XNYS:MFA MFA Financial Inc Quarterly Report 10-Q Filing - 6/30/2012

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Table of Contents

 

 

 

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 June 30, 2012

 

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)

 


 

Maryland

 

13-3974868

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

350 Park Avenue, 20th Floor, New York, New York

 

10022

(Address of principal executive offices)

 

(Zip Code)

 

(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.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

357,473,807 shares of the registrant’s common stock, $0.01 par value, were outstanding as of July 27, 2012.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I
FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011

 

1

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2012 and June 30, 2011

 

2

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2012 and June 30, 2011

 

3

 

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2012

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2012 and June 30, 2011

 

5

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

38

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

64

 

 

 

 

Item 4.

Controls and Procedures

 

71

 

 

 

 

PART II
OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

72

 

 

 

 

Item 1A.

Risk Factors

 

72

 

 

 

 

Item 6.

Exhibits

 

73

 

 

 

 

Signatures

 

 

74

 



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

(In Thousands, Except Per Share Amounts)

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets:

 

 

 

 

 

Mortgage-backed securities (“MBS”):

 

 

 

 

 

Agency MBS, at fair value ($6,470,099 and $6,666,963 pledged as collateral, respectively)

 

$

7,014,611

 

$

7,137,531

 

Non-Agency MBS, at fair value ($1,318,240 and $692,534 pledged as collateral, respectively)

 

2,129,359

 

1,492,376

 

Non-Agency MBS transferred to consolidated variable interest entities (“VIEs”) (1)

 

2,546,534

 

2,283,070

 

Securities obtained and pledged as collateral, at fair value

 

512,907

 

306,401

 

Cash and cash equivalents

 

593,376

 

394,022

 

Restricted cash

 

9,009

 

15,502

 

MBS linked transactions, net (“Linked Transactions”), at fair value

 

14,295

 

55,801

 

Interest receivable

 

44,569

 

42,837

 

Derivative hedging instruments, at fair value

 

 

26

 

Goodwill

 

7,189

 

7,189

 

Prepaid and other assets

 

19,774

 

15,879

 

Total Assets

 

$

12,891,623

 

$

11,750,634

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Repurchase agreements

 

$

8,368,407

 

$

7,813,159

 

Securitized debt (2)

 

861,255

 

875,520

 

Obligation to return securities obtained as collateral, at fair value

 

512,907

 

306,401

 

8% Senior Notes due 2042 (“Senior Notes”)

 

100,000

 

 

Accrued interest payable

 

13,402

 

9,112

 

Derivative hedging instruments, at fair value

 

89,823

 

114,220

 

Dividends and dividend equivalents rights (“DERs”) payable

 

83,263

 

97,525

 

Payable for unsettled purchases

 

99,272

 

27,056

 

Accrued expenses and other liabilities

 

7,493

 

9,881

 

Total Liabilities

 

$

10,135,822

 

$

9,252,874

 

 

 

 

 

 

 

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; 356,866 and 356,112 issued and outstanding, respectively

 

3,569

 

3,561

 

Additional paid-in capital, in excess of par

 

2,802,293

 

2,795,925

 

Accumulated deficit

 

(256,283

)

(243,061

)

Accumulated other comprehensive income/(loss)

 

206,184

 

(58,703

)

Total Stockholders’ Equity

 

$

2,755,801

 

$

2,497,760

 

Total Liabilities and Stockholders’ Equity

 

$

12,891,623

 

$

11,750,634

 

 


(1)  Non-Agency MBS transferred to consolidated VIEs included in the consolidated balance sheet at June 30, 2012 and December 31, 2011 represent assets of the consolidated VIEs that can be used only to settle the obligations of each respective VIE.

(2)  Securitized Debt included in the consolidated balance sheet at June 30, 2012 and December 31, 2011, 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 10 and 15 for further discussion.)

