New York Mortgage Trust Inc (NYMT) 2006 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 and full year 2006 results conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Julie Tu of the Financial Relations Board.

Please go ahead, Miss Tu.

Thank you, Eric.

Good morning, everyone, and welcome to New York Mortgage Trusts' conference call to discuss its fourth quarter operating results.

A press release was distributed yesterday after the close of market.

If you did not receive a copy, a 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 Samantha Alfonso at 212-827-3746.

At this time management would like me to inform you that certain statements made during the 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 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 and good morning everyone.

We again appreciate your attendance and welcome this opportunity to speak with you all about a status update and review of our fourth quarter results.

Several members of our executive management Team are with us today including Dave Akre our Vice Chairman and Co-CEO, Steve Mumma our Chief Investment Officer and CFO, and Joe Fierro our mortgage company's Chief Operating Officer.

As you may have read in last night's press release, we requested a 15-day extension to file our Form 10-K.

This extension was filed simply to allow the company and our independent auditors additional time to reflect our mortgage banking platform's results as discontinued operations in our year-end financial statements.

This is an extensive time-consuming process, yet we are focused on meeting the extended deadline and filing our 10-K by March 30.

I'd like to begin by bringing you up to speed regarding our exit from the Mortgage Banking business.

As a way of background, approximately five months ago our Board of Directors retained Milestone Advisors as our financial advisors to assist us in the exploration of our strategic alternatives.

After an extensive review and confidential preliminary discussions, we entered into a definitive agreement on February 7th to sell substantially all of the operating assets of our wholly owned taxable REIT subsidiaries Retail Mortgage Banking Platform to IndyMac Bancorp.

The approximate $13.4 million purchase price will include an $8 million premium to the net book value of the assets being acquired by IndyMac.

This is a bittersweet event for us as our ultimate goal was to continue to grow our Mortgage Banking business nationally, yet given the persistence of challenging market conditions and our lack of sufficient scale, we made the decision to simply monetize this asset and reinvest the proceeds into our Portfolio Management business.

Towards that end, we are excited about this transaction nonetheless as it will substantially reduce and ultimately eliminate our taxable REIT subsidiaries operating losses, providing the REIT parent the opportunity to stabilize its book value and earnings potential.

Furthermore, IndyMac has both the scale and infrastructure to be able to absorb our Retail Mortgage Banking business and approximately 500 employees into their Mortgage Banking Platform and unlock the profits that we have been unable to achieve given our relatively small capital base.

To recap the pending deal, the Mortgage Banking business's operating assets, included in this transaction, include the New York Mortgage company name, 21 full service and 11 satellite retail mortgage banking offices located in 11 states, all branch employees and loan officers, the majority of employees of NYMC's corporate headquarters, and NYMC's pipeline of mortgage applications and process at the time of closing.

IndyMac will also assume certain liabilities of NYMC's retail platform including certain lease liabilities and obligations under the pipeline loan allocations.

They will also assume a significant portion of the retention and severance expenses associated with this transaction.

We expect to realize net proceeds of approximately $12.1 million after fees and expenses and before a deduction of approximately $2.3 million, which will be held in escrow to support warranties and indemnifications provided to IndyMac as well as other price adjustments.

This sale is on track to close at the originally agreed upon price in the early part of April.

In a separate transaction, we recently completed and announced the sale of our Wholesale Lending Origination business to Tribeca Lending Corp, a wholly owned subsidiary of Franklin Credit Management Corporation.

This deal closed on February 22nd and generated proceeds of approximately $500,000.

As a part of that transaction, Tribeca Lending acquired substantially all of the operating assets of our Wholesale Mortgage Banking platform, including the existing pipeline of locked and unlocked mortgage applications, assumed the lease liability related to our Bridgewater, New Jersey Wholesale Lending office and made employment offers to substantially all of our 60 Wholesale Lending employees.

Strategically these two transactions are the first steps in increasing our financial flexibility and will, post-closing of the IndyMac transaction, achieve several critical objectives.

It will substantially reduce and ultimately eliminate our taxable REIT subsidiaries operating losses.

It will stabilize the company going forward to be able to focus exclusively on the Mortgage Portfolio business, which is to generate income with high credit quality mortgage assets, which will include securities as well as loans.

It will enable NYMC to retain the economic value of its accumulated net operating losses.

We will appreciably increase NYMC's investable capital and financial flexibility, we will lower NYMC's executive management compensation expenses and by way of my and Joe Fierro's acceptance of employment with IndyMac in connection with this sale, we will significantly reduce the company's future potential severance obligations.

