Ladies and gentlemen, thank you for standing by and welcome to the MFA Financial, Incorporated Third Quarter 2014 Earnings Call. At this time, phone lines are in a listen-only mode. We will have a question-and-answer session later on. (Operator Instructions). And as a reminder, today's conference call is being recorded. At this time, I'd like to turn the conference over to our first speaker Danielle Rosatelli. Please go ahead.

Good morning. The information discussed on this conference call today may contain or refer to forward-looking statements regarding MFA Financial, Inc., which reflects management's beliefs, expectation and assumption as to MFA's future performance and operation. When used, statements that are not historical in nature, including those containing words such as will, believe, expect, anticipate, estimate, plan, continue, intend, should, could, would, may, 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, 2013, 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 third quarter 2014 financial results. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the third quarter 2014 earnings release and earnings presentation slides, each of which has been filed with the SEC and posted on our website at mfafinancial.com. Thank you for your time. I would now like to turn this call over to Bill Gorin, MFA's Chief Executive Officer.

Thanks very much, Danielle. I'd like to welcome everyone to MFA's third quarter 2014 financial results webcast. With me today are Craig Knutson, MFA's President and Chief Operating Officer; Gudmundur Kristjansson, Senior Vice President; Steve Yarad, CFO and other members of senior management team. Turning to page three, executive summary, you see that in this low interest rate environment, we've continued to indentify and acquire attractive investments within our targeted residential mortgage credit universe. In the third quarter, we generated net income of $75.1 million or $0.20 per common share. The dividend per share was also $0.20 and that's consistent with the first and second quarters. Book value per common share declined approximately 1% to $8.28 per share as of September 30. Based on our continued improvements in the loan-to-value ratio, loans underlying our non-agency MBS portfolio and other factors we again transferred significant amount, approximately $20 million from credit reserve to accretable discount. We remain positioned for a more flexible monetary policy by the Federal Reserve that will be driven by measures of labor market, inflation, and other economic data. Our net duration is 0.62. Our leverage ratio as determined by GAAP is 2.7 to 1, and 69% of our MBS are adjustable-rate hybrid or step-up. Turning to page 4, you see that in the third quarter we continue to identify attractive investment opportunities across the residential mortgage asset universe. We're positioned to grow our holding for security backed by re-performing non-performing loans by 91% to $943 million, while increasing our holdings of credit sensitive residential whole loans by 89% to a $113 million. We acquired $42.5 million and opportunistically sold $61.6 million of non-agency MBS issued prior to 2008, realizing gain of $13.9 million. This is the ninth consecutive quarter we have realized gains through selective sales of…

Thanks, Bill. On Slide 6, we show changes to MFA's book value in the third quarter. Overall, our book value was fairly consistent in the quarter but ended down 1% on September 30. Moving to Slide 7. On Slide 7, we show the duration of our assets and liabilities, as well as the net duration of our entire portfolio. The duration of our assets declined modestly to 1.8 at the end of the third quarter from 1.9 at the end of the second quarter as more of a hybrid but closer to reset and our new acquisitions primarily consisted of RPL and NPL MBS that had limited sensitivity to interest rates. The duration of our hedges also declined modestly to minus 3.7 at the end of third quarter from minus 3.9 at the end of the second quarter and $46 million of swaps matured in third quarter in our existing swaps for three months closer to maturity. In aggregate, MFA's net duration declined modestly to 62 basis points at the end of third quarter versus 65 basis points at the end of the second quarter. MFA continues to maintain net portfolio duration below 1. And we believe that by limiting interest rate risk in our portfolio, we are well positioned for uncertain monetary policy at the end of quantitative easing. Now, I'll turn the call back over the Bill, who will discuss our asset allocation.

