UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)xOF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2000.ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE¨SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number: 001-13533NovaStar 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,
Westwood,
KS
(Address of
principal executive offices)
|
66205
(Zip
Code)
|
(913)
362-1090
(Registrants
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 registrants common stock outstanding as of May
10, 2000 was 6,983,298.
NOVASTAR
FINANCIAL, INC.
FORM
10-Q
Quarter Ended
March 31, 1999
INDEX
Page |
|||||
---|---|---|---|---|---|
PART IFINANCIAL INFORMATION | |||||
Item 1. Consolidated Financial Statements: | |||||
Balance Sheets | 1 | ||||
Statements of Operations | 2 | ||||
Statements of Cash Flows | 3 | ||||
Notes | 4 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 5 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 30 | ||||
PART IIOTHER INFORMATION | |||||
Item 1. Legal Proceedings | 35 | ||||
Item 2. Changes in Securities | 35 | ||||
Item 3. Defaults Upon Senior Securities | 35 | ||||
Item 4. Submission of Matters to a Vote of Security Holders | 35 | ||||
Item 5. Other Information | 35 | ||||
Item 6. Exhibits and Reports on Form 8-K | 35 | ||||
Signatures | 38 |
NOVASTAR FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share
amounts)
ASSETS |
March 31,
2000 |
December 31,
1999 |
||||
---|---|---|---|---|---|---|
(unaudited) | ||||||
Cash and cash equivalents | $ 2,345 | $ 2,395 | ||||
Mortgage loans | 551,776 | 620,406 | ||||
Mortgage securitiesavailable-for-sale | 6,775 | 6,775 | ||||
Accrued interest receivable | 11,860 | 12,452 | ||||
Advances to and investment in NFI Holding Corporation | 32,473 | 29,208 | ||||
Assets acquired through foreclosure | 18,446 | 16,891 | ||||
Other assets | 1,856 | 2,383 | ||||
Total assets | $625,531 | $690,510 | ||||
LIABILITIES AND STOCKHOLDERS
EQUITY |
||||||
Liabilities: | ||||||
Collateralized mortgage obligations | $520,895 | $586,868 | ||||
Dividends payable | 525 | 525 | ||||
Accounts payable and other liabilities | 2,454 | 1,803 | ||||
Total liabilities | 523,874 | 589,196 | ||||
Stockholders equity: | ||||||
Capital stock, $0.01 par value, 50,000,000 shares authorized: | ||||||
Class B, convertible preferred stock, 4,285,714
shares issued and outstanding,
respectively |
43 | 43 | ||||
Common stock, 8,140,698 and 8,130,069 shares
issued; 7,212,298 and
7,460,523 shares outstanding, respectively |
81 | 81 | ||||
Additional paid-in capital | 151,187 | 151,173 | ||||
Accumulated deficit | (40,815 | ) | (41,502 | ) | ||
Accumulated other comprehensive income | 836 | 242 | ||||
Cost of treasury stock | (2,829 | ) | (1,877 | ) | ||
Notes receivable from founders | (6,846 | ) | (6,846 | ) | ||
Total stockholders equity | 101,657 | 101,314 | ||||
Total liabilities and stockholders equity | $625,531 | $690,510 | ||||
See notes
to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands)
For
the Three
Months Ended March 31, |
||||||
---|---|---|---|---|---|---|
2000 |
1999 |
|||||
Interest income: | ||||||
Mortgage loans | $12,812 | $19,550 | ||||
Mortgage securities | 266 | | ||||
Total interest income | 13,078 | 19,550 | ||||
Interest expense | 9,698 | 13,209 | ||||
Net interest income | 3,380 | 6,341 | ||||
Prepayment penalty income | 489 | 656 | ||||
Provision for credit losses | (1,579 | ) | (2,299 | ) | ||
Premiums for mortgage loan insurance | (365 | ) | (457 | ) | ||
Loan servicing fees paid to NovaStar Mortgage, Inc. | (696 | ) | (1,115 | ) | ||
Net portfolio income | 1,229 | 3,126 | ||||
Other income (loss) | (2 | ) | 279 | |||
Equity in net income of NFI Holding Corporation | 699 | 551 | ||||
General and administrative expenses: | ||||||
Net fees for other services provided by NovaStar Mortgage, Inc. | 3 | 1,050 | ||||
Compensation and benefits | 384 | 585 | ||||
Professional and outside services | 130 | 332 | ||||
Office administration | 171 | 208 | ||||
Other | 26 | 55 | ||||
Total general and administrative expenses | 714 | 2,230 | ||||
Net income | $ 1,212 | $ 1,726 | ||||
Dividends on preferred shares | $ (525 | ) | $ (31 | ) | ||
Net income available to common shareholders | $ 687 | $ 1,695 | ||||
Basic earnings per share | $ 0.09 | $ 0.21 | ||||
Diluted earnings per share | $ 0.09 | $ 0.20 | ||||
Weighted average basic shares outstanding | 7,342 | 8,130 | ||||
Weighted average diluted shares outstanding | 7,352 | 8,638 | ||||
Dividends declared per common share | $ | $ | ||||
See notes
to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
For
the Three Months
Ended March 31, |
||||||
---|---|---|---|---|---|---|
2000 |
1999 |
|||||
Net cash provided by operating activities | $ 5,486 | $ 6,315 | ||||
Cash flow from investing activities: | ||||||
Mortgage loan repayments | 59,770 | 61,233 | ||||
Sales of assets acquired through foreclosure | 6,697 | 3,757 | ||||
Mortgage loans sold to others | | 4,545 | ||||
Proceeds from paydowns on available-for-sale securities | 661 | | ||||
Net change in advance to NFI Holding Corporation | (4,936 | ) | (11,784 | ) | ||
Net cash provided by investing activities | 62,192 | 57,751 | ||||
Cash flow from financing activities: | ||||||
Payments on collateralized mortgage obligations | (66,265 | ) | (72,395 | ) | ||
Change in short-term borrowings | | (18,029 | ) | |||
Proceeds from issuance of capital stock and
exercise of equity instruments, net of
offering costs |
14 | 28,761 | ||||
Dividends paid on preferred stock | (525 | ) | | |||
Treasury stock purchases | (952 | ) | | |||
Net cash used in financing activities | (67,728 | ) | (61,663 | ) | ||
Net increase (decrease) in cash and cash equivalents | (50 | ) | 2,403 | |||
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: | ||||||
Cash paid for interest | $ 9,801 | $ 13,487 | ||||
Issuance of warrants | $ | $ 350 | ||||
Dividends payable | $ 525 | $ 2,876 | ||||
Assets acquired through foreclosure | $ 6,935 | $ 7,270 | ||||
See notes
to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2000 (Unaudited)
Note
1. Financial Statement Presentation
The consolidated financial statements as of and for
the periods ended March 31, 2000 and 1999 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 Managements 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 Financials annual
report to shareholders and annual report on Form 10-K for the
fiscal year ended December 31, 1999.
