Chimera Investment Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Chimera is a mortgage REIT investing primarily in Agency and Non-Agency mortgage-backed securities (MBS) and securitized residential mortgage loans. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q3 2015 / September 30, 2015 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $211.9 million | $190.4 million in Q3 2014 |
| Net interest income (GAAP) | $144.0 million | $151.5 million in Q3 2014 |
| Net income (loss) | $(48.3) million; $(0.24) per diluted share | $377.6 million; $1.85 per diluted share in Q3 2014 |
| Net income | $135.0 million for nine months; $0.65 per diluted share | $582.7 million; $2.85 per diluted share for nine months 2014 |
| Cash and cash equivalents | $40.1 million | $164.6 million at December 31, 2014 |
| Total assets / stockholders’ equity | $15.94 billion / $3.12 billion | $19.16 billion / $3.61 billion at December 31, 2014 |
| Repurchase agreements | $7.15 billion | $8.46 billion at December 31, 2014 |
| Total debt-to-equity leverage | 3.8:1; recourse leverage 2.5:1 | 3.8:1; recourse leverage 2.6:1 at December 31, 2014 |
For the first nine months, operating cash flow was $253.9 million, investing activities provided $2.0 billion, and financing activities used $2.34 billion. Cash declined by $124.5 million to $40.1 million. The company declared dividends of $0.48 per share for Q3 and $1.44 per share for the nine months.
Management’s non-GAAP economic net interest income was $134.7 million in Q3 2015 versus $134.3 million in Q3 2014, and $444.2 million for the nine months versus $328.5 million. The reported net interest margin was 4.0% in Q3 versus 4.3% a year earlier, and 4.0% for the nine-month period versus 5.3%.
Material changes and unusual items
- Net loss in Q3 largely reflected market-value losses: $71.5 million of unrealized derivative losses and $41.0 million of unrealized losses on financial instruments at fair value. Q3 2014 had respective gains of $13.0 million and $162.9 million.
- For the nine months, net income fell to $135.0 million from $582.7 million. Results included a $99.7 million loss on termination of interest-rate swaps, compared with no such terminations in 2014, and the prior-year period included a $47.8 million gain on deconsolidation of a VIE.
- Net interest income increased 31% for the nine months, as interest income rose 51% to $670.8 million; higher interest expense, portfolio fair-value changes, and derivative losses more than offset this growth. Management attributed increased interest income mainly to acquisitions of seasoned sub-prime mortgage loans.
- Portfolio mix shifted: Agency MBS fell to 44.3% of interest-earning assets at amortized cost from 52.1% at year-end 2014; securitized loans rose to 35.7% from 32.5%, and Non-Agency RMBS rose to 9.8% from 5.1%. The portfolio’s fixed-rate share declined to 85.6% from 92.5%.
- On August 5, Chimera internalized management, terminated its FIDAC management agreement without a termination fee, hired employees, and entered a transition-services arrangement through year-end, with possible monthly extensions. Q3 included $4.0 million in compensation and benefits and $3.0 million of transition-service expense.
- The board authorized a $250 million share repurchase program. During Q3, the company repurchased approximately 16.6 million shares for $231 million at an average $13.94 per share, including Annaly’s 8.997 million shares acquired for $126.4 million. The program had approximately $19.2 million remaining at September 30.
- Chimera adopted fair-value accounting for certain loan securitization assets and related debt on January 1, 2015; the adoption reduced opening equity by $12.1 million. A 1-for-5 reverse stock split took effect in April 2015.
Outlook, risks, and contingencies
The filing provides no specific earnings or dividend guidance. Management expects to adjust asset allocation to market conditions and says it expects to meet near-term liquidity needs through portfolio cash flows and financing. It cautions that falling collateral values may trigger margin calls and could force asset sales at a loss or additional debt or equity issuance.
- Key exposures include interest-rate and spread movements, prepayment and extension risk, credit losses on Non-Agency securities and loans, financing and refinancing availability, and counterparty risk. Repo financing was $7.15 billion, generally short-term; weighted-average repo maturity was 80 days. Non-Agency repo haircuts rose to 33.8% from 29.4% at year-end.
- Fair-value estimates rely significantly on unobservable inputs: Non-Agency RMBS, securitized loans, and related fair-value debt were classified as Level 3. Management’s estimates depend on assumptions about defaults, prepayments, loss severity, and discount rates.
- At September 30, 90.4% of Non-Agency RMBS was rated below B or not rated. The Non-Agency portfolio was concentrated in Alt-A collateral (67%); California represented 30.9% of its collateral.
- The company reported $52.7 million of net other-than-temporary credit impairment losses for the nine months, versus $8.9 million in 2014. It stated it did not intend to sell RMBS in unrealized-loss positions and did not expect to be forced to sell them before recovery.
- Management said disclosure controls were effective. A material weakness in internal control over financial reporting, previously attributed to reliance on spreadsheets, was being addressed through a new system and controls; management expected remediation in 2015, but the filing does not state that remediation was complete.
- Management reported no contingencies requiring accrual or disclosure. Certain securitization documents include repurchase obligations upon specified representation-and-warranty breaches. After quarter-end, the company exercised a call to retire $522 million of securitized debt at par.
Most important facts for investors to verify
- Whether earnings and book value remain sensitive to Level 3 valuations, especially for Non-Agency RMBS, seasoned sub-prime loans, and related securitized debt.
- Repo renewal terms, collateral haircuts, margin-call capacity, and the company’s exposure to individual financing and derivative counterparties.
- Whether portfolio credit performance and impairment assumptions support the reported values and expected cash flows, particularly given the high share of below-B or unrated Non-Agency RMBS.
- The full-year cost and operational effects of management internalization, including transition costs and the completion of the internal-control remediation.
- The sustainability of dividends and capital returns relative to taxable income, cash generation, leverage, and the remaining authorization under the repurchase program.