The Company administers the MFA Mortgage Investments, Inc. 2003 Non-employee Directors’ Deferred Compensation Plan and the MFA Mortgage Investments, Inc. Senior Officers Deferred Bonus Plan (collectively, the “Deferred Plans”). Pursuant to the Deferred Plans, directors and senior officers of the Company may elect to defer a certain percentage of their compensation. The Deferred Plans are intended to provide non-employee directors and senior officers of the Company with an opportunity to defer up to 100% of certain compensation, as defined in the Deferred Plans, while at the same time aligning their interests with the interests of the Company’s stockholders. Amounts deferred are considered to be converted into “stock units” of the Company, which do not represent stock of the Company, but rather the right to receive a cash payment equal to the fair market value of an equivalent number of shares of the common stock. Deferred accounts increase or decrease in value as would equivalent shares of the Company’s common stock and are settled in cash at the termination of the deferral period, based on the value of the stock units at that time. The Deferred Plans are non-qualified plans under the Employee Retirement Income Security Act and are not funded. Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company. Effective January 1, 2007, the Company’s Board of Directors resolved to suspend indefinitely the directors’ ability to defer additional compensation under the MFA Mortgage Investments, Inc. 2003 Non-employee Directors’ Deferred Compensation Plan.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this quarterly report on Form 10-Q, we refer to MFA Mortgage Investments, Inc. and its subsidiaries as “we,” “us,” or “our,” unless we specifically state otherwise or the context indicates otherwise.
The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this quarterly report on Form 10-Q as well as our annual report on Form 10-K for the year ended December 31, 2006.
FORWARD LOOKING STATEMENTS
When used in this quarterly report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the 1933 Act and Section 21E of the Securities Exchange Act of 1934 (or 1934 Act) and, as such, may involve known and unknown risks, uncertainties and assumptions.
These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, those relating to: changes in interest rates and the market value of our MBS; changes in the prepayment rates on the mortgage loans collateralizing our MBS; our ability to use borrowings to finance our assets; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and risks associated with investing in real estate, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made and we do not undertake, and specifically disclaim, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
GENERAL
Our Business
We are a self-advised REIT primarily engaged in the business of investing, on a leveraged basis, in ARM-MBS. Our MBS portfolio consists primarily of Agency MBS and, tosecurities that are either (i) issued or guaranteed by a lesser extent, high quality ARM-MBSfederally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. government, such as Ginnie Mae, or (ii) rated in one of the two highest rating categories by at least one of the Rating Agencies.nationally recognized rating agency. Our operating policies also permit us to invest in residential mortgage loans, residential MBS, direct or indirect investments in multi-family apartment properties,in: (i) other types of MBS; (ii) residential mortgage loans; (iii) collateralized debt obligations and other related securities; (iv) real estate; (v) securities issued by REITs, limited partnerships REITs orand closed-end fundsfunds; (vi) high-yield corporate securities and other corporate or government fixed income instruments.instruments (corporate or government); and (vii) other types of assets approved by the Board or a committee thereof. Our principal business objective is to generate net income for distribution to our stockholders resulting from the spread between the interest and other income we earn on our investments and the interest expense we pay on the borrowings that we use to finance our investments and our operating costs.
We have elected to be taxed as a REIT for U.S. federal income tax purposes. One of the requirements of maintaining our qualification as a REIT is that we must distribute at least 90% of our annual taxable net income to our stockholders, subject to certain adjustments.
At March 31, 2007, 99.5% of our assets consisted of Agency MBS, AAA-rated MBS, MBS-related receivables and cash. In addition, we also held all of the indirect interests in one multi-family apartment property, containing a total of 191 rental units, located in Georgia and $14.3 million of Non-Agency MBS and other investment securities rated below AAA or non-rated.
The results of our business operations are affected by a number of factors many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, MBS in the market place. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve, borrowing costs (i.e., interest expense) and prepayment speeds on our MBS portfolio, the behavior of which involves various risks and uncertainties. Interest rates and prepayment speeds, as measured by the constant prepayment rate (or CPR), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings (i.e., repurchase agreements) to increase; (ii) the value of our MBS portfolio and, correspondingly, our stockholders’
24
equity to decline; (iii) prepayments on our MBS portfolio to slow, thereby slowing the amortization of MBS purchase premiums; and (iv) coupons on our MBS to reset, although on a delayed basis, to higher interest rates.rates; and (v) the value of our Swaps and, correspondingly, our stockholders’ equity to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) prepayments on our MBS portfolio to increase, thereby accelerating the amortization of MBS purchase premiums; (ii) coupons on our MBS assets to reset, although on a delayed basis, to lower interest rates; (iii) the interest expense associated with our borrowings to decrease; and (iv) the value of our MBS portfolio and, correspondingly, our stockholders’ equity to increase.increase; and (v) the value of our Swaps and, correspondingly, our stockholders’ equity to decrease. In addition, our borrowing costs and credit lines are further affected by our perceived credit worthiness.
Core inflation measuresAlthough we primarily invest in Agency and AAA rated ARM-MBS; pursuant to our operating policies, we may also acquire fixed rate MBS and/or other investment securities of lower credit quality. At September 30, 2007, we had $11.1 million invested in securities that were rated below AAA or unrated. At September 30, 2007, 99.6% of our assets consisted of Agency MBS, AAA-rated MBS, MBS-related receivables and cash.
The adjustable-rate mortgage loans (or ARMs) collateralizing our MBS are comprised of hybrid mortgage loans, which have interest rates that are fixed for a specified period (typically three to ten years) and, thereafter, generally adjust annually to an increment over a specified interest rate index and, to a lesser extent, ARMs, which have interest rates that generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index.
It is our business strategy to hold our investment securities, primarily comprised of MBS, as long-term investments. As such, on at least a quarterly basis, we assess both our ability and intent to continue to remain somewhat elevated relativehold each of our investment securities. As part of this process, we monitor our investment securities for other-than-temporary impairment. A change in our ability and/or intent to continue to hold any of our investment securities could result in our recognizing an impairment charge or realizing losses upon the goalsale of the U.S. Federal Reserve (or the Fed)such securities. At September 30, 2007, we had gross unrealized losses of 1% to 2%. While the Fed continues to expect that core inflation will slow gradually, recent data$26.1 million and gross unrealized gains of $10.0 million on inflation, productivity growth and energy prices have increased the odds that inflation may not moderate as expected. Considering the U.S. economy’s recent moderate growth rate and the weaker housing market, but with inflation risks still the predominant concern, future U.S. Federal Open Market Committee actions are presently uncertain and remain dependent on future incoming data.our investment securities portfolio.
WhileWe rely primarily on borrowings under repurchase agreements to finance the prolongedacquisition of MBS which have longer-term contractual maturities. Even though most of our MBS have interest rates that adjust over time based on short-term changes in corresponding interest rate indices, typically following an initial fixed-rate period, of monetary tightening increased the target federal funds rate from 1.00%interest we pay on our borrowings may increase at a faster pace than the interest we earn on our MBS. In order to 5.25%, the ten-year treasury rate was 4.65% as of March 31, 2007, resulting in an inverted yield curve. Inreduce this interest rate risk exposure, we enter into derivative financial instruments, which were comprised entirely of Swaps at September 30, 2007. Our Swaps, which are an integral component of our financing strategy, are designated as cash-flow hedges against a portion of our current and anticipated LIBOR-based repurchase agreements. Our Swaps are expected to result in interest savings in a rising interest rate environment; and, conversely, in a declining interest rate environment result in us paying the stated fixed swap rate on each of our instruments, which could be higher than the market rate.
During the nine months ended September 30, 2007, we entered into 64 new Swaps with an aggregate notional amount of $2.279 billion, which had a fully indexed adjustableweighted average fixed pay rate mortgage hasof 5.01%, had Swaps with an aggregate notional amount of $584.7 million expire, and terminated six Swaps with an aggregate notional amount of $305.2 million realizing a higher rate thannet loss of $384,000. We paid a 30-yearweighted average fixed rate mortgage. Newly originated adjustableof 5.00% on our Swaps and received a variable rate mortgages are generally 5/1of 5.35% during the nine months ended September 30, 2007. Our Swaps resulted in a net reduction of interest expense of $6.3 million, or 7/1 hybrids that have initial fixed term rates approximately 2514 basis points, lower than 30-year fixed rate mortgagesfor the nine months ended September 30, 2007. During the nine months ended September 30, 2007, we received payments of approximately $327,000 on our Caps and often feature an interest-only period. Whilerecognized $278,000 of Cap premium amortization. During the yieldnine months ended September 30, 2007, we did not purchase any Caps and had Caps with $150.0 million notional amount expire. We had no Caps remaining at September 30, 2007.
Through wholly-owned subsidiaries, we provide third-party investment advisory services which generates fee income. In addition, we will continue to explore alternative business strategies, investments and financing sources and other strategic initiatives, including, but not limited to, the expansion of third-party advisory services, the creation of new investment vehicles to manage, the creation or acquisition of a mortgage origination platform, the acquisition and securitization of ARMs and the creation and/or acquisition of a third-party asset management business to complement our core business strategy of investing, on a leveraged basis, in high quality ARM-MBS. However, no assurance can be provided that any such strategic initiatives will or will not be implemented in the future or, if undertaken, that any such strategic initiatives will favorably impact us.
