring now ranges anywhere from $150,000 to $285,000. So, I think more of the RPL stuff that are coming out of the GSE is reflective of that. So, yes, it's still low loan balance, relative to where jumbo production is. But -- and the convexity profile remains similar on a $250,000 loan as it is on a $85,000 loan, given the sort of seasoned reperforming nature of them.

Eric Hagen -- KBW -- Analyst

Okay, thanks for that. I'm just trying to gauge how big the market is or how active the turnover is in that market? Is it -- I think, you just responded to Doug's question, that a lot of it's coming from banks and the GSEs, but can you quantify how big that market is at this point or how big?

Mohit Marria -- Chief Investment Officer

We can adjust the GSEs alone between Fannie and Freddie, probably still have north of $100 billion of seasoned reperforming loans that they need to pare down. And that's assuming no new loans enter the reperforming space, something like default that they have to work through. So, if the portfolio remains static, I think it's still north of $100 billion, that they would need to dispose of.

Eric Hagen -- KBW -- Analyst

Got it. Thanks for that. Okay. And then, one more from me. I mean, a fairly good chunk of your dividend was characterized last year as a return of capital as opposed to ordinary dividends. Is that simply a timing difference between recognizing positive marks on subordinated securities as they pull to par and the taxable impact is just occurring later in time. And I realize that book-to-tax reconciliations can sometimes be a little complicated. I just want to get a sense for what drives that characterization for you guys?

Matthew J. Lambiase -- President and Chief Executive Officer

Sure. The other piece of color, there's always timing differences between GAAP and tax. But here, we did have some losses on our hedges that are taken upfront for GAAP, obviously, removed from core, but are taken over time for tax. And that's one of the bigger drivers of the core to tax difference this year.

Mohit Marria -- Chief Investment Officer

Yeah. And I would just add that, that the tax number is, one moment in time, it's very complicated -- like to your point, it's very complicated calculation and I don't think it gives a lot of meaning to the business. I think you have to look at it over a very long period of time, and I'm not sure what you would learn from it. I would just take it for -- and not for a forward-looking measure.

Eric Hagen -- KBW -- Analyst

Of course. Yes, just wanted to get a sense for what drove that characterization. So, thank you. Thanks for the comments, guys.

Operator

Our next question comes from the line of Trevor Cranston of JMP Securities.

Trevor Cranston -- JMP Securities -- Analyst

All right, thanks. Good morning. I think you had mentioned in the prepared comments that you benefited in the fourth quarter from slower pre-pay speeds on the agency book and it looks like the yield on the agencies picked up to a decent amount this quarter. Can you provide some color on how you're thinking about that going forward with the rally in rates we've seen so far in 1Q? And how much you think speeds may pick up in 1Q and going forward, especially relative to kind of how fast they got during the fall of last year? Thanks.

Mohit Marria -- Chief Investment Officer

Trevor, this is Mohit, again. These have slowed down, just due to seasonal factors right now. But as the market has rallied in the 30 basis points from year-end through today, we do, with spring approaching, we think speeds will tick back up. I don't think they would get back to the same level that we saw in the fall, September, October, from the lowest hit in August. But we do think speeds will pick up from where we are here in Jan and Feb marginally.

Trevor Cranston -- JMP Securities -- Analyst

Okay, got you. Then, the second question, for the income that was generated this quarter from the legacy securities, which were called, and I guess, some of it was also penalty income on the CMBS, can you provide any additional color in terms of, especially the legacy securities book, in terms of how much of that estimate is currently callable? Just, we can sort of get a sense on how much of those gains might be coming through in the future? Thanks.

Matthew J. Lambiase -- President and Chief Executive Officer

Sure. It's hard to estimate the exact timing of that type of income. You have certain deals, where you don't expect them to be called and they are, and other ones where they'll have a bond with a very low factor and you expect it could be called at any time and it isn't. What I can say, a fair amount of our non-agency portfolio is in that category, the older legacy items. But I can say we have way more discount or positive income coming than premium on IO. So over time, we should have a very good positive impact, although it could be up or down quarter-to-quarter.

