F I N A N C I A L , I N C.
F I N A N C I A L , I N C.
2 0 1 5 A N N U A L R E P O R T
2015 ANNUAL REPORT CONTENTS: LETTER TO SHAREHOLDERS | FORM 10-K | STOCK PERFORMANCE GRAPH | CORPORATE INFORMATION
JAMES CASEBERE, LANDSCAPE WITH HOUSES (DUTCHESS COUNTY, NY) #2, 2010 (DETAIL)
2015 ANNUAL REPORT
| ONE
MFA FINA NCI A L , INC.
is an internally managed real estate investment trust (REIT) with the objective of deliver-
ing shareholder value through the generation of distributable income and through asset
performance linked to residential mortgage credit fundamentals. We selectively invest, on
a leveraged basis, in residential mortgage assets with a focus on credit analysis, projected
prepayment rates, interest rate sensitivity and expected return.
2015 ANNUAL REPORT
} T WO
DE A R FE L LOW SH A R EHOL DER S,
DURING 2015, WE CONTINUED TO EXECUTE OUR STRATEGY FOR ORDERLY INVESTMENT WITHIN AN
EXPANDING RESIDENTIAL MORTGAGE ASSET INVESTMENT UNIVERSE. AS WE IDENTIFY OPPORTUNI-
TIES IN THE RESIDENTIAL MORTGAGE ASSET SECTOR, MFA HAS THE FOCUS AND THE REQUISITE
CAPABILITY TO ANALYZE INVESTMENTS AND MAKE INVESTMENTS OF SIGNIFICANT SIZE.
In the low interest rate environment that existed in 2015,
we continued to acquire credit sensitive mortgage assets
that generate earnings without increasing MFA’s overall
interest rate exposure. We increased our acquisitions of
re-performing and non-performing whole loans, bring-
ing our holdings of credit sensitive residential whole
loans to approximately $900 million. Our credit sensitive
residential whole loans offer additional exposure to resi-
dential mortgage credit while affording us the opportu-
nity to improve outcomes through sensible and effective
servicing decisions. In addition, we maintained our
active investment in three-year step-up securities backed
by non-performing or re-performing residential mort-
gage loans, raising our holdings of these assets to approx-
imately $2.5 billion at year-end. The coupon paid to
MFA on these securities will increase by 300 basis points
if they have not been redeemed by the end of their third
year from issuance.
Our credit sensitive residential assets continued to bene-
fit from improved housing fundamentals. Home price
appreciation and underlying mortgage loan amortization
have decreased the loan-to-value ratio (“LTV”) for many
of the mortgages underlying MFA’s Non-Agency MBS
issued prior to 2008 (Legacy Non-Agency MBS). In
addition, delinquencies continue to decline. Due to these
important credit indicators and other factors, we again
reduced our estimate of future defaults and future real-
ized losses. This decrease in estimated future losses is
expected to increase the interest income realized over the
remaining life of MFA’s Legacy Non-Agency MBS.
As always, we invest for the long term. Over the last 10
years, assuming reinvestment of dividends, $1,000
invested in MFA common stock at the beginning of
2006 would have grown to $3,548, an average annual-
ized return of 13.5%.
2016 AND BEYOND
In December 2015, the Federal Reserve increased its tar-
get Federal Funds rate for the first time in nine years.
MFA remains positioned for a period when Federal
Reserve monetary policy may become more variable
based on indicators of inflation, measures of the labor
markets, international developments and other incoming
data. With our relatively low level of leverage, an MBS
portfolio that is approximately 73% adjustable rate,
hybrid or step-up, and our relatively low interest rate
duration, we believe we are well positioned to continue
to take advantage of investment opportunities within the
residential mortgage credit universe as they arise. On
behalf of the Board of Directors and all of MFA’s dedi-
cated and talented employees, we again thank you for
your continued ownership and support.
WILLIAM S. GORIN
Chief Executive Officer and Director
CRAIG L. KNUTSON
President and Chief Operating Officer
Various forward-looking statements are made in this Annual Report, which generally include the words “ believe,” “expect,” “will,” “antici-
pate” and similar expressions. Certain factors that may affect these forward-looking statements, including MFA’s ability to achieve its goals
and meet its objectives, are discussed on pages 5 to 26, page 73 and page 76 of MFA’s Annual Report on Form 10-K, which is a part hereof.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-13991
MFA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
350 Park Avenue, 20th Floor, New York, New York
(Address of principal executive offices)
13-3974868
(I.R.S. Employer
Identification No.)
10022
(Zip Code)
(212) 207-6400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
7.50% Series B Cumulative Redeemable
Preferred Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
8.00% Senior Notes due 2042
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
On June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2.73 billion based on the closing
sales price of our common stock on such date as reported on the New York Stock Exchange.
On February 12, 2016, the registrant had a total of 371,076,243 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders
scheduled to be held on or about May 25, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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5
27
27
27
27
28
32
34
74
81
143
143
146
146
146
146
146
146
147
148
CAUTIONARY STATEMENT — This Annual Report on Form 10-K includes “forward-looking” statements within the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include information about possible or assumed future
results with respect to the Company’s business, financial condition, liquidity, results of operations, plans and objectives. You can
identify forward-looking statements by such words as “will,” “believe,” expect,” “anticipate,” “estimate,” “plan,” “continue,”
“intend,” “should,” “could,” “would,” “may” or similar expressions. We caution that any such forward-looking statements
made by us are not guarantees of future performance and that actual results may differ materially from these forward-looking
statements. We discuss certain factors that affect our business and that may cause our actual results to differ materially from
these forward-looking statements under “Item 1A. Risk Factors” of this Annual Report on Form 10-K. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake
no obligation to update or revise any forward-looking statements except as may be required by law.
In this Annual Report on Form 10-K, references to “we,” “us,” “our” or “the Company” refer to MFA Financial, Inc. and
its subsidiaries unless specifically stated otherwise or the context otherwise indicates. The following defines certain of the
commonly used terms in this Annual Report on Form 10-K: MBS refers to mortgage-backed securities secured by pools of
residential mortgage loans; Agency MBS refers to MBS that are issued or guaranteed 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 refers to residential
MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation; Legacy Non-Agency
MBS refers to MBS issued prior to 2008; RPL/NPL MBS refers to MBS collateralized by re-performing/non-performing loans;
Hybrids refer to hybrid mortgage loans that have interest rates that are fixed for a specified period of time and, thereafter, generally
adjust annually to an increment over a specified interest rate index; ARMs refer to adjustable-rate mortgage loans and to Hybrids
that are past their fixed-rate period, both of which typically have interest rates that adjust annually to an increment over a specified
interest rate index; Linked Transactions refer to Non-Agency MBS purchases which were financed with the same counterparty
and for periods prior to 2015 considered linked for financial statement reporting purposes and were reported at fair value on a
combined basis; and CRT securities refer to credit risk transfer securities which are general obligations of government-sponsored
entities (Fannie Mae and Freddie Mac).
Item 1. Business.
PART I
GENERAL
We are primarily engaged in the real estate finance business. We engage in our business through subsidiaries that invest, on
a leveraged basis, in residential mortgage assets, including Agency MBS, Non-Agency MBS, residential whole loans and CRT
securities. 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 were incorporated in Maryland on July 24, 1997, and began operations on April 10, 1998. We have elected to be treated
as a real estate investment trust (or REIT) for U.S. federal income tax purposes. In order to maintain our qualification as a REIT,
we must comply with a number of requirements under federal tax law, including that we must distribute at least 90% of our annual
REIT taxable income to our stockholders. We have elected to treat certain of our subsidiaries as a taxable REIT subsidiary (or
TRS). In general, a TRS may hold assets and engage in activities that a REIT or qualified REIT subsidiary cannot hold or engage
in directly and generally may engage in any real estate or non-real estate related business.
We are a holding company and conduct our real estate finance businesses primarily through wholly-owned subsidiaries, so
as to maintain an exemption from registration under the Investment Company Act of 1940, as amended (or the Investment Company
Act) by ensuring that less than 40% of the value of our total assets, exclusive of U.S. Government securities and cash items (which
we refer to as our adjusted total assets for Investment Company Act purposes), on an unconsolidated basis consist of “investment
securities” as defined by the Investment Company Act. We refer to this test as the “40% Test.”
INVESTMENT STRATEGY
As stated above, we primarily invest through subsidiaries in Agency MBS, Non-Agency MBS, residential whole loans and
CRT securities.
The mortgages collateralizing our Agency MBS portfolio are predominantly Hybrids, 15-year fixed-rate mortgages and
ARMs. Our selection of Agency MBS is largely designed to generate attractive returns relative to interest rate and prepayment
risks. The Hybrid loans collateralizing our MBS typically have initial fixed-rate periods at origination of three, five, seven or ten
years. At the end of this fixed-rate period, these mortgages become adjustable and their interest rates adjust based on the London
Interbank Offered Rate (or LIBOR) or in some cases the one-year constant maturity treasury rate (or CMT). These interest rate
adjustments are typically limited by periodic caps (which limit the amount of the interest rate change from the prior rate) and
lifetime caps (which are maximum interest rates permitted for the life of the mortgage). As coupons earned on Agency Hybrids
and ARMs adjust over time as interest rates change, these assets are generally less sensitive to changes in interest rates than are
fixed rate MBS. In general, Hybrid loans and ARMs have 30-year final maturities and they amortize over this 30-year period.
While the coupons on 15-year fixed-rate mortgages do not adjust, they amortize according to a 15-year amortization schedule and
have a 15-year final maturity. Due to their accelerated amortization and shorter final maturity, these assets are generally less
sensitive to changes in long-term interest rates as compared to fixed-rate mortgages with a longer final maturity, such as 30-year
mortgages.
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Our Non-Agency MBS portfolio primarily consists of (i) Legacy Non-Agency MBS and (ii) MBS collateralized by re-
performing and non-performing loans (or RPL/NPL MBS). In addition to Non-Agency MBS investments, during 2014 we began
investing in re-performing and non-performing residential whole loans through our interests in certain consolidated trusts. Our
strategy of combining investments in Agency MBS, Non-Agency MBS and residential whole loans is designed to generate attractive
returns with less overall sensitivity to changes in the yield curve, the general level of interest rates and prepayments. We expect
to continue to seek more credit sensitive assets in 2016, such as residential whole loans, while seeking to minimize sensitivity to
interest rates.
Our Legacy Non-Agency MBS have been acquired primarily at discounts to face/par value, which we believe serves to
mitigate our exposure to credit risk. A portion of the purchase discount on substantially all of our Legacy Non-Agency MBS is
designated as a non-accretable discount (also referred to hereafter as Credit Reserve), which effectively mitigates our risk of loss
on the mortgages collateralizing such MBS and is not expected to be accreted into interest income. The portion of the purchase
discount that is designated as accretable discount is accreted into interest income over the life of the security. The mortgages
collateralizing our Legacy Non-Agency MBS consist primarily of ARMs, 30-year fixed rate mortgages and Hybrids. Legacy
Non-Agency ARMs and Hybrids typically exhibit reduced interest rate sensitivity (as compared to fixed-rate Legacy Non-Agency
MBS) due to their interest rate adjustments (similar to Agency ARMs and Hybrids). However, yields on Legacy Non-Agency
MBS, unlike Agency MBS, also exhibit sensitivity to changes in credit performance. If credit performance improves, the Credit
Reserve may be decreased (and accretable discount increased), resulting in a higher yield over the remaining life of the security.
Similarly, deteriorating credit performance could increase the Credit Reserve and decrease the yield over the remaining life of the
security or other-than-temporary impairment could result. To the extent that higher interest rates in the future are indicative of an
improving economy, better employment data and/or higher home prices, it is possible that these factors will improve the credit
performance of Legacy Non-Agency MBS and therefore mitigate the interest rate sensitivity of these securities.
Our RPL/NPL MBS were purchased primarily through new issue at prices at or around par and represent the senior tranches
of the related securitizations. These RPL/NPL MBS are structured with significant credit enhancement (typically approximately
50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) and typically receive no cash
flow (interest or principal) until the senior tranche is paid off. Prior to purchase, we analyze the deal structure in order to assess
the associated credit risk. Subsequent to purchase, the ongoing credit risk associated with the deal is evaluated by analyzing the
extent to which actual credit losses occur that result in a reduction in the amount of subordination enjoyed by our bond. Based
on the recent performance of the collateral underlying our RPL/NPL MBS and current subordination levels, we do not believe
that we are currently exposed to significant risk of credit loss on these investments. In addition, these deal structures contain an
interest rate step-up feature, whereby the original coupon on the senior tranche increases by 300 basis points if the security that
we hold has not been redeemed by the issuer after 36 months. We expect that the combination of the priority cash flow of the
senior tranche and the 36-month step-up will result in these securities’ exhibiting short average lives and, accordingly, reduced
interest rate sensitivity. Consequently, we believe that RPL/NPL MBS provide attractive returns given our assessment of the
interest rate and credit risk associated with these securities.
In addition, during 2015, we continued to transition to more credit sensitive, less interest sensitive residential mortgage assets
by acquiring residential whole loans through certain trusts that are consolidated on our balance sheet for financial reporting
purposes. To date, we have focused on purchasing packages of both re-performing and non-performing whole loans. Re-performing
loans are typically characterized by borrowers who have experienced payment delinquencies in the past and the amount owed on
the mortgage may exceed the value of the property pledged as collateral. These loans are purchased at purchase prices that are
discounted (often substantially so) to the contractual loan balance to reflect the credit history of the borrower, the loan-to-value
(or LTV) of the loan and the coupon. Non-performing loans are typically characterized by borrowers who have defaulted on their
obligations and/or have payment delinquencies of 60 days or more at the time we acquire the loan. These loans are also purchased
at purchase prices that are discounted (often substantially so) to the contractual loan balance that reflects primarily the non-
performing nature of the loan. Typically, this purchase price is a discount to the expected value of the collateral securing the loan,
such value to be realized after foreclosure and liquidation of the property. All of the residential whole loans were purchased by
the consolidated trusts on a servicing-released basis, i.e., the sellers of such loans transferred the right to service the loans as part
of the sale. Because we do not directly service any loans, we have contracted with loan servicing companies with specific expertise
in working with delinquent borrowers in an effort to cure delinquencies through, among other things, loan modification and third-
party refinancing. To the extent these efforts are successful, we believe our investments in residential whole loans will yield
attractive returns. In addition, to the extent that it is not possible to achieve a successful outcome for a particular borrower and
the real property collateral must be foreclosed on and liquidated, we believe that the discounted purchase price at which the asset
was acquired, provides us with a level of protection against financial loss.
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FINANCING STRATEGY
Our financing strategy is designed to increase the size of our investment portfolio by borrowing against a substantial portion
of the market value of the assets in our portfolio. We primarily use repurchase agreements to finance our holdings of MBS,
residential whole loans and CRT securities. We enter into interest rate derivatives to hedge the interest rate risk associated with
a portion of our repurchase agreement borrowings. Going forward, in connection with our current and any future investment in
residential whole loans, our financing strategy may expand to the use of securitization or other forms of structured financing.
Repurchase agreements, although legally structured as sale and repurchase transactions, are financing contracts (i.e.,
borrowings) under which we pledge our MBS, residential whole loans and CRT securities as collateral to secure loans with
repurchase agreement counterparties (i.e., lenders). Repurchase agreements involve the transfer of the pledged collateral to a
lender at an agreed upon price in exchange for such lender’s simultaneous agreement to return the same security back to the
borrower at a future date (i.e., the maturity of the borrowing) at a higher price. The difference between the sale price that we
receive and the repurchase price that we pay represents interest paid to the lender. Our cost of borrowings under repurchase
agreements is generally LIBOR based. Under our repurchase agreements, we pledge our securities as collateral to secure the
borrowing, which is equal in value to a specified percentage of the fair value of the pledged collateral, while we retain beneficial
ownership of the pledged collateral. At the maturity of a repurchase financing, unless the repurchase financing is renewed with
the same counterparty, we are required to repay the loan including any accrued interest and concurrently receive back our pledged
collateral from the lender. With the consent of the lender, we may renew a repurchase financing at the then prevailing financing
terms. Margin calls, whereby, a lender requires that we pledge additional securities or cash as collateral to secure borrowings
under our repurchase financing with such lender, are routinely experienced by us when the value of the MBS 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. We also may make margin calls on counterparties when collateral values increase.
In order to reduce our exposure to counterparty-related risk, we generally seek to enter into repurchase agreements and other
financing arrangements, and derivatives, with a diversified group of financial institutions. At December 31, 2015, we had
outstanding balances under repurchase agreements with 27 separate lenders.
In July 2015, the Company’s wholly-owned subsidiary, MFA Insurance, Inc. (or MFA Insurance), became a member of the
Federal Home Loan Bank (or FHLB) of Des Moines. At December 31, 2015 and February 16, 2016, MFA Insurance had FHLB
advances of approximately $1.500 billion and $1.200 billion, respectively. FHLB advances are secured financing transactions
and are carried at their contractual amounts. The ability to borrow from the FHLB is subject to the Company’s continued
creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with the
FHLB.
In January, 2016, the Federal Housing Finance Agency (or FHFA) released its final rule amending its regulation on FHLB
membership, which, amongst other things, provided termination rules for current captive insurance members. As a result of such
regulation, MFA Insurance will not be permitted new advances or renewal of existing advances and will be required to terminate
its FHLB membership and repay any outstanding advances within one year of the rule’s effective date of February 19, 2016.
In addition to repurchase agreements, FHLB advances, securitized debt and 8% Senior Notes due 2042 (or Senior Notes),
we may also use other sources of funding in the future to finance our MBS portfolio, including, but not limited to, other types of
collateralized borrowings, loan agreements, lines of credit or the issuance of debt securities.
COMPETITION
We operate in the mortgage REIT industry. We believe that our principal competitors in the business of acquiring and holding
residential mortgage assets of the types in which we invest are financial institutions, such as banks, savings and loan institutions,
life insurance companies, institutional investors, including mutual funds and pension funds, hedge funds, other mortgage-REITs
as well as the U.S. Federal Reserve as part of its monetary policy activities. Some of these entities may not be subject to the same
regulatory constraints (i.e., REIT compliance or maintaining an exemption under the Investment Company Act) as us. In addition,
many of these entities have greater financial resources and access to capital than us. The existence of these entities, as well as the
possibility of additional entities forming in the future, may increase the competition for the acquisition of residential mortgage
assets, resulting in higher prices and lower yields on such assets.
At December 31, 2015, we had 50 full-time and three part-time employees. We believe that our relationship with our
employees is good. None of our employees are unionized or represented under a collective bargaining agreement.
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EMPLOYEES
AVAILABLE INFORMATION
We maintain a Web site at www.mfafinancial.com. We make available, free of charge, on our Web site our (a) Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including any amendments thereto), proxy
statements and other information (or, collectively, the Company Documents) filed with, or furnished to, the Securities and Exchange
Commission (or SEC), as soon as reasonably practicable after such documents are so filed or furnished, (b) Corporate Governance
Guidelines, (c) Code of Business Conduct and Ethics and (d) written charters of the Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee of our Board of Directors (or our Board). Our Company Documents filed
with, or furnished to, the SEC are also available at the SEC’s Web site at www.sec.gov. We also provide copies of the foregoing
materials, free of charge, to stockholders who request them. Requests should be directed to the attention of our General Counsel
at MFA Financial, Inc., 350 Park Avenue, 20th Floor, New York, New York 10022.
4
Item 1A. Risk Factors.
This section highlights specific risks that could affect our Company and its business. Readers should carefully consider each
of the following risks and all of the other information set forth in this Annual Report on Form 10-K. Based on the information
currently known to us, we believe the following information identifies the most significant risk factors affecting our Company.
However, the risks and uncertainties we face are not limited to those described below. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develops into actual events or if the circumstances described in the risks and
uncertainties occur or continue to occur, these events or circumstances could have a material adverse effect on our business,
prospects, financial condition, results of operations, cash flows or liquidity. These events could also have a negative effect on the
trading price of our securities.
General
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, the market value of our assets, 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. 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) and prepayment speeds on our MBS, the
behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which
measure the amount of unscheduled principal prepayment on a bond as a percentage of the bond 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 operating results also depend upon our ability to effectively manage the risks associated with our business operations,
including interest rate, prepayment, financing and credit risks, while maintaining our qualification as a REIT.
We may change our investment strategy, operating policies and/or asset allocations without stockholder consent, which
could materially adversely affect our results of operations.
We may change our investment strategy, operating policies and/or asset allocation with respect to investments, acquisitions,
leverage, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders.
A change in our investment strategy may increase our exposure to interest rate risk, credit risk, default risk and/or real estate market
fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different
from our historical investments. These changes could materially adversely affect our financial condition, results of operations,
the market price of our common stock or our ability to pay dividends or make distributions.
Credit Risks
Our investments in Non-Agency MBS (including RPL/NPL MBS) involve credit risk, which could materially adversely
affect our results of operations.
The holder of a mortgage or MBS assumes the risk that the related borrowers may default on their obligations to make full
and timely payments of principal and interest. Under our investment policy, we have the ability to acquire Non-Agency MBS,
residential whole loans and other investment assets of lower credit quality. In general, Legacy Non-Agency MBS and RPL/NPL
MBS (which, as of December 31, 2015 represented 48.8% of our total assets) carry greater investment risk than Agency MBS
because they are not guaranteed as to principal or interest by the U.S. Government, any federal agency or any federally chartered
corporation. Higher-than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying these
investments could adversely affect the value of these assets. Accordingly, defaults in the payment of principal and/or interest on
our Legacy Non-Agency MBS, RPL/NPL MBS and other investment assets of less-than-high credit quality would likely result in
our incurring losses of income from, and/or losses in market value relating to, these assets, which could materially adversely affect
our results of operations.
Our investments in re-performing and non-performing residential whole loans involve credit risks, some of which are
different from our Non-Agency MBS, which could materially adversely affect our results of operations.
Our investment in residential whole loans was relatively speaking our fastest growing asset class during 2015, and represented
approximately 6.8% of our total assets as of December 31, 2015. We expect that our investment portfolio in residential whole
5
loans will continue to increase during 2016, as we seek opportunities in these credit sensitive assets. As a holder of residential
whole loans, we are subject to the risk that the related borrowers may default or have defaulted on their obligations to make full
and timely payments of principal and interest. If actual results are different from our assumptions in determining the prices paid
to acquire such loans, particularly if the market value of the underlying property decreases significantly subsequent to purchase,
we may incur significant losses, which could materially adversely affect our results of operations.
A significant portion of our Non-Agency MBS and residential whole loans are secured by properties in a small number of
geographic areas and may be disproportionately affected by economic or housing downturns, natural disasters, terrorist
events, regulatory changes, adverse climate changes or other adverse events specific to those markets.
A significant number of the mortgages underlying our Non-Agency MBS and residential whole loan investments are
concentrated in certain geographic areas. For example, we have significantly higher exposure in California, Florida, New York,
Virginia, Maryland and New Jersey. (See “Credit Risk” included under Part II, Item 7A “Quantitative and Qualitative Disclosures
About Market Risk” in this Annual Report on Form 10-K.) Certain markets within these states (particularly in California and
Florida) experienced significant decreases in residential home values during the financial crisis of 2007-2008 and the years
thereafter, although in more recent years some of these markets have experienced a recovery in home prices. Any event that
adversely affects the economy or real estate market in any of these states could have a disproportionately adverse effect on our
Non-Agency MBS and residential whole loan investments. In general, any material decline in the economy or significant problems
in a particular real estate market would likely cause a decline in the value of residential properties securing the mortgages in that
market, thereby increasing the risk of delinquency, default and foreclosure of re-performing loans and the loans underlying our
Non-Agency MBS. This could, in turn, have a material adverse effect on our credit loss experience on our Non-Agency MBS
and residential whole loan investments in the affected market if higher-than-expected rates of default and/or higher-than-expected
loss severities on our re-performing loan investments or the mortgages underlying our Non-Agency MBS were to occur.
The occurrence of a natural disaster (such as an earthquake, tornado, hurricane or a flood), terrorist attack or a significant
adverse climate change may cause a sudden decrease in the value of real estate in the area or areas affected and would likely reduce
the value of the properties securing the mortgages collateralizing our Non-Agency MBS or residential whole loans. Because
certain natural disasters are not typically covered by the standard hazard insurance policies maintained by borrowers (such as
hurricanes or certain flooding), or the proceeds payable under any such policy is not sufficient to cover the related repairs, the
affected borrowers may have to pay for any repairs themselves. Under these circumstances, borrowers may decide not to repair
their property or may stop paying their mortgages under those circumstances. This would likely cause defaults and credit loss
severities to increase.
Changes in governmental laws and regulations, fiscal policies, property taxes and zoning ordinances can also have a negative
impact on property values, which could result in borrowers’ deciding to stop paying their mortgages. This circumstance could
cause defaults and loss severities to increase, thereby adversely impacting our results of operations.
We have investments in Non-Agency MBS collateralized by Alt A loans and may also have investments collateralized by
subprime mortgage loans, which, due to lower underwriting standards, are subject to increased risk of losses.
We have certain investments in Non-Agency MBS backed by collateral pools containing mortgage loans that were originated
under underwriting standards that were less strict than those used in underwriting “prime mortgage loans.” These lower standards
permitted mortgage loans, often with LTV ratios in excess of 80%, to be made to borrowers having impaired credit histories, lower
credit scores, higher debt-to-income ratios and/or unverified income. Difficult economic conditions, including increased interest
rates and lower home prices, can result in Alt A and subprime mortgage loans having increased rates of delinquency, foreclosure,
bankruptcy and loss (including such as during the credit crisis of 2007-2008 and the housing crisis of the last few years), and are
likely to otherwise experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of higher delinquency
rates and losses associated with Alt A and subprime mortgage loans, the performance of our Non-Agency MBS that are backed
by these types of loans could be correspondingly adversely affected, which could materially adversely impact our results of
operations, financial condition and business.
We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential
whole loans if they breach representations and warranties, which could cause us to suffer losses.
In connection with our residential whole loan investments, we typically enter into a loan purchase agreement, as buyer, of
the loans from a seller. When we invest in mortgage loans , sellers typically make very limited representations and warranties
about such loans. Residential mortgage loan purchase agreements may entitle the purchaser of the loans to seek indemnity or
demand repurchase or substitution of the loans in the event the seller of the loans breaches a representation or warranty given to
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the purchaser. However, there can be no assurance that a mortgage loan purchase agreement will contain appropriate representations
and warranties, that we or the trust that purchases the mortgage loans would be able to enforce a contractual right to repurchase
or substitution, or that the seller of the loans will remain solvent or otherwise be able to honor its obligations under its mortgage
loan purchase agreements. The inability to obtain or enforce an indemnity or require repurchase of a significant number of loans
could require us to absorb the associated losses, and adversely affect our results of operations, financial condition and business.
To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated
with such assets and may not reveal other weaknesses in such assets, which could lead to losses.
Before making an investment, we typically, but not always, conduct (either directly or using third parties) certain due diligence.
There can be no assurance that we will conduct any specific level of due diligence, or that, among other things, our due diligence
processes will uncover all relevant facts, which could result in losses on these assets to the extent we ultimately acquire them,
which, in turn, could adversely affect our results of operations, financial condition and business.
We have experienced, and may in the future experience, declines in the market value of certain of our investment securities
resulting in our recording impairments, which have had, and may in the future have, an adverse effect on our results of
operations and financial condition.
A decline in the market value of our MBS or other investment securities may require us to recognize an “other-than-temporary
impairment” (or OTTI) against such assets under GAAP. When the fair value of an available-for-sale (or AFS) investment security
is less than its amortized cost at the balance sheet date, the security is considered impaired. We assess our impaired securities on
at least a quarterly basis and designate such impairments as either “temporary” or “other-than-temporary.” If we intend to sell an
impaired security, or it is more likely than not that we will be required to sell the impaired security before any anticipated recovery,
then we must recognize an OTTI 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 we do not expect to sell an other-than-temporarily impaired security, only the
portion of the OTTI that is related to credit losses is required to be recognized through charges to earnings with the remainder
recognized through accumulated other comprehensive income/(loss) (or AOCI) on our consolidated balance sheets. Impairments
recognized through other comprehensive income/(loss) (or OCI) do not impact earnings. Following the recognition of an OTTI
through earnings, a new cost basis is established for the security and may not be adjusted for subsequent recoveries in fair value
through earnings. However, OTTIs recognized through charges to earnings may be accreted back to the amortized cost basis of
the security on a prospective basis through interest income. The determination as to whether an OTTI exists and, if so, the amount
of credit impairment recognized in earnings is subjective, as such determinations are based on factual information available at the
time of assessment as well as on our estimates of the future performance and cash flow projections. As a result, the timing and
amount of OTTIs constitute material estimates that are susceptible to significant change.
Our use of models in connection with the valuation of our assets subjects us to potential risks in the event that such models
are incorrect, misleading or based on incomplete information.
As part of our risk management process, we may use models to evaluate, depending on the asset class, house price appreciation
and depreciation by county, region, prepayment speeds and foreclosure frequency, cost and timing. Certain assumptions used as
inputs to the models may be based on historical trends. These trends may not be indicative of future results. Furthermore, the
assumptions underlying the models may prove to be inaccurate, causing the model output also to be incorrect. In the event models
and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For
example, by relying on incorrect models and data, we may be induced to buy certain assets at prices that are too high, to sell certain
other assets at prices that are too low or to miss favorable opportunities altogether, which could have a material adverse impact
on our business and growth prospects.
Valuations of some of our assets are subject to inherent uncertainty, may be based on estimates, may fluctuate over short
periods of time and may differ from the values that would have been used if a ready market for these assets existed.
While the determination of the fair value of our investment assets takes into consideration valuations provided by third-party
dealers and pricing services, the final determination of exit price fair values for our investment assets is based on our judgment,
and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets may
be difficult to obtain or may not be reliable. In general, dealers and pricing services heavily disclaim their valuations as such
valuations are not intended to be binding bid prices. Additionally, dealers may claim to furnish valuations only as an accommodation
and without special compensation, and so they may disclaim any and all liability arising out of any inaccuracy or incompleteness
in valuations. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from
one dealer or pricing service to another.
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Our results of operations, financial condition and business could be materially adversely affected if our fair value
determinations of these assets were materially higher than the values that would exist if a ready market existed for these assets.
Mortgage loan modification and refinancing programs and future legislative action may materially adversely affect the
value of, and the returns on, our MBS and residential whole loan investments.
The U.S. Government, through the Federal Reserve, the Treasury Department, the Federal Housing Administration (or the
FHA) and other agencies implemented a number of federal programs designed to assist homeowners, including the Home Affordable
Modification Program (or HAMP), which provides homeowners with assistance in avoiding residential mortgage loan foreclosures,
the Hope for Homeowners Program (or H4H Program), which allows certain distressed borrowers to refinance their mortgages
into FHA-insured loans in order to avoid foreclosure, and the Home Affordable Refinance Program (or HARP), which allows
borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments without new
mortgage insurance, up to an unlimited loan-to-value ratio for fixed-rate mortgages. HAMP, the H4H Program and other loss
mitigation programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the
loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or to extend the payment terms of
the loans. Especially with our Non-Agency MBS and residential whole loan investments, a continuing number of loan modifications
with respect to a given underlying loan, including, but not limited to, those related to principal forgiveness and coupon reduction,
could negatively impact the realized yields and cash flows on such investments. These loan modification programs, future
legislative or regulatory actions, including possible amendments to the bankruptcy laws, that result in the modification of
outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans
with Fannie Mae, Freddie Mac or Ginnie Mae, may materially adversely affect the value of, and the returns on, these assets.
Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure.
The residential whole loans that have been acquired to date were purchased together with the related mortgage servicing
rights. We rely on unaffiliated servicing companies to service and manage the mortgages underlying our residential whole loans.
If a servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make
these payments, resulting in a higher frequency of default. If a servicer takes longer to liquidate non-performing mortgages, our
losses related to those loans may be higher than originally anticipated. Any failure by servicers to service these mortgages and
related real estate owned (or REO) properties could negatively impact the value of these investments and our financial performance.
In addition, while we have contracted with unaffiliated servicing companies to carry out the actual servicing of the loans (including
all direct interface with the borrowers), we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal
regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable
law and regulation. (See “Regulatory Risk and Risks Related to the Investment Company Act of 1940 -- Our business is subject
to extensive regulation.) In light of the current regulatory environment, such exposure could be significant even though we might
have contractual claims against our servicers for any failure to service the loans to the required standard.
When one of our residential whole loans is foreclosed upon, title to the underlying property is taken by a Company subsidiary.
The foreclosure process, especially in judicial foreclosure states such as New York, Florida and New Jersey can be lengthy and
expensive, and the delays and costs involved in completing a foreclosure, and then liquidating the property through sale, may
materially increase any related loss. Finally, at such time as title is taken to a foreclosed property, it may require more extensive
rehabilitation than we estimated at acquisition. Thus, a material amount of foreclosed residential mortgage loans, particularly in
the states mentioned above, could result in significant losses in our residential whole loan portfolio and could materially adversely
affect our results of operations.
The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and
regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government, may materially
adversely affect our business.
The payments of principal and interest we receive on our Agency MBS, which depend directly upon payments on the
mortgages underlying such securities, are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Fannie Mae and Freddie Mac
are U.S. Government-sponsored entities (or GSEs), but their guarantees are not backed by the full faith and credit of the United
States (although the FHFA largely controls their actions through its conservatorship of the two GSEs, which occurred in the wake
of the 2007-2008 financial crisis). Ginnie Mae is part of a U.S. Government agency and its guarantees are backed by the full faith
and credit of the United States.
Although since the financial crisis of 2007-2008 the U.S. Government has undertaken several measures to support the positive
net worth of Fannie Mae and Freddie Mac, there is no guarantee of continuing capital support if such support were to become
necessary. These uncertainties lead to questions about the availability of, and trading market for, Agency MBS. Despite the steps
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taken by the U.S. Government, Fannie Mae and Freddie Mac could default on their guarantee obligations which would materially
and adversely affect the value of our Agency MBS. Accordingly, if these government actions are inadequate in the future and the
GSEs were to suffer losses, be significantly reformed, or cease to exist (as discussed below), our business, operations and financial
condition could be materially and adversely affected.
In addition, the problems faced by Fannie Mae and Freddie Mac resulting in their being placed into federal conservatorship
and receiving significant U.S. Government support have sparked serious debate among federal policy makers regarding the
continued role of the U.S. Government in providing liquidity for mortgage loans. In 2011, the Obama administration proposed a
plan to wind down the GSEs, and both houses of Congress have considered legislation to reform the GSEs, their functions and
their missions. The future roles of Fannie Mae and Freddie Mac may be reduced (perhaps significantly) and the nature of their
guarantee obligations could be limited relative to historical measurements. Alternatively, it is still possible that Fannie Mae and
Freddie Mac could be dissolved entirely or privatized, and, as mentioned above, the U.S. Government could determine to stop
providing liquidity support of any kind to the mortgage market. Any changes to the nature of the GSEs or their guarantee obligations
could redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business,
operations and financial condition. If Fannie Mae or Freddie Mac were to be eliminated, or their structures were to change radically
(in particular a limitation or removal of the guarantee obligation), we could be unable to acquire additional Agency MBS and our
existing Agency MBS could be materially and adversely impacted.
We could be negatively affected in a number of ways depending on the manner in which events unfold for Fannie Mae and
Freddie Mac. We rely on our Agency MBS as collateral for a significant portion of our financings under our repurchase agreements.
Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing
on our Agency MBS on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions.
As indicated above, future legislation could, among other things, reform the GSEs and their functions, or nationalize, privatize,
or eliminate them entirely. Any law affecting the GSEs may create market uncertainty and have the effect of reducing the actual
or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws could increase
the risk of loss on our investments in Agency MBS guaranteed by Fannie Mae and/or Freddie Mac. It also is possible that such
laws could adversely impact the market for such securities and the spreads at which they trade. All of the foregoing could materially
and adversely affect our business, operations and financial condition.
Government use of eminent domain to seize underwater mortgages could materially adversely affect the value of, and the
returns on, our MBS.
The mortgages securing our investments are located in many geographic regions across the United States, with significantly
higher exposure in California, Florida, New York, Virginia and Maryland. Several county and municipal governments have
discussed using eminent domain to seize from mortgage holders the mortgages of borrowers who are underwater, but not in default.
Legislation enacted in 2014 prohibits the FHFA and the Department of Housing and Urban Development from using federal funds
to facilitate the seizure of mortgage loans by a state or local municipality. However, if definitive action were to be taken in the
future by any local governments, and such actions withstand Constitutional and other legal challenges, resulting in mortgages
securing certain of our investments being seized using eminent domain, the consideration received from the seizing authorities
for such mortgages may be substantially less than the outstanding principal balance, which would result in a realized loss and a
corresponding write-down of the principal balance of those mortgages. The result of these seizures would be that the amounts we
receive on our investments would be less than we would otherwise have received if the mortgage loans had not been seized, which
may result in a lower return on such assets or require charges for OTTI or loan loss reserves. If governments ultimately adopt such
plans and mortgages securing certain of our investments are seized on a widespread scale, it could have a material adverse effect
on the value of and/or returns on our assets and our results of operations more generally.
Prepayment and Reinvestment Risk
Prepayment rates on the mortgage loans underlying our MBS may materially adversely affect our profitability or result
in liquidity shortfalls that could require us to sell assets in unfavorable market conditions.
The MBS that we acquire are secured by pools of mortgages on residential properties. In general, the mortgages collateralizing
our MBS may be prepaid at any time without penalty. Prepayments on our MBS result when borrowers satisfy (i.e., pay off) the
mortgage upon selling or refinancing their mortgaged property. When we acquire a particular MBS, we anticipate that the
underlying mortgage loans will prepay at a projected rate which, together with expected coupon income, provides us with an
expected yield on that MBS. If we purchase MBS at a premium to par value, and borrowers then prepay the underlying mortgage
loans at a faster rate than we expected, the increased prepayments on the MBS would result in a yield lower than expected on such
securities because we would be required to amortize the related premium on an accelerated basis. Conversely, if we purchase
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MBS at a discount to par value, and borrowers then prepay the underlying mortgage loans at a slower rate than we expected, the
decreased prepayments on the MBS would result in a lower yield than expected on such securities and/or may result in OTTI if
the fair value of the security is less than its amortized cost.
Prepayment rates on mortgage loans are influenced by changes in mortgage and market interest rates and a variety of economic,
geographic, governmental and other factors beyond our control. Consequently, prepayment rates cannot be predicted with certainty
and no strategy can completely insulate us from prepayment risks. In periods of declining interest rates, prepayment rates on
mortgage loans generally increase. Because of prepayment risk, the market value of our MBS (and in particular our Agency MBS)
may benefit less than other fixed income securities from a decline in interest rates. If general interest rates decline at the same
time, we would likely not be able to reinvest the proceeds of the prepayments that we receive in assets yielding as much as those
yields on the assets that were prepaid.
With respect to Agency MBS, we have, at times, purchased securities that have a higher coupon rate than the prevailing
market interest rates. In exchange for a higher coupon rate, we typically pay a premium over par value to acquire such securities.
In accordance with U.S. generally accepted accounting principles (or GAAP), we amortize premiums on our MBS over the life
of the related MBS. If the underlying mortgage loans securing these securities prepay at a more rapid rate than anticipated, we
will be required to amortize the related premiums on an accelerated basis, which could adversely affect our profitability. Defaults
on the mortgages underlying Agency MBS typically have the same effect as loan prepayments because of the underlying Agency
guarantee. As of December 31, 2015, we had net purchase premiums on our Agency MBS of $172.0 million (or 3.8% of current
par value) and net purchase discounts on our Non-Agency MBS of $1.100 billion (or 15.8% of current par value).
Prepayments, which are the primary feature of MBS that distinguishes them from other types of bonds, are difficult to predict
and can vary significantly over time. As the holder of MBS, we receive a monthly payment equal to a portion of our investment
principal in a particular MBS as the underlying mortgages are prepaid. With respect to Agency MBS, we typically receive notice
of monthly principal prepayments on the fifth business day of each month (such day is commonly referred to as “factor day”) and
receive the related scheduled payment on a specified later date, which for (a) our Agency ARM-MBS and fixed-rate Agency MBS
guaranteed by Fannie Mae is the 25th day of the month (or next business day thereafter), (b) our Agency ARM-MBS guaranteed
by Freddie Mac is the 15th day of the following month (or next business day thereafter), (c) our fixed-rate Agency MBS guaranteed
by Freddie Mac is the 15th day of the month (or next business day thereafter), and (d) our Agency ARM-MBS guaranteed by
Ginnie Mae is the 20th day of that month (or next business day thereafter). With respect to our Non-Agency MBS, we typically
receive notice of monthly principal prepayments and the related scheduled payment on the 25th day of each month (or next business
day thereafter). In general, on the date each month that principal prepayments are announced (i.e., factor day for Agency MBS),
the value of our MBS pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal
and, as a result, our lenders will typically initiate a margin call that requires us to pledge additional collateral in the form of cash
or additional MBS, in an amount equal to the prepaying principal, in order to re-establish the required ratio of borrowing to
collateral value under such repurchase agreements. Accordingly, in the case of Agency MBS, the announcement on factor day of
principal prepayments occurs prior to our receipt of the related scheduled payment. This timing differential creates a short-term
receivable for us in the amount of any such principal prepayments; however, under our repurchase agreements, we may receive
a margin call in the amount of the related reduction in value of the Agency MBS and be required to post on or about factor day
additional cash or other collateral in the amount of the prepaying principal to be received, which thereby would reduce our liquidity
during the period in which the short-term receivable is outstanding. As a result, in order to meet any such margin calls, we might
be forced to sell assets in order to maintain adequate liquidity. Forced sales, particularly under adverse market conditions, may
result in lower sales prices than sales made under ordinary market conditions in the normal course of business. If our MBS were
to be liquidated at prices below our amortized cost (i.e., our cost basis) of such assets, we would incur losses, which could materially
adversely affect our earnings. In addition, in order to continue to earn a return on this prepaid principal, we must reinvest it in
additional MBS or other assets; however, in a declining interest rate environment, we might earn a lower return on our reinvested
funds as compared to the return earned on the MBS that had prepaid.
Prepayments may have a materially negative impact on our financial results, the effects of which depend on, among other
things, the timing and amount of the prepayment delay on Agency MBS, the amount of unamortized premium on MBS prepayments,
the rate at which prepayments are made on our Non-Agency MBS, the reinvestment lag and the availability of suitable reinvestment
opportunities.
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Risks Related to Our Use of Leverage
Our business strategy involves the use of leverage, and we may not achieve what we believe to be optimal levels of leverage
or we may become overleveraged, which may materially adversely affect our liquidity, results of operations or financial
condition.
Our business strategy involves the use of borrowing or “leverage.” Pursuant to our leverage strategy, we borrow against a
substantial portion of the market value of our MBS and our residential whole loans and use the borrowed funds to finance our
investment portfolio and the acquisition of additional investment assets. We are not required to maintain any particular debt-to-
equity ratio. Future increases in the amount by which the collateral value is required to contractually exceed the repurchase
transaction loan amount, decreases in the market value of our MBS, increases in interest rate volatility and changes in the availability
of acceptable financing could cause us to be unable to achieve the amount of leverage we believe to be optimal. The return on
our assets and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions
prevent us from achieving the desired amount of leverage on our investments or cause the cost of our financing to increase relative
to the income earned on our leveraged assets. If the interest income on our MBS purchased with borrowed funds fails to cover
the interest expense of the related borrowings, we will experience net interest losses and may experience net losses from operations.
Such losses could be significant as a result of our leveraged structure. The use of leverage to finance our MBS and other assets
involves a number of other risks, including, among other things, the following:
•
•
•
Adverse developments involving major financial institutions or involving one of our lenders could result in a rapid
reduction in our ability to borrow and materially adversely affect our business, profitability and liquidity. As of
December 31, 2015, we had amounts outstanding under repurchase agreements with 27 separate lenders. A material
adverse development involving one or more major financial institutions or the financial markets in general could result
in our lenders reducing our access to funds available under our repurchase agreements or terminating such repurchase
agreements altogether. Because all of our repurchase agreements are uncommitted and renewable at the discretion of
our lenders, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time,
which could materially adversely affect our business and profitability. Furthermore, if a number of our lenders became
unwilling or unable to continue to provide us with financing, we could be forced to sell assets, including MBS in an
unrealized loss position, in order to maintain liquidity. Forced sales, particularly under adverse market conditions may
result in lower sales prices than ordinary market sales made in the normal course of business. If our MBS were liquidated
at prices below our amortized cost (i.e., the cost basis) of such assets, we would incur losses, which could adversely affect
our earnings.
Our profitability may be materially adversely affected by a reduction in our leverage. As long as we earn a positive
spread between interest and other income we earn on our leveraged assets and our borrowing costs, we believe that we
can generally increase our profitability by using greater amounts of leverage. There can be no assurance, however, that
repurchase financing will remain an efficient source of long-term financing for our assets. The amount of leverage that
we use may be limited because our lenders might not make funding available to us at acceptable rates or they may require
that we provide additional collateral to secure our borrowings. If our financing strategy is not viable, we will have to
find alternative forms of financing for our assets which may not be available to us on acceptable terms or at acceptable
rates. In addition, in response to certain interest rate and investment environments or to changes in market liquidity, we
could adopt a strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize
and/or prepay, thereby decreasing the outstanding amount of our related borrowings. Such an action could reduce interest
income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and
liabilities as well as the sale prices for which the assets were sold.
If we are unable to renew our borrowings at acceptable interest rates, it may force us to sell assets under adverse
market conditions, which may materially adversely affect our liquidity and profitability. Since we rely primarily on
borrowings under repurchase agreements to finance our MBS, our ability to achieve our investment objectives depends
on our ability to borrow funds in sufficient amounts and on acceptable terms, and on our ability to renew or replace
maturing borrowings on a continuous basis. Our repurchase agreement credit lines are renewable at the discretion of our
lenders and, as such, do not contain guaranteed roll-over terms. Our ability to enter into repurchase transactions in the
future will depend on the market value of our MBS pledged to secure the specific borrowings, the availability of acceptable
financing and market liquidity and other conditions existing in the lending market at that time. If we are not able to renew
or replace maturing borrowings, we could be forced to sell assets, including MBS in an unrealized loss position, in order
to maintain liquidity. Forced sales, particularly under adverse market conditions could result in lower sales prices than
ordinary market sales made in the normal course of business. If our MBS were liquidated at prices below our amortized
cost (i.e., the cost basis) of such assets, we would incur losses, which could materially adversely affect our earnings.
11
•
•
•
A decline in the market value of our assets may result in margin calls that may force us to sell assets under adverse
market conditions, which may materially adversely affect our liquidity and profitability. In general, the market value
of our MBS is impacted by changes in interest rates, prevailing market yields and other market conditions. A decline in
the market value of our MBS may limit our ability to borrow against such assets or result in lenders initiating margin
calls, which require a pledge of additional collateral or cash to re-establish the required ratio of borrowing to collateral
value, under our repurchase agreements. Posting additional collateral or cash to support our credit will reduce our liquidity
and limit our ability to leverage our assets, which could materially adversely affect our business. As a result, we could
be forced to sell a portion of our assets, including MBS in an unrealized loss position, in order to maintain liquidity.
If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us
at the end of the transaction term or if we default on our obligations under the repurchase agreement, we could incur
losses. When we engage in repurchase transactions, we generally transfer securities to lenders (i.e., repurchase agreement
counterparties) and receive cash from such lenders. Because the cash we receive from the lender when we initially
transfer the securities to the lender is less than the value of those securities (this difference is referred to as the “haircut”),
if the lender defaults on its obligation to transfer the same securities back to us, we would incur a loss on the transaction
equal to the amount of the haircut (assuming there was no change in the value of the securities). See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, for
further discussion regarding risks related to exposure to financial institution counterparties in light of recent market
conditions. Our exposure to defaults by counterparties may be more pronounced during periods of significant volatility
in the market conditions for mortgages and mortgage-related assets as well as the broader financial markets. At
December 31, 2015, we had greater than 5% stockholders’ equity at risk to the following repurchase agreement
counterparties: Credit Suisse (approximately 13.8%), Wells Fargo (approximately 11.3%), RBC (approximately 11.0%),
UBS (approximately 7.2%) and Goldman Sachs (approximately 5.1%).
In addition, generally, if we default on one of our obligations under a repurchase transaction with a particular lender,
that lender can elect to terminate the transaction and cease entering into additional repurchase transactions with us. In
addition, some of our repurchase agreements contain cross-default provisions, so that if a default occurs under any one
agreement, the lenders under our other repurchase agreements could also declare a default. Any losses we incur on our
repurchase transactions could materially adversely affect our earnings and thus our cash available for distribution to our
stockholders.
Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy.
Borrowings made under repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code. If
a lender under one of our repurchase agreements defaults on its obligations, it may be difficult for us to recover our assets
pledged as collateral to such lender. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase
agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against
the lender for damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer
subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit
Insurance Act, our ability to exercise our rights to recover our securities under a repurchase agreement or to be compensated
for any damages resulting from the lender’s insolvency may be further limited by those statutes. These claims would be
subject to significant delay and, if and when received, may be substantially less than the damages we actually incur. In
addition, in the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment
under the Bankruptcy Code, the effect of which, among other things, would be to allow the creditor under the agreement
to avoid the automatic stay provisions of the Bankruptcy Code and take possession of, and liquidate, our collateral under
our repurchase agreements without delay. Our risks associated with the insolvency or bankruptcy of a lender maybe
more pronounced during periods of significant volatility in the market conditions for mortgages and mortgage-related
assets as well as the broader financial markets.
An increase in our borrowing costs relative to the interest we receive on our MBS or our re-performing residential whole
loans may materially adversely affect our profitability.
Our earnings are primarily generated from the difference between the interest income we earn on our investment portfolio,
less net amortization of purchase premiums and discounts, and the interest expense we pay on our borrowings. We rely primarily
on borrowings under repurchase agreements to finance the acquisition of MBS which have longer-term contractual maturities.
Even though the majority of our investments have interest rates that adjust over time based on changes in corresponding interest
rate indexes, the interest we pay on our borrowings may increase at a faster pace than the interest we earn on our investments. In
general, if the interest expense on our borrowings increases relative to the interest income we earn on our investments, our
profitability may be materially adversely affected, including due to the following reasons:
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Changes in interest rates, cyclical or otherwise, may materially adversely affect our profitability. Interest rates are
highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and
political conditions, as well as other factors beyond our control. In general, we finance the acquisition of our investments
through borrowings in the form of repurchase transactions, which exposes us to interest rate risk on the financed assets.
The cost of our borrowings is based on prevailing market interest rates. Because the terms of our repurchase transactions
typically range from one to six months at inception, the interest rates on our borrowings generally adjust more frequently
(as new repurchase transactions are entered into upon the maturity of existing repurchase transactions) than the interest
rates on our investments. During a period of rising interest rates, our borrowing costs generally will increase at a faster
pace than our interest earnings on the leveraged portion of our investment portfolio, which could result in a decline in
our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability
composition, including the impact of hedging transactions, at the time as well as the magnitude and period over which
interest rates increase. Further, an increase in short-term interest rates could also have a negative impact on the market
value of our MBS portfolio. If any of these events happen, we could experience a decrease in net income or incur a net
loss during these periods, which may negatively impact our distributions to stockholders.
Interest rate caps on the mortgages collateralizing our MBS may materially adversely affect our profitability if short-
term interest rates increase. The coupons earned on ARM-MBS adjust over time as interest rates change (typically after
an initial fixed-rate period for Hybrids). The financial markets primarily determine the interest rates that we pay on the
repurchase transactions used to finance the acquisition of our MBS; however, the level of adjustment to the interest rates
earned on our ARM-MBS is typically limited by contract (or in certain cases by state or federal law). The interim and
lifetime interest rate caps on the mortgages collateralizing our MBS limit the amount by which the interest rates on such
assets can adjust. Interim interest rate caps limit the amount interest rates on a particular ARM can adjust during the next
adjustment period. Lifetime interest rate caps limit the amount interest rates can adjust upward from inception through
maturity of a particular ARM. Our repurchase transactions are not subject to similar restrictions. Accordingly, in a
sustained period of rising interest rates or a period in which interest rates rise rapidly, we could experience a decrease in
net income or a net loss because the interest rates paid by us on our borrowings (excluding the impact of hedging
transactions) could increase without limitation (as new repurchase transactions are entered into upon the maturity of
existing repurchase transactions) while increases in the interest rates earned on the mortgages collateralizing our MBS
could be limited due to interim or lifetime interest rate caps.
