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Section 1: 10-Q (10-Q)

Table of Contents

 

 

 

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, 2010

 

OR

 

o

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: 1-13991

 

MFA FINANCIAL, INC.

 (Exact name of registrant as specified in its charter)

 


 

Maryland

 

13-3974868

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

350 Park Avenue, 21st Floor, New York, New York

 

10022

(Address of principal executive offices)

 

(Zip Code)

 

(212) 207-6400

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all 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 o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

280,162,633  shares of the registrant’s common stock, $0.01 par value, were outstanding as of April 27, 2010.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I
FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009

 

1

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009

 

2

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009

 

3

 

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2010

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2010 and March 31, 2009

 

5

 

 

 

 

 

Notes to the Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

40

 

 

 

 

Item 4.

Controls and Procedures

 

46

 

 

 

 

 

PART II
OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

47

 

 

 

 

Item 1A.

Risk Factors

 

47

 

 

 

 

Item 6.

Exhibits

 

47

 

 

 

 

Signatures

 

 

50

 



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

(In Thousands, Except Per Share Amounts)

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Agency mortgage-backed securities (“MBS”), at fair value ($5,819,179 and $7,597,136 pledged as collateral, respectively)

 

$

6,156,682

 

$

7,664,851

 

Non-Agency MBS, at fair value ($1,028,445 and $240,694 pledged as collateral, respectively)

 

1,312,030

 

1,093,103

 

Cash and cash equivalents

 

768,656

 

653,460

 

Restricted cash

 

39,387

 

67,504

 

Forward contracts to repurchase MBS (“MBS Forwards”), at fair value

 

101,659

 

86,014

 

Interest receivable

 

35,099

 

41,775

 

Real estate, net

 

10,954

 

10,998

 

Goodwill

 

7,189

 

7,189

 

Prepaid and other assets

 

3,057

 

2,315

 

Total Assets

 

$

8,434,713

 

$

9,627,209

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Repurchase agreements

 

$

6,013,875

 

$

7,195,827

 

Accrued interest payable

 

8,263

 

13,274

 

Mortgage payable on real estate

 

9,101

 

9,143

 

Interest rate swap agreements (“Swaps”), at fair value

 

153,750

 

152,463

 

Dividends and dividend equivalents rights (“DERs”) payable

 

387

 

76,286

 

Accrued expenses and other liabilities

 

4,278

 

11,954

 

Total Liabilities

 

$

6,189,654

 

$

7,458,947

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.01 par value; series A 8.50% cumulative redeemable; 5,000 shares authorized; 3,840 shares issued and outstanding ($96,000 aggregate liquidation preference)

 

$

38

 

$

38

 

Common stock, $.01 par value; 370,000 shares authorized; 280,163 and 280,078 issued and outstanding, respectively

 

2,802

 

2,801

 

Additional paid-in capital, in excess of par

 

2,181,451

 

2,180,605

 

Accumulated deficit

 

(121,552

)

(202,189

)

Accumulated other comprehensive income

 

182,320

 

187,007

 

Total Stockholders’ Equity

 

$

2,245,059

 

$

2,168,262

 

Total Liabilities and Stockholders’ Equity

 

$

8,434,713

 

$

9,627,209

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

1



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

(In Thousands, Except Per Share Amounts)

 

(Unaudited)

 

Interest Income:

 

 

 

 

 

MBS

 

$

  107,644

 

$

  132,153

 

Cash and cash equivalent investments

 

53

 

611

 

Interest Income

 

107,697

 

132,764

 

 

 

 

 

 

 

Interest Expense

 

38,451

 

72,137

 

 

 

 

 

 

 

Net Interest Income

 

69,246

 

60,627

 

 

 

 

 

 

 

Other-Than-Temporary Impairments:

 

 

 

 

 

Total other-than-temporary impairment losses

 

 

(1,549

)

Portion of loss recognized in other comprehensive income

 

 

 

Net Impairment Losses Recognized in Earnings

 

 

(1,549

)

 

 

 

 

 

 

Other Income/(Loss):

 

 

 

 

 

Gain on MBS Forwards, net

 

12,800

 

 

Gains on sales of MBS

 

33,739

 

 

Revenue from operations of real estate

 

374

 

383

 

Losses on termination of repurchase agreements

 

(26,815

)

 

Miscellaneous other income, net

 

 

44

 

Other Income, net

 

20,098

 

427

 

 

 

 

 

 

 

Operating and Other Expense:

 

 

 

 

 

Compensation and benefits

 

4,368

 

3,502

 

Other general and administrative expense

 

1,853

 

1,868

 

Real estate operating expense and mortgage interest

 

446

 

462

 

Operating and Other Expense

 

6,667

 

5,832

 

 

 

 

 

 

 

Net Income Before Preferred Stock Dividends

 

82,677

 

53,673

 

Less:  Preferred Stock Dividends

 

2,040

 

2,040

 

Net Income to Common Stockholders

 

$

  80,637

 

$

  51,633

 

 

 

 

 

 

 

Income Per Share of Common Stock:

 

 

 

 

 

Basic and Diluted

 

$

  0.29

 

$

  0.23

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

(In Thousands)

 

(Unaudited)

 

Net income before preferred stock dividends

 

$

82,677

 

$

53,673

 

Other Comprehensive Income:

 

 

 

 

 

Unrealized gain on MBS arising during the period, net

 

38,059

 

121,786

 

Reclassification adjustment for MBS sales

 

(41,459

)

 

Reclassification adjustment for net losses included in net income for other-than-temporary impairments

 

 

1,405

 

Unrealized (loss)/gain on Swaps arising during the period, net

 

(1,287

)

10,821

 

Comprehensive income before preferred stock dividends

 

$

77,990

 

$

187,685

 

Dividends declared on preferred stock

 

(2,040

)

(2,040

)

Comprehensive Income to Common Stockholders

 

$

75,950

 

$

185,645

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

Three Months
Ended
March 31,
2010

 

(In Thousands, Except Per Share Amounts)

 

(Unaudited)

 

 

 

 

 

Preferred Stock, Series A 8.50% Cumulative Redeemable — Liquidation Preference $25.00 per Share:

 

 

 

Balance at December 31, 2009 and March 31, 2010 (3,840 shares)

 

$

38

 

 

 

 

 

Common Stock, Par Value $0.01:

 

 

 

Balance at December 31, 2009 (280,078 shares)

 

2,801

 

Issuance of common stock (85 shares)

 

1

 

Balance at March 31, 2010 (280,163 shares)

 

2,802

 

 

 

 

 

Additional Paid-in Capital, in excess of Par:

 

 

 

Balance at December 31, 2009

 

2,180,605

 

Issuance of common stock, net of expenses

 

124

 

Equity-based compensation expense

 

722

 

Balance at March 31, 2010

 

2,181,451

 

 

 

 

 

Accumulated Deficit:

 

 

 

Balance at December 31, 2009

 

(202,189

)

Net income

 

82,677

 

Dividends declared on preferred stock

 

(2,040

)

Balance at March 31, 2010

 

(121,552

)

 

 

 

 

Accumulated Other Comprehensive Income:

 

 

 

Balance at December 31, 2009

 

187,007

 

Change in unrealized gains on MBS, net

 

(3,400

)

Unrealized losses on Swaps

 

(1,287

)

Balance at March 31, 2010

 

182,320

 

