MFA Financial(MFA) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents MFA Financial, Inc.'s unaudited consolidated financial statements and management's discussion and analysis for the period ended June 30, 2021 Item 1. Financial Statements This section presents the unaudited consolidated financial statements of MFA Financial, Inc. for the period ended June 30, 2021, including balance sheets, statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, significant accounting policies, and specific financial instrument details Consolidated Balance Sheets This section provides a comparative overview of the company's financial position, detailing assets, liabilities, and stockholders' equity at June 30, 2021, and December 31, 2020 Consolidated Balance Sheet Highlights (June 30, 2021 vs. December 31, 2020) | Category | June 30, 2021 (Thousands) | December 31, 2020 (Thousands) | Change (Thousands) | % Change | |:---|:---|:---|:---|:---| | Assets: ||||| | Residential whole loans, net | $5,550,979 | $5,325,401 | $225,578 | 4.24% | | Securities, at fair value | $302,835 | $399,999 | $(97,164) | -24.29% | | Cash and cash equivalents | $906,409 | $814,354 | $92,055 | 11.30% | | Total Assets | $7,208,409 | $6,932,300 | $276,109 | 3.98% | | Liabilities: ||||| | Financing agreements | $4,428,791 | $4,336,976 | $91,815 | 2.12% | | Other liabilities | $253,081 | $70,522 | $182,559 | 258.86% | | Total Liabilities | $4,681,872 | $4,407,498 | $274,374 | 6.22% | | Stockholders' Equity: ||||| | Total Stockholders' Equity | $2,526,537 | $2,524,802 | $1,735 | 0.07% | Consolidated Statements of Operations This section presents the company's unaudited financial performance, including interest income, expenses, net income, and earnings per share for the three and six months ended June 30, 2021 and 2020 Consolidated Statements of Operations Highlights (Three Months Ended June 30) | Metric | 2021 (Thousands) | 2020 (Thousands) | Change (Thousands) | % Change | |:---|:---|:---|:---|:---| | Interest Income | $84,528 | $102,778 | $(18,250) | -17.76% | | Interest Expense | $25,555 | $87,991 | $(62,436) | -71.00% | | Net Interest Income | $58,973 | $14,787 | $44,186 | 298.82% | | Reversal/(Provision) for credit and valuation losses | $8,867 | $85,377 | $(76,510) | -89.62% | | Other Income/(Loss), net | $21,647 | $60,947 | $(39,300) | -64.48% | | Operating and Other Expense | $22,773 | $64,533 | $(41,760) | -64.71% | | Net Income/(Loss) | $66,714 | $96,578 | $(29,864) | -30.92% | | Net Income/(Loss) Available to Common Stock | $58,495 | $88,434 | $(29,939) | -33.85% | | Basic Earnings/(Loss) per Common Share | $0.13 | $0.19 | $(0.06) | -31.58% | | Diluted Earnings/(Loss) per Common Share | $0.13 | $0.19 | $(0.06) | -31.58% | Consolidated Statements of Operations Highlights (Six Months Ended June 30) | Metric | 2021 (Thousands) | 2020 (Thousands) | Change (Thousands) | % Change | |:---|:---|:---|:---|:---| | Interest Income | $165,579 | $270,787 | $(105,208) | -38.85% | | Interest Expense | $55,625 | $171,750 | $(116,125) | -67.61% | | Net Interest Income | $109,954 | $99,037 | $10,917 | 11.02% | | Reversal/(Provision) for credit and valuation losses | $31,617 | $(65,334) | $96,951 | -148.39% | | Other Income/(Loss), net | $55,966 | $(752,365) | $808,331 | -107.44% | | Operating and Other Expense | $45,301 | $93,755 | $(48,454) | -51.68% | | Net Income/(Loss) | $152,236 | $(812,417) | $963,700 | -118.62% | | Net Income/(Loss) Available to Common Stock | $135,798 | $(825,776) | $961,574 | -116.44% | | Basic Earnings/(Loss) per Common Share | $0.30 | $(1.82) | $2.12 | -116.48% | | Diluted Earnings/(Loss) per Common Share | $0.30 | $(1.82) | $2.12 | -116.48% | Consolidated Statements of Comprehensive Income/(Loss) This section outlines the company's comprehensive income or loss, including net income and other comprehensive income components, for the three and six months ended June 30, 2021 and 2020 Consolidated Statements of Comprehensive Income/(Loss) Highlights (Six Months Ended June 30) | Metric | 2021 (Thousands) | 2020 (Thousands) | Change (Thousands) | % Change | |:---|:---|:---|:---|:---| | Net income/(loss) | $152,236 | $(812,417) | $964,653 | -118.74% | | Other Comprehensive (Loss) | $(12,718) | $(324,334) | $311,616 | -96.08% | | Comprehensive income/(loss) before preferred stock dividends | $139,518 | $(1,136,751) | $1,276,269 | -112.27% | | Comprehensive Income/(Loss) Available to Common Stock | $123,080 | $(1,150,110) | $1,273,190 | -110.70% | Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's stockholders' equity, including net income, stock issuances, repurchases, and dividends, for the six months ended June 30, 2021 and 2020 Changes in Stockholders' Equity (Six Months Ended June 30, 2021) | Item | Amount (Thousands) | |:---|:---| | Balance at December 31, 2020 | $2,524,802 | | Net Income | $152,236 | | Issuance of common stock, net of expenses | $780 | | Repurchase of shares of common stock | $(48,877) | | Equity based compensation expense | $4,427 | | Dividends declared on common stock | $(77,602) | | Dividends declared on Preferred Stock | $(16,438) | | Change in unrealized gains on MBS, net | $(13,444) | | Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk | $726 | | Balance at June 30, 2021 | $2,526,537 | Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2021 and 2020 Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30) | Category | 2021 (Thousands) | 2020 (Thousands) | Change (Thousands) | |:---|:---|:---|:---| | Net cash provided by operating activities | $96,596 | $56,644 | $39,952 | | Net cash provided by investing activities | $39,494 | $5,405,435 | $(5,365,941) | | Net cash used in financing activities | $(42,361) | $(4,922,891) | $4,880,530 | | Net increase in cash, cash equivalents and restricted cash | $93,729 | $539,188 | $(445,459) | | Cash, cash equivalents and restricted cash at end of period | $915,248 | $673,852 | $241,396 | Notes to the Unaudited Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements, covering accounting policies, financial instruments, and other relevant information Note 1. Organization This note describes MFA Financial, Inc.'s corporate structure, its election as a REIT, and the role of its taxable REIT subsidiaries - MFA Financial, Inc. 