I'd also like to note that the assignment of our corporate headquarters lease to Lehman Brothers is on track and expected to yield us nearly $3 million in the second quarter of this year.

Regarding our exit from the Mortgage Banking business, on a personal level, this is not quite what we set out to accomplish when the company completed its IPO nearly three short years ago and we regret that the market has been so challenging.

However, we are confident that these asset sales are strategically and tactically in the best interest of all of our stakeholders.

As previously announced, following the completion of the IndyMac transaction, I will be resigning my day-to-day management duties at New York Mortgage Trust.

I will though remain Chairman of the Board.

As one of the founders and largest shareholders, it is important to me to remain involved, be it in a non-operating and largely advisory role as a member of our Board of Directors.

David Akre will remain Vice Chairman and Co-CEO and Steve Mumma will assume the additional roles of President and Co-Chief Executive Officer, which I will be vacating.

I am highly confident that this team will be able to lead New York Mortgage Trust solidly into the future and that they are dedicated to and quite capable of delivering on our commitments.

I'd now like to turn the call over to Dave Akre, our Co-CEO, to discuss our near-term initiatives.

After that Steve Mumma, our CFO and Chief Investment Officer and soon to be Co-CEO, will make a few comments.

Dave?

Thank you, Steve.

I'll start by categorizing our outlook for New York Mortgage Trust as mildly optimistic, primarily because the Origination Platform transactions will allow us to stabilize book value, increase investable capital, and focus our energies on the future.

Before discussing the future, let me do a quick industry update.

There are five major factors impacting the entire mortgage industry, including our REIT and Origination businesses, principally, a yield curve that has been inverted since June of 2006, declining house prices and origination volumes nationwide, extreme origination competition even now, and the most significant issues in the market today -- early payment defaults and liquidity.

Contrary to many media outlets, EPDs have not been limited to the sub-prime market alone, they are also an increasing problem for Alt-A, which comprised approximately 26% of our originations in 2006.

And while guideline changes across virtually the entire industry will greatly curtail this problem going forward, until losses work their way through the system, liquidity will remain critical.

Accordingly, following the IndyMac transaction, our management team will be focused on the disposition of remaining loans held for sale and EPDs.

As of December 31st we have reserves of 4.9 million to cover potential losses going forward from EPDs.

This reserve combined with the proceeds from the Origination Platform sales gives us a good deal of comfort going forward.

Further, we believe that for us a majority of the EPD impact will be substantially behind us by the third quarter.

I personally feel the Fed will ease in the second half of this year primarily due to a housing slowdown, and while the slowdown could increase loan losses before a rate cut, the Fed ease will immediately help our net interest margin and eventually help the entire housing market.

I don't want anyone to believe however that we're going to sit back and wait for the Fed to bail us out, that's not our style.

So as soon as we feel we have a good handle on EPD and transition issues, we'll begin looking at purchasing bulk loan packages for securitization and other strategies to begin to take advantage of our NOL.

Actually one of the benefits of the current market environment is wider spreads on prime loans due to liquidity issues and we hope to take advantage of that.

My best guess is these changes won't have a significant impact on our earnings until the third quarter.

In the interim however, the meaningful portion of our portfolio will be resetting and Steve Mumma can discuss that in a minute.

Let me also reiterate that the review of strategic alternatives for NYMT is still under way and at this time it's difficult to say when that will come to a conclusion.

I'd like to say however that we will always be principally concerned with the long-term interest of our shareholders.

In summary, times remain challenging but we will continue to focus our attention on minimizing losses, prudently managing our portfolio, and maximizing the benefits of the NOL.

With that I'd like to turn it over to Steve Mumma.

Thank you Dave and good morning everyone.

Today I will be discussing our 2006 fourth quarter and full year results on a consolidated basis only, as the company is finalizing the discontinued operations allocation for 10-K reporting and we intend to file a notice of the late filing Form 12b-25 today.

For the fourth quarter we reported a consolidated net loss of 8.8 million or $0.48 per share compared with a net loss of 1.3 million or $0.07 per share for the same period in '05.

During the fourth quarter we fully reserved the tax benefit resulting in no net increases on our deferred tax assets from the third quarter.

Our fourth quarter 2006 loan origination volume totaled $585.6 million, a 29% year-over-year decrease and a 3% decline sequentially.

Additionally, the net interest margin on our mortgage portfolio for the fourth quarter of 2006 averaged 9 basis points.

This is down from 16 basis points in the third quarter of 2006 and down from 62 basis points from the fourth quarter of 2005.

