UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-13447
CHIMERA INVESTMENT CORPORATION
(Exact name of Registrant as specified in its Charter)
MARYLAND 26-0630461
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1211 AVENUE OF THE AMERICAS, SUITE 2902
NEW YORK, NEW YORK
(Address of principal executive offices)
10036
(Zip Code)
(646) 454-3759
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes |X| No |_|
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting company. See
definition of "accelerated filer," "large accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Class Outstanding at May 7, 2009
Common Stock, $.01 par value 472,401,769
CHIMERA INVESTMENT CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition at March 31, 2009 (Unaudited) and December 31, 2008
(Derived from the audited consolidated statement of financial condition at December 31, 2008) 1
Consolidated Statements of Operations and Comprehensive Income (Loss) for the quarters ended
March 31, 2009 and 2008 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the quarter ended March 31, 2009 (Unaudited) 3
Consolidated Statements of Cash Flows for the quarters ended March 31, 2009 and 2008 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
Item 4. Controls and Procedures 47
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 6. Exhibits 51
SIGNATURES 52
CERTIFICATIONS 53
i
PART I.
ITEM 1. FINANCIAL STATEMENTS
CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share and per share data)
March 31, 2009 December 31,
(unaudited) 2008(1)
----------------- -----------------
ASSETS
Cash and cash equivalents $ 12,200 $ 27,480
Mortgage-Backed Securities, at fair value 1,085,792 855,467
Securitized loans held for investment, net of allowance for loan losses of
$1.9 million and $1.6 million, respectively 565,895 583,346
Accrued interest receivable 11,212 9,951
Other assets 949 1,257
----------------- -----------------
Total assets $ 1,676,048 $ 1,477,501
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 559,926 $ 562,119
Securitized debt 473,168 488,743
Payable for investments purchased 193,973 -
Accrued interest payable 2,468 2,465
Dividends payable 10,566 7,040
Accounts payable and other liabilities 3,121 2,679
----------------- -----------------
Total liabilities 1,243,222 1,063,046
----------------- -----------------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock: par value $.01 per share; 500,000,000 shares authorized,
and 177,196,945 and 177,198,212 shares issued and outstanding,
respectively 1,761 1,760
Additional paid-in capital 832,070 831,966
Accumulated other comprehensive loss (256,705) (266,668)
Accumulated deficit (144,300) (152,603)
----------------- -----------------
Total stockholders' equity 432,826 414,455
----------------- -----------------
Total liabilities and stockholders' equity $ 1,676,048 $ 1,477,501
================= =================
(1) Derived from the audited consolidated statement of financial condition at
December 31, 2008.
See notes to consolidated financial statements.
1
CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
(unaudited)
For the Quarter For the Quarter
Ended March 31, Ended March 31,
2009 2008
----------------- -----------------
Interest income $ 28,007 $ 28,194
Interest expense 9,042 14,022
----------------- -----------------
Net interest income 18,965 14,172
----------------- -----------------
Unrealized loss on interest rate swaps - (31,493)
Realized gains (losses) on sales of investments 3,627 (32,819)
----------------- -----------------
Net investment income (expense) 22,592 (50,140)
----------------- -----------------
Other expenses
Management fee 2,583 2,227
General and administrative expenses 1,139 2,565
----------------- -----------------
Total expenses 3,722 4,792
Income (loss) before income taxes 18,870 (54,932)
Income tax 1 3
----------------- -----------------
Net income (loss) $ 18,869 $ (54,935)
================= =================
Net income (loss) per share - basic and diluted $ 0.11 $ (1.46)
================= =================
Weighted average number of shares outstanding - basic and
diluted 177,196,959 37,744,486
================= =================
Comprehensive Income (Loss):
Net income (loss) $ 18,869 $ (54,935)
----------------- -----------------
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities 13,590 (88,257)
Reclassification adjustment for realized (gains) losses included
in net income (3,627) 32,819
----------------- -----------------
Other comprehensive income (loss) 9,963 (55,438)
----------------- -----------------
Comprehensive income (loss) $ 28,832 $ (110,373)
================= =================
See notes to consolidated financial statements.
2
CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(unaudited)
Accumulated
Other
Common Stock Additional Comprehensive Accumulated
Par Value Paid-in Capital Loss Deficit Total
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2008 $ 1,760 $ 831,966 ($266,668) ($152,603) $414,455
Net income - - - 18,869 18,869
Other comprehensive income - - 9,963 - 9,963
Proceeds from restricted stock
grants 1 104 - - 105
Common dividends declared, $0.06
per share - - - (10,566) (10,566)
---------------------------------------------------------------------------------
Balance, March 31, 2009 $ 1,761 $ 832,070 ($256,705) ($144,300) $432,826
=================================================================================
See notes to consolidated financial statements.
3
CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Quarter For the Quarter
Ended March 31, Ended March 31,
2009 2008
----------------- -----------------
Cash Flows From Operating Activities:
Net income (loss) $ 18,869 $ (54,935)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Amortization of investment discounts (1,254) (615)
Unrealized loss on interest rate swaps - 31,493
Realized (gain) loss on sale of investments (3,627) 32,819
Provision for loan losses 234 1,179
Restricted stock grant expense 104 697
Changes in operating assets:
Increase in accrued interest receivable (1,261) (5,871)
Decrease (increase) in other assets 309 (329)
Changes in operating liabilities:
Increase in accounts payable and other liabilities 442 799
Increase in accrued interest payable 4 2,792
----------------- -----------------
Net cash provided by operating activities 13,820 8,029
Cash Flows From Investing Activities:
Mortgage-Backed securities portfolio:
Purchases (607,798) (1,228,572)
Sales 548,433 248,014
Principal payments 38,557 49,190
Loans held for investment portfolio:
Purchases - (329,610)
Sales - -
Principal payments - 6,857
Securitized loans:
Purchases - -
Principal payments 16,911 -
Reverse repurchase agreements - 265,000
Decrease in restricted cash - (101,484)
----------------- -----------------
Net cash used in investing activities (3,897) (1,090,605)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements 29,325,631 5,448,193
Payments on repurchase agreements (29,327,824) (4,279,243)
Costs associated with common stock offerings - (87)
Net payments on securitized debt (15,970) -
4
CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollars in thousands)
(unaudited)
Common dividends paid (7,040) (943)
----------------- -----------------
Net cash (used in) provided by financing activities (25,203) 1,167,920
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (15,280) 85,344
Cash and cash equivalents at beginning of period 27,480 6,026
----------------- -----------------
Cash and cash equivalents at end of period $ 12,200 $ 91,370
================= =================
Supplemental disclosure of cash flow information
Interest paid $ 9,039 $ 11,230
================= =================
Taxes paid $ - $ 45
================= =================
Non cash investing activities
Payable for investments purchased $ 193,973 $ -
================= =================
Receivable for investments sold $ - $ 113,581
================= =================
Net change in unrealized gain (loss) on available for sale securities $ 9,963 $ (55,438)
================= =================
Non cash financing activities
Common dividends declared, not yet paid $ 10,566 $ 9,814
================= =================
See notes to consolidated financial statements.
5
CHIMERA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2009
--------------------------------------------------------------------------------
(unaudited)
1. Organization and Significant Accounting Policies
Chimera Investment Corporation, or the Company, was organized in Maryland on
June 1, 2007. The Company commenced operations on November 21, 2007 when it
completed its initial public offering. The Company has elected to be taxed as a
real estate investment trust, or REIT, under the Internal Revenue Code of 1986,
as amended. As long as the Company qualifies as a REIT, the Company will
generally not be subject to U.S. federal or state corporate taxes on its income
to the extent that the Company distributes at least 90% of its taxable net
income to its stockholders. In July 2008, the Company formed Chimera Securities
Holdings, LLC, a wholly-owned subsidiary. Chimera Securities Holdings, LLC is a
qualified REIT subsidiary used to hold residential mortgage-backed securities,
or RMBS, for certain of the Company's securitizations. Annaly Capital
Management, Inc., or Annaly, owns 8.6% of the Company's common shares. The
Company is managed by Fixed Income Discount Advisory Company, or FIDAC, an
investment advisor registered with the Securities and Exchange Commission. FIDAC
is a wholly-owned subsidiary of Annaly.
A summary of the Company's significant accounting policies follows:
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they may not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America, or GAAP. The consolidated
interim financial statements are unaudited; however, in the opinion of the
Company's management, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial position, results
of operations, and cash flows have been included. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2008. The nature of the Company's business is such
that the results of any interim period are not necessarily indicative of results
for a full year. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Chimera Securities Holdings, LLC.
All intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and money market funds.
Restricted Cash
Restricted cash includes cash held by counterparties as collateral for
repurchase agreements and interest rate swaps.
Reverse Repurchase Agreements
The Company may invest its daily available cash balances via reverse repurchase
agreements to provide additional yield on its assets. These investments will
typically be recorded as short term investments, will mature daily, and are
referred to as reverse repurchase agreements in the consolidated statement of
financial condition. Reverse repurchase agreements are recorded at cost and are
collateralized by RMBS.
6
Residential Mortgage-Backed Securities
The Company invests in RMBS representing interests in obligations backed by
pools of mortgage loans and carries those securities at fair value estimated
using a pricing model. Management reviews the fair values generated by the model
to determine whether prices are reflective of the current market. Management
performs a validation of the fair value calculated by the pricing model by
comparing its results to independent prices provided by dealers in the
securities and/or third party pricing services. If dealers or independent
pricing services are unable to provide a price for an asset, or if the price
provided by them is deemed unreliable by FIDAC, then the asset will be valued at
its fair value as determined in good faith by FIDAC. In the current market, it
may be difficult or impossible to obtain third party pricing on certain of the
Company's investments. In addition, validating third party pricing for the
Company's investments may be more subjective as fewer participants may be
willing to provide this service to the Company. Moreover, the current market is
more illiquid than in recent history for some of the investments the Company
owns. Illiquid investments typically experience greater price volatility as a
ready market does not exist. As volatility increases or liquidity decreases, the
Company may have greater difficulty financing its investments which may
negatively impact its earnings and the execution of its investment strategy.
Please see Note 4 for a discussion of fair value measurement.
Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires the Company to
classify its investment securities as either trading investments,
available-for-sale investments or held-to-maturity investments. The Company
intends to hold its RMBS as available-for-sale and as such may sell any of its
RMBS as part of its overall management of its portfolio. All assets classified
as available-for-sale are reported at estimated fair value, with unrealized
gains and losses included in other comprehensive income.
Management evaluates the Company's assets for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been lower than carrying value, (2) the
financial condition and near-term prospects of the issuer, (3) credit quality
and cash flow performance of the security, and (4) the intent and ability of the
Company to retain its investment in the security for a period of time sufficient
to allow for any anticipated recovery in fair value. Unrealized losses on assets
that are considered other than temporary, as measured by the amount of decline
in fair value attributable to other-than-temporary factors, are recognized in
income and the cost basis of the assets is adjusted.
RMBS transactions are recorded on the trade date. Realized gains and losses from
sales of RMBS are determined based on the specific identification method and
recorded as a gain (loss) on sale of investments in the statement of operations.
Accretion of discounts or amortization of premiums on available-for-sale
securities and mortgage loans is computed using the effective interest yield
method and is included as a component of interest income in the statement of
operations.
Securitized Loans Held for Investment
The Company's securitized residential mortgage loans are comprised of fixed-rate
and variable-rate loans. The Company purchases pools of residential mortgage
loans through a select group of originators. Mortgage loans are designated as
held for investment, recorded on trade date, and are carried at their principal
balance outstanding, plus any premiums or discounts which are amortized or
accreted over the estimated life of the loan, less allowances for loan losses.
Allowance for Loan Losses
The Company has established an allowance for loan losses at a level that
management believes is adequate based on an evaluation of known and inherent
risks related to the Company's loan portfolio. The estimate is based on a
variety of factors including current economic conditions, industry loss
experience, the loan originator's loss experience, credit quality trends, loan
portfolio composition, delinquency trends, national and local economic trends,
national unemployment data, changes in housing appreciation or depreciation and
whether specific geographic areas where the Company has significant loan
7
concentrations are experiencing adverse economic conditions and events such as
natural disasters that may affect the local economy or property values. Upon
purchase of the pools of loans, the Company obtained written representations and
warranties from the sellers that the Company could be reimbursed for the value
of the loan if the loan fails to meet the agreed upon origination standards.
While the Company has little history of its own to establish loan trends,
delinquency trends of the originators and the current market conditions aid in
determining the allowance for loan losses. The Company also performed due
diligence procedures on a sample of loans that met its criteria during the
purchase process. The Company has created an unallocated provision for possible
loan losses estimated as a percentage of the remaining principal on the loans.
Management's estimate is based on historical experience of similarly
underwritten pools.
When the Company determines it is probable that specific contractually due
amounts are uncollectible, the amount is considered impaired. Where impairment
is indicated, a valuation write-off is measured based upon the excess of the
recorded investment over the net fair value of the collateral, reduced by
selling costs. Any deficiency between the carrying amount of an asset and the
net sales price of repossessed collateral is charged to the allowance for loan
losses.
Securitized Debt
The Company has issued securitized debt to finance a portion of its residential
mortgage loan portfolio. The securitizations are collateralized by residential
adjustable or fixed rate mortgage loans that have been placed in a trust and pay
interest and principal payments to the debt holders of that securitization. The
Company's securitizations which are accounted for as financings under SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities ("SFAS 140"), are recorded as an asset called
"Securitized loans" and the corresponding debt as "Securitized debt" in the
consolidated statement of financial condition.
Fair Value Disclosure
SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires
disclosure of the fair value of financial instruments for which it is
practicable to estimate that value. The estimated fair value of mortgage-backed
securities and interest rate swaps is equal to their carrying value presented in
the consolidated statements of financial condition. Securitized loans are
carried at amortized cost. The estimated fair value of cash and cash
equivalents, accrued interest receivable, reverse repurchase agreements,
mortgage-backed securities purchased, dividends payable, accounts payable, and
accrued interest payable, generally approximates cost due to the short term
nature of these financial instruments.
Interest Income
Interest income on RMBS and loans held for investment is recognized over the
life of the investment using the effective interest method as described by SFAS
No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases, for securities of high
credit quality and Emerging Issues Task Force ("EITF") No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets, as amended by Staff Position ("FSP") EITF No.
99-20-1, for all other securities. Income recognition is suspended for loans
when, in the opinion of management, a full recovery of income and principal
becomes doubtful. Income recognition is resumed when the loan becomes
contractually current and performance is demonstrated to be resumed.
Derivative Financial Instruments/Hedging Activity
The Company may hedge interest rate risk through the use of derivative financial
instruments such as interest rate swaps. If the Company hedges using interest
rate swaps it accounts for these instruments as free-standing derivatives.
Accordingly, they are carried at fair value with realized and unrealized gains
and losses recognized in earnings.
8
The Company accounts for derivative financial instruments in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), as amended and interpreted. SFAS 133 requires an entity to
recognize all derivatives as either assets or liabilities in the consolidated
statement of financial condition and to measure those instruments at fair value.
Additionally, the fair value adjustments affect either other comprehensive
income in stockholders' equity until the hedged item is recognized in earnings
or net income depending on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature of the hedging activity.
Credit Risk
The Company retains the risk of potential credit losses on all of the non-Agency
residential mortgage loans it owns as well as the residential mortgage loans
which collateralize the RMBS it owns. The Company attempts to mitigate the risk
of potential credit losses through its diligence in the asset selection process.
Mortgage Loan Sales and Securitizations
The Company periodically enters into transactions in which it sells financial
assets, such as RMBS, mortgage loans and other assets. It may also securitize
and re-securitize financial assets. These transactions are recorded in
accordance with SFAS 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities (SFAS 140) and are accounted for as
either a "sale" and the loans held for investment are removed from the
consolidated statements of financial condition or as a "financing" and are
classified as "Securitized loans held for investment" on the Company's
consolidated statements of financial condition, depending upon the structure of
the securitization transaction. In these securitizations and re-securitizations
the Company sometimes retains or acquires senior or subordinated interests in
the securitized or re-securitized assets. Gains and losses on such
securitizations or re-securitizations are recognized using the guidance in SFAS
No. 140 which is based on a financial components approach that focuses on
control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished.
The Company determines the gain or loss on sale of mortgage loans by allocating
the carrying value of the underlying mortgage loans between securities or loans
sold and the interests retained based on their fair values. The gain or loss on
sale is the difference between the cash proceeds from the sale and the amount
allocated to the securities or loans sold.
