Maturities of mortgage securities owned by the Company depend on repayment characteristics and experience of the underlying financial instruments.
4031
|
| | | | | | | | | | | | | | |
| Original Face | | Amortized Cost Basis | | Fair Value | | Average Yield (A) |
As of December 31, 2010 | | | | | | | |
Subordinated securities pledged to CDO | $ | 369,507 |
| | $ | 73,900 |
| | $ | 1,198 |
| | |
Other subordinated securities | 215,280 |
| | — |
| | — |
| | |
Total | $ | 584,787 |
| | $ | 73,900 |
| | $ | 1,198 |
| | 1.96 | % |
| |
| | |
| | |
| | |
(A) Calculated from the ending fair value of the securities.
The Company recognized net trading losses of $0.2$1.4 million and $0.2 million for the yearyears ended December 31, 2011 and 2010 as compared to net trading losses of $11.8 million for the year ended December 31, 2009., respectively. These net trading lossesamounts are included in the other expense line on the Company’sCompany's consolidated statements of operations.
Note 6. Notes Receivable and Allowance for Doubtful Accounts
The Company has made loans to independent entities that have used the proceeds to finance current and on-going operations. Notes receivable are considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due that are contractually obligated. The Company determines the required allowance for doubtful accounts using information such as the borrower's financial condition and economic trends and conditions. Recognition of income is suspended and the loan is placed on non-accrual status when management determines that collection of future income is not probable. Accrual is resumed, and previously suspended income is recognized, when the loan becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans are recorded against the receivable and then to any unrecognized income.
The Company writes off uncollectible notes receivable when repayment of contractually-obligated amounts is not deemed to be probable. There was $0.5 million charge off, which had previously been reserved, during the year ended December 31, 2011 and there were no amounts written off during the year ended December 31, 2010. Due to the low number of notes receivable, the Company evaluates each note individually for collectability rather than analyzing by class or credit quality indicator. As a result of this review, there were (recoveries) provisions made for credit losses of $(0.5) million and $0.7 million for the years ended December 31, 2011 and 2010, respectively. Along with the extension of repayment terms and additional borrowings, the Company had one modification of a note receivable agreement for the year ended December 31, 2011, see details in the following paragraph. The Company had no modifications of notes receivable agreements for the year ended December 31, 2010.
The Company has a note receivable due from an entity with which it was previously in litigation. As discussed in Note 10 to the consolidated financial statements, during 2011 the Company agreed to settle the litigation. Pursuant to the settlement, approximately $1.3 million of the amount due under the note was paid at the time of settlement. A modification to the settlement was reached in February 2012, $1.5 million was paid at the time of the modification and the remaining note balance of approximately $1.1 million plus an additional $0.1 million will be due in February 2013. In addition to the $1.5 million included in notes receivable as of December 31, 2011, the Company has a net receivable of $1.1 million in other assets, $1.2 million of principal net of a $0.1 million discount which will be recognized straight line until its due date in February 2013.
The remaining $0.7 million of notes receivable outstanding as of December 31, 2011 was classified as current. As of December 31, 2010, the remaining $0.6 million of notes receivable was 90 days or more past due and still accruing interest.
Activity in the allowance for credit losses on notes receivable is as follows for the years ended December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | |
| For the Year Ended December 31, |
| 2011 | | 2010 |
Balance, beginning of period | $ | 1,047 |
| | $ | 300 |
|
(Recovery) provision for credit losses | (540 | ) | | 747 |
|
Write-offs | (507 | ) | | — |
|
Balance, end of period | $ | — |
| | $ | 1,047 |
|
| | | |
Note 7. Property and Equipment, Net
All of the Company's property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives of the assets that are leasehold improvements, lesser of 5 years or remaining lease term, furniture and fixtures, 5 years, office and computer equipment, 3 to 5 years, and software, 3 years.
Maintenance and repairs are charged to expense. Major renewals and improvements are capitalized. Gains and losses on
dispositions are credited or charged to earnings as incurred. Depreciation and amortization expense relating to property and equipment was $2.0 million and $0.9 million for the years ended December 31, 2011 and 2010, respectively.
The following table shows the Company's property and equipment, net as of December 31, 2011 and December 31, 2010 (dollars in thousands):
|
| | | | | | | |
| December 31, 2011 | | December 31, 2010 |
Furniture, fixtures and office equipment | $ | 1,216 |
| | $ | 803 |
|
Hardware and computer equipment | 2,961 |
| | 2,148 |
|
Software | 6,887 |
| | 5,794 |
|
Leasehold improvements | 352 |
| | 258 |
|
Total Cost | 11,416 |
| | 9,003 |
|
Less: Accumulated depreciation and amortization | (5,827 | ) | | (4,182 | ) |
Property and equipment, net | $ | 5,589 |
| | $ | 4,821 |
|
|
Note 8. Goodwill
Goodwill totaled $5.3 million and $3.2 million as of December 31, 2011 and December 31, 2010, respectively. As part of the purchase price allocation for the acquisition of Mango, $2.2 million was allocated to goodwill during the year ended December 31, 2011. See Note 4 to the consolidated financial statements for further details of the acquisition. During the year ended December 31, 2010, payments of approximately $3.2 million were made to the former majority owners of StreetLinks upon certain earnings targets being achieved. As all consideration paid had previously been assigned to the assets acquired and liabilities assumed, the $3.2 million was recorded as goodwill during the year ended December 31, 2010. There are no remaining contingent consideration payments that could be required for the StreetLinks acquisition.
Goodwill is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. For tax purposes, the goodwill is included in the Company's basis in its investment in Mango and StreetLinks as they are limited liability companies. Therefore, it will be non-deductible for tax purposes as long as the Company holds its investment in Mango and StreetLinks.
Goodwill activity is as follows for the years ended December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | |
| For the Year Ended December 31, |
| 2011 | | 2010 |
Balance, beginning of period | $ | 3,170 |
| | $ | — |
|
StreetLinks earnings target payment | — |
| | 3,170 |
|
Mango acquisition | 2,166 |
| | — |
|
Balance, end of period | $ | 5,336 |
| | $ | 3,170 |
|
| | | |
Note 9. Borrowings
Senior Notes –In an effort to improve the Company's liquidity position, on March 22, 2011, the Company entered into agreements that canceled the then existing $78.1 million aggregate principal amount of junior subordinated notes (the “Junior Subordinated Notes”). The Junior Subordinated Notes were replaced by unsecured senior notes pursuant to three indentures (collectively, the “Senior Notes”). The aggregate principal amount of the Senior Debentures is $85.9 million. The Senior Notes accrue interest at a rate of 1% until the earlier of (a) the completion of an equity offering by the Company or its subsidiaries that results in proceeds of $40 million or more or (b) January 1, 2016. Thereafter, the Senior Notes will accrue interest at a rate of three-month LIBOR plus 3.5% (the “Full Rate”). Interest on the Senior Notes is paid on a quarterly basis and no principal payments are due until the Senior Notes mature on March 30, 2033.
NFI’sFor accounting purposes the Debt Exchange transactions were considered a modification of a debt instrument as opposed to an extinguishment and new debt. Therefore, the principal amount of the debt will be accreted up to the new principal balance of $85.9 million using the effective interest method, using the effective interest method from the current balance of $79.7 million as of December 31, 2011.
The indentures governing the Senior Notes (the “Indentures”) contain certain restrictive covenants (the “Negative Covenants”) subject to certain exceptions in the Indentures, including written consent of the holders of the Senior Notes. The Negative Covenants prohibit the Company and its subsidiaries, from among other things, incurring debt, permitting any lien upon any of its
property or assets, making any cash dividend or distribution or liquidation payment, acquiring shares of the Company or its subsidiaries, making payment on debt securities of the Company that rank pari passu or junior to the Senior Notes, or disposing of any equity interest in its subsidiaries or all or substantially allof the assets of its subsidiaries. At any time that the Senior Notes accrue interest at the Full Rate and the Company satisfies certain financial covenants (the “Financial Covenants”), the Negative Covenants will not apply. Satisfaction of the Financial Covenants requires the Company to demonstrate on a consolidated basis that (1) its Tangible Net Worth is equal to or greater than $40 million, and (2) either (a) the Interest Coverage Ratio is equal to or greater than 1.35x, or (b) the Leverage Ratio is not greater than 95%. The Financial Covenants are not applicable to the Company as of December 31, 2011 as the Senior Notes are not accruing interest at the Full Rate.
The Company was in compliance with all Negative Covenants as of December 31, 2011.
Junior Subordinated Notes –Prior to March 22, 2011, NFI's wholly-owned subsidiary NovaStar Mortgage, Inc. (“NMI”) had approximately $78.1 million in principal amount of unsecured notes (collectively, the “Notes”) outstanding to NovaStar Capital Trust I and NovaStar Capital Trust II (collectively, the “Trusts”) which secured trust preferred securities issued by the Trusts. $50.0 million of the principal amount had maturity dates in March 2035 and the remaining $28.1 million had maturity dates in June 2036. NFI had guaranteed NMI's obligations under the Notes. NMI failed to make quarterly interest payments that were due on all payment dates in 2008 and through April 24, 2009 on these Notes.
On April 24, 2009 (the “Exchange Date”), the parties executed the necessary documents to complete an exchange of the Notes for new preferred obligations. On the Exchange Date, the Company paid interest due through December 31, 2008 in the aggregate amount of $5.3 million. The Notes mature in 2035 and 2036 at which time the total principal amount is due.
The new preferred obligations required quarterly distributions of interest to the holders at a rate equal to 1.0% per annum beginning January 1, 2009 through December 31, 2009, subject to reset to a variable rate equal toannum. As discussed above, the three-month LIBOR plus 3.5% upon the occurrence of an “Interest Coverage Trigger.” For purposes of the new preferred obligations, an Interest Coverage Trigger occured when the ratio of EBITDA for any quarter ending on or after December 31, 2008 to the product as of the last day of such quarter, of the stated liquidation value of all outstanding Preferred Securities (i) multiplied by 7.5%, (ii) multiplied by 1.5 and (iii) divided by 4, equals or exceeds 1.00 to 1.00. Beginning January 1, 2010 until the earlier of February 18, 2019 or the occurrence of an Interest Coverage Trigger, the unpaid principal amount of the new preferred obligations bore interest at a rate of 1.0% per annum and, thereafter, at a variable rate, reset quarterly, equal to the three-month LIBOR plus 3.5% per annum. The Company did not exceed the Interest Coverage Trigger during the year ended December 31, 2010. See Note 19 for discussion of the Trust Preferred Securities transaction in which theJunior Subordinated Notes were cancelled.exchanged for Senior Notes and the Trusts were dissolved.
Collateralized Debt Obligation Issuance (“CDO”)
The collateral for the Company’s CDO consists of subordinated securities which– As discussed in Note 18, prior to 2010 the Company retained from its loan securitizations as well as subordinatedexecuted a securitization of mortgage securities purchased from other issuers. This securitization was structured legally asin what is commonly called a sale, but for accounting purposes was accounted for as a financing. This securitization did not meet the qualifying special purpose entity criteria. Accordingly, the securities remain on the Company’s consolidated balance sheets, retained interests were not created, and securitization bond financing replaced the short-term debt used to finance the securities.Collateralized Debt Obligation (“CDO”). The Company records interest income on the securities and interest expense on the bonds issued in the securitization over the lifeliabilities of the relatedCDO had no value as of December 31, 2011, as the CDO is a non-recourse financing and the associated mortgage securities and bonds.
had no value at December 31, 2011. The Company elected theliabilities were carried at a fair value option for the asset-backed bonds issued from NovaStar ABS CDO I. The election was made for these liabilities to help reduce income statement volatility which otherwise would arise if the accounting method for this debt was not matched with the fair value accounting for the mortgage securities. Fair value is estimated using quoted market prices. The Company recognized fair value adjustments of $1.2 and $5.1 million for the years endedat December 31, 2010, and 2009, respectively, which isare included in the other expense line item on the consolidated statements of operations.
On January 30, 2008, an event of default occurred under the CDO bond indenture agreement due to the noncompliance of certain overcollateralization tests. As a result, the trustee, upon notice and at the direction of a majority of the secured noteholders, may declare all of the secured notes to be immediately due and payable including accrued and unpaid interest. No such notice has been given as of March 22, 2011. As therecurrent liabilities. There is no recourse to the Company it does not expect any significant impact to its financial condition, cash flows or results of operation as a resultfor the obligations of the event of default.CDO.
Asset-backed Bonds (“ABB”). The Company issued ABB secured by its mortgage loans and ABB secured by its mortgage securities – trading in certain transactions treated as financings as a means for long-term non-recourse financing. For financial reporting purposes, the mortgage loans held-in-portfolio and mortgage securities – trading, as collateral, are recorded as assets of the Company and the ABB are recorded as debt. Interest and principal on each ABB is payable only from principal and interest on the underlying mortgage loans or mortgage securities collateralizing the ABB. Interest rates reset monthly and are indexed to one-month LIBOR. The estimated weighted-average months to maturity are based on estimates and assumptions made by management. The actual maturity may differ from expectations.
For ABB secured by mortgage loans, the Company retained a “clean up” call option to repay the ABB, and reacquire the mortgage loans, when the remaining unpaid principal balance of the underlying mortgage loans falls below 10% of their original amounts. The Company subsequently sold all of these clean up call rights, to the buyer of its mortgage servicing rights. The Company did retain separate independent rights to require the buyer of its mortgage servicing rights to repurchase loans from the trusts and subsequently sell them to the Company. The Company does not expect to exercise any of the call rights that it retained. The Company had no ABB transactions for the year ended December 31, 2010.
41
The following is a summary of outstanding ABB and related loans (dollars in thousands):
| | Asset-backed Bonds | | Mortgage Loans |
| | | | | | | | | Estimated | | | | | | | |
| | | | | | | | | Weighted | | | | | | | |
| | | | | | Weighted | | Average | | | | | | | |
| | | | | | Average | | Months | | | | | | Weighted |
| | Remaining | | Interest | | to Call or | | Remaining | | Average |
| | Principal | | Rate | | Maturity | | Principal | | Coupon |
As of December 31, 2010: | | | | | | | | | | | | | | | | |
ABB Secured by Mortgage Securities: | | | | | | | | | | | | | | | | |
NovaStar ABS CDO I | | $ | 324,662 | (A) | | 0.81 | % | | 12 | | | | (B) | | | (B) |
|
As of December 31, 2009: | | | | | | | | | | | | | | | | |
ABB Secured by Mortgage Loans: | | | | | | | | | | | | | | | | |
NHES Series 2006-1 | | $ | 475,360 | | | 0.52 | % | | 72 | | $ | 399,913 | | | 8.03 | % |
NHES Series 2006-MTA1 | | | 602,068 | | | 0.48 | | | 51 | | | 532,696 | | | 3.84 | |
NHES Series 2007-1 | | | 1,201,517 | | | 0.50 | | | 106 | | | 1,052,873 | | | 6.99 | |
Unamortized debt issuance costs, net | | | (8,343 | ) | | | | | | | | | | | | |
| | $ | 2,270,602 | | | | | | | | | | | | | |
ABB Secured by Mortgage Securities: | | | | | | | | | | | | | | | | |
NovaStar ABS CDO I | | $ | 323,999 | (A) | | 0.80 | % | | 16 | | | | (B) | | | (B) |
|
(A) | | The NovaStar ABS CDO I ABB are carried at a fair value of $1.2 million and $1.0 million at December 31, 2010 and 2009, respectively and are included in the other current liabilities line item of the consolidated balance sheets. |
(B) | | Collateral for the NovaStar ABS CDO I are subordinated mortgage securities. |
The expected repayment requirements relating to the CDO at December 31, 2010 are difficult to estimate as they are based on anticipated receipts from underlying mortgage security collateral. In the event that receipts from the underlying collateral are adversely impacted by credit losses, there could be insufficient receipts available to repay the CDO principal. As there is no recourse to the Company, it only expects to pay out the amounts that it receives from the collateral.