Adjustments of interest rates on our borrowings may not be matched to interest rate indexes on our MBS. In general,
the interest rates on our repurchase transactions are based on LIBOR, while the interest rates on our ARM-MBS may be
indexed to LIBOR or CMT rate. Accordingly, any increase in LIBOR relative to one-year CMT rates will generally result
in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earned on our ARM-
MBS tied to these other index rates. Any such interest rate index mismatch could adversely affect our profitability, which
may negatively impact our distributions to stockholders.
A flat or inverted yield curve may adversely affect ARM-MBS prepayment rates and supply. Our net interest income
varies primarily as a result of changes in interest rates as well as changes in interest rates across the yield curve. When
the differential between short-term and long-term benchmark interest rates narrows, the yield curve is said to be
“flattening.” In addition, a flatter yield curve generally leads to fixed-rate mortgage rates that are closer to the interest
rates available on ARMs, potentially decreasing the supply of ARM-MBS. At times, short-term interest rates may increase
and exceed long-term interest rates, causing an inverted yield curve. When the yield curve is inverted, fixed-rate mortgage
rates may approach or be lower than mortgage rates on ARMs, further increasing ARM-MBS prepayments and further
negatively impacting ARM-MBS supply. Increases in prepayments on our MBS portfolio cause our premium amortization
to accelerate, lowering the yield on such assets. If this happens, we could experience a decrease in net income or incur
a net loss during these periods, which may negatively impact our distributions to stockholders.
Amendments to the Federal Home Loan Bank membership regulations will require us to terminate our membership with
the FHLB, which could adversely affect our ability to finance our operations.
Our captive insurance subsidiary, MFA Insurance, is a member of the Federal Home Loan Bank of Des Moines (or FHLB
Des Moines) and obtains advances from the FHLB Des Moines in the form of secured borrowings. On January 12, 2016, the
FHFA amended its regulations governing FHLB membership. The amendments exclude captive insurers from the definition of
“insurance company,” making MFA Insurance ineligible for FHLB membership, and, MFA Insurance is required to terminate its
membership with the FHLB Des Moines by February 19, 2017. It is also required to repay its existing advances from the FHLB
Des Moines by February 19, 2017 or, if earlier, the date it terminates its membership with the FHLB Des Moines, and it is prohibited
from receiving new advances or renewing existing advances with the FHLB Des Moines. As of December 31, 2015 and February 16,
2016, MFA Insurance had approximately $1.500 billion and $1.200 billion, respectively, in outstanding secured advances from
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the FHLB Des Moines. There is no guarantee that we will be able to find suitable counterparties, or any counterparties, to replace
the advances received by the FHLB Des Moines or that such replacements will be made on comparable terms, which could
adversely affect our ability to finance our operations.
Risks Associated With Adverse Developments in the Mortgage Finance and Credit Markets and Financial Markets
Generally
Market conditions for mortgages and mortgage-related assets as well as the broader financial markets may materially
adversely affect the value of the assets in which we invest.
Our results of operations are materially affected by conditions in the markets for mortgages and mortgage-related assets,
including MBS, as well as the broader financial markets and the economy generally. Significant adverse changes in financial
market conditions leading to the forced sale of large quantities of mortgage-related and other financial assets, would result in
significant volatility in the market for mortgages and mortgage-related assets and potentially significant losses for ourselves and
certain other market participants. In addition, concerns over actual or anticipated low economic growth rates higher levels of
unemployment or uncertainty regarding future U.S. monetary policy may contribute to increased interest rate volatility. Declines
in the value of our investments, or perceived market uncertainty about their value, may make it difficult for us to obtain financing
on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Additionally,
increased volatility and/or deterioration in the broader residential mortgage and MBS markets could materially adversely affect
the performance and market value of our investments.
A lack of liquidity in our investments may materially adversely affect our business.
The assets that comprise our investment portfolio and that we acquire are not traded on an exchange. A portion of our
investments are subject to legal and other restrictions on resale and are otherwise generally less liquid than exchange-traded
securities. Any illiquidity of our investments may make it difficult for us to sell such investments if the need or desire arises. In
addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value
at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an
investment in a business entity to the extent that we have or could be attributed with material, non-public information regarding
such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may
be relatively limited, which could adversely affect our results of operations and financial condition.
Actions by the U.S. Government designed to stabilize or reform the financial markets may not achieve their intended
effect or otherwise benefit our business, and could materially adversely affect our business.
In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-
Frank Act), in part to impose significant investment restrictions and capital requirements on banking entities and other organizations
that are significant to U.S. financial markets. For instance, the Dodd-Frank Act imposes significant restrictions on the proprietary
trading activities of certain banking entities and subjects other systemically significant entities and activities regulated by the U.S.
Federal Reserve to increased capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act
also seeks to reform the asset-backed securitization market (including the MBS market) by requiring the retention of a portion of
the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. The
Dodd-Frank Act also imposes significant regulatory restrictions on the origination of residential mortgage loans. The Dodd-Frank
Act’s extensive requirements, and implementation by regulatory agencies such as the Commodity Futures Trading Commission
(or CFTC), the Federal Deposit Insurance Corporation (or FDIC), Federal Reserve Board, and the SEC may have a significant
effect on the financial markets, and may affect the availability or terms of financing from our lender counterparties and the
availability or terms of MBS, both of which could have a material adverse effect on our business.
In addition, the U.S. Government, U.S. Federal Reserve, U.S. Treasury and other governmental and regulatory bodies have
taken or are considering taking other actions to continue to address the fallout from the 2007-2008 financial and credit crisis
domestically and internationally. International financial regulators are examining standard setting for systemically significant
entities, such as those considered by the Third Basel Accords (Basel III) to be incorporated by domestic entities. We cannot predict
whether or when such actions may occur or what affect, if any, such actions could have on our business, results of operations and
financial condition.
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Deterioration in the condition of European banks and financial institutions could have a material adverse effect on our
business.
In the years following the financial and credit crisis of 2007-2008, certain of our repurchase agreement counterparties in the
United States and Europe experienced financial difficulty and were either rescued by government assistance or otherwise benefited
from accommodative monetary policy of Central Banks. Several European governments implemented measures to attempt to
shore up their financial sectors through loans, credit guarantees, capital infusions, promises of continued liquidity funding and
interest rate cuts. Additionally, other governments of the world’s largest economic countries also implemented interest rate cuts.
Although economic and credit conditions have stabilized in the past few years, there is no assurance that these and other plans
and programs will be successful in the longer term, and, in particular, when governments and central banks begin to significantly
unwind or otherwise reverse these programs and policies. If unsuccessful, this could materially adversely affect our financing
and operations as well as those of the entire mortgage sector in general.
Several of our financing counterparties are European banks (or their U.S. based subsidiaries) that, have provided financing
to us, particularly repurchase agreement financing for the acquisition of residential mortgage assets. If European banks and
financial institutions experienced a deterioration in financial condition, there is the possibility that this would also negatively affect
the operations of their U.S. banking subsidiaries. This could adversely affect our financing and operations as well as those of the
entire mortgage sector in general.
Any downgrade, or perceived potential of a downgrade, of U.S. sovereign credit ratings or the credit ratings of the GSEs
by the various credit rating agencies may materially adversely affect our the value of our Agency MBS and our business
more generally.
During the summer of 2011, Standard & Poor’s Ratings Services (or S&P), one of the major credit rating agencies, downgraded
the U.S. sovereign credit rating in response to the protracted debate over the “U.S. debt ceiling limit” and S&P’s perception of
the U.S. Government’s ability to address its long-term budget deficit. At the same time, S&P also lowered the credit ratings of
the GSEs in response to the downgrade in the U.S. sovereign credit rating, as the value of the Agency MBS issued by the GSEs
and their ability to meet their obligations under such Agency MBS are largely determined by the support provided to them by the
U.S. Government and market perceptions of the strength of such support and the likelihood of its continuity.
We could be adversely affected in a number of ways in the event of a default by the U.S. Government, a further downgrade
by S&P or a downgrade of the U.S. sovereign credit rating by another credit rating agency Such adverse effects could include
higher financing costs and/or a reduction in the amount of financing provided based on the market value of collateral posted under
our repurchase agreements and other financing arrangements. In addition, although the rating agencies have more recently
determined that the GSEs’ outlook is generally stable, to the extent that the credit rating of any or all of the GSEs were to be
downgraded in the future, the value of our Agency MBS could be adversely affected. These outcomes could in turn materially
adversely affect our operations and financial condition in a number of ways, including a reduction in the net interest spread between
our assets and associated repurchase agreement borrowings or a decrease in our ability to obtain repurchase agreement financing
on acceptable terms, or at all.
Regulatory Risk and Risks Related to the Investment Company Act of 1940
Our business is subject to extensive regulation.
Our business is subject to extensive regulation by federal and state governmental authorities, self-regulatory organizations
and securities exchanges. We are required to comply with numerous federal and state laws. The laws, rules and regulations
comprising this regulatory framework change frequently, as can the interpretation and enforcement of existing laws, rules and
regulations. Some of the laws, rules and regulations to which we are subject are intended primarily to safeguard and protect
consumers, rather than stockholders or creditors. From time to time, we may receive requests from federal and state agencies for
records, documents and information regarding our policies, procedures and practices regarding our business activities. We incur
significant ongoing costs to comply with these government regulations.
Although we do not originate or directly service residential mortgage loans, we must comply with various federal and state
laws, rules and regulations as a result of owning MBS and residential whole loans. These rules generally focus on consumer
protection and include, among others, rules promulgated under the Dodd-Frank Act, and the Gramm-Leach-Bliley Financial
Modernization Act of 1999 (or Gramm-Leach-Bliley). These requirements can and do change as statutes and regulations are
enacted, promulgated, amended and interpreted, and the recent trend among federal and state lawmakers and regulators has been
toward increasing laws, regulations and investigative proceedings in relation to the mortgage industry generally. Although we
believe that we have structured our operations and investments to comply with existing legal and regulatory requirements and
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interpretations, changes in regulatory and legal requirements, including changes in their interpretation and enforcement by
lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity and results of
operations.
Maintaining our exemption from registration under the Investment Company Act imposes significant limits on our
operations.
We conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company
under the Investment Company Act. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any
issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section
3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in
the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities
having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items)
on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. Government securities
and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the
exception from the definition of investment company for private funds set forth in Section 3(c)(1) or Section 3(c)(7) of the
Investment Company Act.
We are a holding company and conduct our real estate businesses primarily through wholly-owned subsidiaries. We conduct
our real estate business so that we do not come within the definition of an investment company because less than 40% of the value
of our adjusted total assets on an unconsolidated basis will consist of “investment securities.” The securities issued by any wholly-
owned or majority-owned subsidiaries that we may form in the future that are excepted from the definition of “investment company”
based on Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own,
may not have a value in excess of 40% of the value of our adjusted total assets on an unconsolidated basis. We monitor our
holdings to ensure continuing and ongoing compliance with this test. In addition, we believe we will not be considered an investment
company under Section 3(a)(1)(A) of the Investment Company Act because we will not engage primarily or hold ourselves out
as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our wholly-owned
subsidiaries, we will be primarily engaged in the non-investment company businesses of these subsidiaries.
If the value of securities issued by our subsidiaries that are excepted from the definition of “investment company” by Section
3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we own, exceeds 40% of our
adjusted total assets on an unconsolidated basis, or if one or more of such subsidiaries fail to maintain an exception or exemption
from the Investment Company Act, we could, among other things, be required either (a) to substantially change the manner in
which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a
manner that, or at a time when, we would not otherwise choose to do so or (c) to register as an investment company under the
Investment Company Act, either of which could have an adverse effect on us and the market price of our securities. If we were
required to register as an investment company under the Investment Company Act, we would become subject to substantial
regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with
affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to
diversification and industry concentration, and other matters.
We expect that our subsidiaries that invest in residential mortgage loans (whether through a consolidated trust or otherwise)
will rely upon the exemption from registration as an investment company under the Investment Company Act pursuant to Section
3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55%
of these subsidiaries’ assets must be comprised of qualifying real estate assets and at least 80% of each of their portfolios must be
comprised of qualifying real estate assets and real estate-related assets under the Investment Company Act. Mortgage loans that
were fully and exclusively secured by real property are generally qualifying real estate assets for purposes of the exemption. All,
or substantially all, of our residential mortgage loans are fully and exclusively secured by real property with a loan-to-value ratio
of less than 100%. As a result, we believe our residential mortgage loans that are fully and exclusively secured by real property
meet the definition of qualifying real estate assets. To the extent we own any residential mortgage loans with a loan-to-value ratio
of greater than 100%, we intend to classify, depending on guidance from the SEC staff, only the portion of the value of such loans
that does not exceed the value of the real estate collateral as qualifying real estate assets and the excess as real estate-related assets.
In August 2011, the SEC issued a “concept release” pursuant to which they solicited public comments on a wide range of
issues relating to companies engaged in the business of acquiring mortgages and mortgage-related instruments and that rely on
Section 3(c)(5)(C) of the Investment Company Act. The concept release and the public comments thereto have not yet resulted in
SEC rulemaking or interpretative guidance and we cannot predict what form any such rulemaking or interpretive guidance may
take. There can be no assurance, however, that the laws and regulations governing the Investment Company Act status of REITs,
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or guidance from the SEC or its staff regarding the exemption from registration as an investment company on which we rely, will
not change in a manner that adversely affects our operations. We expect each of our subsidiaries relying on Section 3(c)(5)(C) to
rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets, if any,
to determine which assets are qualifying real estate assets and real estate-related assets. To the extent that the SEC staff publishes
new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. In addition, we
may be limited in our ability to make certain investments and these limitations could result in us holding assets we might wish to
sell or selling assets we might wish to hold.
Certain of our subsidiaries may rely on the exemption provided by Section 3(c)(6) to the extent that they hold residential
mortgage loans through majority owned subsidiaries that rely on Section 3(c)(5)(C). The SEC staff has issued little interpretive
guidance with respect to Section 3(c)(6) and any guidance published by the staff could require us to adjust our strategy accordingly.
To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exceptions
we and our subsidiaries rely on from the Investment Company Act, we may be required to adjust our strategy accordingly. Any
additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue
the strategies we have chosen.
There can be no assurance that the laws and regulations governing the Investment Company Act status of REITs, including
the Division of Investment Management of the SEC providing more specific or different guidance regarding these exemptions,
will not change in a manner that adversely affects our operations.
Risks Related to Our Use of Hedging Strategies
Our use of hedging strategies to mitigate our interest rate exposure may not be effective.
In accordance with our operating policies, we pursue various types of hedging strategies, including interest rate swap
agreements (or Swaps), to seek to mitigate or reduce our exposure to losses from adverse changes in interest rates. Our hedging
activity will vary in scope based on the level and volatility of interest rates, the type of assets held and financing sources used and
other changing market conditions. No hedging strategy, however, can completely insulate us from the interest rate risks to which
we are exposed and there is no guarantee that the implementation of any hedging strategy would have the desired impact on our
results of operations or financial condition. Certain of the U.S. federal income tax requirements that we must satisfy in order to
qualify as a REIT may limit our ability to hedge against such risks. We will not enter into derivative transactions if we believe
that they will jeopardize our qualification as a REIT.
Interest rate hedging may fail to protect or could adversely affect us because, among other things:
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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our
ability to sell or assign our side of the hedging transaction; and
the party owing money in the hedging transaction may default on its obligation to pay.
We primarily use Swaps to hedge against future increases in interest rates on our repurchase agreements. Should a Swap
counterparty be unable to make required payments pursuant to such Swap, the hedged liability would cease to be hedged for the
remaining term of the Swap. In addition, we may be at risk for any collateral held by a hedging counterparty to a Swap, should
such counterparty become insolvent or file for bankruptcy. Our hedging transactions, which are intended to limit losses, may
actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
We may enter into hedging instruments that could expose us to contingent liabilities in the future, which could materially
adversely affect our results of operations.
Subject to maintaining our qualification as a REIT, part of our financing strategy involves entering into hedging instruments
that could require us to fund cash payments in certain circumstances (e.g., the early termination of a hedging instrument caused
by an event of default or other voluntary or involuntary termination event or the decision by a hedging counterparty to request the
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posting of collateral that it is contractually owed under the terms of a hedging instrument). With respect to the termination of an
existing Swap, the amount due would generally be equal to the unrealized loss of the open Swap position with the hedging
counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of
operations and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. Any
losses we incur on our hedging instruments could materially adversely affect our earnings and thus our cash available for distribution
to our stockholders.
The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty
risks, which could adversely affect our business and results of operations.
As indicated above, from time to time we enter into Swaps. Entities entering into Swaps are exposed to credit losses in the
event of non-performance by counterparties to these transactions. The CFTC, issued new rules that became effective in October
2012 regarding Swaps under the authority granted to it pursuant to the Dodd-Frank Act. Although the new rules do not directly
affect the negotiations and terms of individual Swap transactions between counterparties, they do require that the clearing of all
Swap transactions through registered derivatives clearing organizations, or swap execution facilities, through standardized
documents under which each Swap counterparty transfers its position to another entity whereby the centralized clearinghouse
effectively becomes the counterparty to each side of the Swap. It is the intent of the Dodd-Frank Act that the clearing of Swaps
in this manner is designed to avoid concentration of swap risk in any single entity by spreading and centralizing the risk in the
clearinghouse and its members. In addition to greater initial and periodic margin (collateral) requirements and additional transaction
fees both by the swap execution facility and the clearinghouse, the Swap transactions are now subjected to greater regulation by
both the CFTC and the SEC. These additional fees, costs, margin requirements, documentation, and regulation could adversely
affect our business and results of operations. Additionally, for all Swaps we entered into prior to June 2013, we are not required
to clear them through the central clearinghouse and these Swaps are still subject to the risks of non-performance by any of the
individual counterparties with whom we entered into these transactions. If the Swap counterparty cannot perform under the terms
of a Swap, we would not receive payments due under that agreement, we may lose any unrealized gain associated with the Swap,
and the hedged liability would cease to be hedged by the Swap. We may also be at risk for any collateral we have pledged to secure
our obligation under the Swap if the counterparty becomes insolvent or files for bankruptcy. Default by a party with whom we
enter into a hedging transaction may result in a loss and force us to cover our commitments, if any, at the then-current market
price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to
dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into
an offsetting contract in order to cover our risk. We cannot assure you that there will always be a liquid secondary market that
will exist for hedging instruments purchased or sold and we may be required to maintain a position until exercise or expiration,
which could result in losses.
Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase margin requirements
on our hedging instruments in the event of adverse economic developments.
In response to events having or expected to have adverse economic consequences or which create market uncertainty, clearing
facilities or exchanges upon which some of our hedging instruments (i.e., interest rate swaps) are traded may require us to post
additional collateral against our hedging instruments. For example, in response to the U.S. approaching its debt ceiling without
resolution and the federal government shutdown, in October 2013, the Chicago Mercantile Exchange announced that it would
increase margin requirements by 12% for all over-the-counter interest rate swap portfolios that its clearinghouse guaranteed. This
increase was subsequently rolled back shortly thereafter upon the news that Congress passed legislation to temporarily suspend
the national debt ceiling and reopen the federal government, and provide a time period for broader negotiations concerning federal
budgetary issues. In the event that future adverse economic developments or market uncertainty (including those due to
governmental, regulatory, or legislative action or inaction) result in increased margin requirements for our hedging instruments,
it could materially adversely affect our liquidity position, business, financial condition and results of operations.
We may fail to qualify for hedge accounting treatment, which could materially adversely affect our results of operations.
We record derivative and hedge transactions in accordance with GAAP, specifically according to the Financial Accounting
Standards Board (or FASB) Accounting Standards Codification Topic on Derivatives. Under these standards, we may fail to
qualify for hedge accounting treatment for a number of reasons, including if we use instruments that do not meet the definition
of a derivative, we fail to satisfy hedge documentation and hedge effectiveness assessment requirements or our instruments are
not highly effective. If we fail to qualify for hedge accounting treatment, though the fundamental economic performance of our
business would be unaffected, our operating results for financial reporting purposes may be materially adversely affected because
losses on the derivatives we enter into would be recorded in net income, rather than AOCI, a component of stockholders’ equity.
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Risks Related to Our Taxation as a REIT and the Taxation of Our Assets
If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax
liability, which would reduce the amount of cash available for distribution to our stockholders.
We have elected to qualify as a REIT and intend to comply with the provisions of the Internal Revenue Code of 1986, as
amended (or the Code) related to REIT qualification. Accordingly, we will not be subject to U.S. federal income tax to the extent
we distribute 100% of our REIT taxable income (which is generally our taxable income, computed without regard to the dividends
paid deduction, any net income from prohibited transactions, and any net income from foreclosure property) to stockholders within
the timeframe permitted under the Code and provided that we comply with certain income, asset ownership and other tests applicable
to REITs. We believe that we currently meet all of the REIT requirements and intend to continue to qualify as a REIT under the
provisions of the Code. Many of the REIT requirements however are highly technical and complex. The determination of whether
we are a REIT requires an analysis of various factual matters and circumstances, some of which may not be totally within our
control and some of which involve interpretation. For example, if we are to qualify as a REIT, annually at least 75% of our gross
income must come from, among other sources, interest on obligations secured by mortgages on real property or interests in real
property, gain from the disposition of real property, including mortgages or interests in real property (other than sales or dispositions
of real property, including mortgages on real property, or securities that are treated as mortgages on real property, that we hold
primarily for sale to customers in the ordinary course of a trade or business (i.e., prohibited transactions)), dividends, other
distributions on and gains from the disposition of shares in other REITs, commitment fees received for agreements to make real
estate loans and certain temporary investment income. In addition, the composition of our assets must meet qualified requirements
at the close of each quarter. There can be no assurance that we will be able to satisfy these or other requirements or that the Internal
Revenue Service (or IRS) or a court would agree with any conclusions or positions we have taken in interpreting the REIT
requirements.
Even a technical or inadvertent mistake could jeopardize our REIT qualification unless we meet certain statutory relief
provisions. If we were to fail to qualify as a REIT in any taxable year for any reason, we would be subject to U.S. federal income
tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our
stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be
substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse
impact on the value of our common stock. Unless we were entitled to relief under certain Code provisions, we also would be
disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.
We may lose our REIT status if the IRS successfully challenges our characterization of our income from foreign TRSs.
We have elected to treat a Cayman Islands company as a TRS. We will likely be required to include in our income, even
without the receipt of actual distributions, earnings from our investment in the foreign TRS. Income inclusions from equity
investments in foreign corporations are technically neither actual dividends nor any of the other enumerated categories of qualifying
income for the 95% gross income test. However, the IRS, based on discretionary authority granted to it under the Code, has issued
private letter rulings to other REITs holding that income inclusions from equity investments in foreign corporations would be
treated as qualifying income for purposes of the 95% gross income test. Private letter rulings may be relied upon only by the
taxpayers to whom they are issued and the IRS may revoke a private letter ruling. Based on those private letter rulings and advice
of counsel, we generally intend to treat such income inclusions as qualifying income for purposes of the 95% gross income test.
Nevertheless, no assurance can be provided that the IRS would not successfully challenge our treatment of such income as qualifying
income. In the event that such income was determined not to qualify for the 95% gross income test, we could be subject to a
penalty tax with respect to such income to the extent it exceeds 5% of our gross income or we could fail to continue to qualify as
a REIT.
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REIT distribution requirements could adversely affect our ability to execute our business plan.
To maintain our qualification as a REIT, we must distribute at least 90% of our REIT taxable income (determined without
regard to the dividends paid deduction and excluding any net capital gain) to our stockholders within the timeframe permitted
under the Code. We generally must make these distributions in the taxable year to which they relate, or in the following taxable
year if declared before we timely (including extensions) file our tax return for the year and if paid with or before the first regular
dividend payment after such declaration. To the extent that we satisfy this distribution requirement, but distribute less than 100%
of our taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, if we should
fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our
REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to
a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed,
plus (y) the amounts of income we retained and on which we have paid corporate income tax.
The dividend distribution requirement limits the amount of cash we have available for other business purposes, including
amounts to fund our growth. Also, it is possible that because of differences in timing between the recognition of taxable income
and the actual receipt of cash, we may have to borrow funds on unfavorable terms, sell investments at disadvantageous prices or
distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to maintain our
qualification as a REIT or avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase
our costs or reduce our stockholders’ equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which
could adversely affect the value of our common stock.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify as a REIT for U.S. federal income tax purposes, we may be required to pay certain federal, state and local
taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a
result of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other
taxes. In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash
income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory,
we may hold some of our assets through TRSs or other subsidiary corporations that will be subject to corporate level income tax
at regular rates. In addition, if we lend money to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to
us, which could result in an even higher corporate level tax liability. Any of these taxes would reduce our operating cash flow and
thus our cash available for distribution to our stockholders.
If our foreign TRSs are subject to U.S. federal income tax at the entity level, it would greatly reduce the amounts those
entities would have available to distribute to us and that they would have available to pay their creditors.
There is a specific exemption from regular U.S. federal income tax for non-U.S. corporations that restrict their activities in
the United States to trading stock and securities (or any activity closely related thereto) for their own account whether such trading
(or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian
or other agent. We intend that our foreign TRS will rely on that exemption or otherwise operate in a manner so that it will not be
subject to regular U.S. federal income tax on its net income at the entity level. If the IRS succeeded in challenging that tax
treatment, it would greatly reduce the amount that the foreign TRS would have available to pay to their creditors and to distribute
to us. In addition, even if our foreign TRS qualifies for that exemption, it may nevertheless be subject to U.S. federal withholding
tax on certain types of income.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To remain qualified as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among
other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders
and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we
do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous
to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. In addition, in certain
cases, the modification of a debt instrument could result in the conversion of the instrument from a qualifying real estate asset to
a wholly or partially non-qualifying asset that must be contributed to a TRS or disposed of in order for us to qualify or maintain
our qualification as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases,
to maintain ownership of, certain attractive investments.
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We may generate taxable income that differs from our GAAP income on our Non-Agency MBS and residential whole loan
investments purchased at a discount to par value, which may result in significant timing variances in the recognition of
income and losses.
We have acquired and intend to continue to acquire Non-Agency MBS and residential whole loans at prices that reflect
significant market discounts on their unpaid principal balances. For financial statement reporting purposes, we generally establish
a portion of the purchase discount on Non-Agency MBS as a Credit Reserve. This Credit Reserve is generally not accreted into
income for financial statement reporting purposes. For tax purposes, however, we are not permitted to anticipate, or establish a
reserve for, credit losses prior to their occurrence. As a result, discount on securities acquired in the primary or secondary market
is included in the determination of taxable income and is not impacted by losses until such losses are incurred. Such differences
in accounting for tax and GAAP can lead to significant timing variances in the recognition of income and losses. Taxable income
on Non-Agency MBS purchased at a discount to their par value may be higher than GAAP earnings in early periods (before losses
are actually incurred) and lower than GAAP earnings in periods during and subsequent to when realized credit losses are incurred.
Dividends will be declared and paid at the discretion of our Board and will depend on REIT taxable earnings, our financial results
and overall financial condition, maintenance of our REIT qualification and such other factors as our Board may deem relevant
from time to time.
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur and may limit the manner
in which we effect future securitizations.
Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools for U.S. federal income tax
purposes. The real estate mortgage investment conduit (or REMIC) provisions of the Code generally provide that REMICs are
the only form of pass-through entity permitted to issue debt obligations with two or more maturities if the payments on those
obligations bear a relationship to the mortgage obligations held by such entity. If we engage in a non-REMIC securitization
transaction, directly or indirectly through a qualified REIT subsidiary (or QRS), in which the assets held by the securitization
vehicle consist largely of mortgage loans or MBS, in which the securitization vehicle issues to investors two or more classes of
debt instruments that have different maturities, and in which the timing and amount of payments on the debt instruments is
determined in large part by the amounts received on the mortgage loans or MBS held by the securitization vehicle, the securitization
vehicle will be a taxable mortgage pool. As long as we or another REIT hold a 100% interest in the equity interests in a taxable
mortgage pool, either directly, or through a QRS, it will not be subject to tax. A portion of the income that we realize with respect
to the equity interest we hold in a taxable mortgage pool will, however, be considered to be excess inclusion income and, as a
result, a portion of the dividends that we pay to our stockholders will be considered to consist of excess inclusion income. Such
excess inclusion income is treated as unrelated business taxable income (or UBTI) for tax-exempt stockholders, is subject to
withholding for foreign stockholders (without the benefit of any treaty reduction), and is not subject to reduction by net operating
loss carryovers. In addition to the extent that our stock is owned by tax-exempt “disqualified organizations,” such as certain
government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur
a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we may reduce the amount of our
distributions to any disqualified organization whose stock ownership gave rise to the tax. Historically, we have not generated
excess inclusion income; however, despite our efforts, we may not be able to avoid creating or distributing excess inclusion income
to our stockholders in the future. In addition, we could face limitations in selling equity interests to outside investors in securitization
transactions that are taxable mortgage pools or selling any debt securities issued in connection with these securitizations that might
be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize
our returns from securitization transactions.
We have not established a minimum dividend payment level, and there is no guarantee that we will maintain current
dividend payment levels or pay dividends in the future.
In order to maintain our qualification as a REIT, we must comply with a number of requirements under U.S. federal tax law,
including that we distribute at least 90% of our REIT taxable income within the timeframe permitted under the Code, which is
calculated generally before the dividends paid deduction and excluding net capital gain. Dividends will be declared and paid at
the discretion of our Board and will depend on our REIT taxable earnings, our financial results and overall condition, maintenance
of our REIT qualification and such other factors as our Board may deem relevant from time to time. We have not established a
minimum dividend payment level for our common stock and our ability to pay dividends may be negatively impacted by adverse
changes in our operating results. Therefore, our dividend payment level may fluctuate significantly, and, under some circumstances,
we may not pay dividends at all.
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Our reported GAAP net income may differ from the amount of REIT taxable income and dividend distribution requirements
and, therefore, our GAAP results may not be an accurate indicator of future taxable income and dividend distributions.
Generally, the cumulative net income we report over the life of an asset will be the same for GAAP and tax purposes, although
the timing of this income recognition over the life of the asset could be materially different. Differences exist in the accounting
for GAAP net income and REIT taxable income which can lead to significant variances in the amount and timing of when income
and losses are recognized under these two measures. Due to these differences, our reported GAAP financial results could materially
differ from our determination of REIT taxable income, and our dividend distribution requirements, and, therefore, our GAAP
results may not be an accurate indicator of future taxable income and dividend distributions.
Over time, accounting principles, conventions, rules, and interpretations may change, which could affect our reported
GAAP and taxable earnings, and stockholders’ equity.
Accounting rules for the various aspects of our business change from time to time. Changes in GAAP, or the accepted
interpretation of these accounting principles, can affect our reported income, earnings, and stockholders’ equity. In addition,
changes in tax accounting rules or the interpretations thereof could affect our REIT taxable income and our dividend distribution
requirements. These changes may materially adversely affect our results of operations.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to
remain qualified as a REIT.
We enter into certain financing arrangements that are structured as sale and repurchase agreements pursuant to which we
nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a
later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold
pursuant thereto. We generally believe that we would be treated for REIT asset and income test purposes as the owner of the assets
that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership
of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did
not own the assets during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code could substantially limit our ability to hedge our liabilities. Any income from a properly
designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be
made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, or from certain other limited types
of hedging transactions, generally does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the
extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-
qualifying income for purposes of both of the gross income tests. As a result of these rules, we may have to limit our use of
advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities
because a TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we
would otherwise want to bear. In addition, losses in a TRS will generally not provide any tax benefit, except for being carried
forward against future taxable income in the TRS.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize
from them.
We may acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt
instruments are acquired may reflect doubts about their ultimate collectibility rather than current market interest rates. The amount
of such discount will nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market
discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. If we collect
less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not
be able to benefit from any offsetting loss deductions.
Some of the debt instruments that we acquire may have been issued with original issue discount. We will be required to
report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future
projected payments due on such debt instruments will be made. If such debt instruments turn out not to be fully collectible, an
offsetting loss deduction will become available only in the later year that uncollectibility is provable.
In addition, we may acquire debt instruments that are subsequently modified by agreement with the borrower. If the
amendments to the outstanding instrument are “significant modifications” under the applicable Treasury regulations, the modified
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instrument will be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be
required to recognize taxable gain to the extent the principal amount of the modified instrument exceeds our adjusted tax basis in
the unmodified instrument, even if the value of the instrument or the payment expectations have not changed. Following such a
taxable modification, we would hold the modified loan with a cost basis equal to its principal amount for federal tax purposes.
Finally, in the event that any debt instruments acquired by us are delinquent as to mandatory principal and interest payments,
or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue
to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectibility. Similarly, we may
be required to accrue interest income with respect to debt instruments at its stated rate regardless of whether corresponding cash
payments are received or are ultimately collectible. In each case, while we would in general ultimately have an offsetting loss
deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our
having taxable income in that later year or thereafter.
For these and other reasons, we may have difficulty making distributions sufficient to maintain our qualification as a REIT
or avoid corporate income tax and the 4% excise tax in a particular year.
Dividends paid by REITs do not qualify for the reduced tax rates
The maximum regular U.S. federal income tax rate for dividends paid to domestic stockholders that are individuals, trusts
and estates is currently 20%. Dividends paid by REITs, however, are generally not eligible for the reduced rates. Although this
legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to
regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be
relatively less attractive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the
value of the stock of REITs, including our common stock.
We may enter into resecuritization transactions, the tax treatment of which could have a material adverse effect on our
results of operations.
We have engaged in and may in the future, engage in resecuritization transactions in which we transfer Non-Agency MBS
to a special purpose entity that has formed or will form a securitization vehicle that will issue multiple classes of securities secured
by and payable from cash flows on the underlying Non-Agency MBS. To date, we have structured two such transactions as a
REMIC securitizations, which, to the extent we have transferred securities in a resecuritization, is viewed as the sale of securities
for tax purposes. Although such transactions are treated as sales for tax purposes, they have historically not given rise to any
taxable gain so that the prohibited transactions tax rules have not been implicated (i.e., the tax only applies to net taxable gain
from sales that are prohibited transactions); however, no assurance can be offered that the IRS will agree with such treatment. In
addition, to these REMIC securitization transactions, we have also engaged in two resecuritization transactions that we believe
should be treated as financing transactions for tax purposes. If a securitization transaction were to be considered to be a sale of
property to customers in the ordinary course of a trade or business, and we recognized a gain on such transaction for tax purposes,
then we could risk exposure to the 100% tax on net taxable income from prohibited transactions. Moreover, even if we retained
MBS resulting from a resecuritization transaction and then subsequently sold such securities at a tax gain, the gain could, absent
an available safe-harbor provision, be characterized as net income from a prohibited transaction. Under these circumstances, our
results of operations could be materially adversely affected.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more
difficult or impossible for us to remain qualified as a REIT.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative,
judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us.
Revisions in U.S. federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments
and affect the tax considerations of an investment in us.
Risks Related to Our Corporate Structure
Our ownership limitations may restrict business combination opportunities.
To qualify as a REIT under the Code, no more than 50% of the value of our outstanding shares of capital stock may be owned,
directly or under applicable attribution rules, by five or fewer individuals (as defined by the Code to include certain entities) during
the last half of each taxable year. To preserve our REIT qualification, among other things, our charter generally prohibits direct
or indirect ownership by any person of more than 9.8% of the number or value of the outstanding shares of our capital stock.
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Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limit. Any transfer of shares of
our capital stock or other event that, if effective, would violate the ownership limit will be void as to that number of shares of
capital stock in excess of the ownership limit and the intended transferee will acquire no rights in such shares. Shares issued or
transferred that would cause any stockholder to own more than the ownership limit or cause us to become “closely held” under
Section 856(h) of the Code will automatically be converted into an equal number of shares of excess stock. All excess stock will
be automatically transferred, without action by the prohibited owner, to a trust for the exclusive benefit of one or more charitable
beneficiaries that we select, and the prohibited owner will not acquire any rights in the shares of excess stock. The restrictions
on ownership and transfer contained in our charter could have the effect of delaying, deferring or preventing a change in control
or other transaction in which holders of shares of common stock might receive a premium for their shares of common stock over
the then current market price or that such holders might believe to be otherwise in their best interests. The ownership limit
provisions also may make our shares of common stock an unsuitable investment vehicle for any person seeking to obtain, either
alone or with others as a group, ownership of more than 9.8% of the number or value of our outstanding shares of capital stock.
Provisions of Maryland law and other provisions of our organizational documents may limit the ability of a third
party to acquire control of the Company.
Certain provisions of the Maryland General Corporation Law (or MGCL) may have the effect of delaying, deferring or
preventing a transaction or a change in control of our company that might involve a premium price for holders of our common
stock or otherwise be in their best interests, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an
“interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of
our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately
prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock)
or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an
interested stockholder, and thereafter impose two supermajority stockholder voting requirements to approve these
combinations (unless our common stockholders receive a minimum price, as defined under Maryland law, for their shares
in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares);
and
“control share” provisions that provide that holders of “control shares” of our company (defined as voting shares of stock
which, when aggregated with all other shares controlled by the acquiring stockholder, entitle the stockholder to exercise
one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined
as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent
approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
Our bylaws provide that we are not subject to the “control share” provisions of the MGCL. However, our Board may elect
to make the “control share” statute applicable to us at any time, and may do so without stockholder approval.
Title 3, Subtitle 8 of the MGCL permits our Board, without stockholder approval and regardless of what is currently provided
in our charter or bylaws, to elect on behalf of our company to be subject to statutory provisions that may have the effect of delaying,
deferring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our
common stock or otherwise be in their best interest. Our Board may elect to opt in to any or all of the provisions of Title 3, Subtitle
8 of the MGCL without stockholder approval at any time. In addition, without our having elected to be subject to Subtitle 8, our
charter and bylaws already (1) provide for a classified board, (2) require the affirmative vote of the holders of at least 80% of the
votes entitled to be cast in the election of directors for the removal of any director from our Board, which removal will be allowed
only for cause, (3) vest in our Board the exclusive power to fix the number of directorships and (4) require, unless called by our
Chairman of the Board, Chief Executive Officer or President or our Board, the written request of stockholders entitled to cast not
less than a majority of all votes entitled to be cast at such a meeting to call a special meeting. These provisions may delay or
prevent a change of control of our company.
Future offerings of debt securities, which would rank senior to our common stock upon liquidation, and future offerings
of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes
of dividend and liquidating distributions, may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity
securities, including commercial paper, senior or subordinated notes and series or classes of preferred stock or common stock.
Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings
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will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute
the holdings of our existing stockholders or reduce the market price of our common stock, or both. Preferred stock could have a
preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend
distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future
offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock
and diluting their stock holdings in us.
Our Board may approve the issuance of capital stock with terms that may discourage a third party from acquiring the
Company.
Our charter permits our Board to issue shares of preferred stock, issuable in one or more classes or series. We may issue a
class of preferred stock to individual investors in order to comply with the various REIT requirements or to finance our operations.
Our charter further permits our Board to classify or reclassify any unissued shares of preferred or common stock and establish the
preferences and rights (including, among others, voting, dividend and conversion rights) of any such shares of stock, which rights
may be superior to those of shares of our common stock. Thus, our Board could authorize the issuance of shares of preferred or
common stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders
of the outstanding shares of our common stock might receive a premium for their shares over the then current market price of our
common stock.
Future issuances or sales of shares could cause our share price to decline.
Sales of substantial numbers of shares of our common stock in the public market, or the perception that such sales might
occur, could adversely affect the market price of our common stock. In addition, the sale of these shares could impair our ability
to raise capital through a sale of additional equity securities. Other issuances of our common stock could have an adverse effect
on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing stockholders.
Other Business Risks
We are dependent on our executive officers and other key personnel for our success, the loss of any of whom may materially
adversely affect our business.
Our success is dependent upon the efforts, experience, diligence, skill and network of business contacts of our executive
officers and key personnel. The departure of any of our executive officers and/or key personnel could have a material adverse
effect on our operations and performance.
We are dependent on information systems and their failure could significantly disrupt our business.
Our business is highly dependent on our information and communications systems. Any failure or interruption of our systems
or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading
activities, which could have a material adverse effect on operating results, the market price of our common stock and other securities
and our ability to pay dividends to our stockholders. In addition, we also face the risk of operational failure, termination or capacity
constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents
or other financial intermediaries we use to facilitate our securities transactions.
Computer malware, viruses, and computer hacking and phishing and cyber attacks have become more prevalent in our
industry and may occur on our systems in the future. We rely heavily on financial, accounting and other data processing systems.
It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or
security breaches of our networks or systems (or networks or systems of, among other third parties, our lenders) or any failure to
maintain performance, reliability and security of our technical infrastructure. As a result, any such computer malware, viruses,
and computer hacking and phishing attacks may negatively affect our operations.
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We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire
desirable investments, which could materially adversely affect our results of operations.
We operate in a highly competitive market for investment opportunities. Our profitability depends, in large part, on our
ability to acquire MBS or other investments at favorable prices. In acquiring our investments, we compete with a variety of
institutional investors, including other REITs, public and private funds, commercial and investment banks, commercial finance
and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably
greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and
access to funding sources that are not available to us. Many of our competitors are not subject to the operating constraints associated
with REIT compliance or maintenance of an exemption from the Investment Company Act. In addition, some of our competitors
may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments
and establish additional business relationships than us. Furthermore, government or regulatory action and competition for
investment securities of the types and classes which we acquire may lead to the price of such assets increasing, which may further
limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material
adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable
investments may be limited in the future and we may not be able to take advantage of attractive investment opportunities from
time to time, as we can provide no assurance that we will be able to identify and make investments that are consistent with our
investment objectives.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Office Leases
We pay monthly rent pursuant to two operating leases. Our lease for our corporate headquarters in New York, New York
extends through May 31, 2020. The lease provides for aggregate cash payments ranging over time of approximately $2.5 million
per year, paid on a monthly basis, exclusive of escalation charges. In addition, as part of this lease agreement, we have provided
the landlord a $785,000 irrevocable standby letter of credit fully collateralized by cash. The letter of credit may be drawn upon
by the landlord in the event that we default under certain terms of the lease. In addition, we have a lease through December 31,
2016, for our off-site back-up facility located in Rockville Centre, New York, which provides for, among other things, lease
payments totaling $30,000, annually.
Item 3. Legal Proceedings.
There are no material legal proceedings to which we are a party or to which any of our assets are subject.
To date, we have not been required to make any payments to the IRS as a penalty for failing to make disclosures required
with respect to certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.
Item 4. Mine Safety Disclosures.
Not applicable.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the New York Stock Exchange, under the symbol “MFA.” On February 12, 2016, the last
sales price for our common stock on the New York Stock Exchange was $6.39 per share. The following table sets forth the high
and low sales prices per share of our common stock during each calendar quarter for the years ended December 31, 2015 and
2014:
Quarter Ended
March 31
June 30
September 30
December 31
Holders
2015
2014
High
Low
High
Low
$
$
8.22
8.04
7.80
7.17
$
7.68
7.39
5.78
6.17
$
7.96
8.50
8.47
8.45
7.03
7.65
7.77
7.78
As of February 12, 2016, we had 611 registered holders of our common stock. Such information was obtained through
our registrar and transfer agent, based on the results of a broker search.
Dividends
No dividends may be paid on our common stock unless full cumulative dividends have been paid on our preferred stock.
We have paid full cumulative dividends on our preferred stock on a quarterly basis through December 31, 2015. We have historically
declared cash dividends on our common stock on a quarterly basis. During 2015 and 2014, we declared total cash dividends to
holders of our common stock of $296.4 million ($0.80 per share) and $294.8 million ($0.80 per share), respectively. In general,
our common stock dividends have been characterized as ordinary income to our stockholders for income tax purposes. However,
a portion of our common stock dividends may, from time to time, be characterized as capital gains or return of capital. For the
year ended December 31, 2015, a portion of our dividends were deemed to be capital gains. For the year ended December 31,
2014, our common stock dividends were characterized as ordinary income to stockholders. (For additional dividend information,
see Notes 13(a) and 13(b) to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.)
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31,
1998 and, as such, anticipate distributing at least 90% of our REIT taxable income within the timeframe permitted by the Code.
Although we may borrow funds to make distributions, cash for such distributions has generally been, and is expected to continue
to be, largely generated from our results of our operations.
28
We declared and paid the following dividends on our common stock during the years 2015 and 2014:
Year
2015
Declaration Date
Record Date
Payment Date
December 9, 2015
December 28, 2015
January 29, 2016
$
September 17, 2015
September 29, 2015
October 30, 2015
Dividend per
Share
0.20 (1)
0.20
June 15, 2015
March 13, 2015
June 29, 2015
March 27, 2015
July 31, 2015
April 30, 2015
2014
December 9, 2014
December 26, 2014
January 30, 2015
$
September 17, 2014
September 29, 2014
October 31, 2014
June 13, 2014
March 10, 2014
June 27, 2014
March 28, 2014
July 31, 2014
April 30, 2014
0.20
0.20
0.20
0.20
0.20
0.20
(1) At December 31, 2015, the Company had accrued dividends and dividend equivalents payable of $74.6 million related to the common stock
dividend declared on December 9, 2015.
Dividends are declared and paid at the discretion of our Board and depend on our cash available for distribution, financial
condition, ability to maintain our qualification as a REIT, and such other factors that our Board may deem relevant. We have not
established a minimum payout level for our common stock. (See Part I, Item 1A., “Risk Factors”, and Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, of this Annual Report on Form 10-K, for information
regarding the sources of funds used for dividends and for a discussion of factors, if any, which may adversely affect our ability to
pay dividends.)
Purchases of Equity Securities
As previously disclosed, in August 2005, our Board authorized a stock repurchase program (or Repurchase Program), to
repurchase up to 4.0 million shares of our outstanding common stock under the Repurchase Program. The Board reaffirmed such
authorization in May 2010. In December 2013, our Board increased the number of shares authorized for repurchase to an aggregate
of 10.0 million shares (under which approximately 6.6 million shares remain available for repurchase). Such authorization does
not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization. Subject to
applicable securities laws, repurchases of common stock under the Repurchase Program are made at times and in amounts as we
deem appropriate (including, in our discretion, through the use of one or more plans adopted under Rule 10b5-1 promulgated
under the Securities Exchange Act of 1934, as amended (or 1934 Act)), using available cash resources. Shares of common stock
repurchased by us under the Repurchase Program are cancelled and, until reissued by us, are deemed to be authorized but unissued
shares of our common stock. The Repurchase Program may be suspended or discontinued by us at any time and without prior
notice.
We did not repurchase any shares of our common stock under the Repurchase Program during the years ended December 31,
2015 and 2014.
29
We engaged in no share repurchase activity during the fourth quarter of 2015 pursuant to the Repurchase program. We did,
however, withhold restricted shares (under the terms of grants under our Equity Compensation Plan (or Equity Plan)) to offset tax
withholding obligations that occur upon the vesting and release of restricted stock awards and/or RSUs. The following table
presents information with respect to (i) such withheld restricted shares, and (ii) eligible shares remaining for repurchase under the
Repurchase Program:
Month
October 1-31, 2015:
Repurchase Program (2)
Employee Transactions (3)
November 1-30, 2015:
Repurchase Program (2)
Employee Transactions (3)
December 1-31, 2015:
Repurchase Program (2)
Employee Transactions (3)
Total Repurchase Program (2)
Total Employee Transactions (3)
Total
Number of
Shares
Purchased
Weighted
Average Price
Paid Per
Share (1)
Total Number of
Shares Repurchased as
Part of Publicly
Announced
Repurchase Program
or Employee Plan
Maximum Number of
Shares that May Yet be
Purchased Under the
Repurchase Program or
Employee Plan
— $
—
—
—
—
266,849
— $
$
266,849
—
—
—
—
—
6.77
—
6.77
—
N/A
—
N/A
—
N/A
—
N/A
6,616,355
N/A
6,616,355
N/A
6,616,355
N/A
6,616,355
N/A
(1) Includes brokerage commissions.
(2) As of December 31, 2015, we had repurchased an aggregate of 3,383,645 shares under the Repurchase Program.
(3) Our Equity Plan provides that the value of the shares delivered or withheld be based on the price of our common stock on the date the
relevant transaction occurs.
Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan
In September 2003, we initiated a Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (or the DRSPP)
to provide existing stockholders and new investors with a convenient and economical way to purchase shares of our common
stock. Under the DRSPP, existing stockholders may elect to automatically reinvest all or a portion of their cash dividends in
additional shares of our common stock and existing stockholders and new investors may make optional cash purchases of shares
of our common stock in amounts ranging from $50 (or $1,000 for new investors) to $10,000 on a monthly basis and, with our
prior approval, in excess of $10,000. At our discretion, we may issue shares of our common stock under the DRSPP at discounts
of up to 5% from the prevailing market price at the time of purchase. Computershare Shareowner Services LLC is the administrator
of the DRSPP (or the Plan Agent). Stockholders who own common stock that is registered in their own name and who want to
participate in the DRSPP must deliver a completed enrollment form to the Plan Agent. Stockholders who own common stock that
is registered in a name other than their own (e.g., broker, bank or other nominee) and who want to participate in the DRSPP must
either request such nominee holder to participate on their behalf or request that such nominee holder re-register our common stock
in the stockholder’s name and deliver a completed enrollment form to the Plan Agent. During the years ended 2015 and 2014, we
issued 162,373 and 4,526,855 shares of common stock through the DRSPP generating net proceeds of approximately $1.2 million
and $35.6 million, respectively.
30
Securities Authorized For Issuance Under Equity Compensation Plans
During 2015, we adopted the Equity Plan, as approved by our stockholders. The Equity Plan amended and restated our 2010
Equity Compensation Plan. (For a description of the Equity Plan, see Note 15(a) to the consolidated financial statements included
under Item 8 of this Annual Report on Form 10-K.)
The following table presents certain information with respect to our equity compensation plans as of December 31, 2015:
Award (1)
Restricted Stock Units (or RSUs)
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
1,875,730
1,875,730
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in the
first column of this table)
(2)
9,366,840 (3)
(1) All equity based compensation is granted pursuant to plans that have been approved by our stockholders.
(2) A weighted average exercise price is not applicable for our RSUs, as such equity awards result in the issuance of shares of our common
stock provided that such awards vest and, as such, do not have an exercise price. At December 31, 2015, 729,523 RSUs were vested, 584,907
RSUs were subject to time based vesting and 561,300 RSUs will vest subject to achieving a market condition.
(3) Number of securities remaining available for future issuance under equity compensation plans excludes RSUs presented in the table and
110,920 shares of restricted stock, which were issued and outstanding at December 31, 2015.
31
Item 6. Selected Financial Data.
Our selected financial data set forth below is derived from our audited financial statements and should be read in conjunction
with our consolidated financial statements and the accompanying notes, included under Item 8 of this Annual Report on Form 10-
K.
