Chimera Investment Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; balance-sheet comparisons are to December 31, 2010. Dollar amounts below are in millions unless otherwise noted. Chimera is an externally managed mortgage REIT investing primarily in residential mortgage-backed securities (RMBS), using leverage to earn the spread between asset income and financing costs.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Interest income, including non-retained securities | $222.7 | $183.4 | $450.4 | $363.2 |
| Net interest income, as presented | $186.9 | $155.4 | $379.0 | $294.1 |
| Economic net interest income, after realized swap losses | $182.6 | $154.7 | $371.9 | $293.4 |
| Net income | $117.8 | $124.6 | $281.2 | $250.2 |
| Net income per share | $0.11 | $0.16 | $0.27 | $0.35 |
| Comprehensive income (loss) | $29.2 | $(19.7) | $31.9 | $350.6 |
- Q2 annualized asset yield after principal write-downs was 6.64%, versus 8.47% a year earlier; economic cost of funds was 2.44% versus 2.93%, leaving a 4.20% spread versus 5.54%.
- At June 30, total assets were $10.09 billion and stockholders’ equity was $3.44 billion. RMBS fair value was $9.71 billion, including $5.01 billion of Agency and $4.70 billion of non-Agency RMBS; securitized loans, net, were $302.9 million.
- Repurchase agreements were $4.32 billion; securitized debt was approximately $2.15 billion. Reported leverage was 1.9:1, including non-recourse securitized debt; recourse leverage was 1.3:1. Repo borrowings had a 0.28% weighted-average rate and 59-day weighted-average remaining maturity.
- Cash was $16.1 million at June 30. For the six months, operating cash flow was $216.5 million, investing cash flow was $(2.31) billion, and financing cash flow was $2.10 billion.
Material changes versus comparable periods
- Q2 net income declined about 5% year over year, while EPS fell from $0.16 to $0.11; weighted-average shares increased from 765.5 million to 1.027 billion, reflecting the larger share base following 2010 offerings. Six-month net income rose, but EPS decreased from $0.35 to $0.27.
- Interest income and net interest income increased with portfolio growth, but asset yield and net interest spread declined. Management attributed spread pressure to lower portfolio coupons, increased debt-issuance-cost amortization, and swap costs.
- Q2 non-Agency RMBS principal write-down losses rose to $22.0 million from $0.3 million; six-month losses were $41.6 million versus $1.3 million. Non-Agency credit impairment recognized in earnings was $1.0 million in Q2 and $3.7 million for the six months.
- Available-for-sale securities produced other comprehensive losses of $88.6 million for Q2 and $249.4 million for the six months. Equity declined from $3.68 billion at year-end, principally reflecting the six-month OCI loss and declared dividends.
- The portfolio shifted toward Agency RMBS: at June 30, principal-value composition was 71.5% non-Agency, 25.5% Agency, and 3.0% securitized loans, compared with 83.4%, 12.6%, and 4.0%, respectively, at year-end. Recourse leverage increased from 0.5:1 at June 30, 2010 to 1.3:1.
- Quarterly dividends declared were $0.13 per share versus $0.17 a year earlier; six-month dividends were $0.27 versus $0.34.
Outlook, risks, and notable items
- Management expects the portfolio to remain weighted toward RMBS in the near term and expects to continue relying substantially on repurchase-agreement financing. It stated that current assets, leverage, and borrowing arrangements were expected to cover anticipated short-term liquidity needs, while warning that falling collateral values could create margin calls and force asset sales or additional financing.
- No specific earnings, spread, or dividend guidance was provided. Management intends to pay regular quarterly dividends, subject to available cash, financing requirements, and REIT distribution rules.
- Key risks include non-Agency credit deterioration, interest-rate and prepayment changes, extension risk, fair-value uncertainty and market illiquidity, repo refinancing and collateral/margin-call exposure, and the effectiveness of hedges. About 84% of the reported non-Agency portfolio was rated below B or not rated; 99% was classified by the company as Alt-A collateral.
- Interest-rate sensitivity analysis estimated that a 75-basis-point rate decline would reduce projected net interest income by 9.10% and increase portfolio value by 4.76%; a 75-basis-point rise would increase projected net interest income by 1.31% and reduce portfolio value by 5.08%. Management cautioned that actual results could differ materially.
- Other notable items: swap losses were $23.8 million in Q2, including $19.5 million unrealized; fair-value estimates depend on models and dealer/pricing-service inputs. FIDAC management fees were $13.2 million for Q2. Management reported no material legal proceedings or subsequent events and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether the rise in non-Agency principal write-downs and the portfolio’s credit performance are consistent with management’s expected-loss assumptions.
- Current repo counterparties, haircuts, refinancing availability, collateral requirements, and liquidity under stressed market values.
- How portfolio growth and increased leverage affect book value, recourse leverage, and per-share earnings after the 2010 equity issuance.
- The quality and sensitivity of fair-value estimates, including the gap between GAAP and estimated economic book value: $3.35 versus $3.08 per share at June 30.
- Whether asset yields, swap costs, and the dividend level remain sustainable as interest rates, prepayments, and credit losses change.