 

 

 

 

Total Stockholders’ Equity at March 31, 2010

 

$

2,245,059

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended
March 31,

 

 

 

2010

 

2009

 

(In Thousands)

 

(Unaudited)

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

82,677

 

$

53,673

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gains on sale of MBS

 

(33,739

)

 

Losses on termination of repurchase agreements

 

26,815

 

 

Other-than-temporary impairment charges

 

 

1,549

 

Net (accretion)/amortization of purchase (discount) and premium on MBS

 

(485

)

4,228

 

Decrease in interest receivable

 

6,676

 

1,585

 

Depreciation and amortization on real estate

 

163

 

94

 

Unrealized gain and other on MBS Forwards

 

(8,927

)

 

Increase in prepaid and other assets and other

 

(664

)

(746

)

Decrease in accrued expenses and other liabilities

 

(7,676

)

(2,181

)

Decrease in accrued interest payable

 

(5,011

)

(7,745

)

Equity-based compensation expense

 

722

 

474

 

Negative amortization and principal accretion on MBS

 

 

(12

)

Net cash provided by operating activities

 

$

60,551

 

$

50,919

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Principal payments on MBS

 

$

574,798

 

$

357,525

 

Proceeds from sale of MBS

 

939,119

 

 

Purchases of MBS

 

(193,851

)

(62,034

)

Net additions to leasehold improvements, furniture, fixtures and real estate investment

 

(210

)

(218

)

Net cash provided by investing activities

 

$

1,319,856

 

$

295,273

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Principal payments on repurchase agreements

 

$

(13,998,897

)

$

(16,630,370

)

Proceeds from borrowings under repurchase agreements

 

12,816,945

 

16,364,175

 

Payments to terminate repurchase agreements

 

(26,815

)

 

Principal payments on MBS Forwards

 

(346,435

)

 

Proceeds from MBS Forwards

 

339,717

 

 

Payments made for margin calls on repurchase agreements and Swaps

 

(259,286

)

(74,360

)

Proceeds received for reverse margin calls on repurchase agreements and Swaps

 

287,416

 

70,820

 

Proceeds from issuances of common stock

 

125

 

16,373

 

Dividends paid on preferred stock

 

(2,040

)

(2,040

)

Dividends paid on common stock and DERs

 

(75,899

)

(46,351

)

Principal payments on mortgage loan

 

(42

)

(39

)

Net cash used by financing activities

 

$

(1,265,211

)

$

(301,792

)

Net increase in cash and cash equivalents

 

$

115,196

 

$

44,400

 

Cash and cash equivalents at beginning of period

 

$

653,460

 

$

361,167

 

Cash and cash equivalents at end of period

 

$

768,656

 

$

405,567

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.      Organization

 

MFA Financial, Inc. (the “Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998.  The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes.  In order to maintain its qualification as a REIT, the Company must comply with a number of requirements under federal tax law, including that it must distribute at least 90% of its annual REIT taxable income to its stockholders.  (See Note 10(b))

 

2.      Summary of Significant Accounting Policies

 

(a)  Basis of Presentation and Consolidation

The interim unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted according to such SEC rules and regulations.  Management believes, however, that the disclosures included in these interim financial statements are adequate to make the information presented not misleading.  The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2010 and results of operations for all periods presented have been made.  The results of operations for the three months ended March 31, 2010 should not be construed as indicative of the results to be expected for the full year.

 

The consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with GAAP.  The preparation of financial statements in conformity with 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.  The consolidated financial statements of the Company include the accounts of all subsidiaries; significant intercompany accounts and transactions have been eliminated.

 

Effective July 1, 2009, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification, (the “Codification”), which is now the source of authoritative GAAP.  While the Codification did not change GAAP, all existing authoritative accounting literature, with certain exceptions, was superseded and incorporated into the Codification.  As a result, pre-Codification references to GAAP have been eliminated.

 

(b)  Agency and Non-Agency MBS

The Company has investments in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or any agency of the U.S. Government, such as Ginnie Mae (collectively, “Agency MBS”), and MBS not guaranteed by any U.S. Government agency or any federally chartered corporation (“Non-Agency MBS”), as described in Note 3.

 

Designation

The Company generally intends to hold its MBS until maturity; however, from time to time, it may sell any of its securities as part of the overall management of its business.  As a result, all of the Company’s MBS are designated as “available-for-sale” and, accordingly, are carried at their fair value with unrealized gains and losses excluded from earnings (except when an other-than-temporary impairment is recognized, as discussed below) and reported in accumulated other comprehensive income, a component of stockholders’ equity.

 

Upon the sale of an investment security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income to earnings as a realized gain or loss using the specific identification method.

 

Revenue Recognition, Premium Amortization and Discount Accretion

Interest income on securities is accrued based on the outstanding principal balance and their contractual terms.  Premiums and discounts associated with Agency MBS and Non-Agency MBS rated AA and higher at the time of purchase, are amortized into interest income over the life of such securities using the effective yield method.  Adjustments to premium amortization are made for actual prepayment activity.

 

Interest income on the Non-Agency MBS that were purchased at a discount to par value and/or were rated below AA at the time of purchase is recognized based on the security’s effective interest rate.  The effective interest

 

6



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

rate on these securities is based on the projected cash flows from each security, which are estimated based on the Company’s observation of current information and events and include assumptions related to interest rates, prepayment speeds and the timing and amount of credit losses.  On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about prepayment rates, the timing and amount of credit losses, and other factors.  Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities.  (See Note 3)

 

Based on the projected cash flows from the Company’s Non-Agency MBS purchased at a discount to par value, a portion of the purchase discount may be designated as credit protection against future credit losses and, therefore, may not be accreted into interest income.  The amount designated as credit discount may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors.  If the performance of a security with a credit discount is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income over time.  Conversely, if the performance of a security with a credit discount is less favorable than forecasted, additional amounts of the purchase discount may be designated as credit discount, or impairment charges and write-downs of such securities to a new cost basis could result.

 

Determination of MBS Fair Value

The Company determines the fair value of its Agency MBS based upon prices obtained from a third-party pricing service, which are indicative of market activity.  In determining the fair value of its Non-Agency MBS, management considers prices obtained from third-party pricing services, broker quotes received and other applicable market based data.  If listed prices or quotes are not available, then fair value is based upon internally developed models that are primarily based on observable market-based inputs.  (See Note 13)

 

Impairments

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired.  The Company assesses its impaired securities on at least a quarterly basis, and designates such impairments as either “temporary” or “other-than-temporary.”  If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date.  If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the other-than-temporary impairment related to credit losses is recognized through charges to earnings with the remainder recognized as a component of other accumulated comprehensive income on the consolidated balance sheet.  Impairments recognized through other comprehensive income do not impact earnings.  Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security and may not be adjusted for subsequent recoveries in fair value through earnings.  However, other-than-temporary impairments recognized through charges to earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income.  The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual and subjective information available at the time of assessment.  As a result, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.  (See Note 3)

 

Non-Agency MBS on which impairments are recognized have experienced, or are expected to experience, adverse cash flow changes.  The Company’s estimation of cash flows expected for its Non-Agency MBS is based on its review of the underlying mortgage loans securing the MBS.  The Company considers information available about the performance of underlying mortgage loans, including credit enhancement, default rates, loss severities, delinquency rates, percentage of non-performing, Fair Isaac Corporation (“FICO”) scores at loan origination, year of origination, loan-to-value ratios, geographic concentrations, as well as reports by nationally recognized statistical rating organization, such as Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”), or Fitch, Inc. (collectively, “Rating Agencies”), general market assessments, and dialogue with market participants.  As a result, significant judgment is used in the Company’s analysis to determine the expected cash flows for its MBS.  In determining the component of the gross other-than-temporary impairment related to credit losses, the Company compares the amortized cost basis of each other-than-temporarily impaired security to the expected principal recovery on the impaired MBS.

