UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________
 
FORM 10-Q
______________
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)          
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2006
 
OR
 
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)        
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to               
 
Commission file number 001-32216
 
______________
 
NEW YORK MORTGAGE TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
47-0934168 
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
1301 Avenue of the Americas, New York, New York 10019
(Address of Principal Executive Office) (Zip Code)
 
(212) 634-9400
(Registrant’s Telephone Number, Including Area Code)
 
______________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filers” and “large accelerated filers” in Rule 12b-2 of the Exchange Act. (Check one.):
 
Large Accelerated Filer ¨
Accelerated Filer ý
Non-Accelerated Filer ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨   No ý
 
The number of shares of the registrant’s common stock, par value $.01 per share, outstanding on November 1, 2006 was 18,077,160.
 




NEW YORK MORTGAGE TRUST, INC.
 
FORM 10-Q
 
 
Page
   
Part I. Financial Information
  
Item 1. Consolidated Financial Statements (unaudited):
  
Consolidated Balance Sheets
3
Consolidated Statements of Operations
4
Consolidated Statements of Stockholders’ Equity
5
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Forward Looking Statement Effects
37
General
38
Strategic Overview
38
Description of Business
40
Known Material Trends and Commentary
41
Significance of Estimates and Critical Accounting Policies
43
Overview of Performance
45
Summary of Operations and Key Performance Measurements
45
Financial Highlights for the Third Quarter of 2006
47
Results of Operations and Financial Condition
60
Off-Balance Sheet Arrangements
65
Liquidity and Capital Resources
66
Inflation
68
Item 3. Quantitative and Qualitative Disclosures about Market Risk
68
Interest Rate Risk
69
Credit Spread Exposure
72
Fair Values
72
Item 4. Controls and Procedures
76
Part II. Other Information
  
Item 1. Legal Proceedings
77
Item 5. Other Information
77
Item 6. Exhibits
77
Signatures
79

2


PART I: FINANCIAL INFORMATION
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
2006
  
December 31,
2005
  
   
(dollar amounts in thousands)
  
   
(unaudited)
  
                        
  
ASSETS
  
 
  
 
  
Cash and cash equivalents
  
$
6,879
  
$
9,056
  
Restricted cash
    
1,979
    
5,468
  
Investment securities - available for sale
    
523,969
    
716,482
  
Due from loan purchasers
    
132,950
    
121,813
  
Escrow deposits - pending loan closings
    
1,622
    
1,434
  
Accounts and accrued interest receivable
    
9,256
    
14,866
  
Mortgage loans held for sale
    
109,197
    
108,271
  
Mortgage loans held in securitization trusts
    
628,625
    
776,610
  
Mortgage loans held for investment
    
—
    
4,060
  
Prepaid and other assets
    
27,118
    
16,505
  
Derivative assets
    
3,402
    
9,846
  
Property and equipment, net
    
6,838
    
6,882
  
Total Assets
  
$
1,451,835
  
$
1,791,293
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Liabilities:
              
Financing arrangements, portfolio investments
  
$
886,956
  
$
1,166,499
  
Financing arrangements, loans held for sale/for investment
    
208,285
    
225,186
  
Collateralized debt obligations
    
203,550
    
228,226
  
Due to loan purchasers
    
11,677
    
1,652
  
Accounts payable and accrued expenses
    
14,736
    
22,794
  
Subordinated debentures
    
45,000
    
45,000
  
Derivative liabilities
    
686
    
394
  
Other liabilities
    
202
    
584
  
Total liabilities
    
1,371,092
    
1,690,335
  
Commitments and Contingencies (Note 13)
              
Stockholders’ Equity:
              
Common stock, $0.01 par value, 400,000,000 shares authorized, 18,327,371 shares issued and 18,077,160 outstanding at September 30, 2006 and 18,258,221 shares issued and 17,984,843 outstanding at December 31, 2005
    
183
    
183
  
Additional paid-in capital
    
100,324
    
107,573
  
Accumulated other comprehensive (loss)/income
    
(5,570
)
  
1,910
  
Accumulated deficit
    
(14,194
)
  
(8,708
)
Total stockholders’ equity
    
80,743
    
100,958
  
Total Liabilities and Stockholders’ Equity
  
$
1,451,835
  
$
1,791,293
  
 
See notes to consolidated financial statements.
 
3

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
For the Nine Months Ended
September 30, 
  
For the Three Months Ended
September 30, 
  
   
2006 
  
2005 
  
2006 
  
2005 
  
   
(amounts in thousands, except per share data)
  
   
(unaudited)
  
Revenue:
                  
Interest income:
  
 
  
 
  
 
  
 
  
Investment securities and loans held in securitization trusts
 
$
50,050
  
$
40,523
  
$
16,998
  
$
13,442
  
Loans held for investment
    
—
    
5,388
    
—
    
1,783
  
Loans held for sale
    
12,155
    
10,573
    
3,880
    
4,473
  
Total interest income
    
62,205
    
56,484
    
20,878
    
19,698
  
Interest expense:
                        
Investment securities and loans held in securitization trusts
   
42,320
    
30,090
    
15,882
    
10,751
  
Loans held for investment
    
—
    
3,911
    
—
    
1,366
  
Loans held for sale
    
9,284
    
7,284
    
3,337
    
3,441
  
Subordinated debentures
    
2,656
    
1,095
    
877
    
601
  
Total interest expense
    
54,260
    
42,380
    
20,096
    
16,159
  
Net interest income
    
7,945
    
14,104
    
782
    
3,539
  
Other Income (Expense):
                        
Gain on sales of mortgage loans
    
14,362
    
21,634
    
4,311
    
8,985
  
Loan losses 
    
(4,077
)
  
—
    
(4,077
)
  
—
  
Brokered loan fees
    
8,672
    
7,181
    
2,402
    
2,647
  
Loss on sale of current period securitized loans
    
(747
)
  
—
    
—
    
—
  
(Loss) gain on sale of securities and related hedges
    
(529
)
  
2,207
    
440
    
1,286
  
Miscellaneous income
   
310
    
195
    
43
    
91
  
Total other income
   
17,991
    
31,217
    
3,119
    
13,009
  
Expenses:
                        
Salaries and benefits
    
17,720
    
23,875
    
5,378
    
7,302
  
Brokered loan expenses
    
6,609
    
5,689
    
1,674
    
1,483
  
Occupancy and equipment
    
3,871
    
4,981
    
1,256
    
1,265
  
Marketing and promotion
    
1,643
    
3,900
    
427
    
1,310
  
Data processing and communications
    
1,938
    
1,807
    
524
    
618
  
Office supplies and expenses
    
1,464
    
1,909
    
426
    
651
  
Professional fees
    
3,329
    
2,812
    
798
    
966
  
Travel and entertainment
    
409
    
707
    
126
    
261
  
Depreciation and amortization
    
1,625
    
1,069
    
539
    
302
  
Other
    
1,308
    
1,084
    
536
    
531
  
Total expenses
    
39,916
    
47,833
    
11,684
    
14,689
  
(Loss) Income Before Income Tax Benefit
    
(13,980
)
  
(2,512
)
  
(7,783
)
  
1,859
  
Income tax benefit
    
8,494
    
5,880
    
3,915
    
1,000
  
Net (Loss) Income
  
$
(5,486
)
$
3,368
  
$
(3,868
)
$
2,859
  
Basic (loss) income per share
  
$
(0.31
)
$
0.19
  
$
(0.21
)
$
0.16
  
Diluted (loss) income per share
  
$
(0.31
)
$
0.19
  
$
(0.21
)
$
0.16
  
Weighted average shares outstanding - basic
    
17,975
    
17,855
    
18,025
    
17,958
  
Weighted average shares outstanding - diluted
    
17,975
    
18,121
    
18,025
    
18,242
  
 
See notes to consolidated financial statements.
 
4
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 
   
For the Nine Months Ended September 30, 2006
  
   
Common
Stock
  
Additional
Paid-In
Capital
  
Stockholders’
Deficit
  
Accumulated
Other
Comprehensive
(Loss)/Income
  
Comprehensive
(Loss)/Income
  
Total
  
   
(dollar amounts in thousands)
  
   
(unaudited)
  
Balance, January 1, 2006 - Stockholders’ Equity
  
$
183
  
$
107,573
  
$
(8,708
)
$
1,910
    
—
  
$
100,958
  
Net loss
    
—
    
—
    
(5,486
)
  
—
  
$
(5,486
)
  
(5,486
)
Dividends declared
    
—
    
(7,679
)
  
—
    
—
    
—
    
(7,679
)
Repurchase of common stock
    
(1
)
  
(299
)
  
—
    
—
    
—
    
(300
)
Vested restricted stock
    
1
    
825
    
—
    
—
    
—
    
826
  
Vested performance shares
    
—
    
165
    
—
    
—
    
—
    
165
  
Forfeited performance shares
    
—
    
(258
)
  
—
    
—
    
—
    
(258
)
Vested stock options
    
—
    
25
    
—
    
—
    
—
    
25
  
Forfeited stock options
    
—
    
(28
)
  
—
    
—
    
—
    
(28
)
Decrease in net unrealized gain on available for sale securities
    
—
    
—
    
—
    
(854
)
  
(854
)
  
(854
)
Decrease in net unrealized gain on derivative instruments
    
—
    
—
    
—
    
(6,626
)
  
(6,626
)
  
(6,626
)
Comprehensive loss
    
—
    
—
    
—
    
—
  
$
(12,966
)
  
—
  
Balance, September 30, 2006 - Stockholders’ Equity
  
$
183
  
$
100,324
  
$
(14,194
)
$
(5,570
)
      
$
80,743
  
 
See notes to consolidated financial statements.
 
