New York Mortgage Trust Inc (NYMT) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the New York Mortgage Trust Fourth Quarter Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder this conference is being recorded Tuesday, March 7, 2006. At this time I would like to turn the presentation over to Julie Tu with the financial relations board. Please go ahead, ma'am.

Good morning and welcome to New York Mortgage Trust Fourth Quarter Conference Call. The press release was distributed yesterday after the close of the market. If you did not receive a copy, the release is available on the company's website at www.nymtrust.com in the investor relations section. Additionally, we are hosting a live webcast of today's call, which you can access in the same section or through www.earnings.com. Finally, to be added to the company's quarterly distribution list, please contact me at (212) 827-3776.

At this time, management would like me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give not assurance that expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the SEC. So, now at this time for opening remarks I would like to introduce Steven Schnall, Chairman of the Board and Co-Chief Executive Officer and President. Steven, please go ahead.

Thank you, Julie and good morning everyone. We appreciate again that you're all able to join us today for our fourth quarter 2005 conference call. And we value your interest in New York Mortgage Trust.

Before we get into our formal remarks, I'd like to review the format for today's call. I will provide some key observations about our operating performance in the fourth quarter and for the full-year. And will then provide an update on our focused to prudently and profitably continue to grow our mortgage lending business. Michael Wirth our CFO will then proceed with a detailed recap of our financial results. At the conclusion of our formal remarks we will be available for your questions. I'd also like to mention that the following members of our executive management team are also here with us today and will be available for questions. David Akre our Vice Chairman and Co-CEO; Steve Mumma our Chief Operating Officer and Chief Investment Officer; Joe Fierro, the mortgage company's Chief Operating Officer and [Brad Howe] our General Counsel.

Okay, now on to fourth quarter financial results. As many of you know the entire residential mortgage sector faced a very challenging environment in the second half of 2005. We were not immune to these rapidly changing and difficult market conditions and despite great progress on many fronts our financial results for the fourth quarter were unfortunately reflective of these current market challenges.

I'll start by reviewing the performance in our mortgage banking subsidiary. As discussed last quarter we anticipated and ultimately experienced a drop-off in retail origination volume due not only so seasonality, but also to a national decline resulting from rising rates. The Mortgage Banker's Association estimates that industry wide fourth quarter origination volumes declined 19% from the previous quarter. Our origination decreased by approximately that same percentage form our record third quarter of approximately $1 billion to approximately $823 million in the fourth quarter. And though we are continuing to experience volume declines in early 2006, it is worth pointing out that November to February is typically our slowest months due to seasonality. And also that we are currently seeing application and funding bonds beginning to increase again in the past few weeks.

Looking ahead, based on current application activity we expect that our volume will be back up near our rec - - back up near our record levels by this summer. This expected pick up in production, which we expect will run counter to the national declining trend, is due in large part to our ongoing successful retail loan officer recruitment efforts as well as growth in our new wholesale business.

Despite this growth from our current origination levels, our revised projection for total origination volume in 2006 is now $4 billion. Though this is 20% lower than our previously stated projection for 2006, it is still greater than our record 2005 production and at a time when national volumes are expected to continue to decline.

Now, regarding our wholesale origination business, this unit is ramping up nicely. We funded approximately $70 million during the fourth quarter and though these results were below our original expectations, we are pleased with the steady ramp up in the volume of this new division. This lower than projected ramp up in volume is reflective primarily of this division's shift in focus to all day loans from our original focus on jumbo hybrid ARMs, primarily as a result from the market shift towards fixed rates and longer term hybrid ARMs.

Despite this lower ramp, we do realize to expect profitable wholesale production of over $700 million in 2006. Additionally, we are very pleased that despite this lower projected ramp up this new segment is on tract to reach profitability this month. For the second half of 2006, we expect the unit to add meaningfully to our TRSs financial results.

