New York Mortgage Trust Inc (NYMT) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the New York Mortgage Trust Second Quarter Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded today, Tuesday, August 8, 2006.

I would now like to turn the conference over to Julie Tu with the Financial Relations Board.

Please go ahead, ma'am.

Good morning, and welcome to New York Mortgage Trust's Second 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 that expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

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.

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.

Good morning.

We welcome the opportunity to speak with you all this morning and to update you on our business activities.

I will begin the call with a recap of the quarter and then we will go over recent operating highlights.

Michael Wirth, our CFO, will then provide a detailed recap of our financial results.

At the conclusion of our formal remarks, we will be available for your questions, and as usual, several members of our executive management team are also with us today, including David Akre, our Vice-Chairman and Co-Chief Executive Officer;

Steve Mumma, our Chief Operating and Chief Investment Officer; and Joe Fierro, the Mortgage Company's Chief Operating Officer.

As indicated in yesterday's press release, our second quarter operating results represent an improvement over the previous quarter within both our Mortgage Portfolio Management and Mortgage Lending segments.

These improvements were largely the result of implementation of cost cutting initiatives announced previously, an increase in our mortgage origination volumes and the asset reposition, which occurred in the 2006 first quarter, which were described in detail during our first quarter conference call.

Despite this progress, our REIT portfolio and Mortgage Banking business continue to be impacted by a number of factors affecting the mortgage industry.

These include; compressed net interest margins resulting from the flat yield curve; this is particularly true for our Mortgage Portfolio Management segment, which has over $1.3 billion invested in mortgage securities and loans held in securitization trusts.

Interest rates on fixed rate mortgages that are at the highest levels in four years and interest rates on ARMS that are at the highest levels in five years.

Continued decline in origination and mortgage application volumes nationally; and extreme competition due to excess origination capacity in the industry.

In the face of this difficult economic environment, we remain committed to effectively managing our business to counter these trends.

During the first six months of 2006, we streamlined our non-sales related expenses to levels proportionate with today's level of performance and through the elimination of excess capacity and layoffs reduced the expenses in our Mortgage Banking business.

As a result, during the second quarter, we realized $900,000 in reductions in general and administrative expenses including non-commission and non-sales payroll.

Looking ahead, we expect these actions to continue to generate additional significant savings in the second half of 2006 and into 2007.

Also, as previously announced in March 2006, we disposed $388 million of lower-yielding acquired mortgage-backed securities.

To date, the majority of the equity freed up from this sale has been reinvested in incrementally higher-yielding assets, which have provided some help to our current portfolio yield.

We also continue to sell nearly 100% of our loan production, so that for the foreseeable future, we will have some relief from the earnings pressure caused by foregone premiums on retained loans that we experienced in 2005.

Also during the second quarter, we completed the build-out of our new loan operating software, which in future quarters will enable us to recognize cost savings through substantial additional operational efficiencies, and will also provide us with a technological scale to continue to grow our Mortgage Banking business.

Additionally, in the second quarter, we launched one of our three planned regional joint venture title insurance agency subsidiaries, and the second such joint venture is currently being launched.

These joint ventures will begin to create additional revenue and profit opportunities toward the latter part of 2006.

Shifting gears now, I would like to update you regarding an exciting new mortgage loan product that we created and launched on Friday of last week, which we celebrated at the New York Stock Exchange closing bell ceremony, last Friday.

Specifically, we introduced the launch of our Homeowner Protection ARM.

This is a monthly Adjustable Rate Mortgage with a 10-year interest rate cap at 6.99% and no negative amortization.

We believe that this new product will be compelling for consumers in that it's maximum rate for the first 10 years, which is capped of 6.99%, is approximately the same as a fixed rate or comparably termed hybrid ARM loan, but can decrease in a declining rate environment, thus largely eliminating the need for a borrower to refinance.

And while it is too early to report actual results, we are confident that this new product will gain meaningful traction, thereby increasing our origination volumes and our operating results in future quarters.

