MFA Financial, Inc. Announces Third Quarter 2021 Financial Results

NEW YORK, Nov. 5, 2021 /PRNewswire/ -- MFA Financial, Inc. (NYSE:MFA) today provided its financial results for the third quarter ended September 30, 2021.

Third Quarter 2021 financial results update:

• MFA generated third quarter net income of $124.3 million, or $0.28 per basic common share ($0.27 per diluted common share), including $43.9 million or $0.10 per common share of purchase accounting related gains recorded on closing of the Lima One acquisition.
• GAAP book value at September 30, 2021 was $4.82 per common share, while Economic book value, a non-GAAP financial measure of MFA's financial position that adjusts GAAP book value by the amount of unrealized market value changes in residential whole loans held at carrying value for GAAP reporting, was $5.27 per common share at quarter-end.
• Completed the acquisition of Lima One Capital, a leading nationwide originator and servicer of business purpose loans (BPLs) on July 1, 2021. Lima One's financial results are consolidated into MFA's results from that date. In connection with the closing of the transaction, we recorded purchase accounting related gains totaling $38.9 million as accounting standards require that we reflect our previously recorded investment in Lima One common equity at the fair value implied by the transaction. Further, we recorded a $5.0 million gain to reverse a prior impairment of our investment in Lima One preferred equity that was repaid concurrent with transaction closing. In addition to these purchase accounting related gains, origination, servicing and other investment activity related to Lima One meaningfully contributed to our consolidated net income for the quarter.
• Net interest income increased on a sequential quarterly basis to $61.8 million as asset acquisitions and higher net interest spreads resulted in a 15% increase in net interest income from our portfolio of residential whole loans. In addition, during the quarter, we completed a securitization of $289.3 million of Non-QM Loans, with a weighted average coupon of bonds sold of 1.23%, lowering the funding rate of the underlying assets by more than 100 basis points. For the third quarter, the net interest spread generated by our residential whole loan portfolio increased to 3.32%, while the overall net interest spread generated by all of our interest bearing assets was 2.98%, almost unchanged from the prior quarter.
• Loan acquisition activity of $2.0 billion is the highest quarterly total in our history, including approximately $695 million of Non-QM and $485 million of Business Purpose loans. In addition, we purchased over $820 million of "Agency eligible investor loans", which are residential mortgage loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). This purchase activity exceeded portfolio run-off, resulting in net loan portfolio growth of approximately $1.5 billion.
• Subsequent to the end of the quarter, we completed our first securitization of $312.3 million of Agency eligible investor loans.
• MFA paid a regular cash dividend for the third quarter of $0.10 per share of common stock on October 29, 2021.

Commenting on the third quarter 2021 results, Craig Knutson, MFA's CEO and President said, "We are very pleased with our third quarter results and activity.  MFA acquired $2 billion of loans during the third quarter, the highest quarterly total in our history, and grew our loan portfolio by $1.5 billion after runoff.  We earned $0.28 per common share, which was bolstered by gains of $43.9 million associated with our acquisition of Lima One as well as by increased net interest income.  Our book value increased by 3.7% to $4.82 per share (economic book value increased by 2.9% to $5.27) and we generated an economic return for the quarter of 5.8% (GAAP) and 4.9% (Economic Book Value).  Net interest income on our loan portfolio increased by 15% from $48 million to $55 million, driven by increased loan purchases and by continued interest expense reductions due to securitizations.  Finally, on July 1, 2021, we completed the acquisition of Lima One Capital, a leading nationwide originator and servicer of business purpose loans (BPLs).  MFA's financial statements for the third quarter reflect consolidation of Lima One." 

Mr. Knutson added, "Our third quarter results were driven by strong portfolio performance, with  improving mortgage credit leading to a release of CECL reserves of $9.7 million.  On the liability side, we continue to execute on our plan to reduce funding costs through securitizations.  We completed a Non-QM securitization in August and subsequent to quarter end, our first Agency eligible investor loan securitization in October.  These transactions deliver a meaningful benefit by terming out non-mark-to-market financing while significantly reducing borrowing costs and also generating more liquidity.  We expect to execute additional securitizations in the fourth quarter."

Mr. Knutson continued, "We also took advantage of a strong housing market to continue to reduce our REO portfolio, selling 151 properties for aggregate proceeds of $45.4 million and generating $7.3 million of gains." 

Q3 2021 Portfolio Activity

MFA's residential mortgage investment portfolio increased by $1.5 billion during the third quarter, as record high loan purchase activity significantly exceeded portfolio run-off. Loan acquisitions were nearly double the prior two quarters combined, with $820.2 million of Agency eligible investor loans, $694.5 million of Non-QM loans and $485.1 million of Business Purpose loans acquired during the quarter.

At September 30, 2021, our investments in residential whole loans totaled $7.1 billion. Of this amount, $5.4 billion are Purchased Performing Loans, $551.2 million are Purchased Credit Deteriorated Loans and $1.1 billion are Purchased Non-performing Loans. During the quarter, we recognized approximately $79.6 million of Interest Income on residential whole loans in our consolidated statements of operations, representing a yield of 5.52%. Purchased Performing Loans generated a yield of 4.56%, Purchased Credit Deteriorated Loans generated a yield of 7.08% and Purchased Non-performing Loans generated a yield of 8.81%. Overall loan portfolio yields were four bps higher than the prior quarter. Significant acquisitions of purchased performing loans drove a sequential quarter increase in interest income from our residential whole loan portfolio of approximately $10.6 million. Overall delinquency rates across our residential whole loan portfolio declined compared to the prior quarter. The amount of Non-QM loans that were 60 or more days delinquent, measured as a percentage of the unpaid principal balance, decreased during the quarter and was 5.3% at September 30, 2021, compared to 7.8% at June 30, 2021. In addition, the amount of Purchased Credit Deteriorated loans that were 90 or more days delinquent, measured as a percentage of the unpaid principal balance, increased slightly during the quarter and was 18.3% at September 30, 2021, compared to 18.0% at June 30, 2021. Delinquency levels for our Rehabilitation loans decreased from the prior quarter, with loans that were 60 or more days delinquent totaling $107.1 million, compared to $120.4 million at June 30, 2021. The percentage amount of Purchased Non-performing Loans that were 90 or more days delinquent decreased to 42.5% at September 30, 2021 from 43.7% at June 30, 2021.

