Unassociated Document
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 September 30, 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: 1-13991
MFA
FINANCIAL, INC.
(Exact
name of registrant as specified in its charter)
______________
Maryland
(State
or other jurisdiction of
incorporation
or organization)
350
Park Avenue, 21st Floor, New York, New York
(Address
of principal executive offices)
|
13-3974868
(I.R.S.
Employer
Identification
No.)
10022
(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 ü 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 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, 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 [ü]
|
|
Accelerated
filer [ ]
|
|
|
|
|
|
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 ü
280,371,277
shares of the registrant’s common stock, $0.01 par value, were outstanding as of
November 2, 2009.
TABLE
OF CONTENTS
|
|
|
|
|
|
|
Page
|
PART
I FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and
December 31, 2008
|
1
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited) for the Three and Nine Months
Ended September 30, 2009 and September 30, 2008
|
2
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited) for the
Nine Months Ended September 30, 2009
|
3
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 2009 and September 30, 2008
|
4
|
|
|
|
|
Consolidated
Statements of Comprehensive Income/(Loss) (Unaudited) for the Three
and Nine Months Ended September 30, 2009 and September 30,
2008
|
5
|
|
|
|
|
Notes
to the Consolidated Financial Statements (Unaudited)
|
6
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
45
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
51
|
|
|
|
|
PART
II OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
52
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
52
|
|
|
|
|
Item
6.
|
Exhibits
|
|
52
|
|
|
|
|
Signatures
|
|
54
|
MFA
FINANCIAL, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
(In
Thousands, Except Per Share Amounts)
|
|
(Unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Mortgage-backed
securities (“MBS”) at fair value (including pledged
MBS
of $8,347,435 and $10,026,638, respectively)
(Notes
2(b), 3, 4, 7, 8 and 13)
|
|
$ |
9,349,052 |
|
|
$ |
10,122,583 |
|
Cash
and cash equivalents (Notes 2(c), 7 and 8)
|
|
|
486,695 |
|
|
|
361,167 |
|
Restricted
cash (Notes 2(d), 4 and 8)
|
|
|
44,009 |
|
|
|
70,749 |
|
Forward
contracts to repurchase MBS (“MBS Forwards”), at fair value
(Notes
2(l), 4, and 13)
|
|
|
53,459 |
|
|
|
- |
|
Interest
receivable (Note 5)
|
|
|
44,646 |
|
|
|
49,724 |
|
Real
estate, net (Notes 2(f) and 6)
|
|
|
11,074 |
|
|
|
11,337 |
|
Securities
held as collateral, at fair value (Notes 7, 8 and 13)
|
|
|
- |
|
|
|
17,124 |
|
Goodwill
(Note 2(e))
|
|
|
7,189 |
|
|
|
7,189 |
|
Prepaid
and other assets
|
|
|
2,878 |
|
|
|
1,546 |
|
Total
Assets
|
|
$ |
9,999,002 |
|
|
$ |
10,641,419 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase
agreements (Notes 2(g), 7 and 8)
|
|
$ |
7,575,287 |
|
|
$ |
9,038,836 |
|
Accrued
interest payable
|
|
|
12,722 |
|
|
|
23,867 |
|
Mortgage
payable on real estate (Note 6)
|
|
|
9,184 |
|
|
|
9,309 |
|
Interest
rate swap agreements (“Swaps”), at fair value
(Notes
2(l), 4, 8 and 13)
|
|
|
178,353 |
|
|
|
237,291 |
|
Obligations
to return cash and security collateral, at fair value
(Notes
8 and 13)
|
|
|
- |
|
|
|
22,624 |
|
Dividends
and dividend equivalents rights (“DERs”)
payable (Notes
10(b)
and 12(a))
|
|
|
205 |
|
|
|
46,385 |
|
Accrued
expenses and other liabilities
|
|
|
7,978 |
|
|
|
6,030 |
|
Total
Liabilities
|
|
$ |
7,783,729 |
|
|
$ |
9,384,342 |
|
|
|
|
|
|
|
|
|
|
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) (Note 10)
|
|
$ |
38 |
|
|
$ |
38 |
|
Common
stock, $.01 par value; 370,000 shares authorized;
280,000
and 219,516
issued and outstanding, respectively (Note 10)
|
|
|
2,800 |
|
|
|
2,195 |
|
Additional
paid-in capital, in excess of par
|
|
|
2,179,942 |
|
|
|
1,775,933 |
|
Accumulated
deficit
|
|
|
(132,400 |
) |
|
|
(210,815 |
) |
Accumulated
other comprehensive income/(loss) (Note 10(h))
|
|
|
164,893 |
|
|
|
(310,274 |
) |
Total
Stockholders’ Equity
|
|
$ |
2,215,273 |
|
|
$ |
1,257,077 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
9,999,002 |
|
|
$ |
10,641,419 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MFA
FINANCIAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
Thousands, Except Per Share Amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
(Note 3)
|
|
$ |
124,399 |
|
|
$ |
139,419 |
|
|
$ |
383,029 |
|
|
$ |
383,026 |
|
Cash
and cash equivalent investments
|
|
|
149 |
|
|
|
1,529 |
|
|
|
1,020 |
|
|
|
6,711 |
|
Interest
Income
|
|
|
124,548 |
|
|
|
140,948 |
|
|
|
384,049 |
|
|
|
389,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense (Notes 4 and 7)
|
|
|
52,976 |
|
|
|
85,033 |
|
|
|
183,119 |
|
|
|
255,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Income
|
|
|
71,572 |
|
|
|
55,915 |
|
|
|
200,930 |
|
|
|
134,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary
Impairments: (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary impairment losses
|
|
|
- |
|
|
|
(183 |
) |
|
|
(78,135 |
) |
|
|
(5,051 |
) |
Portion
of loss recognized in other comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
69,126 |
|
|
|
- |
|
Net Impairment Losses
Recognized in Earnings
|
|
|
- |
|
|
|
(183 |
) |
|
|
(9,009 |
) |
|
|
(5,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income/(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on MBS Forwards, net (Note 4)
|
|
|
754 |
|
|
|
- |
|
|
|
754 |
|
|
|
- |
|
Net
gain/(loss) on sale of MBS (Note 3)
|
|
|
- |
|
|
|
- |
|
|
|
13,495 |
|
|
|
(24,530 |
) |
Revenue
from operations of real estate (Note 6)
|
|
|
378 |
|
|
|
407 |
|
|
|
1,145 |
|
|
|
1,219 |
|
Loss
on early termination of Swaps, net (Note 4)
|
|
|
- |
|
|
|
(986 |
) |
|
|
- |
|
|
|
(92,467 |
) |
Miscellaneous
other income, net
|
|
|
- |
|
|
|
68 |
|
|
|
43 |
|
|
|
247 |
|
Other
Income/(Loss)
|
|
|
1,132 |
|
|
|
(511 |
) |
|
|
15,437 |
|
|
|
(115,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits (Note 12)
|
|
|
3,710 |
|
|
|
3,264 |
|
|
|
10,824 |
|
|
|
8,595 |
|
Real
estate operating expense and mortgage interest (Note 6)
|
|
|
444 |
|
|
|
439 |
|
|
|
1,359 |
|
|
|
1,312 |
|
New
business initiative
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
998 |
|
Other
general and administrative expense
|
|
|
1,713 |
|
|
|
1,465 |
|
|
|
5,559 |
|
|
|
3,936 |
|
Operating and Other
Expense
|
|
|
5,867 |
|
|
|
5,168 |
|
|
|
17,742 |
|
|
|
14,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income/(Loss) Before Preferred Stock Dividends
|
|
|
66,837 |
|
|
|
50,053 |
|
|
|
189,616 |
|
|
|
(852 |
) |
Less: Preferred
Stock Dividends (Note 10(a))
|
|
|
2,040 |
|
|
|
2,040 |
|
|
|
6,120 |
|
|
|
6,120 |
|
Net Income/(Loss) to Common
Stockholders
|
|
$ |
64,797 |
|
|
$ |
48,013 |
|
|
$ |
183,496 |
|
|
$ |
(6,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss)
Per Share of Common Stock:
Basic
and Diluted (Note 11)
|
|
$ |
0.25 |
|
|
$ |
0.24 |
|
|
$ |
0.78 |
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared Per Share of Common Stock (Note 10(b))
|
|
$ |
0.25 |
|
|
$ |
0.20 |
|
|
$ |
0.47 |
|
|
$ |
0.38 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MFA
FINANCIAL, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
For
the
Nine
Months
Ended
September
30, 2009
|
|
(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, 2008 and September 30, 2009 (3,840 shares)
|
|
$ |
38 |
|
|
|
|
|
|
Common
Stock, Par Value $0.01:
|
|
|
|
|
Balance
at December 31, 2008 (219,516 shares)
|
|
|
2,195 |
|
Issuance
of common stock (60,484 shares)
|
|
|
605 |
|
Balance
at September 30, 2009 (280,000 shares)
|
|
|
2,800 |
|
|
|
|
|
|
Additional Paid-in Capital, in
excess of Par:
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
1,775,933 |
|
Issuance
of common stock, net of expenses
|
|
|
402,577 |
|
Shares
issued for common stock option exercises, net of shares
withheld
|
|
|
116 |
|
Equity-based
compensation expense
|
|
|
1,316 |
|
Balance
at September 30, 2009
|
|
|
2,179,942 |
|
|
|
|
|
|
Accumulated
Deficit:
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
(210,815 |
) |
Net
income
|
|
|
189,616 |
|
Dividends
declared on common stock
|
|
|
(104,688 |
) |
Dividends
declared on preferred stock
|
|
|
(6,120 |
) |
Dividends
attributable to DERs
|
|
|
(393 |
) |
Balance
at September 30, 2009
|
|
|
(132,400 |
) |
|
|
|
|
|
Accumulated
Other Comprehensive (Loss)/Income:
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
(310,274 |
) |
Unrealized
gains on MBS, net
|
|
|
416,229 |
|
Unrealized
gains on Swaps
|
|
|
58,938 |
|
Balance
at September 30, 2009
|
|
|
164,893 |
|
|
|
|
|
|
Total
Stockholders' Equity at September 30, 2009
|
|
$ |
2,215,273 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MFA
FINANCIAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
189,616 |
|
|
$ |
(852 |
) |
Adjustments
to reconcile net income/(loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Losses
on sale of MBS
|
|
|
- |
|
|
|
25,101 |
|
Gains
on sales of MBS
|
|
|
(13,495 |
) |
|
|
(571 |
) |
Losses
on early termination of Swaps
|
|
|
- |
|
|
|
92,467 |
|
Other-than-temporary
impairment charges
|
|
|
9,009 |
|
|
|
5,051 |
|
Amortization
of purchase premium on MBS, net of accretion of discounts
|
|
|
8,468 |
|
|
|
15,335 |
|
Decrease/(increase)
in interest receivable
|
|
|
5,078 |
|
|
|
(7,708 |
) |
Depreciation
and amortization on real estate
|
|
|
353 |
|
|
|
355 |
|
Increase
in prepaid and other assets and other
|
|
|
(1,021 |
) |
|
|
(206 |
) |
Increase
in accrued expenses and other liabilities
|
|
|
1,948 |
|
|
|
1,988 |
|
(Decrease)/increase
in accrued interest payable
|
|
|
(11,145 |
) |
|
|
252 |
|
Equity-based
compensation expense
|
|
|
1,316 |
|
|
|
944 |
|
Negative
amortization and principal accretion on MBS
|
|
|
(12 |
) |
|
|
(493 |
) |
Net
cash provided by operating activities
|
|
$ |
190,115 |
|
|
$ |
131,663 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on MBS and other investments securities
|
|
$ |
1,413,711 |
|
|
$ |
1,119,414 |
|
Proceeds
from sale of MBS
|
|
|
438,507 |
|
|
|
1,851,019 |
|
Purchases
of MBS
|
|
|
(666,428 |
) |
|
|
(5,188,932 |
) |
Net
additions to leasehold improvements, furniture, fixtures and real estate
investment
|
|
|
(549 |
) |
|
|
(113 |
) |
Net
cash provided/(used) by investing activities
|
|
$ |
1,185,241 |
|
|
$ |
(2,218,612 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on repurchase agreements
|
|
$ |
(50,186,109 |
) |
|
$ |
(44,159,270 |
) |
Proceeds
from borrowings under repurchase agreements
|
|
|
48,722,560 |
|
|
|
46,012,730 |
|
Principal
payments on MBS Forwards
|
|
|
(219,916 |
) |
|
|
- |
|
Proceeds
from MBS Forwards
|
|
|
166,547 |
|
|
|
- |
|
Payments
made on termination of Swaps
|
|
|
- |
|
|
|
(91,868 |
) |
Payments
made for margin calls on repurchase agreements and Swaps
|
|
|
(114,570 |
) |
|
|
(173,610 |
) |
Cash
received for reverse margin calls on repurchase agreements and
Swaps
|
|
|
135,868 |
|
|
|
178,127 |
|
Proceeds
from issuances of common stock
|
|
|
403,298 |
|
|
|
616,376 |
|
Dividends
paid on preferred stock
|
|
|
(6,120 |
) |
|
|
(6,120 |
) |
Dividends
paid on common stock and DERs
|
|
|
(151,261 |
) |
|
|
(85,181 |
) |
Principal
payments on mortgage loan
|
|
|
(125 |
) |
|
|
(115 |
) |
Net
cash (used)/provided by financing activities
|
|
$ |
(1,249,828 |
) |
|
$ |
2,291,069 |
|
Net
Increase in cash and cash equivalents
|
|
$ |
125,528 |
|
|
$ |
204,120 |
|
Cash
and cash equivalents at beginning of period
|
|
$ |
361,167 |
|
|
$ |
234,410 |
|
Cash
and cash equivalents at end of period
|
|
$ |
486,695 |
|
|
$ |
438,530 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
MFA
FINANCIAL, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) before preferred stock dividends
|
|
$ |
66,837 |
|
|
$ |
50,053 |
|
|
$ |
189,616 |
|
|
$ |
(852 |
) |
Other
Comprehensive Income/(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain/(loss) on MBS arising during the
period,
net
|
|
|
173,536 |
|
|
|
(152,191 |
) |
|
|
410,397 |
|
|
|
(208,886 |
) |
Reclassification
adjustment for MBS sales
|
|
|
- |
|
|
|
- |
|
|
|
(3,033 |
) |
|
|
(8,241 |
) |
Reclassification
adjustment for net losses included in net
income
for other-than-temporary impairments
|
|
|
- |
|
|
|
96 |
|
|
|
8,865 |
|
|
|
1,500 |
|
Unrealized
(loss)/gain on Swaps arising during the period, net
|
|
|
(4,943 |
) |
|
|
(10,448 |
) |
|
|
58,938 |
|
|
|
321 |
|
Reclassification
adjustment for net losses included in earnings
from
Swaps
|
|
|
- |
|
|
|
773 |
|
|
|
- |
|
|
|
48,972 |
|
Comprehensive
income/(loss) before preferred stock dividends
|
|
$ |
235,430 |
|
|
$ |
(111,717 |
) |
|
$ |
664,783 |
|
|
$ |
(167,186 |
) |
Dividends
declared on preferred stock
|
|
|
(2,040 |
) |
|
|
(2,040 |
) |
|
|
(6,120 |
) |
|
|
(6,120 |
) |
Comprehensive
Income/(Loss) to Common Stockholders
|
|
$ |
233,390 |
|
|
$ |
(113,757 |
) |
|
$ |
658,663 |
|
|
$ |
(173,306 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
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, 2008. In the opinion of management, all
normal and recurring adjustments necessary to present fairly the financial
condition of the Company at September 30, 2009 and results of operations for all
periods presented have been made. The results of operations for the
nine-month period ended September 30, 2009 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.
Hierarchy
of GAAP
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“FAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162 (“FAS 168”). FAS 168 identified
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of non-governmental
entities that are presented in conformity with GAAP in the United
States. FAS 168 established the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB. All non-grandfathered, non-SEC
accounting literature not included in the Codification, except as noted in FAS
168, is superseded and deemed non-authoritative for interim and annual periods
ending after September 15, 2009. FAS 168 revised the framework for
selecting the accounting principles to be used in the preparation of financial
statements that are presented in conformity with GAAP. The Company’s
adoption of the Codification at September 30, 2009, resulted in the Company
eliminating references to prior sources of GAAP which are integrated into the
Codification.
(b)
MBS
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 other comprehensive income/(loss), a component of Stockholders’
Equity. (See Note 2(j))
Upon the
sale of an investment security, any unrealized gain or loss is reclassified out
of accumulated other comprehensive income/(loss) to earnings as a realized gain
or loss using the specific identification method.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 an agency of the
U.S. Government, such as Ginnie Mae (collectively, “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. Amortization and 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 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 rates 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 interest rates, 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 Notes 2(n) and 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 judgment is used to arrive at fair value that considers prices
obtained from a third-party pricing service, 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
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 earnings with the remainder recognized as a component of other
comprehensive income/(loss) on the consolidated balance sheet. The
amount of credit impairment is determined by comparing the amortized cost of an
impaired security to the present value of cash flows expected to be collected,
discounted at the security’s yield prior to recognizing the
impairment. (See Note 2(n))
Impairments
recognized through other comprehensive income/(loss) 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 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)
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 Note
2(l))
(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). (See Note 8) The
Company did not hold any cash pledged by its counterparties at September 30,
2009 and held $5.5 million of cash pledged by its counterparties at December 31,
2008. At September 30, 2009, all of the Company’s cash investments
were in high quality overnight money market funds.
(d) Restricted Cash
Restricted
cash represents the Company’s cash held by 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 restricted cash held as
collateral against its Swaps of $44.0 million and $70.7 million at September 30,
2009 and December 31, 2008, respectively. (See Notes 4 and
8)
(e)
Goodwill
At
September 30, 2009 and December 31, 2008, 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 September 30, 2009, the Company had not
recognized any impairment against its goodwill.
(f)
Real Estate
At
September 30, 2009, the Company indirectly held 100% of the ownership interest
in Lealand Place, a 191-unit apartment property located in Lawrenceville,
Georgia (“Lealand”), which is consolidated with the Company. 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. (See Notes 2(l), 7 and 8)
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company’s repurchase agreements typically have terms ranging from one month to
three 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 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. At September 30, 2009, the
Company had outstanding balances under repurchase agreements with 18 separate
lenders with a maximum amount at risk (the difference between the amount loaned
to the Company, including interest payable, and the fair value of securities
pledged by the Company as collateral, including accrued interest on such
securities) to any single lender of $123.0 million, or 5.6% of stockholders’
equity, related to repurchase agreements. (See Notes 4 and
7)
(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. Equity based awards for which there is no risk of
forfeiture are expensed upon grant or at such time that there is no longer a
risk of forfeiture. The Company applies 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 Note 2(i) and 12)
(i)
Earnings per Common Share (“EPS”)
Basic EPS
is computed by dividing net income/(loss) allocable 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.
(j) Comprehensive
Income/Loss
The
Company’s comprehensive income/(loss) includes net income/(loss), the change in
net unrealized gains/(losses) on its MBS and hedging instruments, adjusted by
realized net gains/(losses) included in net income/(loss) for the period and is
reduced by dividends declared on the Company’s preferred stock.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 its 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 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/(loss) 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 all of the associated
hedges were deemed ineffective.
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. 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/(loss). (See Note
2(b)) 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.
During
the three months ended September 30, 2009, the Company entered into 14
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)
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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
are 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 Notes 2(n) and 13)
Although
permitted 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
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
On
January 1, 2009, new accounting guidance became effective providing that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of basic earnings per share
pursuant to the two-class method. The Company adopted this guidance
on January 1, 2009 and retrospectively adjusted all previously reported EPS
data, which did not have a material impact on its historical EPS
amounts.
Other-than-temporary
Impairments, Determining Fair Value and Interim Disclosures about Fair Value of
Financial Instruments
In April
2009, new accounting guidance was issued with respect to determining fair value
when the volume and level of activity for an asset or liability have
significantly decreased, identifying transactions that are not orderly and
interim disclosures about fair value of financial instruments. The
Company adopted these new accounting rules as of April 1, 2009. The
new guidance is summarized below.
In
addition to existing guidance, an other-than-temporary impairment is deemed to
exist if an entity does not expect to recover the entire amortized cost basis of
a security. Among other things, the new accounting guidance
addressed: (i) the determination as to when an investment is considered
impaired; (ii) whether that impairment is other-than-temporary; (iii) the
measurement of an impairment loss; (iv) accounting considerations subsequent to
the recognition of an other-than-temporary impairment; and (v) certain required
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Should an other-than-temporary
impairment exist on a security that the Company expects to continue to hold, the
security is written down, with the total other-than-temporary impairment
bifurcated into (i) the amount related to expected credit losses, which are
recognized through earnings, and (ii) the amount related to all other factors,
which are recognized as a component of other comprehensive
income. The disclosures required by this new accounting are included
in Note 3 to the consolidated financial statements. The Company’s
adoption of this new accounting guidance required a reassessment of all
securities which were other-than-temporarily impaired through March 31,
2009. This reassessment did not result in a cumulative effect
adjustment to any component of stockholders’ equity in connection with its
adoption.
Additional
guidance was provided for fair value measures in determining if the market for
an asset or liability is inactive and, accordingly, if quoted market prices may
not be indicative of fair value. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial
statements.
The
existing disclosure requirements related to the fair value of financial
instruments that were previously required in annual financial statements were
extended to interim financial statements. This guidance provides for
additional disclosures, such that its adoption did not have any impact on the
Company’s consolidated financial statements. The required disclosures
are included in Note 13 to the consolidated financial statements.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounting
Standards Codification
See Note
2(a).