Note 8. Commitments and Contingencies
Commitments. The Company leases office space under various operating lease agreements. Rent expense for 2010 and 2009 aggregated $1.3 million and $1.9 million, respectively. At December 31, 2010, future minimum lease commitments under those leases are as follows (dollars in thousands):
| Lease |
| Obligations |
2011 | $ | 1,406 |
2012 | | 969 |
2013 | | 723 |
2014 | | 73 |
2015 | | - |
| $ | 3,171 |
|
The Company has sublease agreements for office space formerly occupied by the Company and received approximately $0.6 million and $0.7 million during the years ended December 31, 2010 and 2009, respectively.
Contingencies
The Company has a contingent obligation related to a Corvisa earn-out agreement based on future net income of up to $0.6 million, which could be due to the former owners of Corvisa. A liability of $0.5 million, based on management’s estimate of Corvisa achieving its earnings targets, is included in the other liabilities line item of the consolidated balance sheets as of December 31, 2010.
42
Pending Litigation.
The Company is a party to various legal proceedings, all of which, except as set forth below, are of an ordinary, routine nature, including, but not limited to, breach of contract claims, tort claims, and claims for violations of federal and state consumer protection laws. Furthermore, the Company has received indemnification and loan repurchase demands with respect to alleged violations of representations and warranties made in loan sale and securitization agreements. These indemnification and repurchase demands have not resulted in significant losses to the Company and the number of demands has steadily decreased, but such claims could be significant if multiple loans are involved.
Due to the uncertainty of any potential loss due to pending litigation and due to the Company’s belief that an adverse ruling is not probable for the below-described claims, the Company has not accrued a loss contingency related to the following matters in its consolidated financial statements. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than those proceedings described in detail below, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s financial condition and liquidity. However, a material adverse outcome in one or more of these proceedings could have a material adverse impact on the results of operations in a particular quarter or fiscal year.
On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case include NovaStar Mortgage Funding Corporation (“NMFC”) and its individual directors, several securitization trusts sponsored by the Company, and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. Plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933 by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff’s claims. The Court has not ruled on this motion and discovery regarding the plaintiff’s claims has not commenced. The Company cannot provide an estimate of the range of any loss. The Company believes it has meritorious defenses to the case and expects to defend the case vigorously.
On December 31, 2009, ITS Financial, LLC (“ITS”) filed a complaint against Advent and the Company alleging a breach of contract by Advent for a contract for services related to tax refund anticipation loans and early season loans. ITS does business as Instant Tax Service. The defendants moved the case to the United States District Court for the Southern District of Ohio. The complaint alleges that the Company worked in tandem and as one entity with Advent in all material respects. The complaint also alleges fraud in the inducement, tortious interference by the Company with the contract, breach of good faith and fair dealing, fraudulent and negligent misrepresentation, and liability of the Company by piercing the corporate veil and joint and several liability. The plaintiff references a $3.0 million loan made by the Company to plaintiff and seeks a judgment declaring that this loan be subject to an offset by the plaintiff’s damages. On September 13, 2010, the Court denied the Company’s motion to transfer the case to the United States District Court for the Western District of Missouri, and on September 29, 2010, the Company answered the complaint and made a counterclaim against the plaintiff for plaintiff’s failure to repay the loan. On February 21, 2011, the Company amended its counterclaim, asserting additional claims against the plaintiff. The Company cannot provide an estimate of the range of any loss. The Company believes that the defendants have meritorious defenses to this case and expects to vigorously defend the case and pursue its counterclaims.
On July 9, 2010 and on February 11, 2011, Cambridge Place Investment Management, Inc. filed complaints in the Suffolk, Massachusetts Superior Court against NMFC and numerous other entities seeking damages on account of losses associated with residential mortgage-backed securities purchased by plaintiff’s assignors. The complaints allege untrue statements and omissions of material facts relating to loan underwriting and credit enhancement. The complaints also allege a violation of Section 410 of the Massachusetts Uniform Securities Act, (Chapter 110A of the Massachusetts General Laws). Defendants have removed the first case to the United States District Court for the District of Massachusetts, and plaintiff has filed a motion to remand the case back to state court. This litigation is in its early stage, and the Company cannot provide an estimate of the range of any loss. The Company believes that it has meritorious defenses to these claims and expects that the cases will be defended vigorously.
On or about July 16, 2010, NovaStar Mortgage, Inc. received a “Purchasers’ Notice of Election to Void Sale of Securities” regarding NovaStar Mortgage Funding Trust Series 2005-4 from the Federal Home Loan Bank of Chicago. The notice was allegedly addressed to several entities including NovaStar Mortgage, Inc. and NMFC. The notice alleges joint and several liability for a rescission of the purchase of a $15.0 million security pursuant to Illinois Securities Law, 815 ILCS section 5/13(A). The notice does not specify the factual basis for the claim, and no legal action to enforce the claim has been filed The Company will assess its defense to the claim if and when the factual basis and additional information supporting the claim is provided.
Note 9. Shareholders’ Equity
To preserve liquidity, the Company’s Board of Directors has suspended the payment of dividends on its Series C Preferred Stock and its Series D1 Preferred Stock. As a result, dividends continue to accrue on the Series C Preferred Stock and Series D1 Preferred Stock. Total accrued dividends payable related to the Series C Preferred Stock and Series D1 Preferred Stock were $50.9 million and $34.4 million as of December 31, 2010 and 2009, respectively. All accrued and unpaid dividends on the Company’s preferred stock must be paid prior to any payments of dividends or other distributions on the Company’s common stock. In addition, since dividends on the Series C Preferred Stock were in arrears for six or more quarterly periods (whether or not consecutive), the holders of the Series C Preferred Stock, voting as a single class, elected two additional directors to the Company’s Board of Directors, as described below. The Company does not expect to pay the dividends due to management’s intent to restructure its capital.
43
On March 17, 2009, the Company notified the holders of the Series C Preferred Stock that the Company would not make the dividend payment on the Series C Preferred Stock due on March 31, 2009. Because dividends on the Series C Preferred Stock are presently in arrears for six quarters, under the terms of the Articles Supplementary to the Company’s Charter that established the Series C Preferred Stock, the holders of the Series C Preferred Stock had the right, as of March 31, 2009, to elect two additional directors to the Company’s board of directors. At the Company’s Annual Meeting of Shareholders on June 25, 2009, the holders of the Series C Preferred Stock elected two additional directors of the Company to serve until such time that that all dividends accumulated and due on the Series C Preferred Stock have been paid fully paid.
Dividends on the Series C Preferred Stock are payable in cash and accrue at a rate of 8.9% annually. Accrued and unpaid dividends payable related to the Series C Preferred Stock were approximately $21.6 million and $15.0 million as of December 31, 2010 and 2009, respectively.
Dividends on the Series D1 Preferred Stock are payable in cash and accrue at a rate of 13.0% per annum. In addition, holders of the Series D1 Preferred Stock are entitled to participate in any common stock dividends on an as converted basis. The Company’s board of directors has suspended the payment of dividends on the Company’s Series D1 Preferred Stock. As a result, dividends continue to accrue on the Series D1 Preferred Stock, and the dividend rate on the Series D1 Preferred Stock increased from 9.0% to 13.0%, compounded quarterly, effective October 16, 2007 with respect to all unpaid dividends and subsequently accruing dividends. Accrued and unpaid dividends payable related to the Series D1 Preferred Stock were approximately $29.3 million and $19.4 million as of December 31, 2010 and 2009, respectively.
The Series D1 Preferred Stock is convertible into the Company’s 9.0% Series D2 Mandatory Convertible Preferred Stock having a par value of $0.01 per share and an initial liquidation preference of $25.00 per share (“Series D2 Preferred Stock”) upon the later of (a) July 16, 2009, or (b) the date on which the shareholders of the Company approve certain anti-dilution protection for the Series D1 Preferred Stock and Series D2 Preferred Stock that, upon such shareholder approval, would apply in the event the Company issues additional common stock for a price below the price at which the Series D1 Preferred Stock (or the Series D2 Preferred Stock into which the Series D1 Preferred Stock has been converted, if any) may be converted into common stock. The rights, powers and privileges of the Series D2 Preferred Stock are substantially similar to those of the Series D1 Preferred Stock, except that accrued and unpaid dividends on the Series D2 Preferred Stock can be added to the common stock conversion and liquidation valueof the Series D2 Preferred Stock in lieu of cash payment, and the dividend rate on the Series D2 Preferred Stock is fixed in all circumstances at 9.0%.
The Series D1 Preferred Stock (or the Series D2 Preferred Stock into which the Series D1 Preferred stock has been converted, if any) is convertible into the Company’s common stock at any time at the option of the holders. The Series D1 Preferred Stock (or the Series D2 Preferred Stock into which the Series D1 Preferred stock has been converted, if any) is currently convertible into 1,875,000 shares of common stock based upon an initial conversion price of $28.00 per share, subject to adjustment as provided above or certain other extraordinary events. On July 16, 2016, the Series D1 Preferred Stock (or the Series D2 Preferred Stock into which the Series D1 Preferred stock has been converted, if any) will automatically convert into shares of common stock.
During the years ended December 31, 2010 and 2009, there were no shares of common stock issued under the Company’s stock-based compensation plan.
The Company’s Board of Directors has approved the repurchase of up to $9 million of the Company’s common stock. No shares were repurchased during 2010 and 2009. The Company has repurchased $8.0 million prior to 2009, leaving approximately $1.0 million of shares that may yet be purchased under the repurchase plan. Under Maryland law, shares repurchased under the repurchase plan are to be returned to the Company’s authorized but unissued shares of common stock. Common stock purchased under the repurchase plan is charged against additional paid-in capital.
44
Note 10. Commitments and Contingencies
Commitments – The Company leases office space under various operating lease agreements. Rent expense for 2011 and 2010 aggregated $1.2 million and $1.3 million, respectively. At December 31, 2011, future minimum lease commitments under those leases are as follows (dollars in thousands):
|
| | | |
| Lease |
| Obligations |
2012 | $ | 1,467 |
|
2013 | 1,158 |
|
2014 | 509 |
|
2015 | 387 |
|
2016 | 912 |
|
| $ | 4,433 |
|
|
The Company has sublease agreements for office space formerly occupied by the Company and received approximately $0.4 million and $0.6 million during the years ended December 31, 2011 and 2010, respectively.
Contingencies – The Company has a contingent obligation related to a Corvisa earn-out agreement based on future net income of up to $1.2 million and $0.6 million as of December 31, 2011 and 2010, respectively, which could be due to the former owners of Corvisa. The increase in the potential obligation is due to the Company's acquisition of the remaining noncontrolling interests of Corvisa during November 2011. See Note 4 to the consolidated financial statements for further details. A liability of $0.9 million and $0.5 million, based on management’s estimate of Corvisa achieving its earnings targets, is included in the other liabilities line item of the consolidated balance sheets as of December 31, 2011 and December 31, 2010, respectively.
The Company also has contingent obligations related to a Mango separation agreement with a former employee of up to $0.3 million as of December 31, 2011. As of December 31, 2011, there was a liability for this contingent obligation of $150.0 thousand in the other current liabilities and $150.0 thousand in the other liabilities line items in the consolidated balance sheets, respectively.
The Company has also entered into an agreement that requires it to pay a vendor a minimum of $0.3 million during the first quarter of 2012 if certain services are provided by the vendor.
The Company has received indemnification and loan repurchase demands with respect to alleged violations of representations and warranties (“defects”) made in loan sale and securitization agreements. These demands have been received substantially
beginning in 2006 and have continued into 2011. Prior to the Company ceasing the origination of loans in its mortgage lending business, it sold loans to securitization trusts and other third parties and agreed to repurchase a loan due to missing documentation or breaches of representations or warranties made in sale documents that materially adversely affected the value of the loan.
Beginning in 1997 and ending in 2007, affiliates of the Company sold loans to securitization trusts and third parties with the potential of such repurchase obligations. The aggregate original principal balance of these loans was $43.1 billion at the time of sale or securitization. The remaining principal balance of these loans is not available as these loans are serviced by third parties and may have been refinanced, sold or liquidated. During 2010 and 2011, the Company has received claims to repurchase loans with original principal balances of approximately $30.8 million. These claims have not been acknowledged as valid by the Company. In some cases, claims were made against affiliates of the Company that have ceased operations and have no or limited assets. The Company has not repurchased any loans in 2010 or 2011.
Historically, repurchases of loans or indemnification of losses where a loan defect has been alleged have been insignificant and any future losses for alleged loan defects have not been deemed to be probable or reasonably estimable; therefore, the Company has recorded no reserves related to these claims. The Company does not use internal groupings for purposes of determining the status of these loans. The Company is unable to develop an estimate of the maximum potential amount of future payments related to repurchase demands because the Company does not have access to information relating to loans sold and securitized and the number or amount of claims deemed probable of assertion is not known nor is it reasonably estimated. Further, the validity of claims received remains questionable. Also, considering that the Company completed its last sale or securitization of loans during 2007, the Company believes that it will be difficult for a claimant to successfully validate any additional repurchase demands. Management does not expect that the potential impact of claims will be material to the Company's financial statements.
Pending Litigation – The Company is a party to various legal proceedings. Except as set forth below, these proceedings are of an ordinary and routine nature, including, but not limited to, breach of contract claims, tort claims, and claims for violations of federal and state consumer protection laws.
Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than the active proceedings described in detail below, proceedings and actions against the Company should not, individually, or in the aggregate, have a material effect on the Company's financial condition, operations and liquidity. Furthermore, due to the uncertainty of any potential loss as a result of pending litigation and due to the Company's belief that an adverse ruling is not probable, the Company has not accrued a loss contingency related to the following matters in its consolidated financial statements. However, a material outcome in one or more of the active proceedings described below could have a material impact on the results of operations in a particular quarter or fiscal year.
On May 21, 2008, a purported class action case was filed in the Supreme Court of the State of New York, New York County, by the New Jersey Carpenters' Health Fund, on behalf of itself and all others similarly situated. Defendants in the case included NovaStar Mortgage Funding Corporation (“NMFC”) and its individual directors, several securitization trusts sponsored by the Company ("affiliated defendants") and several unaffiliated investment banks and credit rating agencies. The case was removed to the United States District Court for the Southern District of New York. On June 16, 2009, the plaintiff filed an amended complaint. Plaintiff seeks monetary damages, alleging that the defendants violated sections 11, 12 and 15 of the Securities Act of 1933, as amended, by making allegedly false statements regarding mortgage loans that served as collateral for securities purchased by plaintiff and the purported class members. On August 31, 2009, the Company filed a motion to dismiss the plaintiff's claims, which the Court granted on March 31, 2011, with leave to amend. Plaintiff filed a second amended complaint on May 16, 2011, and the Company has again filed a motion to dismiss. Because the litigation is procedurally in an early stage, the Company cannot provide an estimate of the range of any loss. The Company believes that the affiliated defendants have meritorious defenses to the case and expects them to defend the case vigorously.
On December 31, 2009, ITS Financial, LLC (“ITS”) filed a complaint against Advent and the Company alleging a breach of contract by Advent for a contract for services related to tax refund anticipation loans and early season loans. ITS does business as Instant Tax Service. The defendants moved the case to the United States District Court for the Southern District of Ohio. The complaint alleged that the Company worked in tandem and as one entity with Advent in all material respects. The complaint also alleged fraud in the inducement, tortious interference by the Company with the contract, breach of good faith and fair dealing, fraudulent and negligent misrepresentation, and liability of the Company by piercing the corporate veil and joint and several liability. The plaintiff referenced a $3.0 million loan made by the Company to ITS and sought a judgment declaring that this loan be subject to an offset by ITS's damages. On September 29, 2010, the Company and Advent answered the complaint and made a counterclaim against ITS for ITS's failure to repay the loan. On February 21, 2011, the Company amended its counterclaim, asserting additional claims against ITS. On October 21, 2011, the Court granted the Company's motion for partial summary judgment on the loan claim and granted a partial summary judgment in favor of the Company with respect to certain claims and damages alleged by ITS. In December 2011, the parties settled the litigation and the case was dismissed. The Company paid no money to the plaintiff, and the plaintiff agreed to a payment to Company of approximately $3.9 million. Approximately $1.3 million was paid to the Company at the time of the settlement with the remaining balance to be paid in February 2012. In February 2012, the Company agreed to a modification to the settlement; pursuant to the modification $1.5 million was paid at the time of the modification and approximately $1.2 million will be due in February 2013.