(Dollars in Thousands, Except per Share Amounts)
2015
2014
2013
2012
2011
At or/For the Year Ended December 31,
Operating Data:
Interest Income
Interest expense
Net impairment losses recognized in earnings (1)
(705)
—
—
(1,200)
$
492,143
$
463,817
$
482,940
$
499,157
$
496,747
(176,948)
(159,808)
(164,013)
(171,670)
Gain on sales of MBS and U.S. Treasury securities,
net (2)
Unrealized net gains and net interest income from
Linked Transactions
Net gain on residential whole loans held at fair value
Other (loss)/income, net
Operating and other expense
Net income
Preferred stock dividends
Issuance costs of redeemed preferred stock (3)
Net income available to common stock and
participating securities
Earnings per share — basic and diluted
Dividends declared per share of common stock (4)
Dividends declared per share of preferred stock (5)
Balance Sheet Data:
MBS and CRT securities
Residential whole loans, at carrying value
Residential whole loans, at fair value
Cash and cash equivalents
Linked Transactions
Total assets
Securitized debt
Swaps (in a liability position)
Total liabilities
Preferred stock, liquidation preference
Total stockholders’ equity
Other Data:
Average total assets
Average total stockholders’ equity
Return on average total assets (6)
Return on average total stockholders’ equity (7)
Total average stockholders’ equity to total average
assets (8)
Dividend payout ratio (9)
(149,411)
(10,570)
6,730
3,015
—
1,082
34,900
37,497
25,825
9,001
—
17,092
17,722
(1,457)
(52,429)
116
80
(45,290)
3,225
—
(7,298)
(37,970)
12,610
—
10
(41,069)
(31,179)
$
313,226
$
313,504
$
302,709
$
306,839
$
316,414
15,000
—
298,226
0.80
0.800
1.875
$
$
$
$
15,000
—
298,504
0.81
0.800
1.875
$
$
$
$
$
$
$
$
13,750
3,947
285,012
0.78
1.640
2.136
$
$
$
$
8,160
—
298,679
0.83
0.880
2.125
8,160
—
$
$
$
$
308,254
0.90
1.005
2.125
$ 11,356,643
$ 10,762,622
$ 11,371,358
$ 12,607,625
$10,912,977
271,845
623,276
165,007
—
207,923
143,472
182,437
398,336
—
—
565,370
28,181
—
—
401,293
12,704
—
—
394,022
55,801
13,167,323
12,354,744
12,471,908
13,517,550
11,750,634
22,057
70,526
110,574
62,198
366,205
28,217
646,816
63,034
875,520
114,220
10,200,062
9,151,472
9,329,657
10,206,544
9,252,874
200,000
200,000
2,967,261
3,203,272
200,000
3,142,251
96,000
96,000
3,311,006
2,497,760
$ 13,672,737
$ 12,547,418
$ 13,192,285
$ 12,942,171
$11,185,224
$ 3,129,461
$ 3,230,932
$ 3,262,458
$ 2,945,687
$ 2,701,204
2.18%
10.01%
22.89%
1.00
2.38%
9.70%
25.75%
0.99
2.16%
9.28%
24.73%
1.10
2.31%
10.42%
22.76%
1.06
2.76%
11.71%
24.18%
1.09
6.74
Repurchase agreements and other advances
9,388,902
8,267,388
8,339,297
8,752,472
7,813,159
Book value per share of common stock (10)
$
7.47
$
8.12
$
8.06
$
8.99
$
32
(1) Reflects OTTI recognized through earnings related to Non-Agency MBS.
(2) 2015: We sold Non-Agency MBS for $70.7 million, realizing gross gains of $34.9 million. 2014: We sold Non-Agency MBS for $123.9
million, realizing gross gains of $37.5 million. 2013: We sold Non-Agency MBS for $152.6 million, realizing gross gains of $25.8 million
and sold U.S. Treasury securities for $422.2 million, realizing net losses of approximately $24,000. 2012: We sold Agency MBS for $168.9
million, realizing gross gains of $9.0 million. 2011: We sold Agency MBS for $150.6 million, realizing gross gains of $6.7 million.
(3) Issuance costs of redeemed preferred stock represent the original offering costs related to the 8.50% Series A Cumulative Redeemable
Preferred Stock (“Series A Preferred Stock”), which was redeemed on May 16, 2013.
(4) 2013: Includes special cash dividends paid totaling $0.78 per share. 2011: Includes a special cash dividend of $0.02 per share.
(5) 2013: Reflects dividends declared per share on Series A Preferred Stock and 7.50% Series B Cumulative Redeemable Preferred Stock (“Series
B Preferred Stock”) of $0.80 and $1.33, respectively.
(6) Reflects net income available to common stock and participating securities divided by average total assets.
(7) Reflects net income divided by average total stockholders’ equity.
(8) Reflects total average stockholders’ equity divided by total average assets.
(9) Reflects dividends declared per share of common stock (excluding special dividends) divided by earnings per share.
(10) Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.
33
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 REIT primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including
Agency MBS, Non-Agency MBS, residential whole loans and CRT securities. 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.
At December 31, 2015, we had total assets of approximately $13.167 billion, of which $11.173 billion, or 84.9%, represented
our MBS portfolio. At such date, our MBS portfolio was comprised of $4.752 billion of Agency MBS and $6.421 billion of Non-
Agency MBS which includes $3.795 billion of Legacy Non-Agency MBS and $2.626 billion of RPL/NPL MBS. In addition, at
December 31, 2015, we had approximately $895.1 million in residential whole loans acquired through our consolidated trusts,
which represented approximately 6.8% of our total assets. Our remaining investment-related assets were primarily comprised of
collateral obtained in connection with reverse repurchase agreements, cash and cash equivalents (including restricted cash), CRT
securities, MBS-related receivables, derivative instruments, and REO.
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, the market value of our assets, 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. 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) and prepayment speeds on our MBS, the
behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which
measure the amount of unscheduled principal prepayment on a bond as a percentage of the bond 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.
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 our MBS portfolio and, correspondingly, our stockholders’ equity to
decline; (iii) coupons on our ARM-MBS to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our MBS to
decline, thereby slowing the amortization of our MBS purchase premiums and the accretion of our purchase discounts; and (v)
the value of our derivative hedging instruments and, correspondingly, our stockholders’ equity 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 our MBS portfolio and, correspondingly, our stockholders’ equity to increase; (iii) coupons on our ARM-MBS to reset, on a
delayed basis, to lower interest rates; (iv) prepayments on our MBS to increase, thereby accelerating the amortization of our MBS
purchase premiums and the accretion of our purchase discounts; and (v) the value of our derivative hedging instruments and,
correspondingly, our stockholders’ equity to decrease. 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.
We are exposed to credit risk in our Non-Agency MBS and residential whole loans, generally meaning that we are subject
to credit losses in these portfolios that correspond to the risk of delinquency, default and foreclosure on the underlying real estate
collateral. (See Part I, Item 1A., “Risk Factors - Credit Risks”, of this Annual Report on Form 10-K), We believe the discounted
purchase prices paid on certain of these investments mitigates 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 securities or loans. Our investment process for credit sensitive
assets involves analysis focused primarily on quantifying and pricing credit risk.
34
The table below presents the composition of our MBS portfolios with respect to repricing characteristics as of December 31,
2015:
Underlying Mortgages
(In Thousands)
Hybrids in contractual fixed-rate period
Hybrids in adjustable period
15-year fixed rate
Greater than 15-year fixed rate
Floaters
Total
Agency MBS
Fair Value (1)
Non-Agency MBS
Fair Value (2)
Total
MBS (1)(2)
Percent
of Total
December 31, 2015
$
1,411,282
$
416,390
$
1,827,672
21.4%
1,489,452
1,780,746
—
69,733
2,104,432
7,728
1,206,565
59,836
3,593,884
1,788,474
1,206,565
129,569
42.1
20.9
14.1
1.5
$
4,751,213
$
3,794,951
$
8,546,164
100.0%
(1) Does not include principal payments receivable in the amount of $1.0 million.
(2) Does not reflect $2.626 billion of RPL/NPL MBS, which are re-performing deals with both fixed rate and hybrid re-performing loans. These
deal structures contain a coupon step-up of 300 basis points at 36 months or sooner from issuance.
As of December 31, 2015, approximately $7.449 billion, or 66.7%, of our MBS portfolio was in its contractual fixed-rate
period or were fixed-rate MBS and approximately $3.723 billion, or 33.3%, was in its contractual adjustable-rate period, or were
floating rate MBS with interest rates that reset monthly. Our ARM-MBS in their contractual adjustable-rate period primarily
include MBS collateralized by Hybrids for which the initial fixed-rate period has elapsed, such that the interest rate will typically
adjust on an annual or semiannual basis.
Premiums arise when we acquire MBS at a price in excess of the principal balance of the mortgages securing such MBS
(i.e., par value). Conversely, discounts arise when we acquire MBS at a price below the principal balance of the mortgages securing
such MBS or acquire residential whole loans at a price below the principal balance of the mortgage. Premiums paid on our MBS
are amortized against interest income and accretable purchase discounts on these investments are accreted to interest income.
Purchase premiums on our MBS, which are primarily carried on our Agency MBS, are amortized against interest income over the
life of each security 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 internal rate of
return (or IRR)/interest income earned on such 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 repayment rate (or CRR), which measures voluntary prepayments of mortgages
collateralizing a particular MBS, and the conditional default rate (or CDR), which measures involuntary prepayments resulting
from defaults. CPRs on Agency MBS and Legacy Non-Agency MBS may differ significantly. For the year ended December 31,
2015, our Agency MBS portfolio experienced a weighted average CPR of 13.2%, and our Legacy Non-Agency MBS portfolio
experienced a CPR of 14.1%. For the year ended December 31, 2014, our Agency MBS portfolio experienced a weighted average
CPR of 13.0%, and our Legacy Non-Agency MBS portfolio (including Legacy Non-Agency MBS underlying our Linked
Transactions) experienced a CPR of 12.3%. Over the last consecutive eight quarters, ending with December 31, 2015, the monthly
fair value weighted average CPR on our Agency and Legacy Non-Agency MBS portfolios ranged from a high of 16.7% experienced
during the month ended July 31, 2015 to a low of 10.4%, experienced during each of the months ended March 31, 2015 and March
31, 2014, with an average CPR over such quarters of 13.1%.
Our method of accounting for Non-Agency MBS purchased at significant discounts to par value, requires us to make
assumptions with respect to each security. These assumptions include, but are not limited to, future interest rates, voluntary
prepayment rates, default rates, mortgage modifications and loss severities. As part of our Non-Agency MBS surveillance process,
we track and compare each security’s actual performance over time to the performance expected at the time of purchase or, if we
have modified our original purchase assumptions, to our revised performance expectations. To the extent that actual performance
or our expectation of future performance of our Non-Agency MBS deviates materially from our expected performance parameters,
we may revise our performance expectations, such that the amount of purchase discount designated as credit discount may be
increased or decreased over time. Nevertheless, credit losses greater than those anticipated or in excess of the recorded purchase
discount could occur, which could materially adversely impact our operating results.
35
It is our business strategy to hold our MBS as long-term investments. On at least a quarterly basis, we assess our ability and
intent to continue to hold each security and, as part of this process, we monitor our securities for other-than-temporary impairment.
A change in our ability and/or intent to continue to hold any of our 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. At December 31, 2015, we had net unrealized gains of $28.8 million on our Agency MBS, comprised
of gross unrealized gains of $69.2 million and gross unrealized losses of $40.4 million, and net unrealized gains on our Non-
Agency MBS of $559.0 million, comprised of gross unrealized gains of $587.3 million and gross unrealized losses of $28.4 million.
At December 31, 2015, we did not intend to sell any of our MBS that were in an unrealized loss position, and we believe it is more
likely than not that we will not be required to sell those securities before recovery of their amortized cost basis, which may be at
their maturity.
We rely primarily on borrowings under repurchase agreements to finance our Agency MBS and Non-Agency MBS. Our
MBS have longer-term contractual maturities than our borrowings under repurchase agreements. Even though the majority of our
MBS have interest rates that adjust over time based on short-term changes in corresponding interest rate indices (typically following
an initial fixed-rate period for our Hybrids), the interest rates we pay on our borrowings will typically change at a faster pace than
the interest rates we earn on our MBS. In order to reduce this interest rate risk exposure, we may enter into derivative instruments,
which at December 31, 2015 were comprised of Swaps.
Our Swap derivative instruments are designated as cash-flow hedges against a portion of our current and forecasted LIBOR-
based repurchase agreements. Our Swaps do not extend the maturities of our repurchase agreements; they do, however, lock in
a fixed rate of interest over their term for the notional amount of the Swap corresponding to the hedged item. During 2015, we
did not enter into any new Swaps and had Swaps with an aggregate notional amount of $710.2 million and a weighted average
fixed-pay rate of 1.96% amortize and/or expire. At December 31, 2015, we had Swaps designated in hedging relationships with
an aggregate notional amount of $3.050 billion with a weighted average fixed-pay rate of 1.82% and a weighted average variable
interest rate received of 0.34%.
Recent Market Conditions and Our Strategy
During 2015, we continued to invest in residential mortgage assets, including both MBS and, through consolidated trusts,
residential whole loans. At December 31, 2015, our MBS portfolio was approximately $11.173 billion compared to $12.573
billion (including $1.913 billion MBS reported as components of Linked Transactions) at December 31, 2014.
At December 31, 2015, $6.421 billion, or 57.5% of our MBS portfolios was invested in Non-Agency MBS. During the year
ended December 31, 2015, the fair value of our Non-Agency MBS holdings increased by $1.665 billion. The primary components
of the change during the year in these Non-Agency MBS include the reclassification of $1.913 billion of Non-Agency MBS that
were previously reported as a component of Linked Transactions and $1.734 billion of purchases (at a weighted average purchase
price of 99.9%). Partially offsetting these increases were $1.845 billion of principal repayments and other principal reductions,
a decrease reflecting Non-Agency MBS price changes of $66.3 million and the sale of Non-Agency MBS with a fair value of
$70.8 million.
At December 31, 2015, $4.752 billion, or 42.5% of our MBS portfolio was invested in Agency MBS. During the year ended
2015, the fair value of our Agency MBS decreased by $1.152 billion. This was due to $1.059 billion of principal repayments,
$41.2 million of premium amortization and a $51.3 million decrease in net unrealized gains.
In this low interest rate environment, we continue to transition to more credit sensitive, less interest sensitive residential
mortgage assets. During the year ended December 31, 2015, we purchased through consolidated trusts residential whole loans
of approximately $608.3 million, with an unpaid principal balance of approximately $770.5 million. At December 31, 2015, our
total recorded investment in residential whole loans was $895.1 million. Of this amount, $271.8 million is presented as residential
whole loans at carrying value and $623.3 million as residential whole loans at fair value in our consolidated balance sheets. For
the year ended December 31, 2015, we recognized approximately $16.0 million of income on residential whole loans held at
carrying value in Interest Income on our consolidated statement of operations, representing an effective yield of 6.63% (excluding
servicing costs). In addition, we recorded net gains on residential whole loans held at fair value of $17.7 million in Other Income,
net in our consolidated statement of operations for the year ended December 31, 2015.
We currently expect to continue to seek more credit sensitive, less interest rate sensitive residential mortgage assets during
2016, particularly residential whole loans and Non-Agency MBS (including RPL/NPL MBS). In order to achieve our current
investment strategy, we may continue to permit more interest rate sensitive Agency MBS to pay down.
36
In addition to our investments in Agency MBS, Non-Agency MBS and residential whole loans, we invest in CRT securities,
which are debt obligations issued by Fannie Mae and Freddie Mac. At December 31, 2015, our investments in these securities
totaled $183.6 million.
New accounting guidance that was effective at the beginning of the year prospectively eliminated the use of Linked
Transaction accounting. Accordingly, on adoption of the new standard on January 1, 2015, we reclassified $1.913 billion of Non-
Agency MBS and $4.6 million of CRT securities that were previously reported as a component of Linked Transactions to Non-
Agency MBS and CRT securities respectively on the consolidated balance sheets. In addition, liabilities of $1.520 billion that
were previously presented as a component of Linked Transactions were reclassified to Repurchase agreements on the consolidated
balance sheets. Furthermore, an amount of $4.5 million representing net unrealized gains on securities previously reported as a
component of Linked Transactions as of December 31, 2014 was reclassified from Accumulated deficit to AOCI (See Notes 2(t)
and 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K).
Our book value per common share was $7.47 as of December 31, 2015. Book value per common share decreased from
$8.12 as of December 31, 2014 due primarily to the impact of realized gains on sales and discount accretion income on Legacy
Non-Agency MBS that was recognized and paid as dividends during the year, the change in the value of our Swaps, and lower
unrealized gains on our Agency MBS and Legacy Non-Agency MBS, resulting from lower asset values.
At the end of 2015, the average coupon on mortgages underlying our Agency MBS was lower compared to the end of 2014,
due to prepayments on higher yielding assets and downward resets on Hybrid and ARM-MBS within the portfolio. As a result,
the coupon yield on our Agency MBS portfolio declined 18 basis points to 2.78% for 2015 from 2.96% for 2014. The net Agency
MBS yield decreased to 2.00% for 2015, from 2.23% for 2014. The net yield for our Legacy Non-Agency MBS portfolio was
7.62% for 2015 compared to 7.74% for 2014. The decrease in the net yield on our Legacy Non-Agency MBS portfolio is primarily
due to prepayments on higher yielding assets in the portfolio, partially offset by increases in accretable discount due to the impact
of credit reserve releases, in the current and prior year, that have occurred as a result of the improved credit performance of loans
underlying the Legacy Non-Agency MBS portfolio. The net yield for our RPL/NPL MBS portfolio was 3.68% for the year ended
December 31, 2015 compared to 3.69% for the year ended December 31, 2014. In the comparable prior period, the majority of
our RPL/NPL MBS were reported as Linked Transactions.
We believe that our $787.5 million Credit Reserve and OTTI appropriately factors in remaining uncertainties regarding
underlying mortgage performance and the potential impact on future cash flows for our existing Legacy Non-Agency MBS
portfolio. Home price appreciation and underlying mortgage loan amortization have decreased the LTV for many of the mortgages
underlying our Legacy Non-Agency MBS portfolio. Home price appreciation during the past few years has generally been driven
by a combination of limited housing supply, low mortgage rates, capital flows into own-to-rent foreclosure purchases and
demographic-driven U.S. household formation. We estimate that the average LTV of mortgage loans underlying our Legacy Non-
Agency MBS has declined from approximately 105% as of January 2012 to approximately 71% as of December 31, 2015. In
addition, we estimate that the percentage of non-delinquent loans underlying our Legacy Non-Agency MBS that are underwater
(with LTVs greater than 100%), has declined from approximately 52% as of January 2012 to 7% at December 31, 2015. Lower
LTVs lessen the likelihood of defaults and simultaneously decrease loss severities. Further, during 2014 and 2015, we have also
observed faster voluntary prepayment (i.e. prepayment of loans in full with no loss) speeds than originally projected. The yields
on our Legacy Non-Agency MBS that were purchased at a discount are generally positively impacted if prepayment rates on these
securities exceed our prepayment assumptions. Based on these current conditions, we have reduced estimated future losses within
our Legacy Non-Agency portfolio. As a result, during the year ended 2015, $41.1 million was transferred from Credit Reserve to
accretable discount. This increase in accretable discount is expected to increase the interest income realized over the remaining
life of our Legacy Non-Agency MBS. The remaining average contractual life of such assets is approximately 20 years, but based
on scheduled loan amortization and prepayments (both voluntary and involuntary), loan balances will decline substantially over
time. Consequently, we believe that the majority of the impact on interest income from the reduction in Credit Reserve will occur
over the next ten years.
At December 31, 2015, we have access to various sources of liquidity which we estimate to be in excess of $571.0 million.
This amount includes (i) $165.0 million of cash and cash equivalents; (ii) $241.7 million in estimated financing available from
unpledged Agency MBS and from other Agency MBS collateral that is currently pledged in excess of contractual requirements;
and (iii) $164.3 million in estimated financing available from unpledged Non-Agency MBS. Consequently, we believe that we
are positioned to continue to take advantage of investment opportunities within the residential mortgage marketplace. In 2016,
we intend to continue to selectively acquire MBS and residential whole loans. In addition, while the majority of our Legacy Non-
Agency MBS will not return their full face value due to loan defaults, we believe that they will deliver attractive loss adjusted
yields due to our discounted average amortized cost of 75% of face value at December 31, 2015.
37
Repurchase agreement funding for both Agency MBS and Non-Agency MBS continues to be available to us from multiple
counterparties. Typically, repurchase agreement funding involving Non-Agency MBS is available from fewer counterparties, at
terms requiring higher collateralization and higher interest rates, than for repurchase agreement funding involving Agency MBS.
In July 2015, our wholly-owned subsidiary, MFA Insurance, became a member of the FHLB of Des Moines, further diversifying
our potential sources of funding for residential mortgage investments. However, in January, 2016, the FHFA released its final rule
amending its regulation on FHLB membership, which, amongst other things, provided termination rules for current captive
insurance members. As a result of such regulation, MFA Insurance will not be permitted new advances or renewal of existing
advances and will be required to terminate its FHLB membership within one year of the rule’s effective date of February 19, 2016.
At December 31, 2015, our debt consisted of borrowings under repurchase agreements with 27 counterparties, FHLB advances,
securitized debt, Senior Notes outstanding and obligation to return securities obtained as collateral, resulting in a debt-to-equity
multiple of 3.4 times. (See table on page 55 under Results of Operations that presents our quarterly leverage multiples since March
31, 2014.)
Information About Our Assets
The tables below present certain information about our asset allocation at December 31, 2015.
ASSET ALLOCATION
Agency
MBS
Legacy
Non-Agency
MBS
RPL/NPL
MBS (1)
MBS
Portfolio
Residential
Whole
Loans, at
Carrying
Value (2)
Residential
Whole
Loans, at
Fair Value
Other,
net (3)
Total
(Dollars in Thousands)
Fair Value/Carrying Value
$ 4,752,244
$ 3,794,951 $2,625,866
$ 11,173,061
$ 271,845
$ 623,276
$ 479,437
$ 12,547,619
Less Repurchase Agreements
(2,727,542)
(2,464,982) (2,080,163)
(7,272,687)
(67,989)
(419,761)
(128,465)
(7,888,902)
Less FHLB advances
(1,500,000)
Less Securitized Debt
Less Senior Notes
Equity Allocated
—
(22,057)
—
—
—
—
(1,500,000)
(22,057)
—
—
—
—
—
—
—
—
— (100,000)
—
—
$ 524,702
$ 1,307,912
$ 545,703
$ 2,378,317
$ 203,856
$ 203,515
$ 250,972
Less Swaps at Market Value
—
—
—
—
—
—
(69,399)
Net Equity Allocated
$ 524,702
$ 1,307,912
$ 545,703
$ 2,378,317
$ 203,856
$ 203,515
$ 181,573
Debt/Net Equity Ratio (4)
8.06x
1.90x
3.81x
0.33x
2.06x
(1,500,000)
(22,057)
(100,000)
3,036,660
(69,399)
2,967,261
3.38x
$
$
(1) Represents private-label MBS issued in 2013, 2014 and 2015 in which the underlying collateral consists of re-performing/non-performing loans that were
originated in prior years. Included with the balance of Non-Agency MBS reported on our consolidated balance sheets.
(2) The carrying value of such loans reflects the purchase price, accretion of income, cash received and provision for loan losses since acquisition. At
December 31, 2015, the fair value of such loans is estimated to be $289.7 million.
(3) Includes cash and cash equivalents and restricted cash, securities obtained and pledged as collateral, CRT securities, interest receivable, goodwill, prepaid
and other assets, obligation to return securities obtained as collateral of $507.4 million, interest payable, dividends payable and accrued expenses and
other liabilities.
(4) Represents the sum of borrowings under repurchase agreements, FHLB advances and securitized debt as a multiple of net equity allocated. The numerator
of our Total Debt/Net Equity ratio also includes the obligation to return securities obtained as collateral of $507.4 million, and Senior Notes.
38
Agency MBS
The following table presents certain information regarding the composition of our Agency MBS portfolio as of
December 31, 2015 and 2014:
December 31, 2015
Weighted
Average
Purchase
Price
Weighted
Average
Market
Price
Fair
Value (1)
Weighted
Average
Loan Age
(Months) (2)
Weighted
Average
Coupon (2)
3 Month
Average
CPR
(Dollars in Thousands)
15-Year Fixed Rate:
Low Loan Balance (3)
HARP (4)
Other (Post June 2009) (5)
Other (Pre June 2009) (6)
Current
Face
$ 1,430,258
146,821
144,596
745
104.3%
104.7
103.9
104.9
103.1% $ 1,475,086
151,387
103.1
153,477
106.1
106.8
796
Total 15-Year Fixed Rate
$ 1,722,420
104.3%
103.4% $ 1,780,746
Hybrid:
Other (Post June 2009) (5)
Other (Pre June 2009) (6)
Total Hybrid
CMO/Other
Total Portfolio
(Dollars in Thousands)
15-Year Fixed Rate:
Low Loan Balance (3)
HARP (4)
Other (Post June 2009) (5)
Other (Pre June 2009) (6)
$ 1,811,007
899,185
$ 2,710,192
117,791
$
$ 4,550,403
104.4%
101.7
103.5%
102.5%
103.8%
104.8% $ 1,897,030
105.7
950,666
105.1% $ 2,847,696
122,771
104.2% $
104.4% $ 4,751,213
Current
Face
$ 1,705,386
177,193
192,325
1,069
104.3%
104.7
103.9
104.9
104.0% $ 1,773,255
184,192
104.0
206,132
107.2
107.7
1,151
December 31, 2014
Weighted
Average
Purchase
Price
Weighted
Average
Market
Price
Fair
Value (1)
Weighted
Average
Loan Age
(Months) (2)
Weighted
Average
Coupon (2)
3 Month
Average
CPR
44
43
63
79
45
56
109
73
175
65
2.99%
2.98
4.14
4.50
3.09%
2.89%
2.60
2.80%
2.52%
2.90%
8.4%
7.9
16.1
28.9
9.1%
15.6%
9.3
13.5%
12.2%
11.8%
32
31
51
67
34
44
97
60
163
53
3.01%
2.99
4.15
4.50
3.12%
3.15%
2.82
3.04%
2.41%
3.06%
7.7%
6.5
13.0
0.8
8.1%
17.9%
8.8
15.1%
8.9%
12.3%
Total 15-Year Fixed Rate
$ 2,075,973
104.3%
104.3% $ 2,164,730
Hybrid:
Other (Post June 2009) (5)
Other (Pre June 2009) (6)
Total Hybrid
CMO/Other
Total Portfolio
$ 2,343,186
1,049,495
$ 3,392,681
141,639
$
$ 5,610,293
104.4%
101.7
103.6%
102.5%
103.8%
105.4% $ 2,469,714
106.8
1,120,830
105.8% $ 3,590,544
148,391
104.8% $
105.2% $ 5,903,665
(1) Does not include principal payments receivable of $1.0 million and $542,000 at December 31, 2015 and 2014, respectively.
(2) Weighted average is based on MBS current face at December 31, 2015 and 2014, respectively.
(3) Low loan balance represents MBS collateralized by mortgages with original loan balance of less than or equal to $175,000.
(4) Home Affordable Refinance Program (or HARP) MBS are backed by refinanced loans with LTVs greater than or equal to 80% at origination.
(5) MBS issued in June 2009 or later. Majority of underlying loans are ineligible to refinance through the HARP program.
(6) MBS issued before June 2009.
39
The following table presents certain information regarding our 15-year fixed-rate Agency MBS as of December 31, 2015
and 2014:
December 31, 2015
Weighted
Average
Purchase
Price
Weighted
Average
Market
Price
Weighted
Average
Loan Age
(Months) (2)
Weighted
Average
Loan Rate
Low Loan
Balance
and/or
HARP (3)
3 Month
Average
CPR
Fair
Value (1)
Current
Face
$
834,689
104.0%
101.5% $
846,925
355,439
9,238
448,064
74,990
105.9
103.5
103.5
105.2
103.4
104.9
106.4
106.5
367,471
9,691
476,793
79,866
$ 1,722,420
104.3%
103.4% $ 1,780,746
36
42
62
61
65
45
3.04%
100%
6.9%
3.49
4.18
4.40
4.88
100
100
79
33
8.0
12.6
13.1
13.3
3.57%
92%
9.1%
December 31, 2014
Weighted
Average
Purchase
Price
Weighted
Average
Market
Price
Weighted
Average
Loan Age
(Months) (2)
Weighted
Average
Loan Rate
Low Loan
Balance
and/or
HARP (3)
3 Month
Average
CPR
Fair
Value (1)
Current
Face
$
969,213
104.0%
102.2% $
990,328
420,623
11,990
575,040
99,107
105.9
103.5
103.5
105.2
104.2
106.0
107.2
107.6
438,377
12,706
616,662
106,657
$ 2,075,973
104.3%
104.3% $ 2,164,730
24
30
50
49
53
34
3.04%
100%
6.1%
3.49
4.17
4.40
4.88
100
100
79
32
4.4
11.7
12.4
16.9
3.60%
91%
8.1%
Coupon
(Dollars in Thousands)
15-Year Fixed Rate:
2.5%
3.0%
3.5%
4.0%
4.5%
Total 15-Year Fixed Rate
Coupon
(Dollars in Thousands)
15-Year Fixed Rate:
2.5%
3.0%
3.5%
4.0%
4.5%
Total 15-Year Fixed Rate
(1) Does not include principal payments receivable of $1.0 million and $542,000 at December 31, 2015 and 2014, respectively.
(2) Weighted average is based on MBS current face at December 31, 2015 and 2014, respectively.
(3) Low Loan Balance represents MBS collateralized by mortgages with an original loan balance less than or equal to $175,000. HARP MBS are backed by
refinanced loans with LTVs greater than or equal to 80% at origination.
40
The following table presents certain information regarding our Hybrid Agency MBS as of December 31, 2015 and 2014:
(Dollars in Thousands)
Hybrid Post June 2009:
Agency 5/1
Agency 7/1
Agency 10/1
Total Hybrids Post June 2009
Hybrid Pre June 2009:
Coupon < 4.5% (5)
Coupon >= 4.5% (6)
Total Hybrids Pre June 2009
Total Hybrids
(Dollars in Thousands)
Hybrid Post June 2009:
Agency 5/1
Agency 7/1
Agency 10/1
Total Hybrids Post June 2009
Hybrid Pre June 2009:
Coupon < 4.5% (5)
Coupon >= 4.5% (6)
Total Hybrids Pre June 2009
Total Hybrids
Current
Face
$
723,853
838,505
248,649
$ 1,811,007
$
853,168
46,017
$
899,185
$ 2,710,192
Current
Face
$
953,410
1,091,645
298,131
$ 2,343,186
$
864,414
185,081
$ 1,049,495
$ 3,392,681
December 31, 2015
Weighted
Average
Purchase
Price
Weighted
Average
Market
Price
Fair
Value (1)
Weighted
Average
Coupon (2)
Weighted
Average
Loan Age
(Months) (2)
Weighted
Average
Months to
Reset (3)
Interest
Only (4)
3 Month
Average
CPR
104.2%
104.5
104.7
104.4%
101.7%
101.5
101.7%
103.5%
765,426
105.7% $
873,765
104.2
103.7
257,839
104.8% $ 1,897,030
901,870
105.7% $
48,796
106.0
105.7% $
950,666
105.1% $ 2,847,696
December 31, 2014
2.62%
3.04
3.18
2.89%
2.43%
5.73
2.60%
2.80%
64
51
47
56
109
102
109
73
7
32
72
27
6
18
6
20
23%
22
61
28%
59%
73
60%
39%
15.6%
16.7
11.5
15.6%
8.9%
17.4
9.3%
13.5%
Weighted
Average
Purchase
Price
Weighted
Average
Market
Price
Fair
Value (1)
Weighted
Average
Coupon (2)
Weighted
Average
Loan Age
(Months) (2)
Weighted
Average
Months to
Reset (3)
Interest
Only (4)
3 Month
Average
CPR
104.2%
104.5
104.7
104.4%
101.8%
101.2
101.7%
103.6%
106.4% $ 1,014,865
1,143,315
104.7
104.5
311,534
105.4% $ 2,469,714
922,639
106.7% $
107.1
198,191
106.8% $ 1,120,830
105.8% $ 3,590,544
3.21%
3.07
3.22
3.15%
2.29%
5.26
2.82%
3.04%
51
40
36
44
99
84
97
60
11
43
83
35
6
13
7
26
22%
20
59
26%
57%
80
61%
37%
22.9%
14.8
12.7
17.9%
7.2%
15.6
8.8%
15.1%
(1) Does not include principal payments receivable of $1.0 million and $542,000 at December 31, 2015 and 2014, respectively.
(2) Weighted average is based on MBS current face at December 31, 2015 and 2014, respectively.
(3) Weighted average months to reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon
the underlying benchmark interest rate index, margin and periodic or lifetime caps. The months to reset do not reflect scheduled amortization or prepayments.
(4) Interest only represents MBS backed by mortgages currently in their interest only period. Percentage is based on MBS current face at December 31, 2015
and 2014, respectively.
(5) Agency 3/1, 5/1, 7/1 and 10/1 Hybrid ARM-MBS with coupon less than 4.5%.
(6) Agency 3/1, 5/1, 7/1 and 10/1 Hybrid ARM-MBS with coupon greater than or equal to 4.5%.
41
Non-Agency MBS
The following table presents information with respect to our Non-Agency MBS at December 31, 2015 and December 31,
2014. As previously discussed, new accounting guidance that was effective on January 1, 2015 prospectively eliminated the use
of Linked Transaction accounting and as a result we did not have any Linked Transactions effective January 1, 2015. Accordingly,
on adoption of the new standard on January 1, 2015, we reclassified $1.913 billion of Non-Agency MBS and $4.6 million of CRT
securities that had previously been reported as a component of Linked Transactions to Non-Agency MBS and CRT securities,
respectively on our consolidated balance sheets. Non-Agency MBS at December 31, 2014 is presented: (i) excluding Linked
Transactions and reported in accordance with GAAP; (ii) underlying our Linked Transactions and reflected consistent with GAAP
reporting requirements (effective on such date); and (iii) on a combined basis (Non-GAAP).
December 31,
2015
2014
$
6,961,493
$
5,319,901
6,420,817
4,755,432
5,861,843
(787,541) (1)
(312,182)
73
4,020,241
(900,557) (2)
(399,564)
461
$
1,922,487
1,913,189
1,908,776
(15,543)
1,832
$
7,242,388
6,668,621
5,929,017
(916,100) (3)
(397,732)
461
(In Thousands)
(i) Non-Agency MBS (GAAP)
Face/Par
Fair Value
Amortized Cost
Purchase Discount Designated as Credit Reserve and OTTI
Purchase Discount Designated as Accretable
Purchase Premiums
(ii) Non-Agency MBS Underlying Linked Transactions
Face/Par
Fair Value
Amortized Cost
Purchase Discount Designated as Credit Reserve
Purchase Discount Designated as Accretable
(iii) Combined Non-Agency MBS and MBS Underlying Linked Transactions
(Non-GAAP)
Face/Par
Fair Value
Amortized Cost
Purchase Discount Designated as Credit Reserve and OTTI
Purchase Discount Designated as Accretable
Purchase Premiums
(1) Includes discount designated as Credit Reserve of $766.0 million and OTTI of $21.5 million.
(2) Includes discount designated as Credit Reserve of $877.6 million and OTTI of $23.0 million.
(3) Includes discount designated as Credit Reserve of $893.1 million and OTTI of $23.0 million.
42
Purchase Discounts on Non-Agency MBS and Securities Underlying Linked Transactions
The following table presents the changes in the components of purchase discount on Non-Agency MBS with respect to
purchase discount designated as Credit Reserve and OTTI, and accretable purchase discount for the years ended December 31,
2015 and 2014. As previously discussed, new accounting guidance that was effective for us on January 1, 2015 prospectively
eliminated the use of Linked Transaction accounting and as a result we did not have any Linked Transactions effective January
1, 2015. The information presented for the year ended December 31, 2014 includes securities underlying Linked Transactions
and is presented on both a GAAP and Non-GAAP basis (effective on such date):
GAAP Basis
(In Thousands)
For the Year Ended December 31,
2015
2014
Discount
Designated as
Credit Reserve
and OTTI
Accretable
Discount (1)
Discount
Designated as
Credit Reserve
and OTTI
Accretable
Discount (1)
Balance at beginning of period
$
(900,557) $
(399,564) $
(1,043,037) $
(460,039)
Cumulative effect adjustment on adoption of revised
accounting standard for repurchase agreement financing
Accretion of discount
Realized credit losses
Purchases
Sales
Net impairment losses recognized in earnings
Unlinking of Linked Transactions
Transfers/release of credit reserve
Balance at end of period
(15,543)
—
80,821
(1,200)
8,525
(705)
—
41,118
1,832
93,173
—
(4,925)
38,420
—
—
(41,118)
—
—
89,481
(80,256)
44,692
—
(6,414)
94,977
—
103,653
—
30,003
20,360
—
1,436
(94,977)
$
(787,541) $
(312,182) $
(900,557) $
(399,564)
Non-GAAP Adjustments
(In Thousands)
Balance at beginning of period
Accretion of discount
Realized credit losses
Purchases
Unlinking of Linked Transactions
Transfers/release of credit reserve
Balance at end of period
Non-GAAP Basis
(In Thousands)
Balance at beginning of period
Accretion of discount
Realized credit losses
Purchases
Sales
Unlinking of Linked Transactions
Transfers/release of credit reserve
Balance at end of period
Discount
Designated as
Credit Reserve
and OTTI
Accretable
Discount (1)
$
(4,721) $
—
783
(17,801)
6,414
(218)
$
(15,543) $
(3,212)
1,004
—
4,950
(1,128)
218
1,832
Discount
Designated as
Credit Reserve
and OTTI
Accretable
Discount (1)
$
(1,047,758) $
(463,251)
—
90,264
(98,057)
44,692
—
94,759
104,657
—
34,953
20,360
308
(94,759)
$
(916,100) $
(397,732)
(1) Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.
43
The following table presents information with respect to the yield components of our Non-Agency MBS for the periods
presented:
2015
2014
2013
For the Year Ended December 31,
Legacy
Non-Agency
MBS
RPL/NPL
MBS
Legacy
Non-Agency
MBS
RPL/NPL MBS
Legacy
Non-Agency
MBS
RPL/NPL MBS
Non-Agency MBS
Coupon Yield (1)
Effective Yield Adjustment (2)
Net Yield
5.08%
2.54
7.62%
3.61%
0.07
3.68%
5.19%
2.55
7.74%
3.55%
0.14
3.69%
5.63%
1.62
7.25%
4.56%
—
4.56%
(1) Reflects coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes
the coupon yield to be higher than the pass-through coupon interest rate.
(2) The effective yield adjustment is the difference between the net yield, calculated utilizing management’s estimates of timing and amount of
future cash flows for Legacy Non-Agency MBS and RPL/NPL MBS, less the current coupon yield.
The information presented as of December 31, 2014 in the above tables on pages 42-43, includes certain underlying Non-
Agency MBS and the associated repurchase agreement borrowings that were disclosed both separately and/or on a combined basis
with our Non-Agency MBS portfolio. Prior to January 1, 2015, for GAAP financial reporting purposes, we were required to account
for these items as Linked Transactions. Consequently, the presentation of this information in the above tables constitutes Non-
GAAP financial measures within the meaning of Regulation G, as promulgated by the SEC.
In assessing the performance of our Non-Agency MBS portfolio prior to January 1, 2015, we did not view these transactions
as linked, but rather viewed the performance of the underlying Non-Agency MBS and the related repurchase agreement borrowings
as we would any other Non-Agency MBS that was not part of a linked transaction. Accordingly, as Linked Transaction accounting
was discontinued on January 1, 2015, we consider that the Non-GAAP information disclosed in the above table for prior periods
provides appropriate comparability to current period disclosures for our Non-Agency MBS portfolio.
Actual maturities of MBS are generally shorter than stated contractual maturities because actual maturities of MBS are
affected by the contractual lives of the underlying mortgage loans, periodic payments of principal, and prepayments of principal.
The following table presents certain information regarding the amortized costs, weighted average yields and contractual maturities
of our MBS at December 31, 2015 and does not reflect the effect of prepayments or scheduled principal amortization on our MBS:
(Dollars in Thousands)
Agency MBS:
Fannie Mae
Freddie Mac
Ginnie Mae
Total Agency MBS
Non-Agency MBS
Total MBS
One to Five Years
Five to Ten Years
Over Ten Years
Total MBS (1)
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Total
Amortized
Cost
Total Fair
Value
Weighted
Average
Yield
$
$
653
—
—
653
$ 358,034
$ 358,687
2.60% $ 189,916
3.21% $
3,638,635
2.13% $
3,829,204
$
3,865,485
2.19%
—
—
130,538
—
2.80
—
754,260
9,460
2.02
1.71
884,798
9,460
2.60% $ 320,454
3.04% $
4,402,355
2.11% $
4,723,462
4.08% $
4,124
8.36% $
5,499,685
6.05% $
5,861,843
877,109
9,650
$
$
4,752,244
6,420,817
4.07% $ 324,578
3.11% $
9,902,040
4.30% $
10,585,305
$ 11,173,061
2.13
1.71
2.18%
5.93%
4.25%
(1) We did not have any MBS with contractual maturities of less than one year at December 31, 2015.
At December 31, 2015, our CRT securities had an amortized cost of $186.3 million, a fair value of $183.6 million, a weighted
average yield of 5.09% and weighted average time to maturity of 9.0 years.
44
Residential Whole Loans
The following table presents the contractual maturities of the residential whole loans held by consolidated trusts at
December 31, 2015 and does not reflect estimates of prepayments or scheduled amortization. For residential whole loans at
carrying value, amounts presented are estimated based on the underlying loan contractual amounts.
(In Thousands)
Amount due:
Within one year
After one year:
Over one to five years
Over five years
Total due after one year
Total residential whole loans
Residential Whole
Loans
at Carrying Value
Residential Whole
Loans
at Fair Value
$
$
$
2,319
$
5,760
3,197
266,329
269,526
271,845
$
$
5,437
612,079
617,516
623,276
The following table presents at December 31, 2015, the dollar amount of our residential whole loans at fair value, contractually
maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates:
(In Thousands)
Interest rates:
Fixed
Adjustable
Total
Residential Whole
Loans
at Fair Value (1)
$
$
342,702
274,814
617,516
(1) Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of December 31, 2015.
Information is not presented for residential whole loans at carrying value as income is recognized based on pools of assets
with similar risk characteristics using an estimated yield based on cash flows expected to be collected over the lives of the loans
in such pools rather than on the contractual coupons of the underlying loans.
The following table presents additional information regarding our residential whole loans at fair value at December 31, 2015
and 2014:
(Dollars in Thousands)
Loans 90 days or more past due:
Number of Loans
Aggregate Amount Outstanding
Residential Whole Loans
at Fair Value
December 31, 2015
December 31, 2014
$
2,426
493,640
$
779
128,591
Income on residential whole loans at carrying value is recognized based on pools of assets with similar credit risk
characteristics using an estimated yield based on cash flows expected to be collected over the lives of the loans in such pools rather
than the contractual coupons of the underlying loans. As the unit of account is at the pool level rather than the individual loan
level, none of our residential whole loans at carrying value are currently considered 90 days or more past due.
45
Exposure to Financial Counterparties
We finance a significant portion of our MBS and CRT securities with repurchase agreements and other advances. In connection
with these financing arrangements, we pledge our securities as collateral to secure the borrowing. The amount of collateral pledged
will typically exceed the amount of the financing with the extent of over-collateralization ranging from 1%-6% of the amount
borrowed (U.S. Treasury and Agency MBS collateral) to up to 64% (Non-Agency MBS collateral). Consequently, while repurchase
agreement financing results in us recording a liability to the counterparty in our consolidated balance sheets, we are exposed to
the counterparty, if during the term of the repurchase agreement financing, a lender should default on its obligation and we are
not able to recover our pledged assets. The amount of this exposure is the difference between the amount loaned to us plus interest
due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on
such collateral.
In addition, we use interest rate Swaps to manage interest rate risk exposure in connection with our repurchase agreement
financings. We will make cash payments or pledge securities as collateral as part of a margin arrangement in connection with
interest rate Swaps that are in an unrealized loss position. In the event that a counterparty for a Swap that is not subject to central
clearing were to default on its obligation, we would be exposed to a loss to a Swap counterparty to the extent that the amount of
cash or securities pledged exceeded the unrealized loss on the associated Swaps and we were not able to recover the excess
collateral.
The table below summarizes our exposure to our counterparties at December 31, 2015, by country of domicile:
Country
(Dollars in Thousands)
European Countries: (2)
Switzerland
United Kingdom
France
Holland
Germany
Total
Other Countries:
United States (3)
Canada (4)
Japan
China
Total
Total Counterparty Exposure
Number of
Counterparties
Repurchase
Agreement
Financing and
Other Advances
Swaps at Fair
Value
Exposure (1)
Exposure as a
Percentage of
MFA Total Assets
2
2
2
1
1
8
13
4
3
1
21
29
$
2,141,858
$
— $
307,622
259,761
245,494
—
2,954,735
—
—
396
357
753
638,992
109,518
42,832
12,934
130
804,406
$
5,141,035
$
997,405
459,332
336,395
6,934,167
9,888,902 (5) $
$
(70,152)
—
—
—
(70,152)
(69,399)
$
1,032,057
359,307
26,371
7,108
1,424,843
$
2,229,249
4.85%
0.83
0.33
0.10
—
6.11%
7.62%
2.73
0.20
0.05
10.60%
16.71%
(1) Represents for each counterparty the amount of cash and/or securities pledged as collateral less the aggregate of repurchase agreement
financing and other advances, Swaps at fair value, and net interest receivable/payable on all such instruments.
(2) Includes European-based counterparties as well as U.S.-domiciled subsidiaries of the European parent entity.
(3) Includes one counterparty that is a central clearing house for our Swaps.
(4) Includes exposure to foreign based affiliates of the Canadian parent entity.
(5) Includes $500.0 million of repurchase agreements entered into in connection with contemporaneous repurchase and reverse repurchase
agreements with a single counterparty
At December 31, 2015, we did not use credit default swaps or other forms of credit protection to hedge the exposures
summarized in the table above.
Weak economic conditions in Europe could potentially impact our major European financial counterparties, with the
possibility that this would also impact the operations of their U.S. domiciled subsidiaries. This could adversely affect our financing
and operations as well as those of the entire mortgage sector in general. Management monitors our exposure to our repurchase
agreement and Swap counterparties on a regular basis, using various methods, including review of recent rating agency actions
46
or other developments and by monitoring the amount of cash and securities collateral pledged and the associated loan amount
under repurchase agreements and/or the fair value of Swaps with our counterparties. We intend to make reverse margin calls on
our counterparties to recover excess collateral as permitted by the agreements governing our financing arrangements, or take other
necessary actions to reduce the amount of our exposure to a counterparty when such actions are considered necessary.
Tax Considerations
Current period estimated taxable and items expected to impact future taxable income
We estimate that for 2015, our taxable income was approximately $307.5 million. Based on dividends paid or declared
during 2015, we have undistributed taxable income of approximately $7.6 million, or $0.02 per share. We have until the filing
of our 2015 tax return (due not later than September 15, 2016) to declare the distribution of any 2015 REIT taxable income not
previously distributed.
Certain events that are expected to occur over the next few quarters are anticipated to impact the amount of taxable income
generated, including (i) the unwind of a resecuritization transaction, which is currently expected to generate taxable income of
approximately $0.19 per share, and (ii) the receipt of our share of settlement proceeds in connection with the $8.5 billion settlement
of the Bank of America/Countrywide MBS litigation, which is expected to generate taxable income of approximately $0.05 per
share.
Key differences between GAAP net income and REIT Taxable Income for Non-Agency MBS and Residential Whole Loans
Our total Non-Agency MBS portfolio for tax differs from our portfolio reported for GAAP primarily due to the fact that for
tax purposes; (i) certain of the MBS contributed to the variable interest entities (or VIEs) used to facilitate resecuritization
transactions were deemed to be sold; and (ii) the tax portfolio includes certain securities issued by these VIEs. In addition, for
our Non-Agency MBS tax portfolio, potential timing differences arise with respect to the accretion of market discount into income
and recognition of realized losses for tax purposes as compared to GAAP. Consequently, our REIT taxable income calculated in
a given period may differ significantly from our GAAP net income.
The determination of taxable income attributable to Non-Agency MBS and residential whole loans is dependent on a number
of factors, including principal payments, defaults, loss mitigation efforts and loss severities. In projecting taxable income for Non-
Agency MBS and residential whole loans 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. Moreover, the
deductibility of realized losses from Non-Agency MBS and residential whole loans, and their effect on market discount accretion
is analyzed on an asset-by-asset basis and while they will result in a reduction of taxable income, this reduction tends to occur
gradually and primarily in periods after the realized losses are reported.
Resecuritization transactions result in differences between GAAP net income and REIT Taxable Income
For tax purposes, depending on the transaction structure, a resecuritization transaction may be treated either as a sale or a
financing of the underlying MBS. Income recognized from resecuritization transactions will differ for tax and GAAP. For tax
purposes, we own and may in the future acquire interests in resecuritization 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, 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. For tax purposes, 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 effecting our dividend distribution requirement to stockholders.
Regulatory Developments
The U.S. Congress, Board of Governors of the Federal Reserve System, U.S. Treasury, FDIC, SEC and other governmental
and regulatory bodies have taken and continue to consider additional actions in response to the 2007-2008 financial crisis. In
particular, the Dodd-Frank Act created a new regulator, an independent bureau housed within the Federal Reserve System, and
known as the Consumer Financial Protection Bureau (or the CFPB). The CFPB has broad authority over a wide range of consumer
financial products and services, including mortgage lending. One portion of the Dodd-Frank Act, the Mortgage Reform and Anti-
Predatory Lending Act (or Mortgage Reform Act), contains new underwriting and servicing standards for the mortgage industry,
as well as restrictions on compensation for mortgage originators. In addition, the Mortgage Reform Act grants broad discretionary
regulatory authority to the CFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that the
47
CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper
to ensure responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also affects the securitization
of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating Rating Agencies.
The Dodd-Frank Act requires that numerous regulations, many of which (including those mentioned above regarding
underwriting and mortgage originator compensation) have only recently been implemented and operationalized. As a result, we
are unable to fully predict at this time how the Dodd-Frank Act, as well as other laws that may be adopted in the future, will affect
our business, results of operations and financial condition, or the environment for repurchase financing and other forms of
borrowing, the investing environment for Agency MBS, Non-Agency MBS and/or residential mortgage loans, the securitization
industry, Swaps and other derivatives. However, at a minimum, we believe that the Dodd-Frank Act and the regulations promulgated
thereunder are likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization
industries, including us.
In addition to the regulatory actions being implemented under the Dodd-Frank Act, on August 31, 2011, the SEC issued a
concept release under which it is reviewing interpretive issues related to Section 3(c)(5)(C) of the Investment Company Act.
Section 3(c)(5)(C) excludes from the definition of “investment company” entities that are primarily engaged in, among other
things, “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Many companies that engage
in the business of acquiring mortgages and mortgage-related instruments seek to rely on existing interpretations of the SEC Staff
with respect to Section 3(c)(5)(C) so as not to be deemed an investment company for the purpose of regulation under the Investment
Company Act. In connection with the concept release, the SEC requested comments on, among other things, whether it should
reconsider its existing interpretation of Section 3(c)(5)(C). To date the SEC has not taken or otherwise announced any further
action in connection with the concept release. (For additional discussion of the SEC’s concept release and its potential impact on
us, please see Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K.)
Congress may continue to consider legislation that would significantly reform the country’s mortgage finance system,
including, among other things, eliminating Freddie Mac and Fannie Mae and replacing them with a single new MBS insurance
agency. Many details remain unsettled, including the scope and costs of the agencies’s guarantee and their affordable housing
mission, some of which could be addressed even in the absence of large-scale reform. While the likelihood of enactment of major
mortgage finance system reform in the short term remains uncertain, it is possible that the adoption of any such reforms could
adversely affect the types of assets we can buy, the costs of these assets and our business operations. As the FHFA and both houses
of Congress continue to consider various measures intended to dramatically restructure the U.S. housing finance system and the
operations of Fannie Mae and Freddie Mac, we expect debate and discussion on the topic to continue throughout 2016.
Results of Operations
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
General
For 2015, our net income available to our common stock and participating securities was $298.2 million, or $0.80 per basic
and diluted common share, relatively unchanged compared to net income available to common stock and participating securities
for 2014 of $298.5 million, or $0.81 per basic and diluted common share.
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) and prepayment speeds on our MBS. Interest rates and CPRs (which measure the amount of unscheduled principal
prepayment on a bond as a percentage of the bond 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 2015, our net interest spread and margin were 2.33% and 2.65%, respectively, compared to a net interest spread and
margin of 2.40% and 2.78%, respectively, for 2014. Our net interest income increased by $11.2 million, or 3.7%, to $315.2 million
from $304.0 million for 2014. For 2015, net interest income on RPL/NPL MBS and CRT securities increased by approximately
48
$60.3 million. Prior to January 1, 2015, the majority of these assets and associated repurchase agreement financings were reported
as components of Linked Transactions with net income reported in Other Income, net in our consolidated statement of operations.
This increase was partially offset by the $58.9 million decline in net interest income from Agency and Legacy Non-Agency MBS
compared to 2014, primarily due to lower average balances of these MBS and associated Agency repurchase financings. In
addition, net interest income for 2015 compared to 2014 was approximately $6.2 million higher due to higher investments in
residential whole loans at carrying value and lower outstanding balances of securitized debt.