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, requiring it to distribute at least 90% of its annual REIT taxable income to stockholders. Certain subsidiaries are treated as taxable REIT subsidiaries ("TRS") to hold assets and engage in activities not permitted directly by the REIT[28] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the interim financial statements, including those for loan valuation, derivatives, and income taxes - The interim unaudited consolidated financial statements are prepared in accordance with SEC rules and GAAP, requiring management to make significant estimates and assumptions, particularly for impairment, valuation allowances, and loss allowances on residential whole loans and securities. The Company manages its business as one operating segment: investing in residential mortgage assets on a leveraged basis[29][30][31] - Starting in Q2 2021, the Company elected the fair value option for all new loan purchases, simplifying reporting. Previously, this option was primarily used for Purchased Non-performing Loans. Loans acquired before Q2 2021 are not retroactively adjusted to fair value[33] - The Company uses various derivative instruments, primarily Swaps and TBA securities, to economically hedge exposure to market risks like interest rate and prepayment risk. All Swaps were terminated in Q1 2020 due to market turmoil from COVID-19, but TBA short positions were initiated in Q2 2021 to hedge Agency eligible investor loans[75][76][78] - The Company has elected to be taxed as a REIT, requiring distribution of at least 90% of REIT taxable income. TRS subsidiaries are subject to corporate income taxes, and their net taxable income is generally not included in REIT taxable income until distributed. No provision for current or deferred income taxes has been made for the REIT, but a valuation allowance for deferred tax assets related to TRS net taxable losses was recognized[72][73] Note 3. Residential Whole Loans This note provides detailed information on the company's residential whole loan portfolio, including accounting models, credit loss allowances, and interest income - As of June 30, 2021, residential whole loans totaled $5.55 billion, up from $5.33 billion at December 31, 2020. The Company began electing the fair value option for all loan purchases in Q2 2021, a change from prior periods where it was typically only elected for Purchased Non-performing Loans[87][88] Residential Whole Loans by Accounting Model (June 30, 2021 vs. December 31, 2020) | Category | June 30, 2021 (Thousands) | December 31, 2020 (Thousands) | % Change | |:---|:---|:---|:---| | Held at Carrying Value: |||| | Purchased Performing Loans | $2,861,228 | $3,521,624 | -18.75% | | Purchased Credit Deteriorated Loans | $609,157 | $673,708 | -9.58% | | Allowance for Credit Losses | $(54,261) | $(86,833) | -37.50% | | Held at Fair Value: |||| | Purchased Performing Loans | $966,404 | $0 | N/A | | Purchased Non-Performing Loans | $1,168,451 | $1,216,902 | -3.98% | | Total Residential Whole Loans | $5,550,979 | $5,325,401 | 4.24% | | Number of loans | 18,592 | 18,734 | -0.76% | Allowance for Credit Losses Roll-Forward (Six Months Ended June 30, 2021) | Category | Allowance at Dec 31, 2020 (Thousands) | Current provision/(reversal) (Thousands) | Write-offs (Thousands) | Allowance at Jun 30, 2021 (Thousands) | |:---|:---|:---|:---|:---| | Non-QM loans | $21,068 | $(8,939) | $(37) | $12,092 | | Rehabilitation loans | $18,371 | $(5,509) | $(1,258) | $11,604 | | Single-family rental loans | $3,918 | $(1,558) | $0 | $2,360 | | Seasoned performing loans | $107 | $(50) | $0 | $57 | | Purchased Credit Deteriorated Loans | $43,369 | $(14,899) | $(322) | $28,148 | | Totals | $86,833 | $(30,955) | $(1,617) | $54,261 | - The Company recorded a reversal of provision for credit losses of $31.6 million for the six months ended June 30, 2021, compared to a provision of $65.3 million in the prior year, primarily due to lower loan balances and updated macro-economic assumptions[98] Interest Income on Residential Whole Loans (Six Months Ended June 30) | Category | 2021 (Thousands) | 2020 (Thousands) | Change (Thousands) | % Change | |:---|:---|:---|:---|:---| | Held at Carrying Value: ||||| | Purchased Performing Loans | $73,024 | $134,432 | $(61,408) | -45.68% | | Purchased Credit Deteriorated Loans | $19,593 | $18,481 | $1,112 | 6.02% | | Held at Fair Value: ||||| | Purchased Performing Loans | $2,908 | $0 | $2,908 | N/A | | Purchased Non-Performing Loans | $38,029 | $37,959 | $70 | 0.18% | | Total Residential Whole Loans | $133,554 | $190,872 | $(57,318) | -30.03% | Note 4. Securities, at Fair Value This note details the company's securities portfolio, primarily MSR-related assets and