UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the Fiscal Year Ended December 31, 2005
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the Transition Period From
to
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Commission
File Number 001-32216
NEW
YORK MORTGAGE TRUST, INC.
(Exact
name of registrant as specified in its charter)
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Maryland
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47-0934168
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1301
Avenue of the Americas, New York, New York 10019
(Address
of principal executive office) (Zip Code)
(Registrant’s
telephone number, including area code)
(212)
634-9400
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
£
No
R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
£
No
R
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
R
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filers” and “large accelerated filers” in Rule 12b-2 of The Exchange Act. (check
one):
Large
Accelerated Filer £
Accelerated Filer R
Non-Accelerated Filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No
R
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 2005 was approximately $133.5 million based on the closing price
on such date of the registrant’s common stock as reported by the New York Stock
Exchange Composite Transactions.
The
number of shares of the Registrant’s Common Stock outstanding on March 1, 2006
was 18,258,221.
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Where
Incorporated
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1.
Proxy
Statement for Annual Meeting of Stockholders to be held on June 14,
2006,
to be filed with the Securities and Exchange Commission
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Part
III
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NEW
YORK MORTGAGE TRUST, INC.
FORM
10-K
For
the Fiscal Year Ended December 31, 2005
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General
New
York
Mortgage Trust, Inc. together with its consolidated subsidiaries (“NYMT”, the
“Company”, “we”, “our”, and “us”) is a self-advised residential mortgage finance
company that originates, acquires and invests in adjustable and variable rate
mortgage (“ARM”) assets. We earn net interest income from residential
mortgage-backed securities and adjustable-rate mortgage loans and securities.
We
also earn gain on sale income and net interest income by originating a variety
of residential mortgage loan products through our wholly-owned subsidiary,
The
New York Mortgage Company, LLC (“NYMC”). NYMC also originates residential
mortgage loans as a broker for other mortgage bankers for the purpose of
obtaining broker fee income. NYMC, which originates residential mortgage loans
through a network of 28 full-service loan origination locations and 26 satellite
loan origination locations, is presently licensed or authorized to do business
in 43 states and the District of Columbia.
Our
residential mortgage investments are comprised of ARM loans, ARM securities
and
floating rate collateralized mortgage obligations (“CMO Floaters”). The ARM
loans and securities have interest rates that reset in a year or less and
“hybrid” ARM loans and securities have a fixed interest rate for an initial
period of two to seven years before converting to ARM loans and securities
whose
rates will reset each year or such shorter period for their remaining terms
to
maturity. ARM securities represent interests in pools of whole ARM loans. The
ARM securities are rated by at least one of two nationally recognized rating
agencies, Standard & Poor’s, Inc. or Moody’s Investors Service, Inc. (the
“Rating Agencies”), or issued by Freddie Mac (“FHLMC”), Fannie Mae (“FNMA”) or
Ginnie Mae (“GNMA”). The securitizations result in a series of rated mortgage
securities backed by the ARM loans. The CMO Floaters are mortgage securities
backed by a pool of FNMA, FHLMC or GNMA fixed rate mortgage loans which have
interest rates that adjust monthly. As an investor in residential mortgage
assets, our net income is generated primarily from the difference between the
interest income we earn on our mortgage assets and the cost of our borrowings
(net of hedging expenses), commonly referred as the “Net Spread.”. Our goal is
to maximize the long-term sustainable difference between the yield on our
investments and the cost of financing these assets through the following
strategies:
| • |
focusing
on originating high credit quality residential mortgage loans through
NYMC
that we believe can either be retained in our portfolio or sold at
a
profit;
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| • |
focusing
on maximizing our lending to home buyers rather than to home owners
seeking to refinance their mortgage loans, which we believe makes
our
business less vulnerable to declines in loan origination volume resulting
from increases in interest rates;
|
| • |
leveraging
our portfolio to increase its size with the intent to enhance our
returns
while at the same time managing the increased risk of loss associated
with
this leverage;
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| • |
utilizing
hedging strategies that we consider appropriate to minimize exposure
to
interest rate changes; and
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| • |
expanding
our retail and wholesale mortgage banking business through the hiring
of
additional loan officers, the opening of new retail branch offices
in new
markets and selectively pursuing strategic acquisitions in the mortgage
banking industry.
|
In
order
to be a full service provider to our customers, we originate mortgage loans
through NYMC. Licensed or exempt from licensing in 43 states and the District
of
Columbia and through a network of 28 full service branch loan origination
locations and 26 satellite loan origination locations, NYMC offers a broad
range
of residential mortgage products, with a primary focus on prime, or high credit
quality, residential mortgage loans. We either sell the fixed-rate loans that
we
originate to third parties and retain and finance in our portfolio selected
adjustable-rate and hybrid mortgage loans that we originate or we sell them
to
third parties. Our portfolio of loans is held at the real estate investment
trust (“REIT”) level or by a qualified REIT subsidiary (“QRS”). We rely on our
own underwriting criteria with respect to the mortgage loans we retain and
rely
on the underwriting criteria of the institutions to which we sell our loans
with
respect to the loans we intend to sell. In either case, we directly perform
the
underwriting of such loans with our own experienced underwriters.
Upon
completion of our initial public offering (“IPO”) in June 2004, we purchased or
invested, on a leveraged basis, residential mortgage-backed securities
guaranteed by FNMA or FHLMC or rated investment grade-AAA. Over time, as these
securities amortize and pay-off, they will be replaced by adjustable-rate and
hybrid mortgage loans that we originate or other qualifying loans or securities.
We may also supplement our portfolio with loans originated through our
correspondent network or purchased from third parties. We believe that our
return is enhanced by retaining loans that we originate as the basis for our
portfolio. We believe that mortgage investors that do not have their own
origination capabilities (a “passive portfolio investor”) must purchase their
mortgage loans from third parties at higher premiums than our cost of
originating the mortgage loans that we retain.
We
finance the purchases and originations of our ARM loans, ARM securities and
CMO
Floaters (collectively “ARM Assets”) with equity capital, unsecured debt and
short-term borrowings such as repurchase agreements, securitizations resulting
in floating-rate long-term collateralized debt obligations (“CDOs”) and other
collateralized financings. We enter into swap agreements whereby we receive
floating rate payments in exchange for fixed rate payments, effectively
converting the borrowings to a fixed rate. We believe our exposure and risks
related to changes in interest rates can be prudently managed through holding
ARM Assets and attempting to match the duration of our liabilities with the
duration of our ARM Assets. From a credit risk perspective, we retain high
quality assets and follow strict credit underwriting standards.
Unlike
banks, savings and loans or most mortgage originators, we are structured as
a
REIT for federal income tax purposes. We have elected to be taxed as a REIT
under Sections 856-860 of the Internal Revenue Code (IRC) of 1986, as amended,
commencing with our taxable year ended December 31, 2004, and we operate so
as
to qualify as a real estate investment trust (“REIT”) for federal income tax
purposes. We hold our investment in ARM Assets directly or in a QRS.
Accordingly, the net interest income we earn on our ARM Assets is generally
not
subject to federal income tax as long as we distribute at least 90% of our
REIT
taxable income in the form of a dividend to our stockholders each year and
comply with various other requirements. Failure to qualify as a REIT would
subject the Company to federal income tax (including any applicable minimum
tax)
on its taxable income at regular corporate rates and distributions to its
shareholders in any such year would not be deductible by the
Company.
Our
mortgage banking operations are performed at NYMC, a taxable REIT subsidiary
(“TRS”). The activities we conduct through NYMC, including sourcing and selling
mortgage loans sold to third parties, are subject to federal and state corporate
income tax. We may elect to retain any after tax income generated by NYMC,
and,
as a result, may increase our consolidated capital and grow our business through
retained earnings or distribute all or a portion of our after-tax NYMC earnings
to our stockholders.
Access
to our Periodic SEC Reports and Other Corporate
Information
Our
internet website address is www.nymtrust.com. We make available free of charge,
through our internet website, our annual report on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments thereto
that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission (the “SEC”). Our Corporate Governance Guidelines and Code of Business
Conduct and Ethics and the charters of our Audit, Compensation and Nominating
and Corporate Governance Committees are also available on our website and are
available in print to any stockholder upon request in writing to New York
Mortgage Trust, Inc., c/o Chief Financial Officer and Secretary, 1301 Avenue
of
the Americas, 7th floor, New York, New York 10019. Information on our website
is
neither part of nor incorporated into this annual report on Form
10-K.
Corporate
Governance
We
operate our business with a focus on high standards in business practices and
professional conduct. The following are some of the highlights relating to
our
corporate governance:
| • |
Our
board of directors is composed of a super-majority of independent
directors. As per guidelines established by the SEC and NYSE, the
Audit,
Nominating/Governance and Compensation Committees are composed exclusively
of independent directors.
|
| • |
We
have adopted a Code of Business Conduct and Ethics and Corporate
Governance Guidelines that apply to all officers, directors and employees
(as well as a supplemental Code of Ethics for Senior Financial Officers)
to promote the highest standard of conduct and ethics in our dealings
with
our customers, stockholders, vendors, the public and our
employees.
|
| • |
Our
Insider Trading Policy prohibits any of the directors, officers or
employees of the Company from buying or selling our stock on the
basis of
material nonpublic information, and in conjunction with our Regulation
FD
policy, prohibits communicating material nonpublic information to
others.
Trading of our securities by directors, officers or employees is
allowed
only during a discreet narrow open period after our quarterly report
on
Form 10-Q or annual report on Form 10-K is filed with the
SEC.
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| • |
Generally,
we will “early adopt” new accounting standards promulgated by the
Financial Accounting Standards Board (“FASB”), the SEC or other standard
setting accounting body.
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| • |
We
have established a formal internal audit function to monitor and
test the
efficiency of our internal controls and procedures as well as the
implementation of Section 404 of the Sarbanes-Oxley Act of
2002.
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| • |
We
have made publicly available, through our website www.nymtrust.com,
the
charters of the independent committees of our Board of Directors
(Audit
Committee, Compensation Committee, Nominating and Corporate Governance
Committee) and other corporate governance materials, including our
Code of
Business Conduct and Ethics, our Corporate Governance Guidelines,
our
Insider Trading Policy, and other corporate governance
policies.
|
Company History
We
were
formed as a Maryland corporation in September 2003. On January 9, 2004, we
capitalized New York Mortgage Funding, LLC (“NYMF”) as a wholly-owned subsidiary
of our company. NYMF is a qualified REIT subsidiary, or QRS, in which we
accumulate mortgage loans that the Company intends to securitize. In June 2004,
we sold 15 million shares of our common stock in an IPO at a price to the public
of $9.00 per share, for net proceeds of approximately $122 million after
deducting the underwriters’ discount and other offering expenses. Concurrent
with our IPO, we issued 2,750,000 shares of common stock in exchange for the
contribution to us of 100% of the equity interests of NYMC. Prior to the IPO,
we
did not have recurring business operations.
Prior
to
being acquired by us, NYMC’s business strategy was to sell or broker all of the
loans it originated to third parties and the largest component of NYMC’s net
income was generated by the gain on sale of such loans. For accounting purposes
and reporting purposes, the combination of our company and NYMC is accounted
for
as a reverse merger and the related transfer of loans originated by NYMC to
us
is accounted for as a transfer of assets between entities under common control.
Accordingly, we have recorded assets and liabilities transferred from NYMC
at
their carrying amounts in the accounts of NYMC at the date of transfer. The
consolidated financial statements include the accounts of our company subsequent
to the IPO and also include the accounts of NYMC and NYMF prior to the IPO.
As a
result, our historical financial results prior to the IPO reflect the financial
operations of this prior business strategy of selling virtually all of the
loans
originated by NYMC to third parties. Furthermore, the ARM loans we originated
and securitized in the securitizations completed in 2005 were recorded at cost
with no gain on sale recognized, as would be the case if sold to third parties.
Since our IPO, our business strategy has been to invest in ARM loans and
securitize them to generate net interest income. As a result, our historic
operations prior to the IPO and current financial operations are not necessarily
comparable.
Our
Industry
Generally,
the residential mortgage industry is segmented by the size of the mortgage
loans
and credit characteristics of the borrowers. Mortgage loans that conform to
the
guidelines of entities such as FHLMC, FNMA or GNMA, for both size and credit
characteristics are often referred to as “conforming” mortgage loans. All other
mortgage loans are often referred to as non-conforming loans either because
the
size of the loan exceeds the guideline limit or the credit profiles of the
borrowers do not meet the guideline requirements. Our strategy focuses on
adjustable- and fixed-rate and hybrid first lien mortgage loans to borrowers
with strong credit profiles, which we refer to as prime mortgage loans. We
believe the adjustable-rate and hybrid segment of the prime residential mortgage
loan industry and our ability to originate such loans provides us the
opportunity to build a portfolio of our high quality self-originated prime
adjustable-rate and hybrid loans with the goal of generating higher
risk-adjusted returns on investment than would be available from a portfolio
based either on purchased loans or on fixed-rate or non-prime loans. We believe
that our experience as a mortgage loan originator with a comprehensive and
sophisticated process for credit evaluation, risk-based pricing and loss
mitigation will, over time, provide us with a significant advantage over other
portfolio investors who do not have comparable origination
capabilities.
We
believe changes are continuing to occur in the U.S. mortgage industry, resulting
in the shifting of investment capital and mortgage assets out of traditional
lending and savings institutions and into new forms of mortgage banking and
mortgage investment firms, including those that qualify as REITs under the
Internal Revenue Code. We believe that, while traditional mortgage investment
companies, such as banks, thrifts and insurance companies, generally have
greater diversification in their investments than we have as a REIT, they
provide less attractive investment structures for investing in mortgage assets
because of the costs associated with regulation, infrastructure and corporate
level taxation. As a REIT, we are generally able to pass through our REIT
earnings to our stockholders without incurring entity-level federal income
tax,
thereby allowing us to make relatively larger distributions than institutions
with similar investments because they are subject to federal income tax on
their
earnings.
Additionally,
with the development of highly competitive national mortgage markets (which
we
believe is partly due to the operations of FHLMC, FNMA or GNMA), local and
regional mortgage originators have lost market share to more efficient mortgage
originators who compete nationally. The growth of the secondary mortgage market,
including new securitization techniques, has also resulted in financing
structures that can be utilized efficiently to fund leveraged mortgage
portfolios and better manage interest rate risk.
Operating
Policies, Strategies and Business Segments
The
Company operates two segments:
| • |
Mortgage
Portfolio Management—
long-term investment in high-quality, adjustable-rate mortgage loans
and
residential mortgage-backed securities;
and
|
| • |
Mortgage
Lending—
mortgage loan originations as conducted by
NYMC.
|
Our
mortgage portfolio management operations primarily invest in adjustable-rate
agency and “AAA”— rated residential mortgage-backed securities and high-quality
mortgages that are originated by our mortgage operations or that may be acquired
from third parties. Our equity capital and borrowed funds are used to invest
in
residential mortgage-backed securities and loans held for subsequent
securitization, thereby producing net interest income.
Our
mortgage lending segment originates residential mortgage loans through our
taxable REIT subsidiary, NYMC. Loans are originated through NYMC’s retail and
internet branches as well as from independent mortgage brokers and generate
gain
on sale revenue when the loans are sold to third parties or revenue from
brokered loans when the loans are brokered to third parties.
Mortgage
Portfolio Management
Prior
to
the completion of our IPO on June 29, 2004, our operations were limited to
the
mortgage operations described in the section below entitled “Mortgage Lending.”
Beginning in July 2004, we began to implement our business plan of investing
in
high quality, adjustable rate mortgage loan securities. Our portfolio management
strategy is to originate and acquire ARM Assets to hold in our portfolio, fund
them using equity capital and borrowings and to generate net interest income
from the difference, or net spread, between the yield on these assets and our
cost of financing. In order to accomplish this, our:
| • |
Proceeds
from equity raising efforts are promptly invested in acquired ARM
Assets
in order to generate returns on the equity
investment.
|
| • |
Acquired
ARM Assets are replaced with high-quality, higher-yielding, lower
cost ARM
loans self-originated through NYMC retail channels or otherwise
acquired.
|
| • |
Mortgage
portfolio management operates with a long-term investment
outlook.
|
| • |
Short-term
financing of ARM loans to be securitized is provided by secured warehouse
and aggregation lines.
|
| • |
Ultimate
financing for ARM loans is provided by either issuing collateralized
debt
obligations or by repurchase financing
facilities.
|
We
believe we benefit from a cost advantage from self-originating loans and holding
these loans in securitized form in the REIT or our QRS:
| • |
through
self-origination, we avoid the intermediation costs associated with
purchasing mortgage assets in the capital markets;
and
|
| • |
the
net interest income generated in the REIT or our QRS generally will
not be
subject to tax, whereas, had we sold our loans in the capital markets
through our TRS, we would have been subject to tax on the gain on
sale of
loans.
|
We
believe, this strategy, together with prudent leverage to produce the
mortgage-backed securities we hold, will produce a greater return for our
stockholders in the long term relative to a purchased securities portfolio.
This
greater return is accomplished by a combination of the recognition of the
incremental lower cost to originate such loans and/or the ability to better
afford appropriate interest rate hedging strategies in order to provide a
similar return to a purchased securities portfolio but with a lower risk
profile.
We
seek
to have a portfolio consisting of high quality mortgage-backed securities and
loans. We believe that retaining high quality assets in our portfolio helps
us
mitigate risks associated with market disruptions. Our investment guidelines
define the following classifications for securities we own:
| • |
Category
I investments are mortgage-backed securities that are either rated
within
one of the two highest rating categories by at least one of the Rating
Agencies, or have their repayment guaranteed by FHLMC, FNMA or
GNMA.
|
| • |
Category
II investments are mortgage-backed securities with an investment
grade
rating of BBB/Baa or better by at least one of the Rating
Agencies.
|
| • |
Category
III investments are mortgage-backed securities that have no rating
from,
or are rated below investment grade by at least one of the Rating
Agencies.
|
We
retain
on our balance sheet a majority of the residential first lien adjustable-rate
and hybrid mortgage loans originated by NYMC that we believe have a low risk
of
default and resulting loss and are of the following types:
| • |
1
month adjustable-rate (various total terms);
|
| • |
6
month adjustable-rate (various total terms);
|
| • |
1
year adjustable-rate (various total terms);
|
| • |
2
year fixed-rate, adjustable-rate hybrid (various total
terms);
|
| • |
3
year fixed-rate, adjustable-rate hybrid (various total terms);
|
| • |
5
year fixed-rate, adjustable-rate hybrid (various total terms):
and
|
| • |
7
year fixed-rate, adjustable-rate hybrid (various total
terms).
|
The
investment policy adopted by our Board of Directors provides, among other
things, that:
| • |
no
investment shall be made which would cause us to fail to qualify
as a
REIT;
|
| • |
no
investment shall be made which would cause us to be regulated as
an
investment company;
|
| • |
at
least 70% of our assets will be Category I investments or loans that
back
or will back such investments; and
|
| • |
no
more than 7.5% of our assets will be Category III
investments.
|
Our
Board
of Directors may amend or waive compliance with this investment policy at any
time without the consent of our stockholders.
We
seek
to avoid many of the risks typically associated with companies that purchase
mortgage-backed securities in the capital markets.
| • |
For
our self-originated loan portfolio, we perform our own underwriting
rather
than rely on the underwriting of
others.
|
| • |
We
attempt to maintain a net duration, or duration gap, of one year
or less
on our ARM portfolio, related borrowings and hedging
instruments.
|
| • |
We
structure our liabilities to mitigate potential negative effects
of
changes in the relationship between short- and longer-term interest
rates.
|
| • |
We
may purchase or structure credit enhancements to mitigate potential
losses
from borrower defaults.
|
| • |
Substantially
all of the Company’s securities are backed by ARM loans. Because we are
focused on holding ARM loans rather than fixed-rate loans, we believe
we
will be adversely affected to a lesser extent by early repayments
due to
falling interest rates or a reduction in our net interest income
due to
rising interest rates.
|
Our
Board
of Directors has also established an investment and leverage committee for
the
purpose of approving certain investment transactions and the incurrence of
indebtedness. This committee is comprised of our co-chief executive officers,
our chief investment officer and chief operating officer, and our chief
financial officer. The committee has the authority to approve, without the
need
of further approval of our board of directors, the following transactions from
time to time, any of which may be entered into by us or any of our
subsidiaries:
| • |
the
purchase and sale of agency and private label mortgage-backed securities,
subject to the limitations described
above;
|
| • |
securitizations
of our mortgage loan portfolio;
|
| • |
the
purchase and sale of agency debt;
|
| • |
the
purchase and sale of U.S. Treasury securities;
|
| • |
the
purchase and sale of overnight investments;
|
| • |
the
purchase and sale of money market funds;
|
| • |
hedging
arrangements using:
|
| • |
interest
rate swaps and Eurodollar contracts;
|
| • |
caps,
floors and collars;
|
| • |
financial
futures; and
|
| • |
options
on any of the above; and
|
| • |
the
incurrence of indebtedness using:
|
| • |
repurchase
agreements;
|
| • |
bank
loans, up to an aggregate of $100 million; and
|
| • |
term
repurchase agreements.
|
Initially,
the loans held for investment are funded through warehouse facilities and
repurchase agreements. We ultimately finance the loans that we retain in our
portfolio through securitization transactions. Upon securitization, we expect
that a vast majority of the resulting mortgage-backed securities will become
eligible for inclusion in Category I.
The
only
subordinate classes of mortgage-backed securities that we will hold (Category
III investments) are subordinate classes that result from securitizations of
the
mortgage loans in our portfolio. We do not seek to acquire subordinated
mortgage-backed securities as investments but instead acquire them only in
connection with our mortgage loan securitizations or in order to help us meet
our asset tests as a REIT.
We
generally maintain an overall debt-to-equity ratio ranging from 8:1 to 12:1
on
the financing of our portfolio ARM Assets. Our liabilities are primarily termed
repurchase agreements with maturities ranging from one to twelve months. A
significant risk to our operations, relating to our portfolio management, is
the
risk that interest rates on our assets will not adjust at the same times or
amounts that rates on our liabilities adjust. Even though we retain and invest
in ARM loans, many of the hybrid ARM loans in our portfolio have fixed rates
of
interest for a period of time ranging from two to seven years. Our funding
costs
are generally not constant or fixed. As a result, we use interest rate swaps
to
extend the duration of our liabilities to attempt to match the duration of
our
assets and we use termed repurchase agreements with laddered maturities to
reduce the risk of a disruption in the repurchase market. Since we hold
primarily ARM Assets rated AAA and agency securities (FHLMC or FNMA), we believe
we are less susceptible to a disruption in the repurchase market as these types
of securities have typically been eligible for repurchase market financing
even
when repurchase financing was not available for other classes of mortgage assets
or asset backed bonds.
Mortgage
Lending
The
origination of mortgage loans through NYMC is significant to our financial
results in that it:
| • |
originates
many of the high quality mortgage loans that we retain and ultimately
collateralize as mortgage securities that we hold in portfolio or
issue as
collateralized debt obligations;
|
| • |
allows
us to be competitive by offering a broad range of residential mortgage
loan products; and
|
| • |
generates
gain on sale income at the TRS with the ability to sell to third
parties
any fixed-rate and ARM loans that are not eligible for retention
and
investment in the our portfolio.
|
Furthermore,
we believe our ability to originate ARM loans for securitization benefits us
by
providing:
| • |
the
ability to originate ARM loans at lower cost, so that the amount
of
premium (net cost over par) to be amortized will be reduced in the
event
of prepayment;
|
| • |
generally
higher yielding investments as our cost basis is lower; providing
the
ability to generate a higher return to shareholders and/or the ability
to
absorb the cost of additional interest rate hedges and thus reduce
the
inherent interest rate risk in our
portfolio;
|
| • |
greater
control over the quality and types of ARM loans in our portfolio
as we
directly perform our own underwriting of such loans and can encourage
our
loan officers to focus on certain types of ARM
products.
|
Through
NYMC, our loan origination business originates primarily first mortgages on
one-to-four family dwellings through our retail loan production offices and
is
supplemented by our wholesale division and internet channel
(www.MortgageLine.com).
We
believe that the substantial growth of NYMC’s mortgage banking business since
its inception has resulted from its commitment to providing exemplary service
to
its customers and its concentration on retail, referral-based, mortgage banking
to borrowers with strong credit profiles. Based on our past experience and
our
knowledge of the mortgage industry, we believe that referrals from realtors,
attorneys, accountants and other professionals and business from repeat
customers tend to generate a higher percentage of purchase mortgage loan
applications than refinance applications as compared to the loan applications
generated by advertising and other mass marketing efforts. For the year ended
December 31, 2005, our residential purchase loan originations represented 57.8%
of NYMC’s total residential mortgage loan originations as measured by principal
balance, as compared to an industry-wide percentage of 53.5% for one-to-four
family mortgage loans, according to the February 7, 2006 report of the Mortgage
Bankers Association, or MBA.
In
addition, we believe that the market for mortgage loans for home purchases
is
less susceptible than the refinance market to downturns during periods of
increasing interest rates, because borrowers seeking to purchase a home do
not
generally base their decision to purchase on changes in interest rates alone,
while borrowers that refinance their mortgage loans often make their decision
as
a direct result of changes in interest rates. Consequently, while our
referral-based marketing strategy may cause our overall loan origination volume
during periods of declining interest rates to lag our competitors who rely
on
mass marketing and advertising and who therefore capture a greater percentage
of
loan refinance applications during those periods, we believe our strategy will
enable us to sustain stronger home purchase loan origination volumes than those
same competitors during periods of flat to rising interest rates. In addition,
we believe that our referral-based business results in relatively higher gross
margins and lower advertising costs and loan generation expenses than most
other
mortgage companies whose business is not referral-based.
The
following table details the payment stream, loan purpose and documentation
type
of our mortgage loan originations for the year ended December 31,
2005:
MORTGAGE
LOAN ORIGINATION SUMMARY
For
the fiscal year ended December 31, 2005
|
(Dollar
amounts in thousands)
|
Number
of
Loans
|
Dollar
Value
|
%
of Total
|
|||||||
|
Payment
Stream
|
||||||||||
|
Fixed
Rate
|
||||||||||
|
FHA/VA
|
1,805
|
$
|
242,258
|
7.0
|
%
|
|||||
|
Conventional
Conforming
|
6,031
|
967,922
|
28.2
|
%
|
||||||
|
Conventional
Jumbo
|
581
|
351,971
|
10.2
|
%
|
||||||
|
Total
Fixed Rate
|
8,417
|
$
|
1,562,151
|
45.4
|
%
|
|||||
|
ARMs
|
||||||||||
|
FHA/VA
|
94
|
$
|
15,244
|
0.5
|
%
|
|||||
|
Conventional
|
6,202
|
1,859,976
|
54.1
|
%
|
||||||
|
Total
ARMs
|
6,296
|
1,875,220
|
54.6
|
%
|
||||||
|
Annual
Total
|
14,713
|
$
|
3,437,371
|
100.0
|
%
|
|||||
|
Loan
Purpose
|
||||||||||
|
Conventional
|
12,814
|
$
|
3,179,869
|
92.5
|
%
|
|||||
|
FHA/VA
|
1,899
|
257,502
|
7.5
|
%
|
||||||
|
Total
|
14,713
|
$
|
3,437,371
|
100.0
|
%
|
|||||
|
Documentation
Type
|
||||||||||
|
Full
Documentation
|
9,238
|
$
|
2,100,239
|
61.1
|
%
|
|||||
|
Stated
Income
|
2,489
|
696,789
|
20.3
|
%
|
||||||
|
Stated
Income/Stated Assets
|
1,346
|
320,624
|
9.3
|
%
|
||||||
|
No
Documentation
|
609
|
145,845
|
4.2
|
%
|
||||||
|
No
Ratio
|
437
|
83,013
|
2.4
|
%
|
||||||
|
Stated
Assets
|
13
|
2,315
|
0.1
|
%
|
||||||
|
Other
|
581
|
88,546
|
2.6
|
%
|
||||||
|
Total
|
14,713
|
$
|
3,437,371
|
100.00
|
%
|
|||||
Retail
Loan Origination
Our
loan
origination strategy is predominantly retail, referral-based, mortgage banking.
Our loan officers rely primarily on the various relationships they have
established with their clientele, realtors, attorneys and others who routinely
interact with those who may need mortgage financing. Retail loan origination
allows us to provide a variety of attractive and innovative mortgage products
at
competitive rates. Unlike many banks and financial institutions which focus
solely on loan products to retain in their portfolios, we offer a wide range
of
products — products that we can retain in portfolio and products that we will
sell to third parties if such loans do not meet our investment
parameters.
Because
we are predominately referral-based, our cost of sourcing potential retail
clients is less than an organization that relies heavily on concentrated
broadcast, print or internet media advertising. In order to remain compliant
with the Real Estate Settlement Procedures Act (“RESPA”), we do not pay referral
fees or enter into above market co-branding, co-marketing or shared facilities
relationships. By eliminating intermediaries between the borrower and us, we
can
both originate high quality mortgage loans for retention in our portfolio at
attractive yields or offer loans that may be sold to third parties, while at
the
same time offering our customers a variety of mortgage products at competitive
rates and fees.
Wholesale
Loan Origination
Our
wholesale lending strategy has historically been a small component of our loan
origination operations. We have a network of non-affiliated wholesale loan
brokers and mortgage lenders who submit loans to us. We maintain relationships
with these wholesale brokers and, as with retail loan originations, will
underwrite, process, and fund wholesale loans through our centralized facilities
and processing systems. In order to further diversify our origination network,
during 2005, we began to expand our wholesale loan origination capacity with
the
creation of a division specifically for wholesale loan
originations.
Correspondent
Lending
Through
our correspondent lending channels, we may acquire mortgage loans from
Company-approved correspondent lenders. We review our correspondents for the
soundness of their in-house mortgage lending procedures and their ability to
fulfill their representations and warranties to us. Generally, loans acquired
from correspondents are originated to our approved specifications including
our
internally developed loan products, credit and property guidelines, and
underwriting criteria. In addition, correspondents may sell their own loan
products to us that are originated according to the correspondents’ product
specifications and underwriting guidelines that we have approved and
accepted.
To
verify
product quality and compliance with our underwriting and investment guidelines,
we perform a full review of all of the loans generated by the correspondent
prior to the purchase thereof. A full underwriting review of each loan file,
including all credit and appraisal information, is performed as well as
documentation sufficiency and compliance. Similar to loans originated through
our retail and wholesale channels, these loans are also subjected to our quality
control reviews.
Underwriting
Historically,
NYMC’s underwriting philosophy has been to underwrite loans according to the
guidelines established by the available purchasers of its loans. However, the
Company underwrites to its own guidelines select ARM loans it retains for its
investment portfolio. We believe that proper underwriting for such loans is
critical to managing the credit risk inherent in a loan portfolio.
Typically,
mortgage underwriting guidelines provide a framework for determining whether
a
proposed mortgage loan to a potential borrower will be approved. The key points
in this framework are the borrower’s credit scores and other indicia of the
borrower’s ability and willingness to repay the loan, such as the borrower’s
employment and income, the amount of the borrower’s equity in and the value of
the borrower’s property securing the loan, the borrower’s debt to income and
other debt ratios, the loan to value (“LTV”) of the loan, the amount of funds
available to the borrower for closing and the borrower’s post-closing
liquidity.
We
continue to follow the underwriting guidelines established by available
purchasers with respect to the loans we intend to sell. Furthermore, for
mortgage loans we intend to retain, we follow a specific underwriting
methodology based on the following philosophy — first evaluate the borrower’s
ability and willingness to repay the loan, and then evaluate the value of the
property securing the loan. We seek only to retain mortgage loans that we
believe have low risk of default and resultant loss. As underwriting basically
seeks to predict future borrower payment patterns and ability based on the
borrower’s history and current financial information and the lender’s ability to
be made whole in the future through foreclosure in the event a default does
occur, no assurance can be made that every loan originated or purchased will
perform as anticipated.
The
key
aspects of our underwriting guidelines are as follows:
Borrower—
In
evaluating the borrower’s ability and willingness to repay a loan, we review and
analyze the following aspects of the borrower: credit score, income and its
source, employment history, debt levels in revolving, installment and other
mortgage loans, credit history and use of credit in the past, and finally the
ability and/or willingness to provide verification for the above. Credit scores,
credit history, use of credit in the past and information as to debt levels
can
be typically obtained from a third party credit report through a credit
repository. Those sources are used in all cases, as available. In certain cases,
borrowers have little or no credit history that can be tracked by one of the
primary credit repositories. In these cases, the reason for the lack of history
is considered and taken into account. In our experience, more than 95% of
prospective borrowers have accessible credit histories.
Property—
In
evaluating a potential property to be used as collateral for a mortgage loan,
we
consider all of the following aspects of the property: the loan balance versus
the property value, or LTV, the property type, how the property will be occupied
(a primary residence, second home or investment property), if the property’s
apparent value is supported by recent sales of similar properties in the same
or
a nearby area, any unique characteristics of the property and our confidence
in
the above data and their sources.
Other
Considerations—
Other
considerations that impact our decision regarding a borrower’s loan application
include the borrower’s purpose in requesting the loan (purchase of a home as
opposed to cashing equity out of the home through a refinancing for example),
the loan type (adjustable-rate, including adjustment periods and loan life
rate
caps, or fixed-rate), and any items unique to a loan that we believe could
affect credit performance.
In
addition, we work with nationally recognized providers of appraisal, credit,
and
title insurance. We oversee the activities of these service providers through
on-site visits, report monitoring, customer service surveys, post-closing
quality control, and periodic direct participation and conversations with our
customers. A significant amount of our settlement services are performed by
in-house professionals. We have an extensive quality control review process
that
is contracted with a third party in order to verify that selected loans were
properly underwritten, executed and documented. All loans retained in portfolio
and a selection of other loans sold to third parties also are quality control
reviewed internally as well.
Our
Loan Origination Financing Strategy
We
finance our loan originations utilizing warehouse agreements as well as other
similar financing arrangements. The agreements are each renewable annually,
but
are not committed, meaning that the counterparties to the agreements may
withdraw access to the credit facilities at any time.
Warehouse
Facilities—
Non-depository mortgage lenders, such as NYMC, typically rely on credit
facilities for capital needed to fund new mortgage loans. These facilities
are
typically lines of credit or master repurchase agreements from other financial
institutions that the mortgage banker can draw from in order to fund new
mortgage loans. These facilities are referred to as warehouse lines or warehouse
facilities.
Warehouse
lines are typically collateralized loans made to mortgage bankers that in turn
pledge the resulting loans to the warehouse lender. Third-party mortgage
custodians, usually large banks, typically hold the mortgage loans, including
the notes, mortgages and other important loan documentation, for the benefit
of
the mortgage lender who is deemed to own the loan and, if there is a default
under the warehouse line, for the benefit of the warehouse lender.
We
currently have a $250 million warehouse facility with Greenwich Capital
Financial Products, Inc. and a $200 million warehouse facility with Credit
Suisse First Boston Mortgage Capital, LLC. On December 13, 2005 we entered
into
a master repurchase agreement with Deutsche Bank Structured Products, Inc.
under
which we can enter into up to $300 million in loan repurchase arrangements.
This
facility became operational in January 2006.
Loan
Servicing
Loan
servicing is the administration function of a mortgage loan whereby an entity
collects monthly payments from a mortgage borrower and disburses those funds
to
the appropriate parties. The servicer has to account for all payments, maintain
balances in certain accounts for each loan, maintain escrow accounts for real
estate taxes and insurance, remit the correct amount of principal and interest
monthly to the holder of the loan and handle foreclosures as
required.
Any
loans
that we originate and retain for our portfolio have their servicing handled
by
Cenlar Federal Savings Bank (“Cenlar”), a wholesale bank specializing in
mortgage sub-servicing nationwide. Under this arrangement, Cenlar acts as an
intermediary between us and the borrower. It collects payments from borrowers,
handles accounting and remittance of the payments, handles escrow accounts
and
does certain tax reporting. As our retained loans are securitized, Cenlar
continues to service those loans and reports to the securities trustee or master
servicer, as appropriate.
For
a
loan originated and sold to third parties, the servicing rights are sold upon
the sale of the loan. We may choose to own, for periods usually not more than
90
days, certain loans designated as held for sale to third parties in order to
increase earnings. In these cases, we believe there is a large enough spread
between the mortgage loan interest rate and the interest rate paid on the
applicable warehouse line to make any additional risk in carrying those loans
on
our balance sheet worthwhile. In these cases, and during the interim period
between the time we fund (and subsequently own) a loan and sell the loan to
a
third party, we service loans through Cenlar as well.
Loan
servicing provided by Cenlar is provided on a private label basis, meaning
that
Cenlar employees will identify themselves as being our representatives and
correspondence regarding loans is on our letterhead. The benefit to us of this
arrangement is that we pay for loan services as we use them, without a
significant investment in personnel, systems and equipment. In addition, since
Cenlar sub-services on our behalf and reports directly to us, we are quickly
made aware of any customer wishing for an early payoff of their loan through
refinancing or sale of their home. As a result, we can quickly respond to
customer needs and make immediate efforts reestablishing customer contact in
order to capture the potential payoff of a customer’s loan with another loan
product (potential refinancing, modification or new purchase mortgage) that
suits their needs.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements. Forward
looking statements are those which are not historical in nature. They can often
be identified by their inclusion of words such as “will,” “anticipate,”
“estimate,” “should,” “expect,” “believe,” “intend” and similar expressions. Any
projection of revenues, earnings or losses, capital expenditures, distributions,
capital structure or other financial terms is a forward-looking statement.
Certain statements regarding the following particularly are forward-looking
in
nature:
| • |
our
business strategy;
|
| • |
future
performance, developments, market forecasts or projected
dividends;
|
| • |
projected
acquisitions or joint ventures; and
|
| • |
projected
capital expenditures.
|
It
is
important to note that the description of our business in general and our
investment in mortgage loans and mortgage-backed securities holdings in
particular, is a statement about our operations as of a specific point in time.
It is not meant to be construed as an investment policy, and the types of assets
we hold, the amount of leverage we use, the liabilities we incur and other
characteristics of our assets and liabilities are subject to reevaluation and
change without notice.
Our
forward-looking statements are based upon our management’s beliefs, assumptions
and expectations of our future operations and economic performance, taking
into
account the information currently available to us. Forward-looking statements
involve risks and uncertainties, some of which are not currently known to us
that might cause our actual results, performance or financial condition to
be
materially different from the expectations of future results, performance or
financial condition we express or imply in any forward-looking statements.
Some
of the important factors that could cause our actual results, performance or
financial condition to differ materially from expectations are:
| • |
our
limited operating history with respect to our portfolio
strategy;
|
| • |
our
proposed portfolio strategy may be changed or modified by our management
without advance notice to stockholders, and that we may suffer losses
as a
result of such modifications or
changes;
|
| • |
impacts
of a change in demand for mortgage loans on our net income and cash
available for distribution;
|
| • |
our
ability to originate prime and high-quality adjustable-rate and hybrid
mortgage loans for our portfolio or for sale to third
parties;
|
| • |
risks
associated with the use of leverage;
|
| • |
interest
rate mismatches between our mortgage-backed securities and our borrowings
used to fund such purchases;
|
| • |
changes
in interest rates and mortgage prepayment rates;
|
| • |
effects
of interest rate caps on our adjustable-rate mortgage-backed
securities;
|
| • |
the
degree to which our hedging strategies may or may not protect us
from
interest rate volatility;
|
| • |
potential
impacts of our leveraging policies on our net income and cash available
for distribution;
|
| • |
our
board’s ability to change our operating policies and strategies without
notice to you or stockholder
approval;
|
| • |
the
other important factors described in this Annual Report on Form 10-K,
including those under the captions “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” “Risk Factors,” and
“Quantitative and Qualitative Disclosures about Market
Risk.”
|
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the events described
by
our forward-looking events might not occur. We qualify any and all of our
forward-looking statements by these cautionary factors. In addition, you should
carefully review the risk factors described in other documents we file from
time
to time with the Securities and Exchange Commission, including the Company’s
registration statement on Form S-11 (File No. 333-111668).
This
Annual Report on Form 10-K contains market data, industry statistics and other
data that have been obtained from, or compiled from, information made available
by third parties. We have not independently verified their data.
Seasonality
Loan
originations and payoffs are typically at their lowest levels during the first
and fourth quarters of the year due to a reduced level of home buying activity
during the colder months and while schools are in session. Loan originations
and
payoffs generally increase during the warmer months, beginning in March and
continuing through October. The Company typically experiences higher earnings
in
the second and third quarters and lower earnings in the first and fourth
quarters from its loan origination segment.
Competition
We
face
intense competition from finance and mortgage banking companies, other mortgage
REITs, internet-based lending companies where entry barriers are relatively
low,
and, to a growing extent, from traditional bank and thrift lenders that have
increased their participation in the mortgage industry. As we expand our loan
origination business further and build a portfolio of mortgage loans and
mortgage-backed securities, we face a significant number of additional
competitors, many of whom will be well established in the markets we seek to
operate. Some of our competitors are much larger than we are, have better name
recognition than we do and have far greater financial and other resources than
we do.
We
anticipate that the majority of our competition will be in the mortgage
industry. In addition to mortgage banking companies, internet-based lending
companies, traditional banks and thrift lenders, the government sponsored
entities Fannie Mae and Freddie Mac are also expanding their participation
in
the mortgage industry. While the government sponsored entities presently do
not
have the legal authority to originate mortgage loans, they do have the authority
to buy loans. If as a result of their purchasing practices, these government
sponsored entities experience significantly higher-than-expected losses, the
experience could adversely affect overall investor perception of the mortgage
industry.
Competition
in the industry can take many forms, including lower interest rates and fees,
less stringent underwriting standards, convenience in obtaining a loan, customer
service, amount and term of a loan and marketing and distribution channels.
The
need to maintain mortgage loan volume in this competitive environment creates
a
risk of price and quality competition in the mortgage industry. Price
competition could cause us to lower the interest rates that we charge borrowers,
which could lower the value of our loans we sell or retain in our portfolio.
If
our competitors adopt less stringent underwriting standards, we will be
pressured to do so as well. If we do not relax underwriting standards in
response to our competitors, we may lose market share. If we relax our
underwriting standards in response to price competition, we may be exposed
to
higher credit risk without receiving higher pricing to compensate for the higher
risk. Any increase in these pricing and underwriting pressures could reduce
the
volume of our loan originations and sales and significantly harm our business,
financial condition, liquidity and results of operations.
Personnel
The
Company recruits, hires and retains individuals with the specific skills that
complement its corporate growth and business strategies. As of December 31,
2005, we employed 802 people. Of this number, 329 were loan officers dedicated
to originating loans. The number of employees at December 31, 2004 was 782,
of
which 344 were loan officers dedicated to originating loans.
Certain
Federal Income Tax Considerations and Our Status as a REIT
We
have
elected to be taxed as a REIT under the federal income tax laws. As such, we
operate in such a manner as to qualify for taxation as a REIT under the federal
income tax laws, and we intend to continue to operate in such a manner, but
no
assurance can be given that we will operate in a manner so as to qualify or
remain qualified as a REIT.
As
a
REIT, we generally will not be subject to federal income tax on the REIT taxable
income that we distribute to our stockholders, but taxable income generated
by
NYMC, our taxable REIT subsidiary, is subject to regular corporate income tax.
The benefit of REIT tax status is a tax treatment that avoids “double taxation,”
or taxation at both the corporate and stockholder levels, that generally applies
to distributions by a corporation to its stockholders.
Summary
Requirements for Qualification
Organizational
Requirements
A
REIT is
a corporation, trust, or association that meets each of the following
requirements:
1)
It is
managed by one or more trustees or directors.
2)
Its
beneficial ownership is evidenced by transferable shares, or by transferable
certificates of beneficial interest.
3)
It
would be taxable as a domestic corporation, but for the REIT provisions of
the
federal income tax laws.
4)
It is
neither a financial institution nor an insurance company subject to special
provisions of the federal income tax laws.
5)
At
least 100 persons are beneficial owners of its shares or ownership
certificates.
6)
Not
more than 50% in value of its outstanding shares or ownership certificates
is
owned, directly or indirectly, by five or fewer individuals, which the federal
income tax laws define to include certain entities, during the last half of
any
taxable year.
7)
It
elects to be a REIT, or has made such election for a previous taxable year,
and
satisfies all relevant filing and other administrative requirements established
by the IRS that must be met to elect and maintain REIT status.
8)
It
meets certain other qualification tests, described below, regarding the nature
of its income and assets.
We
must
meet requirements 1 through 4 during our entire taxable year and must meet
requirement 5 during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months.
Qualified
REIT Subsidiaries.
A
corporation that is a “qualified REIT subsidiary” is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items
of
income, deduction, and credit of a “qualified REIT subsidiary” are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT.
A
“qualified REIT subsidiary” is a corporation, all of the capital stock of which
is owned by the REIT. Thus, in applying the requirements described herein,
any
“qualified REIT subsidiary” that we own will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiary
will
be treated as our assets, liabilities, and items of income, deduction, and
credit.
Taxable
REIT Subsidiaries.
A REIT
is permitted to own up to 100% of the stock of one or more “taxable REIT
subsidiaries,” or TRSs. A TRS is a fully taxable corporation that may earn
income that would not be qualifying income if earned directly by the parent
REIT. Overall, no more than 20% of the value of a REIT’s assets may consist of
stock or securities of one or more TRSs.
A
TRS
will pay income tax at regular corporate rates on any income that it earns.
In
addition, the TRS rules limit the deductibility of interest paid or accrued
by a
TRS to its parent REIT to assure that the TRS is subject to an appropriate
level
of corporate taxation. We have elected for NYMC to be treated as a TRS. NYMC
is
subject to corporate income tax on its taxable income, which is its net income
from loan originations and sales.
Qualified
REIT Assets
On
the
last day of each calendar quarter, at least 75% of the value of our assets
(which includes any assets held through a qualified REIT subsidiary) must
consist of qualified REIT assets — primarily, real estate, mortgage loans
secured by real estate, and certain mortgage-backed securities (“Qualified REIT
Assets”), government securities, cash, and cash items. We believe that
substantially all of our assets are and will continue to be Qualified REIT
Assets. On the last day of each calendar quarter, of the assets not included
in
the foregoing 75% asset test, the value of securities that we hold issued by
any
one issuer may not exceed 5% in value of our total assets and we may not own
more than 10% of the voting power or value of any one issuer’s outstanding
securities (with an exception for securities of a qualified REIT subsidiary
or
of a taxable REIT subsidiary). In addition, the aggregate value of our
securities in taxable REIT subsidiaries cannot exceed 20% of our total assets.
We monitor the purchase and holding of our assets for purposes of the above
asset tests and seek to manage our portfolio to comply at all times with such
tests.
We
intend
to limit substantially all of the assets that we acquire to Qualified REIT
Assets. Our strategy to maintain REIT status may limit the type of assets,
including hedging contracts and other assets that we otherwise might
acquire.
We
may
from time to time hold, through one or more taxable REIT subsidiaries, assets
that, if we held them directly, could generate income that would have an adverse
effect on our qualification as a REIT or on certain classes of our
stockholders.
Gross
Income Tests
We
must
meet the following separate income-based tests each year:
1.
The
75% Test. At least 75% of our gross income for the taxable year must be derived
from Qualified REIT Assets. Such income includes interest (other than interest
based in whole or in part on the income or profits of any person) on obligations
secured by mortgages on real property, rents from real property, gain from
the
sale of Qualified REIT Assets, and qualified temporary investment income or
interests in real property. The investments that we have made and intend to
continue to make will give rise primarily to mortgage interest qualifying under
the 75% income test.
2.
The
95% Test. At least 95% of our gross income for the taxable year must be derived
from the sources that are qualifying for purposes of the 75% test, and from
dividends, interest or gains from the sale or disposition of stock or other
assets that are not dealer property.
