MFA FINANCIAL, INC. - Quarter Report: 2013 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

OR

 

o     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)

 

 

 

(212) 207-6400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically 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 x No o

 

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.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

361,278,928 shares of the registrant’s common stock, $0.01 par value, were outstanding as of April 24, 2013.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

		Page
PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	1
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2013 and March 31, 2012	2
	Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2013 and March 31, 2012	3
	Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2013	4
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2013 and March 31, 2012	5
	Notes to the Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	69
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 6.	Exhibits	70
Signatures		71

 

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MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

		March 31,			December 31,
(In Thousands, Except Per Share Amounts)		2013			2012
		(Unaudited)
Assets:
Mortgage-backed securities (“MBS”):
Agency MBS, at fair value ($6,739,499 and $6,747,299 pledged as collateral, respectively)		$	7,153,905		$	7,225,460
Non-Agency MBS, at fair value ($1,851,879 and $1,602,953 pledged as collateral, respectively)		2,795,645			2,762,006
Non-Agency MBS transferred to consolidated variable interest entities (“VIEs”) (1)		2,592,632			2,620,159
Securities obtained and pledged as collateral, at fair value		408,118			408,833
Cash and cash equivalents		601,570			401,293
Restricted cash		5,017			5,016
MBS linked transactions, net (“Linked Transactions”), at fair value		12,572			12,704
Interest receivable		42,106			44,033
Derivative hedging instruments, at fair value		324			203
Goodwill		7,189			7,189
Prepaid and other assets		33,674			30,654
Total Assets		$	13,652,752		$	13,517,550
Liabilities:
Repurchase agreements		$	8,902,827		$	8,752,472
Securitized debt (2)		542,014			646,816
Obligation to return securities obtained as collateral, at fair value		508,187			508,827
8% Senior Notes due 2042 (“Senior Notes”)		100,000			100,000
Accrued interest payable		12,867			16,104
Derivative hedging instruments, at fair value		50,839			63,034
Dividends and dividend equivalents rights (“DERs”) payable		259,607			72,222
Payable for unsettled purchases		—			33,479
Excise tax and interest payable		5,000			7,500
Accrued expenses and other liabilities		5,863			6,090
Total Liabilities		$	10,387,204		$	10,206,544
Commitments and contingencies (Note 10)
Stockholders’ Equity:
Preferred stock, $.01 par value; series A 8.50% cumulative redeemable 5,000 shares authorized; 3,840 shares issued and outstanding ($96,000 aggregate liquidation preference)		$	38		$	38
Common stock, $.01 par value; 895,000 shares authorized; 358,419 and 357,546 issued and outstanding, respectively		3,584			3,575
Additional paid-in capital, in excess of par		2,813,878			2,805,724
Accumulated deficit		(444,324		)	(260,308		)
Accumulated other comprehensive income		892,372			761,977
Total Stockholders’ Equity		$	3,265,548		$	3,311,006
Total Liabilities and Stockholders’ Equity		$	13,652,752		$	13,517,550

 

(1)  Non-Agency MBS transferred to consolidated VIEs represent assets of the 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 in consolidation.  The third-party beneficial interest holders in the VIEs have no recourse to the general credit of the Company.  (See Notes 9 and 15 for further discussion.)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended
		March 31,
(In Thousands, Except Per Share Amounts)		2013			2012
Interest Income:
Agency MBS		$	42,787		$	53,300
Non-Agency MBS		41,047			25,794
Non-Agency MBS transferred to consolidated VIEs		38,868			44,410
Cash and cash equivalent investments		36			19
Interest Income		$	122,738		$	123,523
Interest Expense:
Repurchase agreements		$	34,675		$	36,070
Securitized debt		3,476			4,057
Senior Notes		2,007			—
Total Interest Expense		$	40,158		$	40,127
Net Interest Income		$	82,580		$	83,396
Other-Than-Temporary Impairments:
Total other-than-temporary impairment losses		$	—		$	(879	)
Portion of loss reclassed from other comprehensive income		—			(41		)
Net Impairment Losses Recognized in Earnings		$	—		$	(920	)
Other Income, net:
Unrealized net gains and net interest income from Linked Transactions		$	1,536		$	7,699
Gain on sales of MBS and U.S. Treasury securities, net		1,633			2,953
Other, net		55			—
Other Income, net		$	3,224		$	10,652
Operating and Other Expense:
Compensation and benefits		$	5,273		$	5,612
Other general and administrative expense		3,180			2,803
Operating and Other Expense		$	8,453		$	8,415
Net Income		$	77,351		$	84,713
Less: Preferred Stock Dividends		2,040			2,040
Net Income Available to Common Stock and Participating Securities		$	75,311		$	82,673
Earnings per Common Share - Basic and Diluted		$	0.21		$	0.23
Dividends Declared per Share of Common Stock		$	0.72	(1)	$	0.24