25
curve is inverted,Impact of Market Conditions
During 2007, concerns about increased subprime mortgage delinquencies led investors to question the underlying risk and value of certain subprime and related collateralized debt obligation (or CDOs) securities across the ratings spectrum. This uncertainty spread to impact investors’ risk assessment of a wide range of MBS and CDOs. In the third quarter of 2007, this significantly impacted issuers of asset-backed commercial paper (or ABCP), as money market funds and other investors curtailed their investment in certain types of ABCP due to continuing concerns about underlying asset values and future liquidity. As a result of certain issuers being unable to place (or roll) these types of ABCP, there was a significant increase in forced sales of MBS and other securities which further negatively impacted the market value of these assets. As a result, continuing concerns about the ABCP market and its participants and commitments to leveraged private equity transactions have caused many investment banks and other lenders to be more cautious in providing financing through repurchase agreements and have impacted the amount, term and margin requirements associated with these types of financings.
Primarily in response to market conditions during the third quarter of 2007, we believeselectively sold $650.4 million of Agency and AAA rated MBS at a loss of $22.0 million, with $11.8 million of such net loss previously reflected in the carrying value of these assets at June 30, 2007. As a result of these sales, we (i) decreased the size of our non-Agency MBS portfolio by approximately one-third (or $279.7 million) and (ii) positively impacted spreads earned on our MBS portfolio and future earnings by disposing of lower-yielding Agency MBS acquired prior to 2006 that aswere negatively impacting net interest income. The Agency MBS sold generated an average yield of 4.3% during the second quarter of 2007 and had coupons that were not scheduled to reset during the 12 months following their sales. In addition, during the quarter ended September 30, 2007, we purchased $937.7 million of Agency MBS and committed to purchase Agency MBS which settled in October 2007 at an aggregate purchase price of $152.0 million. These sales and purchase transactions positively impacted our portfolio yield and increased our concentration in Agency MBS.
The interest rates for most of our adjustable-rate assets are primarily dependent on LIBOR, the one-year constant maturity treasury (or CMT) rate or the 12-month CMT moving average (or MTA). At September 30, 2007, we had (i) approximately $5.481 billion of MBS in our portfolio that were acquired during 2006 and 2007, which had an average yield during the quarter of 5.8%, (ii) approximately $432.7 million of MBS, indexed to MTA, that were acquired prior to 2006, which had an average yield during the quarter of approximately 5.7%, and (iii) approximately $888.4 million of MBS, indexed to CMT, LIBOR and the 11th District Cost of Funds Index (or COFI), that were acquired prior to 2006, which had an average yield during the quarter of approximately 4.6%.
During the latter part of the third quarter of 2007, spreads on MBS, relative to our cost of funding, widened due to the market conditions described above. Taking advantage of these market conditions, we invested in hybrid Agency MBS with longer initial fixed rate periodperiods, ranging from seven to ten years (i.e., 7/1’s to 10/1’s).
On September 12, 2007, we completed a public offering of a hybrid MBS ends and the rate becomes adjustable, the homeowner is likely to prepay and refinance rather than pay the higher fully-indexed rate. Historically, the yield curve has predominately had a positive slope, reflecting short-term rates lower than long-term rates, and we believe that this current period12,650,000 shares of yield curve inversion will not continue over the long term. We expect to return to higher spreads when the yield curve returns to its normal positive slope. Despite an inverted yield curve, we have been able to increase our common stock, dividendgenerating cash proceeds of approximately $86.9 million after the payment of underwriting discounts and commissions and expenses incurred in eachconnection with the offering. We deployed the proceeds from this offering on a leveraged basis, purchasing $624.7 million of Agency MBS in September 2007. At September 30, 2007, our MBS portfolio was $6.875 billion, compared to $6.994 billion at June 30, 2007 and $6.341 billion at December 31, 2006. Our leverage ratio, as measured by debt-to-equity, was 8.3 to 1 at September 30, 2007 reflecting the net impact of our sales and purchases of MBS during the third quarter of 2007. (See Notes 12(b) and 12(c) to the consolidated financial statements, included under Item 1.)
The following table presents information regarding our leverage ratios as of the last two quarters.dates presented.
Date
| | | | Leverage
Ratio(1)
|
|---|
| September 30, 2007 | | | | 8.3 to 1 |
| June 30, 2007 | | | | 9.1 to 1 |
| March 31, 2007 | | | | 8.3 to 1 |
| December 31, 2006 | | | | 8.4 to 1 |
| September 30, 2006 | | | | 5.9 to 1 |
(1) As measured by debt to equity.
26
We expect that over time ARM-MBS experience higher prepayment rates than do fixed-rate MBS, as we believe that homeowners with adjustable-rate and hybrid mortgages exhibit more rapid housing turnover levels or refinancing activity compared to fixed-rate borrowers. In addition, we anticipate that prepayments on ARM-MBS accelerate significantly as the coupon reset date approaches. Over the last eight quarters, ending with March 31,September 30, 2007, the CPR on our MBS portfolio has ranged from a low of 23.8%18.1%, which was experienced during the third quarter of 2007, to a high of 34.9%31.2%, with an average quarterly CPR of 28.1%24.7%. Prepayment speeds tend to follow a seasonal trend, usually increasingWe have experienced CPRs trending down over the last two quarters ended September 30, 2007. We expect that our prepayment rates will remain at lower levels in the second quarter fromnear-term reflecting our increased investments in 7/1 and 10/1 MBS, which have longer fixed-rate periods, weakness in the first quarter. We believe that our MBS will continue to prepay at a CPR in excesshousing market and the tightening of 20% despite potential increases in interest rates, thereby reducing extension risk.underwriting standards on mortgage loans. As of March 31,September 30, 2007, assuming a 25%20% CPR, approximately 43.7%35.0% of our MBS assets were expected to reset or prepay during the next twelve12 months, with a total of 95.7%86.6% expected to reset or prepay during the next 60 months, with an average time period until our assets prepay or reset of approximately 30 months. AssumingAt September 30, 2007, assuming a 25%20% CPR, the average time period until our assets prepay or reset was approximately 24 months as of March 31, 2007.30 months. Our liabilities, which are in the form of repurchase agreements, a portion of which are hedged with corresponding Swaps, extended on average approximately 1620 months, reflecting the impact of Swaps, resulting in an asset/liability mismatch of approximately eightten months at March 31,September 30, 2007. At March 31, 2007, we had net purchase premiums of $97.5 million, or 1.5% of current par value, compared to $98.8 million of net purchase premiums, or 1.6% of par balance, at December 31, 2006.
The ARMs collateralizing our MBS are comprised of hybrid mortgage loans, which have interest rates that are fixed for a specified period (typically three to seven years) and, thereafter, generally adjust annually to an increment over a specified interest rate index, and, to a lesser extent, adjustable-rate mortgage loans, which have interest rates that generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index.
During the first six months of 2006, we had sold assets and reduced our leverage in response to the rising interest rate environment and flat, and at times inverted, yield curve. Following this period of contraction, we were able to take advantage of the investment opportunities and grow our portfolio during the last six months of 2006 and maintain such levels through the first quarter of 2007. At March 31, 2007, our investment portfolio was $6.388 billion, relatively unchanged from $6.341 billion at December 31, 2006. Our leverage ratio, as measured by debt-to-equity, was also relatively unchanged at 8.3 to 1 at March 31, 2007 from 8.4 to 1 as of December 31, 2006.
Although we have acquired primarily Agency and AAA rated ARM-MBS to date, pursuant to our operating policies, we also may acquire fixed rate MBS and/or other investment securities of lower credit quality. At March 31, 2007, 0.2% of our investment securities portfolio was comprised of mortgage-related securities and other investment securities that were rated below AAA or non-rated, of which an aggregate of $2.0 million of these assets were acquired during the quarter ended March 31, 2007. While such lower credit quality investments do not represent a significant component of our total investment portfolio, we could increase our investment in this asset class, if spreads on such investments widen. We believe that a number of factors, including housing price declines, the continued pressure for many originators to stretch underwriting standards to maintain mortgage origination volume, and the complex structures involved in many mortgage securitizations, may create additional investment opportunities for us over the remainder of 2007. We remain positioned to selectively increase the allocation of our capital to fixed rate MBS, non-agency MBS and other mortgage-related assets rated below AAA should the risk-reward trade-off become compelling.
Through wholly-owned subsidiaries, we provide third-party investment advisory services which generates fee income. In addition, we will continue to explore alternative business strategies, investments and financing sources and other strategic initiatives, including, but not limited to, the acquisition and securitization of ARMs, the expansion of third-party advisory services, the creation of new investment vehicles to manage, the creation or acquisition of a mortgage origination platform and the creation and/or acquisition of a third-party asset management business to complement our core business strategy of investing, on a leveraged basis, in high quality ARM-MBS. However, no assurance can be provided that any such strategic initiatives will or will not be implemented in the future or, if undertaken, that any such strategic initiatives will favorably impact us.