Distributions
We
must
distribute to our stockholders on a pro rata basis each year an amount equal
to
at least (i) 90% of our taxable income before deduction of dividends paid and
excluding net capital gain, plus (ii) 90% of the excess of the net income from
foreclosure property over the tax imposed on such income by the Internal Revenue
Code, less (iii) any “excess non-cash income.” We have made and intend to
continue to make distributions to our stockholders in sufficient amounts to
meet
the distribution requirement for REIT qualification.
An
investment in our securities involves various risks. You should carefully
consider the following risk factors before making an investment decision
involving our securities. The risks discussed herein can adversely affect our
business, liquidity, operating results, prospects, and financial condition.
This
could cause the market price of our securities to decline and could cause you
to
lose all or part of your investment. The risk factors described below are not
the only risks that may affect us. Additional risks and uncertainties not
presently known to us also may adversely affect our business, liquidity,
operating results, prospects, and financial
condition.
Our
business strategy partially depends on our ability to originate prime
adjustable-rate and hybrid mortgage loans for our portfolio.
Our
portfolio of prime adjustable-rate and hybrid mortgage loans will, over time,
be
comprised primarily of mortgage loans that we originate through NYMC. If NYMC
is
not able to originate prime adjustable-rate and hybrid mortgage loans that
meet
our investment criteria at the volumes we expect, the time required for, and
the
cost associated with, building our portfolio may be greater than expected,
which
could have an adverse effect on our results of operations and our ability to
make distributions to our stockholders.
We
may experience a decline in the market value of our assets
The
market value of the interest-bearing assets that we have acquired and intend
to
continue to acquire, most notably mortgage-backed securities and originated
or
purchased residential mortgage loans and any related hedging instruments, may
move inversely with changes in interest rates. We anticipate that increases
in
interest rates will tend to decrease our net income. A decline in the market
value of our investments may limit our ability to borrow or result in lenders
requiring additional collateral or initiating margin calls under our repurchase
agreements. As a result, we could be required to sell some of our investments
under adverse market conditions in order to maintain liquidity. If such sales
are made at prices lower than the amortized costs of such investments, we will
incur losses. A default under our repurchase agreements could also result in
the
liquidation of the underlying investments used as collateral and result in
a
loss equal to the difference between the value of the collateral and the amount
owed under our repurchase agreements.
Our
success will depend on our ability to obtain financing to leverage our
equity.
If
we are
limited in our ability to leverage our assets, the returns on our portfolio
may
be harmed. A key element of our strategy is our use of leverage to increase
the
size of our portfolio in an attempt to enhance our returns. As of
December 31, 2005, our leverage ratio, defined as total financing
facilities less subordinated debentures outstanding divided by total
stockholders’ equity plus subordinated debentures at December 31, 2005 was
11 to 1. Our repurchase agreements are not currently committed facilities,
meaning that the counterparties to these agreements may at any time choose
to
restrict or eliminate our future access to the facilities and we have no other
committed credit facilities through which we may leverage our equity. If we
are
unable to leverage our equity to the extent we currently anticipate, the returns
on our portfolio could be diminished, which may limit or eliminate our ability
to make distributions to our stockholders.
Interest
rate fluctuations may cause losses.
We
believe our primary interest rate exposure relates to our mortgage loans,
mortgage-backed securities and variable-rate debt, as well as the interest
rate
swaps and caps that we utilize for risk management purposes. Changes in interest
rates may affect our net interest income, which is the difference between the
interest income we earn on our interest-earning assets and the interest expense
we incur in financing these assets. Changes in the level of interest rates
also
can affect our ability to originate or acquire mortgage loans or mortgage-backed
securities, the value of our assets and our ability to realize gains from the
sale of such assets. In a period of rising interest rates, our interest expense
could increase while the interest we earn on our assets would not change as
rapidly. This would adversely affect our profitability.
Our
operating results depend in large part on differences between income received
from our assets, net of credit losses, and our financing costs. We anticipate
that in most cases, for any period during which our assets are not match-funded,
the income from such assets will adjust more slowly to interest rate
fluctuations than the cost of our borrowings. Consequently, changes in interest
rates, particularly short-term interest rates, may significantly influence
our
net income. We anticipate that increases in interest rates will tend to decrease
our net income. Interest rate fluctuations resulting in our interest expense
exceeding our interest income would result in operating losses for us and may
limit or eliminate our ability to make distributions to our
stockholders.
Our
mortgage loan originations historically have been concentrated in specific
geographic regions and any adverse market or economic conditions in those
regions may have a disproportionately adverse effect on the ability of our
customers to make their loan payments.
Our
mortgage loan originations have been and may in the future be concentrated
in
specific geographic regions — predominantly in the mid-Atlantic, Northeast and
New England regions of the United States. Adverse market or economic conditions
in a particular region may disproportionately increase the risk that borrowers
in that region will be unable to make their mortgage payments. In addition,
the
market value of the real estate securing those mortgage loans could be adversely
affected by adverse market and economic conditions in that region. Any sustained
period of increased payment delinquencies, foreclosures or losses caused by
adverse market or economic conditions in that geographic region could adversely
affect both our net interest income from loans in our portfolio as well as
our
ability to originate, sell and securitize loans, which would significantly
harm
our revenues, results of operations, financial condition, and business
prospects.
A
prolonged economic slowdown, a lengthy or severe recession or declining real
estate values could harm our operations.
We
believe the risks associated with our business will be more acute during periods
of economic slowdown or recession if these periods are accompanied by declining
real estate values. Declining real estate values will likely reduce our level
of
new mortgage loan originations, since borrowers often use increases in the
value
of their existing home to support the refinancing of their existing mortgage
loans or the purchase of new homes at higher levels of borrowings. Further,
declining real estate values significantly increase the likelihood that we
will
incur losses on our loans in the event of default. Any sustained period of
increased payment delinquencies, foreclosures or losses could adversely affect
both our net interest income from loans in our portfolio as well as our ability
to originate, sell and securitize loans, which would significantly harm our
revenues, results of operations, financial condition, and business
prospects.
Our
past operating results have occurred during a period of rapid growth for the
residential mortgage industry and may not be indicative of our future operating
results.
The
growth rate of our origination platform has benefited from low interest rates,
a
long period of economic growth and strategic acquisitions of mortgage
origination platforms. NYMC’s loan originations for the year ending December 31,
2005 increased 86% over the prior period, aided in large part to our acquisition
of Guaranty Residential Lending, Inc., while according to the MBA’s February 7,
2006 Mortgage Finance Forecast, lender origination volume for 2005 was flat
versus the prior year. The MBA further projected that overall loan originations
will decline in 2006. These projected declines in overall volume of closed
loan
originations are likely to have a negative effect on our loan origination volume
and net income. Accordingly, our historical performance may not be indicative
of
future results, and our results of operations may be materially adversely
affected as interest rates rise. In addition, NYMC’s recent and rapid growth may
distort some of its ratios and financial statistics and our change in business
strategy to include the development of a portfolio of mortgage loans and
mortgage-backed securities makes period-to-period comparisons difficult. In
light of this growth and change in business strategy, our historical performance
and operating and origination data may be of little relevance in predicting
our
future performance.
Excessive
supply of or reduced demand for mortgage-backed securities in the market for
these securities may cause the market to require a higher yield on our
mortgage-backed securities and thereby cause a decline in the value of our
portfolio.
The
mortgage-backed securities we will own are also subject to spread risk. The
majority of these securities will be adjustable-rate securities valued based
on
a market credit spread to U.S. Treasury security yields. In other words, their
value is dependent on the yield demanded on such securities by the market based
on their credit relative to U.S. Treasury securities. Excessive supply of such
securities combined with reduced demand will generally cause the market to
require a higher yield on such securities, resulting in the use of a higher
or
wider spread over the benchmark rate (usually the applicable U.S. Treasury
security yield) to value such securities. Under such conditions, the value
of
our securities portfolio would tend to decline. Conversely, if the spread used
to value such securities were to decrease or tighten, the value of our
securities portfolio would tend to increase. Such changes in the market value
of
our portfolio could adversely affect our net equity, net income or cash flow
directly through their impact on unrealized gains or losses on
available-for-sale securities, and therefore our ability to realize gains on
such securities, or indirectly through their impact on our ability to borrow
and
access capital.
Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market’s
expectations of future interest rates, would also affect the yield required
on
our securities and therefore their value. This would have similar effects on
our
portfolio and our financial position and results of operations as a change
in
spreads would.
Loan
prepayment rates may increase, adversely affecting yields on our planned
investments.
The
value
of the assets we have acquired and intend to continue to acquire may be affected
by prepayment rates on mortgage loans. Prepayment rates on mortgage loans are
influenced by changes in current interest rates and a variety of economic,
geographic and other factors beyond our control, and consequently, such
prepayment rates cannot be predicted with certainty. In periods of declining
mortgage loan interest rates, prepayments on mortgage loans generally increase.
If general interest rates decline as well, the proceeds of such prepayments
received during such periods are likely to be reinvested by us in assets with
lower yields than the yields on the assets that were prepaid. In addition,
the
market value of any mortgage assets may, because of the risk of prepayment,
benefit less than other fixed-income securities from declining interest rates.
Conversely, in periods of rising interest rates, prepayments on mortgage loans
generally decrease, in which case we would not have the prepayment proceeds
available to invest in assets with higher yields. Under certain interest rate
and prepayment scenarios, we may fail to recoup fully our cost of acquisition
of
certain investments.
Our
hedging transactions may limit our gains or result in losses.
We
use
derivatives, primarily interest rate swaps and caps, to hedge our liabilities
and this has certain risks, including the risk that losses on a hedging
transaction will reduce the amount of cash available for distribution to our
stockholders and that such losses may exceed the amount invested in such
instruments. Our board of directors has adopted a general policy with respect
to
the use of derivatives, and which generally allows us to use derivatives when
we
deem appropriate for risk management purposes, but does not set forth specific
guidelines. To the extent consistent with maintaining our status as a REIT,
we
may use derivatives, including interest rate swaps and caps, options, term
repurchase contracts, forward contracts and futures contracts, in our risk
management strategy to limit the effects of changes in interest rates on our
operations. However, a hedge may not be effective in eliminating the risks
inherent in any particular position. Our profitability may be adversely affected
during any period as a result of the use of derivatives in a hedging
transaction.
The
mortgage loans we typically invest in and the mortgage loans underlying the
mortgage-backed securities we typically invest in are subject to risks of
delinquency, foreclosure and loss, which could result in losses to
us.
Residential
mortgage loans are secured by residential properties and are subject to risks
of
delinquency and foreclosure, and risks of loss. The ability of a borrower to
repay a loan secured by residential property typically is dependent primarily
upon the income or assets of the borrower, but also may be affected by property
location and condition, competition and demand for comparable properties,
changes in zoning laws, environmental contamination, changes in national,
regional or local economic conditions, declines in regional or local real estate
values, increases in interest rates, real estate tax rates, changes in
governmental rules and regulations and acts of God, terrorism, social unrest
and
civil disturbances.
In
the
event of any default under a mortgage loan held directly by us, we will bear
a
risk of loss of principal to the extent of any deficiency between the value
of
the collateral that we can realize upon foreclosure and sale and the principal
and accrued interest of the mortgage loan. In the event of the bankruptcy of
a
mortgage loan borrower, the mortgage loan to such borrower will be deemed to
be
secured only to the extent of the value of the underlying collateral at the
time
of bankruptcy (as determined by the bankruptcy court), and the lien securing
the
mortgage loan will be subject to the avoidance powers of the bankruptcy trustee
or debtor-in-possession to the extent the lien is unenforceable under state
law.
Foreclosure of a mortgage loan can be an expensive and lengthy process. The
occurrence of an event of default or foreclosure could have a material adverse
effect on our cash flow from operations and could limit the amount we have
available for payment of our debt obligations and distribution to our
stockholders. Residential mortgage-backed securities evidence interests in
or
are secured by pools of residential mortgage loans. Accordingly, the
mortgage-backed securities we typically invest in are subject to all of the
risks of the underlying mortgage loans.
We
may be required to repurchase mortgage loans that we have sold or to indemnify
holders of our mortgage-backed securities.
If
any of
the mortgage loans that we originate and sell, or that we pledge to secure
mortgage-backed securities that we issue in our securitizations, do not comply
with the representations and warranties that we make about the characteristics
of the loans, the borrowers and the properties securing the loans, we may be
required to repurchase those loans in the case of the loans that we have sold,
or replace them with substitute loans or cash in the case of securitized loans.
If this occurs, we may have to bear any associated losses directly. In addition,
in the case of loans that we have sold, we may be required to indemnify the
purchasers of such loans for losses or expenses incurred as a result of a breach
of a representation or warranty made by us. Repurchased loans typically require
an allocation of working capital to carry on our books, and our ability to
borrow against such assets is limited, which could limit the amount by which
we
can leverage our equity. Any significant repurchases or indemnification payments
could significantly harm our cash flow and results of operations and limit
our
ability to make distributions to our stockholders.
We
may be subject to losses due to fraudulent and negligent acts on the part of
loan applicants, mortgage brokers, other vendors and our
employees.
When
we
originate mortgage loans, we rely upon information supplied by borrowers and
other third parties, including information contained in the applicant’s loan
application, property appraisal reports, title information and employment and
income documentation. If any of this information is misrepresented or falsified
and if we do not discover it prior to funding a loan, the actual value of such
loan may be significantly lower than anticipated. As a practical matter, we
generally bear the risk of loss associated with a misrepresentation whether
it
is made by the loan applicant, the mortgage broker, another third party or
one
of our employees. A loan subject to a material misrepresentation is typically
unsaleable or is subject to repurchase or substitution if it is sold or
securitized prior to detection of the misrepresentation. Although we may have
rights against persons and entities who made or knew about the
misrepresentation, those persons and entities may be difficult to locate, and
it
is often difficult to collect any monetary losses from them that we may have
suffered.
Our
operations are subject to a body of complex laws and regulations at the federal,
state and local levels.
We
must
comply with the laws, rules and regulations, as well as judicial and
administrative decisions, of all jurisdictions in which we originate mortgage
loans, as well as an extensive body of federal laws, rules and regulations.
The
volume of new or modified laws, rules and regulations applicable to our business
has increased in recent years and individual municipalities have also begun
to
enact laws, rules and regulations that restrict or otherwise affect loan
origination activities, and in some cases loan servicing activities. The laws,
rules and regulations of each of these jurisdictions are different, complex
and,
in some cases, in direct conflict with each other. It may be more difficult
to
identify comprehensively, to interpret accurately, to program properly our
information systems and to effectively train our personnel with respect to
all
of these laws, rules and regulations, thereby potentially increasing the risks
of non-compliance with these laws, rules and regulations.
Our
failure to comply with these laws, rules and regulations can lead
to:
| · |
civil
and criminal liability, including potential monetary
penalties;
|
| · |
loss
of state licenses or permits required for continued lending and servicing
operations;
|
| · |
legal
defenses causing delay or otherwise adversely affecting our ability
to
enforce loans, or giving the borrower the right to rescind or cancel
the
loan transaction;
|
|
·
|
demands
for indemnification or loan repurchases from purchasers of our
loans;
|
|
·
|
class
action lawsuits; and
|
|
·
|
administrative
enforcement actions.
|
We
commenced operations as a newly public company in June 2004 and have a limited
operating history.
NYMC,
our
mortgage banking subsidiary, has a substantial operating history, but we were
not formed until September 2003 and had no operations prior to closing our
IPO on June 29, 2004. As a result, we have a limited history managing a
portfolio of mortgage loans or mortgage-backed securities for you to determine
the likelihood of our achieving our investment objectives.
Our
executive officers have agreements that provide them with benefits in the event
their employment is terminated following a change in control.
We
have
entered into agreements with the members of our senior management team, Messrs.
Schnall, Akre, Wirth, Fierro and Mumma, that provide them with severance
benefits if their employment ends under specified circumstances following a
change in control. These benefits could increase the cost to a potential
acquirer of us and thereby prevent or discourage a change in control that might
involve a premium price for your shares or otherwise be in your best
interest.
Certain
provisions of Maryland law and our charter and bylaws could hinder, delay or
prevent a change in control which could have an adverse effect on the value
of
our securities.
Certain
provisions of Maryland law, our charter and our bylaws may have the effect
of
delaying, deferring or preventing transactions that involve an actual or
threatened change in control. These provisions include the following, among
others:
| · |
our
charter provides that, subject to the rights of one or more classes
or
series of preferred stock to elect one or more directors, a director
may
be removed with or without cause only by the affirmative vote of
holders
of at least two-thirds of all votes entitled to be cast by our
stockholders generally in the election of
directors;
|
| · |
our
bylaws provide that only our board of directors shall have the authority
to amend our bylaws;
|
|
·
|
under
our charter, our board of directors has authority to issue preferred
stock
from time to time, in one or more series and to establish the terms,
preferences and rights of any such series, all without the approval
of our
stockholders;
|
|
·
|
the
Maryland Business Combination Act;
and
|
|
·
|
the
Maryland Control Share Acquisition
Act.
|
Although
our board of directors has adopted a resolution exempting us from application
of
the Maryland Business Combination Act and our bylaws provide that we are not
subject to the Maryland Control Share Acquisition Act, our board of directors
may elect to make the “business combination” statute and “control share” statute
applicable to us at any time and may do so without stockholder approval.
Maintenance
of our Investment Company Act exemption imposes limits on our
operations.
We
have
conducted and intend to continue to conduct our operations so as not to become
regulated as an investment company under the Investment Company Act of 1940,
as
amended. We believe that there are a number of exemptions under the Investment
Company Act that are applicable to us. To maintain the exemption, the assets
that we acquire are limited by the provisions of the Investment Company Act
and
the rules and regulations promulgated under the Investment Company Act. In
addition, we could, among other things, be required either (a) to change the
manner in which we conduct our operations to avoid being required to register
as
an investment company or (b) to register as an investment company, either of
which could have an adverse effect on our operations and the market price for
our securities.
Failure
to qualify as a REIT would adversely affect our operations and ability to make
distributions.
We
have
operated and intend to continue to operate so to qualify as a REIT for federal
income tax purposes. Our continued qualification as a REIT will depend on our
ability to meet various requirements concerning, among other things, the
ownership of our outstanding stock, the nature of our assets, the sources of
our
income, and the amount of our distributions to our stockholders.
In
order
to qualify as a REIT, we generally are required each year to distribute to
our
stockholders at least 90% of our REIT taxable income, excluding any net capital
gain. To the extent that we distribute at least 90%, but less than 100% of
our
REIT taxable income, we will be subject to corporate income tax on our
undistributed REIT taxable income. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by us with respect to any calendar year are less than the sum of (i) 85%
of
our ordinary REIT income for that year, (ii) 95% of our REIT capital gain net
income for that year, and (iii) 100% of our undistributed REIT taxable income
from prior years.
We
have
made and intend to continue to make distributions to our stockholders to comply
with the 90% distribution requirement and to avoid corporate income tax and
the
nondeductible excise tax. However, differences in timing between the recognition
of REIT taxable income and the actual receipt of cash could require us to sell
assets or to borrow funds on a short-term basis to meet the 90% distribution
requirement and to avoid corporate income tax and the nondeductible excise
tax.
If
we
fail to qualify as a REIT in any taxable year, we would be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates. In addition, if we do not qualify for certain
statutory relief provisions, we generally would be disqualified from treatment
as a REIT for the four taxable years following the year in which we lost our
REIT status. Failing to obtain, or losing, our REIT status would reduce our
net
earnings available for investment or distribution to stockholders because of
the
additional tax liability, and we would no longer be required to make
distributions to stockholders. Additionally, we might be required to borrow
funds or liquidate some investments in order to pay the applicable
tax.
None.
Our
principal executive and administrative offices are located at 1301 Avenue of
the
Americas, 7th floor, New York, New York 10019. We also operate retail loan
origination sales offices at 54 (28 branches and 26 branch satellite) locations
in 11 states. All of our facilities are leased. The aggregate annual rent for
these locations is approximately $5.0 million.
Further
details of our facilities is as follows:
|
Location
|
|
Business
Activity
|
Business
Segment
|
|
|
New
York City
|
Corporate
Headquarters and
Mortgage
Origination
|
Mortgage
Portfolio
Management
and
Mortgage
Lending
|
||
|
Bridgewater,
New Jersey
|
Wholesale
Lending
|
Mortgage
Lending
|
||
|
Various-54
locations in 11 states
|
Retail
Mortgage Origination
|
Mortgage
Lending
|
||
The
Company is at times subject to various legal proceedings arising in the ordinary
course of business. The Company does not believe that any of its current legal
proceedings, individually or in the aggregate, will have a material adverse
effect on its operations or financial condition.
None.
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Our
common stock is traded on the New York Stock Exchange under the trading symbol
“NTR”. As of March 1, 2006, we had 18,258,221 shares of common stock
outstanding, and as of March
6,
2006, there were 88 holders of record. This figure does not reflect the
beneficial ownership of shares held in nominee name.
The
following table sets forth, for the periods indicated, the high, low and quarter
end closing sales prices per share of common stock on the NYSE and the cash
dividends paid or payable per share of common stock.
|
|
Common
Stock Prices
|
Cash
Dividends
|
|||||||||||||||||
|
|
High
|
Low
|
Close
|
Declared
|
Paid
or
Payable
|
Amount
per
Share
|
|||||||||||||
|
Year
Ended December 31, 2005
|
|||||||||||||||||||
|
Fourth
quarter
|
$
|
7.50
|
$
|
5.51
|
$
|
6.62
|
12/09/05
|
1/26/06
|
$
|
0.21
|
|||||||||
|
Third
quarter
|
9.20
|
7.00
|
7.47
|
9/26/05
|
10/26/05
|
0.21
|
|||||||||||||
|
Second
quarter
|
10.23
|
9.04
|
9.07
|
6/02/05
|
07/26/05
|
0.25
|
|||||||||||||
|
First
quarter
|
11.30
|
9.90
|
10.22
|
03/11/05
|
04/26/05
|
0.25
|
|||||||||||||
|
Common
Stock Prices
|
Cash
Dividends
|
||||||||||||||||||
|
|
High
|
Low
|
Close
|
Declared
|
Paid
or
Payable
|
Amount
per
Share
|
|||||||||||||
|
Year
Ended December 31, 2004
|
|||||||||||||||||||
|
Fourth
quarter
|
$
|
11.34
|
$
|
8.90
|
$
|
11.20
|
12/16/04
|
1/26/05
|
$
|
0.24
|
|||||||||
|
Third
quarter
|
9.90
|
8.55
|
9.35
|
9/16/04
|
10/26/04
|
0.16
|
|||||||||||||
|
Second
quarter
|
9.15
|
8.69
|
8.86
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
||||||||||
| (1) |
The
Company closed its IPO on June 29, 2004. As a result, no dividend
for the
two days of the quarter ended June 30, 2004 was declared or
paid.
|
In
order
to qualify for the tax benefits accorded to a REIT under the Code, we intend
to
pay quarterly dividends such that all or substantially all of our taxable income
each year (subject to certain adjustments) is distributed to our stockholders.
All of the distributions that we make will be at the discretion of our Board
of
Directors and will depend on our earnings and financial condition, maintenance
of REIT status and any other factors that the Board of Directors deems
relevant.
During
2005, taxable dividend distributions
for the Company’s common stock were $0.95 per share. The Company’s common
stock is currently listed under the CUSIP #649604-10-5 and trades under the
NYSE
ticker symbol NTR. For tax reporting purposes, the 2005 taxable dividend
distributions will be classified as follows: $0.81532 as ordinary income
and
$0.13468 as a return of capital. The following table contains this
information on a quarterly basis.
|
Declaration
Date
|
Record
Date
|
Payment
Date
|
Cash
Distribution per share
|
Income
Dividends
|
Short-term
Capital Gain
|
Total
Taxable Ordinary Dividend
|
Return
of Capital
|
|||||||||||||||
|
12/16/04
|
1/6/05
|
1/26/05
|
$
|
0.24
|
$
|
0.21558
|
$
|
0.02076
|
$
|
0.23634
|
$
|
0.00366
|
||||||||||
|
3/11/05
|
4/6/05
|
4/26/05
|
$
|
0.25
|
$
|
0.18931
|
$
|
0.03005
|
$
|
0.21936
|
$
|
0.03064
|
||||||||||
|
6/2/05
|
7/14/05
|
7/26/05
|
$
|
0.25
|
$
|
0.15421
|
$
|
0.07059
|
$
|
0.22480
|
$
|
0.02520
|
||||||||||
|
9/26/05
|
10/6/05
|
10/26/05
|
$
|
0.21
|
$
|
0.13482
|
$
|
—
|
$
|
0.13482
|
$
|
0.07518
|
||||||||||
|
Total
2005 Cash Distributions
|
$
|
0.95
|
$
|
0.69392
|
$
|
0.12140
|
$
|
0.81532
|
$
|
0.13468
|
||||||||||||
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The
Company has not purchased any of its registered equity securities in the twelve
months ended December 31, 2005.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information as of December 31, 2005 with respect
to
compensation plans under which equity securities of the Company are authorized
for issuance. The Company has no such plans that were not approved by security
holders.
|
Plan
Category
|
Number
of Securities to
be
Issued upon Exercise
of
Outstanding Options,
Warrants
and Rights
|
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
|
Number
of Securities
Remaining
Available for
Future
Issuance under Equity
Compensation
Plans
|
|||||||
|
Equity
compensation plans approved by security holders.
|
566,500
|
$
|
9.56
|
139,500
|
||||||
The
following selected consolidated financial data is derived from our audited
consolidated financial statements and the notes thereto for the periods
presented and should be read in conjunction with the more detailed information
therein and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included elsewhere in this annual report. Operating
results are not necessarily indicative of future performance.
The
selected financial data as of and for the year ended December 31, 2005 and
December 31, 2004 includes the operations of NYMT and its consolidated
subsidiaries. Included in the selected financial data for the year ended
December 31, 2004 are the results of NYMT for the period beginning June 29,
2004
(the closing date of our IPO) and NYMC for the year-to-date period beginning
January 1, 2004. Prior to our IPO, NYMT had no operations and, as a result,
for
all years prior to 2004, the financial data presented is for NYMC
only.
Selected
Consolidated Financial and Other Data
|
|
For
the Year Ended December 31,
|
|||||||||||||||
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
(Dollar
amounts in thousands, except per share data)
|
||||||||||||||||
|
Operating
Data:
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Interest
income
|
$
|
77,476
|
$
|
27,299
|
$
|
7,609
|
$
|
2,986
|
$
|
1,570
|
||||||
|
Interest
expense
|
60,104
|
16,013
|
3,266
|
1,673
|
1,289
|
|||||||||||
|
Net
Interest Income
|
17,372
|
11,286
|
4,343
|
1,313
|
281
|
|||||||||||
|
Gains
on sales of mortgage loans
|
26,783
|
20,835
|
23,031
|
9,858
|
6,429
|
|||||||||||
|
Brokered
loan fees
|
9,991
|
6,895
|
6,683
|
5,241
|
3,749
|
|||||||||||
|
Gain
on sale of securities and related hedges
|
2,207
|
774
|
—
|
—
|
—
|
|||||||||||
|
Impairment
loss on investment securities
|
(7,440
|
)
|
—
|
—
|
—
|
—
|
||||||||||
|
Miscellaneous
|
232
|
227
|
45
|
15
|
48
|
|||||||||||
|
Total
other income
|
31,773
|
28,731
|
29,759
|
15,114
|
10,226
|
|||||||||||
|
Expenses:
|
||||||||||||||||
|
Salaries
and benefits
|
30,979
|
17,118
|
9,247
|
5,788
|
3,644
|
|||||||||||
|
Brokered
loan expenses
|
7,543
|
5,276
|
3,734
|
2,992
|
2,174
|
|||||||||||
|
General
and administrative expenses
|
24,512
|
13,935
|
7,395
|
3,897
|
2,808
|
|||||||||||
|
Total
expenses
|
63,034
|
36,329
|
20,376
|
12,677
|
8,626
|
|||||||||||
|
(Loss)/income
before income tax benefit
|
(13,889
|
)
|
3,688
|
13,726
|
3,750
|
1,881
|
||||||||||
|
Income
tax benefit
|
8,549
|
1,259
|
—
|
—
|
—
|
|||||||||||
|
Net
(loss)/income
|
$
|
(5,340
|
)
|
$
|
4,947
|
$
|
13,726
|
$
|
3,750
|
$
|
1,881
|
|||||
|
Basic
(loss)/income per share
|
$
|
(0.30
|
)
|
$
|
0.28
|
—
|
—
|
—
|
||||||||
|
Diluted
(loss)/income per share
|
$
|
(0.30
|
)
|
$
|
0.27
|
—
|
—
|
—
|
||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
9,056
|
$
|
7,613
|
$
|
4,047
|
$
|
2,746
|
$
|
1,549
|
||||||
|
Mortgage
loans held in securitization trusts or held for investment
|
780,670
|
190,153
|
—
|
—
|
—
|
|||||||||||
|
Investment
securities available for sale
|
716,482
|
1,204,745
|
—
|
—
|
—
|
|||||||||||
|
Mortgage
loans held for sale
|
108,271
|
85,385
|
36,169
|
34,039
|
9,894
|
|||||||||||
|
Due
from loan purchasers and escrow deposits pending loan
closings
|
123,247
|
96,140
|
58,862
|
40,621
|
20,707
|
|||||||||||
|
Total
assets
|
1,791,293
|
1,614,762
|
110,081
|
83,004
|
34,561
|
|||||||||||
|
Financing
arrangements
|
1,391,685
|
1,470,596
|
90,425
|
73,016
|
29,705
|
|||||||||||
|
Collateralized
debt obligations
|
228,226
|
—
|
—
|
—
|
—
|
|||||||||||
|
Subordinated
debentures
|
45,000
|
—
|
—
|
—
|
—
|
|||||||||||
|
Subordinated
notes due to members
|
—
|
—
|
14,707
|
—
|
—
|
|||||||||||
|
Total
liabilities
|
1,690,335
|
1,495,280
|
110,555
|
76,504
|
30,891
|
|||||||||||
|
Equity
(deficit)
|
100,958
|
119,482
|
(474
|
)
|
6,500
|
3,670
|
||||||||||
|
Investment
Portfolio Data:
|
||||||||||||||||
|
Average
yield on investment portfolio
|
4.16
|
3.90
|
—
|
—
|
—
|
|||||||||||
|
Net
duration of interest earning assets to liabilities
|
0.91
|
0.42
|
—
|
—
|
—
|
|||||||||||
|
Originations
Data:
|
||||||||||||||||
|
Purchase
originations
|
$
|
1,985,651
|
$
|
1,089,499
|
$
|
803,446
|
$
|
469,404
|
$
|
374,454
|
||||||
|
Refinancing
originations
|
1,451,720
|
756,006
|
796,879
|
407,827
|
209,748
|
|||||||||||
|
Total
originations
|
$
|
3,437,371
|
$
|
1,845,505
|
$
|
1,600,325
|
$
|
877,231
|
$
|
584,202
|
||||||
|
Fixed-rate
originations
|
$
|
1,562,151
|
$
|
878,749
|
$
|
890,172
|
$
|
518,382
|
$
|
398,056
|
||||||
|
Adjustable-rate
originations
|
1,875,220
|
966,756
|
710,153
|
358,849
|
186,146
|
|||||||||||
|
Total
originations
|
$
|
3,437,371
|
$
|
1,845,505
|
$
|
1,600,325
|
$
|
877,231
|
$
|
584,202
|
||||||
|
Total
mortgage sales
|
$
|
2,875,288
|
$
|
1,435,340
|
$
|
1,234,848
|
$
|
633,223
|
$
|
404,470
|
||||||
|
Brokered
originations
|
562,083
|
410,165
|
|
365,477
|
|
244,008
|
|
179,732
|
||||||||
|
Total
originations
|
$
|
3,437,371
|
$
|
1,845,505
|
$
|
1,600,325
|
$
|
877,231
|
$
|
584,202
|
||||||
|
Originated
Mortgage Loans Retained for Investment:
|
||||||||||||||||
|
Par
amount
|
$
|
555.2
|
$
|
95.1
|
n/a
|
n/a
|
n/a
|
|||||||||
|
Weighted
average middle credit score
|
734
|
743
|
n/a
|
n/a
|
n/a
|
|||||||||||
|
Weighted
average LTV
|
69.62
|
%
|
66.58
|
%
|
n/a
|
n/a
|
n/a
|
|||||||||
|
Mortgage
Loans Sold:
|
||||||||||||||||
|
Weighted
average whole loan sales price over par - non-FHA(1)
|
1.34
|
%
|
1.70
|
%
|
1.75
|
%
|
1.51
|
%
|
1.34
|
%
|
||||||
|
Weighted
average whole loan sales price over par - FHA(1)
|
3.63
|
%
|
2.96
|
%
|
4.10
|
%
|
3.46
|
%
|
3.10
|
%
|
||||||
|
Weighted
average whole loan sales price over par - all mortgage loans
sold
|
1.52
|
%
|
2.02
|
%
|
1.75
|
%
|
1.52
|
%
|
1.37
|
%
|
||||||
|
Weighted
average middle credit score non-FHA(1)
|
704
|
715
|
—
|
—
|
—
|
|||||||||||
|
Weighted
average middle credit score FHA(1)
|
633
|
631
|
629
|
668
|
650
|
|||||||||||
|
Weighted
average middle credit score all mortgage loans sold
|
696
|
703
|
719
|
716
|
713
|
|||||||||||
|
Weighted
average LTV non-FHA(1)
|
74.58
|
%
|
71.95
|
%
|
68.47
|
%
|
67.23
|
%
|
71.38
|
%
|
||||||
|
Weighted
average LTV FHA(1)
|
92.76
|
%
|
92.12
|
%
|
88.82
|
%
|
91.78
|
%
|
86.82
|
%
|
||||||
|
Weighted
average LTV all mortgage loans sold
|
76.65
|
%
|
75.88
|
%
|
68.67
|
%
|
67.42
|
%
|
71.71
|
%
|
||||||
|
Operational/Performance
Data:
|
||||||||||||||||
|
Salaries,
general and administrative expense as a percentage of total loans
originated
|
1.61
|
%
|
1.68
|
%
|
1.04
|
%
|
1.10
|
%
|
1.10
|
%
|
||||||
|
Number
of state licensed or exempt from licensing at period end
|
43
|
40
|
15
|
13
|
7
|
|||||||||||
|
Number
of locations at period end
|
54
|
66
|
15
|
13
|
7
|
|||||||||||
|
Number
of employees at period end
|
802
|
782
|
335
|
184
|
147
|
|||||||||||
|
Dividends
declared per common share
|
$
|
0.92
|
$
|
0.40
|
—
|
—
|
—
|
|||||||||
| (1) |
Beginning
near the end of the first quarter of 2004, our volume of FHA loans
increased; prior to such time the volume of FHA loan originations
was
immaterial. Generally, FHA loans have lower average balances and
FICO
scores which are reflected in the statistics above. All FHA loans
are
currently and will be in the future sold or brokered to third
parties.
|
-21-
General
New
York
Mortgage Trust, Inc. (“NYMT,” the “Company,” “we,” “our” and “us”) is a
self-advised residential mortgage finance company that originates, acquires,
retains and securitizes mortgage loans and mortgage-backed securities. Our
wholly-owned taxable REIT subsidiary (“TRS”), The New York Mortgage Company, LLC
(“NYMC”), is a residential mortgage banking company that originates a wide range
of mortgage loans, with a particular focus on prime adjustable- and fixed-rate,
first lien, residential purchase mortgage loans. Prior to the simultaneous
completion of our acquisition of NYMC and our initial public offering (“IPO”) in
2004, NYMC sold all of the loans it originated to third parties, and also
brokered loans to other mortgage lenders prior to funding. NYMC, which
originates residential mortgage loans through a network of 28 full-service
loan
origination locations and 26 satellite loan origination locations, is presently
licensed or authorized to do business in 43 states and the District of
Columbia.
Strategic
Overview
We
are
considered an “active” mortgage REIT in that NYMC, our TRS, originates loans
that may either be held in portfolio, aggregated and subsequently securitized
for long-term investment or sold to third parties for gain on sale revenue.
When
we aggregate and securitize residential mortgage loans for investment, the
leveraged portfolio is comprised largely of prime adjustable-rate mortgage
loans
that we originate and that meet our investment objectives and portfolio
requirements, including adjustable-rate loans that have an initial fixed-rate
period, which we refer to as hybrid mortgage loans. We believe that our ability
to originate mortgage loans as the basis for our portfolio will enable us to
build a portfolio that generates a higher return than the returns realized
by
“passive” mortgage investors that do not have their own origination
capabilities, because the cost to originate and retain such mortgage loans
for
securitization is generally less than the premiums paid to purchase similar
assets from third parties. Our portfolio loans are held at the REIT level or
by
New York Mortgage Funding, LLC (“NYMF”), our qualified REIT subsidiary
(“QRS”).
We
aggregate a portfolio comprised mainly of high credit quality, adjustable-rate
mortgage loans until the portfolio reaches a size sufficient for us to
securitize such loans. We obtain the loans we securitize from either our TRS,
NYMC, or from third parties. Our first securitization occurred on February
25,
2005 and we completed our second and third loan securitizations on July 28,
2005
and December 20, 2005, respectively. These securitization transactions, through
which we financed the adjustable-rate and hybrid mortgage loans that we
retained, were structured as financings for both tax and financial accounting
purposes. Therefore, we do not expect to generate a gain or loss on sales from
these activities, and, following the securitizations, the loans are classified
on our consolidated balance sheet as assets. For our first two securitizations,
we retained all of the resultant securities and financed such securities with
repurchase agreements; for our third securitization we sold investment grade
securities and the securitization debt is recorded as a liability.
NYMC
also
originates and sells loans to third parties for gain on sale revenue rather
than
aggregating lower cost assets, depending on market conditions. We also,
depending on market conditions, retain in our portfolio selected adjustable-rate
and hybrid mortgage loans that we originate. Generally, we sell the fixed-rate
loans and any adjustable-rate and hybrid mortgage loans that do not meet our
investment criteria or portfolio requirements that we originate to third
parties. We rely on our own underwriting criteria with respect to the mortgage
loans we retain and rely on the underwriting criteria of the institutions to
which we sell our loans with respect to the loans we sell. The ability to
originate and sell loans for gain on sale revenue is another advantage of being
an active mortgage REIT.
We
earn
net interest income from purchased residential mortgage-backed securities and
adjustable-rate mortgage loans and securities originated through NYMC. We have
acquired and will seek to acquire additional assets that will produce
competitive returns, taking into consideration the amount and nature of the
anticipated returns from the investment, our ability to pledge the investment
for secured, collateralized borrowings and the costs associated with
originating, financing, managing, securitizing and reserving for these
investments.
Funding
Diversification.
We
strive to maintain and achieve a balanced and diverse funding mix to finance
our
investment portfolio and assets. As a mortgage lender, we rely primarily on
secured warehouse lines of credit for our funding needs on loans held for sale
to third parties. Since our IPO in June 2004, we rely primarily on repurchase
agreements in order to finance our investment portfolio of residential loans
and
mortgage-backed securities. As of December 31, 2005, we have $5.4 billion of
commitments to provide repurchase agreement financing through 23 different
counterparties. During 2005, we further diversified our sources of financing
with the issuance of $45 million of trust preferred securities classified as
subordinated debentures.
On
our
first two securitizations (collateralized debt obligations, or ”CDO”) of
mortgage loans, we retained 100% of the issued securities and financed such
securities with repurchase agreements. The creation of mortgage-backed
securities of our self-originated mortgage loans in this manner provides an
asset with better liquidity and longer-term financing at better rates as opposed
to financing whole loans through warehouse lines. In December, 2005 we completed
our third securitization of $235.0 million of self-originated ARM loans and
sold
the majority of the securities to third parties. Because we did not retain
all
of the resultant securities as in prior CDOs, this securitization eliminated
the
risk of short-term financing (reducing the asset to liability duration gap,
which is the difference between the estimated maturities or lives of our earning
assets and related financing facilities) and the mark-to-market pricing risk
inherent in financing through repurchase agreements or warehouse lines of
credit; as a result of this permanent financing we are not subject to margin
calls on the assets of this CDO.
Risk
Management.
As a
mortgage lender and a manager of mortgage loan investments, we must mitigate
key
risks inherent in these businesses, principally credit risk and interest rate
risk.
Exceptional
Investment Portfolio Credit Quality.
We
retain in our portfolio only selected, high-quality loans that we originate
or
may opportunistically acquire. As a result, our investment portfolio consists
of
high-quality loans that we have either securitized for our own portfolio or
that
collateralize our CDO financings. High credit quality creates significant
portfolio liquidity and provides for financing opportunities that are readily
available on generally favorable terms. When we retain loans for investment,
either whole loans being aggregated for securitization or CDOs in which we
retain all resultant securities or below A-rated tranches, we retain the risk
of
potential credit losses relative to the agency or higher rated securities we
may
purchase from time-to-time. Since we began our portfolio investment operations,
we have not experienced any credit losses in our portfolio.
We
believe that our credit performance is reflective of the high credit quality
of
the loans we originate or acquire for securitization, our prudent in-house
underwriting, property valuation methods and review, our overall investment
policies and prudent management of our delinquent loan portfolio. We believe
that our delinquencies of 0.25% of the total par balance of our investment
portfolio of residential loans at December 31, 2005 reflect strong credit
characteristics and the credit culture of our underwriting and investment
philosophy. The weighted average seasoning of loans in our investment portfolio
of mortgage loans was approximately 12 months at December 31, 2005.
Interest
Rate Risk Management.
Another
primary risk to our investment portfolio of mortgage loans and mortgage-backed
securities is interest rate risk. We have a match funding philosophy in which
we
use hedging instruments to fix or cap the interest rates on our short-term,
CDO
and other financing arrangements that finance our investment portfolio of
mortgage loans and securities. We hedge our financing costs in an attempt to
maintain a net duration gap of less than one year; as of December 31, 2005,
our
net duration gap was approximately 11 months.
As
we
originate loans held for investment or acquire mortgage-backed securities or
loans, we seek to employ our match funding strategy in order to stabilize net
asset values and earnings during periods of rising interest rates. To do so,
we
use hedging instruments in conjunction with our borrowings to approximate the
repricing characteristics of such assets. The Company utilizes a model based
risk analysis system to assist in projecting portfolio performances over a
scenario of different interest rates and market stresses. The model incorporates
shifts in interest rates, changes in prepayments and other factors impacting
the
valuations of our financial securities, including mortgage-backed securities,
repurchase agreements, interest rate swaps and interest rate caps. However,
given the prepayment uncertainties on our mortgage assets, it is not possible
to
definitively lock-in a spread between the earnings yield on our investment
portfolio and the related cost of borrowings. Nonetheless, through active
management and the use of evaluative stress scenarios of the portfolio, we
believe that we can mitigate a significant amount of both value and earnings
volatility. See further discussion of interest rate risk at the “Quantitative
And Qualitative Disclosures About Market Risk - Interest Rate Risk” section of
this document.
Other
Risk Considerations:
Our
business is affected by a variety of economic and industry factors. Management
periodically reviews and assesses these factors and their potential impact
on
our business. The most significant risk factors management considers while
managing the business and which could have a material adverse effect on our
financial condition and results of operations are:
| • |
a
decline in the market value of our assets due to rising interest
rates;
|
| • |
an
adverse impact on our earnings from a decrease in the demand for
mortgage
loans due to, among other things, a period of rising interest
rates;
|
| • |
our
ability to originate prime adjustable-rate and hybrid mortgage loans
for
our portfolio;
|
| • |
increasing
or decreasing levels of prepayments on the mortgages underlying our
mortgage-backed securities;
|
| • |
our
ability to obtain financing to fund and hold mortgage loans prior
to their
sale or securitization;
|
| • |
the
overall leverage of our portfolio and the ability to obtain financing
to
leverage our equity;
|
| • |
the
potential for increased borrowing costs and its impact on net
income;
|
| • |
the
concentration of our mortgage loans in specific geographic regions;
|
| • |
our
ability to use hedging instruments to mitigate our interest rate
and
prepayment risks;
|
| • |
a
prolonged economic slow down, a lengthy or severe recession or declining
real estate values could harm our
operations;
|
| • |
if
our assets are insufficient to meet the collateral requirements of
our
lenders, we might be compelled to liquidate particular assets
at inopportune times and at disadvantageous
prices;
|
| • |
if
we are disqualified as a REIT, we will be subject to tax as a regular
corporation and face substantial tax liability;
and
|
| • |
compliance
with REIT requirements might cause us to forgo otherwise attractive
opportunities.
|
Financial
Overview
Income.
Our
primary sources of income are net interest income on our loans and residential
investment securities and gain on sale of mortgage loans. Net interest income
is
the difference between interest income, which is the income that we earn on
our
loans and residential investment securities and interest expense, which is
the
interest we pay on borrowings and subordinated debt. Net interest income is
also
earned on the bankered loan origination production of our TRS for the period
of
time from when a loan is closed to the sale of such loan to a third
party.
Income
from the gain on sale of mortgage loans to third parties is the difference
between the sales price and the adjusted cost basis of originated loans when
title transfers. The adjusted cost basis of the loans includes the original
principal amount adjusted for deferrals of origination and commitment fees
received, net of direct loan origination costs (including commissions and
salaries for employees directly responsible for such originations)
paid.
Other
significant sources of income include fees received on brokered loans and income
from the sale of securities and related hedges.
Expenses.
Non-interest expenses we incur in operating our business consist primarily
of
salary and employee benefits, brokered loan expenses, occupancy and equipment
expenses, marketing and promotion expenses, and other general and administrative
expenses.
Salary
and employee benefits consist primarily of the salaries and wages paid to our
employees (exclusive of salaries and wages allocated to net gain on sale of
mortgage loans), payroll taxes and expenses for health insurance, retirement
plans and other employee benefits.
Brokered
loan expenses are primarily direct commissions and other costs associated with
brokered loans when such loans are closed with the borrower. Costs associated
with brokered loans are expensed when incurred.
Occupancy
and equipment expenses, which are the fixed and variable costs of buildings
and
equipment, consist of building lease expenses, furniture and equipment expenses,
maintenance, real estate taxes and other associated costs of
occupancy.
Marketing
and promotion expenses include the cost of print, radio and internet
advertisements, promotions, third-party marketing services, public relations
and
sponsorships.
Other
general and administrative expenses include expenses for professional fees,
office supplies, postage and shipping, telephone, insurance, travel and
entertainment and other miscellaneous operating expenses.
Many
of
our expenses are variable in nature and are relative to our loan origination
production volumes. Variable expenses include commissions on loan originations,
brokered loan costs and, to a lesser degree, office supplies, marketing and
promotion and other miscellaneous expenses. Fixed expenses are primarily
occupancy and equipment lease expenses and data processing and communications
expenses.
Description
of Businesses
Mortgage
Lending
Our
mortgage lending operations are important to our financial results as they
either produce the loans that will ultimately collateralize the mortgage
securities that we will hold in our portfolio or provide us the flexibility
to
sell the loans for gain on sale revenue. We primarily originate prime,
first-lien, residential mortgage loans and, to a lesser extent, second lien
mortgage loans, home equity lines of credit, and bridge loans. We originate
a
wide range of mortgage loan products including adjustable-rate mortgage (“ARM”)
loans which may have an initial fixed rate period, and fixed-rate mortgages.
Since the completion of our IPO, we sell or retain and aggregate our
self-originated, high-quality, shorter-term ARM loans in order to pool them
into
mortgage securities. The fixed rate loans we originate and any ARM loans not
meeting our investment criteria continue to be sold to third parties. For the
years ended December 31, 2005 and 2004, we originated $2.9 billion and $1.4
billion in mortgage loans for sale to third parties, respectively. We recognized
gains on sales of mortgage loans totaling $26.8 million and $20.8 million for
the years ended December 31, 2005 and 2004, respectively.