Let me turn now to our mortgage portfolio. Due to the continued flat yield curve we are expecting continued pressure in our REIT portfolio as net interest margins have continued to compress. In a response to this net interest margin compression, we intend to rebalance our portfolio into coming weeks in the sale of approximately $388 million of lower yielding securities, which we acquired post IPO and replaced them with higher yielding securities. This intended rebalancing is expected to result in a loss of approximately $0.41 per diluted share. And though the sale of these lower yielding assets has not yet taken place, because it is our intent to do so, we have booked the anticipated loss in the fourth quarter. Note also that these rebalancing results in a P&L affect only and that the market value of the securities being sold has already been marketed down in prior quarters through the OCI section of our balance sheet. In other words, our net reduction in book value from the third to fourth quarters despite a $0.48 consolidated net loss will be only $0.07 which represents our consolidated net loss exclusive of the effective of this portfolio rebalancing.

Despite the flat yield curve and excluding this portfolio rebalancing, we still generated reasonable returns while our net interest margin inclusive of hedging costs narrowed to 62 basis points. This is down from 70 basis points in the prior quarter and 103 basis points in the second quarter of 2005.

As we have transitioned a significant portion of our portfolio from acquired securities to self originated loans, we have realized some incremental benefits associated with the higher yielding self originations. At the same time, the industry wide narrowing of the yield pick up from self originations persists. As a result, beginning during the first quarter of 2006 and for the foreseeable future, we will revert to selling almost all of our originations to third parties. Which will enable us to realize a far more favorable overall financial outcome in our mortgage company taxable REIT subsidiary. This shift from retaining ARM loans to selling them, further exemplifies the inherent benefit of being an active or self originating REIT. In other words, our ability to recognize gain on sales loans when portfolio conditions are less than optimal, simply adds further value to the overall active REIT strategy.

Notwithstanding the fact that we will be selling the vast majority of our retail and wholesale loan production, we expect to continue to opportunistically purchase whole loans from others at more favorable terms that those at which we could acquire mortgage backed securities. We expect that this will enable us to continue to add to our higher yielding self-securitized portion of our [MBS] portfolio during 2006.

Turning now to our fourth quarter results. In our mortgage portfolio management segment we realized a net loss of $5.4 million or $0.29 per share. Within our taxable REIT subsidiaries we realized a net loss of $3.3 million or $0.19 per share. This loss in our TRS is due primarily to the [foregone] premiums on loans retained for our portfolio. Start up costs in our new wholesale business and mostly the seasonality in loan origination volumes. Combining these two segments we reported a consolidated net loss of $8.7 million or $0.48 per share for the quarter.

While these results are disappointing and below our expectations, it's important to point out that 2005 was a year of major strategic accomplishments for us and our progress is not truly reflected in our financial results. Here is a brief recap of our year. We realized record loan originations of $3.4 billion representing growth of 86% over 2004. We enter 2006 with a critical mass of self originated loans representing more than half of our total investment portfolio. We successfully completed three securitizations of high-credit quality, self-originating loans representing nearly $900 million. We strengthened our balance sheet by raising $45 million of subordinated debt by the issuance of trust preferred securities. And ended the year with total assets of approximately $1.8 billion and a loan and mortgage portfolio of approximately $1.5 billion including $885 million in securitized loans and residential loans [help for sale]. We distributed $0.92 to shareholders in the form of dividends. And lastly we supplemented our growing mortgage banking business with a launch of a new wholesale lending division, which will provide us with additional scale and beginning this month, profit opportunities going forward.

These achievements are a direct result of our disciplined approach to our business; out flexibility in managing economic change. The successful implementation of sound mortgage banking principles and growth strategies and a sharp focus on credit quality.

Looking ahead, we believe that the previously discussed factors impacting the industry, decline in origination volumes nationally, phenomenously low gain on sales margins, thin warehouse spread due to the flat yield curve and extreme competition due to excess capacity in the market will continue to be prevalent over the near-term and will exert continued pressure within our REIT portfolio and our mortgage banking business.

