x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2000. |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from |
Maryland (State or other jurisdiction of incorporation or organization) | 74-2830661 (I.R.S. Employer Identification | |
Page | |||||||||
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PART I | FINANCIAL INFORMATION | ||||||||
Item 1. | Consolidated Financial Statements: | ||||||||
Balance Sheets | 1 | ||||||||
Statements of Operations | 2 | ||||||||
Statements of Cash Flows | 3 | ||||||||
Notes | 4 | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | ||||||||
PART II | OTHER INFORMATION | ||||||||
Item 1. | Legal Proceedings | ||||||||
Item 2. | Changes in Securities | ||||||||
Item 3. | Defaults Upon Senior Securities | ||||||||
Item 4. | Submission of Matters to a Vote of Security Holders | ||||||||
Item 5. | Other Information | ||||||||
Item 6. | Exhibits and Reports on Form 8-K | ||||||||
Signatures |
June 30, 2000 | December 31, 1999 | |||||
---|---|---|---|---|---|---|
(unaudited) | ||||||
Assets | ||||||
Cash and cash equivalents | $ 2,551 | $ 2,395 | ||||
Mortgage loans | 493,001 | 620,406 | ||||
Mortgage-backed securities— available-for-sale | 21,000 | 6,775 | ||||
Accrued interest receivable | 11,301 | 12,452 | ||||
Advances to and investment in NFI Holding Corporation | 38,037 | 29,208 | ||||
Assets acquired through foreclosure | 15,145 | 16,891 | ||||
Other assets | 1,717 | 2,383 | ||||
Total assets | $ 582,752 | $ 690,510 | ||||
Liabilities and Stockholders’ Equity | ||||||
Liabilities: | ||||||
Borrowings | $ 478,862 | $ 586,868 | ||||
Dividends payable | 525 | 525 | ||||
Accounts payable and other liabilities | 2,287 | 1,803 | ||||
Total liabilities | 481,674 | 589,196 | ||||
Stockholders’ equity: | ||||||
Capital stock, $0.01 par value, 50,000,000 shares authorized: | ||||||
Class B, convertible preferred stock, 4,285,714 shares issued and outstanding, respectively | 43 | 43 | ||||
Common stock, 8,143,407 and 8,130,069 shares issued; 6,940,607 and 7,460,523 shares outstanding, respectively | 81 | 81 | ||||
Additional paid-in capital | 151,197 | 151,173 | ||||
Accumulated deficit | (41,193 | ) | (41,502 | ) | ||
Accumulated other comprehensive income | 1,698 | 242 | ||||
Cost of treasury stock, 1,202,800 and 673,400 shares, respectively | (3,902 | ) | (1,877 | ) | ||
Notes receivable from founders | (6,846 | ) | (6,846 | ) | ||
Total stockholders’ equity | 101,078 | 101,314 | ||||
Total liabilities and stockholders’ equity | $ 582,752 | $ 690,510 | ||||
September 30,2000 | December 31, 1999 | |||||
---|---|---|---|---|---|---|
(unaudited) | ||||||
Assets | ||||||
Cash and cash equivalents | $ 2,767 | $ 2,395 | ||||
Mortgage loans | 424,547 | 620,406 | ||||
Mortgage-backed securities—available-for-sale | 41,784 | 6,775 | ||||
Accrued interest receivable | 9,782 | 12,452 | ||||
Advances to and investment in NFI Holding Corporation | 20,617 | 29,208 | ||||
Assets acquired through foreclosure | 15,315 | 16,891 | ||||
Other assets | 1,905 | 2,383 | ||||
Total assets | $516,717 | $690,510 | ||||
Liabilities and Stockholders’ Equity | ||||||
Liabilities: | ||||||
Borrowings | $413,156 | $586,868 | ||||
Dividends payable | 525 | 525 | ||||
Accounts payable and other liabilities | 2,173 | 1,803 | ||||
Total liabilities | 415,854 | 589,196 | ||||
Stockholders’ equity: | ||||||
Capital stock, $0.01 par value, 50,000,000 shares authorized: | ||||||
Class B, convertible preferred stock, 4,285,714 shares issued and outstanding | 43 | 43 | ||||
Common stock, 8,143,407 and 8,130,069 shares issued; 6,206,441 and 7,460,523 shares outstanding, respectively | 81 | 81 | ||||
Additional paid-in capital | 151,197 | 151,173 | ||||
Accumulated deficit | (39,742 | ) | (41,502 | ) | ||
Accumulated other comprehensive income | 3,283 | 242 | ||||
Cost of treasury stock, 1,936,966 and 673,400 shares, respectively | (7,153 | ) | (1,877 | ) | ||
Notes receivable from founders | (6,846 | ) | (6,846 | ) | ||
Total stockholders’ equity | 100,863 | 101,314 | ||||
Total liabilities and stockholders’ equity | $516,717 | $690,510 | ||||
See notes to consolidated financial statements.
For the Six Months Ended June 30, | For the Three Months Ended June 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||
Interest income on mortgage loans | $24,590 | $36,641 | $11,778 | $17,091 | $ | 34,981 | $ | 52,236 | $ | 10,391 | $ | 15,595 | ||||||||||||||||
Interest expense on mortgage loans | 18,641 | 24,853 | 8,943 | 11,644 | 26,881 | 36,059 | 8,240 | 11,206 | ||||||||||||||||||||
Net interest income | 5,949 | 11,788 | 2,835 | 5,447 | 8,100 | 16,177 | 2,151 | 4,389 | ||||||||||||||||||||
Prepayment penalty income | 983 | 1,616 | 494 | 960 | 1,431 | 2,385 | 448 | 769 | ||||||||||||||||||||
Provision for credit losses | (2,792 | ) | (5,865 | ) | (1,213 | ) | (3,566 | ) | (4,004 | ) | (11,499 | ) | (1,212 | ) | (5,634 | ) | ||||||||||||
Premiums for mortgage loan insurance | (707 | ) | (912 | ) | (342 | ) | (455 | ) | (1,009 | ) | (1,339 | ) | (302 | ) | (427 | ) | ||||||||||||
Loan servicing fees paid to NovaStar Mortgage, Inc. | (1,383 | ) | (2,120 | ) | (687 | ) | (1,005 | ) | (1,982 | ) | (3,056 | ) | (599 | ) | (936 | ) | ||||||||||||
Net portfolio income | 2,050 | 4,507 | 1,087 | 1,381 | ||||||||||||||||||||||||
Net portfolio income (loss) | 2,536 | 2,668 | 486 | (1,839 | ) | |||||||||||||||||||||||
Net interest income on mortgage-backed securities | 727 | — | 461 | — | 1,329 | 100 | 602 | 100 | ||||||||||||||||||||
Other income | 138 | 384 | 140 | 105 | ||||||||||||||||||||||||
Equity in net income (loss) of NFI Holding Corporation | (141 | ) | 942 | (840 | ) | 391 | ||||||||||||||||||||||
Other income (loss) | (453 | ) | 706 | (591 | ) | 322 | ||||||||||||||||||||||
Equity in net income of NFI Holding Corporation | 646 | 1,518 | 787 | 576 | ||||||||||||||||||||||||
General and administrative expenses: | ||||||||||||||||||||||||||||
Net fees for other services provided by (to) NovaStar Mortgage, Inc. | (2 | ) | 456 | (5 | ) | (594 | ) | (1,460 | ) | 287 | (1,458 | ) | (169 | ) | ||||||||||||||
Compensation and benefits | 717 | 937 | 333 | 352 | ||||||||||||||||||||||||
Compensation and benefits. | 1,042 | 1,358 | 325 | 421 | ||||||||||||||||||||||||
Professional and outside services | 257 | 365 | 127 | 33 | 467 | 546 | 210 | 181 | ||||||||||||||||||||
Office administration | 401 | 408 | 230 | 200 | 607 | 611 | 206 | 203 | ||||||||||||||||||||
Other | 43 | 96 | 17 | 41 | 66 | 156 | 23 | 60 | ||||||||||||||||||||
Total general and administrative expenses | 1,416 | 2,262 | 702 | 32 | 722 | 2,958 | (694 | ) | 696 | |||||||||||||||||||
Net income | $ 1,358 | $ 3,571 | $ 146 | $ 1,845 | ||||||||||||||||||||||||
Net income (loss) | $ | 3,336 | $ | 2,034 | $ | 1,978 | $ | (1,537 | ) | |||||||||||||||||||
Dividends on preferred shares | $(1,050 | ) | $ (556 | ) | $ (525 | ) | $ (525 | ) | $ | (1,575 | ) | $ | (1,081 | ) | $ | (525 | ) | $ | (525 | ) | ||||||||
Net income (loss) available to common shareholders | $ 308 | $ 3,015 | $ (379 | ) | $ 1,320 | $ | 1,761 | $ | 953 | $ | 1,453 | $ | (2,062 | ) | ||||||||||||||
Basic earnings per share | $ 0.04 | $ 0.37 | $ (0.05 | ) | $ 0.16 | |||||||||||||||||||||||
Diluted earnings per share | $ 0.04 | $ 0.34 | $ (0.05 | ) | $ 0.15 | |||||||||||||||||||||||
Basic earnings (loss) per share | $ | 0.25 | $ | 0.12 | $ | 0.21 | $ | (0.25 | ) | |||||||||||||||||||
Diluted earnings (loss) per share | $ | 0.25 | $ | 0.11 | $ | 0.18 | $ | (0.25 | ) | |||||||||||||||||||
Weighted average basic shares outstanding | 7,181 | 8,130 | 7,020 | 8,130 | 7,087 | 8,130 | 6,900 | 8,130 | ||||||||||||||||||||
Weighted average diluted shares outstanding | 7,189 | 10,603 | 7,020 | 12,655 | 7,094 | 8,326 | 11,192 | 8,130 | ||||||||||||||||||||
Dividends declared per common share | $ — | $ — | $ — | $ — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
For the Six Months Ended June 30, | For the Ninth Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | ||||||||||||||||
Net cash provided by operating activities | $ 9,523 | $ 14,772 | $ 13,945 | $ 23,504 | |||||||||||||||
Cash flow from investing activities: | |||||||||||||||||||
Mortgage loan repayments | 110,960 | 127,127 | 176,799 | 201,034 | |||||||||||||||
Sales of assets acquired through foreclosure | 14,926 | 9,548 | 15,295 | 17,542 | |||||||||||||||
Mortgage loans sold to others | — | 4,900 | — | 4,900 | |||||||||||||||
Proceeds from paydowns on mortgage-backed securities | 826 | — | 2,161 | — | |||||||||||||||
Net change in advances to NFI Holding Corporation | (11,233 | ) | (13,087 | ) | 7,309 | (15,360 | ) | ||||||||||||
Purchase of mortgage-backed securities from NFI Holding Corporation | (13,233 | ) | — | (33,767 | ) | — | |||||||||||||
Net cash provided by investing activities | 102,246 | 128,488 | 167,797 | 208,116 | |||||||||||||||
Cash flow from financing activities: | |||||||||||||||||||
Payments on collateralized mortgage obligations | (108,563 | ) | (151,259 | ) | (185,502 | ) | (236,872 | ) | |||||||||||
Change in short-term borrowings | — | (18,029 | ) | 10,960 | (18,029 | ) | |||||||||||||
Net proceeds from issuance of capital stock and exercise of equity instruments | 25 | 29,072 | 23 | 29,029 | |||||||||||||||
Dividends paid on preferred stock | (1,050 | ) | (31 | ) | (1,575 | ) | (556 | ) | |||||||||||
Dividends paid on common stock | — | (2,845 | ) | — | (2,845 | ) | |||||||||||||
Treasury stock purchases | (2,025 | ) | — | �� | (5,276 | ) | — | ||||||||||||
Net cash used in financing activities | (111,613 | ) | (143,092 | ) | (181,370 | ) | (229,273 | ) | |||||||||||
Net increase in cash and cash equivalents | 156 | 168 | 372 | 2,347 | |||||||||||||||
Cash and cash equivalents, beginning of period | 2,395 | — | 2,395 | — | |||||||||||||||
Cash and cash equivalents, end of period | $ 2,551 | $ 168 | $ 2,767 | $ 2,347 | |||||||||||||||
Supplemental disclosure of cash flow information: | |||||||||||||||||||
Cash paid for interest | $ 18,778 | $ 25,317 | $ 27,048 | $ 36,567 | |||||||||||||||
Assets acquired through foreclosure | $ 12,033 | $ 15,542 | $ 12,136 | $ 22,570 | |||||||||||||||
Dividends payable | $ 525 | $ 525 | $ 525 | $ 525 | |||||||||||||||
Issuance of warrants | $ — | $ 350 | $ — | $ 350 | |||||||||||||||
Value of Asset-Backed Bonds Issued | Economic Residual Value as of September 30, 2000 | Value of Collateral Sold | Gain Recognized | |||||
---|---|---|---|---|---|---|---|---|
NMFT 2000-1 | $226 million | $13,750,000 | $229,846,000 | $2,936,000 | ||||