 

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Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Balance Sheet Presentation

The Company’s MBS pledged as collateral against repurchase agreements and Swaps are included in MBS on the consolidated balance sheets with the fair value of the MBS pledged disclosed parenthetically.  Purchases and sales of securities are recorded on the trade date or when all significant uncertainties regarding the securities are removed.  However, if a repurchase agreement is determined to be linked to the purchase of an MBS, then the MBS and linked repurchase borrowing will be reported net, as an MBS Forward.  (See Notes 2(l) and 4)

 

(c)  Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with financial institutions and investments in high quality money market funds, all of which have original maturities of three months or less.  Cash and cash equivalents may also include cash pledged as collateral to the Company by its repurchase agreement and/or Swap counterparties as a result of reverse margin calls (i.e., margin calls made by the Company).  The Company did not hold any cash pledged by its counterparties at March 31, 2010 or December 31, 2009.  At March 31, 2010, all of the Company’s cash investments were in high quality overnight money market funds.  (See Notes 8 and 13)

 

(d)  Restricted Cash

Restricted cash represents the Company’s cash held by its counterparties as collateral against the Company’s Swaps and/or repurchase agreements.  Restricted cash, which earns interest, is not available to the Company for general corporate purposes, but may be applied against amounts due to counterparties to the Company’s repurchase agreements and/or Swaps, or returned to the Company when the collateral requirements are exceeded or at the maturity of the Swap or repurchase agreement.  The Company had aggregate restricted cash held as collateral against its Swaps of $39.4 million at March 31, 2010 and $67.5 million held as collateral against its repurchase agreements and Swaps at December 31, 2009.  (See Notes 4, 7, 8 and 13)

 

(e)  Goodwill

At March 31, 2010 and December 31, 2009, the Company had goodwill of $7.2 million, which represents the unamortized portion of the excess of the fair value of its common stock issued over the fair value of net assets acquired in connection with its formation in 1998.  Goodwill is tested for impairment at least annually, or more frequently under certain circumstances, at the entity level.  Through March 31, 2010, the Company had not recognized any impairment against its goodwill.

 

(f)  Real Estate

The Company has 100% of the ownership interest in Lealand Place, a 191-unit apartment property located in Lawrenceville, Georgia, through Lealand Place, LLC (“Lealand”), an indirect, wholly-owned subsidiary.  This property was acquired through a tax-deferred exchange under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”).  (See Note 6)

 

The property, capital improvements and other assets held in connection with this investment are carried at cost, net of accumulated depreciation and amortization.  Maintenance, repairs and minor improvements are expensed in the period incurred, while real estate assets, except land, and capital improvements are depreciated over their useful life using the straight-line method.

 

(g)  Repurchase Agreements

The Company finances the acquisition of a significant portion of its MBS with repurchase agreements.  Under repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sale price.  The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender.  Although structured as a sale and repurchase, under its repurchase agreements, the Company pledges its securities as collateral to secure the borrowing, which is equal in value to a specified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral.  At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender.  With the consent of the lender, the Company may renew a repurchase agreement at the then prevailing financing terms.  Margin calls, whereby a lender requires that the Company pledge additional securities or cash as collateral to secure borrowings under its repurchase agreements with such lender, are routinely experienced by the Company when the value of the MBS pledged as collateral declines as a result of principal amortization or due to changes in market interest rates, spreads or other market conditions.  To date, the Company had satisfied all of its margin calls and has never sold assets in response to a margin call.

 

The Company’s repurchase agreements typically have terms ranging from one month to six months at inception, with some having longer terms.  Should a counterparty decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation.  If, during the

 

8



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

term of a repurchase agreement, a lender should file for bankruptcy, the Company might experience difficulty recovering its pledged assets which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender.  The Company enters into repurchase agreements with multiple counterparties with a maximum loan from any lender of no more than three times the Company’s stockholders’ equity.  (See Notes 2(l), 4, 7 and 8)

 

(h)  Equity Based Compensation

Compensation expense for equity based awards is recognized over the vesting period of such awards, based upon the fair value of such awards at the grant date.  Payments pursuant to DERs, which are attached to certain equity based awards, are charged to stockholders’ equity when declared.  The Company has applied a zero forfeiture rate for its equity based awards, as such awards have been granted to a limited number of employees and historical forfeitures have been minimal.  Forfeitures, or an indication that forfeitures may occur, would result in a revised forfeiture rate and are accounted for prospectively as a change in estimate.

 

Forfeiture provisions for dividends and DERs on unvested equity instruments on the Company’s equity based awards vary by award.  To the extent that equity awards do not vest and grantees are not required to return payments of dividends or DERs to the Company, additional compensation expense is recorded at the time an award is forfeited.  (See Notes 2(i) and 12)

 

(i)  Earnings per Common Share (“EPS”)

Basic EPS is computed by dividing net income to common stockholders by the weighted average number of shares of common stock outstanding during the period, which also includes participating securities representing unvested share-based payment awards that contain nonforfeitable rights to dividends or DERs.  Diluted EPS is computed by dividing net income available to holders of common stock by the weighted average shares of common stock and common equivalent shares outstanding during the period.  For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options and restricted stock units (“RSUs”) outstanding using the treasury stock method.  Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds, along with future compensation expenses for unvested stock options and RSUs, are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period.  No common share equivalents are included in the computation of any diluted per share amount for a period in which a net operating loss is reported.  (See Note 11)

 

(j)  Comprehensive Income

The Company’s comprehensive income includes net income, the change in net unrealized gains/(losses) on its MBS and hedging instruments, adjusted by realized net gains/(losses) reclassified out of accumulated other comprehensive income for MBS and is reduced by dividends declared on the Company’s preferred stock.

 

(k)  U.S. Federal Income Taxes

The Company has elected to be taxed as a REIT under the provisions of the Code and the corresponding provisions of state law.  The Company expects to operate in a manner that will enable it to continue to be taxed as a REIT.  A REIT is not subject to tax on its earnings to the extent that it distributes at least 90% of its annual REIT taxable income to its stockholders.  As such, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.

 

(l)  Derivative Financial Instruments

Hedging Activity

As part of the Company’s interest rate risk management, it periodically hedges a portion of its interest rate risk using derivative financial instruments and does not enter into derivative transactions for speculative or trading purposes and, accordingly, accounts for its Swaps as cash flow hedges.  The Company’s Swaps have the effect of modifying the interest rate repricing characteristics of the Company’s repurchase agreements and cash flows for such liabilities.  No cost is incurred at the inception of a Swap, pursuant to which the Company agrees to pay a fixed rate of interest and receive a variable interest rate, generally based on one-month or three-month London Interbank Offered Rate (“LIBOR”), on the notional amount of the Swap.  The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities and the relationship between the hedging instrument and the hedged liability.  The Company assesses, both at inception of a hedge and on a quarterly

 

9



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

basis thereafter, whether or not the hedge is “highly effective.”