26
RESULTS OF OPERATIONS
Quarter Ended March 31,September 30, 2007 Compared to the Quarter Ended March 31,September 30, 2006
In accordance with generally accepted accounting principles, revenues and expenses for our indirect interest in real estate properties which have been sold and that were not reported as discontinued operations in our Form 10-Q filed for the period ended March 31, 2006 have been restated and reported on a net basis as a component of discontinued operations for such quarter. (See Notes 2(g) and 5 to the consolidated financial statements, included under Item 1 of this quarterly report on Form 10-Q.)
For the firstthird quarter of 2007, we had a net income available to our common stockholdersloss of $7.8$12.5 million, or $0.10$(0.15) per share.common share, which was significantly impacted by losses of $22.0 million realized on sales of MBS. For the firstthird quarter of 2006, we had net income available to our common stockholders of $12.9 million, or $0.16 per share, which included $4.6$5.0 million, or $0.06 per common share, from discontinued operations. In addition, for the first quarter of 2006, we realized net gains of $1.6 million on the sale of certain MBS that we had previously impaired.share.
Our interest income for the firstthird quarter of 2007 increased by $30.8$49.2 million, or 57.0%103.5%, to $84.8$96.7 million compared to $54.0$47.5 million earned duringfor the firstthird quarter of 2006. TheThis increase in interest income was primarily reflectsattributable to the increase in interest income earned on our MBS portfolio, reflecting the growth in the size of andour MBS portfolio as well as the increase in the yield earned on our portfolio.MBS. Excluding changes in market value,values, we increased our average MBS portfolio by $1.024$2.953 billion, or 19.4%75.7%, to $6.300$6.853 billion for firstthe third quarter of 2007 from $5.277$3.900 billion for firstthe third quarter of 2006. In addition, theThe net yield earned on our MBS portfolio increased by 13175 basis points to 5.35%5.58% for the firstthird quarter of 2007, compared to 4.04%from 4.83% for the firstthird quarter of 2006.2006, reflecting the increase in market interest rates. The increase in the net yield earned on our MBS portfolio primarily reflects a 12538 basis point increase in the gross yield on the MBS portfolio to 6.11%6.12% for the firstthird quarter of 2007 from 4.86%5.74% for the firstthird quarter of 2006 and to a lesser extent, a nine32 basis point reduction in the cost of net premium amortization to 5538 basis points for the firstthird quarter of 2007 from 6470 basis points for the firstthird quarter of 2006. The decrease in the cost of our premium amortization during the firstthird quarter of 2007 reflects athe decrease in the CPR experienced on our portfolio and the decrease in the average purchase premium on our MBS portfolio andportfolio. For the decrease in thethird quarter of 2007, our CPR experienced on our portfoliowas 18.1% compared to 23.8% for the quarter ended March 31, 2007 from a CPR of 24.4%26.4% for the firstthird quarter of 2006. OurWe had a net purchase premium as a percentage of the current face (or par value) of our MBS was 1.5%of 1.2% and 2.0%1.8% at March 31,September 30, 2007 and March 31,September 30, 2006, respectively.
The following table presents the components of the net yield earned on our MBS portfolio for the quarterly periods presented:
Quarter Ended
| | | | Stated
Coupon
| | Net Premium
Amortization
| | Cost of
Delay for
Principal
Receivable
| | Net Yield
|
|---|
| March 31, 2007 | | | | | 6.11 | % | | | (0.55 | )% | | | (0.21 | )% | | | 5.35 | % |
| December 31, 2006 | | | | | 6.04 | | | | (0.64 | ) | | | (0.22 | ) | | | 5.18 | |
| September 30, 2006 | | | | | 5.74 | | | | (0.70 | ) | | | (0.21 | ) | | | 4.83 | |
| June 30, 2006 | | | | | 5.16 | | | | (0.76 | ) | | | (0.19 | ) | | | 4.21 | |
| March 31, 2006 | | | | | 4.86 | | | | (0.64 | )(1) | | | (0.18 | ) | | | 4.04 | |
(1) The cost of net premium amortization for the quarter ended March 31, 2006 reflects the impact of a $20.7 million impairment charge taken against certain MBS at December 31, 2005. This impairment charge resulted in a new cost basis for our MBS identified as impaired which reduced our purchase premiums on these assets, which in turn reduced our premium amortization on these assets. Following the first quarter 2006 sale of all of the impaired MBS, our premium as a percentage of current face and basis point cost of premium amortization increased.
The following table presents the quarterly average CPR experienced on our MBS portfolio on an annualized basis:
Quarter Ended
| | | | CPR
|
|---|
March 31, 2007 | | | | | 23.8 | % |
December 31, 2006 | | | | | 26.0 | |
September 30, 2006 | | | | | 26.4 | |
June 30, 2006 | | | | | 26.1 | |
March 31, 2006 | | | | | 24.4 | |
Quarter Ended
| | | | Gross
Yield/
Stated
Coupon
| | Net Premium
Amortization
| | Cost of
Delay for
Principal
Receivable
| | Net Yield
|
|---|
| September 30, 2007 | | | | | 6.12 | % | | | (0.38 | )% | | | (0.16 | )% | | | 5.58 | % |
| June 30, 2007 | | | | | 6.09 | | | | (0.50 | ) | | | (0.19 | ) | | | 5.40 | |
| March 31, 2007 | | | | | 6.11 | | | | (0.55 | ) | | | (0.21 | ) | | | 5.35 | |
| December 31, 2006 | | | | | 6.04 | | | | (0.64 | ) | | | (0.22 | ) | | | 5.18 | |
| September 30, 2006 | | | | | 5.74 | | | | (0.70 | ) | | | (0.21 | ) | | | 4.83 | |
Interest income from our short-term cash investments, comprised of investments in high quality money market/sweepmarket accounts, decreasedincreased by $218,000$655,000 to $448,000$1.1 million for the firstthird quarter of 2007 from $666,000$471,000 for the firstthird quarter of 2006. Our cash investments yielded 5.27%4.96% for the firstthird quarter of 2007 compared to 4.42%4.76% for the firstthird quarter of 2006, reflecting
27
market increases in short-term interest rates. Our average cash investment in short-term cash investments decreasedincreased to $34.4$90.0 million for the firstthird quarter of 2007 compared to $61.1$39.2 million for the firstthird quarter of 2006. In general, we manage our short-term cash investments
27
relative to our investing, financing, and operating requirements, investment opportunities, current and investment opportunities.anticipated market conditions and expectations.
Our interest expense for the firstthird quarter of 2007 increased by $29.5 million, or 68.9%,114.1% to $72.3$81.8 million, from $42.8$38.2 million for the firstthird quarter of 2006. This2006, reflecting an increase in interest expensethe amount of, and rate paid on, our borrowings. Our average liability under repurchase agreements for the firstthird quarter of 2007 reflectsincreased by $2.980 billion, or 91.8%, to $6.226 billion, from $3.246 billion for the third quarter of 2006, reflecting an increase in our leverage and our leveraging of new equity capital as we grew our MBS portfolio. Net of the impact of our Swaps, we experienced a 14254 basis point increase in the cost of our borrowings to 5.19%5.21% for the firstthird quarter of 2007, from 3.77%4.67% for the firstthird quarter of 2006, reflecting the increase in short-term market interest rates. In addition, our average liability under repurchase agreements for the first quarter of 2007 increased by $1.042 billion, or 22.6%, to $5.648 billion from $4.606 billion for the first quarter of 2006. Our Hedging Instruments decreased the cost of our borrowings by $1.7$2.5 million, or 1216 basis points, during the firstthird quarter of 2007 while such instruments decreased the cost of our borrowings by $976,000,and $1.6 million, or nine19 basis points, duringfor the firstthird quarter of 2006. (See Notes 2(l) and 4 to the accompanying consolidated financial statements, included under Item 1.)
The following table presents certain quarterly information about our average interest earninginterest-earning assets and interestinterest- bearing liabilities, interest income and expense, asset yields, cost of funds and net interest income for the quarters presented.
