MFA FINANCIAL, INC. 10-K

Item 8. Financial Statements and Supplementary Data. Index to Financial Statements and Schedule Page Report of Independent Registered Public Accounting Firm 73 Financial Statements: Consolidated Balance Sheets at December 31, 2022 and December 31, 2021 77 Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020 78 Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2022, 2021 and 2020 79 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021 and 2020 80 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 82 Notes to the Consolidated Financial Statements 84 Note 1. Organization 84 Note 2. Summary of Significant Accounting Policies 84 Note 3. Residential Whole Loans 94 Note 4. Securities, at Fair Value 101 Note 5. Other Assets 105 Note 6. Financing Agreements 110 Note 7. Other Liabilities 115 Note 8. Income Taxes 115 Note 9. Commitments and Contingencies 117 Note 10. Stockholders’ Equity 118 Note 11. EPS Calculation 124 Note 12. Equity Compensation and Other Benefit Plans 125 Note 13. Fair Value of Financial Instruments 129 Note 14. Use of Special Purpose Entities and Variable Interest Entities 137 Note 15. Segment Reporting 138 Note 16. Subsequent Events 143 Schedule IV - Mortgage Loans on Real Estate 144 All other financial statement schedules are omitted because the required information is not applicable or deemed not material, or the required information is included in the consolidated financial statements and/or notes thereto. 72 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors MFA Financial, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of MFA Financial, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income/(loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedule IV – Mortgage Loans on Real Estate (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Assessment of the valuation of residential whole loans, at fair value As discussed in Notes 2, 3 and 13 to the consolidated financial statements, the Company records certain residential whole loans at fair value on its consolidated balance sheet as a result of a fair value election made at the time of acquisition. As of December 31, 2022, the recorded balance of the Company’s residential whole loans, at fair value was $5.7 billion. The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. 73 Table of Contents We identified the assessment of the valuation of residential whole loans, at fair value, as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, was involved in determining certain of the estimate assumptions, including the forecasted prepayment, default and loss given default rates, property appraised value, and discount rate, which are not readily observable in the market and subject to significant measurement uncertainty. The evaluation of the assumptions to determine the valuation of residential whole loans, at fair value, required subjective and complex auditor judgement as the assumptions used were sensitive to variation, such that minor changes in home prices and/or credit quality of the borrower can cause significant changes in the estimate. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of residential whole loans, at fair value. This included controls related to the Company’s process to evaluate property appraised values and residential whole loan valuations. We involved valuation professionals with specialized skills and knowledge who assisted in evaluating the Company’s internal controls specific to the assessment of the third-party developed valuation techniques and models. We involved valuation professionals with specialized skills and knowledge, who assisted in: • evaluating that the methodology used by the Company in determining the property appraised value and residential whole loan fair value is in accordance with U.S. GAAP • evaluating the methodology and assumptions used to determine the property appraised value used by the Company for a sample of residential whole loans at fair value • evaluating the assumptions used to determine the residential whole loan fair value used by the Company by comparing them to market research and relevant industry practices • developing a fair value estimate for a sample of non-performing residential whole loans at fair value using the evaluated property appraised value, estimated time to liquidate the loan, expected liquidation costs, and home price index assumptions used by the Company and publicly available external market data collectively with independently developed valuation models and/or inputs and comparing the results of our estimate of fair value to the Company’s fair value estimate and • developing an independent fair value estimate for a sample of performing residential whole loans at fair value based on independently developed valuation models and/or inputs and comparing the results of our estimate of fair value to the Company’s fair value estimate. Assessment of the allowance for credit losses on certain residential whole loans held at carrying value As discussed in Note 2 and 3 to the consolidated financial statements, the Company’s total allowance for credit losses on residential whole loans held at carrying value as of December 31, 2022 was $35.3 million (the December 31, 2022 ACL). The Company estimated the December 31, 2022 ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances, specific to the Company’s loan portfolio segments grouped by shared risk characteristics which include Non-Qualified Mortgages (non-QM loans), Transitional loans, Single-Family Rental loans, Seasoned Performing loans, and Purchased Credit Deteriorated loans. These expected credit losses are generally calculated based on the estimated probability of default and loss severity of loans in the portfolio, which involves projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. These results were not discounted. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The default and severity rates were applied to the estimated amount of loans outstanding during each future period, based on contractual terms and expected prepayments. Expected prepayments are estimated based on historical experience and current and expected future economic conditions, including market interest rates. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. The Company forecasts future economic conditions based on forecasts provided by an external preparer of 74 Table of Contents economic forecasts, as well as its own knowledge of the market and its portfolio. The Company may considers multiple scenarios and select the one that it believes results in the most reasonable estimate of expected losses. The Company may apply qualitative adjustments to these expected loss estimates, which are determined based on a variety of factors, including differences between the Company’s loan portfolio and the loan portfolios represented by data available in regulatory filings of certain banks that are considered to have similar loan portfolios (available proxy data), and differences between current (and expected future) market conditions in comparison to market conditions that occurred in historical periods. We identified the assessment of the December 31, 2022 ACL associated with the Company’s non-QM loans and Purchased Credit Deteriorated loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the December 31, 2022 ACL for these loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the December 31, 2022 ACL methodology, including the methods and models used to estimate the expected prepayments and default and loss severity rates and their significant assumptions. Such significant assumptions included the reasonable and supportable forecasts, including reversion periods and macroeconomic forecast scenario, and the composition of the publicly available data derived from the historical loss experience of certain banks. The assessment also included the evaluation of the qualitative factors and their significant assumptions. Such significant assumptions were sensitive to variation, such that minor changes in the assumption can cause significant changes in the estimates. The assessment also included an evaluation of the conceptual soundness and performance of the prepayment, default and loss severity models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the December 31, 2022 ACL estimate, including controls over the: • development of the ACL methodology • continued use and appropriateness of changes made to the prepayment, default and loss severity models • identification and determination of the significant assumptions used in the prepayment, default and loss severity models • performance monitoring of the prepayment, default and loss severity models • continued use and appropriateness of changes made to the qualitative factors, including the significant assumptions used in the measurement of the qualitative factors • analysis of the ACL results, trends, and ratios. We evaluated the Company’s process to develop the December 31, 2022 ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • evaluating the Company’s ACL methodology for compliance with U.S. generally accepted accounting principles • evaluating judgments made by the Company in the continued use and appropriateness of changes made to the prepayment, default and loss severity models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices • assessing the conceptual soundness and performance testing of the prepayment, default and loss severity models by inspecting the model documentation to determine whether the models are suitable for their intended use • evaluating the methodology used to develop the economic forecast scenarios and underlying macroeconomic assumptions by comparing it to the Company’s business environment and relevant industry practices • evaluating the economic forecast scenario selected through comparison to publicly available forecasts • evaluating the length of the historical experience period and reasonable and supportable forecast periods by comparing them to specific portfolio risk characteristics and trends • assessing the composition of the publicly available data derived from the historical loss experience of certain banks by comparing to specific portfolio risk characteristics 75 Table of Contents • evaluating the methodology used to develop the qualitative factors and the effect of those factors on the ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models. We also assessed the sufficiency of the audit evidence obtained related to the December 31, 2022 ACL by evaluating the: • cumulative results of the audit procedures • qualitative aspects of the Company’s accounting practices • potential bias in the accounting estimates. /s/ KPMG LLP We have served as the Company’s auditor since 2011. New York, New York February 23, 2023 76 Table of Contents MFA FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Amounts) December 31, 2022 December 31, 2021 Assets: Residential whole loans, net ($ 5,727,524 and $ 5,305,349 held at fair value, respectively) (1)(2) $ 7,518,739 $ 7,913,000 Securities, at fair value (2) 333,364 256,685 Cash and cash equivalents 334,183 304,696 Restricted cash 159,898 99,751 Other assets (2) 766,221 565,556 Total Assets $ 9,112,405 $ 9,139,688 Liabilities: Financing agreements ($ 3,898,744 and $ 3,266,773 held at fair value, respectively) $ 6,812,086 $ 6,378,782 Other liabilities 311,470 218,058 Total Liabilities $ 7,123,556 $ 6,596,840 Commitments and contingencies (See Note 9) Stockholders’ Equity: Preferred stock, $ 0.01 par value; 7.5 % Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($ 200,000 aggregate liquidation preference) $ 80 $ 80 Preferred stock, $ 0.01 par value; 6.5 % Series C fixed-to-floating rate cumulative redeemable; 12,650 shares authorized; 11,000 shares issued and outstanding ($ 275,000 aggregate liquidation preference) 110 110 Common stock, $ 0.01 par value; 874,300 and 874,300 shares authorized; 101,802 and 108,138 shares issued and outstanding, respectively 1,018 1,082 Additional paid-in capital, in excess of par 3,684,291 3,775,482 Accumulated deficit ( 1,717,991 ) ( 1,279,484 ) Accumulated other comprehensive income 21,341 45,578 Total Stockholders’ Equity $ 1,988,849 $ 2,542,848 Total Liabilities and Stockholders’ Equity $ 9,112,405 $ 9,139,688 (1) Includes approximately $ 4.0 billion and $ 3.0 billion of Residential whole loans transferred to consolidated variable interest entities (“VIEs”) at December 31, 2022 and December 31, 2021, respectively. Such assets can be used only to settle the obligations of each respective VIE. (2) See Note 6 for information regarding the Company’s pledged assets. The accompanying notes are an integral part of the consolidated financial statements. 77 Table of Contents MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, (In Thousands, Except Per Share Amounts) 2022 2021 2020 Interest Income: Residential whole loans $ 441,223 $ 303,468 $ 332,212 Securities, at fair value 28,921 56,690 90,094 Other interest-earning assets 7,437 1,800 9,850 Cash and cash equivalent investments 4,838 344 676 Interest Income $ 482,419 $ 362,302 $ 432,832 Interest Expense: Asset-backed and other collateralized financing arrangements $ 243,083 $ 104,597 $ 242,039 Other interest expense 15,760 15,788 26,719 Interest Expense $ 258,843 $ 120,385 $ 268,758 Net Interest Income $ 223,576 $ 241,917 $ 164,074 Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans $ 2,646 $ 44,863 $ ( 22,381 ) Provision for Credit Losses on Other Assets ( 28,579 ) — — Net Interest Income after (Provision)/Reversal of Provision for Credit Losses $ 197,643 $ 286,780 $ 141,693 Other (Loss)/Income, net: Net (loss)/gain on residential whole loans measured at fair value through earnings ( 866,762 ) 16,243 16,386 Net realized loss on residential whole loans held at carrying value — — ( 273,030 ) Impairment and other net (loss)/gain on securities and other portfolio investments ( 25,067 ) 74,496 ( 350,567 ) Net gain on real estate owned 25,379 22,838 5,391 Net gain/(loss) on derivatives used for risk management purposes 255,179 1,426 ( 61,249 ) Net gain/(loss) on securitized debt measured at fair value through earnings 290,639 15,027 ( 11,929 ) Lima One - origination, servicing and other fee income 46,745 22,600 — Other, net 9,297 12,473 ( 4,571 ) Other (Loss)/Income, net $ ( 264,590 ) $ 165,103 $ ( 679,569 ) Operating and Other Expense: Compensation and benefits $ 76,728 $ 53,817 $ 31,042 Other general and administrative expense 35,812 31,729 25,666 Loan servicing, financing and other related costs 42,894 30,867 40,372 Amortization of intangible assets 9,200 6,600 — Costs associated with restructuring/forbearance agreement — — 44,434 Operating and Other Expense $ 164,634 $ 123,013 $ 141,514 Net (Loss)/Income $ ( 231,581 ) $ 328,870 $ ( 679,390 ) Less Preferred Stock Dividend Requirement $ 32,875 $ 32,875 $ 29,796 Net (Loss)/Income Available to Common Stock and Participating Securities $ ( 264,456 ) $ 295,995 $ ( 709,186 ) Basic (Loss)/Earnings per Common Share $ ( 2.57 ) $ 2.66 $ ( 6.28 ) Diluted (Loss)/Earnings per Common Share $ ( 2.57 ) $ 2.63 $ ( 6.28 ) The accompanying notes are an integral part of the consolidated financial statements. 78 Table of Contents MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) For the Year Ended December 31, (In Thousands) 2022 2021 2020 Net (loss)/income $ ( 231,581 ) $ 328,870 $ ( 679,390 ) Other Comprehensive (Loss): Unrealized (losses)/gains on securities available-for-sale ( 25,492 ) ( 32,774 ) 420,281 Reclassification adjustment for securities sales included in net income — — ( 389,127 ) Reclassification adjustment for impairments included in net income — — ( 344,269 ) Derivative hedging instrument fair value changes, net — — ( 50,127 ) Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk 1,255 1,059 ( 2,314 ) Reclassification adjustment for losses related to hedging instruments included in net income — — 72,802 Other Comprehensive (Loss) ( 24,237 ) ( 31,715 ) ( 292,754 ) Comprehensive (loss)/income before preferred stock dividends $ ( 255,818 ) $ 297,155 $ ( 972,144 ) Dividends required on preferred stock ( 32,875 ) ( 32,875 ) ( 29,796 ) Comprehensive (Loss)/Income Available to Common Stock and Participating Securities $ ( 288,693 ) $ 264,280 $ ( 1,001,940 ) The accompanying notes are an integral part of the consolidated financial statements. 79 Table of Contents MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Year Ended December 31, 2022 (In Thousands, Except Per Share Amounts) Preferred Stock 6.5 % Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $ 25.00 per Share Preferred Stock 7.5 % Series B Cumulative Redeemable - Liquidation Preference $ 25.00 per Share Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Shares Amount Shares Amount Shares Amount Balance at December 31, 2021 11,000 $ 110 8,000 $ 80 108,138 $ 1,082 $ 3,775,482 $ ( 1,279,484 ) $ 45,578 $ 2,542,848 Net loss — — — — — — — ( 231,581 ) — ( 231,581 ) Issuance of common stock, net of expenses — — — — 197 1 1,097 — — 1,098 Repurchase of shares of common stock (1) — — — — ( 6,533 ) ( 65 ) ( 103,188 ) — — ( 103,253 ) Equity based compensation expense — — — — — — 11,335 — — 11,335 Change in accrued dividends attributable to stock-based awards — — — — — — ( 435 ) ( 1,997 ) — ( 2,432 ) Dividends declared on common stock ($ 1.67 per share) — — — — — — — ( 171,426 ) — ( 171,426 ) Dividends declared on Series B Preferred Stock ($ 1.875 per share) — — — — — — — ( 15,000 ) — ( 15,000 ) Dividends declared on Series C Preferred Stock ($ 1.625 per share) — — — — — — — ( 17,875 ) — ( 17,875 ) Dividends attributable to dividend equivalents — — — — — — — ( 628 ) — ( 628 ) Change in unrealized losses on securities, net — — — — — — — — ( 25,492 ) ( 25,492 ) Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk — — — — — — — — 1,255 1,255 Balance at December 31, 2022 11,000 $ 110 8,000 $ 80 101,802 $ 1,018 $ 3,684,291 $ ( 1,717,991 ) $ 21,341 $ 1,988,849 MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Year Ended December 31, 2021 (In Thousands, Except Per Share Amounts) Preferred Stock 6.5 % Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $ 25.00 per Share Preferred Stock 7.5 % Series B Cumulative Redeemable - Liquidation Preference $ 25.00 per Share Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Shares Amount Shares Amount Shares Amount Balance at December 31, 2020 11,000 $ 110 8,000 $ 80 112,929 $ 1,129 $ 3,851,517 $ ( 1,405,327 ) $ 77,293 $ 2,524,802 Net Income — — — — — — — 328,870 — 328,870 Issuance of common stock, net of expenses — — — — 288 3 1,829 — — 1,832 Repurchase of shares of common stock (1) — — — — ( 5,079 ) ( 50 ) ( 86,343 ) — — ( 86,393 ) Equity based compensation expense — — — — — — 9,038 — — 9,038 Change in accrued dividends attributable to stock-based awards — — — — — — ( 559 ) ( 278 ) — ( 837 ) Dividends declared on common stock ($ 1.540 per share) — — — — — — — ( 169,275 ) — ( 169,275 ) Dividends declared on Series B Preferred Stock ($ 1.875 per share) — — — — — — — ( 15,000 ) — ( 15,000 ) Dividends declared on Series C Preferred Stock ($ 1.625 per share) — — — — — — — ( 17,875 ) — ( 17,875 ) Dividends attributable to dividend equivalents — — — — — — — ( 599 ) — ( 599 ) Change in unrealized losses on securities, net — — — — — — — — ( 32,774 ) ( 32,774 ) Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk — — — — — — — — 1,059 1,059 Balance at December 31, 2021 11,000 $ 110 8,000 $ 80 108,138 $ 1,082 $ 3,775,482 $ ( 1,279,484 ) $ 45,578 $ 2,542,848 80 Table of Contents For the Year Ended December 31, 2020 (In Thousands, Except Per Share Amounts) Preferred Stock 6.5 % Series C Fixed-to-Floating Cumulative Redeemable - Liquidation Preference $ 25.00 per Share Preferred Stock 7.5 % Series B Cumulative Redeemable - Liquidation Preference $ 25.00 per Share Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Shares Amount Shares Amount Shares Amount Balance at December 31, 2019 — $ — 8,000 $ 80 113,092 $ 1,131 $ 3,643,734 $ ( 631,040 ) $ 370,047 $ 3,383,952 Cumulative effect adjustment on adoption of new accounting standard ASU 2016-13 — — — — — — — ( 8,326 ) — ( 8,326 ) Net loss — — — — — — — ( 679,390 ) — ( 679,390 ) Issuance of Series C Preferred Stock, net of expenses 11,000 110 — — — — 265,942 — — 266,052 Issuance of common stock, net of expenses — — — — 3,448 34 7,419 — — 7,453 Repurchase of shares of common stock (1) — — — — ( 3,611 ) ( 36 ) ( 53,541 ) — — ( 53,577 ) Equity based compensation expense — — — — — — 6,715 — — 6,715 Change in accrued dividends attributable to stock-based awards — — — — — — 856 — — 856 Dividends declared on common stock ($ 0.500 per share) — — — — — — — ( 56,546 ) — ( 56,546 ) Dividends declared on Series B Preferred Stock ($ 1.875 per share) — — — — — — — ( 15,000 ) — ( 15,000 ) Dividends declared on Series C Preferred Stock ($ 1.345 per share) — — — — — — — ( 14,796 ) — ( 14,796 ) Dividends attributable to dividend equivalents — — — — — — — ( 229 ) — ( 229 ) Change in unrealized losses on MBS, net — — — — — — — — ( 313,115 ) ( 313,115 ) Derivative hedging instruments fair value changes and amortization, net — — — — — — — — 22,675 22,675 Warrants issued and repurchased, net — — — — — — ( 19,608 ) — — ( 19,608 ) Changes in fair value of financing agreements at fair value due to changes in instrument-specific credit risk — — — — — — — — ( 2,314 ) ( 2,314 ) Balance at December 31, 2020 11,000 $ 110 8,000 $ 80 112,929 $ 1,129 $ 3,851,517 $ ( 1,405,327 ) $ 77,293 $ 2,524,802 (1) For the year ended December 31, 2022, includes approximately $ 1.0 million ( 56,690 shares) surrendered for tax purposes related to equity-based compensation awards. For the year ended December 31, 2021, includes approximately $ 799,000 ( 53,281 shares) surrendered for tax purposes related to equity-based compensation awards. For the year ended December 31, 2020, includes approximately $ 2.7 million ( 90,134 shares) surrendered for tax purposes related to equity-based compensation awards. The accompanying notes are an integral part of the consolidated financial statements. 81 Table of Contents MFA FINANCIAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the Year Ended December 31, (In Thousands) 2022 2021 2020 Cash Flows From Operating Activities: Net (loss)/income $ ( 231,581 ) $ 328,870 $ ( 679,390 ) Adjustments to reconcile net income to net cash provided by operating activities: Net loss/(gain) on residential whole loans 866,762 ( 12,931 ) 246,419 Impairment and other net loss/(gain) on securities and other portfolio investments, net 25,067 ( 74,602 ) 350,567 Net gain on real estate owned ( 24,473 ) ( 18,772 ) ( 2,486 ) Accretion of purchase discounts and amortization of purchase premiums on residential whole loans and securities, and amortization of terminated hedging instruments ( 27,314 ) ( 59,424 ) 10,949 Provision/(Reversal of provision) for credit losses on residential whole loans and other assets 25,933 ( 48,355 ) 22,121 Net (gain)/loss on derivatives used for risk management purposes ( 247,898 ) ( 2,095 ) 60,680 Net margin received/(paid) for derivatives used for risk management purposes 214,754 574 — Net (gain)/loss on securitized debt measured at fair value through earnings ( 290,639 ) ( 14,391 ) 11,929 Net other non-cash losses included in net income 27,503 27,388 28,480 Decrease/(Increase) in other assets 40,077 ( 20,015 ) 39,930 (Decrease)/Increase in other liabilities ( 12,114 ) 14,046 ( 50,803 ) Net cash provided by operating activities $ 366,077 $ 120,293 $ 38,396 Cash Flows From Investing Activities: Purchases of residential whole loans, loan related investments and capitalized advances $ ( 3,206,941 ) $ ( 4,516,971 ) $ ( 1,477,320 ) Proceeds from sales of residential whole loans, and residential whole loan repurchases — — 1,510,902 Principal payments on residential whole loans and loan related investments 1,878,802 2,012,901 1,825,606 Increase in cash balances resulting from Lima One purchase transaction, net — 6,121 — Purchases of securities — — ( 163,748 ) Proceeds from sales of securities and other assets 15,660 — 3,790,148 Principal payments on securities 53,121 157,297 633,194 Purchases of real estate owned and capital improvements ( 978 ) ( 1,338 ) ( 10,198 ) Proceeds from sales of real estate owned 133,980 187,010 279,786 Additions to leasehold improvements, furniture and fixtures ( 300 ) ( 12,048 ) ( 4,862 ) Net cash used in investing activities $ ( 1,126,656 ) $ ( 2,167,028 ) $ 6,383,508 Cash Flows From Financing Activities: Principal payments on financing agreements with mark-to-market collateral provisions $ ( 2,971,332 ) $ ( 1,822,198 ) $ ( 21,810,920 ) Proceeds from borrowings under financing agreements with mark-to-market collateral provisions 2,631,606 3,022,279 14,008,042 Principal payments on other collateralized financing agreements ( 2,152,143 ) ( 1,883,068 ) ( 1,733,345 ) Proceeds from borrowings under other collateralized financing agreements 3,676,510 2,692,576 3,803,150 Payment made for other collateralized financing agreement related costs ( 16,390 ) ( 7,145 ) ( 1,699 ) Principal payment on redemption of Senior notes — ( 100,000 ) — Payments made for settlements and unwinds of Swaps designated as hedges — — ( 60,022 ) Proceeds from issuance of series C preferred stock — — 275,000 Payments made for costs related to series C preferred stock issuance — — ( 8,948 ) Proceeds from issuances of common stock 1,183 1,825 7,441 Payments made for the repurchase of common stock through the stock repurchase program ( 102,311 ) ( 85,591 ) ( 50,835 ) Proceeds from the issuance of warrants — — 14,041 Payments made for the repurchase of warrants — — ( 33,650 ) Dividends paid on preferred stock ( 32,875 ) ( 32,875 ) ( 29,796 ) Dividends paid on common stock and dividend equivalents ( 184,035 ) ( 156,140 ) ( 113,508 ) Net cash provided by/(used in) financing activities $ 850,213 $ 1,629,663 $ ( 5,735,049 ) Net increase in cash, cash equivalents and restricted cash $ 89,634 $ ( 417,072 ) $ 686,855 Cash, cash equivalents and restricted cash at beginning of period $ 404,447 $ 821,519 $ 134,664 Cash, cash equivalents and restricted cash at end of period $ 494,081 $ 404,447 $ 821,519 Supplemental Disclosure of Cash Flow Information Interest Paid $ 239,185 $ 116,966 $ 254,270 (continued) 82 Table of Contents Non-cash Investing and Financing Activities: Transfer from residential whole loans to real estate owned $ 82,911 $ 72,304 $ 96,766 Dividends and dividend equivalents declared and unpaid $ 35,769 $ 47,751 $ 34,016 Right-of-use lease asset and lease liability $ — $ 40,893 $ — Repayment of Lima One preferred stock in connection with the Lima One transaction $ — $ 22,030 $ — Receivable for sale of unsettled residential whole loans $ 275,656 $ — $ — Payable for purchase of unsettled Agency MBS $ 132,025 $ — $ — Deconsolidation of securitized Agency eligible investor loans and related debt $ 490,952 $ — $ — The accompanying notes are an integral part of the consolidated financial statements. 