June 22, 2020 - 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 March 31, 2020

☐ 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
6.50% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share	MFA/PC	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

453,242,244 shares of the registrant’s common stock, $0.01 par value, were outstanding as of June 10, 2020.

Explanatory Note

On May 6, 2020, MFA Financial, Inc. (the “Company”) furnished information in a Current Report on Form 8-K (the “Form 8-K”) pursuant to the Order (Release No. 34-88465) of the U.S. Securities and Exchange Commission (the “SEC”), dated March 25, 2020 (the “Order”). The Order provides registrants, including the Company, with the ability to extend the dates by which certain filings are required to be made with the SEC, in light of operational challenges presented by the COVID-19 pandemic. In the Form 8-K, the Company disclosed that, while it had fully implemented its business continuity plan and had transitioned to a remote work environment in response to the operational and health risks associated with the COVID-19 pandemic, the disruption and volatility in the financial markets triggered in large part by the pandemic had a significant impact on the Company’s operations and financial position. As a result, the Company’s management had to devote significant time and attention to address such matters, which had diverted management resources from completing tasks necessary to timely file this Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (the “Quarterly Report”) on or before the original filing deadline of May 11, 2020. In light of the foregoing circumstances, and in reliance on the Order, the Company disclosed in the Form 8-K that it did not intend to file the Quarterly Report by May 11, 2020. The Company, in reliance on and as permitted by the Order, is hereby timely filing this Quarterly Report within 45 days from the original filing deadline.

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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 March 31, 2020 (Unaudited) and December 31, 2019	1

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2020 and March 31, 2019	2

	Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three Months Ended March 31, 2020 and March 31, 2019	3

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2020 and March 31, 2019	4

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2020 and March 31, 2019	6

	Notes to the Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	89

Item 4.	Controls and Procedures	96

PART II
OTHER INFORMATION

Item 1.	Legal Proceedings	97

Item 1A.	Risk Factors	97

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

Item 3.	Defaults Upon Senior Securities	98

Item 4.	Mine Safety Disclosures	99

Item 5.	Other Information	99

Item 6.	Exhibits	99

Signatures		100

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MFA FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS

(In Thousands Except Per Share Amounts)	March 31, 2020			December 31, 2019
	(Unaudited)
Assets:
Residential whole loans:
Residential whole loans, at carrying value ($5,055,177 and $4,847,782 pledged as collateral, respectively) (1) (2)	$	5,934,042		$	6,069,370
Residential whole loans, at fair value ($718,343 and $794,684 pledged as collateral, respectively) (1)	1,243,792			1,381,583
Allowance for credit and valuation losses on residential whole loans held at carrying value and held-for-sale	(218,011		)	(3,025		)
Total residential whole loans, net	6,959,823			7,447,928
Residential mortgage securities:
Non-Agency MBS, at fair value ($1,331,674 and $2,055,802 pledged as collateral, respectively)	1,119,940			2,063,529
Agency MBS, at fair value ($568,704 and $1,658,614 pledged as collateral, respectively)	553,413			1,664,582
Credit Risk Transfer (“CRT”) securities, at fair value ($263,225 and $252,175 pledged as collateral, respectively)	254,101			255,408
Mortgage servicing rights (“MSR”) related assets ($877,204 and $1,217,002 pledged as collateral, respectively)	738,054			1,217,002
Cash and cash equivalents	116,465			70,629
Restricted cash	216,902			64,035
Other assets	1,171,639			784,251
Total Assets	$	11,130,337		$	13,567,364

Liabilities:
Repurchase agreements	$	7,768,180		$	9,139,821
Other liabilities	921,482			1,043,591
Total Liabilities	$	8,689,662		$	10,183,412

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
Preferred stock, $.01 par value; 6.50% Series C fixed-to-floating rate cumulative redeemable; 12,650 shares authorized; 11,000 shares issued and outstanding ($275,000 aggregate liquidation preference)	110			—
Common stock, $.01 par value; 874,300 and 886,950 shares authorized; 453,138 and 452,369 shares issued and outstanding, respectively	4,531			4,524
Additional paid-in capital, in excess of par	3,906,613			3,640,341
Accumulated deficit	(1,548,361		)	(631,040		)
Accumulated other comprehensive income	77,702			370,047
Total Stockholders’ Equity	$	2,440,675		$	3,383,952
Total Liabilities and Stockholders’ Equity	$	11,130,337		$	13,567,364


(1)	Includes approximately $185.9 million and $186.4 million of Residential whole loans, at carrying value and $516.4 million and $567.4 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at March 31, 2020 and December 31, 2019, respectively. Such assets can be used only to settle the obligations of each respective VIE.


(2)	Includes Non-QM loans held-for-sale with an amortized cost of $965.5 million and a net carrying value of $895.3 million at March 31, 2020.

