TableWe 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 Contentspurchase. 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.
| · | 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. |
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.
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 Agency 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 Agency 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.
Recent marketMarket 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 Agency RMBS. Changes in interest rates and prepayments affect the market price of the Agency 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 recent 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.
Under our alternative investment strategy, theThe 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.
Under our alternativeOur investment strategy we may invest inpermits 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.
Under our alternative investment strategy, weWe 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.
Our alternative assetsWe may includeinvest in high yield or subordinated corporateand 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.
Under alternative investment strategy, our assetsWe may includeinvest 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.
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:
· | acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses; |
· | acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001; |
· | adverse changes in national and local economic and market conditions; and |
· | 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; |
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 alternative investment and may not reveal other investment performance issues.
Before investing in an alternative 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.
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:
| · | the movement of interest rates; |
| · | the availability of financing in the market; and |
| · | the value and liquidity of our mortgage-related assets. |
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 investmentsinvestment 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:
| · | our lenders do not make debt financing available to us at acceptable rates; or |
| · | our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do. |
The dislocations in the residential mortgage market and credit markets have led lenders, including the financial institutions that provide financing for our investments,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 portfolio,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, 2008,2009, 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.
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. To financeGiven 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 investment portfolio we generally seekand an overall leverage ratio of four to borrow between seven and ninefive times the amount of our equity.is appropriate at this time. At December 31, 20082009, 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 6.8:1 to 1. This definition of the leverage ratio is consistent with the manner in which the credit providers under our repurchase agreementagreements 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.
Our liquidity may be adversely affected by margin calls under itsour repurchase agreements because theywe 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 the Companyus to post additional collateral to cover the decrease. When the Company iswe are subject to such a margin call, itwe must provide the lender with additional collateral or repay a portion of the outstanding borrowings with minimal notice. Any such margin call could harm the Company'sour liquidity, results of operation and financial condition. Additionally, in order to obtain cash to satisfy a margin call, the Companywe may be required to liquidate assets at a disadvantageous time, which could cause it to incur further losses and adversely affect itsour 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:
| · | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |
| · | available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; |
| · | the duration of the hedge may not match the duration of the related liability; |
| · | 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; |
| · | 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 |
| · | the party owing money in the hedging transaction may default on its obligation to pay. |
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.
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.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.
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 has or iscertain 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 16.8%16.7% and 12.2%12.1%, respectively, of our outstanding common stock as of December 31, 2008.2009. 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 9.5%6.7% of the Company’s outstanding common stock as of December 3, 2008. 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 yearthree-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 amount of two times 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.
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’sBoard’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’sStockholder’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.
The Series A Preferred Stock represents approximately 21% of our outstanding capital stock, on a fully diluted basis, as of March 1, 2009.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 March 1, 2009.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
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 9.9%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.
Our Board of Directors may grant an exemption from that ownership limit in its sole discretion, subject to such conditions, representations and undertakings as it may determine. In November 2008, our Board of Directors granted an exemption from the ownership limit to permit Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group, Inc., to beneficially own up to 25% of the aggregate value of our outstanding capital stock. Because all other individuals who own our stock are permitted to own up to 9.9% in value of the outstanding shares of our capital stock, it is possible that four other individuals acquired between November 2008 and December 31, 2008, or could acquire during the last half of a taxable year, a sufficient amount of our stock to cause us to violate the 5/50 rule. In connection with the ownership waiver granted by us to Mr. Jolson, we intend to submit a proposal to our stockholders to amend our charter to reduce the 9.9% ownership limit to a percentage that will allow us to satisfy the 5/50 test with no uncertainty while also accommodating the exemption applicable to Mr. Jolson. Although we believe that we satisfy and will continue to satisfy the 5/50 test, there can be no assurance that our stockholders will approve an amendment to the charter reducing the 9.9% ownership limit prior to July 1, 2009 or that, absent such approval, we will continue to satisfy the 5/50 test on and after July 1, 2009.
Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a change in control which could have an adverse effect on the value of our securities.
Certain provisions of Maryland law, our charter and our bylaws may have the effect of delaying, deferring or preventing transactions that involve an actual or threatened change in control. These provisions include the following, among others:
| · | our charter provides that, subject to the rights of one or more classes or series of preferred stock to elect one or more directors, a director may be removed with or without cause only by the affirmative vote of holders of at least two-thirds of all votes entitled to be cast by our stockholders generally in the election of directors; |
| · | our bylaws provide that only our Board of Directors shall have the authority to amend our bylaws; |
· | · | under our charter, our Board of Directors has authority to issue preferred stock from time to time, in one or more series and to establish the terms, preferences and rights of any such series, all without the approval of our stockholders; |
| · | the Maryland Business Combination Act; and |
| · | the Maryland Control Share Acquisition Act. |
Although our Board of Directors has adopted a resolution exempting us from application of the Maryland Business Combination Act and our bylaws provide that we are not subject to the Maryland Control Share Acquisition Act, our Board of Directors may elect to make the “business combination” statute and “control share” statute applicable to us at any time and may do so without stockholder approval.
Maintenance of our Investment Company Act exemption imposes limits on our operations.
We have conducted and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act. 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.
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 2008)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 MBS,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.
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, 2008,2009, our principal executive and administrative offices are located in leased space at 52 Vanderbilt Avenue, Suite 403, New York, New York 1001710017.
The Company isWe are at times subject to various legal proceedings arising in the ordinary course of our business. As of the date of this report, the Company doeswe do not believe that any of itsour current legal proceedings, individually or in the aggregate, will have a material adverse effect on itsour operations, financial condition or cash flows.flows
On December 13, 2006, Steven B. Yang and Christopher Daubiere (the “Plaintiffs”), filed suit in the United States District Court for the Southern District of New York against HC and the Company, alleging that HC failed to pay them, and similarly situated employees, overtime in violation of the Fair Labor Standards Act (“FLSA”) and New York State law. The Plaintiffs, each of whom were former employees in the Company's discontinued mortgage lending business, purported to bring a FLSA “collective action” on behalf of similarly situated loan officers of HC and sought unspecified amounts for alleged unpaid overtime wages, liquidated damages, attorney’s fees and costs.
On December 30, 2007, the Company entered into an agreement in principle with the Plaintiffs to settle this suit and on June 2, 2008, the court granted preliminary approval of the settlement. Upon completion of a fairness hearing on September 18, 2008, the court certified the class and approved the settlement, excluding Plaintiffs' counsel's application for attorney fees, which remained subject to final approval by the court. As part of the preliminary settlement, the Company funded the settlement in the amount of $1.35 million into an escrow account for the Plaintiffs. Plaintiffs’ counsel's fee was determined by the court and final approval for distributions of the settlement amount and Plaintiffs’ counsel's fees was granted on November 7, 2008. The Company previously reserved and expensed this amount in the year ended December 31, 2007. In December 2008, amounts held in the escrow account were disbursed in satisfaction of the settlement amounts and fees owed to Plaintiffs’ counsel, thereby resulting in the termination of this suit.
None
PART II
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, 2008,2009, we had 9,320,0949,415,094 shares of common stock outstanding and as of March 1, 2009,2010, there were approximately 3830 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name. We completed a one-for-two reverse stock split of our common stock in May 2008, which provided stockholders of record as of May 29, 2008 with one share of common stock for every two shares owned. In October 2007, we completed a one-for-five reverse stock split of our common stock, which provided stockholders of record as of October 9, 2007 with one share of common stock for every five shares owned.
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 of common stock. All stock prices and dividends set forth immediately below reflect the Company’s reverse stock splits as if they had occurred on January 1, 2007.basis. The data below has been sourced from http://www.bloomberg.com.
| | 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 | | 7/25/08 | | | 0.16 | |
First quarter | | | 9.80 | | | | 4.40 | | | | 5.40 | | 04/21/08 | | 05/15/08 | | | 0.12 | |
| 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 (2) | | Cash Dividends | |
| | High | | | Low | | | Close | | Declared | | Paid or Payable | | | Amount per Share | |
Year Ended December 31, 2007 | | | | | | | | | | | | | | | | |
Fourth quarter | | $ | 10.00 | | | $ | 6.02 | | | $ | 8.60 | | | | | | | | |
Third quarter | | | 19.26 | | | | 3.10 | | | | 8.40 | | | | | | | | |
Second quarter | | | 29.60 | | | | 17.70 | | | | 19.10 | | | | | | | | |
First quarter | | | 33.90 | | | | 23.40 | | | | 25.40 | | 3/14/07 | | 4/26/07 | | $ | 0.50 | |
| (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.
|
| 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. | |
| (2)
| Our common stock was listed on the NYSE from the dateWe intend to continue to pay quarterly dividends to holders of shares of our IPO until September 11, 2007, at which time our common stock was delisted from the NYSE. Our common stock was reported on the OTCBB beginning on September 11, 2007.
|
During 2008, dividend distributions for the Company’s common stock were $0.44 per share (as adjusted for the reverse stock splits). As of December 31, 2008, the Company’s common stock trades under the ticker symbol NYMT and was listed under CUSIP Nos. 649604501 and 649604600. For tax reporting purposes, 2008 taxable dividend distributionsstock. Future dividends will be classifiedat 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 follows: $0.2597 as ordinary income and $0.1803 as a returnour Board of capital. The following table contains this information on a quarterly basis.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 | |
| | | | | | | | | | | | | | | | | | | |
04/21/08 | | 04/30/08 | | 05/15/08 | | $ | 0.1200 | | | $ | 0.0941 | | | $ | 0.0000 | | | $ | 0.0941 | | | $ | 0.0259 | |
06/30/08 | | 07/10/08 | | 07/25/08 | | $ | 0.1600 | | | $ | 0.1600 | | | $ | 0.0000 | | | $ | 0.1600 | | | $ | 0.0000 | |
09/29/08 | | 10/10/08 | | 10/27/08 | | $ | 0.1600 | | | $ | 0.0056 | | | $ | 0.0000 | | | $ | 0.0056 | | | $ | 0.1544 | |
Total 2008 Cash Distributions | | $ | 0.4400 | | | $ | 0.2597 | | | $ | 0.0000 | | | $ | 0.2597 | | | $ | 0.1803 | |
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 currently 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 2006.2006 and currently has no intention to recommence repurchases in the near-term..
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 20082009 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 | | — | | $ | — | | 103,1118,111 | |
Performance Graph
The following line graph sets forth, for the period from June 23,December 31, 2004 the date of our IPO, through December 31, 2008,2009, 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 each of the indices was $100 as of June 23, 2004.December 31, 2004 and that all dividends were reinvested. The performance reflected in the graph is not necessarily indicative of future performance.
*$100 invested on 6/24/04 in stock & index-including reinvestment of dividends.
Fiscal year ended December 31.
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.
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, | | | As of and For the Year Ended December 31, | |
(Dollar amounts in thousands, except per Share Amounts) | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | |
(Dollar amounts in thousands, except per share amounts) | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Operating Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 44,123 | | | $ | 50,564 | | | $ | 64,881 | | | $ | 62,725 | | | $ | 20,394 | | | $ | 31,095 | | | $ | 44,123 | | | $ | 50,564 | | | $ | 64,881 | | | $ | 62,725 | |
Interest expense | | | 36,260 | | | | 50,087 | | | | 60,097 | | | | 49,852 | | | | 12,470 | | | | 14,235 | | | | 36,260 | | | | 50,087 | | | | 60,097 | | | | 49,852 | |
Net Interest Income | | | 7,863 | | | | 477 | | | | 4,784 | | | | 12,873 | | | | 7,924 | | |
Net interest income | | | | 16,860 | | | | 7,863 | | | | 477 | | | | 4,784 | | | | 12,873 | |
Provision for loan losses | | | (1,462 | ) | | | (1,683 | ) | | | (57 | ) | | | — | | | | — | | | | (2,262 | ) | | | (1,462 | ) | | | (1,683 | ) | | | (57 | ) | | | — | |
(Loss) gain on sale of securities and related hedges | | | (19,977 | ) | | | (8,350 | ) | | | (529 | ) | | | 2,207 | | | | 167 | | |
Realized gains (losses) on securities and related hedges | | | | 3,282 | | | | (19,977 | ) | | | (8,350 | ) | | | (529 | ) | | | 2,207 | |
Impairment loss on investment securities | | | (5,278 | ) | | | (8,480 | ) | | | — | | | | (7,440 | ) | | | — | | | | (119 | ) | | | (5,278 | ) | | | (8,480 | ) | | | — | | | | (7,440 | ) |
Total other expense | | | (26,717 | ) | | | (18,513 | ) | | | (586 | ) | | | (5,233 | ) | | | 167 | | |
Total other income (expenses) | | | | 901 | | | | (26,717 | ) | | | (18,513 | ) | | | (586 | ) | | | (5,233 | ) |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 1,869 | | | | 865 | | | | 714 | | | | 1,934 | | | | 382 | | | | 2,118 | | | | 1,869 | | | | 865 | | | | 714 | | | | 1,934 | |
General and administrative expenses | | | 5,041 | | | | 1,889 | | | | 1,318 | | | | 2,384 | | | | 810 | | | | 4,759 | | | | 5,041 | | | | 1,889 | | | | 1,318 | | | | 2,384 | |
Total expenses | | | 6,910 | | | | 2,754 | | | | 2,032 | | | | 4,318 | | | | 1,192 | | | | 6,877 | | | | 6,910 | | | | 2,754 | | | | 2,032 | | | | 4,318 | |
(Loss) income from continuing operations | | | (25,764 | ) | | | (20,790 | ) | | | 2,166 | | | | 3,322 | | | | 6,899 | | |
Income (loss) discontinued operations – net of tax (1) | | | 1,657 | | | | (34,478 | ) | | | (17,197 | ) | | | (8,662 | ) | | | (1,952 | ) | |
Net (loss) income (2) | | $ | (24,107 | ) | | $ | (55,268 | ) | | $ | (15,031 | ) | | $ | (5,340 | ) | | $ | 4,947 | | |
Basic and diluted (loss) income per common share from continuing operations | | $ | (3.11 | ) | | $ | (11.46 | ) | | $ | 1.20 | | | $ | 1.85 | | | $ | 3.85 | | |
Basic and diluted income (loss) per common share from discontinued operations | | $ | 0.20 | | | $ | (19.01 | ) | | $ | (9.53 | ) | | $ | (4.81 | ) | | $ | (1.09 | ) | |
Basic and diluted (loss) income per common share | | $ | (2.91 | ) | | $ | (30.47 | ) | | $ | (8.33 | ) | | $ | (2.96 | ) | | $ | 2.76 | | |
Dividends per common share | | $ | 0.54 | | | $ | 0.50 | | | $ | 4.70 | | | $ | 9.20 | | | $ | 4.00 | | |
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 | | $ | 9,387 | | | $ | 5,508 | | | $ | 969 | | | $ | 9,056 | | | $ | 7,613 | | | $ | 24,522 | | | $ | 9,387 | | | $ | 5,508 | | | $ | 969 | | | $ | 9,056 | |
Investment securities available for sale | | | 477,416 | | | | 350,484 | | | | 488,962 | | | | 716,482 | | | | 1,204,745 | | | | 176,691 | | | | 477,416 | | | | 350,484 | | | | 488,962 | | | | 716,482 | |
Mortgage loans held in securitization trusts or held for investment (net) | | | 348,337 | | | | 430,715 | | | | 588,160 | | | | 780,670 | | | | 190,153 | | |
Assets related to discontinued operations | | | 5,854 | | | | 8,876 | | | | 212,805 | | | | 248,871 | | | | 201,034 | | |
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 | | | 853,300 | | | | 808,606 | | | | 1,321,979 | | | | 1,789,943 | | | | 1,614,762 | | | | 488,814 | | | | 853,300 | | | | 808,606 | | | | 1,321,979 | | | | 1,789,943 | |
Financing arrangements | | | 402,329 | | | | 315,714 | | | | 815,313 | | | | 1,166,499 | | | | 1,115,809 | | |
Financing arrangements, portfolio investments | | | | 85,106 | | | | 402,329 | | | | 315,714 | | | | 815,313 | | | | 1,166,499 | |
Collateralized debt obligations | | | 335,646 | | | | 417,027 | | | | 197,447 | | | | 228,226 | | | | — | | | | 266,754 | | | | 335,646 | | | | 417,027 | | | | 197,447 | | | | 228,226 | |
Subordinated debentures | | | 44,618 | | | | 44,345 | | | | 44,071 | | | | 43,650 | | | | — | | |
Subordinated debentures (net) | | | | 44,892 | | | | 44,618 | | | | 44,345 | | | | 44,071 | | | | 43,650 | |
Convertible preferred debentures | | | 19,702 | | | | — | | | | — | | | | — | | | | — | | | | 19,851 | | | | 19,702 | | | | — | | | | — | | | | — | |
Liabilities related to discontinued operations | | | 3,566 | | | | 5,833 | | | | 187,705 | | | | 231,925 | | | | 189,095 | | |
Liabilities related to discontinued operation (1) | | | | 1,778 | | | | 3,566 | | | | 5,833 | | | | 187,705 | | | | 231,925 | |
Total liabilities | | | 814,052 | | | | 790,188 | | | | 1,250,407 | | | | 1,688,985 | | | | 1,495,280 | | | | 425,827 | | | | 814,052 | | | | 790,188 | | | | 1,250,407 | | | | 1,688,985 | |
Total stockholders’ equity | | $ | 39,248 | | | $ | 18,418 | | | $ | 71,572 | | | $ | 100,958 | | | $ | 119,482 | | | $ | 62,987 | | | $ | 39,248 | | | $ | 18,418 | | | $ | 71,572 | | | $ | 100,958 | |
| (1) | In connection with the sale of the Company'sour wholesale mortgage origination platform assets on February 22, 2007 and the sale of itsour retail mortgage origination platform assets on March 31, 2007, the Company is required towe classify itsour mortgage lending business as a discontinued operationsoperation in accordance with Statement of Financial Accounting Standards No. 144 (see note 8 in the notes to our consolidated financial statements). |
| (2) | The selected financial data as of and for the years ended December 31, 2008, December 31, 2007, December 31, 2006 and December 31, 2005, include the operations of NYMT and its consolidated subsidiaries. Included in the selected financial data for the year ended December 31, 2004 are the results of NYMT for the period beginning June 29, 2004 (the closing date of our IPO) and HC for the period January 1, 2004 to June 29, 2004. |
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, that investsin the business of acquiring and managing primarily in real estate-related assets, including residential adjustable-rate, hybrid adjustable-rate and fixed-rate mortgage-backed securities (“RMBS”), for which includes collateralizedthe 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 obligation floating rate securitiesloans (“non-Agency RMBS”), and prime credit quality residential adjustable-rate mortgage (“ARM”) loans (“held in securitization trusts, or prime ARM loans”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 to a lesser extent, in certain alternativemanage various other types of real estate-related and financial assets, thatincluding, 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. 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 theseour leveraged assets and our operating costs, which we refer to as our net interest income.
Our investment strategy historically has focused on investments in RMBS issued or guaranteed by a U.S. government agency (such as the Government National Mortgage Association, or Ginnie Mae), or by a U.S. Government-sponsored entity (such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac), prime ARM loans, and non-agency RMBS. We refer throughout this Annual Report on Form 10-K to RMBS issued by a U.S. government agency or U.S. Government-sponsored entity as “Agency RMBS”. Starting with the completion of our initial public offering in June 2004, we began building a leveraged investment portfolio comprised largely of RMBS purchased in the open market or through privately negotiated transactions, and prime ARM loans originated by us or purchased from third parties that we securitized and which are held in our securitization trusts. Since exiting the mortgage lending business on March 31, 2007, we have exclusively focused our resources and efforts on investing, on a leveraged basis, in RMBS and, since August 2007, we have employed a portfolio strategy that focuses on investments in Agency RMBS. We refer to our historic investment strategy throughout this Annual Report on Form 10-K as our “principal investment strategy.”
In January 2008, we formed a strategic relationship with JMP Group Inc., a full-service investment banking and asset management firm, and certain of its affiliates (collectively, the “JMP Group”), for the purpose of improving our capitalization and diversifying our investment strategy away from a strategy exclusively focused on investments in Agency RMBS, in partintend to achieve attractive risk-adjusted returns, and to potentially utilize all or part of a $64.0 million net operating loss carry-forward that resulted from our exit from the mortgage lending business in 2007. In connection with this strategic relationship, the JMP Group made a $20.0 million investment in our Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock)” in January 2008 and purchased approximately $4.5 million of our common stockobjective by investing in a private placement in February, 2008. In addition, in connection with the JMP Group’s strategic investment in us, James J. Fowler, a managing directorbroad class of HCS (defined below), became our Non-Executive Chairman of the Board of Directors. As of December 31, 2008, JMP Group Inc. and its affiliates beneficially owned approximately 33.7% of our outstanding common stock. The 33.7% includes shares of Series A preferred stock which may be converted into common stock.
In an effort to diversify our investment strategy, we entered into an advisory agreement with Harvest Capital Strategies LLC (“HCS”), formerly known as JMP Asset Management LLC, concurrent with the issuance of our Series A Preferred Stock to the JMP Group, pursuant to which HCS will implement and manage our investments in alternative real estate-related and financial assets. Pursuant to the advisory agreement, HCS is responsible for managing investments made by two of our wholly-owned subsidiaries, Hypotheca Capital, LLC (“HC,” also formerly known as The New York Mortgage Company, LLC), and New York Mortgage Funding, LLC, as well as any additional subsidiaries acquired or formed in the future to hold investments made on our behalf by HCS. We refer to these subsidiaries in our periodic reports filed with the Securities and Exchange Commission (“SEC”) as the “Managed Subsidiaries.” Due to market conditions and other factors in 2008, including the significant disruptions in the credit markets, we elected to forgo making investments in alternative real estate-related and financial assets, and instead, exclusively focusedincluding those listed above, that in aggregate, will generate attractive risk-adjusted total returns for our resources and efforts on preserving capital and investing in Agency RMBS. However, we expectstockholders.
Prior to begin the diversification of2009, our investment strategy in 2009 by opportunistically investing in certain alternative real estate-related and financial assets, or equity interests therein, including, without limitation, certain non-Agency RMBS and other non-rated mortgage assets, commercial mortgage-backed securities, commercial real estate loans, collateralized loan obligations and other investments. We refer throughout this Annual Report on Form 10-K to our investment in alternative real estate-related and financial assets, other thanportfolio was primarily comprised of Agency RMBS, prime ARM loans held in securitization trusts and non-Agencycertain non-agency RMBS thatrated 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 already held in our four securitization trusts. Beginning in the first quarter of 2009, we commenced a repositioning of our investment portfolio asto 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 “alternative investment strategy” and such assets as our “alternative assets.” Generally, we expect that our investment in alternative assets will be made on a non-levered basis, will be conductedportfolio through the Managed Subsidiariesdisposition 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 will be managedour opportunistic purchase in March 2009 of discounted notes issued by HCS. Currently, we have established for our alternative assets a targeted range of 5% to 10% of our total assets, subject to market conditions, credit requirements and the availability of appropriate market opportunities.CLO.
We expect to benefit from the JMP Group’s and HCS’ investment expertise, infrastructure, deal flow, extensive relationships in the financial community and financial and capital structuring skills. Moreover, as a result of the JMP Group’s and HCS’ investment expertise and knowledge of investment opportunities in multiple asset classes, we believe we have preferred access to a unique source of investment opportunities that may be in discounted or distressed positions, many of which may not be available to other companies that we compete with. We intendelected to be selective in our investments in alternative assets, seeking out co-investment opportunities with the JMP Group where available, conducting substantial due diligence on the alternative assets we seek to acquire and any loans underlying those assets, and limiting our exposure to losses by investing in alternative assets on a non-levered basis. By diversifying our investment strategy, we intend to construct an investment portfolio that, when combined with our current assets, will achieve attractive risk-adjusted returns and that is structured to allow us to maintain our qualification as a REIT and the requirements for exclusion from regulation under the Investment Company Act of 1940, as amended, or Investment Company Act.
Because we intend to continue to qualifytaxed as a REIT for federal income tax purposes andcommencing with our taxable year ended on December 31, 2004. As a result, we generally will not be subject to operate our business so as to be exempt from regulation under the Investment Company Act, we will be required to invest a substantial majority of our assets in qualifying real estate assets, such as agency RMBS, mortgage loans and other liens on and interests in real estate. Therefore, the percentage of our assets we may invest in corporate investments and other types of instruments is limited, unless those investments comply with various federal income tax requirements for REIT qualification and the requirements for exclusion from Investment Company Act regulation.on our taxable income that is distributed to our stockholders.
