NEW YORK MORTGAGE TRUST, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________________
FORM
10-K
___________________
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x
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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, 2009
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o
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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
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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52
Vanderbilt Avenue, New York, NY 10017
(Address
of principal executive office) (Zip Code)
(212)
792-0107
(Registrant’s
telephone number, including area code)
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, par value $0.01 per share
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NASDAQ
Stock Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
o
No
x
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
o
No
x
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
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No
o
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.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check
one):
Large
Accelerated Filer
o
Accelerated Filer
o
Non-Accelerated
Filer
x
Smaller
Reporting Company
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 2009 was approximately $48.1 million.
The
number of shares of the Registrant’s Common Stock outstanding on March 1, 2010
was 9,415,094.
2
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Where
Incorporated
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1.
Portions of the Registrant's Definitive Proxy Statement relating to
its 2010 Annual Meeting of Stockholders scheduled for May 11,
2010 to be filed with the Securities and Exchange Commission by no later
than April 30, 2010.
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Part
III, Items 10-14
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3
NEW
YORK MORTGAGE TRUST, INC.
FORM
10-K
For
the Fiscal Year Ended December 31, 2009
TABLE
OF CONTENTS
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PART I
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Item 1.
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Business
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5
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Item 1A.
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Risk
Factors
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18
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Item 1B.
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Unresolved Staff
Comments
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37
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Item 2.
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Properties
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37
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Item 3.
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Legal
Proceedings
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37
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Item 4.
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(Removed
and
Reserved)
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37
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PART II
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Item 5.
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Market For Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
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37
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Item 6.
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Selected Financial
Data
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41
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Item 7.
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Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
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42
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Item 7A.
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Quantitative and Qualitative
Disclosures About Market Risk
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66
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Item 8.
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Financial Statements and
Supplementary Data
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71
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Item 9.
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Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
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71
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Item 9A.
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Controls and
Procedures
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72
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Item 9B.
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Other
Information
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72
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PART
III
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Item 10.
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Directors and Executive Officers
of the Registrant and Corporate Governance
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73
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Item 11.
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Executive
Compensation
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73
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Item 12.
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Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
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73
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Item 13.
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Certain Relationships and Related
Party Transactions and Director Independence
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73
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Item 14.
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Principal Accountant Fees and
Services
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73
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PART IV
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Item 15.
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Exhibits, Financial Statement
Schedules
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74
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4
General
New York
Mortgage Trust, Inc., together with its consolidated subsidiaries (“NYMT”, the
“Company”, “we”, “our”, and “us”), is a self-advised real estate investment
trust, or REIT, in the business of acquiring and managing primarily residential
adjustable-rate, hybrid adjustable-rate and fixed-rate mortgage-backed
securities (“RMBS”), for which the principal and interest payments are
guaranteed by a U.S. Government agency, such as the Government National Mortgage
Association (“Ginnie Mae”), or a U.S. Government-sponsored entity (“GSE” or
“Agency”), such as the Federal National Mortgage Association (“Fannie Mae”) or
the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which we refer to
collectively as “Agency RMBS,” RMBS backed by prime jumbo and Alternative
A-paper (“Alt-A”) mortgage loans (“non-Agency RMBS”), and prime credit
quality residential adjustable-rate mortgage (“ARM”) loans held in
securitization trusts, or prime ARM loans. The remainder of our
current investment portfolio is comprised of notes issued by a collateralized
loan obligation (“CLO”). We also may opportunistically acquire and
manage various other types of real estate-related and financial assets,
including, among other things, certain non-rated residential mortgage assets,
commercial mortgage-backed securities (“CMBS”), commercial real estate loans and
other similar investments. These assets, together with non-Agency
RMBS and CLOs, typically present greater credit risk and less interest rate risk
than our investments in Agency RMBS and prime ARM loans, and may also permit us
to potentially utilize all or part of a significant net operating loss
carry-forward held by Hypotheca Capital, LLC (“HC,” then doing business as The
New York Mortgage Company LLC), our wholly-owned subsidiary and former mortgage
lending business.
Our
principal business objective is to generate net income for distribution to our
stockholders resulting from the spread between the interest and other income we
earn on our interest-earning assets and the interest expense we pay on the
borrowings that we use to finance our leveraged assets and our operating costs,
which we refer to as our net interest income. We intend to achieve
this objective by investing in a broad class of real estate-related and
financial assets, including those listed above, that in aggregate, will generate
attractive risk-adjusted total returns for our stockholders.
Prior to
2009, our investment portfolio was primarily comprised of Agency RMBS, prime ARM
loans held in securitization trusts and certain non-agency RMBS rated in the
highest rating category by two rating agencies. The prime ARM loans in our
portfolio were purchased from third parties or originated by us through HC and
were subsequently securitized by us and are held in our four securitization
trusts. Beginning in the first quarter of 2009, we commenced a
repositioning of our investment portfolio to transition the portfolio from one
primarily focused on leveraged Agency RMBS and prime ARM loans held in
securitization trusts, which primarily involve interest rate risk, to a more
diversified portfolio that includes elements of credit risk with reduced
leverage. The repositioning included a reduction in the Agency RMBS
held in our portfolio through the disposition of $193.8 million of GSE-issued
collateralized mortgage obligation floating rate securities, which we refer to
as “Agency CMO floaters”, a net increase of approximately $27.5 million (par
value) in our non-Agency RMBS position and our opportunistic purchase in March
2009 of discounted notes issued by a CLO.
We
elected to be taxed as a REIT for federal income tax purposes commencing with
our taxable year ended on December 31, 2004. As a result, we generally will not
be subject to federal income tax on our taxable income that is distributed to
our stockholders.
The
financial information requirements required under this Item 1 may be found in
our audited consolidated financial statements beginning on page
F-3.
Strategic
Relationship
In connection with a $20.0 million
private investment in our Series A Cumulative Convertible Redeemable preferred
stock (the “Series A Preferred Stock”) by JMP Group Inc. and certain of its
affiliates (collectively, the “JMP Group”) in the first quarter of 2008, we
entered into an advisory agreement with Harvest Capital Strategies LLC (“HCS,”
formerly known as JMP Asset Management LLC), an affiliate of the JMP Group,
pursuant to which HCS advises the Company with respect to assets held by HC and
New York Mortgage Funding, LLC (“NYMF”), excluding certain Agency RMBS held in
these entities for regulatory compliance purposes, and assets held by any
additional subsidiaries acquired or formed in the future to hold investments
made on the Company’s behalf. We refer to these entities as the
“Managed Subsidiaries.” We formed this relationship with HCS and the
JMP Group for the purpose of improving our capitalization and diversifying our
portfolio of investment securities away from the focused leveraged Agency RMBS
strategy we employed from early 2007 and into the first quarter of 2009 to a
portfolio that, as noted above, includes elements of credit risk with reduced
leverage and one that may permit us to potentially utilize all or part of an
approximately $62.2 million net operating loss carry-forward held by HC at
December 31, 2009.
5
Our Investment Strategy
We intend
to achieve our principal business objective of generating net income for
distribution to our stockholders by building and managing a diversified
investment portfolio comprised of a broad class of real estate-related and
financial assets, that in aggregate, will generate attractive risk-adjusted
total returns for our stockholders. We have invested in the past and intend to
invest in the future in assets that collectively allow us to maintain our REIT
status and our exemption from registration under the Investment Company
Act. In building and managing our current investment portfolio,
we:
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invest
in and manage high-credit quality Agency and non-Agency
RMBS, including ARM securities, fixed rate securities, and
high-credit quality ARM mortgage loans that primarily involve interest
rate risk;
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opportunistically
invest in certain other real estate-related and financial assets,
including non-Agency RMBS, that further diversifies portfolio risk by
introducing elements of credit risk and that may permit us to utilize all
or a portion of a significant net operating loss carry-forward held by
HC;
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leverage
our investments in Agency RMBS and prime ARM loans held in securitization
trusts by entering into repurchase agreements or issuing collateralized
debt obligations, as applicable;
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generally
operate as a long-term portfolio investor;
and
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generate
earnings from the return on our interest earning securities and spread
income from our securitized mortgage loan
portfolio.
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Prior to
2009, our investment strategy had focused on the acquisition or origination of
prime ARM loans for securitization and the acquisition of RMBS, primarily Agency
RMBS, for our investment portfolio. As noted above, commencing in the
first quarter of 2009, we began to diversify our portfolio by disposing of
Agency CMO floaters and acquiring non-Agency RMBS and discounted notes issued by
a CLO. As of December 31, 2009, our portfolio was comprised of
approximately $159.1 million in RMBS, of which approximately $116.2 million was
Agency RMBS and $42.9 million was non-Agency RMBS, and approximately $276.2
million of prime ARM loans held in securitization trusts.
We expect
that over the near term, our investment portfolio will continue to be weighted
towards RMBS and prime ARM loans held in securitization trusts, with continued
diversification of the portfolio to non-Agency RMBS and other real
estate-related and financial assets as market opportunities arise. If
necessary, we will modify our investment allocation strategy from time to time
in the future as market conditions change in an effort to maximize the returns
from our portfolio of investment assets. As a result, although we
focus on the assets described below, our targeted asset classes and allocation
strategy may vary over time from those described herein.
Our
Targeted Asset Classes
Set forth
below is a list of the asset classes we currently target, followed by a brief
description of these assets and their position, if any, in our
portfolio:
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Asset Class
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Principal Assets
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Residential
Mortgage-Backed Securities
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Agency
RMBS, primarily issued by Fannie Mae or Freddie Mac and backed by hybrid
ARM loans;
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Non-Agency
RMBS backed by prime jumbo and Alt-A, including investment grade and
non-investment grade classes.
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Prime
ARM Loans Held in Securitization Trusts
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Prime
ARM loans originated by us or acquired from third parties and securitized
in 2005 and early 2006 in four securitization trusts.
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Other
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Residential
whole mortgage loans (including non-rated loans), CMBS, commercial
mortgages and other commercial real estate debt, CLOs and other corporate
debt or corporate equity securities and other similar
investments.
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6
RMBS Issued by Fannie Mae or Freddie
Mac and Collateralized by Hybrid ARM Loans
. Agency RMBS consists of
Agency pass-through certificates and CMOs issued or guaranteed by an Agency.
Pass-through certificates provide for a pass-through of the monthly interest and
principal payments made by the borrowers on the underlying mortgage loans to the
holders of the pass-through certificate. CMOs divide a pool of mortgage loans
into multiple tranches with different principal and interest payment
characteristics.
Between
March 31, 2007 and the first quarter of 2009, we focused a significant amount of
our resources and efforts on the purchase and management of hybrid ARM RMBS
issued by either Fannie Mae or Freddie Mac, including both pass-through
certificates and Agency CMO floaters. Hybrid ARM RMBS are adjustable rate
mortgage assets that have a rate that is fixed for a period of three to ten
years initially, before becoming annual or semi-annual adjustable rate mortgage
assets. Because the coupons earned on Agency RMBS collateralized by ARM
loans adjust over time as interest rates change (typically after an initial
fixed-rate period), the market values of these assets are generally less
sensitive to changes in interest rates than are Agency RMBS collateralized by
fixed-rate residential mortgage loans. In addition, the hybrid ARMs
that collateralize our Agency RMBS typically have interim and lifetime caps on
interest rate adjustments.
Fannie
Mae guarantees to the holder of Fannie Mae RMBS that it will distribute amounts
representing scheduled principal and interest on the mortgage loans in the pool
underlying the Fannie Mae certificate, whether or not received, and the full
principal amount of any such mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. Freddie
Mac guarantees to each holder of certain Freddie Mac certificates the
timely payment of interest at the applicable pass-through rate and principal on
the holder’s pro rata share of the unpaid principal balance of the related
mortgage loans. We prefer Fannie Mae-issued RMBS collateralized by ARM loans due
to their shorter remittance cycle; which is the time between when a borrower
makes a payment and the investor receives the net payment.
Typically,
we seek to acquire Agency RMBS collateralized by hybrid ARM loans with fixed
periods of five years of less. In most cases we are required to pay a premium
above the par value for these assets, the amount of which generally depends on
the pass-through rates of the security, the months remaining before the mortgage
loan converts to an ARM, and other considerations. As noted above,
commencing in the first quarter of 2009, we initiated a program to dispose of
the Agency CMO floaters in our investment portfolio. However, we may
invest in Agency CMO floaters in the future should the returns on such
securities again become attractive.
Non-Agency
RMBS.
The Company may invest in residential non-Agency RMBS,
including investment-grade (AAA through BBB rated) and non-investment grade (BB
and B rated and unrated) classes. The mortgage loan collateral for residential
non-Agency RMBS consists of residential mortgage loans that do not generally
conform to underwriting guidelines issued by Fannie Mae, Freddie Mac or Ginnie
Mae due to certain factors, including a mortgage balance in excess of Agency
underwriting guidelines, borrower characteristics, loan characteristics and
insufficient documentation. Consequently, the principal and interest
on non-Agency RMBS are not guaranteed by GSEs, such as Fannie Mae and Freddie
Mac, or in the case of Ginnie Mae, the U.S. Government.
Prime ARM Loans Held in
Securitization Trusts.
Our portfolio also includes prime ARM loans
held in four securitization trusts. The loans held in securitization
trusts are loans that primarily were originated by our discontinued
mortgage lending business, and to a lesser extent purchased from third parties,
that we securitized in 2005 and early 2006. These loans are substantially prime
full documentation interest only hybrid ARMs on residential properties and are
all are first lien mortgages. The Company maintained the ownership trust
certificates, or equity, of these securitizations which includes rights to
excess interest, if any. Subject to market conditions, we may acquire mortgage
loans in the future and subsequently securitize these loans.
Commercial Mortgage-Backed
Securities
. We may invest in commercial mortgage-backed securities, or
CMBS, through the purchase of mortgage pass-through notes. CMBS are
secured by, or evidence ownership interests in, a single commercial mortgage
loan or a pool of mortgage loans secured by commercial properties. These
securities may be senior, subordinated, investment grade or non-investment
grade. We expect that most of our CMBS investments will be part of a capital
structure or securitization where the rights of the class in which we invest are
subordinated to senior classes but senior to the rights of lower rated classes
of securities, although we may invest in the lower rated classes of securities
if we believe the risk adjusted returns are attractive. We generally intend to
invest in CMBS that will yield high current interest income and where we
consider the return of principal to be likely. We may acquire CMBS from private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, finance companies, investment
banks and other entities.
The
yields on CMBS depend on the timely payment of interest and principal due on the
underlying mortgage loans and defaults by the borrowers on such loans may
ultimately result in defaults on the CMBS. In the event of a default, the
trustee for the benefit of the holders of CMBS has recourse only to the
underlying pool of mortgage loans and, if a loan is in default, to the mortgaged
property securing such mortgage loan. After the trustee has exercised all of the
rights of a lender under a defaulted mortgage loan and the related mortgaged
property has been liquidated, no further remedy will be available. However,
holders of relatively senior classes of CMBS will be protected to a certain
degree by the structural features of the securitization transaction within which
such CMBS were issued, such as the subordination of the more junior classes of
the CMBS.
7
High Yield
Corporate Bonds
.
We may invest in high
yield corporate bonds, which are below investment grade debt obligations of
corporations and other nongovernmental entities. We expect that a significant
portion of such bonds we may invest in will not be secured by mortgages or liens
on assets, and may have an interest-only payment schedule, with the principal
amount staying outstanding and at risk until the bond’s maturity. High yield
bonds are typically issued by companies with significant financial
leverage.
Collateralized Loan
Obligations
.
We may
invest in debentures, subordinated debentures or equity interests in a CLO. A
CLO is secured by, or evidences ownership interests in, a pool of assets that
may include RMBS, non-agency RMBS, CMBS, commercial real estate loans or
corporate loans. Typically a CLO is collateralized by a diversified
group of assets either within a particular asset class or across many asset
categories. These securities may be senior, subordinated, investment
grade or non-investment grade. We expect the majority of our CLO investments to
be part of a capital structure or securitization where the rights of the class
in which we will invest to receive principal and interest are subordinated to
senior classes but senior to the rights of lower rated classes of securities,
although we may invest in the lower rated classes of securities if we believe
the risk adjusted return is attractive.
Equity Securities
.
To a lesser extent,
subject to maintaining our qualification as a REIT, we also may invest in common
and preferred equity, which may or may not be related to real estate. These
investments may include direct purchases of common or preferred equity or other
equity type investments. We will follow a value-oriented investment approach and
focus on the anticipated cash flows generated by the underlying business,
discounted by an appropriate rate to reflect both the risk of achieving those
cash flows and the alternative uses for the capital to be invested. We will also
consider other factors such as the strength of management, the liquidity of the
investment, the underlying value of the assets owned by the issuer and prices of
similar or comparable securities.
Other Assets.
We
also may from time to time opportunistically acquire other mortgage-related and
financial assets that may include, among others: residential whole mortgage
loans, commercial mortgages and other commercial real estate debt and other
similar assets.
Our
Financing Strategy
Given the
continued uncertainty in the credit markets, we believe that maintaining a
maximum leverage ratio in the range of 6 to 8 times for our Agency RMBS
portfolio and an overall Company leverage ratio of 4 to 5 times is appropriate
at this time. At December 31, 2009 the leverage ratio for our
portfolio of Agency RMBS, which we define as our outstanding indebtedness under
repurchase agreements divided by the sum of total stockholders’ equity and our
Series A Preferred Stock, was 1 to 1 and, excluding our Series A Preferred
Stock, the leverage ratio was 1.4 to 1. We also have $44.9 million of
subordinated trust preferred securities outstanding and $266.8 million of
collateralized debt obligations (“CDO”) outstanding, both of which are not
dependent on market values of pledged securities or changing credit conditions
by our lenders.
We strive
to maintain and achieve a balanced and diverse funding mix to finance our
investment portfolio. We rely primarily on repurchase agreements collateralized
by Agency RMBS and CDOs in order to finance the Agency RMBS in our investment
portfolio and prime ARM loans held in our securitization trusts. Repurchase
agreements provide us with short-term borrowings that bear interest rates that
are linked to the London Interbank Offered Rate (“LIBOR”), a short term market
interest rate used to determine short term loan rates. Pursuant to these
repurchase agreements, the financial institution that serves as a counterparty
will generally agree to provide us with financing based on the market value
of the securities that we pledge as collateral, less a “haircut.” Our repurchase
agreements may require us to deposit additional collateral pursuant to a margin
call if the market value of our pledged collateral declines or if unscheduled
principal payments on the mortgages underlying our pledged securities increase
at a higher than anticipated rate. To reduce the risk that we would be required
to sell portions of our portfolio at a loss to meet margin calls, we intend to
maintain a balance of cash or cash equivalent reserves and a balance of
unpledged mortgage securities to use as collateral for additional borrowings. As
of December 31, 2009, we had repurchase agreements outstanding with five
different counterparties totaling $85.1 million.
As of December 31, 2009,
we financed approximately $276.2 million of loans we hold in securitization
trusts permanently with approximately $9.9 million of our own equity investment
in the securitization trusts and the issuance of approximately $266.8 million of
CDOs.
Since the
first quarter of 2009, we have used cash from operating activities to purchase
non-Agency RMBS and the discounted notes issued by a CLO. However,
should the prospects for stable, reliable and favorable repurchase agreement
financing for non-Agency RMBS develop in the future, we would expect to increase
our repurchase agreement borrowings collateralized by non-Agency
RMBS. See “Management’s Discussion and Analysis of
Results of Operations and
Financial Condition― Liquidity and Capital Resources” for further discussion on
our financing activities.
8
Our
Hedging and Interest Rate Risk Management Strategies
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 securities collateralized by ARM loans, many of the underlying hybrid ARM
loans that back the RMBS in our portfolio have initial fixed rates of interest
for a period of time ranging from two to five years. Our funding costs are
variable and the maturities are short term in nature. We use hedging instruments
to reduce our risk associated with changes in interest rates that could
affect our RMBS assets and prime ARM loans held in securitization trusts.
Typically, we utilize interest rate swaps to effectively extend the
maturity of our short term borrowings to better match the interest rate
sensitivity to the underlying assets being financed. By extending the maturities
on our short term borrowings, we attempt to lock in a spread between the
interest income generated by the RMBS in our portfolio and the interest expense
related to the financing of such assets in order to maintain a net duration gap
of less than one year. As we acquire RMBS, we seek to hedge interest rate risk
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 re-pricing characteristics of such assets. We
utilize a model based risk analysis system to assist in projecting portfolio
performances over a variety 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 RMBS, it
is not possible to definitively lock-in a spread between the earnings yield on
our 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.
Our
Investment Guidelines
In
acquiring assets for our portfolio and subsequently managing those assets,
management is required to adhere to investment guidelines adopted by our Board
of Directors, unless such guidelines are amended, repealed, modified or waived
by our Board. Pursuant to our investment guidelines, we will focus on
acquiring assets in the following categories:
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·
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Category
I investments are RMBS that are either rated within one of the two highest
rating categories by either Moody’s Investor Services or Standard and
Poor’s (the “Ratings Agencies”), or have their repayment guaranteed by
Freddie Mac, Fannie Mae or Ginnie
Mae;
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·
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Category
II investments are all residential mortgage-related securities that do not
fall within Category I; and
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·
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Category
III investments are all CMBS and non-mortgage-related securities,
including, without limitation, subordinated debentures or equity interests
in a CLO, high yield corporate bonds and equity
securities.
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The
investment guidelines provide the following investment limitations:
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·
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no
investment shall be made which would cause us to fail to qualify as a
REIT;
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·
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no
investment shall be made which would cause us or our subsidiaries to
register as an investment company under the Investment Company
Act;
|
Certain
of our officers have the authority to approve, without the need of further
authorization 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 Category I investments, subject to the limitations
described above;
|
|
·
|
the
purchase and sale of agency debt, U.S. Treasury securities, overnight
investments and money market funds;
|
|
·
|
certain
hedging arrangements; and
|
|
·
|
the
incurrence of indebtedness using:
|
|
|
·
repurchase agreements; and
|
|
|
·
term
repurchase agreements.
|
9
Until
further modified by our Board of Directors, our Category II and Category III
investments will require the approval of our Board of Directors.
Our
Relationship with HCS and the Advisory Agreement
HCS, an
external advisor to the managed subsidiaries, is a wholly-owned subsidiary
of JMP Group Inc. that manages a family of single-strategy and multi-manager
hedge fund products. HCS also sponsors and partners with other
investment firms. As of December 31, 2009, HCS had $443.0 million in client
assets under management.
Concurrent
and in connection with the issuance of our Series A Preferred Stock in January
2008, we entered into an advisory agreement with HCS pursuant to which HCS
advises the Managed Subsidiaries with respect to assets held by the Managed
Subsidiaries, excluding Agency RMBS held by the Managed Subsidiaries for
regulatory compliance purposes and certain non-Agency RMBS. In
addition, pursuant to the stock purchase agreement providing for the sale of the
Series A Preferred Stock to the JMP Group, James J. Fowler was appointed
Chairman of our Board of Directors. Mr. Fowler, who also serves as the
non-compensated Chief Investment Officer of the Managed Subsidiaries, is a
managing director of HCS, a subsidiary of JMP Group Inc. and a significant
investor in our Series A Preferred Stock.
As of
December 31, 2009, HCS, JMP Group Inc. and Joseph A. Jolson, the Chairman and
Chief Executive Officer of JMP Group Inc., collectively beneficially owned a
significant percentage of our outstanding capital stock.
See “―
Conflicts of
Interest with HCS; Equitable Allocation of Investment Opportunities” below for
more information. In addition, in November 2008 our Board of Directors approved
an exemption from the ownership limitations contained in our charter to permit
Mr. Jolson to beneficially own up to 25% of the aggregate value of our
outstanding capital stock. As a result, these stockholders exert
significant influence over us.
Advisory
Agreement
As
described above, in January 2008, we entered into an advisory agreement with
HCS. The following is a summary of the key economic terms of the advisory
agreement:
|
Type
|
Description
|
|
|
Base
Advisory Fee
|
A
base advisory fee of 1.50% per annum of the “equity capital” of the
Managed Subsidiaries is payable by us to HCS in cash, quarterly in
arrears.
Equity
capital of the Managed Subsidiaries is defined as, for any fiscal quarter,
the greater of (i) the net asset value of the investments of the Managed
Subsidiaries as of the end of the fiscal quarter, excluding any
investments made prior to the date of the advisory agreement and any
assets contributed by us to the Managed Subsidiaries for the purpose of
facilitating compliance with our exclusion from regulation under the
Investment Company Act, or (ii) the sum of $20,000,000 plus 50% of the net
proceeds to us or our subsidiaries of any offering of common or preferred
stock completed by us during the term of the advisory
agreement.
|
|
|
Incentive
Compensation
|
The
advisory agreement calls for incentive compensation to be paid by us to
HCS under certain circumstances. If earned, incentive compensation is paid
quarterly in arrears in cash
; provided, however,
that a portion of the incentive compensation may be paid in shares of our
common stock.
For
the first three fiscal quarters of each fiscal year, 25% of the core
earnings of the Managed Subsidiaries attributable to the investments that
are managed by HCS that exceed a hurdle rate equal to the greater of (i)
2.00% or (ii) 0.50% plus one-fourth of the ten year treasury rate for such
quarter.
For
the fourth fiscal quarter of each fiscal year, the difference between (i)
25% of the GAAP (as defined in Item 7 below) net income of the
Managed Subsidiaries attributable to the investments that are managed by
HCS that exceeds a hurdle rate equal to the greater of (a) 8.00% and (b)
2.00% plus the ten year treasury rate for such fiscal year, and (ii) the
amount of incentive compensation paid for the first three fiscal quarters
of such fiscal year.
|
10
|
Term
|
December
31, 2010, unless terminated earlier. The advisory agreement
shall be automatically renewed for a one-year term each anniversary after
the initial term unless we deliver prior written notice to HCS of the
non-renewal not less than 180 days prior to the expiration of the term (or
any extension).
|
|
|
Termination
Fee
|
If
we terminate the advisory agreement for cause, no termination fee is
payable. Otherwise, if we terminate the advisory agreement or elect not to
renew it, we will pay a cash termination fee equal to the sum of (i) the
average annual base advisory fee and (ii) the average annual incentive
compensation earned during the 24-month period immediately preceding the
date of termination.
|
For the
years ended December 31, 2009 and 2008, HCS was paid a base advisory fee of $0.8
million and $0.7 million, respectively, and an incentive compensation fee of
$0.5 million for the year ended December 31, 2009. There was no
incentive fee paid for the year ended December 31, 2008.
Conflicts
of Interest with HCS; Equitable Allocation of Investment
Opportunities
HCS
manages, and is expected to continue to manage, other client accounts with
similar or overlapping investment strategies. HCS has agreed to make available
to the Managed Subsidiaries all investment opportunities that it determines, in
its reasonable and good faith judgment, based on their investment objectives,
policies and strategies, and other relevant factors, are appropriate for them in
accordance with HCS’s written allocation procedures and policies.
Since
certain of the Managed Subsidiaries’ targeted investments are typically
available only in specified quantities and since certain of their targeted
investments may also be targeted investments for other HCS accounts, HCS may not
be able to buy as much of certain investments as required to satisfy the needs
of all of its clients’ accounts. In these cases, HCS’s allocation procedures and
policies would typically allocate such investments to multiple accounts in
proportion to the needs of each account. The policies permit departure from
proportional allocation when the total HCS allocation would result in an
inefficiently small amount of the security being purchased for an account. In
that case, the policy allows for a “rotational” protocol of allocating
subsequent investments so that, on an overall basis, each account is treated
equitably.
We expect
that HCS will source substantially all of the non-RMBS investments made by the
Managed Subsidiaries as advisor to those entities. HCS is authorized
to follow broad investment guidelines determining which assets the Managed
Subsidiaries will invest in, subject to the approval of our Board of Directors
to our investment guidelines. However, as we diversify our investment portfolio
in the future, our Board of Directors may elect to not review individual
investments. In conducting their review of the investments held by our Managed
Subsidiaries, our directors will rely primarily on information provided to them
by HCS and our management. Furthermore, the Managed Subsidiaries may use complex
investment strategies and transactions, which may be difficult or impossible to
unwind. Although our Board of Directors must first approve an investment
opportunity that falls under the advisory agreement, HCS has great latitude to
determine the types of assets it may decide are proper investments for the
Managed Subsidiaries. The investment guidelines do not permit HCS to invest in
Agency RMBS, since these investments are made by us.
The
advisory agreement does not restrict the ability of HCS or its affiliates from
engaging in other business ventures of any nature (including other REITs),
whether or not such ventures are competitive with the Managed Subsidiaries’
business so long as HCS’s management of other REITs or funds does not
disadvantage us or the Managed Subsidiaries.
HCS may
engage other parties, including its affiliates, to provide services to us or our
subsidiaries; provided that any such agreements with affiliates of HCS shall be
on terms no more favorable to such affiliate than would be obtained from a third
party on an arm’s-length basis and, in certain circumstances, approved by a
majority of our independent directors. With respect to portfolio management
services, any agreements with affiliates shall be subject to our prior written
approval and HCS shall remain liable for the performance of such services. With
respect to monitoring services, any agreements with affiliates shall be subject
to our prior written approval and the base advisory fee payable to HCS shall be
reduced by the amount of any fees payable to such other parties, although we
will reimburse any out-of-pocket expenses incurred by such other parties that
are reimbursable by us.
11
Pursuant
to Schedules 13D filed with the SEC on February 17, 2009, and a Schedule 13G/A
filed on February 16, 2010, HCS, JMP Group, Inc. and Joseph A. Jolson, the
Chairman and Chief Executive Officer of JMP Group Inc., beneficially owned
approximately 16.7%, 12.1% and 6.7%, respectively, of our outstanding common
stock as of December 31, 2008 in the case of HCS and JMP Group Inc., and as of
December 31, 2009 in the case of Mr. Jolson. In addition, as of
December 31, 2009, HCS and JMP Group Inc. collectively beneficially owned 100%
of outstanding Series A Preferred Stock. Any outstanding shares of
our Series A Preferred Stock at December 31, 2010 must be redeemed for the
purchase price plus any accrued or unpaid dividends on the Series A Preferred
Stock as of that date. As of February 28, 2010, $20.0 million of the
Series A Preferred Stock remained outstanding. HCS is an investment
adviser that manages investments and trading accounts of other persons,
including certain accounts affiliated with JMP Group, Inc., and is deemed the
beneficial owner of shares of our common stock held by these accounts. As noted
above, Mr. Fowler and Joseph A. Jolson are affiliates of JMP Group, Inc and HCS.
As a result of the combined voting power of HCS, JMP Group, Inc. and Joseph A.
Jolson, these stockholders exert significant influence over matters submitted to
a vote of stockholders, including the election of directors and approval of a
change in control or business combination of our company, and strategic
direction of our Company. This concentration of ownership may result in
decisions affecting us that are not in the best interests of all our
stockholders. In addition, Mr. Fowler may have a conflict of interest in
situations where the best interests of our company and stockholders do not align
with the interests of HCS, JMP Group, Inc. or its affiliates, which may result
in decisions that are not in the best interests of all our
stockholders.
Company
History
We were
formed as a Maryland corporation in September 2003. In June 2004, we completed
our initial public offering, or IPO, that resulted in approximately $122 million
in net proceeds to our company. Prior to the IPO, we did not have recurring
business operations. As part of our formation transactions, concurrent with our
IPO, we acquired 100% of the equity interests in HC, which at the time was a
residential mortgage origination company that historically had sold or brokered
all of the mortgage loans it originated to third parties. Effective with the
completion of our IPO, we operated two business segments: (i) our mortgage
portfolio management segment and (ii) our mortgage lending segment. Under this
business model, we would retain and either finance in our portfolio selected
adjustable-rate and hybrid mortgage loans that we originated or we would sell
them to third parties, while continuing to sell all fixed-rate loans originated
by HC to third parties.
Commencing
in March 2006, we stopped retaining all loans originated by HC and began to sell
these loans to third parties. With the mortgage lending business
facing increasingly difficult operating conditions, we began considering
strategic alternatives for our mortgage lending business in
mid-2006. In the first quarter of 2007, we completed the sale of
substantially all of the assets related to our retail and wholesale residential
mortgage lending platform, thereby marking our exit from the mortgage lending
business.
In
January 2008 we formed a strategic relationship with the JMP Group, whereby HCS
became the contractual advisor to the Managed Subsidiaries and the JMP Group
purchased 1.0 million shares of our Series A Preferred Stock for an aggregate
purchase price of $20.0 million. The Series A Preferred Stock entitles the
holders to receive a cumulative dividend of 10% per year, subject to an increase
to the extent any future quarterly common stock dividends exceed $0.20 per
share. The Series A Preferred Stock is convertible into shares of the Company's
common stock based on a conversion price of $8.00 per share of common stock,
which represents a conversion rate of two and one-half (2 ½) shares of common
stock for each share of Series A Preferred Stock. The Series A
Preferred Stock matures on December 31, 2010, at which time any outstanding
shares must be redeemed by the Company at the $20.00 per share liquidation
preference. Pursuant to Statement of Financial Accounting Standards (“SFAS”)
No.150,
Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity
, because of this mandatory redemption feature, the Company
classifies these securities as a liability on its balance sheet.
In
February 2008, we completed the issuance and sale of 7.5 million shares of our
common stock to certain accredited investors in a private placement at a price
of $8.00 per share, generating net proceeds to us of $56.5 million after payment
of private placement fees and expenses.
The
Company’s shares of common stock are currently listed on the NASDAQ Capital
Market (“NASDAQ”) under the symbol “NYMT.” In connection with the
minimum listing price requirements of NASDAQ, we have completed two separate
reverse stock splits on our common stock; a 1-for-5 reverse split in October
2007 and a 1-for-2 reverse split in May 2008. The information in this
Annual Report on Form 10-K gives effect to these reverse stock splits as if they
occurred at the Company’s inception.
Our
Structure
We
conduct our business through New York Mortgage Trust, Inc., which serves as the
parent company, and several of our subsidiaries, including special purpose
subsidiaries established for loan securitization purposes. We conduct
certain of our portfolio investment operations through our wholly-owned taxable
REIT subsidiary ("TRS"), HC, in order to utilize, to the extent permitted by
law, some or all of a net operating loss carry-forward held in HC that resulted
from HC’s exit from the mortgage lending business. Our wholly-owned
qualified REIT subsidiary ("QRS"), NYMF, currently holds certain
mortgage-related assets for regulatory compliance purposes. The
Company consolidates all of its subsidiaries under generally accepted accounting
principles in the United States of America (“GAAP”).
12
Certain
Federal Income Tax Considerations and Our Status as a REIT
We have
elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue
Code (IRC) of 1986, as amended, for federal income tax purposes, commencing with
our taxable year ended December 31, 2004, and we believe that our current and
proposed method of operation will enable us to continue to qualify as a REIT for
our taxable year ended December 31, 2010 and thereafter. We hold our mortgage
portfolio investments directly or in a qualified REIT subsidiary, or QRS.
Accordingly, the net interest income we earn on these 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. Taxable income generated by HC, our
taxable REIT subsidiary, or TRS, 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. Failure to qualify as a REIT
would subject our Company to federal income tax (including any applicable
minimum tax) on its taxable income at regular corporate rates and distributions
to its stockholders in any such year would not be deductible by our
Company.
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 HC to be treated as a TRS. HC is
subject to corporate income tax on its taxable income.
13
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 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.
IRS
guidance allows us to pay a portion of our annual distributions in shares of
common stock rather than cash (generally up to 90% in 2010) if we meet certain
requirements. In the event we need to preserve liquidity, we may pay
a portion of our distributions in shares of our common stock.
Investment
Company Act Exemption
We
operate our business so as to be exempt from registration under the Investment
Company Act. We rely on the exemption provided by Section 3(c)(5)(C) of the
Investment Company Act. We monitor our portfolio periodically and prior to each
investment to confirm that we continue to qualify for the exemption. To qualify
for the exemption, we make investments so that at least 55% of the assets we own
consist of qualifying mortgages and other liens on and interests in real estate,
which are collectively referred to as “qualifying real estate assets,” and so
that at least 80% of the assets we own consist of real estate-related assets
(including our qualifying real estate assets, both as measured on an
unconsolidated basis). We generally expect that our investments will be
considered either qualifying real estate assets or real estate-related assets
under Section 3(c)(5)(C) of the Investment Company Act. Qualification for
the Section 3(c)(5)(C) exemption may limit our ability to make certain
investments. In addition, we must ensure that each of our subsidiaries qualifies
for the Section 3(c)(5)(C) exemption or another exemption available under the
Investment Company Act.
Competition
Our
success depends, in large part, on our ability to acquire assets at favorable
spreads over our borrowing costs. When we invest in mortgage-backed securities,
mortgage loans and other investment assets, we compete with a variety of
institutional investors, including other REITs, insurance companies, mutual
funds, hedge funds, pension funds, investment banking firms, banks and other
financial institutions that invest in the same types of assets. Many of these
investors have greater financial resources and access to lower costs of capital
than we do.
14
Corporate Offices and Personnel
Our
corporate headquarters are located at 52 Vanderbilt Avenue, Suite 403, New York,
New York, 10017 and our telephone number is (212) 792-0107. As of
December 31, 2009 we employed four full-time employees.
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 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
Secretary, 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017.
Information on our website is neither part of nor incorporated into this Annual
Report on Form 10-K.
15
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 and 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 and investment strategy;
|
|
·
|
future
performance, developments, market and industry forecasts or projected
dividends;
|
|
·
|
future
interest rate and credit environments;
and
|
|
·
|
projected
acquisitions or joint ventures.
|
It is
important to note that the description of our business is general and our
investment in real estate-related and financial assets in particular, is a
statement about our operations as of a specific point in time and is not meant
to be construed as an investment policy. The types of assets we hold, the
amount of leverage we use or the liabilities we incur and other characteristics
of our assets and liabilities disclosed in this report as of a specified period
of time 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 and
many of which are beyond our control and 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
portfolio strategy and operating strategy may be changed or modified by
our management without advance notice to you or stockholder approval and
we may suffer losses as a result of such modifications or
changes;
|
|
·
|
our
ability to successfully diversify our investment portfolio and identify
suitable assets for
investments;
|
|
·
|
market
changes in the terms and availability of repurchase agreements used and
other funding sources to finance our investment portfolio
activities;
|
|
·
|
reduced
demand for our securities in the mortgage securitization and secondary
markets;
|
|
·
|
interest
rate mismatches between our mortgage-backed securities and our borrowings
used to fund such purchases;
|
|
·
|
changes
in interest rates and mortgage prepayment
rates;
|
|
·
|
Increased
rates of default and/or decreased recovery rates on our
assets;
|
|
·
|
changes
in the financial markets and economy
generally;
|
|
·
|
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;
|
16
|
·
|
our
board's ability to change our operating policies and strategies without
notice to you or stockholder
approval;
|
|
·
|
our
ability to successfully implement and grow our alternative investment
strategy;
|
|
·
|
our
ability to manage, minimize or eliminate liabilities stemming from the
discontinued operations including, among other things, litigation and
repurchase obligations on the sale of mortgage loans;
and
|
|
·
|
the
other important factors identified, or incorporated by reference into this
report, including, but not limited to those under the captions
“Management's Discussion and Analysis of Financial Condition and Results
of Operations” and “Quantitative and Qualitative Disclosures about Market
Risk”, and those described in Part I, Item 1A – “Risk Factors” of
this report and the various other factors identified in any other
documents filed by us with the SEC.
|
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 SEC.
