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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2004.

 

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

  

74-2830661

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

8140 Ward Parkway, Suite 300, Kansas City, MO 64114

(Address of principal executive office)

(Zip Code)

 

(816) 237-7000

Registrant’s telephone number, including area code:

 

 

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 ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes x No ¨

 

The number of shares of the registrant’s common stock outstanding on May 6, 2004 was 24,993,465.

 

Table of Contents

NOVASTAR FINANCIAL, INC.

 

FORM 10-Q

Quarter Ended March 31, 2004

 

Part I

    Financial Information     

Item 1.

    Consolidated Financial Statements (unaudited):     
     Balance Sheets    1
     Statements of Income    2
     Statements of Cash Flows    3
     Notes to Consolidated Financial Statements    5

Item 2.

    Management’s Discussion and Analysis of Financial Condition and Results of Operations    11
     Table 1, Nonconforming Loan Originations    19
     Table 2, Carrying Value of Mortgage Loans    20
     Table 3, Valuation of Individual Mortgage Securities and Assumptions    21
     Table 4, Short-term Financing Resources    25
     Table 5, Mortgage Securities Interest Analysis    27
     Table 6, Mortgage Portfolio Management Net Interest Income Analysis    28
     Table 7, Quarterly Activity – Allowance for Credit Losses    29
     Table 8, Gains on Sales of Mortgage Assets and Losses on Derivative Instruments    30
     Table 9, Mortgage Loan Sales and Securitizations    31
     Table 10, General and Administrative Expenses    32
     Table 11, Wholesale Loan Costs of Production, as a Percent of Principal    33
     Table 12, Summary of Servicing Operations    33
     Table 13, Taxable Net Income    34
     Table 14, Contractual Obligations    36

Item 3.

    Quantitative and Qualitative Disclosures about Market Risk    37
     Table 15, Interest Rate Sensitivity – Income    37
     Table 16, Interest Rate Sensitivity – Market Value    38
     Table 17, Interest Rate Risk Management Contracts    39

Item 4.

    Controls and Procedures    39

Part II

    Other Information     

Item 1.

    Legal Proceedings    40

Item 2.

    Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities    40

Item 3.

    Defaults Upon Senior Securities    40

Item 4.

    Submission of Matters to a Vote of Security Holders    40

Item 5.

    Other Information    40

Item 6.

    Exhibits and Reports on Form 8-K    41
     Signatures    42

 

Table of Contents

PART I. FINANCIAL INFORMATION

 

NOVASTAR FINANCIAL, INC.

 

CONSOLIDATED BALANCE SHEETS

(unaudited; dollars in thousands, except share amounts)

 

    

March 31,

2004

    

December 31,

2003

  

Assets

                 

Cash and cash equivalents

    $ 197,861     $ 118,180  

Mortgage loans – held-for-sale

      777,237       697,992  

Mortgage loans – held-in-portfolio

      83,931       94,717  

Mortgage securities – available-for-sale

      404,003       382,287  

Mortgage servicing rights

      23,863       19,685  

Servicing related advances

      19,185       19,281  

Deposits with derivative instrument counterparties, net

      16,861       19,492  

Property and equipment, net

      13,980       14,537  

Accrued interest receivable

      3,387       3,739  

Assets acquired through foreclosure

      3,241       3,192  

Other assets

      40,278       26,855  
    
 

Total assets

    $ 1,583,827     $ 1,399,957  
    
 

Liabilities and Stockholders’ Equity

                 

Liabilities:

                 

Short-term borrowings secured by mortgage loans

    $ 714,061     $ 639,852  

Short-term borrowings secured by mortgage securities

      167,909       232,684  

Asset-backed bonds secured by mortgage loans

      79,044       89,384  

Asset-backed bonds secured by mortgage securities

      161,274       43,596  

Accounts payable and other liabilities

      58,937       63,658  

Dividends payable

      33,480       30,559  
    
 

Total liabilities

      1,214,705       1,099,733  

Commitments and contingencies

                 

Stockholders’ equity:

                 

Capital stock, $0.01 par value, 50,000,000 shares authorized:

                 

Common stock, 24,800,174 and 24,447,315 shares issued and outstanding, respectively

      248       245  

Preferred stock, 2,990,000 issued and outstanding

      30       —    

Additional paid-in capital

      318,163       231,294  

Accumulated deficit

      (19,787 )     (15,522 )

Accumulated other comprehensive income

      71,408       85,183  

Other

      (940 )     (976 )
    
 

Total stockholders’ equity

      369,122       300,224  
    
 

Total liabilities and stockholders’ equity

    $ 1,583,827     $ 1,399,957  
    
 

 

See accompanying notes to consolidated financial statements.

