November 6, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________________________________

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-13991

MFA FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

__________________________________________________________________



Maryland		13-3974868
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

350 Park Avenue, 20th Floor
New York	New York	10022
(Address of principal executive offices)		(Zip Code)

(212) 207-6400

(Registrant’s telephone number, including area code)

_____________________________________________

Not Applicable

(Former name, former address and former fiscal year, if changed since last period)

____________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	MFA	New York Stock Exchange
7.50% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share	MFA/PB	New York Stock Exchange
8.00% Senior Notes due 2042	MFO	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o

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



Large accelerated filer	x	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

451,770,207 shares of the registrant’s common stock, $0.01 par value, were outstanding as of October 31, 2019.

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MFA FINANCIAL, INC.

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		Page

PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	1

	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019 and September 30, 2018	2

	Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2019 and September 30, 2018	3

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2019 and September 30, 2018	4

	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and September 30, 2018	6

	Notes to the Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	89

Item 4.	Controls and Procedures	97

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	98

Item 1A.	Risk Factors	98

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98

Item 3.	Defaults Upon Senior Securities	98

Item 4.	Mine Safety Disclosures	98

Item 5.	Other Information	98

Item 6.	Exhibits	98

Signatures		99

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MFA FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS

(In Thousands Except Per Share Amounts)	September 30, 2019			December 31, 2018
	(Unaudited)
Assets:
Residential mortgage securities:
Agency MBS, at fair value ($1,809,380 and $2,575,331 pledged as collateral, respectively)	$	1,813,873		$	2,698,213
Non-Agency MBS, at fair value ($2,389,549 and $3,248,900 pledged as collateral, respectively)	2,397,789			3,318,299
Credit Risk Transfer (“CRT”) securities, at fair value ($377,779 and $480,315 pledged as collateral, respectively)	377,892			492,821
Residential whole loans, at carrying value ($3,657,830 and $1,645,372 pledged as collateral, respectively) (1)	4,969,414			3,016,715
Residential whole loans, at fair value ($835,762 and $738,638 pledged as collateral, respectively) (1)	1,453,169			1,665,978
Mortgage servicing rights (“MSR”) related assets ($1,164,284 and $611,807 pledged as collateral, respectively)	1,164,284			611,807
Cash and cash equivalents	154,193			51,965
Restricted cash	38,998			36,744
Other assets	735,209			527,785
Total Assets	$	13,104,821		$	12,420,327

Liabilities:
Repurchase agreements	$	8,571,422		$	7,879,087
Other liabilities	1,129,973			1,125,139
Total Liabilities	$	9,701,395		$	9,004,226

Commitments and contingencies (See Note 10)

Stockholders’ Equity:
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)	$	80		$	80
Common stock, $.01 par value; 886,950 shares authorized; 451,692 and 449,787 shares issued and outstanding, respectively	4,517			4,498
Additional paid-in capital, in excess of par	3,634,140			3,623,275
Accumulated deficit	(637,161		)	(632,040		)
Accumulated other comprehensive income	401,850			420,288
Total Stockholders’ Equity	$	3,403,426		$	3,416,101
Total Liabilities and Stockholders’ Equity	$	13,104,821		$	12,420,327


(1)	Includes approximately $189.9 million and $209.4 million of Residential whole loans, at carrying value and $593.3 million and $694.7 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at September 30, 2019 and December 31, 2018, respectively. Such assets can be used only to settle the obligations of each respective VIE.

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

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MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands, Except Per Share Amounts)	2019			2018			2019			2018
Interest Income:
Agency MBS	$	11,806		$	14,332		$	45,521		$	42,795
Non-Agency MBS	44,582			58,667			150,610			169,812
CRT securities	4,251			7,748			15,545			25,939
Residential whole loans held at carrying value	64,226			29,524			171,725			61,788
MSR-related assets	15,274			6,407			38,232			20,249
Cash and cash equivalent investments	903			754			2,703			2,348
Other interest-earning assets	1,679			—			4,272			—
Interest Income	$	142,721		$	117,432		$	428,608		$	322,931

Interest Expense:
Repurchase agreements	$	74,240		$	50,881		$	220,939		$	142,832
Other interest expense	11,583			7,997			28,954			18,410
Interest Expense	$	85,823		$	58,878		$	249,893		$	161,242

Net Interest Income	$	56,898		$	58,554		$	178,715		$	161,689

Other Income, net:
Net gain on residential whole loans measured at fair value through earnings	$	40,175		$	34,942		$	116,915		$	105,883
Net realized gain on sales of residential mortgage securities	17,708			16,415			50,027			32,661
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings	(571		)	(8,545		)	8,101			(11,776		)
Net (loss)/gain on Swaps not designated as hedges for accounting purposes	(929		)	4,002			(17,267		)	4,355
Other, net	6,046			1,545			12,684			5,902
Other Income, net	$	62,429		$	48,359		$	170,460		$	137,025