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 defaultrecovery on our assets or the mortgages or loans that underlie such assets; |
| · | general economic and financial and credit market conditions; |
| · | our leverage, our access to funding and our borrowing costs; |
| · | 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 operations,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.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. BecauseWith the maturities of our assets generally haveof longer termsduration than those of our liabilities, interest rate increases will tend to decrease ourthe 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.
In addition, our returns will be affected by the credit performance of our non-agency RMBS and other investments. IfOur 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, if credit losses on our investments, loans, or the loans underlying our investments increase,exceed our expectations, it may have an adverse effect on our performance.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; moreposition. 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, 2008,2009, the amount of repurchase requests outstanding was approximately $1.8$2.0 million, against which we had a reserve of approximately $0.4$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. In addition, we may be subject to new repurchase requests from investors with whom we have not settled or with respect to repurchase obligations not covered under the settlement.
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
General. The well publicized disruptionsIn 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 markets that beganlosses and decreased liquidity. These conditions, together with liquidating sales by several large institutions, have resulted in 2007 escalated throughout 2008volatility in the value of most real estate-related and spreadfinancial 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 greater economy. During the year, global financial markets came under increased stress as problems in the U.S. real estate and residential mortgage market spread to the broader economy and the global financial sector. In addition, fears of a global recession increased and were exacerbated by further declines in the housing and credit markets in the U.S. and Europe, which heightened concerns over the creditworthiness of some financial institutions. As a result, most sectors of the financial markets experienced significant declines during the year, including international equity and credit markets, driven, in part, by deleveraging and difficulty pricing risk in the market that has been affecting investors all over the world.
In response, various initiatives by the U.S. Government have been implemented to address credit and liquidity issues. AmongThese actions include, among other things, in September 2008, Fannie Mae and Freddie Mac were placed under conservatorship by the FHFA and the U.S. Treasury Department (“the Treasury”) announced it would purchase senior preferred stock in Fannie Mae or Freddie Mac, if needed, to a maximum of $100.0 billion per company in order that each maintains a positive net worth. In October 2008, the U.S. Treasury created the “capital purchase program” as part of the $700.0 billion Troubled Asset Relief Program, allocating $350.0 billion to invest in U.S. financial institutions to help stabilize and strengthen the U.S. financial system. In November 2008, the Federal Reserve Bank of New York (“the Federal Reserve”) announced that it would buy up to $500.0 billion of Agency RMBS from Fannie Mae, Freddie Mac and Ginnie Mae, and in January 2009, the Federal Reserve began to purchase Agency RMBS in accordance with this initiative. In March 2009, the Federal Reserve announced that it was increasing its purchase commitment for Agency RMBS by up to an additional $750 billion. We believe that the stronger backing for the guarantors of Agency RMBS, resulting from the conservatorship of Fannie Mae and Freddie Mac, andEESA, TARP, the U.S. Treasury’s commitment to purchase senior preferred stock in these companies has,CPP, TALF, ARRA and are expected to continue to, positively impact the value of our Agency RMBS. Although the U.S. government has committed capital to Fannie Mae and Freddie Mac, there can be no assurance that the credit facilities and other 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.
On February 18, 2009, the President of the United States announced the Homeowner Affordability and Stability Plan, or HASP, which is intended to stabilizeHASP. Although the housing market by providing relief to distressed homeowners in an effort to reduce or forestall home foreclosures. Among other things,impact from many of these actions remains uncertain, certain sectors have reported signs of stabilizing recently, including the HASP is designed to (i) enable responsible homeowners to refinance in certain instances where their home value has fallen below the amount outstanding on the homeowner’s mortgage, (ii) address certain “at-risk” homeowners by providing cash incentives to lenders to refinance the homeowner’s mortgage to a lower interest rate and subsidizing in part a reduction in the outstanding mortgage principal, (iii) provide for an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings and (iv) support lower mortgage interest rates by increasing the U.S. Treasury’s preferred stock investment in each ofAgency RMBS market.
Developments at Fannie Mae and Freddie Mac to $200 billion, increasing the size of the companies’ retained mortgage portfolios to $900 billion each and reaffirming its commitment to continue purchasing Fannie Mae and Freddie Mac issued RMBS. This new U.S. government program, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns. Payments on the Agency RMBS in which we invest.
On March 23, 2009,invest are guaranteed by Fannie Mae and Freddie Mac. Because of the U.S. Treasury announcedguarantee and the creation of a public–private investment program designedunderwriting standards associated with mortgages underlying Agency RMBS, they have historically had high price stability and been considered to attract private capital to purchase eligible legacy loans from participating banks and eligible legacy securitiespresent low credit risk. However, the recent turmoil in the secondary market through FDIC debt guarantees equity co-investment byresidential mortgage sector severely weakened the U.S. Treasuryfinancial condition of Fannie Mae and government-supported term asset-backed loan facilities, as applicable.
The outcomeFreddie Mac. As a result, Agency RMBS experienced increased price volatility. In response to the severely weakened financial condition of these events remain highly uncertain and we cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.
Mortgage asset values. Investors’ appetite for U.S. mortgage assets remained weak throughout 2008. Due to liquidations of large investment portfolios of mortgage assets in connection with forced and voluntary de-leveraging in the mortgage asset industry in March 2008, along with decreased demand for these assets among investors mortgage asset prices declined significantly in March 2008. Prices improved during the second quarter of 2008 as Fannie Mae and Freddie Mac increased buyingand 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 securities for their portfolio. However,RMBS purchasing program that is scheduled to terminate during the third quarter prices were negatively impacted by events involving2010 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 andwill continue to have a positive effect on the bankruptcy of Lehman Brothers Holdings Inc. More recently, the Federal Reserve’s announcement on January 9, 2009 that it had begun to buy Agency RMBS, resulted in an increase in the valuesupply of Agency RMBS. We believeFor example, at a hearing on January 22, 2010, the Chairman of the House Financial Services Committee stated that the stronger backing forcommittee will be recommending to the guarantors of Agency RMBS, resulting from the conservatorship ofU.S. Congress to abolish Fannie Mae and Freddie Mac along within favor of a new system of providing housing finance.
Prior to December 2009, the financing arrangement between the U.S. Treasury’s commitmentTreasury and Fannie Mae and Freddie Mac required these entities to purchase senior preferred stock in these companies and the Federal Reserve’scap their Agency RMBS purchaseportfolio 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.
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 has,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 15th and are expected to continue to, positively impactApril 15th. 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 value ofnet income derived from our Agency RMBS.
Financing markets and liquidity - -Mortgage asset values In connection with. During 2009, the market disruptionvalue of March 2008, many financial institutions withdrew or reduced financing and liquidity that they typically offered clients as partthe 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 daily business operations. Significant events in the financial markets in the second half of 2008 caused further tightening of lending standards and reduced overall market liquidity. In March 2008, the market experienced extreme liquidity dislocations as a result of a major broker dealer failure and several large hedge fund liquidations.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 events the secured borrowing terms changed significantly, increased haircuts along with reduced credit availability caused most leveraged investorsassets. Nevertheless, we believe that despite higher market prices and lower yields, that risk-adjusted returns on non-Agency RMBS continue to significantly reduce their portfolio leverage. The Company’s average haircut increased to approximately 8.8% at March 31, 2008 from 5.6% at December 31, 2007. As of December 31, 2008, the Company’s average haircut was 9.2%.represent attractive investment opportunities.
Financing costs and interest rates - -Credit Quality. The overall credit market deterioration since August 2007 has also affected prevailing interest rates. For example, interest rates have been unusually volatile since the third quarter of 2007. Since September 18, 2007, 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 liquidity. Actions by the Federal Reserve has loweredand the targetU.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 from 5.25% to a range between 0% and0 – 0.25%. Historically,, along with the reduction of the 30-day London Interbank Offered Rate, or LIBOR has closely tracked movements in the Federal Funds Rate. Our funding costs under repurchase agreements have traditionally tracked 30 day LIBOR. The spread between LIBOR and the Fed Funds Rate was unusually volatile during 2008, but narrowed considerably toward the end of 2008. Asto 0.23% as of December 31, 2008,2009, have lowered our financing costs (which most closely correlates with the 30-day LIBOR was 0.44% whileLIBOR) and stabilized the Fed Funds Rate was 0.25%. Becauseavailability 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 experience continued volatility.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.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. While such significant decreases in mortgageWe experienced similar prepayment rates would typically foster mortgage refinancing, such activity has not occurred.on both our Agency RMBS and prime ARM loans during the second, third and fourth quarters of 2009. We believe that the decline in home values, increasesexpect speeds to be higher in the jobless rate andfirst half of 2010 due to the resulting deterioration in borrowers creditworthinessannounced delinquent loan buyback program from Fannie Mae. We do not expect this will have limited refinance activity to date. The recent creation of the HASP is aimed to further assist homeowners in refinancing and to reduce potential foreclosures. Although we expect that the constant prepayment rate, or CPR, will trend upward during 2009 based on current market interest rates, future CPRs will be affected by the success of HASP and the timing and purpose of any future legislation, if any, and the resultinga material impact on borrowers’ ability to refinance, mortgage interest rates in the market and home values.Company.
Significant Events in 2008
Strategic Relationship Established With JMP Group Inc.
On January 18, 2008, we issued 1.0 million shares of our Series A Preferred Stock to JMP Group Inc. and certain of its affiliates for an aggregate purchase price of $20.0 million. Concurrent with our issuance of the Series A Preferred Stock, we entered into an advisory agreement with HCS, which is an affiliate of JMP Group Inc., to manage investments made by the Managed Subsidiaries. We expect that HCS will assist us with the implementation of our alternative investment strategy, and once implemented, will manage our alternative investment strategy, as described more fully in Item 1 of this Annual Report on Form 10-K. In acting as our advisor, HCS will play a key role in the sourcing of our alternative investment opportunities. As of the date of this report, HCS had yet to manage any of our assets. For more information regarding the terms of the advisory agreement, see “Our Relationship with HCS and the Advisory Agreement” in Item 1 of this Annual Report on Form 10-K and the advisory agreement itself, which is filed an exhibit to this Annual Report on Form 10-K.
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 matures on December 31, 2010, has a redemption value of $20.00 per share, and 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.
Completion of $60.0 Million Offering of Common Stock
On February 21, 2008, the Company completed the issuance and sale of 7.5 million shares of its common stock to certain accredited investors (as such term is defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended, or Securities Act) at a price of $8.00 per share. This private offering of the Company's common stock generated gross proceeds to the Company of $60.0 million, and net proceeds to the Company of approximately $56.6 million. Pursuant to a registration rights agreement, the Company filed a resale shelf registration statement registering the resale of the shares sold in this offering, which became effective in April 2008. Pursuant to the registration rights agreement, we paid $0.7 million in liquidated damages in 2008 to the investors in the offering for not filing a resale shelf registration statement by the date required in the registration rights agreement and not obtaining NASDAQ listing for our common stock on or prior to the effective date of the resale shelf registration statement. We do not expect to incur future penalty fees under the registration rights agreement.
In accordance with our investment plan, we promptly deployed the net proceeds from our January and February 2008 equity offerings by purchasing an aggregate of approximately $714.1 million of Agency hybrid RMBS during January and February 2008. These acquisitions were financed in part with repurchase agreements and hedged with interest rate swaps.
March 2008 Credit Market Disruption
During March 2008, news of potential and actual security liquidations negatively impacted market values for, and available liquidity to finance, certain mortgage securities, including some of our Agency RMBS and AAA-rated non-Agency RMBS, resulting in a significant deleveraging event for a relatively broad range of leveraged public and private companies with investment and financing strategies similar to ours. In response to these significantly changed conditions, we undertook a number of strategic actions to reduce leverage and increase liquidity in our portfolio of Agency RMBS. During March 2008, the Company sold, in aggregate, approximately $592.8 million of Agency RMBS from its investment portfolio that was comprised of $516.4 million of Agency hybrid ARM RMBS and $76.4 million of Agency CMO floating rate securities (“CMO Floaters”), resulting in a loss of $15.0 million. As a result of these sales of RMBS, we also terminated associated interest rate swaps that were used to hedge our liability costs with a notional balance of $297.7 million at a cost of $2.0 million. We believe these proactive steps taken by our management team to reduce leverage and increase liquidity enabled our company to successfully navigate the extremely difficult operating and credit conditions facing companies with investment and financing strategies similar to ours.
Subsequent Events – March 2009
Restructuring of Principal Investment Portfolio. As of December 31, 2008, our principal investment portfolio included approximately $197.7 million of collateralized mortgage obligation floating rate securities issued by an Agency, which we refer to as Agency CMO Floaters. Following a review of our principal investment portfolio, we determined in March 2009 that the Agency CMO Floaters held in our portfolio were no longer producing acceptable returns, and as a result, we decided to initiate a program to dispose of these securities on an opportunistic basis. As of March 25, 2009, the Company had sold approximately $149.8 million in current par value of Agency CMO Floaters under this program resulting in a net gain of approximately $0.2 million. As a result of these sales and our intent to sell the remaining Agency CMO Floaters in our principal investment portfolio, we concluded the reduction in value at December 31, 2008 was other-than-temporary and recorded an impairment charge of $4.1 million for the quarter and year ended December 31, 2008.
In addition, we also determined that $6.1 million in current par value of non-agency RMBS, which includes $2.5 million in current par value of retained residual interest, had suffered an other-than-temporary impairment and, accordingly, recorded an impairment charge of $1.2 million for the quarter and year ended December 31, 2008.
Note Regarding Discontinued OperationsOperation
In connection with the sale of our wholesale mortgage lending platform assets on February 22, 2007 and the sale of our retail mortgage lending platform assets to Indymac Bank, F.S.B. (“Indymac”) on March 31,in the first quarter of 2007, during the fourth quarter of 2006, we classified our mortgage lending business as a discontinued operations in accordance with the provisions of SFAS No. 144.operation. As a result, we have reported revenues and expenses related to the mortgage lending business as a discontinued operationsoperation and the related assets and liabilities as assets and liabilities related to a discontinued operationsoperation 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 to Indymac are part of our ongoing operations and accordingly, we have not classified as a discontinued operations in accordance with the provisions of SFAS No. 144.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, 2008,2009 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 down from $8.9 million in assets and $5.8 million in liabilities as ofat December 31, 2007.2008.
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.
Balance Sheet Analysis
Investment Securities - Available for Sale. OurAt December 31, 2009 our securities portfolio consists of Agency RMBS, or primarily AAA-rated residential RMBS.Non-agency RMBS, originally rated AAA and Collateralized Loan Obligations. At December 31, 2008,2009, we had no investment securities in a single issuer or entity, other than Fannie Mae, or Freddie Mac, that had an aggregate book value in excess of 10% of our total assets. The following tables set forth the credit characteristics of our principal investment securities portfolioavailable for sale as of December 31, 20082009 and December 31, 2007:2008:
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 | | Par Value | | | Carrying Value | | | % of Portfolio | | | Coupon | | | Yield | |
Credit | | | | | | | | | | | | | | | | | |
Agency Hybrid ARMs | | FNMA | | $ | 251,810 | | | $ | 258,196 | | | | 54 | % | | | 5.15 | % | | | 3.93 | % |
Agency REMIC CMO Floating Rate | | FNMA/FHLMC | | | 203,638 | | | | 197,675 | | | | 41 | % | | | 1.83 | % | | | 8.54 | % |
Private Label Floating Rate | | AAA | | | 23,289 | | | | 18,118 | | | | 4 | % | | | 1.27 | % | | | 15.85 | % |
Private Label Floating Rate | | Aa | | | 3,648 | | | | 2,828 | | | | 1 | % | | | 2.30 | % | | | 4.08 | % |
NYMT Retained Securities | | AAA-BBB | | | 609 | | | | 530 | | | | 0 | % | | | 5.80 | % | | | 8.56 | % |
NYMT Retained Securities | | Below Investment Grade | | | 2,462 | | | | 69 | | | | 0 | % | | | 5.67 | % | | | 16.99 | % |
Total/Weighted Average | | | | $ | 485,456 | | | $ | 477,416 | | | | 100 | % | | | 3.55 | % | | | 6.51 | % |
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.
December 31, 2007 | | Sponsor or Rating | | Par Value | | | Carrying Value | | | % of Portfolio | | | Coupon | | | Yield | |
Credit | | | | | | | | | | | | | | | | | |
Agency REMIC CMO Floating Rate | | FNMA/FHLMC/GNMA | | $ | 324,676 | | | $ | 318,689 | | | | 91 | % | | | 5.98 | % | | | 5.55 | % |
Private Label Floating Rate | | AAA | | | 29,764 | | | | 28,401 | | | | 8 | % | | | 5.66 | % | | | 5.50 | % |
NYMT Retained Securities | | AAA-BBB | | | 2,169 | | | | 2,165 | | | | 1 | % | | | 6.31 | % | | | 6.28 | % |
NYMT Retained Securities | | Below Investment Grade | | | 2,756 | | | | 1,229 | | | | 0 | % | | | 5.68 | % | | | 12.99 | % |
Total/Weighted Average | | | | $ | 359,365 | | | $ | 350,484 | | | | 100 | % | | | 5.95 | % | | | 5.61 | % |
The following table sets forth the stated reset periods and weighted average yields of our investment securities available for sale at December 31, 20082009 and December 31, 20072008 (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 | % |
| | 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 Hybrid ARMs | | $ | — | | | | — | % | | $ | 66,910 | | | | 3.69 | % | | $ | 191,286 | | | | 4.02 | % | | $ | 258,196 | | | | 3.93 | % |
Agency REMIC CMO Floating Rate | | | 197,675 | | | | 8.54 | % | | | — | | | | — | % | | | — | | | | — | % | | | 197,675 | | | | 8.54 | % |
Private Label Floating Rate | | | 20,946 | | | | 14.25 | % | | | — | | | | — | % | | | — | | | | — | % | | | 20,946 | | | | 14.25 | % |
NYMT Retained Securities | | | 530 | | | | 8.56 | % | | | — | | | | — | % | | | 69 | | | | 16.99 | % | | | 599 | | | | 15.32 | % |
Total/Weighted Average | | $ | 219,151 | | | | 9.21 | % | | $ | 66,910 | | | | 3.69 | % | | $ | 191,355 | | | | 4.19 | % | | $ | 477,416 | | | | 6.51 | % |
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 | |
| | Less than 6 Months | | | More than 6 Months To 24 Months | | | More than 24 Months To 60 Months | | | Total | |
December 31, 2007 | | Carrying Value | | | Weighted Average Yield | | | Carrying Value | | | Weighted Average Yield | | | Carrying Value | | | Weighted Average Yield | | | Carrying Value | | | Weighted Average Yield | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Agency REMIC CMO Floating Rate | | $ | 318,689 | | | | 5.55 | % | | $ | — | | | | — | % | | $ | — | | | | — | % | | $ | 318,689 | | | | 5.55 | % |
Private Label Floating Rate | | | 28,401 | | | | 5.50 | % | | | — | | | | — | % | | | — | | | | — | % | | | 28,401 | | | | 5.50 | % |
NYMT Retained Securities | | | 2,165 | | | | 6.28 | % | | | — | | | | — | % | | | 1,229 | | | | 12.99 | % | | | 3,394 | | | | 10.03 | % |
Total/Weighted Average | | $ | 349,255 | | | | 5.55 | % | | $ | — | | | | — | % | | $ | 1,229 | | | | 12.99 | % | | $ | 350,484 | | | | 5.61 | % |
| | 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 | % |
Prepayment Experience. The constant prepayment rate (“CPR”) on our overall portfolio averaged approximately 12%19% during 20082009 as compared to 19%12% during 2007.2008. CPRs on our purchased portfolio of investment securities averaged approximately 9%18% while the CPRs on loans held in our securitization trusts averaged approximately 19% during 2008.2009. 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.requirements and that we subsequently securitized. The Company has completed four securitizations; three were classified as financings per SFAS No. 140 and one, New York Mortgage Trust 2006-1, qualified as a sale, under SFAS No. 140, which resulted in the recording of residual assets and mortgage servicing rights. The Company sold all the residual assets carrying value total $0.1 million and are included in investment securities available for sale.related to the 2006-1 securitization during the third quarter ended September 30, 2009 incurring a realized loss of approximately $32,000.
