MFA Financial, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. MFA is a REIT investing, on a leveraged basis, in residential mortgage assets. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $114.5 million | $124.0 million in Q2 2015 |
| Net interest income | $66.8 million | $81.1 million in Q2 2015 |
| Net interest spread / margin | 2.14% / 2.46% | 2.33% / 2.66% in Q2 2015 |
| Net income | $79.0 million; $0.20 per common share | $78.1 million; $0.20 per share in Q2 2015 |
| Six-month net income available to common stock and participating securities | $149.5 million; $0.40 per share | $152.7 million; $0.41 per share in first half 2015 |
| Common dividend declared | $0.20 per share for Q2 | $0.20 per share in Q2 2015 |
| Total assets / stockholders’ equity | $12.83 billion / $2.95 billion | $13.16 billion / $2.97 billion at Dec. 31, 2015 |
| Repurchase agreements and other advances | $9.04 billion | $9.39 billion at Dec. 31, 2015 |
| Cash and cash equivalents / restricted cash | $182.8 million / $143.1 million | $165.0 million / $71.5 million at Dec. 31, 2015 |
For the six months, operating cash flow was $36.1 million, investing cash flow provided $601.6 million, and financing activities used $619.9 million; cash increased $17.8 million. Book value per common share was $7.41, versus $7.17 at March 31, 2016 and $7.47 at December 31, 2015. Leverage was 3.3 times equity, down from 3.4 times at year-end. Management estimated available liquidity above $522.7 million, including cash and financing capacity from unpledged or excess collateral.
Material changes and notable items
- Q2 net interest income fell 17.7% year over year, principally reflecting lower average Agency and Legacy Non-Agency MBS balances. Higher borrowing costs and increased financing for residential whole loans and RPL/NPL MBS also pressured results. For the first half, net interest income declined 18.3% year over year.
- Q2 other income was $27.0 million, up from $10.2 million, reflecting $14.5 million of gains on residential whole loans held at fair value and $9.2 million of gains on MBS sales. First-half other income was $49.7 million, including $26.4 million of loan gains and $19.0 million of MBS sale gains.
- A one-time $61.8 million cash settlement related to Countrywide mortgage securitization litigation affected second-quarter results and taxable income. Management said the settlement contributed approximately $0.05 per share to estimated first-half taxable income.
- Management released $22.4 million from Legacy Non-Agency MBS credit reserves to accretable discount in Q2, citing improved collateral performance, lower estimated losses, and stronger voluntary prepayments. No credit-related OTTI was recognized in the first half, compared with $0.7 million in first-half 2015.
- The residential whole-loan portfolio grew to approximately $1.1 billion from $895.1 million at year-end. REO increased to 328 properties with a $56.8 million carrying value, from 182 properties and $28.0 million.
Outlook, risks, and contingencies
- Management expects to continue selectively acquiring residential whole loans and MBS, with emphasis on more credit-sensitive, less interest-rate-sensitive assets; Agency MBS may run off without reinvestment. No earnings or dividend guidance is provided.
- FHLB advances were $545 million at quarter-end, down from $1.5 billion at year-end. Due to membership rule changes, MFA Insurance must terminate FHLB membership and repay outstanding advances by February 19, 2017; management reported a further $25 million reduction after quarter-end.
- Short-term, renewable repurchase financing creates rollover, counterparty, collateral and margin-call risks. Management cautioned that falling asset values or tighter financing markets could materially weaken liquidity. Repo borrowings had a weighted average remaining term to interest-rate reset of 21 days.
- Interest-rate sensitivity estimates show a 100-basis-point increase could reduce projected 12-month net interest income by 7.97% and portfolio value by 0.63%. These are model-based estimates and actual outcomes may differ.
- Other key exposures include credit losses in Non-Agency MBS and whole loans, prepayment variability, Level 3 loan valuations, regulatory change, REIT distribution and qualification requirements, and the scheduled FHLB exit. The company reported compliance with financial covenants and no material pending legal proceedings or material changes to its previously disclosed risk factors.
- Management estimated first-half REIT taxable income of $228.6 million and undistributed taxable income of $80.9 million, or $0.22 per share. The unwind of a resecuritization was estimated to create approximately $70.9 million of taxable income, or $0.19 per common share, without a corresponding GAAP gain.
Important facts for investors to verify
- Whether net interest margins and earnings can stabilize as lower MBS balances and higher financing costs persist.
- Whether the $61.8 million litigation settlement and reserve releases are non-recurring, and how much future income depends on revised credit and cash-flow assumptions.
- Progress and funding impact of repaying the remaining FHLB advances by February 19, 2017.
- Liquidity and collateral capacity under adverse interest-rate, spread, prepayment, and repo-renewal conditions.
- Realization of whole-loan valuations and resolution of delinquent loans: $520.6 million of fair-value loans were at least 90 days past due at June 30, 2016.
- Final taxable income, required REIT distributions, and the relationship between taxable income, GAAP earnings, and declared dividends.