Given these current persistent challenges, the following are some of the actions we are taking to counter these trends and enhance our profitability during 2006. During the first quarter we have reduced our mortgage banking businesses annual expenses by more than $4 million, primarily through the elimination of excess capacity and lay-offs. During the first quarter we reverted to selling nearly 100% of our loan production so that we would no longer suffer from [foregone] premiums and retained loans as we did in 2005.

We remain highly focused on growing our wholesale business and doing so without any additional significant upfront costs as the unit will reach profitability this month. We are highly focused on recruitment and retention of seasoned loan officers in our retail business. We expect to launch our new loan operating software during the second quarter which has been nearly two years in development. And which will enable us to recognize cost savings through substantial additional operational efficiencies. And also in the second quarter we expect to launch three regional joint venture title insurance agency subsidiaries which will create significant additional revenue and profit opportunities.

Lastly, in order to enhance our REIT portfolio's net interest margin and dividendable income, during the first quarter as discussed we will dispose of $388 million in lower yielding acquired mortgage backed securities. Thus realizing losses already recognized in our balance sheet and reinvesting the proceeds in higher yielding assets which will produce significantly higher current returns in our current portfolio.

Given all the aforementioned progress, new revenue opportunities, recent cost cuts and portfolio repositioning and despite the current market challenges our board of directors has approved a first quarter dividend distribution of $0.14 per share. And because we are keenly aware of the importance of returning a favorable and consistent dividend to our investors, based primarily upon REIT earnings, we will attempt to maintain this $0.14 dividend for the - - dividend level for the remainder of 2006.

As a final note, I want to stress that while we remain committed to managing the risks of our business to very low levels, we will look for opportunities to further enhance our competitive position and grow our mortgage business profitably through consolidation, acquisition and aggressive recruitment of loan officers and top quality talent. We appreciate your continued support and I'd now like to turn the call over to Michael Wirth our CFO to review our financial results.

Thank you, Steve. Good morning everyone. As Julie noted, everyone should have our press release available to them. Therefore, I'll be brief with my comments in order to allow time for questions.

I'd first like to breakdown our fourth quarter performance into distinct segments to give our listeners some detail as to our operating strategies and financial results and the context in which to evaluate these results. I will first start with the operations of our REIT, or what we call the mortgage portfolio management segment of our business on a stand alone basis. As we've discussed in previous conference calls, the performance of the REIT exclusive of our taxable REIT subsidiaries is a major foundation for our dividend policy. As we must distribute at least 90% of its earnings in order to maintain B status.

During 2005, the REIT on a stand alone basis had net interest income of 14.9 million for the year and expenses of 8.7 million. This resulted in net income of 6.2 million of $0.34 a share for the REIT segment. For the fourth quarter 2005 the REIT on a stand alone basis had net interest income of 3 million and expenses of 8.4 million. This resulted in a net loss of 5.4 million or $0.29 a share for the REIT segment.

During 2005, REIT had a net loss from securities and related hedges of 5.2 million of which 2.2 million represented actual gains on securities sold during the year. And 7.4 million represents the realization of a booked loss that was an OCI being realized in the fourth quarter income statement. As Steve had mentioned, this 7.4 million loss in the fourth quarter, is on 388 million of formerly considered available for sale securities that are now classified as trading securities. That we anticipate selling in 2006 in order to rebalance our portfolio with higher yielding assets. The dominate driving the REITs net income is the net interest income we earned in our portfolio of [extensible] mortgage loans and securities.

Like our peers, during 2005 we were impacted by rising interest rates, a flattening of the yield curve and accelerated mortgage fee payments. And thus a contraction in our securities portfolio net interest margins. The net interest margin earned on a REIT investment portfolio during 2005 inclusive of hedging costs to mitigate interest rate risk narrowed to an average of 86 basis points, down from 134 basis points in 2004. During the fourth quarter of 2005, a spread compression continued as the net interest margin earned on the REITs investment portfolio narrowed to 62 basis points down from 70 basis points in the third quarter.