 

The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings when: it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); it is no longer probable that the forecasted transaction will occur; or it is determined that designating the derivative as a hedge is no longer appropriate.

 

Swaps are carried on the Company’s balance sheet at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative.  Changes in the fair value of the Company’s Swaps are recorded in other comprehensive income provided that the hedge remains effective.  A change in fair value for any ineffective amount of a Swap would be recognized in earnings.  The Company has not recognized any change in the value of its existing Swaps through earnings as a result of hedge ineffectiveness, except that all gains and losses realized on Swaps that were terminated early were recognized, as the borrowings that such Swaps hedged were repaid.

 

Although permitted under certain circumstances, the Company does not offset cash collateral receivables or payables against its net derivative positions.  (See Notes 4, 8 and 13)

 

Non-Hedging Activity/MBS Forwards

On January 1, 2009, the Company adopted new accounting guidance required for certain transfers of financial assets and repurchase financings.  Given that this guidance was prospective, the initial adoption had no impact on the Company’s consolidated financial statements.  Under the new accounting guidance, it is presumed that the initial transfer of a financial asset (i.e., the purchase of an MBS by the Company) and repurchase financing of this MBS with the same counterparty are considered part of the same arrangement, or a “linked transaction.”  The two components of a linked transaction (MBS purchase and repurchase financing) are not reported separately but are netted together and reported as a derivative instrument, specifically as a net forward contract on the Company’s consolidated balance sheet as MBS Forwards.  In addition, changes in the fair value of the net forward contract are reported as gains or losses on the Company’s consolidated statements of operation and are not included in other comprehensive income.  However, if certain criteria are met, the initial transfer (i.e., purchase of a security by the Company) and repurchase financing will not be treated as a linked transaction and will be evaluated and reported separately, as an MBS purchase and repurchase financing.  (See Note 2(b))

 

During the three months ended March 31, 2010, the Company entered into 10 transactions that were identified as linked transactions.  As such, the Company accounted for these purchase contracts and related repurchase agreements on a net basis and recorded a derivative instrument, or forward contract on the Company’s consolidated balance sheet.  Changes in the fair value of these forward contracts (i.e., MBS Forwards) are reported as a net gain or loss on the Company’s consolidated statements of operations.  When or if a transaction is no longer considered to be linked, the MBS and repurchase financing will be reported on a gross basis.  In this case, the fair value of the MBS at the time the transactions are no longer considered linked will become the cost basis of the MBS.  (See Notes 4, 8 and 13)

 

(m)  Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities

The Company’s presentation of fair value for its financial assets and liabilities is determined within a framework that stipulates that the fair value of a financial asset or liability is an exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.  The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.  This definition of fair value is based on a consistent definition of fair value which focuses on exit price and prioritizes, the use of market-based inputs over entity-specific inputs when determining fair value.  In addition, the framework for measuring fair value establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  (See Note 13)

 

Although permitted under GAAP to measure many financial instruments and certain other items at fair value, the Company has not elected the fair value option for any of its assets or liabilities.  If the fair value option is elected, unrealized gains and losses on such items for which fair value is elected would be recognized in earnings at each subsequent reporting date.  A decision to elect the fair value option for an eligible financial instrument, which may be made on an instrument by instrument basis, is irrevocable.

 

(n)  New Accounting Standards and Interpretations

Accounting Standards Codification

See Note 2(a).

 

10



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Accounting for Transfers of Financial Assets

On June 12, 2009, the FASB issued new accounting for transfers of financial assets which: (i) eliminates the concept of a qualified special purpose entity (“QSPE”) and eliminates its exemption as a variable interest entity; (ii) clarifies that the objective of determining whether a transferor has surrendered control over transferred financial assets must consider the transferor’s continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer; (iii) modifies the financial-components approach and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset; and (iv) defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale.  Under this new accounting, when the transfer of financial assets are accounted for as a sale, the transferor must recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of the transfer, including any retained beneficial interest.  This new accounting eliminated off-balance sheet transactions when an entity retains any interest in or control over assets transferred in this process.  The implementation of the new accounting for transfers of financial assets on January 1, 2010 did not have any impact on the Company’s consolidated financial statements, as it has no off-balance sheet transactions, no QSPEs, nor has it transferred assets through a securitization.

 

In conjunction with new accounting for transfers of financial assets, the FASB issued new guidance that requires an enterprise to perform an analysis to determine whether an enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”).  The analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity which could potentially be significant to the VIE.  With the removal of the QSPE exemption, established QSPEs must be evaluated for consolidation under this statement.  In addition, enhanced disclosures are required to provide users of financial statements with more transparent information about and an enterprise’s involvement in a VIE and also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE.  The Company does not have any interests in a VIE.  The Company’s adoption of this new accounting on January 1, 2010 did not have any impact on the Company, as it is not the primary beneficiary of any VIE.

 

(o)  Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

3.      MBS

 

The Company’s MBS are primarily comprised of Agency MBS and, to a lesser extent, Non-Agency MBS, as described below.  MBS do not have a single maturity date and, further, the mortgage loans underlying ARM-MBS have interest rates that do not all reset at the same time.  At March 31, 2010 and December 31, 2009, the Company’s MBS were primarily secured by hybrid mortgages that have a fixed interest rate for a specified period, typically three to ten years, and, thereafter, generally reset annually (“Hybrids”), and adjustable-rate mortgages (“ARMs”) (collectively, “ARM-MBS”).  At March 31, 2010, 0.2% of the Company’s MBS portfolio was comprised of MBS secured by fixed rates mortgages.

 

The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements and Swaps.  The Company has Non-Agency MBS that are accounted for as components of MBS Forwards and, accordingly, are not reflected in the tables set forth in this note.  (See Notes 4 and 8)

 

Agency MBS:  Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae, and, as such, carry an implied AAA rating.  The payment of principal and/or interest on Ginnie Mae MBS is backed by the full faith and credit of the U.S. Government.  Since the third quarter of 2008, Fannie Mae and Freddie Mac have remained in conservatorship under the Federal Housing Finance Agency, which significantly strengthened the backing for these government-sponsored entities.

 

Non-Agency MBS:  The Company’s Non-Agency MBS are secured by pools of residential mortgages, and are not guaranteed by an agency of U.S. Government or any federally chartered corporation.  Non-Agency MBS may be rated by one or more Rating Agencies or may be unrated (i.e., not assigned a rating by any Rating Agency).  The rating indicates the opinion of the Rating Agency as to the credit worthiness of the investment, indicating the obligor’s ability to meet its full financial commitment on the obligation.  A rating of “D” is assigned when a security has defaulted on any of its contractual terms.  The Company’s Non-Agency MBS are primarily comprised of the

 

11



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

senior most tranches from the MBS structure.  The Company’s Non-Agency MBS categories include “MFR MBS”, which were purchased beginning in late 2008 at discounts to par value through its wholly-owned subsidiary MFResidential Assets I, LLC (“MFR”) and MBS purchased by the Company prior to July 2007 (“Legacy MBS”).

