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NYMT > SEC Filings for NYMT > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for NEW YORK MORTGAGE TRUST INC



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


We are a REIT, for federal income tax purposes, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets and, to a lesser extent, financial assets. Our objective is to manage a portfolio of investments that will deliver stable distributions to our stockholders over diverse economic conditions. We intend to achieve this objective through a combination of net interest margin and net realized capital gains from our investment portfolio. Our portfolio includes certain credit sensitive assets and investments sourced from distressed markets in recent years that create the potential for capital gains, as well as more traditional types of mortgage-related investments that generate interest income.

We have endeavored to build in recent years a diversified investment portfolio that includes elements of interest rate and credit risk, as we believe a portfolio diversified among interest rate and credit risks are best suited to delivering stable cash flows over various economic cycles. Under our investment strategy, our targeted assets currently include multi-family CMBS, mezzanine loans to and preferred equity investments in owners of multi-family properties, residential mortgage loans, including loans sourced from distressed markets, and Agency RMBS. Subject to maintaining our qualification as a REIT, we also may opportunistically acquire and manage various other types of mortgage-related and financial assets that we believe will compensate us appropriately for the risks associated with them, including, without limitation, non-Agency RMBS (which may include IOs and POs), collateralized mortgage obligations and securities issued by newly originated residential securitizations, including credit sensitive securities from these securitizations.

We strive to maintain and achieve a balanced and diverse funding mix to finance our assets and operations. To this end, we rely primarily on a combination of short-term borrowings, such as repurchase agreements with terms typically of 30 days, and longer term structured financings, such as securitization and re-securitization transactions, with terms longer than one year.

We internally manage a certain portion of our portfolio, including Agency ARMs, fixed-rate Agency RMBS, non-Agency RMBS, CLOs and residential securitized loans. In addition, as part of our investment strategy, we also contract with certain external investment managers to manage specific asset types targeted by us. We are a party to separate investment management agreements with Headlands, Midway, and RiverBanc, with Headlands providing investment management services with respect to our investments in certain distressed residential mortgage loans, Midway providing investment management services with respect to our investments in Agency IOs, and RiverBanc providing investment management services with respect to our investments in multi-family CMBS and certain commercial real estate-related debt investments.

Significant Events in 2013

? We generated net income attributable to common stockholders of $1.11 per share;

? We declared aggregate 2013 dividends of $1.08 per common share;

? We issued 13,600,000 shares of common stock in a public offering at a net price to the public of $6.96 per share resulting in net proceeds to us of $94.4 million, after deducting underwriting discounts and commissions and offering expenses;

? We issued 3,000,000 shares of 7.75% Series B Cumulative Redeemable Preferred Stock with a liquidation preference of $25.00 per share, in a public offering for net proceeds of approximately $72.4 million, after deducting underwriting discounts and offering expenses;

? We acquired two first loss PO securities and certain IO securities issued by two Freddie Mac-sponsored securitizations for an aggregate purchase price of $71.6 million;

? We acquired distressed residential mortgage loans for an aggregate purchase cost of $218.2 million; and

? We completed a term structured financing of multi-family CMBS and three separate structured financings of distressed residential mortgage loans, resulting in net proceeds to us, after expenses, of $55.1 million and $136.6 million, respectively.

Key Fourth Quarter 2013 Developments

Multi-Family CMBS Transaction

On November 22, 2013, we acquired the first loss PO security in a newly issued Freddie Mac-sponsored Multifamily K-Series securitization and entered into a master repurchase agreement with an expected three-year term for the purpose of financing this security and other PO securities owned by us that were issued by Freddie Mac-sponsored Multifamily K-Series securitizations that are collateralized by multi-family mortgage loans. As part of the financing, we received net cash proceeds of approximately $55.1 million after deducting expenses associated with the transaction.

Fourth Quarter 2013 Common Stock Dividend

On December 10, 2013, our Board of Directors declared a regular quarterly cash dividend of $0.27 per common share for the quarter ended December 31, 2013. The dividend was paid on January 27, 2014 to our common stockholders of record as of December 20, 2013.

Preferred Stock Dividend

On December 10, 2013, our Board of Directors declared a Series B Preferred Stock quarterly cash dividend of $0.484375 per share of Series B Preferred Stock. The dividend was paid on January 15, 2014 to our preferred stockholders of record as of January 1, 2014.

Subsequent Developments

On January 10, 2014, we closed on the issuance of 11,500,000 shares of common stock in an underwritten public offering (including 1,500,000 shares issuable pursuant to an option granted to the underwriters), resulting in net proceeds of approximately $75.8 million after deducting estimated offering expenses.