The following table detailsAt December 31, 2009, mortgage loans held in securitization trusts at December 31, 2008 and December 31, 2007 (dollar amounts in thousands):
| | Par Value | | | Coupon | | | Carrying Value | | | Yield | |
December 31, 2008 | | $ | 347,546 | | | | 5.56 | % | | $ | 348,337 | | | | 3.96 | % |
December 31, 2007 | | $ | 429,629 | | | | 5.74 | % | | $ | 430,715 | | | | 5.36 | % |
At December 31, 2008 mortgage loans held in securitization trusts representedtotaled approximately 41%$276.2 million, or 56.5% of our total assets. Of thisthe mortgage loan investment portfolioloans held in securitized trusts, 100% are traditional ARMs or hybrid ARMs, and 79%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/amortizationinterest-only period is typically 10 years, which mitigates the “payment shock” at the time of interest rate reset. No loans in our investment portfolioNone 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 | % |
Characteristics of Our Mortgage Loans Held in Securitization Trusts and Retained Interest 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 REMIC securitizationsecuritizations as of December 31, 2008 (dollar amounts in thousands):
Loans Held in Securitization Trusts: | | # of Loans | | | Par Value | | | Carrying Value | |
Loan Characteristics: | | | | | | | | | |
Mortgage loans held in securitization trusts | | | 793 | | | $ | 347,546 | | | $ | 348,337 | |
Retained interest in REMIC securitization (included in Investment securities available for sale) | | | 337 | | | | 177,442 | | | | 599 | |
Total Loans Held | | | 1,130 | | | $ | 524,988 | | | $ | 348,936 | |
| | Average | | | High | | | Low | |
General Loan Characteristics: | | | | | | | | | |
Original Loan Balance | | $ | 491 | | | $ | 3,500 | | | $ | 48 | |
Current Coupon Rate | | | 5.67 | % | | | 8.13 | % | | | 4.00 | % |
Gross Margin | | | 2.34 | % | | | 5.00 | % | | | 1.13 | % |
Lifetime Cap | | | 11.19 | % | | | 13.38 | % | | | 9.13 | % |
Original Term (Months) | | | 360 | | | | 360 | | | | 360 | |
Remaining Term (Months) | | | 319 | | | | 327 | | | | 283 | |
The following table sets forth the composition of our loans held in securitization trusts and loans backing the retained interests from our REMIC securitization as of December 31, 2007 (dollar amounts in thousands):
| | # of Loans | | | Par Value | | | Carrying Value | |
Loan Characteristics: | | | | | | | | | |
Mortgage loans held in securitization trusts | | | 972 | | | $ | 429,629 | | | $ | 430,715 | |
Retained interest in securitization (included in Investment securities available for sale) | | | 391 | | | | 209,455 | | | | 3,394 | |
Total Loans Held | | | 1,363 | | | $ | 639,084 | | | $ | 434,109 | |
| | Average | | | High | | | Low | | Average | | | High | | | Low | |
General Loan Characteristics: | | | | | | | | | | | | | | | | | |
Original Loan Balance | | $ | 490 | | | $ | 3,500 | | | $ | 48 | | |
Original Loan Balance (dollar amounts in thousands) | | $ | 468 | | | $ | 3,500 | | | $ | 48 | |
Current Coupon Rate | | | 5.79 | % | | | 9.93 | % | | | 4.00 | % | | 5.56 | % | | | 8.13 | % | | | 4.00 | % |
Gross Margin | | | 2.34 | % | | | 6.50 | % | | | 1.13 | % | | 2.36 | % | | | 5.00 | % | | | 1.13 | % |
Lifetime Cap | | | 11.19 | % | | | 13.75 | % | | | 9.00 | % | | 11.21 | % | | | 13.38 | % | | | 9.13 | % |
Original Term (Months) | | | 360 | | | | 360 | | | | 360 | | | 360 | | | | 360 | | | | 360 | |
Remaining Term (Months) | | | 330 | | | | 339 | | | | 295 | | | 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 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Arm Loan Type | | | | | | |
Traditional ARMs | | | 2.2 | % | | | 2.3 | % |
2/1 Hybrid ARMs | | | 1.1 | % | | | 1.6 | % |
3/1 Hybrid ARMs | | | 7.8 | % | | | 10.2 | % |
5/1 Hybrid ARMs | | | 86.3 | % | | | 83.4 | % |
7/1 Hybrid ARMs | | | 2.6 | % | | | 2.5 | % |
Total | | | 100.0 | % | | | 100.0 | % |
Percent of ARM loans that are Interest Only | | | 78.6 | % | | | 77.3 | % |
Weighted average length of interest only period | | 8.3 years | | | 8.3 years | |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Traditional ARMs - Periodic Caps | | | | | | |
None | | | 79.4 | % | | | 72.9 | % |
1% | | | 1.2 | % | | | 1.4 | % |
Over 1% | | | 19.4 | % | | | 25.7 | % |
Total | | | 100.0 | % | | | 100.0 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Hybrid ARMs - Initial Cap | | | | | | |
3.00% or less | | | 6.7 | % | | | 8.3 | % |
3.01%-4.00% | | | 4.0 | % | | | 5.1 | % |
4.01%-5.00% | | | 88.2 | % | | | 85.6 | % |
5.01%-6.00% | | | 1.1 | % | | | 1.0 | % |
Total | | | 100.0 | % | | | 100.0 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Original FICO Scores | | | | | | |
650 or less | | | 4.4 | % | | | 3.9 | % |
651 to 700 | | | 18.0 | % | | | 17.0 | % |
701 to 750 | | | 32.7 | % | | | 32.4 | % |
751 to 800 | | | 40.9 | % | | | 42.5 | % |
801 and over | | | 4.0 | % | | | 4.2 | % |
Total | | | 100.0 | % | | | 100.0 | % |
Average FICO Score | | | 736 | | | | 738 | |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Original Loan to Value (LTV) | | | | | | |
50% or less | | | 9.7 | % | | | 9.5 | % |
50.01%-60.00% | | | 8.2 | % | | | 8.9 | % |
60.01%-70.00% | | | 25.8 | % | | | 27.3 | % |
70.01%-80.00% | | | 54.4 | % | | | 52.2 | % |
80.01% and over | | | 1.9 | % | | | 2.1 | % |
Total | | | 100.0 | % | | | 100.0 | % |
Average LTV | | | 69.9 | % | | | 69.7 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Property Type | | | | | | |
Single Family | | | 51.4 | % | | | 51.3 | % |
Condominium | | | 23.3 | % | | | 22.8 | % |
Cooperative | | | 9.8 | % | | | 9.8 | % |
Planned Unit Development | | | 12.8 | % | | | 13.0 | % |
Two to Four Family | | | 2.7 | % | | | 3.1 | % |
Total | | | 100.0 | % | | | 100.0 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Occupancy Status | | | | | | |
Primary | | | 85.1 | % | | | 84.4 | % |
Secondary | | | 11.0 | % | | | 12.0 | % |
Investor | | | 3.9 | % | | | 3.6 | % |
Total | | | 100.0 | % | | | 100.0 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Documentation Type | | | | | | |
Full Documentation | | | 72.7 | % | | | 72.0 | % |
Stated Income | | | 19.6 | % | | | 19.7 | % |
Stated Income/ Stated Assets | | | 6.3 | % | | | 6.8 | % |
No Documentation | | | 1.0 | % | | | 1.0 | % |
No Ratio | | | 0.4 | % | | | 0.5 | % |
Total | | | 100.0 | % | | | 100.0 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Loan Purpose | | | | | | |
Purchase | | | 58.0 | % | | | 57.8 | % |
Cash out refinance | | | 16.1 | % | | | 15.9 | % |
Rate & term refinance | | | 25.9 | % | | | 26.3 | % |
Total | | | 100.0 | % | | | 100.0 | % |
| | December 31, 2008 Percentage | | | December 31, 2007 Percentage | |
Geographic Distribution: 5% or more in any one state | | | | | | |
NY | | | 30.7 | % | | | 31.2 | % |
MA | | | 17.2 | % | | | 17.4 | % |
FL | | | 7.8 | % | | | 8.3 | % |
CA | | | 7.2 | % | | | 7.2 | % |
NJ | | | 6.0 | % | | | 5.7 | % |
Other (less than 5% individually) | | | 31.1 | % | | | 30.2 | % |
Total | | | 100.0 | % | | | 100.0 | % |
The following table details loan summary information for loans held in securitization trust at December 31, 20082009 (all amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | Principal Amount of Loans | | | | | | | | | | | | | | | | | | | | | | | | | Principal Amount of Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | Subject to | | | | | | | | | | | | | | | | | | | | | | | | | Subject to | |
| | | | | | | | | | | | | | | | Periodic | | | | | | | | Delinquent | | | | | | | | | | | | | | | | | Periodic | | | | | | | | Delinquent | |
Description | Description | | Interest Rate | | Final Maturity | | Payment | | | | Original | | Current | | Principal | | Description | | Interest Rate | | Final Maturity | | Payment | | | | Original | | Current | | Principal | |
Property | | | | Loan | | | | | | | | | | | | Term | | Prior | | Amount of | | Amount of | | or | | | | | Loan | | | | | | | | | | | | | Term | | Prior | | Amount of | | Amount of | | or | |
Type | | Balance | | Count | | Max | | Min | | Avg | | Min | | Max | | (months) | | Liens | | Principal | | Principal | | Interest | | | Balance | | Count | | Max | | Min | | | Avg | | Min | | Max | | (months) | | Liens | | Principal | | Principal | | Interest | |
Single | | | <= $100,000 | | | 12 | | 7.75 | | 4.75 | | 5.44 | | 12/01/34 | | 11/01/35 | | | 360 | | | NA | | $ | 1,595 | | $ | 853 | | $ | 69 | | | <= $100,000 | | 11 | | 5.88 | | 3.38 | | | 4.97 | | 12/01/34 | | 11/01/35 | | 360 | | NA | | $ | 1,724 | | $ | 766 | | $ | - | |
Family | | <= $250,000 | | | 93 | | 8.13 | | 4.75 | | 5.63 | | 09/01/32 | | 12/01/35 | | | 360 | | | NA | | 18,680 | | 16,740 | | | 249 | | |
| | <= $500,000 | | | 139 | | 7.13 | | 4.25 | | 5.54 | | 09/01/32 | | 01/01/36 | | | 360 | | | NA | | 51,158 | | 48,545 | | | 1,257 | | |
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 | | | 65 | | 7.38 | | 4.38 | | 5.56 | | 07/01/33 | | 12/01/35 | | | 360 | | | NA | | 47,889 | | 45,919 | | | 3,645 | | | <=$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 | | | 33 | | 6.75 | | | 5.00 | | 5.64 | | | 01/01/35 | | | 01/01/36 | | | 360 | | | NA | | | 57,977 | | 56,407 | | | - | | | >$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 | | | 342 | | 8.13 | | | 4.25 | | 5.58 | | | 09/01/32 | | | 01/01/36 | | | 360 | | | NA | | $ | 177,299 | | $ | 168,464 | | $ | 5,220 | | | 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 | | $ | 76 | | $ | - | | | <= $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 | | 1,015 | | | - | | | <= $250,000 | | 6 | | 6.75 | | 4.38 | | | 5.75 | | 12/01/34 | | 07/01/35 | | 360 | | NA | | | 1,115 | | | 996 | | | - | |
| | <= $500,000 | | | 21 | | 7.25 | | 5.00 | | 5.82 | | 09/01/34 | | 01/01/36 | | | 360 | | | NA | | 7,764 | | 7,568 | | | 513 | | | <= $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 | | | 4 | | 6.88 | | 5.38 | | 6.06 | | 12/01/34 | | 08/01/35 | | | 360 | | | NA | | 3,068 | | 3,047 | | | - | | | <=$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 | | | - | | | - | | | - | | | >$1,000,000 | | 0 | | - | | - | | | - | | - | | - | | 360 | | NA | | | - | | | - | | | - | |
| | Summary | | | 32 | | | 7.25 | | | 4.38 | | | 5.86 | | | 09/01/34 | | | 01/01/36 | | | 360 | | | NA | | $ | 12,027 | | $ | 11,706 | | $ | 513 | | | 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 | | 6.63 | | 4.38 | | 5.79 | | 01/01/35 | | 12/01/35 | | | 360 | | | NA | | $ | 1,938 | | $ | 1,133 | | $ | - | | | <= $100,000 | | 16 | | 6.38 | | 3.00 | | | 4.99 | | 01/01/35 | | 12/01/35 | | 360 | | NA | | $ | 2,707 | | $ | 1,150 | | $ | - | |
| | <= $250,000 | | | 94 | | 6.88 | | 4.50 | | 5.65 | | 08/01/32 | | 01/01/36 | | | 360 | | | NA | | 18,643 | | 16,953 | | | 230 | | | <= $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 | | | 91 | | 6.88 | | 4.50 | | 5.45 | | 09/01/32 | | 12/01/35 | | | 360 | | | NA | | 31,915 | | 30,853 | | | 917 | | | <= $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 | | | 36 | | 6.13 | | 4.50 | | 5.36 | | 08/01/33 | | 11/01/35 | | | 360 | | | NA | | 26,589 | | 24,751 | | | - | | | <=$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 | | | 15 | | 6.13 | | | 5.13 | | | 5.61 | | | 07/01/34 | | | 09/01/35 | | | 360 | | | NA | | | 24,568 | | | 22,061 | | | - | | | > $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 | | | 252 | | | 6.88 | | | 4.38 | | | 5.55 | | | 08/01/32 | | | 01/01/36 | | | 360 | | | NA | | $ | 103,653 | | $ | 95,751 | | $ | 1,147 | | | 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 | | | 5 | | 6.25 | | 4.75 | | 5.60 | | 09/01/34 | | 06/01/35 | | | 360 | | | NA | | $ | 842 | | $ | 247 | | $ | - | | | <= $100,000 | | 4 | | 5.50 | | 3.00 | | | 4.56 | | 09/01/34 | | 06/01/35 | | 360 | | NA | | $ | 1,350 | | $ | 221 | | $ | - | |
| | <= $250,000 | | | 24 | | 6.25 | | 4.00 | | 5.45 | | 10/01/34 | | 12/01/35 | | | 360 | | | NA | | 4,710 | | 4,319 | | | - | | | <= $250,000 | | 21 | | 6.13 | | 2.88 | | | 5.02 | | 10/01/34 | | 12/01/35 | | 360 | | NA | | | 4,089 | | | 3,662 | | | 212 | |
| | <= $500,000 | | | 41 | | 6.38 | | 4.75 | | 5.45 | | 08/01/34 | | 12/01/35 | | | 360 | | | NA | | 16,829 | | 15,401 | | | - | | | <= $500,000 | | 34 | | 6.38 | | 1.38 | | | 5.02 | | 08/01/34 | | 12/01/35 | | 360 | | NA | | | 13,817 | | | 12,474 | | | - | |
| | <=$1,000,000 | | | 29 | | 6.75 | | 4.75 | | 5.35 | | 11/01/34 | | 11/01/35 | | | 360 | | | NA | | 21,454 | | 20,435 | | | - | | | <=$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 | | | 6 | | | 6.00 | | | 4.88 | | | 5.44 | | | 11/01/34 | | | 12/01/35 | | | 360 | | | NA | | | 8,664 | | | 8,164 | | | - | | | > $1,000,000 | | 5 | | 6.00 | | 2.25 | | | 4.38 | | 11/01/34 | | 12/01/35 | | 360 | | NA | | | 7,544 | | | 6,992 | | | - | |
| | Summary | | | 105 | | | 6.75 | | | 4.00 | | | 5.42 | | | 08/01/34 | | | 12/01/35 | | | 360 | | | NA | | $ | 52,499 | | $ | 48,566 | | $ | - | | | Summary | | 80 | | 6.38 | | 1.38 | | | 5.12 | | 08/01/34 | | 12/01/35 | | 360 | | NA | | $ | 38,084 | | $ | 34,431 | | $ | 212 | |
PUD | | <= $100,000 | | | 3 | | 5.63 | | 5.25 | | 5.38 | | 07/01/35 | | 08/01/35 | | | 360 | | | NA | | $ | 938 | | $ | 244 | | $ | - | | | <= $100,000 | | 1 | | 5.63 | | 5.63 | | | 5.63 | | 07/01/35 | | 07/01/35 | | 360 | | NA | | $ | 100 | | $ | 94 | | $ | - | |
| | <= $250,000 | | | 25 | | 6.75 | | 4.38 | | 5.61 | | 01/01/35 | | 12/01/35 | | | 360 | | | NA | | 5,275 | | 4,665 | | | - | | | <= $250,000 | | 20 | | 6.50 | | 2.75 | | | 5.23 | | 01/01/35 | | 12/01/35 | | 360 | | NA | | | 4,439 | | | 3,836 | | | - | |
| | <= $500,000 | | | 22 | | 7.88 | | 4.38 | | 5.70 | | 08/01/32 | | 12/01/35 | | | 360 | | | NA | | 7,799 | | 7,474 | | | 480 | | | <= $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 | | | 8 | | 5.88 | | 4.75 | | 5.36 | | 09/01/33 | | 12/01/35 | | | 360 | | | NA | | 5,637 | | 5,474 | | | - | | | <=$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 | | | 5.22 | | 5.71 | | | 04/01/34 | | | 12/01/35 | | | 360 | | | NA | | | 5,233 | | | 5,202 | | | - | | | > $1,000,000 | | 4 | | 6.13 | | 3.22 | | | 5.21 | | 04/01/34 | | 12/01/35 | | 360 | | NA | | | 5,233 | | | 5,172 | | | - | |
| | Summary | | | 62 | | | 7.88 | | | 4.38 | | | 5.60 | | | 08/01/32 | | | 01/01/36 | | | 360 | | | NA | | $ | 24,882 | | $ | 23,059 | | $ | 480 | | | Summary | | 51 | | 6.88 | | 2.75 | | | 5.01 | | 08/01/32 | | 01/01/36 | | 360 | | NA | | $ | 20,372 | | $ | 19,245 | | $ | 638 | |
Summary | | <= $100,000 | | | 37 | | 7.75 | | 4.38 | | 5.64 | | 09/01/34 | | 12/01/35 | | | 360 | | | NA | | $ | 5,393 | | $ | 2,553 | | $ | 69 | | | <= $100,000 | | 33 | | 6.63 | | 3.00 | | | 5.00 | | 10/01/34 | | 12/01/35 | | 360 | | NA | | $ | 5,961 | | $ | 2,306 | | $ | 76 | |
| | <= $250,000 | | | 242 | | 8.13 | | 4.00 | | 5.62 | | 08/01/32 | | 01/01/36 | | | 360 | | | NA | | 48,423 | | 43,692 | | | 479 | | | <= $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 | | | 314 | | 7.88 | | 4.25 | | 5.54 | | 08/01/32 | | 01/01/36 | | | 360 | | | NA | | 115,465 | | 109,841 | | | 3,167 | | | <= $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 | | | 142 | | 7.38 | | 4.38 | | 5.47 | | 07/01/33 | | 12/01/35 | | | 360 | | | NA | | 104,637 | | 99,626 | | | 3,645 | | | <=$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 | | | 58 | | | 6.75 | | | 4.88 | | 5.62 | | | 04/01/34 | | | 01/01/36 | | | 360 | | | NA | | | 96,442 | | | 91,834 | | | - | | | > $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 | | | 793 | | | 8.13 | | | 4.00 | | 5.56 | | | 08/01/32 | | | 01/01/36 | | | 360 | | | NA | | $ | 370,360 | | $ | 347,546 | | $ | 7,360 | | | 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, 2008.2009.
| | Principal | | | Premium | | | Allowance for Loan Losses | | | Net Carrying Value | | | Principal | | | Premium | | | Allowance for Loan Losses | | | Net Carrying Value | |
Balance, December 31, 2007 | | $ | 429,629 | | | $ | 2,733 | | | $ | (1,647 | ) | | $ | 430,715 | | |
Balance, December 31, 2008 | | | $ | 345,619 | | | $ | 2,197 | | | $ | (844 | ) | | $ | 346,972 | |
Additions | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | |
Principal repayments | | | (82,083 | ) | | | - | | | | - | | | | (82,083 | ) | | | (67,380 | ) | | | — | | | | — | | | | (67,380 | ) |
Provision for loan loss | | | - | | | | - | | | | (1,433 | ) | | | (1,433 | ) | | | — | | | | — | | | | (2,192 | ) | | | (2,192 | ) |
Transfer to real estate owned | | | | (1,232 | ) | | | — | | | | 406 | | | | (826 | ) |
Charge-Offs | | | | | | | | | | | 1,674 | | | | 1,674 | | | | — | | | | — | | | | 49 | | | | 49 | |
Amortization for premium | | | - | | | | (536 | ) | | | - | | | | (536 | ) | | | — | | | | (447 | ) | | | — | | | | (447 | ) |
Balance, December 31, 2008 | | $ | 347,546 | | | $ | 2,197 | | | $ | (1,406 | ) | | $ | 348,337 | | |
Balance, December 31, 2009 | | | $ | 277,007 | | | $ | 1,750 | | | $ | (2,581 | ) | | $ | 276,176 | |
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. In addition we had four REO properties totaling approximately $1.9 million. 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 | % |
As of December 31, 2007, we had 14 delinquent loans totaling approximately $8.8 million categorized as Mortgage Loans Held in Securitization Trusts. The table below shows delinquencies in our loan portfolio as of December 31, 2007 (dollar amounts in thousands):
Days Late | | Number of Delinquent Loans | | | Total Dollar Amount | | | % of Loan Portfolio | | | Number of Delinquent Loans | | Total Dollar Amount | | % of Loan Portfolio | |
30-60 | | - | | | $ | - | | | - | | | 3 | | $ | 1,363 | | 0.39 | % |
61-90 | | 2 | | | $ | 1,859 | | | 0.43 | % | | 1 | | $ | 263 | | 0.08 | % |
90+ | | 12 | | | $ | 6,910 | | | 1.61 | % | | 13 | | $ | 5,734 | | 1.65 | % |
Real Estate Owned (REO) | | 4 | | | $ | 4,145 | | | 0.96 | % | | 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 $9.4$24.5 million at December 31, 2008.2009.
Restricted Cash. Restricted cash totaled $8.0$3.0 million as of December 31, 2008.2009. Included in restricted cash was $4.2$2.9 million related to amounts deposited to meet margin calls on interest rate swaps and $3.2$0.1 million related to a letter of credit for amounts posted to meet repurchase agreement margin calls.the corporate headquarter lease.
Prepaid and Other Assets. Prepaid and other assets totaled $1.2$2.1 million as of December 31, 2008. Prepaid2009 and other assets consistconsisted mainly of $0.4$0.5 million real estate owned (“REO”), $0.2 million in escrow advances related to mortgage loans held in securitization trust, and $0.2$0.5 million of capitalized servicing costs.capitalization expenses related to equity and bond issuance cost and $0.3 million prepaid insurance.
Financing Arrangements, Portfolio Investments. As of December 31, 2008,2009, there were approximately $402.3$85.1 million of repurchase agreement borrowings outstanding. Our repurchase agreements typically haveprovide for terms of 30 days. As of December 31, 2008,2009, the current weighted average borrowing rate on these financing facilities was 2.62%0.27%.
Collateralized Debt Obligations. As of December 31, 2008,2009, we had $335.6$266.8 million of CDOs outstanding with ana weighted average interest rate of 0.85%0.61%.
Subordinated Debentures. As of December 31, 2008,2009, our wholly owned subsidiary, HC, had trust preferred securities outstanding of $44.6$44.9 million net of deferred bond issuance costs of $0.4$0.1 million, with ana weighted average interest rate of 6.61%5.93%. The securities are fully guaranteed by the Companyour 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’sour 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, (5.22%(4.00% at December 31, 2008)2009). These securities mature on March 15, 2035 and may be called at par by the Companyus any time after March 15, 2010. HC entered into an interest rate cap agreement to limit the maximum interest rate cost of thethese 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.securities and is schedule to mature in March 2010.
$2020.0 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 the Companyus any time after October 30, 2010.
Convertible Preferred Debentures. At December 31, 20082009 we had $19.7$19.9 million of convertible preferred debentures outstanding, net of $0.3$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 future 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 the Company'sour 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. TheAny shares of Series A Preferred Stock maturesthat remain outstanding on December 31, 2010. Pursuant to SFAS No. 150, Accounting2010 must be redeemed in exchange for Certain Financial Instruments with Characteristics of both Liabilitiesthe liquidation amount, which is $20.0 million plus all accrued and Equity, becauseunpaid dividends. Because of this mandatory redemption feature, the Company classifieswe classify these securities as a liability on itsour 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 LIBOR.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 premium,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 attempted to 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 provide no assurance thatnot guaranty we will avoid counter partydo 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 valuationsvaluation 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 in accordance with GAAP, unless specifically precluded under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities.hedges. To this end, terms of the hedges are matched closely to the terms of hedged items.
The following table summarizes the estimated fair value of derivative assets and liabilities as of December 31, 20082009 and December 31, 20072008 (dollar amounts in thousands):
| | December 31, 2008 | | | December 31, 2007 | | | December 31, 2009 | | | December 31, 2008 | |
Derivative assets: | | | | | | | | | | | | |
Interest rate caps | | $ | 22 | | | $ | 416 | | | $ | 4 | | | $ | 22 | |
Total derivative assets | | $ | 22 | | | $ | 416 | | | $ | 4 | | | $ | 22 | |
| | | | | | | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 4,194 | | | $ | 3,517 | | | $ | 2,511 | | | $ | 4,194 | |
Total derivative liabilities | | $ | 4,194 | | | $ | 3,517 | | | $ | 2,511 | | | $ | 4,194 | |
Balance Sheet Analysis - Stockholders’ Equity
Stockholders’ equity at December 31, 20082009 was $39.2$63.0 million and included $8.5$11.8 million of net unrealized losses, $5.6gains, $2.9 million in unrealized derivative losses related to cash flow hedges and $2.9$14.7 million in unrealized lossesgains related to available for sale securities presented as accumulated other comprehensive income.
ResultsStatement of Operations Analysis
The following is a brief description of key terms from our consolidated financial statements: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, which for 2008 was RMBS and loans in securitization trusts, and interest expense, which is the interestexpense 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 Expenses.Income (expense). Other expenseincome (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 expenseincome (expense) includes net lossesgains (losses) from the sale of investments securities or the early termination of interest rate swaps and losses from impairments on investment securities.swaps.
Expenses. Non-interest expensesExpenses we incur in operating our business consist primarily of salary and employee benefits, professional fees, insurance, management feesrent for office space and equipment expenses, and other general and administrative expenses. Other general and administrative expenses include expenses for office rents, equipment rentals,professional fees, office supplies, postage and shipping, telephone, insurance, travel and entertainment and other miscellaneous operating expenses. InBeginning in 2008, other expenses includedinclude the penalty payments paidfees payable to investorsHCS pursuant to a registration rights agreement we entered into in connection with our February 2008 common equity offering.the advisory agreement.
Income (loss) from discontinued operations:operation. LossIncome (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, which are primarily expenses related to rent expense for leased locations not assigned as part of the disposition of our mortgage lending business and certain allocated payroll expenses for employees remaining with us. Our discontinued operations were profitable in 2008 due primarily to the rent reimbursement from Indymac stemming from Indymac’s use of our former corporate headquarters through the end of July 2008. 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 2007 and 20062007
(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 | )% |
(dollar amounts in thousands) | | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | % Change | | | 2006 | | | % Change | |
Net interest income | | $ | 7,863 | | | $ | 477 | | | | 1,548.4 | % | | $ | 4,784 | | | | (62.8 | )% |
Other expenses | | $ | 26,717 | | | $ | 18,513 | | | | 44.3 | % | | $ | 586 | | | | 3,059.2 | % |
Total expenses | | $ | 6,910 | | | $ | 2,754 | | | | 150.9 | % | | $ | 2,032 | | | | 52.9 | % |
(Loss) income for continuing operations | | $ | (25,764 | ) | | $ | (20,790 | ) | | | (23.9 | )% | | $ | 2,166 | | | | (34.8 | )% |
Income (loss) from discontinued operations | | $ | 1,657 | | | $ | (34,478 | ) | | | 104.8 | % | | $ | (17,197 | ) | | | (98.5 | )% |
Net loss | | $ | (24,107 | ) | | $ | (55,268 | ) | | | 56.4 | % | | $ | (15,031 | ) | | | (181.5 | )% |
Basic and diluted loss per share | | $ | (2.91 | ) | | $ | (30.47 | ) | | | 90.4 | % | | $ | (8.33 | ) | | | (179.9 | )% |
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 or a2007. The decrease in net loss of $31.2 million. The decreasemillion was due mainly to the elimination of non recurring charges that were recordedfollowing factors: $7.4 million improvement in 2007, including an $18.4net interest margin due mainly from reduced financing costs, $36.1 million charge to reserve 100% of the deferred tax asset relatednet earnings improvement in our discontinued operations which was due to the discontinued business, a $16.1 million operating loss forsale of the mortgage origination business that was sold in March 2007. Additionally, the netof 2007, offset by an increase in realized losses from sale of securities and termination of interest margin for the twelve months ended December 31, 2008 increased by $7.4 million as compared to the same periodrate swaps in 2007 due to significant portfolio restructuring. The Company incurred a $5.3 million non cash impairment in the fourth quarter of 2008 as compared to an $8.5 million impairment charge in the fourth quarter of 2007.2008.
