Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K.
GENERAL
We are a specialty finance company that invests in and finances residential mortgage assets. We invest, on a leveraged basis, in residential whole loans, residential mortgage securities and other real estate assets. Through our wholly-owned subsidiary, Lima One, a leading nationwide originator and servicer of business purpose loans (or BPLs) that we acquired on July 1, 2021, we also originate and service business purpose loans for real estate investors. Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return. We are an internally-managed real estate investment trust.
On April 4, 2022, we effected a one-for-four reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”). Accordingly, all share and per share data included in the consolidated financial statements and applicable disclosures have been adjusted retroactively to reflect the impact of the Reverse Stock Split. For all periods presented, all share and per share data have been adjusted on a retroactive basis to reflect the effect of the Reverse Stock Split.
At December 31, 2022, we had total assets of $9.1 billion, of which $7.5 billion, or 83%, represented residential whole loans. Our residential whole loans include primarily: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential and multi-family properties made to non-occupant borrowers that intend to rehabilitate and sell the properties (or Transitional loans), which are comprised of Residential transitional loans and Multi-family transitional loans), (iii) business purpose loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (or Single-family rental loans), (iv) loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (or Agency eligible investor loans), (v) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans) and (vi) re-performing loans on which a borrower was previously delinquent but has resumed repaying (or RPLs) and NPLs. In addition, at December 31, 2022, we had $333.4 million in investments in Securities, at fair value, including Agency MBS, MSR-related assets, CRT securities and Non-Agency MBS. Our remaining investment-related assets, which represent approximately 3% of our total assets at December 31, 2022, were primarily comprised of REO, capital contributions made to loan origination partners, other interest-earning assets, and loan-related receivables.
The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income and the market value of our assets, liabilities and hedges that are accounted for at fair value through earnings, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets. Changes in these factors, or uncertainty in the market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio. Further, our GAAP results may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, including certain residential whole loans, securitized debt and Swaps. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense), the level of loan delinquencies, which may result in changes in the amount of non-accrual loans, and prepayment speeds, the behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which is an annualized measure of the amount of unscheduled principal prepayments on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically.
With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to increase; (ii) the value of certain of our residential mortgage assets and securitized debt to decline; (iii) coupons on our adjustable-rate assets to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our assets to decline, thereby slowing the amortization of purchase premiums and the accretion of our purchase discounts, and slowing our ability to redeploy capital to generally higher yielding investments; and (v) the value of our derivative hedging
instruments, if any, to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to decrease; (ii) the value of certain of our residential mortgage assets and securitized debt, to increase; (iii) coupons on our adjustable-rate assets, on a delayed basis, to lower interest rates; (iv) prepayments on our assets to increase, thereby accelerating the amortization of purchase premiums and the accretion of our purchase discounts, and accelerating the redeployment of our capital to generally lower yielding investments; and (v) the value of our derivative hedging instruments, if any, to decrease. Further, changes in credit spreads will also impact the valuation of our residential whole loans and securitized debt, which could result in volatility in GAAP earnings. In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market.
Our investments in residential mortgage assets expose us to credit risk, meaning that we are generally subject to credit losses due to the risk of delinquency, default and foreclosure on the underlying real estate collateral. Our investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Further, we believe the discounted purchase prices paid on Purchased Non-performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments.
Premiums arise when we acquire an MBS or loan at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal balance. Conversely, discounts arise when we acquire an MBS or loan at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance. Accretable purchase discounts on these investments are accreted to interest income. Premiums paid to purchase loans, primarily on certain of our Non-QM loans, business purpose loans and Agency eligible investor loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets.
CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. In particular, CPR reflects the conditional prepayment rate, which measures voluntary prepayments of a loan, and the conditional default rate (or CDR) measures involuntary prepayments resulting from defaults. CPRs on our residential mortgage securities and whole loans may differ significantly. For the year ended December 31, 2022, the average CPRs on certain of our loan portfolios were: 16.3% for Non-QM loans, 10.9% for Single-family rental loans, 8.5% for Purchased Credit Deteriorated loans, and 7.1% for Purchased Non-Performing loans.
It is generally our business strategy to hold our residential mortgage assets as long-term investments. On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our investments in securities that are designated as AFS for impairment. A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security.
Our residential mortgage investments have longer-term contractual maturities than our non-securitization related financing liabilities, and the interest rates we pay on our non-securitization related financings will typically change at a faster pace than the interest rates we earn on our investments. In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which currently include Swaps.
Recent Market Conditions and Our Strategy
2022 was extremely challenging for fixed income investors, and exceptionally so for mortgage investors, including us, and was characterized by higher interest rates across the yield curve as well as wider mortgage and credit spreads. We addressed these challenges by prioritizing liquidity and active portfolio management, including increasing our use of interest rate swaps to hedge exposure to higher interest rates and using loan securitizations to generate securitized debt to replace floating rate recourse mark-to-market financing with fixed rate non-recourse, non-mark-to-market financing. These securitizations provide longer term, non-recourse, non-mark-to-market financing. While continued interest rate volatility and generally wider spreads on securitized mortgage assets pressured mortgage loan pricing, we believe that our active portfolio and risk management measures partially mitigated the impact of the interest rate environment. Subsequent to year-end, we have completed an additional three securitizations thus far in 2023 totaling $668.2 million, further reducing our use of shorter-term, recourse, mark-to-market financing.
2022 Portfolio Activity and impact on financial results
At December 31, 2022, our residential mortgage asset portfolio, which includes residential whole loans and REO, and Securities, at fair value, was approximately $8.0 billion compared to $8.3 billion at December 31, 2021.
The following table presents the activity for our residential mortgage asset portfolio for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Millions) | | December 31, 2021 | | Runoff (1) | | Acquisitions (2) | | Other (3) | | December 31, 2022 | | Change |
| Residential whole loans and REO | | $ | 8,069 | | | $ | (1,910) | | | $ | 3,126 | | | $ | (1,636) | | | $ | 7,649 | | | $ | (420) | |
| Securities, at fair value | | 257 | | | (52) | | | 156 | | | (28) | | | 333 | | | 76 | |
| Totals | | $ | 8,326 | | | $ | (1,962) | | | $ | 3,282 | | | $ | (1,664) | | | $ | 7,982 | | | $ | (344) | |
(1)Primarily includes principal repayments and sales of REO.
(2)Includes draws on previously originated Transitional loans.
(3)Primarily includes the impact of transactions that resulted in the sale of previously non-securitized Agency Eligible Investor loans and deconsolidation of Agency Eligible Investor loan securitizations, changes in fair value and changes in the allowance for credit losses.
At December 31, 2022, our total recorded investment in residential whole loans and REO was $7.6 billion, or 95.8% of our residential mortgage asset portfolio. Of this amount, $6.3 billion are Purchased Performing Loans, $448.9 million are Purchased Credit Deteriorated Loans and $796.1 million are Purchased Non-performing Loans. Loan acquisition activity of $3.1 billion during 2022 included $2.0 billion of business purpose loans (including draws on Transitional loans) and $1.1 billion of Non-QM loans, which were offset by portfolio run-off and asset valuation declines. In addition, near the end of the fourth quarter, we reached an agreement to sell to a third party the majority of our holdings of Agency Eligible Investor loans that were not previously securitized and transferred to a different third party certain contractual redemption rights in connection with previously securitized Agency Eligible Investor loans, resulting in the de-consolidation of the securitization trusts that hold these loans. As a result of these transactions, our portfolio of Agency Eligible Investor loans decreased by approximately $780 million. Further, the debt issued to third parties by these securitizations is no longer reported on our balance sheet at December 31, 2022. During 2022, we recognized approximately $441.2 million of residential whole loan interest income on our consolidated statements of operations, representing an effective yield of 5.19%, with Purchased Performing Loans generating an effective yield of 4.56%, Purchased Credit Deteriorated Loans generating an effective yield of 6.69% and Purchased Non-performing Loans generating an effective yield of 10.03%. All of our Purchased Non-performing Loans and certain of our Purchased Performing Loans are measured at fair value as a result of the election of the fair value option at acquisition. Included in earnings in Other income, net are net losses on these loans of $866.8 million for the year ended December 31, 2022. At December 31, 2022 and 2021, we had REO with an aggregate carrying value of $130.6 million and $156.2 million, respectively, which is included in Other assets on our consolidated balance sheets.
At December 31, 2022, we held $333.4 million of Securities, at fair value, including $131.7 million of Agency MBS, $97.9 million of MSR-related assets, $79.2 million of CRT securities and $24.6 million of Non-Agency MBS securities recorded in connection with the deconsolidation of Agency Eligible Investor loan securitizations. The net yield on our Securities, at fair value was 14.67% for 2022, compared to 22.95% for 2021. The decrease in the net yield on our Securities, at fair value portfolio primarily reflects higher accretion income recognized in the prior year period due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020 and the redemption of a Non-Agency MBS that had been previously purchased at a discount.
For the year ended December 31, 2022, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $2.6 million. The reversal of provision recorded in 2022 primarily reflects portfolio run-off, partially
offset by adjustments to lower future estimates of prepayment speeds given recent and expected future increases in interest rates. The total allowance for credit losses recorded on residential whole loans held at carrying value at December 31, 2022 was $35.3 million. In addition, during the year we recorded an impairment charge in earnings of $28.6 million against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero. These investments, which were legally structured as preferred equity interests, are nonetheless accounted for by the Company as debt instruments, based on an evaluation of the Company’s rights and obligations under the terms of the agreements.
During 2022, we completed nine securitizations with unpaid principal balance (or UPB) of loans sold of $2.7 billion. This included $1.5 billion of Non-QM loans, $707.3 million of Single-family rental loans, $336.1 million of re-performing loans and $251.5 million of Transitional loans. These securitizations provided longer term, non-recourse, non-mark-to-market financing. Subsequent to the fourth quarter, we have completed three additional securitizations totaling $668.2 million, further reducing our use of shorter-term recourse, mark-to-market financing. During 2022, interest rates increased and credit spreads widened further, impacting the values of the majority of our residential whole loan portfolios and associated financing liabilities and hedges, which resulted in significant mark-to-market losses in our GAAP financial results. We continue to closely follow the actions of the Federal Reserve and the pace at which it has and is expected to further increase interest rates and the impact such rate increases would be expected to have on levels of inflation, the overall economic environment and our business.
Our GAAP book value per common share was $14.87 as of December 31, 2022. Book value per common share decreased from $19.12 as of December 31, 2021. Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark-to-market gains or losses on our residential whole loans and securitized debt held at carrying value, was $15.55 as of December 31, 2022, a decrease from $20.58 as of December 31, 2021. Decreases in GAAP and Economic book value during 2022 primarily reflect declines in the fair value of our Residential whole loan portfolios due to increased interest rates and widening spreads, partially offset by increases in the value of interest rate swaps and securitized debt. For additional information regarding the calculation of Economic book value per share, including a reconciliation to GAAP book value per share, refer to “Reconciliation of GAAP and Non-GAAP Financial Measures” below.
For more information regarding market factors which impact our portfolio, see Part I, Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K.
Information About Our Assets
The table below presents certain information about our asset allocation at December 31, 2022:
ASSET ALLOCATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | Purchased Performing Loans (1) | | Purchased Credit Deteriorated Loans (2) | | Purchased Non-Performing Loans | | Securities, at fair value | | Real Estate Owned | | Other,
net (3) | | Total |
| Fair Value/Carrying Value | | $ | 6,274 | | | $ | 449 | | | $ | 796 | | | $ | 333 | | | $ | 131 | | | $ | 675 | | | $ | 8,658 | |
| Receivable/(Payable) for Unsettled Transactions | | 276 | | | — | | | — | | | (132) | | | — | | | — | | | 144 | |
| Financing Agreements with Non-mark-to-market Collateral Provisions | | (862) | | | (37) | | | (96) | | | — | | | (9) | | | — | | | (1,004) | |
| Financing Agreements with Mark-to-market Collateral Provisions | | (1,893) | | | (89) | | | (113) | | | (112) | | | (16) | | | — | | | (2,223) | |
| Securitized Debt | | (2,758) | | | (249) | | | (334) | | | — | | | (17) | | | — | | | (3,358) | |
| Convertible Senior Notes | | — | | | — | | | — | | | — | | | — | | | (228) | | | (228) | |
| Net Equity Allocated | | $ | 1,037 | | | $ | 74 | | | $ | 253 | | | $ | 89 | | | $ | 89 | | | $ | 447 | | | $ | 1,989 | |
Debt/Net Equity Ratio (4) | | 5.3 | x | | 5.1 | x | | 2.1 | x | | 2.7 | x | | 0.5 | x | | | | 3.5 | x |
(1)Includes $3.4 billion of Non-QM loans, $1.4 billion of Transitional loans, $1.4 billion of Single-family rental loans, $82.9 million of Seasoned performing loans, and $51.1 million of Agency eligible investor loans. At December 31, 2022, the total fair value of these loans is estimated to be approximately $6.2 billion.
(2)At December 31, 2022, the total fair value of these loans is estimated to be approximately $468.8 million.
(3)Includes $334.2 million of cash and cash equivalents, $159.9 million of restricted cash, and $28.3 million of capital contributions made to loan origination partners, as well as other assets and other liabilities.
(4)Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements and payable for unsettled transactions noted above as a multiple of net equity allocated.
Residential Whole Loans
The following table presents the contractual maturities of our residential whole loan portfolios at December 31, 2022. Amounts presented do not reflect estimates of prepayments or scheduled amortization.
| | | | | | | | | | | | | | | | | | | | |
| (In Thousands) | | Purchased
Performing Loans (1) | | Purchased Credit
Deteriorated Loans (2) | | Purchased Non-Performing Loans |
| Amount due: | | | | | | |
| Within one year | | $ | 717,134 | | | $ | 986 | | | $ | 2,780 | |
| After one year: | | | | | | |
| Over one to five years | | 762,676 | | | 2,939 | | | 3,745 | |
| Over five years | | 4,807,840 | | | 466,369 | | | 789,584 | |
| Total due after one year | | $ | 5,570,516 | | | $ | 469,308 | | | $ | 793,329 | |
| Total residential whole loans | | $ | 6,287,650 | | | $ | 470,294 | | | $ | 796,109 | |
(1)Excludes an allowance for credit losses of $13.9 million at December 31, 2022.
(2)Excludes an allowance for credit losses of $21.4 million at December 31, 2022.
The following table presents, at December 31, 2022, the dollar amount of certain of our residential whole loans, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates:
| | | | | | | | | | | | | | | | | | | | |
| (In Thousands) | | Purchased
Performing Loans (1) | | Purchased Credit Deteriorated Loans (2) | | Purchased Non-Performing Loans |
| Interest rates: | | | | | | |
| Fixed | | $ | 4,302,316 | | | $ | 397,939 | | | $ | 642,840 | |
| Adjustable | | 1,268,200 | | | 71,369 | | | 150,489 | |
| Total | | $ | 5,570,516 | | | $ | 469,308 | | | $ | 793,329 | |
(1)Excludes an allowance for credit losses of $13.9 million at December 31, 2022.
(2)Excludes an allowance for credit losses of $21.4 million at December 31, 2022.
For additional information regarding our residential whole loan portfolios, see Note 3 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
Securities, at Fair Value
The following table presents information with respect to our Securities, at fair value at December 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| (Dollars in Thousands) | | December 31, 2022 | | December 31, 2021 |
| MSR-Related Assets | | | | |
| Face/Par | | $ | 105,000 | | | $ | 154,350 | |
| Fair Value | | 97,898 | | | 153,771 | |
| Amortized Cost | | 86,399 | | | 121,376 | |
Weighted average yield (1) | | 14.30 | % | | 10.30 | % |
| Weighted average time to maturity | | 0.8 years | | 1.7 years |
| | | | |
| CRT Securities | | | | |
| Face/Par | | $ | 80,791 | | | $ | 99,999 | |
| Fair Value | | 79,214 | | | 102,914 | |
| Amortized Cost | | 70,438 | | | 86,643 | |
Weighted average yield (1) | | 9.96 | % | | 10.52 | % |
| Weighted average time to maturity | | 19.0 Years | | 18.5 years |
| | | | |
| Non-Agency MBS | | | | |
| Face/Par | | 29,858 | | | $ | — | |
| Fair Value | | 24,552 | | | — | |
| Amortized Cost | | 24,552 | | | — | |
Weighted average yield (2) | | N/A | | — | % |
| Weighted average time to maturity | | 28.8 Years | | — | |
| | | | |
| Agency MBS | | | | |
| Face/Par | | $ | 131,165 | | | $ | — | |
| Fair Value | | 131,700 | | | — | |
| Amortized Cost | | 132,025 | | | — | |
Weighted average yield (2) | | N/A | | — | % |
| Weighted average time to maturity | | 30.0 Years | | — | |
(1)Weighted average yield is annualized interest income divided by average amortized cost.
(2)These securities were acquired at the end of the reporting period and, therefore, no interest income was recorded with respect to these securities in 2022.
Tax Considerations
Current period estimated taxable income
We estimate that for 2022, our REIT taxable income was approximately $28.3 million.
Key differences between GAAP net income and REIT Taxable Income
Residential Whole Loans and Securities
The determination of taxable income attributable to residential whole loans and securities is dependent on a number of factors, including principal payments, defaults, loss mitigation efforts and loss severities. In estimating taxable income for such investments during the year, management considers estimates of the amount of discount expected to be accreted. Such estimates require significant judgment and actual results may differ from these estimates.
Potential timing differences can arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of gain or loss for tax purposes as compared to GAAP. For example: a) while our REIT uses fair value accounting for GAAP in some instances, it generally is not used for purposes of determining taxable income; b) impairments generally are not recognized by us for income tax purposes until the asset is written-off or sold; c) capital losses may only be recognized by us to the extent of its capital gains; capital losses in excess of capital gains generally are carried over
by us for potential offset against future capital gains; and d) tax hedge gains and losses resulting from the termination of interest rate swaps by us generally are amortized over the remaining term of the swap.
Securitization
Generally, securitization transactions for GAAP and tax can be characterized as either sales or financings, depending on transaction type, structure and available elections. For GAAP purposes, our securitizations have been treated as on-balance sheet financing transactions. For tax purposes, they have been characterized as both financing and sale transactions.
Where a securitization has been characterized as a sale, gain or loss is recognized for tax purposes. In addition, we own or may in the future acquire interests in securitization and/or re-securitization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID). As the holder of the retained interests in the trust, for tax purposes we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues. The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred. REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders.
For securitization and/or re-securitization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in taxable income or loss. Given that securitization and re-securitization transactions are typically accounted for as financing transactions for GAAP purposes, such income or loss is not likely to be recognized for GAAP. As a result, the income recognized from securitization and re-securitization transactions may differ for tax and GAAP purposes.
Whether our investments are held by our REIT or one of its Taxable REIT Subsidiaries (TRS)
We estimate that for 2022, our net TRS taxable loss will be $171.5 million. Net income or loss generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period. REIT taxable income generally does not include taxable income of the TRS unless and until it is distributed to the REIT. For example, because our securitization transactions that are treated as a sale for tax purposes are undertaken by a domestic TRS, any gain or loss recognized on the sale is not included in our REIT taxable income until it is distributed by the TRS. Similarly, the income earned from loans, securities, REO and other investments held by our domestic TRS is excluded from REIT taxable income until it is distributed by the TRS. Net income of our foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS. A TRS may carry forward its net taxable losses indefinitely as net operating losses to offset up to 80% of its taxable income in future tax years, but REIT taxable income generally does not include the net taxable loss of a TRS unless the TRS liquidates for tax purposes.
Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion related to our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2021, which was filed with the SEC on February 23, 2022, and is available on the SEC’s website at www.sec.gov and on our website at www.mfafinancial.com.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table summarizes the changes in our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | |
| (In Thousands) | | December 31, 2022 | | December 31, 2021 | | YoY Change |
| Interest Income: | | | | | | |
| Residential whole loans | | $ | 441,223 | | | $ | 303,468 | | | $ | 137,755 | |
| Securities, at fair value | | 28,921 | | | 56,690 | | | (27,769) | |
| Other interest-earning assets | | 7,437 | | | 1,800 | | | 5,637 | |
| Cash and cash equivalent investments | | 4,838 | | | 344 | | | 4,494 | |
| Interest Income | | $ | 482,419 | | | $ | 362,302 | | | $ | 120,117 | |
| | | | | | |
| Interest Expense: | | | | | | |
| Asset-backed and other collateralized financing arrangements | | $ | 243,083 | | | $ | 104,597 | | | $ | 138,486 | |
| Other interest expense | | 15,760 | | | 15,788 | | | (28) | |
| Interest Expense | | $ | 258,843 | | | $ | 120,385 | | | $ | 138,458 | |
| | | | | | |
| Net Interest Income | | $ | 223,576 | | | $ | 241,917 | | | $ | (18,341) | |
| | | | | | |
| Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans | | $ | 2,646 | | | $ | 44,863 | | | $ | (42,217) | |
| Provision for Credit Losses on Other Assets | | (28,579) | | | — | | | (28,579) | |
| Net Interest Income after (Provision)/Reversal of Provision for Credit Losses | | $ | 197,643 | | | $ | 286,780 | | | $ | (89,137) | |
| | | | | | |
| Other (Loss)/Income, net: | | | | | | |
| Net (loss)/gain on residential whole loans measured at fair value through earnings | | $ | (866,762) | | | $ | 16,243 | | | $ | (883,005) | |
| | | | | | |
| Impairment and other net (loss)/gain on securities and other portfolio investments | | (25,067) | | | 74,496 | | | (99,563) | |
| Net gain on real estate owned | | 25,379 | | | 22,838 | | | 2,541 | |
| Net gain/(loss) on derivatives used for risk management purposes | | 255,179 | | | 1,426 | | | 253,753 | |
| Net gain/(loss) on securitized debt measured at fair value through earnings | | 290,639 | | | 15,027 | | | 275,612 | |
| Lima One - origination, servicing and other fee income | | 46,745 | | | 22,600 | | | 24,145 | |
| Other, net | | $ | 9,297 | | | $ | 12,473 | | | $ | (3,176) | |
| Other (Loss)/Income, net | | $ | (264,590) | | | $ | 165,103 | | | $ | (429,693) | |
| | | | | | |
| Operating and Other Expense: | | | | | | |
| Compensation and benefits | | $ | 76,728 | | | $ | 53,817 | | | $ | 22,911 | |
| Other general and administrative expense | | 35,812 | | | 31,729 | | | 4,083 | |
| Loan servicing, financing and other related costs | | 42,894 | | | 30,867 | | | 12,027 | |
| Amortization of intangible assets | | 9,200 | | | 6,600 | | | 2,600 | |
| Operating and Other Expense | | $ | 164,634 | | | $ | 123,013 | | | $ | 41,621 | |
| | | | | | |
| Net (Loss)/Income | | $ | (231,581) | | | $ | 328,870 | | | $ | (560,451) | |
| Less Preferred Stock Dividend Requirement | | $ | 32,875 | | | $ | 32,875 | | | $ | — | |
| Net (Loss)/Income Available to Common Stock and Participating Securities | | $ | (264,456) | | | $ | 295,995 | | | $ | (560,451) | |
| | | | | | |
| Basic (Loss)/Earnings per Common Share | | $ | (2.57) | | | $ | 2.66 | | | $ | (5.23) | |
| Diluted (Loss)/Earnings per Common Share | | $ | (2.57) | | | $ | 2.63 | | | $ | (5.20) | |
General
For 2022, we had a net loss available to our common stock and participating securities of ($264.5) million, or ($2.57) per basic and diluted common share, compared to net income available to common stock and participating securities for 2021 of $296.0 million, or $2.66 per basic common share and $2.63 per diluted common share. This decrease in net income available to common stock and participating securities primarily reflects lower Other income, which declined by $429.7 million to a net loss of $264.6 million for the current year period, compared to net income of $165.1 million in the prior year period. The decrease was primarily driven by mark-to-market losses in the current year period on our residential whole loans that are measured at fair value through earnings, partially offset by net gains on securitized debt measured at fair value through earnings as well as on derivatives used for risk management purposes. These net losses on portfolio investments were also partially offset by higher
Origination, Servicing and Other Fee income at Lima One and net REO related gains. In addition, Other income also includes losses of $25.1 million, primarily related to mark-to-market adjustments on an equity investment in a loan origination partner, while the prior year period includes $38.9 million of gains recorded in connection with Lima One purchase accounting and a gain of $34.0 million from the reversal of prior period impairments. The prior year period also included a $42.2 million larger net reversal of the Provision for Credit Losses on Residential Whole Loans held at carrying value. The reversals recorded in both the current and prior periods primarily reflect run-off of loans held at carrying value and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts. However, the current period reversal is lower than the prior year period as the impact of lower loan balances was partially offset by adjustments to lower future estimates of prepayment speeds given recent and expected future increases in market interest rates. The larger prior year reversal reflects a greater impact of adjustments to macro-economic assumptions consistent with revised economic forecasts as the U.S economy continued to recover from the impact of the COVID-19 pandemic. In addition, in the current year period we recorded a Provision for Credit Losses on Other Assets of $28.6 million, reflecting an impairment charge against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero. Finally, Operating and other expenses were $41.6 million higher during the year ended December 31, 2022, compared to the prior year period, as they primarily reflect operating expenses of Lima One, higher securitization related expenses as well as higher amortization of Intangible Assets associated with the Lima One acquisition. We completed the acquisition of Lima One on July 1, 2021, and accordingly began consolidating Lima One’s financial results beginning on that date.
Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense), the level of loan delinquencies, which may result in changes in the amount of non-accrual loans, and prepayment speeds on our investments. Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of its unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty.
The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.”
For 2022, our net interest spread and margin (including the impact of swaps) were 1.74% and 2.52%, respectively, compared to a net interest spread and margin (including the impact of swaps) of 2.79% and 3.57%, respectively, for 2021. Our net interest income decreased by $18.3 million, or 7.6%, to $223.6 million from $241.9 million for 2021. For 2022, net interest income includes lower net interest income for our Securities, at fair value portfolio of approximately $29.4 million compared to 2021, primarily due to higher accretion income recognized in the prior year period due to the impact of the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020 and the redemption of a Non-Agency MBS that had been previously purchased at a discount and the lower average amount invested in these assets. Net interest income also includes higher net interest income from our residential whole loan portfolio of approximately $1.3 million compared to 2021, primarily due to higher amounts invested in these assets partially offset by an increase in our average collateralized financing agreement borrowings and lower yields earned on these assets. Further, we earned an additional $10.1 million from our investments in other interest earning assets and cash during 2022 as compared to the prior year period.
Analysis of Net Interest Income
The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the years ended December 31, 2022 and 2021. Average yields are derived by dividing interest income by the average amortized cost of the related assets, and average costs are derived by dividing interest expense by the daily average balance of the related liabilities, for the periods shown. The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2022 | | 2021 |
| | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost |
| (Dollars in Thousands) | | | | | | |
| Assets: | | | | | | | | | | | | |
Interest-earning assets (1): | | | | | | | | | | | | |
| Residential whole loans | | $ | 8,506,728 | | | $ | 441,223 | | | 5.19 | % | | $ | 5,767,655 | | | $ | 303,468 | | | 5.26 | % |
Securities, at fair value (2)(3) | | 197,188 | | | 28,921 | | | 14.67 | | | 246,978 | | | 56,690 | | | 22.95 | |
Cash and cash equivalents (4) | | 507,798 | | | 4,838 | | | 0.95 | | | 715,529 | | | 344 | | | 0.05 | |
| Other interest-earning assets | | 63,254 | | | 7,437 | | | 11.76 | | | 20,100 | | | 1,800 | | | 8.96 | |
| Total interest-earning assets | | 9,274,968 | | | 482,419 | | | 5.20 | | | 6,750,262 | | | 362,302 | | | 5.37 | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | |
Collateralized financing agreements (5) | | $ | 3,511,565 | | | $ | 139,585 | | | 3.98 | % | | $ | 2,565,064 | | | $ | 67,766 | | | 2.64 | % |
Securitized debt (6) | | 3,456,319 | | | 103,498 | | | 2.99 | | | 1,902,913 | | | 36,831 | | | 1.94 | |
| Convertible Senior Notes | | 227,097 | | | 15,760 | | | 6.94 | | | 225,768 | | | 15,668 | | | 6.94 | |
| Senior Notes | | — | | | — | | | — | | | 1,096 | | | 120 | | | 8.31 | |
| Total interest-bearing liabilities | | 7,194,981 | | | 258,843 | | | 3.60 | | | 4,694,841 | | | 120,385 | | | 2.56 | |
Net interest income/net interest rate spread (7) | | | | 223,576 | | | 1.60 | | | | | 241,917 | | | 2.81 | |
Impact of net swap carry (8) | | | | 10,042 | | | 0.14 | | | | | (669) | | | (0.02) | |
| Net interest rate spread (including the impact of Swaps) | | | | $ | 233,618 | | | 1.74 | % | | | | $ | 241,248 | | | 2.79 | % |
Net interest-earning assets/net interest margin (9) | | $ | 2,079,987 | | | | | 2.52 | % | | $ | 2,055,421 | | | | | 3.57 | % |
(1)Yields presented throughout this Annual Report on Form 10-K are calculated using average amortized cost data for residential whole loans and securities, which excludes unrealized gains and losses. For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date.
(2)The net yield of 14.67% includes $7.8 million of accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020. Excluding this accretion, the yield reported would have been 10.73%.
(3)The net yield of 22.95% includes $20.5 million of accretion income recognized in 2021, due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020; and $8.1 million of accretion recognized during 2021 on the redemption of a Non-Agency MBS security that was purchased at a discount. Excluding this accretion, the yield reported would have been 11.38%.
(4)Includes average interest-earning cash, cash equivalents and restricted cash.
(5)Collateralized financing agreements include the following: mark-to-market asset based financing and non-mark-to-market asset based financing. For additional information, see Note 6, included under Item 8 of this Annual Report on Form 10-K.
(6)Includes both Securitized debt, at carrying value and Securitized debt, at fair value.
(7)Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(8)Reflects the impact of positive or negative swap carry. Positive swap carry results when income from the receive leg of a swap is greater than the expense on the pay leg. Negative swap carry results when income from the receive leg is less than the expense on the pay leg.
(9)Net interest margin reflects net interest income (including net swap expense) divided by average interest-earning assets.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates (yield/cost) and changes in the volume (average balance) of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) the changes attributable to changes in volume (changes in average balance multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior average balance); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately, based on absolute values, to the changes due to rate and volume.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| | Compared to |
| | | Year Ended December 31, 2021 |
| | | Increase/(Decrease) due to | | Total Net Change in Interest Income/Expense |
| (In Thousands) | | Volume | | Rate | |
| Interest-earning assets: | | | | | | |
| Residential whole loans | | $ | 141,854 | | | $ | (4,099) | | | $ | 137,755 | |
| Securities, at fair value | | (9,954) | | | (17,815) | | | (27,769) | |
| Cash and cash equivalents | | (133) | | | 4,627 | | | 4,494 | |
| Other interest-earning assets | | 4,921 | | | 716 | | | 5,637 | |
| Total net change in income of interest-earning assets | | $ | 136,688 | | | $ | (16,571) | | | $ | 120,117 | |
| | | | | | |
| Interest-bearing liabilities: | | | | | | |
| Residential whole loan financing agreements | | $ | 32,384 | | | $ | 37,243 | | | $ | 69,627 | |
| Securities, at fair value repurchase agreements | | (766) | | | 2,407 | | | 1,641 | |
| REO financing agreements | | 185 | | | 366 | | | 551 | |
| Securitized debt | | 40,088 | | | 26,579 | | | 66,667 | |
| Convertible Senior Notes and Senior Notes | | (28) | | | — | | | (28) | |
| Total net change in expense of interest-bearing liabilities | | $ | 71,863 | | | $ | 66,595 | | | $ | 138,458 | |
| Net change in net interest income | | $ | 64,825 | | | $ | (83,166) | | | $ | (18,341) | |
The following table presents certain quarterly information regarding our net interest spread and net interest margin for the quarterly periods presented:
| | | | | | | | | | | | | | |
| | | Total Interest-Earning Assets and Interest-
Bearing Liabilities |
| Quarter Ended | | Net Interest Spread (1) | | Net Interest Margin (2) |
| |
| December 31, 2022 | | 2.21 | % | | 3.04 | % |
| September 30, 2022 | | 1.64 | | | 2.43 | |
| June 30, 2022 | | 1.37 | | | 2.13 | |
| March 31, 2022 | | 1.96 | | | 2.63 | |
| | | | |
| December 31, 2021 | | 2.93 | | | 3.56 | |
| September 30, 2021 | | 2.98 | | | 3.70 | |
| June 30, 2021 | | 3.02 | | | 3.86 | |
| March 31, 2021 | | 2.31 | | | 3.29 | |
(1)Reflects the difference between the yield on average interest-earning assets and average cost of funds (including net swap expense).