 

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

 

1



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands, Except Per Share Amounts)

 

2012

 

2011

 

2012

 

2011

 

Interest Income:

 

 

 

 

 

 

 

 

 

Agency MBS

 

$

49,550

 

$

65,982

 

$

102,850

 

$

126,157

 

Non-Agency MBS

 

32,674

 

28,825

 

58,468

 

51,719

 

Non-Agency MBS transferred to consolidated VIEs

 

43,280

 

37,275

 

87,690

 

64,030

 

Cash and cash equivalent investments

 

27

 

27

 

46

 

81

 

Interest Income

 

125,531

 

132,109

 

249,054

 

241,987

 

 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

36,252

 

34,535

 

72,322

 

67,589

 

Securitized debt

 

4,652

 

2,660

 

8,709

 

4,259

 

Senior Notes

 

1,784

 

 

1,784

 

 

Interest Expense

 

42,688

 

37,195

 

82,815

 

71,848

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

82,843

 

94,914

 

166,239

 

170,139

 

 

 

 

 

 

 

 

 

 

 

Other-Than-Temporary Impairments:

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

 

(637

)

(879

)

(637

)

Portion of loss reclassified from other comprehensive income

 

(280

)

(1,755

)

(321

)

(1,755

)

Net Impairment Losses Recognized in Earnings

 

(280

)

(2,392

)

(1,200

)

(2,392

)

 

 

 

 

 

 

 

 

 

 

Other Income/(Loss), net:

 

 

 

 

 

 

 

 

 

Unrealized net gains/(losses) and net interest income from Linked Transactions

 

568

 

(5,613

)

8,267

 

9,237

 

Gains on sales of MBS

 

 

 

2,953

 

 

Revenue from operations of real estate held-for-sale

 

 

375

 

 

756

 

Other, net

 

1

 

12

 

1

 

12

 

Other Income/(Loss), net

 

569

 

(5,226

)

11,221

 

10,005

 

 

 

 

 

 

 

 

 

 

 

Operating and Other Expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

5,156

 

4,991

 

10,768

 

10,114

 

Other general and administrative expense

 

3,210

 

2,789

 

6,013

 

4,950

 

Real estate held-for-sale operating expense

 

 

230

 

 

537

 

Operating and Other Expense

 

8,366

 

8,010

 

16,781

 

15,601

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

74,766

 

79,286

 

159,479

 

162,151

 

Less: Preferred Stock Dividends

 

2,040

 

2,040

 

4,080

 

4,080

 

Net Income Available to Common Stock and Participating Securities

 

$

72,726

 

$

77,246

 

$

155,399

 

$

158,071

 

 

 

 

 

 

 

 

 

 

 

Earnings per Common Share - Basic and Diluted

 

$

0.20

 

$

0.22

 

$

0.43

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared per share of Common Stock

 

$

0.23

 

$

0.25

 

$

0.47

 

$

0.49

 

 

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

 

2



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

74,766

 

$

79,286

 

$

159,479

 

$

162,151

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

Unrealized (loss)/gain on Agency MBS, net

 

(11,170

)

46,456

 

(14,328

)

37,713

 

Unrealized (loss)/gain on Non-Agency MBS, net

 

(6,057

)

(159,657

)

256,545

 

(141,551

)

Reclassification adjustment for MBS sales included in net income

 

 

 

(2,901

)

 

Reclassification adjustment for other-than-temporary impairments included in net income

 

280

 

2,392

 

1,200

 

2,392

 

Unrealized gain/(loss) on derivative hedging instruments, net

 

12,280

 

(10,933

)

24,371

 

14,738

 

Other Comprehensive Income

 

(4,667

)

(121,742

)

264,887

 

(86,708

)

Comprehensive income/(loss) before preferred stock dividends

 

$

70,099

 

$

(42,456

)

$

424,366

 

$

75,443

 

Dividends declared on preferred stock

 

(2,040

)

(2,040

)

(4,080

)

(4,080

)

Comprehensive Income/(Loss) Available to Common Stock and Participating Securities

 

$

68,059

 

$

(44,496

)

$

420,286

 

$

71,363

 

 

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

 

3



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30, 2012

 

(In Thousands, Except Per Share Amounts)

 

Dollars

 

Shares

 

 

 

 

 

 

 

Preferred Stock, Series A 8.50% Cumulative Redeemable — Liquidation Preference $25.00 per Share:

 

 

 

 

 

Balance at June 30, 2012 and December 31, 2011

 

$

38

 

3,840

 

 

 

 

 

 

 

Common Stock, Par Value $.01:

 

 

 

 

 

Balance at December 31, 2011

 

3,561

 

356,112

 

Issuance of common stock

 

8

 

754

 

Balance at June 30, 2012

 

3,569

 

356,866

 

 

 

 

 

 

 

Additional Paid-in Capital, in excess of Par:

 

 

 

 

 

Balance at December 31, 2011

 