 

(1)  Includes a special dividend of $0.50 per share.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended
		March 31,
(In Thousands)		2013			2012
Net income		$	77,351		$	84,713
Other Comprehensive Income:
Unrealized loss on Agency MBS, net		(27,291		)	(3,158		)
Unrealized gain on Non-Agency MBS, net		146,730			262,602
Reclassification adjustment for MBS sales included in net income		(1,360		)	(2,901		)
Reclassification adjustment for other-than-temporary impairments included in net income		—			920
Unrealized gain on derivative hedging instruments, net		12,316			12,091
Other Comprehensive Income		130,395			269,554
Comprehensive income before preferred stock dividends		$	207,746		$	354,267
Dividends declared on preferred stock		(2,040		)	(2,040		)
Comprehensive Income Available to Common Stock and Participating Securities		$	205,706		$	352,227

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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MFA FINANCIAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

		Three Months Ended
		March 31, 2013
(In Thousands, Except Per Share Amounts)		Dollars			Shares
Preferred Stock, Series A 8.50% Cumulative Redeemable - Liquidation Preference $25.00 per Share:
Balance at March 31, 2013 and December 31, 2012		$	38		3,840
Common Stock, Par Value $.01:
Balance at December 31, 2012		3,575			357,546
Issuance of common stock (1)		9			883
Repurchase of shares of common stock (1)		—			(10	)
Balance at March 31, 2013		3,584			358,419
Additional Paid-in Capital, in excess of Par:
Balance at December 31, 2012		2,805,724
Issuance of common stock, net of expenses (1)		7,359
Equity-based compensation expense		885
Repurchase of shares of common stock (1)		(90		)
Balance at March 31, 2013		2,813,878
Accumulated Deficit:
Balance at December 31, 2012		(260,308		)
Net income		77,351
Dividends declared on common stock		(258,404		)
Dividends declared on preferred stock		(2,040		)
Dividends attributable to DERs		(923		)
Balance at March 31, 2013		(444,324		)
Accumulated Other Comprehensive Income:
Balance at December 31, 2012		761,977
Change in unrealized gains on MBS, net		118,079
Change in unrealized losses on derivative hedging instruments, net		12,316
Balance at March 31, 2013		892,372
Total Stockholders’ Equity at March 31, 2013		$	3,265,548

 

(1)  For the three months ended March 31, 2013, includes approximately $90,000 (9,607 shares) surrendered for tax purposes related to equity-based compensation awards.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended
		March 31,
(In Thousands)		2013			2012
Cash Flows From Operating Activities:
Net income		$	77,351		$	84,713
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of MBS and U.S. Treasury securities		(1,633		)	(2,953		)
Other-than-temporary impairment charges		—			920
Accretion of purchase discounts on MBS		(12,058		)	(9,418		)
Amortization of purchase premiums on MBS		14,793			10,782
Depreciation and amortization on fixed assets and other assets		1,097			427
Equity-based compensation expense		885			1,101
Unrealized gains and other on Linked Transactions		(1,136		)	(6,245		)
Decrease in interest receivable		1,891			244
(Increase)/decrease in prepaid and other assets		(4,088		)	1,844
Decrease in accrued expenses and other liabilities, and excise tax and interest		(2,699		)	(3,886		)
(Decrease)/increase in accrued interest payable on financial instruments		(3,237		)	2,404
Net cash provided by operating activities		$	71,166		$	79,933
Cash Flows From Investing Activities:
Principal payments on MBS		$	711,901		$	558,516
Proceeds from sale of MBS and U.S. Treasury securities		206,203			71,103
Purchases of MBS		(569,006		)	(737,950		)
Additions to leasehold improvements, furniture and fixtures		(54		)	(130		)
Net cash provided by/(used in) investing activities		$	349,044		$	(108,461	)
Cash Flows From Financing Activities:
Principal payments on repurchase agreements		$	(18,024,857	)	$	(14,744,454	)
Proceeds from borrowings under repurchase agreements		18,175,212			14,840,227
Proceeds from issuance of securitized debt		—			186,691
Principal payments on securitized debt		(104,802		)	(94,789		)
Payments made on obligation to return securities obtained as collateral		(200,050		)	—
Payments made for resecuritization related costs		—			(1,763		)
Cash disbursements on financial instruments underlying Linked Transactions		(57,977		)	(299,173		)
Cash received from financial instruments underlying Linked Transactions		59,245			218,269
Payments made for margin calls on repurchase agreements and interest rate swaps (“Swaps”)		—			(1,590		)
Proceeds from reverse margin calls on repurchase agreements and Swaps		—			4,090
Proceeds from issuances of common stock		7,278			451
Dividends paid on preferred stock		(2,040		)	(2,040		)
Dividends paid on common stock and DERs		(71,942		)	(96,792		)
Net cash (used in)/provided by financing activities		$	(219,933	)	$	9,127
Net increase/(decrease) in cash and cash equivalents		$	200,277		$	(19,401	)
Cash and cash equivalents at beginning of period		$	401,293		$	394,022
Cash and cash equivalents at end of period		$	601,570		$	374,621
Non-cash Investing and Financing Activities:
MBS recorded upon de-linking of Linked Transactions		$	—		$	122,826
Net increase in securities obtained as collateral/obligation to return securities obtained as collateral		$	200,099		$	197,339
Dividends and DERs declared and unpaid		$	259,607		$	86,778