5
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  
  
For the Nine Months Ended
September 30,
  
   
2006
  
2005
  
           
   
(dollar amounts in thousands)
  
   
(unaudited)
  
Cash Flows from Operating Activities:
  
 
  
 
  
Net (loss) income
  
$
(5,486
)
$
3,368
  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
            
Depreciation and amortization
    
1,625
    
1,069
  
Amortization of premium on investment securities and mortgage loans
    
1,962
    
4,880
  
Loss on sale of current period securitized loans
    
747
    
—
  
Loss (gain) on sale of securities and related hedges
    
529
    
(2,207
)
Purchase of mortgage loans held for sale
    
(222,907
)
  
—
  
Origination of mortgage loans held for sale
    
(1,402,457
)
  
(1,723,917
)
Proceeds from sales of mortgage loans
    
1,621,438
    
1,689,574
  
Restricted stock compensation expense
    
734
    
1,823
  
Stock option grants - compensation expense
    
(3
)
  
34
  
Deferred tax benefit
    
(8,494
)
  
(5,880
)
Change in value of derivatives
    
110
    
(1,349
)
Loan losses
    
3,289
    
—
  
Minority interest expense
    
(30
)
  
—
  
(Increase) decrease in operating assets:
            
Due from loan purchasers
    
(11,137
)
  
(63,717
)
Escrow deposits - pending loan closings
    
(188
)
  
4,303
  
Accounts and accrued interest receivable
    
5,610
    
(473
)
Prepaid and other assets
    
(3,036
)
  
(793
)
Increase (decrease) in operating liabilities:
            
Due to loan purchasers
    
8,875
    
1,257
  
Accounts payable and accrued expenses
    
(6,802
)
  
(583
)
Other liabilities
    
(382
)
  
(16
)
Net cash used in operating activities
    
(16,003
)
  
(92,627
)
               
Cash Flows from Investing Activities:
            
Restricted cash
    
3,489
    
1,896
  
Purchase of investment securities
    
(388,398
)
  
(148,150
)
Purchase of mortgage loans held in securitization trusts
    
—
    
(167,874
)
Principal repayments received on mortgage loans held in securitization trusts
    
151,450
    
77,721
  
Proceeds from sale of investment securities
    
452,780
    
223,813
  
Origination of mortgage loans held for investment
    
—
    
(456,028
)
Principal paydown on investment securities
    
126,203
    
320,540
  
Payments received on loans held for investment
    
—
    
8,935
  
Purchases of property and equipment
    
(1,373
)
  
(2,724
)
Net cash provided by (used in) investing activities
    
344,151
    
(141,871
)

See notes to consolidated financial statements.
 
6
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
 
  
  
For the Nine Months Ended
September 30,
  
   
2006
  
2005
  
           
   
(dollar amounts in thousands)
  
   
(unaudited)
  
Cash Flows from Financing Activities:
            
Repurchase of common stock
    
(300
)
  
—
  
Change in financing arrangements, net
    
(321,120
)
  
206,618
  
Dividends paid
    
(8,947
)
  
(13,431
)
Issuance of subordinated debentures
    
—
    
45,000
  
Capital contributions from minority interest member
    
42
    
—
  
Net cash (used in) provided by financing activities
    
(330,325
)
  
238,187
  
               
Net (Decrease) Increase in Cash and Cash Equivalents
    
(2,177
)
  
3,689
  
Cash and Cash Equivalents - Beginning of Period
    
9,056
    
7,613
  
Cash and Cash Equivalents - End of Period
  
$
6,879
  
$
11,302
  
               
Supplemental Disclosure
            
Cash paid for interest
  
$
68,398
  
$
65,716
  
               
Non Cash Financing Activities
              
Dividends declared to be paid in subsequent period
  
$
2,566
  
$
3,826
  

See notes to consolidated financial statements.
 
7

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1.  
Summary of Significant Accounting Policies

Organization - New York Mortgage Trust, Inc. (“NYMT” or the “Company”) is a fully-integrated, self-advised, residential mortgage finance company formed as a Maryland corporation in September 2003. The Company earns net interest income from residential mortgage-backed securities and hybrid and adjustable-rate mortgage loans and securities originated through its wholly-owned subsidiary, The New York Mortgage Company, LLC (“NYMC”), or acquired from third parties. The Company also earns net interest income from its investment in and the securitization of certain adjustable rate mortgage loans that meet the Company’s investment criteria. The Company is licensed, or exempt from licensing, in 44 states and the District of Columbia, with 27 full-service offices and 23 satellite locations that are licensed or pending state license approval. NYMC originates a wide range of mortgage loans, with a primary focus on prime, residential mortgage loans.
 
The Company is organized and conducts its operations so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. As such, the Company will generally not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.
 
On January 9, 2004, the Company capitalized New York Mortgage Funding, LLC (“NYMF”) as a wholly-owned subsidiary of the Company. NYMF is a qualified REIT subsidiary, or (“QRS”), in which the Company accumulates mortgage loans that the Company intends to securitize.
 
In June 2006, operations began in the joint venture, Settlement Services of America, LLC (“SSA”), a Delaware limited liability company. SSA’s primary purpose is to operate and manage a title agency that performs core title agent services such as evaluating searches to determine issuability of title, clearing underwriting objections, issuance of title policies on behalf of title insurance companies and where customary, issue title commitments and conduct title searches. SSA is owned 80% by NYMC and 20% by Title Abstract Company of PA, a wholly owned subsidiary of Title Alliance, Ltd. Due to the Company's exercising control over the operations of SSA, their balances and operations have been fully consolidated in the accompanying consolidated financial statements and all intercompany accounts and transactions have been eliminated.
 
In August 2006, operations began in the joint venture, New England Settlement Services, LLC (“NESS”), a Delaware limited liability company. NESS’s primary purpose is to operate and manage a title agency that performs, among other functions, core title agent services, including the evaluation of searches to determine the insurability of title, the clearance of underwriting objections, the actual issuance of policies on behalf of title insurance companies and, where customary, the issuance of title commitments and the conducting of title searches. NESS is owned 55% by NYMC and 45% by SILMA, LLC, an affiliate of Liberty Title & Escrow Company. Due to the Company's exercising control over the operations of NESS, their balances and operations have been fully consolidated in the accompanying consolidated financial statements and all intercompany accounts and transactions have been eliminated.
 
As used herein, references to the “Company,” “NYMT,” “we,” “our” and “us” refer to New York Mortgage Trust, Inc., collectively with its subsidiaries.
 
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. As permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”), the financial statements contain certain condensed financial information and exclude certain footnote disclosures normally included in audited consolidated financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”). In the opinion of management, the accompanying financial statements contain all adjustments, including normal recurring accruals, necessary to fairly present the accompanying financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as amended. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006. Certain prior period amounts have been reclassified to conform to current period classifications, including the reclassification of $5.4 million and $1.8 million of Interest income - Investment securities and loans held in securitization trusts, for the nine and three months ended September 30, 2005 respectively, to Interest income - Loans held for investment. In addition, there was a reclassification of $3.9 million and $1.4 million of Interest expense - Investment securities and loans held in securitization trusts, for the nine and three months ended September 30, 2005 respectively, to Interest expense - Loans held for investments. All intercompany transactions and balances have been eliminated.
 
8
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1.  
Summary of Significant Accounting Policies - (continued)
 
Concurrent with the closing of the Company’s initial public offering (“IPO”), 100,000 of the 2,750,000 shares exchanged for the equity interests of NYMC, were placed in escrow through December 31, 2004 and were available to satisfy any indemnification claims the Company may have had against Steven B. Schnall, the Company’s Chairman, President and Co-Chief Executive Officer, Joseph V. Fierro, the Chief Operating Officer of NYMC, and each of their affiliates, as the contributors of NYMC, for losses incurred as a result of defaults on any residential mortgage loans originated by NYMC and closed prior to the completion of the IPO. As of December 31, 2004, the amount of escrowed shares was reduced by 47,680 shares, representing $493,000 for estimated losses on loans closed prior to the Company’s IPO. Furthermore, the contributors of NYMC amended the escrow agreement to extend the escrow period to December 31, 2005 for the remaining 52,320 shares. On or about December 31, 2005, the escrow period was extended for an additional year to December 31, 2006. During the three month period ended September 30, 2006 the Company concluded that all indemnification claims related to the escrowed shares are finally determined and that no additional losses were incurred by the Company as a result of defaults on any residential mortgage loans originated by NYMC and closed prior completion of the IPO and thereby concluded that no further indemnification was necessary. The remaining 52,320 shares were released from escrow and returned to the contributors.
 