Operating and Other Expense:
Compensation and benefits	$	7,920		$	6,868		$	24,315		$	20,654
Other general and administrative expense	5,022			4,155			15,601			13,569
Loan servicing and other related operating expenses	10,786			8,758			31,763			23,569
Operating and Other Expense	$	23,728		$	19,781		$	71,679		$	57,792

Net Income	$	95,599		$	87,132		$	277,496		$	240,922
Less Preferred Stock Dividends	3,750			3,750			11,250			11,250
Net Income Available to Common Stock and Participating Securities	$	91,849		$	83,382		$	266,246		$	229,672

Basic Earnings per Common Share	$	0.20		$	0.19		$	0.59		$	0.56
Diluted Earnings per Common Share	$	0.20		$	0.19		$	0.58		$	0.56

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

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MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
Net income	$	95,599		$	87,132		$	277,496		$	240,922
Other Comprehensive Income/(Loss):
Unrealized gain/(loss) on Agency MBS, net	603			(9,177		)	22,483			(27,507		)
Unrealized gain/(loss) on Non-Agency MBS, CRT securities and MSR term notes, net	4,880			(25,101		)	27,602			(62,743		)
Reclassification adjustment for MBS sales included in net income	(14,499		)	(9,455		)	(36,370		)	(25,580		)
Derivative hedging instrument fair value changes, net	(233		)	5,390			(30,384		)	32,974
Amortization of de-designated hedging instruments, net	(685		)	—			(1,769		)	—
Other Comprehensive Income/(Loss)	(9,934		)	(38,343		)	(18,438		)	(82,856		)
Comprehensive income before preferred stock dividends	$	85,665		$	48,789		$	259,058		$	158,066
Dividends declared on preferred stock	(3,750		)	(3,750		)	(11,250		)	(11,250		)
Comprehensive Income Available to Common Stock and Participating Securities	$	81,915		$	45,039		$	247,808		$	146,816

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

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MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
	Nine Months Ended September 30, 2019
(In Thousands, Except Per Share Amounts)	Preferred Stock 7.50% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share			Common Stock				Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
(In Thousands, Except Per Share Amounts)	Shares	Amount		Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2018	8,000	$	80	449,787		$	4,498	$	3,623,275		$	(632,040	)	$	420,288		$	3,416,101
Net income	—	—		—		—		—			88,857			—			88,857
Issuance of common stock, net of expenses	—	—		1,066		7		544			—			—			551
Repurchase of shares of common stock (1)	—	—		(370	)	—		(2,610		)	—			—			(2,610		)
Equity based compensation expense	—	—		—		—		992			—			—			992
Accrued dividends attributable to stock-based awards	—	—		—		—		435			—			—			435
Dividends declared on common stock ($0.20 per share)	—	—		—		—		—			(90,097		)	—			(90,097		)
Dividends declared on preferred stock ($0.46875 per share)	—	—		—		—		—			(3,750		)	—			(3,750		)
Dividends attributable to dividend equivalents	—	—		—		—		—			(256		)	—			(256		)
Change in unrealized gains on MBS, net	—	—		—		—		—			—			5,094			5,094
Derivative hedging instrument fair value changes, net	—	—		—		—		—			—			(10,786		)	(10,786		)
Balance at March 31, 2019	8,000	$	80	450,483		$	4,505	$	3,622,636		$	(637,286	)	$	414,596		$	3,404,531
Net income	—	—		—		—		—			93,040			—			93,040
Issuance of common stock, net of expenses	—	—		139		1		585			—			—			586
Equity based compensation expense	—	—		—		—		2,438			—			—			2,438
Accrued dividends attributable to stock-based awards	—	—		—		—		(260		)	—			—			(260		)
Dividends declared on common stock ($0.20 per share)	—	—		—		—		—			(90,124		)	—			(90,124		)
Dividends declared on preferred stock ($0.46875 per share)	—	—		—		—		—			(3,750		)	—			(3,750		)
Dividends attributable to dividend equivalents	—	—		—		—		—			(276		)	—			(276		)
Change in unrealized gains on MBS, net	—	—		—		—		—			—			17,637			17,637
Derivative hedging instrument fair value changes, net	—	—		—		—		—			—			(20,449		)	(20,449		)
Balance at June 30, 2019	8,000	$	80	450,622		$	4,506	$	3,625,399		$	(638,396	)	$	411,784		$	3,403,373
Net income	—	—		—		—		—			95,599			—			95,599
Issuance of common stock, net of expenses	—	—		1,070		11		7,713			—			—			7,724
Repurchase of shares of common stock (1)	—	—		—		—		—			—			—			—
Equity based compensation expense	—	—		—		—		1,288			—			—			1,288
Accrued dividends attributable to stock-based awards	—	—		—		—		(260		)	—			—			(260		)
Dividends declared on common stock ($0.20 per share)	—	—		—		—		—			(90,338		)	—			(90,338		)
Dividends declared on preferred stock ($0.46875 per share)	—	—		—		—		—			(3,750		)	—			(3,750		)
Dividends attributable to dividend equivalents	—	—		—		—		—			(276		)	—			(276		)
Change in unrealized gains on MBS, net	—	—		—		—		—			—			(9,016		)	(9,016

Form: 10-Q

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