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

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 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.  (See Note 11)

 

2.      Summary of Significant Accounting Policies

 

(a)  Basis of Presentation and Consolidation

 

The interim unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted according to these SEC rules and regulations.  Management believes that the disclosures included in these interim financial statements are adequate to make the information presented not misleading.  The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2013 and results of operations for all periods presented have been made.  The results of operations for the three months ended March 31, 2013 should not be construed as indicative of the results to be expected for the full year.

 

The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with 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 Agency and Non-Agency MBS (Note 3), valuation of Agency and Non-Agency MBS (Notes 3 and 14), derivative hedging instruments (Notes 5 and 14) and income recognition on certain Non-Agency MBS purchased at a discount (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 (Note 2 (m)).  Actual results could differ from those estimates.

 

The consolidated financial statements of the Company include the accounts of all subsidiaries; significant intercompany accounts and transactions have been eliminated.

 

(b)  Agency and Non-Agency MBS (including Non-Agency MBS transferred to a consolidated VIE)

 

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 any 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”), as described in Note 3.

 

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” 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.

 

Upon the sale of an investment security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method.

 

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 rated AA and higher 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.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

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.  The effective interest rate is based on 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 yield/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 MBS Fair Value

 

In determining the fair value of the Company’s MBS, 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 14)

 

Impairments/OTTI

 

When the fair value of an investment 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 sheet.  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 are susceptible to significant change.  (See Note 3)

 

Non-Agency MBS that are purchased at significant discounts to par/and are otherwise assessed to be of less than high credit quality 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, 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

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

flows is the current yield used for income recognition purposes.  Impairment assessment for Non-Agency MBS that were purchased at prices close to par and are 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 effective interest rate.

 

Balance Sheet Presentation

 

The Company’s MBS pledged as collateral against repurchase agreements and Swaps are included in MBS on the consolidated balance sheet with the fair value of the MBS pledged disclosed parenthetically.  Purchases and sales of securities are recorded on the trade date.  However, if on the purchase settlement date, a repurchase agreement is used to finance the purchase of an MBS with the same counterparty and such transactions are determined to be linked, then the MBS and linked repurchase borrowing will be reported on the same settlement date as Linked Transactions.  (See Notes 2(n) and 5)

 

(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 sheet 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(i) for Repurchase Agreements and Reverse Repurchase Agreements)

 

(d)  Cash and Cash Equivalents

 

Cash and cash equivalents include cash on deposit with financial institutions and investments in money market funds, all of which have original maturities of three months or less.  Cash and cash equivalents may also include cash pledged as collateral to the Company by its 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 March 31, 2013 or December 31, 2012.  At March 31, 2013 and December 31, 2012, all of the Company’s cash investments were comprised of 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.  (See Notes 7 and 14)

 

(e)  Restricted Cash

 

Restricted cash represents the Company’s cash held by its counterparties as collateral against the Company’s Swaps and/or repurchase agreements.  Restricted cash, which earns interest, 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 returned to the Company when the collateral requirements are exceeded or at the maturity of the Swap or repurchase agreement.  The Company had aggregate restricted cash held as collateral against its Swaps of $5.0 million at March 31, 2013 and December 31, 2012, respectively.  (See Notes 5, 6, 7 and 14)

 

(f)  Goodwill

 

At March 31, 2013 and December 31, 2012, 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 March 31, 2013, the Company had not recognized any impairment against its goodwill.