NMFT 2000-2 (A) | $334 million | $20,534,000 | $188,734,000 | $3,584,000 |
(A) | A second closing for NMFT 2000-2 is scheduled for December 26, 2000 in which $151.3 million of loans will be added. |
Founded in 1996 as a specialty finance lender to invest in mortgage assets; |
Assets have primarily come from the wholesale origination of nonconforming, single-family, residential mortgage loans of its affiliate, NovaStar Mortgage; |
Operates as a long-term portfolio investor; |
Loans are financed on a short-term basis through various warehouse facilities. Long-term financing is provided through securitization where asset-backed bonds are issued in financing-structured transactions; |
Earnings are generated from spread income on the mortgage loan and securities portfolio and indirectly by gains associated with the sale of loans to outside parties or through securitization transactions of NovaStar Mortgage. |
Primary customer is the retail mortgage broker who deals with the borrower. NovaStar Mortgage’s account executives work with more than |
Borrowers generally are individuals or families who do not qualify for agency/conventional lending programs because of a lack of available documentation or previous credit difficulties. Often, these borrowers have built up high-rate consumer debt and are attempting to use equity in their home to consolidate debt and lower their total monthly payments. |
Loans are financed on a short-term basis through warehouse facilities. Long-term financing is provided through securitization where asset-backed bonds are issued in transactions that are structured as a sale. |
Loans are held for sale—either to affiliates, third parties for cash or |
Credit Grade | Allowed Mortgage Lates (A) | Maximum Loan- to- value | June 30, 2000 | December 31, 1999 | |||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, 2000 | December 31, 1999 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Credit Grade | Credit Grade | Allowed Mortgage Lates (A) | Maximum Loan- to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | Allowed Mortgage Lates (A) | Maximum Loan-to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | ||||||||||||||||||||||||||||||||||
Retained loans collateralizing asset-backed bonds: | Retained loans collateralizing asset-backed bonds: | ||||||||||||||||||||||||||||||||||||||||||||||||||
AA | AA | 0 x 30 | 95 | $ 70,669 | 9.94 | % | 83.1 | % | $ 85,476 | 9.50 | % | 83.2 | % | 0 x 30 | 95 | $ | 62,099 | 10.11 | % | 82.8 | % | $ | 85,476 | 9.50 | % | 83.2 | % | ||||||||||||||||||||||||
A | A | 1 x 30 | 90 | 199,077 | 10.33 | 79.5 | 244,187 | 10.06 | 80.1 | 1 x 30 | 90 | 170,903 | 10.61 | 79.3 | 244,187 | 10.06 | 80.1 | ||||||||||||||||||||||||||||||||||
A– | 2 x 30 | 90 | 116,396 | 10.84 | 82.0 | 149,248 | 10.45 | 81.8 | |||||||||||||||||||||||||||||||||||||||||||
A- | 2 x 30 | 90 | 100,568 | 11.18 | 81.8 | 149,248 | 10.45 | 81.8 | |||||||||||||||||||||||||||||||||||||||||||
B | B | 3 x 30, 1 x 60 5 x 30, 2 x 60 | 85 | 68,068 | 11.32 | 78.1 | 89,477 | 10.86 | 78.4 | 3 x 30, 1 x 60 | 85 | 59,056 | 11.68 | 78.0 | 89,477 | 10.86 | 78.4 | ||||||||||||||||||||||||||||||||||
5 x 30, 2 x 60 | |||||||||||||||||||||||||||||||||||||||||||||||||||
C | C | 1 x 90 | 75 | 31,878 | 11.82 | 72.5 | 42,766 | 11.35 | 72.5 | 1 x 90 | 75 | 26,353 | 12.11 | 72.8 | 42,766 | 11.35 | 72.5 | ||||||||||||||||||||||||||||||||||
D | D | 6 x 30, 3 x 60, | 65 | 5,909 | 12.59 | 62.6 | 7,668 | 12.16 | 62.1 | 6 x 30, 3 x 60, | 65 | 5,004 | 12.95 | 63.4 | 7,668 | 12.16 | 62.1 | ||||||||||||||||||||||||||||||||||
2 x 90 | 2 x 90 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total on balance sheet | Total on balance sheet | $491,997 | 10.66 | % | 79.8 | % | $618,822 | 10.31 | % | 80.0 | % | Total on balance sheet | $ | 423,983 | 10.94 | % | 79.6 | % | $ | 618,822 | 10.31 | % | 80.0 | % | |||||||||||||||||||||||||||
Credit Grade | Allowed Mortgage Lates (A) | Maximum Loan-to- value | June 30, 2000 | December 31, 1999 | |||||||||||||||||||||||||||||||||||||||||||||||
Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | ||||||||||||||||||||||||||||||||||||||||||||||
Sold loans collateralizing asset-backed bonds (A): | |||||||||||||||||||||||||||||||||||||||||||||||||||
AAA | 0 x 30 | 97 | (B) | $ 87,102 | 9.57 | % | 80.6 | % | $ 3,474 | 9.18 | % | 80.7 | % | ||||||||||||||||||||||||||||||||||||||
AA | 0 x 30 | 95 | 82,678 | 10.03 | 83.7 | 27,236 | 9.47 | 84.8 | |||||||||||||||||||||||||||||||||||||||||||
A | 1 x 30 | 90 | 77,161 | 10.21 | 81.8 | 43,119 | 9.86 | 83.1 | |||||||||||||||||||||||||||||||||||||||||||
A– | 2 x 30 | 90 | 56,967 | 10.41 | 82.2 | 35,311 | 10.09 | 83.1 | |||||||||||||||||||||||||||||||||||||||||||
B | 3 x 30, 1 x 60 5 x 30, 2 x 60 | 85 | 31,601 | 10.83 | 80.4 | 19,612 | 10.59 | 79.7 | |||||||||||||||||||||||||||||||||||||||||||
C | 1 x 90 | 75 | 16,785 | 11.26 | 71.6 | 11,405 | 11.09 | 71.9 | |||||||||||||||||||||||||||||||||||||||||||
D | 6 x 30, 3 x 60, | 65 | 2,401 | 12.16 | 63.0 | 3,171 | 12.16 | 62.1 | |||||||||||||||||||||||||||||||||||||||||||
2 x 90 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total off balance sheet | $354,695 | 10.16 | % | 81.3 | % | $143,328 | 10.08 | % | 81.5 | % | |||||||||||||||||||||||||||||||||||||||||
September 30, 2000 | December 31, 1999 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Credit Grade | Allowed Mortgage Lates (A) | Maximum Loan-to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- value | |||||||||||||||
Sold loans collateralizing asset- backed bonds: | |||||||||||||||||||||||
AAA | 0 x 30 | 97 | (B) | $115,453 | 9.69 | % | 80.8 | % | $ 3,474 | 9.18 | % | 80.7 | % | ||||||||||
AA | 0 x 30 | 95 | 136,895 | 10.17 | 83.6 | 27,236 | 9.47 | 84.8 | |||||||||||||||
A | 1 x 30 | 90 | 106,876 | 10.39 | 81.2 | 43,119 | 9.86 | 83.1 | |||||||||||||||
A- | 2 x 30 | 90 | 75,505 | 10.49 | 81.4 | 35,311 | 10.09 | 83.1 | |||||||||||||||
B | 3 x 30, 1x 60 | 85 | 39,052 | 10.97 | 79.3 | 19,612 | 10.59 | 79.7 | |||||||||||||||
5 x 30, 2 x 60 | |||||||||||||||||||||||
C | 1 x 90 | 75 | 16,180 | 11.50 | 70.4 | 11,405 | 11.09 | 71.9 | |||||||||||||||
D | 6 x 30, 3 x 60, | 65 | 2,071 | 12.29 | 70.0 | 3,171 | 12.16 | 62.1 | |||||||||||||||
2 x 90 | |||||||||||||||||||||||
Other | Varies | 97 | 36,525 | 11.42 | 92.6 | — | — | — | |||||||||||||||
Total off balance sheet | $528,557 | 10.35 | % | 82.0 | % | $143,328 | 10.08 | % | 81.5 | % | |||||||||||||
(A) | Represents the number of times a prospective borrower is allowed to be late more than 30, 60 or 90 days. For instance, a 3x30, 1x60 category would afford the prospective borrower to be more than 30 days late on three separate occasions and 60 days late no more than one time. | |
(B) | 97% on fixed-rate purchases; all other maximum of 95%. |
Retained loans collateralizing asset- backed bonds — on balance sheet | Sold loans collateralizing asset-backed bonds — off balance sheet | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, 2000 | December 31, 1999 | June 30, 2000 | December 31, 1999 | |||||||||
Collateral Location | ||||||||||||
Florida | 15 | % | 14 | % | 17 | % | 21 | % | ||||
California | 15 | 16 | 9 | 7 | ||||||||
Washington | 7 | 7 | 4 | 4 | ||||||||
Texas | 5 | 5 | 3 | 6 | ||||||||
Oregon | 4 | 5 | 2 | 1 | ||||||||
Tennessee | 4 | 3 | 7 | 5 | ||||||||
Michigan | 3 | 3 | 7 | 5 | ||||||||
Ohio | 3 | 3 | 6 | 4 | ||||||||
All other states | 44 | 44 | 45 | 47 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
As of December 31, 1999: Retained loans collateralizing asset-
backed bonds—on balance sheet Sold loans collateralizing asset-backed
bonds—off balance sheet September 30, 2000 December 31, 1999 September 30, 2000 December 31, 1999 Collateral Location Florida 15 % 14 % 16 % 21 % California 14 16 10 7 Washington 6 7 4 4 Texas 5 5 3 6 Nevada 4 4 6 4 Oregon 4 5 2 1 Tennessee 4 3 6 5 Michigan 3 3 8 5 Ohio 3 3 6 4 All other states 42 40 39 43 Total 100 % 100 % 100 % 100 % JuneSeptember 30, 2000 and December 31, 1999.JuneSeptember 30, 2000 and December 31, 1999Product/Type June 30, 2000 December 31, 1999 September 30, 2000 December 31, 1999 Retained loans collateralizing asset-backed bonds — on balance sheet: Retained loans collateralizing asset-backed bonds—
on balance sheet: Two and three-year fixed. $ 251,423 $343,193 $201,440 $343,193 Six-month LIBOR and one-year CMT 33,912 43,178 27,164 43,178 30/15-year fixed and balloon 206,662 232,451 30/15-year fixed and other 195,379 232,451 Outstanding principal 491,997 618,822 423,983 618,822 Premium 9,997 12,689 8,696 12,689 Allowance for credit losses (8,993 ) (11,105 ) (8,132 ) (11,105 ) Carrying Value $ 493,001 $620,406 $424,547 $620,406 Carrying value as a percent of principal 100.20 % 100.26 % 100.13 % 100.26 % Sold loans collateralizing asset-backed bonds — off balance sheet: Sold loans collateralizing asset-backed bonds—
off balance sheet: Two and three-year fixed. $ 185,143 $ 78,238 $357,210 $ 78,238 Six-month LIBOR and one-year CMT 17,177 5,052 2,864 5,052 30/15-year fixed and balloon 152,375 60,038 30/15-year fixed and other 168,483 60,038 Outstanding principal $ 354,695 $143,328 $528,557 $143,328 Mortgage securities retained $ 21,000 $ 6,775 Mortgage securities retained. $ 41,784 $ 6,775 estimated lives of the assets. See Tables 4, 5, and 6 for the impact of principal payments on amortization. To mitigate the effect of prepayments on interest income from mortgage loans, NovaStar Financial generally strives to acquire mortgage loans that have prepayment penalties. During the sixnine months ended JuneSeptember 30, 2000, prepayment penalties collected from borrowers totaled $983,000$1.4 million in comparison with $1.6$2.4 million for the same period of 1999. Table 4 is an analysis of mortgage loans and prepayment penalties.JuneSeptember 30, 2000 and December 31, 1999 (dollars Weighted Average Current
Principal Premium Percent with
Prepayment
Penalty Weighted Average Current
Principal Premium Percent with
Prepayment
Penalty Coupon Loan-
to-
value Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty Coupon Loan-to-
value Remaining
Prepayment Penalty
Period (in years) -
Loans with PenaltyAs of June 30, 2000 As of September 30, 2000 Retained loans collateralizing
asset-backed bonds: NHES 1997-1 $ 66,171 $3,039 22 % 11.47 % 75.0 % 0.37 $ 58,054 $2,679 23 % 11.61 % 74.9 % 0.33 NHES 1997-2 72,405 1,431 37 11.26 79.3 0.41 63,337 1,269 22 11.34 79.1 0.31 NHES 1998-1 148,676 2,454 47 10.89 80.9 0.67 127,936 2,126 48 10.96 80.6 0.57 NHES 1998-2 204,482 3,060 59 10.43 81.1 1.11 174,393 2,609 58 10.54 81.0 0.98 All other loans 263 13 — 12.47 76.0 — 263 13 — 12.86 76.0 — Total on balance sheet $491,997 $9,997 47 % 10.66 % 79.8 % 0.77 $423,983 $8,696 45 % 10.94 % 79.6 % 0.67 Sold loans collateralizing