Income Taxes
The Company qualifies to be taxed as a REIT, and therefore it generally will not
be subject to corporate federal or state income tax to the extent that
qualifying distributions are made to stockholders and the REIT requirements,
including certain asset, income, distribution and stock ownership tests are met.
If the Company failed to qualify as a REIT and did not qualify for certain
statutory relief provisions, the Company would be subject to federal, state and
local income taxes and may be precluded from qualifying as a REIT for the
subsequent four taxable years following the year in which the REIT qualification
was lost.
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of deferred income
taxes for differences between the basis of assets and liabilities for financial
statement and income tax purposes. Deferred tax assets and liabilities represent
the future tax consequence for those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available to offset
future taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. In July 2006,
the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a company's
financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in an income tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 was effective
for the Company upon inception and its effect was not material.
9
Net Income/Loss per Share
The Company calculates basic net income/loss per share by dividing net
income/loss for the period by the weighted-average shares of its common stock
outstanding for that period. Diluted net income/loss per share takes into
account the effect of dilutive instruments, such as stock options, but uses the
average share price for the period in determining the number of incremental
shares that are to be added to the weighted average number of shares
outstanding. The Company had no potentially dilutive securities outstanding
during the periods presented.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123R, Accounting for Stock-Based Compensation, which
establishes accounting and disclosure requirements using fair value based
methods of accounting for stock-based compensation plans. Compensation expense
related to grants of stock and stock options is recognized over the vesting
period of such grants based on the estimated fair value on the grant date.
Stock compensation awards granted by Chimera to the employees of FIDAC are
accounted for in accordance with EITF 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods and Services, which requires the Company to measure the fair
value of the equity instrument using the stock prices and other measurement
assumptions as of the earlier of either the date at which a performance
commitment by the counterparty is reached or the date at which the
counterparty's performance is complete.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles or (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In February 2008, the Financial Accounting Standards Board ("FASB") issued FSP
No. SFAS 140-3 Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions, ("FSP SFAS 140-3"). FSP SFAS 140-3 addresses whether
transactions where assets purchased from a particular counterparty and financed
through a repurchase agreement with the same counterparty can be considered and
accounted for as separate transactions, or are required to be considered
"linked" transactions and may be considered derivatives under SFAS 133. FSP SFAS
140-3 requires purchases and subsequent financing through repurchase agreements
be considered linked transactions unless all of the following conditions apply:
(1) the initial purchase and the use of repurchase agreements to finance the
purchase are not contractually contingent upon each other; (2) the repurchase
financing entered into between the parties provides full recourse to the
transferee and the repurchase price is fixed; (3) the financial assets are
readily obtainable in the market; and (4) the financial instrument and the
repurchase agreement are not coterminous. This FSP is effective for the Company
as of January 1, 2009. The Company meets the requirements of this FSP to treat
repurchase financings as non-linked transactions and this FSP has no effect on
financial reporting.
In June 2008, the FASB proposed amending SFAS 140 and FASB Interpretation No.
46, Consolidation of Variable Interest Entities (revised December 2003) ("FIN
46R"). This was due to increased scrutiny of these accounting pronouncements by
the Securities and Exchange Commission (the "SEC"), Congress and financial
statement users in the wake of recent deterioration in the credit markets. The
proposed amendments would eliminate the Qualified Special Purpose Entity (QSPE)
in SFAS 140, and modify the consolidation model in FIN 46(R). QSPEs are utilized
10
extensively by many financial firms in securitizations for off-balance sheet
financing for "sale accounting" treatment in the transfer of financial assets.
Currently, QSPEs do not have to be consolidated on the issuing firm's financial
statements. Should the proposed changes to SFAS 140 become final, enterprises
involved with QSPEs will no longer be exempt from applying FIN 46(R), the FASB
Interpretation on consolidation; thus, previously unconsolidated entities may
have to be consolidated. The revisions will also eliminate the provision in
paragraph 9(b) of SFAS 140 that allowed entities to "look-through" to the rights
of beneficial interest holders when analyzing control. Further, the revisions
will address the de-recognition of assets and amend the criteria for said
de-recognition; and require that the beneficial interests received by a
transferor, in connection with a sale of an entire financial asset to an entity
that is not consolidated by the transferor, be considered proceeds of the sale
and initially measured at fair value. This amendment is currently being
redeliberated by the FASB.
In December 2008, the FASB issued a staff position entitled FSP SFAS 140-4 and
FIN 46(R)-8 (FSP). The FSP amends both SFAS 140 and FIN 46R, to require public
entities to provide additional disclosures about the transfer of financial
assets and involvement with variable interest entities (including qualifying
special purpose entities or QSPE), respectively. The intent of the disclosure
requirements is to provide greater transparency to financial statement users
about an enterprise's continuing involvement with financial assets after they
have been transferred in a securitization or asset-backed financing arrangement
(SFAS 140); and to demonstrate how an enterprise's involvement with a variable
interest entity (VIE) affects its financial position, financial performance and
cash flows (FIN 46(R)). The Company sponsored two securitizations during 2008
and two during the first quarter of 2009. The first was accounted for as a
financing, and all other securitizations were accounted for as sales.
Additionally, the Company is involved in asset-backed financing arrangements in
the form of repurchase agreements and reverse repurchase agreements; therefore
it is directly affected by the FSP. The implementation of this FSP increased
disclosures regarding the Company's assets and liabilities, which are included
in Note 4. This FSP was effective for the Company on December 31, 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measurements. SFAS 157
requires companies to disclose the fair value of its financial instruments
according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined).
Additionally, companies are required to provide enhanced disclosure regarding
instruments in the level 3 category (which require significant management
judgment), including a reconciliation of the beginning and ending balances
separately for each major category of assets and liabilities. SFAS 157 was
adopted by the Company on January 1, 2008. SFAS 157 did not significantly impact
the manner in which management estimates fair value, but it required additional
disclosures, which are included in Note 4.
In October 2008, FASB issued FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active ("FSP 157-3"), in
response to the deterioration of the credit markets. This FSP provides guidance
clarifying how SFAS 157, should be applied when valuing securities in markets
that are not active. The guidance provides an illustrative example that applies
the objectives and framework of SFAS 157, utilizing management's internal cash
flow and discount rate assumptions when relevant observable data do not exist.
It further clarifies how observable market information and market quotes should
be considered when measuring fair value in an inactive market. It reaffirms the
notion of fair value as an exit price as of the measurement date and that fair
value analysis is a transactional process and should not be broadly applied to a
group of assets. FSP 157-3 was effective upon issuance including prior periods
for which financial statements have not been issued. The implementation of FSP
157-3 did not have a material effect on the fair value of the Company's assets
as the Company intends to continue the methodologies used in previous quarters
to value assets as defined under the original SFAS 157.
On October 3, 2008 the Emergency Economic Stabilization Act of 2008 (the "EESA")
was signed into law. Section 133 of the EESA mandated that the SEC conduct a
study on mark-to-market accounting standards. The SEC provided its study to the
US Congress on December 30, 2008. Part of the recommendations within the study
indicated that "fair value requirements should be improved through development
of application and best practices guidance for determining fair value in
illiquid or inactive markets". As a result of this study and the recommendations
therein, on April 9, 2009, the FASB issued Staff Position (FSP) 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or
11
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional guidance on determining fair value when
the volume and level of activity for the asset or liability have significantly
decreased when compared with normal market activity for the asset or liability
(or similar assets or liabilities). The FSP gives specific factors to evaluate
if there has been a decrease in normal market activity and if so, provides a
methodology to analyze transactions or quoted prices and make necessary
adjustments to fair value in accordance with Statement 157. The objective is to
determine the point within a range of fair value estimates that is most
representative of fair value under current market conditions. FSP 157-4 is
effective for the Company for interim and annual reporting periods ending after
June 15, 2009. The Company does not foresee FSP 157-4 having a material impact
on the manner in which the Company estimates fair value, nor does it expect
material increases in current disclosures.
Additionally, in conjunction with FSP 157-4, the FASB issued FAS 115-2 and FAS
124-2, Recognition and Presentation of Other Than Temporary Impairments. The
objective of the new guidance is to make impairment guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments (OTTI) on debt and equity securities in financial statements. This,
too, was as a result of the SEC mark-to-market study mandated under the EESA.
The SEC's recommendation was to "evaluate the need for modifications (or the
elimination) of current OTTI guidance to provide for a more uniform system of
impairment testing standards for financial instruments." The new guidance
revises the OTTI evaluation methodology. Previously the analytical focus was on
whether the entity had the "intent and ability to retain its investment in the
debt security for a period of time sufficient to allow for any anticipated
recovery in fair value." Now the focus is on whether the entity has the "intent
to sell the debt security or, more likely than not, will be required to sell the
debt security before its anticipated recovery." Further, the security is
analyzed for credit loss (the difference between the present value of cash flows
expected to be collected and the amortized cost basis). If the company does not
intend to sell the debt security, nor will be required to sell the debt security
prior to its anticipated recovery, the credit loss, if any, will be recognized
in the statement of earnings, while the balance of impairment related to other
factors will be recognized in Other Comprehensive Income (OCI). If the company
intends to sell the security, or will be required to sell the security before
its anticipated recovery, the full OTTI will be recognized in the statement of
earnings. FAS 115-2 and FAS 124-2 are effective for the Company for all interim
and annual periods ending after June 15, 2009. We expect that adoption of these
rules will increase footnote disclosure and may result in a cumulative effect
adjustment to retained earnings in the period of adoption. In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, ("SFAS 159"). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS
159 became effective for the Company January 1, 2008. The Company did not elect
the fair value option for any existing eligible financial instruments.
In March 2008, the FASB issued SFAS No. 161, ("SFAS 161"), Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS 161 attempts to improve the transparency of financial reporting by
providing additional information about how derivative and hedging activities
affect an entity's financial position, financial performance and cash flows.
This statement changes the disclosure requirements for derivative instruments
and hedging activities by requiring enhanced disclosure about (1) how and why an
entity uses derivative instruments, (2) how derivative instruments and related
hedged items are accounted for under SFAS Statement 133 and its related
interpretations, and (3) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows. To
meet these objectives, SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. This disclosure framework is intended to better convey the purpose
of derivative use in terms of the risks that an entity is intending to manage.
SFAS 161 was effective and adopted by the Company on January 1, 2009. The
adoption of SFAS 161 will increase footnote disclosure when the Company engages
in hedging activities.
In January 2009, the FASB issued EITF Staff Position No EITF 99-20-1,
"Amendments to the Impairment Guidance of EITF Issue 99-20". EITF 99-20-1 was
issued in an effort to provide a more consistent determination on whether an
12
other-than-temporary impairment has occurred for certain beneficial interests in
securitized financial assets. Other-than-temporary impairment has occurred if
there has been an adverse change in future estimated cash flow and its impact
reflected in current earnings. The determination cannot be overcome by
management judgment of the probability of collecting all cash flows previously
projected. For debt securities that are not within the scope of EITF 99-20-1,
Statement 115 continues to apply. The objective of other-than-temporary
impairment analysis is to determine whether it is probable that the holder will
realize some portion of the unrealized loss on an impaired security. Factors to
consider when making an other-than-temporary impairment decision include
information about past events, current conditions, reasonable and supportable
forecasts, remaining payment terms, financial condition of the issuer, expected
defaults, value of underlying collateral, industry analysis, sector credit
rating, credit enhancement, and financial condition of guarantor. The Company's
non-Agency RMBS investments fall under the guidance of this EITF and as such the
Company assesses each security for other-than-temporary impairments based on
estimated future cash flows. This EITF became effective for the Company on
December 31, 2008.
On April 9, 2009, the FASB also issued FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments. The FSP requires
disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. This will be effective for
the Company June 30, 2009. The adoption of FSP FAS 107-1 and APB 28-1 will
increase footnote disclosure.
2. Mortgage-Backed Securities
The following table represents the Company's available for sale RMBS portfolio
as of March 31, 2009 and December 31, 2008, at fair value.
March 31, 2009 December 31, 2008
--------------------------------------------------------------------------------------------------
(dollars in thousands)
Mortgage-Backed securities, at amortized cost $1,342,497 $1,122,135
Gross unrealized gain 9,504 7,700
Gross unrealized loss (266,209) (274,368)
------------------------ ----------------------
Fair value $1,085,792 $ 855,467
======================== ======================
During the quarter ended March 31, 2009, the Company completed sales of RMBS
with a carrying value of $544.8 million which resulted in a realized gain of
approximately $3.6 million. During the quarter ended December 31, 2008 the
Company had no sales of investments.
The following table presents the gross unrealized losses and estimated fair
value of the Company's RMBS by length of time that such securities have been in
a continuous unrealized loss position at March 31, 2009 and December 31, 2008.
Unrealized Loss Position For:
Less than 12 Months 12 Months or More Total
Estimated Unrealized Estimated Unrealized Estimated Fair Unrealized
Fair Value Losses Fair Value Losses Value Losses
--------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
March 31, 2009 $238,249 ($ 58,308) $470,978 ($207,901) $709,227 ($266,209)
December 31, 2008 $855,467 ($274,368) $ - $ - $855,467 ($274,368)
The Company's investments are not considered other-than-temporarily impaired
because the Company has assessed the securities using cash flow modeling to
determine if principal impairment has occurred and the Company currently has the
ability and intent to hold the investments to maturity or for a period of time
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments.
13
Actual maturities of mortgage-backed securities are generally shorter than
stated contractual maturities. Actual maturities of the Company's RMBS are
affected by the contractual lives of the underlying mortgages, periodic payments
of principal and prepayments of principal.
The following tables summarize the Company's RMBS at March 31, 2009 and December
31, 2008 according to their estimated weighted-average life classifications:
March 31, 2009
(dollars in thousands)
Weighted Average
Weighted Average Life Fair Value Amortized Cost Coupon
--------------------------------------------------------------------------------------------------------------------------
Less than one year $ - $ - -
Greater than one year and less than five years 909,005 1,116,722 6.07%
Greater than five years 176,787 225,775 6.03%
------------------------------------------------------------------------
Total $1,085,792 $1,342,497 6.07%
========================================================================
December 31, 2008
(dollars in thousands)
Weighted Average
Weighted Average Life Fair Value Amortized Cost Coupon
--------------------------------------------------------------------------------------------------------------------------
Less than one year $ - $ - -
Greater than one year and less than five years 768,163 975,835 6.05%
Greater than five years 87,304 146,300 6.56%
------------------------------------------------------------------------
Total $855,467 $1,122,135 6.12%
========================================================================
The weighted-average lives of the mortgage-backed securities as of March 31,
2009 and December 31, 2008 in the tables above are based on data provided
through dealer quotes, assuming constant prepayment rates to the balloon or
reset date for each security. The prepayment model considers current yield,
forward yield, steepness of the curve, current mortgage rates, mortgage rates of
the outstanding loan, loan age, margin and volatility.
In March 2009, the Company sponsored a $281.9 million re-securitization whereby
it re-securitized certain residential mortgage-backed securities it owned. In
this transaction, the Company initially retained all of the securities issued by
the securitization trust including approximately $89.4 million in subordinated
bonds and $192.5 million of AAA-rated fixed and hybrid senior bonds. Pursuant to
FAS 140, this transaction was accounted for as a sale.
In January 2009, the Company sponsored a $140.4 million re-securitization
whereby it re-securitized certain residential mortgage-backed securities it
owned. Concurrent with the settlement of this transaction, the Company sold
approximately $139.4 million of the AAA-rated fixed senior bonds to third-party
investors and retained approximately $1.0 million in AAA-rated fixed senior
bonds and a fixed rate IO. Pursuant to FAS 140, the transaction with the third
party was accounted for as a sale.
3. Securitized Loans Held for Investment
The following table represents the Company's securitized residential mortgage
loans classified as held for investment at March 31, 2009 and December 31, 2008.