The net interest spread on our Agency MBS portfolio declined to 0.88% for 2015 compared to 1.08% for 2014. The net
interest spread on our Legacy Non-Agency MBS portfolio increased to 4.80% for 2015 compared to 4.73% for 2014. The net
interest spread on our RPL/NPL MBS portfolio was 2.01% for 2015 compared to 2.10% for 2014. In the comparable prior period,
the majority of our RPL/NPL MBS were reported as Linked Transactions with net interest income reported in Other Income, net.
49
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, 2015, 2014 and 2013. 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.
(Dollars in Thousands)
Assets:
Interest-earning assets:
Agency MBS (1)
For the Year Ended December 31,
2015
2014
2013
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
$ 5,282,198
$105,835
2.00% $
6,388,112
$142,543
2.23% $ 6,841,082
$156,046
2.28%
Legacy Non-Agency MBS (1)
3,600,339
274,352
RPL/NPL MBS (1)
Total MBS
CRT securities (1)
Residential whole loans, at
carrying value (2)
Cash and cash equivalents (3)
2,423,808
89,218
11,306,345
469,405
133,458
6,572
241,801
212,917
16,036
130
Total interest-earning assets
11,894,521
492,143
7.62
3.68
4.15
4.92
6.63
0.06
4.14
4,072,237
314,998
36,065
1,332
10,496,414
458,873
16,972
772
58,762
358,576
4,083
89
10,930,724
463,817
7.74
3.69
4.37
4.55
6.95
0.02
4.24
Total non-interest-earning assets (2)
1,778,216
Total assets
$ 13,672,737
1,616,694
$ 12,547,418
4,507,039
326,749
461
21
11,348,582
482,816
—
—
475,287
—
—
124
11,823,869
482,940
1,368,416
$ 13,192,285
7.25
4.56
4.25
—
—
0.03
4.08
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Agency repurchase agreements (4)
$ 4,465,949 $ 51,891
1.16
$
5,662,872 $ 65,128
1.15
$ 6,116,468 $ 72,856
1.19
Legacy Non-Agency repurchase
agreements (4)
RPL/NPL repurchase agreements
CRT securities repurchase
agreements
Residential whole loan repurchase
agreements
FHLB advances
Total repurchase agreements and
other advances
Securitized debt
Senior Notes
Total interest-bearing liabilities
Total non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income/net interest
rate spread (5)
Net interest-earning assets/net
interest margin (6)
Ratio of interest-earning assets to
interest-bearing liabilities
2,629,059
1,928,392
74,062
32,246
2.82
1.67
92,860
1,614
1.74
2.75
0.39
1.74
3.04
8.03
1.81
222,336
257,811
6,108
997
9,596,407
166,918
1,996
8,034
176,948
65,681
100,000
9,762,088
781,188
10,543,276
3,129,461
$ 13,672,737
2,625,403
79,302
17,200
11,323
16,060
—
273
189
352
—
8,332,858
145,244
6,533
8,031
159,808
231,828
100,000
8,664,686
651,800
9,316,486
3,230,932
$ 12,547,418
3.01
1.59
1.67
2.19
—
1.74
2.82
8.03
1.84
2,596,663
71,029
2.74
—
—
—
—
1.65
2.48
8.03
1.76
—
—
—
—
—
—
—
—
8,713,131
143,885
12,100
8,028
164,013
487,476
100,000
9,300,607
629,220
9,929,827
3,262,458
$ 13,192,285
$315,195
2.33%
$304,009
2.40%
$318,927
2.32%
$ 2,132,433
2.65% $
2,266,038
2.78% $ 2,523,262
2.70%
1.22x
1.26x
1.27x
(1) Yields presented throughout this Annual Report on Form 10-K are calculated using average amortized cost data for securities which excludes unrealized
gains and losses and includes principal payments receivable on securities. 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. Includes Non-Agency MBS transferred to consolidated VIEs.
(2) Excludes residential whole loans held at fair value that are reported as a component of total non-interest-earning assets.
(3) Includes average interest-earning cash, cash equivalents and restricted cash.
(4) Average cost of repurchase agreements includes the cost of Swaps allocated based on the proportionate share of the overall estimated weighted average
portfolio duration.
(5) Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds.
(6) Net interest margin reflects net interest income divided by average interest-earning assets.
50
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.
(In Thousands)
Interest-earning assets:
Agency MBS
Legacy Non-Agency MBS
RPL/NPL MBS (1)
CRT securities
Residential whole loans at carrying value (1)
Cash and cash equivalents
Year Ended December 31, 2015
Compared to
Year Ended December 31, 2014
Year Ended December 31, 2014
Compared to
Year Ended December 31, 2013
Increase/
(Decrease) due to
Volume
Rate
Total Net
Change in
Interest
Income/
Expense
Increase/
(Decrease) due to
Volume
Rate
Total Net
Change in
Interest
Income/
Expense
$ (23,092) $ (13,616) $
(36,708)
$ (10,163) $ (3,340) $
(13,503)
(36,021)
(4,625)
(40,646)
(32,895)
21,123
(11,772)
87,884
5,731
11,872
(5)
2
69
81
46
87,886
5,800
11,953
41
1,337
772
4,083
(29)
(5)
—
—
(6)
1,332
772
4,083
(35)
Total net change in income from interest-earning assets
$
46,369
$ (18,043) $
28,326
$ (36,895) $ 17,772
$
(19,123)
Interest-bearing liabilities:
Agency repurchase agreements
$ (13,900) $
663
$
(13,237)
$
(5,275) $ (2,453) $
(7,728)
Legacy Non-Agency repurchase agreements
110
(5,350)
RPL/NPL repurchase agreements
CRT securities repurchase agreements
Residential whole loan repurchase agreements
FHLB advances
Securitized debt
Senior Notes
31,957
1,417
5,645
997
(5,013)
—
16
8
111
—
476
3
(5,240)
31,973
1,425
5,756
997
832
273
189
352
—
7,441
8,273
—
—
—
—
273
189
352
—
(4,537)
(7,041)
1,474
(5,567)
3
—
3
3
Total net change in expense of interest-bearing liabilities
Net change in net interest income
$
$
21,213
$ (4,073) $
17,140
$ (10,670) $
6,465
25,156
$ (13,970) $
11,186
$ (26,225) $ 11,307
$
$
(4,205)
(14,918)
(1) Excludes residential whole loans held at fair value which are reported as a component of non-interest-earning assets.
51
The following table presents certain quarterly information regarding our net interest spread and net interest margin for the
quarterly periods presented:
Quarter Ended
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Total Interest-Earning Assets and Interest-
Bearing Liabilities
Net Interest
Spread (1)
Net Interest
Margin (2)
2.22%
2.54%
2.24
2.33
2.44
2.41
2.32
2.42
2.44
2.58
2.66
2.77
2.76
2.70
2.80
2.84
(1) Reflects the difference between the yield on average interest-earning assets and average cost of funds.
(2) Reflects annualized net interest income divided by average interest-earning assets.
The following table presents the components of the net interest spread earned on our Agency, Legacy Non-Agency MBS
and RPL/NPL MBS for the quarterly periods presented:
Agency MBS
Legacy Non-Agency MBS
RPL /NPL MBS
Total MBS
Quarter Ended
Net
Yield
(1)
Cost of
Funding
(2)
Net
Interest
Spread
(3)
Net
Yield
(1)
Cost of
Funding
(2)
Net
Interest
Spread
(3)
Net
Yield
(1)
Cost of
Funding
(2)
Net
Interest
Spread
(3)
Net
Yield
(1)
Cost of
Funding
(2)
Net
Interest
Spread
(3)
December 31, 2015
2.04%
1.17%
0.87%
7.64%
2.90%
4.74%
3.70%
1.81%
1.89%
4.17%
1.81%
2.36%
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
1.84
1.89
2.22
2.17
2.09
2.26
2.39
1.13
1.06
1.13
1.12
1.14
1.13
1.21
0.71
0.83
1.09
1.05
0.95
1.13
1.18
7.60
7.59
7.64
7.68
7.70
7.72
7.80
2.76
2.77
2.85
2.95
2.97
3.11
3.04
4.84
4.82
4.79
4.73
4.73
4.61
4.76
3.74
3.66
3.62
3.19
3.53
4.16
4.30
1.73
1.60
1.52
1.60
1.49
—
—
2.01
2.06
2.10
1.59
2.04
4.16
4.30
4.08
4.09
4.26
4.33
4.28
4.36
4.50
1.73
1.65
1.69
1.76
1.75
1.77
1.80
2.35
2.44
2.57
2.57
2.53
2.59
2.70
(1) Reflects annualized interest income on MBS divided by average amortized cost of MBS.
(2) Reflects annualized interest expense divided by average balance of repurchase agreements and other advances, including the cost of Swaps
allocated based on the proportionate share of the overall estimated weighted average portfolio duration and securitized debt. Agency cost
of funding includes 74, 74, 70, 78, 79, 82, 81 and 85 basis points and Legacy Non-Agency cost of funding includes 69, 66, 68,78, 84, 89, 88
and 74 basis points associated with Swaps to hedge interest rate sensitivity on these assets for the quarters ended December 31, 2015,
September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively.
(3) Reflects the difference between the net yield on average MBS and average cost of funds on MBS.
Interest Income
Interest income on our Agency MBS for 2015 decreased by $36.7 million, or 25.8% to $105.8 million from $142.5 million
for 2014. This change primarily reflects a $1.106 billion decrease in the average amortized cost of our Agency MBS portfolio to
$5.282 billion for 2015 from $6.388 billion for 2014. In addition, the net yield on our Agency MBS decreased to 2.00% for 2015
from 2.23% for 2014. At the end of 2015, the average coupon on mortgages underlying our Agency MBS was lower compared
to the end of 2014, as a result of prepayments on higher yielding assets and downward resets on Hybrid and ARM-MBS within
the portfolio. As a result, the coupon yield on our Agency MBS portfolio declined 18 basis points to 2.78% for 2015 from 2.96%
for 2014. During 2015, our Agency MBS portfolio experienced a 13.2% CPR and we recognized a $41.2 million of net premium
52
amortization compared to a CPR of 13.0% and $46.8 million of net premium amortization in 2014. At December 31, 2015, we
had net purchase premiums on our Agency MBS of $172.0 million, or 3.8% of current par value, compared to net purchase
premiums of $213.3 million, or 3.8% of par value at December 31, 2014.
Interest income on our Non-Agency MBS (which includes Non-Agency MBS transferred to consolidated VIEs) increased
$47.2 million, or 14.9%, for 2015 to $363.6 million compared to $316.3 million for 2014. Non-Agency MBS interest income
reflected the inclusion of MBS that, prior to January 1, 2015, were accounted for as components of Linked Transactions and
income from such securities was reported in Other Income, net in prior periods. In addition, primarily due to the accounting
change for Linked Transactions, the average amortized cost of our Non-Agency MBS increased by $1.916 billion or 46.6%, to
$6.024 billion for 2015, from $4.108 billion for 2014. Our Legacy Non-Agency MBS portfolio yielded 7.62% for 2015 compared
to 7.74% for 2014. The decrease in the yield on our Legacy Non-Agency MBS is primarily due to prepayments on higher yielding
assets in the portfolio, partially offset by increases in accretable discount due to the impact of credit reserve releases, in the current
and prior year, that have occurred as a result of the improved credit performance of loans underlying the Legacy Non-Agency
MBS portfolio. Our RPL/NPL MBS portfolio yielded 3.68% for 2015 compared to 3.69% for 2014. During 2015, we recognized
net purchase discount accretion of $92.8 million on our Non-Agency MBS, compared to $103.4 million for 2014. At December 31,
2015, we had net purchase discounts of $1.096 billion, including Credit Reserve and previously recognized OTTI of $787.5 million,
on our Legacy Non-Agency MBS, or 25.4% of par value. During 2015 we reallocated $41.1 million of purchased discount
designated as Credit Reserve to accretable purchase discount.
The following table presents the components of the coupon yield and net yields earned on our Agency MBS, Legacy Non-
Agency MBS and RPL/NPL MBS and weighted average CPR experienced for such MBS for the quarterly periods presented:
Quarter Ended
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Agency MBS
Legacy Non-Agency MBS
RPL/NPL MBS
Coupon
Yield (1)
Net
Yield (2)
3 Month
Average
CPR (3)
Coupon
Yield (1)
Net
Yield (2)
3 Month
Average
CPR (3)
Coupon
Yield (1)
Net
Yield (2)
3 Month
Average
Bond
CPR (4)
2.76%
2.04%
11.8%
5.09%
7.64%
14.6%
3.68%
3.70%
21.5%
2.74
2.77
2.99
2.91
2.94
2.99
3.01
1.84
1.89
2.22
2.17
2.09
2.26
2.39
15.4
14.8
10.9
12.3
15.1
13.0
11.5
5.10
5.06
5.11
5.13
5.18
5.27
5.19
7.60
7.59
7.64
7.68
7.70
7.72
7.80
16.3
14.8
11.1
12.5
12.7
12.1
11.9
3.62
3.57
3.56
3.91
3.53
4.16
4.30
3.74
3.66
3.62
3.19
3.53
4.16
4.30
29.5
28.6
19.6
17.6
19.7
15.8
16.0
(1) Reflects the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Legacy Non-Agency
MBS causes the coupon yield to be higher than the pass-through coupon interest rate.
(2) Reflects annualized interest income on MBS divided by average amortized cost of MBS.
(3) 3 month average CPR weighted by positions as of the beginning of each month in the quarter.
(4) All principal payments are considered to be prepayments for CPR purposes.
Interest Expense
Our interest expense for 2015 increased by $17.1 million, or 10.7% to $176.9 million, from $159.8 million for 2014. This
increase primarily reflects an increase in our average borrowings to finance RPL/NPL MBS (primarily due to the reclassification
of repurchase agreements previously reported as a component of Linked Transactions as discussed above), residential whole loans
and CRT securities, and utilization of FHLB advances, which was partially offset by a decrease in our average repurchase agreement
borrowings to finance Agency MBS, lower financing rates on Legacy Non-Agency MBS, and a decrease in the average balance
of securitized debt.
At December 31, 2015, we had repurchase agreement borrowings of $7.889 billion of which $3.050 billion was hedged with
Swaps, FHLB advances of $1.500 billion and securitized debt of $22.1 million. At December 31, 2015, our Swaps designated in
hedging relationships had a weighted average fixed-pay rate of 1.82% and extended 45 months on average with a maximum
remaining term of approximately 92 months.
53
The effective interest rate paid on our borrowings decreased to 1.81% for 2015 from 1.84% for 2014. This decrease reflects
the lower average balance of Agency repurchase agreements and securitized debt, the lower financing rates associated with our
Legacy Non-Agency MBS portfolio (including the allocation of Swap expense), partially offset by the increase in our average
balance of repurchase agreements used to finance RPL/NPL MBS.
Payments made and/or received on our Swaps are a component of our borrowing costs and accounted for interest expense
of $53.8 million or 57 basis points, for 2015, compared to interest expense of $69.8 million, or 81 basis points, for 2014. The
weighted average fixed-pay rate on our Swaps designated as hedges decreased to 1.86% for 2015 from 1.93% for 2014. The
weighted average variable interest rate received on our Swaps increased to 0.19% for 2015 from 0.16% for 2014. During 2015,
we did not enter into any new Swaps and had Swaps with an aggregate notional amount of $710.2 million and a weighted average
fixed-pay rate of 1.96% amortize and/or expire.
We expect that our interest expense and funding costs for 2016 will be impacted by market interest rates, the amount of our
borrowings and incremental hedging activity, existing and future interest rates on our hedging instruments and the extent to which
we execute additional longer-term structured financing transactions. As a result of these variables, our borrowing costs cannot be
predicted with any certainty. (See Notes 6, 8 and 16 to the accompanying consolidated financial statements, included under Item
8 of this Annual Report on Form 10-K.)
OTTI
During 2015 we recognized OTTI charges through earnings of $705,000 against certain of our Non-Agency MBS. These
impairment charges reflected changes in our estimated cash flows for such securities based on an updated assessment of the
estimated future performance of the underlying collateral, including the expected principal loss over the term of the securities and
changes in the expected timing of receipt of cash flows. We did not recognize any OTTI charges through earnings against our
Non-Agency MBS during 2014. At December 31, 2015, we had 336 Agency MBS with a gross unrealized loss of $40.4 million,
59 RPL/NPL MBS with a gross unrealized loss of $19.3 million and 58 Legacy Non-Agency MBS with a gross unrealized loss
of $9.1 million. Impairments on Agency MBS in an unrealized loss position at December 31, 2015 are considered temporary and
not credit related. Unrealized losses on Non-Agency MBS for which no OTTI was recorded during the year are considered
temporary based on an assessment of changes in the expected cash flows for such securities, which considers recent bond
performance and expected future performance of the underlying collateral. Significant judgment is used both in our analysis of
expected cash flows for our Legacy Non-Agency MBS and any determination of the credit component of OTTI. (See “Critical
Accounting Policies and Estimates” for more information regarding OTTI.)
Other Income, net
For 2015, Other income, net, decreased by $3.6 million to $51.2 million from $54.8 million for 2014. Other income, net for
2015 primarily reflects $34.9 million of gross gains realized on the sale of $70.7 million Non-Agency MBS, a $17.7 million net
gain recorded on residential whole loans held at fair value, and $1.8 million of net losses related to loans transferred to REO during
the year. During 2014, we sold Non-Agency MBS for $123.9 million and realized gross gains of $37.5 million. In addition, the
year ended 2014 included unrealized net gains and net interest income on Linked Transactions of $17.1 million, which included
interest income of $24.4 million on the underlying Non-Agency MBS, interest expense of $8.0 million on borrowings under
repurchase agreements and an increase of $677,000 in the fair value of the underlying securities. As previously mentioned, new
accounting guidance effective on January 1, 2015 prospectively eliminated the use of Linked Transaction accounting and as a
result we did not have any Linked Transactions effective January 1, 2015 (See Note 6 to the accompanying consolidated financial
statements, included under Item 8 of this Annual Report on Form 10-K).
Operating and Other Expense
For 2015, we had compensation and benefits and other general and administrative expense of $42.0 million, or 1.34% of
average equity, compared to $40.7 million, or 1.26% of average equity, for 2014. Compensation and benefits expense increased
$712,000 to $26.3 million for 2015, compared to $25.6 million for 2014, primarily reflecting higher costs associated with our
wider residential asset strategy. Our other general and administrative expenses increased by $588,000 to $15.8 million for 2015
compared to $15.2 million for 2014. The increase was primarily due to higher IT development and related costs, data analytics
and pricing services related expenses and costs associated with our attaining FHLB membership, partially offset by lower
professional services related costs.
Operating and Other Expense during 2015 also includes $10.4 million of loan servicing and other related operating expenses
related to our residential whole loan activities. These expenses increased compared to the prior year period by approximately $7.0
million, consistent with the overall growth in this asset class during 2015. The overall increase is primarily due to loan servicing
54
and due diligence related expenses associated with acquisitions closed over the past year. Also included in this expense category
is the impact of loan loss provisions and non-recoverable REO maintenance and other loan related expenses that are incurred in
connection with our investments in this asset class.
Operating and Other Expense for 2014 also included a $1.2 million accrual of interest with respect to prior years undistributed
taxable income. No such expense was incurred in 2015.
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
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Return on
Average Total
Assets (1)
Return on
Average Total
Stockholders’
Equity (2)
2.10%
9.80%
Total Average
Stockholders’
Equity to Total
Average Assets (3)
22.56%
2.22
2.16
2.25
2.44
2.41
2.38
2.30
10.21
9.78
10.26
9.91
9.62
9.25
9.10
22.85
23.18
22.97
25.78
26.27
25.69
25.27
Dividend
Payout
Ratio (4)
Leverage
Multiple (5)
Book Value
per Share
of Common
Stock (6)
1.05
1.00
1.00
0.95
1.00
1.00
1.00
1.00
$
3.4
3.3
3.3
3.3
2.8
2.7
2.8
2.9
7.47
7.70
7.96
8.13
8.12
8.28
8.37
8.20
(1) Reflects annualized net income available to common stock and participating securities divided by average total assets. The decrease for the
quarter ended March 31, 2015 compared to the quarter ended December 31, 2014 is primarily due to the reclassification of $1.918 billion
of MBS previously reported as a component of Linked Transactions.
(2) Reflects annualized net income divided by average total stockholders’ equity.
(3) Reflects total average stockholders’ equity divided by total average assets. The decrease for the quarter ended March 31, 2015 compared
to the quarter ended December 31, 2014 is primarily due to the reclassification of $1.918 billion of MBS previously reported as a component
of Linked Transactions.
(4) Reflects dividends declared per share of common stock divided by earnings per share.
(5) Represents the sum of borrowings under repurchase agreements, FHLB advances, securitized debt, payable for unsettled MBS purchases,
and obligations to return securities obtained as collateral and Senior Notes divided by stockholders’ equity. The increase in our leverage
multiple for the quarter ended March 31, 2015 from the quarter ended December 31, 2014 is primarily due to the reclassification of $1.520
billion of repurchase agreements previously reported as a component of Linked Transactions.
(6) Reflects total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
General
For 2014, we had net income available to our common stock and participating securities of $298.5 million, or $0.81 per basic
and diluted common share, compared to net income available to common stock and participating securities of $285.0 million, or
$0.78 per basic and diluted common share, for 2013. The increase in net income available to our common stock and participating
securities, and the increase of this item on a per share basis primarily reflected an increase in unrealized net gains and net interest
income from Linked Transactions, higher gains on sales of MBS partially offset by a reduction in net interest income. Yields on
Agency MBS were lower for 2014 compared to 2013 and were impacted by lower coupon yields. Non-Agency MBS yields were
higher compared to the prior year period due primarily to the impact of credit reserve releases. In addition, during 2013, we had
$7.5 million of unrealized losses on forward contracts for the sale of Agency MBS securities on a generic pool, or to-be-announced
basis (or TBA short positions), a $3.9 million write-off of issuance costs on the redemption of the Series A Preferred Stock (see
Note 13 to the accompanying consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K) and
a $2.0 million charge related to the impairment of resecuritization related costs. None of these items re-occurred in 2014.
55
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) and prepayment speeds on our MBS. Interest rates and CPRs (which measure the amount of unscheduled principal
prepayment on a bond as a percentage of the bond 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 2014, our net interest spread and margin were 2.40% and 2.78%, respectively, compared to a net interest spread and
margin of 2.32% and 2.70%, respectively, for 2013. Although our net interest spread and margin increased, our net interest income
decreased by $14.9 million, or 4.7%, to $304.0 million from $318.9 million for 2013. This decrease primarily reflected the impact
of the lower average balance of our MBS portfolio as measured by amortized cost, increased Non-Agency MBS borrowing costs
(including the impact of allocated Swap expense), partially offset by higher yielding Non-Agency MBS due to improved credit
performance, a decrease in the average balance of securitized debt and lower Agency MBS borrowing costs. It should be noted
that our reported net interest income for 2014 and 2013 excluded the interest income on Non-Agency MBS and CRT securities
and the interest expense on repurchase agreements financings that had been accounted for as Linked Transactions and for which
the net interest income was reported in Other income, net in our consolidated statement of operations. For 2014, the net interest
earned on our investments accounted for as Linked Transactions increased by approximately $13.5 million to $16.4 million
compared to $2.9 million for 2013. The net interest spread on our Agency MBS portfolio declined slightly to 1.08% for 2014
compared to 1.09% for 2013. The net interest spread on our Non-Agency MBS portfolio increased to 4.70% for 2014 compared
to 4.55% for 2013.
The following table presents certain quarterly information regarding our net interest spread and net interest margin for the
quarterly periods presented:
Quarter Ended
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Total Interest-Earning Assets and Interest-
Bearing Liabilities
Net Interest
Spread (1)
Net Interest
Margin (2)
2.41%
2.76%
2.32
2.42
2.44
2.34
2.24
2.38
2.32
2.70
2.80
2.84
2.75
2.63
2.73
2.69
(1) Reflected the difference between the yield on average interest-earning assets and average cost of funds.
(2) Reflected annualized net interest income divided by average interest-earning assets.
56
The following table presents the components of the net interest spread earned on our Agency and Non-Agency MBS for the
quarterly periods presented:
Quarter Ended
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Agency MBS
Non-Agency MBS
Total MBS
Net
Yield (1)
Cost of
Funding (2)
Net
Interest
Spread (3)
Net
Yield (1)
Cost of
Funding (2)
Net
Interest
Spread (3)
Net
Yield (1)
Cost of
Funding (2)
2.17%
2.09
2.26
2.39
2.37
2.13
2.19
2.42
1.12%
1.14
1.13
1.21
1.26
1.12
1.15
1.24
1.05% 7.59%
0.95
1.13
1.18
7.68
7.71
7.80
1.11
1.01
1.04
1.18
7.77
7.33
7.15
6.80
2.92%
2.96
3.11
2.99
3.01
2.91
2.41
2.45
4.66% 4.33%
4.72
4.60
4.81
4.28
4.36
4.50
4.76
4.42
4.74
4.35
4.48
4.20
4.18
4.17
1.76%
1.75
1.77
1.80
1.85
1.74
1.56
1.63
Net
Interest
Spread (3)
2.57%
2.53
2.59
2.70
2.63
2.46
2.62
2.54
(1) Reflected annualized interest income on MBS divided by average amortized cost of MBS.
(2) Reflected annualized interest expense divided by average balance of repurchase agreements, including the cost of Swaps allocated based
on the proportionate share of the overall estimated weighted average portfolio duration, and securitized debt. Agency cost of funding included
79, 82, 81, 85, 86 and 74 basis points and Non-Agency cost of funding included 84, 89, 88, 74, 72 and 57 basis points associated with Swaps
to hedge interest rate sensitivity on these assets for the quarters ended December 31, 2014, September 30, 2014, June 30, 2014, March 31,
2014, December 31, 2013 and September 30, 2013, respectively. Agency cost of funding includes 100 and 88 basis points associated with
Swaps to hedge interest rate sensitivity on these assets for the quarters ended June 30, 2013 and March 31, 2013, respectively. Non-Agency
funding cost did not include any costs associated with Swaps in those periods.
(3) Reflected the difference between the net yield on average MBS and average cost of funds on MBS.
Interest Income
Interest income on our Agency MBS for 2014 decreased by $13.5 million, or 8.7% to $142.5 million from $156.0 million
for 2013. This change primarily reflected a $453.0 million decrease in the average amortized cost of our Agency MBS portfolio
to $6.388 billion for 2014 from $6.841 billion for 2013 and a decrease in the net yield on our Agency MBS to 2.23% for 2014
from 2.28% for 2013. At the end of 2014, the average coupon on mortgages underlying our Agency MBS was lower compared
to the end of 2013, due to acquisition of assets in the marketplace at generally lower coupons and as a result of prepayments on
higher yielding assets and downward resets on Hybrid and ARM-MBS within the portfolio. As a result, the coupon yield on our
Agency MBS portfolio declined 17 basis points to 2.96% for 2014 from 3.13% for 2013. During 2014, our Agency MBS portfolio
experienced a 13.0% CPR and we recognized a $46.8 million of net premium amortization compared to a CPR of 17.9% and $57.9
million of net premium amortization in 2013. At December 31, 2014, we had net purchase premiums on our Agency MBS of
$213.3 million, or 3.8% of current par value, compared to net purchase premiums of $226.8 million, or 3.6% of par value at
December 31, 2013.
Interest income on our Non-Agency MBS (which includes Non-Agency MBS transferred to consolidated VIEs) decreased
$10.4 million, or 3.2%, for 2014 to $316.3 million compared to $326.8 million for 2013, primarily due to the decrease in the
amortized cost of our Non-Agency MBS portfolio, partially offset by the increase in the net yield on our Non-Agency MBS
portfolio. For 2014, the average amortized cost of our Non-Agency MBS (excluding Non-Agency MBS reported as a component
of Linked Transactions) decreased by $399.2 million or 8.9%, to $4.108 billion, from $4.508 billion for 2013. Our Non-Agency
MBS portfolio yielded 7.70% for 2014 compared to 7.25% for 2013. The increase in the yield on our Non-Agency MBS was
primarily due to the impact of credit reserve releases, in the then current and prior year, that had occurred as a result of the improved
credit performance of loans underlying the Legacy Non-Agency MBS portfolio. During 2014, we recognized net purchase discount
accretion of $103.4 million on our Non-Agency MBS, compared to $73.2 million for 2013. At December 31, 2014, we had net
purchase discounts of $1.300 billion, including Credit Reserve and previously recognized OTTI of $900.6 million, on our Non-
Agency MBS, or 24.4% of par value. During 2014 we reallocated $95.0 million of purchased discount designated as Credit
Reserve to accretable purchase discount.
57
The following table presents the components of the coupon yield and net yields earned on our Agency MBS and Non-Agency
MBS and weighted average CPR experienced for such MBS for the quarterly periods presented:
Quarter Ended
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Agency MBS
Non-Agency MBS
Total MBS
Coupon
Yield (1)
Net
Yield (2)
3 Month
Average
CPR
Coupon
Yield (1)
Net
Yield (2)
3 Month
Average
CPR
Coupon
Yield (1)
Net
Yield (2)
3 Month
Average
CPR
2.91%
2.17% 12.34%
5.10%
7.59% 12.53%
3.78%
4.34% 12.43%
2.94
2.99
3.01
3.04
3.07
3.14
3.25
2.09
2.26
2.39
2.37
2.13
2.19
2.42
15.11
13.05
11.54
12.87
19.25
20.19
19.08
5.17
5.27
5.19
5.40
5.59
5.71
5.78
7.68
7.71
7.80
7.77
7.33
7.15
6.80
12.71
12.05
11.90
14.16
18.15
16.37
15.06
3.81
3.87
3.86
3.96
4.07
4.17
4.26
4.28
4.36
4.50
4.48
4.20
4.18
4.17
13.94
12.58
11.71
13.42
18.77
18.53
17.34
(1) Reflected the annualized coupon interest income divided by the average amortized cost. The discounted purchase price on Non-Agency MBS
causes the coupon yield to be higher than the pass-through coupon interest rate. (Does not include MBS underlying our Linked Transactions.
See Note 6 to the accompanying consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.)
(2) Reflected annualized interest income on MBS divided by average amortized cost of MBS.
Interest Expense
Our interest expense for 2014 decreased by $4.2 million, or 2.6% to $159.8 million, from $164.0 million for 2013. This
decrease primarily reflected a decrease in the average balance of securitized debt, a decrease in our average borrowings to finance
Agency MBS and the lower effective interest rate paid on borrowings to finance Agency MBS, which was partially offset by
higher effective funding costs associated with Non-Agency MBS, including allocated Swap financing costs, and securitized debt.
At December 31, 2014, we had repurchase agreement borrowings of $8.267 billion of which $3.760 billion was hedged with
Swaps, and securitized debt of $110.6 million. At December 31, 2014, our Swaps designated in hedging relationships had a
weighted average fixed-pay rate of 1.85% and extended 47 months on average with a maximum remaining term of approximately
104 months.
The following table presents information about our securitized debt at December 31, 2014:
Benchmark Interest Rate
(Dollars in Thousands)
Fixed Rate
Weighted Average Coupon Rate
Total
At December 31, 2014
Securitized Debt
Interest Rate
$
$
57,288
53,286
110,574
2.85%
3.82
3.31%
The effective interest rate paid on our borrowings increased to 1.84% for 2014 from 1.76% for 2013. This increase reflected
additional higher cost financing (including the impact of allocated Swap expense) associated with our Non-Agency MBS portfolio
partially offset by the lower average balance of securitized debt and Agency repurchase agreements. Payments made and/or
received on our Swaps are a component of our borrowing costs and accounted for interest expense of $69.8 million or 81 basis
points, for 2014, compared to interest expense of $59.0 million, or 63 basis points, for 2013. The weighted average fixed-pay rate
on our Swaps decreased to 1.93% for 2014 from 2.08% for 2013. The weighted average variable interest rate received on our
Swaps decreased to 0.16% for 2014 from 0.19% for 2013. During 2014, we entered into four new Swaps with an aggregate
notional amount of $400.0 million, a weighted average fixed-pay rate of 1.95% with initial maturities ranging from five to seven
years, and had Swaps with an aggregate notional amount of $685.0 million and a weighted average fixed-pay rate of 2.28% amortize
and/or expire.
58
The following table presents our leverage multiples, as measured by debt-to-equity, at the dates presented:
At the Period Ended
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
GAAP
Leverage
Multiple (1)
2.8
2.7
2.8
2.9
2.9
3.0
3.1
3.1
Non-GAAP
Leverage
Multiple (2)
3.3
3.0
2.9
3.0
3.0
3.1
3.1
3.1
(1) Represented the sum of borrowings under repurchase agreements, securitized debt, payable for unsettled MBS purchases, and obligations
to return securities obtained as collateral and Senior Notes divided by stockholders’ equity.
(2) The Non-GAAP Leverage Multiple reflected the sum of our borrowings under repurchase agreements, securitized debt, payable for unsettled
MBS purchases, obligations to return securities obtained as collateral, Senior Notes and borrowings that were reported on our consolidated
balance sheets as a component of Linked Transactions of $1.520 billion, $791.8 million, $387.5 million, $206.0 million, $102.7 million,
$82.4 million, $33.2 million and $34.1 million at December 31, 2014, September 30, 2014, June 30, 2014, March 31, 2014, December 31,
2013, September 30, 2013, June 30, 2013 and March 31, 2013 respectively. We presented a Non-GAAP leverage multiple since repurchase
agreement borrowings that were a component of Linked Transactions may not be linked in the future and, if no longer linked, would be
reported as repurchase agreement borrowings, which would increase our leverage multiple. (See Note 6 to the accompanying consolidated
financial statements, included under Item 8 of this Annual Report on Form 10-K.)
OTTI
During 2014 and 2013, we did not recognize any OTTI charges through earnings against our Non-Agency MBS. At
December 31, 2014, we had 271 Agency MBS with a gross unrealized loss of $33.6 million and 45 Non-Agency MBS and CRT
securities with a gross unrealized loss of $5.8 million. Impairments on Agency MBS in an unrealized loss position at December 31,
2014 are considered temporary and not credit related. Unrealized losses on Non-Agency MBS and CRT securities for which no
OTTI was recorded during the year were considered temporary based on an assessment of changes in the expected cash flows for
such securities, which considered recent bond performance and expected future performance of the underlying collateral.
Significant judgment was used both in the Company’s analysis of expected cash flows for its Legacy Non-Agency MBS and any
determination of the credit component of OTTI. (See “Critical Accounting Policies and Estimates” for more information regarding
OTTI.)
Other Income, net
For 2014, Other income, net, increased by $33.0 million to $54.8 million from $21.8 million for 2013. In 2014 Other income,
net primarily reflected $37.5 million of net gains realized on the sale of certain Non-Agency MBS and unrealized net gains and
net interest income of $17.1 million on our Linked Transactions. In addition, during 2014 we recorded net gains on residential
whole loans held at fair value of $116,000, primarily reflecting changes in market value of the underlying loans since acquisition.
During 2014, we sold Non-Agency MBS for $123.9 million, realizing gross gains of $37.5 million. During 2013, we sold Non-
Agency MBS for $152.6 million, and realized gross gains of $25.8 million and sold U.S. Treasury securities for $422.2 million,
realizing net losses of approximately $24,000. The unrealized net gains and net interest income from Linked Transactions of $17.1
million for 2014 included interest income of $24.4 million on the underlying Non-Agency MBS, interest expense of $8.0 million
on the borrowings under repurchase agreements and an increase of $677,000 in the fair value of the underlying securities. The
unrealized net gains and net interest income on Linked Transactions of $3.2 million for 2013 included interest income of $3.9
million on the underlying Non-Agency MBS, interest expense of $925,000 on borrowings under repurchase agreements and an
increase of $281,000 in the fair value of the underlying securities. During 2014, certain of our Linked Transactions became
unlinked, resulting in our recording Non-Agency MBS with a fair value of $86.4 million on our consolidated balance sheets. The
$7.5 million of losses realized on TBA short positions for 2013 reflected losses on the sale of $350.0 million notional of TBA
securities.
59
Operating and Other Expense
For 2014, we had compensation and benefits and other general and administrative expense of $40.7 million, or 1.26% of
average equity, compared to $33.7 million, or 1.03% of average equity, for 2013. The $5.3 million increase in our compensation
and benefits expense to $25.6 million for 2014, compared to $20.3 million for 2013, primarily reflected increases in equity-based
compensation expense, salary and bonus expense, and payroll taxes. Our other general and administrative expenses increased by
$1.8 million to $15.2 million for 2014 compared to $13.4 million for 2013. The increase was primarily comprised of increases
in professional services, board of director expenses and the cost of data and analytical systems.
During 2014, we recorded $3.4 million of other investment related operating expenses related to our residential whole loan
activities. In addition, during 2014, an interest accrual of $1.2 million was recorded, reflecting an additional accrual of interest
with respect to prior years undistributed taxable income. During 2013, we recorded an excise tax and interest accrual of $2.0
million reflecting an updated estimate of excise tax payable in respect of undistributed REIT taxable income for the 2012 tax year
and an additional accrual of interest with respect to prior years undistributed taxable income and recorded $250,000 reflecting an
estimate of excise tax payable in respect of undistributed REIT taxable income for the 2013 tax year. In addition, for 2013, we
realized a $2.0 million charge related to the impairment of resecuritization related costs.
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
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
Return on
Average Total
Assets (1)
Return on
Average Total
Stockholders’
Equity (2)
2.44%
9.91%
Total Average
Stockholders’
Equity to Total
Average Assets (3)
25.78%
2.41
2.38
2.30
2.37
2.10
2.10
2.20
9.62
9.25
9.10
9.55
8.71
8.29
8.92
26.27
25.69
25.27
24.80
24.12
25.35
24.63
Dividend
Payout
Ratio (4)
Book Value
per Share
of Common
Stock (5)
$
1.00
1.00
1.00
1.00
1.00
1.16 (6)
1.16
1.05 (7)
8.12
8.28
8.37
8.20
8.06
7.85
8.19
8.84
(1) Reflected annualized net income available to common stock and participating securities divided by average total assets.
(2) Reflected annualized net income divided by average total stockholders’ equity.
(3) Reflected total average stockholders’ equity divided by total average assets.
(4) Reflected dividends declared per share of common stock divided by earnings per share.
(5) Reflected total stockholders’ equity less the preferred stock liquidation preference divided by total shares of common stock outstanding.
(6) Excluded the special common stock dividend declared on August 1, 2013.
(7) Excluded the special common stock dividend declared on March 4, 2013.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements include our accounts and all majority owned and controlled subsidiaries. In addition,
we consolidate the special purpose entities (or SPEs) created to facilitate the resecuritization transactions completed in prior years
and the acquisition of residential whole loans. The preparation of consolidated financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements.
In preparing these consolidated financial statements, management has made estimates and judgments of certain amounts included
in the consolidated financial statements, giving due consideration to materiality. Application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties and, as a result, 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 more significant of these to be as follows:
60
Classifications of Investment Securities and Assessment for Other-Than-Temporary Impairments
Our investments in securities are primarily comprised of Agency MBS and Non-Agency MBS, as discussed and detailed in
Notes 2(b) and 3 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. All of our
MBS are designated as available-for-sale (or AFS) and, accordingly, are carried on our consolidated balance sheets at their fair
value with unrealized gains and losses excluded from earnings (except when an OTTI is recognized, as discussed below) and
reported in AOCI, a component of Stockholders’ Equity. We do not intend to hold any of our investment securities for trading
purposes; however, if available-for-sale securities were classified as trading securities, there could be substantially greater volatility
in our earnings.
When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered
impaired. We assess our impaired securities on at least a quarterly basis and designate such impairments as either “temporary”
or “other-than-temporary.” If we intend to sell an impaired security, or it is more likely than not that we will be required to sell
the impaired security before its anticipated recovery, then we must recognize an OTTI 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 we do not expect to sell
an other-than-temporarily impaired security, only the portion of the OTTI related to credit losses is recognized through charges
to earnings with the remainder recognized through AOCI on the consolidated balance sheets.
In making our assessments about OTTIs, we review and consider certain information relating to our financial position and
the impaired securities, including the nature of such securities, the contractual collateral requirements impacting us and our
investment and leverage strategies, as well as subjective information, including our current and targeted liquidity position, the
credit quality and expected cash flows of the underlying assets collateralizing such securities, and current and anticipated market
conditions. In determining the OTTI related to credit losses for securities that were purchased at significant discounts to par and/
or are considered to be of less than high credit quality, we compare the present value of the remaining cash flows expected to be
collected at the purchase date (or last date previously revised) against the present value of the cash flows expected to be collected
at the current financial reporting date. The determination as to whether an OTTI exists and, if so, the amount of credit impairment
recognized in earnings is subjective, as such determinations are based on factual information available at the time of assessment
as well as management’s estimates of the future performance and cash flow projections. As a result, the timing and amount of
OTTIs constitute material estimates that may be susceptible to significant change.
During 2015, we recognized credit-related OTTI losses through earnings related to our Non-Agency MBS of $705,000. At
December 31, 2015, we did not intend to sell any MBS that were in an unrealized loss position, and it is “more likely than not”
that we will not be required to sell these MBS before recovery of their amortized cost basis, which may be at their maturity.
Gross unrealized losses on our Agency MBS were $40.4 million at December 31, 2015. Agency MBS are issued by GSEs
and enjoy either the implicit or explicit backing of the full faith and credit of the U.S. Government. While our Agency MBS are
not rated by any rating agency, they are currently perceived by market participants to be of high credit quality, with risk of default
limited to the unlikely event that the U.S. Government would not continue to support the GSEs. Given the credit quality inherent
in Agency MBS, we do not consider any of the current impairments on our Agency MBS to be credit related. In assessing whether
it is more likely than not that we will be required to sell any impaired security before its anticipated recovery, which may be at its
maturity, we consider for each impaired security, the significance of each investment, the amount of impairment, the projected
future performance of such impaired securities, as well as our current and anticipated leverage capacity and liquidity position.
Based on these analyses, we determined that at December 31, 2015 any unrealized losses on our Agency MBS were temporary.
The payments of principal and interest we receive on our Agency MBS, which depend directly upon payments on the
mortgages underlying such securities, are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Fannie Mae and Freddie
Mac are GSEs, but their guarantees are not explicitly backed by the full faith and credit of the United States. Ginnie Mae is part
of a U.S. Government agency and its guarantees are explicitly backed by the full faith and credit of the United States. We believe
that the stronger backing for the guarantors of Agency MBS resulting from the conservatorship of Fannie Mae and Freddie Mac
has further strengthened their credit worthiness; however, there can be no assurance that these actions will be adequate for their
needs. Accordingly, if these government actions are inadequate and the GSEs suffer losses in the future or cease to exist, our view
of the credit worthiness of our Agency MBS could materially change, which may affect our assessment of OTTI for Agency MBS
in future periods. (See Part I, Item 1A., Risk Factors, “The federal conservatorship of Fannie Mae and Freddie Mac and related
efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the
U.S. Government, may materially adversely affect our business.”)
Unrealized losses on our Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs) were $28.4
million, of which $19.3 million were RPL/NPL MBS and $9.1 million were Legacy Non-Agency MBS at December 31, 2015.
Based upon the most recent evaluation, we do not consider these unrealized losses to be indicative of OTTI and do not believe
61
that these unrealized losses are credit related, but are rather a reflection of current market yields and/or market place bid-ask
spreads. We have reviewed our Non-Agency MBS that are in an unrealized loss position to identify those securities with losses
that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent
bond performance, where possible, and expected future performance of the underlying collateral.
Our expectations with respect to our securities in an unrealized loss position may change over time, given, among other
things, the dynamic nature of markets and other variables. Future sales or changes in our expectations with respect to securities
in an unrealized loss position could result in us recognizing OTTI charges or realizing losses on sales of MBS in the future. (See
Notes 2(b) and 3 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K.)
Fair Value Measurements
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 our financial instruments measured at fair value on a recurring
basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Securities Obtained and Pledged as Collateral/Obligation to Return Securities Obtained as Collateral
The fair value of U.S. Treasury securities obtained as collateral and the associated obligation to return securities obtained as
collateral are based upon prices obtained from a third-party pricing service, which are indicative of market activity. Securities
obtained as collateral are classified as Level 1 in the fair value hierarchy.
MBS and CRT Securities
We determine the fair value of our Agency MBS, based upon prices obtained from third-party pricing services, which are
indicative of market activity and repurchase agreement counterparties.
For Agency MBS, the valuation methodology of our third-party pricing services incorporate commonly used market pricing
methods, trading activity observed in the market place and other data inputs. The methodology also considers the underlying
characteristics of each security, which are also observable inputs, including: collateral vintage, coupon, maturity date, loan age,
reset date, collateral type, periodic and life cap, geography, and prepayment speeds. Management analyzes pricing data received
from third-party pricing services and compares it to other indications of fair value including data received from repurchase
agreement counterparties and its own observations of trading activity observed in the market place.
In determining the fair value of our Non-Agency MBS and CRT 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. In
valuing Non-Agency MBS, we understand that pricing services use observable inputs that include, in addition to trading activity
observed in the market place, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign
pricing factors such as spread and prepayment assumptions. For tranches of Legacy Non-Agency MBS that are cross-collateralized,
performance of all collateral groups involved in the tranche are considered. We collect and consider current market intelligence
on all major markets, including benchmark security evaluations and bid-lists from various sources, when available.
Our MBS and CRT securities are valued using various market data points as described above, which management considers
directly or indirectly observable parameters. Accordingly, our MBS and CRT securities are classified as Level 2 in the fair value
hierarchy.
62
Residential Whole Loans, at Fair Value
We determine the fair value of our residential whole loans held at fair value after considering portfolio valuations obtained
from a third-party who specializes in providing valuations of residential mortgage loans and trading activity observed in the market
place. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy.
Swaps
We determine the fair value of our non-centrally cleared Swaps considering valuations obtained from a third-party pricing
service. For Swaps that are cleared by a central clearing house, valuations provided by the clearing house are used. All valuations
obtained are tested with internally developed models that apply readily observable market parameters. We consider the
creditworthiness of both us and our counterparties, along with collateral provisions contained in each derivative agreement, from
the perspective of both us and our counterparties. All of our Swaps are subject either to bilateral collateral arrangements, or for
cleared Swaps, to the clearing house’s margin requirements. Consequently, no credit valuation adjustment was made in determining
the fair value of such instruments. Our Swaps are classified as Level 2 in the fair value hierarchy.
Interest Income on our Non-Agency MBS
Interest income on the Non-Agency MBS that were purchased at a discount to par value and/or are considered to be of less
than high credit quality is recognized based on the security’s effective interest rate which is the security’s IRR. The IRR is
determined using management’s estimate of the projected cash flows for each security, which are based on our observation of
current information and events and include assumptions related to fluctuations in interest rates, prepayment speeds and the timing
and amount of credit losses. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow
projections based on input and analysis received from external sources, internal models, and our judgment about interest rates,
prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected,
or from those estimated at the last evaluation, may result in a prospective change in the IRR/interest income recognized on these
securities or in the recognition of OTTIs.
Based on the projected cash flows for our Non-Agency MBS purchased at a discount to par value, a portion of the purchase
discount may be designated as Credit Reserve, which effectively mitigates our risk of loss on the mortgages collateralizing such
MBS and is not expected to be accreted into interest income. The amount designated as Credit Reserve may be adjusted over
time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral,
economic conditions and other factors. If the performance of a security with a Credit Reserve is more favorable than forecasted,
a portion of the amount designated as Credit Reserve may be reallocated to accretable discount and recognized into interest income
over time. Conversely, if the performance of a security with a Credit Reserve is less favorable than forecasted, the amount
designated as Credit Reserve may be increased, or impairment charges and write-downs of such securities to a new cost basis
could result.
Residential Whole Loans
Residential whole loans included in our consolidated balance sheets are generally comprised of pools of fixed and adjustable
rate residential mortgage loans acquired through consolidated trusts in secondary market transactions at discounted purchase
prices. The accounting model utilized by us is determined at the time each loan package is initially acquired and is generally based
on the delinquency status of the majority of the underlying borrowers in the package at acquisition. The accounting model described
below under “Residential Whole Loans at Carrying Value” is typically utilized by us for loans where the underlying borrower
has a delinquency status of less than 60 days at the acquisition date. The accounting model described below under “Residential
Whole Loans at Fair Value” is typically utilized by us for loans where the underlying borrower has a delinquency status of 60
days or more at the acquisition date. The accounting model initially applied is not subsequently changed.
Our residential whole loans pledged as collateral against repurchase agreements are included in the consolidated balance
sheets with the fair value of the loans pledged disclosed parenthetically. Purchases and sales of residential whole loans are recorded
on the trade date, with amounts recorded 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.
63
Residential Whole Loans at Carrying Value
Notwithstanding that majority of these loans are considered to be performing substantially in accordance with their current
contractual terms and conditions, we have elected to account for these loans as credit impaired as they were acquired at discounted
prices that reflect, in part, the impaired credit history of the borrower. Substantially all of the borrowers have previously experienced
payment delinquencies and the amount owed on the mortgage loan may exceed the value of the property pledged as collateral.
Consequently, we have assessed that these loans have a higher likelihood of default than newly originated mortgage loans with
LTVs of 80% or less to credit worthy borrowers. We believe that amounts paid to acquire these loans represent fair market value
at the date of acquisition. Such loans are initially recorded at fair value with no allowance for loan losses. Subsequent to acquisition,
the recorded amount reflects the original investment amount, plus accretion of interest income, less principal and interest cash
flows received. These loans are presented on our consolidated balance sheets at carrying value, which reflects the recorded amount
reduced by any allowance for loan losses established subsequent to acquisition.
Under the application of this accounting model we may aggregate into pools loans acquired in the same fiscal quarter that
are assessed as having similar risk characteristics. For each pool established, or on an individual loans basis for loans not aggregated
into pools, we estimate at acquisition and periodically on at least a quarterly basis, the principal and interest cash flows expected
to be collected. The difference between the cash flows expected to be collected and the carrying amount of the loans is referred
to as the “accretable yield.” This amount is accreted as interest income over the life of the loans using an effective interest rate
(level yield) methodology. Interest income recorded each period reflects the amount of accretable yield recognized and not the
coupon interest payments received on the underlying loans. The difference between contractually required principal and interest
payments and the cash flows expected to be collected, referred to as the “non-accretable difference,” and includes estimates of
both the effect of prepayments and expected credit losses over the life of the underlying loans.
A decrease in expected cash flows in subsequent periods may indicate impairment at the pool and/or individual loan level
thus requiring the establishment of an allowance for loan losses by a charge to the provision for loan losses. The allowance for
loan losses represents the present value of cash flows expected at acquisition, adjusted for any increases due to changes in estimated
cash flows that are subsequently no longer expected to be received at the relevant measurement date. A significant increase in
expected cash flows in subsequent periods first reduces any previously recognized allowance for loan losses and then will result
in a recalculation in the amount of accretable yield. The adjustment of accretable yield due to a significant increase in expected
cash flows is accounted for prospectively as a change in estimate and results in reclassification from non-accretable difference to
accretable yield.
Residential Whole Loans at Fair Value
Certain of our residential whole loans are presented at fair value on our consolidated balance sheets as a result of a fair value
election made at time of acquisition. Given the significant uncertainty associated with estimating the timing of and amount of cash
flows associated with these loans that will be collected, and that the cash flows ultimately collected may be dependent on the value
of the property securing the loan, we consider that accounting for these loans at fair value should result in a better reflection over
time of the economic returns from these loans. We determine the fair value of our residential whole loans held at fair value after
considering portfolio valuations obtained from a third-party who specializes in providing valuations of residential mortgage loans
and trading activity observed in the market place. Subsequent changes in fair value are reported in current period earnings and
presented in Net gain on residential whole loans held at fair value on our consolidated statements of operations.
Cash received reflecting coupon payments on residential whole loans held at fair value is not included in Interest Income,
but rather is presented in Net gain on residential whole loans held at fair value on our consolidated statements of operations.
Hedging Activities
We may use a variety of derivative instruments to economically hedge a portion of our exposure to market risks, including
interest rate risk and prepayment risk. The objective of our risk management strategy is to reduce fluctuations in net book value
over a range of interest rate scenarios. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities
increasing during a period of rising interest rates. Our derivative instruments are currently comprised of Swaps, which are designated
as cash flow hedges against the interest rate risk associated with certain of our borrowings. Prior to 2015, our derivative financial
instruments also included Linked Transactions, which were not designated as hedging instruments. New accounting guidance
that was effective for us on January 1, 2015 prospectively eliminated the use of Linked Transaction accounting. During 2013, we
also entered into TBA short positions which were not designated as hedging instruments.