2,795,925

 

 

 

Issuance of common stock, net of expenses

 

3,787

 

 

 

Equity-based compensation expense

 

2,581

 

 

 

Balance at June 30, 2012

 

2,802,293

 

 

 

 

 

 

 

 

 

Accumulated Deficit:

 

 

 

 

 

Balance at December 31, 2011

 

(243,061

)

 

 

Net income

 

159,479

 

 

 

Dividends declared on common stock

 

(167,883

)

 

 

Dividends declared on preferred stock

 

(4,080

)

 

 

Dividends attributable to DERs

 

(738

)

 

 

Balance at June 30, 2012

 

(256,283

)

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income:

 

 

 

 

 

Balance at December 31, 2011

 

(58,703

)

 

 

Change in unrealized gains on MBS, net

 

240,516

 

 

 

Change in unrealized losses on derivative hedging instruments

 

24,371

 

 

 

Balance at June 30, 2012

 

206,184

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity at June 30, 2012

 

$

2,755,801

 

 

 

 

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

 

4



Table of Contents

 

MFA FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In Thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

159,479

 

$

162,151

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on sales of MBS

 

(2,953

)

 

Other-than-temporary impairment charges

 

1,200

 

2,392

 

Accretion of purchase discounts on MBS

 

(19,322

)

(22,367

)

Amortization of purchase premiums on MBS

 

23,302

 

16,036

 

Increase in interest receivable

 

(939

)

(8,433

)

Depreciation and amortization on real estate and other assets

 

1,322

 

901

 

Unrealized (gains)/losses and other on Linked Transactions

 

(6,145

)

1,840

 

Decrease/(increase) in prepaid and other assets

 

251

 

(2,952

)

(Decrease)/increase in accrued expenses and other liabilities

 

(2,332

)

6,421

 

Increase/(decrease) in accrued interest payable

 

4,290

 

(392

)

Equity-based compensation expense

 

2,581

 

1,956

 

Net cash provided by operating activities

 

$

160,734

 

$

157,553

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Principal payments on MBS

 

$

1,222,662

 

$

1,061,032

 

Proceeds from sale of MBS

 

71,103

 

 

Purchases of MBS

 

(1,603,202

)

(3,643,387

)

Additions to leasehold improvements, furniture, fixtures and real estate investment

 

(301

)

(1,027

)

Net cash used in investing activities

 

$

(309,738

)

$

(2,583,382

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Principal payments on repurchase agreements

 

$

(31,191,396

)

$

(27,834,730

)

Proceeds from borrowings under repurchase agreements

 

31,746,644

 

29,666,014

 

Proceeds from issuance of securitized debt

 

186,691

 

963,255

 

Principal payments on securitized debt

 

(200,956

)

(122,148

)

Payments made for resecuritization related costs

 

(1,814

)

(6,981

)

Proceeds from issuance of Senior Notes

 

100,000

 

 

Payments made for Senior Notes related costs

 

(3,415

)

 

Cash disbursements on financial instruments underlying Linked Transactions

 

(439,243

)

(1,595,158

)

Cash received from financial instruments underlying Linked Transactions

 

328,515

 

1,043,911

 

Payments made for margin calls on repurchase agreements and interest rate swap agreements (“Swaps”)

 

(2,390

)

(5,800

)

Proceeds from reverse margin calls on repurchase agreements and Swaps

 

8,890

 

25,414

 

Payment made to purchase interest rate swaption (“Swaption”)

 

 

(915

)

Proceeds from issuances of common stock

 

3,795

 

605,392

 

Dividends paid on preferred stock

 

(4,080

)

(4,080

)

Dividends paid on common stock and DERs

 

(182,883

)

(150,360

)

Net cash provided by financing activities

 

$

348,358

 

$

2,583,814

 

Net increase in cash and cash equivalents

 

$

199,354

 

$

157,985

 

Cash and cash equivalents at beginning of period

 

$

394,022

 

$

345,243

 

Cash and cash equivalents at end of period

 

$

593,376

 

$

503,228

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

MBS recorded upon de-linking of Linked Transactions

 

$

158,379

 

$

715,998

 

Repurchase agreements recorded upon de-linking of Linked Transactions

 

$

 

$

46,698

 

Securities obtained as collateral

 

$

206,506

 

$

 

Dividends and DERs declared and unpaid

 

$

83,263

 

$

90,080

 

 

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

 

5



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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(b))

 

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 (“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, 2011.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at June 30, 2012 and results of operations for all periods presented have been made.  The results of operations for the six months ended June 30, 2012 should not be construed as indicative of the results to be expected for the full year.