For the year ended December 31, 2007, we reported aComparative Net Interest Income
| | For the years ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | Average Balance | | | Amount | | | Yield/ Rate | | | Average Balance | | | Amount | | | Yield/ Rate | | | Average Balance | | | Amount | | | Yield/ Rate | |
| | ($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 loss of $55.3 million, as compared to a net loss of $15.0 millioninterest income for the year ended December 31, 2006. The increase in net loss of $40.3 was due2009 as compared to the following factors: an $18.4 million charge to reserve 100%year ended December 31, 2008 was primarily the result of the deferred tax asset, a decrease in net interest marginrestructuring of $4.3 million, an $8.5 million non cash impairment related toour investment securities portfolio during 2009, which included the investment portfolio, an increase of $7.8 million related to losses on sale of securities$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 hedges and an increase in loan lossesthe addition of $1.6approximately $27.5 million related toof non-Agency RMBS at a discounted price of 60% of par value. In addition, our loans held in securitization trust.trusts contributed to the improvement in net interest income for the year ended December 31, 2009. Our portfolio of loans held in securitization trusts realized net margins of approximately 387 basis points for the year ended December 31, 2009.
Revenues
Comparative Net Interest Income
| | For the years ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
thousands) | | Average Balance | | | Amount | | | Yield/ Rate | | | Average Balance | | | Amount | | | Yield/ Rate | | | Average Balance | | | Amount | | | Yield/ Rate | |
| | ($ Millions) | | | | | | | | | ($ Millions) | | | | | | | | | ($ Millions) | | | | | | | |
Interest Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities and loans held in the securitization trusts | | $ | 907.3 | | | | 44,778 | | | | 4.94 | % | | $ | 907.0 | | | $ | 52,180 | | | | 5.74 | % | | $ | 1,266.4 | | | $ | 66,973 | | | | 5.29 | % |
Amortization of net premium | | | 1.4 | | | | (655 | ) | | | (0.08 | )% | | | 2.4 | | | | (1,616 | ) | | | (0.18 | )% | | | 5.9 | | | $ | (2,092 | ) | | | (0.16 | )% |
Interest income | | $ | 908.7 | | | | 44,123 | | | | 4.86 | % | | $ | 909.4 | | | $ | 50,564 | | | | 5.56 | % | | $ | 1,272.3 | | | $ | 64,881 | | | | 5.13 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities and loans held in the securitization trusts | | $ | 820.5 | | | | 30,351 | | | | 3.65 | % | | $ | 864.7 | | | $ | 46,529 | | | | 5.31 | % | | $ | 1,201.2 | | | $ | 56,553 | | | | 4.64 | % |
Subordinated debentures | | | 45.0 | | | | 3,760 | | | | 8.24 | % | | | 45.0 | | | | 3,558 | | | | 7.80 | % | | | 45.0 | | | | 3,544 | | | | 7.77 | % |
Convertible preferred debentures | | | 20.0 | | | | 2,149 | | | | 10.60 | % | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | $ | 885.5 | | | | 36,260 | | | | 4.09 | % | | $ | 909.7 | | | $ | 50,087 | | | | 5.43 | % | | $ | 1,246.2 | | | $ | 60,097 | | | | 4.76 | % |
Net interest income | | $ | 23.2 | | | | 7,863 | | | | 0.77 | % | | $ | (0.3 | ) | | $ | 477 | | | | 0.13 | % | | $ | 26.1 | | | $ | 4,784 | | | | 0.37 | % |
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.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.
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 Constant Prepayment Rate (“CPR”)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 | | | CPR | | | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 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 | % | | $ | 776.5 | | 4.04 % | | 3.86 % | | 2.45 % | | 1.41 % | | 16.0 % |
Expenses
Comparative Expenses
| | For the Year Ended December 31, | |
(dollar amounts in thousands) | | 2008 | | | 2007 | | | % Change | | | 2006 | | | % Change | |
Salaries and benefits | | $ | 1,869 | | | $ | 865 | | | | 116.1 | % | | $ | 714 | | | | 21.1 | % |
Professional fees | | | 1,212 | | | | 612 | | | | 98.0 | % | | | 598 | | | | 2.3 | % |
Insurance | | | 948 | | | | 474 | | | | 100.0 | % | | | 204 | | | | 132.4 | % |
Management fees | | | 665 | | | | — | | | | 100.0 | % | | | — | | | | — | |
Other | | | 2,216 | | | | 803 | | | | 176.0 | % | | | 516 | | | | 55.6 | % |
Total Expenses | | $ | 6,910 | | | $ | 2,754 | | | | 150.9 | % | | $ | 2,032 | | | | 35.5 | % |
| | 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 $4.2 million increasechanges in total expenses in 2008for the year ended December 31, 2009 as compared to 2007 was tothe year ended December 31, 2008 are due to the following:
● | · | $1.00.2 million or 116.1% increase in salaries and benefitspayroll due mainly to the elimination of allocating salaries between our continuing and discontinued operations.increased compensation for performance related bonuses in 2009. |
| ·● | $0.6 million or 98.0% increase in professionalmanagement fees was due to increased legal fees defending nuisance lawsuits related to our discontinued operations and the elimination of allocating audit between our continuing and discontinued operations.incentive fee payments earned in 2009. |
● | · | $0.70.5 million in management fees paid to HCS pursuant the advisory agreement entered into in January 2008. |
| | |
| · | $1.4 million increasedecrease in other expenses includesdue to one-time penalty fees of $0.7 million non-recurring penalty fees paid in 2008 pursuant to a registration rights agreement, $0.2 million write-off of capitalized legal costs related to discontinued securitizationdelayed shelf registration statement and $0.2 million related to rent.filing for our private placement of common stock. |
The majority of all expense increases fromincrease in total expenses for the year ended December 31, 20062008 as compared to total expenses for the year ended December 31, 2007 was due 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 increased allocationsale of expenses to NYMT from the discontinued operations.
It should be noted thatour mortgage lending business, certain expenses are shared by theof our Company were part of our discontinued mortgage lending business and are included as aexpenses of our discontinued operationsoperation for this presentation.the year ended December 31, 2007.
Discontinued Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | For the Year Ended December 31, | |
(dollar amounts in thousands) | | 2008 | | | 2007 | | | % Change | | | 2006 | | | % Change | | | 2009 | | | 2008 | | | % Change | | | 2007 | | | % Change | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | $ | 419 | | | $ | 1,070 | | | | (60.8 | )% | | $ | 3,524 | | | | (69.6 | )% | | $ | 235 | | | $ | 419 | | | | (43.9 | )% | | $ | 1,070 | | | | (60.8 | )% |
Gain on sale of mortgage loans | | | 46 | | | | 2,561 | | | | (98.2 | )% | | | 17,987 | | | | (85.8 | )% | | | — | | | | 46 | | | | (100.0 | )% | | | 2,561 | | | | (98.2 | )% |
Loan losses | | | (433 | ) | | | (8,874 | ) | | | (95.1 | )% | | | (8,228 | ) | | | 7.9 | % | | | (280 | ) | | | (433 | ) | | | (35.3 | )% | | | (8,874 | ) | | | (95.1 | )% |
Brokered loan fees | | | — | | | | 2,318 | | | | (100.0 | )% | | | 10,937 | | | | (78.8 | )% | | | — | | | | — | | | | — | | | | 2,318 | | | | (100.0 | )% |
Gain on sale of retail lending segment | | | — | | | | 4,368 | | | | (100.0 | )% | | | — | | | | 100.0 | | | | — | | | | — | | | | — | | | | 4,368 | | | | (100.0 | )% |
Other income (expense) | | | 1,463 | | | | (67 | ) | | | 2,284 | % | | | (294 | ) | | | (77.2 | )% | | | 1,290 | | | | 1,463 | | | | (11.8 | )% | | | (67 | ) | | | 2,283.6 | % |
Total net revenues | | | 1,495 | | | | 1,376 | | | | 8.6 | % | | | 23,926 | | | | (94.2 | )% | | $ | 1,245 | | | $ | 1,495 | | | | (16.7 | )% | | $ | 1,376 | | | | 8.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, commissions and benefits | | | 63 | | | | 7,209 | | | | (99.1 | )% | | | 21,711 | | | | (66.8 | )% | | $ | 4 | | | $ | 63 | | | | (93.7 | )% | | $ | 7,209 | | | | (99.1 | )% |
Brokered loan expenses | | | — | | | | 1,731 | | | | (100.0 | )% | | | 8,277 | | | | (79.1 | )% | | | — | | | | — | | | | — | | | | 1,731 | | | | (100.0 | )% |
Occupancy and equipment | | | (559 | ) | | | 1,819 | | | | (130.7 | )% | | | 5,077 | | | | (64.2 | )% | | | 1 | | | | (559 | ) | | | 100.2 | % | | | 1,819 | | | | (130.7 | )% |
General and administrative | | | 334 | | | | 6,743 | | | | (95.0 | )% | | | 14,552 | | | | (53.7 | )% | | | 454 | | | | 334 | | | | 35.9 | % | | | 6,743 | | | | (95.0 | )% |
Total expenses | | | (162 | ) | | | 17,502 | | | | (100.9 | )% | | | 49,617 | | | | (64.7 | )% | | | 459 | | | | (162 | ) | | | 383.3 | % | | | 17,502 | | | | (100.9 | )% |
Income (loss) before income tax (provision) benefit | | | 1,657 | | | | (16,126 | ) | | | 110.3 | % | | | (25,691 | ) | | | (37.2 | )% | | | 786 | | | | 1,657 | | | | (52.6 | )% | | | (16,126 | ) | | | (110.3 | )% |
Income tax (provision) benefit | | | — | | | | (18,352 | ) | | | (100.0 | )% | | | 8,494 | | | | (316.1 | )% | | | — | | | | — | | | | — | | | | (18,352 | ) | | | (100.0 | )% |
Loss from discontinued operations – net of tax | | $ | 1,657 | | | $ | (34,478 | ) | | | 104.8 | % | | $ | (17,197 | ) | | | (100.5 | )% | |
Gain (loss) from discontinued operations – net of tax | | | $ | 786 | | | $ | 1,657 | | | | (52.6 | ) % | | $ | (34,478 | ) | | | 104.8 | % |
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. In connection with the March 2008 market disruption and the anticipated increase in collateral requirements by our lenders as a result of the decrease in the market value of our investment securities, we elected to increase our liquidity by reducing our leverage through the sale of an aggregate of approximately $592.8 million of Agency RMBS in March 2008, which resulted in an aggregate loss of approximately $17.1 million, including losses related to the termination of interest rate swaps. At December 31, 2008,2009, we had cash balances of $9.4$24.5 million, $20.9$85.6 million in unencumbered securities, including $25.2 million of agency RMBS and borrowings of $402.3$85.1 million under outstanding repurchase agreements. At December 31, 2008,2009, we also had longer-term capital resources, including CDOs outstanding of $335.6$266.8 million and subordinated debt of $44.6$44.9 million. In addition, the
The Company received net proceeds of $19.6also has $19.9 million and $56.5 million from private offerings of its Series A Convertible Preferred Stock and common stock, respectively, in January and February 2008.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 must be redeemed by us at the $20.00 per share liquidation preference.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. However, should further volatility and deterioration
Given the continued uncertainty in the broader credit residential mortgage and MBS markets, occurwe believe that maintaining a maximum leverage ratio in the future, we cannot assure you thatrange of 6 to 8 times for our existing sourcesAgency RMBS portfolio and an overall Company leverage ratio of liquidity will be sufficient4 to meet our liquidity requirements during the next 12 months.
To finance our RMBS investment portfolio, we generally seek to borrow between seven and nine5 times the amount of our equity.is appropriate at this time. At December 31, 2008 our2009 the leverage ratio for our portfolio of Agency RMBS, investment portfolio, which we define as our outstanding indebtedness under repurchase agreements divided by the sum of total stockholders’ equity and the convertible preferred debentures,our Series A Preferred Stock, was 6.8:1. This definition of1 to 1 and, excluding our Series A Preferred Stock, the leverage ratio is consistent with the manner in which the credit providers under our repurchase agreements calculate our leverage.was 1.4 to 1.
We had outstanding repurchase agreements, a form of collateralized short-term borrowing, with sixfive different financial institutions as of December 31, 2008.2009. These agreements are secured by our mortgage-backed securitiesAgency 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.
In connection with the dramatic declines in the housing market and significant asset write-downs by financial institutions, many investors and financial institutions that lend in the mortgage securities repurchase markets (including some of the lenders under our repurchase agreements) significantly tightened their lending standards and, in some cases, have ceased to provide funding to borrowers, including other financial institutions. In our case, during March 2008, we experienced increases in the amount of “haircut,” which is the difference between the value of the collateral and the loan amount, required to obtain financing for both our Agency RMBS and non-Agency RMBS. As of December 31, 2008, our RMBS securities portfolio consisted of approximately $455.9 million of Agency RMBS and $21.5 million of non-Agency RMBS, which was financed with approximately $402.3 million of repurchase agreement borrowing with an average haircut of 9%. Although average haircuts have remained stable since the second quarter, any increase in haircuts by our lenders would materially adversely affect our profitability and liquidity. Moreover, in the event the conditions that have recently caused global credit and other financial markets to experience substantial volatility and disruption persist or worsen, certain financial institutions may become insolvent or further tighten their lending standards, which could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability may be adversely affected if we are unable to obtain cost-effective financing for our investments.
We enter into interest rate swap agreements to extend the maturity of our repurchase agreements as a mechanism to reduce the interest rate risk of the securitiesRMBS portfolio. At December 31, 2008,2009, we had $137.3$107.4 million in notional interest rate swaps outstanding. Should market rates for similar term interest rate swaps drop below the minimumfixed 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, 20082009 the Company pledged $4.2$2.9 million in cash margin to cover decreased valuation of the interest rate swaps. The weighted average maturity of the swaps was 3.62.6 years at December 31, 2008.2009.
We also own approximately $3.8 million of loans held for sale. Our inability to sell approximately $5.4 million, net of lower of costthese loans at all or market adjustment, of mortgage loans we ownon favorable terms could adversely affect our profitability as any sale for less than the current valuationreserved 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, 2008,2009, we had a total of $1.8$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 $0.4$0.3 million. In addition, we may be subject to new repurchase requests from investors with whom we have not settled or with respect to repurchase obligations not covered under the settlement.
We paid quarterly cash dividends of $0.12, $0.16$0.10, $0.18, $0.23 and $0.16$0.25 per common share in May,January, April, July, and October 2008,2009, respectively. On December 23, 2008,21, 2009, we declared a 2009 fourth quarter cash dividend of $0.10$0.25 per common shareshare. The dividend was paid on January 26, 2010 to common stockholders of record as of January 5, 2009, which was paid on January 26, 2009.7, 2010. On January 30, 2009,2010, we paid a $0.50$0.63 per share cash dividend, or approximately $0.5$0.6 million in the aggregate, on shares of our Series A Preferred Stock to holders of record as of December 31, 2008.2009. 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 during each of the first, secondin January, April, July, and third quarters of 2008.October 2009, respectively. Each of these dividends was paid out of the Company’s working capitalcapital. We expect to continue to pay quarterly cash dividends on our common stock and recorded as interest expense in the Company’s consolidated statement of operations as theour Series A Preferred Stock is reported as debt per SFAS No. 150, Accounting for Certain Financial Instruments with Characteristicsduring it term. However, our Board of both Liabilities and Equity. WeDirectors 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.
Certain of our assets may generate substantial mismatches between REIT taxable income and available cash. These assets could include mortgage-backed securities we hold that have been issued at a discount and require the accrual of taxable income in advance of the receipt of cash. As a result, our REIT taxable income may exceed our cash available for distribution and the requirement to distribute a substantial portion of our net taxable income could cause us to:
| · | sell assets in adverse market conditions; |
| · | borrow on unfavorable terms; |
| · | distribute amounts that would otherwise be invested in assets or repayment of debt, in order to comply with the REIT distribution requirements. |
Inflation
For the periods presented herein, inflation has been relatively low and we believe that inflation has not had a material effect on our results of operations. The impact of inflation is primarily reflected in the increased costs of our operations. Virtually all our assets and liabilities are financial in nature. Our consolidated financial statements and corresponding notes thereto have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. As a result, interest rates and other factors influence our performance far more than inflation. Inflation affects our operations primarily through its effect on interest rates, since interest rates typically increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand for mortgages and a borrower’s ability to qualify for mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interest rates, borrowers may prepay their mortgages, which in turn may adversely affect our yield and subsequently the value of our portfolio of mortgage assets.
Contractual Obligations and Commitments
The Company had the following contractual obligations at December 31, 2008:2009:
($ amounts in thousands) | | Total | | | Less than 1 year | | | 1 to 3 years | | | 4 to 5 years | | | after 5 years | | | Total | | | Less than 1 year | | | 1 to 3 years | | | 3 to 5 years | | | More than 5 years | |
Operating leases | | $ | 867 | | | $ | 219 | | | $ | 383 | | | $ | 265 | | | $ | — | | | $ | 648 | | | $ | 190 | | | $ | 391 | | | $ | 67 | | | $ | — | |
Repurchase agreements (1) | | | 403,627 | | | | 403,627 | | | | — | | | | — | | | | — | | | | 85,124 | | | | 85,124 | | | | — | | | | — | | | | — | |
Collateralized debt obligations (1)(2) | | | 350,923 | | | | 46,407 | | | | 102,563 | | | | 68,631 | | | | 133,322 | | |
CDOs (1)(2) | | | | 281,109 | | | | 92,275 | | | | 28,726 | | | | 23,463 | | | | 136,645 | |
Subordinated debentures (1) | | | 110,168 | | | | 3,016 | | | | 5,187 | | | | 4,849 | | | | 97,116 | | | | 93,126 | | | | 2,355 | | | | 3,737 | | | | 3,732 | | | | 83,302 | |
Convertible preferred debentures (1)(3) | | | 24,000 | | | | 2,000 | | | | 22,000 | | | | — | | | | — | | | | 22,500 | | | | 22,500 | | | | — | | | | — | | | | — | |
Interest rate swaps (1) | | | 7,402 | | | | 3,348 | | | | 3,519 | | | | 535 | | | | — | | | | 4,057 | | | | 2,570 | | | | 1,448 | | | | 39 | | | | — | |
Management fees (4) | | | 1,476 | | | | 738 | | | | 738 | | | | — | | | | — | | |
Employment agreements (3) | | | 200 | | | | 200 | | | | — | | | | — | | | | — | | |
| | $ | 898,663 | | | $ | 459,555 | | | $ | 134,390 | | | $ | 74,280 | | | $ | 230,438 | | |
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 paidpayments during the period. Interest based on interest rates in effect on December 31, 2008.2009. |
(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) | Represents base cash compensation under contractAmounts 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 Company’s Chief Executive Officer, Steven R. Mumma.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 respect to the advisory feeHCS (see below) are subject to adjustment based on the equity capitalassets under management as of the Managed Subsidiaries and any incentive compensation due pursuant to the advisory agreement between the Managed Subsidiaries and HCS. See “Item 1. Business - Our Relationship with HCS and the Advisory Agreement - Advisory Agreement” above for a summary of the material terms of the advisory agreement. December 31, 2009. |
Advisory Agreement
On January 18, 2008, we entered into an advisory agreement with HCS, pursuant to which HCS will advise, manageadvises, manages and makemakes investments on behalf of two of our wholly-owned subsidiaries.the Managed Subsidiaries. Pursuant to the Advisory Agreement,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 is 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 will be 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 residential mortgageprime ARM loans held in securitization trusts and mortgage-backed securitiesRMBS 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 securitiesRMBS 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 managementmanagement’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.
Fair value. The Company adopted SFAS No.157, Fair Value Measurements, effective January 1, 2008, and accordingly all assets and liabilities measured at fair value will utilize valuation methodologies in accordance with the statement. 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 established by FAS 157 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 generally 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 Cureinterest 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 the fair value ofquoted prices for a security isare not reasonably available from a dealer, the security will be re-classified as a Level 3 security and, as a result, management estimateswill 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’sCompany's investment securities that are comprised of RMBS are valued based upon readily observable market parameters and are classified as Level 2 fair values.
Impairment of and Basis Adjustments on Securitized Financial Assetsb. Investment Securities Available for Sale (CLO) - As previously described herein, during 2005 and early 2006, we regularly securitized our mortgage loans and retainedThe fair value of the beneficial interests created by such securitization. Such assets are evaluated for impairment on a quarterly basis or, if events or changes in circumstances indicate that these assets or the underlying collateral may be impaired, on a more frequent basis. We evaluate whether these assets are considered impaired, whether the impairment is other-than-temporary and, if the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the asset’s amortized cost basis and its fair value. These evaluations require management to make estimates and judgments based on changes in market interest rates, credit ratings, credit and delinquency data and other information to determine whether unrealized losses are reflective of credit deterioration and our ability and intent to hold the investment to maturity or recovery. This other-than-temporary impairment analysis requires significant management judgment and we deem this to be a critical accounting estimate.
AsCLO notes, as of December 31, 2008, our principal investment portfolio included approximately $197.7 million of Agency CMO Floaters. Following2009, was based on management’s valuation determined by using a review of our principal investment portfolio, we determineddiscounted 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 March 2009 that the Agency CMO Floaters heldfuture, management will consider quoted prices provided by dealers who make markets in our portfolio were no longer producing acceptable returns and initiated a program to dispose of these securities on an opportunistic basis. As of March 25, 2009,similar financial instruments in determining the Company had sold approximately $149.8 million in current parfair value of Agency CMO Floaters under this program resulting in a net gain of approximately $0.2 million. As a result of these sales and our intent to sell the remaining Agency CMO Floaters in our principal investment portfolio, we concluded the reduction in value at December 31, 2008 was other-than-temporary and recorded an impairment charge of $4.1 million for the quarter and year ended December 31, 2008.
In addition, we also determined that $6.1 million in current par value of non-agency RMBS, which includes $2.5 million in current par value of retained residual interest, had suffered an other-than-temporary impairment and, accordingly, recorded an impairment charge of $1.2 million for the quarter and year ended December 31, 2008.CLO notes. The CLO notes are classified as Level 3 fair values.
b. 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.
c. Mortgage Loans Held for Sale (Net) (net)–The –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. As there
Mortgage Loans Held in Securitization Trusts (net) – Impaired Loans – Impaired mortgage loans held in the securitization trusts are not readily available quoted prices for identical or similar loansrecorded 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 classified as Level 3 fair values.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.
NewRecent Accounting Pronouncements - - On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.
The changes to previous practice resulting from the application of SFAS No.157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The definition of fair value retains the exchange price notion used in earlier definitions of fair value. SFAS No.157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. SFAS No.157 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. In addition, SFAS No.157 provides a framework for measuring fair value, and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date The Company has disclosed the required elements of SFAS No. 157 herein at Note 11.
On January 1, 2008, the Company adopted SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value.
The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 establishes presentation and disclosure requirements and requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS No. 159 also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. The Company’s adoption of SFAS No. 159 did not have a material impact on the consolidated financial statements as the Company did not elect the fair value option for any of its existing financial assets or liabilities as of January 1, 2008.
In June 2007, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards . EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock units, which are expected to vest, be recorded as an increase to additional paid-in capital. The Company currently accounts for this tax benefit as a reduction to income tax expense. EITF Issue No. 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2008, and the Company expects to adopt the provisions of EITF Issue No. 06-11 beginning in the first quarter of 2009. The Company does not expect the adoption of EITF Issue No. 06-11 to have a material effect on its financial condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141, Business Combinations and issued SFAS No. 141(R) Business Combinations. SFAS No. 141(R) broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and it stipulates that acquisition related costs be generally expensed rather than included as part of the basis of the acquisition. SFAS No. 141(R) expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS No. 141(R) is effective for all transactions the Company closes, on or after January 1, 2009. Adoption of SFAS No. 141(R) will impact the Company’s acquisitions subsequent to January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An AmendmentA discussion of ARB No. 51. SFAS No.160 requires a noncontrolling interest in a subsidiary to be reported as equityrecent accounting pronouncements and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS No. 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS No.160 is effective for the Company on January 1, 2009 and most of its provisions will apply prospectively. We are currently evaluating the impact SFAS No.160 will have on our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. SFAS No.140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under SFAS No.140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”) unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. FSP No. 140-3 is effective for the Company’s fiscal years beginning after November 15, 2008, and will be applied to new transactions entered into after the date of adoption. Early adoption is prohibited. The Company is currently evaluating the impact of adopting FSP No.140-3 on its financial condition and cash flows. Adoption of FSP No.140-3 will have no effect on the Company’s results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, and is effective for financial statements the Company issues for fiscal years beginning after November 15, 2008, with early application encouraged. The Company will adopt SFAS No. 161 in the first quarter of 2009. Because SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 will not affect the Company’s financial condition, results of operations or cash flows.
