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 September 30, 2000.
|
OR
| ¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from to
|
Commission File Number: 001-13533
NovaStar Financial, Inc.
(Exact name of registrant as specified in its charter)
| Maryland
(State or other jurisdiction
of incorporation or organization)
|
|
74-2830661
(I.R.S. Employer
Identification Number)
|
|
1901 W. 47
th
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. Yes
x No ¨
The number of shares of the registrant’s common stock outstanding as of November 10, 2000 was 6,163,741.
NOVASTAR FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
NOVASTAR FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
| |
|
September 30, 2000
|
|
December 31, 1999
|
| |
|
(unaudited) |
|
|
|
|
| Assets |
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ 2,767 |
|
|
$ 2,395 |
|
| Mortgage loans |
|
424,547 |
|
|
620,406 |
|
| Mortgage-backed securities—available-for-sale |
|
41,784 |
|
|
6,775 |
|
| Accrued interest receivable |
|
9,782 |
|
|
12,452 |
|
| Advances to and investment in NFI Holding Corporation |
|
20,617 |
|
|
29,208 |
|
| Assets acquired through foreclosure |
|
15,315 |
|
|
16,891 |
|
| Other assets |
|
1,905 |
|
|
2,383 |
|
| |
|
|
|
|
|
|
| Total assets |
|
$516,717 |
|
|
$690,510 |
|
| |
|
|
|
|
|
|
| Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
| Liabilities: |
| Borrowings |
|
$413,156 |
|
|
$586,868 |
|
| Dividends payable |
|
525 |
|
|
525 |
|
| Accounts payable and other liabilities |
|
2,173 |
|
|
1,803 |
|
| |
|
|
|
|
|
|
| Total liabilities |
|
415,854 |
|
|
589,196 |
|
| |
| Stockholders’ equity: |
| Capital stock, $0.01 par value, 50,000,000 shares authorized: |
|
|
|
|
|
|
Class B, convertible preferred stock, 4,285,714
shares issued and outstanding |
|
43 |
|
|
43 |
|
Common stock, 8,143,407 and 8,130,069 shares issued;
6,206,441 and 7,460,523 shares outstanding, respectively |
|
81 |
|
|
81 |
|
| Additional paid-in capital |
|
151,197 |
|
|
151,173 |
|
| Accumulated deficit |
|
(39,742 |
) |
|
(41,502 |
) |
| Accumulated other comprehensive income |
|
3,283 |
|
|
242 |
|
| Cost of treasury stock, 1,936,966 and 673,400 shares, respectively |
|
(7,153 |
) |
|
(1,877 |
) |
| Notes receivable from founders |
|
(6,846 |
) |
|
(6,846 |
) |
| |
|
|
|
|
|
|
| Total stockholders’ equity |
|
100,863 |
|
|
101,314 |
|
| |
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
|
$516,717 |
|
|
$690,510 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands)
| |
|
For the Nine Months
Ended September 30,
|
|
For the Three Months
Ended September 30,
|
|
| |
|
2000
|
|
|
1999
|
|
|
2000
|
|
1999
|
|
| Interest income on mortgage loans |
|
$ |
34,981 |
|
|
$ |
52,236 |
|
|
$ |
10,391 |
|
|
$ |
15,595 |
|
| Interest expense on mortgage loans |
|
|
26,881 |
|
|
|
36,059 |
|
|
|
8,240 |
|
|
|
11,206 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
8,100 |
|
|
|
16,177 |
|
|
|
2,151 |
|
|
|
4,389 |
|
| Prepayment penalty income |
|
|
1,431 |
|
|
|
2,385 |
|
|
|
448 |
|
|
|
769 |
|
| Provision for credit losses |
|
|
(4,004 |
) |
|
|
(11,499 |
) |
|
|
(1,212 |
) |
|
|
(5,634 |
) |
| Premiums for mortgage loan insurance |
|
|
(1,009 |
) |
|
|
(1,339 |
) |
|
|
(302 |
) |
|
|
(427 |
) |
| Loan servicing fees paid to NovaStar Mortgage, Inc. |
|
|
(1,982 |
) |
|
|
(3,056 |
) |
|
|
(599 |
) |
|
|
(936 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net portfolio income (loss) |
|
|
2,536 |
|
|
|
2,668 |
|
|
|
486 |
|
|
|
(1,839 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income on mortgage-backed securities |
|
|
1,329 |
|
|
|
100 |
|
|
|
602 |
|
|
|
100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income (loss) |
|
|
(453 |
) |
|
|
706 |
|
|
|
(591 |
) |
|
|
322 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Equity in net income of NFI Holding Corporation |
|
|
646 |
|
|
|
1,518 |
|
|
|
787 |
|
|
|
576 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net fees for other services provided by (to) NovaStar Mortgage, Inc. |
|
|
(1,460 |
) |
|
|
287 |
|
|
|
(1,458 |
) |
|
|
(169 |
) |
| Compensation and benefits. |
|
|
1,042 |
|
|
|
1,358 |
|
|
|
325 |
|
|
|
421 |
|
| Professional and outside services |
|
|
467 |
|
|
|
546 |
|
|
|
210 |
|
|
|
181 |
|
| Office administration |
|
|
607 |
|
|
|
611 |
|
|
|
206 |
|
|
|
203 |
|
| Other |
|
|
66 |
|
|
|
156 |
|
|
|
23 |
|
|
|
60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total general and administrative expenses |
|
|
722 |
|
|
|
2,958 |
|
|
|
(694 |
) |
|
|
696 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
3,336 |
|
|
$ |
2,034 |
|
|
$ |
1,978 |
|
|
$ |
(1,537 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends on preferred shares |
|
$ |
(1,575 |
) |
|
$ |
(1,081 |
)
|
|
$ |
(525 |
) |
|
$ |
(525 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) available to common shareholders |
|
$ |
1,761 |
|
|
$ |
953 |
|
|
$ |
1,453 |
|
|
$ |
(2,062 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic earnings (loss) per share |
|
$ |
0.25 |
|
|
$ |
0.12 |
|
|
$ |
0.21 |
|
|
$ |
(0.25 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted earnings (loss) per share |
|
$ |
0.25 |
|
|
$ |
0.11 |
|
|
$ |
0.18 |
|
|
$ |
(0.25 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average basic shares outstanding |
|
|
7,087 |
|
|
|
8,130 |
|
|
|
6,900 |
|
|
|
8,130 |
|
| Weighted average diluted shares outstanding |
|
|
7,094 |
|
|
|
8,326 |
|
|
|
11,192 |
|
|
|
8,130 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends declared per common share |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
| |
|
For the Ninth Months
Ended September 30,
|
| |
|
2000 |
|
1999 |
| Net cash provided by operating activities |
|
$ 13,945 |
|
|
$ 23,504 |
|
|
|
| Cash flow from investing activities: |
|
|
|
|
|
|
| Mortgage loan repayments |
|
176,799 |
|
|
201,034 |
|
| Sales of assets acquired through foreclosure |
|
15,295 |
|
|
17,542 |
|
| Mortgage loans sold to others |
|
— |
|
|
4,900 |
|
| Proceeds from paydowns on mortgage-backed securities |
|
2,161 |
|
|
— |
|
| Net change in advances to NFI Holding Corporation |
|
7,309 |
|
|
(15,360 |
) |
| Purchase of mortgage-backed securities from NFI Holding Corporation |
|
(33,767 |
) |
|
— |
|
| |
|
|
|
|
|
|
| Net cash provided by investing activities |
|
167,797 |
|
|
208,116 |
|
|
|
| Cash flow from financing activities: |
|
|
|
|
|
|
| Payments on collateralized mortgage obligations |
|
(185,502 |
) |
|
(236,872 |
) |
| Change in short-term borrowings |
|
10,960 |
|
|
(18,029 |
) |
| Net proceeds from issuance of capital stock and exercise of equity instruments |
|
23 |
|
|
29,029 |
|
| Dividends paid on preferred stock |
|
(1,575 |
) |
|
(556 |
) |
| Dividends paid on common stock |
|
— |
|
|
(2,845 |
) |
| Treasury stock purchases |
|
(5,276 |
) |
|
— |
|
| |
|
|
|
|
|
|
| Net cash used in financing activities |
|
(181,370 |
) |
|
(229,273 |
) |
| |
|
|
|
|
|
|
| Net increase in cash and cash equivalents |
|
372 |
|
|
2,347 |
|
| Cash and cash equivalents, beginning of period |
|
2,395 |
|
|
— |
|
| |
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
|
$ 2,767 |
|
|
$ 2,347 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
| Cash paid for interest |
|
$ 27,048 |
|
|
$ 36,567 |
|
| |
|
|
|
|
|
|
| Assets acquired through foreclosure |
|
$ 12,136 |
|
|
$ 22,570 |
|
| |
|
|
|
|
|
|
| Dividends payable |
|
$ 525 |
|
|
$ 525 |
|
| |
|
|
|
|
|
|
| Issuance of warrants |
|
$ — |
|
|
$ 350 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 (Unaudited)
Note 1. Financial Statement Presentation
The consolidated financial statements as of and for the periods ended September 30, 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 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, 1999.
NovaStar Financial owns 100 percent of the common stock of three special purpose entities — NovaStar Assets
Corporation, NovaStar Certificates Financing Corporation and NovaStar Mortgage Funding Corporation. NovaStar Financial formed these entities in connection with the issuance of collateralized mortgage obligations. The consolidated financial statements of
NovaStar Financial include the accounts of these entities. Significant intercompany accounts and transactions have been eliminated in consolidation.
NovaStar Financial owns 100 percent of the non-voting preferred stock of NFI Holding Corporation (Holding) for
which it receives 99 percent of any dividends paid by NFI Holding. The founders of NovaStar Financial own the voting common stock of NFI Holding and receive 1% of any dividends paid by NFI Holding. NovaStar Mortgage, Inc., NovaStar Capital, Inc. and
NovaStar Home Mortgage, Inc. are wholly owned subsidiaries of NFI Holding. NovaStar Mortgage Funding Corporation II, NovaStar Mortgage Funding Corporation III and NovaStar REMIC Financing Corporation are subsidiaries of NovaStar Mortgage. NovaStar
Financial accounts for its investment in Holding using the equity method.
New Accounting Pronouncements. During 1998, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. 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 provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of hedge asset or liability that is attributable to the hedge risk or the earnings effect
of the hedge forecasted transaction. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133 an amendment of FASB Statement No. 133 was issued in June 1999 and postponed the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. Management has reviewed all financial instruments of NovaStar Financial and has determined that NovaStar Financial’s interest rate cap agreements are derivative instruments under SFAS No. 133. These derivatives
are used to hedge the interest rate risk on variable rate debt and will be accounted for as cash flow hedges under SFAS No. 133. Management does not expect the adoption of SFAS No. 133 to have a material impact on the financial statements of the NovaStar
Financial, Inc.
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125. SFAS 125 was issued in June 1996 to revise the standards for accounting for securitization and other transfers of financial assets and requires certain disclosures regarding those transfers. SFAS 140 replaces SFAS 125 in its entirety. However, it
carries over most of the provisions of SFAS 125. SFAS 140 also formalizes guidance provided by the FASB in various committee publications and technical bulletins. This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December
15, 2000. Disclosures about securitization and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. Management does not expect the adoption of
SFAS No. 140 to have a material impact on the financial statements of NovaStar Financial.
In addition, Note 1 of the consolidated financial statements contained in the annual report on Form 10-K for the
fiscal year ended December 31, 1999 describes certain recently issued accounting pronouncements. Management believes the implementation of these pronouncements and others that have gone into effect since the date of these reports will not have a material
impact on the consolidated financial statements.
Note 2. NovaStar Mortgage Funding Trust Series 2000-1 and 2000-2
On March 31, 2000 and September 28, 2000, NovaStar Mortgage executed securitization transactions that were
constructed to allow for accounting as sales of loans. Details of these transactions are as follows:
| |
|
Value of
Asset-Backed
Bonds Issued
|
|
Economic Residual Value
as of September 30, 2000
|
|
Value of
Collateral Sold
|
|
Gain
Recognized
|
| NMFT 2000-1 |
|
$226 million |
|
$13,750,000 |
|
$229,846,000 |
|
$2,936,000 |
| NMFT 2000-2 (A) |
|
$334 million |
|
$20,534,000 |
|
$188,734,000 |
|
$3,584,000 |
|
|
| (A)
|
A second closing for NMFT 2000-2 is scheduled for December 26, 2000 in which $151.3 million of loans will be added.
|
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, 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 quarterly 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., NovaStar
Capital and NovaStar Home Mortgage, Inc. are wholly owned subsidiaries of NFI Holding. NovaStar Mortgage Funding Corporation II, NovaStar Mortgage Funding Corporation III and NovaStar REMIC Financing Corporation are subsidiaries of NovaStar Mortgage. The
business of NovaStar Mortgage is discussed in “Description of Business—Business of NovaStar Mortgage.” NovaStar Capital was formed to focus on acquiring non-conforming residential mortgage loans from banks, thrifts and credit unions. In
February 2000, NovaStar Capital discontinued operations. NovaStar Home Mortgage was created in May 1999 to operate a network of mortgage brokers. Currently, NovaStar Home Mortgage operates 48 branches in 24 states.
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, NovaStar Capital, Inc and NovaStar Home Mortgage, Inc. The founders are the only members of the Board of Directors of NFI Holding,
NovaStar Mortgage, NovaStar Capital and NovaStar Home Mortgage, Inc. 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. REITs will be allowed to own directly all of the stock of taxable subsidiaries
beginning in the tax year 2001. The value of all taxable subsidiaries of a REIT will be limited to 20% of the total value of the REIT’s assets. Accordingly, NovaStar Financial expects to acquire all of the common stock of NFI Holding Corporation from
Scott Hartman and Lance Anderson in January 2001. As a result, NFI Holding will become a wholly-owned consolidated subsidiary of NovaStar Financial.
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
Financial’s Annual Report on Form 10K 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 and securities 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 Mortgage’s account executives work with
more than 4,500 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 sale—either to affiliates, third parties for cash or subsidiaries as collateral for securitization.
|
Financial Condition of NovaStar Financial, Inc. as of September 30, 2000 and December 31, 1999
NovaStar Financial’s 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 September 30, 2000 was $425 million versus $620 million as of December 31, 1999. The carrying value of
collateralized mortgage obligations as of September 30, 2000 was $402 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 nine
months of 2000. Even though NovaStar Financial is no longer purchasing the loans originated from NovaStar Mortgage, NovaStar Financial has been able to grow its mortgage asset portfolio by purchasing the residual assets of all NovaStar Mortgage’s
securitization transactions. The carrying value of the residual assets of NovaStar Financial was $42 million as of September 30, 2000 compared with $7 million as of December 31, 1999. Mortgage loans collateralizing residual assets totaled $526 million as
of September 30, 2000 compared with $143 million as of December 31, 2000 bringing the total carrying value of mortgage assets managed by NovaStar Financial to nearly $1 billion as of September 30, 2000 compared with $770 million as of December 31, 1999.
Mortgage Loans. Table 1 is a presentation of loans as of September 30,
2000 and December 31, 1999 and their credit grades. Table 2 is a summary of all mortgage loans owned by NovaStar Financial as of September 30, 2000 and December 31, 1999 by state. These tables also provide details regarding the collateral outstanding on
NovaStar Mortgage’s REMIC transactions, which NovaStar Financial owns the residual interests. The REMIC transactions are discussed further in the “Mortgage Loans—Available for Sale” and “Mortgage Loans Sales” sections of this
document.
Table 1
Mortgage Loans by Credit Grade
(dollars in thousands)
| |
|
|
|
|
|
|
September 30, 2000
|
|
December 31, 1999
|
Credit
Grade
|
|
Allowed
Mortgage
Lates (A)
|
|
Maximum
Loan-to-
value
|
|
Current
Principal
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Loan-to-
value
|
|
Current
Principal
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Loan-to-
value
|
Retained loans collateralizing
asset-backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AA |
|
|
0 x 30 |
|
|
95 |
|
$ |
62,099 |
|
|
10.11 |
% |
|
|
82.8 |
% |
|
$ |
85,476 |
|
|
9.50 |
% |
|
|
83.2 |
% |
| A |
|
|
1 x 30 |
|
|
90 |
|
|
170,903 |
|
|
10.61 |
|
|
|
79.3 |
|
|
|
244,187 |
|
|
10.06 |
|
|
|
80.1 |
|
| A- |
|
|
2 x 30 |
|
|
90 |
|
|
100,568 |
|
|
11.18 |
|
|
|
81.8 |
|
|
|
149,248 |
|
|
10.45 |
|
|
|
81.8 |
|
| B |
|
|
3 x 30, 1 x 60 |
|
|
85 |
|
|
59,056 |
|
|
11.68 |
|
|
|
78.0 |
|
|
|
89,477 |
|
|
10.86 |
|
|
|
78.4 |
|
| |
|
|
5 x 30, 2 x 60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| C |
|
|
1 x 90 |
|
|
75 |
|
|
26,353 |
|
|
12.11 |
|
|
|
72.8 |
|
|
|
42,766 |
|
|
11.35 |
|
|
|
72.5 |
|
| D |
|
|
6 x 30, 3 x 60, |
|
|
65 |
|
|
5,004 |
|
|
12.95 |
|
|
|
63.4 |
|
|
|
7,668 |
|
|
12.16 |
|
|
|
62.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
2 x 90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total on balance sheet |
|
|
|
|
$ |
423,983 |
|
|
10.94 |
% |
|
|
79.6 |
% |
|
$ |
618,822 |
|
|
10.31 |
% |
|
|
80.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
September 30, 2000
|
|
December 31, 1999
|
Credit
Grade
|
|
Allowed
Mortgage
Lates (A)
|
|
Maximum
Loan-to-
value
|
|
Current
Principal
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Loan-to-
value
|
|
Current
Principal
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Loan-to-
value
|
Sold loans collateralizing asset-
backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AAA |
|
|
0 x 30 |
|
|
97 |
(B) |
|
$115,453 |
|
9.69 |
% |
|
80.8 |
% |
|
$ 3,474 |
|
9.18 |
% |
|
80.7 |
% |
| AA |
|
|
0 x 30 |
|
|
95 |
|
|
136,895 |
|
10.17 |
|
|
83.6 |
|
|
27,236 |
|
9.47 |
|
|
84.8 |
|
| A |
|
|
1 x 30 |
|
|
90 |
|
|
106,876 |
|
10.39 |
|
|
81.2 |
|
|
43,119 |
|
9.86 |
|
|
83.1 |
|
| A- |
|
|
2 x 30 |
|
|
90 |
|
|
75,505 |
|
10.49 |
|
|
81.4 |
|
|
35,311 |
|
10.09 |
|
|
83.1 |
|
| B |
|
|
3 x 30, 1x 60 |
|
|
85 |
|
|
39,052 |
|
10.97 |
|
|
79.3 |
|
|
19,612 |
|
10.59 |
|
|
79.7 |
|
| |
|
|
5 x 30, 2 x 60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| C |
|
|
1 x 90 |
|
|
75 |
|
|
16,180 |
|
11.50 |
|
|
70.4 |
|
|
11,405 |
|
11.09 |
|
|
71.9 |
|
| D |
|
|
6 x 30, 3 x 60, |
|
|
65 |
|
|
2,071 |
|
12.29 |
|
|
70.0 |
|
|
3,171 |
|
12.16 |
|
|
62.1 |
|
| |
|
|
2 x 90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
Varies |
|
|
97 |
|
|
36,525 |
|
11.42 |
|
|
92.6 |
|
|
— |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total off balance sheet |
|
|
|
|
|
$528,557 |
|
10.35 |
% |
|
82.0 |
% |
|
$143,328 |
|
10.08 |
% |
|
81.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Represents the number of times a prospective borrower is allowed to be late more than 30, 60 or 90 days. For instance, a 3x30, 1x60
category would afford the prospective borrower to be more than 30 days late on three separate occasions and 60 days late no more than one time.
|
(B)
|
97% on fixed-rate purchases; all other maximum of 95%.
|
Table 2
Mortgage Loans by State
Percent of Portfolio
(based on current principal balance)
| |
|
Retained loans collateralizing asset-
backed bonds—on balance sheet
|
|
Sold loans collateralizing asset-backed
bonds—off balance sheet
|
| |
|
September 30, 2000
|
|
December 31, 1999
|
|
September 30, 2000
|
|
December 31, 1999
|
Collateral Location
|
|
|
|
|
|
|
|
|
|
|
|
|
| Florida |
|
15 |
% |
|
14 |
% |
|
16 |
% |
|
21 |
% |
| California |
|
14 |
|
|
16 |
|
|
10 |
|
|
7 |
|
| Washington |
|
6 |
|
|
7 |
|
|
4 |
|
|
4 |
|
| Texas |
|
5 |
|
|
5 |
|
|
3 |
|
|
6 |
|
| Nevada |
|
4 |
|
|
4 |
|
|
6 |
|
|
4 |
|
| Oregon |
|
4 |
|
|
5 |
|
|
2 |
|
|
1 |
|
| Tennessee |
|
4 |
|
|
3 |
|
|
6 |
|
|
5 |
|
| Michigan |
|
3 |
|
|
3 |
|
|
8 |
|
|
5 |
|
| Ohio |
|
3 |
|
|
3 |
|
|
6 |
|
|
4 |
|
| All other states |
|
42 |
|
|
40 |
|
|
39 |
|
|
43 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Table 3 provides a summary of NovaStar Financial’s mortgage loans by type and carrying value as of September
30, 2000 and December 31, 1999.
Table 3
Carrying Value of Loans by Product/Type
September 30, 2000 and December 31, 1999
(in thousands)
Product/Type
|
|
September 30, 2000
|
|
December 31, 1999
|
|
|
Retained loans collateralizing asset-backed bonds—
on balance sheet: |
|
|
|
|
|
|
| Two and three-year fixed. |
|
$201,440 |
|
|
$343,193 |
|
| Six-month LIBOR and one-year CMT |
|
27,164 |
|
|
43,178 |
|
| 30/15-year fixed and other |
|
195,379 |
|
|
232,451 |
|
| |
|
|
|
|
|
|
| Outstanding principal |
|
423,983 |
|
|
618,822 |
|
| Premium |
|
8,696 |
|
|
12,689 |
|
| Allowance for credit losses |
|
(8,132 |
) |
|
(11,105 |
) |
| |
|
|
|
|
|
|
| Carrying Value |
|
$424,547 |
|
|
$620,406 |
|
| |
|
|
|
|
|
|
| Carrying value as a percent of principal |
|
100.13 |
% |
|
100.26 |
% |
| |
|
|
|
|
|
|
|
|
Sold loans collateralizing asset-backed bonds—
off balance sheet: |
|
|
|
|
|
|
| Two and three-year fixed. |
|
$357,210 |
|
|
$ 78,238 |
|
| Six-month LIBOR and one-year CMT |
|
2,864 |
|
|
5,052 |
|
| 30/15-year fixed and other |
|
168,483 |
|
|
60,038 |
|
| |
|
|
|
|
|
|
| Outstanding principal |
|
$528,557 |
|
|
$143,328 |
|
| |
|
|
|
|
|
|
| Mortgage securities retained. |
|
$ 41,784 |
|
|
$ 6,775 |
|
| |
|
|
|
|
|
|
Substantially all mortgage loans are acquired at a premium. Premiums are amortized as a reduction of interest
income over the 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 nine months ended September 30, 2000, prepayment penalties collected from borrowers totaled $1.4 million in comparison with $2.4 million for the same period of 1999. Table 4 is an analysis of mortgage loans and
prepayment penalties.
Table 4
Mortgage Loan Prepayment Penalties
September 30, 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 September 30, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retained loans collateralizing asset-backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NHES 1997-1 |
|
$ 58,054 |
|
$2,679 |
|
23 |
% |
|
11.61 |
% |
|
74.9 |
% |
|
0.33
|
| NHES 1997-2 |
|
63,337 |
|
1,269 |
|
22 |
|
|
11.34 |
|
|
79.1 |
|
|
0.31
|
| NHES 1998-1 |
|
127,936 |
|
2,126 |
|
48 |
|
|
10.96 |
|
|
80.6 |
|
|
0.57
|
| NHES 1998-2 |
|
174,393 |
|
2,609 |
|
58 |
|
|
10.54 |
|
|
81.0 |
|
|
0.98
|
| All other loans |
|
263 |
|
13 |
|
— |
|
|
12.86 |
|
|
76.0 |
|
|
—
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total on balance sheet |
|
$423,983 |
|
$8,696 |
|
45 |
% |
|
10.94 |
% |
|
79.6 |
% |
|
0.67
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sold loans collateralizing asset-backed bonds (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NMFT 1999-1 |
|
$119,327 |
|
$ — |
|
66 |
% |
|
10.43 |
% |
|
81.7 |
% |
|
1.36
|
| NMFT 2000-1 (B) |
|
221,963 |
|
— |
|
93 |
|
|
10.15 |
|
|
81.1 |
|
|
2.63
|
| NMFT 2000-2 (C) |
|
187,267 |
|
— |
|
90 |
|
|
10.54 |
|
|
83.3 |
|
|
2.62
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total off balance sheet |
|
$528,557 |
|
$ — |
|
86 |
% |
|
10.35 |
% |
|
82.0 |
% |
|
2.34
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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.
|
(C)
|
The economic residual interests in NMFT 2000-2 were purchased by NovaStar Financial September 29, 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
(dollars in thousands)
| |
|
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
|
| September 30, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained loans
collateralizing asset-
backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NHES 1997-1 |
|
October 1, 1997 |
|
$ 58,054 |
|
7 |
|
44 |
|
41 |
|
41 |
|
40 |
| NHES 1997-2 |
|
December 11, 1997 |
|
63,337 |
|
3 |
|
33 |
|
38 |
|
47 |
|
35 |
| NHES 1998-1 |
|
April 30, 1998 |
|
127,936 |
|
3 |
|
38 |
|
45 |
|
41 |
|
29 |
| NHES 1998-2 |
|
August 18, 1998 |
|
174,393 |
|
3 |
|
39 |
|
43 |
|
30 |
|
23 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold loans collateralizing
asset—backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NMFT 1999-1 |
|
January 29, 1999 |
|
$119,327 |
|
5 |
|
36 |
|
31 |
|
23 |
|
18 |
| NMFT 2000-1 |
|
March 31, 2000 |
|
221,963 |
|
2 |
|
8 |
|
9 |
|
— |
|
7 |
| NMFT 2000-2 |
|
September 28, 2000 |
|
187,267 |
|
1 |
|
— |
|
— |
|
— |
|
— |
| |
|
Issue Date
|
|
Current
Principal
Balance
|
|
Weighted
Average Age
of Loans at
Inception
(in months)
|
|
Constant Prepayment Rate
(Annual Percent)
|
| |
|
|
|
|
One-
month
|
|
Three-
month
|
|
Twelve-
month
|
|
Life
|
| December 31, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained loans
collateralizing asset-
backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NHES 1997-1 |
|
October 1, 1997 |
|
$ 85,015 |
|
7 |
|
44 |
|
42 |
|
50 |
|
40 |
| NHES 1997-2 |
|
December 11, 1997 |
|
101,031 |
|
3 |
|
64 |
|
58 |
|
42 |
|
32 |
| NHES 1998-1 |
|
April 30, 1998 |
|
195,170 |
|
3 |
|
47 |
|
36 |
|
29 |
|
23 |
| NHES 1998-2 |
|
August 18, 1998 |
|
237,223 |
|
3 |
|
26 |
|
21 |
|
21 |
|
18 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold loans collateralizing
asset—backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NMFT 1999-1 |
|
January 29, 1999 |
|
$143,328 |
|
5 |
|
14 |
|
20 |
|
14 |
|
14 |
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
|
| |
September 30, 2000 |
|
2.05 |
% |
| |
June 30, 2000 |
|
2.03 |
|
| |
March 31, 2000 |
|
2.05 |
|
| |
December 31, 1999 |
|
2.05 |
|
| |
September 30, 1999 |
|
2.09 |
|
| |
June 30, 1999 |
|
2.15 |
|
| |
March 31, 1999 |
|
2.22 |
|
Mortgage-Backed Securities – Available-For-Sale. NovaStar
Financial owns the economic residual certificates in NovaStar Mortgage Funding Trust Series 1999-1, 2000-1 and 2000-2. As the owner of the residual certificates, NovaStar Financial receives the net cash flow of the NovaStar Mortgage Funding Trust Series
asset-backed bonds, which represent the right to receive, over the life of the securitizations, the excess of the weighted average coupon on the mortgage loan collateral over the sum of the interest rate on the bonds, a normal servicing fee, a trustee
fee, insurance premiums and the credit losses relating to the securitized loans. As of September 30, 2000 and December 31, 1999, the carrying value of the residual interests was $41.8 million and $6.8 million. These values represent the present value of
the residual cashflows that NovaStar Financial expects to receive over the life of the securitizations, taking into consideration estimated prepayment speeds and credit losses, and is discounted at a rate which management believes is an appropriate
risk-adjusted market rate of return for the residual asset. The residual cashflows are realized over the life of the securitizations as cash distributions are received from the trusts. NovaStar Financial believes its residual assets are fairly valued as
of September 30, 2000, but can provide no assurance that future prepayment and loss experience or changes in the required market discount rate will not require write-downs of the residual asset. Write-downs would reduce the income of future periods and
could cause NovaStar Financial to report net losses.
Key statistics, assumptions and characteristics of the NovaStar Mortgage Funding Trust Series mortgage loan
collateral and bonds as of September 30, 2000 and December 31, 1999 are included in the table below and in Tables 4, 5 and 8 of this document.
NovaStar Mortgage originated and securitized the loans serving as collateral in NMFT 1999-1, 2000-1 and 2000-2.
Upon securitization, NovaStar Mortgage recognized gains on the transfer of the loans. Details of these transactions are provided in “Mortgage Loan Sales.”
Table 7
Residual Assets’ Key Statistics, Assumptions and Characteristics
September 30, 2000 and December 31, 1999
(dollars in thousands)
| |
|
September 30, 2000
|
|
|
December 31, 1999
|
|
| |
|
1999-1 |
|
|
2000-1 |
|
|
2000-2 |
|
|
1999-1 |
|
| Estimated Fair Value |
|
$ |
7,500 |
|
|
$ |
13,750 |
|
|
$ |
20,534 |
|
|
$ |
6,775 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Constant Prepayment Rate (weighted average life) |
|
|
37 |
|
|
|
29 |
|
|
|
28 |
|
|
|
31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Static loss, net of mortgage insurance |
|
|
2.5 |
% |
|
|
1.0 |
% |
|
|
1.0 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Discount Rate |
|
|
17 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| As a percent of mortgage loan principal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent loans (30 days and greater) |
|
|
9.05 |
% |
|
|
2.59 |
% |
|
|
0.21 |
% |
|
|
7.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans in foreclosure |
|
|
4.16 |
|
|
|
0.13 |
|
|
|
— |
|
|
|
3.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real Estate Owned |
|
|
1.92 |
|
|
|
— |
|
|
|
— |
|
|
|
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative losses |
|
$ |
969 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired through Foreclosure. As of September 30, 2000, NovaStar Financial had 174
loans in real estate owned with a carrying value of $15.3 million (principal of $16.7 million) compared to 192 loans with a carrying value of $16.9 million (principal of $24.4 million) as of December 31, 1999.
Short-term and Long-term Financing Arrangements. Mortgage loan originations are funded with various
financing facilities prior to securitization. Loans originated are funded initially using committed warehouse lines with First Union National Bank or Residential Funding Corporation (RFC) under which NovaStar Financial and NovaStar Mortgage are
co-borrowers. NovaStar Financial and NovaStar Mortgage can borrow up to $75 million from First Union and $50 million from RFC under these warehouse agreements. NovaStar Financial and NovaStar Mortgage also use repurchase agreements as a means of
warehousing loans prior to securitization. First Union provides a $175 million committed facility for this purpose. These First Union and RFC facilities are committed through July 27, 2001 and December 27, 2000, respectively.
First Union also provides a $25 million committed facility secured by residual interests in asset-backed bonds
that is committed through December 2001. Amounts outstanding as of September 30, 2000 under this financing arrangement were $11.0 million.
Amounts outstanding under short-term financing arrangements as of September 30, 2000 are detailed in Table 25 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. The securitization transactions executed by NovaStar Mortgage have been structured as sales for financial reporting and tax purposes. NovaStar Financial as the residual owner does not have an option to call these bonds in
the future. However, NovaStar Mortgage, as servicer of the collateral of these transactions, holds a small clean up call.
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 September 30, 2000 was $402
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 Financial’s CMOs as of September 30, 2000 and
December 31, 1999. This table also provides details regarding the bonds and collateral outstanding underlying NovaStar Financial’s economic residual interests.
Table 8
Collateralized Mortgage Obligations
September 30, 2000 and December 31, 1999
(dollars in thousands)
| |
|
Collateralized
Mortgage Obligation
|
|
Mortgage Loans
|
| |
|
Remaining
Principal
|
|
Current
Interest
Rate
|
|
Remaining
Principal
(A)
|
|
Weighted
Average
Coupon
|
|
Estimated
Weighted
Average
Months to Call
|
| As of September 30, 2000: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retained loans collateralizing asset-backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NHES 1997-1 |
|
$ 54,325 |
|
|
7.13 |
% |
|
$59,297 |
|
11.61 |
% |
|
—
|
| NHES 1997-2 |
|
59,453 |
|
|
6.88 |
|
|
65,061 |
|
11.34 |
|
|
4
|
| NHES 1998-1 |
|
116,152 |
|
|
6.90 |
|
|
130,671 |
|
10.96 |
|
|
13
|
| NHES 1998-2 |
|
173,663 |
|
|
6.84 |
|
|
183,913 |
|
10.54 |
|
|
25
|
| Unamortized debt issuance costs, net |
|
(1,397 |
) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total on balance sheet |
|
$402,196 |
|
|
|
|
|
| |
|
Collateralized
Mortgage
Obligation
|
|
Mortgage Loans
|
| |
|
Remaining
Principal
|
|
Current
Interest
Rate
|
|
Remaining
Principal
(A)
|
|
Weighted
Average
Coupon
|
|
Estimated
Weighted
Average
Months
to Call
|
| Sold loans collateralizing asset-backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NMFT 1999-1 |
|
$116,659 |
|
|
7.14 |
% |
|
$119,327 |
|
10.43 |
% |
|
50 |
| NMFT 2000-1 (B) |
|
218,166 |
|
|
7.02 |
|
|
221,963 |
|
10.15 |
|
|
63 |
| NMFT 2000-2 (C) |
|
334,220 |
|
|
6.95 |
|
|
187,267 |
|
10.54 |
|
|
66 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total off balance sheet |
|
$669,045 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| As of December 31, 1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retained loans collateralizing asset-backed bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
6.67 |
% |
|
$143,328 |
|
10.08 |
% |
|
55 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Includes assets acquired through foreclosure.
(B) NovaStar Financial purchased the residual interests in NMFT 2000-1 on April 1, 2000.
(C) NovaStar Financial purchased the residual interests in NMFT 2000-2 on September 29, 2000.
Stockholders’ Equity. The decrease in NovaStar Financial’s stockholders’ equity as of
September 30, 2000 compared with December 31, 1999 is a result of the following:
|
·
|
$3.3 million increase due to net income recognized for the nine months ended September 30, 2000.
|
|
·
|
$5.3 million decrease as a result of common stock repurchases. NovaStar Financial’s Board of Directors amended its
stock repurchase program to increase the amount of common stock authorized to be acquired up to an aggregate purchase price of $9 million. Stock repurchases may be made in the open market, in block purchase transactions, through put options or through
privately negotiated transactions. The timing of repurchases and the number of shares ultimately repurchased will depend upon market conditions and corporate requirements. As of September 30,
2000, NovaStar Financial had repurchased 1,936,966 shares of its common stock. The number of shares repurchased by NovaStar Financial has increased to 1,979,666 through November 10, 2000 for an aggregate purchase price of $7.3 million.
|
|
·
|
$3.0 million increase in the unrealized gain on the economic residual interests in NovaStar Mortgage’s asset backed bond
transactions that for tax and accounting purposes were treated by NovaStar Mortgage as sales. The residual interests in those transactions have been classified as available-for-sale securities and the unrealized gain is recognized as a component of
accumulated other comprehensive income.
|
|
·
|
$1.6 million decrease due to dividends on Class B 7% cumulative convertible preferred stock in 2000.
|
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 Financial’s
stock price averaged $17.08 per share, dividends of $0.28 were declared and the value of each warrant was $2.08. The combination of these produced a return to investors in the private placement exceeding 15%. As a result, the first tranche of these notes
was forgiven resulting in a non-cash charge of $1,083,000 during the fourth quarter of 1997. NovaStar 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 Financial’s 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 September 30, 2000 and December 31, 1999. Accrued interest on these notes was $339,000 as of September
30, 2000 and December 31, 1999.
Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999
Net Income
During the nine months ended September 30, 2000, NovaStar Financial recorded net income of $3.3 million, $0.25 per
diluted common share, compared with net income of $2.0 million, $0.11 per diluted common share, for the nine months ended September 30, 1999.
NovaStar Financial’s 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 9 presents a summary of the average interest-earning assets, average interest-bearing liabilities and the
related yields and rates thereon for the nine months ended September 30, 2000 and 1999.
Table 9
Interest Analysis
(dollars in thousands)
| |
|
Mortgage Loans
|
|
Mortgage-Backed Securities
|
|
Total
|
| |
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
| Nine months ended September 30, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-earning mortgage assets |
|
$475,419 |
|
$34,981 |
|
9.81 |
% |
|
$13,648 |
|
$1,611 |
|
15.74 |
% |
|
$489,067 |
|
$36,592 |
|
9.98 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations |
|
$499,805 |
|
$26,721 |
|
7.13 |
% |
|
— |
|
— |
|
— |
|
|
$499,805 |
|
$26,721 |
|
7.13 |
% |
| Other borrowings |
|
— |
|
— |
|
— |
|
|
5,228 |
|
282 |
|
7.19 |
% |
|
5,228 |
|
282 |
|
7.19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of derivative financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Instruments hedging liabilities |
|
|
|
160 |
|
|
|
|
|
|
— |
|
— |
|
|
|
|
160 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total borrowings |
|
$499,805 |
|
$26,881 |
|
7.17 |
% |
|
$ 5,228 |
|
$ 282 |
|
7.19 |
% |
|
$505,033 |
|
$27,163 |
|
7.17 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
|
$ 8,100 |
|
|
|
|
|
|
$1,329 |
|
|
|
|
|
|
$ 9,429 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest spread |
|
|
|
|
|
2.64 |
% |
|
|
|
|
|
8.55 |
% |
|
|
|
|
|
2.81 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net yield |
|
|
|
|
|
2.27 |
% |
|
|
|
|
|
12.98 |
% |
|
|
|
|
|
2.57 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mortgage Loans
|
|
Mortgage-Backed Securities
|
|
Total
|
| |
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
| Nine months ended September 30, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-earning mortgage assets |
|
$765,073 |
|
$52,236 |
|
9.10 |
% |
|
$808 |
|
$100 |
|
16.50 |
% |
|
$765,845 |
|
$52,336 |
|
9.11 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations |
|
$785,547 |
|
$33,782 |
|
5.73 |
% |
|
$ — |
|
$ — |
|
— |
% |
|
$785,547 |
|
$33,782 |
|
5.73 |
% |
| Other borrowings |
|
5,623 |
|
541 |
|
12.83 |
|
|
— |
|
— |
|
— |
|
|
5,623 |
|
541 |
|
12.83 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of derivative financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Instruments hedging liabilities |
|
|
|
1,736 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
1,736 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total borrowings |
|
$791,170 |
|
$36,059 |
|
6.08 |
% |
|
$ — |
|
— |
|
— |
% |
|
$791,170 |
|
$36,059 |
|
6.08 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
|
$16,177 |
|
|
|
|
|
|
$100 |
|
|
|
|
|
|
$16,277 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest spread |
|
|
|
|
|
3.02 |
% |
|
|
|
|
|
16.50 |
% |
|
|
|
|
|
3.03 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net yield |
|
|
|
|
|
2.82 |
% |
|
|
|
|
|
16.50 |
% |
|
|
|
|
|
2.83 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income. During 2000, mortgage loans earned $35.0 million, or a yield of 9.8%, compared with $52.2
million, or a yield of 9.1% for the same period of 1999. Mortgage-backed securities income for 2000 consists of earnings on economic residual interests that NovaStar Financial purchased from NovaStar Mortgage starting in September 1999. In total, assets
earned $36.6 million, or a yield of 10.0% for the nine months ended September 30, 2000. During the same period of 1999, assets earned $52.3 million or a 9.1% yield. As noted in Table 9, interest income is a function of volume and rates. Increasing the
volume of assets will cause future increases in interest income, while declining balances will reduce interest income. Market interest rates will also affect future interest income.
Interest Expense. The cost of borrowed funds for mortgage loans was $26.9 million for the nine months ended
September 30, 2000, or 7.2% of average borrowings compared with $36.1 million, or 6.1% for the same period of 1999. Mortgage-backed securities’ cost of borrowed funds for the nine months
ended September 30, 2000 includes repurchase agreements secured by economic residual interests executed during the second and third quarters of 2000. Average
interest-bearing liabilities for the nine months ended September 30, 2000 also consisted of financing costs on collateralized mortgage obligations compared with the same period of 1999, which also included a short-term financing arrangement with GMAC/RFC
secured by residual interests in NovaStar Financial’s CMOs. In 1998, NovaStar Financial borrowed $15 million from GMAC/RFC, which included a $3 million financing fee. In February 1999, NovaStar Financial used the First Union residual facility to pay
this debt in full. In March 1999, proceeds from the convertible preferred stock offering repaid all the outstanding debt on the residual facility.
NovaStar Financial’s collateralized mortgage obligations are indexed to LIBOR. During the nine months ended
September 30, 2000, one-month LIBOR averaged 6.33% compared with 5.07% for same period of 1999. Because the Federal Reserve Board increased the targeted federal funds interest rate in the latter part of 1999, effective borrowing costs have been higher in
2000. As with interest income, the cost of funds in the future will largely depend on market conditions, most notably levels of short-term interest rates. Rates on other borrowings generally fluctuate with short-term market interest rates, such as LIBOR
or the federal funds rate.
Net Interest Income and Spread. Net interest income on mortgage loans for the nine
months ended September 30, 2000 was $9.4 million, or 2.6% of average interest-earning mortgage loans, compared with $16.3 million, or 2.8% for the same period of 1999. Net interest spread on mortgage loans was 2.8% and 3.0%, respectively, for the nine
months ended September 30, 2000 and 1999. Net interest income on mortgage-backed securities (economic residual interests) during the nine months ended September 30, 2000 was $1.3 million, or 13.0% of average interest-earning mortgage securities with a net
interest spread of 8.6%. The volume of assets and liabilities and how well the spread between earnings on assets and the cost of funds is managed will dictate future net interest income.
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 Securities—
Available-For-Sale” and “Mortgage Loan Sales” sections of this document, NovaStar Financial sold a cap with a carrying value of $480,000 to NovaStar Mortgage recognizing a deferred gain of $880,000. The cap was hedging liabilities incurred
to fund the mortgage loans sold to NMFT 2000-1 and the deferred gain will be amortized over the remaining cap term. This cap had a carrying value of $545,000 as of September 30, 2000. During the nine months ended September 30, 2000 and 1999, net interest
expense incurred on hedging agreements was $160,000 and $1.7 million, respectively, which is included as a component of interest expense. The significant decline in this expense in 2000 compared with the same period of 1999 is a result of the majority of
the caps’ quarterly LIBOR resets in 2000 were greater than their strike rates.
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 nine months ended September 30, 2000 and 1999, 91% of the mortgage loans originated by NovaStar Mortgage had prepayment penalties. As of September 30, 2000, 45% of NovaStar Financial’s mortgage loan portfolio had
prepayment penalties compared with 58% as of December 31, 1999. Prepayment penalties totaled $1.4 million during the nine months ended September 30, 2000 compared with $2.4 million for the same period of 1999. The decrease is due to NovaStar Financial no
longer purchasing loans from NovaStar Mortgage, seasoning of the portfolio and prepayment penalty windows expiring in 2000 compared with 1999.
Premiums for Mortgage Loan Insurance
NovaStar Financial and NovaStar Mortgage have executed agreements 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.
As of September 30, 2000 and December 31, 1999, approximately 66% and 39% of the loans owned by NovaStar Financial
are covered under this agreement, including loans serving as collateral for the REMIC deals. The loans collateralizing REMIC deals are not recorded as loans of NovaStar Financial, but the performance of NovaStar’s investment in the residual interests
of the REMIC deals is dependent on the credit losses of the underlying collateral.
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 nine months ended September 30, 2000, total premiums paid by NovaStar Financial totaled $1.0 million compared with $1.3
million for the same period of 1999. Premiums for mortgage insurance on loans serving as collateral for the residual interests owned by NovaStar Financial is paid from the loan collateral proceeds, and therefore are not included in the amount of total
premiums paid as shown 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. All loans owned by NovaStar Financial are serviced by NovaStar Mortgage. NovaStar Mortgage uses several
techniques to mitigate 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. While short sales serve to reduce the overall severity of losses incurred, they also accelerate the
timing of losses. Loans are charged off in full when the cost of pursuing foreclosure and liquidation exceed recorded balances. Management also believes aggressive servicing is an important element to managing credit risk.
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.
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. The net gains or (losses) recognized on real estate owned properties are discussed further under “Other Income”. 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 nine months ended September 30, 2000, NovaStar Financial made provisions for losses of $4.0 million and
incurred net charge-offs of $7.0 million, compared to $11.5 million and $9.7 million during the same period of 1999. Charge-offs during the nine months of 2000 include $586,000 resulting from short sale transactions and loans charged off in full compared
with $879,000 during the same period of 1999.
In the opinion of management, the allowance for credit losses as of September 30, 2000 is adequate to cover losses
inherent in the portfolio at that date. If losses do not develop in accordance with current expectations, future provisions will be increased or decreased as necessary. Management also believes that internal processes involving quality control, appraisal
review and servicing that have been made as a result of experience to-date will result in lower losses being incurred on loans currently being originated.
Table 10 is a rollforward of the activity in the allowance for credit losses during 2000 and 1999.
Table 10
Rollforward of Allowance for Credit Losses
(in thousands)
| |
|
2000
|
|
|
1999
|
|
| |
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
| Beginning balance |
|
$ 8,993 |
|
|
$ 9,763 |
|
|
$11,105 |
|
|
$ 5,370 |
|
|
$ 3,573 |
|
|
$ 3,492 |
|
|
$ 3,573 |
|
| Provision for credit losses |
|
1,212 |
|
|
1,213 |
|
|
1,579 |
|
|
10,579 |
|
|
5,634 |
|
|
3,566 |
|
|
2,299 |
|
Amounts charged off, net
of recoveries |
|
(2,073 |
) |
|
(1,983 |
) |
|
(2,921 |
) |
|
(4,844 |
) |
|
(3,837 |
) |
|
(3,485 |
) |
|
(2,380 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending Balance |
|
$ 8,132 |
|
|
$ 8,993 |
|
|
$ 9,763 |
|
|
$11,105 |
|
|
$ 5,370 |
|
|
$ 3,573 |
|
|
$ 3,492 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables provide details regarding the delinquencies, defaults, and loss statistics of NovaStar
Financial’s mortgage loan portfolio.
Table 11
Loan Delinquencies (90 days and greater) (A)
2000 and 1999
(in thousands)
| |
|
2000
|
|
1999
|
| |
|
September 30
|
|
June 30
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1997-1 Issued October 1, 1997 |
|
$3,410 |
|
$4,039 |
|
$3,434 |
|
$4,726 |
|
$6,093 |
|
$6,087 |
|
$6,454 |
| 1997-2 Issued December 11, 1997 |
|
5,222 |
|
6,336 |
|
6,311 |
|
6,047 |
|
5,934 |
|
5,671 |
|
8,388 |
| 1998-1 Issued April 30, 1998 |
|
8,131 |
|
6,455 |
|
5,987 |
|
8,467 |
|
11,411 |
|
9,687 |
|
11,818 |
| 1998-2 Issued August 18, 1998 |
|
10,621 |
|
11,159 |
|
11,433 |
|
12,754 |
|
10,247 |
|
10,808 |
|
10,832 |
(A)
|
Includes loans in foreclosure or bankruptcy.
|
Table 12
Loan Delinquencies (90 days and greater) as a Percent of Total Loan Principal(A)
2000 and 1999
| |
|
2000
|
|
1999
|
| |
|
September 30
|
|
June 30
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Mortgage loans Collateralizing
NovaStar Home Equity Series
(CMO): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1997-1 Issued October 1, 1997 |
|
6.01 |
% |
|
6.21 |
% |
|
4.59 |
% |
|
5.63 |
% |
|
6.32 |
% |
|
5.13 |
% |
|
4.37 |
% |
| 1997-2 Issued December 11, 1997 |
|
8.23 |
|
|
8.88 |
|
|
7.66 |
|
|
6.24 |
|
|
4.92 |
|
|
4.03 |
|
|
5.38 |
|
| 1998-1 Issued April 30, 1998 |
|
6.44 |
|
|
4.40 |
|
|
3.58 |
|
|
4.42 |
|
|
5.32 |
|
|
4.13 |
|
|
4.64 |
|
| 1998-2 Issued August 18, 1998 |
|
6.03 |
|
|
5.48 |
|
|
5.10 |
|
|
5.38 |
|
|
4.06 |
|
|
3.94 |
|
|
3.72 |
|
(A)
|
Includes loans in foreclosure or bankruptcy.
|
Table 13
Delinquencies, Defaults and Losses
September 30, 2000 and December 31, 1999
(dollars in thousands)
|
|
NovaStar Home Equity Series
|
|
|
|
|
|
|
|
| September 30, 2000 |
|
1997-1
|
|
|
1997-2
|
|
|
1998-1
|
|
|
1998-2
|
|
|
All Loans
|
|
| Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, January 1, 2000 |
|
$2,335 |
|
|
$ 2,861 |
|
|
$4,214 |
|
|
$ 1,685 |
|
|
$11,105 |
|
| Provision for credit losses |
|
532 |
|
|
815 |
|
|
1,419 |
|
|
1,235 |
|
|
4,004 |
|
| Amounts charged off, net of Recoveries |
|
(1,154 |
) |
|
(1,796 |
) |
|
(2,246 |
) |
|
(1,778 |
) |
|
(6,977 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, September 30, 2000 |
|
$1,713 |
|
|
$ 1,880 |
|
|
$3,387 |
|
|
$ 1,142 |
|
|
$ 8,132 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Defaults as a percent of loan balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent loans (A) |
|
11.46 |
% |
|
9.09 |
% |
|
8.81 |
% |
|
12.49 |
% |
|
10.78 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans in foreclosure |
|
3.99 |
|
|
6.71 |
|
|
4.80 |
|
|
4.53 |
|
|
4.86 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate owned |
|
4.34 |
|
|
3.70 |
|
|
3.88 |
|
|
3.82 |
|
|
3.90 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative losses |
|
$4,102 |
|
|
$ 4,272 |
|
|
$4,015 |
|
|
$ 2,345 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NovaStar Home Equity Series
|
|
|
|
|
|
|
|
| December 31, 1999 |
|
1997-1
|
|
|
1997-2
|
|
|
1998-1
|
|
|
1998-2
|
|
|
All Loans
|
|
| Allowance for Credit Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, January 1, 1999 |
|
$ 816 |
|
|
$ 1,049 |
|
|
$1,163 |
|
|
$ 346 |
|
|
$ 3,573 |
|
| Provision for credit losses |
|
4,317 |
|
|
5,436 |
|
|
8,194 |
|
|
4,065 |
|
|
22,078 |
|
| Amounts charged off, net of Recoveries |
|
(2,798 |
) |
|
(3,624 |
) |
|
(5,143 |
) |
|
(2,726 |
) |
|
(14,546 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 1999 |
|
$2,335 |
|
|
$ 2,861 |
|
|
$4,214 |
|
|
$1,685 |
|
|
$11,105 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Defaults as a percent of loan balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent loans (A) |
|
8.03 |
% |
|
9.89 |
% |
|
6.38 |
% |
|
7.50 |
% |
|
7.63 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans in foreclosure |
|
4.73 |
|
|
4.32 |
|
|
3.75 |
|
|
4.02 |
|
|
4.09 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate owned |
|
3.85 |
|
|
4.88 |
|
|
3.61 |
|
|
2.62 |
|
|
3.51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative losses |
|
$2,377 |
|
|
$ 1,756 |
|
|
$ 538 |
|
|
$ 745 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Includes loans delinquent 30 days or greater
|
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. Loan servicing fees for the first nine months of 2000 were $2.0 million compared with
$3.1 million for the same period of 1999. The reduction is due to principal paydowns between the two periods.
Other Income
Other income (loss) during the nine months ended September 30, 2000 primarily consists of net losses recognized on
the sale of real estate owned properties of $722,000 compared with net gains on the sale of real estate owned properties of $74,000 during the same period of 1999. The net losses recognized in 2000 resulted from the liquidation of aged properties with
slightly higher severities than
Novastar Financial’s historical average severity. Other income for the nine months ended
September 30, 2000 also consists of interest earned on securitization funds held in trust of $169,000 and interest earned on money market funds of $101,000. Other income for the same period of 1999 also included interest earned on notes receivable from
founders of $368,000 and interest earned on securitization funds held in trust of $173,000.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2000 and 1999 are provided in Table
14. Table 15 displays the relationship of portfolio expenses to stockholders’ equity during 2000 and 1999 by quarter.
Table 14
General and Administrative Expenses
(dollars in thousands)
| |
|
Nine Months Ended September 30,
|
| |
|
2000
|
|
1999
|
| |
|
|
|
Percent of
Stockholders’
Equity
(Annualized)
|
|
|
|
Percent of
Stockholders’
Equity
(Annualized)
|
| Compensation and benefits |
|
$1,042 |
|
|
1.38 |
% |
|
$1,358 |
|
1.61 |
% |
| Professional and outside services |
|
467 |
|
|
0.62 |
|
|
546 |
|
0.65 |
|
| Office administration |
|
607 |
|
|
0.80 |
|
|
611 |
|
0.72 |
|
| Other |
|
66 |
|
|
0.09 |
|
|
156 |
|
0.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total general and administrative expenses before Intercompany fees |
|
2,182 |
|
|
2.89 |
% |
|
2,671 |
|
3.16 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
| Net fees for other services provided by (to) NovaStar Mortgage, Inc. |
|
(1,460 |
) |
|
|
|
|
287 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total general and administrative expenses. |
|
$ 722 |
|
|
|
|
|
$2,958 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Table 15
Portfolio Related Expenses as a
Percent of Stockholders’ Equity
2000 and 1999
| |
|
Percent of
Stockholders’
Equity
|
| 2000: |
|
|
|
| Third quarter |
|
3.05 |
% |
| Second quarter |
|
2.80 |
|
| First quarter |
|
2.80 |
|
| 1999: |
|
|
|
| Fourth quarter |
|
3.63 |
|
| Third quarter |
|
3.06 |
|
| Second quarter |
|
2.07 |
|
| First quarter |
|
3.94 |
|
Compensation and benefits includes employee base salaries, benefit costs and incentive compensation awards. The
decrease in compensation and benefits for the nine months ended September 30, 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 2000 decline is a result of legal fees incurred on the structuring of various financing arrangements and general company growth
experienced during the first nine 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 nine
months ended September 30, 2000 and 1999.
| |
Nine Months Ended
September 30,
|
|
| |
2000
|
|
|
1999
|
|
| Amounts paid to NovaStar Mortgage: |
|
|
|
| |
|
|
|
|
|
|
|
| Loan servicing fees |
$ |
1,982 |
|
|
$ |
3,056 |
|
| |
|
|
|
|
|
| Administrative fees |
|
126 |
|
|
|
1,263 |
|
| Amounts received from NovaStar Mortgage: |
| Guaranty, commitment, loan sale and securitization fees |
|
(1,246 |
) |
|
|
— |
|
| Interest income |
|
(340 |
) |
|
|
(976 |
) |
| |
|
|
|
|
|
| |
$ |
(1,460 |
) |
|
$ |
287 |
|
| |
|
|
|
|
|
The decline in these fees for the nine months ended September 30, 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%. Under this agreement, NovaStar
Mortgage is required to pay guaranty fees in the amount 0.25% of the loans sold by NovaStar Mortgage for which NovaStar Financial has guaranteed the performance of NovaStar Mortgage. In addition, beginning July 1, 2000, NovaStar Mortgage entered into the
following intercompany agreements:
|
· |
Servicing support fee: NovaStar Mortgage pays NovaStar Financial a fee equal to five basis points of the weighted average mortgage loan
servicing principal. |
|
· |
Financing commitment fee: NovaStar Mortgage pays NovaStar Financial a fee equal to 25 basis points on a $150 million annual commitment
|
|
· |
Residual purchase commitment fee: NovaStar Mortgage pays NovaStar Financial a fee at each securitization close equal to 20 basis points of the
collateral principal value. |
|
· |
Securitization consulting fee: NovaStar Mortgage pays NovaStar Financial a fee at each securitization close equal to 12.5 basis points of the
collateral principal value. |
|
· |
Guaranty spread fee: NovaStar Mortgage pays NovaStar Financial a fee equal to one basis point of the weighted average mortgage loan warehouse
and repurchase borrowings. |
NovaStar Financial provides liquidity resources for all operations and enhances the creditworthiness of NovaStar
Mortgage. In addition, Novastar Financial provides substantial expertise to NovaStar Mortgage in its execution of loan sales and securitizations. The fees charged to NovaStar Mortgage are designed to recognize this liquidity, credit and financial support.
Equity in Earnings of NFI Holding Corporation
For the nine months ended September 30, 2000, NFI Holding recorded net income of $652,000 compared with net income
of $1.5 million 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 Holding’s net earnings include the net earnings of NovaStar Mortgage, a
subsidiary of NFI Holding as discussed under “Basis of Presentation”. NFI Holding’s financial position and results of operation for the nine months ended September 30, 2000 and 1999 are discussed further under the heading “NFI Holding
Corporation”.
Results of Operations of NovaStar Financial, Inc.—Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999
Net Income
During the three months ended September 30, 2000, NovaStar Financial recorded net income of $2.0 million, $0.18
per diluted common share, compared with a net loss of $1.5 million, $0.25 per diluted common share, for the three months ended September 30, 1999.
Net Interest Income
Table 16 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 September 30, 2000 and 1999.
Table 16
Interest Analysis
(dollars in thousands)
| |
|
Mortgage Loans
|
|
Mortgage-Backed Securities
|
|
Average
Balance
|
|
Total
|
|
Annual
Yield/
Rate
|
Three months ended September 30, 2000
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
|
Interest
Income/
Expense
|
| Interest-earning mortgage assets |
|
$417,846 |
|
$10,391 |
|
|
9.95 |
% |
|
$18,701 |
|
$733 |
|
15.68 |
% |
|
$436,548 |
|
$11,124 |
|
|
10.19 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations |
|
$443,082 |
|
$ 8,400 |
|
|
7.58 |
% |
|
— |
|
— |
|
— |
|
|
$443,082 |
|
$ 8,400 |
|
|
7.58 |
% |
| Other borrowings |
|
— |
|
— |
|
|
— |
|
|
6,787 |
|
131 |
|
7.72 |
% |
|
6,787 |
|
131 |
|
|
7.72 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of derivative financial instruments hedging liabilities | Cost of derivative financial instruments hedging liabilities | |
|
|
(160 |
) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
(160 |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total borrowings |
|
$443,082 |
|
$ 8,240 |
|
|
7.44 |
% |
|
$ 6,787 |
|
$131 |
|
7.72 |
% |
|
$449,869 |
|
$ 8,371 |
|
|
7.44 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
|
$ 2,151 |
|
|
|
|
|
|
|
$602 |
|
|
|
|
|
|
$ 2,753 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest spread |
|
|
|
|
|
|
2.51 |
% |
|
|
|
|
|
7.96 |
% |
|
|
|
|
|
|
2.75 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net yield |
|
|
|
|
|
|
2.06 |
% |
|
|
|
|
|
12.88 |
% |
|
|
|
|
|
|
2.52 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mortgage Loans
|
|
Mortgage-Backed Securities
|
|
Average
Balance
|
|
Total
|
|
Annual
Yield/
Rate
|
Three months ended September 30, 2000
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annual
Yield/
Rate
|
|
|
Interest
Income/
Expense
|
| Interest-earning mortgage assets |
|
$690,323 |
|
$15,595 |
|
|
9.04 |
% |
|
$ 2,424 |
|
$100 |
|
16.50 |
% |
|
$692,747 |
|
$15,695 |
|
|
9.06 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collateralized mortgage obligations |
|
$706,685 |
|
$10,626 |
|
|
6.01 |
% |
|
— |
|
— |
|
— |
|
|
$706,685 |
|
$10,626 |
|
|
6.01 |
% |
| Other borrowings |
|
— |
|
— |
|
|
— |
|
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of derivative financial instruments hedging liabilities |
|
|
|
580 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
580 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total borrowings |
|
$706,685 |
|
$11,206 |
|
|
6.34 |
% |
|
$ — |
|
— |
|
— |
% |
|
$706,685 |
|
$11,206 |
|
|
6.34 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
|
|
$ 4,389 |
|
|
|
|
|
|
|
$100 |
|
|
|
|
|
|
$ 4,489 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net interest spread |
|
|
|
|
|
|
2.70 |
% |
|
|
|
|
|
16.50 |
% |
|
|
|
|
|
|
2.72 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net yield |
|
|
|
|
|
|
2.54 |
% |
|
|
|
|
|
16.50 |
% |
|
|
|
|
|
|
2.59 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets were $436.5 million during the three months ended September 30, 2000, which
included in $18.7 million of residual assets classified as mortgage-backed securities, compared with average interest-earning assets of $692.7 million for the same period of 1999, comprised primarily of mortgage loans. Mortgage securities earned $733,000
for the three months ended September 30, 2000, or a yield of 15.7% compared with $100,000, or a yield of 16.5% for the same period of 1999. During the three months ended September 30, 2000, mortgage loans earned $10.4 million, or a yield of 10.0%,
compared with $15.6 million, or a yield of 9.0% for the same period of 1999. In total, assets earned $11.1 million—a 10.2% yield for three months ended September 30, 2000 compared to $15.7 million, or a 9.1% yield for the same period ended September
30, 1999.
During the three months ended September 30, 2000, borrowed funds for NovaStar Financial averaged $443.1 million on
which interest was incurred of $8.2 million, or 7.4%. In comparison, for the three months ended September 30, 1999, borrowed funds for NovaStar Financial averaged $706.7 million on which interest was incurred of $11.2 million, or 6.3%.
Net interest income during the three months ended September 30, 2000 was $2.8 million or 2.5% of average
interest-earning assets, compared with $4.4 million, or 2.6% of average interest-earning assets during the same period of 1999. Net interest spread was 2.8% during the three months ended September 30, 2000 compared with 2.7% during the three months ended
September 30, 1999.
During the three months ended September 30, 2000 and 1999, net interest expense was incurred on hedging
agreements of $(160,000) and $580,000, respectively, which is included as a component of interest expense. The decline in this expense for the third quarter of 2000 compared with the same period of 1999 is due to the fact that quarterly LIBOR reset rates
were higher than the interest rate agreement strike rates on a majority of NovaStar Financial’s interest rate agreements during the third quarter of 2000. NovaStar Financial receives credits against the quarterly premium payments to counterparties
whenever LIBOR reset rates are higher than the strike rates.
Provisions for Credit Losses and Premium for Mortgage Loan Insurance
During the three months ended September 30, 2000, NovaStar Financial provided $1.2 million to the allowance for
credit losses, compared with $5.6 million during the same period of 1999. Charge-offs during the three months ended September 30, 2000 were $2.1 million compared with $3.8 million during the same period of 1999. See “Mortgage Insurance” and
Provisions for Credit Losses“ under ”Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 2000.“
Premiums for mortgage loan insurance include the premiums paid to Radian Guaranty, Inc. and PMI, Inc. on certain
loans held in NovaStar Financial’s portfolio.
Loan Servicing Fees Paid to NovaStar Mortgage, Inc.
Loan servicing fees paid to NovaStar Mortgage, Inc. include the 50 basis point fee that NovaStar Mortgage charges
NovaStar Financial for the loans collateralizing the CMOs. This fee is based on the collected principal balance of the mortgage loans serviced. The decrease in loan servicing fees paid to NovaStar Mortgage during the three months ended September 30, 2000
compared with the same period of 1999 is due to principal paydowns in NovaStar Financial’s CMO collateral during the two periods.
Other Income
Other income during the three months ended September 30, 2000 primarily consists of prepayment penalties of
$448,000, net loss recognized on the sale of real estate owned properties of $684,000, interest earned on securitization funds held in trust of $59,000 and interest earned on money market funds of $34,000. Other income for the same period of 1999
primarily consisted of prepayment penalties of $769,000, net gains on the sale of real estate owned properties of $91,000, interest earned on notes receivable from founders of $126,000 and interest earned on securitization funds held in trust of $62,000.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2000 and 1999 are provided in Table 17.
Table 17
General and Administrative Expenses
(dollars in thousands)
| |
|
Three Months Ended September 30,
|
| |
|
2000
|
|
1999
|
| |
|
|
|
|
Percent of
Stockholders’
Equity
(Annualized)
|
|
|
|
|
Percent of
Stockholders’
Equity
(Annualized)
|
| Compensation and benefits |
|
$ |
325 |
|
|
1.30 |
% |
|
$ |
421 |
|
1.49 |
% |
| Professional and outside services |
|
|
210 |
|
|
0.84 |
|
|
|
181 |
|
0.64 |
|
| Office administration |
|
|
206 |
|
|
0.82 |
|
|
|
203 |
|
0.72 |
|
| Other |
|
|
23 |
|
|
0.09 |
|
|
|
60 |
|
0.21 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total general and administrative expenses before Intercompany fees |
|
|
764 |
|
|
3.05 |
% |
|
|
865 |
|
3.06 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net fees for other services provided by (to) NovaStar Mortgage, Inc. |
|
|
(1,458 |
) |
|
|
|
|
|
(169 |
) |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total general and administrative expenses. |
|
$ |
(694 |
) |
|
|
|
|
$ |
696 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits totaled $325,000 for the nine months ended September 30, 2000 compared with $421,000 for
the same period of 1999. The decline is due to staff reductions and intercompany employee expense allocations to NovaStar Mortgage.
Professional and outside services for the three months ended September 30, 2000 was $210,000 compared with $181,000 for the three
months ended September 30, 1999. This line-item includes the cost of various accounting and legal services and varies based on the nature and timing of operational needs.
The following is a summary of the fees, in thousands, paid to NovaStar Mortgage for the three months ended
September 30, 2000 and 1999:
| |
|
Three Months
Ended
September 30,
|
| |
|
2000
|
|
1999
|
| Amounts paid to NovaStar Mortgage: |
|
|
|
|
|
|
|
|
| Loan servicing fees |
|
$ |
599 |
|
|
$ |
936 |
|
| |
|
|
|
|
|
|
| Administrative fees, net of guaranty fees. |
|
|
(111 |
) |
|
|
115 |
|
| Amounts received from NovaStar Mortgage: |
|
|
|
|
|
|
|
|
| Guaranty, commitment, loan sale and securitization fees |
|
|
(1,239 |
) |
|
|
— |
|
| Interest income |
|
|
(108 |
) |
|
|
(284 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
(1,458) |
|
|
$ |
(169 |
) |
| |
|
|
|
|
|
|
The decline in loan servicing fees paid to NovaStar Mortgage for the three months ended September 30, 2000
compared with the three months ended September 30, 1999 is due to a decline in NovaStar Financial’s mortgage loan portfolio serviced by NovaStar Mortgage.
The guaranty, commitment, loan sale and securitization fees are a result of the intercompany agreements NovaStar
Mortgage and NovaStar Financial entered July 1, 2000. These agreements are discussed further under the “Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30,
1999”.
The decrease in the interest income paid to NovaStar Mortgage during these same periods is a result of the decline
in average intercompany borrowings in 2000.
Equity in Earnings (Loss) of NFI Holding Corporation
For the three months ended September 30, 2000, NFI Holding recorded net income of $795,000 compared with net
income of $583,000 for the same period of 1999. NFI Holding’s financial position and results of operation for the three month period ended September 30, 2000 and 1999 are discussed further under the heading “NFI Holding Corporation”.
Estimated 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 18 is a summary of the differences between net income or loss reported for GAAP and estimated
taxable income for nine months ended September 30, 2000 and 1999.
Table 18
Estimated Taxable Income (Loss)
Nine Months Ended September 30, 2000 and 1999
(in thousands)
| |
|
September 30,
|
|
| |
|
2000
|
|
|
1999
|
|
| Net income |
|
$ |
3,336 |
|
|
$ |
2,034 |
|
| Use of net operating loss carryforward |
|
|
(176 |
) |
|
|
(2,628 |
) |
| Results of NFI Holding and subsidiaries |
|
|
(646 |
) |
|
|
(1,518 |
) |
| Provision for credit losses |
|
|
4,004 |
|
|
|
11,499 |
|
| Loans charged-off |
|
|
(6,977 |
) |
|
|
(9,702 |
) |
| Other, net |
|
|
459 |
|
|
|
1,175 |
|
| |
|
|
|
|
|
|
| Estimated taxable income (loss) |
|
$ |
— |
|
|
$ |
860 |
|
| |
|
|
|
|
|
|
NovaStar Financial has a net operating loss carryforward of approximately $2.3 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 Financial’s operational results. Instead of selling loans to NovaStar Financial, NovaStar Mortgage has sold loans to outside third parties. Through its indirect equity
ownership of NFI Holding, NovaStar Financial has shared in the profits of NovaStar Mortgage’s loan sales.
The following table presents NFI Holding’s consolidated financial statements as of September 30, 2000 and
1999, which consists primarily of the assets, liabilities, and operational results of NovaStar Mortgage.
NFI Holding Corporation
Condensed Consolidated Balance Sheets
(unaudited, dollars in thousands)
|
| |
|
|
September 30,
2000 |
|
|
December 31,
1999 |
| Assets |
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
3,272 |
|
$ |
1,466 |
| Mortgage loans |
|
|
68,750 |
|
|
107,916 |
| Other assets |
|
|
12,647 |
|
|
10,061 |
| |
|
|
|
|
|
Total assets |
|
$ |
84,669 |
|
$ |
119,443 |
| |
|
|
|
|
| Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
| Liabilities: |
| Borrowings |
|
$ |
44,805 |
|
$ |
78,448 |
| Due to NovaStar Financial, Inc. |
|
|
12,918 |
|
|
22,161 |
| Accounts payable and other liabilities
|
|
|
19,247 |
|
|
11,787 |
| |
|
|
|
|
|
Total liabilities |
|
|
76,970 |
|
|
112,396 |
| Stockholders’ equity |
|
|
7,699 |
|
|
7,047 |
| |
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
84,669 |
|
$ |
119,443 |
| |
|
|
|
|
NFI Holding Corporation
Condensed Consolidated Statements of Operations
(unaudited, dollars in thousands)
| |
|
Nine Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
| |
|
2000
|
|
1999
|
|
2000
|
|
1999
|
| Interest income |
|
$11,828 |
|
$ 7,948 |
|
|
$ 4,723 |
|
|
$3,122 |
|
| Interest expense. |
|
7,034 |
|
3,764 |
|
|
3,007 |
|
|
1,544 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net interest income |
|
4,794 |
|
4,184 |
|
|
1,716 |
|
|
1,578 |
|
| Provision for credit losses |
|
80 |
|
(284 |
) |
|
97 |
|
|
(168 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| Net interest income after provision for credit losses |
|
4,714 |
|
4,468 |
|
|
1,619 |
|
|
1,746 |
|
| Other income: |
|
|
|
|
|
|
|
|
|
|
|
| Fees from third parties |
|
5,057 |
|
706 |
|
|
2,826 |
|
|
152 |
|
| Fees received from, net of paid to, NovaStar Financial, Inc. |
|
522 |
|
3,343 |
|
|
(859 |
) |
|
767 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net gain on sales of mortgage assets |
|
9,909 |
|
9,189 |
|
|
5,075 |
|
|
3,101 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total other income |
|
15,488 |
|
13,238 |
|
|
7,042 |
|
|
4,020 |
|
| General and administrative expenses |
|
19,550 |
|
16,172 |
|
|
7,866 |
|
|
5,183 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net income before taxes |
|
652 |
|
1,534 |
|
|
795 |
|
|
583 |
|
| Income tax expense |
|
— |
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ 652 |
|
$ 1,534 |
|
|
$ 795 |
|
|
$ 583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Financial Condition of NFI Holding Corporation as of September 30, 2000 and December 31, 1999
Mortgage Loan Originations. NFI Holding originated 4,498 non-conforming residential
mortgage loans during the nine months ended September 30, 2000 with an aggregate principal amount of $511 million. Virtually all of NFI Holding’s mortgage assets as of September 30, 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 19 is a summary of NFI Holding’s wholesale loan originations for 2000 and 1999. Table 20 presents a
summary of mortgage loan transfers of NFI Holding during 2000 and 1999. Table 21 is a summary of wholesale loan origination costs of production.
Table 19
2000 and 1999 Quarterly Wholesale Loan Originations
(dollars in thousands, except for average loan balance)
| |
|
Number
of Loans
|
|
Principal
|
|
Average
Loan
Balance
|
|
|
|
Weighted Average
|
|
Percent with
Prepayment
Penalty
|
| |
|
|
|
|
Price Paid
to
Broker
|
|
Loan to
Value
|
|
Credit
Rating (A)
|
|
Coupon
|
| 2000: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third quarter |
|
1,793 |
|
$207,662 |
|
$115,818 |
|
101.1 |
|
84 |
% |
|
5.20 |
|
10.72 |
% |
|
90 |
% |
| Second quarter |
|
1,473 |
|
171,375 |
|
116,344 |
|
101.0 |
|
82 |
|
|
5.32 |
|
10.50 |
|
|
91 |
|
| First quarter |
|
1,232 |
|
132,072 |
|
107,201 |
|
101.1 |
|
80 |
|
|
5.45 |
|
10.16 |
|
|
93 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2000 total |
|
4,498 |
|
$511,109 |
|
$113,630 |
|
101.1 |
|
82 |
% |
|
5.30 |
|
10.50 |
% |
|
91 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1999: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fourth quarter |
|
1,265 |
|
$130,288 |
|
$102,994 |
|
101.0 |
|
82 |
% |
|
5.30 |
|
10.04 |
% |
|
91 |
% |
| 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 20
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: |
|
|
|
|
|
|
|
|
|
|
|
| Third quarter |
|
$ 50,334 |
|
$ 1,552 |
|
104.0 |
|
|
$188,734 |
|
$3,584 |
| Second quarter |
|
27,799 |
|
661 |
|
104.0 |
|
|
101,675 |
|
1,392 |
| First quarter |
|
48,548 |
|
1,204 |
|
104.0 |
|
|
128,171 |
|
1,544 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 2000 total |
|
$126,681 |
|
$ 3,417 |
|
104.0 |
|
|
$418,580 |
|
$6,520 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 1999: |
|
|
|
|
|
|
|
|
|
|
|
| Fourth quarter |
|
$109,443 |
|
$ 2,583 |
|
104.1 |
% |
|
$ — |
|
$ — |
| Third quarter |
|
110,512 |
|
3,075 |
|
104.2 |
|
|
— |
|
— |
| Second quarter |
|
98,048 |
|
2,911 |
|
104.4 |
|
|
25,800 |
|
355 |
| First quarter |
|
72,824 |
|
1,593 |
|
103.6 |
|
|
138,847 |
|
1,250 |
| |
|
|
|
|
|
|
|
|
|
|
|
| 1999 total |
|
$390,827 |
|
$10,162 |
|
104.1 |
|
|
$164,647 |
|
$1,605 |
| |
|
|
|
|
|
|
|
|
|
|
|
Table 21
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: |
| Third quarter |
|
2.6 |
% |
|
0.5 |
% |
|
3.1 |
% |
| |
|
|
|
|
|
|
|
|
|
| Second quarter |
|
3.0 |
% |
|
0.5 |
% |
|
3.5 |
% |
| |
|
|
|
|
|
|
|
|
|
| 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 Mortgage’s quarter-to-quarter 1999 wholesale loan production costs
steadily declined as a result of increased efficiencies in the mortgage lending operation. During the third quarter of 1999, NovaStar Mortgage introduced Internet Underwriter®, “IU”, a web-based origination system that has allowed NovaStar
Mortgage to increase production volumes without adding infrastructure. First quarter 2000 production costs were slightly higher than fourth quarter 1999 due in part to more expense allocations from NovaStar Financial. In addition, NovaStar Mortgage hired
more account executives during the first three months of 2000. Account executive costs typically are higher in the first few months of employment and are expected to decline, as a percent of principal, as the sales force becomes more productive with added
experience and exposure to NovaStar Mortgage’s whole loan origination products and markets.
Table 22 is a summary of loans originated by state for 2000 and 1999 by quarter. As of September 30, 2000,
NovaStar Mortgage had 78 account executives 46 covering states.
Table 22
Mortgage Loan Originations by State
2000 and 1999
| |
|
Percent of Total Originations during Quarter
(based on original principal balance)
|
|
| |
|
2000
|
|
|
|
|
|
1999
|
|
Collateral Location
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
| Florida |
|
12 |
% |
|
13 |
% |
|
14 |
% |
|
12 |
% |
|
15 |
% |
|
12 |
% |
|
15 |
% |
| California |
|
11 |
|
|
10 |
|
|
10 |
|
|
10 |
|
|
10 |
|
|
8 |
|
|
6 |
|
| Ohio |
|
7 |
|
|
8 |
|
|
7 |
|
|
8 |
|
|
12 |
|
|
10 |
|
|
8 |
|
| Michigan |
|
10 |
|
|
11 |
|
|
11 |
|
|
12 |
|
|
10 |
|
|
10 |
|
|
12 |
|
| Nevada |
|
6 |
|
|
7 |
|
|
7 |
|
|
5 |
|
|
4 |
|
|
4 |
|
|
3 |
|
| Arizona |
|
5 |
|
|
5 |
|
|
5 |
|
|
8 |
|
|
5 |
|
|
7 |
|
|
4 |
|
| Colorado |
|
5 |
|
|
5 |
|
|
4 |
|
|
2 |
|
|
1 |
|
|
1 |
|
|
2 |
|
| Tennessee |
|
5 |
|
|
6 |
|
|
7 |
|
|
6 |
|
|
4 |
|
|
6 |
|
|
9 |
|
| Washington |
|
5 |
|
|
5 |
|
|
5 |
|
|
4 |
|
|
4 |
|
|
5 |
|
|
3 |
|
| All other states |
|
34 |
|
|
30 |
|
|
30 |
|
|
33 |
|
|
35 |
|
|
37 |
|
|
38 |
|
NFI Holding’s loan originations are funded through warehouse and repurchase facilities at First Union and
GMAC/RFC. Table 25 of the “Liquidity Resources and Capital” section of this document detail borrowings outstanding under these financing arrangements as of September 30, 2000.
Mortgage Loan Sales. NovaStar Mortgage executed two securitizations during the
first nine months of 2000, combining $570 million in loans, which were sold to a Special Purpose Entity (SPE), of which $151 million will settle in December 2000. A gain of $6.5 million was recognized on these transactions. Bonds issued by the SPE were
$560 million and proceeds received were used to pay down warehouse and mortgage loan repurchase facilities of NovaStar Mortgage. The loans were sold without recourse. NovaStar Mortgage retained residual certificates issued by the SPE, which NovaStar
Financial subsequently purchased. NovaStar Mortgage also retained loan servicing rights for the loans sold. The values 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 and 2000-2.
| |
Constant
prepayment rate
(weighted average
life) |
Static loss, net of
mortgage insurance
(basis points) |
Discount
Rate |
| 2000-1 |
27 |
1% |
15% |
| 2000-2 |
28 |
1% |
15% |
Details regarding loan collateral as of September 30, 2000 and December 31, 1999 are included in Tables 4, 5 and 8
of this document.
NFI Holding also sold $126.7 million of its whole loan portfolio to unrelated third parties for cash at a net
gain of $3.4 million at an average price to par of 104.0 during 2000. Table 20 of “Financial Condition of NFI Holding Corporation as of September 30, 2000 and December 31, 1999” provides a quarterly analysis of NFI Holding’s mortgage loan
sales to third parties.
Mortgage Loan Servicing. Loan servicing is a critical part of NovaStar Mortgage’
s business. The majority of the loans serviced by NovaStar Mortgage are owned by NovaStar Financial. In the opinion of management, maintaining contact with borrowers is vital in managing credit risk and in borrower retention. 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 23 provides summaries of delinquencies and default statistics of NovaStar Mortgage’s mortgage loan
portfolio in 2000 and 1999 by quarter. The information presented in both tables includes mortgage loans owned by NovaStar Financial and its affiliates. Other information regarding the credit quality of NovaStar Financial’s mortgage loans is provided
in Table 1.
| |
|
Table 23
Delinquencies and Defaults (dollars in thousands)
|
| |
|
2000
|
|
1999
|
| |
|
September 30
|
|
June 30
|
|
March 31
|
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
Loan servicing
portfolio |
|
$1,016,952 |
|
$970,016 |
|
$872,693 |
|
$894,572 |
|
$969,343 |
|
$1,032,065 |
|
$1,072,393 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total defaults: |
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent loans (A) |
|
4.90% |
|
4.82% |
|
5.58% |
|
6.28% |
|
4.75% |
|
5.21% |
|
4.12% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in
foreclosure |
|
3.34 |
|
3.25 |
|
3.55 |
|
3.62 |
|
3.79 |
|
3.36 |
|
3.39 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Real estate owned |
|
1.97 |
|
2.07 |
|
2.65 |
|
2.71 |
|
2.24 |
|
2.20 |
|
1.66 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Includes loans delinquent 30 days or greater
|
The following table presents a summary of the mortgage loan activity of NFI Holding for 2000 and 1999 as a percent
of the respective quarter’s beginning principal of mortgage loans held in portfolio and loan origination principal.
Table 24
Mortgage Loan Activity—NFI Holding Corporation
| |
|
Percent Sold
to NovaStar
Financial, Inc.
|
|
Percent Sold
to Third
Parties
|
|
Percent Sold
in
Securitizations
|
|
Percent
Held in
Portfolio
|
|
Percent of
Prepayments
|
|
Total
|
| 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third quarter |
|
— |
|
9 |
% |
|
60 |
% |
|
30 |
% |
|
1 |
% |
|
100 |
% |
| Second quarter |
|
— |
|
12 |
|
|
44 |
|
|
43 |
|
|
1 |
|
|
100 |
|
| 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 Corporation—Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999
For the nine months ended September 30, 2000, NFI Holding recorded net income of $652,000 compared with net income
of $1.5 million 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 operating results of NFI Holding for the nine months ended September 30, 2000 compared
with the same period of 1999:
|
·
|
Fees from third parties increased from $706,000 during the nine months ended September 30, 1999 to $5.1 million during the nine
months ended September 30, 2000. The significant increase is due to broker fees received on loans originated through the mortgage brokers of NovaStar Home Mortgage. NovaStar Home Mortgage operates 48 mortgage broker offices in 24 states. The operations of
NovaStar Home Mortgage began in November 1999.
|
|
·
|
Fees received from, net of paid to, Novastar Financial, Inc. declined from $3.3 million in 1999 to $522,000 in 2000, primarily due
to the cancellation of the administrative fee agreement between NovaStar Financial and NovaStar Mortgage on April 1, 1999. A summary of the intercompany fees by type is included in the “Results of Operations of NovaStar Financial, Inc.—Nine
Months Ended September 30, 2000 Compared to the Nine Months Ended September 30, 1999” section of this document.
|
|
·
|
During the nine months ended September 30, 2000, NovaStar Mortgage recognized net gains of $9.9 million on the sale of whole loans.
Of that amount, $6.5 million was recognized in two securitization transactions that closed during the period. The remainder of the gain was primarily due to various whole loan sales to third parties for cash. During the same period of 1999,
|
|
|
NovaStar Mortgage recognized gains of $9.2 million on the transfer of whole loans, including $1.6 million on the NMFT 1999-1
asset-backed bond transaction.
|
|
·
|
General and administrative expenses increased from $16.2 million during the first nine months of 1999 to $19.6 million during the
same period of 2000. The increase is primarily attributable to various expenses incurred by the broker branches of NovaStar Home Mortgage, including the net income generated from the branches is expensed to the branch in the form of compensation. NovaStar
Home Mortgage began providing various accounting and compensation services to mortgage brokerage companies during the fourth quarter of 1999.
|
|
·
|
No income tax expense has been recorded during the first nine months of 2000 because of the existence of substantial net operating
loss carryforwards, which are expected to offset all of the pre-tax income in 2000.
|
Results of Operations of NFI Holding Corporation—Three Months Ended September 30, 2000 Compared to the Three Months Ended September 30, 1999
| For the three months ended September 30, 2000, NFI Holding recorded net income of
$795,000 compared with net income of $583,000 for the same period of 1999. The following summarizes the explains the decline in net earnings for the three months ended September 30, 2000 compared with the same period of 1999: |
|
·
|
Fees from third parties increased from $152,000 during the three months ended September 30, 1999 to $2.8 million during the three
months ended September 30, 2000. The significant increase is due to broker fees received on loans originated through the mortgage brokers of NovaStar Home Mortgage.
|
|
·
|
Net gains on sales of mortgage assets increased from $3.1 million during the third quarter 1999 to $5.1 million during the third
quarter 2000. During the three months ended September 30, 2000 NovaStar Mortgage recognized a gain of $3.6 million on the first close of the 2000-2 securitization transaction. The remainder of the gain recognized in the third quarter 2000 was primarily on
mortgage loan sales to third parties. During the third quarter of 1999, all of NFI Holding’s net gain on sales of mortgage assets were on mortgage loan sales to third parties.
|
|
·
|
Fees received from, net of paid to, NovaStar Financial, Inc. decreased from $767,000 during the third quarter of 1999 to ($859,000)
during the same period of 2000 as a result of the implementation of additional intercompany agreements July 1, 2000 as discussed under the “Results of Operations of NovaStar Financial, Inc.—Nine Months Ended September 30, 2000 Compared to the
Nine Months Ended September 30, 1999”.
|
|
·
|
General and administrative expenses increased from $5.2 million during the third quarter 1999 to $7.9 million during the third
quarter 2000. The increase is primarily attributable to various expenses incurred by the broker branches of NovaStar Home Mortgage, including the net income (loss) generated from the branches is expensed to the branch in the form of compensation paid to
|
|
|
brokers. NovaStar Home Mortgage began providing various accounting and compensation services to mortgage brokerage companies during
the fourth quarter of 1999.
|
|
·
|
No income tax expense has been recorded in the third quarter of 2000 because of the existence of substantial net operating loss
carryforwards, which are expected to offset all of the pre-tax income in 2000.
|
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.
NovaStar Mortgage requires substantial cash to fund loan originations and operating costs. As of September 30,
2000, NFI Holding owned $68.8 million of non-conforming mortgage loans. NFI Holding provided financing for these loans through warehouse and repurchase credit facilities with 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 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 25 is a summary of cash, financing arrangements and available borrowing capacity for NovaStar Financial and
NovaStar Mortgage, on a combined basis, as of September 30, 2000:
Table 25
Liquidity Resources
September 30, 2000
(in thousands)
| |
|
Maturity
|
|
Maximum
Borrowing
Limit
|
|
Lending
Value of
Collateral
|
|
Borrowings
|
|
Availability
|
| Resource |
|
|
|
| Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,039 |
| Committed facilities with First Union National Bank (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warehouse line of credit |
|
|
7/27/01 |
|
$ |
75,000 |
|
$ |
43,950 |
|
|
$ |
21,038 |
|
$ |
22,912 |
| Secured whole loan repurchase agreement |
|
|
7/27/01 |
|
$ |
175,000 |
|
$ |
224 |
|
|
$ |
224 |
|
$ |
— |
| Residual financing available |
|
|
12/17/01 |
|
$ |
25,000 |
|
$ |
(B |
) |
|
$ |
10,960 |
|
$ |
14,040 |
Committed facility with GMAC/Residential Funding
Corporation (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warehouse line of credit |
|
|
12/27/00 |
|
$ |
50,000 |
|
$ |
23,543 |
|
|
$ |
23,543 |
|
$ |
— |
| |
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
$ |
335,961 |
|
$ |
81,024 |
|
|
$ |
55,765 |
|
$ |
42,991 |
| |
|
|
|
|
|
|
|
|
|
|
|
| (A)
|
Value of collateral and borrowings include amounts for NovaStar Financial and NovaStar Mortgage, as they are co-borrowers under the
arrangements with First Union National Bank and GMAC/RFC.
|
| (B)
|
Management estimates the value of the residuals range from $55 to $70 million and does not include the value of mortgage servicing
rights.
|
The warehouse line of credit and whole loan repurchase agreements with First Union National Bank expire on July
27, 2001.
In the opinion of management, the available liquidity resources are sufficient to cover expected future production
of NovaStar Mortgage.
Cash activity during the nine months ended September 30, 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
During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. 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 provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of the changes in the fair value of hedge asset or liability that is attributable to the hedge risk or the earnings effect of the hedge forecasted transaction. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133 an amendment of FASB Statement No. 133 was issued in June 1999 and postponed the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. Management has reviewed all financial instruments of NovaStar Financial and has determined that NovaStar Financial’s interest rate cap agreements are derivative instruments under SFAS No. 133. These derivatives
are used to hedge the interest rate risk on variable rate debt and will be accounted for as cash flow hedges under SFAS No. 133. Management does not expect the adoption of SFAS No. 133 to have a material impact on the financial statements of the NovaStar
Financial, Inc.
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125. SFAS 125 was issued in June 1996 to revise the standards for accounting for securitization and other transfers of financial assets and requires certain disclosures regarding those transfers. SFAS 140 replaces SFAS 125 in its entirety. However, it
carries over most of the provisions of SFAS 125. SFAS 140 also formalizes guidance provided by the FASB in various committee publications and technical bulletins. This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement is
effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. Management does not expect the adoption of SFAS No. 140
to have a material impact on the financial statements of NovaStar Financial.
In addition, Note 1 of the consolidated financial statements contained in the annual report on Form 10-K for the fiscal year ended December
31, 1999 describes certain recently issued accounting pronouncements. Management believes the implementation of these pronouncements and others that have gone into effect since the date of these reports will not have a material impact on the consolidated
financial statements.
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 Financial’s net asset value will experience an adverse change when interest rates change. When interest rates on the assets do not adjust
at the same rates as 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 September 30,
2000 borrowings under all financing arrangements adjust daily, monthly, or quarterly. On the other hand, very few of the mortgage assets owned by NovaStar Financial, as of September 30, 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 September 30, 2000 and December 31, 1999.
Table 26
Interest Rate Sensitivity-Income
September 30, 2000 and December 31, 1999
(dollars in thousands)
| |
|
Basis Point Increase
(Decrease) in Interest
Rate(A)
|
|
As of September 30, 2000
|
|
(100)
|
|
Base
|
|
100
|
|
| Income from: |
|
|
|
|
| Assets |
|
$ |
84,379 |
|
|
$ |
86,755 |
|
|
$ |
88,761 |
|
| Liabilities (B) |
|
|
64,589 |
|
|
|
72,375 |
|
|
|
80,318 |
|
| Interest rate agreements |
|
|
(1,882 |
) |
|
|
221 |
|
|
|
3,961 |
|
| |
|
|
|
|
|
|
|
|
|
| Net spread income |
|
$ |
17,908 |
|
|
$ |
14,601 |
|
|
$ |
12,404 |
|
| |
|
|
|
|
|
|
|
|
|
| Cumulative change in income from base (C) |
|
$ |
3,307 |
|
|
|
— |
|
|
$ |
(2,197 |
) |
| |
|
|
|
|
|
|
|
|
|
| Percent change from base spread income (D) |
|
|
22.6 |
% |
|
|
— |
|
|
|
(15.0 |
)% |
| |
|
|
|
|
|
|
|
|
|
| Percent change of capital(E) |
|
|
3.3 |
% |
|
|
— |
|
|
|
(2.2 |
)% |
| |
|
|
|
|
|
|
|
|
|
| |
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 |
|
|
$ |
5,237 |
|
|
$ |
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
September 30, 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 September 30, 2000 and December 31,
1999.
|
Table 27
Interest Rate Sensitivity—Market Value
September 30, 2000 and December 31, 1999
(dollars in thousands)
| |
|
Basis Point Increase
(Decrease) in
Interest Rate(A)
|
As of September 30, 2000
|
|
(100)
|
|
100
|
| Change in market values of: |
|
|
|
|
|
|
| Assets |
$ |
12,254 |
|
$ |
(14,627 |
) |
| Liabilities |
|
(1,820 |
) |
|
2,020 |
|
| Interest rate agreements |
|
(2,611 |
) |
|
5,522 |
|
| |
|
|
|
|
|
|
| Cumulative change in market value |
$ |
7,823 |
|
$ |
(7,085 |
) |
| |
|
|
|
|
|
|
| Percent change of market value portfolio equity (B) |
|
8.4 |
% |
|
(7.6 |
)% |
| |
|
|
|
|
|
|
|
| As of December 31, 1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in market values of: |
|
|
|
|
|
|
| Assets |
$ |
9,112 |
|
$ |
(11,340 |
) |
| 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 September 30, 2000 and December 31, 1999.
|
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 September 30, 2000 and December 31, 1999. The values under the headings “100” and “(100)” are management’s estimates of the
income and change in market value of those same assets, liabilities and interest rate agreements assuming that interest rates were 100 basis points, or 1 percent higher and lower. The cumulative change in income or market value represents the change in
income or market value of assets, 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 Financial’s interest rate sensitivity and hedged position quarterly. Although management also evaluates the portfolio using interest rate increases and decreases less than and
greater than one percent, management focuses on the one percent increase.
Assumptions 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 September 30, 2000 and December 31, 1999.
Management’s analysis for assessing interest rate sensitivity on its mortgage loans relies significantly on
estimates for prepayment speeds. The prepayment model used by management has been internally developed and is a function based on the borrowers’ payment change percentage. The factors affecting the size of the borrowers’ payment are as follows:
|
·
|
Refinancing incentives (the interest rate of the mortgage compared with the current mortgage rates available to the borrower)
|
|
·
|
Prepayment penalties (length and type)
|
|
·
|
Estimated closing costs
|
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. When a borrower has a higher balance loan, as refinancing rates fall, the percent of potential payment decrease is greater
than on a comparably smaller balance loan, thereby making higher balance loans prepay faster. 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 and NovaStar Financial and NovaStar Mortgage’s mortgage loan portfolio. Actual results may differ from the estimates and assumptions used in the model and the projected results as shown in
the sensitivity analyses. Management evaluates and updates the model periodically as the market changes and new data is collected.
NovaStar Financial’s projected prepayment rates are based on a prepayment vector and 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 vector is also multiplied by a factor of 55% to 70% depending on the length and type of penalty periods when a prepayment penalty is in effect on the loan. Prepayment
assumptions are also multiplied by a factor of greater than 100% during periods around rate resets and prepayment penalty expirations. These assumptions change with levels of interest rates. The actual historical speeds experienced on NovaStar
Financial’s loans shown in Table 5 are weighted average speeds of all loans in each deal.
As shown in Table 5, actual prepayment rates on loans that have been held in portfolio for shorter periods are slower than
long term prepayment rates used in the interest rate sensitivity analysis. This table also indicates that as pools of loans held in portfolio season, the actual prepayment rates are more consistent with the long term prepayment rates used in the interest
sensitivity analysis.
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 management’s view, to enable NovaStar Financial to maintain an equity liquidation value sufficient to maintain operations given a variety of potentially adverse circumstances. Accordingly, the hedging program addresses both income
preservation, as discussed in the first part of this section, and capital preservation concerns.
Interest rate cap agreements are legal contracts between NovaStar Financial and a third party firm or “
counter-party”. The counter-party agrees to make payments to NovaStar Financial in the future should the one- 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
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Legal Proceedings |
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As of September 30, 2000, there were no material legal proceedings pending to which NovaStar Financial was a party or of which any of its property was subject.
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Changes in Securities |
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Not applicable |
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Item 3. |
Defaults upon Senior Securities |
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Not applicable |
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Item 4. |
Submission of Matters of Vote of Security Holders |
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Not applicable |
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Item 5. |
Other Information |
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None |
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Listing
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Exhibit No.
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Description of Document
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3.1* |
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Articles of Amendment and Restatement of the Registrant |
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3.2* |
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Articles Supplementary of the Registrant |
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3.3* |
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Bylaws of the Registrant |
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3.3a***** |
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Amendment to Bylaws of the Registrant, adopted February 2, 2000 |
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3.4**** |
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Articles Supplementary of NovaStar Financial, Inc. dated as of March 24, 1999, as filed with the Maryland Department of Assessment and Taxation.
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4.1* |
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Specimen Common Stock Certificate |
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4.2* |
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Specimen Warrant Certificate |
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4.3**** |
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Specimen certificate for Preferred Stock |
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10.1* |
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Purchase Terms Agreement, dated December 6, 1996, between the Registrant and the Placement Agent. |
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10.2* |
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Registration Rights Agreement, dated December 9, 1996, between the Registrant and the Placement Agent. |
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10.3* |
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Warrant Agreement, dated December 9, 1996, between the Registrant and the Holders of the Warrants Acting Through the Registrant as the Initial Warrant
Agent. |
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10.4* |
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Founders’ Registration Rights Agreement, dated December 9, 1996, between the Registrant and the original holders of Common Stock of the Registrant.
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10.5* |
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Commitment Letter dated October 3, 1996 from General Electric Capital Group accepted by the Registrant. |
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10.6* |
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Form of Master Repurchase Agreement for mortgage loan financing |
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10.7* |
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Mortgage Loan Warehousing Agreement dated as of November 24, 1997 between First Union National Bank of North Carolina, NovaStar Mortgage, Inc. and the
Registrant. |
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10.7a*** |
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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. |
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10.7b***** |
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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. |
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10.7c |
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Amendment No. 10 dated as of July 28, 2000 to Mortgage Loan Warehousing Agreement dated as of February 20, 1997 between First Union National Bank and
Registrant. |
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10.8* |
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Employment Agreement, dated September 30, 1996, between the Registrant and Scott F. Hartman. |
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10.9* |
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Employment Agreement, dated September 30, 1996, between the Registrant and W. Lance Anderson. |
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10.10* |
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Promissory Note by Scott F. Hartman to the Registrant, dated December 9, 1996. |
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10.11* |
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Promissory Note by W. Lance Anderson to the Registrant, dated December 9, 1996. |
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10.12* |
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Stock Pledge Agreement between Scott F. Hartman and the Registrant, dated December 9, 1996. |
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10.13* |
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Stock Pledge Agreement between W. Lance Anderson and the Registrant, dated December 9, 1996. |
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10.14* |
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1996 Executive and Non-Employee Director Stock Option Plan, as last amended December 6, 1996. |
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10.15* |
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Administrative Services Outsourcing Agreement, dated June 30, 1997, between the Registrant and NovaStar Mortgage, Inc. |
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10.16* |
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Mortgage Loan Sale and Purchase Agreement, dated as of June 30, 1997, between the Registrant and NovaStar Mortgage, Inc. |
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10.17* |
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Flow Loan Subservicing Agreement, dated as of June 30, 1997, between the |
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Registrant and NovaStar Mortgage, Inc. |
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10.18* |
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Certificate of Incorporation of NFI Holding Corporation. |
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10.19* |
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Agreement of Shareholders of Common Stock NFI Holding Corporation. |
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10.20** |
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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. |
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10.21*** |
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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. |
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10.22*** |
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Form of Addendum to Master Repurchase Agreement dated as of February 12, 1999 between Registrant’s taxable affiliate, as seller, and First Union
Bank, as buyer, with respect to the residual interest on certain asset-backed bonds. |
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10.23*** |
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Warrant Agreement dated as of February 12, 1999 between the Registrant and First Union National Bank. |
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10.24**** |
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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. |
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10.25**** |
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Registration Rights Agreement, dated March 25, 1999 among NovaStar Financial and Stifel, Nicolaus & Company, Incorporated. |
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10.26***** |
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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. |
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10.27 |
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Mortgage Loan Sale and Securitization Transaction Administration Personnel and Facilities Agreement, dated as of July 1, 2000 between the Registrant
and NovaStar Mortgage, Inc. |
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10.28 |
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Lending and Credit Support Agreement, dated as of July 1, 2000 between the Registrant and NovaStar Mortgage, Inc. |
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10.29 |
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Software License Agreement, dated as of July 1, 2000 between the Registrant and |
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NovaStar Mortgage, Inc. |
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10.30 |
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Amendment dated as of July 28, 2000 to the Master Repurchase Agreement, dated as of February 12, 1999 between First Union National Bank and the Registrant.
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11.1 |
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Statement regarding computation of per share earnings. |
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21.1 |
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Subsidiaries of the Registrant |
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27.1 |
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Financial Data Schedule |
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* |
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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. |
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** |
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Incorporated by reference to the correspondingly numbered exhibit to Form 8-K filed by the Registrant with the SEC on December 22, 1998. |
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*** |
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Incorporated by reference to the correspondingly numbered exhibit to Form 8-K filed by the Registrant with the SEC on February 23, 1999. |
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**** |
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Incorporated by reference to the correspondingly numbered exhibit to Form 8-K filed by the Registrant with the SEC on April 5, 1999. |
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*****
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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.
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| NovaStar Financial has filed the following Form 8-K’s: |
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NovaStar Financial filed a Form 8-K on September 29, 2000 regarding NovaStar Financial, Inc.’s expansion of its stock repurchase program and the
repurchase of 9.7% of its outstanding common stock from GE Capital Equity in a negotiated bulk transaction. |
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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: November 13, 2000 |
/s/ Scott F. Hartman |
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Chairman of the Board, Secretary and
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(Principal Executive Officer)
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| DATE: November 13, 2000 |
/s/ Rodney E. Schwatken |
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Vice President, Treasurer and Controller (Principal Accounting Officer)
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