Trevor Cranston -- JMP Securities -- Analyst

Got you. Okay, that's helpful. Thank you.

Operator

Our next question comes from the line of Kenneth Lee of RBC Capital Markets.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. Just a quick follow-up on that last question, in terms of the callable securities. Realize it's probably hard to forecast from quarter-to-quarter in terms of whether you could see gains or losses, but could you just tell us maybe under which macro assumptions or interest rate levels, could you see a little bit more losses within the IOs or conversely more gains on the other securities, just in terms of the backdrop, regardless of the actual, obviously, behaviors? Thanks.

Robert Colligan -- Chief Financial Officer

Good morning, Ken. I think it's going to be less dependent on rates. I mean, a lot of these securities were issued in '05, '06, '07. So, they have had the ability to sort of refinance, if they could, and why a lot of these securities are impaired. But as just normal amortization, these deals continue to factor down. Other deals have a 10% to 20% deal clean-up calls, which they are approaching as these deals continue to relever, which is why some of these deals have been called over the last year, more meaningfully in Q4 of this past quarter. We think there's lot of factors that go into making something callable. Just as we look at our securitizations, there is the cost of the call, where you could refinance. And given the strong bid for loans that we've also discussed over the last several quarters, that execution is helping achieve or making a lot of these legacy deals more callable.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. And just one follow-up, if I may. Wondering if you could just highlight some of the key drivers for the movements in the book value per share sequentially in the quarter? Thanks.

Matthew J. Lambiase -- President and Chief Executive Officer

Yes, on the credit side, spreads were effectively unchanged quarter-over-quarter, maybe slightly lighter. The biggest driver of the lower book value was the change in rates. The market sold off roughly about 30 basis points from September 30 to December and that put some pressure on book value. But year-over-year, the book value is still higher, which is sort of the bigger takeaway, given the volatile markets.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. Very helpful, thank you.

Operator

Our next question comes from the line of Matthew Howlett of Nomura.

Matthew Howlett -- Nomura -- Analyst

Thanks, guys. Did you give a cadence on the agency MBS portfolio, as the repays come in? Is that book good[Phonetic] to continue to run down and with capital reallocated?

Mohit Marria -- Chief Investment Officer

Yes, I mean, as we mentioned in the opening remark, the paydown sales we had for the year, in the agency portfolio, have been redeployed in our loan investments and that equity base there has grown as a loan portfolio. If we continue to see opportunities as we said on prior calls, and that is a source of funding for those acquisitions.

Matthew Howlett -- Nomura -- Analyst

Okay. And then, with the recourse, the leverage comes down, obviously, naturally as you -- presumably higher leverage on that book. So, when you look at the company's capital or excess capital position, is that improving as the agency book runs down or do you look at it sort of as a wash with redeploying in lower leverage credit strategies? I mean, I guess, how do you look at just the excess capital position of the company today at 3.4 times of economic leverage?

Mohit Marria -- Chief Investment Officer

Hey, Matt. I think we just view it as a wash, right? Most of that capital is being deployed into loans. And we've had a lot of success, acquiring loans, where around 2019, we bought over $2 billion. We're hoping for similar success in 2020. And given the paydowns we're achieving on the pass-throughs, that should help fund those acquisitions and keep with leverage[Phonetic].

Matthew Howlett -- Nomura -- Analyst

Okay, got it. Okay. Another follow-up, just on the new issue market, I asked you last quarter, want to ask again, the new issue, you guys are active, but doesn't seem like you're active in non-QM. Clearly that market is doubling again this year. Can you give us an update on anything you're looking at, at that asset class?