 

The 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), and derivative hedging instruments (Notes 4 and 14) and income recognition on certain Non-Agency MBS purchased at a discount (Note 3).  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.  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

(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), a component of stockholders’ equity.

 

Upon the sale of an investment security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income/(loss) 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

JUNE 30, 2012

 

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 on these securities is based on management’s estimate from each security of the projected cash flows, which are estimated 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 OTTI impairments.  (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 its 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 other accumulated comprehensive income/(loss) on the consolidated balance sheet.  Impairments recognized through other comprehensive income/(loss) 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/or 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

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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 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 sheets 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 4)

 

(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 June 30, 2012 or December 31, 2011.  At June 30, 2012 and December 31, 2011, 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 8 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 $9.0 million and $15.5 million at June 30, 2012 and December 31, 2011, respectively.  (See Notes 4, 7, 8 and 14)

 

(f)  Goodwill

 

At June 30, 2012 and December 31, 2011, 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 June 30, 2012, the Company had not recognized any impairment against its goodwill.

 

(g)  Depreciation

 

Real Estate

 

During 2011 the Company had 100% of the ownership interest in Lealand Place, a 191-unit apartment property located in Lawrenceville, Georgia, through Lealand Place, LLC (“Lealand”), an indirect, wholly-owned subsidiary.  This property was acquired through a tax-deferred exchange under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”).  This investment was sold for cash proceeds of $11.4 million, resulting in a gain on sale in the fourth quarter of 2011 of $430,000.  (See Note 6)

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

The property, capital improvements and other assets held in connection with this investment were carried at cost, net of accumulated depreciation and amortization.  Maintenance, repairs and minor improvements were expensed in the period incurred, while real estate assets, except land, and capital improvements were depreciated over their useful life using the straight-line method.  The estimated life was 27.5 years for buildings and five to seven years for furniture and fixtures.

 

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 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 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 on such collateral.  The Company enters into repurchase agreements with multiple counterparties with a maximum loan from any lender of no more than three times the Company’s stockholders’ equity.   (See Notes 2(n), 4, 7, 8 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

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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, the Company granted certain RSUs that vest annually over a 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 accumulated other comprehensive income/(loss) for MBS and is reduced by dividends declared on the Company’s preferred stock.

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

(m)  U.S. Federal Income Taxes

 

The Company has elected to be taxed as a REIT under the provisions of the Code and the corresponding provisions of state law.  The Company expects to operate in a manner that will enable it to continue to be taxed as a REIT.  A REIT is not subject to tax on its earnings to the extent that it distributes at least 90% of its annual REIT taxable income to its stockholders.  As such, no provision for current or deferred income taxes has been made in the accompanying consolidated financial statements.  To the extent that the Company incurs interest and/or penalties in connection with its tax obligations, such amounts shall be classified as income tax expense on the Company’s consolidated statements of operations.

 

(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 4, 8 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 other comprehensive income/(loss) 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.

 

Swaptions

 

As part of its strategy to hedge its exposure to increases in interest rates, the Company in 2011 purchased a Swaption, which gave it the right, but not the obligation, to enter into a Swap at a future date.  This contract expired unexercised in early 2012.  Swaptions are carried as assets on the Company’s balance sheet at fair value.  Changes in the intrinsic value of the Swap underlying the Swaption are recorded in other comprehensive income/(loss), a component of stockholders’ equity, provided that the hedge remains effective, while changes in the time value of the Swaption are recorded as gains/losses through earnings as a component of other income during the option period.  The Company uses the cumulative dollar-offset ratio to assess the hedge effectiveness of its Swaptions.

 

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 other comprehensive income/(loss).  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 4 and 14)

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

(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 is based on a consistent definition of fair value which 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 transparency 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.