This trend is due mainly to the continued increase in our cost of funds and the reduction in the average investable portfolio assets from $1.5 billion during the fourth quarter of 2005 to $1.1 billion in the fourth quarter of 2006.

On a full year basis, for the 12 months ended 2006 we reported consolidated net loss of 14.2 million or $0.79 per share compared with a loss of 5.3 million or $0.30 per share for 2005.

Again it should be noted that the deferred tax valuation allowance taken in the fourth quarter this year resulted in the decrease in net income of approximately $4 million.

Looking at our full year origination volume for 2006 totaled 2.5 billion versus 3.4 billion for 2005, a 26% overall decline.

The net interest margin on the company's Mortgage portfolio for 2006 averaged 49 basis points.

This is down from 86 basis points in 2005 and again is due to the increase in cost of funds, flat to inverted yield curve and a reduction in average earning assets during the year.

Some of the operating benchmarks I'd like to talk about.

At December 31, 2006 total employees decreased to 616 individuals from 802 individuals a year ago.

The 23% reduction in overall headcount is almost totally due to the reduction in administrative, back office, and non-sales related personnel.

After the completion of the Indy transaction we expect long-term headcount to go down to between eight and 10 individuals.

During the fourth quarter of 2006 approximately 72% of our loan originations banked were bank loans to third parties and approximately 28% were brokered to other lenders.

During the fourth quarter we took an additional loan loss reserve of $3.4 million and added a total loan loss provision of 7.4 million for the year 2006.

At the end of 2006 we had approximately $4.9 million in reserve allowance on our books.

As it relates to our investment activity, as of December 31, 2006 the company's portfolio of high credit quality investment securities totaled $489 million and had a weighted average purchase price of PAR .30 and a market value of 99.5.

Approximately 19% of the securities purchased in our portfolio are backed by 3/1 hybrid adjustable rate mortgages, 41% are backed by 5/1 hybrid adjustable rate mortgages and the remaining 39% are comprised of short reset floating rate securities.

Loans held in securitization trust totaled 588.2 million and had an average purchase price of PAR .65 with a fair market value of approximately 99.75.

Delinquencies in the loans held in securitizations totaled 1.16% of the outstanding and consisted of seven loans, one of which represents approximately 48% of the total.

This particular loan has an LTV of 65 and we are in the process of remediation and anticipate no material loss.

After the close of the IndyMac transaction the company will be in a position to redeploy the proceeds back into our portfolio business.

Additionally, as 33% of the portfolio resets over the next six months, this will give us an opportunity to either earn a higher interest rate on the reset coupon, or reinvest into the potentially higher yielding investment opportunities for the repayment of the principal.

There will be detailed information available about both the mortgage lending segment and the mortgage portfolio segment when we file our 10-K later this month.

Finally I'd like to say I look forward to becoming the Co-CEO with David after the completion of the Indy transaction and would like to wish both Steve and Joe good luck in their future.

On that note I'll turn the call back over to Steve.

Thanks, Steve.

This concludes our comments and once again we'd like to thank you for your continued interest and support, and we're now ready to open the call up for questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS].

Our first question is from Steve Delaney with Flagstone Securities.

Please go ahead.

Good morning guys, I'll be brief, I'm getting ready to hop on a plane.

Just a couple things, regarding first, Steve, the IndyMac deal, can you comment on what delayed the closing from March to April?

And do you expect it'll be early or late April?

And I ask that question just because of the kind of run rate of losses in the TRS, I think it's pertinent whether it's early or late in the month.

Originally I believe we were scheduled for March 31st.

We're now scheduled for April 1st, which is basically the next day.

Monday is the 2nd so that's the day actually we're expecting IndyMac to take over the operations.

All right well I think we can certainly live with one day, thanks for being that specific.

No problem, we're doing our best.

We're trying to cut it to half a day.

We can give you a day's slack there.

The $2.3 million escrow, I assume one of the items that'll impact that are losses, EPDs out of the pipeline after they take things over administratively, is that correct?

Actually not, they're assuming a pipeline of applications, but they're not actually buying any closed loans.

New York Mortgage's objective post-closing will be to liquidate its loans held for sale, IndyMac is just assuming applications.

So the escrow that they're going to be holding is largely just a backstop against reps and warranties that we're making in the asset portfolio.

Well that's very good.

So as far as your application pipeline including any lost commitments, is the risk on that non-closed loan, the application pipeline, that risk will be picked up by IndyMac, is that correct?

Well actually we're going to do a mark-to-market on the locked pipeline prior to closing and there'll be a settle up one way or the other.

Yes, but as far as credit exposure down the road?

The credit exposure will all belong to IndyMac.

Very good, okay.