asset-backed bonds (A): NMFT 1999-1 $128,138 $ — 80 % 10.08 % 81.7 % 1.55 $119,327 $ — 66 % 10.43 % 81.7 % 1.36 NMFT 2000-1 (B) 226,557 — 92 10.22 81.1 2.84 221,963 — 93 10.15 81.1 2.63 NMFT 2000-2 (C) 187,267 — 90 10.54 83.3 2.62 Total off balance sheet $354,695 $ — 88 % 10.16 % 81.3 % 2.37 $528,557 $ — 86 % 10.35 % 82.0 % 2.34 Weighted Average Current
Principal Premium Percent with
Prepayment
Penalty Weighted Average Current
Principal Premium Percent with
Prepayment
Penalty Coupon Loan-to-
value Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty Coupon Loan-to-
value Remaining
Prepayment Penalty
Period (in years) -
Loans with PenaltyAs of December 31, 1999 Retained loans collateralizing
asset-backed bonds: NHES 1997-1 $ 85,015 $ 3,942 32 % 11.04 % 75.5 % 0.51 $ 85,015 $ 3,942 32 % 11.04 % 75.5 % 0.51 NHES 1997-2 101,031 1,917 35 10.90 79.3 0.55 101,031 1,917 35 10.90 79.3 0.55 NHES 1998-1 195,170 3,205 63 10.08 81.1 0.93 195,170 3,205 63 10.08 81.1 0.93 NHES 1998-2 237,223 3,606 74 9.97 81.1 1.51 237,223 3,606 74 9.97 81.1 1.51 All other loans 383 19 6 11.96 77.6 0.10 383 19 6 11.96 77.6 0.10 Total on balance sheet $618,822 $12,689 58 % 10.31 % 80.0 % 1.03 $618,822 $12,689 58 % 10.31 % 80.0 % 1.03 Sold loans collateralizing
asset-backed bonds (A): Off balance sheet NMFT 1999-1 $143,328 $ — 84 % 10.08 % 81.5 % 2.03 $143,328 $ — 84 % 10.08 % 81.5 % 2.03 (A) NovaStar Financial owns economic residual interests. The mortgage loans are not retained on the balance sheet of NovaStar Financial. (B) The economic residual interests in NMFT 2000-1 were purchased by NovaStar Financial April 1, 2000. (C) The economic residual interests in NMFT 2000-2 were purchased by NovaStar Financial September 29, 2000. Weighted
Average Age
of Loans at
Inception
(in months) Constant Prepayment Rate
(Annual Percent) Issue Date Current
Principal
Balance One-
month Three-
month Twelve-
month Life June 30, 2000 Retained loans collateralizing
asset-backed bonds: NHES 1997-1 October 1, 1997 $ 66,171 7 47 43 45 40 NHES 1997-2 December 11, 1997 72,405 3 43 43 49 34 NHES 1998-1 April 30, 1998 148,676 3 43 41 37 27 NHES 1998-2 August 18, 1998 204,482 3 36 31 25 20 Sold loans collateralizing
asset-backed bonds: NMFT 1999-1 January 29, 1999 $128,138 5 18 18 19 16 NMFT 2000-1 March 31, 2000 226,557 2 8 6 — 5 Issue Date Current
Principal
Balance Weighted
Average Age
of Loans at
Inception
(in months) Constant Prepayment Rate
(Annual Percent) Issue Date Current
Principal
Balance Weighted
Average Age
of Loans at
Inception
(in months) Constant Prepayment Rate
(Annual Percent) One-
month Three-
month Twelve-
month Life One-
month Three-
month Twelve-
month Life Retained loans collateralizing
asset-backed bonds: September 30, 2000 Retained loans
collateralizing asset-
backed bonds: NHES 1997-1 October 1, 1997 $ 85,015 7 44 42 50 40 October 1, 1997 $ 58,054 7 44 41 41 40 NHES 1997-2 December 11, 1997 101,031 3 64 58 42 32 December 11, 1997 63,337 3 33 38 47 35 NHES 1998-1 April 30, 1998 195,170 3 47 36 29 23 April 30, 1998 127,936 3 38 45 41 29 NHES 1998-2 August 18, 1998 237,223 3 26 21 21 18 August 18, 1998 174,393 3 39 43 30 23 Sold loans collateralizing
asset-backed bonds: Sold loans collateralizing
asset—backed bonds: NMFT 1999-1 January 29, 1999 $143,328 5 14 20 14 14 January 29, 1999 $119,327 5 36 31 23 18 NMFT 2000-1 March 31, 2000 221,963 2 8 9 — 7 NMFT 2000-2 September 28, 2000 187,267 1 — — — — Issue Date Current
Principal
Balance Weighted
Average Age
of Loans at
Inception
(in months) Constant Prepayment Rate
(Annual Percent) One-
month Three-
month Twelve-
month Life December 31, 1999 Retained loans
collateralizing asset-
backed bonds: NHES 1997-1 October 1, 1997 $ 85,015 7 44 42 50 40 NHES 1997-2 December 11, 1997 101,031 3 64 58 42 32 NHES 1998-1 April 30, 1998 195,170 3 47 36 29 23 NHES 1998-2 August 18, 1998 237,223 3 26 21 21 18 Sold loans collateralizing
asset—backed bonds: NMFT 1999-1 January 29, 1999 $143,328 5 14 20 14 14 Mortgage
LoansSeptember 30, 2000 2.05 % June 30, 2000 2.03 %March 31, 2000 2.05 December 31, 1999 2.05 September 30, 1999 2.09 June 30, 1999 2.15 March 31, 1999 2.22 Securities—Available-For-Sale.Securities – In September 1999 and April 2000,Available-For-Sale. NovaStar Financial purchased NovaStar Mortgage’sowns the economic residual certificates in NovaStar Mortgage Funding Trust Series 1999-1, 2000-1 and 2000-1, respectively.2000-2. As the owner of the residual certificates, NovaStar Financial receives the net cash flow of the NovaStar Mortgage Funding Trust Series 1999-1 and 2000-1 asset-backed bonds, which represent the right to receive, over the life of the securitizations, the excess of the weighted average coupon on the mortgage loan collateral over the sum of the interest rate on the bonds, a normal servicing fee, a trustee fee, insurance premiums and the credit losses relating to the loans securitized.securitized loans. As of JuneSeptember 30, 2000 and December 31, 1999, the carrying value of the NMFT 1999-1 and 2000-1 economic residual interests was $21.0$41.8 million and $6.8 million. These values represent the present value of the residual cashflows that NovaStar Financial expects to receive over the life of the securitizations, taking into consideration estimated prepayment speeds and credit losses, and is discounted at a rate which management believes is an appropriate risk-adjusted market rate of return for the residual asset. The residual cashflows are realized over the life of the securitizationsecuritizations as cash distributions are received from the trust.trusts. NovaStar Financial believes its residual assets are fairly valued as of JuneSeptember 30, 2000, but can provide no assurance that future prepayment and loss experience or changes in the required market discount rate will not require write-downs of the residual asset. Write-downs would reduce the income of future periods and could cause NovaStar Financial to report net losses. Methodologies and assumptions used in valuing the economic residual interests are discussed in the “Mortgage Loan Sales” section of this document.1999-1 and 2000-1 mortgage loan collateral and bonds as of JuneSeptember 30, 2000 and December 31, 1999 are included in the table below and in Tables 4, 5 and 78 of this document. June 30, 2000 December 31, 1999 1999-1 2000-1 1999-1 Constant Prepayment Rate 27 to 47 25 to 30 35 to 45 Annual Constant Default Rate, net of
mortgage insurance (basis points) 75 25 75 Discount Rate 18 % 15 % 20 % As a percent of mortgage loan principal: Delinquent loans (30 days and greater) 6.84 % 1.08 % 7.03 % Loans in foreclosure 4.16 0.13 3.22 Real Estate Owned 1.74 — 1.26 Cumulative losses $ 408 $ — $ 315 September 30, 2000 December 31, 1999 1999-1 2000-1 2000-2 1999-1 Estimated Fair Value $ 7,500 $ 13,750 $ 20,534 $ 6,775 Constant Prepayment Rate (weighted average life) 37 29 28 31 Static loss, net of mortgage insurance 2.5 % 1.0 % 1.0 % 2.5 % Discount Rate 17 % 15 % 15 % 17 % As a percent of mortgage loan principal: Delinquent loans (30 days and greater) 9.05 % 2.59 % 0.21 % 7.03 % Loans in foreclosure 4.16 0.13 — 3.22 Real Estate Owned 1.92 — — 1.26 Cumulative losses $ 969 $ — $ — $ — Foreclosure.Foreclosure. As of JuneSeptember 30, 2000, NovaStar Financial had 180174 loans in real estate owned with a carrying value of $15.1$15.3 million (principal of $16.5$16.7 million) compared to 192 loans with a carrying value of $16.9 million (principal of $24.4 million) as of December 31, 1999.andor Residential Funding Corporation (RFC) under which NovaStar Financial and NovaStar Mortgage are co-borrowers. NovaStar Financial and NovaStar Mortgage can borrow up to $75 million from First Union and $150$50 million from RFC under these warehouse agreements. NovaStar Financial and NovaStar Mortgage also use repurchase agreements as a means of warehousing loans prior to securitization. First Union provides a $175 million committed facility for this purpose. These First Union and RFC facilities are committed through July 27, 2001 and December 27, 2000, respectively.As of June 30, 2000 and December 31, 1999, NovaStar Financial had no borrowings under these facilities. During the second quarter of 2000, NovaStar Financial entered into a repurchase agreement secured by residual interests of NMFT 2000-1 with another counterparty. Amounts outstanding as of JuneSeptember 30, 2000 under this financing arrangement were $11.0 million.JuneSeptember 30, 2000 are detailed in Table 2325 of this document.JuneSeptember 30, 2000 was $479$402 million compared with $587 million as of December 31, 1999. The decline in carrying value is primarily a result of principal paydowns.JuneSeptember 30, 2000 and December 31, 1999. This table also provides details regarding the bonds and collateral outstanding underlying NovaStar Financial’s economic residual interests.78JuneSeptember 30, 2000 and December 31, 1999 Collateralized
Mortgage Obligation Mortgage Loans Collateralized
Mortgage Obligation Mortgage Loans Remaining
Principal Current
Interest
Rate Remaining
Principal
(A) Weighted
Average
Coupon Estimated
Weighted
Average
Months to Call Remaining
Principal
Current
Interest
Rate
Remaining
Principal
(A)
Weighted
Average
Coupon Estimated
Weighted
Average
Months to CallAs of June 30, 2000: As of September 30, 2000: Retained loans collateralizing asset-backed bonds: NHES 1997-1 $ 62,253 7.13 % $ 68,179 11.47 % — $ 54,325 7.13 % $59,297 11.61 % — NHES 1997-2 68,468 6.91 74,252 11.26 6 59,453 6.88 65,061 11.34 4 NHES 1998-1 138,118 6.93 152,569 10.89 15 116,152 6.90 130,671 10.96 13 NHES 1998-2 200,705 6.88 211,802 10.43 24 173,663 6.84 183,913 10.54 25 Unamortized debt issuance costs, net (1,670 ) (1,397 ) Total on balance sheet $467,875 $402,196 Collateralized
Mortgage
Obligation Mortgage Loans Collateralized
Mortgage
Obligation Mortgage Loans Remaining
Principal Current
Interest
Rate Remaining
Principal
(A) Weighted
Average
Coupon Estimated
Weighted
Average
Months to Call Remaining
Principal
Current
Interest
Rate
Remaining
Principal
(A)
Weighted
Average
Coupon Estimated
Weighted
Average
Months