83 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 1. Organization MFA Financial, Inc. (the “Company”) was incorporated in Maryland on July 24, 1997 and began operations on April 10, 1998. The Company has elected to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. In order to maintain its qualification as a REIT, the Company must comply with a number of requirements under federal tax law, including that it must distribute at least 90% of its annual REIT taxable income to its stockholders. The Company has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business (see Note 8). 2. Summary of Significant Accounting Policies (a) Basis of Presentation and Consolidation On April 4, 2022, the Company effected a one-for-four reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”). Accordingly, all share and per share data included in these consolidated financial statements and notes thereto have been adjusted retroactively to reflect the impact of the Reverse Stock Split. The accompanying consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could differ from those estimates, which could materially impact the Company’s results of operations and its financial condition. Management has made significant estimates in several areas: impairment, valuation allowances and loss allowances on residential whole loans (see Note 3), mortgage-backed securities (“MBS”), credit risk transfer (“CRT”) securities and mortgage servicing rights (“MSR”)-related assets (collectively, “Securities, at fair value”) (see Note 4) and Other assets (see Note 5), valuation of Securities, at fair value (see Notes 4 and 13), income recognition and valuation of residential whole loans (see Notes 3 and 13), valuation of financing agreements (Notes 6 and 13), and valuation of derivative instruments (see Notes 5(d) and 13). In addition, estimates are used in the determination of taxable income used in the assessment of REIT compliance and contingent liabilities for related taxes, penalties and interest (see Note 8). Actual results could differ from those estimates. The consolidated financial statements of the Company include the accounts of all subsidiaries. All intercompany accounts and transactions have been eliminated. In addition, the Company consolidates entities established to facilitate transactions related to the acquisition and securitization of residential whole loans. Certain prior period amounts have been reclassified to conform to the current period presentation. On July 1, 2021, the Company completed the acquisition of Lima One Holdings, LLC, the parent company of Lima One Capital, LLC (collectively referred to as “Lima One”), a leading nationwide originator and servicer of business purpose loans (“BPLs”). Lima One’s financial results are consolidated with MFA’s results from that date. 84 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (b) Residential Whole Loans (including Residential Whole Loans transferred to consolidated VIEs) Residential whole loans included in the Company’s consolidated balance sheets are primarily comprised of pools of fixed- and adjustable-rate residential mortgage loans acquired through consolidated trusts in secondary market transactions or originated by Lima One. The accounting model utilized by the Company is determined at the time each loan package is initially acquired. Prior to the second quarter of 2021, the fair value option was typically elected on loans that were 60 or more days delinquent at purchase (“Purchased Non-performing Loans”). Purchased Credit Deteriorated Loans acquired prior to the second quarter of 2021, and where the underlying borrower had a delinquency status of less than 60 days at the acquisition date, are typically held at carrying value. Purchased Performing Loans acquired prior to the second quarter of 2021 are also typically held at carrying value, but the accounting methods for income recognition and determination and measurement of any required credit loss reserves (as discussed below) differ from those used for Purchased Credit Deteriorated Loans held at carrying value. Starting in the second quarter of 2021, the Company has elected the fair value option for all loans acquired, irrespective of borrower delinquency status at acquisition. Over time, the Company expects that election of the fair value option should serve to simplify reporting of the results of its loan investment activities as fair value accounting will be used for the majority of loans in the Company’s portfolio. The accounting model initially applied to loan acquisitions is not permitted to be subsequently changed. Consequently, the Company is not permitted to retroactively apply fair value accounting to loans held at carrying value acquired in periods prior to the second quarter of 2021. The Company’s residential whole loans pledged as collateral against financing agreements are included in the consolidated balance sheets with amounts pledged disclosed in Note 6. Purchases and sales of residential whole loans that are subject to an extended period of due diligence that crosses a reporting date are recorded in the Company’s balance sheet at amounts reflecting management’s current estimate of assets that will be acquired or disposed at the closing of the transaction. This estimate is subject to revision at the closing of the transaction, pending the outcome of due diligence performed prior to closing. Residential whole loans purchased under flow arrangements with loan origination partners are generally recorded at the transaction settlement date. Recorded amounts of residential whole loans for which the closing of the purchase transaction is yet to occur are not eligible to be pledged as collateral against any financing agreement until the closing of the purchase transaction. Interest income, credit related losses and changes in the fair value of loans held at fair value are recorded post settlement for acquired loans and until transaction settlement for sold loans (see Notes 3, 6, 13 and 14). Purchased Performing Loans Acquisitions of Purchased Performing Loans to date (which include loans purchased from third parties or loans originated by Lima One) have been primarily comprised of: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (“Non-QM loans”), (ii) short-term business purpose loans collateralized by residential and multi-family properties made to non-occupant borrowers that intend to rehabilitate and sell the properties (“Transitional loans” or “TL”) (also sometimes referred to as “Rehabilitation loans” or “Fix and Flip loans”), (iii) business purpose loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (“Single-family rental loans”), (iv) loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (“Agency eligible investor loans”), and (v) previously originated loans secured by residential real estate that is generally owner occupied (“Seasoned performing loans”). Purchased Performing Loans are initially recorded at their purchase price (or amount funded for originated loans). Interest income on Purchased Performing Loans acquired at par is accrued based on each loan’s current interest bearing balance and current interest rate. Interest income on such loans acquired at a premium/discount to par is recorded each period based on the contractual coupon net of any amortization of premium or accretion of discount, adjusted for actual prepayment activity. For loans acquired with related servicing rights retained by the seller, interest income is reported net of related serving costs. For Purchased Performing Loans acquired prior to the second quarter of 2021 and where the fair value option was not elected, an allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, the value of the underlying collateral and the ability of the Company to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Income recognition is suspended, and interest accruals are reversed against income, for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion 85 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 of management, a full recovery of income and principal becomes doubtful (i.e., such loans are placed on nonaccrual status). For nonaccrual loans, interest income is recorded under the cash basis method as interest payments are received. Interest accruals are resumed when the loan becomes contractually current. A loan is written off when it is no longer realizable and/or it is legally discharged. Modified loans are considered “troubled debt restructurings” if the Company grants a concession to a borrower who is experiencing financial difficulty (including the interpretation of this definition set forth in OCC Bulletin 2020-35). Charge-offs to the allowance for loan losses occur when losses are confirmed through the receipt of cash or other consideration from the completion of a sale; when a modification or restructuring takes place in which we grant a concession to a borrower or agree to a discount in full or partial satisfaction of the loan; when we take ownership and control of the underlying collateral in full satisfaction of the loan; when loans are reclassified as other investments; or when significant collection efforts have ceased and it is highly likely that a loss has been realized. The aggregate allowance for credit losses is equal to the sum of the losses expected over the life of each respective loan. Expected losses are generally calculated based on the estimated probability of default and loss severity of loans in the portfolio, which involves projecting each loan’s expected cash flows based on their contractual terms, expected prepayments, and estimated default and loss severity rates. The results were not discounted. The default and severity rates were estimated based on the following steps: (i) obtained the Company’s historical experience through an entire economic cycle for each loan type or, to the extent the Company did not have sufficient historical loss experience for a given loan type, publicly available data derived from the historical loss experience of certain banks, which data the Company believes is generally representative of its portfolio, (ii) obtained historical economic data (U.S. unemployment rates and home price appreciation) over the same period, and (iii) estimated default and severity rates during three distinct future periods based on historical default and severity rates during periods when economic conditions similar to those forecasted were experienced. The default and severity rates were applied to the estimated amount of loans outstanding during each future period, based on contractual terms and expected prepayments. Expected prepayments are estimated based on historical experience and current and expected future economic conditions, including market interest rates. The three periods were as follows: (i) a one-year forecast of economic conditions based on U.S. unemployment rates and home price appreciation, followed by (ii) a two-year “reversion” period during which economic conditions (U.S. unemployment rates and home price appreciation) are projected to revert to historical averages on a straight line basis, followed by (iii) the remaining life of each loan, during which period economic conditions (U.S. unemployment rates and home price appreciation) are projected to equal historical averages. In addition, a liability is established (and recorded in Other Liabilities) each period using a similar methodology for committed but undrawn loan amounts. The Company forecasts future economic conditions based on forecasts provided by an external preparer of economic forecasts, as well as its own knowledge of the market and its portfolio. The Company may consider multiple scenarios and select the one that it believes results in the most reasonable estimate of expected losses. The Company may apply qualitative adjustments to these results as further described in Note 3. For certain loans where foreclosure has been deemed to be probable, loss estimates are based on whether the value of the underlying collateral is sufficient to recover the carrying value of the loan. This methodology has not changed significantly from the calculation of the allowance for credit losses in prior periods. Purchased Credit Deteriorated Loans The Company has elected to account for these loans as credit deteriorated as they have experienced a deterioration in credit quality since origination and prior to our purchase and were acquired at discounted prices that reflect, in part, the impaired credit history of the borrower. Substantially all of these loans have previously experienced payment delinquencies and the amount owed may exceed the value of the property pledged as collateral. Consequently, these loans generally have a higher likelihood of default than newly originated mortgage loans with loan-to-value ratios (“LTVs”) of 80 % or less to creditworthy borrowers. The Company believes that amounts paid to acquire these loans represent fair market value at the date of acquisition. Loans considered credit deteriorated are initially recorded at the purchase price on a net basis, after establishing an initial allowance for credit losses (their initial cost basis is equal to their purchase price plus the initial allowance for credit losses). Subsequent to acquisition, the gross recorded amount for these loans reflects the initial cost basis, plus accretion of interest income, less principal and interest cash flows received. Purchased Credit Deteriorated Loans acquired prior to the second quarter of 2021, or where the fair value option was not otherwise elected, are presented on the Company’s consolidated balance sheets at carrying value, which reflects the recorded cost basis reduced by any allowance for credit losses. Interest income on such loans purchased is recorded each period based on the contractual coupon net of amortization of the difference between their cost basis and unpaid principal balance (“UPB”), subject to the Company’s nonaccrual policy. 86 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Residential Whole Loans at Fair Value Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at the time of acquisition. Prior to the second quarter of 2021, this accounting election was made primarily on Purchased Non-performing Loans. Starting in the second quarter of 2021, the Company made the fair value election on all loan acquisitions, which, to date, have been comprised exclusively of Purchased Performing Loans including loans originated by Lima One since its consolidation. The Company generally considers accounting for these loans at fair value to be more reflective of the expected pattern of returns from these loans under current economic conditions. The Company determines the fair value of its residential whole loans held at fair value after considering portfolio valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans and trading activity observed in the marketplace. Subsequent changes in fair value are reported in current period earnings and presented in Net (loss)/gain on residential whole loans measured at fair value through earnings on the Company’s consolidated statements of operations. Interest income is recorded on these loans based on their yield and is presented as part of interest income in the Company’s consolidated statements of operations. Cash outflows associated with loan-related advances made by the Company on behalf of the borrower are included in the basis of the loan and are reflected in unrealized gains or losses reported each period. Income and costs associated with originating loans on which the fair value option was elected are recorded in other income and expense respectively in the period in which they are earned or incurred. (c) Securities, at Fair Value MSR-Related Assets The Company has investments in financial instruments whose cash flows are considered to be largely dependent on underlying MSRs that either directly or indirectly act as collateral for the investment. These financial instruments, which are referred to as MSR-related assets, are discussed in more detail below. The Company’s MSR-related assets pledged as collateral against repurchase agreements are included in the consolidated balance sheets with the amounts pledged disclosed in Note 6. Purchases and sales of MSR-related assets are recorded on the trade date (see Notes 4, 6, and 13). Term Notes Backed by MSR-Related Collateral The Company has invested in term notes that are issued by special purpose vehicles (“SPV”) that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. The Company considers payment of principal and interest on these term notes to be largely dependent on the cash flows generated by the underlying MSRs as this impacts the cash flows available to the SPV that issued the term notes. Credit risk borne by the holders of the term notes is also mitigated by structural credit support in the form of over-collateralization. Credit support is also provided by a corporate guarantee from the ultimate parent or sponsor of the SPV that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the underlying MSRs be insufficient. The Company’s term notes backed by MSR-related collateral are treated as “available-for-sale” (“AFS”) securities and reported at fair value on the Company’s consolidated balance sheets with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive income/(loss) (“AOCI”), a component of Stockholders’ Equity, subject to impairment and loss allowances. Interest income is recognized on an accrual basis on the Company’s consolidated statements of operations. The Company’s valuation process for such notes is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral, as applicable, and the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. 87 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Other Residential Mortgage Securities The Company has invested in residential MBS that are issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively, “Agency MBS”), and residential MBS that are not guaranteed by any agency of the U.S. Government or any federally chartered corporation (“Non-Agency MBS”). In addition, the Company has investments in CRT securities that are issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company. Designation Securities that the Company generally intends to hold until maturity, but that it may sell from time to time as part of the overall management of its business, are designated as AFS. Such securities are carried at their fair value with unrealized gains and losses excluded from earnings (except when an allowance for loan losses is recognized, as discussed below) and reported in AOCI, a component of Stockholders’ Equity. Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of AOCI to earnings as a realized gain or loss using the specific identification method . The Company has elected the fair value option for its Agency and Non-Agency MBS. These securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations. In addition, the Company has elected the fair value option for certain of its CRT securities as it considers this method of accounting to more appropriately reflect the risk-sharing structure of these securities. Such securities are carried at their fair value with changes in fair value included in earnings for the period and reported in Other Income, net on the Company’s consolidated statements of operations. Revenue Recognition, Premium Amortization and Discount Accretion Interest income on securities is accrued based on their outstanding principal balance and their contractual terms. Premiums and discounts associated with Non-Agency MBS assessed as high credit quality at the time of purchase are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity. Determination of Fair Value for Residential Mortgage Securities In determining the fair value of the Company’s residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity (see Note 13). 88 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Allowance for credit losses When the fair value of an AFS security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities, as well as securities for which a credit loss allowance had been previously recorded, on at least a quarterly basis and determines whether any changes to the allowance for credit losses are required. If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then the Company must recognize a write-down through charges to earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an impaired security, only the portion of the impairment related to credit losses is recognized through a loss allowance charged to earnings with the remainder recognized through AOCI on the Company’s consolidated balance sheets. Impairments recognized through other comprehensive income/(loss) (“OCI”) do not impact earnings. Credit loss allowances are subject to reversal through earnings resulting from improvements in expected cash flows. The determination as to whether to record (or reverse) a credit loss allowance is subjective, as such determinations are based on factual information available at the time of assessment as well as the Company’s estimates of future performance and cash flow projections. As a result, the timing and amount of losses constitute material estimates that are susceptible to significant change (see Note 4). Balance Sheet Presentation The Company’s residential mortgage securities pledged as collateral against financing agreements and interest rate swap agreements (“Swaps”) are included on the consolidated balance sheets with the fair value of the securities pledged disclosed in Note 6. Purchases and sales of securities are recorded on the trade date. (d) Cash and Cash Equivalents Cash and cash equivalents include cash on deposit with financial institutions and investments in money market funds, all of which have original maturities of three months or less. Cash and cash equivalents may also include cash pledged as collateral to the Company by its financing counterparties as a result of reverse margin calls (i.e., margin calls made by the Company). The Company did not hold any cash pledged by its counterparties at December 31, 2022 and December 31, 2021. At December 31, 2022 and December 31, 2021, the Company had cash and cash equivalents of $ 334.2 million and $ 304.7 million, respectively. At December 31, 2022, the Company had $ 267.1 million of investments in overnight money market funds, which are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. As of December 31, 2021, the Company had $ 215.8 million worth of investments in overnight money market funds. In addition, deposits in FDIC insured accounts generally exceed insured limits (see Notes 6 and 13). (e) Restricted Cash Restricted cash primarily represents the Company’s cash collections held in connection with certain of the Company’s financing agreements, Swaps and/or loan servicing activities that are not available to the Company for general corporate purposes. Restricted cash may be applied against amounts due to financing agreements and/or Swap counterparties, or may be returned to the Company when the related collateral requirements are exceeded or at the maturity of financing agreements and/or Swaps. The Company had aggregate restricted cash of $ 159.9 million and $ 99.8 million at December 31, 2022 and December 31, 2021, respectively (see Notes 5(d), 6 and 13). (f) Goodwill & Intangible Assets At December 31, 2022 and December 31, 2021, the Company had goodwill of $ 61.1 million, which represents the excess of the fair value of consideration paid over the fair value of net assets acquired in connection with the acquisition of Lima One, and other intangible assets of $ 12.2 million and $ 21.4 million, respectively (net of amortization), primarily comprised of customer relationships, non-competition agreements (fully amortized as of June 30, 2022), trademarks and trade names, and internally developed software recognized as part of the acquisition of Lima One (see Note 5(b)). The intangible assets are amortized over their expected useful lives, which ranged from one to ten years at acquisition. Goodwill, which is not subject to amortization, and intangible assets are tested for impairment at least annually, or more frequently under certain circumstances that could reduce the fair value of the Lima One reporting unit (a component of the Lima One segment) below its carrying amount. Through December 31, 2022, the Company had not recognized any impairment against its goodwill or intangible assets. Goodwill and intangible assets are included in Other assets on the Company’s consolidated balance sheets. 