64
Our Swaps designated as hedging transactions have the effect of modifying the repricing characteristics of our repurchase
agreements and cash flows for such liabilities. Under each Swap, we agree to pay a fixed rate of interest and receive a variable
interest rate, generally based on one-month or three-month LIBOR, on the notional amount of the Swap. We document our risk-
management policies, including objectives and strategies, as they relate to our hedging activities and the relationship between the
hedging instrument and the hedged liability for all Swaps designated as hedging transactions. We assess, both at inception of a
hedge and on a quarterly basis thereafter, whether or not the hedge relationship is “highly effective.”
We discontinue hedge accounting on a prospective basis and recognize changes in the fair value of the derivative through
earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including
forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating
the derivative as a hedge is no longer appropriate.
Swaps are carried on our consolidated balance sheets at fair value, as assets, if their fair value is positive, or as liabilities, if
their fair value is negative. Changes in the fair value of our Swaps designated in hedging transactions are recorded in OCI provided
that the hedge remains effective. Changes in fair value for any ineffective amount of a Swap are recognized in earnings. We have
not recognized any change in the value of our existing Swaps designated as hedges through earnings as a result of hedge
ineffectiveness.
During 2013, we entered into TBA short positions as a means of managing interest rate risk and MBS basis risk associated
with our investment and financing activities. A TBA short position is a forward contract for sale of Agency MBS at a predetermined
price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency MBS that could be
delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets
Association (or SIFMA), are not known at the time of the transaction.
TBA short positions were accounted for as derivative instruments since we could not assert that it was probable at inception
and throughout the term of the TBA contract that we would physically deliver the Agency security upon settlement of the contract.
TBA short positions were presented as either derivative assets or liabilities, at fair value on our consolidated balance sheets. Gains
and losses associated with TBA short positions were reported in Other income, net on our consolidated statements of operations.
Although permitted under certain circumstances, we do not offset cash collateral receivables or payables against our net
derivative positions.
Income Taxes
We believe that we operate in, and intend to continue to operate in, a manner that allows and will continue to allow us to be
taxed as a REIT. Provided that we distribute all of our REIT taxable income (including net long-term capital gains) to stockholders
in the timeframe permitted by the Code, we do not generally expect to pay corporate level taxes and/or excise taxes. However,
such taxes may arise from time to time in the normal course of our business. Many of the REIT requirements, however, are highly
technical and complex. In addition, REIT taxable income calculated at the time our financial statements are prepared is based on
certain estimates that may be revised as our tax return, which is not required to be filed until September in the following year, is
completed. If we were to fail to meet certain of the REIT requirements, we would be subject to U.S. federal, state and local income
taxes.
In addition, we have elected to treat certain of our subsidiaries as a TRS. In general, a TRS may hold assets and engage in
activities that we cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business.
Generally, a TRS is subject to U.S. federal, state and local corporate income taxes. Since a portion of our business may be conducted
through one or more TRS, our income earned by TRS may be subject to corporate income taxation. To maintain our REIT election,
no more than 25% (or, for 2018 and subsequent taxable years, 20%) of the value of a REIT’s assets at the end of each quarter may
consist of stock or securities in a TRS. For purposes of the determination of U. S. federal and state income taxes, the Company’s
subsidiaries that elected to be treated as a 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. No deferred tax benefit was recorded
by the Company in 2015 or 2014, as a valuation allowance for the full amount of the associated deferred tax asset was recognized
as its recovery is not considered more likely than not.
65
Accounting for Stock-Based Compensation
We expense our equity-based compensation awards that are subject to vesting conditions, ratably over the vesting period of
such awards, based upon the fair value of such awards at the grant date. Compensation expense for equity-based awards is recorded
net of estimated forfeitures expected to occur over the vesting period. (See Notes 2(l) and 15 to the consolidated financial statements,
included under Item 8 of this Annual Report on Form 10-K.)
During 2010, we granted certain RSUs that vested after either two or four years of service and provided that certain criteria
were met, which were based on a formula that included changes in our closing stock price over a two- or four-year period and
dividends declared on our common stock during those periods. From 2011 through 2013, we granted certain RSUs that vested
annually over a one or three-year period, provided that certain criteria were met, which were based on a formula tied to our
achievement of average total stockholder return during that three-year period. During 2014 and 2015, we made grants of RSUs
certain of which cliff vest after a three-year period and certain of which cliff vest after a three-year period, subject to the achievement
of certain performance criteria, based on a formula tied to our achievement of average total stockholder return during that three-
year period. The features in these awards related to the attainment of total stockholder return 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 in addition
to estimates regarding the amount of RSUs expected to be forfeited during the associated service period, determined the amount
of compensation expense recognized. The amount of compensation expense recognized was not dependent on whether the market
condition was or will be achieved, while differences in actual forfeiture experience relative to estimated forfeitures results in
adjustments to the timing and amount of compensation expense recognized.
We have awarded dividend equivalents that may be granted as a separate instrument or may be a right associated with the
grant of another equity-based award. Compensation expense for separately awarded dividend equivalents is based on the grant
date fair value of such awards and is recognized over the vesting period. Payments pursuant to these dividend equivalents are
charged to Stockholders’ Equity. Payments pursuant to dividend equivalents that are attached to equity-based awards are charged
to Stockholders’ Equity to the extent that the attached equity awards are expected to vest. Compensation expense is recognized
for payments made for dividend equivalents to the extent that the attached equity awards do not or are not expected to vest and
grantees are not required to return payments of dividends or dividend equivalents to the Company.
RECENT ACCOUNTING STANDARDS TO BE ADOPTED IN FUTURE PERIODS
Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued Accounting Standards Update (or ASU) 2016-01, Recognition and Measurement of
Financial Assets and Financial Liabilities (or ASU 2016-01).The amendments in this ASU affect all entities that hold financial
assets or owe financial liabilities, and address certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. The classification and measurement guidance of investments in debt securities and loans are not affected by the
amendments in this ASU. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2017. Early adoption is not permitted for public business entities, except for a provision
related to financial statements of fiscal years or interim periods that have not yet been issued, to recognize in other comprehensive
income, the change in fair value of a liability resulting from a change in the instrument-specific credit risk measured using the
fair value option. Entities should apply the amendments in this ASU by recording a cumulative-effect adjustment to equity as of
the beginning of the fiscal year of adoption. We are currently evaluating the effect that ASU 2016-01 will have on our consolidated
financial statements and related disclosures.
Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (or ASU 2015-03). The
amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet
as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt issued at a discount.
The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03
is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2015. Early adoption is permitted for financial statements that have not previously been issued and entities should apply the
new guidance on a retrospective basis. We do not expect adoption of ASU 2015-03 to have a significant impact on our financial
position or financial statement disclosures.
66
Consolidation - Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (or ASU 2015-02). The
amendments in this ASU change the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships
and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests
in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates
the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar
entities. ASU 2015-02 is effective for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015. At the effective date, all previous consolidation analyses that the guidance affects must be
reconsidered. Early adoption is permitted, including adoption in an interim period. If an entity adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A
reporting entity may apply the amendments in this ASU using a modified retrospective approach by recording a cumulative-effect
adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments
retrospectively. We are currently evaluating the effect that ASU 2015-02 will have on our consolidated financial statements and
related disclosures. While we have not yet selected a transition method, we do not expect adoption of ASU 2015-2 to have a
significant impact on our financial position.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (or ASU 2014-09). The ASU requires
an entity to recognize revenue in an amount that reflects the consideration to which it expects to be entitled for the transfer of
promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP
when it becomes effective. ASU 2014-09 originally would have been effective for public business entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2016. Early application is not permitted. The standard
permits the use of either the retrospective or cumulative effect transition method. On April 29, 2015, the FASB proposed a one-
year deferral of the effective date for ASU 2014-09. On July 9, 2015 the FASB affirmed its proposal to defer the effective date
of the new revenue standard for all entities by one year. As a result, public entities would apply the new revenue standard to annual
reporting periods beginning after December 15, 2017 and interim periods therein. The FASB would also permit entities to adopt
the standard early, but not before the original public entity effective date. We are currently evaluating the effect that ASU 2014-09
will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have
we determined the effect of the standard on our ongoing financial reporting.
Presentation of Financial Statements - Going Concern
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern (or ASU 2014-15). The amendments in this ASU provide guidance in GAAP about management’s responsibility to
evaluate whether there is a substantial doubt about an entity’s going concern and to provide related footnote disclosures. In
connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability
to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the
date that the financial statements are available to be issued when applicable). The amendments in ASU 2014-15 are effective for
the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is
permitted. We do not expect adoption of ASU 2014-15 to have a significant impact on our financial position or financial statement
disclosures.
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 MBS 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 MBS and residential whole loans, to
make dividend payments on our capital stock, to fund our operations 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 MBS and residential whole loans, 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
67
an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depositary shares
representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement
and, at December 31, 2015, we had 6.8 million shares of common stock available for issuance pursuant to our DRSPP shelf
registration statement. During 2015, we issued 162,373 shares of common stock through our DRSPP, raising net proceeds of
approximately $1.2 million.
On April 15, 2013, we completed the issuance of 8.0 million shares of our 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 aggregate net proceeds to us from the offering of the Series B Preferred Stock were approximately $193.3 million, after
deducting the underwriting discount and related offering expenses. We used a portion of the net proceeds to redeem all of our
outstanding Series A Preferred Stock (as discussed below), and used the remaining net proceeds of the offering for general corporate
purposes, including, without limitation, to acquire additional MBS consistent with our investment policy, and for working capital,
which included, among other things, the repayment of our repurchase agreements.
On May 16, 2013, we redeemed all 3,840,000 outstanding shares of our Series A Preferred Stock at an aggregate redemption
price of approximately $97.0 million, or $25.27153 per share, including all accrued and unpaid dividends to the Redemption Date.
The redemption value of the Series A Preferred Stock exceeded its carrying value by $3.9 million, which represents the original
offering costs for the Series A Preferred Stock.
Our borrowings under repurchase agreements 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 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 (as defined below), 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.
With respect to margin maintenance requirements for repurchase agreements with Non-Agency MBS as collateral, 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 repurchase 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. In the unlikely event that resolution
cannot be reached, 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 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.
68
The following table presents information regarding the margin requirements, or the percentage amount by which the collateral
value is contractually required to exceed the loan amount (this difference is referred to as the “haircut”), on our repurchase
agreements at December 31, 2015 and December 31, 2014:
At December 31, 2015
Repurchase agreement borrowings secured by:
Agency MBS
Legacy Non-Agency MBS
RPL/NPL MBS
U.S. Treasury securities
CRT securities
Residential whole loans
At December 31, 2014
Repurchase agreement borrowings secured by:
Agency MBS
Legacy Non-Agency MBS
RPL/NPL MBS
U.S. Treasury securities
CRT securities
Residential whole loans
Weighted
Average
Haircut
Low
High
4.67%
3.00%
6.00%
25.42
21.37
1.60
25.04
27.69
Weighted
Average
Haircut
10.00
20.00
1.00
20.00
25.00
63.50
30.00
2.00
30.00
36.00
Low
High
4.79%
3.00%
6.00%
28.88
20.00
1.62
25.00
33.43
10.00
20.00
1.00
25.00
30.00
60.00
20.00
2.00
25.00
35.00
The weighted average haircut requirements for the respective underlying collateral types for our repurchase agreements have
not significantly changed since December 31, 2014, with the exception of Residential whole loans and Legacy Non-Agency MBS.
During 2015, the Company has increased the number of counterparties providing repurchase agreement financing for residential
whole loans resulting in a lower overall weighted average haircut. The decrease in the weighted average haircut for Legacy Non-
Agency MBS results from the unwind during 2015 of certain re-securitization transactions and subsequent refinancing of the
underlying MBS at lower haircut levels.
During 2015, the financial market environment was impacted by continued accommodative monetary policy. Repurchase
agreement funding for both Agency MBS and Non-Agency MBS has been available to us at generally attractive market terms
from multiple counterparties. Typically, due to the credit risk inherent to Non-Agency MBS, repurchase agreement funding
involving Non-Agency MBS is available from fewer counterparties, at terms requiring higher collateralization and higher interest
rates, than repurchase agreement funding secured by Agency MBS and U.S. Treasury securities. Therefore, we generally expect
to be able to finance our acquisitions of Agency MBS on more favorable terms than financing for Non-Agency MBS.
In July 2015, our wholly-owned subsidiary, MFA Insurance became a member of the FHLB. As a member of the FHLB,
MFA Insurance had access to a variety of products and services offered by the FHLB, including secured advances (subject to our
continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements
with the FHLB). The weighted average haircut on our FHLB advances at December 31, 2015 was 7.00%. However, in January,
2016, the FHFA amended its regulation on FHLB membership, which, among other things, provided termination rules for current
captive insurance members. As a result, MFA Insurance will not be permitted new advances or renewal of existing advances and
will be required to terminate its FHLB membership and repay any outstanding advances by no later than February 19, 2017. As
of December 31, 2015 and February 16, 2016, MFA Insurance had approximately $1.500 billion and $1.200 billion, respectively,
in outstanding advances (backed by Agency MBS).
We maintain cash and cash equivalents, unpledged Agency and Non-Agency MBS and collateral in excess of margin
requirements held by our counterparties (or collectively, “cash and other unpledged collateral”) to meet routine margin calls and
protect against unforeseen reductions in our borrowing capabilities. Our ability to meet future margin calls will be impacted by
our ability to use cash or obtain financing from unpledged collateral, 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
69
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.)
At December 31, 2015, we had a total of $11.339 billion of MBS, U.S. Treasury securities, CRT securities and residential
whole loans and $71.5 million of restricted cash pledged against our repurchase agreements and Swaps. In addition, at December 31,
2015, we had $1.612 billion of Agency MBS pledged against our FHLB advances. At December 31, 2015 we have access to
various sources of liquidity which we estimate exceeds $571.0 million. This includes (i) $165.0 million of cash and cash equivalents;
(ii) $241.7 million in estimated financing available from unpledged Agency MBS and other Agency MBS collateral that is currently
pledged in excess of contractual requirements; and (iii) $164.3 million in estimated financing available from unpledged Non-
Agency MBS.
The table below presents certain information about our borrowings under repurchase agreements and other advances, and
securitized debt:
Quarter Ended (1)
(In Thousands)
December 31, 2015
Repurchase Agreements and Other Advances
Securitized Debt
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
$ 9,428,224
$ 9,388,902
$ 9,413,189
$
28,252
$
22,057
$
September 30, 2015
9,422,882
9,475,834
9,475,834
June 30, 2015
March 31, 2015
9,720,193
9,820,548 (2)
9,635,036
9,809,586 (2)
9,746,825
9,863,779 (2)
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
8,190,491
8,267,905
8,464,135
8,412,045
8,462,138
8,679,410
8,842,018
8,873,852
8,267,388
8,125,723
8,384,101
8,606,129
8,339,297
8,568,171
8,909,283
8,902,827
8,271,123
8,272,039
8,501,978
8,606,129
8,504,593
8,721,573
8,909,283
8,956,951
51,021
80,754
103,688
137,503
190,753
264,806
336,893
399,762
440,665
505,409
606,858
32,217
62,320
91,280
110,574
156,276
214,048
292,526
366,205
419,693
443,748
542,014
27,927
50,269
80,744
104,299
138,026
190,423
267,740
338,965
398,384
462,207
508,893
609,707
(1) The information presented in the table above excludes Senior Notes issued in April 2012. The outstanding balance of Senior Notes has been
unchanged at $100.0 million since issuance.
(2) The increase from December 31, 2014 reflects the reclassification of $1.520 billion of repurchase agreements previously presented as
components of Linked Transactions. New accounting guidance that was effective on January 1, 2015 prospectively eliminated the use of
Linked Transaction accounting and as a result we did not have any Linked Transactions effective January 1, 2015.
Cash Flows and Liquidity For the Year Ended December 31, 2015
Our cash and cash equivalents decreased by $17.4 million during the year ended December 31, 2015, reflecting: $849.7
million used by our financing activities; $550.1 million provided by our investing activities, primarily from payments on our MBS;
and $282.2 million provided by our operating activities.
At December 31, 2015, our debt-to-equity multiple was 3.4 times compared to 2.8 times at December 31, 2014. After
adjusting the reported debt-to-equity ratio at December 31, 2014 to reflect new accounting standards that became effective January
1, 2015, which eliminated Linked Transaction accounting and resulted in the reclassification of $1.520 billion of liabilities relating
to repurchase agreements that had been previously reported as a component of Linked Transactions, the debt to equity ratio at
December 31, 2014 would have been 3.3 times. At December 31, 2015, we had borrowings under repurchase agreements of
$7.889 billion with 27 counterparties, of which $2.728 billion was secured by Agency MBS, $1.960 billion was secured by Legacy
Non-Agency MBS, $2.080 billion was secured by RPL/NPL MBS, $504.8 million was secured by U.S. Treasuries, $128.5 million
was secured by CRT securities and $487.8 million were secured by residential whole loans. We continue to have available capacity
under our repurchase agreement credit lines. At December 31, 2014, we had borrowings under repurchase agreements of $8.267
70
billion with 25 counterparties of which $5.178 billion was secured by Agency MBS, $2.233 billion was secured by Legacy Non-
Agency MBS, $130.9 million was secured by RPL/NPL MBS, $507.1 million was secured by U.S. Treasuries, $76.0 million was
secured by CRT securities and $142.3 million were secured by residential whole loans.
As of December 31, 2015 and February 16, 2016, we had approximately $1.500 billion and $1.200 billion, respectively, in
outstanding secured FHLB advances, which had a weighted average term to maturity of 4.79 years. As a result of the previously
mentioned final FHFA rule released in January, 2016, MFA Insurance will be required to terminate its FHLB membership and
repay the outstanding advances within one year of the rule’s effective date of February 19, 2016.
At December 31, 2015, outstanding securitized debt was $22.1 million, which had a weighted average expected remaining
term of 0.35 years. During the year ended December 31, 2015, securitized debt was reduced by principal payments of $88.3
million.
During 2015, we received $550.1 million through our investing activities. We received cash of $2.917 billion from
prepayments and scheduled amortization on our MBS, of which $1.857 billion was from Non-Agency MBS and $1.060 billion
was attributable to Agency MBS. We purchased $1.734 billion of Non-Agency MBS and $76.3 million of CRT securities funded
with cash and repurchase agreement borrowings. While we generally intend to hold our MBS as long-term investments, we may
sell certain of our securities in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt
to market conditions. In addition, during 2015 we sold certain of our Non-Agency MBS for $70.7 million, realizing gross gains
of $34.9 million.
In connection with our repurchase agreement borrowings 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 for MBS; (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 securities 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:
For the Quarter Ended
(In Thousands)
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
Collateral Pledged to Meet Margin Calls
Fair Value of
Securities
Pledged
Cash Pledged
Aggregate
Assets Pledged
For Margin
Calls
Cash and
Securities
Received For
Reverse
Margin Calls
Net Assets
Received/
(Pledged) For
Margin Activity
$
225,323
$
32,200
$
257,523
$
276,596
$
397,763
391,088
309,114
86,300
50,700
98,000
484,063
441,788
407,114
433,003
408,968
350,036
19,073
(51,060)
(32,820)
(57,078)
We are subject to various financial covenants under our repurchase agreements and derivative contracts, which include
minimum net worth and/or profitability requirements, maximum debt-to-equity ratios and minimum market capitalization
requirements. We have maintained compliance with all of our financial covenants through December 31, 2015.
During 2015, we paid $297.4 million for cash dividends on our common stock and dividend equivalents and paid cash
dividends of $15.0 million on our preferred stock. On December 9, 2015, we declared our fourth quarter 2015 dividend on our
common stock of $0.20 per share; on January 29, 2016, we paid this dividend, which totaled $74.4 million, including dividend
equivalents of approximately $263,000.
We believe that we have adequate financial resources to meet our current obligations, including margin calls, as they come
due, to fund dividends we declare and to actively pursue our investment strategies. However, should the value of our MBS suddenly
decrease, significant margin calls on our repurchase agreement borrowings could result and our liquidity position could be materially
and adversely affected. Further, should market liquidity tighten, our repurchase agreement counterparties may increase our margin
requirements on new financings, reducing our ability to use leverage. Access to financing may also be negatively impacted by
the ongoing volatility in the world financial markets, potentially adversely impacting our current or potential lenders’ ability or
71
willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will continue to permit
us to consummate additional securitization transactions if we determine to seek that form of financing.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance-sheet arrangements.
AGGREGATE CONTRACTUAL OBLIGATIONS
The following table summarizes the effect on our liquidity and cash flows of contractual obligations for the principal and
interest amounts due at December 31, 2015:
Due During the Year Ending December 31,
(In Thousands)
Repurchase agreements
2016
2017
2018
2019
2020
Thereafter
Total
$ 7,694,793
$
194,109
$
— $
— $
— $
— $
7,888,902
Interest expense on repurchase agreements (1)
30,552
10,574
FHLB advances (2)
—
1,500,000
Interest expense on FHLB advances (1)(2)
Securitized debt (3)
Interest expense on securitized debt (1)
Senior Notes (4)
Interest expense on Senior Notes (1)
Long-term lease obligations
7,501
6,219
551
—
8,000
2,552
1,025
7,259
356
—
8,000
2,522
—
—
—
—
—
—
7,362
1,217
148
—
8,000
2,522
5
—
8,000
2,522
—
—
—
—
—
—
8,000
1,050
—
—
—
—
—
100,000
171,911
—
41,126
1,500,000
8,526
22,057
1,060
100,000
211,911
11,168
Total
$ 7,750,168
$ 1,723,845
$
18,032
$
11,744
$
9,050
$
271,911
$
9,784,750
(1) Interest expense based on the interest rate in effect at December 31, 2015.
(2) As a result of the previously mentioned final FHFA rule adopted in January, 2016, MFA Insurance’s FHLB membership will terminate one year from the rules
effective date of February 19, 2016, requiring any outstanding advances and associated interest to be repaid by February 19, 2017. As a result, the contractual
obligations in the table above are reflected as due during the year ended December 31, 2017.
(3) Securitized debt is contractually scheduled to mature by November 2022. However, the weighted average life of the securitized debt is estimated to be 0.35
years assuming a 12.0% weighted average CPR.
(4) Senior Notes mature April 2042 but may be redeemed, in whole or in part, at any time on or after April 15, 2017.
INFLATION
Substantially all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors
impact our performance far more than does inflation. Our financial statements are prepared in accordance with GAAP and dividends
declared are based upon net ordinary income as calculated for tax purposes. In each case, our results of operations and reported
assets, liabilities and equity are measured with reference to historical cost or fair value without considering inflation.
72
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, which are subject to risks and uncertainties. The forward-looking statements contain words such as “will,”
“believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may” or similar
expressions.
These forward-looking statements include information about possible or assumed future results with respect to our business,
financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects, among
others, may be forward-looking: changes in interest rates and the market value of our MBS; changes in the prepayment rates on
the mortgage loans securing our MBS, an increase of which could result in a reduction of the yield on MBS in our portfolio and
an increase of which could require us to reinvest the proceeds received by us as a result of such prepayments in MBS with lower
coupons; credit risks underlying our assets, including changes in the default rates and management’s assumptions regarding default
rates on the mortgage loans securing our Non-Agency MBS and as related to our residential whole loan portfolio; our ability to
borrow to finance our assets and the terms, including the cost, maturity and other terms, of any such borrowings; implementation
of or changes in government regulations or programs affecting our business; our estimates regarding taxable income the actual
amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and
financing costs, the method elected by us to accrete the market discount on Non-Agency MBS and the extent of prepayments,
realized losses and changes in the composition of our Agency MBS and Non-Agency MBS portfolios that may occur during the
applicable tax period, including gain or loss on any MBS disposals; the timing and amount of distributions to stockholders, which
are declared and paid at the discretion of our Board of Directors and will depend on, among other things, our taxable income, our
financial results and overall financial condition and liquidity, maintenance of our REIT qualification and such other factors as the
Board deems relevant; our ability to maintain our qualification as a REIT for federal income tax purposes; our ability to maintain
our exemption from registration under the Investment Company Act, including statements regarding the concept release issued
by the SEC relating to interpretive issues under the Investment Company Act with respect to the status under the Investment
Company Act of certain companies that are in engaged in the business of acquiring mortgages and mortgage-related interests; our
ability to successfully implement our strategy to grow our residential whole loan portfolio; expected returns on our investments
in non-performing residential whole loans (or NPLs), which are affected by, among other things, the length of time required to
foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts
advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately
realized upon resolution of the asset; and risks associated with investing in real estate assets, including changes in business
conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual,
quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in
any forward-looking statements we make. All forward-looking statements are based on beliefs, assumptions and expectations of
our future performance, taking into account all information currently available. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date they are made. New risks and uncertainties arise over time
and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and
do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
(See Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K)
73
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We seek to manage our risks related to interest rates, liquidity, prepayment speeds, market value and the credit quality of our
assets while, at the same time, seeking to provide an opportunity to stockholders to realize attractive total returns through ownership
of our capital stock. While we do not seek to avoid risk, we seek, consistent with our investment policies, to: assume risk that
can be quantified based on management’s judgment and experience and actively manage such risk; earn sufficient returns to justify
the taking of such risks; and maintain capital levels consistent with the risks that we undertake.
INTEREST RATE RISK
We generally acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities, a portion of which
are hedged with Swaps. We are exposed to interest rate risk on our residential mortgage assets, as well as on our liabilities
(repurchase agreements, FHLB advances and securitized debt). Changes in interest rates can affect our net interest income and
the fair value of our assets and liabilities.
We finance the majority of our investments in Agency, Legacy Non-Agency and RPL/NPL MBS with short-term repurchase
agreements. In general, when interest rates change, the borrowing costs of our repurchase agreements (net of the impact of Swaps)
change more quickly than the yields on our assets. In a rising interest rate environment the borrowing costs of our repurchase
agreements may increase faster than the interest income on our assets, thereby reducing our net income. In order to mitigate
compression in net income based on such interest rate movements, we use Swaps and other hedging instruments to lock in a portion
of the net interest spread between assets and liabilities.
When interest rates change, the fair value of our residential mortgage assets could change at a different rate than the fair
value of our liabilities. We measure the sensitivity of our portfolio to changes in interest rates by estimating the duration of our
assets and liabilities. Duration is the approximate percentage change in fair value for a 100 basis point parallel shift in the yield
curve. In general, our assets have higher duration than our liabilities and in order to reduce this exposure we use Swaps and other
hedging instruments to reduce the gap in duration between our assets and liabilities.
In calculating the duration of our Agency MBS we take into account the characteristics of the underlying mortgage loans
including whether the underlying loans are fixed rate, adjustable or hybrid; coupon, expected prepayment rates and lifetime and
periodic caps. We use third-party financial models, combined with management’s assumptions and observed empirical data when
estimating the duration of our Agency MBS.
In analyzing the interest rate sensitivity of our Legacy Non-Agency MBS we take into account the characteristics of the
underlying mortgage loans, including credit quality and whether the underlying loans are fixed-rate, adjustable or hybrid. We
estimate the duration of our Legacy Non-Agency MBS using management’s assumptions.
Our RPL/NPL MBS deal structures contain an interest rate step-up feature whereby the original coupon increases by 300
basis points if the bond is not redeemed by the issuer after 36 months. Therefore, we believe their fair value exhibits little sensitivity
to changes in interest rates. We estimate the duration of our RPL/NPL MBS using management’s assumptions.
The fair value of our re-performing residential whole loans is dependent on the value of the underlying real estate collateral,
past and expected delinquency status of the borrower as well as the level of interest rates. Because the borrower is not delinquent
on their mortgage payments but is less likely to prepay the loan due to weak credit history and/or high LTV, we believe our re-
performing residential whole loans exhibit positive duration. We estimate the duration of our re-performing residential whole loans
using management’s assumptions.
The fair value of our non-performing residential whole loans is primarily dependent on the value of the underlying real estate
collateral and the time until collateral liquidation. Since neither the value of the collateral nor the liquidation timeline is generally
sensitive to interest rates, we believe their fair value exhibits little sensitivity to interest rates. We estimate the duration of our non-
performing residential whole loans using management’s assumptions.
We use Swaps as part of our overall interest rate risk management strategy. Such derivative financial instruments are intended
to act as a hedge against future interest rate increases on our repurchase agreement financings, which rates are typically highly
correlated with LIBOR. While our derivatives do not extend the maturities of our borrowings under repurchase agreements, they
do, in effect, lock in a fixed rate of interest over their term for a corresponding amount of our repurchase agreement financing that
are hedged.
74
At December 31, 2015, MFA’s $8.546 billion of Agency MBS and Legacy Non-Agency MBS were backed by Hybrid,
adjustable and fixed-rate mortgages. Additional information about these MBS, including average months to reset and three-month
average CPR, is presented below:
Agency MBS
Legacy Non-Agency MBS (1)
Total (1)
Time to Reset
Fair Value (2)
(Dollars in Thousands)
< 2 years (5)
$
1,977,308
2-5 years
> 5 years
ARM-MBS Total
15-year fixed (6)
30-year fixed (6)
40-year fixed (6)
Fixed-Rate Total
MBS Total
772,627
220,532
2,970,467
1,780,746
—
—
1,780,746
4,751,213
$
$
$
$
Average
Months to
Reset (3)
3 Month
Average
CPR (4)
Fair Value
Average
Months to
Reset (3)
3 Month
Average
CPR (4)
Fair Value (2)
Average
Months to
Reset (3)
3 Month
Average
CPR (4)
6
36
75
19
12.7% $
2,580,658
15.7
11.7
—
—
13.4% $
2,580,658
9.1% $
7,728
—
—
1,199,794
6,771
9.1% $
1,214,293
11.8% $
3,794,951
6
—
—
6
13.7% $
4,557,966
—
—
772,627
220,532
13.7% $
5,551,125
4.3% $
1,788,474
16.4
14.1
1,199,794
6,771
16.4% $
2,995,039
14.6% $
8,546,164
6
36
75
13
13.4%
15.7
11.7
13.6%
9.0%
16.4
14.1
12.3%
13.1%
(1) Excludes $2.626 billion of RPL/NPL MBS. Refer to table below for further information on RPL/NPL MBS.
(2) Does not include principal payments receivable of $1.0 million.
(3) Months to reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying
benchmark interest rate index, margin and periodic and/or lifetime caps. The months to reset do not reflect scheduled amortization or prepayments.
(4) 3 month average CPR weighted by positions as of the beginning of each month in the quarter.
(5) Includes floating rate MBS that may be collateralized by fixed-rate mortgages.
(6) Information presented based on data available at time of loan origination.
The following table presents certain information about our RPL/NPL MBS portfolio at December 31, 2015:
(Dollars in Thousands)
Re-Performing MBS
Non-Performing MBS
Total RPL/NPL MBS
Fair Value
Net Coupon
Months to
Step-Up (1)
Current
Credit
Support (2)
Original
Credit
Support
3 Month
Average
Bond CPR (3)
$
$
490,566
2,135,300
2,625,866
3.69%
3.71
3.71%
18
24
23
47%
49
49%
40%
48
47%
24.4%
20.7
21.5%
(1) Months to step-up is the weighted average number of months remaining before the coupon interest rate increases pursuant to the first coupon
reset. We anticipate that the securities will be redeemed prior to the step-up date.
(2) Credit Support for a particular security is expressed as a percentage of all outstanding mortgage loan collateral. A particular security will
not be subject to principal loss as long as credit enhancement is greater than zero.
(3) All principal payments are considered to be prepayments for CPR purposes.
At December 31, 2015, our CRT securities had a fair value of $183.6 million and reset monthly based on one-month LIBOR.
75
The information presented in the following “Shock Tables” projects the potential impact of sudden parallel changes in interest
rates on our net interest income and portfolio value, including the impact of Swaps, over the next 12 months based on the assets
in our investment portfolio at December 31, 2015 and December 31, 2014. All changes in income and value are measured as the
percentage change from the projected net interest income and portfolio value at the base interest rate scenario at December 31,
2015 and 2014.
December 31, 2015
Change in Interest Rates
(Dollars in Thousands)
+100 Basis Point Increase
+ 50 Basis Point Increase
Actual at December 31, 2015
- 50 Basis Point Decrease
-100 Basis Point Decrease
Change in Interest Rates
(Dollars in Thousands)
+100 Basis Point Increase
+ 50 Basis Point Increase
Actual at December 31, 2014
- 50 Basis Point Decrease
-100 Basis Point Decrease
$
$
$
$
$
$
$
$
$
$
Estimated
Value
of Assets (1)
Estimated
Value of Swaps
Estimated
Value of
Financial
Instruments
Change in
Estimated Value
Percentage
Change in Net
Interest
Income
Percentage
Change in
Portfolio
Value
12,318,148
12,415,124
12,506,160
12,591,257
12,670,416
$
$
$
$
$
33,313
$
12,351,461
(18,043) $
12,397,081
(69,399) $
12,436,761
(120,756) $
12,470,501
(172,112) $
12,498,304
$
$
$
$
$
(85,300)
(39,680)
—
33,740
61,543
(8.98)%
(5.82)%
—
(1.01)%
(8.20)%
(0.69)%
(0.32)%
—
0.27 %
0.49 %
December 31, 2014
Estimated
Value
of Assets (2)
Estimated
Value of Swaps
Estimated
Value of
Financial
Instruments
Change in
Estimated Value
Percentage
Change in Net
Interest
Income (3)
Percentage
Change in
Portfolio
Value
13,067,430
13,183,505
13,290,985
13,390,860
13,482,139
$
$
$
$
$
73,379
7,159
$
$
13,140,809
13,190,664
(59,062) $
13,231,923
(125,282) $
13,265,578
(191,503) $
13,290,636
$
$
$
$
$
(91,114)
(41,259)
—
33,655
58,713
(5.66)%
(3.01)%
—
(3.36)%
(9.48)%
(0.69)%
(0.31)%
—
0.25 %
0.44 %
(1) At December 31, 2015 such assets include MBS and CRT securities, residential whole loans, cash and cash equivalents and restricted cash
(2) At December 31, 2014 such assets include MBS and CRT securities, including linked MBS and CRT securities that were reported as a component of our
Linked Transactions on our consolidated balance sheets, residential whole loans, cash and cash equivalents and restricted cash. New accounting guidance
that was effective on January 1, 2015 prospectively eliminated the use of Linked Transaction accounting and as a result we did not have any Linked Transactions
effective January 1, 2015.
(3) Includes underlying interest income and interest expense associated with MBS and repurchase agreement borrowings underlying our Linked Transactions.
Certain assumptions have been made in connection with the calculation of the information set forth in the Shock Table and,
as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes.
The base interest rate scenario assumes interest rates at December 31, 2015 and December 31, 2014. The analysis presented
utilizes assumptions and estimates based on management’s judgment and experience. Furthermore, while we generally expect to
retain the majority of our assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially
change our interest rate risk profile. It should be specifically noted that the information set forth in the above table and all related
disclosure constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(or 1933 Act) and Section 21E of the 1934 Act. Actual results could differ significantly from those estimated in the Shock Table
above.
The Shock Table quantifies the potential changes in net interest income and portfolio value, which includes the value of our
Swaps (which are carried at fair value), should interest rates immediately change (i.e., are shocked). The Shock Table presents
the estimated impact of interest rates instantaneously rising 50 and 100 basis points, and falling 50 and 100 basis points. The cash
flows associated with our portfolio of MBS for each rate shock are calculated based on assumptions, including, but not limited
to, prepayment speeds, yield on replacement assets, the slope of the yield curve and composition of our portfolio. Assumptions
with respect to interest rate sensitive liabilities (assumed to be repurchase agreement financings and securitized debt) include
anticipated interest rates, collateral requirements as a percent of the repurchase agreement financings, and the amounts and terms
of borrowing. At December 31, 2015 and December 31, 2014, we applied a floor of 0% for all anticipated interest rates included
in our assumptions. Due to this floor, it is anticipated that any hypothetical interest rate shock decrease would have a limited
positive impact on our funding costs; however, because prepayments speeds are unaffected by this floor, it is expected that any
increase in our prepayment speeds (occurring as a result of any interest rate shock decrease or otherwise) could result in an
76
acceleration of our premium amortization on our Agency MBS and discount accretion on our Non-Agency MBS and in the
reinvestment of principal repayments in lower yielding assets. As a result, because the presence of this floor limits the positive
impact of interest rate decrease on our funding costs, hypothetical interest rate shock decreases could cause a decline in the fair
value of our financial instruments and our net interest income to decline.
At December 31, 2015, the impact on portfolio value was approximated using estimated effective duration (i.e., the price
sensitivity to changes in interest rates), including the effect of Swaps, of 0.59 which is the weighted average of 1.97 for our Agency
MBS, 1.10 for our Non-Agency investments, (3.45) for our Swaps and zero for our cash and cash equivalents. Estimated convexity
(i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.19), which is the weighted
average of (0.50) for our Agency MBS, zero for our Swaps, zero for our Non-Agency MBS and zero for our cash and cash
equivalents. At December 31, 2014, the impact on portfolio value was approximated using a calculated effective duration (i.e.,
the price sensitivity to changes in interest rates), including the effect of Swaps, of 0.56 which is the weighted average of 2.02 for
our Agency MBS, 1.23 for our Non-Agency MBS, (3.58) for our Swaps and zero for our cash and cash equivalents. Estimated
convexity (i.e., the approximate change in duration relative to the change in interest rates) of the portfolio was (0.25), which is
the weighted average of (0.56) for our Agency MBS, zero for our Swaps, zero for our Non-Agency MBS and zero for our cash
and cash equivalents. The impact on our net interest income is driven mainly by the difference between portfolio yield and cost
of funding of our repurchase agreements (including those underlying our Linked Transactions), which includes the cost and/or
benefit from Swaps. Our asset/liability structure is generally such that an increase in interest rates would be expected to result in
a decrease in net interest income, as our borrowings are generally shorter in term than our interest-earning assets. When interest
rates are shocked, prepayment assumptions are adjusted based on management’s expectations along with the results from the
prepayment model.
CREDIT RISK
Although we do not believe that we are exposed to credit risk in our Agency MBS portfolio, we are exposed to credit risk
through our credit-sensitive residential mortgage investments, in particular Legacy Non-Agency MBS and residential whole loans
and to a lesser extent our investments in RPL/NPL MBS and CRT securities. Our exposure to credit risk from our credit sensitive
investments is discussed in more detail below:
Legacy Non-Agency MBS
In the event of the return of less than 100% of par on our Legacy Non-Agency MBS, credit support contained in the MBS
deal structures and the discount purchase prices we paid mitigate our risk of loss on these investments. Over time, we expect the
level of credit support remaining in certain MBS deal structures to decrease, which will result in an increase in the amount of
realized credit loss experienced by our Legacy Non-Agency MBS portfolio. Our investment process for Legacy Non-Agency
MBS involves analysis focused primarily on quantifying and pricing credit risk. When we purchase Legacy Non-Agency MBS,
we assign certain assumptions to each of the MBS, including but not limited to, future interest rates, voluntary prepayment rates,
mortgage modifications, default rates and loss severities, and generally allocate a portion of the purchase discount as a Credit
Reserve which provides credit protection for such securities. As part of our surveillance process, we review our Legacy Non-
Agency MBS by tracking their actual performance compared to the securities’ expected performance at purchase or, if we have
modified our original purchase assumptions, compared to our revised performance expectations. To the extent that actual
performance of a Legacy Non-Agency MBS is less favorable than the expected performance, we may revise our performance
expectations. As a result, we could reduce the accretable discount on such security and/or recognize an other-than-temporary
impairment through earnings, which could have a material adverse impact on our operating results.
In evaluating our asset/liability management and Legacy Non-Agency MBS credit performance, we consider the credit
characteristics underlying our Legacy Non-Agency MBS. The following table presents certain information about our Legacy
Non-Agency MBS portfolio at December 31, 2015. Information presented with respect to the weighted average FICO scores and
other information aggregated based on information reported at the time of mortgage origination are historical and, as such, does
not reflect the impact of the general decline in home prices or changes in a borrowers’ credit scores or the current use of the
mortgaged properties.
77
The information in the table below is presented as of December 31, 2015:
Year of Securitization (2)
2007
2006
2005
and Prior
2007
2006
2005
and Prior
Total
Securities with Average Loan FICO
of 715 or Higher (1)
Securities with Average Loan FICO
Below 715 (1)
(Dollars in Thousands)
Number of securities
MBS current face (3)
92
76
100
26
56
65
415
$ 1,197,872
$
810,849
$
903,183
$ 220,865
$ 577,275
$ 603,444
$ 4,313,488
Total purchase discounts, net (3)
$ (305,408)
$ (216,915)
$ (158,605)
$ (64,305)
$ (194,306)
$ (156,903)
$ (1,096,442)
Purchase discount designated as
Credit Reserve and OTTI (3)(4)
$ (202,963)
$ (112,556)
$
(76,834)
$ (62,550)
$ (212,521)
$ (120,116)
$ (787,540)
Purchase discount designated as
Credit Reserve and OTTI as
percentage of current face
MBS amortized cost (3)
MBS fair value (3)
Weighted average fair value to
current face
Weighted average coupon (5)
Weighted average loan age
(months) (5)(6)
Weighted average current loan
size (5)(6)
16.9%
13.9%
8.5%
28.3%
36.8%
19.9%
18.3%
$ 892,464
$ 1,056,600
$
$
593,934
699,347
$
$
744,578
824,482
$ 156,560
$ 382,969
$ 446,541
$ 3,217,046
$ 189,823
$ 480,532
$ 544,167
$ 3,794,951
88.2%
3.89%
86.2%
3.40%
91.3%
3.01%
85.9%
4.83%
83.2%
4.85%
90.2%
4.30%
105
114
128
109
116
128
$
518
$
499
$
319
$
393
$
263
$
257
$
Percentage amortizing (7)
60%
73%
100%
69%
80%
100%
Weighted average FICO score at
origination (5)(8)
Owner-occupied loans
Rate-term refinancings
Cash-out refinancings
3 Month CPR (6)
3 Month CRR (6)(9)
3 Month CDR (6)(9)
3 Month loss severity
60+ days delinquent (8)
Percentage of always current
borrowers (Lifetime) (10)
Percentage of always current
borrowers (12M) (11)
Weighted average credit
enhancement (8)(12)
731
90.5%
28.6%
34.4%
14.9%
11.5%
3.8%
55.7%
12.5%
729
90.9%
20.2%
35.4%
15.6%
12.3%
3.9%
49.5%
11.8%
727
85.8%
15.0%
26.7%
16.3%
13.6%
3.2%
46.1%
10.8%
706
83.9%
21.3%
43.9%
14.4%
10.7%
4.4%
63.0%
18.7%
704
85.1%
15.7%
42.3%
14.4%
10.7%
4.3%
63.3%
18.3%
705
83.9%
14.9%
37.7%
14.9%
12.4%
3.1%
62.8%
15.3%
40.8%
39.9%
46.4%
34.1%
28.5%
34.4%
77.7%
76.5%
77.3%
68.6%
65.3%
68.0%
0.2%
0.8%
4.5%
0.1%
1.1%
3.3%
88.0%
3.85%
116
396
79%
721
87.6%
20.1%
35.0%
15.2%
12.1%
3.7%
55.2%
13.5%
38.9%
73.9%
1.8%
(1) FICO score is used by major credit bureaus to indicate a borrower’s creditworthiness at time of loan origination.
(2)
Information presented based on the initial year of securitization of the underlying collateral. Certain of our Non-Agency MBS have been resecuritized.
The historical information presented in the table is based on the initial securitization date and data available at the time of original securitization
(and not the date of resecuritization). No information has been updated with respect to any MBS that have been resecuritized.
(3) Excludes Non-Agency MBS issued in 2013, 2014 and 2015 in which the underlying collateral consists of RPL/NPL MBS. These Non-Agency MBS
have a current face of $2.648 billion, amortized cost of $2.645 billion, fair value of $2.626 billion and purchase discounts of $3.2 million at
December 31, 2015.
Information provided is based on loans for all groups that provide credit enhancement for MBS with credit enhancement.
(4) Purchase discounts designated as Credit Reserve and OTTI are not expected to be accreted into interest income.
(5) Weighted average is based on MBS current face at December 31, 2015.
(6)
Information provided based on loans for individual groups owned by us.
(7) Percentage of face amount for which the original mortgage note contractually calls for principal amortization in the current period.
(8)
(9) CRR represents voluntary prepayments and CDR represents involuntary prepayments.
(10) Percentage of face amount of loans for which the borrower has not been delinquent since origination.
(11) Percentage of face amount of loans for which the borrower has not been delinquent in the last twelve months.
(12) Credit enhancement for a particular security is expressed as a percentage of all outstanding mortgage loan collateral. A particular security will
not be subject to principal loss as long as its credit enhancement is greater than zero. As of December 31, 2015, a total of 282 Non-Agency MBS
in our portfolio representing approximately $3.134 billion or 73% of the current face amount of the portfolio had no credit enhancement.
78
The mortgages securing our Legacy Non-Agency MBS are located in many geographic regions across the United States.
The following table presents the five largest geographic concentrations of the mortgages collateralizing our Legacy Non-Agency
MBS at December 31, 2015:
Property Location
California
Florida
New York
Virginia
Maryland
RPL/NPL MBS
Percent
43.9%
7.5%
5.7%
4.0%
3.8%
Our RPL/NPL MBS were purchased primarily through new issue at prices at or around par and represent the senior tranches
of the related securitizations. These RPL/NPL MBS are structured with significant credit enhancement (typically approximately
50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) and typically receive no cash
flow (interest or principal) until the senior tranche is paid off. Prior to purchase, we analyze the deal structure in order to assess
the associated credit risk. Subsequent to purchase, the ongoing credit risk associated with the deal is evaluated by analyzing the
extent to which actual credit losses occur that result in a reduction in the amount of subordination enjoyed by our bond. Based
on the recent performance of the collateral underlying our RPL/NPL MBS and the current subordination levels, we do not believe
that we are currently exposed to significant risk of credit loss on these investments.
CRT Securities
We are exposed to potential credit losses from our investments in CRT securities issued by Fannie Mae and Freddie Mac.
While CRT securities are debt obligations of these GSEs, payment of principal on these securities is not guaranteed. As an investor
in a CRT security, we may incur a loss if the loans in the associated reference pool experience delinquencies exceeding specified
thresholds or other specified credit events occur. We assess the credit risk associated with our investment in CRT securities by
assessing the current performance of the loans in the associated reference pool.
Furthermore, as discussed in Part I, Item 1A., “Risk Factors,” and in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” of this Annual Report on Form 10-K, we are potentially exposed to repurchase
agreement counterparties should they default on their obligations and we are unable to recover any excess collateral pledged to
them.
Residential Whole Loans
We are also exposed to credit risk from our investments in residential whole loans. Our investment process for residential
whole loans is generally similar to that used for Legacy Non-Agency MBS and is likewise focused on quantifying and pricing
credit risk. Consequently, these loans are acquired at purchase prices that generally are discounted (often substantially) to the
contractual loan balances reflecting a number of factors, including the impaired credit history of the borrower and the value of the
collateral securing the loan. In addition, as the owner of the servicing rights, our process is also focused on selecting a sub-servicer
with the appropriate expertise to mitigate losses and maximize our overall return. This involves, among other things, performing
due diligence on the sub-servicer prior to their engagement as well as ongoing oversight and surveillance. To the extent that loan
delinquencies and defaults are higher than our expectation at the time the loans were purchased, the discounted purchase price at
which the asset is acquired is intended to provide a level of protection against financial loss.
79
The following table presents the five largest geographic concentrations by state of our credit sensitive residential whole loan
portfolio at December 31, 2015:
Property Location
California
New York
New Jersey
Florida
Maryland
Percent of Interest-Bearing
Unpaid Principal Balance
16.7%
16.3%
8.6%
7.8%
5.2%
LIQUIDITY RISK
The primary liquidity risk we face arises from financing long-maturity assets with shorter-term borrowings primarily in the
form of repurchase agreements. We pledge residential mortgage assets and cash to secure our repurchase agreements, FHLB
advances and Swaps. At December 31, 2015, we had access to various sources of liquidity which we estimate exceeds $571.0
million, an amount that includes (i) $165.0 million of cash and cash equivalents; (ii) $241.7 million in estimated financing available
from unpledged Agency MBS and other Agency MBS collateral that are currently pledged in excess of contractual requirements;
and (iii) $164.3 million in estimated financing available from currently unpledged Non-Agency MBS. Should the value of our
residential mortgage assets pledged as collateral suddenly decrease, margin calls under our repurchase agreements would likely
increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties chose
not to provide ongoing funding, our ability to finance our long-maturity assets would decline or be available on possibly less
advantageous terms. As such, we cannot assure you that we will always be able to roll over our repurchase agreement financings
and other advances. Further, should market liquidity tighten, our repurchase agreement counterparties may increase our margin
requirements on new financings, including repurchase agreement borrowings that we roll with the same counterparty, reducing
our ability to use leverage.
PREPAYMENT RISK
Premiums arise when we acquire a MBS at a price in excess of the aggregate principal balance of the mortgages securing
the MBS (i.e., par value). Conversely, discounts arise when we acquire a MBS 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.
Premiums paid on our MBS are amortized against interest income and accretable purchase discounts on our MBS are accreted to
interest income. Purchase premiums on our MBS, which are primarily carried on our Agency MBS, are amortized against interest
income over the life of each security 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
IRR/interest income earned on these assets. Generally, if prepayments on Non-Agency MBS and residential whole loans purchased
at significant discounts and not accounted for at fair value are less than anticipated, we expect that the income recognized on these
assets will be reduced and impairments and/or loan loss reserves could result.
80
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Schedule
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets at December 31, 2015 and December 31, 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive (Loss)/Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to the Consolidated Financial Statements
Schedule IV - Mortgage Loans on Real Estate
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.
Page
82
83
84
85
86
88
90
142
81
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
MFA Financial, Inc.:
We have audited the accompanying consolidated balance sheets of MFA Financial, Inc. and subsidiaries (the Company) as of
December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss)/income, changes in
stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of MFA Financial, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2015, 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), the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated February 18, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
New York, New York
February 18, 2016
82
MFA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
Assets:
Mortgage-backed securities (“MBS”) and credit risk transfer (“CRT”) securities:
December 31,
2015
December 31,
2014
Agency MBS, at fair value ($4,532,094 and $5,519,813 pledged as collateral, respectively)
$
4,752,244
$
5,904,207
Non-Agency MBS, at fair value ($4,874,372 and $2,377,343 pledged as collateral, respectively)
Non-Agency MBS transferred to consolidated variable interest entities (“VIEs”), at fair value (1)
CRT securities, at fair value ($170,352 and $94,610 pledged as collateral, respectively)
Securities obtained and pledged as collateral, at fair value
Residential whole loans, at carrying value ($93,692 and $67,536 pledged as collateral, respectively)
Residential whole loans, at fair value ($585,971, and $143,072 pledged as collateral, respectively)
Cash and cash equivalents
Restricted cash
Interest receivable
Derivative instruments:
MBS linked transactions, net (“Linked Transactions”), at fair value
Interest rate swap agreements (“Swaps”), at fair value
Goodwill
Prepaid and other assets
Total Assets
Liabilities:
Repurchase agreements and other advances
Securitized debt (2)
Obligation to return securities obtained as collateral, at fair value
8% Senior Notes due 2042 (“Senior Notes”)
Accrued interest payable
Swaps, at fair value
Dividends and dividend equivalents payable
Accrued expenses and other liabilities
Total Liabilities
Commitments and contingencies (See Note 12)
Stockholders’ Equity:
5,822,519
598,298
183,582
507,443
271,845
623,276
165,007
71,538
29,002
3,358,426
1,397,006
102,983
512,105
207,923
143,472
182,437
67,255
32,581
—
1,127
7,189
134,253
$ 13,167,323
398,336
3,136
7,189
37,688
$ 12,354,744
$
9,388,902
22,057
507,443
100,000
16,949
70,526
74,575
19,610
$ 10,200,062
$
$
8,267,388
110,574
512,105
100,000
13,095
62,198
74,529
11,583
9,151,472
Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares
issued and outstanding ($200,000 aggregate liquidation preference)
Common stock, $.01 par value; 886,950 shares authorized; 370,584 and 370,084 shares issued and outstanding,
respectively
Additional paid-in capital, in excess of par
Accumulated deficit
Accumulated other comprehensive income
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$
80
$
80
3,706
3,019,956
(572,332)
515,851
$
2,967,261
$ 13,167,323
3,701
3,013,634
(568,596)
754,453
$
3,203,272
$ 12,354,744
(1) Non-Agency MBS transferred to consolidated VIEs represent assets of consolidated VIEs that can be used only to settle the obligations of each respective VIE.