CRT securities, held at fair value, and their contribution to interest income - The Company's securities at fair value primarily consist of MSR-related assets and CRT securities. As of June 30, 2021, MSR-related assets totaled $196.5 million (down from $239.0 million at Dec 31, 2020) and CRT securities totaled $106.3 million (up from $104.2 million at Dec 31, 2020). The Company sold all Legacy Non-Agency MBS and substantially reduced other Non-Agency MBS holdings in 2020, with remaining holdings reduced to zero by June 30, 2021[108][110][113][115][117] Securities, at Fair Value (June 30, 2021 vs. December 31, 2020) | Category | June 30, 2021 (Thousands) | December 31, 2020 (Thousands) | % Change | |:---|:---|:---|:---| | MSR-Related Assets (Fair Value) | $196,549 | $238,999 | -17.76% | | CRT Securities (Fair Value) | $106,285 | $104,234 | 1.97% | | RPL/NPL MBS (Fair Value) | $0 | $53,946 | -100.00% | | Total Securities, at Fair Value | $302,835 | $399,999 | -24.29% | - For the six months ended June 30, 2021, interest income from securities at fair value decreased by $41.5 million to $31.8 million, primarily due to lower average invested amounts from portfolio sales in 2020. However, the net yield increased to 23.33% from 5.63% in the prior year, driven by $8.4 million in accretion income from the redemption of an MSR-related asset and $8.1 million from a Non-Agency MBS redemption[351] Note 5. Other Assets This note describes other significant assets, including Real Estate Owned (REO), capital contributions to loan origination partners, and derivative instruments used for hedging Other Assets Components (June 30, 2021 vs. December 31, 2020) | Category | June 30, 2021 (Thousands) | December 31, 2020 (Thousands) | % Change | |:---|:---|:---|:---| | REO | $204,762 | $249,699 | -17.99% | | Capital contributions to loan origination partners | $81,512 | $47,148 | 72.89% | | Lease right-of-use asset | $38,137 | $758 | 4931.27% | | Total Other Assets | $439,347 | $385,381 | 13.99% | - The Company had 766 REO properties with an aggregate carrying value of $204.8 million at June 30, 2021, a decrease from 946 properties valued at $249.7 million at December 31, 2020. Formal foreclosure proceedings were in process for $144.9 million of residential whole loans held at carrying value and $405.2 million of residential whole loans held at fair value[134][135] - The Company made capital contributions to loan origination partners, including $49.7 million in common equity and $100.4 million in preferred equity. No impairment charges were recorded on these investments for the three and six months ended June 30, 2021, compared to $7.1 million and $65.2 million in the prior year period, respectively[139] - The Company unwound all $4.1 billion of Swap hedging transactions in Q1 2020 due to COVID-19 market turmoil. In Q2 2021, the Company began taking short positions in TBA securities to economically hedge interest rate and other market risks from Agency eligible investor loans, recording a net loss of $1.1 million on these positions[141][146] Note 6. Financing Agreements This note provides details on the company's financing arrangements, including collateralized debt, securitized debt, and convertible senior notes, and their associated terms Financing Agreements (June 30, 2021 vs. December 31, 2020) | Category | June 30, 2021 (Thousands) | December 31, 2020 (Thousands) | % Change | |:---|:---|:---|:---| | At Fair Value: |||| | Agreements with non-mark-to-market collateral provisions | $795,341 | $1,159,213 | -31.40% | | Agreements with mark-to-market collateral provisions | $858,066 | $1,338,077 | -35.87% | | Securitized debt | $640,696 | $869,482 | -26.31% | | At Carrying Value: |||| | Securitized debt | $1,405,685 | $645,027 | 117.93% | | Agreements with mark-to-market collateral provisions | $503,191 | $0 | N/A | | Convertible senior notes | $225,812 | $225,177 | 0.28% | | Total Financing Agreements | $4,428,791 | $4,336,976 | 2.12% | - The Company entered into new asset-backed financing arrangements and renegotiated existing ones in Q2 2020, electing the fair value option for these to simplify accounting. This included a $1.65 billion non-mark-to-market term loan facility and non-mark-to-market facilities for Rehabilitation loans[148][150][151] - The Company redeemed all outstanding Senior Notes on January 6, 2021, which bore interest at 8.00% per year. Convertible Senior Notes, issued in June 2019, bear interest at 6.25% and mature in June 2024, convertible into common stock at $7.95 per share[161][163] Pledged Collateral for Financing Arrangements (June 30, 2021) | Asset Category | Non-Mark-to-Market (Thousands) | Mark-to-Market (Thousands) | Securitized (Thousands) | Total (Thousands) | |:---|:---|:---|:---|:---| | Residential whole loans, at carrying value | $916,778 | $682,947 | $1,808,332 | $3,408,057 | | Residential whole loans, at fair value | $413,804 | $1,016,692 | $484,586 | $1,915,082 | | Other assets: REO | $17,765 | $34,801 | $38,432 | $90,998 | | Total Pledged Assets | $1,348,347 | $1,734,440 | $2,331,350 | $5,414,137 | Note 7. Collateral Positions This note describes the assets pledged as collateral for the company's financing arrangements and derivative hedging instruments - The Company pledges securities or cash as collateral for financing arrangements and receives collateral for reverse repurchase agreements. The total fair value of assets pledged as collateral for borrowings and derivative hedging instruments was $3.5 billion