FORM 10-Q<del> FOR NOVASTAR FINANCIAL</del>
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
FORM
10-Q
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
x
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly
period ended September 30, 1999.
March 31, 2000.
OR
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
¨
SECURITIES
EXCHANGE ACT OF 1934
For the transition
period from
to
.
Commission File
Number: 001-13533
NovaStar
Financial, Inc.
(Exact name of
registrant as specified in its charter)
| Maryland
(State or other
jurisdiction of
incorporation or organization)
| | 74-2830661 (I.R.S. Employer
Identification No.) | |
| 1901 W. 47th
Place, Suite 105,
Suite 105, Westwood,
KS
(Address of
principal executive offices)
|
|
74-2830661
(I.R.S. Employer Identification No.)
66205
(Zip
Code)
|
|
(913) 362-1090
(Registrant’s telephone number, including
area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x
No ¨
The number of shares of the registrant’s
common stock outstanding as of November 10, 1999 was 7,585,069.
(913)
362-1090 (Registrant’s
telephone number, including area code) (Former name,
former address and former fiscal year, if changed since last
report) Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90
days. Yes x No ¨ The
number of shares of the registrant’s common stock outstanding as of May
10, 2000 was 6,983,298.
| |
NOVASTAR
FINANCIAL, INC.
FORM
10-Q
QUARTER ENDED SEPTEMBER 30,Quarter Ended
March 31, 1999
INDEX
NOVASTAR FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share
amounts)
ASSETS
|
|
September
30, 1999March 31,
2000
|
|
December 31,
1998
1999
|
|
|
(unaudited) | | |
Assets |
Cash
and cash equivalents |
|
$ 2,3472,345 | |
| |
$ — 2,395 |
|
Mortgage loans net
|
|
699,428551,776 | |
|
620,406 |
945,798 | |
Mortgage securities—
available for saleavailable-for-sale |
|
6,9536,775 | |
|
6,775 |
—
| |
Accrued
interest receivable |
|
13,86611,860 | |
|
12,452 |
17,608 | |
Due from affiliates
| | 22,044 |
| | 18,521 |
|
InvestmentAdvances to and investment in NFI Holding
Corporation |
|
8,49132,473 | |
|
29,208 |
13 | |
Assets
acquired through foreclosure |
|
15,44318,446 | |
|
16,891 |
10,583 | |
Other
assets |
|
2,5741,856 | |
|
2,383 |
5,273 | |
| |
|
|
|
|
|
|
|
Total assets |
|
$771,146625,531 |
|
|
$997,796690,510 |
|
| |
|
|
|
|
|
|
| Liabilities and
StockholdersLIABILITIES AND STOCKHOLDERS’
EquityEQUITY
| | |
| Liabilities: |
|
Collateralized mortgage obligations |
|
$656,568520,895 |
|
|
$891,944 |
|
Residual interest
financing586,868 |
| — |
| | 18,000 |
|
| |
| | |
| |
Total borrowings | | 656,568 |
| | 909,944 | |
|
Dividends payable |
|
525 |
|
|
2,845525 |
|
Accounts payable and accrued expensesother liabilities |
|
1,3822,454 | |
|
1,803 |
2,157 | |
| |
|
|
|
|
|
|
|
Total liabilities |
|
658,475523,874 | |
|
589,196 |
914,946 | |
| Stockholders’ equity: | | | | | | |
Capital stock, $0.01 par value, 50,000,000 shares
authorized: | | | | | | |
PreferredClass B, convertible preferred stock, 4,285,714
shares of Class B 7% cumulativeissued and outstanding,
convertible preferred stock issued and
outstanding as of
September 30, 1999 with a redemption and
liquidation
value of $7 per sharerespectively |
|
43 |
|
|
—
43 |
|
Common stock, 8,140,698 and 8,130,069 shares
issuedissued; 7,212,298 and
7,460,523 shares
outstanding, respectively |
|
81 |
|
|
81 |
|
|
Additional paid-in capital |
|
151,164151,187 | |
|
151,173 |
122,180 | |
|
Accumulated deficit |
|
(31,85040,815 |
) |
|
(32,80441,502 |
) |
|
Accumulated other comprehensive income |
| 836 | | | 242 | |
— Cost of treasury stock |
| (2,829 | ) |
|
—
(1,877 |
) |
|
Notes receivable from founders |
|
(6,7676,846 |
) |
|
(6,6076,846 |
) |
| |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
112,671101,657 | |
|
101,314 |
82,850 | |
| |
|
|
|
|
|
|
|
Total liabilities and stockholders’
equity |
|
$771,146625,531 |
|
|
$997,796690,510 |
|
| |
|
|
|
|
|
|
See notes
to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share amounts)
thousands)
|
| For the
Nine
Months Ended
September 30,
| |
For
the Three
Months
Ended
September 30,March 31,
|
|
| 2000
| |
1999
| | 1998
| | 1999
| | 1998
|
| Interest income: |
|
|
|
| | | | | | |
|
|
|
Mortgage loans | | $12,812 | | | $19,550 | |
|
Mortgage securities | | 266 | | | — | |
| |
|
$52,236
|
|
|
$56,274 |
| | $15,595 |
| | $22,312
|
|
Mortgage securities
Total interest income |
|
10013,078 | |
| 19,550 | |
| Interest expense |
|
22,8819,698 | |
|
13,209 |
100 |
| | 6,485 | |
| |
|
| | |
| | |
| | |
| |
Total interest
income | | 52,336 |
|
|
79,155
|
| | 15,695 |
| | 28,797 |
|
Interest expense
| | 36,059 |
| | 60,948 |
| | 11,206 |
| | 22,088 |
|
| |
| | |
| | |
| | |
|
|
| Net
interest income |
|
16,2773,380 | |
| 6,341 | |
| Prepayment penalty income |
|
18,207489 | |
|
656 |
4,489 |
| | 6,709 | |
| Provision for credit losses |
|
11,499 (1,579 | ) |
| (2,299 | ) |
| Premiums for mortgage loan insurance |
|
3,400(365 | ) |
| (457 | ) |
| Loan
servicing fees paid to NovaStar Mortgage, Inc. |
|
5,634(696 | ) |
|
(1,115 |
1,179 |
) |
| |
|
| | |
| | |
| | |
| |
Net interest
income after provision for credit losses | | 4,778 |
|
|
14,807 |
| | (1,145 | ) | | 5,530
|
|
OtherNet
portfolio income | | 3,091 |
| 1,229 | |
|
2,0123,126 | |
| Other
income (loss) |
| (2 | ) |
|
1,091279 |
| | 919 | |
Equity
in earnings
(loss)net income of NFI Holding Corporation |
|
1,518699 | |
| 551 |
| (2,455 | ) | | 576 |
| | (2,446 | ) |
| General
and administrative expenses: |
|
|
|
| | | | | | |
|
|
Loan servicingNet fees paid
tofor other services provided by NovaStar
Mortgage, Inc. |
|
3,0563 | |
|
1,050 |
2,672 |
| | 936 |
| | 1,184 | |
Compensation and benefits.benefits |
|
1,358384 | |
|
585 |
1,374 |
| | 421 |
| | 478 |
|
Other loan servicing
expenses | | 1,392 |
| | 491 |
| | 446 |
| | 363 | |
|
Professional and outside services |
|
546130 | |
|
332 |
649 |
| | 181 |
| | 296 |
|
Fees for other services
provided by (to) NovaStar Mortgage,
Inc. | | 287 |
| | 1,934 |
| | (169 | ) | | (1,249 | ) |
Forgiveness of notes
receivable from founders | | — |
| | 812 |
| | — |
| | 270 | |
|
Office administration |
|
611171 | |
|
208 |
681 |
| | 203 |
| | 276 | |
|
Other |
|
10326 | |
| 55 |
| 184 |
| | 41 |
| | (9 | ) |
| |
|
|
|
|
| | |
| | |
|
|
|
Total general and administrative
expenses |
|
7,353714 | |
|
2,230 |
8,797 |
| | 2,059 |
| | 1,609 | |
| |
|
| | |
| | |
| | |
| |
Net income (loss)
| | $ 2,034
|
|
|
$ 5,567
|
|
| $(1,537 | )Net
income |
|
$ 2,394
1,212 |
| | $ 1,726 | |
| |
|
| | |
| | |
| | |
| |
Preferred stock
dividends | | (1,081 | ) | | — |
|
|
| |
| Dividends on preferred shares | | $ (525 |
) |
|
— $ (31 |
) |
| |
|
| | |
| | |
| | |
| |
Income (loss)
available to common stockholders | | $
953 |
|
|
$ 5,567
|
|
| $(2,062 | )Net
income available to common shareholders |
|
$ 2,394
687 |
| | $ 1,695 | |
| |
|
|
|
|
| | |
| | |
|
|
Basic
earnings (loss) per share |
|
$ 0.120.09 | |
| |
$ 0.690.21 |
| | $ (0.25
| ) | | $
0.29 | |
| |
|
|
|
|
| | |
| | |
|
|
Diluted
earnings (loss) per share |
|
$ 0.110.09 | |
| |
$ 0.640.20 |
| | $ (0.25
| ) | | $
0.29 | |
| |
|
|
|
|
| |
| Weighted average basic shares outstanding | | 7,342 | | | 8,130 | |
| | |
|
|
|
| |
| Weighted average diluted shares outstanding | | 7,352 | | | 8,638 | |
| | |
|
|
|
|
|
| Dividends declared per common share |
|
$ — |
|
|
$ 1.00 |
| | $
— |
| | $
0.35 | |
| |
|
|
|
|
| | |
| | |
|
|
See notes
to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
|
|
For
the NineThree Months
Ended
September 30,March 31,
|
|
| 2000
| |
1999
| | 1998
|
| Net
cash provided by operating activities |
|
$ 23,5045,486 | |
| |
$ 9,2246,315 |
|
|
| Cash
flow from investing activities: |
|
|
|
|
| |
|
|
Mortgage loan repayments |
|
201,03459,770 | |
|
61,233 |
94,608 |
|
Mortgage loans sold to
others | | 4,900 |
| | 7,933 | |
|
Sales of assets acquired through
foreclosure |
|
17,5426,697 | |
| 3,757 |
| 2,350 |
|
Investment in NFI
Holding Corp. | | (7,000 | ) | | — |
|
Net change in amounts
due from affiliates | | (8,360 | ) | | (265,068 | ) |
Mortgage loans purchased
from NovaStar Mortgage, Inc.sold to others |
|
— |
|
|
(510,267 | ) |
Purchases of
available-for-sale securities4,545 |
| — |
| | (375,051
| ) |
Proceeds from sales of
available-for-sale securities | | — |
| | 323,631 | |
Proceeds from paydowns on and maturities of available-for-sale
securities |
| 661 | | |
— |
|
|
Net change in advance to NFI Holding
Corporation |
|
150,018(4,936 | ) |
| (11,784 | ) |
| |
|
|
|
|
|
|
Net cash provided by
(used in) investing
activities |
|
208,11662,192 | |
| 57,751 | |
| Cash
flow from financing activities: |
| | | | | |
|
Payments on collateralized mortgage
obligations | |
(571,84666,265 | ) | | (72,395 |
) |
| |
Cash flow from
financing activities:
Change in short-term borrowings |
|
— |
|
|
(18,029 |
|
| ) |
Proceeds from issuance of capital stock and
exercise of equity instruments, net of
net of offering costs of $1,240 |
|
29,02914 | |
| 28,761 |
| (73 | ) |
|
Dividends paid on preferred stock |
|
(556525 |
) |
|
— |
|
Dividends paid on commonTreasury stock purchases |
|
(2,845952 |
) |
|
(6,062— |
) |
Change in short-term
borrowings |
|
(18,029 | )
|
|
29,783 |
|
|
Payments on
collateralized mortgage obligations
Net cash used in financing
activities | | (67,728 | ) | | (61,663 | ) |
| | |
|
|
|
| |
| Net
increase (decrease) in cash and cash equivalents | | (236,872
50 |
) |
|
(128,8472,403 |
) |
| Cash
and cash equivalents, beginning of period | | 2,395 | | | — | |
| | |
| | |
| |
| Cash
and cash equivalents, end of period | | $ 2,345 | | | $ 2,403 | |
| | |
| | |
| |
| Supplemental disclosure of cash flow
information: | | | | | | |
Proceeds from issuing
collateralized mortgage obligationsCash paid for interest | | $ 9,801 | | | $ 13,487 | |
| |
|
—
|
|
|
665,000
|
|
Debt issuance costs paid
on collateralized mortgage obligationsIssuance of warrants |
|
$ —
|
|
|
2,821$ 350 |
|
| |
|
| | |
| |
Net cash provided by
(used in) financing activities | | (229,273 | ) | | 562,622 |
|
| |
| | |
| |
| | | | | | |
Net increase in cash and
cash equivalents | | $
2,347 |
|
|
—
|
|
Cash and cash
equivalents, beginning of period | | — |
| | — |
|
| |
| | |
| |
Cash and cash
equivalents, end of period | | $
2,347 |
| | $
— |
|
| |
| | |
| |
Supplemental
disclosure of cash flow information: | | | | | | |
|
Note received in
exchange for options exercised by founders | | $
— |
| | $
4,350 |
|
| |
| | |
| |
Cash paid for interest
| | $
36,567 |
| | $
60,312 |
|
| |
| | |
|
|
|
Dividends payable |
|
$ 525 |
|
|
$ 2,8452,876 |
|
| |
|
|
|
|
|
|
|
Assets acquired through foreclosure |
|
$ 22,5706,935 | |
| |
$ 9,5007,270 |
|
| |
|
|
|
|
|
|
See notes
to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999March
31, 2000 (Unaudited)
Note
1. Financial Statement Presentation
The consolidated financial statements as of and for
the periods ended September 30,March 31, 2000 and 1999 and 1998 are unaudited. In the
opinion of management, all adjustments have been made which were
of a normal and recurring nature, necessary for a fair
presentation of the balance sheets and results of operations.
The consolidated financial statements should be read in
conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the
consolidated financial statements of NovaStar Financial and the
notes thereto, included in NovaStar Financial’s annual
report to shareholders and annual report on Form 10-K for the
fiscal year ended December 31, 1998.1999.
NovaStar Financial owns 100 percent of the common
stock of three special purpose entities—NovaStar Assets
Corporation, NovaStar Certificates Financing Corporation and
NovaStar Mortgage Funding Corporation. NovaStar Financial formed
these entities in connection with the issuance of collateralized
mortgage obligations. The consolidated financial statements of
NovaStar Financial include the accounts of these entities.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
NovaStar Financial owns 100 percent of the
non-voting preferred stock of NFI Holding Corporation (Holding)
for which it receives 99 percent of any dividends paid by NFI
Holding. The founders of NovaStar Financial own the voting
common stock of NFI Holding and receive 1% of any dividends paid
by NFI Holding. NovaStar Mortgage, Inc., and NovaStar Capital, Inc. and NovaStar Home Mortgage,
Inc. are wholly owned subsidiaries of NFI Holding. NovaStar
Mortgage Funding Corporation II, NovaStar Mortgage Funding
Corporation III and NovaStar REMIC Financing Corporation are
subsidiaries of NovaStar Mortgage. NovaStar Financial accounts
for its investment in NFI Holding using the equity
method.
Note
2. Stockholders’
EquityNovaStar Mortgage Funding Trust Series 2000-1
On March 31, 2000, NovaStar Mortgage executed its
second securitization transaction that for financial reporting
and tax purposes was treated as a sale. As part of this
transaction, NovaStar Mortgage sold loans of $230 million, of
which $102 million will settle in June 2000, to NovaStar
Mortgage Funding Trust Series (NMFT) 2000-1. In return, NMFT
2000-1 issued asset-backed bonds of $226 million. NovaStar
Mortgage retained economic residual certificates issued by NMFT
2000-1, with a carrying value of $13.5 million at March 1999,31,
2000, which NovaStar Financial issued 4,285,714 sharespurchased from NovaStar Mortgage
in April 2000. Through NovaStar Financial’s indirect
ownership of Class B 7% cumulative convertible preferred stock. The preferred
shares have no voting rights, are senior to any other classNFI Holding, a gain of NovaStar Financial capital stock and have a stated and liquidation
value of $7 per share. Each holder of the preferred stock is
entitled to quarterly dividends that accrue at 7% per annum$1.5 million was recognized
on the
stated value. Holders of the Class B preferred shares have the
right, at any time, to convert all or a portion of their preferred
stock into an equal number of shares of common stock. NovaStar
Financial has the right to redeem the Class B preferred stock at any
time on or after March 31, 2002 at a price of $7.00 per share,
payable in cash.this transaction.
Comprehensive income includes net income and revenues,
expenses, gains and losses that are not included in net income. The
net change is unrealized gain (loss) on available-for-sale
securities in 1999 includes the change in market value of the
economic residual interests of the NovaStar Home Equity Series
1999-1 securitization NovaStar Mortgage issued in January 1999. The
fair market value of this security approximated its amortized cost
as of September 30, 1999. The net change in unrealized gain (loss)
on available-for-sale securities as of September 30, 1998 includes
the change in market value of agency securities. Accordingly,
NovaStar Financial did not own any available-for-sale securities as
of December 31, 1998. Following is a summary of comprehensive income
for the nine and three month periods ended September 30, 1999 and
1998.
| | For the
Nine Months
Ended
September 30,
| | For the
Three Months
Ended
September 30,
|
|---|
| | 1999
| | 1998
| | 1999
| | 1998
|
|---|
Net income (loss)
| | $2,034 | | $ 5,567
|
| | $(1,537 | ) | | $2,394 |
|
Other
comprehensive income—net change in
unrealized
gain (loss) on available-for-sale
securities | | — | | (9,130 | ) | | (1,860 | ) | | (4,828 | ) |
| |
| |
| | |
| | |
| |
Comprehensive
income (loss) | | $2,034 | | $(3,563 | ) | | $(3,397 | ) | | $2,434 |
|
| |
| |
| | |
| | |
| |
Note 3. Earnings Per Share
The computations of basic and diluted EPS for the nine and
three month periods ended September 30, 1999 and 1998 are as
follows (in thousands, except per share amounts):
| | For the nine
months ended
September 30,
| | For the three
months ended
September 30,
|
|---|
| | 1999
| | 1998
| | 1999
| | 1998
|
|---|
Numerator:
|
Net Income (loss)
| | $2,034 |
| | $5,567 | | $(1,537 | ) | | $2,394 |
Less: Preferred
stock dividends | | (1,081 | ) | | — | | (525 | ) | | —
|
| |
| | |
| |
| | |
|
Income (loss)
available to common
stockholders—basic and diluted
| | $ 953
|
| | $5,567 | | $(2,062 | ) | | $2,394 |
| |
| | |
| |
| | |
|
|
|
Denominator:
| | | | | | | | | | |
Weighted average
common
shares outstanding—basic | | 8,130 |
| | 8,033 | | 8,130 |
| | 8,124 |
| |
| | |
| |
| | |
|
Warrants | | 177 |
| | 555 | | — |
| | — |
Stock options
| | 19 |
| | 51 | | — |
| | 34 |
| |
| | |
| |
| | |
|
Weighted average
common
shares outstanding—diluted | | 8,326 |
| | 8,639 | | 8,130 |
| | 8,158 |
| |
| | |
| |
| | |
|
Basic earnings
(loss) per share | | $ 0.12
|
| | $ 0.69
| | $ (0.25
| ) | | $ 0.29
|
| |
| | |
| |
| | |
|
Diluted earnings
(loss) per share | | $ 0.11
|
| | $ 0.64
| | $ (0.25
| ) | | $ 0.29
|
| |
| | |
| |
| | |
|
|
The convertible preferred stock issued in March 1999 was not
included in the earnings per share computations as they are
anti-dilutive for the 1999 periods presented. The following stock
options and warrants to purchase shares of common stock were
outstanding during each period presented, but were not included in
the computation of diluted earnings per share because the options
’ weighted-average exercise price was greater than the average
market price of the common shares for the periods presented,
therefore, the effect would be antidilutive (in thousands, except
per share amounts):
| | For the nine
months ended
September 30,
| | For the three
months ended
September 30,
|
|---|
| | 1999
| | 1998
| | 1999
| | 1998
|
|---|
Number of stock
options and warrants | | 4,402 | | 224 | | 4,507 | | 256 |
Weighted average
exercise price | | $11.51 | | $18.03 | | $11.44 | | $17.92 |
Note 4. Reclassifications
During 1999, NovaStar Financial reclassified the principal and
interest collections received on the securitized mortgage loan
portfolio to more closely match the timing of the principal and
interest payments made to bondholders of the collateralized mortgage
obligations (CMOs). Under the terms of NovaStar Financial’s
CMOs, the principal and interest collected by NovaStar Mortgage,
NovaStar Financial’s servicer, during any given month are held
in trust and remitted to bondholders of the CMOs the following
month. Prior to the reclassification change in 1999, NovaStar
Financial reduced the securitized mortgage loan and accrued interest
balances when mortgage loan payments were received by NovaStar
Mortgage. Thus at any given month-end, NovaStar Financial’s
mortgage loan balance would reflect the principal and interest
collected during the month. However, the CMO balances would not
reflect these principal and interest payments until the following
month-end. In order to better match the collateral principal and
interest payments with the CMO principal and interest payments, a
reclass was made on NovaStar Financial’s books to gross up
mortgage loans and accrued interest and reduce the Due from
Affiliates balance. NovaStar Mortgage’s Due to Affiliates and
restricted cash were also reduced. Similar adjustments were made to
the December 31, 1998 balance sheets of NovaStar Financial and
NovaStar Mortgage to reflect the current year presentation.
In March 1998, the founders exercised options to acquire
289,332 shares of common stock by executing notes payable to
NovaStar Financial. The notes bear interest at one month LIBOR plus
1% are collateralized by the common stock issued, and are
non-recourse in nature which means that NovaStar Financial’s
recourse is limited to the collateral. Previously, NovaStar
Financial had recorded such notes as assets. In September 1999, such
amounts, including accrued interest, were reclassified as part of
the contra-equity account, notes receivable from founders. A similar
reclassification was made in December 31, 1998 for comparability.
Unpaid principal on the notes was $4,340,000 as of September 30,
1999 while accrued interest on these notes was $261,000.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in
conjunction with the preceding consolidated financial statements
of NovaStar Financial and the accompanying notes thereto as well as NovaStar
Financial’s annual report to shareholders and annual report
on formForm 10-K for the fiscal year ended December 31,
1998.1999.
Safe
Harbor Statement
“Safe Harbor” statement under the Private
Securities Litigation Reform Act of 1995: Statements in this
discussion regarding NovaStar Financial, Inc. and its business,
which are not historical facts, are “forward-looking
statements” that involve risks and uncertainties. Certain
matters discussed in this annual report may constitute
forward-looking statements within the meaning of the federal
securities laws that inherently include certain risks and
uncertainties. Actual results and the time of certain events
could differ materially from those projected in or contemplated
by the forward-looking statements due to a number of factors,
including general economic conditions, fluctuations in interest
rates, fluctuations in prepayment speeds, fluctuations in losses
due to defaults on mortgage loans, the availability of
non-conforming residential mortgage loans, the availability and
access to financing and liquidity resources, and other risk
factors outlined in the annual report on Form 10-K for the
fiscal year ended December 31, 1999. Other factors not presently
identified may also cause actual results to differ. Management
continuously updates and revises these estimates and assumptions
based on actual conditions experienced. It is not practicable to
publish all revisions and, as a result, no one should assume
that results projected in or contemplated by the forward-looking
statements will continue to be accurate in the future. Risks and
uncertainties, which could cause results to differ from those
discussed in the forward-looking statements herein, are listed
in the “Risk Management” section of thisthe annual report. In addition, there
are many important factors that could cause actual results to differ
materially from those indicated inreport
on Form 10-K for the forward-looking statements.
These factors include, but are not limited to, general economic
conditions, interest rate levels and risk, prepayment speeds,
delinquency and loss rates, changes in the asset securitization
industry or the REIT provisions of the Internal Revenue Code, demand
for services and products offered by NovaStar, the impact of
covenants in loan agreements, the degree to which NovaStar Financial
is leveraged, the needs for and availability of financing, access to
capital and other risks identified in NovaStar Financial’s
Securities and Exchange Commission filings. In addition, it should
be noted that past financial and operational performance of NovaStar
Financial is not necessarily indicative of future financial and
operational performance.fiscal year ended December 31,
1999.
Information
Management intends to provide extensive information about the
financial position and results of operations of NovaStar Financial
in a format that is clear and easy to understand. This report and
other published documents are designed to provide a framework for
understanding NovaStar Financial’s business and the associated
risks. The manner in which management conducts business and assesses
risks will determine future performance. By providing detailed
information to this extent, investors will be able to evaluate
NovaStar Financial as an investment option and to compare NovaStar
Financial with its competition.
Basis
of Presentation
NovaStar Financial owns 100% of the common stock of
NovaStar Assets Corporation, NovaStar Certificates Financing
Corporation and NovaStar Mortgage Funding Corporation. These
entities were established as special purpose entities used in
issuance of collateralized mortgage obligations. The
consolidated financial statements of NovaStar Financial include
the financial condition and results of operations of these
entities.
NovaStar Financial also owns 100% of the non-voting
preferred stock of NFI Holding Corporation for which it receives
99% of any dividends paid by NFI Holding. A significant component of the
financial results of NovaStar Financial are derived from the
operations of NovaStar Mortgage, Inc. Scott Hartman and
Lance Anderson, the founders of NovaStar Financial, own the
voting common stock of NFI Holding and receive 1% of any
dividends paid by NFI Holding. NovaStar Mortgage, Inc. and
NovaStar Capital are wholly owned subsidiaries of NFI Holding.
NovaStar Mortgage Funding Corporation II, NovaStar Mortgage
Funding Corporation III and NovaStar REMIC Financing Corporation
are subsidiaries of NovaStar Mortgage. The business of NovaStar
Mortgage is discussed in “Description of
Business—Business of NovaStar Mortgage.” NovaStar
Capital was formed to focus on acquiring non-conforming
residential mortgage loans from banks, thrifts and credit
unions. In February 2000, NovaStar Capital discontinued
operations.
A significant component of the financial results of
NovaStar Financial are derived from the operations of NovaStar
Mortgage, Inc. Key officers of NovaStar Financial also serve as
officers of NFI Holding, NovaStar Mortgage and NovaStar Capital,
Inc. The founders are the only members of the Board of Directors
of NFI Holding, NovaStar Mortgage and NovaStar Capital. NovaStar
Home Mortgage, Inc. was created in May of 19981999 to provide
administrative services to a select group of brokers. NovaStar
Mortgage owns 100% of NovaStar Mortgage Funding Corporation II,
NovaStar Mortgage Funding Corporation III and NovaStar REMIC
Financing Corporation. Both of theseThese special purpose entities were
created in January 1999 for the issuance of interests in real estate mortgage
investment conduits commonly known as REMICs. NovaStar Financial
accounts for its investment in NFI Holding using the equity
method.method, meaning the operations of NFI Holding are not
consolidated with NovaStar Financial.
Recent Developments
Stock repurchase.Federal Tax Legislation. Recently adopted
legislation will allow REITs to own directly all of the stock of
taxable subsidiaries beginning in the tax year 2001. The value
of all taxable subsidiaries of a REIT will be limited to 20% of
the total value of the REIT’s assets. Accordingly, NovaStar
Financial’s Board expects to acquire all of Directors amended its stock repurchase program to increase the
amount of common stock authorized to be acquired up to an aggregate
purchase price of $5 million. Stock repurchases may be madeNFI
Holding Corporation from Scott Hartman and Lance Anderson 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 November 10,
1999, NovaStar Financial had repurchased 545,000 shares of its
common stock.January 2001.