For the
Quarter Ended
| | | Average
Amortized
Cost of
MBS(1)
| | Interest
Income
on MBS
| | Average
Cash and
Cash
Equivalents
| | Total
Interest
Income
| | Yield on
Average
Interest-
Earning
Assets
| | Average
Balance of
Repurchase
Agreements
| | Interest
Expense
| | Average
Cost of
Funds
| | Net
Interest
Income
|
|
| Average
Amortized
Cost of
MBS(1)
|
| Interest
Income
on MBS
|
| Average
Cash and
Cash
Equivalents
|
| Total
Interest
Income
|
| Yield on
Average
Interest-
Earning
Assets
|
| Average
Balance of
Repurchase
Agreements
|
| Interest
Expense
|
| Average
Cost of
Funds
|
| Net
Interest
Income
|
|---|
| (Dollars in Thousands) | | |
| | | | | | | |
| September 30, 2007 | | | $ | 6,852,994 | | | $ | 95,540 | | | $ | 90,006 | | | $ | 96,716 | | | | 5.57 | % | | $ | 6,225,695 | | | $ | 81,816 | | | | 5.21 | % | | $ | 14,900 | |
| June 30, 2007 | | | | 6,696,979 | | | | 90,341 | | | | 51,160 | | | | 91,026 | | | | 5.39 | | | | 6,051,209 | | | | 78,348 | | | | 5.19 | | | | 12,678 | |
| March 31, 2007 | | $ | 6,300,491 | | | $ | 84,341 | | | $ | 34,443 | | | $ | 84,795 | | | | 5.35 | % | | $ | 5,647,700 | | | $ | 72,260 | | | | 5.19 | % | | $ | 12,535 | | | | 6,300,491 | | | | 84,341 | | | | 34,443 | | | | 84,795 | | | | 5.35 | | | | 5,647,700 | | | | 72,260 | | | | 5.19 | | | | 12,535 | |
| December 31, 2006 | | | 5,469,461 | | | | 70,836 | | | | 52,412 | | | | 71,480 | | | | 5.18 | | | | 4,833,897 | | | | 62,114 | | | | 5.10 | | | | 9,366 | | | | 5,469,461 | | | | 70,836 | | | | 52,412 | | | | 71,480 | | | | 5.18 | | | | 4,833,897 | | | | 62,114 | | | | 5.10 | | | | 9,366 | |
| September 30, 2006 | | | 3,899,728 | | | | 47,061 | | | | 39,240 | | | | 47,532 | | | | 4.83 | | | | 3,245,774 | | | | 38,205 | | | | 4.67 | | | | 9,327 | | | | 3,899,728 | | | | 47,061 | | | | 39,240 | | | | 47,532 | | | | 4.83 | | | | 3,245,774 | | | | 38,205 | | | | 4.67 | | | | 9,327 | |
| June 30, 2006 | | | 4,337,887 | | | | 45,645 | | | | 47,266 | | | | 46,185 | | | | 4.21 | | | | 3,672,905 | | | | 38,818 | | | | 4.24 | | | | 7,367 | | |
| March 31, 2006 | | | 5,276,973 | | | | 53,329 | | | | 61,126 | | | | 53,995 | | | | 4.05 | | | | 4,605,790 | | | | 42,785 | | | | 3.77 | | | | 11,210 | | |
(1) Unrealized gains/(losses)gains and loses are not reflected in the average amortized cost of MBS.
For the first quarter ofended September 30, 2007, our net interest income increased by $1.3$5.6 million, or 11.8%59.8%, to $12.5$14.9 million, from $11.2$9.3 million for the first quarter ofended September 30, 2006. This increase can be attributed primarily to the higher yield earned on our assets, before the impact of leverage, an increased use ofincrease in our leverage and the loweran increase in our spread earned during the first quarter of 2007. The impact of prior increases in interest rates, along with the flattened and at times inverted yield curve, which has prevailed in prior trailing quarters, is apparent when comparing net interest income for the firstthird quarter of 2007 compared to the first quarter of 2006. Our first quarter 2007 net interest spread and margin were 0.16% and 0.73%, respectively, compared to a net interest spread and margin of 0.28% and 0.79%, respectively, for the firstthird quarter of 2006.
The following table presents quarterly information regarding our net interest spread and net interest margin (which is net interest income divided by interest-earning assets) for the quarters presented.
For the
Quarter Ended
| | | Net Interest
Spread
| | Net Interest
Margin
| | | Net Interest
Spread
| | Net Interest
Margin
|
|---|
| September 30, 2007 | | | | 0.36 | % | | | 0.90 | % |
| June 30, 2007 | | | | 0.20 | | | | 0.74 | |
| March 31, 2007 | | | 0.16 | % | | | 0.73 | % | | | 0.16 | | | | 0.73 | |
| December 31, 2006 | | | 0.08 | | | | 0.72 | | | | 0.08 | | | | 0.72 | |
| September 30, 2006 | | | 0.16 | | | | 0.98 | | | | 0.16 | | | | 0.98 | |
| June 30, 2006 | | | (0.03 | ) | | | 0.66 | | |
| March 31, 2006 | | | 0.28 | | | | 0.79 | | |
For the quarter ended March 31,September 30, 2007, we earnedhad net other operating losses of $22.1 million compared to net other operating income of $531,000 compared to $2.2 million$569,000 for the quarter ended March 31,September 30, 2006. The firstAs previously discussed, in August 2007, we sold $601.1 million of Agency and AAA rated MBS realizing aggregate losses of $21.5 million. Our other operating income for the third quarter of 2006 other operating income included a netgross gain of $1.6 million$36,000 realized on the $20.3 million sale of previously impaireda MBS. Our revenue from operations of real estate and miscellaneous other income, which is primarily comprised of advisory fees, are not expected to be material to our future results of operations. (See Note 5b to the accompanying consolidated financial statements, included under Item 1.)
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For the firstthird quarter of 2007, we had operating and other expense of $3.2$3.5 million, including real estate operating expenses and mortgage interest totaling $420,000$451,000 attributable to our one remaining real estate investment. For the firstthird quarter of 2007, our non-real estate related overhead, comprised of compensation and benefits and other general and administrative expense, was $2.8 million, or 0.18% of average assets, compared to $2.7$3.1 million, or 0.20% of average assets, compared to $2.4 million, or 0.24% of average assets, for the firstthird quarter of 2006. Our expenses as a percentage of our average assets decreased, reflecting the increase inas we increased our average assets by leveraging our existing and new equity capital. The cost of our
28
compensation and benefits increased by $373,000 for the firstthird quarter of 2007 compared to the firstthird quarter of 2006, as a result of increasingreflecting an increase in our compensation expense and the sizecost of our MBS portfolio.additional hires. Other general and administrative expenses, which were $1.2 million for the firstthird quarter of 2007 compared to $1.1$942,000 for the third quarter of 2006, were comprised primarily of the cost of professional services, including auditing and legal fees, costs of complying with the provisions of the Sarbanes-Oxley Act of 2002, corporate insurance, office rent, Board fees and miscellaneous other operating overhead. Our other general and administrative expense for the third quarter of 2007 primarily reflects the cost of our additional office space and the renewal our existing leases at our headquarters at current market rates and an increase in our Board fees.
During the quarter ended September 30, 2007, we recognized income of $257,000 related to a reduction of the $1.8 million of built-in gains tax recognized on the sale of Greenhouse during 2006. For the quarter ended September 30, 2006, the net loss of $1,000 from discontinued operations reflects the reclassification of the net results of operations for Cameron, which was sold during the fourth quarter of 2006. (See Note 2(g) to the accompanying consolidated financial statements, included under Item 1.)
Nine-Month Period Ended September 30, 2007 Compared to the Nine-Month Period Ended September 30, 2006
For the nine months ended September 30, 2007, we had net income available to our common stockholders of $3.5 million, or $0.04 per common share. Our results for the nine months ended September 30, 2007 were significantly impacted by losses of $22.1 million realized on sales of MBS. For the nine months ended September 30, 2006, we had a net loss of $3.8 million, or $(0.05) per common share, which was significantly impacted by net losses of $23.1 million realized on the sale of MBS and $4.6 million of income from discontinued operations.
Our interest income for the nine months ended September 30, 2007 increased by $124.8 million, or 84.5%, to $272.5 million compared to $147.7 million earned during the first nine months of 2006. This increase in interest income is primarily attributable to the increase in interest income earned on our MBS portfolio, reflecting the growth of our MBS portfolio as well as the increase in the yield earned on our MBS. Excluding changes in market values, we increased our average MBS portfolio by $2.119 billion, or 47.1%, to $6.619 billion for the first nine months of 2007 from $4.500 billion for the first nine months of 2006. The net yield earned on our MBS portfolio increased by 111 basis points, to 5.44% for the first nine months of 2007 from 4.33% for the first nine months of 2006. The increase in the net yield earned on our MBS primarily reflects an 89 basis point increase in the gross yield on the MBS portfolio to 6.11% for the first nine months of 2007 from 5.22% for the first nine months of 2006 and, a 22 basis point reduction in the cost of net premium amortization to 48 basis points for the first nine months of 2007 from 70 basis points for the comparable 2006 period. The decrease in the cost of our premium amortization during the first nine months of 2007 reflects the decrease in the CPR experienced on our portfolio and the decrease in the average purchase premium on our MBS portfolio. For the nine months ended September 30, 2007 our CPR was 21.4% compared to a CPR of 25.5% for the first nine months of 2006.
Interest income from our cash investments, comprised of investments in high quality money market accounts, increased by $531,000 to $2.2 million for the first nine months of 2007 from $1.7 million for the first nine months of 2006. Our cash investments yielded 5.03% for the first nine months of 2007, compared to 4.56% for first nine months of 2006, reflecting market increases in short-term interest rates. Our average cash investments increased to $58.7 million for the first nine months of 2007 compared to $49.1 million for the first nine months of 2006. In general, we manage our cash investments relative to our investing, financing, operating requirements, investment opportunities, current and anticipated market conditions and expectations.
