MFA Financial, Inc. Announces Third Quarter 2015 Financial Results

04 Nov, 2015, 08:30 ET from MFA Financial, Inc.

NEW YORK, Nov. 4, 2015 /PRNewswire/ -- MFA Financial, Inc. (NYSE: MFA) today announced financial results for the third quarter ended September 30, 2015.

Third Quarter 2015 and other highlights:

  • Generated third quarter net income available to common shareholders of $75.8 million, or $0.20 per common share (based on 372.2 million weighted average common shares outstanding). As of September 30, 2015, book value per common share was $7.70.
  • On October 30, 2015, MFA paid its third quarter 2015 dividend of $0.20 per share of common stock to shareholders of record as of September 29, 2015.
  • MFA substantially grew its credit sensitive loan portfolio by $348 million to $777 million in response to access to a range of attractive investment opportunities.

William Gorin, MFA's CEO, said, "In the third quarter, we continued to identify and acquire credit sensitive residential mortgage assets that generate earnings without increasing MFA's overall interest rate exposure.  We significantly increased our acquisitions of re-performing and non-performing whole loans, bringing our holdings of credit sensitive residential whole loans to $777.4 million.  In addition, we sold $23.5 million of Non-Agency MBS issued prior to 2008 ("Legacy Non-Agency MBS"), realizing a gain of $11.2 million.  This is the thirteenth consecutive quarter we have realized gains through selected sales of Legacy Non-Agency MBS based on our projections of future cash flows relative to market pricing.  We did not acquire any Agency MBS in this quarter.

"MFA remains positioned for a period when Federal Reserve monetary policy may become more variable based on measures of the labor markets, indicators of inflation, international developments and other incoming data.  Through asset selection and hedging strategy, the estimated effective duration, a gauge of MFA's interest rate sensitivity, remains below 1.0 and measured 0.58 at quarter-end. Leverage, which reflects the ratio of our financing obligations to equity, was 3.3:1 at quarter-end."

Craig Knutson, MFA's President and COO, added, "MFA's portfolio asset selection process continues to emphasize residential mortgage credit exposure while seeking to minimize sensitivity to interest rates.  Our Legacy Non-Agency portfolio has benefited from improved housing fundamentals as LTVs decrease and delinquencies decline, thus lowering our expectations of future defaults and reducing expected future losses.  Our RPL/NPL MBS portfolio has credit protection through deal structure and subordination, while the short term nature of the cash flows minimizes its sensitivity to interest rate changes.  And our credit sensitive residential whole loans offer additional exposure to residential mortgage credit while offering us the opportunity to improve outcomes through sensible and effective servicing decisions."

MFA's Legacy Non-Agency MBS had a face amount of $4.543 billion with an amortized cost of $3.395 billion and a net purchase discount of $1.148 billion at September 30, 2015.  This discount consists of an $815.4 million credit reserve and other-than-temporary impairments and a $333.1 million net accretable discount.  We believe this credit reserve appropriately factors in remaining uncertainties regarding underlying mortgage performance and the potential impact on future cash flows.  Our Legacy Non-Agency MBS loss adjusted yield of 7.60% for the third quarter is based on projected defaults equal to 22% of underlying loan balances.  On average, these loans are approximately nine years seasoned and approximately 14% are currently 60 or more days delinquent.

The Agency MBS portfolio had an average amortized cost basis of 103.8% of par as of September 30, 2015, and generated a 1.84% yield in the third quarter.  The Legacy Non-Agency MBS portfolio had an average amortized cost of 74.7% of par as of September 30, 2015, and generated a loss-adjusted yield of 7.60% in the third quarter.  At the end of the third quarter, MFA held approximately $2.487 billion of the senior most tranches of RPL/NPL MBS.  These securities had an amortized cost of 99.9% of par and generated a 3.74% yield for the quarter. 