NovaStar Financial owns 100 percent of the common
stock of three special purpose entitiesNovaStar 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. 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 Holding using the equity
method.
Note
2. NovaStar 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 31,
2000, which NovaStar Financial purchased from NovaStar Mortgage
in April 2000. Through NovaStar Financials indirect
ownership of NFI Holding, a gain of $1.5 million was recognized
on this transaction.
Item
2. Managements 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 notes thereto as well as NovaStar
Financials annual report to shareholders and annual report
on Form 10-K for the fiscal year ended December 31,
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 the annual report
on Form 10-K for the fiscal year ended December 31,
1999.
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. 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
BusinessBusiness 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 1999 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. These special purpose entities were
created 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, meaning the operations of NFI Holding are not
consolidated with NovaStar Financial.
Recent Developments
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 REITs assets. Accordingly, NovaStar
Financial expects to acquire all of the common stock of NFI
Holding Corporation from Scott Hartman and Lance Anderson in
January 2001.
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 Financials Annual Report on Form 10-K under
Federal Income Tax Consequences.
Description of Business
Business of NovaStar Financial:
|
|
Founded
in 1996 as a specialty finance lender to invest in mortgage
assets;
|
|
Assets
have primarily come from the wholesale origination of
nonconforming, single-family, residential mortgage loans of
its affiliate, NovaStar Mortgage;
|
|
Operates as a long-term portfolio investor;
|
|
Loans
are financed on a short-term basis through various warehouse
facilities. Long-term financing is provided through
securitization where asset-backed bonds are issued in
financing-structured transactions;
|
|
Earnings are generated from spread income on the
mortgage loan 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:
|
|
Primary
customer is the retail mortgage broker who deals with the
borrower. NovaStar Mortgages account executives work
with more than 2,000 brokers to solicit loans.
|
|
Borrowers generally are individuals or families who do
not qualify for agency/conventional lending programs because
of a lack of available documentation or previous credit
difficulties. Often, these borrowers have built up high-rate
consumer debt and are attempting to use equity in their home
to consolidate debt and lower their total monthly
payments.
|
|
Loans
are financed on a short-term basis through warehouse
facilities. Long-term financing is provided through
securitization where asset-backed bonds are issued in
transactions that are structured as a sale.
|
|
Loans
are held for saleeither 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 is forgiven if certain incentive
performance targets are achieved. The incentive tests relate to
the return generated to investors in the private placement,
including the appreciation in stock price, the value of the
warrants, and dividends paid. One tranche will be forgiven for
each fiscal year NovaStar Financial generates a return of 15% to
investors in the private placement. All three tranches will be
forgiven if a return of 100% is generated within five
years.
During the period from the closing of the private
placement through December 31, 1997, NovaStar Financials
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 Financial
has not recognized any further forgiveness of the notes since
1997 as incentive performance targets have 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
Financials recourse is limited to the collateral. These
notes and accrued interest are classified as part of the
contra-equity account, notes receivable from founders. Unpaid
principal on the notes was $4,340,000 as of March 31, 2000 and
December 31, 1999. Accrued interest on these notes was $339,000
as of March 31, 2000 and December 31, 1999.
Financial Condition of NovaStar Financial, Inc. as of
March 31, 2000 and December 31, 1999
NovaStar Financials balance sheets consist
primarily of securitized mortgage loans originated by and
purchased from NovaStar Mortgage, which serve as collateral for
its collateralized mortgage obligations. The carrying value of
mortgage loans as of March 31, 2000 was $552 million versus $620
million as of December 31, 1999. The carrying value of
collateralized mortgage obligations as of March 31, 2000 was
$521 million compared with $587 million as of December 31, 1999.
The decline in both balance sheet items is primarily a result of
principal paydowns that occurred during the first quarter
2000.
Mortgage Loans. Table 1 is a presentation of
loans as of March 31, 2000 and December 31, 1999 and their
credit grades. Table 2 is a summary of all mortgage loans owned
by NovaStar Financial as of March 31, 2000 and December 31, 1999
by state. These tables also provide details regarding the
collateral outstanding on NovaStar Mortgages REMIC
transactions, which NovaStar Financial owns the residual
interests. The REMIC transactions are discussed further in the
Mortgage LoansAvailable for Sale and
Mortgage Loans Sales sections of this
document.
Table
1
Mortgage Loans by Credit Grade
(dollars in thousands)
Credit Grade |
Allowed
Mortgage 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 |
||||||||||||||||
Retained loans collateralizing
asset-backed bonds: |
|||||||||||||||||||||
AA | 0 × 30 | 95 | $ 78,513 | 9.75 | % | 83.2 | % | $ 85,476 | 9.50 | % | 83.2 | % | |||||||||
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 a prospective bnorrower
is allowed to be late more than 30, 60 or 90 days. For
instance, a 3×30, 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)
|
97% on
fixed-rate purchases; all other maximum of 95%.
|
Table
2
Mortgage Loans by State
Percent of Portfolio
(based
on current principal balance)
Collateral Location |
Retained loans collateralizing asset-
backed bondson balance sheet |
Sold
loans collateralizing asset-
backed bondsoff balance sheet |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2000 |
December 31, 1999 |
March 31, 2000 |
December 31, 1999 |
|||||||||
California | 15 | % | 16 | % | 9 | % | 7 | % | ||||
Florida | 14 | 14 | 18 | 21 | ||||||||
Washington | 7 | 7 | 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 | 45 | 44 | 45 | 47 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Table 3 provides a summary of NovaStar
Financials mortgage loans by type and carrying value as of
March 31, 2000 and December 31, 1999.