 

(g)  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.

 

(h)  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 sheet in prepaid and

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

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 to third parties and over the stated legal maturity of the Senior Notes.

 

(i)  Repurchase Agreements and Reverse Repurchase Agreements

 

The Company finances the acquisition of a significant portion of its MBS 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, with the exception of certain repurchase agreements accounted for as components of Linked Transactions.  (See Note 2(n) below.)  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 or such collateral.  (See Notes 2(n), 5, 6, 7 and 14)

 

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 sheet.  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 sheet and disclosed as “Obligation to return securities obtained as collateral.”  (See Note 2(c))

 

(j)  Equity-Based Compensation

 

Compensation expense for equity based awards 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 has 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 vest after either two or four years of service and provided that certain criteria are met, which are based on a formula that includes 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.  During 2011 and 2012, the Company granted certain RSUs that vest annually over a one

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

or three-year period, provided that certain criteria are met, which are based on a formula that includes changes in the Company’s closing stock price over the annual vesting period and dividends declared on the Company’s common stock during those periods.  Such criteria constitute a “market condition” which impacts the amount of compensation expense recognized for these awards.  Specifically, the uncertainty regarding whether the market condition will be achieved is 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, determines the amount of compensation expense that is recognized.  Compensation expense is not reversed should the market condition not be achieved, while differences in actual forfeiture experience relative to estimated forfeitures will result in adjustments to the timing and amount of compensation expense recognized.

 

The Company has awarded DERs that may be attached to or awarded separately from other equity based awards.  Compensation expense for separately awarded DERs is based on the grant date fair value of such awards and is recognized over the vesting period.  Payments pursuant to these DERs are charged to stockholders’ equity.  Payments pursuant to DERs 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 DERs 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 DERs to the Company.  (See Notes 2(k) and 13)

 

(k)  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 DERs 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 12)

 

(l)  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 MBS and its derivative hedging instruments, currently comprised of Swaps, (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of AOCI for MBS and is reduced by dividends declared on the Company’s preferred stock.

 

(m)  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 a REIT, the Company must, among other things, distribute at least 90% of its REIT taxable income to stockholders in the timeframe permitted by the Code.  The Company is not subject to tax to the extent that it distributes 100% of its REIT taxable income 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.  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 shall be included within Operating and other expense on the Company’s consolidated statements of operations.

 

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 March 31, 2013, December 31, 2012, or March 31, 2012. The Company’s tax returns for tax years 2009 through 2011 are open to examination.  The Company expects to file its 2012 tax return prior to September 15, 2013.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

(n)         Derivative Financial Instruments

 

Hedging Activity

 

As part of the Company’s interest rate risk management, it periodically hedges a portion of its interest rate risk using derivative financial instruments, currently comprised of Swaps.  Hedge accounting is used to account for these instruments.

 

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.  The Company assesses, both at inception of a hedge and on a quarterly basis thereafter, whether or not the hedge is “highly effective.”

 

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 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 5, 7 and 14)

 

Swaps

 

Swaps are carried on the Company’s balance sheet 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 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 through earnings as a result of hedge ineffectiveness.

 

Non-Hedging Activity/Linked Transactions

 

It is 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 MBS with the same counterparty are considered part of the same arrangement, or a “linked transaction,” unless certain criteria are met.  The two components of a linked transaction (MBS purchase and repurchase financing) are not reported separately but are evaluated on a combined basis and reported as a forward (derivative) contract and are presented as “Linked Transactions” on the Company’s consolidated balance sheet.  Changes in the fair value of the assets and liabilities underlying Linked Transactions and associated interest income and expense are reported as “unrealized net gains/(losses) and net interest income from Linked Transactions” on the Company’s consolidated statements of operations and are not included in OCI.  However, if certain criteria are met, the initial transfer (i.e., the purchase of a security by the Company) and repurchase financing will not be treated as a Linked Transaction and will be evaluated and reported separately, as an MBS purchase and repurchase financing.  When or if a transaction is no longer considered to be linked, the MBS and repurchase financing will be reported on a gross basis.  In this case, the fair value of the MBS at the time the transactions are no longer considered linked will become the cost basis of the MBS, and the income recognition yield for such MBS will be calculated prospectively using this new cost basis.  (See Notes 5 and 14)

 

(o)  Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities

 