We are very excited about this new product, as it is the first monthly ARM that virtually entirely insulates the borrower from interest rate risks for a period of 10 years.

Also, the 10-year rate cap on this loan is only negligibly higher than the prevailing rates on a 10-year ARM or 30-year fixed mortgage, but unlike those products, our Homeowners Protection ARM rates will drop should market rates drop.

The new product behaves in effect like a fixed-rate loan, yet eliminates the hassle and expense of refinancing when interest rates fall.

To our knowledge, there is no other product like it.

Lastly, regarding this new product, which we intent to securitize, once we have aggregated the critical mass, we have not yet determined whether we will retain the securities for our portfolio, or sell some or all of the bonds, but our model indicates that our execution will be very favorable on either case.

Turning now to our second quarter results, I am pleased to announce that our origination volume grew 21% to $741 million, compared with our 2006 first quarter levels of 614 million.

Note though that despite this positive trend, we are currently experiencing significant volume pressure due to competitive pressures in the slowing home sales environment.

Regarding our wholesale origination business, we funded approximately $92 million during the second quarter, a 16% improvement over the first quarter.

Additionally, we recently hired several new seasoned account executives, and as a result, we are already seeing our pipeline grow fairly dramatically.

Looking ahead, we expect the profitability of the wholesale units to continue to contribute positively to our overall financial results.

Moving now to our second quarter operating results and financial results.

On a consolidated basis, we are pleased to report forward progress and earnings momentum resulting in a consolidated net income of $178,000 or $0.01 per share for the quarter ended June 30, 2006, as compared to a net loss of 1.8 million or $0.10 per share for the immediately preceding quarter ended March 31, 2006.

Our Mortgage Portfolio Management segment, which is our REIT operations exclusive of its taxable REIT subsidiaries, reported net income of $2.4 million or $0.13 per share.

During the quarter, net interest margins in our REIT portfolio improved to 78 basis points as compared to 71 basis points from the immediately preceding first quarter of 2006.

Our Mortgage Lending segment reported net revenues of 9.6 million and a net after-tax loss of 2.2 million or $0.12 per share, compared to a net loss of $0.21 per share for the quarter ended March 31, 2006, and a net loss of $0.16 per share for the quarter ended June 30, 2005.

This improvement was primarily attributable to the 21% increase in our mortgage origination volume from the first quarter of 2006 and was achieved despite weaker than expected origination volumes and continued pricing pressure on premiums earned on loans sold to third parties.

Additionally, regarding gain on sale margins, we are currently seeing signs of some market stabilization as premiums tightened by only approximately 11 basis points for the second quarter of 2006 relative to the first quarter of 2006.

Given the aforementioned progress, new revenue opportunities, recent cost cuts and the portfolio repositioning and despite the current market challenges, our Board of Directors approved a second quarter dividend distribution of $0.14 per share.

With that, I would now like to turn to turn the call over to Michael Wirth, our CFO, to review our financial results in more detail.

Thank you, Steve.

Good morning, everyone.

I would first like to break down our second quarter performance into distinct segments and provide some detail as to our operating strategies and financial results.

I will start with the operations of our REIT, which is our Mortgage Portfolio Management segment.

As 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 REIT status.

The dominant driver of the REIT's net income is the net interest income we earn on our portfolio of residential mortgage loans and securities.

Like our peers, during the second quarter, we continue to be impacted by rising interest rates and a flattening of the yield curve.

For the quarter ended June 30, 2006, the REIT, on a standalone basis, had net interest income of 3.1 million and expenses of 699,000.

This resulted in net income of 2.4 million or $0.13 a share for the REIT segment.

This compares favorably to the first quarter of 2006 REIT net income of 2 million, but less favorably to the 3.5 million of net income earned by the REIT in the second quarter of 2005.

The main difference in quarterly REIT performance over the prior year is the result of a 22 basis point reduction in net interest spread and reduced average earning assets in the current quarter.

However, on a positive note, our cumulative prepayment speeds remain reasonable and as expected at 23% for the second quarter and averaged 20% for the six months ended June 30, 2006.