(2) Securitized Debt represents third-party liabilities of consolidated VIEs and excludes liabilities of the VIEs acquired by the Company that eliminate on consolidation.
The third-party beneficial interest holders in the VIEs have no recourse to the general credit of the Company. (See Notes 12 and 17 for further discussion.)
The accompanying notes are an integral part of the consolidated financial statements.
83
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
2015
2014
2013
For the Year Ended December 31,
Interest Income:
Agency MBS
Non-Agency MBS
Non-Agency MBS transferred to consolidated VIEs
CRT securities
Residential whole loans held at carrying value
Cash and cash equivalent investments
Interest Income
Interest Expense:
Repurchase agreements and other advances
Securitized debt
Senior Notes
Interest Expense
Net Interest Income
Other-Than-Temporary Impairments:
Total other-than-temporary impairment losses
Portion of loss reclassed from other comprehensive income
Net Impairment Losses Recognized in Earnings
Other Income, net:
Unrealized net gains and net interest income from Linked Transactions
Net gain on residential whole loans held at fair value
Losses on TBA short positions
Gain on sales of MBS and U.S. Treasury securities, net
Other, net
Other Income, net
Operating and Other Expense:
Compensation and benefits
Other general and administrative expense
Loan servicing and other related operating expenses
Excise tax and interest
Impairment of resecuritization related costs
Operating and Other Expense
Net Income
Less Preferred Stock Dividends
Less Issuance Costs of Redeemed Preferred Stock
Net Income Available to Common Stock and Participating Securities
Earnings per Common Share - Basic and Diluted
$
105,835
$
142,543
$
317,821
45,749
6,572
16,036
130
185,806
130,524
772
4,083
89
156,046
170,485
156,285
—
—
124
$
$
$
$
$
$
$
$
$
$
$
$
$
492,143
$
463,817
$
482,940
166,918
$
145,244
$
1,996
8,034
176,948
315,195
$
$
(525) $
(180)
(705) $
6,533
8,031
159,808
304,009
$
$
— $
—
— $
— $
17,092
$
17,722
—
34,900
(1,457)
116
—
37,497
80
51,165
$
54,785
$
26,293
$
25,581
$
15,752
10,384
—
—
52,429
313,226
15,000
—
298,226
0.80
$
$
$
$
15,164
3,383
1,162
—
45,290
313,504
15,000
—
298,504
0.81
$
$
$
$
143,885
12,100
8,028
164,013
318,927
—
—
—
3,225
—
(7,517)
25,825
219
21,752
20,328
13,361
—
2,250
2,031
37,970
302,709
13,750
3,947
285,012
0.78
The accompanying notes are an integral part of the consolidated financial statements.
84
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(In Thousands)
Net Income
Other Comprehensive (Loss)/Income:
Unrealized (loss)/gain on Agency MBS, net
Unrealized (loss)/gain on Non-Agency MBS, net
Reclassification adjustment for MBS sales included in net income
Reclassification adjustment for other-than-temporary impairments included in net
income
Unrealized (loss)/gain on derivative hedging instruments, net
Reclassification of unrealized loss on de-designated derivative hedging instruments
Cumulative effect adjustment on adoption of revised accounting standard for
repurchase agreement financing
Other Comprehensive (Loss)/Income
Comprehensive Income before preferred stock dividends and issuance costs of
redeemed preferred stock
Dividends declared on preferred stock
Issuance costs of redeemed preferred stock
Comprehensive Income Available to Common Stock and Participating Securities
For the Year Ended December 31,
2015
2014
2013
$
313,226
$
313,504
$
302,709
(51,332)
(143,558)
(37,207)
(705)
(10,337)
—
4,537
(238,602)
65,739
29,812
(34,948)
—
(44,292)
447
—
(186,568)
134,505
(19,833)
—
47,614
—
—
16,758
(24,282)
$
$
74,624
$
330,262
$
278,427
(15,000)
(15,000)
—
—
(13,750)
(3,947)
59,624
$
315,262
$
260,730
The accompanying notes are an integral part of the consolidated financial statements.
85
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENT(cid:54) OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Year Ended December 31, 2015
Preferred Stock
7.50% Series B
Cumulative
Redeemable -
Liquidation Preference
$25.00 per Share
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
(In Thousands,
Except Per Share Amounts)
Balance at December 31, 2014
8,000
$
80
370,084
$ 3,701
$ 3,013,634
$
(568,596) $
754,453
$ 3,203,272
Cumulative effect adjustment on adoption
of revised accounting standard for
repurchase agreement financing
Net income
Issuance of common stock, net of
expenses (1)
Repurchase of shares of common stock (1)
Equity based compensation expense
Accrued dividends attributable to stock-
based awards
Dividends declared on common stock
Dividends declared on preferred stock
Dividends attributable to dividend
equivalents
Change in unrealized losses on MBS, net
Change in unrealized losses on derivative
hedging instruments, net
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2015
8,000
$
—
—
—
—
—
—
—
—
—
—
—
80
—
—
809
(309)
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
(4,537)
313,226
1,216
(2,273)
7,829
(450)
—
—
—
—
—
—
—
—
—
(296,384)
(15,000)
(1,041)
—
—
4,537
—
—
—
—
—
—
—
—
—
313,226
1,221
(2,273)
7,829
(450)
(296,384)
(15,000)
(1,041)
(232,802)
(232,802)
(10,337)
(10,337)
370,584
$ 3,706
$ 3,019,956
$
(572,332) $
515,851
$ 2,967,261
For the Year Ended December 31, 2014
Preferred Stock
7.50% Series B
Cumulative
Redeemable -
Liquidation Preference
$25.00 per Share
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
(In Thousands,
Except Per Share Amounts)
Balance at December 31, 2013
8,000
$
Net income
Issuance of common stock, net of
expenses (1)
Repurchase of shares of common stock (1)
Equity based compensation expense
Accrued dividends attributable to stock-
based awards
Dividends declared on common stock
Dividends declared on preferred stock
Dividends attributable to dividend
equivalents
Change in unrealized gains on MBS, net
Change in unrealized losses on derivative
hedging instruments, net
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2014
8,000
$
80
—
—
—
—
—
—
—
—
—
—
80
365,125
$ 3,651
$ 2,972,369
$
(571,544) $
737,695
$ 3,142,251
—
5,305
(346)
—
—
—
—
—
—
—
—
50
—
—
—
—
—
—
—
—
—
313,504
35,590
(2,688)
8,581
(218)
—
—
—
—
—
—
—
—
—
(294,792)
(15,000)
(764)
—
—
—
—
—
—
—
—
—
—
60,603
313,504
35,640
(2,688)
8,581
(218)
(294,792)
(15,000)
(764)
60,603
(43,845)
(43,845)
370,084
$ 3,701
$ 3,013,634
$
(568,596) $
754,453
$ 3,203,272
86
Preferred Stock
8.50% Series A
Cumulative
Redeemable -
Liquidation
Preference $25.00
per Share
Preferred Stock
7.50% Series B
Cumulative
Redeemable -
Liquidation
Preference $25.00
per Share
Common Stock
(In Thousands,
Except Per Share Amounts)
Shares Amount
Shares Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
For the Year Ended December 31, 2013
Balance at December 31, 2012
3,840
$
— $ — 357,546
$ 3,575
$2,805,724
$
(260,308) $
761,977
$3,311,006
Net income
Issuance of common stock, net
of expenses (1)
Redemption of Series A
Preferred Stock
Issuance of Series B Preferred
Stock, net of expenses
Repurchase of shares of
common stock (1)
Equity based compensation
expense
Dividends declared on
common stock
Dividends declared on
preferred stock
Dividends attributable to
dividend equivalents
Issuance cost of redeemed
Preferred stock
Change in unrealized losses on
MBS, net
Change in unrealized gains on
derivative hedging
instruments, net
38
—
—
—
—
(3,840)
(38)
—
—
—
—
—
—
—
—
—
—
—
—
— 8,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
302,709
—
—
—
80
—
—
—
—
—
—
—
—
—
9,855
—
—
—
97
—
—
77,528
(92,015)
193,236
(2,276)
(21)
(16,260)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,156
—
—
—
—
—
—
—
—
—
—
—
(594,318)
(13,750)
(1,930)
(3,947)
—
—
—
—
—
—
—
—
—
—
—
—
302,709
77,625
(92,053)
193,316
(16,281)
4,156
(594,318)
(13,750)
(1,930)
(3,947)
(71,896)
(71,896)
47,614
47,614
Balance at December 31, 2013
— $ — 8,000
$
80
365,125
$ 3,651
$2,972,369
$
(571,544) $
737,695
$3,142,251
(1) For the year ended December 31, 2015, includes approximately $2.3 million (309,206 shares) surrendered for tax purposes related to equity-based compensation
awards. For the year ended December 31, 2014, includes approximately $2.7 million (345,559 shares) surrendered for tax purposes related to equity-based
compensation awards. For the year ended December 31, 2013, includes approximately $15.4 million (2,143,354 shares) repurchased through the Company’s
publicly announced stock repurchase program and approximately $849,000 (132,276 shares) surrendered for tax purposes related to equity-based compensation
awards.
The accompanying notes are an integral part of the consolidated financial statements.
87
MFA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of MBS and U.S. Treasury securities
Other-than-temporary impairment charges
Accretion of purchase discounts on MBS and CRT securities and residential whole loans
Amortization of purchase premiums on MBS
Depreciation and amortization on real estate, fixed assets and other assets
Equity-based compensation expense
Unrealized (gain)/loss on residential whole loans at fair value
Unrealized gains on derivative instruments
Decrease in interest receivable
Increase in prepaid and other assets
Realized loss on TBA short positions
Increase/(decrease) in accrued expenses and other liabilities, and excise tax and interest
Increase in accrued interest payable on financial instruments
Net cash provided by operating activities
Cash Flows From Investing Activities:
Principal payments on MBS and CRT securities
Proceeds from sale of MBS and U.S. Treasury securities
Purchases of MBS and CRT securities
Purchases of residential whole loans
Principal payments on residential whole loans
Purchases of Federal Home Loan Bank stock
Additions to leasehold improvements, furniture and fixtures
Net cash provided by investing activities
Cash Flows From Financing Activities:
Principal payments on repurchase agreements and other advances
Proceeds from borrowings under repurchase agreements and other advances
Proceeds from issuance of securitized debt
Principal payments on securitized debt
Payments made on obligation to return securities obtained as collateral
Maturity of obligation to return securities obtained as collateral
Cash disbursements on financial instruments underlying Linked Transactions
Cash received from financial instruments underlying Linked Transactions
Payments made for margin calls on repurchase agreements and Swaps
Proceeds from reverse margin calls on repurchase agreements and Swaps
Settlement of TBA short positions
Proceeds from issuances of common stock
Payments made for redemption of Series A Preferred Stock
Proceeds from issuance of Series B Preferred Stock
Payments made for preferred stock offering costs
Payments made to repurchase common stock
Dividends paid on preferred stock
Dividends paid on common stock and dividend equivalents
Net cash used in financing activities
$
88
For the Year Ended December 31,
2015
2014
2013
$
313,226
$
313,504
$
302,709
(34,900)
705
(95,377)
41,624
860
7,832
(6,532)
—
4,844
(6,278)
—
5,425
50,745
282,174
2,916,807
70,747
(1,810,303)
(617,017)
51,427
(60,017)
(1,560)
550,084
$
$
$
(37,497)
—
(89,182)
32,052
1,191
8,581
96
(1,673)
4,561
(12,684)
—
(8,301)
45,165
255,813
1,939,948
123,910
(1,261,646)
(356,440)
6,017
—
(786)
451,003
$
$
$
(25,825)
—
(73,447)
58,207
5,831
4,158
—
(1,111)
8,180
(5,549)
7,517
3,610
13,808
298,088
2,770,710
574,869
(1,744,605)
—
—
—
(373)
1,600,601
$
$
$
$ (92,012,931) $ (75,939,948) $ (69,851,602)
69,438,427
129,314
(409,606)
(246,850)
(275,402)
(419,802)
405,436
75,868,039
—
(254,078)
—
—
(6,750,803)
6,336,872
91,614,851
—
(88,347)
—
—
—
—
(69,902)
(208,600)
(267,200)
22,809
132,800
215,100
(7,517)
—
—
77,625
35,639
1,218
(96,000)
—
—
200,000
—
—
(6,684)
—
—
(16,281)
—
—
(13,750)
(15,000)
(15,000)
(594,827)
(294,670)
(297,379)
(849,688) $ (1,089,749) $ (1,734,612)
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Disclosure of Cash Flow Information:
Interest paid
Non-cash Investing and Financing Activities:
MBS and CRT securities recorded upon adoption of revised accounting standard for
repurchase agreement financing
Repurchase agreements recorded upon adoption of revised accounting standard for
repurchase agreement financing
MBS recorded upon de-linking of Linked Transactions
Repurchase agreements recorded upon de-linking of Linked Transactions
Net increase in securities obtained as collateral/obligation to return securities obtained as
collateral
Transfer from residential whole loans to real estate owned
Dividends and dividend equivalents declared and unpaid
$
$
$
$
$
$
$
$
$
$
$
(17,430) $
$
182,437
$
165,007
(382,933) $
$
565,370
$
182,437
164,077
401,293
565,370
172,919
$
160,935
$
162,186
1,917,813
$
— $
1,519,593
$
— $
— $
— $
$
$
86,449
49,095
—
—
—
—
32,670
30,104
74,575
$
$
$
135,165
2,904
74,529
$
$
$
401,135
—
73,643
The accompanying notes are an integral part of the consolidated financial statements.
89
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
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 a taxable REIT subsidiary (“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 Notes 2(o) and 13)
2.
Summary of Significant Accounting Policies
(a) Basis of Presentation and Consolidation
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 be worse than anticipated in those estimates, which
could materially impact the Company’s results of operations and its financial condition. Management has made significant estimates
in several areas, including other-than-temporary impairment (“OTTI”) on MBS (See Note 3), valuation of MBS and CRT securities
(See Notes 3 and 16), income recognition and valuation of residential whole loans (See Notes 4 and 16), valuation of derivative
instruments (See Notes 6 and 16) and income recognition on certain Non-Agency MBS purchased at a discount (See Note 3). In
addition, estimates are used in the determination of taxable income used in the assessment of REIT compliance and contingent
liabilities for related taxes, penalties and interest (See Note 2(o)). Actual results could differ from those estimates.
The Company has one reportable segment as we manage our business and analyze and report our results of operations on the
basis of one operating segment - investing, on a leveraged basis, in residential mortgage assets.
The consolidated financial statements of the Company include the accounts of all subsidiaries; significant intercompany
accounts and transactions have been eliminated. In addition, the Company consolidates the special purpose entities created to
facilitate the resecuritization transactions completed in prior years and the acquisition of residential whole loans. Certain prior
period amounts have been reclassified to conform to the current period presentation.
(b) MBS (including Non-Agency MBS transferred to consolidated VIEs) and CRT Securities
The Company has investments 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 Ginnie Mae (collectively,
“Agency MBS”), and residential MBS that are not guaranteed by any U.S. Government agency or any federally chartered corporation
(“Non-Agency MBS”). In addition, the Company has investments in CRT securities, that are issued by Fannie Mae and Freddie
Mac. The coupon payments on CRT securities are paid by Fannie Mae and Freddie Mac and the principal payments received are
based on the performance of loans in a reference pool of recently securitized MBS. As the loans in the underlying reference pool
are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a loss if
certain defined credit events occur, including if the loans in the reference pool experience delinquencies exceeding specified
thresholds.
Designation
The Company generally intends to hold its MBS until maturity; however, from time to time, it may sell any of its securities
as part of the overall management of its business. As a result, all of the Company’s MBS are designated as “available-for-
sale” (“AFS”) and, accordingly, are carried at their fair value with unrealized gains and losses excluded from earnings (except
when an OTTI is recognized, as discussed below) and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a
component of Stockholders’ Equity.
90
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
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 certain of its CRT securities as it considers this method of accounting
more appropriately reflects 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 statement of
operations.
Revenue Recognition, Premium Amortization and Discount Accretion
Interest income on securities is accrued based on the outstanding principal balance and their contractual terms. Premiums
and discounts associated with Agency MBS and 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.
Interest income on the Non-Agency MBS that were purchased at a discount to par value and/or are considered to be of less
than high credit quality is recognized based on the security’s effective interest rate which is the security’s internal rate of return
(“IRR”). The IRR is determined using management’s estimate of the projected cash flows for each security, which are based on
the Company’s observation of current information and events and include assumptions related to fluctuations in interest rates,
prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate,
makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and
its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash
flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the IRR/
interest income recognized on these securities or in the recognition of OTTIs. (See Note 3)
Based on the projected cash flows from the Company’s Non-Agency MBS purchased at a discount to par value, a portion
of the purchase discount may be designated as non-accretable purchase discount (“Credit Reserve”), which effectively mitigates
the Company’s risk of loss on the mortgages collateralizing such MBS and is not expected to be accreted into interest income.
The amount designated as Credit Reserve may be adjusted over time, based on the actual performance of the security, its underlying
collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a
security with a Credit Reserve is more favorable than forecasted, a portion of the amount designated as Credit Reserve may be
reallocated to accretable discount and recognized into interest income over time. Conversely, if the performance of a security with
a Credit Reserve is less favorable than forecasted, the amount designated as Credit Reserve may be increased, or impairment
charges and write-downs of such securities to a new cost basis could result.
Determination of Fair Value for MBS and CRT Securities
In determining the fair value of the Company’s MBS and CRT 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 16)
91
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Impairments/OTTI
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 on at least a quarterly basis and designates such impairments as either
“temporary” or “other-than-temporary.” 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 an OTTI 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 other-than-temporarily impaired security, only the portion of the OTTI related to
credit losses is recognized through charges to earnings with the remainder recognized through AOCI on the consolidated balance
sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. Following the
recognition of an OTTI through earnings, a new cost basis is established for the security and may not be adjusted for subsequent
recoveries in fair value through earnings. However, OTTIs recognized through charges to earnings may be accreted back to the
amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an OTTI
exists and, if so, the amount of credit impairment recognized in earnings is subjective, as such determinations are based on factual
information available at the time of assessment as well as the Company’s estimates of the future performance and cash flow
projections. As a result, the timing and amount of OTTIs constitute material estimates that may be susceptible to significant
change. (See Note 3)
Non-Agency MBS that are assessed to be of less than high credit quality and on which impairments are recognized have
experienced, or are expected to experience, credit-related adverse cash flow changes. The Company’s estimate of cash flows for
its Non-Agency MBS is based on its review of the underlying mortgage loans securing the MBS. The Company considers
information available about the past and expected future performance of underlying mortgage loans, including timing of expected
future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, Fair
Isaac Corporation (“FICO”) scores at loan origination, year of origination, loan-to-value ratios (“LTVs”), geographic
concentrations, as well as reports by credit rating agencies, such as Moody’s Investors Services, Inc. (“Moody’s”), Standard &
Poor’s Corporation (“S&P”), or Fitch, Inc. (collectively, “Rating Agencies”), general market assessments, and dialogue with market
participants. As a result, significant judgment is used in the Company’s analysis to determine the expected cash flows for its Non-
Agency MBS. In determining the OTTI related to credit losses for securities that were purchased at significant discounts to par
and/or are considered to be of less than high credit quality, the Company compares the present value of the remaining cash flows
expected to be collected at the purchase date (or last date previously revised) against the present value of the cash flows expected
to be collected at the current financial reporting date. The discount rate used to calculate the present value of expected future cash
flows is the current yield used for income recognition purposes. Impairment assessment for Non-Agency MBS and CRT securities
that were purchased at prices close to par and/or are otherwise considered to be of high credit quality involves comparing the
present value of the remaining cash flows expected to be collected against the amortized cost of the security at the assessment
date. The discount rate used to calculate the present value of the expected future cash flows is based on the instrument’s IRR.
Balance Sheet Presentation
The Company’s MBS and CRT securities pledged as collateral against repurchase agreements, Federal Home Loan Bank
advances and Swaps are included on the consolidated balance sheets with the fair value of the securities pledged disclosed
parenthetically. Purchases and sales of securities are recorded on the trade date.
(c) Securities Obtained and Pledged as Collateral/Obligation to Return Securities Obtained as Collateral
The Company has obtained securities as collateral under collateralized financing arrangements in connection with its financing
strategy for Non-Agency MBS. Securities obtained as collateral in connection with these transactions are recorded on the
Company’s consolidated balance sheets as an asset along with a liability representing the obligation to return the collateral obtained,
at fair value. While beneficial ownership of securities obtained remains with the counterparty, the Company has the right to sell
the collateral obtained or to pledge it as part of a subsequent collateralized financing transaction. (See Note 2(k) for Repurchase
Agreements and Reverse Repurchase Agreements)
(d) Residential Whole Loans
Residential whole loans included in the Company’s consolidated balance sheets are generally comprised of pools of fixed
and adjustable rate residential mortgage loans acquired through consolidated trusts in secondary market transactions at discounted
purchase prices. The accounting model utilized by the Company is determined at the time each loan package is initially acquired
92
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
and is generally based on the delinquency status of the majority of the underlying borrowers in the package at acquisition. The
accounting model described below under “Residential Whole Loans at Carrying Value” is typically utilized by the Company for
loans where the underlying borrower has a delinquency status of less than 60 days at the acquisition date. The accounting model
described below under “Residential Whole Loans at Fair Value” is typically utilized by the Company for loans where the underlying
borrower has a delinquency status of 60 days or more at the acquisition date. The accounting model initially applied is not
subsequently changed.
The Company’s residential whole loans pledged as collateral against repurchase agreements are included in the consolidated
balance sheets with the fair value of the loans pledged disclosed parenthetically. Purchases and sales of residential whole loans
are recorded on the trade date, with amounts recorded 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 at Carrying Value
Notwithstanding that the majority of these loans are considered to be performing substantially in accordance with their current
contractual terms and conditions, the Company has elected to account for these loans as credit impaired as they were acquired at
discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of the borrowers have previously
experienced payment delinquencies and the amount owed on the mortgage loan may exceed the value of the property pledged as
collateral. Consequently, the Company has assessed that these loans have a higher likelihood of default than newly originated
mortgage loans with LTVs of 80% or less to credit worthy borrowers. The Company believes that amounts paid to acquire these
loans represent fair market value at the date of acquisition. Such loans are initially recorded at fair value with no allowance for
loan losses. Subsequent to acquisition, the recorded amount reflects the original investment amount, plus accretion of interest
income, less principal and interest cash flows received. These loans are presented on the Company’s consolidated balance sheets
at carrying value, which reflects the recorded amount reduced by any allowance for loan losses established subsequent to acquisition.
Under the application of this accounting model the Company may aggregate into pools loans acquired in the same fiscal
quarter that are assessed as having similar risk characteristics. For each pool established, or on an individual loan basis for loans
not aggregated into pools, the Company estimates at acquisition and periodically on at least a quarterly basis, the principal and
interest cash flows expected to be collected. The difference between the cash flows expected to be collected and the carrying
amount of the loans is referred to as the “accretable yield.” This amount is accreted as interest income over the life of the loans
using an effective interest rate (level yield) methodology. Interest income recorded each period reflects the amount of accretable
yield recognized and not the coupon interest payments received on the underlying loans. The difference between contractually
required principal and interest payments and the cash flows expected to be collected is referred to as the “non-accretable difference,”
and includes estimates of both the effect of prepayments and expected credit losses over the life of the underlying loans.
A decrease in expected cash flows in subsequent periods may indicate impairment at the pool and/or individual loan level
thus requiring the establishment of an allowance for loan losses by a charge to the provision for loan losses. The allowance for
loan losses represents the present value of cash flows expected at acquisition, adjusted for any increases due to changes in estimated
cash flows, that are subsequently no longer expected to be received at the relevant measurement date. A significant increase in
expected cash flows in subsequent periods first reduces any previously recognized allowance for loan losses and then will result
in a recalculation in the amount of accretable yield. The adjustment of accretable yield due to a significant increase in expected
cash flows is accounted for prospectively as a change in estimate and results in reclassification from nonaccretable difference to
accretable yield. (See Notes 4 and 17)
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 time of acquisition. Given the significant uncertainty associated with estimating the timing of and
amount of cash flows associated with these loans that will be collected, and that the cash flows ultimately collected may be
dependent on the value of the property securing the loan, the Company considers that accounting for these loans at fair value
should result in a better reflection over time of the economic returns from these loans. The Company determines the fair value of
its residential whole loans held at fair value after considering portfolio valuations obtained from a third-party who specializes in
providing valuations of residential mortgage loans and trading activity observed in the market place. Subsequent changes in fair
value are reported in current period earnings and presented in Net gain on residential whole loans held at fair value on the Company’s
consolidated statements of operations.
93
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Cash received reflecting coupon payments on residential whole loans held at fair value is not included in Interest Income,
but rather is presented in Net gain on residential whole loans held at fair value on the Company’s consolidated statements of
operations. (See Notes 4 and 16)
(e) 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 repurchase agreement and/or Swap 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, 2015 or 2014. The Company’s
investments in overnight money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency were $120.4 million and $182.4 million at December 31, 2015 and 2014,
respectively. (See Notes 9 and 16)
(f) Restricted Cash
Restricted cash represents the Company’s cash held by its counterparties as collateral or otherwise in connection with the
Company’s Swaps and/or repurchase agreements. Restricted cash is not available to the Company for general corporate purposes,
but may be applied against amounts due to counterparties to the Company’s repurchase agreements and/or Swaps, or may be
returned to the Company when the related collateral requirements are exceeded or at the maturity of the Swap or repurchase
agreement. The Company had aggregate restricted cash held as collateral or otherwise in connection with its Swaps and repurchase
agreements of $71.5 million and $67.3 million at December 31, 2015 and 2014, respectively. (See Notes 6, 8, 9 and 16)
(g) Goodwill
At December 31, 2015 and 2014, the Company had goodwill of $7.2 million, which represents the unamortized portion of
the excess of the fair value of its common stock issued over the fair value of net assets acquired in connection with its formation
in 1998. Goodwill is tested for impairment at least annually, or more frequently under certain circumstances, at the entity level.
Through December 31, 2015, the Company had not recognized any impairment against its goodwill.
(h) Real Estate Owned (“REO”)
REO represents real estate acquired by the Company, including through foreclosure or deed in lieu of foreclosure, and is
initially recorded at fair value less estimated selling costs. 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
Prepaid and other assets on the Company’s consolidated balance sheets. Changes in fair value that result in an adjustment to the
reported value 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. (See Note 7)
(i) Depreciation
Leasehold Improvements 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 eight years at the time of purchase.
(j) Resecuritization and Senior Notes Related Costs
Resecuritization related costs are costs associated with the issuance of beneficial interests by consolidated VIEs and incurred
by the Company in connection with various resecuritization transactions completed by the Company. Senior Notes related costs
are costs incurred by the Company in connection with the issuance of its Senior Notes in April, 2012. These costs may include
underwriting, rating agency, legal, accounting and other fees. Such costs, which reflect deferred charges, are included on the
Company’s consolidated balance sheets in Prepaid and other assets. These deferred charges are amortized as an adjustment to
interest expense using the effective interest method, based upon the actual repayments of the associated beneficial interests issued
94
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
to third parties and over the stated legal maturity of the Senior Notes. 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.
(k) Repurchase Agreements and Other Advances
Repurchase Agreements
The Company finances the holdings of a significant portion of its MBS and CRT securities with repurchase agreements.
Under repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities 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, the
Company pledges its securities as collateral to secure the borrowing, which is equal in value 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, 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 securities 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 MBS 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.
The Company’s repurchase financings typically have terms ranging from one month to six months at inception, but may also
have longer or shorter terms. Should a counterparty decide not to renew a repurchase financing at maturity, the Company must
either refinance elsewhere or be in a position to satisfy the obligation. If, during the term of a repurchase 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 8, 9 and 16)
In addition to the repurchase agreement financing arrangements discussed above, as part of its financing strategy for Non-
Agency MBS, the Company has entered into contemporaneous repurchase and reverse repurchase agreements with a single
counterparty. Under a typical reverse repurchase agreement, the Company buys securities from a borrower for cash and agrees
to sell the same securities in the future for a price that is higher than the original purchase price. The difference between the
purchase price the Company originally paid and the sale price represents interest received from the borrower. In contrast, the
contemporaneous repurchase and reverse repurchase transactions effectively resulted in the Company pledging Non-Agency MBS
as collateral to the counterparty in connection with the repurchase agreement financing and obtaining U.S. Treasury securities as
collateral from the same counterparty in connection with the reverse repurchase agreement. No net cash was exchanged between
the Company and counterparty at the inception of the transactions. Securities obtained and pledged as collateral are recorded as
an asset on the Company’s consolidated balance sheets. Interest income is recorded on the reverse repurchase agreement and
interest expense is recorded on the repurchase agreement on an accrual basis. Both the Company and the counterparty have the
right to make daily margin calls based on changes in the value of the collateral obtained and/or pledged. The Company’s liability
to the counterparty in connection with this financing arrangement is recorded on the Company’s consolidated balance sheets and
disclosed as “Obligation to return securities obtained as collateral, at fair value.” (See Note 2(c))
Federal Home Loan Bank (“FHLB”) Advances
FHLB advances are secured financing transactions and are carried at their contractual amounts. The ability to borrow from
the FHLB is subject to the Company’s continued creditworthiness, pledging of sufficient eligible collateral to secure advances,
and compliance with certain agreements with the FHLB. The amount of collateral pledged to the FHLB to secure advances is
subject to periodic adjustment based on changes in the fair value of the collateral. Accrued interest payable on FHLB advances
is included in Accrued interest payable on the Company’s consolidated balance sheets. (See Notes 8, 9, 16 and 18)
In addition, as a condition to membership in the FHLB, the Company’s wholly-owned subsidiary, MFA Insurance, Inc. (“MFA
Insurance”) is required to purchase and hold a certain amount of FHLB stock, which is based, in part, upon the outstanding principal
95
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
balance of advances from the FHLB. FHLB stock is considered a non-marketable investment, is carried at cost and is subject to
recoverability testing under applicable accounting standards. This stock can only be redeemed or sold at its par value, and only
to the FHLB. Accordingly, when evaluating FHLB stock for impairment, the Company considers the ultimate recoverability of
the par value rather than recognizing temporary declines in value. FHLB stock is included in Prepaid and other assets on the
Company’s consolidated balance sheets.
(l) 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. With respect to awards granted in 2009 and
prior years, the Company applied a zero forfeiture rate for these awards, as they were granted to a limited number of employees,
and historical forfeitures have been minimal. Forfeitures, or an indication that forfeitures are expected to occur, may result in a
revised forfeiture rate and would be accounted for prospectively as a change in estimate.
During 2010, the Company granted certain restricted stock units (“RSUs”) that vested after either two or four years of service
and provided that certain criteria were met, which were based on a formula that included changes in the Company’s closing stock
price over a two- or four-year period and dividends declared on the Company’s common stock during those periods. From 2011
through 2013, the Company granted certain RSUs that vested annually over a one or three-year period, provided that certain criteria
were met, which were based on a formula tied to the Company’s achievement of average total stockholder return during that three-
year period. During 2014 and 2015, the Company made grants of RSUs certain of which cliff vest after a three-year period and
certain of which cliff vest after a three-year period, subject to the achievement of certain performance criteria based on a formula
tied to the Company’s achievement of average total stockholder return during that three-year period. The features in these awards
related to the attainment of total stockholder return 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 in addition to estimates regarding the amount
of RSUs expected to be forfeited during the associated service period, determined the amount of compensation expense recognized.
The amount of compensation expense recognized was not dependent on whether the market condition was or will be achieved,
while differences in actual forfeiture experience relative to estimated forfeitures results in adjustments to the timing and amount
of compensation expense recognized.
The Company has awarded dividend equivalents that may be granted as a separate instrument or may be a right associated
with the grant of another equity-based award. Compensation expense for separately awarded dividend equivalents is based on the
grant date fair value of such awards and is recognized over the vesting period. Payments pursuant to these dividend equivalents
are charged to Stockholders’ Equity. Payments pursuant to dividend equivalents that are attached to equity-based awards are
charged to Stockholders’ Equity to the extent that the attached equity awards are expected to vest. Compensation expense is
recognized for payments made for dividend equivalents to the extent that the attached equity awards do not or are not expected to
vest and grantees are not required to return payments of dividends or dividend equivalents to the Company. (See Notes 2(m) and
15)
(m) 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 other securities that participate in dividends, such as the Company’s unvested restricted stock
and RSUs that have non-forfeitable rights to dividends and dividend equivalents attached to/associated with RSUs and vested
stock options to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both shares
of common stock and 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 dilutive unexercised
stock options and RSUs outstanding that are unvested and have dividends that are subject to forfeiture using the treasury stock
method. Under the treasury stock method, common equivalent shares are calculated assuming that all dilutive common stock
equivalents are exercised and the proceeds, along with future compensation expenses associated with such instruments, are used
to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. (See
Note 14)
96
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
(n) 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 de-
designated derivative hedging instruments and is reduced by dividends declared on the Company’s preferred stock and issuance
costs of redeemed preferred stock.
(o) U.S. Federal 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. 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 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. As the Company’s objective is to distribute 100% of its REIT taxable income to its stockholders within the permitted
timeframe, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.
Should the Company incur a liability for corporate income tax, such amounts would be recorded as REIT income tax expense on
the Company’s consolidated statements of operations. Furthermore, 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% 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 a 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 TRS is subject to U.S. federal, state and local corporate income taxes. Since a portion of the
Company’s business may be conducted through one or more TRS, its income earned by TRS may be subject to corporate income
taxation. To maintain the Company’s REIT election, no more than 25% (or, for 2018 and subsequent taxable years, 20%) of the
value of a REIT’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 a 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. No deferred tax benefit was recorded by the Company in 2015 or 2014, as a valuation allowance for
the full amount of the associated deferred tax asset was recognized as its recovery is not considered more likely than not.
Based on its analysis of any potential 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, 2015, 2014 or 2013. The
Company filed its 2014 tax return prior to September 15, 2015. The Company’s tax returns for tax years 2010 through 2014 are
open to examination.
97
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
(p) 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. In particular, the Company attempts to mitigate the risk of the cost of its
variable rate liabilities increasing during a period of rising interest rates. The Company’s derivative instruments are currently
comprised of Swaps, which are designated as cash flow hedges against the interest rate risk associated with certain of its borrowings.
Prior to 2015, the Company’s derivative financial instruments also included Linked Transactions, which were not designated as
hedging instruments. New accounting guidance that was effective for the Company on January 1, 2015 prospectively eliminated
the use of Linked Transaction accounting. (See Note 6) During 2013, the Company also entered into forward contracts for the
sale of Agency MBS securities on a generic pool, or to-be-announced basis (“TBA short positions”) which were not designated
as hedging instruments.
Linked Transactions
Prior to 2015, it was presumed that the initial transfer of a financial asset (i.e., the purchase of an MBS by the Company)
and contemporaneous repurchase financing of such security with the same counterparty were considered part of the same
arrangement, or a “linked transaction,” unless certain criteria were met. The two components of a linked transaction (security
purchase and repurchase financing) were not reported separately but were evaluated on a combined basis and reported as a forward
(derivative) contract and were presented as “Linked Transactions” on the Company’s consolidated balance sheets. Changes in the
fair value of the assets and liabilities underlying Linked Transactions and associated interest income and expense were reported
as “Unrealized net gains/(losses) and net interest income from Linked Transactions” on the Company’s consolidated statements
of operations and were not included in OCI. However, if certain criteria were met, the initial transfer (i.e., the purchase of a security
by the Company) and repurchase financing were not treated as a Linked Transaction and would have been evaluated and reported
separately as an MBS purchase and MBS repurchase financing. When or if a transaction was no longer considered to be linked,
the security and repurchase financing were reported on a gross basis. In this case, the fair value of the MBS at the time the
transactions were no longer considered linked became the cost basis of the MBS, and the income recognition yield for such MBS
was calculated prospectively using this new cost basis.
New accounting guidance that was effective for the Company on January 1, 2015 prospectively eliminated the use of Linked
Transaction accounting as described above. This resulted in changes subsequent to January 1, 2015 to the presentation of assets
and liabilities, and revenues and expenses of Non-Agency MBS and associated repurchase agreements that had been accounted
for as Linked Transactions prior to that date. The changes include the presentation of Non-Agency MBS and associated repurchase
agreements as separate assets and liabilities, rather than on a combined basis on the Company’s consolidated balance sheets. In
addition, starting in 2015, interest income related to the securities and interest expense related to the associated repurchase
agreements are separately presented and included in the determination of the Company’s net interest income on its consolidated
statement of operations. Further, the previous treatment of Linked Transactions as forward (derivative) instruments recorded at
fair value at the end of each period, with changes in fair value included in net income, was discontinued and effective January 1,
2015 MBS that were previously accounted for as components of Linked Transactions are accounted for on a consistent basis with
other MBS held by the Company as AFS securities. (See Notes 2(t), 6 and 16)
Swaps
The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging
activities and the relationship between the hedging instrument and the hedged liability for all Swaps designated as hedging
transactions. The Company assesses, both at inception of a hedge and on a quarterly basis thereafter, whether or not the hedge is
“highly effective.”
Swaps are carried on the Company’s consolidated balance sheets at fair value, as assets, if their fair value is positive, or as
liabilities, if their fair value is negative. Changes in the fair value of the Company’s Swaps designated in hedging transactions are
recorded in OCI provided that the hedge remains effective. Changes in fair value for any ineffective amount of a Swap are
recognized in earnings. The Company has not recognized any change in the value of its existing Swaps designated as hedges
through earnings as a result of hedge ineffectiveness.
The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings
when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted
98
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the
derivative as a hedge is no longer appropriate.
Although permitted under certain circumstances, the Company does not offset cash collateral receivables or payables against
its net derivative positions. (See Notes 6, 9 and 16)
TBA Short Positions
During 2013, the Company entered into TBA short positions as a means of managing interest rate risk and MBS basis risk
associated with its investment and financing activities. A TBA short position is a forward contract for the sale of Agency MBS at
a predetermined price, face amount, issuer, coupon and maturity on an agreed-upon future date. The specific Agency MBS that
could be delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets
Association (“SIFMA”), are not known at the time of the transaction.
TBA short positions were accounted for as derivative instruments since the Company could not assert that it was probable
at inception and throughout the term of the TBA contract, that it would physically deliver the Agency security upon settlement of
the contract. TBA short positions were presented as either derivative assets or liabilities, at fair value on its consolidated balance
sheets. Gains and losses associated with TBA short positions were reported in Other Income, net on the Company’s consolidated
statements of operations. (See Note 6)
The Company did not have any TBA short positions at December 31, 2015 and 2014.
(q) 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 residential whole loans and CRT securities at time of acquisition. Subsequent changes in the fair value of these
loans and CRT securities are reported in Net gain on residential whole loans held at fair value and Other Income, net respectively
on 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(d), 4 and 16)
(r) 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 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) have disproportional voting rights and the entity’s activities are conducted on behalf of the investor that has
disproportionally 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 resecuritization transactions which result in the Company consolidating the VIEs that were
created to facilitate the transactions and to which the underlying assets in connection with the resecuritizations were transferred.
99
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
In determining the accounting treatment to be applied to these resecuritization transactions, the Company concluded that the entities
used to facilitate these transactions were VIEs and that they should be consolidated. If the Company had determined that
consolidation was not required, it would have then assessed whether the transfer of the underlying assets would qualify as a sale
or should be accounted for as secured financings under GAAP.
Prior to the completion of its initial resecuritization transaction in October 2010, the Company had not transferred assets to
VIEs or Qualifying Special Purpose Entities (“QSPEs”) and other than acquiring MBS issued by such entities, had no other
involvement with VIEs or QSPEs. (See Note 17)
The Company also includes in 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.
(s) Offering Costs Related to Issuance and Redemption of Preferred Stock
Offering costs related to 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. (See Notes 13 and 14)
(t) New Accounting Standards and Interpretations
Accounting Standards Adopted in 2015
Receivables - Recognition of Residential Real Estate upon Foreclosure
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04,
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU 2014-04”). This
ASU applies to all creditors who obtain physical possession (resulting from an in substance repossession or foreclosure) of residential
real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The ASU clarifies that an in substance
repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate
property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate
property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the
creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally,
the amendments require interim and annual disclosure of both (i) the amount of foreclosed residential real estate property held by
the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are
in the process of foreclosure according to local requirements of the applicable jurisdiction.
ASU 2014-04 was effective for the Company for reporting periods beginning after December 15, 2014. The Company has
elected to adopt the amendments in this ASU using a prospective transition method. The Company’s adoption of ASU 2014-04
beginning on January 1, 2015, did not have a material impact on the Company’s consolidated financial statements.
Transfers and Servicing
In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
(“ASU 2014-11”). The amendments of ASU 2014-11 require two accounting changes. First, the amendments in this ASU change
the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing
arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a
repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.
In addition, the amendments in ASU 2014-11 require disclosures for certain transactions comprising (i) a transfer of a financial
asset accounted for as a sale and (ii) an agreement with the same transferee entered into in contemplation of the initial transfer
that results in the transferor retaining substantially all of the exposure to the economic return on the transferred asset throughout
the term of the transaction. ASU 2014-11 also requires disclosures for repurchase agreements, securities lending transactions, and
repurchase-to-maturity transactions that are accounted for as secured borrowings.
100
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
ASU 2014-11 was effective for the Company for reporting periods beginning after December 15, 2014. An entity is required
to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained
earnings as of the beginning of the period of adoption. Accordingly, on adoption of the new standard on January 1, 2015, the
Company reclassified $1.913 billion of Non-Agency MBS and $4.6 million of CRT securities, that were previously reported on
the Company’s consolidated balance sheets as a component of Linked Transactions to Non-Agency MBS and CRT securities,
respectively. In addition, liabilities of $1.520 billion that were previously presented on the Company’s consolidated balance sheets
as a component of Linked Transactions were reclassified to Repurchase agreements. Furthermore, an amount of $4.5 million
representing net unrealized gains on securities previously reported as a component of Linked Transactions as of December 31,
2014 was reclassified from Accumulated deficit to AOCI. These reclassification adjustments had no net impact on the Company’s
overall Total Stockholders’ Equity. While the Company’s adoption of this new standard beginning on January 1, 2015, did not
have a material impact on the Company’s consolidated financial statements, it did result in changes, subsequent to adoption, to
the presentation of assets and liabilities and revenues and expenses of Non-Agency MBS and CRT securities and associated
repurchase agreements that had been accounted for as MBS Linked Transactions prior to that date. These changes include the
presentation, as noted above, of Non-Agency MBS and CRT securities and associated repurchase agreements as separate assets
and liabilities, rather than on a combined basis. In addition, subsequent to the date of adoption the interest income related to the
securities and the interest expense related to the associated repurchase agreements are separately presented and included in the
determination of the Company’s Net Interest Income. Further, the prior accounting requirement for MBS Linked Transactions,
which involved treating the combined transaction as a derivative that was recorded at fair value each period, with changes in fair
value included in net income, was discontinued and effective January 1, 2015. MBS that were previously accounted for as
components of Linked Transactions are accounted for in a manner consistent with other MBS held by the Company as AFS
securities.
101
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
3. MBS and CRT Securities
Agency and Non-Agency MBS
The Company’s MBS are comprised of Agency MBS and Non-Agency MBS which include MBS issued prior to 2008
(“Legacy Non-Agency MBS”) . These MBS are secured by: (i) hybrid mortgages (“Hybrids”), which have interest rates that are
fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index;
(ii) adjustable-rate mortgages (“ARMs”); (iii) mortgages that have interest rates that reset more frequently (collectively, “ARM-
MBS”); and (iv) 15 year and longer-term fixed rate mortgages. In addition, the Company’s MBS are also comprised of MBS
secured by re-performing/non-performing loans (“RPL/NPL MBS”), where the cash flows of the bond may not reflect the
contractual cash flows of the underlying collateral. RPL/NPL MBS contain a feature where the coupon steps-up 300 basis points
at 36 months from issuance or sooner.
The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements,
FHLB advances and Swaps. Non-Agency MBS that were accounted for as components of Linked Transactions prior to 2015 are
not reflected in the tables for prior periods set forth in this note, as they were accounted for as derivatives. New accounting guidance
that was effective for the Company on January 1, 2015 prospectively eliminated the use of Linked Transaction accounting. (See
Notes 2(t), 6 and 9)
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. The payment of principal and/or interest
on Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. Government. Since the third quarter of 2008,
Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency, which significantly
strengthened the backing for these government-sponsored entities.
Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs): The Company’s Non-Agency MBS
are secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally
chartered corporation. Credit risk associated with Non-Agency MBS is regularly assessed as new information regarding the
underlying collateral becomes available and based on updated estimates of cash flows generated by the underlying collateral.
CRT Securities
CRT securities are debt obligations issued by Fannie Mae and Freddie Mac. While the coupon payments are paid by Fannie
Mae or Freddie Mac on a monthly basis, the payment of principal is dependent on the performance of loans in a reference pool of
MBS securitized by Fannie Mae or Freddie Mac. As principal on loans in the reference pool are paid, principal payments on the
securities are made and the principal balances of the securities are reduced. Consequently, CRT securities mirror the payment and
prepayment behavior of the mortgage loans in the reference pool. As an investor in a CRT security, the Company may incur a loss
if certain defined credit events occur, including if the loans in the reference pool experience delinquencies exceeding specified
thresholds. The Company assesses the credit risk associated with CRT securities by assessing the current and expected future
performance of the associated reference pool. CRT securities that were accounted for as components of Linked Transactions prior
to 2015 are not reflected in the tables for prior periods set forth in this note, as they were accounted for as derivatives. (See Notes
2(t), 6 and 9)
102
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following tables present certain information about the Company’s MBS and CRT securities at December 31, 2015 and
2014:
(In Thousands)
Agency MBS:
Fannie Mae
Freddie Mac
Ginnie Mae
Total Agency MBS
Non-Agency MBS:
(In Thousands)
Agency MBS:
Fannie Mae
Freddie Mac
Ginnie Mae
Total Agency MBS
Non-Agency MBS:
December 31, 2015
Principal/
Current
Face
Purchase
Premiums
Accretable
Purchase
Discounts
Discount
Designated
as Credit
Reserve and
OTTI (1)
Amortized
Cost (2)
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Net
Unrealized
Gain/
(Loss)
$
3,690,020
$
139,243
$
(59)
$
— $
3,829,204
$
3,865,485
$
62,111
$
(25,830)
$
36,281
851,087
9,296
32,680
164
4,550,403
172,087
Expected to Recover Par (3)(4)
2,906,878
Expected to Recover Less than
Par (3)
Total Non-Agency MBS (5)
4,054,615
6,961,493
73
—
73
Total MBS
CRT securities (6)
11,511,896
172,160
192,000
—
—
—
(59)
(31,576)
(280,606)
(312,182)
(312,241)
(5,689)
—
—
—
—
884,798
9,460
877,109
9,650
6,906
190
(14,595)
(7,689)
—
190
4,723,462
4,752,244
69,207
(40,425)
28,782
2,875,375
2,878,532
23,300
(20,143)
3,157
(787,541)
2,986,468
(787,541)
5,861,843
3,542,285
6,420,817
(787,541)
10,585,305
11,173,061
—
186,311
183,582
564,031
587,331
656,538
418
(8,214)
(28,357)
(68,782)
(3,147)
555,817
558,974
587,756
(2,729)
Total MBS and CRT securities
$ 11,703,896
$
172,160
$
(317,930)
$
(787,541)
$ 10,771,616
$ 11,356,643
$
656,956
$
(71,929)
$
585,027
December 31, 2014
Principal/
Current
Face
Purchase
Premiums
Accretable
Purchase
Discounts
Discount
Designated
as Credit
Reserve and
OTTI (1)
Amortized
Cost (2)
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Net
Unrealized
Gain/
(Loss)
$
4,587,823
$
174,245
$
(71)
$
— $
4,761,997
$
4,843,084
$
102,187
$
(21,100)
$
81,087
1,011,659
10,811
38,895
189
5,610,293
213,329
Expected to Recover Par (3)(4)
431,788
Expected to Recover Less than
Par (3)
Total Non-Agency MBS (5)
4,888,113
5,319,901
461
—
461
Total MBS
CRT securities
10,930,194
213,790
109,500
—
—
—
(71)
(29,501)
(370,063)
(399,564)
(399,635)
(4,727)
—
—
—
—
1,051,096
1,049,854
11,280
(12,522)
(1,242)
11,000
11,269
269
—
269
5,824,093
5,904,207
113,736
(33,622)
80,114
402,748
428,431
26,735
(1,052)
25,683
(900,557)
3,617,493
(900,557)
4,020,241
4,327,001
4,755,432
(900,557)
9,844,334
10,659,639
—
104,773
102,983
712,168
738,903
852,639
324
(2,660)
(3,712)
(37,334)
(2,114)
709,508
735,191
815,305
(1,790)
Total MBS and CRT securities
$ 11,039,694
$
213,790
$
(404,362)
$
(900,557)
$
9,949,107
$ 10,762,622
$
852,963
$
(39,448)
$
813,515
(1) Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income. Amounts disclosed at
December 31, 2015 reflect Credit Reserve of $766.0 million and OTTI of $21.5 million. Amounts disclosed at December 31, 2014 reflect Credit Reserve of
$877.6 million and OTTI of $23.0 million.
(2) Includes principal payments receivable of $1.0 million and $542,000 at December 31, 2015 and 2014, respectively, which are not included in the Principal/
Current Face.
(3) Based on management’s current estimates of future principal cash flows expected to be received.
(4) At December 31, 2015 RPL/NPL MBS had a $2.648 billion Principal/Current face, $2.645 billion amortized cost and $2.626 billion fair value. At December 31,
2014, RPL/NPL MBS had a $161.0 million Principal/Current face, $161.0 million amortized cost and $161.0 million fair value (excludes RPL/NPL MBS with
$1.850 billion Principal/Current face, $1.847 billion amortized cost and $1.847 billion fair value that were presented as a component of Linked Transactions
at December 31, 2014).
(5) At December 31, 2015 and 2014, the Company expected to recover approximately 89% and 83%, respectively, of the then-current face amount of Non-Agency
MBS.
(6) Amounts disclosed at December 31, 2015 includes CRT securities with a fair value of $62.2 million for which the fair value option has been elected. Such
securities have gross unrealized gains of approximately $332,000, gross unrealized losses of approximately $555,000 and net unrealized losses of approximately
$223,000 at December 31, 2015.
103
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Unrealized Losses on MBS and CRT Securities
The following table presents information about the Company’s MBS and CRT securities that were in an unrealized loss
position at December 31, 2015:
(Dollars in Thousands)
Agency MBS:
Fannie Mae
Freddie Mac
Total Agency MBS
Non-Agency MBS:
Expected to Recover Par (1)
Expected to Recover Less than Par (1)
Total Non-Agency MBS
Total MBS
CRT securities (2)
Total MBS and CRT securities
Unrealized Loss Position For:
Less than 12 Months
12 Months or more
Total
Fair
Value
Unrealized
Losses
Number of
Securities
Fair
Value
Unrealized
Losses
Number of
Securities
Fair
Value
Unrealized
Losses
$ 856,602
$
7,548
121
$ 813,485
$
18,282
109
$ 1,670,087
$
25,830
298,768
1,155,370
2,239,418
184,664
2,424,082
3,579,452
137,585
5,463
13,011
16,717
4,348
21,065
34,076
2,672
42
163
59
35
94
257
33
315,566
1,129,051
9,132
27,414
64
173
614,334
2,284,421
212,584
64,081
276,665
3,426
3,866
7,292
12
11
23
2,452,002
248,745
2,700,747
1,405,716
34,706
196
4,985,168
4,525
475
1
142,110
14,595
40,425
20,143
8,214
28,357
68,782
3,147
$ 3,717,037
$
36,748
290
$ 1,410,241
$
35,181
197
$ 5,127,278
$
71,929
(1) Based on management’s current estimates of future principal cash flows expected to be received.