Subsequent
to our IPO in June 2004, we have sold or retained for our portfolio the high
quality, adjustable-rate mortgage loans that we originate. For the years ended
December 31, 2005 and 2004, we originated and retained $555.2 million and $95.1
million of such loans, respectively. When we retain mortgage loans that we
originate, we record such assets at GAAP (“GAAP” means generally accepted
accounting principles) cost. The GAAP cost is then amortized on the effective
interest method over the estimated lives of the retained loans. For the years
ended December 31, 2005 and 2004, the GAAP cost of loans was approximately
58
and 45 basis points over par, respectively. Furthermore, when we retain loans
that we originate, we are not able to recognize gain on sale revenues (and
thus
higher GAAP net income) as we would have if such loans were sold to third
parties. Instead, the value of the gain on sale revenue inures to the benefit
of
our investment portfolio in the form of a lower cost asset and thus
incrementally higher yield during the lives of retained loans. We estimate
that
the foregone premium we would have otherwise received had retained loans been
sold to third parties is approximately $7.5 million and $2.0 million for the
years ended December 31, 2005 and 2004, respectively.
Our
wholesale lending strategy has historically been a small component of our loan
origination operations. We have a network of non-affiliated wholesale loan
brokers and mortgage lenders who submit loans to us. We maintain relationships
with these wholesale brokers and, as with retail loan originations, will
underwrite, process, and fund wholesale loans through our centralized facilities
and processing systems. In order to further diversify our origination network,
during 2005, we began to expand our wholesale loan origination capacity with
the
creation of a division specifically for wholesale loan
originations.
We
also
sold broker loans to third party mortgage lenders for which we receive a broker
fee. For the years ended December 31, 2005 and 2004, we originated $562.1
million and $410.1 million in brokered loans, respectively. We recognized net
brokering income totaling $2.4 million and $1.6 million during the years ended
December 31, 2005 and 2004, respectively.
NYMC
originates all of the mortgage loans we sell or broker and some of the loans
that we retain for investment. On mortgages to be sold, we underwrite, process
and fund the mortgages originated by NYMC.
A
significant risk to our mortgage lending operations is liquidity risk - the
risk
that we will not have financing facilities and cash available to fund and hold
loans prior to their sale or securitization. We maintain lending facilities
with
large banking and investment institutions to reduce this risk. On a short-term
basis, we finance mortgage loans using warehouse lines of credit and repurchase
agreements. Details regarding available financing arrangements and amounts
outstanding under those arrangements are included in “Liquidity and Capital
Resources” below.
Mortgage
Portfolio Management
Prior
to
the completion of our IPO on June 29, 2004, our operations were limited to
the
mortgage operations described in the preceding section. Beginning in July 2004,
we began to implement our business plan of investing in high-quality, adjustable
rate mortgage related securities and residential loans. Our mortgage portfolio,
consisting primarily of residential mortgage-backed securities and mortgage
loans held for investment, currently generates a substantial portion of our
earnings. In managing our investment in a mortgage portfolio, we:
| • |
invest
in assets generated primarily from our self-origination of high-credit
quality, single-family, residential mortgage
loans;
|
|
•
|
invest
in mortgage-backed securities originated by others, including ARM
securities and collateralized mortgage obligation floaters (“CMO
Floaters”);
|
| • |
generally
operate as a long-term portfolio investor;
|
| • |
finance
our portfolio by entering into repurchase agreements and as we aggregate
mortgage loans for investment, issuing mortgage-backed
bonds from time to time; and
|
| • |
generate
earnings from the return on our mortgage securities and spread income
from
our mortgage loan portfolio.
|
A
significant risk to our operations, relating to our portfolio management, is
the
risk that interest rates on our assets will not adjust at the same times or
amounts that rates on our liabilities adjust. Even though we retain and invest
in ARMs, many of the hybrid ARM loans in our portfolio have fixed rates of
interest for a period of time ranging from two to seven years. Our funding
costs
are generally not constant or fixed. As a result, we use derivative instruments
(interest rate swaps and interest rate caps) to mitigate, but not eliminate,
the
risk of our cost of funding increasing or decreasing at a faster rate than
the
interest on our investment assets.
As
of
December 31, 2005, our mortgage securities portfolio consisted of 100% AAA-
rated or Fannie Mae, Freddie Mac or Ginnie Mae-guaranteed (“FNMA/FHLMC/GNMA”)
mortgage securities. This allows the company to obtain excellent financing
rates
as well as enhanced liquidity. The loans held in securitization trusts and
mortgage loans held for investment consisted of high-credit quality prime
adjustable rate mortgages with initial reset periods of no greater than seven
years with 99.7% with initial reset periods of five years or less. The loan
portfolio has had no credit losses to date. Our portfolio strategy for ARM
loan
originations is to acquire only high-credit quality ARM loans for our
securitization process thereby limiting future potential losses.
Such
assets are evaluated for impairment on a quarterly basis or, if events
or
changes in circumstances indicate that these assets or the underlying collateral
may be impaired, on a more frequent basis. We evaluate whether these
assets are considered impaired, whether the impairment is other-than-temporary
and, if the impairment is other-than-temporary, recognize an impairment
loss
equal to the difference between the asset’s amortized cost basis and its fair
value. We recorded an impairment loss of $7.4 million in the fourth
quarter of 2005 because we concluded that we no longer had the intent to
hold
certain lower-yielding mortgage-backed securities until their values
recovered. This impairment was not due to any underlying credit
issues but was related to our intent to no longer hold identified lower-yield
securities and to re-position our portfolio by selling such securities
and
replacing them with higher yield securities with similar credit characteristics
in order to earn higher net interest spread in the future.
-26-
Known
Material Trends and Commentary
Mortgage
Lending.
The U.S.
residential mortgage market has experienced considerable growth during the
past
ten years according to The Bond Market Association and the Federal Reserve.
According to the MBA’s February 7, 2006 Mortgage Finance Forecast, lenders
originated $2.8 trillion in 2005, unchanged from the amount originated in 2004.
However, the mix of origination volume changed substantially. In 2004, purchase
mortgages comprised 47% of total originations while in 2005; purchase mortgages
represented 58% of total originations. The chart below illustrates our
origination volume growth for the past two years relative to the MBA industry
projections:
For
the
year ended December 31, 2005, our total originations of residential mortgage
loans, aided in part by our acquisition of selected Guaranteed Residential
Lending (“GRL”) branches, increased by $1.6 billion, or 86%, versus the
comparable period for the prior year. This 86% increase in our mortgage
originations compares favorably to the marginal change for total U.S.
1-to-4-family mortgage originations for the period estimated in the February
7,
2006 Mortgage Finance Forecast. The following chart summarizes the our loan
origination volume and characteristics for each of the four quarters of 2005
relative to our 2004 historical origination production:
With
regard to purchase mortgage originations, statistics from the MBA indicate
that
since 1990, the volume of purchase mortgages year-after-year steadily increases
throughout various economic and interest rate cycles. While management is unable
to predict borrowing habits, we believe that historical trends indicate that
the
purchase mortgage market is relatively stable and our focus on retail based
purchase origination volume contributes to consistent originations growth.
For
the year ended December 31, 2005, our purchase mortgage originations, aided
in
part by our acquisition of GRL, have increased by $896.2 million, or 82%, over
the comparable period for the prior year. This increase presently exceeds the
13% increase forecasted in the MBA’s February 7, 2006 Mortgage Finance Forecast
for total U.S. 1-to-4-family purchase mortgage originations for the period.
The
following chart summarizes the our purchase loan origination volume and
characteristics for each of the four quarters of 2005 relative to our prior
year
purchase loan historical origination production:
For
the
year ended December 31, 2005, our originations of mortgage refinancings, aided
in part by our acquisition of GRL, have increased by $695.7, million or 92%,
versus the comparable period for the prior year. This 92% increase in our
origination of mortgage refinancings compares favorably to the 12% decrease
for
total U.S. 1-to-4-family refinance mortgage originations for the period
estimated in the MBA’s February 7, 2006 Mortgage Finance Forecast.
In
the
February 7, 2006 forecast, the MBA projected that mortgage loan volumes will
decrease to $2.2 trillion in 2006, primarily due to an expected continued
decline in the volume of loan refinancings. For the year ended December 31,
2005, NYMC’s residential purchase loan originations represented 58% of NYMC’s
total residential mortgage loan originations as measured by principal balance,
as compared to an industry-wide percentage of 54% for one-to-four family
mortgage loans as estimated in the MBA’s February 7, 2006 Mortgage Finance
Forecast. We believe that our concentration on purchase loan originations has
caused our loan origination volume to be less susceptible to the industry-wide
decline in origination volume that has resulted from rising interest rates.
We
believe that the market for mortgage loans for home purchases is less
susceptible than the refinance market to downturns during periods of increasing
interest rates, because borrowers seeking to purchase a home do not generally
base their decision to purchase on changes in interest rates alone, while
borrowers that refinance their mortgage loans often make their decision as
a
direct result of changes in interest rates. Consequently, while our
referral-based marketing strategy may cause our overall loan origination volume
during periods of declining interest rates to lag our competitors who rely
on
mass marketing and advertising and who therefore capture a greater percentage
of
loan refinance applications during those periods, we believe this strategy
enables us to sustain stronger home purchase loan origination volumes than
those
same competitors during periods of flat to rising interest rates. In addition,
we believe that our referral-based business results in relatively higher gross
margins and lower advertising costs and loan generation expenses than most
other
mortgage companies whose business is not referral-based.
State
and
local governing bodies are focused on certain practices engaged in by certain
participants in the mortgage lending business relating to fees borrowers incur
in obtaining a mortgage loan - generally termed “predatory lending” within the
mortgage industry. In several instances, states or local governing bodies have
imposed strict laws on lenders to curb such practices. To date, these laws
have
had an insignificant impact on our business. We have capped fee structures
consistent with those adopted by federal mortgage agencies and have implemented
rigid processes to ensure that our lending practices are not predatory in
nature.
Liquidity.
We
depend on the capital markets to finance the mortgage loans we originate. In
the
short-term, we finance our mortgage loans using “warehouse” lines of credit and
“aggregation” lines provided by commercial and investment banks. As we execute
our business plan of securitizing self-originated or purchased mortgage loans,
we have issued bonds from our loan securitizations and will own such bonds
although we may sell the bonds to large, institutional investors at some point
in the future. These bonds and some of our mortgage loans may be financed with
repurchase agreements with well capitalized commercial and investment banks.
Commercial and investment banks have provided significant liquidity to finance
our operations through these various financing facilities. While management
cannot predict the future liquidity environment, we are currently unaware of
any
material reason to prevent continued liquidity support in the capital markets
for our business. See “Liquidity and Capital Resources” below for further
discussion of liquidity risks and resources available to us.
The
mortgage REIT industry has seen a significant increase in capital raising in
the
public markets. Additionally, there have been several new entrants, to the
mortgage REIT business and other mortgage lender conversions (or proposed
conversions) to REIT status. While many of these entrants focus on sub-prime
and
nonconforming mortgage lending, there are also entrants which will compete
with
our focus on the high-quality and prime mortgage marketplace. This increased
activity may impact the pricing and underwriting guidelines within the
high-quality and prime marketplace. We have not changed our guidelines or
pricing in response to this activity nor do we have any plans to make such
changes at this time.
Significance
of Estimates and Critical Accounting Policies
We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, many of which
require the use of estimates, judgments and assumptions that affect reported
amounts. These estimates are based, in part, on our judgment and assumptions
regarding various economic conditions that we believe are reasonable based
on
facts and circumstances existing at the time of reporting. The results of these
estimates affect reported amounts of assets, liabilities and accumulated other
comprehensive income at the date of the consolidated financial statements and
the reported amounts of income, expenses and other comprehensive income during
the periods presented.
Changes
in the estimates and assumptions could have a material effect on these financial
statements. Accounting policies and estimates related to specific components
of
our consolidated financial statements are disclosed in the notes to our
financial statements. In accordance with SEC guidance, those material accounting
policies and estimates that we believe are most critical to an investor’s
understanding of our financial results and condition and which require complex
management judgment are discussed below.
Revenue
Recognition.
Interest
income on our residential mortgage loans and mortgage-backed securities is
a
combination of the interest earned based on the outstanding principal balance
of
the underlying loan/security, the contractual terms of the assets and the
amortization of yield adjustments, principally premiums and discounts, using
generally accepted interest methods. The net GAAP cost over the par balance
of
self-originated loans held for investment and premium and discount associated
with the purchase of mortgage-backed securities and loans are amortized into
interest income over the lives of the underlying assets using the effective
yield method as adjusted for the effects of estimated prepayments. Estimating
prepayments and the remaining term of our interest yield investments require
management judgment, which involves, among other things, consideration of
possible future interest rate environments and an estimate of how borrowers
will
react to those environments, historical trends and performance. The actual
prepayment speed and actual lives could be more or less than the amount
estimated by management at the time of origination or purchase of the assets
or
at each financial reporting period.
Fair
Value.
Generally, the financial instruments we utilize are widely traded and there
is a
ready and liquid market in which these financial instruments are traded. The
fair values for such financial instruments are generally based on market prices
provided by five to seven dealers who make markets in these financial
instruments. If the fair value of a financial instrument is not reasonably
available from a dealer, management estimates the fair value based on
characteristics of the security that the Company receives from the issuer and
on
available market information.
In
the
normal course of our mortgage loan origination business, we enter into
contractual interest rate lock commitments, or (“IRLCs”), to extend credit to
finance residential mortgages. Mark-to-market adjustments on IRLCs are recorded
from the inception of the interest rate lock through the date the underlying
loan is funded. The fair value of the IRLCs is determined by an estimate of
the
ultimate gain on sale of the loans net of estimated net costs to originate
the
loan. To mitigate the effect of the interest rate risk inherent in issuing
an
IRLC from the lock-in date to the funding date of a loan, we generally enter
into forward sale loan contracts, or (“FSLCs”). Since the FSLCs are committed
prior to mortgage loan funding and thus there is no owned asset to hedge, the
FSLCs in place prior to the funding of a loan are undesignated derivatives
under
SFAS No. 133 and are marked to market with changes in fair value recorded to
current earnings.
Impairment
of and Basis Adjustments on Securitized Financial Assets. As
previously described herein, we regularly securitize our mortgage loans and
retain the beneficial interests created. In addition, we may purchase such
beneficial interests from third parties. Such assets are evaluated for
impairment on a quarterly basis or, if events or changes in circumstances
indicate that these assets or the underlying collateral may be impaired, on
a
more frequent basis. We evaluate whether these assets are considered impaired,
whether the impairment is other-than-temporary and, if the impairment is
other-than-temporary, recognize an impairment loss equal to the difference
between the asset’s amortized cost basis and its fair value. These evaluations
require management to make estimates and judgments based on changes in market
interest rates, credit ratings, credit and delinquency data and other
information to determine whether unrealized losses are reflective of credit
deterioration and our ability and intent to hold the investment to maturity
or
recovery. This other-than-temporary impairment analysis requires significant
management judgment and we deem this to be a critical accounting estimate.
We
recorded an impairment loss of $7.4 million during 2005, because we concluded
that we no longer had the intent to hold certain lower-yielding mortgage-backed
securities until their values recovered. At December 31, 2005, we have an
unrealized loss of $4.1 million on the remaining securities in our portfolio,
which we do not consider to represent an other than temporary
impairment.
Loan
Loss Reserves on Mortgage Loans. We
evaluate a reserve for loan losses based on management’s judgment and estimate
of credit losses inherent in our portfolio of residential mortgage loans held
for sale and mortgage loans held in securitization trusts. The estimation
involves the consideration of various credit-related factors including, but
not
limited to, current economic conditions, the credit diversification of the
portfolio, loan-to-value ratios, delinquency status, historical credit losses,
purchased mortgage insurance and other factors deemed to warrant consideration.
If the credit performance of our mortgage loans held for investment or held
in
the securitization trusts deviates from expectations, the allowance for loan
losses is adjusted to a level deemed appropriate by management to provide for
estimated probable losses in the portfolio. Two critical assumptions used in
estimating the loan loss reserve are frequency and severity. Frequency is the
assumed rate of default or the expected rate at which loans may go into
foreclosure over the life of the loans. Severity represents the expected rate
of
realized loss upon disposition/resolution of the collateral that has gone into
foreclosure. Based on the performance and credit characteristics of the loan
portfolio as of December 31, 2005, management established a loan loss reserve
of
$12.1 thousand.
Securitizations.
We
create
securitization entities as a means of either:
|
·
|
creating
securities backed by mortgage loans which we will continue to hold
and
finance that will be more liquid than holding whole loan assets; or
|
|
·
|
securing
long-term collateralized financing for our residential mortgage
loan
portfolio and matching the income earned on residential mortgage
loans
with the cost of related liabilities, otherwise referred to a match
funding our balance sheet.
|
Residential
mortgage loans are transferred to a separate bankruptcy-remote legal entity
from
which private-label multi-class mortgage-backed notes are issued. On a
consolidated basis, securitizations are accounted for as secured financings
as
defined by SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
and,
therefore, no gain or loss is recorded in connection with the securitizations.
Each securitization entity is evaluated in accordance with Financial
Accounting Standards Board Interpretation, or FIN, 46(R), Consolidation
of Variable Interest Entities,
and we
have determined that we are the primary beneficiary of the securitization
entities. As such, the securitization entities are consolidated into our
consolidated balance sheet subsequent to securitization. Residential
mortgage loans transferred to securitization entities collateralize the
mortgage-backed notes issued, and, as a result, those investments are not
available to us, our creditors or stockholders. All discussions relating
to securitizations are on a consolidated basis and do not necessarily reflect
the separate legal ownership of the loans by the related bankruptcy-remote
legal
entity.
Derivative
Financial Instruments -
The
Company has developed risk management programs and processes, which include
investments in derivative financial instruments designed to manage market
risk
associated with its mortgage banking and its mortgage-backed securities
investment activities.
All
derivative financial instruments are reported as either assets or liabilities
in
the consolidated balance sheet at fair value. The gains and losses associated
with changes in the fair value of derivatives not designated as hedges are
reported in current earnings. If the derivative is designated as a fair value
hedge and is highly effective in achieving offsetting changes in the fair
value
of the asset or liability hedged, the recorded value of the hedged item is
adjusted by its change in fair value attributable to the hedged risk. If
the
derivative is designated as a cash flow hedge, the effective portion of change
in the fair value of the derivative is recorded in OCI and is recognized
in the
income statement when the hedged item affects earnings. The Company calculates
the effectiveness of these hedges on an ongoing basis, and, to date, has
calculated effectiveness of approximately 100%. Ineffective portions, if
any, of
changes in the fair value or cash flow hedges are recognized in
earnings.
New
accounting pronouncements - In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” SFAS
154 changes the requirements for the accounting for and reporting of a change
in
accounting principle. Previous guidance required that most voluntary changes
in
accounting principle be recognized by including in net income of the period
of
the change the cumulative effect of changing to the new accounting principle.
SFAS 154 requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of
the
change. Management believes SFAS 154 will have no impact on the Company’s
financial statements.
In
February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments”. Key provisions of SFAS 155 include: (1) a broad
fair value measurement option for certain hybrid financial instruments that
contain an embedded derivative that would otherwise require bifurcation;
(2) clarification that only the simplest separations of interest payments
and principal payments qualify for the exception afforded to interest-only
strips and principal-only strips from derivative accounting under paragraph
14
of FAS 133 (thereby narrowing such exception); (3) a requirement that
beneficial interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or whether they are hybrid instruments
that contain embedded derivatives requiring bifurcation; (4) clarification
that concentrations of credit risk in the form of subordination are not embedded
derivatives; and (5) elimination of the prohibition on a QSPE holding
passive derivative financial instruments that pertain to beneficial interests
that are or contain a derivative financial instrument. In general, these
changes
will reduce the operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in securitization
transactions, including interest-only strips and principal-only strips, required
to be accounted for in accordance with FAS 133. Management does not believe
that
SFAS 155 will have a material effect on the financial condition, results
of
operations, or liquidity of the Company.
Overview
of Performance
For
the
year ended December 31, 2005, we reported a net loss of $5.3 million, as
compared to net income of $4.9 million for the year ended December 31, 2004.
Our
revenues were driven largely from increases in interest income on
investments in mortgage loans and mortgage securities (our “mortgage portfolio
management” segment) and gain on sale income from loan originations sold to
third parties (our “mortgage lending” segment) during the period. The change in
net income is attributed to an increase in gain on sale revenues and net
interest income from our investment portfolio. These gains were offset by an
impairment charge of $7.4 million in
the
fourth quarter related to $388.3
million
of
available for sale
securities that we anticipate selling in 2006 in order to rebalance our
portfolio with higher yielding assets,
one-time
severance charges of $3.0 million, and increased expenses incurred for and
subsequent to the acquisition of multiple retail loan origination locations
during 2004. Also, the execution of our core business strategy to retain
selected self-originated loans in our portfolio (this involves foregoing the
gain on sale premiums we would have otherwise received when such loans are
sold
to third parties), which reduced the growth in gain on sale income from what
it
otherwise would have been.
As
upfront expenses related to the acquisition and/or infrastructure enhancements
of our loan origination capacity begin to result in higher production volume
and
lowered stabilized costs, the mortgage lending segment is expected to become
a
more meaningful contributor to our financial performance in the future. For
the
year ended December 31, 2005, total residential originations, including brokered
loans, were $3.4 billion as compared to $1.8 billion and $1.6 billion for the
same period of 2004 and 2003, respectively. The increase in our loan origination
levels for the year ended December 31, 2005 as compared to the same period
of
2004 and 2003 is the result of the addition of sales personnel and branch
offices primarily in new and underserved markets. Total employees increased
to
802 at December 31, 2005 from 782 at December 31, 2004; for 2005 we also had
the
benefit of a full year’s service from 275 employees related to our GRL
acquisition in November 2004. Included in the total number of employees, the
number of loan officers dedicated to originating loans decreased to 329 at
December 31, 2005 from 344 at December 31, 2004. Full-service loan origination
locations decreased to 28 offices and 26 satellite loan origination locations
at
December 31, 2005 from an aggregate of 66 locations at December 31,
2004.
Summary
of Operations and Key Performance Measurements
For
the
year ended December 31, 2005, our net income was dependent upon our mortgage
portfolio management operations and the net interest (interest income on
portfolio assets net of the interest expense and hedging costs associated with
the financing of such assets) generated from our portfolio of mortgage loans
held for investment, mortgage loans held in the securitization trusts and
residential mortgage-backed securities in our portfolio management segment.
The
following table presents the components of our net interest income from our
investment portfolio of mortgage securities and loans for the year ended
December 31, 2005:
|
|
Amount
|
Average
Outstanding
Balance
|
Effective
Rate
|
|||||||
|
(Dollar
s in Millions)
|
||||||||||
|
Net
Interest Income Components:
|
||||||||||
|
Interest
Income
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
60,988
|
$
|
1,361.2
|
4.48
|
%
|
||||
|
Mortgage
loans held for investment
|
7,778
|
146.6
|
5.31
|
%
|
||||||
|
Amortization
of premium
|
(6,041
|
)
|
—
|
(0.40
|
)%
|
|||||
|
Total
interest income
|
$
|
62,725
|
$
|
1,507.8
|
4.16
|
%
|
||||
|
Interest
Expense
|
||||||||||
|
Repurchase
agreements
|
$
|
43,107
|
$
|
1,283.3
|
3.31
|
%
|
||||
|
Warehouse
borrowings
|
5,847
|
142.7
|
4.04
|
%
|
||||||
|
Interest
rate swaps and caps
|
(1,106
|
)
|
—
|
(0.08
|
)%
|
|||||
|
Total
interest expense
|
$
|
47,848
|
$
|
1,426.0
|
3.31
|
%
|
||||
|
Net
Interest Income
|
$
|
14,877
|
0.85
|
%
|
||||||
The
key
performance measures for our portfolio management activities are:
| • |
net
interest spread on the portfolio;
|
| • |
characteristics
of the investments and the underlying pool of mortgage loans including
but
not limited to credit quality, coupon
and prepayment rates; and
|
| • |
return
on our mortgage asset investments and the related management of interest
rate risk.
|
For
the
year ended December 31, 2005, our net income was also dependent upon our
mortgage lending operations and originations from our mortgage lending segment,
which include the mortgage loan sales (“mortgage banking”) and mortgage
brokering activities on residential mortgages sold or brokered to third parties.
Our mortgage banking activities generate revenues in the form of gains on sales
of mortgage loans to third parties and ancillary fee income and interest income
from borrowers. Our mortgage brokering operations generate brokering fee
revenues from third party buyers. When we retain a portion of our loan
originations for our investment portfolio, we do not realize the gain on sale
premiums we would have otherwise recognized had these loans been sold to third
parties and such loans retained on our balance sheet at cost. As a result,
revenues in our mortgage banking segment are lower and the book value of these
assets on our balance sheet, which are accounted for on a cost basis, may differ
from their fair market value.
A
breakdown of our loan originations for the year ended December 31, 2005
follows:
|
Description
|
Number
of
Loans
|
Aggregate
Principal
Balance
($000’s)
|
Percentage
of
Total
Principal
|
Weighted
Average
Interest
Rate
|
Average
Loan
Size
|
|||||||||||
|
Purchase
mortgages
|
9,174
|
$
|
1,985.7
|
57.8
|
%
|
6.33
|
%
|
$
|
216,443
|
|||||||
|
Refinancings
|
5,539
|
1,451.7
|
42.2
|
%
|
5.99
|
%
|
262,091
|
|||||||||
|
Total
|
14,713
|
$
|
3,437.4
|
100.0
|
%
|
6.19
|
%
|
233,628
|
||||||||
|
Adjustable
rate or hybrid
|
6,296
|
$
|
1,875.2
|
54.6
|
%
|
6.00
|
%
|
297,843
|
||||||||
|
Fixed
rate
|
8,417
|
1,562.2
|
45.4
|
%
|
6.41
|
%
|
185,595
|
|||||||||
|
Total
|
14,713
|
$
|
3,437.4
|
100.0
|
%
|
6.19
|
%
|
233,628
|
||||||||
|
Bankered
|
12,654
|
$
|
2,875.3
|
83.6
|
%
|
6.25
|
%
|
227,224
|
||||||||
|
Brokered
|
2,059
|
562.1
|
16.4
|
%
|
5.84
|
%
|
272,988
|
|||||||||
|
Total
|
14,713
|
$
|
3,437.4
|
100.0
|
%
|
6.19
|
%
|
$
|
233,628
|
|||||||
The
key
performance measures for our origination activities are:
| • |
dollar
volume of mortgage loans originated;
|
| • |
relative
cost of the loans originated;
|
| • |
characteristics
of the loans, including but not limited to the coupon and credit
quality
of the loan, which will indicate their expected
yield; and
|
| • |
return
on our mortgage asset investments and the related management of interest
rate risk.
|
Management’s
discussion and analysis of financial condition and results of operations, along
with other portions of this report, are designed to provide information
regarding our performance and these key performance measures.
Year
Ended December 31, 2005 Financial Highlights
| • |
Net
income for the Company’s Mortgage Portfolio Management segment totaled
$6.2 million for the year ended December 31, 2005 after recognition
of an
impairment loss on investment securities of $7.4
million.
|
| • |
Consolidated
net loss totaled $5.3 million for the year ended December 31,
2005.
|
| • |
Completion
of three securitizations totaling $896.9 million in residential mortgage
loans, respectively.
|
| • |
Issuance
of $45.0 million of trust preferred
securities.
|
| • |
Total
assets increased to $1.8 billion as of December 31, 2005 from $1.6
billion
as of December 31, 2004.
|
| • |
Aided
in part by the GRL acquisition, 89% growth in loan originations of
$3.4
billion for the year ended December 31, 2005 as compared to $1.8
million
for the year ended December 31, 2004 and relative to an overall industry
increase of 0.7% for the year ended December 31, 2005 as projected
by the
MBA.
|
| • |
During
the second quarter the Company undertook cost-cutting initiatives
which
reduced its overall recurring annual compensation expenses by an
estimated
$3.7 million.
|
| • |
The
Company’s new wholesale lending division began
operations.
|
-32-
Financial Condition
Balance
Sheet Analysis - Asset Quality
Investment
Portfolio Related Assets
Mortgage
Loans Held in Securitization Trusts and Mortgage Loans Held for Investment.
We
retain
in our portfolio substantially all of the adjustable-rate mortgage loans that
we
originate and that meet our investment criteria and portfolio requirements.
These loans are classified as “mortgage loans held for investment” during a
period of aggregation and until the portfolio reaches a size sufficient for
us
to securitize such loans. Once securitized into sequentially rated classes,
loans are classified as “mortgage loans held in securitization
trusts.”
The
following table details Mortgage Loans Held for Investment at December 31,
2005
(dollar amounts in thousands):
|
Category
|
Par
Value
|
Coupon
|
Carrying
Value
|
Yield
|
|||||||||
|
Mortgage
Loans Held for Investment
|
$
|
4,054
|
5.84
|
%
|
$
|
4,060
|
5.56
|
%
|
|||||
During
2005, we securitized loan investments in three different
securitizations:
|
·
|
New
York Mortgage Trust 2005-1 (“NYMT ’05-1”), February 25, 2005; $419.0
million of loans
|
|
·
|
New
York Mortgage Trust 2005-2 (“NYMT ’05-2”), July 28, 2005; $242.9 million
of loans
|
|
·
|
New
York Mortgage Trust 2005-3 (“NYMT ’05-3”), December 20, 2005; $235.0 of
loans
|
The
following table details Mortgage Loans Held in Securitization Trusts (dollar
amounts in thousands):
|
Category
|
Par
Value
|
Coupon
|
Carrying
Value
|
Yield
|
|||||||||
|
Mortgage
Loans Held in Securitization Trusts
|
$
|
771,451
|
5.17
|
%
|
$
|
776,610
|
5.49
|
%
|
|||||
At
December 31, 2005 mortgage loans held for investment and mortgage loans held
in
securitization trusts totaled $780.7 million, or 44% of total assets. Of this
mortgage loan investment portfolio 100% are traditional or hybrid ARMs and
74.9%
are ARM loans that are interest only. On our hybrid ARMs, interest rate reset
periods are predominately seven years or less and the interest-only/amortization
period is typically 10 years, which mitigates the “payment shock” at the time of
interest rate reset. No loans in our investment portfolio of mortgage loans
are
option-ARMs or ARMs with negative amortization.
Prior
to
2005, we had no loans held in securitization trusts. The following table sets
forth the composition of our loans held for investment and in securitization
trusts as of December 31, 2005:
Characteristics
of Our Mortgage Loans Held for Investment and Securitization (dollar amounts
in
thousands):
|
|
#
of Loans
|
Par
Value
|
Carrying
Value
|
|||||||
|
Loan
Characteristics:
|
||||||||||
|
Mortgage
loans held in securitization trusts
|
1,609
|
$
|
771,451
|
$
|
776,610
|
|||||
|
Mortgage
loans held for investment
|
11
|
4,054
|
4,060
|
|||||||
|
Total
Loans Held
|
1,620
|
$
|
775,505
|
$
|
780,670
|
|||||
|
|
Average
|
High
|
Low
|
|||||||
|
General
Loan Characteristics:
|
||||||||||
|
Original
Loan Balance
|
$
|
486
|
$
|
3,500
|
$
|
25
|
||||
|
Coupon
Rate
|
5.26
|
%
|
7.75
|
%
|
3.00
|
%
|
||||
|
Gross
Margin
|
2.40
|
%
|
7.01
|
%
|
1.13
|
%
|
||||
|
Lifetime
Cap
|
11.08
|
%
|
13.75
|
%
|
9.00
|
%
|
||||
|
Original
Term (Months)
|
360
|
360
|
359
|
|||||||
|
Remaining
Term (Months)
|
348
|
360
|
319
|
|||||||
|
|
Percentage
|
|||
|
Arm
Loan Type
|
||||
|
Traditional
ARMs
|
4.7
|
%
|
||
|
2/1
Hybrid ARMs
|
5.3
|
%
|
||
|
3/1
Hybrid ARMs
|
32.4
|
%
|
||
|
5/1
Hybrid ARMs
|
57.3
|
%
|
||
|
7/1
Hybrid ARMs
|
0.3
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
Percent
of ARM loans that are Interest Only
|
74.9
|
%
|
||
|
Weighted
average length of interest only period
|
8.2
years
|
|||
|
|
Percentage
|
|||
|
Traditional
ARMs - Periodic Caps
|
||||
|
None
|
64.5
|
%
|
||
|
1%
|
19.4
|
%
|
||
|
Over
1%
|
16.1
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
Hybrid
ARMs - Initial Cap
|
||||
|
3.00%
or less
|
29.6
|
%
|
||
|
3.01%-4.00%
|
10.7
|
%
|
||
|
4.01%-5.00%
|
58.2
|
%
|
||
|
5.01%-6.00%
|
1.5
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
FICO
Scores
|
||||
|
650
or less
|
5.0
|
%
|
||
|
651
to 700
|
18.0
|
%
|
||
|
701
to 750
|
35.4
|
%
|
||
|
751
to 800
|
38.2
|
%
|
||
|
801
and over
|
3.4
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
Average
FICO Score
|
733
|
|||
|
|
Percentage
|
|||
|
Loan
to Value (LTV)
|
||||
|
50%
or less
|
9.5
|
%
|
||
|
50.01%-60.00%
|
9.4
|
%
|
||
|
60.01%-70.00%
|
28.6
|
%
|
||
|
70.01%-80.00%
|
49.7
|
%
|
||
|
80.01%
and over
|
2.8
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
Average
LTV
|
69.3
|
%
|
||
|
|
Percentage
|
|||
|
Property
Type
|
||||
|
Single
Family
|
53.7
|
%
|
||
|
Condominium
|
23.1
|
%
|
||
|
Cooperative
|
10.1
|
%
|
||
|
Planned
Unit Development
|
9.2
|
%
|
||
|
Two
to Four Family
|
3.9
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
Occupancy
Status
|
||||
|
Primary
|
84.2
|
%
|
||
|
Secondary
|
10.7
|
%
|
||
|
Investor
|
5.1
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
Documentation
Type
|
||||
|
Full
Documentation
|
61.8
|
%
|
||
|
Stated
Income
|
24.1
|
%
|
||
|
Stated
Income/ Stated Assets
|
11.8
|
%
|
||
|
No
Documentation
|
1.6
|
%
|
||
|
No
Ratio
|
0.7
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
Loan
Purpose
|
||||
|
Purchase
|
60.0
|
%
|
||
|
Cash
out refinance
|
25.2
|
%
|
||
|
Rate
& term refinance
|
14.8
|
%
|
||
|
Total
|
100.0
|
%
|
||
|
|
Percentage
|
|||
|
Geographic
Distribution: 5% or more in any one state
|
||||
|
NY
|
32.7
|
%
|
||
|
MA
|
19.4
|
%
|
||
|
CA
|
14.1
|
%
|
||
|
NJ
|
5.8
|
%
|
||
|
FL
|
5.4
|
%
|
||
|
Other
(less than 5% individually)
|
22.6
|
%
|
||
|
Total
|
100.0
|
%
|
||
Delinquency
Status
As
of
December 31, 2005, we had four delinquent loans totaling $2.0 million
categorized as Mortgage Loans Held in Securitization Trusts. The table below
shows delinquencies in our loan portfolio as of December 31, 2005 (dollar
amounts in thousands):
|
Days
Late
|
Number
of Delinquent Loans
|
Total
Dollar
Amount
|
%
of
Loan
Portfolio
|
|||||||
|
30-60
|
1
|
$
|
193.1
|
0.02
|
%
|
|||||
|
61-90
|
—
|
—
|
—
|
|||||||
|
90+
|
3
|
$
|
1,771.0
|
0.23
|
%
|
|||||
Interest
is recognized as revenue when earned according to the terms of the mortgage
loans and when, in the opinion of management, it is collectible. The accrual
of
interest on loans is discontinued when, in management’s opinion, the interest is
not collectible in the normal course of business, but in no case beyond when
payment on a loan becomes 90 days delinquent. Interest collected on loans for
which accrual has been discontinued is recognized as income upon
receipt.
We
establish an allowance for loan losses based on our estimate of credit losses
inherent in the Company’s investment portfolio of residential loans held for
investment. Our portfolio of mortgage loans held for investment is collectively
evaluated for impairment as the loans are homogeneous in nature. The allowance
is based upon management’s assessment of various factors affecting our mortgage
loan portfolio, including current economic conditions, the makeup of the
portfolio based on credit grade, loan-to-value ratios, delinquency status,
historical credit losses, purchased mortgage insurance and other factors that
management believes warrant consideration. The allowance is maintained through
ongoing provisions charged to operating income and is reduced by loans that
are
charged off. Determining the allowance for loan losses is subjective in nature
due to the estimation required and the potential for imprecision. As of December
31, 2005 and 2004 our allowance for loan losses totaled $12,000 and zero,
respectively.
Investment
Securities - Available for Sale. Our
securities portfolio consists of agency securities or AAA-rated residential
mortgage-backed securities. At December 31, 2005, we had no investment
securities in a single issuer or entity (other than a government sponsored
agency of the U.S. Government) that had an aggregate book value in excess of
10%
of our total assets. The following table sets forth the credit characteristics
of our securities portfolio as of December 31, 2005.
Characteristics
of Our Investment Securities (dollar amounts in
thousands):
|
|
Sponsor
or
Rating
|
Par
Value
|
Carrying
Value
|
%
of
Portfolio
|
Coupon
|
Yield
|
|||||||||||||
|
Credit
|
|||||||||||||||||||
|
Agency
REMIC CMO Floating Rate
|
FNMA/FHLMC/GNMA
|
$
|
13,505
|
$
|
13,535
|
2
|
%
|
5.56
|
%
|
5.45
|
%
|
||||||||
|
FHLMC
Agency ARMs
|
FHLMC
|
91,835
|
91,217
|
13
|
%
|
4.28
|
%
|
3.82
|
%
|
||||||||||
|
FNMA
Agency ARMs
|
FNMA
|
298,526
|
297,048
|
41
|
%
|
4.18
|
%
|
3.91
|
%
|
||||||||||
|
Private
Label ARMs
|
AAA
|
315,835
|
314,682
|
44
|
%
|
4.74
|
%
|
4.51
|
%
|
||||||||||
|
Total/Weighted
Average
|
$
|
719,701
|
$
|
716,482
|
100
|
%
|
4.47
|
%
|
4.19
|
%
|
|||||||||
-35-
The
following table sets forth the interest rate repricing characteristics of our
securities portfolio as of December 31, 2005 (dollar amounts in
thousands):
|
|
Carrying
Value
|
%
of
Portfolio
|
Weighted
Average
Coupon
|
|||||||
|
Interest
Rate Repricing
|
||||||||||
|
<
6 Months
|
$
|
13,535
|
2
|
%
|
5.56
|
%
|
||||
|
<
24 Months
|
445,870
|
62
|
%
|
4.28
|
%
|
|||||
|
<
60 Months
|
257,077
|
36
|
%
|
4.73
|
%
|
|||||
|
Total
|
$
|
716,482
|
100
|
%
|
4.47
|
%
|
||||
The
following table sets forth the stated reset periods and weighted average yields
of our investment securities at December 31, 2005 (dollar amounts in
thousands):
|
Less
than
6
Months
|
More
than 6 Months
To
24 Months
|
More
than 24 Months
To
60 Months
|
Total
|
||||||||||||||||||||||
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
||||||||||||||||||
|
Agency
REMIC CMO Floating Rate
|
$
|
13,535
|
5.45
|
%
|
$
|
—
|
$
|
—
|
|
—
|
$
|
13,535
|
5.45
|
%
|
|||||||||||
|
FHLMC
Agency ARMs
|
—
|
—
|
91,217
|
3.82
|
%
|
—
|
—
|
91,217
|
3.82
|
%
|
|||||||||||||||
|
FNMA
Agency ARMs
|
—
|
—
|
297,048
|
3.91
|
%
|
—
|
—
|
297,048
|
3.91
|
%
|
|||||||||||||||
|
Private
Label ARMs
|
—
|
—
|
57,605
|
4.22
|
%
|
257,077
|
4.57
|
%
|
314,682
|
4.51
|
%
|
||||||||||||||
|
Total
|
$
|
13,535
|
5.45
|
%
|
$
|
445,870
|
3.93
|
%
|
$
|
257,077
|
4.57
|
%
|
$
|
716,482
|
4.19
|
%
|
|||||||||
Mortgage
Lending Related Assets
Mortgage
Loans Held for Sale.
Mortgage
loans that we have originated but do not intend to hold for investment and
are
held pending sale to investors are classified as “mortgage loans held for sale.”
We had mortgage loans held for sale of $108.3 million at December 31, 2005
as
compared to $85.4 million at December 31, 2004. We use warehouse lines of credit
and loan aggregation facilities to finance our mortgage loans held for sale.
Fluctuations in mortgage loans held for sale, warehouse lines of credit, due
to/from loan purchasers and related accounts are dependent on factors such
as
loan production, seasonality and our investor’s ability to purchase loans on a
timely basis.
Due
from Purchasers. We
had
amounts due from loan purchasers totaling $121.8 million at December 31, 2005
as
compared to $79.9 million at December 31, 2004. Amounts due from loan purchasers
are a receivable for the principal and premium due to us for loans that have
been shipped but for which payment has not yet been received at period end.
Escrow
Deposits - Pending Loan Closings.
We had
escrow deposits pending loan closing of $1.4 million at December 31, 2005 as
compared to $16.2 million at December 31, 2004. Escrow deposits pending loan
closing are advance cash fundings by us to escrow agents to be used to close
loans within the next one to three business days.
Non-Loan
or Investment Assets
Cash
and
Cash Equivalents.
We
had
unrestricted cash and cash equivalents of $9.1 million at December 31, 2005
versus $7.6 million at December 31, 2004.
Prepaid
and Other Assets. Prepaid
and other assets totaled $16.5 million as of December 31, 2005. Prepaid and
other assets consist primarily of a deferred tax benefit of $10.2 million and
loans held by us which are pending remedial action (such as updating loan
documentation) or which do not currently meet third-party investor
criteria.
Property
and Equipment, Net -
Property and equipment totaled $6.9 million as of December 31, 2005 and have
estimated lives ranging from three to ten years, and are stated at cost less
accumulated depreciation and amortization. Depreciation is determined in amounts
sufficient to charge the cost of depreciable assets to operations over their
estimated service lives using the straight-line method. Leasehold improvements
are amortized over the lesser of the life of the lease or service lives of
the
improvements using the straight-line method.
Balance
Sheet Analysis - Financing Arrangements
Financing
Arrangements, Mortgage Loans Held for Sale/for Investment.
We
had
debt outstanding on our financing facilities which finance our mortgage loans
held for sale and mortgage loans held for investment of $225.2 million at
December 31, 2005 as compared to $359.2 million at December 31, 2004. As of
December 31, 2005, the current weighted average borrowing rate on these
financing facilities is 5.09%. The fluctuations in mortgage loans -
held-for-sale and short-term borrowings are dependent on loans we have
originated during the period as well as loans we have sold
outright.
Financing
Arrangements, Portfolio Investments. We
have
arrangements to enter into repurchase agreements, a form of collateralized
borrowings, with 23 different financial institutions having a total line
capacity of $5.4 billion. As of December 31, 2005 and December 31, 2004, there
were $1.2 billion and $1.1 billion, respectively, of repurchase borrowings
outstanding. Our repurchase agreements typically have terms of less than one
year. As of December 31, 2005, the current weighted average borrowing rate
on
these financing facilities is 4.37%.
Collateralized
Debt Obligations. On
December 20, 2005 we issued CDOs secured by ARM loans and restricted cash placed
as collateral for prefunded loans which will be replaced by ARM loans within
30
days. For financial reporting purposes, the ARM loans and restricted cash held
as collateral are recorded as assets of the Company and the CDO is recorded
as
the Company’s debt. The transaction includes interest rate caps and are held by
the trust and recorded as an asset or liability of the Company. The interest
rate cap limits the interest rate exposure on these transactions. As of December
31, 2005 we have CDO outstanding of $228.2 million with an average interest
rate
of 4.68%.
Subordinated
Debentures.
As of
December 31, 2005, we have trust preferred securities outstanding of $45.0
million. The securities are fully guaranteed by the Company with respect to
distributions and amounts payable upon liquidation, redemption or repayment.
These securities are classified as subordinated debentures in the liability
section of the Company’s consolidated balance sheet.
$25.0
million of our subordinated debentures have a floating interest rate equal
to
three-month LIBOR plus 3.75%, resetting quarterly (7.77% at December 31, 2005).
These securities mature on March 15, 2035 and may be called at par by the
Company any time after March 15, 2010. NYMC entered into an interest rate cap
agreement to limit the maximum interest rate cost of the trust preferred
securities to 7.5%. The term of the interest rate cap agreement is five years
and resets quarterly in conjunction with the reset periods of the trust
preferred securities.
$20
million of our subordinated debentures have a fixed interest rate equal to
8.35%
up to and including July 30, 2010, at which point the interest rate is converted
to a floating rate equal to one-month LIBOR plus 3.95% until maturity. The
securities mature on October 30, 2035 and may be called at par by the Company
any time after October 30, 2010.
Derivative
Assets and Liabilities. We
generally hedge only the risk related to changes in the benchmark interest
rate
used in the variable rate index, usually a London Interbank Offered Rate, known
as LIBOR, or a U.S. Treasury rate.
In
order
to reduce these risks, we enter into interest rate swap agreements whereby
we
receive floating rate payments in exchange for fixed rate payments, effectively
converting the borrowing to a fixed rate. We also enter into interest rate
cap
agreements whereby, in exchange for a fee, we are reimbursed for interest paid
in excess of a contractually specified capped rate.
Derivative
financial instruments contain credit risk to the extent that the institutional
counterparties may be unable to meet the terms of the agreements. We minimize
this risk by using multiple counterparties and limiting our counterparties
to
major financial institutions with good credit ratings. In addition, we regularly
monitor the potential risk of loss with any one party resulting from this type
of credit risk. Accordingly, we do not expect any material losses as a result
of
default by other parties.
We
enter
into derivative transactions solely for risk management purposes. The decision
of whether or not a given transaction (or portion thereof) is hedged is made
on
a case-by-case basis, based on the risks involved and other factors as
determined by senior management, including the financial impact on income and
asset valuation and the restrictions imposed on REIT hedging activities by
the
Internal Revenue Code, among others. In determining whether to hedge a risk,
we
may consider whether other assets, liabilities, firm commitments and anticipated
transactions already offset or reduce the risk. All transactions undertaken
as a
hedge are entered into with a view towards minimizing the potential for economic
losses that could be incurred by us. Generally, all derivatives entered into
are
intended to qualify as hedges in accordance with GAAP, unless specifically
precluded under SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities. To
this
end, terms of the hedges are matched closely to the terms of hedged
items.
We
have
also developed risk management programs and processes designed to manage market
risk associated with normal mortgage banking and mortgage-backed securities
investment activities.
In
the
normal course of our mortgage loan origination business, we enter into
contractual interest rate lock commitments, or IRLCs, to extend credit to
finance residential mortgages. These commitments, which contain fixed expiration
dates, become effective when eligible borrowers lock-in a specified interest
rate within time frames established by our origination, credit and underwriting
practices. Interest rate risk arises if interest rates change between the time
of the lock-in of the rate by the borrower and the sale of the
loan.
To
mitigate the effect of the interest rate risk inherent in issuing an IRLC from
the lock-in date to the funding date of a loan, we generally enter into forward
sale loan contracts, or FSLCs. Once a loan has been funded, our risk management
objective for our mortgage loans held for sale is to protect earnings from
an
unexpected charge due to a decline in value of such mortgage loans. Our strategy
is to engage in a risk management program involving the designation of FSLCs
(the same FSLCs entered into at the time of the IRLC) to hedge most of our
mortgage loans held for sale.