 

(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 2012

 

Transfers and Servicing

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-03, Reconsideration of Effective Control for Repurchase Agreements, (“ASU 2011-03”), which changes the assessment of whether repurchase agreement transactions should be accounted for as sales or secured financings.  In a typical repurchase agreement transaction, an entity transfers financial assets to the counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future.  Prior to this update, one of the factors in determining whether sale treatment could be used was whether the transferor maintained effective control of the transferred assets and in order to do so, the transferor must have the ability to repurchase such assets.  This ASU changes the assessment of effective control by focusing on a transferor’s contractual rights and obligations with respect to transferred financial assets, rather than whether the transferor has the practical ability to perform in accordance with those rights or obligations.  ASU 2011-03 was effective for the Company for the first interim or annual period beginning on or after December 15, 2011.  With the exception of Linked Transactions, the Company records repurchase agreements as secured borrowings and not sales,

 

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MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

and accordingly, the adoption of this update on January 1, 2012 did not have a material impact on the Company’s consolidated financial statements.

 

Fair Value Measurements and Disclosures

 

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”) further converging U.S. GAAP and International Financial Reporting Standards (“IFRS”) by providing common fair value measurement and disclosure requirements.  The amendments in this update change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  These include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  ASU 2011-04 was effective for the Company for interim and annual reporting periods beginning after December 15, 2011 and upon adoption on January 1, 2012, did not have a material impact on the Company’s consolidated financial statements.

 

Comprehensive Income

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”) which allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements.   Either presentation requires the presentation on the face of the financial statements any reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented.  There is no change in what must be reported in OCI or when an item of OCI must be reclassified to net income.  ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, (“ASU 2011-12”) which defers certain aspects of ASU 2011-05.  Specifically, ASU 2011-12 defers the effective date for the requirements of ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and OCI for all periods presented.  All other requirements of ASU 2011-05 are not affected by this update.  ASU 2011-12 requires retrospective application and was effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company’s adoption of ASU 2011-05 and ASU 2011-12 beginning on January 1, 2012 did not have a material impact on the Company’s consolidated financial statements.

 

Intangibles — Goodwill and Other

 

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, (“ASU 2011-08”) which simplifies how entities test goodwill for impairment.  Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  If the entity concludes otherwise, then it is required to test goodwill for impairment under the currently prescribed two-step process.  ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company’s adoption of ASU 2011-08 beginning on January 1, 2012, did not have a material impact on its consolidated financial statements.

 

Recent Accounting Standards to be Adopted in Future Periods

 

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 would include 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 IFRS requirements.  ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

13



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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, financial statement presentation, revenue recognition, leases, financial instruments, hedging, measurement of credit impairment 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 4 and 8)

 

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.

 

14



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

The following tables present certain information about the Company’s MBS at June 30, 2012 and December 31, 2011:

 

 

 

June 30, 2012

 

 

 

 

 

 

 

 

 

Discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal/

 

 

 

Accretable

 

as Credit

 

 

 

Carrying

 

Gross

 

Gross

 

Net

 

 

 

Current

 

Purchase

 

Purchase

 

Reserve

 

Amortized

 

Value/

 

Unrealized

 

Unrealized

 

Unrealized

 

(In Thousands)

 

Face

 

Premiums

 

Discounts

 

and OTTI (1)

 

Cost (2)

 

Fair Value

 

Gains

 

Losses

 

Gain/(Loss)

 

Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

5,914,532

 

$

168,658

 

$

(104

)

$

 

$

6,083,086

 

$

6,256,800

 

$

176,532

 

$

(2,818

)

$

173,714

 

Freddie Mac

 

689,648

 

21,658

 

 

 

716,883

 

741,844

 

25,010

 

(49

)

24,961

 

Ginnie Mae

 

15,350

 

265

 

 

 

15,615

 

15,967

 

352

 

 

352

 

Total Agency MBS

 

6,619,530

 

190,581

 

(104

)

 

6,815,584

 

7,014,611

 

201,894

 

(2,867

)

199,027

 

Non-Agency MBS: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rated AAA

 

38,015

 

195

 

(998

)

 

37,212

 

37,150

 

52

 

(114

)

(62

)

Rated AA

 

47

 

1

 

 

 

48

 

34

 

 

(14

)

(14

)

Rated A

 

22,836

 

656

 

 

 

23,492

 

20,895

 

 

(2,597

)

(2,597

)

Rated BBB

 

42,420

 

56

 

(2,874

)

(499

)

39,103

 

37,957

 

422

 

(1,568

)

(1,146

)

Rated BB

 

95,427

 

41

 

(6,358

)

(1,653

)

87,457

 

82,865

 

173

 

(4,765

)

(4,592

)

Rated B

 

319,951

 

16

 

(27,519

)

(20,123

)