Servicing. On October 20, 1999,Also, effective beginning with the 2001 tax year,
the minimum dividend distributions of a REIT will have to equal
90% of taxable income, down from 95% of taxable income under
current law. This provision will also first be effective
beginning with the 2001 tax year. These and other federal tax
legislation changes and proposals are discussed further in
NovaStar Mortgage was
notified that its servicing department had received anFinancial’s Annual Report on Form 10-K under
“Above
Average” Residential Servicer rating from Standard & Poors.
An “Above Average” rating signifies a high degree of
efficiency and competency in managing portfolios. In addition,
Standard & Poors approved NovaStar Mortgage as a designated
“Special ServicerFederal Income Tax Consequences”.
Description of Business
|
Business of NovaStar Financial:
|
|
Ÿ
|
NovaStar
Financial was foundedFounded
in 1996 as a specialty finance lender to invest in mortgage
assets;
|
|
Ÿ
|
NovaStar
Financial’s assetsAssets
have primarily come from the wholesale origination of
nonconforming, single-family, nonconformingresidential mortgage loans byof
its affiliate, NovaStar Mortgage;
|
|
Ÿ
|
NovaStar
Financial operatesOperates as a long-term portfolio investor;
|
|
Ÿ
|
NovaStar
Financial’s loansLoans
are financed on a short-term basis through a mortgage loan repurchase facility.various warehouse
facilities. Long-term financing is provided through
securitization where asset-backed bonds are issued in
financing-structured transactions;
|
|
Ÿ
|
Earnings are generated from spread income on the
mortgage loan portfolio and indirectly by gains associated
with the sale of loans to outside parties or through
securitization transactions of NovaStar Mortgage.
|
|
Business of NovaStar Mortgage:
|
|
Ÿ
|
NovaStar
Mortgage’sPrimary
customer is the retail mortgage broker who deals with the
borrower. NovaStar Mortgage’s account executives work
with overmore than 2,000 brokers to solicit loans.
|
|
Ÿ
|
NovaStar
Mortgage’s borrowersBorrowers 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.
|
|
Ÿ
|
NovaStar
Mortgage’s loansLoans
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.
|
| Ÿ | Loans
are held for sale—either to affiliates, third parties for
cash or in securitization transactions treated as
sales.
|
Notes
Receivable from Founders
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”, and will beis 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.
During the period from the closing of the private
placement through December 31, 1997, NovaStar Financial’s
stock price averaged $17.08 per share, dividends of $0.28 were
declared and the value of each warrant was $2.08. The
combination of these produced a return to investors in the
private placement exceeding 15%. As a result, the first tranche
of these notes was forgiven resulting in a non-cash charge of
$1,083,000 during the fourth quarter of 1997. NovaStar recorded a non-cash charge of $812,000 to earnings during
the nine months ended September 30, 1998 in anticipation of the
forgiveness of the second tranche. However, this non-cash charge was
reversed in the fourth quarter of 1998 as the incentive performance
targets were not met in 1998. NovaStar Financial
has not recognized any further forgiveness of the second tranche in 1999 because management
does not believe thenotes since
1997 as incentive performance targets will behave not been
met.
In March 1998, the founders exercised options to
acquire 289,332 shares of common stock by executing notes
payable to NovaStar Financial. The notes bear interest at one
month LIBOR plus 1%, are collateralized by the common stock
issued, and are non-recourse in nature which means that NovaStar
Financial’s recourse is limited to the collateral. Previously, NovaStar
Financial had recorded suchThese
notes as assets. In September 1999, such
amounts, includingand accrued interest were reclassifiedare classified as part of the
contra-equity account, notes receivable from founders. A similar
reclassification was made in December 31, 1998 for comparability.
Unpaid
principal on the notes was $4,340,000 as of September 30,
1999 while accruedMarch 31, 2000 and
December 31, 1999. Accrued interest on these notes was $261,000.$339,000
as of March 31, 2000 and December 31, 1999.
Financial Condition of NovaStar Financial, Inc. as of
September 30, 1999March 31, 2000 and December 31, 19981999
NovaStar Financial’s balance sheets at September 30, 1999
and December 31, 1998consist
primarily consist of securitized mortgage loans originated by and
purchased from NovaStar Mortgage, which serve as collateral onfor
its collateralized mortgage obligations. The carrying value of
mortgage loans at September 30, 1999as of March 31, 2000 was $699$552 million versus $946$620
million atas of December 31, 1998.1999. The carrying value of
collateralized mortgage obligations at September 30, 1999as of March 31, 2000 was
$657$521 million compared with $892$587 million atas of December 31, 1998.1999.
The decline in both balance sheet items is primarily a result of
principal paydowns that occurred during the first nine months of 1999.quarter
2000.
During 1999, NovaStar Financial reclassified the principal and
interest collections received on the securitized mortgage loan
portfolio to more closely match the timing of the principal and
interest payments
made to bondholders of the collateralized mortgage obligations
commonly called CMOs. Under the terms of NovaStar Financial’s
CMOs, the principal and interest collected by NovaStar Mortgage NovaStar Financial’s servicer, during any given month are held
in trust and remitted to bondholders of the CMOs the following
month. Prior to the reclassification change in 1999, NovaStar
Financial reduced the securitized mortgage loan and accrued interest
balances when mortgage loan payments were received by NovaStar
Mortgage. Thus at any given month-end, NovaStar Financial’s
mortgage loan balance would reflect the principal and interest
collected during the month. However, the CMO balances would not
reflect these principal and interest payments until the following
month. In order to better match the collateral principal and
interest payments with the CMO principal and interest payments, a
reclass was made on NovaStar Financial’s books to gross up
mortgage loans and accrued interest and reduce the Due from
Affiliates balance. NovaStar Mortgage’s Due to Affiliates and
restricted cash were also reduced. Similar adjustments were made to
the December 31, 1998 balance sheets of NovaStar Financial and
NovaStar Mortgage to reflect the current year presentation.
Loans. Table 1 is a presentation of
loans as of September 30, 1999March 31, 2000 and December 31, 19981999 and their
credit grades. Table 2 is a summary of all mortgage loans owned
by NovaStar Financial as of September
30, 1999March 31, 2000 and December 31, 19981999
by state. These tables also provide details regarding the
collateral outstanding on NovaStar Mortgage’s REMIC
transactions, which NovaStar Financial owns the residual
interests. The REMIC transactions are discussed further in the
“Mortgage Loans—Available for Sale” and
“Mortgage Loans Sales” sections of this
document.
Table
1
Mortgage Loans by Credit Grade
(dollars in thousands)
Credit Grade
|
|
| |
| | September 30,
1999
| | December 31,
1998
|
Credit
Grade
| |
Allowed
Mortgage
Lates (A)Lates(A)
|
|
Maximum
Loan-
to-value
| | March 31, 2000
| | December 31, 1999
|
|---|
| |
|
Current
Principal
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Loan-to-
value
|
|
Current
Principal
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Loan-to-
value
|
|---|
AARetained loans collateralizing
asset-backed bonds: |
|
0 x 30 |
| 95 | (B) | | $ 93,139 | | 9.53 | % | | 83.4 | % | | $120,427 | | 9.51 | % | | 83.4 | % |
A | | 1 x 30 | | 90 |
| | 272,177 | | 9.89 |
| | 80.1 |
| | 366,913 | | 9.84 |
| | 79.7 |
|
A | | 2 x 30 | | 90 |
| | 166,811 | | 10.33 |
| | 81.8 |
| | 220,591 | | 10.31 |
| | 81.3 |
|
B | | 3 x 30, 1x 60
5 x 30, 2 x 60, | | 85 |
| | 102,011 | | 10.77 |
| | 78.2 |
| | 142,346 | | 10.62 |
| | 77.9 |
|
C | | 1 x 90 | | 75 |
| | 47,069 | | 11.24 |
| | 72.4 |
| | 64,529 | | 11.13 |
| | 72.3 |
|
D | | 6 x 30, 3 x 60,
2 x 90 | | 65 |
| | 9,181 | | 12.05 |
| | 61.6 |
| | 13,697 | | 12.14 |
| | 62.2 |
|
| | | | | | |
| |
| | |
| | |
| |
| | |
| |
Total |
|
|
|
|
|
|
| | $690,388 | | | | | | | |
|
AA |
|
10.200
× 30 | | 95 | | | $ 78,513 | | 9.75 |
% |
|
79.983.2 |
% |
|
$928,503 85,476 |
|
10.159.50 |
% |
|
79.583.2 |
% |
|
A | | 1
× 30 | | 90 | | | 218,271 | | 10.14 | | | 79.9 | | | 244,187 | | 10.06 | | | 80.1 | |
|
A- | | 2
× 30 | | 90 | | | 131,531 | | 10.60 | | | 82.1 | | | 149,248 | | 10.45 | | | 81.8 | |
|
B | | 3
× 30, 1 × 60 | | 85 | | | 77,274 | | 11.10 | | | 78.5 | | | 89,477 | | 10.86 | | | 78.4 | |
| | | 5
× 30, 2 × 60 | | | | | | | | | | | | | | | | | | | |
|
C | | 1
× 90 | | 75 | | | 37,809 | | 11.53 | | | 72.7 | | | 42,766 | | 11.35 | | | 72.5 | |
|
D | | 6
× 30, 3 × 60, | | 65 | | | 6,871 | | 12.43 | | | 62.1 | | | 7,668 | | 12.16 | | | 62.1 | |
| | | | |
|
|
|
| |
| | |
| | |
| |
| | |
| |
| | | 2
× 90 | | | | | | | | | | | | | | | | | | | |
|
Total on balance sheet | | | | | $550,269 | | 10.45 | % | | 80.0 | % | | $618,822 | | 10.31 | % | | 80.0 | % |
| | | | | | |
| |
| | |
| | |
| |
| | |
| |
Sold
loans collateralizing
asset-backed bonds(A): | | | | | | | | | | | | | | | | | | | |
|
AAA | | 0
× 30 | | 97 | (B) | | $ 52,445 | | 9.51 | % | | 80.5 | % | | $ 3,474 | | 9.18 | % | | 80.7 | % |
|
AA | | 0
× 30 | | 95 | | | 59,288 | | 9.79 | | | 84.0 | | | 27,236 | | 9.47 | | | 84.8 | |
|
A | | 1
× 30 | | 90 | | | 61,179 | | 10.00 | | | 82.1 | | | 43,119 | | 9.86 | | | 83.1 | |
|
A- | | 2
× 30 | | 90 | | | 47,283 | | 10.22 | | | 82.4 | | | 35,311 | | 10.09 | | | 79.7 | |
|
B | | 3
× 30, 1 × 60 | | 85 | | | 26,238 | | 10.66 | | | 79.7 | | | 19,612 | | 10.59 | | | 71.9 | |
| | | 5
× 30, 2 × 60 | | | | | | | | | | | | | | | | | | | |
|
C | | 1
× 90 | | 75 | | | 15,063 | | 11.18 | | | 70.8 | | | 11,405 | | 11.09 | | | 62.1 | |
|
D | | 6
× 30, 3 × 60, | | 65 | | | 2,931 | | 12.17 | | | 62.1 | | | 3,171 | | 12.16 | | | 81.5 | |
| | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | 2
× 90 | | | | | | | | | | | | | | | | | | | |
|
Total off balance sheet | | | | | $264,427 | | 10.05 | % | | 81.2 | % | | $143,328 | | 10.08 | % | | 81.5 | % |
| | | | | | |
| |
| | |
| | |
| |
| | |
| |
(A)
|
Represents the number of times NovaStar Financial allows a prospective borrowerbnorrower
is allowed to be late more than 30, 60 or 90 days. For
instance, a 3x30, 1x603×30, 1×60 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)
|
Fixed97% on
fixed-rate purchases; all other maximum of 90%95%.
|
Table
2
Mortgage Loans by State
Percent of Portfolio
(based
(based
on current principal balance)
Collateral Location
|
|
September 30,
1999Retained loans collateralizing asset-
backed bonds—on balance sheet
|
| Sold
loans collateralizing asset-
backed bonds—off balance sheet
|
| | March 31, 2000
| |
December 31, 19981999
| | March 31, 2000
| | December 31, 1999
|
|---|
| California |
| 15 | % | |
16 |
% |
|
189 | % | | 7 |
% |
| Florida |
|
1314 | |
| 14 | |
|
1218 |
| | 21 | |
| Washington |
|
7 |
|
|
87 |
| | 4 | | | 4 | |
| Texas | | 5 | | | 5 | | | 4 | | | 6 | |
| Oregon |
| 4 | | |
5 |
|
| 2 | | | 1 | |
| Tennessee | | 4 | | | 3 | | | 6 | | |
5 |
|
| Michigan | | 3 | | | 3 | | | 7 | | | 5 | |
| Ohio | | 3 | | | 3 | | | 5 | | | 4 | |
| All
other states |
|
5945 | |
| 44 | |
|
5745 |
| | 47 | |
|
|
| |
|
| |
|
| |
|
| |
|
Total |
|
100 |
% |
| 100 | % | | 100 | % | |
100 |
% |
| |
|
|
|
|
| | |
| | |
|
|
Table 3 provides a summary of NovaStar
Financial’s mortgage loans by type and carrying value as of
September 30, 1999March 31, 2000 and December 31, 1998.1999.
Table
3
Carrying Value of Loans by
Product/Type
September 30, 1999March
31, 2000 and December 31, 1998
(in1999
(in
thousands)
Product/Type
|
|
September
30, 1999March 31, 2000
|
|
December 31, 19981999
|
Two and three-year
fixedRetained loans collateralizing asset-backed
bonds—on balance sheet: |
|
$386,298 | |
| | |
|
Two and three-year fixed. |
|
$526,044293,789 |
| | $343,193 | |
|
Six-month LIBOR and one-year CMT |
|
54,48512,418 | |
|
43,178 |
91,430 | |
|
30/15-year fixed and balloon |
|
249,605244,062 | |
|
232,451 |
311,029 | |
| |
|
|
|
|
|
|
|
Outstanding principal |
|
690,388550,269 | |
|
618,822 |
928,503 | |
|
Premium |
|
14,41011,270 | |
|
12,689 |
20,868 | |
|
Allowance for credit losses |
|
(5,3709,763 |
) |
|
(3,57311,105 |
) |
| |
|
|
|
|
|
|
|
Carrying Value |
|
$699,428551,776 |
|
|
$945,798620,406 |
|
| |
|
|
|
|
|
|
|
Carrying value as a percent of
principal |
|
101.31100.27 |
% |
|
101.86100.26 |
% |
| |
|
|
|
|
| |
| Sold
loans collateralizing asset-backed bonds—off balance
sheet: | | | | | | |
|
Two and three-year fixed. | | $146,026 | | | $ 78,237 | |
|
Six-month LIBOR and one-year CMT | | 4,620 | | | 5,052 | |
|
30/15-year fixed and balloon | | 113,780 | | | 60,038 | |
| | |
| | |
| |
|
Outstanding principal | | $264,427 | | | $143,328 | |
| | |
| | |
|
|
Substantially all mortgage loans are acquired at a
premium. Premiums are amortized as a reduction of interest
income over the 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 three
months ended March 31, 2000, prepayment penalties collected from
borrowers totaled $489,000 in comparison with $656,000 for the
same period of 1999. Table 4 is a summaryan analysis of the securities acquired during 1999mortgage loans
and 1998 by quarter.prepayment penalties.
Table
4
Mortgage Security AcquisitionsLoan Prepayment Penalties
Three Months Ended September 30,March
31, 2000 and December 31, 1999 and 1998
(dollars in
thousands)
|
|
Current
Principal
|
|
Premium
|
|
DiscountPercent
with
Prepayment
Penalty
|
| Net
Price
to Par
| |
Weighted
Average
|
| | | | | | Coupon
| | Loan-to-
value
| | Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty
|
|---|
1999:As
of March 31, 2000 | | | | | | | | | | | | | | | |
Retained loans collateralizing asset-
backed bonds: | | | | | | | | | | | | | | | |
Third quarter—
NovaStar Home Equity Series
1999-1 residual interestNHES 1997-1 |
|
$
7,24373,555 |
|
$ —
3,455 |
|
$—
27 | % |
| 11.23 | % |
|
— 75.4 | % |
|
16.5 | %0.44 |
Second quarterNHES 1997-2 |
| 82,860 | | 1,626 | | 37 | | | 11.04 | | | 79.4 | | | 0.50 |
|
NHES 1998-1 | | 170,732 | | 2,790 | | 48 | | | 10.45 | | | 81.0 | | | 0.81 |
|
NHES 1998-2 | | 222,739 | | 3,379 | | 73 | | | 9.98 | | | 81.1 | | | 1.33 |
|
All other loans | | 383 | | 20 | | — | | | 11.83 | | | 79.5 | | | — |
| |
|
—
|
|
$—
|
|
|
—
| | —
|
|
First quarter | |
— | |
— | | $—
|
|
|
—
| | —
|
|
|
1998: |
Fourth quarter | | $
— | | $ —
| | $— |
|
|
— |
| —
| % |
Third quarter | | —
| | —
| | —
|
| | —
| | —
|
|
Second quarter—
Federal National Mortgage
Association
| | 80,237 | | 823 | | —
|
| | 101.0 | | 6.40 |
|
First quarter: |
Federal National Mortgage
Association | | 40,929 | | 444 | | —
|
| | 101.1 | | 6.12 |
|
Government National MortgageTotal on balance sheet | | $550,269 | | $11,270 | | 54 | % | | 10.45 | | | 80.0 | % | | 0.92 |
| | |
| |
| |
| | |
| | |
| | |
|
Sold
loans collateralizing asset-backed
bonds (A): | | | | | | | | | | | | | | | |
|
NMFT 1999-1 | | $136,613 | | $ — | | 84 | % | | 10.07 | % | | 81.6 | % | | 1.82 |
|
NMFT 2000-1 (B) | | 127,814 | | — | | 90 | | | 10.03 | | | 80.7 | | | 2.97 |
| | |
| |
| | | | | | | | | | | |
|
Total off balance sheet | | $264,427 | | $ — | | 79 | % | | 10.05 | % | | 81.2 | % | | 2.37 |
| | |
| |
| |
| | |
| | |
| | |
|
| |
| | | Current
Principal
| | Premium
| | Percent
with
Prepayment
Penalty
| | Weighted Average
|
|---|
| | | | | | Coupon
| | Loan-to-
value
| | Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty
|
|---|
| As
of December 31, 1999 | | | | | | | | | | | | | | | |
Retained loans collateralizing asset-
backed bonds: | | | | | | | | | | | | | | | |
|
NHES 1997-1 | | $ 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 |
|
NHES 1998-1 | | 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 |
|
All other loans | | 383 | | 19 | | 6 | | | 11.96 | | | 77.6 | | | 0.10 |
| | |
| |
| | | | | | | | | | | |
|
Total on balance sheet | | $618,822 | | $12,689 | | 58 | % | | 10.31 | % | | 80.0 | % | | 1.03 |
| | |
| |
| |
| | |
| | |
| | |
|
Sold
loans collateralizing asset-
backed bonds (A): | | | | | | | | | | | | | | | |
Off balance sheet NMFT
Association1999-1 | | $143,328 | | $ — | | 84 | % | | 10.08 | % | | 81.5 | % | | 2.03 |
| | |
| |
| |
|
|
229,130
|
|
|
3,726 |
|
|
(364 |
)
|
(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. |
In periods of decreasing interest rates, borrowers
are more likely to refinance their mortgages to obtain a better
interest rate. Even in rising rate environments, borrowers tend
to repay their mortgage principal balances earlier than is
required by the terms of their mortgages. Non-conforming
borrowers, as they update their credit rating, are more likely
to refinance their mortgage loan to obtain a lower interest
rate.
Prepayment rates in the table below represent the
annualized principal prepayment rate in the most recent one,
three and twelve month periods and over the life of the pool of
loans.
Table
5
Prepayment Speeds
| | | 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
|
|---|
| March 31, 2000 |
|
101.5 |
|
6.39 |
| | | | | | | | | |
Retained loans collateralizing
asset-backed bonds: | | | | | | | | | | | | | | |
|
NHES 1997-1 | | October
1, 1997 | | $ 73,555 | | 7 | | 31 | | 37 | | 49 | | 40 |
|
NHES 1997-2 | | December 11, 1997 | | 82,860 | | 3 | | 46 | | 47 | | 46 | | 33 |
|
NHES 1998-1 | | April
30, 1998 | | 170,732 | | 3 | | 49 | | 41 | | 34 | | 25 |
|
NHES 1998-2 | | August
18, 1998 | | 222,739 | | 3 | | 23 | | 20 | | 23 | | 18 |
Sold
loans collateralizing asset-
backed bonds: | | | | | | | | | | | | | | |
|
NMFT 1999-1 | | January
29, 1999 | | $136,613 | | 5 | | 24 | | 20 | | 17 | | 15 |
|
NMFT 2000-1 | | March
31, 2000 | | 127,814 | | 3 | | — | | — | | — | | — |
| 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 |
Since April 1998, NovaStar Financial has not purchased any
agency securities.Table 6 details the amount of premium as a percent
of principal at quarter end for 2000 and 1999.
Table
6
Premium as a Percent of Principal
| | | Mortgage
Loans
| | Mortgage
Securities
| | Total
Mortgage
Assets
|
|---|
| March
31, 2000. | | 2.05 | % | | — | % | | 2.05 | % |
| December 31, 1999 | | 2.05 | | | — | | | 2.05 | |
| September 30, 1999 | | 2.09 | | | — | | | 2.09 | |
| June
30, 1999 | | 2.15 | | | — | | | 2.15 | |
| March
31, 1999. | | 2.22 | | | — | | | 2.22 | |
Mortgage
Securities—Available-For-Sale.In September 1999,
NovaStar Financial purchased NovaStar Mortgage’s economic
residual interestscertificates in the NovaStar Home EquityMortgage Funding Trust Series
1999–01 securitization transaction. The NovaStar Home
Equity Series 1999–01 transaction is discussed further under
the “Mortgage Loan Sales” section of this document.1999-1. As the owner of the residual certificate,certificates, NovaStar
Financial receives the net cash flow of the NovaStar Home Equity 1999–1
securitization,Mortgage
Funding Trust Series 1999-1 asset-backed bonds, which representsrepresent
the right to receive, over the life of the securitization, the
excess of the weighted average coupon on the loans securitizedmortgage loan
collateral over the sum of the interest rate on the bonds, a
normal servicing fee, a trustee fee, an insurance feepremiums and the
credit losses relating to the loans securitized. At
September 30,As of March 31,
2000 and December 31, 1999, the amortized costcarrying value of the NMFT
1999-1 economic residual interests approximated market value.was $6.8 million. This value
represents the present value of the residual cashflows that
NovaStar Financial expects to receive over the life of the
securitization, 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 securitization as cash
distributions are received from the trust. NovaStar Financial
believes its residual asset is fairly valued at September 30, 1999as of March 31,
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.
Some keyAs discussed in the “Mortgage Loan Sales”
section of this document, NovaStar Mortgage sold mortgage loans
of $230 million on March 31, 2000 to a Special Purpose Entity
(SPE) and retained the mortgage servicing rights and the
economic residual certificates issued in NovaStar Mortgage
Funding Trust Series 2000-1. On April 1, 2000, NovaStar
Financial purchased these economic residual certificates from
NovaStar Mortgage. Methodologies and assumptions used in valuing
the economic residual interest are discussed in the
“Mortgage Loan Sales” section of this
document.
Key statistics, assumptions and characteristics of
the NovaStar Home EquityMortgage Funding Trust Series 1999
–11999-1 and 2000-1
mortgage loan collateral at September 30,and bonds as of March 31, 2000 and
December 31, 1999 are as
follows:included in the table below and in Tables
4, 5 and 7 of this document.
| | | March 31, 2000
| | December 31, 1999
|
| | | 1999-1
| | 2000-1
| | 1999-1
|
|---|
Principal value
(in 000’s)Constant Prepayment Rate | | 35 to
45 | | | 25 to
30 | | | 35 to
45 | |
| Annual
Constant Default Rate (basis points) | | 75 | | | 100 | | | 75 | |
| |
|
$149,841
| | |
| | |
|
|
Weighted average
couponDiscount Rate |
|
10.120 | % | | 15 | % | | 20 |
% |
Constant
annualized prepayment rate (life) |
|
11
| | |
| | |
| |
| As a
percent of mortgage loan principal | | | | | | | | | |
| Delinquent loans (30 days and greater) | | 4.85 | % | | 0.62 | % | | 7.03 | % |
| | |
| | |
| | |
| |
| Loans
in foreclosure | | 4.32 | | | — | | | 3.22 | |
| | |
| | |
| | |
| |
| Real
Estate Owned | | 2.44 | | | — | | | 1.26 | |
| | |
| | |
| | |
| |
| Cumulative losses | | $652 | | | $
— | | | $315 | |
| | |
| | |
| | |
|
|
Delinquency statisticsAssets Acquired through Foreclosure. As of
the 1999–1 securitization are
disclosedMarch 31, 2000, NovaStar Financial had 211 loans in Tables 23 and 24real estate
owned with a carrying value of “Financial Condition$18.4 million (principal of NovaStar Mortgage$20.6
million) compared to 192 loans with a carrying value of $16.9
million (principal of $24.4 million) as of September 30, 1999 and December 31,
1998.
”1999.
Short-term and Long-term Financing
Arrangements.
NovaStar Financial isMortgage loan originations are funded with
various financing facilities prior to securitization. Loans
originated have typically been funded initially through a co-borrower with NovaStar
Mortgage and NovaStar Capital under$75
million committed warehouse lending and master
repurchase agreementsline with First Union National Bank
under which are
scheduled to mature in February 2000. As of September 30, 1999, NovaStar Financial and NovaStar Mortgage can borrow up to $75
million under the warehouse lending agreement and $300 million under
the master repurchase agreement. As of September 30, 1999 and
December 31, 1998,are
co-borrowers. NovaStar Financial had no borrowings outstanding, and NovaStar Mortgage had borrowingsalso have
a $50 million committed warehouse facility with GMAC/RFC.
NovaStar Financial and NovaStar Mortgage also use repurchase
agreements as a means of $22,191,000 and $50,429,000
outstanding, respectively under these arrangements. Borrowings under
these arrangements are secured by mortgage loans. The interest rate
on borrowings under the warehouse lending arrangement is indexedwarehousing loans prior to
the federal funds rate. Under the master repurchase agreement,
borrowings are indexed to one-month LIBOR.
On February 12, 1999, two additional one-year agreements were
executed withsecuritization. First Union whereby NovaStar Financial and/or NovaStar
Mortgage can borrow up to $20provides a $175 million committed
facility for such purposes. First Union also provides a $25
million committed facility secured by residual interests in
CMOs issued by NovaStar Financial, its affiliates or
subsidiaries. Borrowings under these arrangements bear interest at
one-month LIBOR plus five percent.asset-backed bonds that is committed through December 2001. As
of September 30,March 31, 2000 and December 31, 1999, NovaStar Financial had
no borrowings under this financing
arrangement. In connection with executing the renewals and
additional agreements, NovaStar Financial issued warrants to First
Union to acquire 350,000 shares of NovaStar common stock for $6.94
per share. In exchange for the new warrants, First Union returned
186,667 warrants that were purchased in NovaStar Financial’s
1996 private placement. The new warrants expire on February 12,
2002.-
All arrangements with First Union require NovaStar Financial
andthese facilities. Amounts outstanding under
these facilities by NovaStar Mortgage to maintain minimum tangible net worth, meet
equity ratio tests and comply with other customary debt covenants.
As of December 31, 1998, NovaStar Financial also had a
short-term financing arrangement with GMAC/Residential Funding
Corporation (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
connection with the agreement, NovaStar Financial issued 812,731
warrants to GMAC/RFC for the purchase of NovaStar Financial’s
stock at $4.63 per share and 364,982 tag along warrants to purchase
common stock on the terms of the December 9, 1996 warrants which
were issued at $15.00 per share. NovaStar Financial had no other
short-term borrowings outstanding as of DecemberMarch 31, 1998. In
February2000 are
detailed in Table 21 of 1999, NovaStar Financial used financing sources at First
Union to pay this debt in full.document.