Table
3
Carrying Value of Loans by
Product/Type
March
31, 2000 and December 31, 1999
(in
thousands)
Product/Type |
March 31, 2000 |
December 31, 1999 |
||||
---|---|---|---|---|---|---|
Retained loans collateralizing asset-backed bondson balance sheet: | ||||||
Two and three-year fixed. | $293,789 | $343,193 | ||||
Six-month LIBOR and one-year CMT | 12,418 | 43,178 | ||||
30/15-year fixed and balloon | 244,062 | 232,451 | ||||
Outstanding principal | 550,269 | 618,822 | ||||
Premium | 11,270 | 12,689 | ||||
Allowance for credit losses | (9,763 | ) | (11,105 | ) | ||
Carrying Value | $551,776 | $620,406 | ||||
Carrying value as a percent of principal | 100.27 | % | 100.26 | % | ||
Sold loans collateralizing asset-backed bondsoff 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 an analysis of mortgage loans
and prepayment penalties.
Table
4
Mortgage Loan Prepayment Penalties
March
31, 2000 and December 31, 1999 (dollars in
thousands)
Current
Principal |
Premium |
Percent
with Prepayment Penalty |
Weighted Average |
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Coupon |
Loan-to-
value |
Remaining
Prepayment Penalty Period (in years) - Loans with Penalty |
|||||||||||||||||||||||||||||
As of March 31, 2000 | |||||||||||||||||||||||||||||||
Retained loans collateralizing asset-
backed bonds: |
|||||||||||||||||||||||||||||||
NHES 1997-1 | $ 73,555 | $ 3,455 | 27 | % | 11.23 | % | 75.4 | % | 0.44 | ||||||||||||||||||||||
NHES 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 | | |||||||||||||||||||||||||
Total 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
1999-1 |
$143,328 | $ | 84 | % | 10.08 | % | 81.5 | % | 2.03 | ||||||||||||||||||||||
(A)
|
NovaStar Financial owns economic residual interests.
The mortgage loans are not retained on the balance sheet of
NovaStar Financial.
|
(B)
|
The
economic residual interests in NMFT 2000-1 were purchased by
NovaStar Financial April 1, 2000.
|
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 | ||||||||||||||
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 |
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
SecuritiesAvailable-For-Sale. In September 1999,
NovaStar Financial purchased NovaStar Mortgages economic
residual certificates in NovaStar Mortgage Funding Trust Series
1999-1. As the owner of the residual certificates, NovaStar
Financial receives the net cash flow of the NovaStar Mortgage
Funding Trust Series 1999-1 asset-backed bonds, which represent
the right to receive, over the life of the securitization, the
excess of the weighted average coupon on the mortgage loan
collateral over the sum of the interest rate on the bonds, a
normal servicing fee, a trustee fee, insurance premiums and the
credit losses relating to the loans securitized. As of March 31,
2000 and December 31, 1999, the carrying value of the NMFT
1999-1 economic residual interests 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 as 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.
As 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 Mortgage Funding Trust Series 1999-1 and 2000-1
mortgage loan collateral and bonds as of March 31, 2000 and
December 31, 1999 are 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 |
|||||||
Constant Prepayment Rate | 35 to 45 | 25 to 30 | 35 to 45 | ||||||
Annual Constant Default Rate (basis points) | 75 | 100 | 75 | ||||||
Discount Rate | 20 | % | 15 | % | 20 | % | |||
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 | ||||||
Assets Acquired through Foreclosure. As of
March 31, 2000, NovaStar Financial had 211 loans in real estate
owned with a carrying value of $18.4 million (principal of $20.6
million) compared to 192 loans with a carrying value of $16.9
million (principal of $24.4 million) as of December 31,
1999.
Short-term and Long-term Financing
Arrangements. Mortgage loan originations are funded with
various financing facilities prior to securitization. Loans
originated have typically been funded initially through a $75
million committed warehouse line with First Union National Bank
under which NovaStar Financial and NovaStar Mortgage are
co-borrowers. NovaStar Financial and NovaStar Mortgage also have
a $50 million committed warehouse facility with GMAC/RFC.
NovaStar Financial and NovaStar Mortgage also use repurchase
agreements as a means of warehousing loans prior to
securitization. First Union provides a $175 million committed
facility for such purposes. First Union also provides a $25
million committed facility secured by residual interests in
asset-backed bonds that is committed through December 2001. As
of March 31, 2000 and December 31, 1999, NovaStar Financial had
no borrowings under these facilities. Amounts outstanding under
these facilities by NovaStar Mortgage as of March 31, 2000 are
detailed in Table 21 of this document.
On a long-term basis, NovaStar Financial has
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. Non-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 Mortgages 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.
The following table provides details regarding
NovaStar Financials CMOs as of March 31, 2000 and December
31, 1999. This table also provides details regarding the bonds
and collateral outstanding underlying NovaStar Financials
economic residual interests.
Table
7
Collateralized Mortgage Obligations
March
31, 2000 and December 31, 1999
(dollars in thousands)
Collateralized
Mortgage Obligation |
Mortgage Loans |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Remaining
Principal |
Interest
Rate |
Remaining
Principal (A) |
Weighted
Average Coupon |
Estimated
Weighted Average Months to Call |
|||||||||
As of March 31, 2000: | |||||||||||||
Retained loans collateralizing asset-backed bonds: | |||||||||||||
NHES 1997-1 | $ 67,284 | 6.59 | % | $ 76,481 | 11.23 | % | | ||||||
NHES 1997-2 | 76,171 | 6.38 | 86,166 | 11.04 | 9 | ||||||||
NHES 1998-1 | 161,505 | 6.20 | 175,705 | 10.45 | 18 | ||||||||
NHES 1998-2 | 217,870 | 6.35 | 229,807 | 9.98 | 26 | ||||||||
Unamortized debt issuance costs, net | (1,935 | ) | |||||||||||
Total on balance sheet | $520,895 | ||||||||||||
Sold loans collateralizing asset-backed bonds: | |||||||||||||
NMFT 1999-1 | $133,994 | 6.46 | % | $136,613 | 10.07 | % | 52 | ||||||
NMFT 2000-1 (B) | 226,320 | 6.53 | 127,814 | 10.03 | 66 | ||||||||
Total off balance sheet | $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 Financials stockholders equity
as of March 31, 2000 compared with December 31, 1999 is a result
of the following:
|
$1.2
million increase due to net income recognized for the three
months ended March 31, 2000.
|
|
$952,000 decrease as a result of repurchases of common
stock. NovaStar Financials 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.
|
|
$594,000 increase in unrealized gain of economic
residual interests in NovaStar Mortgages 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
Financials balance sheet through its indirect ownership
of NovaStar Mortgage through NFI Holding.
|
|
$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 three months ended March 31,
1999.