272,325

 

269,844

 

8,596

 

(11,077

)

(2,481

)

Rated CCC

 

1,240,369

 

 

(79,972

)

(239,642

)

920,755

 

960,116

 

55,757

 

(16,396

)

39,361

 

Rated CC

 

578,202

 

 

(28,951

)

(108,941

)

440,310

 

444,224

 

17,612

 

(13,698

)

3,914

 

Rated C

 

1,710,909

 

 

(57,740

)

(385,361

)

1,267,808

 

1,292,990

 

54,973

 

(29,791

)

25,182

 

Unrated and D-rated (4)

 

2,235,661

 

 

(60,725

)

(684,533

)

1,490,403

 

1,529,818

 

83,970

 

(44,555

)

39,415

 

Total Non-Agency MBS

 

6,283,837

 

965

 

(265,137

)

(1,440,752

)

4,578,913

 

4,675,893

 

221,555

 

(124,575

)

96,980

 

Total MBS

 

$

12,903,367

 

$

191,546

 

$

(265,241

)

$

(1,440,752

)

$

11,394,497

 

$

11,690,504

 

$

423,449

 

$

(127,442

)

$

296,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal/

 

 

 

Accretable

 

as Credit

 

 

 

Carrying

 

Gross

 

Gross

 

Net

 

 

 

Current

 

Purchase

 

Purchase

 

Reserve

 

Amortized

 

Value/

 

Unrealized

 

Unrealized

 

Unrealized

 

(In Thousands)

 

Face

 

Premiums

 

Discounts

 

and OTTI (1)

 

Cost (2)

 

Fair Value

 

Gains

 

Losses

 

Gain/(Loss)

 

Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

5,981,834

 

$

154,809

 

$

(135

)

$

 

$

6,136,508

 

$

6,329,925

 

$

194,997

 

$

(1,580

)

$

193,417

 

Freddie Mac

 

743,517

 

22,717

 

 

 

768,572

 

791,085

 

22,677

 

(164

)

22,513

 

Ginnie Mae

 

15,920

 

275

 

 

 

16,195

 

16,521

 

326

 

 

326

 

Total Agency MBS

 

6,741,271

 

177,801

 

(135

)

 

6,921,275

 

7,137,531

 

218,000

 

(1,744

)

216,256

 

Non-Agency MBS: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rated AAA

 

12,258

 

245

 

 

 

12,503

 

12,258

 

 

(245

)

(245

)

Rated AA

 

47

 

1

 

 

 

48

 

34

 

 

(14

)

(14

)

Rated A

 

28,950

 

765

 

(624

)

(5

)

29,086

 

24,911

 

341

 

(4,516

)

(4,175

)

Rated BBB

 

46,593

 

42

 

(3,020

)

(582

)

43,033

 

38,352

 

 

(4,681

)

(4,681

)

Rated BB

 

100,513

 

33

 

(10,749

)

(3,223

)

86,574

 

81,789

 

2,232

 

(7,017

)

(4,785

)

Rated B

 

355,930

 

17

 

(30,584

)

(25,004

)

300,359

 

277,438

 

2,729

 

(25,650

)

(22,921

)

Rated CCC

 

1,031,407

 

 

(68,174

)

(203,185

)

760,048

 

741,028

 

27,767

 

(46,787

)

(19,020

)

Rated CC

 

687,664

 

 

(33,478

)

(142,777

)

511,409

 

487,619

 

14,209

 

(37,999

)

(23,790

)

Rated C

 

2,128,919

 

 

(64,963

)

(487,397

)

1,576,559

 

1,503,737

 

44,988

 

(117,810

)

(72,822

)

Unrated and D-rated(4)

 

1,022,072

 

 

(38,887

)

(366,593

)

616,592

 

608,280

 

34,934

 

(43,246

)

(8,312

)

Total Non-Agency MBS

 

5,414,353

 

1,103

 

(250,479

)

(1,228,766

)

3,936,211

 

3,775,446

 

127,200

 

(287,965

)

(160,765

)

Total MBS

 

$

12,155,624

 

$

178,904

 

$

(250,614

)

$

(1,228,766

)

$

10,857,486

 

$

10,912,977

 

$

345,200

 

$

(289,709

)

$

55,491

 

 


(1)  Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income.  Amounts disclosed at June 30, 2012 reflect Credit Reserve of $1.388 billion and OTTI of $52.9 million.  Amounts disclosed at December 31, 2011 reflect Credit Reserve of $1.174 billion and OTTI of $54.5 million.