89 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (g) Real Estate Owned (“REO”) REO represents real estate acquired by the Company, including through foreclosure, deed in lieu of foreclosure, or purchased in connection with the acquisition of residential whole loans. REO acquired through foreclosure or deed in lieu of foreclosure is initially recorded at fair value less estimated selling costs. REO acquired in connection with the acquisition of residential whole loans is initially recorded at its purchase price. Subsequent to acquisition, REO is reported, at each reporting date, at the lower of the current carrying amount or fair value less estimated selling costs and for presentation purposes is included in Other assets on the Company’s consolidated balance sheets. Changes in fair value that result in an adjustment to the reported amount of an REO property that has a fair value at or below its carrying amount are reported in Other Income, net on the Company’s consolidated statements of operations. The Company has acquired certain properties that it holds for investment purposes, including rentals to third parties. These properties are held at their historical basis less depreciation, and are subject to impairment. Related rental income and expenses are recorded in Other Income, net (see Note 5). (h) Leases and Depreciation Leases The Company records its operating lease liabilities and operating lease right-of-use assets on its consolidated balance sheets. The operating lease liabilities are equal to the present value of the remaining fixed lease payments (excluding real estate tax and operating expense escalations) discounted at the Company’s estimated incremental borrowing rate at the date of lease commencement, and the operating lease right-of-use assets are equal to the operating lease liabilities adjusted for lease incentives and initial direct costs. As lease payments are made, the operating lease liabilities are reduced to the present value of the remaining lease payments and the operating lease right-of-use assets are reduced by the difference between the lease expense (straight-lined over the lease term) and the theoretical interest expense amount (calculated using the incremental borrowing rate at the date of lease commencement). See Notes 5 and 9 for further discussion on leases. Leasehold Improvements, Real estate and Other Depreciable Assets Depreciation is computed on the straight-line method over the estimated useful life of the related assets or, in the case of leasehold improvements, over the shorter of the useful life or the lease term. Furniture, fixtures, computers and related hardware have estimated useful lives ranging from five to fifteen years at the time of purchase. The building component of real estate held-for-investment is depreciated over 27.5 years. (i) Loan Securitization and Other Debt Issuance Costs Loan securitization related costs are costs associated with the issuance of beneficial interests by consolidated VIEs and incurred by the Company in connection with various financing transactions completed by the Company. These costs may include underwriting, rating agency, legal, accounting and other fees. Such costs, which reflect deferred charges (unless the debt is recorded at fair value, as discussed below), are included on the Company’s consolidated balance sheets as a direct deduction from the corresponding debt liability. These deferred charges are amortized as an adjustment to interest expense using the effective interest method. For certain financing agreements, such costs are amortized over the shorter of the period to the expected or stated legal maturity of the debt instruments. The Company periodically reviews the recoverability of these deferred costs and, in the event an impairment charge is required, such amount will be included in Operating and Other Expense on the Company’s consolidated statements of operations. To the extent that the Company has elected the fair value option for the related debt liability, these costs are expensed at the closing of the transaction. (j) Financing Agreements The Company finances the majority of its residential mortgage assets with financing agreements that include repurchase agreements and other forms of collateralized financing. Under repurchase agreements, the Company sells assets to a lender and agrees to repurchase the same assets in the future for a price that is higher than the original sale price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although legally structured as sale and repurchase transactions, the Company accounts for repurchase agreements as secured borrowings. Under its repurchase agreements and other forms of collateralized financing, the Company pledges its assets as collateral to secure the borrowing, in an amount which is equal to a specified percentage of the fair value of the pledged collateral, while the Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase financing, 90 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 unless the repurchase financing is renewed with the same counterparty, the Company is required to repay the loan including any accrued interest and concurrently receives back its pledged collateral from the lender. With the consent of the lender, the Company may renew a repurchase financing at the then prevailing financing terms. Margin calls, whereby a lender requires that the Company pledge additional assets or cash as collateral to secure borrowings under its repurchase financing with such lender, are routinely experienced by the Company when the value of the assets pledged as collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions. The Company also may make margin calls on counterparties when collateral values increase. Should a counterparty decide not to renew a financing arrangement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation. If, during the term of a financing, a lender should default on its obligation, the Company might experience difficulty recovering its pledged assets which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to such lender, including accrued interest receivable on such collateral (see Notes 6 and 13). The Company has elected the fair value option on certain of its financing agreements. These agreements are reported at their fair value, with changes in fair value being recorded in earnings each period (or other comprehensive income, to the extent the change results from a change in instrument specific credit risk), as further detailed in Note 6. Financing costs, including “up front” fees paid at inception related to financing agreements at fair value are expensed as incurred. Interest expense is recorded based on the current interest rate in effect for the related agreement. (k) Equity-Based Compensation Compensation expense for equity-based awards that are subject to vesting conditions, is recognized ratably over the vesting period of such awards, based upon the fair value of such awards at the grant date. The Company has made annual grants of restricted stock units (“RSUs”), certain of which cliff vest after a three-year period, subject only to continued employment, and others of which cliff vest after a three-year period, subject to both continued employment and the achievement of certain performance criteria based on a formula tied to the Company’s achievement of average total shareholder return (“TSR”) during that three-year period, as well as the TSR of the Company relative to the TSR of a group of peer companies (over the three-year period) selected by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) at the date of grant. The features in these awards related to the attainment of TSR over a specified period constitute a “market condition,” which impacts the amount of compensation expense recognized for these awards. Specifically, the uncertainty regarding the achievement of the market condition was reflected in the grant date fair valuation of the RSUs, which is recognized as compensation expense over the relevant vesting period. The amount of compensation expense recognized is not dependent on whether the market condition was or will be achieved. The Company makes dividend equivalent payments in connection with certain of its equity-based awards. A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Company’s Equity Compensation Plan (the “Equity Plan”), and they are paid in cash at such times and in accordance with such rules, terms and conditions, as the Compensation Committee may determine in its discretion. Dividend equivalent payments are generally charged to Stockholders’ Equity to the extent that the attached equity awards are expected to vest. Compensation expense is also recognized for dividend equivalent payments to the extent that the equity awards to which such payments relate do not or are not expected to vest and the grantees to whom such payments are made are nonetheless not required to return such dividend equivalent payments to the Company (see Notes 2(l) and 12). (l) Earnings per Common Share (“EPS”) Basic EPS is computed using the two-class method, which includes the weighted-average number of shares of common stock outstanding during the period and an estimate of other securities that participate in dividends, such as the Company’s dividend equivalents attached to/associated with RSUs, to arrive at total common equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and estimated securities that participate in dividends based on their respective weighted-average shares outstanding for the period. For the diluted EPS calculation, common equivalent shares are further adjusted for the effect of RSUs outstanding that are unvested and have dividends that are subject to forfeiture, and for the effect of outstanding warrants, using the treasury stock method. Under the treasury stock method, common equivalent 91 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 shares are calculated assuming that all dilutive common stock equivalents are exercised and the proceeds, along with future compensation expenses associated with such instruments (if any), are used to repurchase shares of the Company’s outstanding common stock at the average market price during the reported period. In addition, the Company’s 6.25 % Convertible Senior Notes due 2024 (the “Convertible Senior Notes”) are included in the calculation of diluted EPS if the assumed conversion into common shares is dilutive, using the “if-converted” method. This calculation involves adding back the periodic interest expense associated with the Convertible Senior Notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted EPS (see Note 11). (m) Comprehensive Income/(Loss) The Company’s comprehensive income/(loss) available to common stock and participating securities includes net income, the change in net unrealized gains/(losses) on its AFS securities and derivative hedging instruments (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of AOCI for sold AFS securities and terminated hedging relationships, as well as the portion of unrealized gains/(losses) on its financing agreements held at fair value related to instrument-specific credit risk, and is reduced by dividends declared on the Company’s preferred stock and issuance costs of redeemed preferred stock. (n) Derivative Financial Instruments The Company may use a variety of derivative instruments to economically hedge a portion of its exposure to market risks, including interest rate risk and prepayment risk. The objective of the Company’s risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. Swaps Historically, the Company’s derivative instruments have generally been comprised of Swaps, the majority of which were designated as cash flow hedges against the interest rate risk associated with its borrowings. The Company documented its risk-management policies, including objectives and strategies, for its hedging activities and the relationship between the hedging instrument and the hedged liability for all Swaps designated as hedging transactions. The Company assessed, both at the inception of a hedge and on a quarterly basis thereafter, whether or not the hedge was “highly effective.” During the first quarter of 2020, in response to the turmoil in the financial markets resulting from COVID-19, and given that management no longer considered these transactions to be effective hedges in the then prevailing interest rate environment, the Company terminated all of its then existing Swaps. Changes in the fair value of the Company’s Swaps previously designated in hedging transactions were recorded in OCI provided that the hedge remained effective. Periodic payments accrued in connection with Swaps designated as hedges were included in interest expense and treated as an operating cash flow. The Company discontinued hedge accounting for the terminated Swaps as it determined that it was no longer probable that the forecasted transactions would occur. The Company has entered into Swaps that were not designated as hedges for accounting purposes. Changes in the fair value of the Company’s Swaps not designated in hedging transactions are recorded in Other income, net on the Company’s consolidated statements of operations. Swaps are carried on the Company’s consolidated balance sheets at fair value, in Other assets, if their fair value is positive, or in Other liabilities, if their fair value is negative (see Notes 5(d), 6 and 13). To Be Announced (“TBA”) Securities The Company has entered into transactions to take short positions in TBA securities in connection with the management of interest rate and other market risks associated with purchases of Agency eligible investor loans. As the Company did not intend to physically settle its transactions in TBA securities, they were required to be accounted for as derivative financial instruments. The Company did not apply hedge accounting to its TBA securities. Accordingly, TBA securities were recorded on the Company’s balance sheets at fair value, with realized and unrealized changes in fair value each period recorded in Other income, net in the Company’s consolidated statements of operations. 92 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (o) Fair Value Measurements and the Fair Value Option for Financial Assets and Financial Liabilities The Company’s presentation of fair value for its financial assets and liabilities is determined within a framework that stipulates that the fair value of a financial asset or liability is an exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. This definition of fair value focuses on exit price and prioritizes the use of market-based inputs over entity-specific inputs when determining fair value. In addition, the framework for measuring fair value establishes a three-level hierarchy for fair value measurements based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. In addition to the financial instruments that it is required to report at fair value, the Company has elected the fair value option for certain of its financial assets and liabilities at the time of acquisition or issuance. Subsequent changes in the fair value of these financial instruments are generally reported in Other income, net, in the Company’s consolidated statements of operations. A decision to elect the fair value option for an eligible financial instrument, which may be made on an instrument by instrument basis, is irrevocable (see Notes 2(b), 2(c), 3, 4, and 13). (p) Variable Interest Entities An entity is referred to as a VIE if it meets at least one of the following criteria: (i) the entity has equity that is insufficient to permit the entity to finance its activities without the additional subordinated financial support of other parties; or (ii) as a group, the holders of the equity investment at risk lack (a) the power to direct the activities of an entity that most significantly impact the entity’s economic performance; (b) the obligation to absorb the expected losses; or (c) the right to receive the expected residual returns; or (iii) the holders of the equity investment at risk have disproportional voting rights and the entity’s activities are conducted on behalf of the investor that has disproportionately few voting rights. The Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE. The Company has entered into several financing transactions which resulted in the Company forming entities to facilitate these transactions. In determining the accounting treatment to be applied to these transactions, the Company concluded that the entities used to facilitate these transactions are VIEs and that they should be consolidated. If the Company had determined that consolidation was not required, it would have then assessed whether the transfers of the underlying assets would qualify as sales or should be accounted for as secured financings under GAAP (see Note 14). The Company also includes on its consolidated balance sheets certain financial assets and liabilities that are acquired/issued by trusts and/or other special purpose entities that have been evaluated as being required to be consolidated by the Company under the applicable accounting guidance. (q) Offering Costs Related to Issuance and Redemption of Preferred Stock Offering costs related to the issuance of preferred stock are recorded as a reduction in Additional paid-in capital, a component of Stockholders’ Equity, at the time such preferred stock is issued. On redemption of preferred stock, any excess of the fair value of the consideration transferred to the holders of the preferred stock over the carrying amount of the preferred stock in the Company’s consolidated balance sheets is included in the determination of Net Income Available to Common Stock and Participating Securities in the calculation of EPS. (r) New Accounting Standards and Interpretations Accounting Standards Adopted in 2022 As of December 31, 2022, there were no new accounting standards or interpretations adopted by the Company that had a material effect on its consolidated financial statements in 2022. 93 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 3. Residential Whole Loans Included on the Company’s consolidated balance sheets at December 31, 2022 and 2021 are approximately $ 7.5 billion and $ 7.9 billion, respectively, of residential whole loans generally arising from the Company’s interests in certain trusts established to acquire the loans and certain entities established in connection with its loan securitization transactions. The Company has assessed that these entities are required to be consolidated for financial reporting purposes. Starting in the second quarter of 2021, the Company elected the fair value option for all loan acquisitions, including loans originated by Lima One subsequent to its acquisition by the Company. Prior to the second quarter of 2021, the fair value option was typically elected only for Purchased Non-performing Loans. The following table presents the components of the Company’s Residential whole loans, and the accounting model designated at December 31, 2022 and 2021: Held at Carrying Value Held at Fair Value Total (Dollars in Thousands) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Purchased Performing Loans: Non-QM loans $ 987,282 $ 1,448,162 $ 2,372,548 $ 2,013,369 $ 3,359,830 $ 3,461,531 Transitional loans (1) 75,188 217,315 1,342,032 517,530 1,417,220 734,845 Single-family rental loans 210,833 331,808 1,165,741 619,415 1,376,574 951,223 Seasoned performing loans 82,932 102,041 — — 82,932 102,041 Agency eligible investor loans — — 51,094 1,082,765 51,094 1,082,765 Total Purchased Performing Loans $ 1,356,235 $ 2,099,326 $ 4,931,415 $ 4,233,079 $ 6,287,650 $ 6,332,405 Purchased Credit Deteriorated Loans $ 470,294 $ 547,772 $ — $ — $ 470,294 $ 547,772 Allowance for Credit Losses $ ( 35,314 ) $ ( 39,447 ) $ — $ — $ ( 35,314 ) $ ( 39,447 ) Purchased Non-Performing Loans $ — $ — $ 796,109 $ 1,072,270 $ 796,109 $ 1,072,270 Total Residential Whole Loans $ 1,791,215 $ 2,607,651 $ 5,727,524 $ 5,305,349 $ 7,518,739 $ 7,913,000 Number of loans 7,126 9,361 16,717 14,734 23,843 24,095 (1) As of December 31, 2022 includes $ 784.9 million of loans collateralized by one-to-four family residential properties and $ 632.3 million of loans collateralized by multi-family properties. As of December 31, 2021, includes $ 521.0 million of loans collateralized by one-to-four family residential properties and $ 213.9 million of loans collateralized by multi-family properties. 94 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents additional information regarding the Company’s Residential whole loans at December 31, 2022 and 2021: December 31, 2022 Fair Value / Carrying Value Unpaid Principal Balance (“UPB”) Weighted Average Coupon (2) Weighted Average Term to Maturity (Months) Weighted Average LTV Ratio (3) Weighted Average Original FICO (4) Aging by UPB 60+ Delinquency % Past Due Days (Dollars In Thousands) Current 30-59 60-89 90+ Purchased Performing Loans: Non-QM loans $ 3,352,471 $ 3,671,468 5.13 % 351 65 % 733 $ 3,520,671 $ 56,825 $ 32,253 $ 61,719 2.6 % Transitional loans (1) 1,411,997 1,431,692 7.78 12 66 746 1,348,815 6,463 2,234 74,180 5.3 Single-family rental loans 1,375,297 1,485,967 5.74 324 69 737 1,442,095 8,431 7,978 27,463 2.4 Seasoned performing loans 82,884 90,843 3.31 151 30 714 84,514 993 937 4,399 5.9 Agency eligible investor loans 51,094 61,816 3.44 344 68 757 61,816 — — — — Total Purchased Performing Loans $ 6,273,743 $ 6,741,786 5.78 % 271 3.1 % Purchased Credit Deteriorated Loans $ 448,887 $ 554,907 4.66 % 277 63 % N/A $ 403,042 $ 48,107 $ 16,270 $ 87,488 18.7 % Purchased Non-Performing Loans $ 796,109 $ 884,257 5.01 % 277 68 % N/A $ 444,045 $ 89,623 $ 40,554 $ 310,035 39.6 % Residential whole loans, total or weighted average $ 7,518,739 $ 8,180,950 5.64 % 272 8.1 % December 31, 2021 Fair Value / Carrying Value Unpaid Principal Balance (“UPB”) Weighted Average Coupon (2) Weighted Average Term to Maturity (Months) Weighted Average LTV Ratio (3) Weighted Average Original FICO (4) Aging by UPB 60+ Delinquency % Past Due Days (Dollars In Thousands) Current 30-59 60-89 90+ Purchased Performing Loans: Non-QM loans $ 3,453,242 $ 3,361,164 5.07 % 355 66 % 731 $ 3,165,964 $ 77,581 $ 22,864 $ 94,755 3.5 % Transitional loans (1) 727,964 731,154 7.18 11 67 735 616,733 5,834 5,553 103,034 14.9 Single-family rental loans 949,772 924,498 5.46 329 70 732 898,166 2,150 695 23,487 2.6 Seasoned performing loans 101,995 111,710 2.76 162 37 722 102,047 938 481 8,244 7.8 Agency eligible investor loans 1,082,765 1,060,486 3.40 354 62 767 1,039,257 21,229 — — — Total Purchased Performing Loans $ 6,315,738 $ 6,189,012 5.05 % 307 4.2 % Purchased Credit Deteriorated Loans $ 524,992 $ 643,187 4.55 % 283 69 % N/A $ 456,924 $ 50,048 $ 18,736 $ 117,479 21.2 % Purchased Non-Performing Loans $ 1,072,270 $ 1,073,544 4.87 % 283 73 % N/A $ 492,481 $ 87,041 $ 40,876 $ 453,146 46.0 % Residential whole loans, total or weighted average $ 7,913,000 $ 7,905,743 4.99 % 301 11.2 % (1) As of December 31, 2022 Transitional loans includes $ 632.3 million of loans collateralized by multi-family properties with a weighted average term to maturity of 18 months and a weighted average LTV ratio of 73 %. As of December 31, 2021, Transitional loans includes $ 213.9 million of loans collateralized by multi-family properties with a weighted average term to maturity of 23 months and a weighted average LTV ratio of 80 %. (2) Weighted average is calculated based on the interest bearing principal balance of each loan within the related category. For loans acquired with servicing rights released by the seller, interest rates included in the calculation do not reflect loan servicing fees. For loans acquired with servicing rights retained by the seller, interest rates included in the calculation are net of servicing fees. 95 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (3) LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Transitional loans, totaling $ 223.2 million and $ 137.3 million at December 31, 2022 and 2021, respectively, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting, is 70 % and 71 % at December 31, 2022 and 2021, respectively. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful. (4) Excludes loans for which no Fair Isaac Corporation (“FICO”) score is available. During 2022, Agency eligible investor loans with an unpaid principal balance of $ 337.8 million were sold, realizing losses, before the impact of economic hedging gains and the reversal of previously recognized unrealized losses of $ 72.3 million. No Residential whole loans were sold during 2021. During 2020, $ 1.8 billion of Non-QM loans were sold, realizing losses of $ 273.0 million, and Purchased Non-Performing loans with an aggregate unpaid principal of $ 24.1 million were sold, realizing net losses of approximately $ 800,000 . In addition, in 2022, the Agency eligible investor loan securitizations were deconsolidated from the Company’s financial statements which resulted in the de-recognition of Agency eligible investor loans with an unpaid principal balance of $ 598.0 million (see Note 14 for further discussion). 96 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Allowance for Credit Losses The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential Whole Loans, at Carrying Value: For the Year Ended December 31, 2022 (Dollars In Thousands) Non-QM Loans Transitional Loans (1)(2) Single-family Rental Loans Seasoned Performing Loans Purchased Credit Deteriorated Loans (3) Totals Allowance for credit losses at December 31, 2021 $ 8,289 $ 6,881 $ 1,451 $ 46 $ 22,780 $ 39,447 Current provision ( 909 ) ( 1,460 ) ( 122 ) ( 1 ) ( 975 ) ( 3,467 ) Write-offs ( 51 ) ( 219 ) ( 27 ) — ( 226 ) ( 523 ) Allowance for credit losses at March 31, 2022 $ 7,329 $ 5,202 $ 1,302 $ 45 $ 21,579 $ 35,457 Current provision/(reversal) ( 199 ) ( 23 ) 174 1 1,877 1,830 Write-offs — ( 118 ) ( 184 ) — ( 58 ) ( 360 ) Allowance for credit losses at June 30, 2022 $ 7,130 $ 5,061 $ 1,292 $ 46 $ 23,398 $ 36,927 Current provision/(reversal) ( 242 ) 583 83 3 120 547 Write-offs — ( 114 ) ( 61 ) — ( 107 ) ( 282 ) Allowance for credit losses at September 30, 2022 $ 6,888 $ 5,530 $ 1,314 $ 49 $ 23,411 $ 37,192 Current provision/(reversal) 471 ( 13 ) ( 37 ) ( 1 ) ( 1,996 ) ( 1,576 ) Write-offs — ( 294 ) — — ( 8 ) ( 302 ) Allowance for credit losses at December 31, 2022 $ 7,359 $ 5,223 $ 1,277 $ 48 $ 21,407 $ 35,314 For the Year Ended December 31, 2021 (Dollars In Thousands) Non-QM Loans Transitional Loans (1)(2) Single-family Rental Loans Seasoned Performing Loans Purchased Credit Deteriorated Loans (3) Totals Allowance for credit losses at December 31, 2020 $ 21,068 $ 18,371 $ 3,918 $ 107 $ 43,369 $ 86,833 Current provision ( 6,523 ) ( 3,700 ) ( 1,172 ) ( 41 ) ( 10,936 ) ( 22,372 ) Write-offs — ( 1,003 ) — — ( 214 ) ( 1,217 ) Allowance for credit and valuation losses at March 31, 2021 $ 14,545 $ 13,668 $ 2,746 $ 66 $ 32,219 $ 63,244 Current provision/(reversal) ( 2,416 ) ( 1,809 ) ( 386 ) ( 9 ) ( 3,963 ) ( 8,583 ) Write-offs ( 37 ) ( 255 ) — — ( 108 ) ( 400 ) Allowance for credit losses at June 30, 2021 $ 12,092 $ 11,604 $ 2,360 $ 57 $ 28,148 $ 54,261 Current provision/(reversal) ( 2,403 ) ( 2,526 ) ( 670 ) ( 7 ) ( 4,020 ) ( 9,626 ) Write-offs — ( 393 ) ( 56 ) — ( 84 ) ( 533 ) Allowance for credit losses at September 30, 2021 $ 9,689 $ 8,685 $ 1,634 $ 50 $ 24,044 $ 44,102 Current provision/(reversal) ( 1,400 ) ( 706 ) ( 178 ) ( 4 ) ( 1,142 ) ( 3,430 ) Write-offs — ( 1,098 ) ( 5 ) — ( 122 ) ( 1,225 ) Allowance for credit losses at December 31, 2021 $ 8,289 $ 6,881 $ 1,451 $ 46 $ 22,780 $ 39,447 (1) In connection with purchased Transitional loans at carrying value, the Company had unfunded commitments of $ 8.0 million and $ 18.5 million as of December 31, 2022 and 2021, respectively, with an allowance for credit losses of $ 29,000 and $ 205,000 at December 31, 2022 and 2021, respectively. Such allowance is included in “Other liabilities” in the Company’s consolidated balance sheets (see Note 7). (2) Includes $ 56.1 million and $ 87.0 million of loans that were assessed for credit losses based on a collateral dependent methodology as of December 31, 2022 and 2021, respectively. (3) Includes $ 48.5 million and $ 57.4 million of loans that were assessed for credit losses based on a collateral dependent methodology as of December 31, 2022 and 2021, respectively. The Company adopted the accounting standard addressing the measurement of credit losses on financial instruments (“CECL”) on January 1, 2020. The anticipated impact of the COVID-19 pandemic on expected economic conditions, including forecasted unemployment, home price appreciation, and prepayment rates, for the short to medium term resulted in significantly increased estimates of credit losses recorded under CECL for the first quarter of 2020 for residential whole loans held at carrying value. Since the end of the first quarter of 2020, primarily as a result of generally more stable markets and an ongoing 97 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 economic recovery, the Company has made subsequent revisions to certain macroeconomic assumptions, including its estimates related to future rates of unemployment and home price appreciation, and has made adjustments to the quantitative model outputs for relevant qualitative factors. The net impact of these assumption revisions and qualitative adjustments, as well as reductions in balances subject to CECL, has resulted in a reversal of a portion of the allowance for loan loss since the end of the first quarter of 2020. The Company’s estimates of expected losses that form the basis of the Allowance for Credit Losses include certain qualitative adjustments which have the effect of increasing expected loss estimates. These qualitative adjustments were determined based on a variety of factors, including differences between the Company’s loan portfolio and the loan portfolios represented by data available in regulatory filings of certain banks that are considered to have similar loan portfolios (available proxy data), and differences between current (and expected future) market conditions in comparison to market conditions that occurred in historical periods. Such differences include uncertainty with respect to the ongoing impact of the COVID-19 pandemic, anticipated inflation and increasing market interest rates, and heightened political uncertainty. The Company’s estimates of credit losses reflect the Company’s expectation that the performance of its portfolio will experience higher delinquencies and defaults compared to the performance in historical periods of portfolios included in the available proxy data. Estimates of credit losses under CECL are highly sensitive to changes in assumptions and current economic conditions have increased the difficulty of accurately forecasting future conditions. The amortized cost basis of Purchased Performing Loans on nonaccrual status as of December 31, 2022 and December 31, 2021 was $ 195.1 million and $ 240.2 million, respectively. The amortized cost basis of Purchased Credit Deteriorated Loans on nonaccrual status as of December 31, 2022 and December 31, 2021 was $ 80.5 million and $ 108.9 million, respectively. The fair value of Purchased Non-performing Loans on nonaccrual status as of December 31, 2022 and December 31, 2021 was $ 413.1 million and $ 588.1 million, respectively. During the year ended December 31, 2022, the Company recognized $ 18.8 million of interest income on loans on nonaccrual status, including $ 13.2 million on its portfolio of loans which were non-performing at acquisition. At December 31, 2022 and December 31, 2021, there were approximately $ 71.7 million and $ 107.4 million, respectively, of loans held at carrying value on nonaccrual status that did not have an associated allowance for credit losses because they were determined to be collateral dependent and the estimated fair value of the related collateral exceeded the carrying value of each loan, respectively. 98 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents certain additional credit-related information regarding our Residential whole loans, at Carrying Value: Amortized Cost Basis by Origination Year and LTV Bands (Dollars In Thousands) 2022 2021 2020 2019 2018 Prior Total Non-QM loans LTV <= 80% (1) $ — $ 47,343 $ 189,257 $ 460,422 $ 232,400 $ 28,516 $ 957,938 LTV > 80% (1) — 2,128 14,330 5,752 6,078 1,056 29,344 Total Non-QM loans $ — $ 49,471 $ 203,587 $ 466,174 $ 238,478 $ 29,572 $ 987,282 Year Ended December 31, 2022 Gross write-offs $ — $ — $ — $ — $ 51 $ — $ 51 Transitional loans LTV <= 80% (1) $ — $ 1,182 $ 5,153 $ 44,815 $ 12,727 $ 3,047 $ 66,924 LTV > 80% (1) — — — 4,594 1,971 1,699 8,264 Total Transitional loans $ — $ 1,182 $ 5,153 $ 49,409 $ 14,698 $ 4,746 $ 75,188 Year Ended December 31, 2022 Gross write-offs $ — $ — $ 92 $ 367 $ 287 $ — $ 746 Single-family rental loans LTV <= 80% (1) $ — $ 13,487 $ 25,036 $ 119,112 $ 47,476 $ 3,195 $ 208,306 LTV > 80% (1) — — 313 2,129 85 — 2,527 Total Single-family rental loans $ — $ 13,487 $ 25,349 $ 121,241 $ 47,561 $ 3,195 $ 210,833 Year Ended December 31, 2022 Gross write-offs $ — $ — $ — $ 205 $ 68 $ — $ 273 Seasoned performing loans LTV <= 80% (1) $ — $ — $ — $ — $ — $ 80,341 $ 80,341 LTV > 80% (1) — — — — — 2,591 2,591 Total Seasoned performing loans $ — $ — $ — $ — $ — $ 82,932 $ 82,932 Year Ended December 31, 2022 Gross write-offs $ — $ — $ — $ — $ — $ — $ — Purchased credit deteriorated loans LTV <= 80% (1) $ — $ — $ — $ — $ — $ 378,816 $ 378,816 LTV > 80% (1) — — — — — 91,478 91,478 Total Purchased credit deteriorated loans $ — $ — $ — $ — $ — $ 470,294 $ 470,294 Year Ended December 31, 2022 Gross write-offs $ — $ — $ — $ — $ — $ 400 $ 400 Total LTV <= 80% (1) $ — $ 62,012 $ 219,446 $ 624,349 $ 292,603 $ 493,915 $ 1,692,325 Total LTV > 80% (1) — 2,128 14,643 12,475 8,134 96,824 134,204 Total residential whole loans, at carrying value $ — $ 64,140 $ 234,089 $ 636,824 $ 300,737 $ 590,739 $ 1,826,529 Year Ended December 31, 2022 Total Gross write-offs $ — $ — $ 92 $ 572 $ 406 $ 400 $ 1,470 (1) LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Transitional loans, totaling $ 223.2 million at December 31, 2022, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. The weighted average LTV of these loans based on the current unpaid principal balance and the valuation obtained during underwriting is 70 % at December 31, 2022. Certain low value loans secured by vacant lots are categorized as LTV > 80%. 99 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following tables present certain information regarding the LTVs of the Company’s Residential whole loans that are 90 days or more delinquent: December 31, 2022 (Dollars In Thousands) Carrying Value / Fair Value UPB LTV (1) Purchased Performing Loans Non-QM loans $ 61,812 $ 61,719 67.9 % Transitional loans 73,266 74,180 68.1 % Single-family rental loans 27,466 27,463 72.9 % Seasoned performing loans 4,127 4,399 42.2 % Agency eligible investor loans — — — Total Purchased Performing Loans $ 166,671 $ 167,761 Purchased Credit Deteriorated Loans $ 69,402 $ 87,488 74.8 % Purchased Non-Performing Loans $ 296,697 $ 310,035 76.9 % Total Residential Whole Loans $ 532,770 $ 565,284 December 31, 2021 (Dollars In Thousands) Carrying Value / Fair Value UPB LTV (1) Purchased Performing Loans Non-QM loans $ 96,473 $ 94,755 64.6 % Transitional loans 103,166 103,034 67.6 % Single-family rental loans 23,524 23,487 73.4 % Seasoned performing loans 7,740 8,244 45.6 % Agency eligible investor loans — — — Total Purchased Performing Loans $ 230,903 $ 229,520 Purchased Credit Deteriorated Loans $ 95,899 $ 117,479 79.1 % Purchased Non-Performing Loans $ 454,443 $ 453,146 80.2 % Total Residential Whole Loans $ 781,245 $ 800,145 (1) LTV represents the ratio of the total unpaid principal balance of the loan to the estimated value of the collateral securing the related loan as of the most recent date available, which may be the origination date. For Transitional loans, the LTV presented is the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan, where available. For certain Transitional loans, an after repaired valuation was not obtained and the loan was underwritten based on an “as is” valuation. Excluded from the calculation of weighted average LTV are certain low value loans secured by vacant lots, for which the LTV ratio is not meaningful. 100 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following tables present the components of interest income on the Company’s Residential whole loans for the years ended December 31, 2022, 2021 and 2020: Held at Carrying Value Held at Fair Value Total For the Year Ended December 31, For the Year Ended December 31, For the Year Ended December 31, (In Thousands) 2022 2021 2020 2022 2021 2020 2022 2021 2020 Purchased Performing Loans: Non-QM loans $ 51,359 $ 75,517 $ 136,527 $ 98,384 $ 21,431 $ — $ 149,743 $ 96,948 $ 136,527 Transitional loans 7,810 22,424 49,484 67,714 10,705 — 75,524 33,129 49,484 Single-family rental loans 15,314 24,863 27,722 53,661 9,306 — 68,975 34,169 27,722 Seasoned performing loans 4,673 6,684 8,793 — — — 4,673 6,684 8,793 Agency eligible investor loans — — — 30,361 11,667 — 30,361 11,667 — Total Purchased Performing Loans $ 79,156 $ 129,488 $ 222,526 $ 250,120 $ 53,109 $ — $ 329,276 $ 182,597 $ 222,526 Purchased Credit Deteriorated Loans $ 33,427 $ 40,130 $ 36,238 $ — $ — $ — $ 33,427 $ 40,130 $ 36,238 Purchased Non-Performing Loans $ — $ — $ — $ 78,520 $ 80,741 $ 73,448 $ 78,520 $ 80,741 $ 73,448 Total Residential Whole Loans $ 112,583 $ 169,618 $ 258,764 $ 328,640 $ 133,850 $ 73,448 $ 441,223 $ 303,468 $ 332,212 4. Securities, at Fair Value Term Notes Backed by MSR-Related Collateral At December 31, 2022 and 2021, the Company had $ 97.9 million and $ 153.8 million, respectively, of term notes issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered to be largely dependent on cash flows generated by the underlying MSRs, as this impacts the cash flows available to the SPV that issued the term notes. At December 31, 2022, these term notes had an amortized cost of $ 86.4 million, gross unrealized gains of approximately $ 11.5 million, a weighted average yield of 14.3 % and a weighted average term to maturity of 0.8 years. At December 31, 2021, the term notes had an amortized cost of $ 121.4 million, gross unrealized gains of approximately $ 32.4 million, a weighted average yield of 10.3 % and a weighted average term to maturity of 1.7 years. During the three months ended March 31, 2020, the Company recognized an impairment loss related to its term notes of $ 280.8 million based on its intent to sell, or the likelihood it will be required to sell, such notes. CRT Securities CRT securities are debt obligations issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company. The Company assesses the credit risk associated with its investments in CRT securities by assessing the current and expected future performance of the associated loan pool. The Company pledges a portion of its CRT securities as collateral against its borrowings under repurchase agreements (see Note 6). 101 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Agency and Non-Agency MBS The Company’s MBS are comprised of Agency MBS and Non-Agency MBS. Agency MBS: Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae. Non-Agency MBS: The Company’s Non-Agency MBS are primarily secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation. The following tables present certain information about the Company’s Agency, Non-Agency and CRT securities at December 31, 2022 and 2021: December 31, 2022 (In Thousands) Principal/ Current Face Purchase Premiums Accretable Purchase Discounts Discount Designated as Credit Reserve (1) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gain/(Loss) Fair Value Total residential mortgage securities (2)(3)(4)(5) $ 241,814 $ 6,306 $ ( 6,272 ) $ ( 14,833 ) $ 227,015 $ 9,974 $ ( 1,523 ) $ 8,451 $ 235,466 December 31, 2021 (In Thousands) Principal/ Current Face Purchase Premiums Accretable Purchase Discounts Discount Designated as Credit Reserve (1) Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gain/(Loss) Fair Value Total residential mortgage securities (2)(3) $ 99,999 $ 7,466 $ ( 55 ) $ ( 20,768 ) $ 86,642 $ 16,282 $ ( 10 ) $ 16,272 $ 102,914 (1) Discount designated as Credit Reserve is generally not expected to be accreted into interest income. (2) Based on management ’ s current estimates of future principal cash flows expected to be received. (3) Amounts disclosed at December 31, 2022 include CRT securities with a fair value of $ 48.6 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $ 131,000 and gross unrealized losses of approximately $ 1.2 million at December 31, 2022. Amounts disclosed at December 31, 2021 includes CRT securities with a fair value of $ 67.5 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $ 1.8 million and gross unrealized losses of approximately $ 10,000 at December 31, 2021. (4) Amounts disclosed at December 31, 2022 include Non-Agency MBS with a fair value of $ 24.6 million for which the fair value option has been elected. Such securities had no gross unrealized gains and no gross unrealized losses at December 31, 2022. (5) Amounts disclosed at December 31, 2022 include Agency MBS with a fair value of $ 131.7 million for which the fair value option has been elected. Such securities had no gross unrealized gains and gross unrealized losses of approximately $ 325,000 at December 31, 2022 . 102 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Impairment and other net (loss)/gain on securities and other portfolio investment s The following table present the components of Impairment and other net (loss)/gain on securities and other portfolio investments for the years ended December 31, 2022, 2021 and 2020, which is presented in Other income in the consolidated statements of operations: For the Year Ended December 31, (In Thousands) 2022 2021 2020 Net unrealized (loss)/gain on securities $ ( 3,230 ) $ 1,607 $ ( 10,486 ) Net realized gain from the sale of securities 84 — 90,408 Impairment of securities — — ( 344,269 ) Total Impairment and other net (loss)/gain on securities $ ( 3,146 ) $ 1,607 $ ( 264,347 ) Net unrealized loss on other portfolio investments $ ( 21,921 ) $ — $ — Net realized loss on other portfolio investments — — ( 5,407 ) Reversal of impairment/(Impairment) other portfolio investments (1) — 33,956 ( 80,813 ) Gain on investment in Lima One common equity — 38,933 — Total Impairment and other net (loss)/gain on securities and other portfolio investments $ ( 25,067 ) $ 74,496 $ ( 350,567 ) (1) Includes impairment in 2020 and 2021 related to a preferred equity investment in a loan originator, which was restructured in December 2021 and subsequently assessed as debt for accounting purposes. Accordingly, subsequent impairments on this investment recorded in 2022 are reflected as “Provision for Credit Losses on Other Assets” in the Company’s consolidated statement of operations. The following table presents information about the Company’s sales of its securities for the years ended December 31, 2022, 2021 and 2020. The Company has no continuing involvement with any of the sold securities. For the Year Ended December 31, 2022 2021 2020 (In Thousands) Sales Proceeds Gains/(Losses) Sales Proceeds Gains/(Losses) Sales Proceeds Gains/(Losses) Agency MBS $ — $ — $ — $ — $ 1,500,875 $ ( 19,291 ) Non-Agency MBS — — — — 1,318,958 107,999 CRT securities 15,660 84 — — 243,025 ( 27,011 ) MSR-related assets — — — — 711,698 28,711 Total $ 15,660 $ 84 $ — $ — $ 3,774,556 $ 90,408 Unrealized Losses on Residential Mortgage Securities There were no gross unrealized losses on the Company’s AFS securities at December 31, 2022. The Company did not recognize an allowance for credit losses (or other than temporary impairment in prior year periods) through earnings related to its MBS for the years ended December 31, 2022 and 2021. During the three months ended March 31, 2020, the Company recognized an aggregate impairment loss related to its MBS of $ 63.5 million based on its intent to sell, or the likelihood it will be required to sell, certain securities at such time. 103 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Impact of AFS Securities on AOCI The following table presents the impact of the Company’s AFS securities on its AOCI for the years ended December 31, 2022, 2021, and 2020: For the Year Ended December 31, (In Thousands) 2022 2021 2020 AOCI from AFS securities: Unrealized gain on AFS securities at beginning of period $ 46,833 $ 79,607 $ 392,722 Unrealized (losses)/gains on securities available-for-sale ( 25,492 ) ( 32,774 ) 420,281 Reclassification adjustment for MBS sales included in net income — — ( 389,127 ) Reclassification adjustment for impairment included in net income — — ( 344,269 ) Change in AOCI from AFS securities ( 25,492 ) ( 32,774 ) ( 313,115 ) Balance at end of period $ 21,341 $ 46,833 $ 79,607 Interest Income on Securities, at Fair Value The following table presents the components of interest income on the Company’s Securities, at fair value for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, (In Thousands) 2022 2021 2020 Residential Mortgage Securities Coupon interest $ 4,793 $ 4,076 $ 47,686 Effective yield adjustment (1)(2)(3) 3,143 13,265 6,450 Interest income $ 7,936 $ 17,341 $ 54,136 MSR-related assets Coupon interest $ 6,610 $ 7,462 $ 25,970 Effective yield adjustment (1)(2)(4) 14,374 31,887 9,987 Interest income $ 20,984 $ 39,349 $ 35,957 (1) Includes amortization of premium paid net of accretion of purchase discount. For Agency MBS, RPL/NPL MBS and the corporate loan secured by MSRs, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity. (2) The effective yield adjustment is the difference between the net income calculated using the net yield less the current coupon yield. The net yield may be based on management’s estimates of the amount and timing of future cash flows or in the instrument’s contractual cash flows, depending on the relevant accounting standards. (3) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a discount of $ 8.8 million during the year ended December 31, 2021. (4) Includes $ 7.8 million and $ 20.5 million of accretion income recognized during the years ended December 31, 2022 and 2021, respectively, due to the impact of the redemption at par of MSR-related assets that had been held at amortized cost basis below par due to an impairment charge recorded in the first quarter of 2020. 104 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 5. Other Assets The following table presents the components of the Company’s Other assets at December 31, 2022 and 2021: (In Thousands) December 31, 2022 December 31, 2021 Receivable for sale of unsettled residential whole loans $ 275,656 $ — REO (1) 130,605 156,223 Goodwill 61,076 61,076 Intangibles, net (2) 12,200 21,400 Capital contributions made to loan origination partners 28,308 71,673 Other interest-earning assets 63,964 57,522 Interest receivable 68,704 50,191 Other loan related receivables 23,463 34,191 Lease Right-of-Use Asset (3) 39,459 39,370 Other 62,786 73,910 Total Other Assets $ 766,221 $ 565,556 (1) Includes $ 11.3 million of REO that was held-for-investment at December 31, 2021. (2) Net of aggregate accumulated amortization of $ 15.8 million and $ 6.6 million as of December 31, 2022 and 2021. (3) An estimated incremental borrowing rate of 7.5 % was used in connection with the Company’s primary operating lease (see Notes 2 and 9). (a) Real Estate Owned At December 31, 2022, the Company had 388 REO properties with an aggregate carrying value of $ 130.6 million. At December 31, 2021, the Company had 553 REO properties with an aggregate carrying value of $ 156.2 million. At December 31, 2022, $ 130.1 million of residential real estate property was held by the Company that was acquired either through a completed foreclosure proceeding or from completion of a deed-in-lieu of foreclosure or similar legal agreement. In addition, formal foreclosure proceedings were in process with respect to $ 106.4 million of residential whole loans held at carrying value and $ 244.5 million of residential whole loans held at fair value at December 31, 2022. The following table presents the activity in the Company’s REO for the years ended December 31, 2022 and 2021: For the Year Ended December 31, (Dollars In Thousands) 2022 2021 Balance at beginning of period $ 156,223 $ 249,699 Adjustments to record at lower of cost or fair value ( 4,255 ) ( 4,772 ) Transfer from residential whole loans (1) 82,911 72,304 Purchases and capital improvements, net 978 2,458 Disposals and other (2) ( 105,252 ) ( 163,466 ) Balance at end of period $ 130,605 $ 156,223 Number of properties 388 553 (1) Includes a net loss recorded on transfer of approximately $ 1.2 million and $ 700,000 , respectively, for the years ended December 31, 2022 and 2021. (2) During the year ended December 31, 2022, the Company sold 416 REO properties for consideration of $ 133.8 million, realizing net gains of approximately $ 28.7 million. During the year ended December 31, 2021, the Company sold 647 REO properties for consideration of $ 187.9 million, realizing net gains of approximately $ 23.5 million. These amounts are included in Other Income, net on the Company’s consolidated statements of operations. 