(2)Reflects annualized net interest income (including net swap expense) divided by average interest-earning assets.
The following table presents the components of the net interest spread earned on our Residential whole loans for the quarterly periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | December 31, 2022 | | September 30, 2022 | | June 30, 2022 | | March 31, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 |
| | | | | | | | | | | | | | | | |
| Purchased Performing Loans | | | | | | | | | | | | | | | | |
Net Yield (1) | | 5.04 | % | | 4.75 | % | | 4.20 | % | | 4.18 | % | | 4.12 | % | | 4.56 | % | | 4.45 | % | | 4.41 | % |
Cost of Funding (2) | | 3.70 | % | | 3.60 | % | | 3.28 | % | | 2.74 | % | | 2.24 | % | | 2.14 | % | | 2.09 | % | | 2.46 | % |
| Net Interest Spread | | 1.34 | % | | 1.15 | % | | 0.92 | % | | 1.44 | % | | 1.88 | % | | 2.42 | % | | 2.36 | % | | 1.95 | % |
| | | | | | | | | | | | | | | | |
| Purchased Credit Deteriorated Loans | | | | | | | | | | | | | | | | |
Net Yield (1) | | 6.59 | % | | 6.49 | % | | 6.85 | % | | 6.79 | % | | 7.15 | % | | 7.08 | % | | 7.17 | % | | 5.00 | % |
Cost of Funding (2) | | 2.13 | % | | 2.72 | % | | 3.17 | % | | 2.88 | % | | 2.32 | % | | 2.18 | % | | 2.39 | % | | 2.86 | % |
| Net Interest Spread | | 4.46 | % | | 3.77 | % | | 3.68 | % | | 3.91 | % | | 4.83 | % | | 4.90 | % | | 4.78 | % | | 2.14 | % |
| | | | | | | | | | | | | | | | |
| Purchased Non-Performing Loans | | | | | | | | | | | | | | | | |
Net Yield (1) | | 11.15 | % | | 9.84 | % | | 9.40 | % | | 9.82 | % | | 9.83 | % | | 8.81 | % | | 7.98 | % | | 7.13 | % |
Cost of Funding (2) | | 3.01 | % | | 2.86 | % | | 3.34 | % | | 3.09 | % | | 2.53 | % | | 2.43 | % | | 2.71 | % | | 3.41 | % |
| Net Interest Spread | | 8.14 | % | | 6.98 | % | | 6.06 | % | | 6.73 | % | | 7.30 | % | | 6.38 | % | | 5.27 | % | | 3.72 | % |
| | | | | | | | | | | | | | | | |
| Total Residential Whole Loans | | | | | | | | | | | | | | | | |
Net Yield (1) | | 5.62 | % | | 5.30 | % | | 4.85 | % | | 4.94 | % | | 5.08 | % | | 5.52 | % | | 5.48 | % | | 5.03 | % |
Cost of Funding (2) | | 3.56 | % | | 3.49 | % | | 3.28 | % | | 2.79 | % | | 2.28 | % | | 2.20 | % | | 2.25 | % | | 2.70 | % |
| Net Interest Spread | | 2.06 | % | | 1.81 | % | | 1.57 | % | | 2.15 | % | | 2.80 | % | | 3.32 | % | | 3.23 | % | | 2.33 | % |
(1)Reflects annualized interest income on Residential whole loans divided by average amortized cost of Residential whole loans. Excludes servicing costs.
(2)Reflects annualized interest expense divided by average balance of agreements with mark-to-market collateral provisions (repurchase agreements), agreements with non-mark-to-market collateral provisions, and securitized debt. Cost of funding shown in the table above for the quarterly periods ended December 31, 2022, September 30, 2022, June 30, 2022, March 31, 2022 and December 31, 2021 include the impact of the net carry (the difference between swap interest income received and swap interest expense paid) on our Swaps. While we have not elected hedge accounting treatment for Swaps, and accordingly, net carry is not presented in interest expense in our consolidated statement of operations, we believe it is appropriate to allocate net carry to the cost of funding to reflect the economic impact of our Swaps on the funding costs shown in the table above. For the quarter ended December 31, 2022, this decreased the overall funding cost by 89 basis points for our Residential whole loans, 87 basis points for our Purchased Performing Loans, 141 basis points for our Purchased Credit Deteriorated Loans, and 76 basis points for our Purchased Non-Performing Loans. For the quarter ended September 30, 2022, this decreased the overall funding cost by 20 basis points for our Residential whole loans, 19 basis points for our Purchased Performing Loans, 43 basis points for our Purchased Credit Deteriorated Loans, and 24 basis points for our Purchased Non-Performing Loans. For the quarter ended June 30, 2022, this increased the overall funding cost by 25 basis points for our Residential whole loans, 23 basis points for our Purchased Performing Loans, 43 basis points for our Purchased Credit Deteriorated Loans, and 29 basis points for our Purchased Non-Performing Loans. For the quarter ended March 31, 2022, this increased the overall funding cost by 35 basis points for our Residential whole loans, 33 basis points for our Purchased Performing Loans, 56 basis points for our Purchased Credit Deteriorated Loans, and 39 basis points for our Purchased Non-Performing Loans. For the quarter ended December 31, 2021, this increased the overall funding cost by 5 basis points for our Residential whole loans, 5 basis points for our Purchased Performing Loans, 9 basis points for our Purchased Credit Deteriorated Loans, and 2 basis points for our Purchased Non-Performing Loans.
The following table presents the components of the net interest spread earned on our residential mortgage securities and MSR-related assets for the quarterly periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Securities, at fair value |
| Quarter Ended | | Net Yield (1)(2) | | Cost of
Funding (3) | | Net Interest
Rate
Spread |
| December 31, 2022 | | 30.33 | % | | 5.47 | % | | 24.86 | % |
| September 30, 2022 | | 11.06 | | | 3.94 | | | 7.12 | |
| June 30, 2022 | | 10.09 | | | 2.54 | | | 7.55 | |
| March 31, 2022 | | 10.13 | | | 1.72 | | | 8.41 | |
| | | | | | |
| December 31, 2021 | | 26.28 | | | 1.50 | | | 24.78 | |
| September 30, 2021 | | 18.78 | | | 1.61 | | | 17.17 | |
| June 30, 2021 | | 24.57 | | | 1.81 | | | 22.76 | |
| March 31, 2021 | | 22.25 | | | 2.02 | | | 20.23 | |
(1)Reflects annualized interest income divided by average amortized cost. Impairment charges recorded on MSR-related assets resulted in a lower amortized cost basis which impacted the calculation of net yields in subsequent periods.
(2)For the quarter ended December 31, 2022, the net yield of 30.33% includes $7.8 million of accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020. Excluding this accretion, the yield reported would have been 11.87%. For the quarter ended December 31, 2021, the net yield of 26.28% includes $8.1 million of accretion income recognized on the redemption at par of an MSR-related asset that had been held at amortized cost basis below par due to an impairment charge during the first quarter of 2020. Excluding this accretion, the yield reported would have been 11.37%. For the quarter ended September 30, 2021, the net yield of 18.78% includes $4.0 million of accretion income recognized on the redemption at par of an MSR-related asset that had been held at amortized cost basis below par due to an impairment charge during the first quarter of 2020. Excluding this accretion, the yield reported would have been 11.63%. For the quarter ended June 30, 2021, the net yield of 24.57% includes $8.4 million of accretion income recognized on the redemption at par of an MSR-related asset that had been held at amortized cost basis below par due to an impairment charge recorded in the first quarter of 2020. Excluding this accretion, the yield reported would have been 11.13%. For the quarter ended March 31, 2021, the net yield of 22.25% includes $8.1 million of accretion income recognized on the redemption of an RPL/NPL MBS security that was previously purchased at a discount. Excluding this accretion, the yield reported would have been 11.26%.
(3)Reflects annualized interest expense divided by average balance of repurchase agreements.
Interest Income
Interest income on our residential whole loans increased by $137.8 million, or 45.4%, for 2022, to $441.2 million compared to $303.5 million for 2021. This increase primarily reflects a $2.7 billion increase in the average balance of this portfolio to $8.5 billion for 2022 from $5.8 billion for 2021, partially offset by an decrease in the yield to 5.19% for 2022 from 5.26% for 2021.
Interest income on our securities portfolio decreased $27.8 million to $28.9 million for 2022 from $56.7 million for 2021. This decrease primarily reflects a decrease in the net yield to 14.67% for 2022, compared to 22.95% for 2021 and a decrease in the average amortized cost of the portfolio of $49.8 million. The decrease in the net yield on our securities portfolio primarily reflects higher accretion income recognized in 2021 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020; and the redemption of a Non-Agency MBS that had been previously purchased at a discount.
Interest Expense
Our interest expense for 2022 increased by $138.5 million, or 115.0%, to $258.8 million, from $120.4 million for 2021. This increase primarily reflects an increase in our average collateralized financing agreement borrowings to finance our residential mortgage asset portfolio and an increase in financing rates on our financing agreements.
Provision for Credit Losses on Residential Whole Loans Held at Carrying Value
For 2022, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $2.6 million compared to a reversal of provision of $44.9 million for 2021. The reversals recorded in both the current and prior
periods primarily reflect run-off of loans held at carrying value and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts. The current period reversal reflects lower loan balances, partially offset by adjustments to lower future estimates of prepayment speeds given recent and expected future increases in market interest rates. The larger prior year reversal reflects a greater impact of adjustments to macro-economic assumptions consistent with revised economic forecasts as the U.S economy continued to recover from the impact of the COVID-19 pandemic. With respect to our residential whole loans held at carrying value, CECL requires that reserves for credit losses are estimated at the reporting date based on expected cash flows over the life of the loan or financial instrument, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions.
Provision for Credit Losses on Other Assets
For 2022, we recorded a provision for credit losses on Other Assets of $28.6 million reflecting an impairment charge against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero.
Other (Loss)/Income, net
For 2022, Other Loss, net was $264.6 million compared to Other Income, net of $165.1 million for 2021. The components of Other (Loss)/Income, net for 2022 and 2021 are summarized in the table below:
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 |
| Net (loss)/gain on residential whole loans measured at fair value through earnings | | $ | (866,762) | | | $ | 16,243 | |
| | | | |
| Impairment and other net (loss)/gain on securities and other portfolio investments | | (25,067) | | | 74,496 | |
| Net gain on real estate owned | | 25,379 | | | 22,838 | |
| Net gain/(loss) on derivatives used for risk management purposes | | 255,179 | | | 1,426 | |
| Net gain/(loss) on securitized debt measured at fair value through earnings | | 290,639 | | | 15,027 | |
| Lima One - origination, servicing and other fee income | | 46,745 | | | 22,600 | |
| Other, net | | 9,297 | | | 12,473 | |
| Other (Loss)/Income, net | | $ | (264,590) | | | $ | 165,103 | |
Operating and Other Expense
During 2022, we had compensation and benefits and other general and administrative expenses of $112.5 million, compared to $85.5 million for 2021. Compensation and benefits expense increased $22.9 million to $76.7 million for 2022, compared to $53.8 million for 2021 primarily reflecting the impact of including Lima One compensation expense in our financial results, higher salary expense and an increase in long-term incentive compensation partially offset by a reduction in annual bonus compensation for the current period. Our other general and administrative expenses increased by $4.1 million to $35.8 million for 2022 compared to $31.7 million for 2021, primarily reflecting the impact of including Lima One expenses in our financial results, increased information technology costs, higher professional services costs, and higher office lease costs associated with our corporate headquarters, partially offset by lower costs associated with deferred compensation to Directors in the current year period, which were impacted by changes in our stock price. The prior period also included higher expense for corporate income taxes related to activity in our taxable REIT subsidiaries and costs associated with terminating certain financing facilities that were replaced with securitization financing, which did not re-occur this period.
Operating and Other Expense during 2022 also includes $42.9 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses increased compared to 2021 by approximately $12.0 million, or 39.0%, primarily due to higher expenses recognized related to loan securitization activities and higher diligence and other costs associated with acquiring loans, partially offset by lower servicing fees and non-recoverable advances on our REO and Purchased Credit Deteriorated loans.
In addition, Other expenses for 2022 and 2021 also includes $9.2 million and $6.6 million, respectively, of amortization related to intangible assets recognized as part of the purchase accounting for the Lima One acquisition.
Selected Financial Ratios
The following table presents information regarding certain of our financial ratios at or for the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or for the Quarter Ended | | Return on Average Total Assets (1) | | Return on Average Total Stockholders’ Equity (2) | | Dividend Payout Ratio (3) | | Total Average Stockholders’ Equity to Total Average Assets (4) | | Leverage Multiple (5) | | Recourse Leverage Multiple (6) |
| December 31, 2022 | | (0.02) | % | | 1.32 | % | | — | | | 21.59 | % | | 3.5 | | 1.8 | |
| September 30, 2022 | | (0.66) | | | (2.57) | | | — | | | 22.53 | | | 3.6 | | 1.7 | |
| June 30, 2022 | | (1.14) | | | (4.35) | | | — | | | 24.33 | | | 3.3 | | 1.8 | |
| March 31, 2022 | | (0.97) | | | (3.33) | | | — | | | 26.63 | | | 3.1 | | 1.9 | |
| | | | | | | | | | | | |
| December 31, 2021 | | 1.67 | | | 6.84 | | | 1.38 | | 30.00 | | | 2.5 | | 1.5 | |
| September 30, 2021 | | 6.64 | | | 20.48 | | | 0.36 | | 34.55 | | | 2.2 | | 1.4 | |
| June 30, 2021 | | 3.46 | | | 10.57 | | | 0.77 | | 37.28 | | | 1.8 | | 1.0 | |
| March 31, 2021 | | 4.55 | | | 13.54 | | | 0.44 | | 37.21 | | | 1.6 | | 1.0 | |
(1)Reflects annualized net income available to common stock and participating securities divided by average total assets. For the quarters ended December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, the amounts calculated reflect the quarterly net income available to common stock and participating securities divided by average total assets.
(2)Reflects annualized net income divided by average total stockholders’ equity. For the quarters ended December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, the amounts calculated reflect the quarterly net income divided by average total stockholders’ equity.
(3)Reflects dividends declared per share of common stock divided by earnings per share. The ratio has not been calculated for periods where earnings per share is negative as the calculations are not meaningful.
(4)Reflects total average stockholders’ equity divided by total average assets.
(5)Represents the sum of our borrowings under financing agreements and payable for unsettled purchases divided by stockholders’ equity.
(6)Represents the sum of our borrowings under financing agreements (excluding securitized debt) and payable for unsettled purchases divided by stockholders’ equity.
Reconciliation of GAAP and Non-GAAP Financial Measures
Reconciliation of GAAP Net Income to non-GAAP Distributable Earnings
“Distributable earnings” is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission. Distributable earnings is determined by adjusting GAAP net income/(loss) by removing certain unrealized gains and losses, primarily on residential mortgage investments, associated debt, and hedges that are, in each case, accounted for at fair value through earnings, certain realized gains and losses, as well as certain non-cash expenses and securitization-related transaction costs. Management believes that the adjustments made to GAAP earnings result in the removal of (i) income or expenses that are not reflective of the longer term performance of our investment portfolio, (ii) certain non-cash expenses, and (iii) expense items required to be recognized solely due to the election of the fair value option on certain related residential mortgage assets and associated liabilities. Distributable earnings is one of the factors that our Board of Directors considers when evaluating distributions to our shareholders. Accordingly, we believe that the adjustments to compute Distributable earnings specified below provide investors and analysts with additional information to evaluate our financial results.
Distributable earnings should be used in conjunction with results presented in accordance with GAAP. Distributable earnings does not represent and should not be considered as a substitute for net income or cash flows from operating activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.
The following table provides a reconciliation of our GAAP net (loss)/income used in the calculation of basic EPS to our non-GAAP Distributable earnings for the quarterly periods below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| (In Thousands, Except Per Share Amounts) | | December 31, 2022 | | September 30, 2022 | | June 30, 2022 | | March 31, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 |
| GAAP Net income/(loss) used in the calculation of basic EPS | | $ | (1,647) | | | $ | (63,410) | | | $ | (108,760) | | | $ | (91,266) | | | $ | 35,734 | | | $ | 123,858 | | | $ | 58,290 | | | $ | 77,029 | |
| | | | | | | | | | | | | | | | |
| Adjustments: | | | | | | | | | | | | | | | | |
| Unrealized and realized gains and losses on: | | | | | | | | | | | | | | | | |
| Residential whole loans held at fair value | | 68,828 | | | 291,818 | | | 218,181 | | | 287,935 | | | 42,564 | | | (20,494) | | | (6,226) | | | (32,088) | |
| Securities held at fair value | | 383 | | | (1,549) | | | 1,459 | | | 2,934 | | | 364 | | | (494) | | | (1,374) | | | (100) | |
| Interest rate swaps | | 12,725 | | | (108,917) | | | (31,767) | | | (80,753) | | | (71) | | | — | | | — | | | — | |
| Securitized debt held at fair value | | (44,988) | | | (100,767) | | | (84,348) | | | (62,855) | | | (6,137) | | | (857) | | | 232 | | | (7,629) | |
| Investments in loan origination partners | | 8,526 | | | 2,031 | | | 39,162 | | | 780 | | | (23,956) | | | (48,933) | | | — | | | — | |
| Expense items: | | | | | | | | | | | | | | | | |
| Amortization of intangible assets | | 1,300 | | | 1,300 | | | 3,300 | | | 3,300 | | | 3,300 | | | 3,300 | | | — | | | — | |
| Equity based compensation | | 2,480 | | | 2,673 | | | 3,540 | | | 2,645 | | | 2,306 | | | 2,306 | | | 2,744 | | | 1,688 | |
| | | | | | | | | | | | | | | | |
| Securitization-related transaction costs | | 1,744 | | | 5,014 | | | 6,399 | | | 3,233 | | | 5,178 | | | — | | | — | | | 2 | |
| Total adjustments | | 50,998 | | | 91,603 | | | 155,926 | | | 157,219 | | | 23,548 | | | (65,172) | | | (4,624) | | | (38,127) | |
| Distributable earnings | | $ | 49,351 | | | $ | 28,193 | | | $ | 47,166 | | | $ | 65,953 | | | $ | 59,282 | | | $ | 58,686 | | | $ | 53,666 | | | $ | 38,902 | |
| | | | | | | | | | | | | | | | |
| GAAP (loss)/earnings per basic common share | | $ | (0.02) | | | $ | (0.62) | | | $ | (1.06) | | | $ | (0.86) | | | $ | 0.33 | | | $ | 1.12 | | | $ | 0.53 | | | $ | 0.68 | |
| Distributable earnings per basic common share | | $ | 0.48 | | | $ | 0.28 | | | $ | 0.46 | | | $ | 0.62 | | | $ | 0.54 | | | $ | 0.53 | | | $ | 0.49 | | | $ | 0.34 | |
| Weighted average common shares for basic earnings per share | | 101,800 | | | 101,795 | | | 102,515 | | | 106,568 | | | 109,468 | | | 110,222 | | | 110,383 | | | 112,784 | |
Selected Financial Ratios (using Distributable earnings)
The following table presents information regarding certain of our financial ratios at or for the dates presented:
| | | | | | | | | | | | | | | | | | | | |
| At or for the Quarter Ended | | Return on Average Total Assets (1) | | Return on Average Total Stockholders’ Equity (2) | | Dividend Payout Ratio (3) |
| December 31, 2022 | | 2.10 | % | | 11.34 | % | | 0.73 |
| September 30, 2022 | | 1.19 | | | 6.79 | | | 1.57 |
| June 30, 2022 | | 1.99 | | | 9.60 | | | 0.96 |
| March 31, 2022 | | 2.82 | | | 11.90 | | | 0.71 |
| | | | | | |
| December 31, 2021 | | 2.76 | | | 10.46 | | | 0.81 |
| September 30, 2021 | | 3.13 | | | 10.34 | | | 0.75 |
| June 30, 2021 | | 3.17 | | | 9.80 | | | 0.82 |
| March 31, 2021 | | 2.29 | | | 7.46 | | | 0.88 |
(1)Reflects annualized Distributable earnings divided by average total assets.
(2)Reflects annualized Distributable earnings before preferred dividends divided by average total stockholders’ equity.
(3)Reflects dividends declared per share of common stock divided by Distributable earnings per share.
Segment Reporting (using Distributable earnings)
The following tables present our non-GAAP Distributable earnings by segment for the periods below:
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| (Dollars in Thousands) | | Mortgage-Related Assets | | Lima One | | Corporate | | Total |
| Year ended December 31, 2022 | | | | | | | | |
| GAAP Net loss used in the calculation of basic EPS | | $ | (88,913) | | | $ | (9,665) | | | $ | (166,505) | | | $ | (265,083) | |
| | | | | | | | |
| Adjustments: | | | | | | | | |
| Unrealized and realized gains and losses on: | | | | | | | | |
| Residential whole loans held at fair value | | 730,028 | | | 136,734 | | | — | | | 866,762 | |
| Securities held at fair value | | 3,227 | | | — | | | — | | | 3,227 | |
| Interest rate swaps | | (174,424) | | | (34,288) | | | — | | | (208,712) | |
| Securitized debt held at fair value | | (232,194) | | | (60,764) | | | — | | | (292,958) | |
| Investments in loan origination partners | | — | | | — | | | 50,499 | | | 50,499 | |
| Expense items: | | | | | | | | |
| Amortization of intangible assets | | — | | | 9,200 | | | — | | | 9,200 | |
| Equity based compensation | | — | | | 164 | | | 11,174 | | | 11,338 | |
| | | | | | | | |
| Securitization-related transaction costs | | — | | | — | | | 16,390 | | | 16,390 | |
| Total adjustments | | $ | 326,637 | | | $ | 51,046 | | | $ | 78,063 | | | $ | 455,746 | |
| Distributable earnings | | $ | 237,724 | | | $ | 41,381 | | | $ | (88,442) | | | $ | 190,663 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Thousands) | | Mortgage-Related Assets | | Lima One | | Corporate | | Total |
| Year ended December 31, 2021 | | | | | | | | |
| GAAP Net income/(loss) used in the calculation of basic EPS | | $ | 306,147 | | | $ | 20,434 | | | $ | (31,630) | | | $ | 294,951 | |
| | | | | | | | |
| Adjustments: | | | | | | | | |
| Unrealized and realized gains and losses on: | | | | | | | | |
| Residential whole loans held at fair value | | 2,718 | | | (18,962) | | | — | | | (16,244) | |
| Securities held at fair value | | (1,604) | | | — | | | — | | | (1,604) | |
| Interest rate swaps | | (51) | | | (20) | | | — | | | (71) | |
| Securitized debt held at fair value | | (13,958) | | | (433) | | | — | | | (14,391) | |
| Investments in loan origination partners | | — | | | — | | | (72,889) | | | (72,889) | |
| Expense items: | | | | | | | | |
| Amortization of intangible assets | | — | | | 6,600 | | | — | | | 6,600 | |
| Equity based compensation | | — | | | 71 | | | 8,973 | | | 9,044 | |
| | | | | | | | |
| Securitization-related transaction costs | | — | | | — | | | 5,180 | | | 5,180 | |
| Total adjustments | | $ | (12,895) | | | $ | (12,744) | | | $ | (58,736) | | | $ | (84,375) | |
| Distributable earnings | | $ | 293,252 | | | $ | 7,690 | | | $ | (90,366) | | | $ | 210,576 | |
Reconciliation of GAAP Book Value per Common Share to non-GAAP Economic Book Value per Common Share
“Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans and securitized debt held at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these financial instruments. These adjustments are also reflected in the table below in our end of period stockholders’ equity. Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our investment activities, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.
The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of the quarterly periods below:
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| | Quarter Ended: |
| (In Millions, Except Per Share Amounts) | | December 31, 2022 | | September 30, 2022 | | June 30, 2022 | | March 31, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 |
| GAAP Total Stockholders’ Equity | | $ | 1,988.8 | | | $ | 2,033.9 | | | $ | 2,146.4 | | | $ | 2,349.0 | | | $ | 2,542.8 | | | $ | 2,601.1 | | | $ | 2,526.5 | | | $ | 2,542.3 | |
| Preferred Stock, liquidation preference | | (475.0) | | | (475.0) | | | (475.0) | | | (475.0) | | | (475.0) | | | (475.0) | | | (475.0) | | | (475.0) | |
| GAAP Stockholders’ Equity for book value per common share | | 1,513.8 | | | 1,558.9 | | | 1,671.4 | | | 1,874.0 | | | 2,067.8 | | | 2,126.1 | | | 2,051.5 | | | 2,067.3 | |
| Adjustments: | | | | | | | | | | | | | | | | |
| Fair value adjustment to Residential whole loans, at carrying value | | (70.2) | | | (58.2) | | | 9.5 | | | 54.0 | | | 153.5 | | | 198.8 | | | 206.2 | | | 203.0 | |
Fair value adjustment to Securitized debt, at carrying value (1) | | 139.7 | | | 109.6 | | | 75.4 | | | 47.7 | | | 4.3 | | | (8.0) | | | (8.9) | | | (3.6) | |
| | | | | | | | | | | | | | | | |
Stockholders’ Equity including fair value adjustments to Residential whole loans and Securitized debt held at carrying value (Economic book value) (1) | | $ | 1,583.3 | | | $ | 1,610.3 | | | $ | 1,756.3 | | | $ | 1,975.7 | | | $ | 2,225.6 | | | $ | 2,316.9 | | | $ | 2,248.8 | | | $ | 2,266.7 | |
| | | | | | | | | | | | | | | | |
| GAAP book value per common share | | $ | 14.87 | | | $ | 15.31 | | | $ | 16.42 | | | $ | 17.84 | | | $ | 19.12 | | | $ | 19.29 | | | $ | 18.62 | | | $ | 18.54 | |
Economic book value per common share (1) | | $ | 15.55 | | | $ | 15.82 | | | $ | 17.25 | | | $ | 18.81 | | | $ | 20.58 | | | $ | 21.02 | | | $ | 20.41 | | | $ | 20.32 | |
| Number of shares of common stock outstanding | | 101.8 | | | 101.8 | | | 101.8 | | | 105.0 | | | 108.1 | | | 110.2 | | | 110.2 | | | 111.5 | |
(1)Economic book value per common share for periods prior to December 31, 2021 have been restated to include the impact of fair value changes in securitized debt held at carrying value.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements include the accounts of all of our subsidiaries. The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements, giving due consideration to materiality. Actual results could differ from these estimates.
Our accounting policies are described in Note 2 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Management believes the policies which more significantly rely on estimates and judgments to be as follows:
Fair Value Measurements - Residential Whole Loans
GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. The following describes the valuation methodologies used for our financial instrument investments categorized as level 3 in the valuation hierarchy, which require the most significant estimates and judgments to be made.
We determine the fair value of our residential whole loans after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The estimation of cash flows used in pricing models is inherently subjective and imprecise. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. See “Quantitative and Qualitative Disclosures about Market Risk” for further information about the sensitivity of our investment portfolio to changes in market factors, particularly market interest rates.
See Note 13 to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for information regarding the assumptions used in valuing our residential whole loans.
Residential whole loans, at fair value are recorded on our consolidated balance sheets at fair value and changes in their fair value are recorded through earnings. We held $5.7 billion and $5.3 billion of residential whole loans, at fair value, at December 31, 2022 and 2021, respectively, which represented 62.9% and 58.0% of our total assets at those dates, respectively. Residential whole loans, at fair value recorded valuation changes of ($866.8) million, $16.2 million and $16.4 million during the years ended December 31, 2022, 2021, and 2020, respectively.
With respect to Residential whole loans, at carrying value, the fair value for these loans is disclosed in the footnotes to the consolidated financial statements and changes in their fair value do not impact earnings. We held $1.8 billion and $2.6 billion of residential whole loans, at carrying value, at December 31, 2022 and 2021, respectively, which represented 19.7% and 28.5% of our total assets at those dates, respectively. Residential whole loans, at carrying value experienced net fair value changes of ($223.7) million, ($20.4) million and ($8.5) million during the years ended December 31, 2022, 2021, and 2020, respectively.
Allowance for Credit Losses on Residential Whole Loans
An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, including related economic forecasts, the value of the underlying collateral and our ability to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Allowances for credit losses on our residential whole loans, at carrying value recorded at December 31, 2022, 2021, and 2020 were $35.3 million, $39.4 million and $86.8 million, respectively. For further discussion of the allowance for credit losses during these periods, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses on Residential Whole Loans Held at Carrying Value.”
Recent Accounting Standards to Be Adopted in Future Periods
We are not aware of any recent accounting standards to be adopted in future periods that we expect would materially impact us.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions. Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase and originate residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate.
We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities. To the extent we raise additional funds through capital market transactions, we currently anticipate using the net proceeds from such transactions to acquire additional residential mortgage-related assets, consistent with our investment policy, and for working capital, which may include, among other things, the repayment of our financing transactions. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our universal shelf registration statement and, at December 31, 2022, we had approximately 2.0 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement. During 2022, we issued 80,027 shares of common stock through our DRSPP, raising net proceeds of approximately $1.2 million.
During 2022, we repurchased 6,476,746 shares of our common stock through the stock repurchase program at an average cost of $15.80 per share and a total cost of approximately $102.1 million, net of fees and commissions paid to the sales agents of approximately $161,000. As of December 31, 2022, we were permitted to purchase an additional $202.5 million of our common stock under the stock repurchase program.
In February 2023, our Board authorized a repurchase program for our 6.25% Convertible Senior Notes due 2024 (or the Convertible Senior Notes) under which we may repurchase up to $100 million of our Convertible Senior Notes. The convertible notes repurchase program does not require the purchase of any minimum amount of Convertible Senior Notes. The timing and extent to which we repurchase our Convertible Senior Notes will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice.
Financing agreements
Our borrowings under financing agreements include a combination of shorter term and longer arrangements. Certain of these arrangements are collateralized directly by our residential mortgage investments or otherwise have recourse to us, while securitized debt financing is non-recourse financing. Further, certain of our financing agreements contain terms that allow the lender to make margin calls on us based on changes in the value of the underlying collateral securing the borrowing. As of December 31, 2022, we had $2.2 billion of total unpaid principal balance related to asset-backed financing agreements with mark-to-market collateral provisions and $4.6 billion of total unpaid principal balance related to asset-backed financing agreements that do not include mark-to-market collateral provisions. Repurchase agreements and other forms of collateralized financing are uncommitted and renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time. The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (or SIFMA) or the global master repurchase agreement published by SIFMA and the International Capital Market Association. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts (or the percentage amount by which the collateral value is contractually required to exceed the loan amount), purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default and setoff provisions. Other non-repurchase agreement financing arrangements also contain provisions governing collateral maintenance. At December 31, 2022, we had unused financing capacity of approximately $1.2 billion across our financing arrangements for all collateral types.
Margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty. We address margin call requests in accordance with the required terms specified in the applicable agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day. We review margin calls
made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination. When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and are able to resolve the matter. If this is not successful, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include the engagement of a third-party to review collateral valuations. For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing. For additional information regarding our various types of financing arrangements, including those with non-mark-to-market terms and the haircuts for those agreements with mark-to-market collateral provisions, see Note 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.
At December 31, 2022, we had a total of $3.9 billion of residential whole loans and securities and $16.0 million of restricted cash pledged to our financing counterparties. We expect that we will continue to pledge residential mortgage assets as part of certain of our ongoing financing arrangements. When the value of our residential mortgage assets pledged as collateral experiences rapid decreases, margin calls under our financing arrangements could materially increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties choose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or otherwise become available on possibly less advantageous terms. Further, when liquidity tightens, our counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to use leverage. Access to financing may also be negatively impacted by ongoing volatility in financial markets, thereby potentially adversely impacting our current or future lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will exist to permit us to consummate additional securitization transactions if we determine to seek that form of financing.
Our ability to meet future margin calls will be affected by our ability to use cash or obtain financing from unpledged collateral, the amount of which can vary based on the market value of such collateral, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. (See “Interest Rate Risk” included under Item 7A. of this Annual Report on Form 10-K and our Consolidated Statements of Cash Flows, included under Item 8 of this Annual Report on Form 10-K.)
The table below presents certain information about our borrowings under asset-backed financing agreements and securitized debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Asset-backed Financing Agreements | | Securitized Debt |
Quarter Ended (1) | | Quarterly
Average
Balance | | End of Period
Balance | | Maximum
Balance at Any
Month-End | | Quarterly
Average
Balance | | End of Period
Balance | | Maximum
Balance at Any
Month-End |
| (In Thousands) | | | | | | | | | | | | |
| December 31, 2022 | | $ | 3,147,303 | | | $ | 3,226,651 | | | $ | 3,226,651 | | | $ | 3,842,757 | | | $ | 3,357,590 | | | $ | 3,855,013 | |
| September 30, 2022 | | 3,351,046 | | | 3,229,640 | | | 3,411,200 | | | 3,643,872 | | | 3,832,311 | | | 3,832,311 | |
| June 30, 2022 | | 3,638,476 | | | 3,530,510 | | | 3,761,049 | | | 3,170,406 | | | 3,374,716 | | | 3,374,716 | |
| March 31, 2022 | | 3,920,895 | | | 3,942,343 | | | 4,138,377 | | | 2,555,241 | | | 2,859,061 | | | 2,859,061 | |
| | | | | | | | | | | | |
| December 31, 2021 | | 3,313,641 | | | 3,501,839 | | | 3,501,839 | | | 2,302,990 | | | 2,650,473 | | | 2,650,473 | |
| September 30, 2021 | | 2,516,940 | | | 3,278,941 | | | 3,278,941 | | | 2,008,639 | | | 2,045,729 | | | 2,137,773 | |
| June 30, 2021 | | 2,063,852 | | | 2,156,598 | | | 2,156,598 | | | 1,778,909 | | | 2,046,381 | | | 2,046,381 | |
| March 31, 2021 | | 2,632,791 | | | 2,221,570 | | | 2,443,149 | | | 1,535,995 | | | 1,548,920 | | | 1,602,148 | |
| | | | | | | | | | | | |
| December 31, 2020 | | 2,833,649 | | | 2,497,290 | | | 2,823,306 | | | 1,202,292 | | | 1,514,509 | | | 1,514,509 | |
| September 30, 2020 | | 3,511,453 | | | 3,217,678 | | | 3,613,968 | | | 610,120 | | | 837,683 | | | 837,683 | |
| June 30, 2020 | | 4,736,610 | | | 3,692,845 | | | 5,024,926 | | | 538,245 | | | 516,102 | | | 541,698 | |
| March 31, 2020 | | 9,233,808 | | | 7,768,180 | | | 9,486,555 | | | 558,007 | | | 533,733 | | | 594,458 | |
(1)The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019 and $100.0 million of Senior Notes issued in April 2012. Subsequent to the end of the third quarter of 2020, we repaid in full the outstanding principal balance of the senior secured term loan facility. During the first quarter of 2021, we redeemed all of our outstanding Senior Notes.
Cash Flows and Liquidity for the Year Ended December 31, 2022
Our cash, cash equivalents and restricted cash increased by $89.6 million during 2022, reflecting: $1.1 billion used in our investing activities, $850.2 million provided by our financing activities and $366.1 million provided by our operating activities.
At December 31, 2022, our debt-to-equity multiple was 3.5 times compared to 2.5 times at December 31, 2021. Our recourse leverage multiple at December 31, 2022 was 1.8 times compared to 1.5 times at December 31, 2021. At December 31, 2022, we had borrowings under asset-backed financing agreements of $3.2 billion, of which $3.1 billion were secured by residential whole loans, $111.7 million were secured by securities and $25.5 million were secured by REO. In addition, at December 31, 2022, we had securitized debt of $3.4 billion in connection with our loan securitization transactions. At December 31, 2021, we had borrowings under asset-backed financing agreements of $3.5 billion, of which $3.3 billion were secured by residential whole loans, $159.1 million were secured by securities and $23.0 million were secured by REO. In addition, at December 31, 2021, we had securitized debt of $2.7 billion in connection with our loan securitization transactions.
During 2022, $1.1 billion was used in our investing activities. We utilized $3.2 billion for acquisitions of residential whole loans, loan related investments and capitalized advances. During 2022, we received $1.9 billion of principal payments on residential whole loans and loan related investments and $134.0 million of proceeds on sales of REO. In addition, during 2022, we received cash of $53.1 million from proceeds from sales and prepayments and scheduled amortization on our securities.
In connection with our repurchase agreement financings and Swaps, we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties. Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required. The value of securities pledged as collateral fluctuates reflecting changes in: (i) the face (or par) value of our assets; (ii) market interest rates and/or other market conditions; and (iii) the market value of our Swaps. Margin calls/reverse margin calls are satisfied when we pledge/receive additional collateral in the form of additional assets and/or cash.
The table below summarizes our margin activity with respect to our repurchase agreement financings and derivative hedging instruments for the quarterly periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Collateral Pledged to Meet Margin Calls | | Cash and Securities Received for Reverse
Margin Calls | | Net Assets Received/(Pledged) for Margin Activity |
For the Quarter Ended (1) | | Fair Value of Securities Pledged | | Cash Pledged | | Aggregate Assets Pledged For Margin Calls | | |
| (In Thousands) | | | | | | | | | | |
| December 31, 2022 | | $ | — | | | $ | 12,121 | | | $ | 12,121 | | | $ | 13,629 | | | $ | 1,508 | |
| September 30, 2022 | | — | | | 4,784 | | | 4,784 | | | 12,291 | | | 7,507 | |
| June 30, 2022 | | — | | | 18,985 | | | 18,985 | | | — | | | (18,985) | |
| March 31, 2022 | | — | | | 40,834 | | | 40,834 | | | 346 | | | (40,488) | |
(1)Excludes variation margin payments on our cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.
We are subject to various financial covenants under our financing agreements, which include minimum liquidity and net worth requirements, net worth decline limitations and maximum debt-to-equity ratios. We were in compliance with all financial covenants as of December 31, 2022.
During 2022, we paid $184.0 million for cash dividends on our common stock and dividend equivalents and paid cash dividends of $32.9 million on our preferred stock. On December 14, 2022, we declared our fourth quarter 2021 dividend on our common stock of $0.35 per share; on January 31, 2023, we paid this dividend, which totaled approximately $35.8 million, including dividend equivalents of approximately $138,000.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Schedule
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All other financial statement schedules are omitted because the required information is not applicable or deemed not material, or the required information is included in the consolidated financial statements and/or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
MFA Financial, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MFA Financial, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income/(loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedule IV – Mortgage Loans on Real Estate (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the valuation of residential whole loans, at fair value
As discussed in Notes 2, 3 and 13 to the consolidated financial statements, the Company records certain residential whole loans at fair value on its consolidated balance sheet as a result of a fair value election made at the time of acquisition. As of December 31, 2022, the recorded balance of the Company’s residential whole loans, at fair value was $5.7 billion. The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset.
We identified the assessment of the valuation of residential whole loans, at fair value, as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, was involved in determining certain of the estimate assumptions, including the forecasted prepayment, default and loss given default rates, property appraised value, and discount rate, which are not readily observable in the market and subject to significant measurement uncertainty. The evaluation of the assumptions to determine the valuation of residential whole loans, at fair value, required subjective and complex auditor judgement as the assumptions used were sensitive to variation, such that minor changes in home prices and/or credit quality of the borrower can cause significant changes in the estimate.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of residential whole loans, at fair value. This included controls related to the Company’s process to evaluate property appraised values and residential whole loan valuations. We involved valuation professionals with specialized skills and knowledge who assisted in evaluating the Company’s internal controls specific to the assessment of the third-party developed valuation techniques and models.
We involved valuation professionals with specialized skills and knowledge, who assisted in:
•evaluating that the methodology used by the Company in determining the property appraised value and residential whole loan fair value is in accordance with U.S. GAAP
•evaluating the methodology and assumptions used to determine the property appraised value used by the Company for a sample of residential whole loans at fair value
•evaluating the assumptions used to determine the residential whole loan fair value used by the Company by comparing them to market research and relevant industry practices
•developing a fair value estimate for a sample of non-performing residential whole loans at fair value using the evaluated property appraised value, estimated time to liquidate the loan, expected liquidation costs, and home price index assumptions used by the Company and publicly available external market data collectively with independently developed valuation models and/or inputs and comparing the results of our estimate of fair value to the Company’s fair value estimate and
•developing an independent fair value estimate for a sample of performing residential whole loans at fair value based on independently developed valuation models and/or inputs and comparing the results of our estimate of fair value to the Company’s fair value estimate.
Assessment of the allowance for credit losses on certain residential whole loans held at carrying value
As discussed in Note 2 and 3 to the consolidated financial statements, the Company’s total allowance for credit losses on residential whole loans held at carrying value as of December 31, 2022 was $35.3 million (the December 31, 2022 ACL). The Company estimated the December 31, 2022 ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances, specific to the Company’s loan portfolio segments grouped by shared risk characteristics which include Non-Qualified Mortgages (non-QM loans), Transitional loans, Single-Family Rental loans, Seasoned Performing loans, and Purchased Credit Deteriorated loans. These expected credit losses are generally calculated based on the estimated probability of default and loss severity of loans in the portfolio, which involves projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. These results were not discounted. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The default and severity rates were applied to the estimated amount of loans outstanding during each future period, based on contractual terms and expected prepayments. Expected prepayments are estimated based on historical experience and current and expected future economic conditions, including market interest rates. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. The Company forecasts future economic conditions based on forecasts provided by an external preparer of
economic forecasts, as well as its own knowledge of the market and its portfolio. The Company may considers multiple scenarios and select the one that it believes results in the most reasonable estimate of expected losses. The Company may apply qualitative adjustments to these expected loss estimates, which are determined based on a variety of factors, including differences between the Company’s loan portfolio and the loan portfolios represented by data available in regulatory filings of certain banks that are considered to have similar loan portfolios (available proxy data), and differences between current (and expected future) market conditions in comparison to market conditions that occurred in historical periods.
We identified the assessment of the December 31, 2022 ACL associated with the Company’s non-QM loans and Purchased Credit Deteriorated loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the December 31, 2022 ACL for these loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the December 31, 2022 ACL methodology, including the methods and models used to estimate the expected prepayments and default and loss severity rates and their significant assumptions. Such significant assumptions included the reasonable and supportable forecasts, including reversion periods and macroeconomic forecast scenario, and the composition of the publicly available data derived from the historical loss experience of certain banks. The assessment also included the evaluation of the qualitative factors and their significant assumptions. Such significant assumptions were sensitive to variation, such that minor changes in the assumption can cause significant changes in the estimates. The assessment also included an evaluation of the conceptual soundness and performance of the prepayment, default and loss severity models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the December 31, 2022 ACL estimate, including controls over the:
•development of the ACL methodology
•continued use and appropriateness of changes made to the prepayment, default and loss severity models
•identification and determination of the significant assumptions used in the prepayment, default and loss severity models
•performance monitoring of the prepayment, default and loss severity models
•continued use and appropriateness of changes made to the qualitative factors, including the significant assumptions used in the measurement of the qualitative factors
•analysis of the ACL results, trends, and ratios.
We evaluated the Company’s process to develop the December 31, 2022 ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s ACL methodology for compliance with U.S. generally accepted accounting principles
•evaluating judgments made by the Company in the continued use and appropriateness of changes made to the prepayment, default and loss severity models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•assessing the conceptual soundness and performance testing of the prepayment, default and loss severity models by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the methodology used to develop the economic forecast scenarios and underlying macroeconomic assumptions by comparing it to the Company’s business environment and relevant industry practices
•evaluating the economic forecast scenario selected through comparison to publicly available forecasts
•evaluating the length of the historical experience period and reasonable and supportable forecast periods by comparing them to specific portfolio risk characteristics and trends
•assessing the composition of the publicly available data derived from the historical loss experience of certain banks by comparing to specific portfolio risk characteristics
•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
We also assessed the sufficiency of the audit evidence obtained related to the December 31, 2022 ACL by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
New York, New York
February 23, 2023
MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| (In Thousands, Except Per Share Amounts) | | December 31,
2022 | | December 31,
2021 |
| Assets: | | | | |
Residential whole loans, net ($5,727,524 and $5,305,349 held at fair value, respectively) (1)(2) | | $ | 7,518,739 | | | $ | 7,913,000 | |
Securities, at fair value (2) | | 333,364 | | | 256,685 | |
| Cash and cash equivalents | | 334,183 | | | 304,696 | |
| Restricted cash | | 159,898 | | | 99,751 | |
Other assets (2) | | 766,221 | | | 565,556 | |
| Total Assets | | $ | 9,112,405 | | | $ | 9,139,688 | |
| | | | |
| Liabilities: | | | | |
Financing agreements ($3,898,744 and $3,266,773 held at fair value, respectively) | | $ | 6,812,086 | | | $ | 6,378,782 | |
| Other liabilities | | 311,470 | | | 218,058 | |
| Total Liabilities | | $ | 7,123,556 | | | $ | 6,596,840 | |
| | | | |
| Commitments and contingencies (See Note 9) | | | | |
| | | | |
| Stockholders’ Equity: | | | | |
Preferred stock, $0.01 par value; 7.5% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference) | | $ | 80 | | | $ | 80 | |
Preferred stock, $0.01 par value; 6.5% Series C fixed-to-floating rate cumulative redeemable; 12,650 shares authorized; 11,000 shares issued and outstanding ($275,000 aggregate liquidation preference) | | 110 | | | 110 | |
Common stock, $0.01 par value; 874,300 and 874,300 shares authorized; 101,802 and 108,138 shares issued and outstanding, respectively | | 1,018 | | | 1,082 | |
| Additional paid-in capital, in excess of par | | 3,684,291 | | | 3,775,482 | |
| Accumulated deficit | | (1,717,991) | | | (1,279,484) | |
| Accumulated other comprehensive income | | 21,341 | | | 45,578 | |
| Total Stockholders’ Equity | | $ | 1,988,849 | | | $ | 2,542,848 | |
| Total Liabilities and Stockholders’ Equity | | $ | 9,112,405 | | | $ | 9,139,688 | |
(1)Includes approximately $4.0 billion and $3.0 billion of Residential whole loans transferred to consolidated variable interest entities (“VIEs”) at December 31, 2022 and December 31, 2021, respectively. Such assets can be used only to settle the obligations of each respective VIE.
(2)See Note 6 for information regarding the Company’s pledged assets.
The accompanying notes are an integral part of the consolidated financial statements.
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands, Except Per Share Amounts) | | 2022 | | 2021 | | 2020 |
| Interest Income: | | | | | | |
| Residential whole loans | | $ | 441,223 | | | $ | 303,468 | | | $ | 332,212 | |
| Securities, at fair value | | 28,921 | | | 56,690 | | | 90,094 | |
| Other interest-earning assets | | 7,437 | | | 1,800 | | | 9,850 | |
| Cash and cash equivalent investments | | 4,838 | | | 344 | | | 676 | |
| Interest Income | | $ | 482,419 | | | $ | 362,302 | | | $ | 432,832 | |
| | | | | | |
| Interest Expense: | | | | | | |
| Asset-backed and other collateralized financing arrangements | | $ | 243,083 | | | $ | 104,597 | | | $ | 242,039 | |
| Other interest expense | | 15,760 | | | 15,788 | | | 26,719 | |
| Interest Expense | | $ | 258,843 | | | $ | 120,385 | | | $ | 268,758 | |
| | | | | | |
| Net Interest Income | | $ | 223,576 | | | $ | 241,917 | | | $ | 164,074 | |
| | | | | | |
| Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans | | $ | 2,646 | | | $ | 44,863 | | | $ | (22,381) | |
| Provision for Credit Losses on Other Assets | | (28,579) | | | — | | | — | |
| Net Interest Income after (Provision)/Reversal of Provision for Credit Losses | | $ | 197,643 | | | $ | 286,780 | | | $ | 141,693 | |
| | | | | | |
| Other (Loss)/Income, net: | | | | | | |
| Net (loss)/gain on residential whole loans measured at fair value through earnings | | (866,762) | | | 16,243 | | | 16,386 | |
| Net realized loss on residential whole loans held at carrying value | | — | | | — | | | (273,030) | |
| Impairment and other net (loss)/gain on securities and other portfolio investments | | (25,067) | | | 74,496 | | | (350,567) | |
| Net gain on real estate owned | | 25,379 | | | 22,838 | | | 5,391 | |
| Net gain/(loss) on derivatives used for risk management purposes | | 255,179 | | | 1,426 | | | (61,249) | |
| Net gain/(loss) on securitized debt measured at fair value through earnings | | 290,639 | | | 15,027 | | | (11,929) | |
| Lima One - origination, servicing and other fee income | | 46,745 | | | 22,600 | | | — | |
| Other, net | | 9,297 | | | 12,473 | | | (4,571) | |
| Other (Loss)/Income, net | | $ | (264,590) | | | $ | 165,103 | | | $ | (679,569) | |
| | | | | | |
| Operating and Other Expense: | | | | | | |
| Compensation and benefits | | $ | 76,728 | | | $ | 53,817 | | | $ | 31,042 | |
| Other general and administrative expense | | 35,812 | | | 31,729 | | | 25,666 | |
| Loan servicing, financing and other related costs | | 42,894 | | | 30,867 | | | 40,372 | |
| Amortization of intangible assets | | 9,200 | | | 6,600 | | | — | |
| Costs associated with restructuring/forbearance agreement | | — | | | — | | | 44,434 | |
| Operating and Other Expense | | $ | 164,634 | | | $ | 123,013 | | | $ | 141,514 | |
| | | | | | |
| Net (Loss)/Income | | $ | (231,581) | | | $ | 328,870 | | | $ | (679,390) | |
| Less Preferred Stock Dividend Requirement | | $ | 32,875 | | | $ | 32,875 | | | $ | 29,796 | |
| Net (Loss)/Income Available to Common Stock and Participating Securities | | $ | (264,456) | | | $ | 295,995 | | | $ | (709,186) | |
| | | | | | |
| Basic (Loss)/Earnings per Common Share | | $ | (2.57) | | | $ | 2.66 | | | $ | (6.28) | |
| Diluted (Loss)/Earnings per Common Share | | $ | (2.57) | | | $ | 2.63 | | | $ | (6.28) | |
The accompanying notes are an integral part of the consolidated financial statements.
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| Net (loss)/income | | $ | (231,581) | | | $ | 328,870 | | | $ | (679,390) | |
| Other Comprehensive (Loss): | | | | | | |
| Unrealized (losses)/gains on securities available-for-sale | | (25,492) | | | (32,774) | | | 420,281 | |
| Reclassification adjustment for securities sales included in net income | | — | | | — | | | (389,127) | |
| Reclassification adjustment for impairments included in net income | | — | | | — | | | (344,269) | |
| Derivative hedging instrument fair value changes, net | | — | | | — | | | (50,127) | |
| Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk | | 1,255 | | | 1,059 | | | (2,314) | |
| Reclassification adjustment for losses related to hedging instruments included in net income | | — | | | — | | | 72,802 | |
| Other Comprehensive (Loss) | | (24,237) | | | (31,715) | | | (292,754) | |
| Comprehensive (loss)/income before preferred stock dividends | | $ | (255,818) | | | $ | 297,155 | | | $ | (972,144) | |
| Dividends required on preferred stock | | (32,875) | | | (32,875) | | | (29,796) | |
| Comprehensive (Loss)/Income Available to Common Stock and Participating Securities | | $ | (288,693) | | | $ | 264,280 | | | $ | (1,001,940) | |
The accompanying notes are an integral part of the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
| | For the Year Ended December 31, 2022 |
(In Thousands, Except Per Share Amounts) | | Preferred Stock 6.5% Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $25.00 per Share | | Preferred Stock 7.5% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share | | Common Stock | | Additional Paid-in Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Income | | Total |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2021 | | 11,000 | | | $ | 110 | | | 8,000 | | | $ | 80 | | | 108,138 | | | $ | 1,082 | | | $ | 3,775,482 | | | $ | (1,279,484) | | | $ | 45,578 | | | $ | 2,542,848 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (231,581) | | | — | | | (231,581) | |
Issuance of common stock, net of expenses | | — | | | — | | | — | | | — | | | 197 | | | 1 | | | 1,097 | | | — | | | — | | | 1,098 | |
Repurchase of shares of common stock (1) | | — | | | — | | | — | | | — | | | (6,533) | | | (65) | | | (103,188) | | | — | | | — | | | (103,253) | |
| Equity based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 11,335 | | | — | | | — | | | 11,335 | |
| Change in accrued dividends attributable to stock-based awards | | — | | | — | | | — | | | — | | | — | | | — | | | (435) | | | (1,997) | | | — | | | (2,432) | |
Dividends declared on common stock ($1.67 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (171,426) | | | — | | | (171,426) | |
Dividends declared on Series B Preferred Stock ($1.875 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,000) | | | — | | | (15,000) | |
Dividends declared on Series C Preferred Stock ($1.625 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (17,875) | | | — | | | (17,875) | |
| Dividends attributable to dividend equivalents | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (628) | | | — | | | (628) | |
| Change in unrealized losses on securities, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (25,492) | | | (25,492) | |
| Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,255 | | | 1,255 | |
| Balance at December 31, 2022 | | 11,000 | | | $ | 110 | | | 8,000 | | | $ | 80 | | | 101,802 | | | $ | 1,018 | | | $ | 3,684,291 | | | $ | (1,717,991) | | | $ | 21,341 | | | $ | 1,988,849 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY |
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
(In Thousands,
Except Per Share Amounts) | | Preferred Stock 6.5% Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $25.00 per Share | | Preferred Stock 7.5% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share | | Common Stock | | Additional Paid-in Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Income | | Total |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2020 | | 11,000 | | | $ | 110 | | | 8,000 | | | $ | 80 | | | 112,929 | | | $ | 1,129 | | | $ | 3,851,517 | | | $ | (1,405,327) | | | $ | 77,293 | | | $ | 2,524,802 | |
| Net Income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 328,870 | | | — | | | 328,870 | |
| | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock, net of expenses | | — | | | — | | | — | | | — | | | 288 | | | 3 | | | 1,829 | | | — | | | — | | | 1,832 | |
Repurchase of shares of common stock (1) | | — | | | — | | | — | | | — | | | (5,079) | | | (50) | | | (86,343) | | | — | | | — | | | (86,393) | |
| Equity based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 9,038 | | | — | | | — | | | 9,038 | |
| Change in accrued dividends attributable to stock-based awards | | — | | | — | | | — | | | — | | | — | | | — | | | (559) | | | (278) | | | — | | | (837) | |
Dividends declared on common stock ($1.540 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (169,275) | | | — | | | (169,275) | |
Dividends declared on Series B Preferred Stock ($1.875 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,000) | | | — | | | (15,000) | |
Dividends declared on Series C Preferred Stock ($1.625 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (17,875) | | | — | | | (17,875) | |
| Dividends attributable to dividend equivalents | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (599) | | | — | | | (599) | |
| Change in unrealized losses on securities, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (32,774) | | | (32,774) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,059 | | | 1,059 | |
| Balance at December 31, 2021 | | 11,000 | | | $ | 110 | | | 8,000 | | | $ | 80 | | | 108,138 | | | $ | 1,082 | | | $ | 3,775,482 | | | $ | (1,279,484) | | | $ | 45,578 | | | $ | 2,542,848 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
(In Thousands,
Except Per Share Amounts) | | Preferred Stock 6.5% Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $25.00 per Share | | Preferred Stock 7.5% Series B Cumulative Redeemable - Liquidation Preference $25.00 per Share | | Common Stock | | Additional Paid-in Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Income | | Total |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance at December 31, 2019 | | — | | | $ | — | | | 8,000 | | | $ | 80 | | | 113,092 | | | $ | 1,131 | | | $ | 3,643,734 | | | $ | (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 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (679,390) | | | — | | | (679,390) | |
| Issuance of Series C Preferred Stock, net of expenses | | 11,000 | | | 110 | | | — | | | — | | | — | | | — | | | 265,942 | | | — | | | — | | | 266,052 | |
| Issuance of common stock, net of expenses | | — | | | — | | | — | | | — | | | 3,448 | | | 34 | | | 7,419 | | | — | | | — | | | 7,453 | |
Repurchase of shares of common stock (1) | | — | | | — | | | — | | | — | | | (3,611) | | | (36) | | | (53,541) | | | — | | | — | | | (53,577) | |
| Equity based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 6,715 | | | — | | | — | | | 6,715 | |
| Change in accrued dividends attributable to stock-based awards | | — | | | — | | | — | | | — | | | — | | | — | | | 856 | | | — | | | — | | | 856 | |
Dividends declared on common stock ($0.500 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (56,546) | | | — | | | (56,546) | |
Dividends declared on Series B Preferred Stock ($1.875 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,000) | | | — | | | (15,000) | |
Dividends declared on Series C Preferred Stock ($1.345 per share) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (14,796) | | | — | | | (14,796) | |
| Dividends attributable to dividend equivalents | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (229) | | | — | | | (229) | |
| Change in unrealized losses on MBS, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (313,115) | | | (313,115) | |
| Derivative hedging instruments fair value changes and amortization, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 22,675 | | | 22,675 | |
| Warrants issued and repurchased, net | | — | | | — | | | — | | | — | | | — | | | — | | | (19,608) | | | — | | | — | | | (19,608) | |
| Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,314) | | | (2,314) | |
| Balance at December 31, 2020 | | 11,000 | | | $ | 110 | | | 8,000 | | | $ | 80 | | | 112,929 | | | $ | 1,129 | | | $ | 3,851,517 | | | $ | (1,405,327) | | | $ | 77,293 | | | $ | 2,524,802 | |
(1) For the year ended December 31, 2022, includes approximately $1.0 million (56,690 shares) surrendered for tax purposes related to equity-based compensation awards. For the year ended December 31, 2021, includes approximately $799,000 (53,281 shares) surrendered for tax purposes related to equity-based compensation awards. For the year ended December 31, 2020, includes approximately $2.7 million (90,134 shares) surrendered for tax purposes related to equity-based compensation awards.
The accompanying notes are an integral part of the consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | |
| MFA FINANCIAL, INC. |
| CONSOLIDATED STATEMENT OF CASH FLOWS |
| | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| Cash Flows From Operating Activities: | | | | | | |
| Net (loss)/income | | $ | (231,581) | | | $ | 328,870 | | | $ | (679,390) | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Net loss/(gain) on residential whole loans | | 866,762 | | | (12,931) | | | 246,419 | |
| Impairment and other net loss/(gain) on securities and other portfolio investments, net | | 25,067 | | | (74,602) | | | 350,567 | |
| Net gain on real estate owned | | (24,473) | | | (18,772) | | | (2,486) | |
| Accretion of purchase discounts and amortization of purchase premiums on residential whole loans and securities, and amortization of terminated hedging instruments | | (27,314) | | | (59,424) | | | 10,949 | |
| Provision/(Reversal of provision) for credit losses on residential whole loans and other assets | | 25,933 | | | (48,355) | | | 22,121 | |
| Net (gain)/loss on derivatives used for risk management purposes | | (247,898) | | | (2,095) | | | 60,680 | |
| Net margin received/(paid) for derivatives used for risk management purposes | | 214,754 | | | 574 | | | — | |
| Net (gain)/loss on securitized debt measured at fair value through earnings | | (290,639) | | | (14,391) | | | 11,929 | |
| Net other non-cash losses included in net income | | 27,503 | | | 27,388 | | | 28,480 | |
| Decrease/(Increase) in other assets | | 40,077 | | | (20,015) | | | 39,930 | |
| (Decrease)/Increase in other liabilities | | (12,114) | | | 14,046 | | | (50,803) | |
| Net cash provided by operating activities | | $ | 366,077 | | | $ | 120,293 | | | $ | 38,396 | |
| | | | | | |
| Cash Flows From Investing Activities: | | | | | | |
| Purchases of residential whole loans, loan related investments and capitalized advances | | $ | (3,206,941) | | | $ | (4,516,971) | | | $ | (1,477,320) | |
| Proceeds from sales of residential whole loans, and residential whole loan repurchases | | — | | | — | | | 1,510,902 | |
| Principal payments on residential whole loans and loan related investments | | 1,878,802 | | | 2,012,901 | | | 1,825,606 | |
| Increase in cash balances resulting from Lima One purchase transaction, net | | — | | | 6,121 | | | — | |
| Purchases of securities | | — | | | — | | | (163,748) | |
| Proceeds from sales of securities and other assets | | 15,660 | | | — | | | 3,790,148 | |
| Principal payments on securities | | 53,121 | | | 157,297 | | | 633,194 | |
| Purchases of real estate owned and capital improvements | | (978) | | | (1,338) | | | (10,198) | |
| Proceeds from sales of real estate owned | | 133,980 | | | 187,010 | | | 279,786 | |
| Additions to leasehold improvements, furniture and fixtures | | (300) | | | (12,048) | | | (4,862) | |
Net cash used in investing activities | | $ | (1,126,656) | | | $ | (2,167,028) | | | $ | 6,383,508 | |
| | | | | | |
| Cash Flows From Financing Activities: | | | | | | |
| Principal payments on financing agreements with mark-to-market collateral provisions | | $ | (2,971,332) | | | $ | (1,822,198) | | | $ | (21,810,920) | |
| Proceeds from borrowings under financing agreements with mark-to-market collateral provisions | | 2,631,606 | | | 3,022,279 | | | 14,008,042 | |
| Principal payments on other collateralized financing agreements | | (2,152,143) | | | (1,883,068) | | | (1,733,345) | |
| Proceeds from borrowings under other collateralized financing agreements | | 3,676,510 | | | 2,692,576 | | | 3,803,150 | |
| Payment made for other collateralized financing agreement related costs | | (16,390) | | | (7,145) | | | (1,699) | |
| Principal payment on redemption of Senior notes | | — | | | (100,000) | | | — | |
| Payments made for settlements and unwinds of Swaps designated as hedges | | — | | | — | | | (60,022) | |
| Proceeds from issuance of series C preferred stock | | — | | | — | | | 275,000 | |
| Payments made for costs related to series C preferred stock issuance | | — | | | — | | | (8,948) | |
| Proceeds from issuances of common stock | | 1,183 | | | 1,825 | | | 7,441 | |
| Payments made for the repurchase of common stock through the stock repurchase program | | (102,311) | | | (85,591) | | | (50,835) | |
| Proceeds from the issuance of warrants | | — | | | — | | | 14,041 | |
| Payments made for the repurchase of warrants | | — | | | — | | | (33,650) | |
| Dividends paid on preferred stock | | (32,875) | | | (32,875) | | | (29,796) | |
| Dividends paid on common stock and dividend equivalents | | (184,035) | | | (156,140) | | | (113,508) | |
| Net cash provided by/(used in) financing activities | | $ | 850,213 | | | $ | 1,629,663 | | | $ | (5,735,049) | |
| Net increase in cash, cash equivalents and restricted cash | | $ | 89,634 | | | $ | (417,072) | | | $ | 686,855 | |
| Cash, cash equivalents and restricted cash at beginning of period | | $ | 404,447 | | | $ | 821,519 | | | $ | 134,664 | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 494,081 | | | $ | 404,447 | | | $ | 821,519 | |
| | | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | | |
| Interest Paid | | $ | 239,185 | | | $ | 116,966 | | | $ | 254,270 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | (continued) |
| | | | | | | | | | | | | | | | | | | | |
| Non-cash Investing and Financing Activities: | | | | | | |
| Transfer from residential whole loans to real estate owned | | $ | 82,911 | | | $ | 72,304 | | | $ | 96,766 | |
| Dividends and dividend equivalents declared and unpaid | | $ | 35,769 | | | $ | 47,751 | | | $ | 34,016 | |
| Right-of-use lease asset and lease liability | | $ | — | | | $ | 40,893 | | | $ | — | |
| Repayment of Lima One preferred stock in connection with the Lima One transaction | | $ | — | | | $ | 22,030 | | | $ | — | |
| Receivable for sale of unsettled residential whole loans | | $ | 275,656 | | | $ | — | | | $ | — | |
| Payable for purchase of unsettled Agency MBS | | $ | 132,025 | | | $ | — | | | $ | — | |
| Deconsolidation of securitized Agency eligible investor loans and related debt | | $ | 490,952 | | | $ | — | | | $ | — | |
The accompanying notes are an integral part of the consolidated financial statements.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
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 8).