Collateralized mortgage obligations.
On a long-term basis, NovaStar Financial financeshas
financed its mortgage loans using collateralized mortgage
obligations commonly called CMOs. Investors in CMOs are repaid
based on the performance of the mortgage loans collateralizing
the CMOs. These non-recourse financing arrangements match the
loans with the financing arrangement for long periods of time,
as compared to repurchase agreements that mature frequently with
interest rates that reset frequently and have liquidity risk in
the form of margin calls. Under the terms of its CMOs, NovaStar
Financial is entitled to repurchase the mortgage loan collateral
and repay the remaining CMO when their aggregate principal
balance falls below 35% for issue 97-01 and 25% for issues
97-02, 98-01 and 98-02. SubprimeNon-conforming mortgage loans are not
readily obtainable financial assets. As a result, NovaStar
Financial retains effective control over the transferred assets
as defined in paragraph 9c. of Statement of Financial Accounting
Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
and further clarified by paragraph 30 of SFAS No. 125.
Accordingly, NovaStar Financial records its CMO transactions as
secured borrowings, rather than sales of the transferred loans.
NovaStar Mortgage’s securitization transactions are treated
as sales of the transferred loans.
Under its CMOs, NovaStar Financial retains the
mortgage loans and incurs the obligation to pay the CMO
bondholders. NovaStar Financial earns the net spread between the
interest income on the loans and the interest expense on the
bonds. The spread earned also is reduced by credit losses on the
portfolio. Prepayments on the mortgage loans serve to reduce the
term over which interest spread is earned. The longer the
mortgage collateral is outstanding, the longer the period of
cash flow. To the extent the borrowers prepay, it shortens the
life of the CMO and the period over which cash flow is received.
The cash flow will change when interest rates on the bonds
fluctuate at amounts or times that are different from the
mortgage loan collateral, thereby subjecting NovaStar Financial
to interest rate risk. The carrying value of CMOs as of March
31, 2000 was $521 million compared with $587 million as of
December 31, 1999. The decline in carrying value is primarily a
result of principal paydowns.
Following is a summary of outstandingThe following table provides details regarding
NovaStar Financial’s CMOs as of September 30,
1999March 31, 2000 and December
31, 1998 (dollars in thousands):1999. This table also provides details regarding the bonds
and collateral outstanding underlying NovaStar Financial’s
economic residual interests.
Table
57
Collateralized Mortgage Obligations
September 30, 1999March
31, 2000 and December 31, 1998
(dollars1999
(dollars in thousands)
|
|
Collateralized
Mortgage
Obligation
|
|
Mortgage Loans
|
|
|
Remaining
Principal
|
|
Interest
Rate
|
|
Estimated
WeightedRemaining
Average MonthsPrincipal
to Call(A)
|
| (A)
Remaining
Principal
| |
Weighted
Average
Coupon
| | Estimated
Weighted
Average
Months to Call
|
As
of September
30, 1999:March 31, 2000: | | | |
NovaStar Home
Equity Series:Retained loans collateralizing asset-backed
bonds: |
IssueNHES 1997-1 |
|
$ 88,594 67,284 |
|
|
5.626.59 |
% |
|
—$ 76,481 |
|
$100,17111.23 | % |
|
10.88 | %— |
IssueNHES 1997-2 |
|
117,12676,171 | |
| 6.38 | |
|
5.6286,166 |
| 11.04 | |
|
23 | | 126,710 | | 10.41 |
9 |
IssueNHES 1998-1 |
|
205,752161,505 | |
| 6.20 | |
|
5.45175,705 |
| 10.45 | |
|
36 | | 219,442 | | 10.05 |
18 |
IssueNHES 1998-2 |
|
247,883217,870 | |
| 6.35 | |
|
5.49229,807 |
| 9.98 | |
|
40 | | 258,830 | | 9.97 |
26 |
Unamortized debt issuance
costs, net |
|
(2,787)(1,935 |
) |
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on balance sheet |
|
$656,568520,895 | |
| |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
31, 1998: |
NovaStar Home
Equity Series:Sold
loans collateralizing asset-backed bonds: |
Issue 1997-1NMFT 1999-1 |
|
$163,419133,994 |
|
|
5.886.46 |
% |
|
29$136,613 |
|
$174,51610.07 | % |
|
10.56 | %52 |
Issue 1997-2NMFT 2000-1 (B) |
|
164,496226,320 | |
| 6.53 | |
|
5.88127,814 |
| 10.03 | |
|
3166 | | 173,858 | | 10.37 |
|
Issue 1998-1 | | 268,152 |
| | 5.69 |
| | 35 | | 277,776 | | 10.01 |
|
Issue 1998-2 | | 300,161 |
| | 5.74 |
| | 38 | | 306,807 | | 9.95 |
|
Unamortized debt issuance
costs | | (4,284 | ) | | | | | | | | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off balance sheet |
|
$891,944 |
360,314 |
| | | | | | | | | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | Collateralized
Mortgage
Obligation
| | Mortgage Loans
|
|---|
| | | Remaining
Principal
| | Interest
Rate
| | Remaining
Principal
(A)
| | Weighted
Average
Coupon
| | Estimated
Weighted
Average
Months to Call
|
|---|
| As
of December 31, 1999: |
|
NHES 1997-1 | | $ 75,580 | | 6.94 | % | | $ 87,534 | | 11.04 | % | | — |
|
NHES 1997-2 | | 95,053 | | 6.72 | | | 104,851 | | 10.90 | | | 12 |
|
NHES 1998-1 | | 186,493 | | 6.55 | | | 200,625 | | 10.08 | | | 22 |
|
NHES 1998-2 | | 231,969 | | 6.71 | | | 244,109 | | 9.97 | | | 29 |
|
Unamortized debt issuance costs, net | | (2,227) | | | | | | | | | | |
| | |
| | | | | | | | | | |
|
Total on balance sheet | | $586,868 | | | | | | | | | | |
| | |
| | | | | | | | | | |
| Sold
loans collateralizing asset-backed bonds: | | | | | | | | | | | | |
|
Off balance sheet NMFT 1999-1 | | $140,710 | | 6.95 | % | | $143,328 | | 10.08 | % | | 49 |
| | |
| | | | | | | | | | |
(A)
|
Includes assets acquired through
foreclosure. |
(B) | NovaStar Financial purchased the residual interests in
NMFT 2000-1 on April 1, 2000. Estimated collateral to be
included in the NMFT 2000-1 second closing scheduled for June
2000.
|
Stockholders’ Equity.The
increase in NovaStar Financial acquires substantially all’s stockholders’ equity
as of its
mortgage assets atMarch 31, 2000 compared with December 31, 1999 is a premium. Premiums are amortized as a reduction
of interest income over the estimated livesresult
of the assets. See
Tables 6, 7, 8 and 9following:
| Ÿ | $1.2
million increase due to net income recognized for the three
months ended March 31, 2000. |
| Ÿ | $952,000 decrease as a result of repurchases of common
stock. 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 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 March
31, 2000, NovaStar Financial had repurchased 928,400 shares of
its common stock. The number of shares repurchased by NovaStar
Financial has increased to 1,157,400 through May 10, 2000 for
an aggregate purchase price of $3.7 million. |
| Ÿ | $594,000 increase in unrealized gain of 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 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. As of March 31, 2000, NovaStar Financial owns the NMFT
1999-1 residual and NovaStar Mortgage owns the 2000-1
residual. The unrealized gain of the NMFT 2000-1 economic
residual asset is appropriately reflected on NovaStar
Financial’s balance sheet through its indirect ownership
of NovaStar Mortgage through NFI Holding. |
| Ÿ | $525,000 decrease due to dividends on Class B 7%
cumulative convertible preferred stock in 2000. |
Results of Operations of NovaStar Financial, Inc.—Three
Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999
Net
Income
During the three months ended March 31, 2000,
NovaStar Financial recorded net income of $1.2 million, $0.09
per diluted share, compared with net income of $1.7 million,
$0.20 per diluted share, 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 some form of prepayment penalty.
During the ninethree months ended September 30, 1999,March 31,
1999.
NovaStar Financial
collected $2.4 million in prepayment penalties from borrowers
compared with $1.3 million during the same period’s primary sources of 1998. Table 6
is an analysis ofrevenue
are interest earned on its securitized mortgage loansloan portfolio
and prepayment penalties.penalty income. In addition, results indirectly
reflect gains from the sale of whole loans to third parties and
securitization transactions executed by NovaStar
Mortgage.
Net
Interest Income
Table 8 presents a summary of the average
interest-earning assets, average interest-bearing liabilities
and the related yields and rates thereon for the three months
ended March 31, 2000 and 1999.
Table
68
Interest Analysis
Mortgage Loan Prepayment Penalties
September 30, 1999 and December 31, 1998 (dollars(dollars in thousands)
|
|
Current
PrincipalMortgage Loans
|
|
PremiumMortgage Securities
|
|
Percent
with
Prepayment
PenaltyTotal
| | Weighted Average
|
Three months ended
March 31, 2000 | | |
|
|
CouponAverage
Balance
|
|
Loan-to-Interest
valueIncome/
Expense
|
|
RemainingAnnual
Prepayment PenaltyYield/
Period (in years) -Rate
| | Average
Loans with PenaltyBalance
| | Interest
Income/
Expense
| | Annual
Yield/
Rate
| | Average
Balance
| | Interest
Income/
Expense
| | Annual
Yield/
Rate
|
As of September
30, 1999Interest-earning mortgage assets |
|
|
Loans
collateralizing NovaStar
Home Equity Series (CMO):$532,962 |
|
| | | | | | | | | | | | | |
1997-1$12,812 |
|
$ 97,067
| | $ 4,505
| | 339.61 |
% |
|
10.88$6,450 | | $266 | | 16.50 |
% |
|
75.4 | %$539,412 |
|
0.58$13,078 |
1997-2 |
9.70 |
123,247 | | 2,412 | | 50 |
| | 10.41 |
| | 79.4 |
| | 0.63 |
1998-1 | | 214,782 | | 3,605 | | 73 |
| | 10.05 |
| | 81.2 |
| | 1.11 |
1998-2 | | 254,908 | | 3,869 | | 74 |
| | 9.97 |
| | 81.1 |
| | 1.67 |
All other loans
| | 384 | | 19 | | 10 |
| | 11.83 |
| | 77.6 |
| | 0.13% |
| |
|
|
|
| |
| | |
| |
| |
| | |
| |
| |
| |
Interest-bearing liabilities
Collateralized
mortgage
obligations | | $557,299 | | $ 9,397 | | 6.74 | % | | — | | — | | — | | | $557,299 | | $ 9,397 | | 6.74 | % |
| Other
borrowings | | — | | — | | — | | | — | | — | | — | | | — | | — | | — | |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$690,388 | | $14,410
|
|
63 | % |
|
10.20 | % |
|
80.0 | % Cost of
derivative financial
Instruments hedging
liabilities |
| | |
1.16301 | | | | | | | | | | | | | | 301 | | | |
| |
|
| |
| |
| | |
| | |
| | |
|
| | Current
Principal
| | Premium
| | Percent
with
Prepayment
Penalty
| | Weighted Average
|
|---|
| | | | | Coupon
| | Loan-to-
value
| | Remaining
Prepayment Penalty
Period (in years) -
Loans with Penalty
|
|---|
As of December
31, 1998 | | |
Loans
collateralizing NovaStar
Home Equity Series (CMO): |
1997-1 | | $170,118 | | $ 7,975
| | 65 | % | | 10.57 | % | | 75.1 | % | | 0.89 |
1997-2 | | 170,363 | | 3,403 | | 72 | |
|
10.37
|
| | 78.5 |
| | 1.10 |
1998-1 | | 275,673 | | 4,651 | | 69 |
| | 10.01 |
| | 81.1 |
| | 1.51 |
1998-2 | | 306,586 | | 4,703 | | 71 |
| | 9.95 |
| | 81.1 |
| | 2.09 |
All other loans
| | 5,763 | | 136 | | 65 |
| | 9.91 |
| | 80.0 |
| | 1.59 |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total | | $928,503 | | $20,868 | | 70 | % | | 10.15 | % | | 79.5 | % | | 1.52 |
| |
| |
| |
| | |
| | |
| | |
|
In periods of decreasing interest rates, borrowers are more
likely to refinance their mortgages to obtain a better interest
rate. Even in rising rate environments, borrowers tend to
collectively repay their mortgage principal balances earlier than is
required by the terms of their mortgages. This is particularly true
for non-conforming borrowers who are seeking to upgrade their credit
rating to obtain a lower interest rate.
Prepayment rates in the table below represent the annualized
principal prepayment rate in the most recent one, three and twelve
month periods and over the life of the pool of loans.
Table 7
Prepayment Speeds
| | 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
|
|---|
As of September
30, 1999 | | |
NovaStar Home
Equity
Series: | | |
1997-1 | | October 1, 1997
| | $ 97,067
| | 7 | | 44 | | 56 | | 48 | | 39 |
1997-2 | | December 11, 1997
| | 123,247 | | 3 | | 50 | | 46 | | 34 | | 27 |
1998-1 | | April 30, 1998
| | 214,782 | | 3 | | 31 | | 29 | | 25 | | 20 |
1998-2 | | August 18, 1998
| | 254,908 | | 3 | | 30 | | 27 | | 18 | | 17 |
As of December
31, 1998 | | |
NovaStar Home
Equity
Series: | | |
1997-1 | | October 1, 1997
| | $170,118 | | 7 | | 44 | | 36 | | 33 | | 31 |
1997-2 | | December 11, 1997
| | 170,363 | | 3 | | 42 | | 32 | | 22 | | 21 |
1998-1 | | April 30, 1998
| | 275,673 | | 3 | | 20 | | 17 | | —
| | 12 |
1998-2 | | August 18, 1998
| | 306,586 | | 3 | | 18 | | 10 | | —
| | 9 |
Table 8 summarizes mortgage asset activity during 1999 and
1998 and Table 9 details the amount of premium as a percent of
principal at quarter end for 1999 and 1998.
Table 8
Mortgage Assets Activity
(in thousands)
| | Mortgage Loans
| | Mortgage
Securities
| | Total
|
|---|
| | Principal | | Premium | | Principal | | Premium | | Principal | | Premium |
|---|
Balance,
December 31, 1997 | | $559,436
| |
|
$17,861
|
|
| $
504,847 |
| | $ 8,205
|
| | $1,064,283 |
| | $26,066 |
|
Acquisitions | | 207,976 |
| | 3,758 |
| | 270,059 |
| | 3,806 |
| | 478,035 |
| | 7,564 |
|
Principal
repayments and
amortization | | (27,224 | ) | | (1,160 | ) | | (63,892 | ) | | (731 | ) | | (91,116 | ) | | (1,891 | ) |
Dispositions | | — |
| | — |
| | (310,113
| ) | | (5,294 | ) | | (310,113 | ) | | (5,294 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance, March
31, 1998 | | 740,188 |
| | 20,459 |
| | 400,901 |
| | 5,986 |
| | 1,141,089 |
| | 26,445 |
|
Acquisitions | | 290,350 |
| | 5,148 |
| | 80,237 |
| | 823 |
| | 370,587 |
| | 5,971 |
|
Principal
repayments and
amortization | | (43,849 | ) | | (1,506 | ) | | (47,201 | ) | | (451 | ) | | (91,050 | ) | | (1,957 | ) |
Dispositions | | (2,843 | ) | | (53 | ) | | — |
| | — |
| | (2,843 | ) | | (53 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance, June
30, 1998 | | 983,846 |
| | 24,048 |
| | 433,937 |
| | 6,358 |
| | 1,417,783
|
| | 30,406 |
|
Acquisitions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Principal
repayments and
amortization | | (54,745 | ) | | (1,442 | ) | | (38,925 | ) | | (493 | ) | | (93,670 | ) | | (1,935 | ) |
Dispositions | | (4,666 | ) | | (56 | ) | | (7,781 | ) | | (107 | ) | | (12,447 | ) | | (163 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance,
September 30, 1998 | | 924,435 |
| | 22,550 |
| | 387,231 |
| | 5,758 |
| | 1,311,666 |
| | 28,308 |
|
Acquisitions | | 42,298 |
| | 458 |
| | — |
| | — |
| | 42,298 |
| | 458 |
|
Principal
repayments and
amortization | | (62,953 | ) | | (2,135 | ) | | (15,215 | ) | | (173 | ) | | (78,168 | ) | | (2,308 | ) |
Adjustment(A)
| | 25,101 |
| | — |
| | — |
| | — |
| | 25,101 |
| | — |
|
Dispositions | | (378 | ) | | (5 | ) | | (372,016 | ) | | (5,585 | ) | | (372,394 | ) | | (5,590 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance,
December 31, 1998 | | $928,503 |
| | $20,868 |
| | $
— |
| | $
— |
| | $
928,503 |
| | $20,868 |
|
| |
| | |
| | |
| | |
| | |
| | |
| |
Acquisitions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Principal
repayments and
amortization | | (70,883 | ) | | (1,830 | ) | | — |
| | — |
| | (70,883 | ) | | (1,830 | ) |
Dispositions | | (4,446 | ) | | (79 | ) | | — |
| | — |
| | (4,446 | ) | | (79 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance, March
31, 1999 | | 853,174
|
| | 18,959
|
| | $
— |
| | $
— |
| |
853,174 |
| | 18,959
|
|
Acquisitions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Principal
repayments and
amortization | | (77,650 | ) | | (2,289 | ) | | — |
| | — |
| | (77,650 | ) | | (2,289 | ) |
Dispositions | | (364 | ) | | (12 | ) | | — |
| | — |
| | (364 | ) | | (12 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance, June
30, 1999 | | 775,160
|
| | 16,658
|
| |
— |
| |
— |
| |
775,160 |
| | 16,658
|
|
| |
| | |
| | |
| | |
| | |
| | |
| |
Acquisitions | | — |
| | — |
| | 7,243 |
| | — |
| | 7,243 |
| | — |
|
Principal
repayments and
amortization | | (84,772 | ) | | (2,248 | ) | | (290 | ) | | — |
| | (85,062 | ) | | (2,248 | ) |
Dispositions | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance,
September 30, 1999 | | $690,388 |
| | $14,410 |
| | $
6,953 |
| | $
— |
| | $
697,341 |
| | $14,410 |
|
| |
| | |
| | |
| | |
| | |
| | |
| |
(A)
|
Adjustment due to balance sheet reclassifications that were made
in 1999 and 1998. See the “Financial Condition of NovaStar
Financial as of September 30, 1999 and December 31, 1998”
section of this document for a description of the
reclassifications that were made to better match the timing of
principal and interest payments of NovaStar Financial’s
securitized mortgage loan portfolio with the principal and
interest payments of collateralized mortgage obligations.
|
Table 9
Premium as a Percent of Principal
| | Mortgage
Loans
| | Mortgage
Securities
| | Total
Mortgage
Assets
|
|---|
As of: | | | | | | | | | |
September 30, 1999 | | 2.09 | % | | — | % | | 2.09 | % |
June 30, 1999 | | 2.15 |
| | — |
| | 2.15 |
|
March 31, 1999 | | 2.22 Total
borrowings |
| $557,299 |
|
— | $ 9,698 |
|
2.22 |
|
December 31, 1998 | | 2.25 |
| | — |
| | 2.25 |
|
September 30, 1998 | | 2.44 |
| | 1.49 |
| | 2.16 |
|
June 30, 1998 | | 2.44 |
| | 1.47 |
| | 2.14 |
|
March 31, 1998 | | 2.76 |
| | 1.49 |
| | 2.32 |
|
December 31, 1997 | | 3.19 |
| | 1.63 |
| | 2.45 |
|
Stockholders’ equity.
During the first nine months of 1999, NovaStar Financial
increased its equity from $83 million at December 31, 1998 to $113
million at September 30, 1999. This was primarily a result of the
issuance of 4,285,714 shares of Class B 7% cumulative convertible
preferred stock in March 1999. Gross proceeds on the issuance
aggregated $30 million. The issuance of these preferred shares will
have an impact on future earnings per share as discussed under “
Net Income” below.
Also, included in the accumulated other comprehensive income
component of stockholders’ equity as of September 30, 1999 is
the unrealized gain on available-for-sale securities. NovaStar
Mortgage sold its first asset backed bonds in January 1999, which
for accounting and tax purposes was treated as a sale. The economic
residual interests in those transactions have been classified as
available-for-sale securities. In September 1999, NovaStar Financial
purchased this security from NovaStar Mortgage. The amortized cost
of the economic residual interests approximated fair value at
September 30, 1999.
|
Results of Operations of NovaStar Financial, Inc.—Nine Months
Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
|
Net Income
During the nine months ended September 30, 1999, NovaStar
Financial recorded net income of $2.0 million, $0.11 per diluted
share, compared with net income of $5.6 million, $0.64 per diluted
share, for the nine months ended September 30, 1998. In computing
earnings per share, shares issued during the period are weighted for
the portion of the period they are outstanding. If the preferred
shares would have been outstanding for the entire nine months of
1999, NovaStar Financial’s pro forma diluted earnings per share
for the nine months ended September 30, 1999 would have been the
same as diluted earnings per share for the nine months ended
September 30, 1999 as the preferred shares are considered
anti-dilutive for the nine months ended September 30, 1999.
NovaStar Financial’s main sources of revenue are interest
earned on its securitized mortgage loan portfolio and prepayment
penalty income. In addition, results indirectly reflect gains from
the sale of whole loan packages to third parties and securitizations
of NovaStar Mortgage.
Net Interest Income
Table 10 presents a summary of the average interest-earning
assets, average interest-bearing liabilities and the related yields
and rates thereon for the nine months ended September 30, 1999 and
1998.
Table 10
Interest Analysis
(dollars in thousands)
| | Mortgage Loans
| | Mortgage
Securities
| | Total
| |
|
|---|
Nine months
ended September 30, 1999
| | 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 | | $765,073 | | $52,236 | | 9.106.96 |
% |
| $
808 | |
$
100— |
|
16.50$— | | — |
% |
|
$
765,845557,299 |
|
$52,336 9,698 |
|
9.116.96 |
% |
| |
|
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Interest-bearing
liabilities | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements |
|
$
—
|
|
$
— | | — | % | | $
— | | $
— | | — | % | | $
— | | $
— | | — | % |
Collateralized mortgage obligations
| | 785,547 | | 33,782 | | 5.73
|
|
|
—
|
|
—
|
|
—
|
|
|
785,547
|
|
33,782
|
|
5.73
|
|
Other borrowingsNet
interest income |
| | |
5,623$ 3,114 |
| | | | | |
541$266 |
| | | | | |
12.83$ 3,380 |
|
|
— | | — | | — |
| | 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 | | | | | | 2.65 | % | | | | | | 16.50 | % | | | | | | 2.74 | % |
| | | | | | |
|
|
|
|
|
|
|
| | | |
Net interest spread | | | | | | 3.02 | % | | | | | | 16.50 | % | | | | | | 3.03 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Net yield | | | | | | 2.82 | % | | | | | | 16.50 | % | | | | | | 2.83 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Provisions for credit losses | | | | $11,499 | | 2.00 |
| | $
— | | $
— | | — | % | | | | $11,499 | | 2.00 |
|
| | | |
| |
| | | | |
|
|
|
|
|
|
|
| |
|
|
Net
interest income after provision
for credit
lossesyield |
| | | $ 4,678
| | | | | $
— | | $
100 | | |
| |
|
| | |
$ 4,778
2.34 | % |
|
|
| | | 16.50 | % | | | | | | 2.51 | % |
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | Mortgage Loans
| | Mortgage Securities
| | Total
|
|---|
Three months ended
March 31, 1999
| | 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 | | $830,558 | | $19,550 | | 9.42 | % | | $— | | $— | | — | % | | $830,558 | | $19,550 | | 9.42 | % |
| | |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Interest-bearing liabilities
Repurchase
agreements | | $ —
| | $ — | | — | % | | $— | | $— | | — | % | | $ —
| | $ — | | — | % |
Collateralized mortgage
obligations | | 862,559 | | 12,139 | | 5.63 | | | — | | — | | — | | | 862,559 | | 12,139 | | 5.63 | |
| Other
borrowings | | 17,051 | | 490 | | 11.49 | | | — | | — | | — | | | 17,051 | | 490 | | 11.49 | |
| | |
| | | | | | |
| | | | | | |
| | |
|
|
|
Net interest spread after provision
for creditCost of
derivative financial
losses | | | | | | 1.02 | % | | | | | | 16.50 | % | | | | | | 1.03 | % |
| |
| |
| |
| | |
| |
| |
| | |
| | | |
| |
Net yield after provision for credit
losses | | | | | | 0.82 | % | | | | | | 16.50 | % | | | | | | 0.83 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
|
| | Mortgage Loans
| | Mortgage
Securities
| | Total
|
|---|
Nine months
ended September 30, 1998
| | 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 | | $781,786 | | $56,274 | | 9.60 | % | | $478,125
| | $22,881 | | 6.38 | % | | $1,259,911
| | $79,155 | | 8.38 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Interest-bearing
liabilities |
Repurchase agreements | | $156,854 | | $ 7,643
| | 6.50 | % | | $511,460 | | $20,785 | | 5.42 | % | | $
668,314 | | $28,428 | | 5.67 | % |
Collateralized mortgage obligations
| | 626,960 | | 29,659 | | 6.31 |
| | — | | — | | — |
| | 626,960 | | 29,659 | | 6.31 |
|
Other borrowings | | 20,043 | | 647 | | 4.30 |
| | — | | — | | — |
| | 20,043 | | 647 | | 4.30 |
|
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Cost of derivative financial | | | | | | | | | | | | | | | | | | | | | |
Instruments hedging liabilities
| | | | 1,637 | | | | | | | 577 | | |
| | | | 2,214 | | | |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Total borrowings | | $803,857 | | $39,586 | | 6.57 | % | | $511,460 | | 21,362 | | 5.57 | % | | $1,315,317 | | $60,948 | | 6.18 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Net interest income | | | | $16,688 | | |
| | | | $ 1,519
| | |
| | | | $18,207 | | |
|
| |
| |
| |
| | |
| |
| |
| | |
| |
| | | |
Net interest spread | | | | | | 3.03 | % | | | | | | 0.81 | % | | | | | | 2.20 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Net yield | | | | | | 2.85 | % | | | | | | 0.42 | % | | | | | | 1.93 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Provision for credit losses | | | | $ 3,400
| | 0.58 |
| | $
— | | — | | — |
| | | | $ 3,400 | | 0.36 |
|
| | | |
| |
| | |
| | | |
| | | | |
| |
| |
Net interest income after provision
for credit
lossesliabilities |
| | |
580 |
| $13,288 | |
|
|
| | |
$
— |
| $1,519 | |
|
|
|
|
|
$14,807580 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
Net interest spread after provision
for credit
losses Total
borrowings |
|
$879,610 |
|
$13,209 |
|
2.456.01 |
% |
|
$— |
|
— |
|
0.81— |
% |
|
$879,610 |
|
$13,209 |
|
1.846.01 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
| |
| Net
interest income | | | | $ 6,341 | | | | | | | $— | | | | | | | $ 6,341 | | | |
| |
|
|
|
| | | | | | |
| | | | | | |
| | |
|
Net
yield after provision for credit
lossesinterest spread |
|
|
|
|
|
2.273.41 |
% |
|
|
|
|
|
0.42— |
% |
|
|
|
|
|
1.573.41 |
% |
| |
|
| |
| |
| | |
| |
| |
| | |
|
|
|
|
| | | | | | |
| | | | | | |
| |
| Net
yield. | | | | | | 3.05 | % | | | | | | — | % | | | | | | 3.05 | % |
| | | | | | |
| | | | | | |
| | | | | | |
|
|
Interest incomeIncome. .
