Chimera Investment Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Chimera is an externally managed mortgage REIT investing primarily in residential mortgage-backed securities (RMBS) and mortgage loans. Unless otherwise noted, amounts below are in millions of dollars.
Financial and operating highlights
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Interest income, including non-retained | $198.5 | $104.7 | $561.7 | $197.8 |
| Net interest income | $155.7 | $95.5 | $449.1 | $171.2 |
| Net income | $126.4 | $158.0 | $376.6 | $228.5 |
| Diluted earnings per share | $0.14 | $0.24 | $0.49 | $0.51 |
| Comprehensive income | $148.2 | $324.7 | $498.8 | $441.9 |
| Operating cash flow | Not provided by quarter in the filing excerpt | $225.4 | $102.3 |
- At September 30, total assets were $7.23 billion, including $6.78 billion of RMBS and $389.3 million of securitized loans. Stockholders’ equity was $2.90 billion, compared with $2.13 billion at December 31, 2009.
- Cash and cash equivalents were $11.9 million. Repurchase agreements were $1.57 billion; securitized debt was $320.6 million and non-retained securitized debt was $1.96 billion. Management reported total period-end leverage of 1.3:1 and recourse leverage of 0.5:1.
- Q3 annualized portfolio yield was 9.02%, cost of funds 4.58%, and net interest spread 4.44%. The spread was 6.04% in Q3 2009. For the first nine months, spread was 5.14%, versus 4.91% in 2009.
- Net cash used in investing activities was $903.0 million for the nine months, chiefly reflecting $2.30 billion of securities purchases, partly offset by sales and principal receipts. Financing activities provided $665.3 million; cash declined $12.3 million from year-end.
Material changes versus comparable periods
- Q3 net income fell 20% year over year, and diluted EPS fell from $0.24 to $0.14. Management attributed the quarterly per-share decline primarily to the absence of realized gains on re-securitizations, which were accounted for as financings after a 2010 accounting change.
- Nine-month net income rose to $376.6 million, but EPS declined to $0.49 from $0.51. Management cited the timing of investing proceeds from the June 2010 share offering and the larger weighted-average share count.
- Interest income and net interest income increased with portfolio growth. The higher Q3 cost of funds and narrower spread reflected, among other factors, debt-cost amortization and a full quarter of interest-rate-swap payments.
- Effective January 1, 2010, new consolidation and transfer-accounting rules required consolidation of certain re-securitization trusts. This added non-retained RMBS and corresponding non-recourse debt to the balance sheet and reversed $98.1 million of previously recognized gains; the resulting $88.2 million net cumulative adjustment reduced opening retained earnings and book value by $0.13 per share. These presentation changes limit direct comparability with 2009.
- Common shares outstanding increased substantially following two 2010 offerings, which raised approximately $767.7 million net in total. The quarter-end dividend was $0.18 per share, versus $0.17 for Q4 2009.
Outlook, risks, and unusual items
- No specific earnings or dividend guidance was provided. Management expected the portfolio to remain weighted toward RMBS in the near term and stated that available assets and borrowing arrangements were expected to meet anticipated short-term liquidity needs. Future financing and equity access remain dependent on market conditions.
- The portfolio is heavily exposed to credit-sensitive non-Agency RMBS: approximately 83% of the investment portfolio was non-Agency at September 30, and 67.27% of the consolidated RMBS portfolio was rated below B or not rated. About 99% of non-Agency RMBS collateral was classified as Alt-A; California represented 57.3% of its geographic concentration.
- Q3 net credit impairment was $0.9 million; nine-month net credit impairment was $10.3 million. The securitized-loan allowance was $6.0 million, or 155 basis points of principal. Loans more than 60 days delinquent increased to 2.63% from 1.82% at December 31, 2009.
- Interest-rate swaps had $450 million notional value and a $24.8 million fair-value liability at quarter-end. Unrealized swap losses were $13.6 million in Q3. The company’s sensitivity analysis projected that a 75-basis-point rate rise would increase net interest income 11.46% but reduce portfolio value 4.29%; a 75-basis-point decline would reduce projected net interest income 21.42% and increase portfolio value 4.56%. These are model estimates, not forecasts.
- Management highlighted refinancing, collateral margin calls, short-term funding availability, mortgage prepayments, credit losses, valuation uncertainty, and possible servicer underperformance as material risks. It also warned that loan-modification and foreclosure-related laws may delay or reduce collections. Management reported no known material contingencies; ordinary-course legal matters were not expected to materially affect the financial statements.
- The company recorded $0.75 million of tax expense, primarily a REIT excise tax relating to a 2009 distribution shortfall. It stated that it intended to continue regular quarterly dividends, subject to available cash, debt service, and REIT requirements.
Important facts for investors to verify
- How much of reported earnings and balance-sheet growth reflects the new consolidation accounting, rather than retained economic exposure or cash generation.
- Whether portfolio yield, funding costs, and the narrower quarterly spread remain sustainable as repo financing reprices and hedges perform.
- Credit performance and valuation assumptions for non-Agency and Alt-A holdings, including delinquency trends, California concentration, and impairment estimates.
- Near-term repo maturities, collateral requirements, liquidity available to meet margin calls, and dependence on rolling or replacing financing.
- Dividend coverage by taxable income and cash flows, and the effect of the substantially higher share count on per-share returns.