105 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 ( b ) Goodwill and Intangible Assets On July 1, 2021, the Company completed the acquisition of Lima One (see Note 15). In connection with the acquisition of Lima One, the Company identified and recorded goodwill of $ 61.1 million and finite-lived intangible assets totaling $ 28.0 million. The amortization period for each of the finite lived intangible assets and the activity for the years ended December 31, 2022 and 2021 is summarized in the table below: (Dollars in Thousands) Acquisition Date July 1, 2021 Amortization Year Ended December 31, 2021 Carrying Value at December 31, 2021 Amortization Year Ended December 31, 2022 Carrying Value at December 31, 2022 Amortization Period (Years) (1) Trademarks / Trade Names $ 4,000 $ ( 200 ) $ 3,800 $ ( 400 ) $ 3,400 10 Customer Relationships 16,000 ( 4,000 ) 12,000 ( 6,000 ) 6,000 4 Internally Developed Software 4,000 ( 400 ) 3,600 ( 800 ) 2,800 5 Non-Compete Agreements 4,000 ( 2,000 ) 2,000 ( 2,000 ) — 1 Total Identified Intangibles $ 28,000 $ ( 6,600 ) $ 21,400 $ ( 9,200 ) $ 12,200 (1) Amortization is calculated on a straight-line basis over the amortization period, except for Customer Relationships, where amortization is calculated based on expected levels of customer attritio n . 106 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 ( c ) Capital Contributions Made to Loan Origination Partners The Company has made investments in several loan originators as part of its strategy to be a reliable source of capital to select partners from whom the Company sources residential mortgage loans through both flow arrangements and bulk purchases. At December 31, 2022, the carrying value of these investments (including adjustments for impairments or mark-to-market changes) was $ 28.3 million, including $ 3.7 million of common equity (including partnership interests) and $ 24.6 million of preferred equity. During the year ended December 31, 2022, the Company recorded an impairment charge in earnings of $ 28.6 million against the carrying value of its investment in one loan origination partner, bringing the net carrying value of this investment to zero as of June 30, 2022. This impairment charge was recorded in Provision for credit losses on other assets in the consolidated statement of operations. Further, for the year ended December 31, 2022, the Company recorded a valuation adjustment of $ 21.9 million against its investment in a loan origination partner that is accounted for at fair value through earnings. During the year ended December 31, 2021, the Company reversed $ 10.0 million of previously recorded impairment as two of the Company’s preferred equity investments were repaid in full. In addition, the Company recorded a gain of $ 24.0 million related to a preferred equity investment that had been previously impaired and that was required to be revalued during the period, as the investee company completed a capital transaction with an unrelated third party. The Company did no t record any impairment charges to earnings on investments in loan origination partners during the year ended December 31, 2021. During the year ended December 31, 2020, the Company recorded impairment charges of $ 65.3 million on investments in certain loan origination partners following an evaluation of the anticipated impact of COVID-19 on economic conditions for the short to medium term. This activity was recorded in Other income in the consolidated statements of operations. For certain of the Company’s investments, the interests acquired to date by the Company generally do not have a readily determinable fair value. Consequently, the Company accounts for these interests (including any acquired options and warrants) in loan originators initially at cost. The carrying value of these investments will be adjusted if it is determined that an impairment has occurred or if there has been a subsequent observable transaction in either the investee company’s equity securities or a similar security that provides evidence to support an adjustment to the carrying value. In addition, for certain partners, options or warrants have also been acquired that provide the Company the ability to increase the level of its investment if certain conditions are met. At the end of each reporting period, or earlier if circumstances warrant, the Company evaluates whether the nature of its interests and other involvement with the investee entity requires the Company to apply equity method accounting or consolidate the results of the investee entity with the Company’s financial results. On July 1, 2021, the Company completed the acquisition of certain ownership interests in Lima One, which resulted in the Company owning all of Lima One’s outstanding ownership interests (see Note 15). Accordingly, the Company consolidated Lima One’s financial results beginning on that date. 107 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (d) Derivative Instruments Swaps The Company’s derivative instruments include Swaps, which are used to economically hedge the interest rate risk associated with certain borrowings. Pursuant to these arrangements, the Company agreed to pay a fixed rate of interest and receive a variable interest rate, generally based on the Secured Overnight Financing Rate (“SOFR”), on the notional amount of the Swap. At December 31, 2022, none of the Company’s Swaps were designated as hedges for accounting purposes. In response to the turmoil in the financial markets resulting from COVID-19 experienced during the three months ended March 31, 2020, and given that management no longer considered those transactions to be effective hedges in the then prevailing interest rate environment, the Company unwound all of its then approximately $ 4.1 billion of Swap hedging transactions late in the first quarter of 2020 in order to recover previously posted margin. Consequently, during the year ended December 31, 2020, the Company concluded that it was appropriate to transfer from AOCI to earnings approximately $ 57.0 million of losses on Swaps that had previously been designated as hedges for accounting purposes, because the hedged transactions were no longer considered probable to occur. At December 31, 2022 and 2021, the Company had restricted cash pledged as collateral against its Swap contracts of $ 60.8 million and $ 14.4 million, respectively. At December 31, 2022, the Company had Swaps with an aggregate notional amount of $ 3.2 billion and an average maturity of approximately 42 months with a maximum term of approximately 78 months. The following table presents information about the Company’s Swaps at December 31, 2022 and 2021: December 31, 2022 December 31, 2021 Maturity (1) Notional Amount Weighted Average Fixed-Pay Interest Rate Weighted Average Variable Interest Rate (2) Notional Amount Weighted Average Fixed-Pay Interest Rate Weighted Average Variable Interest Rate (2) (Dollars in Thousands) Within 30 days to 12 months $ — — % — % $ — — % — % Over 12 months to 24 months 550,010 1.01 4.30 — — — Over 24 months to 36 months 775,000 1.75 4.30 450,010 0.90 0.05 Over 36 months to 48 months 450,000 1.12 4.30 — — — Over 48 months to 60 months 1,075,000 1.86 4.30 450,000 1.12 0.05 Over 60 months to 72 months — — — — — — Over 72 months to 84 months 310,000 2.95 4.30 — — — Total Swaps $ 3,160,010 1.69 % 4.30 % $ 900,010 1.01 % 0.05 % (1) Each maturity category reflects contractual amortization and/or maturity of notional amounts. (2) Reflects the benchmark variable rate due from the counterparty at the date presented, which rate adjusts daily based on SOFR. TBA Securities In order to economically hedge the risks arising from the investments in Agency eligible investor loans, the Company entered into short positions in certain TBA securities. The Company did not have any open short positions in TBA securities at December 31, 2022. The table below summarizes open short positions in TBA securities as of December 31, 2021, which had an aggregate value of ($ 1.3 ) million and were included in Other assets/liabilities on the Company’s consolidated balance sheets. 108 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 December 31, 2021 (Dollars in Thousands) Notional Amount Settlement Date TBA Security UMBS 2.5 $ 180,000 January 13, 2022 UMBS 2.0 $ 130,000 January 13, 2022 TBA short positions are subject to margining requirements which serve to mitigate counterparty credit risk associated with these transactions. Open TBA positions are measured at fair value each reporting date, with realized and unrealized changes in the fair value of these positions recorded in Other income, net on the Company’s consolidated statements of operations. Impact of Derivative Instruments on Earnings The following table present the components of Net gain/(loss) on derivatives used for risk management purposes for the years ended December 31, 2022, 2021 and 2020, which is presented in Other income in the consolidated statements of operations: For the Year Ended December 31, (In Thousands) 2022 2021 2020 Income on swap variable receive leg $ 52,395 $ 34 $ 933 Expense on swap fixed pay leg ( 42,353 ) ( 703 ) ( 1,503 ) Unrealized mark-to-market gain 208,712 70 5,708 Net price alignment expense on margin collateral received ( 2,761 ) — — Loss on unwind of swaps not designated as hedges for accounting purposes — — ( 9,353 ) Loss on terminated swaps designated as hedges for accounting purposes — — ( 57,034 ) Net gain on TBA short positions 39,186 2,025 — Total Net gain/(loss) on derivatives used for risk management purposes $ 255,179 $ 1,426 $ ( 61,249 ) Impact of Derivative Hedging Instruments on AOCI The following table presents the impact of the Company’s derivative hedging instruments on its AOCI for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, (In Thousands) 2022 2021 2020 AOCI from derivative hedging instruments: Balance at beginning of period $ — $ — $ ( 22,675 ) Net loss on Swaps — — ( 50,127 ) Reclassification adjustment for losses/gains related to hedging instruments included in net income — — 72,802 Balance at end of period $ — $ — $ — 109 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 6. Financing Agreements The following tables present the components of the Company’s financing agreements at December 31, 2022 and 2021: December 31, 2022 (In Thousands) Collateral Unpaid Principal Balance Fair Value/Carrying Value (1) Weighted Average Cost of Funding (2) Weighted Average Term to Maturity (Months) Agreements with mark-to-market collateral provisions Residential Whole Loans and REO $ 2,111,647 $ 2,111,396 3.63 % 6.9 Agreements with mark-to-market collateral provisions Securities 111,651 111,651 3.34 % 1.5 Total Agreements with mark-to-market collateral provisions 2,223,298 2,223,047 3.62 % Agreements with non-mark-to-market collateral provisions Residential Whole Loans and REO 1,004,260 1,003,604 5.00 % 16.8 Securitized debt Residential Whole Loans 3,586,397 3,357,590 2.99 % See Note 14 Convertible senior notes Unsecured 229,989 227,845 6.94 % See below Total Financing agreements (2) $ 7,043,944 $ 6,812,086 3.46 % December 31, 2021 (In Thousands) Collateral Unpaid Principal Balance Fair Value/Carrying Value (1) Weighted Average Cost of Funding (2) Weighted Average Term to Maturity (Months) Agreements with mark-to-market collateral provisions Residential Whole Loans and REO $ 2,403,724 $ 2,403,151 2.15 % 6.6 Agreements with mark-to-market collateral provisions Securities 159,148 159,148 1.78 % 1.4 Total Agreements with mark-to-market collateral provisions 2,562,872 2,562,299 2.11 % Agreements with non-mark-to-market collateral provisions Residential Whole Loans and REO 939,003 939,540 3.57 % 9.8 Securitized debt Residential Whole Loans 2,645,495 2,650,473 1.94 % See Note 14 Convertible senior notes Unsecured 230,000 226,470 6.94 % See below Total Financing agreements (2) $ 6,377,370 $ 6,378,782 2.58 % (1) The Company has both financing agreements held at fair value and financings agreements held at their carrying value (amortized cost basis). Financing agreements held at fair value are reported at estimated fair value each period as a result of the Company’s fair value option election. The fair value option was not elected for financing agreements held at carrying value. Consequently, total financing agreements as presented reflects a summation of balances reported at fair and carrying value. At December 31, 2022, the Company had $ 884.5 million of agreements with mark-to-market collateral provisions held at fair value, $ 578.9 million of agreements with non-mark-to-market collateral provisions held at fair value, and $ 2.4 billion of securitized debt held at fair value, with amortized cost bases of $ 884.5 million, $ 578.9 million, and, $ 2.6 billion respectively. At December 31, 2021, the Company had the $ 1.3 billion of agreements with mark-to-market collateral provisions held at fair value, $ 628.3 million of agreements with non-mark-to-market collateral provisions held at fair value, and $ 1.3 billion of securitized debt held at fair value, with amortized cost bases of $ 1.3 billion, $ 627.0 million, and $ 1.3 billion, respectively. (2) Weighted average cost of funding reflects year-to-date interest expense divided by average balance for the financing agreements. The cost of funding for the total financing agreements includes the impact of the net carry (the difference between swap interest income received and swap interest expense paid) on the Company’s Swaps. For the year ended December 31, 2022, this decreased the overall funding cost by 14 basis points, and for the year ended December 31, 2021, this increased the overall funding cost by two basis points. The Company does not allocate the impact of the net carry by type of financing agreement. 110 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents maturities with respect to the Company’s financing agreements with mark-to-market and non-mark-to-market collateral provisions: As of December 31, 2022 Unpaid Principal Balance, Maturing In (In Thousands) Collateral 0-3 Months (1) 3-6 Months (1) 6-12 Months Greater than 12 Months (2) Total Agreements with mark-to-market collateral provisions Residential Whole Loans $ 828,804 $ 53,247 $ 939,434 $ 290,162 $ 2,111,647 Agreements with mark-to-market collateral provisions Securities 111,651 — — — 111,651 Total Agreements with mark-to-market collateral provisions 940,455 53,247 939,434 290,162 2,223,298 Agreements with non-mark-to-market collateral provisions Residential Whole Loans 9,268 184,576 415,041 395,375 1,004,260 (1) $ 304.1 million of the mark-to-market agreements ($ 250.9 million and $ 53.2 million included in the 0-3 and 3-6 months categories, respectively) can be terminated by either party. (2) $ 290.2 million of the mark-to-market agreements (included in the greater than 12 months category) have a one year extension option to September 2024. The following table presents information with respect to the Company’s financing agreements with mark-to-market collateral provisions and associated assets pledged as collateral at December 31, 2022 and 2021: (Dollars in Thousands) December 31, 2022 December 31, 2021 Mark-to-market financing agreements secured by residential whole loans $ 2,095,002 $ 2,391,602 Fair value of residential whole loans pledged as collateral under financing agreements $ 2,632,489 $ 3,301,288 Weighted average haircut on residential whole loans (1) 18.33 % 25.27 % Mark-to-market financing agreements secured by securities at fair value $ 111,651 $ 159,148 Securities at fair value pledged as collateral under financing agreements $ 177,111 $ 256,685 Weighted average haircut on securities at fair value (1) 37.43 % 37.00 % Mark-to-market financing agreements secured by real estate owned $ 16,394 $ 11,549 Fair value of real estate owned pledged as collateral under financing agreements $ 33,367 $ 34,606 Weighted average haircut on real estate owned (1) 48.07 % 58.46 % (1) Haircut represents the percentage amount by which the collateral value is contractually required to exceed the loan amount. 111 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents information with respect to the Company’s financing agreements with non-mark-to-market collateral provisions and associated assets pledged as collateral at December 31, 2022 and 2021: (Dollars in Thousands) December 31, 2022 December 31, 2021 Non-mark-to-market financing secured by residential whole loans $ 994,494 $ 928,055 Fair value of residential whole loans pledged as collateral under financing agreements $ 1,301,685 $ 1,420,283 Weighted average haircut on residential whole loans 21.43 % 29.98 % Non-mark-to-market financing secured by real estate owned $ 9,109 $ 11,485 Fair value of real estate owned pledged as collateral under financing agreements $ 22,902 $ 29,894 Weighted average haircut on real estate owned 60.23 % 61.28 % In addition, the Company had aggregate restricted cash held in connection with its financing agreements of $ 16.0 million and $ 10.2 million at December 31, 2022 and 2021, respectively. The following table presents repricing information (excluding the impact of associated derivative hedging instruments, if any) about the Company’s financing agreements that have non-mark-to-market collateral provisions as well as those that have mark-to-market collateral provisions, at December 31, 2022 and 2021: December 31, 2022 December 31, 2021 Unpaid Principal Balance Weighted Average Interest Rate Unpaid Principal Balance Weighted Average Interest Rate Time Until Interest Rate Reset (Dollars in Thousands) Within 30 days $ 3,060,111 6.60 % $ 3,222,268 2.36 % Over 30 days to 3 months 167,447 6.19 257,444 2.49 Over 3 months to 12 months — — 22,163 4.50 Over 12 months — — — — Total financing agreements $ 3,227,558 6.58 % $ 3,501,875 2.38 % (a) Other Information on Financing Agreements Convertible Senior Notes On June 3, 2019, the Company issued $ 230.0 million in aggregate principal amount of its Convertible Senior Notes in an underwritten public offering, including an additional $ 30.0 million issued pursuant to the exercise of the underwriters’ option to purchase additional Convertible Senior Notes. The total net proceeds the Company received from the offering were approximately $ 223.3 million, after deducting offering expenses and the underwriting discount. The Convertible Senior Notes bear interest at a fixed rate of 6.25 % per year, paid semiannually on June 15 and December 15 of each year commencing December 15, 2019 and will mature on June 15, 2024, unless earlier converted, redeemed or repurchased in accordance with their terms. The Convertible Senior Notes are convertible at the option of the holders at any time until the close of business on the business day immediately preceding the maturity date into shares of the Company’s common stock based on a conversion rate of 31.4346 shares (which reflects an adjustment resulting from the Company’s Reverse Stock Split) of the Company’s common stock for each $ 1,000 principal amount of the Convertible Senior Notes, which is equivalent to a conversion price of approximately $ 31.81 per share of common stock. The Convertible Senior Notes have an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 6.94 %. The Company does not have the right to redeem the Convertible Senior Notes prior to maturity, except to the extent necessary to preserve its status as a REIT, in which case the Company may redeem the Convertible Senior Notes, in whole or in part, at a redemption price equal to the principal amount redeemed plus accrued and unpaid interest. During the year ended December 31, 2022, $ 11,000 of convertible senior notes were converted into 345 shares of the Company’s common stock. 112 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The Convertible Senior Notes are the Company’s senior unsecured obligations and are (i) effectively junior to all of the Company’s secured indebtedness, which includes the Company’s repurchase agreements and other financing arrangements, to the extent of the value of the collateral securing such indebtedness and (ii) equal in right of payment to the Company’s existing and future senior unsecured obligations, if any. Senior Notes On April 11, 2012, the Company issued $ 100.0 million in aggregate principal amount of its Senior Notes in an underwritten public offering. On January 6, 2021, the Company redeemed all of its outstanding Senior Notes. The Senior Notes bore interest at a fixed rate of 8.00 % per year, paid quarterly in arrears on January 15, April 15, July 15 and October 15. The Senior Notes had an effective interest rate, including the impact of amortization to interest expense of debt issuance costs, of 8.31 %. Senior Secured Term Loan Facility On June 26, 2020, the Company entered into a $ 500 million senior secured term loan facility (the “Term Loan Facility”). The outstanding balance of the Term Loan Facility was repaid and the Term Loan Facility was terminated prior to December 31, 2020. (b) Counterparties The Company had financing agreements, including repurchase agreements and other forms of secured financing, with 12 and 14 counterparties at December 31, 2022 and 2021, respectively. The following table presents information with respect to each counterparty under financing agreements for which the Company had greater than 5 % of stockholders’ equity at risk in the aggregate at December 31, 2022: December 31, 2022 Counterparty Rating (1) Amount at Risk (2) Weighted Average Months to Repricing for Repurchase Agreements Percent of Stockholders’ Equity Counterparty (Dollars in Thousands) Barclays Bank (3) BBB/Aa3/A $ 309,463 1 15.6 % Wells Fargo A+/Aa2/AA- 234,826 1 11.8 Credit Suisse BBB-/Baa2/BBB 192,129 1 9.7 (1) As rated at December 31, 2022 by S&P, Moody’s and Fitch, Inc., respectively. The counterparty rating presented is the lowest published rating for these entities. (2) The amount at risk reflects the difference between (a) the amount loaned to the Company through financing agreements, including interest payable, and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets. (3) Includes amounts at risk with various affiliates of Athene Holding, Ltd., held via participation in a loan syndication administered by Barclays Bank. 113 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (c) Pledged Collateral The following tables present the Company’s assets (based on carrying value) pledged as collateral for its various financing arrangements as of December 31, 2022 and 2021: December 31, 2022 Financing Agreements (In Thousands) Non-Mark-to-Market (1) Mark-to-Market (1) Securitized Total Assets: Residential whole loans, at carrying value $ 215,993 $ 284,683 $ 1,314,104 $ 1,814,780 Residential whole loans, at fair value 1,095,556 2,164,158 2,720,757 5,980,471 Securities, at fair value — 177,111 — 177,111 Other assets: REO 19,837 28,490 36,486 84,813 Total $ 1,331,386 $ 2,654,442 $ 4,071,347 $ 8,057,175 December 31, 2021 Financing Agreements (In Thousands) Non-Mark-to-Market (1) Mark-to-Market (1) Securitized Total Assets: Residential whole loans, at carrying value $ 693,982 $ 459,349 $ 1,476,588 $ 2,629,919 Residential whole loans, at fair value 706,377 2,810,865 1,525,114 5,042,356 Securities, at fair value — 256,685 — 256,685 Other assets: REO 25,692 29,374 35,379 90,445 Total $ 1,426,051 $ 3,556,273 $ 3,037,081 $ 8,019,405 (1) An aggregate of $ 30.9 million and $ 25.7 million of accrued interest on those assets pledged against non-mark-to-market and mark-to-market financings agreements had also been pledged as of December 31, 2022 and 2021, respectively. The Company pledges securities or cash as collateral to its counterparties in relation to certain of its financing arrangements. The Company exchanges collateral with its counterparties based on changes in the fair value, notional amount and term of the associated financing arrangements and Swap contracts, as applicable. In connection with these margining practices, either the Company or its counterparty may be required to pledge cash or securities as collateral. When the Company’s pledged collateral exceeds the required margin, the Company may initiate a reverse margin call, at which time the counterparty may either return the excess collateral or provide collateral to the Company in the form of cash or equivalent securities. The Company’s assets pledged as collateral are also described in Notes 2(e) - Restricted Cash and 5(d) - Derivative Instruments. Certain of the Company’s financing arrangements and derivative transactions are governed by underlying agreements that generally provide for a right of setoff in the event of default or in the event of a bankruptcy of either party to the transaction. In the Company’s consolidated balance sheets, all balances associated with repurchase agreements are presented on a gross basis. 