And the window then on that 2.3 million against reps and warranties, how long a window is that?

I believe there are different buckets contained in that 2.3 million the longest of which I believe is 12 months.

Okay thank you.

And on the Lehman lease you're still looking at the 3 million fee, that's going to close in second quarter as well, are there any capitalized costs or fees associated that would have to go against that similar to the 1.3 million of fees and costs you've got on the IndyMac premium?

In other words I'm trying to get at what the net gain on that 3 million might end up being.

Well, actually there are no capitalized costs against it, but just to clarify something, the 3 million that we're expecting first of all it's going to be, the deal that we cut with Lehman is that there will be $3 million paid to us if we move out on a certain date.

For each month that we go beyond that we'll forfeit $200,000.

So it's not yet determined whether we're going to actually hit the target date.

We'll be very close, so I would expect we may lose up to 200,000 of the 3 million depending on exactly when we're able to get out of here, which is largely a function of how long it'll take us to get T1s connected in the new location that we're moving into.

But also to note that $3 million, although we'll be receiving the cash when we move, it won't actually come into income because we'll not actually be released from our lease, we'll simply be assigning our lease to Lehman, but will have residual liability associated with that lease in the event of a Lehman default.

Obviously there's very little risk of that, but the $3 million won't come into income; it'll be amortized over the life of the sub-lease.

Oh I see.

And what's that remaining term then?

2010.

2010

To 2010, okay thanks for clarifying that.

Sure.

Additionally there's about $1.5 million of income that we have not yet recognized associated with the cash that we received to actually move into this same space, so that income will also be amortized or continue to be amortized over the remaining life of the sublease.

Yes 2.8 plus 1.5, that'd be 4.3 over from now through 2010?

Right.

Okay very good.

We're still working on getting a release from the sub-lease, but that hasn't been determined definitively yet.

Okay.

And I guess one final thing for Steve Mumma, if you can answer this, you mentioned you will have eight to 10 people, obviously much smaller office space.

Can you give us some rough idea of what you think the quarterly run rate of expenses of G&A will be for the REIT say when we get to the third quarter, which should be the first really clean quarter?

You know Steve, honestly I have an idea what that rate is going to be, but until we get down to over the next one to three months I'd have a much better idea.

I'll come back and we'll make some announcements once we're better positioned to do that.

Yes, because I think we can figure out what might happen with the spread, but that would be helpful information.

Thanks guys, I'll sign off for now.

Thank you very much.

Thanks, Steve.

Our next question comes from Paul Miller with FBR.

Please go ahead.

Yes, thank you very much.

Guys I've been traveling so I haven't been able to really see your news release, so if these questions are in your news release I do apologize.

I haven't been in the office in a week.

On the EPDs, have you guys disclosed how much EPDs that you guys had to deal with in the fourth quarter?

We have not yet, the only thing we've talked about, Paul, is the total loss we've taken in 2006 was approximately $7.4 million.

But in terms of volume dollar amounts we have not disclosed that yet.

Can you tell us the severity rate of -- I guess what I'm looking for is trying to quantify the future liabilities you guys have over the next couple quarters, because you're going still going to have EPD liability at least to the third quarter I guess when you said when the production liabilities drop completely off.

What type of percentages were you getting on your push backs?

I know we've been hearing anywhere from 20 to 40 basis points from some companies, could you disclose that number?

Paul, it's Dave Akre, hi.

Hi, David.

Not performing firsts are I'm going to say trading in the call it $0.75 on the dollar for a ballpark number.

Seconds in the past couple of weeks have gone from probably, you know a non-performing second, has probably gone from, I'm going to say $0.25, $0.30 down to probably $0.10.

That market has fallen away quite dramatically in the last couple of weeks.

So you can probably use those as pretty good benchmarks.

And then on the overall pushback that you're getting, is that roughly running 30, 40, 50 basis points on total production, like the last 12 months of production?

You know I've been trying to get that number together.

I don't have that number off hand.

But I'll have a much better idea of that in a day or so.

And another thing that I've been really, I've been on the road for a week traveling to as many of these mortgage banking companies as possible, and I guess one of the things that we've been hearing is February was a really bad month for early payment defaults.

And so the first quarter is probably going to be worse for a lot of the Alt-A lenders than the fourth quarter.

Can you share some of that experience with us on that issue also?

You know I would say I would generally agree with that comment, I think that's probably all I can say.

Paul, I would say that the comment is probably driven more from outside market factors from where they're getting their loans resold as opposed to just the level of EPDs, just because of what happened to various companies in the news recently.