As a result, the net interest margin on the REIT's investment portfolio during the second quarter of 2006, inclusive of interest rate hedging costs, favorably widened to 78 basis points from 71 basis points earned in the first quarter and from 62 basis points earned in the fourth quarter of 2005.

Our asset yields are reflective of the high quality of prime loans in our portfolio.

These assets are not accompanied by higher levels of credit risk associated with Alt-A or sub prime loans, and we do not anticipate a degradation of portfolio returns due to credit losses in our investment portfolio.

To further protect our portfolio with regard to credit risk, we have no option ARM or negative amortization loans in the portfolio.

The credit performance of over 1,900 loans in our investment portfolio continues to be outstanding.

Only nine such loans are delinquent, and they represent less than 1% of the total par balance.

As a testament to our stringent credit criteria, we are currently expecting no losses on these loans.

For the quarter ended June 30, 2006, our Mortgage Lending segment, also known as our taxable REIT subsidiary or TRS, recognized 9.4 million in revenues, and 11.6 million in expenses for a net loss of approximately 2.2 million or $0.12 a share.

The current quarter's net loss in the Mortgage Lending segment compares favorably to the net loss of 3.8 million in the first quarter of 2006 and 2.9 million for the second quarter of 2005.

The loss in the Mortgage Lending segment is partially due to overall mortgage and interest rate environments, which had adversely affected gain on sale premiums and net interest margins.

For the quarter ended June 30, 2006, the combination of our two business segments produced consolidated GAAP net loss of approximately 0.2 million or $0.01 per share.

Financial results of our Mortgage Lending segment also were impacted by a 35% reduction in gain on sale premiums to 133 basis points for the second quarter of 2006 relative to our 206 basis points experienced in the second quarter of 2005.

It should also be noted that various cost cutting initiatives undertaken at the end of the first quarter of 2006 were fully implemented in the second quarter.

These initiatives include expense reductions to general and administrative expense, including non-commission and non-sales payroll, with savings of approximately $900,000.

I would like now to discuss other operating benchmarks and characteristics.

As of June 30, 2006, total employees decreased to 727 individuals, from 857 individuals a year ago.

Included in the total number of employees are 403 loan officers dedicated to originating loans at the end of the second quarter, a 4.7% increase from the 385 loan officers that we had in the second quarter of 2005.

The 15.2 reduction in overall headcount is due to a 31.4% decrease in administrative, back office and non-sales related personnel.

The reduction in non-sales personnel was partially as a result of the efficiencies gained from branch consolidations and shared markets during the past year.

These branch consolidations lowered our number of locations to 51 at June 30, 2006, as compared to 62 locations a year ago.

During the second quarter of 2006, approximately 68% of our loan originations were bank loans which were sold to third parties and approximately 32% was brokered to other parties or to other lenders.

For additional information related to the characteristics of our loan originations, please refer to our earnings press release that was issued last evening.

For loans we originated and sold to third parties for gain on sale, our gross gain on sales, inclusive of the premiums, was approximately 260 basis points and our net gain on sale was approximately 118 basis points during the quarter.

Non-payroll-related G&A expense for the Mortgage Lending segment as a percentage of originations was approximately 70 basis points for the quarter.

Exclusive of payroll-allocated to net gain on sale for bankered and brokered loans, G&A expense for the mortgage lending segment as a percentage of originations was approximately 151 basis points.

Let me now turn to some key points regarding New York Mortgage Trust balance sheet.

At June 30, 2006, we had total assets of 1.6 billion, which included 652.7 million of available for sale residential mortgage-backed securities, 690.5 million of mortgage loans held in the securitization trust, 76.1 million of due from loan purchasers and 84.3 million of residential mortgage loans held for sale.

Our aggregate warehouse lines and reverse repurchase borrowings under our facilities was 1.2 billion as of June 30, 2006.

We also had 213.5 million of outstanding collateralized debt obligations as a result of our most recent CDO securitization.

This CDO securitization structured for sale treatment rather than financing for GAAP purposes, creates long-term financing at a locked rate in order to better stabilize earnings and expected cash flows.