On July 9, 2010 and on February 11, 2011, Cambridge Place Investment Management, Inc. filed complaints in the Suffolk, Massachusetts Superior Court against NMFC and numerous other entities seeking damages on account of losses associated with residential mortgage-backed securities purchased by plaintiff's assignors. The complaints allege untrue statements and omissions of material facts relating to loan underwriting and credit enhancement. The complaints also allege a violation of Section 410 of the Massachusetts Uniform Securities Act (Chapter 110A of the Massachusetts General Laws). Defendants removed the cases to the United States District Court for the District of Massachusetts, and plaintiff filed motions to remand the cases back to state court. On August 22, 2011, the federal court remanded these cases back to state court, and on October 14, 2011, the plaintiff filed amended complaints. In December 2011, the Company, together with the other defendants in the litigation, filed a motion to dismiss the complaints alleging that the plaintiff lacked standing. Because this litigation is procedurally in its early stage, the Company cannot provide an estimate of the range of any loss. The Company believes that NMFC has meritorious defenses to these claims and expects that the cases will be defended vigorously.
On June 20, 2011, the National Credit Union Administration Board, as liquidating agent of U.S. Central Federal Credit Union, filed an action against NMFC and numerous other defendants in the United States District Court for the District of Kansas, claiming that the defendants issued or underwrote residential mortgage-backed securities pursuant to allegedly false or misleading registration statements, prospectuses, and/or prospectus supplements. On October 12, 2011, the complaint was served on NMFC. On December 20, 2011, NMFC filed a motion to dismiss the plaintiff's complaint and to strike certain paragraphs of the complaint. This litigation is in an early stage, and the Company cannot provide an estimate of the range of any loss. The Company believes that NMFC has meritorious defenses to the case and expects it to defend the case vigorously.
Note 11. Shareholders’ Deficit
During the second quarter of 2011, we completed the exchange of all outstanding shares of our preferred stock for an aggregate of 80,985,600 shares of newly-issued common stock and $3.0 million in cash. Completion of this exchange eliminated our obligations with respect to outstanding and future preferred dividends and the preferred liquidating preference related to the preferred stock. At the time of the exchange, there were accrued and unpaid dividends of approximately $59.3 million on the preferred stock and the aggregate liquidating preference was $127.3 million. See Note 3 to the consolidated financial statements for further details.
There was 0.9 million shares of nonvested shares issued to the non-employee directors during the year ended December 31, 2011. During the year ended December 31, 2010, there were no shares of common stock issued under the Company’s stock-based compensation plan.
The Company’s Board of Directors has approved the repurchase of up to $9.0 million of the Company’s common stock. No shares were repurchased during 2011 and 2010. The Company has repurchased $8.0 million prior to 2009, leaving approximately $1.0 million of shares that may yet be purchased under the repurchase plan. Under Maryland law, shares repurchased under the repurchase plan are to be returned to the Company’s authorized but unissued shares of common stock. Common stock purchased under the repurchase plan is charged against additional paid-in capital.
Note 12. Comprehensive Income
Comprehensive income includes revenues, expenses, gains and losses that are not included in net income. The following is a roll-forwardschedule of accumulated other comprehensive income for the years ended December 31, 20102011 and 20092010 (dollars in thousands):
| For the Year Ended |
| December 31, |
| 2010 | | 2009 |
Net income (loss) | $ | 985,654 | | | $ | (183,156 | ) |
Other comprehensive (loss) income: | | | | | | | |
Change in unrealized loss on mortgage securities – available-for-sale | | (700 | ) | | | (5,106 | ) |
| |
Change in unrealized gain (loss) on derivative instruments used in cash flow hedges | | - | | | | 8 | |
Impairment on mortgage securities – available-for-sale reclassified to earnings | | - | | | | 1,198 | |
Net settlements of derivative instruments used in cash flow hedges reclassified to earnings | | - | | | | 85 | |
Other comprehensive loss | | (700 | ) | | | (3,815 | ) |
Total comprehensive income (loss) | | 984,954 | | | | (186,971 | ) |
Comprehensive loss attributable to noncontrolling interests | | 1,048 | | | | 2,054 | |
Total comprehensive income (loss) attributable to NovaStar Financial, Inc. | $ | 983,906 | | | $ | (184,917 | ) |
|
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2011 | | 2010 |
Net income | | $ | 7,272 |
| | $ | 985,654 |
|
Other comprehensive loss: | | |
| | |
|
Change in unrealized loss on mortgage securities – available-for-sale | | (1,144 | ) | | (700 | ) |
Other comprehensive loss | | (1,144 | ) | | (700 | ) |
Total comprehensive income | | 6,128 |
| | 984,954 |
|
Comprehensive loss attributable to noncontrolling interests | | (491 | ) | | (1,048 | ) |
Total comprehensive income attributable to NovaStar Financial, Inc. | | $ | 5,637 |
| | $ | 983,906 |
|
| | | | |
Accumulated other comprehensive income was comprised of unrealized gains relating to the mortgage securities – available-for-sale as of December 31, 20102011 and 2009.
Note 11. Fair Value Accounting
For financial reporting purposes, the Company follows a fair value hierarchy that is used to measure the fair value of assets and liabilities. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale at the date of measurement.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:
- 2010
Level 1—Quoted prices for identical instruments in active markets. Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.Level 3—Instruments whose significant value drivers are unobservable.
The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The methods the Company uses to determine fair value on an instrument specific basis are detailed in the section titled “Valuation Methods,” below.
The following tables present for each of the fair value hierarchy levels, the Company’s assets and liabilities related to continuing operations which are measured at fair value on a recurring basis as of December 31, 2010 and 2009 (dollars in thousands):
| | | | | Fair Value Measurements at Reporting Date Using |
| | | | | Quoted Prices in | | | | | | |
| | Fair Value at | | Active Markets for | | Significant Other | | Significant |
| | December 31, | | Identical Assets | | Observable Inputs | | Unobservable |
Description | | 2010 | | (Level 1) | | (Level 2) | | Inputs (Level 3) |
Assets | | | | | | | | | | | | |
Mortgage securities – trading | | $ | 1,198 | | $ | - | | $ | - | | $ | 1,198 |
Mortgage securities – available- | | | | | | | | | | | | |
for-sale | | | 4,580 | | | - | | | - | | | 4,580 |
Total Assets | | $ | 5,778 | | $ | - | | $ | - | | $ | 5,778 |
|
Liabilities | | | | | | | | | | | | |
Asset-backed bonds secured by | | | | | | | | | | | | |
mortgage securities | | $ | 1,198 | | $ | - | | $ | - | | $ | 1,198 |
Contingent consideration (A) | | | 450 | | | | | | | | | 450 |
Total Liabilities | | $ | 1,648 | | $ | - | | $ | - | | $ | 1,648 |
|
(A) | | The contingent consideration represents the estimated fair value of the additional potential earn-out opportunity payable in connection with our acquisition of Corvisa that is contingent based upon certain future earnings targets. The company estimated the fair value using projected revenue over the earn-out period, and applied a discount rate to the projected earn-out payments that approximated the weighted average cost of capital. |
45
| | | | | Fair Value Measurements at Reporting Date Using |
| | | | | Quoted Prices in | | | | | | |
| | Fair Value at | | Active Markets for | | Significant Other | | Significant |
| | December 31, | | Identical Assets | | Observable Inputs | | Unobservable |
Description | | 2009 | | (Level 1) | | (Level 2) | | Inputs (Level 3) |
Assets | | | | | | | | | | | | |
Mortgage securities – trading | | $ | 1,087 | | $ | - | | $ | - | | $ | 1,087 |
Mortgage securities – available- | | | | | | | | | | | | |
for-sale | | | 6,903 | | | - | | | - | | | 6,903 |
Total Assets | | $ | 7,990 | | $ | - | | $ | - | | $ | 7,990 |
|
Liabilities | | | | | | | | | | | | |
Asset-backed bonds secured by | | | | | | | | | | | | |
mortgage securities | | $ | 968 | | $ | - | | $ | - | | $ | 968 |
Derivative instruments, net | | | 157 | | | - | | | 157 | | | - |
Total Liabilities | | $ | 1,125 | | $ | - | | $ | 157 | | $ | 968 |
|
The following tables provide a reconciliation of the beginning and ending balances for the Company’s mortgage securities – trading which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2009 to December 31, 2010 (dollars in thousands):
| | | | | | | | | Estimated Fair |
| | | | | Unrealized | | Value of Mortgage |
| Cost Basis | | Loss | | Securities |
As of December 31, 2009 | $ | 104,013 | | | $ | (102,926 | ) | | $ | 1,087 | |
Increases (decreases) to mortgage securities – trading: | | | | | | | | | | | |
Accretion of income | | 1,766 | | | | - | | | | 1,766 | |
Proceeds from paydowns of securities | | (1,497 | ) | | | - | | | | (1,497 | ) |
Other than temporary impairments | | (30,382 | ) | | | 30,382 | | | | - | |
Mark-to-market value adjustment | | - | | | | (158 | ) | | | (158 | ) |
Net increase (decrease) to mortgage securities | | (30,113 | ) | | | 30,224 | | | | 111 | |
As of December 31, 2010 | $ | 73,900 | | | | (72,702 | ) | | | 1,198 | |
|
| | | | | | | | | Estimated Fair |
| | | | | Unrealized | | Value of Mortgage |
| Cost Basis | | Loss | | Securities |
As of December 31, 2008 | $ | 433,968 | | | $ | (426,883 | ) | | $ | 7,085 | |
Increases (decreases) to mortgage securities – trading: | | | | | | | | | | | |
Accretion of income | | 10,713 | | | | - | | | | 10,713 | |
Proceeds from paydowns of securities | | (4,885 | ) | | | - | | | | (4,885 | ) |
Other than temporary impairments | | (335,783 | ) | | | 335,783 | | | | - | |
Mark-to-market value adjustment | | - | | | | (11,826 | ) | | | (11,826 | ) |
Net increase (decrease) to mortgage securities | | (329,955 | ) | | | 323,957 | | | | (5,998 | ) |
As of December 31, 2009 | $ | 104,013 | | | $ | (102,926 | ) | | $ | 1,087 | |
|
The following tables provide a reconciliation of the beginning and ending balances for the Company’s mortgage securities – available-for-sale which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2009 to December 31, 2010 and December 31, 2008 to December 31, 2009 (dollars in thousands):
| | | | | | | | | Estimated Fair |
| | | | | Unrealized | | Value of Mortgage |
| Cost Basis | | Gain | | Securities |
As of December 31, 2009 | $ | 1,794 | | | $ | 5,109 | | | $ | 6,903 | |
Increases (decreases) to mortgage securities: | | | | | | | | | | | |
Accretion of income (A) | | 2,235 | | | | - | | | | 2,235 | |
Proceeds from paydowns of securities (A) (B) | | (3,858 | ) | | | - | | | | (3,858 | ) |
Other | | (2 | ) | | | 2 | | | | - | |
Mark-to-market value adjustment | | | | | | (700 | ) | | | (700 | ) |
Net decrease to mortgage securities | | (1,625 | ) | | | (698 | ) | | | (2,323 | ) |
As of December 31, 2010 | $ | 169 | | | | 4,411 | | | | 4,580 | |
|
(A) | | Cash received on mortgage securities with no cost basis was $7.5 million for the year ended December 31, 2010. |
(B) | | For mortgage securities with a remaining cost basis, the Company reduces the cost basis by the amount of cash that is contractually due from the securitization trusts. In contrast, for mortgage securities in which the cost basis has previously reached zero, the Company records in interest income the amount of cash that is contractually due from the securitization trusts. In both cases, there are instances where the Company may not receive a portion of this cash until after the consolidated balance sheets reporting date. Therefore, these amounts are recorded as receivables from the securitization trusts, which are included in the other assets line on the Company’s consolidated balance sheets. As of December 31, 2010, the Company had no receivables from securitization trusts related to mortgage securities available-for-sale with a remaining or zero cost basis. |
46
| | | | | | | | | Estimated Fair |
| | | | | Unrealized | | Value of Mortgage |
| Cost Basis | | Gain | | Securities |
As of December 31, 2008 | $ | 3,771 | | | $ | 9,017 | | | $ | 12,788 | |
Increases (decreases) to mortgage securities: | | | | | | | | | | | |
Accretion of income (A) | | 12,815 | | | | - | | | | 12,815 | |
Proceeds from paydowns of securities (A) (B) | | (13,594 | ) | | | - | | | | (13,594 | ) |
Impairment on mortgage securities – available-for-sale | | (1,198 | ) | | | - | | | | (1,198 | ) |
Mark-to-market value adjustment | | - | | | | (3,908 | ) | | | (3,908 | ) |
Net decrease to mortgage securities | | (1,977 | ) | | | (3,908 | ) | | | (5,885 | ) |
As of December 31, 2009 | $ | 1,794 | | | $ | 5,109 | | | $ | 6,903 | |
|
(A) | | Cash received on mortgage securities with no cost basis was $1.9 million for the year ended December 31, 2009. |
(B) | | For mortgage securities with a remaining cost basis, the Company reduces the cost basis by the amount of cash that is contractually due from the securitization trusts. In contrast, for mortgage securities in which the cost basis has previously reached zero, the Company records in interest income the amount of cash that is contractually due from the securitization trusts. In both cases, there are instances where the Company may not receive a portion of this cash until after the consolidated balance sheets reporting date. Therefore, these amounts are recorded as receivables from the securitization trusts, which are included in the other assets line on the Company’s consolidated balance sheets. As of December 31, 2009, the Company had receivables from securitization trusts of $12.5 million, related to mortgage securities available-for-sale with a remaining cost basis. At December 31, 2009, there were no receivables from securitization trusts related to mortgage securities with a zero cost basis. |
The following table provides quantitative disclosures about the fair value measurements for the Company’s assets which are measured at fair value on a nonrecurring basis as of December 31, 2009 (dollars in thousands):
| | | | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in | | | | | |
| | | | Active Markets for | | Significant Other | | Significant |
| | Real Estate | | Identical Assets | | Observable Inputs | | Unobservable Inputs |
Fair Value at | | Owned (A) | | (Level 1) | | (Level 2) | | (Level 3) |
December 31, 2009 | | 64,179 | | $ | - | | $ | - | | $ | 64,179 |
|
(A) | | The Company did not hold any Real Estate Owned as of December 31, 2010. |
At the time a mortgage loan held-in-portfolio becomes real estate owned, the Company records the property at the lower of its carrying amount or fair value. Upon foreclosure and through liquidation, the Company evaluates the property's fair value as compared to its carrying amount and records a valuation adjustment when the carrying amount exceeds fair value. Any valuation adjustments at the time the loan becomes real estate owned is charged to the allowance for credit losses.
The following table provides a summary of the impact to earnings from the Company’s assets and liabilities which are measured at fair value on a recurring and nonrecurring basis (dollars in thousands):
| | Fair Value | | Fair Value Adjustments For | | |
Asset or Liability Measured at | | Measurement | | the Year Ended December 31, | | Statement of Operation Line |
Fair Value | | Frequency | | 2010 | | 2009 | | Item Impacted |
Mortgage securities – trading | | Recurring | | $ | (158 | ) | | $ | (11,826 | ) | | Other expense |
Mortgage securities – available- | | | | | | | | | | | | |
for-sale | | Recurring | | | - | | | | (1,198 | ) | | Other expense |
Real estate owned | | Nonrecurring | | | (178 | ) | | | (9,164 | ) | | Provision for credit losses |
Derivative instruments, net | | Recurring | | | 157 | | | | (7,361 | ) | | Other expense |
Asset-backed bonds secured by | | | | | | | | | | | | |
mortgage securities | | Recurring | | | 1,226 | | | | 5,083 | | | Other expense |
Total fair value losses | | | | $ | 1,047 | | | $ | (24,466 | ) | | |
|
47
Valuation Methods.
Mortgage securities – trading. Trading securities are recorded at fair value with gains and losses, realized and unrealized, included in earnings. The Company uses the specific identification method in computing realized gains or losses.
Upon the closing of its NMFT Series 2007-2 securitization, the Company classified the residual security it retained as trading. The Company also classified the NHEL 2006-1, NHEL 2006-MTA1 and NHEL 2007-1 residual securities as trading upon the derecognition of these securitization trusts. The Company estimates fair value based on the present value of expected future cash flows using management’s best estimates of credit losses, prepayment rates, forward yield curves, and discount rates, commensurate with the risks involved. Due to the unobservable inputs used by the Company in determining the expected future cash flows, the Company determined its valuation methodology for residual securities would qualify as Level 3. See “Mortgage securities – available-for-sale" for further discussion of the Company’s valuation policies relating to residual securities.