 

The following tables present certain information about the Company’s MBS at March 31, 2010 and December 31, 2009:

 

March 31, 2010

(In Thousands)

 

Principal/
Current
Face

 

Purchase
Premiums

 

Purchase
Discounts

 

Credit
Discounts (1)

 

Amortized
Cost (2)

 

Carrying
Value/
Fair Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Net
Unrealized
Gain/(Loss)

 

Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

5,335,797

 

$

70,122

 

$

(325

)

$

 

$

5,405,594

 

$

5,600,003

 

$

200,385

 

$

(5,976

)

$

194,409

 

Freddie Mac

 

445,841

 

6,767

 

 

 

521,604

 

535,859

 

14,419

 

(164

)

14,255

 

Ginnie Mae

 

20,090

 

353

 

 

 

20,443

 

20,820

 

377

 

 

377

 

Total Agency MBS

 

5,801,728

 

77,242

 

(325

)

 

5,947,641

 

6,156,682

 

215,181

 

(6,140

)

209,041

 

Non-Agency MBS (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rated AAA

 

37,346

 

1,062

 

 

 

38,408

 

30,437

 

 

(7,971

)

(7,971

)

Rated AA

 

2,987

 

29

 

(524

)

(17

)

2,474

 

2,536

 

375

 

(313

)

62

 

Rated A

 

37,172

 

53

 

(5,913

)

(2,646

)

28,666

 

31,322

 

4,518

 

(1,862

)

2,656

 

Rated BBB

 

96,300

 

22

 

(8,556

)

(4,408

)

83,358

 

83,966

 

3,247

 

(2,639

)

608

 

Rated BB

 

40,506

 

 

(731

)

(4,652

)

34,442

 

33,175

 

1,534

 

(2,801

)

(1,267

)

Rated B

 

61,336

 

 

(15,653

)

(11,114

)

34,568

 

48,641

 

14,073

 

 

14,073

 

Rated CCC

 

569,158

 

 

(44,046

)

(186,101

)

337,441

 

394,482

 

60,222

 

(3,181

)

57,041

 

Rated CC

 

836,809

 

 

(55,813

)

(265,534

)

505,296

 

559,169

 

79,386

 

(25,513

)

53,873

 

Rated C

 

155,718

 

 

(10,557

)

(57,878

)

87,283

 

99,724

 

12,441

 

 

12,441

 

Unrated and D-rated (4)

 

46,886

 

 

(3,827

)

(5,409

)

33,065

 

28,578

 

2,002

 

(6,489

)

(4,487

)

Total Non-Agency MBS

 

1,884,218

 

1,166

 

(145,620

)

(537,759

)

1,185,001

 

1,312,030

 

177,798

 

(50,769

)

127,029

 

Total MBS

 

$

7,685,946

 

$

78,408

 

$

(145,945

)

$

(537,759

)

$

7,132,642

 

$

7,468,712

 

$

392,979

 

$

(56,909

)

$

336,070

 

 

December 31, 2009

(In Thousands)

 

Principal/
Current
Face

 

Purchase
Premiums

 

Purchase
Discounts

 

Credit
Discounts (1)

 

Amortized
Cost (2)

 

Carrying
Value/
Fair Value

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Net
Unrealized
Gain/(Loss)

 

Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

6,723,557

 

$

88,712

 

$

(544

)

$

 

$

6,811,725

 

$

7,056,211

 

$

247,964

 

$

(3,478

)

$

244,486

 

Freddie Mac

 

545,787

 

8,327

 

 

 

567,049

 

585,462

 

18,589

 

(176

)

18,413

 

Ginnie Mae

 

22,353

 

397

 

 

 

22,750

 

23,178

 

428

 

 

428

 

Total Agency MBS

 

7,291,697

 

97,436

 

(544

)

 

7,401,524

 

7,664,851

 

266,981

 

(3,654

)

263,327

 

Non-Agency MBS (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rated AAA

 

38,125

 

1,084

 

 

 

39,209

 

29,971

 

 

(9,238

)

(9,238

)

Rated AA

 

23,594

 

29

 

(5,797

)

(2,640

)

15,186

 

18,300

 

3,477

 

(363

)

3,114

 

Rated A

 

32,849

 

54

 

(6,873

)

(61

)

25,969

 

26,416

 

2,613

 

(2,166

)

447

 

Rated BBB

 

97,412

 

23

 

(6,239

)

(8,074

)

82,441

 

80,556

 

3,755

 

(5,640

)

(1,885

)

Rated BB

 

53,184

 

 

(7,401

)

(12,026

)

33,533

 

38,676

 

6,228

 

(1,085

)

5,143

 

Rated B

 

73,343

 

 

(15,574

)

(15,537

)

42,232

 

53,853

 

11,621

 

 

11,621

 

Rated CCC

 

575,112

 

53

 

(47,178

)

(216,391

)

310,249

 

350,495

 

49,024

 

(8,778

)

40,246

 

Rated CC

 

601,050

 

 

(48,057

)

(159,680

)

383,146

 

406,709

 

48,908

 

(25,345

)

23,563

 

Rated C

 

101,820

 

 

(9,667

)

(38,695

)

53,458

 

63,560

 

10,149

 

(47

)

10,102

 

Unrated and D-rated (4)

 

41,257

 

 

(2,533

)

(1,900

)

31,537

 

24,567

 

78

 

(7,048

)

(6,970

)

Total Non-Agency MBS

 

1,637,746

 

1,243

 

(149,319

)

(455,004

)

1,016,960

 

1,093,103

 

135,853

 

(59,710

)

76,143

 

Total MBS

 

$

8,929,443

 

$

98,679

 

$

(149,863

)

$

(455,004

)

$

8,418,484

 

$

8,757,954

 

$

402,834

 

$

(63,364

)

$

339,470

 

 


(1)  Purchase discounts designated as credit discounts are not expected to be accreted into interest income.

(2) Includes principal payments receivable, which are not included in the Principal/Current Face.  Amortized cost is reduced by other-than-temporary impairments recognized through earnings.

(3)  Non-Agency MBS are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented.

(4)  Includes two MBS, which were D-rated and had an aggregate amortized cost and fair value of $29.3 million and $22.8 million, respectively, at March 31, 2010 and had an aggregate amortized cost and fair value of $29.9 million and $22.8 million, respectively, at December 31, 2009.  The Company recognized other-than-temporary impairments on these MBS during 2009.

 

12



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The table below presents the Company’s unrealized gain/loss position by MBS category at March 31, 2010 and December 31, 2009:

 

 

 

March 31, 2010

 

December 31, 2009

 

(Dollars in Thousands)

 

Unrealized
Gains

 

Unrealized
Losses

 

Unrealized
Gains

 

Unrealized
Losses

 

Agency MBS

 

$

215,181

 

$

6,140

 

$

266,981

 

$

3,654

 

MFR MBS

 

177,798

 

5,709

 

135,819

 

6,577

 

Legacy Non-Agency MBS

 

 

45,060

 

34

 

53,133

 

Total

 

$

392,979

 

$

56,909

 

$

402,834

 

$

63,364

 

 

Unrealized Losses on MBS and Impairments

The following table presents information about the Company’s MBS that were in an unrealized loss position at March 31, 2010:

 

 

 

 

 

Unrealized Loss Position For:

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

(In Thousands) 

 

Fair
Value

 

Unrealized
Losses

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Number of
Securities

 

Fair
Value

 

Unrealized
Losses

 

Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

293,563

 

$

2,893

 

17

 

$

65,780

 

$

3,083

 