to CallSold loans collateralizing asset-backed bonds: NMFT 1999-1 $126,079 6.72 % $128,707 10.08 % 50 $116,659 7.14 % $119,327 10.43 % 50 NMFT 2000-1 (B) 222,279 7.02 125,885 10.22 63 218,166 7.02 221,963 10.15 63 NMFT 2000-2 (C) 334,220 6.95 187,267 10.54 66 Total off balance sheet $348,358 $669,045 Retained loans collateralizing asset-backed bonds: NHES 1997-1 $ 75,580 6.94 $ 87,534 11.04 — $ 75,580 6.94 $ 87,534 11.04 — NHES 1997-2 95,053 6.72 104,851 10.90 12 95,053 6.72 104,851 10.90 12 NHES 1998-1 186,493 6.55 200,625 10.08 22 186,493 6.55 200,625 10.08 22 NHES 1998-2 231,969 6.71 244,109 9.97 29 231,969 6.71 244,109 9.97 29 Unamortized debt issuance costs, net (2,227 ) (2,227 ) Total on balance sheet $586,868 $586,868 Sold loans collateralizing asset-backed bonds: Off balance sheet NMFT 1999-1 $140,710 6.95 % $143,328 10.08 % 55 $140,710 6.67 % $143,328 10.08 % 55 (A)Includes assets acquired through foreclosure.(B)NovaStar Financial purchased the residual interests in NMFT 2000-1 on April 1, 2000.Stockholders’ Equity. The decrease in NovaStar Financial’s stockholders’ equity as of June 30, 2000 compared withDecember 31, 1999 is a result of the following:Ÿ·$ 1.43.3 million increase due to net income recognized for the sixnine months ended JuneSeptember 30, 2000.Ÿ·2.05.3 million decrease as a result of common stock repurchases.NovaStar Financial’s Board of Directors amended its stock repurchase program during the third quarter of 1999 to increase the amount of common stock authorized to be acquired up to an aggregate purchase price of $5$9 million. Stock repurchases may be made in the open market, in block purchase transactions, through put options or through privately negotiated transactions. The timing of repurchases and the number of shares ultimately repurchased will depend upon market conditions and corporate requirements. As of JuneSeptember 30, 2000, NovaStar Financial had repurchased 1,202,8001,936,966 shares of its common stock. The number of shares repurchased by NovaStar Financial has increased to 1,220,5001,979,666 through AugustNovember 10, 2000 for an aggregate purchase price of $4.0$7.3 million.Ÿ·$ 1.53.0 million increase in the unrealized gain ofon the economic residual interests in NovaStar Mortgage’s NMFT 1999-1 and 2000-1 asset backed bond transactions that for tax and accounting purposes were treated by NovaStar Mortgage as sales. The residual interests in those transactions have been classified as available-for-sale securities and the unrealized gain is recognized as a component of accumulated other comprehensive income.Ÿ·$ 1.11.6 million decrease due to dividends on Class B 7% cumulative convertible preferred stock in 2000.. The.The founders of NovaStar Financial purchased 216,666 units in the 1996 private placement in exchange for forgivable promissory notes. A unit consisted of one share of convertible preferred stock and one common stock warrant. Principal on these notes is divided into three equal parts, called “ tranches”“tranches”, and is forgiven if certain incentive performance targets are achieved. The incentive tests relate to the return generated to investors in the private placement, including the appreciation in stock price, the value of the warrants, and dividends paid. One tranche will be forgiven for each fiscal year NovaStar Financial generates a return of 15% to investors in the private placement. All three tranches will be forgiven if a return of 100% is generated within five years.JuneSeptember 30, 2000 and December 31, 1999. Accrued interest on these notes was $339,000 as of JuneSeptember 30, 2000 and December 31, 1999.SixNine Months Ended JuneSeptember 30, 2000 Compared to the SixNine Months Ended JuneSeptember 30, 1999sixnine months ended JuneSeptember 30, 2000, NovaStar Financial recorded net income of $1.4$3.3 million, $0.04$0.25 per diluted common share, compared with net income of $3.6$2.0 million, $0.34$0.11 per diluted common share, for the sixnine months ended JuneSeptember 30, 1999.89 presents a summary of the average interest-earning assets, average interest-bearing liabilities and the related yields and rates thereon for the sixnine months ended JuneSeptember 30, 2000 and 1999.89 Mortgage Loans Mortgage-Backed Securities Total Mortgage Loans Mortgage-Backed Securities Total Six months ended June 30, 2000 Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
RateNine months ended September 30, 2000 Interest-earning mortgage assets $504,522 $24,590 9.75 % $11,025 $878 15.93 % $515,547 $25,468 9.88 % $475,419 $34,981 9.81 % $13,648 $1,611 15.74 % $489,067 $36,592 9.98 % Interest-bearing liabilities Collateralized mortgage obligations $528,478 $18,322 6.93 % — — — $557,299 $18,322 6.93 % $499,805 $26,721 7.13 % — — — $499,805 $26,721 7.13 % Other borrowings — — — 4,487 151 6.71 4,487 151 6.71 — — — 5,228 282 7.19 % 5,228 282 7.19 Cost of derivative financial
Instruments hedging liabilities 319 0.11 — — 319 0.11 Cost of derivative financial Instruments hedging liabilities 160 — — 160 Total borrowings $528,478 $18,641 7.05 % $ 4,487 $151 6.73 % $561,786 $18,792 7.05 % $499,805 $26,881 7.17 % $ 5,228 $ 282 7.19 % $505,033 $27,163 7.17 % Net interest income $ 5,949 $727 $ 6,676 $ 8,100 $1,329 $ 9,429 Net interest spread 2.69 % 9.20 % 2.83 % 2.64 % 8.55 % 2.81 % Net yield 2.36 % 13.19 % 2.59 % 2.27 % 12.98 % 2.57 % Mortgage Loans Mortgage-Backed Securities Total Six months ended June 30, 2000 Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
RateInterest-earning mortgage assets $793,973 $36,641 9.23 % $ — $ — — % $793,973 $36,641 9.23 % Interest-bearing liabilities Collateralized mortgage
obligations $825,540 $23,156 5.61 % $ — $ — — % $825,540 $23,156 5.61 % Other borrowings 8,482 541 12.76 — — — 8,482 541 12.76 Cost of derivative financial
Instruments hedging liabilities 1,156 — 1,156 Total borrowings $834,022 $24,853 5.96 % $ — — — % $24,853 5.96 % Net interest income $11,788 $ — $11,788 Net interest spread 3.27 % — % 3.27 % Net yield. 2.97 % — % 2.97 % Mortgage Loans Mortgage-Backed Securities Total Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
Rate Average
Balance Interest
Income/
Expense Annual
Yield/
RateNine months ended September 30, 1999 Interest-earning mortgage assets $765,073 $52,236 9.10 % $808 $100 16.50 % $765,845 $52,336 9.11 % Interest-bearing liabilities Collateralized mortgage obligations $785,547 $33,782 5.73 % $ — $ — — % $785,547 $33,782 5.73 % Other borrowings 5,623 541 12.83 — — — 5,623 541 12.83 Cost of derivative financial Instruments hedging liabilities 1,736 — 1,736 Total borrowings $791,170 $36,059 6.08 % $ — — — % $791,170 $36,059 6.08 % Net interest income $16,177 $100 $16,277 Net interest spread 3.02 % 16.50 % 3.03 % Net yield 2.82 % 16.50 % 2.83 % $24.6$35.0 million, or a yield of 9.8%, compared with $36.6$52.2 million, or a yield of 9.2%9.1% for the same period of 1999. Mortgage-backed securities income for 2000 consists of earnings on economic residual interests that NovaStar Financial purchased from NovaStar Mortgage starting in September 1999 and April 2000.1999. In total, assets earned $25.5$36.6 million, or a yield of 9.9%10.0% for the sixnine months ended JuneSeptember 30, 2000. During the same period of 1999, assets earned $36.6$52.3 million or a 9.2%9.1% yield. As noted in Table 8,9, interest income is a function of volume and rates. Increasing the volume of assets will cause future increases in interest income, while declining balances will reduce interest income. Market interest rates will also affect future interest income.ExpenseExpense.. The cost of borrowed funds for mortgage loans was $18.6$26.9 million for the sixnine months ended JuneSeptember 30, 2000, or 7.1%7.2% of average borrowings compared with $24.9$36.1 million, or 6.0%6.1% for the same period of 1999. Mortgage-backed securities’ cost of borrowed funds for the sixnine monthsJuneSeptember 30, 2000 includes repurchase agreements secured by economic residual interests executed during the second quarterand third quarters of 2000. Average interest-bearing liabilities for the sixnine months ended JuneSeptember 30, 2000 also consisted of financing costs on collateralized mortgage obligations compared with the same period of 1999, which also included a short-term financing arrangement with GMAC/RFC secured by residual interests in NovaStar Financial’s CMOs. In 1998, NovaStar Financial borrowed $15 million from GMAC/RFC, which included a $3 million financing fee. In February 1999, NovaStar Financial used the First Union residual facility to pay this debt in full. In March 1999, proceeds from the convertible preferred stock offering repaid all the outstanding debt on the residual facility.sixnine months ended JuneSeptember 30, 2000, one-month LIBOR averaged 6.19%6.33% compared with 4.96%5.07% for same period of 1999. Because the Federal Reserve Board increased the targeted federal funds interest rate in the latter part of 1999, effective borrowing costs have been higher in 2000. As with interest income, the cost of funds in the future will largely depend on market conditions, most notably levels of short-term interest rates. Rates on other borrowings generally fluctuate with short-term market interest rates, such as LIBOR or the federal funds rate.sixnine months ended JuneSeptember 30, 2000 was $5.9$9.4 million, or 2.4%2.6% of average interest-earning mortgage loans, compared with $11.8$16.3 million, or 3.0%2.8% for the same period of 1999. Net interest spread on mortgage loans was 2.7%2.8% and 3.3%3.0%, respectively, for the sixnine months ended JuneSeptember 30, 2000 and 1999. Net interest income on mortgage-backed securities (economic residual interests) during the sixnine months ended JuneSeptember 30, 2000 was $727,000,$1.3 million, or 13.2%13.0% of average interest-earning mortgage securities with a net interest spread of 9.2%8.6%. The volume of assets and liabilities and how well the spread between earnings on assets and the cost of funds is managed will dictate future net interest income.