Relative to other residential mortgage assets, it is important to note that our current basis point net interest return is also reflective of the fact that our portfolios comprise of high-credit quality, prime loans, which are not accompanied by levels of credit risk that one typically associates with lower quality, all-day or sub-prime loans. In other words, asset yields are reflective of high quality assets in our portfolio and we do not anticipate a degradation of our portfolio returns due to credit risk. To further protect our portfolio with regard to credit risk we have no option ARM or negative amortization loans in our portfolio.

Our taxable REIT subsidiary or what we call our TRS which is considered our mortgage lending segment had 51.8 million in gross revenue and 63.2 million in expenses. For a net loss of approximately 11.6 million or $0.64 loss per share for the full-year of 2005. For the fourth quarter our TRS recognized 12.2 million in gross revenues and 15.5 million in expenses for a net loss of approximately 3.3 million or $0.19 loss per share.

For the full-year 2005, the combination of these two segments produced a consolidated GAAP net loss of approximately 5.3 million or $0.30 loss per share. For the fourth quarter the combination of these two segments produced a consolidated GAAP net loss of approximately 8.7 million or a $0.48 loss per share. The loss at the TRS segment is partially due to overall mortgage and interest rate environments which have diversely affected the gain on sale premiums and net interest margins.

During 2005, we estimate that the gain on sale premium declined significantly relative to 2004. All other things being equal, if market conditions enable us to realize the same gain on sale spread as in 2004; we would've earned approximately another 11.8 million in additional revenue.

The company retained in its investment portfolio approximately 555.2 million loans originated by the TRS during 2005. The foregone premium that TRS would have earned on these loans had they been sold to third parties, would've had an additional estimated premium income of 7.5 million during the course of 2005.

It is important to note that our 2005 annual results reflect the various growth and efficiency initiatives we implemented during the year. During the year the TRS incurred 2.6 million of continued start up expenses related to the creation of our new wholesale division. The wholesale division is now operational and out of its start up phase and is anticipated to be a meaningful contributor to both origination volume and net profitability beginning this month. Also accrued expenses of approximately 2.6 million related to the assumption of the GRL branches and its sales force were paid during 2005. GRL is a significant contributor to our 86.3% increase in loan origination volume for 2005, relative to 2004. When assessing the performance of our TRS, it is relevant to view it without these items and exclusive of any foregone premium.

I'd now like to discuss other operating characteristics and benchmarks. The credit performance of the over 1,600 loans in our investment portfolio continues to be outstanding. Only four such loans are delinquent and they represent only 0.25% of the total [bar] balance. As a testament to our stringent credit criteria, we are currently expecting no losses on these loans.

During the year total employees increased 802 individuals at December 31, 2005 from 782 individuals a year ago. Included in total number of employees are 329 loan officers dedicated to originating loans at year end. Our number of locations decreased to 54 at December 31, 2005 as compared to 66 locations at December 31, 2004. Partly as a result of the consolidation of branches in shared markets after our assumption of GRL branches in late 2004.

The origination volume from the GRL branch acquisition, which was fully integrated during the course of 2005 in our organic same store growth, has been significant. The combination of these efforts resulted in a 30% increase in origination volume for the fourth quarter for 2005, relative to the same quarter of the prior year.

During 2005, approximately 68% of our loan origination were bankered loans and sold to for third parties for gain on sale. Approximately 16% of our 2005 production volume was retained in our investment portfolio and approximately 16% was brokered to other lenders. For additional information related to the characteristics of our loan originations, please refer to our earnings press release that was issued yesterday afternoon.

The net GAAP cost of loans pertained in our portfolio during 2005 was approximately 58 basis points of [par]. For loans we originated and sold to third parties for gain on sale premiums, our gross gain on sales inclusive of the premiums was approximately 293 basis points. And our net gain on sale was approximately 115 basis points during 2005.