Accounting
for Transfers of Financial Assets
On June
12, 2009, the FASB issued Statement No. 166, Accounting for Transfer of
Financial Assets – an Amendment of FASB Statement No. 140 (“FAS 166”), which
amends previous derecognition guidance. FAS 166, which remains
authoritative until such time that it is integrated into the Codification,
eliminates the concept of a qualified special purpose entity (“QSPE”) and
eliminates the exception from applying FASB Interpretation 46(R), Consolidation
of Variable Interest Entities to QSPEs. Additionally, FAS 166
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. FAS 166 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. FAS 166 defines the term "participating interest" to establish
specific conditions for reporting a transfer of a portion of a financial asset
as a sale. Under FAS 166, 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. This includes any retained beneficial
interest. The implementation of FAS 166 materially affects the
securitization process in general, as it eliminates off-balance sheet
transactions when an entity retains any interest in or control over assets
transferred in this process. The Company does not believe the
implementation of FAS 166 will have a material impact on its consolidated
financial statements, as it has no off-balance sheet transactions, no QSPEs, nor
has it transferred assets through a securitization. FAS 166 becomes
effective for the Company on January 1, 2010.
In
conjunction with FAS 166, FASB issued Statement No. 167, Amendment to FASB
Interpretation No 46(R) (“FAS 167”), which remains authoritative until such time
that it is integrated into the Codification. FAS 166 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. FAS 167 requires
enhanced disclosures to provide users of financial statements with more
transparent information about and an enterprise's involvement in a
VIE. Further, FAS 166 also requires ongoing assessments of whether an
enterprise is the primary beneficiary of a VIE. Currently, the
Company is not the primary beneficiary of any VIEs. The effective
date for FAS 167 is January 1, 2010. Upon implementation and, as
required by the standard, on an ongoing basis, the Company will assess the
applicability of this standard to its holdings and report
accordingly.
(o)
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
3. MBS
At
September 30, 2009 and December 31, 2008, 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 September 30, 2009, 0.8% of the Company’s MBS
portfolio were fixed-rate MBS secured by fixed rates mortgages, all of which
were non-Agency MBS acquired during 2009.
The
Company’s MBS are primarily comprised of Agency MBS and, to a lesser extent,
non-Agency MBS. The Company’s 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. In addition, the Company may have
investments in MBS, which may or may not be rated. The Company
pledges a significant portion of its MBS as collateral against its repurchase
agreements and Swaps. (See Note 8)
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 guarantors.
Non-Agency
MBS: The Company’s non-Agency MBS, which are primarily
comprised of the senior most tranches from the MBS structure (“Senior MBS”), are
securities that are secured by pools of residential mortgages, and are not
guaranteed by any U.S. government agency or any federally chartered
corporation. The Company’s Senior MBS are rated by a nationally
recognized rating agency, such as Moody’s Investors Services, Inc. (“Moody’s”),
Standard & Poor’s Corporation (“S&P”) or Fitch, Inc. (collectively,
“Rating Agencies”). At September 30, 2009, the Company’s non-Agency
MBS were rated from AAA to C by one or more of the Rating Agencies or were
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.
The
following table presents certain information about the Company's MBS at
September 30, 2009 and December 31, 2008:
September
30, 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
|
|
$ |
7,349,064 |
|
|
$ |
97,977 |
|
|
$ |
(615 |
) |
|
$ |
- |
|
|
$ |
7,446,426 |
|
|
$ |
7,747,168 |
|
|
$ |
306,328 |
|
|
$ |
(5,586 |
) |
|
$ |
300,742 |
|
Freddie
Mac
|
|
|
584,745 |
|
|
|
8,912 |
|
|
|
- |
|
|
|
- |
|
|
|
608,674 |
|
|
|
628,345 |
|
|
|
19,843 |
|
|
|
(172 |
) |
|
|
19,671 |
|
Ginnie
Mae
|
|
|
25,000 |
|
|
|
442 |
|
|
|
- |
|
|
|
- |
|
|
|
25,442 |
|
|
|
25,948 |
|
|
|
506 |
|
|
|
- |
|
|
|
506 |
|
Total
Agency MBS
|
|
|
7,958,809 |
|
|
|
107,331 |
|
|
|
(615 |
) |
|
|
- |
|
|
|
8,080,542 |
|
|
|
8,401,461 |
|
|
|
326,677 |
|
|
|
(5,758 |
) |
|
|
320,919 |
|
Non-Agency
MBS (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated
AAA
|
|
|
41,170 |
|
|
|
1,172 |
|
|
|
- |
|
|
|
- |
|
|
|
42,342 |
|
|
|
30,553 |
|
|
|
- |
|
|
|
(11,789 |
) |
|
|
(11,789 |
) |
Rated
AA
|
|
|
18,008 |
|
|
|
30 |
|
|
|
(5,378 |
) |
|
|
(2,298 |
) |
|
|
10,362 |
|
|
|
12,809 |
|
|
|
2,962 |
|
|
|
(515 |
) |
|
|
2,447 |
|
Rated
A
|
|
|
33,637 |
|
|
|
55 |
|
|
|
(6,968 |
) |
|
|
(61 |
) |
|
|
26,662 |
|
|
|
25,821 |
|
|
|
2,174 |
|
|
|
(3,015 |
) |
|
|
(841 |
) |
Rated
BBB
|
|
|
49,866 |
|
|
|
273 |
|
|
|
(2,178 |
) |
|
|
(5,133 |
) |
|
|
42,827 |
|
|
|
37,235 |
|
|
|
2,541 |
|
|
|
(8,133 |
) |
|
|
(5,592 |
) |
Rated
BB
|
|
|
32,636 |
|
|
|
51 |
|
|
|
(4,121 |
) |
|
|
(10,458 |
) |
|
|
18,108 |
|
|
|
21,913 |
|
|
|
5,238 |
|
|
|
(1,433 |
) |
|
|
3,805 |
|
Rated
B
|
|
|
73,010 |
|
|
|
- |
|
|
|
(16,501 |
) |
|
|
(13,567 |
) |
|
|
42,942 |
|
|
|
51,711 |
|
|
|
8,769 |
|
|
|
- |
|
|
|
8,769 |
|
Rated
CCC
|
|
|
528,508 |
|
|
|
85 |
|
|
|
(54,186 |
) |
|
|
(189,824 |
) |
|
|
284,065 |
|
|
|
314,738 |
|
|
|
35,454 |
|
|
|
(4,781 |
) |
|
|
30,673 |
|
Rated
CC
|
|
|
573,649 |
|
|
|
122 |
|
|
|
(41,611 |
) |
|
|
(154,015 |
) |
|
|
372,588 |
|
|
|
371,807 |
|
|
|
34,843 |
|
|
|
(35,624 |
) |
|
|
(781 |
) |
Rated
C
|
|
|
126,854 |
|
|
|
30 |
|
|
|
(7,437 |
) |
|
|
(33,876 |
) |
|
|
83,670 |
|
|
|
79,319 |
|
|
|
6,875 |
|
|
|
(11,226 |
) |
|
|
(4,351 |
) |
Unrated
and Other
|
|
|
7,940 |
|
|
|
- |
|
|
|
(2,529 |
) |
|
|
(1,900 |
) |
|
|
1,698 |
|
|
|
1,685 |
|
|
|
3 |
|
|
|
(16 |
) |
|
|
(13 |
) |
Total
Non-Agency MBS
|
|
|
1,485,278 |
|
|
|
1,818 |
|
|
|
(140,909 |
) |
|
|
(411,132 |
) |
|
|
925,264 |
|
|
|
947,591 |
|
|
|
98,859 |
|
|
|
(76,532 |
) |
|
|
22,327 |
|
Total
MBS
|
|
$ |
9,444,087 |
|
|
$ |
109,149 |
|
|
$ |
(141,524 |
) |
|
$ |
(411,132 |
) |
|
$ |
9,005,806 |
|
|
$ |
9,349,052 |
|
|
$ |
425,536 |
|
|
$ |
(82,290 |
) |
|
$ |
343,246 |
|
Table
continued
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table
continued
December
31, 2008
|
|
(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
|
|
$ |
8,986,206 |
|
|
$ |
115,106 |
|
|
$ |
(1,401 |
) |
|
$ |
- |
|
|
$ |
9,099,911 |
|
|
$ |
9,156,030 |
|
|
$ |
78,148 |
|
|
$ |
(22,029 |
) |
|
$ |
56,119 |
|
Freddie
Mac
|
|
|
714,110 |
|
|
|
10,753 |
|
|
|
- |
|
|
|
- |
|
|
|
732,248 |
|
|
|
732,719 |
|
|
|
3,462 |
|
|
|
(2,991 |
) |
|
|
471 |
|
Ginnie
Mae
|
|
|
30,017 |
|
|
|
532 |
|
|
|
- |
|
|
|
- |
|
|
|
30,549 |
|
|
|
29,864 |
|
|
|
- |
|
|
|
(685 |
) |
|
|
(685 |
) |
Total
Agency MBS
|
|
|
9,730,333 |
|
|
|
126,391 |
|
|
|
(1,401 |
) |
|
|
- |
|
|
|
9,862,708 |
|
|
|
9,918,613 |
|
|
|
81,610 |
|
|
|
(25,705 |
) |
|
|
55,905 |
|
Non-Agency
MBS (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated
AAA
|
|
|
106,191 |
|
|
|
1,487 |
|
|
|
(4,705 |
) |
|
|
(2,585 |
) |
|
|
100,388 |
|
|
|
71,418 |
|
|
|
961 |
|
|
|
(29,931 |
) |
|
|
(28,970 |
) |
Rated
AA
|
|
|
29,064 |
|
|
|
352 |
|
|
|
- |
|
|
|
- |
|
|
|
29,416 |
|
|
|
17,767 |
|
|
|
- |
|
|
|
(11,649 |
) |
|
|
(11,649 |
) |
Rated
A
|
|
|
115,213 |
|
|
|
- |
|
|
|
(1,261 |
) |
|
|
(584 |
) |
|
|
113,368 |
|
|
|
67,346 |
|
|
|
269 |
|
|
|
(46,291 |
) |
|
|
(46,022 |
) |
Rated
BBB
|
|
|
10,524 |
|
|
|
91 |
|
|
|
(750 |
) |
|
|
(1,955 |
) |
|
|
7,910 |
|
|
|
4,999 |
|
|
|
66 |
|
|
|
(2,977 |
) |
|
|
(2,911 |
) |
Rated
BB
|
|
|
79,700 |
|
|
|
- |
|
|
|
(626 |
) |
|
|
- |
|
|
|
79,074 |
|
|
|
41,075 |
|
|
|
- |
|
|
|
(37,999 |
) |
|
|
(37,999 |
) |
Rated
CCC
|
|
|
1,852 |
|
|
|
- |
|
|
|
(175 |
) |
|
|
(756 |
) |
|
|
921 |
|
|
|
989 |
|
|
|
68 |
|
|
|
- |
|
|
|
68 |
|
Unrated
and Other
|
|
|
2,161 |
|
|
|
- |
|
|
|
- |
|
|
|
(197 |
) |
|
|
1,781 |
|
|
|
376 |
|
|
|
- |
|
|
|
(1,405 |
) |
|
|
(1,405 |
) |
Total
Non-Agency MBS
|
|
|
344,705 |
|
|
|
1,930 |
|
|
|
(7,517 |
) |
|
|
(6,077 |
) |
|
|
332,858 |
|
|
|
203,970 |
|
|
|
1,364 |
|
|
|
(130,252 |
) |
|
|
(128,888 |
) |
Total
MBS
|
|
$ |
10,075,038 |
|
|
$ |
128,321 |
|
|
$ |
(8,918 |
) |
|
$ |
(6,077 |
) |
|
$ |
10,195,566 |
|
|
$ |
10,122,583 |
|
|
$ |
82,974 |
|
|
$ |
(155,957 |
) |
|
$ |
(72,983 |
) |
(1) Purchase
discounts designated as credit reserves 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) The Company’s 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.
|
|
The
following table presents components of interest income for the three and nine
months ended September 30, 2009 and 2008:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
(In
Thousands)
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
MBS
|
|
$ |
103,561 |
|
|
$ |
134,781 |
|
|
$ |
345,312 |
|
|
$ |
367,577 |
|
MFR
MBS
(1)
|
|
|
16,821 |
|
|
|
- |
|
|
|
25,287 |
|
|
|
- |
|
Legacy
non-Agency MBS and other (2)
|
|
|
4,017 |
|
|
|
4,638 |
|
|
|
12,430 |
|
|
|
15,449 |
|
Total
|
|
$ |
124,399 |
|
|
$ |
139,419 |
|
|
$ |
383,029 |
|
|
$ |
383,026 |
|
(1)
“MFR MBS” are comprised of non-Agency MBS acquired at a discount through
the Company’s wholly-owned subsidiary MFResidential Assets I, LLC
(“MFR”). Interest income presented for the three and nine
months ended September 30, 2009 does not reflect interest income on MBS
underlying the Company’s MBS
Forwards. (See Note 4)
|
(2)
“Legacy non-Agency MBS” are all non-Agency MBS that were purchased by the
Company prior to July 2007.
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unrealized
Losses on MBS and Impairments
The
following table presents information about the Company’s MBS that were in an
unrealized loss position at September 30, 2009:
|
|
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
|
|
$ |
12,789 |
|
|
$ |
68 |
|
|
|
19 |
|
|
$ |
417,077 |
|
|
$ |
5,518 |
|
|
|
49 |
|
|
$ |
429,866 |
|
|
$ |
5,586 |
|
Freddie
Mac
|
|
|
5,426 |
|
|
|
13 |
|
|
|
7 |
|
|
|
9,213 |
|
|
|
159 |
|
|
|
4 |
|
|
|
14,639 |
|
|
|
172 |
|
Total
Agency MBS
|
|
|
18,215 |
|
|
|
81 |
|
|
|
26 |
|
|
|
426,290 |
|
|
|
5,677 |
|
|
|
53 |
|
|
|
444,505 |
|
|
|
5,758 |
|
Non-Agency
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rated
AAA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
30,553 |
|
|
|
11,789 |
|
|
|
3 |
|
|
|
30,553 |
|
|
|
11,789 |
|
Rated
AA
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,047 |
|
|
|
515 |
|
|
|
2 |
|
|
|
1,047 |
|
|
|
515 |
|
Rated
A
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
13,471 |
|
|
|
3,015 |
|
|
|
3 |
|
|
|
13,471 |
|
|
|
3,015 |
|
Rated
BBB
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,011 |
|
|
|
8,133 |
|
|
|
2 |
|
|
|
26,011 |
|
|
|
8,133 |
|
Rated
BB
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,938 |
|
|
|
1,433 |
|
|
|
1 |
|
|
|
2,938 |
|
|
|
1,433 |
|
Rated
CCC
|
|
|
27,130 |
|
|
|
1,169 |
|
|
|
2 |
|
|
|
7,738 |
|
|
|
3,612 |
|
|
|
2 |
|
|
|
34,868 |
|
|
|
4,781 |
|
Rated
CC
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
98,714 |
|
|
|
35,624 |
|
|
|
2 |
|
|
|
98,714 |
|
|
|
35,624 |
|
Rated
C
|
|
|
7,837 |
|
|
|
63 |
|
|
|
1 |
|
|
|
23,171 |
|
|
|
11,163 |
|
|
|
1 |
|
|
|
31,008 |
|
|
|
11,226 |
|
Unrated
and other
|
|
|
117 |
|
|
|
16 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
117 |
|
|
|
16 |
|
Total
Non-Agency MBS
|
|
|
35,084 |
|
|
|
1,248 |
|
|
|
6 |
|
|
|
203,643 |
|
|
|
75,284 |
|
|
|
16 |
|
|
|
238,727 |
|
|
|
76,532 |
|
Total
MBS
|
|
$ |
53,299 |
|
|
$ |
1,329 |
|
|
|
32 |
|
|
$ |
629,933 |
|
|
$ |
80,961 |
|
|
|
69 |
|
|
$ |
683,232 |
|
|
$ |
82,290 |
|
All of
the unrealized gains on the Company’s non-Agency MBS were on MFR MBS while $75.3
million of the gross unrealized losses were related to Legacy non-Agency
MBS. At September 30, 2009, the Company had borrowings under
repurchase agreements of $109.7 million (1.4% of total borrowings under
repurchase agreements) secured by non-Agency MBS, which amount excludes $162.6
million of borrowings that are accounted for as components of MBS
Forwards. (See Note 4)
The
Company recognized aggregate credit related other-than-temporary impairments of
$9.0 million against certain of its non-Agency MBS, all of which were acquired
prior to July 2007, during the nine months ended September 30,
2009. These other-than-temporary impairments were comprised of $7.5
million of impairments against four Legacy non-Agency MBS, which were Senior
MBS, recognized at June 30, 2009 and impairments of $1.5 million recognized
against five non-Agency MBS at March 31, 2009, none of which were Senior
MBS. The Company did not recognize any credit related
other-than-temporary impairments during the three months ended September 30,
2009. The Company projected adverse changes in expected cash flows
for each of the non-Agency MBS on which a credit related impairment was
recognized. The other-than-temporarily impaired Legacy non-Agency MBS
(that were Senior MBS) had an aggregate amortized cost of $188.1 million prior
to recognizing the impairments and the five other non-Agency MBS (none of which
were Senior MBS) had an amortized cost of $1.7 million prior to recognizing the
impairments. During the three and nine months ended September 30,
2008, the Company recognized impairment charges of $183,000 and $5.1 million,
respectively, against non-Agency MBS that were unrated.
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 Rating Agency reports, 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
present value of its expected cash flows, discounted using its pre-impairment
yield.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Given the
high credit quality inherent in Agency MBS, the Company does not consider any of
the current impairments on such 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
September 30, 2009 any unrealized losses on its MBS were
temporary. These unrealized losses 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. At September 30, 2009, the Company did not intend to sell any of
its Agency and non-Agency MBS that were in an unrealized loss position, all of
which were performing in accordance with their terms.
Other-than-temporary
impairment amounts that were related to credit losses were recognized into
earnings, with the remainder recognized into other comprehensive
income/(loss). The table below presents the roll-forward of
other-than-temporary impairments for the three and nine months ended September
30, 2009:
|
|
Other-Than-Temporary
Impairments
|
|
(In
Thousands)
|
|
Gross
|
|
|
Included
in Other Comprehensive Income/(Loss)
|
|
|
Included
in Earnings
|
|
Quarter
ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Impairments
recognized on securities not previously impaired
|
|
|
1,549 |
|
|
|
- |
|
|
|
1,549 |
|
Balance
March 31, 2009
|
|
$ |
1,549 |
|
|
$ |
- |
|
|
$ |
1,549 |
|
Quarter
ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments
recognized on securities not previously impaired
|
|
|
76,586 |
|
|
|
69,126 |
|
|
|
7,460 |
|
Balance
June 30, 2009
|
|
$ |
78,135 |
|
|
$ |
69,126 |
|
|
$ |
9,009 |
|
Quarter
ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments
recognized on securities not previously impaired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
September 30, 2009
|
|
$ |
78,135 |
|
|
$ |
69,126 |
|
|
$ |
9,009 |
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table
below presents a summary of the significant inputs considered in determining the
measurement of the credit loss component recognized in earnings for the
Company’s Legacy non-Agency MBS on which impairments were recognized from
January 1, 2009 through September 30, 2009:
(Dollars
in Thousands)
|
At
Time of Impairment
|
MBS
current face
|
$ 188,613
|
|
|
Credit
enhancement (1):
|
|
Weighted
average (2)
|
6.43%
|
Range
(3)
|
2.97%
- 23.11%
|
|
|
Projected
CPR (4):
|
|
Weighted
average (2)
|
7.75%
|
Range
(3)
|
7.05%
- 9.28%
|
|
|
Projected
Loss Severity:
|
|
Weighted
average (2)
|
50.30%
|
Range
(3)
|
50.00%
- 60.00%
|
|
|
60+
days delinquent (5):
|
|
Weighted
average (2)
|
13.34%
|
Range
(3)
|
10.26%
- 29.03%
|
(1)
Represents a level of protection (subordination) for the securities,
expressed as a percentage of total current underlying loan
balance.
(2)
Calculated by weighting the relevant input/assumptions for each individual
security by current outstanding face of the security.
(3)
Represents the range of inputs/assumptions based on individual
securities.
(4)
CPR – constant prepayment rate.
(5)
Includes, for each security, underlying loans 60 or more days delinquent,
foreclosed loans and other real estate
owned.
|
The
following table presents the impact of the Company’s MBS on its other
comprehensive income/(loss) for the three months and nine months ended September
30, 2009 and 2008:
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Accumulated
other comprehensive income/(loss) from
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain/(loss) on MBS at beginning of period
|
|
$ |
169,710 |
|
|
$ |
(34,300 |
) |
|
$ |
(72,983 |
) |
|
$ |
29,232 |
|
Unrealized
gain/(loss) on MBS arising during the
period,
net
|
|
|
173,536 |
|
|
|
(152,191 |
) |
|
|
410,397 |
|
|
|
(208,886 |
) |
Reclassification
adjustment for MBS sales
|
|
|
- |
|
|
|
- |
|
|
|
(3,033 |
) |
|
|
(8,241 |
) |
Reclassification
adjustment for net losses included in net income for
other-than-temporary
impairments
|
|
|
- |
|
|
|
96 |
|
|
|
8,865 |
|
|
|
1,500 |
|
Balance
at the end of period
|
|
$ |
343,246 |
|
|
$ |
(186,395 |
) |
|
$ |
343,246 |
|
|
$ |
(186,395 |
) |
4. Derivatives
The
Company’s derivatives are comprised of Swaps that are designated as cash flow
hedges against the interest rate risk associated with its borrowings and MBS
Forwards that 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 September 30, 2009 and December 31,
2008:
Derivative
Instrument
|
Designation
|
Balance
Sheet
Location
|
September
30,
2009
|
December
31,
2008
|
(In
Thousands)
|
|
|
|
|
MBS
Forwards, at fair value
|
Non-Hedging
|
Assets
|
$ 53,459
|
$ -
|
Swaps,
at fair value
|
Hedging
|
Liabilities
|
$ (178,353)
|
$ (237,291)
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MBS
Forwards
During
the three months ended September 30, 2009, MFR entered into 14 transactions
involving purchases of 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 an asset on the
Company’s consolidated balance sheet at September 30, 2009. The fair
value of the MBS Forward 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/(loss) in other income. The following table
presents certain information about the non-Agency MBS and repurchase agreements
underlying the Company’s MBS Forwards at September 30, 2009:
Linked
Transactions at September 30, 2009
|
|
Linked
Repurchase Agreements
|
|
Linked
MBS
|
|
Maturity
or Repricing
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
|
Non-Agency
MBS
|
|
Fair
Value
|
|
|
Current
Face
|
|
|
Weighted
Average
Coupon
Rate
|
|
(Dollars
in Thousands)
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
Within
30 days
|
|
$ |
125,493 |
|
|
|
1.92 |
% |
|
Rated
AA
|
|
$ |
55,770 |
|
|
$ |
61,529 |
|
|
|
4.56 |
% |
3
months to 6 months
|
|
|
37,136 |
|
|
|
1.65 |
|
|
Rated
A
|
|
|
17,512 |
|
|
|
21,508 |
|
|
|
3.77 |
|
Total
|
|
$ |
162,629 |
|
|
|
1.86 |
% |
|
Rated
BBB
|
|
|
108,433 |
|
|
|
125,345 |
|
|
|
4.96 |
|
|
|
|
|
|
|
|
|
|
|
Rated
BB
|
|
|
33,438 |
|
|
|
39,478 |
|
|
|
4.60 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
215,153 |
|
|
$ |
247,860 |
|
|
|
4.70 |
% |
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 three and nine months ended September 30, 2009:
Components
of Gain on MBS Forwards, net
|
|
For
the Three and Nine Months Ended September 30, 2009
|
|
(In
Thousands)
|
|
|
|
Interest
income attributable to linked MBS
|
|
$ |
1,147 |
|
Interest
expense attributable to linked repurchase agreements
|
|
|
(245 |
) |
Change
in fair value of linked MBS included in earnings
|
|
|
(148 |
) |
Gain
on MBS Forwards
|
|
$ |
754 |
|
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 September 30, 2009.