NovaStar Financial’s average interest-earning assets consist
primarily ofDuring 2000, mortgage loans
for the nine months ended September 30,
1999. For the nine months ended September 30, 1998, NovaStar
Financial’s average interest assets included 60% mortgage loans
and 40% of lower-yielding agency securities. As discussed in “
Financial Condition of NovaStar Financial, Inc. as of September 30,
1999 and December 31, 1998”, NovaStar Financial sold all of its
agency securities in October 1998 to meet short-term liquidity needs
faced in the fourth quarter of 1998. Agency securities earned $22.9$12.8 million, for the nine months ended September 30, 1998, or a yield of 6.4%.9.6%, compared with $19.6
million, or a yield of 9.4% for the same period of 1999.
Mortgage securities income for the nine months ended September
30, 1999 consist2000 consists of earnings on
economic residual interests that NovaStar Financial purchased
from NovaStar Mortgage in September 1999. During
the nine months ended September 30, 1999, mortgage loansIn total, assets
earned $52.2$13.1 million, or a yield of 9.1%, compared with $56.3 million, or a
yield of 9.6%9.7% for the same period of 1998. In total, assets earned
$52.3 million, or a yield of 9.1% for the ninethree months
ended September 30, 1999.March 31, 2000. During the same period of 1998,1999, assets
earned $79.2$19.6 million or an 8.4%a 9.4% yield.
As noted in Table 10,8,
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.
Interest expenseExpense. . The cost of borrowed funds
for mortgage loans was $9.7 million for the three months ended
March 31, 2000, or 7.0% of average borrowings compared with
$13.2 million, or 6.0% for the same period of 1999. Average
interest-bearing liabilities for the ninethree months ended September 30, 1999March
31, 2000 consisted primarily of financing costs on
collateralized mortgage loans,
while average interest bearing liabilities for the nine months ended
September 30, 1998 consisted of 60% mortgage loans and 40% agency
securities. During the fourth quarter of 1998, NovaStar Financial
sold all of its agency securities. Mortgage loan cost of borrowed
funds was $36.1 million for the nine months ended September 30,
1999, or 6.1% of average mortgage loan borrowings compared with
$39.6 million for the same period of 1998, or 6.6% of average
mortgage loan borrowings. Agency security cost of borrowed funds was
$21.4 million during the nine months ended September 30, 1998, or
5.6% of average agency security borrowings. The composition of
interest expense is significantly different for the nine months
ended September 30, 1999obligations compared with the same
period of 1998. This
is due1999, 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 following factors:convertible preferred stock offering
repaid all the outstanding debt on the residual
facility.
| Ÿ
| The
majority of mortgage loans serve as collateral on collateralized
mortgage obligations at September 30, 1999. During 1998, the
mortgage loans served as collateral on collateralized mortgage
obligations, warehouse and repurchase facility debt. The change in
financing composition is primarily due to the fact that NovaStar
Financial discontinued purchasing mortgage loans from NovaStar
Mortgage during the last half of 1998. Prior to that point in
time, NovaStar Financial had purchased 100% of NovaStar Mortgage
’s loan production. Loans held in portfolio prior to
securitization were financed by repurchase facilities. Under
agreements with NovaStar Mortgage, NovaStar Financial reimbursed
NovaStar Mortgage for its warehousing costs incurred prior to
sale. Repurchase and warehouse facility costs for the nine months
ended September 30, 1998 are included under repurchase agreements
and other borrowings in Table 10.
|
| Ÿ
| NovaStar
sold all of its agency securities in October 1998 and paid off all
related financing on these assets. No agency securities have been
purchased since that time.
|
| Ÿ
| Due to
the liquidity crisis faced in the last quarter of 1998,
GMAC/Residential Funding Corporation provided additional financing
under a residual line that was secured by mortgage interests in
NovaStar’s asset-backed bonds. This facility carried a
substantially higher interest cost than other borrowing
arrangements. This debt was paid off in February 1999 with funds
from a similar facility provided by First Union National Bank. The
interest on this facility during the nine months ended September
30, 1999 is included as a component of other borrowings in Table
10.
|
Advances under the warehouse line of credit bear interest
based on the federal funds rate plus a spread. NovaStar Financial
and NovaStar Mortgage receive credits’s collateralized mortgage
obligations are indexed to warehouse line interest
based on cash balances maintained with First Union. Advances under
the master repurchase agreement bear interest at rates based on
LIBOR, plus a spread.LIBOR. During the ninethree months ended
September 30,
1999,March 31, 2000, one-month LIBOR averaged 5.07
percent5.92% compared with
5.66 percent4.95% for the nine months ended September
30, 1998.same period of 1999. Because the Federal Reserve Board
increased the targeted Federal
Fundsfederal funds interest rate in Junethe latter
part of 1999, management expects effective borrowing costs to behave been higher for the second half of 1999.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.
Net interest incomeInterest Income and spread.
Spread. Net interest
income on mortgage loans duringfor the ninethree months ended September 30, 1999March 31,
2000 was $16.2$3.1 million, or 2.8%2.3% of average interest-earning
mortgage loans, compared with $16.7$6.3 million, or 2.9%3.1% for the nine months ended September 30, 1998.same
period of 1999. Net interest spread on mortgage loans was 3.0%2.7%
and 3.4%, respectively, for the ninethree months ended September 30, 1999March 31,
2000 and 1998.1999. Net interest income on economic
residual interests, classified as mortgage securities
(economic residual interests) during the ninethree months ended
September 30, 1999March 31, 2000 was $100,000,$266,000, or 16.5% of average
interest-earning mortgage securities compared withand net interest income on agency securities classified as mortgage
securities of $1.5 million, or 0.4% of average interest-earning
agency securities for the same period of 1998. Net interest spread
on mortgage securities was 16.5% for the nine months ended September
30, 1999 compared with 0.8% for the nine months ended September 30,
1998. The significant increase in net margin and spread for the nine
months ended September 30, 1999 compared with the nine months ended
September 30, 1998 is due to the change in NovaStar Financial’s
asset and liability composition. During the latter part of 1998,
NovaStar Financial sold all agency securities and paid off related
financing. NovaStar Financial has not purchased any more of these
lower-yielding mortgage assets. Net interest income and the spread
are functions of asset yields relative to its costs of funds.spread.
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.
Impact of interest rate agreements.
Interest Rate Agreements.
NovaStar Financial has entered into interest rate agreements
designed to mitigate exposure to interest rate risk. Interest
rate cap agreements require NovaStar Financial to pay a monthly
fixed premium while allowing it to receive a rate that adjusts
with LIBOR, when rates rise above a certain agreed-upon rate.
These agreements are used to alter, in effect, the interest
rates on funding costs to more closely match the yield on
interest-earning assets.
As part of the NMFT 2000-1 asset-backed bond
transaction discussed under “Mortgage
Securities—Available-For-Sale” and “Mortgage Loan
Sales” sections of this document, NovaStar Financial sold a
cap with a carrying value of $480,000 to NovaStar Mortgage
recognizing a deferred gain of $880,000. The cap was hedging
liabilities of the mortgage loans sold to NMFT 2000-1 and the
deferred gain will be amortized over the remaining cap term.
During the ninethree months ended September 30,March 31, 2000 and 1999, and 1998, net
interest expense incurred on hedging agreements was $1.7 million$301,000 and
$2.2 million,$580,000, respectively, which is included as a component of
interest expense. The following table provides details of the
interest rate agreements as of September 30, 1999 and December 31,
1998.
Table 11
Interest Rate Agreements
September 30, 1999 and December 31, 1998
(dollars in thousands)
| | Notional
Value
| | Unrealized
| | Weighted
Days to
Maturity
| |
Weighted
Average
Cap Rate
|
|---|
| | | Gains
| | Losses
|
|---|
As of September
30, 1999: | | | | | | | | | | | |
Interest rate cap
agreements | | $530,000 | | $376 | | $ 813
| | 544 | | 6.32 | % |
| |
| |
| |
| |
| |
| |
As of December
31, 1998: |
|
Interest rate cap
agreements | | $625,000 | | $—
| | $2,483 | | 734 | | 6.27 | % |
| |
| |
| |
| |
| |
| |
OtherPrepayment Penalty Income
Other incomeNovaStar Financial strives to purchase loans that
have some form of prepayment penalty fee to mitigate exposure to
prepayment risk. During the three months ended March 31, 2000,
93% of the mortgage loans originated by NovaStar Mortgage had
prepayment penalties compared with 89% during the ninesame period of
1999. As of March 31, 2000, 54% of NovaStar Financial’s
mortgage loan portfolio had prepayment penalties compared with
58% as of December 31, 1999. Prepayment penalties totaled
$489,000 during the three months ended September 30, 1999
primarily consists of prepayment penalties of $2.4 million, net
gains recognized on the sale of real estate owned of $74,000,
interest earned on securitization funds held in trust of $173,000,
and interest earned on notes receivable from founders of $368,000.
Other incomeMarch 31, 2000 compared
with $656,000 for the same period of 1999. The decrease is due
to the seasoning of the portfolio and prepayment penalty windows
expiring in 2000 compared with 1999.
Premiums for Mortgage Loan Insurance
In August of 1998, consistedNovaStar Financial and NovaStar
Mortgage executed an agreement whereby lender-paid mortgage
insurance coverage is purchased on selected mortgage loans. The
use of prepayment
penaltiesmortgage insurance is one method of $1.1 million,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.
As of March 31, 2000 and December 31, 1999,
approximately 50% 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 loans
collateralizing NMFT 1999-1 and 2000-1 are not recorded as loans
of NovaStar Financial, but the performance of NovaStar’s
investment in the residual interests of NMFT 1999-1 and 2000-1
is dependent on the credit losses of the underlying collateral.
NovaStar Financial purchased the economic residual interest earnedin
NMFT 2000-1 on notes receivable from foundersApril 1, 2000.
Premiums for mortgage insurance on loans maintained
on the balance sheet of $241,000, gainsNovaStar Financial are recorded as a
portfolio cost and included in the income statement under the
caption “Premiums for Mortgage Loan Insurance.” During
the three months ended March 31, 2000, total premiums paid by
NovaStar Financial totaled $365,000 compared with $457,000 for
the same period of 1999. The monthly premiums paid on mortgage loan salesloans
serving as collateral for NMFT 1999-1 and NMFT 2000-1 reduce
NovaStar Financial’s monthly residual cashflow receipt and
are not included in the amount of $315,000, net gains on mortgage security
sales of $16,000 and interest earned on securitization funds held in
trust of $337,000.total premiums paid set forth
above.
Provisions for Credit Losses
NovaStar Financial makes provisionsowns loans where the borrower
possesses credit risk higher than that of conforming borrowers.
Delinquent loans and losses are expected to occur. Most of the
loans owned by NovaStar Financial were underwritten and funded
by NovaStar Mortgage. NovaStar Mortgage uses several different
techniques to mitigate the credit losses, including pre-funding
audits by quality control personnel and in-depth appraisal
reviews. Another loss mitigation technique allows a borrower to
sell their property for less than the outstanding loan balance
prior to foreclosure in transactions known as short sales, when
it is believed that the resulting loss is less than what would
be realized through foreclosure. Loans are charged off in full
when the cost of pursuing foreclosure and liquidation exceed
recorded balances. While short sales have served to reduce the
overall severity of losses incurred, they also accelerate the
timing of losses.
As discussed further under the caption
“Premiums for Mortgage Loan Insurance”, lender paid
mortgage insurance is also used as a means of managing credit
risk exposure. Generally, the exposure to credit loss on insured
loans is considered minimal. Management also believes aggressive
servicing is an important element to managing credit
risk.
Provisions for credit losses are made in amounts
considered necessary to maintain allowancesthe allowance at levelsa level
sufficient to cover probable losses inherent in the loan
portfolioportfolio. Charge-offs are recognized at the reporting date. The leveltime of probableforeclosure
by recording the value of real estate owned property at its
estimated realizable value. Subsequent gains or losses on
dispositions, if any, are recorded in operations. One of the
principal methods used to estimate expected losses is estimated usinga
delinquency migration analysis. TheThis analysis takes into
consideration historical information about actualregarding foreclosure and
loss severity experience and applies that information to the
portfolio at the reporting date. Chargeoffs are
recognized at the time of foreclosure by recording the value of
repossessed property at its realizable value. Subsequent gains or
losses on dispositions, if any, are recorded in operations.
NovaStar Financial uses several different loss mitigation
techniques, including targeted pre-funding audits by quality control
personnel and increased appraisal reviews. Borrowers are allowed to
sell property for less than the outstanding loan balance prior to
foreclosure otherwise known as short sales, when it is believed
resulting losses are less than those that would be realized through
foreclosure.
In August of 1998, NovaStar Financial and NovaStar Mortgage
executed an agreement with, Radian Guaranty, Inc. (Radian), formerly
Commonwealth Mortgage Acceptance Corporation (CMAC), whereby Radian
will provide insurance coverage on mortgage loans. As of September
30, 1999 and December 31, 1998, approximately 29% and 26% of the
loans owned by NovaStar Financial and substantially all of the loans
owned by NovaStar Mortgage are covered under this agreement. During
the nine months ended September 30, 1999, total premiums paid to
Radian totaled $1.3 million and are included as a component of loan
servicing expense in the financial statements. Management believes
that its exposure to credit loss on loans insured by Radian is
minimal. Management expects that a substantial portion of loans
originated in future periods will be covered under similar insurance
arrangements.
During the ninethree months ended September 30, 1999,March 31, 2000,
NovaStar Financial made provisions for losses of $11.5$1.6 million
and incurred net chargeoffscharge-offs of $9.7$2.9 million, compared to provisions of $3.4$2.3
million and net chargeoffs of $3.0$2.4 million forduring the same period of 1998.
Chargeoffs in 19991999.
Charge-offs during the first quarter of 2000 include $1.6 million$191,000
resulting from short salessale transactions and loans fully charged off prior to foreclosure. While management
believesin
full compared with $224,000 during the short sales have served to reduce NovaStar Financial
’s overall losses, they led to higher levelssame period of
losses1999.
The level and trend of charge-offs in 1999
than expected. Notwithstanding the short sale activity, the higher
level of chargeoffs in 1999 has led
management to conclude that total losses on securitized mortgage
loans will be higher, and will occur earlier, in the life of
the loan portfolio, than originally
projected. As a result,The provisions during 1999 provisions have been substantially higher than prior years.
Management believes thatand resulting allowance as
of December 31, 1999 reflect the increased loss migration techniques employed,
including those described above, will reduce the overall losses to
be incurred.activity. In the
opinion of management, the allowance for credit losses at September 30, 1999as of
March 31, 2000 is adequate to cover losses inherent in the
portfolio at that date. If losses do not develop as the
migration analysis indicates,in accordance
with current expectations, future provisions will be increased
or decreased as necessary.-
Asnecessary. Management also believes that
internal processes involving quality control, appraisal review
and servicing that have been made as a result of September 30, 1999, NovaStar Financial had 174experience
to-date will result in lower losses being incurred on loans
in
real estate owned with a carrying value of $15.4 million compared to
126 loans with a carrying value of $10.6 million as of December 31,
1998.currently being originated.
Table 129 is a rollforward of the activity in the
allowance for credit losses during 19992000 and 1998.1999.
Table
129
Rollforward of Allowance for Credit
Losses
(in
thousands)
|
| 2000
| |
1999
| | 1998
|
|
| March 31
| | December 31
| |
September 30
|
|
June
30
|
|
March 31
| | December 31
| | September
30
| | June 30
| | March 31
|
| Beginning balance |
| $11,105 | | |
$ 3,5735,370 | |
| $3,573 | |
|
$ 3,492 | |
| |
$ 3,573 |
| | $ 2,757
|
| | $ 3,341
|
| | $2,871 |
| | $2,313 | |
| Provision for credit losses |
| 1,579 | | | 10,579 | | |
5,634 |
|
|
3,566 |
|
|
2,299 |
| | 4,030 |
| | 1,179 |
| | 1,145 |
| | 1,076 | |
Amounts
charged off, net
of recoveries |
| (3,837 | ) | | (3,485 | ) | | (2,380 | ) | | (3,214 | ) | | (1,763 | ) | |
(6752,921 |
) |
|
(5184,844 | ) | | (3,837 | ) | | (3,485 | ) | | (2,380 |
) |
| |
|
| | |
| | |
| | |
| | |
| | |
| | |
| |
Ending Balance
| | $ 5,370
|
|
|
$ 3,573
|
|
|
$ 3,492
|
|
|
$ 3,573
|
|
|
$ 2,757
|
|
| Ending
Balance. | |
$3,341 9,763 | |
| $11,105 | |
|
$2,8715,370 |
| | $3,573 | | | $3,492 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| | |
|
|
Loans owned by NovaStar Financial are serviced by NovaStar
Mortgage. DetailsThe following tables provide details regarding the
delinquencies, defaults, and loss statistics of NovaStar
Financial’s mortgage loan portfolio.
Table
10
Loan
Delinquencies (90 days and greater) (A)
2000
and 1999
| | | 2000
| | 1999
|
|---|
| | | March 31
| | December 31
| | September 30
| | June
30
| | March 31
|
|---|
Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO): |
|
1997-1 Issued October 1, 1997 | | 4.59 | % | | 5.63 | % | | 6.32 | % | | 5.13 | % | | 4.37 | % |
|
1997-2 Issued December 11, 1997 | | 7.66 | | | 6.24 | | | 4.92 | | | 4.03 | | | 5.38 | |
|
1998-1 Issued April 30, 1998 | | 3.58 | | | 4.42 | | | 5.32 | | | 4.13 | | | 4.64 | |
|
1998-2 Issued August 18, 1998 | | 5.10 | | | 5.38 | | | 4.06 | | | 3.94 | | | 3.72 | |
(A) | Includes loans in foreclosure or
bankruptcy. |
Table
11
Delinquencies, Defaults and Losses
March
31, 2000 and December 31, 1999
(dollars in thousands)
| | | NovaStar Home Equity Series
|
|---|
| | | 1997-1
| | 1997-2
| | 1998-1
| | 1998-2
| | Warehouse
| | All
Loans
|
|---|
| March 31, 2000 | | | | | | | | | | | | | | | | | |
| Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | |
|
Balance, January 1, 2000 | | $ 2,335 | | | $ 2,861 | | | $ 4,214 | | | $ 1,685 | | | $
10 | | | $ 11,105 | |
|
Provision for credit losses | | 225 | | | 672 | | | 286 | | | 396 | | | — | | | 1,579 | |
|
Amounts charged off, net of recoveries | | (629 | ) | | (708 | ) | | (982 | ) | | (602 | ) | | — | | | (2,921 | ) |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
Balance, March 31, 2000 | | $ 1,931 | | | $ 2,825 | | | $ 3,518 | | | $ 1,479 | | | $
10 | | | $ 9,763 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Defaults as a percent of loan balance | | | | | | | | | | | | | | | | | | |
|
Delinquent loans (A) | | 6.89 | % | | 9.38 | % | | 4.02 | % | | 4.40 | % | | 32.62 | % | | 5.40 | % |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
Loans in foreclosure | | 3.23 | | | 4.82 | | | 2.73 | | | 4.09 | | | 11.69 | | | 3.68 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
Real estate owned | | 4.91 | | | 4.85 | | | 3.75 | | | 2.90 | | | 34.75 | | | 3.76 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Cumulative losses | | $ 5,990 | | | $ 6,691 | | | $ 6,621 | | | $ 2,564 | | | | | | | |
| | |
| | |
| | |
| | |
| | | | | |
| |
| | | NovaStar Home Equity Series
|
|---|
| | | 1997-1
| | 1997-2
| | 1998-1
| | 1998-2
| | Warehouse
| | All
Loans
|
|---|
| December 31, 1999 | | | | | | | | | | | | | | | | | |
| Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | |
|
Balance, January 1, 1999 | | $ 816 | | | $ 1,049 | | | $ 1,163 | | | $ 346 | | | $ 199 | | | $ 3,573 | |
|
Provision for credit losses | | 4,317 | | | 5,436 | | | 8,194 | | | 4,065 | | | 66 | | | 22,078 | |
|
Amounts charged off, net of recoveries | | (2,798 | ) | | (3,624 | ) | | (5,143 | ) | | (2,726 | ) | | (255 | ) | | (14,546 | ) |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
Balance, December 31, 1999 | | $ 2,335 | | | $ 2,861 | | | $ 4,214 | | | $ 1,685 | | | $
10 | | | $ 11,105 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Defaults as a percent of loan balance | | | | | | | | | | | | | | | | | | |
|
Delinquent loans (A) | | 8.03 | % | | 9.89 | % | | 6.38 | % | | 7.50 | % | | 35.27 | % | | 7.63 | % |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
Loans in foreclosure | | 4.73 | | | 4.32 | | | 3.75 | | | 4.02 | | | 9.48 | | | 4.09 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
Real estate owned | | 3.85 | | | 4.88 | | | 3.61 | | | 2.62 | | | 47.00 | | | 3.51 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Cumulative losses | | $ 5,416 | | | $ 5,698 | | | $ 4,996 | | | $ 2,251 | | | | | | | |
| | |
| | |
| | |
| | |
| | | | | |
(A) | Includes loans delinquent 30 days or
greater |
Loan
Servicing Fees Paid to NovaStar Mortgage, Inc.
Loan servicing fees paid to NovaStar Mortgage, Inc.
include the 50 basis point fee charged by NovaStar Mortgage for
servicing the loans owned by NovaStar Financial serving as
collateral on CMOs. The fee charged is based on the loan
principal balance of the mortgage loans serviced. The decline in
the loan servicing portfolio are presented in Tables
23 and 24, in “Financial Condition of NovaStar Mortgage as of
September 30, 1999 and December 31, 1998”.fee is due to principal paydowns between the
two periods.
General and Administrative Expenses
General and administrative expenses for the ninethree
months ended September 30,March 31, 2000 and 1999 and 1998 are provided in Table 13.12.
Table 1413 displays the relationship of portfolio expenses to
net interest
incomestockholders’ equity during 19992000 and 19981999 by
quarter.
Table
1312
General and Administrative Expenses
(dollars in thousands)
|
|
NineThree Months Ended September 30,March 31,
|
|
| 2000
| |
1999
| | 1998
|
|
| |
| |
Percent of
Net InterestStockholders’
IncomeEquity
| |
|
| |
Percent of
Net InterestStockholders’
IncomeEquity
|
| Compensation and benefits |
|
$1,358384 |
|
8.30.36 |
% |
|
$1,374 585 |
|
7.50.49 |
% |
Loan servicing
| | 1,392 | | 8.6 |
| | 491 | | 2.7 |
|
| Professional and outside services |
|
546130 |
|
3.40.12 | |
| 332 |
|
6490.28 |
| 3.6 | |
| Office
administration |
|
611171 |
|
3.80.16 | |
| 208 |
|
6810.17 |
| 3.7 | |
| Other |
|
10326 |
|
0.60.02 | |
| 55 |
|
1840.05 |
| 1.0 | |
| |
|
|
|
|
|
|
|
|
|
|
Total portfolio-relatedgeneral and administrative expenses
before
intercompany
fees |
|
4,010711 |
|
24.70.66 |
% |
|
3,3791,180 |
|
18.50.99 |
% |
| |
|
|
|
|
|
|
|
|
| |
Forgiveness of
notes receivable from founders |
| —
| | | | | 812 | | | |
| Fees
for services provided by NovaStar Mortgage, Inc. |
|
3,3433 |
|
|
|
|
4,6061,050 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
expenses |
|
$7,353714 |
| | | |
$2,230 |
|
|
$8,797 | | |
|
| |
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio(A)
| | | | 38.0 | % | | | | 43.5 | % |
| | | |
| | | | |
| |
(A)
| The
efficiency ratio is calculated by dividing general and
administrative expenses by the sum of net interest income and
other income.
|
Table
1413
Portfolio Related Expenses as a
Percent of Net Interest IncomeStockholders’ Equity
19992000
and 19981999
|
|
Percent of
Net
Interest IncomeStockholders’
Equity
|
|
| 2000: | | | |
|---|
Efficiency
Ratio
First quarter
| | 0.66 |
| 1999: |
| | | | |
|
Third
Fourth quarter |
|
28.7 | % | | 36.9 | %0.91 |
Second
Third quarter |
|
19.8 |
| | 22.9 |
0.76 |
First
Second quarter |
|
25.8 |
| | 52.3 |
0.52 |
1998: | | | | | | |
1998
First quarter |
|
25.6 |
| | 5,747.0 |
|
Fourth quarter
| | 89.7 |
| | (14.1 | ) |
Third quarter
| | 22.3 |
| | 21.1 |
|
Second quarter
| | 19.3 |
| | 58.9 |
|
First quarter
| | 14.8 |
| | 55.0 |
0.99 |
Compensation and benefits includes employee base
salaries, benefit costs and incentive compensation awardsawards. The
decrease in compensation and has remained
relatively consistentbenefits for the ninethree months ended
September 30, 1999March 31, 2000 compared with the same period of 1998.
Loan servicing for the nine months ended September 30, 1999 consists principally of the fees paidis due to
Radian as discussed under
the “Provisions for Credit Losses.” This line-item also
includes the direct costs associated with the mortgage loan
servicing operation that are paid directlystaff reductions and employee cost allocations to independent third
parties for such things as property appraisals and borrower location
services. NovaStar
loans were not covered by insurance until the
third quarter of 1998, which caused the increase in loan servicing
costs from 1998 to 1999.Mortgage.
Professional and outside services include fees for
legal and accounting services and annual and quarterly reports.services. In the normal course of business,
fees are incurred for professional services related to general
corporate matters and specific transactions. The first quarter
2000 decline is a result of legal fees incurred on the
structuring of various financing arrangements and general
company growth experienced during the first three months of
1999. Office administration includes items such as rent,
depreciation, telephone, office supplies, postage, delivery,
maintenance and repairs.
The following is a summary of the fees, in
thousands, paid to (received from) NovaStar Mortgage for the
ninethree months ended September 30, 1999March 31, 2000 and 1998:1999.
|
|
NineThree Months
Ended
September 30,March 31,
|
|
| 2000
| |
1999
| | 1998
|
| Amounts
paid to NovaStar Mortgage: |
Loan servicing fees | | |
|
$3,056 |
| | $2,672 |
|
Administrative
Loan servicing fees |
|
1,263$696 | |
|
| 5,700 |
$1,115 |
| |
|
|
|
|
|
| Administrative fees, net of guaranty fees |
| $117 | | | $1,050 |
| Amounts
received from NovaStar Mortgage: |
|
|
|
| |
|
Purchase commitment fee | | — |
| | (3,766 | ) |
Interest
Intercompany interest income |
|
(976114 |
) |
|
— | |
| |
|
|
|
|
|
| Net
fees for other services provided by Novastar Mortgage,
Inc. |
| $ 3 | | | $1,050 |
| |
|
$3,343
|
|
|
$4,606
|
|
| |
| | |
| |
The fees for services provided by NovaStar Mortgage
represent the following:
| Ÿ
|
Administrative fees for services, including the development of
loan products, underwriting, funding, and quality control.
|
| Ÿ
| Servicing
fees to NovaStar Mortgage. NovaStar Mortgage receives 50 basis
points on the collected principal balance of NovaStar Financial
loans serving as collateral on CMOs.
|
| Ÿ
| Purchase
commitment fee. A fee NovaStar Mortgage pays to NovaStar
Financial, if it chooses to retain the mortgage loans it
originates or sells them to third parties.
|
| Ÿ
| Interest
income. Interest payments NovaStar Mortgage pays to NovaStar
Financial for financing loan fundings and various operating costs
of NovaStar Mortgage.
|
The increasesignificant decline in loan servicingthese fees paid to NovaStar Mortgage for the ninethree
months ended September 30, 1999March 31, 2000 compared with the nine
months ended September 30, 19981999 is due to the
increase in NovaStar
Financial’s average securitized mortgage loan portfolio
serviced by NovaStar Mortgage.