at June 30, 2021, down from $4.2 billion at December 31, 2020[169][170] Note 8. Offsetting Assets and Liabilities This note explains the company's presentation of repurchase agreements and other financial instruments on a gross basis in its consolidated balance sheets - The Company presents all balances associated with repurchase agreements on a gross basis in its consolidated balance sheets. Financial instruments pledged against financing arrangements totaled $3.4 billion at June 30, 2021, and restricted cash is reported separately[171][172] Note 9. Other Liabilities This note details various other liabilities, including payables for loan purchases, dividends, lease liabilities, and accrued expenses Other Liabilities Components (June 30, 2021 vs. December 31, 2020) | Category | June 30, 2021 (Thousands) | December 31, 2020 (Thousands) | % Change | |:---|:---|:---|:---| | Payable for unsettled residential whole loans purchases | $131,275 | $0 | N/A | | Dividends and dividend equivalents payable | $44,236 | $34,016 | 30.05% | | Lease liability | $41,680 | $636 | 6453.46% | | Accrued interest payable | $6,406 | $11,116 | -42.37% | | Accrued expenses and other | $29,484 | $24,754 | 19.11% | | Total Other Liabilities | $253,081 | $70,522 | 258.86% | Note 10. Commitments and Contingencies This note outlines the company's contractual obligations, such as lease agreements and unfunded loan commitments - The Company relocated its corporate headquarters in April 2021, incurring aggregate lease expense of $1.8 million for the six months ended June 30, 2021. Future minimum rental payments under the new 15-year lease total $72.88 million[175][176][177] - The Company had unfunded commitments of $89.7 million for purchased Rehabilitation loans and agreed to purchase $131.3 million of residential whole loans at fair value, with a corresponding liability recorded in Other Liabilities[179][180] Note 11. Stockholders' Equity This note provides information on the company's preferred and common stock, dividend declarations, share repurchase programs, and accumulated other comprehensive income - The Company has two series of preferred stock: 7.50% Series B Cumulative Redeemable Preferred Stock and 6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock. Dividends on Series B and C Preferred Stock were $0.46875 and $0.40625 per share, respectively, for each of the two quarters ended June 30, 2021[181][183][184][188] - Common stock dividends declared were $0.10 per share for Q2 2021 and $0.075 per share for Q1 2021. The Company issued 197,588 shares of common stock through its DRSPP for $794,979 net proceeds during the six months ended June 30, 2021[189][191] - The Board authorized a $250 million share repurchase program through the end of 2022. During the six months ended June 30, 2021, the Company repurchased 11,606,229 shares for $48.1 million at an average cost of $4.14 per share. Approximately $117.7 million remained available for repurchase[194][196][422] Changes in Accumulated Other Comprehensive Income/(Loss) (Six Months Ended June 30, 2021) | Component | Balance at Dec 31, 2020 (Thousands) | Net OCI during the period (Thousands) | Balance at Jun 30, 2021 (Thousands) | |:---|:---|:---|:---| | Net Unrealized Gain/(Loss) on AFS Securities | $79,607 | $(13,444) | $66,163 | | Net Unrealized Gain/(Loss) on Swaps | $0 | $0 | $0 | | Net Unrealized Gain/(Loss) on Financing Agreements | $(2,314) | $726 | $(1,588) | | Total AOCI | $77,293 | $(12,718) | $64,575 | Note 12. EPS Calculation This note details the calculation of basic and diluted earnings per common share, including the treatment of convertible securities EPS Calculation (Six Months Ended June 30) | Metric | 2021 (Thousands, except per share) | 2020 (Thousands, except per share) | |:---|:---|:---| | Net income/(loss) to common stockholders - basic | $135,319 | $(825,776) | | Basic weighted average common shares outstanding | 446,307 | 453,092 | | Basic Earnings/(Loss) per Common Share | $0.30 | $(1.82) | | Net income/(loss) to common stockholders - diluted | $143,142 | $(825,776) | | Diluted weighted average common shares outstanding | 475,227 | 453,092 | | Diluted Earnings/(Loss) per Common Share | $0.30 | $(1.82) | - For the six months ended June 30, 2021, Convertible Senior Notes were dilutive and included in diluted EPS calculation using the 'if-converted' method. Approximately 4.8 million equity instruments were anti-dilutive and excluded from diluted EPS[203][204] Note 13. Equity Compensation and Other Benefit Plans This note describes the company's equity compensation plans, deferred compensation arrangements, and 401(k) savings plan - The Company's Equity Compensation Plan allows for grants of stock options, restricted stock, RSUs, and dividend equivalent rights. As of June 30, 2021, approximately 11.8 million shares remained available for grant. Unrecognized compensation expense related to RSUs was $11.3 million, expected to be recognized over 2.0 years[206][207][208] Equity-Based Compensation Expense (Six Months Ended June 30) | Category | 2021 (Thousands) | 2020 (Thousands) | |:---|:---|:---| | RSUs | $4,432 | $2,827 | | Total | $4,432 | $2,827 | - The Company sponsors deferred compensation plans for senior officers and non-employee directors, with a total liability of $2.5 million at June 30, 2021. The Company also sponsors a 401(k) Savings Plan, matching 100% of the first 3% and 50% of the next 2% of eligible compensation, with matching contributions of $250,000 for the