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility and credit exposure. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market conditions may occur which could cause actual results to differ materially.
 
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.
 
Restricted Cash - Restricted cash is held by counterparties as collateral for hedging instruments and two letters of credit related to the Company’s lease of its corporate headquarters. In addition, the Company includes in restricted cash payments from prospective borrowers as required by certain States until a transaction is consummated.
 
Investment Securities Available for Sale - The Company’s investment securities are residential mortgage-backed securities comprised of Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”) and “AAA”-rated adjustable-rate securities, including adjustable-rate loans that have an initial fixed-rate period. Investment securities are classified as available for sale securities and are reported at fair value with unrealized gains and losses reported in other comprehensive income (“OCI”). Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in gain on sale of securities and related hedges. Purchase premiums or discounts on investment securities are accreted or amortized to interest income over the estimated life of the investment securities using the interest method. Investment securities may be subject to interest rate, credit and/or prepayment risk.
 
9
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
When the fair value of an available for sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security (e.g., whether the security will be sold prior to the recovery of fair value). Management considers at a minimum the following factors that, both individually or in combination, could indicate the decline to be “other-than-temporary:” 1) the length of time and extent to which the market value has been less than book value; 2) the financial condition and near-term prospects of the issuer; or 3) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. If, in management’s judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Even though no credit concerns exist with respect to an available for sale security, an other-than-temporary impairment may be evident if management determines that the Company does not have the intent and ability to hold an investment until a forecasted recovery of the value of the investment.
 
As of December 31, 2005, management concluded that the decline in value of certain of the available for sale securities was other-than-temporary based on the intent of the Company to potentially sell such securities rather than retain them for a time sufficient to allow for anticipated recovery in market value. Accordingly, the cost basis of those securities of $395.7 million was written down to fair value and an unrealized loss of $7.4 million was transferred from accumulated other comprehensive income as an impairment loss on investment securities during the year ended December 31, 2005. During the quarter ended March 31, 2006, these securities were sold, which resulted in an additional loss of approximately $1.0 million due to a decline in the value of such securities subsequent to the year end.
 
The Company recognizes interest income from its investments in subordinated interests (other than beneficial interests of high quality, sufficiently collateralized to ensure that the possibility of credit loss is remote, or that cannot contractually be prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment) in accordance with Emerging Issues Task Force Consensus 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” Accordingly, on a quarterly basis, when there are significant changes in estimated cash flows from the cash flows previously estimated (typically due to actual prepayment and credit loss experience), the Company calculates a revised yield based on the current cost of the investment and the revised cash flows. The revised yield is then applied prospectively to recognize interest income. If newly estimated cash flows are lower than the cash flows previously estimated on a present value basis (adjusted for cash receipts during the intervening period), the security is written down to fair value with the resulting charge being realized in income and a new cost basis is established.
 
Due from Loan Purchasers and Escrow Deposits - Pending Loan Closings - Amounts due from loan purchasers are a receivable for the principal and premium due to us for loans sold and shipped but for which payment has not yet been received at period end. Escrow deposits pending loan closing are advance cash fundings by us to escrow agents to be used to close loans within the next one to three business days.
 
Mortgage Loans Held for Sale - Mortgage loans held for sale represent originated mortgage loans held for sale to third party investors. The loans are initially recorded at cost based on the principal amount outstanding net of deferred direct origination costs and fees. The loans are subsequently carried at the lower of cost or market value. Market value is determined by examining outstanding commitments from investors or current investor yield requirements, calculated on an aggregate loan basis, less an estimate of the costs to close the loan, and the deferral of fees and points received, plus the deferral of direct origination costs. Gains or losses on sales are recognized at the time title transfers to the investor which is typically concurrent with the transfer of the loan files and related documentation and are based upon the difference between the sales proceeds from the final investor and the adjusted book value of the loan sold. At September 30, 2006, the Company incurred a charge of $1.7 million related to specific loans that have been deemed permanently impaired and have adjusted these loans to their respective fair values. (See Loan Losses below).
 
10
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1.  
Summary of Significant Accounting Policies - (continued)
 
Mortgage Loans Held in Securitization Trusts - Mortgage loans held in securitization trusts are certain ARM loans transferred to New York Mortgage Trust 2005-1, New York Mortgage Trust 2005-2 and New York Mortgage Trust 2005-3 that have been securitized into sequentially rated classes of beneficial interests. Mortgage loans held in securitization trusts are recorded at amortized cost, using the same accounting principles as those used for mortgage loans held for investment. Currently the Company has retained 100% of the securities issued by New York Mortgage Trust 2005-1 and the New York Mortgage Trust 2005-2 and the securities have been financed as a secured borrowing under repurchase agreements. For our third securitization, New York Mortgage Trust 2005-03, we sold investment grade securities to third parties, which are recorded as collateralized debt obligations on the accompanying consolidated balance sheet. For our fourth securitization, the Company sold residential mortgage loans of $277.4 million to New York Mortgage Trust 2006-1 in a securitization transaction structured as a sale under SFAS 140 on March 30, 2006.
 
Mortgage Loans Held for Investment - The Company may retain the adjustable-rate mortgage loans originated that meet specific investment criteria and portfolio requirements. Loans originated and retained in the Company’s portfolio are serviced through a subservicer. Servicing is the function primarily consisting of collecting monthly payments from mortgage borrowers, and disbursing those funds to the appropriate loan investors.
 
Mortgage loans held for investment are recorded net of deferred loan origination fees and associated direct costs and are stated at amortized cost. Net loan origination fees and associated direct mortgage loan origination costs are deferred and amortized over the life of the loan as an adjustment to yield. This amortization includes the effect of projected prepayments.
 
Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.
 
Mortgage Servicing Rights - When the Company sells loans in securitizations of residential mortgage loans, it may, depending on the structure of the securitization, capitalize mortgage servicing rights (“MSRs”) that are initially measured at fair value based on defined interest rate risk strata. When the Company sells certain loans and retains the servicing rights, it allocates the cost basis of the loans between the assets sold and the MSRs based on their relative fair values on the date of sale. Generally, MSRs result from certain loan securitizations structured as real estate mortgage investment conduits (“REMIC”).
 
The Company estimates the fair value of its MSRs based on the present value of future expected cash flows estimated using management’s best estimates of key assumptions, including prepayment speeds, forward yield curves, and discount rates commensurate with the risk involved. Periodic changes in fair value are recorded to income or expense for the period.
 
Mortgage servicing rights were created as a result of the securitization of $277.4 million of mortgage loans through New York Mortgage Trust 2006-1. The value of these servicing rights was $0.4 million at September 30, 2006 and is included as a component of “Prepaid and other assets” on the Company’s consolidated balance sheet.
 
Credit Risk and Allowance for Loan Losses - The Company limits its exposure to credit losses on its portfolio of residential adjustable-rate mortgage-backed securities by purchasing securities that are guaranteed by a government-sponsored or federally-chartered corporations (FNMA or FHLMC) (collectively “Agency Securities”) or that have a “AAA” investment grade rating by at least one of nationally recognized rating agencies, Standard & Poor’s, Inc., Fitch Ratings or Moody’s Investors Service, Inc. at the time of purchase.
 
11
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
The Company seeks to limit its exposure to credit losses on its portfolio of residential adjustable-rate mortgage loans held for investment (including mortgage loans held in the securitization trusts) by originating and investing in loans primarily to borrowers with strong credit profiles, which are evaluated by analyzing the borrower’s credit score (“FICO” is a credit score, ranging from 300 to 850, with 850 being the best score, based upon the credit evaluation methodology developed by Fair, Isaac and Company, a consulting firm specializing in creating credit evaluation models), employment, income and assets and related documentation, the amount of equity in and the value of the property securing the borrower’s loan, debt to income ratio, credit history, funds available for closing and post-closing liquidity.
 
The Company estimates an allowance for loan losses based on management’s assessment of probable credit losses in the Company’s investment portfolio of residential mortgage loans. Mortgage loans are collectively evaluated for impairment as the loans are homogeneous in nature. The allowance is based upon management’s assessment of various credit-related factors, including current economic conditions, the credit diversification of the portfolio, loan-to-value ratios, delinquency status, historical credit losses, purchased mortgage insurance and other factors deemed to warrant consideration. If the credit performance of mortgage loans held for investment deviates from expectations, the allowance for loan losses is adjusted to a level deemed appropriate by management to provide for estimated probable losses in the portfolio.
 