Our interest expense for the first nine months of 2007 increased by 94.0% to $232.4 million, from $119.8 million for the first nine months of 2006, reflecting an increase in the amount of, and rate paid on, our borrowings. Our average liability under repurchase agreements for the first nine months of 2007 increased by $2.141 billion, or 55.8%, to $5.977 billion, from $3.836 billion for the first nine months of 2006, reflecting an increase in our leverage and leveraging of new equity capital as we grew our investment portfolio. Net of the impact of our Hedging Instruments, we experienced a 102 basis point increase in the cost of our borrowings to 5.20% for the first nine months of 2007, from 4.18% for the first nine months of 2006, reflecting the increase in market interest rates. Our Hedging Instruments decreased the cost of our repurchase agreements by $6.4 million, or 14 basis points, during the first nine months of 2007 and decreased the cost of our repurchase agreements by $4.1 million, or 14 basis points, during the first nine months of 2006. (See Notes 2(l) and 4 to the accompanying consolidated financial statements, included under Item 1.)
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For the nine months ended September 30, 2007, our net interest income increased by $12.2 million, or 43.8%, to $40.1 million, from $27.9 million for the nine months ended September 30, 2006. This increase can be attributed primarily to the higher yield earned on our assets before the impact of leverage, an increase in our leverage and the improvement to our spread for the first nine months of 2007 compared to the first nine months of 2006. Our net interest spread and margin were 0.24% and 0.79%, respectively, for the nine months ended September 30, 2007, compared to 0.15% and 0.81%, respectively, for the first nine months of 2006.
For the first nine months of 2007, we had a net other loss of $21.0 million compared to a net other loss of $21.4 million for the first nine months of 2006. Our net other loss for both periods were primarily comprised of losses realized on sales of MBS. During the first nine months of 2007, we realized losses of $22.1 million on the sale of MBS, of which $22.0 million were incurred during the third quarter of 2007 primarily as a result of sales of Agency and AAA rated MBS made to increase our liquidity position in response to the disruption in the credit markets. Our net other loss for the first nine months of 2006 was comprised primarily of a net loss of $23.1 million on sales of MBS, as a result of the repositioning of our MBS portfolio.
Our one remaining real estate investment generated revenue of approximately $1.2 million for each of the first nine months of 2007 and 2006. In addition, we earned $328,000 and $600,000 in advisory fees during the nine months ended September 30, 2007 and 2006, respectively, which are included in miscellaneous other income, net. Our revenue from operations of real estate and advisory fees are not expected to be material to our future results of operations. (See Note 5b to the accompanying consolidated financial statements, included under Item 1.)
During the first nine months of 2007, we had operating and other expense of $9.8 million, which included real estate operating expenses and mortgage interest totaling $1.3 million attributable to our one remaining real estate investment. Our non-real estate related overhead, comprised of compensation and benefits and other general and administrative expense, was $8.5 million, or 0.17% of average assets for the first nine months of 2007, compared to $7.6 million, or 0.22% of average assets, for the first nine months of 2006. Our expenses as a percentage of our average assets decreased, as we increased our average assets by leveraging our existing and new equity capital during the first nine months of 2007. The cost of our compensation and benefits increased by $306,000 for the first nine months of 2007 compared to the first nine months of 2006, reflecting an increase in our compensation expense, and our additional hires. Our other general and administrative expenses for the nine months ended September 30, 2007, are comprised primarily of the cost of professional services, including auditing and legal fees, costs of complying with the provisions of the Sarbanes-Oxley Act of 2002, corporate insurance, office rent, Board fees and miscellaneous other operating overhead. Commencingcosts. The increase in our other general and administrative expense for the second quarterfirst nine months of 2007 we expect that these costs will increase, primarily as a resultto $3.7 million from $3.0 million for the first nine months of 2006, reflects the cost of our acquiring additional office space and renewingthe renewal our existing leases at our headquarters at current market rates.rates commencing with the second quarter of 2007 and an increase in our Board fees.
For the first nine months of 2007, we recognized $257,000 of income related to a reduction of the $1.8 million built-in-gains tax of recognized on the sale of Greenhouse during 2006. For the first nine months of 2006, we reported income of $4.6 million from discontinued operations, or $0.06 per common share, which was primarily comprised the first quarter gain of $4.7 million on the sale of Greenhouse, and a net loss of $134,000 from the operations for Greenhouse and Cameron on a net basis. (See Note 72(g) to the accompanying consolidated financial statements, included under Item 1.)
During the first quarter of 2006, we reported income from discontinued operations of $4.6 million, or $0.06 per common share, primarily comprised of a gain realized on the sale of our interest in Greenhouse, net of built-in gains taxes of $1.8 million. While the gain on the sale of Greenhouse was beneficial to us for the first quarter of 2006, this property had not been a significant component of our operating results.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash generally consist of borrowings under repurchase agreements, payments of principal and interest we receive on our MBS portfolio and, depending on market opportunities, proceeds from capital market transactions. We use significant cash to repay principal and interest on our repurchase agreements, purchase MBS, make dividend payments on our capital stock, fund our operations and to make such other investments that we consider appropriate. In addition, based upon market conditions, we may use cash to repurchase shares of our common stock pursuant to our Repurchase Program.
Borrowings under repurchase agreements were $5.763 billion at March 31, 2007, compared to $5.723 billion at December 31, 2006. During the first quarter of 2007, we increased the amount of our borrowings as we purchased MBS. Our debt-to-equity ratio was relatively stable at 8.3 to 1 at March 31, 2007, compared to 8.4 to 1 at December 31, 2006. At March 31, 2007, we continued to have available capacity under our repurchase agreement credit limits. At March 31, 2007, our repurchase agreements had a weighted average borrowing rate of 5.26%, on loan balances of between $790,000 and $109.5 million.
During the first quarter of 2007, we paid cash dividends of $2.0 million on our preferred stock and $4.9 million on our common stock (which were declared in December 2006). On April 3, 2007, we declared our first quarter 2007 dividend on our common stock, which totaled $6.6 million and was paid on April 30, 2007 to stockholders of record on April 13, 2007.
We employ a diverse capital raising strategy under which we may issue our capital stock. DuringOn September 12, 2007, we completed a public offering of 12,650,000 shares of our common stock and received net proceeds of approximately $86.9 million after the payment of underwriting discounts and commissions and expenses. In addition, during the first quarternine months of 2007, we issued 45,0003,206,000 shares of common stock pursuant to theour CEO Program raising net proceeds of $338,182$23,891,416 and issued 3,40312,027 shares of common stock pursuant to theour DRSPP raising net proceeds of $25,145.$86,963. At March 31,September 30, 2007, we had an aggregate of $240,973,221$125,159,022 available under our two
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effective shelf registration statements on Form S-3 and 9,510,7809,502,156 shares of common stock remained available for issuance pursuant to our DRSPP shelf registration. We may, as market conditions permit, issue additional
On October 5, 2007, we completed our second public offering of 2007, issuing 8,050,000 shares of common stock and/or preferred stock pursuantand received net proceeds of approximately $60.2 million after the payment of underwriting discounts and commissions and expenses. We intend to these registration statements.use the net proceeds from this offering to acquire additional high quality MBS, on a leveraged basis, consistent with our investment policy and for working capital, which may include, among other things, the repayment of our repurchase agreements.
To the extent we raise additional equity capital from future capital market transactions, we currently anticipate using the net proceeds to purchase additional MBS or other securities, to make scheduled payments of principal and interest on our repurchase agreements and for other general corporate purposes. We may also acquire additional interests in residential ARMs multi-family apartment properties and/or other investments consistent with our investment strategies and operating policies. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular terms.
InWhile we generally intend to hold our MBS as long-term investments, certain MBS may be sold in order to reducemanage our interest rate risk exposure, we may enter into derivative financial instruments,and liquidity needs, meet other operating objectives and adapt to market conditions. As such, as Swaps and Caps. Our Swaps and Capsall of our MBS are designated as cash-flow hedges againstavailable-for-sale. The timing and impact of future sales of MBS, if any, cannot be predicted with any certainty. During the nine months ended September 30, 2007, we sold 30 MBS, generating net proceeds of $705.7 million. We received cash of $1.384 billion from prepayments and scheduled amortization on our investment securities during the first nine months of 2007. Since our MBS are generally financed with repurchase agreements, a significant portion of the proceeds from our currentMBS sales, prepayments and anticipated LIBOR basedscheduled amortization were used to repay balances under our repurchase agreements. During the first quarternine months ended September 30, 2007, we purchased $2.656 billion of investment securities, primarily comprised of ARM-MBS, using proceeds from repurchase agreements, existing cash and cash proceeds generated from the equity raised through the public sale of our common stock.
During the month ended October 31, 2007, we purchased $819.3 million of MBS (of which $152.0 million were committed to in September 2007) and committed to purchase approximately $60.0 million which are scheduled to settle in November 2007.