At March 31, 2009 approximately 56.0% of the Company's securitized loans are
adjustable rate mortgage loans and 44.0% are fixed rate mortgage loans. All of
the adjustable rate loans held for investment are hybrid ARMs. Hybrid ARMs are
mortgages that have interest rates that are fixed for an initial period
(typically three, five, seven or 10 years) and thereafter reset at regular
intervals subject to interest rate caps. The loans held for investment are
carried at their principal balance outstanding less an allowance for loan
losses:
14
March 31, 2009 December 31, 2008
----------------------------------------------------------------------------------------------------------
(dollars in thousands)
Securitized mortgage loans, at principal balance $567,750 $584,967
Less: allowance for loan losses 1,855 1,621
---------------------------------------------------
Securitized mortgage loans held for investment $565,895 $583,346
===================================================
The following table summarizes the changes in the allowance for loan losses for
the securitized mortgage loan portfolio during the quarters ended March 31, 2009
and December 31, 2008:
March 31, 2009 December 31, 2008
(dollars in thousands)
Balance, beginning of period $1,621 $ 681
Provision for loan losses 234 940
Charge-offs - -
---------------------------------------
Balance, end of period $1,855 $1,621
=======================================
On a quarterly basis, the Company evaluates the adequacy of its allowance for
loan losses. The Company's allowance for loan losses for the quarter ended March
31, 2009 was $1.9 million, representing 33 basis points of the principal balance
of the Company's securitized mortgage loan portfolio. The Company's allowance
for loan losses was $1.6 million for the year ended December 31, 2008,
representing 28 basis points of the principal balance of the Company's
securitized loan portfolio.
4. Fair Value Measurements
SFAS 157 defines fair value, establishes a framework for measuring fair value,
establishes a three-level valuation hierarchy for disclosure of fair value
measurement and enhances disclosure requirements for fair value measurements.
The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The three levels
are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets and liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly,
for substantially the full term of the financial instrument.
Level 3 - inputs to the valuation methodology are unobservable and
significant to fair value.
Mortgage-Backed Securities and interest rate swaps are valued using a pricing
model. The MBS pricing model incorporates such factors as coupons, prepayment
speeds, spread to the US Department of Treasury, or the Treasury, and swap
curves, convexity, duration, periodic and life caps, and credit enhancement.
Interest rate swaps are modeled by incorporating such factors as the Treasury
curve, LIBOR rates, and the receive rate on the interest rate swap. Management
reviews the fair values determined by the pricing model and compares its results
to dealer quotes received on investments to validate reasonableness of the
valuations indicated by the pricing model. The dealer quotes incorporate common
market pricing methods, including a spread measurement to the Treasury curve or
interest rate swap curve as well as underlying characteristics of the particular
security including coupon, periodic and life caps, rate reset period, issuer,
additional credit support and expected life of the security.
Any changes to the valuation methodology are reviewed by management to ensure
the changes are appropriate. As markets and products develop and the pricing for
certain products becomes more transparent, we continue to refine our valuation
methodologies. The methods used may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values.
15
Furthermore, while the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies, or assumptions, to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date. The Company uses inputs that are current as of the measurement date, which
may include periods of market dislocation, during which price transparency may
be reduced.
At March 31, 2009 and December 31, 2008, the Company has classified its RMBS as
"Level 2".
The Company's financial assets and liabilities carried at fair value on a
recurring basis are valued at March 31, 2009 as follows:
Level 1 Level 2 Level 3
(dollars in thousands)
------------------------------------------------------------------------------------------
Assets:
Mortgage-Backed Securities - $1,085,792 -
As fair value is not an entity specific measure and is a market based approach
which considers the value of an asset or liability from the perspective of a
market participant, observability of prices and inputs can vary significantly
from period to period. During times of market dislocation, as has been
experienced during the recent months, the observability of prices and inputs can
be reduced for certain instruments. A condition such as this can cause
instruments to be reclassified from level 1 to level 2 or level 2 to level 3
when the Company is unable to obtain third party pricing verification. As of the
quarter ended March 31, 2009, the Company was able to obtain third party pricing
verification for all assets classified as level 2. The classification of assets
and liabilities by level remains unchanged at March 31, 2009, when compared to
the previous quarter.
5. Repurchase Agreements
Residential Mortgage-Backed Securities
--------------------------------------
The Company had outstanding $559.9 million and $562.1 million of repurchase
agreements with weighted average borrowing rates of 1.78% and 1.43% and weighted
average remaining maturities of 5 and 2 days as of March 31, 2009 and December
31, 2008, respectively. At March 31, 2009 and December 31, 2008, RMBS pledged as
collateral under these repurchase agreements had an estimated fair value of
$645.1 million and $680.8 million, respectively. The interest rates of these
repurchase agreements are generally indexed to the one-month LIBOR rate and
re-price accordingly.
At March 31, 2009 and December 31, 2008, the repurchase agreements
collateralized by RMBS had the following remaining maturities:
March 31, 2009 December 31, 2008
-----------------------------------------
(dollars in thousands)
Within 30 days $559,926 $562,119
30 to 59 days - -
60 to 89 days - -
90 to 119 days - -
Greater than or equal to 120 days - -
-----------------------------------------
Total $559,926 $562,119
=========================================
At March 31, 2009, and December 31, 2008 the Company had an amount at risk of
approximately 18% and 29%, respectively, of its equity with Annaly, an
affiliate.
16
6. Securitized Debt
All of the Company's securitized debt is collateralized by residential mortgage
loans. For financial reporting purposes, the Company's securitized debt is
accounted for as a financing pursuant to SFAS 140. Thus, the residential
mortgage loans held as collateral are recorded in the assets of the Company as
securitized loans and the securitized debt is recorded as a liability in the
statement of financial condition.
The following table presents the estimated principal repayment schedule of the
securitized debt held in bankruptcy remote entities outstanding at March 31,
2009 and December 31, 2008:
March 31, 2009 December 31, 2008
------------------------------------
Within One Year $49,232 $65,561
One to Three Years 85,945 112,745
Three to Five Years 70,371 85,955
Greater Than or Equal to Five Years 289,278 246,535
------------------------------------
Total $494,826 $510,796
====================================
Maturities of the Company's securitized debt are dependent upon cash flows
received from the underlying loans receivable. The estimate of their repayment
is based on scheduled principal payments on the underlying loans receivable.
This estimate will differ from actual amounts to the extent prepayments and/or
loan losses are experienced.
The following table presents the carrying amount and estimated fair value of the
Company's securitized debt at March 31, 2009 and December 31, 2008:
March 31, 2009 December 31, 2008
-------------------------------------------------------------------------------
Carrying Amount Estimated Fair Carrying Amount Estimated Fair
Value Value
-------------------------------------------------------------------------------
Securitized Debt $473,168 $494,826 $488,743 $510,796
-------------------------------------------------------------------------------
Total $473,168 $494,826 $488,743 $510,796
===============================================================================
As of March 31, 2009 and December 31, 2008, the Company had no off balance sheet
credit risk.
At March 31, 2009, the securitized debt collateralized by residential mortgage
loans had a principal balance of $473.2 million. The debt matures between the
years 2023 and 2038. At March 31, 2009, the debt carried a weighted average cost
of financing equal to 5.58%, of which approximately 44% of the remaining
principal balance is a fixed rate at 6.32% and 56% of the remaining principal
balance is at a variable rate of 5.65%. At December 31, 2008, securitized debt
collateralized by residential mortgage loans had a principal balance of $488.7
million. At December 31, 2008, the debt carried a weighted average cost of
financing equal to 5.55%, of which approximately 44% of the remaining principal
balance is a fixed rate at 6.33% and 56% of the remaining principal balance at a
variable rate of 5.65%.
7. Common Stock
The Company's charter provides that it may issue up to 550,000,000 shares of
stock, consisting of up to 500,000,000 shares of common stock having a par value
of $0.01 per share and up to 50,000,000 shares of preferred stock having a par
value of $0.01 per share. During the quarter ended March 31, 2009, the Company
declared dividends to common shareholders totaling $10.6 million or $0.06 per
share, which were paid on April 29, 2009.
On April 15, 2009 the Company announced the sale of 235,000,000 shares of common
stock at $3.00 per share for estimated proceeds, less the underwriters' discount
and offering expenses, of $674.8 million. Immediately following the sale of
these shares Annaly purchased 24,955,752 shares at the same price per share as
the public offering, for proceeds of approximately $74.9 million. In addition,
on April 16, 2009 the underwriters exercised the option to purchase up to an
additional 35,250,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters' discount, of approximately $101.3 million.
These sales were completed on April 21, 2009. In all, the Company raised net
proceeds of approximately $851.0 in these offerings.
17
There was no preferred stock issued or outstanding as of March 31, 2009 or
December 31, 2008.
8. Long Term Incentive Plan
The Company has adopted a long term stock incentive plan to provide incentives
to its independent directors and employees of FIDAC and its affiliates, to
stimulate their efforts towards the Company's continued success, long-term
growth and profitability and to attract, reward and retain personnel and other
service providers. The incentive plan authorizes the Compensation Committee of
the board of directors to grant awards, including incentive stock options,
non-qualified stock options, restricted shares and other types of incentive
awards. The incentive plan authorizes the granting of options or other awards
for an aggregate of the greater of 8.0% of the outstanding shares of the
Company's common stock, or 14,175,776 shares, up to a ceiling of 40,000,000
shares.
On January 2, 2008, the Company granted restricted stock awards in the amount of
1,301,000 shares to FIDAC's employees and the Company's independent directors.
The awards to the independent directors vested on the date of grant and the
awards to FIDAC's employees vest quarterly over a period of 10 years. Of these
shares, as of March 31, 2009, 173,125 shares have vested and 19,147 shares were
forfeited or cancelled. During the three months ended March 31, 2009, 32,225
shares vested and 1,267 shares were forfeited.
A summary of the status of the Company's non-vested shares as of March 31, 2009,
and changes during the quarter ended March 31, 2009, is presented below:
Weighted Average Grant
Non-vested Shares Date Fair Value
--------------------------------------------------------------------------------
Non-vested at December 31, 2008 1,160,100 $ 17.72
Granted - -
Vested 32,225 $3.36
Forfeited 1,267 $3.36
--------------------------------------------
Non-vested at March 31, 2009 1,127,875 $17.72
============================================
As of March 31, 2009, there was $20.0 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the long term incentive plan. That cost is expected to be recognized over a
weighted-average period of 9 years. The total fair value of shares vested during
the quarter ended March 31, 2009 was $108,276.
9. Income Taxes
As a REIT, the Company is not subject to Federal income tax on earnings
distributed to its shareholders. Most states recognize REIT status as well. The
Company has decided to distribute the majority of its income. During the
quarters ended March 31, 2009 and 2008, respectively, the Company recorded
income tax expense of $1,200 and $2,813 related to state and federal tax
liabilities on undistributed income.
10. Credit Risk and Interest Rate Risk
The Company's primary components of market risk are credit risk and interest
rate risk. The Company is subject to credit risk in connection with its
investments in residential mortgage loans and credit sensitive mortgage-backed
18
securities. When the Company assumes credit risk, it attempts to minimize
interest rate risk through asset selection, hedging and matching the income
earned on mortgage assets with the cost of related liabilities. The Company is
subject to interest rate risk, primarily in connection with its investments in
fixed-rate and adjustable-rate mortgage-backed securities, residential mortgage
loans, and borrowings under repurchase agreements. The Company attempts to
minimize credit risk through due diligence and asset selection. The Company's
strategy is to purchase loans underwritten to agreed-upon specifications of
selected originators in an effort to mitigate credit risk. The Company has
established a whole loan target market including prime borrowers with FICO
scores generally greater than 650, Alt-A documentation, geographic
diversification, owner-occupied property, and moderate loan to value ratio.
These factors are considered to be important indicators of credit risk.
11. Management Agreement and Related Party Transactions
The Company has entered into a management agreement with FIDAC, which provides
for an initial term through December 31, 2010 with automatic one-year extension
options and subject to certain termination rights. The Company pays FIDAC a
quarterly management fee equal to 1.75% per annum of the gross Stockholders'
Equity (as defined in the management agreement) of the Company. Management fees
accrued and subsequently paid to FIDAC for the quarter ending March 31, 2009 was
$2.6 million. At December 31, 2008, quarterly management fees in the amount of
$2.3 million were accrued and subsequently paid to FIDAC.
On October 13, 2008, the Company and FIDAC amended the management agreement to
reduce the base management fee from 1.75% per annum to 1.50% per annum of the
Company's stockholders' equity and provide that the incentive fees may be in
cash or shares of the Company's common stock, at the election of the Company's
board of directors.
On October 19, 2008, the Company and FIDAC further amended the management
agreement to provide that the incentive fee be eliminated in its entirety and
FIDAC receive only the management fee of 1.50% per annum of the Company's
stockholders' equity.
The Company is obligated to reimburse FIDAC for its costs incurred under the
management agreement. In addition, the management agreement permits FIDAC to
require the Company to pay for its pro rata portion of rent, telephone,
utilities, office furniture, equipment, machinery and other office, internal and
overhead expenses of FIDAC incurred in the operation of the Company. These
expenses are allocated between FIDAC and the Company based on the ratio of the
Company's proportion of gross assets compared to all remaining gross assets
managed by FIDAC as calculated at each quarter end. FIDAC and the Company will
modify this allocation methodology, subject to the Company's board of directors'
approval if the allocation becomes inequitable (i.e., if the Company becomes
very highly leveraged compared to FIDAC's other funds and accounts). FIDAC has
waived its right to request reimbursement from the Company of these expenses
until such time as it determines to rescind that waiver.
During the quarter ended March 31, 2009, 32,225 shares of restricted stock
issued by the Company to FIDAC's employees vested, as discussed in Note 8.
In March 2008, the Company entered into a RMBS repurchase agreement and a
receivables sales agreement with Annaly. These agreements contain customary
representations, warranties and covenants. As of March 31, 2009, the Company was
financing $452.5 million under this agreement.
12. Commitments and Contingencies
From time to time, the Company may become involved in various claims and legal
actions arising in the ordinary course of business. Management is not aware of
any reported or unreported contingencies at March 31, 2009.
13. Subsequent Events
19
On April 15, 2009 the Company announced the sale of 235,000,000 shares of common
stock at $3.00 per share for estimated proceeds, less the underwriters' discount
and offering expenses, of $674.8 million. Immediately following the sale of
these shares Annaly purchased 24,955,752 shares at the same price per share as
the public offering, for proceeds of approximately $74.9 million. In addition,
on April 16, 2009 the underwriters exercised the option to purchase up to an
additional 35,250,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters' discount, of approximately $101.3 million.
These sales were completed on April 21, 2009. In all, the Company raised net
proceeds of approximately $851.0 million in these offerings.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
Special Note Regarding Forward-Looking Statements
We make forward-looking statements in this report that are subject to risks
and uncertainties. These forward-looking statements include information about
possible or assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives. When we use the words
"believe," "expect," "anticipate," "estimate," "plan," "continue," "intend,"
"should," "may," "would," "will" or similar expressions, we intend to identify
forward-looking statements. Statements regarding the following subjects, among
others, are forward-looking by their nature:
o our business and investment strategy;
o our projected financial and operating results;
o our ability to maintain existing financing arrangements, obtain future
financing arrangements and the terms of such arrangements;
o general volatility of the securities markets in which we invest;
o the implementation, timing and impact of, and changes to, various
government programs, including the US Department of the Treasury's plan
to buy Agency residential mortgage-backed securities, the Term
Asset-Backed Securities Loan Facility and the Public-Private Investment
Program;
o our expected investments;
o changes in the value of our investments;
o interest rate mismatches between our mortgage-backed securities and our
borrowings used to fund such purchases;
o changes in interest rates and mortgage prepayment rates;
o effects of interest rate caps on our adjustable-rate mortgage-backed
securities;
o rates of default or decreased recovery rates on our investments;
o prepayments of the mortgage and other loans underlying our
mortgage-backed or other asset-backed securities;
o the degree to which our hedging strategies may or may not protect us
from interest rate volatility;
o impact of and changes in governmental regulations, tax law and rates,
accounting guidance, and similar matters;
o availability of investment opportunities in real estate-related and
other securities;
o availability of qualified personnel;
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o estimates relating to our ability to make distributions to our
stockholders in the future;
o our understanding of our competition; and
o market trends in our industry, interest rates, the debt securities
markets or the general economy.
The forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. You should not place undue reliance on these
forward-looking statements. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us. Some of these factors are described under the caption "Risk
Factors" in our most recent Annual Report on Form 10-K and any subsequent
Quarterly Reports on Form 10-Q. If a change occurs, our business, financial
condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements. Any forward-looking statement
speaks only as of the date on which it is made. New risks and uncertainties
arise from time to time, and it is impossible for us to predict those events or
how they may affect us. Except as required by law, we are not obligated to, and
do not intend to, update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
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Executive Summary
We are a specialty finance company that invests in residential
mortgage-backed securities, or RMBS, residential mortgage loans, real estate
related securities and various other asset classes. We are externally managed by
Fixed Income Discount Advisory Company, which we refer to as FIDAC. FIDAC is a
fixed-income investment management company specializing in managing investments
in Agency RMBS, which are mortgage pass-through certificates, collateralized
mortgage obligations, or CMOs, and other mortgage-backed securities representing
interests in or obligations backed by pools of mortgage loans issued or
guaranteed by the Federal National Mortgage Association, or Fannie Mae, the
Federal Home Loan Mortgage Corporation, or Freddie Mac, and the Government
National Mortgage Association, or Ginnie Mae.