Non-payroll related GNA expense for the mortgage lending segment as a percentage of originations was approximately 67 basis points for the year. Exclusive of payroll allocated net gain on sale per bankered and brokered loan originations, GNA expense for the mortgage lending segment has percentage of origination was approximately 161 basis points.

As mentioned in our prior earnings calls, qualitatively we continue to make infrastructure improvements to facility the additional loan production growth, we anticipate during the course of the year and beyond. Our new loan operating system under development for almost two years is slated for a full corporate-wide rollout in April. And will enable us to achieve increased loan origination capacity and operating efficiencies that will ultimately impact the bottom line.

Let me now turn to some key points regarding New York Trust balance sheet. At December 31, 2005, we had total assets of 1.8 billion, which includes: 328 million of available for sale residential mortgage backed securities, 338 million of trading residential mortgage backed securities, 781 million of mortgage loans held in securitization trust and loans held for investment, 122 million of due from loan purchases and 108 million of residential mortgage loans held for sale. Our aggregate warehouse lines and reversed for purchase borrowings under our facilities was 1.6 billion as of December 31, 2005.

Helping us to maintain liquidity and financing capacity we have over 23 commercial investment banks, providing us with financing arrangements with a capacity of over $5.4 billion. The notional amount of the company's interest rate SWAPS as of December 31, 2005 was 645 million. The notional amount of our caps as of December 31, 2005 was 1.9 billion. Our net to ratio GAAP with a difference between the estimated maturities or lives of our earning assets and the related financing facilities is approximately 11 months.

For the fourth quarter of 2005 the average earning assets in our investment portfolio was approximately 1.5 billion with a weighted average coupon of 4.8% and a yield on earning assets of 4.4%. We financed this portfolio through repurchase agreements, warehouse lines and underlying interest rate hedges at a weighted average interest rate of 3.8% for the fourth quarter. The combination of the yield on earning assets, less the cost of financing resulted in a net interest margin of 62 basis points for the fourth quarter.

For additional information you may access our 10K which will be filed next week with the SEC. You can access our filed 10K at our website at www.nymtrust.com or at the SEC website at www.sec.gov. This concludes my comments. The management team at New York Mortgage Trust thanks you for your continued interest and support.

I believe we are now ready to open the call to questions.

Thank you. Ladies and gentlemen at this time we will begin the question and answer session.

[OPERATING INSTRUCTIONS]

One moment please for the first question. Our first question comes from Paul Miller with Friedman, Billings, and Ramsey. Please go ahead.

Yes, thank you very much. Michael can you go over your hedging strategies for the REIT portfolio and how did it get so - - and how did it get to the [inaudible] where it came to the point where you had to take [inaudible].

Well, let me have Steve Mumma who really manages the portfolio to answer that for you.

Paul, do me a favor, repeat the last couple of words, you got cut out. Turn it up a little bit?

Can you hear me?

Yes, just repeat the last part of your sentence.

Well, my question can you go over your hedging strategies. I know you hedged the duration of this portfolio and I'm just wondering how did it get so out of whack. Like, how did you get to the 11 point duration gap, because I know you do - - correct me if I'm wrong but your plan was to hedge this portfolio.

Right and the - - we've always stated that our duration gap we manage up to one year or less. And if you look over the last couple of quarters the duration is gone from about a half a year out to three-quarters of a year and now to .19 year - -.

.91

.91 years. And it's a combination of we're adding some five-ones. We think the curve - - we think the fed is about done with what they are going to do. And that's where we feel comfortable for the position of the portfolio.

When you said you think the fed is done, do you think - - .

No, we say - - we think it's about done. We think the majority of the tightening is behind us. The curve has been inverted now, going back looks like its going to be flat. And that's where we think we are comfortable with the portfolio.

And with the - - and I know this is a rough estimate - - I'm not trying to pin you to it. But the $0.14 dividend or the $0.14 quarterly dividend, what type - - are you looking out at a flat sort of [inaudible] for the next four quarters?

