Business Context and Reporting Period
Company: Chimera Investment Corporation (NYSE: CIM)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Chimera is a specialty finance company and Real Estate Investment Trust (REIT) that invests in residential mortgage-backed securities (RMBS), residential mortgage loans, and other asset-backed securities. The company is externally managed by Fixed Income Discount Advisory Company (FIDAC), a subsidiary of Annaly Capital Management, Inc. Its strategy focuses on acquiring non-Agency RMBS and prime/Alt-A mortgage loans to generate attractive risk-adjusted returns primarily through dividends.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Assets | $4.62 billion | $1.48 billion |
| Net Interest Income | $263.5 million | $44.7 million |
| Net Income (Loss) | $324.0 million | ($119.8 million) |
| Earnings Per Share (Basic/Diluted) | $0.64 | ($1.90) |
| Total Liabilities | $2.49 billion | $1.06 billion |
| Shareholders' Equity | $2.13 billion | $414.5 million |
| Debt-to-Equity Ratio | 1.1:1 | 2.5:1 |
| Dividends Declared Per Share | $0.43 | $0.62 |
Portfolio Composition (Dec 31, 2009): Non-Agency RMBS (67.7%), Agency RMBS (25.0%), Securitized Residential Mortgage Loans (7.3%).
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $324.0 million in 2009, a significant improvement from a net loss of $119.8 million in 2008. This $443.8 million swing was driven by realized gains on sales of investments ($103.6 million in 2009 vs. $144.3 million losses in 2008) and a 355 basis point increase in net interest spread.
- Balance Sheet Expansion: Total assets grew 212% from $1.48 billion to $4.62 billion, fueled by significant equity capital raises in April and May 2009 (approx. $1.46 billion in net proceeds) and increased leverage.
- Financing Structure: Repurchase agreements increased from $562.1 million in 2008 to $1.98 billion in 2009. The average cost of funds decreased significantly from 4.64% in 2008 to 2.03% in 2009.
- Asset Mix Shift: The portfolio shifted heavily toward Non-Agency RMBS, which grew from 52.5% of the portfolio in 2008 to 67.7% in 2009, while the proportion of securitized loans decreased from 33.8% to 7.3%.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the 2009 performance to improved market conditions, lower borrowing costs, and successful asset sales. The company continues to focus on non-Agency RMBS and prime mortgage loans. It expects to maintain its REIT status by distributing substantially all taxable income.
Key Risks and Contingencies:
- Market Liquidity: The filing highlights ongoing volatility in the mortgage and credit markets. Access to financing for non-Agency RMBS remains challenging compared to Agency securities.
- Interest Rate Risk: The company faces risks from interest rate mismatches between assets and liabilities. Rising rates could increase borrowing costs faster than asset yields adjust, particularly for fixed-rate assets financed with floating-rate debt.
- Prepayment Risk: Government initiatives (e.g., HAMP, refinancing programs) may accelerate prepayment speeds, potentially harming income on assets purchased at a premium.
- Accounting Changes: The company notes upcoming changes in consolidation standards (ASU 2009-17) effective January 1, 2010, which may require the consolidation of certain re-securitization transactions previously treated as sales, potentially reversing recorded gains.
- Related Party Transactions: A significant portion of financing ($259 million) comes from Annaly Capital Management, a related party and significant shareholder, creating potential conflicts of interest.
Investor Verification Checklist
- Realized Gains Sustainability: Verify the extent to which 2009 net income relied on one-time realized gains from asset sales versus recurring net interest income.
- Cost of Funds Stability: Confirm the ability to maintain the low average cost of funds (2.03%) in a potentially rising interest rate environment.
- Accounting Impact: Assess the financial impact of the new consolidation rules (ASU 2009-17) on future earnings and balance sheet leverage.
- Related Party Dependence: Evaluate the risk associated with the $259 million repurchase agreement with Annaly Capital Management and the potential for margin calls.
- Asset Quality: Review the allowance for loan losses ($4.6 million) and the credit quality of the non-Agency RMBS portfolio, which is subject to higher default risk than Agency securities.