The
following table summarizes the estimated fair value of derivative assets and
liabilities as of December 31, 2005 and December 31, 2004 (dollar amounts in
thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Derivative
Assets:
|
|||||||
|
Interest
rate caps
|
$
|
3,340
|
$
|
411
|
|||
|
Interest
rate swaps
|
6,383
|
3,229
|
|||||
|
Interest
rate lock commitments - loan commitments
|
123
|
5
|
|||||
|
Interest
rate lock commitments - mortgage loans held for sale
|
—
|
33
|
|||||
|
Total
derivative assets
|
$
|
9,846
|
$
|
3,678
|
|||
|
Derivative
Liabilities:
|
|||||||
|
Forward
loan sale contracts - loan commitments
|
(38
|
)
|
(24
|
)
|
|||
|
Forward
loan sale contracts - mortgage loans held for sale
|
(18
|
)
|
(2
|
)
|
|||
|
Forward
loan sale contracts - TBA securities
|
(324
|
)
|
(139
|
)
|
|||
|
Interest
rate lock commitments - mortgage loans held for sale
|
(14
|
)
|
—
|
||||
|
Total
derivative liabilities
|
$
|
(394
|
)
|
$
|
(165
|
)
|
|
Balance
Sheet Analysis - Stockholders’ Equity
Stockholders’
equity at December 31, 2005 was $101.0 million and included $1.9 million of
net
unrealized gains on available for sale securities and cash flow hedges presented
as accumulated other comprehensive income.
Asset
Acquisitions
Since
our
IPO in June 2004, we have originated and acquired high quality residential
mortgage loans or securities for our investment portfolio. Nearly all our
investment asset acquisitions have been hybrid ARM Assets with reset periods
of
less than five years or traditional ARM Assets generally indexed to LIBOR.
The
following table illustrates our origination and acquisition activity of such
assets since our IPO.
Investment
Portfolio Asset Originations and Acquisitions
(Dollar
amounts in thousands)
|
|
2005
|
2004
|
|||||
|
ARM
Loans
|
|||||||
|
Direct
retail originations
|
$
|
525,699
|
$
|
95,077
|
|||
|
Wholesale
originations 1
|
29,490
|
—
|
|||||
|
Correspondent
originations
|
165,442
|
93,901
|
|||||
|
Total
|
$
|
720,631
|
$
|
188,978
|
|||
|
ARM
Securities
|
|||||||
|
Agency
securities
|
$
|
388,265
|
$
|
598,290
|
|||
|
AAA-rated
|
314,682
|
540,897
|
|||||
|
Other
privately issued
|
13,535
|
65,558
|
|||||
|
Total
|
$
|
716,482
|
$
|
1,204,745
|
|||
| 1 |
Our
wholesale division began origination operations in the fourth quarter
of
2005. A significant portion of this division’s product is expected to be
high-quality, portfolio eligible product in future
periods.
|
Securitizations
During
2005, we completed three CDO transactions in which we securitized $896.9 million
of our residential mortgage loans into a series of multi-class adjustable rate
securities. In the first two CDOs, we elected to retain 100% of the resultant
securities and finance them through repurchase agreements. The creation of
mortgage-backed securities of our mortgage loans in this manner provides an
asset with better liquidity and longer-term financing at better rates as opposed
to financing whole loans through warehouse lines. Beginning with our third
CDO
of self-originated mortgage loans in December 2005, $235 million of ARM loans
were permanently financed through the issuance of securities to third parties.
Because we did not retain all of the resultant securities as in prior CDOs,
this
securitization eliminated the risk of short-term financing (eliminating the
asset to liability duration gap) and the mark-to-market pricing risk inherent
in
financing through repurchase agreements or warehouse lines of credit; as a
result of this permanent financing we are not subject to margin calls.
We
did
not account for these securitizations as sales because the transactions are
secured borrowings under SFAS 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” A summary of the three
CDOs completed in 2005 follows.
New
York Mortgage Trust 2005-1.
February
25, 2005 - securitization of approximately $419.0 million of high-credit
quality, first-lien, adjustable rate mortgage and hybrid adjustable rate
mortgages. The amount of each class of notes, together with the interest rate
and credit ratings for each class as rated by S&P, are set forth below
(dollar amounts in thousands):
|
Class
|
Approximate
Principal Amount
|
Interest
Rate
|
S&P
Rating
|
|||||||
|
A
|
$
|
391,761
|
LIBOR
+ 27
|
%
|
AAA
|
|||||
|
M-1
|
$
|
18,854
|
LIBOR
+ 50
|
%
|
AA
|
|||||
|
M-2
|
$
|
6,075
|
LIBOR
+ 85
|
%
|
A
|
At
the
time of securitization, the weighted average loan-to-value of the mortgage
loans
in the trust was approximately 68.8% and the weighted average FICO score was
approximately 729. The weighted average current loan rate of the pool of
mortgage loans is approximately 4.56% and the weighted average maximum loan
rate
(after periodic rate resets) is 10.63%.
New
York Mortgage Trust 2005-2.
July 29,
2005 - securitization of approximately $242.9 million of high-credit quality,
first-lien, adjustable rate mortgage and hybrid adjustable rate mortgages.
The
amount of each class of notes, together with the interest rate and credit
ratings for each class as rated by S&P, are set forth below (dollar amounts
in thousands):
|
Class
|
Approximate
Principal
Amount
|
Interest
Rate
|
S&P
Rating
|
|||||||
|
A
|
$
|
217,126
|
LIBOR
+ 33
|
%
|
AAA
|
|||||
|
M-1
|
$
|
16,029
|
LIBOR
+ 60
|
%
|
AA
|
|||||
|
M-2
|
$
|
6,314
|
LIBOR
+ 100
|
%
|
A
|
|||||
At
the
time of securitization, the weighted average loan-to-value of the mortgage
loans
in the trust was approximately 69.8% and the weighted average FICO score was
approximately 736. The weighted average current loan rate of the pool of
mortgage loans is approximately 5.46% and the weighted average maximum loan
rate
(after periodic rate resets) is 11.22%.
New
York Mortgage Trust 2005-3.
December
20, 2005 - securitization of approximately $235.0 million of high-credit
quality, first-lien, adjustable rate mortgage and hybrid adjustable rate
mortgages. The amount of each class of notes, together with the interest rate
and credit ratings for each class as rated by S&P and Moody’s, are set forth
below (dollar amounts in thousands):
|
Class
|
Approximate
Principal
Amount
|
Interest
Rate
|
S&P/Moody’s
Rating
|
|||||||
|
A-1
|
$
|
70,000
|
LIBOR
+ 24
|
%
|
AAA
/ Aaa
|
|||||
|
A-2
|
$
|
98,267
|
LIBOR
+ 23
|
%
|
AAA
/ Aaa
|
|||||
|
A-3
|
$
|
10,920
|
LIBOR
+ 32
|
%
|
AAA
/ Aaa
|
|||||
|
M-1
|
$
|
25,380
|
LIBOR
+ 45
|
%
|
AA+
/ Aa2
|
|||||
|
M-2
|
$
|
24,088
|
LIBOR
+ 68
|
%
|
AA
/ A2
|
|||||
At
the
time of securitization, the weighted average loan-to-value of the mortgage
loans
in the Trust was approximately 69.5% and the weighted average FICO score was
approximately 732. The weighted average current loan rate of the pool of
mortgage loans is approximately 5.79% and the weighted average maximum loan
rate
(after periodic rate resets) is 11.58%.
Prepayment
Experience
The
cumulative prepayment rate (“CPR”) on our mortgage loan portfolio averaged
approximately 27% during 2005 as compared to 20% during 2004. CPRs on our
purchased portfolio of investment securities averaged approximately 29% while
the CPRs on loans held for investment or held in our securitization trusts
averaged approximately 24% during 2005. When prepayment expectations over the
remaining life of assets increase, we have to amortize premiums over a shorter
time period resulting in a reduced yield to maturity on our investment assets.
Conversely, if prepayment expectations decrease, the premium would be amortized
over a longer period resulting in a higher yield to maturity. We monitor our
prepayment experience on a monthly basis and adjust the amortization of our
net
premiums accordingly.
Results
of Operations
Our
results of operations for our mortgage portfolio management segment during
a
given period typically reflect the net interest spread earned on our investment
portfolio of residential mortgage loans and mortgage-backed securities. The
net
interest spread is impacted by factors such as our cost of financing, the
interest rate our investments are earning and our interest hedging strategies.
Furthermore, the cost of originating loans held in our portfolio, the amount
of
premium or discount paid on purchased portfolio investments and the prepayment
rates on portfolio investments will impact the net interest spread as such
factors will be amortized over the expected term of such
investments.
Our
results of operations for our mortgage lending segment during a given period
typically reflect the total volume of loans originated and closed by us during
that period. The volume of closed loan originations generated by us in any
period is impacted by a variety of factors. These factors include:
|
•
|
The
demand for new mortgage loans.
Reduced demand for mortgage loans causes closed loan origination
volume to
decline. Demand for new mortgage loans is directly impacted by current
interest rate trends and other economic conditions. Rising interest
rates
tend to reduce demand for new mortgage loans, particularly loan
refinancings, and falling interest rates tend to increase demand
for new
mortgage loans, particularly loan
refinancings.
|
| • |
Loan
refinancing and home purchase trends.
As discussed above, the volume of loan refinancings tends to increase
following declines
in interest rates and to decrease when interest rates rise. The volume
of
home purchases is also affected by interest rates,
although to a lesser extent than refinancing volume. Home purchase
trends
are also affected by other economic changes such
as inflation, improvements in the stock market, unemployment rates
and
other similar factors.
|
| • |
Seasonality.
Historically, according to the MBA, loan originations during late
November, December, January and February of
each year are typically lower than during other months in the year
due, in
part, to inclement weather, fewer business days (due
to holidays and the short month of February), and the fact that home
buyers tend to purchase homes during the warmer months
of the year. As a result, loan volumes tend to be lower in the first
and
fourth quarters of a year than in the second and third
quarters.
|
| • |
Occasional
spikes in volume resulting from isolated events.
Mortgage lenders may experience spikes in loan origination volume
from time to time due to non-recurring events or transactions, such
as a
large mass closing of a condominium project for
which a bulk end-loan commitment was
negotiated.
|
The
mortgage banking industry witnessed record levels of closed loan originations
beginning in mid-2002 and continuing throughout 2003, due primarily to the
availability of historically low interest rates during that period. These
historically low interest rates caused existing home owners to refinance their
mortgages at record levels and induced many first-time home buyers to purchase
homes and many existing home owners to purchase new homes. We, like most
industry participants, enjoyed a record increase in our volume of closed loan
originations during that period. During the first quarter of 2004, the Federal
Reserve Bank of the United States signaled that moderate increases in interest
rates were likely to occur during and after the second quarter of 2004 and
followed up its first increase in interest rates in four years with measured,
continued increases to-date.
In
its
February 7, 2006 Mortgage Finance Forecast, the MBA estimated that closed loan
originations in the industry declined to $2.77 trillion in 2004 and remained
static in 2005. Our origination volumes to date have continued to trend upward,
due in part to the GRL acquisition. Although not forecast, a decline in the
overall volume of closed loan originations may have a negative effect on our
loan origination volume and net income. We believe that our concentration on
purchase loan originations has caused our loan origination volume to be less
susceptible to the industry-wide decline in origination volume.
The
volume and cost of our loan production is critical to our financial results.
The
loans we produce generate gains as they are sold to third parties. Loans we
retain for securitization serve as collateral for our mortgage securities.
We do
not recognize gain on sale income on loans originated by us and retained in
our
investment portfolio as they are recorded at cost and will generate revenues
through their maturity and ultimate repayment. As the cost basis of a retained
loan is typically lower than loans purchased from third parties or already
placed in a securitization, we would expect an incremental yield increase on
these loans relative to their purchased counterparts.
The
cost
of our production is also critical to our financial results as it is a
significant factor in the gains we recognize. In addition, the type of loan
production is an important factor in recognizing gain on sale premiums.
Beginning near the end of the first quarter of 2004, our volume of FHA loans
increased. Generally, FHA loans have lower average balances and FICO scores
which are reflected in the statistics above. All FHA loans are currently and
will be in the future sold or brokered to third parties. The following table
summarizes our loan production for each quarter of 2005, 2004 and
2003.
|
Aggregate
|
Weighted
|
|||||||||||||||||||||
|
Principal
|
Percentage
|
Average
|
Average
|
Weighted
|
||||||||||||||||||
|
Number
|
Balance
|
Of
Total
|
Interest
|
Principal
|
Average
|
|||||||||||||||||
|
of
Loans
|
($
in millions)
|
Principal
|
Rate
|
Balance
|
LTV
|
FICO
|
||||||||||||||||
|
2005:
|
||||||||||||||||||||||
|
Fourth
Quarter
|
||||||||||||||||||||||
|
ARM
|
1,321
|
$
|
452.5
|
55.0
|
%
|
6.33
|
%
|
$
|
342,551
|
71.9
|
700
|
|||||||||||
|
Fixed-rate
|
1,617
|
343.7
|
41.8
|
%
|
6.79
|
%
|
212,524
|
72.2
|
712
|
|||||||||||||
|
Subtotal-non-FHA
|
2,938
|
$
|
796.2
|
96.8
|
%
|
6.53
|
%
|
$
|
270,987
|
72.1
|
705
|
|||||||||||
|
FHA
- ARM
|
1
|
$
|
0.2
|
0.0
|
%
|
5.80
|
%
|
$
|
157,545
|
84.6
|
655
|
|||||||||||
|
FHA
- fixed-rate
|
194
|
26.5
|
3.2
|
%
|
6.06
|
%
|
136,820
|
93.5
|
639
|
|||||||||||||
|
Subtotal
- FHA
|
195
|
$
|
26.7
|
3.2
|
%
|
6.06
|
%
|
$
|
136,927
|
93.4
|
639
|
|||||||||||
|
Total
ARM
|
1,322
|
$
|
452.7
|
55.0
|
%
|
6.33
|
%
|
$
|
342,411
|
72.0
|
700
|
|||||||||||
|
Total
fixed-rate
|
1,811
|
370.2
|
45.0
|
%
|
6.74
|
%
|
204,414
|
73.7
|
707
|
|||||||||||||
|
Total
Originations
|
3,133
|
$
|
822.9
|
100.0
|
%
|
6.52
|
%
|
$
|
262,643
|
72.7
|
703
|
|||||||||||
|
Purchase
mortgages
|
1,949
|
$
|
426.8
|
51.9
|
%
|
6.73
|
%
|
$
|
218,995
|
78.5
|
716
|
|||||||||||
|
Refinancings
|
989
|
369.4
|
44.9
|
%
|
6.29
|
%
|
373,447
|
64.5
|
692
|
|||||||||||||
|
Subtotal-non-FHA
|
2,938
|
$
|
796.2
|
96.8
|
%
|
6.53
|
%
|
$
|
270,987
|
72.1
|
705
|
|||||||||||
|
FHA
- purchase
|
38
|
$
|
6.1
|
0.7
|
%
|
6.40
|
%
|
$
|
161,278
|
97.4
|
649
|
|||||||||||
|
FHA
- refinancings
|
157
|
20.6
|
2.5
|
%
|
5.95
|
%
|
131,033
|
92.1
|
636
|
|||||||||||||
|
Subtotal
- FHA
|
195
|
$
|
26.7
|
3.2
|
%
|
6.06
|
%
|
$
|
136,927
|
93.4
|
639
|
|||||||||||
|
Total
purchase
|
1,987
|
$
|
433.0
|
52.6
|
%
|
6.72
|
%
|
$
|
217,891
|
78.8
|
715
|
|||||||||||
|
Total
refinancings
|
1,146
|
389.9
|
47.4
|
%
|
6.28
|
%
|
340,237
|
66.0
|
689
|
|||||||||||||
|
Total
Originations
|
3,133
|
$
|
822.9
|
100.0
|
%
|
6.52
|
%
|
$
|
262,643
|
72.7
|
703
|
|||||||||||
|
Third
Quarter
|
||||||||||||||||||||||
|
ARM
|
1,727
|
$
|
513.3
|
51.2
|
%
|
6.10
|
%
|
$
|
297,213
|
73.8
|
705
|
|||||||||||
|
Fixed-rate
|
1,946
|
392.2
|
39.1
|
%
|
6.43
|
%
|
201,537
|
73.2
|
717
|
|||||||||||||
|
Subtotal-non-FHA
|
3,673
|
$
|
905.5
|
90.3
|
%
|
6.25
|
%
|
$
|
246,522
|
73.5
|
710
|
|||||||||||
|
FHA
- ARM
|
4
|
$
|
0.8
|
0.1
|
%
|
5.80
|
%
|
$
|
217,202
|
94.7
|
642
|
|||||||||||
|
FHA
- fixed-rate
|
700
|
95.9
|
9.6
|
%
|
5.72
|
%
|
136,954
|
92.9
|
633
|
|||||||||||||
|
Subtotal
- FHA
|
704
|
$
|
96.7
|
9.7
|
%
|
5.72
|
%
|
$
|
137,410
|
93.0
|
633
|
|||||||||||
|
Total
ARM
|
1,731
|
$
|
514.1
|
51.3
|
%
|
6.10
|
%
|
$
|
297,028
|
73.8
|
705
|
|||||||||||
|
Total
fixed-rate
|
2,646
|
488.1
|
48.7
|
%
|
6.29
|
%
|
184,451
|
77.1
|
700
|
|||||||||||||
|
Total
Originations
|
4,377
|
$
|
1,002.2
|
100.0
|
%
|
6.19
|
%
|
$
|
228,973
|
75.4
|
703
|
|||||||||||
|
Purchase
mortgages
|
2,568
|
$
|
558.1
|
55.7
|
%
|
6.39
|
%
|
$
|
217,314
|
78.1
|
719
|
|||||||||||
|
Refinancings
|
1,105
|
347.4
|
34.6
|
%
|
6.01
|
%
|
314,402
|
66.2
|
696
|
|||||||||||||
|
Subtotal-non-FHA
|
3,673
|
$
|
905.5
|
90.3
|
%
|
6.25
|
%
|
$
|
246,522
|
73.5
|
710
|
|||||||||||
|
FHA
- purchase
|
71
|
$
|
11.7
|
1.2
|
%
|
6.05
|
%
|
$
|
165,045
|
96.3
|
659
|
|||||||||||
|
FHA
- refinancings
|
633
|
85.0
|
8.5
|
%
|
5.67
|
%
|
134,310
|
92.5
|
630
|
|||||||||||||
|
Subtotal
- FHA
|
704
|
$
|
96.7
|
9.7
|
%
|
5.72
|
%
|
$
|
137,410
|
93.0
|
633
|
|||||||||||
|
Total
purchase
|
2,639
|
$
|
569.8
|
56.9
|
%
|
6.38
|
%
|
$
|
215,908
|
78.5
|
718
|
|||||||||||
|
Total
refinancings
|
1,738
|
432.4
|
43.1
|
%
|
5.94
|
%
|
248,811
|
71.4
|
683
|
|||||||||||||
|
Total
Originations
|
4,377
|
$
|
1,002.2
|
100.0
|
%
|
6.19
|
%
|
$
|
228,973
|
75.4
|
703
|
|||||||||||
|
Second
Quarter
|
||||||||||||||||||||||
|
ARM
|
1,839
|
$
|
537.9
|
57.2
|
%
|
5.90
|
%
|
$
|
292,482
|
72.7
|
709
|
|||||||||||
|
Fixed-rate
|
1,777
|
337.1
|
35.9
|
%
|
6.47
|
%
|
189,732
|
72.7
|
718
|
|||||||||||||
|
Subtotal-non-FHA
|
3,616
|
$
|
875.0
|
93.1
|
%
|
6.12
|
%
|
$
|
241,988
|
72.7
|
712
|
|||||||||||
|
FHA
- ARM
|
30
|
$
|
4.8
|
0.5
|
%
|
5.34
|
%
|
$
|
159,088
|
93.7
|
611
|
|||||||||||
|
FHA
- fixed-rate
|
449
|
59.9
|
6.4
|
%
|
5.97
|
%
|
133,408
|
92.6
|
624
|
|||||||||||||
|
Subtotal
- FHA
|
479
|
$
|
64.7
|
6.9
|
%
|
5.92
|
%
|
$
|
135,016
|
92.7
|
623
|
|||||||||||
|
Total
ARM
|
1,869
|
$
|
542.7
|
57.7
|
%
|
5.89
|
%
|
$
|
290,341
|
72.8
|
708
|
|||||||||||
|
Total
fixed-rate
|
2,226
|
397.0
|
42.3
|
%
|
6.39
|
%
|
178,371
|
75.7
|
704
|
|||||||||||||
|
Total
Originations
|
4,095
|
$
|
939.7
|
100.0
|
%
|
6.10
|
%
|
$
|
229,475
|
74.0
|
706
|
|||||||||||
|
Purchase
mortgages
|
2,652
|
$
|
587.8
|
62.6
|
%
|
6.21
|
%
|
$
|
221,657
|
76.4
|
720
|
|||||||||||
|
Refinancings
|
964
|
287.2
|
30.5
|
%
|
5.94
|
%
|
297,918
|
65.1
|
695
|
|||||||||||||
|
Subtotal-non-FHA
|
3,616
|
$
|
875.0
|
93.1
|
%
|
6.12
|
%
|
$
|
241,988
|
72.7
|
712
|
|||||||||||
|
FHA
- purchase
|
85
|
$
|
13.9
|
1.5
|
%
|
5.99
|
%
|
$
|
163,693
|
96.3
|
644
|
|||||||||||
|
FHA
- refinancings
|
394
|
50.8
|
5.4
|
%
|
5.91
|
%
|
128,829
|
91.7
|
617
|
|||||||||||||
|
Subtotal
- FHA
|
479
|
$
|
64.7
|
6.9
|
%
|
5.92
|
%
|
$
|
135,016
|
92.7
|
623
|
|||||||||||
|
Total
purchase
|
2,737
|
$
|
601.7
|
64.1
|
%
|
6.20
|
%
|
$
|
219,857
|
76.8
|
719
|
|||||||||||
|
Total
refinancings
|
1,358
|
338.0
|
35.9
|
%
|
5.93
|
%
|
248,860
|
69.1
|
684
|
|||||||||||||
|
Total
Originations
|
4,095
|
$
|
939.7
|
100.0
|
%
|
6.10
|
%
|
$
|
228,973
|
74.0
|
706
|
|||||||||||
|
First
Quarter
|
||||||||||||||||||||||
|
ARM
|
1,313
|
$
|
355.3
|
52.8
|
%
|
5.61
|
%
|
$
|
270,603
|
72.7
|
708
|
|||||||||||
|
Fixed-rate
|
1,274
|
247.8
|
36.9
|
%
|
6.31
|
%
|
194,541
|
71.4
|
719
|
|||||||||||||
|
Subtotal-non-FHA
|
2,587
|
$
|
603.1
|
89.7
|
%
|
5.90
|
%
|
$
|
233,145
|
72.2
|
712
|
|||||||||||
|
FHA
- ARM
|
59
|
$
|
9.5
|
1.4
|
%
|
5.10
|
%
|
$
|
160,093
|
93.8
|
648
|
|||||||||||
|
FHA
- fixed-rate
|
462
|
59.9
|
8.9
|
%
|
5.85
|
%
|
129,756
|
92.2
|
635
|
|||||||||||||
|
Subtotal
- FHA
|
521
|
$
|
69.4
|
10.3
|
%
|
5.75
|
%
|
$
|
133,191
|
92.4
|
637
|
|||||||||||
|
Total
ARM
|
1,372
|
$
|
364.8
|
54.2
|
%
|
5.60
|
%
|
$
|
265,851
|
73.2
|
706
|
|||||||||||
|
Total
fixed-rate
|
1,736
|
307.7
|
45.8
|
%
|
6.22
|
%
|
177,299
|
75.5
|
703
|
|||||||||||||
|
Total
Originations
|
3,108
|
$
|
672.5
|
100.0
|
%
|
5.88
|
%
|
$
|
216,390
|
74.3
|
705
|
|||||||||||
|
Purchase
mortgages
|
1,717
|
$
|
365.9
|
54.4
|
%
|
6.03
|
%
|
$
|
213,081
|
76.2
|
723
|
|||||||||||
|
Refinancings
|
870
|
237.2
|
35.3
|
%
|
5.69
|
%
|
272,743
|
66.0
|
696
|
|||||||||||||
|
Subtotal-non-FHA
|
2,587
|
$
|
603.1
|
89.7
|
%
|
5.90
|
%
|
$
|
233,145
|
72.2
|
712
|
|||||||||||
|
FHA
- purchase
|
95
|
$
|
15.1
|
2.2
|
%
|
5.66
|
%
|
$
|
158,699
|
97.2
|
672
|
|||||||||||
|
FHA
- refinancings
|
426
|
54.3
|
8.1
|
%
|
5.78
|
%
|
127,503
|
91.0
|
627
|
|||||||||||||
|
Subtotal
- FHA
|
521
|
$
|
69.4
|
10.3
|
%
|
5.75
|
%
|
$
|
133,191
|
92.4
|
637
|
|||||||||||
|
Total
purchase
|
1,812
|
$
|
381.0
|
56.6
|
%
|
6.02
|
%
|
$
|
210,230
|
77.0
|
721
|
|||||||||||
|
Total
refinancings
|
1,296
|
291.5
|
43.4
|
%
|
5.71
|
%
|
225,002
|
70.7
|
683
|
|||||||||||||
|
Total
Originations
|
3,108
|
$
|
672.5
|
100.0
|
%
|
5.88
|
%
|
$
|
216,390
|
74.3
|
705
|
|||||||||||
|
2004:
|
||||||||||||||||||||||
|
Fourth
Quarter
|
||||||||||||||||||||||
|
ARM
|
1,094
|
$
|
330.1
|
52.2
|
%
|
5.23
|
%
|
$
|
301,765
|
71.1
|
714
|
|||||||||||
|
Fixed-rate
|
956
|
206.8
|
32.7
|
%
|
6.32
|
%
|
216,266
|
72.1
|
714
|
|||||||||||||
|
Subtotal-non-FHA
|
2,050
|
$
|
536.9
|
84.9
|
%
|
5.65
|
%
|
$
|
261,893
|
71.5
|
714
|
|||||||||||
|
FHA
- ARM
|
150
|
$
|
19.5
|
3.1
|
%
|
5.20
|
%
|
$
|
130,215
|
92.7
|
627
|
|||||||||||
|
FHA
- fixed-rate
|
599
|
76.2
|
12.0
|
%
|
6.04
|
%
|
127,281
|
92.0
|
622
|
|||||||||||||
|
Subtotal
- FHA
|
749
|
$
|
95.7
|
15.1
|
%
|
5.87
|
%
|
$
|
127,868
|
92.1
|
623
|
|||||||||||
|
Total
ARM
|
1,244
|
$
|
349.6
|
55.3
|
%
|
5.23
|
%
|
$
|
281,080
|
72.3
|
709
|
|||||||||||
|
Total
fixed-rate
|
1,555
|
283.0
|
44.7
|
%
|
6.24
|
%
|
181,988
|
77.5
|
689
|
|||||||||||||
|
Total
Originations
|
2,799
|
$
|
632.6
|
100.0
|
%
|
5.68
|
%
|
$
|
226,029
|
74.6
|
700
|
|||||||||||
|
Purchase
mortgages
|
1,426
|
$
|
353.3
|
55.8
|
%
|
5.65
|
%
|
$
|
247,722
|
75.1
|
724
|
|||||||||||
|
Refinancings
|
624
|
183.6
|
29.1
|
%
|
5.65
|
%
|
294,278
|
64.4
|
694
|
|||||||||||||
|
Subtotal-non-FHA
|
2,050
|
$
|
536.9
|
84.9
|
%
|
5.65
|
%
|
$
|
261,893
|
71.5
|
714
|
|||||||||||
|
FHA
- purchase
|
82
|
$
|
13.3
|
2.1
|
%
|
5.93
|
%
|
$
|
162,494
|
96.4
|
647
|
|||||||||||
|
FHA
- refinancings
|
667
|
82.4
|
13.0
|
%
|
5.86
|
%
|
123,611
|
91.4
|
619
|
|||||||||||||
|
Subtotal
- FHA
|
749
|
$
|
95.7
|
15.1
|
%
|
5.87
|
%
|
$
|
127,868
|
92.1
|
623
|
|||||||||||
|
Total
purchase
|
1,508
|
$
|
366.6
|
57.9
|
%
|
5.66
|
%
|
$
|
243,088
|
75.9
|
721
|
|||||||||||
|
Total
refinancings
|
1,291
|
266.0
|
42.1
|
%
|
5.71
|
%
|
206,102
|
72.8
|
671
|
|||||||||||||
|
Total
Originations
|
2,799
|
$
|
632.6
|
100.0
|
%
|
5.68
|
%
|
$
|
226,029
|
74.6
|
700
|
|||||||||||
|
Third
Quarter
|
||||||||||||||||||||||
|
ARM
|
692
|
$
|
208.9
|
50.3
|
%
|
5.06
|
%
|
$
|
301,879
|
70.7
|
718
|
|||||||||||
|
Fixed-rate
|
639
|
145.7
|
35.1
|
%
|
6.70
|
%
|
228,013
|
71.0
|
714
|
|||||||||||||
|
Subtotal-non-FHA
|
1,331
|
$
|
354.6
|
85.4
|
%
|
5.73
|
%
|
$
|
266,416
|
70.8
|
716
|
|||||||||||
|
FHA
- ARM
|
52
|
$
|
6.8
|
1.6
|
%
|
5.29
|
%
|
$
|
130,769
|
92.2
|
597
|
|||||||||||
|
FHA
- fixed-rate
|
429
|
54.0
|
13.0
|
%
|
6.33
|
%
|
125,874
|
92.2
|
612
|
|||||||||||||
|
Subtotal
- FHA
|
481
|
$
|
60.8
|
14.6
|
%
|
6.21
|
%
|
$
|
126,403
|
92.2
|
610
|
|||||||||||
|
Total
ARM
|
744
|
$
|
215.7
|
51.9
|
%
|
5.07
|
%
|
$
|
289,919
|
71.4
|
714
|
|||||||||||
|
Total
fixed-rate
|
1,068
|
199.7
|
48.1
|
%
|
6.60
|
%
|
186,985
|
76.7
|
687
|
|||||||||||||
|
Total
Originations
|
1,812
|
$
|
415.4
|
100.0
|
%
|
5.80
|
%
|
$
|
229,249
|
73.9
|
701
|
|||||||||||
|
Purchase
mortgages
|
1,019
|
$
|
265.9
|
64.0
|
%
|
5.78
|
%
|
$
|
260,942
|
73.4
|
725
|
|||||||||||
|
Refinancings
|
312
|
88.7
|
21.4
|
%
|
5.59
|
%
|
284,295
|
63.1
|
691
|
|||||||||||||
|
Subtotal-non-FHA
|
1,331
|
$
|
354.6
|
85.4
|
%
|
5.73
|
%
|
$
|
266,416
|
70.8
|
716
|
|||||||||||
|
FHA
- purchase
|
54
|
$
|
8.7
|
2.1
|
%
|
6.36
|
%
|
$
|
161,111
|
95.0
|
637
|
|||||||||||
|
FHA
- refinancings
|
427
|
52.1
|
12.5
|
%
|
6.18
|
%
|
122,014
|
91.8
|
605
|
|||||||||||||
|
Subtotal
- FHA
|
481
|
$
|
60.8
|
14.6
|
%
|
6.21
|
%
|
$
|
126,403
|
92.2
|
610
|
|||||||||||
|
Total
purchase
|
1,073
|
$
|
274.6
|
66.1
|
%
|
5.80
|
%
|
$
|
255,918
|
74.1
|
722
|
|||||||||||
|
Total
refinancings
|
739
|
140.8
|
33.9
|
%
|
5.81
|
%
|
190,528
|
73.7
|
660
|
|||||||||||||
|
Total
Originations
|
1,812
|
$
|
415.4
|
100.0
|
%
|
5.80
|
%
|
$
|
229,249
|
73.9
|
701
|
|||||||||||
|
Second
Quarter
|
||||||||||||||||||||||
|
ARM
|
781
|
$
|
253.4
|
49.3
|
%
|
4.91
|
%
|
$
|
324,456
|
69.8
|
722
|
|||||||||||
|
Fixed-rate
|
797
|
167.2
|
32.5
|
%
|
6.31
|
%
|
209,787
|
70.6
|
720
|
|||||||||||||
|
Subtotal-non-FHA
|
1,578
|
$
|
420.6
|
81.8
|
%
|
5.47
|
%
|
$
|
266,540
|
70.1
|
721
|
|||||||||||
|
FHA
- ARM
|
29
|
$
|
4.1
|
0.8
|
%
|
4.37
|
%
|
$
|
141,379
|
93.5
|
653
|
|||||||||||
|
FHA
- fixed-rate
|
764
|
89.3
|
17.4
|
%
|
5.87
|
%
|
116,885
|
91.9
|
655
|
|||||||||||||
|
Subtotal
- FHA
|
793
|
$
|
93.4
|
18.2
|
%
|
5.81
|
%
|
$
|
117,781
|
92.0
|
654
|
|||||||||||
|
Total
ARM
|
810
|
$
|
257.5
|
50.1
|
%
|
4.90
|
%
|
$
|
317,901
|
70.1
|
721
|
|||||||||||
|
Total
fixed-rate
|
1,561
|
256.5
|
49.9
|
%
|
6.16
|
%
|
164,318
|
78.0
|
697
|
|||||||||||||
|
Total
Originations
|
2,371
|
$
|
514.0
|
100.0
|
%
|
5.53
|
%
|
$
|
216,786
|
74.1
|
709
|
|||||||||||
|
Purchase
mortgages
|
1,021
|
$
|
262.7
|
51.1
|
%
|
5.46
|
%
|
$
|
257,297
|
74.8
|
728
|
|||||||||||
|
Refinancings
|
557
|
157.9
|
30.7
|
%
|
5.48
|
%
|
283,483
|
62.2
|
711
|
|||||||||||||
|
Subtotal-non-FHA
|
1,578
|
$
|
420.6
|
81.8
|
%
|
5.47
|
%
|
$
|
266,540
|
70.1
|
721
|
|||||||||||
|
FHA
- purchase
|
71
|
$
|
10.6
|
2.1
|
%
|
6.25
|
%
|
$
|
149,296
|
96.1
|
633
|
|||||||||||
|
FHA
- refinancings
|
722
|
82.8
|
16.1
|
%
|
5.75
|
%
|
114,681
|
91.4
|
657
|
|||||||||||||
|
Subtotal
- FHA
|
793
|
$
|
93.4
|
18.2
|
%
|
5.81
|
%
|
$
|
117,781
|
92.0
|
654
|
|||||||||||
|
Total
purchase
|
1,092
|
$
|
273.3
|
53.2
|
%
|
5.49
|
%
|
$
|
250,275
|
75.6
|
724
|
|||||||||||
|
Total
refinancings
|
1,279
|
240.7
|
46.8
|
%
|
5.57
|
%
|
188,194
|
72.3
|
693
|
|||||||||||||
|
Total
Originations
|
2,371
|
$
|
514.0
|
100.0
|
%
|
5.53
|
%
|
$
|
216,786
|
74.1
|
709
|
|||||||||||
|
First
Quarter
|
||||||||||||||||||||||
|
ARM
|
458
|
$
|
121.8
|
43.0
|
%
|
5.55
|
%
|
$
|
265,982
|
83.8
|
839
|
|||||||||||
|
Fixed-rate
|
578
|
151.8
|
53.5
|
%
|
5.43
|
%
|
262,547
|
60.1
|
611
|
|||||||||||||
|
Subtotal-non-FHA
|
1,036
|
$
|
273.6
|
96.5
|
%
|
5.48
|
%
|
$
|
264,066
|
70.7
|
713
|
|||||||||||
|
FHA
- ARM
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
FHA
- fixed-rate
|
35
|
$
|
9.8
|
3.5
|
%
|
4.48
|
%
|
281,445
|
68.0
|
445
|
||||||||||||
|
Subtotal
- FHA
|
35
|
$
|
9.8
|
3.5
|
%
|
4.48
|
%
|
$
|
281,445
|
68.0
|
445
|
|||||||||||
|
Total
ARM
|
458
|
$
|
121.8
|
43.0
|
%
|
5.55
|
%
|
$
|
265,982
|
83.8
|
839
|
|||||||||||
|
Total
fixed-rate
|
613
|
161.6
|
57.0
|
%
|
5.38
|
%
|
263,626
|
60.6
|
601
|
|||||||||||||
|
Total
Originations
|
1,071
|
$
|
283.4
|
100.0
|
%
|
5.45
|
%
|
$
|
264,633
|
70.6
|
703
|
|||||||||||
|
Purchase
mortgages
|
623
|
$
|
164.2
|
57.9
|
%
|
5.42
|
%
|
$
|
263,586
|
74.1
|
711
|
|||||||||||
|
Refinancings
|
413
|
109.4
|
38.6
|
%
|
5.58
|
%
|
264,789
|
65.5
|
715
|
|||||||||||||
|
Subtotal-non-FHA
|
1,036
|
$
|
273.6
|
96.5
|
%
|
5.48
|
%
|
$
|
264,066
|
70.7
|
713
|
|||||||||||
|
FHA
- purchase
|
27
|
$
|
7.8
|
2.8
|
%
|
4.73
|
%
|
$
|
289,221
|
73.2
|
462
|
|||||||||||
|
FHA
- refinancings
|
8
|
2.0
|
0.7
|
%
|
3.55
|
%
|
255,200
|
48.3
|
380
|
|||||||||||||
|
Subtotal
- FHA
|
35
|
$
|
9.8
|
3.5
|
%
|
4.48
|
%
|
$
|
281,445
|
68.0
|
445
|
|||||||||||
|
Total
purchase
|
650
|
$
|
172.0
|
60.7
|
%
|
5.39
|
%
|
$
|
264,651
|
74.1
|
700
|
|||||||||||
|
Total
refinancings
|
421
|
111.4
|
39.3
|
%
|
5.54
|
%
|
264,607
|
65.2
|
708
|
|||||||||||||
|
Total
Originations
|
1,071
|
$
|
283.4
|
100.0
|
%
|
5.45
|
%
|
$
|
264,633
|
70.6
|
703
|
|||||||||||
|
2003:
|
||||||||||||||||||||||
|
Fourth
Quarter
|
||||||||||||||||||||||
|
ARM
|
502
|
$
|
181.1
|
53.3
|
%
|
4.79
|
%
|
$
|
360,691
|
69.8
|
708
|
|||||||||||
|
Fixed-rate
|
705
|
158.7
|
46.7
|
%
|
6.57
|
%
|
225,127
|
69.5
|
707
|
|||||||||||||
|
Total
Originations
|
1,207
|
$
|
339.8
|
100.0
|
%
|
5.62
|
%
|
$
|
281,509
|
69.7
|
707
|
|||||||||||
|
Purchase
mortgages
|
749
|
$
|
203.2
|
59.8
|
%
|
5.66
|
%
|
$
|
271,209
|
75.8
|
712
|
|||||||||||
|
Refinancings
|
458
|
136.6
|
40.2
|
%
|
5.58
|
%
|
298,353
|
61.2
|
699
|
|||||||||||||
|
Total
Originations
|
1,207
|
$
|
339.8
|
100.0
|
%
|
5.62
|
%
|
$
|
281,509
|
69.7
|
707
|
|||||||||||
|
Third
Quarter
|
||||||||||||||||||||||
|
ARM
|
585
|
$
|
224.1
|
46.1
|
%
|
4.76
|
%
|
$
|
383,018
|
67.6
|
714
|
|||||||||||
|
Fixed-rate
|
1,062
|
262.2
|
53.9
|
%
|
6.17
|
%
|
246,880
|
66.5
|
707
|
|||||||||||||
|
Total
Originations
|
1,647
|
$
|
486.3
|
100.0
|
%
|
5.53
|
%
|
$
|
295,235
|
67.0
|
711
|
|||||||||||
|
Purchase
mortgages
|
772
|
$
|
218.2
|
44.9
|
%
|
5.73
|
%
|
$
|
282,537
|
75.3
|
717
|
|||||||||||
|
Refinancings
|
875
|
268.1
|
55.1
|
%
|
5.35
|
%
|
306,439
|
59.8
|
706
|
|||||||||||||
|
Total
Originations
|
1,647
|
$
|
486.3
|
100.0
|
%
|
5.53
|
%
|
$
|
295,235
|
67.0
|
711
|
|||||||||||
|
Second
Quarter
|
||||||||||||||||||||||
|
ARM
|
452
|
$
|
158.1
|
38.3
|
%
|
4.77
|
%
|
$
|
349,624
|
66.5
|
691
|
|||||||||||
|
Fixed-rate
|
1,051
|
254.8
|
61.7
|
%
|
6.12
|
%
|
242,478
|
66.6
|
714
|
|||||||||||||
|
Total
Originations
|
1,503
|
$
|
412.9
|
100.0
|
%
|
5.60
|
%
|
$
|
274,700
|
66.6
|
705
|
|||||||||||
|
Purchase
mortgages
|
647
|
$
|
173.7
|
42.1
|
%
|
5.73
|
%
|
$
|
268,487
|
74.3
|
690
|
|||||||||||
|
Refinancings
|
856
|
239.2
|
57.9
|
%
|
5.50
|
%
|
279,397
|
60.9
|
716
|
|||||||||||||
|
Total
Originations
|
1,503
|
$
|
412.9
|
100.0
|
%
|
5.60
|
%
|
$
|
274,700
|
66.6
|
705
|
|||||||||||
|
First
Quarter
|
||||||||||||||||||||||
|
ARM
|
399
|
$
|
144.1
|
39.9
|
%
|
5.13
|
%
|
$
|
361,230
|
69.5
|
720
|
|||||||||||
|
Fixed-rate
|
948
|
217.3
|
60.1
|
%
|
6.46
|
%
|
229,203
|
70.7
|
707
|
|||||||||||||
|
Total
Originations
|
1,347
|
$
|
361.4
|
100.0
|
%
|
5.93
|
%
|
$
|
268,311
|
70.3
|
712
|
|||||||||||
|
Purchase
mortgages
|
845
|
$
|
208.5
|
57.7
|
%
|
6.09
|
%
|
$
|
246,758
|
77.9
|
721
|
|||||||||||
|
Refinancings
|
502
|
152.9
|
42.3
|
%
|
5.72
|
%
|
304,590
|
59.8
|
699
|
|||||||||||||
|
Total
Originations
|
1,347
|
$
|
361.4
|
100.0
|
%
|
5.93
|
%
|
$
|
268,311
|
70.3
|
712
|
|||||||||||
Our
increase in loan origination volume and other operational and financial
performance results was primarily dependent on the number of offices and our
level of staffing these offices. Our personnel costs are largely variable in
that loan origination personnel are paid commissions on loan production volume
and the related operations personnel are somewhat variable in terms of have
flexibility to scale operations based on volume levels. Our staffing levels
also
have a high correlation to levels of expense for marketing and promotion
expense, office supplies, data processing and travel and entertainment expenses.
Likewise, the number of offices and branches which we operate has a high
correlation to occupancy and equipment expense.
Other
Operational Information
|
For
the Year Ended December 31,
|
||||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Loan
officers
|
329
|
344
|
(4.4
|
)%
|
142
|
142.3
|
%
|
|||||||||
|
Other
employees
|
473
|
438
|
8.0
|
%
|
193
|
126.9
|
%
|
|||||||||
|
Total
employees
|
802
|
782
|
2.6
|
%
|
335
|
133.4
|
%
|
|||||||||
|
Number
of sales locations
|
54
|
66
|
(18.2
|
)%
|
15
|
340.0
|
%
|
|||||||||
To
supplement our organic growth in originations, we acquired eight branches with
134 employees of Staten Island Bank (“SIB”) in March 2004 and 15 branches with
275 employees of GRL in November 2004. During the course of 2004 and 2005,
these
acquisitions have been fully integrated within our structural framework of
operations.
Results
of Operations - Comparison of Years Ended December 31, 2005, 2004 and
2003
Net
Income - Overview
Comparative
Net Income
|
($
in thousands)
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Net
(loss)/income
|
$
|
(5,340
|
)
|
$
|
4,947
|
(207.9
|
)%
|
$
|
13,726
|
(64.0
|
)%
|
|||||
|
EPS
(Basic)
|
$
|
(0.30
|
)
|
$
|
0.28
|
(207.1
|
)%
|
$
|
—
|
—
|
||||||
|
EPS
(Diluted)
|
$
|
(0.30
|
)
|
$
|
0.27
|
(211.1
|
)%
|
$
|
—
|
—
|
||||||
For
the
year ended December 31, 2005, we reported net loss of $5.3 million, as compared
to net income of $4.9 million for the year ended December 31, 2004. Our
revenues were driven largely from interest income on investments in mortgage
loans and mortgage securities (our “mortgage portfolio management” segment) and
gain on sale income from loan originations sold to third parties (our “mortgage
lending” segment) during the period. The change in net income is
attributed to an increase in gain on sale income and net interest income from
our investment portfolio. These gains were offset by the execution of our core
business strategy to retain selected originated loans in our portfolio (thus
forgoing the gain on sale premiums we would have otherwise received when such
loans are sold to third parties), an impairment charge of $7.4 million
in
the
fourth quarter related to $388.3 million of available for sale securities that
we now anticipate selling in 2006 in order to rebalance our
portfolio with higher yielding assets, one-time severance charges of $3.0
million, and increased expenses incurred for and subsequent to the acquisition
of multiple retail loan origination locations during 2004.
Net
income in 2003 was reflective of our pre-IPO operation as only a mortgage
originator. 2003 was a year of record earnings for many mortgage
originators due to low interest rates and record mortgage lending volumes.
Subsequent to our IPO in June 2004, and after a ramp-up period of approximately
three months, our mortgage portfolio operations became a significant contributor
to our net income. During 2004, our mortgage lending segment began to feel
the effects of higher interest rates and reduced net interest and gain on sale
margin on mortgage loans that we bankered and sold to third parties.
Furthermore, as part of our self-origination strategy, loans originated and
retained for investment, further contribute to the decline in GAAP net income
in
that we forgo the gain on sale premiums we would have otherwise received had
those loans been sold to a third party.
Comparative
Net Interest Income
|
($
in thousands)
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Interest
income
|
$
|
77,476
|
$
|
27,299
|
183.8
|
%
|
$
|
7,609
|
258.8
|
%
|
||||||
|
Interest
expense
|
60,104
|
16,013
|
275.3
|
%
|
3,266
|
390.3
|
%
|
|||||||||
|
Net
interest income
|
$
|
17,372
|
$
|
11,286
|
53.9
|
%
|
$
|
4,343
|
159.9
|
%
|
||||||
Net
interest income contributed $17.4 million, $11.3 million and $4.3 million to
total revenues for the years ended December 31, 2005, 2004, and 2003,
respectively. Our portfolio investment strategy was initiated in the third
quarter of 2004; prior to that period net interest income was earned on mortgage
loans held for sale during the interim period of funding a loan to a borrower
and the ultimate sale of the loan to a third party
Non-interest
related expenses were higher for the year ended December 31, 2005, relative
to
2004 and 2003 as a result of our new business strategies implemented with the
completion of our IPO in mid-year 2004. Incremental expenses primarily include
higher salaries for management of the portfolio management segment and increased
professional fee expenses for audit and implementation costs of Sarbanes-Oxley
404 compliance. With regard to our mortgage lending operations in place during
all three past years, we incurred incremental expenses associated with new
or
consolidating branch offices and satellite locations and increased personnel
costs associated with an expansion of NYMC’s information technology, accounting,
operations and marketing departments in connection with these new branches
and
locations and business strategies. In addition, during the year ended December
31, 2005, a charge of $2.3 million in compensation expense was recorded
primarily for the prior issuance of performance shares and accrued bonuses
issued in connection with our hiring and retention of former GRL branch
employees. As a result of our acquisition of the GRL branches in mid-November
2004, we incurred upfront expenses, with little offsetting revenues, through
the
mid-point of the first quarter due to lag time in closing the new originations
associated with the assumption of these branches.