Well, we're running our estimates using what ever the four yield curve is presenting to us with the current market place. So, our anticipation is right now is fairly flat out around 5% to the end of the year.

And then the other issue is, you guys still did have decent production in the fourth quarter, but you showed a pretty good loss there. Can you get us comfortable with the fact that you guys can be a profitable entity given your size going forward? Because we all know that it's going to be a tough '06. And the money would be - - is '04 the [inaudible] or can you just get us comfortable with the fact that a guy that does $4 billion a year can be profitable to TRS.

Hi Paul, its Steve. We're confident that it can be and we've done a lot of things to remedy the losses that we experienced in '05. Keep in mind that until literally this month, our wholesale business being start-up phase was causing a pretty significant drag on earnings. Also a 19% drop off from production due to seasonality should reverse itself in the coming months. But most significantly the bulk of that loss in addition to the foregone premiums which were not going to suffer for the foreseeable future. The bulk of that loss is due to pretty sharp decline in gain on sale margins. And we are already seeing that reverse itself, as well. So the combination of the wholesale business becoming profitable, the gain on sale margins widening out a little bit, the volume picking up already that we're seeing today. Also we cut $4 million worth of payroll in the last few weeks. We think we've got some additional cuts that we could achieve in the coming weeks. And we've also had some extremely successful loan officer - - seasoned loan officer recruitment efforts. So, the combination of all these things, there's no magic pill or quick fix, but we are highly confident that the mortgage company will be a net contributor to earnings in the not too distant future. And so the combination of the TRS is capable of, yet not delivering today, added to the rebalancing that we just - - that we're about to do in the REIT portfolio. For which we've already taken the loss in the fourth quarter, 2006 should be a far better year for us on a net or consolidated earning basis than was 2005.

And then the one thing that confused me a little bit, because one of the things that as - - that I do, looking at an asset REIT how I classify you guys. Is that it allows you to cherry pick your own portfolio, that to keep higher return products in your REIT. And it sounds like that you're now going off into another direction in a sense that you want to manage the mortgage bank on its own right and then have a REIT on the side, that's going to go out there and purchase loans into the market. Can you just specify that again, why don't you just put up the two companies and where is the - - where is the benefits of having a REIT now that doesn't work off a TRS going forward?

Paul, its Dave Akre. I think basically what we're taking advantage of is the ability to go out and buy loans in the market place at or slightly better than the yields we are able to get from the loans from the TRS. So, being that we have our eyes open, we're taking advantage of that opportunity, we're able to therefore boost the returns or the bottom line on the TRS better. We'll have better results in the TRS and at the same time we're going to, if anything, do slightly better than we would otherwise in the REIT portfolio. So there's not anything dramatically new here. It's just taking advantage of this market opportunities.

Some loans that we've been able to buy, we've been able to buy it at prices lower than we can realize by selling comparable production, just some disconnects that we're able to take advantage. But also regarding the basic strategy of being an active originating REIT. The idea here is given market conditions, having the mortgage origination capabilities will enable us to toggle between self originations for portfolio or self-originations for gain on sale. And short of this being an extremely pressured time for the mortgage banking industry as a whole, in a more normalized market or even in this market as we take some of the actions that we've been taking. We'll be able to see a REIT portfolio that looks a little bit like a passive REIT portfolio and add to that mortgage banking earnings. So, you'll still have on a consolidated basis better results than you would if you were just a passive REIT portfolio. There is typically value to having a mortgage banking business. This just happens to be an amorously difficult time. So the strategy as a whole, when the yield curve is steeper and when gain on sale - - when the lower cost of producing loans outweighs the benefit of buying loans. That strategy will still hold true in certain markets. It's just for us at this particular last several weeks, it hasn't been the case.

Can you just tell me why you can buy loans cheaper on the street than you can produce them. That doesn't make any sense to me?

