Chimera Investment Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Chimera is an externally managed mortgage REIT investing primarily in Agency and Non-Agency residential mortgage-backed securities (RMBS) and residential loans. The filing was signed October 31, 2013; the company marked “No” for being current with required SEC filings.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest income | $161.5 million | $179.9 million | $311.2 million | $351.9 million |
| GAAP net interest income | $139.6 million | $144.1 million | $252.9 million | $280.5 million |
| Net income | $40.8 million | $54.0 million | $121.0 million | $154.6 million |
| Diluted earnings per share | $0.04 | $0.05 | $0.12 | $0.15 |
| Dividend declared per common share | $0.09 | $0.13 | $0.20 | $0.27 |
- Q2 economic net interest income, which includes realized swap losses, was $134.4 million versus $139.8 million. The economic net interest spread was 4.23% versus 3.52%; average portfolio yield was 6.53% versus 5.96%, and average cost of funds was 2.30% versus 2.44%.
- For the first half, economic net interest income was $243.3 million versus $273.4 million and the spread was 3.37% versus 3.48%. Management attributed lower earnings mainly to reduced portfolio size and accretion, lower net interest income, and higher credit impairment charges.
- Net other-than-temporary credit impairment losses on Non-Agency RMBS were $65.7 million for Q2 and $114.1 million for the first half, compared with $62.2 million and $95.4 million, respectively, in 2011. Q2 comprehensive income was $102.4 million, including $61.7 million of other comprehensive income.
- At June 30, total assets were $8.31 billion, liabilities $5.13 billion, and stockholders’ equity $3.18 billion. Cash and cash equivalents were $116.2 million, down from $206.3 million at year-end 2011.
- Debt included $2.36 billion of Agency RMBS repurchase agreements and $2.58 billion of non-recourse securitized liabilities. Reported total debt was approximately $4.9 billion, with debt-to-equity leverage of 1.6:1, versus 1.5:1 at year-end. Repo borrowings had a 0.43% weighted-average rate and 76-day weighted-average remaining maturity; the average haircut was 5%.
- Six-month cash flows: $189.4 million provided by operating activities, $467.8 million used in investing activities, and $188.4 million provided by financing activities. Cash declined by $90.1 million. Investment activity included $1.19 billion of loan purchases and $1.10 billion of securitized-loan debt proceeds.
- Portfolio mix by principal value shifted: Non-Agency RMBS fell to 72.9% from 75.4% at year-end; Agency RMBS to 18.1% from 21.1%; securitized loans rose to 9.0% from 3.5%. Non-Agency holdings were highly credit-sensitive: 94.93% were rated below B or not rated.
Material changes, outlook, and risks
- The company expanded securitized residential loans materially, with loans held for investment rising to $1.32 billion from $256.6 million at year-end. It completed the CSMC 2012-CIM2 securitization during Q2 and retained subordinate interests. Consolidated VIE assets and liabilities are restricted/non-recourse, respectively.
- Management said it expected the portfolio to remain weighted toward RMBS and anticipated continued use of repo and securitization financing. It stated that assets, leverage, and available borrowing arrangements were expected to cover near-term liquidity needs, while warning that falling collateral values could prompt margin calls and force asset sales. The board announced a regular $0.09 quarterly dividend for Q3 and Q4 2012 and each quarter of 2013; future distributions remain subject to board action and REIT requirements.
- Material accounting and control issues: prior financial statements were restated for errors in Non-Agency RMBS accounting, and the filing also describes corrections to OTTI and OCI presentation. Management said a previously identified material weakness in internal controls had not been remediated and disclosure controls were ineffective as of June 30, 2012 and the report date. Management nevertheless concluded the statements in this filing were fairly presented in accordance with GAAP.
- The company disclosed an ongoing Audit Committee investigation related to Non-Agency RMBS accounting and three shareholder derivative demand letters alleging failures of oversight and accurate financial reporting. The company could not predict their outcomes. Management reported no contingency requiring accrual for ordinary-course claims or representation-and-warranty repurchase obligations.
- Because of late SEC filings, the company said it could not use its equity distribution agreement, DRSPP, or Form S-3 to raise capital until it had filed timely for a full year. The management fee was reduced from 1.50% to 0.75% of defined gross equity effective November 28, 2012, with the reduction tied to becoming current on filings; the manager also agreed to cover specified restatement and investigation costs not covered by insurance.
- Key risks include Non-Agency RMBS credit and valuation uncertainty, interest-rate and prepayment mismatch, short-term repo refinancing and collateral-margin risk, swap-counterparty exposure, and maintaining REIT and Investment Company Act exemptions. Most Non-Agency RMBS fair values used Level 3 inputs and significant management estimates.
Investor verification priorities
- Review the restatement disclosures, the OTTI/OCI corrections, and whether the material weakness and ineffective disclosure controls were subsequently remediated.
- Check subsequent filings for the Audit Committee investigation, derivative demands, and any related expenses, claims, or outcomes.
- Verify subsequent portfolio credit performance, Non-Agency RMBS cash-flow assumptions and Level 3 valuations, loan delinquencies, and allowance adequacy.
- Assess liquidity and refinancing capacity, repo counterparties and margin terms, swap collateral, and the ability to access equity markets while filing restrictions apply.
- Confirm later dividend declarations and the impact of the management-fee reduction and manager reimbursement commitments.