Borrowings under our repurchase agreements were $6.314 billion at September 30, 2007 compared to $5.723 billion at December 31, 2006. At September 30, 2007, we continued to expandhave available capacity under our use of Swaps as a financing strategy and entered into 16 new Swaps with an aggregate notional amount of $501.0 million, which haverepurchase agreement credit limits. At September 30, 2007, our repurchase agreements had a weighted average fixed payborrowing rate of 4.90%. 5.13%, on loan balances of between $550,000 and $137.5 million.
During the quarternine months ended March 31,September 30, 2007, we had Swaps with an aggregate notional amountpaid cash dividends of $85.0$6.1 million expire. We paid a weighted average fixed rate of 4.97% on our Swapspreferred stock and received$19.0 million on our common stock. On October 1, 2007, we declared a variable ratedividend of 5.33% during$0.10 per share on our common stock for the firstthird quarter of 2007. At MarchThis dividend, which in the aggregate totaled $10.6 million, was paid on October 31, 2007 we had 48 Swaps with an aggregate notional amountto stockholders of $2.085 billion, which have maturities extending through March 28, 2012, with a weighted average fixed pay raterecord as of 4.98% and a weighted average term of 41 months. Our Swaps resulted in a net reduction of interest expense of $1.7 million, orOctober 12, basis points, for the quarter ended March 31, 2007. At March 31, 2007, we had one Cap with an aggregate notional amount of $50.0 million, which had a remaining active period of two months and a cap rate of 3.75%. During the quarter ended March 31, 2007, we received payments of approximately $196,000 on our Caps and had $181,000 of Cap premium amortization. During the quarter ended March 31, 2007, we had Caps with $100.0 million notional amount expire and did not purchase any Caps as we expanded our use of Swaps to hedge our interest rate exposure. (See Note 4 to the accompanying consolidated financial statements, included under Item 1.)
Under our repurchase agreements we pledge additional assets as collateral to our repurchase agreement counterparties (i.e., lenders) when the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (i.e., a margin call). Margin calls result from a decline in the value of ourthe MBS collateralizing our repurchase agreements, generally due to changes infollowing the estimated fair value of such MBS resulting frommonthly principal reduction of such MBS fromdue to scheduled amortization and prepayments on the mortgages underlying our MBS,mortgages, changes in market interest rates, a decline in market prices and other market factors. To cover a margin call, we may pledge additional securities or cash. Cash held on deposit as collateral with lenders, if any, is reported on
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our balance sheet as “restricted cash”. At the time one of our repurchase agreement matures, any restricted cash on deposit is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed.
Through March 31,September 30, 2007, we satisfied all of our margin calls with either cash or an additional pledge of MBS collateral. At March 31,September 30, 2007, we had MBS with a fair value of $291.2$205.5 million that were not pledged as collateral and $53.7$206.4 million of unrestricted cash. We believe that we have adequate financial resources to meet our obligations, including margin calls, as they come due, and to fund dividends we declare as well asand to actively pursue our investment strategies. However, should market interest rates and/or prepayment speeds onthe value of our MBS suddenly increase,decrease, significant margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.
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INFLATION
Substantially all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors impact our performance far more than does inflation. Our financial statements are prepared in accordance with GAAP and dividends are based upon net income as calculated for tax purposes; in each case, our results of operations and reported assets, liabilities and equity are measured with reference to historical cost or fair market value without considering inflation.
OTHER MATTERS
We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes of, the Investment Company Act of 1940, as amended (or the Investment Company Act). If we failed to maintain our exempt status under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in our annual report on Form 10-K for the year ended December 31, 2006 and this quarterly report on Form 10-Q for the quarter ended March 31,September 30, 2007. The Investment Company Act exempts entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (or Qualifying Interests). Under the current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain (i) at least 55% of our assets in Qualifying Interests (or the 55% Test) and (ii) at least 80% of our assets in real estate related assets (including Qualifying Interests) (or the 80% Test). MBS that do not represent all of the certificates issued (i.e., an undivided interest) with respect to the entire pool of mortgages (i.e., a whole pool) underlying such MBS may be treated as securities separate from such underlying mortgage loans and, thus, may not be considered Qualifying Interests for purposes of the 55% Test; however, such MBS would be considered real estate related assets for purposes of the 80% Test. Therefore, for purposes of the 55% Test, our ownership of these types of MBS is limited by the provisions of the Investment Company Act. In meeting the 55% Test, we treat as Qualifying Interests those MBS issued with respect to an underlying pool as to which we own all of the issued certificates. If the SEC or its staff were to adopt a contrary interpretation, we could be required to sell a substantial amount of our MBS under potentially adverse market conditions. Further, in order to insure that at all times we qualify for this exemption from the Investment Company Act, we may be precluded from acquiring MBS whose yield is higher than the yield on MBS that could be otherwise purchased in a manner consistent with this exemption. Accordingly, we monitor our compliance with both of the 55% Test and the 80% Test in order to maintain our exempt status under the Investment Company Act. As of March 31,September 30, 2007, we determined that we were in and had maintained compliance with both the 55% Test and the 80% Test.
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FORWARD LOOKING STATEMENTS
When used in this quarterly report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the 1933 Act and Section 21E of the Securities Exchange Act of 1934 (or 1934 Act) and, as such, may involve known and unknown risks, uncertainties and assumptions.
These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, those relating to: changes in interest rates and the market value of our MBS; changes in the prepayment rates on the mortgage loans collateralizing our MBS; our ability to use borrowings to finance our assets; changes in government regulations affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and risks associated with investing in real estate, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made and we do not undertake, and specifically disclaim, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We seek to manage our risks related to interest rate,rates, liquidity, prepayment speeds, market value liquidity, prepayment and the credit risks, inherent in all financial institutions, in a prudent manner designed to insurequality of our longevityassets while, at the same time, seeking to provide an opportunity to stockholders to realize attractive total returns through ownership of our capital stock. While we do not seek to avoid risk, we seek to;to: assume risk that can be quantified from historical experience, and actively manage such risk; earn sufficient returns to justify the taking of such risks and;risks; and, maintain capital levels consistent with the risks that we undertake.
INTEREST RATE RISK
We primarily invest in ARM-MBS on a leveraged basis. We take into account both anticipated coupon resets and expected prepayments when measuring the sensitivity of our ARM-MBS portfolio to changes in interest rates. In measuring our assets-to-borrowings repricing gap (or Repricing Gap), we measure the difference between: (a) the weighted average months until the next coupon adjustment or projected prepayment on the ARM-MBS portfolio; and (b) the months remaining until our repurchase agreements mature, applying the same projected prepayment rate and including the impact of Swaps. The CPR is applied in order to reflect, to a certain extent, the prepayment characteristics inherent in our interest-earning assets and interest-bearing liabilities. Based on historical results, we believe that applying a 25% CPR assumption, provides a realistic approximation of the Repricing Gap for our ARM-MBS portfolio over time. Over the last two years, on a quarterly basis, ending with March 31,September 30, 2007, the monthly CPR on our MBS portfolio ranged from a low of 23.8%18.1%, which was experienced during the quarter ended September 30, 2007, to a high of 34.9%31.2%, with an average quarterly CPR of 28.1%24.7%.
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The following table presents information at March 31,September 30, 2007 about our Repricing Gap based on contractual maturities (i.e., 0 CPR), and applying a 15% CPR, 20% CPR and 25% CPR.
CPR
| | | Estimated Months
to Asset Reset
| | Estimated Months to
Liabilities Reset (1)
| | Repricing
Gap
| | | Estimated Months
to Asset Reset
| | Estimated Months to
Liabilities Reset (1)
| | Repricing
Gap in
Months
|
|---|
0%(2) | | | 42 | | | | 16 | | | | 26 | | | | 54 | | | | 20 | | | | 34 | |
| 15% | | | 30 | | | | 16 | | | | 14 | | | | 35 | | | | 20 | | | | 15 | |
| 20% | | | | 30 | | | | 20 | | | | 10 | |
| 25% | | | 24 | | | | 16 | | | | 8 | | | | 27 | | | | 20 | | | | 7 | |
(1) Reflects the effect of our Hedging Instruments.
(2) Reflects contractual maturities, which does not consider any prepayments.prepayments.
At March 31,September 30, 2007, our financing obligations under repurchase agreements had remaining contractual terms of fourfive years or less.less, which does not reflect the impact of Swaps. Upon contractual maturity or an interest reset date, these borrowings are refinanced at then prevailing market rates.
The interest rates for most of our adjustable-rate assets are primarily dependent on LIBOR, the one-year constant
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maturity treasury (or CMT)CMT rate LIBOR, or the 12-month CMT moving average (or MTA),MTA rate, while our debt obligations, in the form of repurchase agreements, are generally priced off of LIBOR. While LIBOR and CMT generally move together, there can be no assurance that such movements will be parallel, such that the magnitude of the movement of one index will match that of the other index. At March 31,September 30, 2007, we had 12.4%78.0% of our ARM-MBS portfoliorepricing from LIBOR (of which 64.1% repriced based on 12-month LIBOR and 13.9% repriced based on six-month LIBOR), 14.6% repricing from the one-year CMT index, 77.3% repricing from the one-year LIBOR index, 9.4%6.7% repricing from MTA and 0.9%0.7% repricing from the 11th District Cost of Funds Index (or COFI).COFI.
