MFA Financial(MFA) - 2020 Q4 - Annual Report

Part I Business MFA Financial, an internally-managed REIT, significantly reshaped its residential mortgage asset portfolio in 2020 towards whole loans and adopted more durable financing strategies in response to COVID-19 market disruption and extensive regulatory oversight - MFA Financial operates as an internally-managed REIT, investing on a leveraged basis in residential mortgage assets, including whole loans, mortgage-backed securities (MBS), and MSR-related assets[21][27] - In response to the COVID-19 pandemic's market disruption in 2020, the company significantly changed its asset composition, selling all Agency and Legacy Non-Agency MBS and reducing investments in MSR-related assets and CRT securities[22][26] Portfolio Composition Change (2019 vs. 2020) | Asset Class | % of Assets (Dec 31, 2020) | % of Assets (Dec 31, 2019) | | :--- | :--- | :--- | | Residential whole loans | 77% | 55% | | Residential mortgage securities | 2% | 29% | | MSR-related assets | 3% | 9% | - The company's financing strategy shifted in 2020 to rely more heavily on durable, non-mark-to-market financing, such as term loan facilities and securitizations, to reduce exposure to margin calls[36] - The business is subject to extensive regulation, including the Dodd-Frank Act, and recent pandemic-related legislation like the CARES Act, which introduced homeowner protections such as forbearance and foreclosure moratoriums[42][43][47] Risk Factors The company faces significant risks including ongoing COVID-19 impacts, credit and prepayment risks from its whole loan portfolio, leverage-related challenges, market volatility, liquidity concerns, and regulatory and interest rate changes affecting REIT status and profitability - The COVID-19 pandemic has adversely affected and is likely to continue to affect the company's business, financial condition, and operations due to market volatility, potential for increased loan delinquencies, and uncertain economic conditions[64][66] - The company's investment portfolio, which is heavily concentrated in residential whole loans (77% of total assets), is subject to significant credit risk from borrower defaults, particularly during economic downturns[73][74] - The use of leverage, primarily through repurchase agreements, exposes the company to risks of increased borrowing costs, margin calls during market declines, and potential termination of financing lines, which could force asset sales under adverse conditions[107][109] - Failure to maintain qualification as a REIT would subject the company to corporate income tax, substantially reducing cash available for distribution to stockholders and potentially leading to delisting from the NYSE[153][155] - The planned discontinuation of LIBOR after 2021 and transition to alternative reference rates like SOFR introduces uncertainty and potential basis risk that could adversely affect the profitability of its assets, liabilities, and hedges[113][114] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[202] Properties The company leases its corporate headquarters in New York, NY, extending its current lease through June 2021 while executing a new 15-year lease for a new headquarters with relocation expected in Q1 2021 - The company leases its corporate headquarters in New York, NY, with the current lease extended through June 30, 2021, and the expense for this lease was approximately $2.9 million for the year ended December 31, 2020[203] - A new 15-year lease for new office space in New York has been executed, with an expected relocation in Q1 2021, and the estimated annual rental expense for the new space is approximately $4.6 million[204] Legal Proceedings The company reports that it is not a party to any material legal proceedings, nor are any of its assets subject to such proceedings - There are no material legal proceedings to which the company is a party or to which any of its assets are subject[205] Mine Safety Disclosures This section is not applicable to the company's business - Not applicable[206] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's NYSE-listed common and preferred stocks saw a significant dividend reduction in 2020, alongside the authorization and partial execution of a $250 million share repurchase program, while no shares were sold through its ATM program Common Stock Dividends Declared (per share) | Year | Dividend per Share | | :--- | :--- | | 2020 | $0.125 | | 2019 | $0.80 | - A new share repurchase program was authorized on November 2, 2020, for up to $250 million of common stock through the end of 2022[214] 2020 Share and Warrant Repurchases | Security | Shares/Warrants Repurchased | Total Cost | | :--- | :--- | :--- | | Common Stock | 14,085,678 | ~$50.8 million | | Warrants | 17,593,576 | $33.7 million | - The company did not sell any shares through its At-the-Market (ATM) Program during 2020, with approximately $390.0 million remaining available for future offerings[223] Management's Discussion and Analysis of Financial Condition and Results of Operations MFA Financial reported a significant net loss in 2020 due to COVID-19 market disruption, asset sales, and impairment charges, leading to a reshaped portfolio focused on residential whole loans, increased financing costs, and a decline in GAAP book value per share, while adopting CECL and prioritizing liquidity Year-over-Year Performance Comparison | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net (Loss)/Income | ($709.2 million) | $363.1 million | | (Loss)/Earnings per Share | ($1.57) | $0.80 | | GAAP Book Value per Share | $4.54 | $7.04 | - The significant net loss in 2020 was primarily due to asset sales at a loss, impairment charges on securities and MSR-related assets, and higher financing costs resulting from market disruption caused by the COVID-19 pandemic[273] Residential Mortgage Asset Portfolio Activity (2020, in Millions) | | Dec 31, 2019 | Runoff | Acquisitions | Sales | Other | Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Residential whole loans and REO | $7,860 | $(1,920) | $1,345 | $(1,780) | $70 | $5,575 | | MSR-related assets | $1,217 | $(77) | $4 | $(683) | $(222) | $239 | | Residential mortgage securities | $3,984 | $(558) | $160 | $(3,000) | $(425) | $161 | | Totals | $13,061 | $(2,555) | $1,509 | $(5,463) | $(577) | $5,975 | - The company adopted the new CECL accounting standard on January 1, 2020, and recorded a provision for credit losses of $13.4 million on residential whole loans held at carrying value for the year[245][297] - Net interest income decreased by 63.7% to $90.6 million in 2020 from $249.4 million in 2019, driven by lower average balances of interest-earning assets due to portfolio sales and higher funding costs[276] Quantitative and Qualitative Disclosures About Market Risk The company manages significant market risks including interest rate sensitivity, concentrated credit risk in residential whole loans, and liquidity risk through stable financing and strong cash positions, while also addressing prepayment risk affecting asset yields Interest Rate Sensitivity Analysis (as of Dec 31, 2020) | Change in Interest Rates | % Change in Net Interest Income | % Change in Portfolio Value | | :--- | :--- | :--- | | +100 Basis Points | +6.27% | -1.76% | | +50 Basis Points | +3.10% | -0.80% | | -50 Basis Points | -3.87% | +0.63% | | -100 Basis Points | -8.03% | +1.09% | - The company's primary credit risk exposure is concentrated in its residential whole loan portfolio, which is underwritten to mitigate loss through low LTVs for performing loans and significant purchase discounts for non-performing loans[354][355][356] Top 5 Geographic Concentrations of Residential Whole Loans (by UPB) | Property Location | Percent of Interest-Bearing UPB | | :--- | :--- | | California | 35.1% | | Florida | 13.4% | | New York | 7.9% | | New Jersey | 5.4% | | Texas | 3.1% | - Liquidity risk, stemming from financing long-term assets with short-term borrowings, is managed by increasing the use of non-recourse financing (securitizations) and maintaining access to $814.4 million in cash and cash equivalents as of year-end 2020[365][367] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and KPMG LLP's independent auditor's report, which highlights critical audit matters related to the allowance for credit losses and valuation of residential whole loans due to significant judgment and estimates Consolidated Balance Sheet Highlights (in Thousands) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Residential Whole Loans, net | $5,325,401 | $7,447,928 | | Total Assets | $6,932,300 | $13,568,170 | | Total Liabilities | $4,407,498 | $10,184,218 | | Total Stockholders' Equity | $2,524,802 | $3,383,952 | Consolidated Statement of Operations Highlights (in Thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $90,626 | $249,370 | | Other (Loss)/Income, net | ($606,121) | $225,857 | | Net (Loss)/Income | ($679,390) | $378,117 | - The independent auditor's report from KPMG LLP identified two critical audit matters: the assessment of the allowance for credit losses on residential whole loans held at carrying value, and the valuation of residential whole loans carried at fair value, due to the high degree of subjective and complex judgment required[380][383][387] - The company adopted the new credit loss accounting standard (ASU 