16

 

$

359,343

 

$

5,976

 

Freddie Mac

 

 

 

 

7,221

 

164

 

2

 

7,221

 

164

 

Total Agency MBS

 

293,563

 

2,893

 

17

 

73,001

 

3,247

 

18

 

366,564

 

6,140

 

Non-Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rated AAA

 

 

 

 

30,437

 

7,971

 

3

 

30,437

 

7,971

 

Rated AA

 

 

 

 

1,184

 

313

 

2

 

1,184

 

313

 

Rated A

 

 

 

 

13,235

 

1,862

 

3

 

13,235

 

1,862

 

Rated BBB

 

 

 

 

10,465

 

2,639

 

1

 

10,465

 

2,639

 

Rated BB

 

 

 

 

15,366

 

2,801

 

1

 

15,366

 

2,801

 

Rated CCC

 

15,840

 

69

 

1

 

10,748

 

3,112

 

3

 

26,588

 

3,181

 

Rated CC

 

6,000

 

5,640

 

1

 

100,783

 

19,873

 

2

 

106,783

 

25,513

 

Unrated and other

 

151

 

20

 

3

 

22,779

 

6,469

 

1

 

22,930

 

6,489

 

Total Non-Agency MBS

 

21,991

 

5,729

 

5

 

204,997

 

45,040

 

16

 

226,988

 

50,769

 

Total MBS

 

$

315,554

 

$

8,622

 

22

 

$

277,998

 

$

48,287

 

34

 

$

593,552

 

$

56,909

 

 

At March 31, 2010, the Company did not intend to sell any of its MBS that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these MBS before recovery of their amortized cost basis, which may be at their maturity.

 

Gross unrealized losses on the Company’s Agency MBS were $6.1 million at March 31, 2010.  Given the credit quality inherent in Agency MBS, the Company does not consider any of the current impairments on such Agency MBS to be credit related.  In assessing whether it is more likely than not that the Company will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, it considers the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position.  Based on these analyses, the Company determined that at March 31, 2010 any unrealized losses on its Agency MBS were temporary.

 

Unrealized losses on the Company’s Non-Agency MBS were $50.8 million at March 31, 2010. These unrealized losses, which were not designated as credit related, are primarily believed to be related to an overall widening of spreads for many types of fixed income products, reflecting, among other things, limited liquidity in the market and a general negative bias toward structured mortgage products, including Non-Agency MBS.

 

The Company did not recognize any other-than-temporary impairment losses during the quarter ended March 31, 2010.  During the first quarter of 2009, the Company recognized other-than-temporary impairments of $1.5 million of credit related impairments in earnings against five of its Legacy Non-Agency MBS with an amortized cost of $1.7 million prior to recognizing the impairments.

 

13



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The table below presents the composition of the Company’s other-than-temporary impairments for the quarterly periods ended March 31, 2010 and March 31, 2009:

 

 

 

Three Months Ended
March 31,

 

(In Thousands)

 

2010

 

2009

 

Credit related other-than-temporary impairments included in earnings

 

$

 

$

1,549

 

Non-credit related other-than-temporary impairments recognized in other comprehensive income

 

 

 

Total other-than-temporary impairment losses

 

$

 

$

1,549

 

 

The following table presents the impact of the Company’s MBS on its accumulated other comprehensive income for the quarters ended March 31, 2010 and 2009:

 

 

 

Three Months Ended
March 31,

 

(In Thousands)

 

2010

 

2009

 

Accumulated other comprehensive income from investment securities:

 

 

 

 

 

Unrealized gain/(loss) on MBS at beginning of quarter

 

$

339,470

 

$

(72,983

)

Unrealized gain on MBS, net

 

38,059

 

121,786

 

Reclassification adjustment for MBS sales

 

(41,459

)

 

Reclassification adjustment for other-than-temporary impairments included in net income

 

 

1,405

 

Balance at the end of period

 

$

336,070

 

$

50,208

 

 

Sales of MBS

During the quarter ended March 31, 2010, the Company sold $931.9 million of Agency MBS, realizing gross gains of $33.1 million and sold one Non-Agency MFR MBS for $7.2 million, realizing a gross gain of $654,000.  The Company did not sell any MBS during the quarter ended March 31, 2009.  The Company has no continuing involvement with the MBS sold.

 

MBS Interest Income

The following table presents components of interest income on the Company’s MBS portfolio by category for the quarterly periods ended March 31, 2010 and 2009:

 

MBS Category

 

Coupon
Interest

 

Net (Premium
Amortization)/Discount
Accretion

 

Interest
Income

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Quarter Ended March 31, 2010

 

 

 

 

 

 

 

Agency MBS

 

$

86,829

 

$

(8,150

)

$

78,679

 

MFR MBS

 

17,099

 

8,367

 

25,466

 

Legacy Non-Agency MBS

 

3,231

 

268

 

3,499

 

Total

 

$

107,159

 

$

485

 

$

107,644

 

Quarter Ended March 31, 2009

 

 

 

 

 

 

 

Agency MBS

 

$

130,941

 

$

(4,637

)

$

126,304

 

MFR MBS

 

1,127

 

495

 

1,622

 

Legacy Non-Agency MBS

 

4,312

 

(85

)

4,227

 

Total

 

$

136,380

 

$

(4,227

)

$

132,153

 

 

14



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

4.      Derivatives

 

The Company’s derivatives are comprised of Swaps, which are designated as cash flow hedges against the interest rate risk associated with its borrowings, and MBS Forwards, which are not designated as hedging instruments.  The following table presents the fair value of the Company’s derivative instruments and their balance sheet location at March 31, 2010 and December 31, 2009:

 

Derivative Instrument

 

Designation

 

Balance Sheet
Location

 

March 31,
2010

 

December 31,
2009

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

MBS Forwards, at fair value

 

Non-Hedging

 

Assets

 

$

101,659

 

$

86,014

 

Swaps, at fair value

 

Hedging

 

Liabilities

 

$

(153,750

)

$

(152,463

)

 

MBS Forwards

At March 31, 2010, the Company had 33 transactions involving Non-Agency MBS and repurchase financings that were identified as linked transactions.  Each of these linked transactions is accounted for and reported as an MBS Forward, which is reported as an asset on the Company’s consolidated balance sheet.  The fair value of the MBS Forward also reflects the accrued interest receivable on the underlying MBS and the accrued interest payable on the underlying repurchase agreement.  The Company’s MBS Forwards are not designated as hedging instruments and, as a result, the change in the fair value of MBS Forwards are reported as a net gain or loss in other income.