2. Summary of Significant Accounting Policies
(a) Basis of Presentation and Consolidation
On April 4, 2022, the Company effected a one-for-four reverse stock split of its issued and outstanding shares of common
stock (the “Reverse Stock Split”). Accordingly, all share and per share data included in these consolidated financial statements
and notes thereto have been adjusted retroactively to reflect the impact of the Reverse Stock Split.
The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“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: impairment, valuation allowances and loss allowances on residential whole loans (see Note 3), mortgage-backed securities (“MBS”), credit risk transfer (“CRT”) securities and mortgage servicing rights (“MSR”)-related assets (collectively, “Securities, at fair value”) (see Note 4) and Other assets (see Note 5), valuation of Securities, at fair value (see Notes 4 and 13), income recognition and valuation of residential whole loans (see Notes 3 and 13), valuation of financing agreements (Notes 6 and 13), and valuation of derivative instruments (see Notes 5(d) and 13). 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 8). Actual results could differ from those estimates.
The consolidated financial statements of the Company include the accounts of all subsidiaries. All intercompany accounts and transactions have been eliminated. In addition, the Company consolidates entities established to facilitate transactions related to the acquisition and securitization of residential whole loans. Certain prior period amounts have been reclassified to conform to the current period presentation. On July 1, 2021, the Company completed the acquisition of Lima One Holdings, LLC, the parent company of Lima One Capital, LLC (collectively referred to as “Lima One”), a leading nationwide originator and servicer of business purpose loans (“BPLs”). Lima One’s financial results are consolidated with MFA’s results from that date.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(b) Residential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs)
Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixed- and adjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market transactions or originated by Lima One. The accounting model utilized by the Company is determined at the time each loan package is initially acquired. Prior to the second quarter of 2021, the fair value option was typically elected on loans that were 60 or more days delinquent at purchase (“Purchased Non-performing Loans”). Purchased Credit Deteriorated Loans acquired prior to the second quarter of 2021, and where the underlying borrower had a delinquency status of less than 60 days at the acquisition date, are typically held at carrying value. Purchased Performing Loans acquired prior to the second quarter of 2021 are also typically held at carrying value, but the accounting methods for income recognition and determination and measurement of any required credit loss reserves (as discussed below) differ from those used for Purchased Credit Deteriorated Loans held at carrying value. Starting in the second quarter of 2021, the Company has elected the fair value option for all loans acquired, irrespective of borrower delinquency status at acquisition. Over time, the Company expects that election of the fair value option should serve to simplify reporting of the results of its loan investment activities as fair value accounting will be used for the majority of loans in the Company’s portfolio. The accounting model initially applied to loan acquisitions is not permitted to be subsequently changed. Consequently, the Company is not permitted to retroactively apply fair value accounting to loans held at carrying value acquired in periods prior to the second quarter of 2021.
The Company’s residential whole loans pledged as collateral against financing agreements are included in the consolidated balance sheets with amounts pledged disclosed in Note 6. Purchases and sales of residential whole loans that are subject to an extended period of due diligence that crosses a reporting date are recorded in the Company’s balance sheet at amounts reflecting management’s current estimate of assets that will be acquired or disposed at the closing of the transaction. This estimate is subject to revision at the closing of the transaction, pending the outcome of due diligence performed prior to closing. Residential whole loans purchased under flow arrangements with loan origination partners are generally recorded at the transaction settlement date. Recorded amounts of residential whole loans for which the closing of the purchase transaction is yet to occur are not eligible to be pledged as collateral against any financing agreement until the closing of the purchase transaction. Interest income, credit related losses and changes in the fair value of loans held at fair value are recorded post settlement for acquired loans and until transaction settlement for sold loans (see Notes 3, 6, 13 and 14).
Purchased Performing Loans
Acquisitions of Purchased Performing Loans to date (which include loans purchased from third parties or loans originated by Lima One) have been primarily comprised of: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (“Non-QM loans”), (ii) short-term business purpose loans collateralized by residential and multi-family properties made to non-occupant borrowers that intend to rehabilitate and sell the properties (“Transitional loans” or “TL”) (also sometimes referred to as “Rehabilitation loans” or “Fix and Flip loans”), (iii) business purpose loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (“Single-family rental loans”), (iv) loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (“Agency eligible investor loans”), and (v) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”). Purchased Performing Loans are initially recorded at their purchase price (or amount funded for originated loans). Interest income on Purchased Performing Loans acquired at par is accrued based on each loan’s current interest bearing balance and current interest rate. Interest income on such loans acquired at a premium/discount to par is recorded each period based on the contractual coupon net of any amortization of premium or accretion of discount, adjusted for actual prepayment activity. For loans acquired with related servicing rights retained by the seller, interest income is reported net of related serving costs.
For Purchased Performing Loans acquired prior to the second quarter of 2021 and where the fair value option was not elected, an allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, the value of the underlying collateral and the ability of the Company to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Income recognition is suspended, and interest accruals are reversed against income, for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
of management, a full recovery of income and principal becomes doubtful (i.e., such loans are placed on nonaccrual status). For nonaccrual loans, interest income is recorded under the cash basis method as interest payments are received. Interest accruals are resumed when the loan becomes contractually current. A loan is written off when it is no longer realizable and/or it is legally discharged. Modified loans are considered “troubled debt restructurings” if the Company grants a concession to a borrower who is experiencing financial difficulty (including the interpretation of this definition set forth in OCC Bulletin 2020-35).
Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized.
The aggregate allowance for credit losses is equal to the sum of the losses expected over the life of each respective loan. Expected losses are generally calculated based on the estimated probability of default and loss severity of loans in the portfolio, which involves projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. The results were not discounted. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The default and severity rates were applied to the estimated amount of loans outstanding during each future period, based on contractual terms and expected prepayments. Expected prepayments are estimated based on historical experience and current and expected future economic conditions, including market interest rates. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. In addition, a liability is established (and recorded in Other Liabilities) each period using a similar methodology for committed but undrawn loan amounts. The Company forecasts future economic conditions based on forecasts provided by an external preparer of economic forecasts, as well as its own knowledge of the market and its portfolio. The Company may consider multiple scenarios and select the one that it believes results in the most reasonable estimate of expected losses. The Company may apply qualitative adjustments to these results as further described in Note 3. For certain loans where foreclosure has been deemed to be probable, loss estimates are based on whether the value of the underlying collateral is sufficient to recover the carrying value of the loan. This methodology has not changed significantly from the calculation of the allowance for credit losses in prior periods.
Purchased Credit Deteriorated Loans
The Company has elected to account for these loans as credit deteriorated as they have experienced a deterioration in credit quality since origination and prior to our purchase and were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of these loans have previously experienced payment delinquencies and the amount owed may exceed the value of the property pledged as collateral. Consequently, these loans generally have a higher likelihood of default than newly originated mortgage loans with loan-to-value ratios (“LTVs”) of 80% or less to creditworthy borrowers. The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Loans considered credit deteriorated are initially recorded at the purchase price on a net basis, after establishing an initial allowance for credit losses (their initial cost basis is equal to their purchase price plus the initial allowance for credit losses). Subsequent to acquisition, the gross recorded amount for these loans reflects the initial cost basis, plus accretion of interest income, less principal and interest cash flows received. Purchased Credit Deteriorated Loans acquired prior to the second quarter of 2021, or where the fair value option was not otherwise elected, are presented on the Company’s consolidated balance sheets at carrying value, which reflects the recorded cost basis reduced by any allowance for credit losses. Interest income on such loans purchased is recorded each period based on the contractual coupon net of amortization of the difference between their cost basis and unpaid principal balance (“UPB”), subject to the Company’s nonaccrual policy.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Residential Whole Loans at Fair Value
Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. Prior to the second quarter of 2021, this accounting election was made primarily on Purchased Non-performing Loans. Starting in the second quarter of 2021, the Company made the fair value election on all loan acquisitions, which, to date, have been comprised exclusively of Purchased Performing Loans including loans originated by Lima One since its consolidation. The Company generally considers accounting for these loans at fair value to be more reflective of the expected pattern of returns from these loans under current economic conditions. The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans and trading activity observed in the marketplace. Subsequent changes in fair value are reported in current period earnings and presented in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations.
Interest income is recorded on these loans based on their yield and is presented as part of interest income in the Company’s consolidated statements of operations. Cash outflows associated with loan-related advances made by the Company on behalf of the borrower are included in the basis of the loan and are reflected in unrealized gains or losses reported each period. Income and costs associated with originating loans on which the fair value option was elected are recorded in other income and expense respectively in the period in which they are earned or incurred.
(c) Securities, at Fair Value
MSR-Related Assets
The Company has investments in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral for the investment. These financial instruments, which are referred to as MSR-related assets, are discussed in more detail below. The Company’s MSR-related assets pledged as collateral against repurchase agreements are included in the consolidated balance sheets with the amounts pledged disclosed in Note 6. Purchases and sales of MSR-related assets are recorded on the trade date (see Notes 4, 6, and 13).
Term Notes Backed by MSR-Related Collateral
The Company has invested in term notes that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment of principal and interest on these term notes to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. Credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient.
The Company’s term notes backed by MSR-related collateral are treated as “available-for-sale” (“AFS”) securities and reported at fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity, subject to impairment and loss allowances. Interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. The Company’s valuation process for such notes is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral, as applicable, and the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Other Residential Mortgage Securities
The Company has invested in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation (“Non-Agency MBS”). In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company.
Designation
Securities that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as AFS. Such securities are carried at their fair value with unrealized gains and losses excluded from earnings (except when an allowance for loan losses is recognized, as discussed below) and reported in AOCI, a component of Stockholders’ Equity.
Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.
The Company has elected the fair value option for its Agency and Non-Agency MBS. These securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.
In addition, the Company has elected the fair value option for certain of its CRT securities as it considers this method of accounting to more appropriately reflect the risk-sharing structure of these securities. Such securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations.
Revenue Recognition, Premium Amortization and Discount Accretion
Interest income on securities is accrued based on their outstanding principal balance and their contractual terms. Premiums and discounts associated with Non-Agency MBS assessed as high credit quality at the time of purchase are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.
Determination of Fair Value for Residential Mortgage Securities
In determining the fair value of the Company’s residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity (see Note 13).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Allowance for credit losses
When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and determines whether any changes to the allowance for credit losses are required. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as to whether to record (or reverse) a credit loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections. As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4).
Balance Sheet Presentation
The Company’s residential mortgage securities pledged as collateral against financing agreements and interest rate swap agreements (“Swaps”) are included on the consolidated balance sheets with the fair value of the securities pledged disclosed in Note 6. Purchases and sales of securities are recorded on the trade date.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with financial institutions and investments in money market funds, all of which have original maturities of three months or less. Cash and cash equivalents may also include cash pledged as collateral to the Company by its financing counterparties as a result of reverse margin calls (i.e., margin calls made by the Company). The Company did not hold any cash pledged by its counterparties at December 31, 2022 and December 31, 2021. At December 31, 2022 and December 31, 2021, the Company had cash and cash equivalents of $334.2 million and $304.7 million, respectively. At December 31, 2022, the Company had $267.1 million of investments in overnight money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. As of December 31, 2021, the Company had $215.8 million worth of investments in overnight money market funds. In addition, deposits in FDIC insured accounts generally exceed insured limits (see Notes 6 and 13).
(e) Restricted Cash
Restricted cash primarily represents the Company’s cash collections held in connection with certain of the Company’s financing agreements, Swaps and/or loan servicing activities that are not available to the Company for general corporate purposes. Restricted cash may be applied against amounts due to financing agreements and/or Swap counterparties, or may be returned to the Company when the related collateral requirements are exceeded or at the maturity of financing agreements and/or Swaps. The Company had aggregate restricted cash of $159.9 million and $99.8 million at December 31, 2022 and December 31, 2021, respectively (see Notes 5(d), 6 and 13).
(f) Goodwill & Intangible Assets
At December 31, 2022 and December 31, 2021, the Company had goodwill of $61.1 million, which represents the excess of the fair value of consideration paid over the fair value of net assets acquired in connection with the acquisition of Lima One, and other intangible assets of $12.2 million and $21.4 million, respectively (net of amortization), primarily comprised of customer relationships, non-competition agreements (fully amortized as of June 30, 2022), trademarks and trade names, and internally developed software recognized as part of the acquisition of Lima One (see Note 5(b)). The intangible assets are amortized over their expected useful lives, which ranged from one to ten years at acquisition. Goodwill, which is not subject to amortization, and intangible assets are tested for impairment at least annually, or more frequently under certain circumstances that could reduce the fair value of the Lima One reporting unit (a component of the Lima One segment) below its carrying amount. Through December 31, 2022, the Company had not recognized any impairment against its goodwill or intangible assets. Goodwill and intangible assets are included in Other assets on the Company’s consolidated balance sheets.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(g) Real Estate Owned (“REO”)
REO represents real estate acquired by the Company, including through foreclosure, deed in lieu of foreclosure, or purchased in connection with the acquisition of residential whole loans. REO acquired through foreclosure or deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. REO acquired in connection with the acquisition of residential whole loans is initially recorded at its purchase price. Subsequent to acquisition, REO is reported, at each reporting date, at the lower of the current carrying amount or fair value less estimated selling costs and for presentation purposes is included in Other assets on the Company’s consolidated balance sheets. Changes in fair value that result in an adjustment to the reported amount of an REO property that has a fair value at or below its carrying amount are reported in Other Income, net on the Company’s consolidated statements of operations. The Company has acquired certain properties that it holds for investment purposes, including rentals to third parties. These properties are held at their historical basis less depreciation, and are subject to impairment. Related rental income and expenses are recorded in Other Income, net (see Note 5).
(h) Leases and Depreciation
Leases
The Company records its operating lease liabilities and operating lease right-of-use assets on its consolidated balance sheets. The operating lease liabilities are equal to the present value of the remaining fixed lease payments (excluding real estate tax and operating expense escalations) discounted at the Company’s estimated incremental borrowing rate at the date of lease commencement, and the operating lease right-of-use assets are equal to the operating lease liabilities adjusted for lease incentives and initial direct costs. As lease payments are made, the operating lease liabilities are reduced to the present value of the remaining lease payments and the operating lease right-of-use assets are reduced by the difference between the lease expense (straight-lined over the lease term) and the theoretical interest expense amount (calculated using the incremental borrowing rate at the date of lease commencement). See Notes 5 and 9 for further discussion on leases.
Leasehold Improvements, Real estate and Other Depreciable Assets
Depreciation is computed on the straight-line method over the estimated useful life of the related assets or, in the case of leasehold improvements, over the shorter of the useful life or the lease term. Furniture, fixtures, computers and related hardware have estimated useful lives ranging from five to fifteen years at the time of purchase. The building component of real estate held-for-investment is depreciated over 27.5 years.
(i) Loan Securitization and Other Debt Issuance Costs
Loan securitization related costs are costs associated with the issuance of beneficial interests by consolidated VIEs and incurred by the Company in connection with various financing transactions completed by the Company. These costs may include underwriting, rating agency, legal, accounting and other fees. Such costs, which reflect deferred charges (unless the debt is recorded at fair value, as discussed below), are included on the Company’s consolidated balance sheets as a direct deduction from the corresponding debt liability. These deferred charges are amortized as an adjustment to interest expense using the effective interest method. For certain financing agreements, such costs are amortized over the shorter of the period to the expected or stated legal maturity of the debt instruments. The Company periodically reviews the recoverability of these deferred costs and, in the event an impairment charge is required, such amount will be included in Operating and Other Expense on the Company’s consolidated statements of operations. To the extent that the Company has elected the fair value option for the related debt liability, these costs are expensed at the closing of the transaction.
(j) Financing Agreements
The Company finances the majority of its residential mortgage assets with financing agreements that include repurchase agreements and other forms of collateralized financing. Under repurchase agreements, the Company sells assets to a lender and agrees to repurchase the same assets in the future for a price that is higher than the original sale price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although legally structured as sale and repurchase transactions, the Company accounts for repurchase agreements as secured borrowings. Under its repurchase agreements and other forms of collateralized financing, the Company pledges its assets as collateral to secure the borrowing, in an amount which is equal to a specified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase financing,
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
unless the repurchase financing is renewed with the same counterparty, the Company is required to repay the loan including any accrued interest and concurrently receives back its pledged collateral from the lender. With the consent of the lender, the Company may renew a repurchase financing at the then prevailing financing terms. Margin calls, whereby a lender requires that the Company pledge additional assets or cash as collateral to secure borrowings under its repurchase financing with such lender, are routinely experienced by the Company when the value of the assets pledged as collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions. The Company also may make margin calls on counterparties when collateral values increase.
Should a counterparty decide not to renew a financing arrangement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation. If, during the term of a financing, a lender should default on its obligation, the Company might experience difficulty recovering its pledged assets which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to such lender, including accrued interest receivable on such collateral (see Notes 6 and 13).
The Company has elected the fair value option on certain of its financing agreements. These agreements are reported at their fair value, with changes in fair value being recorded in earnings each period (or other comprehensive income, to the extent the change results from a change in instrument specific credit risk), as further detailed in Note 6. Financing costs, including “up front” fees paid at inception related to financing agreements at fair value are expensed as incurred. Interest expense is recorded based on the current interest rate in effect for the related agreement.
(k) Equity-Based Compensation
Compensation expense for equity-based awards that are subject to vesting conditions, is recognized ratably over the vesting period of such awards, based upon the fair value of such awards at the grant date.
The Company has made annual grants of restricted stock units (“RSUs”), certain of which cliff vest after a three-year period, subject only to continued employment, and others of which cliff vest after a three-year period, subject to both continued employment and the achievement of certain performance criteria based on a formula tied to the Company’s achievement of average total shareholder return (“TSR”) during that three-year period, as well as the TSR of the Company relative to the TSR of a group of peer companies (over the three-year period) selected by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) at the date of grant. The features in these awards related to the attainment of TSR over a specified period constitute a “market condition,” which impacts the amount of compensation expense recognized for these awards. Specifically, the uncertainty regarding the achievement of the market condition was reflected in the grant date fair valuation of the RSUs, which is recognized as compensation expense over the relevant vesting period. The amount of compensation expense recognized is not dependent on whether the market condition was or will be achieved.
The Company makes dividend equivalent payments in connection with certain of its equity-based awards. A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Company’s Equity Compensation Plan (the “Equity Plan”), and they are paid in cash at such times and in accordance with such rules, terms and conditions, as the Compensation Committee may determine in its discretion. Dividend equivalent payments are generally charged to Stockholders’ Equity to the extent that the attached equity awards are expected to vest. Compensation expense is also recognized for dividend equivalent payments to the extent that the equity awards to which such payments relate do not or are not expected to vest and the grantees to whom such payments are made are nonetheless not required to return such dividend equivalent payments to the Company (see Notes 2(l) and 12).
(l) Earnings per Common Share (“EPS”)
Basic EPS is computed using the two-class method, which includes the weighted-average number of shares of common stock outstanding during the period and an estimate of other securities that participate in dividends, such as the Company’s dividend equivalents attached to/associated with RSUs, to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and estimated securities that participate in dividends based on their respective weighted-average shares outstanding for the period. For the diluted EPS calculation, common equivalent shares are further adjusted for the effect of RSUs outstanding that are unvested and have dividends that are subject to forfeiture, and for the effect of outstanding warrants, using the treasury stock method. Under the treasury stock method, common equivalent
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds, along with future compensation expenses associated with such instruments (if any), are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. In addition, the Company’s 6.25% Convertible Senior Notes due 2024 (the “Convertible Senior Notes”) are included in the calculation of diluted EPS if the assumed conversion into common shares is dilutive, using the “if-converted” method. This calculation involves adding back the periodic interest expense associated with the Convertible Senior Notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted EPS (see Note 11).
(m) Comprehensive Income/(Loss)
The Company’s comprehensive income/(loss) available to common stock and participating securities includes net income, the change in net unrealized gains/(losses) on its AFS securities and derivative hedging instruments (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of AOCI for sold AFS securities and terminated hedging relationships, as well as the portion of unrealized gains/(losses) on its financing agreements held at fair value related to instrument-specific credit risk, and is reduced by dividends declared on the Company’s preferred stock and issuance costs of redeemed preferred stock.
(n) Derivative Financial Instruments
The Company may use a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. The objective of the Company’s risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios.
Swaps
Historically, the Company’s derivative instruments have generally been comprised of Swaps, the majority of which were designated as cash flow hedges against the interest rate risk associated with its borrowings. The Company documented its risk-management policies, including objectives and strategies, for its hedging activities and the relationship between the hedging instrument and the hedged liability for all Swaps designated as hedging transactions. The Company assessed, both at the inception of a hedge and on a quarterly basis thereafter, whether or not the hedge was “highly effective.”
During the first quarter of 2020, in response to the turmoil in the financial markets resulting from COVID-19, and given that management no longer considered these transactions to be effective hedges in the then prevailing interest rate environment, the Company terminated all of its then existing Swaps. Changes in the fair value of the Company’s Swaps previously designated in hedging transactions were recorded in OCI provided that the hedge remained effective. Periodic payments accrued in connection with Swaps designated as hedges were included in interest expense and treated as an operating cash flow. The Company discontinued hedge accounting for the terminated Swaps as it determined that it was no longer probable that the forecasted transactions would occur.
The Company has entered into Swaps that were not designated as hedges for accounting purposes. Changes in the fair value of the Company’s Swaps not designated in hedging transactions are recorded in Other income, net on the Company’s consolidated statements of operations. Swaps are carried on the Company’s consolidated balance sheets at fair value, in Other assets, if their fair value is positive, or in Other liabilities, if their fair value is negative (see Notes 5(d), 6 and 13).
To Be Announced (“TBA”) Securities
The Company has entered into transactions to take short positions in TBA securities in connection with the management of interest rate and other market risks associated with purchases of Agency eligible investor loans. As the Company did not intend to physically settle its transactions in TBA securities, they were required to be accounted for as derivative financial instruments. The Company did not apply hedge accounting to its TBA securities. Accordingly, TBA securities were recorded on the Company’s balance sheets at fair value, with realized and unrealized changes in fair value each period recorded in Other income, net in the Company’s consolidated statements of operations.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(o) Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities
The Company’s presentation of fair value for its financial assets and liabilities is determined within a framework that stipulates that the fair value of a financial asset or liability is an exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value. In addition, the framework for measuring fair value establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.
In addition to the financial instruments that it is required to report at fair value, the Company has elected the fair value option for certain of its financial assets and liabilities at the time of acquisition or issuance. Subsequent changes in the fair value of these financial instruments are generally reported in Other income, net, in the Company’s consolidated statements of operations. A decision to elect the fair value option for an eligible financial instrument, which may be made on an instrument by instrument basis, is irrevocable (see Notes 2(b), 2(c), 3, 4, and 13).
(p) Variable Interest Entities
An entity is referred to as a VIE if it meets at least one of the following criteria: (i) the entity has equity that is insufficient to permit the entity to finance its activities without the additional subordinated financial support of other parties; or (ii) as a group, the holders of the equity investment at risk lack (a) the power to direct the activities of an entity that most significantly impact the entity’s economic performance; (b) the obligation to absorb the expected losses; or (c) the right to receive the expected residual returns; or (iii) the holders of the equity investment at risk have disproportional voting rights and the entity’s activities are conducted on behalf of the investor that has disproportionately few voting rights.
The Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.
The Company has entered into several financing transactions which resulted in the Company forming entities to facilitate these transactions. In determining the accounting treatment to be applied to these transactions, the Company concluded that the entities used to facilitate these transactions are VIEs and that they should be consolidated. If the Company had determined that consolidation was not required, it would have then assessed whether the transfers of the underlying assets would qualify as sales or should be accounted for as secured financings under GAAP (see Note 14).
The Company also includes on its consolidated balance sheets certain financial assets and liabilities that are acquired/issued by trusts and/or other special purpose entities that have been evaluated as being required to be consolidated by the Company under the applicable accounting guidance.
(q) Offering Costs Related to Issuance and Redemption of Preferred Stock
Offering costs related to the issuance of preferred stock are recorded as a reduction in Additional paid-in capital, a component of Stockholders’ Equity, at the time such preferred stock is issued. On redemption of preferred stock, any excess of the fair value of the consideration transferred to the holders of the preferred stock over the carrying amount of the preferred stock in the Company’s consolidated balance sheets is included in the determination of Net Income Available to Common Stock and Participating Securities in the calculation of EPS.
(r) New Accounting Standards and Interpretations
Accounting Standards Adopted in 2022
As of December 31, 2022, there were no new accounting standards or interpretations adopted by the Company that had a material effect on its consolidated financial statements in 2022.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
3. Residential Whole Loans
Included on the Company’s consolidated balance sheets at December 31, 2022 and 2021 are approximately $7.5 billion and $7.9 billion, respectively, of residential whole loans generally arising from the Company’s interests in certain trusts established to acquire the loans and certain entities established in connection with its loan securitization transactions. The Company has assessed that these entities are required to be consolidated for financial reporting purposes. Starting in the second quarter of 2021, the Company elected the fair value option for all loan acquisitions, including loans originated by Lima One subsequent to its acquisition by the Company. Prior to the second quarter of 2021, the fair value option was typically elected only for Purchased Non-performing Loans.
The following table presents the components of the Company’s Residential whole loans, and the accounting model designated at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Held at Carrying Value | | Held at Fair Value | | Total |
| (Dollars in Thousands) | | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 |
| Purchased Performing Loans: | | | | | | | | | | | | |
| Non-QM loans | | $ | 987,282 | | | $ | 1,448,162 | | | $ | 2,372,548 | | | $ | 2,013,369 | | | $ | 3,359,830 | | | $ | 3,461,531 | |
Transitional loans (1) | | 75,188 | | | 217,315 | | | 1,342,032 | | | 517,530 | | | 1,417,220 | | | 734,845 | |
| Single-family rental loans | | 210,833 | | | 331,808 | | | 1,165,741 | | | 619,415 | | | 1,376,574 | | | 951,223 | |
| Seasoned performing loans | | 82,932 | | | 102,041 | | | — | | | — | | | 82,932 | | | 102,041 | |
| Agency eligible investor loans | | — | | | — | | | 51,094 | | | 1,082,765 | | | 51,094 | | | 1,082,765 | |
| Total Purchased Performing Loans | | $ | 1,356,235 | | | $ | 2,099,326 | | | $ | 4,931,415 | | | $ | 4,233,079 | | | $ | 6,287,650 | | | $ | 6,332,405 | |
| | | | | | | | | | | | |
| Purchased Credit Deteriorated Loans | | $ | 470,294 | | | $ | 547,772 | | | $ | — | | | $ | — | | | $ | 470,294 | | | $ | 547,772 | |
| | | | | | | | | | | | |
| Allowance for Credit Losses | | $ | (35,314) | | | $ | (39,447) | | | $ | — | | | $ | — | | | $ | (35,314) | | | $ | (39,447) | |
| | | | | | | | | | | | |
| Purchased Non-Performing Loans | | $ | — | | | $ | — | | | $ | 796,109 | | | $ | 1,072,270 | | | $ | 796,109 | | | $ | 1,072,270 | |
| | | | | | | | | | | | |
| Total Residential Whole Loans | | $ | 1,791,215 | | | $ | 2,607,651 | | | $ | 5,727,524 | | | $ | 5,305,349 | | | $ | 7,518,739 | | | $ | 7,913,000 | |
| | | | | | | | | | | | |
| Number of loans | | 7,126 | | | 9,361 | | | 16,717 | | | 14,734 | | | 23,843 | | | 24,095 | |
(1)As of December 31, 2022 includes $784.9 million of loans collateralized by one-to-four family residential properties and $632.3 million of loans collateralized by multi-family properties. As of December 31, 2021, includes $521.0 million of loans collateralized by one-to-four family residential properties and $213.9 million of loans collateralized by multi-family properties.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents additional information regarding the Company’s Residential whole loans at December 31, 2022 and 2021:
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value / Carrying Value | | Unpaid Principal Balance (“UPB”) | | Weighted Average Coupon (2) | | Weighted Average Term to Maturity (Months) | | Weighted Average LTV Ratio (3) | | Weighted Average Original FICO (4) | | Aging by UPB | | 60+ Delinquency % |
| | | | | | | | | | Past Due Days | |
| (Dollars In Thousands) | | | | | | | | Current | | 30-59 | | 60-89 | | 90+ | |
| Purchased Performing Loans: | | | | | | | | | | | | | | | | | | | | | | |
| Non-QM loans | | $ | 3,352,471 | | | $ | 3,671,468 | | | 5.13 | % | | 351 | | 65 | % | | 733 | | $ | 3,520,671 | | | $ | 56,825 | | | $ | 32,253 | | | $ | 61,719 | | | 2.6 | % |
Transitional loans (1) | | 1,411,997 | | | 1,431,692 | | | 7.78 | | | 12 | | 66 | | | 746 | | 1,348,815 | | | 6,463 | | | 2,234 | | | 74,180 | | | 5.3 | |
| Single-family rental loans | | 1,375,297 | | | 1,485,967 | | | 5.74 | | | 324 | | 69 | | | 737 | | 1,442,095 | | | 8,431 | | | 7,978 | | | 27,463 | | | 2.4 | |
| Seasoned performing loans | | 82,884 | | | 90,843 | | | 3.31 | | | 151 | | 30 | | | 714 | | 84,514 | | | 993 | | | 937 | | | 4,399 | | | 5.9 | |
| Agency eligible investor loans | | 51,094 | | | 61,816 | | | 3.44 | | | 344 | | 68 | | | 757 | | 61,816 | | | — | | | — | | | — | | | — | |
| Total Purchased Performing Loans | | $ | 6,273,743 | | | $ | 6,741,786 | | | 5.78 | % | | 271 | | | | | | | | | | | | | | 3.1 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Purchased Credit Deteriorated Loans | | $ | 448,887 | | | $ | 554,907 | | | 4.66 | % | | 277 | | 63 | % | | N/A | | $ | 403,042 | | | $ | 48,107 | | | $ | 16,270 | | | $ | 87,488 | | | 18.7 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Purchased Non-Performing Loans | | $ | 796,109 | | | $ | 884,257 | | | 5.01 | % | | 277 | | 68 | % | | N/A | | $ | 444,045 | | | $ | 89,623 | | | $ | 40,554 | | | $ | 310,035 | | | 39.6 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Residential whole loans, total or weighted average | | $ | 7,518,739 | | | $ | 8,180,950 | | | 5.64 | % | | 272 | | | | | | | | | | | | | | 8.1 | % |
December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value / Carrying Value | | Unpaid Principal Balance (“UPB”) | | Weighted Average Coupon (2) | | Weighted Average Term to Maturity (Months) | | Weighted Average LTV Ratio (3) | | Weighted Average Original FICO (4) | | Aging by UPB | | 60+ Delinquency % |
| | | | | | | | | | Past Due Days | |
| (Dollars In Thousands) | | | | | | | | Current | | 30-59 | | 60-89 | | 90+ | |
| Purchased Performing Loans: | | | | | | | | | | | | | | | | | | | | | | |
| Non-QM loans | | $ | 3,453,242 | | | $ | 3,361,164 | | | 5.07 | % | | 355 | | 66 | % | | 731 | | $ | 3,165,964 | | | $ | 77,581 | | | $ | 22,864 | | | $ | 94,755 | | | 3.5 | % |
Transitional loans (1) | | 727,964 | | | 731,154 | | | 7.18 | | | 11 | | 67 | | | 735 | | 616,733 | | | 5,834 | | | 5,553 | | | 103,034 | | | 14.9 | |
| Single-family rental loans | | 949,772 | | | 924,498 | | | 5.46 | | | 329 | | 70 | | | 732 | | 898,166 | | | 2,150 | | | 695 | | | 23,487 | | | 2.6 | |
| Seasoned performing loans | | 101,995 | | | 111,710 | | | 2.76 | | | 162 | | 37 | | | 722 | | 102,047 | | | 938 | | | 481 | | | 8,244 | | | 7.8 | |
| Agency eligible investor loans | | 1,082,765 | | | 1,060,486 | | | 3.40 | | | 354 | | 62 | | | 767 | | 1,039,257 | | | 21,229 | | | — | | | — | | | — | |
| Total Purchased Performing Loans | | $ | 6,315,738 | | | $ | 6,189,012 | | | 5.05 | % | | 307 | | | | | | | | | | | | | | 4.2 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Purchased Credit Deteriorated Loans | | $ | 524,992 | | | $ | 643,187 | | | 4.55 | % | | 283 | | 69 | % | | N/A | | $ | 456,924 | | | $ | 50,048 | | | $ | 18,736 | | | $ | 117,479 | | | 21.2 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Purchased Non-Performing Loans | | $ | 1,072,270 | | | $ | 1,073,544 | | | 4.87 | % | | 283 | | 73 | % | | N/A | | $ | 492,481 | | | $ | 87,041 | | | $ | 40,876 | | | $ | 453,146 | | | 46.0 | % |
| | | | | | | | | | | | | | | | | | | | | | |
| Residential whole loans, total or weighted average | | $ | 7,913,000 | | | $ | 7,905,743 | | | 4.99 | % | | 301 | | | | | | | | | | | | | | 11.2 | % |
(1)As of December 31, 2022 Transitional loans includes $632.3 million of loans collateralized by multi-family properties with a weighted average term to maturity of 18 months and a weighted average LTV ratio of 73%. As of December 31, 2021, Transitional loans includes $213.9 million of loans collateralized by multi-family properties with a weighted average term to maturity of 23 months and a weighted average LTV ratio of 80%.