Thank you, Gudmundur. Turning to Page 8, which is the page where we set the record from those QuickNotes, we present our assets, yields and spreads broken down what is now five categories. These are Agency MBS, seasoned Non-Agency MBS. MBS backed by re-performing loans and non-performing loans, credit sensitive Residential Whole Loan, and Cash and Other. In the quarter, we continue to find a wide range of residential mortgage asset investment opportunities allowing us to maintain a level of assets consistent with the prior quarters. While our agency and non-agency MBS holdings declined due to run-off, and some non-agency MBS sales, our holdings of RPL/NPL MBS and credit sensitive residential whole loans grew. By pursuing a wider residential mortgage strategy, we continue to find opportunity to generate attractive net interest rate spreads without increasing interest rate exposure. It's important to remember that equity sensitivity to changes in interest rate is impacted by both duration and the leverage utilized. We continue to maintain a leverage of approximately three times. Asset allocation and selection is what drives both our income and our interest rate sensitivity. And I would again like to talk a little bit about our holdings. We hold $5.3 billion face amount or $4.8 billion market value of non-agency MBS with an average amortized cost of approximately 75% of par and a credit reserve of approximately $930 million. These assets generated a loss adjusted yield of approximately 7.7% in the third quarter. We continue to maintain our historical preference for adjustable rate, hybrid and step-up MBS, and 69% of all our MBS fall into these three categories. We are actively acquiring residential mortgage credit assets both securities backed by RPLs or NPLs for credit sensitive residential whole loans that we believe deliver attractive yields relative to interest rate exposure. As usual, none of our Agency MBS of third year fixed rate. Like to now hand the presentation over to Craig Knutson, our President and Chief Operating Officer to give you some more detail on these RPL/NPL MBS and update you on MFA's credit fundamentals.

Thank you, Bill. As Bill mentioned previously, we have substantially grown our holdings of RPL/NPL MBS during the third quarter. We particularly like this asset class for several reasons. First, low duration, minimal interest rate risk and price volatility, these securities are callable after 12 months and typically they have a 300 basis point coupon step-up after three years, if they have not been called at the end of the third year. So we expected these bonds will be called before the step-up date and hence, the low duration and minimal interest rate risk. Second, low credit risk. These structures have significant credit enhancement generally approximately 50%. The subordinate bonds received no cash flow and therefore the transaction delevers very quickly. Third, with leverage, we are able to produce approximately 10% ROEs with these securities. And then, finally, there is a larger size available. So $25 million to a $100 million or even more than a $100 million trade sizes are relatively easy versus legacy Non-Agency were at times even a $10 million trade size is difficult to access. Moving to Page 10. The credit metrics on the loans underlying our legacy Non-Agency portfolio continue to improve. LTVs continue to decline due to home price appreciation and principal amortization. Delinquencies have declined, as fewer current loans become delinquent and foreclosure pipelines are slowly liquidated. Loans on average 102 months seasoned, that's eight-and-a-half years. And in addition, since over half of these loans we're refinancing so they will not purchase money mortgages. We know that the homeowners have actually been living in the houses for more than that eight-and-a-half years. As Bill mentioned previously, we again lowered our estimates of future losses in the portfolio and we transferred almost $20 million from our credit reserve to accretable discount. All else equal,…

Thank you. (Operator Instructions). And today our first question comes from the line of Dan Altscher with FBR. Please go ahead.

Thanks good morning. I appreciate taking my call. I wanted take a look at the CPRs in particularly the agency ARM book. We had a bit of a kick up looks like 18.3 versus 15.9. Now I understand there could be some seasonality as we roll through the third quarter there. So I get that but do you think there is anything else going on there, I guess may be across the board, you talked about fed funds or short-term rates increasing, folks looking to may be refi ahead of what they think might be higher rates?

No, hi, this is Gudmundur. I mean in general prepaid has picked up a little bit during the summer months and this is just regular seasonality particularly to the short reset hybrids. The one month lag we're still very low and one year lag we're still very low. So the reset coupon and the reset into is a bit low where they can refinance their new 5 on a new 7.1. So we’re not really seeing kind of a refi driven pickup for these people to expand their mortgages. As we expect -- as we move into the winter months that we'll see the reverse of the seasonality and in fact the aggregate agency CPR for October was 12.7 so down from the 15.1 average for the third quarter.

As we look at the RPLs and NPLs and the credit sensitive, does that continues to become a bigger portion of the pie. Can we talk about a little bit about the competition for that business I mean the yield on the asset seem to be trending down slightly? But I'm wondering what a reflection of that is competition versus may be just a continued improvement in the underlying credit profile of those borrowers enhance the yields compress there as opposed to may be competition driven?