NovaStar Financials primary 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 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
8
Interest Analysis
(dollars in thousands)
Mortgage Loans |
Mortgage Securities |
Total |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended
March 31, 2000 |
Average
Balance |
Interest
Income/ Expense |
Annual
Yield/ Rate |
Average
Balance |
Interest
Income/ Expense |
Annual
Yield/ Rate |
Average
Balance |
Interest
Income/ Expense |
Annual
Yield/ Rate |
||||||||||||
Interest-earning mortgage assets | $532,962 | $12,812 | 9.61 | % | $6,450 | $266 | 16.50 | % | $539,412 | $13,078 | 9.70 | % | |||||||||
Interest-bearing liabilities
Collateralized mortgage obligations |
$557,299 | $ 9,397 | 6.74 | % | | | | $557,299 | $ 9,397 | 6.74 | % | ||||||||||
Other borrowings | | | | | | | | | | ||||||||||||
Cost of
derivative financial
Instruments hedging liabilities |
301 | 301 | |||||||||||||||||||
Total borrowings | $557,299 | $ 9,698 | 6.96 | % | $ | $ | | % | $557,299 | $ 9,698 | 6.96 | % | |||||||||
Net interest income | $ 3,114 | $266 | $ 3,380 | ||||||||||||||||||
Net interest spread | 2.65 | % | 16.50 | % | 2.74 | % | |||||||||||||||
Net yield | 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 | ||||||||||||
Cost of
derivative financial
Instruments hedging liabilities |
580 | | 580 | ||||||||||||||||||
Total borrowings | $879,610 | $13,209 | 6.01 | % | $ | | | % | $879,610 | $13,209 | 6.01 | % | |||||||||
Net interest income | $ 6,341 | $ | $ 6,341 | ||||||||||||||||||
Net interest spread | 3.41 | % | | % | 3.41 | % | |||||||||||||||
Net yield. | 3.05 | % | | % | 3.05 | % | |||||||||||||||
Interest Income. During 2000, mortgage loans
earned $12.8 million, or a yield of 9.6%, compared with $19.6
million, or a yield of 9.4% for the same period of 1999.
Mortgage securities income for 2000 consists of earnings on
economic residual interests that NovaStar Financial purchased
from NovaStar Mortgage in September 1999. In total, assets
earned $13.1 million, or a yield of 9.7% for the three months
ended March 31, 2000. During the same period of 1999, assets
earned $19.6 million or a 9.4% yield. As noted in Table 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 Expense. 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 three months ended March
31, 2000 consisted primarily of financing costs on
collateralized mortgage obligations compared with the same
period of 1999, which also included a short-term financing
arrangement with GMAC/RFC secured by residual interests in
NovaStar Financials CMOs. In 1998, NovaStar Financial
borrowed $15 million from GMAC/RFC, which included a $3 million
financing fee. In February 1999, NovaStar Financial used the
First Union residual facility to pay this debt in full. In March
1999, proceeds from the convertible preferred stock offering
repaid all the outstanding debt on the residual
facility.
NovaStar Financials collateralized mortgage
obligations are indexed to LIBOR. During the three months ended
March 31, 2000, one-month LIBOR averaged 5.92% compared with
4.95% for same period of 1999. Because the Federal Reserve Board
increased the targeted federal funds interest rate in the latter
part of 1999, effective borrowing costs have been higher in
2000. As with interest income, the cost of funds in the future
will largely depend on market conditions, most notably levels of
short-term interest rates. Rates on other borrowings generally
fluctuate with short-term market interest rates, such as LIBOR
or the federal funds rate.
Net Interest Income and Spread. Net interest
income on mortgage loans for the three months ended March 31,
2000 was $3.1 million, or 2.3% of average interest-earning
mortgage loans, compared with $6.3 million, or 3.1% for the same
period of 1999. Net interest spread on mortgage loans was 2.7%
and 3.4%, respectively, for the three months ended March 31,
2000 and 1999. Net interest income on mortgage securities
(economic residual interests) during the three months ended
March 31, 2000 was $266,000, or 16.5% of average
interest-earning mortgage securities and net interest 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.
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
SecuritiesAvailable-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 three months ended March 31, 2000 and 1999, net
interest expense incurred on hedging agreements was $301,000 and
$580,000, respectively, which is included as a component of
interest expense.
Prepayment Penalty Income
NovaStar 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 same period of
1999. As of March 31, 2000, 54% of NovaStar Financials
mortgage loan portfolio had prepayment penalties compared with
58% as of December 31, 1999. Prepayment penalties totaled
$489,000 during the three months ended March 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, NovaStar Financial and NovaStar
Mortgage executed an agreement whereby lender-paid mortgage
insurance coverage is purchased on selected mortgage loans. The
use of mortgage insurance is one method of managing the credit
risk in the mortgage asset portfolio. Going forward, management
expects that it will evaluate the cost-benefit of securing
lender paid mortgage insurance for each securitization
transaction.
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 NovaStars
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 in
NMFT 2000-1 on April 1, 2000.
Premiums for mortgage insurance on loans maintained
on the balance sheet of NovaStar 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 loans
serving as collateral for NMFT 1999-1 and NMFT 2000-1 reduce
NovaStar Financials monthly residual cashflow receipt and
are not included in the amount of total premiums paid set forth
above.