In January 2014, the Company sold a pool of distressed residential mortgage loans with a carrying value of approximately $29.4 million for an aggregate purchase price of approximately $36.9 million. This sale will result in a net realized gain, before income taxes to the Company, of approximately $7.5 million.

Current Market Conditions and Commentary

General. The U.S. economy continued to exhibit mixed results in 2013, with real gross domestic product ("GDP") estimated to have expanded by 1.9% for the full year, as compared to growth of 2.8% in 2012. However, the U.S. economy showed signs of expansion during the second half of the year, with GDP growing at an annual rate of 4.1% and 2.4% in the third and fourth quarters of 2013, respectively. According to the U.S. Department of Labor, the U.S. unemployment rate fell from 7.9% as of the end of December 2012 to 6.7% as of the end of December 2013, while total nonfarm payroll employment posted an average monthly increase of 194,000 jobs in 2013 as compared to an average monthly increase of 181,000 jobs in 2012. While these signs of employment growth are encouraging, the economy continued to produce mixed employment results in 2013 and evidence of a continued decline in the labor force participation rate has raised concerns that the current unemployment rate is not an accurate measure of the economy's overall health. However, the improved performance of the U.S. economy during the second half of 2013 has contributed to an improved outlook of many U.S. Federal Reserve, or Federal Reserve, policymakers in recent months. According to the minutes of a meeting of the Federal Reserve Open Market Committee (the "FOMC") of the U.S. Federal Reserve from December 17-18, 2013, most meeting participants expressed greater confidence in their outlook for the U.S. economy and almost all continued to project that the rate of growth of economic activity would strengthen in coming years, projecting GDP growth of 2.8% to 3.2% in 2014 and 3.0% to 3.4% in 2015. Based, in part, on this data, and as more fully discussed below, the FOMC announced on December 18, 2013 that it would commence tapering of asset purchases under QE3 (defined below) beginning in January 2014. Markets reacted to this news mostly favorably, with many market participants relieved that tapering had finally begun.

The Federal Reserve has undertaken three rounds of quantitative easing in an effort to support a stronger economic recovery and to help ensure that inflation, over time, is at a rate that is most consistent with the Federal Reserve's dual mandate of fostering maximum employment and price stability. The most current version of the Federal Reserve's quantitative easing program, which is referred to as "QE3," was originally announced in September 2012 as an open-ended program to purchase an additional $40 billion of Agency RMBS per month until the unemployment rate, among other economic indicators, showed signs of improvement. This program, when combined with the Federal Reserve's programs to extend its holdings' average maturity, or "operation twist," and reinvest principal payments from its holdings of agency debt and Agency RMBS into Agency RMBS, was expected to increase the Federal Reserve's holdings of long-term securities by approximately $85 billion per month through the end of 2012. As "operation twist" expired in December 2012, the Federal Reserve announced that it would continue purchasing additional Agency RMBS by about $40 billion per month and longer-term U.S. Treasury securities at a pace of $45 billion per month, and would continue its policy of reinvesting the principal payments from its holdings of Agency debt and Agency RMBS in Agency RMBS. This accommodative monetary policy contributed to historically low-levels of interest rates and higher valuations for Agency RMBS, resulting in an extremely attractive investment environment for Agency RMBS-focused strategies.

As data began to show signs of a strengthening U.S. economy during the second quarter of 2013, speculation surrounding the timing and size of a possible reduction in the Federal Reserve's asset purchase program grew more significant. The FOMC meeting minutes released on May 22, 2013 announced, for the first time, that the Federal Reserve was considering beginning to taper the pace of purchases of Agency RMBS as early as June 2013. In mid-June 2013, Chairman Bernanke announced that the Federal Reserve would begin to scale back Agency RMBS purchases later in 2013 if the economy continued to improve in line with the FOMC's current projections and that such purchases would cease entirely when the unemployment rate reached 7%. Chairman Bernanke reiterated a similar view in mid-July 2013 while reporting to the U.S. House of Representatives' Financial Services Committee, but then softened the statement by noting that any such moderation in purchases could be adjusted depending on incoming economic data. However, despite the Chairman's uncertain outlook for tapering and the sluggish expansion of GDP in the first half of 2013, the markets had priced in the expectation that the FOMC would begin to taper in the near term, and that such tapering might be announced as early as September. In mid-September 2013, contrary to the general market consensus, the FOMC announced that it would maintain its current level of asset purchases under QE3, thereby causing further uncertainty for interest rates and the credit markets. Finally, on December 18, 2013, given indications that the U.S. economy had improved sufficiently, the Federal Reserve announced that it would reduce the pace of its purchases of (i) longer-term U.S. Treasury securities to $40 billion per month and (ii) Agency RMBS to $35 billion per month, and that it would likely reduce the pace of asset purchases in further measured steps to be announced at future meetings. In late January 2014, the Federal Reserve announced that it would reduce its asset purchases by an additional $10 billion per month beginning in February 2014.