114 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 7 . Other Liabilities The following table presents the components of the Company’s Other liabilities at December 31, 2022 and 2021: (In Thousands) December 31, 2022 December 31, 2021 Payable for purchase of unsettled Agency MBS $ 132,026 $ — Dividends and dividend equivalents payable 35,769 47,751 Lease liability 45,314 44,977 Accrued interest payable 23,040 9,621 Accrued expenses and other 75,321 115,709 Total Other Liabilities $ 311,470 $ 218,058 8. Income Taxes The Company has elected to be taxed as a REIT under the provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), and the corresponding provisions of state law. The Company expects to operate in a manner that will enable it to satisfy the various requirements to maintain its status as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must, among other things, distribute at least 90% of its REIT taxable income (excluding net long-term capital gains) to stockholders in the timeframe permitted by the Code. As long as the Company maintains its status as a REIT, the Company will not be subject to regular federal income tax at the REIT level to the extent that it distributes 100% of its REIT taxable income (including net long-term capital gains) to its stockholders within the permitted timeframe. Should this not occur, the Company would be subject to federal taxes at prevailing corporate tax rates on the difference between its REIT taxable income and the amounts deemed to be distributed for that tax year. The Company’s objective is to distribute 100 % of its REIT taxable income to its stockholders within the permitted timeframe. If the Company fails to distribute during each calendar year, or by the end of January following the calendar year in the case of distributions with declaration and record dates falling in the last three months of the calendar year, at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. To the extent that the Company incurs interest, penalties or related excise taxes in connection with its tax obligations, including as a result of its assessment of uncertain tax positions, such amounts will be included in Operating and Other Expense on the Company’s consolidated statements of operations. In addition, the Company has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. Generally, a domestic TRS is subject to U.S. federal, state and local corporate income taxes. Given that a portion of the Company’s business is conducted through one or more TRS, the net taxable income earned by its domestic TRS, if any, is subject to corporate income taxation. To maintain the Company’s REIT election, no more than 20% of the value of the Company’s assets at the end of each calendar quarter may consist of stock or securities in TRS. For purposes of the determination of U.S. federal and state income taxes, the Company’s subsidiaries that elected to be treated as TRS record current or deferred income taxes based on differences (both permanent and timing) between the determination of their taxable income and net income under GAAP. Based on its analysis of any potentially uncertain tax positions, the Company concluded that it does not have any material uncertain tax positions that meet the relevant recognition or measurement criteria as of December 31, 2022 or 2021. As of the date of this filing, the Company’s tax returns for tax years 2019 through 2021 are open to examination. 115 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The tax effects of temporary differences that give rise to significant portions of net deferred tax assets (“DTAs”) recorded at the Company’s domestic TRS entities at December 31, 2022 and 2021 are presented in the following table: (In Thousands) December 31, 2022 December 31, 2021 Deferred tax assets (DTAs): Net operating loss and tax credit carryforwards $ 97,655 $ 35,796 Unrealized mark-to-market, impairments and loss provisions 12,609 3,753 Other realized / unrealized treatment differences ( 28,620 ) 12,131 Total deferred tax assets 81,644 51,680 Less: valuation allowance ( 81,644 ) ( 51,680 ) Net deferred tax assets $ — $ — Realization of the Company’s DTAs at December 31, 2022 is dependent on several factors, including generating sufficient taxable income prior to the expiration of net operating loss (“NOL”) carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. The Company determines the extent to which realization of the deferred assets is not expected to be more likely than not and establishes a valuation allowance accordingly. No net deferred tax benefit was recorded by the Company for the years ended December 31, 2022 and 2021, related to the net taxable losses in TRS entities, since a valuation allowance for the full amount of the associated deferred tax asset at the ends of those periods was recognized as its recovery was not considered more likely than not. The related NOL carryforwards generated prior to 2018 will begin to expire in 2037; those generated in 2018 and later can be carried forward indefinitely, until fully utilized. The Company’s estimate of net DTAs could change in future periods to the extent that actual or revised estimates of future taxable income change from current expectations. At December 31, 2022, the Company’s federal NOL carryforward was $ 382.6 million, which may be carried forward indefinitely. If certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized. The income tax provision (benefit) is included in Other general and administrative expense in the Company’s consolidated statements of operations. The following table summarizes the Company’s income tax provision (benefit) primarily recorded at the Company’s domestic TRS entities for the years ended December 31, 2022, 2021, and 2020: For the Year Ended (In Thousands) December 31, 2022 December 31, 2021 December 31, 2020 Current provision (benefit) Federal $ ( 1,309 ) $ 2,025 $ 1,403 State 263 644 598 Total current provision (benefit) ( 1,046 ) 2,669 2,001 Deferred provision (benefit) Federal 166 — — State 29 — — Total deferred provision (benefit) 195 — — Total provision (benefit) $ ( 851 ) $ 2,669 $ 2,001 116 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following is a reconciliation of the statutory federal tax rate to the Company’s effective tax rate at December 31, 2022, 2021, and 2020: For the Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % Non-taxable REIT income (dividends paid deduction) 2.6 % ( 4.6 ) % 0.1 % Other differences in taxable income (loss) from GAAP ( 13.0 ) % ( 4.7 ) % ( 14.4 ) % State and local taxes — % — % — % Change in valuation allowance on DTAs ( 10.1 ) % ( 11.1 ) % ( 6.9 ) % Effective tax rate 0.5 % 0.6 % ( 0.2 ) % 9. Commitments and Contingencies (a) Lease Commitments The Company’s primary lease commitment relates to its corporate headquarters. For the year ended December 31, 2022, the Company recorded an expense of approximately $ 5.0 million in connection with this lease. The original term specified in this lease is approximately fifteen years with a termination date of December 2036 and an option to renew for an additional five years . The Company recognized total lease expense of $ 6.5 million, $ 4.0 million and $ 3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in Other general and administrative expense on the Company’s consolidated statements of operations. At December 31, 2022, the contractual minimum rental payments (exclusive of possible rent escalation charges and normal recurring charges for maintenance, insurance and taxes) were as follows: Year Ended December 31, Minimum Rental Payments (In Thousands) 2023 $ 5,748 2024 5,751 2025 4,888 2026 4,776 2027 5,055 Thereafter 46,999 Total $ 73,217 (b) Representations and Warranties in Connection with Loan Securitization and Other Loan Sale Transactions In connection with the loan securitization and sale transactions entered into by the Company, the Company has the obligation under certain circumstances to repurchase assets previously transferred to securitization vehicles, or otherwise sold, upon breach of certain representations and warranties. As of December 31, 2022, the Company was not aware of any material unsettled repurchase claims that would require a reserve (see Note 14). (c) Transitional Loan Commitments At December 31, 2022, the Company had unfunded commitments of $ 553.4 million in connection with its purchased Transitional loans (see Note 3). 117 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (d) Agency MBS Purchase Commitments At December 31, 2022, the Company had commitments to purchase Agency MBS for $ 132.0 million. Agency MBS are included in Securities, at fair value on the Company’s consolidated balance sheets, with a liability for the purchase amount included in Other liabilities. 10. Stockholders’ Equity ( a ) Preferred Stock 7.50 % Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”) On April 15, 2013, the Company completed the issuance of 8.0 million shares of its Series B Preferred Stock with a par value of $ 0.01 per share, and a liquidation preference of $ 25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The Company’s Series B Preferred Stock is entitled to receive a dividend at a rate of 7.50 % per year on the $ 25.00 liquidation preference before the Company’s common stock is paid any dividends and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series B Preferred Stock is redeemable at $ 25.00 per share plus accrued and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option. The Series B Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board of Directors (the “Board”), until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series B Preferred Stock. As a result of the turmoil in the financial markets resulting from the global COVID-19 pandemic, and in order to preserve liquidity, on March 25, 2020, the Company revoked the previously announced first quarter 2020 quarterly cash dividends on each of the Company's common stock and Series B Preferred Stock. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series B Preferred Stock and declared a preferred stock dividend of $ 0.9375 per share, payable on July 31, 2020 to Series B Preferred stockholders of record as of July 15, 2020. The following table presents cash dividends declared by the Company on its Series B Preferred Stock from January 1, 2020 through December 31, 2022: Year Declaration Date Record Date Payment Date Dividend Per Share 2022 November 18, 2022 December 5, 2022 December 30, 2022 $ 0.46875 August 22, 2022 September 6, 2022 September 30, 2022 0.46875 May 18, 2022 June 1, 2022 June 30, 2022 0.46875 February 17, 2022 March 1, 2022 March 31, 2022 0.46875 2021 November 16, 2021 December 1, 2021 December 31, 2021 $ 0.46875 August 26, 2021 September 8, 2021 September 30, 2021 0.46875 May 24, 2021 June 7, 2021 June 30, 2021 0.46875 February 19, 2021 March 5, 2021 March 31, 2021 0.46875 2020 November 18, 2020 December 4, 2020 December 31, 2020 $ 0.46875 August 12, 2020 September 8, 2020 September 30, 2020 0.46875 July 1, 2020 July 15, 2020 July 31, 2020 0.93750 118 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 6.50 % Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) On February 28, 2020, the Company amended its charter through the filing of articles supplementary to reclassify 12,650,000 shares of the Company’s authorized but unissued common stock as shares of the Company’s Series C Preferred Stock. On March 2, 2020, the Company completed the issuance of 11.0 million shares of its Series C Preferred Stock with a par value of $ 0.01 per share, and a liquidation preference of $ 25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The total net proceeds the Company received from the offering were approximately $ 266.0 million, after deducting offering expenses and the underwriting discount. The Company’s Series C Preferred Stock is entitled to receive dividends (i) from and including the original issue date to, but excluding, March 31, 2025, at a fixed rate of 6.50 % per year on the $ 25.00 liquidation preference and (ii) from and including March 31, 2025, at a floating rate equal to three-month London Interbank Offered Rate (“LIBOR”) plus a spread of 5.345 % per year of the $ 25.00 per share liquidation preference before the Company’s common stock is paid any dividends, and is senior to the Company’s common stock with respect to distributions upon liquidation, dissolution or winding up. Pursuant to the terms of the Series C Preferred Stock, upon the expected discontinuation of the publication of three-month LIBOR in June 2023, a calculation agent will be appointed to select an industry accepted substitute or successor base rate to the three-month LIBOR rate. The calculation agent may also implement changes to the business day convention, the definition of business day, the dividend determination date, the interest rate spread and the method for obtaining the substitute or successor base rate, in a manner that is consistent with industry accepted practices. In March 2022, Congress enacted a federal statute that provides a safe harbor for those, like the calculation agent, that are contractually responsible for determining LIBOR replacements under certain circumstances, which the Company expects will apply to the Series C Preferred Stock. The Federal Reserve is required to promulgate rules under this statute which, once final, the Company expects will affect the selection of an industry accepted substitute or successor base rate under the terms of the Series C Preferred Stock. Dividends on the Series C Preferred Stock are payable quarterly in arrears on or about March 31, June 30, September 30 and December 31 of each year. The Series C Preferred Stock is not redeemable by the Company prior to March 31, 2025, except under circumstances where it is necessary to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and upon the occurrence of certain specified change in control transactions. On or after March 31, 2025, the Company may, at its option, subject to certain procedural requirements, redeem any or all of the shares of the Series C Preferred Stock for cash at a redemption price of $ 25.00 per share, plus any accrued and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date. The Series C Preferred Stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series C Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series C Preferred Stock cannot be made without the affirmative vote of holders of at least 66 2/3% of the outstanding shares of Series C Preferred Stock. Pursuant to the now-terminated forbearance agreements that the Company had previously entered into in the second quarter of 2020, the Company was prohibited from paying dividends on its Series C Preferred Stock during the forbearance period. On July 1, 2020, the Company announced that it had reinstated the payment of dividends on its Series C Preferred Stock and declared a preferred stock dividend of $ 0.53264 per share, payable on July 31, 2020 to the Series C Preferred stockholders of record as of July 15, 2020. Upon payment of this dividend, the Company paid in full all accumulated but previously unpaid dividends on its Series C Preferred Stock. 119 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents cash dividends declared by the Company on its Series C Preferred Stock from January 1, 2020 through December 31, 2022: Year Declaration Date Record Date Payment Date Dividend Per Share 2022 November 18, 2022 December 5, 2022 December 30, 2022 $ 0.40625 August 22, 2022 September 6, 2022 September 30, 2022 0.40625 May 18, 2022 June 1, 2022 June 30, 2022 0.40625 February 17, 2022 March 1, 2022 March 31, 2022 0.40625 2021 November 16, 2021 December 1, 2021 December 31, 2021 $ 0.40625 August 26, 2021 September 8, 2021 September 30, 2021 0.40625 May 24, 2021 June 7, 2021 June 30, 2021 0.40625 February 19, 2021 March 5, 2021 March 31, 2021 0.40625 2020 November 18, 2020 December 4, 2020 December 31, 2020 $ 0.40625 August 12, 2020 September 8, 2020 September 30, 2020 0.40625 July 1, 2020 July 15, 2020 July 31, 2020 0.53264 120 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (b) Dividends on Common Stock The following table presents cash dividends declared by the Company on its common stock from January 1, 2020 through December 31, 2022: Year Declaration Date Record Date Payment Date Dividend Per Share 2022 December 14, 2022 December 30, 2022 January 31, 2023 $ 0.350 (1) September 13, 2022 September 30, 2022 October 31, 2022 0.440 June 15, 2022 June 30, 2022 July 29, 2022 0.440 March 11, 2022 March 22, 2022 April 29, 2022 0.440 (2) 2021 December 14, 2021 December 31, 2021 January 31, 2022 $ 0.440 (3)(4) September 15, 2021 September 30, 2021 October 29, 2021 0.400 (3) June 15, 2021 June 30, 2021 July 30, 2021 0.400 (3) March 12, 2021 March 31, 2021 April 30, 2021 0.300 (3) 2020 December 17, 2020 December 30, 2020 January 29, 2021 $ 0.300 (5)(6) August 6, 2020 September 30, 2020 October 30, 2020 0.200 (5) (1) At December 31, 2022, the Company had accrued dividends and dividend equivalents payable of $ 35.8 million related to the common stock dividend declared on December 14, 2022. This dividend will be subject to taxation in 2023 for the recipient. For more information see the Company’s 2022 Dividend Tax Information on its website. (2) The $ 0.44 per share dividend declared on March 11, 2022, has been adjusted to reflect the Reverse Stock Split; the amount actually paid in respect of such dividend was $ 0.11 per share, which was based on the pre-split number of shares held by stockholders at the record date for such dividend (March 22, 2022). (3) The $ 0.44 , $ 0.40 , $ 0.40 and $ 0.30 per share dividend amounts for the three months ended December 31, 2021, September 30, 2021, June 30, 2021 and March 31, 2021, respectively, have been adjusted to reflect the Company’s one-for-four reverse stock split effected on April 4, 2022; the dividends actually paid in respect of such dividends were $ 0.11 , $ 0.10 , $ 0.10 and $ 0.075 per share, respectively, which were based on the pre-split number of shares held by stockholders at the record dates for such dividends (December 31, 2021, September 30, 2021, June 30, 2021, and March 31, 2021, respectively). (4) At December 31, 2021, the Company had accrued dividends and dividend equivalents payable of $ 47.8 million related to the common stock dividend declared on December 14, 2021. This dividend was considered taxable income to the recipient in 2022. For more information see the Company’s 2021 Dividend Tax Information on its website (5) The $ 0.30 and $ .20 per share dividend amounts for the three months ended December 31, 2020 and September 30, 2020, respectively, have been adjusted to reflect the Company’s one-for-four reverse stock split effected on April 4, 2022; the dividends actually paid in respect of such dividends were $ 0.075 and $ 0.05 per share, respectively, which were based on the pre-split number of shares held by stockholders at the record dates for such dividends (December 30, 2020 and September 30, 2020, respectively). (6) At December 31, 2020, we had accrued dividends and dividend equivalents payable of $ 34.0 million related to the common stock dividend declared on December 17, 2020. This dividend was considered taxable income to the recipient in 2021. For more information see the Company’s 2020 Dividend Tax Information on its website. In general, the Company’s common stock dividends have been characterized as ordinary income to its stockholders for income tax purposes. However, a portion of the Company’s common stock dividends may, from time to time, be characterized as capital gains or return of capital. For the year ended December 31, 2022, the portion of the Company’s common stock dividends paid during the year deemed to be a return of capital was $ 1.76 per share of common stock. For the year ended December 31, 2021, the portion of the Company’s common stock dividends paid during the year deemed to be a return of capital was $ 1.0512 per share of common stock. For the year ended December 31, 2020, the portion of the Company’s common stock dividends paid during the year deemed to be a return of capital was $ 0.20 per share of common stock. 121 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (c) Discount Waiver, Direct Stock Purchase and Dividend Reinvestment Plan (“DRSPP”) On September 27, 2022, the Company filed a shelf registration statement on Form S-3 with the SEC under the Securities Act of 1933, as amended (the “Securities Act”), for the purpose of registering common stock for sale through its DRSPP. Pursuant to Rule 462(e) under the Securities Act, this shelf registration statement became effective automatically upon filing with the SEC and, registered an aggregate of 2.0 million shares of common stock. The Company’s DRSPP is designed to provide existing stockholders and new investors with a convenient and economical way to purchase shares of common stock through the automatic reinvestment of dividends and/or optional cash investments. At December 31, 2022, approximately 2.0 million shares of common stock remained available for issuance pursuant to the DRSPP shelf registration statement. During the years ended December 31, 2022, 2021 and 2020, the Company issued 80,027 , 107,925 and 58,909 shares of common stock through the DRSPP, raising net proceeds of approximately $ 1.2 million, $ 1.9 million and $ 1.0 million, respectively. From the inception of the DRSPP in September 2003 through December 31, 2022, the Company issued 8,841,553 shares pursuant to the DRSPP, raising net proceeds of $ 290.7 million. ( d) At-the-Market Offering Program On August 16, 2019, the Company entered into a three-year distribution agreement under the terms of which the Company had the ability to offer and sell shares of its common stock having an aggregate gross sales price of up to $ 400.0 million, from time to time, through various sales agents, pursuant to an at-the-market equity offering program (the “ATM Program”). During the years ended December 31, 2022, 2021 and 2020, the Company did no t sell any shares of common stock through the ATM Program, and the ATM Program expired in August 2022. (e) Stock Repurchase Program On March 11, 2022, the Company’s Board authorized a stock repurchase program under which the Company may repurchase up to $ 250 million of its common stock through the end of 2023. The Board’s authorization superseded and replaced the authorization under prior stock repurchase program that had been adopted in November 2020, which also authorized the Company to repurchase up to $ 250 million. The stock repurchase program does not require the purchase of any minimum number of shares. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. Acquisitions under the stock repurchase program may be made in the open market, through privately negotiated transactions or block trades or other means, in accordance with applicable securities laws (including, in the Company’s discretion, through the use of one or more plans adopted under Rule 10b5-1 promulgated under the Exchange Act of 1934, as amended (the “Exchange Act”)). During the years ended December 31, 2022, 2021 and 2020, the Company repurchased 6,476,746 , 5,025,374 and 3,521,420 shares of its common stock through the stock repurchase program at an average cost of $ 15.80 , $ 17.04 and $ 14.44 per share and a total cost of approximately $ 102.1 million, $ 85.6 million and $ 50.8 million, net of fees and commissions paid to the sales agent of approximately $ 161,000 , $ 201,000 and $ 141,000 , respectively. In addition, as discussed further below, during the year ended December 31, 2020 the Company repurchased 4,398,394 , warrants for $ 33.7 million that were included in the stock repurchase program. As of December 31, 2022, the Company was permitted to purchase an additional $ 202.5 million of its common stock under the stock repurchase program. 