Mortgage securities – available-for-sale. Mortgage securities – available-for-sale represent residual securities the Company retained in securitization and resecuritization transactions. Mortgage securities classified as available-for-sale are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of mortgage securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses. The Company uses the discount rate methodology for determining the fair value of its residual securities. The fair value of the residual securities is estimated based on the present value of future expected cash flows to be received. Management’s best estimate of key assumptions, including credit losses, prepayment speeds, the market discount rates and forward yield curves commensurate with the risks involved, are used in estimating future cash flows.
Derivative instruments. The fair value of derivative instruments is estimated by discounting the projected future cash flows using appropriate market rates.
Asset-backed bonds secured by mortgage securities. See discussion under “Fair Value Option for Financial Assets and Financial Liabilities.”
Real estate owned. Real estate owned is carried at the lower of cost or fair value less estimated selling costs. The Company estimates fair value at the asset’s liquidation value less selling costs using management’s assumptions which are based on historical loss severities for similar assets.
Fair Value Option for Financial Assets and Financial Liabilities
Under the fair value option guidance, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.
The Company elected the fair value option for the asset-backed bonds issued from the CDO, which the Company closed in the first quarter of 2007. The Company elected the fair value option for these liabilities to help reduce earnings volatility which otherwise would arise if the accounting method for this debt was not matched with the fair value accounting for the related mortgage securities – trading. The asset-backed bonds which are being carried at fair value are included in the “Other current liabilities“ line item on the consolidated balance sheets. The change in the asset-backed bonds balance is due to the fair value adjustments since adoption of the guidance. The Company has not elected fair value accounting for any other consolidated balance sheets items as allowed by the guidance from Fair Value Option for Financial Assets and Financial Liabilities.
The following table shows the difference between the unpaid principal balance and the fair value of the asset-backed bonds secured by mortgage securities for which the Company has elected fair value accounting as of December 31, 2010 and December 31, 2009 (dollars in thousands):
| | Unpaid Principal | | Year to Date Gain | | | |
Unpaid Principal Balance as of | | Balance | | Recognized | | Fair Value |
December 31, 2010 | | $ | 324,662 | | $ | 1,226 | | $ | 1,198 |
December 31, 2009 | | | 323,999 | | | 5,083 | | | 968 |
|
48
Substantially all of the change in fair value of the asset-backed bonds during the year ended December 31, 2010 is considered to be related to specific credit risk as all of the bonds are floating rate.
Note 12. Property13. Fair Value Accounting
For financial reporting purposes, the Company follows a fair value hierarchy that is used to measure the fair value of assets and Equipment, Netliabilities. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” or the price at which an asset
could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale at the date of measurement.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities.
Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates.
Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.
The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The methods the Company uses to determine fair value on an instrument specific basis are detailed in the section titled “Valuation Methods,” below.
| December 31, |
| 2010 | | 2009 |
Furniture, fixtures and office equipment | $ | 803 | | | $ | 709 | |
Hardware and computer equipment | | 2,148 | | | | 1,773 | |
Software | | 5,794 | | | | 2,301 | |
Leasehold improvements | | 258 | | | | 258 | |
| | 9,003 | | | | 5,041 | |
Less: Accumulated depreciation and amortization | | (4,182 | ) | | | (3,238 | ) |
| $ | 4,821 | | | $ | 1,803 | |
|
All of the Company’s property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives of the assets are leasehold improvements, lesser of 5 years or remaining lease term, furniture and fixtures, 5 years, office and computer equipment, 3 to 5 years and software, 3 years.
Maintenance and repairs are charged to expense. Major renewals and improvements are capitalized. Gains and losses on dispositions are credited or charged to earnings as incurred. Depreciation and amortization expense relating to property and equipment was $0.9 millionfollowing tables present for each of the fair value hierarchy levels, the Company’s assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
Description | | Fair Value at December 31, 2011 (A) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) (A) |
Assets: | | | | | | | | |
Mortgage securities – available-for-sale | | $ | 3,878 |
| | $ | — |
| | $ | — |
| | $ | 3,878 |
|
Total assets | | $ | 3,878 |
| | $ | — |
| | $ | — |
| | $ | 3,878 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Contingent consideration (B) | | $ | 1,154 |
| | $ | — |
| | $ | — |
| | $ | 1,154 |
|
Total liabilities | | $ | 1,154 |
| | $ | — |
| | $ | — |
| | $ | 1,154 |
|
| | | | | | | | |
(A) The Company's mortgage securities – trading and asset-backed bonds secured by mortgage securities were valued at zero as of December 31, 2011.
(B) The contingent consideration represents the estimated fair value of the additional potential amounts payable in connection with our acquisitions of Mango and Corvisa, $0.3 million and $0.9 million, respectively.
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date Using |
Description | | Fair Value at December 31, 2010 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
Mortgage securities – trading | | $ | 1,198 |
| | $ | — |
| | $ | — |
| | $ | 1,198 |
|
Mortgage securities – available-for-sale | | 4,580 |
| | — |
| | — |
| | 4,580 |
|
Total assets | | $ | 5,778 |
| | $ | — |
| | $ | — |
| | $ | 5,778 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Asset-backed bonds secured by mortgage securities | | $ | 1,198 |
| | $ | — |
| | $ | — |
| | $ | 1,198 |
|
Contingent consideration (A) | | 450 |
| | — |
| | — |
| | 450 |
|
Total liabilities | | $ | 1,648 |
| | $ | — |
| | $ | — |
| | $ | 1,648 |
|
| | | | | | | | |
(A) The contingent consideration represents the estimated fair value of the additional potential earn-out opportunity payable in connection with our acquisition of Corvisa that is contingent and based upon certain future earnings targets.
The following tables provide a reconciliation of the beginning and ending balances for the Company's mortgage securities – trading which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 20102011 and 2009,2010, respectively (dollars in thousands):
|
| | | | | | | |
| For the Year Ended December 31, |
| 2011 | | 2010 |
Balance, beginning of period | $ | 1,198 |
| | $ | 1,087 |
|
Increases (decreases) to mortgage securities – trading: | | | |
Accretion of income | 973 |
| | 1,766 |
|
Proceeds from paydowns of securities | (761 | ) | | (1,497 | ) |
Mark-to-market value adjustment | (1,410 | ) | | (158 | ) |
Net (decrease) increase to mortgage securities – trading | (1,198 | ) | | 111 |
|
Balance, end of period | $ | — |
| | $ | 1,198 |
|
| | | |
The following tables provide a reconciliation of the beginning and ending balances for the Company's mortgage securities – available-for-sale which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | |
| For the Year Ended December 31, |
| 2011 | | 2010 |
Balance, beginning of period | $ | 4,580 |
| | $ | 6,903 |
|
Increases (decreases) to mortgage securities – available-for-sale: | | | |
Accretion of income (A) | 1,716 |
| | 2,235 |
|
Proceeds from paydowns of securities (A) (B) | (1,274 | ) | | (3,858 | ) |
Mark-to-market value adjustment | (1,144 | ) | | (700 | ) |
Net decrease to mortgage securities – available-for-sale | (702 | ) | | (2,323 | ) |
Balance, end of period | $ | 3,878 |
| | $ | 4,580 |
|
| | | |
(A) Cash received on mortgage securities with no cost basis was $7.6 million and $7.5 million for the years ended December 31, 2011 and 2010, respectively.
Note 13. GoodwillThe following table presents information on mortgage securities – available-for-sale held by the Company as of December 31, 2011 arising from the Company's residential mortgage-related securitization transactions. The pre-tax sensitivities of the current fair value of the retained interests to immediate 10% and 25% adverse changes in assumptions and parameters are also shown (dollars in thousands):
|
| | | |
| |
Carrying amount/fair value of residual interests | $ | 3,878 |
|
Weighted average life (in years) | 2.00 |
|
Weighted average prepayment speed assumption (CPR) (percent) | 17.5 |
|
Fair value after a 10% increase in prepayment speed | $ | 3,804 |
|
Fair value after a 25% increase in prepayment speed | $ | 3,689 |
|
Weighted average expected annual credit losses (percent of current collateral balance) | 5.5 |
|
Fair value after a 10% increase in annual credit losses | $ | 3,786 |
|
Fair value after a 25% increase in annual credit losses | $ | 3,734 |
|
Weighted average residual cash flows discount rate (percent) | 25.0 | % |
Fair value after a 500 basis point increase in discount rate | $ | 3,720 |
|
Fair value after a 1000 basis point increase in discount rate | $ | 3,571 |
|
Market interest rates: | |
Fair value after a 100 basis point increase in market rates | $ | 2,558 |
|
Fair value after a 200 basis point increase in market rates | $ | 1,408 |
|
| |
The preceding sensitivity analysis is hypothetical and should be used with caution. In particular, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independent of changes in any other assumption; in
practice, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Further, changes in fair value based on a 10% or 25% variation in an assumption or parameter generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.
The following table provides a reconciliation of the beginning and ending balances for the Company's contingent consideration liability which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | |
| For the Year Ended December 31, |
| 2011 | | 2010 |
Balance, beginning of period | $ | 450 |
| | $ | — |
|
Acquisition of Corvisa | — |
| | 450 |
|
Fair value adjustment | (150 | ) | | — |
|
Acquisition of Corvisa noncontrolling interest (A) | 554 |
| | — |
|
Acquisition of Mango | 300 |
| | — |
|
Balance, end of period | $ | 1,154 |
| | $ | 450 |
|
| | | |
(A) As part of the Corvisa noncontrolling interest acquisition, the previous contingent consideration payable of $0.3 million was canceled, the new contingent consideration payable amount was estimated at $0.9 million.
The following table provides a summary of the impact to earnings for the years ended December 31, 2011 and 2010 from the Company's assets and liabilities which are measured at fair value on a recurring and nonrecurring basis (dollars in thousands):
|
| | | | | | | | | | | | |
| | Fair Value | Fair Value Adjustments For the | |
| | Measurement | | Year Ended December 31, | | Statement of Operations |
Asset or Liability Measured at Fair Value | | Frequency | | 2011 | | 2010 | | Line Item Impacted |
Mortgage securities – trading | | Recurring | | $ | (1,410 | ) | | $ | (158 | ) | | Other income (expense) |
Real estate owned (A) | | Nonrecurring | | — |
| | (178 | ) | | Provision for credit losses |
Derivative instruments, net (A) | | Recurring | | — |
| | 157 |
| | Other income (expense) |
Contingent consideration (B) | | Recurring | | 150 |
| | — |
| | Other income (expense) |
Asset-backed bonds secured by mortgage securities | | Recurring | | 1,198 |
| | 1,226 |
| | Other income (expense) |
Total fair value gains (C) | | | | $ | (62 | ) | | $ | 1,047 |
| | |
| | | | | | | | |
| |
(A) | The Company did not hold any real estate owned or derivative instruments as of December 31, 2011 or December 31, 2010. |
(B) The contingent consideration represents the change in the estimated fair value of the additional potential amounts payable in connection with our acquisitions of Corvisa and Mango.
| |
(C) | The Company did not have any impairments relating to mortgage securities – available-for-sale for the years ended December 31, 2011 and 2010. |
Valuation Methods
Mortgage securities – trading. Trading securities are recorded at fair value with gains and losses, realized and unrealized, included in earnings. The Company uses the specific identification method in computing realized gains or losses. The Company estimates fair value based on the present value of expected future cash flows using management's best estimates of credit losses, prepayment rates, forward yield curves, and discount rates, commensurate with the risks involved. Due to the unobservable inputs used by the Company in determining the expected future cash flows, the Company determined its valuation methodology for residual securities would qualify as Level 3.
Mortgage securities – available-for-sale. Mortgage securities classified as available-for-sale are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of mortgage securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses. The Company uses the discount rate methodology for determining the fair value of its residual securities. The fair value of the residual securities is estimated based on the present value of future expected cash flows to be received. Management's best estimate of key assumptions, including credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved, are used in estimating future cash flows.
Contingent consideration. The fair value of the Mango contingent consideration was estimated using a probability analysis of compliance with the separation agreement and a discount rate was applied to the projected earn-out payments that approximated the weighted average cost of capital. The key input was management's estimation of probability that the employee will comply with the agreement. The Company estimated the fair value of the Corvisa contingent consideration using projected revenue over the earn-out period, and applied a discount rate to the projected earn-out payments that approximated the weighted average cost of capital. The key inputs for the projected revenue analysis were the number of units completed and the average amount of revenue per unit.
Asset-backed bonds secured by mortgage securities. See discussion under “Fair Value Option for Financial Assets and Financial Liabilities.”
Fair Value Option for Financial Assets and Financial Liabilities
The Company elected the fair value option for asset-backed bonds issued from the CDO to help reduce earnings volatility which otherwise would arise if the accounting method for this debt was not matched with the fair value accounting for the related mortgage securities. The asset-backed bonds which are being carried at fair value are included in the “Other current liabilities” line item on the consolidated balance sheets, the asset-backed bonds had no value as of December 31, 2011 and an estimated fair value of $1.2 million as of December 31, 2010. The Company recognized fair value adjustments of $1.2 million and $1.2 million for the years ended December 31, 2011 and 2010, respectively, which is included in the “Other expenses” line item on the consolidated statements of operations. Substantially all of the change in fair value of the asset-backed bonds during the years ended December 31, 2011 and 2010 is considered to be related to specific credit risk as all of the bonds are floating rate.
The following table shows the difference between the unpaid principal balance and the fair value of the asset-backed bonds secured by mortgage securities for which the Company has elected fair value accounting as of December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | | | | | | |
Unpaid Principal Balance as of | | Unpaid Principal Balance | | Year to Date Gain Recognized | | Fair Value |
December 31, 2011 | | $ | 325,375 |
| | $ | 2,069 |
| | $ | — |
|
December 31, 2010 | | 324,662 |
| | 1,226 |
| | 1,198 |
|
| | | | | | |
The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies could have a material impact on the estimated fair value amounts. The fair value of short-term financial assets and liabilities, such as cash, service fees receivable, notes receivable, and accounts payable and accrued expenses are not included in the following table as their fair value approximates their carrying value.
The estimated fair values of the Company’s financial instruments are as follows as of December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | | | | | | |
| | December 31, 2011 | | December 31, 2010 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial assets: | | | | | | | | |
Restricted cash | | 2,912 |
| | 2,836 |
| | 1,413 |
| | 1,341 |
|
Mortgage securities – trading | | — |
| | — |
| | 1,198 |
| | 1,198 |
|
Mortgage securities – available-for-sale | | 3,878 |
| | 3,878 |
| | 4,580 |
| | 4,580 |
|
Financial liabilities: | | | | | | | | |
Borrowings: | | | | | | | | |
Asset-backed bonds secured by mortgage securities | | — |
| | — |
| | 1,198 |
| | 1,198 |
|
Junior subordinated notes | | — |
| | — |
| | 78,086 |
| | 17,988 |
|
Senior notes | | 79,654 |
| | 10,273 |
| | — |
| | — |
|
| | | | | | | | |
Restricted Cash – The fair value of restricted cash was estimated by discounting estimated future release of the cash from restriction.
Mortgage securities – trading - See Valuation Methods section above for fair value method utilized.
Mortgage securities – available-for-sale - See Valuation Methods section above for fair value method utilized.
Asset-backed bonds secured by mortgage securities – See Valuation Methods section above for fair value method utilized.
Senior notes and Junior subordinated notes – The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. As of December 31, 2011, the value of the Senior Notes was calculated assuming that the Company would be required to pay interest at a rate of 1.0% per annum until January 2016, at which time the Company would be required to start paying the Full Rate of three-month LIBOR plus 3.5% until maturity in March 2033. The three-month LIBOR used in the analysis was projected using a forward interest rate curve. As of December 31, 2010, goodwill totaled $3.2 millionthe value of the Junior Notes was calculated assuming that the Company would be required to pay interest at the Full Rate of three-month LIBOR plus 3.5% until maturity in March 2035 and June 2036. The large discrepancy between the estimated fair value of the Senior Notes and the Junior Notes was included inmainly attributable to the Appraisal management reporting unit. There was no goodwillassumption that the Company would be paying 1.0% per annum on the Senior Notes until January 2016 compared to the Full Rate for the entire term on the Junior Notes. The overall forward interest rate curve also decreased as of December 31, 2009.