(2) Amounts disclosed at December 31, 2015 includes CRT securities with a fair value of $54.1 million for which the fair value option has
been elected. Such securities have unrealized losses of $555,000 at December 31, 2015.
At December 31, 2015, the Company did not intend to sell any of its investments that were in an unrealized loss position,
and it is “more likely than not” that the Company will not be required to sell these securities before recovery of their amortized
cost basis, which may be at their maturity. With respect to Non-Agency MBS held by consolidated VIEs, the ability of any entity
to cause the sale to a third-party by the VIE prior to the maturity of these Non-Agency MBS is either specifically precluded, or is
limited to specified events of default, none of which has occurred to date.
Gross unrealized losses on the Company’s Agency MBS were $40.4 million at December 31, 2015. Agency MBS are issued
by Government Sponsored Entities (“GSEs”) and enjoy either the implicit or explicit backing of the full faith and credit of the
U.S. Government. While the Company’s Agency MBS are not rated by any rating agency, they are currently perceived by market
participants to be of high credit quality, with risk of default limited to the unlikely event that the U.S. Government would not
continue to support the GSEs. Given the credit quality inherent in Agency MBS, the Company does not consider any of the current
impairments on its Agency MBS to be credit related. In assessing whether it is more likely than not that it will be required to sell
any impaired security before its anticipated recovery, which may be at its maturity, the Company considers for each impaired
security, the significance of each investment, the amount of impairment, the projected future performance of such impaired
securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the
Company determined that at December 31, 2015 any unrealized losses on its Agency MBS were temporary.
Unrealized losses on the Company’s Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs)
were $28.4 million, of which $19.3 million were RPL/NPL MBS and $9.1 million were Legacy Non-Agency MBS at December 31,
2015. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI
and does not believe that these unrealized losses are credit related, but are rather a reflection of current market yields and/or market
place bid-ask spreads. The Company has reviewed its Non-Agency MBS that are in an unrealized loss position to identify those
securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities,
which considers recent bond performance and, where possible, expected future performance of the underlying collateral.
The Company recognized credit-related OTTI losses through earnings related to its Non-Agency MBS of $705,000 during
the year ended December 31, 2015. The Company did not recognize any credit-related OTTI losses through earnings related to
its investments during the years ended December 31, 2014 and 2013.
104
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Non-Agency MBS on which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash
flow changes. The Company’s estimate of cash flows for these Non-Agency MBS is based on its review of the underlying mortgage
loans securing these MBS. The Company considers information available about the structure of the securitization, including
structural credit enhancement, if any, and the past and expected future performance of underlying mortgage loans, including timing
of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing
loans, FICO scores at loan origination, year of origination, LTVs, geographic concentrations, as well as Rating Agency reports,
general market assessments, and dialogue with market participants. Changes in the Company’s evaluation of each of these factors
impacts the cash flows expected to be collected at the OTTI assessment date. For Non-Agency MBS purchased at a discount to
par that were assessed for and had no OTTI recorded this period, such cash flow estimates indicated that the amount of expected
losses decreased compared to the previous OTTI assessment date. These positive cash flow changes are primarily driven by recent
improvements in LTVs due to loan amortization and home price appreciation, which, in turn, positively impacts the Company’s
estimates of default rates and loss severities for the underlying collateral. In addition, voluntary prepayments (i.e. loans that prepay
in full with no loss) have generally trended higher for these MBS which also positively impacts the Company’s estimate of expected
loss. Overall, the combination of higher voluntary prepayments and lower LTVs supports the Company’s assessment that such
MBS are not other-than-temporarily impaired.
The following table presents the composition of OTTI charges recorded by the Company for the years ended December 31,
2015, 2014 and 2013:
(In Thousands)
Total OTTI losses
OTTI reclassified from OCI
OTTI recognized in earnings
For the Year Ended December 31,
2015
2014
2013
$
$
(525) $
(180)
(705) $
— $
—
— $
—
—
—
The following table presents a roll-forward of the credit loss component of OTTI on the Company’s Non-Agency MBS for
which a non-credit component of OTTI was previously recognized in OCI. Changes in the credit loss component of OTTI are
presented based upon whether the current period is the first time OTTI was recorded on a security or a subsequent OTTI charge
was recorded.
(In Thousands)
Credit loss component of OTTI at beginning of period
Additions for credit related OTTI not previously recognized
Subsequent additional credit related OTTI recorded
Credit loss component of OTTI at end of period
For the Year Ended December 31,
2015
2014
2013
36,115
$
36,115
$
36,115
461
244
—
—
—
—
36,820
$
36,115
$
36,115
$
$
105
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Purchase Discounts on Non-Agency MBS
The following table presents the changes in the components of the Company’s purchase discount on its Non-Agency MBS
between purchase discount designated as Credit Reserve and OTTI and accretable purchase discount for the years ended
December 31, 2015 and 2014:
(In Thousands)
Balance at beginning of period
Cumulative effect adjustment on adoption of revised
accounting standard for repurchase agreement financing
Accretion of discount
Realized credit losses
Purchases
Sales
Net impairment losses recognized in earnings
Unlinking of Linked Transactions
Transfers/release of credit reserve
Balance at end of period
For the Year Ended December 31,
2015
2014
Discount
Designated as
Credit Reserve
and OTTI
Accretable
Discount (1)
Discount
Designated as
Credit Reserve
and OTTI (2)
Accretable
Discount (1)(2)
$
(900,557) $
(399,564) $
(1,043,037) $
(460,039)
(15,543)
—
80,821
(1,200)
8,525
(705)
—
41,118
(787,541) $
$
1,832
93,173
—
(4,925)
38,420
—
—
(41,118)
(312,182) $
—
—
89,481
(80,256)
44,692
—
(6,414)
94,977
(900,557) $
—
103,653
—
30,003
20,360
—
1,436
(94,977)
(399,564)
(1) Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.
(2) The Company reallocated $218,000 of purchase discount designated as Credit Reserve to accretable purchase discount on Non-Agency MBS
underlying Linked Transactions for the year ended December 31, 2014.
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,
2015, 2014, and 2013:
(In Thousands)
AOCI from AFS securities:
Unrealized gain on AFS securities at beginning of period
Unrealized (loss)/gain on Agency MBS, net
Unrealized (loss)/gain on Non-Agency MBS, net
Cumulative effect adjustment on adoption of revised accounting standard
for repurchase agreement financing
Reclassification adjustment for MBS sales included in net income
Reclassification adjustment for OTTI included in net income
Change in AOCI from AFS securities
Balance at end of period
Sales of MBS
For the Year Ended December 31,
2015
2014
2013
$
$
813,515
(51,332)
(143,558)
4,537
(37,207)
(705)
(228,265)
585,250
$
752,912
$
65,739
29,812
—
(34,948)
—
60,603
$
813,515
$
824,808
(186,568)
134,505
—
(19,833)
—
(71,896)
752,912
During 2015, the Company sold certain Non-Agency MBS for $70.7 million, realizing gross gains of $34.9 million. During
2014, the Company sold certain Non-Agency MBS for $123.9 million, realizing gross gains of $37.5 million. During 2013, the
106
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Company sold certain Non-Agency MBS for $152.6 million realizing gross gains of $25.8 million. The Company has no continuing
involvement with any of the sold MBS.
Interest Income on MBS and CRT Securities
The following table presents components of interest income on the Company’s MBS and CRT securities for the years ended
December 31, 2015, 2014 and 2013:
(In Thousands)
Agency MBS
Coupon interest
Effective yield adjustment (1)
Interest income
Legacy Non-Agency MBS
Coupon interest
Effective yield adjustment (2)
Interest income
RPL/NPL MBS
Coupon interest
Effective yield adjustment (2)
Interest income
CRT securities
Coupon interest
Effective yield adjustment (2)
Interest income
For the Year Ended December 31,
2015
2014
2013
$
$
$
$
$
$
$
$
147,066
(41,231)
105,835
183,349
91,003
274,352
87,429
1,789
89,218
5,844
728
6,572
$
$
$
$
$
$
$
$
189,355
(46,812)
142,543
212,073
103,491
315,564
898
(132)
766
665
107
772
$
$
$
$
$
$
$
$
213,995
(57,949)
156,046
253,560
73,189
326,749
21
—
21
—
—
—
(1) Includes amortization of premium paid net of accretion of purchase discount. For Agency MBS, interest income is recorded at an effective
yield, which reflects net premium amortization based on actual prepayment activity.
(2) The effective yield adjustment is the difference between the net income calculated using the net yield, which is based on management’s
estimates of the amount and timing of future cash flows, less the current coupon yield.
4.
Residential Whole Loans
Included on the Company’s consolidated balance sheets as of December 31, 2015 and 2014 are approximately $895.1 million
and $351.4 million, respectively, of residential whole loans arising from the Company’s 100% equity interest in certificates issued
by certain trusts established to acquire the loans. Based on its evaluation of these interests and other factors, the Company has
determined that the trusts are required to be consolidated for financial reporting purposes.
Residential Whole Loans at Carrying Value
Residential whole loans at carrying value totaled approximately $271.8 million and $207.9 million at December 31, 2015
and 2014, respectively. The carrying value reflects the original investment amount, plus accretion of interest income, less principal
and interest cash flows received. The carrying value is reduced by any allowance for loan losses established subsequent to
acquisition.
For the years ended December 31, 2015 and 2014, a net provision for loan losses of approximately $1.0 million and $137,000,
respectively, was recorded, which is included in Operating and Other expense on the Company’s consolidated statement of
operations.
107
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents the activity in the Company’s allowance for loan losses on its residential whole loan pools at
carrying value for the years ended December 31, 2015 and 2014:
(In Thousands)
Balance at the beginning of period
Provisions for loan losses
Balance at the end of period
For the Year Ended December 31,
2015
2014
$
$
137
1,028
1,165
$
$
—
137
137
The following table presents information regarding estimates of the contractually required payments, the cash flows expected
to be collected, and the estimated fair value of the residential whole loans held at carrying value acquired by the Company for the
years ended December 31, 2015 and 2014:
(In Thousands)
Contractually required principal and interest
Contractual cash flows not expected to be collected (non-accretable yield)
Expected cash flows to be collected
Interest component of expected cash flows (accretable yield)
Fair value at the date of acquisition
For the Year Ended December 31,
2015
2014
$
$
160,806
(27,040)
133,766
(51,413)
82,353
$
$
448,453
(100,466)
347,987
(135,425)
212,562
The following table presents accretable yield activity for the Company’s residential whole loans held at carrying value for
the years ended December 31, 2015 and 2014:
(In Thousands)
Balance at beginning of period
Additions
Accretion
Reclassifications to non-accretable difference, net
Balance at end of period
For the Year Ended December 31,
2015
2014
$
$
133,012
51,413
(15,511)
6,357
175,271
$
$
—
135,425
(3,996)
1,583
133,012
Accretable yield for residential whole loans is the excess of loan cash flows expected to be collected over the purchase price.
The cash flows expected to be collected represents the Company’s estimate of the amount and timing of undiscounted principal
and interest cash flows. Additions include accretable yield estimates for purchases made during the period and reclassification to
accretable yield from non-accretable yield. Accretable yield is reduced by accretion during the period. The reclassifications
between accretable and non-accretable yield and the accretion of interest income are based on changes in estimates regarding loan
performance and the value of the underlying real estate securing the loans. In future periods, as the Company updates estimates
of cash flows expected to be collected from the loans and the underlying collateral, the accretable yield may change. Therefore,
the amount of accretable income recorded during the year ended December 31, 2015 is not necessarily indicative of future results.
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 time of acquisition. Subsequent changes in fair value are reported in current period earnings and
presented in Net gain on residential whole loans held at fair value on the Company’s consolidated statements of operations.
108
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents information regarding the Company’s residential whole loans at fair value at December 31,
2015 and 2014:
(Dollars in Thousands)
Outstanding principal balance
Aggregate fair value
Number of loans
December 31, 2015
December 31, 2014
$
$
786,330
623,276
3,143
$
$
182,613
143,472
885
During the years ended December 31, 2015 and 2014, the Company recorded net gains on residential whole loans held at
fair value of $17.7 million and $116,000, respectively.
The following table presents the components of Net gain on residential whole loans held at fair value for the years ended
December 31, 2015 and 2014:
(In Thousands)
Coupon payments and other income received
Net unrealized gains
Net gain on payoff/liquidation of loans
Total
5.
Interest Receivable
For the Year Ended December 31,
2015
2014
$
$
9,303
6,540
1,879
17,722
$
$
504
(427)
39
116
The following table presents the Company’s interest receivable by investment category at December 31, 2015 and 2014:
(In Thousands)
MBS interest receivable:
Fannie Mae
Freddie Mac
Ginnie Mae
Non-Agency MBS
Total MBS interest receivable
Residential whole loans
CRT securities
Money market and other investments
Total interest receivable
December 31,
2015
2014
$
$
8,999
2,177
15
15,438
26,629
2,259
92
22
29,002
$
$
11,761
2,598
17
16,794
31,170
1,324
66
21
32,581
109
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
6.
Derivative Instruments
The Company’s derivative instruments are currently comprised of Swaps, which are designated as cash flow hedges against
the interest rate risk associated with its borrowings. Prior to 2015, the Company had also entered into Linked Transactions, which
were not designated as hedging instruments. (See Notes 2(p), 2(t) and below) The following table presents the fair value of the
Company’s derivative instruments and their balance sheet location at December 31, 2015 and 2014:
December 31,
2015
2014
Derivative Instrument
Designation
Balance Sheet
Location
Notional
Amount
Fair Value
Notional
Amount
Fair Value
(In Thousands)
Linked Transactions
Non-Hedging
Non-cleared legacy Swaps (1)
Non-cleared legacy Swaps (1)
Cleared Swaps (2)
Hedging
Hedging
Hedging
Assets
Assets
Liabilities
N/A
$
$
450,000
50,000
Liabilities
$ 2,550,000
$
$
$
N/A
1,127
(59)
(70,467)
N/A $
398,336
$
$
450,000
760,170
$ 2,550,000
$
$
$
3,136
(4,263)
(57,935)
(1) Non-cleared legacy Swaps include Swaps executed and settled bilaterally with counterparties without the use of an organized exchange or
central clearing house.
(2) Cleared Swaps include Swaps executed bilaterally with a counterparty in the over-the-counter market but then novated to a central clearing
house, whereby the central clearing house becomes the counterparty to both of the original counterparties.
Linked Transactions
Prior to January 1, 2015, the Company’s Linked Transactions had been evaluated on a combined basis, reported as forward
(derivative) instruments and presented as assets on the Company’s consolidated balance sheets at fair value. The fair value of
Linked Transactions reflected the value of the underlying Non-Agency MBS, linked repurchase agreement borrowings and accrued
interest receivable/payable on such instruments. The Company’s Linked Transactions were not designated as hedging instruments
and, as a result, the change in the fair value and net interest income from Linked Transactions had been reported in Other Income,
net on the Company’s consolidated statements of operations.
New accounting guidance that was effective for the Company on January 1, 2015 prospectively eliminated the use of Linked
Transaction accounting. An entity is required to present changes in accounting for transactions outstanding on the effective date
as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Accordingly, on adoption of
the new standard on January 1, 2015, the Company reclassified $1.913 billion of Non-Agency MBS and $4.6 million of CRT
securities that were previously reported as a component of Linked Transactions to Non-Agency MBS and CRT securities,
respectively on the consolidated balance sheet. In addition, liabilities of $1.520 billion that were previously presented as a
component of Linked Transactions were reclassified to Repurchase agreements on the consolidated balance sheet. Furthermore,
an amount of $4.5 million representing net unrealized gains on securities previously reported as a component of Linked Transactions
as of December 31, 2014 was reclassified from Accumulated deficit to AOCI. These reclassification adjustments had no net impact
on the Company’s overall Total Stockholders’ Equity.
110
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following tables present certain information about the Legacy Non-Agency MBS, RPL/NPL MBS, CRT securities
and repurchase agreements underlying the Company’s Linked Transactions at December 31, 2014:
Linked Transactions at December 31, 2014
Linked Repurchase Agreements
Linked MBS/CRT Securities
Maturity or Repricing
Balance
Weighted
Average
Interest
Rate
Fair Value
Amortized
Cost
Par/Current
Face
Weighted
Average
Coupon
Rate
(Dollars in Thousands)
(Dollars in Thousands)
Within 30 days
$ 1,514,393
1.47%
Legacy Non-Agency MBS
$
66,382
$
61,658
$
72,513
4.20%
>30 days to 90 days
5,200
1.35
RPL/NPL MBS
1,846,807
1,847,118
1,849,974
Total
$ 1,519,593
1.47%
CRT securities
4,624
4,500
4,500
3.49
4.56
Total
$ 1,917,813
$ 1,913,276
$ 1,926,987
3.52%
At December 31, 2014, Linked Transactions also included approximately $1.3 million of associated accrued interest receivable
and $1.1 million of accrued interest payable.
The following table presents certain information about the components of the unrealized net gains and net interest income
from Linked Transactions included in the Company’s consolidated statements of operations for the years ended December 31,
2014 and 2013:
(In Thousands)
Interest income attributable to MBS underlying Linked Transactions
Interest expense attributable to linked repurchase agreement borrowings underlying
Linked Transactions
Change in fair value of Linked Transactions included in earnings
Unrealized net gains and net interest income from Linked Transactions
For the Year Ended December 31,
2014
2013
$
$
24,443
$
(8,028)
677
17,092
$
3,869
(925)
281
3,225
Swaps
Consistent with market practice, the Company has agreements with its Swap counterparties that provide for the posting of
collateral based on the fair values of its derivative contracts. Through this margining process, either the Company or its derivative
counterparty may be required to pledge cash or securities as collateral. In addition, Swaps novated to and cleared by a central
clearing house are subject to initial margin requirements. Certain derivative contracts provide for cross collateralization with
repurchase agreements with the same counterparty.
A number of the Company’s Swap contracts include financial covenants, which, if breached, could cause an event of default
or early termination event to occur under such agreements. Such financial covenants include minimum net worth requirements
and maximum debt-to-equity ratios. If the Company were to cause an event of default or trigger an early termination event pursuant
to one of its Swap contracts, the counterparty to such agreement may have the option to terminate all of its outstanding Swap
contracts with the Company and, if applicable, any close-out amount due to the counterparty upon termination of the Swap contracts
would be immediately payable by the Company. The Company was in compliance with all of its financial covenants through
December 31, 2015. At December 31, 2015, the aggregate fair value of assets needed to immediately settle Swap contracts that
were in a liability position to the Company, if so required, was approximately $72.0 million, including accrued interest payable
of approximately $1.5 million.
111
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents the assets pledged as collateral against the Company’s Swap contracts at December 31, 2015
and December 31, 2014:
(In Thousands)
Agency MBS, at fair value
Restricted cash
Total assets pledged against Swaps
December 31,
2015
2014
$
$
38,569
70,573
109,142
$
$
57,247
66,486
123,733
The use of derivative hedging instruments exposes the Company to counterparty credit risk. In the event of a default by a
derivative counterparty, the Company may not receive payments to which it is entitled under its derivative agreements, and may
have difficulty recovering its assets pledged as collateral against such agreements. If, during the term of a derivative contract, a
counterparty should file for bankruptcy, the Company may experience difficulty recovering its assets pledged as collateral which
could result in the Company having an unsecured claim against such counterparty’s assets for the difference between the fair value
of the derivative and the fair value of the collateral pledged to such counterparty.
The Company’s derivative hedging instruments, or a portion thereof, could become ineffective in the future if the associated
repurchase agreements that such derivatives hedge fail to exist or fail to have terms that match those of the derivatives that hedge
such borrowings. At December 31, 2015, all of the Company’s derivatives were deemed effective for hedging purposes and no
derivatives were terminated during the years ended December 31, 2015 and 2014.
The Company’s Swaps designated as hedging transactions have the effect of modifying the repricing characteristics of the
Company’s repurchase agreements and cash flows for such liabilities. To date, no cost has been incurred at the inception of a
Swap (except for certain transaction fees related to entering into Swaps cleared though a central clearing house), pursuant to which
the Company agrees to pay a fixed rate of interest and receive a variable interest rate, generally based on one-month or three-
month London Interbank Offered Rate (“LIBOR”), on the notional amount of the Swap. The Company did not recognize any
change in the value of its existing Swaps designated as hedges through earnings as a result of hedge ineffectiveness during any of
the three years ended December 31, 2015.
At December 31, 2015, the Company had Swaps designated in hedging relationships with an aggregate notional amount of
$3.050 billion, which had net unrealized losses of $69.4 million, and extended 45 months on average with a maximum term of
approximately 92 months.
The following table presents certain information with respect to the Company’s Swap activity during the year ended
December 31, 2015:
(Dollars in Thousands)
New Swaps:
Aggregate notional amount
Weighted average fixed-pay rate
Initial maturity date
Number of new Swaps
Swaps amortized/expired:
Aggregate notional amount
Weighted average fixed-pay rate
112
December 31, 2015
$
$
—
—%
N/A
—
710,170
1.96%
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents information about the Company’s Swaps at December 31, 2015 and 2014:
December 31, 2015
December 31, 2014
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)
$
50,000
2.13%
0.42% $
22,290
3.63%
0.23%
—
—
100,000
350,000
550,000
200,000
—
100,000
—
—
0.48
0.58
1.49
1.71
2.22
2.20
—
2.75
—
—
0.32
0.27
0.32
0.42
0.36
0.30
—
0.40
387,880
300,000
—
150,000
350,000
550,000
200,000
1,500,000
200,000
100,000
1.80
2.06
—
1.03
0.58
1.49
1.71
2.22
2.20
2.75
0.16
0.17
—
0.16
0.16
0.16
0.17
0.16
0.17
0.16
$ 3,050,000
1.82%
0.34% $ 3,760,170
1.85%
0.16%
Maturity (1)
(Dollars in Thousands)
Within 30 days
Over 30 days to 3 months
Over 3 months to 6 months
Over 6 months to 12 months
Over 12 months to 24 months
Over 24 months to 36 months
Over 36 months to 48 months
Over 48 months to 60 months
1,500,000
Over 60 months to 72 months
200,000
Over 72 months to 84 months
Over 84 months (3)
Total Swaps
(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 monthly or quarterly based on one-
month or three-month LIBOR, respectively.
(3) Reflects one Swap with a maturity date of July 2023.
The following table presents the net impact of the Company’s derivative hedging instruments on its interest expense and the
weighted average interest rate paid and received for such Swaps for the years ended December 31, 2015, 2014 and 2013:
(Dollars in Thousands)
Interest expense attributable to Swaps
Weighted average Swap rate paid
Weighted average Swap rate received
TBA Short Positions
For the Year Ended December 31,
2015
53,759
$
2014
69,842
$
2013
59,031
$
1.86%
0.19%
1.93%
0.16%
2.08%
0.19%
During 2013, the Company entered into TBA short positions as a means of managing interest rate risk and MBS basis risk
associated with its investment and financing activities. A TBA short position is a forward contract for the sale of Agency MBS at
a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency MBS
that could be delivered into the contract upon the settlement date, published each month by SIFMA, are not known at the time of
the transaction.
TBA short positions were accounted for as derivative instruments since the Company could not assert that it is probable at
inception, and throughout the term of the TBA contract, that it would physically deliver the Agency security upon settlement of
the contract. The Company presented TBA short positions as either derivative assets or liabilities, at fair value on its consolidated
balance sheets. Gains and losses associated with TBA short positions were reported in Other income, net on the Company’s
consolidated statements of operations. During 2013, the Company sold short $350.0 million notional of 15-year Agency MBS
2.5% TBA Securities and realized a loss of $7.5 million on close out of this position. The Company did not have any TBA short
positions at December 31, 2015 and 2014.
113
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
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, 2015, 2014 and 2013:
(In Thousands)
AOCI from derivative hedging instruments:
Balance at beginning of period
Unrealized (loss)/gain on Swaps, net
Reclassification of unrealized loss on de-designated Swaps
Balance at end of period
Counterparty Credit Risk from Use of Swaps
For the Year Ended December 31,
2015
2014
2013
$
$
(59,062) $
(10,337)
—
(69,399) $
(15,217) $
(44,292)
447
(59,062) $
(62,831)
47,614
—
(15,217)
By using Swaps, the Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not
perform as expected. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as
a derivative asset on its consolidated balance sheets to the extent that amount exceeds collateral obtained from the counterparty
or, if in a net liability position, the extent to which collateral posted exceeds the liability to the counterparty. The amounts reported
as a derivative asset/(liability) are derivative contracts in a gain/(loss) position, and to the extent subject to master netting
arrangements, net of derivatives in a loss/(gain) position with the same counterparty and collateral received/(pledged). The
Company attempts to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, executing master
netting arrangements and obtaining collateral, where appropriate. Counterparty credit risk related to the Company’s Swaps is
considered in determining the fair value of such derivatives and in its assessment of hedge effectiveness.
7. Real Estate Owned
At December 31, 2015, the Company had 182 REO properties with an aggregate carrying value of $28.0 million. At
December 31, 2014, the Company had 46 REO properties with an aggregate carrying value of $5.5 million. During the years
ended December 31, 2015 and 2014, the Company acquired 13 and 24 residential properties, for approximately $1.7 million and
$2.6 million, respectively, in connection with the acquisition of residential whole loans.
During the years ended December 31, 2015 and 2014, the Company reclassified 186 and 22 mortgage loans to REO at an
aggregate estimated fair value of $30.1 million and $2.9 million, respectively at the time of transfer. Such transfers occur when
the Company takes possession of the property by foreclosing on the borrower or completes a “deed-in-lieu of foreclosure”
transaction.
At December 31, 2015, $26.1 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 $17.3 million of residential whole loans at carrying value
and $394.9 million of residential whole loans at fair value at December 31, 2015.
During the year ended December 31, 2015, the Company sold 63 REO properties for consideration of $6.5 million, realizing
net gains of approximately $76,000 which are included in Other, net on the Company’s consolidated statements of operations.
The Company did not sell any REO properties during the year ended December 31, 2014. In addition, following an updated
assessment of liquidation amounts expected to be realized that was performed on all REO held at the end of each quarter during
the year ended December 31, 2015, an aggregate adjustment of approximately $3.5 million was recorded to reflect certain REO
properties at the lower of cost or estimated fair value for the year ended December 31, 2015.
114
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents the activity in the Company’s REO for the years ended December 31, 2015 and 2014. The Company
did not have REO prior to 2014.
(In Thousands)
Balance at beginning of period
Adjustments to record at lower of cost or fair value
Transfer from residential whole loans (1)
Purchases and capital improvements
Disposals
Balance at end of period
For the Year Ended December 31,
2015
2014
$
$
5,492
(3,475)
30,104
2,461
(6,556)
28,026
$
$
—
—
2,904
2,588
—
5,492
(1) Includes net gain recorded on transfer of approximately $1.7 million and $331,000, respectively, for the years ended December 31, 2015
and 2014.
Real estate owned is included in Prepaid and other assets in the Company’s consolidated balance sheets.
8.
Repurchase Agreements and Other Advances
Repurchase Agreements
The Company’s repurchase agreements are accounted for as secured borrowings and are collateralized by the Company’s
MBS, U.S. Treasury securities (obtained as part of a reverse repurchase agreement), CRT securities, residential whole loans and
cash, and bear interest that is generally LIBOR-based. (See Notes 2(k) and 9) At December 31, 2015, the Company’s borrowings
under repurchase agreements had a weighted average remaining term-to-interest rate reset of 21 days and an effective repricing
period of 18 months, including the impact of related Swaps. At December 31, 2014, the Company’s borrowings under repurchase
agreements had a weighted average remaining term-to-interest rate reset of 25 days and an effective repricing period of 21 months,
including the impact of related Swaps.
115
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents information with respect to the Company’s borrowings under repurchase agreements and
associated assets pledged as collateral at December 31, 2015 and 2014:
(Dollars in Thousands)
Repurchase agreement borrowings secured by Agency MBS
December 31, 2015
2,727,542
$
December 31, 2014
5,177,835
$
Fair value of Agency MBS pledged as collateral under repurchase agreements
Weighted average haircut on Agency MBS (1)
Repurchase agreement borrowings secured by Legacy Non-Agency MBS (2)
Fair value of Legacy Non-Agency MBS pledged as collateral under repurchase
agreements (2)(3)
Weighted average haircut on Legacy Non-Agency MBS (1)
Repurchase agreement borrowings secured by RPL/NPL MBS (2)
Fair value of RPL/NPL MBS pledged as collateral under repurchase agreements (2)
Weighted average haircut on RPL/NPL MBS (1)
Repurchase agreements secured by U.S. Treasuries
Fair value of U.S. Treasuries pledged as collateral under repurchase agreements
Weighted average haircut on U.S. Treasuries (1)
Repurchase agreements secured by CRT securities (2)
Fair value of CRT securities pledged as collateral under repurchase agreements (2)
Weighted average haircut on CRT securities (1)
Repurchase agreements secured by residential whole loans
Fair value of residential whole loans pledged as collateral under repurchase agreements
$
$
$
$
$
$
$
$
$
$
$
2,881,049
4.67%
1,960,222
2,818,968
25.42%
2,080,163
2,625,866
21.37%
504,760
507,443
1.60%
128,465
170,352
25.04%
487,750
684,136
$
$
$
$
$
$
$
$
$
$
$
5,462,566
4.79%
2,233,236
3,491,312
28.88%
130,919
160,688
20.00%
507,114
512,105
1.62%
75,960
94,610
25.00%
142,324
212,986
Weighted average haircut on residential whole loans (1)
27.69%
33.43%
(1) Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount.
(2) Does not reflect Legacy Non-Agency MBS, RPL/NPL MBS, CRT securities and repurchase agreement borrowings that were components of
Linked Transactions at December 31, 2014. As previously discussed, new accounting guidance effective January 1, 2015 prospectively
eliminated the use of Linked Transaction accounting. (See Note 6)
(3) Includes $570.5 million and $1.275 billion of Legacy Non-Agency MBS acquired from consolidated VIEs at December 31, 2015 and 2014,
respectively, that are eliminated from the Company’s consolidated balance sheets.
The following table presents repricing information about the Company’s borrowings under repurchase agreements, which
does not reflect the impact of associated derivative hedging instruments, at December 31, 2015 and 2014:
Time Until Interest Rate Reset
(Dollars in Thousands)
Within 30 days
Over 30 days to 3 months
Over 3 months to 12 months
Total
December 31, 2015
December 31, 2014
Balance
Weighted
Average
Interest Rate
Balance (1)
Weighted
Average
Interest Rate
$
7,054,483
1.44% $
7,144,737
734,955
99,464
1.79
2.36
1,000,313
122,338
$
7,888,902
1.48% $
8,267,388
0.72%
1.12
1.98
0.79%
(1) At December 31, 2014, the Company had repurchase agreements of $1.520 billion that were linked to securities purchased and accounted
for as Linked Transactions, and as such, the linked repurchase agreements are not included in the above table. As previously discussed, new
accounting guidance effective January 1, 2015 prospectively eliminated the use of Linked Transaction accounting. (See Note 6)
116
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents contractual maturity information about the Company’s borrowings under repurchase agreements,
all of which are accounted for as secured borrowings, at December 31, 2015 and does not reflect the impact of derivative contracts
that hedge such repurchase agreements:
Contractual Maturity
(Dollars in Thousands)
Overnight
Within 30 days
Over 30 days to 3 months
Over 3 months to 12 months
Over 12 months
Total
Agency
MBS
Legacy
Non-Agency
MBS
RPL/NPL
MBS
U.S.
Treasuries
CRT
Securities
Residential
Whole
Loans
Total
Weighted
Average
Interest
Rate
December 31, 2015
$
— $
— $
— $
— $
— $
— $
—
—%
2,563,741
163,801
—
—
892,341
613,131
454,750
—
143,705
265,872
—
1,670,586
504,760
110,921
— 17,544
— 5,742,349
—
938,181
—
—
—
—
293,641
194,109
1,014,263
194,109
1.27
1.71
2.19
3.11
$ 2,727,542
$ 1,960,222
$ 2,080,163
$ 504,760
$128,465
$ 487,750
$ 7,888,902
1.48%
Gross amount of recognized liabilities for repurchase agreements in Note 10
Amounts related to repurchase agreements not included in offsetting disclosure in Note 10
$ 7,888,902
$
—
The Company had repurchase agreements with 27 and 25 counterparties at December 31, 2015 and 2014, respectively. The
following table presents information with respect to each counterparty under repurchase agreements for which the Company had
greater than 5% of stockholders’ equity at risk in the aggregate at December 31, 2015:
Counterparty
(Dollars in Thousands)
Credit Suisse
Wells Fargo (3)
RBC (4)
UBS (5)
Goldman Sachs
December 31, 2015
Counterparty
Rating (1)
Amount at
Risk (2)
Weighted
Average Months
to Maturity for
Repurchase
Agreements
Percent of
Stockholders’
Equity
BBB+/Aa2/A $
AA-/Aa2/AA
AA-/Aa3/AA
A/A1/A
BBB+/A3/A
410,814
334,613
327,400
214,107
152,055
1
6
2
19
9
13.8%
11.3
11.0
7.2
5.1
(1) As rated at December 31, 2015 by S&P, Moody’s and Fitch, Inc., respectively. The counterparty rating presented is the lowest published
for these entities.
(2) The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest
payable, and (b) the cash and the fair value of the securities pledged by the Company as collateral, including accrued interest receivable
on such securities.
(3) Includes $269.7 million at risk with Wells Fargo Bank, NA and $64.9 million at risk with Wells Fargo Securities LLC.
(4) Includes $309.8 million at risk with RBC Barbados, $10.7 million at risk with Royal Bank of Canada and $6.8 million at risk with RBC
Capital Markets LLC. Counterparty ratings are not published for RBC Barbados and RBC Capital Markets LLC.
(5) Includes Non-Agency MBS pledged as collateral with contemporaneous repurchase and reverse repurchase agreements.
FHLB Advances
As of December 31, 2015, MFA Insurance had $1.500 billion in outstanding long-term secured FHLB advances with a
weighted average borrowing rate of 0.50% and a weighted average term to maturity of 4.79 years. However, MFA Insurance is
required by recent amendments to FHLB membership regulations to terminate its membership and repay the outstanding advances
by February 19, 2017. (See Note 18) Interest payable on outstanding FHLB advances at December 31, 2015 totaled approximately
$508,000, and is included in Accrued interest payable on the Company’s consolidated balance sheets.
117
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
9.
Collateral Positions
The Company pledges securities or cash as collateral to its counterparties pursuant to its borrowings under repurchase
agreements, FHLB advances and its derivative contracts that are in an unrealized loss position, and it receives securities or cash
as collateral pursuant to financing provided under reverse repurchase agreements and certain of its derivative contracts in an
unrealized gain position. The Company exchanges collateral with its counterparties based on changes in the fair value, notional
amount and term of the associated repurchase agreements, FHLB advances and derivative contracts, as applicable. Through this
margining process, either the Company or its counterparty may be required to pledge cash or securities as collateral. In addition,
Swaps novated to and cleared by a central clearing house are subject to initial margin requirements. 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 following table summarizes the fair value of the Company’s collateral positions, which includes collateral pledged and
collateral held, with respect to its borrowings under repurchase agreements, reverse repurchase agreements, derivative hedging
instruments and FHLB advances at December 31, 2015 and 2014:
(In Thousands)
Derivative Hedging Instruments:
Agency MBS
Cash (1)
Repurchase Agreement Borrowings:
Agency MBS
Legacy Non-Agency MBS (2)(3)
RPL/NPL MBS
U.S. Treasury securities
CRT securities
Residential whole loans
Cash (1)
FHLB Advances:
Agency MBS
Reverse Repurchase Agreements:
U.S. Treasury securities
December 31, 2015
December 31, 2014
Assets Pledged
Collateral Held
Assets Pledged
Collateral Held
$
38,569
$
— $
57,247
$
70,573
109,142
2,881,049
2,818,968
2,625,866
507,443
170,352
684,136
965
9,688,779
1,612,476
1,612,476
—
—
—
—
—
—
—
—
—
—
—
—
—
—
507,443
507,443
66,486
123,733
5,462,566
3,491,312
160,688
512,105
94,610
212,986
769
9,935,036
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
512,105
512,105
512,105
Total
$ 11,410,397
$
507,443
$ 10,058,769
$
(1) Cash pledged as collateral is reported as “Restricted cash” on the Company’s consolidated balance sheets.
(2) Includes $570.5 million and $1.275 billion of Legacy Non-Agency MBS acquired in connection with resecuritization transactions from
consolidated VIEs at December 31, 2015 and 2014, respectively, that are eliminated from the Company’s consolidated balance sheets.
(3) In addition, at December 31, 2015 and 2014, $726.7 million and $731.0 million of Legacy Non-Agency MBS, respectively, are pledged as
collateral in connection with contemporaneous repurchase and reverse repurchase agreements entered into with a single counterparty.
118
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents detailed information about the Company’s assets pledged as collateral pursuant to its borrowings
under repurchase agreements and other advances, and derivative hedging instruments at December 31, 2015:
Legacy Non-Agency MBS(2)(3)
2,818,968
2,278,870
December 31, 2015
Assets Pledged Under Repurchase
Agreements and Other Advances
Assets Pledged Against Derivative
Hedging Instruments
Fair Value
Amortized
Cost
Accrued
Interest on
Pledged
Assets
Fair Value/
Carrying
Value
Amortized
Cost
Accrued
Interest on
Pledged
Assets
$ 4,493,525
$ 4,465,081
$
10,593
$
38,569
$
39,460
$
2,625,866
2,644,797
507,443
170,352
684,136
965
507,443
173,367
673,788
965
10,241
1,592
—
83
952
—
—
—
—
—
—
—
—
—
—
—
70,573
70,573
$ 11,301,255
$ 10,744,311
$
23,461
$ 109,142
$ 110,033
$
Total Fair
Value of
Assets
Pledged and
Accrued
Interest
$ 4,542,767
2,829,209
2,627,458
507,443
170,435
685,088
71,538
$ 11,433,938
80
—
—
—
—
—
—
80
(In Thousands)
Agency MBS (1)
RPL/NPL MBS
U.S. Treasuries
CRT securities
Residential whole loans
Cash (4)
Total
(1) Includes Agency MBS pledged under FHLB advances with an aggregate fair value of $1.612 billion, aggregate amortized cost of $1.606
billion and aggregate accrued interest of approximately $3.9 million at December 31, 2015.
(2) Includes $570.5 million of Legacy Non-Agency MBS acquired in connection with resecuritization transactions from consolidated VIEs at
December 31, 2015, that are eliminated from the Company’s consolidated balance sheets.
(3) In addition, at December 31, 2015, $726.7 million of Legacy Non-Agency MBS are pledged as collateral in connection with contemporaneous
repurchase and reverse repurchase agreements entered into with a single counterparty.
(4) Cash pledged as collateral is reported as “Restricted cash” on the Company’s consolidated balance sheets.
119
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
10. Offsetting Assets and Liabilities
The following tables present information about certain assets and liabilities that are subject to master netting arrangements
(or similar agreements) and may potentially be offset on the Company’s consolidated balance sheets at December 31, 2015 and
2014:
Offsetting of Financial Assets and Derivative Assets
(In Thousands)
December 31, 2015
Swaps, at fair value
Total
December 31, 2014
Swaps, at fair value
Total
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts of
Assets
Presented in
the
Consolidated
Balance Sheets
Gross Amounts Not Offset in
the Consolidated Balance Sheets
Financial
Instruments
Cash
Collateral
Received
Net Amount
$
$
$
$
1,127
1,127
3,136
3,136
$
$
$
$
— $
— $
1,127
1,127
— $
— $
3,136
3,136
$
$
$
$
(1,127) $
(1,127) $
(3,136) $
(3,136) $
— $
— $
— $
— $
—
—
—
—
Offsetting of Financial Liabilities and Derivative Liabilities
(In Thousands)
December 31, 2015
Swaps, at fair value (2)
Repurchase agreements and
other advances (3)
Total
December 31, 2014
Swaps, at fair value (2)
Repurchase agreements (3)
Total
Gross
Amounts of
Recognized
Liabilities
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts of
Liabilities
Presented in
the
Consolidated
Balance Sheets
Gross Amounts Not Offset in the
Consolidated Balance Sheets
Financial
Instruments (1)
Cash
Collateral
Pledged (1)
Net Amount
$
70,526
$
— $
70,526
$
— $
(70,526) $
9,388,902
$ 9,459,428
$
62,198
8,267,388
$ 8,329,586
$
$
$
—
9,388,902
— $ 9,459,428
(9,387,937)
$ (9,387,937) $
(965)
(71,491) $
— $
62,198
$
— $
8,267,388
—
— $ 8,329,586
(8,266,619)
$ (8,266,619) $
(62,198) $
(769)
(62,967) $
—
—
—
—
—
—
(1) Amounts disclosed in the Financial Instruments column of the table above represent collateral pledged that is available to be offset against
liability balances associated with repurchase agreements and other advances, and derivative transactions. Amounts disclosed in the Cash
Collateral Pledged column of the table above represent amounts pledged as collateral against derivative transactions and repurchase
agreements, and exclude excess collateral of $47,000 and $4.3 million at December 31, 2015 and 2014, respectively.
(2) The fair value of securities pledged against the Company’s Swaps was $38.6 million and $57.2 million at December 31, 2015 and 2014,
respectively.
(3) The fair value of financial instruments pledged against the Company’s repurchase agreements and other advances was $11.300 billion and
$9.934 billion at December 31, 2015 and 2014, respectively.
120
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Nature of Setoff Rights
In the Company’s consolidated balance sheets, all balances associated with the repurchase agreement and derivative
transactions are presented on a gross basis.
Certain of the Company’s repurchase agreement 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. For
one repurchase agreement counterparty, the underlying agreements provide for an unconditional right of setoff.
11.
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. The total net proceeds to the Company from the offering of the Senior Notes were approximately $96.6 million,
after deducting offering expenses and the underwriting discount. The Senior Notes bear interest at a fixed rate of 8.00% per year,
paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year and will mature on April 15, 2042. The
Company may redeem the Senior Notes, in whole or in part, at any time on or after April 15, 2017 at a redemption price equal to
100% of the principal amount redeemed plus accrued and unpaid interest to, but not excluding, the redemption date.
The Senior Notes are the Company’s senior unsecured obligations and are subordinate to all of the Company’s secured
indebtedness, which includes the Company’s repurchase agreements, obligation to return securities obtained as collateral, and
other financing arrangements, to the extent of the value of the collateral securing such indebtedness.
12. Commitments and Contingencies
(a) Lease Commitments
The Company pays monthly rent pursuant to two operating leases. The lease term for the Company’s headquarters in New
York, New York extends through May 31, 2020. The lease provides for aggregate cash payments ranging over time of approximately
$2.5 million per year, paid on a monthly basis, exclusive of escalation charges. In addition, as part of this lease agreement, the
Company has provided the landlord a $785,000 irrevocable standby letter of credit fully collateralized by cash. The letter of credit
may be drawn upon by the landlord in the event that the Company defaults under certain terms of the lease. In addition, the
Company has a lease through December 31, 2016 for its off-site back-up facility located in Rockville Centre, New York, which
provides for, among other things, lease payments totaling $30,000, annually.
The Company recognized lease expense of $2.6 million, $2.5 million and $2.7 million for the years ended December 31,
2015, 2014 and 2013, respectively, which is included in Other general and administrative expense within the consolidated statements
of operations. At December 31, 2015, 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)
2016
2017
2018
2019
2020
Total
$
$
2,552
2,522
2,522
2,522
1,050
11,168
(b) Representations and Warranties in Connection with Resecuritization Transactions
In connection with the resecuritization transactions engaged in by the Company (See Note 17 for further discussion), the
Company has the obligation under certain circumstances to repurchase assets from its VIEs upon breach of certain representations
and warranties.
121
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
13. Stockholders’ Equity
(a) Preferred Stock
Redemption of 8.50% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”)
On May 16, 2013 (the “Redemption Date”), the Company redeemed all 3,840,000 outstanding shares of its Series A Preferred
Stock at an aggregate redemption price of approximately $97.0 million, or $25.27153 per share, including all accrued and unpaid
dividends to the Redemption Date. The redemption value of the Series A Preferred Stock exceeded its carrying value by $3.9
million, which represents the original offering costs for the Series A Preferred Stock. This amount was included in the determination
of net income available to common stock and participating securities from the Redemption Date through the year ended December
31, 2013. In addition, as part of the redemption price on its Series A Preferred Stock, the Company paid a dividend of $0.27153
per share, which reflected accrued and unpaid dividends for the period from April 1, 2013 through and including the Redemption
Date.
Issuance of 7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”)
On April 15, 2013, the Company filed articles supplementary amending its charter to reclassify 8,050,000 shares of the
Company’s authorized but unissued common stock as shares of the Company’s Series B Preferred Stock. On the same date, 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 aggregate
net proceeds to the Company from the offering of the Series B Preferred Stock were approximately $193.3 million, after deducting
the underwriting discount and related offering expenses. The Company used a portion of the net proceeds to redeem all of its
outstanding Series A Preferred Stock (as discussed above), and used the remaining net proceeds of the offering for general corporate
purposes, including, without limitation, to acquire additional MBS consistent with its investment policy, and for working capital,
which included, among other things, the repayment of its repurchase agreements.
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
commencing on April 15, 2018 (subject to the Company’s right, under limited circumstances, to redeem the Series B Preferred
Stock prior to that date in order to preserve its qualification as a REIT and upon certain specified change in control transactions
in which the Company’s common stock and the acquiring or surviving entity common securities would not be listed on the New
York Stock Exchange (the “NYSE”), the NYSE MKT or NASDAQ, or any successor exchanges).
On May 20, 2013, the Company declared the first dividend payable on the Series B Preferred Stock, which was paid on July
1, 2013 to preferred stockholders of record as of June 3, 2013. The amount of such dividend payable was $0.39583 per share, and
was paid in respect of the partial period commencing on April 15, 2013, the date of original issue of the Series B Preferred Stock,
and ending on, and including, June 30, 2013.
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.
122
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents cash dividends declared by the Company on its Series B Preferred Stock from January 1, 2013
through December 31, 2015:
Year
2015
Declaration Date
November 19, 2015
Record Date
Payment Date
December 3, 2015
December 31, 2015
Dividend Per Share
$0.46875
August 24, 2015
September 9, 2015
September 30, 2015
May 18, 2015
June 2, 2015
June 30, 2015
February 13, 2015
February 27, 2015
March 31, 2015
2014
November 21, 2014
December 5, 2014
December 31, 2014
August 25, 2014
September 8, 2014
September 30, 2014
May 19, 2014
June 10, 2014
June 30, 2014
February 14, 2014
February 28, 2014
March 31, 2014
2013
November 19, 2013
August 22, 2013
December 3, 2013
September 5, 2013
December 31, 2013
September 30, 2013
May 20, 2013
June 3, 2013
July 1, 2013
0.46875
0.46875
0.46875
$0.46875
0.46875
0.46875
0.46875
$0.46875
0.46875
0.39583
(b) Dividends on Common Stock
The following table presents cash dividends declared by the Company on its common stock from January 1, 2013 through
December 31, 2015:
Year
2015
Declaration Date
December 9, 2015
Record Date
December 28, 2015
Payment Date
January 29, 2016
Dividend Per Share
$0.20
(1)
September 17, 2015
September 29, 2015
October 30, 2015
June 15, 2015
March 13, 2015
June 29, 2015
March 27, 2015
July 31, 2015
April 30, 2015
2014
December 9, 2014
December 26, 2014
January 30, 2015
September 17, 2014
September 29, 2014
October 31, 2014
June 13, 2014
March 10, 2014
June 27, 2014
March 28, 2014
July 31, 2014
April 30, 2014
2013
December 11, 2013
December 31, 2013
January 31, 2014
September 26, 2013
October 11, 2013
October 31, 2013
August 1, 2013
June 28, 2013
March 28, 2013
March 4, 2013
August 12, 2013
August 30, 2013
July 12, 2013
April 12, 2013
March 18, 2013
July 31, 2013
April 30, 2013
April 10, 2013
0.20
0.20
0.20
$0.20
0.20
0.20
0.20
$0.20
0.22
0.28
0.22
0.22
0.50
(2)
(3)
(1) At December 31, 2015, the Company had accrued dividends and dividend equivalents payable of $74.6 million related to the common stock
dividend declared on December 9, 2015.
(2) Reflects the special cash dividend on common stock declared on August 1, 2013.
(3) Reflects the special cash dividend on common stock declared on March 4, 2013.
123
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
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, 2015, a portion of the Company’s common stock dividends were
deemed to be capitalized gains. For the years ended December 31, 2014 and 2013, our common stock dividends were characterized
as ordinary income to stockholders.
(c) Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (“DRSPP”)
On August 8, 2013, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange
Commission (“SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), for the purpose of registering additional
common stock for sale through its DRSPP. Pursuant to Rule 462(e) of the 1933 Act, this shelf registration statement became
effective automatically upon filing with the SEC and, when combined with the unused portion of the Company’s previous DRSPP
shelf registration statements, registered an aggregate of 15 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, 2015, 6.8 million shares of
common stock remained available for issuance pursuant to the DRSPP shelf registration statement.
During the years ended December 31, 2015, 2014 and 2013, the Company issued 162,373, 4,526,855 and 9,511,739 shares
of common stock through the DRSPP, raising net proceeds of approximately $1.2 million, $35.6 million and $77.6 million,
respectively. From the inception of the DRSPP in September 2003 through December 31, 2015, the Company issued 30,728,992
shares pursuant to the DRSPP, raising net proceeds of $258.3 million.
(d) Stock Repurchase Program
As previously disclosed, in August 2005, the Company’s Board authorized a stock repurchase program (the “Repurchase
Program”) to repurchase up to 4.0 million shares of its outstanding common stock. The Board reaffirmed such authorization in
May 2010. In December 2013, the Board increased the number of shares authorized under the Repurchase Program to an aggregate
of 10.0 million. Such authorization does not have an expiration date and, at present, there is no intention to modify or otherwise
rescind such authorization. Subject to applicable securities laws, repurchases of common stock under the Repurchase Program
are made at times and in amounts as the Company deems appropriate, (including, in our discretion, through the use of one or more
plans adopted under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended (the “1934 Act”)) using
available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program are cancelled and,
until reissued by the Company, are deemed to be authorized but unissued shares of the Company’s common stock. The Repurchase
Program may be suspended or discontinued by the Company at any time and without prior notice. The Company did not repurchase
any shares of its common stock during the years ended December 31, 2015 and 2014. During the year ended December 31, 2013,
the Company repurchased 2,143,354 shares of its common stock at a total cost of approximately $15.4 million and an average cost
of $7.20 per share. At December 31, 2015, 6,616,355 shares remained authorized for repurchase under the Repurchase Program.
124
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
(e) Accumulated Other Comprehensive Income/(Loss)
The following table presents changes in the balances of each component of the Company’s AOCI for the years ended
December 31, 2015, 2014 and 2013:
2015
2014
2013
For the Year Ended December 31,
(In Thousands)
Net
Unrealized
Gain/
(Loss) on
AFS
Securities
Net
Unrealized
Gain/
(Loss)
on Swaps
Net
Unrealized
Gain/
(Loss) on
AFS
Securities
Net
Unrealized
Gain/
(Loss)
on Swaps
Net
Unrealized
Gain/
(Loss) on
AFS
Securities
Net
Unrealized
Gain/
(Loss)
on Swaps
Total
AOCI
Total
AOCI
Total
AOCI
Balance at beginning of period
$ 813,515
$ (59,062) $754,453
$ 752,912
$ (15,217) $737,695
$ 824,808
$ (62,831) $761,977
OCI before reclassifications
(194,890)
(10,337)
(205,227)
95,551
(44,292)
51,259
(52,063)
47,614
(4,449)
Amounts reclassified from
AOCI (1)
Cumulative effect adjustment on
adoption of revised accounting
standard for repurchase
agreement financing
(37,912)
— (37,912)
(34,948)
447
(34,501)
(19,833)
— (19,833)
4,537
—
4,537
—
—
—
—
—
—
Net OCI during period (2)
(228,265)
(10,337)
(238,602)
60,603
(43,845)
16,758
(71,896)
47,614
(24,282)
Balance at end of period
$ 585,250
$ (69,399) $515,851
$ 813,515
$ (59,062) $754,453
$ 752,912
$ (15,217) $737,695
(1) See separate table below for details about these reclassifications.
(2) For further information regarding changes in OCI, see the Company’s consolidated statements of comprehensive income/(loss).