17
Set
forth below are the risks that we believe are material to
stockholders. You should carefully consider the following risk
factors and the various other factors identified in or incorporated by reference
into any other documents filed by us with the SEC in evaluating our company and
our business. 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. 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.
Risks
Related to Our Business and Our Company
Interest
rate mismatches between the interest-earning assets held in our investment
portfolio, particularly RMBS, and the borrowings used to fund the purchases of
those assets may reduce our net income or result in a loss during periods of
changing interest rates.
Certain
of the RMBS held in our investment portfolio have a fixed coupon rate, generally
for a significant period, and in some cases, for the average maturity of the
asset. At the same time, our repurchase agreements and other
borrowings typically provide for a payment reset period of 30 days or
less. In addition, the average maturity of our borrowings generally
will be shorter than the average maturity of the RMBS in our portfolio and in
which we seek to invest. Historically, we have used swap agreements
as a means for attempting to fix the cost of certain of our liabilities over a
period of time; however, these agreements will generally not be sufficient to
match the cost of all our liabilities against all of our investment
securities. In the event we experience unexpectedly high or low
prepayment rates on our RMBS, our strategy for matching our assets with our
liabilities is more likely to be unsuccessful.
Interest
rate fluctuations will also cause variances in the yield curve, which may reduce
our net income. The relationship between short-term and longer-term
interest rates is often referred to as the “yield curve.” If
short-term interest rates rise disproportionately relative to longer-term
interest rates (a flattening of the yield curve), our borrowing costs may
increase more rapidly than the interest income earned on the RMBS and other
interest-earning assets in our investment portfolio. Because the RMBS
in our investment portfolio typically bear interest based on longer-term rates
while our borrowings typically bear interest based on short-term rates, a
flattening of the yield curve would tend to decrease our net income and the
market value of these securities. Additionally, to the extent cash
flows from investments that return scheduled and unscheduled principal are
reinvested, the spread between the yields of the new investments and available
borrowing rates may decline, which would likely decrease our net
income. It is also possible that short-term interest rates may exceed
longer-term interest rates (a yield curve inversion), in which event our
borrowing costs may exceed our interest income and we could incur significant
operating losses. A flat or inverted yield curve may also result in
an adverse environment for adjustable-rate RMBS volume, as there may be little
incentive for borrowers to choose the underlying mortgage loans over a
longer-term fixed-rate loan. If the supply of adjustable-rate RMBS
decreases, yields may decline due to market forces.
Declines
in the market values of assets in our investment portfolio may adversely affect
periodic reported results and credit availability, which may reduce earnings
and, in turn, cash available for distribution to our stockholders.
The
market value of the interest-bearing assets in which we invest, most notably
RMBS and purchased prime ARM 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 and the market
value of our interest-bearing assets. Substantially all of the RMBS
and CLO within our investment portfolio is classified for accounting purposes as
“available for sale.” Changes in the market values of trading
securities will be reflected in earnings and changes in the market values of
available for sale securities will be reflected in stockholders’
equity. As a result, a decline in market values may reduce the book
value of our assets. Moreover, if the decline in market value of an
available for sale security is other than temporary, such decline will reduce
earnings.
A decline
in the market value of our RMBS and other interest-bearing assets, such as the
decline we experienced during the market disruption in March 2008, may adversely
affect us, particularly in instances where we have borrowed money based on the
market value of those assets. If the market value of those assets
declines, the lender may require us to post additional collateral to support the
loan, which would reduce our liquidity and limit our ability to leverage our
assets.
In
addition, if we are, or anticipate being, unable to post the additional
collateral, we would have to sell the assets at a time when we might not
otherwise choose to do so. In the event that we do not have
sufficient liquidity to meet such requirements, lending institutions may
accelerate indebtedness, increase interest rates and terminate our ability to
borrow, any of which could result in a rapid deterioration of our financial
condition and cash available for distribution to our
stockholders. Moreover, if we liquidate the assets at prices lower
than the amortized cost of such assets, we will incur losses.
18
We
may change our investment strategy, operating policies and/or asset allocations
without stockholder consent, any of which could result in losses.
We may
change our investment strategy, operating policies and/or asset allocation with
respect to investments, acquisitions, leverage, growth, operations,
indebtedness, capitalization and distributions at any time without the consent
of our stockholders, which may result in riskier investments. For
example, during 2009, we commenced investments pursuant to an alternative
investment strategy adopted by our company that was focused on a broad range of
real estate- and financial-related assets that differ in structure, risk and
potential return, among other things, from the Agency RMBS that we had focused
our investment efforts on since 2007. We will continue to consider a
broad range of assets for investment, including those outside of our targeted
asset class, that we believe will be accretive to earnings and may allow us to
utilize all or a portion of an approximately $62.2 million net operating loss
carry-forward. The assets we may acquire in the future are comprised
of a broad range of asset classes and types and may be different than our
historical investments. A change in our investment strategy may
increase our exposure to interest rate and/or credit risk, default risk and real
estate market fluctuations. Furthermore, a change in our asset
allocation could result in our making investments in asset categories different
from our historical investments and in which we have limited or no investment
experience. These changes could result in a decline in earnings or
losses which could adversely affect our financial condition, results of
operations, the market price of our common stock or our ability to pay
dividends.
Continued
adverse developments in the residential mortgage market, and the economy
generally, may adversely affect our business, particularly our ability to
acquire RMBS and the value of the RMBS that we hold in our portfolio as well as
our ability to finance or sell our RMBS.
In recent
years, the residential mortgage market in the United States has experienced a
variety of difficulties and changed economic conditions, including declining
home values, heightened defaults, credit losses and liquidity
concerns. News of potential and actual security liquidations as a
result of those economic difficulties has increased the volatility of many
financial assets, including RMBS. These disruptions materially
adversely affected the performance and market value in recent years of the RMBS
in our portfolio and prime ARM loans held in securitization trusts, as well as
other interest-earning assets that we may consider acquiring in the
future. Securities backed by residential mortgage loans originated in
2006 and 2007 have had higher and earlier than expected rates of
delinquencies. In addition, while some economists believe the
recession ended in the fourth quarter of 2009, housing prices continue to fall
in certain areas around the country while unemployment rates have risen sharply
during the past year, which will further increase the risk for higher
delinquency rates. Many RMBS and other interest-earning assets have
been downgraded by rating agencies in recent years, and rating agencies may
further downgrade these securities in the future. Lenders have
imposed additional and more stringent equity requirements necessary to finance
these assets, particularly in the case of non-Agency securities, and
frequent impairments based on mark-to-market valuations have generated
substantial collateral calls in the industry. As a result of these
difficulties and changed economic conditions, many companies operating in the
mortgage specialty finance sectors have failed and others, including Fannie Mae
and Freddie Mac, continue to face serious operating and financial
challenges. While the U.S. Federal Reserve has taken certain actions
in an effort to ameliorate the current market conditions, and the U.S. Treasury
and the Federal Housing Finance Agency, or FHFA, which is the federal regulator
now assigned to oversee Fannie Mae and Freddie Mac, are also taking actions,
despite reported stabilization in some sectors, these efforts may ultimately be
ineffective. As a result of these factors, among others, the market
for these securities may be adversely affected for a significant period of
time.
During
the past two years, housing prices and appraisal values in many states have
declined or stopped appreciating, after extended periods of significant
appreciation. A continued decline or an extended flattening of those
values may result in additional increases in delinquencies and losses on
residential mortgage loans generally, particularly with respect to second homes
and investor properties and with respect to any residential mortgage loans, the
aggregate loan amounts of which (including any subordinate liens) are close to
or greater than the related property values.
Fannie
Mae and Freddie Mac guarantee the payments of principal and interest on the
Agency RMBS in our portfolio even if the borrowers of the underlying mortgage
loans default on their payments. However, rising delinquencies and
market perception can still negatively affect the value of our Agency RMBS or
create market uncertainty about their true value. While the market
disruptions have been most pronounced in the non-Agency RMBS market, the impact
has extended to Agency RMBS. During a significant portion of 2008,
the value of Agency RMBS were unstable and relatively illiquid compared to prior
periods.
Agency
RMBS guaranteed by Fannie Mae and Freddie Mac are not supported by the full
faith and credit of the United States. Fannie Mae and Freddie Mac
have suffered significant losses and, despite significant steps taken by the
U.S. government to stabilize these entities, Fannie Mae and Freddie Mac could
default on their guarantee obligations, which would materially and adversely
affect the value of our RMBS or other Agency indebtedness in which we may invest
in the future. The U.S. Treasury plans to release a preliminary
report on the future of Fannie Mae and Freddie Mac in the near future, which
report may recommend the abolishment of Fannie Mae and Freddie Mac in favor of a
new system.
19
We
generally post our Agency RMBS, and we may in the future post non-Agency RMBS,
as collateral for our borrowings under repurchase agreements. Any
decline in their value, or perceived market uncertainty about their value, would
make it more difficult for us to obtain financing on favorable terms or at all,
or to maintain our compliance with the terms of any financing
arrangements. The value of RMBS may decline for several reasons,
including, for example, rising delinquencies and defaults, increases in interest
rates, falling home prices and credit uncertainty at Fannie Mae or Freddie
Mac. In addition, in recent years, repurchase lenders have been
requiring higher levels of collateral to support loans collateralized by RMBS
than they have in the past, making borrowings more difficult and
expensive. At the same time, market uncertainty about residential
mortgage loans in general could continue to depress the market for RMBS, which
means that it may be more difficult for us to sell RMBS on favorable terms or at
all. Further, a decline in the value of RMBS, particularly Agency
RMBS, could subject us to margin calls, for which we may have insufficient
liquidity to support, resulting in forced sales of our assets at inopportune
times. If market conditions result in a decline in available
purchasers of RMBS or the value of our RMBS, our financial position and results
of operations could be adversely affected.
The
conservatorship of Fannie Mae and Freddie Mac and related efforts, along with
any changes in laws and regulations affecting the relationship between Fannie
Mae and Freddie Mac and the U.S. government, may adversely affect our
business.
The
payments we expect to receive on the Agency RMBS we hold in our portfolio and in
which we invest depend upon a steady stream of payments on the mortgages
underlying the securities and are guaranteed by Ginnie Mae, Fannie Mae and
Freddie Mac. Ginnie Mae is part of a U.S. government agency and its
guarantees are backed by the full faith and credit of the United
States. Fannie Mae and Freddie Mac are U.S. government-sponsored
enterprises, but their guarantees are not backed by the full faith and credit of
the United States.
Since
2007, Fannie Mae and Freddie Mac have reported substantial losses and a need for
substantial amounts of additional capital. In response to the
deteriorating financial condition of Fannie Mae and Freddie Mac and the recent
credit market disruption, Congress and the U.S. Treasury undertook a series of
actions to stabilize these government-sponsored entities and the financial
markets, generally, including placing Fannie Mae and Freddie Mac into
conservatorship on September 7, 2008. The conservatorship of Fannie
Mae and Freddie Mac and certain other actions taken by the U.S. Treasury and
U.S. Federal Reserve were designed to boost investor confidence in Fannie Mae’s
and Freddie Mac’s debt and mortgage-backed securities. The U.S.
government program includes contracts between the U.S. Treasury and each
government-sponsored enterprise to seek to ensure that each enterprise maintains
a positive net worth. Each contract had an original capacity of $200
billion, but now has no cap. Each contract provides for the provision
of cash by the U.S. Treasury to the government-sponsored enterprise if FHFA
determines that its liabilities exceed its assets. Freddie Mac has
drawn $60 billion and Fannie Mae has drawn $51 billion under these
contracts. Both Fannie Mae and Freddie Mac have indicated they will
need to request additional draws this year, and it is possible the draw request
will not be granted. Although the U.S. government has described some
specific steps and reforms that it intends to take as part of the
conservatorship process, efforts to stabilize these entities may not be
successful and the outcome and impact of these events remain highly
uncertain.
Although
the U.S. government has committed capital to Fannie Mae and Freddie Mac, there
can be no assurance that the capital infusions will be adequate for their
needs. If the financial support is inadequate, these companies could
continue to suffer losses and could fail to honor their guarantees and other
obligations. In June 2009, as part of the Obama administration’s
far-reaching financial industry recovery proposal, the U.S. Treasury announced
that it and the Department of Housing and Urban Development, in consultation
with other government agencies, plans to engage in a wide-ranging initiative to
develop recommendations on the future of Fannie Mae and Freddie Mac, and the
Federal Home Loan Bank System. The future roles of Fannie Mae and
Freddie Mac could be significantly reduced and the nature of their guarantees
could be considerably limited relative to historical measurements. A
preliminary report on these future roles is expected to be released by the U.S.
Treasury in the near future. Any changes to the nature of the
guarantees provided by Fannie Mae and Freddie Mac could redefine what
constitutes Agency RMBS and could have broad adverse implications for the market
and for our business.
The U.S.
Treasury’s RMBS purchase program is expected to end in the first quarter of
2010. The U.S. Treasury will have purchased $220 billion in RMBS when
this program ends. The U.S. Treasury can hold its portfolio of RMBS
to maturity and, based on mortgage market conditions, may make adjustments to
the portfolio. This flexibility may adversely affect the pricing and
availability for RMBS, particularly Agency RMBS. It is also possible
that the U.S. Treasury could decide to purchase Agency securities in the future,
which could create additional demand that would negatively affect the pricing of
RMBS that we seek to acquire.
The U.S.
Treasury could also stop providing credit support to Fannie Mae and Freddie Mac
in the future. The problems faced by Fannie Mae and Freddie Mac
resulting in their being placed into conservatorship have stirred debate among
some federal policy makers regarding the continued role of the U.S. government
in providing liquidity for mortgage loans. The U.S. Treasury plans to
release a preliminary report of the future of Fannie Mae and Freddie Mac in
February 2010. Each of Fannie Mae and Freddie Mac could be dissolved
and the U.S. government could determine to stop providing liquidity support of
any kind to the mortgage market. If Fannie Mae or Freddie Mac were
eliminated, we would not be able, or if their structures were to change
radically, we might not be able, to acquire Agency RMBS from these companies,
which would adversely affect our current business model.
20
Our
income also could be negatively affected in a number of ways depending on the
manner in which related events unfold. For example, the current
credit support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and
any additional credit support it may provide in the future, could have the
effect of lowering the interest rates we expect to receive from the Agency RMBS
in our portfolio and in which we invest, thereby tightening the spread between
the interest we earn on our portfolio of targeted assets and our cost of
financing that portfolio. A reduction in the supply of Agency RMBS
could also negatively affect the pricing of the Agency RMBS held in our
portfolio and in which we invest by reducing the spread between the interest we
earn on our portfolio of targeted assets and our cost of financing that
portfolio.
As
indicated above, recent legislation has changed the relationship between Fannie
Mae and Freddie Mac and the U.S. government. Future legislation could
further change the relationship between Fannie Mae and Freddie Mac and the U.S.
government, and could also nationalize or eliminate such entities
entirely. In January 2010, House Financial Services Committee
Chairman, Barney Frank, was reported to have indicated that his Committee would
recommend abolishing Fannie Mae and Freddie Mac in their current form in favor
of a whole new system of housing finance. Any law affecting these
government-sponsored enterprises may create market uncertainty and have the
effect of reducing the actual or perceived credit quality of securities issued
or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws
could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac
Agency RMBS. It also is possible that such laws could adversely
impact the market for RMBS and spreads at which such securities
trade. All of the foregoing could materially adversely affect our
business, operations and financial condition.
There
can be no assurance that the actions taken by the U.S. and foreign governments,
central banks and other governmental and regulatory bodies for the purpose of
seeking to stabilize the financial markets will achieve the intended effect or
benefit our business, and further government or market developments could
adversely affect us.
In
response to the financial issues affecting the banking system, the financial and
housing markets and the economy as a whole, the U.S. government has implemented
a number of initiatives intended to bolster the banking system, the financial
and housing markets and the economy as a whole. These actions
include: (i) the Emerging Economic Stabilization Act of 2008, or
ESSA, which established the Troubled-Asset Relief Program, or TARP; (ii) the
voluntary Capital Purchase Program, or the CPP, which was implemented under
authority provided in the EESA and gives the U.S. Treasury the authority to
purchase up to $250 billion of senior preferred shares in qualifying
U.S.-controlled banks, saving associations, and certain bank and savings and
loan holding companies engaged only in financial activities; (iii) a program to
purchase $200 billion in direct obligations of Fannie Mae, Freddie Mac and the
Federal Home Loan Banks and $1.25 trillion in RMBS issued or guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae; (iv) the creation of a new funding
mechanism, the Financial Stability Trust, that will provide financial
institutions with bridge financing until such institutions can raise capital in
the capital markets; (v) the creation of a Public-Private Investment Fund for
private investors to purchase mortgages and mortgage-related assets from
financial institutions; (vi) the Term Asset-Backed Securities Loan Facility with
the goal of increasing securitization activity for various consumer and
commercial loans and other financial assets, including student loans, automobile
loans and leases, credit card receivables, SBA small business loans and
commercial mortgage-backed securities; and (vii) the American Recovery and
Reinvestment Act of 2009, or the ARRA, which includes a wide variety of programs
intended to stimulate the economy and provide for extensive infrastructure,
energy, health and education needs. For a more detailed description
of certain of these initiatives, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Current Market Conditions and
Known Material Trends.”
Despite
reports of stabilization in some sectors, no assurance can be given that these
initiatives will have a beneficial impact on the banking system, financial
market or housing market. To the extent the markets do not respond
favorably to these initiatives or if these initiatives do not function as
intended, the pricing, supply, liquidity and value of our assets and the
availability of financing on attractive terms may be materially adversely
affected.
Mortgage
loan modification programs and future legislative action may adversely affect
the value of, and the returns, on the interest-earning assets in which we
invest.
In late
2008, the U.S. government, through the Federal Housing Authority and the Federal
Deposit Insurance Corporation, or FDIC, commenced implementation of programs
designed to provide homeowners with assistance in avoiding residential mortgage
loan foreclosures. The programs involve, among other things,
modifications of mortgage loans to reduce the principal amount of the loans or
the rate of interest payable on the loans, or to extend the payment terms of the
loans. In addition, members of the U.S. Congress have indicated
support for additional legislative relief for homeowners, including an amendment
of the bankruptcy laws to permit the modification of mortgage loans in
bankruptcy proceedings. These loan modification programs, as well as
future legislative or regulatory actions, including amendments to the bankruptcy
laws, that result in the modification of outstanding mortgage loans may as well
as changes in the requirements necessary to qualify for refinancing a mortgage
with Fannie Mae, Freddie Mac or Ginnie Mae adversely affect the value of, and
the returns on, the interest-earning assets in which we invest, including
through prepayments on the mortgage loans underlying our RMBS and the mortgage
loans held in our securitization trusts.
21
The
principal and interest payments on our non-Agency RMBS are not guaranteed by any
entity, including any government sponsored entity or agency, and, therefore, are
subject to increased risks, including credit risk.
Our
portfolio includes non-Agency RMBS which are backed by residential mortgage
loans that do not conform to the Fannie Mae or Freddie Mac underwriting
guidelines. Consequently, the principal and interest on non-Agency
RMBS, unlike those on Agency RMBS, are not guaranteed by government-sponsored
entities such as Fannie Mae and Freddie Mac or, in the case of Ginnie Mae, the
U.S. Government.
Changes
in prepayment rates on our RMBS may decrease our net interest
income.
Pools of
mortgage loans underlie the mortgage-backed securities that we hold in our
investment portfolio and in which we invest. We will generally
receive principal distributions from the principal payments that are made on
these underlying mortgage loans. When borrowers repay their mortgage
loans faster than expected, this will result in prepayments that are faster than
expected on the related-RMBS. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic and
other factors, all of which are beyond our control. Prepayment rates
generally increase when interest rates fall and decrease when interest rates
rise, but changes in prepayment rates are difficult to
predict. Prepayment rates also may be affected by conditions in the
housing and financial markets, general economic conditions and the relative
interest rates on fixed-rate and adjustable-rate mortgage
loans. Faster than expected prepayments could adversely affect our
profitability, including in the following ways:
-
We have purchased RMBS, and may purchase in the future investment securities, that have a higher interest rate than the market interest rate at the time of purchase. In exchange for this higher interest rate, we are required to pay a premium over the face amount of the security to acquire the security. In accordance with accounting rules, we amortize this premium over the anticipated term of the mortgage security. If principal distributions are received faster than anticipated, we would be required to expense the premium faster. We may not be able to reinvest the principal distributions received on these investment securities in similar new mortgage-related securities and, to the extent that we can do so, the effective interest rates on the new mortgage-related securities will likely be lower than the yields on the mortgages that were prepaid.
-
We also may acquire RMBS or other investment securities at a discount. If the actual prepayment rates on a discount mortgage security are slower than anticipated at the time of purchase, we would be required to recognize the discount as income more slowly than anticipated. This would adversely affect our profitability. Slower than expected prepayments also may adversely affect the market value of a discount mortgage security.
On
February 10, 2010, Fannie Mae and Freddie Mac announced their intention to
significantly increase their purchases of delinquent loans from the pools of
mortgages collateralizing their Agency RMBS beginning March 2010. Their program
to purchase delinquent loans is expected to impact the rate of principal
prepayments on our Agency RMBS.
A
flat or inverted yield curve may adversely affect prepayment rates on and supply
of our RMBS.
Our net
interest income varies primarily as a result of changes in interest rates as
well as changes in interest rates across the yield curve. We believe
that when the yield curve is relatively flat, borrowers have an incentive to
refinance into hybrid mortgages with longer initial fixed rate periods and fixed
rate mortgages, causing our RMBS, or investment securities, to experience faster
prepayments. In addition, a flatter yield curve generally leads to
fixed-rate mortgage rates that are closer to the interest rates available on
hybrid ARMs and ARMs, possibly decreasing the supply of the RMBS we seek to
acquire. At times, short-term interest rates may increase and exceed
long-term interest rates, causing an inverted yield curve. When the
yield curve is inverted, fixed-rate mortgage rates may approach or be lower than
hybrid ARMs or ARM rates, further increasing prepayments on, and negatively
impacting the supply of, our RMBS. Increases in prepayments on our
portfolio will cause our premium amortization to accelerate, lowering the yield
on such assets. If this happens, we could experience a decrease in
net income or incur a net loss during these periods, which may negatively impact
our distributions to stockholders.
22
Interest
rate caps on our adjustable-rate RMBS may reduce our income or cause us to
suffer a loss during periods of rising interest rates.
The
mortgage loans underlying our adjustable-rate RMBS typically will be subject to
periodic and lifetime interest rate caps. Additionally, we may invest
in ARMs with an initial “teaser” rate that will provide us with a lower than
market interest rate initially, which may accordingly have lower interest rate
caps than ARMs without such teaser rates. Periodic interest rate caps
limit the amount an interest rate can increase during a given
period. Lifetime interest rate caps limit the amount an interest rate
can increase through maturity of a mortgage loan. If these interest
rate caps apply to the mortgage loans underlying our adjustable-rate RMBS, the
interest distributions made on the related RMBS will be similarly
impacted. Our borrowings may not be subject to similar interest rate
caps. Accordingly, in a period of rapidly increasing interest rates,
the interest rates paid on our borrowings could increase without limitation
while caps would limit the interest distributions on our adjustable-rate
RMBS. Further, some of the mortgage loans underlying our
adjustable-rate RMBS may be subject to periodic payment caps that result in a
portion of the interest on those loans being deferred and added to the principal
outstanding. As a result, we could receive less interest
distributions on adjustable-rate RMBS, particularly those with an initial teaser
rate, than we need to pay interest on our related borrowings. These
factors could lower our net interest income, cause us to suffer a net loss or
cause us to incur additional borrowings to fund interest payments during periods
of rising interest rates or sell our investments at a loss.
Competition
may prevent us from acquiring mortgage-related assets at favorable yields, which
would negatively impact our profitability.
Our net
income largely depends on our ability to acquire mortgage-related assets at
favorable spreads over our borrowing costs. In acquiring
mortgage-related assets, we compete with other REITs, investment banking firms,
savings and loan associations, banks, insurance companies, mutual funds, other
lenders and other entities that purchase mortgage-related assets, many of which
have greater financial resources than us. Additionally, many of our
potential competitors are not subject to REIT tax compliance or required to
maintain an exemption from the Investment Company Act. As a result,
we may not in the future be able to acquire sufficient mortgage-related assets
at favorable spreads over our borrowing costs which, would adversely affect our
profitability.
We
may experience periods of illiquidity for our assets which could adversely
affect our ability to finance our business or operate profitably.
We bear
the risk of being unable to dispose of our interest-earning assets at
advantageous times or in a timely manner because these assets generally
experience periods of illiquidity. The lack of liquidity may result
from the absence of a willing buyer or an established market for these assets,
legal or contractual restrictions on resale or disruptions in the secondary
markets. This illiquidity may adversely affect our profitability and
our ability to finance our business and could cause us to incur substantial
losses.
An
increase in interest rates can have negative effects on us, including causing a
decrease in the volume of newly-issued, or investor demand for, RMBS, which
could harm our financial condition and adversely affect our
operations.
An
increase in interest rates can have various negative affects on
us. Increases in interest rates may negatively affect the fair market
value of our RMBS and other interest-earning assets. When interest
rates rise, the value of RMBS and fixed-rate investment securities generally
declines. Typically, as interest rates rise, prepayments on the
underlying mortgage loans tend to slow. The combination of rising
interest rates and declining prepayments may negatively affect the price of
RMBS, and the effect can be particularly pronounced with fixed-rate
RMBS. In accordance with GAAP, we will be required to reduce the
carrying value of our RMBS by the amount of any decrease in the fair value of
our RMBS compared to amortized cost. If unrealized losses in fair
value occur, we will either have to reduce current earnings or reduce
stockholders’ equity without immediately affecting current earnings, depending
on how we classify our assets under GAAP. In either case, our net
stockholders’ equity will decrease to the extent of any realized or unrealized
losses in fair value and our financial position will be negatively
impacted.
Furthermore,
rising interest rates generally reduce the demand for consumer and commercial
credit, including mortgage loans, due to the higher cost of
borrowing. A reduction in the volume of mortgage loans originated may
affect the volume of RMBS available to us, which could adversely affect our
ability to acquire assets that satisfy our investment
objectives. Rising interest rates may also cause RMBS and other
interest-earning assets that were issued prior to an interest rate increase to
provide yields that are below prevailing market interest rates. If
rising interest rates cause us to be unable to acquire a sufficient volume of
RMBS and other interest-earning assets with a yield that is above our borrowing
cost, our ability to satisfy our investment objectives and to generate income
and pay dividends, may be materially and adversely affected.
Changes
in interest rates, particularly higher interest rates, can also harm the credit
performance of our interest-earning assets. Higher interest rates
could reduce the ability of borrowers to make interest payments or to refinance
their loans and could reduce property values, all of which could increase our
credit losses. In the event we experience a significant increase in
credit losses as a result of higher interest rates, our earnings and financial
condition will be materially adversely affected.
23
Market
conditions may upset the historical relationship between interest rate changes
and prepayment trends, which would make it more difficult for us to analyze our
investment portfolio.
Our
success depends on our ability to analyze the relationship of changing interest
rates on prepayments of the mortgage loans that underlie our
RMBS. Changes in interest rates and prepayments affect the market
price of the RMBS that we hold in our portfolio and in which we intend to
invest. In managing our investment portfolio, to assess the effects
of interest rate changes and prepayment trends on our investment portfolio, we
typically rely on certain assumptions that are based upon historical trends with
respect to the relationship between interest rates and prepayments under normal
market conditions. If the dislocations in the residential mortgage
market over the last few years or other developments change the way that
prepayment trends have historically responded to interest rate changes, our
ability to (i) assess the market value of our investment portfolio, (ii)
effectively hedge our interest rate risk and (iii) implement techniques to
reduce our prepayment rate volatility would be significantly affected, which
could materially adversely affect our financial position and results of
operations.
A
substantial majority of the RMBS within our investment portfolio is recorded at
fair value as determined in good faith by our management based on market
quotations from brokers and dealers. Although we currently are able
to obtain market quotations for assets in our portfolio, we may be unable to
obtain quotations from brokers and dealers for certain assets within our
investment portfolio in the future, in which case our management may need to
determine in good faith the fair value of these assets.
Substantially
all of the assets held within our investment portfolio are in the form of
securities that are not publicly traded on a national securities exchange or
quotation system. The fair value of securities and other assets that
are not publicly traded in this manner may not be readily
determinable. A substantial majority of the assets in our investment
portfolio are valued by us at fair value as determined in good faith by our
management based on market quotations from brokers and
dealers. Although we currently are able to obtain quotations from
brokers and dealers for substantially all of the assets within our investment
portfolio, we may be unable to obtain such quotations on other assets in our
investment portfolio in the future, in which case, our manager may need to
determine in good faith the fair value of these assets. Because such
quotations and valuations are inherently uncertain, may fluctuate over short
periods of time and may be based on estimates, our determinations of fair value
may differ materially from the values that would have been used if a public
market for these securities existed. The value of our common stock
could be adversely affected if our determinations regarding the fair value of
these assets are materially higher than the values that we ultimately realize
upon their disposal. Misjudgments regarding the fair value of our
assets that we subsequently recognize may also result in impairments that we
must recognize.
Loan
delinquencies on our prime ARM loans held in securitization trusts may increase
as a result of significantly increased monthly payments required from ARM
borrowers after the initial fixed period.
The
scheduled increase in monthly payments on certain adjustable rate mortgage loans
held in our securitization trusts may result in higher delinquency rates on
those mortgage loans and could have a material adverse affect on our net income
and results of operations. This increase in borrowers' monthly
payments, together with any increase in prevailing market interest rates, may
result in significantly increased monthly payments for borrowers with adjustable
rate mortgage loans. Borrowers seeking to avoid these increased
monthly payments by refinancing their mortgage loans may no longer be able to
fund available replacement loans at comparably low interest rates or at
all. A decline in housing prices may also leave borrowers with
insufficient equity in their homes to permit them to refinance their loans or
sell their homes. In addition, these mortgage loans may have
prepayment premiums that inhibit refinancing.
We
may be required to repurchase loans if we breached representations and
warranties from loan sale transactions, which could harm our profitability and
financial condition.
Loans
from our discontinued mortgage lending operations that were sold to third
parties under agreements include numerous representations and warranties
regarding the manner in which the loan was originated, the property securing the
loan and the borrower. If these representations or warranties are
found to have been breached, we may be required to repurchase the
loan. We may be forced to resell these repurchased loans at a loss,
which could harm our profitability and financial condition.
24
The
mortgage loans we may invest directly in and those underlying our CMBS and RMBS
are subject to delinquency, foreclosure and loss, which could result in losses
to us.
Our
investment strategy permits us to consider a broad range of asset types,
including CMBS, non-Agency RMBS and other mortgage assets, including mortgage
loans. Commercial mortgage loans are secured by multi-family or
commercial property. They are subject to risks of delinquency and
foreclosure, and risks of loss that are greater than similar risks associated
with loans made on the security of single-family residential
property. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of the property rather than upon the existence of independent income
or assets of the borrower. If the net operating income of the
property is reduced, the borrower’s ability to repay the loan may be
impaired. Such income can be affected by many factors.
Residential
mortgage loans are secured by single-family residential
property. They are subject to risks of delinquency and foreclosure,
and risks of loss. The ability of a borrower to repay a loan secured
by a residential property depends on the income or assets of the
borrower. Many factors may impair borrowers’ abilities to repay their
loans. ABS are bonds or notes backed by loans or other financial
assets.
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 and the principal and accrued interest of the mortgage
loan. This could impair our cash flow from operations. In
the event of the bankruptcy of a mortgage loan borrower, the loan will be deemed
secured only to the extent of the value of the underlying collateral at the time
of bankruptcy (as determined by the bankruptcy court). 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 expensive and lengthy. This could impair
our anticipated return on the foreclosed mortgage loan. Moreover,
RMBS represent interests in or are secured by pools of residential mortgage
loans and CMBS represent interests in or are secured by a single commercial
mortgage loan or a pool of commercial mortgage loans. To the extent a
foreclosure or loss occurs on the underlying mortgage loan, we will receive less
principal and interest from that security in the future. Accordingly,
the CMBS and non-Agency RMBS we may invest in are subject to all of the risks of
the underlying mortgage loans.
Our
investments in subordinated CMBS or RMBS could subject us to increased risk of
losses.
We may
also invest in securities that represent subordinated tranches of CMBS or
non-Agency RMBS. In general, losses on an asset securing a mortgage
loan included in a securitization will be borne first by the equity holder of
the property, then by any cash reserve fund or letter of credit provided by the
borrower, and then by the first loss subordinated security holder. In
the event of default and the exhaustion of any equity support, reserve fund,
letter of credit—and any classes of securities junior to those in which we
invest—we may not be able to recover all of our investment in the securities we
purchase. In addition, if the underlying mortgage portfolio has been
overvalued by the originator, or if the values subsequently decline and, as a
result, less collateral is available to satisfy delinquent interest and
principal payments due on the related CMBS or RMBS, the securities in which we
invest may effectively become the first loss position behind the more senior
securities, which may result in significant losses to us.
The
prices of lower credit quality securities are generally less sensitive to
interest rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual issuer developments. A
projection of an economic downturn, for example, could cause a decline in the
price of lower credit quality securities because the ability of obligors of
mortgages underlying mortgage-backed securities to make principal and interest
payments or to refinance may be impaired. In this case, existing
credit support in the securitization structure may be insufficient to protect us
against loss of our principal on these securities.
We
may invest in high yield or subordinated and lower rated securities that have
greater risks of loss than other investments, which could adversely affect our
business, financial condition and cash available for dividends.
We may
invest in high yield or subordinated or lower rated securities, which
involve a higher degree of risk than other investments. Numerous
factors may affect a company’s ability to repay its high yield or subordinated
securities, including the failure to meet its business plan, a downturn in its
industry or negative economic conditions. These securities may not be
secured by mortgages or liens on assets. Our right to payment and
security interest with respect to such securities may be subordinated to the
payment rights and security interests of the senior
lender. Therefore, we may be limited in our ability to enforce our
rights to collect these loans and to recover any of the loan balance through a
foreclosure of collateral.
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Our
real estate assets are subject to risks particular to real
property.
We own
assets secured by real estate and may own real estate directly in the future,
either through direct acquisitions or upon a default of mortgage loans. Real
estate assets are subject to various risks, including:
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acts
of God, including earthquakes, floods and other natural disasters, which
may result in uninsured losses;
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acts
of war or terrorism, including the consequences of terrorist attacks, such
as those that occurred on September 11,
2001;
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adverse
changes in national and local economic and market conditions;
and
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changes
in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and regulations,
fiscal policies and ordinances;
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The
occurrence of any of the foregoing or similar events may reduce our return from
an affected property or asset and, consequently, materially adversely affect our
business, financial condition and results of operations and our ability to make
distributions to our shareholders.
We
are highly dependent on information systems and system failures could
significantly disrupt our business, which may, in turn, materially adversely
affect our business, financial condition and results of operations and our
ability to make distributions to our shareholders.
Our
business is highly dependent on communications and information systems. Any
failure or interruption of our systems could cause delays or other problems in
our securities trading activities, including RMBS trading activities, which
could materially adversely affect on our business, financial condition and
results of operations and our ability to make distributions to our
stockholders.
Our
due diligence may not reveal all the liabilities associated with
an investment and may not reveal other investment performance
issues.
Before
investing in an asset, we review the loans or other assets comprising the
investment and other factors that we believe are material to the performance of
the investment. In this process, we rely on the resources available
to us and, in some cases, an investigation by HCS, its affiliates or third
parties. This process is particularly important and subjective with
respect to new or private companies because there may be little or no
information publicly available about them. Our due diligence
processes might not uncover all relevant facts, thus resulting in investment
losses.
Risk
Related to Our Debt Financing
Continued
adverse developments in the residential mortgage market and financial markets,
including recent mergers, acquisitions or bankruptcies of potential repurchase
agreement counterparties, as well as defaults, credit losses and liquidity
concerns, could make it difficult for us to borrow money to fund our investment
strategy or continue to fund our investment portfolio on a leveraged basis, on
favorable terms or at all, which could adversely affect our
profitability.
We rely
on the availability of financing to acquire Agency RMBS and to fund our
investment portfolio on a leveraged basis. Since March 2008, there
have been several announcements of proposed mergers, acquisitions or
bankruptcies of investment banks and commercial banks that have historically
acted as repurchase agreement counterparties. This has resulted in a
fewer number of potential repurchase agreement counterparties operating in the
market and reduced financing capacity. In addition, many commercial
banks, investment banks and insurance companies have announced extensive losses
from exposure to the residential mortgage market. These losses have
reduced financial industry capital, leading to reduced liquidity for some
institutions. Institutions from which we seek to obtain financing may
have owned or financed RMBS which have declined in value and caused them to
suffer losses as a result of the recent downturn in the residential mortgage
market. If these conditions persist, these institutions may be forced
to exit the repurchase market, merge with another counterparty, become insolvent
or further tighten their lending standards or increase the amount of equity
capital or haircut required to obtain financing. Moreover, because
our equity market capitalization places us at the low end of market
capitalization among all mortgage REITs, continued adverse developments in the
residential mortgage market may cause some of our lenders to reduce or terminate
our access to future borrowings before those of our competitors. Any
of these events could make it more difficult for us to obtain financing on
favorable terms or at all. Our profitability will be adversely
affected if we are unable to obtain cost-effective financing for our
investments.