(2)  Includes principal payments receivable of $5.6 million and $2.3 million at June 30, 2012 and December 31, 2011, 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 154 Non-Agency MBS that were D-rated and had an aggregate amortized cost and fair value of $1.476 billion and $1.514 billion, respectively, at June 30, 2012 and 78 Non-Agency MBS that were D-rated and had an aggregate amortized cost and fair value of $602.0 million and $593.8 million, respectively, at December 31, 2011.

 

15



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

Unrealized Losses on MBS and Impairments

 

The following table presents information about the Company’s MBS that were in an unrealized loss position at June 30, 2012:

 

Unrealized Loss Position For:

 

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

(In Thousands)

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

599,290

 

$

2,064

 

38

 

$

47,942

 

$

754

 

10

 

$

647,232

 

$

2,818

 

Freddie Mac

 

18,391

 

31

 

2

 

2,832

 

18

 

1

 

21,223

 

49

 

Total Agency MBS

 

617,681

 

2,095

 

40

 

50,774

 

772

 

11

 

668,455

 

2,867

 

Non-Agency MBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rated AAA

 

17,587

 

114

 

2

 

 

 

 

17,587

 

114

 

Rated AA

 

 

 

 

34

 

14

 

1

 

34

 

14

 

Rated A

 

 

 

 

20,895

 

2,597

 

1

 

20,895

 

2,597

 

Rated BBB

 

3,936

 

1

 

1

 

23,254

 

1,567

 

7

 

27,190

 

1,568

 

Rated BB

 

9,506

 

345

 

2

 

72,348

 

4,420

 

9

 

81,854

 

4,765

 

Rated B

 

8,863

 

73

 

1

 

174,843

 

11,004

 

14

 

183,706

 

11,077

 

Rated CCC

 

91,881

 

1,366

 

7

 

237,592

 

15,030

 

24

 

329,473

 

16,396

 

Rated CC

 

43,890

 

633

 

3

 

185,561

 

13,065

 

14

 

229,451

 

13,698

 

Rated C

 

184,805

 

2,249

 

13

 

482,007

 

27,542

 

33

 

666,812

 

29,791

 

Unrated and other

 

260,531

 

6,107

 

26

 

576,614

 

38,448

 

43

 

837,145

 

44,555

 

Total Non-Agency MBS

 

620,999

 

10,888

 

55

 

1,773,148

 

113,687

 

146

 

2,394,147

 

124,575

 

Total MBS

 

$

1,238,680

 

$

12,983

 

95

 

$

1,823,922

 

$

114,459

 

157

 

$

3,062,602

 

$

127,442

 

 

At June 30, 2012, the Company did not intend to sell any of its MBS that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these MBS 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 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 have occurred to date.

 

Gross unrealized losses on the Company’s Agency MBS were $2.9 million at June 30, 2012.  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 their maturity, the Company considers 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 June 30, 2012 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 $124.6 million at June 30, 2012.  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 to be credit related, but are rather due to non-credit related factors, including the impact on Hybrid MBS of lower current and projected interest rates, which has negatively affected market values for these securities.  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 MBS, which considers recent bond performance and expected future performance of the underlying collateral.

 

The Company recognized credit-related OTTI losses through earnings of approximately $280,000 and $1.2 million on Non-Agency MBS during the three and six months ended June 30, 2012, respectively.  The Company recognized credit-related OTTI losses of $2.4 million through earnings during the three and six months ended June 30, 2011, all of which were recognized in connection with Non-Agency MBS during the second quarter of 2011.

 

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 its 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

 

16



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

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, loan-to-value ratios, geographic concentrations, as well as Rating Agency reports, general market assessments, and dialogue with market participants.  Significant judgment is used in both the Company’s analysis of the expected cash flows for its Non-Agency MBS and any determination of the credit component of OTTI.

 

The following table presents the composition of OTTI charges recorded by the Company for the three and six months ended June 30, 2012 and 2011:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands)

 

2012

 

2011

 

2012

 

2011

 

Total OTTI losses

 

$

 

$

(637

)

$

(879

)

$

(637

)

OTTI reclassified from other comprehensive income

 

(280

)

(1,755

)

(321

)

(1,755

)

OTTI recognized in earnings

 

(280

)

(2,392

)

(1,200

)

(2,392

)

 

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 other comprehensive income.  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.