In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement. The adoption of this FSP would affect the accounting for our convertible preferred debentures. The FSP requires the initial proceeds from the sale of our convertible preferred debentures to be allocated between a liability component and an equity component. The resulting discount would be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP would be effective for our fiscal year beginning on January 1, 2009 and requires retroactive application. We are currently evaluating the impact of the FSPpossible effects on our financial statements.statements is included in Note 2 — Summary of Significant Accounting Policies included in Item 8 of this Annual Report on Form 10-K.
On October 10, 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No.157-3 clarifies the application of SFAS No.157 in a market that is not active and provides an example to illustrate key consideration in determining the fair value of a financial asset when the market for that financial asset is not active. The issuance of FSP 157-3 did not have any impact on the Company’s determination of fair value for its financial assets.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and FIN No. 46(R), “Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of Accounting Research Bulletin No. 51” to require additional disclosures regarding transfers of financial assets and interest in variable interest entities and is effective for interim or annual reporting periods ending after December 15, 2008. The adoption of FSP SFAS 140-4 and FIN 46(R)-8 did not have a material impact on the Company’s financial statements.
On January 12, 2009, the FASB issued EITF No. 99-20-1, “Amendments to the Impairment Guidance of EITF 99-20” to achieve more consistent determination of whether an other-than-temporary impairment has occurred for all beneficial interest within the scope of EITF 99-20. EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, on a prospective basis. EITF 99-20-1 eliminates the requirement that a holder’s best estimate of cash flows be based upon those that “a market participant” would use and instead requires that an other–than–temporary impairment be recognized as a realized loss through earnings when it its “probable” there has been an adverse change in the holder’s estimated cash flows from cash flows previously projected. This change is consistent with the impairment models contained in SFAS No. 115. EITF No. 99-20-1 emphasizes that the holder must consider all available information relevant to the collectibility of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of future cash flows. Such information generally should include the remaining payment terms of the security, prepayments speeds, financial condition of the issuer, expected defaults, and the value of any underlying collateral. The holder should also consider industry analyst reports and forecasts, sector credit ratings, and other market data that are relevant to the collectibility of the security. The Company’s adoption of EITF 99-20-1 at December 31, 2008 did not have a material impact on the Company’s consolidated financial statements.
We seekMarket risk is the exposure to manage our risks related toloss resulting from changes in interest rates, liquidity, prepayment speeds, credit quality of our assets and the market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive total returns through ownership of our capital stock. While we do not seek to avoid risk, we seek to: assume risk that can be quantified from historical experience, and actively manage such risk; earn sufficient returns to justify the taking of such risks; and maintain capital levels consistent with the risks that we undertake.
We are not subject tospreads, foreign currency exchange becauserates, commodity prices and equity prices. Because we are invested solely in U.S. dollarU.S.-dollar denominated instruments, primarily residential mortgage assets,instruments, and our borrowings are also domestic and U.S. dollar denominated, risk.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:
| · | 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 RMBSinvestment 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 CMO floater assets have interest rates that adjust monthly, at a margin over LIBOR, as do the repurchase agreement liabilities that we use to finance those CMO assets.
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.
We seek to manage interest rate risk in the portfolio by utilizing interest rate swaps caps and Eurodollar futures,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 speedspeeds 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, 2008,2009, 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 Net Interest Income | | Changes in Net Interest Income |
Changes in Interest Rates | | Changes in Net Interest Income | | | Changes in Net Interest Income |
+200 | | $ | (4,162 | ) | | $(3,009) |
+100 | | $ | (2,508 | ) | | $(1,807) |
-100 | | $ | (6,347 | ) | | $ 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 decreasesdecrease 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. However,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.
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 trust,trusts, the principal and interest payments from mortgage assets and cash proceeds from the issuance of equity securities.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 securitiesother assets due to either borrower defaults, or a counterparty failure. Our portfolio of loans held in securitization trusts as of December 31, 20082009 consisted of approximately $348.3$276.2 million of securitized first liens originated in 2005 and earlier, approximately $455.9 million of Agency RMBS backed by the credit of Fannie Mae or Freddie Mac, approximately $18.1 million of non-Agency floating rate securities rated AAA by both Standard and Poor’s and Moody’s. In addition we own approximately $5.4 million of loans held for sale in HC, net of lower or cost or market (“LOCOM”) adjustment.
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 69.5%70.3%, and average borrower creditFICO score of approximately 736.732. In addition, approximately 70.0%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 defaults,default on these loans, we cannot assure you that all borrowers will continue to satisfy their payment obligations under these loans and thereby avoidingavoid default.
The $348.3 million of mortgage loans held in securitization trusts are permanently financed with $335.6 million of collateralized debt obligations leaving the Company with a net exposure of $12.7 million of credit exposure, which represents the Company's equity interest in the CDO's.
As of Contents
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(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, 2008,2009, 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 the Company's residential mortgage-backedour investment securities are generally based on market prices provided by five to seven dealers who make markets in these financial instruments. If the fair value of a security is not reasonably available from a dealer, management estimates the fair value based on characteristics of the security that the Company receiveswe receive from the issuer and on available market information.
The fair value of mortgage loans held for in securitization trusts are determined byis 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 pricing sheet whichvaluation at December 31, 2009 and December 31, 2008 fair value.
The fair value of these CDOs is based third party loan origination entities in similar products and markets.on discounted cashflows as well as market pricing on comparable CDOs.
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, 2008,2009, using a discounted cash flow simulation model.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 | | Changes in Market Value | | Net Duration |
| | (Amount in thousands) | | | | (Amount in thousands) | | |
+200 | | $ | (16,381 | ) | 0.88 years | | | $(7,813) | | | 0.83 years |
+100 | | $ | (6,149 | ) | 0.52 years | | | $(4,451) | | | 0.73 years |
Base | | $ | — | | 0.41 years | | | — | | | 0.65 years |
-100 | | $ | 4,595 | | 0.15 years | | | $ 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.
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.
TheOur financial statements of the Company and the related notes, and schedules to the financial statements, together with the Report of Independent Registered Public Accounting Firm thereon, as required by this Item 8, are set forth beginning on page F-1 of this annual report on Form 10-K and are incorporated herein by reference.
None.
Evaluation of Disclosure Controls and Procedures.Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision of and with the participation of our management, including Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our- We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2008that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management timely.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 management, including our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2008.2009.
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 (“COSO”).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, 2008.2009.
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 the our internal control over financial reporting during the quarter ended December 31, 20082009 that have materially affected, or are reasonably likely to materially affect, the our internal control over financial reporting.
None.
PART III
Information on our directors and executive officers and the audit committee of our Board of Directors 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 June 9, 2009May 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 officerofficers 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”,Directors,” “Executive Compensation”,Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our 20092010 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 20092010 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 20092010 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 20092010 Proxy Statement to be filed with the SEC is incorporated herein by reference.
| (a) | Financial Statements and Schedules. The following financial statements and schedules are included in this report: |
| | Page |
FINANCIAL STATEMENTS: | | |
| |
- Grant Thornton LLP | F-2 |
| | |
| Report of Independent Registered Public Accounting Firm - DELOITTE & TOUCHE LLP | F-3 |
| | |
| Consolidated Statements of OperationsBalance Sheets | F-4 |
| | |
| Consolidated Statements of Stockholders’/Members’ EquityOperations | F-5 |
| | |
| Consolidated Statements of Cash FlowsStockholders’/Members’ Equity | F-6 |
| | |
| Consolidated Statements of Cash Flows | F-7 |
| | |
| Notes to Consolidated Financial Statements | F-7 F-8 |
The information set forth under “Exhibit Index” below is incorporated herein by reference.
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 31, 20098, 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 31, 20098, 2010 |
Steven R. Mumma | | Chief Financial Officer | | |
| | (Principal Executive Officer and Principal Financial Officer) | | |
| | | | |
/s/ James J. Fowler | | Chairman of the Board | | March 31, 20098, 2010 |
James J. Fowler | | | | |
| | | | |
/s/ David R. Bock | | Director | | March 31, 2009 |
David R. Bock | | | | |
| | | | |
/s/ Alan L. Hainey | | Director | | March 31, 20098, 2010 |
Alan L. Hainey | | | | |
| | | | |
/s/ Steven G. Norcutt | | Director | | March 31, 20098, 2010 |
Steven G. Norcutt | | | | |
| | | | |
/s/ Steven M. AbreuDaniel K. Osborne | | Director | | March 31, 20098, 2010 |
Steven M. AbreuDaniel K. Osborne | | | | |
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, 20082009
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
| | Page | |
FINANCIAL STATEMENTS: | | | | |
| | | | |
- Grant Thornton LLP | | | F-2 | |
| | | | |
Report of Independent Registered Public Accounting Firm - DELOITTE & TOUCHE LLP | | | F-3 | |
| | | | |
Balance Sheets | | | F-4 | |
| | | | |
Operations | | | F-5 | |
| | | | |
Stockholders’ Equity | | | F-6 | |
| | | | |
of Cash Flows | | | F-7 | |
| | | | |
Notes to Consolidated Financial Statements | | | F-8 | |
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
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 sheetssheet of New York Mortgage Trust, Inc. and subsidiaries (the "Company") as of December 31, 2008, and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the threetwo 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 2007, and the results of their operations and their cash flows for each of the threetwo 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
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
| | December 31, 2008 | | | December 31, 2007 | | | December 31, 2009 | | | December 31, 2008 | |
ASSETS | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,387 | | | $ | 5,508 | | | $ | 24,522 | | | $ | 9,387 | |
Restricted cash | | | 7,959 | | | | 7,515 | | | | 3,049 | | | | 7,959 | |
Investment securities available for sale, at fair value (including pledged assets of $456,506 and $337,356 at December 31, 2008 and 2007, respectively) | | | 477,416 | | | | 350,484 | | |
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 | | | 3,095 | | | | 3,485 | | | | 2,048 | | | | 3,095 | |
Mortgage loans held in securitization trusts (net) | | | 348,337 | | | | 430,715 | | | | 276,176 | | | | 346,972 | |
Prepaid and other assets | | | 1,191 | | | | 1,545 | | | | 2,107 | | | | 2,595 | |
Derivative assets | | | 22 | | | | 416 | | | | 4 | | | | 22 | |
Property and equipment (net) | | | 39 | | | | 62 | | |
Assets related to discontinued operations | | | 5,854 | | | | 8,876 | | |
Assets related to discontinued operation | | | | 4,217 | | | | 5,854 | |
Total Assets | | $ | 853,300 | | | $ | 808,606 | | | $ | 488,814 | | | $ | 853,300 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Financing arrangements, portfolio investments | | $ | 402,329 | | | $ | 315,714 | | | $ | 85,106 | | | $ | 402,329 | |
Collateralized debt obligations | | | 335,646 | | | | 417,027 | | | | 266,754 | | | | 335,646 | |
Derivative liabilities | | | 4,194 | | | | 3,517 | | | | 2,511 | | | | 4,194 | |
Accounts payable and accrued expenses | | | 3,997 | | | | 3,752 | | | | 4,935 | | | | 3,997 | |
Subordinated debentures (net) | | | 44,618 | | | | 44,345 | | | | 44,892 | | | | 44,618 | |
Convertible preferred debentures (net) | | | 19,702 | | | | — | | | | 19,851 | | | | 19,702 | |
Liabilities related to discontinued operations | | | 3,566 | | | | 5,833 | | |
Total liabilities | | | 814,052 | | | | 790,188 | | |
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 9,320,094 shares issued and outstanding at December 31, 2008 and 1,817,927 shares issued and outstanding at December 31, 2007 | | | 93 | | | | 18 | | |
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 | | | 150,790 | | | | 99,357 | | | | 142,519 | | | | 150,790 | |
Accumulated other comprehensive loss | | | (8,521 | ) | | | (1,950 | ) | |
Accumulated other comprehensive income (loss) | | | | 11,818 | | | | (8,521 | ) |
Accumulated deficit | | | (103,114 | ) | | | (79,007 | ) | | | (91,444 | ) | | | (103,114 | ) |
Total stockholders’ equity | | | 39,248 | | | | 18,418 | | |
Total Stockholders’ Equity | | | | 62,987 | | | | 39,248 | |
Total Liabilities and Stockholders’ Equity | | $ | 853,300 | | | $ | 808,606 | | | $ | 488,814 | | | $ | 853,300 | |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)data)
| | For the Year Ended December 31, | | | For the Year Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
REVENUES: | | | | | | | | | | | | | | | | | | |
Interest income - Investment securities and loans held in securitization trusts | | $ | 44,123 | | | $ | 50,564 | | | $ | 64,881 | | |
Interest expense - Investment securities and loans held in securitization trusts | | | 30,351 | | | | 46,529 | | | | 56,553 | | |
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 | | | 13,772 | | | | 4,035 | | | | 8,328 | | | | 22,523 | | | | 13,772 | | | | 4,035 | |
Interest expense - subordinated debentures | | | (3,760 | ) | | | (3,558 | ) | | | (3,544 | ) | | | (3,189 | ) | | | (3,760 | ) | | | (3,558 | ) |
Interest expense - convertible preferred debentures | | | (2,149 | ) | | | — | | | | — | | | | (2,474 | ) | | | (2,149 | ) | | | — | |
Net interest income | | | 7,863 | | | | 477 | | | | 4,784 | | | | 16,860 | | | | 7,863 | | | | 477 | |
OTHER EXPENSE: | | | | | | | | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | | | | | | | |
Provision for loan losses | | | (1,462 | ) | | | (1,683 | ) | | | (57 | ) | | | (2,262 | ) | | | (1,462 | ) | | | (1,683 | ) |
Realized losses on securities and related hedges | | | (19,977 | ) | | | (8,350 | ) | | | (529 | ) | |
Realized gains (losses) on securities and related hedges | | | | 3,282 | | | | (19,977 | ) | | | (8,350 | ) |
Impairment loss on investment securities | | | (5,278 | ) | | | (8,480 | ) | | | — | | | | (119 | ) | | | (5,278 | ) | | | (8,480 | ) |
Total other expense | | | (26,717 | ) | | | (18,513 | ) | | | (586 | ) | |
Total other income (expense) | | | | 901 | | | | (26,717 | ) | | | (18,513 | ) |
EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 1,869 | | | | 865 | | | | 714 | | | | 2,118 | | | | 1,869 | | | | 865 | |
Professional fees | | | 1,212 | | | | 612 | | | | 598 | | | | 1,284 | | | | 1,212 | | | | 612 | |
Insurance | | | 948 | | | | 474 | | | | 204 | | | | 524 | | | | 948 | | | | 474 | |
Management fees | | | 665 | | | | — | | | | — | | | | 1,252 | | | | 665 | | | | — | |
Other | | | 2,216 | | | | 803 | | | | 516 | | | | 1,699 | | | | 2,216 | | | | 803 | |
Total expenses | | | 6,910 | | | | 2,754 | | | | 2,032 | | | | 6,877 | | | | 6,910 | | | | 2,754 | |
(LOSS) INCOME FROM CONTINUING OPERATIONS | | | (25,764 | ) | | | (20,790 | ) | | | 2,166 | | |
Income (loss) from discontinued operations - net of tax | | | 1,657 | | | | (34,478 | ) | | | (17,197 | ) | |
NET LOSS | | $ | (24,107 | ) | | $ | (55,268 | ) | | $ | (15,031 | ) | |
Basic and diluted loss per common share | | $ | (2.91 | ) | | $ | (30.47 | ) | | $ | (8.33 | ) | |
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 | | $ | 0.54 | | | $ | 0.50 | | | $ | 4.70 | | | $ | 0.91 | | | $ | 0.54 | | | $ | 0.50 | |
Weighted average common shares outstanding-basic and diluted | | | 8,272 | | | | 1,814 | | | | 1,804 | | |
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.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2009, 2008 2007 and 20062007
(Dollar amounts in thousands)
| | | | | Additional Paid-In Capital | | | | | | 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 | |
| | | | | Additional Paid-In Capital | | | | | | Accumulated Other Comprehensive Income (Loss) | | | Comprehensive Income (Loss) | | | Total | |
BALANCE, JANUARY 1, 2006 | | $ | 18 | | | $ | 107,738 | | | $ | (8,708 | ) | | $ | 1,910 | | | | | | $ | 100,958 | |
Net loss | | | — | | | | — | | | | (15,031 | ) | | | — | | | $ | (15,031 | ) | | | (15,031 | ) |
Dividends declared | | | — | | | | (8,595 | ) | | | — | | | | — | | | | — | | | | (8,595 | ) |
Repurchase of common stock | | | (1 | ) | | | (299 | ) | | | — | | | | — | | | | — | | | | (300 | ) |
Restricted stock | | | 1 | | | | 819 | | | | — | | | | — | | | | — | | | | 820 | |
Performance shares | | | — | | | | 8 | | | | — | | | | — | | | | — | | | | 8 | |
Stock options exercised | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | 3 | |
Decrease in net unrealized gain on investment available for sale securities | | | — | | | | — | | | | — | | | | (879 | ) | | | (879 | ) | | | (879 | ) |
Decrease in derivative instruments utilized for cash flow hedge | | | — | | | | — | | | | — | | | | (5,412 | ) | | | (5,412 | ) | | | (5,412 | ) |
Comprehensive loss | | | — | | | | — | | | | — | | | | — | | | $ | (21,322 | ) | | | | |
BALANCE, DECEMBER 31, 2006 | | | 18 | | | | 99,674 | | | | (23,739 | ) | | | (4,381 | ) | | | | | | | 71,572 | |
Net loss | | | — | | | | — | | | | (55,268 | ) | | | — | | | $ | (55,268 | ) | | | (55,268 | ) |
Dividends declared | | | — | | | | (909 | ) | | | — | | | | — | | | | — | | | | (909 | ) |
Restricted stock | | | — | | | | 592 | | | | — | | | | — | | | | — | | | | 592 | |
Reclassification adjustment for net loss included in net income | | | — | | | | — | | | | — | | | | 3,192 | | | | 3,192 | | | | 3,192 | |
Decrease in 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 investment 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 | |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (24,107 | ) | | $ | (55,268 | ) | | $ | (15,031 | ) | |
Adjustments to reconcile net loss to net cash provided by (used in) 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 | | | 1,423 | | | | 765 | | | | 2,106 | | | | 1,435 | | | | 1,423 | | | | 765 | |
Amortization of premium on investment securities and mortgage loans | | | 997 | | | | 1,616 | | | | 2,483 | | |
Loss on sale of securities, loans and related hedges | | | 19,977 | | | | 8,350 | | | | 1,276 | | |
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 | | | 5,278 | | | | 8,480 | | | | — | | | | 119 | | | | 5,278 | | | | 8,480 | |
Purchase of mortgage loans held for investment | | | — | | | | — | | | | (222,907 | ) | |
Origination of mortgage loans held for sale | | | — | | | | (300,863 | ) | | | (1,841,011 | ) | | | — | | | | — | | | | (300,863 | ) |
Proceeds from sales of mortgage loans | | | 2,746 | | | | 398,678 | | | | 2,059,981 | | |
Allowance for deferred tax asset / tax (benefit) | | | — | | | | 18,352 | | | | (8,494 | ) | |
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 | ) | | | — | | | | — | | | | — | | | | (4,368 | ) |
Change in value of derivatives | | | — | | | | 785 | | | | 289 | | | | — | | | | — | | | | 785 | |
Provision for loan losses | | | 1,520 | | | | 2,546 | | | | 6,800 | | | | 2,262 | | | | 1,520 | | | | 2,546 | |
Restricted stock issuance | | | | 261 | | | | — | | | | — | |
Other | | | — | | | | 1,111 | | | | 806 | | | | 270 | | | | — | | | | 1,111 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Due from loan purchasers | | | — | | | | 88,351 | | | | 33,462 | | | | — | | | | — | | | | 88,351 | |
Escrow deposits-pending loan closings | | | — | | | | 3,814 | | | | (2,380 | ) | | | — | | | | — | | | | 3,814 | |
Accounts and accrued interest receivable | | | 415 | | | | 4,141 | | | | 7,188 | | | | 1,055 | | | | 415 | | | | 4,141 | |
Prepaid and other assets | | | 642 | | | | 2,903 | | | | (1,586 | ) | | | (260 | ) | | | 642 | | | | 2,903 | |
Due to loan purchasers | | | 138 | | | | (7,115 | ) | | | 4,209 | | | | — | | | | 138 | | | | (7,115 | ) |
Accounts payable and accrued expenses | | | (2,767 | ) | | | (5,009 | ) | | | (7,957 | ) | | | (2,212 | ) | | | (2,767 | ) | | | (5,140 | ) |
Other liabilities | | | — | | | | (131 | ) | | | (453 | ) | |
Net cash provided by operating activities | | | 6,262 | | | | 167,138 | | | | 18,781 | | | | 11,773 | | | | 6,262 | | | | 167,138 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Increase in restricted cash | | | (444 | ) | | | (4,364 | ) | | | 2,317 | | |
Restricted cash | | | | 4,910 | | | | (444 | ) | | | (4,364 | ) |
Purchases of investment securities | | | (850,609 | ) | | | (231,932 | ) | | | (292,513 | ) | | | (43,869 | ) | | | (850,609 | ) | | | (231,932 | ) |
Proceeds from sale of investment securities | | | 625,986 | | | | 246,874 | | | | 356,895 | | | | 296,553 | | | | 625,986 | | | | 246,874 | |
Principal repayments received on loans held in securitization trust | | | 79,951 | | | | 154,729 | | | | 191,673 | | | | 68,914 | | | | 79,951 | | | | 154,729 | |
Proceeds from sale of retail lending platform | | | — | | | | 12,936 | | | | — | | | | — | | | | — | | | | 12,936 | |
Principal paydown on investment securities | | | 74,172 | | | | 113,490 | | | | 162,185 | | | | 70,343 | | | | 74,172 | | | | 113,490 | |
Purchases of property and equipment | | | — | | | | (396 | ) | | | (1,464 | ) | |
Proceeds from sale of fixed asset and real estate owned property | | | 10 | | | | 880 | | | | — | | |
Net cash (used in) provided by investing activities | | | (70,934 | ) | | | 292,217 | | | | 419,093 | | |
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: | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | — | | | | — | | | | (300 | ) | |
Increase (decrease) in financing arrangements, portfolio investments | | | 86,615 | | | | (672,570 | ) | | | (403,400 | ) | |
Increase (decrease) in financing arrangements, net | | | | (317,223 | ) | | | 86,615 | | | | (672,570 | ) |
Collateralized debt obligation borrowings | | | — | | | | 337,431 | | | | — | | | | — | | | | — | | | | 337,431 | |
Collateralized debt obligation paydowns | | | (81,725 | ) | | | (117,851 | ) | | | (30,779 | ) | | | (69,158 | ) | | | (81,725 | ) | | | (117,851 | ) |
Dividends paid | | | (4,100 | ) | | | (1,826 | ) | | | (11,524 | ) | | | (7,108 | ) | | | (4,100 | ) | | | (1,826 | ) |
Capital contributions from minority interest member | | | — | | | | — | | | | 42 | | |
Payments made for termination of swaps | | | (8,333 | ) | | | — | | | | — | | | | — | | | | (8,333 | ) | | | — | |
Proceeds from common stock issued (net) | | | 56,541 | | | | — | | | | — | | | | — | | | | 56,541 | | | | — | |
Proceeds from convertible preferred debentures (net) | | | 19,553 | | | | — | | | | — | | | | — | | | | 19,553 | | | | — | |
Net cash provided by (used in) financing activities | | | 68,551 | | | | (454,816 | ) | | | (445,961 | ) | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 3,879 | | | | 4,539 | | | | (8,087 | ) | |
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 | | | 5,508 | | | | 969 | | | | 9,056 | | | | 9,387 | | | | 5,508 | | | | 969 | |
CASH AND CASH EQUIVALENTS — End | | $ | 9,387 | | | $ | 5,508 | | | $ | 969 | | | $ | 24,522 | | | $ | 9,387 | | | $ | 5,508 | |
SUPPLEMENTAL DISCLOSURE | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 31,479 | | | $ | 41,338 | | | $ | 76,905 | | | $ | 13,456 | | | $ | 31,479 | | | $ | 41,338 | |
NON CASH FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared to be paid in subsequent period | | $ | 932 | | | $ | — | | | $ | 905 | | | $ | 2,355 | | | $ | 932 | | | $ | — | |
Grant of restricted stock | | | $ | 261 | | | $ | — | | | $ | — | |
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands unless otherwise indicated)
1. | Summary of Significant Accounting Policies |
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, that investsin the business of acquiring and managing primarily in real estate-related assets, including residential adjustable rateadjustable-rate, hybrid adjustable-rate and fixed-rate mortgage-backed securities (including collateralized mortgage obligation floating rate securities) issued(“RMBS”), for which the principal and interest payments are guaranteed by a United States government-sponsored enterpriseU.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, and non-agency mortgage-backed securities. We refer to residential adjustable rate mortgage-backed securities throughout this Annual Report on Form 10-K as “RMBS” and RMBSloans. The remainder of our current investment portfolio is comprised of notes issued by a GSE as “Agency MBS”collateralized loan obligation (“CLO”). We also may invest, although to a lesser extent, in certain alternative real-estate-relatedopportunistically acquire and manage various other types of real estate-related and financial assets, that present greater credit riskincluding, among other things, certain non-rated residential mortgage assets, commercial mortgage-backed securities (“CMBS”), commercial real estate loans and less interest rate risk than our investments our current investments RMBS and prime ARM loans. We refer to our investment in these alternative assets as our “alternative investment strategy.”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 will conductconducts certain of its operations related to its alternativeportfolio investment strategyoperations 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 under our principal investment strategy for regulatory compliance purposes. The Company also may conduct certain of ourother portfolio investment operations related to ourits alternative investment strategy through NYMF. As of December 31, 2008, the Company had not acquired any investments under its alternative investment strategy. The Company consolidates all of its subsidiaries under Generally Accepted Accounting Principlesgenerally 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 the Company and its subsidiaries. All inter-companyall subsidiaries; significant intercompany accounts and transactions are eliminated in consolidation. have been eliminated.
