MFA Financial, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2016. MFA is a REIT investing, on a leveraged basis, in residential mortgage assets, including Agency and Non-Agency MBS, residential whole loans, and credit risk transfer (CRT) securities. The filing is unaudited; results for the quarter are not necessarily indicative of full-year results.
Financial performance and position
- Earnings: Net income was $78.1 million, versus $82.2 million in Q1 2015. Net income available to common stock and participating securities was $74.3 million, or $0.20 per diluted share, compared with $78.4 million, or $0.21. Common dividends declared were $0.20 per share in both periods.
- Interest income and margins: Interest income was $117.5 million, down from $129.9 million; interest expense rose to $47.6 million from $43.9 million. Net interest income fell 18.7% to $69.9 million. Net interest spread narrowed to 2.18% from 2.44%, and net interest margin to 2.51% from 2.77%. Other income increased to $22.7 million from $8.8 million, including $11.9 million of gains on fair-value whole loans and $9.7 million of gains on MBS sales.
- Cash flow: Operating activities provided $39.0 million and investing activities provided $336.7 million; financing activities used $394.5 million. Cash and cash equivalents decreased $18.8 million to $146.2 million. Restricted cash was $123.7 million and is not available for general corporate purposes.
- Balance sheet and leverage: Total assets were $12.844 billion, down from $13.163 billion at year-end 2015. Stockholders’ equity was $2.862 billion, down from $2.967 billion. Repurchase agreements and other advances totaled $9.144 billion; this included $7.951 billion of repurchase borrowings and $1.193 billion of FHLB advances. Securitized debt was $11.8 million and 8% Senior Notes were $96.7 million. The reported debt-to-equity multiple was 3.4x.
- Book value and comprehensive income: Book value per common share declined to $7.17 from $7.47. Comprehensive loss available to common stock and participating securities was $31.1 million, despite positive net income, principally reflecting $105.4 million of other comprehensive losses, including losses on Non-Agency MBS and swaps.
Material changes versus Q1 2015 and year-end 2015
- Net interest income decreased $16.1 million, primarily as average Agency and Legacy Non-Agency MBS balances and yields declined, while borrowing costs increased. The effective cost of interest-bearing liabilities rose to 2.05% from 1.78%.
- Higher fair-value whole-loan gains, MBS sale gains, and RPL/NPL MBS and CRT interest income partly offset lower Agency and Legacy Non-Agency MBS income. Operating and other expense increased to $14.5 million from $12.2 million, including higher loan-servicing costs.
- Compared with December 31, 2015, MBS fair value fell to $10.646 billion from $11.173 billion, while residential whole loans increased to approximately $1.024 billion from $895.1 million. Management said it continued shifting toward more credit-sensitive, less interest-rate-sensitive assets.
- No credit-related MBS impairment loss was recognized in Q1 2016; Q1 2015 included $0.4 million of impairment losses.
Outlook, management commentary, and risks
- Management expected to continue selectively acquiring MBS and residential whole loans in 2016, particularly credit-sensitive assets; Agency MBS could continue to run off without reinvestment. The filing does not provide numerical earnings or dividend guidance.
- Management estimated liquidity sources above $550.3 million: $146.2 million of cash and estimated financing capacity of $233.9 million from Agency MBS and $170.2 million from Non-Agency MBS. These estimates depend on collateral values and financing availability.
- Regulatory changes require MFA’s insurance subsidiary to end FHLB membership and repay outstanding advances by February 19, 2017. Advances were $1.193 billion at quarter-end; MFA reported an additional approximately $300 million reduction after quarter-end.
- Repo funding is uncommitted and renewable at lenders’ discretion. Market-value declines could trigger margin calls, constrain liquidity, or reduce leverage capacity. Other key exposures include interest-rate, prepayment, credit, valuation, and counterparty risks. A modeled 100-basis-point rate increase reduced projected 12-month net interest income by 8.58% and portfolio value by 0.65%; management cautioned that actual results may differ.
- A resecuritization unwind produced no GAAP gain or loss, but was estimated to create approximately $70.9 million of taxable income, or $0.19 per common share. Estimated Q1 taxable income was $134.0 million, with approximately $64.2 million, or $0.17 per share, undistributed based on dividends paid or declared. Taxable income may differ materially from GAAP income.
- Management reported compliance with financial covenants and effective disclosure controls as of March 31, 2016. The filing reported no material pending legal proceedings and no material changes to the risk factors in the 2015 Form 10-K.
Important facts for investors to verify
- Whether repo counterparties maintain funding and current haircuts, and how margin calls affect available liquidity.
- The timing and funding plan for repayment of FHLB advances by February 19, 2017, including the subsequent-quarter reduction.
- Whether whole-loan and Non-Agency MBS performance, valuations, prepayments, defaults, and foreclosure timelines support reported returns and credit assumptions.
- How interest-rate and spread changes affect book value, hedges, and net interest income; the filing’s shock analysis is model-based and forward-looking.
- The tax and dividend implications of the resecuritization unwind and estimated undistributed taxable income, and whether taxable income ultimately differs from estimates.