$715,000$545,000 as of JuneSeptember 30, 2000. During the sixnine months ended JuneSeptember 30, 2000 and 1999, net interest expense incurred on hedging agreements was $319,000$160,000 and $1.2$1.7 million, respectively, which is included as a component of interest expense. The significant decline in this expense in 2000 compared with the same period of 1999 is a result of the majority of the caps’ quarterly LIBOR resets in 2000 were greater than their strike rates.sixnine months ended JuneSeptember 30, 2000 92%and 1999, 91% of the mortgage loans originated by NovaStar Mortgage had prepayment penalties compared with 89% during the same period of 1999.penalties. As of JuneSeptember 30, 2000, 47%45% of NovaStar Financial’s mortgage loan portfolio had prepayment penalties compared with 58% as of December 31, 1999. Prepayment penalties totaled $983,000$1.4 million during the sixnine months ended JuneSeptember 30, 2000 compared with $1.6$2.4 million for the same period of 1999. The decrease is due to theNovaStar Financial no longer purchasing loans from NovaStar Mortgage, seasoning of the portfolio and prepayment penalty windows expiring in 2000 compared with 1999.In August of 1998, NovaStar Financial and NovaStar Mortgage have executed an agreementagreements whereby lender-paid mortgage insurance coverage is purchased on selected mortgage loans. The use of mortgage insurance is one method of managing the credit risk in the mortgage asset portfolio. Going forward, management expects that it will evaluate the cost-benefit of securing lender paid mortgage insurance for each securitization transaction.JuneSeptember 30, 2000 and December 31, 1999, approximately 56%66% and 39% of the loans owned by NovaStar Financial are covered under this agreement, including loans serving as collateral for NMFT 1999-1 and 2000-1.the REMIC deals. The loans collateralizing NMFT 1999-1 and 2000-1REMIC deals are not recorded as loans of NovaStar Financial, but the performance of NovaStar’s investment in the residual interests of NMFT 1999-1 and 2000-1the REMIC deals is dependent on the credit losses of the underlying collateral.sixnine months ended JuneSeptember 30, 2000, total premiums paid by NovaStar Financial totaled $707,000$1.0 million compared with $912,000$1.3 million for the same period of 1999. The monthly premiums paidPremiums for mortgage insurance on loans serving as collateral for NMFT 1999-1the residual interests owned by NovaStar Financial is paid from the loan collateral proceeds, and NMFT 2000-1 reduce NovaStar Financial’s monthly residual cashflow receipt andtherefore are not included in the amount of total premiums paid set forthas shown above.Loans are charged off in full when the cost of pursuing foreclosure and liquidation exceed recorded balances. While short sales serve to reduce the overall severity of losses incurred, they also accelerate the timing of losses. Loans are charged off in full when the cost of pursuing foreclosure and liquidation exceed recorded balances. Management also believes aggressive servicing is an important element to managing credit risk.sixnine months ended JuneSeptember 30, 2000, NovaStar Financial made provisions for losses of $2.8$4.0 million and incurred net charge-offs of $4.9$7.0 million, compared to $5.9$11.5 million and $5.9$9.7 million during the same period of 1999. Charge-offs during the first halfnine months of 2000 include $460,000$586,000 resulting from short sale transactions and loans charged off in full compared with $708,000$879,000 during the same period of 1999.JuneSeptember 30, 2000 is adequate to cover losses inherent in the portfolio at that date. If losses do not develop in accordance with current expectations, future provisions will be increased or decreased as necessary. Management also believes that internal processes involving quality control, appraisal review and servicing that have been made as a result of experience to-date will result in lower losses being incurred on loans currently being originated.910 is a rollforward of the activity in the allowance for credit losses during 2000 and 1999.910 2000 1999 2000 1999 June 30 March 31 December 31 September 30 June 30 March 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31 Beginning balance $9,763 $11,105 $ 5,370 $ 3,573 $ 3,492 $ 3,573 $ 8,993 $ 9,763 $11,105 $ 5,370 $ 3,573 $ 3,492 $ 3,573 Provision for credit losses 1,213 1,579 10,579 5,634 3,566 2,299 1,212 1,213 1,579 10,579 5,634 3,566 2,299 Amounts charged off, net of recoveries (1,983 ) (2,921 ) (4,844 ) (3,837 ) (3,485 ) (2,380 ) (2,073 ) (1,983 ) (2,921 ) (4,844 ) (3,837 ) (3,485 ) (2,380 ) Ending Balance $8,993 $ 9,763 $11,105 $ 5,370 $ 3,573 $ 3,492 $ 8,132 $ 8,993 $ 9,763 $11,105 $ 5,370 $ 3,573 $ 3,492 1011 2000 1999 June 30 March 31 December 31 September 30 June 30 March 31 Mortgage loans Collateralizing
NovaStar Home Equity Series (CMO): 1997-1 Issued October 1, 1997 6.21 % 4.59 % 5.63 % 6.32 % 5.13 % 4.37 % 1997-2 Issued December 11, 1997 8.88 7.66 6.24 4.92 4.03 5.38 1998-1 Issued April 30, 1998 4.40 3.58 4.42 5.32 4.13 4.64 1998-2 Issued August 18, 1998 5.48 5.10 5.38 4.06 3.94 3.72 (A) Includes loans in foreclosure or bankruptcy. 2000 1999 September 30 June 30 March 31 December 31 September 30 June 30 March 31 Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO): 1997-1 Issued October 1, 1997 $3,410 $4,039 $3,434 $4,726 $6,093 $6,087 $6,454 1997-2 Issued December 11, 1997 5,222 6,336 6,311 6,047 5,934 5,671 8,388 1998-1 Issued April 30, 1998 8,131 6,455 5,987 8,467 11,411 9,687 11,818 1998-2 Issued August 18, 1998 10,621 11,159 11,433 12,754 10,247 10,808 10,832 (A) Includes loans in foreclosure or bankruptcy. 1112 2000 1999 September 30 June 30 March 31 December 31 September 30 June 30 March 31 Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO): 1997-1 Issued October 1, 1997 6.01 % 6.21 % 4.59 % 5.63 % 6.32 % 5.13 % 4.37 % 1997-2 Issued December 11, 1997 8.23 8.88 7.66 6.24 4.92 4.03 5.38 1998-1 Issued April 30, 1998 6.44 4.40 3.58 4.42 5.32 4.13 4.64 1998-2 Issued August 18, 1998 6.03 5.48 5.10 5.38 4.06 3.94 3.72 (A) Includes loans in foreclosure or bankruptcy. JuneSeptember 30, 2000 and December 31, 1999 NovaStar Home Equity Series All Loans June 30, 2000 1997-1 1997-2 1998-1 1998-2 Allowance for Credit Losses: Balance, January 1, 2000 $ 2,335 $ 2,861 $ 4,214 $ 1,685 $ 11,105 Provision for credit losses 345 851 833 760 2,792 Amounts charged off, net of Recoveries (889 ) (1,262 ) (1,668 ) (1,082 ) (4,904 ) Balance, June 30, 2000 $ 1,791 $ 2,450 $ 3,379 $ 1,363 $ 8,993 Defaults as a percent of loan balance Delinquent loans (A) 7.88 % 6.70 % 3.84 % 6.60 % 6.00 % Loans in foreclosure 5.31 8.29 7.80 4.69 6.23 Real estate owned 3.79 3.30 3.34 3.30 3.39 Cumulative losses $ 6,702 $ 8,591 $ 8,397 $ 3,471 NovaStar Home Equity Series All Loans December 31, 1999 1997-1 1997-2 1998-1 1998-2 Allowance for Credit Losses: Balance, January 1, 1999 $ 816 $ 1,049 $ 1,163 $ 346 $ 3,573 Provision for credit losses 4,317 5,436 8,194 4,065 22,078 Amounts charged off, net of Recoveries (2,798 ) (3,624 ) (5,143 ) (2,726 ) (14,546 ) Balance, December 31, 1999 $ 2,335 $ 2,861 $ 4,214 $ 1,685 $ 11,105 Defaults as a percent of loan balance Delinquent loans (A) 8.03 % 9.89 % 6.38 % 7.50 % 7.63 % Loans in foreclosure 4.73 4.32 3.75 4.02 4.09 Real estate owned 3.85 4.88 3.61 2.62 3.51 Cumulative losses $ 5,416 $ 5,698 $ 4,996 $ 2,251 (A) Includes loans delinquent 30 days or greater NovaStar Home Equity Series September 30, 2000 1997-1 1997-2 1998-1 1998-2 All Loans Allowance for Credit Losses: Balance, January 1, 2000 $2,335 $ 2,861 $4,214 $ 1,685 $11,105 Provision for credit losses 532 815 1,419 1,235 4,004 Amounts charged off, net of Recoveries (1,154 ) (1,796 ) (2,246 ) (1,778 ) (6,977 ) Balance, September 30, 2000 $1,713 $ 1,880 $3,387 $ 1,142 $ 8,132 Defaults as a percent of loan balance Delinquent loans (A) 11.46 % 9.09 % 8.81 % 12.49 % 10.78 % Loans in foreclosure 3.99 6.71 4.80 4.53 4.86 Real estate owned 4.34 3.70 3.88 3.82 3.90 Cumulative losses $4,102 $ 4,272 $4,015 $ 2,345 NovaStar Home Equity Series December 31, 1999 1997-1 1997-2 1998-1 1998-2 All Loans Allowance for Credit Losses: Balance, January 1, 1999 $ 816 $ 1,049 $1,163 $ 346 $ 3,573 Provision for credit losses 4,317 5,436 8,194 4,065 22,078 Amounts charged off, net of Recoveries (2,798 ) (3,624 ) (5,143 ) (2,726 ) (14,546 ) Balance, December 31, 1999 $2,335 $ 2,861 $4,214 $1,685 $11,105 Defaults as a percent of loan balance Delinquent loans (A) 8.03 % 9.89 % 6.38 % 7.50 % 7.63 % Loans in foreclosure 4.73 4.32 3.75 4.02 4.09 Real estate owned 3.85 4.88 3.61 2.62 3.51 Cumulative losses $2,377 $ 1,756 $ 538 $ 745 (A) Includes loans delinquent 30 days or greater
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | |||||||||||||||||||
Percent of Stockholders’ Equity (Annualized) | Percent of Stockholders’ Equity (Annualized) | Percent of Stockholders’ Equity (Annualized) | Percent of Stockholders’ Equity (Annualized) | |||||||||||||||||||
Compensation and benefits | $ 717 | 1.42 | % | $ 937 | 1.55 | % | $1,042 | 1.38 | % | $1,358 | 1.61 | % | ||||||||||
Professional and outside services | 257 | 0.51 | 365 | 0.60 | 467 | 0.62 | 546 | 0.65 | ||||||||||||||
Office administration | 401 | 0.79 | 408 | 0.67 | 607 | 0.80 | 611 | 0.72 | ||||||||||||||
Other | 43 | 0.09 | 96 | 0.16 | 66 | 0.09 | 156 | 0.18 | ||||||||||||||
Total general and administrative expenses before Intercompany fees | 1,418 | 2.81 | % | 1,806 | 2.98 | % | 2,182 | 2.89 | % | 2,671 | 3.16 | % | ||||||||||
Fees for services provided by NovaStar Mortgage, Inc. | (2 | ) | 456 | |||||||||||||||||||
Net fees for other services provided by (to) NovaStar Mortgage, Inc. | (1,460 | ) | 287 | |||||||||||||||||||
Total general and administrative expenses | $1,416 | $2,262 | ||||||||||||||||||||
Total general and administrative expenses. | $ 722 | $2,958 | ||||||||||||||||||||
Percent of Stockholders’ Equity | |||
---|---|---|---|
2000: | |||
Third quarter | 3.05 | % | |
Second quarter | |||
First quarter | |||
1999: | |||
Fourth quarter | |||
Third quarter | |||
Second quarter | |||
First quarter |
Six Months Ended June 30, | ||||||
---|---|---|---|---|---|---|
2000 | 1999 | |||||
Amounts paid to NovaStar Mortgage: | ||||||
Loan servicing fees | $1,383 | $2,120 | ||||
Administrative fees, net of guaranty fees | $ 230 | $1,148 | ||||
Amounts received from NovaStar Mortgage: | ||||||
Intercompany interest income | (232 | ) | (692 | ) | ||
Net fees for other services provided by Novastar Mortgage, Inc. | $ (2 | ) | $ 456 | |||
Nine Months Ended September 30, | |||||||
---|---|---|---|---|---|---|---|
2000 | 1999 | ||||||
Amounts paid to NovaStar Mortgage: | |||||||
Loan servicing fees | $ | 1,982 | $ | 3,056 | |||
Administrative fees | 126 | 1,263 | |||||
Amounts received from NovaStar Mortgage: | |||||||
Guaranty, commitment, loan sale and securitization fees | (1,246 | ) | — | ||||
Interest income | (340 | ) | (976 | ) | |||
$ | (1,460 | ) | $ | 287 | |||
NovaStar Mortgage pays interest on amounts it borrows from NovaStar Financial. Interest on the borrowings accrues at the federal funds rate plus 1.75%. In addition,Under this agreement, NovaStar Mortgage is required to pay guaranty fees in the amount 0.25% of the loans sold by NovaStar Mortgage for which NovaStar Financial has guaranteed the performance of NovaStar Mortgage. In addition, beginning July 1, 2000, NovaStar Mortgage entered into the following intercompany agreements:
· | Servicing support fee: NovaStar Mortgage pays NovaStar Financial a fee equal to five basis points of the weighted average mortgage loan servicing principal. |
· | Financing commitment fee: NovaStar Mortgage pays NovaStar Financial a fee equal to 25 basis points on a $150 million annual commitment |
· | Residual purchase commitment fee: NovaStar Mortgage pays NovaStar Financial a fee at each securitization close equal to 20 basis points of the collateral principal value. |
· | Securitization consulting fee: NovaStar Mortgage pays NovaStar Financial a fee at each securitization close equal to 12.5 basis points of the collateral principal value. |
· | Guaranty spread fee: NovaStar Mortgage pays NovaStar Financial a fee equal to one basis point of the weighted average mortgage loan warehouse and repurchase borrowings. |
Mortgage Loans | Mortgage- Backed Securities | Total | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended June 30, 2000 | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | |||||||||||||
Interest-earning mortgage assets | $476,082 | $11,778 | 9.90 | % | $15,674 | $612 | 15.62 | % | $491,756 | $12,390 | 10.08 | % | ||||||||||
Interest-bearing liabilities Collateralized mortgage obligations | $500,518 | $ 8,925 | 7.13 | % | — | — | — | $500,518 | $ 8,925 | 7.13 | % | |||||||||||
Other borrowings | — | — | — | 8,998 | 151 | 6.71 | 8,974 | 151 | 6.71 | |||||||||||||
Cost of derivative financial | 18 | 0.01 | — | 18 | 0.01 | |||||||||||||||||
Instruments hedging liabilities | ||||||||||||||||||||||
Total borrowings | $500,518 | $ 8,943 | 7.15 | % | $ 8,974 | $151 | 6.73 | % | $509,492 | $ 9,094 | 7.14 | % | ||||||||||
Net interest income | $ 2,835 | $461 | $ 3,296 | |||||||||||||||||||
Net interest spread | 2.75 | % | 8.89 | % | 2.94 | % | ||||||||||||||||
Net yield | 2.38 | % | 11.76 | % | 2.68 | % | ||||||||||||||||
Mortgage Loans | Mortgage- Backed Securities | Total | Mortgage Loans | Mortgage-Backed Securities | Average Balance | Total | Annual Yield/ Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended June 30, 2000 | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended September 30, 2000 | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning mortgage assets | $753,488 | td7,091 | 9.07 | % | $— | $— | — | % | $753,488 | td7,091 | 9.07 | % | $417,846 | td0,391 | 9.95 | % | td8,701 | $733 | % | $436,548 | 10.19 | % | ||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | $788,894 | $11,068 | 5.61 | % | — | — | — | $788,894 | $11,068 | 5.61 | % | $443,082 | $ 8,400 | 7.58 | % | — | — | — | $443,082 | $ 8,400 | 7.58 | % | ||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | — | — | — | — | — | — | — | — | — | — | — | — | 6,787 | 131 | 7.72 | % | 6,787 | 131 | 7.72 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Cost of derivative financial | �� | 576 | — | 576 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Instruments hedging liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total borrowings | $788,894 | $11,644 | 5.90 | % | $— | — | — | % | $788,894 | $11,644 | 5.90 | % | $443,082 | $ 8,240 | 7.44 | % | $ 6,787 | $131 | 7.72 | % | $449,869 | $ 8,371 | 7.44 | % | ||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ 5,447 | $— | $ 5,447 | $ 2,151 | $602 | $ 2,753 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.17 | % | — | % | 3.17 | % | 2.51 | % | 7.96 | % | 2.75 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net yield. | 2.89 | % | — | % | 2.89 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net yield | 2.06 | % | 12.88 | % | 2.52 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage Loans | Mortgage-Backed Securities | Average Balance | Total | Annual Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended September 30, 2000 | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Interest Income/ Expense | Annual Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning mortgage assets | $690,323 | td5,595 | 9.04 | % | $ 2,424 | td00 | 16.50 | % | $692,747 | td5,695 | 9.06 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | $706,685 | $10,626 | 6.01 | % | — | — | — | $706,685 | $10,626 | 6.01 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of derivative financial instruments hedging liabilities | 580 | — | 580 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total borrowings | $706,685 | $11,206 | 6.34 | % | $ — | — | — | % | $706,685 | $11,206 | 6.34 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ 4,389 | $100 | $ 4,489 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest spread | 2.70 | % | 16.50 | % | 2.72 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net yield | 2.54 | % | 16.50 | % | 2.59 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Three Months Ended September 30, | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | ||||||||||||||||||||||
Percent of Stockholders’ Equity (Annualized) | Percent of Stockholders’ Equity (Annualized) | Percent of Stockholders’ Equity (Annualized) | Percent of Stockholders’ Equity (Annualized) | ||||||||||||||||||||||
Compensation and benefits | $333 | 1.32 | % | $352 | 1.16 | % | $ | 325 | 1.30 | % | $ | 421 | 1.49 | % | |||||||||||
Professional and outside services | 127 | 0.50 | 33 | 0.11 | 210 | 0.84 | 181 | 0.64 | |||||||||||||||||
Office administration | 230 | 0.91 | 200 | 0.66 | 206 | 0.82 | 203 | 0.72 | |||||||||||||||||
Other | 17 | 0.07 | 41 | 0.14 | 23 | 0.09 | 60 | 0.21 | |||||||||||||||||
Total general and administrative expenses before Intercompany fees | 707 | 2.80 | % | 626 | 2.07 | % | 764 | 3.05 | % | 865 | 3.06 | % | |||||||||||||
Fees for services provided by NovaStar Mortgage, Inc. | (5 | ) | (594 | ) | |||||||||||||||||||||
Net fees for other services provided by (to) NovaStar Mortgage, Inc. | (1,458 | ) | (169 | ) | |||||||||||||||||||||
Total general and administrative expenses. | $702 | $ 32 | $ | (694 | ) | $ | 696 | ||||||||||||||||||
Three Months Ended June 30, | Three Months Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | |||||||||||
Amounts paid to NovaStar Mortgage: | ||||||||||||||
Loan servicing fees | $687 | $1,005 | $ | 599 | $ | 936 | ||||||||
Administrative fees, net of guaranty fees | $113 | $ 98 | ||||||||||||
Administrative fees, net of guaranty fees. | (111 | ) | 115 | |||||||||||
Amounts received from NovaStar Mortgage: | ||||||||||||||
Intercompany interest income | (118 | ) | (692 | ) | ||||||||||
Guaranty, commitment, loan sale and securitization fees | (1,239 | ) | — | |||||||||||
Interest income | (108 | ) | (284 | ) | ||||||||||
Net fees for other services provided by Novastar Mortgage, Inc. | $ (5 | ) | $ (594 | ) | ||||||||||
$ | (1,458) | $ | (169 | ) | ||||||||||
June 30, | September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | |||||||||||
Net income | $1,358 | $3,571 | $ | 3,336 | $ | 2,034 | ||||||||
Use of net operating loss carryforward | — | (2,628 | ) | (176 | ) | (2,628 | ) | |||||||
Results of NFI Holding and subsidiaries | (141 | ) | 123 | (646 | ) | (1,518 | ) | |||||||
Provision for credit losses | 2,792 | 5,865 | 4,004 | 11,499 | ||||||||||
Loans charged-off | (4,904 | ) | (5,865 | ) | (6,977 | ) | (9,702 | ) | ||||||
Other, net | 405 | 779 | 459 | 1,175 | ||||||||||
Estimated taxable income (loss) | $ (490 | ) | $1,845 | $ | — | $ | 860 | |||||||
June 30, 2000 | December 31, 1999 | |||
---|---|---|---|---|
Assets | ||||
Cash and cash equivalents. | $ 2,699 | $ 1,466 | ||
Mortgage loans. | 102,486 | 107,916 | ||
Other assets | 10,699 | 10,061 | ||
Total assets | $115,884 | $119,443 | ||
Liabilities and Stockholders’ Equity | ||||
Liabilities: | ||||
Borrowings | $ 65,187 | $ 78,448 | ||
Due to NovaStar Financial, Inc. | 31,133 | 22,161 | ||
Accounts payable and other liabilities | 12,660 | 11,787 | ||
Total liabilities | 108,980 | 112,396 | ||
Stockholders’ equity | 6,904 | 7,047 | ||
Total liabilities and stockholders’ equity | $115,884 | $119,443 | ||
NFI Holding Corporation Condensed Consolidated Balance Sheets (unaudited, dollars in thousands) | ||||||
---|---|---|---|---|---|---|
September 30, 2000 | December 31, 1999 | |||||
Assets | ||||||
Cash and cash equivalents | $ | 3,272 | $ | 1,466 | ||
Mortgage loans | 68,750 | 107,916 | ||||
Other assets | 12,647 | 10,061 | ||||
Total assets | $ | 84,669 | $ | 119,443 | ||
Liabilities and Stockholders’ Equity | ||||||
Liabilities: | ||||||
Borrowings | $ | 44,805 | $ | 78,448 | ||
Due to NovaStar Financial, Inc. | 12,918 | 22,161 | ||||
Accounts payable and other liabilities | 19,247 | 11,787 | ||||
Total liabilities | 76,970 | 112,396 | ||||
Stockholders’ equity | 7,699 | 7,047 | ||||
Total liabilities and stockholders’ equity | $ | 84,669 | $ | 119,443 | ||
Six Months Ended June 30, | Three Months Ended June 30, | Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | 2000 | 1999 | 2000 | 1999 | ||||||||||||||||
Interest income | $ 7,105 | $ 4,826 | $3,430 | $2,080 | $11,828 | $ 7,948 | $ 4,723 | $3,122 | |||||||||||||||
Interest expense | 4,027 | 2,220 | 1,988 | 659 | |||||||||||||||||||
Interest expense. | 7,034 | 3,764 | 3,007 | 1,544 | |||||||||||||||||||
Net interest income | 3,078 | 2,606 | 1,442 | 1,421 | 4,794 | 4,184 | 1,716 | 1,578 | |||||||||||||||
Provision for credit losses | (17 | ) | (116 | ) | 132 | (286 | ) | 80 | (284 | ) | 97 | (168 | ) | ||||||||||
Net interest income after provision for credit losses | 3,095 | 2,722 | 1,310 | 1,707 | 4,714 | 4,468 | 1,619 | 1,746 | |||||||||||||||
Other income: | |||||||||||||||||||||||
Fees from third parties | 2,231 | 554 | 1,525 | 213 | 5,057 | 706 | 2,826 | 152 | |||||||||||||||
Fees received from, net of paid to, NovaStar Financial, Inc. | 1,381 | 2,576 | 682 | 411 | 522 | 3,343 | (859 | ) | 767 | ||||||||||||||
Net gain on sales of mortgage assets | 4,834 | 6,088 | 2,109 | 3,241 | 9,909 | 9,189 | 5,075 | 3,101 | |||||||||||||||
Total other income | 8,446 | 9,218 | 4,316 | 3,865 | 15,488 | 13,238 | 7,042 | 4,020 | |||||||||||||||
General and administrative expenses | 11,684 | 10,989 | 6,475 | 5,178 | 19,550 | 16,172 | 7,866 | 5,183 | |||||||||||||||
Net income (loss) before taxes | (143 | ) | 951 | (849 | ) | 394 | |||||||||||||||||
Net income before taxes | 652 | 1,534 | 795 | 583 | |||||||||||||||||||
Income tax expense | — | — | — | — | — | — | — | — | |||||||||||||||
