Chimera Investment Corporation — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013. The filing was signed February 21, 2014 and discusses significant reporting delays and prior-period restatements. Chimera is an externally managed mortgage REIT investing primarily in residential mortgage-backed securities (RMBS) and securitized mortgage loans.
Financial performance and position
Amounts below are in U.S. dollars; income and cash-flow figures are for the quarter. Balance-sheet comparisons are to December 31, 2012.
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $125.8 million | $149.7 million in Q1 2012 |
| Net interest income | $97.0 million | $113.3 million in Q1 2012 |
| Net income | $79.8 million; $0.08 per diluted share | $80.2 million; $0.08 per diluted share in Q1 2012 |
| Comprehensive income | $203.6 million | $235.7 million in Q1 2012 |
| Common dividend declared | $0.09 per share | $0.11 per share in Q1 2012 |
| Cash and cash equivalents | $649.5 million | $621.2 million |
| Total assets | $7.43 billion | $7.74 billion |
| Total liabilities | $3.78 billion | $4.20 billion |
| Stockholders’ equity | $3.65 billion | $3.54 billion |
| Total debt and leverage | $3.62 billion; 1.0:1 debt-to-equity | $4.03 billion; 1.1:1 |
| Operating / investing / financing cash flow | $66.4 million / $468.9 million / $(507.0) million | $94.5 million / $(428.8) million / $259.2 million in Q1 2012 |
Economic net interest income, a company-defined non-GAAP measure including realized swap payments, was $91.4 million, down from $108.9 million in Q1 2012. The annualized economic net interest spread declined to 0.72% from 2.45%; asset yield fell to 4.33% from 6.19%. Return on average equity was 8.87% versus 10.32%.
Portfolio, debt and liquidity
- At quarter-end, the portfolio mix by principal value was 76.4% Non-Agency RMBS, 14.2% Agency RMBS and 9.4% securitized loans. The company expected the portfolio to remain weighted toward Non-Agency RMBS in the near term.
- Repurchase agreements were $1.42 billion, with a 0.50% weighted-average borrowing rate, 34-day weighted-average remaining maturity and 4.87% weighted-average haircut. Agency RMBS pledged as collateral had a reported fair value of about $1.5 billion.
- Consolidated securitized debt was non-recourse and totaled about $2.20 billion in carrying value. Debt backed by Non-Agency RMBS carried a 4.40% weighted-average financing cost; debt backed by loans carried 3.35%.
- Cash increased by $28.4 million during the quarter. Investing cash inflow largely reflected principal repayments; financing outflow included net repurchase-agreement repayments, securitized-debt repayments and dividends.
- The company said current assets, leverage and available borrowing arrangements were expected to support short-term liquidity needs, but warned that falling collateral values could trigger margin calls and require asset sales, potentially at a loss. It could not use Form S-3 or issue shares through its equity distribution agreement or dividend reinvestment plan until it had made timely SEC filings for a full year.
Changes versus prior comparable period
- Net income was broadly flat, but net interest income declined $16.3 million. Management attributed the decline principally to lower general interest income and reduced Agency RMBS holdings; it also cited lower yields following the addition of whole-loan securitizations.
- Average earning assets increased year over year, but their yield fell 186 basis points. Economic net interest income declined $17.5 million and the economic spread narrowed 173 basis points.
- Net credit impairment charges fell to $6.2 million from $48.4 million. Management attributed the improvement to better fair values and expected cash flows. Net unrealized gains on available-for-sale securities were $117.6 million, contributing to higher accumulated other comprehensive income.
- Management fees fell to $6.4 million from $12.9 million after the contractual rate was reduced from 1.50% to 0.75% of defined gross equity while filings remained not current. The Manager also reimbursed $1.9 million of specified restatement and investigation expenses.
- General and administrative expenses rose to $4.8 million from $2.0 million, primarily due to higher legal, accounting and loan-servicing costs. The dividend declared decreased to $0.09 from $0.11 per share.
Outlook, risks and unusual matters
- Dividends: The Board subsequently declared regular dividends of $0.09 per share for Q2, Q3 and Q4 2013 and determined to pay $0.09 per share for each of the first two quarters of 2014. A $0.20-per-share special dividend was paid in January 2014. Future distributions remain subject to Board decisions, cash needs and REIT requirements.
- Credit and valuation: About 97% of the Non-Agency RMBS portfolio was rated below B or unrated. Non-Agency RMBS valuations rely significantly on management estimates and unobservable inputs; changes in projected defaults, loss severity, prepayments or discount rates could materially change valuations and earnings. The portfolio also had geographic concentration, including 36.8% in California.
- Interest-rate and funding risk: Rising rates may increase floating-rate funding costs, reduce spreads and lower fixed-rate asset values. Prepayment, extension, basis and rate-cap risks may reduce hedge effectiveness. Repurchase agreements are short term and subject to collateral and margin requirements.
- Reporting and controls: The company disclosed material weaknesses in internal control over financial reporting, and management concluded they were not fully remediated as of March 31, 2013; disclosure controls were not effective. An Audit Committee investigation related to the accounting and restatement was ongoing. The Manager agreed to cover specified related costs not paid by insurance.
- Legal and regulatory: Three shareholder derivative demand letters alleged failures in controls and financial disclosures; the investigation and Board response remained pending. The filing reported no contingency requiring accrual. The company also described REIT qualification, Investment Company Act exemption and regulatory risks.
- Other unusual items: The filing refers to a restatement of 2008–2011 financial statements. It reports $1.9 million of Manager expense recoveries in Q1 2013 and states that late SEC filings restricted equity issuance and market access.
Important facts for investors to verify
- Review the restated 2008–2011 statements, the underlying accounting judgments and any subsequent Audit Committee investigation findings or remediation updates.
- Confirm whether material weaknesses and ineffective disclosure controls were subsequently remediated, and whether the company regained timely-filer status and access to equity capital markets.
- Assess the sustainability of net interest income, the reduced spread, portfolio yields and dividend level against funding costs and repayments.
- Evaluate the credit quality, concentration, fair-value assumptions and liquidity of the Non-Agency RMBS portfolio, including the large below-B/unrated share.
- Check subsequent margin-call, counterparty, financing, loan-loss, litigation and dividend developments; the filing’s forward-looking statements are subject to significant uncertainty.