The Company’s presentation of fair value for its financial assets and liabilities is determined within a framework that stipulates that the fair value of a financial asset or liability is an exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.  The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.  This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value.  In addition, the framework for measuring fair value establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.  (See Note 14)

 

Although permitted under GAAP to measure many financial instruments and certain other items at fair value, the Company has not elected the fair value option for any of its assets or liabilities.  If the fair value option is elected, unrealized gains and losses on such items for which fair value is elected would be recognized in earnings at each subsequent reporting date.  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.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

(p)  Variable Interest Entities

 

An entity is referred to as a VIE if it meets at least one of the following criteria:  (1) the entity has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support of other parties; or (2) 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 (3) 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.  In determining the accounting treatment to be applied to these resecuritization transactions, the Company evaluated whether the entities used to facilitate these transactions were VIEs and, if so, whether they should be consolidated.  Based on its evaluation, the Company concluded that the VIEs 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 15)

 

(q)  New and Proposed Accounting Standards and Interpretations

 

Accounting Standards Adopted in 2013

 

Balance Sheet

 

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, (“ASU 2011-11”) regarding disclosures concerning the offsetting of assets and liabilities.  Under ASU 2011-11, an entity is required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.  This disclosure is intended to support further the convergence of U.S. GAAP and International Financial Reporting Standards requirements.  ASU 2011-11 was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.

 

In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”).  The main objective of this ASU is to limit the scope of the new balance sheet and offsetting disclosure requirements of ASU 2011-11 to certain derivatives (including bifurcated embedded derivatives,) repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions.  The amendments of ASU 2013-01 should be applied for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the required disclosures retrospectively for all comparative periods presented.

 

The Company’s adoption of ASU 2011-11 and ASU 2013-01 beginning on January 1, 2013 did not have a material impact on the Company’s consolidated financial statements.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

Comprehensive Income

 

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”).  The amendments of this ASU do not change the current requirements for reporting net income or OCI in financial statements.  However, the amendments require an entity to provide information about the amounts reclassified out of AOCI by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.  ASU 2013-02 was effective prospectively for the Company for reporting periods beginning after December 15, 2012.  The Company’s adoption of ASU 2013-02 beginning on January 1, 2013 did not have a material impact on the Company’s consolidated financial statements.

 

Proposed Accounting Standards

 

The FASB has recently issued or discussed a number of proposed standards on such topics as investment companies and investment property entities, repurchase agreements and similar transactions, measurement of credit impairment, financial instrument measurement and classification, revenue recognition, leases, hedging and disclosures about liquidity risk and interest rate risk.  Some of the proposed changes are potentially significant and could have a material impact on the Company’s reporting.  The Company has not yet fully evaluated the potential impact of these proposals but will make such an evaluation as the standards are finalized.

 

3.      MBS

 

The Company’s MBS are comprised of Agency MBS and 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.  MBS do not have a single maturity date, and further, the mortgage loans underlying ARM-MBS do not all reset at the same time.

 

The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements and Swaps.  Non-Agency MBS that are accounted for as components of Linked Transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.  (See Notes 5 and 7)

 

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.  Non-Agency MBS may be rated by one or more Rating Agencies or may be unrated (i.e., not assigned a rating by any Rating Agency).  The rating indicates the opinion of the Rating Agency as to the creditworthiness of the investment, indicating the obligor’s ability to meet its full financial commitment on the obligation.  A rating of “D” is assigned when a security has defaulted on any of its contractual terms.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

 

The following tables present certain information about the Company’s MBS at March 31, 2013 and December 31, 2012:

 

March 31, 2013

 

