MFA Financial, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 12, 2015. This is an annual report, not a standalone fourth-quarter filing. MFA is a leveraged residential mortgage REIT investing in Agency and Non-Agency mortgage-backed securities (MBS), residential whole loans and, beginning in 2014, credit risk transfer (CRT) securities. In the second quarter, it reorganized as a holding company and began acquiring whole loans through consolidated trusts.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Interest income | $463.8 million | $482.9 million |
| Interest expense | $159.8 million | $164.0 million |
| Net interest income | $304.0 million | $318.9 million |
| Net income | $313.5 million | $302.7 million |
| Net income available to common stock and participating securities | $298.5 million; $0.81 per share | $285.0 million; $0.78 per share |
| Net interest spread / margin | 2.40% / 2.78% | 2.32% / 2.70% |
| Common dividend declared per share | $0.80 | $1.64, including special dividends |
| Book value per common share at year-end | $8.12 | $8.06 |
Net interest income excludes interest from certain “Linked Transactions,” which MFA reported in other income. Net interest earned on those transactions was $16.4 million in 2014 versus $2.9 million in 2013. Full-year other income was $54.8 million, including $37.5 million of realized gains on Non-Agency MBS sales and $17.1 million of gains and net interest income from Linked Transactions. No credit-related OTTI losses were recognized through earnings in 2014.
- Year-end balance sheet: Total assets were $12.35 billion, total liabilities $9.15 billion and stockholders’ equity $3.20 billion. MBS and CRT securities were reported at $10.76 billion; residential whole loans totaled $351.4 million across carrying-value and fair-value classifications.
- Borrowing and leverage: Repurchase agreements were $8.27 billion, securitized debt $110.6 million and 8% Senior Notes $100 million. Reported GAAP debt-to-equity leverage was 2.8x; MFA’s non-GAAP measure, including Linked Transaction borrowings, was 3.3x.
- Liquidity and cash flow: Cash and cash equivalents were $182.4 million. Management estimated total available liquidity above $761.7 million, including borrowing capacity against unpledged or excess-collateral MBS. Operating cash flow was $255.8 million; investing activities provided $451.0 million and financing activities used $1.09 billion. Cash declined $382.9 million during the year.
- Fourth quarter: Net interest income was $72.2 million, net income $79.7 million, common and participating-security income $76.0 million, and basic and diluted EPS $0.20. The quarterly common dividend was $0.20 per share.
Changes versus the prior year
- Common earnings rose to $298.5 million from $285.0 million, and EPS increased to $0.81 from $0.78. Higher Linked Transaction results and MBS sale gains, and the absence of certain 2013 charges, offset lower reported net interest income.
- Net interest income fell 4.7% to $304.0 million, although spread and margin improved. The decline reflected a smaller average MBS balance and higher Non-Agency funding costs, partly offset by improved Non-Agency yields and lower Agency borrowing costs.
- Agency MBS yield declined to 2.23% from 2.28%; Non-Agency MBS yield increased to 7.70% from 7.25%, principally reflecting credit-reserve releases and improved collateral performance.
- MFA added about $2.13 billion of RPL/NPL MBS purchases during 2014, mostly reported within Linked Transactions; began investing in whole loans; and purchased $109.2 million of CRT securities. Combined MBS holdings including Linked Transactions rose to approximately $12.57 billion from $11.50 billion.
- Common dividends fell to $0.80 per share from $1.64, which included $0.78 per share of 2013 special dividends. Year-end book value per share increased slightly, while cash balances declined.
Outlook, commentary and risks
- Management said it intended to continue selectively acquiring Agency MBS, Non-Agency MBS and residential whole loans in 2015. It described liquidity as adequate for current obligations and investment activity, but gave no specific earnings, margin, dividend or portfolio-growth guidance.
- Management cited improving Legacy Non-Agency collateral performance, including estimated average loan-to-value declining to 76% from about 105% in January 2012. It released $95.0 million of Legacy MBS credit reserve to accretable discount in 2014, which is expected to support future interest income; estimates remain sensitive to actual loan performance.
- Interest-rate sensitivity remains material. The filing’s modeled immediate +100-basis-point shock indicated a 5.66% decline in projected 12-month net interest income and a 0.69% decline in portfolio value. The model is assumption-dependent and not a forecast.
- Key exposures include short-term, uncommitted repo funding and margin calls; interest-rate and prepayment risk; credit losses on Non-Agency MBS and whole loans; loan-servicing and foreclosure costs; collateral valuation uncertainty; counterparty concentration; and potential changes to GSEs, REIT rules or Investment Company Act exemptions. California represented 44.3% of Legacy Non-Agency mortgage collateral.
- Repo funding was spread across 25 lenders, but five counterparties individually represented more than 5% of equity at risk; Credit Suisse was the largest at 18.3%. The company reported compliance with financial covenants at year-end.
- Unusual/current items included the new whole-loan business, $3.4 million of related investment operating expenses, $447,000 of gains on whole loans held at fair value, and $137,000 of loan-loss provision. The filing reported no material legal proceedings or material off-balance-sheet arrangements.
Most important facts for investors to verify
- Reconcile reported net interest income with income and expense from Linked Transactions, and assess whether the improved spread is sustainable as portfolio balances and funding costs change.
- Review repo maturities, lender concentration, collateral haircuts, margin requirements and the composition of the stated $761.7 million liquidity estimate.
- Test the assumptions behind the $900.6 million Legacy Non-Agency credit reserve, the 2014 reserve release and projected loan recoveries against actual delinquency, default and loss-severity trends.
- Assess whole-loan performance, including the fair value of delinquent loans, servicing outcomes, foreclosure timelines, REO costs and expected cash flows.
- Compare the $0.80 common dividend with REIT taxable income and cash generation; the filing estimated $263.7 million of 2014 taxable income and $7.3 million undistributed at year-end.
- Review the detailed audited statements and notes for definitions and presentation effects. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.