For the six months ended June 30, 2007, our net interest income increased by $6.6 million, or 35.7%, to $25.2 million, from $18.6 million for the first six months of 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 slight improvement to our spread for the first six months of 2007 compared to the first six months of 2006. Our net interest spread and margin were 0.18% and 0.73%, respectively, for the six months ended June 30, 2007, compared to 0.15% and 0.74%, respectively, for the first six months of 2006.
For the first six months of 2007, we earned net other income of $1.1 million compared to a net other loss of $21.9 million for the first six months of 2006. Our net other loss for the first six 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 $826,000 and $770,000 for the first six months of 2007 and 2006, respectively. 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.)
During the first six months of 2007, we had operating and other expenses of $6.3 million, including real estate operating expenses and mortgage interest totaling $849,000 attributable to our one remaining real estate investment. For the first six months of 2007, our non-real estate related overhead, comprised of compensation and benefits and other general and administrative expense, was $5.4 million, or 0.17% of average assets, compared to $5.2 million, or 0.21% of average assets, for the first six months of 2006. Our expenses as a percentage of average assets decreased, as we increased our average assets for the first six months of 2007, compared to the first six months of 2006. Our asset growth was achieved by increasing our use of leverage on existing equity capital and leveraging newly raised equity capital. Other general and administrative expenses, which were $2.4 million for the first six months of 2007 compared to $2.1 million for the first six months of 2006, 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.
We had no discontinued operations for the first six months of 2007, while we reported income of $4.6 million from discontinued operations, or $0.06 per common share for the first six months of 2006. Discontinued operations for the first six months of 2006 was primarily comprised of a first quarter gain of $4.7 million on the sale of Greenhouse, and the reported net loss of $133,000 from the operations for Greenhouse (which was sold during the first quarter of 2006) and Cameron (which was sold during the fourth quarter of 2006,) on a net basis. (See Note 2(g) to the accompanying consolidated financial statements, included under Item 1.)
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash 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 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 our repurchase agreements were $6.379 billion at June 30, 2007 compared to $5.723 billion at December 31, 2006. During the six months ended June 30, 2007, we increased the amount of our borrowings as we increased the size of our MBS portfolio. Our debt-to-equity ratio increased to 9.1 to 1 at June 30, 2007, compared to 8.4 to 1 at December 31, 2006. At June 30, 2007, we continued to have available capacity under our repurchase agreement credit limits. At June 30, 2007, our repurchase agreements had a weighted average borrowing rate of 5.28%, on loan balances of between $759,000 and $115.8 million.
During the six months ended June 30, 2007, we paid cash dividends of $4.1 million on our preferred stock and $11.5 million on our common stock. On July 2, 2007, we declared our second quarter 2007 dividend on our common stock, which totaled $7.6 million and was paid on July 31, 2007 to stockholders of record on July 13, 2007.
We employ a diverse capital raising strategy under which we may issue our capital stock. During the first six months of 2007, we issued 2,206,000 shares of common stock pursuant to the CEO Program raising net proceeds of $16,388,906 and issued 7,618 shares of common stock pursuant to the DRSPP raising net proceeds of $55,852. At June 30, 2007, we had an aggregate of $224,566,399 available under our two effective shelf registration statements on Form S-3 and 9,506,565 shares of common stock remained available for issuance pursuant to our DRSPP shelf registration. We may, as market conditions permit, issue additional shares of common stock and/or preferred stock pursuant to these registration statements.
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 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.
In order to reduce our interest rate risk exposure, we may enter into derivative financial instruments, such as Swaps and Caps. Our Swaps are designated as cash-flow hedges against a portion of our current and anticipated LIBOR-based repurchase agreements. During the six months ended June 30, 2007, we entered into 43 new Swaps with an aggregate notional amount of $1.580 billion, which have a weighted average fixed pay rate of 5.04%. During the six months ended June 30, 2007, we had Swaps with an aggregate notional amount of $391.8 million expire and terminated one Swap with a notional amount of $43.7 million realizing a gain of $176,000. We paid a weighted average fixed rate of 4.98% on our Swaps and received a variable rate of 5.33% during the six months ended June 30, 2007. At June 30, 2007, we had 74 Swaps with an aggregate notional amount of $2.954 billion. Our Swaps resulted in a net reduction of interest expense of $3.8 million, or 13 basis points, for the six months ended June 30, 2007. During the six months ended June 30, 2007, we had Caps with $150.0 million notional amount expire and did not purchase any Caps as we expanded our use of Swaps to hedge our interest rate exposure. During the six months ended June 30, 2007, we received payments of approximately $327,000 on our Caps and had $278,000 of Cap premium amortization. At June 30, 2007, we had no Caps remaining. (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 our MBS collateralizing our repurchase agreements, generally due to changes in the estimated fair value of such MBS resulting from principal reduction of such MBS from scheduled amortization and prepayments on the mortgages underlying our MBS, changes in market interest rates 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 our balance sheet as “restricted cash”. At the time one of our repurchase agreement matures, any restricted cash on
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deposit is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed.