Well, we're not buying them from the street, we're buying them directly from originators, that we've got - - .

Provide from - - well, provide it from the originators, I mean, are these others - - that doesn't make any sense to me why that's value add.

It's only a slight difference, Paul. It's two fold, one is just a maturability to be able to extract every penny we can out of the gain on sales of our own originations and maybe do slightly better than average. And also to be able to find opportunities to purchase loans from other lenders at slightly better costs than maybe the market at large. And we're talking about two slight advantages when added together may end up being enough basis points to make you want to sell your production and buy other production.

Plus, - - this is Dave again. Plus we're able to pay off the higher cost warehouse line faster by doing securitizations more frequently.

Okay. Okay guys, thanks.

Thanks Paul.

Thanks.

Our next question comes from Steve Delaney with Flagstone Securities. Please go ahead.

Good morning, guys. Could we start with - - Michael, could you provide me with the dollar volume in the fourth quarter of third party loan sales and brokered loans?

Just for the quarter?

Just for the quarter, yes.

Sure. For the quarter we had let me just give you a complete run down here. For bankered loans we sold 569.5 million. For assets add another 26.7 in FHA loans. We retained 99 million and we brokered out 127.6 million.

What was that 26.7 - - that was FHA?

That was FHA - - that's a certain branch that we kind of isolate.

So we would combine that with the 596.5.

That's correct.

Okay, now you suggested maybe you have the year numbers there, if you've got them handy, do you want to go ahead and give me those as well?

I sure will, let me just pull the right page here. For the year, bankered and FHA production was two billion, three twelve-ish. What we retained in portfolio was 555.2 million and what we brokered out to - - what we brokered was 562 million.

562 million. Alright, very good. Thank you.

You bet.

I didn't - - Steve, there wasn't anything mentioned in the press release, unless I just missed it somehow about the previously authorized buyback plan. And I just wondered if you could comment. I know we've got the K coming next week, what your strategy is. I calculate a new book value of 553 and kind of using that as the bench mark, can you give us some thought as to how you see the buyback being used here, if at all?

Well, it was approved by our board as you know and the idea here or the strategy is if there were to come a point in time where we could buyback shares in such a way that it would be accretive to our book value, accretive to earnings to do so, then we would consider doing so. It would have to be significantly accretive though to cause us to want to take precious capital out of our limited amount of capital to buyback shares. So, right now we are trading above book value or hovering around book value. And unless there were significant decline in our price we probably wouldn't execute on a buyback.

Okay and well, that suggests that I think favorably that you see opportunities that can use the capital internally and build the portfolio. Can you give us some sense using these loan purchases, the bulk loan purchases that you're talking about, where the 1.5 billion portfolios may go over the next year? Do you have an internal projection?

Steve right now its about 65% of the loans. Steve, its Steve Mumma.

Yes Steve, sure.

I would imagine with a prepayments and the rebalance of the portfolio will probably be closer to 80, 85% by the end of the year in loans. And it would depend on how many of those pieces that we keep will be doing securitization, but some of these securitization we'll be dealing in the near future will be retaining some of the credit sensitive pieces and some invest it to permanently finance them.

Okay.

Which enables you to give a little bit more leverage, but it's more of a controlled leverage. So, you're really laying off the fixed interest cost. So you really just try to strip out a spread over time.

So you're saying you can see yourself getting to 85% loans versus RMVS by the end of the year?

Right and that would depend if we put them on the balance sheet it would be around 85%, if we sell the majority of them then maybe a lesser percentage.

Okay.

It would be a lesser percentage on the balance sheet, but the overall loan percentage would be higher.

And assuming some slightly higher leverage as your CDOs pick up, do you have a target for where the portfolio could go in a total dollar amount of the portfolio?

I mean, it would be - - we would have to monitor where we think rates are going. Right now we're going to keep the portfolio around 11 times leverage, but it would look again at the opportunities that persist for us purchasing loans and what kind of returns we can get on that capital that's tied up in those deals.