122 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (f) Warrants On June 15, 2020, the Company entered into an Investment Agreement with Apollo and Athene (together the “Purchasers”), under which the Company agreed to issue to the Purchasers warrants (the “Warrants”) to purchase, in the aggregate, 9,259,777 shares (subject to adjustment in accordance with their terms) of the Company’s common stock. One half of the Warrants had an exercise price of $ 6.64 per share and the other half had an exercise price of $ 8.32 per share. The Investment Agreement and the Term Loan Facility (see Note 6) were entered into simultaneously, and the $ 495.0 million of proceeds received were allocated between the debt ($ 481.0 million) and the Warrants ($ 14.0 million). The amount allocated to the Warrants was recorded in Additional paid-in capital on the Company’s consolidated balance sheets. During the fourth quarter of 2020, the Company repurchased, for $ 33.7 million, approximately 48 % of the Warrants that were issued to the Purchasers. The remaining Warrants were exercised by the Purchasers later in the fourth quarter of 2020, resulting in the Company issuing approximately 3.1 million shares of common stock and receiving $ 6.5 million in cash. (g) Accumulated Other Comprehensive Income/(Loss) The following tables present changes in the balances of each component of the Company’s AOCI for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, 2022 (In Thousands) Net Unrealized Gain/(Loss) on AFS Securities Net Gain/(Loss) on Swaps Net Unrealized Gain/(Loss) on Financing Agreements (1) Total AOCI Balance at beginning of period $ 46,833 $ — $ ( 1,255 ) $ 45,578 OCI before reclassifications ( 25,492 ) — 1,255 ( 24,237 ) Amounts reclassified from AOCI (2) — — — — Net OCI during the period (3) ( 25,492 ) — 1,255 ( 24,237 ) Balance at end of period $ 21,341 $ — $ — $ 21,341 For the Year Ended December 31, 2021 (In Thousands) Net Unrealized Gain/(Loss) on AFS Securities Net Gain/(Loss) on Swaps Net Unrealized Gain/(Loss) on Financing Agreements (1) Total AOCI Balance at beginning of period $ 79,607 $ — $ ( 2,314 ) $ 77,293 OCI before reclassifications ( 32,774 ) — 1,059 ( 31,715 ) Amounts reclassified from AOCI (2) — — — — Net OCI during the period (3) ( 32,774 ) — 1,059 ( 31,715 ) Balance at end of period $ 46,833 $ — $ ( 1,255 ) $ 45,578 For the Year Ended December 31, 2020 (In Thousands) Net Unrealized Gain/(Loss) on AFS Securities Net Gain/(Loss) on Swaps Net Unrealized Gain/(Loss) on Financing Agreements (1) Total AOCI Balance at beginning of period $ 392,722 $ ( 22,675 ) $ — $ 370,047 OCI before reclassifications 420,281 ( 50,127 ) ( 2,314 ) 367,840 Amounts reclassified from AOCI (2) ( 733,396 ) 72,802 — ( 660,594 ) Net OCI during the period (3) ( 313,115 ) 22,675 ( 2,314 ) ( 292,754 ) Balance at end of period $ 79,607 $ — $ ( 2,314 ) $ 77,293 (1) Net Unrealized Gain/(Loss) on Financing Agreements at Fair Value due to changes in instrument-specific credit risk. (2) See separate table below for details about these reclassifications. (3) For further information regarding changes in OCI, see the Company’s consolidated statements of comprehensive income/(loss). 123 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents information about the significant amounts reclassified out of the Company’s AOCI for the years ended December 31, 2022, 2021, and 2020: For the Year Ended December 31, 2022 2021 2020 Details about AOCI Components Amounts Reclassified from AOCI Affected Line Item in the Statement Where Net Income is Presented (In Thousands) AFS Securities: Realized gain on sale of securities $ — $ — $ ( 389,127 ) Net realized (loss)/gain on sale of securities and residential whole loans Impairment recognized in earnings — — ( 344,269 ) Other, net Total AFS Securities $ — $ — $ ( 733,396 ) Swaps designated as cash flow hedges: Amortization of de-designated hedging instruments — — 72,802 Other, net Total Swaps designated as cash flow hedges $ — $ — $ 72,802 Total reclassifications for period $ — $ — $ ( 660,594 ) 11. EPS Calculation The following table presents a reconciliation of the (loss)/earnings and shares used in calculating basic and diluted (loss)/earnings per share for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, (In Thousands, Except Per Share Amounts) 2022 2021 2020 Basic (Loss)/Earnings per Share: Net (loss)/income to common stockholders $ ( 231,581 ) $ 328,870 $ ( 679,390 ) Dividends declared on preferred stock ( 32,875 ) ( 32,875 ) ( 29,796 ) Dividends, dividend equivalents and undistributed earnings allocated to participating securities ( 627 ) ( 1,044 ) ( 229 ) Net (loss)/income to common stockholders - basic $ ( 265,083 ) $ 294,951 $ ( 709,415 ) Basic weighted average common shares outstanding 103,153 110,704 113,008 Basic (Loss)/Earnings per Share $ ( 2.57 ) $ 2.66 $ ( 6.28 ) Diluted (Loss)/Earnings per Share: Net (loss)/income to common stockholders - basic $ ( 265,083 ) $ 294,951 $ ( 709,415 ) Dividends, dividend equivalents and undistributed earnings allocated to participating securities — 1,044 — Interest expense on Convertible Senior Notes — 15,668 — Net (loss)/income to common stockholders - diluted $ ( 265,083 ) $ 311,663 $ ( 709,415 ) Basic weighted average common shares outstanding 103,153 110,704 113,008 Unvested and vested restricted stock units — 757 — Effect of assumed conversion of Convertible Senior Notes to common shares — 7,230 — Diluted weighted average common shares outstanding (1) 103,153 118,691 113,008 Diluted (Loss)/Earnings per Share $ ( 2.57 ) $ 2.63 $ ( 6.28 ) (1) At December 31, 2022, the Company had approximately 1.7 million equity instruments outstanding that were excluded in the calculation of diluted EPS for the year ended December 31, 2022. These equity instruments reflect RSUs (based on current estimate of expected share settlement amount) with a weighted average grant date fair value of $ 16.86 . These equity instruments may have a dilutive impact on future EPS. 124 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 During the year ended December 31, 2022, the Convertible Senior Notes were determined to be anti-dilutive and were excluded from the calculation of diluted EPS under the “if-converted” method. Under this method, the periodic interest expense for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether the conversion option is in or out of the money) are included in the denominator for the purpose of calculating diluted EPS. The Convertible Senior Notes may have a dilutive impact on future EPS. 12. Equity Compensation and Other Benefit Plans (a) Equity Compensation Plan In accordance with the terms of the Company’s Equity Plan, which was adopted by the Company’s stockholders on June 10, 2020 (and which amended and restated the Company’s 2010 Equity Compensation Plan), directors, officers and employees of the Company and any of its subsidiaries and other persons expected to provide significant services for the Company and any of its subsidiaries are eligible to receive grants of stock options (“Options”), restricted stock, RSUs, dividend equivalent rights and other stock-based awards under the Equity Plan. Subject to certain exceptions, stock-based awards relating to a maximum of 4.5 million shares of common stock may be granted under the Equity Plan; forfeitures and/or awards that expire unexercised do not count toward this limit. At December 31, 2022, approximately 2.1 million shares of common stock remained available for grant in connection with stock-based awards under the Equity Plan. A participant may generally not receive stock-based awards in excess of 500,000 shares of common stock in any one year and no award may be granted to any person who, assuming exercise of all Options and payment of all awards held by such person, would own or be deemed to own more than 9.8 % of the outstanding shares of the Company’s common stock. Unless previously terminated by the Board, awards may be granted under the Equity Plan until June 10, 2030. Restricted Stock Units Under the terms of the Equity Plan, RSUs are instruments that provide the holder with the right to receive, subject to the satisfaction of conditions set by the Compensation Committee at the time of grant, a payment of a specified value, which may be a share of the Company’s common stock, the fair market value of a share of the Company’s common stock, or such fair market value to the extent in excess of an established base value, on the applicable settlement date. Although the Equity Plan permits the Company to issue RSUs that can settle in cash, all of the Company’s outstanding RSUs as of December 31, 2022 are designated to be settled in shares of the Company’s common stock. All RSUs outstanding at December 31, 2022 may be entitled to receive dividend equivalent payments depending on the terms and conditions of the award either in cash at the time dividends are paid by the Company, or for certain time-based and performance-based RSU awards, as a grant of stock at the time such awards are settled. At December 31, 2022 and 2021, the Company had unrecognized compensation expense of $ 11.2 million and $ 12.3 million, respectively, related to RSUs. The unrecognized compensation expense at December 31, 2022 is expected to be recognized over a weighted average period of 1.6 years. 125 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents information with respect to the Company’s RSUs during the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, 2022 RSUs With Service Condition Weighted Average Grant Date Fair Value RSUs With Market and Service Conditions Weighted Average Grant Date Fair Value Total RSUs Total Weighted Average Grant Date Fair Value Outstanding at beginning of year: 712,160 $ 20.22 905,708 $ 17.14 1,617,868 $ 18.50 Granted (1) 296,379 17.19 381,397 16.04 677,776 16.54 Settled ( 66,125 ) 29.56 ( 112,752 ) 27.86 ( 178,877 ) 28.49 Cancelled/forfeited ( 21,106 ) 17.63 ( 35,858 ) 15.56 ( 56,964 ) 16.33 Outstanding at end of year 921,308 $ 18.63 1,138,495 $ 15.76 2,059,803 $ 17.04 RSUs vested but not settled at end of year 394,996 $ 20.67 190,800 $ 21.98 585,796 $ 21.10 RSUs unvested at end of year 526,312 $ 17.10 947,695 $ 14.51 1,474,007 $ 15.43 For the Year Ended December 31, 2021 RSUs With Service Condition Weighted Average Grant Date Fair Value RSUs With Market and Service Conditions Weighted Average Grant Date Fair Value Total RSUs Total Weighted Average Grant Date Fair Value Outstanding at beginning of year: 457,376 $ 24.76 405,806 $ 25.03 863,182 $ 24.89 Granted (2) 379,281 16.63 602,156 13.60 981,437 14.77 Settled ( 124,497 ) 25.98 ( 102,254 ) 27.62 ( 226,751 ) 26.72 Cancelled/forfeited — — — — — — Outstanding at end of year 712,160 $ 20.22 905,708 $ 17.14 1,617,868 $ 18.50 RSUs vested but not settled at end of year 285,734 $ 20.89 112,752 $ 27.86 398,486 $ 22.86 RSUs unvested at end of year 426,426 $ 19.77 792,956 $ 15.62 1,219,382 $ 17.07 For the Year Ended December 31, 2020 RSUs With Service Condition Weighted Average Grant Date Fair Value RSUs With Market and Service Conditions Weighted Average Grant Date Fair Value Total RSUs Total Weighted Average Grant Date Fair Value Outstanding at beginning of year: 344,933 $ 30.47 325,332 $ 27.13 670,265 $ 28.85 Granted (3) 234,765 19.54 190,800 21.98 425,565 20.63 Settled ( 94,822 ) 30.99 ( 110,326 ) 25.93 ( 205,148 ) 28.27 Cancelled/forfeited ( 27,500 ) 30.36 — — ( 27,500 ) 30.36 Outstanding at end of year 457,376 $ 24.76 405,806 $ 25.03 863,182 $ 24.89 RSUs vested but not settled at end of year 290,115 $ 21.49 102,254 $ 27.62 392,369 $ 23.09 RSUs unvested at end of year 167,261 $ 30.43 303,552 $ 24.16 470,813 $ 26.39 (1) The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 603,525 of these awards granted in 2022, the Company applied: (i) a weighted average volatility estimate of approximately 50 %, which was determined considering historic volatility in the price of the Company’s and its peer group companies common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 1.04 % based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards, respectively. The weighted average grant date fair value for the remaining 74,251 awards with a service condition only was estimated 126 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 based on the closing price of the Company’s common stock at the grant date of $ 13.67 . All of the 381,397 RSUs granted in 2022, the vesting of which is subject to both market and service conditions, are also subject to a one-year post-vesting holding requirement prior to settlement. There is no post vesting holding requirement on the 296,379 RSUs granted in 2022 the vesting of which is subject to a service condition only. (2) The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 621,312 and 306,134 of these awards granted in 2021, the Company applied: (i) a weighted average volatility estimate of approximately 48 % and 54 %, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three and 2.5-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 0.17 % and 0.36 % based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards, respectively. The weighted average grant date fair value for the remaining 53,991 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $ 18.80 . All of the 602,156 RSUs with market and service conditions granted in 2021 are subject to a one-year post-vesting holding requirement. There are no post vesting conditions on the 379,281 RSUs with service conditions granted in 2021. (3) The weighted average grant date fair value of these awards require the Company to estimate certain valuation inputs. In determining the fair value for 301,186 of these awards granted in 2020, the Company applied: (i) a weighted average volatility estimate of approximately 14 %, which was determined considering historic volatility in the price of the Company’s and its peer group companies’ common stock over the three-year period prior to the grant date and the implied volatility of certain exchange-traded options on the Company’s and peer group companies’ common stock at the grant date; and (ii) a weighted average risk-free rate of 1.36 % based on the continuously compounded constant maturity treasury rate corresponding to a maturity commensurate with the expected vesting term of the awards. The weighted average grant date fair value for the remaining 113,148 and 11,231 awards with a service condition only was estimated based on the closing price of the Company’s common stock at the grant date of $ 9.28 and $ 10.24 , respectively. There are no post vesting conditions on these awards. Restricted Stock At December 31, 2022 and 2021, the Company did no t have any unvested shares of restricted common stock outstanding, and no restricted shares vested during the years ended December 31, 2022 and 2021, respectively. The total fair value of restricted shares vested during the year ended December 31, 2020. was approximately $ 131,000 . The following table presents information with respect to the Company’s restricted stock for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, 2022 2021 2020 Shares of Restricted Stock Weighted Average Grant Date Fair Value (1) Shares of Restricted Stock Weighted Average Grant Date Fair Value (1) Shares of Restricted Stock Weighted Average Grant Date Fair Value (1) Outstanding at beginning of year: — $ — — $ — — $ — Granted — — — — 19,888 6.60 Vested (2) — — — — ( 19,888 ) 6.60 Cancelled/forfeited — — — — — — Outstanding at end of year — $ — — $ — — $ — (1) The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock at the grant date. (2) All restrictions associated with restricted stock are removed on vesting. Dividend Equivalents A dividend equivalent is a right to receive a distribution equal to the dividend distributions that would be paid on a share of the Company’s common stock. Dividend equivalents may be granted as a separate instrument or may be a right associated with the grant of another award (e.g., an RSU) under the Equity Plan, and they are paid typically in cash or other consideration at such times and in accordance with such rules, as the Compensation Committee of the Board shall determine in its discretion. Dividend equivalent payments are generally charged to Stockholders’ Equity when common stock dividends are declared to the extent that such equivalents are expected to vest. The Company made dividend equivalent payments associated with RSU 127 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 awards of approximately $ 659,000 , $ 566,000 , and $ 367,000 during the years ended December 31, 2022, 2021 and 2020, respectively. In addition, no dividend equivalents rights awarded as separate instruments were granted during the years ended December 31, 2022, 2021 and 2020. Expense Recognized for Equity-Based Compensation Instruments The following table presents the Company’s expenses related to its equity-based compensation instruments for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, (In Thousands) 2022 2021 2020 RSUs $ 11,338 $ 9,043 $ 6,592 Restricted shares of common stock — — 131 Total $ 11,338 $ 9,043 $ 6,723 (b) Deferred Compensation Plans The Company administers deferred compensation plans for its senior officers and non-employee directors (collectively, the “Deferred Plans”), pursuant to which participants may elect to defer up to 100 % of certain cash compensation. The Deferred Plans are designed to align participants’ interests with those of the Company’s stockholders. Amounts deferred under the Deferred Plans are considered to be converted into “stock units” of the Company. Stock units do not represent stock of the Company, but rather are a liability of the Company that changes in value as would equivalent shares of the Company’s common stock. Deferred compensation liabilities are settled in cash at the termination of the deferral period, based on the value of the stock units at that time. The Deferred Plans are non-qualified plans under the Employee Retirement Income Security Act of 1974 and, as such, are not funded. Prior to the time that the deferred accounts are settled, participants are unsecured creditors of the Company. The Company’s liability for stock units in the Deferred Plans is based on the market price of the Company’s common stock at the measurement date. The following table presents the Company’s expenses related to its Deferred Plans for the years ended December 31, 2022, 2021 and 2020: For the Year Ended December 31, (In Thousands) 2022 2021 2020 Non-employee directors $ ( 1,133 ) $ 537 $ ( 911 ) Total $ ( 1,133 ) $ 537 $ ( 911 ) 128 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The Company distributed cash of approximately $ 53,000 to the participants of the Deferred Plans during the year ended December 31, 2022. The Company did not distribute cash to the participants of the Deferred Plans during the year ended December 31, 2021. The Company distributed cash of $ 769,400 to the participants of the Deferred Plans during the year ended December 31, 2020. The following table presents the aggregate amount of income deferred by participants of the Deferred Plans through December 31, 2022 and 2021 that had not been distributed and the Company’s associated liability for such deferrals at December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In Thousands) Undistributed Income Deferred (1) Liability Under Deferred Plans Undistributed Income Deferred (1) Liability Under Deferred Plans Non-employee directors $ 2,923 $ 1,953 $ 2,687 $ 2,836 Total $ 2,923 $ 1,953 $ 2,687 $ 2,836 (1) Represents the cumulative amounts that were deferred by participants through December 31, 2022 and 2021, which had not been distributed through such respective date. (c) Savings Plan The Company sponsors a tax-qualified employee savings plan (the “Savings Plan”) in accordance with Section 401(k) of the Code. Subject to certain restrictions, all of the Company’s employees are eligible to make tax-deferred contributions to the Savings Plan subject to limitations under applicable law. Participant’s accounts are self-directed and the Company bears the costs of administering the Savings Plan. The Company matches 100 % of the first 3 % of eligible compensation deferred by employees and 50 % of the next 2 %, subject to a maximum as provided by the Code. The Company has elected to operate the Savings Plan under the applicable safe harbor provisions of the Code, whereby among other things, the Company must make contributions for all participating employees and all matches contributed by the Company immediately vest 100 %. For the years ended December 31, 2022, 2021 and 2020, the Company recognized expenses for matching contributions of $ 1.3 million, $ 697,000 and $ 480,000 , respectively. 13. Fair Value of Financial Instruments GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows: Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy. 129 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Residential Whole Loans, at Fair Value The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy; however, the Company determined that the market inputs used in valuing its Agency eligible investor loans were sufficiently observable to be classified as Level 2. Securities, at Fair Value Term Notes Backed by MSR-Related Collateral The Company’s valuation process for term notes backed by MSR-related collateral is similar to that used for other residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. Based on its evaluation of the observability of the data used in its fair value estimation process, these assets are classified as Level 2 in the fair value hierarchy. Other Residential Mortgage Securities (including short positions in TBA securities) In determining the fair value of the Company’s other residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Valuations of TBA securities positions are based on executed levels for positions entered into and subsequently rolled forward, as well as prices obtained from pricing services for outstanding positions at each reporting date. These valuations are assessed for reasonableness by considering market TBA levels observed via Bloomberg for the same coupon and term to maturity. In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available. The Company’s residential mortgage securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters. Accordingly, these securities are classified as Level 2 in the fair value hierarchy. 130 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Financing Agreements, at Fair Value Agreements with mark-to-market collateral provisions These agreements are secured and subject to margin calls and their base interest rates reset frequently to market based rates. As a result, no credit valuation adjustment is required, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with mark-to-market collateral provisions held at fair value are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are typically longer term and are collateralized by residential whole loans where the credit spread paid over the base rate on the instrument is not reset frequently are classified as Level 3 in the fair value hierarchy. Agreements with non-mark-to-market collateral provisions These agreements are secured, but not subject to margin calls, and their base interest rates reset frequently to market based rates. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy. Securitized Debt In determining the fair value of securitized debt, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Accordingly, the Company’s securitized debt is classified as Level 2 in the fair value hierarchy. Swaps Variation margin payments on the Company’s Swaps are treated as a legal settlement of the exposure under the related Swap contract, the effect of which reduces what would have otherwise been reported as the fair value of the Swap, generally to zero. Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations. The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve. The methods described above may produce fair value estimates that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those used by market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced. The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future. 