Provisions for Credit Losses
NovaStar Financial owns 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 the allowance at a level
sufficient to cover probable losses inherent in the loan
portfolio. Charge-offs are recognized at the time of foreclosure
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 a
delinquency migration analysis. This analysis takes into
consideration historical information regarding foreclosure and
loss severity experience and applies that information to the
portfolio at the reporting date.
During the three months ended March 31, 2000,
NovaStar Financial made provisions for losses of $1.6 million
and incurred net charge-offs of $2.9 million, compared to $2.3
million and $2.4 million during the same period of 1999.
Charge-offs during the first quarter of 2000 include $191,000
resulting from short sale transactions and loans charged off in
full compared with $224,000 during the same period of
1999.
The level and trend of charge-offs in 1999 led
management to conclude that total losses on securitized mortgage
loans will be higher, and will occur earlier, than originally
projected. The provisions during 1999 and resulting allowance as
of December 31, 1999 reflect the increased loss activity. In the
opinion of management, the allowance for credit losses as of
March 31, 2000 is adequate to cover losses inherent in the
portfolio at that date. If losses do not develop in accordance
with current expectations, future provisions will be increased
or decreased as necessary. Management also believes that
internal processes involving quality control, appraisal review
and servicing that have been made as a result of experience
to-date will result in lower losses being incurred on loans
currently being originated.
Table 9 is a rollforward of the activity in the
allowance for credit losses during 2000 and 1999.
Table
9
Rollforward of Allowance for Credit
Losses
(in
thousands)
2000 |
1999 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31 |
December 31 |
September 30 |
June
30 |
March 31 |
|||||||||||
Beginning balance | $11,105 | $ 5,370 | $3,573 | $3,492 | $3,573 | ||||||||||
Provision for credit losses | 1,579 | 10,579 | 5,634 | 3,566 | 2,299 | ||||||||||
Amounts charged off, net of recoveries | (2,921 | ) | (4,844 | ) | (3,837 | ) | (3,485 | ) | (2,380 | ) | |||||
Ending Balance. | $ 9,763 | $11,105 | $5,370 | $3,573 | $3,492 | ||||||||||
The following tables provide details regarding the
delinquencies, defaults, and loss statistics of NovaStar
Financials 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 fee is due to principal paydowns between the
two periods.
General and Administrative Expenses
General and administrative expenses for the three
months ended March 31, 2000 and 1999 are provided in Table 12.
Table 13 displays the relationship of portfolio expenses to
stockholders equity during 2000 and 1999 by
quarter.
Table
12
General and Administrative Expenses
(dollars in thousands)
Three Months Ended March 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|
2000 |
1999 |
|||||||||
Percent of
Stockholders Equity |
Percent of
Stockholders Equity |
|||||||||
Compensation and benefits | $384 | 0.36 | % | $ 585 | 0.49 | % | ||||
Professional and outside services | 130 | 0.12 | 332 | 0.28 | ||||||
Office administration | 171 | 0.16 | 208 | 0.17 | ||||||
Other | 26 | 0.02 | 55 | 0.05 | ||||||
Total general and administrative expenses
before
intercompany fees |
711 | 0.66 | % | 1,180 | 0.99 | % | ||||
Fees for services provided by NovaStar Mortgage, Inc. | 3 | 1,050 | ||||||||
Total general and administrative expenses | $714 | $2,230 | ||||||||
Table
13
Portfolio Related Expenses as a
Percent of Stockholders Equity
2000
and 1999
Percent of
Stockholders Equity |
||
---|---|---|
2000: | ||
First quarter | 0.66 | |
1999: | ||
Fourth quarter | 0.91 | |
Third quarter | 0.76 | |
Second quarter | 0.52 | |
First quarter | 0.99 |
Compensation and benefits includes employee base
salaries, benefit costs and incentive compensation awards. The
decrease in compensation and benefits for the three months ended
March 31, 2000 compared with the same period of 1999 is due to
staff reductions and employee cost allocations to NovaStar
Mortgage.
Professional and outside services include fees for
legal and accounting 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
three months ended March 31, 2000 and 1999.
Three Months
Ended March 31, |
|||||
---|---|---|---|---|---|
2000 |
1999 |
||||
Amounts paid to NovaStar Mortgage: | |||||
Loan servicing fees | $696 | $1,115 | |||
Administrative fees, net of guaranty fees | $117 | $1,050 | |||
Amounts received from NovaStar Mortgage: | |||||
Intercompany interest income | (114 | ) | | ||
Net fees for other services provided by Novastar Mortgage, Inc. | $ 3 | $1,050 | |||
The significant decline in these fees for the three
months ended March 31, 2000 compared with 1999 is due to the
cancellation of the administrative fees intercompany agreement
on April 1, 1999, since NovaStar Financial is no longer
purchasing loans from NovaStar Mortgage. 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 has
guaranteed the performance of NovaStar Mortgage.
Equity
in Earnings of NFI Holding Corporation
For the three months ended March 31, 2000, NFI
Holding recorded net income of $706,000 compared with net income
of $557,000 for the same period of 1999. NovaStar Financial
records its portion of the earnings as equity in net earnings of
NFI Holding in its income statement. NFI Holdings net
earnings include the net earnings of NovaStar Mortgage, a
subsidiary of NFI Holding as discussed under Basis of
Presentation. NFI Holdings financial position and
results of operation for the three months ended March 31, 2000
and 1999 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 14 is a summary of the
differences between net income or loss reported for GAAP and
taxable income for three months ended March 31, 2000 and
1999.
Table
14
Taxable Income (Loss)
Three
Months Ended March 31, 2000 and 1999
(in
thousands)
March 31, |
||||||
---|---|---|---|---|---|---|
2000 |
1999 |
|||||
Net income | $ 1,212 | $ 1,726 | ||||
Use of net operating loss carryforward | | (1,475 | ) | |||
Results of NFI Holding and subsidiaries | (699 | ) | (551 | ) | ||
Provision for credit losses | 1,579 | 2,299 | ||||
Loans charged-off | (2,921 | ) | (2,380 | ) | ||
Other, net | 239 | 381 | ||||
Estimated taxable income (loss) | $ (590 | ) | $ | |||
NovaStar Financial has a net operating loss
carryforward of approximately $3.1 million available to offset
taxable income in 2000, and thereby reduce the amount of
required distributions under REIT guidelines. In addition,
dividends paid on convertible preferred stock serve to reduce
the amount of required distributions to common
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 Financials 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 Mortgages loan sales.