In addition, at September 30, 2015, our investments in credit sensitive residential whole loans totaled $777.4 million.  Of this amount, $245.9 million is recorded at carrying value, or 84% of the interest-bearing unpaid principal balance and generated a loss-adjusted yield of 6.52% (5.87% net of servicing costs) during the quarter and $531.5 million is recorded at fair value in our consolidated balance sheet.  On this portion of the portfolio we recorded gains for the quarter of approximately $5.0 million, primarily reflecting coupon interest payments received and changes in the fair value of the underlying loans during the quarter.

For the three months ended September 30, 2015, MFA's costs for compensation and benefits and other general and administrative expenses were $10.0 million or an annualized 1.31% of stockholders' equity as of September 30, 2015.

The following table presents the weighted average prepayment speed on MFA's MBS portfolio.

 

Table 1

Third Quarter 2015 Average CPR

Second Quarter

2015 Average CPR

Agency MBS

15.4%

14.8%

Legacy Non-Agency MBS

16.3%

14.8%

RPL/NPL MBS (1)

29.5%

28.6%

(1)  All principal payments are considered to be prepayments for CPR purposes. Excludes RPL/NPL MBS that have not had a principal payment.

 

As of September 30, 2015, under its swap agreements, MFA had a weighted average fixed-pay rate of interest of 1.82% and a floating receive rate of 0.20% on notional balances totaling $3.050 billion, with an average maturity of 48 months.

The following table presents MFA's asset allocation as of September 30, 2015 and the third quarter 2015 yield on average interest earning assets, average cost of funds and net interest rate spread for the various asset types.

 

Table 2

 

 

ASSET ALLOCATION

At September 30, 2015

Agency MBS

Legacy

Non-Agency MBS

RPL/NPL MBS

Residential Whole

Loans, at Carrying

Value

Residential Whole Loans, at Fair Value

Other, net (1)

Total

($ in Thousands)

Fair Value/ Carrying Value

$

5,020,477

$

4,036,997

$

2,487,225

$

245,894

$

531,537

$

447,923

$

12,770,053

Less Payable for Unsettled Purchases

(4,765)

(4,765)

Less Repurchase Agreements

(4,151,976)

(2,568,494)

(1,970,246)

(46,134)

(381,418)

(92,566)

(9,210,834)

Less FHLB advances

(265,000)

(265,000)

Less Securitized Debt

(32,217)

(32,217)

Less Senior Notes

(100,000)

(100,000)

Equity Allocated

$

603,501

$

1,436,286

$

516,979

$

199,760

$

150,119

$

250,592

$

3,157,237

Less Swaps at Market Value

(105,455)

(105,455)

Net Equity Allocated

$

603,501

$

1,436,286

$

516,979

$

199,760

$

150,119

$

145,137

$

3,051,782

Debt/Net Equity Ratio (2)

7.32x

1.81x

3.81x

0.23x

2.54x

3.32x

For the Quarter Ended September 30, 2015

Yield on Average Interest Earning Assets (3)

1.84%

7.60%

3.74%

6.52%

N/A

—%

4.05%

Less Average Cost of Funds (4)

(1.13)

(2.76)

(1.73)

(2.48)

(2.77)

(1.81)

Net Interest Rate Spread

0.71%

4.84%

2.01%

4.04%

N/A

—%

2.24%

(1)

Includes cash and cash equivalents and restricted cash of $284.2 million, securities obtained and pledged as collateral, $150.0 million of CRT securities, interest receivable, goodwill, prepaid and other assets, obligation to return securities obtained as collateral, interest payable, dividends payable and accrued expenses and other liabilities.

(2)

Represents the sum of borrowings under repurchase agreements, FHLB advances, payable for unsettled MBS purchases and securitized debt as a multiple of net equity allocated.  The numerator of our Total Debt/Net Equity ratio also includes the obligation to return securities obtained as collateral of $509.6 million, Senior Notes and repurchase agreements financing CRT security purchases.