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 March 31,
(In Thousands, Except Per Share Amounts)	2020			2019
Interest Income:
Residential whole loans held at carrying value	$	83,486		$	49,620
Non-Agency MBS	32,551			54,001
Agency MBS	8,861			18,441
CRT securities	2,962			6,200
MSR-related assets	14,207			10,620
Cash and cash equivalent investments	486			764
Other interest-earning assets	2,907			1,306
Interest Income	$	145,460		$	140,952

Interest Expense:
Repurchase agreements	$	72,698		$	70,809
Other interest expense	11,061			8,217
Interest Expense	$	83,759		$	79,026

Net Interest Income	$	61,701		$	61,926

Provision for credit and valuation losses on residential whole loans and other financial instruments	$	(150,827	)	$	(805	)
Net Interest Income after Provision for Credit and Valuation Losses	$	(89,126	)	$	61,121

Other Income, net:
Impairment and other losses on securities available-for-sale and other assets	$	(419,651	)	$	—
Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans	(238,380		)	24,609
Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings	(77,961		)	8,672
Net (loss)/gain on residential whole loans measured at fair value through earnings	(52,760		)	25,267
Net loss on Swaps not designated as hedges for accounting purposes	(4,239		)	(8,944		)
Other, net	2,228			1,565
Other (Loss)/Income, net	$	(790,763	)	$	51,169

Operating and Other Expense:
Compensation and benefits	$	8,899		$	8,554
Other general and administrative expense	4,575			4,645
Loan servicing and other related operating expenses	11,164			10,234
Costs associated with restructuring/forbearance agreement	4,468			—
Operating and Other Expense	$	29,106		$	23,433

Net (Loss)/Income	$	(908,995	)	$	88,857
Less Preferred Stock Dividend Requirement	$	5,215		$	3,750
Net (Loss)/Income Available to Common Stock and Participating Securities	$	(914,210	)	$	85,107

Basic (Loss)/Earnings per Common Share	$	(2.02	)	$	0.19
Diluted (Loss)/Earnings per Common Share	$	(2.02	)	$	0.19

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 March 31,
(In Thousands)	2020			2019
Net (loss)/income	$	(908,995	)	$	88,857
Other Comprehensive Income/(Loss):
Unrealized gains on securities available-for-sale	124,410			22,103
Reclassification adjustment for MBS sales included in net income	(23,953		)	(17,009		)
Reclassification adjustment for impairments included in net income	(344,269		)	—
Derivative hedging instrument fair value changes, net	(50,127		)	(10,445		)
Amortization of de-designated hedging instruments, net	1,594			(341		)
Other Comprehensive Income/(Loss)	(292,345		)	(5,692		)
Comprehensive income before preferred stock dividends	$	(1,201,340	)	$	83,165
Dividends required on preferred stock	(5,215		)	(3,750		)
Comprehensive Income Available to Common Stock and Participating Securities	$	(1,206,555	)	$	79,415

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)
	Three Months Ended March 31, 2020
(In Thousands, Except Per Share Amounts)	Preferred Stock 6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable - Liquidation Preference $25.00 per Share			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		Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2019	—	$	—	8,000	$	80	452,369		$	4,524	$	3,640,341		$	(631,040	)	$	370,047		$	3,383,952
Cumulative effect adjustment on adoption of new accounting standard ASU 2016-13	—	—		—	—		—		—		—			(8,326		)	—			(8,326		)
Net loss	—	—		—	—		—		—		—			(908,995		)	—			(908,995		)
Issuance of Series C Preferred Stock, net of expenses	11,000	110		—	—		—		—		265,919			—			—			266,029
Issuance of common stock, net of expenses	—	—		—	—		1,106		7		680			—			—			687
Repurchase of shares of common stock (1)	—	—		—	—		(337	)	—		(2,652		)	—			—			(2,652		)
Equity based compensation expense	—	—		—	—		—		—		1,266			—			—			1,266
Accrued dividends attributable to stock-based awards	—	—		—	—		—		—		1,059			—			—			1,059
Change in unrealized gains on MBS, net	—	—		—	—		—		—		—			—			(243,812		)	(243,812		)
Derivative hedging instrument fair value changes and amortization, net	—	—		—	—		—		—		—			—			(48,533		)	(48,533		)
Balance at March 31, 2020	11,000	$	110	8,000	$	80	453,138		$	4,531	$	3,906,613		$	(1,548,361	)	$	77,702		$	2,440,675

(1) For the three months ended March 31, 2020 includes approximately $2.7 million (337,026 shares) surrendered for tax purposes related to equity-based compensation awards.

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)
	Three Months Ended March 31, 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 losses on MBS, net	—	—		—		—		—			—			5,094			5,094
Derivative hedging instruments 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

(1) For the three months ended March 31, 2019, includes approximately $2.6 million (370,244 shares) surrendered for tax purposes related to equity-based compensation awards.