And on the other note, do you think maybe you guys were, because you're so small and you're being sold to IndyMac, that people are digging through their loans more thoroughly with your production over the last 12 to 18 months?

In other words were you getting some catch up?

No I disagree, no.

No I think everyone on the investor side is doing very, very thorough due diligence across-the-board.

And we've had discussions with a couple of people, literally one or two people, that have raised that issue out of dozens, so I don't think that's really affecting the outcome for us.

And besides, New York Mortgage Trust would still be a backstop for the loan, so I don't think there's any concern there.

Yes, anybody that digs in, has any kind of market knowledge, can easily understand what's going on and they understand our ability to back our stuff up.

And what a lot of people have also told us is the majority of the EPDs are coming in specific loan products with lower FICOs, stated income, and very high CLTVs, CLTVs in the (multiple speakers) range.

Yes the commonality I've seen is non-owner occupied high CLTV and/or LTV and some stated income and/or stated assets.

Those three combinations usually do not predict a good future.

Okay thank you very much, gentlemen.

Yes.

Thanks, Paul.

Our next question comes from [Donald Greco] from [Fudish Partners].

Please go ahead.

Hi guys, first off before I begin I want to say that I really respect the work that you guys did in terms of trying to build up the company and I'm quite sorry that it didn't work out the way that we'd all intended for it.

My understanding is the future model is going to be eight to 10 people plus a few Bloomberg terminals?

Correct.

Correct.

Okay good.

How much is the net operating loss that you guys will be able to use to rebuild book value?

Currently we have approximately $18 million on the books for deferred tax asset, which represents about $45 million of net operating loss.

Okay.

So --.

Actually that's not true because we took an allowance of the additional [A], we'll have about $53 million of net operating loss.

Oh okay, so you guys can retain earnings up to 53 million then?

Correct.

In the TRS that's correct.

In the TRS.

But you guys are selling the TRS?

No.

We're not selling the TRS, the TRS is going to remain a part of the REIT.

It's an asset sale.

Okay, so you're selling the guts of the TRS, but you're keeping the body?

Correct.

Okay good.

To preserve the NOL.

Very smart.

So obviously one of the critical initiatives going forward is going to be how to best utilize that NOL, and there are rules about change of control and so forth that can limit its use.

But I've got to believe that there are some pretty people out there that are going to help us figure this out.

Okay good.

Going forward, do you have any thoughts on how you guys can kind of add value as part of being a passive RMBS type REIT?

Do you have any thoughts on strategy for that?

I think personally, just given our two backgrounds, Steve Mumma and I, mine is more of a credit oriented background so I would hope that we're going to be able to take advantage of mis-pricings that are occurring, especially now because of credit.

And I think Steve Mumma is extremely -- you know his track record is proven, he knows the short end of the market as well as anybody and he can trade that end of the market and do very well.

I mean that's really what's generating our earnings today is the things that Steve Mumma has done in the past year.

I think the key here is we had two objectives here, the first objective was to stabilize the book value and make sure that we put ourselves in a position that, when the market does change and the curve does get a shape to it that's not upside down, that we'll be able to take advantage of that.

And we felt the best thing to do that was to sell the Mortgage business to a company that has the proper scale that can take advantage of the Mortgage business, and then Dave and I would go back and refocus our energies on looking at opportunities in the marketplace.

And this would still stay focused in residential?

You guys wouldn't be doing maybe a little CMBS --?

I think the foreseeable future is --.

Right.

I mean we would not have the direct expertise for that, if we decided to go into other markets we would bring somebody in that would have that specific expertise.

Yes, I mean I look at what others did in '97/'98 just before the you-know-what hit the fan, and they kind of went into areas they didn't really know at the worst time and they just got destroyed.

So usually unless you really know what you're doing, it's dangerous to change strategies especially now.

Now I'm wondering because I'm thinking of like Luminent which kind of used to be a passive REIT and then they kind of shifted into doing a little more interesting stuff, and I'm wondering if you guys had any thoughts about --?

All they're doing is going into different types of mortgage credit, different types of mortgages basically.

I mean that's essentially what we're going to be doing to a certain extent is doing a mortgage credit play in combination with a spread play on the short end of the curve.

Okay.

So you guys will be kind of playing your specialty mortgage credit on top of a basic super passive strategy?

Correct.

Okay good.

And finally in terms of getting a little more capital to play with, have you guys considered issuing TRUPS or doing anything like that?

I know that right now the common is trading so low that you can't really raise equity that way.

We're continually pursuing all possibilities.

We currently have $45 million in TRUPS outstanding so we're probably maxed out on what it makes sense to have there.