So I would say on two fronts obviously on the home loan front there is a lot of competition for those assets and they trade, at times they trade very tight, and then at times they trade a little bit cheaper. Most of acquisitions that we've done have been smaller pieces which are probably a little bit more off the radar screen. So we think we've been able to pick those up a little bit cheaper. But there is clearly a lot of competition for loans especially some of the well publicized very large auctions, like for instance the HUD auction. On the RPL/NPL stage they're showing this competition for those assets but I wouldn't read into lower yield. I think if yields are down there it's probably because we had more NPLs which typically traded lower yield because they're shorter securities than RPLs. But I think those yields have been fairly consistent. If you go back three or four months ago, they tightened -- they actually tightened quite a bit and we sat out a couple of those deals. The yields have now come back in so three-and-a-half-ish or so is probably a good proxy there.

Dan, if I might add yes you're correct there is more demand. But also there is a lot of supply and that's why another reason we are very attracted to these assets besides the fact they like to yield low (inaudible) there is a good supply that's coming to market over the next couple of years and this is a business that could be important to us and grow over time.

Yes, thanks I appreciate that Craig and Bill. And may be just one other thought, as the credit sensitive portion continues to get bigger piece of the pie, how does the opportunity to may be put a little bit more leverage on those or may be look to re-securitize or do something may be a little bit more structured to get the yield profile or guess the ROE profile excuse me up a bit?

On the loans you mean?

Yes, on the loans I’m sorry yes on the loans.

Yes, at this point it's a $100 million. There certainly is leverage available there both warehouse type of leverage and also securitization. So we'll certainly look to that in the future but for the time being we're just trying to map some critical mass.

Thank you. Next we'll go to the line of Jason Weaver with Sterne Agee.

Hi, good morning everybody. My questions have actually been asked, already I just had two. But I'll say congratulations and solid performance in what was a really wild quarter for the space. Thank you.

Thanks a lot, Jason.

Thank you.

Operator? Next question. Thank you.

We'll go to Steve DeLaney with JMP Securities.

Thanks, good morning everyone. We calculated a return on equity of about 10.9% on the RPL, NPL securities, just curious one, do you agree with that calculation and two, Craig how would you just roughly compare that that return opportunity on equity to what you might be able to obtain in any purchases of new legacy RMBS, senior RMBS?

So I guess, I would agree with your ROE calculation between 10 and 11.

Okay.

And I would say that generally for if you look at legacy, legacy probably right now yields about 4.5% if you call financing, call it 150 so spread of 300 basis points. If you put four times leverage on that you’d end up with 12 plus the yield on the asset. So I think the ROE would certainly be higher if you fully levered legacy non-agency. That being said as I said previously it difficult to acquire size in legacy non-agency. So while the ROEs might be a little bit higher it's much more difficult to put money to work there.

And they're also a longer duration there as well that these higher price levels which you have to be concerned so it would seem the -- NPL, RPL being such short duration you would expect to lower ROE?

Well you're right although it depends on the type of mortgages in legacy. So if it's a post rest hybrid it's a pretty short duration increment as well but yes your point is a good one.

No, I hear you, exactly and as Bill, said you guys have well over 60% are in hybrids or ARMS. So just in that same -- following the same theme on this new expanded asset class so Bloomberg put a list out Monday morning and they're showing, it's just their usual weekly, what's in the pipeline as far as non-agency RMBS both legacy and the new NPL RPL class, and they're showing seven new NPL, RPL deals in the market and there's two or three names on there that I've never seen before. Some people like Truman, Gold Creek, I guess I mentioned there is, are you and Bryan are you all seeing a pickup in the numbers of people that are issuing and has there been some recent pickup in activity, this just seems to be a pretty long list for this asset class?

Yes, this is Bryan. There has been a slight pickup as more participants kind of had their loans and we have claims and then they look to turn out their funding. Those names that you're listing are issuers that have participated in the past and there are larger names behind that. So I don't know if you Truman and Gold Creek are very large money managers that kind of sit behind those two.

Got it.

So they're not sort of like fly by like new entrants. These are well established players in the non-performing loan space.

