MFA Financial, Inc. — 2015 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015; fourth-quarter results are also shown. MFA is a mortgage REIT investing on a leveraged basis in residential Agency and Non-Agency mortgage-backed securities (MBS), residential whole loans and credit risk transfer securities. It reported total assets of $13.17 billion at year-end.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $492.1 million | $463.8 million |
| Net interest income | $315.2 million | $304.0 million |
| Net income | $313.2 million | $313.5 million |
| Net income available to common stock and participating securities | $298.2 million | $298.5 million |
| Basic and diluted EPS | $0.80 | $0.81 |
| Common dividends declared per share | $0.80 | $0.80 |
| Net interest spread / margin | 2.33% / 2.65% | 2.40% / 2.78% |
Operating cash flow was $282.2 million; investing activities provided $550.1 million and financing activities used $849.7 million. Cash and cash equivalents fell $17.4 million to $165.0 million. Total liabilities were $10.20 billion and stockholders’ equity was $2.97 billion. Year-end borrowings and other advances were $9.39 billion, plus $22.1 million of securitized debt and $100 million of 8% Senior Notes. The reported debt-to-equity multiple was 3.4x.
Management estimated available liquidity above $571 million: $165.0 million cash and estimated financing capacity of $241.7 million against Agency MBS and $164.3 million against unpledged Non-Agency MBS. Book value per common share was $7.47, down from $8.12. Net unrealized gains on MBS and CRT securities were $585.0 million, versus $813.5 million a year earlier.
Material changes versus the prior comparable period
- Net income was nearly unchanged, while EPS declined from $0.81 to $0.80. Net interest income rose 3.7%, but the net interest margin narrowed from 2.78% to 2.65%.
- The portfolio shifted further toward credit-sensitive assets. Residential whole loans reached $895.1 million, up from $351.4 million, and represented about 6.8% of assets. Non-Agency MBS and whole loans carried greater credit and valuation risks than Agency MBS.
- Year-end leverage rose from 2.8x to 3.4x as reported; the filing says the comparable 2014 multiple would have been 3.3x after reflecting the accounting change described below.
- A new accounting standard ended Linked Transaction accounting. It moved $1.913 billion of Non-Agency MBS and $1.520 billion of related repurchase liabilities onto the balance sheet separately; the adoption adjustment had no net effect on total equity.
- Operating and other expenses increased to $52.4 million from $45.3 million, including higher loan servicing and related costs as the whole-loan business expanded.
Outlook, commentary, risks and unusual items
- Management expected to continue in 2016 pursuing credit-sensitive, less interest-rate-sensitive assets, especially residential whole loans and Non-Agency MBS, while allowing some Agency MBS to pay down. The filing provides no specific earnings or dividend guidance.
- A material subsequent event is the FHFA rule requiring MFA Insurance to end its FHLB membership, with no new or renewed advances and repayment of outstanding advances by February 19, 2017. Advances were approximately $1.50 billion at year-end and $1.20 billion on February 16, 2016; replacement financing may not be available on comparable terms.
- For 2015, management estimated REIT taxable income of $307.5 million and undistributed taxable income of $7.6 million. It expected the 2016 unwind of a resecuritization to generate approximately $0.19 per common share of taxable income, and proceeds from the Bank of America/Countrywide MBS settlement to generate approximately $0.05 per share. These are taxable-income estimates, not earnings guidance.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point increase would reduce projected next-12-month net interest income by 8.98% and portfolio value by 0.69%; management cautioned that actual outcomes could differ.
- Key risks include short-term, uncommitted repo funding and margin calls; rising funding costs and rate/prepayment mismatches; credit losses on Non-Agency MBS and delinquent whole loans; concentrated geographic exposure; counterparty and illiquidity risks; and uncertainty in Level 3 loan valuations. Of fair-value whole loans, $493.6 million was 90 or more days past due at year-end. REO increased to 182 properties valued at $28.0 million from 46 properties and $5.5 million.
- MFA recognized $705,000 of credit-related impairment losses on Non-Agency MBS in 2015. It also recognized $17.7 million of net gains on whole loans held at fair value and $34.9 million of gains on $70.7 million of MBS sales. Management reported no material legal proceedings; the auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- How the FHLB advance repayment will be funded and whether replacement financing is available on acceptable terms.
- Whether whole-loan delinquencies, foreclosures, REO levels and Level 3 valuations support the reported carrying values and expected returns.
- Whether net interest margin, book value and liquidity remain resilient to changing rates, prepayments, collateral values and repo haircuts.
- How much of the projected taxable income from the resecuritization unwind and settlement is realized, and how it affects distribution requirements.
- Whether the $0.20 quarterly common dividend can be sustained: common dividends declared equaled $0.80 per share against $0.80 annual EPS, and the Board has not set a minimum payout.