 

The following tables present certain information about the Non-Agency MBS and repurchase agreements underlying the Company’s MBS Forwards at March 31, 2010 and December 31, 2009:

 

Linked Transactions at March 31, 2010

Linked Repurchase Agreements

 

 

 

 

 

Maturity or Repricing

 

Balance

 

Weighted
Average
Interest
Rate

 

(Dollars in Thousands)

 

 

 

 

 

Within 30 days

 

$

286,258

 

1.90

%

90 days to 180 days

 

14,105

 

1.69

 

180 days to 360 days

 

21,400

 

1.50

 

Total

 

$

321,763

 

1.87

%

 

Linked MBS

 

 

 

 

 

 

 

 

 

Non-Agency MBS

 

Fair Value

 

Amortized
Cost

 

Par/Current
Face

 

Weighted
Average
Coupon
Rate

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

Rated AA

 

$

63,594

 

$

61,697

 

$

70,209

 

3.81

%

Rated A

 

27,676

 

26,108

 

33,012

 

2.62

 

Rated BBB

 

123,799

 

121,121

 

142,377

 

4.27

 

Rated BB

 

52,706

 

51,750

 

62,489

 

4.82

 

Rated B

 

80,239

 

78,474

 

91,428

 

5.07

 

Rated CCC

 

73,650

 

71,772

 

91,221

 

5.43

 

Total

 

$

421,664

 

$

410,922

 

$

490,736

 

4.53

%

 

Linked Transactions at December 31, 2009

Linked Repurchase Agreements

 

 

 

 

 

Maturity or Repricing

 

Balance

 

Weighted
Average
Interest
Rate

 

(Dollars in Thousands)

 

 

 

 

 

Within 30 days

 

$

209,468

 

1.89

%

>30 days to 90 days

 

35,491

 

1.65

 

Total

 

$

244,959

 

1.85

%

 

Linked MBS

 

 

 

 

 

 

 

 

 

Non-Agency MBS

 

Fair Value

 

Amortized
Cost

 

Par/Current
Face

 

Weighted
Average
Coupon
Rate

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

Rated AA

 

$

62,782

 

$

60,985

 

$

69,381

 

4.16

%

Rated A

 

32,938

 

32,210

 

40,561

 

2.83

 

Rated BBB

 

127,038

 

125,826

 

146,502

 

4.98

 

Rated BB

 

53,644

 

53,172

 

64,131

 

5.05

 

Rated B

 

41,939

 

42,314

 

47,000

 

5.42

 

Rated CCC

 

11,199

 

11,199

 

13,999

 

5.19

 

Total

 

$

329,540

 

$

325,706

 

$

381,574

 

4.67

%

 

15



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents certain information about the components of the gain on MBS Forwards included in the Company’s consolidated statements of operations for the quarterly periods ended March 31, 2010 and 2009:

 

Components of Gain on MBS Forwards, net

 

Three Months Ended March 31,

 

(In Thousands)

 

2010

 

2009

 

Interest income attributable to linked MBS

 

$

7,003

 

$

 

Interest expense attributable to linked repurchase agreements

 

(1,268

)

 

Change in fair value of linked MBS included in earnings

 

7,065

 

 

Gain on MBS Forwards

 

$

12,800

 

$

 

 

Swaps

Consistent with market practice, the Company has agreements with its Swap counterparties that provide for the posting of collateral based on the fair values of its derivative contracts.  Through this margining process, either the Company or its Swap counterparty may be required to pledge cash or securities as collateral.  Collateral requirements vary by counterparty and change over time based on the market value, notional amount and remaining term of the Swap.  Certain Swaps provide for cross collateralization with repurchase agreements with the same counterparty.

 

A number of the Company’s Swaps include financial covenants, which, if breached, could cause an event of default or early termination event to occur under such agreements.  If the Company were to cause an event of default or trigger an early termination event pursuant to one of its Swaps, the counterparty to such agreement may have the option to terminate all of its outstanding Swaps with the Company and, if applicable, any close-out amount due to the counterparty upon termination of the Swaps would be immediately payable by the Company.  The Company was in compliance with all of its financial covenants through March 31, 2010.

 

At March 31, 2010, the Company had MBS with fair value of $143.8 million and restricted cash of $39.4 million pledged as collateral against its Swaps.  At December 31, 2009, the Company had MBS with fair value of $142.6 million and restricted cash of $39.4 million pledged against its Swaps.  (See Note 8)

 

The use of hedging instruments exposes the Company to counterparty credit risk.  In the event of a default by a Swap counterparty, the Company may not receive payments to which it is entitled under its Swap agreements, and may have difficulty recovering its assets pledged as collateral against such Swaps.  If, during the term of the Swap, a counterparty should file for bankruptcy, the Company may experience difficulty recovering its assets pledged as collateral which could result in the Company having an unsecured claim against such counterparty’s assets for the difference between the fair value of the Swap and the fair value of the collateral pledged to such counterparty.  At March 31, 2010, all of the Company’s Swap counterparties were rated A or better by a Rating Agency.

 

At March 31, 2010, all of the Company’s Swaps were deemed effective and no Swaps were terminated during the three months ended March 31, 2010 and March 31, 2009.  The Company has not recognized any change in the value of its Swaps in earnings as a result of the hedge or a portion thereof being ineffective.

 

The following table presents the net impact of the Company’s Swaps on its interest expense and the weighted average interest rate paid and received for such Swaps for the quarterly periods ended March 31, 2010 and 2009:

 

 

 

Three Months Ended
March 31,

 

(Dollars in Thousands)

 

2010

 

2009

 

Interest expense attributable to Swaps

 

$

29,134

 

$

27,048

 

Weighted average Swap rate paid

 

4.24

%

4.20

%

Weighted average Swap rate received

 

0.24

%

1.17

%

 

At March 31, 2010, the Company had Swaps with an aggregate notional amount of $2.812 billion, which had gross unrealized losses of $153.8 million and extended 23 months on average with a maximum term of approximately five years.

 

16



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents information about the Company’s Swaps at March 31, 2010 and December 31, 2009:

 

 

 

March 31, 2010

 

December 31, 2009

 

Maturity (1)

 

Notional
Amount

 

Weighted
Average
Fixed-Pay
Interest Rate

 

Weighted
Average Variable
Interest Rate (2)

 

Notional
Amount

 

Weighted
Average
Fixed-Pay
Interest Rate

 

Weighted
Average Variable
Interest Rate (2)

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 30 days

 

$

57,328

 

3.93

%

0.25

%

$

62,050

 

3.90

%

0.26

%

Over 30 days to 3 months

 

128,594

 

4.03

 

0.25

 

132,987

 

4.06

 

0.25

 

Over 3 months to 6 months

 

170,544

 

4.04

 

0.25

 

185,921

 

4.00

 

0.26

 

Over 6 months to 12 months

 

485,515

 

4.31

 

0.25

 

440,204

 

4.24

 

0.25

 

Over 12 months to 24 months

 

580,796

 

4.14

 

0.25

 

642,595

 

4.12

 

0.25

 

Over 24 months to 36 months

 

735,259

 

4.38

 

0.25

 

833,302

 

4.40

 

0.25

 

Over 36 months to 48 months

 

455,189

 

4.26

 

0.24

 

469,351

 

4.25

 

0.24

 

Over 48 months to 60 months

 

198,361

 

4.27

 

0.25

 

210,042

 

4.30

 

0.24

 

Over 60 months

 

 

 

 

30,170

 

3.59

 

0.27

 

Total Swaps

 

$

2,811,586

 

4.24

%

0.25

%

$

3,006,622

 

4.23

%

0.25

%

 


(1)  Each maturity category reflects contractual amortization and/or maturity of notional amounts.

(2)  Reflects the benchmark variable rate due from the counterparty at the date presented, which rate adjusts monthly or quarterly based on one-month or three-month LIBOR, respectively.