Okay, appreciate that color. And just one final thing, you guys as you mentioned you've been harvesting gains understandably so on the legacy RMBS and that's generating taxable gain on sale revenue and you've been pretty steady here at $0.20 GAAP EPS. Are you in a position where you can make any general comments as to how taxable EPS is tracking your GAAP EPS say for 2014? Thanks.

So, one as at the end of the third quarter I believe we've $0.05 per share undistributed, is that correct Terry? And as you point out Steve, our taxable income is running somewhat less than our GAAP income but we're still undistributed for the year.

Okay, great. That's -- that's important information. Thank you, Bill. Congrats guys.

Thank you.

Thank you. We'll now go to the line of Joel Houck with Wells Fargo.

Thank you and good morning. Lot of good questions here. So may be switching gears more on a higher level, so far this earning season I wouldn't say it's unanimous but most of your peers are claiming that there's more relative value in agency MBS space relative to non-agency and understanding the non-agency market is obviously very dynamic. I don't want to put words in your mouth, but you guys haven't purchased any agency MBS since the first quarter of 2014. Are you guys taking a different approach or may be talk a little bit about the uniqueness in your model and perhaps why you see more relative value on the non-agency side if that's the case?

Thanks for the questions, Joel. So, we've been fairly consistent saying that we preferred non-agencies to agencies. Even in a quarter we've bought agencies, we typically bought a lot more non-agencies. So we definitely have a preference and the preference is based on the yield relative to interest rate risk. So we think we can solve for comparable ROE with less interest rate risk as to what decisions other mortgage REITs make out I can't tell you. But I can tell you our decision is pretty consistent over time although it usually it's not zero in the quarter which just so happens in the last couple of quarters it has been.

Okay. And -- and you have short duration, it's a higher quality bar or so, the credit risk would seem to favor your non-agency book relative to some of the other guys which keeps a prime. How do you view the potential volatility of just the pricing of the bonds or securities in light of what we're trying to see in the marketplace which is little slowdown in housing formation or at least new purchases, oils hitting new lows seems like every day or every week, the tenure signaling that we could possibly go into recession next year, how do you feel about the pricing of your securities and how much volatility and book are you willing to accept if in fact we do go in a recession?

All right. Those are questions we think about all time. It's kind of fundamental to why we got in the business, when we did. That with permanent capital and with low leverage, we can accept some price volatility over time. We can accept let's say going up and down quarter-to-quarter. The point is to make sure we're comfortable with the purchase price and that we are comfortable that our projections of cash flow over time are correct. Because if those things are correct and you do have the staying power based on the fact you have permanent capital and low leverage, we are fairly indifferent to volatility. And in fact, I know its stride to say, we actually do welcome volatility if we could acquire the same assets on lower price. And we're still comfortable with projected cash flow. And the quality asset, we prefer to pay at a lower price. :

Thank you. (Operator Instructions). We'll go on now to the line of Mike Widner with KBW. Please go ahead.

Hey. Good morning guys. So I'm going to ask a couple of follow-ups just because -- I think you answered most of the things I was thinking of. You mentioned at 12.7 CPR for October and I just wanted to clarify. Is that for the total Agency MBS portfolios relative to the 15.1 or was that just the ARM portfolio?

Yes. It's Gudmundur. It's for the entire Agency book so 12.7 versus an average of 15.1 for the entire Agency book in the third quarter.

Okay. So little 2 point -- two-and-a-half secured drop so that's good. Hopefully, that continues. Also just following up on the undistributed taxable income for the year so when you say you have $0.05 undistributed taxable, I mean that's basically the total overall as opposed to the question -- I think the question that Steve I believe asked with sort of how is taxable running relative to the GAAP? And so I just want to make sure that you're basically saying, including carryover from 2013 and so on and so on the total outstanding on distributed tax was $0.05, which is sort of a different I guess, if the question was year-to-date how is GAAP running relative to taxable?

Mike, you're right. That is a cumulative over time number.

So I guess -- the real question, I guess is really how is taxable tracking right now? And because as we think about 2015 dividends I mean, it seems that that's been sort of a steady state that the taxable has been running below GAAP and below the 20 -- below the current dividend level. And I'm just wondering if there is implication to that and if you can comment on that?