(3)

Yields reported on our interest earning assets are calculated based on the interest income recorded and the average amortized cost for the quarter of the respective asset.  At September 30, 2015 the amortized cost of our interest earning assets were as follows: Agency MBS  - $4,954,756; Legacy Non-Agency MBS - $3,394,723; RPL/NPL MBS - $2,490,015; and Residential Whole Loans at carrying value - $245,894. In addition, the yield for residential whole loans at carrying value was 5.87% net of 65 basis points of servicing fee expense incurred during the quarter.  For GAAP reporting purposes, such expenses are included in Loan servicing and other related operating expenses in our statement of operations.  Interest payments received on residential whole loans at fair value is reported in Other Income as Net gain on residential whole loans held at fair value in our statement of operations.  Accordingly, no yield is presented as such loans are not included in interest earning assets for reporting purposes.

(4)

Average cost of funds includes interest on repurchase agreements and other advances, the cost of swaps, Senior Notes and securitized debt. Agency cost of funds includes 74 basis points and Legacy Non-Agency cost of funds includes 66 basis points associated with Swaps to hedge interest rate sensitivity on these assets.

At September 30, 2015, MFA's $9.056 billion of Agency and Legacy Non-Agency MBS, were backed by Hybrid, adjustable and fixed-rate mortgages.  Additional information about these MBS, including average months to reset and three-month average CPR, is presented below:

 

 

Table 3

Agency MBS

Legacy Non-Agency MBS (1)

Total (1)

($ in Thousands)

Time to Reset

Fair Value (2)

Average Months to Reset (3)

3 Month Average CPR (4)

Fair Value

Average Months to Reset (3)

3 Month Average CPR (4)

Fair Value (2)

Average Months to Reset (3)

3 Month Average CPR (4)

< 2 years (5)

$

2,036,783

7

16.3%

$

2,751,368

6

15.1%

$

4,788,151

7

15.5%

2-5 years

870,721

39

21.3

4,854

24

53.0

875,575

39

21.5

> 5 years

231,375

78

14.6

231,375

78

14.6

ARM-MBS Total

$

3,138,879

21

17.6%

$

2,756,222

6

15.2%

$

5,895,101

14

16.3%

15-year fixed (6)

$

1,880,486

11.7%

$

8,630

19.9%

$

1,889,116

11.7%

30-year fixed (6)

1,267,192

18.7

1,267,192

18.7

40-year fixed (6)

4,953

20.5

4,953

20.5

Fixed-Rate Total

$

1,880,486

11.7%

$

1,280,775

18.7%

$

3,161,261

14.8%

MBS Total

$

5,019,365

15.4%

$

4,036,997

16.3%

$

9,056,362

15.8%

(1)

Excludes $2.487 billion of RPL/NPL MBS. Refer to Table 4 for further information.

(2)

Does not include principal payments receivable of $1.1 million.

(3)

MTR or Months to Reset is the number of months remaining before the coupon interest rate resets. At reset, the MBS coupon will adjust based upon the underlying benchmark interest rate index, margin and periodic or lifetime caps.  The MTR does not reflect scheduled amortization or prepayments.

(4)

3 month average CPR weighted by positions as of beginning of each month in the quarter.

(5)

Includes floating rate MBS that may be collateralized by fixed-rate mortgages.

(6)

Information presented based on data available at time of loan origination.

 

 

Table 4

The following table presents certain information about our RPL/NPL MBS portfolio at September 30, 2015:

Fair Value

Net Coupon

Months to Step-Up (1)

Current Credit Support (2)

Original Credit Support

3 Month Average Bond CPR (3)

($ in Thousands)

Re-Performing MBS

$

535,180

3.70%

21

46%

40%

32.9%

Non-Performing MBS

1,952,045

3.63

26

50

49

28.5

Total RPL/NPL MBS

$

2,487,225

3.64%

25

49%

47%

29.5%

(1)

Months to step-up is the weighted average number of months remaining before the coupon interest rate increases pursuant to the first coupon reset.  We anticipate that the securities will be redeemed prior to the step-up date.