The allowance will be maintained through ongoing provisions charged to operating income and will be reduced by loans that are charged off. As of September 30, 2006 the allowance for loan losses was insignificant. Determining the allowance for loan losses is subjective in nature due to the estimation required.
 
Property and Equipment, Net - Property and equipment have lives ranging from three to ten years, and are stated at cost less accumulated depreciation and amortization. Depreciation is determined in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Leasehold improvements are amortized over the lesser of the life of the lease or service lives of the improvements using the straight-line method.
 
Financing Arrangements, Portfolio Investments - Portfolio investments are typically financed with repurchase agreements, a form of collateralized borrowing which is secured by the Company’s portfolio securities on the balance sheet. Such financings are recorded at their outstanding principal balance with any accrued interest due recorded as an accrued expense.
 
Financing Arrangements, Loans Held for Sale/for Investment - Loans held for sale or for investment are typically financed with warehouse lines that are collateralized by loans we originate or purchase from third parties. Such financings are recorded at their outstanding principal balance with any accrued interest due recorded as an accrued expense.
 
Collateralized Debt Obligations - Our CDOs are debt securities that are issued by the Company through an “on balance sheet” securitization and typically secured by ARM loans. For financial reporting purposes, the ARM loans and restricted cash held as collateral are recorded as assets of the Company and the CDOs are recorded as the Company’s debt. The transaction includes interest rate caps held by the securitization trust and recorded as an asset or liability of the Company.
 
Subordinated Debentures - Subordinated debentures are trust preferred securities that are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of the Company’s consolidated balance sheet.
 
12

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
Derivative Financial Instruments - The Company has developed risk management programs and processes, which include investments in derivative financial instruments designed to manage market risk associated with its mortgage banking and its mortgage-backed securities investment activities.
 
All derivative financial instruments are reported as either assets or liabilities in the consolidated balance sheet at fair value. The gains and losses associated with changes in the fair value of derivatives not designated as hedges are reported in current earnings. If the derivative is designated as a fair value hedge and is highly effective in achieving offsetting changes in the fair value of the asset or liability hedged, the recorded value of the hedged item is adjusted by its change in fair value attributable to the hedged risk. If the derivative is designated as a cash flow hedge, the effective portion of change in the fair value of the derivative is recorded in OCI and is recognized in the statement of operations when the hedged item affects earnings. The Company calculates the effectiveness of these hedges on an ongoing basis, and, to date, has calculated effectiveness of approximately 100%. Ineffective portions, if any, of changes in the fair value or cash flow hedges are recognized in earnings.
 
Risk Management - Derivative transactions are entered into by the Company solely for risk management purposes. The decision of whether or not an economic risk within a given transaction (or portion thereof) should be hedged for risk management purposes is made on a case-by-case basis, based on the risks involved and other factors as determined by senior management, including the financial impact on income, asset valuation and restrictions imposed by the Internal Revenue Code among others. In determining whether to hedge a risk, the Company may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All transactions undertaken to hedge certain market risks are entered into with a view towards minimizing the potential for economic losses that could be incurred by the Company. Under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), the Company is required to formally document its hedging strategy before it may elect to implement hedge accounting for qualifying derivatives. Accordingly, all qualifying derivatives are intended to qualify as fair value, or cash flow hedges, or free standing derivatives. To this end, terms of the hedges are matched closely to the terms of hedged items with the intention of minimizing ineffectiveness.
 
In the normal course of its mortgage loan origination business, the Company enters into contractual interest rate lock commitments to extend credit to finance residential mortgages. These commitments, which contain fixed expiration dates, become effective when eligible borrowers lock-in a specified interest rate within time frames established by the Company’s origination, credit and underwriting practices. Interest rate risk arises if interest rates change between the time of the lock-in of the rate by the borrower and the sale of the loan. Under SFAS No. 133, the interest rate lock commitments (“IRLCs”) are considered undesignated or free-standing derivatives. Accordingly, such IRLCs are recorded at fair value with changes in fair value recorded to current earnings. Mark to market adjustments on IRLCs are recorded from the inception of the interest rate lock through the date the underlying loan is funded. The fair value of the IRLCs is determined by the interest rate differential between the contracted loan rate and the currently available market rates as of the reporting date.
 
To mitigate the effect of the interest rate risk inherent in providing IRLCs from the lock-in date to the funding date of a loan, the Company generally enters into forward sale loan contracts (“FSLC”). The FSLCs in place prior to the funding of a loan are undesignated derivatives under SFAS No. 133 and are marked to market through current earnings.
 
Derivative instruments contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties with which it enters into contracts to banks, investment banks and certain private investors who meet established credit and capital guidelines. Management does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any loss due to counterparty default. These commitments and option contracts are considered in conjunction with the Company’s lower of cost or market valuation of its mortgage loans held for sale.
 
13
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
The Company uses other derivative instruments, including treasury, agency or mortgage-backed securities forward sale contracts which are also classified as free-standing, undesignated derivatives and thus are recorded at fair value with the changes in fair value recognized in current earnings.
 
Once a loan has been funded, the Company’s primary risk objective for its mortgage loans held for sale is to protect earnings from an unexpected charge due to a decline in value. The Company’s strategy is to engage in a risk management program involving the designation of FSLCs (the same FSLCs entered into at the time of rate lock) to hedge most of its mortgage loans held for sale. The FSLCs have been designated as qualifying hedges at the time that the loans are funded and the notional amount of the forward delivery contracts, along with the underlying rate and critical terms of the contracts, are equivalent to the unpaid principal amount of the mortgage loan being hedged. The FSLCs effectively fix the forward sales price and thereby offset interest rate and price risk to the Company. Accordingly, the Company evaluates this relationship at least quarterly and, at the time the loan is funded, classifies and accounts for the FSLCs as cash flow hedges.

 
14
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
Interest Rate Risk - The Company hedges the aggregate risk of interest rate fluctuations with respect to its borrowings, regardless of the form of such borrowings, which require payments based on a variable interest rate index. The Company generally intends to hedge only the risk related to changes in the benchmark interest rate (London Interbank Offered Rate (“LIBOR”) or a Treasury rate).
 
In order to reduce such risks, the Company enters into swap agreements whereby the Company receives floating rate payments in exchange for fixed rate payments, effectively converting the borrowing to a fixed rate. The Company also enters into cap agreements whereby, in exchange for a fee, the Company is reimbursed for interest paid in excess of a certain capped rate.
 
To qualify for cash flow hedge accounting, interest rate swaps and caps must meet certain criteria, including:
 
 
·
the items to be hedged expose the Company to interest rate risk; and
 
 
·
the interest rate swaps or caps are expected to be and continue to be highly effective in reducing the Company’s exposure to interest rate risk.
 
The fair values of the Company’s interest rate swap agreements and interest rate cap agreements are based on market values provided by dealers who are familiar with the terms of these instruments. Correlation and effectiveness are periodically assessed at least quarterly based upon a comparison of the relative changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged.
 
For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instruments are reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
 
With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps, will be recognized in current earnings.
 
Termination of Hedging Relationships - The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.
 
Additionally, the Company may elect to undesignate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes recorded in current earnings.
 
Other Comprehensive Income - Other comprehensive income is comprised primarily of net income (loss) from changes in value of the Company’s available for sale securities, and the impact of deferred gains or losses on changes in the fair value of derivative contracts hedging future cash flows.
 
Gain on Sale of Mortgage Loans - The Company recognizes gain on sale of loans sold to third parties as the difference between the sales price and the adjusted cost basis of the loans when title transfers. The adjusted cost basis of the loans includes the original principal amount adjusted for deferrals of origination and commitment fees received, net of direct loan origination costs paid.
 
15
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
Loan Origination Fees and Direct Origination Cost - The Company records loan fees, discount points and certain incremental direct origination costs as an adjustment of the cost of the loan and such amounts are included in gain on sales of loans when the loan is sold or as direct costs of loans that are brokered. Accordingly, salaries, compensation, benefits and commission costs have been reduced for the nine and three months ended September 30, 2006, by $20.3 million and $6.3 million respectively, as compared to $32.2 million and $10.8 million for the respective periods of 2005, because such amounts are considered incremental direct loan origination costs.
 
Brokered Loan Fees and Expenses - The Company records commissions associated with brokered loans when such loans are closed with the borrower. Costs associated with brokered loans are expensed when incurred.
 
Loan Commitment Fees - Mortgage loans held for sale: fees received for the funding of mortgage loans to borrowers at pre-set conditions are deferred and recognized as of the date at which the loan is sold. Mortgage loans held for investment: such fees are deferred and recognized as interest income over the life of the loan based on the effective yield method.
 
