Chimera Investment Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Chimera is an externally managed mortgage investment company and REIT, managed by FIDAC, an Annaly subsidiary. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and position
| Metric | Q2 2010 / June 30, 2010 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $154.7 million | $56.8 million in Q2 2009 |
| Net income; diluted EPS | $124.6 million; $0.16 | $51.6 million; $0.10 in Q2 2009 |
| Six-month net income; diluted EPS | $250.2 million; $0.35 | $70.5 million; $0.21 in H1 2009 |
| Net interest spread | 5.56% | 4.43% in Q2 2009 |
| Return on average equity | 19.14% | 17.36% in Q2 2009 |
| Total assets; stockholders’ equity | $6,878.2 million; $2,912.9 million | $4,618.3 million; $2,126.6 million at Dec. 31, 2009 |
| Cash and cash equivalents | $236.2 million | $24.3 million at Dec. 31, 2009 |
| Debt and leverage | $1,337.8 million repo debt; $342.8 million securitized loan debt; $2,120.9 million non-retained securitized debt. Period-end leverage 1.3:1, including 0.5:1 recourse leverage. | Repo debt was $1,975.4 million at Dec. 31, 2009; no non-retained securitized debt was then reported. |
| Six-month cash flows | Operating +$152.8 million; investing −$693.6 million; financing +$752.8 million; ending cash $236.2 million. | H1 2009: operating +$38.2 million; investing −$2,388.9 million; financing +$2,336.3 million. |
Q2 interest income was $183.4 million, including $49.8 million from non-retained interests; related interest expense was $28.6 million, including $21.4 million non-retained. The annualized yield on average earning assets was 8.49%, versus 6.83% in Q2 2009; average cost of funds was 2.93%, versus 2.40%. Q2 comprehensive loss was $19.7 million, primarily reflecting $151.5 million of unrealized losses on available-for-sale securities.
At June 30, the portfolio included $4.4 billion of non-Agency RMBS, $1.8 billion of Agency RMBS, and $416.5 million of securitized loans. Non-Agency RMBS were approximately 81% of the investment portfolio by principal value. The reported $2.1 billion of non-retained RMBS and related debt reflect consolidation accounting, not assets and liabilities available for general corporate purposes.
Material changes versus comparable periods
- Net income rose year over year, which management attributed mainly to portfolio growth following equity offerings. Average earning assets were $8.6 billion in Q2 2010 versus $3.8 billion in Q2 2009.
- Two 2010 common-stock offerings raised approximately $767.7 million net in total. Shares outstanding increased to 883.2 million at June 30 from 670.4 million at year-end 2009; weighted-average Q2 shares were 765.5 million versus 503.1 million a year earlier.
- Effective January 1, 2010, new consolidation rules required consolidation of certain re-securitization trusts. This added $2.1 billion of non-retained RMBS and $2.1 billion of related non-recourse debt at June 30, and reduced opening retained earnings by $88.2 million, or $0.13 per share. It also increased reported interest income and expense.
- Non-Agency RMBS fair value increased to $4.4 billion from $2.4 billion at year-end, with the portfolio mix shifting toward subordinated and non-retained interests. The $130.4 million Q2 dividend declared was $0.17 per share, the same per-share amount as Q2 2009; the six-month declared dividend was $0.34 per share.
Outlook, risks and unusual items
- Outlook: Management expects the portfolio to remain weighted toward RMBS in the near term and believes current assets, leverage and borrowing arrangements are sufficient for anticipated short-term liquidity needs. It intends to continue regular quarterly dividends, subject to cash availability, debt service, REIT requirements and board decisions. The filing provides no specific earnings or dividend forecast.
- Credit and valuation: Non-Agency securities are exposed to mortgage credit losses; 45.31% of the consolidated RMBS portfolio was rated below B or not rated. The non-Agency portfolio was 99% Alt-A collateral, with California representing 55.2% of the reported geographic concentration. Q2 credit impairment recognized in earnings was $6.9 million; total six-month net credit impairment was $9.4 million.
- Loans: The loan-loss allowance was $5.6 million, or 134 basis points of principal, versus $4.6 million and 97 basis points at year-end. Loans over 60 days delinquent increased to 2.41% from 1.82%; loans in foreclosure increased to 1.09% from 0.89%.
- Funding and rates: Repo borrowings had a 0.47% weighted-average rate and 33-day weighted-average remaining maturity. Short-term funding, collateral values, margin calls and refinancing availability create liquidity risk. Management’s modeled parallel rate shocks showed net interest income down 8.53% under a 25-basis-point rate decline and up 2.42% under a 25-basis-point increase, while portfolio value moved in the opposite direction.
- Hedges and accounting: The company had $450 million notional interest-rate swaps, with an $11.2 million fair-value liability and loss recognized in earnings. Fair values depend on models and market inputs; non-retained RMBS were classified as Level 3. A $88.2 million cumulative accounting adjustment and the Q2 unrealized valuation loss are significant to interpreting reported equity and earnings.
- Other matters: Dodd-Frank was enacted in July 2010; management said the effects of implementing regulations were not yet predictable. The company reported no known material contingencies and no material adverse effect expected from ordinary-course legal matters. It formed a wholly owned taxable REIT subsidiary in July 2010.
Important facts for investors to verify
- Reconcile the effect of the 2010 consolidation rules on earnings, book value, leverage and the non-recourse status of securitized debt.
- Assess the credit quality and valuation assumptions for subordinated, Alt-A and below-B or unrated RMBS, including geographic concentration and impairment estimates.
- Review short-term repo maturity, collateral and margin-call exposure, and the company’s ability to maintain or replace financing.
- Compare reported net income with comprehensive income and cash generation; confirm the timing and sustainability of dividends relative to taxable income and liquidity.
- Reconcile the MD&A cash-flow discussion, which describes financing cash flow as approximately $1.9 billion, with the consolidated cash-flow statement’s reported $752.8 million for the six months ended June 30, 2010.