At
September 30, 2009, the Company had MBS with fair value of $154.4 million and
restricted cash of $44.0 million pledged as collateral against its
Swaps. At December 31, 2008, the Company had MBS with fair value of
$171.0 million and restricted cash of $70.7 million pledged against its
Swaps. (See Note 8)
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2009, all of the Company’s Swap
counterparties were rated A or better by a Rating Agency.
The
following table presents the impact of the Company’s Swaps on its accumulated
other comprehensive income/(loss) for the three and nine months ended September
30, 2009 and 2008:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Accumulated
other comprehensive loss from Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
(173,410 |
) |
|
$ |
(40,765 |
) |
|
$ |
(237,291 |
) |
|
$ |
(99,733 |
) |
Unrealized
(loss)/income on Swaps arising during the
period,
net
|
|
|
(4,943 |
) |
|
|
(10,448 |
) |
|
|
58,938 |
|
|
|
321 |
|
Reclassification
adjustment for net losses included in
net
income/(loss) from Swaps
|
|
|
- |
|
|
|
773 |
|
|
|
- |
|
|
|
48,972 |
|
Balance
at the end of period
|
|
$ |
(178,353 |
) |
|
$ |
(50,440 |
) |
|
$ |
(178,353 |
) |
|
$ |
(50,440 |
) |
At
September 30, 2009, all of the Company’s Swaps were deemed effective and no
Swaps were terminated during the three and nine months ended September 30,
2009. During the nine months ended September 30, 2008, the Company
terminated 48 Swaps with an aggregate notional amount of $1.637 billion (all of
which occurred in March 2008) and, in connection therewith, repaid the
repurchase agreements hedged by such Swaps. These transactions
resulted in the Company recognizing net losses of $91.5 million. In addition,
during the three months ended September 30, 2008, the Company realized a loss of
$986,000 for two Swaps that were terminated in connection with the bankruptcy of
Lehman Brothers. Except for gains and losses realized on Swaps
terminated early and deemed ineffective, 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 three and nine months ended September 30, 2009 and 2008:
|
|
Three
Months Ended September
30,
|
|
|
Nine
Months Ended September
30,
|
|
(Dollars
in Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
expense attributable to Swaps
|
|
$ |
32,215 |
|
|
$ |
15,879 |
|
|
$ |
88,381 |
|
|
$ |
39,774 |
|
Weighted
average Swap rate paid
|
|
|
4.23 |
% |
|
|
4.18 |
% |
|
|
4.21 |
% |
|
|
4.33 |
% |
Weighted
average Swap rate received
|
|
|
0.44 |
% |
|
|
2.64 |
% |
|
|
0.80 |
% |
|
|
3.15 |
% |
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At
September 30, 2009, the Company had Swaps with an aggregate notional amount of
$3.314 billion, which had gross unrealized losses of $178.4 million and extended
25 months on average with a maximum term of approximately six
years. The following table presents information about the Company’s
Swaps at September 30, 2009 and December 31, 2008:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
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
|
|
$ |
67,832 |
|
|
|
3.97 |
% |
|
|
0.40 |
% |
|
$ |
78,348 |
|
|
|
3.92 |
% |
|
|
2.36 |
% |
Over
30 days to 3 months
|
|
|
239,248 |
|
|
|
4.46 |
|
|
|
0.29 |
|
|
|
151,697 |
|
|
|
4.12 |
|
|
|
1.48 |
|
Over
3 months to 6 months
|
|
|
195,037 |
|
|
|
4.01 |
|
|
|
0.36 |
|
|
|
220,318 |
|
|
|
4.04 |
|
|
|
1.78 |
|
Over
6 months to 12 months
|
|
|
356,465 |
|
|
|
4.02 |
|
|
|
0.36 |
|
|
|
513,070 |
|
|
|
4.24 |
|
|
|
1.50 |
|
Over
12 months to 24 months
|
|
|
786,157 |
|
|
|
4.20 |
|
|
|
0.33 |
|
|
|
821,162 |
|
|
|
4.13 |
|
|
|
1.68 |
|
Over
24 months to 36 months
|
|
|
618,248 |
|
|
|
4.33 |
|
|
|
0.32 |
|
|
|
642,595 |
|
|
|
4.12 |
|
|
|
1.61 |
|
Over
36 months to 48 months
|
|
|
776,452 |
|
|
|
4.34 |
|
|
|
0.31 |
|
|
|
833,302 |
|
|
|
4.40 |
|
|
|
1.43 |
|
Over
48 months to 60 months
|
|
|
173,371 |
|
|
|
4.14 |
|
|
|
0.31 |
|
|
|
169,351 |
|
|
|
4.01 |
|
|
|
1.99 |
|
Over
60 months
|
|
|
100,892 |
|
|
|
4.29 |
|
|
|
0.34 |
|
|
|
240,212 |
|
|
|
4.21 |
|
|
|
1.77 |
|
Total
active Swaps
|
|
|
3,313,702 |
|
|
|
4.24 |
% |
|
|
0.33 |
% |
|
|
3,670,055 |
|
|
|
4.19 |
% |
|
|
1.62 |
% |
Forward
Starting Swaps
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
300,000 |
(3) |
|
|
4.39 |
|
|
|
0.44 |
|
Total
|
|
$ |
3,313,702 |
|
|
|
4.24 |
% |
|
|
0.33 |
% |
|
$ |
3,970,055 |
|
|
|
4.21 |
% |
|
|
1.53 |
% |
(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. For forward starting Swaps,
the rate reflects the rate that would be receivable if the Swap were
active.
|
(3) $150.0
million of forward starting Swaps became active on July 21, 2009, and
$150.0 million became active on August 10,
2009.
|
5. Interest
Receivable
The
following table presents the Company’s interest receivable by investment
category at September 30, 2009 and December 31, 2008:
(In
Thousands)
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
MBS
interest receivable:
|
|
|
|
|
|
|
Fannie
Mae
|
|
$ |
33,322 |
|
|
$ |
41,370 |
|
Freddie
Mac
|
|
|
5,290 |
|
|
|
6,587 |
|
Ginnie
Mae
|
|
|
97 |
|
|
|
136 |
|
Non-Agency
MBS
|
|
|
5,910 |
|
|
|
1,605 |
|
Total
interest receivable on MBS
|
|
|
44,619 |
|
|
|
49,698 |
|
Money
market investments
|
|
|
27 |
|
|
|
26 |
|
Total
interest receivable
|
|
$ |
44,646 |
|
|
$ |
49,724 |
|
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
September 30, 2009 and December 31, 2008:
(In
Thousands)
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Real
Estate Assets and Liabilities:
|
|
|
|
|
|
|
Land
and buildings, net of accumulated depreciation
|
|
$ |
11,074 |
|
|
$ |
11,337 |
|
Cash
and other assets
|
|
|
193 |
|
|
|
144 |
|
Mortgage
payable (1)
|
|
|
(9,184 |
) |
|
|
(9,309 |
) |
Accrued
interest and other payables
|
|
|
(293 |
) |
|
|
(168 |
) |
Real
estate assets, net
|
|
$ |
1,790 |
|
|
$ |
2,004 |
|
(1) The
mortgage collateralized by Lealand 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
$185,000 at September 30, 2009 and December 31, 2008. 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 and nine months ended September 30, 2009 and 2008:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
from operations of real estate
|
|
$ |
378 |
|
|
$ |
407 |
|
|
$ |
1,145 |
|
|
$ |
1,219 |
|
Mortgage
interest expense
|
|
|
(161 |
) |
|
|
(164 |
) |
|
|
(483 |
) |
|
|
(492 |
) |
Other
real estate operating expense
|
|
|
(194 |
) |
|
|
(189 |
) |
|
|
(610 |
) |
|
|
(564 |
) |
Depreciation
and amortization expense
|
|
|
(89 |
) |
|
|
(86 |
) |
|
|
(266 |
) |
|
|
(256 |
) |
Loss
from real estate operations, net
|
|
$ |
(66 |
) |
|
$ |
(32 |
) |
|
$ |
(214 |
) |
|
$ |
(93 |
) |
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 September 30, 2009,
the Company’s repurchase agreements had a weighted average remaining contractual
term of approximately three months and an effective repricing period of 14
months including the impact of related Swaps. At December 31, 2008,
the Company’s repurchase agreements had a weighted average remaining contractual
term of approximately four months and an effective repricing period of 16
months, including the impact of related Swaps.
The
following table presents contractual repricing information about the Company’s
repurchase agreements, which does not reflect the impact of Swaps that hedge
existing and forecasted repurchase agreements, at September 30, 2009 and
December 31, 2008:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Maturity
|
|
Balance (1)
|
|
|
Weighted
Average
Interest Rate
|
|
|
Balance
|
|
|
Weighted
Average
Interest
Rate
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
$ |
4,421,160 |
|
|
|
0.39 |
% |
|
$ |
4,999,858 |
|
|
|
2.66 |
% |
Over
30 days to 3 months
|
|
|
1,336,649 |
|
|
|
0.73 |
|
|
|
2,375,728 |
|
|
|
2.37 |
|
Over
3 months to 6 months
|
|
|
1,117,505 |
|
|
|
0.52 |
|
|
|
93,204 |
|
|
|
4.93 |
|
Over
6 months to 12 months
|
|
|
64,573 |
|
|
|
4.35 |
|
|
|
847,363 |
|
|
|
5.18 |
|
Over
12 months to 24 months
|
|
|
356,400 |
|
|
|
3.77 |
|
|
|
316,883 |
|
|
|
3.89 |
|
Over
24 months to 36 months
|
|
|
250,900 |
|
|
|
3.75 |
|
|
|
289,800 |
|
|
|
3.60 |
|
Over
36 months
|
|
|
28,100 |
|
|
|
3.25 |
|
|
|
116,000 |
|
|
|
4.09 |
|
Total
|
|
$ |
7,575,287 |
|
|
|
0.78 |
% |
|
$ |
9,038,836 |
|
|
|
2.94 |
% |
(1) At
September 30, 2009, the Company had repurchase agreements of $162.6
million 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)
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At
September 30, 2009, the Company’s amount at risk with each of its repurchase
agreement counterparties was less than 10% of stockholders’
equity. At September 30, 2009, the Company had MBS with fair value of
$8.193 billion pledged as collateral against its repurchase
agreements. At December 31, 2008, the Company had $9.856 billion
pledged as collateral against its repurchase agreements and held $22.6 million
of collateral pledged by its counterparties as a result of margin calls
initiated by the Company. (See Notes 4 and 8)
8. Collateral
Positions
The
Company pledges its MBS as collateral pursuant to its borrowings under
repurchase agreements, Swaps, and MBS Forwards. 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. 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. With respect to the Company’s MBS Forwards, only
collateral pledged in excess of the MBS that are part of the initial linked
transaction is considered pledged. At September 30, 2009, the Company
had not pledged any additional collateral in connection with its MBS
Forwards.
The
following table summarizes the fair value of the Company’s collateral positions,
which includes collateral pledged and collateral held, with respect to its
repurchase agreements and Swaps at September 30, 2009 and December 31,
2008:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
(In
Thousands)
|
|
Assets
Pledged
|
|
|
Collateral
Held
|
|
|
Assets
Pledged
|
|
|
Collateral
Held
|
|
Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
(1)
|
|
$ |
154,354 |
|
|
$ |
- |
|
|
$ |
170,953 |
|
|
$ |
- |
|
Cash
(2)
|
|
|
44,009 |
|
|
|
- |
|
|
|
70,749 |
|
|
|
- |
|
|
|
|
198,363 |
|
|
|
- |
|
|
|
241,702 |
|
|
|
- |
|
Repurchase
Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
(1)
|
|
$ |
8,193,081 |
|
|
$ |
- |
|
|
$ |
9,855,685 |
|
|
$ |
17,124 |
|
Cash
(2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,500 |
|
|
|
|
8,193,081 |
|
|
|
- |
|
|
|
9,855,685 |
|
|
|
22,624 |
|
Total
|
|
$ |
8,391,444 |
|
|
$ |
- |
|
|
$ |
10,097,387 |
|
|
$ |
22,624 |
|
(1) Although permitted to do so,
the Company had not repledged or sold any of the securities it held as
collateral at September 30, 2009, or December 31, 2008.
|
(2) Cash
held as collateral is reported as “cash and cash equivalents” and included
in “obligations to return cash and security collateral” on the Company's
consolidated balance sheets. Cash pledged as collateral is
reported as “restricted cash” on the Company’s consolidated balance
sheets.
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents detailed information about the Company's MBS pledged as
collateral pursuant to its repurchase agreements and Swaps at September 30,
2009:
|
|
MBS
Pledged Under Repurchase Agreements
|
|
|
MBS
Pledged Against Swaps
|
|
|
|
|
(In
Thousands)
|
|
Fair
Value/ Carrying Value
|
|
|
Amortized
Cost
|
|
|
Accrued
Interest on Pledged MBS
|
|
|
Fair
Value/ Carrying Value
|
|
|
Amortized
Cost
|
|
|
Accrued
Interest on Pledged
MBS
|
|
|
Total
Fair Value of MBS Pledged and Accrued Interest
|
|
Fannie
Mae
|
|
$ |
7,448,044 |
|
|
$ |
7,154,168 |
|
|
$ |
32,067 |
|
|
$ |
112,202 |
|
|
$ |
110,425 |
|
|
$ |
420 |
|
|
$ |
7,592,733 |
|
Freddie
Mac
|
|
|
536,702 |
|
|
|
519,025 |
|
|
|
4,696 |
|
|
|
29,775 |
|
|
|
29,400 |
|
|
|
188 |
|
|
|
571,361 |
|
Ginnie
Mae
|
|
|
12,208 |
|
|
|
11,948 |
|
|
|
44 |
|
|
|
12,377 |
|
|
|
12,165 |
|
|
|
46 |
|
|
|
24,675 |
|
Rated
AAA
|
|
|
28,433 |
|
|
|
39,796 |
|
|
|
185 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
28,618 |
|
Rated
A
|
|
|
12,060 |
|
|
|
14,197 |
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,105 |
|
Rated
BBB
|
|
|
26,011 |
|
|
|
34,144 |
|
|
|
110 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,121 |
|
Rated
CCC
|
|
|
7,738 |
|
|
|
11,349 |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,778 |
|
Rated
CC
|
|
|
98,714 |
|
|
|
134,338 |
|
|
|
685 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
99,399 |
|
Rated
C
|
|
|
23,171 |
|
|
|
34,334 |
|
|
|
177 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
23,348 |
|
Total
|
|
$ |
8,193,081 |
|
|
$ |
7,953,299 |
|
|
$ |
38,049 |
|
|
$ |
154,354 |
|
|
$ |
151,990 |
|
|
$ |
654 |
|
|
$ |
8,386,138 |
|
9. Commitments
and Contingencies
(a)
Lease Commitments
The
Company pays monthly rent pursuant to two separate operating
leases. The Company’s lease for its corporate headquarters in New
York, New York extends through April 30, 2017 and provides for aggregate cash
payments ranging over time from approximately $1.1 million to $1.4 million per
year, paid on a monthly basis, exclusive of escalation charges and landlord
incentives. In connection with this lease, the Company established a
$350,000 irrevocable standby letter of credit in lieu of lease security for the
benefit of the landlord through April 30, 2017. The letter of credit
may be drawn upon by the landlord in the event that the Company defaults under
certain terms of the lease. In addition, at September 30, 2009, the
Company had a lease through December 2011 for its off-site back-up facility
located in Rockville Centre, New York, which provides for, among other things,
rent of approximately $29,000 per year, paid on a monthly basis.
(b)
Securities Purchase Commitments
At
September 30, 2009, the Company had commitments to purchase two non-Agency MBS
with an estimated face value of $19.2 million at an estimated aggregate purchase
price of $14.5 million.
10. Stockholders’
Equity
(a)
Dividends on Preferred Stock
The
following table presents cash dividends declared by the Company on its preferred
stock, from January 1, 2008 through September 30, 2009:
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Cash
Dividend
Per
Share
|
|
August
21, 2009
|
|
September
1, 2009
|
|
September
30, 2009
|
|
$ |
0.53125 |
|
May
22, 2009
|
|
June
1, 2009
|
|
June
30, 2009
|
|
|
0.53125 |
|
February
20, 2009
|
|
March
2, 2009
|
|
March
31, 2009
|
|
|
0.53125 |
|
November
21, 2008
|
|
December
1, 2008
|
|
December
31, 2008
|
|
|
0.53125 |
|
August
22, 2008
|
|
September
2, 2008
|
|
September
30, 2008
|
|
|
0.53125 |
|
May
22, 2008
|
|
June
2, 2008
|
|
June
30, 2008
|
|
|
0.53125 |
|
February
21, 2008
|
|
March
3, 2008
|
|
March
31, 2008
|
|
|
0.53125 |
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b)
Dividends on Common Stock
The
Company typically declares quarterly cash dividends on its common stock in the
month following the close of each fiscal quarter, except that dividends for the
fourth quarter of each year are declared in that quarter for tax related
reasons. On October 1, 2009, the Company declared a $0.25 per share
dividend on its common stock for the quarter ended September 30, 2009, which was
paid on October 30, 2009 to stockholders of record on October 13,
2009. The following table presents cash dividends declared by the
Company on its common stock from January 1, 2008 through September 30,
2009:
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Cash
Dividend
Per
Share
|
|
July
1, 2009
|
|
July
13, 2009
|
|
July
31, 2009
|
|
$ |
0.250 |
|
April
1, 2009
|
|
April
13, 2009
|
|
April
30, 2009
|
|
|
0.220 |
|
December
11, 2008
|
|
December
31, 2008
|
|
January
30, 2009
|
|
|
0.210 |
|
October
1, 2008
|
|
October
14, 2008
|
|
October
31, 2008
|
|
|
0.220 |
|
July
1, 2008
|
|
July
14, 2008
|
|
July
31, 2008
|
|
|
0.200 |
|
April
1, 2008
|
|
April
14, 2008
|
|
April 30,
2008
|
|
|
0.180 |
|
(c)
Shelf Registrations
On
November 26, 2008, the Company filed a shelf registration statement on Form S-3
with the SEC under the Securities Act of 1933, as amended (the “1933 Act”), for
the purpose of registering additional common stock for sale through its Discount
Waiver, Direct Stock Purchase and Dividend Reinvestment Plan
(“DRSPP”). Pursuant to Rule 462(e) of the 1933 Act, this shelf
registration statement became effective automatically upon filing with the SEC
and, when combined with the unused portion of the Company’s previous DRSPP shelf
registration statements, registered an aggregate of 10.0 million shares of
common stock. At September 30, 2009, 9.3 million shares of common
stock remained available for issuance pursuant to the DRSPP shelf registration
statement.
On
October 19, 2007, the Company filed an automatic shelf registration statement on
Form S-3 with the SEC under the 1933 Act, with respect to common stock,
preferred stock, depositary shares representing preferred stock and/or warrants
that may be sold by the Company from time to time pursuant to Rule 415 of the
1933 Act. The number of shares of capital stock that may be issued
pursuant to this registration statement is limited by the number of shares of
capital stock authorized but unissued under the Company’s
charter. Pursuant to Rule 462(e) of the 1933 Act, this registration
statement became effective automatically upon filing with the SEC. On
November 5, 2007, the Company filed a post-effective amendment with the SEC to
this automatic shelf registration statement, which became effective upon
filing.
On
December 17, 2004, the Company filed a registration statement on Form S-8 with
the SEC under the 1933 Act for the purpose of registering additional common
stock for issuance in connection with the exercise of awards under the Company’s
2004 Equity Compensation Plan as amended and restated, (the “2004 Plan”), which
amended and restated the Company’s Second Amended and Restated 1997 Stock Option
Plan (the “1997 Plan”). This registration statement became effective
automatically upon filing with the SEC and, when combined with the previously
registered, but unissued, portions of the Company’s prior registration
statements on Form S-8 relating to awards under the 1997 Plan, related to an
aggregate of 3.5 million shares of common stock, of which 1.5 million shares
remained available for issuance at September 30, 2009.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(d)
Public Offerings of Common Stock
The table
below presents shares issued by the Company through public offerings for the
nine months ended September 30, 2009 and September 30, 2008:
Share
Issue Date
|
|
Shares
Issued
|
|
|
Offering
Price Per Share
|
|
|
Net
Proceeds
|
|
(In
Thousands, Except Per Share Amounts)
|
|
For
the Nine Months Ended September 30, 2009:
|
|
August
4, 2009
|
|
|
57,500 |
|
|
$ |
7.05 |
|
|
$ |
386,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, 2008:
|
|
June
3, 2008
|
|
|
46,000 |
|
|
$ |
6.95 |
|
|
$ |
304,264 |
|
January
23, 2008
|
|
|
28,750 |
|
|
$ |
9.25 |
|
|
$ |
253,030 |
|
(e)
DRSPP
The
Company’s DRSPP is designed to provide existing stockholders and new investors
with a convenient and economical way to purchase shares of common stock through
the automatic reinvestment of dividends and/or optional monthly cash
investments. During the three and nine months ended September 30,
2009, the Company issued 15,227 and 41,298 shares of common stock through the
DRSPP, raising net proceeds of $113,623 and $264,846. From the
inception of the DRSPP, in September 2003, through September 30, 2009, the
Company issued 14,048,414 shares pursuant to the DRSPP raising net proceeds of
$124.8 million.