Loan Losses - Generally loan losses arise from non-performance of loans previously sold to third parties or held in securitization trusts. During the three and nine months ended September 30, 2006, the Company recognized loan losses of $4.1 million.  Of this amount, $2.1 million in permanent impairment charges were recorded, consisting of $1.7 million in Mortgage Loans Held for Sale and $0.4 million in other loans carried in Prepaid and other assets. This write down of specific loans to fair value is reflected in the Company’s balance sheet at September 30, 2006.  The Company also recorded a charge of $1.2 million for interest, premium recapture, fees and contingencies related to loan repurchases. Additionally, the Company took a loan loss charge of $0.8 million for repurchased loans that were sold during the period.
 
Employee Benefit Plans - The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Plan, participating employees may defer up to 15% of their pre-tax earnings, subject to the annual Internal Revenue Code contribution limit. The Company matches contributions up to a maximum of 25% of the first 5% of eligible compensation. Employees vest immediately in their contribution and vest in the Company’s contribution at a rate of 25% after two full years and then an incremental 25% per full year of service until fully vested at 100% after five full years of service. The Company’s total contributions to the Plan for the nine and three months ended September 30, 2006, were $0.3 million and $0.1 million respectively, as compared to $0.3 million and $0.1 million for the respective periods of 2005.
 
Stock Based Compensation - Until January 1, 2006, the Company followed the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” (“SFAS No. 148”). The provisions of SFAS No. 123 allow companies either to expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company, since its inception, has elected not to apply APB No. 25 in accounting for its stock option incentive plans and has expensed stock based compensation in accordance with SFAS No. 123.
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,” (“SFAS No. 123R”) which requires all companies to measure compensation costs for all share-based payments, including employee stock options, at fair value. The Company adopted SFAS No. 123(R) January 1, 2006. The adoption of SFAS No. 123(R) did not have a material impact on the Company’s financial statements.
 
Marketing and Promotion - The Company charges the costs of marketing, promotion and advertising to expense in the period incurred.
 
16

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
Income Taxes - The Company operates so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders’ of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. Distribution of the remaining balance may extend until timely filing of the Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.
 
The Company’s QRS is subject to federal and state income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base upon the change in tax status. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Earnings Per Share - Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
 
New Accounting Pronouncements - In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective in fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of adopting SFAS 157 on the Company’s financial statements.
 
In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 is effective in fiscal years beginning after December 15, 2008. The Company expects there will be no impact of adopting SFAS 158 on the Company’s financial statements.
 
In September 2006, the SEC released Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 permits the Company to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended. The Company is currently assessing the impact of adopting SAB 108 on the Company’s financial statements.
 
17
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
1. Summary of Significant Accounting Policies - (continued)
 
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management believes FIN 48 will have no impact on the Company’s financial statements.
 
In March 2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140.” Effective at the beginning of the first quarter of 2006, the Company early adopted the newly issued statement and elected the fair value option to subsequently measure its mortgage servicing rights (“MSRs”). Under the fair value option, all changes in the fair value of MSRs are reported in the statement of operations. The initial implementation of SFAS 156 did not have a material impact on the Company’s financial statements.
 
In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid Financial Instruments". Among other things, FAS 155: (i) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS 133; (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (v) amends FAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year beginning after September 15, 2006.
 
On September 25, 2006, the FASB met and determined to propose a scope exception under FAS 155 for securitized interests that only contain an embedded derivative that is tied to the prepayment risk of the underlying pre-payable financial assets, and for which the investor does not control the right to accelerate the settlement. If a securitized interest contains any other embedded derivative (for example, an inverse floater), then it would be subject to the bifurcation tests in FAS 133, as would securities purchased at a significant premium. The FASB plans to: (i) expose the proposed guidance for a 30-day comment period in the form of a FAS 133 Derivatives Implementation Issue in early November; (ii) re-deliberate the issue in December 2006 following the completion of the 30-day comment period; and (iii) issue their final position in early 2007.
 
The Company does not expect that the January 1, 2007 anticipated adoption of FAS 155 will have a material impact. However, to the extent that certain of the Company's future investments in securitized financial assets do not meet the scope exception ultimately adopted by the FASB, the Company's future results of operations may exhibit volatility as certain of its future investments may be marked to market value in their entirety through the income statement. Under the current accounting rules, changes in the market value of the Company's investment securities are made through other comprehensive income, a component of stockholders' equity.
 
2. Investment Securities Available for Sale
 
Investment securities available for sale consisted of the following as of September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
 
   
September 30, 2006
  
December 31, 2005
  
             
Amortized cost
  
$
528,923
  
$
720,583
  
Gross unrealized gains
    
664
    
1
  
Gross unrealized losses                                              
    
(5,618
)
  
(4,102
)
Fair value
  
$
523,969
 
$
716,482
  
 
The amortized cost balance at December 31, 2005 included approximately $388.3 million of certain lower-yielding mortgage agency securities (with rate resets of less than two years) that the Company had concluded it no longer had the intent to hold until their values recovered. Upon such determination, the Company recorded an unrealized impairment loss of $7.4 million for the three months ended December 31, 2005. During the first quarter of 2006, all of such designated securities were sold at an additional loss of $1.0 million.
 
18
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
 
2.  
Investment Securities Available for Sale - (continued)
 
None of the remaining securities with unrealized losses have been deemed to be other-than-temporarily impaired. The Company has the intent and believes it has the ability to hold such investment securities until recovery of their amortized cost. Substantially all of the Company’s investment securities available for sale are pledged as collateral for borrowings under financing arrangements (Note 9).
 
The following table sets forth the stated reset periods and weighted average yields of our investment securities at September 30, 2006 (dollar amounts in thousands):
 
   
Less than 6 Months
  
More than 6 Months
to 24 Months
  
More than 24 Months
to 60 Months
  
Total
  
                                                       
  
Carrying
Value
  
Weighted
Average
Yield
  
Carrying
Value
  
Weighted
Average
Yield
  
Carrying
Value
  
Weighted
Average
Yield
  
Carrying
Value
  
Weighted
Average
Yield
  
 
                                  
Agency REMIC CMO Floating Rate
  
$
178,991
    
6.56
%
$
—
    
—
 
$
—
    
—
  
$
178,991
    
6.56
%
Private Label Floaters
    
27,500
    
6.28
%
  
—
    
—
    
—
    
—
    
27,500
    
6.28
%
Private Label ARMs
   
—
    
—
    
43,703
    
6.45
%
  
249,534
    
6.05
%
  
293,237
    
6.11
%
NYMT Retained Securities
    
6,022
    
7.15
%
  
—
    
—
    
18,219
    
6.93
%
  
24,241
    
6.99
%
Total/Weighted Average
  
$
212,513
    
6.54
%
$
43,703
    
6.45
%
$
267,753
    
6.12
%
$
523,969
    
6.32
%
 
The following table sets forth the stated reset periods and weighted average yields of our investment securities at December 31, 2005 (dollar amounts in thousands):
 
                                                   
  
Less than
6 Months
  
More than 6 Months
To 24 Months
  
More than 24 Months
To 60 Months
  
Total
  
 
  
Carrying
Value
  
Weighted
Average
Yield
  
Carrying
Value
  
Weighted
Average
Yield
  
Carrying
Value
  
Weighted
Average
Yield
  
Carrying
Value
  
Weighted
Average
Yield
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Agency REMIC CMO Floating Rate
  
$
13,535
    
5.45
%
$
—
    
—
 
$
—
    
—
  
$
13,535
    
5.45
%
FHLMC Agency ARMs
    
—
    
—
    
91,217
    
3.82
%
  
—
    
—
    
91,217
    
3.82
%
FNMA Agency ARMs
    
—
    
—
    
297,048
    
3.91
%
  
—
    
—
    
297,048
    
3.91
%
Private Label ARMs
    
—
    
—
    
57,605
    
4.22
%
  
257,077
    
4.57
%
  
314,682
    
4.51
%
Total/Weighted Average
  
$
13,535
    
5.45
%
$
445,870
    
3.93
%
$
257,077
    
4.57
%
$
716,482
    
4.19
%
 
The following tables presents the Company’s investment securities available for sale in an unrealized loss position, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
 
19
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
 
  
September 30, 2006
  
 
  
Less than 12 Months
  
12 Months or More
  
Total
  
 
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
                                                                              
  
 
  
 
  
 
  
 
  
 
  
 
  
Agency REMIC CMO Floating Rate
  
$
64,986
  
$
180
 
$
7,969
  
$
2
 
$
72,955
  
$
182
  
Private Label Floaters
    
3,969
    
41
   
—
    
—
   
3,969
    
41
 
Private Label ARMs
    
—
    
—
   
302,421
    
5,306
   
302,421
    
5,306
 
NYMT Retained Securities
    
8,294
    
89
    
—
    
—
    
8,294
    
89
  
Total
  
$
77,249
  
$
310
 
$
310,390
  
$
5,308
 
$
387,639
  
$
5,618
  

 
  
December 31, 2005
  
                                                                                                
  
Less than 12 Months
  
12 Months or More
  
Total
  
 
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
Fair
Value
  
Gross
Unrealized
Losses
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Agency REMIC CMO Floating Rate
  
$
11,761
  
$
19
 
$
—
  
$
—
  
$
11,761
  
$
19
 
Private Label ARMs
    
48,642
    
203
   
270,124
    
3,880
   
318,766
    
4,083
 
Total
  
$
60,403
  
$
222
 
$
270,124
  
$
3,880
 
$
330,527
  
$
4,102
 
 
3. Mortgage Loans Held for Sale
 
Mortgage loans held for sale consisted of the following as of September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
 
   
September 30, 2006
  
December 31, 2005
  
             
Mortgage loans principal amount                                              
  
$
110,804
  
$
108,244
  
Impairment adjustment
    
(1,709
)
  
—
  
Deferred origination costs - net
    
102
    
27
  
Mortgage loans held for sale
  
$
109,197
  
$
108,271
  
 
Substantially all of the Company’s mortgage loans held for sale are pledged as collateral for borrowings under financing arrangements (Note 10).
 