Goodwill activity is2011 to the forward interest rate curve used as follows for the year endedof December 31, 2010 and 2009, respectively (dollars in thousands):
| For the Years Ended |
| December 31, |
| 2010 | | 2009 |
Balance, beginning of period | $ | - | | $ | - | |
Advent acquisition | | - | | | 1,190 | |
StreetLinks contingent consideration payment (A) | | 3,170 | | | - | |
Impairments | | - | | | (1,190 | ) |
Balance, end of period | $ | 3,170 | | $ | - | |
|
(A) | | There are no remaining contingent consideration payments that could be required for the StreetLinks acquisition. |
Duringcausing the year ended December 31, 2010,estimated interest payments of approximately $3.2 million were madeat the Full Rate to be less even with a higher principal balance. See Note 9 to the former majority ownersconsolidated financial statements for further details of StreetLinks upon certain earnings targets being achieved. In accordance with the Business Combinations guidance that was utilized by the Company at the time of acquisition during August 2008, any contingent payments made in excess of amounts assigned to assets acquiredJunior Notes and liabilities recognized should be recorded as goodwill. As all consideration paid had previously been assigned to the assets acquired and liabilities assumed, the $3.2 million was recorded as goodwill during the year ended December 31, 2010. For tax purposes, the goodwill is included in the Company’s basis in its investment in Streetlinks as it is a limited liability company, therefore it will be non-deductible for tax purposes as long as the Company holds its investment in StreetLinks.Senior Notes.
Note 14. Segment Reporting
The Company reviews, manages and operates its business in three segments: corporate, appraisal management and financial intermediary. Corporate operating results include mortgage securities retained from securitizations, corporate general and administrative expenses, and income generated from Mango as they were not significant. Appraisal management operations include the service fee income and related expenses from the Company's majority-owned direct subsidiary, StreetLinks, and its wholly-owned indirect subsidiary, Corvisa. The financial intermediary segment consists of the financial settlement service fee income and related expenses from Advent. This segment had significant operations during the year ended December 31, 2011, and therefore is now managed as its own segment. Operations of Advent had been included in the Corporate segment information in the same period in 2010 as it was in its start-up phase and its operating activities were not significant. The Securitization trusts segment is no longer its own segment due to the derecognition of the securitization trusts which occurred in January 2010. See Note 18 to the condensed consolidated financial statements for further details. Management evaluates segment performance based upon income before income tax benefit, which is prior to the allocation of losses attributable to the noncontrolling interests.
The following is a summary of the operating results of the Company’s segments as of and for the years ended December 31, 2011 and 2010 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Corporate | | Appraisal Management | | Financial Intermediary | | Eliminations | | Total |
For the Year Ended December 31, 2011 | | | | | | | | | |
Service fee income | $ | 624 |
| | $ | 119,387 |
| | $ | 6,739 |
| | $ | — |
| | $ | 126,750 |
|
Interest income | 10,959 |
| | — |
| | — |
| | (624 | ) | | 10,335 |
|
Interest expense | 2,471 |
| | 8 |
| | 616 |
| | (624 | ) | | 2,471 |
|
Depreciation and amortization expense (A) | 195 |
| | 1,732 |
| | 64 |
| | — |
| | 1,991 |
|
Income (loss) before income tax benefit | 42 |
| | 6,394 |
| | (938 | ) | | — |
| | 5,498 |
|
Additions to long-lived assets (B) | 3,080 |
| | 1,860 |
| | 275 |
| | — |
| | 5,215 |
|
| | | | | | | | | |
As of December 31, 2011 | | | | | | | | | |
Total assets (B) (C) | $ | 34,657 |
| | $ | 17,197 |
| | $ | 2,261 |
| | $ | (9,514 | ) | | $ | 44,601 |
|
| | | | | | | | | |
(A) Amounts are included in the cost of services and selling, general and administrative expense line item of the consolidated statements of operations.
| |
(B) | Corporate segment includes goodwill of $2.2 million which relates to Mango. |
| |
(C) | Appraisal management segment includes goodwill of $3.2 million which relates to StreetLinks. |
As of December 31, 2010, the Company reviewed, managed and operated its business in three segments: securitization trusts, corporate and appraisal management. Securitization trusts’trusts' operating results are driven from the income generated on the on-balance sheet securitizations less associated costs. Corporate operating results include income generated from mortgage securities retained from securitizations, corporate
|
| | | | | | | | | | | | | | | | | | | |
| Corporate | | Appraisal Management | | Securitization Trusts | | Eliminations | | Total |
For the Year Ended December 31, 2010 | | | | | | | | | |
Service fee income | $ | — |
| | $ | 75,168 |
| | $ | — |
| | $ | — |
| | $ | 75,168 |
|
Interest income | 9,816 |
| | — |
| | 12,369 |
| | 167 |
| | 22,352 |
|
Interest expense | 1,073 |
| | — |
| | — |
| | — |
| | 1,073 |
|
Depreciation and amortization expense (A) | 268 |
| | 669 |
| | — |
| | — |
| | 937 |
|
(Loss) income before income tax benefit | (1,570 | ) | | 3,833 |
| | 982,284 |
| | (249 | ) | | 984,298 |
|
Additions to long-lived assets (B) | 278 |
| | 6,854 |
| | — |
| | — |
| | 7,132 |
|
| | | | | | | | | |
As of December 31, 2010 | | | | | | | | | |
Total assets (B) | $ | 30,144 |
| | $ | 13,781 |
| | $ | 1,497 |
| | $ | (7,561 | ) | | $ | 37,861 |
|
| | | | | | | | | |
(A) Amounts are included in the cost of services and selling, general and administrative expenses and Advent as it did not have significant operations in the periods. Appraisal management operations include the appraisal fee income and related expenses from the Company’s majority-owned subsidiaries StreetLinks and Corvisa.
49
The following is a summary of the operating results of the Company’s segments for the years ended December 31, 2010 and 2009 (dollars in thousands):
For the Year ended December 31, 2010
| | | | | | | | | | | | | | | | | | | |
| Securitization | | | | | | Appraisal | | | | | | | | |
| Trusts | | Corporate | | | Management | | Eliminations | | Total |
Income and Revenues: | | | | | | | | | | | | | | | | | | | |
Service fee income | $ | - | | | $ | - | | | $ | 75,168 | | | $ | - | | | $ | 75,168 | |
Interest income – mortgage | | | | | | | | | | | | | | | | | | | |
loans | | 10,681 | | | | - | | | | - | | | | 167 | | | | 10,848 | |
Interest income – mortgage | | | | | | | | | | | | | | | | | | | |
securities | | 1,688 | | | | 9,816 | | | | - | | | | - | | | | 11,504 | |
Total | | 12,369 | | | | 9,816 | | | | 75,168 | | | | 167 | | | | 97,520 | |
|
Costs and Expenses: | | | | | | | | | | | | | | | | | | | |
Cost of services | | - | | | | - | | | | 66,475 | | | | - | | | | 66,475 | |
Interest expense – asset- | | | | | | | | | | | | | | | | | | | |
backed bonds | | 1,416 | | | | - | | | | - | | | | - | | | | 1,416 | |
Provision for credit losses | | 17,433 | | | | - | | | | - | | | | - | | | | 17,433 | |
Servicing fees | | 731 | | | | - | | | | - | | | | - | | | | 731 | |
Premiums for mortgage loan | | | | | | | | | | | | | | | | | | | |
insurance | | 308 | | | | - | | | | - | | | | - | | | | 308 | |
Selling, general and | | | | | | | | | | | | | | | | | | | |
administrative expense | | 40 | | | | 14,334 | | | | 4,940 | | | | - | | | | 19,314 | |
Gain on disposition of mortgage | | | | | | | | | | | | | | | | | | | |
loans | | (993,131 | ) | | | - | | | | - | | | | - | | | | (993,131 | ) |
Other expenses (income) | | 3,288 | | | | (3,249 | ) | | | (65 | ) | | | 416 | | | | 390 | |
Total | | (969,915 | ) | | | 11,085 | | | | 71,350 | | | | 416 | | | | (887,064 | ) |
|
Other income | | - | | | | 772 | | | | 15 | | | | - | | | | 787 | |
Interest expense on trust | | | | | | | | | | | | | | | | | | | |
preferred securities | | - | | | | (1,073 | ) | | | - | | | | - | | | | (1,073 | ) |
|
Income (loss) before income tax | | | | | | | | | | | | | | | | | | | |
expense | | 982,284 | | | | (1,570 | ) | | | 3,833 | | | | (249 | ) | | | 984,298 | |
Income tax expense | | - | | | | (1,356 | ) | | | - | | | | - | | | | (1,356 | ) |
Net income (loss) | | 982,284 | | | | (214 | ) | | | 3,833 | | | | (249 | ) | | | 985,654 | |
Less: Net (loss) income | | | | | | | | | | | | | | | | | | | |
attributable to noncontrolling | | | | | | | | | | | | | | | | | | | |
interests | | - | | | | (1,369 | ) | | | 321 | | | | - | | | | (1,048 | ) |
Net income (loss) attributable to | | | | | | | | | | | | | | | | | | | |
NFI | $ | 982,284 | | | $ | 1,155 | | | $ | 3,512 | | | $ | (249 | ) | | $ | 986,702 | |
|
Depreciation and amortization | | | | | | | | | | | | | | | | | | | |
expense (A) | $ | - | | | $ | 268 | | | $ | 669 | | | $ | - | | | $ | 937 | |
|
December 31, 2010: | | | | | | | | | | | | | | | | | | | |
Total assets | $ | 1,497 | | | $ | 30,144 | | | $ | 13,781 | | (B) | $ | (7,561 | ) | | $ | 37,861 | |
|
Additions to long-lived assets | $ | - | | | $ | 278 | | | $ | 6,854 | | (B) | $ | - | | | $ | 7,132 | |
|
(A) | | Amounts are included in the cost of services and selling, general and administrative expense line item of the consolidated statements of operations. | | (B) | | IncludesAppraisal management segment includes goodwill of $3.2 million.million which relates to StreetLinks. |
50
For the Year Ended December 31, 2009
| | | | | | | | | | | | | | | | | | | | | Securitization | | | | | | Appraisal | | | | | | | | | | Trusts | | Corporate | | | Management | | Eliminations | | Total | Income and Revenues: | | | | | | | | | | | | | | | | | | | | Service fee income | $ | - | | | $ | - | | | $ | 31,106 | | | $ | - | | | $ | 31,106 | | Interest income – mortgage | | | | | | | | | | | | | | | | | | | | loans | | 130,017 | | | | - | | | | - | | | | 1,284 | | | | 131,301 | | Interest income – mortgage | | | | | | | | | | | | | | | | | | | | securities | | 7,234 | | | | 16,940 | | | | - | | | | (2,518 | ) | | | 21,656 | | Total | | 137,251 | | | | 16,940 | | | | 31,106 | | | | (1,234 | ) | | | 184,063 | | | Costs and Expenses: | | | | | | | | | | | | | | | | | | | | Cost of services | | - | | | | - | | | | 32,221 | | | | - | | | | 32,221 | | Interest expense – asset- | | | | | | | | | | | | | | | | | | | | backed bonds | | 21,290 | | | | - | | | | - | | | | - | | | | 21,290 | | Provision for credit losses | | 260,860 | | | | - | | | | - | | | | - | | | | 260,860 | | Servicing fees | | 10,639 | | | | - | | | | - | | | | - | | | | 10,639 | | Premiums for mortgage loan | | | | | | | | | | | | | | | | | | | | insurance | | 6,041 | | | | 137 | | | | - | | | | - | | | | 6,178 | | Selling, general and | | | | | | | | | | | | | | | | | | | | administrative expense | | 238 | | | | 18,702 | | | | 1,837 | | | | - | | | | 20,777 | | Other expenses | | 1,600 | | | | 11,749 | | | | 46 | | | | 510 | | | | 13,905 | | Total | | 300,668 | | | | 30,588 | | | | 34,104 | | | | 510 | | | | 365,870 | | | Other income | | 117 | | | | 770 | | | | - | | | | - | | | | 887 | | Interest expense on trust | | | | | | | | | | | | | | | | | | | | preferred securities | | - | | | | (1,128 | ) | | | - | | | | - | | | | (1,128 | ) | | Loss before income tax expense | | (163,300 | ) | | | (14,006 | ) | | | (2,998 | ) | | | (1,744 | ) | | | (182,048 | ) | Income tax expense | | - | | | | 1,108 | | | | - | | | | - | | | | 1,108 | | Net loss | | (163,300 | ) | | | (15,114 | ) | | | (2,998 | ) | | | (1,744 | ) | | | (183,156 | ) | Less: Net loss attributable to | | | | | | | | | | | | | | | | | | | | noncontrolling interests | | - | | | | (1,225 | ) | | | (829 | ) | | | - | | | | (2,054 | ) | Net loss attributable to NFI | $ | (163,300 | ) | | $ | (13,889 | ) | | $ | (2,169 | ) | | $ | (1,744 | ) | | $ | (181,102 | ) | | Depreciation and amortization | | | | | | | | | | | | | | | | | | | | expense (A) | $ | - | | | $ | 438 | | | $ | 431 | | | $ | - | | | $ | 869 | | | December 31, 2009: | | | | | | | | | | | | | | | | | | | | Total assets | $ | 1,437,059 | | | $ | 26,706 | | | $ | 4,164 | | | $ | (8,438 | ) | | $ | 1,459,491 | | | Additions to long-lived assets | $ | - | | | $ | 654 | | | $ | 774 | | | $ | - | | | $ | 1,428 | | |
(A) | | Amounts are included in the cost of services and selling, general and administrative expense line item of the consolidated statements of operations. |
Revenues from one customer of the appraisal management segment, approximately $17.1 million and $10.6 million, were in excess of 10% of total consolidated revenues for the yearyears ended December 31, 2010. There were no customers with revenues in excess of 10% during the year ended December 31, 2009.2011 and 2010, respectively.
51
Note 15. Earnings Per Share The following table presents computations of basic and dilutedFor the year ended December 31, 2011, earnings per share was calculated using the treasury method which included the Series D Preferred Stock assumed to be converted to 1,875,000 shares of Common Stock that shared in distributions with common shareholders on a 1:1 basis through the date of the Recapitalization. See Note 3 to the condensed consolidated financial statements for further details. The weighted average common shares outstanding for the yearsyear ended December 31, 2010 and 2009 are as follows (dollars in thousands, except per share amounts):
2011As a result also include the effect of the convertible participating preferred stock beingnewly-issued Common Stock issued in the Recapitalization.