(2)Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(3)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Transitional loans, totaling $223.2 million and $137.3 million at December 31, 2022 and 2021, respectively, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 70% and 71% at December 31, 2022 and 2021, respectively. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.
(4)Excludes loans for which no Fair Isaac Corporation (“FICO”) score is available.
During 2022, Agency eligible investor loans with an unpaid principal balance of $337.8 million were sold, realizing losses, before the impact of economic hedging gains and the reversal of previously recognized unrealized losses of $72.3 million. No Residential whole loans were sold during 2021. During 2020, $1.8 billion of Non-QM loans were sold, realizing losses of $273.0 million, and Purchased Non-Performing loans with an aggregate unpaid principal of $24.1 million were sold, realizing net losses of approximately $800,000. In addition, in 2022, the Agency eligible investor loan securitizations were deconsolidated from the Company’s financial statements which resulted in the de-recognition of Agency eligible investor loans with an unpaid principal balance of $598.0 million (see Note 14 for further discussion).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Allowance for Credit Losses
The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential Whole Loans, at Carrying Value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
| (Dollars In Thousands) | | Non-QM Loans | | Transitional Loans (1)(2) | | Single-family Rental Loans | | Seasoned Performing Loans | | Purchased Credit Deteriorated Loans (3) | | Totals |
| Allowance for credit losses at December 31, 2021 | | $ | 8,289 | | | $ | 6,881 | | | $ | 1,451 | | | $ | 46 | | | $ | 22,780 | | | $ | 39,447 | |
| Current provision | | (909) | | | (1,460) | | | (122) | | | (1) | | | (975) | | | (3,467) | |
| Write-offs | | (51) | | | (219) | | | (27) | | | — | | | (226) | | | (523) | |
| Allowance for credit losses at March 31, 2022 | | $ | 7,329 | | | $ | 5,202 | | | $ | 1,302 | | | $ | 45 | | | $ | 21,579 | | | $ | 35,457 | |
| Current provision/(reversal) | | (199) | | | (23) | | | 174 | | | 1 | | | 1,877 | | | 1,830 | |
| Write-offs | | — | | | (118) | | | (184) | | | — | | | (58) | | | (360) | |
| Allowance for credit losses at June 30, 2022 | | $ | 7,130 | | | $ | 5,061 | | | $ | 1,292 | | | $ | 46 | | | $ | 23,398 | | | $ | 36,927 | |
| Current provision/(reversal) | | (242) | | | 583 | | | 83 | | | 3 | | | 120 | | | 547 | |
| Write-offs | | — | | | (114) | | | (61) | | | — | | | (107) | | | (282) | |
| Allowance for credit losses at September 30, 2022 | | $ | 6,888 | | | $ | 5,530 | | | $ | 1,314 | | | $ | 49 | | | $ | 23,411 | | | $ | 37,192 | |
| Current provision/(reversal) | | 471 | | | (13) | | | (37) | | | (1) | | | (1,996) | | | (1,576) | |
| Write-offs | | — | | | (294) | | | — | | | — | | | (8) | | | (302) | |
| Allowance for credit losses at December 31, 2022 | | $ | 7,359 | | | $ | 5,223 | | | $ | 1,277 | | | $ | 48 | | | $ | 21,407 | | | $ | 35,314 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| (Dollars In Thousands) | | Non-QM Loans | | Transitional Loans (1)(2) | | Single-family Rental Loans | | Seasoned Performing Loans | | Purchased Credit Deteriorated Loans (3) | | Totals |
| Allowance for credit losses at December 31, 2020 | | $ | 21,068 | | | $ | 18,371 | | | $ | 3,918 | | | $ | 107 | | | $ | 43,369 | | | $ | 86,833 | |
| Current provision | | (6,523) | | | (3,700) | | | (1,172) | | | (41) | | | (10,936) | | | (22,372) | |
| Write-offs | | — | | | (1,003) | | | — | | | — | | | (214) | | | (1,217) | |
| Allowance for credit and valuation losses at March 31, 2021 | | $ | 14,545 | | | $ | 13,668 | | | $ | 2,746 | | | $ | 66 | | | $ | 32,219 | | | $ | 63,244 | |
| Current provision/(reversal) | | (2,416) | | | (1,809) | | | (386) | | | (9) | | | (3,963) | | | (8,583) | |
| Write-offs | | (37) | | | (255) | | | — | | | — | | | (108) | | | (400) | |
| Allowance for credit losses at June 30, 2021 | | $ | 12,092 | | | $ | 11,604 | | | $ | 2,360 | | | $ | 57 | | | $ | 28,148 | | | $ | 54,261 | |
| Current provision/(reversal) | | (2,403) | | | (2,526) | | | (670) | | | (7) | | | (4,020) | | | (9,626) | |
| Write-offs | | — | | | (393) | | | (56) | | | — | | | (84) | | | (533) | |
| Allowance for credit losses at September 30, 2021 | | $ | 9,689 | | | $ | 8,685 | | | $ | 1,634 | | | $ | 50 | | | $ | 24,044 | | | $ | 44,102 | |
| Current provision/(reversal) | | (1,400) | | | (706) | | | (178) | | | (4) | | | (1,142) | | | (3,430) | |
| Write-offs | | — | | | (1,098) | | | (5) | | | — | | | (122) | | | (1,225) | |
| Allowance for credit losses at December 31, 2021 | | $ | 8,289 | | | $ | 6,881 | | | $ | 1,451 | | | $ | 46 | | | $ | 22,780 | | | $ | 39,447 | |
(1)In connection with purchased Transitional loans at carrying value, the Company had unfunded commitments of $8.0 million and $18.5 million as of December 31, 2022 and 2021, respectively, with an allowance for credit losses of $29,000 and $205,000 at December 31, 2022 and 2021, respectively. Such allowance is included in “Other liabilities” in the Company’s consolidated balance sheets (see Note 7).
(2)Includes $56.1 million and $87.0 million of loans that were assessed for credit losses based on a collateral dependent methodology as of December 31, 2022 and 2021, respectively.
(3)Includes $48.5 million and $57.4 million of loans that were assessed for credit losses based on a collateral dependent methodology as of December 31, 2022 and 2021, respectively.
The Company adopted the accounting standard addressing the measurement of credit losses on financial instruments (“CECL”) on January 1, 2020. The anticipated impact of the COVID-19 pandemic on expected economic conditions, including forecasted unemployment, home price appreciation, and prepayment rates, for the short to medium term resulted in significantly increased estimates of credit losses recorded under CECL for the first quarter of 2020 for residential whole loans held at carrying value. Since the end of the first quarter of 2020, primarily as a result of generally more stable markets and an ongoing
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
economic recovery, the Company has made subsequent revisions to certain macroeconomic assumptions, including its estimates related to future rates of unemployment and home price appreciation, and has made adjustments to the quantitative model outputs for relevant qualitative factors. The net impact of these assumption revisions and qualitative adjustments, as well as reductions in balances subject to CECL, has resulted in a reversal of a portion of the allowance for loan loss since the end of the first quarter of 2020. The Company’s estimates of expected losses that form the basis of the Allowance for Credit Losses include certain qualitative adjustments which have the effect of increasing expected loss estimates. These qualitative adjustments were determined based on a variety of factors, including differences between the Company’s loan portfolio and the loan portfolios represented by data available in regulatory filings of certain banks that are considered to have similar loan portfolios (available proxy data), and differences between current (and expected future) market conditions in comparison to market conditions that occurred in historical periods. Such differences include uncertainty with respect to the ongoing impact of the COVID-19 pandemic, anticipated inflation and increasing market interest rates, and heightened political uncertainty. The Company’s estimates of credit losses reflect the Company’s expectation that the performance of its portfolio will experience higher delinquencies and defaults compared to the performance in historical periods of portfolios included in the available proxy data. Estimates of credit losses under CECL are highly sensitive to changes in assumptions and current economic conditions have increased the difficulty of accurately forecasting future conditions.
The amortized cost basis of Purchased Performing Loans on nonaccrual status as of December 31, 2022 and December 31, 2021 was $195.1 million and $240.2 million, respectively. The amortized cost basis of Purchased Credit Deteriorated Loans on nonaccrual status as of December 31, 2022 and December 31, 2021 was $80.5 million and $108.9 million, respectively. The fair value of Purchased Non-performing Loans on nonaccrual status as of December 31, 2022 and December 31, 2021 was $413.1 million and $588.1 million, respectively. During the year ended December 31, 2022, the Company recognized $18.8 million of interest income on loans on nonaccrual status, including $13.2 million on its portfolio of loans which were non-performing at acquisition. At December 31, 2022 and December 31, 2021, there were approximately $71.7 million and $107.4 million, respectively, of loans held at carrying value on nonaccrual status that did not have an associated allowance for credit losses because they were determined to be collateral dependent and the estimated fair value of the related collateral exceeded the carrying value of each loan, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents certain additional credit-related information regarding our Residential whole loans, at Carrying Value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis by Origination Year and LTV Bands |
| (Dollars In Thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| Non-QM loans | | | | | | | | | | | | | | |
LTV <= 80% (1) | | $ | — | | | $ | 47,343 | | | $ | 189,257 | | | $ | 460,422 | | | $ | 232,400 | | | $ | 28,516 | | | $ | 957,938 | |
LTV > 80% (1) | | — | | | 2,128 | | | 14,330 | | | 5,752 | | | 6,078 | | | 1,056 | | | 29,344 | |
| Total Non-QM loans | | $ | — | | | $ | 49,471 | | | $ | 203,587 | | | $ | 466,174 | | | $ | 238,478 | | | $ | 29,572 | | | $ | 987,282 | |
| Year Ended December 31, 2022 Gross write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 51 | | | $ | — | | | $ | 51 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Transitional loans | | | | | | | | | | | | | | |
LTV <= 80% (1) | | $ | — | | | $ | 1,182 | | | $ | 5,153 | | | $ | 44,815 | | | $ | 12,727 | | | $ | 3,047 | | | $ | 66,924 | |
LTV > 80% (1) | | — | | | — | | | — | | | 4,594 | | | 1,971 | | | 1,699 | | | 8,264 | |
| Total Transitional loans | | $ | — | | | $ | 1,182 | | | $ | 5,153 | | | $ | 49,409 | | | $ | 14,698 | | | $ | 4,746 | | | $ | 75,188 | |
| Year Ended December 31, 2022 Gross write-offs | | $ | — | | | $ | — | | | $ | 92 | | | $ | 367 | | | $ | 287 | | | $ | — | | | $ | 746 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Single-family rental loans | | | | | | | | | | | | | | |
LTV <= 80% (1) | | $ | — | | | $ | 13,487 | | | $ | 25,036 | | | $ | 119,112 | | | $ | 47,476 | | | $ | 3,195 | | | $ | 208,306 | |
LTV > 80% (1) | | — | | | — | | | 313 | | | 2,129 | | | 85 | | | — | | | 2,527 | |
| Total Single-family rental loans | | $ | — | | | $ | 13,487 | | | $ | 25,349 | | | $ | 121,241 | | | $ | 47,561 | | | $ | 3,195 | | | $ | 210,833 | |
| Year Ended December 31, 2022 Gross write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | 205 | | | $ | 68 | | | $ | — | | | $ | 273 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Seasoned performing loans | | | | | | | | | | | | | | |
LTV <= 80% (1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 80,341 | | | $ | 80,341 | |
LTV > 80% (1) | | — | | | — | | | — | | | — | | | — | | | 2,591 | | | 2,591 | |
| Total Seasoned performing loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 82,932 | | | $ | 82,932 | |
| Year Ended December 31, 2022 Gross write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Purchased credit deteriorated loans | | | | | | | | | | | | | | |
LTV <= 80% (1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 378,816 | | | $ | 378,816 | |
LTV > 80% (1) | | — | | | — | | | — | | | — | | | — | | | 91,478 | | | 91,478 | |
| Total Purchased credit deteriorated loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 470,294 | | | $ | 470,294 | |
| Year Ended December 31, 2022 Gross write-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 400 | | | $ | 400 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total LTV <= 80% (1) | | $ | — | | | $ | 62,012 | | | $ | 219,446 | | | $ | 624,349 | | | $ | 292,603 | | | $ | 493,915 | | | $ | 1,692,325 | |
Total LTV > 80% (1) | | — | | | 2,128 | | | 14,643 | | | 12,475 | | | 8,134 | | | 96,824 | | | 134,204 | |
| Total residential whole loans, at carrying value | | $ | — | | | $ | 64,140 | | | $ | 234,089 | | | $ | 636,824 | | | $ | 300,737 | | | $ | 590,739 | | | $ | 1,826,529 | |
| Year Ended December 31, 2022 Total Gross write-offs | | $ | — | | | $ | — | | | $ | 92 | | | $ | 572 | | | $ | 406 | | | $ | 400 | | | $ | 1,470 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
(1)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Transitional loans, totaling $223.2 million at December 31, 2022, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting is 70% at December 31, 2022. Certain low value loans secured by vacant lots are categorized as LTV > 80%.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following tables present certain information regarding the LTVs of the Company’s Residential whole loans that are 90 days or more delinquent:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| (Dollars In Thousands) | | Carrying Value / Fair Value | | UPB | | LTV (1) |
| Purchased Performing Loans | | | | | | |
| Non-QM loans | | $ | 61,812 | | | $ | 61,719 | | | 67.9 | % |
| Transitional loans | | 73,266 | | | 74,180 | | | 68.1 | % |
| Single-family rental loans | | 27,466 | | | 27,463 | | | 72.9 | % |
| Seasoned performing loans | | 4,127 | | | 4,399 | | | 42.2 | % |
| Agency eligible investor loans | | — | | | — | | | — | |
| Total Purchased Performing Loans | | $ | 166,671 | | | $ | 167,761 | | | |
| | | | | | |
| Purchased Credit Deteriorated Loans | | $ | 69,402 | | | $ | 87,488 | | | 74.8 | % |
| | | | | | |
| Purchased Non-Performing Loans | | $ | 296,697 | | | $ | 310,035 | | | 76.9 | % |
| | | | | | |
| Total Residential Whole Loans | | $ | 532,770 | | | $ | 565,284 | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (Dollars In Thousands) | | Carrying Value / Fair Value | | UPB | | LTV (1) |
| | | | | | |
| Purchased Performing Loans | | | | | | |
| Non-QM loans | | $ | 96,473 | | | $ | 94,755 | | | 64.6 | % |
| Transitional loans | | 103,166 | | | 103,034 | | | 67.6 | % |
| Single-family rental loans | | 23,524 | | | 23,487 | | | 73.4 | % |
| Seasoned performing loans | | 7,740 | | | 8,244 | | | 45.6 | % |
| Agency eligible investor loans | | — | | | — | | | — | |
| Total Purchased Performing Loans | | $ | 230,903 | | | $ | 229,520 | | | |
| | | | | | |
| Purchased Credit Deteriorated Loans | | $ | 95,899 | | | $ | 117,479 | | | 79.1 | % |
| | | | | | |
| Purchased Non-Performing Loans | | $ | 454,443 | | | $ | 453,146 | | | 80.2 | % |
| | | | | | |
| Total Residential Whole Loans | | $ | 781,245 | | | $ | 800,145 | | | |
(1)LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Transitional loans, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following tables present the components of interest income on the Company’s Residential whole loans for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Held at Carrying Value | | Held at Fair Value | | Total |
| | For the Year Ended December 31, | | For the Year Ended December 31, | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Purchased Performing Loans: | | | | | | | | | | | | | | | | | | |
| Non-QM loans | | $ | 51,359 | | | $ | 75,517 | | | $ | 136,527 | | | $ | 98,384 | | | $ | 21,431 | | | $ | — | | | $ | 149,743 | | | $ | 96,948 | | | $ | 136,527 | |
| Transitional loans | | 7,810 | | | 22,424 | | | 49,484 | | | 67,714 | | | 10,705 | | | — | | | 75,524 | | | 33,129 | | | 49,484 | |
| Single-family rental loans | | 15,314 | | | 24,863 | | | 27,722 | | | 53,661 | | | 9,306 | | | — | | | 68,975 | | | 34,169 | | | 27,722 | |
| Seasoned performing loans | | 4,673 | | | 6,684 | | | 8,793 | | | — | | | — | | | — | | | 4,673 | | | 6,684 | | | 8,793 | |
| Agency eligible investor loans | | — | | | — | | | — | | | 30,361 | | | 11,667 | | | — | | | 30,361 | | | 11,667 | | | — | |
| Total Purchased Performing Loans | | $ | 79,156 | | | $ | 129,488 | | | $ | 222,526 | | | $ | 250,120 | | | $ | 53,109 | | | $ | — | | | $ | 329,276 | | | $ | 182,597 | | | $ | 222,526 | |
| | | | | | | | | | | | | | | | | | |
| Purchased Credit Deteriorated Loans | | $ | 33,427 | | | $ | 40,130 | | | $ | 36,238 | | | $ | — | | | $ | — | | | $ | — | | | $ | 33,427 | | | $ | 40,130 | | | $ | 36,238 | |
| | | | | | | | | | | | | | | | | | |
| Purchased Non-Performing Loans | | $ | — | | | $ | — | | | $ | — | | | $ | 78,520 | | | $ | 80,741 | | | $ | 73,448 | | | $ | 78,520 | | | $ | 80,741 | | | $ | 73,448 | |
| | | | | | | | | | | | | | | | | | |
| Total Residential Whole Loans | | $ | 112,583 | | | $ | 169,618 | | | $ | 258,764 | | | $ | 328,640 | | | $ | 133,850 | | | $ | 73,448 | | | $ | 441,223 | | | $ | 303,468 | | | $ | 332,212 | |
4. Securities, at Fair Value
Term Notes Backed by MSR-Related Collateral
At December 31, 2022 and 2021, the Company had $97.9 million and $153.8 million, respectively, of term notes issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered to be largely dependent on cash flows generated by the underlying MSRs, as this impacts the cash flows available to the SPV that issued the term notes.
At December 31, 2022, these term notes had an amortized cost of $86.4 million, gross unrealized gains of approximately $11.5 million, a weighted average yield of 14.3% and a weighted average term to maturity of 0.8 years. At December 31, 2021, the term notes had an amortized cost of $121.4 million, gross unrealized gains of approximately $32.4 million, a weighted average yield of 10.3% and a weighted average term to maturity of 1.7 years. During the three months ended March 31, 2020, the Company recognized an impairment loss related to its term notes of $280.8 million based on its intent to sell, or the likelihood it will be required to sell, such notes.
CRT Securities
CRT securities are debt obligations issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company. The Company assesses the credit risk associated with its investments in CRT securities by assessing the current and expected future performance of the associated loan pool. The Company pledges a portion of its CRT securities as collateral against its borrowings under repurchase agreements (see Note 6).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Agency and Non-Agency MBS
The Company’s MBS are comprised of Agency MBS and Non-Agency MBS.
Agency MBS: Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae.
Non-Agency MBS: The Company’s Non-Agency MBS are primarily secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation.
The following tables present certain information about the Company’s Agency, Non-Agency and CRT securities at December 31, 2022 and 2021:
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Thousands) | | Principal/ Current
Face | | Purchase
Premiums | | Accretable
Purchase
Discounts | | Discount Designated as Credit Reserve (1) | | Gross Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Net
Unrealized
Gain/(Loss) | | Fair
Value |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total residential mortgage securities (2)(3)(4)(5) | | $ | 241,814 | | | $ | 6,306 | | | $ | (6,272) | | | $ | (14,833) | | | $ | 227,015 | | | $ | 9,974 | | | $ | (1,523) | | | $ | 8,451 | | | $ | 235,466 | |
December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Thousands) | | Principal/ Current
Face | | Purchase
Premiums | | Accretable
Purchase
Discounts | | Discount Designated as Credit Reserve (1) | | Gross Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Net
Unrealized
Gain/(Loss) | | Fair Value |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total residential mortgage securities (2)(3) | | $ | 99,999 | | | $ | 7,466 | | | $ | (55) | | | $ | (20,768) | | | $ | 86,642 | | | $ | 16,282 | | | $ | (10) | | | $ | 16,272 | | | $ | 102,914 | |
(1)Discount designated as Credit Reserve is generally not expected to be accreted into interest income.
(2)Based on management’s current estimates of future principal cash flows expected to be received.
(3)Amounts disclosed at December 31, 2022 include CRT securities with a fair value of $48.6 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $131,000 and gross unrealized losses of approximately $1.2 million at December 31, 2022. Amounts disclosed at December 31, 2021 includes CRT securities with a fair value of $67.5 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $1.8 million and gross unrealized losses of approximately $10,000 at December 31, 2021.
(4)Amounts disclosed at December 31, 2022 include Non-Agency MBS with a fair value of $24.6 million for which the fair value option has been elected. Such securities had no gross unrealized gains and no gross unrealized losses at December 31, 2022.
(5)Amounts disclosed at December 31, 2022 include Agency MBS with a fair value of $131.7 million for which the fair value option has been elected. Such securities had no gross unrealized gains and gross unrealized losses of approximately $325,000 at December 31, 2022.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Impairment and other net (loss)/gain on securities and other portfolio investments
The following table present the components of Impairment and other net (loss)/gain on securities and other portfolio investments for the years ended December 31, 2022, 2021 and 2020, which is presented in Other income in the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| Net unrealized (loss)/gain on securities | | $ | (3,230) | | | $ | 1,607 | | | $ | (10,486) | |
| Net realized gain from the sale of securities | | 84 | | | — | | | 90,408 | |
| Impairment of securities | | — | | | — | | | (344,269) | |
| Total Impairment and other net (loss)/gain on securities | | $ | (3,146) | | | $ | 1,607 | | | $ | (264,347) | |
| | | | | | |
| Net unrealized loss on other portfolio investments | | $ | (21,921) | | | $ | — | | | $ | — | |
| Net realized loss on other portfolio investments | | — | | | — | | | (5,407) | |
Reversal of impairment/(Impairment) other portfolio investments (1) | | — | | | 33,956 | | | (80,813) | |
| Gain on investment in Lima One common equity | | — | | | 38,933 | | | — | |
| Total Impairment and other net (loss)/gain on securities and other portfolio investments | | $ | (25,067) | | | $ | 74,496 | | | $ | (350,567) | |
(1)Includes impairment in 2020 and 2021 related to a preferred equity investment in a loan originator, which was restructured in December 2021 and subsequently assessed as debt for accounting purposes. Accordingly, subsequent impairments on this investment recorded in 2022 are reflected as “Provision for Credit Losses on Other Assets” in the Company’s consolidated statement of operations.
The following table presents information about the Company’s sales of its securities for the years ended December 31, 2022, 2021 and 2020. The Company has no continuing involvement with any of the sold securities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In Thousands) | | Sales Proceeds | | Gains/(Losses) | | Sales Proceeds | | Gains/(Losses) | | Sales Proceeds | | Gains/(Losses) |
| Agency MBS | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,500,875 | | | $ | (19,291) | |
| Non-Agency MBS | | — | | | — | | | — | | | — | | | 1,318,958 | | | 107,999 | |
| CRT securities | | 15,660 | | | 84 | | | — | | | — | | | 243,025 | | | (27,011) | |
| MSR-related assets | | — | | | — | | | — | | | — | | | 711,698 | | | 28,711 | |
| Total | | $ | 15,660 | | | $ | 84 | | | $ | — | | | $ | — | | | $ | 3,774,556 | | | $ | 90,408 | |
Unrealized Losses on Residential Mortgage Securities
There were no gross unrealized losses on the Company’s AFS securities at December 31, 2022.
The Company did not recognize an allowance for credit losses (or other than temporary impairment in prior year periods) through earnings related to its MBS for the years ended December 31, 2022 and 2021. During the three months ended March 31, 2020, the Company recognized an aggregate impairment loss related to its MBS of $63.5 million based on its intent to sell, or the likelihood it will be required to sell, certain securities at such time.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Impact of AFS Securities on AOCI
The following table presents the impact of the Company’s AFS securities on its AOCI for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| AOCI from AFS securities: | | | | | | |
| Unrealized gain on AFS securities at beginning of period | | $ | 46,833 | | | $ | 79,607 | | | $ | 392,722 | |
| Unrealized (losses)/gains on securities available-for-sale | | (25,492) | | | (32,774) | | | 420,281 | |
| Reclassification adjustment for MBS sales included in net income | | — | | | — | | | (389,127) | |
| Reclassification adjustment for impairment included in net income | | — | | | — | | | (344,269) | |
| Change in AOCI from AFS securities | | (25,492) | | | (32,774) | | | (313,115) | |
| Balance at end of period | | $ | 21,341 | | | $ | 46,833 | | | $ | 79,607 | |
Interest Income on Securities, at Fair Value
The following table presents the components of interest income on the Company’s Securities, at fair value for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| Residential Mortgage Securities | | | | | | |
| Coupon interest | | $ | 4,793 | | | $ | 4,076 | | | $ | 47,686 | |
Effective yield adjustment (1)(2)(3) | | 3,143 | | | 13,265 | | | 6,450 | |
| Interest income | | $ | 7,936 | | | $ | 17,341 | | | $ | 54,136 | |
| | | | | | |
| MSR-related assets | | | | | | |
| Coupon interest | | $ | 6,610 | | | $ | 7,462 | | | $ | 25,970 | |
Effective yield adjustment (1)(2)(4) | | 14,374 | | | 31,887 | | | 9,987 | |
| Interest income | | $ | 20,984 | | | $ | 39,349 | | | $ | 35,957 | |
(1)Includes amortization of premium paid net of accretion of purchase discount. For Agency MBS, RPL/NPL MBS and the corporate loan secured by MSRs, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity.
(2)The effective yield adjustment is the difference between the net income calculated using the net yield less the current coupon yield. The net yield may be based on management’s estimates of the amount and timing of future cash flows or in the instrument’s contractual cash flows, depending on the relevant accounting standards.
(3)Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a discount of $8.8 million during the year ended December 31, 2021.
(4)Includes $7.8 million and $20.5 million of accretion income recognized during the years ended December 31, 2022 and 2021, respectively, due to the impact of the redemption at par of MSR-related assets that had been held at amortized cost basis below par due to an impairment charge recorded in the first quarter of 2020.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
5. Other Assets
The following table presents the components of the Company’s Other assets at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| (In Thousands) | | December 31, 2022 | | December 31, 2021 |
| Receivable for sale of unsettled residential whole loans | | $ | 275,656 | | | $ | — | |
REO (1) | | 130,605 | | | 156,223 | |
| Goodwill | | 61,076 | | | 61,076 | |
Intangibles, net (2) | | 12,200 | | | 21,400 | |
| Capital contributions made to loan origination partners | | 28,308 | | | 71,673 | |
| Other interest-earning assets | | 63,964 | | | 57,522 | |
| Interest receivable | | 68,704 | | | 50,191 | |
| Other loan related receivables | | 23,463 | | | 34,191 | |
Lease Right-of-Use Asset (3) | | 39,459 | | | 39,370 | |
| Other | | 62,786 | | | 73,910 | |
| Total Other Assets | | $ | 766,221 | | | $ | 565,556 | |
(1)Includes $11.3 million of REO that was held-for-investment at December 31, 2021.
(2)Net of aggregate accumulated amortization of $15.8 million and $6.6 million as of December 31, 2022 and 2021.
(3)An estimated incremental borrowing rate of 7.5% was used in connection with the Company’s primary operating lease (see Notes 2 and 9).
(a) Real Estate Owned
At December 31, 2022, the Company had 388 REO properties with an aggregate carrying value of $130.6 million. At December 31, 2021, the Company had 553 REO properties with an aggregate carrying value of $156.2 million.
At December 31, 2022, $130.1 million of residential real estate property was held by the Company that was acquired either through a completed foreclosure proceeding or from completion of a deed-in-lieu of foreclosure or similar legal agreement. In addition, formal foreclosure proceedings were in process with respect to $106.4 million of residential whole loans held at carrying value and $244.5 million of residential whole loans held at fair value at December 31, 2022.
The following table presents the activity in the Company’s REO for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| (Dollars In Thousands) | | 2022 | | 2021 |
| Balance at beginning of period | | $ | 156,223 | | | $ | 249,699 | |
Adjustments to record at lower of cost or fair value | | (4,255) | | | (4,772) | |
Transfer from residential whole loans (1) | | 82,911 | | | 72,304 | |
| Purchases and capital improvements, net | | 978 | | | 2,458 | |
Disposals and other (2) | | (105,252) | | | (163,466) | |
| Balance at end of period | | $ | 130,605 | | | $ | 156,223 | |
| | | | |
| Number of properties | | 388 | | | 553 | |
(1)Includes a net loss recorded on transfer of approximately $1.2 million and $700,000, respectively, for the years ended December 31, 2022 and 2021.