4. Mortgage Loans Held in Securitization Trusts
 
Mortgage loans held in securitization trusts consisted of the following as of September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
 
   
September 30, 2006
  
December 31, 2005
  
 
  
 
  
  
  
Mortgage loans principal amount
  
$
624,528
  
$
771,451
  
Deferred origination costs - net
    
4,097
    
5,159
  
Total mortgage loans held in securitization trusts                 
  
$
628,625
  
$
776,610
  
 
20

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
4. Mortgage Loans Held in Securitization Trusts - (continued)
 
Substantially all of the Company’s mortgage loans held in securitization trusts are pledged as collateral for borrowings under financing arrangements (Note 9) or for the collateralized debt obligation (Note 11).
 
As of September 30, 2006, the Company had seven delinquent loans totaling $6.4 million categorized as mortgage loans held in securitization trusts. The table below shows delinquencies in our loan portfolio as of September 30, 2006 (dollar amounts in thousands):
 
Days Late
  
Number of
Delinquent
Loans
  
Total
Dollar
Amount
  
% of Loan
Portfolio
  
                  
30-60
    
3
  
$
3,686
    
0.59
%
61-90                                                                                   
    
1
    
193
    
0.03
%
90+
    
3
    
2,569
    
0.41
%
Totals
    
7
  
$
6,448
        
 
As of December 31, 2005, the Company had four delinquent loans totaling $2.0 million categorized as Mortgage loans held in securitization trusts. The table below shows delinquencies in our loan portfolio as of December 31, 2005 (dollar amounts in thousands):
 
Days Late
  
Number of
Delinquent
Loans
  
Total
Dollar
Amount
  
% of Loan
Portfolio
  
                  
30-60
    
1
  
$
193
    
0.02
%
61-90                                                                                   
    
—
    
—
    
—
  
90+
    
3
    
1,771
    
0.23
%
Totals
    
4
  
$
1,964
        
 
5. Mortgage Loans Held for Investment
 
The Company had no mortgage loans held for investment at September 30, 2006 and at December 31, 2005 mortgage loans held for investment consisted of the following (dollar amounts in thousands):
 
   
December 31, 2005
  
        
Mortgage loans principal amount
  
$
4,054
  
Deferred origination costs - net
    
6
  
Total mortgage loans held for investment                                                       
  
$
4,060
  
 
All of the Company’s mortgage loans held for investment at December 31, 2005 were sold during the first quarter of 2006, with a loss of $0.7 million recognized at the time of sale.
 
Substantially all of the Company’s mortgage loans held for investment were pledged as collateral for borrowings under financing arrangements at December 31, 2005 (Note 9).
 
21
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
6. Sale of Mortgage Loans Through Securitization
 
On March 30, 2006, the Company sold residential mortgage loans to New York Mortgage Trust 2006-1 in a securitization transaction structured as a sale under SFAS 140. In this securitization, the Company retained servicing responsibilities on approximately $66.2 million of mortgage loans and subordinated interests. The Company receives annual servicing fees of approximately 0.21% of the outstanding balance of mortgage loans and rights to future cash flows arising after the senior investors in the securitization trust have received their stated return. The investors and the securitization trust have no recourse to the Company’s other assets. The Company continues to hold the subordinate interests of the 2006-1 securitization. Their value is subject to credit, prepayment and interest rate risks on the transferred financial assets. The Company recognized a pre-tax loss of $0.7 million on this securitization of residential mortgage loans.
 
22
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
7. Property and Equipment - Net
 
Property and equipment consisted of the following as of September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
 
 
     
September 30, 2006
     
December 31, 2005
 
               
Office and computer equipment
 
$
7,715
 
$
6,292
 
Furniture and fixtures
 
 
2,201
 
 
2,306
 
Leasehold improvements
 
 
1,491
 
 
1,429
 
Total premises and equipment
 
 
11,407
 
 
10,027
 
Less: accumulated depreciation and amortization
 
 
(4,569
)
 
(3,145
)
Property and equipment - net
 
$
6,838
 
$
6,882
 
 
8. Derivative Instruments and Hedging Activities
 
The Company enters into derivatives to manage its interest rate and market risk exposure associated with its mortgage banking and its mortgage-backed securities investment activities. In the normal course of its mortgage loan origination business, the Company enters into contractual IRLCs to extend credit to finance residential mortgages. To mitigate the effect of the interest rate risk inherent in providing IRLCs from the lock-in date to the funding date of a loan, the Company generally enters into FSLCs. With regard to the Company’s mortgage-backed securities investment activities, the Company uses interest rate swaps and caps to mitigate the effects of major interest rate changes on net investment spread.
 
The following table summarizes the estimated fair value of derivative assets and liabilities as of September 30, 2006 and December 31, 2005 (dollar amounts in thousands):
 
   
September 30, 2006
  
December 31, 2005
  
           
Derivative Assets:
  
 
  
 
  
Interest rate caps
  
$
2,179
  
$
3,340
  
Interest rate swaps
    
717
    
6,383
  
Interest rate lock commitments - loan commitments
    
136
    
123
  
Interest rate lock commitments - mortgage loans held for sale
    
370
    
—
  
Total derivative assets
  
$
3,402
  
$
9,846
  
Derivative Liabilities:
              
Forward loan sale contracts - loan commitments
    
(71
)
  
(38
)
Forward loan sale contracts - mortgage loans held for sale
    
(130
)
  
(18
)
Forward loan sale contracts - TBA securities
    
(485
)
  
(324
)
Interest rate lock commitments - mortgage loans held for sale
    
—
    
(14
)
Total derivative liabilities
  
$
(686
)
$
(394
)
 
The notional amounts of the Company’s interest rate swaps, interest rate caps and forward loan sales contracts as of September 30, 2006 were $285.0 million, $1.6 billion and $176.5 million, respectively.
 
The notional amounts of the Company’s interest rate swaps, interest rate caps and forward loan sales contracts as of December 31, 2005 were $645.0 million, $1.9 billion and $201.8 million, respectively.
 
The Company estimates that over the next twelve months, approximately $1.8 million of the net unrealized losses on the interest rate swaps will be reclassified from accumulated OCI into earnings.
 
23
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
9. Financing Arrangements, Portfolio Investments
 
The Company has entered into repurchase agreements with third party financial institutions to finance its residential mortgage-backed securities and mortgage loans held in the securitization trusts. The repurchase agreements are short-term borrowings that bear interest rates based on a spread to LIBOR, and are secured by the residential mortgage-backed securities and mortgage loans held in the securitization trusts which they finance. At September 30, 2006, the Company had repurchase agreements with an outstanding balance of $0.9 billion and a weighted average interest rate of 5.34%. As of December 31, 2005, the Company had repurchase agreements with an outstanding balance of $1.2 billion and a weighted average interest rate of 4.37%. At September 30, 2006 and December 31, 2005, securities and mortgage loans pledged as collateral for repurchase agreements had estimated fair values of $0.9 billion and $1.2 billion, respectively. As of September 30, 2006 all of the repurchase agreements were due to mature within 25 days, with weighted average days to maturity equal to 18 days. The Company has $5.3 billion available to it in commitments to provide financings through these repurchase agreements with 23 different counterparties.
 
The following table summarizes outstanding repurchase agreement borrowings secured by portfolio investments as of September 30, 2006 and December 31, 2005 (dollars amounts in thousands):
 
Repurchase Agreements by Counterparty
 
Counterparty Name
  
September 30, 2006
  
December 31, 2005
  
                                                                                                                   
            
Barclays Bank
  
$
22,000
  
$
—
  
Citigroup Global Markets Inc.
    
—
   
200,000
 
Countrywide Securities Corporation
    
184,101
   
109,632
 
Credit Suisse First Boston LLC
    
—
   
148,131
 
Deutsche Bank Securities Inc.
    
—
    
205,233
 
HSBC
    
—
    
163,781
 
J.P. Morgan Securities Inc.
    