For the third quarter, a reversal of the provision for credit losses of $9.7 million was recorded on residential whole loans held at carrying value, primarily reflecting continued run-off of the carrying value portfolio and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts. The total allowance for credit losses recorded on residential whole loans held at carrying value at September 30, 2021 was $44.1 million. In addition, as of September 30, 2021, reserves for credit losses totaling approximately $355,000 were recorded related to undrawn commitments on loans held at carrying value. 

Our Purchased Non-performing Loans and certain of our Purchased Performing Loans are measured at fair value as a result of the election of the fair value option at acquisition, with changes in the fair value and other non-interest related income from these loans recorded in Other income, net each period.  For the third quarter, net gains of $21.8 million were recorded, primarily reflecting unrealized fair value changes in the underlying loans.

In addition, as of the end of the quarter, we held approximately $179 million of REO properties, which decreased from $205 million as of the end of the second quarter.  MFA's proactive asset management team continues to take advantage of current market conditions and has been able to shorten liquidation timelines and increase property sale proceeds, leading to improved outcomes and better returns.

At the end of the third quarter, MFA held approximately $283 million of Securities, at fair value, including $178 million of MSR-related assets and $105 million of CRT securities.

General and Administrative and other expenses

For the three months ended September 30, 2021, MFA's costs for compensation and benefits and other general and administrative expenses were $24.9 million.  Expenses this quarter include $10.4 million compensation and other general and administrative expenses recorded at Lima One.

The following table presents MFA's asset allocation as of September 30, 2021, and the third quarter 2021 yield on average interest-earning assets, average cost of funds and net interest rate spread for the various asset types.

Table 1 - Asset Allocation

The following table presents the activity for our residential mortgage asset portfolio for the three months ended September 30, 2021:

Table 2 - Investment Portfolio Activity Q3 2021

The following tables present information on our investments in residential whole loans.

Residential Whole Loans at September 30, 2021 and December 31, 2020:

Table 3 - Portfolio composition

Table 4 - Yields and average balances

Table 5 - Net Interest Spread

Table 6 - Allowance for Credit Losses

The following table presents a roll-forward of the allowance for credit losses on the Company's Residential Whole Loans, at Carrying Value:

Table 7 - Credit related metrics/Residential Whole Loans

Table 8 - LTV 90+ Days Delinquencies

The following table presents certain information regarding the Company's Residential whole loans that are 90 days or more delinquent:

Webcast
MFA Financial, Inc. plans to host a live audio webcast of its investor conference call on Friday, November 5, 2021, at 10:00 a.m. (Eastern Time) to discuss its third quarter 2021 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.

Cautionary Language Regarding Forward-Looking Statements
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," "could," "would," "may," the negative of these words 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. These forward-looking statements include information about possible or assumed future results with respect to our business, financial condition, liquidity, results of operations, plans and objectives.  Statements regarding the following subjects, among others, may be forward-looking: risks related to the COVID-19 pandemic, including the pandemic's effect on the general economy and our business, financial position and results of operations (including, among other potential effects, increased delinquencies and greater than expected losses in our whole loan portfolio); changes in interest rates and the market (i.e., fair) value of MFA's residential whole loans, MBS and other assets; changes in the prepayment rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in MFA's portfolio and could require MFA to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in MFA's portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows; credit risks underlying MFA's assets, including changes in the default rates and management's assumptions regarding default rates on the mortgage loans in MFA's residential whole loan portfolio; MFA's ability to borrow to finance its assets and the terms, including the cost, maturity and other terms, of any such borrowings; 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 MFA to accrete the market discount on residential whole loans and the extent of prepayments, realized losses and changes in the composition of MFA's residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modifications, foreclosures and liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of MFA's Board 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 MFA's 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 Securities and Exchange Commission ("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 engaged in the business of acquiring mortgages and mortgage-related interests; MFA's ability to continue growing its residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; expected returns on MFA's investments in nonperforming 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; targeted or expected returns on MFA's investments in recently-originated loans, the performance of which is, similar to MFA's other mortgage loan investments, subject to, among other things, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with MFA's investments in MSR-related assets, including servicing, regulatory and economic risks, risks associated with our investments in loan originators, risks associated with investing in real estate assets, including changes in business conditions and the general economy and risks associated with the integration and ongoing operation of Lima One Holdings, LLC (including, without limitation, unanticipated expenditures relating to or liabilities arising from the transaction and/or the inability to obtain, or delays in obtaining, expected benefits (including expected growth in loan origination volumes) from the transaction).  These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that MFA files with the SEC, could cause MFA's actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements are based on beliefs, assumptions and expectations of MFA's future performance, taking into account all information currently available.  Readers are cautioned not to place undue reliance on these forward-looking statements, which 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.