Our adjustable-rate assets reset on various dates that are not matched to the reset dates on our borrowings (i.e., repurchase agreements). In general, the repricing of our debt obligationsrepurchase agreements occurs more quickly than the repricing of our assets. Therefore, on average, our cost of borrowings may rise or fall more quickly in response to changes in market interest rates than does the yield on itsour interest-earning assets.
As part of our overall interest rate risk management strategy, we periodically use Hedging Instruments to mitigate the impact of significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The interest rate risk management strategy at times involves modifying the repricing characteristics of certain assets and liabilities utilizing derivatives. Our Hedging Instruments are intended to serve as a hedge against future interest rate increases on our repurchase agreements, which are typically priced off of LIBOR. At March 31, 2007, we had Swaps with a notional amount of $2.085 billion and had one Cap with an aggregate notional amount of $50.0 million, all of which were active. During the quarter ended March 31, 2007, we received or were due payments of $1.66 million related to our Swaps and approximately $196,500 from counterparties on our Caps. The notional amount of the Swap is presented in the table below, as they impact the cost of a portion of our repurchase agreements. The notional amounts of our Caps, which hedge against increases in interest rates on our LIBOR-based repurchase agreements, are not considered in the gap analysis, as they do not effect the timing of the repricing of the instruments they hedge, but rather, to the extent of the notional amount, cap the amount of interest rate change that can occur relative to the hedged liability. In addition, while the fair value of our Hedging Instruments are reflected in our consolidated balance sheets, the notional amounts are not.
The mismatch between repricings or maturities within a time period is commonly referred to as the “gap” for that period. A positive gap, where repricing of interest-rate sensitive assets exceeds the maturity of interest-rate sensitive liabilities, generally will result in the net interest margin increasing in a rising interest rate environment and decreasing in a falling interest rate environment; conversely, a negative gap, where the repricing of interest rate sensitive liabilities exceeds the repricing of interest-rate sensitive assets will generate opposite results. At March 31,As presented in the following table, at September 30, 2007, we had a negativepositive gap of $205.7 million in our less than three month category. The following gap analysis below is prepared assuming a 25%20% CPR; however, actual future prepayment speeds could vary significantly. The gap analysis does not reflect the constraints on the repricing of ARM-MBS in a given period resulting from interim and lifetime cap features on these securities, nor the behavior of various indexesindices applicable to our assets and liabilities. The gap methodology does not assess the relative sensitivity of assets and liabilities to changes in interest rates and also fails to account for interest rate caps and floors imbedded in our MBS or include assets and liabilities that are not interest rate sensitive. The notional amount of the Swaps is presented in the following table, as they fix the cost and repricing characteristics of a portion of our repurchase agreements. While the fair value of our Swaps are reflected in our consolidated balance sheets, the notional amounts, presented in the table below, are not.
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The following table sets forthpresents our interest rate risk using the gap methodology applying a 25%20% CPR on MBS at March 31,September 30, 2007.
| | | | Gap Table
| |
|---|
| | | At March 31, 2007
| | | | At September 30, 2007
| |
|---|
| (In Thousands) | | | Less than
3 Months
| | Three Months to
One Year
| | One Year to
Two Years
| | Two Years to
Year Three
| | Beyond
Three Years
| | Total
| | | Less than 3
Months
| | Three Months to
One Year
| | One Year to
Two Years
| | Two Years to
Year Three
| | Beyond
Three Years
| | Total
|
|---|
Interest-Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ARM-MBS | | $ | 1,289,245 | | | $ | 1,500,125 | | | $ | 966,421 | | | $ | 836,292 | | | $ | 1,793,522 | | | $ | 6,385,605 | | | $ | 1,207,402 | | | $ | 1,196,140 | | | $ | 904,141 | | | $ | 759,243 | | | $ | 2,808,121 | | | $ | 6,875,047 | |
| Income notes | | | — | | | | — | | | | — | | | | — | | | | 1,980 | | | | 1,980 | | | | — | | | | — | | | | — | | | | — | | | | 1,643 | | | | 1,643 | |
| Cash | | | 53,697 | | | | — | | | | — | | | | — | | | | — | | | | 53,697 | | | | 206,395 | | | | — | | | | — | | | | — | | | | — | | | | 206,395 | |
| Total interest-earning assets | | $ | 1,342,942 | | | $ | 1,500,125 | | | $ | 966,421 | | | $ | 836,292 | | | $ | 1,795,502 | | | $ | 6,441,282 | | | $ | 1,413,797 | | | $ | 1,196,140 | | | $ | 904,141 | | | $ | 759,243 | | | $ | 2,809,764 | | | $ | 7,083,085 | |
| |
Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase agreements | | $ | 3,596,100 | | | $ | 454,300 | | | $ | 1,402,957 | | | $ | 310,000 | | | $ | — | | | $ | 5,763,357 | | | $ | 4,406,541 | | | $ | 364,900 | | | $ | 1,311,920 | | | $ | 47,088 | | | $ | 183,500 | | | $ | 6,313,949 | |
| Mortgage loans | | | — | | | | — | | | | — | | | | — | | | | 9,573 | | | | 9,573 | | | | — | | | | — | | | | — | | | | — | | | | 9,497 | | | | 9,497 | |
| Total interest-bearing liabilities | | $ | 3,596,100 | | | $ | 454,300 | | | $ | 1,402,957 | | | $ | 310,000 | | | $ | 9,573 | | | $ | 5,772,930 | | | $ | 4,406,541 | | | $ | 364,900 | | | $ | 1,311,920 | | | $ | 47,088 | | | $ | 192,997 | | | $ | 6,323,446 | |
| |
| Gap before Hedging Instruments | | $ | (2,253,158 | ) | | $ | 1,045,825 | | | $ | (436,536 | ) | | $ | 526,292 | | | $ | 1,785,929 | | | $ | 668,352 | | | $ | (2,992,744 | ) | | $ | 831,240 | | | $ | (407,779 | ) | | $ | 712,155 | | | $ | 2,616,767 | | | $ | 759,639 | |
| Notional Amounts of Swaps | | | 2,084,524 | | | | — | | | | — | | | | — | | | | — | | | $ | 2,084,524 | | |
| Cumulative Difference Between Interest-Earnings Assets and Interest Bearing Liabilities after Hedging Instruments | | $ | (168,634 | ) | | $ | 877,191 | | | $ | 440,655 | | | $ | 966,947 | | | $ | 2,752,876 | | | | | | |
| Swaps, notional amount | | | | 3,198,493 | | | | — | | | | — | | | | — | | | | — | | | | 3,198,493 | |
Cumulative Difference Between
Interest-earnings Assets and
Interest-bearing Liabilities after
Hedging Instruments | | | $ | 205,749 | | | $ | 1,036,989 | | | $ | 629,210 | | | $ | 1,341,365 | | | $ | 3,958,132 | | | $ | — | |
MARKET VALUE RISK
All of our investment securities are designated as “available-for-sale” assets. As such, they are reflected at their estimated fair value, with the difference between amortized cost and estimated fair value reflected in accumulated other comprehensive income, a component of Stockholders’ Equity.stockholders’ equity. (See Note 810 to the accompanying consolidated financial statements, included under Item 1.) The estimated fair value of our MBS fluctuate primarily due to changes in interest rates and other factors; however, given that, at March 31,September 30, 2007, these securities were primarily Agency MBS or AAA rated MBS, such changes in the estimated fair value of our MBS are generally not believed to be credit-related. At March 31,September 30, 2007, we held $14.3$6.4 million of investment securities that were rated below AAA and $4.7 million of which $5.8 million were non-ratedunrated securities. Therefore,Accordingly, to a limited extent, we are exposed to credit-related market value risk. Generally, in a rising interest rate environment, the estimated fair value of our MBS would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of such MBS would be expected to increase. If the estimated fair value of our MBS collateralizing our repurchase agreements decreases, we may receive margin calls from our repurchase agreement counterparties for additional MBS collateral or cash due to such decline. If suchIn the event that we do not have adequate cash or MBS to meet margin calls, were not met, the lender could liquidate the securities collateralizing our repurchase agreements with such lender, resulting in a loss to us. In such a scenario, we could apply a strategy of reducing borrowings and assets, by selling assets or not replacing securities as they amortize and/or prepay, thereby “shrinking the balance sheet”, as was applied during the first half of 2006.. Such an action would likely reduce our interest income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and liabilities as well as the sale price of the assets sold. Further, suchSuch a decrease in our net interest income could negatively impact cash available for distributions, which in turn could reduce the market price of our issued and outstanding common stock and preferred stock. Further, if we were unable to meet margin calls, lenders could sell the securities collateralizing our repurchase agreements with such lenders, which sales could result in a loss to us.