Prior period amounts hashave been reclassified to conform to current period classifications, including $0.7$1.4 million of deferred debt issuance costreal estate owned previously included in mortgage loans held in securitization trusts (net) to prepaid and other assets 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 an offset to subordinated debentures (net).GAAP have been eliminated.
As used herein, references to the “Company,” “NYMT,” “we,” “our” and “us” refer to New York Mortgage Trust, Inc., collectively with its subsidiaries.
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).
Use of Estimates - The preparation of consolidated 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 liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility and credit exposure. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market conditions may occur which could cause actual results to differ materially.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.
Restricted Cash - Restricted cash includes approximately $7.9$2.9 million held by counterparties as collateral for hedging instruments and approximately $0.1 million held as collateral for onea letter of credit related to the Company’s lease of itits corporate headquarters.
Investment Securities Available for Sale - The Company's investment securities are residential mortgage-backed securitiesinclude RMBS comprised of Fannie Mae, Freddie Mac, non-Agency RMBS, initially rated AAA securities and “AAA”- rated adjustable-rate securities, including adjustable-rate securities that have an initial fixed-rate period.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 lossincome (“OCI”). The fair values for all securities in this classification are based on unadjusted price quotes for similar securities in active markets obtained from independent dealers. 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.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. Investment securities may be subjectAdjustments to interest rate, credit and/oramortization are made for actual prepayment risk.activity.
When the fair value of an available for saleinvestment security is less than its amortized cost management considers whether thereat 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 inthrough 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 security (e.g., whetherother-than-temporary impairment related to credit losses is recognized through earnings with the security will be sold prior toremainder recognized as a component of other comprehensive income (loss) on the recoveryconsolidated balance sheet. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of fair value). Management considers at a minimum the following factors that, both individually or in combination, could indicate the decline is “other-than-temporary:” 1) the length of time and extent to which the fair value has been less than book value; 2) the financial condition and near-term prospects of the issuer; or 3) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. If, in management's judgment, an other-than-temporary impairment exists,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 is written downon a prospective basis through interest income. The determination as to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Even though no credit concerns exist with respect to an available for sale security,whether an other-than-temporary impairment may be evidentexists and, if management determinesso, 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 the Company does not have the intent and abilityare susceptible to hold an investment until a forecasted recovery of the value of the investment.significant change (see note 2).
Impairment of and Basis Adjustments on Securitized Financial Assets - As previously described herein, during 2005 and early 2006, we regularly securitized our mortgage loans and retained the beneficial interests created by such securitization. Such assets are evaluated for impairment on a quarterly basis or, if events or changes in circumstances indicate that these assets or the underlying collateral may be impaired, on a more frequent basis. We evaluate whether these assets are considered impaired, whether the impairment is other-than-temporary and, if the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the asset’s amortized cost basis and its fair value. These evaluations require management to make estimates and judgments based on changes in market interest rates, credit ratings, credit and delinquency data and other information to determine whether unrealized losses are reflective of credit deterioration and our ability and intent to hold the investment to maturity or recovery. This other-than-temporary impairment analysis requires significant management judgment and we deem this to be a critical accounting estimate.
As of December 31, 2008, our principal investment portfolio included approximately $197.7 million of Agency CMO Floaters. Following a review of our principal investment portfolio, we determined in March 2009 that the Agency CMO Floaters held in our portfolio were no longer producing acceptable returns and initiated a program to dispose of these securities on an opportunistic basis. As of March 25, 2009, the Company had sold approximately $149.8 million in current par value of Agency CMO Floaters under this program resulting in a net gain of approximately $0.2 million. As a result of these sales and our intent to sell the remaining Agency CMO Floaters in our principal investment portfolio, we concluded the reduction in value at December 31, 2008 was other-than-temporary and recorded an impairment charge of $4.1 million for the quarter and year ended December 31, 2008.
In addition, we also determined that $6.1 million in current par value of non-agency RMBS, which includes $2.5 million in current par value of retained residual interest, had suffered an other-than-temporary impairment and, accordingly, recorded an impairment charge of $1.2 million for the year ended December 31, 2008.
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 (net) - Mortgage loans held in securitization trusts are certain Adjustable Rate Mortgageadjustable 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. In accordance with Statement of Financial Accounting Standards (“SFAS”) SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, securitized ARM loans and ARM loans collateralizing debt are accounted for as loans and are not considered investments subject to classification under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (see note 3 and note 6). See Collateralized Debt Obligations below for further description.
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—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 creditcurrent 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 68%84% of the property's originalcurrent appraised value. This estimate is based on management's long term experience.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 15%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 85%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, 20082009 the allowance for loan losses held in securitization trusts totaled $1.4$2.6 million. The allowance for loan losses was $1.6$0.8 million at December 31, 2007.2008.
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 — Portfolio investments- Investment securities available for sale are typically financed with repurchase agreements, a form of collateralized borrowing which is secured by portfoliothe 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).
Collateralized Debt Obligations (“CDO”) - We use CDOs to permanently finance our loans held in securitization trusts. For financial reporting purposes, the ARM loans and restricted cash held as collateral are carriedrecorded as assets of the Company and the CDO is carriedrecorded as the Company’s debt. The transaction includes interest rate caps which are held by the securitization trust and recorded as a derivativean asset or liability of the Company.
The Company, as transferor, securitizes mortgage loans and securities by transferring the loans or securities to entities (“Transferees”) which generally qualify under GAAP as “qualifying special purpose entities” (“QSPE's”) as defined under SFAS No. 140. The QSPEs issue investment grade and non-investment grade securities. Generally, the investment grade securities are sold to third party investors, and the Company retains the non-investment grade securities. If a transaction meets the requirements for sale recognition under GAAP, and the Transferee meets the requirements to be a QSPE, the assets transferred to the QSPE are considered sold, and gain or loss is recognized. The gain or loss is based on the price of the securities sold and the estimated fair value of any securities and servicing rights retained over the cost basis of the assets transferred net of transaction costs. If subsequently the Transferee fails to continue to qualify as a QSPE, or the Company obtains the right to purchase assets out of the Transferee, then the Company may have to include in its financial statements such assets, or potentially, all the assets of such Transferee. 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.sale and accordingly, not included in the Company’s financial statements.
Subordinated Debentures (net)(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 and are presented net of the debt issurance costs (see note 7).
Convertible Preferred Debentures (net)(Net) - The Company issued $20.0 million in Series A Convertible Preferred Stock maturingthat mature 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 SFAS No.150, Accounting for Certain Financial Instruments with Characteristicsliquidations preference plus any accrued and unpaid dividends. As a result of both Liabilities and Equity, because of thisthe mandatory redemption feature, the Company classifies these securities as a liability on its balance sheet and are presented net of the debt issurance costs (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 mortgage banking and its mortgage-backed 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 and certain private investors who meet established credit and capital guidelines. Management does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any loss due to counterparty default. In addition, all outstanding interest rate swap agreements have bi-lateral margin call provisionscapabilities, meaning the Company will require margin for interest rate swaps that hasare in the effect ofCompany’s favor, minimizing the net exposure to either counterparty.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”) or a Treasury rate). The Company applies hedge accounting utilizing the cash flow hedge criteria in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.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. Effectiveness isCorrelation and effectiveness are periodically assessed at least monthlyquarterly based upon a comparison of the relative terms, changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instruments are reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps, will be recognized in current earnings.
Termination of Hedging Relationships - The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.
Additionally, the Company may elect to 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.
Accumulative 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, $18,495$0.0 and $0.3 million$18,495 for the years ended December 31, 2009, 2008 2007 and 2006,2007 respectively.
Stock Based Compensation - The Company accountsCompensation expense for itsequity based awards is recognized over the vesting period of such awards, based upon the fair value of the stock options and restricted stock grants in accordance withat the SFAS No. 123 R, Share-Based Payment , (“SFAS No. 123 R”) which requires all companies to measure compensation for all share-based payments, including employee stock options, at fair valuegrant 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 Federalfederal 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.Company (see note 14).
Discontinued OperationsLoans Sold to Investors -In connection with the sale of the assets of For loans originated and sold by our wholesale mortgage origination platform assets on February 22, 2007 and the sale of the assets of our retail mortgage lending platform on March 31, 2007, during the fourth quarter of 2006, we classified ourdiscontinued mortgage lending business, as a discontinued operations in accordance with the provisionsCompany is obligated to repurchase loans based on violations of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, we have reported revenuesrepresentations and expenses related to the mortgage lending business as a discontinued operations and the related assets and liabilities as assets and liabilities related to the discontinued operations for all periods presentedwarranties in the accompanying consolidated financial statements. Certain assets and liabilities, not assigned to the sales will become part of the ongoing operations of NYMT and accordingly, have not been classified as a discontinued operations in accordance with the provisions of SFAS No. 144 (See note 8).
Allowance for Loan Loss on Repurchase Requests and Mortgage Under Indemnification Agreements- We establish a reserve when we have been requested to repurchase from investors and for loans subject to indemnification agreements. Generally loans wherein the borrowers do not make each of all the first three payments to the new investor once the loan has been sold, require us, under the terms of purchase and sale agreement, entered into with the investor, toor early payment defaults. The Company did not repurchase the loan.
Forany loans during the twelve months ended December 31, 2008 no loans were repurchased. For the twelve months ended2009.
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, 2007,2009, we repurchasedhad a total of approximately $6.7$2.0 million of mortgage loans that were originated in 2005, 2006 or 2007, the majority of which were due to early payment defaults. We had pendingunresolved repurchase requests totaling approximately $1.8 million and $4.4 million as of December 31, 2008 and 2007, respectively,that management concluded may reasonably be deemed to have merit against which the Company has taken a provisionreserve of approximately $0.4 million and $0.5 million, respectively.$0.3 million. The allowance for loan lossesreserve is based on one or more of the following factors; historical settlement rates, property value securing the loan in question and specific settlement discussiondiscussions with third parties. The Company intends to address all outstanding repurchase requests by attempting to enter into net settlement agreements.
New Accounting Pronouncements - - On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.
The changes to previous practice resulting from the application of SFAS No.157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The definition of fair value retains the exchange price notion used in earlier definitions of fair value. SFAS No.157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. SFAS No.157 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. In addition, SFAS No.157 provides a framework for measuring fair value, and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company has disclosed the required elements of SFAS No. 157 herein at Note 11.
On January 1, 2008, the Company adopted SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 establishes presentation and disclosure requirements and requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS No. 159 also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. The Company’s adoption of SFAS No. 159 did not have a material impact on the consolidated financial statements as the Company did not elect the fair value option for any of its existing financial assets or liabilities as of January 1, 2008.
In June 2007, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards . EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock units, which are expected to vest, be recorded as an increase to additional paid-in capital. The Company currently accounts for this tax benefit as a reduction to income tax expense. EITF Issue No. 06-11 is to be applied prospectively for the Company’s tax benefits on dividends declared as of January 1, 2009. The Company does not expect the adoption of EITF Issue No. 06-11 to have a material effect on its financial condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. SFAS No. 141(R) broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations; and it stipulates that acquisition related costs be generally expensed rather than included as part of the basis of the acquisition. SFAS No. 141(R) expands required disclosures to improve the ability to evaluate the nature and financial effects of business combinations. SFAS No. 141(R) is effective for all transactions the Company closes, on or after January 1, 2009. Adoption of SFAS No. 141(R) will impact the Company’s acquisitions subsequent to January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. SFAS No.160 requires a noncontrolling interest in a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be identified in the consolidated financial statements. SFAS No. 160 also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS No.160 is effective for the Company on January 1, 2009 and most of its provisions will apply prospectively. We are currently evaluating the impact SFAS No.160 will have on our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. SFAS No.140-3 requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under SFAS No.140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”) unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. FSP No. 140-3 is effective for the Company on January 1, 2009, and will be applied to new transactions entered into after the date of adoption.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment A Summary of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, and is effective for financial statements the Company issues for fiscal years after January 1, 2009, with early application encouraged. The Company will adopt SFAS No. 161 in the first quarter of 2009. Because SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 will not effect the Company’s financial condition, results of operations or cash flows.Recent Accounting Pronouncements Follows:
General Principles
Generally Accepted Accounting Principles (ASC 105)
In May 2008,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 issued FSP No. APB 14-1,Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement. The adoptionStandards Codification (“ASC”) as the source of this FSP would affectauthoritative accounting principles recognized by the accounting for our convertible preferred debentures. The FSP requires the initial proceeds from the sale of our convertible preferred debentures to be allocated between a liability component and an equity component. The resulting discount would be amortized using the effective interest method over the period the debt is expected to remain outstanding as additional interest expense. The FSP would be effective for our fiscal year beginning on January 1, 2009 and requires retroactive application. We are currently evaluating the impact of the FSP on our consolidated financial statements.
On October 10, 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No.157-3 clarifies the application of SFAS No.157 in a market that is not active and provides an example to illustrate key consideration in determining the fair value of a financial asset when the market for that financial asset is not active. The issuance of FSP No. 157-3 did not have any impact on the Company’s determination of fair value for its financial assets.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and FIN No. 46(R), Consolidation of Variable Interest Entities (revised December 2003) – an interpretation of Accounting Research Bulletin No. 51 to require additional disclosures regarding transfers of financial assets and interest in variable interest entities andFASB. Codification is effective for interim or annual reporting periods ending after December 15, 2008. The adoption of FSP SFAS 140-4the 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 FIN 46(R)-8 did not have a material impact ondeemed non-authoritative. Codification requires any references within the Company’s consolidated financial statements.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.
On January 12, 2009,Assets
Investments in Debt and Equity Securities (ASC 320)
New guidance was provided to make impairment guidance more operational and to improve the FASB issued EITF No. 99-20-1, Amendmentspresentation 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 Impairment Guidanceneed for modifications (or the elimination) of EITF 99-20current OTTI guidance to achieveprovide for a more consistent determinationuniform system of impairment testing standards for financial instruments.” The guidance revises the OTTI evaluation methodology. Previously the analytical focus was on whether an other-than-temporarythe 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 has occurredrelated to other factors will be recognized in OCI. This guidance became effective for all beneficial interest withinof the scope of EITF 99-20, Recognition of Interest Income and Imairmant on Purchased Beneficial Interests and Beneficial Interests that Continue to Be Held by a Transferor in Securitized Financial Assets. EITF 99-20-1 is effective forCompany’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 on a prospective basis. EITF No. 99-20-1 eliminatesand is applicable to business acquisitions completed after January 1, 2009. The Company did not make any business acquisitions during the requirement that a holder’s best estimate of cash flows be based upon those that “a market participant” would use and instead requires that an other–than–temporary impairment be recognized as a realized loss through earnings when it its “probable” there has been an adverse change in the holder’s estimated cash flows from cash flows previously projected. This change is consistent with the impairment models contained in SFAS No. 115. EITF No. 99-20-1 emphasizes that the holder must consider all available information relevant to the collectibility of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of future cash flows. Such information generally should include the remaining payment terms of the security, prepayments speeds, financial condition of the issuer, expected defaults, and the value of any underlying collateral.year ended December 31, 2009. The holder should also consider industry analyst reports and forecasts, sector credit ratings, and other market data that are relevant to the collectibility of the security. The Company’s adoption of EITF No. 99-20-1 at December 31, 2008ASC 805 did not have a material impact on the Company’s consolidated financial statements.
2. 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.
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 Hybrid Arm Securities | | $ | 256,978 | | | $ | 1,316 | | | $ | (98 | ) | | $ | 258,196 | |
Agency REMIC CMO Floaters | | | 197,675 | | | | — | | | | — | | | | 197,675 | |
Private Label Floaters | | | 25,047 | | | | — | | | | (4,101 | ) | | | 20,946 | |
NYMT Retained Securities | | | 677 | | | | — | | | | (78 | ) | | | 599 | |
Total/Weighted Average | | $ | 480,377 | | | $ | 1,316 | | | $ | (4,277 | ) | | $ | 477,416 | |
| | 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 | |
Investment securities available for sale consist(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 following as of December 31, 2007 (dollar amounts in thousands):
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Carrying Value | |
Agency Hybrid Arm Securities | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Agency REMIC CMO Floaters | | | 318,689 | | | | — | | | | — | | | | 318,689 | |
Private Label Floaters | | | 28,401 | | | | — | | | | — | | | | 28,401 | |
NYMT Retained Securities | | | 3,394 | | | | — | | | | — | | | | 3,394 | |
Total/Weighted Average | | $ | 350,484 | | | $ | — | | | $ | — | | | $ | 350,484 | |
applicable deal structures.
As of December 31, 2008, our principal investment portfolio included approximately $197.7 million of Agency CMO Floaters. Following a review of our principal investment portfolio, we determined inDuring March 2009, the Company determined that thecertain Agency CMORMBS, related to collateralized mortgage obligations (“CMO”) floaters held in ourits portfolio were no longer producing acceptable returns and initiated a program where we wanted to disposefor the purpose of disposing of these securities on an opportunistic basis. Assecurities. The Company disposed of March 25, 2009, the Company had sold approximately $149.8$159.5 million in current par value of Agency CMO floaters under this program resulting in a net gainduring March 2009, with the balance of approximately $0.2 million. As a result of these sales and our intent to sell the remaining Agency CMO floaters in our principal investmentits portfolio, we concluded the reductionor $34.3 million in current par value, at December 31, 2008 was other-than-temporary due to our intent to sell such securities and recordedbeing sold in April 2009, for an impairment chargeaggregate disposition of $4.1 million for the quarter and year ended December 31, 2008. In addition, we also determined that $6.1approximately $193.8 million in current par value of non-agency RMBS, which includes $2.5 million in current par valueAgency CMO floaters and a net gain of retained residual interest, had suffered an other-than-temporary impairment and, accordingly, recorded an impairment charge of $1.2 million for the quarter and year ended December 31, 2008.
During March 2008, news of security liquidations increased the volatility of many financial assets, including those held in our portfolio. The significant liquidation of RMBS by several large financial institutions in early March 2008 caused a significant decline in the fair market value of our RMBS portfolio, including Agency ARM RMBS and CMO Floaters that we pledge as collateral for borrowings under our repurchase agreements.approximately $0.1 million. As a result of the combination of lower fair values on our Agency securities and rising haircut requirements to finance those securities, we elected to improve our liquidity position by selling approximately $592.8 million of Agency RMBS securities, including $516.4 million of Agency ARM RMBS and $76.4 million of CMO Floaters from our portfolio in March 2008. The sales resulted in a realized loss of approximately $15.0 million.
As a result of the timing of these sales occurring prior to the release of our December 31, 2007 results,this sale program, the Company determined that the unrealized losses on our entire RMBS securities portfolio were considered to be other than temporarily impaired as of December 31, 2007 and incurred an $8.5additional impairment of $0.1 million impairment charge forin the quarter ended DecemberMarch 31, 2007.2009 because the Company intended to sell the Agency CMO floaters.
As of December 31, 2008 and the date of this filing, we have the intent, and believe we have the ability, to hold remaining non impaired portfolio of securities which are currently in unrealized loss positions until recovery of their amortized cost, which may be until maturity. In making the determination management considered the severity and duration of the loss, as well as management’s intent an ability to hold the security until the recoverability or maturity. Given the uncertain state of the financial markets, should conditions change that would require us to sell securities at a loss, we may no longer be able to assert that we have the ability to hold our remaining securities until recovery, and we would then be required to record impairment charges related to these securities. Substantially all of the Company's investment securities available for sale are pledged as collateral for borrowings under financing arrangements (see note 5).
The Company had pledged approximately $456.5 million and $337.4 million in securities at December 31, 2008 and 2007, respectively, as collateral for repurchase agreements (see note 5). The Company had unencumbered securities totaling approximately $20.9 million and $13.1 million at December 31, 2008 and 2007, respectively.
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 per SFAS No.157 (see note 11).
The following table setstables set forth the stated reset periods and weighted average yields of our investment securities available for sale at December 31, 20082009 (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 Hybrid Arm Securities | | $ | — | | — | | $ | 66,910 | | 3.69% | | $ | 191,286 | | 4.02% | | $ | 258,196 | | 3.93% |
Agency REMIC CMO Floaters | | | 197,675 | | 8.54% | | | — | | — | | | — | | — | | | 197,675 | | 8.54% |
Private Label Floaters | | | 20,946 | | 14.25% | | | — | | — | | | — | | — | | | 20,946 | | 14.25% |
NYMT Retained Securities (1) | | | 530 | | 8.56% | | | — | | — | | | 69 | | 16.99% | | | 599 | | 15.32% |
Total/Weighted Average | | $ | 219,151 | | 9.21% | | $ | 66,910 | | 3.69% | | $ | 191,355 | | 4.19% | | $ | 477,416 | | 6.51% |
| | 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% |
(1) The NYMT retained securities includes $0.1 million of residual interests related to the NYMT 2006-1 transaction.
The following table sets forth the stated reset periods and weighted average yields of our investment securities available for sale at December 31, 20072008 (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% |
| | Less than 6 Months | | | More than 6 Months To 24 Months | | | More than 24 Months To 60 Months | | | Total | |
| | Carrying Value | | | Weighted Average Yield | | | Carrying Value | | | Weighted Average Yield | | | Carrying Value | | | Weighted Average Yield | | | Carrying Value | | | Weighted Average Yield | |
Agency REMIC CMO Floaters | | $ | 318,689 | | | | 5.55 | % | | $ | — | | | | — | | | $ | — | | | | — | | | $ | 318,689 | | | | 5.55 | % |
Private Label Floaters | | | 28,401 | | | | 5.50 | % | | | — | | | | — | | | | — | | | | — | | | | 28,401 | | | | 5.50 | % |
NYMT Retained Securities (1) | | | 2,165 | | | | 6.28 | % | | | — | | | | — | | | | 1,229 | | | | 12.99 | % | | | 3,394 | | | | 10.03 | % |
Total/Weighted Average | | $ | 349,255 | | | | 5.55 | % | | $ | — | | | | — | | | $ | 1,229 | | | | 12.99 | % | | $ | 350,484 | | | | 5.61 | % |
(1) The NYMT retained securities includes $1.2$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, 2008. 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 REMIC CMO Floaters and the NYMT retained residual interests related to the NYMT 2006-1 transaction at December 31, 2008 as the Company incurred approximately $5.3 million impairment charge. There were no unrealized positions twelve months or more or as of December 31, 2007 as the Company incurred approximately $8.5 million impairment charge for unrealized loss positions (dollar amounts in thousands):
December 31, 2008 | | Less than 12 Months | | | Total | |
| | Carrying Value | | | Gross Unrealized Losses | | | Carrying Value | | | Gross Unrealized Losses | |
Agency Hybrid Arm Securities | | $ | 9,406 | | | $ | 98 | | | $ | 9,406 | | | $ | 98 | |
Non-Agency floaters | | | 18,119 | | | | 4,101 | | | | 18,119 | | | | 4,101 | |
NYMT retained security | | | 530 | | | | 78 | | | | 530 | | | | 78 | |
Total | | $ | 28,055 | | | $ | 4,277 | | | $ | 28,055 | | | $ | 4,277 | |
3. Mortgage Loans Held in Securitization Trusts (net)3. | Mortgage Loans Held in Securitization Trusts |
Mortgage loans held in securitization trusts consist of the following at December 31, 20082009 and December 31, 20072008 (dollar amounts in thousands):
| | | December 31, | |
| | December 31, 2008 | | | December 31, 2007 | | | 2009 | | | 2008 | |
Mortgage loans principal amount | | $ | 347,546 | | | $ | 429,629 | | | $ | 277,007 | | | $ | 345,619 | |
Deferred origination costs – net | | | 2,197 | | | | 2,733 | | | | 1,750 | | | | 2,197 | |
Allowance for loan losses | | | (1,406 | ) | | | (1,647 | ) | |
Total mortgage loans held in securitization trusts (net) | | $ | 348,337 | | | $ | 430,715 | | |
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, 20082009 and 20072008 (dollar amounts in thousands).:
| | December 31, | | | December 31, | |
| | 2008 | | | 2007 | | | 2009 | | | 2008 | |
Balance at beginning of period | | $ | 1,647 | | | $ | — | | | $ | 844 | | | $ | 367 | |
Provisions for loan losses | | | 1,433 | | | | 1,655 | | | | 2,192 | | | | 1,187 | |
Transfer to real estate owned | | | | (406 | ) | | | (460 | ) |
Charge-offs | | | (1,674 | ) | | | (8 | ) | | | (49 | ) | | | (250 | ) |
Balance of the end of period | | $ | 1,406 | | | $ | 1,647 | | | $ | 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). TheAs of December 31, 2009, the Company’s net investment in the mortgage loans held in securitization trusts, orwhich 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 CDOsCDO’s outstanding, was $12.7 million and $13.7 million, against which the Company had a $1.4 million and $1.6 million allowance for loan losses as December 31, 2008 and 2007, respectively.$10.0 million.