The following table presents NFI Holdings
consolidated financial statements as of March 31, 2000 and 1999,
which consists primarily of the assets, liabilities, and
operational results of NovaStar Mortgage.
NFI
Holding Corporation
Condensed Consolidated Balances Sheets
(dollars in thousands)
March 31,
2000 |
December 31,
1999 |
|||
---|---|---|---|---|
Assets | ||||
Cash and cash equivalents | $ 2,219 | $ 1,466 | ||
Mortgage loans | 61,489 | 107,916 | ||
Mortgage securitiesavailable for sale | 13,500 | | ||
Other assets | 11,881 | 10,061 | ||
Total assets | $89,089 | $119,443 | ||
Liabilities and Stockholders Equity | ||||
Liabilities: | ||||
Borrowings | $38,746 | $ 78,448 | ||
Due to NovaStar Financial, Inc. | 24,721 | 22,161 | ||
Accounts payable and other liabilities | 17,870 | 11,787 | ||
Total liabilities | 81,337 | 112,396 | ||
Stockholders equity | 7,752 | 7,047 | ||
Total liabilities and stockholders equity | $89,089 | $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 | 1,636 | 1,185 | |||
Provision for credit losses | (149 | ) | 170 | ||
Net interest income after provision for credit losses | 1,785 | 1,015 | |||
Other income: | |||||
Fees from third parties | 706 | 341 | |||
Fees received from, net of paid to, NovaStar Financial, Inc. | 699 | 2,165 | |||
Net gain on sales of mortgage assets | 2,725 | 2,847 | |||
Total other income | 4,130 | 5,353 | |||
General and administrative expenses | 5,209 | 5,811 | |||
Net income before taxes | 706 | 557 | |||
Income tax expense | | | |||
Net income | $ 706 | $ 557 | |||
Financial Condition of NFI Holding Corporation as of
March 31, 2000 and December 31, 1999
Mortgage Loan Originations. NFI Holding
originated 1,232 non-conforming residential mortgage loans
during the three months ended March 31, 2000 with an aggregate
principal amount of $132 million. Virtually all of NFI
Holdings mortgage assets as of March 31, 2000 and December
31, 1999 consist of non-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 15 is a summary of NFI Holdings
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 origination
costs of production.
Table
15
2000
and 1999 Quarterly Wholesale Loan Originations
(dollars in 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 |
|||||||||||||||||
2000: | |||||||||||||||||||
First quarter | 1,232 | $132,072 | $107,201 | 101.1 | 80 | % | 5.45 | 10.16 | % | 93 | % | ||||||||
1999: | |||||||||||||||||||
Fourth quarter | 1,265 | $130,288 | $102,994 | 101.0 | 82 | % | 5.30 | 10.04 | % | 91 | % | ||||||||
Third quarter | 1,204 | 125,140 | 103,937 | 100.8 | 82 | 5.28 | 9.87 | 91 | |||||||||||
Second quarter | 1,161 | 114,631 | 98,735 | 101.1 | 82 | 5.14 | 9.82 | 89 | |||||||||||
First quarter | 865 | 82,495 | 95,370 | 100.5 | 80 | 4.95 | 9.85 | 89 | |||||||||||
1999 total | 4,495 | $452,554 | $100,679 | 100.9 | 82 | % | 5.19 | 9.90 | % | 90 | % | ||||||||
(A)
|
AAA=7,
AA=6, A=5, A-=4, B=3, C=2, D=1
|
Table
16
Quarterly 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 |
Principal
Amount |
Net
Gain
Recognized |
|||||||
2000: | |||||||||||
First quarter | $ 48,548 | $ 1,166 | 104.0 | % | $ 128,171 | $ 1,544 | |||||
1999: | |||||||||||
Fourth quarter | $ 109,443 | $ 2,583 | 104.1 | % | $ | $ | |||||
Third quarter | 110,512 | 3,075 | 104.2 | | | ||||||
Second quarter | 98,048 | 2,911 | 104.4 | | | ||||||
First quarter | 72,824 | 1,593 | 103.6 | 138,847 | 1,250 | ||||||
1999 total | $ 390,827 | $ 10,162 | 104.1 | $ 138,847 | $ 1,250 | ||||||
Table
17
Wholesale Loan Costs of Production
Gross Loan
Production |
Premium paid
to broker, net of fees collected |
Total
Acquisition Cost |
||||
---|---|---|---|---|---|---|
Costs as a percent of principal: | ||||||
2000: | ||||||
First quarter | 3.3% | 0.5% | 3.8% | |||
1999: | ||||||
Fourth quarter | 3.1% | 0.5% | 3.6% | |||
Third quarter | 3.8% | 0.4% | 4.2% | |||
Second quarter | 4.2% | 0.5% | 4.7% | |||
First quarter | 6.2% | 0.2% | 6.4% | |||
As noted in the table above, NovaStar
Mortgages 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
Mortgages 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 Holdings loan originations are funded
through warehouse and repurchase facilities at First Union and
GMAC/RFC. Table 21 of the Liquidity Resources and
Capital section of this document detail borrowings
outstanding under these financing arrangements as of March 31,
2000.
Mortgage Loan Sales. In its second
securitization executed by NovaStar Mortgage during the first
quarter of 2000, $230 million in loans were sold to a Special
Purpose Entity (SPE), of which $102 million is to settle in June
2000. A gain of $1.5 million was recognized on the transaction.
Bonds issued by the SPE were $226 million and proceeds received
on the first close were used to pay down warehouse and mortgage
loan repurchase facilities of NovaStar Mortgage. The loans were
sold without recourse to NovaStar Mortgage Funding Trust Series
2000-1. NovaStar Mortgage retained residual certificates issued
by the SPE. In 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 and the mortgage servicing rights have
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
are determined by discounting estimated future cash flows using
the cash out method.