(f)
Controlled Equity Offering Program
On August
20, 2004, the Company initiated a controlled equity offering program (the “CEO
Program”) through which it may, from time to time, publicly offer and sell
shares of common stock through Cantor Fitzgerald & Co. (“Cantor”) in
privately negotiated and/or at-the-market transactions. During the
nine months ended September 30, 2009, the Company issued 2,810,000 shares of
common stock (all of which were issued in January of 2009) in at-the-market
transactions through the CEO Program, raising net proceeds of
$16,355,764. In connection with such transactions, the Company paid
Cantor fees and commissions of $333,791. From inception of the CEO
Program through September 30, 2009, the Company issued 30,144,815 shares of
common stock in at-the-market transactions through such program raising net
proceeds of $194,908,570. In connection with such transactions, the
Company paid Cantor aggregate fees and commissions of
$4,189,247. Shares for the CEO Program are issued through the
automatic shelf registration statement on Form S-3 that was filed on October 19,
2007, as amended.
(g)
Stock Repurchase Program
On August
11, 2005, the Company announced the implementation of a stock repurchase program
(the “Repurchase Program”) to repurchase up to 4.0 million shares of its
outstanding common stock. Subject to applicable securities laws,
repurchases of common stock under the Repurchase Program are made at times and
in amounts as the Company deems appropriate, using available cash
resources. Shares of common stock repurchased by the Company under
the Repurchase Program are cancelled and, until reissued by the Company, are
deemed to be authorized but unissued shares of the Company’s common
stock.
On May 2,
2006, the Company announced an increase in the size of the Repurchase Program,
by an additional 3,191,200 shares of common stock, resetting the number of
shares of common stock that the Company is authorized to repurchase to 4.0
million shares, all of which remained authorized for repurchase at September 30,
2009. The Repurchase Program may be suspended or discontinued by the
Company at any time and without prior notice. The Company has not
repurchased any shares of its common stock under the Repurchase Program since
April 2006.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(h) Accumulated Other Comprehensive
Income/(Loss)
Accumulated
other comprehensive income/(loss) at September 30, 2009 and December 31, 2008
was as follows:
(In
Thousands)
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Available-for-sale
MBS:
|
|
|
|
|
|
|
Unrealized
gains
|
|
$ |
425,536 |
|
|
$ |
82,974 |
|
Unrealized
losses
|
|
|
(82,290 |
) |
|
|
(155,957 |
) |
|
|
|
343,246 |
|
|
|
(72,983 |
) |
Hedging
Instruments:
|
|
|
|
|
|
|
|
|
Unrealized
losses on Swaps, net
|
|
|
(178,353 |
) |
|
|
(237,291 |
) |
|
|
|
(178,353 |
) |
|
|
(237,291 |
) |
Accumulated
other comprehensive income/(loss)
|
|
$ |
164,893 |
|
|
$ |
(310,274 |
) |
11. EPS
Calculation
The
following table presents a reconciliation of the earnings and shares used in
calculating basic and diluted EPS for the three and nine months ended September
30, 2009 and 2008:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
Thousands, Except Per Share Amounts)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$ |
66,837 |
|
|
$ |
50,053 |
|
|
$ |
189,616 |
|
|
$ |
(852 |
) |
Dividends
declared on preferred stock
|
|
|
(2,040 |
) |
|
|
(2,040 |
) |
|
|
(6,120 |
) |
|
|
(6,120 |
) |
Net
income/(loss) to common stockholders for basic and diluted
earnings
per share
|
|
$ |
64,797 |
|
|
$ |
48,013 |
|
|
$ |
183,496 |
|
|
$ |
(6,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares for basic earnings per share
|
|
|
259,089 |
|
|
|
199,406 |
|
|
|
234,902 |
|
|
|
170,111 |
|
Weighted
average dilutive employee stock options (1)
|
|
|
247 |
|
|
|
443 |
|
|
|
165 |
|
|
|
- |
|
Denominator
for diluted earnings per share (1)
|
|
|
259,336 |
|
|
|
199,849 |
|
|
|
235,067 |
|
|
|
170,111 |
|
Basic
and diluted net earnings/(loss) per share
|
|
$ |
0.25 |
|
|
$ |
0.24 |
|
|
$ |
0.78 |
|
|
$ |
(0.04 |
) |
(1)
The impact of dilutive stock options is not included in the computation of
earnings per share for the nine months ended September 30, 2008, as their
inclusion would be
anti-dilutive.
|
12. Equity
Compensation, Employment Agreements and Other Benefit Plans
(a)
2004 Equity Compensation Plan
In
accordance with the terms of the 2004 Plan, directors, officers and employees of
the Company and any of its subsidiaries and other persons expected to provide
significant services for the Company and any of its subsidiaries are eligible to
receive grants of stock options (“Options”), restricted stock, RSUs, DERs and
other stock-based awards under the 2004 Plan.
Subject
to certain exceptions, stock-based awards relating to a maximum of 3.5 million
shares of common stock may be granted under the 2004 Plan; forfeitures and/or
awards that expire unexercised do not count towards such limit. At
September 30, 2009, approximately 1.5 million shares of common stock remained
available for grant in connection with stock-based awards under the 2004
Plan. A participant may generally not receive stock-based awards in
excess of 500,000 shares of common stock in any one-year and no award may be
granted to any person who, assuming exercise of all Options and payment of all
awards held by such person, would own or be deemed to own more than 9.8% of the
outstanding shares of the Company’s capital stock. Unless previously
terminated by the Company’s Board of Directors (the “Board”), awards may be
granted under the 2004 Plan until June 9, 2014. There were no
forfeitures of any equity based compensation awards during the quarter or year
to date periods ended September 30, 2009 and 2008.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A DER is
a right to receive a distribution equal to the dividend that would be paid on a
share of common stock. DERs may be granted separately or together
with other awards and are paid in cash or other consideration at such times, and
in accordance with such rules, as the Compensation Committee (the “Compensation
Committee”) of the Board shall determine at its
discretion. Distributions are made for DERs to the extent of ordinary
income and DERs are not entitled to distributions representing a return of
capital. Payments made on the Company’s DERs are charged to
stockholders’ equity when the common stock dividends are
declared. The Company made payments for DERs of approximately
$209,000 and $167,000 during the three months ended September 30, 2009 and 2008,
respectively, and approximately $568,000 and $504,000 during the nine months
ended September 30, 2009 and 2008, respectively. At September 30,
2009, the Company had 835,892 DERs outstanding, all of which were vested and
entitled to receive dividends.
Options
Pursuant
to Section 422(b) of the Code, in order for stock options granted under the 2004
Plan and vesting in any one calendar year to qualify as an incentive stock
option (“ISO”) for tax purposes, the market value of the Company’s common stock,
as determined on the date of grant, shall not exceed $100,000 during such
calendar year. The exercise price of an ISO may not be lower than
100% (110% in the case of an ISO granted to a 10% stockholder) of the fair
market value of the Company’s common stock on the date of grant. The
exercise price for any other type of Option issued may not be less than the fair
market value on the date of grant. Each Option is exercisable after
the period or periods specified in the award agreement, which will generally not
exceed ten years from the date of grant. Options will be exercisable
at such times and subject to such terms set forth in the related Option award
agreement, which terms are determined by the Compensation
Committee.
During
the nine months ended September 30, 2009, no Options expired or were granted and
100,000 Options were exercised. During the nine months ended
September 30, 2008, 75,000 Options expired, no Options were granted and 255,000
Options were exercised. At September 30, 2009, 532,000 Options were
outstanding under the 2004 Plan, all of which were vested and exercisable, with
a weighted average exercise price of $10.14. As of September 30,
2009, the aggregate intrinsic value of total Options outstanding was zero, as
all Options had exercise prices that exceeded the market price of the Company’s
common stock.
Restricted
Stock
The
Company awarded 75,000 and 99,478 shares of restricted common stock during the
three and nine months ended September 30, 2009, respectively, and awarded
175,000 and 193,311 shares of restricted common stock during the three and nine
months ended September 30, 2008, respectively. At September 30, 2009
and December 31, 2008, the Company had unrecognized compensation expense of $2.2
million and $2.1 million, respectively, related to the unvested shares of
restricted common stock. The Company had accrued dividends payable of
$205,000 and $34,000 on unvested shares of restricted stock at September 30,
2009 and December 31, 2008, respectively. The unrecognized
compensation expense at September 30, 2009 is expected to be recognized over a
weighted average period of 1.7 years.
Restricted
Stock Units
RSUs are
instruments that provide the holder with the right to receive, subject to the
satisfaction of conditions set by the Compensation Committee at the time of
grant, a payment of a specified value, which may be based upon the market value
of a share of the Company’s common stock, or such market value to the extent in
excess of an established base value, on the applicable settlement
date. The Company did not grant any RSUs during the three and nine
month periods ended September 30, 2009 or September 30, 2008. At
September 30, 2009, the Company had an aggregate of 326,392 outstanding RSUs,
with DERs attached which were subject to cliff vesting on December 31, 2010 or
earlier in the event of death or disability of the grantee or termination of an
employee for any reason, other than “cause,” as defined in the related RSU award
agreement. These RSUs will be settled in shares of the Company’s
common stock on the earlier of a termination of service, a change in control, or
on January 1, 2013. At September 30, 2009 and December 31, 2008, the
Company had unrecognized compensation expense of $1.1 million, and $1.8 million,
respectively, related to the unvested RSUs.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents the Company’s expenses related to its equity based
compensation instruments for the three and nine months ended September 30, 2009
and 2008:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Restricted
shares of common stock
|
|
$ |
192 |
|
|
$ |
82 |
|
|
$ |
645 |
|
|
$ |
276 |
|
RSUs
|
|
|
224 |
|
|
|
223 |
|
|
|
671 |
|
|
|
668 |
|
Total
|
|
$ |
416 |
|
|
$ |
305 |
|
|
$ |
1,316 |
|
|
$ |
944 |
|
(b)
Employment Agreements
At
September 30, 2009, the Company had an employment agreement with six of its
senior officers, with varying terms that provide for, among other things, base
salary, bonus and change-in-control payments upon provisions that are subject to
the occurrence of certain triggering events.
(c)
Deferred Compensation Plans
The
Company administers the “2003 Non-employee Directors’ Deferred Compensation
Plan” and the “Senior Officers Deferred Bonus Plan” (collectively, the “Deferred
Plans”). Pursuant to the Deferred Plans, participants may elect to
defer a certain percentage of their compensation. The Deferred Plans
are intended to provide participants with an opportunity to defer up to 100% of
certain compensation, as defined in the Deferred Plans, while at the same time
aligning their interests with the interests of the Company’s
stockholders.
Amounts
deferred are considered to be converted into “stock units” of the
Company. Stock units do not represent stock of the Company, but
rather are a liability of the Company that changes in value as would equivalent
shares of the Company’s common stock. Deferred compensation
liabilities are settled in cash at the termination of the deferral period, based
on the value of the stock units at that time. The Deferred Plans are
non-qualified plans under the Employee Retirement Income Security Act of 1974
and, as such, are not funded. Prior to the time that the deferred
accounts are settled, participants are unsecured creditors of the
Company.
The
Company’s liability for stock units in the Deferred Plans is based on the market
price of the Company’s common stock at the measurement date. The
following table presents the Company’s expenses related to its Deferred Plans
for its Directors and Officers for the three and nine months ended September 30,
2009 and 2008:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(In
Thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Addition
to/(reduction of) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
$ |
83 |
|
|
$ |
43 |
|
|
$ |
184 |
|
|
$ |
(154 |
) |
Officers
|
|
|
8 |
|
|
|
46 |
|
|
|
26 |
|
|
|
(47 |
) |
Total
|
|
$ |
91 |
|
|
$ |
89 |
|
|
$ |
210 |
|
|
$ |
(201 |
) |
The
following table presents the aggregate amount of income deferred by participants
of the Deferred Plans through September 30, 2009 and December 31, 2008 and the
Company’s associated liability under such plans at September 30, 2009 and
December 31, 2008:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
(In
Thousands)
|
|
Income
Deferred
|
|
|
Liability
Under
Deferred
Plans
|
|
|
Income
Deferred
|
|
|
Liability
Under
Deferred
Plans
|
|
Directors’
deferred
|
|
$ |
345 |
|
|
$ |
534 |
|
|
$ |
484 |
|
|
$ |
477 |
|
Officers’
deferred
|
|
|
26 |
|
|
|
47 |
|
|
|
153 |
|
|
|
138 |
|
Total
|
|
$ |
371 |
|
|
$ |
581 |
|
|
$ |
637 |
|
|
$ |
615 |
|
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(d)
Savings Plan
The
Company sponsors a tax-qualified employee savings plan (the “Savings Plan”), in
accordance with Section 401(k) of the Code. Subject to certain
restrictions, the Company’s employees are eligible to make tax deferred
contributions to the Savings Plan subject to limitations under applicable
law. Participant’s accounts are self-directed and the Company bears
the costs of administering the Savings Plan. The Company matches 100%
of the first 3% of eligible compensation deferred by employees and 50% of the
next 2%, subject to a maximum as provided by the Code. The Company
has elected to operate the Savings Plan under applicable safe harbor provisions
of the Code, whereby among other things, the Company must make contributions for
all participating employees and all matches contributed by the Company
immediately vest 100%. For the three months ended September 30, 2009
and 2008, the Company recognized expenses for matching contributions of $34,000
and $29,000, respectively, and $102,000 and $86,000 for the nine months ended
September 30, 2009 and 2008, respectively.
13. Fair
Value of Financial Instruments
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The three levels of valuation hierarchy are defined as
follows:
Level 1 – inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
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 the fair value
measurement.
The
Company has established and documented processes for determining fair
values. Fair value for the Company’s financial instruments is based
upon quoted market prices, where available. If listed prices or
quotes are not available, then fair value is based upon internally developed
models that primarily use inputs that are market-based or independently-sourced
market parameters, including interest rate yield curves.
The
following describes the valuation methodologies used for the Company’s financial
instruments measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy.
MBS
and Securities Held as Collateral
The
Company obtains valuations for its MBS, which are primarily comprised of Agency
ARM-MBS, and securities held as collateral (which, when held, are typically
comprised of Agency MBS) from a third-party pricing service that provides
pool-specific evaluations. The pricing service uses daily
To-Be-Announced (“TBA”) securities (TBA securities are liquid and have quoted
market prices and represent the most actively traded class of MBS) evaluations
from an ARM-MBS trading desk and Bond Equivalent Effective Margins (“BEEMs”) of
actively traded ARM-MBS. Based on government bond research,
prepayment models are developed for various types of ARM-MBS by the pricing
service. Using the prepayment speeds derived from the models, the
pricing service calculates the BEEMs of actively traded
ARM-MBS. These BEEMs are further adjusted by trader maintained matrix
based on other ARM-MBS characteristics such as, but not limited to, index, reset
date, collateral types, life cap, periodic cap, seasoning or age of
security. The pricing service determines prepayment speeds for a
given pool. Given the specific prepayment speed and the BEEM, the
corresponding evaluation for the specific pool is computed using a cash flow
generator with current TBA settlement day. The income approach
technique is then used for the valuation of the Company’s MBS.
The
evaluation methodology of the Company’s third-party pricing service incorporates
commonly used market pricing methods, including a spread measurement to various
indices such as the one-year constant maturity treasury and LIBOR, which are
observable inputs. The evaluation also considers the underlying
characteristics of each security, which are also observable inputs, including:
coupon; maturity date; loan age; reset date; collateral type; periodic and life
cap; geography; and prepayment speeds.
The
Company determines the fair value of its Agency MBS based upon prices obtained
from the pricing service, which are indicative of market activity. In
determining the fair value of its non-Agency MBS, management judgment is used to
arrive at fair value that considers prices obtained from the pricing service,
broker quotes received and other applicable market based data. If
listed prices or quotes are not available for a security, then fair value is
based upon internally developed models that primarily use observable
market-based inputs, in order to arrive at a fair value. In valuing
non-Agency MBS, the pricing service uses observable inputs that includes loan
delinquency data and credit enhancement levels and, assigns a structure to
various characteristics of the MBS and its deal structure to ensure that its
structural classification represents its behavior. Factors such as
vintage, credit enhancements and delinquencies are taken into account to assign
pricing factors such as spread and prepayment assumptions. For
tranches that are cross-collateralized, performance of all collateral groups
involved in the tranche are considered. The pricing service collects
and considers current market intelligence on all major markets including issuer
level information, benchmark security evaluations and bid-lists throughout the
day from various sources, if available. The Company’s MBS are valued
primarily based upon readily observable market parameters and, as such are
classified as Level 2 fair values.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MBS
Forwards
The
Company’s MBS Forwards are valued using a third-party pricing service for the
MBS component of the MBS Forward, which is then netted against the linked
repurchase agreement, at the valuation date. The MBS Forward value is
also increased by accrued interest receivable on the MBS and decreased by
accrued interest payable on the repurchase agreement. The Company's MBS
Forwards are classified as Level 2 fair values.
Swaps
The
Company’s Swaps are valued using a third-party pricing service, and such
valuations are tested with internally developed models that apply readily
observable market parameters. In valuing its Swaps,
the Company considers the credit worthiness of both the Company and its
counterparties, along with collateral provisions contained in each Swap
Agreement, from the perspective of both the Company and its
counterparties. At September 30, 2009, all of the Company’s Swaps
bilaterally provided for collateral, such that no credit related adjustment was
made in determining the fair value of Swaps. The Company’s Swaps are
classified as Level 2 fair values.
The
following table presents the Company’s financial instruments carried at fair
value as of September 30, 2009, on the consolidated balance sheet by the
valuation hierarchy, as previously described:
|
|
Fair
Value at September 30, 2009
|
|
(In
Thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$ |
- |
|
|
$ |
9,349,052 |
|
|
$ |
- |
|
|
$ |
9,349,052 |
|
MBS
Forwards
|
|
|
- |
|
|
|
53,459 |
|
|
|
- |
|
|
|
53,459 |
|
Total
assets carried at fair value
|
|
$ |
- |
|
|
$ |
9,402,511 |
|
|
$ |
- |
|
|
$ |
9,402,511 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$ |
- |
|
|
$ |
178,353 |
|
|
$ |
- |
|
|
$ |
178,353 |
|
Total
liabilities carried at fair value
|
|
$ |
- |
|
|
$ |
178,353 |
|
|
$ |
- |
|
|
$ |
178,353 |
|
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, the Company continues to refine its
valuation methodologies. The methods described above may produce a
fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. 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. The
Company reviews the classification of its financial instruments within the fair
value hierarchy on a quarterly basis, which could cause its financial
instruments to be reclassified to a different level.
MFA
FINANCIAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents the carrying value and estimated fair value of the
Company’s financial instruments, at September 30, 2009 and December 31,
2008:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
(In
Thousands)
|
|
Carrying
Value
|
|
|
Estimated
Fair
Value
|
|
|
Carrying
Value
|
|
|
Estimated Fair
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
$ |
9,349,052 |
|
|
$ |
9,349,052 |
|
|
$ |
10,122,583 |
|
|
$ |
10,122,583 |
|
Cash
and cash equivalents
|
|
|
486,695 |
|
|
|
486,695 |
|
|
|
361,167 |
|
|
|
361,167 |
|
Restricted
cash
|
|
|
44,009 |
|
|
|
44,009 |
|
|
|
70,749 |
|
|
|
70,749 |
|
MBS
Forwards
|
|
|
53,459 |
|
|
|
53,459 |
|
|
|
- |
|
|
|
- |
|
Securities
held as collateral
|
|
|
- |
|
|
|
- |
|
|
|
17,124 |
|
|
|
17,124 |
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
|
7,575,287 |
|
|
|
7,636,225 |
|
|
|
9,038,836 |
|
|
|
9,097,380 |
|
Mortgage
payable on real estate
|
|
|
9,184 |
|
|
|
9,262 |
|
|
|
9,309 |
|
|
|
9,462 |
|
Swaps
|
|
|
178,353 |
|
|
|
178,353 |
|
|
|
237,291 |
|
|
|
237,291 |
|
Obligations
to return cash and security collateral
|
|
|
- |
|
|
|
- |
|
|
|
22,624 |
|
|
|
22,624 |
|
In
addition to the methodology to determine the fair value of the Company’s
financial assets and liabilities reported at fair value, as previously
described, the following methods and assumptions were used by the Company in
arriving at the fair value of the Company’s other financial instruments
presented in the above table:
Cash and Cash Equivalents and
Restricted Cash: Cash and cash equivalents and restricted cash
are comprised of cash held in demand deposit accounts and high quality overnight
money market investments; such that their carrying value reflects their fair
value.
Repurchase Agreements:
Reflects the present value of the contractual cash flows discounted at
the estimated LIBOR based market interest rates at the valuation date for
repurchase agreements with a term equivalent to the term to maturity of the
Company’s repurchase agreements.
Mortgage Payable on Real
Estate: At September 30, 2009, the estimated fair value
reflects the principal balance of mortgage payable and the associated prepayment
penalty at such date. At December 31, 2008, the fair value of the
mortgage loan was based on the present value of the contractual cash flows of
the mortgage discounted at an estimated market interest rate that the Company
would expect to pay, if such mortgage obligation, based on the remaining terms,
were financed at the valuation date.