Helping us to maintain liquidity and financing capacity, we have over 23 commercial investment banks providing us with financing arrangements with the capacity of over $5.3 billion.

The notional amount of the Company's interest rate swaps as of June 30, 2006 was 672 million, and the notional amount of our caps as of June 30, 2006, was 1.7 billion.

Our net duration gap or the difference between the estimated maturities for lives of our earnings assets and the related financing facilities is approximately nine months, which represents a slight favorable decline from the prior quarter.

For the second quarter of 2006, our average earning assets in our investment portfolio was approximately 1.2 billion with a weighted average coupon of 5.29% and a yield on earning assets of 5.08%.

We financed this portfolio through repurchase agreements, warehouse lines and underlying interest rate hedges at a weighted average interest rate of 4.3% for the second quarter.

The combination of the yield on earning assets less the cost of financing resulted in a net interest margin of 78 basis points for the second quarter, which is an improvement of 7 basis points from the first quarter net interest margin.

For additional information, you may access our 10-Q which will be filed tomorrow with the SEC, or visit our website, www.nymtrust.com, or at the SEC website, www.sec.gov.

On that note, I'd like to turn the call back over to Steve.

This concludes our formal comments.

Once again, we'd like to thank you for your continued interest and support.

We are now ready to open the call for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Steve Delaney from Flagstone Securities.

Please go ahead.

Good morning, guys.

Hi, Steve.

Good morning, Steve.

Could you give me the dollar volume of the loans sold to third parties -- your whole loan sales in the quarter?

Sure.

Our whole loan sales, we have banked approximately 507 million or so.

507 million?

Yes.

Okay.

And we brokered about 235 million.

Yes.

That was the 32%.

I needed the bank.

So, the 507 million, and that would relate to the 5.98 million of gain on sale?

That's correct.

Okay, great.

And Steve, you commented on the progress in the wholesale division and the [net] production, which looks like it's up to about 12% of your business now.

Can you say whether or not that division was breakeven in the second quarter?

You indicated you thought it would be going forward.

In the second quarter, the division as a unit was slightly profitable.

Good.

And we expect that to increase.

We recently hired, as I mentioned, a handful of seasoned account executives away from a competitor who brought substantial books of business with them.

So, we are already seeing our pipeline there continue to actually grow pretty dramatically.

So, we are expecting next quarter's results to be even better.

And are they plugged in with this new product?

I mean, is there -- do you think that's something that beyond your retail network that you will find national demand for?

We haven't plugged the new product into our wholesale group just yet; we expect to do that shortly.

But, we want to get it launched in retail and work the bugs out of it, if any, tweak the product if necessary before launching it in wholesale.

Okay.

And your comments about execution, I realize when you are doing new product, I mean, you have got decisions to make about the best execution and also whether you want some of that in your portfolio with caps on it.

But can -- should we assume that if you are a little over a 100 basis points net gain on sale margin from your current prime business, are you expecting a gain on sale margin net on this product that exceeds kind of the average you are doing currently?

As it looks today, we expect the gain on sale to be slightly more favorable than what we are seeing currently, if we were to decide to securitize and sell the entire securitization.

Using a [REMIC].

Yes.

Yes.

Okay.

But at this point, you don't have -- it sounds kind of like you might keep some, you might sell some.

Would that be the best way to characterize?

It's difficult to know yet, we need to really see what kind of volumes we can generate first, and then of course, once we see what the actual executions on the securitization are, as they compare to a model that will help us to determine whether we are going to hold some, or all of the bonds, or sell them all.

Okay.

We will look forward to that update here when we get to the third quarter.

All right, thanks guys.

Bye, Rob.

Thank you.

Our next question comes from Paul Miller from Friedman, Billings, Ramsey.

Please go ahead.

Hi, this is actually Annett Franke, good morning.

Good morning, Annett.

On the REIT portfolio, can you talk about a little bit your strategy here?

Have you deployed all of the cash proceeds from the sale of the assets in the first quarter?

And what kind of assets are you putting on here, in the margin on these assets?