The following table details the significant
assumptions used to determine the value of the resulting
retained assets in NMFT 2000-1.
Constant
Prepayment Rate |
Annual
Constant Default Rate (basis points) |
Discount
Rate |
||||
---|---|---|---|---|---|---|
2000-1 | 25 to 30 | 100 | 15% |
Details regarding the NMFT 1999-1 and NMFT 2000-1
collateral as of March 31, 2000 and December 31, 1999 are
included in Tables 4, 5 and 7 of this document.
NFI Holding also sold $48.5 million of its whole
loan portfolio to unrelated third parties for cash at a net gain
of $1.2 million at an average price to par of 104.0 during 2000.
Table 16 of Financial Condition of NFI Holding Corporation
as of March 31, 2000 and December 31, 1999 provides a
quarterly analysis of NFI Holdings mortgage loan sales to
third parties.
Mortgage Loan Servicing. Loan servicing is
a critical part of NovaStar Mortgages 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. Non-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 19 provides summaries of delinquencies and
default statistics of NovaStar Mortgages mortgage loan
portfolio in 2000 and 1999 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 Financials mortgage loans is
provided in Table 1.
Table
19
Delinquencies and Defaults
2000 |
1999 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31 |
December 31 |
September 30 |
June
30 |
March 31 |
|||||||||||
Loan servicing portfolio | $872,693 | $894,572 | $969,343 | $1,032,065 | $1,072,393 | ||||||||||
Total defaults: | |||||||||||||||
Delinquent loans (A) | 5.58 | % | 6.28 | % | 4.75 | % | 5.21 | % | 4.12 | % | |||||
Loans in foreclosure | 3.55 | 3.62 | 3.79 | 3.36 | 3.39 | ||||||||||
Real estate owned | 2.65 | 2.71 | 2.24 | 2.20 | 1.66 | ||||||||||
(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 quarters beginning principal of
mortgage loans held in portfolio and loan origination
principal.
Table
20
Mortgage Loan ActivityNFI 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 | |||||||||||||||||
First quarter | | 20 | % | 53 | % | 26 | % | 1 | % | 100 | % | ||||||
1999 | |||||||||||||||||
Fourth quarter | | 52 | | 46 | 2 | 100 | |||||||||||
Third quarter | | 54 | | 44 | 2 | 100 | |||||||||||
Second quarter | | 32 | 13 | 54 | 1 | 100 | |||||||||||
First quarter | | 25 | 45 | 29 | 1 | 100 |
Results of Operations of NFI Holding
CorporationThree Months Ended March 31, 2000 Compared to
the three months ended March 31, 1999
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.
The following summarizes reasons impacting
operating results of NFI Holding for the three months ended
March 31, 2000 compared with the same period of
1999:
|
Increase in NFI Holdings net interest income
during 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 first quarter of 2000
compared with 1999. NFI Holdings weighted average loan
volume for the first quarter of 2000 was $136 million compared
with $120 million for the same period of 1999. Spread income
was 3.3% for the three months ended March 31, 2000 compared
with 2.7% for the three months ended March 31,
1999.
|
|
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 on April 1, 1999. A breakdown of the
intercompany fees by type is included in the Results of
Operations of NovaStar Financial, Inc.Three Months Ended
March 31, 2000 Compared to the Three Months Ended March 31,
1999 section of this document.
|
|
During
the three months ended March 31, 2000, NovaStar Mortgage
recognized net gains of $2.7 million on the sale of whole
loans. Of that amount, $1.5 million was recognized as a result
of the closing of NovaStar Mortgages second
securitization transaction. The remainder of the gain was due
to various whole loan sales to third parties for cash. During
the same period of 1999, NovaStar Mortgage recognized gains of
$2.8 million on the transfer of whole loans, including $1.3
million on the first close of the NMFT 1999-1 asset-backed
bond transaction.
|
|
Decline
in general administrative expenses from $5.8 million to $5.2
million is due to increased efficiencies in NovaStar
Mortgages wholesale origination operation during the
first quarter of 2000 compared with the same period of 1999.
The 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 presented in
Table 17.
|
|
No
income tax expense has been recorded in the first quarter of
2000 because of the existence of substantial net operating
loss carryforwards, which are expected to offset pre-tax
income in 2000.
|
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. Mortgage asset
sales, principal, interest and fees collected 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 1999, NovaStar Financial also
improved its equity and liquidity positions significantly
by:
|
Securing lending facilities with First Union National
Bank and GMAC/RFC.
|
|
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.
|
NovaStar Mortgage requires substantial cash to fund
loan originations and operating costs. As of March 31, 2000, NFI
Holding owned $61.5 million of non-conforming mortgage loans.
NFI Holding provided financing for these loans through warehouse
and repurchase credit facilities at First 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 is
at or near the capacity of its production
infrastructure.
Table 21 is a summary of cash, financing
arrangements and available borrowing capacity for NovaStar
Financial and NovaStar Mortgage, on a combined basis, as of
March 31, 2000:
Table
21
Liquidity Resources
March
31, 2000
(in
thousands)
Maximum
Borrowing Limit |
Lending
Value of Collateral |
Borrowings |
Availability |
||||||
---|---|---|---|---|---|---|---|---|---|
Resource | |||||||||
Cash | $ 4,564 | ||||||||
First Union National Bank (A): | |||||||||
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): | |||||||||
Committed warehouse line of credit | $ 50,000 | $ 6,896 | $ 6,896 | $ | |||||
Total | $325,000 | $57,869 | $38,746 | $48,687 | |||||
(A)
|
Value
of collateral and borrowings include amounts for NovaStar
Financial and NovaStar Mortgage, as they are co-borrowers
under the arrangements with First Union National Bank and
GMAC/RFC.
|
(B)
|
Management estimates the value of the residuals range
from $55 to $70 million and does not include the value of
mortgage servicing rights.
|
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 three months ended March
31, 2000 and 1999 are presented in the consolidated statement of
cash flows.