Through June 30, 2007, we satisfied all of our margin calls with either cash or an additional pledge of MBS collateral. At June 30, 2007, we had MBS with a fair value of $280.6 million that were not pledged as collateral and $54.3 million of cash. We believe we have adequate financial resources to meet our obligations, including margin calls, as they come due and to fund dividends we declare as well as to actively pursue our investment strategies. However, should market interest rates and/or prepayment speeds on our MBS suddenly increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.
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 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 June 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 June 30, 2007, we determined that we were in and had maintained compliance with both the 55% Test and the 80% Test.
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
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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 interest rate, market value, liquidity, prepayment and credit risks, which are inherent in all financial institutions, in a prudent manner designed to insure our longevity 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: 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, 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. Over the last two years, on a quarterly basis, ending with June 30, 2007, the monthly CPR on our MBS portfolio ranged from a low of 22.5% to a high of 34.9%, with an average quarterly CPR of 27.1%.
The following table presents information at June 30, 2007 about our Repricing Gap based on contractual maturities (i.e., 0 CPR), and applying a 15% CPR and 25% CPR.
CPR
| | Estimated Months
to Asset Reset
| | Estimated Months to
Liabilities Reset(1)
| | Repricing
Gap in
Months
|
0%(2) | | 49 | | 18 | | 31 |
| 15% | | 33 | | 18 | | 15 |
| 25% | | 25 | | 18 | | 7 |
(1) Reflects the effect of our Hedging Instruments.
(2) Reflects contractual maturities, which does not consider any prepayments.
At June 30, 2007, our financing obligations under repurchase agreements had remaining contractual terms of three years or 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 maturity treasury (or CMT) rate, or the 12-month CMT moving average (or MTA), 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 June 30, 2007, we had 79.9% of our ARM-MBS repricing from LIBOR (of which 65.2% was repriced based on 12-month LIBOR, 14.7% on six-month LIBOR and 0.02% on one-month LIBOR), 11.9% repricing from the one-year CMT index, 7.5% repricing from MTA and 0.7% repricing from the 11th District Cost of Funds Index (or COFI).
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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 obligations 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 its 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. Our 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. At June 30, 2007, we had Swaps with a notional amount of $2.954 billion, all of which were active. During the six months ended June 30, 2007, we received or were due payments of $3.8 million related to our Swaps and approximately $327,000 from one counterparty on a Cap, which expired during the quarter, such that we had no Caps remaining at June 30, 2007.
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 June 30, 2007, we had a negative gap in our less than three month category. The following gap analysis is prepared assuming a 25% 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 indexes 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 impact the cost of a portion of our repurchase agreements. In addition, while the fair value of our Hedging Instruments are reflected in our consolidated balance sheets, the notional amounts are not.
The following table presents our interest rate risk using the gap methodology applying a 25% CPR on MBS at June 30, 2007.