											Discount
											Designated
		Principal/						Accretable			as Credit									Gross			Gross			Net
		Current			Purchase			Purchase			Reserve			Amortized						Unrealized			Unrealized			Unrealized
(In Thousands)		Face			Premiums			Discounts			and OTTI (1)			Cost (2)			Fair Value			Gains			Losses			Gain/(Loss)
Agency MBS:
Fannie Mae		$	5,631,101		$	188,186		$	(51	)	$	—		$	5,819,236		$	5,974,186		$	157,790		$	(2,840	)	$	154,950
Freddie Mac		1,100,024			42,866			—			—			1,146,602			1,164,812			21,227			(3,017		)	18,210
Ginnie Mae		14,170			245			—			—			14,415			14,907			492			—			492
Total Agency MBS		6,745,295			231,297			(51		)	—			6,980,253			7,153,905			179,509			(5,857		)	173,652
Non-Agency MBS (3)
Rated AAA		22,658			135			(205		)	—			22,588			23,338			750			—			750
Rated A		1,008			21			—			—			1,029			988			—			(41		)	(41		)
Rated BBB		42,818			580			(1,346		)	—			42,052			43,440			2,079			(691		)	1,388
Rated BB		118,881			53			(9,028		)	(874		)	109,032			116,887			8,088			(233		)	7,855
Rated B		241,825			—			(31,771		)	(10,377		)	199,677			228,401			28,724			—			28,724
Rated CCC		1,205,624			13			(115,858		)	(188,857		)	900,922			1,063,379			163,933			(1,476		)	162,457
Rated CC		554,897			—			(36,537		)	(132,586		)	385,774			459,565			73,791			—			73,791
Rated C		733,338			—			(47,516		)	(126,533		)	559,289			639,835			80,568			(22		)	80,546
Unrated and D-rated (4)		3,392,056			—			(139,652		)	(853,725		)	2,398,679			2,812,444			413,925			(160		)	413,765
Total Non-Agency MBS		6,313,105			802			(381,913		)	(1,312,952		)	4,619,042			5,388,277			771,858			(2,623		)	769,235
Total MBS		$	13,058,400		$	232,099		$	(381,964	)	$	(1,312,952	)	$	11,599,295		$	12,542,182		$	951,367		$	(8,480	)	$	942,887

 

December 31, 2012

 

											Discount
											Designated
		Principal/						Accretable			as Credit									Gross			Gross			Net
		Current			Purchase			Purchase			Reserve			Amortized						Unrealized			Unrealized			Unrealized
(In Thousands)		Face			Premiums			Discounts			and OTTI (1)			Cost (2)			Fair Value			Gains			Losses			Gain/(Loss)
Agency MBS:
Fannie Mae		$	5,977,388		$	196,686		$	(58	)	$	—		$	6,174,016		$	6,351,621		$	178,970		$	(1,365	)	$	177,605
Freddie Mac		800,854			30,447			—			—			835,724			858,560			22,925			(89		)	22,836
Ginnie Mae		14,526			251			—			—			14,777			15,279			502			—			502
Total Agency MBS		6,792,768			227,384			(58		)	—			7,024,517			7,225,460			202,397			(1,454		)	200,943
Non-Agency MBS (3)
Rated AAA		25,209			158			(219		)	—			25,148			25,905			757			—			757
Rated A		1,147			24			—			—			1,171			1,086			—			(85		)	(85		)
Rated BBB		49,301			637			(1,741		)	(378		)	47,819			48,563			1,806			(1,062		)	744
Rated BB		118,031			39			(8,892		)	(853		)	108,325			112,905			4,937			(357		)	4,580
Rated B		247,532			—			(31,133		)	(12,462		)	203,937			225,281			21,452			(108		)	21,344
Rated CCC		1,235,638			14			(107,618		)	(201,126		)	926,908			1,055,757			131,826			(2,977		)	128,849
Rated CC		579,632			—			(41,191		)	(132,061		)	406,380			468,017			61,739			(102		)	61,637
Rated C		952,984			—			(55,294		)	(166,529		)	731,161			812,523			81,850			(488		)	81,362
Unrated and D-rated (4)		3,300,086			—			(125,538		)	(867,097		)	2,307,451			2,632,128			325,796			(1,119		)	324,677
Total Non-Agency MBS		6,509,560			872			(371,626		)	(1,380,506		)	4,758,300			5,382,165			630,163			(6,298		)	623,865
Total MBS		$	13,302,328		$	228,256		$	(371,684	)	$	(1,380,506	)	$	11,782,817		$	12,607,625		$	832,560		$	(7,752	)	$	824,808

 

(1)  Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income.  Amounts disclosed at March 31, 2013 reflect Credit Reserve of $1.266 billion and OTTI of $46.9 million.  Amounts disclosed at December 31, 2012 reflect Credit Reserve of $1.332 billion and OTTI of $48.7 million.

(2)  Includes principal payments receivable of $3.7 million and $4.4 million at March 31, 2013 and December 31, 2012, respectively, which are not included in the Principal/Current Face.

(3)  Non-Agency MBS, including Non-Agency MBS transferred to consolidated VIEs, are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented. 

(4)  Includes 268 Non-Agency MBS that were D-rated and had an aggregate amortized cost and fair value of $2.348 billion and $2.754 billion, respectively, at March 31, 2013 and 246 Non-Agency MBS that were D-rated and had an aggregate amortized cost and fair value of $2.252 billion and $2.573 billion, respectively, at December 31, 2012.

 

14