 

Impact of Hedging Instruments on Accumulated Other Comprehensive Income

The following table presents the impact of the Company’s Swaps on its accumulated other comprehensive income for the quarterly periods ended March 31, 2010 and 2009:

 

 

 

Three Months Ended
March 31,

 

(In Thousands)

 

2010

 

2009

 

Accumulated other comprehensive loss from Swaps:

 

 

 

 

 

Balance at beginning of period

 

$

(152,463

)

$

(237,291

)

Unrealized (loss)/gain on Swaps arising during the period, net

 

(1,287

)

10,821

 

Balance at the end of period

 

$

(153,750

)

$

(226,470

)

 

5.      Interest Receivable

 

The following table presents the Company’s interest receivable by investment category at March 31, 2010 and December 31, 2009:

 

(In Thousands)

 

March 31,
2010

 

December 31,
2009

 

MBS interest receivable:

 

 

 

 

 

Fannie Mae

 

$

23,486

 

$

30,212

 

Freddie Mac

 

4,149

 

4,863

 

Ginnie Mae

 

70

 

83

 

Non-Agency MBS

 

7,383

 

6,601

 

Total MBS interest receivable

 

35,088

 

41,759

 

Money market investments

 

11

 

16

 

Total interest receivable

 

$

35,099

 

$

41,775

 

 

17



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

6.      Real Estate

 

The following table presents the summary of assets and liabilities of Lealand at March 31, 2010 and December 31, 2009:

 

(In Thousands)

 

March 31,
2010

 

December 31,
2009

 

Real Estate Assets and Liabilities:

 

 

 

 

 

Land and buildings, net of accumulated depreciation

 

$

10,954

 

$

10,998

 

Cash and other assets

 

207

 

298

 

Mortgage payable (1)

 

(9,101

)

(9,143

)

Accrued interest and other payables

 

(202

)

(352

)

Real estate assets, net

 

$

1,858

 

$

1,801

 

 


(1)  The mortgage collateralized by the property is non-recourse, subject to customary non-recourse exceptions, which generally means that the lender’s final source of repayment in the event of default is foreclosure of the property securing such loan.  This mortgage has a fixed interest rate of 6.87%, contractually matures on February 1, 2011 and is subject to a penalty if prepaid.  The Company has a loan to Lealand which had a balance of $439,000 at March 31, 2010 and $297,000 at December 31, 2009.  This loan and the related interest accounts are eliminated in consolidation.

 

The following table presents the summary results of operations for Lealand for the three months ended March 31, 2010 and 2009:

 

 

 

Three Months Ended
March 31,

 

(In Thousands)

 

2010

 

2009

 

Revenue from operations of real estate

 

$

374

 

$

383

 

Mortgage interest expense

 

(156

)

(155

)

Other real estate operating expense

 

(201

)

(222

)

Depreciation and amortization expense

 

(89

)

(85

)

Loss from real estate operations, net

 

$

(72

)

$

(79

)

 

7.      Repurchase Agreements

 

Interest rates on the Company’s repurchase agreements generally are LIBOR-based and are collateralized by the Company’s MBS and cash.  At March 31, 2010, the Company’s borrowings under repurchase agreements had a weighted average remaining term-to-interest rate reset of 35 days and an effective repricing period of 11 months including the impact of related Swaps.  At December 31, 2009, the Company’s borrowings under repurchase agreements had a weighted average remaining term-to-interest rate reset of approximately three months and an effective repricing period of 13 months, including the impact of related Swaps.

 

The following table presents contractual repricing information about the Company’s borrowings under repurchase agreements, which does not reflect the impact of Swaps that hedge existing and forecasted repurchase agreements, at March 31, 2010 and December 31, 2009:

 

 

 

March 31, 2010

 

December 31, 2009

 

Time Until Interest Rate Reset

 

Balance (1)

 

Weighted
Average 
Interest Rate

 

Balance (1)

 

Weighted
Average
Interest Rate

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

Within 30 days

 

$

4,756,589

 

0.46

%

$

4,102,789

 

0.34

%

Over 30 days to 3 months

 

1,152,786

 

0.26

 

2,393,065

 

0.35

 

Over 3 months to 6 months

 

61,000

 

0.44

 

21,281

 

4.00

 

Over 6 months to 12 months

 

8,600

 

3.15

 

272,892

 

3.87

 

Over 12 months to 24 months

 

16,700

 

3.15

 

289,800

 

3.60

 

Over 24 months to 36 months

 

18,200

 

3.15

 

92,100

 

4.30

 

Over 36 months

 

 

 

23,900

 

3.26

 

Total

 

$

6,013,875

 

0.44

%

$

7,195,827

 

0.68

%

 


(1)  At March 31, 2010 and December 31, 2009, the Company had repurchase agreements of $321.8 million and $245.0 million, respectively, that were linked to MBS purchases and accounted for as MBS Forwards.  These linked repurchase agreements are not included in the above table.  (See Note 4)

 

18



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table presents contractual repricing information about the Company’s repurchase agreements, which does not reflect the impact of Swaps that hedged repurchase agreements at March 31, 2010:

 

March 31, 2010

 

Maturity

 

Balance

 

Weighted
Average
Interest Rate

 

(Dollars in Thousands)

 

 

 

 

 

Overnight

 

$

 

%

Within 30 days

 

4,235,613

 

0.31

 

Over 30 days to 90 days

 

1,266,646

 

0.37

 

Over 90 days

 

511,616

 

1.72

 

Demand

 

 

 

Total

 

$

6,013,875

 

0.44

%

 

At March 31, 2010, the Company had Agency MBS with fair value of $5.675 billion pledged as collateral against $5.318 billion of repurchase agreements and Non-Agency MBS with a fair value of $1.028 billion pledged against repurchase agreements of $695.8 million.  At December 31, 2009, the Company had MBS with a fair value of $7.695 billion and restricted cash of $28.1 million pledged as collateral against its repurchase agreements.  (See Notes 4 and 8)

 

During the quarter ended March 31, 2010, in connection with the sale of $931.9 million of Agency MBS (See Note 3) the Company terminated $657.3 million of borrowings under repurchase agreements, incurring aggregate losses of $26.8 million.

 

The Company had repurchase agreements with 17 counterparties at March 31, 2010 and December 31, 2009. The following table presents information with respect to any repurchase agreement and MBS Forward counterparty for which the Company had greater than 10% of stockholders’ equity at risk at March 31, 2010:

 

March 31, 2010

Counterparty

 

Counterparty
Rating (1)

 

Amount at
Risk (2)

 

Weighted
Average Months
to Maturity for
Repurchase
Agreements

 

Percent of
Stockholders’
Equity

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

Deutsche Bank

 

A+/Aa3/AA-

 

$

297,903

 

4

 

13.3

%

 


(1)  As rated by the Rating Agencies at March 31, 2010.

(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements and repurchase agreements underlying MBS Forwards, including interest payable, and (b) the fair value of the securities pledged by the Company as collateral and MBS underlying MBS Forwards, including accrued interest receivable on such securities.

 

8.      Collateral Positions

 

The Company pledges securities or cash as collateral pursuant to its borrowings under repurchase agreements and Swaps.  The Company exchanges collateral with Swap counterparties based on the fair value, notional amount and term of its Swaps.  Through this margining process, either the Company or its Swap counterparty may be required to pledge cash or securities as collateral pursuant to repurchase agreements and Swaps.  When the Company’s pledged collateral exceeds the required margin, the Company may initiate a reverse margin call, at which time the counterparty may either return the excess collateral, or provide collateral to the Company in the form of cash or high quality securities.<