26
We
may incur increased borrowing costs related to repurchase agreements and that
would adversely affect our profitability.
Currently,
a significant portion of our borrowings are collateralized borrowings in the
form of repurchase agreements. If the interest rates on these
agreements increase at a rate higher than the increase in rates payable on our
investments, our profitability would be adversely affected.
Our
borrowing costs under repurchase agreements generally correspond to short-term
interest rates such as LIBOR or a short-term Treasury index, plus or minus a
margin. The margins on these borrowings over or under short-term
interest rates may vary depending upon a number of factors, including, without
limitation:
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the
movement of interest rates;
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the
availability of financing in the market;
and
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the
value and liquidity of our mortgage-related
assets.
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Currently,
repurchase agreement lenders are requiring higher levels of collateral than they
have required in the past to support repurchase agreements collateralized by
Agency RMBS and if this continues it will make our borrowings and use of
leverage less attractive and more expensive. Many financial
institutions have increased lending margins for Agency RMBS to approximately
5.0% on average, which means that we are required to pledge Agency RMBS having a
value of 105% of the amount of our borrowings. These increased
lending margins may require us to post additional cash collateral for our Agency
RMBS. If the interest rates, lending margins or collateral
requirements under these repurchase agreements increase, or if lenders impose
other onerous terms to obtain this type of financing, our results of operations
will be adversely affected.
Failure
to procure adequate debt financing, or to renew or replace existing debt
financing as it matures, would adversely affect our results and may, in turn,
negatively affect the value of our common stock and our ability to distribute
dividends.
We use
debt financing as a strategy to increase our return on investment securities in
our investment portfolio. However, we may not be able to achieve our
desired debt-to-equity ratio for a number of reasons, including the
following:
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our
lenders do not make debt financing available to us at acceptable rates;
or
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our
lenders require that we pledge additional collateral to cover our
borrowings, which we may be unable to
do.
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The
dislocations in the residential mortgage market and credit markets have led
lenders, including the financial institutions that provide financing for our
investment securities, to heighten their credit review standards, and, in some
cases, to reduce or eliminate loan amounts available to borrowers. As
a result, we cannot assure you that any, or sufficient, debt funding will be
available to us in the future on terms that are acceptable to us. In
the event that we cannot obtain sufficient funding on acceptable terms, there
may be a negative impact on the value of our common stock and our ability to
make distributions, and you may lose part or all of your
investment.
Furthermore,
because we rely primarily on short-term borrowings to finance our investment
securities, our ability to achieve our investment objective depends not only on
our ability to borrow money in sufficient amounts and on favorable terms, but
also on our ability to renew or replace on a continuous basis our maturing
short-term borrowings. As of December 31, 2009, substantially
all of our borrowings under repurchase agreements bore maturities of 30 days or
less. If we are not able to renew or replace maturing borrowings, we
will have to sell some or all of our assets, possibly under adverse market
conditions.
The
repurchase agreements that we use to finance our investments may require us to
provide additional collateral, which could reduce our liquidity and harm our
financial condition.
We intend
to use repurchase agreements to finance our investments. If the
market value of the loans or securities pledged or sold by us to a funding
source decline in value, we may be required by the lending institution to
provide additional collateral or pay down a portion of the funds advanced, but
we may not have the funds available to do so. Posting additional
collateral to support our repurchase agreements will reduce our liquidity and
limit our ability to leverage our assets. In the event we do not have
sufficient liquidity to meet such requirements, lending institutions can
accelerate our indebtedness, increase our borrowing rates, liquidate our
collateral at inopportune times and terminate our ability to
borrow. This could result in a rapid deterioration of our financial
condition and possibly require us to file for protection under the U.S.
Bankruptcy Code.
27
We
currently leverage our equity, which will exacerbate any losses we incur on our
current and future investments and may reduce cash available for distribution to
our stockholders.
We
currently leverage our equity through borrowings, generally through the use of
repurchase agreements and CDOs, which are obligations issued in multiple classes
secured by an underlying portfolio of securities, and we may, in the future,
utilize other forms of borrowing. The amount of leverage we incur
varies depending on our ability to obtain credit facilities and our lenders’
estimates of the value of our portfolio’s cash flow. The return on
our investments and cash available for distribution to our stockholders may be
reduced to the extent that changes in market conditions cause the cost of our
financing to increase relative to the income that can be derived from the assets
we hold in our investment portfolio. Further, the leverage on our
equity may exacerbate any losses we incur.
Our debt
service payments will reduce the net income available for distribution to our
stockholders. We may not be able to meet our debt service obligations
and, to the extent that we cannot, we risk the loss of some or all of our assets
to sale to satisfy our debt obligations. A decrease in the value of
the assets may lead to margin calls under our repurchase agreements which we
will have to satisfy. Significant decreases in asset valuation, such
as occurred during March 2008, could lead to increased margin calls, and we may
not have the funds available to satisfy any such margin calls. We
have a target overall leverage amount for our RMBS investment portfolio of seven
to nine times our equity, but there is no established limitation, other than may
be required by our financing arrangements, on our leverage ratio or on the
aggregate amount of our borrowings.
If
we are unable to leverage our equity to the extent we currently anticipate, the
returns on our RMBS portfolio could be diminished, which may limit or eliminate
our ability to make distributions to our stockholders.
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 RMBS portfolio in an attempt to enhance our
returns. Given the continued uncertainty in the credit markets, we
believe that maintaining a maximum leverage ratio in the range of six to eight
times for our Agency RMBS portfolio and an overall leverage ratio of four to
five times is appropriate at this time. At December 31, 2009, our
leverage ratio for our RMBS investment portfolio, which we define as our
outstanding indebtedness under repurchase agreements divided by total
stockholders’ equity and our Series A Preferred Stock, was 1 to
1. This definition of the leverage ratio is consistent with the
manner in which the credit providers under our repurchase agreements calculate
our leverage. 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.
If
a counterparty to our repurchase transactions defaults on its obligation to
resell the underlying security back to us at the end of the transaction term or
if we default on our obligations under the repurchase agreement, we would incur
losses.
When we
engage in repurchase transactions, we generally sell RMBS to lenders (i.e.,
repurchase agreement counterparties) and receive cash from the
lenders. The lenders are obligated to resell the same RMBS back to us
at the end of the term of the transaction. Because the cash we
receive from the lender when we initially sell the RMBS to the lender is less
than the value of those RMBS (this difference is referred to as the “haircut”),
if the lender defaults on its obligation to resell the same RMBS back to us we
would incur a loss on the transaction equal to the amount of the haircut
(assuming there was no change in the value of the RMBS). Further, if
we default on one of our obligations under a repurchase transaction, the lender
can terminate the transaction and cease entering into any other repurchase
transactions with us. Our repurchase agreements contain cross-default
provisions, so that if a default occurs under any one agreement, the lenders
under our other agreements could also declare a default. Any losses
we incur on our repurchase transactions could adversely affect our earnings and
thus our cash available for distribution to our stockholders.
Our
use of repurchase agreements to borrow funds may give our lenders greater rights
in the event that either we or a lender files for bankruptcy.
Our
borrowings under repurchase agreements may qualify for special treatment under
the bankruptcy code, giving our lenders the ability to avoid the automatic stay
provisions of the bankruptcy code and to take possession of and liquidate our
collateral under the repurchase agreements without delay in the event that we
file for bankruptcy. Furthermore, the special treatment of repurchase
agreements under the bankruptcy code may make it difficult for us to recover our
pledged assets in the event that a lender files for bankruptcy. Thus,
the use of repurchase agreements exposes our pledged assets to risk in the event
of a bankruptcy filing by either a lender or us.
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Our
liquidity may be adversely affected by margin calls under our repurchase
agreements because we are dependent in part on the lenders' valuation of the
collateral securing the financing.
Each of
these repurchase agreements allows the lender, to varying degrees, to revalue
the collateral to values that the lender considers to reflect market
value. If a lender determines that the value of the collateral has
decreased, it may initiate a margin call requiring us to post additional
collateral to cover the decrease. When we are subject to such a
margin call, we must provide the lender with additional collateral or repay a
portion of the outstanding borrowings with minimal notice. Any such
margin call could harm our liquidity, results of operation and financial
condition. Additionally, in order to obtain cash to satisfy a margin
call, we may be required to liquidate assets at a disadvantageous time, which
could cause it to incur further losses and adversely affect our results of
operations and financial condition.
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.
Our
use of hedging strategies to mitigate our interest rate exposure may not be
effective and may expose us to counterparty risks.
In
accordance with our operating policies, we may pursue various types of hedging
strategies, including swaps, caps and other derivative transactions, to seek to
mitigate or reduce our exposure to losses from adverse changes in interest
rates. Our hedging activity will vary in scope based on the level and
volatility of interest rates, the type of assets held and financing sources used
and other changing market conditions. No hedging strategy, however,
can completely insulate us from the interest rate risks to which we are exposed
or that the implementation of any hedging strategy would have the desired impact
on our results of operations or financial condition. Certain of the
U.S. federal income tax requirements that we must satisfy in order to qualify as
a REIT may limit our ability to hedge against such risks. We will not
enter into derivative transactions if we believe that they will jeopardize our
qualification as a REIT.
Interest
rate hedging may fail to protect or could adversely affect us because, among
other things:
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interest
rate hedging can be expensive, particularly during periods of rising and
volatile interest rates;
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available
interest rate hedges may not correspond directly with the interest rate
risk for which protection is
sought;
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the
duration of the hedge may not match the duration of the related
liability;
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the
amount of income that a REIT may earn from hedging transactions (other
than through taxable REIT subsidiaries (or TRSs)) to offset interest rate
losses is limited by U.S. federal tax provisions governing
REITs;
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the
credit quality of the party owing money on the hedge may be downgraded to
such an extent that it impairs our ability to sell or assign our side of
the hedging transaction; and
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the
party owing money in the hedging transaction may default on its obligation
to pay.
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We
primarily use swaps to hedge against anticipated future increases in interest
rates on our repurchase agreements. Should a swap counterparty be
unable to make required payments pursuant to such swap, the hedged liability
would cease to be hedged for the remaining term of the swap. In
addition, we may be at risk for any collateral held by a hedging counterparty to
a swap, should such counterparty become insolvent or file for
bankruptcy. Our hedging transactions, which are intended to limit
losses, may actually adversely affect our earnings, which could reduce our cash
available for distribution to our stockholders.
29
Hedging
instruments involve risk since they often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S. or
foreign governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial responsibility or
segregation of customer funds and positions. Furthermore, the
enforceability of hedging instruments may depend on compliance with applicable
statutory and commodity and other regulatory requirements and, depending on the
identity of the counterparty, applicable international
requirements. The business failure of a hedging counterparty with
whom we enter into a hedging transaction will most likely result in its
default. Default by a party with whom we enter into a hedging
transaction may result in the loss of unrealized profits and force us to cover
our commitments, if any, at the then current market price. Although
generally we will seek to reserve the right to terminate our hedging positions,
it may not always be possible to dispose of or close out a hedging position
without the consent of the hedging counterparty and we may not be able to enter
into an offsetting contract in order to cover our risk. We cannot
assure you that a liquid secondary market will exist for hedging instruments
purchased or sold, and we may be required to maintain a position until exercise
or expiration, which could result in losses.
Risks
Related to the Advisory Agreement with HCS
We
are dependent on HCS and certain of its key personnel and may not find a
suitable replacement if HCS terminates the advisory agreement or such key
personnel are no longer available to us.
Pursuant
to the advisory agreement, subject to oversight by our Board of Directors, HCS
advises the Managed Subsidiaries. HCS identifies, evaluates,
negotiates, structures, closes and monitors investments of the Managed
Subsidiaries, other than assets that we contributed to the Managed Subsidiaries
to facilitate compliance with our exclusion from regulation under the Investment
Company Act. The departure of any of the senior officers of HCS, or
of a significant number of investment professionals or principals of HCS, could
have a material adverse effect on our ability to achieve our investment
objectives. We are subject to the risk that HCS will terminate the
advisory agreement or that we may deem it necessary to terminate the advisory
agreement or prevent certain individuals from performing services for us, and
that no suitable replacement will be found to manage the Managed
Subsidiaries.
Pursuant
to the advisory agreement, HCS is entitled to receive an advisory fee payable
regardless of the performance of the assets of the Managed
Subsidiaries.
We will
pay HCS substantial advisory fees, based on the Managed Subsidiaries’ equity
capital (as defined in the advisory agreement), regardless of the performance of
the Managed Subsidiaries’ portfolio. In addition, pursuant to the
advisory agreement, we will pay HCS a base advisory fee even if they are not
managing any assets of the Managed Subsidiaries' portfolio. HCS’s
entitlement to non-performance based compensation may reduce its incentive to
devote the time and effort of its professionals to seeking profitable
opportunities for the Managed Subsidiaries’ portfolio, which could result in a
lower performance of their portfolio and negatively affect our ability to pay
distributions to our stockholders or to achieve capital
appreciation.
Pursuant
to the advisory agreement, HCS is entitled to receive an incentive fee, which
may induce it to make certain investments, including speculative or high risk
investments.
In
addition to its advisory fee, HCS is entitled to receive incentive compensation
based, in part, upon the Managed Subsidiaries’ achievement of targeted levels of
net income. In evaluating investments and other management
strategies, the opportunity to earn incentive compensation based on net income
may lead HCS to place undue emphasis on the maximization of net income at the
expense of other criteria, such as preservation of capital, maintaining
liquidity and/or management of credit risk or market risk, in order to achieve
higher incentive compensation. Investments with higher yield
potential are generally riskier or more speculative. In addition, HCS
has broad discretion regarding the types of investments it will make pursuant to
the advisory agreement. This could result in increased risk to the
value of the Managed Subsidiaries’ invested portfolio.
We
compete with HCS’s other clients for access to HCS.
HCS has
sponsored and/or currently manages other pools of capital and investment
vehicles with an investment focus that overlaps with the Managed Subsidiaries’
investment focus, and is expected to continue to do so in the
future. Furthermore, HCS is not restricted in any way from sponsoring
or accepting capital from new clients or vehicles, even for investing in asset
classes or investment strategies that are similar to, or overlapping with, the
Managed Subsidiaries’ asset classes or investment
strategies. Therefore, the Managed Subsidiaries compete for access to
the benefits that their relationship with HCS provides them. For the
same reasons, the personnel of HCS may be unable to dedicate a substantial
portion of their time managing the Managed Subsidiaries’ investments if HCS
manages any future investment vehicles.
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There
are conflicts of interest in our relationship with HCS, which could result in
decisions that are not in the best interests of our stockholders.
The
Managed Subsidiaries may have or pursue investments in securities in which HCS
or certain of its affiliates have or are seeking an
interest. Similarly, HCS or certain of its affiliates may invest in
securities in which the Managed Subsidiaries have or may have an
interest. Although such investments may present conflicts of
interest, we nonetheless may pursue and consummate such
transactions. Additionally, the Managed Subsidiaries may engage in
transactions directly with HCS or any of its affiliates, including the purchase
and sale of all or a portion of a portfolio investment.
HCS may
from time to time simultaneously seek to purchase investments for the Managed
Subsidiaries and other entities with similar investment objectives for which it
serves as a manager, or for its clients or affiliates and has no duty to
allocate such investment opportunities in a manner that favors the Managed
Subsidiaries. Additionally, such investments for entities with
similar investment objectives may be different from those made on the Managed
Subsidiaries’ behalf. HCS may have economic interests in or other
relationships with others in whose obligations or securities the Managed
Subsidiaries may invest. Each of such ownership and other
relationships may result in securities laws restrictions on transactions in such
securities and otherwise create conflicts of interest. In such
instances, HCS may in its discretion make investment recommendations and
decisions that may be the same as or different from those made with respect to
the Managed Subsidiaries’ investments and may take actions (or omit to take
actions) in the context of these other economic interests or relationships the
consequences of which may be adverse to the Managed Subsidiaries’
interests.
Although
the officers and employees of HCS devote as much time to the Managed
Subsidiaries as HCS deems appropriate, the officers and employees may have
conflicts in allocating their time and services among the Managed Subsidiaries
and HCS’s and its affiliates' other accounts. In addition, HCS and
its affiliates, in connection with their other business activities, may acquire
material non-public confidential information that may restrict HCS from
purchasing securities or selling securities for itself or its clients (including
the Managed Subsidiaries) or otherwise using such information for the benefit of
its clients or itself.
HCS and
JMP Group, Inc. beneficially owned approximately 16.7% and 12.1%, respectively,
of our outstanding common stock as of December 31, 2009. HCS is an
investment adviser that manages investments and trading accounts of other
persons, including certain accounts affiliated with JMP Group, Inc., and is
deemed the beneficial owner of shares of our common stock held by these
accounts. James J. Fowler, the Non-Executive Chairman of our Board of
Directors and also the non-compensated chief investment officer of the Managed
Subsidiaries, is a managing director of HCS. HCS is an affiliate of
JMP Group, Inc. Joseph A. Jolson, the Chairman and Chief Executive
Officer of JMP Group Inc. and HCS, beneficially owned approximately 6.7% of the
Company’s outstanding common stock as of December 3, 2009. In
addition, in November 2008, our Board of Directors approved an exemption from
the ownership limitations contained in our Charter, to permit Mr. Jolson to
beneficially own up to 25% of the aggregate value of our outstanding capital
stock. As a result of the combined voting power of HCS, JMP Group,
Inc. and Mr. Jolson, these stockholders exert significant influence over matters
submitted to a vote of stockholders, including the election of directors and
approval of a change in control or business combination of our
company. This concentration of ownership may result in decisions
affecting us that are not in the best interests of all our
stockholders. In addition, Mr. Fowler may have a conflict of interest
in situations where the best interests of our company and stockholders do not
align with the interests of HCS, JMP Group, Inc. or its affiliates, which may
result in decisions that are not in the best interests of all our
stockholders.
Termination
of the advisory agreement may be difficult and costly.
Termination
of the advisory agreement without cause is subject to several conditions which
may make such a termination difficult and costly. The advisory
agreement provides that it may only be terminated without cause following the
initial three-year period, which ends on December 31, 2010, upon the affirmative
vote of at least two-thirds of our independent directors, based either upon
unsatisfactory performance by HCS that is materially detrimental to us or upon a
determination that the management fee payable to HCS is not fair, subject to
HCS’s right to prevent such a termination by accepting a mutually acceptable
reduction of management fees. HCS will be paid a termination fee
equal to the sum of the average annual base advisory fee and the average annual
incentive compensation earned by it during the 24-month period immediately
preceding the date of termination, calculated as of the end of the most recently
completed fiscal quarter prior to the date of termination. Thus, in
the event we elect not to renew the advisory agreement for any reason other than
cause (as defined in the advisory agreement), we will be required to pay this
termination fee. These provisions may increase the effective cost to
us of terminating the advisory agreement, thereby adversely affecting our
ability to terminate HCS without cause.
31
Risks Related to an Investment in Our Capital Stock
The
market price and trading volume of our common stock may be
volatile.
The
market price of our common stock is highly volatile and subject to wide
fluctuations. In addition, the trading volume in our common stock may
fluctuate and cause significant price variations to occur. Some of
the factors that could result in fluctuations in the price or trading volume of
our common stock include, among other things: actual or anticipated
changes in our current or future financial performance; changes in market
interest rates and general market and economic conditions. We cannot
assure you that the market price of our common stock will not fluctuate or
decline significantly.
No
active trading market for the Series A Preferred Stock currently exists and
one may not develop in the future.
The
shares of Series A Preferred Stock were issued in a private placement
transaction pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and are not listed on the NASDAQ Capital Market or any other
market. Furthermore, even if the Series A Preferred Stock is
accepted for listing on the NASDAQ Capital Market or another securities
exchange, an active trading market may not develop and the market price of the
Series A Preferred Stock may be volatile. As a result, an
investor in our Series A Preferred Stock may be unable to sell his/her
shares of Series A Preferred Stock at a price equal to or greater than that
which the investor paid, if at all.
We
have not established a minimum dividend payment level for our common
stockholders and there are no assurances of our ability to pay dividends to
common or preferred stockholders in the future.
We intend
to pay quarterly dividends and to make distributions to our common stockholders
in amounts such that all or substantially all of our taxable income in each
year, subject to certain adjustments, is distributed. This, along
with other factors, should enable us to qualify for the tax benefits accorded to
a REIT under the Internal Revenue Code of 1986, as amended, or Internal Revenue
Code. We have not established a minimum dividend payment level for
our common stockholders and our ability to pay dividends may be harmed by the
risk factors described herein. From July 2007 until April 2008, our
Board of Directors elected to suspend the payment of quarterly dividends on our
common stock. Our Board’s decision reflected our focus on the
elimination of operating losses through the sale of our mortgage lending
business and the conservation of capital to build future earnings from our
portfolio management operations. All distributions to our common
stockholders will be made at the discretion of our Board of Directors and will
depend on our earnings, our financial condition, maintenance of our REIT status
and such other factors as our Board of Directors may deem relevant from time to
time. There are no assurances of our ability to pay dividends in the
future.
In
addition, in the event that we do not have legally available funds, or any of
our financing agreements in the future restrict our ability, to pay cash
dividends on shares of our Series A Preferred Stock, we will be unable to
pay cash dividends on our Series A Preferred Stock, unless, in the case of
restrictions imposed by our financing agreements, we can refinance amounts
outstanding under those agreements. Although the dividends on our
Series A Preferred Stock would continue to accrue, we may pay dividends on
shares of our Series A Preferred Stock only if we have legally available
funds for such payment.
Upon
conversion of our Series A Preferred Stock, we will be required to issue
shares of common stock to holders of our Series A Preferred Stock, which
will dilute the holders of our outstanding common stock. Our
outstanding shares of Series A Preferred Stock are senior to our common
stock for purposes of dividend and liquidation distributions and have voting
rights equal to those of our common stock.
On
January 18, 2008, we completed the issuance and sale of 1.0 million shares of
Series A Preferred Stock to the JMP Group for an aggregate purchase price
of $20.0 million. The Series A Preferred Stock entitles the
holders to receive a cumulative dividend of 10% per year, subject to an increase
to the extent any future quarterly common stock dividends exceed $0.20 per
share. Holders of our Series A Preferred Stock have dividend and
liquidating distribution preferences over holders of our common stock, which may
negatively affect a Series A Preferred Stockholder’s ability to receive
dividends or liquidating distributions on his or her shares. The
Series A Preferred Stock also has voting rights equal to the voting rights
attached to our common stock, except that each share of Series A Preferred
Stock is entitled to a number of votes equal to the conversion rate for the
Series A Preferred Stock.
The
shares of Series A Preferred Stock are convertible into shares of our
common stock based on a conversion price of $8.00 per share of common stock,
which represents a conversion rate of two and one-half (2 ½) shares of
common stock for each share of Series A Preferred Stock. Upon
conversion of the Series A Preferred Stock, we will issue common stock to
the holders of our Series A Preferred Stock, which will dilute the holders
of our outstanding common stock.
32
The
Series A Preferred Stock represents approximately 21% of our outstanding
capital stock, on a fully diluted basis, as of February 15,
2010. Therefore, the holders of our Series A Preferred Stock
have voting control over us.
The
Series A Preferred Stock represents approximately 21% of our outstanding
capital stock, on a fully diluted basis, as of February 15, 2010. The
Series A Preferred Stock also has voting rights equal to the voting rights
attached to our common stock, except that each share of Series A Preferred
Stock is entitled to a number of votes equal to the conversion
rate. Therefore, the holders of our Series A Preferred Stock
have voting control over us, which may limit your ability to effect corporate
change through the shareholder voting process.
Future
offerings of debt securities, which would rank senior to our common stock and
preferred stock upon our liquidation, and future offerings of equity securities,
which would dilute our existing stockholders and may be senior to our common
stock for the purposes of dividend and liquidating distributions, may adversely
affect the market price of our common stock.
In the
future, we may attempt to increase our capital resources by making offerings of
debt or additional offerings of equity securities, including commercial paper,
medium-term notes, senior or subordinated notes and classes of preferred stock
or common stock. Upon liquidation, holders of our debt securities and
lenders with respect to other borrowings will receive a distribution of our
available assets prior to the holders of our preferred stock and common stock,
with holders of our preferred stock having priority over holders of our common
stock. Additional equity offerings may dilute the holdings of our
existing stockholders or reduce the market price of our common stock, or
both. Our Series A Preferred Stock has a preference on
liquidating distributions or a preference on dividend payments that could limit
our ability to make a dividend distribution to the holders of our common stock,
and any preferred stock issued by us in the future could have similar
terms. Because our decision to issue securities in any future
offering will depend on market conditions and other factors beyond our control,
we cannot predict or estimate the amount, timing or nature of our future
offerings. Thus, holders of our common stock bear the risk of our
future offerings reducing the market price of our common stock and diluting
their stock holdings in us.
We
may not be able to pay the redemption price of our Series A Preferred Stock
on the redemption date.
We have
an obligation to redeem any remaining outstanding shares of our Series A
Preferred Stock on or about December 31, 2010, at a redemption price equal to
100% of the $20.00 per share liquidation preference, plus all accrued and unpaid
dividends. Our common stock is currently trading below the conversion
price for our Series A Preferred Stock. As a result, as of
December 31, 2009, 100% of the Series A Preferred Stock remained
outstanding, which represents an aggregate redemption price (excluding accrued
and unpaid dividends) of approximately $20.0 million. We may be
unable to finance the redemption on favorable terms, or at
all. Consequently, we may not have sufficient cash to purchase the
shares of our Series A Preferred Stock.
We
may not issue preferred stock that is senior to the Series A Preferred
Stock without the consent of the holders of 66 2/3% of the shares of
Series A Preferred Stock, which limits the flexibility of our capital
structure.
As long
as the Series A Preferred Stock is outstanding, we may not issue preferred
stock that is senior to the Series A Preferred Stock with respect to
dividend or liquidation rights without the consent of the holders of 66 2/3% of
the shares of Series A Preferred Stock. This limitation
restricts the flexibility of our capital structure and may prevent us from
issuing equity that would otherwise be in the best interests of our company and
common stockholders.
Future
sales of our common stock could have an adverse effect on our common stock
price.
We cannot
predict the effect, if any, of future sales of common stock, or the availability
of shares for future sales, on the market price of our common
stock. For example, upon conversion of our Series A Preferred
Stock, we will be required to issue shares of our common stock to holders of our
Series A Preferred Stock, which will increase the number of shares
available for sale and dilute existing holders of our common
stock. Sales of substantial amounts of common stock, or the
perception that such sales could occur, may adversely affect prevailing market
prices for our common stock.
Risks
Related to Our Company, Structure and Change in Control
Provisions
33
Our
directors have approved broad investment guidelines for us and do not approve
each investment we make.
Our Board
of Directors has given us substantial discretion to invest in accordance with
our broad investment guidelines. Our Board of Directors periodically
reviews our investment guidelines and our portfolio. However, our
Board of Directors does not review each proposed investment. In
addition, in conducting periodic reviews, our directors rely primarily on
information provided to them by our executive officers and
HCS. Furthermore, transactions entered into by us may be difficult or
impossible to unwind by the time they are reviewed by our
directors. Our management and HCS have substantial discretion within
our broad investment guidelines in determining the types of assets we may decide
are proper investments for us.
We
are dependent on certain key personnel.
We are a
small company and are dependent upon the efforts of certain key individuals,
including James J. Fowler, the Chairman of our Board of Directors, and Steven R.
Mumma, our Chief Executive Officer, President and Chief Financial
Officer. The loss of any key personnel or their services could have
an adverse effect on our operations.
Our
Chief Executive Officer has an agreement with us that provides him with benefits
in the event his employment is terminated following a change in
control.
We have
entered into an agreement with our Chief Executive Officer, Steven R. Mumma,
that provides him with severance benefits if his 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.
The
stock ownership limit imposed by our charter may inhibit market activity in our
common stock and may restrict our business combination
opportunities.
In order
for us to maintain our qualification as a REIT under the Internal Revenue Code,
not more than 50% in value of the issued and outstanding shares of our capital
stock may be owned, actually or constructively, by five or fewer individuals (as
defined in the Internal Revenue Code to include certain entities) at any time
during the last half of each taxable year (other than our first year as a
REIT). This test is known as the “5/50 test.” Attribution
rules in the Internal Revenue Code apply to determine if any individual or
entity actually or constructively owns our capital stock for purposes of this
requirement. Additionally, at least 100 persons must beneficially own
our capital stock during at least 335 days of each taxable year (other than our
first year as a REIT). To help ensure that we meet these tests, our
charter restricts the acquisition and ownership of shares of our capital
stock. Our charter, with certain exceptions, authorizes our directors
to take such actions as are necessary and desirable to preserve our
qualification as a REIT and provides that, unless exempted by our Board of
Directors, no person may own more than 5.0% in value of the outstanding shares
of our capital stock. The ownership limit contained in our charter
could delay or prevent a transaction or a change in control of our company under
circumstances that otherwise could provide our stockholders with the opportunity
to realize a premium over the then current market price for our common stock or
would otherwise be in the best interests of our stockholders.
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.
|
34
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. 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.
Tax
Risks Related to Our Structure
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 satisfy these requirements, we might have
to forego investments we might otherwise make. Thus, compliance with
the REIT requirements may hinder our investment
performance. Moreover, while we intend to continue to operate so to
qualify as a REIT for federal income tax purposes, given the highly complex
nature of the rules governing REITs, there can be no assurance that we will so
qualify in any taxable year.
If we
fail to qualify as a REIT in any taxable year and we do not qualify for certain
statutory relief provisions, we would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. We might be required to borrow funds or
liquidate some investments in order to pay the applicable tax. Our
payment of income tax would reduce our net earnings available for investment or
distribution to stockholders. Furthermore, if we fail to qualify as a
REIT and do not qualify for certain statutory relief provisions, we would no
longer be required to make distributions to stockholders. Unless our
failure to qualify as a REIT were excused under the federal income tax laws, 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.
REIT
distribution requirements could adversely affect our liquidity.
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.
35
Certain
of our assets may generate substantial mismatches between REIT taxable income
and available cash. Such 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
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.
|
Further,
our lenders could require us to enter into negative covenants, including
restrictions on our ability to distribute funds or to employ leverage, which
could inhibit our ability to satisfy the 90% distribution
requirement.
Dividends
payable by REITs do not qualify for the reduced tax rates on dividend income
from regular corporations.
The
maximum U.S. federal income tax rate for dividends payable to domestic
shareholders that are individuals, trust and estates is 15% (through
2010). Dividends payable by REITs, however, are generally not
eligible for the reduced rates. Although the reduced U.S. federal
income tax rate applicable to dividend income from regular corporate dividends
does not adversely affect the taxation of REITs or dividends paid by REITs, the
more favorable rate applicable to regular corporate dividends could cause
investors who are individuals, trusts and estates to perceive investments in
REITs to be relatively less attractive than investments in the stocks of
non-REIT corporations that pay dividends, which could adversely affect the value
of the shares of REITs, including our common shares.
Complying
with REIT requirements may limit our ability to hedge effectively.
The REIT
provisions of the Code substantially limit our ability to hedge the RMBS in our
investment portfolio. Our aggregate gross income from non-qualifying
hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our
annual gross income. As a result, we might have to limit our use of
advantageous hedging techniques or implement those hedges through a
TRS. Any hedging income earned by a TRS would be subject to federal,
state and local income tax at regular corporate rates. This could
increase the cost of our hedging activities or expose us to greater risks
associated with changes in interest rates than we would otherwise want to
bear.
A
decline in the value of the real estate securing the mortgage loans that back
RMBS could cause a portion of our income from such securities to be
nonqualifying income for purposes of the REIT 75% gross income test, which could
cause us to fail to qualify as a REIT.
Pools of
mortgage loans back the RMBS that we hold in our investment portfolio and in
which we invest. In general, the interest income from a mortgage loan
is qualifying income for purposes of the 75% gross income test applicable to
REITs to the extent that the mortgage loan is secured by real
property. If a mortgage loan has a loan-to-value ratio greater than
100%, however, then only a proportionate part of the interest income is
qualifying income for purposes of the 75% gross income test and only a
proportionate part of the value of the loan is treated as a “real estate asset”
for purposes of the 75% asset test applicable to REITs. This
loan-to-value ratio is generally measured at the time that the REIT commits to
acquire the loan. Although the IRS has ruled generally that the
interest income from non-collateralized mortgage obligation (“CMO”) RMBS is
qualifying income for purposes of the 75% gross income test, it is not entirely
clear how this guidance would apply if we purchase non-CMO RMBS in the secondary
market at a time when the loan-to-value ratio of one or more of the mortgage
loans backing the non-CMO RMBS is greater than 100%, and, accordingly, a portion
of any income from such non-CMO RMBS may be treated as non-qualifying income for
purposes of the 75% gross income test. In addition, that guidance
does not apply to CMO RMBS. In the case of CMO RMBS, if less than 95%
of the assets of the issuer of the CMO RMBS constitute “real estate assets,”
then only a proportionate part of our income derived from the CMO RMBS will
qualify for purposes of the 75% gross income test. Although the law
is not clear, the IRS may take the position that the determination of the
loan-to-value ratio for mortgage loans that back CMO RMBS is to be made on a
quarterly basis. A decline in the value of the real estate securing
the mortgage loans that back our CMO RMBS could cause a portion of the interest
income from those RMBS to be treated as non-qualifying income for purposes of
the 75% gross income test. If such non-qualifying income caused us to
fail the 75% gross income test and we did not qualify for certain statutory
relief provisions, we would fail to qualify as a REIT.
36
None.
Other
than real estate owned, acquired through, or in lieu of, foreclosures on
mortgage loans, the Company does not own any properties. As of December 31,
2009, our principal executive and administrative offices are located in leased
space at 52 Vanderbilt Avenue, Suite 403, New York, New York
10017.
We are at times subject to various
legal proceedings arising in the ordinary course of our business. As
of the date of this report, we do not believe that any of our current legal
proceedings, individually or in the aggregate, will have a material adverse
effect on our operations, financial condition or cash flows
Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder
Matters
Our
common stock is traded on NASDAQ under the trading symbol “NYMT”. As
of December 31, 2009, we had 9,415,094 shares of common stock outstanding and as
of March 1, 2010, there were approximately 30 holders of record of our common
stock. This figure does not reflect the beneficial ownership of shares held in
nominee name.
37
The
following table sets forth, for the periods indicated, the high, low and quarter
end closing sales prices per share of our common stock and the cash dividends
paid or payable on our common stock on a per share basis. The data below has
been sourced from
http://www.bloomberg.com
.
|
Common Stock Prices
|
Cash Dividends
|
|||||||||||||||
|
High
|
Low
|
Close
|
Declared
|
Paid or
Payable
|
Amount
per Share
|
|||||||||||
|
Year Ended December
31, 2009
|
||||||||||||||||
|
Fourth
quarter
|
$ | 8.75 | $ | 5.74 | $ | 7.19 |
12/21/09
|
01/26/10
|
$ | 0.25 | ||||||
|
Third
quarter
|
8.03 | 5.05 | 7.60 |
09/28/09
|
10/26/09
|
0.25 | ||||||||||
|
Second
quarter
|
5.97 | 2.23 | 5.16 |
06/14/09
|
07/27/09
|
0.23 | ||||||||||
|
First
quarter
|
3.80 | 1.82 | 3.80 |
03/25/09
|
04/27/09
|
0.18 | ||||||||||
|
Common Stock Prices
(1)
|
Cash Dividends
|
|||||||||||||||
|
High
|
Low
|
Close
|
Declared
|
Paid
or
Payable
|
Amount
per Share
|
|||||||||||
|
Year Ended December
31, 2008
|
||||||||||||||||
|
Fourth
quarter
|
$ | 4.37 | $ | 1.51 | $ | 2.20 |
12/23/08
|
01/26/09
|
$ | 0.10 | ||||||
|
Third
quarter
|
5.99 | 2.50 | 3.17 |
09/29/08
|
10/27/08
|
0.16 | ||||||||||
|
Second
quarter
|
6.24 | 4.00 | 6.20 |
06/30/08
|
07/25/08
|
0.16 | ||||||||||
|
First
quarter
|
9.80 | 4.40 | 5.40 |
04/21/08
|
05/15/08
|
0.12 | ||||||||||
|
(1)
Our
common stock was reported on the OTCBB from January 1, 2008 through June
4, 2008. Our common stock has been listed on the NASDAQ since June 5,
2008.
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We
intend to continue to pay quarterly dividends to holders of shares of common
stock. Future dividends will be at the discretion of the Board of Directors and
will depend on our earnings and financial condition, maintenance of our REIT
qualification, restrictions on making distributions under Maryland law and such
other factors as our Board of Directors deems relevant.
|
Declaration Date
|
Record Date
|
Payment Date
|
Cash Distribution
per share
|
Income
Dividends
|
Short-term
Capital Gain
|
Total Taxable
Ordinary
Dividend
|
Return of
Capital
|
|||||||||||||
|
12/23/08
|
01/07/09
|
01/26/09
|
$ | 0.1000 | $ | 0.1000 | $ | 0.0000 | $ | 0.1000 | $ | 0.0000 | ||||||||
|
03/25/09
|
04/06/09
|
04/27/09
|
$ | 0.1800 | $ | 0.1800 | $ | 0.0000 | $ | 0.1800 | $ | 0.0000 | ||||||||
|
06/14/09
|
06/26/09
|
07/27/09
|
$ | 0.2300 | $ | 0.2300 | $ | 0.0000 | $ | 0.2300 | $ | 0.0000 | ||||||||
|
09/28/09
|
10/13/09
|
10/26/09
|
$ | 0.2500 | $ | 0.2500 | $ | 0.0000 | $ | 0.2500 | $ | 0.0000 | ||||||||
|
Total
2009 Cash Distributions
|
$ | 0.7600 | $ | 0.7600 | $ | 0.0000 | $ | 0.7600 | $ | 0.0000 | ||||||||||
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The
Company has a share repurchase program, which it previously announced in
November 2005. At management’s discretion, the Company is authorized to
repurchase shares of Company common stock in the open market or through
privately negotiated transactions through December 31, 2015. The plan may
be temporarily or permanently suspended or discontinued at any time. The Company
has not repurchased any shares since March 2006 and currently has no intention
to recommence repurchases in the near-term..