Obligations to Return Cash and
Security Collateral: Reflects the aggregate fair value of the
corresponding assets held by the Company as collateral.
Commitments: Commitments
to purchase securities are derived by applying the fees currently charged to
enter into similar agreements, taking into account remaining terms of the
agreements and the present credit worthiness of the
counterparties. The purchase commitments existing at September 30,
2009, would have been offered at substantially the same purchase price and under
substantially the same terms as those that existed at September 30, 2009, such
that the fair value of these commitments was zero at September 30, 2009, and are
not included in the above table. The Company did not have any
commitments to purchase MBS at December 31, 2008.
14. Subsequent
Event
On
October 1, 2009, the Company declared its third quarter 2009 dividend of $0.25
per share on its common stock to stockholders of record on October 13,
2009. The common stock dividends and related DERs totaled $70.2
million and were paid on October 30, 2009.
From
October 1, 2009 through November 4, 2009, the Company sold seven Agency MBS for
an aggregate sales price of $101.5 million, realizing gross gains of $4.5
million.
The
Company has evaluated subsequent events through November 4, 2009, which is the
date the financial statements were issued.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In
this quarterly report on Form 10-Q, we refer to MFA Financial, Inc. and its
subsidiaries as “we,” “us,” or “our,” unless we specifically state otherwise or
the context otherwise indicates.
The
following discussion should be read in conjunction with our financial statements
and accompanying notes included in Item 1 of this quarterly report on Form 10-Q
as well as our annual report on Form 10-K for the year ended December 31,
2008.
Forward
Looking Statements
When used
in this quarterly report on Form 10-Q, in future filings with the SEC or in
press releases or other written or oral communications, statements which are not
historical in nature, including those containing words such as “believe,”
“expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,”
“may” or similar expressions, are intended to identify “forward-looking
statements” within the meaning of Section 27A of the 1933 Act and Section 21E of
the Securities Exchange Act of 1934, as amended (or 1934 Act), and, as such, may
involve known and unknown risks, uncertainties and assumptions.
Statements
regarding the following subjects, among others, may be forward-looking: changes
in interest rates and the market value of our MBS; changes in the prepayment
rates on the mortgage loans securing our MBS; our ability to borrow to finance
our assets; implementation of or changes in government regulations or programs
affecting our business; our ability to maintain our qualification as a REIT for
federal income tax purposes; our ability to maintain our exemption from
registration under the Investment Company Act of 1940, as amended (or Investment
Company Act); and risks associated with investing in real estate assets,
including changes in business conditions and the general
economy. These and other risks, uncertainties and factors, including
those described in the annual, quarterly and current reports that we file with
the SEC, could cause our actual results to differ materially from those
projected in any forward-looking statements we make. All forward-looking
statements speak only as of the date they are made. New risks and
uncertainties arise over time and it is not possible 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.
Business/General
We are a
REIT primarily engaged in the business of investing, on a leveraged basis, in
ARM-MBS, which are primarily secured by pools of residential
mortgages. Our ARM-MBS consist primarily of Agency MBS and, to a
lesser extent, non-Agency MBS. Our principal business objective is to
generate net income for distribution to our stockholders resulting from the
difference between the interest and other income we earn on our investments and
the interest expense we pay on the borrowings that we use to finance our
investments and our operating costs.
At
September 30, 2009, we had total assets of approximately $9.999 billion, of
which $9.349 billion, or 93.5%, represented our MBS portfolio. At
such date, our MBS portfolio was comprised of $8.401 billion of Agency MBS and
$947.6 million of non-Agency MBS. Our remaining investment-related
assets were primarily comprised of cash and cash equivalents, restricted cash,
MBS Forwards, MBS-related receivables, and an investment in a multi-family
apartment property.
The
mortgages collateralizing our MBS portfolios predominantly include Hybrids and
ARMs and, to a lesser extent, fixed-rate mortgages. It is our
business strategy to hold our MBS as long-term investments. The
results of our business operations are affected by a number of factors, many of
which are beyond our control, and primarily depend on, among other things, the
level of our net interest income, the market value of our assets, the supply of,
and demand for, MBS in the market place, the terms and availability of adequate
financing, and the credit performance of our non-Agency MBS. Our net
interest income varies primarily as a result of changes in interest rates, the
slope of the yield curve (i.e., the differential between long-term and
short-term interest rates), borrowing costs (i.e., our interest expense) and
prepayment speeds on our MBS, the behavior of which involves various risks and
uncertainties. Interest rates and prepayment speeds, as measured by
the constant prepayment rate (or CPR), vary according to the type of investment,
conditions in the financial markets, competition and other factors, none of
which can be predicted with any certainty. With respect to our
business operations, increases in interest rates, in general, may over time
cause: (i) the interest expense associated with our repurchase
agreement borrowings to increase; (ii) the value of our MBS and,
correspondingly, our stockholders’ equity to decline; (iii) coupons on our MBS
to reset, although on a delayed basis, to higher interest rates; (iv)
prepayments on our MBS to slow, thereby slowing the amortization of our MBS
purchase premiums and accretion of purchase discounts; and (v) the value of our
Swaps and, correspondingly, our stockholders’ equity to
increase. Conversely, decreases in interest rates, in general, may
over time cause: (i) prepayments on our MBS to increase, thereby accelerating
the amortization of our MBS purchase premiums and accretion of purchase
discounts; (ii) the interest expense associated with our repurchase agreements
to decrease; (iii) the value of our MBS portfolio and, correspondingly, our
stockholders’ equity to increase; (iv) the value of our Swaps and,
correspondingly, our stockholders’ equity to decrease, and (v) coupons on our
MBS to reset, although on a delayed basis, to lower interest
rates. In addition, our borrowing costs and credit lines are further
affected by the type of collateral pledged and general conditions in the credit
market.
We rely
primarily on borrowings under repurchase agreements to finance the acquisition
of Agency MBS and, to a lesser extent, certain non-Agency MBS. Our
MBS have longer-term contractual maturities than our borrowings. Even
though most of our MBS have interest rates that adjust over time based on
short-term changes in corresponding interest rate indices (typically following
an initial fixed-rate period for our Hybrids), the interest we pay on our
borrowings may increase at a faster pace than the interest we earn on our
MBS. In order to reduce this interest rate risk exposure, we may
enter into hedging transactions, which were comprised entirely of Swaps for the
nine months ended September 30, 2009. Swaps, which are an integral
component of our financing strategy, are designated as cash-flow hedges against
a portion of our current and forecasted LIBOR-based repurchase
agreements. Our Swaps are expected to result in interest savings in a
rising interest rate environment and, conversely, in a declining interest rate
environment, result in us paying the stated fixed rate on each of our Swaps,
which could be higher than the market rate. During the quarter ended
September 30, 2009, we did not enter into any new Swaps and had Swaps with an
aggregate notional amount of $206.0 million expire.
As of
September 30, 2009, assuming a 15% CPR on our Agency MBS, which approximates the
speed which we estimate that these MBS generally prepay over time, approximately
26.9% of our Agency MBS assets were expected to reset or prepay during the next
12 months and a total of 85.7% of our Agency MBS were expected to reset or
prepay during the next 60 months, with an average time period until our assets
prepay or reset of approximately 31 months. At September 30, 2009,
our repurchase agreements secured by our Agency MBS were scheduled to reprice in
approximately 14 months on average, reflecting the impact of Swaps, resulting in
an asset/liability mismatch of approximately 17 months for our Agency MBS and
related repurchase agreements.
We
currently use repurchase financing on a limited portion of our non-Agency
MBS. All of the repurchase financing on our MFR MBS is considered
linked with the associated non-Agency MBS that were purchased during the three
months ended September 30, 2009. Our linked transactions are reported
net as MBS Forwards, which are assets on our consolidated balance
sheet. The changes in the fair value of our MBS Forward are reported
as a net gain on our statements of operations. As of September 30,
2009, the fair value of our non-Agency MBS portfolio reported on our balance
sheet was $947.6 million. In addition, we had non-Agency MBS held
through MFR of $215.2 million that were linked with repurchase agreements of
$162.6 million.
A
significant portion of our non-Agency MBS were purchased at a discount, a
portion of which is accreted into interest income over the life of the
security. The accretion of purchase discounts increases the yield on
such MBS above the stated coupon interest rate. As a result, our
non-Agency MBS that were purchased at a discount are less sensitive to changes
in interest rates than our MBS that were purchased at par or a premium to
par. The extent to which our yield is positively impacted by the
accretion of purchase discounts will vary over time by security based upon the
amount of purchase discount per security, the actual credit performance and CPRs
experienced on each MBS.
At
September 30, 2009, approximately $8.450 billion, or 90.4%, of our MBS portfolio
was in its contractual fixed-rate period and approximately $899.3 million, or
9.6%, was in its contractual adjustable-rate period. Our MBS in their
contractual adjustable-rate period primarily include MBS collateralized by
Hybrids for which the initial fixed-rate period has elapsed and the current
interest rate on such MBS is generally adjusted on an annual or semi-annual
basis.
We
continue to explore alternative business strategies, investments and financing
sources and other strategic initiatives, including, but not limited to, the
expansion of our investments in non-Agency MBS and our third-party advisory
services, the creation of new investment vehicles to manage MBS and/or other
real estate-related assets and the creation and/or acquisition of a third-party
asset management business to complement our core business strategy of investing,
on a leveraged basis, in high quality MBS. However, no assurance can
be provided that any such strategic initiatives will or will not be implemented
in the future or, if undertaken, that any such strategic initiatives will
favorably impact us.
Recent
Market Conditions and Our Strategy
The
current financial environment is driven by exceptional monetary
easing. Funding through repurchase agreements remains available to us
at attractive rates from multiple counterparties. However, we
continue to refrain from adding interest-rate sensitive Agency MBS at high
purchase premiums and historically low yields and instead are acquiring
non-Agency MBS at a discount. At September 30, 2009, our MFR MBS
portfolio was $743.8 million. In addition at September 30, 2009,
through MFR, we had non-Agency MBS of $215.2 million with linked repurchase
borrowings of $162.6 million that were reported net, as MBS Forwards on our
consolidated balance sheet. By blending non-Agency MBS with Agency
MBS, we seek to generate attractive returns with less leverage and less
sensitivity to yield curve and interest rate cycles. At September 30,
2009, we had borrowings under repurchase agreements with 18 counterparties and a
resulting debt-to-equity multiple of 3.4 times. This low leverage
multiple reflects the limited amount of leverage used to finance our MFR
MBS. Excluding $811.6 million of equity invested in MFR at September
30, 2009, our leverage multiple was 5.4 times. At September 30, 2009,
our liquidity position was $816.0 million, consisting of $486.7 million of cash
and cash equivalents, $235.1 million of unpledged Agency MBS and $94.2 of excess
collateral. In addition, at September 30, 2009, we had unpledged
non-Agency MBS with a fair value of $751.5 million.
The
following table presents certain benchmark interest rates at the dates
indicated:
Quarter
Ended
|
|
30-Day
LIBOR
|
|
|
Six-Month
LIBOR
|
|
|
12-Month
LIBOR
|
|
|
One-Year
CMT (1)
|
|
|
Two-Year
Treasury
|
|
|
10-Year
Treasury
|
|
|
Target
Federal Funds Rate/Range
|
|
September
30, 2009
|
|
|
0.25 |
% |
|
|
0.63 |
% |
|
|
1.26 |
% |
|
|
0.40 |
% |
|
|
0.96 |
% |
|
|
3.31 |
% |
|
|
0.00
- 0.25 |
% |
June
30, 2009
|
|
|
0.31 |
|
|
|
1.11 |
|
|
|
1.61 |
|
|
|
0.56 |
|
|
|
1.11 |
|
|
|
3.52 |
|
|
|
0.00
- 0.25 |
|
March
31, 2009
|
|
|
0.50 |
|
|
|
1.74 |
|
|
|
1.97 |
|
|
|
0.57 |
|
|
|
0.80 |
|
|
|
2.69 |
|
|
|
0.00
- 0.25 |
|
December
31, 2008
|
|
|
0.44 |
|
|
|
1.75 |
|
|
|
2.00 |
|
|
|
0.37 |
|
|
|
0.77 |
|
|
|
2.21 |
|
|
|
0.00
- 0.25 |
|
September
30, 2008
|
|
|
3.93 |
|
|
|
3.98 |
|
|
|
3.96 |
|
|
|
1.78 |
|
|
|
1.99 |
|
|
|
3.83 |
|
|
|
2.00 |
|
(1) CMT
- rate for one-year constant maturity
treasury.
|
The
market value of our Agency MBS continues to be positively impacted by the U.S.
Federal Reserve’s program to purchase $1.25 trillion of Agency MBS during
2009. These governmental purchases have increased market prices of
Agency MBS, thereby reducing their market yield. As a result, we
opportunistically sold 20 of our longest time-to-reset 10/1 Agency MBS, with an
amortized cost of $425.0 million, during the nine months ended September 30,
2009, all of which were sold during the second quarter. These sales,
which resulted in gains of $13.5 million, decreased our sensitivity to the
impact of potential increases in market interest rates in the
future.
From
November 2008 through September 30, 2009, we acquired $896.2 million of
non-Agency MBS, of which $216.6 million were determined to be part of linked
transactions during the quarter ended September 30, 2009, at a weighted average
purchase price of 60.1% of the face amount. At September 30, 2009,
the MFR MBS, including the MBS that are reported as part of linked transactions,
had weighted average structural credit enhancement of 10.6%. During
the three months ended September 30, 2009, we acquired non-Agency MBS at an
aggregate cost of $555.5 million (including linked MBS) at an average price to
par value of 67.4%, primarily funded with proceeds from our common stock
offering and linked borrowings under repurchase agreements of $162.6
million.
We are
exposed to credit risk in our non-Agency MBS portfolio. However, the
credit support built into MBS deal structures is designed to provide a level of
protection from potential credit losses. In addition, the discounted
purchase prices paid on the MFR MBS provide additional insulation from credit
losses in the event we receive less than 100% of par on such
assets. We evaluate credit risk on our investments through a
comprehensive selection process, which is predominantly focused on quantifying
and pricing credit risk. We review our non-Agency MBS based on
quantitative and qualitative analysis of the risk-adjusted returns on such
investments. We evaluate each investment’s credit risk through our
initial modeling and scenario analysis and on-going asset
surveillance. Nevertheless, unanticipated credit losses could occur,
adversely impacting our operating results.
Unlike
our Agency MBS, the yield on the MFR MBS are expected to increase if prepayment
rates on such assets exceed our prepayment assumptions, as purchase discounts
are accreted into income. During the nine months ended September 30,
2009, our non-Agency MBS portfolio earned $37.7 million, of which $25.3 million
was attributable to MFR MBS and $12.4 million was earned on our Legacy
non-Agency MBS. In addition, we had a net gain of $754,000 on our MBS
Forwards, all of which was attributable to MFR MBS purchased as part of a linked
transaction during the three months ended September 30, 2009. At
September 30, 2009, $947.6 million, or 10.1%, of our MBS portfolio, was invested
in non-Agency MBS, of which $743.8 million were MFR MBS and $203.8 million were
Legacy non-Agency MBS. In addition, we had forward contracts to
repurchase $215.2 million of MFR MBS that are accounted for as linked
transactions and reported as a component of our MBS Forwards.
Market
demand for non-Agency MBS has increased since the end of 2008 (and particularly
during the third quarter of 2009) and, as a result, the fair values of our
non-Agency MBS have increased. Accordingly, while non-Agency MBS
remain available at a discount, such discounts have narrowed relative to
discounts available earlier in 2009 and late 2008 and may continue to narrow in
the future, reducing the market yields on these assets. We are
positioned to continue to take advantage of the opportunities available from
investing in non-Agency MBS. Based on market conditions, we currently
anticipate allocating additional capital to invest in additional non-Agency MBS
over the remainder of 2009. However, we expect that the majority of
our assets will remain in whole-pool Agency MBS, due to the long-term
attractiveness of the asset class and for purposes of our exemption under the
Investment Company Act.
MFR
MBS
The
tables below present our MFR MBS, most of which are Senior MBS. (See
the tables on page 49 of this quarterly report on Form 10-Q for information
about our Senior MBS portfolio) Information presented with respect to
weighted average loan to value, weighted average FICO scores and other
information aggregated based on information reported at the time of mortgage
origination are historical and, as such, does not reflect the impact of the
general decline in home prices or any changes in a borrowers’ credit score or
the current use or status of the mortgaged property. The tables below
include non-Agency MBS with a fair value of $215.2 million that are accounted
for as linked transactions and reported as a component of our MBS
Forwards. Transactions that are currently linked may not be linked in
the future and, if no longer linked, will be included in our MBS
portfolio. In assessing our asset/liability management and
performance, we consider linked MBS as part of our MBS portfolio. As
such, we have included MBS that are a component of linked transactions in the
tables below.
The
following table presents certain information, detailed by year of initial MBS
securitization and FICO score, about the underlying loan characteristics of our
MFR MBS at September 30, 2009:
|
|
Securities
with Average Loan FICO
of
715 or Higher (1)
|
|
|
Securities
with Average Loan FICO
Below
715 (1)
|
|
|
|
|
Year
of Securitization (2)
|
|
2007
|
|
|
2006
|
|
|
2005
and
Prior
|
|
|
2007
|
|
|
2006
|
|
|
2005
and
Prior
|
|
|
Total
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of securities
|
|
|
25 |
|
|
|
37 |
|
|
|
27 |
|
|
|
7 |
|
|
|
13 |
|
|
|
2 |
|
|
|
111 |
|
MBS
current face
|
|
$ |
299,519 |
|
|
$ |
430,372 |
|
|
$ |
334,657 |
|
|
$ |
97,587 |
|
|
$ |
272,573 |
|
|
$ |
11,334 |
|
|
$ |
1,446,042 |
|
MBS
amortized cost
|
|
$ |
177,202 |
|
|
$ |
254,617 |
|
|
$ |
247,571 |
|
|
$ |
42,396 |
|
|
$ |
132,859 |
|
|
$ |
6,796 |
|
|
$ |
861,441 |
|
MBS
fair value
|
|
$ |
199,168 |
|
|
$ |
292,801 |
|
|
$ |
265,042 |
|
|
$ |
51,592 |
|
|
$ |
142,607 |
|
|
$ |
7,707 |
|
|
$ |
958,917 |
|
Weighted
average fair value
to
current face
|
|
|
66.5 |
% |
|
|
68.0 |
% |
|
|
79.2 |
% |
|
|
52.9 |
% |
|
|
52.3 |
% |
|
|
68.0 |
% |
|
|
66.3 |
% |
Weighted
average coupon (3)
|
|
|
5.67 |
% |
|
|
5.49 |
% |
|
|
4.67 |
% |
|
|
4.35 |
% |
|
|
2.51 |
% |
|
|
4.95 |
% |
|
|
4.69 |
% |
Weighted
average loan age
(months)
(3)
(4)
|
|
|
33 |
|
|
|
41 |
|
|
|
54 |
|
|
|
32 |
|
|
|
39 |
|
|
|
57 |
|
|
|
41 |
|
Weighted
average loan to
value
at origination (3)
(5)
|
|
|
71 |
% |
|
|
70 |
% |
|
|
69 |
% |
|
|
76 |
% |
|
|
74 |
% |
|
|
75 |
% |
|
|
71 |
% |
Weighted
average FICO score
at
origination (3)
(5)
|
|
|
734 |
|
|
|
732 |
|
|
|
735 |
|
|
|
708 |
|
|
|
704 |
|
|
|
707 |
|
|
|
726 |
|
Owner-occupied
loans
|
|
|
89.3 |
% |
|
|
87.2 |
% |
|
|
88.8 |
% |
|
|
84.9 |
% |
|
|
82.1 |
% |
|
|
82.1 |
% |
|
|
86.8 |
% |
Rate-term
refinancings
|
|
|
27.9 |
% |
|
|
19.8 |
% |
|
|
19.9 |
% |
|
|
24.3 |
% |
|
|
14.2 |
% |
|
|
10.5 |
% |
|
|
20.7 |
% |
Cash-out
refinancings
|
|
|
28.1 |
% |
|
|
30.8 |
% |
|
|
20.2 |
% |
|
|
33.0 |
% |
|
|
32.6 |
% |
|
|
29.3 |
% |
|
|
28.3 |
% |
3
Month CPR (4)
|
|
|
17.8 |
% |
|
|
16.7 |
% |
|
|
16.3 |
% |
|
|
15.6 |
% |
|
|
19.3 |
% |
|
|
21.2 |
% |
|
|
17.3 |
% |
60+
days delinquent (5)
|
|
|
19.8 |
% |
|
|
18.5 |
% |
|
|
10.1 |
% |
|
|
40.5 |
% |
|
|
35.2 |
% |
|
|
24.1 |
% |
|
|
21.5 |
% |
Credit
enhancement (5)
(6)
|
|
|
9.0 |
% |
|
|
11.0 |
% |
|
|
10.5 |
% |
|
|
12.7 |
% |
|
|
10.8 |
% |
|
|
19.0 |
% |
|
|
10.6 |
% |
(1)
|
FICO
score is a credit score used by major credit bureaus to indicate a
borrower’s credit worthiness. FICO scores are reported borrower
FICO scores at origination for each
loan.
|
(2)
|
Certain
of our non-Agency MBS have been re-securitized. The historical
information presented in the table is based on the initial securitization
date and data available at the time of original securitization (and not
the date of re-securitization). No information has been updated
with respect to any MBS that have been
re-securitized.
|
(3)
|
Weighted
average is based on MBS current face at September 30,
2009.
|
(4)
|
Information
provided is based on loans for individual group owned by
us.
|
(5)
|
Information
provided is based on loans for all groups that provide credit support for
our MBS.
|
(6)
|
Credit
enhancement for a particular security consists of all securities and/or
other credit support that absorb initial credit losses generated by a pool
of securitized loans before such losses affect the particular senior
security.
|
The
underlying Hybrid and ARMs collateralizing our MFR MBS are located in many
geographic regions across the United States. The following table
presents the six largest geographic concentrations of the mortgages
collateralizing these MBS, including linked MBS, at September 30,
2009:
Property
Location
|
|
Percent
|
Southern
California
|
|
|
28.8 |
% |
Northern
California
|
|
|
20.5 |
% |
Florida
|
|
|
7.8 |
% |
New
York
|
|
|
4.8 |
% |
Virginia
|
|
|
4.2 |
% |
Maryland
|
|
|
3.1 |
% |
Recent
Regulatory Developments
In March
2009, the U.S. Treasury, the Federal Deposit Insurance Corporation (or FDIC) and
the Federal Reserve announced the creation of the Public Private Investment
Program (or PPIP). The PPIP has two components: the Legacy Loans
Program (which has been temporarily postponed) and the Legacy Securities
Program. The Legacy Securities Program provides for joint public and
private investment funds (or PPIFs) to purchase legacy non-Agency residential
MBS, as well as commercial mortgage backed securities, that were originally
AAA-rated. Legacy Securities PPIFs have access to equity capital from
the U.S. Treasury, as well as debt financing provided by the U.S.
