MFA Financial(MFA) - 2019 Q3 - Quarterly Report

Part I Financial Statements MFA Financial reported a net income of $277.5 million for the nine months ended September 30, 2019, with total assets increasing to $13.1 billion driven by residential whole loans Financial Indicator | Financial Indicator | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Residential mortgage securities | $4,589,554 | $6,509,333 | | Residential whole loans, at carrying value | $4,969,414 | $3,016,715 | | Residential whole loans, at fair value | $1,453,169 | $1,665,978 | | Cash and cash equivalents | $154,193 | $51,965 | | Total Assets | $13,104,821 | $12,420,327 | | Liabilities & Equity | | | | Repurchase agreements | $8,571,422 | $7,879,087 | | Total Liabilities | $9,701,395 | $9,004,226 | | Total Stockholders' Equity | $3,403,426 | $3,416,101 | | Total Liabilities and Stockholders' Equity | $13,104,821 | $12,420,327 | Income Statement (In Thousands, Except Per Share) | (In Thousands, Except Per Share) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $56,898 | $58,554 | $178,715 | $161,689 | | Other Income, net | $62,429 | $48,359 | $170,460 | $137,025 | | Net Income | $95,599 | $87,132 | $277,496 | $240,922 | | Net Income Available to Common Stock | $91,849 | $83,382 | $266,246 | $229,672 | | Basic EPS | $0.20 | $0.19 | $0.59 | $0.56 | | Diluted EPS | $0.20 | $0.19 | $0.58 | $0.56 | Cash Flow (In Thousands) | (In Thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $153,596 | $90,250 | | Net cash used in investing activities | ($564,347) | ($1,613,054) | | Net cash provided by financing activities | $515,233 | $1,170,415 | | Net increase/(decrease) in cash | $104,482 | ($352,389) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MFA continued its residential mortgage asset investment strategy in Q3 2019, with net income increasing to $91.8 million despite net interest spread compression, maintaining a stable GAAP book value - As of September 30, 2019, total assets were approximately $13.1 billion, with the portfolio composed of 49% residential whole loans ($6.4 billion), 35% residential mortgage securities ($4.6 billion), and 9% MSR-related assets ($1.2 billion)[291] - In Q3 2019, the company expanded loan initiatives, acquiring $918 million in Purchased Performing Loans and contributing $100 million to loan origination partners[302][304] - GAAP book value per common share was $7.09 as of September 30, 2019, with Economic book value at $7.41 per share[310] - The company's debt-to-equity multiple was 2.8 times at September 30, 2019, with access to over $234.7 million in liquidity[311] Results of Operations Net income available to common stock increased to $91.8 million in Q3 2019, while net interest spread compressed to 1.82% due to higher borrowing costs Income Metrics (In Thousands) | (In Thousands) | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | Net Income to Common Stockholders | $91,569 | $83,141 | | Basic EPS | $0.20 | $0.19 | | Core Earnings | $89,412 | $87,684 | | Core Earnings per Share | $0.20 | $0.21 | Net Interest Metrics | Metric | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | Net Interest Spread | 1.82% | 2.41% | | Net Interest Margin | 2.19% | 2.82% | - The decrease in Q3 net interest spread was primarily due to increased funding costs from higher average borrowings and Federal Reserve rate increases[312] - For the nine months ended September 30, 2019, net interest income increased by $17.0 million (10.5%) to $178.7 million, primarily from residential whole loans and MSR-related assets[410] Asset Portfolio Details As of September 30, 2019, MFA's $13.0 billion asset portfolio was primarily composed of residential whole loans, financed mainly through repurchase agreements with a 2.8x debt-to-net equity ratio Asset Class Details (Millions) | Asset Class | Fair Value/Carrying Value (Millions) | Net Equity Allocated (Millions) | Debt/Net Equity Ratio | | :--- | :--- | :--- | :--- | | Agency MBS | $1,814 | $138 | 12.1x | | Legacy Non-Agency MBS | $1,570 | $338 | 3.6x | | RPL/NPL MBS | $828 | $185 | 3.5x | | Residential