38
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information as of December 31, 2009 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
|
— | $ | — | 8,111 | ||||
39
Performance Graph
The
following line graph sets forth, for the period December 31, 2004 through
December 31, 2009, a comparison of the percentage change in the cumulative total
stockholder return on the Company's common stock compared to the cumulative
total return of the NYSE Composite Index and the National Association of Real
Estate Investment Trusts ("NAREIT") Mortgage REIT Index. The graph assumes
that the value of the investment in each of the Company's common stock and the
indices was $100 as of December 31, 2004 and that all dividends were reinvested.
The performance reflected in the graph is not necessarily indicative of future
performance.
The
foregoing graph and chart shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent we specifically incorporate this
information by reference, and shall not otherwise be deemed filed under those
acts.
40
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.
|
As
of and For the Year Ended December 31,
|
||||||||||||||||||||
|
(Dollar
amounts in thousands, except per share amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Operating
Data:
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Interest
income
|
$ | 31,095 | $ | 44,123 | $ | 50,564 | $ | 64,881 | $ | 62,725 | ||||||||||
|
Interest
expense
|
14,235 | 36,260 | 50,087 | 60,097 | 49,852 | |||||||||||||||
|
Net
interest income
|
16,860 | 7,863 | 477 | 4,784 | 12,873 | |||||||||||||||
|
Provision
for loan losses
|
(2,262 | ) | (1,462 | ) | (1,683 | ) | (57 | ) | — | |||||||||||
|
Realized
gains (losses) on securities and related hedges
|
3,282 | (19,977 | ) | (8,350 | ) | (529 | ) | 2,207 | ||||||||||||
|
Impairment
loss on investment securities
|
(119 | ) | (5,278 | ) | (8,480 | ) | — | (7,440 | ) | |||||||||||
|
Total
other income (expenses)
|
901 | (26,717 | ) | (18,513 | ) | (586 | ) | (5,233 | ) | |||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Salaries
and benefits
|
2,118 | 1,869 | 865 | 714 | 1,934 | |||||||||||||||
|
General
and administrative expenses
|
4,759 | 5,041 | 1,889 | 1,318 | 2,384 | |||||||||||||||
|
Total
expenses
|
6,877 | 6,910 | 2,754 | 2,032 | 4,318 | |||||||||||||||
|
Income
(loss) before from continuing operations
|
10,884 | (25,764 | ) | (20,790 | ) | 2,166 | 3,322 | |||||||||||||
|
Income
(loss) from discontinued operation – net of
tax (1)
|
786 | 1,657 | (34,478 | ) | (17,197 | ) | (8,662 | ) | ||||||||||||
|
Net
income (loss)
|
$ | 11,670 | $ | (24,107 | ) | $ | (55,268 | ) | $ | (15,031 | ) | $ | (5,340 | ) | ||||||
|
Basic
net income (loss) per share
|
$ | 1.25 | $ | (2.91 | ) | $ | (30.47 | ) | $ | (8.33 | ) | $ | (2.96 | ) | ||||||
|
Diluted
net income (loss) income per share
|
$ | 1.19 | $ | (2.91 | ) | $ | (30.47 | ) | $ | (8.33 | ) | $ | (2.96 | ) | ||||||
|
Dividends
declared per common share
|
$ | 0.91 | $ | 0.54 | $ | 0.50 | $ | 4.70 | $ | 9.20 | ||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 24,522 | $ | 9,387 | $ | 5,508 | $ | 969 | $ | 9,056 | ||||||||||
|
Investment
securities available for sale
|
176,691 | 477,416 | 350,484 | 488,962 | 716,482 | |||||||||||||||
|
Mortgage
loans held in securitization trusts
|
276,176 | 346,972 | 428,030 | 587,535 | 780,670 | |||||||||||||||
|
Assets
related to discontinued operation (1)
|
4,217 | 5,854 | 8,876 | 212,805 | 248,871 | |||||||||||||||
|
Total
assets
|
488,814 | 853,300 | 808,606 | 1,321,979 | 1,789,943 | |||||||||||||||
|
Financing
arrangements, portfolio investments
|
85,106 | 402,329 | 315,714 | 815,313 | 1,166,499 | |||||||||||||||
|
Collateralized
debt obligations
|
266,754 | 335,646 | 417,027 | 197,447 | 228,226 | |||||||||||||||
|
Subordinated
debentures (net)
|
44,892 | 44,618 | 44,345 | 44,071 | 43,650 | |||||||||||||||
|
Convertible
preferred debentures
|
19,851 | 19,702 | — | — | — | |||||||||||||||
|
Liabilities
related to discontinued operation (1)
|
1,778 | 3,566 | 5,833 | 187,705 | 231,925 | |||||||||||||||
|
Total
liabilities
|
425,827 | 814,052 | 790,188 | 1,250,407 | 1,688,985 | |||||||||||||||
|
Total
stockholders’ equity
|
$ | 62,987 | $ | 39,248 | $ | 18,418 | $ | 71,572 | $ | 100,958 | ||||||||||
|
(1)
|
In
connection with the sale of our wholesale mortgage origination platform
assets on February 22, 2007 and the sale of our retail mortgage
origination platform assets on March 31, 2007, we classify our mortgage
lending business as a discontinued operation in (see note 8 in the
notes to our consolidated financial
statements).
|
41
General
New York
Mortgage Trust, Inc., together with its consolidated subsidiaries (“NYMT”, the
“Company”, “we”, “our”, and “us”), is a self-advised real estate investment
trust, or REIT, in the business of acquiring and managing primarily residential
adjustable-rate, hybrid adjustable-rate and fixed-rate mortgage-backed
securities (“RMBS”), for which the principal and interest payments are
guaranteed by a U.S. Government agency, such as the Government National Mortgage
Association (“Ginnie Mae”) or a U.S. Government-sponsored entity (“GSE” or
“Agency”), such as the Federal National Mortgage Association (“Fannie Mae”) or
the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which we refer to
collectively as “Agency RMBS,” RMBS backed by prime jumbo and Alternative
A-paper (“Alt-A”) mortgage loans (“non-Agency RMBS”), and prime credit
quality residential adjustable-rate mortgage (“ARM”) loans held in
securitization trusts, or prime ARM loans. The remainder of our
current investment portfolio is comprised of notes issued by a collateralized
loan obligation (“CLO”). We also may opportunistically acquire and
manage various other types of real estate-related and financial assets,
including, among other things, certain non-rated residential mortgage assets,
commercial mortgage-backed securities (“CMBS”), commercial real estate loans and
other similar investments. These assets, together with non-Agency
RMBS and CLOs, typically present greater credit risk and less interest rate risk
than our investments in Agency RMBS and prime ARM loans, and may also permit us
to potentially utilize all or part of a significant net operating loss
carry-forward held by Hypotheca Capital, LLC (“HC,” then doing business as The
New York Mortgage Company LLC), our wholly-owned subsidiary and former mortgage
lending business.
Our
principal business objective is to generate net income for distribution to our
stockholders resulting from the spread between the interest and other income we
earn on our interest-earning assets and the interest expense we pay on the
borrowings that we use to finance our leveraged assets and our operating costs,
which we refer to as our net interest income. We intend to achieve
this objective by investing in a broad class of real estate-related and
financial assets, including those listed above, that in aggregate, will generate
attractive risk-adjusted total returns for our stockholders.
Prior to
2009, our investment portfolio was primarily comprised of Agency RMBS, prime ARM
loans held in securitization trusts and certain non-agency RMBS rated in the
highest rating category by two rating agencies. The prime ARM loans in our
portfolio were purchased from third parties or originated by us through HC and
were subsequently securitized by us and are held in our four securitization
trusts. Beginning in the first quarter of 2009, we commenced a
repositioning of our investment portfolio to transition the portfolio from one
primarily focused on leveraged Agency RMBS and prime ARM loans held in
securitization trusts, which primarily involve interest rate risk, to a more
diversified portfolio that includes elements of credit risk with reduced
leverage. The repositioning included a reduction in the Agency RMBS
held in our portfolio through the disposition of $193.8 million of GSE-issued
collateralized mortgage obligation floating rate securities, which we refer to
as “Agency CMO floaters”, a net increase of approximately $27.5 million (par
value) in our non-Agency RMBS position and our opportunistic purchase in March
2009 of discounted notes issued by a CLO.
We
elected to be taxed as a REIT for federal income tax purposes commencing with
our taxable year ended on December 31, 2004. As a result, we generally will not
be subject to federal income tax on our taxable income that is distributed to
our stockholders.
42
Factors
that Affect our Results of Operations and Financial Condition
Our
results of operations and financial condition are affected by various factors,
including, among other things:
|
·
|
changes
in interest rates;
|
|
·
|
rates
of prepayment, default and recovery on our assets or the mortgages or
loans that underlie such assets
;
|
|
·
|
general
economic and financial and credit market condition
s;
|
|
·
|
our
leverage, our access to funding and our borrowing
costs;
|
|
·
|
our
hedging activities;
|
|
·
|
changes
in the credit ratings of the loans, securities, and other assets we
own;
|
|
·
|
the
market value of our investments;
|
|
·
|
liabilities related
to our discontinued operation,
including repurchase obligations on
the sales of mortgage loans
;
and
|
|
·
|
requirements
to maintain REIT status and to qualify for an exemption from registration
under the Investment Company Act.
|
We earn
income and generate cash through our investments. Our income is generated
primarily from the net spread, which we refer to as net interest income, which
is the difference between the interest income we earn on our investment
portfolio and the cost of our borrowings and hedging activities and other
operating costs. Our net interest income will vary based upon, among other
things, the difference between the interest rates earned on our interest-earning
assets and the borrowing costs of the liabilities used to finance those
investments, prepayment speeds and default and recovery rates on the assets or
the loans underlying such assets.
Because changes in
interest rates may significantly affect our activities, our operating results
depend, in large part, upon our ability to manage interest rate risks and
prepayment risks effectively while maintaining our status as a
REIT.
We
anticipate that, for any period during which changes in the interest rates
earned on our assets do not coincide with interest rate changes on our
borrowings, such assets will reprice more slowly than the corresponding
liabilities. Consequently, changes in interest rates, particularly short-term
interest rates, may significantly influence our net interest income. With the
maturities of our assets generally of longer duration than those of our
liabilities, interest rate increases will tend to decrease the net interest
income we derive from, and the market value of our interest rate sensitive
assets (and therefore our book value), including Agency RMBS, prime ARM loans
and certain non-Agency RMBS. Such rate increases could possibly result in
operating losses or adversely affect our ability to make distributions to our
stockholders.
The yield on our assets
may be affected by a difference between the actual prepayment rates and our
projections.
Prepayment rates, as reflected by the rate of principal
paydown, and interest rates vary according to the type of investment, conditions
in the economy and financial markets, competition and other factors, none of
which can be predicted with any certainty. To the extent we have acquired assets
at a premium or discount to par, or face value, changes in prepayment rates may
impact our anticipated yield. In periods of declining interest rates,
prepayments on our mortgage related assets will likely increase. If we are
unable to reinvest the proceeds of such prepayments at comparable yields, our
net interest income will be negatively impacted. The current climate of
government intervention in the mortgage markets significantly increases the risk
associated with prepayments.
While we
historically have used, and intend to use in the future, hedging to mitigate
some of our interest rate risk, we do not hedge all of our exposure to changes
in interest rates and prepayment rates, as there are practical limitations on
our ability to insulate our portfolio from all potential negative consequences
associated with changes in short-term interest rates in a manner that will allow
us to seek attractive net spreads on our assets.
43
In addition, our returns
will be affected by the credit performance of our non-agency RMBS and other
investments.
Our non-Agency RMBS and CLO investments expose us to credit
risk; however, the credit support built into non-Agency RMBS deal structures is
designed to provide a level of protection against potential credit
losses. In addition, the discounted purchase prices paid for the
non-Agency RMBS and CLO investments in our portfolio provide further insulation
from credit losses in the event, as we expect, that we receive less than 100% of
par value on such assets. Nevertheless, i
f credit losses on our
investments, loans, or the loans underlying our investments exceed our
expectations, it may have an adverse effect on our performance and our
earnings.
As it
relates to loans sold previously under certain loan sale agreements by our
discontinued mortgage lending business, we may be required to repurchase some of
those loans or indemnify the loan purchaser for damages caused by a breach of
the loan sale agreement. While in the past we complied with the repurchase
demands by repurchasing the loan with cash and reselling it at a loss, thus
reducing our cash position. More recently, we have addressed these requests by
negotiating a net cash settlement based on the actual or assumed loss on the
loan in lieu of repurchasing the loans. As of December 31, 2009, the amount
of repurchase requests outstanding was approximately $2.0 million, against which
we had a reserve of approximately $0.3 million. We cannot assure you that
we will be successful in settling the remaining repurchase demands on favorable
terms, or at all. If we are unable to continue to resolve our current repurchase
demands through negotiated net cash settlements, our liquidity could be
adversely affected.
For more
information regarding the factors and risks that affect our operations and
performance, see “Item 1A. Risk Factors” above and “Item 7A. Quantitative and
Qualitative Disclosures About Market Risk” below.
Current
Market Conditions and Known Material Trends
In recent
years, the residential housing and mortgage and credit and financial markets in
the United States and globally have experienced a variety of difficulties and
changed economic conditions, including loan defaults, credit losses and
decreased liquidity. These conditions, together with liquidating sales by
several large institutions, have resulted in volatility in the value of most
real estate-related and financial assets, including many of the assets in our
portfolio, and reduced available financing for certain assets. In
response to these conditions, the U.S. Government, Federal Reserve, U.S.
Treasury, FDIC and other governmental and regulatory bodies have taken or are
considering taking other actions in an effort to stabilize the credit and
financial markets and stimulate the economy. These actions include,
among other things, the conservatorship of Fannie Mae and Freddie Mac, EESA,
TARP, the CPP, TALF, ARRA and the Homeowner Affordability and Stability Plan, or
HASP. Although the impact from many of these actions remains uncertain, certain
sectors have reported signs of stabilizing recently, including the Agency RMBS
market.
Developments at Fannie Mae and
Freddie Mac
. Payments on the Agency RMBS in which we invest
are guaranteed by Fannie Mae and Freddie Mac. Because of the guarantee and the
underwriting standards associated with mortgages underlying Agency RMBS, they
have historically had high price stability and been considered to present low
credit risk. However, the recent turmoil in the residential mortgage sector
severely weakened the financial condition of Fannie Mae and Freddie
Mac. As a result, Agency RMBS experienced increased price volatility.
In response to the severely weakened financial condition of Fannie Mae and
Freddie Mac and the corresponding impact that this weakened condition was having
on the U.S. mortgage, credit and financial markets, in 2008 the U.S. Government
placed Fannie Mae and Freddie Mac under federal conservatorship. In connection
with the placement of Fannie Mae and Freddie Mac in conservatorship, the U.S.
Treasury agreed to provide certain financial support to these entities,
including a larger-scale Agency RMBS purchasing program that is scheduled to
terminate during the 2010 first quarter. We expect that the U.S. Government’s
conservatorship of Fannie Mae and Freddie Mac will allow these institutions to
continue to issue Agency RMBS. However, no assurance can be given that the
conservatorship of Fannie Mae and Freddie Mac will continue to have a positive
effect on the supply of Agency RMBS. For example, at a hearing on
January 22, 2010, the Chairman of the House Financial Services Committee
stated that the committee will be recommending to the U.S. Congress to abolish
Fannie Mae and Freddie Mac in favor of a new system of providing housing
finance.
Prior to
December 2009, the financing arrangement between the U.S. Treasury and Fannie
Mae and Freddie Mac required these entities to cap their Agency RMBS portfolio
at $900 billion each and then begin reducing their portfolio of Agency RMBS by
10% per year beginning in 2010. In December 2009, the U.S. Treasury
loosened this requirement by allowing the portfolio reduction requirements to be
applied to the maximum allowable size of the portfolios, rather than the actual
size of the portfolios. Also, the U.S. Treasury originally was going to require
Fannie Mae and Freddie Mac to pay a quarterly commitment fee to the U.S.
Treasury beginning on March 31, 2010. The U.S. Treasury subsequently
postponed that start date to December 31, 2010. The change to Fannie Mae
and Freddie Macs portfolio reduction requirements could extend the time period
by which these entities sell portions of their Agency RMBS portfolios in the
market, which, in turn, could cause the supply of Agency RMBS to be smaller than
we originally anticipated.
44
More
recently, in February of this year, Fannie Mae and Freddie Mac announced that
the GSEs will be purchasing delinquent loans from mortgage pools guaranteed by
them. Delinquent loans for this program will be those that are 120 days or
greater delinquent as of measurement date. Freddie Mac stated that it will be
consummating all of its purchases at once, based on the delinquencies as of
February 2010, with payments to securities holders on March 15
th
and
April 15
th
. On
March 1, 2010, Fannie Mae reported that it would buy approximately $127
billion of loans out of guaranteed RMBS pools beginning in March and running
through about June of this year. These actions could decrease the net income
derived from our Agency RMBS.
Mortgage asset
values
. During 2009, the
market value of the Agency RMBS in our portfolio was positively impacted by the
Federal Reserve’s program to purchase $1.25 trillion of Agency
MBS. This purchase program implemented by the Federal Reserve
increased market prices of Agency RMBS during 2009, thereby reducing their
market yield. As a result, we did not acquire any Agency RMBS during
2009, and instead opportunistically disposed of the Agency CMO floaters in our
portfolio. The Federal Reserve has indicated it will complete its planned
purchases of Agency RMBS by the end of the 2010 first quarter. If no
further action is taken by the Federal Reserve, the market value of Agency RMBS
may decline, which among other things, could cause the market value of our
Agency RMBS to decline.
Market
demand for non-Agency RMBS increased over the course of 2009 due to increased
demand and the reduced market yields for Agency RMBS. Accordingly,
while non-Agency RMBS remain available at a discount, such discounts have
narrowed relative to discounts available in early 2009 and late 2008 and may
continue to narrow in the future, reducing the market yields on these
assets. Nevertheless, we believe that despite higher market prices
and lower yields, that risk-adjusted returns on non-Agency RMBS continue to
represent attractive investment opportunities.
Credit
Quality.
The deterioration of the U.S. housing market as well
as the recent economic downturn have caused U.S. residential mortgage
delinquency rates to remain at high levels for various types of mortgage loans.
Recent months have seen some stabilization or improvement of certain measures of
credit quality, although this stabilization and/or improvement may ultimately
prove to be temporary
Financing markets and
liquidit
y. Actions by the Federal Reserve and the U.S. Treasury over the
past two years appear to have stabilized the financing and liquidity environment
for Agency RMBS. The liquidity facilities created by the Federal Reserve during
2007 and 2008 and its lowering of the Federal Funds Target Rate to 0 – 0.25%,
along with the reduction of the 30-day LIBOR to 0.23% as of December 31,
2009, have lowered our financing costs (which most closely correlates with the
30-day LIBOR) and stabilized the availability of repurchase agreement financing
for Agency RMBS. Moreover, collateral requirements improved throughout
2009. However, available leverage for non-Agency RMBS and other
financial assets has remained scarce during 2009 due to the recent conditions in
the housing and credit markets. More recently, some investment banks
have, to a limited extent, begun making term financing available for non-Agency
RMBS. As of the date of this report, our investment in Agency RMBS
and a CLO remained unlevered; however, should the prospects for stable, reliable
and favorable repurchase agreement financing for non-Agency RMBS develop in the
future, we would expect to increase our repurchase agreement borrowings
collateralized by non-Agency RMBS.
In
addition to a stabilizing financing environment for Agency RMBS, collateral
requirements improved throughout 2009. With respect to interest
rates, because of continued uncertainty in the credit markets and difficult U.S.
economic conditions, we expect that interest rates are likely to remain at these
historically low levels until such time as the economic data begin to confirm a
sustainable improvement in the overall economy.
Prepayment rates.
As a
result of various government initiatives, including HASP and the reduction in
intermediate and longer-term treasury yields, rates on conforming mortgages have
declined, nearing historical lows during 2009. Hybrid and
adjustable-rate mortgage originations have declined substantially, as rates on
these types of mortgages are comparable with rates available on 30-year
fixed-rate mortgages. We experienced similar prepayment rates on both our Agency
RMBS and prime ARM loans during the second, third and fourth quarters of
2009. We expect speeds to be higher in the first half of 2010 due to
the announced delinquent loan buyback program from Fannie Mae. We do
not expect this will have a material impact on the Company.
45
Note
Regarding Discontinued Operation
In
connection with the sale of our wholesale and retail mortgage lending
platform assets in the first quarter of 2007, during the fourth quarter of 2006,
we classified our mortgage lending business as a discontinued
operation. As a result, we have reported revenues and expenses
related to the mortgage lending business as a discontinued operation and the
related assets and liabilities as assets and liabilities related to a
discontinued operation for all periods presented in the accompanying
consolidated financial statements. Certain assets, such as the deferred tax
asset, and certain liabilities, such as subordinated debt and liabilities
related to leased facilities not assigned are part of our ongoing operations and
accordingly, we have not classified as a discontinued operation. See note 8
in the notes to our consolidated financial statements.
Until
March 31, 2007, our discontinued mortgage lending operation contributed to our
then current period financial results. Subsequent to March 31, 2007, our
discontinued mortgage lending operation has impacted our financial results due
to liabilities remaining after the sale of the operation’s assets. As of
December 31, 2009 discontinued operations consist of $4.2 million in assets and
$1.8 million in liabilities, down from $5.9 million in assets and $3.6 million
in liabilities at December 31, 2008.
Prior to
March 31, 2007, we originated a wide range of residential mortgage loan products
including prime, alternative-A, and to a lesser extent sub-prime loans, home
equity lines of credit, second mortgages, and bridge loans. We originated $0.4
billion in mortgage loans during three months ended March 31,
2007. Our sale of the mortgage lending platform assets on March 31,
2007 marked our exit from the mortgage lending business.
As of December 31, 2009, the Company
had $4.2 million in assets related to discontinued operations, including $3.8
million in loans held for sale. The discontinued operations had net
income of $0.8 million for the year ended December 31, 2009. The
Company continues to wind down the discontinued operations and anticipates to be
substantially complete by the end of 2010.
46
Balance
Sheet Analysis
Investment
Securities - Available for Sale
.
At December 31,
2009 our securities portfolio consists of Agency RMBS, Non-agency RMBS,
originally rated AAA and Collateralized Loan Obligations. At December 31, 2009,
we had no investment securities in a single issuer or entity, other than Fannie
Mae, that had an aggregate book value in excess of 10% of our total assets. The
following tables set forth the credit characteristics of our investment
securities available for sale as of December 31, 2009 and December 31,
2008:
Credit
Characteristics of Our Investment Securities (dollar amounts in
thousands):
|
December 31,
2009
|
Sponsor
or
Rating
(1)
|
Par
Value
|
Carrying
Value
|
% of
Portfolio
|
Coupon
|
Yield
|
|||||||||||
|
Credit
|
|||||||||||||||||
|
Agency
RMBS
|
FNMA
|
$ | 110,324 | $ | 116,226 | 65.8 | % | 5.14 | % | 2.37 | % | ||||||
|
Non-Agency
RMBS
|
AAA
|
2,195 | 1,717 | 1.0 | % | 4.97 | % | 11.26 | % | ||||||||
|
|
AA
|
1,270 | 886 | 0.5 | % | 5.18 | % | 15.03 | % | ||||||||
|
|
A | 364 | 321 | 0.2 | % | 4.43 | % | 4.92 | % | ||||||||
|
|
BB
|
13,384 | 11,336 | 6.3 | % | 1.65 | % | 12.79 | % | ||||||||
|
|
B | 11,743 | 8,812 | 5.0 | % | 4.03 | % | 9.57 | % | ||||||||
|
|
CCC
or Below
|
28,028 | 19,794 | 11.2 | % | 5.13 | % | 7.49 | % | ||||||||
|
Collateralized
Loan Obligation
|
BBB
|
10,400 | 5,408 | 3.1 | % | 1.37 | % | 15.20 | % | ||||||||
|
|
BB
|
15,300 | 5,508 | 3.1 | % | 2.67 | % | 23.45 | % | ||||||||
|
|
B | 20,250 | 6,683 | 3.8 | % | 5.27 | % | 30.22 | % | ||||||||
|
Total/Weighted
Average
|
$ | 213,258 | $ | 176,691 | 100.0 | % | 4.51 | % | 6.23 | % | |||||||
(1) –
Ratings based on S&P categories, however securities may have been rated by
either Fitch or Moody’s.
|
December 31,
2008
|
Sponsor or
Rating
(1)
|
Par
Value
|
Carrying
Value
|
% of
Portfolio
|
Coupon
|
Yield
|
|||||||||||
|
Credit
|
|||||||||||||||||
|
Agency
RMBS
|
FNMA/FHLMC
|
$ | 455,447 | $ | 455,871 | 95 | % | 3.67 | % | 5.99 | % | ||||||
|
Non-Agency
RMBS
|
AAA
|
23,289 | 18,118 | 4 | % | 1.27 | % | 15.85 | % | ||||||||
|
|
AA
|
609 | 530 | 0 | % | 1.22 | % | 4.32 | % | ||||||||
|
|
A | 3,648 | 2,828 | 1 | % | 2.30 | % | 4.08 | % | ||||||||
|
|
CCC
or Below
|
2,058 | 69 | 0 | % | 5.67 | % | 20.33 | % | ||||||||
|
|
Not
Rated
|
405 | — | 0 | % | 5.67 | % | 0 | % | ||||||||
|
Total/Weighted
Average
|
$ | 485,456 | $ | 477,416 | 100 | % | 3.55 | % | 6.51 | % | |||||||
(1) –
Ratings based on S&P categories, however securities may have been rated by
either Fitch or Moody’s.
47
The
following table sets forth the stated reset periods and weighted average yields
of our investment securities available for sale at December 31, 2009 and
December 31, 2008 (dollar amounts in thousands):
|
Less
than
6
Months
|
More than 6 Months
To 24 Months
|
More than 24 Months
To 60 Months
|
Total
|
|||||||||||||||||||||||||||||
|
December
31, 2009
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
||||||||||||||||||||||||
|
Agency
RMBS
|
$ | — | — | % | $ | 42,893 | 2.07 | % | $ | 73,333 | 2.54 | % | $ | 116,226 | 2.37 | % | ||||||||||||||||
|
Non-Agency
RMBS
|
22,065 | 10.15 | % | 4,865 | 7.23 | % | 15,936 | 9.57 | % | 42,866 | 9.61 | % | ||||||||||||||||||||
|
Collateralized
Loan Obligation
|
17,599 | 23.48 | % | — | — | % | — | — | % | 17,599 | 23.48 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total/Weighted
Average
|
$ | 39,664 | 16.07 | % | $ | 47,758 | 2.60 | % | $ | 89,269 | 3.80 | % | $ | 176,691 | 6.23 | % | ||||||||||||||||
|
Less
than
6
Months
|
More than 6 Months
To 24 Months
|
More than 24 Months
To 60 Months
|
Total
|
|||||||||||||||||||||||||||||
|
December
31, 2008
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
||||||||||||||||||||||||
|
Agency
RMBS
|
$ | 197,675 | 8.54 | % | $ | 66,910 | 3.69 | % | $ | 191,286 | 4.02 | % | $ | 455,871 | 5.99 | % | ||||||||||||||||
|
Non-Agency
RMBS
|
21,476 | 14.11 | % | — | — | % | 69 | 16.99 | % | 21,545 | 14.35 | % | ||||||||||||||||||||
|
Total/Weighted
Average
|
$ | 219,151 | 9.21 | % | $ | 66,910 | 3.69 | % | $ | 191,355 | 4.19 | % | $ | 477,416 | 6.51 | % | ||||||||||||||||
48
Performance
characteristics of non-Agency RMBS
The
following table details performance characteristics of our non-Agency RMBS
portfolio as of December 31, 2009 (amounts in thousands):
|
Acquired
in
2009
|
Acquired
prior
to
2009
|
|||||||
|
Current
Par Value
|
$ | 38,682 | $ | 18,302 | ||||
| Collateral Type: | ||||||||
| Fixed Rate | $ | 3,738 | $ | 17,693 | ||||
|
Arms
|
$ | 34,944 | $ | 609 | ||||
|
Weighted
average Purchase Price
|
60.51 | % | 92.05 | % | ||||
|
Weighted
average Credit Support
|
8.76 | % | 4.06 | % | ||||
|
Weighted
average 60++ Delinquencies (including 60+, REO and
Foreclosure)
|
20.61 | % | 3.66 | % | ||||
|
Weighted
average 3 month Constant Prepayment Rate
|
16.24 | % | 17.46 | % | ||||
|
Weighted
average 3 month Voluntary Prepayment Rate
|
9.78 | % | 15.84 | % | ||||
Detailed
composition of loans securitizing our collateralized loan
obligations
The
following tables summarize the loans securitizing our CLOs grouped by range of
outstanding balance, industry and Moody’s Investors Services, Inc's (“Moody’s”)
rating category as of December 31, 2009.
|
As
of December 31, 2009
(amounts in
thousands)
|
||||||||
|
Range
of Outstanding Balance
|
Number
of Loans
|
Maturity
Date
|
Total
Principal
|
|||||
| $0 - $500,000 | 7 |
03/2014
- 03/2017
|
$ | 3,471 | ||||
| $500,001 - $2,000,000 | 18 |
12/2011
- 12/2015
|
24,722 | |||||
| $2,000,001 - $5,000,000 | 55 |
5/2011
- 2/2016
|
198,895 | |||||
| $5,000,001 - $10,000,000 | 28 |
11/2010
- 10/2014
|
202,080 | |||||
| +$10,000,000 | 3 |
12/2009
- 10/2012
|
32,292 | |||||
|
Total
|
111 | $ | 461,460 | |||||
49
|
As
of December 31, 2009
|
||||||||||||
|
Industry
|
Number
of
Loans
|
Outstanding
Balance
|
% of
Outstanding
Balance
|
|||||||||
| (amounts in thousands) | ||||||||||||
|
Healthcare,
Education & Childcare
|
14 | $ | 57,190 | 12.4 | % | |||||||
|
Diversified/Conglomerate
Service
|
6 | 42,348 | 9.2 | % | ||||||||
|
Personal,
Food & Misc Services
|
6 | 38,638 | 8.4 | % | ||||||||
|
Electronics
|
7 | 26,532 | 5.7 | % | ||||||||
|
Printing
& Publishing
|
4 | 23,990 | 5.2 | % | ||||||||
|
Telecommunications
|
6 | 23,098 | 5.0 | % | ||||||||
|
Insurance
/ Finance
|
5 | 22,915 | 5.0 | % | ||||||||
|
Utilities
/ Oil & Gas
|
6 | 21,782 | 4.7 | % | ||||||||
|
Personal
& Non-Durable Consumer Products
|
6 | 21,298 | 4.6 | % | ||||||||
|
Retail
Store
|
6 | 21,211 | 4.6 | % | ||||||||
|
Aerospace
& Defense
|
6 | 20,462 | 4.4 | % | ||||||||
|
Cargo
Transport / Personal Transportation
|
3 | 19,499 | 4.2 | % | ||||||||
|
Chemicals,
Plastics and Rubber
|
6 | 18,532 | 4.0 | % | ||||||||
|
Hotels,
Motels, Inns and Gaming
|
4 | 18,183 | 3.9 | % | ||||||||
|
Broadcasting
& Entertainment
|
3 | 16,496 | 3.6 | % | ||||||||
|
Beverage,
Food & Tobacco
|
6 | 15,880 | 3.4 | % | ||||||||
|
Leisure,
Amusement, Motion Pictures & Entertainment
|
4 | 11,146 | 2.4 | % | ||||||||
|
Other
|
13 | 42,260 | 9.3 | % | ||||||||
|
Total
|
111 | $ | 461,460 | 100.0 | % | |||||||
|
As
of December 31, 2009
|
||||||||||||
|
Moody's
Rating Category
|
Number
of
Loans
|
Outstanding
Balance
|
% of
Outstanding
Balance
|
|||||||||
| (amounts in thousands) | ||||||||||||
|
Baa3
|
2 | $ | 6,955 | 1.5 | % | |||||||
|
Ba1
|
9 | 28,242 | 6.1 | % | ||||||||
|
Ba2
|
9 | 26,418 | 5.7 | % | ||||||||
|
Ba3
|
15 | 44,374 | 9.6 | % | ||||||||
| B1 | 17 | 51,355 | 11.1 | % | ||||||||
| B2 | 28 | 106,325 | 23.0 | % | ||||||||
| B3 | 21 | 137,531 | 29.8 | % | ||||||||
|
Caa1
|
5 | 23,850 | 5.2 | % | ||||||||
|
Caa2
|
3 | 26,311 | 5.7 | % | ||||||||
|
Caa3
|
1 | 540 | 0.1 | % | ||||||||
| D | 1 | 9,559 | 2.2 | % | ||||||||
|
Total
|
111 | $ | 461,460 | 100.0 | % | |||||||
50
Prepayment
Experience
.
The constant prepayment
rate (“CPR”) on our overall portfolio averaged approximately 19% during 2009 as
compared to 12% during 2008. CPRs on our purchased portfolio of investment
securities averaged approximately 18% while the CPRs on loans held in our
securitization trusts averaged approximately 19% during 2009. 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 rate to reflect current market conditions.
Mortgage
Loans Held in Securitization Trusts
.
Included in our portfolio are ARM
loans that we originated or purchased in bulk from third parties that met our
investment criteria and portfolio requirements and that we subsequently
securitized. The Company has completed four securitizations; three were
classified as financings and one, New York Mortgage Trust 2006-1, qualified as a
sale, which resulted in the recording of residual assets and mortgage servicing
rights. The Company sold all the residual assets related to the 2006-1
securitization during the third quarter ended September 30, 2009 incurring a
realized loss of approximately $32,000.
At
December 31, 2009, mortgage loans held in securitization trusts totaled
approximately $276.2 million, or 56.5% of our total assets. Of the
mortgage loans held in securitized trusts, 100% are traditional ARMs or hybrid
ARMs, 80.9% of which are ARM loans that are interest only. On our
hybrid ARMs, interest rate reset periods are predominately five years or less
and the interest-only period is typically 10 years, which mitigates the “payment
shock” at the time of interest rate reset. None of the mortgage loans
held in securitization trusts are payment option-ARMs or ARMs with negative
amortization.