(2)

Credit Support for a particular security is expressed as a percentage of all outstanding mortgage loan collateral.  A particular security will not be subject to principal loss as long as credit enhancement is greater than zero. 

(3)

All principal payments are considered to be prepayments for CPR purposes.  Excludes RPL/NPL MBS that have not had a principal payment.

 

Webcast

MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Wednesday, November 4, 2015, at 11:00 a.m. (Eastern Time) to discuss its third quarter 2015 financial results. The live audio webcast will be accessible to the general public over the internet at http://www.mfafinancial.com through the "Webcasts & Presentations" link on MFA's home page.  To listen to the conference call over the internet, please go to the MFA website at least 15 minutes before the call to register and to download and install any needed audio software.  Earnings presentation materials will be posted on the MFA website prior to the conference call and an audio replay will be available on the website following the call.

When used in this press release or other written or oral communications, statements which are not historical in nature, including those containing words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market value of MFA's MBS; changes in the prepayment rates on the mortgage loans securing MFA's MBS; changes in the default rates and management's assumptions regarding default rates on the mortgage loans securing MFA's Non-Agency MBS; MFA's ability to borrow to finance its assets and the terms, including the cost, maturity and other terms, of any such borrowing; implementation of or changes in government regulations or programs affecting MFA's business; MFA's estimates regarding taxable income the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by the Company to accrete the market discount on Non-Agency MBS and the extent of prepayments, realized losses and changes in the composition of MFA's Agency MBS and Non-Agency MBS portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFA's Board of Directors and will depend on, among other things, MFA's taxable income, its financial results and overall financial condition and liquidity, maintenance of its REIT qualification and such other factors as the Board deems relevant; MFA's ability to maintain its qualification as a REIT for federal income tax purposes; MFA's ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (or the Investment Company Act), including statements regarding the Concept Release issued by the SEC relating to interpretive issues under the Investment Company Act with respect to the status under the Investment Company Act of certain companies that are in engaged in the business of acquiring mortgages and mortgage-related interests; MFA's ability to successfully implement its strategy to grow its residential whole loan portfolio; expected returns on our investments in non-performing residential whole loans (NPLs), which are affected by, among other things, the length of time required to foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately realized upon resolution of the asset; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that MFA files with the Securities and Exchange Commission, could cause MFA's actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect MFA. Except as required by law, MFA is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

MFA FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 (In Thousands, Except Share and Per Share Amounts)

September 30, 2015

December 31, 2014

(Unaudited)

Assets:

Mortgage-backed securities ("MBS") and credit risk transfer ("CRT") securities:

Agency MBS, at fair value ($4,702,437 and $5,519,813 pledged as collateral, respectively)

$

5,020,477

$

5,904,207

Non-Agency MBS, at fair value ($4,873,424 and $2,377,343 pledged as collateral, respectively)

5,895,371

3,358,426

Non-Agency MBS transferred to consolidated variable interest entities ("VIEs"), at fair value

628,851

1,397,006

CRT securities, at fair value ($118,616 and $94,610 pledged as collateral, respectively)

149,968

102,983

Securities obtained and pledged as collateral, at fair value

509,620

512,105

Residential whole loans, at carrying value ($65,894 and $67,536 pledged as collateral, respectively)

245,894

207,923

Residential whole loans, at fair value ($525,798 and $143,072 pledged as collateral, respectively)

531,537

143,472

Cash and cash equivalents

174,160

182,437

Restricted cash

109,997

67,255

Interest receivable

30,115

32,581

Derivative instruments:

   MBS linked transactions, net ("Linked Transactions"), at fair value

398,336

   Interest rate swap agreements ("Swaps"), at fair value

18

3,136

Goodwill

7,189

7,189

Prepaid and other assets

81,206

37,688

Total Assets

$

13,384,403

$

12,354,744

Liabilities:

Repurchase agreements and other advances

$

9,475,834

$

8,267,388

Securitized debt

32,217

110,574

Obligation to return securities obtained as collateral, at fair value

509,620

512,105

8% Senior Notes due 2042 ("Senior Notes")

100,000

100,000

Accrued interest payable

15,028

13,095

Swaps, at fair value

105,473

62,198

Dividends and dividend equivalents payable

74,560

74,529

Accrued expenses and other liabilities

19,889

11,583

Total Liabilities

$

10,332,621

$

9,151,472

Stockholders' Equity:

Preferred stock, $.01 par value; 7.50% Series B cumulative redeemable; 8,050 shares authorized; 8,000 shares issued and outstanding ($200,000 aggregate liquidation preference)

$

80

$

80

Common stock, $.01 par value; 886,950 shares authorized; 370,254 and 370,084 shares issued and outstanding, respectively

3,702

3,701

Additional paid-in capital, in excess of par

3,017,355

3,013,634

Accumulated deficit

(567,649)

(568,596)

Accumulated other comprehensive income

598,294

754,453

Total Stockholders' Equity

$

3,051,782

$

3,203,272

Total Liabilities and Stockholders' Equity

$

13,384,403

$

12,354,744

 

MFA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30,

Nine Months Ended September 30,

(In Thousands, Except Per Share Amounts)

2015

2014

2015

2014

(Unaudited)

(Unaudited)

Interest Income:

Agency MBS

$

23,618

$

33,066

$

81,030

$

110,004

Non-Agency MBS

79,276

48,541

241,440

135,169

Non-Agency MBS transferred to consolidated VIEs

11,154

29,303

34,792

105,510

CRT securities

1,593

30

4,477

30

Residential whole loans held at carrying value

4,033

1,197

11,817

1,849

Cash and cash equivalent investments

32

20

88

63

Interest Income

$

119,706

$

112,157

$

373,644

$

352,625

Interest Expense:

Repurchase agreements and other advances

$

41,331

$

35,935

$

122,736

$

109,354

Securitized debt

363

1,415

1,731

5,471

Senior Notes

2,009

2,008

6,025

6,023

Interest Expense

$

43,703

$

39,358

$

130,492

$

120,848

Net Interest Income

$

76,003

$

72,799

$

243,152

$

231,777

Other-Than-Temporary Impairments:

Total other-than-temporary impairment losses

$

$

$

(525)

$

Portion of loss reclassed from other comprehensive income

(180)

    Net Impairment Losses Recognized in Earnings

$

$

$

(705)

$

Other Income, net:

Unrealized net gains and net interest income from Linked Transactions

$

$

2,559

$

$

9,586

Net gain on residential whole loans held at fair value

4,979

10,176

Gain on sales of MBS

11,196

13,880

25,248

25,303

Other, net

327

54

21

(306)

Other Income, net

$

16,502

$

16,493

$

35,445

$

34,583

Operating and Other Expense:

Compensation and benefits

$

6,482

$

5,970

$

19,759

$

18,378

Other general and administrative expense

3,538

3,831

11,673

11,461

Loan servicing and other related operating expenses

2,975

609

6,706

1,550

Excise tax and interest

1,175

Operating and Other Expense

$

12,995

$

10,410

$

38,138

$

32,564

Net Income

$

79,510

$

78,882

$

239,754

$

233,796

Less Preferred Stock Dividends

3,750

3,750

11,250

11,250

Net Income Available to Common Stock and Participating Securities

$

75,760

$

75,132

$

228,504

$

222,546

Earnings per Common Share - Basic and Diluted

$

0.20

$

0.20

$

0.61

$

0.60

Dividends Declared per Share of Common Stock

$

0.20

$

0.20

$

0.60

$

0.60

               

INVESTOR CONTACT:              

InvestorRelations@mfafinancial.com   

212-207-6433

www.mfafinancial.com  

MEDIA CONTACT:        

Abernathy MacGregor

Tom Johnson, Andrew Johnson

212-371-5999

 

 

SOURCE MFA Financial, Inc.



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