LIQUIDITY RISK
The primary liquidity risk for us arises from financing long-maturity assets, which have interim and lifetime interest rate adjustment caps, with shorter-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities are matchedfall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
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Our assets which are pledged to secure repurchase agreements are typically high-quality liquid assets. As a result, we have not had difficulty rolling over (i.e., renewing) these agreements as they mature. However, we cannot assure that we will always be able to roll over our repurchase agreements.MBS. At March 31,September 30, 2007, we had cash and cash equivalents of $53.7$206.4 million and unpledged securitiesMBS of $291.2$205.5 million available to meet margin calls on our repurchase agreements and for other corporate purposes. However, should market interest rates and/or prepayment speeds on the mortgage loans underlyingvalue of our MBSinvestment securities pledged as collateral suddenly increase,decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change into our liquidity position. As such, we cannot assure that we will always be able to roll over our repurchase agreements.
PREPAYMENT AND REINVESTMENT RISK
As we receive repayments of principalPremiums paid on our MBS, from prepayments and scheduled amortization, premiums paid on suchinvestment securities are amortized against interest income and discounts are accreted to interest income.income as we receive principal payments on such securities, reflecting prepayments and scheduled amortization. Premiums arise when we acquire MBS at a price in excess of the principal balance of the mortgages securing such MBS (i.e., par value). Conversely, discounts arise when we acquire MBS at a price below the principal balance of the mortgages securing such MBS. For financial accounting purposes, interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. In general, purchase premiums on our investment securities, currently comprised primarily of MBS, are amortized against interest income over the lives of the securities using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the yield/interest income earned on such assets.
For tax accounting purposes, the purchase premiums and discounts are amortized based on the constant effective yield calculated at the purchase date. Therefore, on a tax basis, amortization of premiums and discounts will differ from those reported for financial purposes under GAAP. At March 31,September 30, 2007, the grossour net premium for ARM-MBSour investment securities portfolio for financial accounting purposes was $97.6$83.5 million (1.5%(1.2% of the carrying valueprincipal balance of MBS); while the grossnet premium for income tax purposes was estimated at $95.1$81.1 million.
In general, we believe that we will be able to reinvest proceeds from scheduled principal payments and prepayments at acceptable yields; however, no assurances can be given that, should significant prepayments occur, market conditions would be such that acceptable investments could be identified and the proceeds timely reinvested.
TABULAR PRESENTATION
The information presented in the following table projects the potential impact of sudden parallel changes in interest rates on net interest income and portfolio value, including the impact of Hedging Instruments, over the next twelve12 months based on the assets in our investment portfolio on March 31,September 30, 2007. We acquire interest-rate sensitive assets and fund them with interest-rate sensitive liabilities. All changes in income and value are measured as the percentage change from the projected net interest income and portfolio value at the base interest rate scenario.
Change in
Interest Rates
| | | | Percentage Change
in Net Interest Income
| | Percentage Change
in Portfolio Value
|
|---|
| + 1.00% | | | | | (22.29%) | | | | (0.90%) | |
| + 0.50% | | | | | (5.83%) | | | | (0.35%) | |
| – 0.50% | | | | | 19.63% | | | | 0.14% | |
| – 1.00% | | | | | 30.01% | | | | 0.09% | |
Change in
Interest Rates
| | | | Percentage Change
in Net Interest Income
| | Percentage Change
in Portfolio Value
|
|---|
| +1.00% | | | | (10.95%) | | (1.17%) |
| +0.50% | | | | (4.19%) | | (0.48%) |
| (0.50%) | | | | 3.66% | | 0.27% |
| (1.00%) | | | | 5.83% | | 0.32% |
Certain assumptions have been made in connection with the calculation of the information set forth in the above table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at March 31,September 30, 2007. The analysis presented utilizes assumptions and estimates based on management’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile. It should be specifically noted that the information set forth in the above table and all related disclosure constitutes forward-looking statements within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act. Actual results could differ significantly from those estimated in the table.
The table quantifies the potential changes in net interest income and portfolio value should interest rates immediately change (or Shock). The table presents the estimated impact of interest rates instantaneously rising 50
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and 100 basis points, and falling 50 and 100 basis points. The cash flows associated with the portfolio of MBS for each rate Shock are calculated based on assumptions, including, but not limited to, prepayment speeds, yield on future acquisitions, slope of the yield curve and size of the portfolio. Assumptions made on the interest rate sensitive liabilities, which are assumed to be repurchase agreements, include anticipated interest rates, collateral
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requirements as a percent of the repurchase agreement, amount and term of borrowing.
The impact on portfolio value is approximated using the calculated effective duration (i.e., the price sensitivity to changes in interest rates) of 0.490.74 and expected convexity (i.e., the approximate change in duration relative to the change in interest rates) of (0.81)(0.85). The impact on net interest income is driven mainly by the difference between portfolio yield and cost of funding of our repurchase agreements, which includes the cost and/or benefit from Hedging Instruments that hedge certain of our repurchase agreements. Our asset/liability structure is generally such that an increase in interest rates would be expected to result in a decrease in net interest income, as our repurchase agreements are generally shorter term than our interest-earning assets. When interest rates are Shocked, prepayment assumptions are adjusted based on management’s expectations along with the results from the prepayment model.
Item 4. Controls and Procedures
Our management, including our Chief Executive Officer (or CEO) and Chief Financial Officer (or CFO), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the 1934 Act) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO concluded that our current disclosure controls and procedures, as designed and implemented, were effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31,September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we are a party or any of our assets are subject.
Item 1a.1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A — Risk Factors of our annual report on Form 10-K for the year ended December 31, 2006 (the “Form 10-K”). The materialization of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements” in this quarterly report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Form 8-K, dated April 10, 1998, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.2Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant, dated August 5, 2002 (incorporated herein by reference to Exhibit 3.1 of the Form 8-K, dated August 13, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation of the Registrant, dated August 13, 2002 (incorporated herein by reference to Exhibit 3.3 of the Form 10-Q for the quarter ended September 30, 2002 filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.4 Articles Supplementary of the Registrant, dated April 22, 2004, designating the Registrant’s 8.50% Series A Cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit 3.4 of the Form 8-A, dated April 23, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
3.5Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.2 of the Form 8-K, dated August 13, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
4.1Specimen of Common Stock Certificate of the Registrant (incorporated herein by reference to Exhibit 4.1 of the Registration Statement on Form S-4, dated February 12, 1998, filed by the Registrant pursuant to the 1933 Act (Commission File No. 333-46179)).
4.2Specimen of Stock Certificate representing the 8.50% Series A Cumulative Redeemable Preferred Stock of the Registrant (incorporated herein by reference to Exhibit 4 of the Form 8-A, dated April 23, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.1Amended and Restated Employment Agreement of Stewart Zimmerman, dated as of April 16, 2006 (incorporated herein by reference to Exhibit 10.1 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.2Amended and Restated Employment Agreement of William S. Gorin, dated as of April 16, 2006 (incorporated herein by reference to Exhibit 10.3 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.3Amended and Restated Employment Agreement of Ronald A. Freydberg, dated as of April 16, 2006 (incorporated herein by reference to Exhibit 10.2 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
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10.4Amended and Restated Employment Agreement of Teresa D. Covello, dated as of January 1, 2006
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(incorporated (incorporated herein by reference to Exhibit 10.5 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.5Amended and Restated Employment Agreement of Timothy W. Korth II, dated as of January 1, 2006 (incorporated herein by reference to Exhibit 10.4 of the Form 8-K, dated April 25, 2006, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.62004 Equity Compensation Plan of the Registrant (incorporated herein by reference to Exhibit 10.1 of the Post-Effective Amendment No. 1 to the Registration Statement on Form S-3, dated July 21, 2004, filed by the Registrant pursuant to the 1933 Act (Commission File No. 333-106606)).
10.7MFA Mortgage Investments, Inc. Senior Officers Deferred Compensation Plan, adopted December 19, 2002 (incorporated herein by reference to Exhibit 10.7 of the Form 10-K, dated December 31, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.8MFA Mortgage Investments, Inc. 2003 Non-Employee Directors Deferred Compensation Plan, adopted December 19, 2002 (incorporated herein by reference to Exhibit 10.8 of the Form 10-K, dated December 31, 2002, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.9Form of Incentive Stock Option Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.9 of the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.10Form of Non-Qualified Stock Option Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.10 of the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.11 Form of Restricted Stock Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.11 of the Form 10-Q, dated September 30, 2004, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
10.12 Form of Phantom Share Award Agreement relating to the Registrant’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 99.1 of the Form 8-K, dated October 22, 2007, filed by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
31.1Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 1, 2007
MFA MORTGAGE INVESTMENTS, INC.
| Date: October 31, 2007 | | | | MFA MORTGAGE INVESTMENTS, INC. |
| | | | By: /s/ | Stewart Zimmerman
Stewart Zimmerman
President and Chief Executive Officer |
| | | | |
| | | | By: /s/ | William S. Gorin
William S. Gorin
Executive Vice President
Chief Financial Officer
(Principal (Principal Financial Officer) |
| | | | |
| | | | By: /s/ | Teresa D. Covello
Teresa D. Covello
Senior Vice President
Chief Accounting Officer and Treasurer
(Principal (Principal Accounting Officer) |
39