 

 

 

Three Months Ended

 

Six Months Ended

 

(In Thousands)

 

June 30, 2012

 

June 30, 2012

 

Credit loss component of OTTI at beginning of period

 

$

35,835

 

$

34,915

 

Additions for credit related OTTI not previously recognized

 

 

458

 

Subsequent additional credit related OTTI recorded

 

280

 

742

 

Credit loss component of OTTI at end of period

 

$

36,115

 

$

36,115

 

 

The significant inputs considered and assumptions made at time of impairment in determining the measurement of the component of OTTI recognized in earnings for the Company’s Non-Agency MBS for the three and six months ended June 30, 2012 and 2011 are summarized as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Credit enhancement (1) (2)

 

 

 

 

 

 

 

 

 

Weighted average (3)

 

4.00%

 

3.80%

 

3.26%

 

3.80%

 

Range (4)

 

0.00-12.10%

 

0.00-13.30%

 

0.00-16.50%

 

0.00-13.30%

 

 

 

 

 

 

 

 

 

 

 

Projected CPR (2) (5)

 

 

 

 

 

 

 

 

 

Weighted average (3)

 

9.80%

 

10.80%

 

9.90%

 

10.80%

 

Range (4)

 

9.10-11.00%

 

1.90-12.00%

 

9.10-13.30%

 

1.90-12.00%

 

 

 

 

 

 

 

 

 

 

 

Projected Loss Severity (2) (6)

 

 

 

 

 

 

 

 

 

Weighted average (3)

 

52.20%

 

48.40%

 

55.50%

 

48.40%

 

Range (4)

 

45.70-55.40%

 

41.90-60.00%

 

45.90-60.00%

 

41.90-60.00%

 

 

 

 

 

 

 

 

 

 

 

60+ days delinquent (2) (7)

 

 

 

 

 

 

 

 

 

Weighted average (3)

 

28.60%

 

20.90%

 

24.40%

 

20.90%

 

Range (4)

 

21.00-32.40%

 

7.30-32.40%

 

18.20-32.40%

 

7.30-32.40%

 

 


(1) Represents a level of protection for these securities, expressed as a percentage of total current underlying loan balance.

(2)  Information provided is based on loans for all groups that provide credit enhancement for MBS with credit enhancement.  If an MBS no longer has credit enhancement, information provided is based on loans for the individual group owned by the Company.

(3) Calculated by weighting the relevant input/assumptions for each individual security by current outstanding face of the security.

(4) Represents the range of inputs/assumptions based on individual securities.

(5) CPR - conditional prepayment rate.

(6)  Projected loss severity represents the projected amount of loss realized on liquidated properties as a percentage of the principal balance.

(7) Includes, for each security, underlying loans 60 or more days delinquent, foreclosed loans and other real estate owned.

 

17



Table of Contents

 

MFA FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

Purchase Discounts on Non-Agency MBS

 

The following tables present 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 three and six months ended June 30, 2012 and 2011:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2012

 

June 30, 2012

 

 

 

Discount

 

 

 

Discount

 

 

 

 

 

Designated as

 

 

 

Designated as

 

 

 

 

 

Credit Reserve

 

Accretable

 

Credit Reserve

 

Accretable

 

(In Thousands)

 

and OTTI (1)

 

Discount (1) (2)

 

and OTTI (1)

 

Discount (1) (2)

 

Balance at beginning of period

 

$

(1,344,718

)

$

(264,182

)

$

(1,228,766

)

$

(250,479

)

Accretion of discount

 

 

9,881

 

 

19,291

 

Realized credit losses

 

35,521

 

 

57,915

 

 

Purchases

 

(139,934

)

(1,004

)

(248,383

)

(8,437

)

Reclass discount for OTTI

 

182

 

(182

)

866

 

(866

)

Net impairment losses recognized in earnings

 

(280

)

 

(1,200

)

 

Unlinking of Linked Transactions

 

(83

)

(1,090

)

(38,662

)

(7,168

)

Transfers/release of credit reserve

 

8,560

 

(8,560

)

17,478

 

(17,478

)

Balance at end of period

 

$

(1,440,752

)

$

(265,137

)

$

(1,440,752

)

$

(265,137

)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2011

 

June 30, 2011

 

 

 

Discount

 

 

 

Discount