37,521
   
37,481
 
Merrill Lynch Government Securities Inc.
    
124,859
    
—
  
Nomura Securities International, Inc.
    
160,088
    
—
  
WaMu Capital Corp
    
95,823
   
158,457
 
West LB
    
262,564
   
143,784
 
Total Financing Arrangements, Portfolio Investments
  
$
886,956
  
$
1,166,499
  
 
10. Financing Arrangements, Mortgage Loans Held for Sale or Investment
 
Financing arrangements secured by mortgage loans held for sale or for investment consisted of the following as of September 30, 2006, and December 31, 2005 (dollar amounts in thousands):
 
   
September 30, 2006
  
             
December 31, 2005
  
               
$250 million master repurchase agreement with Greenwich Capital Financial Products, Inc., expiring on December 4, 2006 bearing interest at one-month LIBOR plus spreads from 0.75% to 1.25% depending on collateral (5.14% at December 31, 2005). Principal repayments are required 120 days from the funding date.(a)
  
$
—
  
$
81,577
  
$200 million master repurchase agreement with CSFB expiring on March 30, 2007 bearing interest at daily LIBOR plus spreads from 0.75% to 2.0% depending on collateral (6.31% at September 30, 2006 and 5.28% at December 31, 2005). Principal repayments are required 90 days from the funding date.
    
121,835
    
143,609
  
$300 million master repurchase agreement with Deutsche Bank Structured Products, Inc. expiring on December 13, 2006 bearing interest at 1 month LIBOR plus spreads from .625% to 1.25% depending on collateral (6.0% at September 30, 2006). Principal payments are due 120 days from the repurchase date.
    
86,450
    
—
  
   
$
208,285
  
$
225,186
  
 
24
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
10. Financing Arrangements, Mortgage Loans Held for Sale or Investment - (continued)
 
——————
(a)
This credit facility, with Greenwich Capital Financial Products, Inc., requires the Company to transfer specific collateral to the lender under repurchase agreements; however, due to the rate of turnover of the collateral by the Company, the counterparty has not taken title to or recorded their interest in any of the collateral transferred. Interest is paid to the counterparty based on the amount of outstanding borrowings and on the terms provided.
 
The 30 day LIBOR rate was 5.32% at September 30, 2006.
 
The lines of credit are secured by all of the mortgage loans held by the Company, except for the loans held in securitization trusts. The lines contain various covenants pertaining to, among other things, maintenance of certain amounts of net worth, periodic income thresholds and working capital. As of September 30, 2006, the Company was in compliance with all covenants with the exception of the net income covenants on all facilities and waivers have been obtained from these institutions. As these annual agreements are negotiated for renewal, these covenants may be further modified. The agreements are each renewable annually, but are not committed, meaning that the counterparties to the agreements may withdraw access to the credit facilities at any time.
 
11. Collateralized Debt Obligations
 
The Company’s CDOs are secured by ARM loans pledged as collateral. The ARM loans are recorded as an asset of the Company and the CDOs are recorded as the Company’s debt. The CDO transaction includes an amortizing interest rate cap contract with a notional amount of $230.6 million as of December 31, 2005 and a notional amount of $198.4 million as of September 30, 2006, which is recorded as an asset of the Company. The interest rate cap limits the interest rate exposure on these transactions. As of September 30, 2006 and December 31, 2005, the Company had CDOs outstanding of $203.6 million and $228.2 million, respectively. As of September 30, 2006 and December 31, 2005 the current weighted average interest rate on these CDOs was 5.70% and 4.74%, respectively. The CDOs are collateralized by ARM loans with a principal balance of $210.8 million and $235.0 million at September 30, 2006 and December 31, 2005, respectively.
 
12. Subordinated Debentures
 
On September 1, 2005, the Company closed a private placement of $20.0 million of trust preferred securities to Taberna Preferred Funding II, Ltd., a pooled investment vehicle. The securities were issued by NYM Preferred Trust II and are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities have a fixed interest rate equal to 8.35% up to and including July 30, 2010, at which point the interest rate is converted to a floating rate equal to one-month LIBOR plus 3.95% until maturity. The securities mature on October 30, 2035 and may be called at par by the Company any time after October 30, 2010. In accordance with the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the issued preferred stock of NYM Preferred Trust II has been classified as subordinated debentures in the liability section of the Company’s consolidated balance sheet.
 
25

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
On March 15, 2005, the Company closed a private placement of $25.0 million of trust preferred securities to Taberna Preferred Funding I, Ltd., a pooled investment vehicle. The securities were issued by NYM Preferred Trust I and are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities have a floating interest rate equal to three-month LIBOR plus 3.75%, resetting quarterly (9.12% at September 30, 2006). The securities mature on March 15, 2035 and may be called at par by the Company any time after March 15, 2010. NYMC entered into an interest rate cap agreement to limit the maximum interest rate cost of the trust preferred securities to 7.5%. The term of the interest rate cap agreement is five years and resets quarterly in conjunction with the reset periods of the trust preferred securities. The interest rate cap agreement is accounted for as a cash flow hedge transaction in accordance with SFAS No.133. In accordance with the guidelines of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, the issued preferred stock of NYM Preferred Trust I has been classified as subordinated debentures in the liability section of the Company’s consolidated balance sheet.
 
 
26
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
13. Commitments and Contingencies
 
Loans Sold to Investors - Generally, the Company is not exposed to significant credit risk on its loans sold to investors. In the normal course of business, the Company is obligated to repurchase loans which do not meet certain terms set by investors. Such loans are then generally repackaged and sold to other investors. At September 30, 2006 the Company recorded a $0.6 million charge for contingencies related to potential loan repurchases.
 
Loans Funding and Delivery Commitments - At September 30, 2006 and December 31, 2005 the Company had commitments to fund loans with agreed-upon rates totaling $258.4 million and $238.4 million, respectively. The Company hedges the interest rate risk of such commitments and the recorded mortgage loans held for sale balances primarily with FSLCs, which totaled $176.5 million and $201.8 million at September 30, 2006 and December 31, 2005, respectively. The remaining commitments to fund loans with agreed-upon rates are anticipated to be sold through optional delivery contract investor programs. The Company does not anticipate any material losses from such sales.
 
Net Worth Requirements - NYMC is required to maintain certain specified levels of minimum net worth to maintain its approved status with FannieMae (“FNMA”), Freddie Mac (FHLMC”), Housing and Urban Development (“HUD”) and other investors. As of September 30, 2006 NYMC was in compliance with all minimum net worth requirements.
 
Outstanding Litigation - The Company is involved in litigation arising in the normal course of business. Although the amount of any ultimate liability arising from these matters cannot presently be determined, the Company does not anticipate that any such liability will have a material effect on its consolidated financial statements.
 
Leases - The Company leases its corporate offices and certain retail facilities and equipment under lease agreements expiring at various dates through 2011. All such leases are accounted for as operating leases. Total rental expense for property and equipment amounted to $3.9 million and $1.3 million for the nine and three months ended September 30, 2006, respectively, and $5.0 million and $1.3 million for the comparable periods of 2005. In March 2005, the Company entered into a sub-lease for its former headquarters space at 304 Park Avenue in New York. The sub-lease tenant has contractual terms for less than the Company’s remaining contractual obligation. This transaction was completed in late March 2005. Accordingly, during the first quarter of 2005, the Company recognized a charge of $0.8 million to earnings.
 
Letters of Credit - NYMC maintains a letter of credit in the amount of $100,000 in lieu of a cash security deposit for an office lease dated June 1998 for the Company’s former headquarters located at 304 Park Avenue South in New York City. The sole beneficiary of this letter of credit is the owner of the building, 304 Park Avenue South LLC. This letter of credit is secured by cash deposited in a bank account maintained at JP Morgan Chase Bank, N.A.
 
Subsequent to the move to a new headquarters location in New York City in July 2003, in lieu of a cash security deposit for the office lease, we entered into an irrevocable transferable letter of credit in the amount of $313,000 with PricewaterhouseCoopers, LLP (sublandlord), as beneficiary. This letter of credit is secured by cash deposited in a bank account maintained at HSBC bank.
 
On August 1, 2006, by payment of $450,000, the Company was relieved of all obligations relating to the irrevocable standby letter of credit in the same amount for the benefit of CCC Atlantic, L.L.C.; the landlord of the Company’s leased facility at 500 Burton Avenue, Northfield, New Jersey. The letter of credit served as security for leased office property, initially occupied by employees of our branches doing business as Ivy League Mortgage, L.L.C. Pursuant to its terms, the letter of credit was initially secured by cash held by the Company in the amount of $500,000 and was reduced to $450,000 on April 1, 2006.
 