(2)During the year ended December 31, 2022, the Company sold 416 REO properties for consideration of $133.8 million, realizing net gains of approximately $28.7 million. During the year ended December 31, 2021, the Company sold 647 REO properties for consideration of $187.9 million, realizing net gains of approximately $23.5 million. These amounts are included in Other Income, net on the Company’s consolidated statements of operations.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(b) Goodwill and Intangible Assets
On July 1, 2021, the Company completed the acquisition of Lima One (see Note 15). In connection with the acquisition of Lima One, the Company identified and recorded goodwill of $61.1 million and finite-lived intangible assets totaling $28.0 million.
The amortization period for each of the finite lived intangible assets and the activity for the years ended December 31, 2022 and 2021 is summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Thousands) | | Acquisition Date July 1, 2021 | | Amortization
Year Ended
December 31, 2021 | | Carrying Value at December 31, 2021 | | Amortization
Year Ended
December 31, 2022 | | Carrying Value at
December 31, 2022 | | Amortization Period (Years) (1) |
| Trademarks / Trade Names | | $ | 4,000 | | | $ | (200) | | | $ | 3,800 | | | $ | (400) | | | $ | 3,400 | | | 10 |
| Customer Relationships | | 16,000 | | | (4,000) | | | 12,000 | | | (6,000) | | | 6,000 | | | 4 |
| Internally Developed Software | | 4,000 | | | (400) | | | 3,600 | | | (800) | | | 2,800 | | | 5 |
| Non-Compete Agreements | | 4,000 | | | (2,000) | | | 2,000 | | | (2,000) | | | — | | | 1 |
| Total Identified Intangibles | | $ | 28,000 | | | $ | (6,600) | | | $ | 21,400 | | | $ | (9,200) | | | $ | 12,200 | | | |
(1) Amortization is calculated on a straight-line basis over the amortization period, except for Customer Relationships, where amortization is calculated based on expected levels of customer attrition.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(c) Capital Contributions Made to Loan Origination Partners
The Company has made investments in several loan originators as part of its strategy to be a reliable source of capital to select partners from whom the Company sources residential mortgage loans through both flow arrangements and bulk purchases. At December 31, 2022, the carrying value of these investments (including adjustments for impairments or mark-to-market changes) was $28.3 million, including $3.7 million of common equity (including partnership interests) and $24.6 million of preferred equity.
During the year ended December 31, 2022, the Company recorded an impairment charge in earnings of $28.6 million against the carrying value of its investment in one loan origination partner, bringing the net carrying value of this investment to zero as of June 30, 2022. This impairment charge was recorded in Provision for credit losses on other assets in the consolidated statement of operations.
Further, for the year ended December 31, 2022, the Company recorded a valuation adjustment of $21.9 million against its investment in a loan origination partner that is accounted for at fair value through earnings. During the year ended December 31, 2021, the Company reversed $10.0 million of previously recorded impairment as two of the Company’s preferred equity investments were repaid in full. In addition, the Company recorded a gain of $24.0 million related to a preferred equity investment that had been previously impaired and that was required to be revalued during the period, as the investee company completed a capital transaction with an unrelated third party. The Company did not record any impairment charges to earnings on investments in loan origination partners during the year ended December 31, 2021. During the year ended December 31, 2020, the Company recorded impairment charges of $65.3 million on investments in certain loan origination partners following an evaluation of the anticipated impact of COVID-19 on economic conditions for the short to medium term. This activity was recorded in Other income in the consolidated statements of operations.
For certain of the Company’s investments, the interests acquired to date by the Company generally do not have a readily determinable fair value. Consequently, the Company accounts for these interests (including any acquired options and warrants) in loan originators initially at cost. The carrying value of these investments will be adjusted if it is determined that an impairment has occurred or if there has been a subsequent observable transaction in either the investee company’s equity securities or a similar security that provides evidence to support an adjustment to the carrying value. In addition, for certain partners, options or warrants have also been acquired that provide the Company the ability to increase the level of its investment if certain conditions are met. At the end of each reporting period, or earlier if circumstances warrant, the Company evaluates whether the nature of its interests and other involvement with the investee entity requires the Company to apply equity method accounting or consolidate the results of the investee entity with the Company’s financial results. On July 1, 2021, the Company completed the acquisition of certain ownership interests in Lima One, which resulted in the Company owning all of Lima One’s outstanding ownership interests (see Note 15). Accordingly, the Company consolidated Lima One’s financial results beginning on that date.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(d) Derivative Instruments
Swaps
The Company’s derivative instruments include Swaps, which are used to economically hedge the interest rate risk associated with certain borrowings. Pursuant to these arrangements, the Company agreed to pay a fixed rate of interest and receive a variable interest rate, generally based on the Secured Overnight Financing Rate (“SOFR”), on the notional amount of the Swap. At December 31, 2022, none of the Company’s Swaps were designated as hedges for accounting purposes.
In response to the turmoil in the financial markets resulting from COVID-19 experienced during the three months ended March 31, 2020, and given that management no longer considered those transactions to be effective hedges in the then prevailing interest rate environment, the Company unwound all of its then approximately $4.1 billion of Swap hedging transactions late in the first quarter of 2020 in order to recover previously posted margin. Consequently, during the year ended December 31, 2020, the Company concluded that it was appropriate to transfer from AOCI to earnings approximately $57.0 million of losses on Swaps that had previously been designated as hedges for accounting purposes, because the hedged transactions were no longer considered probable to occur.
At December 31, 2022 and 2021, the Company had restricted cash pledged as collateral against its Swap contracts of $60.8 million and $14.4 million, respectively.
At December 31, 2022, the Company had Swaps with an aggregate notional amount of $3.2 billion and an average maturity of approximately 42 months with a maximum term of approximately 78 months.
The following table presents information about the Company’s Swaps at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 | | |
Maturity (1) | | Notional
Amount | | Weighted
Average
Fixed-Pay
Interest Rate | | Weighted Average Variable Interest Rate (2) | | Notional
Amount | | Weighted
Average
Fixed-Pay
Interest Rate | | Weighted Average Variable Interest Rate (2) | | |
| (Dollars in Thousands) | | | | | | | | | | | | | | |
| Within 30 days to 12 months | | $ | — | | | — | % | | — | % | | $ | — | | | — | % | | — | % | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Over 12 months to 24 months | | 550,010 | | | 1.01 | | | 4.30 | | | — | | | — | | | — | | | |
| Over 24 months to 36 months | | 775,000 | | | 1.75 | | | 4.30 | | | 450,010 | | | 0.90 | | | 0.05 | | | |
| Over 36 months to 48 months | | 450,000 | | | 1.12 | | | 4.30 | | | — | | | — | | | — | | | |
| Over 48 months to 60 months | | 1,075,000 | | | 1.86 | | | 4.30 | | | 450,000 | | | 1.12 | | | 0.05 | | | |
| Over 60 months to 72 months | | — | | | — | | | — | | | — | | | — | | | — | | | |
| Over 72 months to 84 months | | 310,000 | | | 2.95 | | | 4.30 | | | — | | | — | | | — | | | |
| | | | | | | | | | | | | | |
| Total Swaps | | $ | 3,160,010 | | | 1.69 | % | | 4.30 | % | | $ | 900,010 | | | 1.01 | % | | 0.05 | % | | |
(1)Each maturity category reflects contractual amortization and/or maturity of notional amounts.
(2)Reflects the benchmark variable rate due from the counterparty at the date presented, which rate adjusts daily based on SOFR.
TBA Securities
In order to economically hedge the risks arising from the investments in Agency eligible investor loans, the Company entered into short positions in certain TBA securities. The Company did not have any open short positions in TBA securities at December 31, 2022. The table below summarizes open short positions in TBA securities as of December 31, 2021, which had an aggregate value of ($1.3) million and were included in Other assets/liabilities on the Company’s consolidated balance sheets.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| (Dollars in Thousands) | | Notional Amount | | Settlement Date |
| TBA Security | | | | |
| UMBS 2.5 | | $ | 180,000 | | | January 13, 2022 |
| | | | |
| UMBS 2.0 | | $ | 130,000 | | | January 13, 2022 |
TBA short positions are subject to margining requirements which serve to mitigate counterparty credit risk associated with these transactions. Open TBA positions are measured at fair value each reporting date, with realized and unrealized changes in the fair value of these positions recorded in Other income, net on the Company’s consolidated statements of operations.
Impact of Derivative Instruments on Earnings
The following table present the components of Net gain/(loss) on derivatives used for risk management purposes for the years ended December 31, 2022, 2021 and 2020, which is presented in Other income in the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| Income on swap variable receive leg | | $ | 52,395 | | | $ | 34 | | | $ | 933 | |
| Expense on swap fixed pay leg | | (42,353) | | | (703) | | | (1,503) | |
| Unrealized mark-to-market gain | | 208,712 | | | 70 | | | 5,708 | |
| Net price alignment expense on margin collateral received | | (2,761) | | | — | | | — | |
| Loss on unwind of swaps not designated as hedges for accounting purposes | | — | | | — | | | (9,353) | |
| Loss on terminated swaps designated as hedges for accounting purposes | | — | | | — | | | (57,034) | |
| Net gain on TBA short positions | | 39,186 | | | 2,025 | | | — | |
Total Net gain/(loss) on derivatives used for risk management purposes | | $ | 255,179 | | | $ | 1,426 | | | $ | (61,249) | |
Impact of Derivative Hedging Instruments on AOCI
The following table presents the impact of the Company’s derivative hedging instruments on its AOCI for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| AOCI from derivative hedging instruments: | | | | | | |
| Balance at beginning of period | | $ | — | | | $ | — | | | $ | (22,675) | |
| Net loss on Swaps | | — | | | — | | | (50,127) | |
| Reclassification adjustment for losses/gains related to hedging instruments included in net income | | — | | | — | | | 72,802 | |
| Balance at end of period | | $ | — | | | $ | — | | | $ | — | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
6. Financing Agreements
The following tables present the components of the Company’s financing agreements at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | |
| (In Thousands) | | Collateral | | Unpaid Principal Balance | | Fair Value/Carrying Value (1) | | Weighted Average Cost of Funding (2) | | Weighted Average Term to Maturity (Months) |
| | | | | | | | | | |
| Agreements with mark-to-market collateral provisions | | Residential Whole Loans and REO | | $ | 2,111,647 | | | $ | 2,111,396 | | | 3.63 | % | | 6.9 | |
| Agreements with mark-to-market collateral provisions | | Securities | | 111,651 | | | 111,651 | | | 3.34 | % | | 1.5 | |
| Total Agreements with mark-to-market collateral provisions | | | | 2,223,298 | | | 2,223,047 | | | 3.62 | % | | |
| Agreements with non-mark-to-market collateral provisions | | Residential Whole Loans and REO | | 1,004,260 | | | 1,003,604 | | | 5.00 | % | | 16.8 | |
| Securitized debt | | Residential Whole Loans | | 3,586,397 | | | 3,357,590 | | | 2.99 | % | | See Note 14 |
| Convertible senior notes | | Unsecured | | 229,989 | | | 227,845 | | | 6.94 | % | | See below |
Total Financing agreements (2) | | | | $ | 7,043,944 | | | $ | 6,812,086 | | | 3.46 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 | | |
| (In Thousands) | | Collateral | | Unpaid Principal Balance | | Fair Value/Carrying Value (1) | | Weighted Average Cost of Funding (2) | | Weighted Average Term to Maturity (Months) |
| | | | | | | | | | |
| Agreements with mark-to-market collateral provisions | | Residential Whole Loans and REO | | $ | 2,403,724 | | | $ | 2,403,151 | | | 2.15 | % | | 6.6 | |
| Agreements with mark-to-market collateral provisions | | Securities | | 159,148 | | | 159,148 | | | 1.78 | % | | 1.4 | |
| Total Agreements with mark-to-market collateral provisions | | | | 2,562,872 | | | 2,562,299 | | | 2.11 | % | | |
| Agreements with non-mark-to-market collateral provisions | | Residential Whole Loans and REO | | 939,003 | | | 939,540 | | | 3.57 | % | | 9.8 | |
| Securitized debt | | Residential Whole Loans | | 2,645,495 | | | 2,650,473 | | | 1.94 | % | | See Note 14 |
| Convertible senior notes | | Unsecured | | 230,000 | | | 226,470 | | | 6.94 | % | | See below |
Total Financing agreements (2) | | | | $ | 6,377,370 | | | $ | 6,378,782 | | | 2.58 | % | | |
(1)The Company has both financing agreements held at fair value and financings agreements held at their carrying value (amortized cost basis). Financing agreements held at fair value are reported at estimated fair value each period as a result of the Company’s fair value option election. The fair value option was not elected for financing agreements held at carrying value. Consequently, total financing agreements as presented reflects a summation of balances reported at fair and carrying value. At December 31, 2022, the Company had $884.5 million of agreements with mark-to-market collateral provisions held at fair value, $578.9 million of agreements with non-mark-to-market collateral provisions held at fair value, and $2.4 billion of securitized debt held at fair value, with amortized cost bases of $884.5 million, $578.9 million, and, $2.6 billion respectively. At December 31, 2021, the Company had the $1.3 billion of agreements with mark-to-market collateral provisions held at fair value, $628.3 million of agreements with non-mark-to-market collateral provisions held at fair value, and $1.3 billion of securitized debt held at fair value, with amortized cost bases of $1.3 billion, $627.0 million, and $1.3 billion, respectively.
(2)Weighted average cost of funding reflects year-to-date interest expense divided by average balance for the financing agreements. The cost of funding for the total financing agreements includes the impact of the net carry (the difference between swap interest income received and swap interest expense paid) on the Company’s Swaps. For the year ended December 31, 2022, this decreased the overall funding cost by 14 basis points, and for the year ended December 31, 2021, this increased the overall funding cost by two basis points. The Company does not allocate the impact of the net carry by type of financing agreement.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents maturities with respect to the Company’s financing agreements with mark-to-market and non-mark-to-market collateral provisions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 |
| | Unpaid Principal Balance, Maturing In |
| (In Thousands) | | Collateral | | 0-3 Months (1) | | 3-6 Months (1) | | 6-12 Months | | Greater than 12 Months (2) | | Total |
| Agreements with mark-to-market collateral provisions | | Residential Whole Loans | | $ | 828,804 | | | $ | 53,247 | | | $ | 939,434 | | | $ | 290,162 | | | $ | 2,111,647 | |
| Agreements with mark-to-market collateral provisions | | Securities | | 111,651 | | | — | | | — | | | — | | | 111,651 | |
| Total Agreements with mark-to-market collateral provisions | | | | 940,455 | | | 53,247 | | | 939,434 | | | 290,162 | | | 2,223,298 | |
| Agreements with non-mark-to-market collateral provisions | | Residential Whole Loans | | 9,268 | | | 184,576 | | | 415,041 | | | 395,375 | | | 1,004,260 | |
(1)$304.1 million of the mark-to-market agreements ($250.9 million and $53.2 million included in the 0-3 and 3-6 months categories, respectively) can be terminated by either party.
(2)$290.2 million of the mark-to-market agreements (included in the greater than 12 months category) have a one year extension option to September 2024.
The following table presents information with respect to the Company’s financing agreements with mark-to-market collateral provisions and associated assets pledged as collateral at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| (Dollars in Thousands) | | December 31,
2022 | | December 31,
2021 |
| Mark-to-market financing agreements secured by residential whole loans | | $ | 2,095,002 | | | $ | 2,391,602 | |
| Fair value of residential whole loans pledged as collateral under financing agreements | | $ | 2,632,489 | | | $ | 3,301,288 | |
Weighted average haircut on residential whole loans (1) | | 18.33 | % | | 25.27 | % |
| Mark-to-market financing agreements secured by securities at fair value | | $ | 111,651 | | | $ | 159,148 | |
| Securities at fair value pledged as collateral under financing agreements | | $ | 177,111 | | | $ | 256,685 | |
Weighted average haircut on securities at fair value (1) | | 37.43 | % | | 37.00 | % |
| Mark-to-market financing agreements secured by real estate owned | | $ | 16,394 | | | $ | 11,549 | |
| Fair value of real estate owned pledged as collateral under financing agreements | | $ | 33,367 | | | $ | 34,606 | |
Weighted average haircut on real estate owned (1) | | 48.07 | % | | 58.46 | % |
(1)Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents information with respect to the Company’s financing agreements with non-mark-to-market collateral provisions and associated assets pledged as collateral at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| (Dollars in Thousands) | | December 31,
2022 | | December 31,
2021 |
| Non-mark-to-market financing secured by residential whole loans | | $ | 994,494 | | | $ | 928,055 | |
| Fair value of residential whole loans pledged as collateral under financing agreements | | $ | 1,301,685 | | | $ | 1,420,283 | |
| Weighted average haircut on residential whole loans | | 21.43 | % | | 29.98 | % |
| Non-mark-to-market financing secured by real estate owned | | $ | 9,109 | | | $ | 11,485 | |
| Fair value of real estate owned pledged as collateral under financing agreements | | $ | 22,902 | | | $ | 29,894 | |
| Weighted average haircut on real estate owned | | 60.23 | % | | 61.28 | % |
In addition, the Company had aggregate restricted cash held in connection with its financing agreements of $16.0 million and $10.2 million at December 31, 2022 and 2021, respectively.
The following table presents repricing information (excluding the impact of associated derivative hedging instruments, if any) about the Company’s financing agreements that have non-mark-to-market collateral provisions as well as those that have mark-to-market collateral provisions, at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| Unpaid Principal Balance | | Weighted Average Interest Rate | Unpaid Principal Balance | | Weighted Average Interest Rate |
| Time Until Interest Rate Reset |
| (Dollars in Thousands) | | | | | | | | |
| Within 30 days | | $ | 3,060,111 | | | 6.60 | % | | $ | 3,222,268 | | | 2.36 | % |
| Over 30 days to 3 months | | 167,447 | | | 6.19 | | | 257,444 | | | 2.49 | |
| Over 3 months to 12 months | | — | | | — | | | 22,163 | | | 4.50 | |
| Over 12 months | | — | | | — | | | — | | | — | |
| Total financing agreements | | $ | 3,227,558 | | | 6.58 | % | | $ | 3,501,875 | | | 2.38 | % |
(a) Other Information on Financing Agreements
Convertible Senior Notes
On June 3, 2019, the Company issued $230.0 million in aggregate principal amount of its Convertible Senior Notes in an underwritten public offering, including an additional $30.0 million issued pursuant to the exercise of the underwriters’ option to purchase additional Convertible Senior Notes. The total net proceeds the Company received from the offering were approximately $223.3 million, after deducting offering expenses and the underwriting discount. The Convertible Senior Notes bear interest at a fixed rate of 6.25% per year, paid semiannually on June 15 and December 15 of each year commencing December 15, 2019 and will mature on June 15, 2024, unless earlier converted, redeemed or repurchased in accordance with their terms. The Convertible Senior Notes are convertible at the option of the holders at any time until the close of business on the business day immediately preceding the maturity date into shares of the Company’s common stock based on a conversion rate of 31.4346 shares (which reflects an adjustment resulting from the Company’s Reverse Stock Split) of the Company’s common stock for each $1,000 principal amount of the Convertible Senior Notes, which is equivalent to a conversion price of approximately $31.81 per share of common stock. The Convertible Senior Notes have an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 6.94%. The Company does not have the right to redeem the Convertible Senior Notes prior to maturity, except to the extent necessary to preserve its status as a REIT, in which case the Company may redeem the Convertible Senior Notes, in whole or in part, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. During the year ended December 31, 2022, $11,000 of convertible senior notes were converted into 345 shares of the Company’s common stock.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The Convertible Senior Notes are the Company’s senior unsecured obligations and are (i) effectively junior to all of the Company’s secured indebtedness, which includes the Company’s repurchase agreements and other financing arrangements, to the extent of the value of the collateral securing such indebtedness and (ii) equal in right of payment to the Company’s existing and future senior unsecured obligations, if any.
Senior Notes
On April 11, 2012, the Company issued $100.0 million in aggregate principal amount of its Senior Notes in an underwritten public offering. On January 6, 2021, the Company redeemed all of its outstanding Senior Notes. The Senior Notes bore interest at a fixed rate of 8.00% per year, paid quarterly in arrears on January 15, April 15, July 15 and October 15. The Senior Notes had an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 8.31%.
Senior Secured Term Loan Facility
On June 26, 2020, the Company entered into a $500 million senior secured term loan facility (the “Term Loan Facility”). The outstanding balance of the Term Loan Facility was repaid and the Term Loan Facility was terminated prior to December 31, 2020.
(b) Counterparties
The Company had financing agreements, including repurchase agreements and other forms of secured financing, with 12 and 14 counterparties at December 31, 2022 and 2021, respectively. The following table presents information with respect to each counterparty under financing agreements for which the Company had greater than 5% of stockholders’ equity at risk in the aggregate at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Counterparty Rating (1) | | Amount at Risk (2) | | Weighted
Average Months
to Repricing for
Repurchase Agreements | | Percent of
Stockholders’ Equity |
| Counterparty | | | | |
| (Dollars in Thousands) | | | | | | | | |
Barclays Bank (3) | | BBB/Aa3/A | | $ | 309,463 | | | 1 | | 15.6 | % |
| Wells Fargo | | A+/Aa2/AA- | | 234,826 | | | 1 | | 11.8 | |
| Credit Suisse | | BBB-/Baa2/BBB | | 192,129 | | | 1 | | 9.7 | |
| | | | | | | | |
| | | | | | | | |
(1)As rated at December 31, 2022 by S&P, Moody’s and Fitch, Inc., respectively. The counterparty rating presented is the lowest published rating for these entities.
(2)The amount at risk reflects the difference between (a) the amount loaned to the Company through financing agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets.
(3)Includes amounts at risk with various affiliates of Athene Holding, Ltd., held via participation in a loan syndication administered by Barclays Bank.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(c) Pledged Collateral
The following tables present the Company’s assets (based on carrying value) pledged as collateral for its various financing arrangements as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Financing Agreements |
| (In Thousands) | | Non-Mark-to-Market (1) | | Mark-to-Market (1) | | Securitized | | Total |
| Assets: | | | | | | | | |
| Residential whole loans, at carrying value | | $ | 215,993 | | | $ | 284,683 | | | $ | 1,314,104 | | | $ | 1,814,780 | |
| Residential whole loans, at fair value | | 1,095,556 | | | 2,164,158 | | | 2,720,757 | | | 5,980,471 | |
| Securities, at fair value | | — | | | 177,111 | | | — | | | 177,111 | |
| Other assets: REO | | 19,837 | | | 28,490 | | | 36,486 | | | 84,813 | |
| Total | | $ | 1,331,386 | | | $ | 2,654,442 | | | $ | 4,071,347 | | | $ | 8,057,175 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Financing Agreements |
| (In Thousands) | | Non-Mark-to-Market (1) | | Mark-to-Market (1) | | Securitized | | Total |
| Assets: | | | | | | | | |
| Residential whole loans, at carrying value | | $ | 693,982 | | | $ | 459,349 | | | $ | 1,476,588 | | | $ | 2,629,919 | |
| Residential whole loans, at fair value | | 706,377 | | | 2,810,865 | | | 1,525,114 | | | 5,042,356 | |
| Securities, at fair value | | — | | | 256,685 | | | — | | | 256,685 | |
| Other assets: REO | | 25,692 | | | 29,374 | | | 35,379 | | | 90,445 | |
| Total | | $ | 1,426,051 | | | $ | 3,556,273 | | | $ | 3,037,081 | | | $ | 8,019,405 | |
(1)An aggregate of $30.9 million and $25.7 million of accrued interest on those assets pledged against non-mark-to-market and mark-to-market financings agreements had also been pledged as of December 31, 2022 and 2021, respectively.
The Company pledges securities or cash as collateral to its counterparties in relation to certain of its financing arrangements. The Company exchanges collateral with its counterparties based on changes in the fair value, notional amount and term of the associated financing arrangements and Swap contracts, as applicable. In connection with these margining practices, either the Company or its counterparty may be required to pledge cash or securities as collateral. When the Company’s pledged collateral exceeds the required margin, the Company may initiate a reverse margin call, at which time the counterparty may either return the excess collateral or provide collateral to the Company in the form of cash or equivalent securities. The Company’s assets pledged as collateral are also described in Notes 2(e) - Restricted Cash and 5(d) - Derivative Instruments.
Certain of the Company’s financing arrangements and derivative transactions are governed by underlying agreements that generally provide for a right of setoff in the event of default or in the event of a bankruptcy of either party to the transaction. In the Company’s consolidated balance sheets, all balances associated with repurchase agreements are presented on a gross basis.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
7. Other Liabilities
The following table presents the components of the Company’s Other liabilities at December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| (In Thousands) | | December 31, 2022 | | December 31, 2021 |
| Payable for purchase of unsettled Agency MBS | | $ | 132,026 | | | $ | — | |
| Dividends and dividend equivalents payable | | 35,769 | | | 47,751 | |
| Lease liability | | 45,314 | | | 44,977 | |
| Accrued interest payable | | 23,040 | | | 9,621 | |
| Accrued expenses and other | | 75,321 | | | 115,709 | |
| Total Other Liabilities | | $ | 311,470 | | | $ | 218,058 | |
8. Income Taxes
The Company has elected to be taxed as a REIT under the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to satisfy the various requirements to maintain its status as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must, among other things, distribute at least 90% of its REIT taxable income (excluding net long-term capital gains) to stockholders in the timeframe permitted by the Code. As long as the Company maintains its status as a REIT, the Company will not be subject to regular federal income tax at the REIT level to the extent that it distributes 100% of its REIT taxable income (including net long-term capital gains) to its stockholders within the permitted timeframe. Should this not occur, the Company would be subject to federal taxes at prevailing corporate tax rates on the difference between its REIT taxable income and the amounts deemed to be distributed for that tax year. The Company’s objective is to distribute 100% of its REIT taxable income to its stockholders within the permitted timeframe. If the Company fails to distribute during each calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. To the extent that the Company incurs interest, penalties or related excise taxes in connection with its tax obligations, including as a result of its assessment of uncertain tax positions, such amounts will be included in Operating and Other Expense on the Company’s consolidated statements of operations.
In addition, 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. Generally, a domestic TRS is subject to U.S. federal, state and local corporate income taxes. Given that a portion of the Company’s business is conducted through one or more TRS, the net taxable income earned by its domestic TRS, if any, is subject to corporate income taxation. To maintain the Company’s REIT election, no more than 20% of the value of the Company’s assets at the end of each calendar quarter may consist of stock or securities in TRS. For purposes of the determination of U.S. federal and state income taxes, the Company’s subsidiaries that elected to be treated as TRS record current or deferred income taxes based on differences (both permanent and timing) between the determination of their taxable income and net income under GAAP.
Based on its analysis of any potentially uncertain tax positions, the Company concluded that it does not have any material uncertain tax positions that meet the relevant recognition or measurement criteria as of December 31, 2022 or 2021. As of the date of this filing, the Company’s tax returns for tax years 2019 through 2021 are open to examination.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The tax effects of temporary differences that give rise to significant portions of net deferred tax assets (“DTAs”) recorded at the Company’s domestic TRS entities at December 31, 2022 and 2021 are presented in the following table:
| | | | | | | | | | | | | | |
| (In Thousands) | | December 31, 2022 | | December 31, 2021 |
| Deferred tax assets (DTAs): | | | | |
| Net operating loss and tax credit carryforwards | | $ | 97,655 | | | $ | 35,796 | |
| Unrealized mark-to-market, impairments and loss provisions | | 12,609 | | | 3,753 | |
| Other realized / unrealized treatment differences | | (28,620) | | | 12,131 | |
| | | | |
| | | | |
| Total deferred tax assets | | 81,644 | | | 51,680 | |
| Less: valuation allowance | | (81,644) | | | (51,680) | |
| Net deferred tax assets | | $ | — | | | $ | — | |
Realization of the Company’s DTAs at December 31, 2022 is dependent on several factors, including generating sufficient taxable income prior to the expiration of net operating loss (“NOL”) carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. The Company determines the extent to which realization of the deferred assets is not expected to be more likely than not and establishes a valuation allowance accordingly.
No net deferred tax benefit was recorded by the Company for the years ended December 31, 2022 and 2021, related to the net taxable losses in TRS entities, since a valuation allowance for the full amount of the associated deferred tax asset at the ends of those periods was recognized as its recovery was not considered more likely than not. The related NOL carryforwards generated prior to 2018 will begin to expire in 2037; those generated in 2018 and later can be carried forward indefinitely, until fully utilized. The Company’s estimate of net DTAs could change in future periods to the extent that actual or revised estimates of future taxable income change from current expectations.
At December 31, 2022, the Company’s federal NOL carryforward was $382.6 million, which may be carried forward indefinitely. If certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized.
The income tax provision (benefit) is included in Other general and administrative expense in the Company’s consolidated statements of operations. The following table summarizes the Company’s income tax provision (benefit) primarily recorded at the Company’s domestic TRS entities for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| (In Thousands) | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Current provision (benefit) | | | | | | |
| Federal | | $ | (1,309) | | | $ | 2,025 | | | $ | 1,403 | |
| State | | 263 | | | 644 | | | 598 | |
| Total current provision (benefit) | | (1,046) | | | 2,669 | | | 2,001 | |
| Deferred provision (benefit) | | | | | | |
| Federal | | 166 | | | — | | | — | |
| State | | 29 | | | — | | | — | |
| Total deferred provision (benefit) | | 195 | | | — | | | — | |
| Total provision (benefit) | | $ | (851) | | | $ | 2,669 | | | $ | 2,001 | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following is a reconciliation of the statutory federal tax rate to the Company’s effective tax rate at December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended |
| | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Federal statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Non-taxable REIT income (dividends paid deduction) | | 2.6 | % | | (4.6) | % | | 0.1 | % |
| Other differences in taxable income (loss) from GAAP | | (13.0) | % | | (4.7) | % | | (14.4) | % |
| State and local taxes | | — | % | | — | % | | — | % |
| Change in valuation allowance on DTAs | | (10.1) | % | | (11.1) | % | | (6.9) | % |
| | | | | | |
| | | | | | |
| Effective tax rate | | 0.5 | % | | 0.6 | % | | (0.2) | % |
9. Commitments and Contingencies
(a) Lease Commitments
The Company’s primary lease commitment relates to its corporate headquarters. For the year ended December 31, 2022, the Company recorded an expense of approximately $5.0 million in connection with this lease. The original term specified in this lease is approximately fifteen years with a termination date of December 2036 and an option to renew for an additional five years.
The Company recognized total lease expense of $6.5 million, $4.0 million and $3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in Other general and administrative expense on the Company’s consolidated statements of operations.
At December 31, 2022, the contractual minimum rental payments (exclusive of possible rent escalation charges and normal recurring charges for maintenance, insurance and taxes) were as follows:
| | | | | | | | |
| Year Ended December 31, | | Minimum Rental Payments |
| (In Thousands) | | |
| 2023 | | $ | 5,748 | |
| 2024 | | 5,751 | |
| 2025 | | 4,888 | |
| 2026 | | 4,776 | |
| 2027 | | 5,055 | |
| Thereafter | | 46,999 | |
| Total | | $ | 73,217 | |
(b) Representations and Warranties in Connection with Loan Securitization and Other Loan Sale Transactions
In connection with the loan securitization and sale transactions entered into by the Company, the Company has the obligation under certain circumstances to repurchase assets previously transferred to securitization vehicles, or otherwise sold, upon breach of certain representations and warranties. As of December 31, 2022, the Company was not aware of any material unsettled repurchase claims that would require a reserve (see Note 14).
(c) Transitional Loan Commitments
At December 31, 2022, the Company had unfunded commitments of $553.4 million in connection with its purchased Transitional loans (see Note 3).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(d) Agency MBS Purchase Commitments
At December 31, 2022, the Company had commitments to purchase Agency MBS for $132.0 million. Agency MBS are included in Securities, at fair value on the Company’s consolidated balance sheets, with a liability for the purchase amount included in Other liabilities.