The
following table details mortgage loans held in securitization trusts at December
31, 2009 and December 31, 2008 (dollar amounts in thousands):
|
# of Loans
|
Par Value
|
Coupon
|
Carrying Value
|
Yield
|
||||||||||||||||
|
December
31, 2009
|
647 | $ | 277,007 | 5.19 | % | $ | 276,176 | 5.40 | % | |||||||||||
|
December
31, 2008
|
789 | $ | 345,619 | 5.56 | % | $ | 346,972 | 3.96 | % | |||||||||||
51
Characteristics of Our Mortgage Loans Held in Securitization:
The
following table sets forth the composition of our loans held in securitization
trusts as of December 31, 2009 (dollar amounts in thousands):
Loans
Held in Securitization Trusts:
|
Average
|
High
|
Low
|
|||||||||
|
General
Loan Characteristics:
|
|||||||||||
|
Original
Loan Balance (dollar amounts in thousands)
|
$ | 456 | $ | 2,950 | $ | 48 | |||||
|
Current
Coupon Rate
|
5.19 | % | 7.25 | % | 1.38 | % | |||||
|
Gross
Margin
|
2.37 | % | 5.00 | % | 1.13 | % | |||||
|
Lifetime
Cap
|
11.26 | % | 13.25 | % | 9.13 | % | |||||
|
Original
Term (Months)
|
360 | 360 | 360 | ||||||||
|
Remaining
Term (Months)
|
304 | 312 | 271 | ||||||||
|
Average
Months to Reset
|
6 | 12 | 1 | ||||||||
|
Original
Average FICO Score
|
732 | 820 | 593 | ||||||||
|
Original
Average LTV (% of original home value)
|
70.3 | 95.0 | 13.9 | ||||||||
Index
/ Reset Characteristics:
|
%
of Outstanding Loan Balance
|
Weighted
Average Gross Margin (%)
|
|||||||
|
General
Loan Characteristics:
|
||||||||
|
One
Month Libor
|
3.0 | % | 1.67 | % | ||||
|
Six
Month Libor
|
71.8 | % | 2.40 | % | ||||
|
One
Year Libor
|
16.6 | % | 2.27 | % | ||||
|
One
Year CMT
|
8.6 | % | 2.66 | % | ||||
|
Total
/ Weighted Average
|
100.0 | % | 2.37 | % | ||||
The
following tables sets forth the composition of our loans held in securitization
trusts and loans backing the retained interests from our securitizations as of
December 31, 2008 (dollar amounts in thousands):
Loans
Held in Securitization Trusts:
|
Average
|
High
|
Low
|
|||||||||
|
General
Loan Characteristics:
|
|||||||||||
|
Original
Loan Balance (dollar amounts in thousands)
|
$ | 468 | $ | 3,500 | $ | 48 | |||||
|
Current
Coupon Rate
|
5.56 | % | 8.13 | % | 4.00 | % | |||||
|
Gross
Margin
|
2.36 | % | 5.00 | % | 1.13 | % | |||||
|
Lifetime
Cap
|
11.21 | % | 13.38 | % | 9.13 | % | |||||
|
Original
Term (Months)
|
360 | 360 | 360 | ||||||||
|
Remaining
Term (Months)
|
316 | 324 | 283 | ||||||||
|
Average
Months to Reset
|
15 | 24 | 1 | ||||||||
|
Original
Average FICO Score
|
735 | 820 | 593 | ||||||||
|
Original
Average LTV (% of original home value)
|
69.6 | 95.0 | 13.9 | ||||||||
Index
/ Reset Characteristics:
|
%
of Outstanding Loan Balance
|
Weighted
Average Gross Margin (%)
|
|||||
|
General
Loan Characteristics:
|
||||||
|
One
Month Libor
|
2.6 | % | 1.69 | % | ||
|
Six
Month Libor
|
71.6 | % | 2.41 | % | ||
|
One
Year Libor
|
16.3 | % | 2.27 | % | ||
|
One
Year CMT
|
9.5 | % | 2.65 | % | ||
|
Total
/ Weighted Average
|
100.0 | % | 2.39 | % |
52
The
following table details loan summary information for loans held in
securitization trust at December 31, 2009 (all amounts in
thousands)
|
Principal
Amount of Loans
|
|||||||||||||||||||||||||||||
|
Subject
to
|
|||||||||||||||||||||||||||||
|
Periodic
|
Delinquent
|
||||||||||||||||||||||||||||
|
Description
|
Interest
Rate
|
Final
Maturity
|
Payment
|
Original
|
Current
|
Principal
|
|||||||||||||||||||||||
|
Property
|
Loan
|
Term
|
Prior
|
Amount
of
|
Amount
of
|
or
|
|||||||||||||||||||||||
|
Type
|
Balance
|
Count
|
Max
|
Min
|
Avg
|
Min
|
Max
|
(months)
|
Liens
|
Principal
|
Principal
|
Interest
|
|||||||||||||||||
|
Single
|
<=
$100,000
|
11 | 5.88 | 3.38 | 4.97 |
12/01/34
|
11/01/35
|
360 |
NA
|
$ | 1,724 | $ | 766 | $ | - | ||||||||||||||
|
FAMILY
|
<=
$250,000
|
71 | 7.25 | 3.13 | 5.33 |
09/01/32
|
12/01/35
|
360 |
NA
|
14,605 | 12,765 | 640 | |||||||||||||||||
|
<=
$500,000
|
121 | 7.13 | 2.75 | 5.21 |
10/01/32
|
01/01/36
|
360 |
NA
|
45,220 | 42,278 | 5,471 | ||||||||||||||||||
|
<=$1,000,000
|
50 | 6.38 | 1.63 | 4.99 |
12/01/34
|
12/01/35
|
360 |
NA
|
38,363 | 36,553 | 2,186 | ||||||||||||||||||
|
>$1,000,000
|
26 | 6.25 | 1.50 | 5.47 |
01/01/35
|
01/01/36
|
360 |
NA
|
45,082 | 44,329 | 6,246 | ||||||||||||||||||
|
Summary
|
279 | 7.25 | 1.50 | 5.22 |
09/01/32
|
01/01/36
|
360 |
NA
|
$ | 144,994 | $ | 136,691 | $ | 14,543 | |||||||||||||||
| 2-4 |
<=
$100,000
|
1 | 6.63 | 6.63 | 6.63 |
02/01/35
|
02/01/35
|
360 |
NA
|
$ | 80 | $ | 75 | $ | 76 | ||||||||||||||
|
FAMILY
|
<=
$250,000
|
6 | 6.75 | 4.38 | 5.75 |
12/01/34
|
07/01/35
|
360 |
NA
|
1,115 | 996 | - | |||||||||||||||||
|
<=
$500,000
|
18 | 7.25 | 2.13 | 4.98 |
09/01/34
|
01/01/36
|
360 |
NA
|
6,262 | 6,012 | 254 | ||||||||||||||||||
|
<=$1,000,000
|
3 | 5.75 | 4.63 | 5.25 |
12/01/34
|
08/01/35
|
360 |
NA
|
2,540 | 2,539 | - | ||||||||||||||||||
|
>$1,000,000
|
0 | - | - | - | - | - | 360 |
NA
|
- | - | - | ||||||||||||||||||
|
Summary
|
28 | 7.25 | 2.13 | 5.23 |
09/01/34
|
01/01/36
|
360 |
NA
|
$ | 9,997 | $ | 9,622 | $ | 330 | |||||||||||||||
|
Condo
|
<=
$100,000
|
16 | 6.38 | 3.00 | 4.99 |
01/01/35
|
12/01/35
|
360 |
NA
|
$ | 2,707 | $ | 1,150 | $ | - | ||||||||||||||
|
<=
$250,000
|
82 | 6.50 | 2.88 | 5.37 |
08/01/32
|
01/01/36
|
360 |
NA
|
15,859 | 14,747 | 1,024 | ||||||||||||||||||
|
<=
$500,000
|
74 | 6.88 | 1.50 | 4.93 |
09/01/32
|
12/01/35
|
360 |
NA
|
25,467 | 24,445 | 919 | ||||||||||||||||||
|
<=$1,000,000
|
27 | 6.13 | 1.63 | 5.08 |
08/01/33
|
11/01/35
|
360 |
NA
|
19,442 | 18,490 | 546 | ||||||||||||||||||
|
>
$1,000,000
|
12 | 6.13 | 3.88 | 5.44 |
07/01/34
|
09/01/35
|
360 |
NA
|
18,773 | 18,186 | 1,669 | ||||||||||||||||||
|
Summary
|
211 | 6.88 | 1.50 | 5.15 |
08/01/32
|
01/01/36
|
360 |
NA
|
$ | 82,248 | $ | 77,018 | $ | 4,158 | |||||||||||||||
|
CO-OP
|
<=
$100,000
|
4 | 5.50 | 3.00 | 4.56 |
09/01/34
|
06/01/35
|
360 |
NA
|
$ | 1,350 | $ | 221 | $ | - | ||||||||||||||
|
<=
$250,000
|
21 | 6.13 | 2.88 | 5.02 |
10/01/34
|
12/01/35
|
360 |
NA
|
4,089 | 3,662 | 212 | ||||||||||||||||||
|
<=
$500,000
|
34 | 6.38 | 1.38 | 5.02 |
08/01/34
|
12/01/35
|
360 |
NA
|
13,817 | 12,474 | - | ||||||||||||||||||
|
<=$1,000,000
|
16 | 5.63 | 4.75 | 5.40 |
11/01/34
|
11/01/35
|
360 |
NA
|
11,284 | 11,082 | - | ||||||||||||||||||
|
>
$1,000,000
|
5 | 6.00 | 2.25 | 4.38 |
11/01/34
|
12/01/35
|
360 |
NA
|
7,544 | 6,992 | - | ||||||||||||||||||
|
Summary
|
80 | 6.38 | 1.38 | 5.12 |
08/01/34
|
12/01/35
|
360 |
NA
|
$ | 38,084 | $ | 34,431 | $ | 212 | |||||||||||||||
|
PUD
|
<=
$100,000
|
1 | 5.63 | 5.63 | 5.63 |
07/01/35
|
07/01/35
|
360 |
NA
|
$ | 100 | $ | 94 | $ | - | ||||||||||||||
|
<=
$250,000
|
20 | 6.50 | 2.75 | 5.23 |
01/01/35
|
12/01/35
|
360 |
NA
|
4,439 | 3,836 | - | ||||||||||||||||||
|
<=
$500,000
|
21 | 6.88 | 2.75 | 4.78 |
08/01/32
|
12/01/35
|
360 |
NA
|
7,168 | 6,857 | 183 | ||||||||||||||||||
|
<=$1,000,000
|
5 | 5.88 | 3.40 | 4.83 |
09/01/33
|
12/01/35
|
360 |
NA
|
3,432 | 3,286 | 455 | ||||||||||||||||||
|
>
$1,000,000
|
4 | 6.13 | 3.22 | 5.21 |
04/01/34
|
12/01/35
|
360 |
NA
|
5,233 | 5,172 | - | ||||||||||||||||||
|
Summary
|
51 | 6.88 | 2.75 | 5.01 |
08/01/32
|
01/01/36
|
360 |
NA
|
$ | 20,372 | $ | 19,245 | $ | 638 | |||||||||||||||
|
Summary
|
<=
$100,000
|
33 | 6.63 | 3.00 | 5.00 |
10/01/34
|
12/01/35
|
360 |
NA
|
$ | 5,961 | $ | 2,306 | $ | 76 | ||||||||||||||
|
<=
$250,000
|
200 | 7.25 | 2.75 | 5.32 |
08/01/32
|
01/01/36
|
360 |
NA
|
40,107 | 36,006 | 2,059 | ||||||||||||||||||
|
<=
$500,000
|
268 | 7.25 | 1.38 | 5.21 |
08/01/32
|
01/01/36
|
360 |
NA
|
97,934 | 92,066 | 7,099 | ||||||||||||||||||
|
<=$1,000,000
|
101 | 6.38 | 1.63 | 5.08 |
07/01/33
|
12/01/35
|
360 |
NA
|
75,061 | 71,950 | 2,732 | ||||||||||||||||||
|
>
$1,000,000
|
47 | 6.25 | 1.50 | 5.32 |
04/01/34
|
01/01/36
|
360 |
NA
|
76,632 | 74,679 | 7,915 | ||||||||||||||||||
|
Grand
Total
|
649 | 7.25 | 1.38 | 5.19 |
08/01/32
|
01/01/36
|
360 |
NA
|
$ | 295,695 | $ | 277,007 | $ | 19,881 | |||||||||||||||
The
following table details activity for loans held in securitization trust (net)
for the year ended December 31, 2009.
|
Principal
|
Premium
|
Allowance
for Loan Losses
|
Net
Carrying Value
|
|||||||||||||
|
Balance,
December 31, 2008
|
$ | 345,619 | $ | 2,197 | $ | (844 | ) | $ | 346,972 | |||||||
|
Additions
|
— | — | — | — | ||||||||||||
|
Principal
repayments
|
(67,380 | ) | — | — | (67,380 | ) | ||||||||||
|
Provision
for loan loss
|
— | — | (2,192 | ) | (2,192 | ) | ||||||||||
|
Transfer
to real estate owned
|
(1,232 | ) | — | 406 | (826 | ) | ||||||||||
|
Charge-Offs
|
— | — | 49 | 49 | ||||||||||||
|
Amortization
for premium
|
— | (447 | ) | — | (447 | ) | ||||||||||
|
Balance,
December 31, 2009
|
$ | 277,007 | $ | 1,750 | $ | (2,581 | ) | $ | 276,176 | |||||||
53
Delinquency
Status
As of
December 31, 2009, we had 41 delinquent loans totaling approximately $19.9
million categorized as Mortgage Loans Held in Securitization Trusts (net). In
addition we had two REO properties totaling approximately $0.7 million included
in prepaid and other assets. The number of delinquent loans in our
securitization trusts was significantly higher as of December 31, 2009 as
compared to delinquencies as of December 31, 2008. The increase was due, in
part, to higher delinquency rates nationally, which equaled approximately 9.5%
of all loans outstanding as of the end of the 2009 fourth quarter, and also as a
result of the services of our loans treating as delinquent certain of the loans
in our portfolio that are subject to, temporary modification plans. Excluding
this treatment of loans subject to temporary modification plans the delinquency
rate on the loans held in our securitization trusts as of December 31, 2009
would have been lower. The table below shows delinquencies in our loan portfolio
as of December 31, 2009 (dollar amounts in thousands):
|
Days
Late
|
Number
of Delinquent Loans
|
Total
Dollar
Amount
|
%
of
Loan
Portfolio
|
|||||
| 30-60 |
5
|
$
|
2,816
|
1.01
|
%
|
|||
| 61-90 |
4
|
$
|
1,150
|
0.41
|
%
|
|||
| 90+ |
32
|
$
|
15,915
|
5.73
|
%
|
|||
|
Real
Estate Owned (REO)
|
2
|
$
|
739
|
0.27
|
%
|
|||
As of
December 31, 2008, we had 17 delinquent loans totaling approximately $7.4
million categorized as Mortgage Loans Held in Securitization Trusts. The table
below shows delinquencies in our loan portfolio as of December 31, 2008 (dollar
amounts in thousands):
| Days Late | Number of Delinquent Loans |
Total
Dollar
Amount
|
%
of
Loan
Portfolio
|
|||||
| 30-60 | 3 | $ | 1,363 | 0.39 | % | |||
| 61-90 | 1 | $ | 263 | 0.08 | % | |||
| 90+ | 13 | $ | 5,734 | 1.65 | % | |||
|
Real
Estate Owned (REO)
|
4 | $ | 1,927 | 0.55 | % | |||
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.
Cash and Cash
Equivalents.
We had unrestricted cash and cash equivalents of $24.5
million at December 31, 2009.
Restricted
Cash.
Restricted cash totaled $3.0 million as of December 31, 2009.
Included in restricted cash was $2.9 million related to amounts deposited to
meet margin calls on interest rate swaps and $0.1 million related to a letter of
credit for the corporate headquarter lease.
Prepaid and Other
Assets
.
Prepaid and other
assets totaled $2.1 million as of December 31, 2009 and consisted mainly of $0.5
million real estate owned (“REO”), $0.2 million in escrow advances related to
mortgage loans held in securitization trust, $0.5 million of capitalization
expenses related to equity and bond issuance cost and $0.3 million prepaid
insurance.
54
Financing
Arrangements, Portfolio Investments
.
As of December 31, 2009,
there were approximately $85.1 million of repurchase agreement borrowings
outstanding. Our repurchase agreements typically provide for terms of 30 days.
As of December 31, 2009, the current weighted average borrowing rate on these
financing facilities was 0.27%.
Collateralized
Debt Obligations
.
As of December
31, 2009, we had $266.8 million of CDOs outstanding with a weighted average
interest rate of 0.61%.
Subordinated
Debentures
.
As of
December 31, 2009, our wholly owned subsidiary, HC, had trust preferred
securities outstanding of $44.9 million net of deferred bond issuance costs of
$0.1 million, with a weighted average interest rate of 5.93%. The
securities are fully guaranteed by our 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 our
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, (4.00% at December 31, 2009).
These securities mature on March 15, 2035 and may be called at par by us any
time after March 15, 2010. HC entered into an interest rate cap agreement to
limit the maximum interest rate cost of these trust preferred securities to 7.5%
through March 15, 2010. 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 and is schedule to mature in March 2010.
$20.0
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 us any time
after October 30, 2010.
Convertible
Preferred Debentures
.
At December 31, 2009 we had
$19.9 million of convertible preferred debentures outstanding, net of $0.1
million of deferred debt issuance cost. We issued these shares of Series A
Preferred Stock to JMP Group Inc. and certain of its affiliates for an aggregate
purchase price of $20.0 million. The Series A Preferred Stock entitles the
holders to receive a cumulative dividend of 10% per year, subject to an increase
to the extent any quarterly common stock dividends exceed $0.20 per share. The
current dividend rate is 12.5% based on the fourth quarter common stock dividend
of $0.25. The Series A Preferred Stock is convertible into shares of
our common stock based on a conversion price of $8.00 per share of common stock,
which represents a conversion rate of two and one-half (2 ½) shares of common
stock for each share of Series A Preferred Stock. Any shares of Series A
Preferred Stock that remain outstanding on December 31, 2010 must be redeemed in
exchange for the liquidation amount, which is $20.0 million plus all accrued and
unpaid dividends. Because of this mandatory redemption feature, we classify
these securities as a liability on our balance sheet.
Derivative Assets
and Liabilities
.
We generally hedge the risk related to changes in the benchmark interest rate
used in the variable rate index, usually a London Interbank Offered Rate
(“LIBOR”).
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 our short term repurchase agreement borrowing or CDOs 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 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, but
can not guaranty we do not have counterparty failures.
We enter
into derivative transactions solely for risk management purposes. The decision
of whether or not a given transaction, or a 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 cash flow hedges. To this end, terms of the hedges are
matched closely to the terms of hedged items.
55
The
following table summarizes the estimated fair value of derivative assets and
liabilities as of December 31, 2009 and December 31, 2008 (dollar amounts in
thousands):
|
|
December
31,
2009
|
December
31,
2008
|
||||||
|
Derivative
assets:
|
||||||||
|
Interest
rate caps
|
$ | 4 | $ | 22 | ||||
|
Total
derivative assets
|
$ | 4 | $ | 22 | ||||
|
|
||||||||
|
Derivative
liabilities:
|
||||||||
|
Interest
rate swaps
|
$ | 2,511 | $ | 4,194 | ||||
|
Total
derivative liabilities
|
$ | 2,511 | $ | 4,194 | ||||
Balance
Sheet Analysis - Stockholders’ Equity
Stockholders’
equity at December 31, 2009 was $63.0 million and included $11.8 million of net
unrealized gains, $2.9 million in unrealized derivative losses related to cash
flow hedges and $14.7 million in unrealized gains related to available for sale
securities presented as
accumulated
other comprehensive income.
56
Statement
of Operations Analysis
The following is a brief description of
key terms from our statements of operations:
Revenues
.
Our primary source of income is net interest income on our portfolio of assets.
Net interest income is the difference between interest income, which is the
income that we earn on our assets, and interest expense, which is the
expense we pay on our portfolio borrowings, subordinated debt and convertible
preferred debentures. Prior to our exit from the mortgage lending business
in March 2007, net interest income was also earned on the majority of loan
originations by HC for the period of time commencing upon the closing
of a loan and ending upon the sale of such loan to a third
party.
Other Income
(expense).
Other income (expense) includes loan losses for costs incurred
with respect to the disposition of non-performing or early payment default
loans we have originated or purchased from third parties or from losses incurred
on non-performing loans held in securitization trusts. In addition,
other income (expense) includes net gains (losses) from the sale of investments
securities or the early termination of interest rate swaps.
Expenses
.
Expenses we incur in our business consist primarily of salary and employee
benefits, rent for office space and equipment expenses, and other general and
administrative expenses. 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. Beginning in 2008, expenses include the fees payable to HCS
pursuant to the advisory agreement.
Income (loss)
from discontinued operation.
Income (loss) from discontinued operations
includes all revenues and expenses related to our discontinued mortgage lending
business excluding those costs that will be retained by us. See
note 8 to our consolidated financial statements included in this Annual Report
on Form 10-K for more information regarding our discontinued
operations.
Results
of Operations - Comparison of Years Ended December 31, 2009, 2008 and
2007
|
(dollar
amounts in thousands)
|
For
the Years Ended December 31,
|
|||||||||||||||||||
|
2009
|
2008
|
%
Change
|
2007
|
%
Change
|
||||||||||||||||
|
Net
interest income
|
$ | 16,860 | $ | 7,863 | 114.4 | % | $ | 477 | 1,548.4 | % | ||||||||||
|
Other
income (expense)
|
$ | 901 | $ | (26,717 | ) | (103.4 | )% | $ | (18,513 | ) | 44.3 | % | ||||||||
|
Total
expenses
|
$ | 6,877 | $ | 6,910 | (0.5 | )% | $ | 2,754 | 150.9 | % | ||||||||||
|
Income
(loss) for continuing operations
|
$ | 10,884 | $ | (25,764 | ) | (142.2 | )% | $ | (20,790 | ) | 23.9 | % | ||||||||
|
Income
(loss) from discontinued operations
|
$ | 786 | $ | 1,657 | (52.6 | )% | $ | (34,478 | ) | (104.8 | )% | |||||||||
|
Net
gain (loss)
|
$ | 11,670 | $ | (24,107 | ) | (148.4 | )% | $ | (55,268 | ) | (56.4 | )% | ||||||||
|
Basic
gain (loss) per share
|
$ | 1.25 | $ | (2.91 | ) | (143.0 | )% | $ | (30.47 | ) | (90.4 | )% | ||||||||
|
Diluted
gain (loss) per share
|
$ | 1.19 | $ | (2.91 | ) | (140.9 | )% | $ | (30.47 | ) | (90.4 | )% | ||||||||
For the
year ended December 31, 2009, we reported net income of $11.7 million as
compared to a net loss of $24.1 million for the year ended December 31, 2008,
which represents a $35.8 million improvement. The increase in net income was due
primarily to significantly improved operating conditions, a first quarter 2009
portfolio restructuring that resulted in increased portfolio yields, and reduced
borrowing costs that have resulted from a lower interest rate
environment. The large realized loss recorded in 2008 was primarily a
result of the March 2008 market disruption and the Company’s response to that
disruption. The Company sold an aggregate of $592.8 million of Agency
RMBS in its portfolio during March 2008 in an effort to reduce its leverage and
improve its liquidity position in response to the market disruption and incurred
a loss of $15.0 million. In addition, the Company terminated a total of $517.7
million of notional interest rate swaps in the quarter ended March 31, 2008,
resulting in a realized loss of $4.8 million.
For the
year ended December 31, 2008, we reported a net loss of $24.1 million, as
compared to a net loss of $55.3 million for the year ended December 31, 2007.
The decrease in net loss of $31.2 million was due to the following factors: $7.4
million improvement in net interest margin due mainly from reduced financing
costs, $36.1 million net earnings improvement in our discontinued operations
which was due to the sale of the mortgage origination business in March of 2007,
offset by an increase in realized losses from sale of securities and termination
of interest rate swaps in 2008.
57
Comparative
Net Interest Income
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Amount |
Yield/
Rate
|
Average
Balance
|
Amount |
Yield/
Rate
|
Average
Balance
|
Amount |
Yield/
Rate
|
||||||||||||||||||||||||||||
| ($Millions) | ($Millions) | ($Millions) | ||||||||||||||||||||||||||||||||||
| Interest Income: | ||||||||||||||||||||||||||||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$ | 643.2 | $ | 30,085 | 4.68 | % | $ | 907.3 | $ | 44,778 | 4.94 | % | $ | 907.0 | $ | 52,180 | 5.74 | % | ||||||||||||||||||
|
Amortization
of net premium
|
(31.3 | ) | 1,010 | 0.40 | % | 1.4 | (655 | ) | (0.08 | )% | 2.4 | (1,616 | ) | (0.18 | %) | |||||||||||||||||||||
|
Interest
income
|
$ | 611.9 | $ | 31,095 | 5.08 | % | $ | 908.7 | $ | 44,123 | 4.86 | % | $ | 909.4 | $ | 50,564 | 5.56 | % | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest
Expense:
|
||||||||||||||||||||||||||||||||||||
|
Investment
securities and loans held in the securitization trusts
|
$ | 537.0 | $ | 8,572 | 1.57 | % | $ | 820.5 | $ | 30,351 | 3.65 | % | $ | 864.7 | $ | 46,529 | 5.31 | % | ||||||||||||||||||
|
Subordinated
debentures
|
45.0 | 3,189 | 6.99 | % | 45.0 | 3,760 | 8.24 | % | 45.0 | 3,558 | 7.80 | % | ||||||||||||||||||||||||
|
Convertible
preferred debentures
|
20.0 | 2,474 | 12.20 | % | 20.0 | 2,149 | 10.60 | % | — | — | — | |||||||||||||||||||||||||
|
Interest
expense
|
$ | 602.0 | $ | 14,235 | 2.33 | % | $ | 885.5 | $ | 36,260 | 4.09 | % | $ | 909.7 | $ | 50,087 | 5.43 | % | ||||||||||||||||||
|
Net
interest income
|
$ | 16,860 | 2.75 | % | $ | 7,863 | 0.77 | % | $ | 477 | 0.13 | % | ||||||||||||||||||||||||
The increase in net interest income for
the year ended December 31, 2009 as compared to the year ended December 31, 2008
was primarily the result of the restructuring of our investment securities
portfolio during 2009, which included the sale of $193.8 million of lower
yielding Agency CMO floaters, the purchase of $46.0 million of CLO's that
generally return a higher-yield than the Agency CMO floaters we sold and the
addition of approximately $27.5 million of non-Agency RMBS at a discounted price
of 60% of par value. In addition, our loans held in securitization trusts
contributed to the improvement in net interest income for the year ended
December 31, 2009. Our portfolio of loans held in securitization
trusts realized net margins of approximately 387 basis points for the year ended
December 31, 2009.
The
operating results for our mortgage portfolio management business during a given
period typically reflect the net interest spread earned on our investment
portfolio of residential mortgage securities and loans as well as CLO. The net
interest spread is impacted by factors such as our cost of financing, the
interest rate our investments are earning and our interest hedging strategies.
Furthermore, the cost of loans held in our portfolio, the amount of premium or
discount paid on purchased portfolio investments and the prepayment rates on
portfolio investments will impact the net interest spread as such factors will
be amortized over the expected term of such investments.
58
For our
portfolio of investment securities, mortgage loans held for investments and
loans held in securitization trusts, our net interest spread as well as average
CPR by quarter since we began our portfolio investment activities is as
follows:
|
Quarter
Ended
|
Average
Interest
Earning
Assets ($ millions)
|
Weighted
Average
Coupon
|
Weighted
Average
Cash
Yield
on
Interest
Earning
Assets
|
Cost
of Funds
|
Net
Interest Spread
|
Constant
Prepayment
Rate
(CPR)
|
|||||||
|
December
31, 2009
|
$
|
476.8
|
4.75%
|
5.78%
|
1.45%
|
4.33%
|
18.1%
|
||||||
|
September
30, 2009
|
$
|
571.0
|
4.98
%
|
5.60
%
|
1.47
%
|
4.13
%
|
22.5
%
|
||||||
|
June
30, 2009
|
$
|
600.5
|
4.99
%
|
5.09
%
|
1.48
%
|
3.61
%
|
21.4
%
|
||||||
|
March
31, 2009
|
$
|
797.2
|
4.22
%
|
4.31
%
|
1.79
%
|
2.52
%
|
12.3
%
|
||||||
|
December
31, 2008
|
$
|
841.7
|
4.77
%
|
4.65
%
|
3.34
%
|
1.31
%
|
9.2
%
|
||||||
|
September
30, 2008
|
$
|
874.5
|
4.81
%
|
4.72
%
|
3.36
%
|
1.36
%
|
13.8
%
|
||||||
|
June
30, 2008
|
$
|
899.3
|
4.86
%
|
4.78
%
|
3.35
%
|
1.43
%
|
14.0
%
|
||||||
|
March
31, 2008
|
$
|
1,019.2
|
5.24
%
|
5.20
%
|
4.35
%
|
0.85
%
|
13.0
%
|
||||||
|
December
31, 2007
|
$
|
799.2
|
5.90
%
|
5.79
%
|
5.33
%
|
0.46
%
|
19.0
%
|
||||||
|
September
30, 2007
|
$
|
865.7
|
5.93
%
|
5.72
%
|
5.38
%
|
0.34
%
|
21.0
%
|
||||||
|
June
30, 2007
|
$
|
948.6
|
5.66
%
|
5.55
%
|
5.43
%
|
0.12
%
|
21.0
%
|
||||||
|
March
31, 2007
|
$
|
1,022.7
|
5.59
%
|
5.36
%
|
5.34
%
|
0.02
%
|
19.2
%
|
||||||
|
December
31, 2006
|
$
|
1,111.0
|
5.53
%
|
5.35
%
|
5.26
%
|
0.09
%
|
17.2
%
|
||||||
|
September
30, 2006
|
$
|
1,287.6
|
5.50
%
|
5.28
%
|
5.12
%
|
0.16
%
|
20.7
%
|
||||||
|
June
30, 2006
|
$
|
1,217.9
|
5.29
%
|
5.08
%
|
4.30
%
|
0.78
%
|
19.8
%
|
||||||
|
March
31, 2006
|
$
|
1,478.6
|
4.85
%
|
4.75
%
|
4.04
%
|
0.71
%
|
18.7
%
|
||||||
|
December
31, 2005
|
$
|
1,499.0
|
4.84
%
|
4.43
%
|
3.81
%
|
0.62
%
|
26.9
%
|
||||||
|
September
30, 2005
|
$
|
1,494.0
|
4.69
%
|
4.08
%
|
3.38
%
|
0.70
%
|
29.7
%
|
||||||
|
June
30, 2005
|
$
|
1,590.0
|
4.50
%
|
4.06
%
|
3.06
%
|
1.00
%
|
30.5
%
|
||||||
|
March
31, 2005
|
$
|
1,447.9
|
4.39
%
|
4.01
%
|
2.86
%
|
1.15
%
|
29.2
%
|
||||||
|
December
31, 2004
|
$
|
1,325.7
|
4.29
%
|
3.84
%
|
2.58
%
|
1.26
%
|
23.7
%
|
||||||
|
September
30, 2004
|
$
|
776.5
|
4.04
%
|
3.86
%
|
2.45
%
|
1.41
%
|
16.0
%
|
||||||
59
Comparative Expenses
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
(dollar
amounts in thousands)
|
2009
|
2008
|
%
Change
|
2007
|
%
Change
|
|||||||||||||||
|
Salaries
and benefits
|
$ | 2,118 | $ | 1,869 | 13.3 | % | $ | 865 | 116.1 | % | ||||||||||
|
Professional
fees
|
1,284 | 1,212 | 5.9 | % | 612 | 98.0 | % | |||||||||||||
|
Insurance
|
524 | 948 | (44.7 | )% | 474 | 100.0 | % | |||||||||||||
|
Management
fees
|
1,252 | 665 | 88.3 | % | — | 100.0 | % | |||||||||||||
|
Other
|
1,699 | 2,216 | (23.3 | )% | 803 | 176.0 | % | |||||||||||||
|
Total
Expenses
|
$ | 6,877 | $ | 6,910 | (0.5 | )% | $ | 2,754 | 150.9 | % | ||||||||||
The
changes in expenses for the year ended December 31, 2009 as compared to the year
ended December 31, 2008 are due to the following:
|
●
|
$0.2
million increase in payroll due to increased compensation for performance
related bonuses in 2009.
|
|
●
|
$0.6
million increase in management fees related to incentive fee payments
earned in 2009.
|
|
●
|
$0.5
million decrease in other expenses due to one-time penalty fees of $0.7
million paid in 2008 related to delayed shelf registration filing for our
private placement of common stock.
|
The increase in total expenses for the
year ended December 31, 2008 as compared to total expenses for the year ended
December 31, 2007 was primarily the result of the sale of our mortgage lending
business and the classification of that business in 2007 as a discontinued
operation. Prior to the sale of our mortgage lending business,
certain expenses of our Company were part of our discontinued mortgage
lending business and are included as expenses of our discontinued operation
for the year ended December 31, 2007.
|
Discontinued
Operations
|
||||||||||||||||||||
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
(dollar
amounts in thousands)
|
2009
|
2008
|
%
Change
|
2007
|
%
Change
|
|||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Net
interest income
|
$ | 235 | $ | 419 | (43.9 | )% | $ | 1,070 | (60.8 | )% | ||||||||||
|
Gain
on sale of mortgage loans
|
— | 46 | (100.0 | )% | 2,561 | (98.2 | )% | |||||||||||||
|
Loan
losses
|
(280 | ) | (433 | ) | (35.3 | )% | (8,874 | ) | (95.1 | )% | ||||||||||
|
Brokered
loan fees
|
— | — | — | 2,318 | (100.0 | )% | ||||||||||||||
|
Gain
on sale of retail lending segment
|
— | — | — | 4,368 | (100.0 | )% | ||||||||||||||
|
Other
income (expense)
|
1,290 | 1,463 | (11.8 | )% | (67 | ) | 2,283.6 | % | ||||||||||||
|
Total
net revenues
|
$ | 1,245 | $ | 1,495 | (16.7 | )% | $ | 1,376 | 8.6 | % | ||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Salaries,
commissions and benefits
|
$ | 4 | $ | 63 | (93.7 | )% | $ | 7,209 | (99.1 | )% | ||||||||||
|
Brokered
loan expenses
|
— | — | — | 1,731 | (100.0 | )% | ||||||||||||||
|
Occupancy
and equipment
|
1 | (559 | ) | 100.2 | % | 1,819 | (130.7 | )% | ||||||||||||
|
General
and administrative
|
454 | 334 | 35.9 | % | 6,743 | (95.0 | )% | |||||||||||||
|
Total
expenses
|
459 | (162 | ) | 383.3 | % | 17,502 | (100.9 | )% | ||||||||||||
|
Income
(loss) before income tax (provision) benefit
|
786 | 1,657 | (52.6 | )% | (16,126 | ) | (110.3 | )% | ||||||||||||
|
Income
tax (provision) benefit
|
— | — | — | (18,352 | ) | (100.0 | )% | |||||||||||||
|
Gain
(loss) from discontinued operations – net of tax
|
$ | 786 | $ | 1,657 | (52.6 | ) % | $ | (34,478 | ) | 104.8 | % | |||||||||
60
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, fund our
operations, pay dividends to our stockholders and other general business needs.
We recognize the need to have funds available for our operating businesses and
meet these potential cash requirements. Our investments and assets generate
liquidity on an ongoing basis through mortgage principal and interest payments,
prepayments and net earnings held prior to payment of dividends. In addition,
depending on market conditions, the sale of investment securities or capital
market transactions may provide additional liquidity. We intend to meet our
liquidity needs through normal operations with the goal of avoiding unplanned
sales of assets or emergency borrowing of funds. At December 31, 2009, we had
cash balances of $24.5 million, $85.6 million in unencumbered securities,
including $25.2 million of agency RMBS and borrowings of $85.1 million under
outstanding repurchase agreements. At December 31, 2009, we also had longer-term
capital resources, including CDOs outstanding of $266.8 million
and subordinated debt of $44.9 million.
The
Company also has $19.9 million of its Series A Convertible Preferred Stock
outstanding, net of deferred issuance costs. The Series A Preferred Stock
matures on December 31, 2010, at which time we must redeem any outstanding
shares at the $20.00 per share liquidation preference plus any accrued and
unpaid dividends at that time. The Series A Preferred Stock is convertible
into shares of the Company’s common stock based on a conversion price of $8.00
per share of common stock, which represents a conversion rate of two and
one-half (2 ½) shares of common stock for each share of Series A Preferred
Stock. As of March 1, 2010, our common stock was trading below the
$8.00 conversion price for our Series A Preferred Stock. As a
result, as of December 31, 2009, 100% of the Series A Preferred Stock
remained outstanding, which represents an aggregate redemption price (excluding
accrued and unpaid dividends) of approximately $20.0 million. In the event we
are required to redeem all or a portion of the outstanding Series A Preferred
Stock at December 31, 2010, we expect to use working capital to satisfy the
redemption terms. Based on our current investment portfolio, leverage ratio and
available borrowing arrangements, we believe our existing cash balances,
funds available under our current repurchase agreements and cash flows
from operations will meet our liquidity requirements for at least the next 12
months.
Given the
continued uncertainty in the credit markets, we believe that maintaining a
maximum leverage ratio in the range of 6 to 8 times for our Agency RMBS
portfolio and an overall Company leverage ratio of 4 to 5 times is appropriate
at this time. At December 31, 2009 the leverage ratio for our
portfolio of Agency RMBS, which we define as our outstanding indebtedness under
repurchase agreements divided by the sum of total stockholders’ equity and our
Series A Preferred Stock, was 1 to 1 and, excluding our Series A Preferred
Stock, the leverage ratio was 1.4 to 1.
We had
outstanding repurchase agreements, a form of collateralized short-term
borrowing, with five different financial institutions as of December 31, 2009.
These agreements are secured by our Agency RMBS and bear interest rates that
have historically moved in close relationship to LIBOR. Our borrowings under
repurchase agreements are based on the fair value of our mortgage backed
securities portfolio. Interest rate changes can have a negative impact on
the valuation of these securities, reducing the amount we can borrow under these
agreements. Moreover, our repurchase agreements allow the
counterparties to determine a new market value of the collateral to reflect
current market conditions and because these lines of financing are not
committed, the counterparty can call the loan at any time. If a counterparty
determines that the value of the collateral has decreased, the counterparty may
initiate a margin call and require us to either post additional collateral to
cover such decrease or repay a portion of the outstanding borrowing, on minimal
notice. Moreover, In the event an existing counterparty elected to not reset the
outstanding balance at its maturity into a new repurchase agreement, we would be
required to repay the outstanding balance with cash or proceeds received from a
new counterparty or to surrender the mortgage-backed securities that serve
as collateral for the outstanding balance, or any combination thereof. If we are
unable to secure financing from a new counterparty and had to surrender the
collateral, we would expect to incur a significant loss.
61
We enter
into interest rate swap agreements as a mechanism to reduce the interest rate
risk of the RMBS portfolio. At December 31, 2009, we had $107.4
million in notional interest rate swaps outstanding. Should market
rates for similar term interest rate swaps drop below the fixed rates we have
agreed to on our interest rate swaps, we will be required to post additional
margin to the swap counterparty, reducing available liquidity.
At December 31, 2009 the
Company pledged $2.9 million in cash margin to cover decreased valuation of the
interest rate swaps. The weighted average maturity of the swaps was
2.6 years at December 31, 2009.
We also
own approximately $3.8 million of loans held for sale. Our inability
to sell these loans at all or on favorable terms could adversely affect our
profitability as any sale for less than the current reserved balance would
result in a loss. Currently, these loans are not financed or
pledged.
As it
relates to loans sold previously under certain loan sale agreements by our
discontinued mortgage lending business, we may be required to repurchase some of
those loans or indemnify the loan purchaser for damages caused by a breach of
the loan sale agreement. While in the past we complied with the repurchase
demands by repurchasing the loan with cash and reselling it at a loss, thus
reducing our cash position; more recently we have addressed these requests by
negotiating a net cash settlement based on the actual or assumed loss on the
loan in lieu of repurchasing the loans. The Company periodically receives
repurchase requests, each of which management reviews to determine, based on
management’s experience, whether such request may reasonably be deemed to have
merit. As of December 31, 2009, we had a total of $2.0 million of unresolved
repurchase requests that management concluded may reasonably be deemed to have
merit, against which we had a reserve of approximately $0.3
million.
We paid
quarterly cash dividends of $0.10, $0.18, $0.23 and $0.25 per common share in
January, April, July, and October 2009, respectively. On December 21, 2009, we
declared a 2009 fourth quarter cash dividend of $0.25 per common
share. The dividend was paid on January 26, 2010 to common
stockholders of record as of January 7, 2010. On January 30, 2010, we paid a
$0.63 per share cash dividend, or approximately $0.6 million in the aggregate,
on shares of our Series A Preferred Stock to holders of record as of December
31, 2009. We also paid a $0.50, $0.50, $0.58 and $0.63 per share cash dividend
on shares of our Series A Preferred Stock in January, April, July, and October
2009, respectively. Each of these dividends was paid out of the
Company’s working capital. We expect to continue to pay quarterly cash dividends
on our common stock and our Series A Preferred Stock during it term. However,
our Board of Directors will continue to evaluate our dividend policy each
quarter and will make adjustments as necessary, based on a variety of factors,
including, among other things, the need to maintain our REIT status, our
financial condition, liquidity, earnings projections and business prospects. Our
dividend policy does not constitute an obligation to pay dividends, which only
occurs when our Board of Directors declares a dividend.
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.
62
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 and Commitments
The
Company had the following contractual obligations at December 31,
2009:
|
($
amounts in thousands)
|
Total
|
Less
than
1
year
|
1
to 3 years
|
3
to 5 years
|
More
than
5
years
|
|||||||||||||||
|
Operating
leases
|
$ | 648 | $ | 190 | $ | 391 | $ | 67 | $ | — | ||||||||||
|
Repurchase
agreements (1)
|
85,124 | 85,124 | — | — | — | |||||||||||||||
|
CDOs
(1)(2)
|
281,109 | 92,275 | 28,726 | 23,463 | 136,645 | |||||||||||||||
|
Subordinated
debentures (1)
|
93,126 | 2,355 | 3,737 | 3,732 | 83,302 | |||||||||||||||
|
Convertible
preferred debentures (3)
|
22,500 | 22,500 | — | — | — | |||||||||||||||
|
Interest
rate swaps (1)
|
4,057 | 2,570 | 1,448 | 39 | — | |||||||||||||||
|
Management
Fees (4)
|
1,618 | 1,618 | — | — | — | |||||||||||||||
|
Total contractual obligations
|
$ | 488,182 | $ | 206,632 | $ | 34,302 | $ | 27,301 | $ | 219,947 | ||||||||||
|
(1)
|
Amounts
include projected interest payments during the period. Interest
based on interest rates in effect on December 31, 2009.
|
|
(2)
|
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 and estimated principal prepayments based on our
internal prepayment model on the underlying loans receivable. This
estimate will differ from actual amounts to the extent prepayments and/or
loan losses are experienced.
|
|
(3)
|
Amounts
include projected dividend payments on the Series A Preferred Stock.