Prior to the June 2011 Recapitalization, the Series D Preferred Stock were considered participating securities and therefore the earnings per share information below is calculated under the two-class method which is discussed infor the Earnings per Shareyear ended December 31, 2010 accounting guidance.. In determining the number of diluted shares outstanding, the relevant guidance requires disclosure of the more dilutive earnings per share result between the if-converted method calculation and the two-class method calculation. For the year ended December 31, 2010, the two-class method calculation was more dilutive; therefore, the earnings per share information below is presented following the two-class method which includes convertible participating preferred stock assumed to be converted to 1,875,000 shares of common stock that share in distributions with common shareholders on a 1:1 basis. For
The computations of basic and diluted earnings per share for the yearyears ended December 31, 2009,2011 and 2010 (dollars in thousands, except share and per share amounts) are as the convertible participating preferred stockholders do not have an obligation to participate in losses, no allocation of undistributed losses was necessary.follows:
| For the Year Ended | | December 31, | | 2010 | | 2009 | Numerator: | | | | | | | | Net income (loss) | $ | 985,654 | | | $ | (183,156 | ) | Less loss attributable to noncontrolling interests | | (1,048 | ) | | | (2,054 | ) | Dividends on preferred shares | | (16,499 | ) | | | (15,312 | ) | Allocation of undistributed income to convertible participating preferred stock | | (162,246 | ) | | | - | | Income (loss) available to common shareholders | $ | 807,957 | | | $ | (196,414 | ) | | Denominator: | | | | | | | | Weighted average common shares outstanding – basic and diluted | | 9,337,207 | | | | 9,368,053 | | | Basic earnings per share: | | | | | | | | Net income (loss) | $ | 105.56 | | | $ | (19.55 | ) | Less loss attributable to noncontrolling interests | | (0.11 | ) | | | (0.22 | ) | Dividends on preferred shares | | (1.77 | ) | | | (1.64 | ) | Allocation of undistributed income to convertible participating preferred stock | | (17.37 | ) | | | - | | Net income (loss) available to common shareholders | $ | 86.53 | | | $ | (20.97 | ) | | Diluted earnings per share: | | | | | | | | Net income (loss) | $ | 105.56 | | | $ | (19.55 | ) | Less loss attributable to noncontrolling interests | | (0.11 | ) | | | (0.22 | ) | Dividends on preferred shares | | (1.77 | ) | | | (1.64 | ) | Allocation of undistributed income to convertible participating preferred stock | | (17.37 | ) | | | - | | Net income (loss) available to common shareholders | $ | 86.53 | | | $ | (20.97 | ) | |
42
| | | | | | | | | | For the Year Ended December 31, | | 2011 | | 2010 | Numerator: | | | | Net income | $ | 7,272 |
| | $ | 985,654 |
| Less loss attributable to noncontrolling interests | (491 | ) | | (1,048 | ) | Dividends on preferred shares | (8,428 | ) | | (16,499 | ) | Net effect of preferred stock exchange (A) | 95,460 |
| | — |
| Allocation of undistributed income to convertible participating preferred stock | — |
| | (162,246 | ) | Net income available to common shareholders | $ | 94,795 |
| | $ | 807,957 |
| | | | | Denominator: | | | | Weighted average common shares outstanding - basic | 52,132,669 |
| | 9,337,207 |
| | | | | Weighted average common shares outstanding - dilutive: | | | | Weighted average common shares outstanding - basic | 52,132,669 |
| | 9,337,207 |
| Nonvested shares | 159,653 |
| | — |
| Weighted average common shares outstanding - dilutive | 52,292,322 |
| | 9,337,207 |
| | | | | Basic earnings per share: | | | | Net income | $ | 0.14 |
| | $ | 105.56 |
| Less loss attributable to noncontrolling interests | (0.01 | ) | | (0.11 | ) | Dividends on preferred shares | (0.16 | ) | | (1.77 | ) | Net effect of preferred stock exchange (A) | 1.83 |
| | — |
| Allocation of undistributed income to convertible participating preferred stock | — |
| | (17.37 | ) | Net income available to common shareholders | $ | 1.82 |
| | $ | 86.53 |
| | | | | Diluted earnings per share: | | | | Net income | $ | 0.14 |
| | $ | 105.56 |
| Less loss attributable to noncontrolling interests | (0.01 | ) | | (0.11 | ) | Dividends on preferred shares | (0.16 | ) | | (1.77 | ) | Net effect of preferred stock exchange (A) | 1.82 |
| | — |
| Allocation of undistributed income to convertible participating preferred stock | — |
| | (17.37 | ) | Net income available to common shareholders | $ | 1.81 |
| | $ | 86.53 |
| | | | |
| | (A) | The net effect of the preferred stock exchange includes amounts attributable to the Series C Offer and the Series D Exchange and was calculated in accordance with applicable Earnings per Share guidance. The Series C Offer amount is calculated as the difference between (1) the fair value of the consideration transferred to the holders of the Series C Preferred Stock and (2) the carrying amount of the Series C Preferred Stock. The Series D Exchange amount consists of the excess of (1) the fair value of all securities and other consideration transferred by the Company to the Series D Holders over (2) the fair value of securities issuable pursuant to the original conversion terms. |
The following table presentsweighted-average stock options to purchase shares of common stock thatCommon Stock were outstanding during each period presented, but were not included in the computation of diluted earnings (loss) per share because the number of shares assumed to be repurchased, as calculated was greater than the number of shares to be obtained upon exercise, therefore, the effect would be antidilutive (in thousands, except exercise prices): | For the Year Ended | | December 31, | | 2010 | | 2009 | Number of stock options (in thousands) | | 282 | | | 114 | Weighted average exercise price of stock options | $ | 21.91 | | $ | 52.98 | |
52 | | | | | | | | | | For the Year Ended December 31, | | 2011 | | 2010 | Number of stock options | 677 |
| | 282 |
| Weighted average exercise price of stock options | $ | 8.38 |
| | $ | 21.91 |
| | | | |
The Company granted 0.4 million options to purchase shares of Common Stock at an exercise price of $0.51, of which the weighted average outstanding amount is included in the table above. The Company also granted 0.9 million nonvested shares to
its non-employee directors on August 9, 2011, approximately 0.7 million of which were not included in the earnings per share as they were anti-dilutive for the year ended December 31, 2011. The Company had 27,354 and 30,846 of additional nonvested shares outstanding as of December 31, 2011 and December 31, 2010, respectively which have original cliff vesting schedules ranging between five and ten years. The nonvested shares for each period were not included in the earnings per share because they were anti-dilutive.
Note 16. Income Taxes The components of income tax expense (benefit)benefit for the years ended December 31, 20102011 and 20092010 were as follows (dollars in thousands): | | For the Year Ended | | | December 31, | | | 2010 | | 2009 | Current: | | | | | | | | | Federal | | $ | (1,038 | ) | | $ | 1,192 | | State and local | | | (318 | ) | | | (84 | ) | Total current | | | (1,356 | ) | | | 1,108 | | | | | | | | | | | Total income tax (benefit) expense | | $ | (1,356 | ) | | $ | 1,108 | | |
| | | | | | | | | | | | For the Year Ended December 31, | | | 2011 | | 2010 | Current: | | |
| | |
| Federal | | $ | (1,519 | ) | | $ | (1,038 | ) | State and local | | (255 | ) | | (318 | ) | Total income tax benefit | | $ | (1,774 | ) | | $ | (1,356 | ) | | | | | |
The Company recorded a receivable for the overpayment of previously paid income taxes of $2.3 million during 2011 which is reflected in the amounts above. A substantial portion of the receivable was collected subsequent to 2011. There was an accrued interest receivable of $0.1 million as of December 31, 2011.
A reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of 35% to the Company’s actual income tax expense (benefit)benefit and resulting effective tax rate from continuing operations for the years ended December 31, 20102011 and 20092010 were as follows (dollars in thousands): | | | | | | | | | | | | For the Year Ended December 31, | | | 2011 | | 2010 | Income tax at statutory rate | | $ | 2,068 |
| | $ | 344,871 |
| State income taxes, net of federal tax benefit | | 179 |
| | 14,734 |
| Valuation allowance | | (8,524 | ) | | (382,565 | ) | Change in state tax rate | | — |
| | 10,583 |
| Adjustment to deferred tax asset | | 3,161 |
| | 4,271 |
| Recapitalization cost | | 774 |
| | — |
| Derecognition of securitized trust | | — |
| | 8,409 |
| Uncertain tax positions | | 558 |
| | 380 |
| Other | | 10 |
| | (2,039 | ) | Total income tax benefit | | $ | (1,774 | ) | | $ | (1,356 | ) | | | | | |
| | For the Year Ended | | | December 31, | | | 2010 | | 2009 | Income tax at statutory rate | | $ | 344,871 | | | $ | (62,998 | ) | State income taxes, net of federal tax benefit | | | 14,734 | | | | (3,201 | ) | Valuation allowance | | | (382,565 | ) | | | 72,119 | | Interest and penalties | | | (89 | ) | | | (218 | ) | Change in state tax rate | | | 10,583 | | | | (7,768 | ) | Adjustment to net operating loss | | | 4,271 | | | | 2,079 | | Derecognition of securitization trust | | | 8,409 | | | | - | | Other | | | (1,570 | ) | | | 1,095 | | Total income tax (benefit) expense | | $ | (1,356 | ) | | $ | 1,108 | | |
The 2010 income tax benefit shown above, does not reflect the ($2.0 million) income tax benefit recorded as part of the “Gain on Deconsolidation of Securitization Trusts.” The gain relates to the removal of the income tax payable and uncertain tax position related to the securitization trusts that were derecognized during the year.
Significant components of the Company’s deferred tax assets and liabilities at December 31, 20102011 and 20092010 were as follows (dollars in thousands): | | | | | | | | | | | | December 31, 2011 | | December 31, 2010 | Deferred tax assets: | | | | | Basis difference – investments | | $ | 157,256 |
| | $ | 162,675 |
| Federal net operating loss carryforwards | | 114,329 |
| | 113,527 |
| Allowance for loan losses | | — |
| | 440 |
| State net operating loss carryforwards | | 12,185 |
| | 15,055 |
| Other | | 2,641 |
| | 3,048 |
| Gross deferred tax asset | | 286,411 |
| | 294,745 |
| Valuation allowance | | (284,491 | ) | | (292,528 | ) | Deferred tax asset | | 1,920 |
| | 2,217 |
| Deferred tax liabilities: | | | | | Other | | 1,920 |
| | 2,217 |
| Deferred tax liability | | 1,920 |
| | 2,217 |
| Net deferred tax asset | | $ | — |
| | $ | — |
| | | | | |
| | December 31, | | December 31, | | | 2010 | | 2009 | Deferred tax assets: | | | | | | | | | Basis difference – investments | | $ | 162,675 | | | $ | 389,027 | | Federal net operating loss carryforwards | | | 113,527 | | | | 163,280 | | Allowance for loan losses | | | 440 | | | | 93,715 | | State net operating loss carryforwards | | | 15,055 | | | | 18,719 | | Excess inclusion income | | | - | | | | 2,291 | | Other | | | 3,048 | | | | 9,801 | | Gross deferred tax asset | | | 294,745 | | | | 676,833 | | Valuation allowance | | | (292,528 | ) | | | (674,823 | ) | Deferred tax asset | | | 2,217 | | | | 2,010 | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | Other | | | 2,217 | | | | 2,010 | | Deferred tax liability | | | 2,217 | | | | 2,010 | | | | | | | | | | | Net deferred tax asset | | $ | - | | | $ | - | | |
Based on the evidence available as of December 31, 2011 and 2010, the Company believes that it is not more likely than not that the Company will not realize its net deferred tax assets. Based on this conclusion, the Company recordedhad a valuation allowance of $292.5$284.5 million for deferred tax assets as of December 31, 2011 compared to $292.5 million as of December 31, 2010 compared to $674.8 million as.
As of December 31, 2009. This large decrease was mainly attributable to the derecognition of securitization trusts during the year ended December 31, 2010. 53
As of December 31, 2010,2011, the Company had a federal net operating loss of approximately $324.4$326.8 million. The federal net operating loss may be carried forward to offset future taxable income, subject to applicable provisions of the Code, including substantial limitations in the event of an “ownership change” as defined in Section 382 of the Code. If not used, this net operating loss will expire in years 2025 through 2030.2031. The Company has state net operating loss carryovers arising from both combined and separate filings from as early as 2004. The state net operating loss carryovers may expire as early as 20112012 and as late as 2030.2031.
The activity in the accrued liability for unrecognized tax benefits for the years ended December 31, 20102011 and 20092010 was as follows (dollars in thousands): | | | | | For the Year Ended December 31, | | | 2010 | | 2009 | | 2011 | | 2010 | Beginning balance | | $ | 906 | | $ | 480 | | | $ | 966 |
| | $ | 906 |
| Gross decreases – tax positions in prior period | | - | | - | | | Gross increases – tax positions in current period | | 470 | | 674 | | | 615 |
| | 470 |
| Lapse of statute of limitations | | (143 | ) | | (248 | ) | | (88 | ) | | (143 | ) | Other | | | (267 | ) | | | - | | | — |
| | (267 | ) | Ending balance | | $ | 966 | | $ | 906 | | | $ | 1,493 |
| | $ | 966 |
| | | | | | |
As of December 31, 20102011 and 2009,2010, the total gross amount of unrecognized tax benefits was $1.0$1.5 million and $0.9$1.0 million, respectively, which also represents the total amount of unrecognized tax benefits that would impact the effective tax rate. The Company anticipates a reduction of unrecognized tax benefits in the amount of $0.1$0.4 million due the lapse of statute of limitations in the next twelve months. The Company does not expect any other significant change in the liability for unrecognized tax benefits in the next twelve months. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. InterestThe benefit for interest and penalties recorded in income tax expense was $0.1$0.2 million and $0.2$0.1 million for the years ended December 31, 20102011 and 2009,2010, respectively. There was accrued interest and penalties of $0.1 million as of December 31, 2011. Accrued interest and penalties payable were $0.1 million and $1.9 million as of December 31, 2010 and 2009, respectively.. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions. Tax years 20062007 to 20102011 remain open to examination for U.S. federal income tax. Tax years 20052006 to 20102011 remain open for major state tax jurisdictions. Management believes it has adequately provided for potential tax liabilities that may be assessed for years in which the statute of limitations remains open. However, if there were an assessment of any material liability it may adversely affect the Company’s financial condition and liquidity.
Note 17. Employee Benefit Plans
Eligible employees may save for retirement through pretax contributions in defined contribution plans offered by the Company. Employees of the Company may contribute up to the statutory limit. The Company may elect to match a certain percentage of participants’ contributions. No contributions were made to the plans for the yearyears ended December 31, 2011 and 2010. There were $0.1 million in contributions made to the plans for the year ended December 31, 2009. The Company may also elect to make a discretionary contribution, which is allocated to participants based on each participant’s compensation. There were no contributions made to the plans during the yearyears ended December 31, 2011 and 2010. For 2009, $0.4 million was contributed to the plan’s participants, all of which came from the plan’s forfeitures account. The Company maintains a stock compensation plan. As a resultThe aggregate value and expense associated with the grants under the plan is not material to the Company's consolidated statements. Note 18. Securitization Transactions Prior to 2010, the Company securitized mortgage loans. For three of the differential betweensecuritizations (NHEL 2006-1, NHEL 2006-MTA1 and NHEL 2007-1), the exercise pricetransactions were structured legally as sales, but for accounting purposes were treated as financings. Accordingly, the loans in these securitizations remained as assets and securitization bond financing were reflected as a liabilities. The Company recorded interest income on loans held-in-portfolio and interest expense on the bonds issued in the securitizations. During the first quarter of 2010, certain events occurred that required the Company to reconsider the accounting for these consolidated loan trusts. During January of 2010, the Company attempted to sell the mezzanine-level bonds the Company owns from the NHEL 2006-1 and NHEL 2006-MTA1 securitization trusts and the current market pricefinal derivative of the options outstanding, it is not likely thatNHEL 2007-1 loan securitization trust expired. These events prompted a reconsideration of the stock compensation plan will have a significant impact onCompany's consolidation conclusion. As all requirements for derecognition had been met under applicable accounting guidelines, the Company’sCompany derecognized the assets and liabilities of the three consolidated securitizations as of January 25, 2010. Upon derecognition, all assets, liabilities and accumulated deficits were removed from our consolidated financial statements and, accordingly, additional information relative tostatements. A gain of $993.1 million was recognized upon derecognition, representing the number of options and related expenses is not included herein. Note 18. Fair Value of Financial Instrumentsnet accumulated deficits in these trusts.