Net income (loss) | $ (143 | ) | $ 951 | $ (849 | ) | $ 394 | |||||||||||||||||
Net income | $ 652 | $ 1,534 | $ 795 | $ 583 | |||||||||||||||||||
Number of Loans | Principal | Average Loan Balance | Price Paid to Broker | Weighted Average | Percent with Prepayment Penalty | Number of Loans | Principal | Average Loan Balance | Weighted Average | Percent with Prepayment Penalty | ||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Loan to Value | Credit Rating (A) | Coupon | Percent with Prepayment Penalty | Number of Loans | Principal | Average Loan Balance | Price Paid to Broker | Loan to Value | Credit Rating (A) | Coupon | Percent with Prepayment Penalty | |||||||||||||||||||||||||||
2000: | ||||||||||||||||||||||||||||||||||||||
Third quarter | 1,793 | $207,662 | $115,818 | 101.1 | 84 | % | 5.20 | 10.72 | % | 90 | % | |||||||||||||||||||||||||||
Second quarter | 1,473 | $171,375 | $116,344 | 101.0 | 82 | % | 5.32 | 10.50 | % | 91 | % | 1,473 | 171,375 | 116,344 | 101.0 | 82 | 5.32 | 10.50 | 91 | |||||||||||||||||||
First quarter | 1,232 | 132,072 | 107,201 | 101.1 | 80 | % | 5.45 | 10.16 | 93 | 1,232 | 132,072 | 107,201 | 101.1 | 80 | 5.45 | 10.16 | 93 | |||||||||||||||||||||
2000 total | 2,705 | $303,447 | $112,180 | 101.0 | 81 | % | 5.38 | 10.36 | % | 92 | % | 4,498 | $511,109 | $113,630 | 101.1 | 82 | % | 5.30 | 10.50 | % | 91 | % | ||||||||||||||||
1999: | ||||||||||||||||||||||||||||||||||||||
Fourth quarter | 1,265 | $130,288 | $102,994 | 101.0 | 82 | % | 5.30 | 10.04 | % | 91 | % | 1,265 | $130,288 | $102,994 | 101.0 | 82 | % | 5.30 | 10.04 | % | 91 | % | ||||||||||||||||
Third quarter | 1,204 | 125,140 | 103,937 | 100.8 | 82 | 5.28 | 9.87 | 91 | 1,204 | 125,140 | 103,937 | 100.8 | 82 | 5.28 | 9.87 | 91 | ||||||||||||||||||||||
Second quarter | 1,161 | 114,631 | 98,735 | 101.1 | 82 | 5.14 | 9.82 | 89 | 1,161 | 114,631 | 98,735 | 101.1 | 82 | 5.14 | 9.82 | 89 | ||||||||||||||||||||||
First quarter | 865 | 82,495 | 95,370 | 100.5 | 80 | 4.95 | 9.85 | 89 | 865 | 82,495 | 95,370 | 100.5 | 80 | 4.95 | 9.85 | 89 | ||||||||||||||||||||||
1999 total | 4,495 | $452,554 | $100,679 | 100.9 | 82 | % | 5.19 | 9.90 | % | 90 | % | 4,495 | $452,554 | $100,679 | 100.9 | 82 | % | 5.19 | 9.90 | % | 90 | % | ||||||||||||||||
(A)AAA=7, AA=6, A=5, A-=4, B=3, C=2, D=1 |
(A) | AAA=7, AA=6, A=5, A-=4, B=3, C=2, D=1 |
Mortgage Loan Sales to Third Parties | Mortgage Loans Transferred in Securitizations | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Principal Amount | Net Gain Recognized | Weighted Average Price To Par | Principal Amount | Net Gain Recognized | |||||||
2000: | |||||||||||
Second quarter | $ 27,799 | $ 661 | 104.0 | $101,675 | $1,392 | ||||||
First quarter | 48,548 | 1,204 | 104.0 | 128,171 | 1,544 | ||||||
2000 total | $ 76,347 | $ 1,865 | 104.0 | $229,846 | $2,936 | ||||||
1999: | |||||||||||
Fourth quarter | $109,443 | $ 2,583 | 104.1 | % | $ — | $ — | |||||
Third quarter | 110,512 | 3,075 | 104.2 | — | — | ||||||
Second quarter | 98,048 | 2,911 | 104.4 | 25,800 | 355 | ||||||
First quarter | 72,824 | 1,593 | 103.6 | 138,847 | 1,250 | ||||||
1999 total | $390,827 | $10,162 | 104.1 | $164,647 | $1,605 | ||||||
Mortgage Loan Sales to Third Parties | Mortgage Loans Transferred in Securitizations | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Principal Amount | Net Gain Recognized | Weighted Average Price To Par | Principal Amount | Net Gain Recognized | |||||||
2000: | |||||||||||
Third quarter | $ 50,334 | $ 1,552 | 104.0 | $188,734 | $3,584 | ||||||
Second quarter | 27,799 | 661 | 104.0 | 101,675 | 1,392 | ||||||
First quarter | 48,548 | 1,204 | 104.0 | 128,171 | 1,544 | ||||||
2000 total | $126,681 | $ 3,417 | 104.0 | $418,580 | $6,520 | ||||||
1999: | |||||||||||
Fourth quarter | $109,443 | $ 2,583 | 104.1 | % | $ — | $ — | |||||
Third quarter | 110,512 | 3,075 | 104.2 | — | — | ||||||
Second quarter | 98,048 | 2,911 | 104.4 | 25,800 | 355 | ||||||
First quarter | 72,824 | 1,593 | 103.6 | 138,847 | 1,250 | ||||||
1999 total | $390,827 | $10,162 | 104.1 | $164,647 | $1,605 | ||||||
Gross Loan Production | Premium paid to broker, net of fees collected | Total Acquisition Cost | Gross Loan Production | Premium paid to broker, net of fees collected | Total Acquisition Cost | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Costs as a percent of principal: | ||||||||||||||||||
2000: | ||||||||||||||||||
Third quarter | 2.6 | % | 0.5 | % | 3.1 | % | ||||||||||||
Second quarter | 3.0 | % | 0.5 | % | 3.5 | % | 3.0 | % | 0.5 | % | 3.5 | % | ||||||
First quarter | 3.3 | % | 0.5 | % | 3.8 | % | 3.3 | % | 0.5 | % | 3.8 | % | ||||||
1999: | ||||||||||||||||||
Fourth quarter | 3.1 | % | 0.5 | % | 3.6 | % | 3.1 | % | 0.5 | % | 3.6 | % | ||||||
Third quarter | 3.8 | % | 0.4 | % | 4.2 | % | 3.8 | % | 0.4 | % | 4.2 | % | ||||||
Second quarter | 4.2 | % | 0.5 | % | 4.7 | % | 4.2 | % | 0.5 | % | 4.7 | % | ||||||
First quarter | 6.2 | % | 0.2 | % | 6.4 | % | ||||||||||||
First quarter. | 6.2 | % | 0.2 | % | 6.4 | % | ||||||||||||
Percent of Total Originations during Quarter (based on original principal balance) | Percent of Total Originations during Quarter (based on original principal balance) | ||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | 1999 | 2000 | 1999 | ||||||||||||||||||||||||||||||||||||
Collateral Location | Second | First | Fourth | Third | Second | First | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||
Florida | 13 | % | 14 | % | 12 | % | 15 | % | 12 | % | 15 | % | 12 | % | 13 | % | 14 | % | 12 | % | 15 | % | 12 | % | 15 | % | |||||||||||||
California | 11 | 10 | 10 | 10 | 10 | 8 | 6 | ||||||||||||||||||||||||||||||||
Ohio | 7 | 8 | 7 | 8 | 12 | 10 | 8 | ||||||||||||||||||||||||||||||||
Michigan | 11 | 11 | 12 | 10 | 10 | 12 | 10 | 11 | 11 | 12 | 10 | 10 | 12 | ||||||||||||||||||||||||||
California | 9 | 10 | 10 | 10 | 8 | 6 | |||||||||||||||||||||||||||||||||
Nevada | 6 | 7 | 7 | 5 | 4 | 4 | 3 | ||||||||||||||||||||||||||||||||
Arizona | 5 | 5 | 8 | 5 | 7 | 4 | 5 | 5 | 5 | 8 | 5 | 7 | 4 | ||||||||||||||||||||||||||
Ohio | 9 | 7 | 8 | 12 | 10 | 8 | |||||||||||||||||||||||||||||||||
Colorado | 5 | 5 | 4 | 2 | 1 | 1 | 2 | ||||||||||||||||||||||||||||||||
Tennessee | 6 | 7 | 6 | 4 | 6 | 9 | 5 | 6 | 7 | 6 | 4 | 6 | 9 | ||||||||||||||||||||||||||
Washington | 5 | 5 | 4 | 4 | 5 | 3 | 5 | 5 | 5 | 4 | 4 | 5 | 3 | ||||||||||||||||||||||||||
All other states. | 42 | 41 | 40 | 40 | 42 | 43 | |||||||||||||||||||||||||||||||||
All other states | 34 | 30 | 30 | 33 | 35 | 37 | 38 |
Constant Prepayment Rate | Annual Constant Default Rate, net of mortgage insurance (basis points) | Discount Rate | |||||
---|---|---|---|---|---|---|---|
2000-1 | 25 to 30 | 25 | 15 | % |
Constant prepayment rate (weighted average life) | Static loss, net of mortgage insurance (basis points) | Discount Rate | |
---|---|---|---|
2000-1 | 27 | 1% | 15% |
2000-2 | 28 | 1% | 15% |
2000 | 1999 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30 | March 31 | December 31 | September 30 | June 30 | March 31 | |||||||||||||
Loan servicing portfolio | $970,016 | $872,693 | $894,572 | $969,343 | $1,032,065 | $1,072,393 | ||||||||||||
Total defaults: | ||||||||||||||||||
Delinquent loans (A) | 4.82 | % | 5.58 | % | 6.28 | % | 4.75 | % | 5.21 | % | 4.12 | % | ||||||
Loans in foreclosure | 3.25 | 3.55 | 3.62 | 3.79 | 3.36 | 3.39 | ||||||||||||
Real estate owned | 2.07 | 2.65 | 2.71 | 2.24 | 2.20 | 1.66 | ||||||||||||
Table 23 Delinquencies and Defaults (dollars in thousands) | ||||||||||||||
2000 | 1999 | |||||||||||||
September 30 | June 30 | March 31 | December 31 | September 30 | June 30 | March 31 | ||||||||
Loan servicing portfolio | $1,016,952 | $970,016 | $872,693 | $894,572 | $969,343 | $1,032,065 | $1,072,393 | |||||||
Total defaults: | ||||||||||||||
Delinquent loans (A) | 4.90% | 4.82% | 5.58% | 6.28% | 4.75% | 5.21% | 4.12% | |||||||
Loans in foreclosure | 3.34 | 3.25 | 3.55 | 3.62 | 3.79 | 3.36 | 3.39 | |||||||
Real estate owned | 1.97 | 2.07 | 2.65 | 2.71 | 2.24 | 2.20 | 1.66 | |||||||
(A) | Includes loans delinquent 30 days or greater |
Percent Sold to NovaStar Financial, Inc. | Percent Sold to Third Parties | Percent Sold in Securitizations | Percent Held in Portfolio | Percent of Prepayments | Total | Percent Sold to NovaStar Financial, Inc. | Percent Sold to Third Parties | Percent Sold in Securitizations | Percent Held in Portfolio | Percent of Prepayments | Total | |||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Third quarter | — | 9 | % | 60 | % | 30 | % | 1 | % | 100 | % | |||||||||||||||||||||||||||||||||||||||||
Second quarter | — | 12 | % | 44 | % | 43 | % | 1 | % | 100 | % | — | 12 | 44 | 43 | 1 | 100 | |||||||||||||||||||||||||||||||||||
First quarter | — | 20 | 53 | 26 | 1 | 100 | — | 20 | 53 | 26 | 1 | 100 | ||||||||||||||||||||||||||||||||||||||||
1999 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Fourth quarter | — | 52 | — | 46 | 2 | 100 | — | 52 | — | 46 | 2 | 100 | ||||||||||||||||||||||||||||||||||||||||
Third quarter | — | 54 | — | 44 | 2 | 100 | — | 54 | — | 44 | 2 | 100 | ||||||||||||||||||||||||||||||||||||||||
Second quarter | — | 32 | 13 | 54 | 1 | 100 | — | 32 | 13 | 54 | 1 | 100 | ||||||||||||||||||||||||||||||||||||||||
First quarter | — | 25 | 45 | 29 | 1 | 100 | — | 25 | 45 | 29 | 1 | 100 |
During the |
NovaStar Mortgage recognized gains of |
No income tax expense has been recorded during the first nine months of 2000 because of the existence of substantial net operating loss carryforwards, which are expected to offset all of the pre-tax income in 2000. |
For the three months ended September 30, 2000, NFI Holding recorded net income of $795,000 compared with net income of $583,000 for the same period of 1999. The following summarizes the explains the decline in net earnings for the three months ended September 30, 2000 compared with the same period of 1999: |
· | Fees from third parties increased from $152,000 during the three months ended September 30, 1999 to $2.8 million during the three months ended September 30, 2000. The significant increase is due to broker fees received on loans originated through the mortgage brokers of NovaStar Home Mortgage. |
· | Net gains on sales of mortgage assets increased from $3.1 million during the third quarter 1999 to $5.1 million during the third quarter 2000. During the three months ended September 30, 2000 NovaStar Mortgage recognized a gain of $3.6 million on the first close of the 2000-2 securitization transaction. The remainder of the gain recognized in the third quarter 2000 was primarily on mortgage loan sales to third parties. During the third quarter of 1999, all of NFI Holding’s net gain on sales of mortgage assets were on mortgage loan sales to third parties. |