Quarterly dividend rate based on the quarterly dividend paid on January
26, 2010. The calculation of the dividend rate is merely a
projection for the purposes of this table and does not represent an
obligation of the Company to pay all or any portion of the projected
dividend amount.
|
|
(4)
|
Amounts
due under our advisory agreement with HCS (see below) are based on assets
under management as of December 31,
2009.
|
63
Advisory Agreement
On January 18, 2008, we entered into an
advisory agreement with HCS, pursuant to which HCS advises, manages and makes
investments on behalf of the Managed Subsidiaries. Pursuant to the advisory
agreement, HCS is entitled to receive the following compensation:
|
·
|
base
advisory fee equal to 1.50% per annum of the “equity capital” (as defined
in Item 1 of this Annual Report) of the Managed
Subsidiaries payable by us to HCS in cash, quarterly in
arrears; and
|
|
·
|
incentive
compensation equal to 25% of the GAAP net income of the Managed
Subsidiaries attributable to the investments that are managed by HCS that
exceed a hurdle rate equal to the greater of (a) 8.00% and (b) 2.00% plus
the ten year treasury rate for such fiscal year payable by us to HCS in
cash, quarterly in arrears;
provided, however,
that
a portion of the incentive compensation may be paid in shares of our
common stock.
|
If we terminate the advisory agreement
(other than for cause) or elect not to renew it, we will be required to pay HCS
a cash termination fee equal to the sum of (i) the average annual base advisory
fee and (ii) the average annual incentive compensation earned during the
24-month period immediately preceding the date of termination.
Significance
of Estimates and Critical Accounting Policies
We
prepare our consolidated 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
consolidated 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 prime ARM loans held in securitization trusts and RMBS 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 RMBS 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’s 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.
64
Fair value.
The Company has
established and documented processes for determining fair
values. Fair value is based upon quoted market prices, where
available. If listed prices or quotes are not available, then fair
value is based upon internally developed models that primarily use inputs that
are market-based or independently-sourced market parameters, including interest
rate yield curves.
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The three levels of valuation hierarchy are defined as
follows:
Level 1
- inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2
- inputs to the
valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial
instrument.
Level 3
- inputs to the
valuation methodology are unobservable and significant to the fair value
measurement.
The
following describes the valuation methodologies used for the Company’s financial
instruments measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy.
a. Investment Securities Available
for Sale (RMBS)
- Fair value for the RMBS in our portfolio is based on
quoted prices provided by dealers who make markets in similar financial
instruments. The dealers will incorporate common market pricing methods,
including a spread measurement to the Treasury curve or interest rate swap curve
as well as underlying characteristics of the particular security including
coupon, periodic and life caps, collateral type, rate reset period and seasoning
or age of the security. If quoted prices for a security are not reasonably
available from a dealer, the security will be re-classified as a Level 3
security and, as a result, management will determine the fair value based on
characteristics of the security that the Company receives from the issuer and
based on available market information. Management reviews all prices used in
determining valuation to ensure they represent current market conditions. This
review includes surveying similar market transactions, comparisons to interest
pricing models as well as offerings of like securities by dealers. The Company's
investment securities that are comprised of RMBS are valued based upon readily
observable market parameters and are classified as Level 2 fair
values.
b. Investment Securities Available
for Sale (CLO)
- The fair value of the CLO notes, as of December 31,
2009, was based on management’s valuation determined by using a discounted
future cash flows model that management believes would be used by market
participants to value similar financial instruments. If a reliable market for
these assets develops in the future, management will consider quoted prices
provided by dealers who make markets in similar financial instruments in
determining the fair value of the CLO notes. The CLO notes are classified as
Level 3 fair values.
c. Interest Rate Swaps and Caps –
The fair value of interest rate swaps and caps are based on using market
accepted financial models as well as dealer quotes.
The model utilizes
readily observable market parameters, including treasury rates, interest rate
swap spreads and swaption volatility curves. The Company’s interest
rate caps and swaps are classified as Level 2 fair values.
Mortgage Loans Held for Sale
(net)
–The fair value of mortgage loans held for sale (net) are estimated
by the Company based on the price that would be received if the loans were sold
as whole loans taking into consideration the aggregated characteristics of the
loans such as, but not limited to, collateral type, index, interest rate,
margin, length of fixed interest rate period, life cap, periodic cap,
underwriting standards, age and credit.
Mortgage Loans Held in
Securitization Trusts (net) – Impaired Loans –
Impaired mortgage loans
held in the securitization trusts are recorded at amortized cost less specific
loan loss reserves. Impaired loan value is based on management’s estimate of the
net realizable value taking into consideration local market conditions of the
distressed property, updated appraisal values of the property and estimated
expenses required to remediate the impaired loan.
Real Estate Owned Held in
Securitization Trusts –
Real estate owned held in the securitization
trusts are recorded at net realizable value. Any subsequent adjustment will
result in the reduction in carrying value with the corresponding amount charge
to earnings. Net realizable value based on an estimate of disposal
taking into consideration local market conditions of the distressed property,
updated appraisal values of the property and estimated expenses required sell
the property.
Recent
Accounting Pronouncements
A discussion of recent accounting
pronouncements and the possible effects on our financial statements is included
in Note 2 — Summary of Significant Accounting Policies included in
Item 8 of this Annual Report on Form 10-K.
65
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 risk
|
|
·
|
Liquidity
risk
|
|
·
|
Prepayment
risk
|
|
·
|
Credit
risk
|
|
·
|
Market
(fair value) risk
|
Interest
Rate Risk
Interest
rates are sensitive to many factors, including governmental, monetary, tax
policies, domestic and international economic conditions, and political or
regulatory matters beyond our control. Changes in interest rates affect the
value of our investment securities and ARM loans we manage and hold in our
investment portfolio, the variable-rate borrowings we use to finance our
portfolio, and the interest rate swaps and caps we use to hedge our portfolio.
All of our portfolio interest market risk sensitive assets, liabilities and
related derivative positions are managed with a long term perspective and are
not for trading purposes.
Interest
rate risk is measured by 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
interest rates can affect our net interest income, which is the difference
between the interest income earned on assets and our interest expense incurred
in connection with our borrowings.
Our
adjustable-rate hybrid ARM assets reset on various dates that are not matched to
the reset dates on our repurchase agreements. In general, the
repricing of our repurchase agreements occurs more quickly than the repricing of
our assets. First, our floating rate borrowings may react to changes in interest
rates before our adjustable rate assets because the weighted average next
re-pricing 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.
66
We seek
to manage interest rate risk in the portfolio by utilizing interest rate swaps
and interest rate caps, with the goal of optimizing the earnings potential while
seeking to maintain long term stable portfolio values. We continually monitor
the duration of our mortgage assets and have a policy to hedge the financing
such that the net duration of the assets, our borrowed funds related to such
assets, and related hedging instruments, are less than one year.
Interest
rates can also affect our net return on 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 liabilities that have been extended by the use of interest rate swaps
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 speeds 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.
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 the model, as of December 31, 2009, instantaneous changes in
interest rates would have had the following effect on net interest income:
(dollar amounts in thousands):
|
Changes in Net Interest Income
|
||
|
Changes in Interest Rates
|
|
Changes in Net Interest
Income
|
|
+200
|
$(3,009)
|
|
|
+100
|
$(1,807)
|
|
|
-100
|
$ 2,606
|
|
Interest
rate changes may also impact our net book value as our mortgage assets and
related hedge derivatives are marked-to-market each quarter. Generally, as
interest rates increase, the value of our mortgage assets decrease and as
interest rates decrease, the value of such investments will increase. In
general, we would expect however that, over time, decreases in value of our
portfolio attributable to interest rate changes will be offset, to the degree we
are hedged, 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. That said, 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.
67
Liquidity
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 to operate our business. It is our policy to have
adequate liquidity at all times. We plan to meet liquidity through normal
operations with the goal of avoiding unplanned sales of assets or emergency
borrowing of funds.
Our
principal sources of liquidity are the repurchase agreements on our RMBS, the
CDOs we have issued to finance our loans held in securitization trusts, the
principal and interest payments from mortgage assets and cash proceeds from the
issuance of equity securities (as market and other conditions permit). We
believe our existing cash balances and cash flows from operations will be
sufficient for our liquidity requirements for at least the next 12
months.
As it
relates to our investment portfolio, derivative financial instruments we use to
hedge interest rate risk subject us to “margin call” risk. If the value of our
pledged assets decrease, due to a change in interest rates, credit
characteristics, or other pricing factors, we may be required to post additional
cash or asset collateral, or reduce the amount we are able to borrower versus
the collateral. Under our interest rate swaps typically we pay a fixed rate to
the counterparties while they pay us a floating rate. If interest rates drop
below the fixed rate we are paying on an interest rate swap, we may be required
to post cash margin.
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 yield for mortgage assets
purchased at a premium to their then current balance, as with the majority of
our assets. Conversely, mortgage assets purchased for less than their then
current balance exhibit higher yields due to faster prepayments. Furthermore,
prepayment speeds exceeding or lower than our modeled prepayment speeds 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, thereby increasing
prepayments.
Our
prepayment model will help determine the amount of hedging we use to off-set
changes in interest rates. If actual prepayment rates are higher than modeled,
the yield will be less than modeled in cases where we paid a premium for the
particular mortgage asset. Conversely, when we have paid a premium, if actual
prepayment rates experienced are slower than modeled, we would amortize the
premium over a longer time period, resulting in a higher yield to
maturity.
In an
increasing prepayment environment, the timing difference between the actual cash
receipt of principal paydowns and the announcement of the principal paydown may
result in additional margin requirements from our repurchase agreement
counterparties.
We
mitigate prepayment risk by constantly evaluating our mortgage assets relative
to prepayment speeds observed 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 further develop or make modifications
to our hedge balances. Historically, we have not hedged 100% of our liability
costs due to prepayment risk.
Credit
Risk
Credit
risk is the risk that we will not fully collect the principal we have invested
in mortgage loans or other assets due to either borrower defaults, or a
counterparty failure. Our portfolio of loans held in securitization trusts as of
December 31, 2009 consisted of approximately $276.2 million of securitized first
liens originated in 2005 and earlier. The securitized first liens were
principally originated in 2005 by our subsidiary, HC, prior to our exit from the
mortgage lending business. These are predominately high-quality loans with an
average loan-to-value (“LTV”) ratio at origination of approximately 70.3%, and
average borrower FICO score of approximately 732. In addition, approximately
67.7% of these loans were originated with full income and asset verification.
While we feel that our origination and underwriting of these loans will help to
mitigate the risk of significant borrower default on these loans, we
cannot assure you that all borrowers will continue to satisfy their payment
obligations under these loans and thereby avoid default.
68
As of
December 31, 2009, we owned approximately $42.9 million on non-Agency RMBS
senior securities. The non-Agency RMBS has a weighted average amortized purchase
price of approximately 70.6% of current par value. Management
believes the purchase price discount coupled with the credit support within the
bond structure protects us from principal loss under most stress scenarios for
these non-Agency RMBS. In addition, as of December 31, 2009 we own
approximately $46.0 million of par value of CLOs, with a carrying value of $17.6
million and a discounted purchase price of approximately 19.99% of
par. The securities are backed by a portfolio of middle market
corporate loans.
Market
(Fair Value) Risk
Changes
in interest rates also expose us to market risk that the market value (fair
value) on our assets may decline. 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, 2009, 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, estimate of future cashflows, 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 our investment securities are generally based on market prices
provided by 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 we
receive from the issuer and on available market information.
The fair
value of mortgage loans held in securitization trusts 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 estimated market prices for
similar types of loans. Due to significant market dislocation over the past 18
months, secondary market prices were given minimal weighting when arriving at
loan valuation at December 31, 2009 and December 31, 2008 fair
value.
The fair
value of these CDOs is based on discounted cashflows as well as market pricing
on comparable CDOs.
69
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 portfolio assets 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 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 and net duration
changes of our portfolio as of December 31, 2009, using a
discounted cash flow simulation model assuming an instantaneous interest rate
shift. Application of this method results in an estimation of the fair market
value change of our assets, liabilities and hedging instruments per 100 basis
point (“bp”) shift in interest rates.
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 re-pricing of the interest rate of 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.
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.
|
Market Value Changes
|
||||||
|
Changes in
Interest Rates
|
Changes in
Market Value
|
Net
Duration
|
||||
|
|
(Amount in thousands)
|
|
||||
|
+200
|
$(7,813)
|
0.83 years
|
||||
|
+100
|
$(4,451)
|
0.73 years
|
||||
|
Base
|
—
|
0.65 years
|
||||
|
-100
|
$
3,384
|
0.36 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.
70
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 investment assets and the
availability and the cost of financing for portfolio assets. 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 assets in determining the
earnings at risk.
Our
financial statements and the related notes, 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 and
are incorporated herein by reference.
None.
71
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 as appropriate to allow timely decisions
regarding required disclosures. An evaluation was performed under the
supervision and with the participation of our management, including our Chief
Executive Officer and 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 amended) as of December 31,
2009. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2009.
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). Our internal control
system was designed to provide reasonable assurance to our management and Board
of Directors regarding the reliability, preparation and fair presentation of
published financial statements in accordance with generally accepted accounting
principles. Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
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. 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, 2009.
This Annual Report on
Form 10-K does not include an attestation report of our independent registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to the rules of the SEC that permit us to
provide only management’s report in this Annual Report on Form
10-K.
Changes in Internal Control Over
Financial Reporting.
There have been no changes in our internal control
over financial reporting during the quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
None.
72
Information
on our directors and executive officers and the audit committee of our 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”) to be filed with respect to our Annual Meeting of
Stockholders to be held May 11, 2010 (the “2009 Proxy Statement”).
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 Sections 302 and 906 of the Sarbanes Oxley Act of
2002.
The
information presented under the headings “Compensation of Directors,” “Executive
Compensation,” “Compensation Committee Interlocks and Insider Participation” and
“Compensation Committee Report” in our 2010 Proxy Statement to be filed with the
SEC is incorporated herein by reference.
The
information presented under the headings “Share Ownership of Directors and
Executive Officers” and “Share Ownership by Certain Beneficial Owners” in our
2010 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” and “Information on Our Board of Directors and its
Committees” in our 2010 Proxy Statement to be filed with the SEC is incorporated
herein by reference.
The
information presented under the heading “Relationship with Independent
Registered Public Accounting Firm” in our 2010 Proxy Statement to be filed with
the SEC is incorporated herein by reference.
73
|
(a)
|
Financial
Statements
|
|
Page
|
||
|
|
||
|
Report of Independent Registered
Public Accounting Firm - Grant Thornton LLP
|
F-2
|
|
| Report of Independent Registered Public Accounting Firm - DELOITTE & TOUCHE LLP | F-3 | |
|
Consolidated Balance
Sheets
|
F-4
|
|
|
Consolidated Statements of
Operations
|
F-5
|
|
|
Consolidated Statements of
Stockholders’/Members’ Equity
|
F-6
|
|
|
Consolidated Statements of Cash
Flows
|
F-7
|
|
|
Notes to Consolidated Financial
Statements
|
F-8
|
|
(b)
|
Exhibits.
|
The
information set forth under “Exhibit Index” below is incorporated herein by
reference.
74
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
8, 2010
|
By:
|
/s/ Steven
R. Mumma
|
|
Name: Steven
R. Mumma
|
||
|
Title: 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 R. Mumma
|
President, Chief Executive Officer and
|
March 8, 2010
|
||
|
Steven
R. Mumma
|
Chief
Financial Officer
|
|||
|
(Principal
Executive Officer and Principal Financial Officer)
|
||||
|
/s/
James J. Fowler
|
Chairman
of the Board
|
March
8, 2010
|
||
|
James
J. Fowler
|
||||
|
/s/
Alan L. Hainey
|
Director
|
March
8, 2010
|
||
|
Alan
L. Hainey
|
||||
|
/s/
Steven G. Norcutt
|
Director
|
March
8, 2010
|
||
|
Steven
G. Norcutt
|
||||
|
/s/
Daniel K. Osborne
|
Director
|
March
8, 2010
|
||
|
Daniel
K. Osborne
|
75
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AND
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
For
Inclusion in Form 10-K
Filed
with
United
States Securities and Exchange Commission
December
31, 2009
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
Index
to Consolidated Financial Statements
|
Page
|
||||
|
FINANCIAL
STATEMENTS:
|
||||
|
Report of Independent Registered
Public Accounting Firm - Grant Thornton LLP
|
F-2
|
|||
| Report of Independent Registered Public Accounting Firm - DELOITTE & TOUCHE LLP | F-3 | |||
|
Consolidated Balance
Sheets
|
F-4
|
|||
|
Consolidated Statements of
Operations
|
F-5
|
|||
|
Consolidated Statements of
Stockholders’ Equity
|
F-6
|
|||
|
Consolidated Statements of Cash
Flows
|
F-7
|
|||
|
Notes to Consolidated Financial
Statements
|
F-8
|
|||
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
New York
Mortgage Trust, Inc.
We have
audited the accompanying consolidated balance sheet of New York Mortgage Trust,
Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December
31, 2009, and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year ended December 31, 2009.
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
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
the financial statements are free of material misstatement.
The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting.
Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.
Accordingly, we express
no such opinion.
An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
We believe that our
audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of New York Mortgage Trust,
Inc. and subsidiaries as of December 31, 2009, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant
Thornton LLP
New York,
New York
March 8,
2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
New York
Mortgage Trust, Inc.
New York,
New York
We have
audited the accompanying consolidated balance sheet of New York Mortgage Trust,
Inc. and subsidiaries (the "Company") as of December 31, 2008, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 2008.
These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
consolidated
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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2008, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.
/s/
DELOITTE & TOUCHE LLP
New York,
New York
March 31,
2009
F-3
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollar
amounts in thousands)
|
December 31,
2009
|
December 31,
2008
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 24,522 | $ | 9,387 | ||||
|
Restricted
cash
|
3,049 | 7,959 | ||||||
|
Investment
securities available for sale, at fair value (including pledged assets of
$91,071 and $456,506 at December 31, 2009 and 2008,
respectively)
|
176,691 | 477,416 | ||||||
|
Accounts
and accrued interest receivable
|
2,048 | 3,095 | ||||||
|
Mortgage
loans held in securitization trusts (net)
|
276,176 | 346,972 | ||||||
|
Prepaid
and other assets
|
2,107 | 2,595 | ||||||
|
Derivative
assets
|
4 | 22 | ||||||
|
Assets
related to discontinued operation
|
4,217 | 5,854 | ||||||
|
Total
Assets
|
$ | 488,814 | $ | 853,300 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Financing
arrangements, portfolio investments
|
$ | 85,106 | $ | 402,329 | ||||
|
Collateralized
debt obligations
|
266,754 | 335,646 | ||||||
|
Derivative
liabilities
|
2,511 | 4,194 | ||||||
|
Accounts
payable and accrued expenses
|
4,935 | 3,997 | ||||||
|
Subordinated
debentures (net)
|
44,892 | 44,618 | ||||||
|
Convertible
preferred debentures (net)
|
19,851 | 19,702 | ||||||
|
Liabilities
related to discontinued operation
|
1,778 | 3,566 | ||||||
|
Total
Liabilities
|
425,827 | 814,052 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Common
stock, $0.01 par value, 400,000,000 shares authorized 9,415,094 shares
issued and outstanding at December 31, 2009 and 9,320,094 shares
issued and outstanding at December 31, 2008
|
94 | 93 | ||||||
|
Additional
paid-in capital
|
142,519 | 150,790 | ||||||
|
Accumulated
other comprehensive income (loss)
|
11,818 | (8,521 | ) | |||||
|
Accumulated
deficit
|
(91,444 | ) | (103,114 | ) | ||||
|
Total
Stockholders’ Equity
|
62,987 | 39,248 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 488,814 | $ | 853,300 | ||||
See notes
to consolidated financial statements.
F-4
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollar
amounts in thousands, except per share data)
|
|
For
the Year Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
REVENUES:
|
||||||||||||
|
Interest
income - investment securities and loans held in securitization
trusts
|
$ | 31,095 | $ | 44,123 | $ | 50,564 | ||||||
|
Interest
expense - investment securities and loans held in securitization
trusts
|
8,572 | 30,351 | 46,529 | |||||||||
|
Net
interest income from investment securities and loans held in
securitization trusts
|
22,523 | 13,772 | 4,035 | |||||||||
|
Interest
expense - subordinated debentures
|
(3,189 | ) | (3,760 | ) | (3,558 | ) | ||||||
|
Interest
expense - convertible preferred debentures
|
(2,474 | ) | (2,149 | ) | — | |||||||
|
Net
interest income
|
16,860 | 7,863 | 477 | |||||||||
|
OTHER
INCOME (EXPENSE)
|
||||||||||||
|
Provision
for loan losses
|
(2,262 | ) | (1,462 | ) | (1,683 | ) | ||||||
|
Realized
gains (losses) on securities and related hedges
|
3,282 | (19,977 | ) | (8,350 | ) | |||||||
|
Impairment
loss on investment securities
|
(119 | ) | (5,278 | ) | (8,480 | ) | ||||||
|
Total
other income (expense)
|
901 | (26,717 | ) | (18,513 | ) | |||||||
|
EXPENSES:
|
||||||||||||
|
Salaries
and benefits
|
2,118 | 1,869 | 865 | |||||||||
|
Professional
fees
|
1,284 | 1,212 | 612 | |||||||||
|
Insurance
|
524 | 948 | 474 | |||||||||
|
Management
fees
|
1,252 | 665 | — | |||||||||
|
Other
|
1,699 | 2,216 | 803 | |||||||||
|
Total
expenses
|
6,877 | 6,910 | 2,754 | |||||||||
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
10,884 | (25,764 | ) | (20,790 | ) | |||||||
|
Income
(loss) from discontinued operation - net of tax
|
786 | 1,657 | (34,478 | ) | ||||||||
|
NET
INCOME (LOSS)
|
$ | 11,670 | $ | (24,107 | ) | $ | (55,268 | ) | ||||
|
Basic
net income (loss) per share
|
$ | 1.25 | $ | (2.91 | ) | $ | (30.47 | ) | ||||
|
Diluted
net income (loss) per share
|
$ | 1.19 | $ | (2.91 | ) | $ | (30.47 | ) | ||||
|
Dividends
declared per common share
|
$ | 0.91 | $ | 0.54 | $ | 0.50 | ||||||
|
Weighted
average shares outstanding-basic
|
9,367 | 8,272 | 1,814 | |||||||||
|
Weighted
average shares outstanding-diluted
|
11,867 | 8,272 | 1,814 | |||||||||
See notes
to consolidated financial statements.
F-5
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2009, 2008 and 2007
(Dollar
amounts in thousands)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||||||||
|
BALANCE,
JANUARY 1, 2007
|
$ | 18 | $ | 99,674 | $ | (23,739 | ) | $ | (4,381 | ) | — | $ | 71,572 | |||||||||||
|
Net
loss
|
— | — | (55,268 | ) | — | $ | (55,268 | ) | (55,268 | ) | ||||||||||||||
|
Dividends
declared
|
— | (909 | ) | — | — | — | (909 | ) | ||||||||||||||||
|
Repurchase
of common stock
|
— | — | — | — | — | — | ||||||||||||||||||
|
Restricted
stock
|
— | 592 | — | — | — | 592 | ||||||||||||||||||
|
Reclassification
adjustment for net loss included in net income
|
— | — | — | 3,192 | 3,192 | 3,192 | ||||||||||||||||||
|
Decrease
derivative instruments utilized for cash flow hedge
|
— | — | — | (761 | ) | (761 | ) | (761 | ) | |||||||||||||||
|
Comprehensive
loss
|
— | — | — | — | $ | (52,837 | ) | |||||||||||||||||
|
BALANCE,
DECEMBER 31, 2007
|
18 | 99,357 | (79,007 | ) | (1,950 | ) | 18,418 | |||||||||||||||||
|
Net
loss
|
— | — | (24,107 | ) | — | $ | (24,107 | ) | (24,107 | ) | ||||||||||||||
|
Dividends
declared
|
— | (5,033 | ) | — | — | — | (5,033 | ) | ||||||||||||||||
|
Common
stock issuance
|
75 | 56,466 | — | — | — | 56,541 | ||||||||||||||||||
|
Increase
in net unrealized loss on available for sale securities
|
— | — | — | (2,961 | ) | (2,961 | ) | (2,961 | ) | |||||||||||||||
|
Decrease
in derivative instruments utilized for cash flow hedge
|
— | — | — | (3,610 | ) | (3,610 | ) | (3,610 | ) | |||||||||||||||
|
Comprehensive
loss
|
— | — | — | — | $ | (30,678 | ) | |||||||||||||||||
|
BALANCE,
DECEMBER 31, 2008
|
93 | 150,790 | (103,114 | ) | (8,521 | ) | 39,248 | |||||||||||||||||
|
Net
income
|
11,670 | $ | 11,670 | 11,670 | ||||||||||||||||||||
|
Dividends
declared
|
(8,531 | ) | (8,531 | ) | ||||||||||||||||||||
|
Restricted
stock
|
1 | 260 | 261 | |||||||||||||||||||||
|
Reclassification
adjustment for net gain included in net income
|
(2,657 | ) | (2,657 | ) | (2,657 | ) | ||||||||||||||||||
|
Increase
in net unrealized gain on available for sale securities
|
20,340 | 20,340 | 20,340 | |||||||||||||||||||||
|
Increase
in derivative instruments utilized for cash flow hedge
|
2,656 | 2,656 | 2,656 | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 32,009 | ||||||||||||||||||||||
|
BALANCE,
DECEMBER 31, 2009
|
$ | 94 | $ | 142,519 | $ | (91,444 | ) | $ | 11,818 | $ | 62,987 | |||||||||||||
See notes
to consolidated financial statements.
F-6
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollar
amounts in thousands)
|
|
For the Years Ended December
31,
|
|||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income (loss)
|
$ | 11,670 | $ | (24,107 | ) | $ | (55,268 | ) | ||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,435 | 1,423 | 765 | |||||||||
|
Amortization
of (discount) premium on investment securities and mortgage
loans
|
(743 | ) | 997 | 1,616 | ||||||||
|
(Gain)
loss on sale of securities, loans and related hedges
|
(3,280 | ) | 19,977 | 8,350 | ||||||||
|
Impairment
loss on investment securities
|
119 | 5,278 | 8,480 | |||||||||
|
Origination
of mortgage loans held for sale
|
— | — | (300,863 | ) | ||||||||
|
Proceeds
from repayments or sales of mortgage loans
|
1,196 | 2,746 | 398,678 | |||||||||
|
Allowance
for deferred tax asset
|
— | — | 18,352 | |||||||||
|
Gain
on sale of retail lending platform
|
— | — | (4,368 | ) | ||||||||
|
Change
in value of derivatives
|
— | — | 785 | |||||||||
|
Provision
for loan losses
|
2,262 | 1,520 | 2,546 | |||||||||
|
Restricted
stock issuance
|
261 | — | — | |||||||||
|
Other
|
270 | — | 1,111 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Due
from loan purchasers
|
— | — | 88,351 | |||||||||
|
Escrow
deposits-pending loan closings
|
— | — | 3,814 | |||||||||
|
Accounts
and accrued interest receivable
|
1,055 | 415 | 4,141 | |||||||||
|
Prepaid
and other assets
|
(260 | ) | 642 | 2,903 | ||||||||
|
Due
to loan purchasers
|
— | 138 | (7,115 | ) | ||||||||
|
Accounts
payable and accrued expenses
|
(2,212 | ) | (2,767 | ) | (5,140 | ) | ||||||
|
Net
cash provided by operating activities
|
11,773 | 6,262 | 167,138 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Restricted
cash
|
4,910 | (444 | ) | (4,364 | ) | |||||||
|
Purchases
of investment securities
|
(43,869 | ) | (850,609 | ) | (231,932 | ) | ||||||
|
Proceeds
from sale of investment securities
|
296,553 | 625,986 | 246,874 | |||||||||
|
Principal
repayments received on loans held in securitization trust
|
68,914 | 79,951 | 154,729 | |||||||||
|
Proceeds
from sale of retail lending platform
|
— | — | 12,936 | |||||||||
|
Principal
paydown on investment securities
|
70,343 | 74,172 | 113,490 | |||||||||
|
Purchases
of fixed assets
|
— | — | (396 | ) | ||||||||
|
Sale
of fixed assets and real estate owned property
|
— | 10 | 880 | |||||||||
|
Net
cash provided by (used in) investing activities
|
396,851 | (70,934 | ) | 292,217 | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Increase
(decrease) in financing arrangements, net
|
(317,223 | ) | 86,615 | (672,570 | ) | |||||||
|
Collateralized
debt obligation borrowings
|
— | — | 337,431 | |||||||||
|
Collateralized
debt obligation paydowns
|
(69,158 | ) | (81,725 | ) | (117,851 | ) | ||||||
|
Dividends
paid
|
(7,108 | ) | (4,100 | ) | (1,826 | ) | ||||||
|
Payments
made for termination of swaps
|
— | (8,333 | ) | — | ||||||||
|
Proceeds
from common stock issued (net)
|
— | 56,541 | — | |||||||||
|
Proceeds
from convertible preferred debentures (net)
|
— | 19,553 | — | |||||||||
|
Net
cash (used in) provided by financing activities
|
(393,489 | ) | 68,551 | (454,816 | ) | |||||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
15,135 | 3,879 | 4,539 | |||||||||
|
CASH
AND CASH EQUIVALENTS — Beginning
|
9,387 | 5,508 | 969 | |||||||||
|
CASH
AND CASH EQUIVALENTS — End
|
$ | 24,522 | $ | 9,387 | $ | 5,508 | ||||||
|
SUPPLEMENTAL
DISCLOSURE
|
||||||||||||
|
Cash
paid for interest
|
$ | 13,456 | $ | 31,479 | $ | 41,338 | ||||||
|
NON
CASH FINANCING ACTIVITIES
|
||||||||||||
|
Dividends
declared to be paid in subsequent period
|
$ | 2,355 | $ | 932 | $ | — | ||||||
|
Grant
of restricted stock
|
$ | 261 | $ | — | $ | — | ||||||
See notes
to consolidated financial statements.
F-7
NEW
YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar
amounts in thousands unless otherwise indicated)
|
1.
|
Summary
of Significant Accounting
Policies
|
Organization
-
New York Mortgage Trust, Inc., together
with its consolidated subsidiaries (“NYMT”, the “Company”, “we”, “our”, and
“us”), is a self-advised real estate investment trust, or REIT, in the business
of acquiring and managing primarily residential adjustable-rate, hybrid
adjustable-rate and fixed-rate mortgage-backed securities (“RMBS”), for which
the principal and interest payments are guaranteed by a U.S. Government agency,
such as the Government National Mortgage Association (“Ginnie Mae”) or a U.S.
Government-sponsored entity (“GSE” or “Agency”), such as the Federal National
Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage
Corporation (“Freddie Mac”), which we refer to collectively as “Agency RMBS,”
RMBS backed by prime jumbo and Alternative A-paper (“Alt-A”) (“non-Agency
RMBS”), and prime credit quality residential adjustable-rate mortgage
(“ARM”) loans held in securitization trusts, or prime ARM loans. The
remainder of our current investment portfolio is comprised of notes issued by a
collateralized loan obligation (“CLO”). We also may opportunistically
acquire and manage various other types of real estate-related and
financial assets, including, among other things, certain non-rated residential
mortgage assets, commercial mortgage-backed securities (“CMBS”), commercial real
estate loans and other similar investments.
We seek attractive long-term investment
returns by investing our equity capital and borrowed funds in such securities.
Our principal business objective is to generate net income for distribution to
our stockholders resulting from the spread between the interest and other income
we earn on our interest-earning assets and the interest expense we pay on the
borrowings that we use to finance these assets and our operating costs, which we
refer to as our net interest income.
The
Company conducts its business through the parent company, NYMT, and several
subsidiaries, including special purpose subsidiaries established for loan
securitization purposes, a taxable REIT subsidiary ("TRS") and a qualified
REIT subsidiary ("QRS"). The Company conducts certain
of its portfolio investment operations through its wholly-owned TRS,
Hypotheca Capital, LLC (“HC”), in order to utilize, to the extent permitted by
law, some or all of a net operating loss carry-forward held in HC that resulted
from the Company's exit from the mortgage lending business.
Prior to March 31, 2007, the Company conducted substantially all
of its mortgage lending business through HC. The
Company's wholly-owned QRS, New York Mortgage Funding, LLC
(“NYMF”), currently holds certain mortgage-related assets
for regulatory compliance purposes. The Company also may conduct
certain other portfolio investment operations related to its alternative
investment strategy through NYMF. The Company consolidates all of its
subsidiaries under generally accepted accounting principles in the United States
of America (“GAAP”).
The
Company is organized and conducts its operations to qualify as a 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.
Basis of Presentation
- The
accompanying consolidated financial statements have been prepared on the accrual
basis of accounting in accordance with U.S. generally accepted accounting
principles (“GAAP”). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
The
consolidated financial statements of the Company include the accounts of all
subsidiaries; significant intercompany accounts and transactions have been
eliminated.
Prior
period amounts have been reclassified to conform to current period
classifications, including $1.4 million of real estate owned previously included
in mortgage loans held in securitization trusts (net) to prepaid and other
assets.
Effective
July 1, 2009, the Company adopted the provisions of the Financial Accounting
Standards Board (“FASB”), Accounting Standards Codification, (the
“Codification”), which is now the source of authoritative GAAP. While
the Codification did not change GAAP, all existing authoritative accounting
literature, with certain exceptions, was superseded and incorporated into the
Codification. As a result, pre-Codification references to GAAP have
been eliminated.
F-8
The Board
of Directors declared a one for five reverse stock split of our common stock, as
of October 9, 2007 and a one for two reverse stock split of our common stock, as
of May 27, 2008, decreasing the number of common shares then outstanding to
approximately 9.3 million. Prior and current period share amounts and earnings
per share disclosures included herein have been restated to reflect the reverse
stock split. In addition, the terms of our Series A Preferred Stock provide that
the conversion rate for the Series A Preferred Stock be appropriately adjusted
to reflect any reverse stock split. As a result, the description of our Series A
Preferred Stock reflects the May 2008 reverse stock split (see note
15).
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 includes $2.9 million held by counterparties as collateral for hedging
instruments and $0.1 million held as collateral for a letter of credit related
to the Company’s lease of its corporate headquarters.
Investment Securities Available for
Sale
- The Company's investment securities include RMBS comprised
of Fannie Mae, Freddie Mac, non-Agency RMBS, initially rated AAA
securities and CLOs. 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 realized gain (loss) on sale
of securities and related hedges in the consolidated statements of operations.
Purchase premiums or discounts on investment securities are amortized or
accreted to interest income over the estimated life of the investment securities
using the interest method. Adjustments to amortization are made for actual
prepayment activity.
When the
fair value of an investment security is less than its amortized cost at the
balance sheet date, the security is considered impaired. The Company
assesses its impaired securities on at least a quarterly basis, and designates
such impairments as either “temporary” or “other-than-temporary.” If
the Company intends to sell an impaired security, or it is more likely than not
that it will be required to sell the impaired security before its anticipated
recovery, then it must recognize an other-than-temporary impairment through
earnings equal to the entire difference between the investment’s amortized cost
and its fair value at the balance sheet date. If the Company does not
expect to sell an other-than-temporarily impaired security, only the portion of
the other-than-temporary impairment related to credit losses is recognized
through earnings with the remainder recognized as a component of other
comprehensive income (loss) on the consolidated balance
sheet. Impairments recognized through other comprehensive income
(loss) do not impact earnings. Following the recognition of an
other-than-temporary impairment through earnings, a new cost basis is
established for the security and may not be adjusted for subsequent recoveries
in fair value through earnings. However, other-than-temporary
impairments recognized through earnings may be accreted back to the amortized
cost basis of the security on a prospective basis through interest
income. The determination as to whether an other-than-temporary
impairment exists and, if so, the amount considered other-than-temporarily
impaired is subjective, as such determinations are based on both factual and
subjective information available at the time of assessment. As a
result, the timing and amount of other-than-temporary impairments constitute
material estimates that are susceptible to significant change (see note
2).
F-9
Accounts and Accrued Interest
Receivable
- Accounts and accrued receivable includes interest receivable
for investment securities and mortgage loans held in securitization
trusts.
Mortgage Loans Held in
Securitization Trusts
- Mortgage loans held in securitization trusts are
certain adjustable rate mortgage ("ARM") loans transferred to New York
Mortgage Trust 2005-1, New York Mortgage Trust 2005-2 and New York Mortgage
Trust 2005-3 that have been securitized into sequentially rated classes of
beneficial interests. Mortgage loans held in securitization trusts
are carried at their unpaid principal balances, net of unamortized premium
or discount, unamortized loan origination costs and allowance for loan losses.
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.
Allowance for Loan Losses on
Mortgage Loans Held in Securitization Trusts
- We establish an
allowance for loan losses based on management's judgment and estimate of credit
losses inherent in our portfolio of mortgage loans held in securitization
trusts.
Estimation
involves the consideration of various credit-related factors including but not
limited to, macro-economic conditions, the current housing market conditions,
loan-to-value ratios, delinquency status, historical credit loss severity rates,
purchased mortgage insurance, the borrower's current economic condition and
other factors deemed to warrant consideration. Additionally, we look at the
balance of any delinquent loan and compare that to the current value of the
collateralizing property. We utilize various home valuation methodologies
including appraisals, broker pricing opinions (“BPOs”), internet-based property
data services to review comparable properties in the same area or consult with a
realtor in the property's area.
