Troubled mortgage REIT Chimera Investment Corp. (CIM) has filed an SEC Form 8-K dated August 1, 2012 to update and clarify the company's attempts to restate past financial results. A press release has also been issued by the company stating the current dividend rate will be paid for the final two quarters of 2012. Investors on both sides of the Chimera debate will find some ammunition for their arguments.
The main point of the 8-K is that Chimera Investment had been using the wrong guidance source for GAAP accounting for the time frame "From the Company's inception in 2007 through the second quarter of 2011" To correct for the mistake the GAAP results for 2008, 2009 and 2010 and first half of 2011 will be restated on the 2011 10-K - annual report - when it is filed. The accounting errors during the four years overstated the interest income earned and understated other-than-temporary impairment losses on non-agency MBS. Here are the estimated changes in GAAP reporting for the period from 2008 through the first three quarters of 2011 - quoted from the 8-K:
Interest income for the Restatement Period is expected to decrease by approximately $411 million (22%) from approximately $1.88 billion to $1.46 billion.
Other-than-temporary impairment losses for the Restatement Period is expected to increase by approximately $293 million (154%) from approximately $190 million to $484 million.
Realized losses on sales for the Restatement Period is expected to decrease by approximately $9 million (31%) from approximately $29 million to $20 million.
Net income for the Restatement Period is expected to decrease by approximately $695 million (66%) from approximately $1.06 billion to $367 million.
Accumulated other comprehensive income (loss) for the Restatement Period is expected to increase by approximately $695 million (2,317%) from approximately $30 million to $725 million.
Accumulated deficit for the Restatement Period is expected to increase by approximately $695 million (240%) from ($289) million to ($984) million.
The first three items add up to impairments of $695 million and each of the last three lists $695 million, so it seems the $695 million over the 3.5 year period will just move around the income statement until it finds a home. The company's statement that the accounting changes will have no material effect on previously reported book values appears to be true as long as the final, official numbers work out in the same fashion.
I would like to quote the comments in the 8-K concerning Chimera's accounting procedures:
We are aware that the occurrence of a restatement of previously issued consolidated financial statements can indicate material weaknesses in internal controls over financial reporting. We are in the process of assessing the extent of the material weaknesses in our internal controls over financial reporting during the Restatement Period, and it is possible we may identify one or more control deficiencies.
The company also has no estimate on when it will file the 2011 10-K annual report or the 10-Q reports for the first and second quarters of 2012.
The good news on the dividend front is the announcement that Chimera Investment plans to make a 9 cent per share - same as for the second quarter - distribution for the third and fourth quarters of 2012. The 36 cent annual rate holds the CIM yield in the 14% area - a yield probably in line with the risk this stock still poses for investors. The caveat in the press release concerning the distributions of "Portions of such distributions may be ordinary income, capital gains or a return of capital." gives investor something to think about. The phrase also reflects the perception from the accounting issues that the company has a little trouble deciding how the cash flows should be classified.
For investors holding shares of Chimera Investments, today's two pieces of news are good news. The market seems to agree, pushing the share price up over 10% early in the trading day. As I write this, some of that gain has come off and it will be interesting to see where the shares will go from here.
My position remains that either the Chimera Investment business model or the execution of the business plan are flawed. Two years ago, the company was paying 17 cents quarterly and now it plans to pay 9 cents. The accounting mix up and the long delay to determine a course of action to rectify the situation to me indicates a lack of solid understanding of the high-risk mortgage securities in the company's portfolio. It will be interesting to read through the official 2011 annual report plus the results for the first, second and third quarters of 2012.
Final data for thought: At the end of 2010, Chimera reported an economic book value of $3.59 per share, for the 2011 third quarter the value was $3.01 and when the most recent dividend was announced on 6/19/2012 the estimated book value was $2.76 per share.
CIM data by YCharts