Business Context and Reporting Period
Company: Chimera Investment Corporation (Chimera)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Chimera is a specialty finance company and Real Estate Investment Trust (REIT) that invests primarily in residential mortgage-backed securities (RMBS), including non-Agency and Agency securities, as well as securitized residential mortgage loans. The company is externally managed by Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, Inc.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Income | $125.6 million | $18.9 million |
| Net Income Per Share (Basic & Diluted) | $0.19 | $0.11 |
| Net Interest Income | $138.6 million | $19.0 million |
| Total Assets | $6.16 billion | $1.65 billion (Q1 2009) |
| Total Liabilities | $3.86 billion | $1.03 billion (Q1 2009) |
| Stockholders' Equity | $2.29 billion | $432.8 million (Q1 2009) |
| Cash and Cash Equivalents | $44.2 million | $12.2 million |
| Net Cash Provided by Operating Activities | $75.3 million | $13.8 million |
| Annualized Yield on Average Earning Assets | 10.04% | 6.44% |
| Annualized Cost of Funds | 4.50% | 3.48% |
| Net Interest Spread | 5.54% | 2.96% |
Material Changes vs. Prior Period
- Significant Growth in Scale: Total assets increased from approximately $1.65 billion in Q1 2009 to $6.16 billion in Q1 2010, driven by secondary equity offerings in 2009 and early 2010.
- Accounting Standard Adoption (ASC 810): Effective January 1, 2010, the company adopted new consolidation standards (ASC 810) requiring the consolidation of certain Variable Interest Entities (VIEs) previously treated as sales. This resulted in the recognition of $1.65 billion in "Senior, non-retained" non-Agency RMBS assets and $1.64 billion in corresponding "Securitized debt, non-retained" liabilities. This change significantly altered the presentation of the balance sheet and income statement, adding $17.0 million to net interest income for the quarter.
- Portfolio Composition: The portfolio shifted to be more heavily weighted toward non-Agency RMBS (76.5% of principal value) compared to Agency RMBS (15.3%).
- Impairments: The company recorded $2.5 million in net other-than-temporary credit impairment losses in Q1 2010, compared to none in Q1 2009. Total OTTI losses were $22.7 million, with $20.1 million recognized in Other Comprehensive Income (OCI).
- Dividends: Dividends declared increased to $0.17 per share in Q1 2010 from $0.06 per share in Q1 2009.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the increase in net income to the expansion of the interest-earning asset base following capital raises. The company continues to focus on acquiring non-Agency RMBS and residential mortgage loans, utilizing leverage to enhance returns.
- Subsequent Events: In April 2010, the company completed a public offering of 85 million shares plus an over-allotment, raising approximately $352.7 million in net proceeds. Additionally, a re-securitization transaction was completed in April 2010.
- Market Risks:
- Interest Rate Risk: The company faces risks from rising interest rates increasing borrowing costs faster than asset yields, particularly for fixed-rate assets funded with floating-rate debt. A 75 basis point increase in rates is projected to decrease net interest income by 5.08%.
- Credit Risk: Significant exposure to non-Agency RMBS, with 56.2% of the portfolio rated below B or unrated. The portfolio is heavily concentrated in Alt-A collateral.
- Liquidity Risk: Reliance on repurchase agreements and securitization markets. A decline in collateral value or increased prepayment rates could trigger margin calls or liquidity shortfalls.
- Contingencies: No material legal proceedings or contingencies were reported as of March 31, 2010.
Investor Verification Checklist
- Accounting Impact: Verify the specific impact of the ASC 810 adoption on the balance sheet, noting the large increase in non-recourse liabilities ("Securitized debt, non-retained") that do not have recourse to the company's general credit.
- Portfolio Quality: Review the concentration of "Below B or not rated" assets (56.2%) and the specific delinquency rates (18% to 45% for impaired securities) within the non-Agency portfolio.
- Liquidity Position: Assess the maturity profile of repurchase agreements, noting that $1.28 billion matures within 30 days, and the company's ability to roll over this debt in current market conditions.
- Capital Raises: Confirm the deployment of the $352.7 million raised in the April 2010 offering and its impact on future leverage ratios.
- Impairment Methodology: Scrutinize the assumptions used for Other-Than-Temporary Impairment (OTTI) calculations, particularly regarding prepayment speeds and loss severity for the seven securities impaired in the quarter.