We have elected and intend to qualify to be taxed as a REIT for federal
income tax purposes commencing with our taxable year ending on December 31,
2007. Our targeted asset classes and the principal investments we expect to make
in each are as follows:
o RMBS, consisting of:
o Non-Agency RMBS, including investment-grade and non-investment grade
classes, including the BB-rated, B-rated and non-rated classes
o Agency RMBS
o Whole mortgage loans, consisting of:
o Prime mortgage loans
o Jumbo prime mortgage loans
o Alt-A mortgage loans
o Asset Backed Securities, or ABS, consisting of:
o Commercial mortgage-backed securities, or CMBS
o Debt and equity tranches of CDOs
o Consumer and non-consumer ABS, including investment-grade and
non-investment grade classes, including the BB-rated, B-rated and
non-rated classes
We completed our initial public offering on November 21, 2007. In that
offering and in a concurrent private offering we raised net proceeds of
approximately $533.6 million. We completed a second public offering and second
private offering on October 29, 2008. In these offerings we raised net proceeds
of approximately $301.0 million and we completed investing these proceeds during
the first quarter of 2009. We completed a third public offering and third
private offering on April 21, 2009. In these offerings we raised net proceeds of
approximately $851.0 and we have commenced investing these proceeds.
Our objective is to provide attractive risk-adjusted returns to our
investors over the long-term, primarily through dividends and secondarily
through capital appreciation. We intend to achieve this objective by investing
in a broad class of financial assets to construct an investment portfolio that
is designed to achieve attractive risk-adjusted returns and that is structured
to comply with the various federal income tax requirements for REIT status.
Since we commenced operations in November 2007, we have focused our
investment activities on acquiring non-Agency RMBS and on purchasing residential
mortgage loans that have been originated by select high-quality originators,
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including the retail lending operations of leading commercial banks. Our
investment portfolio at March 31, 2009 was weighted toward non-Agency RMBS. We
expect that over the near term our investment portfolio will continue to be
weighted toward RMBS, subject to maintaining our REIT qualification and our 1940
Act exemption. In addition, we have engaged in and depending on market
conditions, anticipate continuing to engage in transactions with residential
mortgage lending operations of leading commercial banks and other high-quality
originators in which we identify and re-underwrite residential mortgage loans
owned by such entities, and rather than purchasing and securitizing such
residential mortgage loans ourselves, we and the originator would structure the
securitization and we would purchase the resulting mezzanine and subordinate
non-Agency RMBS. We may also engage in similar transactions with non-Agency RMBS
in which we would acquire AAA-rated non-Agency RMBS and immediately
re-securitize those securities. We would sell the resulting AAA-rated super
senior RMBS and retain the AAA-rated mezzanine RMBS.
Our investment strategy is intended to take advantage of opportunities in
the current interest rate and credit environment. We will adjust our strategy to
changing market conditions by shifting our asset allocations across these
various asset classes as interest rate and credit cycles change over time. We
believe that our strategy, combined with FIDAC's experience, will enable us to
pay dividends and achieve capital appreciation throughout changing market
cycles. We expect to take a long-term view of assets and liabilities, and our
reported earnings and mark-to-market valuations at the end of a financial
reporting period will not significantly impact our objective of providing
attractive risk-adjusted returns to our stockholders over the long-term.
We use leverage to seek to increase our potential returns and to fund the
acquisition of our assets. Our income is generated primarily by the difference,
or net spread, between the income we earn on our assets and the cost of our
borrowings. We expect to finance our investments using a variety of financing
sources including repurchase agreements, warehouse facilities, securitizations,
commercial paper and term financing CDOs. We may manage our debt by utilizing
interest rate hedges, such as interest rate swaps, to reduce the effect of
interest rate fluctuations related to our debt.
Recent Developments
We commenced operations in November 2007 in the midst of challenging market
conditions which affected the cost and availability of financing from the
facilities with which we expected to finance our investments. These instruments
included repurchase agreements, warehouse facilities, securitizations,
asset-backed commercial paper, or ABCP, and term CDOs. The liquidity crisis
which commenced in August 2007 affected each of these sources--and their
individual providers--to different degrees; some sources generally became
unavailable, some remained available but at a high cost, and some were largely
unaffected. For example, in the repurchase agreement market, non-Agency RMBS
became harder to finance, depending on the type of assets collateralizing the
RMBS. The amount, term and margin requirements associated with these types of
financings were also impacted. At that time, warehouse facilities to finance
whole loan prime residential mortgages were generally available from major
banks, but at significantly higher cost and had greater margin requirements than
previously offered. It was also extremely difficult to term finance whole loans
through securitization or bonds issued by a CDO structure. Financing using ABCP
froze as issuers became unable to place (or roll) their securities, which
resulted, in some instances, in forced sales of mortgage-backed securities, or
MBS, and other securities which further negatively impacted the market value of
these assets.
Although the credit markets had been undergoing much turbulence, as we
started ramping up our portfolio in late 2007, we noted a slight easing. We
entered into a number of repurchase agreements we could use to finance RMBS. In
January 2008, we entered into two whole mortgage loan repurchase agreements. As
we began to see the availability of financing, we were also seeing better
underwriting standards used to originate new mortgages. We commenced buying and
financing RMBS and also entered into agreements to purchase whole mortgage
loans. We purchased high credit quality assets which we believed we would be
readily able to finance.
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Beginning in mid-February 2008, credit markets experienced a dramatic and
sudden adverse change. The severity of the limitation on liquidity was largely
unanticipated by the markets. Credit once again froze, and in the mortgage
market, valuations of non-Agency RMBS and whole mortgage loans came under severe
pressure. This credit crisis began in early February 2008, when a heavily
leveraged investor announced that it had to de-lever and liquidate a portfolio
of approximately $30 billion of non-Agency RMBS. Prices of these types of
securities dropped dramatically, and lenders started lowering the prices on
non-Agency RMBS that they held as collateral to secure the loans they had
extended. The subsequent failure in March 2008 of Bear Stearns & Co. worsened
the crisis. As the year progressed, deterioration in the fair value of our
assets continued, we received and met margin calls under our repurchase
agreements, which resulted in our obtaining additional funding from third
parties, including from Annaly, and taking other steps to increase our
liquidity.
The challenges of the first half of 2008 have continued throughout 2008 and
so far into 2009, as financing difficulties have severely pressured liquidity
and asset values. In September 2008, Lehman Brothers Holdings, Inc., a major
investment bank, experienced a major liquidity crisis and failed. Securities
trading remains limited and mortgage securities financing markets remain
challenging as the industry continues to report negative news. This dislocation
in the non-Agency mortgage sector has made it difficult for us to obtain
short-term financing on favorable terms. As a result, we have completed loan
securitizations in order to obtain long-term financing and terminated our
un-utilized whole loan repurchase agreements in order to avoid paying non-usage
fees under those agreements. In addition, we have continued to seek funding from
Annaly. Under these circumstances, we expect to take actions intended to protect
our liquidity, which may include reducing borrowings and disposing of assets as
well as raising capital.
During this period of market dislocation, fiscal and monetary policymakers
have established new liquidity facilities for primary dealers and commercial
banks, reduced short-term interest rates, and passed legislation that is
intended to address the challenges of mortgage borrowers and lenders. This
legislation, the Housing and Economic Recovery Act of 2008, seeks to forestall
home foreclosures for distressed borrowers and assist communities with
foreclosure problems.
Subsequent to June 30, 2008, there were increased market concerns about
Freddie Mac and Fannie Mae's ability to withstand future credit losses
associated with securities held in their investment portfolios, and on which
they provide guarantees, without the direct support of the federal government.
In September 2008 Fannie Mae and Freddie Mac were placed into the
conservatorship of the Federal Housing Finance Agency, or FHFA, their federal
regulator, pursuant to its powers under The Federal Housing Finance Regulatory
Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008. As
the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the
operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and
operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors, and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator's appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
of the conservator.
In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac,
(i) the U.S. Department of Treasury and FHFA have entered into preferred stock
purchase agreements between the U.S. Department of Treasury, or the Treasury,
and Fannie Mae and Freddie Mac pursuant to which the Treasury will ensure that
each of Fannie Mae and Freddie Mac maintains a positive net worth; (ii) the
Treasury has established a new secured lending credit facility which will be
available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, which is
intended to serve as a liquidity backstop, which will be available until
December 2009; and (iii) the Treasury has initiated a temporary program to
purchase RMBS issued by Fannie Mae and Freddie Mac. Given the highly fluid and
evolving nature of these events, it is unclear how our business will be
impacted. Based upon the further activity of the U.S. government or market
response to developments at Fannie Mae or Freddie Mac, our business could be
adversely impacted.
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The Emergency Economic Stabilization Act of 2008, or EESA, was recently
enacted. The EESA provides the U.S. Secretary of the Treasury with the authority
to establish a Troubled Asset Relief Program, or TARP, to purchase from
financial institutions up to $700 billion of equity or preferred securities,
residential or commercial mortgages and any securities, obligations, or other
instruments that are based on or related to such mortgages, that in each case
was originated or issued on or before March 14, 2008, as well as any other
financial instrument that the U.S. Secretary of the Treasury, after consultation
with the Chairman of the Board of Governors of the Federal Reserve System,
determines the purchase of which is necessary to promote financial market
stability, upon transmittal of such determination, in writing, to the
appropriate committees of the U.S. Congress. The EESA also provides for a
program that would allow companies to insure their troubled assets.
In addition, the U.S. Government, Federal Reserve and other governmental and
regulatory bodies have taken or are considering taking other actions to address
the financial crisis. The Term Asset-Backed Securities Loan Facility, or TALF,
was first announced by the Treasury on November 25, 2008, and has been expanded
in size and scope since its initial announcement. Under the TALF, the Federal
Reserve Bank of New York makes non-recourse loans to borrowers to fund their
purchase of eligible assets, currently certain asset-backed securities but not
residential mortgage-backed securities. In addition, on March 23, 2009 the
government announced that the Treasury in conjunction with the Federal Deposit
Insurance Corporation, or FDIC, and the Federal Reserve, would create the
Public-Private Investment Program, or PPIP. The PPIP aims to recreate a market
for specific illiquid residential and commercial loans and securities through a
number of joint public and private investment funds. The PPIP is designed to
draw new private capital into the market for these securities and loans by
providing government equity co-investment and attractive public financing. As
these programs are still in early stages of development, it is not possible for
us to predict how these programs will impact our business.
Although these aggressive steps are intended to protect and support the US
housing and mortgage market, we continue to operate under very difficult market
conditions. As a result, there can be no assurance that the EESA, the TARP, the
TALF, PPIP or other policy initiatives will have a beneficial impact on the
financial markets, including current extreme levels of volatility. We cannot
predict whether or when such actions may occur or what impact, if any, such
actions could have on our business, results of operations and financial
condition.
Trends
We expect the results of our operations to be affected by various factors,
many of which are beyond our control. Our results of operations will primarily
depend on, among other things, the level of our net interest income, the market
value of our assets, and the supply of and demand for such assets. Our net
interest income, which reflects the amortization of purchase premiums and
accretion of discounts, varies primarily as a result of changes in interest
rates, borrowing costs, and prepayment speeds, which is a measurement of how
quickly borrowers pay down the unpaid principal balance on their mortgage loans.
Prepayment Speeds. Prepayment speeds, as reflected by the Constant
Prepayment Rate, or CPR, vary according to interest rates, the type of
investment, conditions in financial markets, competition and other factors, none
of which can be predicted with any certainty. In general, when interest rates
rise, it is relatively less attractive for borrowers to refinance their mortgage
loans, and as a result, prepayment speeds tend to decrease. When interest rates
fall, prepayment speeds tend to increase. For mortgage loan and RMBS investments
purchased at a premium, as prepayment speeds increase, the amount of income we
earn decreases because the purchase premium we paid for the bonds amortizes
faster than expected. Conversely, decreases in prepayment speeds result in
increased income and can extend the period over which we amortize the purchase
premium. For mortgage loan and RMBS investments purchased at a discount, as
prepayment speeds increase, the amount of income we earn increases because of
the acceleration of the accretion of the discount into interest income.
Conversely, decreases in prepayment speeds result in decreased income and can
extend the period over which we accrete the purchase discount into interest
income.
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Rising Interest Rate Environment. As indicated above, as interest rates
rise, prepayment speeds generally decrease, increasing our net interest income.
Rising interest rates, however, increase our financing costs which may result in
a net negative impact on our net interest income. In addition, if we acquire
Agency and non-Agency RMBS collateralized by monthly reset adjustable-rate
mortgages, or ARMs, and three- and five-year hybrid ARMs, such interest rate
increases could result in decreases in our net investment income, as there could
be a timing mismatch between the interest rate reset dates on our RMBS portfolio
and the financing costs of these investments. Monthly reset ARMs are ARMs on
which coupon rates reset monthly based on indices such as the one-month London
Interbank Offering Rate, or LIBOR. Hybrid ARMs are mortgages that have interest
rates that are fixed for an initial period (typically three, five, seven or ten
years) and thereafter reset at regular intervals subject to interest rate caps.
With respect to our floating rate investments, such interest rate increases
should result in increases in our net investment income because our floating
rate assets are greater in amount than the related floating rate liabilities.
Similarly, such an increase in interest rates should generally result in an
increase in our net investment income on fixed-rate investments made by us
because our fixed-rate assets would be greater in amount than our fixed-rate
liabilities. We expect, however, that our fixed-rate assets would decline in
value in a rising interest rate environment and that our net interest spreads on
fixed rate assets could decline in a rising interest rate environment to the
extent such assets are financed with floating rate debt.
Falling Interest Rate Environment. As interest rates fall, prepayment speeds
generally increase, decreasing our net interest income. Falling interest rates,
however, decrease our financing costs which may result in a net positive impact
on our net interest income. In addition, if we acquire Agency and non-Agency
RMBS collateralized by monthly reset adjustable-rate mortgages, or ARMs, and
three- and five-year hybrid ARMs, such interest rate decreases could result in
increases in our net investment income, as there could be a timing mismatch
between the interest rate reset dates on our RMBS portfolio and the financing
costs of these investments. Monthly reset ARMs are ARMs on which coupon rates
reset monthly based on indices such as the one-month London Interbank Offering
Rate, or LIBOR. Hybrid ARMs are mortgages that have interest rates that are
fixed for an initial period (typically three, five, seven or ten years) and
thereafter reset at regular intervals subject to interest rate caps.
With respect to our floating rate investments, such interest rate decreases
may result in decreases in our net investment income because our floating rate
assets may be greater in amount than the related floating rate liabilities.
Similarly, such a decrease in interest rates should generally result in an
increase in our net investment income on fixed-rate investments made by us
because our fixed-rate assets would be greater in amount than our fixed-rate
liabilities. We expect, however, that our fixed-rate assets would increase in
value in a falling interest rate environment and that our net interest spreads
on fixed rate assets could increase in a falling interest rate environment to
the extent such assets are financed with floating rate debt.
Credit Risk. One of our strategic focuses is acquiring assets which we
believe to be of high credit quality. We believe this strategy will generally
keep our credit losses and financing costs low. We retain the risk of potential
credit losses on all of the residential mortgage loans we hold in our portfolio.
Additionally, some of our investments in RMBS may be qualifying interests for
purposes of maintaining our exemption from the 1940 Act because we retain a 100%
ownership interest in the underlying loans. If we purchase all classes of these
securitizations, we have the credit exposure on the underlying loans. Prior to
the purchase of these securities, we conduct a due diligence process that allows
us to remove loans that do not meet our credit standards based on loan-to-value
ratios, borrowers' credit scores, income and asset documentation and other
criteria that we believe to be important indications of credit risk.
Size of Investment Portfolio. The size of our investment portfolio, as
measured by the aggregate unpaid principal balance of our mortgage loans and
aggregate principal balance of our mortgage related securities and the other
assets we own is also a key revenue driver. Generally, as the size of our
investment portfolio grows, the amount of interest income we receive increases.
The larger investment portfolio, however, drives increased expenses as we incur
additional interest expense to finance the purchase of our assets.