Well, it's hard to forecast what taxable income will be in the future, because our portfolio does turnover. So while you're right the tax is lower than GAAP for a lot of these seasoned Non-Agencies we're holding for a while, that portfolio is declining somewhat and we are adding new assets where we don't have a differential. So I know Mike, you're trying to forecast. So that would be difficult. So I'll continue -- I'll repeat that our GAAP income is somewhat higher than our tax. On a cumulative basis, we still are in an undistributed position. But in terms of forecast in 2015, it's somewhat difficult because our assets are turning over. So if taxable income tends to be frontloaded with our non-agency assets to the extent we are buying new assets, like the credit sensitive loans for example, it's hard to project what's going to be happening in 2015. So maybe I’m not giving you the detail that would help you, but I am telling you the factor that will impact 2015.

Yes. I know, I mean, I don't expect you guys to give the answer that taxable is going to continue to run lower and, therefore, there is an implication that the dividend is going to get trimmed. But I mean just that it seems bit sooner or later that's the trend that we’re running on. And that's -- I guess that's the question you are not going to answer but --

I would just -- I just like to add one other factor. Mike, as you know, taxable income is a floor, it's not a ceiling, you must distribute (inaudible) taxable income. But if your economic and GAAP earnings are higher than your taxable income because of strange core in the tax laws, the front loaded are taxable income and cause us to pay a very large special in prior years doesn't necessarily mean it's a ceiling either. We will take into account GAAP, economic and taxable earnings when distribute -- when declaring dividends.

Well -- I mean, I guess that leads to a follow-up. When you guys do not report whatever we’re now sort of cause core -- and by our measures core has also been running below GAAP, stripping out the gains on sales. And so, as you do think about how to set that dividend level, I mean most of us have sort of accustomed to not really thinking about gap at all in the mortgage REIT space just because there are so many distortions in it. Most mortgage reads tend to tackle along the lines of core and for a lot of them that that tends to track closer to taxable. And by our estimates, your core has been $0.18 the first two quarters of the year, a little lower and I might need the Q to be precise about it, but closer to $0.16 this quarter. And so again how does that -- if you think about economic returns as well, I mean, that is not one that a lot of the guys talk about in the sector but if you factor into market changes and all that sort of stuff so changes in book that would be I think this quarter a lower number as well. So I don't know, you opened up that question, so I mean how do those things play relative -- again you mentioned GAAP and GAAP is just not one that many people in the mortgage read space think much about just because of all distortions regard to setting dividend policy.

Yes, again I can't answer for everyone. The reason that we comfortable with GAAP over core is that we still have effective hedge counting. And that I think is the big differential on most cases and that's we you don't have a special defined term as you are talking about. So I think that's the difference.

Yes, that's good point. It's a pain in the ass but you guys still do it. All right, well, I think that's all my questions. I appreciate all the comments and color as always and another solid quarter. Nice job with the portfolio.

Thank you very much.

Thank you. Now we'll go to the line of Dougs Harter with Credit Suisse.

Good morning. This is Matt (inaudible) asking on behalf of Doug Harter. I was wondering if you can give us a sense of what the underlying assumptions are on the credit reserve for legacy non-agency in order to get a sense for future transfer as accretable yields.

I'm sorry, could you repeat the question?

I was wondering if you can give us a sense of what the underlying assumptions are on the credit reserve for legacy non-agency in order to get a sense for future transfers to accretable yield.

Well, I can generalize about the assumptions but the assumptions are truly on a bond level. So there are probably 500 odd line items and the assumptions are built on a bond by bond basis, but generally speaking I think the legacy portfolio has about 15% of the loans that are 60 plus stays delinquent. And I am guessing that our assumption assume that approximately 26% or so of the loans will ultimately default. So if you will, all the delinquent loans and then about another 10% of loans that are current today, but the assumption are, like I say, they are on a bond by bond basis, and it's not just default but it also depends on what prepayment speeds are assumed over time. So there is really a lot that goes into it and I think it would be difficult to take those broad assumptions and then infer some future credit change.

There are no further questions in queue at this time.

I want to thank everyone for joining us today and we look forward to speaking to you all again next quarter. So, thanks very much.