The following disclosureassets and liabilities of the estimated fair value of financial instruments presents amounts that have been determined using available market informationsecuritization trusts and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicativeresulting gain recognized upon derecognition consisted of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies could have a material impact onfollowing at the estimated fair value amounts. 54
The estimated fair valuestime of the Company’s financial instruments are as follows as of December 31, 2010 and 2009reconsideration event (dollars in thousands):
| | 2010 | | 2009 | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Financial assets: | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 12,582 | | $ | 12,582 | | $ | 7,104 | | | $ | 7,104 | | Restricted cash | | | 1,413 | | | 1,341 | | | 5,342 | | | | 5,206 | | Mortgage loans – held-in-portfolio | | | - | | | - | | | 1,289,474 | | | | 1,160,527 | | Mortgage securities – trading | | | 1,198 | | | 1,198 | | | 1,087 | | | | 1,087 | | Mortgage securities – available-for-sale | | | 4,580 | | | 4,580 | | | 6,903 | | | | 6,903 | | Notes receivable | | | 3,965 | | | 3,965 | | | 4,920 | | | | 4,920 | | Accrued interest receivable | | | - | | | - | | | 74,025 | | | | 74,025 | | Financial liabilities: | | | | | | | | | | | | | | | Borrowings: | | | | | | | | | | | | | | | Asset-backed bonds secured by | | | | | | | | | | | | | | | mortgage loans | | | - | | | - | | | 2,270,602 | | | | 1,297,980 | | Asset-backed bonds secured by | | | | | | | | | | | | | | | mortgage securities | | | 1,198 | | | 1,198 | | | 968 | | | | 968 | | Junior subordinated debentures | | | 78,086 | | | 17,988 | | | 77,815 | | | | 6,225 | | Accrued interest payable | | | 345 | | | 345 | | | 751 | | | | 751 | | Derivative instruments: | | | - | | | - | | | (157 | ) | | | (157 | ) | |
| | | | | | Total | Assets: | | Mortgage loans – held-in-portfolio | $ | 1,953,188 |
| Allowance for loan losses | (702,901 | ) | Accrued interest receivable | 72,725 |
| Real estate owned | 55,309 |
| Total assets | 1,378,321 |
| | |
| Liabilities: | | Asset-backed bonds secured by mortgage loans | 2,235,633 |
| Due to servicer | 131,772 |
| Other liabilities | 4,047 |
| Total liabilities | 2,371,452 |
| | |
| Gain on derecognition of securitization trusts | $ | 993,131 |
| | |
|
CashIn other mortgage loan securitizations executed by the Company, transactions were structured as a sale legally and cash equivalents – The fair valuefor accounting purposes. At the time of cash and cash equivalents approximates its carrying value.
Restricted Cash – The fair value of restricted cash was estimatedsecuritization, the loans in these securitizations were removed from the Company's balance sheet. However, the Company retained the residual interest securities issued by discounting estimated future release of the cash from restriction.
securitization trust. These retained interests were classified as Mortgage loans – held-in-portfolio – The fair value of mortgage loans – held-in-portfolio was estimated using the carrying value less a market discount. The internal rate of return is less than what an outside investor would require due to the embedded credit risk, therefore a market discount is required to get to the fair value. The fair value of mortgage loans – held-in-portfolio approximated its carrying value at December 31, 2009. Mortgage securities- trading – SeeSecurities, which are described more fully in Note 115 to the consolidated financial statements for fair value method utilized.statements.
Mortgage securities – available-for-sale – See Note 11The following table relates to the securitizations where the Company retained an interest in the assets issued by the securitization trust, a variable interest entity or VIE (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | Size/Principal Outstanding (A) | | Assets on Balance Sheet (B) | | Liabilities on Balance Sheet | | Maximum Exposure to Loss(C) | | Year to Date Loss on Sale | | Year to Date Cash Flows | December 31, 2011 | $ | 6,265,564 |
| | $ | 3,878 |
| | $ | — |
| | $ | 3,878 |
| | $ | — |
| | $ | 8,920 |
| December 31, 2010 | 7,189,121 |
| | 4,580 |
| | — |
| | 4,580 |
| | — |
| | 11,362 |
| | | | | | | | | | | |
| | (A) | Size/Principal Outstanding reflects the estimated principal of the underlying assets held by the VIE. |
| | (B) | Assets on balance sheet are securities issued by the entity and are recorded in Mortgage securities. |
| | (C) | The maximum exposure to loss includes the assets held by the Company. The maximum exposure to loss assumes a total loss on the referenced assets held by the VIE. |
Prior to 2010, the Company executed a securitization of mortgage securities in what is commonly called a Collateralized Debt Obligation (“CDO”). The Company serves as the CDO's asset manager. The collateral for the CDO consisted of subordinated mortgage securities and included securities retained by the Company in its loan securitizations and purchased from third parties. This securitization was structured legally as a sale, but for accounting purposes was accounted for as a financing. Accordingly, the CDO assets (securities) and securitization bond financing were included in the Company's consolidated financial statements for fair value method utilized. Notes receivable – The fair value of notes receivable approximates its carrying value.
Accrued interest receivable – The fair value of accrued interest receivable approximates its carrying value.
Asset-backed bonds secured by mortgage loans – The fair value of asset-backed bonds secured by mortgage loans andbalance sheet. During the related accrued interest payable was estimated usingyear ended December 31, 2011, the fair value of mortgage loans – held-in-portfolio as the trusts have no recourseassets and liabilities were reduced to the Company’s other, unsecuritized assets.
Asset-backed bonds secured by mortgage securities –The faira value of asset-backed bonds secured by mortgage securities and the related accrued interest payable is approximated using quoted market prices.
Junior subordinated debentures –zero. As of December 31, 2010, the fair value of junior subordinated debentures is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. As of December 31, 2009, the fair value of junior subordinated debentures is estimated using the price from the repurchase transaction that the Company completed during 2008.assets and liabilities were valued at $1.2 million.
Accrued interest payable – The fair value of accrued interest payable approximates its carrying value.
Derivative instruments – The fair value of derivative instruments is estimated by discounting the projected future cash flows using appropriate rates.
55
Note 19. Subsequent Events RefinancingOn March 8, 2012, Steve Haslam, the Chief Executive Officer of Trust Preferred Securities
In an effort to improveStreetLinks, was appointed the Company’s liquidity position, on March 22, 2011, the Company entered into agreements that cancel the existing $78,125,000 aggregate principal amountChief Operating Officer of Trust Preferred Securities (the “TruPS”) issued in 2009 by certain statutory trusts formed by a wholly-owned subsidiary, NovaStar Mortgage, Inc. (“NMI”). NMI issued unsecured junior subordinated notes (the “Junior Subordinated Notes”), to support the payment obligations under the TruPS. The Junior Subordinated Notes were guaranteed by the Company. As a resultpart of the transaction, the Junior Subordinated Notes were cancelled. In placetransition of the TruPS and associated Junior Subordinated Notes,Mr. Haslam to his new position with the Company, issuedand pursuant to the holdersexercise of his rights under his employment agreement with StreetLinks, he sold all of his 1,927 membership units of StreetLinks to the TruPS unsecured senior notesCompany pursuant to three indentures (collectively, the “Senior Notes”). The aggregate principal amount of the Senior Notes is $85,937,500, which is a 10% increase in principal over the liquidation value of the TruPS. The new Senior Notes will accrue interest at a rate of 1% until the earlier to occur of (a) a completed equity offeringMembership Interest Purchase Agreement, dated March 8, 2012, by the Company or its subsidiaries that results in proceeds of $40 million or more or (b) January 1, 2016. Thereafter, the Senior Notes will accrue interest at a rate of three-month LIBOR plus 3.5% (the “Full Rate”).The Senior Notes mature on March 30, 2033.
The indentures governing the Senior Notes contain negative covenants that, among other things, restrict the Company’s use of cash (including cash payments for distributions to shareholders). At any time that the Senior Notes accrue interest at the Full Rate,and between Mr. Haslam and the Company satisfies certain financial covenants, certain negative covenants and restrictions on cash will not apply.
Proposed Recapitalization(the “Unit Purchase Agreement”). The 1,927 membership units of Preferred Stock.
As described in the Company’s Form S-4 Registration Statement, as amended (Registration No. 333-171115), filed with the SEC (the “Form S-4”), the Company is proposing to recapitalize the outstanding shares of its Series C Preferred Stock and its Series D1 Preferred Stock. The Series C Preferred Stock is publicly held, and the Series D Preferred Stock is privately held.
Upon the terms and subject to the conditions set forth in the Form S-4, the Company is proposing to exchange, for each outstanding share of Series C Preferred Stock, at the election of the holder, either:
3 shares of newly-issued Common Stock of the Company, and $2.00 in cash; or19 shares of newly-issued Common Stock (the “Series C Offer”).
The elections made by the holders of the Series C Preferred Stock will be subject to allocation and proration procedures intended to ensure that, in the aggregate, 43,823,600 newly-issued shares of Common Stock and $1,623,000 in cash (plus such other cash that is needed to cash out fractional shares) will be issued to the holders of the Series C Preferred Stock. The proposed Series C Offer will not be made unless and until the Form S-4 is declared effective by the SEC and it is subject to other closing conditions, such as the acceptance of the Series C Offer by at least two-thirdsStreetLinks represent approximately 5% of the outstanding shares of Series C Preferred Stock andStreetLinks membership units. The total purchase price under the requisite affirmative vote of shareholders in support of certain aspects of the recapitalization.
The proposed Series C OfferUnit Purchase Agreement is part of a larger recapitalization of the Company, whereby the holders of the Company’s Series D1 Preferred Stock have agreed$6.1 million, which is payable to exchange their stock for an aggregate of 37,161,600 newly-issued shares of Common Stock and $1,377,000 in cash (the “Series D Exchange”). The closing of the Series D Exchange is contingent upon the closing of the Series C Offer by not later thanMr. Haslam as follows: $0.5 million on March 8, 2012, $0.5 million on June 30, 2011 and2012, $0.3 million on the satisfactionlast day of other conditions.each quarter thereafter until March 8, 2016, on which date the unpaid principal balance of $1.6 million is to be paid, plus interest on the unpaid balance at the rate of four percent per annum, compounded quarterly.
As of March 18, 2011, the Series C Preferred Stock had an aggregate liquidation preference of $74.8 million and accrued and unpaid dividends of $23.0 million, and the Series D1 Preferred Stock had an aggregate liquidation preference of $52.5 million and accrued and unpaid dividends of $31.5 million. The proposed recapitalization, if effected, would eliminate the Series C Preferred Stock and Series D Preferred Stock and their associated liquidation preferences and dividends.47 There are multiple conditions to the closing of the Series C Offer and the Series D Exchange that are beyond our control, and we cannot provide you any assurance that these conditions will be satisfied or that the Series C Offer and the Series D Exchange will close.
56
REPORT OF INDEPENDENT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NovaStar Financial, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of NovaStar Financial, Inc. and subsidiaries (the "Company") as of December 31, 20102011 and 2009,2010, and the related consolidated statements of operations, shareholders’shareholders' deficit and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the CompanyNovaStar Financial, Inc. and subsidiaries as of December 31, 20102011 and 2009,2010, and the results of itstheir operations and itstheir cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP Kansas City, Missouri
March 15, 201222, 2011
57
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Item 9A. Controls and Procedures Disclosure Controls and Procedures The Company maintains a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the federal securities laws, including this report, is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the federal securities laws is accumulated and communicated to the Company’s management on a timely basis to allow decisions regarding required disclosure. The Company’s principal executive officer and principal financial officer evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d)) as of the end of the period covered by this report and concluded that the Company’s controls and procedures were effective.
Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.2011. To make this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has excluded from the scope of its assessment of internal control over financial reporting the operations and related assets of Corvisa,Mango, which the Company acquired on November 4, 2010. At December 31, 2010,October 17, 2011. As of and for the year ended December 31, 2010,2011, the amounts subject to the internal control over financial reporting arising from this acquisition represented 9.0%9.8% of our consolidated total assets, (2.9%(7.0%) of our consolidated net assets, 0.1%0.5% of our consolidated total revenue, and 0.0%(2.9%) of our consolidated net income. Based on that evaluation and its assessment, management concluded that the Company’s internal control over financial reporting is effective as of December 31, 2010 and the outstanding material weakness2011, mentioned below, was remediated during this period. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that it is reasonably possible that a material misstatement in the company’s annual or interim financial statements and related disclosures will not be prevented or detected on a timely basis..
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the three months ended December 31, 20102011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting other than the remediation of the material weakness discussed above. During the quarter ended December 31, 2010, the Company implemented additional review controls over financial reporting, in particular related to the preparation and review of the financial statements. In addition, certain duties have been transitioned to other members of the department to mitigate control risks. As a result, management believes that the Company has remediated the material weakness for segregation of duties.reporting.
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Item 9B. Other Information None.
PARTPart III
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to Items 401, 405 and 407(d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the information included in our Proxy Statement for the 20112012 Annual Meeting of Shareholders.
Item 11. Executive Compensation Information with respect to Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is incorporated by reference to the information included in our Proxy Statement for the 20112012 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information with respect to Items 403 of Regulation S-K is incorporated by reference to the information included in our Proxy Statement for the 20112012 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence Information with respect to Item 404 and 407(a) of Regulation S-K is incorporated by reference to the information included in our Proxy Statement for the 20112012 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
Information with respect to Item 9(e) of Schedule 14A is incorporated by reference to the information included in our Proxy Statement for the 20112012 Annual Meeting of Shareholders.
