MFA Financial, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
MFA is a leveraged residential mortgage REIT investing in Agency and Non-Agency mortgage-backed securities (MBS), credit risk transfer securities, and residential whole loans. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are to the corresponding 2014 periods unless otherwise stated.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $119.7m | $112.2m | $373.6m | $352.6m |
| Net interest income | $76.0m | $72.8m | $243.2m | $231.8m |
| Net income | $79.5m | $78.9m | $239.8m | $233.8m |
| Net income available to common stock and participating securities | $75.8m | $75.1m | $228.5m | $222.5m |
| Basic and diluted EPS | $0.20 | $0.20 | $0.61 | $0.60 |
| Net interest spread / margin | 2.24% / 2.58% | 2.32% / 2.70% | 2.34% / 2.67% | 2.39% / 2.79% |
Common dividends declared were $0.20 per share for Q3 and $0.60 per share for the nine-month period. The quarterly payout ratio was 100% of EPS.
At September 30, total assets were $13.384bn, versus $12.355bn at December 31, 2014; stockholders’ equity was $3.052bn, versus $3.203bn. The MBS portfolio was $11.545bn, including $5.020bn Agency and $6.524bn Non-Agency MBS. Residential whole loans totaled $777.4m. Book value per common share was $7.70, down from $7.96 at June 30 and $8.12 at year-end 2014.
Repurchase agreements and other advances totaled $9.476bn, including $9.211bn of repos and $265m of FHLB advances; securitized debt was $32.2m and 8% Senior Notes were $100m. Reported leverage was 3.3x. Cash and cash equivalents were $174.2m; restricted cash of $110.0m was pledged or otherwise restricted. Management estimated available liquidity above $724.1m, including cash and estimated financing capacity from unpledged or excess-collateral MBS.
For the nine months, operating cash flow was $159.2m, investing cash flow was $497.9m, and financing cash flow was negative $665.4m. Cash declined $8.3m to $174.2m.
Material changes versus comparable periods
- Q3 net income available to common holders increased modestly, while EPS remained $0.20. Nine-month EPS rose to $0.61 from $0.60.
- Net interest income increased, but spread and margin declined in both comparison periods. Management cited lower Agency MBS yields and balances, offset by higher contribution from RPL/NPL MBS, CRT securities, and whole loans.
- Q3 comprehensive income available to common holders was a loss of $20.5m, versus income of $41.6m a year earlier, principally reflecting $96.3m of other comprehensive losses on MBS and hedging instruments. Nine-month comprehensive income available to common holders was $72.3m, versus $302.4m.
- MFA expanded credit-sensitive holdings: whole loans reached $777.4m, compared with $351.4m at year-end 2014. Non-Agency MBS fair value rose to $6.524bn from $4.755bn, while Agency MBS declined to $5.020bn from $5.904bn.
- A 2015 accounting-standard change ended “Linked Transactions” accounting and moved related assets and liabilities onto the balance sheet separately. Management said adoption did not materially affect total equity, but it changed presentation and comparability of portfolio, interest income, expense, and leverage measures.
Outlook, management commentary, risks, and unusual items
- Management intended to continue selective MBS and residential whole-loan purchases during the remainder of 2015, with a strategy emphasizing more credit-sensitive and less interest-sensitive assets. No specific earnings or dividend guidance was provided.
- Management estimated nine-month REIT taxable income of $236.5m and undistributed taxable income of $14.4m, or $0.04 per share. It anticipated taxable-income effects from a planned resecuritization unwind (over $0.15 per share) and a share of Bank of America/Countrywide settlement proceeds (about $0.05 per share); these estimates and timing are uncertain.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point rate rise would reduce next-12-month net interest income by 8.31% and portfolio value by 0.69%. A 100-basis-point decline was estimated to reduce net interest income by 8.27% while increasing portfolio value by 0.47%. These are model-based estimates, not forecasts.
- Liquidity depends heavily on short-term, uncommitted repo financing. Repo borrowings had a 21-day weighted-average remaining term to interest-rate reset; declining collateral values, larger margin requirements, reduced market liquidity, or lenders declining to renew could pressure liquidity and leverage. Management reported compliance with financial covenants.
- MFA Insurance obtained FHLB Des Moines membership in July 2015 and had $265m of advances at quarter-end. Proposed FHFA rules could exclude captive insurers that joined after the proposal date; if finalized as proposed, the subsidiary could lose membership and face termination of this funding source.
- Credit, valuation, prepayment, and foreclosure risks remain material, particularly for Non-Agency MBS and whole loans. The whole-loan fair-value portfolio included $433.0m of loans 90 or more days past due; MFA held 110 REO properties with a $14.5m carrying value. The company recorded $705,000 of Non-Agency MBS credit impairment for the nine months and a $1.9m total REO valuation adjustment.
- Management released $34.7m from Legacy Non-Agency MBS credit reserve to accretable discount during the nine months, citing improved collateral performance and home-price appreciation; this is expected to increase interest income over time but depends on estimates of future cash flows.
- The company reported no material pending legal proceedings, no material changes to its previously disclosed risk factors, and effective disclosure controls as of September 30, 2015.
Important facts for investors to verify
- Whether estimated liquidity above $724.1m remains available under stressed collateral values and repo renewal or margin-call conditions.
- Assumptions behind the $815.4m Non-Agency MBS credit reserve and the releases to accretable discount, including actual loan performance and loss estimates.
- Valuation and expected recoveries for Level 3 whole loans, including the impact of delinquencies, foreclosures, servicing costs, and REO dispositions.
- Final FHFA rules and their effect on FHLB membership, existing advances, and alternative funding capacity.
- Actual taxable income, timing and amount of expected tax-related events, and whether distributions remain aligned with taxable income and liquidity.
- Effects of interest rates, prepayments, and funding costs on net interest spread, book value, and the sustainability of the common dividend.