MFA Financial, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are to December 31, 2014. MFA is a leveraged residential mortgage REIT investing primarily in Agency and Non-Agency mortgage-backed securities (MBS), with a growing residential whole-loan portfolio. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Interest income | $124.0 million | $118.6 million | $253.9 million | $239.8 million |
| Interest expense | $42.8 million | $40.6 million | $86.8 million | $81.5 million |
| Net interest income | $81.1 million | $78.1 million | $167.1 million | $158.3 million |
| Net income | $78.1 million | $78.7 million | $160.2 million | $154.9 million |
| Net income available to common stock and participating securities | $74.3 million | $75.0 million | $152.7 million | $147.4 million |
| Basic and diluted EPS | $0.20 | $0.20 | $0.41 | $0.40 |
| Common dividend declared per share | $0.20 | $0.20 | $0.40 | $0.40 |
Q2 net interest spread was 2.33% and net interest margin was 2.66%, compared with 2.42% and 2.80%, respectively, a year earlier. For the first six months, spread was 2.38% versus 2.43%, and margin was 2.72% versus 2.82%.
At June 30, total assets were $13.65 billion and stockholders’ equity was $3.15 billion. MBS totaled $12.21 billion, including $5.33 billion of Agency MBS and $6.88 billion of Non-Agency MBS. Residential whole loans totaled $429.3 million. Book value per common share was $7.96, down from $8.13 at March 31 and $8.12 at year-end 2014.
Repurchase agreements were $9.64 billion; securitized debt was $62.3 million and 8% Senior Notes were $100 million. Reported debt-to-equity leverage was 3.3x, versus 2.8x at year-end on the previously reported basis; management said year-end leverage would also have been 3.3x under the new accounting presentation. Cash and cash equivalents were $218.5 million, with restricted cash of $68.1 million. Management estimated total available liquidity above $841.6 million, including estimated financing capacity from unpledged or excess-collateral MBS.
For the six months, operating cash flow was $122.8 million, investing cash flow was $293.7 million and financing cash flow was negative $380.4 million. Cash and cash equivalents increased $36.1 million to $218.5 million.
Material changes versus comparable periods
- Q2 net interest income rose 3.9% year over year, while net income available to common stock and participating securities edged lower and EPS remained $0.20. For the first six months, common income rose to $152.7 million from $147.4 million, and EPS increased to $0.41 from $0.40.
- Q2 interest income on Agency MBS declined, reflecting a smaller average portfolio and lower yields. Lower Agency and Legacy Non-Agency MBS income was offset by income from RPL/NPL MBS, CRT securities and residential whole loans.
- Operating expenses increased, including $1.7 million of loan-servicing and related costs in Q2, as MFA expanded its whole-loan activities. The prior-year Q2 also included a $1.2 million accrual related to prior-year undistributed taxable income.
- Other comprehensive loss was $64.2 million in Q2, versus comprehensive income of $58.8 million a year earlier, primarily reflecting unrealized MBS valuation losses. Common-available comprehensive income was $10.1 million versus $133.8 million.
- Effective January 1, 2015, new accounting guidance ended Linked Transaction accounting. MFA began presenting associated MBS and repurchase agreements separately, and classifying related interest income and expense in net interest income. This changed reported balance-sheet and income-statement presentation and comparability; adoption reclassifications had no net effect on total stockholders’ equity.
Outlook, commentary and risks
- Management said it intended to continue selectively acquiring MBS and residential whole loans during the remainder of 2015. The filing provides no quantified earnings or dividend guidance; dividend decisions remain at the Board’s discretion.
- Management cited improving collateral performance in its Legacy Non-Agency MBS portfolio, including lower estimated loan-to-value ratios and faster voluntary prepayments. It released $5.5 million of credit reserve to accretable discount during Q2 and reported $847.0 million of credit reserve and OTTI discount at quarter-end.
- Q2 credit-related OTTI recognized in earnings was $298,000; the six-month amount was $705,000. Management considered other reported unrealized MBS losses temporary and said it did not intend, and was not more likely than not required, to sell impaired securities before recovery.
- Funding and liquidity remain key risks: repo borrowings are generally short-term, uncommitted and renewable at lenders’ discretion. Falling collateral values or tighter markets could cause margin calls, higher haircuts, reduced leverage or difficulty refinancing. Interest-rate, prepayment, spread, credit, foreclosure and counterparty risks also affect results.
- The company’s sensitivity analysis estimated that an immediate 100-basis-point rate increase would reduce next-12-month net interest income by 8.50% and portfolio value by 0.72%; a 100-basis-point decrease was estimated to reduce net interest income by 9.17% while increasing portfolio value by 0.51%. These are model-based estimates, not forecasts.
- Other notable items: 75 REO properties had a carrying value of $8.9 million at quarter-end, including a $1.4 million valuation adjustment. Formal foreclosure proceedings were in process for whole loans with $121.9 million of reported balances. MFA reported no material pending legal proceedings, no material change in risk factors, and effective disclosure controls. Subsequent to quarter-end, a subsidiary became a member of the Federal Home Loan Bank of Des Moines.
Important facts for investors to verify
- How much of reported earnings and net interest growth reflects portfolio economics versus the Linked Transaction accounting change, and compare prior periods on a consistent basis.
- Whether the $841.6 million liquidity estimate remains available under stressed collateral values, higher haircuts and potential repo non-renewals; review counterparty and margin-call concentration.
- Whether Legacy Non-Agency MBS credit assumptions, reserve releases and expected cash flows remain supportable, and whether RPL/NPL loan performance or foreclosure timelines change.
- How changing rates, prepayments and funding costs affect net interest margin, book value and the declared dividend; note the reported $7.96 common book value per share and 3.3x leverage.
- Reconcile estimated six-month REIT taxable income of approximately $157.4 million with GAAP net income of $160.2 million and the reported $13.6 million of estimated undistributed taxable income.