Comparative
Other Non-Interest Related Expense
|
($
in thousands)
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Other
non-interest related expenses
|
$
|
63,034
|
$
|
36,329
|
73.5
|
%
|
$
|
20,376
|
78.3
|
%
|
||||||
Revenues
Net
Interest Income.
The
following table summarizes the changes in net interest income for 2005, 2004
and
2003:
Yields
Earned on Mortgage Loans and Securities and Rates on Financial
Arrangements
|
($
in
thousands)
|
2005
|
2004
|
2003
|
|||||||||||||||||||||||||
|
Average
Balance
|
Amount
|
Yield/
Rate
|
Average
Balance
|
Amount
|
Yield/
Rate
|
Average
Balance
|
Amount
|
Yield/
Rate
|
||||||||||||||||||||
|
($Millions)
|
($Millions)
|
($Millions)
|
||||||||||||||||||||||||||
|
Interest
Income:
|
||||||||||||||||||||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
1,347.4
|
$
|
60,988
|
4.53
|
%
|
$
|
1,006.8
|
$
|
21,338
|
4.24
|
%
|
—
|
—
|
—
|
|||||||||||||
|
Loans
held for investment
|
145.7
|
7,778
|
5.34
|
%
|
32.9
|
723
|
4.09
|
%
|
—
|
—
|
—
|
|||||||||||||||||
|
Loans
held for sale
|
238.7
|
14,751
|
6.19
|
%
|
122.6
|
6,905
|
5.63
|
%
|
134.5
|
7,609
|
5.66
|
%
|
||||||||||||||||
|
Amortization
of net premium
|
14.7
|
$
|
(6,041
|
)
|
(0.46
|
)%
|
$
|
11.5
|
$
|
(1,667
|
)
|
(0.46
|
)%
|
—
|
$
|
—
|
%
|
|||||||||||
|
Interest
income
|
$
|
1,746.5
|
$
|
77,476
|
4.44
|
%
|
$
|
1,173.8
|
$
|
27,299
|
4.65
|
%
|
134.5
|
$
|
7,609
|
5.66
|
%
|
|||||||||||
|
Interest
Expense:
|
||||||||||||||||||||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
1,283.3
|
$
|
42,001
|
3.23
|
%
|
$
|
930.1
|
$
|
11,982
|
4.09
|
%
|
—
|
$
|
—
|
—
|
||||||||||||
|
Loans
held for investment
|
142.7
|
5,847
|
4.04
|
%
|
32.7
|
488
|
2.72
|
%
|
—
|
—
|
—
|
|||||||||||||||||
|
Loans
held for sale
|
233.3
|
10,252
|
4.39
|
%
|
103.3
|
3,543
|
2.65
|
%
|
117.0
|
3,266
|
2.54
|
%
|
||||||||||||||||
|
Subordinated
debentures
|
26.6
|
2,004
|
7.54
|
%
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Interest
expense
|
$
|
1,685.9
|
$
|
60,104
|
3.52
|
%
|
$
|
1,066.1
|
$
|
16,013
|
3.0.
|
%
|
$
|
117.0
|
$
|
3,266
|
2.54
|
%
|
||||||||||
|
Net
interest income
|
$
|
60.6
|
$
|
17,372
|
0.92
|
%
|
$
|
107.7
|
$
|
11,286
|
1.65
|
%
|
$
|
17.5
|
$
|
4,344
|
3.12
|
%
|
||||||||||
For
our
portfolio investments of investment securities, mortgage loans held for
investments and loans held in securitization trusts, our net interest spread
for
each quarter since we began our portfolio investment activities
follows:
|
As
of the Quarter Ended
|
Average
Interest
Earning
Assets
($
millions)
|
Historical
Weighted
Average
Coupon
|
Yield
on
Interest
Earning
Assets
|
Cost
of
Funds
|
Net
Interest
Spread
|
|||||||||||
|
December
31, 2005
|
$
|
1,499.0
|
4.84
|
%
|
4.43
|
%
|
3.81
|
%
|
0.62
|
%
|
||||||
|
September
30, 2005
|
$
|
1,494.0
|
4.69
|
%
|
4.08
|
%
|
3.38
|
%
|
0.70
|
%
|
||||||
|
June
30, 2005
|
$
|
1,590.0
|
4.50
|
%
|
4.06
|
%
|
3.06
|
%
|
1.00
|
%
|
||||||
|
March
31, 2005
|
$
|
1,447.9
|
4.39
|
%
|
4.01
|
%
|
2.86
|
%
|
1.15
|
%
|
||||||
|
December
31, 2004
|
$
|
1,325.7
|
4.29
|
%
|
3.84
|
%
|
2.58
|
%
|
1.26
|
%
|
||||||
|
September
30, 2004
|
$
|
776.5
|
4.04
|
%
|
3.86
|
%
|
2.45
|
%
|
1.41
|
%
|
||||||
Gain
on Sales of Mortgage Loans. The
following table summarizes the gain on sales of mortgage loans for 2005, 2004
and 2003:
Gain
on Sales of Mortgage Loans
|
($
in thousands)
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Total
bankered loan volume
|
$
|
2,875,288
|
$
|
1,435,340
|
100.32
|
%
|
$
|
1,234,848
|
16.24
|
%
|
||||||
|
Total
bankered loan volume - units
|
12,654
|
6,882
|
83.87
|
%
|
4,770
|
44.28
|
%
|
|||||||||
|
Bankered
originations retained in portfolio
|
$
|
555,189
|
$
|
95,077
|
483.94
|
%
|
—
|
—
|
||||||||
|
Bankered
originations retained in portfolio - units
|
1,249
|
187
|
567.91
|
%
|
—
|
—
|
||||||||||
|
Net
bankered loan volume
|
$
|
2,320,099
|
$
|
1,340,263
|
73.11
|
%
|
$
|
1,234,848
|
8.54
|
%
|
||||||
|
Net
bankered loan volume - units
|
11,405
|
6,695
|
70.35
|
%
|
4,770
|
40.36
|
%
|
|||||||||
|
Gain
on sales of mortgage loans
|
$
|
26,783
|
$
|
20,835
|
28.55
|
%
|
$
|
23,031
|
(9.53
|
)%
|
||||||
|
Average
gain on sale spread
|
0.51
|
%
|
0.44
|
%
|
15.91
|
%
|
0.30
|
%
|
46.67
|
%
|
||||||
The
increase in bankered loan volumes during the years ended 2005 and 2004 is due
to
increased loan origination personnel and branch offices as compared to each
prior year. The year ended 2005 includes full year utilization of increased
personnel and branches while the increases for year ended 2004 primarily
occurred in the latter half of the year.
While
bankered loan volumes have increased, the gain on sales of mortgage loans have
not had a correlating increase due to lower net market spreads as a result
of
lower premiums when sold to third parties in 2005 and a higher cost of
origination, in part due to the upfront and incremental costs of the GRL
acquisition that were expensed in 2005. Such costs, such as amortization of
the
pipeline premium paid to GRL and retention compensation for GRL employees were
primarily expensed in 2005.
Furthermore,
gain on sale revenues in 2005 and 2004 are impacted by the execution of our
core
business strategy: retaining selected adjustable rate mortgages for our
investment portfolio. The execution of this strategy, which began in the third
quarter of 2004 after our IPO, requires that we forgo the gain on sale premiums
(revenues) we would otherwise receive when we sell these loans to third-parties.
Instead, the cost basis of these loans, which is far lower than the loan and
its
associated third-party premium, is retained in our investment portfolio with
the
inherent value of the loan realized over time. For the years ended December
31,
2005 and 2004, we originated and retained $555.2 million and $95.1 million
respectively, of loans in our investment portfolio and estimate that the forgone
gain on sale premium, net of the cost basis of these loans when retained in
our
investment portfolio, was $7.5 million and $2.0 million,
respectively.
Brokered
Loan Fees. The
following table summarizes brokered loan volume, fees and related expenses
for
the fiscal years ended 2005, 2004 and 2003:
Brokered
Loan Fees and Brokered Loan Expense
|
($
in thousands)
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Total
brokered loan volume
|
$
|
562.1
|
$
|
410.1
|
37.1
|
%
|
$
|
365.5
|
12.2
|
%
|
||||||
|
Total
brokered loan volume - units
|
2,059
|
1,171
|
75.8
|
%
|
934
|
25.4
|
%
|
|||||||||
|
Brokered
loan fees
|
$
|
9,991
|
$
|
6,895
|
44.9
|
%
|
$
|
6,683
|
3.2
|
%
|
||||||
|
Brokered
loan expenses
|
$
|
7,543
|
$
|
5,276
|
43.0
|
%
|
$
|
3,734
|
41.3
|
%
|
||||||
The
increase in brokered loan volume during the years ended 2005 and 2004 is due
to
increased loan origination personnel and branch offices as compared to each
prior year. The year ended 2005 includes full year utilization of increased
personnel and branches while the increases for year ended 2004 primarily
occurred in the latter half of the year.
While
brokered loan volumes have increased, brokered loan revenues have not had a
correlating increase due to lower lender rebates/premiums. Broker loan expenses,
as a percentage of brokered loan revenues have increased in 2005, relative
to
2004 and 2003, due to higher costs of origination, in part due to the upfront
and incremental costs of the GRL acquisition that were directed allocated and
expensed in 2005.
Gain
on sale of securities and related hedges. During
the year ended December 31, 2005, the gain on the sale of securities and related
hedges was $2.2 million as compared to $0.8 million and zero for the years
ended
2004 and 2003, respectively.
Impairment
loss on investment securities. During
the year ended December 31, 2005 we recognized an impairment loss on investment
securities of $7.4 million as compared to zero for the same period of 2004
and
2003, respectively. This loss, recognized in the fourth quarter of 2005, relates
to $388 million of securities classified as available for sale securities for
which we changed our intent to hold, and now plan to liquidate as part of our
portfolio restructuring.
Expenses
Most
of
our expenses are directly correlated to our staffing levels and our number
of
offices:
|
($
in thousands)
|
For
the Year Ended December 31,
|
|||||||||||||||
|
2005
|
2004
|
%
Change
|
2003
|
%
Change
|
||||||||||||
|
Loan
officers
|
329
|
344
|
(4.4
|
)%
|
142
|
142.3
|
%
|
|||||||||
|
Other
employees
|
473
|
438
|
8.0
|
%
|
193
|
126.9
|
%
|
|||||||||
|
Total
employees
|
802
|
782
|
2.6
|
%
|
335
|
133.4
|
%
|
|||||||||
|
Number
of sales locations
|
54
|
66
|
(18.2
|
)%
|
15
|
340.0
|
%
|
|||||||||
|
Salaries
and benefits
|
$
|
30,979
|
$
|
17,118
|
81.0
|
%
|
$
|
9,247
|
85.1
|
%
|
||||||
|
Occupancy
and equipment
|
6,127
|
3,529
|
73.6
|
%
|
2,018
|
74.9
|
%
|
|||||||||
|
Marketing
and promotion
|
4,861
|
3,190
|
52.4
|
%
|
1,008
|
216.5
|
%
|
|||||||||
|
Data
processing and communications
|
2,371
|
1,598
|
48.4
|
%
|
608
|
162.8
|
%
|
|||||||||
|
Office
supplies and expenses
|
2,333
|
1,519
|
53.6
|
%
|
803
|
89.2
|
%
|
|||||||||
|
Travel
and entertainment
|
840
|
612
|
37.3
|
%
|
666
|
(8.1
|
)%
|
|||||||||
|
Depreciation
and amortization
|
1,716
|
690
|
148.7
|
%
|
412
|
67.5
|
%
|
|||||||||
The
category increases noted above are in direct correlation to the 86% and 13%
increases in loan origination volume exhibited for the fiscal years ended
December 31, 2005 and December 31, 2004, respectively. Additionally, increased
expenses in the fiscal year ended December 31, 2004 over the same period of
2003
were due to the ramp up of additional key staff and costs necessary for our
transition to a public company following our IPO in June of that year as well
as
the integration of the GRL acquisition in the latter half of 2004. Fiscal year
end December 31, 2005 reflects a full year of these expenses.
Professional
Fees Expense. During
the year ended December 31, 2005, we had professional fees expense of $4.7
million compared to $2.0 million and $1.0 million for the same periods of 2004
and 2003, an increase of 135% and 100% for the respective periods. This increase
was primarily due to the increased costs of compliance with various regulatory
and public company requirements, such as the Sarbanes-Oxley Act of 2002 and
increases in dues, licenses and permits in states where NYMC has a new
presence.
Off-Balance
Sheet Arrangements
Since
inception, we have not maintained any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Further, we have not guaranteed any obligations of unconsolidated
entities nor do we have any commitment or intent to provide funding to any
such
entities. Accordingly, we are not materially exposed to any market, credit,
liquidity or financing risk that could arise if we had engaged in such
relationships.
Liquidity
and Capital Resources
Liquidity
is a measure of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, fund and maintain investments, pay
dividends to our stockholders and other general business needs. We recognize
the
need to have funds available for our operating businesses and our investment
in
mortgage loans until the settlement or sale of mortgages with us or with other
investors. It is our policy to have adequate liquidity at all times to cover
normal cyclical swings in funding availability and mortgage demand and to allow
us to meet abnormal and unexpected funding requirements. We plan to meet
liquidity through normal operations with the goal of avoiding unplanned sales
of
assets or emergency borrowing of funds.
We
believe our existing cash balances and funds available under our credit
facilities and cash flows from operations will be sufficient for our liquidity
requirements for at least the next 12 months. Unused borrowing capacity will
vary as the market values of our securities vary. Our investments and assets
will also generate liquidity on an ongoing basis through mortgage principal
and
interest payments, pre-payments and net earnings held prior to payment of
dividends. Should our liquidity needs ever exceed these on-going or immediate
sources of liquidity discussed above, we believe that our securities could
be
sold to raise additional cash in most circumstances. We do, however, expect
to
expand our mortgage origination operations and may have to arrange for
additional sources of capital through the issuance of debt or equity or
additional bank borrowings to fund that expansion. At December 31, 2005, we
had
no commitments for any additional financings, and we cannot ensure that we
will
be able to obtain any future additional financing at the times required and
on
terms and conditions acceptable to us.
To
finance our investment portfolio, we generally seek to borrow between eight
and
12 times the amount of our equity. Our leverage ratio, defined as total
financing facilities outstanding divided by total stockholders’ equity, at
December 31, 2005, was 16 to 1. We, and the providers of our finance facilities,
generally view our $45.0 million of subordinated trust preferred debentures
outstanding at December 31, 2005 as a form of equity which would result in
an
adjusted leverage ratio of 11 to 1.
We
have
arrangements to enter into repurchase agreements, a form of collateralized
short-term borrowing, with 23 different financial institutions with total
borrowing capacity of $5.4 billion; as of December 31, 2005 we had borrowed
from
eight of these firms. These agreements are secured by our mortgage-backed
securities and bear interest rates that have historically moved in close
relationship to LIBOR. As of December 31, 2005 we had $1.2 billion in
outstanding repurchase agreements. Under these repurchase agreements the
financial institutions lend money versus the market value of our mortgage-backed
securities portfolio, and, accordingly, an increase in interest rates can have
a
negative impact on the valuation of these securities, resulting in a potential
margin call from the financial institution. We monitor the market valuation
fluctuation as well as other liquidity needs to ensure there is adequate
collateral available to meet any additional margin calls or liquidity
requirements.
We
enter
into interest rate swap agreements to extend the maturity of our repurchase
agreements as a mechanism to reduce the interest rate risk of the securities
portfolio. At December 31, 2005 we had $645.0 million in interest rate swaps
outstanding with six different financial institutions. The weighted average
maturity of the swaps was 334 days at December 31, 2005. The impact of the
interest swaps extends the maturity of the repurchase agreements to one
year.
To
originate a mortgage loan, we may draw against a $200.0 million repurchase
facility with Credit Suisse First Boston Mortgage Capital, LLC, or CSFB. This
facility is secured by the mortgage loans owned by us. Advances drawn under
this
facility bear interest at rates that vary depending on the type of mortgage
loans securing the advances. This facility is subject to sub-limits, advance
rates and terms that vary depending on the type of mortgage loans securing
these
financings and the ratio of our liabilities to our tangible net worth. As of
December 31, 2005, the aggregate outstanding balance under this facility was
$144.0 million and the aggregate maximum amount available for additional
borrowings was $56.0 million. This agreement is not a committed facility and
may
be terminated at any time at the discretion of the counterparty.
In
addition to this facility, we may also draw against a master loan and security
agreement with Greenwich Capital for $250 million and $300 million with Deutsche
Bank Structured Products, Inc. Under these agreements, the
counterparty provides
financing to us for the origination or acquisition of certain mortgage loans,
which then will be sold to third parties or contributed for future
securitization to one or more trusts or other entities sponsored by us or an
affiliate. We will repay advances under this credit facility with a portion
of
the proceeds from the sale of all mortgage-backed securities issued by the
trust
or other entity, along with a portion of the proceeds resulting from permitted
whole loan sales. Advances under this facility bear interest at a floating
rate
initially equal to LIBOR plus a spread (starting at 0.62%) that varies depending
on the types of mortgage loans securing these facilities. Advances under this
facility are subject to lender approval of the mortgage loans intended for
origination or acquisition, advance rates and the then ratio of our liabilities
to our tangible net worth. This facility is not a committed facility and may
be
terminated at any time at the discretion of the counterparties. As of December
31, 2005 the outstanding balance of the Greenwich facility was $81.6 million
and
the Deutsche Bank facility was zero with the maximum aggregate amount available
for additional borrowings of $168.4 million.
The
documents governing these facilities contain a number of compensating balance
requirements and restrictive financial and other covenants that, among other
things, require us to maintain a maximum ratio of total liabilities to tangible
net worth, of 20 to 1 in the case of each of the CSFB facility, 20 to 1 and
20
to 1 in the case of the Greenwich Capital facility and 15 to 1 in the case
of
Deutsche Bank, as well as to comply with applicable regulatory and investor
requirements. These facilities also contain various covenants pertaining to,
among other things, the maintenance of certain periodic income thresholds and
working capital. The lines contain various covenants pertaining to, among other
things, maintenance of certain amounts of net worth, periodic income thresholds
and working capital. As of December 31, 2005, the Company was in compliance
with
all covenants with the exception of the net income covenant on the CSFB and
Greenwich facilities and waivers have been obtained from these institutions.
As
these annual agreements are negotiated for renewal, these covenants may be
further modified. The agreements are each renewable annually, but are not
committed, meaning that the counterparties to the agreements may withdraw access
to the credit facilities at any time.
The
agreements also contain covenants limiting the ability of our subsidiaries
to:
| • |
transfer
or sell assets;
|
| • |
create
liens on the collateral; or
|
| • |
incur
additional indebtedness, without obtaining the prior consent of the
lenders, which consent may not be unreasonably withheld.
|
These
limits may in turn restrict our ability to pay cash or stock dividends on our
stock. In addition, under our warehouse facilities, we cannot continue to
finance a mortgage loan that we hold through the warehouse facility
if:
| • |
the
loan is rejected as “unsatisfactory for purchase” by the ultimate investor
and has exceeded its permissible warehouse period
which varies by facility;
|
| • |
we
fail to deliver the applicable note, mortgage or other documents
evidencing the loan within the requisite time
period;
|
| • |
the
underlying property that secures the loan has sustained a casualty
loss in
excess of 5% of its appraised value;
or
|
| • |
the
loan ceases to be an eligible loan (as determined pursuant to the
warehouse facility agreement).
|
We
expect
that these credit facilities will be sufficient to meet our capital and
financing needs during the next twelve months. The balances of these facilities
fluctuate based on the timing of our loan closings (at which point we may draw
upon the facilities) and the near-term subsequent sale of these loans to third
parties or the alternative financing thereof through repurchase agreements
or,
in the future, securitizations for mortgage loans we intend to retain (at which
point these facilities are paid down). The current availability under these
facilities and our current and projected levels of loan origination volume
are
consistent with our historic ability to manage our pipeline of mortgage loans,
the subsequent sale thereof and the related pay down of the
facilities.
As
of
December 31, 2005, our aggregate warehouse and repurchase facility borrowings
under these facilities were $225.2 million and $1.2 billion, respectively,
at an
average interest rate of approximately 4.89%.
Our
financing arrangements are short-term facilities secured by the underlying
investment in residential mortgage loans, the value of which may move inversely
with changes in interest rates. A decline in the market value of our investments
in the future may limit our ability to borrow under these facilities or result
in lenders requiring additional collateral or initiating margin calls under
our
repurchase agreements. As a result, we could be required to sell some of our
investments under adverse market conditions in order to maintain liquidity.
If
such sales are made at prices lower than the amortized costs of such
investments, we will incur losses.
Our
ability to originate loans depends in large part on our ability to sell the
mortgage loans we originate at cost or for a premium in the secondary market
so
that we may generate cash proceeds to repay borrowings under our warehouse
facilities and our repurchase agreement. The value of our loans depends on
a
number of factors, including:
| • |
interest
rates on our loans compared to market interest rates;
|
| • |
the
borrower credit risk classification;
|
| • |
loan-to-value
ratios, loan terms, underwriting and documentation; and
|
| • |
general
economic conditions.
|
We
make
certain representations and warranties, and are subject to various affirmative
and negative financial and other covenants, under the agreements covering the
sale of our mortgage loans regarding, among other things, the loans’ compliance
with laws and regulations, their conformity with the ultimate investors’
underwriting standards and the accuracy of information. In the event of a breach
of these representations, warranties or covenants or in the event of an early
payment default, we may be required to repurchase the loans and indemnify the
loan purchaser for damages caused by that breach. We have implemented strict
procedures to ensure quality control and conformity to underwriting standards
and minimize the risk of being required to repurchase loans. We have been
required to repurchase loans we have sold from time to time; however, these
repurchases have not had a material impact on our results of
operations.
We
intend
to make distributions to our stockholders to comply with the various
requirements to maintain our REIT status and to minimize or avoid corporate
income tax and the nondeductible excise tax. However, differences in timing
between the recognition of REIT taxable income and the actual receipt of cash
could require us to sell assets or to borrow funds on a short-term basis to
meet
the REIT distribution requirements and to avoid corporate income tax and the
nondeductible excise tax.
Certain
of our assets may generate substantial mismatches between REIT taxable income
and available cash. These assets could include mortgage-backed securities we
hold that have been issued at a discount and require the accrual of taxable
income in advance of the receipt of cash. As a result, our REIT taxable income
may exceed our cash available for distribution and the requirement to distribute
a substantial portion of our net taxable income could cause us to:
| • |
sell
assets in adverse market conditions;
|
| • |
borrow
on unfavorable terms; or
|
| • |
distribute
amounts that would otherwise be invested in future acquisitions,
capital
expenditures or repayment of debt, in order to
comply with the REIT distribution
requirements.
|
Inflation
For
the
periods presented herein, inflation has been relatively low and we believe
that
inflation has not had a material effect on our results of operations. The impact
of inflation is primarily reflected in the increased costs of our operations.
Virtually all our assets and liabilities are financial in nature. Our
consolidated financial statements and corresponding notes thereto have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due
to inflation. As a result, interest rates and other factors influence our
performance far more than inflation. Inflation affects our operations primarily
through its effect on interest rates, since interest rates typically increase
during periods of high inflation and decrease during periods of low inflation.
During periods of increasing interest rates, demand for mortgages and a
borrower’s ability to qualify for mortgage financing in a purchase transaction
may be adversely affected. During periods of decreasing interest rates,
borrowers may prepay their mortgages, which in turn may adversely affect our
yield and subsequently the value of our portfolio of mortgage
assets.
Contractual
Obligations
The
Company had the following contractual obligations (excluding derivative
financial instruments) at December 31, 2005:
|
($
in thousands)
|
Total
|
Less
Than
1
Year
|
1
to 3
Years
|
4
to 5
Years
|
After
5
Years
|
|||||||||||
|
Reverse
repurchase agreements
|
$
|
1,166,499
|
$
|
1,166,499
|
—
|
—
|
—
|
|||||||||
|
Warehouse
facilities
|
225,186
|
225,186
|
—
|
—
|
—
|
|||||||||||
|
Operating
leases
|
16,768
|
4,685
|
9,967
|
2,116
|
—
|
|||||||||||
|
Collateralized
debt obligations(1)
|
228,226
|
33,233
|
95,949
|
36,122
|
62,922
|
|||||||||||
|
Subordinated
debentures
|
45,000
|
—
|
—
|
—
|
45,000
|
|||||||||||
|
Employment
agreements(2)
|
7,385
|
1,846
|
5,539
|
—
|
—
|
|||||||||||
|
$
|
1,689,064
|
$
|
1,431,449
|
$
|
111,455
|
$
|
38,238
|
$
|
107,922
|
|||||||
| (1) |
Maturities
of our CDOs are dependent upon cash flows received from the underlying
loans receivable. Our estimate of their repayment is based on scheduled
principal payments on the underlying loans receivable. This estimate
will
differ from actual amounts to the extent prepayments and/or loan
losses
are experienced.
|
| (2) |
Represents
base cash compensation of executive officers.
|
New Accounting Pronouncements
In
December, 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based payment,” ( “SFAS No. 123R”) which will require all companies
to measure compensation costs for all share-based payments, including employee
stock options, at fair value. This statement will be effective for our company
with the quarter beginning January 1, 2006. We have elected to expense share
based compensation in accordance with SFAS No. 123, therefore proactively
adopting the requirements of SFAS No. 123R.
Market
risk is the exposure to loss resulting from changes in interest rates, credit
spreads, foreign currency exchange rates, commodity prices and equity prices.
Because we are invested solely in U.S.-dollar denominated instruments, primarily
residential mortgage instruments, and our borrowings are also domestic and
U.S.
dollar denominated, we are not subject to foreign currency exchange, or
commodity and equity price risk; the primary market risk that we are exposed
to
is interest rate risk and its related ancillary risks. Interest rate risk is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations
and
other factors beyond our control. All of our market risk sensitive assets,
liabilities and related derivative positions are for non-trading purposes
only.
Management
recognizes the following primary risks associated with our business and the
industry in which we conduct business:
| • |
Interest
rate and market (fair value) risk
|
| • |
Credit
spread risk
|
| • |
Liquidity
and funding risk
|
| • |
Prepayment
risk
|
| • |
Credit
risk
|
Interest
Rate Risk
Our
primary interest rate exposure relates to the portfolio of adjustable-rate
mortgage loans and mortgage-backed securities we acquire, as well as our
variable-rate borrowings and related interest rate swaps and caps. Interest
rate
risk is defined as the sensitivity of our current and future earnings to
interest rate volatility, variability of spread relationships, the difference
in
re-pricing intervals between our assets and liabilities and the effect that
interest rates may have on our cash flows, especially the speed at which
prepayments occur on our residential mortgage related assets.
Changes
in the general level of interest rates can affect our net interest income,
which
is the difference between the interest income earned on interest earning assets
and our interest expense incurred in connection with our interest bearing debt
and liabilities. Changes in interest rates can also affect, among other things,
our ability to originate and acquire loans and securities, the value of our
loans, mortgage pools and mortgage-backed securities, and our ability to realize
gains from the resale and settlement of such originated loans.
In
our
investment portfolio, our primary market risk is interest rate risk. Interest
rate risk can be defined as the sensitivity of our portfolio, including future
earnings potential, prepayments, valuations and overall liquidity. We attempt
to
manage interest rate risk by adjusting portfolio compositions, liability
maturities and utilizing interest rate derivatives including interest rate
swaps
and caps. Management’s goal is to maximize the earnings potential of the
portfolio while maintaining long term stable portfolio valuations.
We
utilize a model based risk analysis system to assist in projecting portfolio
performances over a scenario of different interest rates. The model incorporates
shifts in interest rates, changes in prepayments and other factors impacting
the
valuations of our financial securities, including mortgage-backed securities,
repurchase agreements, interest rate swaps and interest rate caps.
Based
on
the results of this model, as of December 31, 2005, an instantaneous shift
of
100 basis points in interest rates would result in an approximate decrease
in
the net interest spread by 30-35 basis points as compared to our base line
projections over the next year.
The
following tables set forth information about financial instruments (dollar
amounts in thousands):
|
December
31, 2005
|
||||||||||
|
|
Notional
Amount
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||
|
Investment
securities available for sale
|
$
|
719,701
|
$
|
716,482
|
$
|
716,482
|
||||
|
Mortgage
loans held for investment
|
4,054
|
4,060
|
4,079
|
|||||||
|
Mortgage
loans held in the securitization trusts
|
771,451
|
776,610
|
775,311
|
|||||||
|
Mortgage
loans held for sale
|
108,244
|
108,271
|
109,252
|
|||||||
|
Commitments
and contingencies:
|
||||||||||
|
Interest
rate lock commitments - loan commitments
|
130,320
|
123
|
123
|
|||||||
|
Interest
rate lock commitments - mortgage loans held for sale
|
108,109
|
(14
|
)
|
(14
|
)
|
|||||
|
Forward
loan sales contracts
|
51,763
|
(380
|
)
|
(380
|
)
|
|||||
|
Interest
rate swaps
|
645,000
|
6,383
|
6,383
|
|||||||
|
Interest
rate caps
|
1,858,860
|
3,340
|
3,340
|
|||||||
|
|
December
31, 2004
|
|||||||||
|
|
Notional
Amount
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||
|
Investment
securities available for sale
|
$
|
1,194,055
|
$
|
1,204,745
|
$
|
1,204,745
|
||||
|
Mortgage
loans held for investment
|
188,859
|
190,153
|
190,608
|
|||||||
|
Mortgage
loans held for sale
|
85,105
|
85,385
|
86,098
|
|||||||
|
Commitments
and contingencies:
|
||||||||||
|
Interest
rate lock commitments
|
156,110
|
38
|
38
|
|||||||
|
Forward
loan sales contracts
|
97,080
|
(165
|
)
|
(165
|
)
|
|||||
|
Interest
rate swaps
|
670,000
|
3,228
|
3,228
|
|||||||
|
Interest
rate caps
|
250,000
|
411
|
411
|
|||||||
The
impact of changing interest rates may be mitigated by portfolio prepayment
activity that we closely monitor and the portfolio funding strategies we employ.
First, our adjustable rate borrowings may react to changes in interest rates
before our adjustable rate assets because the weighted average next repricing
dates on the related borrowings may have shorter time periods than that of
the
adjustable rate assets. Second, interest rates on adjustable rate assets may
be
limited to a “periodic cap” or an increase of typically 1% or 2% per adjustment
period, while our borrowings do not have comparable limitations. Third, our
adjustable rate assets typically lag changes in the applicable interest rate
indices by 45 days, due to the notice period provided to adjustable rate
borrowers when the interest rates on their loans are scheduled to
change.
In
a
period of declining interest rates or nominal differences between long-term
and
short-term interest rates, the rate of prepayment on our mortgage assets may
increase. Increased prepayments would cause us to amortize any premiums paid
for
our mortgage assets faster, thus resulting in a reduced net yield on our
mortgage assets. Additionally, to the extent proceeds of prepayments cannot
be
reinvested at a rate of interest at least equal to the rate previously earned
on
such mortgage assets, our earnings may be adversely affected.
Conversely,
if interest rates rise or if the differences between long-term and short-term
interest rates increase the rate of prepayment on our mortgage assets may
decrease. Decreased prepayments would cause us to amortize the premiums paid
for
our ARM assets over a longer time period, thus resulting in an increased net
yield on our mortgage assets. Therefore, in rising interest rate environments
where prepayments are declining, not only would the interest rate on the ARM
Assets portfolio increase to re-establish a spread over the higher interest
rates, but the yield also would rise due to slower prepayments. The combined
effect could significantly mitigate other negative effects that rising
short-term interest rates might have on earnings.
Interest
rates can also affect our net return on hybrid adjustable rate (“hybrid ARM”)
securities and loans net of the cost of financing hybrid ARMs. We continually
monitor and estimate the duration of our hybrid ARMs and have a policy to hedge
the financing of the hybrid ARMs such that the net duration of the hybrid ARMs,
our borrowed funds related to such assets, and related hedging instruments
are
less than one year. During a declining interest rate environment, the prepayment
of hybrid ARMs may accelerate (as borrowers may opt to refinance at a lower
rate) causing the amount of fixed-rate financing to increase relative to the
amount of hybrid ARMs, possibly resulting in a decline in our net return on
hybrid ARMs as replacement hybrid ARMs may have a lower yield than those being
prepaid. Conversely, during an increasing interest rate environment, hybrid
ARMs
may prepay slower than expected, requiring us to finance a higher amount of
hybrid ARMs than originally forecast and at a time when interest rates may
be
higher, resulting in a decline in our net return on hybrid ARMs. Our exposure
to
changes in the prepayment speed of hybrid ARMs is mitigated by regular
monitoring of the outstanding balance of hybrid ARMs and adjusting the amounts
anticipated to be outstanding in future periods and, on a regular basis, making
adjustments to the amount of our fixed-rate borrowing obligations for future
periods.
Interest
rate changes can also affect the availability and pricing of adjustable rate
assets, which affects our origination activity and investment opportunities.
During a rising interest rate environment, there may be less total loan
origination activity, particularly for refinancings. At the same time, a rising
interest rate environment may result in a larger percentage of adjustable rate
products being originated, mitigating the impact of lower overall loan
origination activity. In addition, our focus on purchase mortgages as opposed
to
refinancings also mitigates the volatility of our origination volume as
refinancing volume is typically a function of lower interest rates, whereas,
purchase mortgage volume has historically remained relatively static during
interest rate cycles. Conversely, during a declining interest rate environment
total loan origination activity may rise with many of the borrowers desiring
fixed-rate mortgage products. Although adjustable rate product origination
as a
percentage of total loan origination may decline during these periods, the
increased loan origination and refinancing volume in the industry may produce
sufficient investment opportunities. Additionally, a flat yield curve may be
an
adverse environment for adjustable rate products because the incentive for
a
borrower to choose an adjustable rate product over a longer term fixed-rate
mortgage loan is minimized and, conversely, in a steep yield curve environment,
adjustable rate products may enjoy an above average advantage over longer term
fixed-rate mortgage loans, increasing our investment opportunities.
As
the
rate environment changes, the impact on origination volume and the type of
loan
product that is favored is mitigated, in part, by our ability to operate in
our
two business segments. In periods where adjustable rate product is favored,
our
mortgage portfolio management segment, which invests in such mortgage loans,
will benefit from a larger selection of loan product for its portfolio and
the
inherent lower cost basis and resultant wider net margin. Our mortgage lending
segment, regardless of whether adjustable rate or fixed rate product is favored,
will continue to originate such loans and will continue to sell to third parties
all fixed rate product; as a result, in periods where fixed rate product is
favored, our origination segment may see increased revenues as such fixed
product is sold to third parties.
Interest
rate changes may also impact our net book value as our securities, certain
mortgage loans and related hedge derivatives are marked-to-market each quarter.
Generally, as interest rates increase, the value of our fixed income
investments, such as mortgage loans and mortgage-backed securities, decreases
and as interest rates decrease, the value of such investments will increase.
We
seek to hedge to some degree changes in value attributable to changes in
interest rates by entering into interest rate swaps and other derivative
instruments. In general, we would expect that, over time, decreases in value
of
our portfolio attributable to interest rate changes will be offset to some
degree by increases in value of our interest rate swaps, and vice versa.
However, the relationship between spreads on securities and spreads on swaps
may
vary from time to time, resulting in a net aggregate book value increase or
decline. However, unless there is a material impairment in value that would
result in a payment not being received on a security or loan, changes in the
book value of our portfolio will not directly affect our recurring earnings
or
our ability to make a distribution to our stockholders.
In
order
to minimize the negative impacts of changes in interest rates on earnings and
capital, we closely monitor our asset and liability mix and utilize interest
rate swaps and caps, subject to the limitations imposed by the REIT
qualification tests.
Movements
in interest rates can pose a major risk to us in either a rising or declining
interest rate environment. We depend on substantial borrowings to conduct our
business. These borrowings are all made at variable interest rate terms that
will increase as short term interest rates rise. Additionally, when interest
rates rise, mortgage loans held for sale and any applications in process with
interest rate lock commitments, or IRLCs, decrease in value. To preserve the
value of such loans or applications in process with IRLCs, we may enter into
forward sale loan contracts, or FSLCs, to be settled at future dates with fixed
prices.
When
interest rates decline, loan applicants may withdraw their open applications
on
which we have issued an IRLC. In those instances, we may be required to purchase
loans at current market prices to fulfill existing FSLCs, thereby incurring
losses upon sale.
We
monitor our mortgage loan pipeline closely and on occasion may choose to
renegotiate locked loan terms with a borrower to prevent withdrawal of open
applications and mitigate the associated losses.
In
the
event that we do not deliver the FSLCs or exercise our option contracts, the
instruments can be settled on a net basis. Net settlement entails paying or
receiving cash based upon the change in market value of the existing instrument.
All FSLCs and option contracts to buy securities are to be contractually settled
within six months of the balance sheet date. FSLCs and options contracts for
individual loans generally must be settled within 60 days.
Our
hedging transactions using derivative instruments also involve certain
additional risks such as counterparty credit risk, the enforceability of hedging
contracts and the risk that unanticipated and significant changes in interest
rates will cause a significant loss of basis in the contract. The counterparties
to our derivative arrangements are major financial institutions and securities
dealers that are well capitalized with high credit ratings and with which we
may
also have other financial relationships. While we do not anticipate
nonperformance by any counterparty, we are exposed to potential credit losses
in
the event the counterparty fails to perform. Our exposure to credit risk in
the
event of default by a counterparty is the difference between the value of the
contract and the current market price. There can be no assurance that we will
be
able to adequately protect against the forgoing risks and will ultimately
realize an economic benefit that exceeds the related expenses incurred in
connection with engaging in such hedging strategies.
While
we
have not experienced any significant credit losses, in the event of a
significant rising interest rate environment and/or economic downturn, mortgage
and loan defaults may increase and result in credit losses that would adversely
affect our liquidity and operating results.
Credit
Spread Exposure
The
mortgage-backed securities we currently, and will in the future, own are also
subject to spread risk. The majority of these securities will be adjustable-rate
securities that are valued based on a market credit spread to U.S. Treasury
security yields. In other words, their value is dependent on the yield demanded
on such securities by the market based on their credit relative to U.S. Treasury
securities. Excessive supply of such securities combined with reduced demand
will generally cause the market to require a higher yield on such securities,
resulting in the use of a higher or wider spread over the benchmark rate
(usually the applicable U.S. Treasury security yield) to value such securities.
Under such conditions, the value of our securities portfolio would tend to
decline. Conversely, if the spread used to value such securities were to
decrease or tighten, the value of our securities portfolio would tend to
increase. Such changes in the market value of our portfolio may affect our
net
equity, net income or cash flow directly through their impact on unrealized
gains or losses on available-for-sale securities, and therefore our ability
to
realize gains on such securities, or indirectly through their impact on our
ability to borrow and access capital.
Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market’s
expectations of future interest rates, would also affect the yield required
on
our securities and therefore their value. These shifts, or a change in spreads,
would have a similar effect on our portfolio, financial position and results
of
operations.
Market
(Fair Value) Risk
For
certain of the financial instruments that we own, fair values will not be
readily available since there are no active trading markets for these
instruments as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated for these investments
using various valuation techniques, such as computing the present value of
estimated future cash flows using discount rates commensurate with the risks
involved. However, the determination of estimated future cash flows is
inherently subjective and imprecise. Minor changes in assumptions or estimation
methodologies can have a material effect on these derived or estimated fair
values. These estimates and assumptions are indicative of the interest rate
environments as of December 31, 2005 and do not take into consideration the
effects of subsequent interest rate fluctuations.
We
note
that the values of our investments in mortgage-backed securities, and in
derivative instruments, primarily interest rate hedges on our debt, will be
sensitive to changes in market interest rates, interest rate spreads, credit
spreads and other market factors. The value of these investments can vary and
has varied materially from period to period. Historically, the values of our
mortgage loan portfolio have tended to vary inversely with those of its
derivative instruments.
The
following describes the methods and assumptions we use in estimating fair values
of our financial instruments:
Fair
value estimates are made as of a specific point in time based on estimates
using
present value or other valuation techniques. These techniques involve
uncertainties and are significantly affected by the assumptions used and the
judgments made regarding risk characteristics of various financial instruments,
discount rates, estimates of future cash flows, future expected loss experience
and other factors.
Changes
in assumptions could significantly affect these estimates and the resulting
fair
values. Derived fair value estimates cannot be substantiated by comparison
to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumptions used to estimate fair values, the fair values used by us should
not
be compared to those of other companies.
The
fair
values of the Company’s residential mortgage-backed securities are generally
based on market prices provided by five to seven dealers who make markets in
these financial instruments. If the fair value of a security is not reasonably
available from a dealer, management estimates the fair value based on
characteristics of the security that the Company receives from the issuer and
on
available market information.
The
fair
value of loans held for investment are determined by the loan pricing sheet
which is based on internal management pricing and third party competitors in
similar products and markets.
The
fair
value of commitments to fund with agreed upon rates are estimated using the
fees
and rates currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current market interest rates and the existing
committed rates.
The
fair
value of commitments to deliver mortgages is estimated using current market
prices for dealer or investor commitments relative to our existing
positions.
The
market risk management discussion and the amounts estimated from the analysis
that follows are forward-looking statements that assume that certain market
conditions occur. Actual results may differ materially from these projected
results due to changes in our ARM portfolio and borrowings mix and due to
developments in the domestic and global financial and real estate markets.
Developments in the financial markets include the likelihood of changing
interest rates and the relationship of various interest rates and their impact
on our ARM portfolio yield, cost of funds and cash flows. The analytical methods
that we use to assess and mitigate these market risks should not be considered
projections of future events or operating performance.
As
a
financial institution that has only invested in U.S.-dollar denominated
instruments, primarily residential mortgage instruments, and has only borrowed
money in the domestic market, we are not subject to foreign currency exchange
or
commodity price risk. Rather, our market risk exposure is largely due to
interest rate risk. Interest rate risk impacts our interest income, interest
expense and the market value on a large portion of our assets and liabilities.
The management of interest rate risk attempts to maximize earnings and to
preserve capital by minimizing the negative impacts of changing market rates,
asset and liability mix, and prepayment activity.
The
table
below presents the sensitivity of the market value of our portfolio using a
discounted cash flow simulation model. Application of this method results in
an
estimation of the percentage change in the market value of our assets,
liabilities and hedging instruments per 100 basis point (“bp”) shift in interest
rates expressed in years - a measure commonly referred to as duration. Positive
portfolio duration indicates that the market value of the total portfolio will
decline if interest rates rise and increase if interest rates decline. The
closer duration is to zero, the less interest rate changes are expected to
affect earnings. Included in the table is a “Base Case” duration calculation for
an interest rate scenario that assumes future rates are those implied by the
yield curve as of December 31, 2005. The other two scenarios assume interest
rates are instantaneously 100 and 200 bps higher that those implied by market
rates as of December 31, 2005.
The
use
of hedging instruments is a critical part of our interest rate risk management
strategies, and the effects of these hedging instruments on the market value
of
the portfolio are reflected in the model’s output. This analysis also takes into
consideration the value of options embedded in our mortgage assets including
constraints on the repricing of the interest rate of ARM Assets resulting from
periodic and lifetime cap features, as well as prepayment options. Assets and
liabilities that are not interest rate-sensitive such as cash, payment
receivables, prepaid expenses, payables and accrued expenses are excluded.
The
duration calculated from this model is a key measure of the effectiveness of
our
interest rate risk management strategies.
Changes
in assumptions including, but not limited to, volatility, mortgage and financing
spreads, prepayment behavior, defaults, as well as the timing and level of
interest rate changes will affect the results of the model. Therefore, actual
results are likely to vary from modeled results.
Net
Portfolio Duration
December
31, 2005
|
|
|
Basis
point increase
|
||||||||
|
|
Base
|
+100
|
+200
|
|||||||
|
Mortgage
Portfolio
|
1.20
years
|
1.56
years
|
1.69
years
|
|||||||
|
Borrowings
(including hedges)
|
0.29
|
0.29
|
0.29
|
|||||||
|
Net
|
0.91
years
|
1.27
years
|
1.40
years
|
|||||||
It
should
be noted that the model is used as a tool to identify potential risk in a
changing interest rate environment but does not include any changes in portfolio
composition, financing strategies, market spreads or changes in overall market
liquidity.
Based
on
the assumptions used, the model output suggests a very low degree of portfolio
price change given increases in interest rates, which implies that our cash
flow
and earning characteristics should be relatively stable for comparable changes
in interest rates.
Although
market value sensitivity analysis is widely accepted in identifying interest
rate risk, it does not take into consideration changes that may occur such
as,
but not limited to, changes in investment and financing strategies, changes
in
market spreads, and changes in business volumes. Accordingly, we make extensive
use of an earnings simulation model to further analyze our level of interest
rate risk.
There
are
a number of key assumptions in our earnings simulation model. These key
assumptions include changes in market conditions that affect interest rates,
the
pricing of ARM products, the availability of ARM products, and the availability
and the cost of financing for ARM products. Other key assumptions made in using
the simulation model include prepayment speeds and management’s investment,
financing and hedging strategies, and the issuance of new equity. We typically
run the simulation model under a variety of hypothetical business scenarios
that
may include different interest rate scenarios, different investment strategies,
different prepayment possibilities and other scenarios that provide us with
a
range of possible earnings outcomes in order to assess potential interest rate
risk. The assumptions used represent our estimate of the likely effect of
changes in interest rates and do not necessarily reflect actual results. The
earnings simulation model takes into account periodic and lifetime caps embedded
in our ARM Assets in determining the earnings at risk.
Liquidity
and Funding Risk
Liquidity
is a measure of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, fund and maintain investments, pay
dividends to our stockholders and other general business needs. We recognize
the
need to have funds available for our operating businesses and our investment
in
mortgage loans until the settlement or sale of mortgages with us or with other
investors. It is our policy to have adequate liquidity at all times to cover
normal cyclical swings in funding availability and mortgage demand and to allow
us to meet abnormal and unexpected funding requirements. We plan to meet
liquidity through normal operations with the goal of avoiding unplanned sales
of
assets or emergency borrowing of funds.
Our
mortgage lending operations require significant cash to fund loan originations.
Our warehouse lending arrangements, including repurchase agreements, support
the
mortgage lending operation. Generally, our warehouse mortgage lenders allow
us
to borrow between 96% and 100% of the outstanding principal. Funding for the
difference - generally 2% of the principal - must come from other cash inflows.
Our operating cash inflows are predominately from cash flow from mortgage
securities, principal and interest on mortgage loans, third party sales of
originated loans that do not fit our portfolio investment criteria, and fee
income from loan originations. Other than access to our financing facilities,
proceeds from equity offerings have been used to support
operations.
Loans
financed with warehouse, aggregation and repurchase credit facilities are
subject to changing market valuations and margin calls. The market value of
our
loans is dependent on a variety of economic conditions, including interest
rates
(and borrower demand) and end investor desire and capacity. There is no
certainty that market values will remain constant. To the extent the value
of
the loans declines significantly, we would be required to repay portions of
the
amounts we have borrowed. The derivative financial instruments we use also
subject us to “margin call” risk based on their market values. Under our
interest rate swaps, we pay a fixed rate to the counterparties while they pay
us
a floating rate. When floating rates are low, on a net basis we pay the
counterparty and visa-versa. In a declining interest rate environment, we would
be subject to additional exposure for cash margin calls. However, the asset
side
of the balance sheet should increase in value in a further declining interest
rate scenario. Most of our interest rate swap agreements provide for a
bi-lateral posting of margin, the effect being that on either side of the
valuation for such swaps, the counterparty can call/post margin. Unlike typical
unilateral posting of margin only in the direction of the swap counterparty,
this provides us with additional flexibility in meeting our liquidity
requirements as we can call margin on our counterparty as swap values
increase.
