MFA Financial, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; fourth-quarter figures are noted where available. MFA is a leveraged mortgage REIT investing primarily in residential Agency and Non-Agency mortgage-backed securities (MBS).
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| MBS interest and dividend income | $499.0 million | $496.6 million |
| Interest expense | $171.7 million | $149.4 million |
| Net interest income | $327.5 million | $347.3 million |
| Net income | $306.8 million | $316.4 million |
| Net income available to common stock and participating securities | $298.7 million | $308.3 million |
| Basic and diluted earnings per share | $0.83 | $0.90 |
| Net interest spread / margin | 2.38% / 2.78% | 2.83% / 3.23% |
| Operating cash flow | $310.4 million | $334.4 million |
- Fourth-quarter 2012 net income was $69.2 million; income available to common stock and participating securities was $67.2 million, or $0.19 per share.
- At year-end, total assets were $13.52 billion, including $12.61 billion of MBS: $7.23 billion Agency and $5.38 billion Non-Agency. Cash and cash equivalents were $401.3 million; stockholders’ equity was $3.31 billion and book value per common share was $8.99, versus $6.74 a year earlier.
- Debt-to-equity leverage was 3.0x at year-end, down from 3.6x. Repurchase agreements were $8.75 billion, securitized debt $646.8 million, and 8% Senior Notes due 2042 totaled $100 million.
- Cash increased $7.3 million: operating activities provided $310.4 million, investing activities used $650.4 million, and financing activities provided $347.3 million. The filing reports a $896.2 million liquidity “Cushion” for potential margin calls, comprising cash, unpledged Agency MBS, and excess Agency collateral.
- Common dividends declared were $0.88 per share in 2012, totaling $314.6 million, compared with $1.005 per share and $358.1 million in 2011. The 8.50% Series A preferred stock has a $96 million liquidation preference; required preferred dividends were paid.
Material changes versus 2011
- Net income available to common holders fell 3.1%, and EPS declined from $0.90 to $0.83. Management attributed the decline mainly to lower net yields and narrower interest spreads.
- Agency MBS net yield declined to 2.83% from 3.50%; Non-Agency MBS net yield declined to 6.76% from 7.55%. Total net interest income decreased 5.7%, while interest expense rose 14.9% as average borrowing and financing costs increased.
- The MBS portfolio grew from $10.91 billion to $12.61 billion. Non-Agency MBS fair value increased, including market appreciation; the company transferred $152.5 million of purchase discount from Credit Reserve to accretable discount based on improved loss expectations.
- Book value per common share rose 33.4%, alongside $820.7 million of other comprehensive income, driven chiefly by unrealized gains on Non-Agency MBS and improved swap valuations. These valuation gains did not represent equivalent realized earnings.
- MFA issued $100 million of 8% Senior Notes and continued using longer-term financing and resecuritizations. It also repurchased 1.24 million common shares for $9.7 million.
- Net impairment losses recognized in earnings declined to $1.2 million from $10.6 million.
Outlook, risks, contingencies, and unusual items
- Management said it expected to continue selectively acquiring Agency and Non-Agency MBS in 2013, with Agency MBS expected to remain the majority of assets. It cited available financing and potential loss-adjusted returns on discounted Non-Agency MBS, but provided no quantitative earnings or dividend guidance.
- The Federal Reserve’s accommodative policy and Agency MBS purchases supported financing availability but put downward pressure on Agency yields. Management cautioned that yields, funding costs, spreads, and future financing costs were uncertain.
- Key risks include leverage and short-term, uncommitted repo funding; margin calls and forced asset sales; interest-rate, yield-curve, prepayment and reinvestment risk; Non-Agency credit and housing-market risk; counterparty concentration; and changes to GSE support, mortgage policy, regulation, or the company’s REIT and Investment Company Act status.
- Tax and controls: A review found taxable income for certain prior years had been understated because MBS discount accretion and premium amortization were not fully reflected. Management said this did not materially affect prior or 2012 GAAP financial statements, but identified a material weakness in controls over MBS taxable-income calculations. Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2012; remediation was underway. The financial statements received an unqualified audit opinion.
- The board declared a $0.50-per-share special common dividend, payable April 10, 2013, to address previously undistributed REIT taxable income and part of the 2012 amount. About $130.3 million was allocated to 2010 and 2011 taxable income. Management estimated 2012 taxable income exceeded distributions declared to date and expected additional 2013 dividends; the final tax calculation was not yet complete. MFA recorded a $7.5 million accrual for potential federal excise tax and interest.
- There were no material legal proceedings reported. The filing describes potential repurchase obligations tied to representations and warranties in resecuritizations and ordinary lease commitments; it does not quantify a material expected loss from these matters.
Important facts for investors to verify
- Progress and independent validation of remediation for the material weakness in taxable-income controls, and whether future filings or tax returns require adjustments.
- Final 2012 REIT taxable income, any additional distributions or excise taxes, and the treatment of the special dividend.
- Current net interest spread and margin, asset yields, funding costs, and the pace of premium amortization and Non-Agency discount accretion.
- Liquidity and margin-call capacity under adverse MBS price or financing conditions, including repo renewal terms, collateral haircuts, and counterparty exposures.
- Non-Agency MBS credit performance, geographic concentration, delinquency and loss assumptions, and support for the $152.5 million reserve-to-accretable-discount transfer.
- Whether reported book-value changes are sustained by realized portfolio performance, given the substantial role of unrealized gains in 2012.