The decline incancellation of the administrative fees paid to NovaStar
Mortgage during these same periods is partly a result of the
reduction in NovaStar Mortgage’s production volumes as
indicated in Table 21. The decline in 1999 originations reflect
decisions made by management as a result of constrained liquidity
circumstances the subprime mortgage industry faced during the latter
part of 1998. Accordingly, the administrative fees NovaStar
Financial paid to NovaStar Mortgage during this same period were
reduced. Thisintercompany agreement was cancelled
on April 1, 1999, since NovaStar Financial is no longer
purchasing loans from NovaStar Mortgage. Accordingly,This agreement was
replaced with an intercompany loan and guarantee agreement with
NovaStar Mortgage. Under the terms of this agreement, 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, Novastar Mortgage is
required to pay guaranty fees in the amount 0.25% of the loans
sold by Novastar Mortgage for which NovaStar Financial is no longer utilizinghas
guaranteed the services as outlined in the agreement.performance of NovaStar Mortgage.
The decrease in purchase commitment fees for the nine months
ended September 30, 1999 compared with the same period of 1998 is
due to the discontinuance of this intercompany agreement beginning
January 1, 1999.
The increase in interest income for the nine months ended
September 30, 1999 compared with the same period of 1998 is due to
this intercompany agreement that went into effect April 1, 1999.
Equity
in Earnings (Loss) of NFI Holding Corporation
For the ninethree months ended September 30, 1999,March 31, 2000, NFI
Holding recorded net income of $1.5 million$706,000 compared with a net lossincome
of $2.5
million$557,000 for the same period of 1998.1999. NovaStar Financial
records its portion of the lossearnings as equity in net lossearnings of
NFI Holding in its income statement. NFI Holding’s net
loss includesearnings include the net earnings of NovaStar Mortgage, and NovaStar Capital, subsidiariesa
subsidiary of NFI Holding as discussed under “Basis of
Presentation”. NFI Holding’s financial position and
results of operation for the nine month periodthree months ended September 30,March 31, 2000
and 1999 and 1998 are discussed further under the heading “NFI
Holding Corporation”.
Results of Operations of NovaStar Financial, Inc.
—Three Months Ended September 30, 1999 Compared to the Three
Months Ended September 30, 1998.
Net Income
During the three months ended September 30, 1999, NovaStar
Financial recorded a net loss of $1.5 million, $0.25 per diluted
share, compared with net income of $2.4 million, $0.29 per diluted
share, for the three months ended September 30, 1998.
Net Interest Income
Table 15 presents a summary of the average interest-earnings
assets, average interest-bearing liabilities and the related yields
and rates thereon for the three months ended September 30, 1999 and
1998.
Table 15
Interest Analysis
Three Months Ended September 30, 1999 and 1998
(dollars in thousands)
| | Mortgage Loans
| | Mortgage
Securities
| | Total
|
|---|
September 30,
1999
| | 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 | | $690,323 | | $15,595 |
| | 9.04 | % | | $2,424 | | $100 | | 16.50 | % | | $692,747 | | $15,695 |
| | 9.06 | % |
| | | | | | |
| | | | |
| |
| | | | | | | |
| |
Interest-bearing
liabilities | | | | |
| | |
| | | | | | |
| | | | |
| | |
|
Repurchase
agreements | | $
— | | $
— |
| | — | % | | $ —
| | $
| | — | % | | $
— | | $
— |
| | — | % |
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 |
| | 0.33 |
| | | | | | — |
| |
| | $
580 |
| | 0.33 |
|
| | | |
| | |
| | | | | | |
| | | | |
| | |
| |
Total borrowings | | $706,685 | | $11,206 |
| | 6.34 | % | | $ —
| | $—
| | — | % | | $706,685 | | $11,206 |
| | 6.34 | % |
| | | | | | |
| | |
| |
| |
| | | | | | | |
| |
Net interest income
| | | | $ 4,389
|
| | |
| | | | $100 | | |
| |
| |
|
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Net interest spread
| | | | |
| | 2.70 | % | | | | | | 16.50 | % | |
| | $ 4,489
|
| | 2.72 | % |
| | | | | | |
| | | | | | |
| | | | | | | |
| |
Net yield | |
| | | | | 2.54 | % | | | | | | 16.50 | % | | | |
|
| | 2.59 | % |
| | | | | | |
| | | | | | |
| | | | | | | |
| |
| Provision for
credit losses | | | | $ 5,634
|
| | 3.26 | % | | | | $—
| | |
| | | | $ 5,634
|
| | 3.25 | % |
| | | |
| | |
| | | | |
| | | | | | |
| | |
| |
Net interest
income after provisions for
credit losses | | | | $(1,245 | ) | | |
| | | | $100 | | |
| | | | $(1,145 | ) | | |
|
| | | |
| | | | | | | |
| | | | | | |
| | | | |
Net interest
spread after provision for
credit losses | | | | |
| | (0.56 | )% | | | | | | 16.50 | % | | | |
|
| | (0.53 | )% |
| | | | | | |
| | | | | | |
| | | | | | | |
| |
Net yield after
provision for credit
losses | | | | |
| | (0.72 | )% | | | | | | 16.50 | % | | | |
|
| | (0.66 | )% |
| | | | | | |
| | | | | | |
| | | | | | | |
| |
| | Mortgage Loans
| | Mortgage
Securities
| | Total
|
|---|
September 30,
1998
| | 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 | | $927,132 | | $22,312 | | 9.63 | % | | $412,335 | | $6,483 | | 6.29 | % | | $1,339,467 | | $28,797 | | 8.60 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Interest-bearing
liabilities | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements | | $144,041 | | $ 2,303
| | 6.40 | % | | $419,901 | | $6,121 | | 5.83 | % | | $
563,942 | | $ 8,424
| | 5.98 | % |
Collateralized mortgage obligations
| | 821,739 | | 12,734 | | 6.20 |
| | — | | — | | — |
| | 821,739 | | 12,734 | | 6.20 |
|
Other borrowings | | 10,446 | | 111 | | 4.25 |
| | — | | — | | — |
| | 10,446 | | 111 | | 4.25 |
|
| |
| | | | | | |
| | | |
| | |
| | | | | |
Cost of derivative financial
Instruments
hedging liabilities | | | | 638 | | | | | | | 181 | | | | | | | 819 | | | |
| | | |
| |
| | | | |
| | | | | | |
| |
| |
Total borrowings | | $976,226 | | $15,786 | | 6.47 | % | | $419,901 | | $6,302 | | 6.00 | % | | $1,396,127 | | $22,088 | | 6.33 | % |
| |
| |
| |
| | |
| |
| |
| | |
| |
| |
| |
Net interest income | | | | $ 6,528
| | | | | | | $ 181
| | | | | | | $ 6,709
| | | |
| | | |
| | | | | | |
| | | | | | |
| | | |
Net interest spread | | | | | | 3.16 | % | | | | | | 0.29 | % | | | | | | 2.27 | % |
| | | | | |
| | | | | | |
| | | | | | |
| |
Net yield | | | | | | 2.82 | % | | | | | | 0.18 | % | | | | | | 2.00 | % |
| | | | | |
| | | | | | |
| | | | | | |
| |
Provision for credit losses | | | | $ 1,179
| | (0.51 | )% | | | | $
— | | | | | | | $ 1,179
| | (0.35 | )% |
| | | |
| |
| | | | |
| | | | | | |
| |
| |
Net interest income after provision
for
credit losses | | | | $ 5,349
| | | | | | | $ 181
| | | | | | | $ 5,530
| | | |
| | | |
| | | | | | |
| | | | | | |
| | | |
Net interest spread after provision
for
credit losses | | | | | | 2.65 | % | | | | | | 0.18 | % | | | | | | 1.92 | % |
| | | | | |
| | | | | | |
| | | | | | |
| |
Net yield after provision for credit
losses | | | | | | 2.31 | % | | | | | | 0.18 | % | | | | | | 1.65 | % |
| | | | | |
| | | | | | |
| | | | | | |
| |
Average interest-earning assets for the three months ended
September 30, 1999 primarily consisted of mortgage loans, while
average interest-bearing assets for the three months ended September
30, 1998 consisted of 70% mortgage loans and 30% agency securities.
During the fourth quarter of 1998, NovaStar Financial sold all of
its agency securities. Mortgage loan interest income was $15.6
million for the three months ended September 30, 1999, or a yield of
9.0% compared with $22.3 million for the same period of 1998, or a
yield of 9.6%. For the three months ended September 30, 1999,
interest earned on economic residual interests was $100,000, or a
yield of 16.5%. Agency securities earned $6.5 million, or a yield of
6.3% during the three months ended September 30, 1998.
Average interest-bearing liabilities for the three months
ended September 30, 1999 consisted of financing costs on mortgage
loans, while average interest-bearing liabilities for the three
months ended September 30, 1998 was a mix of mortgage loans and
agency security financings. Mortgage loan financing costs were $11.2
million for the three months ended September 30, 1999, or 6.3% of
average mortgage loan borrowings compared with $15.8 million for the
same period of 1998, or 6.5% or average mortgage loan borrowings.
Agency security financing costs were $6.3 million during the three
months ended September 30, 1998, or 6.0% of average agency security
borrowings.
Net interest income on mortgage loans during the three months
ended September 30, 1999 was $4.4 million, or 2.5% of average
interest-earning mortgage loans, compared with $6.5 million or 2.8%
of average interest-earning mortgage loans for the three months
ended September 30, 1998. Net interest spread on mortgage loans was
2.7% for the three months ended September 30, 1999 compared with
3.2% for the same period of 1998. Net interest income on economic
residual interests, classified as mortgage securities during the
three months ended September 30, 1999 was $100,000, or 16.5% of
average interest-mortgage securities compared with net interest
income on agency securities classified as mortgage securities of
$181,000 million, or 0.2% of average interest-earning agency
securities for the same period of 1998. Net interest spread on
mortgage securities was 16.5% for the three months ended September
30, 1999 compared with 0.3% for the three months ended September 30,
1998. The increase in net margin and spread for the three months
ended September 30, 1999 compared with the three months ended
September 30, 1998 is due to the change in NovaStar Financial’s
asset and liability composition as discussed under “Results of
Operations—Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998”.
During the three months ended September 30, 1999 and 1998,
net interest expense was incurred on hedging agreements of $580,000
and $819,000, respectively, which is included as a component of
interest expense.
Other Income
Other income during the three months ended September 30, 1999
primarily consists of prepayment penalties of $769,000, net gains
recognized on the sale of real estate owned properties of $91,000,
interest earned on securitization funds held in trust of $62,000,
and interest earned on notes receivable from founders of $126,000.
Other income for the same period of 1998 primarily consisted of
prepayment penalties of $426,000, net gains on mortgage asset sales
of $108,000 and interest earned on notes receivable from founders of
$72,000.
Provisions for Credit Losses
During the three months ended September 30, 1999, NovaStar
Financial provided $5.6 million to the allowance for credit losses,
compared with $1.2 million during the same period of 1998.
Charge-offs during the three months ended September 30, 1999 were
$3.8 million compared with $1.8 million during the same period of
1998. See discussion of “Provisions for Credit Losses”
under “Results of Operations of NovaStar Financial, Inc.—
Nine Months Ended September 30, 1999 Compared to the Nine Months
Ended September 30, 1998.”
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 1999 and 1998 are provided in Table 16.
Table 16
General and Administrative Expenses
(dollars in thousands)
| | Three Months
Ended September 30,
|
|---|
| | 1999
| | 1998
|
|---|
| |
| | Percent
of Net
Interest
Income
| | | | Percent
of Net
Interest
Income
|
|---|
Compensation and
benefits | | $ 421
| | 9.4 | % | | $ 478
|
| | 10.6 | % |
Professional and
outside services | | 181 | | 4.0 |
| | 296 |
| | 6.6 |
|
Other loan
servicing | | 446 | | 9.9 |
| | 363 |
| | 8.1 |
|
Office
administration | | 203 | | 4.5 |
| | 276 |
| | 6.1 |
|
Other | | 41 | | 0.9 |
| | (9 | ) | | (0.2 | ) |
| |
| |
| | |
| | |
| |
Total
portfolio-related expenses | | $1,292 | | 28.7 | % | | $1,404 |
| | 31.2 | % |
| | | |
| | | | | |
| |
Forgiveness of
notes receivable from founders | | | | | | | 270 |
| | | |
Fees for services
provided by NovaStar Mortgage, Inc. | | 767 | | | | | (65 | ) | | | |
| |
| | | | |
| | | | |
Total general and
administrative expenses | | $2,059 | | | | | $1,609 |
| | | |
| |
| | | | |
| | | | |
Efficiency Ratio
(A) | | | | 36.9 | % | | | | | 28.8 | % |
| | | |
| | | | | |
| |
(A)
| The
efficiency ratio is calculated by dividing general and
administrative expenses by the sum of net interest income and
other income.
|
Compensation and benefits remained relatively stable, totaling
$421,000 for the three months ended September 30, 1999 compared with
$478,000 for the same period of 1998.
Professional and outside services for the three months ended
September 30, 1999 was $181,000 compared with $296,000 for the three
months ended September 30, 1998. Professional and outside services
include fees for legal and accounting services, costs of contract
laborers, costs to publish annual and quarterly reports, etc. The
amount of and variance in these costs is dependent on the timing of
services performed.
Other loan servicing for the three months ended September 30,
1999 was $446,000 compared with $363,000 for the three months ended
September 30, 1998. Other loan servicing in 1999 consists
principally of the fees paid to Radian as discussed under the “
Provisions for Credit Losses.” This line-item also includes the
direct costs associated with the mortgage loan servicing operation
that are paid directly to independent third parties for such things
as property appraisals and borrower location services. NovaStar
loans were not covered by insurance until the third quarter of 1998,
which caused the increase in loan servicing costs from 1998 to 1999.
The following is a summary of the fees, in thousands, paid to
NovaStar Mortgage for the three months ended September 30, 1999 and
1998:
| | Three Months
Ended
September 30,
|
|---|
| | 1999
| | 1998
|
|---|
Amounts paid to
NovaStar Mortgage: | | | | | | |
Loan servicing fees
| | $936 |
| | $1,184 |
|
Administrative fees
| | 115 |
| | 2,100 |
|
| |
| | |
| |
Amounts paid to
NovaStar Mortgage: | | | | | | |
Purchase commitment fee
| | — |
| | (3,349 | ) |
Interest income | | (284 | ) | | — |
|
| |
| | |
| |
| | $767 |
| | $
(65 | ) |
| |
| | |
| |
The decrease in loan servicing fees paid to NovaStar Mortgage
for the three months ended September 30, 1999 compared with the
three months ended September 30, 1998 is due to the decline in
NovaStar Financial’s mortgage loan portfolio collateralizing
CMOs.
The decline in the administrative fees paid to NovaStar
Mortgage during these same periods is a result of NovaStar Financial
discontinued paying these fees to NovaStar Mortgage in April 1999.
The decrease in purchase commitment fees for the three months
ended September 30, 1999 compared with the same period of 1998 is
due to the discontinuance of this intercompany agreement beginning
January 1, 1999. This line-item still includes NovaStar Financial
’s portion of system departmental costs.
The increase in interest income for the three months ended
September 30, 1999 compared with the same period of 1998 is due to
this intercompany agreement went into effect April 1, 1999.
Equity in Earnings (Loss) of NFI Holding
Corporation
For the three months ended September 30, 1999, NFI Holding
recorded net income of $583,000 compared with a net loss of $2.5
million for the same period of 1998. NFI Holding’s financial
position and results of operation for the three month periods ended
September 30, 1999 and 1998 are discussed further under the heading
“NFI Holding Corporation.”-
Taxable Income (Loss)
Income reported for financial reporting purposes as
calculated in accordance with generally accepted accounting
principles (GAAP) differs from income computed for income tax
purposes. This distinction is important as dividends paid are
based on taxable income. Table 1714 is a summary of the
differences between net income or loss reported for GAAP and
taxable income for 1999three months ended March 31, 2000 and
1998.
1999.
Table
1714
Taxable Income (Loss)
1999Three
Months Ended March 31, 2000 and 1998 (in1999
(in
thousands)
|
| March 31,
|
| | | 2000
| |
1999
| | 1998
|
|---|
| | Third
Quarter
| | Second
Quarter
| | First
Quarter
| | Fourth
Quarter
| | Third
Quarter
| | Second
Quarter
| | First
Quarter
|
|---|
Net
income (loss)
|
|
$(1,537 1,212 |
) |
|
$ 1,845
1,726 |
| | $ 1,726
|
| | $(27,388 | ) | | $ 2,394
|
| | $1,894 |
| | $1,279 | |
Use of
net operating loss
carryforward |
|
— |
|
| (1,153 | ) | |
(1,475 |
) | | — |
| | — |
| | — |
| | — |
|
Results
of NFI Holding and
subsidiaries |
|
(577)(699 |
) |
| 674 |
| |
(551 |
) | | 320 |
| | 2,447 |
| | —
|
| | 271 |
|
| Provision for credit losses |
|
5,6341,579 | |
| | 3,566 |
| |
2,299 |
| | 4,030 |
| | 1,179 |
| | 1,145 |
| | 1,076 |
|
| Loans
charged-off |
|
(3,8362,921 |
) |
| (3,484 | ) | | (2,380 | ) | |
(3,214 | ) | | (1,763 | ) | | (675 | ) | | (5182,380 |
) |
Capital losses
Other,
net |
|
— 239 |
|
| — |
| | —
|
| | 14,963 |
| | —
|
| | —
|
| | —
|
|
Other, net | | 397 |
| | 397 |
| |
381 |
| | (370 | ) | | 96 |
| | 208 |
| | (2 | ) |
| |
|
|
|
|
| | |
| | |
| | |
| | |
| | |
|
|
Estimated taxable income
(loss) |
|
$ 81(590 |
| | $ 1,845
|
| | $
— |
| | $(11,659 |
) |
|
$ 4,353 — |
| | $2,572 |
| | $2,106 | |
| |
|
|
|
|
| | |
| | |
| | |
| | |
| | |
|
|
The net loss realized during the 1998 fourth quarter resulted
in NovaStar Financial incurring a net loss for both financial
reporting and income tax purposes for the 1998 fiscal year. NovaStar Financial has a net operating loss
carryforward of approximately $2.6$3.1 million available to offset
taxable income in 1999,2000, and thereby reduce the amount of
required distributions under REIT guidelines. In addition,
the $0.35 per common share, $2.8 million dividenddividends paid on April 15, 1999 andconvertible preferred stock serve to reduce
the $556,000amount of preferred dividends paid in
May and August 1999 representrequired distributions of 1999 taxable income.
Consequently, NovaStar Financial does not anticipate declaring any
further dividends onto common
stock for 1999. NovaStar Financial
expects the common stock dividend paid in April 1999 to be
designated as a return of capital. NovaStar Financial anticipates
that it will return to its previous policy of declaring dividends on
common stock in 2000.shareholders.
NFI
Holding Corporation
Since NovaStar Financial discontinued purchasing
loans from NovaStar Mortgage and holding them in portfolio in
the latter part of 1998, NovaStar Mortgage has had a larger
impact on NovaStar Financial’s operational results. Instead
of selling loans to NovaStar Financial, NovaStar Mortgage has
sold loans to outside third parties. Through its indirect equity
ownership of NFI Holding, NovaStar Financial has shared in the
profits of NovaStar Mortgage’s loan sales.
The following table presents NFI Holding’s
consolidated financial statements as of September 30,March 31, 2000 and 1999,
and 1998, which consists primarily consist of the assets, liabilities, and
operational results of NovaStar Mortgage. Accordingly, the discussion that
follows focuses on NovaStar Mortgage.
Table 18
NFI
Holding Corporation
Condensed Consolidated BalanceBalances Sheets
(in
(dollars in thousands)
|
|
September
30,March 31,
19992000
|
|
December 31,
19981999
|
| | (unaudited) |
|---|
| Assets |
|
|
|
|
Cash
and cash equivalents.equivalents |
| $ 2,219 | |
$ 947 | | $
5,7591,466 |
Mortgage loans. | | 103,258loans |
|
216,83961,489 | | 107,916 |
Mortgage securities—available for sale | | 13,500 | | — |
| Other
assets |
|
8,64911,881 |
|
4,49210,061 |
| |
|
|
|
|
|
Total assets |
|
$112,85489,089 |
|
$227,090119,443 |
| |
|
|
|
|
| Liabilities and Stockholders’
Equity |
|
|
| |
| Liabilities: | | | |
|
|
Borrowings |
| $38,746 | |
$ 72,620
78,448 | | $203,341 |
|
Due to NovaStar Financial, Inc. |
|
22,04424,721 |
|
18,52122,161 |
|
Accounts payable and other liabilities |
|
9,69917,870 |
|
5,215 |
Stockholders’ equity
| | 8,491 | | 1311,787 |
| |
|
|
|
|
|
Total liabilities | | 81,337 | | 112,396 |
| Stockholders’ equity | | 7,752 | | 7,047 |
| | |
| |
|
|
Total liabilities and stockholders’
equity |
|
$112,854 | | $227,090 |
89,089 |
|
| |
|
NFI Holding Corporation
Condensed Consolidated Statements of Operations
(unaudited; in thousands)
| | For the Nine
Months Ended
September 30,
| | For the Three
Months Ended
September 30,
|
|---|
| | 1999
| | 1998
| | 1999
| | 1998
|
|---|
Interest income |
| $ 8,542
| | $
6,539 |
| | $3,122 |
| | $ 3,745
|
|
Interest expense.
| | 4,358 | | 4,809 |
| | 1,543 |
| | 2,391 |
119,443 |
| |
|
|
|
|
NFI
Holding Corporation
Condensed Consolidated Statements of
Operations
(dollars in thousands)
| | | Three Months
Ended
March 31,
|
|---|
| | | 2000
| | 1999
|
|---|
| Interest income | | $3,675 | | | $2,746 |
| Interest expense | | 2,039 | | | 1,561 |
| | |
|
|
|
| | |
| |
|
Net interest income |
|
4,1841,636 | | | 1,185 |
| Provision for credit losses | | (149 | ) | | 170 |
| |
|
1,730
|
|
|
1,579
|
| Net
interest income after provision for credit losses |
| 1,785 | |
|
1,354 |
1,015 |
| Other
income: |
| | | |
| |
|
|
|
| |
Administrative servicing
fees received from NovaStar
Financial | | 3,343 | | 4,606 |
| | 767 |
| | (65 | ) |
|
Fees from third parties |
|
707706 | |
|
2,305341 |
|
Fees received from, net of paid to, NovaStar
Financial, Inc. |
| 699 | |
|
152 |
| | 687 |
2,165 |
Net gain on sales of mortgage loansassets |
|
9,1892,725 | |
|
1,209 |
| | 3,101 |
| | 798 |
2,847 |
| |
|
| |
|
|
|
| | |
| |
|
Total other income |
|
13,2394,130 | |
|
8,120 |
| | 4,020 |
| | 1,420 |
5,353 |
| General
and administrative expenses |
|
15,889 | 5,209 |
12,330 | |
|
5,250 |
| | 5,246 |
5,811 |
| |
|
| |
| | |
| | |
| |
Income (loss)
before taxes | | 1,534 | | (2,480 | ) | | 349 |
|
|
(2,472
|
| Net
income before taxes |
) | 706 | | | 557 |
| Income
tax expense |
|
— |
| — | |
| (234 | ) | |
—
| |
| |
|
| |
| | |
| | |
| |
Net income or
(loss) | | $ 1,534
| | $ (2,480) | | | $ 583
|
|
|
$(2,472
|
| Net
income |
) | $ 706 | | | $ 557 |
| |
|
| |
|
|
|
| | |
| |
Financial Condition of NovaStar Mortgage, Inc.NFI Holding Corporation as of
September 30, 1999March 31, 2000 and December 31, 19981999
Mortgage Loan Originations. NovaStar MortgageNFI Holding
originated 3,100 subprime1,232 non-conforming residential mortgage loans
during the ninethree months ended September 30, 1999March 31, 2000 with an aggregate
principal amount of $313$132 million. Virtually all of NovaStar MortgageNFI
Holding’s mortgage assets at September 30, 1999as of March 31, 2000 and December
31, 19981999 consist of subprimenon-conforming mortgage loans that will be
sold directly to independent buyers of whole loans or through
securitization transactions that are treated for tax and
accounting purposes as sales.
Table 1915 is a summary of NFI Holding’s
wholesale loan originations for 2000 and 1999. Table 16 presents
a summary of mortgage loan transfers of NFI Holding during 2000
and 1999. Table 17 is a summary of wholesale loan originations for
1999 and 1998. Table 20 presents a summaryorigination
costs of mortgage loan sales of
NovaStar Mortgage during 1999 and 1998. Table 21 is a summary of
loan costs for NovaStar Mortgage relative to its wholesale loan
originations.production.
Table
1915
19992000
and 19981999 Quarterly Wholesale Loan Originations
—NovaStar Mortgage, Inc.
(dollars in thousands)thousands, except for average loan
balance)
|
|
Number
of Loans
|
|
Principal
|
|
Average
Loan
Balance
|
|
Price Paid
to
Broker
|
|
Weighted Average
|
|
Percent with
Prepayment
Penalty
|
| |
|
|
|
|
|
Loan
to
Value
|
|
Credit
Rating (A)
|
|
Coupon
|
1999:2000: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter | | 1,139 | | $118,379 | | $104 | | 100.8 | | 82 | % | | 5.29 | | 9.87 | % | | 91 | % |
Second quarter | | 1,120 | | 111,952
| | 100
| | 100.9 | | 82 | | | 5.16 | | 9.80 | | | 89 | |
|
First quarter |
|
8651,232 |
|
82,495$132,072 |
|
95$107,201 |
|
100.5101.1 |
|
80 |
| | 4.95 | | 9.87 |
| | 89 |
|
| |
| |
| |
| |
| |
| | |
| |
| | |
| |
1999 total | | 3,124 | | $312,826 | | $100 | | 100.7 | | 82 |
% |
|
5.155.45 |
|
9.8410.16 |
% |
|
9093 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998:1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter |
|
1,5011,265 |
|
$133,739 | | $ 89
130,288 |
|
100.8$102,994 |
|
81101.0 | | 82 |
% |
|
4.755.30 |
|
9.7810.04 |
% |
|
8891 |
% |
|
Third quarter |
|
2,6551,204 |
|
240,498125,140 |
|
90103,937 |
|
101.4100.8 |
|
8182 | |
| 5.28 |
|
4.379.87 | |
|
10.1191 |
| | 79 | |
|
Second quarter |
|
3,1331,161 |
|
294,303114,631 |
|
9498,735 |
|
101.3101.1 |
|
8182 | |
| 5.14 |
|
4.439.82 | |
|
9.9389 |
| | 71 | |
|
First quarter |
|
2,033865 |
|
207,97682,495 |
|
102 | | 101.495,370 |
|
81100.5 |
| 80 | |
|
4.454.95 |
|
9.939.85 | |
|
89 |
65 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998
1999 total | | 9,322 |
|
$876,516 | | $ 94
4,495 |
|
101.3$452,554 |
|
81$100,679 | | 100.9 | | 82 |
% |
|
4.475.19 |
|
9.969.90 |
% |
|
7490 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
AAA=7,
AA=6, A=5, A-=4, B=3, C=2, D=1
|
Table
2016
Mortgage Loan Sales to Third Parties—NovaStar
Mortgage, Inc.