The following sets forth delinquent loans, including real estate owned through foreclosure (REO) in our portfolio as of December 31, 20082009 and December 31, 20072008 (dollar amounts in thousands):
December 31, 20082009
Days Late | | Number of Delinquent Loans | | Total Dollar Amount | | % of Loan Portfolio | | | Number of Delinquent Loans | | Total Dollar Amount | | % of Loan Portfolio | |
30-60 | | 3 | | $ | 1,363 | | 0.39 | % | | 5 | | $ | 2,816 | | 1.01 | % |
61-90 | | 1 | | $ | 263 | | 0.08 | % | | 4 | | $ | 1,150 | | 0.41 | % |
90+ | | 13 | | $ | 5,734 | | 1.65 | % | | 32 | | $ | 15,915 | | 5.73 | % |
REO | | 4 | | $ | 1,927 | | 0.55 | % | |
Real estate owned through foreclosure | | | 2 | | $ | 739 | | 0.27 | % |
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 | % |
Days Late | | Number of Delinquent Loans | | | Total Dollar Amount | | | % of Loan Portfolio | |
30-60 | | | — | | | $ | — | | | | — | % |
61-90 | | | 2 | | | $ | 1,859 | | | | 0.43 | % |
90+ | | | 12 | | | $ | 6,910 | | | | 1.61 | % |
REO | | | 4 | | | $ | 4,145 | | | | 0.96 | % |
4. 4. | Derivative Instruments and Hedging Activities |
The Company enters into derivative transactionsinstruments to manage its interest rate risk exposure. These derivativesderivative 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 had the effectCompany agrees to modifypay a fixed rate of interest and receive a variable interest rate based on one month LIBOR, on the notional amount of the interest rate repricing characteristics to mitigate the effects ofswaps. 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 net investment spread.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.
DuringThe 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, 2008, the Company paid a total of $8.3 million to terminate a total of $517.7 million of notional interest rate swaps resulting in a realized loss of $4.8 million and recorded as realized loss on securities and related hedges.
The following table summarizes the estimated fair value of derivative assets and liabilities as of December 31, 2008 and December 31, 20072009 (dollar amounts in thousands):
| | December 31, 2008 | | | December 31, 2007 | |
Derivative assets: | | | | | | |
Interest rate caps | | $ | 22 | | | $ | 416 | |
Total derivative assets | | $ | 22 | | | $ | 416 | |
| | | | | | | | |
Derivative liabilities: | | | | | | | | |
Interest rate swaps | | $ | 4,194 | | | $ | 3,517 | |
Total derivative liabilities | | $ | 4,194 | | | $ | 3,517 | |
| | 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.
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, 2008.2009 (dollar amounts in thousands):
The notional amounts | | 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 interest rate swapsCDOs 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, were $137.3 million, and $434.4 million, respectively.
The notional amounts of the Company’s interest rate swaps and These interest rate caps asare 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 Decembersubordinated debentures that effectively caps three month LIBOR at 3.75% until March 31, 2007 were $220.0 million, and $749.6 million, respectively.2010.
5. 5. | Financing Arrangements, Portfolio Investments |
The Company has entered into repurchase agreements with third party financial institutions to finance its mortgage-backed securitiesRMBS 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%. As of December 31, 2007, the Company had repurchase agreements with an outstanding balance of $315.7 million and a weighted average interest rate of 5.02%. At December 31, 20082009 and December 31, 2007,2008, securities pledged as collateral for repurchase agreements had estimated fair values and carrying values of $456.5$91.1 million and $337.4$456.5 million, respectively. All outstanding borrowings under our repurchase agreements mature within 3224 days. As of December 31, 2008,2009, the average days to maturity for allborrowings under the Company’s repurchase agreements are 17was 22 days.
The follow table summarizes outstanding repurchase agreement borrowings secured by portfolio investments as of December 31, 20082009 and December 31, 2007 (dollars2008 (dollar amounts in thousands):
Repurchase Agreements by Counterparty
Repurchase Agreements by Counterparty | | Repurchase Agreements by Counterparty | |
| | | | | | | |
Counterparty Name | | December 31, 2008 | | | December 31, 2007 | | | December 31, 2009 | | | December 31, 2008 | |
AVM | | $ | 54,911 | | | $ | — | | |
Barclays Securities | | | — | | | | 101,297 | | |
AVM, L.P. | | | $ | — | | | $ | 54,911 | |
Cantor Fitzgerald | | | | 9,643 | | | | — | |
Credit Suisse First Boston LLC | | | 97,781 | | | | 97,388 | | | | 20,477 | | | | 97,781 | |
Enterprise Bank of Florida | | | 19,409 | | | | — | | | | — | | | | 19,409 | |
Goldman, Sachs & Co. | | | — | | | | 66,432 | | |
HSBC | | | 42,120 | | | | 50,597 | | | | — | | | | 42,120 | |
Jefferies & Company, Inc. | | | | 17,764 | | | | — | |
MF Global | | | 30,272 | | | | — | | | | — | | | | 30,272 | |
RBS Greenwich Capital | | | 157,836 | | | | — | | | | 22,962 | | | | 157,836 | |
South Street Securities LLC | | | | 14,260 | | | | — | |
Total Financing Arrangements, Portfolio Investments | | $ | 402,329 | | | $ | 315,714 | | | $ | 85,106 | | | $ | 402,329 | |
As of December 31, 2008,2009, our Agency ARM RMBS are financed with $233.3$85.1 million of repurchase agreement funding with an advance rate of 94% that implies a haircut of 6%, our Agency CMO floaters are financed with $154.6 million of repurchase agreement financing with an advance rate of 87% that implies a haircut of 13%, and the non-Agency CMO floater was financed with $14.4 million of repurchase agreement funding with an advance rate of 80% that implies a 20% haircut..
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, 2008,2009, the Company had $9.4$24.5 million in cash and $20.9$85.6 million in unencumbered securities, including $16.3$25.2 million in Agency RMBS, to meet additional haircut or market valuation requirements.
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, 20082009 and December 31, 2007,2008, the Company had CDOs outstanding of $335.6$266.8 million and $417.0$335.6 million, respectively. As of December 31, 20082009 and December 31, 2007,2008, the current weighted average interest rate on these CDOs was 0.85%0.61% and 5.25%0.85%, respectively. The CDOs are collateralized by ARM loans with a principal balance of $347.5$277.7 million and $429.6$347.5 million at December 31, 20082009 and December 31, 2007,2008, respectively. The Company retained the owner trust certificates, or residual interest for three securitizations, and, as of December 31, 20082009 and December 31, 2007,2008, had a net investment in the securitizations trusts of $12.7$10.0 million and $13.7$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, and an aggregate notional amount of $286.9 million as of December 31, 2007, 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, and $0.1 million as of December 31, 2007, respectively. The interest rate caps reduce interest rate exposure on these transactions.
7. | Subordinated Debentures (net)(Net) |
Subordinated debentures consist of the following The follow table summarizes outstanding repurchase agreement borrowings secured by portfolio investments as of December 31, 20082009 and December 31, 2007 (dollars2008 (dollar amounts in thousands):
| | December 31, | | | December 31, | |
| | 2008 | | 2007 | | | 2009 | | | 2008 | |
Subordinated debentures | | $ | 45,000 | | | $ | 45,000 | | | $ | 45,000 | | | $ | 45,000 | |
Less: unamortized bond issuance costs | | | (382 | ) | | | (655 | ) | | | (108 | ) | | | (382 | ) |
Subordinated debentures (net) | | $ | 44,618 | | | $ | 44,345 | | | $ | 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. In accordance with the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the issuedThe preferred stock of NYM Preferred Trust II has been classified as subordinated debentures (net) 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 (5.22%(4.00% at December 31, 20082009 and 8.58%5.22% at December 31, 2007)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 in accordance with SFAS No.133 “Accounting for Derivative Instruments and Hedging Activities”. In accordance with the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the issuedtransaction. The preferred stock of NYM Preferred Trust I has been classified as subordinated debentures (net) in the liability section of the Company’s consolidated balance sheet.
As of March 1, 2009,5, 2010, the Company has not been notified, and is not aware, of any event of default under the covenants for the subordinated debentures.
8. | Discontinued OperationsOperation |
In connection with the sale of our wholesale mortgage origination platform assets on February 22, 2007 andduring the sale of our retail mortgage lending platform onquarter ended March 31, 2007, during the fourth quarter of 2006, we classified our mortgage lending businesssegment as a discontinued operations in accordance with the provisions of SFAS No. 144.operation. As a result, we have reported revenues and expenses related to the mortgage lending businesssegment as a discontinued operationsoperation and the related assets and liabilities as assets and liabilities related to a discontinued operationsoperation 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 leasedlease facilities not assigned to Indymac Bank,F.S.B. (“Indymac”), the acquirersold, are part of our retail mortgage origination assets, will become part of the ongoing operations of NYMT and accordingly, we have not included these items as part of the discontinued operations in accordance with the provisions of SFAS No. 144.operation.
Balance Sheet Data
The components of Assetsassets related to the discontinued operationsoperation 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):
| | December 31, | |
| | 2008 | | | 2007 | |
Accounts and accrued interest receivable | | $ | 26 | | | $ | 51 | |
Mortgage loans held for sale (net) | | | 5,377 | | | | 8,077 | |
Prepaid and other assets | | | 451 | | | | 737 | |
Property and equipment (net) | | | — | | | | 11 | |
Total assets | | $ | 5,854 | | | $ | 8,876 | |
| | 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 | ) |
The components of Liabilities related to the discontinued operations as of December 31, 2008 and 2007 are as follows (dollar amounts in thousands):
| December 31, | |
| 2008 | | 2007 | |
Due to loan purchasers | | $ | 708 | | | $ | 894 | |
Accounts payable and accrued expenses | | | 2,858 | | | | 4,939 | |
Total liabilities | | $ | 3,566 | | | $ | 5,833 | |
Mortgage Loans Held for Sale (net) - - Mortgage loans held for sale are recorded at lower of cost or market and consist of the following as of December 31, 2008 and December 31, 2007 (dollar amounts in thousands):
| | December 31, | |
| | 2008 | | | 2007 | |
Mortgage loans principal amount | | $ | 6,547 | | | $ | 9,636 | |
Deferred origination costs – net | | | (34 | ) | | | (43 | ) |
Lower of cost or market adjustments | | | (1,136 | ) | | | (1,516 | ) |
Total mortgage loans held for sale (net) | | $ | 5,377 | | | $ | 8,077 | |
Lower of Cost or Market Adjustments - - The following table presents the activity in the Company's account for lower of cost or market adjustments for the years ended December 31, 2008 and 2007 (dollar amounts in thousands).
| | December 31, | |
| | 2008 | | | 2007 | |
Balance at beginning of year | | $ | 1,516 | | | $ | 4,042 | |
Lower cost or market adjustments | | | (380 | ) | | | (2,526 | ) |
Balance of the end of year | | $ | 1,136 | | | $ | 1,516 | |
The combined results of operations related to the discontinued operations are as follows (dollar amounts in thousands):
| | For the Year Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
Revenues: | | | | | | | | | |
Net interest income | | $ | 419 | | | $ | 1,070 | | | $ | 3,524 | |
Gain on sale of mortgage loans | | | 46 | | | | 2,561 | | | | 17,987 | |
Losses from lower of cost or market of loans | | | (433 | ) | | | (8,874 | ) | | | (8,228 | ) |
Brokered loan fees | | | — | | | | 2,318 | | | | 10,937 | |
Gain on retail lending segment | | | — | | | | 4,368 | | | | — | |
Other income (expense) | | | 1,463 | | | | (67 | ) | | | (294 | ) |
Total net revenues | | | 1,495 | | | | 1,376 | | | | 23,926 | |
Expenses: | | | | | | | | | | | | |
Salaries, commissions and benefits | | | 63 | | | | 7,209 | | | | 21,711 | |
Brokered loan expenses | | | — | | | | 1,731 | | | | 8,277 | |
Occupancy and equipment | | | (559 | ) | | | 1,819 | | | | 5,077 | |
General and administrative | | | 334 | | | | 6,743 | | | | 14,552 | |
Total expenses | | | (162 | ) | | | 17,502 | | | | 49,617 | |
Income (loss) before income tax benefit | | | 1,657 | | | | (16,126 | ) | | | (25,691 | ) |
Income tax (provision) benefit | | | — | | | | (18,352 | ) | | | 8,494 | |
Income (loss) from discontinued operations – net of tax | | $ | 1,657 | | | $ | (34,478 | ) | | $ | (17,197 | ) |
9. | Commitments and Contingencies |
Loans Sold to Investors - TheFor 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 representationrepresentations and warranties related to loans originated and sold by our discontinued mortgage origination business. in the sale agreement, or early payment defaults. The Company did not repurchase any loans during the year ended December 31, 2008. 2009.
The Company repurchased from investors $6.7 millionperiodically receives repurchase requests based on alleged violations of loans from investors for the year ended December 31, 2007.
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, 20082009, we had a total of $1.8$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 $0.4 million included in other liabilities$0.3 million. The reserve is based on one or more of the discontinued operations.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 other than as described below,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.
On December 13, 2006, Steven B. Yang and Christopher Daubiere (“Plaintiffs”), filed suit in the United States District Court for the Southern District of New York against HC and us, alleging that we failed to pay them, and similarly situated employees, overtime in violation of the Fair Labor Standards Act (“FLSA”) and New York State law. The Plaintiffs, each of whom were former employees in our discontinued mortgage lending business, purported to bring a FLSA “collective action” on behalf of similarly situated loan officers in our now discontinued mortgage lending business and sought unspecified amounts for alleged unpaid overtime wages, liquidated damages, attorney’s fee and costs.
On December 30, 2007 we entered into an agreement in principle with the Plaintiffs to settle this suit. On June 2, 2008 the court granted a preliminary approval of settlement and authorized to plaintiffs and held a fairness hearing on September 18, 2008. At the hearing, the court certified the class and approved the settlement, subject to a final motion to approve Plaintiffs’ counsel’s application for fees. As part of the preliminary settlement, the Company funded the settlement in the amount of $1.35 million into an escrow account for the Plaintiffs. The amount was previously reserved and expensed in the year ended December 31, 2007. The Plaintiffs’ counsel fee was determined by the court and final approval for distributions was made on November 7, 2008. The Plaintiffs’ counsel fee and Plaintiffs’ award distribution were made from the escrow account by the escrow agent during December 2008.
Leases - The Company leases its corporate offices and certain office space related to our discontinued mortgage lending operation not assumed by IndyMac and equipment under short-term lease agreements expiring at various dates through 2010.2013. All such leases are accounted for as operating leases. Total rental (income)lease expense for property and equipment amounted to ($0.6) million, $1.5$0.2 million and $4.8$0.4 million for the years ended December 31, 2008, 20072009 and 2006,December 31, 2008, respectively.
Pursuant to an Assignment and Assumption of Sublease and an Escrow Agreement (“the Agreements”), with Lehman Brothers Holding, Inc. (“Lehman”) (collectively, the “Agreement”), the Company assigned and Lehman assumed the sublease for the Company’s corporate headquarters at 1301 Avenue of the Americas. Pursuant to the Agreements, Lehman funded an escrow account, containing $3.0 million for the benefit of HC as consideration for the assignment of the lease to Lehman. The escrow amount was reduced by $0.2 million for each month the Company or IndyMac remained in the leased space between February 1, 2008 and July 31, 2008, for a total escrow reduction of $1.2 million, which amount was subsequently reimbursed to HC by IndyMac. The remaining $1.8 million in escrow was released to the Company by Lehman on August 18, 2008. IndyMac occupied the leased space at 1301 Avenue of the Americas until July 31, 2008 pursuant to contractual provisions related to the sale of the mortgage origination business. Pursuant to the provisions of the sale transaction with IndyMac, IndyMac paid rent equal to the Company’s cost, including any penalties and foregone bonuses resulting from the delay in vacating the leased premises.
As of December 31, 2008 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 | |
2009 | | $ | 219 | |
2010 | | | 189 | |
2011 | | | 194 | |
2012 | | | 198 | |
2013 | | | 67 | |
Thereafter | | | — | |
| | $ | 867 | |
Letters of Credit– The Company maintains a letter of credit in the amount of $178,200$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.
HC maintains a letterAs of creditDecember 31, 2009 obligations under non-cancelable operating leases that have an initial term of more than one year are as follows (dollar amounts in the amount of $100,000 in lieu of a cash security deposit for an office lease dated June 1998 for the Company's former headquarters located at 304 Park Avenue South in New York City. The sole beneficiary of this letter of credit is the owner of the building, 304 Park Avenue South LLC. This letter of credit is secured by cash deposited in a bank account maintained at JP Morgan Chase bank.thousands):
Year Ending December 31, | | Total | |
2010 | | $ | 190 | |
2011 | | | 193 | |
2012 | | | 198 | |
2013 | | | 67 | |
| | $ | 648 | |
10. | Concentrations of Credit Risk |
At December 31, 2008 and2009, 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, 2007,2008, 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 | % |
| | December 31, | |
| | 2008 | | | 2007 | |
New York | | | 30.7 | % | | 31.2 | % |
Massachusetts | | | 17.2 | % | | 17.4 | % |
Florida | | | 7.8 | % | | 8.3 | % |
California | | | 7.2 | % | | 7.2 | % |
New Jersey | | | 6.0 | % | | 5.7 | % |
11. | Fair Value of Financial Instruments |
The Company adopted SFAS No.157 effective January 1, 2008, and accordingly all assets and liabilities measured at fair value will utilize valuation methodologies in accordance with the statement. 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 established by SFAS No.157 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 generally 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 Cureinterest 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 the fair value ofquoted prices for a security isare not reasonably available from a dealer, the security will be re-classified as a Level 3 security and, as a result, management estimateswill 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’sCompany'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.
c. 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. As there are not readily available quoted prices for identical or similar loans are classified as Level 3 fair values.
The following table presents the Company’s financial instruments carriedmeasured at fair value on a recurring basis as of December 31, 2009 and December 31, 2008 on the Company’s consolidated balance sheet by SFAS No.157 valuation hierarchy, as previously describedsheets (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 | |
| | Fair Value 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 | |
Mortgage loans held for sale (net) | | | — | | | | — | | | | 5,377 | | | | 5,377 | |
Derivative assets (interest rate caps) | | | — | | | | 22 | | | | — | | | | 22 | |
Total | | $ | — | | | $ | 477,438 | | | $ | 5,377 | | | $ | 482,815 | |
Liabilities carried at fair value: | | | | | | | | | | | | |
Derivative liabilities (interest rate swaps) | | | — | | | | 4,194 | | | | — | | | | 4,194 | |
Total | | $ | — | | | $ | 4,194 | | | $ | — | | | $ | 4,194 | |
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 valuationsvaluation for the Level 3 assets for the three months and year ended December 31, 20082009 (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.
Mortgage Loans Held for Sale (Net) | | Three Months Ended December 31, 2008 | | | Year Ended December 31, 2008 | |
| | | | | | |
Beginning balance | | $ | 5,391 | | | $ | 8,077 | |
Principal paydown | | | (14 | ) | | | (2,746 | ) |
LOCOM adjustment | | | — | | | | 46 | |
Ending balance | | $ | 5,377 | | | $ | 5,377 | |
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 the measurementeach 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.
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:
| At December 31, |
| 2008 | | 2007 | |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,387 | | | $ | 9,387 | | | $ | 5,508 | | | $ | 5,508 | |
Restricted cash | | | 7,959 | | | | 7,959 | | | | 7,515 | | | | 7,515 | |
Mortgage loans held in securitization trusts (net) | | | 348,337 | | | | 343,028 | | | | 430,715 | | | | 420,925 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Financing arrangements, portfolio investments | | | 402,329 | | | | 402,329 | | | | 315,714 | | | | 315,714 | |
Collateralized debt obligations | | | 335,646 | | | | 199,503 | | | | 417,027 | | | | 417,027 | |
Subordinated debentures (net) | | | 44,618 | | | | 10,049 | | | | 44,345 | | | | 44,345 | |
Convertible preferred debentures (net) | | | 19,702 | | | | 16,363 | | | | — | | | | — | |
a. Cash and Cash Equivalentscash equivalents and Restricted Cash: 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. Due to significant market dislocation secondary market prices were given minimal weighting when arriving at loan valuation at December 31, 2008.
c. Financing arrangements, portfolio investments –- The fair value of these financing arrangements approximates cost as they are short term in nature and mature withinin 30 days.
d. Collateralized debt obligations –- The fair value of these collateralized debt obligationsCDOs is based on discounted cashflows as well as market pricing on comparable collateralized debt obligations.
e. Subordinated Debenturesdebentures (net) –- The fair value of these subordinated debentures is based on discounted cashflows using management’s estimate for market yields.
d. Convertible preferred debentures (net)- The fair value of these subordinated debentures 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.
A reconciliation of the statutory income tax provision (benefit) to the effective income tax provision for the years ended December 31, 2009, 2008 2007 and 2006,2007, are as follows (dollar amounts in thousands).
| | December 31, | | | December 31, | |
| | 2008 | | | 2007 | | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
(Benefit) provision at statutory rate | | $ | (8,438 | ) | (35.0 | )% | | $ | (9,830 | ) | (35.0 | )% | | $ | (8.234 | ) | (35.0 | )% | | $ | 3,546 | | | | (35.0 | )% | | $ | (8,438 | ) | | | (35.0 | )% | | $ | (9,830 | ) | | | (35.0 | )% |
Non-taxable REIT income (loss) | | | 7,598 | | 31.5 | % | | | 3,008 | | 10.7 | % | | (1,891 | ) | (8.0 | )% | | | (3,008 | ) | | | 30.0 | % | | | 7,598 | | | | 31.5 | % | | | 3,008 | | | | 10.7 | % |
Transfer pricing of loans sold to nontaxable parent | | | — | | — | | | | — | | — | | | 11 | | 0.0 | % | |
State and local tax benefit | | | (221 | ) | (0.9 | )% | | | (1,797 | ) | (6.4 | )% | | (2,663 | ) | (11.3 | )% | |
State and local tax provision (benefit) | | | | 142 | | | | (1.0 | )% | | | (221 | ) | | | (0.9 | )% | | | (1,797 | ) | | | (6.4 | )% |
Valuation allowance | | | 572 | | 2.4 | % | | | 26,962 | | 96.0 | % | | 4,269 | | 18.1 | % | | | (680 | ) | | | 6.0 | % | | | 572 | | | | 2.4 | % | | | 26,962 | | | | 96.0 | % |
Miscellaneous | | | 489 | | 2.0 | % | | | 9 | | 0.0 | % | | | 14 | | 0.1 | % | | | — | | | | — | % | | | 489 | | | | 2.0 | % | | | 9 | | | | 0.0 | % |
Total provision (benefit) | | $ | — | | — | % | | $ | 18,352 | | 65.3 | % | | $ | (8,494 | ) | (36.1 | )% | |
Total provision | | | $ | — | | | | — | % | | $ | — | | | | — | % | | $ | 18,352 | | | | 65.3 | % |
The income tax provision for the year ended December 31, 20082009 (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 provision | | | | |
Federal | | $ | 14,522 | |
State | | | 3,830 | |
Total tax provision | | $ | 18,352 | |
The income tax benefit for the year ended December 31, 2006 (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 | |
| | Deferred | |
Regular tax benefit | | | | |
Federal | | $ | (6,721 | ) |
State | | | (1,773 | ) |
Total tax benefit | | $ | (8,494 | ) |
The gross deferred tax asset at December 31, 20082009 is $30.1$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, 20082009 are as follows (dollar amounts in thousands):
Deferred tax assets: | | | | | | | | |
Net operating loss carryover | | $ | 27,655 | | | $ | 27,697 | |
Mark to market adjustment | | | 313 | | | | 469 | |
Sec. 267 disallowance | | | 268 | | | | 268 | |
Charitable contribution carryforward | | | 1 | | | | 1 | |
GAAP reserves | | | 769 | | | | 429 | |
Rent expense | | | 1,074 | | | | 537 | |
Gross deferred tax asset | | | 30,080 | | | | 29,401 | |
Valuation allowance | | | (30,080 | ) | | | (29,401 | ) |
Net deferred tax asset | | $ | — | | | $ | — | |
At December 31, 2008,2009, the Company had approximately $64.0$62.2 million of net operating loss carryforwards which may be used to offset future taxable income. The carryforwards will expire in 2024 through 2028.2029. 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. ManagementAt 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.
