August 6, 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 June 30, 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

453,330,456 shares of the registrant’s common stock, $0.01 par value, were outstanding as of July 31, 2020.

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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 June 30, 2020 (Unaudited) and December 31, 2019	1

	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2020 and June 30, 2019	2

	Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Six Months Ended June 30, 2020 and June 30, 2019	3

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2020 and June 30, 2019	4

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2020 and June 30, 2019	6

	Notes to the Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	61

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	91

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	97

Item 3.	Defaults Upon Senior Securities	97

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)	June 30, 2020			December 31, 2019
	(Unaudited)
Assets:
Residential whole loans:
Residential whole loans, at carrying value ($4,556,213 and $4,847,782 pledged as collateral, respectively) (1)	$	4,813,119		$	6,069,370
Residential whole loans, at fair value ($691,660 and $794,684 pledged as collateral, respectively) (1)	1,200,981			1,381,583
Allowance for credit losses on residential whole loans held at carrying value	(136,589		)	(3,025		)
Total residential whole loans, net	5,877,511			7,447,928
Residential mortgage securities, at fair value ($148,210 and $3,966,591 pledged as collateral, respectively)	148,343			3,983,519
Mortgage servicing rights (“MSR”) related assets ($255,035 and $1,217,002 pledged as collateral, respectively)	254,228			1,217,002
Cash and cash equivalents	666,172			70,629
Restricted cash	7,680			64,035
Other assets	613,474			784,251
Total Assets	$	7,567,408		$	13,567,364

Liabilities:
Financing agreements ($4,194,324 and $0 held at fair value, respectively)	$	5,011,356		$	10,031,606
Other liabilities	35,001			151,806
Total Liabilities	$	5,046,357		$	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; 453,244 and 452,369 shares issued and outstanding, respectively	4,532			4,524
Additional paid-in capital, in excess of par	3,922,399			3,640,341
Accumulated deficit	(1,451,783		)	(631,040		)
Accumulated other comprehensive income	45,713			370,047
Total Stockholders’ Equity	$	2,521,051		$	3,383,952
Total Liabilities and Stockholders’ Equity	$	7,567,408		$	13,567,364


(1)	Includes approximately $181.4 million and $186.4 million of Residential whole loans, at carrying value and $506.7 million and $567.4 million of Residential whole loans, at fair value transferred to consolidated variable interest entities (“VIEs”) at June 30, 2020 and December 31, 2019, 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 June 30,						Six Months Ended June 30,
(In Thousands, Except Per Share Amounts)	2020			2019			2020			2019
Interest Income:
Residential whole loans held at carrying value	$	69,427		$	57,879		$	152,913		$	107,499
Residential mortgage securities	4,975			72,395			49,349			151,037
MSR-related assets	9,741			12,338			23,948			22,958
Other interest-earning assets	3,165			1,287			6,072			2,593
Cash and cash equivalent investments	60			1,036			546			1,800
Interest Income	$	87,368		$	144,935		$	232,828		$	285,887

Interest Expense:
Asset-backed and other collateralized financing arrangements	$	82,085		$	81,826		$	159,945		$	158,841
Other interest expense	5,906			3,218			11,805			5,229
Interest Expense	$	87,991		$	85,044		$	171,750		$	164,070

Net Interest (Expense)/Income	$	(623	)	$	59,891		$	61,078		$	121,817

Reversal/(Provision) for credit and valuation losses on residential whole loans and other financial instruments	$	85,377		$	(385	)	$	(65,334	)	$	(1,190	)
Net Interest Income/(Expense) after Provision for Credit and Valuation Losses	$	84,754		$	59,506		$	(4,256	)	$	120,627

Other Income, net:
Impairment and other losses on securities available-for-sale and other assets	$	(5,094	)	$	—		$	(424,745	)	$	—
Net realized gain/(loss) on sales of residential mortgage securities and residential whole loans	49,485			7,710			(188,895		)	32,319
Net unrealized gain/(loss) on residential mortgage securities measured at fair value through earnings	64,438			—			(13,523		)	8,672
Net gain/(loss) on residential whole loans measured at fair value through earnings	20,320			51,473			(32,440		)	76,740
Loss on terminated swaps previously designated as hedges for accounting purposes	(49,857		)	—			(49,857		)	—
Other, net	(2,935		)	(2,321		)	(4,946		)	(9,700		)
Other Income/(Loss), net	$	76,357		$	56,862		$	(714,406	)	$	108,031

Operating and Other Expense:
Compensation and benefits	$	8,578		$	7,841		$	17,477		$	16,395
Other general and administrative expense	7,652			5,934			12,227			10,579
Loan servicing and other related operating expenses	8,337			9,553			19,617			19,787
Costs associated with restructuring/forbearance agreement	39,966			—			44,434			$	—
Operating and Other Expense	$	64,533		$	23,328		$	93,755		$	46,761

Net Income/(Loss)	$	96,578		$	93,040		$	(812,417	)	$	181,897
Less Preferred Stock Dividend Requirement	$	8,144		$	3,750		$	13,359		7,500
Net Income/(Loss) Available to Common Stock and Participating Securities	$	88,434		$	89,290		$	(825,776	)	$	174,397

Basic Earnings/(Loss) per Common Share	$	0.19		$	0.20		$	(1.82	)	$	0.39
Diluted Earnings/(Loss) per Common Share	$	0.19		$	0.20		$	(1.82	)	$	0.38

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 June 30,						Six Months Ended June 30,
(In Thousands)	2020			2019			2020			2019
Net income/(loss)	$	96,578		$	93,040		$	(812,417	)	$	181,897
Other Comprehensive Income/(Loss):
Unrealized gains on securities available-for-sale	48,715			24,008			393,503			44,307
Reclassification adjustment for MBS sales included in net income	(144,736		)	(6,371		)	(389,067		)	(21,576		)
Reclassification adjustment for impairments included in net income	—			—			(344,269		)	—
Derivative hedging instrument fair value changes, net	—			(19,706		)	(50,126		)	(30,151		)
Reclassification adjustment for losses/(gains) related to hedging instruments included in net income	64,032			(743		)	65,625			(1,084		)
Other Comprehensive Income/(Loss)	(31,989		)	(2,812		)	(324,334		)	(8,504		)
Comprehensive income before preferred stock dividends	$	64,589		$	90,228		$	(1,136,751	)	$	173,393
Dividends required on preferred stock	(8,144		)	(3,750		)	(13,359		)	(7,500		)
Comprehensive Income/(Loss) Available to Common Stock and Participating Securities	$	56,445		$	86,478		$	(1,150,110	)	$	165,893

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)
	Six Months Ended June 30, 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
Net income	—	—		—	—		—		—		—			96,578			—			96,578
Issuance of common stock, net of expenses	—	—		—	—		106		1		36			—			—			37
Equity based compensation expense	—	—		—	—		—		—		1,709			—			—			1,709
Change in unrealized gains on MBS, net	—	—		—	—		—		—		—			—			(96,021		)	(96,021		)
Derivative hedging instrument fair value changes, net	—	—		—	—		—		—		—			—			64,032			64,032
Warrants Issued	—	—		—	—		—		—		14,041			—			—			14,041
Balance at June 30, 2020	11,000	$	110	8,000	$	80	453,244		$	4,532

Form: 10-Q

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