Whole Loans, at Carrying Value | $4,969 | $1,724 | 1.9x | | Residential Whole Loans, at Fair Value | $1,453 | $307 | 3.7x | | MSR Related Assets | $1,164 | $246 | 3.7x | | Total | $12,961 | $3,403 | 2.8x | - Residential Whole Loans at carrying value include $4.3 billion in Purchased Performing Loans and $718.2 million in Purchased Credit Impaired Loans[306][318] - The Legacy Non-Agency MBS portfolio included a $462.1 million purchase discount designated as Credit Reserve and OTTI[337][339] Liquidity and Capital Resources MFA's liquidity sources exceeded $234.7 million as of September 30, 2019, primarily from cash and unpledged assets, with a debt-to-equity ratio of 2.8x, relying on diverse repurchase agreements - As of September 30, 2019, the company had access to over $234.7 million in liquidity, including $154.2 million in cash and equivalents, excluding $1.1 billion of unencumbered residential whole loans[456] - The debt-to-equity multiple increased to 2.8x at September 30, 2019, with total borrowings under repurchase agreements at $8.6 billion[459] Collateral Haircuts | Collateral Type | Weighted Average Haircut | | :--- | :--- | | Agency MBS | 4.42% | | Legacy Non-Agency MBS | 20.57% | | RPL/NPL MBS | 21.89% | | CRT securities | 19.25% | | Residential whole loans | 14.85% | | MSR-related assets | 21.00% | - During the nine months ended September 30, 2019, the company paid $271.0 million in common stock dividends and $11.3 million in preferred stock dividends[464] Non-GAAP Financial Measures MFA presents non-GAAP Core Earnings and Economic Book Value, with Q3 2019 Core Earnings at $89.4 million and Economic Book Value at $7.41 per share as of September 30, 2019 EPS Comparison (per share) | (per share) | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | GAAP EPS | $0.20 | $0.19 | | Core Earnings Per Share | $0.20 | $0.21 | Book Value Comparison (per share) | (per share) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | GAAP Book Value | $7.09 | $7.15 | | Economic Book Value | $7.41 | $7.35 | - Core Earnings are utilized by management for portfolio performance evaluation, dividend determination, and capital allocation[440] - Economic Book Value provides investors with a measure reflecting fair value changes for all residential mortgage investments, irrespective of GAAP accounting[443] Quantitative and Qualitative Disclosures about Market Risk MFA Financial manages interest rate, credit, and liquidity risks, maintaining a low net effective duration of 1.14 and mitigating credit risk through portfolio diversification and discounts Interest Rate Sensitivity | Change in Interest Rates | % Change in Net Interest Income | % Change in Portfolio Value | | :--- | :--- | :--- | | +100 Basis Points | (4.90)% | (1.38)% | | +50 Basis Points | (2.65)% | (0.63)% | | -50 Basis Points | 0.36% | 0.50% | | -100 Basis Points | 1.05% | 0.87% | - The company's estimated net effective duration was 1.14 as of September 30, 2019, indicating low sensitivity to interest rate changes[313][491] - Credit risk is concentrated in Legacy Non-Agency MBS and residential whole loan portfolios, mitigated by a $462.1 million credit reserve and discounted purchase prices[492][493][502][503] - The largest geographic concentration for Legacy Non-Agency MBS and residential whole loan portfolios is California, at 42.7% and 37.0% of unpaid principal balance, respectively[499][507] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2019[516] - No material changes to internal control over financial reporting occurred during Q3 2019[517] Part II Other Information The company reported no material legal proceedings or changes to risk factors, and no common stock repurchases were made in Q3 2019, with 6.6 million shares remaining authorized - No material pending legal proceedings exist for the company[520] - No material changes occurred to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K[521] - The company did not repurchase common stock in Q3 2019, with approximately 6.6 million shares remaining authorized under its 10.0 million share program[522][523]