But if we raise more common in the future, if the common stock rises up to book value or better, then that'll give us the opportunity to raise more TRUPS as well.

And part of our strategic alternative is looking at ways to bring in additional capital, either via a part as a significant investment in the company or other methods.

Okay.

And what's the current book value per share that you guys have at the moment?

It hasn't been released yet and it will be released with the K later this month.

The K later this month.

Okay well I look really forward to seeing this new turnaround in NTR, I look forward to hearing back from you guys next quarter.

Great, thank you.

Bye.

Our next question comes from Jim Ackor with RCB Capital.

Please go ahead.

Thank you, good morning guys.

So you're not going to release at this point what your existing book value at the year-end until you release the K, is that what I heard correctly?

Yes.

Okay and presumably once we know what the fourth quarter book value is there will be more changes to that book value depending on how the rest of the IndyMac transaction and first quarter earnings play out.

So I mean a critical part to this entire story right now, particularly if you're talking about where the stock is, which is currently at $2.47 cents, is trying to understand what pro forma book value should look like.

Can you comment broadly on what sort of changes outside of the impact of operations in the first quarter, what sort of changes we should expect to pro forma book value as a consequence of these transactions with IndyMac and Tribeca?

Well, to the first comment on book value is that it is substantially higher than our share price today.

As far as changes to book value in the first quarter, you can expect that obviously the asset sale is going to produce 12 to $14 million in additional book value and that will be reduced by EPDs that will incur from loans closed prior to the asset sale.

But that 12 to $14 million we're going to bring in, most of that will survive.

But actually the net fee, actually the price over the book value of the $8 million premium, that's really what would be accretive to book value.

But in terms of other charges whether it be to --.

Right.

It will not go straight all down to book value, but in our mind, if you look at our book value now, it should be stable going forward to rising.

Okay that sounds -- so there won't be -- no severance charges, Indy is going to incur a bunch of those severance charges, no charges to get out of any systems --?

There will be some charges incurred.

But still the net will be positive.

Versus the $8 million that you're getting on the premium?

Yes.

Right.

Okay.

Another question that I had, in terms of getting a little bit deeper into capturing the NOLs, keeping the taxable REIT subsidiary, presumably you're going to have to develop some of the business that generates revenue above and beyond your core spread business in order to recapture these tax loss carry forwards?

Correct.

And I mean do you have any broad stroke ideas in terms of what sorts of businesses or what you might be able to do in the TRS to do that?

We're reviewing several possibilities and our energies right now are focusing on getting the Indy transaction closed, we've been in discussions over the last two months with different business ideas.

Okay.

And last one for you, in terms of the spread which I think you said was 9 bips, can you give us the asset yield versus the cost of funds?

And can you comment on whether or not, I mean presumably at this point assuming the Fed doesn't go any further, your cost of funds is going to be pretty close to peaking?

That's right.

For the fourth quarter the approximate cost, the asset yield was about 555 with a cost of funds of around 546.

Then would you feel comfort with the statement that the cost of funds is not likely to go much higher from this level?

Yes.

Okay.

And I would also feel comfortable that going forward, given the resets of our portfolio coming, that the spread should start to improve from a combination of resets as well as the increase in portfolio size.

Part of the differently is your portfolio decreases going through this market, you have less investable assets, so the assets that are going away from you are typically the higher paying assets and what you're left with is lower paying assets.

So if you're not reinvesting those proceeds, your portfolio over time spread will continue to have pressure.

Okay great.

Thank you very much.

Our next question is from Jim Delisle with Cambridge Place.

Please proceed.

Good morning, guys.

How are you, Jim?

Hey the $8 million expected accretion does that take into account -- well stepping back just a second, I have you saying earlier there's $5 million in loan loss allowance already on the books?

Yes.

Okay.

And presumably you said any EPDs in the approved yet not funded line is going to be the responsibility of New York Mortgage Trust and will be then netted against that 12 to 14 million?

In not yet funded loans, any loans funded by IndyMac, they will own the associated EPD risk.

There is a pipeline of loans that will be funded prior to closing which we'll have to dispose of post-closing, which we will own the EPD risk on.

So presumably that $5 million allowance, some portion of that is allocatable against those loans.

No the reserve is set up at year-end to not cover the existing losses that we know of as well as potential losses, and we continue to reevaluate that.

Okay.

The loans we're talking about here, what do they look like?

I mean do you have a breakdown in terms of what percentage of these are firsts, seconds, FICO and Alt-doc and everything along those lines so we can try to get a handle as to what kind of EPD liability you may currently have?

Well if you look at the release we've got numbers about our production as a whole for the year.