Nine Months Ended September 30, 1999 and Year
Ended December 31, 1998Quarterly Mortgage Loan Transfers
(dollars in thousands)
|
| Mortgage Loan Sales to Third Parties
| | Mortgage Loans
Transferred in
Securitizations
|
| | |
Principal
Amount
|
|
Net Gain
Recognized
|
|
Weighted
Average
Price To
Par
|
|
PercentPrincipal
Amount
| | Net
Gain
of
PrincipalRecognized
|
|---|
1999:2000: | |
| |
| |
| | | |
Third quarter | | $106,759 | | $2,969 | | 104.2 | | 2.79 | % |
Second quarter | | 97,281 | | 2,875 | | 104.4 | | 2.96 |
|
|
First quarter |
|
73,743$ 48,548 |
|
1,576$ 1,166 |
|
103.6104.0 | % |
|
2.14$ 128,171 |
| $ 1,544 |
| |
|
| |
| |
| |
| |
1999 total |
|
$277,783 | | $7,420
|
|
104.1 | | 2.80 | % |
| |
| |
| |
| |
| |
1998: | |
|
|
|
|
|
| 1999: |
|
| | | | | | | | |
|
|
Fourth quarter |
|
$108,800 | | $1,985 109,443 |
|
103.6$ 2,583 |
|
1.82104.1 |
% | | $
— | | $ — |
|
Third quarter |
|
18,133110,512 |
|
8263,075 |
|
106.0104.2 | |
|
4.56— |
| — |
|
Second quarter |
|
6,74298,048 |
|
1732,911 |
|
106.0104.4 | |
|
2.57— |
| — |
|
First quarter |
|
—
72,824 |
|
—
1,593 |
|
— 103.6 | |
|
—
138,847 |
| 1,250 |
| |
|
|
|
|
|
|
|
|
|
|
|
1998
1999 total |
|
$133,675 | | $2,984 390,827 |
|
104.0$ 10,162 |
|
2.23104.1 |
% | | $ 138,847 | | $ 1,250 |
| |
|
| |
| |
| |
| |
Table 21
Costs of Loan Production—NovaStar Mortgage,
Inc.
Nine Months Ended September 30, 1999 and Year
Ended December 31, 1998
(dollars in thousands)
| | 1999
| | 1998
|
|---|
| | Third
Quarter
| | Second
Quarter
| | First
Quarter
| | Fourth
Quarter
| | Third
Quarter
| | Second
Quarter
| | First
Quarter
|
|---|
Gross costs
of loan production (A) |
|
$
4,972
| |
|
|
|
$
4,487
|
|
|
Table
17
Wholesale Loan Costs of Production
| | | Gross Loan
Production
| | Premium paid
to broker,
net of
fees collected
| | Total
Acquisition
Cost
|
|---|
$ 5,062
Costs
as a percent of principal: |
| |
|
$
7,109 |
|
| $
5,606 |
| | $
4,783 |
| | $
3,853 |
|
Fees collected
2000: |
|
| (556 |
| ) | |
|
First quarter |
|
(374 | )3.3% |
|
(284 | )0.5% |
|
(386 | ) | | (631 | ) | | (946 | ) | | (774 | )3.8% |
| |
|
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net costs of loan
production |
|
$
4,416
|
|
| $
4,113 |
| | $ 4,778
|
| | $
6,723 |
| | $
4,975 |
| | $
3,837 |
| | $
3,079 |
|
Wholesale loan
origination—
principal1999: |
|
118,379 |
| |
|
111,952 |
| | 82,495 |
| | 133,739 |
| | 240,498 |
| | 294,303 |
| | 207,974 |
|
Premium paid to
broker
Fourth quarter |
|
9213.1% |
| 0.5% |
|
948 |
| | 441 |
| | 1,043 |
| | 3,439 |
| | 3,679 |
| | 2,935 |
3.6% |
| |
|
| | |
| | |
| | |
| | |
| | |
| | |
| |
Total acquisition
cost (B) |
|
$123,716 |
|
|
$117,013
|
|
Third quarter |
|
$87,7143.8% |
| 0.4% |
|
$141,505 |
| | $248,912 |
| | $301,819 |
| | $213,988 |
4.2% |
| |
|
|
|
|
|
|
|
| | |
| | |
| | |
| | |
| |
Costs as a percent
of principal: |
Gross loan production
Second quarter |
|
4.2 | %4.2% |
|
4.0 | %0.5% |
|
6.1 | % | | 5.3 | % | | 2.3 | % | | 1.6 | % | | 1.9 | %4.7% |
| |
|
|
|
|
|
|
|
| | |
| | |
| | |
| | |
| |
Fees collected (C) | | (0.5 | )%First quarter |
|
(0.3 | )%6.2% |
|
(0.3 | )%0.2% |
|
(0.3 | )% | | (0.2 | )% | | (0.3 | )% | | (0.4 | )%6.4% |
| |
|
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net loan production
|
|
3.7 | %
|
|
3.7 | % | | 5.8 | % | | 5.0 | % | | 2.1 | % | | 1.3 | % | | 1.5 | % |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Premium paid to broker
| | 0.8 | % | | 0.8 | % | | 0.5 | % | | 0.8 | % | | 1.4 | % | | 1.3 | % | | 1.4 | % |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Total acquisition cost
| | 4.5 | % | | 4.5 | % | | 6.3 | % | | 5.8 | % | | 3.5 | % | | 2.6 | % | | 2.9 | % |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
(A)
| Loan
production general and administrative expenses as reported for
GAAP, plus deferred loan costs.
|
(B)
|
Principal, premium and general and administrative expenses
associated with loan production.
|
(C)
| During
the second quarter of 1999, NovaStar Mortgage gave brokers the
option on all original full package submissions to 1) have the
underwriting fee NovaStar Mortgage charged waived or 2) pay the
underwriting fee and receive an extra 50 basis points in premium
from NovaStar Mortgage. Prior to this point in time, the
underwriting fee charged by NovaStar Mortgage was waived on all
original full package submissions.
|
Table 22 is a summary of loans originated by NovaStar
Mortgage by state for 1999 and 1998 by quarter. As of September 30,
1999, NovaStar Mortgage had 41 account executives covering 44 states.
Table 22
Mortgage Loan Originations by State—NovaStar
Mortgage, Inc.
1999 and 1998
| | Percent of
Total Originations during Quarter
(based on original principal balance)
|
|---|
| | 1999
| | 1998
|
|---|
Collateral
Location
| | Third
| | Second
| | First
| | Fourth
| | Third
| | Second
| | First
|
|---|
Florida | | 15 | % | | 12 | % | | 15 | % | | 24 | % | | 17 | % | | 16 | % | | 12 | % |
Michigan | | 10 |
| | 10 |
| | 12 |
| | 6 |
| | 5 |
| | 5 |
| | 5 |
|
Ohio | | 12 |
| | 10 |
| | 8 |
| | 9 |
| | 4 |
| | 5 |
| | 2 |
|
California | | 10 |
| | 8 |
| | 6 |
| | 2 |
| | 6 |
| | 9 |
| | 15 |
|
Arizona | | 5 |
| | 7 |
| | 4 |
| | 2 |
| | 3 |
| | 3 |
| | 3 |
|
Tennessee | | 4 |
| | 6 |
| | 9 |
| | 6 |
| | 4 |
| | 4 |
| | 4 |
|
Washington | | 4 |
| | 5 |
| | 3 |
| | 3 |
| | 5 |
| | 6 |
| | 7 |
|
Pennsylvania | | 4 |
| | 4 |
| | 4 |
| | 5 |
| | 4 |
| | 3 |
| | 2 |
|
North Carolina
| | 1 |
| | 1 |
| | 2 |
| | 4 |
| | 5 |
| | 3 |
| | 2 |
|
Texas | | 2 |
| | 1 |
| | 2 |
| | 3 |
| | 5 |
| | 3 |
| | 3 |
|
All other states
| | 33 |
| | 36 |
| | 35 |
| | 36 |
| | 42 |
| | 43 |
| | 45 |
|
As noted in the table above, NovaStar
Mortgage’s quarter-to-quarter 1999 wholesale loan
production costs steadily declined as a result of increased
efficiencies in the mortgage lending operation. During the third
quarter of 1999, NovaStar Mortgage introduced Internet
Underwriter, “IU”, a web-based origination system that
has allowed NovaStar Mortgage to increase production volumes
without adding infrastructure. First quarter 2000 production
costs were slightly higher than fourth quarter 1999 due in part
to more expense allocations from NovaStar Financial. In
addition, NovaStar Mortgage hired more account executives during
the first three months of 2000. Account executive costs
typically are higher in the first few months of employment and
are expected to decline as the sales force becomes more
productive with added experience and exposure to NovaStar
Mortgage’s whole loan origination products and
markets.
Table 18 is a summary of loans originated by state
for 2000 and 1999 by quarter. As of March 31, 2000, NovaStar
Mortgage had 56 account executives 47 covering
states.
Table
18
Mortgage Loan Originations by State
2000
and 1999
| | | Percent of Total Originations
during Quarter
(based on original principal balance)
|
|---|
| | | 2000
| | 1999
|
|---|
Collateral Location
| | First
| | Fourth
| | Third
| | Second
| | First
|
|---|
| Florida | | 14 | % | | 12 | % | | 15 | % | | 12 | % | | 15 | % |
| Michigan | | 11 | | | 12 | | | 10 | | | 10 | | | 12 | |
| California | | 10 | | | 10 | | | 10 | | | 8 | | | 6 | |
| Arizona | | 5 | | | 8 | | | 5 | | | 7 | | | 4 | |
| Ohio | | 7 | | | 8 | | | 12 | | | 10 | | | 8 | |
| Tennessee | | 7 | | | 6 | | | 4 | | | 6 | | | 9 | |
| Washington | | 5 | | | 4 | | | 4 | | | 5 | | | 3 | |
| All
other states | | 41 | | | 40 | | | 40 | | | 42 | | | 43 | |
NFI Holding’s loan originations are funded
through warehouse and repurchase facilities at First Union and
are discussed
further inGMAC/RFC. Table 21 of the “Financial ConditionLiquidity Resources and
Capital” section of NovaStar Financialthis document detail borrowings
outstanding under these financing arrangements as of September 30, 1999 and DecemberMarch 31,
1998” and “Results of
Operations of NovaStar Financial, Inc.—Nine Months Ended
September 30, 1999 Compared to the Nine Months Ended September 30,
1998”.2000.
Mortgage Loan Sales. In aits second
securitization executed by NovaStar Mortgage during the first
quarter of 1999, $1652000, $230 million in loans were sold to a Special
Purpose Entity (SPE), of which $26$102 million settledis to settle in April 1999.
ProceedsJune
2000. A gain of bonds$1.5 million was recognized on the transaction.
Bonds issued by the SPE $160were $226 million and proceeds received
on the first close were used to pay for thedown warehouse and mortgage
loans acquired fromloan repurchase facilities of NovaStar Mortgage. The loans were
sold without recourse byto NovaStar Mortgage.Mortgage Funding Trust Series
2000-1. NovaStar Mortgage retained a residual certificatecertificates issued
by the SPE. In September
1999,April 2000, NovaStar Financial purchased the
economic residual interests. NovaStar Mortgage also retained
loan servicing rights for the loans sold to the SPE. The value
of the retained interests inand the mortgage servicing rights hashave
been recorded as an asset and the loans sold have been removed
from the balance sheet of NovaStar Mortgage.
NovaStar Mortgage allocated its basis in the
mortgage loans between the portion of the mortgage loans sold
and the retained assets based on the relative fair values of
those portions at the time of sale. The values of these assets
wereare determined by discounting estimated future cash flows using
the cash out method.
Following are
The following table details the significant
values and assumptions used in
determiningto determine the values of the assets sold and valuesvalue of the resulting
retained assets.assets in NMFT 2000-1.
| | | Constant
Prepayment
Rate
| | Annual
Constant
Default Rate
(basis points)
| | Discount
Rate
|
Estimated average
value of mortgage loans sold2000-1 |
|
103.025 to
30 | % |
Assumptions used in
determining future cash flow: | 100 |
| | |
Estimated prepayment speeds |
| 30 to 35 CPR |
|
Estimated rate of default
| | 70 CDR |
|
Discount rate | | 16.5 | % |
Value of residual
certificate | | $
9,700,000 |
|
Value of mortgage
servicing rights | | $
646,000 |
|
Aggregate gain | | $
1,605,000 |
15% |
OfDetails regarding the aggregate gain recognizedNMFT 1999-1 and NMFT 2000-1
collateral as of March 31, 2000 and December 31, 1999 are
included in the securitization,
$355,000 was recorded upon the April closing.Tables 4, 5 and 7 of this document.
NovaStar MortgageNFI Holding also sold $278$48.5 million of its whole
loan portfolio to unrelated third parties for cash at a net gain
of $7.4$1.2 million at an average price to par of 104104.0 during the nine months ended
September 30, 1999.2000.
Table 2016 of “Financial Condition of NovaStar Mortgage, Inc.NFI Holding Corporation
as of September 30, 1999March 31, 2000 and December 31, 19981999” provides a
quarterly analysis of NovaStar MortgageNFI Holding’s mortgage loan sales to
third parties.
Mortgage loan servicing. Loan Servicing. Loan servicing is
a critical part of NovaStar Mortgage’s business. The
majority of the loans serviced by NovaStar Mortgage are owned by
NovaStar Financial. In the opinion of management, maintaining
contact with borrowers is vital in managing credit risk and in
borrower retention. SubprimeNon-conforming borrowers are prone to late
payments and are more likely to default on their obligations
than conventional borrowers. NovaStar Mortgage strives to
identify issues and trends with borrowers early and take quick
action to address such matters.
Table 23 is a summary of delinquent loans in NovaStar Mortgage
’s servicing portfolio as of September 30, 1999 and 1998 by
quarter. Table 2419 provides summaries of delinquencies defaults, and
lossdefault statistics as of September 30,NovaStar Mortgage’s mortgage loan
portfolio in 2000 and 1999 and 1998 by quarter. The information presented
in both tables include mortgage loans owned by NovaStar
Financial and its affiliates. Other information regarding the
credit quality of NovaStar Financial’s mortgage loans is
provided in Table 1.
Table
2319
Loan Delinquencies (90 days and greater) (A)
1999Delinquencies and 1998Defaults
|
| 2000
| |
1999
| | 1998
|
|
| March 31
| | December 31
| |
September 30
|
|
June
30
|
|
March 31
| | December 31
| | September
30
| | June 30
| | March 31
|
Mortgage loans
collateralizing NovaStar
Home Equity series (CMO):Loan
servicing portfolio | | $872,693 | | | $894,572 | | | $969,343 | | | $1,032,065 | | | $1,072,393 | |
| | |
| | |
| | |
| | |
| | |
| |
| Total
defaults: | | | | | | | | | | | | | | | |
1997-1
(Issued October 1, 1997)Delinquent loans (A) |
|
6.325.58 |
% |
|
5.136.28 |
% |
|
4.374.75 |
% |
|
5.455.21 |
% |
|
5.97 | % | | 5.86 | % | | 4.394.12 |
% |
1997-2
(Issued December 11, 1997) |
|
4.92
|
|
|
4.03
|
|
|
5.38
|
|
|
5.62
|
|
|
4.97 |
| | 4.72 |
| | 2.23
|
|
1998-1
(Issued April 30, 1998)Loans in foreclosure | | 3.55 | | | 3.62 | | | 3.79 | | | 3.36 | | | 3.39 | |
| |
|
5.32
|
|
|
4.13
|
|
|
4.64
|
|
|
4.44
|
|
|
2.06 |
| | —
|
| | —
|
|
1998-2
(Issued August 18, 1998)Real estate owned |
|
4.062.65 | |
| 2.71 | |
|
3.942.24 | |
| 2.20 | |
|
3.721.66 |
| | 2.35 |
| | 0.40 |
| | —
|
| | —
|
|
1999-1
(Issued January 29, 1999) (B) | | 3.41 |
| | 3.39 |
| | 2.35 |
| | —
|
| | —
|
| | —
|
| | —
|
|
All loans in
servicing portfolio | | 5.80 |
| | 5.15 |
| | 5.00 |
| | 3.35 |
| | 2.45 |
| | 2.53 |
| | 2.28 |
|
(A)
| Includes
loans in foreclosure or bankruptcy.
|
(B)
| This
securitization was treated as a sale under SFAS 125 and
accordingly the mortgage loans and related liability are not
included on NovaStar’s balance sheet.
|
Table 24
Delinquencies, Defaults and Losses
September 30, 1999 and December 31, 1998
(dollars in thousands)
| | NovaStar Home
Equity Series (A)
| | |
|---|
September 30,
1999
| | 1997-1
| | 1997-2
| | 1998-1
| | 1998-2
| | 1999-1
| | Other (C)
| | All
Loans
|
|---|
Loan servicing
portfolio (B) | | $ 96,399
|
| | $120,542 |
| | $214,518 |
| | $252,359 |
| | $149,942 |
| | $
135,583 |
| | $969,343 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(A) | Includes loans delinquent 30 days or
greater |
The following table presents a summary of the
mortgage loan activity of NFI Holding for 2000 and 1999 as a
percent of the respective quarter’s beginning principal of
mortgage loans held in portfolio and loan origination
principal.
Table
20
Mortgage Loan Activity—NFI Holding
Corporation
| | | Percent Sold
to NovaStar
Financial, Inc.
| | Percent
Sold to
Third
Parties
| | Percent Sold
in
Securitizations
| | Percent
Held in
Portfolio
| | Percent of
Prepayments
| | Total
|
|---|
| 2000 |
|
|
| | |
| |
Allowance for
Credit Losses: | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 1999 First quarter |
|
$
816— | | 20 | % | | 53 | % | | 26 | % | | 1 | % | | 100 | % |
| 1999 |
|
| $
1,049 |
| | $
1,163 |
| | $
346 |
| | $
— |
| | $
353 |
| | $
3,727 |
|
Provision for credit losses
| | 2,250 |
| | 2,649 |
| | 3,099 |
| | 2,444 |
| | —
|
| | 1,020 |
| | 11,462 |
|
Amounts charged off, net of
recoveries | | (1,705 | ) | | (2,438 | ) | | (3,264 | ) | | (2,039 | ) | | —
|
| | (243 | ) | | (9,689 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance, September 30, 1999
| | $
1,361 |
| | $
1,260 |
| | $
998 |
| | $
751 |
| | $
— |
| | $
1,130 |
| | $
5,500 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Defaults as a
percent of loan servicing | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans (D) | | 7.43 | % Fourth quarter |
|
6.14 | %— |
|
4.4852 |
% |
|
5.66— |
% |
|
4.9246 |
% |
|
0.152 |
% |
|
4.75100 |
% |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Loans in foreclosure | | 5.56 Third quarter |
| — |
|
4.3354 | |
| — | |
|
4.6644 | |
| 2 | |
|
3.50100 |
| | 3.23 |
| | 1.86 |
| | 3.79 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Real estate owned Second quarter |
|
3.91— |
| 32 | |
|
3.8313 | |
| 54 | |
|
3.091 | |
|
100 |
1.84 |
| | 0.80 |
| | 0.65 |
| | 2.24 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
|
| | NovaStar Home
Equity Series (A)
| | |
|---|
December 31,
1998
| | 1997-1
| | 1997-2
| | 1998-1
| | 1998-2
| | Other (C)
| | All Loans
| |
|
|---|
Loan servicing
portfolio (B) | | $168,255 |
| | $167,685 |
| | $273,583 |
| | $301,857 |
| | $268,587 |
| | $1,179,967 |
| | | |
| |
| | |
| | |
| | |
| | |
| | |
| | | | |
Allowance for
Credit Losses: | | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 1998 | | $
1,063 |
| | $
967 |
| | $
— |
| | $
— |
| | $
283 |
| | $
2,313 |
| | | |
Provision for credit losses
| | 1,895 |
| | 2,257 |
| | 1,878 |
| | 222 |
| | 1,388 |
| | 7,640 |
| | | |
Amounts charged off, net of
recoveries | | (2,142 | ) | | (2,175 | ) | | (715 | ) | | 124 |
| | (1,318 | ) | | (6,226 | ) | | | |
| |
| | |
| | |
| | |
| | |
| | |
| | | | |
Balance, December 31, 1998
First quarter |
|
$
816— |
| 25 | |
|
$
1,04945 | |
| 29 | |
|
$
1,1631 | |
|
100 |
$
346 |
| | $
353 |
| | $
3,727 |
| | | |
| |
| | |
| | |
| | |
| | |
| | |
| | | | |
| Defaults as a
percent of loan servicing | | | | | | | | | | | | | | | | | | | | | |
Delinquent loans (D) | | 6.45 | % | | 5.95 | % | | 4.89 | % | | 4.06 | % | | 2.01 | % | | 4.40 | % | | | |
| |
| | |
| | |
| | |
| | |
| | |
| | | | |
Loans in foreclosure | | 2.63 |
| | 2.96 |
| | 3.60 |
| | 2.06 |
| | 0.40 |
| | 2.25 |
| | | |
| |
| | |
| | |
| | |
| | |
| | |
| | | | |
Real estate owned | | 3.54 |
| | 2.76 |
| | 1.01 |
| | 0.09 |
| | 0.23 |
| | 1.21 |
| | | |
| |
| | |
| | |
| | |
| | |
| | |
| | | | |
| | Results of Operations of NFI Holding
Corporation—Three Months Ended March 31, 2000 Compared to
the three months ended March 31, 1999
| | 1998
|
|---|
| | September
30
| | June 30
| | March 31
| | December 31
| | September 30
| | June 30
| | March 31
|
|---|
Total defaults:
| | | | | | | | | | | | | | | | | | | | | |
Delinquent
loans | | 4.75 | % | | 5.21 | % | | 4.12 | % | | 4.40 | % | | 2.95 | % | | 1.95 | % | | 1.92 | % |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Loans in
foreclosure | | 3.79 |
| | 3.36 | | | 3.39 |
| | 2.25 |
| | 2.02 |
| | 2.28 |
| | 2.29 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Real estate
owned | | 2.24 |
| | 2.20 | | | 1.66 |
| | 1.21 |
| | 0.81 |
| | 0.52 |
| | 0.24 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
(A)
| Loans
owned by NovaStar Financial
For the three months ended March 31, 2000, NFI
Holding recorded net income of $706,000 compared with a net
income of $557,000 during the same period of 1999. A summarized
income statement of NFI Holding is presented in the “NFI
Holding Corporation” section of this document. |
(B)
| Includes
assets acquired through foreclosure
|
(C)
| Includes
loans owned by NovaStar Financial, NovaStar Mortgage and NovaStar
Capital
|
(D)
| Includes
loans delinquent 30 days or greater
|
The following table presents a summarysummarizes reasons impacting
operating results of the mortgage loan
activity of NovaStar Mortgage for 1999 and 1998.
Table 25
Mortgage Loan Activity—NovaStar Mortgage, Inc.
(dollars in thousands)
| | 1999
| | 1998
|
|---|
| | Principal
| | Premium
| | Principal
| | Premium
|
|---|
Balance,
January 1 | | $
206,495 |
| | $ 3,114
|
| | $
— |
| | $
— |
|
Originations | | 82,495 |
| | 997 |
| | 207,976 |
| | 3,758 |
|
Sales to NovaStar
Financial, Inc. | | —
|
| | —
|
| | (207,976 | ) | | (3,758 | ) |
Sales to third
parties | | (71,829
| ) | | (649 | ) | | —
|
| | —
|
|
Sales in
securitization transactions | | (132,451 | ) | | (2,109 | ) | | — |
| | — |
|
Principal
repayments and amortization | | (1,963 | ) | | (45 | ) | | —
|
| | —
|
|
| |
| | |
| | |
| | |
| |
Balance, March
31 | | $
82,747 |
| | $ 1,308
|
| | $
— |
| | $
— |
|
Originations | | 111,952 |
| | 1,641 |
| | 294,303 |
| | 5,207 |
|
Sales to NovaStar
Financial, Inc. | | — |
| | — |
| | (290,350 | ) | | (5,148 | ) |
Sales to third
parties | | (64,225 | ) | | (1,368 | ) | | (3,953 | ) | | (59 | ) |
Sales in
securitization transactions | | (25,436 | ) | | (259 | ) | | — |
| | — |
|
Principal
repayments and amortization | | (1,703 | ) | | (46 | ) | | —
|
| | —
|
|
| |
| | |
| | |
| | |
| |
Balance, June 30
| | $
103,335 |
| | $ 1,276
|
| | $
— |
| | $
— |
|
Originations | | 118,379 |
| | 1,865 |
| | 240,498 |
| | 4,035 |
|
Sales to NovaStar
Financial, Inc. | | — |
| | — |
| | —
|
| | —
|
|
Sales to third
parties | | (127,080
| ) | | (1,992 | ) | | (12,836 | ) | | (517 | ) |
Principal
repayments and amortization | | (2,828 | ) | | (37 | ) | | (1,567 | ) | | (7 | ) |
| |
| | |
| | |
| | |
| |
Balance,
September 30 | | $
91,806 |
| | $ 1,112
|
| | $
226,095 |
| | $ 3,511
|
|
| |
| | |
| | | | | | | |
Originations | | | | | | | | 133,739 |
| | 1,821 |
|
Sales to NovaStar
Financial, Inc. | | | | | | | | —
|
| | —
|
|
Sales to third
parties | | | | | | | | (116,886 | ) | | (2,156 | ) |
Principal
repayments and amortization | | | | | | | | (36,453 | ) | | (62 | ) |
| | | | | | | |
| | |
| |
Balance,
December 31 | | | | | | | | $ 206,495 |
| | $ 3,114 |
|
| | | | | | | |
| | |
| |
Results of Operations of NovaStar Mortgage, Inc.
—Nine Months Ended September 30, 1999 Compared to the Nine
Months Ended September 30, 1998
The following table presents a summarized income statement of
NovaStar Mortgage, Inc.NFI Holding for the ninethree months ended
September 30, 1999
and 1998:
Table 26
NovaStar Mortgage, Inc.—Statements of
Operations
Nine Months Ended September 30 (dollars in
thousands)
| | 1999
| | 1998
|
|---|
Net interest income
| | $4,096 | | $ 1,691
|
|
Services provided
to NovaStar Financial, Inc. | | 3,343 | | 4,606 |
|
Fees from third
parties | | 676 | | 2,302 |
|
Gains on sale of
mortgage assets | | 9,042 | | 1,209 |
|
Expenses: |
Production | | 6,745 | | 6,118 |
|
Servicing | | 3,508 | | 2,145 |
|
Other | | 4,595 | | 3,863 |
|
| |
| |
| |
Net income (loss)
| | $2,309 | | $(2,318 | ) |
| |
| |
| |
The following summarizes changes in net earnings of NovaStar
Mortgage for the nine months ended September 30, 1999March 31, 2000 compared with the same period of
1998:1999:
|
Ÿ
|
Beginning
July 1, 1998, NovaStar Mortgage retained its mortgage loan
production to sell to third parties or securitize versus selling
them directly to NovaStar Financial. Prior to this pointIncrease in time,
NovaStar Financial acquired 100% of NovaStar MortgageNFI Holding’s
wholesale loan production. Accordingly, NovaStar Mortgage
recognized $4.1 million in net interest income
on these loansduring the three months ended March 31, 2000 from $1.2 million
to $1.6 million. The increase is twofold; higher average loan
volume and interest spread for the nine months ended September 30,first quarter of 2000
compared with 1999. The net interest income
NovaStar Mortgage recognized in 1998 also includes net interest
earned on agency securities. NovaStar Mortgage sold allNFI Holding’s weighted average loan
volume for the first quarter of its
agency securities during the latter part of 1998.
|
| Ÿ
| The
administrative fee agreement between NovaStar Financial and
NovaStar Mortgage2000 was cancelled on April 1, 1999. These fees are
included in services provided to NovaStar Financial, Inc. The
other components of this financial statement line-item are
discussed further in the “Results of Operations of NovaStar
Financial, Inc.—Nine Months Ended September 30, 1999$136 million compared
to the Nine Months Ended September 30, 1998.”
|
| Ÿ
| During
the nine months ended September 30, 1999, NovaStar Mortgage
recognized net gains of $9.0with $120 million on mortgage loan sales. $1.6
million of the gains recognized was a result of the closing of
NovaStar Mortgage’s first securitization transaction. The
remainder of the gain is due to various mortgage loan sales to
independent third parties. NovaStar Mortgage recognized $211,000
and $998,000 on sales of mortgage securities and mortgage loans,
respectively, duringfor the same period of 1998.
|
| Ÿ
| NovaStar
Mortgage’s wholesale origination operation1999. Spread income
was not operating
at full capacity during3.3% for the ninethree months ended September 30, 1999March 31, 2000 compared
with 2.7% for the ninethree months ended September 30, 1998. NovaStar
Mortgage’s costs of loan production as a percent of principal
averaged 4.3% for the first nine months of 1999 versus 1.6% during
the first nine months of 1998 as detailed in Table 19.
