Business Context and Reporting Period
Company: Chimera Investment Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: August 1, 2012
Subject: Non-reliance on previously issued financial statements and announcement of a restatement covering the period from the Company's inception in 2007 through September 30, 2011.
Key Financial Metrics and Restatement Impact
The filing details a material accounting error regarding the application of GAAP (ASC 320-10, ASC 325-40, and ASC 310-30) to non-Agency residential mortgage-backed securities. The Audit Committee concluded that previously issued financial statements for the "Restatement Period" (2008–2011) must be restated. The filing provides estimated cumulative impacts on the Consolidated Statements of Operations and Financial Condition:
- Interest Income: Expected to decrease by approximately $411 million (22%), from $1.88 billion to $1.46 billion.
- Other-Than-Temporary Impairment (OTTI) Losses: Expected to increase by approximately $293 million (154%), from $190 million to $484 million.
- Realized Losses on Sales: Expected to decrease by approximately $9 million (31%), from $29 million to $20 million.
- Net Income: Expected to decrease by approximately $695 million (66%), from $1.06 billion to $367 million.
- Accumulated Other Comprehensive Income (Loss): Expected to increase by approximately $695 million (2,317%), from $30 million to $725 million.
- Accumulated Deficit: Expected to increase by approximately $695 million (240%), from ($289) million to ($984) million.
Note: The Company states these changes are not expected to affect previously reported GAAP or economic book values, actual cash flows, dividends, or taxable income.
Material Changes Versus Prior Period
The primary material change is the determination that the Company incorrectly applied accounting guidance for interest income and OTTI recognition on non-Agency residential mortgage-backed securities. Previously, the Company applied ASC 320-10 for interest income and incorrectly accreted purchase discounts. The correct guidance requires the application of ASC 325-40 for certain non-high credit quality securities and ASC 310-30 for securities with deteriorated credit quality. This error resulted in the overstatement of interest income and the understatement of OTTI losses in prior filings.
Guidance, Outlook, Risks, and Unusual Items
- Restatement Timing: The Company intends to present the restatement in its Annual Report on Form 10-K for the year ended December 31, 2011. The filing date for this report is currently unknown. Subsequent quarterly reports are expected to be filed within 60 days of the 2011 10-K.
- Internal Controls: The Company acknowledges the restatement indicates material weaknesses in internal controls over financial reporting. An assessment of these weaknesses is ongoing.
- Forward-Looking Statements: The estimated financial impacts are based on current expectations. The Company warns that final amounts may differ materially as the evaluation of cash flow projections for OTTI and income recognition continues.
- Unusual Items: The filing explicitly states that previously issued consolidated financial statements for the Restatement Period and the corresponding audit opinions by Deloitte & Touche, LLP should no longer be relied upon.
Investor Verification Checklist
- Verify the final quantitative impact of the restatement once the 2011 Form 10-K is filed, as current figures are estimates.
- Monitor the Company's assessment of material weaknesses in internal controls over financial reporting.
- Review the upcoming 2011 10-K for the detailed presentation of the restated financial statements.
- Confirm that the restatement does not alter actual cash flows, dividends, or taxable income as asserted by management.
- Check for any additional control deficiencies identified during the ongoing remediation process.