Government. In July 2009, the Treasury announced that it will invest
up to $30 billion in equity and debt issued by Legacy Securities PPIFs and
announced that it has selected nine asset managers to manage these
PPIFs. These nine asset managers have organized or are expected to
organize PPIFs to purchase, in partnership with private capital, Senior MBS as
well as other eligible assets. Two of these PPIFs closed their
initial capital raises of private equity on September 30, 2009. The
PPIFs established by these managers will increase the competition for Senior MBS
assets, which could cause prices of these assets to rise. Higher
prices means lower effective yields on available assets and potentially higher
values for our existing Senior MBS portfolio.
Further,
the Federal Reserve, the Federal Housing Administration and the FDIC have
stepped up implementation of programs, including the Home Affordable Mortgage
Modification Program (or HAMP), designed to provide homeowners with assistance
in avoiding residential mortgage loan foreclosures. These programs
may involve the modification of mortgage loans to reduce the principal amount of
the loans (through forbearance and/or forgiveness) or the rate of interest
payable on the loans, or may extend the payment terms of the
loans. According to a report released in October 2009 by the U.S.
Treasury, more than 85 percent of residential mortgages are covered by servicers
participating in HAMP. In general, these loan modification programs,
as well as future legislative or regulatory actions that result in the
modification of outstanding mortgage loans, may affect the value of, and the
returns on, our MBS portfolio. It should be noted, however, that to
the extent that theses modifications are successful and the borrowers do not
default on their mortgage obligations, the actual default rates realized on our
non-Agency MBS may be less than the default assumptions made by us at the
purchase of such non-Agency RMBS.
The U.S.
Government, Federal Reserve, U.S. Treasury, FDIC and other governmental and
regulatory bodies have taken or are considering taking other actions to address
the financial crisis. We are unable to 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.
Results
of Operations
Quarter
Ended September 30, 2009 Compared to the Quarter Ended September 30,
2008
For the
third quarter of 2009, we had net income available to our common stockholders of
$64.8 million, or $0.25 per common share, compared to a net income of $48.0
million, or $0.24 per common share for the third quarter of 2008.
Interest
income on our MBS portfolio for the third quarter of 2009 decreased by $15.0
million, or 10.8%, to $124.4 million compared to $139.4 million for the third
quarter of 2008. This decrease reflects the net impact of a decrease
in the average MBS portfolio and an increase in the net yield on our portfolio
to 5.43% for the quarter ended September 30, 2009 compared to 5.30% the quarter
ended September 30, 2008. Excluding changes in market values, our
average investment in MBS decreased by $1.366 billion, or 13.0%, to $9.165
billion for the quarter ended September 30, 2009 from $10.531 billion for the
quarter ended September 30, 2008. The increase in the net yield on
our MBS portfolio reflects the positive impact of our MFR MBS portfolio,
partially off-set by a decrease in the net yield on our Agency MBS portfolio, a
portion of which reset to lower market interest rates. Our MFR MBS
yielded 14.19% for the quarter ended September 30, 2009, while our Agency MBS
yield decreased to 4.93% for the quarter ended September 30, 2009 from 5.29% for
the quarter ended September 30, 2008. During 2009, the average net
purchase premiums on our MBS portfolio decreased significantly, as we continued
to purchase non-Agency MBS at a discount. During the three months
ended September 30, 2009, we recognized net premium amortization of $7.2
million, or 31 basis points, primarily against our Agency MBS portfolio, and
accreted purchased discounts of $6.5 million, or 28 basis points, primarily
against our MFR MBS portfolio. During the three months ended
September 30, 2008, we recognized net premium amortization of $4.4 million,
comprised of premium amortization of $4.5 million and discount accretion of
$61,000. At September 30, 2009, we had net purchase premiums of
$106.7 million, or 1.3% of current par value, on our Agency MBS and net purchase
discounts of $550.2 million on our non-Agency MBS portfolio, including purchase
credit discounts of $411.1 million, which are generally not expected to be
accreted into interest income. Our average CPR for the quarter ended
September 30, 2009, increased to 20.2% from 10.3% for the quarter ended
September 30, 2008.
The
following table presents the components of the net yield earned on our MBS
portfolios and CPRs experienced for the quarterly periods
presented:
Quarter
Ended
|
|
Gross
Yield/Stated Coupon
|
|
|
Net
Premium Amortization
|
|
|
Other
(1)
|
|
|
Net
Yield
|
|
|
CPR
|
|
September
30, 2009
|
|
|
5.37 |
% |
|
|
(0.03 |
)% |
|
|
0.09 |
% |
|
|
5.43 |
% |
|
|
20.2 |
% |
June
30, 2009
|
|
|
5.46 |
|
|
|
(0.15 |
) |
|
|
(0.04 |
) |
|
|
5.27 |
|
|
|
16.0 |
|
March
31, 2009
|
|
|
5.50 |
|
|
|
(0.17 |
) |
|
|
(0.10 |
) |
|
|
5.23 |
|
|
|
12.2 |
|
December
31, 2008
|
|
|
5.54 |
|
|
|
(0.14 |
) |
|
|
(0.11 |
) |
|
|
5.29 |
|
|
|
8.5 |
|
September
30, 2008
|
|
|
5.58 |
|
|
|
(0.17 |
) |
|
|
(0.11 |
) |
|
|
5.30 |
|
|
|
10.3 |
|
(1)
Reflects the cost of delay in receiving principal on the MBS and the
(cost)/benefit to carry purchase (premiums)/discounts,
respectively.
|
The
following table presents information about income generated from each of our MBS
portfolio groups during the quarters ended September 30, 2009 and September 30,
2008:
MBS
Category
|
|
Average
Amortized
Cost
|
|
|
Coupon
Interest
|
|
|
Net
(Premium
Amortization)/Discount
Accretion
|
|
|
Interest
Income
|
|
|
Net
Asset
Yield
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
MBS
|
|
$ |
8,403,474 |
|
|
$ |
110,787 |
|
|
$ |
(7,226 |
) |
|
$ |
103,561 |
|
|
|
4.93 |
% |
MFR
MBS (1)
|
|
|
474,268 |
|
|
|
10,435 |
|
|
|
6,386 |
|
|
|
16,821 |
|
|
|
14.19 |
|
Legacy
non-Agency MBS
|
|
|
287,525 |
|
|
|
3,914 |
|
|
|
103 |
|
|
|
4,017 |
|
|
|
5.59 |
|
Total
|
|
$ |
9,165,267 |
|
|
$ |
125,136 |
|
|
$ |
(737 |
) |
|
$ |
124,399 |
|
|
|
5.43 |
% |
Quarter
Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
MBS
|
|
$ |
10,193,720 |
|
|
$ |
139,179 |
|
|
$ |
(4,398 |
) |
|
$ |
134,781 |
|
|
|
5.29 |
% |
MFR
MBS
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Legacy
non-Agency MBS
|
|
|
337,202 |
|
|
|
4,665 |
|
|
|
(27 |
) |
|
|
4,638 |
|
|
|
5.50 |
|
Total
|
|
$ |
10,530,922 |
|
|
$ |
143,844 |
|
|
$ |
(4,425 |
) |
|
$ |
139,419 |
|
|
|
5.30 |
% |
(1) Does
not include linked MBS with a fair value of $215.2 million. Had
the linked MFR MBS not been a linked transaction, our MFR MBS would have
had an average amortized cost of $540.9 million, coupon interest of $11.3
million, discount accretion of $6.6 million, interest income of $17.9
million, and a net asset yield of 13.29%. (See Note 4 to the
accompanying consolidated financial statements, included under Item 1 of
this quarterly report on Form
10-Q.)
|
Interest
income from our cash investments, which are comprised of high quality money
market investments, decreased by $1.4 million to $149,000 for the third quarter
of 2009, from $1.5 million for the third quarter of 2008. This
decrease is attributable to the significant decrease in the yield earned on our
cash investments to 0.13% for the third quarter of 2009 compared to 2.16% for
the third quarter of 2008, reflecting significant decreases in market interest
rates. During the third quarter of 2009, we raised net proceeds of
$386.7 million through a public offering of our common stock. This transaction
temporarily increased our cash investments during the third quarter of
2009. In general, we manage our cash investments relative to our
investing, financing and operating requirements, investment opportunities and
current and anticipated market conditions.
The
decrease in the cost of our borrowings under repurchase agreements for the third
quarter of 2009 reflects the significant decreases in market interest rates and
the decrease in our average borrowings. Our interest expense for the
third quarter of 2009 decreased by 37.7% to $53.0 million, from $85.0 million
for the third quarter of 2008, reflecting the significant decrease in the
interest rates paid on our repurchase agreements and a 17.1% decrease in our
average borrowings for the current quarter. Our average repurchase
agreements for the third quarter of 2009 were $7.775 billion, compared to $9.374
billion for the third quarter of 2008. We experienced a 90 basis
point decrease in our effective cost of borrowing to 2.70% for the quarter ended
September 30, 2009 from 3.60% for the quarter ended September 30,
2008. Payments made, and/or received, on our Swaps are a component of
our borrowing costs and accounted for interest expense of $32.2 million, or 163
basis points, for the quarter ended September 30, 2009, compared to interest
expense of $15.9 million, or 67 basis points, for the third quarter of
2008. At September 30, 2009, we had repurchase agreements of $162.6
million that were a component of a linked transaction and, as such, are not
included in our borrowings under repurchase agreements. (See Note 4
to the accompanying consolidated financial statements, included under Item 1of
this quarterly report on Form 10-Q.)
Our cost
of funding on the hedged portion of our borrowings is in effect fixed over the
term of the related Swap. As a result, the interest expense on hedged repurchase
agreements has not decreased in connection with recent declines in market
interest rates, reflecting the fixed rate stated in our Swap
agreements. At September 30, 2009, we had repurchase agreements of
$7.575 billion, of which $3.314 billion was hedged with Swaps. At
September 30, 2009, our Swaps had a weighted average fixed-pay rate of 4.24% and
extended 25 months on average with a maximum term of approximately six
years. (See Notes 4 and 7 to the accompanying consolidated financial
statements, included under Item 1 of this quarterly report on Form
10-Q.)
For the
third quarter of 2009, our net interest income increased by $15.7 million, or
28.0%, to $71.6 million from $55.9 million for the third quarter of
2008. This increase reflects the improvement in our net interest
spread, reflecting reduced borrowing costs and the positive impact of our MFR
MBS portfolio, a significant portion of which were not leveraged. Our
third quarter 2009 net interest spread and margin were 2.48% and 3.00%,
respectively, compared to a net interest spread and margin of 1.61% and 2.09%,
respectively, for the third quarter of 2008.
The
following table presents certain quarterly information regarding our net
interest spreads and net interest margin for the quarterly periods
presented:
|
|
Total
Interest-Earning Assets and Interest-Bearing Liabilities
|
|
|
MBS
Only
|
|
Quarter
Ended
|
|
Net
Interest Spread
|
|
|
Net
Interest Margin (1)
|
|
|
Net
Yield on MBS
|
|
|
Cost
of Funding MBS
|
|
|
Net
MBS Spread
|
|
September
30, 2009
|
|
|
2.48 |
% |
|
|
3.00 |
% |
|
|
5.43 |
% |
|
|
2.70 |
% |
|
|
2.73 |
% |
June
30, 2009
|
|
|
2.31 |
|
|
|
2.75 |
|
|
|
5.27 |
|
|
|
2.78 |
|
|
|
2.49 |
|
March
31, 2009
|
|
|
1.77 |
|
|
|
2.26 |
|
|
|
5.23 |
|
|
|
3.26 |
|
|
|
1.97 |
|
December
31, 2008
|
|
|
1.37 |
|
|
|
1.91 |
|
|
|
5.29 |
|
|
|
3.82 |
|
|
|
1.47 |
|
September
30, 2008
|
|
|
1.61 |
|
|
|
2.09 |
|
|
|
5.30 |
|
|
|
3.60 |
|
|
|
1.70 |
|
(1) Net
interest income divided by average interest-earning
assets.
|
The
following table presents information regarding our average balances, interest
income and expense, yields on average interest-earning assets, average cost of
funds and net interest income for the quarters presented:
Quarter
Ended
|
|
Average
Amortized Cost of
MBS (1)
|
|
|
Interest
Income on MBS
|
|
|
Average
Interest Earning Cash (2)
|
|
|
Total
Interest Income
|
|
|
Yield
on Average Interest-Earning Assets
|
|
|
Average
Balance of Repurchase Agreements
|
|
|
Interest
Expense
|
|
|
Average
Cost of Funds
|
|
|
Net
Interest Income
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009 (3)
|
|
$ |
9,165,267 |
|
|
$ |
124,399 |
|
|
$ |
437,444 |
|
|
$ |
124,548 |
|
|
|
5.18 |
% |
|
$ |
7,774,620 |
|
|
$ |
52,976 |
|
|
|
2.70 |
% |
|
$ |
71,572 |
|
June
30, 2009
|
|
|
9,604,374 |
|
|
|
126,477 |
|
|
|
358,343 |
|
|
|
126,737 |
|
|
|
5.09 |
|
|
|
8,369,408 |
|
|
|
58,006 |
|
|
|
2.78 |
|
|
|
68,731 |
|
March
31, 2009
|
|
|
10,107,407 |
|
|
|
132,153 |
|
|
|
457,953 |
|
|
|
132,764 |
|
|
|
5.03 |
|
|
|
8,984,456 |
|
|
|
72,137 |
|
|
|
3.26 |
|
|
|
60,627 |
|
December
31, 2008
|
|
|
10,337,787 |
|
|
|
136,762 |
|
|
|
284,178 |
|
|
|
137,780 |
|
|
|
5.19 |
|
|
|
9,120,214 |
|
|
|
87,522 |
|
|
|
3.82 |
|
|
|
50,258 |
|
September
30, 2008
|
|
|
10,530,924 |
|
|
|
139,419 |
|
|
|
281,376 |
|
|
|
140,948 |
|
|
|
5.21 |
|
|
|
9,373,968 |
|
|
|
85,033 |
|
|
|
3.60 |
|
|
|
55,915 |
|
(1) Unrealized
gains and losses are not reflected in the average amortized cost of
MBS.
|
(2) Includes
average interest earning cash, cash equivalents and restricted
cash.
|
(3) The
information for the quarter ended September 30, 2009, does not include the
MBS or repurchase agreements that are accounted for as linked
transactions.
|
For the
quarter ended September 30, 2009, our net other operating income of $1.1 million
was comprised of a net gain of $754,000 from MBS Forwards and revenue of
$378,000 from our operations of our one remaining real estate
property. Beginning in the third quarter of 2009, certain of our MBS
purchases and related repurchase financings were accounted for as linked
transactions, where the purchase of the MBS and the financing under a repurchase
agreement is accounted for as a net derivative. While this net
treatment does not change the economic substance of these transactions over
time, the presentation in our financial statements differs from that of typical
MBS purchases and repurchase agreement financings. Our linked
transactions, where we purchased and financed the MBS with the same
counterparty, are reported as MBS Forwards on our consolidated balance
sheet. Changes in the fair value of MBS Forwards are reported as a
gain or loss through earnings. During the quarter ended September 30,
2009, we recognized a net gain of $754,000 in connection with our MBS Forwards,
comprised of gross gains of $958,000 and gross losses of $205,000 on 14 MBS
Forwards. For the three months ended September 30, 2008, we had
$407,000 of revenue from real estate operations and experienced a loss of
$986,000 from an early termination of two Swaps in connection with the
bankruptcy of Lehman Brothers Holding, Inc.
We did
not recognize any other-than-temporary impairments during the three months ended
September 30, 2009. For the quarter ended September 30, 2008, we
recognized an other-than-temporary impairment of $183,000 in connection with one
of our non-Agency (which was not a Senior MBS) that was rated BB at the time of
impairment.
For the
third quarter of 2009, we had operating and other expenses of $5.9 million,
including real estate operating expenses and mortgage interest totaling
$444,000. For the third quarter of 2009, our compensation and
benefits and other general and administrative expense were $5.4 million, or
0.22% of average assets, compared to $4.7 million, or 0.18% of average assets,
for the third quarter of 2008. The $446,000 increase in our employee
compensation and benefits expense for the third quarter of 2009 compared to the
third quarter of 2008, reflects increases to our contractual and general bonus
pool accrual, higher salary expense reflecting additional hires, primarily
related to our strategy of investing in non-Agency MBS, salary increases, and
the vesting of equity based compensation awards. Our other general
and administrative expenses, which are comprised primarily of the cost of
professional services, including auditing and legal fees, costs of complying
with the provisions of the Sarbanes-Oxley Act of 2002, office rent, corporate
insurance, data and analytical systems, Board fees and miscellaneous other
operating costs, increased to $1.7 million for the third quarter of 2009 from
$1.5 million for the third quarter of 2008. The increase in these costs
primarily reflects the cost of expanding our investment analytic capability and
data system upgrades, the mark to market impact of the Deferred Plan for the
Board, which expense varies in accordance with the market performance of our
common stock, and Board directed consulting fees.
Nine-Month
Period Ended September 30, 2009 Compared to the Nine-Month Period Ended
September 30, 2008
For the
nine months ended September 30, 2009, we had net income available to our common
stockholders of $183.5 million, or $0.78 per common share, compared to a net
loss of $7.0 million, or $(0.04) per common share for the nine months ended
September 30, 2008.
Interest
income on our MBS portfolio for the nine months ended September 30, 2009
remained relatively flat at $383.0 million earned during both the first nine
months of 2009 and 2008. Our interest income on MBS has remained
unchanged as our MBS portfolio has grown, and the net yield on such portfolio
has declined. Excluding changes in market values, our average
investment in MBS increased by $192.4 million, or 2.0%, to $9.622 billion for
the first nine months of 2009 from $9.430 billion for the first nine months of
2008. The net yield on our MBS portfolio decreased by 11 basis
points, to 5.31% for the first nine months of 2009 compared to 5.42% for the
first nine months of 2008. This decrease in the net yield on our MBS
portfolio primarily reflects the net impact of a 34 basis point decrease in the
net yield on our Agency MBS portfolio that was partially offset by the positive
impact of the 14.37% yield on our MFR MBS. The decrease in the net
yield on our Agency MBS portfolio reflects the general decline in market
interest rates. As market interest rates decreased, prepayments on our Agency
MBS increased, accelerating amortization of purchase premiums, and our assets
scheduled to adjust reset to lower market rates. During the nine
months ended September 30, 2009, the average net purchase premiums on our MBS
portfolio decreased significantly, as we continued to purchase non-Agency MBS
through MFR at a discount. We recognized premium amortization of
$17.8 million, or 25 basis points, primarily against our Agency and Legacy
non-Agency MBS portfolio, and accreted purchase discounts of $9.3 million, or 13
basis points, primarily against our MFR MBS, during the nine months ended
September 30, 2009. During the nine months ended September 30, 2008,
we recognized net premium amortization of $15.3 million, comprised of gross
premium amortization of $15.5 million and gross discount accretion of
$214,000. Our average CPR for the nine months ended September 30,
2009 was 16.0% compared to 13.2% for the first nine months of
2008. At September 30, 2009, we had net purchase premiums of $106.7
million, or 1.3% of current par value, on our Agency MBS and net purchase
discounts of $550.2 million, or 37.1%, including purchase credit discounts of
$411.1 million, on our non-Agency MBS, which discounts were primarily on our MFR
MBS portfolio.
The
following table presents information about income generated from each of our
investment security categories during the nine months ended September 30, 2009
and September 30, 2008:
|
|
Average
Amortized
Cost
|
|
|
Coupon
Interest
|
|
|
Net
(Premium
Amortization)/
Discount
Accretion
|
|
|
Interest
Income
|
|
|
Net
Asset
Yield
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
MBS
|
|
$ |
9,084,417 |
|
|
$ |
363,083 |
|
|
$ |
(17,771 |
) |
|
$ |
345,312 |
|
|
|
5.07 |
% |
MFR
MBS (1)
|
|
|
234,633 |
|
|
|
16,060 |
|
|
|
9,227 |
|
|
|
25,287 |
|
|
|
14.37 |
|
Legacy
non-Agency MBS
|
|
|
303,251 |
|
|
|
12,353 |
|
|
|
77 |
|
|
|
12,430 |
|
|
|
5.47 |
|
Total
|
|
$ |
9,622,301 |
|
|
$ |
391,496 |
|
|
$ |
(8,467 |
) |
|
$ |
383,029 |
|
|
|
5.31 |
% |
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
MBS
|
|
$ |
9,059,886 |
|
|
$ |
382,750 |
|
|
$ |
(15,173 |
) |
|
$ |
367,577 |
|
|
|
5.41 |
% |
MFR
MBS
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Legacy
non-Agency MBS and other
|
|
|
370,037 |
|
|
|
15,611 |
|
|
|
(162 |
) |
|
|
15,449 |
|
|
|
5.57 |
|
Total
|
|
$ |
9,429,923 |
|
|
$ |
398,361 |
|
|
$ |
(15,335 |
) |
|
$ |
383,026 |
|
|
|
5.42 |
% |
(1)
Does not include linked MBS with a fair value of $215.2 million at
September 30, 2009. Had the linked MFR MBS not been a linked
transaction, our MFR MBS would have had an average amortized cost of
$257.1 million, coupon interest of $17.0 million, discount accretion of
$9.4 million, interest income of $26.4 million and a net asset yield of
13.71%. (See Note 4 to the accompanying consolidated financial
statements, included under Item 1 of this quarterly report on Form
10-Q.)
|
|
Interest
income from our cash investments decreased by $5.7 million to $1.0 million for
the first nine months of 2009 from $6.7 million for the first nine months of
2008. Our average cash investments increased to $417.8 million and
yielded 0.33% for the first nine months of 2009 compared to $334.7 million
yielding 2.68% for the first nine months of 2008. In general, we
manage our cash investments relative to our investing, financing and operating
requirements, investment opportunities and current and anticipated market
conditions. During the quarter ended September 30, 2009, we raised
net proceeds of $386.7 million through a public offering of our common stock.