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Since changes in interest rates may significantly affect our activities, our
operating results depend, in large part, upon our ability to effectively manage
interest rate risks and prepayment risks while maintaining our status as a REIT.
Current Environment. The current weakness in the broader mortgage markets
could adversely affect one or more of our potential lenders or any of our
lenders and could cause one or more of our potential lenders or any of our
lenders to be unwilling or unable to provide us with financing or require us to
post additional collateral. In general, this could potentially increase our
financing costs and reduce our liquidity or require us to sell assets at an
inopportune time. We expect to use a number of sources to finance our
investments, including repurchase agreements, warehouse facilities,
securitizations, asset-backed commercial paper and term CDOs. Current market
conditions have affected the cost and availability of financing from each of
these sources and their individual providers to different degrees; some sources
generally are unavailable, some are available but at a high cost, and some are
largely unaffected. For example, in the repurchase agreement market, borrowers
have been affected differently depending on the type of security they are
financing. Non-Agency RMBS have been harder to finance, depending on the type of
assets collateralizing the RMBS. The amount, term and margin requirements
associated with these types of financings have been negatively impacted.
Currently, warehouse facilities to finance whole loan prime residential
mortgages are generally available from major banks, but at significantly higher
cost and have greater margin requirements than previously offered. Many major
banks that offer warehouse facilities have also reduced the amount of capital
available to new entrants and consequently the size of those facilities offered
now are smaller than those previously available. We decided to terminate our two
whole loan repurchase agreements in order to avoid paying non-usage fees under
those agreements.
It is currently a challenging market to term finance whole loans through
securitization or bonds issued by a CDO structure. The highly rated senior bonds
in these securitizations and CDO structures currently have liquidity, but at
much wider spreads than issues priced in recent history. The junior subordinate
tranches of these structures currently have few buyers and current market
conditions have forced issuers to retain these lower rated bonds rather than
sell them.
Certain issuers of ABCP have been unable to place (or roll) their
securities, which has resulted, in some instances, in forced sales of MBS and
other securities which has further negatively impacted the market value of these
assets. These market conditions are fluid and likely to change over time. As a
result, the execution of our investment strategy may be dictated by the cost and
availability of financing from these different sources.
If one or more major market participants fails or otherwise experiences a
major liquidity crisis, as was the case for Bear Stearns & Co. in March 2008,
and Lehman Brothers Holdings Inc. in September 2008, it could negatively impact
the marketability of all fixed income securities and this could negatively
impact the value of the securities we acquire, thus reducing our net book value.
Furthermore, if many of our potential lenders or any of our lenders are
unwilling or unable to provide us with financing, we could be forced to sell our
securities or residential mortgage loans at an inopportune time when prices are
depressed.
As described above, there has been significant government action in the
capital markets. However, there can be no assurance that the government's
actions with respect to Freddie Mac and Fannie Mae, the EESA, the TARP, the
TALF, the PPIP or other policy initiatives will have a beneficial impact on the
financial markets, including current extreme levels of volatility. To the extent
the market does not respond favorably to these actions, or these actions do not
function as intended, our business may not receive the anticipated positive
impact from them. In addition, the U.S. Government, Federal Reserve and other
governmental and regulatory bodies have taken or are considering taking other
actions to address the financial crisis. We cannot predict whether or when such
actions may occur or what impact, if any, such actions could have on our
business, results of operations and financial condition.
In the current market, it may be difficult or impossible to obtain third
party pricing on the investments we purchase. In addition, validating third
party pricing for our investments may be more subjective as fewer participants
may be willing to provide this service to us. Moreover, the current market is
more illiquid than in recent history for some of the investments we purchase.
Illiquid investments typically experience greater price volatility as a ready
market does not exist. As volatility increases or liquidity decreases we may
have greater difficulty financing our investments which may negatively impact
our earnings and the execution of our investment strategy.
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Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP. These
accounting principles may require us to make some complex and subjective
decisions and assessments. Our most critical accounting policies will involve
decisions and assessments that could affect our reported assets and liabilities,
as well as our reported revenues and expenses. We believe that all of the
decisions and assessments upon which our financial statements are based will be
reasonable at the time made and based upon information available to us at that
time. At each quarter end, we calculate estimated fair value using a pricing
model. We validate our pricing model by obtaining independent pricing on all of
our assets and performing a verification of those sources to our own internal
estimate of fair value. We have identified what we believe will be our most
critical accounting policies to be the following:
Mortgage Loan Sales and Securitizations
We periodically enter into transactions in which we sell financial assets,
such as RMBS, mortgage loans and other assets. We also securitize and
re-securitize financial assets. These transactions are recorded in accordance
with SFAS 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS 140) and are accounted for as either a
"sale" and the loans held for investment are removed from the consolidated
statements of financial condition or as a "financing" and are classified as
"Securitized loans held for investment" on the Company's consolidated statements
of financial condition, depending upon the structure of the securitization
transaction. In these securitizations and re-securitizations we sometimes retain
or acquire senior or subordinated interests in the securitized or re-securitized
assets. Gains and losses on such securitizations or re-securitizations are
recognized using the guidance in SFAS No. 140 which is based on a financial
components approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished.
We determine the gain or loss on sale of mortgage loans by allocating the
carrying value of the underlying mortgage between securities or loans sold and
the interests retained based on their fair values. The gain or loss on sale is
the difference between the cash proceeds from the sale and the amount allocated
to the securities or loans sold.
Valuation of Investments
On January 1, 2008, we adopted SFAS 157, which defines fair value,
establishes a framework for measuring fair value, and establishes a three-level
valuation hierarchy for disclosure of fair value measurement and enhances
disclosure requirements for fair value measurements. The valuation hierarchy is
based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets and liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly,
for substantially the full term of the financial instrument.
Level 3 - inputs to the valuation methodology are unobservable and
significant to overall fair value.
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Mortgage-Backed Securities and interest rate swaps are valued using a
pricing model. The MBS pricing model incorporates such factors as coupons,
prepayment speeds, spread to the Treasury and swap curves, convexity, duration,
periodic and life caps, and credit enhancement. Interest rate swaps are modeled
by incorporating such factors as the Treasury curve, LIBOR rates, and the
receive rate on the interest rate swaps. Management reviews the fair values
determined by the pricing model and compares its results to dealer quotes
received on each investment to validate the reasonableness of the valuations
indicated by the pricing models. The dealer quotes incorporate common market
pricing methods, including a spread measurement to the Treasury curve or
interest rate swap curve as well as underlying characteristics of the particular
security including coupon, periodic and life caps, rate reset period, issuer,
additional credit support and expected life of the security.
Any changes to the valuation methodology are reviewed by management to
ensure the changes are appropriate. As markets and products develop and the
pricing for certain products becomes more transparent, we continue to refine our
valuation methodologies. The methods used by us may produce a fair value
calculation that may not be indicative of net realizable value or reflective of
future fair values. Furthermore, while we believe our valuation methods are
appropriate and consistent with other market participants, the use of different
methodologies, or assumptions, to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date. We use inputs that are current as of the measurement date, which may
include periods of market dislocation, during which price transparency may be
reduced. This condition could cause our financial instruments to be reclassified
from Level 2 to Level 3.
As of March 31, 2009 and December 31, 2008, we have classified the valuation
of our RMBS as "Level 2" as described above.
Securitized Loans Held for Investment
Our securitized residential mortgage loans are comprised of fixed-rate and
variable-rate loans. We purchase pools of residential mortgage loans through a
select group of originators. Mortgage loans are designated as held for
investment, recorded on trade date, and are carried at their principal balance
outstanding, plus any premiums or discounts which are amortized or accreted over
the estimated life of the loan, less allowances for loan losses.
Available-for-Sale Securities
Our investments in RMBS are classified as available-for-sale securities that
are carried on the consolidated statement of financial condition at their fair
value. This classification results in changes in fair values being recorded as
adjustments to accumulated other comprehensive income or loss, which is a
component of stockholders' equity.
When the fair value of an available-for-sale security is less than its
amortized cost for an extended period or there is a significant decline in
value, we consider whether there is an other-than-temporary impairment in the
value of the security. If, based on our analysis, an other-than-temporary
impairment exists, the cost basis of the security is written down to the
then-current fair value, and the unrealized loss is transferred from accumulated
other comprehensive loss as an immediate reduction of current earnings (as if
the loss had been realized in the period of other-than-temporary impairment).
The determination of other-than-temporary impairment is a subjective process,
and different judgments and assumptions could affect the timing of loss
realization.
We consider the following factors when determining an other-than-temporary
impairment for a security:
o The length of time and the extent to which the market value has been
less than the amortized cost;
o and the financial condition and near-term prospects of the issuer;
o The credit quality and cash flow performance of the security; and
30
o Our intent to hold the security for a period of time sufficient to allow
for any anticipated recovery in market value.
The determination of other-than-temporary impairment is made at least
quarterly. If we determine an impairment to be other than temporary we will
realize a loss which will negatively impact current income.
Investment Consolidation
For each investment we make, we evaluate the underlying entity that issued
the securities we will acquire or to which we will make a loan to determine the
appropriate accounting treatment. In performing our analysis, we refer to
guidance in Statement of Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and FASB Interpretation No. (FIN) 46R, Consolidation of Variable
Interest Entities. FIN 46R addresses the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
voting rights are not effective in identifying an investor with a controlling
financial interest. In variable interest entities, or VIEs, an entity is subject
to consolidation under FIN 46R if the investors either do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support, are unable to direct the entity's activities, or
are not exposed to the entity's losses or entitled to its residual returns. VIEs
within the scope of FIN 46R are required to be consolidated by their primary
beneficiary. The primary beneficiary of a VIE is determined to be the party that
absorbs a majority of the entity's expected losses, its expected returns, or
both. This determination can sometimes involve complex and subjective analyses.
Interest Income Recognition
Interest income on available-for-sale securities and loans held for
investment is recognized over the life of the investment using the effective
interest method as described by SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases, for securities of high credit quality and EITF No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets, for all other securities.
Income recognition is suspended for loans when, in the opinion of management, a
full recovery of income and principal becomes doubtful. Income recognition is
resumed when the loan becomes contractually current and performance is
demonstrated to be resumed.
Under SFAS No. 91 and EITF No. 99-20, management will estimate, at the time
of purchase, the future expected cash flows and determine the effective interest
rate based on these estimated cash flows and our purchase price. As needed,
these estimated cash flows will be updated and a revised yield computed based on
the current amortized cost of the investment. In estimating these cash flows,
there will be a number of assumptions that will be subject to uncertainties and
contingencies. These include the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations), the
pass-through or coupon rate and interest rate fluctuations. In addition,
interest payment shortfalls due to delinquencies on the underlying mortgage
loans, and the timing of the magnitude of credit losses on the mortgage loans
underlying the securities have to be judgmentally estimated. These uncertainties
and contingencies are difficult to predict and are subject to future events that
may impact management's estimates and our interest income.
Accounting For Derivative Financial Instruments
Our policies permit us to enter into derivative contracts, including
interest rate swaps and interest rate caps, as a means of mitigating our
interest rate risk. We intend to use interest rate derivative instruments to
mitigate interest rate risk rather than to enhance returns.
We account for derivative financial instruments in accordance with SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
as amended and interpreted. SFAS 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
condition and to measure those instruments at fair value. Additionally, the fair
value adjustments will affect either other comprehensive income in stockholders'
equity until the hedged item is recognized in earnings or net income depending
on whether the derivative instrument qualifies as a hedge for accounting
purposes and, if so, the nature of the hedging activity.
31
In the normal course of business, we may use a variety of derivative
financial instruments to economically manage, or hedge, interest rate risk.
These derivative financial instruments must be effective in reducing our
interest rate risk exposure in order to qualify for hedge accounting. When the
terms of an underlying transaction are modified, or when the underlying hedged
item ceases to exist, all changes in the fair value of the instrument are
included in net income for each period until the derivative instrument matures
or is settled. Any derivative instrument used for risk management that does not
meet the hedging criteria is carried at fair value with the changes in value
included in net income.
Derivatives will be used for economic hedging purposes rather than
speculation. We will rely on quotations from third parties to determine fair
values. If our hedging activities do not achieve our desired results, our
reported earnings may be adversely affected.
Reserve for Possible Credit Losses
The expense for possible credit losses in connection with debt investments
is a charge to earnings to increase the allowance for possible credit losses to
the level that management estimates to be adequate considering delinquencies,
loss experience and collateral quality. Other factors considered relate to
geographic trends and product diversification, the size of the portfolio and
current economic conditions. Based upon these factors, we establish the
provision for possible credit losses by category of asset. When it is probable
that we will be unable to collect all amounts contractually due, the account is
considered impaired.
Where impairment is indicated, a valuation write-down or write-off is
measured based upon the excess of the recorded investment amount over the net
fair value of the collateral, as reduced by selling costs. Any deficiency
between the carrying amount of an asset and the net sales price of repossessed
collateral is charged to the allowance for credit losses.
Income Taxes
We have elected and intend to qualify to be taxed as a REIT. Accordingly, we
will generally not be subject to corporate federal or state income tax to the
extent that we make qualifying distributions to our stockholders, and provided
we satisfy on a continuing basis, through actual investment and operating
results, the REIT requirements including certain asset, income, distribution and
stock ownership tests. If we fail to qualify as a REIT, and do not qualify for
certain statutory relief provisions, we will be subject to federal, state and
local income taxes and may be precluded from qualifying as a REIT for the
subsequent four taxable years following the year in which we lost our REIT
qualification. Accordingly, our failure to qualify as a REIT could have a
material adverse impact on our results of operations and amounts available for
distribution to our stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its
stockholders is computed using our taxable income as opposed to net income
reported on the financial statements. Taxable income, generally, will differ
from net income reported on the financial statements because the determination
of taxable income is based on tax provisions and not financial accounting
principles.
In the future, we may create and elect to treat certain of our subsidiaries
as taxable REIT subsidiaries, or TRSs. In general, a TRS of ours may hold assets
and engage in activities that we cannot hold or engage in directly and generally
may engage in any real estate or non-real estate-related business. A TRS is
subject to federal, state and local corporate income taxes.
While our TRS will generate net income, our TRS can declare dividends to us
which will be included in our taxable income and necessitate a distribution to
our stockholders. Conversely, if we retain earnings at the TRS level, no
distribution is required and we can increase book equity of the consolidated
entity.
32
Financial Condition
At March 31, 2009, our portfolio consisted of $1.1 billion of RMBS and of
approximately $565.9 million of securitized mortgage loans.
The following table summarizes certain characteristics of our portfolio at
March 31, 2008 and December 31, 2008.
March 31, 2009 December 31, 2008
----------------------------------------------------------------------------------------------------------------
Leverage at period-end 2.4:1 2.5:1
Residential mortgage-backed securities as a % of portfolio 71.6% 66.2%
Residential mortgage loans as a % of portfolio - -
Loans collateralizing secured debt as a % of portfolio 28.4% 33.8%
Fixed-rate investments as % of portfolio 35.8% 29.9%
Adjustable-rate investments as % of portfolio 64.2% 70.1%
Fixed-rate investments
Residential mortgage-backed securities as a % of fixed-rate assets 65.1% 49.9%
Residential mortgage loans as a % of fixed-rate assets - -
Loans collateralizing secured debt as a % of fixed-rate assets 34.9% 50.1%
Adjustable-rate investments
Residential mortgage-backed securities as a % of adjustable-rate assets 75.2% 73.1%
Residential mortgage loans as a % of adjustable-rate assets - -
Loans collateralizing secured debt as a % of adjustable-rate assets 24.8% 26.9%
Annualized yield on average earning assets during the period 6.44% 5.74%
Annualized cost of funds on average repurchase agreements balance 3.48% 3.96%
during the period
Annualized interest rate spread during the period 2.96% 1.78%
Weighted average yield on assets at period-end 7.21% 5.93%
Weighted average cost of funds at period-end 3.57% 3.39%
Residential Mortgage-Backed Securities
The table below summarizes our RMBS investments at March 31, 2009 and December
31, 2008:
March 31, December 31,
2009 2008
(dollars in thousands)
--------------------------------------------------------------------------
Amortized cost $1,342,497 $1,122,135
Gross unrealized gains 9,504 7,700
Gross unrealized losses (266,209) (274,368)
---------------------------------
Fair value $1,085,792 $855,467
=================================
As of March 31, 2009, the RMBS in our portfolio were purchased at a net
discount to their par value. Our RMBS had a weighted average amortized cost of
94.8% and 99.0% at March 31, 2009 and December 31, 2008, respectively.
The following table summarizes certain characteristics of our RMBS portfolio
at March 31, 2009 and December 31, 2008.