six months ended June 30, 2021[212][214][215] Note 14. Fair Value of Financial Instruments This note explains the fair value hierarchy and valuation methodologies used for the company's financial instruments, including key unobservable inputs for Level 3 assets - The Company categorizes fair value measurements into a three-level hierarchy based on input observability. Residential whole loans at fair value are classified as Level 3, while securities at fair value (MSR-related assets, other residential mortgage securities) and securitized debt are generally classified as Level 2. Financing agreements can be Level 2 or 3 depending on collateral provisions and reset frequency[216][217][218][219][220][222][223][224][225] Fair Value Hierarchy of Financial Instruments (June 30, 2021) | Category | Level 1 (Thousands) | Level 2 (Thousands) | Level 3 (Thousands) | Total (Thousands) | |:---|:---|:---|:---|:---| | Assets: ||||| | Residential whole loans, at fair value | $0 | $0 | $2,134,855 | $2,134,855 | | Securities, at fair value | $0 | $302,835 | $0 | $302,835 | | Liabilities: ||||| | Agreements with non-mark-to-market collateral provisions | $0 | $0 | $795,341 | $795,341 | | Agreements with mark-to-market collateral provisions | $0 | $0 | $858,066 | $858,066 | | Securitized debt | $0 | $640,696 | $0 | $640,696 | - For Level 3 residential whole loans, fair value is determined using discounted cash flow or liquidation models, with key unobservable inputs including discount rates (3.5%-8.0%), prepayment rates (0.0%-43.9%), default rates (0.0%-49.1%), loss severity (0.0%-100.0%), and annual change in home prices (4.3%-12.1%). Changes in these assumptions can significantly impact fair value[235][237][238] Note 15. Use of Special Purpose Entities and Variable Interest Entities This note describes the company's use of SPEs and VIEs for financing transactions, particularly loan securitizations, and their consolidation impact - The Company uses Special Purpose Entities (SPEs) to facilitate financing transactions, particularly loan securitizations, to obtain improved financing terms and non-recourse financing. These SPEs are consolidated as Variable Interest Entities (VIEs) because the Company has both the power to direct their economic performance and the right to receive benefits or absorb losses[241][242][243][248] - As of June 30, 2021, securitized loans of approximately $2.3 billion and REO of $38.4 million are included in the Company's consolidated balance sheets due to these transactions. The aggregate carrying value of Senior Bonds issued by consolidated VIEs was $2.0 billion, with no recourse to the Company's general credit[247] Note 16. Subsequent Events This note discloses significant events occurring after the reporting period, specifically the acquisition of Lima One Holdings, LLC - On July 1, 2021, the Company completed the acquisition of all outstanding ownership interests in Lima One Holdings, LLC, the parent company of Lima One Capital, LLC. This acquisition is expected to be accretive to overall profitability and increase the amount of business purpose loans on the balance sheet, though general and administrative expenses are also expected to rise[251][277] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of MFA Financial, Inc.'s financial condition and results of operations, highlighting key factors influencing performance, portfolio activity, and strategic initiatives - MFA Financial, Inc. is a specialty finance company investing in residential mortgage assets on a leveraged basis, including residential whole loans, MBS, MSR-related assets, and other real estate assets. The company also originates and services business purpose loans through subsidiaries[258] - At June 30, 2021, total assets were approximately $7.2 billion, with residential whole loans comprising 77% ($5.6 billion) and securities at fair value (MSR-related assets and CRT securities) making up 4% ($302.8 million)[259] - The company's financial results are significantly affected by net interest income, market value of assets, financing availability, economic conditions, and credit performance of credit-sensitive assets. GAAP results are also impacted by market volatility and fair value changes of certain financial instruments[260] - For the six months ended June 30, 2021, net income available to common stock and participating securities was $135.8 million ($0.30 EPS), a significant improvement from a net loss of $825.8 million ($-1.82 EPS) in the prior year, driven by higher Other income, a reversal of credit loss provisions, and increased net interest income[335] - Net interest income increased by $10.9 million (11.02%) to $110.0 million for the six months ended June 30, 2021, primarily due to lower financing costs and higher yields on residential whole loans, despite lower average invested balances in securities[337] - The Company recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $31.6 million for the six months ended June 30, 2021, compared to a provision of $65.3 million in the prior year, reflecting updated macro-economic assumptions and lower loan balances[353] - Other Income/(Loss), net, increased by $808.3 million to $56.0 million for the six months ended June 30, 2021, compared to a $752.4 million loss in the prior year, which was heavily impacted by asset disposals, impairment losses, and swap termination losses due to COVID-19 market disruptions[354] - Operating and Other Expense decreased by $48.5 million (51.68%) to $45.3 million for