The market reaction during the second and third quarters of 2013 to the possible tapering of QE3 was extremely negative, although volatility eased some and pricing improved for many fixed-income assets subsequent to the FOMC's mid-September 2013 announcement. The rate on the ten-year U.S. Treasury note moved sharply higher after dropping to 1.63% in early May, rising to 2.49% at the end of the second quarter and to as high as 2.99% in early September before falling to 2.61% at the end of September, and then rising again to close at 3.03% at the end of December 2013. As the yield on the ten-year U.S. Treasury note advanced during 2013, Agency RMBS underperformed, in some cases dramatically, as evidenced by significantly lower pricing on these assets. However, losses on these assets recovered some subsequent to the FOMC's September announcement. With tapering now well underway, we believe that market conditions for many types of fixed income securities will be less volatile in 2014.

Notwithstanding the changes to QE3, the FOMC has maintained its intent to keep the target range for the federal funds rate between 0% and 0.25% until either the unemployment rate drops below 6.5% or the projected inflation rate over the next one to two years increases above 2.5% and longer-term inflation expectations continue to be well anchored, although the FOMC has recently indicated that it may be necessary to maintain the current target range until well past the time that the unemployment rate declines below 6.5%.

Unlike many mortgage REITs, the market movements outlined above generally had a positive impact on our overall portfolio and results in 2013. Although these movements had a meaningful negative impact on our existing Agency RMBS portfolio (including our Agency IOs), primarily during the second quarter of 2013, which suffered from negative price movements outside of our hedged expectations, valuations for our multi-family CMBS and distressed residential loans responded to the market movements of 2013 in a generally positive manner, thereby mitigating to a large extent the downside impact of these events on our overall portfolio and helping us to achieve earnings growth in 2013.

Single-Family Homes and Residential Mortgage Market. The residential real estate market showed signs of continued improvement in 2013, although the rate of price gains have begun to slow some since April 2013. Data released by S&P Indices for its S&P/Case-Shiller Home Price Indices for November 2013 showed that, on average, home prices have increased by 23.7% for the 20-City Composite as compared to March 2012. In addition, according to data provided by the U.S. Department of Commerce, there were 617,800 privately-owned housing starts for single family homes in 2013, the highest since 2008 and up 15.4% over last year. We expect the single-family residential real estate market to continue to improve in the near term, but believe that higher interest rates and tepid job creation will contribute to slowing housing gains for single family homes over the next 12 months.

Multi-family Housing. Apartments and other residential rental properties remain one of the better performing segments of the commercial real estate market. According to data provided by the U.S. Department of Commerce, there were 305,600 starts on multi-family homes, such as apartment buildings, the highest since 2007 and up 24.6% over last year. We believe the performance of multi-family housing in the past year is due, in part, to a significant decline in new construction during the recent economic downturn and increased demand from former homeowners, which has driven stronger rental income growth across the country. In turn, these factors have led to recent valuation improvements for multi-family properties and negligible delinquencies on new multi-family loans originated by Freddie Mac and Fannie Mae.

Developments at Fannie Mae and Freddie Mac. Payments on the Agency ARMs and fixed-rate Agency RMBS in which we invest are guaranteed by Fannie Mae and Freddie Mac. In addition, although not guaranteed by Freddie Mac, all of our multi-family CMBS has been issued by securitization vehicles sponsored by Freddie Mac. As broadly publicized, Fannie Mae and Freddie Mac are presently under federal conservatorship as the U.S. Government continues to evaluate the future of these entities and what role the U.S. Government should continue to play in the housing markets in the future. Since being placed under federal conservatorship, there have been a number of proposals introduced, both from industry groups and by the U.S. Congress, relating to changing the role of the U.S. government in the mortgage market and reforming or eliminating Fannie Mae and Freddie Mac. The most recent bill to receive serious consideration is the Housing Finance Reform and Taxpayer Protection Act of 2013, also known as the Corker-Warner Bill, which was introduced in the U.S. Senate. This legislation, among other things, would eliminate Freddie Mac and Fannie Mae and replace them with a new agency which would provide a financial guarantee that would only be tapped after private institutions and investors stepped in. It remains unclear how this or any other proposal will become law or, should a proposal become law, if or how the enacted law will differ from the current draft of this bill. It is unclear how the proposal or any other similar proposal would impact housing finance, and what impact, if any, they will have on mortgage REITs.

Credit Spreads. Credit spreads in the residential and commercial markets have generally continued to tighten further during 2013, continuing a trend exhibited during a significant part of 2012. Typically when credit spreads widen, credit-sensitive assets such as CLOs and multi-family CMBS, as well as Agency IOs, are negatively impacted, while tightening credit spreads typically have a positive impact on the value of such assets.