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PARTPart IV
Item 15. Exhibits and Financial Statements Schedules
Financial Statements and Schedules | | (1) | | The financial statements as set forth under Item 8 of this report on Form 10-K are included herein. |
| | | (2) | | The required financial statement schedules are omitted because the information is disclosed elsewhere herein. |
Exhibit Listing | | | | Exhibit No. | | Description of Document | 3.11(1) | | Articles of Amendment and Restatement of NovaStar Financial, Inc. (including all amendments and applicable Articles Supplementary) | 3.1.12(2) | | CertificateArticles Supplementary of AmendmentSeries F Participating Stock of the RegistrantNovaStar Financial, Inc. | 3.23(3) | | Amended and Restated Bylaws of the Registrant, adopted July 27, 2005 | 3.2.14(4) | | Amendment to the Amended and Restated Bylaws of the Registrant | 4.15(5) | | Specimen Common Stock Certificate | 4.26(6) | | Specimen Preferred Stock Certificate | 4.37(7) | | Registration Rights Agreement, dated March 15, 2011, between the Company and W. Lance Anderson | 4.4 (8) | | Registration Rights Agreement, dated June 23, 2011, among NovaStar Financial, Inc., Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC, JCP Partners IV LLC and Massachusetts Mutual Life Insurance Company | 4.5 (9) | | Rights Agreement, dated as of September 15, 2011, by and between NovaStar Financial, Inc. and Computershare Trust Company, N.A., as rights agent, incorporated by reference to Exhibit 4.1 of the Company's Form 8-A filed with the SEC on September 21, 2011. | 10.18(10) | | Employment Agreement, dated as of January 7, 2008, by and between NovaStar Financial, Inc. and Rodney E. Schwatken. | 10.29(11) | | Form of Indemnification Agreement for Officers and Directors of NovaStar Financial, Inc. and its Subsidiaries | 10.310(12) | | NovaStar Financial Inc. 2004 Incentive Stock Plan | 10.411(13) | | Amendment One to the NovaStar Financial, Inc. 2004 Incentive Stock Option Plan | 10.512(14) | | Stock Option Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan | 10.613(15) | | Restricted Stock Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan | | | | (1) Incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Registrant with the SEC on June 29, 2011 (File No. 001-13533). | (2) Incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Registrant with the SEC on September 21, 2011 (File No. 001-13533). | (3) Incorporated by reference to Exhibit 3.3.1 to Form 10-Q filed by the Registrant with the SEC on August 5, 2005 (File No. 001-13533). | (4) Incorporated by reference to Exhibit 3.2.1 to Form 8-K filed by the Registrant with the SEC on March 16, 2009 (File No. 001-13533). | (5) Incorporated by reference to Exhibit 4.1 to Form 10-Q filed by the Registrant with the SEC on August 5, 2005 (File No. 001-13533). | (6) Incorporated by reference to Exhibit 4.3 to Form 8-A/A filed by the Registrant with the SEC on January 20, 2004 (File No. 001-13533). | (7) Incorporated by reference to Exhibit 4.1 to Form 8-K filed by the Registrant with the SEC on March 21, 2011 (File No. 001-13533). | (8) Incorporated by reference to Exhibit 4.1 to Form 8-K filed by the Registrant with the SEC on June 29, 2011 (File No. 001-13533). | (9) Incorporated by reference to Exhibit 4.1 to Form 8-K filed by the Registrant with the SEC on September 21, 2011 (File No. 001-13533). | (10) Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed by the Registrant with the SEC on January 10, 2008 (File No. 001-13533). | (11) Incorporated by reference to Exhibit 10.10 to Form 8-K filed by the Registrant with the SEC on November 16, 2005 (File No. 001-13533). | (12) Incorporated by reference to Exhibit 10.15 to Form S-8 filed by the Registrant with the SEC on June 30, 2004 (Registration No. 333-116998). | (13) Incorporated by reference to Exhibit 10.46 to Form 10-Q filed by the Registrant with the SEC on May 10, 2007 (File No. 001-13533). | (14) Incorporated by reference to Exhibit 10.25.1 to Form 8-K filed by the Registrant with the SEC on February 4, 2005 (File No. 001-13533). | (15) Incorporated by reference to Exhibit 10.25.2 to Form 8-K filed by the Registrant with the SEC on February 4, 2005 (File No. 001-13533). |
| | | | Exhibit No. | | Description of Document | 10.714(16) | | Performance Contingent Deferred Stock Award Agreement under NovaStar Financial, Inc. 2004 Incentive Stock Plan | 10.815(17) | | NovaStar Financial, Inc. Executive Bonus Plan | 10.916(18) | | 2005 Compensation Plan for Independent Directors (effective through August 8, 2011) | 10.1017(19) | | NovaStar Financial, Inc. Long Term Incentive Plan | 10.1118(20) | | Securities Purchase Agreement, dated July 16, 2007, by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC |
____________________1 | | Incorporated by reference to Exhibit 3.1 to Form 10-Q filed by the Registrant on August 9, 2007 (File No. 001-13533). | 2 | | Incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Registrant with the SEC on May 26, 2005 (File No. 001-13533). | 3 | | Incorporated by reference to Exhibit 3.3.1 to Form 10-Q filed by the Registrant with the SEC on August 5, 2005 (File No. 001-13533). | 4 | | Incorporated by reference to Exhibit 3.2.1 to Form 8-K filed by the Registrant with the SEC on March 16, 2009 (File No. 001-13533). | 5 | | Incorporated by reference to Exhibit 4.1 to Form 10-Q filed by the Registrant with the SEC on August 5, 2005 (File No. 001-13533). | 6 | | Incorporated by reference to Exhibit 4.3 to Form 8-A/A filed by the Registrant with the SEC on January 20, 2004 (File No. 001-13533). | 7 | | Incorporated by reference to Exhibit 4.1 to Form 8-K filed by the Registrant with the SEC on March 21, 2011 (File No. 001-13533). | 8 | | Incorporated by reference to Exhibit 10.1 to Form 8-K/A filed by the Registrant with the SEC on January 10, 2008 (File No. 001-13533). | 9 | | Incorporated by reference to Exhibit 10.10 to Form 8-K filed by the Registrant with the SEC on November 16, 2005 (File No. 001-13533). | 10 | | Incorporated by reference to Exhibit 10.15 to Form S-8 filed by the Registrant with the SEC on June 30, 2004 (Registration No. 333-116998). | 11 | | Incorporated by reference to Exhibit 10.46 to Form 10-Q filed by the Registrant with the SEC on May 10, 2007 (File No. 001-13533). | 12 | | Incorporated by reference to Exhibit 10.25.1 to Form 8-K filed by the Registrant with the SEC on February 4, 2005 (File No. 001-13533). | 13 | | Incorporated by reference to Exhibit 10.25.2 to Form 8-K filed by the Registrant with the SEC on February 4, 2005 (File No. 001-13533). | 14 | | Incorporated by reference to Exhibit 10.25.3 to Form 8-K filed by the Registrant with the SEC on February 4, 2005 (File No. 001-13533). | 15 | | Incorporated by reference to Exhibit 10.26 to Form 8-K filed by the Registrant with the SEC on March 15, 2007 (File No. 001-13533). | 16 | | Incorporated by reference to Exhibit 10.30 to Form 8-K filed by the Registrant with the SEC on February 11, 2005 (File No. 001-13533). | 17 | | Incorporated by reference to Exhibit 10.34 to Form 8-K filed by the Registrant with the SEC on February 14, 2006 (File No. 001-13533). | 18 | | Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). |
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10.1219(21) | | Standby Purchase Agreement, dated July 16, 2007, by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC | 10.1320(22) | | Registration Rights and Shareholders Agreement, dated July 16, 2007, by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC | 10.1421(23) | | Letter Agreement, dated July 16, 2007, by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC, and Scott Hartman | 10.1522(24) | | Letter Agreement, dated July 16, 2007, by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC, and Lance Anderson | 10.1623(25) | | Letter Agreement, dated July 16, 2007, by and among NovaStar Financial, Inc., Massachusetts Mutual Life Insurance Company, Jefferies Capital Partners IV L.P., Jefferies Employee Partners IV LLC and JCP Partners IV LLC, and Mike Bamburg | 10.1724(26) | | Confidential Settlement Term Sheet Agreement, dated March 17, 2008, between American Interbanc Mortgage LLC, NovaStar Financial, Inc., NovaStar Mortgage, Inc., NFI Holding Corp., and NovaStar Home Mortgage, Inc. (Complete Agreement Filed Due to Expiration of Confidential Treatment Request) | 10.1825(27) | | Amended and Restated Trust Agreement, dated as of February 18, 2009, by and among, NovaStar Mortgage, Inc., The Bank of New York Mellon Trust Company, National Association, BNY Mellon Trust of Delaware and certain administrative trustees (including the form of Preferred Securities Certificate) (I/B) | 10.1926(28) | | Junior Subordinated Indenture, dated as of February 18, 2009, between NovaStar Mortgage, Inc. and The Bank of New York Mellon Trust Company, National Association (I/B) | 10.2027(29) | | Parent Guarantee Agreement, dated as of February 18, 2009, between NovaStar Financial, Inc. and The Bank of New York Mellon Trust Company, National Association (I/B) | 10.2128(30) | | Amended and Restated Trust Agreement, dated as of February 18, 2009, by and among, NovaStar Mortgage, Inc., The Bank of New York Mellon Trust Company, National Association, BNY Mellon Trust of Delaware and certain administrative trustees (including the form of Preferred Securities Certificate) (II/B) | 10.2229(31) | | Junior Subordinated Indenture, dated as of February 18, 2009, between NovaStar Mortgage, Inc. and The Bank of New York Mellon Trust Company, National Association (II/B) | 10.2330(32) | | Parent Guarantee Agreement, dated as of February 18, 2009, between NovaStar Financial, Inc. and The Bank of New York Mellon Trust Company, National Association (II/B) | 10.2431(33) | | Securities Purchase Agreement, dated as of April 26, 2009, by and among NovaStar Financial, Inc., Advent Financial Services, LLC and Mark A. Ernst |
____________________19 | | | (16) Incorporated by reference to Exhibit 10.25.3 to Form 8-K filed by the Registrant with the SEC on February 4, 2005 (File No. 001-13533). | (17) Incorporated by reference to Exhibit 10.26 to Form 8-K filed by the Registrant with the SEC on March 15, 2007 (File No. 001-13533). | (18) Incorporated by reference to Exhibit 10.30 to Form 8-K filed by the Registrant with the SEC on February 11, 2005 (File No. 001-13533). | (19) Incorporated by reference to Exhibit 10.34 to Form 8-K filed by the Registrant with the SEC on February 14, 2006 (File No. 001-13533). | (20) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). | (21) Incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). | 20 | | (22) Incorporated by reference to Exhibit 10.3 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). | 21 | | (23) Incorporated by reference to Exhibit 10.4 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). | 22 | | (24) Incorporated by reference to Exhibit 10.5 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). | 23 | | (25) Incorporated by reference to Exhibit 10.6 to Form 8-K filed by the Registrant with the SEC on July 20, 2007 (File No. 001-13533). | 24 | | (26) Incorporated by reference to Exhibit 10.55 to Form 10-Q filed by the Registrant with the SEC on April 27, 2009 (File No. 001-13533). | 25 | | (27) Incorporated by reference to Exhibit 10.56 to Form 8-K filed by the Registrant with the SEC on February 24, 2009 (File No. 001-13533). | 26 | | (28) Incorporated by reference to Exhibit 10.57 to Form 8-K filed by the Registrant with the SEC on February 24, 2009 (File No. 001-13533). | 27 | | (29) Incorporated by reference to Exhibit 10.58 to Form 8-K filed by the Registrant with the SEC on February 24, 2009 (File No. 001-13533). | 28 | | (30) Incorporated by reference to Exhibit 10.59 to Form 8-K filed by the Registrant with the SEC on February 24, 2009 (File No. 001-13533). | 29 | | (31) Incorporated by reference to Exhibit 10.60 to Form 8-K filed by the Registrant with the SEC on February 24, 2009 (File No. 001-13533). | 30 | | (32) Incorporated by reference to Exhibit 10.61 to Form 8-K filed by the Registrant with the SEC on February 24, 2009 (File No. 001-13533). | 31 | | (33) Incorporated by reference to Exhibit 10.62 to Form 8-K filed by the Registrant with the SEC on April 30, 2009 (File No. 001-13533). |
6151
| | | | Exhibit No. | | Description of Document | 10.2532(34) | | Release and Settlement Agreement dated as of June 30, 2009 by and between NovaStar Financial, Inc. and EHMD, LLC, EHD Holdings, LLC and EHD Properties, LLC | 10.2633(35) | | Voting agreement, dated December 10, 2010, between the Company and Howard M. Amster and Barry A. Igdaloff | 10.2734(36) | | Exchange Agreement, dated December 10, 2010, between the Company and the holders of the Company’sCompany's 9.0% Series D1 Mandatory Convertible Preferred Stock, par value $0.01 per share | 10.2835(37) | | Stock Option Agreement, dated March 15, 2011, between the Company and W. Lance Anderson | 10.2936(38) | | Exchange Agreement, dated as of March 22,, 2011, by and among NovaStar Financial, Inc., NovaStar Capital Trust I/B, NovaStar Capital Trust II/B, Taberna Preferred Funding I, Ltd. and Kodiak CDO I, Ltd. | 10.3037(39) | | First Amendment to The Second Amended and Restated Trust Agreement, dated as of March 22,, 2011, by and among NovaStar Mortgage, Inc., The Bank of New York Mellon Trust Company, National Association, BNY Mellon Trust of Delaware, certain administrative trustees and Taberna Preferred Funding II, Ltd. | 10.3138(40) | | Series 1 Senior Notes Indenture, dated as of March 22,, 2011, by and among NovaStar Financial, Inc. and The Bank Of New York Mellon Trust Company, National Association | 10.3239(41) | | Series 2 Senior Notes Indenture, dated as of March 22,, 2011, by and among NovaStar Financial, Inc. and The Bank Of New York Mellon Trust Company, National Association
| 10.3340(42) | | Series 3 Senior Notes Indenture, dated as of March 22,, 2011, by and among NovaStar Financial, Inc. and The Bank Of New York Mellon Trust Company, National Association | 10.34 (43) | | 2011 Compensation Plan for Independent Directors | 10.35 (44) | | Membership Interest Purchase Agreement, dated March 8, 2012, by and between NovaStar Financial, Inc. and Steve Haslam | 10.36 (45) | | Employment Agreement, dated as of March 8, 2012, by and between NovaStar Financial, Inc. and Steve Haslam | 10.37 (46) | | Stock Option Agreement, dated March 8, 2012, by and between NovaStar Financial, Inc. and Steve Haslam | 10.38 (47) | | Employment Agreement, dated as of March 2, 2012, by and between NovaStar Financial, Inc. and Matthew Lautz | 10.39 (48) | | Employment Agreement, dated as of March 1, 2012, by and between NovaStar Financial, Inc. and Brett Monger | 10.40 (49) | | Stock Option Agreement, dated March 8, 2012, by and between NovaStar Financial, Inc. and Brett Monger | 10.41 (50) | | Amended and Restated NovaStar Financial, Inc. 2004 Incentive Stock Plan | 11.141(51) | | Statement Regarding Computation of Per Share Earnings | 14.142(52) | | NovaStar Financial, Inc. Code of Conduct | 21.1 | | Subsidiaries of the Registrant | 23.1 | | ConsentsConsent of Deloitte & Touche LLP | 31.1 | | Chief Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31.2 | | Principal Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | (34) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on July 1, 2009 (File No. 001-13533). | (35) Incorporated by reference to Exhibit (d)(1) to the Schedule TO/13E-3 filed by the Registrant with the SEC on December 10, 2010 (File No. 005-52325). | (36) Incorporated by reference to Exhibit (d)(2) to the Schedule TO/13E-3 filed by the Registrant with the SEC on December 10, 2010 (File No. 005-52325). | (37) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on March 21, 2011 (File No. 001-13533). | (38) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | (39) Incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | (40) Incorporated by reference to Exhibit 10.3 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | (41) Incorporated by reference to Exhibit 10.4 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | (42) Incorporated by reference to Exhibit 10.5 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | (43) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on August 15, 2011 (File No. 001-13533). | (44) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on March 9, 2012 (File No. 001-13533). | (45) Incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Registrant with the SEC on March 9, 2012 (File No. 001-13533). | (46) Incorporated by reference to Exhibit 10.3 to Form 8-K filed by the Registrant with the SEC on March 9, 2012 (File No. 001-13533). | (47) Incorporated by reference to Exhibit 10.4 to Form 8-K filed by the Registrant with the SEC on March 9, 2012 (File No. 001-13533). | (48) Incorporated by reference to Exhibit 10.5 to Form 8-K filed by the Registrant with the SEC on March 9, 2012 (File No. 001-13533). | (49) Incorporated by reference to Exhibit 10.6 to Form 8-K filed by the Registrant with the SEC on March 9, 2012 (File No. 001-13533). | (50) Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on March 6, 2012 (File No. 001-13533). | (51) See Note 16 to the consolidated financial statements. | (52) Incorporated by reference to Exhibit 14.1 to Form 8-K filed by the Registrant with the SEC on February 14, 2006 (File No. 001-13533). |
| | | | Exhibit No. | | Description of Document | 32.1 | | Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 32.2 | | Principal Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
____________________32101 | | Incorporated by referenceThe following financial information from NovaStar Financial, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Income for the nine and three months ended September 30, 2011 and 2010, (ii) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise this Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on July 1, 2009 (File No. 001-13533). | 33 | | Incorporated by reference to Exhibit (d)(1) to the Schedule TO/13E-3 filed by the Registrant on December 10, 2010 (File No. 005-52325). | 34 | | Incorporated by reference to Exhibit (d)(2) to the Schedule TO/13E-3 filed by the Registrant on December 10, 2010 (File No. 005-52325). | 35 | | Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on March 21, 2011 (File No. 001-13533). | 36 | | Incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | 37 | | Incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | 38 | | Incorporated by reference to Exhibit 10.3 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | 39 | | Incorporated by reference to Exhibit 10.4 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | 40 | | Incorporated by reference to Exhibit 10.5 to Form 8-K filed by the Registrant with the SEC on March 22, 2011 (File No. 001-13533). | 41 | | See Note 16 to the consolidated financial statements. | 42 | | Incorporated by reference to Exhibit 14.1 to Form 8-K filed by the Registrant with the SEC on February 14, 2006 (File No. 001-13533).101 shall be deemed “furnished” and not “filed.” |
6253
Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | NOVASTAR FINANCIAL, INC | | | | (Registrant) | | | | | DATE: | March 22, 201115, 2012 | | /s/ W. LANCE ANDERSON | | | | W. Lance Anderson, Chairman of the Board | | | | of Directors and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and dates indicated. | | | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ W. LANCE ANDERSON | | | | W. Lance Anderson, Chairman of the Board | | | | of Directors and Chief Executive Officer | | (Principal | | (Principal Executive Officer) | | | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ RODNEY E. SCHWATKEN | | | | Rodney E. Schwatken, Chief Financial Officer | | | | (Principal Financial Officer) | | | | | DATE: | March 15, 2012 | | /s/ BRETT A. MONGER | | | | Brett A. Monger, Vice President, | | | | Controller and Chief Accounting Officer | | (Principal Financial | | (Principal Accounting Officer) | | | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ EDWARD W. MEHRER | | | | Edward W. Mehrer, Director | | | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ GREGORY T. BARMORE | | | | Gregory T. Barmore, Director | | | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ ART N. BURTSCHER | | | | Art N. Burtscher, Director | | | DATE: March 22, 2011 | /s/ DONALD M. BERMAN | | Donald M. Berman, Director | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ HOWARD M. AMSTER | | | | Howard M. Amster, Director | | | | | DATE: | March 22, 201115, 2012 | /s/ | /s/ BARRY A. IGDALOFF | | | | Barry A. Igdaloff, Director |
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