· | Fees received from, net of paid to, NovaStar Financial, Inc. decreased from $767,000 during the third quarter of 1999 to ($859,000) during the same period of 2000 as a result of the implementation of additional intercompany agreements July 1, 2000 as discussed under the “Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999”. |
· | General and administrative expenses increased from $5.2 million during the third quarter 1999 to $7.9 million during the third quarter 2000. The increase is primarily attributable to various expenses incurred by the broker branches of NovaStar Home Mortgage, including the net income (loss) generated from the branches is expensed to the branch in the form of compensation paid to |
brokers. NovaStar Home Mortgage began providing various accounting and compensation services to mortgage brokerage companies during the fourth quarter of 1999. |
· | No income tax expense has been recorded in the |
Maturity | Maximum Borrowing Limit | Lending Value of Collateral | Borrowings | Availability | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Resource | |||||||||||
Cash | $ 5,250 | ||||||||||
First Union National Bank (A): | |||||||||||
Committed warehouse line of credit | 7/27/01 | $ 75,000 | $ 44,561 | $11,200 | $33,361 | ||||||
Committed secured whole loan repurchase agreement | 7/27/01 | $175,000 | $ 26,728 | $26,728 | $ — | ||||||
Committed residual financing available. | 12/17/01 | $ 25,000 | (B | ) | $ — | $25,000 | |||||
GMAC/Residential Funding Corporation (A): | |||||||||||
Committed warehouse line of credit | 12/27/00 | $ 50,000 | $ 27,259 | $27,259 | $ — | ||||||
Mortgage securities repurchase agreement | 7/5/00 | $ 10,987 | $ 13,500 | $10,987 | $ — | ||||||
Total | $335,987 | $112,048 | $76,174 | $63,611 | |||||||
Maturity | Maximum Borrowing Limit | Lending Value of Collateral | Borrowings | Availability | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Resource | ||||||||||||||||
Cash | $ | 6,039 | ||||||||||||||
Committed facilities with First Union National Bank (A): | ||||||||||||||||
Warehouse line of credit | 7/27/01 | $ | 75,000 | $ | 43,950 | $ | 21,038 | $ | 22,912 | |||||||
Secured whole loan repurchase agreement | 7/27/01 | $ | 175,000 | $ | 224 | $ | 224 | $ | — | |||||||
Residual financing available | 12/17/01 | $ | 25,000 | $ | (B | ) | $ | 10,960 | $ | 14,040 | ||||||
Committed facility with GMAC/Residential Funding Corporation (A): | ||||||||||||||||
Warehouse line of credit | 12/27/00 | $ | 50,000 | $ | 23,543 | $ | 23,543 | $ | — | |||||||
Total | $ | 335,961 | $ | 81,024 | $ | 55,765 | $ | 42,991 | ||||||||
(A) | Value of collateral and borrowings include amounts for NovaStar Financial and NovaStar Mortgage, as they are co-borrowers under the arrangements with First Union National Bank and GMAC/RFC. |
(B) | Management estimates the value of the residuals range from $55 to $70 million and does not include the value of mortgage servicing rights. |
a private placement offering of preferred stock, raising net proceeds of $47 million. |
an initial public offering of common stock, raising net proceeds of $67 million, and |
a private offering of convertible preferred stock, raising net proceeds of $29 million. |
effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitization and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. Management does not expect the adoption of SFAS No. 140 to have a material impact on the financial statements of NovaStar Financial.
In addition, Note 1 of the consolidated financial statements contained in the annual report on Form 10-K for the fiscal year ended December 31, 1999 describes certain recently issued accounting pronouncements. Management believes the implementation of these pronouncements and others that have gone into effect since the date of these reports will not have a material impact on the consolidated financial statements.
(1) | Maintain the net interest margin between assets and liabilities, and |
(2) | Diminish the effect of changes in interest rate levels on the market value of NovaStar Financial. |
In its assessment of the interest sensitivity and as an indication of exposure to interest rate risk, management relies on models of financial information in a variety of interest rate scenarios. Using these models, the fair value and interest rate sensitivity of each financial instrument, or groups of similar instruments is estimated, and then aggregated to form a comprehensive picture of the risk characteristics of the balance sheet. The risks are analyzed on both an income and market value basis.
Basis Point Increase (Decrease) in Interest Rate(A) | Basis Point Increase (Decrease) in Interest Rate(A) | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of June 30, 2000 | (100) | Base | 100 | ||||||||||||||||||||||||||||
As of September 30, 2000 | (100) | Base | 100 | ||||||||||||||||||||||||||||
Income from: | |||||||||||||||||||||||||||||||
Assets | $75,971 | $78,110 | $79,674 | $ | 84,379 | $ | 86,755 | $ | 88,761 | ||||||||||||||||||||||
Liabilities (B) | 56,488 | 63,262 | 70,234 | 64,589 | 72,375 | 80,318 | |||||||||||||||||||||||||
Interest rate agreements | (1,177 | ) | 1,604 | 4,757 | (1,882 | ) | 221 | 3,961 | |||||||||||||||||||||||
Net spread income | $18,306 | $16,452 | $14,197 | $ | 17,908 | $ | 14,601 | $ | 12,404 | ||||||||||||||||||||||
Cumulative change in income from base (C) | $ 1,854 | — | $(2,255 | ) | $ | 3,307 | — | $ | (2,197 | ) | |||||||||||||||||||||
Percent change from base spread income (D) | 11.3 | % | — | (13.7 | )% | 22.6 | % | — | (15.0 | )% | |||||||||||||||||||||
Percent change of capital (E) | 1.8 | % | — | (2.2 | )% | ||||||||||||||||||||||||||
Percent change of capital(E) | 3.3 | % | — | (2.2 | )% | ||||||||||||||||||||||||||
As of December 31, 1999 | (100) | Base | 100 | (100) | Base | 100 | |||||||||||||||||||||||||
Income from: | |||||||||||||||||||||||||||||||
Assets | $61,610 | $64,419 | $66,954 | $ | 61,610 | $ | 64,419 | $ | 66,954 | ||||||||||||||||||||||
Liabilities (B) | 42,173 | 47,803 | 53,442 | 42,173 | 47,803 | 53,442 | |||||||||||||||||||||||||
Interest rate agreements | (1,379 | ) | (1,379 | ) | 1,122 | (1,379 | ) | (1,379 | ) | 1,122 | |||||||||||||||||||||
Net spread income | $18,058 | $15,237 | $14,634 | $ | 18,058 | $ | 5,237 | $ | 14,634 | ||||||||||||||||||||||
Cumulative change in income from base (C) | $ 2,821 | — | $ (603 | ) | $ | 2,821 | — | $ | (603 | ) | |||||||||||||||||||||
Percent change from base spread income (D) | 18.5 | % | — | (4.0 | )% | 18.5 | % | — | (4.0 | )% | |||||||||||||||||||||
Percent change of capital (E) | 2.8 | % | — | (0.6 | )% | ||||||||||||||||||||||||||
Percent change of capital(E) | 2.8 | % | — | (0.6 | )% | ||||||||||||||||||||||||||
(A) | Income of asset, liability or interest rate agreement in a parallel shift in the yield curve, up and down 1% |
(B) | Includes deal expenses, loan premium amortization, mortgage insurance premiums and provisions for credit losses. |
(C) | Total change in estimated spread income, in dollars, from “base.” “Base” is the estimated spread income as of |
(D) | Total change in estimated spread income, as a percent, from base. |
(E) | Total change in estimated spread income as a percent of total stockholders’ equity as of |
Basis Point Increase (Decrease) in Interest Rate(A) | Basis Point Increase (Decrease) in Interest Rate(A) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of June 30, 2000 | (100) | 100 | |||||||||||
As of September 30, 2000 | (100) | 100 | |||||||||||
Change in market values of: | |||||||||||||
Assets | $12,243 | $(15,294 | ) | $ | 12,254 | $ | (14,627 | ) | |||||
Liabilities | (1,913 | ) | 2,216 | (1,820 | ) | 2,020 | |||||||
Interest rate agreements | (3,881 | ) | 5,406 | (2,611 | ) | 5,522 | |||||||
Cumulative change in market value | $ 6,449 | $ (7,672 | ) | $ | 7,823 | $ | (7,085 | ) | |||||
Percent change of market value portfolio equity(B). | 6.7 | % | (8.0 | )% | |||||||||
Percent change of market value portfolio equity (B) | 8.4 | % | (7.6 | )% | |||||||||
As of December 31, 1999 | |||||||||||||
Change in market values of: | |||||||||||||
Assets | $ 9,112 | $(11,340 | ) | $ | 9,112 | $ | (11,340 | ) | |||||
Liabilities | (2,068 | ) | 2,376 | (2,068 | ) | 2,376 | |||||||
Interest rate agreements | (2,809 | ) | 4,723 | (2,809 | ) | 4,723 | |||||||
Cumulative change in market value | $ 4,235 | $ (4,241 | ) | $ | 4,235 | $ | (4,241 | ) | |||||
Percent change of market value portfolio equity(B). | 4.4 | % | (4.4 | )% | |||||||||
Percent change of market value portfolio equity (B) | 4.4 | % | (4.4 | )% | |||||||||
(A) | Change in market value of assets, liabilities or interest rate agreements in a parallel shift in the yield curve, up and down 1%. |
(B) | Total change in estimated market value as a percent of market value portfolio equity as of |
· | Refinancing incentives (the interest rate of the mortgage compared with the current mortgage rates available to the borrower) |
· | Program Type |
· | Borrower credit grades |
· | Loan Term |
· | Loan-to-value ratios |
· | Loan size |
· | Prepayment penalties |
· | Estimated closing costs |
prepayment speed ranges from 20% to 40% and depends on the characteristics of the loan which include type of product (ARM or fixed rate), note rate, credit grade, LTV, gross margin, weighted average maturity and lifetime and periodic caps and floors. This prepayment curvevector is also multiplied by a factor of 60%55% to 70% depending on average forthe length and type of penalty periods when a prepayment penalty is in effect on the loan. Prepayment assumptions are also multiplied by a factor of greater than 100% during periods around rate resets and prepayment penalty expirations. These assumptions change with levels of interest rates. The actual historical speeds experienced on NovaStar Financial’s loans shown in Table 5 are weighted average speeds of all loans in each deal.
As shown in Table 5, actual prepayment rates on loans that have been held in portfolio for shorter periods are slower than long term prepayment rates used in the interest rate sensitivity analysis. This table also indicates that as pools of loans held in portfolio season, the actual prepayment rates are more consistent with the long term prepayment rates used in the interest sensitivity analysis.
PART II. OTHER INFORMATION