the six months ended June 30, 2021, mainly due to the absence of $44.4 million in professional services and other costs incurred in the prior year for negotiating forbearance arrangements[355] Selected Financial Ratios (Six Months Ended June 30) | Ratio | June 30, 2021 | June 30, 2020 | |:---|:---|:---| | Return on Average Total Assets | 4.01 % | (15.11)% | | Return on Average Total Stockholders' Equity | 12.06 % | (55.26)% | | Total Average Stockholders' Equity to Total Average Assets | 37.24 % | 26.90 % | | Dividend Payout Ratio | 0.58 | — | | Leverage Multiple | 1.8 | 2.0 | | Book Value per Share of Common Stock | $4.65 | $4.51 | | Economic Book Value per Share of Common Stock | $5.12 | $4.46 | Business/General This section provides an overview of MFA Financial, Inc.'s business model as a specialty finance company investing in residential mortgage assets and its operational drivers - MFA Financial, Inc. is a specialty finance company that invests in and finances residential mortgage assets, including residential whole loans, MBS, MSR-related assets, and other real estate assets. It also originates and services business purpose loans through subsidiaries[258] - At June 30, 2021, residential whole loans constituted 77% ($5.6 billion) of total assets, comprising Purchased Performing Loans (68%), Purchased Credit Deteriorated Loans, and Purchased Non-performing Loans. Securities at fair value, including MSR-related assets and CRT securities, represented 4% ($302.8 million) of total assets[259] - The company's operations are affected by net interest income, asset market values, financing availability, economic conditions, and credit performance. Increases in interest rates can raise borrowing costs, reduce asset values, and increase derivative hedging instrument values, while decreases have the opposite effects[260][261] Recent Market Conditions and Our Strategy This section discusses the impact of current market conditions on the company's residential mortgage asset portfolio, strategic initiatives, and recent financial performance - The residential mortgage asset portfolio grew to approximately $6.1 billion at June 30, 2021, from $5.8 billion at March 31, 2021, driven by acquisitions of residential whole loans and REO, partially offset by runoff[268][269] - For Q2 2021, residential whole loans generated $69.0 million in interest income with an effective yield of 5.48%. Net gains of $6.0 million were recognized on fair value residential whole loans. The net yield on Securities, at fair value, was 24.57%, significantly higher than 8.20% in Q2 2020, primarily due to $8.4 million in accretion income from an MSR-related asset redemption[271][273] - The Company recorded an $8.9 million reversal of provision for credit losses on residential whole loans in Q2 2021, reflecting lower loan balances and updated macro-economic forecasts. Total allowance for credit losses was $54.3 million at June 30, 2021[274] - The Company executed two securitization transactions in Q2 2021, totaling $395.1 million of Non-QM loans and $473.2 million of re-performing loans, which lowered funding rates by 203 and 85 basis points, respectively, and generated $88.6 million in additional liquidity[275] - GAAP book value per common share increased to $4.65 at June 30, 2021, from $4.63 at March 31, 2021. Economic book value per common share rose to $5.12 from $5.09, reflecting stable asset prices and GAAP earnings exceeding dividends[276] - Post-quarter, on July 1, 2021, the Company completed the acquisition of Lima One Holdings, LLC, expected to be accretive to profitability and increase business purpose loans, though general and administrative expenses are anticipated to rise[277] Information About Our Assets This section provides detailed information on the company's asset allocation, including residential whole loans and securities, and their respective characteristics Asset Allocation and Net Equity (June 30, 2021) | Category | Fair Value/Carrying Value (Millions) | Net Equity Allocated (Millions) | Debt/Net Equity Ratio | |:---|:---|:---|:---| | Purchased Performing Loans | $3,802 | $926 | 3.1x | | Purchased Credit Deteriorated Loans | $581 | $108 | 4.4x | | Purchased Non-Performing Loans | $1,168 | $406 | 1.9x | | Securities, at fair value | $303 | $125 | 1.4x | | Real Estate Owned | $205 | $161 | 0.3x | | Other, net | $1,027 | $801 | N/A | | Totals | $7,086 | $2,527 | 1.8x | Residential Whole Loans Contractual Maturities (June 30, 2021) | Maturity Period | Purchased Performing Loans (Thousands) | Purchased Credit Deteriorated Loans (Thousands) | Purchased Non-Performing Loans (Thousands) | |:---|:---|:---|:---| | Within one year | $374,991 | $1,093 | $4,501 | | Over one to five years | $84,551 | $3,212 | $3,224 | | Over five years | $3,236,815 | $604,852 | $1,160,726 | | Total Residential Whole Loans | $3,696,357 | $609,157 | $1,168,451 | Securities, at Fair Value (June 30, 2021) | Category | Fair Value (Thousands) | Amortized Cost (Thousands) | Weighted Average Yield | Weighted Average Time to Maturity | |:---|:---|:---|:---|:---| | MSR-Related Assets | $196,549 | $147,239 | 12.67 % | 6.3 years | | CRT Securities | $106,285 | $87,729 | 10.31 % | 19.2 years | | RPL/NPL MBS | $0 | $0 | — % | N/A | Tax Considerations This section explains the tax implications of the company's REIT status and the differences between GAAP net income and REIT taxable income - Estimated taxable income for the six months ended June 30, 2021, was approximately $50.1 million. The