2016-13 / CECL) on January 1, 2020, resulting in a cumulative-effect adjustment that increased the allowance for credit losses on Purchased Performing Loans by approximately $8.3 million[481] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[719] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, a conclusion affirmed by KPMG LLP's unqualified opinion, with no material changes identified in Q4 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[721] - Management assessed internal control over financial reporting using the 2013 COSO framework and concluded it was effective as of December 31, 2020[724] - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[725][728] - There were no changes in internal control over financial reporting during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, these controls[726] Other Information The company executed amended employment agreements with its CEO and Co-CIOs, effective January 1, 2021, outlining base salaries, performance-based bonuses tied to ROAE and individual metrics, annual RSU grants, and severance provisions - Amended and restated employment agreements were executed with the CEO and two Co-CIOs, effective January 1, 2021[735] Executive Compensation Structure | Executive | Position | Base Salary (USD) | Target Annual Bonus (USD) | | :--- | :--- | :--- | :--- | | Craig L. Knutson | CEO & President | $800,000 | $2,000,000 | | G. Kristjansson | Co-CIO & SVP | $400,000 | $950,000 | | Bryan Wulfsohn | Co-CIO & SVP | $400,000 | $950,000 | - The annual bonus is comprised of two components: 75% based on the company's adjusted Return on Average Equity (ROAE) and 25% based on individual performance, company performance, and risk management (IRM Bonus)[739][740][744] - Executives receive annual grants of time-based and performance-based Restricted Stock Units (RSUs), with performance metrics tied to absolute and relative Total Shareholder Return (TSR) over a three-year period[747][752] Part III Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, corporate governance, and compliance with Section 16(a) of the 1934 Act is incorporated by reference from the company's definitive proxy statement, which is expected to be filed in April 2021 - Information required by this item is incorporated by reference from the company's definitive proxy statement to be filed in connection with its 2021 Annual Meeting of Stockholders[768][769][770] Executive Compensation Information regarding executive compensation and related matters is incorporated by reference from the company's definitive proxy statement to be filed in April 2021 - Information required by this item is incorporated by reference from the company's definitive proxy statement[772] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, including equity compensation plan details, is incorporated by reference from the definitive proxy statement, with 3,452,629 securities outstanding and 14,273,190 available for future issuance as of December 31, 2020 - Information regarding security ownership is incorporated by reference from the company's definitive proxy statement[773] Equity Compensation Plan Information (as of Dec 31, 2020) | | Number of Securities | | :--- | :--- | | To be issued upon exercise of outstanding rights | 3,452,629 | | Remaining available for future issuance | 14,273,190 | Certain Relationships and Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive proxy statement to be filed in April 2021 - Information required by this item is incorporated by reference from the company's definitive proxy statement[777] Principal Accountant Fees and Services Information regarding principal accountant fees and services, along with the Audit Committee's pre-approval policies, is incorporated by reference from the company's definitive proxy statement to be filed in April 2021 - Information required by this item is incorporated by reference from the company's definitive proxy statement[778] Part IV Exhibits and Financial Statement Schedules This section provides an index of exhibits filed with the Form 10-K, including consolidated financial statements, the independent auditor's report, corporate governance documents, material contracts, and Sarbanes-Oxley certifications, many of which are incorporated by reference - This section includes the consolidated financial statements and the independent auditor's report[781] - An index of exhibits is provided, listing corporate governance documents, debt instruments, material contracts, and executive compensation plans, many are incorporated by reference[785] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits[816][817] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[826]