So the pipeline is going to look substantially like that.

But how large would the gross number be?

Well it's really the Alt-A production as well as the EPDs are coming in, and the Alt-A production is about 25, 26% of our production.

And then it's a small subset of that 26% which is actually really at risk for EPDs which, as Dave mentioned, are the higher CLTV non-owner occupied and stated income type of product.

And what is the gross amount that New York Mortgage Trust will have funded and NTR will have funded and will sell themselves to take responsibility for the EPDs on?

Gross number -- 500 million, 700 million, something like that?

Are you talking about in '07?

Yes.

Before the deal closes.

It's essentially everything that closes in Q1.

And can you give me an estimate of that kind of a number?

Because once again what I'm just basically trying to get around is what is the gross amount of loans that you folks will have exposure to the EPDs on?

Right now, Jim, we don't typically give that kind of guidance.

I mean until we get closer to the transaction end and get through the transaction then we may deem it appropriate to go out and make some announcement.

But currently we have not made those types of announcements.

At this point we're expecting basically comparable performance of our loans in the first quarter as we saw in the fourth quarter.

Okay.

And what was your held for sale at the end of the fourth quarter?

We haven't released that information yet, Jim, that'll come out when the K is filed.

All right.

And in your efforts to capture your monetized and net operating loss, are there any ways of spinning that out?

Is there any way of monetizing that by selling it to somebody else?

Or does it have to be internally generated taxable income to be shielded?

No there's pretty strict rules about change of control, so we have to do it inside the TRS.

And you mentioned that when the dust clears and you're back to operating profitably with a smaller shop that your plans would be to build a portfolio and focus on that line of business.

An alternative use of the capital that's raised in IndyMac might be buying back shares, what would you say to that?

Yes it's certainly basically a function of where the shares are trading.

So we're not adverse to that all, there is a program approved and in place that would enable us to do that.

And so if the market things that the shares should be trading below where we think they should be trading, we'll probably buy them back.

And I guess the tough question is where do you think they should be trading?

Well it's basically a function of obviously where it's trading at the moment and what our future earnings look like.

So I can't answer that to be honest with you, but --.

If you look at the passive prime mortgage REITs, they're generally trading at an average of about book value and so that's what we will be post sale of the Mortgage business.

That's very, very helpful.

Thanks guys.

Thank you.

Our next comes from Larry Callahan with Huntleigh Securities.

Please go ahead.

Yes hi, I'll try to ask this one a different way.

Can you give a concrete example of REITs that have a TRS with an NOL that has actually done something to realize that NOL benefit?

I mean has it ever happened before?

I mean with someone who has no mortgage banking business in their TRS, can you give one example of how somebody recaptured that net operating loss?

There are none that I know of at this point, but this phenomenon of REITs disposing of their operating assets in the TRS is pretty new right now.

And so I think there'll be a number of companies in this situation and our goal is just to do all we can to optimize and find a way to utilize it.

There's no guarantee obviously that we will though.

Can you name three activities that would be allowable in order to --?

We can accumulate loans in the TRS for securitization, and while you're accumulating those loans they're earning a positive spread that's generating income.

Then you can do the securitizations, sell them out, and do another securitization.

So to the extent -- you can put any types of securities in there and generate a positive spread, it's just a matter of if it's not in the REIT then you would dividend it out from the TRS which you wouldn't be paying taxes into the REIT to dividend out to shareholders.

You just have limitations on the size of the TRS capital in relation to the overall company of the REIT, so any business we would operate in there would have to make sure that we were complying with all the tax REIT rules.

And those have to be real estate related activities or not?

To a percentage they have to, but they don't solely have to be.

Okay, thank you.

Thank you.

Our next question comes from Jim Fowler with JMP Asset Management.

Please go ahead.

Good morning, thank you for taking the call.

Do you have any longer dated exposure on an early payment default rather than a first payment default to any loans outside of your recent loans originated?

I mean typically EPD exposure is three months, but essentially if somebody digs in and finds some impropriety in the file, they can try to put it back at a later date.

There are also some instances where an investor to whom we've sold a loan will find a defect in that loan well beyond the three month EPD period, and they'll give us the opportunity to indemnify then in lieu of buying the loan back and so we've done that on occasion.

Those very rarely come back to you as losses, generally the investor will only ask you to indemnify the loan if it's performing just if there is a defect and the loan is performing, so you give you that option.

We have a small handful of those on the books, but we don't expect any material losses as a result.

Okay thank you very much.

Sure.

Our next question comes from Jay Weinstein with Oak Forest.

Please go ahead.