Financing markets and liquidity. The 30-day London Interbank Offered Rate ("LIBOR") was 0.17% at December 31, 2013, marking a decrease of approximately 4 basis points from December 31, 2012. Longer term interest rates were higher as of December 31, 2013 as compared to the 2012 year end, with the rate on the 10-year U.S. Treasury note increasing by approximately 127 basis points to 3.03%. We expect interest rates to rise over the longer term as the U.S. and global economic outlook improves.

Significant Estimates and Critical Accounting Policies

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires 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 investment securities available for sale and on our mortgage loans is accrued based on the outstanding principal balance and their contractual terms. Premiums and discounts associated with investment securities and mortgage loans at the time of purchase or origination are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.

Interest income on our credit sensitive securities, such as our non-Agency RMBS and certain of our CMBS that were purchased at a discount to par value, is recognized based on the security's effective interest rate. The effective interest rate on these securities is based on management's estimate from each security of the projected cash flows, which are estimated based on the Company's assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on these securities.

Based on the projected cash flows from the Company's first loss principal only CMBS purchased at a discount to par value, a portion of the purchase discount is designated as non-accretable purchase discount or credit reserve, which partially mitigates the Company's risk of loss on the mortgages collateralizing such CMBS, and is not expected to be accreted into interest income. The amount designated as a credit reserve may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit reserve is more favorable than forecasted, a portion of the amount designated as credit reserve may be accreted into interest income over time. Conversely, if the performance of a security with a credit reserve is less favorable than forecasted, the amount designated as credit reserve may be increased, or impairment charges and write-downs of such securities to a new cost basis could result.

With respect to interest rate swaps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps will be recognized in current earnings.

Fair value. The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves. Such inputs to the valuation methodology are unobservable and significant to the fair value measurement. The Company's IOs, POs, multi-family loans held in securitization trusts and multi-family CDOs are considered to be the most significant of its fair value estimates.

The Company's valuation methodologies are described in "Note 13 - Fair Value of Financial Instruments" included in Item 8 of this Annual Report on Form 10-K.

Residential Mortgage Loans Held in Securitization Trusts - Impaired Loans (net). Impaired residential 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.

Variable Interest Entities - A variable interest entity ("VIE") is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company consolidates a VIE when it is the primary beneficiary of such VIE. As primary beneficiary, it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.

Loan Consolidation Reporting Requirement for Certain Multi-Family K-Series Securitizations. As of December 31, 2013, we owned 100% of the first loss securities of the "Consolidated K-Series". The Consolidated K-Series, collectively represents six separate Freddie Mac sponsored multi-family loan K-Series securitizations, of which we, or one of our special purpose entities, or SPEs, own the first loss PO securities and certain IO securities. We determined that the Consolidated K-Series were VIEs and that we are the primary beneficiary of the Consolidated K-Series. As a result, we are required to consolidate the Consolidated K-Series' underlying multi-family loans including their liabilities, income and expenses in our consolidated financial statements. We have elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations in the assets and liabilities of the Consolidated K-Series will be reflected in our consolidated statement of operations. As of December 31, 2012, the Consolidated K-Series represented four separate Freddie Mac sponsored multi-family loan K-Series securitizations.

Fair Value Option - The fair value option provides an election that allows companies to irrevocably elect fair value for financial assets and liabilities on an instrument-by-instrument basis at initial recognition. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The Company elected the fair value option for its Agency IO strategy and the Consolidated K-Series (as defined in Note 2 to our consolidated financial statements included in this report).

Acquired Distressed Residential Mortgage Loans - Acquired distressed residential mortgage loans that have evidence of deteriorated credit quality at acquisition are accounted for under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Under ASC 310-30, the acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Once a pool is assembled, it is treated as if it was one loan for purposes of applying the accounting guidance. The Company applied pool accounting on distressed residential mortgage loans acquired in 2013; distressed residential mortgage loans acquired prior to 2013 are accounted for individually (i.e., not in pools).

Under ASC 310-30, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield," is accreted into interest income over the life of the loans in each pool or individually using a level yield methodology. Accordingly, our acquired distressed residential mortgage loans accounted for under ASC 310-30 are not subject to classification as nonaccrual classification in the same manner as our residential mortgage loans that were not distressed when acquired by us. Rather, interest income on acquired distressed residential mortgage loans relates to the accretable yield recognized at the pool level or on an individual loan basis, and not to contractual interest payments received at the loan level. The difference between contractually required principal and interest payments and the cash flows expected to be collected, referred to as the "non-accretable . . .

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