During the quarter ended December 31, 2007 management determined that the Company would likely not be able to utilize the deferred tax asset and accordingly recorded a 100% valuation allowance. The Company continues to recordmaintain a reserve for 100% allowance againstof the deferred tax benefit as factors resulting in the 100% reserve have not changed materially.asset.
The gross deferred tax asset at December 31, 2007 includes a2008 is $30.1 million; the Company continued to reserve 100% of the deferred tax asset of $0.1 million and aas the facts continue to support the Company's inability to utilize the deferred tax liability of $0.1 million which represents the tax effect of differences between tax basis and financial statement carrying amounts of assets and liabilities.asset. The major sources of temporary differences included in the deferred tax assets and their deferred tax effect atas of December 31, 20072008 are as follows (dollar amounts in thousands):
Deferred tax assets: | | | | | | | |
Net operating loss carryover | | $ | 27,434 | | | $ | 27,655 | |
Restricted stock, performance shares and stock option expense | | | 489 | | |
Mark to market adjustment | | | 86 | | | | 313 | |
Sec. 267 disallowance | | | 268 | | | | 268 | |
Charitable contribution carryforward | | | 1 | | | | 1 | |
GAAP reserves | | | 994 | | | | 769 | |
Rent expense | | | 252 | | | | 1,074 | |
Loss on sublease | | | 50 | | |
Gross deferred tax asset | | | 29,574 | | | | 30,080 | |
Valuation allowance | | | (29,509 | ) | | | (30,080 | ) |
Net deferred tax asset | | $ | 65 | | | $ | — | |
| | | | | |
Deferred tax liabilities: | | | | | |
Depreciation | | $ | 65 | | |
Total deferred tax liability | | $ | 65 | | |
During the quarter endedAt December 31, 2007 management determined that2008, the Company would likely nothad approximately $62.1 million of net operating loss carryforwards which may be ableused to utilize the deferred tax asset and accordingly recorded a 100% valuation allowance. The allowance was expensed in continuing operations because the potential deferred tax benefit remains with the Company.offset future taxable income.
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 to Indymac asin the first quarter of March 31, 2007, the Company exited the mortgage lending business and accordingly no longer reports segment information as it only has one operating segment.
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 and 1,817,927 shares issued and outstanding as of December 31, 2007.2008. 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(“Series A Preferred Stock”) authorized. As of each December 31, 20082009 and December 31, 2007,2008, the Company had issued and outstanding 1,000,000 and 0 shares respectively, of Series A Preferred Stock. Of the common stock authorized, 103,111 shares (plus forfeited shares of 32,832 previously granted) were reserved for issuance as restricted stock awards to employees, officers and directors pursuant to the 2005 Stock Incentive Plan. As of December 31, 2008, 103,111shares2009, 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 Common Stock 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 thisthe private offering. The Company filed a resale shelf registration statementregistrationstatement on Form S-3 on April 4, 2008, which became effective on April 18, 2008.
On April 21, 2008,The following table presents cash dividends declared by the Company declared a $0.12 per share cash dividend on its common stock. 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 dividend was payable on May 15, 2008 to common stockholders of record as of April 30, 2008. On June 26, 2008,following table presents cash dividends declared by the Company declared a $0.16 per share cash dividend on its common stock. The dividend was payable on July 25,Series A Preferred Stock from January 1, 2008 to common stockholders of record as of July 10, 2008. On September 29, 2008, the Company declared a $0.16 per share cash dividend on its common stock. The dividend was payable on October 27, 2008 to common stockholders of record as of October 10, 2008. Onthrough December 23, 2008, the Company declared a $0.10 per share cash dividend on its common stock. The dividend was payable on January 26, 2009 to common stockholders of record as of January 5,31, 2009.
We paid a $0.50Period | | 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 cash dividend in each ofshare. For tax reporting purposes, the first three quarters on the Series A Convertible Preferred Stock. On December 23, 2008 the Company declared a $0.50 per share cash dividend, or an aggregate of $0.5 million, payable on January 30, 2009 to holders of record of our Series A Convertible Preferred Stock as of December 31, 2008. These amounts are included in interest expense as the Series A Convertible Preferred Stock istaxable dividends were classified as a liability on the balance sheet (see note 15).ordinary income.
During 2008, taxable dividends for our common stock were $0.44 per share. For tax reporting purposes, the 2008 taxable dividend wasdividends were classified as $0.26 ordinary income and $0.18 as a return of capital.
During 2007, taxable dividends for our common stock were $0.50 per share. For tax reporting purposes, the 2007 taxable dividend was classified as a return of capital.
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.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.million shares.
All per share and share amounts provided in the quarterlythis report have been restated to give effect to both reverse stock splits.
The Company calculates basic net lossincome (loss) per share by dividing net lossincome (loss) for the period by weighted-average shares of common stock outstanding for that period. Diluted net lossincome (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) income 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 | ) |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
Numerator: | | | | | | | | | |
Net loss – Basic | | $ | (24,107 | ) | | $ | (55,268 | ) | | $ | (15,031 | ) |
Net (loss) income from continuing operations | | | (25,764 | ) | | | (20,790 | ) | | | 2,166 | |
Net income (loss) from discontinued operations (net of tax) | | | 1,657 | | | | (34,478 | ) | | | (17,197 | ) |
Effect of dilutive instruments: | | | | | | | | | | | | |
Convertible preferred debentures (1) | | | 2,149 | | | | — | | | | — | |
Net loss – Dilutive | | | (24,107 | ) | | | (55,268 | ) | | | (15,031 | ) |
Net loss from continuing operations | | | (25,764 | ) | | | (20,790 | ) | | | 2,166 | |
Net income (loss) from discontinued operations (net of tax) | | $ | 1,657 | | | $ | (34,478 | ) | | $ | (17,197 | ) |
Denominator: | | | | | | | | | | | | |
Weighted average basis shares outstanding | | | 8,272 | | | | 1,814 | | | | 1,804 | |
Effect of dilutive instruments: | | | | | | | | | | | | |
Convertible preferred debentures (1) | | | 2,384 | | | | — | | | | — | |
Weighted average dilutive shares outstanding | | | 8,272 | | | | 1,814 | | | | 1,804 | |
EPS: | | | | | | | | | | | | |
Basic EPS | | $ | (2.91 | ) | | $ | (30.47 | ) | | $ | (8.33 | ) |
Basic EPS from continuing operations | | | (3.11 | ) | | | (11.46 | ) | | | 1.20 | |
Basic EPS from discontinued operations (net of tax) | | | 0.20 | | | | (19.01 | ) | | | (9.53 | ) |
Dilutive EPS | | $ | (2.91 | ) | | $ | (30.47 | ) | | $ | (8.33 | ) |
Dilutive EPS from continuing operations | | | (3.11 | ) | | | (11.46 | ) | | | 1.20 | |
Basic EPS from discontinued operations (net of tax) | | | 0.20 | | | | (19.01 | ) | | | (9.53 | ) |
(1) | Approximately 2.4 million shares are excluded from the dilutive calculation for the year ended December 31, 2008 |
(1) – $2.1 million and the 2.4 million in shares are excluded from dilutive calculation as it is anti-dilutive..
15. | Convertible Preferred Debentures (net)(Net) |
In January 2008, the Company issuedAs of December 31, 2009, there were 1.0 million shares of our Series A Convertible Preferred Stock outstanding, with an aggregate redemption value of $20.0 million and current dividend payment rate of 10%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. Pursuant to SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilitiespreference plus any accrued and Equity,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 Convertible Preferred Stock to JMP Group Inc. and certain of its affiliates for an aggregate purchase price of $20.0 million. The Series A Convertible 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 ConvertiblePreferred 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 Convertible Preferred Stock.
2005 Stock Incentive Plan
AtPursuant to the Annual Meeting of Stockholders held on May 31, 2005, the Company’s stockholders approved the adoption of the Company’s 2005 Stock Incentive Plan (the “2005 Plan”"Plan"). The 2005 Plan replaced the 2004 Plan, which was terminated on the same date. The 2005 Plan provides that up to 103,111 shares, eligible employees, officers and directors of the Company’sCompany are offered the opportunity to acquire the Company's common stock may be issued thereunder.through the award of restricted stock and other equity-based awards under the Plan. The 2005 Plan provides that themaximum number of shares available for issuanceof common stock that may be granted under the 2005 Plan may be increased by the number of shares covered by 2004 Plan awards that were forfeited or terminated after March 10, 2005. On October 12, 2006, the Company filed a registration statement on Form S-8 registering the issuance or resale of 103,111 shares under the 2005 Plan.
Options
Each of the 2005 and 2004 Plans provide for the exercise price of options to be determined by the Compensation Committee of the Board of Directors (“Compensation Committee”) but not to be less than the fair market value on the date the option is granted. Options expire ten years after the grant date. As of December 31, 2008 and December 31, 2007 there were no options outstanding, respectively.
The Company accounts for the fair value of its grants in accordance with SFAS No. 123R. The Company incurred no compensation cost for the year ended December 31, 2008 and 2007. No cash was received for the exercise of stock options during the year ended December 31, 2008, 2007 and 2006.
A summary of the status of the Company’s options as of December 31, 2007 and changes during the year then ended is presented below:
| | Number of Options | | | Weighted Average Exercise Price | |
Outstanding at beginning of year, January 1, 2007 | | | 46,900 | | | $ | 95.20 | |
Granted | | | — | | | | — | |
Canceled | | | (46,900 | ) | | | 95.20 | |
Exercised | | | — | | | | — | |
Outstanding at end of year, December 31, 2007 | | | — | | | $ | — | |
Options exercisable at year-end | | | — | | | $ | — | |
The fair value of each option previously grant is estimated on the date of grant using the Binomial option-pricing model with the following weighted-average assumptions:
Risk free interest rate | | | 4.5 | % |
Expected volatility | | | 10 | % |
Expected life | | 10 years | |
Expected dividend yield | | | 10.48 | % |
Restricted Stock
The Company had awarded 68,43399,000 shares of restricted stock under the 2005 Plan on July 13, 2009, of which 50,19034,335 shares have fully vested and 18,233 were cancelled or forfeited. There were no restricted stock awards during the year ended December 31, 2008.vested. As of December 31, 2008 and December 31, 2007 there were no outstanding restricted stock awards2009, 8,111 shares remain available for issuance under the 2005 Plan.Plan including 4,000 shares forfeited during the year. During the year ended December 31, 20072009, the Company recognized non-cash compensation expense of $0.6$0.3 million. At December 31, 2009 the Company had unrecognized compensation expense of $0.2 million relatingrelated to the vested portionunvested shares of restricted stock grants.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’srecipient's termination of employment.employment or resignation from the Board of Directors.
A summary of the status of the Company’sCompany's non-vested restricted stock as of December 31, 20072009 and changes during the yeartwelve months then ended is presented below:
| | Number of Non-vested Restricted Shares | | | Weighted Average Grant Date Fair Value | | | Number of Non-vested Restricted Shares | | Weighted Average Grant Date Fair Value | |
| | | | | | | |
Non-vested shares at beginning of year, January 1, 2007 | | | 21,350 | | | $ | 63.60 | | |
Non-vested shares at beginning of year, January 1, 2009 | | | | — | | | $ | — | |
Granted | | | — | | | | — | | | | 99,000 | | | | 5.28 | |
Forfeited | | | (15,589 | ) | | | 55.78 | | | | (4,000 | ) | | | — | |
Vested | | | (5,761 | ) | | | 86.30 | | | | (34,335 | ) | | | 5.28 | |
Non-vested shares as of December 31, 2007 | | | — | | | $ | — | | |
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 | |
Performance Based Stock Awards
In November 2004, the Company acquired 15 full-service and 26 satellite retail mortgage banking offices located in the Northeast and Mid-Atlantic states from General Residential Lending, Inc. (“GRL”). Pursuant to that transaction, the Company committed to award 47,762There were no non-vested restricted shares of the Company’s stock to certain employees of those branches. Of these committed shares, 41,251 were performance based stock awards granted upon attainment of predetermined production levels and 6,511 were restricted stock awards. As of December 31, 2007, the awards ranged in vesting periods from 3 to 6 months with a share price set at the December 2, 2004 grant date market value of $49.15 per share. Duringoutstanding for the year ended December 31, 2007, the Company recognized non-cash compensation expense reversal, inclusive of forfeitures of $0.1 million relating to these performance based stock awards. There were no outstanding performance based stock awards as of December 31, 2008 and December 31, 2007.
A summary of the status of the Company’s non-vested performance based stock awards as of December 31, 2007 and changes during the year 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, 2007 | | | 2,555 | | | $ | 98.30 | |
Granted | | | — | | | | — | |
Forfeited | | | (2,555 | ) | | | 98.30 | |
Vested | | | — | | | | — | |
Non-vested shares as of December 31, 2007 | | | — | | | $ | — | |
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 | |
| | 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 | ) | | | — | |
Realized losses on 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) income from continuing operations | | | (21,438 | ) | | | 434 | | | | 744 | | | | (5,504 | ) |
Income from discontinued operations - net of tax | | | 180 | | | | 829 | | | | 285 | | | | 363 | |
Net (loss) income | | $ | (21,258 | ) | | $ | 1,263 | | | $ | 1,029 | | | $ | (5,141 | ) |
Per share basic and diluted (loss) income | | $ | (4.19 | ) | | $ | 0.14 | | | $ | 0.11 | | | $ | (0.55 | ) |
Dividends declared per common share | | $ | 0.12 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.10 | |
| | Three Months Ended | | | Three Months Ended | |
| | Mar. 31, 2007 | | | Jun. 30, 2007 | | | Sep. 30, 2007 | | | Dec. 31, 2007 | | | Mar. 31, 2008 | | | Jun. 30, 2008 | | | Sep. 30, 2008 | | | Dec. 31, 2008 | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 13,713 | | | $ | 12,898 | | | $ | 12,376 | | | $ | 11,577 | | | $ | 13,253 | | | $ | 10,755 | | | $ | 10,324 | | | $ | 9,791 | |
Interest expense | | | 13,966 | | | | 12,786 | | | | 12,107 | | | | 11,228 | | | | 11,979 | | | | 8,256 | | | | 8,142 | | | | 7,883 | |
Net interest income | | | (253 | ) | | | 112 | | | | 269 | | | | 349 | | | | 1,274 | | | | 2,499 | | | | 2,182 | | | | 1,908 | |
Other expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision for loan losses | | | — | | | | (940 | ) | | | (99 | ) | | | (644 | ) | | | (1,433 | ) | | | (22 | ) | | | (7 | ) | | | — | |
Loss on sale of securities and related hedges | | | — | | | | (3,821 | ) | | | (1,013 | ) | | | (3,516 | ) | | | (19,848 | ) | | | (83 | ) | | | 4 | | | | (50 | ) |
Impairment loss on investment securities | | | — | | | | — | | | | — | | | | (8,480 | ) | | | | | | | | | | | | | | | (5,278 | ) |
Total other expense | | | — | | | | (4,761 | ) | | | (1,112 | ) | | | (12,640 | ) | | | (21,281 | ) | | | (105 | ) | | | (3 | ) | | | (5,328 | ) |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 345 | | | | 151 | | | | 178 | | | | 191 | | | | 313 | | | | 417 | | | | 258 | | | | 881 | |
General and administrative expenses | | | 302 | | | | 378 | | | | 668 | | | | 541 | | | | 1,118 | | | | 1,543 | | | | 1,177 | | | | 1,203 | |
Total expenses | | | 647 | | | | 529 | | | | 846 | | | | 732 | | | | 1,431 | | | | 1,960 | | | | 1,435 | | | | 2,084 | |
Loss from continuing operations | | | (900 | ) | | | (5,178 | ) | | | (1,689 | ) | | | (13,023 | ) | | | (21,438 | ) | | | 434 | | | | 744 | | | | (5,504 | ) |
Loss from discontinued operations - net of tax | | | (3,841 | ) | | | (9,018 | ) | | | (19,027 | ) | | | (2,592 | ) | |
Loss from discontinued operation - net of tax | | | | 180 | | | | 829 | | | | 285 | | | | 363 | |
Net loss | | $ | (4,741 | ) | | $ | (14,196 | ) | | $ | (20,716 | ) | | $ | (15,615 | ) | | $ | (21,258 | ) | | $ | 1,263 | | | $ | 1,029 | | | $ | (5,141 | ) |
Per share basic and diluted loss | | $ | (2.62 | ) | | $ | (7.84 | ) | | $ | (11.40 | ) | | $ | (8.59 | ) | | $ | (4.19 | ) | | $ | 0.14 | | | $ | 0.11 | | | $ | (0.55 | ) |
Dividends declared per common share | | $ | 0.50 | | | $ | — | | | $ | — | | | $ | — | | | $ | 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
Concurrent and in connection with the issuance of our Series A Preferred Stock onOn January 18, 2008, wethe Company entered into an advisory agreement with Harvest Capital Strategies LLC (“HCS”), which (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 an affiliatea wholly-owned subsidiary of JMP Group Inc. Pursuant to Schedule 13D's13D’s filed with the SEC as of December 31, 2008, HCS and JMP Group Inc. as of December 31, 2009, beneficially owned approximately 16.8%16.7% and 12.2%12.1%, respectively, of ourthe Company’s common stock. Understock, and 100%, collectively, of it Series A Preferred Stock.
Pursuant to the advisory agreement, HCS advisesis 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 Managedfuture 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. As previously disclosed, we have an” On March 31, 2009, the Company began acquiring assets that fall under the advisory agreement, starting with the purchase of approximately $64.0$9.0 million net operating loss carry-forwardin 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, remainsfrom time to time in the future, certain of its alternative investments will take the form of a co-investment alongside or in conjunction with us afterJMP Group Inc. or certain of its affiliates. In accordance with investment guidelines adopted by the saleCompany’s Board of our mortgage lending business. As an advisor toDirectors, any investments by the Managed Subsidiaries we expect that HCS will, at some point indo not qualify as Category I investments (as defined by the future, focus on the acquisition of alternative mortgage related investments on behalf of the Managed Subsidiaries. Some of those investments may allow us to utilize all or a portion of the net operating loss carry-forward to the extent available by law. The commencement of any activity by HCSCompany’s Investment Guidelines) must be approved by the Board of Directors and any subsequent investment on behalf of Managed Subsidiaries must adhere to investment guidelines adopted by our Board of Directors. The advisory agreement provides that HCS will earnbe paid a base advisory fee of 1.5%that is a percentage of the “equity capital” (as defined in the advisory agreement) of the Managed Subsidiaries, and is also eligible to earn incentive compensation ifwhich may include the net asset value of assets held by the Managed Subsidiaries achieve certain performance thresholds. Asas of December 31, 2008, HCS was not managing any assets infiscal quarter end, and an incentive fee upon the Managed Subsidiaries but was earning a base advisory fee on the net proceeds to our Company from our private offerings in each of January 2008 and February 2008.achieving certain investment hurdles. For the threeyear ended December 31, 2009 and twelve months ended December 31, 2008, HCS earned $0.2a base advisory fee of approximately $0.8 million and $0.7 million, respectively, in advisory fees.
respectively. In addition, pursuant to the stock purchase agreement providing for the saleyear ended December 31, 2009, HCS earned an incentive fee of approximately $0.5 million. There was no incentive fee earned in the Series A Convertible Preferred Stock to JMP Group, Inc.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 certain of its affiliates, James J. Fowler and Steven M. Abreu were appointed to our Board of Directors, with Mr. Fowler being appointed the non-executive chairman of our Board of Directors. In addition, concurrent with the completion of the issuance and sale of the Series A Convertible Preferred Stock and pursuant to the stock purchase agreement, four of our then-existing directors resigned from the Board.accrued expenses.
James J. Fowler, the Non-Executive Chairman of our Board of Directors and also the non-compensated Chief Investment Officer of Hypotheca Capital, LLC and New York Mortgage Funding, LLC, is a managing director of HCS. HCS is a wholly-owned subsidiary of JMP Group, Inc.
On February 21, 2008, we completed the issuance of 7.5 million shares of our common stock in a private placement to certain accredited investors, resulting in $56.5 million in net proceeds to the Company. JMP Securities LLC, an affiliate of HCS and JMP Group, Inc., served as the sole placement agent for the transaction and was paid a $3.0 million placement fee from the gross proceeds.
EXHIBIT INDEX
Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below. Management contracts or compensatory plans are filed as Exhibits 10.3, 10.1310.7, 10.8, 10.10 and 10.14.10.11.
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). |
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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). |
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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). |
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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.) |
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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.) |
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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.) |
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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). |
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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). |
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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). |
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4.2(a) | | Junior Subordinated Indenture between The New York Mortgage Company, LLC and JPMorgan Chase Bank, National Association, as trustee, dated SeptemberDecember 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 SeptemberDecember 6, 2005). |
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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 SeptemberDecember 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 SeptemberDecember 6, 2005). |
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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). |
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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 SeptemberDecember 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 SeptemberDecember 6, 2005). |
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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 SeptemberDecember 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 SeptemberDecember 6, 2005). |
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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 SeptemberDecember 9, 2005). |
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10.4 | | Assignment and Assumption of Sublease, by and between Lehman Brothers Holdings Inc. and The New York Mortgage Company, LLC, dated as of November 14, 2006 (Incorporated by reference to Exhibit 10.63 to the Registrant's Annual Report on Form 10-K filed on April 2, 2007). |
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10.5 | | First Amendment to Assignment and Assumption of Sublease, dated as of January 5, 2007, by and between The New York Mortgage Company, LLC and Lehman Brothers Holdings, Inc. (Incorporated by reference to Exhibit 10.64 to the Registrant's Annual Report on Form 10-K filed on April 2, 2007). |
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10.6 | | Second Amendment to Assignment and Assumption of Sublease, dated as of February 8, 2007, by and between The New York Mortgage Company, LLC and Lehman Brothers Holdings, Inc. (Incorporated by reference to Exhibit 10.65 to the Registrant's Annual Report on Form 10-K filed on April 2, 2007). |
10.7 | | Third Amendment to Assignment and Assumption of Sublease, dated as of March 31, 2007, by and between The New York Mortgage Company, LLC and Lehman Brothers Holdings, Inc. (Incorporated by reference to Exhibit 10.74 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2007). |
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10.8 | | Fourth Amendment to Assignment and Assumption of Sublease, dated as of August 30, 2007, by and between The New York Mortgage Company, LLC and Lehman Brothers Holdings, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2007). |
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10.9 | | 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). |
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10.10 | | Amendment No. 5 to Stock Purchase 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 10.1(b) to the Company’s Current Report on Form 8-K filed on January 25, 2008). |
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10.1110.5 | | 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). |
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10.1210.6 | | 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). |
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10.1310.7 | | 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). |
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10.1410.8 | | 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). |
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10.15 | | Form of Purchase 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 10.1 to the Company’s Current Report on Form 8-K filed on February 19, 2008). |
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10.1610.9 | | 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). |
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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.) |
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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.) |
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12.1 | | Computation of Ratios * |
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21.1 | | List of Subsidiaries of the Registrant.* |
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23.1 | | Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).* |
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23.2 | | Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP).* |
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31.1 | | Section 302 Certification of Chief Executive Officer and Chief Financial Officer.* |
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32.1 | | Section 906 Certification of Chief Executive Officer and Chief Financial Officer.* |
* Filed herewith.