Incoming
cash on our mortgage loans and securities is a principal source of cash. The
volume of cash depends on, among other things, interest rates. The volume and
quality of such incoming cash flows can be impacted by severe and immediate
changes in interest rates. If rates increase dramatically, our short-term
funding costs will increase quickly. While many of our loans are hybrid ARMs,
they typically will not reset as quickly as our funding costs creating a
reduction in incoming cash flow. Our derivative financial instruments are used
to mitigate the effect of interest rate volatility.
We
manage
liquidity to ensure that we have the continuing ability to maintain cash flows
that are adequate to fund operations and meet commitments on a timely and
cost-effective basis. Our principal sources of liquidity are the repurchase
agreement market, the issuance of CDOs, whole loan financing facilities as
well
as principal and interest payments from ARM Assets. We believe that our
liquidity level is in excess of that necessary to satisfy our operating
requirements and we expect to continue to use diverse funding sources to
maintain our financial flexibility.
Prepayment
Risk
When
borrowers repay the principal on their mortgage loans before maturity or faster
than their scheduled amortization, the effect is to shorten the period over
which interest is earned, and therefore, reduce the cash flow and yield on
our
ARM Assets. Furthermore, prepayment speeds exceeding or lower than our
reasonable estimates for similar assets, impact the effectiveness of any hedges
we have in place to mitigate financing and/or fair value risk. Generally, when
market interest rates decline, borrowers have a tendency to refinance their
mortgages. The higher the interest rate a borrower currently has on his or
her
mortgage the more incentive he or she has to refinance the mortgage when rates
decline. Additionally, when a borrower has a low loan-to-value ratio, he or
she
is more likely to do a “cash-out” refinance. Each of these factors increases the
chance for higher prepayment speeds during the term of the loan.
We
generally do not originate loans that provide for a prepayment penalty if the
loan is fully or partially paid off prior to scheduled maturity. We mitigate
prepayment risk by constantly evaluating our ARM portfolio at a range of
reasonable market prepayment speeds observed at the time for assets with a
similar structure, quality and characteristics. Furthermore, we stress-test
the
portfolio as to prepayment speeds and interest rate risk in order to develop
an
effective hedging strategy.
For
the
three months ended December 31, 2005, our mortgage assets paid down at an
approximate average annualized Constant Paydown Rate (“CPR”) of 31%, compared to
30% for the three months ended September 30, 2005, to 27% for the three months
ended June 30, 2005, to 22% for the three months ended March 31, 2005 and 24%
for the three months ended December 31, 2004. The constant prepayment rate
averaged approximately 33% during the year of operations ended December 31,
2005. When prepayment experience increases, we have to amortize our premiums
over a shorter time period, resulting in a reduced yield to maturity on our
ARM
Assets. Conversely, if actual prepayment experience decreases, we would amortize
the premium over a longer time period, resulting in a higher yield to maturity.
We monitor our prepayment experience on a monthly basis and adjust the
amortization of the net premium, as appropriate.
Credit
Risk
Credit
risk is the risk that we will not fully collect the principal we have invested
in mortgage loans or securities. As previously noted, we are predominately
a
high-quality loan originator and our underwriting guidelines are intended to
evaluate the credit history of the potential borrower, the capacity and
willingness of the borrower to repay the loan, and the adequacy of the
collateral securing the loan.
We
mitigate credit risk by directly underwriting our own loan originations and
re-underwriting any loans originated through our correspondent networks. With
regard to the purchased mortgage security portfolio, we rely on the guaranties
of FNMA, FHLMC, GNMA or the AAA/Aaa rating established by the Rating
Agencies.
With
regard to loan originations, factors such as FICO score, LTV, debt-to-income
ratio, and other borrower and collateral factors are evaluated. Credit
enhancement features, such as mortgage insurance may also be factored into
the
credit decision. In some instances, when the borrower exhibits strong
compensating factors, exceptions to the underwriting guidelines may be
approved.
Our
loan
originations are concentrated in geographic markets that are generally supply
constrained. We believe that these markets have less exposure to sudden declines
in housing values than those markets which have an oversupply of housing. In
addition, in the supply constrained housing markets we focus on, housing values
tend to be high and, generally, underwriting standards for higher value homes
require lower LTVs and thus more owner equity further mitigating credit risk.
Finally, the higher housing value/mortgage loan financing markets allow for
more
cost efficient origination volume in terms of dollars and units. For our
mortgage securities that are purchased, we rely on the Fannie Mae, Freddie
Mac,
Ginnie Mae and AAA-rating of the securities supplemented with additional due
diligence.
The
financial statements of the Company and the related notes and schedules to
the
financial statements, together with the Report of Independent Registered Public
Accounting Firm thereon, as required by this Item 8, are set forth beginning
on
page F-1 of this annual report on Form 10-K.
None.
Evaluation
of Disclosure Controls and Procedures.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit
under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms
of the SEC, and that such information is accumulated and communicated to our
management timely. An evaluation was performed under the supervision and with
the participation of our management, including our Co-Chief Executive Officers
and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2005. Based upon that evaluation,
our
management, including our Co-Chief Executive Officers and our Chief Financial
Officer, concluded that our disclosure controls and procedures were effective
as
of December 31, 2005.
Management’s
Report on Internal Control Over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officers and principal financial officer,
the
Company conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in “Internal
Control - Integrated Framework,”
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on our evaluation under the framework in Internal
Control -Integrated Framework,
our management concluded that our internal control over financial reporting
was
effective as of December 31, 2005. Our management’s assessment of the
effectiveness of our internal control over financial reporting as of December
31, 2005 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included
herein beginning on page F-2 of
this annual report on Form 10-K.
On
February 28, 2006, the Compensation Committee of the Company’s Board of
Directors granted 2005 cash incentive bonuses to each of the Company’s executive
officers and is summarized in the following table along with 2006 contractual
salaries:
|
|
2006
Annual
Salary(1)
|
2005
Cash
Bonus(2)
|
|||||
|
Steven
B. Schnall
|
$
|
409,500
|
$
|
35,000
|
|||
|
Chairman
of the Board and Co-Chief Executive Officer
|
|||||||
|
David
A. Akre
|
409,500
|
35,000
|
|||||
|
Co-Chief
Executive Officer
|
|||||||
|
Michael
I. Wirth
|
336,000
|
105,000
|
|||||
|
Executive
Vice President and Chief Financial Officer
|
|||||||
|
Joseph
V. Fierro
|
330,750
|
20,000
|
|||||
|
Chief
Operating Officer of NYMC
|
|||||||
|
Steven
R. Mumma
|
$
|
300,000
|
$
|
105,000
|
|||
|
Vice
President and Chief Investment and Operating Officer
|
|||||||
| (1) |
Pursuant
to each of the executive officer’s employment agreements, 2006 base
salaries reflect a 3.4% increase over base salary as established
in
2005.
|
There
was
no change to the fees payable to our directors. Our Board of Directors approved
the grant of 2,500 shares of stock on September 15, 2005 to each of our
non-employee directors. These stock awards vest immediately upon
issuance.
On
December 13, 2005, NYMC Loan Corporation, a wholly owned subsidiary of
New York
Mortgage Trust, Inc. (the “Company”), and the Company entered into a $300
million master repurchase agreement (the “Agreement”) with DB Structured
Products, Inc., Aspen Funding Corp. and Newport Funding Corp. (each a “Buyer”
and collectively the “Buyers”) to finance, on a short-term basis, mortgage loans
originated by The New York Mortgage Company, LLC (“assets”). The Company
guaranteed the payment and performance of NYMC Loan Corporation, as Seller,
under the Agreement. Under the Agreement, the Seller will sell assets to
the
Buyers and agrees to repurchase those assets on a date certain. The purchase
price for assets will generally be an amount equal to the product of the
market
value of the assets to be sold multiplied by a percentage of the purchase
price
that generally ranges from 75% to 98% of the asset's market value, depending
on
the type of mortgage asset being financed and whether the asset is performing
or
non-performing. In general, the repurchase price will equal the original
purchase price plus accrued but unpaid interest. Pursuant to the terms
of the
Agreement, the Seller will pay interest to the Buyers at a fixed percentage
over
LIBOR depending on collateral type. All of the Seller's interest in the
transferred assets pass to the Buyers on the purchase date. Upon receipt
of the
purchase price, the Buyers shall transfer their ownership interests in
the asset
back to the Seller. The Agreement is a $300 million uncommitted lending
facility, meaning the Buyers must agree to each asset financed under the
Agreement. The facility established by the Agreement is set to expire on
December 12, 2006. If the market value of an asset financed under the facility
declines to less than the related Buyer's purchase price (the “margin deficit”),
then the Buyers may require that the Seller transfer cash in an amount
equal to
such margin deficit or additional loans or may retain any funds received
by it
to which the Seller would otherwise be entitled.
The
Company and the Seller are required to maintain certain routine covenants
during
the term of the Agreement, including without limitation, maintaining a
certain
level of net worth, not exceeding a certain indebtedness ratio, providing
financial reports, not undertaking a merger or other fundamental transaction,
and maintaining a certain level of profitability. The Agreement requires
that
all assets subject to the facility have the related loan documents delivered
to
LaSalle Bank, National Association, who holds them as a custodian so long
as
they are subject to the facility.
In
addition to being an uncommitted facility, if an event of default (as defined
in
the Agreement) occurs, the Seller will be unable to finance assets under
the
facility and its obligation to repurchase assets financed under the facility
may, at the option of the Buyers, be accelerated. The definition of an
event of
default includes, among others, the following events: (i) failure to pay
sums
due under the Agreement, (ii) failure to repurchase an asset as required,
(iii)
a default on other obligations of the Company or Seller that involves the
failure to pay a matured obligation or permits the acceleration of the
maturity
of the obligation, (iv) a material adverse change in the Company's or Seller's
property, business, or financial condition, and (v) undergoing a change
in
control of the Company.
If
the
Seller defaults under the Agreement, then the Buyers have most standard
remedies, including, demanding all assets be repurchased and selling the
assets
subject to the facility. Pursuant to an amended and restated guaranty of
the
Company, the Company fully and unconditionally guarantees the obligations
of the
Sellers under the terms of this Agreement.
On
January 5, 2006, the Company and its wholly-owned subsidiaries, The New
York
Mortgage Company, LLC (“NYMC”) and New York Mortgage Funding, LLC (“NYMF”) (the
Company, NYMC and NYMF, each a Seller and together, the “Sellers”), entered into
a $250 million master repurchase agreement with Greenwich Capital Products,
Inc.
(“GCM”). The terms of the agreement between the Sellers and GCM are
substantially similar to the Agreement described above. The agreement between
the Sellers and GCM is a full-recourse facility against the Sellers and
all
obligations of the Sellers are joint and several. This agreement with GCM
is set to expire on December 4, 2006.
-60-
Information
on our directors and executive officers is incorporated by reference from our
Proxy Statement (under the headings “Proposal 1: Election of Directors,”
“Information on Our Board of Directors and its Committees,” “Section 16(a)
Beneficial Ownership Reporting Compliance” and “Executive Officers and
Significant Employees”) to be filed with respect to our Annual Meeting of
Stockholders to be held June 14, 2006 (the “2006 Proxy Statement”).
Because
our common stock is listed on the NYSE, our Co-Chief Executive Officers are
required to make an annual certification to the NYSE stating that they are
not
aware of any violation by us of the corporate governance listing standards
of
the NYSE. Our Co-Chief Executive Officers made their annual certification to
that effect to the NYSE as of June 30, 2005. In addition, we have filed, as
exhibits to this Annual Report on Form 10-K, the certifications of our principal
executive officers and principal financial officer required under Section 302
of
the Sarbanes Oxley Act of 2002.
The
information presented under the headings “Compensation of Directors” and
“Executive Compensation” in our 2006 Proxy Statement to be filed with the SEC is
incorporated herein by reference.
The
information presented under the heading “Security Ownership of Certain
Beneficial Owners and Management” in our 2006 Proxy Statement to be filed with
the SEC is incorporated herein by reference.
The
information presented under the heading “Market for the Registrant’s Common
Equity and Related Stockholder Matters — Securities Authorized for Issuance
Under Equity Compensation Plans” in Item 5 of Part II of this Form 10-K is
incorporated herein by reference.
The
information presented under the heading “Certain Relationships and Related
Transactions” in our 2006 Proxy Statement to be filed with the SEC is
incorporated herein by reference.
The
information presented under the headings “Principal Accountant Fees and
Services” and “Audit Committee Pre-Approval Policy” in our 2006 Proxy Statement
to be filed with the SEC is incorporated herein by reference.
| (a) |
Financial
Statements and Schedules. The following financial statements and
schedules
are included in this report:
|
|
|
Page
|
|
|
FINANCIAL
STATEMENTS:
|
||
|
F-2
|
||
| Report of Independent Registered Public Accounting Firm |
F-3
|
|
|
F-4
|
||
|
F-5
|
||
|
F-6
|
||
|
F-7
|
||
|
F-8
|
| (b) |
Exhibits.
|
The
exhibits required by Item 601 of Regulation S-K are listed below. Management
contracts or compensatory plans are filed as Exhibits
|
Exhibit
|
Description
|
|
|
Amendment
No. 1 to Bylaws
|
||
|
List
of Subsidiaries of the Registrant.
|
||
|
Consent
of Independent Registered Public Accounting Firm (Deloitte & Touche
LLP).
|
||
|
|
||
|
Section
302 Certification of Co-Chief Executive Officer.
|
||
|
Section
302 Certification of Co-Chief Executive Officer.
|
||
|
Section
302 Certification of Chief Financial Officer.
|
||
|
Section
906 Certification of Co-Chief Executive Officers.
|
||
|
Section
906 Certification of Chief Financial
Officer.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
| NEW YORK MORTGAGE TRUST, INC. | ||
| |
|
|
| Date: March 16, 2006 | By: | /s/ STEVEN B. SCHNALL |
|
|
||
|
Name:
Steven B. Schnall
Title: Co-Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Steven B. Schnall
|
Chairman
of the Board, President,
|
March
16, 2006
|
||
|
Steven
B. Schnall
|
and
Co-Chief Executive Officer
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/
David A. Akre
|
Co-Chief
Executive Officer
|
March
16, 2006
|
||
|
David
A. Akre
|
and
Director
|
|||
|
/s/
Michael I. Wirth
|
Executive
Vice President,
|
March
16, 2006
|
||
|
Michael
I. Wirth
|
Chief
Financial Officer,
|
|||
|
secretary
and Treasurer
|
||||
|
(Principal
Financial Officer)
|
||||
|
/s/
David R. Bock
|
Director
|
March
16, 2006
|
||
|
David
R. Bock
|
||||
|
/s/
Alan L. Hainey
|
Director
|
March
16, 2006
|
||
|
Alan
L. Hainey
|
||||
|
/s/
Steven G. Norcutt
|
Director
|
March
16, 2006
|
||
|
Steven
G. Norcutt
|
||||
|
/s/
Mary Dwyer Pembroke
|
Director
|
March
16, 2006
|
||
|
Mary
Dwyer Pembroke
|
||||
|
/s/
Jerome F. Sherman
|
Director
|
March
16, 2006
|
||
|
Jerome
F. Sherman
|
||||
|
/s/
Thomas W. White
|
Director
|
March
16, 2006
|
||
|
Thomas
W. White
|
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AND
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
For
Inclusion in Form 10-K
Filed
with
Securities
and Exchange Commission
December
31, 2005
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
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Page
|
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FINANCIAL
STATEMENTS:
|
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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F-8
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To
the
Board of Directors and Stockholders of
New
York
Mortgage Trust, Inc.
New
York,
NY
We
have
audited management's assessment, included in Management’s
Report on Internal Control over Financial Reporting at Item 9A,
that
New York Mortgage Trust, Inc. and subsidiaries (the “Company”) maintained
effective internal control over financial reporting as of December 31,
2005,
based on the criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal
control
over financial reporting and for its assessment of the effectiveness of
internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness
of the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed
by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1)
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override
of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective
internal
control over financial reporting as of December 31, 2005, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based
on the
criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements
as of and
for the year ended December 31, 2005 of the Company and our report dated
March
15, 2006 expressed an unqualified opinion on those financial
statements.
| |
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| /s/ Deloitte & Touche LLP | ||
|
New York, NY
March
15, 2006
|
||
To
the
Board of Directors and Stockholders of
New
York
Mortgage Trust, Inc.
New
York,
NY
We
have
audited the accompanying consolidated balance sheets of New York Mortgage
Trust,
Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders'/members'
equity,
and cash flows for each of the three years in the period ended December
31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all
material
respects, the financial position of New York Mortgage Trust, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 2005, in conformity with accounting principles generally
accepted
in the United States of America.
We
have
also audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005, based on the
criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
and our
report dated March 15, 2006
expressed an unqualified opinion on management's assessment of the effectiveness
of the Company's internal control over financial reporting and an unqualified
opinion on the effectiveness of the Company's internal control over financial
reporting.
| |
|
|
| /s/ Deloitte & Touche LLP | ||
|
New York, NY
March
15, 2006
|
||
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
(Dollar
amounts in thousands)
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
9,056
|
$
|
7,613
|
|||
|
Restricted
cash
|
5,468
|
2,342
|
|||||
|
Investment
securities — available for sale
|
716,482
|
1,204,745
|
|||||
|
Due
from loan purchasers
|
121,813
|
79,904
|
|||||
|
Escrow
deposits — pending loan closings
|
1,434
|
16,236
|
|||||
|
Accounts
and accrued interest receivable
|
14,866
|
15,554
|
|||||
|
Mortgage
loans held for sale
|
108,271
|
85,385
|
|||||
|
Mortgage
loans held in securitization trusts
|
776,610
|
—
|
|||||
|
Mortgage
loans held for investment
|
4,060
|
190,153
|
|||||
|
Prepaid
and other assets
|
16,505
|
4,351
|
|||||
|
Derivative
assets
|
9,846
|
3,678
|
|||||
|
Property
and equipment, net
|
6,882
|
4,801
|
|||||
|
TOTAL
ASSETS
|
$
|
1,791,293
|
$
|
1,614,762
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
LIABILITIES:
|
|||||||
|
Financing
arrangements, portfolio investments
|
$
|
1,166,499
|
$
|
1,111,393
|
|||
|
Financing
arrangements, loans held for sale/for investment
|
225,186
|
359,203
|
|||||
|
Collateralized
debt obligations
|
228,226
|
—
|
|||||
|
Due
to loan purchasers
|
1,652
|
351
|
|||||
|
Accounts
payable and accrued expenses
|
22,794
|
19,485
|
|||||
|
Subordinated
debentures
|
45,000
|
—
|
|||||
|
Derivative
liabilities
|
394
|
165
|
|||||
|
Other
liabilities
|
584
|
4,683
|
|||||
|
Total
liabilities
|
1,690,335
|
1,495,280
|
|||||
|
COMMITMENTS
AND CONTINGENCIES (Note 12)
|
|||||||
|
STOCKHOLDERS’
EQUITY:
|
|||||||
|
Common
stock, $0.01 par value, 400,000,000 shares authorized 18,258,221
shares
issued and 17,953,674outstanding at December 31, 2005 and 18,217,498
shares issued and 17,797,375 outstanding at December 31,
2004
|
183
|
181
|
|||||
|
Additional
paid-in capital
|
107,573
|
119,045
|
|||||
|
Accumulated
other comprehensive income
|
1,910
|
256
|
|||||
|
Accumulated
deficit
|
(8,708
|
)
|
—
|
||||
|
Total
stockholders’ equity
|
100,958
|
119,482
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
1,791,293
|
$
|
1,614,762
|
|||
See
notes
to consolidated financial statements.
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
(Dollar
amounts in thousands, except per share data)
|
|
For
the Year Ended December 31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
REVENUES:
|
||||||||||
|
Interest
income:
|
||||||||||
|
Investment
securities and loans held in securitization trusts
|
$
|
55,050
|
$
|
19,671
|
$
|
—
|
||||
|
Loans
held for investment
|
7,675
|
723
|
—
|
|||||||
|
Loans
held for sale
|
14,751
|
6,905
|
7,609
|
|||||||
|
Total
interest income
|
77,476
|
27,299
|
7,609
|
|||||||
|
Interest
expense:
|
||||||||||
|
Investment
securities and loans held in securitization trusts
|
42,001
|
11,982
|
—
|
|||||||
|
Loans
held for investment
|
5,847
|
488
|
—
|
|||||||
|
Loans
held for sale
|
10,252
|
3,543
|
3,266
|
|||||||
|
Subordinated
debentures
|
2,004
|
—
|
—
|
|||||||
|
Total
interest expense
|
60,104
|
16,013
|
3,266
|
|||||||
|
Net
interest income
|
17,372
|
11,286
|
4,343
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Gain
on sales of mortgage loans
|
26,783
|
20,835
|
23,031
|
|||||||
|
Brokered
loan fees
|
9,991
|
6,895
|
6,683
|
|||||||
|
Gain
on sales of securities and related hedges
|
2,207
|
774
|
—
|
|||||||
|
Impairment
loss on investment securities
|
(7,440
|
)
|
—
|
—
|
||||||
|
Miscellaneous
income
|
232
|
227
|
45
|
|||||||
|
Total
other income (expense)
|
31,773
|
28,731
|
29,759
|
|||||||
|
EXPENSES:
|
||||||||||
|
Salaries,
commissions and benefits
|
30,979
|
17,118
|
9,247
|
|||||||
|
Brokered
loan expenses
|
7,543
|
5,276
|
3,734
|
|||||||
|
Occupancy
and equipment
|
6,127
|
3,529
|
2,018
|
|||||||
|
Marketing
and promotion
|
4,861
|
3,190
|
1,008
|
|||||||
|
Data
processing and communications
|
2,371
|
1,598
|
608
|
|||||||
|
Office
supplies and expenses
|
2,333
|
1,519
|
803
|
|||||||
|
Professional
fees
|
4,742
|
2,005
|
959
|
|||||||
|
Travel
and entertainment
|
840
|
612
|
666
|
|||||||
|
Depreciation
and amortization
|
1,716
|
690
|
412
|
|||||||
|
Other
|
1,522
|
792
|
921
|
|||||||
|
Total
expenses
|
63,034
|
36,329
|
20,376
|
|||||||
|
(LOSS)/INCOME
BEFORE INCOME TAX BENEFIT
|
(13,889
|
)
|
3,688
|
13,726
|
||||||
|
Income
tax benefit
|
8,549
|
1,259
|
—
|
|||||||
|
NET
(LOSS)/INCOME
|
$
|
(5,340
|
)
|
$
|
4,947
|
$
|
13,726
|
|||
|
Basic
(loss)/income per share
|
$
|
(0.30
|
)
|
$
|
0.28
|
—
|
||||
|
Diluted
(loss)/income per share
|
$
|
(0.30
|
)
|
$
|
0.27
|
—
|
||||
|
Weighted
average shares outstanding-basic(1)
|
17,873
|
17,797
|
—
|
|||||||
|
Weighted
average shares outstanding-diluted(1)
|
17,873
|
18,011
|
—
|
|||||||
| (1) |
Weighted
average shares outstanding-basic and diluted assume the shares outstanding
upon the Company’s initial public offering are outstanding for the full
year.
|
See
notes
to consolidated financial statements.
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
For
the Years Ended December 31, 2005, 2004 and 2003
(Dollar
amounts in thousands)
|
|
Common
Stock
|
Additional
Paid-In
Capital
|
Stockholders’
Members Members’
Equity/Deficit
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Comprehensive
Income
(Loss)
|
Total
|
|||||||||||||
|
BALANCE,
JANUARY 1, 2003 —
|
|||||||||||||||||||
|
Members’
Equity
|
$
|
$
|
$
|
6,469
|
$
|
31
|
$
|
6,500
|
|||||||||||
|
Net
income
|
13,726
|
—
|
$
|
13,726
|
13,726
|
||||||||||||||
|
Distributions
|
(21,534
|
)
|
—
|
—
|
(21,534
|
)
|
|||||||||||||
|
Increase
associated with cash flow hedges
|
—
|
51
|
51
|
51
|
|||||||||||||||
|
Increase
in net unrealized gain on available for sale securities
|
—
|
783
|
783
|
783
|
|||||||||||||||
|
Comprehensive
income
|
—
|
—
|
$
|
14,560
|
—
|
||||||||||||||
|
BALANCE,
DECEMBER 31, 2003 —
|
|||||||||||||||||||
|
Members’
Deficit
|
—
|
—
|
(1,339
|
)
|
865
|
—
|
(474
|
)
|
|||||||||||
|
Net
income
|
—
|
—
|
4,947
|
—
|
4,947
|
4,947
|
|||||||||||||
|
Contributions
|
—
|
—
|
2,310
|
—
|
—
|
2,310
|
|||||||||||||
|
Distributions
|
—
|
—
|
(3,135
|
)
|
—
|
—
|
(3,135
|
)
|
|||||||||||
|
Forfeiture
of 47,680 escrowed shares
|
—
|
(493
|
)
|
—
|
—
|
(493
|
)
|
||||||||||||
|
Dividends
declared
|
—
|
(4,470
|
)
|
(2,783
|
)
|
—
|
—
|
(7,253
|
)
|
||||||||||
|
Initial
public offering — Common stock
|
181
|
121,910
|
—
|
—
|
—
|
122,091
|
|||||||||||||
|
Vested
restricted stock
|
—
|
1,743
|
—
|
—
|
—
|
1,743
|
|||||||||||||
|
Vested
performance shares
|
—
|
249
|
—
|
—
|
—
|
249
|
|||||||||||||
|
Vested
stock options
|
—
|
106
|
—
|
—
|
—
|
106
|
|||||||||||||
|
Decrease
in net unrealized gain on available for sale securities
|
—
|
—
|
—
|
(3,836
|
)
|
(3,836
|
)
|
(3,836
|
)
|
||||||||||
|
Increase
in net unrealized gain on derivative instruments
|
—
|
—
|
—
|
3,227
|
|
3,227
|
|
3,227
|
|
||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
—
|
$
|
4,338
|
—
|
||||||||||||
|
BALANCE,
DECEMBER 31, 2004 — Stockholders’ Equity
|
|
181
|
|
119,045
|
|
0
|
|
256
|
|
—
|
|
119,482
|
|||||||
|
Net
loss
|
—
|
—
|
(5,340
|
)
|
—
|
(5,340
|
)
|
(5,340
|
)
|
||||||||||
|
Dividends
declared
|
—
|
(13,375
|
)
|
(3,368
|
)
|
—
|
—
|
(16,743
|
)
|
||||||||||
|
Vested
restricted stock
|
2
|
1,310
|
—
|
—
|
—
|
1,312
|
|||||||||||||
|
Vested
performance shares
|
—
|
549
|
—
|
—
|
—
|
549
|
|||||||||||||
|
Vested
stock options
|
—
|
44
|
—
|
—
|
—
|
44
|
|||||||||||||
|
Decrease
in net unrealized gain on available for sale securities
|
—
|
—
|
—
|
(1,130
|
)
|
(1,130
|
)
|
(1,130
|
)
|
||||||||||
|
Increase
in net unrealized gain on derivative instruments
|
—
|
—
|
—
|
2,784
|
2,784
|
2,784
|
|||||||||||||
|
Comprehensive
loss
|
—
|
—
|
—
|
—
|
$
|
(3,686
|
)
|
—
|
|||||||||||
|
BALANCE,
DECEMBER 31, 2005 — Stockholders’ Equity
|
$
|
183
|
$
|
107,573
|
$
|
(8,708
|
)
|
$
|
1,910
|
$
|
100,958
|
||||||||
See
notes
to consolidated financial statements.
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
(Dollar
amounts in thousands)
|
For
the Years Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
(loss)/income
|
$
|
(5,340
|
)
|
$
|
4,947
|
$
|
13,726
|
|||
|
Adjustments
to reconcile net (loss)/income to net cash used in operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
1,716
|
690
|
412
|
|||||||
|
Amortization
of premium on investment securities and mortgage loans
|
6,269
|
1,667
|
—
|
|||||||
|
Gain
on sale of securities and related hedges
|
(2,207
|
)
|
(939
|
)
|
—
|
|||||
|
Impairment
loss on investment securities
|
7,440
|
—
|
—
|
|||||||
|
Origination
of mortgage loans held for sale
|
(2,316,734
|
)
|
(1,435,340
|
)
|
(1,234,847
|
)
|
||||
|
Proceeds
from sales of mortgage loans
|
2,293,848
|
1,386,124
|
1,232,711
|
|||||||
|
Restricted
stock compensation expense
|
1,861
|
1,992
|
—
|
|||||||
|
Stock
option grants — compensation expense
|
44
|
106
|
—
|
|||||||
|
Deferred
tax benefit
|
(8,549
|
)
|
(1,309
|
)
|
—
|
|||||
|
Forfeited
shares-non cash
|
(492
|
)
|
—
|
|||||||
|
Change
in value of derivatives
|
(3,155
|
)
|
(314
|
)
|
(107
|
)
|
||||
|
Loss
on sale of fixed assets
|
27
|
—
|
—
|
|||||||
|
(Increase)
decrease in operating assets:
|
||||||||||
|
Due
from loan purchasers
|
(41,909
|
)
|
(21,042
|
)
|
(18,242
|
)
|
||||
|
Due
from affiliate
|
—
|
—
|
(153
|
)
|
||||||
|
Escrow
deposits-pending loan closings
|
14,802
|
(16,236
|
)
|
—
|
||||||
|
Accounts
and accrued interest receivable
|
714
|
(12,846
|
)
|
(1,499
|
)
|
|||||
|
Prepaid
and other assets
|
(3,987
|
)
|
(2,211
|
)
|
(1,116
|
)
|
||||
|
Increase
(decrease) in operating liabilities:
|
||||||||||
|
Due
to loan purchasers
|
1,301
|
(403
|
)
|
(357
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
3,990
|
12,170
|
2,737
|
|||||||
|
Other
liabilities
|
(4,100
|
)
|
4,553
|
(375
|
)
|
|||||
|
Net
cash used in operating activities
|
(53,969
|
)
|
(78,883
|
)
|
(7,110
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Restricted
cash
|
(3,126
|
)
|
(2,124
|
)
|
(15
|
)
|
||||
|
Purchase
of marketable securities
|
—
|
—
|
(2,007
|
)
|
||||||
|
Sale
of investment securities
|
225,326
|
197,350
|
—
|
|||||||
|
Purchase
of investment securities
|
(148,150
|
)
|
(1,533,511
|
)
|
—
|
|||||
|
Purchase
of mortgage loans held in securitization trusts
|
(167,097
|
)
|
—
|
—
|
||||||
|
Principal
repayments received on loans held in securitization trust
|
120,835
|
—
|
—
|
|||||||
|
Purchase
of mortgage loans held for investment
|
—
|
(94,767
|
)
|
—
|
||||||
|
Origination
of mortgage loans held for investment
|
(558,554
|
)
|
(95,386
|
)
|
||||||
|
Proceeds
from sale of marketable securities
|
—
|
3,580
|
1,354
|
|||||||
|
Principal
paydown on investment securities
|
399,694
|
126,944
|
—
|
|||||||
|
Payments
received on loans held for investment
|
13,279
|
—
|
—
|
|||||||
|
Purchases
of property and equipment
|
(3,929
|
)
|
(3,460
|
)
|
(1,472
|
)
|
||||
|
Sale
of fixed assets
|
75
|
—
|
—
|
|||||||
|
Net
cash used in investing activities
|
(121,647
|
)
|
(1,401,374
|
)
|
(2,140
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Proceeds
from issuance of common stock
|
—
|
122,091
|
—
|
|||||||
|
Members’
contributions
|
—
|
1,309
|
—
|
|||||||
|
Increase
in financing arrangements, net
|
149,315
|
1,380,171
|
17,409
|
|||||||
|
Payments
on subordinated notes due members
|
—
|
(13,707
|
)
|
—
|
||||||
|
Dividends
paid
|
(17,256
|
)
|
(2,906
|
)
|
—
|
|||||
|
Cash
distributions to members
|
—
|
(3,135
|
)
|
(6,858
|
)
|
|||||
|
Issuance
of subordinated debentures
|
45,000
|
—
|
—
|
|||||||
|
Net
cash provided by financing activities
|
177,059
|
1,483,823
|
10,551
|
|||||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
1,443
|
3,566
|
1,301
|
|||||||
|
CASH
AND CASH EQUIVALENTS — Beginning of period
|
7,613
|
4,047
|
2,746
|
|||||||
|
CASH
AND CASH EQUIVALENTS — End of period
|
$
|
9,056
|
$
|
7,613
|
$
|
4,047
|
||||
|
SUPPLEMENTAL
DISCLOSURE
|
||||||||||
|
Cash
paid for interest
|
$
|
57,871
|
$
|
11,709
|
$
|
2,988
|
||||
|
NON
CASH FINANCING ACTIVITIES
|
||||||||||
|
Distribution
to members in the form of subordinated notes
|
$
|
—
|
$
|
—
|
$
|
14,707
|
||||
|
Reduction
of subordinated notes due members
|
$
|
—
|
$
|
1,000
|
$
|
—
|
||||
|
Dividends
declared to be paid in subsequent period
|
$
|
3,834
|
$
|
4,347
|
$
|
—
|
||||
|
Grant
of restricted stock
|
$
|
277
|
$
|
1,974
|
$
|
—
|
||||
|
NON
CASH INVESTING ACTIVITIES
|
||||||||||
|
Non-cash
purchase of fixed assets
|
168
|
—
|
—
|
|||||||
See
notes
to consolidated financial statements.
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
(dollar
amounts in thousands unless otherwise indicated)
| 1. |
Summary
of Significant Accounting
Policies
|
Organization
-
New
York Mortgage Trust, Inc. (“NYMT” or the “Company”) is a fully-integrated,
self-advised, residential mortgage finance company formed as a Maryland
corporation in September 2003. The Company earns net interest income from
residential mortgage-backed securities and fixed-rate and adjustable-rate
mortgage loans and securities originated through its wholly-owned subsidiary,
The New York Mortgage Company, LLC (“NYMC”). The Company also earns net interest
income from its investment in and the securitization of certain self-originated
adjustable rate mortgage loans that meet the Company’s investment criteria.
Licensed, or exempt from licensing, in 43 states and the District of Columbia
and through a network of 28 full-service loan origination locations and 26
satellite loan origination locations, NYMC originates a wide range of mortgage
loans, with a primary focus on prime, residential mortgage loans.
The
Company is organized and conducts its operations to qualify as a real estate
investment trust (“REIT”) for federal income tax purposes. As such, the Company
will generally not be subject to federal income tax on that portion of its
income that is distributed to stockholders if it distributes at least 90% of
its
REIT taxable income to its stockholders by the due date of its federal income
tax return and complies with various other requirements.
On
January 9, 2004, the Company capitalized New York Mortgage Funding, LLC (“NYMF”)
as a wholly-owned subsidiary of the Company. NYMF is a qualified REIT
subsidiary, or QRS, in which the Company accumulates mortgage loans that the
Company intends to securitize. In June 2004, the Company sold 15 million shares
of its common stock in an initial public offering (“IPO”) at a price to the
public of $9.00 per share, for net proceeds of $122.0 million after deducting
the underwriters’ discount and other offering expenses. Concurrent with the
Company’s IPO, the Company issued 2,750,000 shares of common stock in exchange
for the contribution to the Company of 100% of the equity interests of NYMC.
Subsequent to the IPO and the contribution of NYMC, the Company had 18,114,445
shares of common stock issued and 17,797,375 shares outstanding. Prior to the
IPO, NYMT did not have recurring business operations.
On
February 25, 2005, the Company completed its first loan securitization of $419.0
million high-credit quality, first-lien, adjustable rate mortgage (“ARM”) loans,
by contributing loans into New York Mortgage Trust 2005-1 (“NYMT ‘05-1 Trust”).
NYMT ‘05-1 Trust is a wholly-owned subsidiary of NYMT. The securitization was
structured as a secured borrowing, with the line-of-credit financing used to
purchase and originate the mortgage loans and refinanced through repurchase
agreements upon securitization. On March 15, 2005, the Company closed a private
placement of $25.0 million of trust preferred securities issued by NYM Preferred
Trust I. NYM Preferred Trust I is a wholly-owned subsidiary of NYMC. On July
28,
2005 the Company completed its second loan securitization of $242.9 million
of
high-credit quality, first-lien, ARM loans, by contributing loans to New York
Mortgage Trust 2005-2 (“NYMT ‘05-2 Trust”). NYMT ‘05-2 Trust is a wholly-owned
subsidiary of NYMT. The securitization was structured as a secured borrowing,
with the line-of-credit financing used to purchase and originate the mortgage
loans and refinanced through repurchase agreements upon securitization. On
September 1, 2005, the Company closed a private placement of $20.0 million
of
preferred securities issued by NYM Preferred Trust II. NYM Preferred Trust
II is
a wholly-owned subsidiary of NYMC. On December 20, 2005 the Company completed
its third loan securitization of $235.0 million of high-credit quality,
first-lien, ARM loans, by contributing loans to New York Mortgage Trust 2005-3
(“NYMT ‘05-3 Trust”). NYMT ‘05-3 Trust is a wholly-owned subsidiary of
NYMT.
As
used
herein, references to the “Company,” “NYMT,” “we,” “our” and “us” refer to New
York Mortgage Trust, Inc., collectively with its subsidiaries.
Basis
of Presentation -
The
consolidated financial statements include the accounts of the Company subsequent
to the IPO and also include the accounts of NYMC and NYMF prior to the IPO.
As a
result, our historical financial results reflect the financial operations of
this prior business strategy of selling virtually all of the loans originated
by
NYMC to third parties. All intercompany accounts and transactions are eliminated
in consolidation. Certain prior period amounts have been reclassified to conform
to current period classifications, including the reclassification of $4.4
million for the fiscal year ended December 31, 2004 of payables to brokers
from
financing arrangements, portfolio investment to other liabilities. In addition,
we have reclassified restricted cash on our statement of cash flows from
operating activities to cash flows from investing activities of $2.1 million
and
$15.2 thousand at December 31, 2004 and December 31, 2003,
respectively.
The
combination of the Company and NYMC was accounted for as a transfer of assets
between entities under common control. Accordingly, the Company has recorded
assets and liabilities transferred from NYMC at their carrying amounts in the
accounts of NYMC at the date of transfer.
Upon
the
closing of the Company’s IPO, of the 2,750,000 shares exchanged for the equity
interests of NYMC, 100,000 shares were held in escrow through December 31,
2004
and were available to satisfy any indemnification claims the Company may have
had against the contributors of NYMC for losses incurred as a result of defaults
on any residential mortgage loans originated by NYMC and closed prior to the
completion of the IPO. As of December 31, 2004, the amount of escrowed shares
was reduced by 47,680 shares, representing $493,000 for estimated losses on
loans closed prior to the Company’s IPO. Furthermore, the contributors of NYMC
entered into a new escrow agreement which extended the escrow period to December
31, 2006 for the remaining 52,320 shares. There have been no additional losses
with respect to the escrow agreement recorded during the twelve month period
ended December 31, 2005.
Use
of Estimates -
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company’s estimates and assumptions primarily arise
from risks and uncertainties associated with interest rate volatility,
prepayment volatility and credit exposure. Although management is not currently
aware of any factors that would significantly change its estimates and
assumptions in the near term, future changes in market conditions may occur
which could cause actual results to differ materially.
Cash
and Cash Equivalents -
Cash
and cash equivalents include cash on hand, amounts due from banks and overnight
deposits. The Company maintains its cash and cash equivalents in highly rated
financial institutions, and at times these balances exceed insurable
amounts.
Restricted
Cash -
Restricted cash is held by counterparties as collateral for hedging instruments,
collateralized debt obligations or (“CDOs”) and two letters of credit related to
the Company’s lease of its corporate headquarters. Restricted cash
collateralizing CDOs is replaced by ARM loans within 30 days.
Investment
Securities Available for Sale -
The
Company’s investment securities are residential mortgage-backed securities
comprised of Ginnie Mae (“GNMA”) and “AAA”- rated adjustable-rate securities,
including adjustable-rate loans that have an initial fixed-rate period.
Investment securities are classified as available for sale securities and are
reported at fair value with unrealized gains and losses reported in other
comprehensive income (“OCI”). Realized gains and losses recorded on the sale of
investment securities available for sale are based on the specific
identification method and included in gain on sale of securities and related
hedges. Purchase premiums or discounts on investment securities are accreted
or
amortized to interest income over the estimated life of the investment
securities using the interest method. Investment securities may be subject
to
interest rate, credit and/or prepayment risk.
When
the
fair value of an available for sale security is less than amortized cost,
management considers whether there is an other-than-temporary impairment in
the
value of the security (e.g., whether the security will be sold prior to the
recovery of fair value). Management considers at a minimum the following factors
that, both individually or in combination, could indicate the decline is
“other-than-temporary:” 1) the length of time and extent to which the market
value has been less than book value; 2) the financial condition and near-term
prospects of the issuer; or 3) the intent and ability of the Company to retain
the investment for a period of time sufficient to allow for any anticipated
recovery in market value. If, in management’s judgment, an other-than-temporary
impairment exists, the cost basis of the security is written down to the
then-current fair value, and the unrealized loss is transferred from accumulated
other comprehensive income as an immediate reduction of current earnings (i.e.,
as if the loss had been realized in the period of impairment). Even though
no
credit concerns exist with respect to an available for sale security, an other-
than-temporary impairment may be evident if management determines that the
Company does not have the intent and ability to hold an investment until a
forecasted recovery of the value of the investment.
As
of
December 31, 2005, management concluded, based on the decision to potentially
sell in the 1st quarter of 2006 certain of its available for sale securities,
that the decline in those securities was other-than-temporary. Accordingly,
the
cost basis of those securities of $395.7 million was written down to fair value
and an unrealized loss of $7.4 million was transferred from accumulated other
comprehensive income as an impairment loss on investment securities to the
accompanying consolidated statement of operations.
Due
from Loan Purchasers and Escrow Deposits - Pending Loan Closings
-
Amounts
due from loan purchasers are a receivable for the principal and premium due
to
us for loans sold and shipped but for which payment has not yet been received
at
period end. Escrow deposits pending loan closing are advance cash fundings
by us
to escrow agents to be used to close loans within the next one to three business
days.
Mortgage
Loans Held for Sale -
Mortgage loans held for sale represent originated mortgage loans held for sale
to third party investors. The loans are initially recorded at cost based on
the
principal amount outstanding net of deferred direct origination costs and fees.
The loans are subsequently carried at the lower of cost or market value. Market
value is determined by examining outstanding commitments from investors or
current investor yield requirements, calculated on an aggregate loan basis,
less
an estimate of the costs to close the loan, and the deferral of fees and points
received, plus the deferral of direct origination costs. Gains or losses on
sales are recognized at the time title transfers to the investor which is
typically concurrent with the transfer of the loan files and related
documentation and are based upon the difference between the sales proceeds
from
the final investor and the adjusted book value of the loan sold.
Mortgage
Loans Held in Securitization Trusts -
Mortgage
loans held in securitization trusts are certain ARM mortgage loans transferred
to the NYMT ‘05-1 Trust, the NYMT ’05-2 Trust and the NYMT ‘05-3 Trust that have
been securitized into sequentially rated classes of beneficial interests.
Mortgage loans held in securitization trusts are recorded at amortized cost,
using the same accounting principles as that used for mortgage loans held for
investment. Currently the Company has retained 100% of the
securities issued by NYMT ’05-1 Trust and the NYMT ’05-2 Trust and the
securities have been financed as a secured borrowing under repurchase
agreements. For our third securitization, NYMT ’05-03 Trust, we sold
investment grade securities to third parties which is recorded as collateralized
debt obligations on the accompanying consolidated balance sheet.
Mortgage
Loans Held for Investment -
The
Company retains substantially all of the adjustable-rate mortgage loans
originated that meet specific investment criteria and portfolio requirements.
Loans originated and retained in the Company’s portfolio are serviced through a
subservicer. Servicing is the function primarily consisting of collecting
monthly payments from mortgage borrowers, and disbursing those funds to the
appropriate loan investors.
Mortgage
loans held for investment are recorded net of deferred loan origination fees
and
associated direct costs and are stated at amortized cost. Net loan origination
fees and associated direct mortgage loan origination costs are deferred and
amortized over the life of the loan as an adjustment to yield. This amortization
includes the effect of projected prepayments.
Interest
income is accrued and recognized as revenue when earned according to the terms
of the mortgage loans and when, in the opinion of management, it is collectible.
The accrual of interest on loans is discontinued when, in management’s opinion,
the interest is not collectible in the normal course of business, but in no
case
when payment becomes greater than 90 days delinquent. Loans return to accrual
status when principal and interest become current and are anticipated to be
fully collectible.
Credit
Risk and Allowance for Loan Losses -
The
Company limits its exposure to credit losses on its portfolio of residential
adjustable-rate mortgage-backed securities by purchasing securities that are
guaranteed by a government-sponsored or federally-chartered corporation (FNMA,
FHLMC or GNMA) (collectively “Agency Securities”) or that have a “AAA”
investment grade rating by at least one of two nationally recognized rating
agencies, Standard & Poor’s, Inc. or Moody’s Investors Service, Inc. at the
time of purchase.
The
Company seeks to limit its exposure to credit losses on its portfolio of
residential adjustable-rate mortgage loans held for investment (including
mortgage loans held in the securitization trusts) by originating and investing
in loans primarily to borrowers with strong credit profiles, which are evaluated
by analyzing the borrower’s credit score (“FICO” is a credit score, ranging from
300 to 850, with 850 being the best score, based upon the credit evaluation
methodology developed by Fair, Isaac and Company, a consulting firm specializing
in creating credit evaluation models), employment, income and assets and related
documentation, the amount of equity in and the value of the property securing
the borrower’s loan, debt to income ratio, credit history, funds available for
closing and post-closing liquidity.
The
Company estimates an allowance for loan losses based on management’s assessment
of probable credit losses in the Company’s investment portfolio of residential
mortgage loans. Mortgage loans are collectively evaluated for impairment as
the
loans are homogeneous in nature. The allowance is based upon management’s
assessment of various credit-related factors, including current economic
conditions, the credit diversification of the portfolio, loan-to-value ratios,
delinquency status, historical credit losses, purchased mortgage insurance
and
other factors deemed to warrant consideration. If the credit performance of
mortgage loans held for investment deviates from expectations, the allowance
for
loan losses is adjusted to a level deemed appropriate by management to provide
for estimated probable losses in the portfolio.
The
allowance will be maintained through ongoing provisions charged to operating
income and will be reduced by loans that are charged off. As of December 31,
2005 the allowance for loan losses is insignificant. Determining the allowance
for loan losses is subjective in nature due to the estimation
required.
Property
and Equipment, Net -
Property and equipment have lives ranging from three to ten years, and are
stated at cost less accumulated depreciation and amortization. Depreciation
is
determined in amounts sufficient to charge the cost of depreciable assets to
operations over their estimated service lives using the straight-line method.
Leasehold improvements are amortized over the lesser of the life of the lease
or
service lives of the improvements using the straight-line method.
Financing
Arrangements, Portfolio Investments—
Portfolio investments are typically financed with repurchase agreements, a
form
of collateralized borrowing which is secured by portfolio securities on the
balance sheet. Such financings are recorded at their outstanding principal
balance with any accrued interest due recorded as an accrued
expense.