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

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MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
(In Thousands)	2020			2019
Cash Flows From Operating Activities:
Net (loss)/income	$	(908,995	)	$	88,857
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sales of residential whole loans at carrying value	145,791			—
Loss/(gain) on sales of residential mortgage securities and MSR-related assets	92,589			(24,609		)
Gain on sales of real estate owned	(3,107		)	(1,398		)
Gain on liquidation of residential whole loans	(1,105		)	(4,684		)
Impairment and other losses on securities available-for-sale and other assets	419,651			—
Accretion of purchase discounts on residential mortgage securities, residential whole loans and MSR-related assets	(12,114		)	(15,915		)
Amortization of purchase premiums on residential mortgage securities and residential whole loans, and amortization of terminated hedging instruments	15,266			7,620
Depreciation and amortization on real estate, fixed assets and other assets	3,582			432
Equity-based compensation expense	1,273			998
Unrealized losses on residential whole loans at fair value	74,556			1,060
Provision for credit and valuation losses on residential whole loans and other financial instruments	150,827			—
Unrealized losses on residential mortgage securities and interest rate swap agreements (“Swaps”) and other	82,464			200
Increase in other assets	(37,811		)	(8,770		)
Decrease in other liabilities	(9,653		)	(6,709		)
Net cash provided by operating activities	$	13,214		$	37,082

Cash Flows From Investing Activities:
Purchases of residential whole loans, loan related investments and capitalized advances	$	(1,119,464	)	$	(1,021,557	)
Principal payments on residential whole loans	508,855			233,724
Principal payments on residential mortgage securities and MSR-related assets	539,882			391,641
Proceeds from sales of residential mortgage securities	1,009,316			208,306
Purchases of residential mortgage securities and MSR-related assets	(162,607		)	(327,221		)
Proceeds from sales of real estate owned	52,042			23,963
Purchases of real estate owned and capital improvements	(5,606		)	(5,923		)
Additions to leasehold improvements, furniture and fixtures	(176		)	(391		)
Net cash provided by/(used in) investing activities	$	822,242		$	(497,458	)

Cash Flows From Financing Activities:
Principal payments on repurchase agreements	$	(12,903,818	)	$	(18,879,173	)
Proceeds from borrowings under repurchase agreements	12,216,862			19,509,794
Principal payments on securitized debt	(37,418		)	(25,501		)
Payments made for settlements and unwinds of Swaps	(88,405		)	(21,478		)
Proceeds from issuance of Series C Preferred Stock	275,000			—
Payments made for costs related to Series C Preferred Stock issuance	(8,912		)	—
Proceeds from issuances of common stock	687			551
Dividends paid on preferred stock	—			(3,750		)
Dividends paid on common stock and dividend equivalents	(90,749		)	(90,198		)
Net cash (used in)/provided by financing activities	$	(636,753	)	$	490,245
Net increase in cash, cash equivalents and restricted cash	$	198,703		$	29,869
Cash, cash equivalents and restricted cash at beginning of period	$	134,664		$	88,709
Cash, cash equivalents and restricted cash at end of period	$	333,367		$	118,578

Supplemental Disclosure of Cash Flow Information
Interest Paid	$	80,158		$	81,435

Non-cash Investing and Financing Activities:
Transfer from residential whole loans to real estate owned	$	50,693		$	65,160
Dividends and dividend equivalents declared and unpaid	$	—		$	90,353
Receivable for unsettled MBS, MSR-related asset, and residential whole loan sales	$	419,583		$	—

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

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

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 U.S. 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. The Company has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. (See Note 2(n))

2. Summary of Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The interim unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “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 in accordance with these SEC rules and regulations. Management believes that the disclosures included in these interim unaudited consolidated financial statements are adequate to make the information presented not misleading. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2020 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2020 should not be construed as indicative of the results to be expected for the full year.

The accompanying 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. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could differ from those estimates, which could materially impact the Company’s results of operations and its financial condition. Management has made significant estimates in several areas, including impairment, valuation allowances and loss allowances on residential whole loans (See Note 3), mortgage-backed securities (“MBS”) (See Note 4) and Other Assets (See Note 5), valuation of MBS, CRT securities and MSR-related assets (See Notes 4 and 14), income recognition and valuation of residential whole loans (See Notes 3 and 14), valuation of derivative instruments (See Notes 5(c) and 14) and income recognition on certain Non-Agency MBS (defined below) purchased at a discount. (See Note 4) In addition, estimates are used in the determination of taxable income used in the assessment of REIT compliance and contingent liabilities for related taxes, penalties and interest. (See Note 2(n)) Actual results could differ from those estimates.

The Company has

Form: 10-Q

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