27

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
14. Related Party Transactions
 
Steven B. Schnall owns a 48% membership interest and Joseph V. Fierro owns a 12% membership interest in Centurion Abstract, LLC (“Centurion”), which provides title insurance brokerage services for certain title insurance providers. From time to time, NYMC refers its mortgage loan borrowers to Centurion for assistance in obtaining title insurance in connection with their mortgage loans, although the borrowers have no obligation to utilize Centurion’s services. When NYMC’s borrowers elect to utilize Centurion’s services to obtain title insurance, Centurion collects various fees and a portion of the title insurance premium paid by the borrower for its title insurance. Centurion received $13,323 in fees and other amounts from NYMC borrowers for the nine months ended
 
September 30, 2006. NYMC does not economically benefit from such referrals.
 
15. Concentrations of Credit Risk
 
The Company has originated loans predominantly in the eastern United States. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers with similar characteristics, which would cause their ability to meet contractual obligations to be similarly impacted by economic or other conditions. At September 30, 2006 and December 31, 2005, there were geographic concentrations of credit risk exceeding 5% of the total loan balances within mortgage loans held for sale as follows:
 
 
     
September 30, 2006
 
December 31, 2005
 
               
New York
    
14.8
%
 
43.0
%
New Jersey
    
14.6
%
 
5.1
%
Massachusetts                                                                                   
    
12.3
%
 
17.8
%
Connecticut
 
 
7.7
%
 
5.8
%
Pennsylvania
 
 
5.9
%
 
4.6
%
Florida
    
3.0
%
  
9.7
%
 
At September 30, 2006 and December 31, 2005, there were geographic concentrations of credit risk exceeding 5% of the total loan balances within mortgage loans held in securitization trusts and mortgage loans held for investment as follows:
 
 
     
September 30, 2006
      
December 31, 2005
 
               
New York
 
 
25.4
%
 
32.7
%
Massachusetts                                                                                   
 
 
14.3
%
 
19.4
%
California
 
 
7.8
%
 
14.1
%
New Jersey
 
 
4.1
%
 
5.8
%
Florida
 
 
3.9
%
 
5.4
%
 
16. Fair Value of Financial Instruments
 
Fair value estimates are made as of a specific point in time based on estimates using market quotes, present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience, and other factors.
 
Changes in assumptions could significantly affect these estimates and the resulting fair values. Derived fair value estimates cannot be necessarily substantiated by comparison to independent markets and, in many cases, could not be necessarily realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company’s fair values should not be compared to those of other companies.
 
28
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
16. Fair Value of Financial Instruments - (continued)
 
Fair value estimates are based on existing financial instruments and do not attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented below do not represent the underlying value of the Company.
 
The fair value of certain assets and liabilities approximate cost due to their short-term nature, terms of repayment or interest rates associated with the asset or liability. Such assets or liabilities include cash and cash equivalents, escrow deposits, unsettled mortgage loan sales, and financing arrangements. All forward delivery commitments and option contracts to buy securities are to be contractually settled within six months of the balance sheet date.
 
The following describes the methods and assumptions used by the Company in estimating fair values of other financial instruments:
 
a. Investment Securities Available for Sale - Fair value is generally estimated based on market prices provided by five to seven dealers who make markets in these financial instruments. If the fair value of a security is not reasonably available from a dealer, management estimates the fair value based on characteristics of the security that the Company receives from the issuer and based on available market information.
 
b. Mortgage Loans Held for Sale - Fair value is estimated using the quoted market prices for securities backed by similar types of loans and current investor or dealer commitments to purchase loans.
 
c. Mortgage Loans Held for Investment - Mortgage loans held for investment are recorded at amortized cost. Fair value is estimated using pricing models and taking into consideration the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the quoted market prices for securities backed by similar types of loans.
 
d. Mortgage Loans Held in Securitization Trusts - Mortgage loans held in securitization trusts are recorded at amortized cost. Fair value is estimated using pricing models and taking into consideration the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the quoted market prices for securities backed by similar types of loans.
 
e. Interest Rate Lock Commitments - The fair value of IRLCs is estimated using the fees and rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of IRLCs is determined in accordance with SAB 105.
 
f. Forward Sale Loan Contracts - The fair value of these instruments is estimated using current market prices for dealer or investor commitments relative to the Company’s existing positions.
 
29
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
16. Fair Value of Financial Instruments - (continued)
 
The following tables set forth information about financial instruments, except for those noted above for which the carrying amount approximates fair value (dollar amounts in thousands):
 
   
September 30, 2006
  
   
Notional Amount
  
Carrying Amount
  
Estimated
Fair Value
  
                  
Investment securities available for sale
  
$
527,275
  
$
523,969
  
$
523,969
  
Mortgage loans held in the securitization trusts
    
624,528
    
628,625
    
624,342
  
Mortgage loans held for sale
    
109,095
    
109,197
    
110,538
  
Commitments and contingencies:
                    
Interest rate lock commitments
    
258,368
    
506
    
506
  
Forward loan sales contracts
    
176,543
    
(686
)
  
(686
)
Interest rate swaps
    
285,000
    
717
    
717
  
Interest rate caps
    
1,615,545
    
2,179
    
2,179
  
 
 
   
December 31, 2005
  
   
Notional Amount
  
Carrying Amount
  
Estimated
Fair Value
  
                  
Investment securities available for sale
  
$
719,701
  
$
716,482
  
$
716,482
  
Mortgage loans held for investment 
    
4,054
    
4,060
    
4,079
  
Mortgage loans held in the securitization trusts
    
771,451
    
776,610
    
775,311
  
Mortgage loans held for sale
    
108,244
    
108,271
    
109,252
  
Commitments and contingencies:
                    
Interest rate lock commitments - loan commitments
    
130,320
    
123
    
123
  
Interest rate lock commitments - mortgage loans held for sale
    
108,109
    
(14
)
  
(14
)
Forward loan sales contracts
    
201,771
    
(380
)
  
(380
)
Interest rate swaps
    
645,000
    
6,383
    
6,383
  
Interest rate caps
    
1,858,860
    
3,340
    
3,340
  
 
17. Income Taxes
 
A reconciliation of the statutory income tax provision (benefit) to the effective income tax provision for the nine month period ended September 30, 2006 and September 30, 2005, is as follows (dollar amounts in thousands):
 
   
September 30, 2006
  
September 30, 2005
  
   
                                 
  
                                 
  
Tax at statutory rate (35%)
  
$
(4,893
)
$
(879
)
Non-taxable REIT income
    
(1,825
)
  
(3,994
)
Transfer pricing of loans sold to nontaxable parent
    
11
    
605
  
State and local taxes
    
(1,773
)
  
(1,174
)
Change in tax status
    
—
    
(452
)
Miscellaneous
    
(14
)
  
14
  
Total provision (benefit)
  
$
(8,494
)
$
(5,880
)
 
30

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
17. Income Taxes - (continued)
 
The income tax benefit for the period ended September 30, 2006 is comprised of the following components (dollar amounts in thousands):
 
   
Deferred
  
Total
  
             
Regular tax benefit                                                                                   
            
Federal
  
$
(6,721
)
$
(6,721
)
State
    
(1,773
)
  
(1,773
)
Total tax benefit
  
$
(8,494
)
$
(8,494
)
 
The income tax benefit for the period ended September 30, 2005 is comprised of the following components (dollar amounts in thousands):
 
   
Deferred
  
Total
  
             
Regular tax benefit                                                                                   
            
Federal
  
$
(4,706
)
$
(4,706
)
State
    
(1,174
)
  
(1,174
)
Total tax benefit
  
$
(5,880
)
$
(5,880
)
 
The major sources of temporary differences and their deferred tax effect at September 30, 2006 are as follows (dollar amounts in thousands):
 
Deferred tax asset:                                                                                                      
        
Net operating loss carry forward
  
$
16,578
  
Restricted stock, performance shares and stock option expense
    
309
  
Rent expense
    
559
  
Management compensation
    
6
  
Mark to market adjustments
    
2
  
GAAP reserves
    
923
  
Loss on sublease
    
127
  
Total deferred tax asset
    
18,504
  
Deferred tax liabilities:
        
Depreciation
    
152
  
Net deferred tax asset
  
$
18,352
  
 
The major sources of temporary differences and their deferred tax effect at December 31, 2005 are as follows (dollar amounts in thousands):
 
Deferred tax asset:                                                                                                        
        
Net operating loss carry forward
  
$
9,560
  
Restricted stock, performance shares and stock option expense
    
125
  
Rent expense
    
120
  
Management compensation
    
98
  
Loss on sublease
    
181
  
Mark to market adjustments
    
94
  
Total deferred tax asset
    
10,178
  
Deferred tax liabilities:
        
Depreciation
    
319
  
Net deferred tax asset
  
$
9,859
  
 
31
 
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
 
17. Income Taxes - (continued)
 
The deferred tax asset is included in prepaid and other assets on the accompanying consolidated balance sheet. Although realization is not assured, management believes it is more likely than not that all the deferred tax assets will be realized. The net operating loss carry forward expires at various intervals between 2012 and 2026.
 
18. Segment Reporting