131 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2022 and 2021, on the consolidated balance sheets by the valuation hierarchy, as previously described: Fair Value at December 31, 2022 (In Thousands) Level 1 Level 2 Level 3 Total Assets: Residential whole loans, at fair value $ — $ 51,094 $ 5,676,430 $ 5,727,524 Securities, at fair value — 333,364 — 333,364 Total assets carried at fair value $ — $ 384,458 $ 5,676,430 $ 6,060,888 Liabilities: Agreements with non-mark-to-market collateral provisions $ — $ — $ 578,879 $ 578,879 Agreements with mark-to-market collateral provisions — — 884,495 884,495 Securitized debt — 2,435,370 — 2,435,370 Total liabilities carried at fair value $ — $ 2,435,370 $ 1,463,374 $ 3,898,744 Fair Value at December 31, 2021 (In Thousands) Level 1 Level 2 Level 3 Total Assets: Residential whole loans, at fair value $ — $ 1,082,765 $ 4,222,584 $ 5,305,349 Securities, at fair value — 256,685 — 256,685 Total assets carried at fair value $ — $ 1,339,450 $ 4,222,584 $ 5,562,034 Liabilities: Agreements with non-mark-to-market collateral provisions $ — $ — $ 1,322,362 $ 1,322,362 Agreements with mark-to-market collateral provisions — — 628,280 628,280 Securitized debt — 1,316,131 — 1,316,131 Total liabilities carried at fair value $ — $ 1,316,131 $ 1,950,642 $ 3,266,773 132 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents additional information for the years ended December 31, 2022 and 2021 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis: Residential Whole Loans, at Fair Value For the Year Ended December 31, (In Thousands) 2022 2021 Balance at beginning of period $ 4,222,584 $ 1,216,902 Purchases and originations 2,749,275 4,367,423 Draws 361,035 53,599 Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings ( 668,899 ) 16,243 Repayments ( 925,773 ) ( 295,790 ) Sales and repurchases ( 10,496 ) ( 2,023 ) Transfer to REO ( 51,296 ) ( 51,005 ) Transfer to Level 2 (1) — ( 1,082,765 ) Balance at end of period $ 5,676,430 $ 4,222,584 (1) The Company determined that the market inputs used in valuing its Agency eligible investor loans were sufficiently observable to be classified as Level 2 beginning in 2021. The following table presents additional information for the years ended December 31, 2022 and 2021 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis: Agreements with Non-mark-to-market Collateral Provisions Year Ended December 31, (In Thousands) 2022 2021 Balance at beginning of period $ 628,280 $ 1,159,213 Issuances 554,823 — Payment of principal ( 602,969 ) ( 529,874 ) Change in unrealized gains ( 1,255 ) ( 1,059 ) Balance at end of period $ 578,879 $ 628,280 The following table presents additional information for the years ended December 31, 2022 and 2021 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis: Agreements with Mark-to-market Collateral Provisions Year Ended December 31, (In Thousands) 2022 2021 Balance at beginning of period $ 1,322,362 $ 1,124,162 Issuances 1,153,555 1,275,265 Payment of principal ( 1,591,422 ) ( 1,077,065 ) Balance at end of period $ 884,495 $ 1,322,362 133 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 Fair Value Methodology for Level 3 Financial Instruments Residential Whole Loans, at Fair Value The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of December 31, 2022 and 2021: December 31, 2022 (Dollars in Thousands) Fair Value (1) Valuation Technique Unobservable Input Weighted Average (2) Range Purchased Non-Performing Loans $ 546,675 Discounted cash flow Discount rate 7.0 % 6.3 - 10.0 % Prepayment rate 8.9 % 0.0 - 33.5 % Default rate 3.7 % 0.0 - 52.4 % Loss severity 11.3 % 0.0 - 100.0 % $ 249,219 Liquidation model Discount rate 7.8 % 7.8 - 7.8 % Annual change in home prices 6.9 % ( 5.4 )- 59.7 % Liquidation timeline (in years) 1.9 0.1 - 4.5 Current value of underlying properties (3) $ 743 $ 28 -$ 4,000 Total $ 795,894 December 31, 2021 (Dollars in Thousands) Fair Value (1) Valuation Technique Unobservable Input Weighted Average (2) Range Purchased Non-Performing Loans $ 720,766 Discounted cash flow Discount rate 3.6 % 1.5 - 9.8 % Prepayment rate 14.4 % 0.0 - 44.0 % Default rate 3.9 % 0.0 - 50.8 % Loss severity 11.7 % 0.0 - 100.0 % $ 351,008 Liquidation model Discount rate 8.0 % 6.7 - 50.0 % Annual change in home prices 9.7 % 4.5 - 21.9 % Liquidation timeline (in years) 1.7 0.1 - 4.5 Current value of underlying properties (3) $ 770 $ 10 -$ 3,995 Total $ 1,071,774 (1) Excludes approximately $ 215,000 and $ 496,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at December 31, 2022 and 2021, respectively. (2) Amounts are weighted based on the fair value of the underlying loan. (3) The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately $ 457,000 and $ 421,000 as of December 31, 2022 and 2021, respectively. 134 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 December 31, 2022 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Input Weighted Average (1) Range Purchased Performing Loans $ 4,857,587 Discounted cash flow Discount rate 7.6 % 5.6 - 22.7 % Prepayment rate 7.9 % 0.0 - 44.8 % Default rate 0.8 % 0.0 - 19.4 % Loss severity 7.3 % 0.0 - 100.0 % $ 22,734 Liquidation model Discount rate 7.8 % 7.8 - 7.8 % Annual change in home prices 3.2 % ( 1.0 )- 10.7 % Liquidation timeline (in years) 1.9 0.8 - 4.2 Current value of underlying properties $ 1,319 $ 50 -$ 2,850 Total $ 4,880,321 December 31, 2021 (Dollars in Thousands) Fair Value Valuation Technique Unobservable Input Weighted Average (1) Range Purchased Performing Loans $ 3,142,366 Discounted cash flow Discount rate 3.9 % 1.4 - 25.9 % Prepayment rate 19.0 % 0.0 - 47.2 % Default rate 0.2 % 0.0 - 17.8 % Loss severity 8.4 % 0.0 - 10.0 % $ 7,948 Liquidation model Discount rate 7.0 % 7.0 %- 7.0 % Annual change in home prices 6.5 % — %- 14.8 % Liquidation timeline (in years) 2.0 0.8 - 4.2 Current value of underlying properties $ 691 $ 60 -$ 1,750 Total $ 3,150,314 (1) Amounts are weighted based on the fair value of the underlying loan. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans. Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a lower fair value measurement, whereas increases in the current or expected value of the underlying properties, in isolation, would result in a higher fair value measurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on the overall valuation. 135 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The following table presents the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2022 and 2021: December 31, 2022 December 31, 2022 December 31, 2021 Level in Fair Value Hierarchy Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value (In Thousands) Financial Assets: Residential whole loans 3 $ 7,467,645 $ 7,397,421 $ 6,830,235 $ 6,983,686 Residential whole loans (1) 2 51,094 51,094 1,082,765 1,082,765 Securities, at fair value 2 333,364 333,364 256,685 256,685 Cash and cash equivalents 1 334,183 334,183 304,696 304,696 Restricted cash 1 159,898 159,898 99,751 99,751 Financial Liabilities (2) : Financing agreements with non-mark-to-market collateral provisions 3 1,003,604 1,004,260 939,540 940,257 Financing agreements with mark-to-market collateral provisions 3 2,111,396 2,111,647 2,403,151 2,403,724 Financing agreements with mark-to-market collateral provisions 2 111,651 111,651 159,148 159,148 Securitized debt (3) 2 3,357,590 3,217,905 2,650,473 2,646,203 Convertible senior notes 2 227,845 211,015 226,470 239,292 (1) At December 31, 2021, $ 654.7 million of Agency eligible investor loans were valued based on the observable prices of related securitized debt. (2) Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs. (3) Includes securitized debt that is carried at amortized cost basis and fair value. Other Assets Measured at Fair Value on a Nonrecurring Basis The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. During the years ended December 31, 2022 and 2021, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $ 82.9 million and $ 72.3 million, respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy. In addition, on July 1, 2021, in connection with the Lima One transaction (see Note 15), the Company revalued its previously existing investments in Lima One and recorded a gain of $ 38.9 million. In connection with the Lima One transaction, all of Lima One’s assets and liabilities were recorded at their estimated fair value. 136 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 14. Use of Special Purpose Entities and Variable Interest Entities A Special Purpose Entity (“SPE”) is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying financial assets on improved terms. Securitization involves transferring assets to a SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business, through the SPE’s issuance of debt or equity instruments. Investors in a SPE usually have recourse only to the assets in the SPE and, depending on the overall structure of the transaction, may benefit from various forms of credit enhancement such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement. The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the SPEs that were created to facilitate these transactions. See Note 2(p) for a discussion of the accounting policies applied to the consolidation of VIEs and transfers of financial assets in connection with financing transactions. The Company has engaged in loan securitizations primarily for the purpose of obtaining improved overall financing terms as well as non-recourse financing on a portion of its residential whole loan portfolio. Notwithstanding the Company’s participation in these transactions, the risks facing the Company are largely unchanged as the Company remains economically exposed to the first loss position on the underlying assets transferred to the VIEs. Loan Securitization Transactions The following table summarizes the key details of the Company’s loan securitization transactions currently outstanding as of December 31, 2022 and 2021: (Dollars in Thousands) December 31, 2022 December 31, 2021 Aggregate unpaid principal balance of residential whole loans sold $ 6,732,609 $ 3,984,355 Face amount of Senior Bonds issued by the VIE and purchased by third-party investors $ 5,333,090 $ 3,667,790 Outstanding amount of Senior Bonds, at carrying value $ 922,220 (1) $ 1,334,342 (1) Outstanding amount of Senior Bonds, at fair value $ 2,435,370 $ 1,316,131 Outstanding amount of Senior Bonds, total $ 3,357,590 $ 2,650,473 Weighted average fixed rate for Senior Bonds issued 3.38 % (2) 2.01 % (2) Weighted average contractual maturity of Senior Bonds 38 years (2) 36 years (2) Face amount of Senior Support Certificates received by the Company (3) $ 715,640 $ 283,930 Cash received $ 5,300,681 $ 3,682,082 (1) Net of $ 2.9 million and $ 6.8 million of deferred financing costs at December 31, 2022 and 2021, respectively. (2) At December 31, 2022 and 2021, $ 1.9 billion and $ 329.0 million, respectively, of Senior Bonds sold in securitization transactions contained a contractual coupon step-up feature whereby the coupon increases by either 100 , 200 or 300 basis points or more at defined dates ranging from 30 months, up to 48 months from issuance if the bond is not redeemed before such date. (3) Provides credit support to the Senior Bonds sold to third-party investors in the securitization transactions. During the years ended December 31, 2022 and 2021, the Company issued Senior Bonds with a current face of $ 2.3 billion and $ 2.4 billion to third-party investors for proceeds of $ 2.2 billion and $ 2.4 billion, respectively, before offering costs and accrued interest. The Senior Bonds issued by the Company during the years ended December 31, 2022 and 2021 are included in “Financing agreements, at fair value” (at carrying value) on the Company’s consolidated balance sheets (see Note 6). As of December 31, 2022 and 2021, as a result of the transactions described above, securitized loans of approximately $ 4.0 billion and $ 3.0 billion are included in “Residential whole loans” and REO with a carrying value of approximately $ 36.5 million and $ 35.4 million are included in “Other assets” on the Company’s consolidated balance sheets, respectively. As of 137 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 December 31, 2022 and 2021, the aggregate carrying value of Senior Bonds issued by consolidated VIEs was $ 3.4 billion and $ 2.7 billion, respectively. These Senior Bonds are disclosed as “securitized debt” and are included in Financing agreements on the Company’s consolidated balance sheets. The holders of the securitized debt have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets from the VIE upon the breach of certain representations and warranties with respect to the residential whole loans sold to the VIE. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE. The Company concluded that the entities created to facilitate the loan securitization transactions are VIEs. The Company completed an analysis of whether each VIE created to facilitate the securitization transactions should be consolidated by the Company, based on consideration of its involvement in each VIE, including the design and purpose of the SPE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of each VIE. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed: • whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and • whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. Based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that it was required to consolidate each VIE created to facilitate the loan securitization transactions. Residential Whole Loans and REO (including Residential Whole Loans and REO transferred to consolidated VIEs) Included on the Company’s consolidated balance sheets as of December 31, 2022 and 2021 are a total of $ 7.5 billion and $ 7.9 billion, respectively, of residential whole loans. These assets, excluding certain loans originated and held by Lima One, and certain of the Company’s REO assets, are directly owned by certain trusts established by the Company to acquire the loans and entities established in connection with the Company’s loan securitization transactions. The Company has assessed that these entities are required to be consolidated (see Notes 3 and 5(a)). In addition, as a result of the sale of certain redemption rights in 2022, the SPE’s that held previously securitized Agency eligible investor loans were deconsolidated from the Company’s financial statements, as the Company concluded that it was no longer the primary beneficiary of those SPE’s. This resulted in the de-recognition of Agency eligible investor loans with an unpaid principal balance of $ 598.0 million and of securitized debt with an unpaid principal balance of $ 567.2 million. All of the loans and debt were held at fair value. Accordingly, no significant additional gains or losses were recorded on de-recognition. 15. Segment Reporting At December 31, 2022, the Company’s reportable segments include (i) mortgage-related assets and (ii) Lima One. The Corporate column in the table below primarily consists of corporate cash and related interest income, investments in loan originators and related economics, general and administrative expenses not directly attributable to Lima One, interest expense on unsecured convertible senior notes (Note 6), securitization issuance costs, and preferred stock dividends. The following tables summarize segment financial information, which in total reconciles to the same data for the Company as a whole. The Company is not presenting comparable segment statements of operations for the year ended December 31, 2020, because the Company did not consolidate Lima One during those periods: 138 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total Year Ended December 31, 2022 Interest Income $ 364,761 $ 113,134 $ 4,524 $ 482,419 Interest Expense 176,725 66,358 15,760 258,843 Net Interest Income/(Expense) $ 188,036 $ 46,776 $ ( 11,236 ) $ 223,576 Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans 2,842 ( 196 ) — 2,646 Provision for Credit Losses on Other Assets — — ( 28,579 ) ( 28,579 ) Net Interest Income/(Expense) after Reversal of Provision/(Provision) for Credit Losses $ 190,878 $ 46,580 $ ( 39,815 ) $ 197,643 Net loss on residential whole loans measured at fair value through earnings $ ( 730,028 ) $ ( 136,734 ) $ — $ ( 866,762 ) Impairment and other net loss on securities and other portfolio investments ( 3,146 ) — ( 21,921 ) ( 25,067 ) Net gain on real estate owned 25,348 31 — 25,379 Net gain on derivatives used for risk management purposes 217,961 37,218 — 255,179 Net gain on securitized debt measured at fair value through earnings 231,176 59,463 — 290,639 Lima One - origination, servicing and other fee income — 46,745 — 46,745 Other, net 4,282 537 4,478 9,297 Total Other (Loss)/Income, net $ ( 254,407 ) $ 7,260 $ ( 17,443 ) $ ( 264,590 ) General and administrative expenses (including compensation) $ — $ 53,185 $ 59,355 $ 112,540 Loan servicing, financing, and other related costs 25,384 1,120 16,390 42,894 Amortization of intangible assets — 9,200 — 9,200 Net Loss $ ( 88,913 ) $ ( 9,665 ) $ ( 133,003 ) $ ( 231,581 ) Less Preferred Stock Dividend Requirement $ — $ — $ 32,875 $ 32,875 Net Loss Available to Common Stock and Participating Securities $ ( 88,913 ) $ ( 9,665 ) $ ( 165,878 ) $ ( 264,456 ) 139 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total Year Ended December 31, 2021 Interest Income $ 347,863 $ 14,249 $ 190 $ 362,302 Interest Expense 99,905 4,691 15,789 120,385 Net Interest Income/(Expense) $ 247,958 $ 9,558 $ ( 15,599 ) $ 241,917 Reversal of Provision/(Provision) for Credit Losses on Residential Whole Loans $ 44,981 $ ( 118 ) $ — $ 44,863 Net Interest Income/(Expense) after Reversal of Provision/(Provision) for Credit Losses $ 292,939 $ 9,440 $ ( 15,599 ) $ 286,780 Net (loss)/gain on residential whole loans measured at fair value through earnings $ ( 2,719 ) $ 18,962 $ — $ 16,243 Impairment and other net gain on securities and other portfolio investments 1,607 — 72,889 74,496 Net gain on real estate owned 22,760 78 — 22,838 Net gain/(loss) on derivatives used for risk management purposes 1,457 ( 31 ) — 1,426 Net gain on securitized debt measured at fair value through earnings 14,594 433 — 15,027 Lima One - origination, servicing and other fee income — 22,600 — 22,600 Other, net 759 128 11,586 12,473 Total Other Income, net $ 38,458 $ 42,170 $ 84,475 $ 165,103 General and administrative expenses (including compensation) $ — $ 24,140 $ 61,406 $ 85,546 Loan servicing, financing, and other related costs 25,250 436 5,181 30,867 Amortization of intangible assets — 6,600 — 6,600 Net Income $ 306,147 $ 20,434 $ 2,289 $ 328,870 Less Preferred Stock Dividend Requirement $ — $ — $ 32,875 $ 32,875 Net Income/(Loss) Available to Common Stock and Participating Securities $ 306,147 $ 20,434 $ ( 30,586 ) $ 295,995 (Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total December 31, 2022 Total Assets $ 6,065,557 $ 2,618,695 $ 428,153 $ 9,112,405 December 31, 2021 Total Assets $ 7,567,084 $ 1,200,737 $ 371,867 $ 9,139,688 Lima One Segment On July 1, 2021, the Company completed the acquisition from affiliates of Magnetar Capital of their ownership interests in Lima One Holdings, LLC, the parent company of Lima One Capital, LLC (collectively, “Lima One”), a leading originator and servicer of business purpose loans. In connection with this transaction, the Company also acquired from certain members of management of Lima One their ownership interests in Lima One Holdings, LLC. With the completion of these transactions (collectively, “the transaction”), the Company acquired the remaining approximately 57 % of the common equity interests of Lima One that it did not previously own, for cash consideration of $ 57.3 million and $ 4.7 million of restricted stock unit awards issued to certain members of the Lima One management team. As a result of these transactions, the Company gained control of 100 % of the ownership interests in Lima One and was required to consolidate its financial results from that date. The transaction is accounted for under the purchase method of accounting. Under purchase accounting, the purchase 140 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 consideration to acquire Lima One is defined as the cash paid to acquire the approximately 57 % of the common equity interests not previously owned and the estimated fair value of the previously owned approximately 43 % common equity interest. Further, under purchase accounting, the Company was required to revalue the previously owned common equity interest to fair value. At the time of the revaluation, the previously owned common equity interest had a carrying value of $ 5.6 million (net of a $ 21.0 million impairment charge that was recorded in the first quarter of 2020). Consequently, the revaluation resulted in the Company recording a gain of $ 38.9 million that is presented in Other income in the Company’s consolidated statement of operations for the year ended December 31, 2021. Accordingly, under the purchase method of accounting, the purchase consideration allocated was $ 101.7 million. The restricted stock awards issued are not included in the purchase consideration as it was determined that they should be accounted for as compensation expense for post-combination services. Additionally, concurrent with the closing of the transaction, the Company injected additional capital that facilitated the repayment by Lima One of $ 47.4 million of outstanding preferred equity interests, of which $ 22.0 million were held by the Company prior to closing. As the Company had previously recorded an impairment write-down on its investment in Lima One’s preferred equity that was repaid in connection with the transaction, the Company recorded a gain of $ 5.0 million to reflect the reversal of this impairment charge. This gain was recorded in Other Income in the consolidated statements of operations for the year ended December 31, 2021. Further, the Company paid a total of $ 428,000 of acquisition related expenses, which were recorded in Operating and Other Expenses in the consolidated statements of operations for the year ended December 31, 2021. The Company performed an allocation of the purchase consideration and recorded the underlying assets acquired (including certain identified intangible assets) and liabilities assumed based on their estimated fair values using the information available at the acquisition date. The excess of the purchase consideration over the net assets acquired of $ 61.1 million was allocated to goodwill. The goodwill is attributed to further access and expansion into business purpose loan markets as well as access to an experienced management team and workforce that are expected to continue to provide services to the business. In addition, the Company identified and recorded finite-lived intangible assets totaling $ 28.0 million (Note 5). The purchase price allocations are summarized in the table below: Purchase Price Allocation (In Thousands) Acquisition Date July 1, 2021 Purchase Price: Cash $ 57,255 Equity method investment at fair value 44,465 Total consideration $ 101,720 Allocated to: Business purpose residential loans, at fair value $ 170,220 Cash and cash equivalents 16,531 Restricted cash 91,394 Other assets 37,107 Goodwill 61,076 Intangible assets 28,000 Total assets acquired $ 404,328 Short term debt, net $ ( 170,908 ) Accrued expenses and other liabilities ( 84,324 ) Total liabilities assumed $ ( 255,232 ) Preferred equity repaid at closing ( 47,376 ) Total net assets acquired $ 101,720 141 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 The Lima One segment includes the stand-alone mortgage origination and servicing business of Lima One, including related goodwill, intangible assets, and direct expenses, plus Lima One-related residential whole loans and REO (defined as both those owned by Lima One on the acquisition date and those originated by Lima One since the acquisition date) and the economics related thereto (including any related taxes and the economics of associated financing and hedging instruments), all as recorded under GAAP. Associated financing economics are equal to the results of direct financings of Lima One-related residential whole loans and REO plus allocations of the results of financings which include Lima One related residential whole loans and REO as part of their collateral, based on the relative carrying values of the financed assets. Associated hedging economics are equal to allocations of the Company’s overall hedging results based on the relative estimated duration of each asset class hedged and the relative fair values of assets within each asset class. Mortgage-Related Assets Segment This segment is comprised of the remainder of the Company’s investments (including any related taxes and the economics of associated financing and hedging instruments). 142 Table of Contents MFA FINANCIAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 16. Subsequent Events Subsequent to quarter end, the Company completed three additional loan securitizations with an aggregate UPB of loans sold of $ 668.2 million. This included $ 313.7 million of Non-QM loans, $ 203.9 million of Single Family Rental loans and $ 150.6 million of Transitional loans. 143 Table of Contents Schedule IV - Mortgage Loans on Real Estate December 31, 2022 Asset Type Number Interest Rate Maturity Date Range Balance Sheet Reported Amount Principal Amount of Loans Subject to Delinquent Principal or Interest (Dollars in Thousands) Residential Whole Loans Original loan balance $ 0 - $ 149,999 7,282 0.00 % - 16.00 % 3/15/2010-4/1/2062 $ 613,600 $ 61,065 Original loan balance $ 150,000 - $ 299,999 7,740 0.00 % - 13.49 % 3/10/2013-8/1/2062 1,356,976 123,816 Original loan balance $ 300,000 - $ 449,999 3,601 0.00 % - 12.60 % 12/1/2018-9/1/2062 1,054,821 125,233 Original loan balance greater than $ 449,999 5,220 0.30 % - 12.95 % 12/1/2018-9/1/2071 4,528,656 255,171 23,843 $ 7,554,053 (1)(2) $ 565,285 (1) Excludes an allowance for loan losses of $ 35.3 million at December 31, 2022. (2) The federal income tax basis is approximately $ 4.3 billion. Reconciliation of Balance Sheet Reported Amounts of Mortgage Loans on Real Estate The following table summarizes the changes in the carrying amounts of residential whole loans during the year ended December 31, 2022: For the Year Ended December 31, 2022 (In Thousands) Residential Whole Loans Beginning Balance $ 7,913,000 Additions during period: Purchases $ 3,126,424 Premium amortization/discount accretion, net 9,798 Reversal of provision for loan loss 4,133 Deductions during period: Repayments $ ( 1,814,509 ) Loan sales and repurchases ( 973,283 ) Changes in fair value recorded in Net gain/(loss) on residential whole loans measured at fair value through earnings ( 676,076 ) Transfer to REO ( 70,748 ) Ending Balance $ 7,518,739 144 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.