| | | | Gap Table
| |
|---|
| | | | At June 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
|
Interest-Earning Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ARM-MBS | | | | $ | 1,321,234 | | | $ | 1,516,794 | | | $ | 1,093,573 | | | $ | 945,336 | | | $ | 2,117,307 | | | $ | 6,994,244 | |
| Income notes | | | | | — | | | | — | | | | — | | | | — | | | | 1,890 | | | | 1,890 | |
| Cash | | | | | 54,329 | | | | — | | | | — | | | | — | | | | — | | | | 54,329 | |
| Total interest-earning assets | | | | $ | 1,375,563 | | | $ | 1,516,794 | | | $ | 1,093,573 | | | $ | 945,336 | | | $ | 2,119,197 | | | $ | 7,050,463 | |
| |
Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase agreements | | | | $ | 4,551,600 | | | $ | 482,300 | | | $ | 1,077,585 | | | $ | 268,000 | | | $ | — | | | $ | 6,379,485 | |
| Mortgage loans | | | | | — | | | | — | | | | — | | | | — | | | | 9,532 | | | | 9,532 | |
| Total interest-bearing liabilities | | | | $ | 4,551,600 | | | $ | 482,300 | | | $ | 1,077,585 | | | $ | 268,000 | | | $ | 9,532 | | | $ | 6,389,017 | |
| |
| Gap before Hedging Instruments | | | | $ | (3,176,037 | ) | | $ | 1,034,494 | | | $ | 15,988 | | | $ | 677,336 | | | $ | 2,109,665 | | | $ | 661,446 | |
| Swaps, notional amount | | | | | 2,954,102 | | | | (50,000 | ) | | | — | | | | (662,480 | ) | | | (2,241,622 | ) | | | — | |
| Cumulative Difference Between Interest-Earnings Assets and Interest Bearing Liabilities after Hedging Instruments | | | | $ | (221,935 | ) | | $ | 762,559 | | | $ | 778,547 | | | $ | 793,403 | | | $ | 661,446 | | | $ | — | |
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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. (See Note 8 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 June 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 credit-related. At June 30, 2007, we held $13.5 million of investment securities that were rated below AAA, of which $6.1 million were non-rated securities. 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 collateral or cash due to such decline. If such 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, such 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.
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 fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
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. At June 30, 2007, we had cash and cash equivalents of $54.3 million and unpledged securities of $280.6 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 underlying our MBS suddenly increase, margin calls relating to our repurchase agreements could increase, causing an adverse change to our liquidity position.
PREPAYMENT AND REINVESTMENT RISK
As we receive repayments of principal on our MBS, from prepayments and scheduled amortization, premiums paid on such securities are amortized against interest income and discounts are accreted to interest income. 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 June 30, 2007, the gross premium for ARM-MBS for financial accounting purposes was $92.3 million (1.3% of the principal balance of MBS); while the gross premium for income tax purposes was estimated at $89.1 million.
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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 12 months based on the assets in our investment portfolio on June 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% | | | | | (18.17%) | | | | (1.34%) | |
| +0.50% | | | | | (8.22%) | | | | (0.56%) | |
| –0.50% | | | | | 5.27% | | | | 0.35% | |
| –1.00% | | | | | 8.51% | | | | 0.48% | |
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 June 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 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 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 0.91 and expected convexity (i.e., the approximate change in duration relative to the change in interest rates) of (0.86). 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
35
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 June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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. 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 4. Submission of Matters to a Vote of Security Holders
On May 22, 2007, we held our 2007 Annual Meeting of Stockholders (the “Meeting”) in New York, New York for the purpose of: (i) electing three Class III directors to serve on the Board until our 2010 Annual Meeting of Stockholders; and (ii) ratifying the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007. The total number of shares of common stock entitled to vote at the Meeting was 80,750,993, of which 73,468,399 shares, or 90.98%, were present in person or by proxy.
The following presents the results of the election of directors:
Name of Class III Nominees
| | | | For
| | Withheld
| |
|---|
| Stewart Zimmerman | | | | | 69,338,223 | | | | 4,130,176 | | | | | | | | | |
| James A. Brodsky | | | | | 72,558,988 | | | | 909,411 | | | | | | | | | |
| Alan L. Gosule | | | | | 69,969,151 | | | | 3,499,248 | | | | | | | | | |
There was no solicitation in opposition to the foregoing nominees by stockholders. The terms of office for Stephen R. Blank, Edison C. Buchanan, Michael L. Dahir and George H. Krauss, our Class I and Class II directors, continued after the Meeting.
The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007 was approved by stockholders with 73,243,456 votes “For,” 107,243 votes “Against” and 117,700 votes “Abstained.”
Further information regarding the proposals is contained in our Proxy Statement, dated April 9, 2007.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended 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)).
3.2 Articles 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)).
3.5 Amended 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)).
4.1 Specimen 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)).
4.2 Specimen 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)).
10.1 Amended 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)).
10.2 Amended 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)).
10.3 Amended 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)).
10.4 Amended and Restated Employment Agreement of Teresa D. Covello, dated as of January 1, 2006 (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)).
10.5 Amended 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)).
10.6 2004 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)).
10.7 MFA 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)).
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10.8 MFA 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)).
10.9 Form 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)).
10.10 Form 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)).
31.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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: July 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 Financial Officer) |
| |
| | | By:/s/Teresa D. Covello
Teresa D. Covello
Senior Vice President
Chief Accounting Officer and Treasurer
(Principal Accounting Officer) |
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