Comparing
the current loan balance to the property value determines the current
loan-to-value (“LTV”) ratio of the loan. Generally, we estimate that a first
lien loan on a property that goes into a foreclosure process and becomes real
estate owned (“REO”), results in the property being disposed of at approximately
84% of the current appraised value. This estimate is based on management's
experience as well as realized severity rates since issuance of our
securitizations. During 2008, as a result of the significant deterioration in
the housing market, we revised our policy to estimate recovery values based on
current home valuations less expected costs to dispose. These costs
typically approximate 16% of the current home value. It is possible given
today's deteriorating market conditions, we may realize less than that return in
certain cases. Thus, for a first lien loan that is delinquent, we will adjust
the property value down to approximately 84% of the current property value and
compare that to the current balance of the loan. The difference determines the
base provision for the loan loss taken for that loan. This base provision for a
particular loan may be adjusted if we are aware of specific circumstances that
may affect the outcome of the loss mitigation process for that loan.
Predominately, however, we use the base reserve number for our
reserve.
The
allowance for loan losses will be maintained through ongoing provisions charged
to operating income and will be reduced by loans that are charged off. As of
December 31, 2009 the allowance for loan losses held in securitization
trusts totaled $2.6 million. The allowance for loan losses was $0.8 million
at December 31, 2008.
Prepaid and Other Assets
-
Prepaid and other assets totaled $2.1 million as of December 31, 2009 and
consist mainly of $0.5 million of real estate owned (“REO”), $0.2 million in
escrow advances related to mortgage loans held in securitization trusts (net),
$0.5 million of capitalization expenses related to equity and bond issuance cost
and $0.3 million in prepaid insurance. Prepaid and other asset totaled $2.6
million as of December 31, 2008 and included $1.4 million of REO, $0.4 million
in escrow advances related to mortgage loans held in securitization trusts (net)
and $0.5 million of capitalization expenses related to equity and bond issuance
cost.
Financing Arrangements, Portfolio
Investments
- Investment securities available for sale are typically
financed with repurchase agreements, a form of collateralized borrowing which is
secured by the securities on the balance sheet. Such financings are
recorded at their outstanding principal balance with any accrued interest due
recorded as an accrued expense (see note 5).
F-10
Collateralized Debt
Obligations (“CDO”) -
We
use CDOs to permanently finance our loans held in securitization trusts.
For financial reporting purposes, the ARM loans 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 which are held by the securitization
trust and recorded as an asset or liability of the Company.
The Company has completed four
securitizations since inception, the first three were accounted for as a
permanent financing (see note 6) and the fourth was accounted for as a sale and
accordingly, not included in the Company’s financial
statements.
Subordinated Debentures (Net)
-
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 (see note 7).
Convertible Preferred Debentures
(Net)
- The Company issued $20.0 million in Series A Convertible
Preferred Stock that mature on December 31, 2010, at which time any outstanding
shares must be redeemed by the Company at the $20.00 per share liquidations
preference plus any accrued and unpaid dividends. As a result of the
mandatory redemption feature, the Company classifies these securities as a
liability on its balance
sheet
(see note 15).
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 securities investment
activities.
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 and investment banks 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. In
addition, all outstanding interest rate swap agreements have bi-lateral margin
call capabilities, meaning the Company will require margin for interest rate
swaps that are in the Company’s favor, minimizing any amounts at
risk.
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”). The Company applies hedge accounting utilizing
the cash flow hedge criteria.
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 premium, 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 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.
F-11
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 un-designate 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.
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.
F-12
Other Comprehensive Income
(Loss)
- Other comprehensive income (loss) is comprised primarily of
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.
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 may match 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 $0.0, $0.0 and $18,495 for the years ended
December 31, 2009, 2008 and 2007 respectively.
Stock Based Compensation -
Compensation expense for equity based awards is recognized over the vesting
period of such awards, based upon the fair value of the stock at the grant date
(see note 16).
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.
HC is a
taxable REIT subsidiary and therefore 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
(see note 12).
The
Company will recognize interest and penalties, if any, related to uncertain tax
positions as income tax expense, which is included in other
expenses.
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 (see
note 14).
Loans Sold to Investors
-
For loans originated and
sold by our discontinued mortgage lending business, the Company is obligated to
repurchase loans based on violations of representations and warranties in the
sale agreement, or early payment defaults. The Company did not repurchase
any loans during the twelve months ended December 31, 2009.
The
Company periodically receives repurchase requests based on alleged violations of
representations and warranties, each of which management reviews to determine,
based on management’s experience, whether such requests may reasonably be deemed
to have merit. As of December 31, 2009, we had a total of $2.0
million of unresolved repurchase requests that management concluded may
reasonably be deemed to have merit against which the Company has a reserve of
approximately $0.3 million. The reserve is based on one or more of
the following factors; historical settlement rates, property value securing the
loan in question and specific settlement discussions with third
parties.
F-13
A Summary of Recent Accounting
Pronouncements Follows:
General
Principles
Generally
Accepted Accounting Principles (ASC 105)
In June
2009, the Financial Accounting Standards Board (“FASB”) issued
The Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(Codification) which revises the framework for selecting the accounting
principles to be used in the preparation of financial statements that are
presented in conformity with Generally Accepted Accounting Principles
(“GAAP”). The objective of the Codification is to establish the FASB
Accounting Standards Codification (“ASC”) as the source of authoritative
accounting principles recognized by the FASB. Codification is
effective for the Company for this September 30, 2009 Form 10-Q. In
adopting the Codification, all non-grandfathered, non-SEC accounting literature
not included in the Codification is superseded and deemed
non-authoritative. Codification requires any references within the
Company’s consolidated financial statements be modified from FASB issues to
ASC. However, in accordance with the FASB Accounting Standards
Codification Notice to Constituents (v 2.0), the Company will not reference
specific sections of the ASC but will use broad topic references.
The
Company’s recent accounting pronouncements section has been reformatted to
reflect the same organizational structure as the ASC. Broad topic
references will be updated with pending content as they are
released.
Assets
Investments
in Debt and Equity Securities (ASC 320)
New
guidance was provided to make impairment guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments
(“OTTI”) on debt and equity securities in financial statements. This
guidance was also the result of the Securities and Exchange Commission (“SEC”)
mark-to-market study mandated under the Emergency Economic Stabilization Act of
2008 (“EESA”). The SEC’s recommendation was to “evaluate the need for
modifications (or the elimination) of current OTTI guidance to provide for a
more uniform system of impairment testing standards for financial
instruments.” The guidance revises the OTTI evaluation
methodology. Previously the analytical focus was on whether the
company had the “intent and ability to retain its investment in the debt
security for a period of time sufficient to allow for any anticipated recovery
in fair value”. Now the focus is on whether the company (1) has
the intent to sell the Investment Securities, (2) is more likely than not that
it will be required to sell the Investment Securities before recovery, or (3)
does not expect to recover the entire amortized cost basis of the Investment
Securities. Further, the security is analyzed for credit
loss, (the difference between the present value of cash flows expected to be
collected and the amortized cost basis). The credit loss, if any,
will then be recognized in the statement of operations, while the balance of
impairment related to other factors will be recognized in OCI. This
guidance became effective for all of the Company’s interim and annual reporting
periods ending after June 15, 2009 with early adoption permitted for periods
ending after March 15, 2009. The Company decided to early adopt. For
the year ended December 31, 2009, the Company did not have unrealized losses in
Investment Securities that were deemed other-than-temporary.
Broad
Transactions
Business
Combinations (ASC 805)
This
guidance establishes principles and requirements for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed and any
noncontrolling interest in a business combination at their fair value at
acquisition date. ASC 805 alters the treatment of acquisition-related costs,
business combinations achieved in stages (referred to as a step acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business combinations, the treatment of in-process research and development
in a business combination as well as the treatment of recognizable deferred tax
benefits. ASC 805 is effective for business combinations closed in fiscal years
beginning after December 15, 2008 and is applicable to business
acquisitions completed after January 1, 2009. The Company did
not make any business acquisitions during the year ended December 31, 2009. The
adoption of ASC 805 did not have a material impact on the Company’s consolidated
financial statements.
F-14
Derivatives
and Hedging (ASC 815)
Effective
January 1, 2009 and adopted by the Company prospectively, the FASB issued
additional guidance attempting to improve the transparency of
financial reporting by mandating the provision of additional information about
how derivative and hedging activities affect an entity’s financial position,
financial performance and cash flows. This guidance changed the
disclosure requirements for derivative instruments and hedging activities by
requiring enhanced disclosure about (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related hedged items are
accounted for, and (3) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. To adhere to this guidance, qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts, gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements must be
made. This disclosure framework is intended to better convey the
purpose of derivative use in terms of the risks that an entity is intending to
manage. The effect of the adoption of this guidance was an increase
in footnote disclosures is discussed in Note 4.
Fair
Value Measurements and Disclosures (ASC 820)
In
response to the deterioration of the credit markets, FASB issued guidance
clarifying how Fair Value Measurements should be applied when valuing securities
in markets that are not active. The guidance provides an illustrative example,
utilizing management’s internal cash flow and discount rate assumptions when
relevant observable data do not exist. It further clarifies how
observable market information and market quotes should be considered when
measuring fair value in an inactive market. It reaffirms the
notion of fair value as an exit price as of the measurement date and that fair
value analysis is a transactional process and should not be broadly applied to a
group of assets. The guidance was effective upon issuance including
prior periods for which financial statements had not been issued. The
implementation of this guidance did not have a material effect on the fair value
of the Company’s assets as the Company continued using the methodologies used in
previous quarters to value assets as defined under the original Fair Value
standards.
In
October 2008 the EESA was signed into law. Section 133 of the EESA
mandated that the SEC conduct a study on mark-to-market accounting
standards. The SEC provided its study to the U.S. Congress on
December 30, 2008. Part of the recommendations within the study
indicated that “fair value requirements should be improved through development
of application and best practices guidance for determining fair value in
illiquid or inactive markets”. As a result of this study and the
recommendations therein, on April 9, 2009, the FASB issued additional guidance
for determining fair value when the volume and level of activity for the asset
or liability have significantly decreased when compared with normal market
activity for the asset or liability (or similar assets or
liabilities). The guidance gives specific factors to evaluate if
there has been a decrease in normal market activity and if so, provides a
methodology to analyze transactions or quoted prices and make necessary
adjustments to fair value. The objective is to determine the point
within a range of fair value estimates that is most representative of fair value
under current market conditions. This guidance became effective for
the Company’s interim and annual reporting periods ending after June 15, 2009
with early adoption permitted for periods ending after March 15,
2009. The adoption does not have a major impact on the manner in
which the Company estimates fair value, nor does it have any impact on our
financial statement disclosures.
In August
2009, FASB provided further guidance regarding the fair value measurement of
liabilities. The guidance states that a quoted price for the
identical liability when traded as an asset in an active market is a Level 1
fair value measurement. If the value must be adjusted for factors
specific to the liability, then the adjustment to the quoted price of the asset
shall render the fair value measurement of the liability a lower level
measurement. This guidance has no material effect on the fair
valuation of the Company’s liabilities.
In
January 2010, the FASB issued ASU 2010-06,
Improving
Disclosures about Fair Value Measurement,
to enhance the usefulness of
fair value measurements. The amended guidance requires both the disaggregation
of information in certain existing disclosures, as well as the inclusion of more
robust disclosures about valuation techniques and inputs to recurring and
nonrecurring fair value measurements. This ASU amends ASC 820 to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurements. This ASU also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation techniques used
to measure fair value. Further, this ASU amends guidance on employers’
disclosures about postretirement benefit plan assets under ASC 715 to require
that disclosures be provided by classes of assets instead of by major categories
of assets. This ASU is effective for the first reporting period (including
interim periods) beginning after December 15, 2009, except for the requirement
to provide the Level 3 activity of purchases, sales, issuances, and settlements
on a gross basis, which will be effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
adoption is permitted. The adoption of this standard may require additional
disclosures, but the Company does not expect the adoption to have a material
effect on our financial statements.
Financial
Instruments (ASC 820-10-50)
On April
9, 2009, the FASB issued guidance which requires disclosures about fair value of
financial instruments for interim reporting periods as well as in annual
financial statements. The effective date of this guidance is for
interim reporting periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The adoption did
not have any impact on financial reporting as all financial instruments are
currently reported at fair value in both interim and annual
periods.
Subsequent
Events (ASC 855)
ASC 855
provides general standards governing accounting for and disclosure of events
that occur after the balance sheet date but before the financial statements are
issued or are available to be issued. ASC 855 also provides guidance on
the period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions occurring after the balance
sheet date. The Company adopted effective June 30, 2009, and adoption had no
impact on the Company’s consolidated financial statements. The Company has
evaluated all events or transactions through the date of this
filing. During this period, we did not have any material subsequent
events that impacted our consolidated financial statements.
F-15
|
2.
|
Investment
Securities Available For Sale, at Fair
Value
|
Investment
securities available for sale consist of the following as of December 31, 2009
(dollar amounts in thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Carrying
Value
|
|||||||||||||
|
Agency
RMBS (1)
|
$ | 112,525 | $ | 3,701 | $ | — | $ | 116,226 | ||||||||
|
Non
Agency RMBS
|
40,257 | 4,764 | (2,155 | ) | 42,866 | |||||||||||
|
CLOs
|
9,187 | 8,412 | — | 17,599 | ||||||||||||
|
Total
|
$ | 161,969 | $ | 16,877 | $ | (2,155 | ) | $ | 176,691 | |||||||
|
(1)
|
- Agency
RMBS includes only Fannie Mae issued securities at December 31,
2009.
|
Investment
securities available for sale consist of the following as of December 31, 2008
(dollar amounts in thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Carrying
Value
|
|||||||||||||
|
Agency
RMBS (1)
|
$ | 454,653 | $ | 1,316 | $ | (98 | ) | $ | 455,871 | |||||||
|
Non-Agency
RMBS
|
25,724 | — | (4,179 | ) | 21,545 | |||||||||||
|
Total
|
$ | 480,377 | $ | 1,316 | $ | (4,277 | ) | $ | 477,416 | |||||||
|
(1)
|
- Agency
RMBS carrying value included $354.4 million of Fannie Mae issued and
$101.5 million of Freddie Mac issued
securities.
|
The
Company commenced its strategy of diversifying its portfolio to introduce more
elements of credit risk by purchasing $46.0 million face amount of CLOs on March
31, 2009 at a purchase price of approximately $9.0 million. This marked the
Company’s first investment outside of RMBS or other mortgage related
assets. In addition, during the second and third quarters of 2009,
the Company further diversified its portfolio by purchasing approximately $45.6
million current par value of non-Agency RMBS at an average cost of 60% of
par. The $45.6 million current par value of non-Agency
RMBS purchased were previously rated AAA (at issuance) and represent the senior
cashflows of the applicable deal structures.
During March 2009, the
Company determined that certain Agency RMBS, related to collateralized
mortgage obligations
(“CMO”) floaters in its portfolio were no longer
producing acceptable returns and initiated a program for the purpose of
disposing of these securities. The Company disposed of approximately $159.5
million in current par value of Agency CMO floaters during March 2009, with the
balance of the Agency CMO floaters in its portfolio, or $34.3 million in current
par value, being sold in April 2009, for an aggregate disposition of
approximately $193.8 million in current par value of Agency CMO floaters and a
net gain of approximately $0.1 million. As a result of this sale
program, the Company incurred an additional impairment of $0.1 million in the
quarter ended March 31, 2009 because the Company intended to sell the Agency CMO
floaters.
F-16
All
securities held in Investment Securities Available for Sale, including Agency,
investment and non-investment grade securities, are based on unadjusted price
quotes for similar securities in active markets and are categorized as Level 2
(see note 11).
The
following tables set forth the stated reset periods and weighted average yields
of our investment securities available for sale at December 31, 2009 (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
RMBS
|
$
|
—
|
—
|
$
|
42,893
|
2.07%
|
$
|
73,333
|
2.54%
|
$
|
116,226
|
2.37%
|
||||||||
|
Non
Agency RMBS
|
22,065
|
10.15%
|
4,865
|
7.23%
|
15,936
|
9.57%
|
42,866
|
9.61%
|
||||||||||||
|
CLO
|
17,599
|
23.48%
|
—
|
—
|
—
|
—
|
17,599
|
23.48%
|
||||||||||||
|
Total/Weighted
Average
|
$
|
39,664
|
16.07%
|
$
|
47,758
|
2.60%
|
$
|
89,269
|
3.80%
|
$
|
176,691
|
6.23%
|
||||||||
The
following table sets forth the stated reset periods and weighted average yields
of our investment securities available for sale at December 31, 2008 (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
RMBS
|
$ | 197,675 | 8.54% | $ | 66,910 | 3.69% | $ | 191,286 | 4.02% | $ | 455,871 | 5.99% | ||||||||
|
Non-Agency
RMBS (1)
|
21,476 | 14.11% | — | — | 69 | 16.99% | 21,545 | 14.35% | ||||||||||||
|
Total/Weighted
Average
|
$ | 219,151 | 9.21% | $ | 66,910 | 3.69% | $ | 191,355 | 4.19% | $ | 477,416 | 6.51% | ||||||||
(1)
The NYMT retained securities includes $0.1 million of residual interests related
to the NYMT 2006-1 transaction.
The
following table presents the Company's investment securities available for sale
in an unrealized loss position, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position at December 31, 2009 and December 31, 2008, respectively, as follows
(dollar amounts in thousands):
|
December
31, 2009
|
Less
than 12 Months
|
Greater
than 12 months
|
Total
|
||||||||||||||||||||||
|
Carrying
Value
|
Gross
Unrealized Losses
|
Carrying
Value
|
Gross
Unrealized Losses
|
Carrying
Value
|
Gross
Unrealized Losses
|
||||||||||||||||||||
|
Non-Agency
RMBS
|
$ | — | $ | — | $ | 14,693 | $ | 2,155 | $ | 14,693 | $ | 2,155 | |||||||||||||
|
Total
|
$ | — | $ | — | $ | 14,693 | $ | 2,155 | $ | 14,693 | $ | 2,155 | |||||||||||||
|
December
31, 2008
|
Less
than 12 Months
|
Greater
than 12 months
|
Total
|
||||||||||||||||||||||
|
Carrying
Value
|
Gross
Unrealized Losses
|
Carrying
Value
|
Gross
Unrealized Losses
|
Carrying
Value
|
Gross
Unrealized Losses
|
||||||||||||||||||||
|
Agency
RMBS
|
$ | 9,406 | $ | 98 | $ | — | $ | — | $ | 9,406 | $ | 98 | |||||||||||||
|
Non-Agency
RMBS
|
18,649 | 4,179 | — | — | 18,649 | 4,179 | |||||||||||||||||||
|
Total
|
$ | 28,055 | $ | 4,277 | $ | — | $ | — | $ | 28,055 | $ | 4,277 | |||||||||||||
There were no unrealized
positions for Agency CMO Floaters and the residual interests related to the NYMT
2006-1 transaction at December 31, 2008 as the Company incurred approximately
$5.3 million impairment charge.
F-17
|
3.
|
Mortgage
Loans Held in Securitization Trusts
|
Mortgage
loans held in securitization trusts consist of the following at December 31,
2009 and December 31, 2008 (dollar amounts in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Mortgage
loans principal amount
|
$ | 277,007 | $ | 345,619 | ||||
|
Deferred
origination costs – net
|
1,750 | 2,197 | ||||||
|
Reserve
for loan losses
|
(2,581 | ) | (844 | ) | ||||
|
Total
mortgage loans held in securitization trusts
|
$ | 276,176 | $ | 346,972 | ||||
Allowance for Loan losses -
The following table presents the activity in the Company's allowance for loan
losses on mortgage loans held in securitization trusts for the year
ended December 31, 2009 and 2008 (dollar amounts in
thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance at
beginning of period
|
$ | 844 | $ | 367 | ||||
|
Provisions
for loan losses
|
2,192 | 1,187 | ||||||
|
Transfer
to real estate owned
|
(406 | ) | (460 | ) | ||||
|
Charge-offs
|
(49 | ) | (250 | ) | ||||
|
Balance
of the end of period
|
$ | 2,581 | $ | 844 | ||||
On a
ongoing basis, the Company evaluates the adequacy of its reserve for loan
losses. The Company’s reserve for loan losses at December 31,
2009 was $2.6 million, representing 93 basis points of the outstanding principal
balance of loans held in securitization trusts as compared to 24 basis points as
of December 31, 2008. As part of the Company’s reserve adequacy
analysis, management will access an overall level of reserves while also
assessing credit losses inherent in each non-performing mortgage loan held in
securitization trusts. These estimates involve the consideration of various
credit related factors, including but not limited to, current housing market
conditions, current loan to value ratios, delinquency status, borrower’s current
economic and credit status and other relevant factors.
Real Estate Owned –
The
following table presents the activity in the Company’s real estate owned held in
securitization trusts for the year ended December 31, 2009 and 2008 (dollar
amounts in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance at
beginning of period
|
$ | 1,366 | $ | 2,865 | ||||
|
Write
downs
|
(70 | ) | (246 | ) | ||||
|
Transfer
from mortgage
loans
held in securitization trusts
|
826 | 1,826 | ||||||
|
Disposal
|
(1,576 | ) | (3,079 | ) | ||||
|
Balance
of the end of period
|
$ | 546 | $ | 1,366 | ||||
Real
estate owned held in securitization trusts are included in the prepaid and other
assets on the balance sheet and write downs are included in loan losses in the
statement of operations for reporting purposes.
All of
the Company’s mortgage loans and real estate owned held in securitization trusts
are pledged as collateral for the CDOs issued by the Company (see note
6). As of December 31, 2009, the Company’s net investment in the
securitization trusts, which is the maximum amount of the Company’s investment
that is at risk to loss and represents the difference between the carrying
amount of the loans and real estate owned held in securitization trust and the
amount of CDO’s outstanding, was $10.0 million.
F-18
The
following sets forth delinquent loans, including real estate owned through
foreclosure (REO) in our portfolio as of December 31, 2009 and December 31, 2008
(dollar amounts in thousands):
December
31, 2009
|
Days
Late
|
Number of Delinquent
Loans
|
Total
Dollar Amount
|
% of Loan
Portfolio
|
|||||
| 30-60 | 5 | $ | 2,816 | 1.01 | % | |||
| 61-90 | 4 | $ | 1,150 | 0.41 | % | |||
| 90+ | 32 | $ | 15,915 | 5.73 | % | |||
|
Real
estate owned through foreclosure
|
2 | $ | 739 | 0.27 | % | |||
|
|
December
31,
2008
|
|
Days
Late
|
Number of Delinquent
Loans
|
Total
Dollar Amount
|
% of Loan
Portfolio
|
|||||
| 30-60 | 3 | $ | 1,363 | 0.39 | % | |||
| 61-90 | 1 | $ | 263 | 0.08 | % | |||
| 90+ | 13 | $ | 5,734 | 1.65 | % | |||
|
Real
estate owned through foreclosure
|
4 | $ | 1,927 | 0.55 | % | |||
F-19
|
4.
|
Derivative
Instruments and Hedging Activities
|
The
Company enters into derivative instruments to manage its interest rate risk
exposure. These derivative instruments include interest rate swaps and caps
entered into to reduce interest expense costs related to our repurchase
agreements, CDOs and our subordinated debentures. The Company’s interest rate
swaps are designated as cash flow hedges against the benchmark interest rate
risk associated with its short term repurchase agreements. There were
no costs incurred at the inception of our interest rate swaps, under which the
Company agrees to pay a fixed rate of interest and receive a variable interest
rate based on one month LIBOR, on the notional amount of the interest rate
swaps. The Company’s interest rate swap notional amounts are based on
an amortizing schedule fixed at the start date of the
transaction. The Company’s interest rate cap transactions are
designated as cashflow hedges against the benchmark interest rate risk
associated with the CDOs and the subordinated debentures. The
interest rate cap transactions were initiated with an upfront premium that is
being amortized over the life of the contract.
The
Company documents its risk-management policies, including objectives and
strategies, as they relate to its hedging activities, and upon entering into
hedging transactions, documents the relationship between the hedging instrument
and the hedged liability contemporaneously. The Company assesses,
both at inception of a hedge and on an on-going basis, whether or not the hedge
is “highly effective” when using the matched term basis.
The
Company discontinues hedge accounting on a prospective basis and recognizes
changes in the fair value through earnings when: (i) it is determined
that the derivative is no longer effective in offsetting cash flows of a hedged
item (including forecasted transactions); (ii) it is no longer probable that the
forecasted transaction will occur; or (iii) it is determined that designating
the derivative as a hedge is no longer appropriate. The Company’s
derivative instruments are carried on the Company’s balance sheet at fair value,
as assets, if their fair value is positive, or as liabilities, if their fair
value is negative. The Company’s derivative instruments are
designated as “cash flow hedges,” changes in their fair value are recorded in
accumulated other comprehensive income(loss), provided that the hedges are
effective. A change in fair value for any ineffective amount of the
Company’s derivative instruments would be recognized in earnings. The
Company has not recognized any change in the value of its existing derivative
instruments through earnings as a result of ineffectiveness of any of its
hedges.
The
following table presents the fair value of derivative instruments and their
location in the Company’s consolidated balance sheets at December 31, 2009 and
December 31, 2008 respectively (dollar amounts in thousands):
|
Derivative
Designated as Hedging
|
Balance
Sheet Location
|
December
31,
2009
|
December
31,
2008
|
|||||||
|
Interest
Rate Caps
|
Derivative
Assets
|
$
|
4
|
$
|
22
|
|||||
|
Interest
Rate Swaps
|
Derivative
Liabilities
|
2,511
|
4,194
|
|||||||
The
following table presents the impact of the Company’s derivative instruments on
the Company’s accumulated other comprehensive income(loss) for the twelve months
ended December 31, 2009 (dollar amounts in thousands):
|
Twelve
Months Ended
|
||||
|
Derivative
Designated as Hedging Instruments
|
December
31, 2009
|
|||
|
Accumulated
other comprehensive income(loss) for derivative
instruments:
|
||||
|
Balance
at beginning of the period
|
$
|
(5,560
|
)
|
|
|
Unrealized
gain on interest rate caps
|
974
|
|||
|
Unrealized
gain (loss) on interest rate swaps
|
1,682
|
|
||
|
Reclassification
adjustment for net gains(losses) included in net income for
hedges
|
—
|
|||
|
Balance
at end of the period
|
$
|
(2,904
|
)
|
|
The
Company estimates that over the next 12 months, approximately $2.2 million
of the net unrealized losses on the interest rate swaps will be
reclassified from accumulated other comprehensive income/(loss) into
earnings.
F-20
The
following table details the impact of the Company’s interest rate swaps and
interest rate caps included in interest expense for the year ended December 31,
2009 (dollar amounts in thousands):
|
Twelve
Months Ended
|
||||
|
December
31, 2009
|
||||
|
Interest
Rate Caps:
|
||||
|
Interest
expense-investment securities and loans held in securitization
trusts
|
$
|
637
|
||
|
Interest
expense-subordinated debentures
|
353
|
|||
|
Interest
Rate Swaps:
|
||||
|
Interest
expense-investment securities and loans held in securitization
trusts
|
3,228
|
|||
Interest Rate Swaps
-
The
Company is required to pledge assets under a bi-lateral margin arrangement,
including either cash or Agency RMBS, as collateral for its interest rate swaps,
whose collateral requirements vary by counterparty and change over time based on
the market value, notional amount, and remaining term of the interest rate swap
(“Swap”). In the event the Company is unable to meet a margin call
under one of its Swap agreements, thereby causing an event of default or
triggering an early termination event under one of its Swap agreements, the
counterparty to such agreement may have the option to terminate all of such
counterparty’s outstanding Swap transactions with the Company. In addition,
under this scenario, any close-out amount due to the counterparty upon
termination of the counterparty’s transactions would be immediately payable by
the Company pursuant to the applicable agreement. The Company
believes it was in compliance with all margin requirements under its Swap
agreements as of December 31, 2009 and December 31, 2008. The Company
had $2.9 million and $4.2 million of restricted cash related to margin posted
for Swaps as of December 31, 2009 and December 31, 2008,
respectively.
The use
of interest rate swaps exposes the Company to counterparty credit risks in the
event of a default by a Swap counterparty. If a counterparty defaults under the
applicable Swap agreement the Company may be unable to collect payments to which
it is entitled under its Swap agreements, and may have difficulty collecting the
assets it pledged as collateral against such Swaps. The Company
currently has in place with all outstanding Swap counterparties bi-lateral
margin agreements thereby requiring a party to post collateral to the Company
for any valuation deficit. This arrangement is intended to limit the
Company’s exposure to losses in the event of a counterparty
default.
The
following table presents information about the Company’s interest rate swaps as
of December 31, 2009 (dollar amounts in thousands):
|
December
31, 2009
|
||||||
|
Maturity
(1)
|
Notional
Amount
|
Weighted
Average
Fixed
Pay
Interest
Rate
|
||||
|
Within
30 Days
|
$
|
2,070
|
2.99
|
% | ||
|
Over
30 days to 3 months
|
3,700
|
2.99
|
||||
|
Over
3 months to 6 months
|
8,330
|
2.99
|
||||
|
Over
6 months to 12 months
|
34,540
|
2.98
|
||||
|
Over
12 months to 24 months
|
34,070
|
3.00
|
||||
|
Over
24 months to 36 months
|
16,380
|
3.01
|
||||
|
Over
36 months to 48 months
|
8,380
|
2.93
|
||||
|
Over
48 months
|
—
|
—
|
||||
|
Total
|
$
|
107,470
|
2.99
|
% | ||
|
(1)
|
The
Company enters into scheduled amortizing interest rate swap transactions
whereby the Company pays a fixed rate of interest and receives one month
LIBOR.
|
Interest Rate Caps
– Interest
rate caps are designated by the Company as cash flow hedges against interest
rate risk associated with the Company’s CDOs and the subordinated debentures.
The interest rate caps associated with the CDOs are amortizing contractual
notional schedules determined at origination. The Company had $364.5 million and
$456.9 million of interest rate caps outstanding as of December 31, 2009 and
December 31, 2008, respectively. These interest rate caps are
utilized to cap the interest rate on the CDOs at a fixed-rate when one month
LIBOR exceeds a predetermined rate. In addition, the Company has an
interest rate cap contract on $25.0 million of subordinated debentures that
effectively caps three month LIBOR at 3.75% until March 31, 2010.
F-21
|
5.
|
Financing
Arrangements, Portfolio Investments
|
The
Company has entered into repurchase agreements with third party financial
institutions to finance its RMBS portfolio. The repurchase agreements are
short-term borrowings that bear interest rates typically based on a spread to
LIBOR, and are secured by the RMBS which they finance. At December 31, 2009, the
Company had repurchase agreements with an outstanding balance of $85.1 million
and a weighted average interest rate of 0.27%. As of December 31, 2008, the
Company had repurchase agreements with an outstanding balance of $402.3 million
and a weighted average interest rate of 2.62%. At December 31, 2009 and December
31, 2008, securities pledged as collateral for repurchase agreements had
estimated fair values and carrying values of $91.1 million and $456.5 million,
respectively. All outstanding borrowings under our repurchase agreements
mature within 24 days. As of December 31, 2009, the average days to
maturity for borrowings under the Company’s repurchase agreements was 22
days.
The
follow table summarizes outstanding repurchase agreement borrowings secured by
portfolio investments as of December 31, 2009 and December 31, 2008 (dollar
amounts in thousands):
|
Repurchase
Agreements by Counterparty
|
||||||||
|
Counterparty
Name
|
December 31,
2009
|
December 31,
2008
|
||||||
|
AVM,
L.P.
|
$ | — | $ | 54,911 | ||||
|
Cantor
Fitzgerald
|
9,643 | — | ||||||
|
Credit
Suisse First Boston LLC
|
20,477 | 97,781 | ||||||
|
Enterprise
Bank of Florida
|
— | 19,409 | ||||||
|
HSBC
|
— | 42,120 | ||||||
| Jefferies & Company, Inc. | 17,764 | — | ||||||
| MF Global | — | 30,272 | ||||||
| RBS Greenwich Capital | 22,962 | 157,836 | ||||||
|
South
Street Securities LLC
|
14,260 | — | ||||||
|
Total Financing
Arrangements, Portfolio Investments
|
$ | 85,106 | $ | 402,329 | ||||
As of
December 31, 2009, our Agency ARM RMBS are financed with $85.1 million of
repurchase agreement funding with an advance rate of 94% that implies a
haircut of 6%.
In the
event we are unable to obtain sufficient short-term financing through repurchase
agreements or otherwise, or our lenders start to require additional collateral,
we may have to liquidate our investment securities at a disadvantageous time,
which could result in losses. Any losses resulting from the disposition of
our investment securities in this manner could have a material adverse effect on
our operating results and net profitability.
As of
December 31, 2009, the Company had $24.5 million in cash and $85.6 million in
unencumbered securities, including $25.2 million in Agency RMBS, to meet
additional haircut or market valuation requirements.
F-22
|
6.
|
Collateralized
Debt Obligations
|
The
Company’s CDOs, which are recorded as liabilities on the Company’s balance
sheet, are secured by ARM loans pledged as collateral, which are recorded as
assets of the Company. As of December 31, 2009 and December 31, 2008, the
Company had CDOs outstanding of $266.8 million and $335.6 million, respectively.
As of December 31, 2009 and December 31, 2008, the current weighted average
interest rate on these CDOs was 0.61% and 0.85%, respectively. The CDOs are
collateralized by ARM loans with a principal balance of $277.7 million and
$347.5 million at December 31, 2009 and December 31, 2008, respectively. The
Company retained the owner trust certificates, or residual interest for three
securitizations, and, as of December 31, 2009 and December 31, 2008, had a net
investment in the securitizations trusts of $10.0 million and $12.7 million,
respectively.
The CDO
transactions include amortizing interest rate cap contracts with an aggregate
notional amount of $182.2 million as of December 31, 2009 and an aggregate
notional amount of $204.3 million as of December 31, 2008, which are recorded as
an asset of the Company. The interest rate caps are carried at fair value and
totaled $4,476 as of December 31, 2009 and $18,575 as of December 31, 2008,
respectively. The interest rate caps reduce interest rate exposure on these
transactions.
|
7.
|
Subordinated
Debentures (Net)
|
The
follow table summarizes outstanding repurchase agreement borrowings secured by
portfolio investments as of December 31, 2009 and December 31, 2008 (dollar
amounts in thousands):
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Subordinated
debentures
|
$ | 45,000 | $ | 45,000 | ||||
|
Less:
unamortized bond issuance costs
|
(108 | ) | (382 | ) | ||||
|
Subordinated
debentures (net)
|
$ | 44,892 | $ | 44,618 | ||||
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 three-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. The 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 (4.00% at December 31, 2009 and 5.22% at
December 31, 2008). The securities mature on March 15, 2035 and may be called at
par by the Company any time after March 15, 2010. HC 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. The preferred stock of NYM Preferred Trust I has
been classified as subordinated debentures in the liability section of the
Company’s consolidated balance sheet.
As of March 5, 2010, the Company has
not been notified, and is not aware, of any event of default under the covenants
for the subordinated debentures.
F-23
|
8.
|
Discontinued
Operation
|
In
connection with the sale of our mortgage origination platform assets during the
quarter ended March 31, 2007, we classified our mortgage lending segment as a
discontinued operation. As a result, we have reported revenues and
expenses related to the segment as a discontinued operation and the related
assets and liabilities as assets and liabilities related to a discontinued
operation for all periods presented in the accompanying consolidated financial
statements. Certain assets, such as the deferred tax asset, and
certain liabilities, such as subordinated debt and liabilities related to lease
facilities not sold, are part of our ongoing operations and accordingly, we have
not included these items as part of the discontinued operation.
Balance
Sheet Data
The
components of assets related to the discontinued operation as of December 31,
2009 and December 31, 2008 are as follows (dollar amounts in
thousands):
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accounts
and accrued interest receivable
|
$ | 18 | $ | 26 | ||||
|
Mortgage
loans held for sale (net)
|
3,841 | 5,377 | ||||||
|
Prepaid
and other assets
|
358 | 451 | ||||||
|
Total assets
|
$ | 4,217 | $ | 5,854 | ||||
The
components of liabilities related to the discontinued operation as of December
31, 2009 and 2008 are as follows (dollar amounts in thousands):
|
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
|
Due
to loan purchasers
|
$ | 342 | $ | 708 | |||
|
Accounts
payable and accrued expenses
|
1,436 | 2,858 | |||||
|
Total liabilities
|
$ | 1,778 | $ | 3,566 | |||
Statements
of Operations Data
The
statements of operations of the discontinued operation for the years ended
December 31, 2009, 2008 and 2007 are as follows (dollar amounts in
thousands):
|
For
the Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 1,242 | $ | 1,495 | $ | 1,376 | ||||||
|
Expenses
|
456 | (162 | ) | 35,854 | ||||||||
|
Income
(loss) from discontinued operations – net of tax
|
$ | 786 | $ | 1,657 | $ | (34,478 | ) | |||||
F-24
|
9.
|
Commitments
and Contingencies
|
Loans Sold to Investors -
For
loans originated and sold by our discontinued mortgage lending business, the
Company is not exposed to long term credit risk. In the normal course of
business, however, the Company is obligated to repurchase loans based on
violations of representations and warranties in the sale agreement, or early
payment defaults. The Company did not repurchase any loans during the year
ended December 31, 2009.
The
Company periodically receives repurchase requests based on alleged violations of
representations and warranties, each of which management reviews to determine,
based on management’s experience, whether such requests may reasonably be deemed
to have merit. As of December 31, 2009, we had a total of $2.0
million of unresolved repurchase requests that management concluded may
reasonably be deemed to have merit, against which the Company has a reserve of
approximately $0.3 million. The reserve is based on one or more of
the following factors; historical settlement rates, property value securing the
loan in question and specific settlement discussions with third
parties.
Outstanding Litigation
- The
Company is at times subject to various legal proceedings arising in the ordinary
course of business. As of December 31, 2009, 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, financial condition or
cash flows.
Leases
- The Company leases
its corporate office and equipment under short-term lease agreements expiring at
various dates through 2013. All such leases are accounted for as
operating leases. Total lease expense for property and equipment
amounted to $0.2 million and $0.4 million for the years ended December 31, 2009
and December 31, 2008, respectively.
Letters of Credit
– The
Company maintains a letter of credit in the amount of $0.2 million in lieu of a
cash security deposit for its current corporate headquarters, located at 52
Vanderbilt Avenue in New York City, for its landlord, Vanderbilt Associates I,
L.L.C, as beneficiary. This letter of credit is secured by cash
deposited in a bank account maintained at JP Morgan Chase bank.