The cash proceeds of this transaction were temporarily held in cash investments
until invested in non-Agency MBS. The yield on our cash investments
generally follows the direction of the target federal funds rate, which has
remained at a range of 0% to 0.25% since December 2008.
Our
interest expense for the first nine months of 2009 decreased by $72.1 million,
or 28.2%, to $183.1 million, from $255.2 million for the first nine months of
2008, reflecting the decrease in short-term interest rates and slight decrease
in our average borrowing. We experienced a 109 basis point decrease
in the cost of our borrowings to 2.92% for the first nine months of 2009, from
4.01% for the first nine months of 2008. The average amount
outstanding under our repurchase agreements for the first nine months of 2009
was $8.372 billion compared to $8.495 billion for the first nine months of 2008,
reflecting our increased emphasis on purchasing non-Agency
MBS. Payments made/received on our Swaps are a component of our
borrowing costs. Swaps accounted for interest expense of $88.4
million, or 141 basis points, for the first nine months of 2009 and $39.8
million, or 63 basis points, for the first nine months of 2008. (See
Notes 2(l) and 4 to the accompanying consolidated financial statements, included
under Item 1.)
For the
nine months ended September 30, 2009, our net interest income increased by $66.3
million to $200.9 million from $134.6 million for the first nine months of
2008. This increase reflects an improvement in our net interest
spread as MBS yields relative to our cost of funding widened due to declining
interest rates and the accretive impact of our MFR MBS. Our net
interest spread and margin were 2.18% and 2.66%, respectively, for the nine
months ended September 30, 2009, compared to 1.31% and 1.83%, respectively, for
the first nine months of 2008.
For the
first nine months of 2009, we had net other operating income of $15.4 million,
which was primarily comprised of gains of $13.5 million realized on the second
quarter sale of 20 of our longer-term Agency MBS for $438.5 million and net
gains of $754,000 on our MBS Forwards. Our net other operating loss
of $115.5 million for the first nine months of 2008 reflects losses of $116.0
million incurred in March 2008 to implement our reduced-leverage strategy in
response to the significant disruptions in the credit market. To
reduce leverage, we sold 84 MBS for $1.851 billion, resulting in net losses of
$24.5 million and terminated 48 Swaps with an aggregate notional amount of
$1.637 billion, realizing losses of $91.5 million. In addition,
during the three months ended September 30, 2008, we realized a loss of $986,000
for two Swaps that were terminated in connection with the bankruptcy of Lehman
Brothers.
During
the first nine months of 2009, we recognized net impairment losses of $9.0
million in connection with certain non-Agency MBS that we acquired prior to July
2007. These other-than-temporary impairments were comprised of $7.5
million of impairments recognized at June 30, 2009 against four Legacy
non-Agency MBS, which were Senior MBS, and impairments of $1.5 million
recognized at March 31, 2009 against five junior non-Agency MBS. The
Senior MBS had an aggregate amortized cost of $188.1 million prior to
recognizing the impairments and the junior non-Agency MBS had an amortized cost
of $1.7 million prior to recognizing the impairments. During the nine
months ended September 30, 2008, we recognized other-than-temporary impairment
charges of $5.1 million primarily against our unrated MBS; following these
impairment charges, all of our unrated MBS were carried at zero.
During
the first nine months of 2009, we had operating and other expenses of $17.7
million, including real estate operating expenses and mortgage interest totaling
$1.4 attributable to our remaining real estate investment. For the
first nine months of 2009, our compensation and benefits and other general and
administrative expense, totaled $16.4 million, or 0.21% of average assets, while
compensation and benefits and other general and administrative expense, totaled
$12.5 million, or 0.17% of average assets, for the first nine months of
2008. During the first nine months of 2008, we also incurred expenses
of $998,000 in connection with a previously planned public offering for
MFResidential Investments, Inc. The $2.2 million increase in our
compensation expense to $10.8 million for the first nine months of 2009 compared
to $8.6 million for the first nine months of 2008, primarily reflects an
increase to our contractual and general bonus pool accrual, higher salary
expense reflecting additional hires primarily related to our strategy of
investing in non-Agency MBS, salary increases, and vesting of equity based
compensation awards. Other general and administrative expenses, which
were $5.6 million for the first nine months of 2009 compared to $3.9 million for
the first nine months of 2008, were comprised primarily of the cost of
professional services, including auditing and legal fees, costs of complying
with the provisions of the Sarbanes-Oxley Act of 2002, office rent, corporate
insurance, data and analytical systems, Board fees and miscellaneous other
operating costs. The increase in these costs primarily reflects
expenses to expand our investment analytic capability and data system
upgrades.
Liquidity
and Capital Resources
Our
principal sources of cash generally consist of borrowings under repurchase
agreements, payments of principal and interest we receive on our MBS portfolio,
cash generated from our operating results and, depending on market conditions,
proceeds from capital market transactions. Our most significant use
of cash is typically to repay principal and pay interest on our repurchase
agreements, to purchase MBS, to make dividend payments on our capital stock, to
fund our operations and to make other investments that we consider
appropriate.
We employ
a diverse capital raising strategy under which we may issue capital
stock. During the nine months ended September 30, 2009, we issued
60.5 million shares of common stock, of which 57.5 million shares were issued
through a public offering completed in early August, 2.8 million shares were
issued pursuant to our CEO Program in at-the-market transactions, and 41,298
shares were issued pursuant to our DRSPP. Through these issuances, we
raised aggregate net proceeds of $403.3 million during the first nine months of
2009. At September 30, 2009, we had the ability to issue an unlimited
amount (subject to the terms of our charter) of common stock, preferred stock,
depositary shares representing preferred stock and/or warrants pursuant to our
automatic shelf registration statement on Form S-3 and 9.3 million shares of
common stock available for issuance pursuant to our DRSPP shelf registration
statement on Form S-3.
To the
extent we issue additional equity through capital market transactions, we
currently anticipate using cash raised from such transactions to purchase
additional MBS, to make scheduled payments of principal and interest on our
repurchase agreements, and for other general corporate purposes. We
may also acquire other investments consistent with our investment strategies and
operating policies. There can be no assurance, however, that we will
be able to raise additional equity capital at any particular time or on any
particular terms.
Our
existing repurchase agreements are renewable at the discretion of our lenders
and, as such, generally do not contain guaranteed roll-over
terms. Repurchase agreement funding currently remains available to us
at attractive rates from multiple counterparties. To protect against
unforeseen reductions in our borrowing capabilities, we maintain unused capacity
under our existing repurchase agreement credit lines with multiple
counterparties and a “cushion” of cash and collateral to meet potential margin
calls. This cushion is comprised of cash and cash equivalents,
unpledged Agency MBS and collateral in excess of margin requirements held by our
counterparties.
At
September 30, 2009, our debt-to-equity multiple was 3.4 times, compared to 7.2
times at December 31, 2008. This reduction in our leverage multiple
reflects a $1.464 billion decrease in our borrowings under repurchase
agreements, a $475.2 million increase in our other comprehensive income
reflecting the market appreciation of our MBS and Swaps, and a $404.6 million
increase in equity generated primarily from issuances of our common
stock. Excluding equity of $811.6 million invested in MFR, our
leverage multiple was 5.4 times at September 30, 2009. At September
30, 2009, we had borrowings under repurchase agreements of $7.575 billion with
18 counterparties and continued to have available capacity under our repurchase
agreement credit lines, compared to repurchase agreements of $9.039 billion with
19 counterparties at December 31, 2008.
During
the nine months ended September 30, 2009, we received cash of $1.414 billion
from prepayments and scheduled amortization on our MBS portfolio and purchased
$666.4 million of non-Agency MBS funded with cash and repurchase
financings. While we generally intend to hold our MBS as long-term
investments, certain MBS may be sold in order to manage our interest rate risk
and liquidity needs, meet other operating objectives and adapt to market
conditions. During the nine months ended September 30, 2009, we sold
20 Agency MBS (all of which were sold during the second quarter of 2009) for
$438.5 million, reducing the average time-to-reset for our
portfolio. We used net cash of $53.4 million in connection with our
MBS Forwards, reflecting net cash used to purchase MBS that were linked to
repurchase financings. From October 1, 2009 through November 4, 2009,
we sold seven Agency MBS for an aggregated sales prices of $101.5 million,
realizing gross gains of $4.5 million.
In
connection with our repurchase agreements and Swaps, we routinely receive margin
calls from our counterparties and make margin calls to our counterparties (i.e.,
reverse margin calls). Margin calls and reverse margin calls, which
requirements vary over time, may occur daily between us and any of our
counterparties when the value of collateral pledged changes from the amount
contractually required. The value of securities pledged as collateral
changes as the face (or par) value of our for MBS changes, reflecting principal
amortization and prepayments, market interest rates and/or other market
conditions change, and the market value of our Swaps changes. Margin
calls/reverse margin calls are satisfied when we pledge/receive additional
collateral in the form of additional securities and/or cash.
Our
capacity to meet future margin calls will be impacted by our cushion, which
varies based on the market value of our securities, our future cash position and
margin requirements. Our cash position fluctuates based on the timing
of our operating, investing and financing activities. (See our
Consolidated Statements of Cash Flows, included under Item 1 of this quarterly
report on Form 10-Q.)
The table
below summarizes our margin activity for the quarterly periods
presented:
|
|
Collateral
Pledged During the Quarter
to
Meet Margin Calls
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
Fair
Value of Securities Pledged
|
|
|
Cash
Pledged
|
|
|
Aggregate
Assets Pledged For Margin Calls
|
|
|
Cash
and Securities Received For Reverse Margin Calls
|
|
|
Net
Assets Received/
(Pledged)
For Margin Activity
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
$ |
305,154 |
|
|
$ |
12,770 |
|
|
$ |
317,924 |
|
|
$ |
269,154 |
|
|
$ |
(48,770 |
) |
June
30, 2009
|
|
|
254,646 |
|
|
|
27,440 |
|
|
|
282,086 |
|
|
|
310,676 |
|
|
|
28,590 |
|
March
31, 2009
|
|
|
177,892 |
|
|
|
74,360 |
|
|
|
252,252 |
|
|
|
209,342 |
|
|
|
(42,910 |
) |
At
September 30, 2009, we had a total of $8.347 billion of MBS and $44.0 million of
restricted cash pledged against our repurchase agreements and
Swaps. At September 30, 2009, we had $816.0 million of assets
available to meet potential margin calls, comprised of cash and cash equivalents
of $486.7 million, unpledged Agency MBS of $235.1 million, and excess collateral
of $94.2 million. In addition, at September 30, 2009, we had
unpledged non-Agency MBS with a fair value of $751.5 million. To
date, we have satisfied all of our margin calls and have never sold assets in
response to a margin call.
During
the nine months ended September 30, 2009, we paid cash dividends of $150.7
million on our common stock and $568,000 for DERs. In addition, we
declared and paid cash dividends of $6.1 million on our preferred stock during
the nine months ended September 30, 2009. On October 1, 2009, we
declared our third quarter 2009 common stock dividend of $0.25 per share, which
totaled $70.2 million, including DERs of $209,000 and not including dividends
subject to vesting on shares of restricted stock. These dividends and
DERS were paid on October 30, 2009.
We
believe we have adequate financial resources to meet our obligations, including
margin calls, as they come due, to fund dividends we declare and to actively
pursue our investment strategies. However, should the value of our
MBS suddenly decrease, significant margin calls on our repurchase agreements
could result, or should the market intervention by the U.S. Government fail to
prevent further significant deterioration in the credit markets, our liquidity
position could be adversely affected.
Inflation
Substantially
all of our assets and liabilities are financial in nature. As a
result, changes in interest rates and other factors impact our performance far
more than does inflation. Our financial statements are prepared in
accordance with GAAP and dividends are based upon net ordinary income as
calculated for tax purposes; in each case, our results of operations and
reported assets, liabilities and equity are measured with reference to
historical cost or fair value without considering inflation.
Other
Matters
We intend
to conduct our business so as to maintain our exempt status under, and not to
become regulated as an investment company for purposes of, the Investment
Company Act. If we failed to maintain our exempt status under the
Investment Company Act and became regulated as an investment company, our
ability to, among other things, use leverage would be substantially reduced and,
as a result, we would be unable to conduct our business as described in our
annual report on Form 10-K for the year ended December 31, 2008 and this
quarterly report on Form 10-Q for the quarter ended September 30,
2009. The Investment Company Act exempts entities that are “primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate” (or Qualifying
Interests). Under the current interpretation of the staff of the SEC,
in order to qualify for this exemption, we must maintain (i) at least 55% of our
assets in Qualifying Interests (or the 55% Test) and (ii) at least 80% of our
assets in real estate related assets (including Qualifying Interests) (or the
80% Test). MBS that do not represent all of the certificates issued
(i.e., an undivided interest) with respect to the entire pool of mortgages
(i.e., a whole pool) underlying such MBS may be treated as securities separate
from such underlying mortgage loans and, thus, may not be considered Qualifying
Interests for purposes of the 55% Test; however, such MBS would be
considered real estate related assets for purposes of the 80%
Test. Therefore, for purposes of the 55% Test, our ownership of these
types of MBS is limited by the provisions of the Investment Company
Act. In meeting the 55% Test, we treat as Qualifying Interests those
MBS issued with respect to an underlying pool as to which we own all of the
issued certificates. If the SEC or its staff were to adopt a contrary
interpretation, we could be required to sell a substantial amount of our MBS
under potentially adverse market conditions. Further, in order to
insure that at all times we qualify for this exemption from the Investment
Company Act, we may be precluded from acquiring MBS whose yield is higher than
the yield on MBS that could be otherwise purchased in a manner consistent with
this exemption. Accordingly, we monitor our compliance with both the
55% Test and the 80% Test in order to maintain our exempt status under the
Investment Company Act. As of September 30, 2009, we determined that
we were in and had maintained compliance with both the 55% Test and the 80%
Test.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
We seek
to manage our risks related to interest rates, liquidity, prepayment speeds,
market value and the credit quality of our assets while, at the same time,
seeking to provide an opportunity to stockholders to realize attractive total
returns through ownership of our capital stock. While we do not seek
to avoid risk, we seek to: assume risk that can be quantified from historical
experience, and actively manage such risk; earn sufficient returns to justify
the taking of such risks; and, maintain capital levels consistent with the risks
that we undertake.
Interest
Rate Risk
We
primarily invest in ARM-MBS on a leveraged basis. We take into
account both anticipated coupon resets and expected prepayments when measuring
the sensitivity of our ARM-MBS portfolio to changes in interest
rates. In measuring our repricing gap, we measure the difference
between: (a) the weighted average months until the next coupon adjustment or
projected prepayment on our MBS portfolios, and (b) the months remaining until
our repurchase agreements mature, including the impact of Swaps. A
CPR is applied in order to reflect, to a certain extent, the prepayment
characteristics inherent in our interest-earning assets and interest-bearing
liabilities. Over the last consecutive eight quarters, ending with
September 30, 2009, the monthly CPR on our MBS portfolio ranged from a high of
20.4%, experienced during the quarter ended September 30, 2009, to a low of 7.3%
experienced during the quarter ended December 31, 2008, with an average CPR over
such quarters of 13.7%.
The
following table presents information at September 30, 2009 about our repricing
gap based on contractual maturities (i.e., 0 CPR), and applying CPRs of 15%, 20%
and 25% to our Agency MBS portfolios:
CPR
Assumptions
|
|
Estimated
Months to Asset Reset or Expected Prepayment (1)
|
|
Estimated
Months to Liabilities Reset
|
|
Repricing
Gap in Months
|
|
0 |
% (2) |
|
|
45 |
|
|
|
14 |
|
|
|
31 |
|
|
15 |
% |
|
|
31 |
|
|
|
14 |
|
|
|
17 |
|
|
20 |
% |
|
|
27 |
|
|
|
14 |
|
|
|
13 |
|
|
25 |
% |
|
|
24 |
|
|
|
14 |
|
|
|
10 |
|
(1) Reflects
the effect of our Swaps.
|
(2) 0%
CPR reflects scheduled amortization and contractual maturities, which does
not consider any prepayments.
|
At
September 30, 2009, our financing obligations under repurchase agreements had a
weighted average remaining contractual term of approximately three
months. Upon contractual maturity or an interest reset date, these
borrowings are refinanced at then prevailing market rates. We use
Swaps as part of our overall interest rate risk management
strategy. Our Swaps are intended to serve as a hedge against future
interest rate increases on our repurchase agreements, which rates are typically
LIBOR based. Our Swaps result in interest savings in a rising
interest rate environment, while in a declining interest rate environment result
in us paying the stated fixed rate on the notional amount for each of our Swaps,
which could be higher than the market rate. During the nine months
ended September 30, 2009, our Swaps accounted for interest expense of $88.4
million, or 141 basis points.
While our
Swaps do not extend the maturities of our repurchase agreements, they do
however, in effect, lock in a fixed rate of interest over their term for a
corresponding amount of our repurchase agreements that such Swaps
hedge. At September 30, 2009, we had repurchase agreements of $7.575
billion, of which $3.314 billion were hedged with active Swaps. At
September 30, 2009, our Swaps had a weighted average fixed-pay rate of 4.24% and
extended 25 months on average with a maximum term of approximately six
years.
The
negative value of our Swaps reflects the decline in market interest rates that
began during the latter part of 2008. At September 30, 2009, our
Swaps were in an unrealized loss position of $178.4 million, compared to an
unrealized loss position of $237.3 million at December 31, 2008. We
expect that the value of our Swaps will continue to improve as they amortize and
the term of the remaining Swaps shortens. From October 1, 2009
through December 31, 2009, $307.1 million, or 9.3% of our $3.314 billion Swap
notional outstanding at September 30, 2009, will amortize or
expire. During the nine months ended September 30, 2009, we did not
enter into or terminate any Swaps.
The
interest rates for most of our MBS, once in their adjustable period, are
primarily reset based on LIBOR, CMT, and the Federal Reserve U.S. 12-month
cumulative average one-year CMT rate (or MTA), while our debt obligations, in
the form of repurchase agreements, are generally priced off of
LIBOR. While LIBOR and CMT generally move together, there can be no
assurance that such movements will be parallel, such that the magnitude of the
movement of one index will match that of the other index. At
September 30, 2009, we had 82.6% of our Agency MBS repricing from LIBOR (of
which 76.9% repriced based on 12-month LIBOR and 5.7% repriced based on
six-month LIBOR), 13.2% repricing from the one-year CMT index, 3.8% repricing
from MTA and 0.4% repricing from the 11th
District Cost of Funds Index (or COFI). Our non-Agency MBS, which
comprised 10.1% of our MBS portfolio (and 12.2% including linked MBS) at
September 30, 2009, have interest rates that reprice based on these benchmark
indices as well, but are leveraged significantly less than our Agency
MBS. The returns on our non-Agency MBS, a significant portion of
which were purchased at a discount, are impacted to a greater extent by the
timing and amount of prepayments and credit performance than by the benchmark
rate to which the underlying mortgages are indexed.
We
acquire interest-rate sensitive assets and fund them with interest-rate
sensitive liabilities, a portion of which are hedged with Swaps. Our
adjustable-rate assets reset on various dates that are not matched to the reset
dates on our repurchase agreements. In general, the repricing of our
repurchase agreements occurs more quickly, including the impact of Swaps than
the repricing of our assets. Therefore, on average, our cost of
borrowings may rise or fall more quickly in response to changes in market
interest rates than would the yield on our interest-earning assets.
The
information presented in the following Shock Table projects the potential impact
of sudden parallel changes in interest rates on net interest income and
portfolio value, including the impact of Swaps, over the next 12 months based on
our interest sensitive financial instruments at September 30,
2009. We have included our linked MBS as part of our MBS portfolio,
as we include these MBS when assessing our interest rate
risk. Further, such MBS may not be linked in future periods, as we
may paydown linked repurchase borrowings and/or finance linked MBS with other
counterparties. All changes in income and value are measured as the
percentage change from the projected net interest income and portfolio value at
the base interest rate scenario.
Shock
Table
|
|
Change
in Interest Rates
|
|
Estimated
Value of MBS (1)
|
|
|
Estimated
Value of Swaps
|
|
|
Estimated
Value of Financial Instruments Carried at Fair
Value
(2)
|
|
|
Estimated
Change in Fair Value
|
|
|
Percentage
Change in Net Interest Income
|
|
|
Percentage
Change in Portfolio Value
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+100
Basis Point Increase
|
|
$ |
9,365,372 |
|
|
$ |
(117,700 |
) |
|
$ |
9,247,672 |
|
|
$ |
(138,180 |
) |
|
|
(2.14 |
)% |
|
|
(1.47 |
)% |
+
50 Basis Point Increase
|
|
$ |
9,479,703 |
|
|
$ |
(148,026 |
) |
|
$ |
9,331,677 |
|
|
$ |
(54,175 |
) |
|
|
(0.53 |
)% |
|
|
(0.58 |
)% |
Actual
at September 30, 2009
|
|
$ |
9,564,205 |
|
|
$ |
(178,353 |
) |
|
$ |
9,385,852 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
-
50 Basis Point Decrease
|
|
$ |
9,618,876 |
|
|
$ |
(208,680 |
) |
|
$ |
9,410,196 |
|
|
$ |
24,344 |
|
|
|
(0.80 |
)% |
|
|
0.26 |
% |
-100
Basis Point Decrease
|
|
$ |
9,643,717 |
|
|
$ |
(239,007 |
) |
|
$ |
9,404,710 |
|
|
$ |
18,858 |
|
|
|
(3.29 |
)% |
|
|
0.20 |
% |
(1) Includes
linked MBS.
|
(2) Excludes
cash investments, which have overnight maturities and are not expected to
change in value as interest rates
change.
|
Certain
assumptions have been made in connection with the calculation of the information
set forth in the Shock Table and, as such, there can be no assurance that
assumed events will occur or that other events will not occur that would affect
the outcomes. The base interest rate scenario assumes interest rates
at September 30, 2009. The analysis presented utilizes assumptions
and estimates based on management’s judgment and
experience. Furthermore, while we generally expect to retain such
assets and the associated interest rate risk to maturity, future purchases and
sales of assets could materially change our interest rate risk
profile. It should be specifically noted that the information set
forth in the Shock Table and all related disclosure constitutes forward-looking
statements within the meaning of Section 27A of the 1933 Act and Section 21E of
the 1934 Act. Actual results could differ significantly from those
estimated in the Shock Table.