Hi, good morning, I apologize I missed some of your first 10 or 15 minutes if this has already been covered.

One quick clarification, the Lehman lease transaction, if I interpreted what you said correctly, that won't go into your GAAP book value immediately, correct?

As you have to kind of hold on to the lease liabilities?

That's correct.

It'll come in as cash and then it will be investable, so it will help us from an earnings standpoint.

But from a book value standpoint it's going to come in over time.

Right, it'll dribble in quite slowly I would imagine.

All right second question, your cost of funds I think you just referred to 540 something if I remember correctly, which is considerably than the other kind of pure passive REITs out there in the world, at least 25 basis points.

Is that just a function of your size or a function of the trouble you guys have been in with what's going on, on the origination side?

Can you comment on that?

It really is not reflective of any financial difficulties we've had, it's basically just a LIBOR based cost of funds and a lot of our liability hedges have rolled off at this point.

Right.

I mean as 33% of the portfolio is getting ready to reset a lot of the swaps have run off the books, so that's why our funding costs have gone up.

But I think what you'll see as the assets reset, the spread will start to rebalance itself and increase.

Right.

I understand the asset side will rebound, I guess I was just interested in the cost of funds side.

Is there any --?

Well for instance, when you put a [free] loan security on your books three years ago and you're going to hedge that security, you layer in swaps.

And as you get closer to the reset the swaps are rolling off and maturing.

So every time a swap matures your average cost of funds is going to start to go up.

So as you peak into the reset, traditionally you're cost of funds would go up.

Yes, in terms of where we've had a mismatch of about six months, so you've seen the liabilities have repriced and now the assets are going to start to reprice.

Right.

And I know this question has sort of been beat to death, in terms of the TRS and the tax laws, and carry forwards.

But in general you have to create a new business to put in there or essentially buy some sort of profitable business in that entity in order to generate -- but I understand it as far as the tax laws go, even you buy a bigger profitable company, you guys have to sort of be the survivor of --?

You have to be a controlling --.

Those are the two options, the third option also, as Steve mentioned, is we could always put earning assets in the TRS and simply accumulate tax-free earnings that way.

But of course that would limit our distributable REIT earnings if we were to do so.

Okay.

All right thank you, I appreciate it.

You're welcome.

[OPERATOR INSTRUCTIONS].

Our next question comes from Robert Grunzinger from Huntleigh.

Please go ahead.

Hi gentlemen, I'm just wondering if you could reiterate, I think you'd touched upon this but I want to clarify, did you say that you expected the reserves for EPD to increase in Q1?

No we didn't say that, we said that we would continue to monitor the reserve balances in the event that we would need to increase them.

Okay.

But we do expect to have some EPDs in the first quarter.

You do expect to have EPDs in the first quarter.

And then is there an associated charge to earnings then as well for Q1?

Well that would go back to the analysis against our reserves to see if we have sufficient reserves or have to take additional stuff.

At this time we typically do not give estimates for the forward-looking period.

Right well not an estimate, but do you expect a charge to be taken in the first quarter?

At this point I don't know.

Okay.

And then I guess going forward Q2 you're not certain as well?

You're not sure?

Correct.

Okay.

And that's all the questions I have.

Thank you very much.

Our next question is a follow-up from Donald Greco.

Please go ahead.

Hi, is it possible for you guys to push down something like an IO strip or some other cash generating thing into the TRS to start collecting some cash in there immediately?

Yes, we can put the securities into the TRS and generate some positive cash flow.

Is it also possible to trade out securities in there so you guys start pushing down the portfolio of the prime loans into the TRS and the TRS sells them for a gain?

When you start transferring securities between companies you introduce other tax issues.

But we're pursuing and evaluating many strategies to try to optimize this.

Yes okay.

And finally just in terms of going forward in the company's interest rate sensitivities, let's say that there was a 25 basis point cut in Fed funds tomorrow, how would that affect the company?

Positively.

Okay strongly positive, yes.

But you know the way we're positioned right now you would probably see an 18 to 20 basis point drop to the bottom line.

That might be something to post in the 10-K as interest rate sensitivity to show kind of how that --.

We do.

Okay.

All right good, I really look forward to seeing Q3 and look forward to seeing you then.

Thank you.

Great.

At this time there are no additional questions in the queue.

I would like to turn the call back over to management for any closing remarks they may have.

All right well thank you all for your questions and for your participation in this call.

And on that note we'll conclude the call today.

Ladies and gentlemen, this does conclude the New York Mortgage Trust fourth quarter and full year 2006 results conference call.

You may now disconnect and we thank you for using AT&T teleconferencing.