The capital of NovaStar Financial has come
from
|
a
private placement offering of preferred stock, raising net
proceeds of $47 million.
|
|
an
initial public offering of common stock, raising net proceeds
of $67 million, and
|
|
a
private offering of convertible preferred stock, raising net
proceeds of $29 million.
|
NovaStar Financial uses capital when financing loans
on a long-term basis. Under short-term financing arrangements,
NovaStar can borrow up to the lessor of 98% of the face amount
or 95% of the market value of the loans it owns. In long-term
financing (i.e. in the form of asset-backed bonds) NovaStar can
finance approximately 95% of the market value of the loans.
NovaStar must use its own capital resources to
finance the difference between the financed portion
and the full loan cost.
During 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
for NovaStar.
During 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
available to support this mode of operation during 2000. When
NovaStar Financial fully deploys its capital, management expects
to either raise more equity from the capital markets or sell
enough loans so that it operates without the need for additional
capital.
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 of the consolidated financial statements
contained in the annual report on Form 10-K for the fiscal year
ended December 31, 1999 describes certain recently issued
accounting pronouncements. Management believes the
implementation of these pronouncements and others that have gone
into effect since the date of these reports will not have a
material impact on the consolidated financial
statements.
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 Volatility. Under its current mode
of operation, NovaStar Financial depends heavily on the market
for wholesale non-conforming mortgage loans. To conserve
capital, NovaStar Mortgage 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 mortgage loans.
Interest 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 Financials 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 the 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 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 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 2/28 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 is 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.
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.
The following are summaries of the analysis as of
March 31, 2000 and December 31, 1999.
Table
22
Interest Rate SensitivityIncome
March
31, 2000 and December 31, 1999
(dollars in thousands)
Basis Point Increase (Decrease)
in Interest Rate(A) |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As
of March 31, 2000 |
(100) |
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 | $61,610 | $64,419 | $66,954 | ||||||||||||||||
Liabilities (B) | 42,173 | 47,803 | 53,442 | ||||||||||||||||
Interest rate agreements | (1,379 | ) | (1,379 | ) | 1,122 | ||||||||||||||
Net spread income | $18,058 | $15,237 | $14,634 | ||||||||||||||||
Cumulative change in income from base (C) | $ 2,821 | | $ (603 | ) | |||||||||||||||
Percent change from base spread income (D) | 18.5 | % | | (4.0 | )% | ||||||||||||||
Percent change of capital (E) | 2.8 | % | | (0.6 | )% | ||||||||||||||
(A)
|
Income
of asset, liability or interest rate agreement in a parallel
shift in the yield curve, up and down 1%.
|
(B)
|
Includes deal expenses, loan premium amortization,
mortgage insurance premiums and provisions for credit
losses.
|
(C)
|
Total
change in estimated spread income, in dollars, from
base. Base is the estimated spread
income as of March 31, 2000 and December 31, 1999.
|
(D)
|
Total
change in estimated spread income, as a percent, from
base.
|
(E)
|
Total
change in estimated spread income as a percent of total
stockholders equity as of March 31, 2000 and December
31, 1999.
|
Table
23
Interest Rate SensitivityMarket
Value
March
31, 2000 and December 31, 1999
(dollars in thousands)
Basis Point Increase
(Decrease) in Interest Rate(A) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As
of March 31, 2000 |
100 |
100 |
|||||||||||
Change in market values of: | |||||||||||||
Assets | $ 9,564 | $(12,220 | ) | ||||||||||
Liabilities | (1,876 | ) | 2,176 | ||||||||||
Interest rate agreements | (3,825 | ) | 5,677 | ||||||||||
Cumulative change in market value | $ 3,863 | $ (4,367 | ) | ||||||||||
Percent change of market value portfolio equity (B). | 3.9 | % | (4.4 | )% | |||||||||
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 market value portfolio equity (B). | 4.4 | % | (4.4 | )% | |||||||||
(A)
|
Change
in market value of assets, liabilities or interest rate
agreements in a parallel shift in the yield curve, up and down
1%.
|
(B)
|
Total
change in estimated market value as a percent of market value
portfolio equity as of March 31, 2000 and December 31,
1999.
|
Interest Rate Sensitivity
Analysis. The values under the heading
Base are managements estimates of spread
income for assets, liabilities and interest rate agreements on
March 31, 2000 and December 31, 1999. The values under the
headings 100 and (100) are
managements 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, net of the change in income or market value of
liabilities and interest rate 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 Financials 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 Used in 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 estimates and assumptions have a significant
impact on the results of the interest rate sensitivity analysis,
the results of which are shown as of March 31, 2000 and December
31, 1999.
Managements analysis for assessing interest
rate sensitivity on its mortgage loans relies significantly on
estimates for prepayment speeds. A prepayment model has been
internally developed based upon four main factors:
|
Refinancing incentives (the interest rate of the
mortgage compared with the current mortgage rates available to
the borrower)
|
|
Borrower credit grades
|
|
Loan-to-value ratios
|
|
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 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 because the penalty is a deterrent to
refinancing.
These factors are weighted based on
managements experience and an evaluation of the important
trends observed in the non-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 sensitivity analyses.
NovaStar Financials 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 Financials loans shown in
Table 5 are weighted average speeds of all loans in each
deal.
As shown in Table 5, actual prepayment rates on
loans that have been held in portfolio for shorter periods are
slower than long term prepayment rates used in the interest rate
sensitivity analysis. This table also indicates that as pools of
loans held in portfolio season, the actual prepayment rates are
more consistent with the long term prepayment rates used in the
interest sensitivity analysis.
Hedging with 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 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 managements 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-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. When the referenced LIBOR interest
rate rises above the contractual strike rate, NovaStar Financial
earns 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 Registrants 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-Ks:
|
NovaStar Financial filed no Form 8-Ks during the
quarterly period ended March 31, 2000.
|
NOVASTAR FINANCIAL, INC.
SIGNATURES
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.
NOVASTAR
FINANCIAL
, INC
.
|
/S
/ SCOTT
F. HARTMAN
|
|
Scott
F. Hartman
|
Chairman of the Board, Secretary and
|
Chief Executive Officer
|
(Principal Executive Officer)
|
DATE: May
12, 2000
/S
/ RODNEY
E. SCHWATKEN
|
|
Rodney E. Schwatken
|
Vice
President, Treasurer and Controller
|
(Principal Accounting Officer)
|
DATE: May
12, 2000