33
Weighted Averages
Estimated Value Constant
(dollars in Yield to Prepayment
thousands) (1) Coupon Maturity Rate(2)
------------------------------------------------------------------------------
March 31, 2009 $1,085,792 6.07% 8.00% 12.4%
December 31, 2008 $855,467 6.12% 6.55% 13.0%
(1) All assets listed in this chart are carried at their fair value.
(2) Represents the estimated percentage of principal that will be prepaid
over the next three months based on historical principal paydowns.
Actual maturities of RMBS are generally shorter than stated contractual
maturities, as they are affected by the contractual lives of the underlying
mortgages, periodic payments of principal, and prepayments of principal. The
stated contractual final maturity of the mortgage loans underlying our portfolio
of RMBS ranges up to 38 years, but the expected maturity is subject to change
based on the prepayments of the underlying loans. As of March 31, 2009, the
average final contractual maturity of the RMBS portfolio is 29 years, and as of
December 31, 2008, it was 30 years. The estimated weighted average months to
maturity of the RMBS in the tables below are based upon our prepayment
expectations, which are based on both proprietary and subscription-based
financial models. Our prepayment projections consider current and expected
trends in interest rates, interest rate volatility, steepness of the yield
curve, the mortgage rate of the outstanding loan, time to reset and the spread
margin of the reset.
The constant prepayment rate, or CPR, attempts to predict the percentage of
principal that will be prepaid over a period of time. We calculate average CPR
on a quarterly basis based on historical principal paydowns. As interest rates
rise, the rate of refinancings typically declines, which we expect may result in
lower rates of prepayment and, as a result, a lower portfolio CPR. Conversely,
as interest rates fall, the rate of refinancings typically increases, which we
expect may result in higher rates of prepayment and, as a result, a higher
portfolio CPR.
After the reset date, interest rates on our hybrid adjustable rate RMBS
securities adjust annually based on spreads over various LIBOR and Treasury
indices. These interest rates are subject to caps that limit the amount the
applicable interest rate can increase during any year, known as periodic cap,
and through the maturity of the applicable security, known as a lifetime cap.
The weighted average periodic cap for the portfolio is an increase of 1.3% and
the weighted average maximum lifetime increases and decreases for the portfolio
are 10.2%.
The following table summarizes our RMBS according to their estimated
weighted average life classifications as of March 31, 2009 and December 31,
2008:
Fair Value
March 31, December 31,
2009 2008
(dollars in thousands)
----------------------------
Less than one year $ - $ -
Greater than one year and less than five years 909,005 768,163
Greater than or equal to five years 176,787 87,304
----------------------------
Total $1,085,792 $855,467
============================
Results of Operations for the Quarters Ended March 31, 2009 and March 31, 2008.
Net Income/Loss Summary
34
Our net income for the quarter ended March 31, 2009 was $18.9 million, or
$0.11 per share. Our net income was generated primarily by interest income on
our portfolio. Our net loss for the quarter ended March 31, 2008 was $54.9
million, or $1.46 per share. We attribute the net loss for the quarter ended
March 31, 2008 to realized losses on sales of assets and unrealized losses on
interest rate swaps that were recorded during the quarter.
The table below presents the net income/loss summary for the quarter ended
March 31, 2009 and 2008:
Net Income/Loss Summary
(dollars in thousands, except for share and per share data)
For the For the
Quarter Ended Quarter Ended
March 31, 2009 March 31, 2008
-----------------------------------------------------------------------------------------------------------------
Interest income $ 28,007 $ 28,194
Interest expense 9,042 14,022
------------------ ------------------
Net interest income 18,965 14,172
------------------ ------------------
Unrealized losses on interest rate
swaps - (31,493)
Realized gains (losses) on sales of investments 3,627 (32,819)
------------------ ------------------
Net investment income (expense) 22,592 (50,140)
------------------ ------------------
Expenses
Management fee 2,583 2,227
General and administrative expenses 1,139 2,565
------------------ ------------------
Total expenses 3,722 4,792
------------------ ------------------
Income (loss) before income taxes 18,870 (54,932)
Income taxes 1 3
------------------ ------------------
Net income (loss) $ 18,869 $ (54,935)
================== ==================
Net Income (loss) per share - basic and diluted $ 0.11 $ (1.46)
================== ==================
Weighted average number of shares outstanding - basic and diluted 177,196,959 37,744,486
================== ==================
Comprehensive Income (loss):
Net income (loss) $ 18,869 $ (54,935)
------------------ ------------------
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities 13,590 (88,257)
Other comprehensive income:
Reclassification adjustment for realized (gains) losses included
in net income (3,627) 32,819
------------------ ------------------
Other comprehensive income (loss) 9,963 (55,438)
------------------ ------------------
Comprehensive income (loss) $ 28,832 $ (110,373)
================== ==================
35
Interest Income and Average Earning Asset Yield
We had average earning assets of $1.7 billion and $1.6 billion for the
quarters ended March 31, 2009 and 2008, respectively. Our interest income was
$28.0 million and $28.2 million for the quarters ended March 31, 2009 and 2008,
respectively. Our interest income remained relatively unchanged even though we
increased our capital due to the deleveraging of the interest earning assets in
our portfolio subsequent to the quarter ended March 31, 2008. The annualized
yield on our portfolio was 6.44% and 6.63% for the quarters ended March 31, 2009
and 2008, respectively. The decline in the annualized yield is attributed to a
decrease in leverage on our portfolio of interest earning assets.
Interest Expense and the Cost of Funds
Our largest expense is the cost of borrowed funds. We had average borrowed
funds of $1.0 billion and $1.3 billion and total interest expense of $9.0
million and $14.0 million for the quarters ended March 31, 2009 and 2008,
respectively. Our annualized cost of funds was 3.48% and 4.23% for the quarters
ended March 31, 2009 and 2008, respectively. The decline in interest expense is
related to a decrease in the borrowing rates for the quarter ended March 31,
2009 versus March 31, 2008 and the subsequent termination of interest rate swaps
that were in the portfolio for the period ended March 31, 2008.
The table below shows our average borrowed funds, interest expense,
average cost of funds, average one-month LIBOR, average six-month LIBOR, average
one-month LIBOR relative to average six-month LIBOR, and average cost of funds
relative to average one- and six- month LIBOR for the quarter ended March 31,
2009, year ended December 31, 2008, and the four quarters in 2008.
Average Cost of Funds
(Ratios have been annualized, dollars in thousands)
Average Average Average
One-Month Cost Cost of
LIBOR of Funds Funds
Average Average Average Relative to Relative to Relative to
Average Cost One- Six- Average Average Average
Borrowed Interest of Month Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
------------------------- ------------ ----------- ------- -------- --------- ------------- ------------- --------------
For the quarter ended $1,038,460 $9,042 3.48% 0.46% 1.74% (1.28%) 3.02% 1.74%
March 31, 2009
------------------------------------------------------------------------------------------------------------------------
For the year ended $1,304,873 $60,544 4.64% 2.68% 3.06% (0.38%) 1.96% 1.58%
December 31, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,105,239 $10,954 3.96% 2.23% 2.94% (0.71%) 1.73% 1.02%
December 31, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,339,531 $15,543 4.64% 2.62% 3.19% (0.57%) 2.02% 1.45%
September 30, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,449,567 $20,025 5.53% 2.59% 2.93% (0.34%) 2.94% 2.60%
June 30, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,325,156 $14,022 4.23% 3.31% 3.18% 0.13% 0.92% 1.05%
March 31, 2008
------------------------------------------------------------------------------------------------------------------------
Net Interest Income
Our net interest income, which equals interest income less interest expense,
totaled $19.0 million and $14.2 million for the quarters ended March 31, 2009
and 2008, respectively. Our net interest spread, which equals the yield on our
average assets for the period less the average cost of funds for the period, was
2.96% and 2.40% for the quarters ended March 31, 2009 and 2008, respectively. We
attribute the increase in net interest income and net interest spread to a
decline in our interest expense and the interest rates at which we borrow.
36
The table below shows our average assets held, total interest earned on
assets, yield on average interest earning assets, average balance of repurchase
agreements, interest expense, average cost of funds, net interest income, and
net interest rate spread for the quarter ended March 31, 2009, the year ended
December 31, 2008 and the four quarters in 2008.
Net Interest Income
(Ratios have been annualized, dollars in thousands)
Yield on
Average Net
Average Interest Interest Average Average Net Interest
Earning Earned Earning Debt Interest Cost of Interest Rate
Assets Held on Assets Assets Balance Expense Funds Income Spread
------------------------- ------------ ---------- ------------ ------------ ---------- ----------- ---------- ----------
For the quarter ended $1,739,767 $28,007 6.44% $1,038,460 $9,042 3.48% $18,965 2.96%
March 31, 2009
------------------------------------------------------------------------------------------------------------------------
For the year ended $1,711,705 $102,093 5.96% $1,304,873 $60,544 4.64% $44,715 1.32%
December 31, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,621,205 $23,254 5.74% $1,105,239 $10,954 3.96% $12,702 1.78%
December 31, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,751,748 $23,419 5.35% $1,339,531 $15,543 4.64% $7,915 0.71%
September 30, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,917,969 $29,630 6.18% $1,449,567 $20,025 5.53% $9,926 0.65%
June 30, 2008
------------------------------------------------------------------------------------------------------------------------
For the quarter ended $1,555,896 $25,790 6.63% $1,325,156 $14,022 4.23% $14,172 2.40%
March 31, 2008
------------------------------------------------------------------------------------------------------------------------
Gains and Losses on Sales of Assets and Interest Rate Swaps
During the quarter ended March 31, 2009, we sold assets with a carrying
value of $544.8 million which resulted in a net gain of approximately $3.6
million. During the quarter ended March 31, 2008, we sold assets and terminated
interest rate swaps with a carrying value of $394.2 million for an aggregate
loss of $32.8 million.
Management Fee and General and Administrative Expenses
We paid FIDAC a management fee of $2.6 million and $2.2 million for the
quarters ended March 31, 2009 and 2008, respectively. The management fee is
based on stockholder's equity and the increase in the management fee for the
quarter ended March 31, 2009 resulted from the increase in the Company's
stockholders equity subsequent to its completion of the October 2008 secondary
offerings.
General and administrative (or G&A) expenses were $1.1 million and $2.6
million for the quarters ended March 31, 2009 and 2008, respectively. We
attribute the decline in G&A expense to a decrease in the loan loss provision
recorded for the quarter ended March 31, 2009 relative to the quarter ended
March 31, 2008.
Total expenses as a percentage of average total assets were 0.94% and 1.10%
for the quarters ended March 31, 2009 and 2008, respectively. The decline in
total expenses as a percentage of average total assets is the result of a
greater average asset base at March 31, 2009.
Currently, FIDAC has waived its right to require us to pay our pro rata
portion of rent, telephone, utilities, office furniture, equipment, machinery
and other office, internal and overhead expenses of FIDAC and its affiliates
required for our operations.
The table below shows our total management fee and G&A expenses as compared
to average total assets and average equity for the quarter ended March 31, 2009,
for the year ended December 31, 2008, and the four quarters in 2008.
37
Management Fee and G&A Expenses and Operating Expense Ratios
(Ratios have been annualized, dollars in thousands)
Total Total Management Total Management
Management Fee and G&A Fee and G&A
Fee and G&A Expenses/Average Expenses/Average
Expenses Total Assets Equity
------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2009 $3,722 0.94% 3.51%
------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2008 $14,027 0.85% 3.50%
------------------------------------------------------------------------------------------------------------
For the quarter ended December 31, 2008 $3,918 1.10% 4.78%
------------------------------------------------------------------------------------------------------------
For the quarter ended September 30, 2008 $1,934 0.46% 2.46%
------------------------------------------------------------------------------------------------------------
For the quarter ended June 30, 2008 $3,380 0.70% 3.35%
------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2008 $4,792 1.10% 4.00%
------------------------------------------------------------------------------------------------------------
Net Income/Loss and Return on Average Equity
Our net income was $18.9 million for the quarter ended March 31, 2009. Our
net loss was $54.9 million for the quarter ended March 31, 2008. The table below
shows our net interest income, gain (loss) on sale of assets, unrealized gains
(loss) on interest rate swaps, total expenses, income tax, each as a percentage
of average equity, and the return on average equity for the quarter ended March
31, 2009, the year ended December 31, 2008 and the four quarters in 2008. Our
return on average equity increased from (45.86%) for the quarter ended March 31,
2008 to 17.82% for the quarter ended March 31, 2009 primarily due to the absence
of realized losses on sales of assets and unrealized losses on interest rate
swaps that were recorded in the quarter ended March 31, 2008.
Components of Return on Average Equity
(Ratios have been annualized)
Net Gain/(Loss) Unrealized
Interest on Sale of Gain/(Loss) on Total
Income/ Investments Interest Rate Expenses/ Income Return on
Average /Average Swaps/Average Average Tax/Average Average
Equity Equity Equity Equity Equity Equity
----------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2009 17.91% 3.42% - (3.51%) - 17.82%
----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2008 11.17% (38.64%) 1.04% (3.50%) - (29.93%)
----------------------------------------------------------------------------------------------------------------------
For the quarter ended December 31, 2008 15.50% - - (4.78%) - 10.72%
----------------------------------------------------------------------------------------------------------------------
For the quarter ended September 30, 2008 10.07% (157.28%) 12.81% (2.46%) (0.02%) (136.88%)
----------------------------------------------------------------------------------------------------------------------
For the quarter ended June 30, 2008 9.84% 1.75% 25.36% (3.35%) - 33.60%
----------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2008 11.83% (27.40%) (26.29%) (4.00%) - (45.86%)
----------------------------------------------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity measures our ability to meet cash requirements, including ongoing
commitments to repay our borrowings, fund and maintain RMBS, mortgage loans and
other assets, pay dividends and other general business needs. Our principal
sources of capital and funds for additional investments primarily include
earnings from our investments, borrowings under securitizations and
re-securitizations, repurchase agreements and other financing facilities, and
proceeds from equity offerings. We expect these sources of financing will be
sufficient to meet our short-term liquidity needs.
We expect to continue to borrow funds in the form of repurchase agreements
and, subject to market conditions, other types of financing. The terms of the
repurchase transaction borrowings under our master repurchase agreements
generally conform to the terms in the standard master repurchase agreement as
published by the Securities Industry and Financial Markets Association, or
SIFMA, as to repayment, margin requirements and the segregation of all
securities we have initially sold under the repurchase transaction. In addition,
38
each lender typically requires that we include supplemental terms and conditions
to the standard master repurchase agreement. Typical supplemental terms and
conditions include changes to the margin maintenance requirements, required
haircuts, and purchase price maintenance requirements, requirements that all
controversies related to the repurchase agreement be litigated in a particular
jurisdiction and cross default provisions. These provisions will differ for each
of our lenders and will not be determined until we engage in a specific
repurchase transaction.
For our short-term (one year or less) and long-term liquidity, which include
investing and compliance with collateralization requirements under our
repurchase agreements (if the pledged collateral decreases in value or in the
event of margin calls created by prepayments of the pledged collateral), we also
rely on the cash flow from investments, primarily monthly principal and interest
payments to be received on our RMBS and whole mortgage loans, cash flow from the
sale of securities as well as any primary securities offerings authorized by our
board of directors.
Based on our current portfolio, leverage ratio and available borrowing
arrangements, we believe our assets will be sufficient to enable us to meet
anticipated short-term (one year or less) liquidity requirements such as to fund
our investment activities, pay fees under our management agreement, fund our
distributions to stockholders and pay general corporate expenses. However, a
decline in the value of our collateral or an increase in prepayment rates
substantially above our expectations could cause a temporary liquidity shortfall
due to the timing of the necessary margin calls on the financing arrangements
and the actual receipt of the cash related to principal paydowns. If our cash
resources are at any time insufficient to satisfy our liquidity requirements, we
may have to sell debt or additional equity securities in a common stock
offering. If required, the sale of RMBS or whole mortgage loans at prices lower
than their carrying value would result in losses and reduced income.
Our ability to meet our long-term (greater than one year) liquidity and
capital resource requirements will be subject to obtaining additional debt
financing and equity capital. Subject to our maintaining our qualification as a
REIT as well as market conditions, we expect to use a number of sources to
finance our investments, including repurchase agreements, warehouse facilities,
securitization, commercial paper and term financing CDOs. Such financing will
depend on market conditions for capital raises and for the investment of any
proceeds. If we are unable to renew, replace or expand our sources of financing
on substantially similar terms, it may have an adverse effect on our business
and results of operations. Upon liquidation, holders of our debt securities and
shares of preferred stock and lenders with respect to other borrowings will
receive a distribution of our available assets prior to the holders of our
common stock.