Okay and looking at that, as far as the new investments can you gives us just a little color for the type of assets. I mean, when you sell this 390 million, what looks attractive to you now out there in terms of in the [whole-end] market?

Well, look at all the opportunities that are available to market place both from loans as well as securities. Specifically, I don't want to get too specific now because we haven't done the purchase fund yet. I don't want to tell past anything that we're looking at. It's hard enough trying to make money in this business. So, we're going to look at the broad spectrum of the assets that we've invested in up to five-one.

I mean, we'll - - I would say we have to stay within the REIT rules and we'll do that.

Sure.

We'll be opportunistic inside of those REIT rules and look at loans - - we'll look at triple A as well as agencies, we'll look at floaters.

And obviously, I mean, the whole reason to reposition is that you would be expecting to see a net interest spread on the marginal trade in excess of 62 basis points you had in the fourth quarter.

That's correct.

That's correct.

That's correct.

Alright. One - - do you have any internal targets as to where you think you can move the needle on this spread?

Until we execute these trades, I'd rather not give a projection right now. We obviously think its going to be more favorable, otherwise we wouldn't do it. But, until we get the trade done, the markets been moving around pretty decently the last couple of days here. So, we'll feel more comfortable once we get the trades executed.

That's what I expected, Steve, but I had to ask the question.

I know.

Thanks guys.

Thanks, Steve.

Thank you and our next question comes from Josh Bederman with JP Morgan. Please go ahead.

Hey guys. A lot of my questions have been answered, just a few things here. First, can you talk a bit about the expenses? You said they went down 4 million, I assume that's on an annualized basis and can you just kind of give a little more detail as to what's going on there?

That's correct. The expenses - - the expense reductions were on an annualized basis. Four million dollars were net salary reductions during the first quarter, primarily through attrition of salary employees whom we did not replace as well specific lay-offs. And in addition to that, there are probably a couple or a few additional million dollars worth of general GNA expense cuts that we're looking at and we'll probably be able to achieve. These are annual expenses again, over the coming several weeks.

Okay, so is it fair to assume that a lot of that won't show up in the first quarter or will? I'm just trying to get a sense of timing?

Most of it will not, because they were very recent.

Okay. Okay and then I just want to verify, origination expectations for '06 you guys said 4 billion retail and 700 million wholesale. So, like almost 5 billion total?

Our projection is about 4 billion in total.

Oh, 4 billion total. Okay.

Right. So we did 3.4 billion in total projections were virtually all of which was retail. We are expecting that to hover around its current level, maybe a slight decline. Despite the fact that MBA is predicting a much larger decline and that will be supplemented by the new wholesale production, which will keep us up above our 2005 level.

Okay. Alright. And then the rebalancing. You guys are doing that into more securities, right, not into purchased full loans, it could be 388.

It could be a combination.

Oh, it could be a combination, yes, that would be right. Okay. Alright, two more things here. First, gain on sale margin you guys said was 115 basis points for the year, what was in the fourth quarter.

For the fourth quarter, gain on sale margin was 86 basis points.

Okay.

That's [net gain on sale].

That's part of our problem in the fourth quarter.

And you guys said that it's been up a bit recently? Can you give that more color there?

Particular on some of the all day trades we've done, we've seen a decent spike up in the executions.

Okay. So - - and that's one key set so, so I mean is it fair to assume that there's going to be some upside here in the near-term?

That would be safe to assume, yes. I mean the all day business is 25, 28% of our production and that's generally the most profitable part of our gain on sale business and those margins have been hammered pretty badly, but they seem to be normalizing again. So, that will help a lot. And this might pick up again on sales of some FHA business; the conventional is still pretty weak. But overall, I'd say that the secondary market execution of the mortgage banking business starting over the last week or couple of weeks going into the second quarter should be much better than we've experienced over the last few months.

Okay. Alright. Thank you.

Thank you.

Thank you.

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