The following table presents information about the significant amounts reclassified out of the Company’s AOCI for the years
ended December 31, 2015, 2014, and 2013:
Details about AOCI Components
Amounts Reclassified from AOCI
Affected Line Item in the Statement
Where Net Income is Presented
For the Year Ended December 31,
2015
2014
2013
(In Thousands)
AFS Securities:
Realized gain on sale of securities
$
(37,207) $
(34,948) $
(19,833)
OTTI recognized in earnings
Total AFS Securities
(705)
(37,912)
—
(34,948)
—
(19,833)
Gain on sales of MBS and
U.S. Treasury securities, net
Net impairment losses
recognized in earnings
Swaps designated as cash flow hedges:
De-designated Swaps
Total Swaps designated as cash flow hedges
—
—
Total reclassifications for period
$
(37,912) $
447
— Other, net
447
(34,501) $
—
(19,833)
At December 31, 2015, and 2014 the Company had unrealized losses recorded in AOCI of $1.3 million, and $629,000,
respectively, on securities for which OTTI had been recognized in earnings in prior periods.
125
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
14. EPS Calculation
The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for the
years ended December 31, 2015, 2014 and 2013:
(In Thousands, Except Per Share Amounts)
Numerator:
Net income
Dividends declared on preferred stock
Dividends, dividend equivalents and undistributed earnings allocated to participating
securities
Issuance costs of redeemed preferred stock (1)
For the Year Ended December 31,
2015
2014
2013
$
$
313,226
(15,000)
$
313,504
(15,000)
302,709
(13,750)
(1,539)
—
(1,106)
—
(1,080)
(3,947)
283,932
Net income available to common stockholders - basic and diluted
$
296,687
$
297,398
$
Denominator:
Weighted average common shares for basic and diluted earnings per share (2)
372,114
369,048
362,399
Basic and diluted earnings per share
$
0.80
$
0.81
$
0.78
(1) Issuance costs of redeemed preferred stock represent the original offering costs related to the Series A Preferred Stock, which was redeemed
on May 16, 2013. (See Note 13)
(2) At December 31, 2015, the Company had an aggregate of 2.0 million equity instruments outstanding that were not included in the calculation
of diluted EPS for the year ended December 31, 2015, as their inclusion would have been anti-dilutive. These equity instruments were
comprised of approximately 111,000 shares of restricted common stock with a weighted average grant date fair value of $7.41 and
approximately $1.9 million RSUs with a weighted average grant date fair value of $6.90. These equity instruments may have a dilutive
impact on future EPS.
15. Equity Compensation, Employment Agreements and Other Benefit Plans
(a) Equity Compensation Plan
In accordance with the terms of the Company’s Equity Compensation Plan (the “Equity Plan”), which was adopted by the
Company’s stockholders on May 21, 2015 (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 12.0 million shares of common stock may be
granted under the Equity Plan; forfeitures and/or awards that expire unexercised do not count towards this limit. At December 31,
2015, approximately 9.4 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 1,500,000 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 May 20, 2025.
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 in cash or other consideration at such times and
in accordance with such rules, as the Compensation Committee of the Board (the “Compensation Committee”) shall determine in
its discretion. Payments made on the Company’s outstanding dividend equivalent rights that have been granted as a separate
instrument are charged to Stockholders’ Equity when common stock dividends are declared to the extent that such equivalents are
126
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
expected to vest. The Company made payments in respect of such separate instruments of approximately $16,000, $69,000 and
$412,000 during the years ended December 31, 2015, 2014 and 2013, respectively. The dividend equivalent payments made in
respect of such separate instruments for the year ended December 31, 2013, reflect special cash dividends paid of $0.78 per share,
or approximately $194,000. At December 31, 2015, there were 8,215 dividend equivalent rights outstanding, which had been
awarded separately from, but in connection with, grants of RSUs made in prior years. A 0% forfeiture rate was assumed with
respect to such dividend equivalent rights outstanding at December 31, 2015. At December 31, 2015, the Company had
unrecognized compensation expense of approximately $44,000 related to such dividend equivalent rights, which are scheduled to
elapse over a weighted average period of 6 months.
The following table presents information about the Company’s dividend equivalents rights awarded as separate instruments
at and for each of the years ended December 31, 2015, 2014 and 2013:
For the Year Ended December 31,
2015
2014
2013
Outstanding at beginning of year:
Granted
Cancelled, forfeited or expired
Outstanding at end of year
Number of Dividend Equivalent Rights
24,402
218,225
266,075
—
(16,187)
8,215
—
(193,823)
24,402
—
(47,850)
218,225
The weighted average grant date fair value of the dividend equivalent rights in the above table is $2.77. The determination
of the weighted average grant date fair value of these awards required the Company to estimate certain valuation inputs. In
determining the fair value for these awards granted in 2011, the Company applied: (i) a weighted average volatility estimate of
approximately 31%, which was determined considering historic volatility in the price of Company’s common stock over the six-
year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s common stock
at the grant date; (ii) a weighted average risk-free rate of 2.23% based on the continuously compounded constant maturity treasury
rate corresponding to a maturity commensurate with the expected vesting term of the awards; and (iii) an estimated annual dividend
yield of 13%.
Options
Pursuant to Section 422(b) of the Code, in order for Options granted under the Equity Plan and vesting in any one calendar
year to qualify as an incentive stock option (“ISO”) for tax purposes, the market value of the common stock to be received upon
exercise of such Options as determined on the date of grant shall not exceed $100,000 during such calendar year. The exercise
price of an ISO may not be lower than 100% (or 110% in the case of an ISO granted to a 10% stockholder) of the fair market value
of the Company’s common stock on the date of grant. The exercise price for any other type of Option issued under the Equity
Plan may not be less than the fair market value on the date of grant. Each Option is exercisable after the period or periods specified
in the award agreement, which will generally not exceed ten years from the date of grant.
127
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
At December 31, 2015, the Company had no Options outstanding. The following table presents information about the
Company’s Options at and for each of the years ended December 31, 2014 and 2013:
For the Year Ended December 31,
2014
2013
Outstanding at beginning of year:
Granted
Cancelled, forfeited or expired
Exercised (1)
Outstanding at end of year
Options exercisable at end of year
Number
of
Options
5,000
—
(5,000)
—
— $
— $
Weighted
Average
Exercise Price
8.40
$
—
8.40
—
—
—
Number
of
Options
427,000
—
(402,000)
(20,000)
5,000
5,000
Weighted
Average
Exercise Price
10.14
$
—
10.25
8.40
8.40
8.40
$
$
(1) For the year ended December 31, 2013, the intrinsic value of Options exercised was approximately $19,000.
Restricted Stock
At December 31, 2015 and December 31, 2014, the Company had unrecognized compensation expense of approximately
$807,000 and $1.8 million, respectively, related to the unvested shares of restricted common stock. The Company had accrued
dividends payable of approximately $193,000 and $312,000 on unvested shares of restricted stock at December 31, 2015 and
December 31, 2014, respectively. The total fair value of restricted shares vested during the years ended December 31, 2015, 2014
and 2013 was approximately $4.3 million, $5.7 million and $2.1 million, respectively. The unrecognized compensation expense
at December 31, 2015 is expected to be recognized over a weighted average period of 1.5 years.
The following table presents information with respect to the Company’s restricted stock for the years ended December 31,
2015, 2014 and 2013:
For the Year Ended December 31,
2015
2014
2013
Outstanding at beginning of year:
Granted
Vested (2)
Cancelled/forfeited
Shares of
Restricted
Stock
243,948
497,007
(629,212)
(823)
Outstanding at end of year
110,920
$
Weighted
Average
Grant Date
Fair Value (1)
7.48
$
Shares of
Restricted
Stock
443,967
Weighted
Average
Grant Date
Fair Value (1)
7.50
$
Shares of
Restricted
Stock
483,442
Weighted
Average
Grant Date
Fair Value (1)
7.74
$
6.83
6.98
7.74
7.41
491,797
(690,397)
(1,419)
243,948
$
8.29
8.07
7.58
7.48
231,531
(270,456)
(550)
443,967
$
7.33
7.77
7.72
7.50
(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.
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, 2015 are designated
to be settled in shares of the Company’s common stock. All RSUs outstanding at December 31, 2015 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
128
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
the Company, or for certain performance-based RSU awards, as a grant of stock at the time such awards are settled. At December 31,
2015 and December 31, 2014, the Company had unrecognized compensation expense of $4.0 million and $2.7 million, respectively,
related to RSUs. The unrecognized compensation expense at December 31, 2015 is expected to be recognized over a weighted
average period of 1.7 years. A 0% forfeiture rate was assumed with respect to unvested RSUs at December 31, 2015.
129
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents information with respect to the Company’s RSUs during the years ended December 31, 2015,
2014 and 2013:
Outstanding at beginning of year:
Granted (1)
Settled
Cancelled/forfeited
RSUs With
Service
Condition
769,174
390,804
(17,298)
(3,750)
Outstanding at end of year
1,138,930
RSUs vested but not settled at
end of year
RSUs unvested at end of year
554,023
584,907
$
$
$
For the Year Ended December 31, 2015
Weighted
Average
Grant Date
Fair Value
7.55
$
RSUs With
Market and
Service
Conditions
449,300
Weighted
Average
Grant Date
Fair Value
5.61
$
7.96
6.60
7.97
7.71
7.83
7.59
291,250
—
(3,750)
736,800
175,500
561,300
5.73
—
5.73
5.66
5.21
5.80
$
$
$
Total
RSUs
1,218,474
682,054
(17,298)
(7,500)
1,875,730
729,523
1,146,207
For the Year Ended December 31, 2014
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
6.84
$
7.01
6.60
6.85
6.90
7.20
6.71
$
$
$
Total
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of year:
Granted (2)
Settled
Cancelled/forfeited
Outstanding at end of year
RSUs vested but not settled at
end of year
RSUs unvested at end of year
490,099
357,015
(72,873)
(5,067)
769,174
467,638
301,536
$
$
$
$
7.75
7.22
7.28
7.36
7.55
7.81
7.15
287,719
273,800
(14,465)
(97,754)
449,300
175,500
273,800
$
$
$
$
4.32
5.87
4.71
2.67
5.61
5.21
5.87
777,818
$
630,815
(87,338)
(102,821)
1,218,474
643,138
575,336
$
$
$
6.48
6.64
6.86
2.90
6.84
7.10
6.54
For the Year Ended December 31, 2013
RSUs With
Service
Condition
Weighted
Average
Grant Date
Fair Value
RSUs With
Market and
Service
Conditions
Weighted
Average
Grant Date
Fair Value
Outstanding at beginning of year:
448,141
$
Granted (3)
Settled
Cancelled/forfeited
Outstanding at end of year
RSUs vested but not settled at
end of year
RSUs unvested at end of year
64,483
(21,025)
(1,500)
490,099
84,199
405,900
$
$
$
7.61
8.23
6.20
7.77
7.75
8.50
7.60
279,507
48,341
(32,066)
(8,063)
287,719
14,625
273,094
$
$
$
$
4.55
2.59
2.80
7.89
4.32
4.69
4.30
Total
Weighted
Average
Grant Date
Fair Value
$
$
$
$
6.43
5.82
4.15
7.88
6.48
7.93
6.27
Total
RSUs
727,648
112,824
(53,091)
(9,563)
777,818
98,824
678,994
(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 582,500 of these awards granted in 2015, the Company applied: (i) a weighted average volatility estimate of approximately
18%, which was determined considering historic volatility in the price of Company’s 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 common stock at the grant date; (ii) a weighted
130
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
average risk-free rate of 0.90% based on the continuously compounded constant maturity treasury rate corresponding to a maturity
commensurate with the expected vesting term of the awards; and (iii) an estimated annual dividend yield of 9%. The weighted average grant
date fair value for the remaining 99,554 awards with a service condition only was estimated based on the closing price of the Company’s
common stock at the grant date ranging from $7.93 to $7.97. There are no post vesting conditions on these awards.
(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 547,600 of these awards granted in 2014, the Company applied: (i) a weighted average volatility estimate of approximately
22%, which was determined considering historic volatility in the price of Company’s 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 common stock at the grant date; (ii) a weighted
average risk-free rate of 0.73% based on the continuously compounded constant maturity treasury rate corresponding to a maturity
commensurate with the expected vesting term of the awards; and (iii) an estimated annual dividend yield of 8%. The weighted average grant
date fair value for the remaining 83,215 awards with a service condition only was estimated based on the closing price of the Company’s
common stock at the grant date ranging from $7.19 to $8.16. There are no post vesting conditions on these awards.
(3) The determination of the weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs.
In determining the fair value for awards granted in 2013, the Company applied: (i) a weighted average volatility estimate of approximately
23%, which was determined considering historic volatility in the price of Company’s 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 common stock at the grant date; (ii) a weighted
average risk-free rate of 0.65% based on the continuously compounded constant maturity treasury rate corresponding to a maturity
commensurate with the expected vesting term of the awards; and (iii) an estimated annual dividend yield of 13%. There are no post vesting
conditions on these awards.
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, 2015, 2014 and 2013:
(In Thousands)
Restricted shares of common stock
RSUs (1)
Dividend equivalent rights
Total
For the Year Ended December 31,
2015
2014
2013
$
$
4,373
$
5,553
$
3,377
82
2,886
146
7,832
$
8,585
$
2,150
1,813
195
4,158
(1) RSU expense for the year ended December 31, 2014 includes approximately $500,000 for a one-time grant to the Company’s chief executive
officer.
(b) Employment Agreements
At December 31, 2015, the Company had employment agreements with four of its officers, with varying terms that provide
for, among other things, base salary, bonus and change-in-control payments upon the occurrence of certain triggering events.
(c) 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.
131
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
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 its non-employee
directors and senior officers for the years ended December 31, 2015, 2014 and 2013:
(In Thousands)
Non-employee directors
Total
For the Year Ended December 31,
2015
2014
2013
$
$
(59) $
(59) $
69
69
$
$
17
17
The Company distributed cash of $109,000, $119,000 and $12,000 to the participants of the Deferred Plans during the years
ended December 31, 2015, 2014 and 2013, respectively. The following table presents the aggregate amount of income deferred
by participants of the Deferred Plans through December 31, 2015 and 2014 that had not been distributed and the Company’s
associated liability for such deferrals at December 31, 2015 and 2014:
(In Thousands)
Non-employee directors
Total
December 31, 2015
December 31, 2014
Undistributed
Income
Deferred (1)
$
$
601
601
Liability Under
Deferred Plans
614
$
614
$
$
$
Undistributed
Income
Deferred (1)
324
324
Liability Under
Deferred Plans
446
$
446
$
(1) Represents the cumulative amounts that were deferred by participants through December 31, 2015 and 2014, which had not been distributed
through such respective date.
(d) 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,
2015, 2014 and 2013, the Company recognized expenses for matching contributions of $309,000, $237,000 and $250,000,
respectively.
16. Fair Value of Financial Instruments
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.
132
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Securities Obtained and Pledged as Collateral/Obligation to Return Securities Obtained as Collateral
The fair value of U.S. Treasury securities obtained as collateral and the associated obligation to return securities obtained as
collateral are based upon prices obtained from a third-party pricing service, which are indicative of market activity. Securities
obtained as collateral are classified as Level 1 in the fair value hierarchy.
MBS and CRT securities
The Company determines the fair value of its Agency MBS, based upon prices obtained from third-party pricing services,
which are indicative of market activity and repurchase agreement counterparties.
For Agency MBS, the valuation methodology of the Company’s third-party pricing services incorporate commonly used
market pricing methods, trading activity observed in the marketplace and other data inputs. The methodology also considers the
underlying characteristics of each security, which are also observable inputs, including: collateral vintage, coupon, maturity date,
loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. Management analyzes pricing data
received from third-party pricing services and compares it to other indications of fair value including data received from repurchase
agreement counterparties and its own observations of trading activity observed in the marketplace.
In determining the fair value of its Non-Agency MBS and CRT 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. 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. For tranches of Legacy Non-Agency MBS that are cross-
collateralized, performance of all collateral groups involved in the tranche are considered. 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 MBS and CRT securities are valued using various market data points as described above, which management
considers directly or indirectly observable parameters. Accordingly, the Company’s MBS and CRT securities are classified as Level
2 in the fair value hierarchy.
Residential Whole Loans, at Fair Value
The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations
obtained from a third-party who specializes in providing valuations of residential mortgage loans trading activity observed in the
market place. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy.
Swaps
The Company determines the fair value of non-centrally cleared Swaps considering valuations obtained from a third-party
pricing service. For Swaps that are cleared by a central clearing house valuations provided by the clearing house are used. All
valuations obtained are tested with internally developed models that apply readily observable market parameters. The Company
considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each
derivative agreement, from the perspective of both the Company and its counterparties. All of the Company’s Swaps are subject
either to bilateral collateral arrangements, or for cleared Swaps, to the clearing house’s margin requirements. Consequently, no
credit valuation adjustment was made in determining the fair value of such instruments. Swaps are classified as Level 2 in the fair
value hierarchy.
133
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of December 31,
2015 and 2014, on the consolidated balance sheets by the valuation hierarchy, as previously described:
Fair Value at December 31, 2015
(In Thousands)
Assets:
Agency MBS
Non-Agency MBS, including MBS transferred to
consolidated VIEs
CRT securities
Securities obtained and pledged as collateral
Residential whole loans, at fair value
Swaps
Total assets carried at fair value
Liabilities:
Swaps
Obligation to return securities obtained as collateral
Total liabilities carried at fair value
Level 1
Level 2
Level 3
Total
$
— $
4,752,244
$
— $
4,752,244
—
—
6,420,817
183,582
507,443
—
—
—
—
1,127
507,443
$ 11,357,770
— $
70,526
507,443
—
507,443
$
70,526
$
$
$
—
—
—
623,276
—
6,420,817
183,582
507,443
623,276
1,127
623,276
$ 12,488,489
— $
—
— $
70,526
507,443
577,969
$
$
$
Fair Value at December 31, 2014
(In Thousands)
Assets:
Agency MBS
Level 1
Level 2
Level 3
Total
$
— $
5,904,207
$
— $
5,904,207
Non-Agency MBS, including MBS transferred to
consolidated VIEs
CRT securities
—
—
4,755,432
102,983
Securities obtained and pledged as collateral
512,105
Residential whole loans, at fair value
Linked Transactions
Swaps
Total assets carried at fair value
Liabilities:
Swaps
Obligation to return securities obtained as collateral
Total liabilities carried at fair value
—
—
—
143,472
—
—
4,755,432
102,983
512,105
143,472
398,336
3,136
143,472
$ 11,819,671
— $
—
— $
62,198
512,105
574,303
—
—
—
—
—
398,336
3,136
$
$
$
512,105
$ 11,164,094
— $
62,198
512,105
—
512,105
$
62,198
$
$
$
134
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents additional information for the years ended December 31, 2015 and 2014 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.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(In Thousands)
Balance at beginning of period
Purchases and capitalized advances
Changes in fair value recorded in Net gain on residential whole loans held at fair value
Collection of principal, net of liquidation gains/losses
Transfer to REO
Balance at end of period
$
$
Residential Whole Loans, at Fair Value
For the Year Ended December 31,
2015
2014
143,472
$
534,574
6,539
(34,767)
(26,542)
623,276
—
147,471
(388)
(1,038)
(2,573)
$
143,472
The Company did not transfer any assets or liabilities from one level to another during the years ended December 31, 2015
and 2014.
The following table presents 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, 2015 and 2014:
Fair Value Methodology for Level 3 Financial Instruments
December 31, 2015
(Dollars in Thousands)
Fair Value (1)
Valuation Technique
Unobservable Input
Range
Weighted Average
Residential whole
loans, at fair value
$
113,166
Discounted cash
flow
Discount rate
Prepayment rate
Default rate
Loss severity
$
392,557 Liquidation model Discount rate
Annual change in home
prices
Liquidation timeline (in
years)
Current value of
underlying properties
6.00-8.70%
0.25-11.10%
0.00-9.10%
10.00-79.40%
6.75-10.02%
(5.51)-6.08%
0.67-4.42
7.00%
6.59%
3.10%
17.03%
6.85%
1.28%
1.56
$14-$3,500
$626
Total
$
505,723
(1) Excludes approximately $117.6 million of loans for which management considers the purchase price continues to reflect the
fair value of such loans at December 31, 2015.
135
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
December 31, 2014
(Dollars in Thousands)
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted Average
Residential whole
loans, at fair value
$
36,101
Discounted cash
flow
Discount rate
Prepayment rate
Default rate
Loss severity
$
107,371 Liquidation model Discount rate
Annual change in home
prices
Liquidation timeline (in
years)
Current value of
underlying properties
6.00-8.00%
0.25-8.20%
0.00-20.30%
10.00-61.69%
7.00-7.00%
(4.73)-3.56%
0.83-4.42
7.52%
4.79%
7.01%
18.88%
7.00%
0.26%
1.94
$29-$4,000
$397
Total
$
143,472
The following table presents the difference between the fair value and the aggregate unpaid principal balance of the Company’s
residential whole loans for which the fair value option was elected at December 31, 2015 and 2014:
(In Thousands)
Residential whole loans, at fair value
Total loans
Loans 90 days or more past due
December 31, 2015
December 31, 2014
Fair Value
Unpaid
Principal
Balance
Difference
Fair Value
Unpaid
Principal
Balance
Difference
$ 623,276
$ 786,330
$ 493,640
$ 637,459
$ (163,054) $ 143,472
$ (143,819) $ 128,591
$ 182,613
$ (39,141)
$ 165,358
$ (36,767)
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.
136
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at
December 31, 2015 and 2014:
(In Thousands)
Financial Assets:
Agency MBS
Non-Agency MBS, including MBS transferred to
consolidated VIEs
CRT securities
Securities obtained and pledged as collateral
Residential whole loans, at carrying value
Residential whole loans, at fair value
Cash and cash equivalents
Restricted cash
Linked Transactions
Swaps
Financial Liabilities:
Repurchase agreements
FHLB advances
Securitized debt
Obligation to return securities obtained as collateral
Senior Notes
Swaps
December 31, 2015
December 31, 2014
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$
4,752,244
$
4,752,244
$
5,904,207
$
5,904,207
6,420,817
6,420,817
4,755,432
4,755,432
183,582
507,443
271,845
623,276
165,007
71,538
—
1,127
7,888,902
1,500,000
22,057
507,443
100,000
70,526
183,582
507,443
289,696
623,276
165,007
71,538
—
1,127
7,828,115
1,500,000
22,057
507,443
99,391
70,526
102,983
512,105
207,923
143,472
182,437
67,255
398,336
3,136
102,983
512,105
217,386
143,472
182,437
67,255
398,336
3,136
8,267,388
8,266,699
—
110,574
512,105
100,000
62,198
—
110,791
512,105
103,031
62,198
In addition to the methodologies used to determine the fair value of the Company’s financial assets and liabilities reported at
fair value on a recurring basis, as previously described, the following methods and assumptions were used by the Company in
arriving at the fair value of the Company’s other financial instruments presented in the above table:
Residential Whole Loans at Carrying Value: The Company determines the fair value of its residential whole loans held at
carrying value after considering portfolio valuations obtained from a third-party who specializes in providing valuations of residential
mortgage loans and trading activity observed in the market place. The Company’s residential whole loans held at carrying value
are classified as Level 3 in the fair value hierarchy.
Cash and Cash Equivalents and Restricted Cash: Cash and cash equivalents and restricted cash are comprised of cash held
in overnight money market investments and demand deposit accounts. At December 31, 2015 and 2014, the Company’s money
market funds were invested in securities issued by the U.S. Government, or its agencies, instrumentalities, and sponsored entities,
and repurchase agreements involving the securities described above. Given the overnight term and assessed credit risk, the
Company’s investments in money market funds are determined to have a fair value equal to their carrying value.
Linked Transactions: As previously discussed, new accounting guidance that was effective for the Company on January 1,
2015 prospectively eliminated the use of Linked Transaction accounting, and as a result, the Company did not have any Linked
Transactions at December 31, 2015. The Non-Agency MBS that prior to January 1, 2015 were accounted for as a component of
Linked Transactions were valued using similar techniques to those used for the Company’s other Non-Agency MBS. The value of
the underlying MBS was then netted against the carrying amount (which approximates fair value) of the repurchase agreement
borrowing at the valuation date. The fair value of Linked Transactions also included accrued interest receivable on the MBS and
accrued interest payable on the underlying repurchase agreement borrowings. The Company’s Linked Transactions were classified
as Level 2 in the fair value hierarchy at December 31, 2014.
137
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Repurchase Agreements: The fair value of repurchase agreements reflects the present value of the contractual cash flows
discounted at market interest rates at the valuation date for repurchase agreements with a term equivalent to the remaining term to
interest rate repricing, which may be at maturity. Such interest rates are estimated based on LIBOR rates observed in the market.
The Company’s repurchase agreements are classified as Level 2 in the fair value hierarchy.
FHLB Advances: FHLB advances reflect collateralized borrowings at variable market interest rates that reset on a monthly
basis. Accordingly, the carrying amount of FHLB advances are considered to approximate fair value. The Company’s FHLB
advances are classified as Level 2 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.
Senior Notes: The fair value of the Senior Notes is determined using the end of day market price quoted on the NYSE at the
reporting date. The Company’s Senior Notes are classified as Level 1 in the fair value hierarchy.
17. 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 resecuritizing previously securitized
financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing
the underlying securitized 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 an 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.
Resecuritization transactions
The Company has entered into several resecuritization transactions that resulted in the Company consolidating as VIEs the
SPEs that were created to facilitate the transactions and to which the underlying assets in connection with the resecuritizations
were transferred. See Note 2(r) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of
financial assets in connection with resecuritization transactions.
138
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
The following table summarizes the key details of the resecuritization transactions in which the Company participated as of
December 31, 2015:
(Dollars in Thousands)
Name of Trust (Consolidated as a VIE)
Principal value of Non-Agency MBS sold
Face amount of Bonds issued by the VIE and purchased by 3rd party investors (1)
Outstanding amount of Senior Bonds at December 31, 2015 (1)
Pass-through rate for Senior Bonds issued
Face amount of Senior Support Certificates received by the Company (2)
Cash received
Notional amount acquired of non-rated, interest only senior certificates (1)
Unamortized deferred costs
February 2012
WFMLT Series
2012-RR1
October 2010
DMSI
2010-RS2
$
$
$
$
$
$
$
433,347
186,691
22,057
2.85%
217,103
186,691
186,691
190
$
$
$
$
$
$
$
985,228
373,577
—
—%
455,063
375,621
—
—
(1) Amount disclosed reflects principal balances of the DMSI 2010-RS A1, A2 and A3 bonds. The DMSI 2010-RS2 A2 and A3 bonds were sold
to third party investors during 2013. The principal balance of the DMSI 2010-RS2 A1 Bond and associated interest only Senior certificate
was paid off during 2013. The principal balances of the DMSI 2010-RS2 A2 and A3 Bonds were paid off in January 2015 and September
2015, respectively.
(2) Provides credit support for the sequential Senior Non-Agency MBS sold to third-party investors in resecuritization transactions (“Senior
Bonds”).
The Company engaged in these transactions primarily for the purpose of obtaining non-recourse financing on a portion of
its Non-Agency MBS portfolio, as well as refinancing a portion of its Non-Agency MBS portfolio on improved terms.
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 MBS transferred to the VIEs.
The activities that can be performed by an entity created to facilitate a resecuritization transaction are generally specified in
the entity’s formation documents. Those documents do not permit the entity, any beneficial interest holder in the entity, or any
other party associated with the entity to cause the entity to sell or replace the assets held by the entity, or limit such ability to when
specific events of default occur.
The Company concluded that the entities created to facilitate these resecuritization transactions are VIEs. The Company
then completed an analysis of whether each VIE created to facilitate the resecuritization transaction 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 these resecuritization transactions.
As of December 31, 2015 and 2014, the aggregate fair value of the Non-Agency MBS that were resecuritized as described
above was $598.3 million and $1.397 billion, respectively. These assets are included in the Company’s consolidated balance sheets
and disclosed as “Non-Agency MBS transferred to consolidated VIEs, at fair value”. As of December 31, 2015 and 2014, the
aggregate outstanding balance of Senior Bonds issued by consolidated VIEs was $22.1 million and $110.6 million, respectively.
These Senior Bonds are included in the Company’s consolidated balance sheets and disclosed as “Securitized debt.” The holders
of the Senior Bonds 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 in relation to
the Non-Agency MBS 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.
139
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
Subsequent to the repayment of the outstanding balance of Senior Bonds issued by the CSMC Series 2011-1R Trust (the
“Trust”), this resecuritization financing structure was terminated during 2015. The termination was effected through an exchange
of the remaining beneficial interests previously issued by the Trust and held by the Company for the underlying securities that had
previously been transferred to and held by the Trust at the date of termination. Following the exchange, the beneficial interests
were cancelled by the trustee and the Trust was terminated. The exchange and termination of this financing structure did not result
in any gain or loss to the Company. As a result of the termination, the underlying securities originally transferred as part of this
resecuritization are reported as Non-Agency MBS in the Company’s consolidated balance sheets at December 31, 2015 and interest
income from the underlying securities from the date of termination through December 31, 2015 is reported as Interest income
from Non-Agency MBS in the Company’s consolidated statements of operations.
Prior to the completion of the Company’s first resecuritization transaction in October 2010, the Company had not transferred
assets to VIEs or QSPEs and other than acquiring MBS issued by such entities, had no other involvement with VIEs or QSPEs.
Residential Whole Loans
Included on the Company’s consolidated balance sheets as of December 31, 2015 and 2014 is a total of $895.1 million and
$351.4 million of residential whole loans, of which approximately $271.8 million and $207.9 million are reported at carrying value
and $623.3 million and $143.5 million are reported at fair value, respectively. The inclusion of these assets arises from the
Company’s 100% equity interest in certain trusts established to acquire the loans. Based on its evaluation of its 100% interest in
these trusts and other factors, the Company has determined that the trusts are required to be consolidated for financial reporting
purposes. During 2015 and 2014, approximately $16.0 million and $4.1 million of interest income was recognized from residential
whole loans reported at carrying value, respectively, which is included in Interest Income on the Company’s consolidated statements
of operations. In addition, the Company recognized net gains of approximately $17.7 million and $116,000, on residential whole
loans held at fair value during 2015 and 2014, respectively, which amounts are included in Other Income, net on the Company’s
consolidated statements of operations. (See Note 4)
18. Subsequent Events
Federal Housing Finance Agency (“FHFA”) Final Rule on FHLB Membership
In January, 2016, the FHFA released its final rule amending its regulation on FHLB membership, which, amongst other
things, provided termination rules for current captive insurance members. As a result of such regulation, MFA Insurance will not
be permitted new advances or renewal of existing advances and will be required to terminate its FHLB membership within one
year of the rule’s effective date of February 19, 2016.
Unwind of resecuritization structure
On February 9, 2016, the Company entered into an agreement to amend the DMSI 2010-RS2 Trust Agreement in order to
facilitate the unwind of a resecuritization transaction in which the Company originally participated in 2010. Concurrent with the
amendment to the Trust Agreement, the Company entered into a transaction to exchange the remaining beneficial interests issued
by the DMSI 2010-RS2 Trust (the “Trust”) that were held by the Company for the underlying securities that had previously been
transferred to and held by the Trust. The Company expects, following completion of any final Trust distributions, the remaining
beneficial interests will be cancelled and the Trust terminated.
For financial reporting purposes, the exchange transaction will not result in any gain or loss to the Company as this
resecuritization was accounted for as a financing transaction. However, for purposes of determining REIT taxable income, this
resecuritization transaction was originally accounted for as a sale of the underlying securities to the Trust and acquisition by the
Company of beneficial interests issued by the Trust. Because the fair value of the underlying securities received exceeded the
Company’s tax basis in the remaining beneficial interests at the exchange date, the unwind of this resecuritization structure will
result in the Company recognizing taxable income currently estimated to be approximately $70.9 million or $0.19 per common
share.
In addition, the unwind of this resecuritization transaction will result in an increase in the Company’s available sources of
liquidity as immediately following the exchange transaction, estimated financing from unpledged Non-Agency MBS is increased
by approximately $90 million.
140
MFA FINANCIAL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
19. Summary of Quarterly Results of Operations (Unaudited)
(In Thousands, Except per Share Amounts)
Interest income
Interest expense
Net interest income
Net impairment losses recognized in earnings
Gain on sales of MBS
Net gain on residential whole loans held at fair value
Other income/(loss)
Operating and other expense
Net income
Preferred stock dividends
Net income available to common stock and participating
securities
Earnings per Common Share - Basic and Diluted
(In Thousands, Except per Share Amounts)
Interest income
Interest expense
Net interest income
Gain on sales of MBS
Unrealized net gains and net interest income from Linked
Transactions
Net gain on residential whole loans held at fair value
Other (loss)/income
Operating and other expense
Net income
Preferred stock dividends
$
$
$
$
March 31
June 30
September 30
December 31
2015 Quarter Ended
$
129,943
(43,940)
86,003
(407)
6,435
2,034
311
(12,202)
82,174
(3,750)
$
123,995
(42,849)
81,146
(298)
7,617
3,224
(678)
(12,940)
78,071
(3,750)
$
119,706
(43,703)
76,003
—
11,196
5,565
(259)
(12,995)
79,510
(3,750)
118,499
(46,456)
72,043
—
9,652
6,899
(831)
(14,292)
73,471
(3,750)
78,424
0.21
$
$
74,321
0.20
$
$
75,760
0.20
$
$
69,721
0.19
March 31
June 30
September 30
December 31
2014 Quarter Ended
$
121,174
(40,921)
80,253
3,571
$
119,294
(40,569)
78,725
7,852
$
112,157
(39,358)
72,799
13,880
3,251
—
(416)
(10,471)
76,188
(3,750)
3,776
—
56
(11,683)
78,726
(3,750)
2,559
—
54
(10,410)
78,882
(3,750)
111,192
(38,960)
72,232
12,194
7,506
116
386
(12,726)
79,708
(3,750)
Net income available to common stock and participating
securities
Earnings per Common Share - Basic and Diluted
$
$
72,438
0.20
$
$
74,976
0.20
$
$
75,132
0.20
$
$
75,958
0.20
141
Schedule IV - Mortgage Loans on Real Estate
December 31, 2015
Asset Type
(Dollars in Thousands)
Number
Interest
Rate
Maturity
Date Range
Balance
Sheet
Reported
Amount
Principal
Amount of
Loans Subject
to Delinquent
Principal or
Interest
Residential whole loans at carrying value
Residential whole loans at fair value
1,993
3,143
0.00%-14.00%
5/20/2015-11/1/2064
$
271,845
$
1.00%-14.00%
2/1/2004-12/1/2055
623,276
$
895,121
$
116,370
679,353
795,723
The following table summarizes the changes in the carrying amounts of residential whole loans during the year ended
December 31, 2015.
Reconciliation of Balance Sheet Reported Amounts of Mortgage Loans on Real Estate
For the Year Ended December 31, 2015
Residential whole
loans at carrying value
Residential whole loans
at fair value
$
207,923
$
143,472
82,338
15,511
(17,029)
(14,053)
N/A
(1,028)
(1,817)
271,845
$
534,574
N/A
(34,767)
—
6,539
N/A
(26,542)
623,276
(In Thousands)
Beginning Balance
Additions during period:
Purchases and capitalized advances
Accretion of purchase discount
Deductions during period:
Collection of principal
Collection of interest
Changes in fair value recorded in Gain on loans recorded at fair
value
Provision for loan loss
Transfer to REO
Ending Balance
$
142
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Management, under the direction of its Chief Executive Officer and Chief Financial Officer, is responsible for maintaining
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act that are designed to ensure
that information required to be disclosed in reports filed or submitted under the 1934 Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated
to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.
In connection with the preparation of this Annual Report on Form 10-K, management reviewed and evaluated the Company’s
disclosure controls and procedures. The evaluation was performed under the direction of the Company’s Chief Executive Officer
and Chief Financial Officer to determine the effectiveness, as of December 31, 2015, of the design and operation of the Company’s
disclosure controls and procedures. Based on that review and evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective
as of December 31, 2015. Notwithstanding the foregoing, a control system, no matter how well designed, implemented and
operated can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose
material information otherwise required to be set forth in the Company’s periodic reports.
(b) Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting
for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
1934 Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers
and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
GAAP, and includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because
of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2015. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated Framework 2013 (the “2013 COSO Framework”). As
a result of this assessment, management concluded that, as of December 31, 2015, our internal control over financial reporting
was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP.
The Company’s independent registered public accounting firm, KPMG LLP, have issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting. This report appears on page 145 of this Annual Report
on Form 10-K.
143
(c) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter
of 2015 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
144
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
MFA Financial, Inc.:
We have audited MFA Financial, Inc.’s (the Company’s) internal control over financial reporting as of December 31, 2015, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of MFA Financial, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated
statements of operations, comprehensive (loss)/income, changes in stockholders’ equity and cash flows for each of the years in
the three-year period ended December 31, 2015, and our report dated February 18, 2016 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
New York, New York
February 18, 2016
145
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
We expect to file with the SEC, in April 2016 (and, in any event, not later than 120 days after the close of our last fiscal
year), a definitive proxy statement (the “Proxy Statement”), pursuant to SEC Regulation 14A in connection with our Annual
Meeting of Stockholders to be held on or about May 25, 2016. The information to be included in the Proxy Statement regarding
the Company’s directors, executive officers, and certain other matters required by Item 401 of Regulation S-K is incorporated
herein by reference.
The information to be included in the Proxy Statement regarding compliance with Section 16(a) of the 1934 Act required
by Item 405 of Regulation S-K is incorporated herein by reference.
The information to be included in the Proxy Statement regarding the Company’s Code of Business Conduct and Ethics
required by Item 406 of Regulation S-K is incorporated herein by reference.
The information to be included in the Proxy Statement regarding certain matters pertaining to the Company’s corporate
governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference.
We have adopted a set of Corporate Governance Guidelines, which together with the charters of the three standing committees
of our Board of Directors (Audit, Compensation, and Nominating and Corporate Governance), and our Code of Business Conduct
and Ethics (which constitutes the Company’s code of ethics), provide the framework for the governance of the Company. A
complete copy of our Corporate Governance Guidelines, the charters of each of the Board committees and the Code of Business
Conduct and Ethics (which applies not only to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer,
but also to all other employees of the Company) may be found by clicking on the “Company Information” link found at the top
of our homepage at www.mfafinancial.com and then clicking on the “Corporate Governance” link. (Information from such site
is not incorporated by reference into this Annual Report on Form 10-K.) You may also obtain free copies of these materials by
writing to our General Counsel at the Company’s headquarters.
Item 11. Executive Compensation.
The information to be included in the Proxy Statement regarding executive compensation and other compensation related
matters required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The tables to be included in the Proxy Statement, which will contain information relating to the Company’s equity
compensation and beneficial ownership of the Company required by Items 201(d) and 403 of Regulation S-K, are incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information to be included in the Proxy Statement regarding transactions with related persons, promoters and certain
control persons and director independence required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information to be included in the Proxy Statement concerning principal accounting fees and services and the Audit
Committee’s pre-approval policies and procedures required by Item 14 is incorporated herein by reference.
146
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of the report
PART IV
The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements. The consolidated financial statements of the Company, together with the independent
registered public accounting firm’s report thereon, are set forth on pages 81 through 141 of this Annual Report on Form 10-K and
are incorporated herein by reference.
(b) Exhibits required by Item 601 of Regulation S-K
The information required by this Item is set forth on the Exhibit Index that follows the signature page of this report.
(c) Financial Statement Schedules required by Regulation S-X
Schedule IV - Mortgage Loans on Real Estate as of December 31, 2015.
All other financial statement schedules have been omitted because the required information is not applicable or deemed
not material, or the required information is presented in the consolidated financial statements and/or in the notes to consolidated
financial statements filed in response to Item 8 of this Annual Report on Form 10-K.
147
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
MFA Financial, Inc.
Date: February 18, 2016
By
/s/
Stephen D. Yarad
Stephen D. Yarad
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
148
Date: February 18, 2016
Date: February 18, 2016
Date: February 18, 2016
Date: February 18, 2016
Date: February 18, 2016
Date: February 18, 2016
Date: February 18, 2016
By
By
By
By
By
/s/ William S. Gorin
William S. Gorin
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Stephen D. Yarad
Stephen D. Yarad
Chief Financial Officer
(Principal Financial Officer)
/s/ Kathleen A. Hanrahan
Kathleen A. Hanrahan
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ George H. Krauss
George H. Krauss
Chairman and Director
/s/ Stephen R. Blank
Stephen R. Blank
Director
By
/s/
James A. Brodsky
James A. Brodsky
Director
By
/s/ Richard J. Byrne
Richard J. Byrne
Director
Date: February 18, 2016
By
/s/ Laurie Goodman
Date: February 18, 2016
Date: February 18, 2016
Laurie Goodman
Director
By
By
/s/ Alan L. Gosule
Alan L. Gosule
Director
/s/ Robin Josephs
Robin Josephs
Director
149
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K. The exhibit numbers followed by an asterisk
(*) indicate exhibits electronically filed herewith. All other exhibit numbers indicate exhibits previously filed and are hereby
incorporated herein by reference. Exhibits numbered 10.1 through 10.22 are management contracts or compensatory plans or
arrangements.
3.1
Amended and Restated Articles of Incorporation of the Company, dated April 8, 1998 (incorporated herein by
reference to Exhibit 3.1 to the Company’s Form 8-K, dated April 24, 1998 (Commission File No. 1-13991)).
3.2
Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company, dated August 5,
2002 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K, dated August 13, 2002 (Commission File
No. 1-13991)).
3.3
Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company, dated August 13,
2002 (incorporated herein by reference to Exhibit 3.3 to the Company’s Form 10-Q for the quarter ended September 30, 2002
(Commission File No. 1-13991)).
3.4
Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company, dated
December 29, 2008 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K, dated December 29, 2008
(Commission File No. 1-13991)).
3.5
Articles of Amendment (Articles Supplementary) to the Amended and Restated Articles of Incorporation of the
Company, dated January 1, 2010 (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K, dated January 5,
2010 (Commission File No. 1-13991)).
3.6
Articles Supplementary of the Company, dated March 8, 2011 (incorporated herein by reference to Exhibit 3.1
to the Company’s Form 8-K, dated March 11, 2011 (Commission File No. 1-13991)).
3.7
Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company, dated May 24,
2011 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, dated May 26, 2011 (Commission File No. 1-13991)).
3.8
Articles Supplementary of the Company, dated April 22, 2004, designating the Company’s 8.50% Series A
Cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit 3.4 to the Company’s Form 8-A, dated
April 23, 2004 (Commission File No. 1-13991)).
3.9
Articles Supplementary of the Company, dated April 12, 2013, designating the Company’s 7.50% Series B
Cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K, dated
April 15, 2013 (Commission File No. 1-13991)).
3.10
Amended and Restated Bylaws of the Company, effective January 1, 2014 (incorporated herein by reference to
Exhibit 3.1 to the Company’s Form 8-K, dated December 18, 2013 (Commission File No. 1-13991)).
4.1
Specimen of Common Stock Certificate of the Company (incorporated herein by reference to Exhibit 4.1 to the
Company’s Registration Statement on Form S-4, dated February 12, 1998 (Commission File No. 333-46179)).
4.2
Specimen of certificate representing the 7.50% Series B Cumulative Redeemable Preferred Stock (incorporated
herein by reference to Exhibit 4.1 to the Company’s Form 8-K, dated April 15, 2013 (Commission File No. 1-13991)).
4.3
Indenture, dated as of April 11, 2012, between the Company and Wilmington Trust, National Association, as
Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Form 8-K, dated April 11, 2012 (Commission File
No. 1-13991)).
4.4
First Supplemental Indenture, dated as of April 11, 2012, between the Company and Wilmington Trust, National
Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s Form 8-K, dated April 11, 2012
(Commission File No. 1-13991)).
4.5
Form of 8.00% Senior Notes due 2042 (incorporated herein by reference to Exhibit 4.3 to the Company’s Form 8-
K, dated April 11, 2012 (Commission File No. 1-13991)).
150
10.1
Employment Agreement, entered into as of January 21, 2014, by and between the Company and William S.
Gorin (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K, dated January 24, 2014 (Commission File
No. 1-13991)).
10.2
Employment Agreement, entered into as of January 21, 2014, by and between the Company and Craig L. Knutson
(incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K, dated January 24, 2014 (Commission File
No. 1-13991)).
10.3
Employment Agreement, entered into as of March 1, 2010, by and between the Company and Gudmundur
Kristjansson (incorporated herein by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2014 (Commission File No. 1-13991)).
10.4
Amendment No. 1, dated February 9, 2015, to Employment Agreement, entered into as of March 1, 2010, by
and between the Company and Gudmundur Kristjansson (incorporated herein by reference to Exhibit 10.4 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2014 (Commission File No. 1-13991)).
10.5
Employment Agreement, entered into as of March 1, 2010, by and between the Company and Sunil Yadav
(incorporated herein by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December
31, 2014 (Commission File No. 1-13991)).
10.6
Amendment No. 1, dated February 9, 2015, to Employment Agreement, entered into as of March 1, 2010, by
and between the Company and Sunil Yadav (incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2014 (Commission File No. 1-13991)).
10.7
2010 Equity Compensation Plan, dated May 10, 2010 (incorporated herein by reference to Exhibit 10.1 to the
Company’s Form 8-K, dated May 10, 2010 (Commission File No. 1-13991)).
10.8 MFA Financial, Inc. Equity Compensation Plan (which is an amendment and restatement of the Company’s
2010 Equity Compensation Plan) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-
K dated May 22, 2015 (Commission File No. 1-13991)).
10.9
Senior Officers Deferred Bonus Plan, dated December 10, 2008 (incorporated herein by reference to Exhibit 10.2
to the Company’s Form 8-K, dated December 12, 2008 (Commission File No. 1-13991)).
10.10* Fourth Amended and Restated 2003 Non-Employee Directors Deferred Compensation Plan, as amended and
restated through December 15, 2014.
10.11
Form of Incentive Stock Option Award Agreement relating to the Company’s Amended and Restated 2010 Equity
Compensation Plan (incorporated herein by reference to Exhibit 10.9 to the Company’s Form 10-Q for the quarter ended
September 30, 2004 (Commission File No. 1-13991)).
10.12
Form of Non-Qualified Stock Option Award Agreement relating to the Company’s Amended and Restated 2010
Equity Compensation Plan (incorporated herein by reference to Exhibit 10.10 to the Company’s Form 10-Q for the quarter ended
September 30, 2004 (Commission File No. 1-13991)).
10.13
Form of Restricted Stock Award Agreement relating to the Company’s Amended and Restated 2010 Equity
Compensation Plan (incorporated herein by reference to Exhibit 10.11 to the Company’s Form 10-Q for the quarter ended
September 30, 2004 (Commission File No. 1-13991)).
10.14
Form of Phantom Share Award Agreement (Time-Based Vesting) relating to the Company’s Amended and
Restated 2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K, dated
July 7, 2011 (Commission File No. 1-13991)).
10.15
Form of Phantom Share Award Agreement (Performance-Based Vesting) relating to the Company’s Amended
and Restated 2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K, dated
July 7, 2011 (Commission File No. 1-13991)).
151
10.16 Form of Phantom Share Award Agreement (Time-Based Vesting) (Gorin and Knutson) relating to the Company’s
Amended and Restated 2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s
Form 8-K, dated January 24, 2014 (Commission File No. 1-13991)).
10.17 Form of Phantom Share Award Agreement (Performance-Based Vesting) (Gorin and Knutson) relating to the
Company’s Amended and Restated 2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.4 to the
Company’s Form 8-K, dated January 24, 2014 (Commission File No. 1-13991)).
10.18 Form of Phantom Share Award Agreement (Vested Award) relating to the Company’s Amended and Restated
2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K, dated January 24,
2014 (Commission File No. 1-13991)).
10.19 Form of Phantom Share Award Agreement (Time-Based Vesting) relating to each of the Company’s Equity
Compensation Plan and the Company’s Amended and Restated 2010 Equity Compensation Plan (incorporated herein by reference
to Exhibit 10.7 to the Company’s Form 8-K, dated January 24, 2014 (Commission File No. 1-13991)).
10.20 Form of Phantom Share Award Agreement (Performance-Based Vesting) relating to each of the Company’s
Equity Compensation Plan and the Company’s Amended and Restated 2010 Equity Compensation Plan (incorporated herein by
reference to Exhibit 10.8 to the Company’s Form 8-K, dated January 24, 2014 (Commission File No. 1-13991)).
10.21
Form of Dividend Equivalent Rights Agreement relating to the Company’s Amended and Restated 2010 Equity
Compensation Plan (incorporated herein by reference to Exhibit 10.6 to the Company’s Form 8-K, dated July 7, 2011 (Commission
File No. 1-13991)).
10.22
Summary Description of Compensation Payable to Non-Employee Directors (incorporated herein by reference
to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2014 (Commission File No. 1-13991)).
12.1* Computation of Ratio of Debt-to-Equity.
21*
Subsidiaries of the Company.
23.1* Consent of KPMG LLP.
31.1* Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
152
**These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
153
DI R EC TOR S A N D OF F IC E R S
DI R E C TOR S
George H. Krauss
Chairman of the Board
Managing Director
The Burlington Capital Group LLC
William S. Gorin
Chief Executive Officer
MFA Financial, Inc.
Stephen R. Blank
Independent Director
James A. Brodsky
Member
Weiner Brodsky Kider PC
Richard J. Byrne
President
Benefit Street Partners LLC
SE N IOR M A N AG E M E N T T E A M
William S. Gorin
Chief Executive Officer
Craig L. Knutson
President and Chief Operating Officer
Ronald A. Freydberg
Executive Vice President
Stephen D. Yarad
Chief Financial Officer
Elwin Ford
Senior Vice President and
Chief Technology Officer
Kathleen A. Hanrahan
Senior Vice President and
Chief Accounting Officer
Gudmundur Kristjansson
Senior Vice President
S TOCK HOL DE R I N FOR M AT ION
Executive Offices
MFA Financial, Inc.
350 Park Avenue, 20th Floor
New York, NY 10022
(212) 207-6400
Registrar and Transfer Agent
Computershare
Regular Mail:
P.O. Box 30170
College Station, TX 77842-3170
For overnight correspondence:
211 Quality Circle, Suite 210
College Station, TX 77845
Stock Exchange Listing
New York Stock Exchange
(Symbol: MFA)
Independent Registered Public
Accounting Firm
KPMG LLP
345 Park Avenue
New York, NY 10154
Annual Meeting
The 2016 Annual Meeting of Stockholders
will be held on Wednesday, May 25, 2016,
at 9:00 a.m. Eastern Time, at:
The Lotte New York Palace Hotel
455 Madison Avenue
New York, NY 10022
Toll Free: (866) 249-2610
Foreign Shareowners:
(201) 680-6578
TDD for Hearing Impaired:
(800) 231-5469
Web Addresses:
General: www.computershare.com/investor
Online inquiries: https://www-us.computershare.com/investor/contact
Design by Curran & Connors, Inc. / www.curran-connors.com
Laurie Goodman
Director
Housing Finance Policy Center
Urban Institute
Alan L. Gosule
Partner
Clifford Chance US LLP
Robin Josephs
Independent Director
Terence B. Meyers
Senior Vice President and
Director of Tax
Harold E. Schwartz
Senior Vice President,
General Counsel and Secretary
Bryan Wulfsohn
Senior Vice President
Sunil Yadav
Senior Vice President
Corporate Governance
Copies of MFA Financial, Inc.’s governance doc-
uments, including its Corporate Governance
Guidelines, as well as the charters of the stand-
ing committees of the Board of Directors
and its Code of Business Conduct and Ethics,
are available on the company’s website at
http://www.mfafinancial.com. Written copies
of these materials are available without charge
upon written request to the company’s Secretary
at the company’s offices.
Information Available to Stockholders
Copies of the company’s 2015 Annual Report
on Form 10-K, as filed with the Securities and
Exchange Commission, as well as its proxy
statement, press releases and other documents,
are available on the company’s website at
http://www.mfafinancial.com. Written copies
of these materials are available without charge
upon written request to the company’s Secretary
at the company’s offices.
F I N A N C I A L , I N C.
350 Park Avenue, New York, NY 10022
Telephone: 212.207.6400
Fax: 212.207.6420
www.mfafinancial.com
F I N A N C I A L , I N C.