We held cash and cash equivalents of approximately $12.2 and $91.4 million
at March 31, 2009 and March 31, 2008, respectively. Our cash and cash
equivalents declined as we no longer have cash posted as collateral to secure
repurchase agreements and interest rate swaps.
Our operating activities provided net cash of approximately $13.8 million
and $8.0 million for the quarter s ended March 31, 2009 and March 31, 2008,
respectively.
Our investing activities used net cash of $3.9 million and $1.1 billion for
the quarters ended March 31, 2009 and March 31, 2008, respectively. During the
quarter ended March 31, 2009 proceeds from asset purchases were largely offset
by proceeds from asset sales that utilized approximately $59.4 million as
compared to asset purchases less asset sales utilizing approximately $1.3
billion for the quarter ended March 31, 2008.
Our financing activities used net cash of $25.2 million during the quarter
ended March 31, 2009 and provided net cash of $1.2 billion for the quarter ended
March 31, 2008 primarily from the use of repurchase agreements. We expect to
continue to borrow funds in the form of repurchase agreements as well as other
types of financing. As of March 31, 2009, we had $452.5 million outstanding
under our repurchase agreement with Annaly collateralized by our RMBS with
weighted average borrowing rates of 2.01% and weighted average remaining
maturities of 1 day. The RMBS pledged as collateral under the repurchase
agreement with Annaly had an estimated fair value of $532.1 million at March 31,
2009. The interest rates of the repurchase agreements with Annaly are generally
indexed to the one-month LIBOR rate and reprice accordingly.
39
At March 31, 2009 and 2008, the repurchase agreements for RMBS had the
following remaining maturities:
March 31, 2009 March 31, 2008
(dollars in thousands)
--------------------------------------------------------------------------------
Within 30 days $559,926 $598,168
30 to 59 days - 384,964
60 to 89 days - -
90 to 119 days - -
Greater than or equal to 120 days - 24,514
------------------- -----------------------
Total $559,926 $1,007,646
==========================================
Increases in short-term interest rates could negatively affect the valuation
of our mortgage-related assets, which could limit our borrowing ability or cause
our lenders to initiate margin calls. Amounts due upon maturity of our
repurchase agreements will be funded primarily through the rollover/reissuance
of repurchase agreements and monthly principal and interest payments received on
our mortgage-backed securities.
For our short-term (one year or less) and long-term liquidity, which
includes investing and compliance with collateralization requirements under our
repurchase agreements (if the pledged collateral decreases in value or in the
event of margin calls created by prepayments of the pledged collateral), we also
rely on the cash flow from investments, primarily monthly principal and interest
payments to be received on our RMBS and whole mortgage loans, cash flow from the
sale of securities as well as any primary securities offerings authorized by our
board of directors.
Based on our current portfolio, leverage ratio and available borrowing
arrangements, we believe our assets will be sufficient to enable us to meet
anticipated short-term (one year or less) liquidity requirements such as to fund
our investment activities, pay fees under our management agreement, fund our
distributions to stockholders and pay general corporate expenses. However, an
increase in prepayment rates substantially above our expectations could cause a
temporary liquidity shortfall due to the timing of the necessary margin calls on
the financing arrangements and the actual receipt of the cash related to
principal paydowns. If our cash resources are at any time insufficient to
satisfy our liquidity requirements, we may have to sell investments or issue
debt or additional equity securities in a common stock offering. If required,
the sale of RMBS or whole mortgage loans at prices lower than their carrying
value would result in losses and reduced income.
Our ability to meet our long-term (greater than one year) liquidity and
capital resource requirements will be subject to obtaining additional debt
financing and equity capital. Subject to our maintaining our qualification as a
REIT, we expect to use a number of sources to finance our investments, including
repurchase agreements, warehouse facilities, securitizations, commercial paper
and term financing CDOs. Such financing will depend on market conditions for
capital raises and for the investment of any proceeds. If we are unable to
renew, replace or expand our sources of financing on substantially similar
terms, it may have an adverse effect on our business and results of operations.
Upon liquidation, holders of our debt securities, if any, and shares of
preferred stock, if any, and lenders with respect to other borrowings will
receive a distribution of our available assets prior to the holders of our
common stock.
We are not required by our investment guidelines to maintain any specific
debt-to-equity ratio as we believe the appropriate leverage for the particular
assets we are financing depends on the credit quality and risk of those assets.
However, our master repurchase agreements require us to maintain certain
debt-to-equity ratios. At March 31, 2009, our total debt was approximately $1.0
billion which represented a debt-to-equity ratio of 2.4:1.
40
Stockholders' Equity
During the quarter ended March 31, 2009, we declared dividends to common
shareholders totaling $10.6 million, or $0.06 per share, all of which was paid
on April 29, 2009.
On April 15, 2009 we announced the sale of 235,000,000 shares of common
stock at $3.00 per share for estimated proceeds, less the underwriters' discount
and offering expenses, of $674.8 million. Immediately following the sale of
these shares Annaly purchased 24,955,752 shares at the same price per share as
the public offering, for proceeds of approximately $74.9 million. In addition,
on April 16, 2009 the underwriters exercised the option to purchase up to an
additional 35,250,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters' discount, of approximately $101.3 million.
These sales were completed on April 21, 2009. In all, we raised net proceeds of
approximately $851.0 in these offerings.
Related Party Transactions
Management Agreement
On November 15, 2007, we entered into a management agreement with FIDAC,
pursuant to which FIDAC is entitled to receive a management fee and, in certain
circumstances, a termination fee and reimbursement of certain expenses as
described in the management agreement. Such fees and expenses do not have fixed
and determinable payments. The management fee is payable quarterly in arrears in
an amount equal to 1.50% per annum, calculated quarterly, of our stockholders'
equity (as defined in the management agreement). FIDAC uses the proceeds from
its management fee in part to pay compensation to its officers and employees
who, notwithstanding that certain of them also are our officers, receive no cash
compensation directly from us. The management fee will be reduced, but not below
zero, by our proportionate share of any CDO management fees FIDAC receives in
connection with the CDOs in which we invest, based on the percentage of equity
we hold in such CDOs.
Financing Arrangements with Annaly
In March 2008, we entered into a RMBS repurchase agreement with Annaly. This
agreement contains customary representations, warranties and covenants contained
in such agreements. As of March 31, 2009, we had $452.5 million outstanding
under the agreement with a weighted average borrowing rate of 2.01%.
Restricted Stock Grants
During the quarter ended March 31, 2009, 32,225 shares of restricted stock
we had awarded to our Manager's employees vested and 1,267 shares were forfeited
or cancelled. We did not grant any incentive awards during the quarter ended
March 31, 2009.
At March 31, 2009 there are approximately 1.1 million unvested shares of
restricted stock issued to employees of FIDAC. For the quarter ended March 31,
2009, compensation expense less general and administrative costs associated with
the amortization of the fair value of the restricted stock totaled $104
thousand.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at March 31,
2009.
(dollars in thousands)
Greater
One to Than or
Within Three Three to Equal to
Contractual Obligations One Year Years Five Years Five Years Total
Repurchase agreements for RMBS $559,926 $ - $ - $ - $559,926
Securitized debt 49,232 85,945 70,371 289,278 494,826
Interest expense on RMBS repurchase agreements(1) 89 - - - 89
Interest expense on securitized debt(1) 25,933 44,168 35,820 130,904 236,825
-----------------------------------------------------------
Total $635,180 $130,113 $106,191 $420,182 $1,291,666
===========================================================
(1) Interest is based on variable rates in effect as of March 31, 2009.
41
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide
funding to any such entities. As such, we are not materially exposed to any
market, credit, liquidity or financing risk that could arise if we had engaged
in such relationships.
Dividends
To qualify as a REIT, we must pay annual dividends to our stockholders of at
least 90% of our taxable income, determined without regard to the deduction for
dividends paid and excluding any net capital gains. We intend to pay regular
quarterly dividends to our stockholders. Before we pay any dividend, whether for
U.S. federal income tax purposes or otherwise, which would only be paid out of
available cash to the extent permitted under our warehouse and repurchase
facilities, we must first meet both our operating requirements and scheduled
debt service on our warehouse lines and other debt payable.
Capital Resources
At March 31, 2009, we had no material commitments for capital expenditures.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in
nature. As a result, interest rates and other factors influence our performance
far more so than does inflation. Changes in interest rates do not necessarily
correlate with inflation rates or changes in inflation rates. Our financial
statements are prepared in accordance with GAAP and our distributions will be
determined by our board of directors consistent with our obligation to
distribute to our stockholders at least 90% of our REIT taxable income on an
annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost
and/or fair market value without considering inflation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary components of our market risk are related to credit risk,
interest rate risk, prepayment risk, market value risk and real estate risk.
While we do not seek to avoid risk completely, we believe the risk can be
quantified from historical experience and we seek to actively manage that risk,
to earn sufficient compensation to justify taking those risks and to maintain
capital levels consistent with the risks we undertake.
Credit Risk
We are subject to credit risk in connection with our investments and face
more credit risk on assets we own which are rated below "AAA". The credit risk
related to these investments pertains to the ability and willingness of the
borrowers to pay, which is assessed before credit is granted or renewed and
periodically reviewed throughout the loan or security term. We believe that
residual loan credit quality is primarily determined by the borrowers' credit
profiles and loan characteristics. FIDAC uses a comprehensive credit review
process. FIDAC's analysis of loans includes borrower profiles, as well as
valuation and appraisal data. FIDAC uses compensating factors such as liquid
assets, low loan to value ratios and job stability in evaluating loans. FIDAC's
resources include a proprietary portfolio management system, as well as third
party software systems. FIDAC utilizes a third party due diligence firm to
perform an independent underwriting review to insure compliance with existing
guidelines. FIDAC selects loans for review predicated on risk-based criteria
42
such as loan-to-value, borrower's credit score(s) and loan size. FIDAC also
outsources underwriting services to review higher risk loans, either due to
borrower credit profiles or collateral valuation issues. In addition to
statistical sampling techniques, FIDAC creates adverse credit and valuation
samples, which we individually review. FIDAC rejects loans that fail to conform
to our standards. FIDAC accepts only those loans which meet our underwriting
criteria. Once we own a loan, FIDAC's surveillance process includes ongoing
analysis through our proprietary data warehouse and servicer files.
Additionally, the non-Agency RMBS and other ABS which we acquire for our
portfolio are reviewed by FIDAC to ensure that they satisfy our risk based
criteria. FIDAC's review of non-Agency RMBS and other ABS includes utilizing its
proprietary portfolio management system. FIDAC's review of non-Agency RMBS and
other ABS is based on quantitative and qualitative analysis of the risk-adjusted
returns on non-Agency RMBS and other ABS present.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic and
political considerations and other factors beyond our control. We are subject to
interest rate risk in connection with our investments and our related debt
obligations, which are generally repurchase agreements, warehouse facilities,
securitization, commercial paper and term financing CDOs. Our repurchase
agreements and warehouse facilities may be of limited duration that are
periodically refinanced at current market rates. We intend to mitigate this risk
through utilization of derivative contracts, primarily interest rate swap
agreements.
Interest Rate Effect on Net Interest Income
Our operating results depend, in large part, on differences between the
income from our investments and our borrowing costs. Most of our warehouse
facilities and repurchase agreements provide financing based on a floating rate
of interest calculated on a fixed spread over LIBOR. The fixed spread varies
depending on the type of underlying asset which collateralizes the financing.
Accordingly, the portion of our portfolio which consists of floating interest
rate assets will be match-funded utilizing our expected sources of short-term
financing, while our fixed interest rate assets will not be match-funded. During
periods of rising interest rates, the borrowing costs associated with our
investments tend to increase while the income earned on our fixed interest rate
investments may remain substantially unchanged. This will result in a narrowing
of the net interest spread between the related assets and borrowings and may
even result in losses. Further, during this portion of the interest rate and
credit cycles, defaults could increase and result in credit losses to us, which
could adversely affect our liquidity and operating results. Such delinquencies
or defaults could also have an adverse effect on the spread between
interest-earning assets and interest-bearing liabilities. Hedging techniques are
partly based on assumed levels of prepayments of our fixed-rate and hybrid
adjustable-rate mortgage loans and RMBS. If prepayments are slower or faster
than assumed, the life of the mortgage loans and RMBS will be longer or shorter,
which would reduce the effectiveness of any hedging strategies we may use and
may cause losses on such transactions. Hedging strategies involving the use of
derivative securities are highly complex and may produce volatile returns.
Interest Rate Effects on Fair Value
Another component of interest rate risk is the effect changes in interest
rates will have on the fair value of the assets we acquire. We face the risk
that the fair value of our assets will increase or decrease at different rates
than that of our liabilities, including our hedging instruments. We primarily
assess our interest rate risk by estimating the duration of our assets and the
duration of our liabilities. Duration essentially measures the market price
volatility of financial instruments as interest rates change. We generally
calculate duration using various financial models and empirical data. Different
models and methodologies can produce different duration numbers for the same
securities.
43
It is important to note that the impact of changing interest rates on fair
value can change significantly when interest rates change beyond 100 basis
points from current levels. Therefore, the volatility in the fair value of our
assets could increase significantly when interest rates change beyond 100 basis
points. In addition, other factors impact the fair value of our interest
rate-sensitive investments and hedging instruments, such as the shape of the
yield curve, market expectations as to future interest rate changes and other
market conditions. Accordingly, in the event of changes in actual interest
rates, the change in the fair value of our assets would likely differ from that
shown above and such difference might be material and adverse to our
stockholders.
Interest Rate Cap Risk
We also invest in adjustable-rate mortgage loans and RMBS. These are
mortgages or RMBS in which the underlying mortgages are typically subject to
periodic and lifetime interest rate caps and floors, which limit the amount by
which the security's interest yield may change during any given period. However,
our borrowing costs pursuant to our financing agreements will not be subject to
similar restrictions. Therefore, in a period of increasing interest rates,
interest rate costs on our borrowings could increase without limitation by caps,
while the interest-rate yields on our adjustable-rate mortgage loans and RMBS
would effectively be limited. This problem will be magnified to the extent we
acquire adjustable-rate RMBS that are not based on mortgages which are fully
indexed. In addition, the mortgages or the underlying mortgages in an RMBS may
be subject to periodic payment caps that result in some portion of the interest
being deferred and added to the principal outstanding. This could result in our
receipt of less cash income on our adjustable-rate mortgages or RMBS than we
need in order to pay the interest cost on our related borrowings. These factors
could lower our net interest income or cause a net loss during periods of rising
interest rates, which would harm our financial condition, cash flows and results
of operations.
Interest Rate Mismatch Risk
We fund a substantial portion of our acquisitions of hybrid adjustable-rate
mortgages and RMBS with borrowings that, after the effect of hedging, have
interest rates based on indices and repricing terms similar to, but of somewhat
shorter maturities than, the interest rate indices and repricing terms of the
mortgages and RMBS. Thus, in most cases the interest rate indices and repricing
terms of our mortgage assets and our funding sources will not be identical,
thereby creating an interest rate mismatch between assets and liabilities.
Therefore, our cost of funds would likely rise or fall more quickly than would
our earnings rate on assets. During periods of changing interest rates, such
interest rate mismatches could negatively impact our financial condition, cash
flows and results of operations. To mitigate interest rate mismatches, we may
utilize the hedging strategies discussed above. Our analysis of risks is based
on FIDAC's experience, estimates, models and assumptions. These analyses rely on
models which utilize estimates of fair value and interest rate sensitivity.
Actual economic conditions or implementation of investment decisions by our
management may produce results that differ significantly from the estimates and
assumptions used in our models and the projected results shown in this Form
10-Q.
Our profitability and the value of our portfolio (including interest rate
swaps) may be adversely affected during any period as a result of changing
interest rates. The following table quantifies the potential changes in net
interest income and portfolio value should interest rates go up or down 25, 50,
and 75 basis points, assuming the yield curves of the rate shocks will be
parallel to each other and the current yield curve. All changes in income and
value are measured as percentage changes from the projected net interest income
and portfolio value at the base interest rate scenario. The base interest rate
scenario assumes interest rates at March 31, 2009 and various estimates
regarding prepayment and all activities are made at each level of rate shock.
Actual results could differ significantly from these estimates.
