MFA Financial, Inc 2026 Q2 Earnings Call

Thank you, Operator. Good morning, everyone. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflect management's beliefs, expectations, and assumptions as to MFA's future performance and operations. When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, should, could, would, or similar expressions, are intended to identify forward-looking statements. All forward-looking statements speak only as of the date on which they are made. These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors, including those described in MFA's annual report on Form 10-K for the year ended December 31, 2025, and other reports that it may file from time to time with the Securities and Exchange Commission.

These risks, uncertainties, and other factors could cause MFA's actual results to differ materially from those projected, expressed, or implied in any forward-looking statements it makes. For additional information regarding MFA's use of forward-looking statements, please see the relevant disclosure in the press release announcing MFA's second quarter 2026 financial results. Thank you for your time. I would now like to turn this call over to MFA's CEO, Craig Knutson.

Thank you, Hal Schwartz. Good morning, everyone. Thank you for joining us for MFA Financial's second quarter 2026 earnings call. With me today are Bryan Wulfsohn, our President and Chief Investment Officer, Michael Roper, our Chief Financial Officer, and other members of our senior management team. I will offer some general remarks on the macroeconomic and political landscapes. I will then provide an update on MFA's business initiatives and portfolio activities. I'll then turn the call over to Michael, followed by Bryan, before we open up the call for questions. Moving to market conditions. We entered April with markets still absorbing the geopolitical shock that ended the first quarter.

After ending March at $118 per barrel, oil traded below $100 per barrel for much of April before spiking back to $118 at the end of April and then trading lower over the last two months of the quarter, closing out just below $73 per barrel at the end of June. In the rates market, while volatility dampened considerably, rates themselves rose modestly higher during the quarter. The MOVE Index closed out the first quarter around 100, but was in the mid-60s by the middle of April, spiked briefly in mid-May, and then closed the quarter in the low 70s. The curve flattened materially during the quarter. Two-year Treasury yields rose 40 basis points and 10 years sold off about 15 basis points, with the 2-10 spread flattening from 52 to 29 basis points.

Kevin Warsh chaired his first set of FOMC meetings in mid-June. His tone at the press conference was more hawkish than many had expected. Inflation data remains elevated, payroll numbers continue to be strong, and markets are now expecting a Fed funds increase later this year. The mortgage market remained constructive through the second quarter, with spreads tightening modestly and securitization markets were well bid. Obviously, Kevin Warsh's second press conference last week did not go as well as his first. I personally think the financial press was more upset than the markets. I remember when Alan Greenspan was the Fed Chair, and he elevated Fed speak to a unique level of incomprehensibility. Through the second quarter market volatility, MFA delivered a solid quarter and made real progress on the strategic initiatives we laid out for you late last year. Economic book value was essentially unchanged.

We again declared a $0.36 dividend. We generated a total economic return of +2.6% for the quarter. First, we continued to prudently deploy capital and grow the balance sheet. Our investment portfolio ended the quarter at approximately $13 billion, up from $12.5 billion at March 31. Roughly 20% larger than a year ago, with growth concentrated in Agency MBS at what we believe remain attractive spreads. Second, this was the defining effort of the quarter, we significantly accelerated the resolution of delinquent assets. We resolved approximately $200 million of previously delinquent loans during the quarter. Our 60-plus day delinquency rate declined from 7.8% to 7.0%. Mike will walk through how these resolutions flow through our earnings metrics. Brian will provide more detail on the progress. The headline is simple. We are converting unproductive assets back into earning capital. We're doing it faster. Thirdly, Lima's momentum continued to build with origination volume up nearly 45% from the first quarter.

The efforts expended throughout much of last year to improve technology and add salespeople are beginning to pay off. Fourth, we completed the exit of our former corporate headquarters and continued to bring down our expense base. Mike will quantify the run rate savings for you. Finally, we continue to repurchase common stock at a significant discount to economic book value, buying back over 500,000 shares during the quarter, funded largely by issuance of preferred stock through our ATM program. Taken together, a stable book value, a growing portfolio, a shrinking problem asset book, and a re-acceleration of origination franchise, and a leaner expense base. We believe the earnings power of this portfolio is becoming increasingly visible as the legacy credit noise recedes.

I'd like to turn the call over to Mike now to discuss our financial results.

Thanks, Craig, and good morning, everyone. At June 30th, GAAP book value was $12.71 per share, and economic book value was $13.20 per share, each effectively unchanged from the end of the first quarter. MFA again paid a common dividend of $0.36 and delivered a quarterly total economic return of 2.6%. Second quarter GAAP net income was approximately $46.8 million, or $0.35 per basic common share. Net interest income, including TBA dollar roll income for the quarter was $59.6 million, a modest increase from $59.2 million in the first quarter. Lima One mortgage banking income rose to $8.4 million in connection with the significant growth in origination that Craig referenced earlier. G&A expenses totaled $31.2 million, including approximately $5 million of accelerated non-cash depreciation expense associated with our former corporate headquarters.

Those assets are now fully depreciated. We expect run rate G&A to average approximately $26 million-$27 million per quarter over the remainder of the year. This run rate reflects the cumulative impact of our expense reduction initiatives and a decline of more than $6 million a quarter from the 2024 quarterly average of $33 million. Moving to our distributable earnings. DE for the quarter was $12.2 million, or $0.12 per share. The decline in our DE was driven by $24.5 million of realized credit losses on fair value loans, as we resolved approximately $200 million of previously delinquent assets during the quarter. As we've discussed on prior calls, DE recognizes these losses only at resolution, while the economics are already embedded in our GAAP results and our book value from prior periods.

Including the reversal of these previously recognized mark-to-market losses in our GAAP results, these same loans contributed $9.6 million of positive earnings for the quarter. DE prior to realized credit losses, the new metric we introduced last quarter, was $36.7 million or $0.35 per share, up from $0.34 per share last quarter. As a reminder, our Q1 results included approximately $0.03 of non-recurring benefit related to the early termination of the lease for our former corporate headquarters. Excluding that one-time item in the first quarter, DE, prior to realized credit losses, improved by $0.04 per share or approximately 14% sequentially, which we believe highlights the improving earnings power of the portfolio. We're disappointed with the credit charges realized this quarter, the benefits of moving non-performing loans off the books are significant.

We redeploy capital into new mid-teen ROE assets, we reduce servicing, legal and other carrying costs, and we reduce the uncertainty of our future earnings. We currently expect realized credit losses to remain elevated in the third quarter, though below the level in Q2, before moderating significantly as we move into the end of the year and into the first half of 2027. We continue to expect that our DE will begin to reconverge with the level of our common dividend as those credit losses subside to more normalized levels. Finally, subsequent to quarter end, we estimate that our economic book value has decreased by approximately 2% since the end of the second quarter, driven by higher market interest rates and modestly wider spreads. I'd now like to turn the call over to Bryan, who will discuss our investment portfolio and Lima One.

Thanks, Mike. We had a productive quarter expanding our investment portfolio, reducing our legacy multifamily exposure, issuing and managing our securitizations, and growing Lima One. I'll touch on each of these. Starting with Non-QM, which remains our biggest asset class at $5.7 billion. We acquired $462 million of Non-QM loans with an average coupon of 6.9% and an LTV of 67%. We continue to source loans from longstanding relationships with a select group of originators. Loans are acquired through flow and mini-bulk transactions and are diligence carefully by our experienced investment team. Credit performance remains strong with a default rate just over 4%. We issued our 24th Non-QM securitization during the quarter, selling nearly $300 million of bonds at an average cost of just over 5.5%. The loans in that deal carry a weighted average coupon of 6.75%.