Financing
Arrangements, Loans Held for Sale/for Investment—
Loans
held for sale or for investment are typically financed with warehouse lines
that
are collateralized by loans we originate or purchase from third parties.
Such financings are recorded at their outstanding principal balance with any
accrued interest due recorded as an accrued expense.
Collateralized
Debt Obligations -
CDOs are
securities that are issued and secured by ARM loans. For financial
reporting purposes, the ARM loans and restricted cash held as collateral are
recorded as assets of the Company and the CDO is recorded as the Company’s debt.
The transaction includes interest rate caps and are held by the securitization
trust and recorded as an asset or liability of the Company.
Subordinated
Debentures -
Subordinated debentures are trust preferred securities that are fully guaranteed
by the Company with respect to distributions and amounts payable upon
liquidation, redemption or repayment. These securities are classified as
subordinated debentures in the liability section of the Company’s consolidated
balance sheet.
Derivative
Financial Instruments -
The
Company has developed risk management programs and processes, which include
investments in derivative financial instruments designed to manage market risk
associated with its mortgage banking and its mortgage-backed securities
investment activities.
All
derivative financial instruments are reported as either assets or liabilities
in
the consolidated balance sheet at fair value. The gains and losses associated
with changes in the fair value of derivatives not designated as hedges are
reported in current earnings. If the derivative is designated as a fair value
hedge and is highly effective in achieving offsetting changes in the fair value
of the asset or liability hedged, the recorded value of the hedged item is
adjusted by its change in fair value attributable to the hedged risk. If the
derivative is designated as a cash flow hedge, the effective portion of change
in the fair value of the derivative is recorded in OCI and is recognized in
the
income statement when the hedged item affects earnings. The Company calculates
the effectiveness of these hedges on an ongoing basis, and, to date, has
calculated effectiveness of approximately 100%. Ineffective portions, if any,
of
changes in the fair value or cash flow hedges are recognized in earnings. (See
Note 15).
In
accordance with a Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 105, “Application of Accounting Principles to Loan Commitments”
(“SAB 105”) issued on March 9, 2004, beginning in the second quarter of 2004,
the fair value of interest rate lock commitments (“IRLCs”) excludes future cash
flows related to servicing rights, if such rights are retained upon the sale
of
originated mortgage loans. Since the Company sells all of its originated loans
with servicing released, SAB 105 had no effect on the value of its
IRLCs.
Risk
Management -
Derivative transactions are entered into by the Company solely for risk
management purposes. The decision of whether or not an economic risk within
a
given transaction (or portion thereof) should be hedged for risk management
purposes is made on a case-by-case basis, based on the risks involved and other
factors as determined by senior management, including the financial impact
on
income, asset valuation and restrictions imposed by the Internal Revenue Code
among others. In determining whether to hedge a risk, the Company may consider
whether other assets, liabilities, firm commitments and anticipated transactions
already offset or reduce the risk. All transactions undertaken to hedge certain
market risks are entered into with a view towards minimizing the potential
for
economic losses that could be incurred by the Company. Under Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (“SFAS No. 133”), the Company is required to formally
document its hedging strategy before it may elect to implement hedge accounting
for qualifying derivatives. Accordingly, all qualifying derivatives are intended
to qualify as fair value, or cash flow hedges, or free standing derivatives.
To
this end, terms of the hedges are matched closely to the terms of hedged items
with the intention of minimizing ineffectiveness.
In
the
normal course of its mortgage loan origination business, the Company enters
into
contractual interest rate lock commitments to extend credit to finance
residential mortgages. These commitments, which contain fixed expiration dates,
become effective when eligible borrowers lock-in a specified interest rate
within time frames established by the Company’s origination, credit and
underwriting practices. Interest rate risk arises if interest rates change
between the time of the lock-in of the rate by the borrower and the sale of
the
loan. Under SFAS No. 133, the IRLCs are considered undesignated or free-standing
derivatives. Accordingly, such IRLCs are recorded at fair value with changes
in
fair value recorded to current earnings. Mark to market adjustments on IRLCs
are
recorded from the inception of the interest rate lock through the date the
underlying loan is funded. The fair value of the IRLCs is determined by the
interest rate differential between the contracted loan rate and the currently
available market rates as of the reporting date.
To
mitigate the effect of the interest rate risk inherent in providing IRLCs from
the lock-in date to the funding date of a loan, the Company generally enters
into forward sale loan contracts (“FSLC”). The FSLCs in place prior to the
funding of a loan are undesignated derivatives under SFAS No. 133 and are marked
to market through current earnings.
Derivative
instruments contain an element of risk in the event that the counterparties
may
be unable to meet the terms of such agreements. The Company minimizes its risk
exposure by limiting the counterparties with which it enters into contracts
to
banks, investment banks and certain private investors who meet established
credit and capital guidelines. Management does not expect any counterparty
to
default on its obligations and, therefore, does not expect to incur any loss
due
to counterparty default. These commitments and option contracts are considered
in conjunction with the Company’s lower of cost or market valuation of its
mortgage loans held for sale.
The
Company uses other derivative instruments, including treasury, agency or
mortgage-backed securities forward sale contracts which are also classified
as
free-standing, undesignated derivatives and thus are recorded at fair value
with
the changes in fair value recognized in current earnings.
Once
a
loan has been funded, the Company’s primary risk objective for its mortgage
loans held for sale is to protect earnings from an unexpected charge due to
a
decline in value. The Company’s strategy is to engage in a risk management
program involving the designation of FSLCs (the same FSLCs entered into at
the
time of rate lock) to hedge most of its mortgage loans held for sale. The FSLCs
have been designated as qualifying hedges for the funded loans and the notional
amount of the forward delivery contracts, along with the underlying rate and
critical terms of the contracts, are equivalent to the unpaid principal amount
of the mortgage loan being hedged. The FSLCs effectively fix the forward sales
price and thereby offset interest rate and price risk to the Company.
Accordingly, the Company evaluates this relationship quarterly and, at the
time
the loan is funded, classifies and accounts for the FSLCs as cash flow
hedges.
Interest
Rate Risk -
The
Company hedges the aggregate risk of interest rate fluctuations with respect
to
its borrowings, regardless of the form of such borrowings, which require
payments based on a variable interest rate index. The Company generally intends
to hedge only the risk related to changes in the benchmark interest rate (London
Interbank Offered Rate (“LIBOR”) or a Treasury rate).
In
order
to reduce such risks, the Company enters into swap agreements whereby the
Company receives floating rate payments in exchange for fixed rate payments,
effectively converting the borrowing to a fixed rate. The Company also enters
into cap agreements whereby, in exchange for a fee, the Company is reimbursed
for interest paid in excess of a certain capped rate.
To
qualify for cash flow hedge accounting, interest rate swaps and caps must meet
certain criteria, including:
| • |
the
items to be hedged expose the Company to interest rate risk; and
|
| • |
the
interest rate swaps or caps are expected to be and continue to be
highly
effective in reducing the Company’s exposure to interest
rate risk.
|
The
fair
values of the Company’s interest rate swap agreements and interest rate cap
agreements are based on market values provided by dealers who are familiar
with
the terms of these instruments. Correlation and effectiveness are periodically
assessed at least quarterly based upon a comparison of the relative changes
in
the fair values or cash flows of the interest rate swaps and caps and the items
being hedged.
For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e. hedging the exposure to variability in expected future cash flows that
is
attributable to a particular risk), the effective portion of the gain or loss
on
the derivative instruments are reported as a component of OCI and reclassified
into earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instruments
in
excess of the cumulative change in the present value of future cash flows of
the
hedged item, if any, is recognized in current earnings during the period of
change.
With
respect to interest rate swaps and caps that have not been designated as hedges,
any net payments under, or fluctuations in the fair value of, such swaps and
caps, will be recognized in current earnings.
Termination
of Hedging Relationships -
The
Company employs a number of risk management monitoring procedures to ensure
that
the designated hedging relationships are demonstrating, and are expected to
continue to demonstrate, a high level of effectiveness. Hedge accounting is
discontinued on a prospective basis if it is determined that the hedging
relationship is no longer highly effective or expected to be highly effective
in
offsetting changes in fair value of the hedged item.
Additionally,
the Company may elect to undesignate a hedge relationship during an interim
period and re-designate upon the rebalancing of a hedge profile and the
corresponding hedge relationship. When hedge accounting is discontinued, the
Company continues to carry the derivative instruments at fair value with changes
recorded in current earnings.
Other
Comprehensive Income -
Other
comprehensive income is comprised primarily of net income (loss) from changes
in
value of the Company’s available for sale securities, and the impact of deferred
gains or losses on changes in the fair value of derivative contracts hedging
future cash flows.
Gain
on Sale of Mortgage Loans -
The
Company recognizes gain on sale of loans sold to third parties as the difference
between the sales price and the adjusted cost basis of the loans when title
transfers. The adjusted cost basis of the loans includes the original principal
amount adjusted for deferrals of origination and commitment fees received,
net
of direct loan origination costs paid.
Loan
Origination Fees and Direct Origination Cost -
The
Company records loan fees, discount points and certain incremental direct
origination costs as an adjustment of the cost of the loan and such amounts
are
included in gain on sales of loans when the loan is sold. Accordingly, salaries,
compensation, benefits and commission costs have been reduced by $41.2 million
and $20.5 million for the years ended December 31, 2005 and 2004, respectively,
because such amounts are considered incremental direct loan origination
costs.
Brokered
Loan Fees and Expenses -
The
Company records commissions associated with brokered loans when such loans
are
closed with the borrower. Costs associated with brokered loans are expensed
when
incurred.
Loan
Commitment Fees -
Mortgage loans held for sale: fees received for the funding of mortgage loans
to
borrowers at pre-set conditions are deferred and recognized at the date at
which
the loan is sold. Mortgage loans held for investment: such fees are deferred
and
recognized into interest income over the life of the loan based on the effective
yield method.
Employee
Benefits Plans -
The
Company sponsors a defined contribution plan (the “Plan”) for all eligible
domestic employees. The Plan qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under the Plan, participating
employees may defer up to 15% of their pre-tax earnings, subject to the annual
Internal Revenue Code contribution limit. The Company matches contributions
up
to a maximum of 25% of the first 5% of salary. Employees vest immediately in
their contribution and vest in the Company’s contribution at a rate of 25% after
two full years and then an incremental 25% per full year of service until fully
vested at 100% after five full years of service. The Company’s total
contributions to the Plan were $0.4 million and $0.2 million for the years
ended
December 31, 2005 and 2004, respectively.
Stock
Based Compensation - The
Company follows the provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based
Compensation, Transition and Disclosure” (“SFAS No. 148”). The provisions of
SFAS No. 123 allow companies either to expense the estimated fair value of
stock
options or to continue to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”) and disclose the pro forma effects on net income
(loss) had the fair value of the options been expensed. The Company, since
its
inception, has elected not to apply APB No. 25 in accounting for its stock
option incentive plans and has expensed stock based compensation in accordance
with SFAS No. 123.
In
December, 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment,” (“SFAS No. 123R”) which will require all companies
to measure compensation costs for all share-based payments, including employee
stock options, at fair value. This statement will be effective for the Company
with the quarter beginning January 1, 2006. The adoption of SFAS No. 123R will
not have a material impact on the Company’s financial statements.
Marketing
and Promotion -
The
Company charges the costs of marketing, promotion and advertising to expense
in
the period incurred.
Income
Taxes -
The
Company operates so as to qualify as a REIT under the requirements of the
Internal Revenue Code. Requirements for qualification as a REIT include various
restrictions on ownership of the Company’s stock, requirements concerning
distribution of taxable income and certain restrictions on the nature of assets
and sources of income. A REIT must distribute at least 90% of its taxable income
to its stockholders of which 85% plus any undistributed amounts from the prior
year must be distributed within the taxable year in order to avoid the
imposition of an excise tax. The remaining balance may extend until timely
filing of the Company’s tax return in the subsequent taxable year. Qualifying
distributions of taxable income are deductible by a REIT in computing taxable
income.
NYMC
changed its tax status upon completion of the IPO from a non-taxable limited
liability company to a taxable REIT subsidiary and therefore subsequent to
the
IPO, is subject to corporate Federal income taxes. Accordingly, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax base upon the change
in
tax status. Deferred tax assets and liabilities are measured using enacted
tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Earnings
Per Share -
Basic
earnings per share excludes dilution and is computed by dividing net income
available to common stockholders by the weighted-average number of shares of
common stock outstanding for the period. Diluted earnings per share reflects
the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company.
New
Accounting Pronouncements - In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” SFAS
154 changes the requirements for the accounting for and reporting of a change
in
accounting principle. Previous guidance required that most voluntary changes
in
accounting principle be recognized by including in net income of the period
of
the change the cumulative effect of changing to the new accounting principle.
SFAS 154 requires retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of
the
change. Management believes SFAS 154 will have no impact on the Company’s
financial statements.
In
February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments”. Key provisions of SFAS 155 include: (1) a broad
fair value measurement option for certain hybrid financial instruments that
contain an embedded derivative that would otherwise require bifurcation;
(2) clarification that only the simplest separations of interest payments
and principal payments qualify for the exception afforded to interest-only
strips and principal-only strips from derivative accounting under paragraph
14
of FAS 133 (thereby narrowing such exception); (3) a requirement that
beneficial interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or whether they are hybrid instruments
that contain embedded derivatives requiring bifurcation; (4) clarification
that concentrations of credit risk in the form of subordination are not embedded
derivatives; and (5) elimination of the prohibition on a QSPE holding
passive derivative financial instruments that pertain to beneficial interests
that are or contain a derivative financial instrument. In general, these
changes
will reduce the operational complexity associated with bifurcating embedded
derivatives, and increase the number of beneficial interests in securitization
transactions, including interest-only strips and principal-only strips, required
to be accounted for in accordance with FAS 133. Management does not believe
that
SFAS 155 will have a material effect on the financial condition, results
of
operations, or liquidity of the Company.
| 2. |
Investment
Securities Available For
Sale
|
Investment
securities available for sale consist of the following as of December 31, 2005
and December 31, 2004 (dollar amounts in thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Amortized
cost
|
$
|
720,583
|
$
|
1,207,715
|
|||
|
Gross
unrealized gains
|
1
|
151
|
|||||
|
Gross
unrealized losses
|
(4,102
|
)
|
(3,121
|
)
|
|||
|
Fair
value
|
$
|
716,482
|
$
|
1,204,745
|
|||
The
amortized cost balance includes approximately $388.3 million of certain
lower-yielding mortgage (with rate resets of less than two years) agency
securities that the Company had concluded it no longer had the intent to hold
until their values recovered. Upon such determination, the Company
recorded an impairment loss of $7.4 million.
Due
to
their terms, none of the remaining securities with unrealized losses have been
deemed to be other-than-temporarily impaired. The Company has the intent and
believes it has the ability to hold such investment securities until recovery
of
their amortized cost. Substantially all of the Company’s investment securities
available for sale are pledged as collateral for borrowings under financing
arrangements (Note 8).
The
following table sets forth the stated reset periods and weighted average yields
of our investment securities at December 31, 2005 (dollar amounts in
thousands):
|
Less
than
6
Months
|
More
than 6 Months
To
24 Months
|
More
than 24 Months
To
60 Months
|
Total
|
||||||||||||||||||||||
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
||||||||||||||||||
|
Agency
REMIC CMO Floating Rate
|
$
|
13,535
|
5.45
|
%
|
$
|
—
|
$
|
—
|
|
—
|
$
|
13,535
|
5.45
|
%
|
|||||||||||
|
FHLMC
Agency ARMs
|
—
|
—
|
91,217
|
3.82
|
%
|
—
|
—
|
91,217
|
3.82
|
%
|
|||||||||||||||
|
FNMA
Agency ARMs
|
—
|
—
|
297,048
|
3.91
|
%
|
—
|
—
|
297,048
|
3.91
|
%
|
|||||||||||||||
|
Private
Label ARMs
|
—
|
—
|
57,605
|
4.22
|
%
|
257,077
|
4.57
|
%
|
314,682
|
4.51
|
%
|
||||||||||||||
|
Total
|
$
|
13,535
|
5.45
|
%
|
$
|
445,870
|
3.93
|
%
|
$
|
257,077
|
4.57
|
%
|
$
|
716,482
|
4.19
|
%
|
|||||||||
| 3. |
Mortgage
Loans Held For Sale
|
Mortgage
loans held for sale consist of the following as of December 31, 2005 and
December 31, 2004 (dollar amounts in thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Mortgage
loans principal amount
|
$
|
108,244
|
$
|
85,105
|
|||
|
Deferred
origination costs - net
|
27
|
280
|
|||||
|
Mortgage
loans held for sale
|
$
|
108,271
|
$
|
85,385
|
|||
Substantially
all of the Company’s mortgage loans held for sale are pledged as collateral for
borrowings under financing arrangements (Note 9).
| 4. |
Mortgage
Loans Held in Securitization
Trusts
|
Mortgage
loans held in securitization trusts consist of the following at December 31,
2005 (dollar amounts in thousands):
|
Mortgage
loans principal amount
|
$
|
771,451
|
||
|
Deferred
origination costs - net
|
5,159
|
|||
|
Total
mortgage loans held in securitization trusts
|
$
|
776,610
|
Substantially
all of the Company’s mortgage loans held in securitization trusts are pledged as
collateral for borrowings under financing arrangements (Note 8) or for the
collateralized debt obligation (Note 10). None of the Company’s mortgage loans
were held in securitization trusts at December 31, 2004.
As
of
December 31, 2005, we had four delinquent loans totaling $2.0 million
categorized as Mortgage Loans Held in Securitization Trusts. The table below
shows delinquencies in our loan portfolio as of December 31, 2005 (dollar
amounts in thousands):
|
Days
Late
|
Number
of Delinquent Loans
|
Total
Dollar
Amount
|
%
of Loan
Portfolio
|
|||||||
|
30-60
|
1
|
$
|
193.1
|
0.02
|
%
|
|||||
|
61-90
|
—
|
—
|
—
|
|||||||
|
90+
|
3
|
$
|
1,771.0
|
0.23
|
%
|
|||||
| 5. |
Mortgage
Loans Held For Investment
|
Mortgage
loans held for investment consist of the following at December 31, 2005 and
December 31, 2004 (dollar amounts in thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Mortgage
loans principal amount
|
$
|
4,054
|
$
|
188,859
|
|||
|
Deferred
origination cost-net
|
6
|
1,294
|
|||||
|
Total
mortgage loans held for investment
|
$
|
4,060
|
$
|
190,153
|
|||
Substantially
all of the Company’s mortgage loans held for investment are pledged as
collateral for borrowings under financing arrangements (Note 9).
| 6. |
Property
and Equipment — Net
|
Property
and equipment consist of the following as of December 31, 2005 and December
31,
2004 (dollar amounts in thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Office
and computer equipment
|
$
|
6,292
|
$
|
3,191
|
|||
|
Furniture
and fixtures
|
2,306
|
2,032
|
|||||
|
Leasehold
improvements
|
1,429
|
1,138
|
|||||
|
Total
premises and equipment
|
10,027
|
6,361
|
|||||
|
Less:
accumulated depreciation and amortization
|
(3,145
|
)
|
(1,560
|
)
|
|||
|
Property
and equipment - net
|
$
|
6,882
|
$
|
4,801
|
|||
| 7. |
Derivative
Instruments and Hedging
Activities
|
The
Company enters into derivatives to manage its interest rate and market risk
exposure associated with its mortgage banking and its mortgage-backed securities
investment activities. In the normal course of its mortgage loan origination
business, the Company enters into contractual IRLCs to extend credit to finance
residential mortgages. To mitigate the effect of the interest rate risk inherent
in providing IRLCs from the lock-in date to the funding date of a loan, the
Company generally enters into FSLCs. With regard to the Company’s
mortgage-backed securities investment activities, the Company uses interest
rate
swaps and caps to mitigate the effects of major interest rate changes on net
investment spread.
The
following table summarizes the estimated fair value of derivative assets and
liabilities as of December 31, 2005 and December 31, 2004 (dollar amounts in
thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Derivative
Assets:
|
|||||||
|
Interest
rate caps
|
$
|
3,340
|
$
|
411
|
|||
|
Interest
rate swaps
|
6,383
|
3,229
|
|||||
|
Interest
rate lock commitments - loan commitments
|
123
|
5
|
|||||
|
Interest
rate lock commitments - mortgage loans held for sale
|
—
|
33
|
|||||
|
Total
derivative assets
|
$
|
9,846
|
$
|
3,678
|
|||
|
Derivative
Liabilities:
|
|||||||
|
Forward
loan sale contracts - loan commitments
|
(38
|
)
|
(24
|
)
|
|||
|
Forward
loan sale contracts - mortgage loans held for sale
|
(18
|
)
|
(2
|
)
|
|||
|
Forward
loan sale contracts - TBA securities
|
(324
|
)
|
(139
|
)
|
|||
|
Interest
rate lock commitments - mortgage loans held for sale
|
(14
|
)
|
—
|
||||
|
Total
derivative liabilities
|
$
|
(394
|
)
|
$
|
(165
|
)
|
|
The
notional amounts of the Company’s interest rate swaps, interest rate caps and
forward loan sales contracts as of December 31, 2005 were $645.0 million, $1.9
billion and $51.8 million, respectively.
The
notional amounts of the Company’s interest rate swaps, interest rate caps and
forward loan sales contracts as of December 31, 2004 were $670.0 million, $250.0
million and $97.1 million, respectively
The
Company estimates that over the next twelve months, approximately $5.2 million
of the net unrealized gains on the interest rate swaps will be reclassified
from
accumulated OCI into earnings.
| 8. |
Financing
Arrangements, Portfolio
Investments
|
The
Company has entered into repurchase agreements with third party financial
institutions to finance its residential mortgage-backed securities and mortgage
loans held in the securitization trusts. The repurchase agreements are
short-term borrowings that bear interest rates based on a spread to LIBOR,
and
are secured by the residential mortgage-backed securities and mortgage loans
held in the securitization trusts which they finance. At December 31, 2005,
the
Company had repurchase agreements with an outstanding balance of $1.2 billion
and a weighted average interest rate of 4.37%. As of December 31, 2004, the
Company had repurchase agreements with an outstanding balance of $1.1 billion
and a weighted average interest rate of 2.35%. At December 31, 2005 and 2004
securities and mortgage loans pledged as collateral for repurchase agreements
had estimated fair values of $1.2 billion. As of December 31, 2005 all of the
repurchase agreements will mature within 30 days, with weighted average days
to
maturity equal to 22 days. The Company has available to it $5.4 billion in
commitments to provide financings through such arrangements with 23 different
counterparties.
The
follow table summarizes outstanding repurchase agreement borrowings secured
by
portfolio investments as of December 31, 2005 and December 31, 2004 (dollars
amounts in thousands):
|
Repurchase
Agreements by Counterparty
|
|||||||
|
Counterparty
Name
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Banc
of America Securities LLC
|
$
|
—
|
$
|
140,000
|
|||
|
Citigroup
Global Markets Inc.
|
200,000
|
—
|
|||||
|
Countrywide
Securities Corporation
|
109,632
|
100,000
|
|||||
|
Credit
Suisse First Boston LLC
|
148,131
|
200,000
|
|||||
|
Deutsche
Bank Securities Inc.
|
205,233
|
—
|
|||||
|
Goldman,
Sachs & Co.
|
—
|
238,000
|
|||||
|
HSBC
|
163,781
|
—
|
|||||
|
J.P.
Morgan Securities Inc.
|
37,481
|
—
|
|||||
|
Merrill
Lynch Government Securities Inc.
|
—
|
128,000
|
|||||
|
UBS
Securities LLC
|
—
|
260,393
|
|||||
|
Wachovia
|
—
|
45,000
|
|||||
|
WaMu
Capital Corp
|
158,457
|
—
|
|||||
|
West
LB
|
143,784
|
—
|
|||||
|
Total
Financing Arrangements, Portfolio Investments
|
$
|
1,166,499
|
$
|
1,111,393
|
|||
| 9. |
Financing
Arrangements, Mortgage Loans Held for Sale/for
Investment
|
Financing
arrangements secured by mortgage loans held for sale or for investment consist
of the following as of December 31, 2005, and December 31, 2004 (dollar amounts
in thousands):
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
$250
million master repurchase agreement with Greenwich Capital expiring
on
December 4, 2006 bearing interest at one-month LIBOR plus spreads
from
0.75% to 1.25% (5.137% at December 31, 2005 and 3.16% at December
31,
2004). Principal repayments are required 120 days from the funding
date(a)
|
$
|
81,577
|
$
|
215,612
|
|||
|
$200
million revolving line of credit agreement with CSFB expiring on
March 31,
2006 bearing interest at daily LIBOR plus spreads from 0.75% to 2.000%
depending on collateral (4.3413% at December 31, 2005 and 3.599%
at
December 31, 2004). Principal repayments are required 90 days from
the
funding date
|
143,609
|
73,752
|
|||||
|
$150
million revolving line of credit agreement with HSBC expiring on
September
30, 2005 bearing interest at one-month LIBOR plus spreads from 1.00%
to
1.25% (4.294 at December 31, 2005 and 3.29% at December 31, 2004)
(b)
|
—
|
69,839
|
|||||
|
$
|
225,186
|
$
|
359,203
|
||||
| (a) |
This
credit facility, with Greenwich Capital Financial Products, Inc.,
requires
the Company to transfer specific collateral to the lender under repurchase
agreements; however, due to the rate of turnover of the collateral
by the
Company, the counterparty has not taken title to or recorded their
interest in any of the collateral transferred. Interest is paid to
the
counterparty based on the amount of outstanding borrowings and on
the
terms provided. This facility was renewed on January 6, 2006 and
expires
December 6, 2006.
|
| (b) |
The
HSBC credit facility was terminated by mutual agreement effective
September 30, 2005 and was paid in full on December 31,
2005.
|
The
lines
of credit are secured by all of the mortgage loans held by the Company, except
for the loans held in the securitization trusts. The lines contain various
covenants pertaining to, among other things, maintenance of certain amounts
of
net worth, periodic income thresholds and working capital. As of December 31,
2005, the Company was in compliance with all covenants with the exception of
the
net income covenant on the CSFB and Greenwich facilities and waivers have been
obtained from these institutions. As these annual agreements are negotiated
for
renewal, these covenants may be further modified. The agreements are each
renewable annually, but are not committed, meaning that the counterparties
to
the agreements may withdraw access to the credit facilities at any
time.
| 10. |
Collateralized
Debt Obligations
|
The
CDO
issued on December 20, 2005 is secured by ARM loans and restricted cash placed
as collateral for prefunded loans which will be replaced by ARM loans within
30
days. For financial reporting purposes, the ARM loans and restricted cash
held
as collateral are recorded as assets of the Company and the CDO is recorded
as
the Company’s debt. The transaction includes an amortizing interest rate cap
contract with an initial notional amount of $230.6 million which is held
by the
trust and recorded as an asset of the Company. The amortizing interest rate
cap
contract limits the interest rate exposure on this transaction. As of December
31, 2005 CDO outstanding totaled $228.2 million net of issuance costs with
an
average interest rate of 4.68%. The CDO is collateralized by ARM loans with
a
principal balance of $235.0 million including the prefunding amount of $4.6
million.
| 11. |
Subordinated
Debentures
|
On
September 1, 2005 the Company closed a private placement of $20.0 million of
trust preferred securities to Taberna Preferred Funding II, Ltd., a pooled
investment vehicle. The securities were issued by NYM Preferred Trust II and
are
fully guaranteed by the Company with respect to distributions and amounts
payable upon liquidation, redemption or repayment. These securities have a
fixed
interest rate equal to 8.35% up to and including July 30, 2010, at which point
the interest rate is converted to a floating rate equal to one-month LIBOR
plus
3.95% until maturity. The securities mature on October 30, 2035 and may be
called at par by the Company any time after October 30, 2010. In accordance
with
the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”, the issued preferred stock
of NYM Preferred Trust II has been classified as subordinated debentures in
the
liability section of the Company’s consolidated balance sheet.
On
March
15, 2005 the Company closed a private placement of $25.0 million of trust
preferred securities to Taberna Preferred Funding I, Ltd., a pooled investment
vehicle. The securities were issued by NYM Preferred Trust I and are fully
guaranteed by the Company with respect to distributions and amounts payable
upon
liquidation, redemption or repayment. These securities have a floating interest
rate equal to three-month LIBOR plus 3.75%, resetting quarterly (7.77%
at December 31, 2005). The securities mature on March 15, 2035 and may be
called at par by the Company any time after March 15, 2010. NYMC entered into
an
interest rate cap agreement to limit the maximum interest rate cost of the
trust
preferred securities to 7.5%. The term of the interest rate cap agreement is
five years and resets quarterly in conjunction with the reset periods of the
trust preferred securities. The interest rate cap agreement is accounted for
as
a cash flow hedge transaction in accordance with SFAS No.133. In accordance
with
the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”, the issued preferred stock
of NYM Preferred Trust I has been classified as subordinated debentures in
the
liability section of the Company’s consolidated balance sheet.
| 12. |
Commitments
and Contingencies
|
Loans
Sold to Investors -
Generally, the Company is not exposed to significant credit risk on its loans
sold to investors. In the normal course of business, the Company is obligated
to
repurchase loans which do not meet certain terms set by investors. Such loans
are then generally repackaged and sold to other investors.
Loans
Funding and Delivery Commitments -
At
December 31, 2005 and December 31, 2004 the Company had commitments to fund
loans with agreed-upon rates totaling $130.3 million and $156.1 million,
respectively. The Company hedges the interest rate risk of such commitments
and
the recorded mortgage loans held for sale balances primarily with FSLCs, which
totaled $51.8 million and $97.1 million at December 31, 2005 and December 31,
2004, respectively. The remaining commitments to fund loans with agreed-upon
rates are anticipated to be sold through optional delivery contract investor
programs. The Company does not anticipate any material losses from such
sales.
Net
Worth Requirements -
NYMC is
required to maintain certain specified levels of minimum net worth to maintain
its approved status with Fannie Mae, Freddie Mac, HUD and other investors.
As of
December 31, 2005 NYMC is in compliance with all minimum net worth
requirements.
Outstanding
Litigation -
The
Company is involved in litigation arising in the normal course of business.
Although the amount of any ultimate liability arising from these matters cannot
presently be determined, the Company does not anticipate that any such liability
will have a material effect on its consolidated financial
statements.
Leases
-
The
Company leases its corporate offices and certain retail facilities and equipment
under short-term lease agreements expiring at various dates through 2010. All
such leases are accounted for as operating leases. Total rental expense for
property and equipment amounted to $4.6 million, $3.3 million and $2.1 million
for the years ended December 31, 2005, 2004 and 2003, respectively. On February
11, 2005, the Company signed a letter of intent to enter into a sub-lease for
its former headquarters space at 304 Park Avenue in New York. The Company’s
remaining contractual obligation to the landlord on this lease is $1.8 million.
The sub-lease tenant will have a contractual rent obligation to the Company
under the sub-lease of $1.0 million. This transaction was completed in late
March 2005. Accordingly, during the first quarter of 2005, the Company
recognized a charge of $0.8 million to earnings.
As
of
December 31, 2005 obligations under non-cancelable operating leases that have
an
initial term of more than one year are as follows (dollar amounts in
thousands):
|
Year
Ending December 31,
|
|
|||
|
2006
|
$
|
4,685
|
||
|
2007
|
4,171
|
|||
|
2008
|
3,442
|
|||
|
2009
|
2,354
|
|||
|
2010
|
2,116
|
|||
|
Thereafter
|
—
|
|||
|
$
|
16,768
|
|||
Letters
of Credit -
NYMC
maintains a letter of credit in the amount of $100,000 in lieu of a cash
security deposit for an office lease dated June 1998 for the Company’s former
headquarters located at 304 Park Avenue South in New York City. The sole
beneficiary of this letter of credit is the owner of the building, 304 Park
Avenue South LLC. This letter of credit is secured by cash deposited in a bank
account maintained at Signature Bank.
Subsequent
to the move to a new headquarters location in New York City in July 2003, in
lieu of a cash security deposit for the office lease, we entered into an
irrevocable transferable letter of credit in the amount of $313,000 with
PricewaterhouseCoopers, LLP (sublandlord), as beneficiary. This letter of credit
is secured by cash deposited in a bank account maintained at HSBC
bank.
On
February 15, 2005, the Company entered into an irrevocable standby letter of
credit in an initial amount of $500,000 with the beneficiary being CCC Atlantic,
L.L.C., the landlord of the Company’s leased facility at 500 Burton Avenue,
Northfield, New Jersey. The letter of credit serves as security for leased
office property, initially occupied by employees of our branches doing business
as Ivy League Mortgage, L.L.C. The letter of credit is secured by the personal
guarantee and a mortgage on the home of the Ivy League Mortgage, L.L.C. branch
manager. The initial amount of the letter of credit will be reduced at each
of
the first four annual anniversary dates by $50,000, thereafter to remain at
a
value of $250,000 until termination on April 1, 2015.
| 13. |
Related
Party Transactions
|
Upon
completion of the Company’s IPO and acquisition of NYMC, Steven B. Schnall and
Joseph V. Fierro, the former owners of NYMC, were entitled to a distribution
of
NYMC’s retained earnings through the close of the Company’s IPO on June 29,
2004, not to exceed $4.5 million. As a result, a distribution of $2.4 million
($0.4 million of retained earnings as of March 31, 2004 plus an estimate of
$2.0
million for NYMC’s earnings through June 29, 2004) was made to the former owners
upon the close of the IPO. The subsequent earnings and elimination of
distributions and unrealized gains and losses attributable to NYMC for the
period prior to June 29, 2004 equated to a distribution overpayment of $1.3
million, for which Messrs. Schnall and Fierro reimbursed the Company immediately
upon the finalization of the overpayment calculation in July 2004.
Steven
B.
Schnall owns a 48% membership interest and Joseph V. Fierro owns a 12%
membership interest in Centurion Abstract, LLC (“Centurion”), which provides
title insurance brokerage services for certain title insurance providers. From
time to time, NYMC refers its mortgage loan borrowers to Centurion for
assistance in obtaining title insurance in connection with their mortgage loans,
although the borrowers have no obligation to utilize Centurion’s services. When
NYMC’s borrowers elect to utilize Centurion’s services to obtain title
insurance, Centurion collects various fees and a portion of the title insurance
premium paid by the borrower for its title insurance. Centurion received $0.6
million in fees and other amounts from NYMC borrowers for the year ended
December 31, 2005. NYMC does not economically benefit from such
referrals.
| 14. |
Concentrations
of Credit Risk
|
The
Company has originated loans predominantly in the eastern United States. Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers with similar characteristics, which would cause
their ability to meet contractual obligations to be similarly impacted by
economic or other conditions. At December 31, 2005 and December 31, 2004, there
were geographic concentrations of credit risk exceeding 5% of the total loan
balances within mortgage loans held for sale as follows:
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
New
York
|
43.0
|
%
|
70.2
|
%
|
|||
|
Massachusetts
|
17.8
|
%
|
6.6
|
%
|
|||
|
Florida
|
9.7
|
%
|
1.9
|
%
|
|||
|
Connecticut
|
5.8
|
%
|
5.0
|
%
|
|||
|
New
Jersey
|
5.1
|
%
|
7.4
|
%
|
|||
At
December 31, 2005 and December 31, 2004, there were geographic concentrations
of
credit risk exceeding 5% of the total loan balances within mortgage loans held
in the securitization trusts and mortgage loans held for investment as
follows:
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
New
York
|
32.7
|
%
|
30.7
|
%
|
|||
|
Massachusetts
|
19.4
|
%
|
1.4
|
%
|
|||
|
California
|
14.1
|
%
|
51.3
|
%
|
|||
|
New
Jersey
|
5.8
|
%
|
5.5
|
%
|
|||
|
Florida
|
5.4
|
%
|
1.4
|
%
|
|||
| 15. |
Fair
Value of Financial
Instruments
|
Fair
value estimates are made as of a specific point in time based on estimates
using
market quotes, present value or other valuation techniques. These techniques
involve uncertainties and are significantly affected by the assumptions used
and
the judgments made regarding risk characteristics of various financial
instruments, discount rates, estimates of future cash flows, future expected
loss experience, and other factors.
Changes
in assumptions could significantly affect these estimates and the resulting
fair
values. Derived fair value estimates cannot be necessarily substantiated by
comparison to independent markets and, in many cases, could not be necessarily
realized in an immediate sale of the instrument. Also, because of differences
in
methodologies and assumptions used to estimate fair values, the Company’s fair
values should not be compared to those of other companies.
Fair
value estimates are based on existing financial instruments and do not attempt
to estimate the value of anticipated future business and the value of assets
and
liabilities that are not considered financial instruments. Accordingly, the
aggregate fair value amounts presented below do not represent the underlying
value of the Company.
The
fair
value of certain assets and liabilities approximate cost due to their short-term
nature, terms of repayment or interest rates associated with the asset or
liability. Such assets or liabilities include cash and cash equivalents, escrow
deposits, unsettled mortgage loan sales, and financing arrangements. All forward
delivery commitments and option contracts to buy securities are to be
contractually settled within six months of the balance sheet date.
The
following describes the methods and assumptions used by the Company in
estimating fair values of other financial instruments:
a.
Investment
Securities Available for Sale -
Fair
value is generally estimated based on market prices provided by five to seven
dealers who make markets in these financial instruments. If the fair value
of a
security is not reasonably available from a dealer, management estimates the
fair value based on characteristics of the security that the Company receives
from the issuer and based on available market information.
b.
Mortgage
Loans Held for Sale -
Fair
value is estimated using the quoted market prices for securities backed by
similar types of loans and current investor or dealer commitments to purchase
loans.
c.
Mortgage
Loans Held for Investment -
Mortgage loans held for investment are recorded at amortized cost. Fair value
is
estimated using pricing models and taking into consideration the aggregated
characteristics of groups of loans such as, but not limited to, collateral
type,
index, interest rate, margin, length of fixed-rate period, life cap, periodic
cap, underwriting standards, age and credit estimated using the quoted market
prices for securities backed by similar types of loans.
d.
Mortgage
Loans Held in the Securitization Trusts - Mortgage
loans held in the securitization trusts are recorded at amortized cost. Fair
value is estimated using pricing models and taking into consideration the
aggregated characteristics of groups of loans such as, but not limited to,
collateral type, index, interest rate, margin, length of fixed-rate period,
life
cap, periodic cap, underwriting standards, age and credit estimated using the
quoted market prices for securities backed by similar types of
loans.
e.
Interest
Rate Lock Commitments -
The
fair value of IRLCs is estimated using the fees and rates currently charged
to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of IRLCs is
determined in accordance with SAB 105.
f.
Forward
Sale Loan Contracts -
The
fair value of these instruments is estimated using current market prices for
dealer or investor commitments relative to the Company’s existing
positions.
The
following tables set forth information about financial instruments, except
for
those noted above for which the carrying amount approximates fair value (dollar
amounts in thousands):
|
|
December
31, 2005
|
|||||||||
|
|
Notional
Amount
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||
|
Investment
securities available for sale
|
$
|
719,701
|
$
|
716,482
|
$
|
716,482
|
||||
|
Mortgage
loans held for investment
|
4,054
|
4,060
|
4,079
|
|||||||
|
Mortgage
loans held in the securitization trusts
|
771,451
|
776,610
|
775,311
|
|||||||
|
Mortgage
loans held for sale
|
108,244
|
108,271
|
109,252
|
|||||||
|
Commitments
and contingencies:
|
||||||||||
|
Interest
rate lock commitments - loan commitments
|
130,320
|
123
|
123
|
|||||||
|
Interest
rate lock commitments - mortgage loans held for sale
|
108,109
|
(14
|
)
|
(14
|
)
|
|||||
|
Forward
loan sales contracts
|
51,763
|
(380
|
)
|
(380
|
)
|
|||||
|
Interest
rate swaps
|
645,000
|
6,383
|
6,383
|
|||||||
|
Interest
rate caps
|
1,858,860
|
3,340
|
3,340
|
|||||||
|
|
December
31, 2004
|
|||||||||
|
|
Notional
Amount
|
Carrying
Amount
|
Estimated
Fair
Value
|
|||||||
|
Investment
securities available for sale
|
$
|
1,194,055
|
$
|
1,204,745
|
$
|
1,204,745
|
||||
|
Mortgage
loans held for investment
|
188,859
|
190,153
|
190,608
|
|||||||
|
Mortgage
loans held for sale
|
85,105
|
85,385
|
86,098
|
|||||||
|
Commitments
and contingencies:
|
||||||||||
|
Interest
rate lock commitments
|
156,110
|
38
|
38
|
|||||||
|
Forward
loan sales contracts
|
97,080
|
(165
|
)
|
(165
|
)
|
|||||
|
Interest
rate swaps
|
670,000
|
3,228
|
3,228
|
|||||||
|
Interest
rate caps
|
250,000
|
411
|
411
|
|||||||
| 16. |
Income
taxes
|
NYMT
and
its taxable subsidiary, NYMC, were S corporations prior to June 29, 2004
pursuant to the Internal Revenue Code of 1986, as amended, and as such did
not
incur any federal income tax expense.
On
June
29, 2004, NYMC became a C corporation for federal and state income tax purposes
and as such is subject to federal and state income tax on its taxable income
for
periods after June 29, 2004.
A
reconciliation of the statutory income tax provision (benefit) to the effective
income tax provision for the years ended December 31, 2005 and December 31,
2004, is as follows (dollar amounts in thousands).
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
Tax
at statutory rate (35%)
|
$
|
(4,861
|
)
|
$
|
1,291
|
||
|
Non-taxable
REIT income
|
(2,038
|
)
|
(2,559
|
)
|
|||
|
Transfer
pricing of loans sold to nontaxable parent
|
555
|
292
|
|||||
|
State
and local taxes
|
(1,731
|
)
|
(372
|
)
|
|||
|
Change
in tax status
|
(453
|
)
|
299
|
||||
|
Income
earned prior to taxable status
|
—
|
(207
|
)
|
||||
|
Miscellaneous
|
(21
|
)
|
(3
|
)
|
|||
|
Total
provision (benefit)
|
$
|
(8,549
|
)
|
$
|
(1,259
|
)
|
|
The
income tax benefit for the year ended December 31, 2005 is comprised of the
following components (dollar amounts in thousands):
|
|
Deferred
|
Total
|
|||||
|
Regular
tax benefit
|
|||||||
|
Federal
|
$
|
(6,818
|
)
|
$
|
(6,818
|
)
|
|
|
State
|
(1,731
|
)
|
(1,731
|
)
|
|||
|
Total
tax benefit
|
$
|
(8,549
|
)
|
$
|
(8,549
|
)
|
|
The
income tax benefit for the year ended December 31, 2004 is comprised of the
following components:
|
|
Current
|
Deferred
|
Total
|
|||||||
|
Regular
Tax Provision (Benefit)
|
||||||||||
|
Federal
|
—
|
$
|
(1,251
|
)
|
$
|
(1,251
|
)
|
|||
|
State
|
$
|
50
|
(327
|
)
|
(277
|
)
|
||||
|
Total
|
$
|
50
|
$
|
(1,578
|
)
|
$
|
(1,528
|
)
|
||
|
Change
in Tax Status
|
||||||||||
|
Federal
|
—
|
$
|
213
|
$
|
213
|
|||||
|
State
|
—
|
56
|
56
|
|||||||
|
|
—
|
$
|
269
|
$
|
269
|
|||||
|
Total
tax expense (benefit)
|
$
|
50
|
$
|
(1,309
|
)
|
$
|
(1,259
|
)
|
||
The
deferred tax asset at December 31, 2005 includes a deferred tax asset of $10.2
million and a deferred tax liability of $0.3 million which represents the tax
effect of differences between tax basis and financial statement carrying amounts
of assets and liabilities. The major sources of temporary differences and their
deferred tax effect at December 31, 2005 are as follows (dollar amounts in
thousands):
|
Deferred
tax assets:
|
||||
|
Net
operating loss forward
|
$
|
9,560
|
||
|
Restricted
stock, performance shares and stock option expense
|
125
|
|||
|
Rent
expense
|
120
|
|||
|
Management
compensation
|
98
|
|||
|
Loss
on Sublease
|
181
|
|||
|
Mark
to market adjustments
|
94
|
|||
|
Total
deferred tax asset
|
10,178
|
|||
|
Deferred
tax liabilities:
|
||||
|
Depreciation
|
319
|
|||
|
Total
deferred tax liability
|
319
|
|||
|
Net
deferred tax asset
|
$
|
9,859
|
||
The
deferred tax asset at December 31, 2004 includes a deferred tax asset of $1.6
million and a deferred tax liability of $0.3 million which represents the tax
effect of differences between tax basis and financial statement carrying amounts
of assets and liabilities. The major sources of temporary differences and their
deferred tax effect at December 31, 2004 are as follows:
|
Deferred
tax assets:
|
||||
|
Net
operating loss carry forward
|
$
|
1,238
|
||
|
Restricted
performance stock option expense
|
329
|
|||
|
Management
compensation
|
90
|
|||
|
1,657
|
||||
|
Deferred
tax liabilities:
|
||||
|
Mark-to-market
adjustments
|
79
|
|||
|
Depreciation
|
269
|
|||
|
348
|
||||
|
Net
deferred tax asset
|
$
|
1,309
|
||
The
net
deferred tax asset is included in prepaid and other assets on the accompanying
consolidated balance sheet. Although realization is not assured, management
believes it is more likely than not that all the deferred tax assets will be
realized. The net operating loss carry forward expires at various intervals
between 2012 and 2026.
| 17. |
Segment
Reporting
|
The
Company operates two segments:
| • |
Mortgage
Portfolio Management—
long-term investment in high-quality, adjustable-rate mortgage loans
and
residential mortgage-backed securities;
and
|
| • |
Mortgage
Lending—
mortgage loan originations as conducted by
NYMC.
|
Our
mortgage portfolio management segment primarily invest in adjustable-rate FNMA,
FHLMC and “AAA”— rated residential mortgage-backed securities and high-quality
mortgages that are originated by our mortgage operations or that may be acquired
from third parties. The Company’s equity capital and borrowed funds are used to
invest in residential mortgage-backed securities, thereby producing net interest
income.