Company has until October 15, 2021, to declare any undistributed 2020 REIT taxable income[290] - Key differences between GAAP net income and REIT taxable income include fair value accounting (generally not used for tax), impairment recognition (not until asset is written-off or sold for tax), capital loss recognition (only to the extent of capital gains for tax), and tax hedge gains/losses amortization. Securitization transactions can be treated as sales for tax purposes, leading to gain/loss recognition not reflected in GAAP[291][292][293][294][295] - Net income from TRS subsidiaries is included in consolidated GAAP net income but generally not in REIT taxable income until distributed to the REIT, except for foreign domiciled TRS subsidiaries whose income is included as if distributed[296] Regulatory Developments This section discusses the impact of regulatory changes, including the Dodd-Frank Act, Investment Company Act, and COVID-19 relief measures, on the company's operations - The Dodd-Frank Act and subsequent regulations, including those from the CFPB, impose underwriting, servicing, and compensation standards on the mortgage industry, and risk retention requirements for securitizations. These are expected to increase economic and compliance costs[298][299] - The SEC's review of Section 3(c)(5)(C) of the Investment Company Act could impact companies acquiring mortgages. Discussions on restructuring the U.S. housing finance system and the operations of Fannie Mae and Freddie Mac, including recent Supreme Court rulings and FHFA leadership changes, create uncertainty for the mortgage markets[300][301][302] - COVID-19 relief measures, such as the CARES Act and CDC eviction moratoriums, have provided forbearance options and halted evictions, potentially impacting mortgage loan cash flows. These measures have been extended multiple times, with ongoing uncertainty about future extensions and their effects[303][304][305][306] Results of Operations This section analyzes the company's financial performance, including net income, net interest income, and other income and expenses, for the reported periods - For Q2 2021, net income available to common stock decreased to $58.5 million ($0.13 EPS) from $88.4 million ($0.19 EPS) in Q2 2020, primarily due to lower credit loss reversal and Other income, partially offset by higher net interest income and lower operating expenses. The prior year included significant balance sheet stabilization actions post-COVID-19 market disruptions[308] - Net interest income for Q2 2021 increased by $44.2 million (298.82%) to $59.0 million, with net interest spread and margin at 3.02% and 3.86% respectively, up from (0.88)% and 0.81% in Q2 2020. This was driven by lower financing rates and higher yields on residential whole loans[310] Net Interest Income Analysis (Three Months Ended June 30) | Category | 2021 Average Balance (Thousands) | 2021 Interest (Thousands) | 2021 Average Yield/Cost | 2020 Average Balance (Thousands) | 2020 Interest (Thousands) | 2020 Average Yield/Cost | |:---|:---|:---|:---|:---|:---|:---| | Residential whole loans | $5,036,675 | $69,016 | 5.48 % | $6,526,612 | $84,837 | 5.20 % | | Securities, at fair value | $249,813 | $15,345 | 24.57 % | $717,783 | $14,716 | 8.20 % | | Total interest-earning assets | $6,137,182 | $84,528 | 5.51 % | $7,741,416 | $102,778 | 5.31 % | | Collateralized financing agreements | $2,062,052 | $13,563 | 2.60 % | $4,736,610 | $75,928 | 6.34 % | | Securitized debt | $1,773,472 | $8,077 | 1.80 % | $538,220 | $5,393 | 3.96 % | | Total interest-bearing liabilities | $4,061,126 | $25,555 | 2.49 % | $5,623,312 | $87,991 | 6.19 % | | Net Interest Income | | $58,973 | 3.02 % | | $14,787 | (0.88)% | - Interest income on residential whole loans decreased by $15.8 million (18.6%) in Q2 2021 due to a $1.5 billion decrease in average balance, partially offset by a yield increase to 5.48%. Interest income on securities at fair value increased by $629,000, driven by a higher net yield of 24.57% due to accretion income from an MSR-related asset redemption[324][325] - Interest expense for Q2 2021 decreased by $62.4 million (71.0%) to $25.6 million, reflecting lower average repurchase agreement borrowings and decreased financing rates (2.49% vs. 6.19% in Q2 2020). The redemption of Senior Notes in Q1 2021 also contributed to lower interest expense[326][327] Other Income/(Loss), net (Three Months Ended June 30) | Category | 2021 (Thousands) | 2020 (Thousands) | |:---|:---|:---| | Net gain on residential whole loans measured at fair value through earnings | $6,021 | $4,910 | | Transfer from OCI of loss on swaps previously designated as hedges | $0 | $(49,857) | | Impairment and other losses on securities available-for-sale and other assets | $0 | $(5,094) | | Net unrealized gain on securities, at fair value measured at fair value through earnings | $1,374 | $64,438 | | Net realized gain on sales of securities, at fair value | $0 | $49,485 | | Net gain/(loss) on real estate owned | $5,125 | $(4,199) | | Total Other Income/(Loss), net | $21,647 | $60,947 | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details MFA Financial, Inc.'s exposure to various market risks, including interest rate risk, credit risk, credit spread risk, liquidity risk, and prepayment risk - The Company is exposed to interest rate risk, where changes in interest rates can affect net interest income and the fair value of assets and liabilities. Borrowing costs on financing agreements typically