Accordingly, in 1999 NovaStar Mortgage capitalized a lower
percentage of its origination costs—which under GAAP are
amortized as an adjustment of the yield over the life of the loan
versus expensed in the period incurred. Management estimates that
if the wholesale origination channel was operating at full
capacity, NovaStar Mortgage’s costs of loan production would
be 2.25–2.50%.-
|
| Ÿ
| NovaStar
Mortgage’s servicing staff increased from September 30, 1998
to September 30, 1999. This increase is due to growth in the loan
servicing portfolio, which averaged $900 million for the nine
months ended September 30, 1998 compared with $1.1 billion for the
nine months ended September 30,March 31,
1999.
|
|
Ÿ
|
Decline
in fees received from, net of paid to, Novastar Financial,
Inc. from $2.2 million in the first quarter of 1999 to
$699,000 for the same period of 2000 due to the cancellation
of the administrative fee agreement between NovaStar Financial
and NovaStar Mortgage remitted $231,000on April 1, 1999. A breakdown of the
intercompany fees by type is included in premium paymentsthe “Results of
Operations of NovaStar Financial, Inc.—Three Months Ended
March 31, 2000 Compared to Radian during
the nine months ended September 30,Three Months Ended March 31,
1999 which are included as a
component” section of other expenses. The agreement with CMAC was executed
during the third quarter of 1998.this document.
|
|
Ÿ
|
Other
departments of NovaStar Mortgage, including systems, quality
control, and administration added staff from September 30, 1998 to
September 30, 1999 to compensate for general company growth.
|
| Ÿ
| Other
expense for the nine months ended September 30, 1999 also includes
the development and design costs incurred for NovaStar Mortgage
’s portion of the automated underwriting and origination
system, Internet Underwriter, which was introduced during the
third quarter of 1999.
|
Results of Operations of NovaStar Mortgage, Inc.
—Three Months Ended September 30, 1999 Compared to the Three
Months Ended September 30, 1998.
The following table presents a summarized income statement of
NovaStar Mortgage, Inc. for the three months ended September 30,
1999 and 1998:
Table 27
NovaStar Mortgage, Inc.—Statements of
Operations
Three Months Ended September 30 (dollars in
thousands)
| | 1999
| | 1998
|
|---|
Net interest income
| | $1,493 |
| | $ 1,314
|
|
Services provided
to NovaStar Financial, Inc. | | 768 |
| | (65 | ) |
Fees from third
parties | | 131 |
| | 685 |
|
Gains on sale of
mortgage assets | | 2,998 |
| | 798 |
|
Expenses: | | | | | | |
Production | | 2,077 |
| | 2,556 |
|
Servicing | | 1,171 |
| | 839 |
|
Other | | 1,601 |
| | 1,647 |
|
| |
| | |
| |
Income before taxes
| | 541 |
| | (2,310 | ) |
Income tax expense
| | (234 | ) | | — |
|
| |
| | |
| |
Net income | | $ 775
|
| | $(2,310 | ) |
| |
| | |
| |
The following summarizes the explanation for the increase in
net earnings of NovaStar Mortgage for the three months ended
September 30, 1999 compared with the same period of 1998:
| Ÿ
| Net
interest income forDuring
the three months ended September 30, 1999March 31, 2000, NovaStar Mortgage
recognized net gains of $2.7 million on the sale of whole
loans. Of that amount, $1.5 million was generated fromrecognized as a result
of the closing of NovaStar Mortgage’s mortgagesecond
securitization transaction. The remainder of the gain was due
to various whole loan portfolio.
Forsales to third parties for cash. During
the same period of 1998, net interest income was also
generated from lower-yielding agency security investments. The
change in portfolio composition between the two periods is
discussed under “Results of Operations of1999, NovaStar Mortgage Inc.—Nine Months Ended September 30, 1999 Compared torecognized gains of
$2.8 million on the Nine Months Ended September 30, 1998.”transfer of whole loans, including $1.3
million on the first close of the NMFT 1999-1 asset-backed
bond transaction.
|
|
Ÿ
|
TheDecline
in general administrative fee agreement between NovaStar Financial andexpenses from $5.8 million to $5.2
million is due to increased efficiencies in NovaStar
Mortgage was cancelled on April 1,’s wholesale origination operation during the
first quarter of 2000 compared with the same period of 1999.
These feesThe cost of loan production as a percent of principal averaged
3.8% during the first quarter of 2000 versus 6.4% during the
first quarter of 1999, the details of which are includedpresented in
services provided to NovaStar Financial, Inc. The
other components of this financial statement line-item are
discussed further in the “Results of Operations of NovaStar
Financial, Inc.—Nine Months Ended September 30, 1999 compared
to the Nine Months Ended September 30, 1998.”Table 17.
|
|
Ÿ
|
DuringNo
income tax expense has been recorded in the three months ended September 30, 1999, NovaStar Mortgage
recognizedfirst quarter of
2000 because of the existence of substantial net gains of $3.0 million on mortgage loan sales.
NovaStar Mortgage recognized net gains of $823,000 on mortgage
loan sales during the three months ended June 30, 1998. Also
includedoperating
loss carryforwards, which are expected to offset pre-tax
income in this line-item for the three months ended September
30, 1998 are agency securities losses of $25,000.2000.
|
NovaStar Capital, Inc.
NovaStar Capital, Inc. was formed to focus on acquiring
nonconforming residential mortgage loans from banks, thrifts and
credit unions. Management is building a sales force of account
executives to develop a nationwide network of financial institutions
to complement the wholesale origination operation of NovaStar
Mortgage. Management believes this is another effective means of
acquiring mortgage loans at a low-cost versus secondary market
purchases. The short-term intent is to treat these loans similar to
NovaStar Mortgage’s wholesale loan originations—to hold in
portfolio to be sold either to independent third parties or in
securitizations. NovaStar Capital originated 116 mortgage loans with
a principal value of $10.4 million during the nine months ended
September 30, 1999. At September 30, 1999, NovaStar Capital had
total assets of $10.6 million, which include primarily mortgage
loans.
During the nine months ended September 30, 1999 and the three
months ended September 30, 1999, NovaStar Capital incurred net
losses of $760,000 and $397,000, respectively. NovaStar Capital’
s operations for these periods primarily consist of compensation
costs. NovaStar Capital also sold $4.7 million of mortgage loans
recognizing net gains of $146,000 for the nine months ended
September 30, 1999. During the third quarter of 1999, NovaStar
Capital sold $3.8 million of mortgage loans for a net gain of
$103,000.
Value of Mortgages Added through Wholesale
Operations
By establishing a wholesale lending operation to originate
subprime residential mortgage loans, NovaStar developed a process to
add mortgage assets to its balance sheet at amounts management
believes are below what it would generally cost, in most market
environments, to acquire the same assets in bulk through open market
purchases. While this lower cost generation has not been possible
during most of 1999, for the reasons described below, management
believes that improvements in the efficiency of the wholesale
lending operation will permit value creation for shareholders in
future periods.
Management estimates the weighted-average value of its
mortgage loan portfolio as of September 30, 1999 to be between 101
and 104 in terms of price to par, based upon certain return
assumptions and secondary market prices. The values presented in
Tables 28 and 29 are management’s estimates based on market
conditions as of September 30, 1999. Management believes the
inherent returns in the mortgage loans it is originating should
warrant a value of 105. Any value assigned to September 30, 1999
loans should take into consideration at what value the loans could
be sold in the open market. During the first nine months of 1999,
NovaStar Financial sold a number of whole loan packages at a
weighted average price of 104.11. Tables 28 and 29 provide management
’s estimates of the value of the mortgage loans in its
portfolio and 1999 third quarter production and the assumptions used
for estimating fair value. Because any estimated value can vary
dramatically based upon the assumptions used, a range of assumptions
is used to determine the estimated value.
During 1999, NovaStar Mortgage originated mortgage loans at an
all-in cost of 105.0% of principal, including direct costs of
acquisition, such as broker premiums, and general overhead expenses.
Table 21 displays costs of production for each quarter. The cost of
production during the first nine months of 1999 and 1998 third and
fourth quarters is higher than previous quarters as a result of
lower production levels. NovaStar Mortgage operated at less than
full capacity during the second half of 1998, partly by design. If
NovaStar Mortgage had operated at or near full capacity, the all-in
cost would be more in the range of 3.0 to 3.5. Direct costs of
acquisition are capitalized as premium and amortized as an
adjustment of yield over the life of the loan.
As of September 30, 1999, the weighted average premium on
mortgage loans outstanding is 2.1% of principal. Depending on which
assumptions are used, the estimated fair value of loans generally
ranges from
102–104% of principal, implying inherent gains of up to 2%. These
amounts would be generally consistent with current whole loan prices
being up to 2%. These amounts would be generally consistent with
current whole loan prices being realized in secondary market sales
transactions. Management has performed extensive analysis regarding
the value of its securitized loan portfolio, using both whole loan
prices and discounted cash flow scenarios. Depending on which
scenario is used, management believes that NovaStar Financial’s
mark-to-market equity ranges from $106 million to $120 million. This
equates to an estimated fair value per diluted share that ranges
from $8.80 to $10.00.
Table 28
Estimated Market Price on Entire Loan Portfolio
As of September 30, 1999
| | Estimated
Market Price
|
|---|
| |
Two- and Three-year
Fixed Loan Products
|
|---|
Bond Equivalent
Yield | | 9.71% | | 9.96% | | 10.21% |
Spread to Index
| | 3.75% | | 4.00% | | 4.25% |
Assumed Prepayment
Speed (CPR) |
35 | | 103.9% | | 103.6% | | 103.3% |
40 | | 103.5% | | 103.2% | | 103.0% |
45 | | 103.0% | | 102.8% | | 102.6% |
| | Estimated
Market Price
|
|---|
| | 30/15-year
Fixed and
Balloon Loan Products
(Three-year Treasury)
|
|---|
Bond Equivalent
Yield | | 9.42% | | 9.67% | | 9.92% |
Spread to Index
| | 3.75% | | 4.00% | | 4.25% |
Assumed Prepayment
Speed (CPR) |
25 | | 102.7% | | 102.6% | | 102.6% |
30 | | 102.1% | | 102.1% | | 102.1% |
35 | | 101.5% | | 101.6% | | 101.7% |
|
| | One-year CMT
Loan
Products
|
|---|
Bond Equivalent
Yield | | 9.68% | | 9.93% | | 10.18% |
Spread to Index
| | 4.50% | | 4.75% | | 5.00% |
Assumed Prepayment
Speed (CPR) |
50 | | 101.9% | | 101.9% | | 101.9% |
55 | | 101.6% | | 101.6% | | 101.6% |
60 | | 101.8% | | 101.3% | | 101.4% |
| | Six-month LIBOR
Loan
Products
|
|---|
Bond
Equivalent Yield | | 9.71% | | 9.96% | | 10.21% |
|
Spread to Index
| | 3.75% | | 4.00% | | 4.25 | % |
Assumed Prepayment
Speed (CPR) |
50 | | 104.0% | | 103.8% | | 103.6% |
|
55 | | 103.7% | | 103.5% | | 103.3% |
|
60 | | 103.3% | | 103.2% | | 103.1% |
|
Table 29
Estimated Market Price of Loans Originated in
Third Quarter of 1999
| | Estimated
Market Price
|
|---|
| | Two- and
Three-year
Fixed Loan Products
|
|---|
Bond Equivalent
Yield | | 9.21% | | 9.46% | | 9.71% |
Spread to Index
| | 3.25% | | 3.50% | | 3.75% |
Assumed Prepayment
Speed (CPR) |
25 | | 105.7% | | 104.9% | | 104.4% |
30 | | 105.0% | | 104.4% | | 103.9% |
35 | | 104.4% | | 103.8% | | 103.4% |
| | Estimated
Market Price
|
|---|
| | 30/15-year
Fixed and
Balloon Loan Products
|
|---|
Bond
Equivalent Yield | | 8.92% | | 9.17% | | 9.42% |
Spread to Index
| | 3.25% | | 3.50% | | 3.75% |
Assumed Prepayment
Speed (CPR) |
15 | | 104.9% | | 104.5% | | 104.2% |
20 | | 104.1% | | 103.8% | | 103.6% |
25 | | 103.2% | | 103.1% | | 103.0% |
Liquidity and Capital Resources
Liquidity means the need for, access to and uses of
cash. The primary needs for cash include the acquisition of
mortgage loans, principal repayment and interest on borrowings,
operating expenses and dividend payments. Substantial cash is
required to support the operating activities of the business,
especially the mortgage origination operation. Principal,Mortgage asset
sales, principal, interest and fees receivedcollected on mortgage assets
and residual interests on CMOs will serve to support cash needs.
Drawing upon various borrowing arrangements typically satisfies
major cash requirements. During the first nine months of 1999, NovaStar Financial also
improved its equity and liquidity positions significantly
by:
|
Ÿ
|
Increasing borrowing capacitySecuring lending facilities with First Union National
Bank to
$395 million in February 1999.and GMAC/RFC.
|
|
Ÿ
|
Raising
additional capital through the issuance of 4 million shares of
Class B 7% cumulative convertible preferred stock in March
1999; gross proceeds aggregating $30 million.
|
Historically, NovaStar Financial demonstrated the ability to
access public capital markets as a source of long-term cash
resources. The events in early October 1998 changed the liquidity
position of NovaStar Financial and many other subprime companies and
REITs. The number of options available to NovaStar Financial with
regard to financing and capital resources have been restricted.
The actions taken by management in the fourth quarter of 1998
to restore liquidity and mitigate additional margin call risk have
significantly reduced cash requirements. The mortgage loans owned by
NovaStar Financial have minimal liquidity risk as they are financed
with non-recourse CMOs. Management expects that interest income on
the loans will generate sufficient cash to meet financing and
operating costs.
NovaStar Mortgage requires substantial cash to fund
loan originations and operating costs. As of September 30, 1999, NovaStar
MortgageMarch 31, 2000, NFI
Holding owned $92.8$61.5 million of subprimenon-conforming mortgage loans.
NovaStar
Mortgage providesNFI Holding provided financing for these loans through warehouse
and repurchase credit facilities at First Union.Union and GMAC/RFC.
Loans financed with warehouse and repurchase credit facilities
are subject to changing market valuation and margin calls.
Management expects to continue selling loans originated by
NovaStar Mortgage or securitizing those loans at a profit to
meet the significant cash needs of the wholesale loan operation.
Management believes NovaStar Financial can operate indefinitely
in this manner, provided that the level of loan originations areis
at or near the capacity of its production
infrastructure.
Table 3021 is a summary of cash, financing
arrangements and available borrowing capacity under those arrangementsfor NovaStar
Financial and NovaStar Mortgage, on a combined basis, as of
September 30, 1999:
March 31, 2000:
Table
3021
Liquidity Resources
September 30, 1999
(dollars March
31, 2000
(in
thousands)
|
|
Maximum
Borrowing
Limit
|
|
Lending
Value of
Collateral
|
|
Borrowings
|
|
Availability
|
| Resource |
|
|
| | |
Cash | | | |
|
|
|
|
| $ 3,294
|
|
First Union
National Bank (A): | |
|
Committed warehouse line
of creditCash |
| | | | | | | |
$75,000 | | $43,650 |
| | $22,191 | | 21,459 |
4,564 |
Committed secured whole
loan repurchase
agreementFirst Union National Bank (A): |
| 300,000 | | 50,429 |
| | 50,429 | | —
|
|
Committed residual
financing available under
CMOs | | 20,000 | | (B | ) | | —
| | 20,000 |
|
| |
|
|
|
|
|
|
|
|
|
Total.Committed warehouse line of
credit |
| $ 75,000 | | $44,373 | | | $25,250 | | $19,123 |
|
Committed secured whole loan repurchase
agreement | | $175,000 | | $ 6,600 | | | $ 6,600 | | $ — |
|
Committed residual financing
available | | $ 25,000 | | (B | ) | | $ — | | $25,000 |
|
GMAC/Residential Funding Corporation
(A): | |
|
|
|
|
|
| $72,620 | |
|
Committed warehouse line of
credit |
|
$44,753 50,000 |
| $ 6,896 | | | $ 6,896 | | $ — |
| |
|
| |
|
|
|
|
|
| |
| |
Total availability
as a percent of: |
Total assets |
|
$325,000 |
|
$57,869 |
|
|
$38,746 |
|
6 | %$48,687 |
| |
|
| |
|
|
|
|
|
| |
| |
Total stockholders’
equity | | | | | | | | | 40 | % |
| | | | | | | | |
| |
(A)
|
Value
of collateral and borrowings include amounts for both NovaStar
Financial and NovaStar Mortgage, as they are co-borrowers
under the arrangements with First Union National Bank.Bank and
GMAC/RFC.
|
(B)
|
Management estimates the value of the residuals range
from $60$55 to $75$70 million and does not include the value of
mortgage servicing rights.
|
The warehouse line of credit and whole loan
repurchase agreements with First Union National Bank expire on
June 1, 2000. Management is negotiating with First Union and
anticipates extending those agreements under similar terms as
those that are currently included in the agreements. In the
opinion of management available liquidity resources are
sufficient to cover expected future production of NovaStar
Mortgage.
Cash activity during the ninethree months ended September 30,March
31, 2000 and 1999 and 1998 are presented in the consolidated statement of
cash flows.
Capital allocation guidelines.
Management’s goal is to balance between the
under-utilization of leverage, which reduces returns to
stockholders, and the over-utilization of leverage, which could
reduce the abilityThe capital of NovaStar to meet its obligations during
adverse market conditions. Capital allocation guidelines have been
approved by the Board of Directors. The guidelines are intended to
keep NovaStar properly leveraged by:Financial has come
from
|
Ÿ
|
Matching
the amounta
private placement offering of leverage allowed to the riskiness on return and
liquiditypreferred stock, raising net
proceeds of $47 million.
|
| Ÿ | an
asset;initial public offering of common stock, raising net proceeds
of $67 million, and
|
|
Ÿ
|
Monitoring the credit and prepayment performancea
private offering of each
investment to adjust the required capital.convertible preferred stock, raising net
proceeds of $29 million.
|
This analysis takes into account hedging instruments and other
risk programs discussed below. Balance sheet leverage is controlled
by monitoringNovaStar Financial uses capital allocation. Following presentswhen financing loans
on a summarylong-term basis. Under short-term financing arrangements,
NovaStar can borrow up to the lessor of 98% of the capital allocation guidelines for the following levels of
capital for various types of assets it owns.
Capital Allocation Guidelines
September 30, 1999
Asset Category
| | (A)
Minimum
Lender
Haircut
| | (B)
Estimated
Price
Duration
| | (C)
Duration
Spread
Cushion
| | (D)
Liquidity
Spread
Cushion
| | (E)
(c + d)
Total
Spread
Cushion
| | (F)
(b x e)
Equity
Cushion
(% of
MV)
| | (F)
(a + f)
CAG
Equity
Required
|
|---|
Agency-issued:
|
Conventional ARMs | | 3.00 | % | | 3.50 | % | | 50 | | — | | 50 | | 1.75 | % | | 4.75 | % |
GNMA ARMs | | 3.00 |
| | 4.50 |
| | 50 | | — | | 50 | | 2.25 |
| | 5.25 |
|
GNMA Fixed Rates | | 3.00 |
| | 5.00 |
| | 50 | | — | | 50 | | 2.50 |
| | 5.50 |
|
Mortgage loans:
| | | |
Collateral for warehouse
financing | | 2.00 |
| | 3.00 |
| | 100 | | 50 | | 150 | | 4.50 |
| | 7.50 |
|
Collateral for
Securitizations (H) | | 5.00 |
| | —
|
| | —
| | — | | —
| | —
|
| | 5.00 |
|
Delinquent | | 100.00 |
| | —
|
| | —
| | — | | —
| | —
|
| | 100.00 |
|
Hedging | | —
|
| | —
|
| | —
| | — | | —
| | —
|
| | 5.45 |
|
Other | | 100.00 |
| | —
|
| | —
| | — | | —
| | —
|
| | 100.00 |
|
(A)
| Indicates
the minimum amount of equity a typical lender would require with
an asset from the applicable asset category. There is some
variation in haircut levels among lenders. From the lender
perspective, this is a “cushion” to protect capital in
case the borrower is unable to meet a margin call. The sizeface amount
or 95% of the
haircut depends on the liquidity and price volatility of the
asset. Agency securities are very liquid, with price volatility in
line with the fixed income markets, which means a lender requires
a smaller haircut. On the other extreme, “B” rated
securities and securities not registered with the Securities and
Exchange Commission are substantially less liquid, and have more
price volatility than agency securities, which results in a lender
requiring a larger haircut. Particular securities that are
performing below expectations would also typically require a
larger haircut.
|
(B)
| Duration
is the price-weighted average term to maturity of financial
instruments’ cash flows.
|
(C)
| Estimated
cushion need to protect against investors requiring a higher
return compared to treasury securities, assuming constant interest
rates.
|
(D)
| Estimated
cushion required due to a potential imbalance of supply and demand
resulting in a wider bid/ask spread.
|
(E)
| Sum of
duration (C) and liquidity (D) spread cushions.
|
(F)
| Product
of estimated price duration (B) and total spread cushion. The
additional equity, as determined by management, to reasonably
protect the NovaStar Financial from lender margin calls. The size
of each cushion is based on management’s experience with the
price volatility and liquidity in the various asset categories.
Individual assets that have exposure to substantial credit risk
will be measured individually and the leverage adjusted as actual
delinquencies, defaults and losses differ with management’s
expectations.
|
(H)
| Capital
allocation guidelines for economic residuals evaluated similarly
as whole loans.
|
Implementation of the capital allocation guidelines
—mark to market. Each month,
assets are marked to market. Market values of the mortgage loan
portfolio are calculated internally using assumptions for losses,
prepayments and discount rates. Mortgage securities are valued using
independent market quotes. The face amount of all financing used for
securities and mortgage loans is subtracted from the current market value of the assets and hedges. This isloans it owns. In long-term
financing (i.e. in the currentform of asset-backed bonds) NovaStar can
finance approximately 95% of the market value of equity. This number is comparedthe loans.
NovaStar must use its own capital resources to
“finance” the required capital as
determined bydifference between the capital allocation guidelines. Iffinanced portion
and the actual
equity falls below the capital required by the capital allocation
guidelines, NovaStar Financial must prepare a plan to bring the
actual capital above the level required by the capital allocation
guidelines.full loan cost.
Each quarter, management presents to the Board of Directors
the resultsDuring 1999 and 2000, most of the loans originated
by NovaStar Mortgage were sold to third parties and in
securitization transactions treated as sales for tax and
financial reporting purposes. In doing so, NovaStar does not use
capital. In fact, if the sales prices are above the full cost to
originate loans, this method of operation will generate capital
allocation guidelines compared to actual
equity. Management may propose changing the capital required for a
class of investments or for an individual investment based on its
prepayment and credit performance relative to the market and the
ability of the management to predict or hedge the risk of the asset.
NovaStar.
Table 31 is a summaryDuring 2000, management expects to finance half of
the loans produced by NovaStar Mortgage. The remainder will be
sold to third parties. NovaStar currently has excess capital
allocation foravailable to support this mode of operation during 2000. When
NovaStar Financial as they applyfully deploys its capital, management expects
to mortgage assets and hedging instruments
during 1999 and 1998.either raise more equity from the capital markets or sell
enough loans so that it operates without the need for additional
capital.
Table 31
Required Equity
| | 1999
| | 1998
|
|---|
| | September
30
| | June 30
| | March 31
| | December 31
| | September
30
| | June 30
| | March 31
|
|---|
Category | | | |
Mortgage loans:
| | | |
Current
unsecuritized
loans | | $ 5,278
|
| | $
4,397 |
| | $
3,823 |
| | $12,648 |
| | $ 14,567
|
| | $ 21,566
|
| | $ 23,628
|
|
Delinquent
unsecuritized
loans | | 2,329 |
| | 868 |
| | 1,197 |
| | 1,685 |
| | 452 |
| | 601 |
| | 1,200 |
|
Securitized
loans | | 41,587 |
| | 47,000 |
| | 49,894 |
| | 64,548 |
| | 55,822 |
| | 37,766 |
| | 23,478 |
|
Mortgage
securities | | — |
| | — |
| | —
|
| | —
|
| | 19,514 |
| | 24,904 |
| | 27,426 |
|
Other assets | | 13,878 |
| | 13,501 |
| | 13,861 |
| | 12,536 |
| | 20,682 |
| | 13,782 |
| | 10,733 |
|
Hedging
instruments | | (24) |
| | (35 | ) | | (100 | ) | | (179 | ) | | (688 | ) | | (232 | ) | | (203 | ) |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Required equity
| | 63,048 |
| | 65,731 |
| | 68,675 |
| | 91,238 |
| | 110,349
|
| | 98,387 |
| | 86,262 |
|
Stockholders’
equity | | 112,671 |
| | 121,237
|
| | 119,712
|
| | 87,204 |
| | 109,848 |
| | 114,875
|
| | 115,798 |
|
Market value in
excess
of the
carrying
value
of
assets and
hedges
| | (9,949 | ) | | 8,536 |
| | 1,482 |
| | 5,961 |
| | 2,331 |
| | 31,999 |
| | 20,685 |
|
| | |
| | |
| |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Excess equity
| | $39,674 |
| | $ 64,042
|
| | $ 52,519
|
| | $ 1,927
|
| | $
1,830 |
| | $ 48,487
|
| | $ 50,221 |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Inflation
Virtually all assets and liabilities of NovaStar
Financial are financial in nature. As a result, interest rates
and other factors drive company performance far more than does
inflation. Changes in interest rates do not necessarily
correlate with inflation rates or changes in inflation rates.
The financial statements of NovaStar Financial are prepared in
accordance with generally accepted accounting principles and the
dividends are based on taxable income. In each case, financial
activities and balance sheet are measured with reference to
historical cost or fair market value without considering
inflation.
Impact
of Recently Issued Accounting Pronouncements
Note 1 toof the consolidated financial statements
ofcontained in the annual
report to shareholders and annual report on Form 10-K for the fiscal year
ended December 31, 19981999 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.
The Year 2000
NovaStar Financial, NovaStar Mortgage and NovaStar Capital,
collectively, NovaStar Financial and affiliates are highly dependent
on purchased and leased computer software to conduct business. In
addition, NovaStar Financial and affiliates are highly dependent on
computer software used by market counterparties and vendors,
including banks, in conducting business. Management recognizes that
some computer software may not have the ability to correctly
identify dates beyond December 31, 1999. Successful modification of
computer software, or the vendors’ successful modification of
their programs, to be year 2000 compliant is critical to the
viability of NovaStar Financial and affiliates.
NovaStar Financial and affiliates use three major, and a
number of smaller, internal automation solutions to conduct its
business operations. The three computer systems considered the most
significant to operations are as follows:
|
Ÿ The internally
developed loan origination and database system
|
|
Ÿ The externally
provided loan servicing system
|
|
Ÿ The purchased
accounting system
|
In addition, NovaStar Financial and affiliates integrate with
a number of outside entities in normal business transactions.