44
Projected Percentage Change in Projected Percentage Change in
Change in Interest Rate Net Interest Income Portfolio Value
----------------------------------------------------------------------------------------------------
-75 Basis Points 2.10% (2.42%)
-50 Basis Points 1.71% (2.86%)
-25 Basis Points 1.31% (3.28%)
Base Interest Rate - -
+25 Basis Points (0.04%) (4.11%)
+50 Basis Points 0.10% (4.52%)
+75 Basis Points 0.24% (4.91%)
Prepayment Risk
As we receive prepayments of principal on these investments, premiums paid
on such investments will be amortized against interest income. In general, an
increase in prepayment rates will accelerate the amortization of purchase
premiums, thereby reducing the interest income earned on the investments.
Conversely, discounts on such investments are accreted into interest income. In
general, an increase in prepayment rates will accelerate the accretion of
purchase discounts, thereby increasing the interest income earned on the
investments.
Extension Risk
FIDAC computes the projected weighted-average life of our investments based
on assumptions regarding the rate at which the borrowers will prepay the
underlying mortgages. In general, when fixed-rate or hybrid adjustable-rate
mortgage loans or RMBS are acquired with borrowings, we may, but are not
required to, enter into an interest rate swap agreement or other hedging
instrument that effectively fixes our borrowing costs for a period close to the
anticipated average life of the fixed-rate portion of the related assets. This
strategy is designed to protect us from rising interest rates because the
borrowing costs are fixed for the duration of the fixed-rate portion of the
related assets. However, if prepayment rates decrease in a rising interest rate
environment, the life of the fixed-rate portion of the related assets could
extend beyond the term of the swap agreement or other hedging instrument. This
could have a negative impact on our results from operations, as borrowing costs
would no longer be fixed after the end of the hedging instrument while the
income earned on the hybrid adjustable-rate assets would remain fixed. This
situation may also cause the market value of our hybrid adjustable-rate assets
to decline, with little or no offsetting gain from the related hedging
transactions. In extreme situations, we may be forced to sell assets to maintain
adequate liquidity, which could cause us to incur losses.
Market Risk
Market Value Risk
Our available-for-sale securities are reflected at their estimated fair
value with unrealized gains and losses excluded from earnings and reported in
other comprehensive income pursuant to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The estimated fair value of these
securities fluctuates primarily due to changes in interest rates, prepayment
speeds, market liquidity, credit quality, and other factors. Generally, in a
rising interest rate environment, the estimated fair value of these securities
would be expected to decrease; conversely, in a decreasing interest rate
environment, the estimated fair value of these securities would be expected to
increase. As market volatility increases or liquidity decreases, the fair value
of our investments may be adversely impacted. If we are unable to readily obtain
independent pricing to validate our estimated fair value of securities in the
portfolio, the fair value gains or losses recorded in other comprehensive income
may be adversely affected.
Real Estate Market Risk
We own assets secured by real property and may own real property directly in
the future. Residential property values are subject to volatility and may be
affected adversely by a number of factors, including, but not limited to,
45
national, regional and local economic conditions (which may be adversely
affected by industry slowdowns and other factors); local real estate conditions
(such as an oversupply of housing); changes or continued weakness in specific
industry segments; construction quality, age and design; demographic factors;
and retroactive changes to building or similar codes. In addition, decreases in
property values reduce the value of the collateral and the potential proceeds
available to a borrower to repay our loans, which could also cause us to suffer
losses.
Risk Management
To the extent consistent with maintaining our REIT status, we seek to manage
risk exposure to protect our portfolio of residential mortgage loans, RMBS, and
other assets and related debt against the effects of major interest rate
changes. We generally seek to manage our risk by:
o monitoring and adjusting, if necessary, the reset index and interest
rate related to our RMBS and our financings;
o attempting to structure our financing agreements to have a range of
different maturities, terms, amortizations and interest rate adjustment
periods;
o using derivatives, financial futures, swaps, options, caps, floors and
forward sales to adjust the interest rate sensitivity of our investments
and our borrowings;
o using securitization financing to lower average cost of funds relative
to short-term financing vehicles further allowing us to receive the
benefit of attractive terms for an extended period of time in contrast
to short term financing and maturity dates of the investments included
in the securitization; and
o actively managing, on an aggregate basis, the interest rate indices,
interest rate adjustment periods, and gross reset margins of our
investments and the interest rate indices and adjustment periods of our
financings.
Our efforts to manage our assets and liabilities are concerned with the
timing and magnitude of the repricing of assets and liabilities. We attempt to
control risks associated with interest rate movements. Methods for evaluating
interest rate risk include an analysis of our interest rate sensitivity "gap",
which is the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at March 31, 2009. The
amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature and does include the effect of the interest rate
swaps. The interest rate sensitivity of our assets and liabilities in the table
could vary substantially if based on actual prepayment experience.
46
1 Year to
Within 3 3 Years Greater than
Months 3-12 Months 3 Years Total
-----------------------------------------------------------------------------
(dollars in thousands)
Rate sensitive assets $586,122 $3,133 $500,492 $888,838 1,978,585
Cash equivalents 12,200 - - - 12,200
-----------------------------------------------------------------------------
Total rate sensitive assets 598,322 3,133 500,492 888,838 1,990,785
-----------------------------------------------------------------------------
Rate sensitive liabilities, with the effect
of swaps 559,926 - - 494,826 1,054,752
-----------------------------------------------------------------------------
Interest rate sensitivity gap $ 38,396 $3,133 $500,492 $394,012 $936,033
=============================================================================
Cumulative rate sensitivity gap $ 38,396 $41,529 $542,021 $936,033
==============================================================
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive
assets 2% 2% 27% 47%
==============================================================
Our analysis of risks is based on FIDAC's experience, estimates, models and
assumptions. These analyses rely on models which utilize estimates of fair value
and interest rate sensitivity. Actual economic conditions or implementation of
investment decisions by FIDAC may produce results that differ significantly from
the estimates and assumptions used in our models and the projected results shown
in the above tables and in this report. These analyses contain certain
forward-looking statements and are subject to the safe harbor statement set
forth under the heading, "Special Note Regarding Forward-Looking Statements."
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer, or CEO, and Chief
Financial Officer, or CFO, reviewed and evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of
the period covered by this quarterly report. Based on that review and
evaluation, the CEO and CFO have concluded that our current disclosure controls
and procedures, as designed and implemented, (1) were effective in ensuring that
information regarding the Company and its subsidiaries is made known to our
management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure and (2) were effective in providing reasonable
assurance that information the Company must disclose in its periodic reports
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods prescribed by the SEC's rules and forms.
Changes in Internal Controls
There have been no changes in our "internal control over financial
reporting" (as defined in Rule 13a-15(f) under the Securities Exchange Act) that
occurred during the period covered by this quarterly report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
47
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
our consolidated financial statements.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2008, which could
materially affect our business, financial condition or future results. The
information presented below updates and should be read in conjunction with the
risk factors and information disclosed in that Form 10-K.
MORTGAGE LOAN MODIFICATION PROGRAMS, FUTURE LEGISLATIVE ACTION AND CHANGES IN
THE REQUIREMENTS NECESSARY TO QUALIFY FOR REFINANCING A MORTGAGE WITH FANNIE
MAE, FREDDIE MAC OR GINNIE MAE MAY ADVERSELY AFFECT THE VALUE OF, AND THE
RETURNS ON, THE ASSETS IN WHICH WE INVEST.
During the second half of 2008 and in early 2009, the U.S. government,
through the Federal Housing Administration, or FHA, and the FDIC, commenced
implementation of programs designed to provide homeowners with assistance in
avoiding residential mortgage loan foreclosures including the Hope for
Homeowners Act of 2008, which allows certain distressed borrowers to refinance
their mortgages into FHA-insured loans. The programs may also involve, among
other things, the modification of mortgage loans to reduce the principal amount
of the loans or the rate of interest payable on the loans, or to extend the
payment terms of the loans. Members of the U.S. Congress have indicated support
for additional legislative relief for homeowners, including an amendment of the
bankruptcy laws to permit the modification of mortgage loans in bankruptcy
proceedings. These loan modification programs, future legislative or regulatory
actions, including amendments to the bankruptcy laws, that result in the
modification of outstanding mortgage loans, as well as changes in the
requirements necessary to qualify for refinancing a mortgage with Fannie Mae,
Freddie Mac or Ginnie Mae may adversely affect the value of, and the returns on,
the RMBS, residential mortgage loans, real estate-related securities and various
other asset classes in which we invest. Depending on whether or not we purchased
an instrument at a premium or discount, the yield we receive may be positively
or negatively impacted by any modification.
THE CONSERVATORSHIP OF FANNIE MAE AND FREDDIE MAC AND RELATED EFFORTS, ALONG
WITH ANY CHANGES IN LAWS AND REGULATIONS AFFECTING THE RELATIONSHIP BETWEEN
FANNIE MAE AND FREDDIE MAC AND THE FEDERAL GOVERNMENT, MAY ADVERSELY AFFECT OUR
BUSINESS.
Due to increased market concerns about Fannie Mae and Freddie Mac's ability
to withstand future credit losses associated with securities held in their
investment portfolios, and on which they provide guarantees, without the direct
support of the federal government, on July 30, 2008, the government passed the
Housing and Economic Recovery Act of 2008, or the HERA. Among other things, the
HERA established the Federal Housing Finance Agency, or FHFA, which has broad
regulatory powers over Fannie Mae and Freddie Mac. On September 7, 2008, the
FHFA placed Fannie Mae and Freddie Mac into conservatorship and, together with
the Treasury, established a program designed to boost investor confidence in
Fannie Mae's and Freddie Mac's debt and mortgage-backed securities. As the
conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the
operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and
operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator's appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
48
of the conservator. A primary focus of this new legislation is to increase the
availability of mortgage financing by allowing Fannie Mae and Freddie Mac to
continue to grow their guarantee business without limit, while limiting net
purchases of Agency RMBS to a modest amount through the end of 2009. It is
currently planned for Fannie Mae and Freddie Mac to reduce gradually their
Agency RMBS portfolios beginning in 2010.
In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac,
the Treasury has taken three additional actions: (i) the Treasury and FHFA have
entered into preferred stock purchase agreements between the Treasury and Fannie
Mae and Freddie Mac pursuant to which the Treasury will ensure that each of
Fannie Mae and Freddie Mac maintains a positive net worth; (ii) the Treasury has
established a new secured lending credit facility which will be available to
Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which is intended to
serve as a liquidity backstop, which will be available until December 2009; and
(iii) the Treasury has initiated a temporary program to purchase Agency RMBS
issued by Fannie Mae and Freddie Mac.
Although the Treasury has committed capital to Fannie Mae and Freddie Mac,
there can be no assurance that these actions will be adequate for their needs.
If these actions are inadequate, Fannie Mae and Freddie Mac could continue to
suffer losses and could fail to honor their guarantees and other obligations.
The future roles of Fannie Mae and Freddie Mac could be significantly reduced
and the nature of their guarantees could be considerably limited relative to
historical measurements. Any changes to the nature of the guarantees provided by
Fannie Mae and Freddie Mac could redefine what constitutes an Agency RMBS and
could have broad adverse market implications.
On November 25, 2008, the Federal Reserve announced that it will initiate a
program to purchase $100 billion in direct obligations of Fannie Mae, Freddie
Mac and the Federal Home Loan Banks and $500 billion in Agency RMBS backed by
Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve stated that its
actions are intended to reduce the cost and increase the availability of credit
for the purchase of houses, and are meant to support housing markets and foster
improved conditions in financial markets more generally. The purchases of direct
obligations began during the first week of December 2008, and the purchases of
Agency RMBS began in early January 2009. The Federal Reserve has announced an
expansion of this program to purchase another $750 million in Agency RMBS. The
Federal Reserve's program to purchase Agency RMBS could cause an increase in the
price of Agency RMBS, which could help the value of assets in our portfolio but
may negatively impact the net interest margin with respect to new Agency RMBS we
may purchase.
The size and timing of the federal government's Agency RMBS purchase program
is subject to the discretion of the Treasury and the Federal Reserve. Purchases
under these programs have already begun, but there is no certainty that they
will continue. It is possible that a change in the Treasury's and the Federal
Reserve's commitment to purchase Agency RMBS in the future could negatively
affect the pricing of Agency RMBS that we seek to acquire. Given the highly
fluid and evolving nature of events, it is unclear how our business may be
impacted. Further activity of the U.S. Government or market response to
developments at Fannie Mae and Freddie Mac could adversely impact our business.
THE ACTIONS OF THE U.S. GOVERNMENT, FEDERAL RESERVE AND TREASURY, INCLUDING THE
ESTABLISHMENT OF THE TALF AND THE PPIP, MAY ADVERSELY AFFECT OUR BUSINESS.
The TALF was first announced by the Treasury on November 25, 2008, and has
been expanded in size and scope since its initial announcement. Under the TALF,
the Federal Reserve Bank of New York makes non-recourse loans to borrowers to
fund their purchase of eligible assets, currently certain asset backed
securities but not RMBS or CMBS. Currently, TALF loans: have three-year terms,
have interest due monthly, are exempt from mark-to-market rules and margin calls
related to a decrease in the underlying collateral value, are pre-payable in
whole or in part, and prohibit the substitution of any underlying collateral. It
is expected that the TALF loans will require that any payments of principal on
the underlying collateral reduce the principal amount of the TALF loan pro rata
49
based upon the original loan-to-value ratio. The nature of the eligible assets
has been expanded several times. The Treasury has stated that through its
expansion of the TALF, non-recourse loans will be made available to investors to
certain fund purchases of legacy securitization assets. Eligible assets are
expected to include certain non-Agency RMBS that were originally rated AAA and
CMBS and ABS that are rated AAA. The eligibility criteria and terms of these
loans have not yet been determined. Additionally, certain terms of the TALF
loans may be modified.
On March 23, 2009, the Treasury in conjunction with the FDIC, and the
Federal Reserve, announced the PPIP. The PPIP aims to recreate a market for
specific illiquid residential and commercial loans and securities through a
number of joint public and private investment funds. The PPIP is designed to
draw new private capital into the market for these securities and loans by
providing government equity co-investment and attractive public financing. The
PPIP is expected to be $500 billion to $1 trillion in size and has two primary
components: a loan purchase program and a securities purchase program.
These programs are still in early stages of development, and it is not
possible to predict how the TALF, the PPIP, or other recent U.S. government
actions will impact the financial markets, including current significant levels
of volatility, or our current or future investments. To the extent the market
does not respond favorably to these initiatives or they do not function as
intended, our business may not receive the anticipated positive impact from this
legislation. We are currently actively evaluating these programs to determine if
they are appropriate in light of our investment strategy. However, we can
provide no assurance that we will be eligible to use these programs or, if
eligible, will be able to utilize them successfully.
In addition, the U.S. government, Federal Reserve, Treasury and other
governmental and regulatory bodies have taken or are considering taking other
actions to address the financial crisis. We cannot predict whether or when such
actions may occur, and such actions could have a dramatic impact on our
business, results of operations and financial condition.
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Item 6. EXHIBITS
Exhibits:
The exhibits required by this item are set forth on the Exhibit Index
attached hereto
EXHIBIT INDEX
Exhibit Description
Number
3.1 Articles of Amendment and Restatement of Chimera Investment Corporation
(filed as Exhibit 3.1 to the Company's Registration Statement on
Amendment No. 1 to Form S-11 (File No. 333-145525) filed on September
27, 2007 and incorporated herein by reference)
3.2 Amended and Restated Bylaws of Chimera Investment Corporation (filed as
Exhibit 3.2 to the Company's Registration Statement on Amendment No. 2
to Form S-11 (File No. 333-145525) filed on November 5, 2007 and
incorporated herein by reference)
4.1 Specimen Common Stock Certificate of Chimera Investment Corporation
(filed as Exhibit 4.1 to the Company's Registration Statement on
Amendment No. 1 to Form S-11 (File No. 333-145525) filed on September
27, 2007 and incorporated herein by reference)
31.1 Certification of Matthew Lambiase, Chief Executive Officer and President
of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of A. Alexandra Denahan, Chief Financial Officer of the
Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Matthew Lambiase, Chief Executive Officer and President
of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of A. Alexandra Denahan, Chief Financial Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of New
York, State of New York.
CHIMERA INVESTMENT CORPORATION
By: /s/ Matthew Lambiase
--------------------
Matthew Lambiase
Chief Executive Officer and President
May 7, 2009
By: /s/ A. Alexandra Denahan
------------------------
A. Alexandra Denahan
Chief Financial Officer (Principal Financial
Officer)
May 7, 2009
52