change faster than asset yields. Historically, Swaps were used to mitigate this, but since Q1 2020, short positions in TBA securities are used for hedging[381][382][387] - The fair value of residential whole loans is sensitive to underlying real estate collateral value, borrower delinquency, and interest rates. Non-performing loans show little interest rate sensitivity, while performing and re-performing loans exhibit positive duration[384][385][386] Interest Rate Shock Table (June 30, 2021) | Change in Interest Rates | Estimated Value of Assets (Thousands) | Estimated Value of Securitized and Other Fixed Rate Debt (Thousands) | Estimated Value of Financial Instruments (Thousands) | Percentage Change in Estimated Net Interest Income | Percentage Change in Portfolio Value | |:---|:---|:---|:---|:---|:---| | +100 Basis Point Increase | $6,955,740 | $80,458 | $7,036,198 | 4.92 % | (1.33)% | | + 50 Basis Point Increase | $7,050,716 | $39,041 | $7,089,757 | 2.79 % | (0.58)% | | Actual at June 30, 2021 | $7,132,204 | $(1,217) | $7,130,987 | — % | — % | | - 50 Basis Point Decrease | $7,200,206 | $(40,315) | $7,159,891 | (2.60)% | 0.41 % | | -100 Basis Point Decrease | $7,254,720 | $(78,255) | $7,176,465 | (4.77)% | 0.64 % | - The Company faces credit risk from residential whole loans (Purchased Non-performing, Purchased Credit Deteriorated, and Purchased Performing Loans) and CRT securities. Risk mitigation includes discounted purchase prices, sound underwriting, and sub-servicer oversight[396][397][398][404] - Liquidity risk arises from financing long-maturity assets with shorter-term borrowings, primarily repurchase agreements. Margin calls, especially during market disruptions, can adversely impact liquidity. At June 30, 2021, the Company had $906.4 million in cash and cash equivalents and $150.8 million in unencumbered residential whole loans[406][407][408] - Prepayment risk affects interest income, particularly for assets purchased at a premium, where increased prepayment rates accelerate premium amortization. Conversely, decreased prepayments can slow capital redeployment to higher-yielding investments[409][410] Item 4. Controls and Procedures This section confirms the effectiveness of MFA Financial, Inc.'s disclosure controls and procedures as of June 30, 2021, and reports no material changes in internal control over financial reporting - Management, under the direction of the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021, ensuring timely and accurate reporting of information required under the Exchange Act[411][412] - There have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[413] PART II. OTHER INFORMATION This section provides additional disclosures beyond financial statements, covering legal proceedings, risk factors, equity sales, and other required information Item 1. Legal Proceedings This section states that MFA Financial, Inc. is not currently involved in any material pending legal proceedings - There are no material pending legal proceedings to which the Company is a party or any of its assets are subject[416] Item 1A. Risk Factors This section supplements the risk factors from the 2020 Form 10-K, specifically addressing the risks associated with the recent acquisition of Lima One Holdings, LLC - The Company is supplementing its existing risk factors with an additional risk related to the acquisition of Lima One Holdings, LLC. The long-term success of the acquisition depends on the ability to combine businesses effectively and realize anticipated growth, particularly in the business purpose loan portfolio[417][418][419] - Risks include the potential for not successfully combining the businesses, leading to unrealized benefits or longer realization times, unforeseen expenses, and diversion of management attention from day-to-day operations[419] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase program and any unregistered sales of equity securities, including shares repurchased during the second quarter of 2021 - The Company's Board authorized a $250 million share repurchase program through the end of 2022. During the six months ended June 30, 2021, the Company repurchased 11,606,229 shares of common stock for approximately $48.1 million at an average cost of $4.14 per share. As of June 30, 2021, $117.7 million remained available for future repurchases[420][421][422] Common Stock Repurchases (Q2 2021) | Month | Total Number of Shares Purchased | Weighted Average Price Paid Per Share | |:---|:---|:---| | April 1-30, 2021 | 4,832,218 | $4.19 | | May 1-31, 2021 | 827,333 | $4.21 | | June 1-30, 2021 | 0 | $0 | | Total Shares Repurchased | 5,659,551 | $4.19 | Item 3. Defaults Upon Senior Securities This section confirms that there have been no defaults upon senior securities - None[425] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - None[426] Item 5. Other Information This section indicates that there is no other information to disclose - None[427] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report, including certifications, interactive data files, and other agreements - The report includes certifications from the CEO and CFO (pursuant to 18 U.S.C. Section 1350 and Section 302/906 of Sarbanes-Oxley Act of 2002) and Interactive Data Files (iXBRL) for financial statements[431][432] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q - The report is signed by Stephen D. Yarad, Chief Financial Officer and Chief Accounting Officer, on behalf of MFA FINANCIAL, INC. on August 5, 2021[434]