And going into the next few quarters, should we see the REIT asset levels remain relatively stable, or should we see some moderate increase here?

We, as Mike commented, we have invested the majority of the assets back into the securities in the REIT portfolio and they were invested in a combination of floating rate securities, primarily agency floating rate securities and some private label floating rate securities, as well as a small amount of agency hybrid securities for [wholesale treatment].

As you know, we are currently selling all our loans out into the marketplace, and have not done a securitization.

So, in the event that we don't do a securitization in this quarter, we will probably see the portfolio assets remain fairly stable.

If we get a securitization off [with] this new product, we may do a transaction that will allow us to increase the portfolio, but it would be through a financing transaction and a securitization.

But, again, we would reevaluate that as we get closer to critical mass where it makes sense to do a securitization.

Okay.

And -- are you -- can you comment on the margins of these new assets you put on the books, just maybe in general?

Well, I would say, clearly any asset you are stepping into today is going to be more favorable than assets we had in our books -- that we put in the books in 2004.

So, we typically try to hit a margin that's going to be added into the overall portfolio, and will be very competitive to what's available in the marketplace today.

You are going to be in the high 80-basis points spreads typically.

Okay.

On your duration gap, are you expecting to maintain a six months or nine months duration gap, or are you putting on new hedges or is that pretty much like in line with your policy here?

Because, I am a little worried here in terms of the margin on a nine months duration gap, if that margin should come down a little more in the next few quarters, or how should we look at this?

I think from a duration gap standpoint, we have tried to be pretty consistent in that we have stated that we want to maintain a gap less than one year.

The gap has drifted out over the course of the year, partially due to slower prepayment speeds, and partially due to some hedges that have run off the books.

The new assets that we have put on the books, we try to bring down the portfolio duration with this new assets either through fully hedging out the hybrids, or adding some floating rate securities that are less sensitive to interest rates overall, and taking some more cap risk and hedging out the cap risk.

Okay, thanks.

If you don't mind, I have one more question.

No problem.

On the TRS, you had forecasted a little bit more in origination volume, and you kind of expected this year has to come close to breakeven in the quarter.

And with the continued losses in the TRS, also you continued to [decline] in the book value.

And what I am little concerned about is, are you -- in terms of your TRS or mortgage banking strategy, are you still looking to increase your retail origination platform by maybe small acquisitions, or building out the branch network?

Or what's your -- I mean you have talked about the new product that you are going to put on the market, but anything, any more color on the strategy here on the TRS?

Sure.

We too were a little bit disappointed at the origination volumes not being stronger, and that's what primarily is responsible for the continued losses in the TRS.

Part of the challenge that we have been facing is just extreme competitive pressure in terms of recruitment of our loan officers by some other larger national players in the market, and so we have been -- our goal is still to grow the retail franchise significantly and we have been fighting aggressively to counter those recruitment pressures by recruiting -- by doing recruitment of our own.

The fact is that, we have actually recruited and hired more new loan officers -- actually significantly more new loan officers than we have lost.

The problem is that when you lose loan officers, the result is an immediate decline in volume, whereas when you recruit new loan officers there is a lag.

So, we expect that our volumes will be stable or growing from this point, just organically.

And then, in terms of our strategy to continue to grow the business, we always have our eyes open for branch acquisition opportunities, as well as, as we've mentioned many times in the past, other actual corporate mortgage bank acquisition opportunities.

So, we are still looking for situations that will be favorable to us, and growing the retail franchises as our primary challenge right now.

Okay.

Okay, thank you very much.

You are welcome.

Thanks, Annett.

Thank you.

[OPERATOR INSTRUCTIONS]

And we have no further audio questions at this time.

Do you have any concluding comments?

Just thank you all again for dialing in, and thank you for your continued interest in New York Mortgage Trust.

We look forward to speaking to you again next quarter.

Thank you.

Ladies and gentlemen, this does conclude the New York Mortgage Trust second quarter conference call.

You may now disconnect.

Thank you for your participation, and please have a pleasant day.