As of
December 31, 2009 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,
|
Total
|
|||
|
2010
|
$
|
190
|
||
|
2011
|
193
|
|||
|
2012
|
198
|
|||
|
2013
|
67
|
|||
|
$
|
648
|
|||
F-25
|
10.
|
Concentrations
of Credit Risk
|
At
December 31, 2009, there were geographic concentrations of credit risk exceeding
5% of the total loan balances within mortgage loans held in the securitization
trusts. At December 31, 2008, there were geographic concentrations of credit
risk exceeding 5% of the total loan balances within mortgage loans held in the
securitization trusts and retained interests in our REMIC securitization, NYMT
2006-1. The Company sold all the retained interests related to NYMT 2006-1
during the quarter ended September 30, 2009. At December 31, 2009 and December
31, 2008, the geographic concentrations of credit risk exceeding 5% are as
follows:
|
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
New
York
|
38.9 | % | 30.7 | % | ||||
|
Massachusetts
|
24.3 | % | 17.2 | % | ||||
|
New
Jersey
|
8.5 | % | 6.0 | % | ||||
|
Florida
|
5.7 | % | 7.8 | % | ||||
F-26
|
11.
|
Fair
Value of Financial Instruments
|
The
Company has established and documented processes for determining fair
values. Fair value is based upon quoted market prices, where
available. If listed prices or quotes are not available, then fair
value is based upon internally developed models that primarily use inputs that
are market-based or independently-sourced market parameters, including interest
rate yield curves.
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The three levels of valuation hierarchy are defined as
follows:
Level 1
- inputs to the
valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2
- inputs to the
valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial
instrument.
Level 3
- inputs to the
valuation methodology are unobservable and significant to the fair value
measurement.
The
following describes the valuation methodologies used for the Company’s financial
instruments measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy.
a. Investment Securities Available
for Sale (RMBS)
- Fair value for the RMBS in our portfolio is based on
quoted prices provided by dealers who make markets in similar financial
instruments. The dealers will incorporate common market pricing methods,
including a spread measurement to the Treasury curve or interest rate swap curve
as well as underlying characteristics of the particular security including
coupon, periodic and life caps, collateral type, rate reset period and seasoning
or age of the security. If quoted prices for a security are not reasonably
available from a dealer, the security will be re-classified as a Level 3
security and, as a result, management will determine the fair value based on
characteristics of the security that the Company receives from the issuer and
based on available market information. Management reviews all prices used in
determining valuation to ensure they represent current market conditions. This
review includes surveying similar market transactions, comparisons to interest
pricing models as well as offerings of like securities by dealers. The Company's
investment securities that are comprised of RMBS are valued based upon readily
observable market parameters and are classified as Level 2 fair
values.
b. Investment Securities Available
for Sale (CLO)
- The fair value of the CLO notes, as of December 31,
2009, was based on management’s valuation determined using a discounted future
cash flows model that management believes would be used by market participants
to value similar financial instruments. If a reliable market for these assets
develops in the future, management will consider quoted prices provided by
dealers who make markets in similar financial instruments in determining the
fair value of the CLO notes. The CLO notes are classified as Level 3 fair
values.
c.
Interest Rate Swaps and
Caps
- The fair value of interest rate swaps and caps are based on
using market accepted financial models as well as dealer quotes. The
model utilizes readily observable market parameters, including treasury rates,
interest rate swap spreads and swaption volatility curves. The
Company’s interest rate caps and swaps are classified as Level 2 fair
values.
F-27
The
following table presents the Company’s financial instruments measured at fair
value on a recurring basis as of December 31, 2009 and December 31, 2008 on the
Company’s consolidated balance sheets (dollar amounts in
thousands):
|
Assets
Measured at Fair Value on a Recurring Basis
at
December 31, 2009
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets
carried at fair value:
|
||||||||||||||||
|
Investment
securities available for sale
|
$
|
—
|
$
|
159,092
|
$
|
17,599
|
$
|
176,691
|
||||||||
|
Derivative
assets (interest rate caps)
|
—
|
4
|
—
|
4
|
||||||||||||
|
Total
|
$
|
—
|
$
|
159,096
|
$
|
17,599
|
$
|
176,695
|
||||||||
|
Liabilities
carried at fair value:
|
||||||||||||||||
|
Derivative
liabilities (interest rate swaps)
|
$
|
—
|
$
|
2,511
|
$
|
—
|
$
|
2,511
|
||||||||
|
Total
|
$
|
—
|
$
|
2,511
|
$
|
—
|
$
|
2,511
|
||||||||
|
Assets
Measured at Fair Value on a Recurring Basis
at
December 31, 2008
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
Assets
carried at fair value:
|
||||||||||||||||
|
Investment
securities available for sale
|
$
|
—
|
$
|
477,416
|
$
|
—
|
$
|
477,416
|
||||||||
|
Derivative
assets (interest rate caps)
|
—
|
22
|
—
|
22
|
||||||||||||
|
Total
|
$
|
—
|
$
|
477,438
|
$
|
—
|
$
|
477,438
|
||||||||
|
Liabilities
carried at fair value:
|
||||||||||||||||
|
Derivative
liabilities (interest rate swaps)
|
$
|
—
|
$
|
4,194
|
$
|
—
|
$
|
4,194
|
||||||||
|
Total
|
$
|
—
|
$
|
4,194
|
$
|
—
|
$
|
4,194
|
||||||||
The
following table details changes in valuation for the Level 3 assets for the year
ended December 31, 2009 (dollar amounts in thousands):
Level 3 -
Investment
securities available for sale
|
Year
Ended
December
31, 2009
|
||||
|
Beginning
Balance
|
$
|
—
|
||
|
Purchases
|
8,728
|
|||
|
Total
gains (realized/unrealized)
|
||||
|
Included
in earnings (1)
|
459
|
|||
|
Included
in other comprehensive income(loss)
|
8,412
|
|||
|
Ending
Balance
|
$
|
17,599
|
||
(1)
- Amounts included in interest income-investment securities and loans held in
securitizations trusts.
F-28
Any
changes to the valuation methodology are reviewed by management to ensure the
changes are appropriate. As markets and products develop and the
pricing for certain products becomes more transparent, the Company continues to
refine its valuation methodologies. The methods described above may
produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. Furthermore, while the
Company believes its valuation methods are appropriate and consistent with other
market participants, the use of different methodologies, or assumptions, to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date. The Company
uses inputs that are current as of each reporting date, which may include
periods of market dislocation, during which time price transparency may be
reduced. This condition could cause the Company’s financial
instruments to be reclassified from Level 2 to Level 3 in future
periods.
The
following table presents assets measured at fair value on a non-recurring basis
as of December 31, 2009 and December 31, 2008 on the consolidated balance sheet
(dollar amounts in thousands):
|
Assets
Measured at Fair Value on a Non-Recurring Basis
at
December 31, 2009
|
||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||
|
Mortgage
loans held for sale (net)
|
$
|
—
|
$
|
—
|
$
|
3,841
|
$
|
3,841
|
||||
|
Mortgage
loans held in securitization trusts (net) – impaired loans
|
—
|
—
|
7,090
|
7,090
|
||||||||
|
Real
estate owned held in securitization trusts
|
—
|
—
|
546
|
546
|
||||||||
|
Assets
Measured at Fair Value on a Non-Recurring Basis
at
December 31, 2008
|
||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||
|
Mortgage
loans held for sale (net)
|
$
|
—
|
$
|
—
|
$
|
5,377
|
$
|
5,377
|
||||
|
Mortgage
loans held in securitization trusts (net) – impaired loans
|
—
|
—
|
2,448
|
2,448
|
||||||||
|
Real
estate owned held in securitization trusts
|
—
|
—
|
1,366
|
1,366
|
||||||||
The
following table presents losses incurred for assets measured at fair value on a
non-recurring basis for the years ended December 31, 2009 and December 31, 2008
on the Company’s consolidated statements of operations (dollar amounts in
thousands):
|
Twelve
Months Ended
|
||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Mortgage
loans held for sale (net)
|
$
|
245
|
$
|
433
|
||||
|
Mortgage
loans held in securitization trusts (net) – impaired loans
|
2,192
|
1,188
|
||||||
|
Real
estate owned held in securitization trusts
|
70
|
246
|
||||||
Mortgage Loans Held for Sale
(net)
–The fair value of mortgage loans held for sale (net) are estimated
by the Company based on the price that would be received if the loans were sold
as whole loans taking into consideration the aggregated characteristics of the
loans such as, but not limited to, collateral type, index, interest rate,
margin, length of fixed interest rate period, life time cap, periodic cap,
underwriting standards, age and credit.
Mortgage Loans Held in
Securitization Trusts (net) – Impaired Loans –
Impaired mortgage loans
held in the securitization trusts are recorded at amortized cost less specific
loan loss reserves. Impaired loan value is based on management’s estimate of the
net realizable value taking into consideration local market conditions of the
distressed property, updated appraisal values of the property and estimated
expenses required to remediate the impaired loan.
Real Estate Owned Held in
Securitization Trusts –
Real estate owned held in the securitization
trusts are recorded at net realizable value. Any subsequent adjustment will
result in the reduction in carrying value with the corresponding amount charge
to earnings. Net realizable value based on an estimate of disposal
taking into consideration local market conditions of the distressed property,
updated appraisal values of the property and estimated expenses required to sell
the property.
F-29
The
following table presents the carrying value and estimated fair value of the
Company’s financial instruments at December 31, 2009 and December 31, 2008
(dollar amounts in thousands):
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
|||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
24,522
|
$
|
24,522
|
$
|
9,387
|
$
|
9,387
|
||||||||
|
Restricted
cash
|
3,049
|
3,049
|
7,959
|
7,959
|
||||||||||||
|
Investment
securities – available for sale
|
176,691
|
176,691
|
477,416
|
477,416
|
||||||||||||
|
Mortgage
loans held in securitization trusts (net)
|
276,176
|
253,833
|
346,972
|
341,127
|
||||||||||||
|
Derivative
assets
|
4
|
4
|
22
|
22
|
||||||||||||
|
Assets
related to discontinued operation-mortgage loans held for sale
(net)
|
3,841
|
3,841
|
5,377
|
5,377
|
||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Financing
arrangements, portfolio investments
|
$
|
85,106
|
$
|
85,106
|
$
|
402,329
|
$
|
402,329
|
||||||||
|
Collateralized
debt obligations
|
266,754
|
211,032
|
335,646
|
199,503
|
||||||||||||
|
Derivative
liabilities
|
2,511
|
2,511
|
4,194
|
4,194
|
||||||||||||
|
Subordinated
debentures (net)
|
44,892
|
26,563
|
44,618
|
10,049
|
||||||||||||
|
Convertible
preferred debentures (net)
|
19,851
|
19,363
|
19,702
|
16,363
|
||||||||||||
In
addition to the methodology to determine the fair value of the Company’s
financial assets and liabilities reported at fair value on a recurring basis and
non-recurring basis, as previously described, the following methods and
assumptions were used by the Company in arriving at the fair value of the
Company’s other financial instruments in the following table:
a.
Cash and cash equivalents and
restricted cash:
Estimated fair value approximates the
carrying value of such assets.
b.
Mortgage Loans Held in
Securitization Trusts (net) -
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 estimated
market prices for similar types of loans.
c.
Financing arrangements, portfolio
investments –
The fair value of these financing arrangements approximates
cost as they are short term in nature and mature in 30 days.
d.
Collateralized debt obligations
–
The fair value of these CDOs is based on discounted cashflows as well
as market pricing on comparable obligations.
e.
Subordinated debentures (net)
–
The fair value of these subordinated debentures (net) is based on
discounted cashflows using management’s estimate for market yields.
f.
Convertible preferred debentures
(net) –
The fair value of the convertible preferred debentures (net) is
based on discounted cashflows using management’s estimate for market
yields.
F-30
|
12.
|
Income
taxes
|
A
reconciliation of the statutory income tax provision (benefit) to the effective
income tax provision for the years ended December 31, 2009,
2008 and 2007, are as follows (dollar amounts in
thousands).
|
December
31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
(Benefit)
provision at statutory rate
|
$ | 3,546 | (35.0 | )% | $ | (8,438 | ) | (35.0 | )% | $ | (9,830 | ) | (35.0 | )% | ||||||||||
|
Non-taxable
REIT income (loss)
|
(3,008 | ) | 30.0 | % | 7,598 | 31.5 | % | 3,008 | 10.7 | % | ||||||||||||||
|
State
and local tax provision (benefit)
|
142 | (1.0 | )% | (221 | ) | (0.9 | )% | (1,797 | ) | (6.4 | )% | |||||||||||||
|
Valuation
allowance
|
(680 | ) | 6.0 | % | 572 | 2.4 | % | 26,962 | 96.0 | % | ||||||||||||||
|
Miscellaneous
|
— | — | % | 489 | 2.0 | % | 9 | 0.0 | % | |||||||||||||||
|
Total
provision
|
$ | — | — | % | $ | — | — | % | $ | 18,352 | 65.3 | % | ||||||||||||
The
income tax provision for the year ended December 31, 2009 (included in
discontinued operations - see note 8) is comprised of the following components
(dollar amounts in thousands):
|
Deferred
|
||||
|
Regular
tax provision
|
||||
|
Federal
|
$ | — | ||
|
State
|
— | |||
|
Total
tax provision
|
$ | — | ||
The
income tax provision for the year ended December 31, 2008 (included in
discontinued operations - see note 8) is comprised of the following components
(dollar amounts in thousands).
|
Deferred
|
||||
|
Regular
tax provision
|
||||
|
Federal
|
$ | — | ||
|
State
|
— | |||
|
Total
tax provision
|
$ | — | ||
The
income tax benefit for the year ended December 31, 2007 (included in
discontinued operations - see note 8) is comprised of the following components
(dollar amounts in thousands).
|
Deferred
|
||||
|
Regular
tax benefit
|
||||
|
Federal
|
$
|
14,522
|
||
|
State
|
3,830
|
|||
|
Total
tax benefit
|
$
|
18,352
|
||
F-31
The gross
deferred tax asset at December 31, 2009 is $29.4 million; the Company continued
to reserve 100% of the deferred tax asset as the facts continue to support the
Company's inability to utilize the deferred tax asset. The major sources of
temporary differences included in the deferred tax assets and their deferred tax
effect as of December 31, 2009 are as follows (dollar amounts in
thousands):
|
Deferred
tax assets:
|
||||
|
Net
operating loss carryover
|
$
|
27,697
|
||
|
Mark
to market adjustment
|
469
|
|||
|
Sec.
267 disallowance
|
268
|
|||
|
Charitable
contribution carryforward
|
1
|
|||
|
GAAP
reserves
|
429
|
|||
|
Rent
expense
|
537
|
|||
|
Gross
deferred tax asset
|
29,401
|
|||
|
Valuation
allowance
|
(29,401
|
)
|
||
|
Net
deferred tax asset
|
$
|
—
|
At
December 31, 2009, the Company had approximately $62.2 million of net operating
loss carryforwards which may be used to offset future taxable income. The
carryforwards will expire in 2024 through 2029. The Internal Revenue Code places
certain limitations on the annual amount of net operating loss carryforwards
that can be utilized if certain changes in the Company’s ownership occur. The
Company may have undergone an ownership change within the meaning of IRC section
382 that would impose such a limitation, but a final conclusion has not been
made. At this time, based on management’s assessment of the limitations,
management does not believe that the limitation would cause a significant amount
of the Company's net operating losses to expire unused. The Company
continues to maintain a reserve for 100% of the deferred tax asset.
The gross
deferred tax asset at December 31, 2008 is $30.1 million; the Company continued
to reserve 100% of the deferred tax asset as the facts continue to support the
Company's inability to utilize the deferred tax asset. The major sources of
temporary differences included in the deferred tax assets and their deferred tax
effect as of December 31, 2008 are as follows (dollar amounts in
thousands):
|
Deferred
tax assets:
|
||||
|
Net
operating loss carryover
|
$ | 27,655 | ||
|
Mark
to market adjustment
|
313 | |||
|
Sec.
267 disallowance
|
268 | |||
|
Charitable
contribution carryforward
|
1 | |||
|
GAAP
reserves
|
769 | |||
|
Rent
expense
|
1,074 | |||
|
Gross
deferred tax asset
|
30,080 | |||
|
Valuation
allowance
|
(30,080 | ) | ||
|
Net
deferred tax asset
|
$ | — | ||
At
December 31, 2008, the Company had approximately $62.1 million of net
operating loss carryforwards which may be used to offset future taxable
income.
|
13.
|
Segment
Reporting
|
Until
March 31, 2007, the Company operated two strategies, managing a mortgage
portfolio, and operating a mortgage lending business. Upon the sale of
substantially all of the mortgage lending operating assets in the first quarter
of 2007, the Company exited the mortgage lending business and accordingly no
longer reports segment information as it only has one operating
segment.
F-32
|
14.
|
Capital
Stock and Earnings per Share
|
The
Company had 400,000,000 shares of common stock, par value $0.01 per share,
authorized with 9,419,094 shares issued and outstanding as of December 31, 2009
and 9,320,094 shares issued and outstanding as of December 31, 2008. The Company
had 200,000,000 shares of preferred stock, par value $0.01 per share,
authorized, including 2,000,000 shares of Series A Cumulative Convertible
Redeemable Preferred Stock (“Series A Preferred Stock”) authorized. As of each
December 31, 2009 and December 31, 2008, the Company had issued and
outstanding 1,000,000 shares of Series A Preferred Stock. As of December
31, 2009, 8,111 shares remain reserved for issuance under the 2005 Stock
Incentive Plan.
On
February 21, 2008, the Company completed the issuance and sale of 7.5 million
shares of its common stock in a private placement at a price of $8.00 per
share. This private offering of the Company's common stock generated net
proceeds to the Company of $56.5 million after payment of private placement fees
and expenses. In connection with this private offering of our common
stock, we entered into a registration rights agreement pursuant to which we were
required to file with the Securities and Exchange Commission, or SEC, a
resale shelf registration statement registering for resale the 7.5 million
shares sold in the private offering. The Company filed a resale shelf
registrationstatement on Form S-3 on April 4, 2008, which became effective
on April 18, 2008.
The
following table presents cash dividends declared by the Company on its common
stock from January 1, 2008 through December 31, 2009.
|
Period
|
Declaration
Date
|
Record
Date
|
Payment
Date
|
Cash
Dividend
Per
Share
|
||||||
|
Fourth
Quarter 2009
|
December
21, 2009
|
January
7, 2010
|
January
26, 2010
|
$
|
0.25
|
|||||
|
Third
Quarter 2009
|
September
28, 2009
|
October
13, 2009
|
October
26, 2009
|
0.25
|
||||||
|
Second
Quarter 2009
|
June
14, 2009
|
June
26, 2009
|
July
27, 2009
|
0.23
|
||||||
|
First
Quarter 2009
|
March
25, 2009
|
April
6, 2009
|
April
27, 2009
|
0.18
|
||||||
|
Fourth
Quarter 2008
|
December
23, 2008
|
January
7, 2009
|
January
26, 2009
|
0.10
|
||||||
|
Third
Quarter 2008
|
September
29, 2008
|
October
10, 2008
|
October
27, 2008
|
0.16
|
||||||
|
Second
Quarter 2008
|
June
30, 2008
|
July
10, 2008
|
July
25, 2008
|
0.16
|
||||||
|
First
Quarter 2008
|
April
21, 2008
|
April
30, 2008
|
May
15,2008
|
0.12
|
||||||
The
following table presents cash dividends declared by the Company on its Series A
Preferred Stock from January 1, 2008 through December 31, 2009.
|
Period
|
Declaration
Date
|
Record
Date
|
Payment
Date
|
Cash
Dividend
Per
Share
|
||||||
|
Fourth
Quarter 2009
|
December
21, 2009
|
December
31, 2009
|
January
29, 2010
|
$
|
0.63
|
|||||
|
Third
Quarter 2009
|
September
28, 2009
|
September
30, 2009
|
October
30, 2009
|
0.63
|
||||||
|
Second
Quarter 2009
|
June
14, 2009
|
June
30, 2009
|
July
30, 2009
|
0.58
|
||||||
|
First
Quarter 2009
|
March
25, 2009
|
March
31, 2009
|
April
30, 2009
|
0.50
|
||||||
|
Fourth
Quarter 2008
|
December
23, 2008
|
December
31, 2008
|
January
30,2009
|
0.50
|
||||||
|
Third
Quarter 2008
|
September
29, 2008
|
September
30, 2008
|
October
30, 2008
|
0.50
|
||||||
|
Second
Quarter 2008
|
June
30, 2008
|
June
30, 2008
|
July
30, 2008
|
0.50
|
||||||
|
First
Quarter 2008
|
April
21, 2008
|
March
31, 2008
|
April
30,2008
|
0.50
|
||||||
During
2009, taxable dividends for our common stock were $0.76 per share. For tax
reporting purposes, the 2009 taxable dividends were classified as ordinary
income.
During
2008, taxable dividends for our common stock were $0.44 per share. For tax
reporting purposes, the 2008 taxable dividends were classified as $0.26 ordinary
income and $0.18 a return of capital.
F-33
The Board
of Directors declared a one-for-two reverse stock split of the Company’s common
stock, effective on May 27, 2008, decreasing the number of shares outstanding at
the time to approximately 9.3 million shares.
The Board
of Directors declared a one-for-five reverse stock split of the Company's common
stock, effective on October 9, 2007, decreasing the number of common shares
outstanding at the time to approximately 3.6 million shares.
All per
share and share amounts provided in the this report have been restated to
give effect to both reverse stock splits.
The
Company calculates basic net income (loss) 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 convertible preferred stock, 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.
The
following table presents the computation of basic and diluted net income (loss)
per share for the periods indicated (in thousands, except per share
amounts):
|
For
the Years Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator
:
|
||||||||||||
|
Net
(loss) income – Basic
|
$ | 11,670 | $ | (24,107 | ) | $ | (55,268 | ) | ||||
|
Net
(loss) income from continuing operations
|
10,884 | (25,764 | ) | (20,790 | ) | |||||||
|
Net
income (loss) from discontinued operations (net of tax)
|
786 | 1,657 | (34,478 | ) | ||||||||
|
Effect
of dilutive instruments:
|
||||||||||||
|
Convertible
preferred debentures (1)
|
2,474 | 2,149 | — | |||||||||
|
Net
income (loss) – Dilutive
|
14,144 | (24,107 | ) | (55,268 | ) | |||||||
|
Net
income (loss) from continuing operations
|
13,358 | (25,764 | ) | (20,790 | ) | |||||||
|
Net
income (loss) from discontinued operations (net of tax)
|
$ | 786 | $ | 1,657 | $ | (34,478 | ) | |||||
|
Denominator:
|
||||||||||||
|
Weighted
average basis shares outstanding
|
9,367 | 8,272 | 1,814 | |||||||||
|
Effect
of dilutive instruments:
|
||||||||||||
|
Convertible
preferred debentures (1)
|
2,500 | 2,384 | — | |||||||||
|
Weighted
average dilutive shares outstanding
|
11,867 | 8,272 | 1,814 | |||||||||
|
EPS:
|
||||||||||||
|
Basic
EPS
|
$ | 1.25 | $ | (2.91 | ) | $ | (30.47 | ) | ||||
|
Basic
EPS from continuing operations
|
1.16 | (3.11 | ) | (11.46 | ) | |||||||
|
Basic
EPS from discontinued operations (net of tax)
|
0.09 | 0.20 | (19.01 | ) | ||||||||
|
Dilutive
EPS
|
$ | 1.19 | $ | (2.91 | ) | $ | (30.47 | ) | ||||
|
Dilutive
EPS from continuing operations
|
1.12 | (3.11 | ) | (11.46 | ) | |||||||
|
Dilutive
EPS from discontinued operations (net of tax)
|
0.07 | 0.20 | (19.01 | ) | ||||||||
|
(1)
|
Approximately
2.4 million shares are excluded from the dilutive calculation for the year
ended December 31, 2008
|
.
|
15.
|
Convertible
Preferred Debentures (Net)
|
As of
December 31, 2009, there were 1.0 million shares of our Series A Preferred Stock
outstanding, with an aggregate redemption value of $20.0 million and current
dividend payment rate of 12.5% per year. The Series A Preferred Stock
matures on December 31, 2010, at which time any outstanding shares
must be redeemed by the Company at the $20.00 per share liquidation
preference plus any accrued and unpaid dividends, because of this mandatory
redemption feature, the Company classifies these securities as a
liability on its balance sheet and, accordingly, the corresponding dividend is
recorded as an interest expense.
We issued these shares of Series A
Preferred Stock to JMP Group Inc. and certain of its affiliates for an aggregate
purchase price of $20.0 million. The Series A Preferred
Stock entitles the holders to receive a minimum cumulative dividend of
10% per year, subject to an increase to the extent any future quarterly common
stock dividends exceed $0.20 per share. The Company paid a third and fourth
quarter 2009 common stock dividend of $0.25, resulting in an increase in the
dividend rate for the Series A Preferred Stock in the 2009 third quarter to
12.5% (per annum).
The
Series A Preferred Stock is convertible into shares of the Company's common
stock based on a conversion price of $8.00 per share of common stock, which
represents a conversion rate of two and one-half (2 ½) shares of common stock
for each share of Series A Preferred Stock.
F-34
|
16.
|
Stock
Incentive Plans
|
Pursuant
to the 2005 Stock Incentive Plan (the "Plan"), eligible employees, officers and
directors of the Company are offered the opportunity to acquire the Company's
common stock through the award of restricted stock and other equity-based awards
under the Plan. The maximum number of shares of common stock that may be granted
under the Plan is 103,111.
The
Company awarded 99,000 shares of restricted stock under the Plan on July 13,
2009, of which 34,335 shares have fully vested. As of December
31, 2009, 8,111 shares remain available for issuance under the Plan including
4,000 shares forfeited during the year. During the year ended December 31, 2009,
the Company recognized non-cash compensation expense of $0.3
million. At December 31, 2009 the Company had unrecognized
compensation expense of $0.2 million related to the unvested shares of
restricted common stock. The unrecognized compensation expense at
December 31, 2009 is expected to be recognized over a weighted average period of
1.5 years. The total fair value of restricted shares vested during
the years ended December 31, 2009 was $0.2 million. 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 or resignation from the Board of Directors.
A summary
of the status of the Company's non-vested restricted stock as of December 31,
2009 and changes during the twelve months then ended is presented
below:
|
Number
of
Non-vested
Restricted
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
|||||||
|
Non-vested
shares at beginning of year, January 1, 2009
|
—
|
$
|
—
|
|||||
|
Granted
|
99,000
|
5.28
|
||||||
|
Forfeited
|
(4,000
|
)
|
—
|
|||||
|
Vested
|
(34,335
|
)
|
5.28
|
|||||
|
Non-vested
shares as of December 31, 2009
|
60,665
|
$
|
5.28
|
|||||
|
Weighted-average
fair value of restricted stock granted during the period
|
99,000
|
$
|
5.28
|
|||||
There
were no non-vested restricted shares of stock outstanding for the year ended
December 31, 2008.
|
17.
|
Quarterly
Financial Data (unaudited)
|
The
following table is a comparative breakdown of our unaudited quarterly results
for the immediately preceding eight quarters (dollar amounts in thousands,
except per share data):
|
Three
Months Ended
|
||||||||||||||||
|
Mar.
31,
2009
|
Jun.
30,
2009
|
Sep.
30,
2009
|
Dec.
31,
2009
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Interest
income
|
$ | 8,585 | $ | 7,621 | $ | 7,994 | $ | 6,895 | ||||||||
|
Interest
expense
|
4,491 | 3,463 | 3,311 | 2,970 | ||||||||||||
|
Net
interest income
|
4,094 | 4,158 | 4,683 | 3,925 | ||||||||||||
|
Other
Expense:
|
||||||||||||||||
|
Provision
for loan losses
|
(629 | ) | (259 | ) | (526 | ) | (848 | ) | ||||||||
|
Realized
losses on securities and related hedges
|
123 | 141 | 359 | 2,659 | ||||||||||||
|
Impairment
loss on investment securities
|
(119 | ) | — | — | — | |||||||||||
|
Total
other expense
|
(625 | ) | (118 | ) | (167 | ) | 1,811 | |||||||||
|
Expenses:
|
||||||||||||||||
|
Salaries
and benefits
|
541 | 472 | 473 | 632 | ||||||||||||
|
General
and administrative expenses
|
1,029 | 1,130 | 1,402 | 1,198 | ||||||||||||
|
Total
expenses
|
1,570 | 1,602 | 1,875 | 1,830 | ||||||||||||
|
(Loss) income
from continuing operations
|
1,899 | 2,438 | 2,641 | 3,906 | ||||||||||||
|
Income
from discontinued operation - net of tax
|
155 | 109 | 236 | 286 | ||||||||||||
|
Net
(loss) income
|
$ | 2,054 | $ | 2,547 | $ | 2,877 | $ | 4,192 | ||||||||
|
Per
share basic (loss) income
|
$ | 0.22 | $ | 0.27 | $ | 0.31 | $ | 0.45 | ||||||||
|
Per
share diluted (loss) income
|
$ | 0.22 | $ | 0.27 | $ | 0.30 | $ | 0.40 | ||||||||
|
Dividends
declared per common share
|
$ | 0.18 | $ | 0.23 | $ | 0.25 | $ | 0.25 | ||||||||
|
Weighted
average shares outstanding-basic
|
9,320 | 9,320 | 9,406 | 9,419 | ||||||||||||
|
Weighted
average shares outstanding-diluted
|
11,820 | 11,820 | 11,906 | 11,919 | ||||||||||||
F-35
|
Three
Months Ended
|
||||||||||||||||
|
Mar.
31,
2008
|
Jun.
30,
2008
|
Sep.
30,
2008
|
Dec.
31,
2008
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Interest
income
|
$ | 13,253 | $ | 10,755 | $ | 10,324 | $ | 9,791 | ||||||||
|
Interest
expense
|
11,979 | 8,256 | 8,142 | 7,883 | ||||||||||||
|
Net
interest income
|
1,274 | 2,499 | 2,182 | 1,908 | ||||||||||||
|
Other
expense
|
||||||||||||||||
|
Provision
for loan losses
|
(1,433 | ) | (22 | ) | (7 | ) | — | |||||||||
|
Loss
on sale of securities and related hedges
|
(19,848 | ) | (83 | ) | 4 | (50 | ) | |||||||||
|
Impairment
loss on investment securities
|
(5,278 | ) | ||||||||||||||
|
Total
other expense
|
(21,281 | ) | (105 | ) | (3 | ) | (5,328 | ) | ||||||||
|
Expenses:
|
||||||||||||||||
|
Salaries
and benefits
|
313 | 417 | 258 | 881 | ||||||||||||
|
General
and administrative expenses
|
1,118 | 1,543 | 1,177 | 1,203 | ||||||||||||
|
Total
expenses
|
1,431 | 1,960 | 1,435 | 2,084 | ||||||||||||
|
Loss from
continuing operations
|
(21,438 | ) | 434 | 744 | (5,504 | ) | ||||||||||
|
Loss
from discontinued operation - net of tax
|
180 | 829 | 285 | 363 | ||||||||||||
|
Net
loss
|
$ | (21,258 | ) | $ | 1,263 | $ | 1,029 | $ | (5,141 | ) | ||||||
|
Per
share basic and diluted loss
|
$ | (4.19 | ) | $ | 0.14 | $ | 0.11 | $ | (0.55 | ) | ||||||
|
Dividends
declared per common share
|
$ | 0.12 | $ | 0.16 | $ | 0.16 | $ | 0.10 | ||||||||
|
Weighted
average shares outstanding-basic and diluted
|
5,070 | 9,320 | 9,320 | 9,320 | ||||||||||||
18.
Related Party Transactions
On
January 18, 2008, the Company entered into an advisory agreement with Harvest
Capital Strategies LLC (“HCS”) (formerly known as JMP Asset Management LLC). The
Company entered into the advisory agreement concurrent and in connection with
its private placement of Series A Preferred Stock to JMP Group Inc. and certain
of it affiliates. HCS is a wholly-owned subsidiary of JMP Group Inc. Pursuant to
Schedule 13D’s filed with the SEC as of December 31, 2008, HCS and JMP Group
Inc. as of December 31, 2009, beneficially owned approximately 16.7% and
12.1%, respectively, of the Company’s common stock, and 100%, collectively, of
it Series A Preferred Stock.
Pursuant
to the advisory agreement, HCS is responsible for managing investments made by
HC and NYMF (other than certain RMBS that are held in these entities for
regulatory compliance purposes) as well as any additional subsidiaries acquired
or formed in the future to hold investments made on the Company’s behalf by HCS.
The Company refers to these subsidiaries in its periodic reports filed with the
Securities and Exchange Commission as the “Managed Subsidiaries.” On March 31,
2009, the Company began acquiring assets that fall under the advisory agreement,
starting with the purchase of approximately $9.0 million in CLOs. The Company’s
investment in the CLOs assets was completed in connection with the acquisition
by JMP Group Inc. of the investment adviser of the CLO. The Company expects
that, from time to time in the future, certain of its alternative investments
will take the form of a co-investment alongside or in conjunction with JMP Group
Inc. or certain of its affiliates. In accordance with investment guidelines
adopted by the Company’s Board of Directors, any investments by the Managed
Subsidiaries that do not qualify as Category I investments (as defined by the
Company’s Investment Guidelines) must be approved by the Board of Directors. The
advisory agreement provides that HCS will be paid a base advisory fee that is a
percentage of the “equity capital” (as defined in the advisory agreement) of the
Managed Subsidiaries, which may include the net asset value of assets held by
the Managed Subsidiaries as of any fiscal quarter end, and an incentive fee upon
the Managed Subsidiaries achieving certain investment hurdles. For the year
ended December 31, 2009 and December 31, 2008, HCS earned a base advisory fee of
approximately $0.8 million and $0.7 million, respectively. In addition, for the
year ended December 31, 2009, HCS earned an incentive fee of approximately $0.5
million. There was no incentive fee earned in the year ended December 31, 2008.
As of December 31, 2009, HCS was managing approximately $45.8 million of assets
on the Company’s behalf. As of December 31, 2009 the Company had a management
fee payable totaling $0.3 million included in accounts payable and accrued
expenses.
F-36
Exhibits.
The exhibits
required by Item 601 of Regulation S-K are listed below. Management contracts or
compensatory plans are filed as Exhibits 10.3, 10.7, 10.8, 10.10 and
10.11.
|
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).
|
||
| 3.1(b) | Articles of Amendment of the Registrant (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 4, 2007). | ||
| 3.1(c) | Articles of Amendment of the Registrant (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 4, 2007). | ||
| 3.1(d) | Articles of Amendment of the Registrant (Incorporated by reference to Exhibit 3.1(d) to the Company’s Current Report on Form 8-K filed on May 16, 2008.) | ||
| 3.1(e) | Articles of Amendment of the Registrant (Incorporated by reference to Exhibit 3.1(e) to the Company’s Current Report on Form 8-K filed on May 16, 2008.) | ||
| 3.1(f) | Articles of Amendment of the Registrant (Incorporated by reference to Exhibit 3.1(f) to the Company’s Current Report on Form 8-K filed on June 15, 2009.) | ||
|
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).
|
||
|
3.2(b)
|
Amendment No. 1 to Bylaws of New
York Mortgage Trust, Inc. (Incorporated by reference to Exhibit 3.2(b) to
Registrant's Annual Report on Form 10-K filed on March 16,
2006)
.
|
||
|
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
December 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 December 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
December 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 December 6, 2005).
|
||
| 4.3(a) | Articles Supplementary Establishing and Fixing the Rights and Preferences of Series A Cumulative Redeemable Convertible Preferred Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 25, 2008). | ||
| 4.3(b) | Form of Series A Cumulative Redeemable Convertible Preferred Stock Certificate (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 25, 2008). | ||
|
10.1
|
Parent
Guarantee Agreement between New York Mortgage Trust, Inc. and JPMorgan
Chase Bank, National Association, as guarantee trustee, dated
December 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 December 6, 2005).
|
|
|
10.2
|
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 December 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 December 6,
2005).
|
|
|
10.3
|
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 December 9, 2005).
|
|
|
10.4
|
Stock
Purchase Agreement, by and among New York Mortgage Trust, Inc. and the
Investors listed on Schedule I thereto, dated as of November 30, 2007
(Incorporated by reference to Exhibit 10.1(a) to the Company’s Current
Report on Form 8-K filed on January 25, 2008).
|
|
|
10.5
|
Registration
Rights Agreement, by and among New York Mortgage Trust, Inc. and the
Investors listed on Schedule I to the Stock Purchase Agreement, dated as
of January 18, 2008 (Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on January 25,
2008).
|
|
|
10.6
|
Advisory
Agreement, by and among New York Mortgage Trust, Inc., Hypotheca Capital,
LLC, New York Mortgage Funding, LLC and JMP Asset Management LLC, dated as
of January 18, 2008 (Incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed on January 25,
2008).
|
|
|
10.7
|
Separation
Agreement and General Release, by and between New York Mortgage Trust,
Inc. and David A. Akre, dated as of February 3, 2009 (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on February 4, 2009).
|
|
|
10.8
|
Amended
and Restated Employment Agreement, by and between New York Mortgage Trust,
Inc. and Steven R. Mumma, dated as of February 11, 2009 (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on February 12, 2009).
|
|
|
10.9
|
Form
of Registration Rights Agreement, by and among New York Mortgage Trust,
Inc. and the Investors listed on Schedule A thereto, dated as of
February 14, 2008 (Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on February 19,
2008).
|
|
|
10.10
|
Form
of Restricted Stock Award Agreement for Officers (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 14,
2009.)
|
|
|
10.11
|
Form
of Restricted Stock Award Agreement for Officers (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 14,
2009.)
|
|
|
12.1
|
Computation
of Ratios *
|
|
|
21.1
|
List
of Subsidiaries of the Registrant.*
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm (Grant Thornton
LLP).*
|
|
| 23.2 |
Consent
of Independent Registered Public Accounting Firm (Deloitte & Touche
LLP).*
|
|
|
31.1
|
Section
302 Certification of Chief Executive Officer and Chief Financial
Officer.*
|
|
|
32.1
|
Section
906 Certification of Chief Executive Officer and Chief Financial
Officer.*
|
* Filed
herewith.
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officer and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules