UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2001. | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_________________ to________________ . | |
Commission File Number: 001-13533 |
NovaStar Financial, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 74-2830661 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1901 W. 47th Place, Suite 105, Westwood, KS 66205 | ||
(Address of principal executive offices) (Zip Code) |
(913) 362-1090
(Registrant's telephone number, including area code)
______________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx Noo
The number of shares of the registrant's common stock outstanding as of May 11, 2001 was 5,715,116.
NOVASTAR FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED MARCH, 31, 2001
INDEX
Page | ||
PART I | FINANCIAL INFORMATION | |
Item 1. | Consolidated Financial Statements: | |
Balance Sheets | 1 | |
Statements of Operations | 2 | |
Statements of Cash Flows | 3 | |
Notes | 4 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 6 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 |
PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 33 |
Item 2. | Changes in Securities | 33 |
Item 3. | Defaults Upon Senior Securities | 33 |
Item 4. | Submission of Matters to a Vote of Security Holders | 33 |
Item 5. | Other Information | 33 |
Item 6. | Exhibits and Reports on Form 8-K | 33 |
Signatures | 35 |
NOVASTAR FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts) (unaudited)
March 31, 2001 | December 31, 2000 | |||||
Assets | ||||||
Cash and cash equivalents | $ | 10,533 | $ | 2,518 | ||
Mortgage loans — held-for-sale | 99,219 | — | ||||
Mortgage loans — held-in-portfolio | 332,766 | 375,927 | ||||
Mortgage securities — available-for-sale | 76,207 | 46,650 | ||||
Accrued interest receivable | 8,187 | 9,151 | ||||
Advances to and investment in NFI Holding Corporation | — | 45,415 | ||||
Assets acquired through foreclosure | 12,835 | 13,054 | ||||
Other assets | 12,438 | 1,767 | ||||
Total assets | $ | 552,185 | $ | 494,482 | ||
Liabilities and Stockholders' Equity | ||||||
Liabilities: | ||||||
Warehouse borrowings | $ | 68,266 | $ | — | ||
Asset-backed bonds | 318,189 | 357,437 | ||||
Mortgage securities repurchase agreements | 25,000 | 25,000 | ||||
Accounts payable and other liabilities | 23,043 | 3,601 | ||||
Dividends payable | 525 | 525 | ||||
Total liabilities | 435,023 | 386,563 | ||||
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, 5,716,316 and 6,094,595 shares issued and outstanding, respectively | 57 | 61 | ||||
Additional paid-in capital | 137,325 | 141,997 | ||||
Accumulated deficit | (35,488 | ) | (37,976 | ) | ||
Accumulated other comprehensive income | 16,583 | 10,168 | ||||
Notes receivable from founders | (1,358 | ) | (6,374 | ) | ||
Total stockholders' equity | 117,162 | 107,919 | ||||
Total liabilities and stockholders' equity | $ | 552,185 | $ | 494,482 | ||
See accompanying notes to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands except per share amounts)
For the Three Months Ended March 31, | ||||||
2001 | 2000 | |||||
Interest income: | ||||||
Mortgage loans | $ | 12,740 | $ | 12,812 | ||
Mortgage securities | 1,350 | 266 | ||||
Total interest income | 14,090 | 13,078 | ||||
Interest expense: | ||||||
Financing on mortgage loans | 8,036 | 9,636 | ||||
Financing on mortgage securities | 480 | 62 | ||||
Interest expense | 8,516 | 9,698 | ||||
Net interest income before provision for credit losses | 5,574 | 3,380 | ||||
Provision for credit losses | (519 | ) | (1,579 | ) | ||
Net interest income | 5,055 | 1,801 | ||||
Prepayment penalty income | 250 | 489 | ||||
Premiums for mortgage loan insurance | (437 | ) | (365 | ) | ||
Loan servicing income (fees) | 6,204 | (696 | ) | |||
Gain on sale of mortgage assets | 5,023 | — | ||||
Other income (loss) | 447 | (2 | ) | |||
Equity in net income of NFI Holding Corporation | — | 699 | ||||
General and administrative expenses: | ||||||
Net fees for other services provided by NovaStar Mortgage, Inc. | — | 3 | ||||
Compensation and benefits | 6,685 | 384 | ||||
Travel and public relations | 1,897 | — | ||||
Office administration | 1,790 | 171 | ||||
Loan expense | 519 | — | ||||
Professional and outside services | 414 | 130 | ||||
Other | 518 | 26 | ||||
Total general and administrative expenses | 11,823 | 714 | ||||
Net income before cumulative effect of a change in accounting principle | 4,719 | 1,212 | ||||
Cumulative effect of a change in accounting principle | (1,706 | ) | — | |||
Net income | 3,013 | 1,212 | ||||
Dividends on preferred shares | (525 | ) | (525 | ) | ||
Net income available to common shareholders | $ | 2,488 | $ | 687 | ||
Basic earnings per share — before cumulative effect of a change in accounting principle | $ | 0.47 | $ | 0.09 | ||
Diluted earnings per share — before cumulative effect of a change in accounting principle | $ | 0.47 | $ | 0.09 | ||
Basic loss per share due to the cumulative effect of a change in accounting principle | $ | (0.17 | ) | $ | — | |
Diluted loss per share due to the cumulative effect of a change in accounting principle | $ | (0.17 | ) | $ | — | |
Basic earnings per share | $ | 0.30 | $ | 0.09 | ||
Diluted earnings per share | $ | 0.30 | $ | 0.09 | ||
Weighted average basic shares outstanding | 5,722 | 7,342 | ||||
Weighted average diluted shares outstanding | 10,162 | 7,352 | ||||
Dividends declared per common share | $ | — | $ | — | ||
See accompanying notes to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
For the Three Months | ||||||||
2001 | 2000 | |||||||
Net cash provided by (used in) operating activities: | $ | (29,100 | ) | $ | 5,486 | |||
Cash flow from investing activities: | ||||||||
Mortgage loan repayments | 32,399 | 59,770 | ||||||
Sales of assets acquired through foreclosure | 8,692 | 6,697 | ||||||
Proceeds from paydowns on available-for-sale securities | 3,557 | 661 | ||||||
Net assets acquired during acquisition of NFI Holding Corporation | 1,242 | — | ||||||
Net change in advance to NFI Holding Corporation | — | (4,936 | ) | |||||
Net cash provided by investing activities | 45,890 | 62,192 | ||||||
Cash flow from financing activities: | ||||||||
Payments on asset-backed bonds | (39,546 | ) | (66,265 | ) | ||||
Change in short-term borrowings | 31,366 | — | ||||||
Proceeds from issuance of capital stock and exercise of equity instruments, net of offering costs | — | 14 | ||||||
Dividends paid on preferred stock | (525 | ) | (525 | ) | ||||
Common stock repurchases | (70 | ) | (952 | ) | ||||
Net cash used in financing activities | (8,775 | ) | (67,728 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 8,015 | (50 | ) | |||||
Cash and cash equivalents, beginning of period | 2,518 | 2,395 | ||||||
Cash and cash equivalents, end of period | $ | 10,533 | $ | 2,345 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Transfer of available-for-sale securities | $ | 25,108 | $ | — | ||||
Cash paid for interest | $ | 8,529 | $ | 9,801 | ||||
Dividends payable | $ | 525 | $ | 525 | ||||
Non-cash activities related to purchase of NFI Holding Corporation: | ||||||||
Operating activities: | ||||||||
Increase in real estate owned | $ | (892 | ) | $ | — | |||
Increase in other assets | $ | (11,132 | ) | $ | — | |||
Decrease in other liabilities | $ | (9,422 | ) | $ | — | |||
Investing activities: | ||||||||
Cash received in purchase | $ | (872 | ) | $ | — | |||
Increase in mortgage loans | $ | (81,733 | ) | $ | — | |||
Decrease in investment in/advances to NFI Holding Corp. | $ | 48,307 | $ | — | ||||
Investing activities: | ||||||||
Increase in borrowings | $ | 36,900 | $ | — | ||||
Decrease in founders' notes receivable | $ | (370 | ) | $ | — | |||
Non-cash financing activities related to founders' notes receivable: | ||||||||
Decrease in founders' notes receivable | $ | (4,611 | ) | $ | — | |||
Increase in additional paid-in capital | $ | 4,611 | $ | — | ||||
See accompanying notes to consolidated financial statements.
NOVASTAR FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 (Unaudited)
Note 1. Financial Statement Presentation
The consolidated financial statements as of and for the periods ended March 31, 2001 and 2000 are unaudited. In the opinion of management, all necessary adjustments have been made, which were of a normal and recurring nature, for a fair presentation of the balance sheets and results of operations. The consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of NovaStar Financial and the notes thereto, included in NovaStar Financial's annual report to shareholders and annual report on Form 10-K for the fiscal year ended December 31, 2000.
NovaStar Financial, Inc. owns 100 percent of the common stock of three special purpose entities — NovaStar Assets Corporation, NovaStar Certificates Financing Corporation and NovaStar Mortgage Funding Corporation. NovaStar Financial formed these entities in connection with the issuance of asset-backed bonds.
The consolidated financial statements of NovaStar Financial include the accounts of these entities. Significant intercompany accounts and transactions have been eliminated in consolidation.
On January 1, 2001, NovaStar Financial purchased 100 percent of the voting common stock of NFI Holding Corporation (Holding). Prior to January 1, 2001 the Chief Executive Officer and Chief Operating Officer of NovaStar Financial each owned one-half of these shares. NovaStar Mortgage, Inc., NovaStar Home Mortgage, Inc., and NovaStar Capital, Inc. are wholly owned subsidiaries of Holding. NovaStar Mortgage Funding Corporation II, NovaStar Mortgage Funding Corporation III and NovaStar REMIC Financing Corporation are subsidiaries of NovaStar Mortgage. Prior to January 1, 2001, NovaStar Financial, Inc. owned all of the preferred shares of Holding, which were non-voting and retired on January 1, 2001. Prior to January 1, 2001, NovaStar Financial, Inc. recorded its investment in Holding using the equity method. Beginning January 1, 2001, the financial condition and results of operations of Holding and NovaStar Financial, Inc. are consolidated.
Note 2. Implementation of Accounting Pronouncements
During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133," SFAS No. 133 standardizes the accounting for derivative instruments, including certain instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative instrument either as a cash flow hedge, a fair value hedge or a hedge of foreign currency exposure. Generally, SFAS No. 133 requires derivative instruments to be recorded at their fair value with hedge ineffectiveness recognized in earnings. In addition, the pronouncement requires that the time value of purchased options be recorded at fair value as an adjustment directly to earnings. The Company adopted SFAS No. 133 on January 1, 2001 and recorded a charge to earnings of $1.7 million. The transition adjustment resulted from adjusting the carrying value of certain interest rate cap agreements to their face value.
The Company uses derivative instruments with the objective of hedging interest rate risk. Interest rates on liabilities of the Company adjust daily or annually, while interest rates on the Company's assets adjust annually, or not at all. The Company has determined that all of our derivative instruments ( interest rate caps & swaps qualify as cashflow hedges and accounts for these instruments accordingly. As discussed above, a $1.7 million transition adjustment resulting from the adoption of SFAS No. 133 was recorded on the income statement as a separate line item. In addition, the Company recorded as additional derivatives loss of $243,000 during the quarter. This amount is included in the amount reported as ""Financing on mortgage loans" on the income statement. The amount of the cash flow hedges' ineffectiveness was immaterial as of March 31, 2001.
Note 3. NovaStar Mortgage Funding Trust Series 2001-1
On March 29, 2001, NovaStar Mortgage executed a securitization transaction that, for financial reporting and tax purposes, was treated as a sale. As part of this transaction, NovaStar Mortgage sold $408 million in loans, of which $207 million will settle in the second quarter of 2001. The loans were sold to NovaStar Mortgage Funding Trust Series (NMFT) 2001-1, which issued asset-backed bonds of $415 million. NovaStar Mortgage retained the AAA-rated interest only and subordinated securities that were issued by NMFT 2001-1, with a carrying value of $25.1 million as of March 31, 2001. A gain of $5.0 million was recognized on this transaction.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the preceding consolidated financial statements of NovaStar Financial and the notes thereto as well as NovaStar Financial's annual report to shareholders and annual report on Form 10-K for the fiscal year ended December 31, 2000.
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, 2000. 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, 2000.
Basis of Presentation
The subsidiaries of NovaStar Financial, Inc. are presented in Note 1 to the consolidated financial statements.
Recent Developments
Federal Tax Legislation. Recently adopted legislation allows a real estate investment trust (REIT) to own directly all of the stock of taxable subsidiaries beginning in the tax year 2001. The value of all taxable subsidiaries of a REIT will be limited to 20% of the total value of the REIT's assets. NovaStar Financial acquired all of the common stock of NFI Holding Corporation from Scott Hartman and Lance Anderson on January 1, 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. These and other federal tax legislation changes and proposals are discussed further in NovaStar Financial's Annual Report on Form 10K under "Federal Income Tax Consequences".
Description of Businesses
Investment Portfolio
Invest in assets generated primarily from our wholesale origination of nonconforming, single-family, residential mortgage loans; | |
Operates as a long-term portfolio investor; | |
Financing is provided by issuing asset-backed bonds and entering into reverse repurchase agreements; | |
Earnings are generated from return on mortgage securities and spread income on the mortgage loan portfolio; |
Residential Mortgage Lending
Primary customer is the retail mortgage broker who deals with the borrower. NovaStar Mortgage's account executives work with more than 5,800 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. | |
Loans are financed through short-term warehouse facilities. | |
Loans are held for sale in either outright sales for cash or in securitization transactions accounted for as sales. |
Branch Operations
Retail mortgage brokers and their staffs operate under the NovaStar Home Mortgage name and are employees of NovaStar Home Mortgage. | |
Branches operate under a strict set of established policies. | |
Branch can broker loans to any approved investor, including NovaStar Mortgage, Inc. | |
Net operating income for the branch is returned as compensation to the branch "owner/manager." | |
As of March 31, 2001, there were 76 active branches in 31 states operating under the NovaStar Home Mortgage name. |
Financial Condition of NovaStar Financial, Inc. as of March 31, 2001 and December 31, 2000
Mortgage Loans. Our balance sheet consists primarily of mortgage loans we have originated. We classify our mortgage loans into two categories: "held-for-sale" and "held-in-portfolio." A majority of our loans serve as collateral for asset-backed bonds we have issued and are classified as "held-in-portfolio." The carrying value of "held-in-portfolio" mortgage loans as of March 31, 2001 was $333 million compared to $376 million as of December 31, 2000.
Loans we have originated, but have not yet securitized, are classified as "held-for-sale." We expect to sell these loans outright in third party transactions or in securitization transactions that will be, for tax and accounting purposes, recorded as sales. We use warehouse lines of credit and mortgage repurchase agreements to finance our held-for-sale loans.
Premiums are paid on substantially all mortgage loans. Premiums are amortized as a reduction of interest income over the estimated lives of the assets. Tables 3 and 6 provide information to analyze
the impact of principal payments on amortization. To mitigate the effect of prepayments on interest income from mortgage loans, we generally strive to originate mortgage loans with prepayment penalties.
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 Table 6 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. This information has not been presented for held-for-sale loans as we do not expect to own the loans for a period long enough to experience material repayments.
Characteristics of the mortgage loans we own are provided in Tables 1 through 8. The operating performance of our mortgage loan portfolio, including net interest income, allowances for credit losses and effects of hedging are discussed under "Results of Operations" and "Interest Rate/Market Risk." Gains on the sales of mortgage loans, including impact of securitizations treated as sales, is also discussed under "Results of Operations."
Table 1 — Mortgage Loans by Credit Grade
(dollars in thousands)
March 31, 2001 | December 31, 2000 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Credit Grade | Allowed Mortgage Lates (A) | Maximum Loan- to-value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- Value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- Value | ||||||||
Held-for-sale: | ||||||||||||||||
AAA | 0 x 30 | 97(B) | $ | 16,887 | 10.03 | % | 75.8 | % | $ | 15,696 | 9.83 | % | 73.8 | % | ||
AA | 0 x 30 | 95 | 27,665 | 10.41 | 83.1 | 25,335 | 10.07 | 81.4 | ||||||||
A | 1 x 30 | 90 | 15,403 | 10.40 | 78.8 | 15,209 | 10.35 | 80.3 | ||||||||
A- | 2 x 30 | 90 | 11,753 | 11.02 | 75.4 | 6,812 | 10.27 | 80.4 | ||||||||
B | 3 x 30, 1x 60,5 x 30, 2 x 60 | 85 | 8,779 | 11.21 | 77.9 | 5,719 | 10.54 | 78.0 | ||||||||
C | 1 x 90 | 75 | 1,721 | 11.63 | 69.5 | 740 | 10.77 | 69.7 | ||||||||
D | 6 x 30, 3 x 60,2 x 90 | 65 | — | — | — | — | — | — | ||||||||
Other | Varies | 97 | 16,106 | 11.95 | 93.8 | 7,823 | 11.95 | 93.8 | ||||||||
$ | 98,314 | 10.76 | 81.3 | $ | 77,334 | 10.27 | 80.5 | |||||||||
Held-in-portfolio: | ||||||||||||||||
AA | 0 x 30 | 95 | $ | 50,687 | 10.09 | % | 82.5 | % | $ | 56,463 | 10.17 | % | 82.6 | % | ||
A | 1 x 30 | 90 | 134,069 | 10.57 | 79.5 | 152,621 | 10.66 | 79.4 | ||||||||
A- | 2 x 30 | 90 | 78,197 | 11.28 | 81.7 | 88,617 | 11.30 | 81.7 | ||||||||
B | 3 x 30, 1x 605 x 30, 2 x 60 | 85 | 44,919 | 11.81 | 78.2 | 51,001 | 11.80 | 78.1 | ||||||||
C | 1 x 90 | 75 | 20,695 | 12.25 | 73.0 | 22,902 | 12.30 | 72.8 | ||||||||
D | 6 x 30, 3 x 60, 2 x 90 | 65 | 3,999 | 13.06 | 63.9 | 4,268 | 13.13 | 63.8 | ||||||||
$ | 332,566 | 10.97 | 79.7 | $ | 375,872 | 11.02 | 79.7 | |||||||||
(A) | Represents the number of times a prospective borrower is allowed to be late more than 30, 60 or 90 days. For instance, a 3x30, 1x60 category would afford the prospective borrower to be more than 30 days late on three separate occasions and 60 days late no more than one time. | |
(B) | 97% on fixed-rate purchases; all other maximum of 95%. |
Table 2—Mortgage Loans
Geographic Concentration
Percent Current Principal as of March 31, 2001
Held-for-sale | Held-in-portfolio | |||
---|---|---|---|---|
Collateral Location | ||||
California | 16 | 13 | ||
Florida | 15 | % | 16 | % |
Michigan | 7 | 3 | ||
Nevada | 6 | 4 | ||
Ohio | 6 | 3 | ||
Tennessee | 4 | 4 | ||
Oregon | 3 | 5 | ||
Washington | 3 | 6 | ||
Texas | 2 | 5 | ||
All other states | 38 | 41 | ||
Total | 100 | % | 100 | % |
Table 3 — Carrying Value of Mortgage Loans by Product/Type
(in thousands)
Product/Type | March, 31, 2001 | December 31, 2000 | ||||
Held-in-portfolio: | ||||||
Two and three-year fixed | $ | 139,198 | $ | $166,627 | ||
Six-month LIBOR and one-year CMT | 20,244 | 23,428 | ||||
30/15-year fixed and balloon | 173,124 | 185,817 | ||||
Outstanding principal | 332,566 | 375,872 | ||||
Premium | 6,832 | 7,745 | ||||
Allowance for credit losses | (6,632 | ) | (7,690 | ) | ||
Carrying Value | $ | $332,766 | $ | $375,927 | ||
Carrying value as a percent of principal | 100.06 | % | 100.01 | % | ||
Held-for-sale: | ||||||
Two and three-year fixed | $ | $72,309 | $ | $ 54,500 | ||
Six-month LIBOR and one-year CMT | — | — | ||||
30/15-year fixed and balloon | 26,005 | 22,834 | ||||
Outstanding principal | 98,314 | 77,334 | ||||
Premium | 1,098 | 997 | ||||
Allowance for credit losses | (193 | ) | (254 | ) | ||
Carrying Value | $ | 99,219 | $ | 78,077 | ||
Carrying value as a percent of principal | 100.92 | % | 100.96 | % | ||
Table 4—Mortgage Credit Analysis - Held-in-portfolio Loans
March 31, 2001
(dollars in thousands)
Credit Grade | Original Balance | Current Principal | Weighted Average Loan- to-Value Ratio | Defaults as Percent of Original Principal | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
60-89 days | 90 days and greater | Foreclosure and REO | Total | |||||||||||
Novastar Home Equity Series 1997-1: | ||||||||||||||
A | $ 117,904 | $20,212 | 75.6 | — | 2.0 | 5.6 | 7.6 | |||||||
A– | 73,499 | 13,841 | 77.8 | — | 5.1 | 9.0 | 14.1 | |||||||
B | 53,812 | 8,459 | 73.0 | 1.33 | — | 10.8 | 12.1 | |||||||
C | 23,065 | 3,364 | 71.0 | 0.86 | 22.9 | 11.4 | 35.2 | |||||||
D | 9,021 | 1,315 | 69.4 | — | — | 20.7 | 20.7 | |||||||
NovaStar Home Equity Series 1997-2: | ||||||||||||||
AA | $ 3,153 | $ 378 | 86.5 | — | — | — | — | |||||||
A | 104,582 | 21,378 | 78.2 | 0.73 | 0.7 | 10.0 | 11.4 | |||||||
A– | 63,660 | 11,979 | 82.2 | 4.29 | 4.1 | 6.1 | 14.5 | |||||||
B | 36,727 | 6,914 | 78.5 | 1.74 | 0.7 | 16.2 | 18.7 | |||||||
C | 11,354 | 2,973 | 69.9 | — | 2.1 | 5.1 | 7.2 | |||||||
D | 1,529 | 512 | 59.7 | 8.86 | — | 7.0 | 15.9 | |||||||
NovaStar Home Equity Series 1998-1: | ||||||||||||||
AA | $ 59,213 | 19,213 | 83.4 | 4.06 | 1.5 | 8.6 | 14.2 | |||||||
A | 113,457 | 39,033 | 80.7 | 0.94 | 0.5 | 9.2 | 10.6 | |||||||
A– | 63,100 | 21,753 | 81.8 | 1.74 | 4.1 | 9.8 | 15.7 | |||||||
B | 38,249 | 11,374 | 78.3 | 0.67 | 0.6 | 13.1 | 14.4 | |||||||
C | 22,908 | 6,501 | 75.5 | — | 2.1 | 13.9 | 16.0 | |||||||
C– | 123 | 121 | 80.0 | — | — | — | — | |||||||
D | 5,493 | 1,193 | 64.0 | — | 17.2 | 10.9 | 28.0 | |||||||
NovaStar Home Equity Series 1998-2: | ||||||||||||||
AA | $ 64,851 | 30,315 | 81.9 | 0.68 | 1.1 | 4.5 | 6.3 | |||||||
A | 113,557 | 54,006 | 83.2 | 1.75 | 3.0 | 10.5 | 15.2 | |||||||
A– | 70,399 | 30,360 | 80.7 | 0.47 | 0.6 | 8.4 | 9.5 | |||||||
B | 40,818 | 18,431 | 80.1 | 1.26 | 6.0 | 17.0 | 24.2 | |||||||
C | 22,335 | 7,922 | 72.8 | 0.32 | 1.8 | 14.8 | 16.9 | |||||||
D | 2,951 | 1,019 | 63.6 | — | — | 23.9 | 23.9 | |||||||
Total | $1,115,760 | $332,566 | ||||||||||||
Loans Repurchased From Trusts | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Cumulative Losses As Reported | Loss Amount | As a % of Original Balance | Total Losses | ||||||||
NHES 1997-1 | 1.69 | % | $3,503 | 1.27 | % | 2.96 | % | ||||
NHES 1997-2 | 1.91 | 6,068 | 2.73 | 4.63 | |||||||
NHES 1998-1 | 1.54 | 7,255 | 2.40 | 3.94 | |||||||
NHES 1998-2 | 1.34 | 1,807 | 0.57 | 1.92 |
Issue Date | Original Principal | Current Principal | Premium | Percent with Prepayment Penalty | Coupon | Remaining Prepayment Penalty Period (in years) for Loans with Penalty | Constant Prepayment Rate (Annual Percent) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three- month | Twelve- Month | Life | |||||||||||||||||||||||
As of March 31, 2001 Held-in-portfolio — serving as collateral for NovaStar Home Equity Series asset backed bonds: | |||||||||||||||||||||||||
Series 1997-1 | October 1, 1997 | $ | 277,301 | $ | 47,191 | $ | 2,173 | 26 | % | 11.51 | % | 0.25 | |||||||||||||
Series 1997-2 | December 11, 1997 | 221,005 | 44,134 | 891 | 19 | 11.32 | 0.28 | 40 | 39 | 40 | |||||||||||||||
Series 1998-1 | April 30, 1998 | 302,543 | 99,188 | 1,620 | 22 | 10.87 | 0.40 | 46 | 45 | 37 | |||||||||||||||
Series 1998-2 | August 18, 1998 | 314,911 | 142,053 | 2,148 | 52 | 10.50 | 0.69 | 41 | 41 | 31 | |||||||||||||||
Total | $ | 1,115,760 | $ | 332,566 | $ | 6,832 | 35 | % | 10.86 | % | 0.48 | 0.49 | |||||||||||||
Held-for-sale: | $ | 98,314 | $ | 1,098 | 79 | % | 10.76 | % | 3.01 | Not meaningful | |||||||||||||||
As of December 31, 2000 Held-in-portfolio — serving as collateral for NovaStar Home Equity Series asset backed bonds: | |||||||||||||||||||||||||
Series 1997-1 | October 1, 1997 | $ | 277,301 | $ | 52,282 | $ | 2,494 | 25 | % | 11.80 | % | 0.30 | 40 | 39 | 40 | ||||||||||
Series 1997-2 | December 11, 1997 | 221,005 | 53,727 | 1,040 | 16 | 11.55 | 0.28 | 46 | 45 | 37 | |||||||||||||||
Series 1998-1 | April 30, 1998 | 302,543 | 114,367 | 1,877 | 33 | 11.03 | 0.46 | 41 | 41 | 31 | |||||||||||||||
Series 1998-2 | August 18, 1998 | 314,911 | 155,596 | 2,334 | 60 | 10.57 | 0.85 | 33 | 35 | 25 | |||||||||||||||
Total | $ | 1,115,760 | $ | 375,972 | $ | 7,745 | 40 | % | 11.02 | % | 0.57 | ||||||||||||||
Held-for-sale: | $ | 77,334 | $ | 997 | 81 | % | 10.27 | % | 3.19 | Not meaningful | |||||||||||||||
Mortgage Securitiesavailable-for-sale. During 2001, 2000 and 1999, $211 million, $570 million, and $165 million in loans were pooled in securitization transactions. These transactions were treated as sales for accounting and tax purposes. We service the loans sold in these securitizations and we retained the AAA-rated, interest-only and other subordinated securities issued in the securitizations. Under the section “Mortgage Loan Sales” we discuss the details of the loan securitization transactions. | |
As of March 31, 2001 and December 31, 2000, the carrying value of mortgage securities was $76.2 million and $46.6 million, respectively. This value represents the present value of the securities’ cash flows that we expect to receive over their lives, considering estimated prepayment speeds and credit losses of the underlying loans, discounted at an appropriate risk-adjusted market rate of return. The cash flows are realized over the life of the loan collateral as cash distributions are received from the trust that manages the collateral. In estimating the fair value of our mortgage securities, management must make assumptions regarding the future performance and cash flow of the mortgage loans collateralizing the securities. These estimates are based on management’s judgements about the nature of the loans. We believe the value of the securities is fair, 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 income of future periods. Table 7 summarizes our mortgage securities and the underlying collateral and senior asset-backed bonds. Table 8 provides a summary of the critical assumptions used in estimating the cash flows of the collateral and the resulting estimated fair value of the mortgage securities. |
Estimated Fair Value of Mortgage Securities | Asset-Backed Bonds | Mortgage Loans | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Remaining Principal | Interest Rate | Remaining Principal | Weighted Average | |||||||||
Coupon | Estimated Months to Call | |||||||||||
March, 31, 2001 | ||||||||||||
NMFT 1999-1 | $ 5,900 | $ 85,291 | 5.66 | $ 88,360 | 10.60 | 54 | ||||||
NMFT 2000-1 | 16,500 | 198,199 | 4.63 | 202,017 | 10.20 | 61 | ||||||
NMFT 2000-2 | 28,700 | 317,685 | 4.76 | 323,603 | 10.60 | 62 | ||||||
NMFT 2001-1 | 25,107 | 413,082 | 5.31 | 209,502 | 10.54 | 69 | ||||||
Total | $76,207 | $1,014,257 | $823,482 | |||||||||
December 31, 2000 | ||||||||||||
NMFT 1999-1 | $ 6,900 | $ 96,521 | 6.23 | $103,968 | 10.67 | 57 | ||||||
NMFT 2000-1 | 14,950 | 210,261 | 6.11 | 216,216 | 10.21 | 64 | ||||||
NMFT 2000-2 | 24,800 | 328,025 | 6.12 | 333,865 | 10.61 | 65 | ||||||
Total | $46,650 | $ 634,807 | $654,049 | |||||||||
March 31, 2001 | December 31, 2000 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
NovaStar Mortgage Funding Trust Series: | 1999-1 | 2000-1 | 2000-2 | 2001-1 | 1999-1 | 2000-1 | 2000-2 | |||||||
Constant prepayment rate (%). | 29 | 30 | 30 | 29 | 32 | 32 | 32 | |||||||
Discount rate | 16.5 | 14.8 | 15.0 | 20.0 | 16.5 | 14.8 | 15.0 | |||||||
As a percent of mortgage loan principal: | ||||||||||||||
Delinquent loans (30 days and greater) | 17.1 | 5.8 | 2.5 | — | 17.0 | 5.7 | 1.1 | |||||||
Loans in foreclosure | 5.3 | 1.8 | 1.0 | — | 5.5 | 1.6 | 0.3 | |||||||
Real Estate Owned | 5.6 | 1.3 | 0.1 | — | 4.2 | 0.1 | — | |||||||
Cumulative losses | 1.2 | — | — | — | 1.0 | — | — |
March 31, 2001 | December 31, 2000 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Credit Grade | Allowed Mortgage Lates (A) | Maximum Loan- to-value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- Value | Current Principal | Weighted Average Coupon | Weighted Average Loan-to- Valu e | |||||||||||||
AAA | 0 x 30 | 97(B | ) | $165,688 | 9.74 | % | 80.9 | % | $143,673 | 9.71 | % | 80.9 | % | ||||||||
AA | 0 x 30 | 95 | 231,580 | 10.26 | 83.6 | 175,068 | 10.25 | 83.5 | |||||||||||||
A | 1 x 30 | 90 | 153,662 | 10.53 | 81.3 | 130,027 | 10.54 | 81.2 | |||||||||||||
A– | 2 x 30 | 90 | 102,547 | 10.70 | 78.1 | 86,660 | 10.65 | 81.3 | |||||||||||||
B | 3 x 30, 1x 60 5 x 30, 2 x 60 | 85 | 61,713 | 11.05 | 69.7 | 44,487 | 11.16 | 79.3 | |||||||||||||
C | 1 x 90 | 75 | 18,708 | 11.71 | 69.7 | 18,398 | 11.69 | 70.1 | |||||||||||||
D | 6 x 30, 3 x 60, 2 x 90 | 65 | 1,336 | 12.67 | 61.6 | 1,568 | 12.69 | 61.6 | |||||||||||||
Other | Varies | 97 | 88,248 | 11.57 | 93.0 | 54,168 | 11.44 | 92.7 | |||||||||||||
$823,482 | 10.50 | $654,049 | |||||||||||||||||||
(A) | Represents the number of times a prospective borrower is allowed to be late more than 30, 60 or 90 days. For instance, a 3x30, 1x60 category would afford the prospective borrower to be more than 30 days late on three separate occasions and 60 days late no more than one time. |
(B) | 97% on fixed-rate purchases; all other maximum of 95%. |
Florida | 14 | % | |
California | 11 | ||
Michigan | 9 | ||
Nevada | 6 | ||
Ohio | 6 | ||
Tennessee | 5 | ||
Washington | 5 | ||
Texas | 3 | ||
Oregon | 3 | ||
All other states | 38 | ||
Total | 100 | % | |
Product/Type | March, 31, 2001 | December 31, 2000 | ||
---|---|---|---|---|
Two and three-year fixed | $595,077 | $465,976 | ||
Six-month LIBOR and one-year CMT | 2,876 | 2,492 | ||
30/15-year fixed and balloon | 225,529 | 185,581 | ||
Outstanding principal | $823,482 | $654,049 | ||
Mortgage securities retained | $ 76,207 | $ 46,650 | ||
Issue Date | Original Principal | Current Principal | Percent with Prepayment Penalty | Coupon | Remaining Prepayment Penalty Period (in years) for Loans with Penalty | Constant Prepayment Rate (Annual Percent) | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three- month | Twelve- Month | Life | ||||||||||||||||||
March 31, 2001 NovaStar Mortgage Funding Trust Series: | ||||||||||||||||||||
1999-1 | January 29, 1999 | $164,995 | $ 88,360 | 64 | 10.61 | % | 1.11 | 37 | 33 | 24 | ||||||||||
2000-1 | March, 31, 2000 | 230,138 | 202,017 | 94 | 10.21 | 2.20 | 20 | 12 | 11 | |||||||||||
2000-2 | September 28, 2000 | 339,688 | 323,603 | 91 | 10.60 | 2.28 | 11 | — | 8 | |||||||||||
2001-1 | March 29, 2001 | 209,502 | 209,502 | 87 | 10.57 | 2.50 | — | — | 8 | |||||||||||
Total | $944,323 | $823,482 | 88 | % | 10.50 | % | 2.19 | |||||||||||||
December 31, 2000 NovaStar Mortgage Funding Trust Series: | ||||||||||||||||||||
1999-1 | January 29, 1999 | $164,995 | $103,968 | 60 | 10.66 | 1.23 | 38 | 28 | 21 | |||||||||||
2000-1 | March, 31, 2000 | 230,138 | 216,216 | 94 | 10.03 | 2.43 | 10 | — | 8 | |||||||||||
2000-2 | September 28, 2000 | 339,502 | 333,865 | 90 | 10.57 | 2.49 | 5 | — | 5 | |||||||||||
Total | $734,635 | $654,049 | 70 | % | 10.66 | % | 1.65 | |||||||||||||
Credit Grade | Original Balance | Current Principal | Weighted Average Loan- to-Value Ratio | Defaults as Percent of Original Principal | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
60–89 days | 90 days and greater | Foreclosure and REO | Total | |||||||||||
Total NovaStar Mortgage Funding Trust Series 1999-1: | ||||||||||||||
AAA | $ 4,024 | $ 2,746 | 80.0 | — | — | 2.3 | 2.3 | |||||||
AA | 30,772 | 17,175 | 85.1 | — | — | 5.8 | 5.8 | |||||||
A | 50,693 | 27,383 | 82.3 | 0.7 | 0.62 | 10.9 | 12.2 | |||||||
A– | 38,953 | 20,739 | 82.8 | 1.6 | 2.53 | 11.6 | 15.8 | |||||||
B | 23,135 | 12,078 | 79.7 | 2.3 | 6.27 | 15.0 | 23.6 | |||||||
C | 12,959 | 6,931 | 71.9 | 1.2 | 3.99 | 22.6 | 27.7 | |||||||
C– | 47 | 46 | 49.0 | — | — | — | — | |||||||
D | 4,412 | 1,262 | 61.6 | — | — | 32.5 | 32.5 | |||||||
NovaStar Mortgage Funding Trust Series 2000-1: | ||||||||||||||
AAA | $ 85,222 | $ 73,377 | 80.6 | 0.2 | 0.31 | 2.8 | 3.2 | |||||||
AA | 55,874 | 49,834 | 82.9 | 0.6 | 0.34 | 2.2 | 3.1 | |||||||
A | 36,422 | 32,781 | 80.2 | 0.2 | 0.77 | 3.2 | 4.1 | |||||||
A– | 23,329 | 21,101 | 80.6 | 3.0 | — | 6.4 | 9.4 | |||||||
B | 13,089 | 10,950 | 80.4 | 0.8 | — | 11.2 | 12.0 | |||||||
C | 5,922 | 4,733 | 68.9 | 0.9 | — | 7.0 | 7.9 | |||||||
C– | 335 | 238 | 51.7 | — | — | — | — | |||||||
D | 51 | 50 | 58.0 | — | — | — | — | |||||||
Other | 9,894 | 8,968 | 91.9 | — | — | 4.1 | 4.1 | |||||||
NovaStar Mortgage Funding Trust Series 2000-2: | ||||||||||||||
AAA | $ 57,846 | $ 54,117 | 81.6 | 0.3 | — | 0.1 | 0.4 | |||||||
AA | 103,454 | 100,014 | 83.3 | 0.4 | 0.08 | 1.2 | 1.7 | |||||||
A | 60,735 | 56,857 | 81.4 | 0.1 | — | 1.8 | 1.9 | |||||||
A– | 39,939 | 38,547 | 81.1 | — | 0.43 | 1.9 | 2.3 | |||||||
B | 19,843 | 19,286 | 76.6 | — | — | 1.1 | 1.1 | |||||||
C | 4,275 | 3,610 | 67.4 | 1.4 | — | — | 1.4 | |||||||
C– | 388 | 387 | 64.4 | — | — | — | — | |||||||
Other | 53,208 | 50,784 | 92.9 | — | — | 1.0 | 1.0 | |||||||
NovaStar Mortgage Funding Trust Series 2001-1: | ||||||||||||||
AAA | $ 34,480 | $ 34,480 | 80.5 | — | — | — | — | |||||||
AA | 64,807 | 64,807 | 84.1 | — | — | — | — | |||||||
A | 36,217 | 36,217 | 81.4 | — | — | — | — | |||||||
A– | 22,869 | 22,869 | 79.7 | — | — | — | — | |||||||
B | 20,058 | 20,058 | 77.5 | 0.3 | — | — | 0.3 | |||||||
C | 3,003 | 3,003 | 68.3 | — | — | 1.0 | 1.0 | |||||||
C– | 134 | 134 | 85.1 | — | — | — | — | |||||||
Other | 28,002 | 28,002 | 93.5 | — | — | — | 0.3 |
(dollars in thousands)
Loans Repurchased From Trusts | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Cumulative Losses As Reported | Loss Amount | As a % of Original Balance | Total Losses | ||||||||
NMFT 1999-1 | 0.91 | % | $423 | 0.26 | % | 1.17 | % | ||||
NMFT 2000-1 | 0.01 | 2 | 0.00 | 0.01 | |||||||
NMFT 2000-2 | 0.01 | 16 | 0.00 | 0.01 | |||||||
NMFT 2001-1 | — | — | — | — |
Expiration | Maximum Borrowing Limit | Lending Value of Collateral | Borrowings | Availability | ||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash | $10,533 | |||||||||
First Union National Bank: | ||||||||||
Mortgage loan warehouse line of credit | July 2001 | $ 75,000 | $ 66,718 | $48,100 | 21,618 | |||||
Mortgage loan repurchase agreement | July 2001 | 175,000 | 2,481 | 2,481 | — | |||||
Mortgage securities repurchase agreement | April 2003 | 25,000 | 25,000 | — | 25,000 | |||||
GMAC/Residential Funding Corporation — Mortgage loan warehouse line of credit | December 2001 | 60,000 | 23,984 | 17,685 | 6,298 | |||||
Morgan Stanley Dean Witter | March 2002 | 100,000 | 25,000 | 25,000 | — | |||||
Total | $435,000 | $146,183 | $93,266 | $63,449 | ||||||
Asset-Backed Bonds | Mortgage Loans | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Weighted Average | ||||||||||||
Remaining Principal | Interest Rate | Remaining Principal (A) | Coupon | Estimated Months to Call | ||||||||
March, 31, 2001 | ||||||||||||
NHES 1997-1 | $ 43,617 | 5.53 | % | $ 47943 | 11.52 | 0 | ||||||
NHES 1997-2 | 42,091 | 5.57 | 45,850 | 11.39 | 0 | |||||||
NHES 1998-1 | 92,877 | 5.33 | 102,527 | 10.92 | 6 | |||||||
NHES 1998-2 | 140,392 | 5.26 | 148,599 | 10.52 | 19 | |||||||
Unamortized debt issuance costs, net | (788 | ) | ||||||||||
Total | $318,189 | |||||||||||
December 31, 2000 | ||||||||||||
NHES 1997-2 | $ 48,121 | 7.13 | % | 5,2910 | 11.66 | 0 | ||||||
NHES 1998-1 | 51,114 | 6.91 | 5,5736 | 11.54 | 0 | |||||||
NHES 1998-1 | 105,780 | 6.92 | 117,121 | 11.05 | 9 | |||||||
NHES 1998-2 | 153,508 | 6.86 | 163,039 | 10.55 | 22 | |||||||
Unamortized debt issuance costs, net | (1,086 | ) | ||||||||||
Total | $357,437 | |||||||||||
(A) | Including assets acquired through foreclosure. |
· | $3.0 million increase due to net income recognized for the three months ended March 31, 2001. |
· | $300,000 net increase due to the restructuring of founders notes receivable and purchase of NFI Holding Corporation on January 1, 2001. This transaction resulted in a $5 million increase in equity due to a decrease in founders notes receivable with a corresponding $4.7 million decrease in equity as a result of repurchases of common stock.Refer to the December 31, 2000 Form 10-K for more detail regarding this transaction. As of March 31, 2001, we have purchased 2,428,445 shares of our common stock. |
· | $6.4 million increase in unrealized gains on mortgage securities classified as available-for-sale. |
· | $525,000 decrease due to dividends on Class B 7% cumulative convertible preferred stock. |
Weighted Average | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Number | Principal | Average Loan Balance | Price Paid to Broker | Loan to Value | Credit Rating (A) | Coupon | Percent with Prepayment Penalty | ||||||||||||||
2001: | |||||||||||||||||||||
First quarter | 2,087 | $244,639 | $117,220 | 101.1 | % | 82 | % | 5.25 | 10.4 | % | 82 | % | |||||||||
2000: | |||||||||||||||||||||
Fourth quarter | 1,768 | $208,232 | $117,778 | 101.1 | % | 82 | % | 5.12 | 10.7 | % | 86 | % | |||||||||
Third quarter | 1,793 | 207,662 | 115,818 | 101.1 | 84 | 5.20 | 10.7 | 90 | |||||||||||||
Second quarter | 1,473 | 171,375 | 116,344 | 101.0 | 82 | 5.32 | 10.5 | 91 | |||||||||||||
First quarter | 1,232 | 132,072 | 107,201 | 101.1 | 80 | 5.45 | 10.2 | 93 | |||||||||||||
Total | 6,266 | $719,341 | $114,801 | 101.1 | 82 | 5.28 | 10.5 | 90 | |||||||||||||
(A) | AAA=7, AA=6, A=5, A-=4, B=3, C=2, D=1 |
2001 | 2000 | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Collateral Location | First | Fourth | Third | Second | First | ||||||||||
California | 17 | % | 11 | % | 11 | % | 10 | % | 10 | % | |||||
Florida | 15 | 14 | 12 | 13 | 14 | ||||||||||
Michigan | 8 | 9 | 10 | 11 | 11 | ||||||||||
Arizona | 6 | 4 | 5 | 5 | 5 | ||||||||||
Ohio | 5 | 6 | 7 | 8 | 7 | ||||||||||
Tennessee | 4 | 4 | 4 | 6 | 7 | ||||||||||
Washington | 3 | 3 | 5 | 5 | 5 | ||||||||||
All other states | 42 | 40 | 35 | 30 | 30 |
Sold to Third Parties | Sold in Securitizations | Held in Warehouse | Payments | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2001 | |||||||||||||||
First quarter | 3 | % | 66 | % | 30 | % | 1 | % | 100 | % | |||||
2000 | |||||||||||||||
Fourth quarter | 9 | 55 | 34 | 2 | 100 | ||||||||||
Third quarter | 9 | 60 | 30 | 1 | 100 | ||||||||||
Second quarter | 12 | 44 | 43 | 1 | 100 | ||||||||||
First quarter | 20 | 53 | 26 | 1 | 100 |
For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|
2001 | Pro Forma 2000 | |||||
Interest income: | ||||||
Mortgage loans | $12,740 | $16,203 | ||||
Mortgage securities | 1,350 | 266 | ||||
Total interest income | 14,090 | 16,469 | ||||
Interest expense | 8,516 | 11,735 | ||||
Net interest income before provision for credit losses | 5,574 | 4,734 | ||||
Provision for credit losses | (519 | ) | (1,430 | ) | ||
Net interest income | 5,055 | 3,304 | ||||
Prepayment penalty income | 250 | 494 | ||||
Premiums for mortgage loan insurance | (437 | ) | (365 | ) | ||
Loan servicing income | 6,204 | 667 | ||||
Gain on sale of mortgage assets | 5,023 | 2,666 | ||||
Other income | 447 | 364 | ||||
General and administrative expenses: | ||||||
Compensation and benefits | 6,685 | 3,288 | ||||
Travel and public relations | 1,897 | 276 | ||||
Office administration | 1,790 | 1,521 | ||||
Loan expense | 519 | 189 | ||||
Professional and outside services | 414 | 526 | ||||
Other | 518 | 118 | ||||
Total general and administrative expenses | 11,823 | 5,918 | ||||
Net income before cumulative effect of change in accounting principle | 4,719 | 1,212 | ||||
Cumulative effect of change in accounting principle | (1,706 | ) | — | |||
Net income | 3,013 | 1,212 | ||||
Dividends on preferred shares | (525 | ) | (525 | ) | ||
Net income available to common shareholders | $ 2,488 | $ 687 | ||||
Mortgage Portfolio | Mortgage Lending and Servicing | Branch Operations | Branch Management | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net interest income | $3,511 | $2,063 | — | — | $ 5,574 | ||||||||||
Provision for losses | (480 | ) | (39 | ) | — | — | (519 | ) | |||||||
Prepayment penalty income | 250 | — | — | — | 250 | ||||||||||
Mortgage insurance | (240 | ) | (197 | ) | — | — | (437 | ) | |||||||
Gains (loss) on sales of loans | (22 | ) | 5,045 | — | — | 5,023 | |||||||||
Fee income (expense) | (479 | ) | 1,393 | 4,840 | 450 | 6,204 | |||||||||
Other income (expense) | 51 | (1,310 | ) | (1,259 | ) | ||||||||||
General and administrative expenses | (760 | ) | (5,729 | ) | (4,840 | ) | (494 | ) | (11,823 | ) | |||||
Net income | $1,831 | $1,226 | $ — | ($44 | ) | $ 3,013 | |||||||||
Mortgage Loans | Mortgage Securities | Total | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | Average Balance | Interest Income/ Expense | Annual Yield/ Rate | ||||||||||||||
Three months ended March 31, 2001 | ||||||||||||||||||||||
Interest-earning mortgage assets | $493,852 | $12,740 | 10.32 | % | $35,613 | $1,350 | 15.15 | % | $529,966 | $14,090 | 10.63 | % | ||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Asset-backed bonds | $341,598 | 5,763 | 6.75 | % | 341,598 | 5,763 | 6.75 | % | ||||||||||||||
Other borrowings | 135,113 | 2,406 | 7.12 | 25,000 | 481 | 7.69 | 160,113 | 2,887 | 7.24 | |||||||||||||
Cost of derivative financial instruments hedging liabilities | (133) | (133) | ||||||||||||||||||||
Total borrowings | $476,711 | 8,036 | 6.74 | 25,000 | 480 | 7.69 | 501,711 | 8,516 | 6.79 | |||||||||||||
Net interest income | $ 4,704 | $ 870 | $ 5,574 | |||||||||||||||||||
Net interest spread | 3.58 | 7.46 | 2.26 | |||||||||||||||||||
Net yield | 3.81 | 9.76 | 4.21 | |||||||||||||||||||
Three months ended March 31, 2000 (proforma) | ||||||||||||||||||||||
Interest-earning mortgage assets | $669,053 | $16,203 | 9.70 | % | $ 6,375 | $ 266 | 16.50 | % | $675,429 | $16,409 | 9.77 | % | ||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Asset-backed bonds | $557,238 | $ 9,334 | 6.63 | % | $ — | $ — | — | % | $557,238 | $ 9,334 | 6.63 | % | ||||||||||
Other borrowings | 109,560 | 2,099 | 7.58 | — | — | — | 109,560 | 2,099 | 7.58 | |||||||||||||
Cost of derivative financial instruments hedging liabilities | 302 | — | — | 302 | ||||||||||||||||||
Total borrowings | $666,799 | 11,735 | 6.96 | $ — | — | — | $666,799 | 11,735 | 6.96 | |||||||||||||
Net interest income | $ 4,468 | $ 266 | $ 4,734 | |||||||||||||||||||
Net interest spread | 2.74 | 16.50 | 2.81 | |||||||||||||||||||
Net yield | 2.64 | 16.50 | 2.77 | |||||||||||||||||||
2001 | 2000 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31 | December 31 | September 30 | June 30 | March 31 | |||||||||||||
Beginning balance | $7,944 | $8,701 | $9,770 | $10,230 | $11,817 | ||||||||||||
Provision for credit losses | 519 | 1,460 | 1,252 | 1,336 | 1,430 | ||||||||||||
Amounts charged off, net of recoveries | (1,638 | ) | (2,217 | ) | (2,321 | ) | (1,796 | ) | (3,017 | ) | |||||||
Ending balance | $6,825 | $7,944 | $8,701 | $ 9,770 | $10,230 | ||||||||||||
Outright Mortgage Loan Sales | Mortgage Loans Transferred in Securitizations | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Principal Amount | Net Gain Recognized | Weighted Average Price To Par | Principal Amount | Net Gain Recognized | |||||||
2001: | |||||||||||
First quarter | $ 10,773 | $ 262 | 102.9(A | ) | $211,420 | $4,944 | |||||
2000: | |||||||||||
Fourth quarter | $ 46,158 | $1,666 | 104.6 | $151,277 | $3,227 | ||||||
Third quarter | 50,334 | 1,552 | 104.4 | 188,734 | 3,584 | ||||||
Second quarter | 27,799 | 661 | 103.8 | 101,675 | 1,392 | ||||||
First quarter | 48,548 | 1,204 | 104.0 | 128,121 | 1,544 | ||||||
Total | $172,839 | $5,083 | 104.2 | $569,857 | $9,747 | ||||||
(A) | Includes sales of loans in our highest credit category, which have relatively low coupons. Average price of 102.9 represent market prices for similar loans, but are lower than market prices for high coupon loans such as those sold in prior quarters. |
Constant Prepayment Rate | Total Projected Default Rate (% of original principal) (A) | Discount Rate | ||||||
---|---|---|---|---|---|---|---|---|
NovaStar Mortgage Funding Trust Series: | ||||||||
1999-01 | 25 to 30 | 2.5 | % | 16.5 | % | |||
2000-01 | 25 to 30 | 1.0 | 14.8 | |||||
2000-02 | 25 to 30 | 1.0 | 15.0 | |||||
2001-01 | 25 to 30 | 1.2 | 20.0 |
(A) | After the effect of mortgage insurance. |
Quarter Ended March 31, | ||||
---|---|---|---|---|
2001 | 2000 | |||
(Pro forma) | ||||
Quarter ended March 31, 2001 | ||||
Compensation and benefits | $ 6,685 | $3,288 | ||
Travel and entertainment | 1,897 | 276 | ||
Office administration | 1,790 | 1,521 | ||
Loan expense | 519 | 189 | ||
Other | 518 | 118 | ||
Professional and outside services | 414 | 526 | ||
Total general and administrative expenses | $11,823 | $5,918 | ||
Cost of production. Our quarter-to-quarter wholesale loan production costs steadily declined as a result of increased efficiencies in the mortgage lending operation. During the third quarter of 1999, we introduced Internet Underwriter®:, “IU”, a web-based origination system that has allowed us to increase production volumes without adding proportionate infrastructure. 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 our loan products and markets. |
Gross Loan Production | Premium paid to broker, net of fees collected | Total Acquisition Cost | ||||
---|---|---|---|---|---|---|
2001: | ||||||
First quarter | 2.3 | 0.7 | 3.0 | |||
2000: | ||||||
Fourth quarter | 2.8 | 0.5 | 3.3 | |||
Third quarter | 2.6 | 0.5 | 3.1 | |||
Second quarter | 3.0 | 0.5 | 3.5 | |||
First quarter. | 3.3 | 0.5 | 3.8 |
Mortgage Portfolio | Mortgage Lending and Servicing | Branch Operations | Branch Management | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Compensation and benefits | $442 | $3,513 | $2,475 | $255 | $6,685 | ||||||
Office administration | 123 | 1,165 | 413 | 89 | 1,790 | ||||||
Professional and outside services | 195 | 207 | 3 | 9 | 414 | ||||||
Loan expense | — | 461 | 58 | — | 519 | ||||||
Travel and entertainment | 11 | 310 | 1,549 | 27 | 1,897 | ||||||
Other | (11 | ) | 73 | 342 | 114 | 518 | |||||
Total | 760 | 5,729 | 4,840 | 494 | 11,823 | ||||||
2001 | 2000 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31 | December 31 | September 30 | June 30 | March 31 | ||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||
Unpaid principal | $1,263,773 | $1,112,615 | $1,016,951 | $970,026 | $872,702 | |||||||||||||||||
Units | 11,999 | 10,774 | 10,041 | 9,683 | 8,919 | |||||||||||||||||
Servicing income, net of amortization of mortgage servicing rights | $1,465 | 0.46 | $ 1,473 | 0.53 | $ 1,392 | 0.55 | $ 1,321 | 0.54 | $ 1,219 | 0.56 | ||||||||||||
Costs of servicing | 1,238 | 0.39 | 1,185 | 0.43 | 1,095 | 0.43 | 1,015 | 0.42 | 1,064 | 0.49 | ||||||||||||
Net servicing income | $ 227 | 0.07 | $ 288 | 0.10 | $ 297 | 0.12 | $ 306 | 0.12 | $ 155 | 0.07 | ||||||||||||
Annualized costs of servicing per unit | $ 412.70 | $ 439.95 | $ 436.21 | $ 419.29 | $ 477.18 | |||||||||||||||||
opened in December 1999. Following is a summary of the operations.
2001 | 2000 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31 | December 31 | September 30 | June 30 | March 31 | ||||||||
Branches (end of quarter) | 84 | 63 | 48 | 25 | 16 | |||||||
Loans originated | 1,126 | 867 | 533 | 272 | 103 | |||||||
Fee income | $4,840 | $3,955 | $2,283 | $1,093 | $330 | |||||||
General and administrative costs | $4,840 | $3,662 | $2,277 | $1,093 | $328 | |||||||
Personnel | 288 | 252 | 162 | 107 | 81 |
2001 | 2000 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31 | December 31 | September 30 | June 30 | March 31 | ||||||||
Fee income | $450 | $343 | $210 | $101 | $31 | |||||||
General and administrative costs | 494 | 590 | 362 | 219 | 93 | |||||||
Personnel | 15 | 12 | 11 | 6 | 5 |
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 support cash needs. Drawing upon various borrowing arrangements typically satisfies major cash requirements.
Mortgage lending requires significant cash to fund loan originations and for operating costs. Our warehouse lending arrangements, including repurchase agreements, are used to support the mortgage lending operation. Loans financed with warehouse and repurchase credit facilities are subject to changing market valuation and margin calls. Loans we originate can be sold to third a party, which also generates cash to fund on-going operations. We believe we can operate indefinitely in this manner, provided that the level of loan originations is at or near the capacity of its production infrastructure. Our liquidity position is shown under "Financial Condition - Short-term Financing Arrangements."
Cash activity during the three months ended March 31, 2001 and 2000 are presented in the consolidated statement of cash flows.
Our capital 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. |
We use capital when financing loans on a long-term basis. Under short-term financing arrangements, we can borrow up to the lessor of 98% of the face amount or 95% of the market value of our loans. In long-term financing (i.e. in the form of asset-backed bonds) we can finance approximately 95% of the market value of the loans. Capital is used to fund the difference between the financed portion and the full loan cost.
During 2000 and 2001, a portion of the loans we originated were sold to third parties and in securitization transactions treated as sales for tax and financial reporting purposes. In doing so, we do not use capital. In fact, if the sales prices are above the full cost to originate loans, this method of operation will generate capital.
During 2001, we expect to finance 75% or more of the loans we produce. The remainder will be sold to third parties. We currently have excess capital to support this mode of operation. When we fully deploy our capital, we expect to either raise more equity from the capital markets or sell enough loans so that we operate without the need for additional capital.
Inflation
Virtually all of our assets and liabilities 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. Our financial statements are prepared in accordance with generally accepted accounting principles and 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, 2000 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
Our investment policy 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 our current mode of operation, we depend heavily on the market for wholesale non-conforming mortgage loans. To conserve capital, we may sell loans we originates. Financial results will depend, in part, on the ability to find purchasers for the loans at prices that cover origination expenses. Exposure to loan price volatility is reduced as we resume 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 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, 2001 borrowings under all financing arrangements adjust daily, monthly, or quarterly. On the other hand, very few of the mortgage assets we own, 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, 2001.
Table 32—Interest Rate Sensitivity-Income
March, 31, 2001
(dollars in thousands)
Basis Point Increase (Decrease) in | |||||||||
(100) | Base | 100 | |||||||
Income from: | |||||||||
Assets | $ | 103,707 | $ | 105,554 | $ | 107,210 | |||
Liabilities (B) | 57,107 | 66,577 | 76,309 | ||||||
Interest rate agreements | (1,299 | ) | ( 1,299 | ) | ( 1,291 | ) | |||
Net interest income | $ | 45,301 | $ | 37,678 | $ | 29,610 | |||
Cumulative change in net interest income from base | |||||||||
Percent change in net interest income from base | 18.8 | — | (21.3 | ) | |||||
Percent change of capital (C) | 6.5 | — | (6.9 | ) | |||||
(A) | Income of asset, liability or interest rate agreement in a parallel shift in the yield curve, up and down 1%. |
(B) | Includes debt issuance costs, amortization of loan premiums, mortgage insurance premiums and provisions for credit losses. |
(C) | Total change in estimated spread income as a percent of total stockholders' equity as of March 31, 2001. |
Table 33—Interest Rate Sensitivity—Market Value
March 31, 2001
(dollars in thousands)
Basis Point Increase (Decrease)in Interest Rate(A) | ||||||
(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 | )% | ||
(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, 2001. |
Interest Rate Sensitivity Analysis. The values under the heading "Base" are management's estimates of spread income for assets, liabilities and interest rate agreements on March 31, 2001. The values under the headings "100" and "(100)" are management's estimates of the income and change in market value of those same assets, liabilities and interest rate agreements assuming that interest rates were 100 basis points, or 1 percent higher and lower. The cumulative change in income or market value represents the change in income or market value of assets, 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 our 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, 2001.
Management's 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 management's 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.
Projected prepayment rates in each interest rate scenario start at a prepayment speed less than 5% in month one and increase to a long-term prepayment speed in nine to 18 months, to account for the seasoning of the loans. The long-term prepayment speed ranges from 20% to 40% and depends on the characteristics of the loan which include type of product (ARM or fixed rate), note rate, credit grade, LTV, gross margin, weighted average maturity and lifetime and periodic caps and floors. This prepayment curve is also multiplied by a factor of 60% on average for periods when a prepayment penalty is in effect on the loan. Prepayment assumptions are also multiplied by a factor of greater than 100% during periods around rate resets and prepayment penalty expirations. These assumptions change with levels of interest rates. The actual historical speeds experienced on NovaStar Financial's loans shown in Table 6 are weighted average speeds of all loans in each deal.
As shown in Table 6, 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 mortgage assets and the differences between interest rate adjustment indices and interest rate adjustment periods of adjustable-rate mortgage loans and related borrowings.
We use interest rate cap and swap contracts to mitigate the risk of the cost of its variable rate liabilities increasing at a faster rate than the earnings on 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.
We seek to build a balance sheet and undertake an interest rate risk management program that is likely, in management's view, to enable us 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 us and a third party firm or "counter-party". The counter-party agrees to make payments to us in the future should the one- or three-month LIBOR interest rate rise above the strike rate specified in the contract. We make either quarterly premium payments or have 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, we earn cap income. Payments on an annualized basis equal the contractual notional face amount times the difference between actual LIBOR and the strike rate.
Interest rate swaps have similar characteristics. However, interest rate swap agreements allow us to pay a fixed rate of interest while receiving a rate that adjusts with one-month LIBOR.
PART II. OTHER INFORMATION
(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. |
10.10a | Promissory Note by Scott F. Hartman to the Registrant, dated January 1, 2001. |
10.11a | Promissory Note by W. Lance Anderson to the Registrant, dated January 1, 2001. |
11.1 | Statement regarding computation of per share earnings. |
21.1 | Subsidiaries of the Registrant |
* | 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 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. |
We filed Form 8-K on January 3, 2001 regarding NovaStar Financial, Inc.'s purchase of all the common shares of NFI Holding Corporation from the founders and a restructure of founders' notes receivable. |
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.
DATE: May 11, 2001 | /s/ Scott F. Hartman | |
Scott F. Hartman Chairman of the Board, Secretary and Chief Executive Officer (Principal Executive Officer) | ||
DATE: May 11, 2001 | /s/ Rodney E. Schwatken | |
Rodney E. Schwatken Vice President, Treasurer and Controller (Principal Accounting Officer) |