The
mortgage lending segment originates residential mortgage loans through the
Company’s taxable REIT subsidiary, NYMC. Loans are originated through NYMC’s
retail and internet branches and generate gain on sale revenue when the loans
are sold to third parties or revenue from brokered loans when the loans are
brokered to third parties.
|
|
Year
Ended December 31, 2005
|
|||||||||
|
(Dollar
amounts in thousands)
|
||||||||||
|
|
Mortgage
Portfolio
Management
Segment
|
Mortgage
Lending
Segment
|
Total
|
|||||||
|
REVENUE:
|
||||||||||
|
Interest
income:
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
55,050
|
$
|
—
|
$
|
55,050
|
||||
|
Loans
held for investment
|
7,675
|
—
|
7,675
|
|||||||
|
Loans
held for sale
|
—
|
14,751
|
14,751
|
|||||||
|
Total
Interest Income
|
62,725
|
14,751
|
77,476
|
|||||||
|
Interest
expense:
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
42,001
|
—
|
42,001
|
|||||||
|
Loans
held for investment
|
5,847
|
—
|
5,847
|
|||||||
|
Loans
held for sale
|
—
|
10,252
|
10,252
|
|||||||
|
Subordinated
debentures
|
—
|
2,004
|
2,004
|
|||||||
|
Total
Interest Expense
|
47,848
|
12,256
|
60,104
|
|||||||
|
Net
interest income
|
14,877
|
2,495
|
17,372
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Gain
on sales of mortgage loans
|
—
|
26,783
|
26,783
|
|||||||
|
Brokered
loan fees
|
—
|
9,991
|
9,991
|
|||||||
|
Gain
on sale of securities and related hedges
|
2,207
|
—
|
2,207
|
|||||||
|
Impairment
loss on investment securities
|
(7,440
|
)
|
—
|
(7,440
|
)
|
|||||
|
Miscellaneous
income
|
1
|
231
|
232
|
|||||||
|
Total
other income (expense)
|
(5,232
|
)
|
37,005
|
31,773
|
||||||
|
EXPENSES:
|
||||||||||
|
Salaries,
commissions and benefits
|
1,934
|
29,045
|
30,979
|
|||||||
|
Brokered
loan expenses
|
—
|
7,543
|
7,543
|
|||||||
|
Occupancy
and equipment
|
33
|
6,094
|
6,127
|
|||||||
|
Marketing
and promotion
|
125
|
4,736
|
4,861
|
|||||||
|
Data
processing and communication
|
148
|
2,223
|
2,371
|
|||||||
|
Office
supplies and expenses
|
21
|
2,312
|
2,333
|
|||||||
|
Professional
fees
|
853
|
3,889
|
4,742
|
|||||||
|
Travel
and entertainment
|
6
|
834
|
840
|
|||||||
|
Depreciation
and amortization
|
8
|
1,708
|
1,716
|
|||||||
|
Other
|
289
|
1,233
|
1,522
|
|||||||
|
Total
expenses
|
3,417
|
59,617
|
63,034
|
|||||||
|
INCOME
(LOSS) BEFORE INCOME TAX BENEFIT
|
6,228
|
(20,117
|
)
|
(13,889
|
)
|
|||||
|
Income
tax benefit
|
—
|
8,549
|
8,549
|
|||||||
|
NET
INCOME (LOSS)
|
$ |
6,228
|
$ |
(11,568
|
)
|
$ |
(5,340
|
)
|
||
|
Segment
assets
|
$ |
1,528,222
|
$ |
263,071
|
$ |
1,791,293
|
||||
|
Segment
equity
|
100,197
|
761
|
100,958
|
|||||||
Prior
to
June 29, 2004, the Company conducted only mortgage lending
operations.
|
|
Year
Ended December 31, 2004
|
|||||||||
|
(Dollar
amounts in thousands)
|
||||||||||
|
|
Mortgage
Portfolio
Management
Segment
|
Mortgage
Lending
Segment
|
Total
|
|||||||
|
REVENUE:
|
||||||||||
|
Interest
income:
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$
|
19,671
|
$
|
—
|
$
|
19,671
|
||||
|
Loans
held for investment
|
723
|
—
|
723
|
|||||||
|
Loans
held for sale
|
—
|
6,905
|
6,905
|
|||||||
|
Total
Interest Income
|
20,394
|
6,905
|
27,299
|
|||||||
|
Interest
expense:
|
||||||||||
|
Investment
securities and loans held in the securitization trusts
|
11,982
|
—
|
11,982
|
|||||||
|
Loans
held for investment
|
488
|
—
|
488
|
|||||||
|
Loans
held for sale
|
—
|
3,543
|
3,543
|
|||||||
|
Total
Interest Expense
|
12,470
|
3,543
|
16,013
|
|||||||
|
Net
interest income
|
7,924
|
3,362
|
11,286
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Gain
on sales of mortgage loans
|
—
|
20,835
|
20,835
|
|||||||
|
Brokered
loan fees
|
—
|
6,895
|
6,895
|
|||||||
|
Gain
on sale of securities
|
167
|
607
|
774
|
|||||||
|
Miscellaneous
income
|
—
|
227
|
227
|
|||||||
|
Total
other income (expense)
|
167
|
28,564
|
28,731
|
|||||||
|
EXPENSES:
|
||||||||||
|
Salaries,
commissions and benefits
|
382
|
16,736
|
17,118
|
|||||||
|
Brokered
loan expenses
|
—
|
5,276
|
5,276
|
|||||||
|
Occupancy
and equipment
|
10
|
3,519
|
3,529
|
|||||||
|
Marketing
and promotion
|
14
|
3,176
|
3,190
|
|||||||
|
Data
processing and communication
|
174
|
1,424
|
1,598
|
|||||||
|
Office
supplies and expenses
|
4
|
1,515
|
1,519
|
|||||||
|
Professional
fees
|
149
|
1,856
|
2,005
|
|||||||
|
Travel
and entertainment
|
1
|
611
|
612
|
|||||||
|
Depreciation
and amortization
|
1
|
689
|
690
|
|||||||
|
Other
|
45
|
747
|
792
|
|||||||
|
Total
expenses
|
780
|
35,549
|
36,329
|
|||||||
|
INCOME
(LOSS) BEFORE INCOME TAX BENEFIT
|
7,311
|
(3,623
|
)
|
3,688
|
||||||
|
Income
tax benefit
|
—
|
1,259
|
1,259
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
7,311
|
$
|
(2,364
|
)
|
$
|
4,947
|
|||
|
Segment
assets
|
$
|
1,413,954
|
$
|
200,808
|
$
|
1,614,762
|
||||
|
Segment
equity
|
107,542
|
11,940
|
119,482
|
|||||||
| 18. |
Capital
Stock and Earnings per
Share
|
The
Company had 400,000,000 shares of common stock, par value $0.01 per share,
authorized with 18,258,221 shares issued and 17,953,674 outstanding as of
December 31, 2005. Of the common stock authorized, 936,111 shares were reserved
for issuance as restricted stock awards to employees, officers and directors.
As
of December 31, 2005, 174,677 shares remain reserved for issuance.
The
Company calculates basic net income per share by dividing net income (loss)
for
the period by weighted-average shares of common stock outstanding for that
period. Diluted net income (loss) per share takes into account the effect of
dilutive instruments, such as stock options and unvested restricted or
performance stock, but uses the average share price for the period in
determining the number of incremental shares that are to be added to the
weighted-average number of shares outstanding. For the year ended December
31,
2004, weighted average shares outstanding assume that the shares outstanding
upon the Company’s IPO are outstanding for the full year ending December 31,
2004. Earnings per share for periods prior to the IPO are not presented as
they
are not representative of the Company’s current capital structure.
The
following table presents the computation of basic and diluted net earnings
per
share for the periods indicated (dollar amounts in thousands, except net
earnings per share):
|
|
|
|
|||||
|
For
the Year Ended
December
31,
2005
|
For
the Year Ended
December
31,
2004
|
||||||
|
Numerator:
|
|||||||
|
Net
income/(loss)
|
$
|
(5,340
|
)
|
$
|
4,947
|
||
|
Denominator:
|
|||||||
|
Weighted
average number of common shares outstanding — basic
|
17,873
|
17,797
|
|||||
|
Net
effect of unvested restricted stock
|
-
|
224
|
|||||
|
Performance
shares
|
-
|
35
|
|||||
|
Escrowed
shares(1)
|
-
|
53
|
|||||
|
Net
effect of stock options(2)
|
-
|
6
|
|||||
|
Weighted
average number of common shares outstanding — dilutive
|
17,873
|
18,115
|
|||||
|
Net
(loss) per share — basic
|
$
|
(0.30
|
)
|
$
|
(0.28
|
)
|
|
|
Net
(loss) per share — diluted
|
$
|
(0.30
|
)
|
$
|
(0.27
|
)
|
|
|
|
|||||||
| (1) |
Upon
the closing of the Company’s IPO, of the 2,750,000 shares exchanged for
the equity interests of NYMC, 100,000 shares were held in escrow
through
December 31, 2004 and were available to satisfy any indemnification
claims
the Company may have had against the contributors of NYMC for losses
incurred as a result of defaults on any residential mortgage loans
originated by NYMC and closed prior to the completion of the IPO.
As of
December 31, 2004, the amount of escrowed shares was reduced by 47,680
shares, representing $492,536 for estimated losses on loans closed
prior
to the Company’s IPO. Furthermore, the contributors of NYMC entered into a
new escrow agreement, which extended the escrow period to December
31,
2006 for the remaining 52,320
shares.
|
| (2) |
The
Company has granted 591,500 of the 706,000 stock options available
for
issuance under the Company’s 2004 stock incentive
plan.
|
|
(3)
|
For
the year ended December 31, 2005 basic and diluted loss per common
share
are the same because the effect of NYMT's restricted shares, performace
shares, escrowed shares and stock options was
antidilutive.
|
During
2005, taxable dividends for New York Mortgage Trust’s common stock were $0.95
per share. For tax reporting purposes, the 2005 taxable dividend will be
classified as follows: $0.81532 as ordinary income and $0.13468 as a return
of
capital.
|
19.
|
Stock
Incentive Plan
|
Pursuant
to the 2004 Stock Incentive Plan (the “2004 Plan”), eligible employees, officers
and directors were offered the opportunity to acquire shares of the Company’s
common stock through the grant of options and the award of restricted stock
under the 2004 Plan. In connection with the Plan, the Company also awarded
shares of stock to employees conditioned upon satisfaction of certain
performance criteria related to the November 2004 acquisition of Guaranty
Residential Lending. The maximum number of options that may be issued is 706,000
shares and the maximum number of restricted stock awards that may be granted
under the 2004 Plan is 794,250.
2005
Stock Incentive Plan
At
the
Annual Meeting of Stockholders held on May 31, 2005, the Company’s stockholders
approved the adoption of the Company’s 2005 Stock Incentive Plan (the “2005
Plan”). The 2005 Plan replaces the 2004 Plan, which was terminated on the same
date. The 2005 Plan provides that up to 936,111 shares of the Company’s common
stock may be issued thereunder. That number of shares represents 711,895 shares
of common stock, or (4% of the 17,797,375 shares of common stock outstanding
at
March 10, 2005), plus 224,216 shares of common stock remaining from the 2004
Plan. The number of shares available for issuance under the 2005 Plan will
be
increased by (a) 6% of the number of additional shares of the Company’s common
stock issued between March 10, 2005 and May 31, 2006 (other than shares issued
under the 2004 Plan or 2005 Plan) and (b) the number of shares covered by 2004
Plan awards that are forfeited or terminated after March 10, 2005.
Options
The
2004
Plan provides for the exercise price of options to be determined by the
Compensation Committee of the Board of Directors (“Compensation Committee”) but
not to be less than the fair market value on the date the option is granted.
Options expire ten years after the grant date. As of December 31, 2005, 591,500
options have been granted pursuant to the 2004 Plan with a vesting period of
two
years.
The
Company accounts for the fair value of its grants in accordance with SFAS No.
123. The compensation cost charged against income during the years ended
December 31, 2005 and 2004 was approximately $44,000 and $106,000,
respectively.
A
summary
of the status of the Company’s options as of December 31, 2005 and changes
during the year then ended is presented below:
|
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||
|
Outstanding
at beginning of year, January 1, 2005
|
556,500
|
$
|
9.57
|
||||
|
Granted
|
35,000
|
$
|
9.83
|
||||
|
Canceled
|
25,000
|
9.83
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Outstanding
at end of year, December 31, 2005
|
566,500
|
$
|
9.56
|
||||
|
Options
exercisable at year-end
|
289,826
|
$
|
9.32
|
||||
|
Weighted-average
fair value of options granted during the year
|
$
|
9.83
|
|||||
A
summary
of the status of the Company’s options as of December 31, 2004 and changes
during the year then ended is presented below:
|
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||
|
Outstanding
at beginning of year, January 1, 2004
|
—
|
—
|
|||||
|
Granted
|
556,500
|
$
|
9.57
|
||||
|
Canceled
|
—
|
—
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Outstanding
at end of year, December 31, 2004
|
556,500
|
$
|
9.57
|
||||
|
Options
exercisable at year-end
|
303,162
|
$
|
9.35
|
||||
|
Weighted-average
fair value of options granted during the year
|
$
|
9.57
|
|||||
The
following table summarizes information about stock options at December 31,
2005:
|
Options
Outstanding
|
|||||||||||||||||||
|
Weighted-
|
|||||||||||||||||||
|
Average
|
|||||||||||||||||||
|
Remaining
|
Options
Exercisable
|
Fair
Value
|
|||||||||||||||||
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
of
Options
|
||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
|
Life
(Years)
|
Price
|
Exercisable
|
Price
|
Granted
|
|||||||||||||
|
$9.00
|
176,500
|
8.5
|
$
|
9.00
|
176,500
|
$
|
9.00
|
$
|
0.39
|
||||||||||
|
$9.83
|
390,000
|
8.9
|
9.83
|
113,326
|
9.83
|
0.29
|
|||||||||||||
|
Total
|
566,500
|
8.8
|
$
|
9.57
|
289,826
|
$
|
9.35
|
$
|
0.33
|
||||||||||
The
following table summarizes information about stock options at December 31,
2004:
|
Options
Outstanding
|
|||||||||||||||||||
|
Weighted-
|
|||||||||||||||||||
|
Average
|
|||||||||||||||||||
|
Remaining
|
Options
Exercisable
|
Fair
Value
|
|||||||||||||||||
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
of
Options
|
||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
|
Life
(Years)
|
Price
|
Exercisable
|
Price
|
Granted
|
|||||||||||||
|
$9.00
|
176,500
|
9.5
|
$
|
9.00
|
176,500
|
$
|
9.00
|
$
|
0.39
|
||||||||||
|
$9.83
|
380,000
|
9.9
|
9.83
|
126,662
|
9.83
|
0.29
|
|||||||||||||
|
Total
|
556,500
|
9.8
|
$
|
9.57
|
303,162
|
$
|
9.35
|
$
|
0.32
|
||||||||||
The
fair
value of each option grant is estimated on the date of grant using the Binomial
option-pricing model with the following weighted-average
assumptions:
|
Risk
free interest rate
|
4.5
|
%
|
||
|
Expected
volatility
|
10
|
%
|
||
|
Expected
life
|
10
years
|
|||
|
Expected
dividend yield
|
10.48
|
%
|
Restricted Stock
As
of
December 31, 2005, the Company has awarded 555,178 shares of restricted stock
under the 2005 Plan, of which 334,120 shares have fully vested. As of December
31, 2005 the remaining shares of restricted stock awarded under the 2004 Plan
are subject to vesting periods between 5 and 36 months. During the year ended
December 31, 2005, the Company recognized non-cash compensation expense of
$1.6
million relating to the vested portion of restricted stock grants. Dividends
are
paid on all restricted stock issued, whether those shares are vested or not.
In
general, unvested restricted stock is forfeited upon the recipient’s termination
of employment.
Performance
Based Stock Awards
In
November 2004, the Company acquired 15 full-service and 26 satellite retail
mortgage banking offices located in the Northeast and Mid-Atlantic states from
General Residential Lending, Inc. (“GRL”). Pursuant to that transaction, the
Company has committed to award 236,909 shares of the Company’s stock to
certain employees of those branches upon attainment of predetermined production
levels. As of December 31, 2005, the awards range in vesting periods from 2
to
18 months with a share price set at the December 2, 2004 grant date market
value
of $9.83 per share. During the year ended December 31, 2005, the Company
recognized non-cash compensation expense of $1.5 million relating to performance
based stock awards. Unvested issued performance share awards have no voting
rights and do not earn dividends.
| 20. |
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
The
following table is a comparative breakdown of our unaudited quarterly results
for the immediately preceding eight quarters. The quarter ended June 30, 2004
has been restated, as explained below, and includes the appropriate adjustments
discussed below (dollar amounts in thousands, except per share
data):
|
Three
Months Ended
|
|||||||||||||
|
|
Mar.
31,
2005
|
Jun.
30,
2005
|
Sep.
30,
2005
|
Dec.
31,
2005
|
|||||||||
|
REVENUES:
|
|||||||||||||
|
Interest
income
|
$
|
17,117
|
$
|
19,669
|
$
|
19,698
|
$
|
20,992
|
|||||
|
Interest
expense
|
11,690
|
14,531
|
16,159
|
17,724
|
|||||||||
|
Net
interest income
|
5,427
|
5,138
|
3,539
|
3,268
|
|||||||||
|
Other
income (expense):
|
|||||||||||||
|
Gain
on sales of mortgage loans
|
4,321
|
8,328
|
8,985
|
5,149
|
|||||||||
|
Brokered
loan fees
|
1,999
|
2,534
|
2,647
|
2,811
|
|||||||||
|
Gain
(loss) on sale of marketable securities and related hedges
|
377
|
544
|
1,286
|
(7,440
|
)
|
||||||||
|
Miscellaneous
income (loss)
|
115
|
(10
|
)
|
91
|
36
|
||||||||
|
Total
other income (expense)
|
6,812
|
11,396
|
13,009
|
556
|
|||||||||
|
EXPENSES:
|
|||||||||||||
|
Salaries,
commissions and related expenses
|
7,143
|
9,430
|
7,302
|
7,104
|
|||||||||
|
Brokered
loan expenses
|
1,520
|
2,686
|
1,483
|
1,854
|
|||||||||
|
General
and administrative expenses
|
6,304
|
6,062
|
5,903
|
6,243
|
|||||||||
|
Total
expenses
|
14,967
|
18,178
|
14,688
|
15,201
|
|||||||||
|
Income
(loss) before provision for income taxes
|
(2,728
|
)
|
(1,644
|
)
|
1,860
|
(11,377
|
)
|
||||||
|
Income
tax benefit
|
2,690
|
2,190
|
1,000
|
2,669
|
|||||||||
|
Net
income (loss)
|
$
|
(38
|
)
|
$
|
546
|
$
|
2,860
|
$
|
(8,708
|
)
|
|||
|
Per
share basic income (loss)
|
$
|
0.00
|
$
|
0.03
|
$
|
0.16
|
$
|
(0.49
|
)
|
||||
|
Per
share diluted income (loss)
|
$
|
0.00
|
$
|
0.03
|
$
|
0.16
|
$
|
(0.49
|
)
|
||||
|
Three
Months Ended
|
|||||||||||||
|
|
Mar.
31,
2004
|
Jun.
30,
2004
|
Sep.
30,
2004
|
Dec.
31,
2004
|
|||||||||
|
REVENUES:
|
|||||||||||||
|
Interest
income
|
$
|
1,261
|
$
|
1,886
|
$
|
10,290
|
$
|
13,862
|
|||||
|
Interest
expense
|
609
|
1,124
|
5,465
|
8,815
|
|||||||||
|
Net
interest income
|
652
|
762
|
4,825
|
5,047
|
|||||||||
|
Other
income
|
|||||||||||||
|
Gain
on sales of mortgage loans
|
3,506
|
6,945
|
4,482
|
5,902
|
|||||||||
|
Brokered
loan fees
|
2,183
|
778
|
1,438
|
2,496
|
|||||||||
|
Gain
(loss) on sale of marketable securities
|
—
|
607
|
126
|
41
|
|||||||||
|
Miscellaneous
income
|
16
|
30
|
50
|
131
|
|||||||||
|
Total
other income
|
5,705
|
8,360
|
6,096
|
8,570
|
|||||||||
|
EXPENSES:
|
|||||||||||||
|
Salaries,
commissions and related expenses
|
2,719
|
4,172
|
4,504
|
5,723
|
|||||||||
|
Brokered
loan expenses
|
1,284
|
835
|
1,017
|
2,140
|
|||||||||
|
General
and administrative expenses
|
2,236
|
3,724
|
3,180
|
4,795
|
|||||||||
|
Total
expenses
|
6,239
|
8,731
|
8,701
|
12,658
|
|||||||||
|
Income
before provision for income taxes
|
118
|
391
|
2,220
|
959
|
|||||||||
|
Income
tax (expense) benefit
|
—
|
(10
|
)
|
232
|
1,037
|
||||||||
|
Net
income
|
$
|
118
|
$
|
381
|
$
|
2,452
|
$
|
1,996
|
|||||
|
Per
share basic income
|
—
|
$
|
0.02
|
$
|
0.14
|
$
|
0.12
|
||||||
|
Per
share diluted income
|
—
|
$
|
0.02
|
$
|
0.14
|
$
|
0.12
|
||||||
On
March
16, 2005, the Company’s management determined that the accounting for the
disposition of marketable securities and certain cash flow hedges owned by
NYMC
was incorrect and should be restated to reflect the gain of $865,000 in earnings
instead of as a change in other comprehensive income. As a result, the net
income reported for the three and six months ended June 30, 2004 and the nine
months ended September 30, 2004 as filed in the Company’s Quarterly Reports on
Form 10-Q for such periods, respectively, was understated by
$865,000.
The
marketable securities were disposed of in a transaction during the second
quarter of 2004 prior to completion of the Company’s IPO so as to avoid owning a
legacy portfolio of securities which (i) did not meet the Company’s new
investment guidelines, (ii) are equity securities, (iii) cannot be appropriately
hedged or (iv) do not generate qualifying REIT income. As a result, the impact
on the sale of these assets did not impact the Company or its earnings generated
during periods after completion of the IPO. However, because the Company’s
acquisition of NYMC is accounted for as a reverse merger for accounting and
financial reporting purposes, the historical financial presentation of net
income is affected.
For
financial presentation purposes, the restatement increases net income by
approximately $783,000 for the marketable securities and $82,000 for the cash
flow hedges with a corresponding reduction in accumulated other comprehensive
income for the periods indicated. There was no impact on total assets,
liabilities or equity on the Company’s balance sheet, or to net comprehensive
income for the periods presented.
EXHIBIT
INDEX
Exhibits.
The
exhibits required by Item 601 of Regulation S-K are listed below. Management
contracts or compensatory plans are filed as Exhibits 10.55, 10.92, 10.93,
10.94, 10.95, 10.96, 10.97, 10.98, 10.102 and 10.105.
|
Exhibit
|
Description
|
|
|
3.1
|
Articles
of Amendment and Restatement of New York Mortgage Trust, Inc.
(Incorporated by reference to Exhibit 3.1 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
3.2(a)
|
Bylaws
of New York Mortgage Trust, Inc. (Incorporated by reference to
Exhibit 3.2
to the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
Amendment
No. 1 to Bylaws of New York Mortgage Trust, Inc.*
|
||
|
4.1
|
Form
of Common Stock Certificate. (Incorporated by reference to Exhibit
4.1 to
the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
4.2(a)
|
Junior
Subordinated Indenture between The New York Mortgage Company,
LLC and
JPMorgan Chase Bank, National Association, as trustee, dated
September 1, 2005. (Incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on September 6, 2005).
|
|
|
4.2(b)
|
Amended
and Restated Trust Agreement among The New York Mortgage Company,
LLC, JPMorgan Chase Bank, National Association, Chase Bank USA,
National
Association and the Administrative Trustees named therein, dated
September 1, 2005. (Incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on September 6, 2005).
|
|
|
10.1
|
Promissory
Note, issued by The New York Mortgage Company, LLC on August
31, 2003, as
amended and restated, on December 23, 2003, in the principal
amount of
$2,574,352.00, payable to Joseph V. Fierro. (Incorporated by
reference to
Exhibit 10.1 to the Company’s Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No.
333-111668),
effective June 23, 2004).
|
|
|
10.2
|
Promissory
Note, issued by The New York Mortgage Company, LLC on August
31, 2003, as
amended and restated, on December 23, 2003, in the principal
amount of
$12,132,550.00 payable to Steven B. Schnall. (Incorporated by
reference to
Exhibit 10.2 to the Company’s Registration Statement on Form S-11 as filed
with the Securities and Exchange Commission (Registration No.
333-111668),
effective June 23, 2004).
|
|
|
10.3
|
Master
Repurchase Agreement between Credit Suisse First Boston Mortgage
Capital
LLC, The New York Mortgage Company, LLC, Steven B. Schnall and
Joseph V.
Fierro, dated October 2, 2002. (Incorporated by reference to
Exhibit 10.3
to the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.4
|
Amendment
No. 1 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated December 4, 2002. (Incorporated
by
reference to Exhibit 10.4 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23,
2004).
|
|
10.5
|
Amendment
No. 2 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated February 20, 2003. (Incorporated
by
reference to Exhibit 10.5 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.6
|
Amendment
No. 3 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated April 22, 2003. (Incorporated
by
reference to Exhibit 10.6 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.7
|
Amendment
No. 4 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated July 1, 2003. (Incorporated
by
reference to Exhibit 10.7 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.8
|
Amendment
No. 5 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated July 7, 2003. (Incorporated
by
reference to Exhibit 10.8 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.9
|
Amendment
No. 6 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated July 31, 2003. (Incorporated
by
reference to Exhibit 10.9 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.10
|
Amendment
No. 7 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated August 4, 2003. (Incorporated
by
reference to Exhibit 10.10 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.11
|
Amendment
No. 8 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated August 9, 2003. (Incorporated
by
reference to Exhibit 10.11 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.12
|
Amendment
No. 9 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated August 28, 2003. (Incorporated
by
reference to Exhibit 10.12 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.13
|
Amendment
No. 10 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated September 17, 2003. (Incorporated
by
reference to Exhibit 10.13 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.14
|
Amendment
No. 11 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated October 1, 2003. (Incorporated
by
reference to Exhibit 10.14 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23,
2004).
|
|
10.15
|
Amendment
No. 12 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated October 31, 2003. (Incorporated
by
reference to Exhibit 10.15 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.16
|
Amendment
No. 13 to Master Repurchase Agreement between Credit Suisse First
Boston
Mortgage Capital LLC, The New York Mortgage Company, LLC, Steven
B.
Schnall and Joseph V. Fierro, dated December 19, 2003. (Incorporated
by
reference to Exhibit 10.16 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.17
|
Credit
Note between HSBC Bank USA and The New York Mortgage Company
LLC, dated as
of March 30, 2001. (Incorporated by reference to Exhibit 10.17
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.18
|
Credit
and Security Agreement between HSBC Bank USA and The New York
Mortgage
Company LLC, dated as of March 30, 2001. (Incorporated by reference
to
Exhibit 10.18 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.19
|
First
Amended Credit Note, dated as of May 24, 2001, between HSBC Bank
USA and
The New York Mortgage Company LLC, dated as of March 30, 2001.
(Incorporated by reference to Exhibit 10.19 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.20
|
First
Amended Credit and Security Agreement, dated as of May 24, 2001,
between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001. (Incorporated by reference to Exhibit 10.20 to the Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.21
|
Second
Amended Credit Note, dated as of June 18, 2001, between HSBC
Bank USA and
The New York Mortgage Company LLC, dated as of March 30, 2001.
(Incorporated by reference to Exhibit 10.21 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.22
|
Second
Amended Credit and Security Agreement, dated June 18, 2001, between
HSBC
Bank USA and The New York Mortgage Company LLC, dated as of March
30,
2001. (Incorporated by reference to Exhibit 10.22 to the Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.23
|
Third
Amended Credit Note, dated as of November 13, 2001, between HSBC
Bank USA
and The New York Mortgage Company LLC, dated as of March 30,
2001.
(Incorporated by reference to Exhibit 10.23 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.24
|
Third
Amended Credit and Security Agreement, dated as of November 13,
2001,
between HSBC Bank USA and The New York Mortgage Company LLC,
dated as of
March 30, 2001. (Incorporated by reference to Exhibit 10.24 to
the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
10.25
|
Fourth
Amended Credit Note, dated as of January 16, 2002, between HSBC
Bank USA
and The New York Mortgage Company LLC, dated as of March 30,
2001.
(Incorporated by reference to Exhibit 10.25 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.26
|
Fourth
Amended Credit and Security Agreement, dated as of January 16,
2002,
between HSBC Bank USA and The New York Mortgage Company LLC,
dated as of
March 30, 2001. (Incorporated by reference to Exhibit 10.26 to
the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.27
|
Fifth
Amended Credit Note, dated as of April 29, 2002, between HSBC
Bank USA and
The New York Mortgage Company LLC, dated as of March 30, 2001.
(Incorporated by reference to Exhibit 10.27 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.28
|
Fifth
Amended Credit and Security Agreement, dated as of April 29,
2002, between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001. (Incorporated by reference to Exhibit 10.28 to the Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.29
|
Extension
Letter, dated August 26, 2002, to Credit and Security Agreement
between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001, as amended. (Incorporated by reference to Exhibit 10.29
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.30
|
Extension
Letter, dated September 11, 2002, to Credit and Security Agreement
between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001, as amended. (Incorporated by reference to Exhibit 10.30
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.31
|
Extension
Letter, dated October 28, 2002, to Credit and Security Agreement
between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001, as amended. (Incorporated by reference to Exhibit 10.31
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.32
|
Extension
Letter, dated November 27, 2002, to Credit and Security Agreement
between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001, as amended. (Incorporated by reference to Exhibit 10.32
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.33
|
Extension
Letter, dated April 15, 2003, to Credit and Security Agreement
between
HSBC Bank USA and The New York Mortgage Company LLC, dated as
of March 30,
2001, as amended. (Incorporated by reference to Exhibit 10.33
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.34
|
Extension
Letter, dated June 24, 2003, to Credit and Security Agreement
between HSBC
Bank USA and The New York Mortgage Company LLC, dated as of March
30,
2001, as amended. (Incorporated by reference to Exhibit 10.34
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
10.35
|
Guaranty
between HSBC Bank USA, The New York Mortgage Company LLC and
Steven
Schnall, dated as of March 30, 2001. (Incorporated by reference
to Exhibit
10.35 to the Company’s Registration Statement on Form S-11 as filed with
the Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.36
|
Guaranty
between HSBC Bank USA, The New York Mortgage Company LLC and
Joseph V.
Fierro, dated as of March 30, 2001. (Incorporated by reference
to Exhibit
10.36 to the Company’s Registration Statement on Form S-11 as filed with
the Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.37
|
First
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Steven Schnall, dated as of May 24, 2001. (Incorporated by
reference
to Exhibit 10.37 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.38
|
First
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Joseph V. Fierro, dated as of May 24, 2001. (Incorporated
by reference
to Exhibit 10.38 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.39
|
Warehousing
Credit Agreement, among The New York Mortgage Company LLC, Steven
B.
Schnall, Joseph V. Fierro and National City Bank of Kentucky,
dated
January 25, 2002. (Incorporated by reference to Exhibit 10.39
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.40
|
First
Amendment, dated April 2002, to Warehousing Credit Agreement,
among The
New York Mortgage Company LLC, Steven B. Schnall, Joseph V. Fierro
and
National City Bank of Kentucky, dated January 25, 2002. (Incorporated
by
reference to Exhibit 10.40 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.41
|
Second
Amendment, dated June 3, 2002, to Warehousing Credit Agreement,
among The
New York Mortgage Company LLC, Steven B. Schnall, Joseph V. Fierro
and
National City Bank of Kentucky, dated January 25, 2002. (Incorporated
by
reference to Exhibit 10.41 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.42
|
Third
Amendment, dated November , 2002, to Warehousing Credit Agreement,
among
The New York Mortgage Company LLC, Steven B. Schnall, Joseph
V. Fierro and
National City Bank of Kentucky, dated January 25, 2002. (Incorporated
by
reference to Exhibit 10.42 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.43
|
Fourth
Amendment, dated June 15, 2003, to Warehousing Credit Agreement,
among The
New York Mortgage Company LLC, Steven B. Schnall, Joseph V. Fierro
and
National City Bank of Kentucky, dated January 25, 2002. (Incorporated
by
reference to Exhibit 10.43 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.44
|
Warehouse
Promissory Note, between The New York Mortgage Company, LLC and
National
City Bank of Kentucky, dated January 25, 2002. (Incorporated
by reference
to Exhibit 10.44 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23,
2004).
|
|
10.45
|
Amended
and Restated Warehouse Promissory Note, between The New York
Mortgage
Company, LLC and National City Bank of Kentucky, dated June 3,
2002.
(Incorporated by reference to Exhibit 10.45 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.46
|
Warehousing
Credit Agreement, between New York Mortgage Company, LLC, Steven
B.
Schnall, Joseph V. Fierro and National City Bank of Kentucky,
dated as of
January 25, 2002. (Incorporated by reference to Exhibit 10.46
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.47
|
Pledge
and Security Agreement, between The New York Mortgage Company,
LLC and
National City Bank of Kentucky, dated as of January 25, 2002.
(Incorporated by reference to Exhibit 10.47 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.48
|
Unconditional
and Continuing Guaranty of Payment by Steven B. Schnall to National
City
Bank of Kentucky, dated January 25, 2002. (Incorporated by reference
to
Exhibit 10.48 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.49
|
Unconditional
and Continuing Guaranty of Payment by Joseph V. Fierro to National
City
Bank of Kentucky, dated January 25, 2002. (Incorporated by reference
to
Exhibit 10.49 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.50
|
Amended
and Restated Unconditional and Continuing Guaranty of Payment
by Steven B.
Schnall to National City Bank of Kentucky, dated June 15, 2003.
(Incorporated by reference to Exhibit 10.50 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.51
|
Amended
and Restated Unconditional and Continuing Guaranty of Payment
by Joseph V.
Fierro to National City Bank of Kentucky, dated June 15, 2003.
(Incorporated by reference to Exhibit 10.51 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.52
|
Inter-Creditor
Agreement, between National City Bank of Kentucky and HSBC Bank
USA, dated
January 25, 2002. (Incorporated by reference to Exhibit 10.52
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.53
|
Whole
Loan Purchase and Sale Agreement/Mortgage Loan Purchase and Sale
Agreement
between The New York Mortgage Company, LLC and Greenwich Capital
Financial
Products, Inc., dated as of September 1, 2003. (Incorporated
by reference
to Exhibit 10.53 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.54
|
Whole
Loan Custodial Agreement/Custodial Agreement between Greenwich
Capital
Financial Products, Inc., The New York Mortgage Company, LLC
and LaSalle
Bank National Association, dated as of September 1, 2003. (Incorporated
by
reference to Exhibit 10.54 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23,
2004).
|
|
10.55
|
Form
of New York Mortgage Trust, Inc. 2004 Stock Incentive Plan. (Incorporated
by reference to Exhibit 10.55 to the Company’s Registration Statement on
Form S-11 as filed with the Securities and Exchange Commission
(Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.56
|
Contribution
Agreement by and among Steven B. Schnall and Joseph V. Fierro
and New York
Mortgage Trust, Inc., dated December 22, 2003. (Incorporated
by reference
to Exhibit 10.56 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.57
|
Agreement
by and among New York Mortgage Trust, Inc., The New York Mortgage
Company,
LLC, Steven B. Schnall and Joseph V. Fierro, dated December 23,
2003.
(Incorporated by reference to Exhibit 10.57 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.58
|
Sixth
Amended Credit and Security Agreement, dated as of August 11,
2003,
between HSBC Bank USA and The New York Mortgage Company LLC,
dated as of
March 30, 2001. (Incorporated by reference to Exhibit 10.58 to
the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.59
|
Temporary
Overadvance Note, dated as of August 11, 2003, between HSBC Bank
USA and
the New York Mortgage Company LLC. (Incorporated by reference
to Exhibit
10.59 to the Company’s Registration Statement on Form S-11 as filed with
the Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.60
|
Second
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Steven Schnall, dated as of June 18, 2001. (Incorporated
by reference
to Exhibit 10.60 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.61
|
Second
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Joseph V. Fierro, dated as of June 18, 2001. (Incorporated
by
reference to Exhibit 10.61 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.62
|
Third
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Steven Schnall, dated as of November 13, 2001. (Incorporated
by
reference to Exhibit 10.62 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.63
|
Third
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Joseph V. Fierro, dated as of November 13, 2001. (Incorporated
by
reference to Exhibit 10.63 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.64
|
Fourth
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Steven Schnall, dated as of January 16, 2002. (Incorporated
by
reference to Exhibit 10.64 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.65
|
Fourth
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Joseph V. Fierro, dated as of January 16, 2002. (Incorporated
by
reference to Exhibit 10.65 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23,
2004).
|
|
10.66
|
Fifth
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Steven Schnall, dated as of April 29, 2002. (Incorporated
by reference
to Exhibit 10.66 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.67
|
Fifth
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Joseph V. Fierro, dated as of April 29, 2002. (Incorporated
by
reference to Exhibit 10.67 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.68
|
Sixth
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Steven Schnall, dated as of August 11, 2003. (Incorporated
by
reference to Exhibit 10.68 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.69
|
Sixth
Amended Guaranty between HSBC Bank USA, The New York Mortgage
Company LLC
and Joseph V. Fierro, dated as of August 11, 2003. (Incorporated
by
reference to Exhibit 10.69 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.70
|
Credit
and Security Agreement by and among HSBC Bank USA, National City
Bank of
Kentucky and The New York Mortgage Company LLC, dated as of December
15,
2003. (Incorporated by reference to Exhibit 10.70 to the Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.71
|
Guaranty
between HSBC Bank USA, National City Bank of Kentucky, The New
York
Mortgage Company LLC and Steven B. Schnall, dated as of December
15, 2003.
(Incorporated by reference to Exhibit 10.71 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.72
|
Guaranty
between HSBC Bank USA, National City Bank of Kentucky, The New
York
Mortgage Company LLC and Joseph V. Fierro, dated as of December
15, 2003.
(Incorporated by reference to Exhibit 10.72 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.73
|
Credit
Note by and between HSBC Bank USA and The New York Mortgage Company
LLC,
dated as of December 15, 2003. (Incorporated by reference to
Exhibit 10.73
to the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.74
|
Credit
Note by and between National City Bank of Kentucky and The New
York
Mortgage Company LLC, dated as of December 15, 2003. (Incorporated
by
reference to Exhibit 10.74 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.75
|
Swingline
Note by and between HSBC Bank USA and The New York Mortgage Company
LLC,
dated as of December 15, 2003. (Incorporated by reference to
Exhibit 10.75
to the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.76
|
Custodial
Agreement by and among Greenwich Capital Financial Products,
Inc., The New
York Mortgage Corporation LLC and Deutsche Bank Trust Company
Americas,
dated as of August 1, 2003. (Incorporated by reference to Exhibit
10.76 to
the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
10.77
|
Master
Mortgage Loan Purchase and Interim Servicing Agreement by and
between The
New York Mortgage Company L.L.C. and Greenwich Capital Financial
Products,
Inc., dated as of August 1, 2003. (Incorporated by reference
to Exhibit
10.77 to the Company’s Registration Statement on Form S-11 as filed with
the Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.78
|
Subordination
and Pledge Agreement by and between HSBC Bank USA and Steven
B. Schnall,
dated as of December 15, 2003. (Incorporated by reference to
Exhibit 10.78
to the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.79
|
Subordination
and Pledge Agreement by and between HSBC Bank USA and Joseph
V. Fierro,
dated as of December 15, 2003. (Incorporated by reference to
Exhibit 10.79
to the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.80
|
Second
Amended and Restated Promissory Note, issued by The New York
Mortgage
Company, LLC on August 31, 2003, as further amended and restated,
on
December 23, 2003 and February 26, 2004, in the principal amount
of
$11,432,550 payable to Steven B. Schnall. (Incorporated by reference
to
Exhibit 10.80 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.81
|
Second
Amended and Restated Promissory Note, issued by The New York
Mortgage
Company, LLC on August 31, 2003, as further amended and restated,
on
December 23, 2003 and February 26, 2004, in the principal amount
of
$2,274,352, payable to Joseph V. Fierro. (Incorporated by reference
to
Exhibit 10.81 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.82
|
Promissory
Note, issued by New York Mortgage Funding, LLC on January 9,
2004 in the
principal amount of $100,000,000.00, payable to Greenwich Capital
Financial Products, Inc. (Incorporated by reference to Exhibit
10.82 to
the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.83
|
Guaranty
between the New York Mortgage Company, LLC and Greenwich Capital
Financial
Products, Inc., dated as of January 9, 2004. (Incorporated by
reference to
Exhibit 10.83 to the Company’s Registration Statement on Form S-11 as
filed with the Securities and Exchange Commission (Registration
No.
333-111668), effective June 23, 2004).
|
|
|
10.84
|
Master
Loan and Security Agreement between New York Mortgage Funding,
LLC and
Greenwich Capital Financial Products, Inc., dated as of January
9, 2004.
(Incorporated by reference to Exhibit 10.84 to the Company’s Registration
Statement on Form S-11 as filed with the Securities and Exchange
Commission (Registration No. 333-111668), effective June 23,
2004).
|
|
|
10.85
|
Custodial
Agreement between New York Mortgage Funding, LLC, Deutche Bank
Trust
Company Americas and Greenwich Capital Financial Products, Inc.,
dated as
of January 9, 2004. (Incorporated by reference to Exhibit 10.85
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.86
|
Amendment
Number One, dated November 24, 2003, to the Master Mortgage Loan
Purchase
and Interim Servicing Agreement, dated as of August 1, 2003.
(Incorporated
by reference to Exhibit 10.86 to the Company’s Registration Statement on
Form S-11 as filed with the Securities and Exchange Commission
(Registration No. 333-111668), effective June 23,
2004).
|
|
10.87
|
Amended
and Restated Contribution Agreement, by and among Steven B. Schnall,
Steven B. Schnall Annuity Trust U/A 3/25/04, Joseph V. Fierro,
2004 Joseph
V. Fierro Grantor Retained Annuity Trust and New York Mortgage
Trust,
Inc., dated March 25, 2004. (Incorporated by reference to Exhibit
10.87 to
the Company’s Registration Statement on Form S-11 as filed with the
Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.88
|
Second
Amended and Restated Contribution Agreement, by and among Steven
B.
Schnall, Steven B. Schnall Annuity Trust U/A 3/25/04, Joseph
V. Fierro,
2004 Joseph V. Fierro Grantor Retained Annuity Trust and New
York Mortgage
Trust, Inc., dated April 29, 2004. (Incorporated by reference
to Exhibit
10.88 to the Company’s Registration Statement on Form S-11 as filed with
the Securities and Exchange Commission (Registration No. 333-111668),
effective June 23, 2004).
|
|
|
10.89
|
Amended
and Restated Agreement by and among New York Mortgage Trust,
Inc., The New
York Mortgage Company, LLC, Steven B. Schnall and Joseph V. Fierro,
dated
April 29, 2004. (Incorporated by reference to Exhibit 10.89 to
the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.90
|
Third
Amended and Restated Promissory Note, issued by The New York
Mortgage
Company, LLC on August 31, 2003, as further amended and restated
on
December 23, 2003, February 26, 2004 and May 26, 2004, in the
principal
amount of $11,432,550 payable to Steven B. Schnall. (Incorporated
by
reference to Exhibit 10.90 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.91
|
Third
Amended and Restated Promissory Note, issued by the New York
Mortgage
Company, LLC on August 31, 2003, as further amended and restated,
on
December 23, 2003, February 26, 2004 and May 26, 2004, in the
principal
amount of $2,274,352 payable to Joseph V. Fierro. (Incorporated
by
reference to Exhibit 10.91 to the Company’s Registration Statement on Form
S-11 as filed with the Securities and Exchange Commission (Registration
No. 333-111668), effective June 23, 2004).
|
|
|
10.92
|
Form
of Employment Agreement between New York Mortgage Trust, Inc.
and Steven
B. Schnall. (Incorporated by reference to Exhibit 10.92 to the
Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.93
|
Form
of Employment Agreement between New York Mortgage Trust, Inc.
and David A.
Akre. (Incorporated by reference to Exhibit 10.93 to the Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.94
|
Form
of Employment Agreement between New York Mortgage Trust, Inc.
and Raymond
A. Redlingshafer, Jr. (Incorporated by reference to Exhibit 10.94
to the
Company’s Registration Statement on Form S-11 as filed with the Securities
and Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.95
|
Form
of Employment Agreement between New York Mortgage Trust, Inc.
and Michael
I. Wirth. (Incorporated by reference to Exhibit 10.95 to the
Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.96
|
Form
of Employment Agreement between New York Mortgage Trust, Inc.
and Joseph
V. Fierro. (Incorporated by reference to Exhibit 10.96 to the
Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
10.97
|
Form
of Employment Agreement between New York Mortgage Trust, Inc.
and Steven
R. Mumma. (Incorporated by reference to Exhibit 10.97 to the
Company’s
Registration Statement on Form S-11 as filed with the Securities
and
Exchange Commission (Registration No. 333-111668), effective
June 23,
2004).
|
|
|
10.98
|
Amendment
No. 1 to Employment Agreement between New York Mortgage Trust,
Inc. and
Steven R. Mumma, dated December 2, 2004. (Incorporated by reference
to
Exhibit 10.98 to the Company’s Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on March 31, 2005).
|
|
|
10.99
|
Amended
and Restated Credit and Security Agreement between HSBC Bank
USA, National
Association, National City Bank of Kentucky, JP Morgan Chase
Bank, N.A.
and The New York Mortgage Company LLC, dated as of February 1, 2005.
(Incorporated by reference to Exhibit 10.99 to the Company’s Annual Report
on Form 10-K as filed with the Securities and Exchange Commission
on March
31, 2005).
|
|
|
10.100
|
Amended
and Restated Master Loan and Security Agreement between New York
Mortgage
Funding, LLC, The New York Mortgage Company, LLC and New York
Mortgage
Trust, Inc. and Greenwich Capital Financial Products, Inc., dated
as of
December 6, 2004. (Incorporated by reference to Exhibit 10.100 to the
Company’s Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 31, 2005).
|
|
|
10.101
|
Amended
and Restated Master Repurchase Agreement Between New York Mortgage
Trust,
Inc., The New York Mortgage Company, LLC, New York Mortgage Funding,
LLC
and Credit Suisse First Boston Mortgage Capital LLC, dated as
of March 30,
2005. (Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K as filed with the Securities and Exchange
Commission on
April 5, 2005).
|
|
|
10.102
|
Separation
and Release Agreement, dated June 30, 2005, by and between the
Company and
Raymond A. Redlingshafer, Jr. (Incorporated by reference to Exhibit
10.1
to the Company’s Current Report on Form 8-K as filed with the Securities
and Exchange Commission on July 5, 2005).
|
|
|
10.103
|
Parent
Guarantee Agreement between New York Mortgage Trust, Inc. and
JPMorgan
Chase Bank, National Association, as guarantee trustee, dated
September 1, 2005. (Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K as filed with the Securities and
Exchange Commission on September 6, 2005).
|
|
|
10.104
|
Purchase
Agreement among The New York Mortgage Company, LLC, New York
Mortgage
Trust, Inc., NYM Preferred Trust II and Taberna Preferred
Funding II, Ltd., dated September 1, 2005. (Incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as
filed with the Securities and Exchange Commission on September
6,
2005).
|
|
|
10.105
|
New
York Mortgage Trust, Inc. 2005 Stock Incentive Plan. (Incorporated
by
reference to Exhibit 10.1 to the Company’s Registration Statement on Form
S-3/A (File No. 333-127400) as filed with the Securities and
Exchange
Commission on September 9, 2005).
|
|
|
Master
Repurchase Agreement among DB Structured Products, Inc., Aspen
Funding
Corp. and Newport Funding Corp, New York Mortgage Trust, Inc.
and NYMC
Loan Corporation, dated as of December 13, 2005.*
|
||
|
Custodial
Agreement among DB Structured Products, Inc., Aspen Funding Corp.,
and
Newport Funding Corp., NYMC Loan Corporation, New York Mortgage
Trust,
Inc. and LaSalle Bank National Association, dated as of December
13,
2005.*
|
||
|
Master
Repurchase Agreement among New York Mortgage Funding, LLC, The
New York
Mortgage Company, LLC, New York Mortgage Trust Inc. and Greenwich
Capital
Financial Products, Inc. dated as of January 5,
2006.*
|
|
Amended
and Restated Custodial Agreement by and among The New York Mortgage
Company, LLC, New York Mortgage Funding, LLC, New York Mortgage
Trust,
Inc., LaSalle Bank National Association and Greenwich Capital
Financial
Products, Inc. dated as of January 5, 2006.*
|
||
|
Computation
of Ratios
|
||
|
List
of Subsidiaries of the Registrant.
|
||
|
Consent
of Independent Registered Public Accounting Firm (Deloitte & Touche
LLP).
|
||
|
Section
302 Certification of Co-Chief Executive Officer.
|
||
|
Section
302 Certification of Co-Chief Executive Officer.
|
||
|
Section
302 Certification of Chief Financial Officer.
|
||
|
Section
906 Certification of Co-Chief Executive Officers.
|
||
|
Section
906 Certification of Chief Financial Officer.
|
||
*
Filed
herewith.