Interfaces with other businesses and third party solution providers
are used to conduct some business processes. Other processes are
supported by systems created internally.
NovaStar Financial and affiliates are using the Federal
Financial Institutions Examination Council’s (FFIEC) “Year
2000 Project Management Awareness” document to guide year 2000
readiness efforts. Each program/system interface used by NovaStar
Financial and affiliates are being reviewed and tested for year 2000
compliance. The FFIEC guide calls for a three-phase approach to
assess year 2000 compliance. Based on this three-phase approach
NovaStar Financial’s and affiliates’ projected timeline is
as follows:
[Chart of timeline]
In the assessment phase, management determined which
business processes/interfaces rely on dates and date arithmetic.
Most business processes/interfaces rely on dates and date
arithmetic. All internally developed business processes/interfaces
have been tested for compliance. Based on these tests, all software
and automation solutions created by NovaStar Financial and
affiliates are year 2000 compliant. NovaStar Financial and
affiliates have updated all internal operating systems and software
with year 2000 compliant versions. NovaStar Financial and affiliates
are still working with market counterparties and vendors to document
that they have assessed software for year 2000 compliance.
Solution updates to non-compliant Year 2000 software were made
in the correction phase. Corrections on NovaStar Financial and
affiliates developed software were made internally and were
insignificant. NovaStar Financial and affiliates are requiring all
market counterparties and vendors to document they have made all
corrections.-
NovaStar Financial and affiliates staff conducted “mock
” business as if it was in the year 2000 during the second
quarter of 1999—the validation phase of NovaStar Financial’
s and affiliates’ year 2000 readiness efforts. During this
phase, NovaStar Financial and affiliates tested all internally
developed software.-
NovaStar Financial and affiliates have contacted all
significant outside market counterparties and vendors to obtain
documentation regarding their process and status for assuring year
2000 compliance. Management has asked that each party adhere to the
same FFIEC guidelines and to provide documents of progress during
each phase. NovaStar Financial and affiliates have received written
confirmation from Alltel Residential Lending Solutions, vendor of
NovaStar Mortgage’s servicing system and Baan/CODA, vendor of
NovaStar Financial’s and affiliates’ accounting system
stating that the versions currently used are fully year 2000
compliant. The Baan/CODA accounting system was successfully tested
internally for Year 2000 compliance.
All internally developed software was designed to be year 2000
compliant. In addition, management has contacted its significant
financial counterparty, First Union National Bank, who has completed
their internal review of year 2000 compliance. NovaStar Financial
and affiliates have received written confirmation that First Union
National Bank is Year 2000 compliant.
Management believes the greatest risk in regard to year 2000
compliance is the software and systems used to service its subprime
mortgage loans. NovaStar Mortgage services the loans owned by
NovaStar Financial. NovaStar Mortgage uses systems developed by
Alltel for loan servicing. If these systems fail, NovaStar Mortgage
will not be able to continue on a manual basis. In this worst case
scenario, loans would not be serviced until the failed system could
be remedied. If the loans go “unserviced” for an extended
period of
time—several weeks—the result could have a material adverse
impact to NovaStar Financial and NovaStar Mortgage.-
NovaStar Financial and affiliates are also at significant risk
in the event the systems of financial institutions, on which
NovaStar Financial and NovaStar Mortgage are relying for financing
and cash management fail. In a worst case scenario, NovaStar
Financial and NovaStar Mortgage may not be able to meet financial
obligations during the period of failure - an unknown
timeframe. The result could have a material adverse impact on
NovaStar Financial and NovaStar Mortgage.
NovaStar Financial and affiliates are exposed to smaller risks
in the event other systems, including those developed internally,
fail to perform beyond December 31, 1999. However, management
believes functions, other than servicing, can be maintained on a
manual basis should systems fail. Although processing and
performance would be slow, risk of material adverse impact to
NovaStar Financial and affiliates for these systems’ failure is
expected to be minimal.-
Management expects, through the completion of its year 2000
plan, the likelihood of a material business disruption is not
significant. The major risks presented above involve year 2000
remediation efforts of third party vendors used by NovaStar
Financial and NovaStar Mortgage. Based on the information provided,
management believes these vendors will meet their obligation for
resolution of year 2000 issues.-
Management estimates it has incurred less than $75,000 in
costs to date in carrying out its year 2000 compliance plan and
estimates it will spend less than $100,000 in completing the plan.
However, the costs could increase dramatically if management
determines that any market counterparty will not be year 2000
compliant.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Interest Rate/Market Risk
The investment policy for NovaStar Financial sets
the following general goals:
|
(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. |
Loan Price volatilityVolatility. Under its current mode
of operation, NovaStar Financial depends heavily on the market
for wholesale subprimenon-conforming mortgage loans. To conserve
capital, NovaStar Mortgage and NovaStar Capital may sell loans it originates. The
financial results of NovaStar Financial will depend, in part, on
the ability to find purchasers for the loans at prices that
cover origination expenses. Exposure to loan price volatility
will be reduced as NovaStar Financial resumes acquisition and
retention of its subprime mortgage loans.
Interest rate risk. Rate Risk. Interest rate risk is the
risk that the market value of assets will increase or decrease
at different rates than that of the liabilities. Expressed
another way, this is the risk that NovaStar Financial’s net
asset value will experience an adverse change when interest
rates change. When interest rates on the assets do not adjust at
the same rates as ourthe liabilities or when the assets are fixed
rates and the liabilities are adjusting, future earnings
potential is affected. Management primarily uses financing
sources where the interest rate resets frequently. As of September 30, 1999,March
31, 2000 borrowings under all financing arrangements adjust
daily, monthly, or quarterly. On the other hand, very few of the
mortgage assets owned by NovaStar Financial, as of September 30, 1999,March 31,
2000, adjust on a monthly or daily basis. Most of the mortgage
loans contain features where their rates are fixed for some
period of time and then adjust frequently thereafter. For
example, one of our loan products is the “ 2/
2/28” loan.
This loan is fixed for its first two years and then adjusts
every six months thereafter.
While short-term borrowing rates are low and
long-term asset rates are high, this portfolio structure
produces good results. However, if short-term interest rates
rise rapidly, earning potential could beis significantly affected, as
the asset rate resets would “lag” the borrowing rate resets. The
converse can be true when sharp declines in short-term interest
rates cause interest costs to fall faster than asset rate
resets, thereby increasing earnings.-earnings.
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.
Table 32 is a summaryThe following are summaries of the analysis as of
September 30,
1999March 31, 2000 and December 31, 1998.1999.
Table
22
Table 32Interest Rate Sensitivity—Income
Interest Rate Sensitivity-IncomeMarch
31, 2000 and December 31, 1999
September 30, 1999 and December 31, 1998(dollars in thousands)
As of September
30, 1999
|
|
Basis Point Increase (Decrease)
in Interest Rate(A)
|
As
of March 31, 2000
| |
(100)
|
|
Base(B)Base
|
|
100
|
| Income
from: |
|
Assets | | $71,842 | | | $74,250 | | | $76,294 | |
|
Liabilities (B) | | 48,989 | | | 55,254 | | | 61,654 | |
|
Interest rate agreements | | (1,861 | ) | | (549 | ) | | 2,884 | |
| |
|
| | |
| | |
| |
|
Net spread income | | $20,992 | | | $18,447 | | | $17,524 | |
| | |
| | |
| | |
| |
|
Cumulative change in income from base
(C) | | $ 2,545 | | | — | | | $ (923 | ) |
| | |
| | |
| | |
| |
|
Percent change from base spread income
(D) | | 13.8 | % | | — | | | (5.0 | )% |
| | |
| | |
| | |
| |
|
Percent change of capital (E) | | 2.5 | % | | — | | | (0.9 | )% |
| | |
| | |
| | |
| |
| |
As
of December 31, 1999
| | (100)
| | Base
| | 100
|
|---|
| Income
from: |
|
|
Assets |
|
$68,71961,610 | | | $64,419 | | | $66,954 | |
|
Liabilities (B) | | 42,173 | | | 47,803 | | | 53,442 | |
|
Interest rate agreements | | (1,379 | ) | | (1,379 | ) | | 1,122 | |
| | |
|
|
|
$71,435
|
|
|
$73,953
|
|
LiabilitiesNet spread income | | $18,058 | | | $15,237 | | | $14,634 | |
| |
|
45,618
|
|
|
52,079
|
|
|
58,386
|
|
Interest rate agreements
Cumulative change in income from base
(C) |
|
(1,433$ 2,821 |
) |
|
(1,433— |
) |
|
221$ (603 |
) |
| |
|
| | |
| | |
| |
Net spread income
| | $21,668 |
|
|
$17,923
|
|
|
$15,788
|
|
| | |
| | |
| | |
| |
Cumulative change
in income from base (B) | | $ 3,745
|
| | —
|
| | $(2,135 | ) |
Percent change from base spread income
(C)(D) |
|
20.918.5 |
% |
|
— | |
| |
(11.94.0 |
)% |
| |
|
| | |
| | |
| |
Percent change of
capital(D) | | 3.3 | % | | —
|
|
|
| | |
| |
|
Percent change of capital (E) | | 2.8 | % | | — | | | (1.90.6 |
)% |
| |
|
|
|
|
|
|
|
|
|
(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
at September 30,as of March 31, 2000 and December 31, 1999.
|
(C)(D)
|
Total
change in estimated spread income, as a percent, from
base.
|
(D)(E)
|
Total
change in estimated spread income as a percent of total
stockholders’ equity at September 30,as of March 31, 2000 and December
31, 1999.
|
Table
23
Interest Rate Sensitivity—Market
Value
March
31, 2000 and December 31, 1999
(dollars in thousands)
|
|
Basis Point Increase
(Decrease)
in Interest
Rate(F)
Rate(A)
|
As
of DecemberMarch 31, 19982000
|
| (100)
| | Base(G)
| |
100
| | 100
|
Income from:Change
in market values of: | | | |
|
Assets |
|
$80,507 9,564 | |
| |
$82,310(12,220 |
| | $83,966 |
) |
|
Liabilities |
|
47,546(1,876 | ) |
|
2,176 |
55,259 |
| | 63,233 | |
|
Interest rate agreements |
|
(2,2443,825 |
) |
|
(2,2445,677 |
) | | 107 | |
| |
|
| | |
| | |
| |
Net spread income
| | $30,717 |
|
|
$24,807
|
|
| Cumulative change in market value | |
$20,840 3,863 | |
| $ (4,367 | ) |
| |
|
| | |
| | |
| |
Cumulative change
in income from base (G) | | $ 5,910
|
|
|
—
|
| | $ 3,967
|
|
Percent
change from base spread income (H)of market value portfolio equity (B). |
|
23.83.9 |
% |
| —
|
| |
(16.04.4 |
)% |
| |
|
|
|
|
| |
| |
As
of December 31, 1999
|
|---|
| Change
in market values of: |
|
Assets | | $ 9,112 | | | $(11,340 | ) |
|
Liabilities | | (2,068 | ) | | 2,376 | |
|
Interest rate agreements | | (2,809 | ) | | 4,723 | |
| | |
|
|
|
| |
| Cumulative change in market value | | $ 4,235 | | | $ (4,241 | ) |
| | |
| | |
|
|
Percent
change of capital(I)market value portfolio equity (B). |
|
6.774.4 |
% |
| —
|
| |
(4.544.4 |
)% |
| |
|
| | |
| | |
| |
(F)
| Income of
asset, liability or interest rate agreement in a parallel shift in
the yield curve, up and down 1%.
|
(G)
| Total
change in estimated spread income, in dollars, from “base.
” “Base” is the estimated spread income at December
31, 1998.
|
(H)
| Total
change in estimated spread income, as a percent, from base.
|
(I)
| Total
change in estimated spread income as a percent of total
stockholders’ equity at December 31, 1998.
|
Table 33
Interest Rate Sensitivity—Market Value
September 30, 1999 and December 31, 1998
| | Basis Point
Increase (Decrease)
in Interest Rate(A)
|
|---|
As of September
30, 1999
| | (100)
| | Base(B)
| | 100
|
|---|
Market values of:
| | | |
Assets | | $826,686 |
| | $818,438 | | $808,062 |
|
Liabilities | | 780,922 |
|
|
778,810
| | 776,414 |
|
Interest rate agreements
| | 378 |
| | 1,725 | | 5,232 |
|
| |
| | |
| |
| |
Net market value
| | $ 46,142
|
| | $ 41,353
| | $ 36,878
|
|
| |
| | |
| |
| |
Cumulative change
in market value from base (B) | | $
4,789 |
| | —
| | $ (4,475
| ) |
Percent change of
market value portfolio
equity (C) | | 4.5 | % | | $
— | | (4.2 | )% |
| |
| | |
| |
|
|
(A)
|
MarketChange
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, in dollars, from “base.
” “Base” is the estimated market value at September
30, 1999.
|
(C)
|
Total
change in estimated market value as a percent of market value
portfolio equity at September 30, 1999. |
| | Basis Point
Increase (Decrease)
in Interest Rate(D)
|
|---|
Asas of March 31, 2000 and December 31,
1998
| | (100)
| | Base(E)
| | 100
|
|---|
Market values of:
| | | |
Assets | | $933,171 |
| | $919,955 | | $905,059 |
|
Liabilities | | 883,706 |
| | 882,992 | | 882,279 |
|
Interest rate agreements
| | 271 |
| | 1,194 | | 3,969 |
|
| |
| | |
| |
| |
Net market value
| | $ 49,736
|
| | $ 38,157
| | $ 26,749
|
|
| |
| | |
| |
| |
Cumulative change
in market value from base (E) | | $ 11,579
|
| | —
| | $(11,408 | ) |
Percent change of
market value portfolio equity (F) | | 12.4 | % | | —
| | (12.2 | )% |
| |
| | |
| |
| |
(D)
| Market
value of assets, liabilities or interest rate agreements in a
parallel shift in the yield curve, up and down 1%.
|
(E)
| Total
change in estimated market value, in dollars, from “base.
” “Base” is the estimated market value at December
31, 1998.
|
(F)
| Total
change in estimated market value as a percent of market value
portfolio equity at December 31, 1998.1999.
|
Interest rate sensitivity analysis.Rate Sensitivity
Analysis.
The values under the heading
“Base” are management’s estimates of spread
income and market value for assets, liabilities and interest rate agreements on
September 30,
1999March 31, 2000 and December 31, 1998.1999. The values under the
headings “100” and “(100)” are
management’s estimates of the income and change in market
value of those same assets, liabilities and interest rate
agreements assuming that interest rates were 100 basis points,
or 1 percent higher and lower. The cumulative change in income
or market value represents the change in income or market value
of assets, from base, net of the change in income or market value of
liabilities and interest rate agreements from base. agreements.
The interest sensitivity analysis is prepared
monthly. If the analysis demonstrates that a 100 basis point
shift, up or down, in interest rates would result in 25 percent
or more cumulative decrease in income from base, or a 10%
cumulative decrease in market value from base, policy requires
management to adjust the portfolio by adding or removing
interest rate cap or swap agreements. The Board of Directors
reviews and approves NovaStar Financial’s interest rate
sensitivity and hedged position quarterly. Although management
also evaluates the portfolio using interest rate increases and
decreases less than and greater than one percent, management
focuses on the one percent increase.
Assumptions usedUsed in interest rate sensitivity analysis.
Interest Rate Sensitivity
Analysis. Management uses a
variety of estimates and assumptions in determining the income
and market value of assets, liabilities and interest rate
agreements. The estimation process is dependent
upon a variety of assumptions, especially in determining the income
and market value of its subprime mortgage loan holdings. The estimates and assumptions have a significant
impact on the results of the interest rate sensitivity analysis,
the results of which are shown as of September 30, 1999March 31, 2000 and December
31, 1998.1999.
Management’s analysis for assessing interest
rate sensitivity on its subprime mortgage loans relies significantly on
estimates for prepayment speeds. A prepayment model has been
internally developed based upon four main factors:
|
Ÿ
|
Refinancing incentives (the interest rate of the
mortgage compared with the current mortgage rates available to
the borrower)
|
|
Ÿ
|
Prepayment penalties, if any
|
Generally speaking, when market interest rates
decline, borrowers are more likely to refinance their mortgages.
The higher the interest rate a borrower currently has on his or
her mortgage the more incentive he or she has to refinance the
mortgage when rates decline. In addition, the higher the credit
grade, the more incentive there is to refinance when credit
ratings improve. When a borrower has a low loan-to-value ratio,
he or she is more likely to do a “cash-out” refinance.
Each of these factors presumably increases the chance for higher prepayment
speeds during the term of the loan. On the other hand,
prepayment penalties serve to mitigate the risk that loans will
prepay under the assumption
thatbecause the penalty is a deterrent to
refinancing.-refinancing.
These factors are weighted based on
management’s experience and an evaluation of the important
trends observed in the subprimenon-conforming mortgage origination
industry. Actual results may differ from the estimates and
assumptions used in the model and the projected results as shown
in the above table.sensitivity analyses.
NovaStar Financial’s projected prepayment rates
in each interest rate scenario start at a prepayment speed less
than 5% in month one and increase to a long-term prepayment
speed in nine to 18 months, to account for the seasoning of the
loans. The long-term 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 curve is also multiplied by a factor
of 60% on average for 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 75 are weighted average speeds of all loans in each
deal.
As shown in Table 7,5, 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. However, thisThis 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.
The investment policy for NovaStar Financial sets the
following general goals:
| (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 assets.
|
Although management evaluates the portfolio using interest
rate increases and decreases greater than one percent, management
focuses on the one percent increase. The investment policy for
NovaStar Financial allows for no more than a 25 percent decrease in
the spread income of the portfolio and for no more than a 10%
decrease in the market value of the portfolio when interest rates
rise or fall by one percent.
Sensitivity as of September 30, 1999 and December 31,
1998. As shown in the above table, if
interest rates were to decrease one percent (-100 basis points), the
spread income would increase by an estimated 3.3% and 6.8% as of
September 30, 1999 and December 31, 1998, respectively. If interest
rates rise by one percent (+100 basis points), the spread income
would decrease by an estimated 1.9% and 4.5% as of September 30,
1999 and December 31, 1998, respectively. If interest rates were to
decrease one percent, the market value of portfolio equity would
increase by an estimated 4.5% and 12.4% as of September 30, 1999 and
December 31, 1998, respectively. If interest rates rise by one
percent, the market value of portfolio equity would decrease by an
estimated 4.2% and 12.2% as of September 30, 1999 and December 31,
1998, respectively.
Hedging with off-balance-sheet financial instruments.
Off-Balance-Sheet Financial
Instruments. In order to address a mismatch of assets and
liabilities, the hedging section of the investment policy is
followed, as approved by the Board. Specifically, the interest
rate risk management program is formulated with the intent to
offset the potential adverse effects resulting from rate
adjustment limitations on its mortgage assets and the
differences between interest rate adjustment indices and
interest rate adjustment periods of its adjustable-rate mortgage
loans and related borrowings.
NovaStar Financial uses interest rate cap and swap agreements
and financial futures contracts
to mitigate the risk of the cost of its variable rate
liabilities increasing at a faster rate than the earnings on its
assets during a period of rising rates. In this way, management
intends generally to hedge as much of the interest rate risk as
determined to be in the best interest of NovaStar Financial,
given the cost of hedging transactions and the need to maintain
REIT status.
NovaStar Financial seeks to build a balance sheet
and undertake an interest rate risk management program that is
likely, in managementsmanagement’s view, to enable NovaStar Financial
to maintain an equity liquidation value sufficient to maintain
operations given a variety of potentially adverse circumstances.
Accordingly, the hedging program addresses both income
preservation, as discussed in the first part of this section,
and capital preservation concerns.
Interest rate cap agreements are legal contracts
between NovaStar Financial and a third party firm or
“counter-party”. The counter-party agrees to make
payments to NovaStar Financial in the future should the one- orone-or
three-month LIBOR interest rate rise above the strike rate
specified in the contract. NovaStar Financial either makes
quarterly premium payments or has chosen to pay the premiums
upfront to the counterparties under contract. Each contract has
a fixed notional face amount on which the interest is computed,
and a set term to maturity. ShouldWhen the referencereferenced LIBOR interest
rate riserises above the contractual strike rate, NovaStar Financial
will earnearns cap income. Payments on an annualized basis equal the
contractual notional face amount times the difference between
actual LIBOR and the strike rate.
PART
II.
OTHER
INFORMATION
Item
1. Legal Proceedings
As of March 31, 2000, there were no material legal
proceedings pending to which NovaStar Financial was a party or
of which any of its property was subject.
Item
2. Changes in Securities
Not applicable
Item
3. Defaults upon Senior Securities
Not applicable
Item
4. Submission of Matters of Vote of Security
Holders
Not applicable
Item
5. Other Information
None
Item
6. Exhibits and Reports on Form 8-K
(a) Exhibit Listing
Exhibit No.
| | Description of Document
| | |
|---|
| 3.1* | | Articles of Amendment and Restatement of the
Registrant. | | |
| | 3.2* | | Articles Supplementary of the Registrant. | | |
| | 3.3* | | Bylaws
of the Registrant. | | |
| | 3.3a***** | | Amendment to Bylaws of the Registrant, adopted February
2, 2000. | | |
| | 3.4**** | | Articles Supplementary of NovaStar Financial, Inc.
dated as of March 24, 1999, as filed
with the Maryland Department of Assessment and
Taxation. | | |
| | 4.1* | | Specimen Common Stock Certificate. | | |
| | 4.2* | | Specimen Warrant Certificate. | | |
| | 4.3**** | | Specimen certificate for Preferred Stock. | | |
| | 10.1* | | Purchase Terms Agreement, dated December 6, 1996,
between the Registrant and the
Placement Agent. | | |
| | 10.2* | | Registration Rights Agreement, dated December 9, 1996,
between the Registrant and the
Placement Agent. | | |
| | 10.3* | | Warrant
Agreement, dated December 9, 1996, between the Registrant and
the Holders of
the Warrants Acting Through the Registrant as the Initial
Warrant Agent. | | |
| | 10.4* | | Founders’ Registration Rights Agreement, dated
December 9, 1996, between the Registrant
and the original holders of Common Stock of the
Registrant. | | |
Exhibit No.
| | Description of Document
| | |
|---|
| 10.5* | | Commitment Letter dated October 3, 1996 from General
Electric Capital Group accepted
by the Registrant. | | |
| | 10.6* | | Form of
Master Repurchase Agreement for mortgage loan
financing. | | |
| | 10.7* | | Mortgage Loan Warehousing Agreement dated as of
November 24, 1997 between First
Union National Bank of North Carolina, NovaStar Mortgage, Inc.
and the Registrant. | | |
| | 10.7a*** | | Amendment No. 6 dated as of February 12, 1999 to
Mortgage Loan Warehousing
Agreement dated as of February 20, 1997 between First Union
National Bank and
Registrant. | | |
| | 10.7b***** | | Amendment No. 7 dated as of December 17, 1999 to
Mortgage Loan Warehousing
Agreement dated as of February 20, 1997 between First Union
National Bank and
Registrant. | | |
| | 10.8* | | Employment Agreement, dated September 30, 1996, between
the Registrant and
Scott F. Hartman. | | |
| | 10.9* | | Employment Agreement, dated September 30, 1996, between
the Registrant and
W. Lance Anderson. | | |
| | 10.10* | | Promissory Note by Scott F. Hartman to the Registrant,
dated December 9, 1996. | | |
| | 10.11* | | Promissory Note by W. Lance Anderson to the Registrant,
dated December 9, 1996. | | |
| | 10.12* | | Stock
Pledge Agreement between Scott F. Hartman and the Registrant,
dated
December 9, 1996. | | |
| | 10.13* | | Stock
Pledge Agreement between W. Lance Anderson and the Registrant,
dated December
9, 1996. |
| |
| 10.14* | | 1996
Executive and Non-Employee Director Stock Option Plan, as last
amended
December 6, 1996. December 6, 1996. |
| |
| 10.15* | | Administrative Services Outsourcing Agreement, dated
June 30, 1997, between the
Registrant and NovaStar Mortgage, Inc. |
| |
| 10.16* | | Mortgage Loan Sale and Purchase Agreement, dated as of
June 30, 1997, between the
Registrant and NovaStar Mortgage, Inc. |
| |
| 10.17* | | Flow
Loan Subservicing Agreement, dated as of June 30, 1997,
between the Registrant
and NovaStar Mortgage, Inc. |
| |
| 10.18* | | Certificate of Incorporation of NFI Holding
Corporation. |
| |
| 10.19* | | Agreement of Shareholders of Common Stock NFI Holding
Corporation. |
| |
| 10.20** | | Term
Loan and Security Agreement between NovaStar Certificates
Financing Corporation
and Reliance Funding Corporation dated as of October 13, 1998
and related agreements
including Guaranty of even date by Registrant. |
| |
| 10.21*** | | Addendum to Master Repurchase Agreement dated as of
February 12, 1999 among
NovaStar Financial, Inc., NovaStar Capital, Inc. and NovaStar
Mortgage, Inc., as sellers,
and First Union National Bank, as buyer. |
| |
| 10.22*** | | Form of
Addendum to Master Repurchase Agreement dated as of February
12, 1999
between Registrant’s taxable affiliate, as seller, and
First Union Bank, as buyer, with
respect to the residual interest on certain asset-backed
bonds. |
| |
| 10.23*** | | Warrant
Agreement dated as of February 12, 1999 between the Registrant
and First Union
National Bank. |
Exhibit No.
| | Description of Document
| | |
|---|
| |
| 10.24**** | | Warrant
Agreement, dated as of March 10, 1999, by and between NovaStar
Financial, Inc.
and Residential Funding Corporation, and related Guaranty
Warrant, Tag Along Warrant
and Registration Rights Agreement as filed with April 6, 1999
8-K of NovaStar Financial,
Inc. |
| |
| 10.25**** | | Registration Rights Agreement, dated March 25, 1999
among NovaStar Financial and
Stifel, Nicolaus & Company, Incorporated. |
| |
| 10.26***** | | Warehousing Credit and Security Agreement, dated as of
December 29, 1999, between
NovaStar Financial, Inc., NovaStar Mortgage, Inc., NovaStar
Capital, Inc. and Residential
Funding Corporation. |
| |
| 11.1 | | Statement regarding computation of per share
earnings. |
| |
| 21.1 | | Subsidiaries of the Registrant. |
| |
| 27.1 | | Financial Data Schedule. |
* | Incorporated by reference to the correspondingly
numbered exhibit to the Registration Statement on Form S-11
(373-32327) filed by the Registrant with the SEC on July 29
1997, as amended. |
** | Incorporated by reference to the correspondingly
numbered exhibit to Form 8-K filed by the Registrant with the
SEC on December 22, 1998. |
*** | Incorporated by reference to the correspondingly
numbered exhibit to Form 8-K filed by the Registrant with the
SEC on February 23, 1999. |
**** | Incorporated by reference to the correspondingly
numbered exhibit to Form 8-K filed by the Registrant with the
SEC on April 5, 1999. |
*****Incorporated by reference to the correspondingly
numbered exhibit to Annual Report on Form 10K filed by the
Registrant with the SEC on March 20, 2000.
(b) NovaStar Financial has filed the following
Form 8-K’s:
| Ÿ | NovaStar Financial filed no Form 8-K’s during the
quarterly period ended March 31, 2000. |
NOVASTAR FINANCIAL, INC.
Pursuant to the requirements 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.-authorized.
|
NOVASTAR
FINANCIAL, INC.NOVASTAR
FINANCIAL
, INC
.
|
DATE: November 12, 1999
|
Chairman of the Board, Secretary and
|
|
(Principal Executive Officer)
|
DATE: NovemberMay
12, 19992000
|
Vice
President, Treasurer and Controller and |
|
(Principal Accounting Officer)
|
DATE: May
12, 2000