The Shock
Table quantifies the potential changes in net interest income and portfolio
value, which includes the value of Swaps, should interest rates immediately
change (or Shock). The Shock Table presents the estimated impact of
interest rates instantaneously rising 50 and 100 basis points, and falling 50
and 100 basis points. The cash flows associated with the portfolio of
MBS for each rate Shock are calculated based on assumptions, including, but not
limited to, prepayment speeds, yield on future acquisitions, slope of the yield
curve and size of the portfolio. Assumptions made on the interest
rate sensitive liabilities, which are assumed to be repurchase agreements,
include anticipated interest rates, collateral requirements as a percent of the
repurchase agreement, amount and term of borrowing. Given the low
level of interest rates at September 30, 2009, we applied a floor of 0%, for all
anticipated interest rates included in our assumptions. Due to
presence of this floor, it is anticipated that any hypothetical interest rate
shock decrease would have a limited positive impact on our funding costs;
however, because prepayments speeds are unaffected by this floor, it is expected
that any increase in our prepayment speeds (occurring as a result of any
interest rate shock decrease or otherwise) could result in an acceleration of
our premium amortization. As a result, because the presence of this
floor limits the positive impact of any interest rate decrease on our funding
costs, hypothetical interest rate shock decreases could cause the fair value of
our financial instruments and our net interest income to decline.
The
impact on portfolio value is approximated using the calculated effective
duration (i.e., the price sensitivity to changes in interest rates) of 0.82 and
expected convexity (i.e., the approximate change in duration relative to the
change in interest rates) of (1.25). The impact on net interest
income is driven mainly by the difference between portfolio yield and cost of
funding of our repurchase agreements, which includes the cost and/or benefit
from Swaps that hedge certain of our repurchase agreements. Our
asset/liability structure is generally such that an increase in interest rates
would be expected to result in a decrease in net interest income, as our
repurchase agreements are generally shorter term than our interest-earning
assets. When interest rates are Shocked, prepayment assumptions are
adjusted based on management’s expectations along with the results from the
prepayment model.
Market
Value Risk
All of
our MBS are designated as “available-for-sale” and, as such, are reported at
their fair value. The difference between amortized cost and fair
value of our MBS is reflected in accumulated other comprehensive income/(loss),
a component of Stockholders’ Equity, except that credit impairments that are
identified as other-than-temporary are recognized through
earnings. Changes in the fair value of our MBS Forwards are reported
in earnings. (See Note 13 to the consolidated financial statements,
included under Item 1 of this quarterly report on Form 10-Q.) The
fair value of our MBS and MBS Forwards fluctuate primarily due to changes in
interest rates and yield curves. At September 30, 2009, our
investments were primarily comprised of Agency MBS and non-Agency MBS,
substantially all of which were Senior MBS. While changes in the fair
value of our Agency MBS is generally not credit-related, changes in the fair
value of our non-Agency MBS and MBS Forwards may reflect both market conditions
and credit risk. At September 30, 2009, our non-Agency MBS had a fair
value of $947.6 million and an amortized cost of $925.3 million, comprised of
gross unrealized gains of $98.9 million and gross unrealized losses of $76.5
million. Our MBS Forwards included MBS with a fair value of $215.2
million, including mark-to-market adjustments of $148,000, which were included
in the net gain recognized on our MBS Forwards for the three and nine months
ended September 30, 2009.
Our
non-Agency MBS are secured by pools of residential mortgages, which are not
guaranteed by the U.S. Government, any federal agency or any federally chartered
corporation, but rather are primarily Senior MBS, which are the senior most
classes from their respective securitizations. The loans
collateralizing our non-Agency MBS are primarily comprised of Hybrids, with
fixed-rate periods generally ranging from three to ten years, and, to a lesser
extent, ARMs and fixed-rate mortgages. At September 30, 2009, 99.2% of our
non-Agency MBS were ARM-MBS and 0.8% were fixed-rate MBS and 99.9% of our
non-Agency MBS were Senior MBS.
Information
presented with respect to weighted average loan to value, weighted average FICO
scores and other information aggregated based on information reported at the
time of mortgage origination are historical and, as such, does not reflect the
impact of the general decline in home prices or any changes in a borrowers’
credit score or the current use or status of the mortgaged
property. Transactions that are currently linked may not be linked in
the future and, if no longer linked, will be included in our MBS
portfolio. In assessing our asset/liability management and
performance, we consider linked MBS as part of our MBS portfolio. As
such, we have included MBS that are a component of linked transactions in the
tables below.
The table
below presents certain information detailed by year of initial MBS
securitization and FICO score about the underlying loan characteristics for all
of our Senior MBS at September 30, 2009:
|
|
Securities
with Average Loan FICO
of
715 or Higher (1)
|
|
|
Securities
with Average Loan FICO
Below
715 (1)
|
|
|
|
|
Year
of Securitization (2)
|
|
2007
|
|
|
2006
|
|
|
2005
and
Prior
|
|
|
2007
|
|
|
2006
|
|
|
2005
and
Prior
|
|
|
Total
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of securities
|
|
|
27 |
|
|
|
37 |
|
|
|
33 |
|
|
|
7 |
|
|
|
13 |
|
|
|
9 |
|
|
|
126 |
|
MBS
current face
|
|
$ |
440,818 |
|
|
$ |
459,123 |
|
|
$ |
381,906 |
|
|
$ |
97,587 |
|
|
$ |
272,572 |
|
|
$ |
73,192 |
|
|
$ |
1,725,198 |
|
MBS
amortized cost
|
|
$ |
312,567 |
|
|
$ |
286,424 |
|
|
$ |
295,229 |
|
|
$ |
42,397 |
|
|
$ |
132,859 |
|
|
$ |
69,392 |
|
|
$ |
1,138,868 |
|
MBS
fair value
|
|
$ |
296,430 |
|
|
$ |
315,924 |
|
|
$ |
300,983 |
|
|
$ |
51,593 |
|
|
$ |
142,607 |
|
|
$ |
53,523 |
|
|
$ |
1,161,060 |
|
Weighted
average fair value to
current
face
|
|
|
67.2 |
% |
|
|
68.8 |
% |
|
|
78.8 |
% |
|
|
52.9 |
% |
|
|
52.3 |
% |
|
|
73.1 |
% |
|
|
67.3 |
% |
Weighted
average coupon (3)
|
|
|
5.76 |
% |
|
|
5.50 |
% |
|
|
4.62 |
% |
|
|
4.35 |
% |
|
|
2.51 |
% |
|
|
4.78 |
% |
|
|
4.80 |
% |
Weighted
average loan age
(months)
(3)
(4)
|
|
|
31 |
|
|
|
41 |
|
|
|
55 |
|
|
|
32 |
|
|
|
39 |
|
|
|
68 |
|
|
|
42 |
|
Weighted
average loan to
value
at origination (3)
(5)
|
|
|
72 |
% |
|
|
70 |
% |
|
|
70 |
% |
|
|
76 |
% |
|
|
74 |
% |
|
|
77 |
% |
|
|
72 |
% |
Weighted
average FICO score
at
origination (3)
(5)
|
|
|
737 |
|
|
|
732 |
|
|
|
734 |
|
|
|
708 |
|
|
|
704 |
|
|
|
695 |
|
|
|
726 |
|
Owner-occupied
loans
|
|
|
90.6 |
% |
|
|
87.6 |
% |
|
|
89.1 |
% |
|
|
84.9 |
% |
|
|
82.1 |
% |
|
|
77.6 |
% |
|
|
87.3 |
% |
Rate-term
refinancings
|
|
|
29.3 |
% |
|
|
20.4 |
% |
|
|
20.5 |
% |
|
|
24.3 |
% |
|
|
14.2 |
% |
|
|
9.8 |
% |
|
|
21.5 |
% |
Cash-out
refinancings
|
|
|
27.2 |
% |
|
|
31.5 |
% |
|
|
19.5 |
% |
|
|
33.0 |
% |
|
|
32.6 |
% |
|
|
38.4 |
% |
|
|
28.3 |
% |
3
Month CPR (4)
|
|
|
16.9 |
% |
|
|
16.8 |
% |
|
|
16.8 |
% |
|
|
15.6 |
% |
|
|
19.3 |
% |
|
|
15.7 |
% |
|
|
17.1 |
% |
60+
days delinquent (5)
|
|
|
18.9 |
% |
|
|
18.2 |
% |
|
|
10.4 |
% |
|
|
40.5 |
% |
|
|
35.2 |
% |
|
|
20.2 |
% |
|
|
20.7 |
% |
Credit
enhancement (5)
(6)
|
|
|
7.8 |
% |
|
|
10.5 |
% |
|
|
10.6 |
% |
|
|
12.7 |
% |
|
|
10.8 |
% |
|
|
33.1 |
% |
|
|
11.0 |
% |
(1) FICO
score is a credit score used by major credit bureaus to indicate a
borrower’s credit worthiness. FICO scores are reported borrower
FICO scores at origination for each loan.
|
(2) Certain
of our non-Agency MBS have been re-securitized. The historical
information presented in the table is based on the initial securitization
date and data available at the time of original securitization (and not
the date of re-securitization). No information has been updated with
respect to any MBS that have been re-securitized.
|
(3) Weighted
average is based on MBS current face at September 30,
2009.
|
(4) Information
provided is based on loans for individual group owned by
us.
|
(5) Information
provided is based on loans for all groups that provide credit support for
our MBS.
|
(6) Credit
enhancement for a particular security consists of all securities and/or
other credit support that absorb initial credit losses generated by a pool
of securitized loans before such losses affect the particular senior
security.
|
The
mortgages securing our non-Agency MBS are located in many geographic
regions. The following table presents the six largest geographic
concentrations of the mortgages collateralizing our non-Agency MBS, including
linked MBS, held at September 30, 2009:
Property
Location
|
|
Percent
|
Southern
California
|
|
|
29.3 |
% |
Northern
California
|
|
|
20.2 |
% |
Florida
|
|
|
7.6 |
% |
New
York
|
|
|
4.5 |
% |
Virginia
|
|
|
4.1 |
% |
Maryland
|
|
|
2.9 |
% |
Generally,
in a rising interest rate environment, the fair value of our MBS would be
expected to decrease; conversely, in a decreasing interest rate environment, the
fair value of such MBS would be expected to increase. If the fair
value of our MBS collateralizing our repurchase agreements decreases, we may
receive margin calls from our repurchase agreement counterparties for additional
MBS collateral or cash due to such decline. If such margin calls are
not met, our lender could liquidate the securities collateralizing our
repurchase agreements with such lender, potentially resulting in a loss to
us. To avoid forced liquidations, we could apply a strategy of
reducing borrowings and assets, by selling assets or not replacing securities as
they amortize and/or prepay, thereby “shrinking the balance
sheet”. Such an action would likely reduce our interest income,
interest expense and net income, the extent of which would be dependent on the
level of reduction in assets and liabilities as well as the sale price of the
assets sold. Such a decrease in our net interest income could
negatively impact cash available for distributions, which in turn could reduce
the market price of our common and preferred stock. Further, if we
were unable to meet margin calls, lenders could sell the securities
collateralizing such repurchase agreements, which sales could result in a loss
to us.
Liquidity
Risk
The
primary liquidity risk for us arises from financing long-maturity assets, which
have interim and lifetime interest rate adjustment caps, with shorter-term
borrowings in the form of repurchase agreements. Although the
interest rate adjustments of these assets and liabilities fall within the
guidelines established by our operating policies, maturities are not required to
be, nor are they, matched.
We
typically pledge high-quality MBS and cash to secure our repurchase agreements
and Swaps. At September 30, 2009, we had $816.0 million of assets
available to meet potential margin calls, comprised of cash and cash equivalents
of $486.7 million, unpledged Agency MBS of $235.1 million and excess collateral
of $94.2 million. In addition, at September 30, 2009, we had
unpledged non-Agency MBS with a fair value of $751.5 million. Should
the value of our MBS pledged as collateral suddenly decrease, margin calls
relating to our repurchase agreements could increase, causing an adverse change
in our liquidity position. As such, we cannot assure that we will
always be able to roll over our repurchase agreements.
Prepayment
and Reinvestment Risk
Premiums
paid on our MBS are amortized against interest income and discounts are accreted
to interest income as we receive principal payments (i.e., prepayments and
scheduled amortization) on such securities. Premiums arise when we
acquire MBS at a price in excess of the principal balance of the mortgages
securing such MBS (i.e., par value). Conversely, discounts arise when
we acquire MBS at a price below the principal balance of the mortgages securing
such MBS. For financial accounting purposes, interest income is
accrued based on the outstanding principal balance of the MBS and their
contractual terms. In addition, purchase premiums on our MBS, which
are primarily carried on our Agency MBS, are amortized against interest income
over the life of each security using the effective yield method, adjusted for
actual prepayment activity. An increase in the prepayment rate, as
measured by the CPR, will typically accelerate the amortization of purchase
premiums, thereby reducing the yield/interest income earned on such
assets.
For tax
purposes, premiums paid on investments are amortized against interest
income. Conversely, discounts on such investments are accreted into
interest income. On a tax basis, amortization of premiums and
accretion of discounts will differ for those reported for financial accounting
purposes under GAAP. At September 30, 2009, the net premium on our
Agency MBS portfolio for financial accounting purposes was $106.7 million and
the net purchase discount on our non-Agency MBS portfolio was $550.2
million. For tax purposes, we estimate that at September 30, 2009,
our net purchase premiums on our Agency MBS was $105.8 million and the net
purchase discount on our non-Agency MBS was $582.5 million.
In
general, we believe that we will be able to reinvest proceeds from scheduled
principal payments and prepayments at acceptable yields; however, no assurances
can be given that, should significant prepayments occur, market conditions would
be such that acceptable investments could be identified and the proceeds timely
reinvested.
Credit
Risk
Although
we do not expect to encounter credit risk in our Agency MBS business, we are
exposed to credit risk in our non-Agency MBS portfolio. With respect
to our Senior MBS, credit support contained in MBS deal structures provide a
level of protection from losses, as do the discounted purchase prices in the
event of the return of less than 100% of par. We also evaluate the
impact of credit risk on our investments through a comprehensive investment
review and a selection process, which is predominantly focused on quantifying
and pricing credit risk. We review our Senior MBS based on
quantitative and qualitative analysis of the risk-adjusted returns on such
investments. Through modeling and scenario analysis, we seek to
evaluate the investment’s credit risk. Credit risk is also monitored
through our on-going asset surveillance. Nevertheless, unanticipated
credit losses could occur which could adversely impact our operating
results.
Item
4. Controls and Procedures
A review
and evaluation was performed by our management, including our Chief Executive
Officer (or CEO) and Chief Financial Officer (or CFO), of the effectiveness of
the design and operation of our disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the 1934 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, were
effective. Notwithstanding the foregoing, a control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that it will detect or uncover failures within the Company to disclose
material information otherwise required to be set forth in our periodic
reports.
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended September 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
There are
no material pending legal proceedings to which we are a party or any of our
assets are subject.
Item
1A. Risk Factors
There
have been no material changes to the risk factors disclosed in Item 1A – Risk
Factors of our annual report on Form 10-K for the year ended December 31, 2008
(the “Form 10-K”). The materialization of any risks and uncertainties
identified in our Forward Looking Statements contained in this report together
with those previously disclosed in the Form 10-K or those that are presently
unforeseen could result in significant adverse effects on our financial
condition, results of operations and cash flows. See Item 2.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Forward Looking Statements” in this quarterly report on Form
10-Q.
Item
6. Exhibits
(a)
Exhibits
3.1 Amended
and Restated Articles of Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3.1 of the Form 8-K, dated April 10, 1998, filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.2 Articles
of Amendment to the Amended and Restated Articles of Incorporation of the
Registrant, dated August 5, 2002 (incorporated herein by reference to Exhibit
3.1 of the Form 8-K, dated August 13, 2002, filed by the Registrant pursuant to
the 1934 Act (Commission File No. 1-13991)).
3.3 Articles
of Amendment to the Amended and Restated Articles of Incorporation of the
Registrant, dated August 13, 2002 (incorporated herein by reference to Exhibit
3.3 of the Form 10-Q for the quarter ended December 31, 2002, filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.4 Articles
of Amendment to the Amended and Restated Articles of Incorporation of the
Registrant, dated December 29, 2008 (incorporated herein by reference to Exhibit
3.1 of the Form 8-K, dated December 29, 2008, filed by the Registrant pursuant
to the 1934 Act (Commission File No. 1-13991)).
3.5 Articles
Supplementary of the Registrant, dated April 22, 2004, designating the
Registrant’s 8.50% Series A Cumulative Redeemable Preferred Stock (incorporated
herein by reference to Exhibit 3.4 of the Form 8-A, dated April 23, 2004, filed
by the Registrant pursuant to the 1934 Act (Commission File No.
1-13991)).
3.6 Amended
and Restated Bylaws of the Registrant (incorporated herein by reference to
Exhibit 3.2 of the Form 8-K, dated December 29, 2008, filed by the Registrant
pursuant to the 1934 Act (Commission File No. 1-13991)).
4.1 Specimen
of Common Stock Certificate of the Registrant (incorporated herein by reference
to Exhibit 4.1 of the Registration Statement on Form S-4, dated February 12,
1998, filed by the Registrant pursuant to the 1933 Act (Commission File No.
333-46179)).
4.2 Specimen
of Stock Certificate representing the 8.50% Series A Cumulative Redeemable
Preferred Stock of the Registrant (incorporated herein by reference to Exhibit 4
of the Form 8-A, dated April 23, 2004, filed by the Registrant pursuant to the
1934 Act (Commission File No. 1-13991)).
10.1 Amended
and Restated Employment Agreement of Stewart Zimmerman, dated as of December 10,
2008 (incorporated herein by reference to Exhibit 10.4 of the Form 8-K, dated
December 12, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.2 Amended
and Restated Employment Agreement of William S. Gorin, dated as of December 10,
2008 (incorporated herein by reference to Exhibit 10.5 of the Form 8-K, dated
December 12, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.3 Amended
and Restated Employment Agreement of Ronald A. Freydberg, dated as of December
10, 2008 (incorporated herein by reference to Exhibit 10.6 of the Form 8-K,
dated December 12, 2008, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.4 Amended
and Restated Employment Agreement of Teresa D. Covello, dated as of December 10,
2008 (incorporated herein by reference to Exhibit 10.8 of the Form 8-K, dated
December 12, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.5 Amended
and Restated Employment Agreement of Timothy W. Korth II, dated as of December
10, 2008 (incorporated herein by reference to Exhibit 10.7 of the Form 8-K,
dated December 12, 2008, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.6 Employment
Agreement of Craig L. Knutson, dated as of July 1, 2009 (incorporated herein by
reference to Exhibit 9.01 of the Form 8-K, dated August 27, 2009, filed by the
Registrant pursuant to the 1954 Act (Commission File No. 1-13991))
10.7 Amended
and Restated 2004 Equity Compensation Plan, dated December 10, 2008
(incorporated herein by reference to Exhibit 10.1 of the Form 8-K, dated
December 12, 2008, filed by the Registrant pursuant to the 1934 Act (Commission
File No. 1-13991)).
10.8 Senior
Officers Deferred Bonus Plan, dated December 10, 2008 (incorporated herein by
reference to Exhibit 10.2 of the Form 8-K, dated December 12, 2008, filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.9 Second
Amended and Restated 2003 Non-Employee Directors Deferred Compensation Plan,
dated December 10, 2008 (incorporated herein by reference to Exhibit 10.3 of the
Form 8-K, dated December 12, 2008, filed by the Registrant pursuant to the 1934
Act (Commission File No. 1-13991)).
10.10 Form
of Incentive Stock Option Award Agreement relating to the Registrant’s 2004
Equity Compensation Plan (incorporated herein by reference to Exhibit 10.9 of
the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the
1934 Act (Commission File No. 1-13991)).
10.11 Form
of Non-Qualified Stock Option Award Agreement relating to the Registrant’s 2004
Equity Compensation Plan (incorporated herein by reference to Exhibit 10.10 of
the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the
1934 Act (Commission File No. 1-13991)).
10.12 Form
of Restricted Stock Award Agreement relating to the Registrant’s 2004 Equity
Compensation Plan (incorporated herein by reference to Exhibit 10.11 of the Form
10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.13 Form
of Phantom Share Award Agreement relating to the Registrant’s 2004 Equity
Compensation Plan (incorporated herein by reference to Exhibit 99.1 of the Form
8-K, dated October 23, 2007, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
31.1 Certification
of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification
of the Chief Executive Officer, 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 the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant
to the requirements 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.
Date:
November 4, 2009
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MFA
Financial, Inc.
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By:
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/s/
Stewart
Zimmerman |
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Stewart
Zimmerman
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Chairman
and Chief Executive Officer
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By:
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/s/
William S. Gorin
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William
S. Gorin
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President
and Chief Financial Officer
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(Principal
Financial Officer)
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By:
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/s/
Teresa D. Covello
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Teresa
D. Covello
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Senior
Vice President and Chief
Accounting Officer
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(Principal
Accounting Officer)
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