 

1

Table of Contents

NOVASTAR FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; dollars in thousands, except per share amounts)

 

     For the Three Months
Ended March 31,
  
     2004
     2003
  

Interest income:

                 

Mortgage securities

    $ 33,212     $ 18,318  

Mortgage loans held-for-sale

      15,116       17,831  

Mortgage loans held-in-portfolio

      2,047       3,167  
    
 

Total interest income

      50,375       39,316  

Interest expense:

                 

Short-term borrowings secured by mortgage loans

      4,755       5,466  

Short-term borrowings secured by mortgage securities

      1,192       560  

Asset-backed bonds secured by mortgage loans

      364       767  

Asset-backed bonds secured by mortgage securities

      2,348       1,183  

Net settlements of derivative instruments used in cash flow hedges

      2,062       2,653  
    
 

Total interest expense

      10,721       10,629  
    
 

Net interest income before credit (losses) recoveries

      39,654       28,687  

Credit (losses) recoveries

      (146 )     92  
    
 

Net interest income

      39,508       28,779  

Gains on sales of mortgage assets

      51,780       29,443  

Losses on derivative instruments

      (25,398 )     (9,149 )

Fee income

      45,519       14,517  

Premiums for mortgage loan insurance

      (626 )     (779 )

Other income, net

      971       183  

General and administrative expenses:

                 

Compensation and benefits

      43,826       18,805  

Loan expense

      14,585       6,557  

Office administration

      10,260       4,943  

Travel and public relations

      7,212       2,990  

Professional and outside services

      2,382       1,514  

Other

      2,118       1,085  
    
 

Total general and administrative expenses

      80,383       35,894  
    
 

Income before income tax expense

      31,371       27,100  

Income tax expense

      446       4,141  
    
 

Net income

      30,925       22,959  

Dividends on preferred shares

      (1,275 )     —    
    
 

Net income available to common shareholders

    $ 29,650     $ 22,959  
    
 

Basic earnings per share

    $ 1.20     $ 1.09  
    
 

Diluted earnings per share

    $ 1.17     $ 1.07  
    
 

Weighted average basic shares outstanding

      24,655       21,002  
    
 

Weighted average diluted shares outstanding

      25,274       21,528  
    
 

Dividends declared per common share

    $ 1.35     $ 1.29  
    
 

 

See accompanying notes to consolidated financial statements.

 

2

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NOVASTAR FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

 

     For the Three Months Ended
March 31,
  
     2004
     2003
  

Cash flows from operating activities:

                 

Net income

    $ 30,925     $ 22,959  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                 

Amortization of premiums on mortgage assets

      214       274  

Amortization of mortgage servicing rights

      3,283       1,726  

Accretion of available-for-sale securities

      (22,860 )     (18,318 )

Amortization of deferred debt issuance costs

      873       115  

Forgiveness of founders’ promissory notes

      35       35  

Credit losses (recoveries)

      146       (92 )

Proceeds from sale of mortgage loans held-for-sale in securitizations

      1,630,178       1,024,031  

Proceeds from sale of mortgage loans held-for-sale to third parties

      17,782       294,604  

Originations and purchases of mortgage loans held-for-sale

      (1,779,752 )     (1,076,306 )

Repayments of mortgage loans held-for-sale

      2,477       7,953  

Gains on sales of mortgage assets

      (51,780 )     (29,443 )

Losses on derivative instruments

      25,398       9,149  

Compensation recognized under stock option plan

      414       325  

Depreciation expense

      1,325       661  

Changes in:

                 

Other assets

      (18,589 )     (13,215 )

Other liabilities

      (1,134 )     3,625  
    
 

Net cash (used in) provided by operating activities

      (161,065 )     228,083  

Cash flows from investing activities:

                 

Mortgage loan repayments—held-in-portfolio

      9,442       11,593  

Proceeds from paydowns on available-for-sale securities

      61,524       37,661  

Proceeds from sales of assets acquired through foreclosure

      1,476       1,115  
    
 

Net cash provided by investing activities

      72,442       50,369  

Cash flows from financing activities:

                 

Payments on asset-backed bonds

      (47,560 )     (28,266 )

Proceeds from issuance of asset-backed bonds

      154,025       —    

Change in short-term borrowings

      9,434       (242,232 )

Proceeds from issuance of capital stock and exercise of equity instruments, net of offering costs

      83,224       233  

Dividends paid on preferred stock

      (1,275 )     —    

Dividends paid on common stock

      (29,544 )     (20,234 )
    
 

Net cash provided by (used in) financing activities

      168,304       (290,499 )
    
 

Net increase (decrease) in cash and cash equivalents