ADAM

Business Context and Reporting Period

Company: New York Mortgage Trust, Inc. (NYMT), a self-advised Real Estate Investment Trust (REIT).

Reporting Period: Quarterly period ended September 30, 2009 (Form 10-Q).

Business Overview: NYMT acquires and manages residential adjustable-rate mortgage-backed securities (RMBS), primarily Agency RMBS (Fannie Mae/Freddie Mac), and prime credit quality residential adjustable-rate mortgage (ARM) loans held in securitization trusts. The Company also pursues an "alternative investment strategy" involving non-Agency RMBS and collateralized loan obligations (CLOs), managed by Harvest Capital Strategies LLC (HCS).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The Company reported a net income of $2.88 million for the quarter ended September 30, 2009, compared to $1.03 million in the same period in 2008. For the nine months ended September 30, 2009, net income was $7.48 million, a significant improvement from a net loss of $18.97 million in the prior year period.
• Net Interest Income Growth: Net interest income increased by $2.50 million for the quarter and $6.98 million for the nine months compared to 2008. This was driven by a transition from lower-yielding Agency CMO floaters to higher-yielding non-Agency RMBS and CLOs, alongside reduced borrowing costs.
• Asset Reduction: Total assets decreased from $853.3 million at December 31, 2008, to $608.1 million at September 30, 2009. This reduction was primarily due to the sale of approximately $245.2 million in Agency CMO floaters.
• Realized Gains/Losses: The Company recorded a realized gain of $0.36 million for the quarter and $0.62 million for the nine months in 2009, contrasting sharply with a realized loss of $19.93 million for the nine months ended September 30, 2008 (attributed to market disruptions and forced asset sales in March 2008).
• Loan Loss Provisions: Provision for loan losses increased to $0.53 million for the quarter and $1.41 million for the nine months in 2009, compared to minimal provisions in 2008, reflecting a more conservative reserve approach (reserve increased to 80 basis points of outstanding principal).

Outlook, Risks, and Management Commentary

• Strategy Shift: Management continues to deploy capital under its alternative investment strategy, purchasing non-Agency RMBS at significant discounts (approx. 60% of par) and CLOs to achieve attractive risk-adjusted returns.
• Liquidity and Leverage: The Company maintains a conservative leverage ratio of 2.5 to 1 (including convertible preferred debentures) for its RMBS portfolio, below its target range of 6 to 8 times, citing continued uncertainty in credit markets. Cash balances of $22.4 million and unencumbered securities of $60.9 million are deemed sufficient for the next 12 months.
• Interest Rate Environment: With LIBOR at 0.25% and the Fed Funds rate at 0.07%, borrowing costs remain historically low. Management expects prepayment rates (CPR) to remain between 17%-22% in the fourth quarter of 2009.
• Risks:
  • Market Risk: Sensitivity analysis indicates a +200 basis point increase in interest rates could reduce net interest income by $4.14 million.
  • Liquidity Risk: Reliance on repurchase agreements (short-term, uncommitted) exposes the Company to margin calls if collateral values decline.
  • Credit Risk: Delinquencies in the securitization trust portfolio have risen, with 4.51% of loans 90+ days delinquent as of September 30, 2009.
  • Repurchase Obligations: The Company faces unresolved repurchase requests of $1.5 million related to its discontinued mortgage lending business, with a reserve of $0.3 million.

Investor Verification Checklist

• Asset Quality: Verify the adequacy of the $2.32 million loan loss reserve against the rising delinquency rate (4.51% 90+ days) in the securitization trusts.
• Liquidity Coverage: Confirm the stability of the $194.7 million repurchase agreement funding and the availability of unencumbered assets ($60.9 million) to meet potential margin calls.
• Alternative Strategy Performance: Monitor the performance and valuation of the new non-Agency RMBS and CLO investments, which are valued using Level 3 inputs and carry higher credit risk.
• Dividend Sustainability: Assess whether the increased dividend ($0.25/share) is sustainable given the reliance on net interest income and the potential for prepayment acceleration in a low-rate environment.
• Repurchase Liability: Track the resolution of the $1.5 million in outstanding repurchase requests from the discontinued operation to ensure the $0.3 million reserve remains sufficient.