10. Stockholders’ Equity
(a) Preferred Stock
7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”)
On April 15, 2013, the Company completed the issuance of 8.0 million shares of its Series B Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The Company’s Series B Preferred Stock is entitled to receive a dividend at a rate of 7.50% per year on the $25.00 liquidation preference before the Company’s common stock is paid any dividends and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series B Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option.
The Series B Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board of Directors (the “Board”), until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series B Preferred Stock.
As a result of the turmoil in the financial markets resulting from the global COVID-19 pandemic, and in order to preserve liquidity, on March 25, 2020, the Company revoked the previously announced first quarter 2020 quarterly cash dividends on each of the Company's common stock and Series B Preferred Stock. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series B Preferred Stock and declared a preferred stock dividend of $0.9375 per share, payable on July 31, 2020 to Series B Preferred stockholders of record as of July 15, 2020.
The following table presents cash dividends declared by the Company on its Series B Preferred Stock from January 1, 2020 through December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | Declaration Date | | Record Date | | Payment Date | | Dividend Per Share |
| 2022 | | November 18, 2022 | | December 5, 2022 | | December 30, 2022 | | $0.46875 |
| | August 22, 2022 | | September 6, 2022 | | September 30, 2022 | | 0.46875 |
| | May 18, 2022 | | June 1, 2022 | | June 30, 2022 | | 0.46875 |
| | February 17, 2022 | | March 1, 2022 | | March 31, 2022 | | 0.46875 |
| | | | | | | | |
| 2021 | | November 16, 2021 | | December 1, 2021 | | December 31, 2021 | | $0.46875 |
| | August 26, 2021 | | September 8, 2021 | | September 30, 2021 | | 0.46875 |
| | May 24, 2021 | | June 7, 2021 | | June 30, 2021 | | 0.46875 |
| | February 19, 2021 | | March 5, 2021 | | March 31, 2021 | | 0.46875 |
| | | | | | | | |
| 2020 | | November 18, 2020 | | December 4, 2020 | | December 31, 2020 | | $0.46875 |
| | August 12, 2020 | | September 8, 2020 | | September 30, 2020 | | 0.46875 |
| | July 1, 2020 | | July 15, 2020 | | July 31, 2020 | | 0.93750 |
| | | | | | | | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”)
On February 28, 2020, the Company amended its charter through the filing of articles supplementary to reclassify 12,650,000 shares of the Company’s authorized but unissued common stock as shares of the Company’s Series C Preferred Stock. On March 2, 2020, the Company completed the issuance of 11.0 million shares of its Series C Preferred Stock with a par value of $0.01 per share, and a liquidation preference of $25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The total net proceeds the Company received from the offering were approximately $266.0 million, after deducting offering expenses and the underwriting discount.
The Company’s Series C Preferred Stock is entitled to receive dividends (i) from and including the original issue date to, but excluding, March 31, 2025, at a fixed rate of 6.50% per year on the $25.00 liquidation preference and (ii) from and including March 31, 2025, at a floating rate equal to three-month London Interbank Offered Rate (“LIBOR”) plus a spread of 5.345% per year of the $25.00 per share liquidation preference before the Company’s common stock is paid any dividends, and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Pursuant to the terms of the Series C Preferred Stock, upon the expected discontinuation of the publication of three-month LIBOR in June 2023, a calculation agent will be appointed to select an industry accepted substitute or successor base rate to the three-month LIBOR rate. The calculation agent may also implement changes to the business day convention, the definition of business day, the dividend determination date, the interest rate spread and the method for obtaining the substitute or successor base rate, in a manner that is consistent with industry accepted practices. In March 2022, Congress enacted a federal statute that provides a safe harbor for those, like the calculation agent, that are contractually responsible for determining LIBOR replacements under certain circumstances, which the Company expects will apply to the Series C Preferred Stock. The Federal Reserve is required to promulgate rules under this statute which, once final, the Company expects will affect the selection of an industry accepted substitute or successor base rate under the terms of the Series C Preferred Stock. Dividends on the Series C Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series C Preferred Stock is not redeemable by the Company prior to March 31, 2025, except under circumstances where it is necessary to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and upon the occurrence of certain specified change in control transactions. On or after March 31, 2025, the Company may, at its option, subject to certain procedural requirements, redeem any or all of the shares of the Series C Preferred Stock for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date.
The Series C Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series C Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series C Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series C Preferred Stock.
Pursuant to the now-terminated forbearance agreements that the Company had previously entered into in the second quarter of 2020, the Company was prohibited from paying dividends on its Series C Preferred Stock during the forbearance period. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series C Preferred Stock and declared a preferred stock dividend of $0.53264 per share, payable on July 31, 2020 to the Series C Preferred stockholders of record as of July 15, 2020. Upon payment of this dividend, the Company paid in full all accumulated but previously unpaid dividends on its Series C Preferred Stock.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents cash dividends declared by the Company on its Series C Preferred Stock from January 1, 2020 through December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | Declaration Date | | Record Date | | Payment Date | | Dividend Per Share |
| 2022 | | November 18, 2022 | | December 5, 2022 | | December 30, 2022 | | $0.40625 |
| | August 22, 2022 | | September 6, 2022 | | September 30, 2022 | | 0.40625 |
| | May 18, 2022 | | June 1, 2022 | | June 30, 2022 | | 0.40625 |
| | February 17, 2022 | | March 1, 2022 | | March 31, 2022 | | 0.40625 |
| | | | | | | | |
| 2021 | | November 16, 2021 | | December 1, 2021 | | December 31, 2021 | | $0.40625 |
| | August 26, 2021 | | September 8, 2021 | | September 30, 2021 | | 0.40625 |
| | May 24, 2021 | | June 7, 2021 | | June 30, 2021 | | 0.40625 |
| | February 19, 2021 | | March 5, 2021 | | March 31, 2021 | | 0.40625 |
| | | | | | | | |
| 2020 | | November 18, 2020 | | December 4, 2020 | | December 31, 2020 | | $0.40625 |
| | August 12, 2020 | | September 8, 2020 | | September 30, 2020 | | 0.40625 |
| | July 1, 2020 | | July 15, 2020 | | July 31, 2020 | | 0.53264 |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(b) Dividends on Common Stock
The following table presents cash dividends declared by the Company on its common stock from January 1, 2020 through December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | Declaration Date | | Record Date | | Payment Date | | Dividend Per Share | |
| 2022 | | December 14, 2022 | | December 30, 2022 | | January 31, 2023 | | $0.350 | (1) |
| | September 13, 2022 | | September 30, 2022 | | October 31, 2022 | | 0.440 | |
| | June 15, 2022 | | June 30, 2022 | | July 29, 2022 | | 0.440 | |
| | March 11, 2022 | | March 22, 2022 | | April 29, 2022 | | 0.440 | (2) |
| | | | | | | | | |
| 2021 | | December 14, 2021 | | December 31, 2021 | | January 31, 2022 | | $0.440 | (3)(4) |
| | September 15, 2021 | | September 30, 2021 | | October 29, 2021 | | 0.400 | (3) |
| | June 15, 2021 | | June 30, 2021 | | July 30, 2021 | | 0.400 | (3) |
| | March 12, 2021 | | March 31, 2021 | | April 30, 2021 | | 0.300 | (3) |
| | | | | | | | | |
| 2020 | | December 17, 2020 | | December 30, 2020 | | January 29, 2021 | | $0.300 | (5)(6) |
| | August 6, 2020 | | September 30, 2020 | | October 30, 2020 | | 0.200 | (5) |
| | | | | | | | | |
| | | | | | | | | |
(1)At December 31, 2022, the Company had accrued dividends and dividend equivalents payable of $35.8 million related to the common stock dividend declared on December 14, 2022. This dividend will be subject to taxation in 2023 for the recipient. For more information see the Company’s 2022 Dividend Tax Information on its website.
(2)The $0.44 per share dividend declared on March 11, 2022, has been adjusted to reflect the Reverse Stock Split; the amount actually paid in respect of such dividend was $0.11 per share, which was based on the pre-split number of shares held by stockholders at the record date for such dividend (March 22, 2022).
(3)The $0.44, $0.40, $0.40 and $0.30 per share dividend amounts for the three months ended December 31, 2021, September 30, 2021, June 30, 2021 and March 31, 2021, respectively, have been adjusted to reflect the Company’s one-for-four reverse stock split effected on April 4, 2022; the dividends actually paid in respect of such dividends were $0.11, $0.10, $0.10 and $0.075 per share, respectively, which were based on the pre-split number of shares held by stockholders at the record dates for such dividends (December 31, 2021, September 30, 2021, June 30, 2021, and March 31, 2021, respectively).
(4)At December 31, 2021, the Company had accrued dividends and dividend equivalents payable of $47.8 million related to the common stock dividend declared on December 14, 2021. This dividend was considered taxable income to the recipient in 2022. For more information see the Company’s 2021 Dividend Tax Information on its website
(5)The $0.30 and $.20 per share dividend amounts for the three months ended December 31, 2020 and September 30, 2020, respectively, have been adjusted to reflect the Company’s one-for-four reverse stock split effected on April 4, 2022; the dividends actually paid in respect of such dividends were $0.075 and $0.05 per share, respectively, which were based on the pre-split number of shares held by stockholders at the record dates for such dividends (December 30, 2020 and September 30, 2020, respectively).
(6)At December 31, 2020, we had accrued dividends and dividend equivalents payable of $34.0 million related to the common stock dividend declared on December 17, 2020. This dividend was considered taxable income to the recipient in 2021. For more information see the Company’s 2020 Dividend Tax Information on its website.
In general, the Company’s common stock dividends have been characterized as ordinary income to its stockholders for income tax purposes. However, a portion of the Company’s common stock dividends may, from time to time, be characterized as capital gains or return of capital. For the year ended December 31, 2022, the portion of the Company’s common stock dividends paid during the year deemed to be a return of capital was $1.76 per share of common stock. For the year ended December 31, 2021, the portion of the Company’s common stock dividends paid during the year deemed to be a return of capital was $1.0512 per share of common stock. For the year ended December 31, 2020, the portion of the Company’s common stock dividends paid during the year deemed to be a return of capital was $0.20 per share of common stock.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(c) Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (“DRSPP”)
On September 27, 2022, the Company filed a shelf registration statement on Form S-3 with the SEC under the Securities Act of 1933, as amended (the “Securities Act”), for the purpose of registering common stock for sale through its DRSPP. Pursuant to Rule 462(e) under the Securities Act, this shelf registration statement became effective automatically upon filing with the SEC and, registered an aggregate of 2.0 million shares of common stock. The Company’s DRSPP is designed to provide existing stockholders and new investors with a convenient and economical way to purchase shares of common stock through the automatic reinvestment of dividends and/or optional cash investments. At December 31, 2022, approximately 2.0 million shares of common stock remained available for issuance pursuant to the DRSPP shelf registration statement.
During the years ended December 31, 2022, 2021 and 2020, the Company issued 80,027, 107,925 and 58,909 shares of common stock through the DRSPP, raising net proceeds of approximately $1.2 million, $1.9 million and $1.0 million, respectively. From the inception of the DRSPP in September 2003 through December 31, 2022, the Company issued 8,841,553 shares pursuant to the DRSPP, raising net proceeds of $290.7 million.
(d) At-the-Market Offering Program
On August 16, 2019, the Company entered into a three-year distribution agreement under the terms of which the Company had the ability to offer and sell shares of its common stock having an aggregate gross sales price of up to $400.0 million, from time to time, through various sales agents, pursuant to an at-the-market equity offering program (the “ATM Program”).
During the years ended December 31, 2022, 2021 and 2020, the Company did not sell any shares of common stock through the ATM Program, and the ATM Program expired in August 2022.
(e) Stock Repurchase Program
On March 11, 2022, the Company’s Board authorized a stock repurchase program under which the Company may repurchase up to $250 million of its common stock through the end of 2023. The Board’s authorization superseded and replaced the authorization under prior stock repurchase program that had been adopted in November 2020, which also authorized the Company to repurchase up to $250 million.
The stock repurchase program does not require the purchase of any minimum number of shares. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. Acquisitions under the stock repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means, in accordance with applicable securities laws (including, in the Company’s discretion, through the use of one or more plans adopted under Rule 10b5-1 promulgated under the Exchange Act of 1934, as amended (the “Exchange Act”)).
During the years ended December 31, 2022, 2021 and 2020, the Company repurchased 6,476,746, 5,025,374 and 3,521,420 shares of its common stock through the stock repurchase program at an average cost of $15.80, $17.04 and $14.44 per share and a total cost of approximately $102.1 million, $85.6 million and $50.8 million, net of fees and commissions paid to the sales agent of approximately $161,000, $201,000 and $141,000, respectively. In addition, as discussed further below, during the year ended December 31, 2020 the Company repurchased 4,398,394, warrants for $33.7 million that were included in the stock repurchase program. As of December 31, 2022, the Company was permitted to purchase an additional $202.5 million of its common stock under the stock repurchase program.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
(f) Warrants
On June 15, 2020, the Company entered into an Investment Agreement with Apollo and Athene (together the “Purchasers”), under which the Company agreed to issue to the Purchasers warrants (the “Warrants”) to purchase, in the aggregate, 9,259,777 shares (subject to adjustment in accordance with their terms) of the Company’s common stock. One half of the Warrants had an exercise price of $6.64 per share and the other half had an exercise price of $8.32 per share. The Investment Agreement and the Term Loan Facility (see Note 6) were entered into simultaneously, and the $495.0 million of proceeds received were allocated between the debt ($481.0 million) and the Warrants ($14.0 million). The amount allocated to the Warrants was recorded in Additional paid-in capital on the Company’s consolidated balance sheets.
During the fourth quarter of 2020, the Company repurchased, for $33.7 million, approximately 48% of the Warrants that were issued to the Purchasers. The remaining Warrants were exercised by the Purchasers later in the fourth quarter of 2020, resulting in the Company issuing approximately 3.1 million shares of common stock and receiving $6.5 million in cash.
(g) Accumulated Other Comprehensive Income/(Loss)
The following tables present changes in the balances of each component of the Company’s AOCI for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
| (In Thousands) | | Net Unrealized
Gain/(Loss) on
AFS Securities | | Net
Gain/(Loss)
on Swaps | | Net Unrealized Gain/(Loss) on Financing Agreements (1) | | Total
AOCI |
| Balance at beginning of period | | $ | 46,833 | | | $ | — | | | $ | (1,255) | | | $ | 45,578 | |
| OCI before reclassifications | | (25,492) | | | — | | | 1,255 | | | (24,237) | |
Amounts reclassified from AOCI (2) | | — | | | — | | | — | | | — | |
Net OCI during the period (3) | | (25,492) | | | — | | | 1,255 | | | (24,237) | |
| Balance at end of period | | $ | 21,341 | | | $ | — | | | $ | — | | | $ | 21,341 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| (In Thousands) | | Net Unrealized
Gain/(Loss) on
AFS Securities | | Net
Gain/(Loss)
on Swaps | | Net Unrealized Gain/(Loss) on Financing Agreements (1) | | Total
AOCI |
| Balance at beginning of period | | $ | 79,607 | | | $ | — | | | $ | (2,314) | | | $ | 77,293 | |
| OCI before reclassifications | | (32,774) | | | — | | | 1,059 | | | (31,715) | |
Amounts reclassified from AOCI (2) | | — | | | — | | | — | | | — | |
Net OCI during the period (3) | | (32,774) | | | — | | | 1,059 | | | (31,715) | |
| Balance at end of period | | $ | 46,833 | | | $ | — | | | $ | (1,255) | | | $ | 45,578 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| (In Thousands) | | Net Unrealized
Gain/(Loss) on
AFS Securities | | Net
Gain/(Loss)
on Swaps | | Net Unrealized Gain/(Loss) on Financing Agreements (1) | | Total
AOCI |
| Balance at beginning of period | | $ | 392,722 | | | $ | (22,675) | | | $ | — | | | $ | 370,047 | |
| OCI before reclassifications | | 420,281 | | | (50,127) | | | (2,314) | | | 367,840 | |
Amounts reclassified from AOCI (2) | | (733,396) | | | 72,802 | | | — | | | (660,594) | |
Net OCI during the period (3) | | (313,115) | | | 22,675 | | | (2,314) | | | (292,754) | |
| Balance at end of period | | $ | 79,607 | | | $ | — | | | $ | (2,314) | | | $ | 77,293 | |
(1)Net Unrealized Gain/(Loss) on Financing Agreements at Fair Value due to changes in instrument-specific credit risk.
(2)See separate table below for details about these reclassifications.
(3)For further information regarding changes in OCI, see the Company’s consolidated statements of comprehensive income/(loss).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents information about the significant amounts reclassified out of the Company’s AOCI for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | |
| Details about AOCI Components | | Amounts Reclassified from AOCI | | Affected Line Item in the Statement
Where Net Income is Presented |
| (In Thousands) | | | | | | | | |
| AFS Securities: | | | | | | | | |
| Realized gain on sale of securities | | $ | — | | | $ | — | | | $ | (389,127) | | | Net realized (loss)/gain on sale of securities and residential whole loans |
| Impairment recognized in earnings | | — | | | — | | | (344,269) | | | Other, net |
| Total AFS Securities | | $ | — | | | $ | — | | | $ | (733,396) | | | |
| Swaps designated as cash flow hedges: | | | | | | | | |
| Amortization of de-designated hedging instruments | | — | | | — | | | 72,802 | | | Other, net |
| Total Swaps designated as cash flow hedges | | $ | — | | | $ | — | | | $ | 72,802 | | | |
| Total reclassifications for period | | $ | — | | | $ | — | | | $ | (660,594) | | | |
11. EPS Calculation
The following table presents a reconciliation of the (loss)/earnings and shares used in calculating basic and diluted (loss)/earnings per share for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands, Except Per Share Amounts) | | 2022 | | 2021 | | 2020 |
| Basic (Loss)/Earnings per Share: | | | | | | |
| Net (loss)/income to common stockholders | | $ | (231,581) | | | $ | 328,870 | | | $ | (679,390) | |
| Dividends declared on preferred stock | | (32,875) | | | (32,875) | | | (29,796) | |
| Dividends, dividend equivalents and undistributed earnings allocated to participating securities | | (627) | | | (1,044) | | | (229) | |
| Net (loss)/income to common stockholders - basic | | $ | (265,083) | | | $ | 294,951 | | | $ | (709,415) | |
| Basic weighted average common shares outstanding | | 103,153 | | | 110,704 | | | 113,008 | |
| Basic (Loss)/Earnings per Share | | $ | (2.57) | | | $ | 2.66 | | | $ | (6.28) | |
| | | | | | |
| Diluted (Loss)/Earnings per Share: | | | | | | |
| Net (loss)/income to common stockholders - basic | | $ | (265,083) | | | $ | 294,951 | | | $ | (709,415) | |
| Dividends, dividend equivalents and undistributed earnings allocated to participating securities | | — | | | 1,044 | | | — | |
| Interest expense on Convertible Senior Notes | | — | | | 15,668 | | | — | |
| Net (loss)/income to common stockholders - diluted | | $ | (265,083) | | | $ | 311,663 | | | $ | (709,415) | |
| Basic weighted average common shares outstanding | | 103,153 | | | 110,704 | | | 113,008 | |
| Unvested and vested restricted stock units | | — | | | 757 | | | — | |
| Effect of assumed conversion of Convertible Senior Notes to common shares | | — | | | 7,230 | | | — | |
Diluted weighted average common shares outstanding (1) | | 103,153 | | | 118,691 | | | 113,008 | |
| Diluted (Loss)/Earnings per Share | | $ | (2.57) | | | $ | 2.63 | | | $ | (6.28) | |
(1)At December 31, 2022, the Company had approximately 1.7 million equity instruments outstanding that were excluded in the calculation of diluted EPS for the year ended December 31, 2022. These equity instruments reflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $16.86. These equity instruments may have a dilutive impact on future EPS.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
During the year ended December 31, 2022, the Convertible Senior Notes were determined to be anti-dilutive and were excluded from the calculation of diluted EPS under the “if-converted” method. Under this method, the periodic interest expense for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether the conversion option is in or out of the money) are included in the denominator for the purpose of calculating diluted EPS. The Convertible Senior Notes may have a dilutive impact on future EPS.
12. Equity Compensation and Other Benefit Plans
(a) Equity Compensation Plan
In accordance with the terms of the Company’s Equity Plan, which was adopted by the Company’s stockholders on June 10, 2020 (and which amended and restated the Company’s 2010 Equity Compensation Plan), directors, officers and employees of the Company and any of its subsidiaries and other persons expected to provide significant services for the Company and any of its subsidiaries are eligible to receive grants of stock options (“Options”), restricted stock, RSUs, dividend equivalent rights and other stock-based awards under the Equity Plan.
Subject to certain exceptions, stock-based awards relating to a maximum of 4.5 million shares of common stock may be granted under the Equity Plan; forfeitures and/or awards that expire unexercised do not count toward this limit. At December 31, 2022, approximately 2.1 million shares of common stock remained available for grant in connection with stock-based awards under the Equity Plan. A participant may generally not receive stock-based awards in excess of 500,000 shares of common stock in any one year and no award may be granted to any person who, assuming exercise of all Options and payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock. Unless previously terminated by the Board, awards may be granted under the Equity Plan until June 10, 2030.
Restricted Stock Units
Under the terms of the Equity Plan, RSUs are instruments that provide the holder with the right to receive, subject to the satisfaction of conditions set by the Compensation Committee at the time of grant, a payment of a specified value, which may be a share of the Company’s common stock, the fair market value of a share of the Company’s common stock, or such fair market value to the extent in excess of an established base value, on the applicable settlement date. Although the Equity Plan permits the Company to issue RSUs that can settle in cash, all of the Company’s outstanding RSUs as of December 31, 2022 are designated to be settled in shares of the Company’s common stock. All RSUs outstanding at December 31, 2022 may be entitled to receive dividend equivalent payments depending on the terms and conditions of the award either in cash at the time dividends are paid by the Company, or for certain time-based and performance-based RSU awards, as a grant of stock at the time such awards are settled. At December 31, 2022 and 2021, the Company had unrecognized compensation expense of $11.2 million and $12.3 million, respectively, related to RSUs. The unrecognized compensation expense at December 31, 2022 is expected to be recognized over a weighted average period of 1.6 years.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents information with respect to the Company’s RSUs during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2022 |
| RSUs With
Service
Condition | | Weighted
Average
Grant Date
Fair Value | | RSUs With
Market and
Service
Conditions | | Weighted
Average
Grant Date
Fair Value | | Total
RSUs | | Total
Weighted
Average
Grant Date
Fair Value |
| Outstanding at beginning of year: | 712,160 | | | $ | 20.22 | | | 905,708 | | | $ | 17.14 | | | 1,617,868 | | | $ | 18.50 | |
Granted (1) | 296,379 | | | 17.19 | | | 381,397 | | | 16.04 | | | 677,776 | | | 16.54 | |
| Settled | (66,125) | | | 29.56 | | | (112,752) | | | 27.86 | | | (178,877) | | | 28.49 | |
| Cancelled/forfeited | (21,106) | | | 17.63 | | | (35,858) | | | 15.56 | | | (56,964) | | | 16.33 | |
| Outstanding at end of year | 921,308 | | | $ | 18.63 | | | 1,138,495 | | | $ | 15.76 | | | 2,059,803 | | | $ | 17.04 | |
| RSUs vested but not settled at end of year | 394,996 | | | $ | 20.67 | | | 190,800 | | | $ | 21.98 | | | 585,796 | | | $ | 21.10 | |
| RSUs unvested at end of year | 526,312 | | | $ | 17.10 | | | 947,695 | | | $ | 14.51 | | | 1,474,007 | | | $ | 15.43 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 |
| | RSUs With
Service
Condition | | Weighted
Average
Grant Date
Fair Value | | RSUs With
Market and
Service
Conditions | | Weighted
Average
Grant Date
Fair Value | | Total
RSUs | | Total
Weighted
Average
Grant Date
Fair Value |
| Outstanding at beginning of year: | 457,376 | | | $ | 24.76 | | | 405,806 | | | $ | 25.03 | | | 863,182 | | | $ | 24.89 | |
Granted (2) | 379,281 | | | 16.63 | | | 602,156 | | | 13.60 | | | 981,437 | | | 14.77 | |
| Settled | (124,497) | | | 25.98 | | | (102,254) | | | 27.62 | | | (226,751) | | | 26.72 | |
| Cancelled/forfeited | — | | | — | | | — | | | — | | | — | | | — | |
| Outstanding at end of year | 712,160 | | | $ | 20.22 | | | 905,708 | | | $ | 17.14 | | | 1,617,868 | | | $ | 18.50 | |
| RSUs vested but not settled at end of year | 285,734 | | | $ | 20.89 | | | 112,752 | | | $ | 27.86 | | | 398,486 | | | $ | 22.86 | |
| RSUs unvested at end of year | 426,426 | | | $ | 19.77 | | | 792,956 | | | $ | 15.62 | | | 1,219,382 | | | $ | 17.07 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 |
| | RSUs With
Service
Condition | | Weighted
Average
Grant Date
Fair Value | | RSUs With
Market and
Service
Conditions | | Weighted
Average
Grant Date
Fair Value | | Total
RSUs | | Total
Weighted
Average
Grant Date
Fair Value |
| Outstanding at beginning of year: | 344,933 | | | $ | 30.47 | | | 325,332 | | | $ | 27.13 | | | 670,265 | | | $ | 28.85 | |
Granted (3) | 234,765 | | | 19.54 | | | 190,800 | | | 21.98 | | | 425,565 | | | 20.63 | |
| Settled | (94,822) | | | 30.99 | | | (110,326) | | | 25.93 | | | (205,148) | | | 28.27 | |
| Cancelled/forfeited | (27,500) | | | 30.36 | | | — | | | — | | | (27,500) | | | 30.36 | |
| Outstanding at end of year | 457,376 | | | $ | 24.76 | | | 405,806 | | | $ | 25.03 | | | 863,182 | | | $ | 24.89 | |
| RSUs vested but not settled at end of year | 290,115 | | | $ | 21.49 | | | 102,254 | | | $ | 27.62 | | | 392,369 | | | $ | 23.09 | |
| RSUs unvested at end of year | 167,261 | | | $ | 30.43 | | | 303,552 | | | $ | 24.16 | | | 470,813 | | | $ | 26.39 | |
(1)The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 603,525 of these awards granted in 2022, the Company applied: (i) a weighted average volatility estimate of approximately 50%, which was determined considering historic volatility in the price of the Company’s and its peer group companies common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 1.04% based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards, respectively. The weighted average grant date fair value for the remaining 74,251 awards with a service condition only was estimated
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
based on the closing price of the Company’s common stock at the grant date of $13.67. All of the 381,397 RSUs granted in 2022, the vesting of which is subject to both market and service conditions, are also subject to a one-year post-vesting holding requirement prior to settlement. There is no post vesting holding requirement on the 296,379 RSUs granted in 2022 the vesting of which is subject to a service condition only.
(2)The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 621,312 and 306,134 of these awards granted in 2021, the Company applied: (i) a weighted average volatility estimate of approximately 48% and 54%, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three and 2.5-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 0.17% and 0.36% based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards, respectively. The weighted average grant date fair value for the remaining 53,991 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $18.80. All of the 602,156 RSUs with market and service conditions granted in 2021 are subject to a one-year post-vesting holding requirement. There are no post vesting conditions on the 379,281 RSUs with service conditions granted in 2021.
(3)The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 301,186 of these awards granted in 2020, the Company applied: (i) a weighted average volatility estimate of approximately 14%, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 1.36% based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards. The weighted average grant date fair value for the remaining 113,148 and 11,231 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $9.28 and $10.24, respectively. There are no post vesting conditions on these awards.
Restricted Stock
At December 31, 2022 and 2021, the Company did not have any unvested shares of restricted common stock outstanding, and no restricted shares vested during the years ended December 31, 2022 and 2021, respectively. The total fair value of restricted shares vested during the year ended December 31, 2020. was approximately $131,000.
The following table presents information with respect to the Company’s restricted stock for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Shares of
Restricted
Stock | | Weighted Average Grant Date Fair Value (1) | | Shares of
Restricted
Stock | | Weighted Average Grant Date Fair Value (1) | | Shares of
Restricted
Stock | | Weighted Average Grant Date Fair Value (1) |
| Outstanding at beginning of year: | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | |
| Granted | — | | | — | | | — | | | — | | | 19,888 | | | 6.60 | |
Vested (2) | — | | | — | | | — | | | — | | | (19,888) | | | 6.60 | |
| Cancelled/forfeited | — | | | — | | | — | | | — | | | — | | | — | |
| Outstanding at end of year | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | |
(1) The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock at the grant date.
(2) All restrictions associated with restricted stock are removed on vesting.
Dividend Equivalents
A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Equity Plan, and they are paid typically in cash or other consideration at such times and in accordance with such rules, as the Compensation Committee of the Board shall determine in its discretion. Dividend equivalent payments are generally charged to Stockholders’ Equity when common stock dividends are declared to the extent that such equivalents are expected to vest. The Company made dividend equivalent payments associated with RSU
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
awards of approximately $659,000, $566,000, and $367,000 during the years ended December 31, 2022, 2021 and 2020, respectively. In addition, no dividend equivalents rights awarded as separate instruments were granted during the years ended December 31, 2022, 2021 and 2020.
Expense Recognized for Equity-Based Compensation Instruments
The following table presents the Company’s expenses related to its equity-based compensation instruments for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| RSUs | | $ | 11,338 | | | $ | 9,043 | | | $ | 6,592 | |
| Restricted shares of common stock | | — | | | — | | | 131 | |
| Total | | $ | 11,338 | | | $ | 9,043 | | | $ | 6,723 | |
(b) Deferred Compensation Plans
The Company administers deferred compensation plans for its senior officers and non-employee directors (collectively, the “Deferred Plans”), pursuant to which participants may elect to defer up to 100% of certain cash compensation. The Deferred Plans are designed to align participants’ interests with those of the Company’s stockholders.
Amounts deferred under the Deferred Plans are considered to be converted into “stock units” of the Company. Stock units do not represent stock of the Company, but rather are a liability of the Company that changes in value as would equivalent shares of the Company’s common stock. Deferred compensation liabilities are settled in cash at the termination of the deferral period, based on the value of the stock units at that time. The Deferred Plans are non-qualified plans under the Employee Retirement Income Security Act of 1974 and, as such, are not funded. Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company.
The Company’s liability for stock units in the Deferred Plans is based on the market price of the Company’s common stock at the measurement date. The following table presents the Company’s expenses related to its Deferred Plans for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 | | 2020 |
| Non-employee directors | | $ | (1,133) | | | $ | 537 | | | $ | (911) | |
| Total | | $ | (1,133) | | | $ | 537 | | | $ | (911) | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The Company distributed cash of approximately $53,000 to the participants of the Deferred Plans during the year ended December 31, 2022. The Company did not distribute cash to the participants of the Deferred Plans during the year ended December 31, 2021. The Company distributed cash of $769,400 to the participants of the Deferred Plans during the year ended December 31, 2020.
The following table presents the aggregate amount of income deferred by participants of the Deferred Plans through December 31, 2022 and 2021 that had not been distributed and the Company’s associated liability for such deferrals at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| (In Thousands) | | Undistributed Income Deferred (1) | | Liability Under
Deferred Plans | | Undistributed Income Deferred (1) | | Liability Under
Deferred Plans |
| Non-employee directors | | $ | 2,923 | | | $ | 1,953 | | | $ | 2,687 | | | $ | 2,836 | |
| Total | | $ | 2,923 | | | $ | 1,953 | | | $ | 2,687 | | | $ | 2,836 | |
(1)Represents the cumulative amounts that were deferred by participants through December 31, 2022 and 2021, which had not been distributed through such respective date.