Robert Colligan -- Chief Financial Officer

Yes, I mean I think, as mentioned on the last earnings call, that's a market we look at all the time. We looked at where issuances are coming in. As I mentioned, the convexity profile of that product gives us some pause, given the premiums needed to acquire those loans. Speeds have been elevated and the premium erosion is there. So, we are sort of cautious on adding that. The convexity profile of the loans, we've been able to acquire over $2 billion, is far superior and the levered returns on what we retain, -- more than meeting the dividend that need to be paid out. So, again, we continue to evaluate it, but we've had a lot of success on continuing to acquire RPL loans.

And on the new issue front, as we mentioned, we did five newly originated collateral deals, both jumbo and investor loans, where the subs are also very attractive from a return on equity standpoint.

Matthew Howlett -- Nomura -- Analyst

Just to reconfirm the mid- to-low teens, you're saying on a net levered return?

Matthew J. Lambiase -- President and Chief Executive Officer

I would say low-to-mid teens.

Matthew Howlett -- Nomura -- Analyst

Low-to-mid teens. Got it, OK. That's pretty attractive. Okay. Then, next question, the $10 billion of 1 to 2019[Phonetic] repo at 12/31, you gave us some general numbers, but where did that roll at over the last 45 days? Where did it go? Where was it and where did it roll out?

Matthew J. Lambiase -- President and Chief Executive Officer

Yes, I mean, as we mentioned the cost of our agency funding at year end was 2.10%[Phonetic] and we were going to see if there was any disruption as we had at the end of 2018. But the Fed injected a lot of liquidity over $500 billion of cash in the market to make sure that didn't get volatile. But as we entered Q1 of 2020, repo rates have been pretty stable. I mean, if you see where one-month LIBOR is, and financing is a few basis points above that. So, meaningfully above where Fed funds' target is. But, again, lower than where we ended Q4 of '19. So, I would say in the 1.75% to 1.80%[Phonetic] area range.

Matthew Howlett -- Nomura -- Analyst

Got it. Great. Thanks a lot. Appreciate it.

Matthew J. Lambiase -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Lee Cooperman of Omega Family Office.

Lee Cooperman -- Omega Family Office -- Analyst

Thank you. You guys continue to execute very well and I appreciate that. Heretofore, we have followed a policy of holding the dividend flat and preferring to buy stock back, whenever it's traded at/or below book value, very understandable. Because of the fine job you guys have done, our stock sells at a meaningful premium to book. Going forward, how do you intend to employ capital as it regards dividend increases, supplemental dividends or stock repurchase?

Matthew J. Lambiase -- President and Chief Executive Officer

Well, I think right now, we think the balance sheet and our capital is pretty right-sized for the business opportunities that we're seeing. I think we have plenty of dry powder, if you will, in our agency book of business that we can deploy into residential credit, when we see opportunities. And that's what I think the team has been doing a great job of finding out those opportunities. I don't know if we would buy back stock at the prices in the market right now and I think if we had the excess income, I think you do a special dividend, if we had that.

Lee Cooperman -- Omega Family Office -- Analyst

You don't have any excess income now that would require a special dividend?

Matthew J. Lambiase -- President and Chief Executive Officer

No. And I think going forward, if you get to a situation where you do, we would certainly favor that of buying back stock at the current price.

Lee Cooperman -- Omega Family Office -- Analyst

And congratulations, you guys are doing a very fine job for the shareholders. Thank you.

Matthew J. Lambiase -- President and Chief Executive Officer

Thank you, Lee, and I appreciate that very much.

Operator

And thank you. That was our final question. I will now turn the floor back over to Matthew Lambiase for any additional or closing remarks.

Matthew J. Lambiase -- President and Chief Executive Officer

Well, thank you all for participating in the Chimera Investment Corporation's fourth quarter 2019 earnings call. And we look forward to speaking to you later in the year with the first quarter's earnings.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Emily Mohr -- Investor Relations

Matthew J. Lambiase -- President and Chief Executive Officer

Mohit Marria -- Chief Investment Officer

Robert Colligan -- Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- KBW -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Matthew Howlett -- Nomura -- Analyst

Lee Cooperman -- Omega Family Office -- Analyst

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