(c) Savings Plan
The Company sponsors a tax-qualified employee savings plan (the “Savings Plan”) in accordance with Section 401(k) of the Code. Subject to certain restrictions, all of the Company’s employees are eligible to make tax-deferred contributions to the Savings Plan subject to limitations under applicable law. Participant’s accounts are self-directed and the Company bears the costs of administering the Savings Plan. The Company matches 100% of the first 3% of eligible compensation deferred by employees and 50% of the next 2%, subject to a maximum as provided by the Code. The Company has elected to operate the Savings Plan under the applicable safe harbor provisions of the Code, whereby among other things, the Company must make contributions for all participating employees and all matches contributed by the Company immediately vest 100%. For the years ended December 31, 2022, 2021 and 2020, the Company recognized expenses for matching contributions of $1.3 million, $697,000 and $480,000, respectively.
13. Fair Value of Financial Instruments
GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:
Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Residential Whole Loans, at Fair Value
The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy; however, the Company determined that the market inputs used in valuing its Agency eligible investor loans were sufficiently observable to be classified as Level 2.
Securities, at Fair Value
Term Notes Backed by MSR-Related Collateral
The Company’s valuation process for term notes backed by MSR-related collateral is similar to that used for other residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. Based on its evaluation of the observability of the data used in its fair value estimation process, these assets are classified as Level 2 in the fair value hierarchy.
Other Residential Mortgage Securities (including short positions in TBA securities)
In determining the fair value of the Company’s other residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Valuations of TBA securities positions are based on executed levels for positions entered into and subsequently rolled forward, as well as prices obtained from pricing services for outstanding positions at each reporting date. These valuations are assessed for reasonableness by considering market TBA levels observed via Bloomberg for the same coupon and term to maturity. In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available.
The Company’s residential mortgage securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters. Accordingly, these securities are classified as Level 2 in the fair value hierarchy.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Financing Agreements, at Fair Value
Agreements with mark-to-market collateral provisions
These agreements are secured and subject to margin calls and their base interest rates reset frequently to market based rates. As a result, no credit valuation adjustment is required, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with mark-to-market collateral provisions held at fair value are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are typically longer term and are collateralized by residential whole loans where the credit spread paid over the base rate on the instrument is not reset frequently are classified as Level 3 in the fair value hierarchy.
Agreements with non-mark-to-market collateral provisions
These agreements are secured, but not subject to margin calls, and their base interest rates reset frequently to market based rates. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy.
Securitized Debt
In determining the fair value of securitized debt, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Accordingly, the Company’s securitized debt is classified as Level 2 in the fair value hierarchy.
Swaps
Variation margin payments on the Company’s Swaps are treated as a legal settlement of the exposure under the related Swap contract, the effect of which reduces what would have otherwise been reported as the fair value of the Swap, generally to zero.
Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations. The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve. The methods described above may produce fair value estimates that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those used by market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced. The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2022 and 2021, on the consolidated balance sheets by the valuation hierarchy, as previously described:
Fair Value at December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Residential whole loans, at fair value | | $ | — | | | $ | 51,094 | | | $ | 5,676,430 | | | $ | 5,727,524 | |
| Securities, at fair value | | — | | | 333,364 | | | — | | | 333,364 | |
| Total assets carried at fair value | | $ | — | | | $ | 384,458 | | | $ | 5,676,430 | | | $ | 6,060,888 | |
| Liabilities: | | | | | | | | |
| Agreements with non-mark-to-market collateral provisions | | $ | — | | | $ | — | | | $ | 578,879 | | | $ | 578,879 | |
| Agreements with mark-to-market collateral provisions | | — | | | — | | | 884,495 | | | 884,495 | |
| Securitized debt | | — | | | 2,435,370 | | | — | | | 2,435,370 | |
| Total liabilities carried at fair value | | $ | — | | | $ | 2,435,370 | | | $ | 1,463,374 | | | $ | 3,898,744 | |
Fair Value at December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In Thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Residential whole loans, at fair value | | $ | — | | | $ | 1,082,765 | | | $ | 4,222,584 | | | $ | 5,305,349 | |
| Securities, at fair value | | — | | | 256,685 | | | — | | | 256,685 | |
| Total assets carried at fair value | | $ | — | | | $ | 1,339,450 | | | $ | 4,222,584 | | | $ | 5,562,034 | |
| Liabilities: | | | | | | | | |
| Agreements with non-mark-to-market collateral provisions | | $ | — | | | $ | — | | | $ | 1,322,362 | | | $ | 1,322,362 | |
| Agreements with mark-to-market collateral provisions | | — | | | — | | | 628,280 | | | 628,280 | |
| Securitized debt | | — | | | 1,316,131 | | | — | | | 1,316,131 | |
| Total liabilities carried at fair value | | $ | — | | | $ | 1,316,131 | | | $ | 1,950,642 | | | $ | 3,266,773 | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents additional information for the years ended December 31, 2022 and 2021 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:
| | | | | | | | | | | | | | |
| | Residential Whole Loans, at Fair Value |
| | For the Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 |
| Balance at beginning of period | | $ | 4,222,584 | | | $ | 1,216,902 | |
| Purchases and originations | | 2,749,275 | | | 4,367,423 | |
| Draws | | 361,035 | | | 53,599 | |
| Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings | | (668,899) | | | 16,243 | |
| Repayments | | (925,773) | | | (295,790) | |
| Sales and repurchases | | (10,496) | | | (2,023) | |
| Transfer to REO | | (51,296) | | | (51,005) | |
Transfer to Level 2 (1) | | — | | | (1,082,765) | |
| Balance at end of period | | $ | 5,676,430 | | | $ | 4,222,584 | |
(1)The Company determined that the market inputs used in valuing its Agency eligible investor loans were sufficiently observable to be classified as Level 2 beginning in 2021.
The following table presents additional information for the years ended December 31, 2022 and 2021 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
| | | | | | | | | | | | | | |
| | Agreements with Non-mark-to-market Collateral Provisions |
| | Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 |
| Balance at beginning of period | | $ | 628,280 | | | $ | 1,159,213 | |
| Issuances | | 554,823 | | | — | |
| Payment of principal | | (602,969) | | | (529,874) | |
| Change in unrealized gains | | (1,255) | | | (1,059) | |
| Balance at end of period | | $ | 578,879 | | | $ | 628,280 | |
The following table presents additional information for the years ended December 31, 2022 and 2021 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
| | | | | | | | | | | | | | |
| | Agreements with Mark-to-market Collateral Provisions |
| | Year Ended December 31, |
| (In Thousands) | | 2022 | | 2021 |
| Balance at beginning of period | | $ | 1,322,362 | | | $ | 1,124,162 | |
| Issuances | | 1,153,555 | | | 1,275,265 | |
| Payment of principal | | (1,591,422) | | | (1,077,065) | |
| Balance at end of period | | $ | 884,495 | | | $ | 1,322,362 | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Fair Value Methodology for Level 3 Financial Instruments
Residential Whole Loans, at Fair Value
The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | |
| (Dollars in Thousands) | | Fair Value (1) | | Valuation Technique | | Unobservable Input | | Weighted Average (2) | | Range |
| | | | | | | | | | |
| Purchased Non-Performing Loans | | $ | 546,675 | | | Discounted cash flow | | Discount rate | | 7.0 | % | | 6.3-10.0% |
| | | | | | Prepayment rate | | 8.9 | % | | 0.0-33.5% |
| | | | | | Default rate | | 3.7 | % | | 0.0-52.4% |
| | | | | | Loss severity | | 11.3 | % | | 0.0-100.0% |
| | | | | | | | | | |
| | $ | 249,219 | | | Liquidation model | | Discount rate | | 7.8 | % | | 7.8-7.8% |
| | | | | | Annual change in home prices | | 6.9 | % | | (5.4)-59.7% |
| | | | | | Liquidation timeline
(in years) | | 1.9 | | 0.1-4.5 |
| | | | | | Current value of underlying properties (3) | | $ | 743 | | | $28-$4,000 |
| Total | | $ | 795,894 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | |
| (Dollars in Thousands) | | Fair Value (1) | | Valuation Technique | | Unobservable Input | | Weighted Average (2) | | Range |
| | | | | | | | | | |
| Purchased Non-Performing Loans | | $ | 720,766 | | | Discounted cash flow | | Discount rate | | 3.6 | % | | 1.5-9.8% |
| | | | | | Prepayment rate | | 14.4 | % | | 0.0-44.0% |
| | | | | | Default rate | | 3.9 | % | | 0.0-50.8% |
| | | | | | Loss severity | | 11.7 | % | | 0.0-100.0% |
| | | | | | | | | | |
| | $ | 351,008 | | | Liquidation model | | Discount rate | | 8.0 | % | | 6.7-50.0% |
| | | | | | Annual change in home prices | | 9.7 | % | | 4.5-21.9% |
| | | | | | Liquidation timeline (in years) | | 1.7 | | 0.1-4.5 |
| | | | | | Current value of underlying properties (3) | | $ | 770 | | | $10-$3,995 |
| Total | | $ | 1,071,774 | | | | | | | | | |
(1)Excludes approximately $215,000 and $496,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at December 31, 2022 and 2021, respectively.
(2)Amounts are weighted based on the fair value of the underlying loan.
(3)The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately $457,000 and $421,000 as of December 31, 2022 and 2021, respectively.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| (Dollars in Thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Weighted Average (1) | | Range |
| | | | | | | | | | |
| Purchased Performing Loans | | $ | 4,857,587 | | | Discounted cash flow | | Discount rate | | 7.6 | % | | 5.6-22.7% |
| | | | | | Prepayment rate | | 7.9 | % | | 0.0-44.8% |
| | | | | | Default rate | | 0.8 | % | | 0.0-19.4% |
| | | | | | Loss severity | | 7.3 | % | | 0.0-100.0% |
| | | | | | | | | | |
| | $ | 22,734 | | | Liquidation model | | Discount rate | | 7.8 | % | | 7.8-7.8% |
| | | | | | Annual change in home prices | | 3.2 | % | | (1.0)-10.7% |
| | | | | | Liquidation timeline (in years) | | 1.9 | | 0.8-4.2 |
| | | | | | Current value of underlying properties | | $ | 1,319 | | | $50-$2,850 |
| Total | | $ | 4,880,321 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (Dollars in Thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Weighted Average (1) | | Range |
| | | | | | | | | | |
| Purchased Performing Loans | | $ | 3,142,366 | | | Discounted cash flow | | Discount rate | | 3.9 | % | | 1.4-25.9% |
| | | | | | Prepayment rate | | 19.0 | % | | 0.0-47.2% |
| | | | | | Default rate | | 0.2 | % | | 0.0-17.8% |
| | | | | | Loss severity | | 8.4 | % | | 0.0-10.0% |
| | | | | | | | | | |
| | $ | 7,948 | | | Liquidation model | | Discount rate | | 7.0 | % | | 7.0%-7.0% |
| | | | | | Annual change in home prices | | 6.5 | % | | —%-14.8% |
| | | | | | Liquidation timeline (in years) | | 2.0 | | 0.8-4.2 |
| | | | | | Current value of underlying properties | | $ | 691 | | | $60-$1,750 |
| Total | | $ | 3,150,314 | | | | | | | | | |
(1)Amounts are weighted based on the fair value of the underlying loan.
Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans. Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a lower fair value measurement, whereas increases in the current or expected value of the underlying properties, in isolation, would result in a higher fair value measurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on the overall valuation.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2022 | | December 31, 2021 |
| Level in Fair Value Hierarchy | Carrying
Value | | Estimated Fair Value | Carrying
Value | | Estimated Fair Value |
| (In Thousands) |
| Financial Assets: | | | | | | | | | | |
| Residential whole loans | | 3 | | $ | 7,467,645 | | | $ | 7,397,421 | | | $ | 6,830,235 | | | $ | 6,983,686 | |
Residential whole loans (1) | | 2 | | 51,094 | | | 51,094 | | | 1,082,765 | | | 1,082,765 | |
| Securities, at fair value | | 2 | | 333,364 | | | 333,364 | | | 256,685 | | | 256,685 | |
| Cash and cash equivalents | | 1 | | 334,183 | | | 334,183 | | | 304,696 | | | 304,696 | |
| Restricted cash | | 1 | | 159,898 | | | 159,898 | | | 99,751 | | | 99,751 | |
Financial Liabilities (2): | | | | | | | | | | |
| Financing agreements with non-mark-to-market collateral provisions | | 3 | | 1,003,604 | | | 1,004,260 | | | 939,540 | | | 940,257 | |
| Financing agreements with mark-to-market collateral provisions | | 3 | | 2,111,396 | | | 2,111,647 | | | 2,403,151 | | | 2,403,724 | |
| Financing agreements with mark-to-market collateral provisions | | 2 | | 111,651 | | | 111,651 | | | 159,148 | | | 159,148 | |
Securitized debt (3) | | 2 | | 3,357,590 | | | 3,217,905 | | | 2,650,473 | | | 2,646,203 | |
| Convertible senior notes | | 2 | | 227,845 | | | 211,015 | | | 226,470 | | | 239,292 | |
| | | | | | | | | | |
(1)At December 31, 2021, $654.7 million of Agency eligible investor loans were valued based on the observable prices of related securitized debt.
(2)Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.
(3)Includes securitized debt that is carried at amortized cost basis and fair value.
Other Assets Measured at Fair Value on a Nonrecurring Basis
The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. During the years ended December 31, 2022 and 2021, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $82.9 million and $72.3 million, respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.
In addition, on July 1, 2021, in connection with the Lima One transaction (see Note 15), the Company revalued its previously existing investments in Lima One and recorded a gain of $38.9 million. In connection with the Lima One transaction, all of Lima One’s assets and liabilities were recorded at their estimated fair value.
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
14. Use of Special Purpose Entities and Variable Interest Entities
A Special Purpose Entity (“SPE”) is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying financial assets on improved terms. Securitization involves transferring assets to a SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt or equity instruments. Investors in a SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.
The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the SPEs that were created to facilitate these transactions. See Note 2(p) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with financing transactions.
The Company has engaged in loan securitizations primarily for the purpose of obtaining improved overall financing terms as well as non-recourse financing on a portion of its residential whole loan portfolio. Notwithstanding the Company’s participation in these transactions, the risks facing the Company are largely unchanged as the Company remains economically exposed to the first loss position on the underlying assets transferred to the VIEs.
Loan Securitization Transactions
The following table summarizes the key details of the Company’s loan securitization transactions currently outstanding as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| (Dollars in Thousands) | | December 31, 2022 | | December 31, 2021 | |
| Aggregate unpaid principal balance of residential whole loans sold | | $ | 6,732,609 | | | $ | 3,984,355 | | |
| Face amount of Senior Bonds issued by the VIE and purchased by third-party investors | | $ | 5,333,090 | | | $ | 3,667,790 | | |
| Outstanding amount of Senior Bonds, at carrying value | | $ | 922,220 | | (1) | $ | 1,334,342 | | (1) |
| Outstanding amount of Senior Bonds, at fair value | | $ | 2,435,370 | | | $ | 1,316,131 | | |
| Outstanding amount of Senior Bonds, total | | $ | 3,357,590 | | | $ | 2,650,473 | | |
| Weighted average fixed rate for Senior Bonds issued | | 3.38 | % | (2) | 2.01 | % | (2) |
| Weighted average contractual maturity of Senior Bonds | | 38 years | (2) | 36 years | (2) |
Face amount of Senior Support Certificates received by the Company (3) | | $ | 715,640 | | | $ | 283,930 | | |
| Cash received | | $ | 5,300,681 | | | $ | 3,682,082 | | |
(1)Net of $2.9 million and $6.8 million of deferred financing costs at December 31, 2022 and 2021, respectively.
(2)At December 31, 2022 and 2021, $1.9 billion and $329.0 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by either 100, 200 or 300 basis points or more at defined dates ranging from 30 months, up to 48 months from issuance if the bond is not redeemed before such date.
(3)Provides credit support to the Senior Bonds sold to third-party investors in the securitization transactions.
During the years ended December 31, 2022 and 2021, the Company issued Senior Bonds with a current face of $2.3 billion and $2.4 billion to third-party investors for proceeds of $2.2 billion and $2.4 billion, respectively, before offering costs and accrued interest. The Senior Bonds issued by the Company during the years ended December 31, 2022 and 2021 are included in “Financing agreements, at fair value” (at carrying value) on the Company’s consolidated balance sheets (see Note 6).
As of December 31, 2022 and 2021, as a result of the transactions described above, securitized loans of approximately $4.0 billion and $3.0 billion are included in “Residential whole loans” and REO with a carrying value of approximately $36.5 million and $35.4 million are included in “Other assets” on the Company’s consolidated balance sheets, respectively. As of
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
December 31, 2022 and 2021, the aggregate carrying value of Senior Bonds issued by consolidated VIEs was $3.4 billion and $2.7 billion, respectively. These Senior Bonds are disclosed as “securitized debt” and are included in Financing agreements on the Company’s consolidated balance sheets. The holders of the securitized debt have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets from the VIE upon the breach of certain representations and warranties with respect to the residential whole loans sold to the VIE. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.
The Company concluded that the entities created to facilitate the loan securitization transactions are VIEs. The Company completed an analysis of whether each VIE created to facilitate the securitization transactions should be consolidated by the Company, based on consideration of its involvement in each VIE, including the design and purpose of the SPE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of each VIE. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:
•whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and
•whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.
Based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that it was required to consolidate each VIE created to facilitate the loan securitization transactions.
Residential Whole Loans and REO (including Residential Whole Loans and REO transferred to consolidated VIEs)
Included on the Company’s consolidated balance sheets as of December 31, 2022 and 2021 are a total of $7.5 billion and $7.9 billion, respectively, of residential whole loans. These assets, excluding certain loans originated and held by Lima One, and certain of the Company’s REO assets, are directly owned by certain trusts established by the Company to acquire the loans and entities established in connection with the Company’s loan securitization transactions. The Company has assessed that these entities are required to be consolidated (see Notes 3 and 5(a)).
In addition, as a result of the sale of certain redemption rights in 2022, the SPE’s that held previously securitized Agency eligible investor loans were deconsolidated from the Company’s financial statements, as the Company concluded that it was no longer the primary beneficiary of those SPE’s. This resulted in the de-recognition of Agency eligible investor loans with an unpaid principal balance of $598.0 million and of securitized debt with an unpaid principal balance of $567.2 million. All of the loans and debt were held at fair value. Accordingly, no significant additional gains or losses were recorded on de-recognition.
15. Segment Reporting
At December 31, 2022, the Company’s reportable segments include (i) mortgage-related assets and (ii) Lima One. The Corporate column in the table below primarily consists of corporate cash and related interest income, investments in loan originators and related economics, general and administrative expenses not directly attributable to Lima One, interest expense on unsecured convertible senior notes (Note 6), securitization issuance costs, and preferred stock dividends.
The following tables summarize segment financial information, which in total reconciles to the same data for the Company as a whole. The Company is not presenting comparable segment statements of operations for the year ended December 31, 2020, because the Company did not consolidate Lima One during those periods:
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Thousands) | | Mortgage-Related Assets | | Lima One | | Corporate | | Total |
| Year Ended December 31, 2022 | | | | | | | | |
| Interest Income | | $ | 364,761 | | | $ | 113,134 | | | $ | 4,524 | | | $ | 482,419 | |
| Interest Expense | | 176,725 | | | 66,358 | | | 15,760 | | | 258,843 | |
| Net Interest Income/(Expense) | | $ | 188,036 | | | $ | 46,776 | | | $ | (11,236) | | | $ | 223,576 | |
| Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans | | 2,842 | | | (196) | | | — | | | 2,646 | |
| Provision for Credit Losses on Other Assets | | — | | | — | | | (28,579) | | | (28,579) | |
| Net Interest Income/(Expense) after Reversal of Provision/(Provision) for Credit Losses | | $ | 190,878 | | | $ | 46,580 | | | $ | (39,815) | | | $ | 197,643 | |
| | | | | | | | |
| Net loss on residential whole loans measured at fair value through earnings | | $ | (730,028) | | | $ | (136,734) | | | $ | — | | | $ | (866,762) | |
| Impairment and other net loss on securities and other portfolio investments | | (3,146) | | | — | | | (21,921) | | | (25,067) | |
| Net gain on real estate owned | | 25,348 | | | 31 | | | — | | | 25,379 | |
| Net gain on derivatives used for risk management purposes | | 217,961 | | | 37,218 | | | — | | | 255,179 | |
| Net gain on securitized debt measured at fair value through earnings | | 231,176 | | | 59,463 | | | — | | | 290,639 | |
| Lima One - origination, servicing and other fee income | | — | | | 46,745 | | | — | | | 46,745 | |
| Other, net | | 4,282 | | | 537 | | | 4,478 | | | 9,297 | |
| Total Other (Loss)/Income, net | | $ | (254,407) | | | $ | 7,260 | | | $ | (17,443) | | | $ | (264,590) | |
| | | | | | | | |
| General and administrative expenses (including compensation) | | $ | — | | | $ | 53,185 | | | $ | 59,355 | | | $ | 112,540 | |
| Loan servicing, financing, and other related costs | | 25,384 | | | 1,120 | | | 16,390 | | | 42,894 | |
| Amortization of intangible assets | | — | | | 9,200 | | | — | | | 9,200 | |
| Net Loss | | $ | (88,913) | | | $ | (9,665) | | | $ | (133,003) | | | $ | (231,581) | |
| | | | | | | | |
| Less Preferred Stock Dividend Requirement | | $ | — | | | $ | — | | | $ | 32,875 | | | $ | 32,875 | |
| Net Loss Available to Common Stock and Participating Securities | | $ | (88,913) | | | $ | (9,665) | | | $ | (165,878) | | | $ | (264,456) | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Thousands) | | Mortgage-Related Assets | | Lima One | | Corporate | | Total |
| Year Ended December 31, 2021 | | | | | | | | |
| Interest Income | | $ | 347,863 | | | $ | 14,249 | | | $ | 190 | | | $ | 362,302 | |
| Interest Expense | | 99,905 | | | 4,691 | | | 15,789 | | | 120,385 | |
| Net Interest Income/(Expense) | | $ | 247,958 | | | $ | 9,558 | | | $ | (15,599) | | | $ | 241,917 | |
| Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans | | $ | 44,981 | | | $ | (118) | | | $ | — | | | $ | 44,863 | |
| Net Interest Income/(Expense) after Reversal of Provision/(Provision) for Credit Losses | | $ | 292,939 | | | $ | 9,440 | | | $ | (15,599) | | | $ | 286,780 | |
| | | | | | | | |
| Net (loss)/gain on residential whole loans measured at fair value through earnings | | $ | (2,719) | | | $ | 18,962 | | | $ | — | | | $ | 16,243 | |
| Impairment and other net gain on securities and other portfolio investments | | 1,607 | | | — | | | 72,889 | | | 74,496 | |
| Net gain on real estate owned | | 22,760 | | | 78 | | | — | | | 22,838 | |
| Net gain/(loss) on derivatives used for risk management purposes | | 1,457 | | | (31) | | | — | | | 1,426 | |
| Net gain on securitized debt measured at fair value through earnings | | 14,594 | | | 433 | | | — | | | 15,027 | |
| Lima One - origination, servicing and other fee income | | — | | | 22,600 | | | — | | | 22,600 | |
| Other, net | | 759 | | | 128 | | | 11,586 | | | 12,473 | |
| Total Other Income, net | | $ | 38,458 | | | $ | 42,170 | | | $ | 84,475 | | | $ | 165,103 | |
| | | | | | | | |
| General and administrative expenses (including compensation) | | $ | — | | | $ | 24,140 | | | $ | 61,406 | | | $ | 85,546 | |
| Loan servicing, financing, and other related costs | | 25,250 | | | 436 | | | 5,181 | | | 30,867 | |
| Amortization of intangible assets | | — | | | 6,600 | | | — | | | 6,600 | |
| Net Income | | $ | 306,147 | | | $ | 20,434 | | | $ | 2,289 | | | $ | 328,870 | |
| | | | | | | | |
| Less Preferred Stock Dividend Requirement | | $ | — | | | $ | — | | | $ | 32,875 | | | $ | 32,875 | |
| Net Income/(Loss) Available to Common Stock and Participating Securities | | $ | 306,147 | | | $ | 20,434 | | | $ | (30,586) | | | $ | 295,995 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Thousands) | | Mortgage-Related Assets | | Lima One | | Corporate | | Total |
| December 31, 2022 | | | | | | | | |
| Total Assets | | $ | 6,065,557 | | | $ | 2,618,695 | | | $ | 428,153 | | | $ | 9,112,405 | |
| | | | | | | | |
| December 31, 2021 | | | | | | | | |
| Total Assets | | $ | 7,567,084 | | | $ | 1,200,737 | | | $ | 371,867 | | | $ | 9,139,688 | |
Lima One Segment
On July 1, 2021, the Company completed the acquisition from affiliates of Magnetar Capital of their ownership interests in Lima One Holdings, LLC, the parent company of Lima One Capital, LLC (collectively, “Lima One”), a leading originator and servicer of business purpose loans. In connection with this transaction, the Company also acquired from certain members of management of Lima One their ownership interests in Lima One Holdings, LLC. With the completion of these transactions (collectively, “the transaction”), the Company acquired the remaining approximately 57% of the common equity interests of Lima One that it did not previously own, for cash consideration of $57.3 million and $4.7 million of restricted stock unit awards issued to certain members of the Lima One management team. As a result of these transactions, the Company gained control of 100% of the ownership interests in Lima One and was required to consolidate its financial results from that date.
The transaction is accounted for under the purchase method of accounting. Under purchase accounting, the purchase
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
consideration to acquire Lima One is defined as the cash paid to acquire the approximately 57% of the common equity interests not previously owned and the estimated fair value of the previously owned approximately 43% common equity interest. Further, under purchase accounting, the Company was required to revalue the previously owned common equity interest to fair value. At the time of the revaluation, the previously owned common equity interest had a carrying value of $5.6 million (net of a $21.0 million impairment charge that was recorded in the first quarter of 2020). Consequently, the revaluation resulted in the Company recording a gain of $38.9 million that is presented in Other income in the Company’s consolidated statement of operations for the year ended December 31, 2021. Accordingly, under the purchase method of accounting, the purchase consideration allocated was $101.7 million. The restricted stock awards issued are not included in the purchase consideration as it was determined that they should be accounted for as compensation expense for post-combination services.
Additionally, concurrent with the closing of the transaction, the Company injected additional capital that facilitated the repayment by Lima One of $47.4 million of outstanding preferred equity interests, of which $22.0 million were held by the Company prior to closing. As the Company had previously recorded an impairment write-down on its investment in Lima One’s preferred equity that was repaid in connection with the transaction, the Company recorded a gain of $5.0 million to reflect the reversal of this impairment charge. This gain was recorded in Other Income in the consolidated statements of operations for the year ended December 31, 2021. Further, the Company paid a total of $428,000 of acquisition related expenses, which were recorded in Operating and Other Expenses in the consolidated statements of operations for the year ended December 31, 2021.
The Company performed an allocation of the purchase consideration and recorded the underlying assets acquired (including certain identified intangible assets) and liabilities assumed based on their estimated fair values using the information available at the acquisition date. The excess of the purchase consideration over the net assets acquired of $61.1 million was allocated to goodwill. The goodwill is attributed to further access and expansion into business purpose loan markets as well as access to an experienced management team and workforce that are expected to continue to provide services to the business. In addition, the Company identified and recorded finite-lived intangible assets totaling $28.0 million (Note 5).
The purchase price allocations are summarized in the table below:
| | | | | | | | |
| Purchase Price Allocation |
| (In Thousands) | | |
| Acquisition Date | | July 1, 2021 |
| | |
| Purchase Price: | | |
| Cash | | $ | 57,255 | |
| Equity method investment at fair value | | 44,465 | |
| Total consideration | | $ | 101,720 | |
| | |
| Allocated to: | | |
| | |
| Business purpose residential loans, at fair value | | $ | 170,220 | |
| Cash and cash equivalents | | 16,531 | |
| Restricted cash | | 91,394 | |
| Other assets | | 37,107 | |
| Goodwill | | 61,076 | |
| Intangible assets | | 28,000 | |
| Total assets acquired | | $ | 404,328 | |
| | |
| Short term debt, net | | $ | (170,908) | |
| Accrued expenses and other liabilities | | (84,324) | |
| Total liabilities assumed | | $ | (255,232) | |
| Preferred equity repaid at closing | | (47,376) | |
| Total net assets acquired | | $ | 101,720 | |
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
The Lima One segment includes the stand-alone mortgage origination and servicing business of Lima One, including related goodwill, intangible assets, and direct expenses, plus Lima One-related residential whole loans and REO (defined as both those owned by Lima One on the acquisition date and those originated by Lima One since the acquisition date) and the economics related thereto (including any related taxes and the economics of associated financing and hedging instruments), all as recorded under GAAP. Associated financing economics are equal to the results of direct financings of Lima One-related residential whole loans and REO plus allocations of the results of financings which include Lima One related residential whole loans and REO as part of their collateral, based on the relative carrying values of the financed assets. Associated hedging economics are equal to allocations of the Company’s overall hedging results based on the relative estimated duration of each asset class hedged and the relative fair values of assets within each asset class.
Mortgage-Related Assets Segment
This segment is comprised of the remainder of the Company’s investments (including any related taxes and the economics of associated financing and hedging instruments).
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
16. Subsequent Events
Subsequent to quarter end, the Company completed three additional loan securitizations with an aggregate UPB of loans sold of $668.2 million. This included $313.7 million of Non-QM loans, $203.9 million of Single Family Rental loans and $150.6 million of Transitional loans.
Schedule IV - Mortgage Loans on Real Estate
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Type | | Number | | Interest
Rate | | Maturity
Date Range | | Balance Sheet Reported Amount | | Principal Amount of Loans Subject to Delinquent Principal or Interest |
| (Dollars in Thousands) | | | | | | | | | | |
| Residential Whole Loans | | | | | | | | | | |
Original loan balance $0 - $149,999 | | 7,282 | | | 0.00% - 16.00% | | 3/15/2010-4/1/2062 | | $ | 613,600 | | | $ | 61,065 | |
Original loan balance $150,000 - $299,999 | | 7,740 | | | 0.00% - 13.49% | | 3/10/2013-8/1/2062 | | 1,356,976 | | | 123,816 | |
Original loan balance $300,000 - $449,999 | | 3,601 | | | 0.00% - 12.60% | | 12/1/2018-9/1/2062 | | 1,054,821 | | | 125,233 | |
Original loan balance greater than $449,999 | | 5,220 | | | 0.30% - 12.95% | | 12/1/2018-9/1/2071 | | 4,528,656 | | | 255,171 | |
| | 23,843 | | | | | | | $ | 7,554,053 | | (1)(2) | $ | 565,285 | |
(1)Excludes an allowance for loan losses of $35.3 million at December 31, 2022.
(2)The federal income tax basis is approximately $4.3 billion.
Reconciliation of Balance Sheet Reported Amounts of Mortgage Loans on Real Estate
The following table summarizes the changes in the carrying amounts of residential whole loans during the year ended December 31, 2022:
| | | | | | | | |
| | For the Year Ended December 31, 2022 |
| (In Thousands) | | Residential Whole Loans |
| Beginning Balance | | $ | 7,913,000 | |
| Additions during period: | | |
| Purchases | | $ | 3,126,424 | |
| Premium amortization/discount accretion, net | | 9,798 | |
| Reversal of provision for loan loss | | 4,133 | |
| | |
| Deductions during period: | | |
| Repayments | | $ | (1,814,509) | |
| Loan sales and repurchases | | (973,283) | |
| Changes in fair value recorded in Net gain/(loss) on residential whole loans measured at fair value through earnings | | (676,076) | |
| Transfer to REO | | (70,748) | |
| Ending Balance | | $ | 7,518,739 | |