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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 June 30, 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   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

8140 Ward Parkway, Suite 300, Kansas City, MO   64114
(Address of principal executive office)   (Zip Code)

 

Registrant’s telephone number, including area code: (816) 237-7000

 

 

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 August 3, 2004 was 24,993,465.

 

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NOVASTAR FINANCIAL, INC.

 

FORM 10-Q

Quarter Ended June 30, 2004

 

Part I

    Financial Information     
Item 1.    Condensed Consolidated Financial Statements (unaudited):     
     Balance Sheets    1
     Statements of Income    2
     Statements of Cash Flows    3
     Notes to Condensed Consolidated Financial Statements    5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    14
     Table 1, Nonconforming Loan Originations    22
     Table 2, Carrying Value of Mortgage Loans    23
     Table 3, Valuation of Individual Mortgage Securities and Assumptions    24
     Table 4, Summary of Mortgage Securities Retained by Year of Issue    28
     Table 5, Short-term Financing Resources    28
     Table 6, Mortgage Securities Interest Analysis    30
     Table 7, Mortgage Portfolio Management Net Interest Income Analysis    31
     Table 8, Quarterly Activity – Allowance for Credit Losses    33
     Table 9, Gains on Sales of Mortgage Assets and Gains (Losses) on Derivative Instruments    34
     Table 10, Mortgage Loan Sales and Securitizations    35
     Table 11, General and Administrative Expenses    36
     Table 12, Wholesale Loan Costs of Production, as a Percent of Principal    37
     Table 13, Summary of Servicing Operations    37
     Table 14, Taxable Net Income    38
     Table 15, Contractual Obligations    40
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    41
     Table 16, Interest Rate Sensitivity – Income    41
     Table 17, Interest Rate Sensitivity – Market Value    42
     Table 18, Interest Rate Risk Management Contracts    43
Item 4.    Controls and Procedures    43

Part II

    Other Information     
Item 1.    Legal Proceedings    44
Item 2.    Changes in Securities and Use of Proceeds and Issuer Purchases of Equity Securities    44
Item 3.    Defaults Upon Senior Securities    44
Item 4.    Submission of Matters to a Vote of Security Holders    44
Item 5.    Other Information    45
Item 6.    Exhibits and Reports on Form 8-K    45
     Signatures    46

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PART I. FINANCIAL INFORMATION

 

NOVASTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; dollars in thousands, except share amounts)

 

     June 30, 2004
     December 31, 2003
  

Assets

                 

Cash and cash equivalents

    $ 191,291     $ 118,180  

Mortgage loans – held-for-sale

      1,370,034       697,992  

Mortgage loans – held-in-portfolio

      74,665       94,717  

Mortgage securities – available-for-sale

      389,050       382,287  

Mortgage servicing rights

      26,442       19,685  

Servicing related advances

      20,794       19,281  

Deposits with derivative instrument counterparties, net

      19,378       19,492  

Property and equipment, net

      13,741       14,537  

Other assets

      64,073       33,786  
    
 

Total assets

    $ 2,169,468     $ 1,399,957  
    
 

Liabilities and Stockholders’ Equity

                 

Liabilities:

                 

Short-term borrowings secured by mortgage loans

    $ 1,311,810     $ 639,852  

Short-term borrowings secured by mortgage securities

      200,728       232,684  

Asset-backed bonds secured by mortgage loans

      69,778       89,384  

Asset-backed bonds secured by mortgage securities

      121,749       43,596  

Accounts payable and other liabilities

      82,676       63,658  

Dividends payable

      33,741       30,559  
    
 

Total liabilities

      1,820,482       1,099,733  

Commitments and contingencies

                 

Stockholders’ equity:

                 

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

                 

Common stock, 24,993,465 and 24,447,315 shares issued and outstanding, respectively

      250       245  

Preferred stock, 2,990,000 issued and outstanding

      30       —    

Additional paid-in capital

      320,428       231,294  

Accumulated deficit

      (20,180 )     (15,522 )

Accumulated other comprehensive income

      49,364       85,183  

Other

      (906 )     (976 )
    
 

Total stockholders’ equity

      348,986       300,224  
    
 

Total liabilities and stockholders’ equity

    $ 2,169,468     $ 1,399,957  
    
 

 

See accompanying notes to consolidated financial statements.

 

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NOVASTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

     For the Six Months
Ended June 30,
     For the Three Months
Ended June 30,
  
     2004
     2003
     2004
     2003
  

Interest income:

                                 

Mortgage securities

    $ 65,333     $ 41,675     $ 32,137     $ 23,357  

Mortgage loans held-for-sale

      34,910       32,621       19,794       14,790  

Mortgage loans held-in-portfolio

      3,792       6,016       1,745       2,849  
    
 
 
 

Total interest income

      104,035       80,312       53,676       40,996  

Interest expense:

                                 

Short-term borrowings secured by mortgage loans

      10,992       10,522       6,237       5,056  

Short-term borrowings secured by mortgage securities

      2,343       1,370       1,151       810  

Asset-backed bonds secured by mortgage loans

      691       1,371       327       604  

Asset-backed bonds secured by mortgage securities

      4,843       1,997       2,495       814  

Net settlements of derivative instruments used in cash flow hedges

      2,581       4,818       519       2,165  
    
 
 
 

Total interest expense

      21,450       20,078       10,729       9,449  
    
 
 
 

Net interest income before credit (losses) recoveries

      82,585       60,234       42,947       31,547  

Credit (losses) recoveries

      (661 )     263       (515 )     171  
    
 
 
 

Net interest income

      81,924       60,497       42,432       31,718  

Fee income

      88,750       34,195       43,231       19,678  

Gains on sales of mortgage assets

      76,954       73,474       25,174       44,031  

Gains (losses) on derivative instruments

      1,717       (24,186 )     27,115       (15,037 )

Premiums for mortgage loan insurance

      (1,581 )     (2,003 )     (955 )     (1,224 )

Impairment on mortgage securities – available-for-sale

      (6,117 )     —         (6,117 )     —    

Other income, net

      2,233       943       1,246       760  

General and administrative expenses:

                                 

Compensation and benefits

      87,609       43,622       43,783       24,817  

Marketing

      33,019       11,659       17,313       6,692  

Office administration

      22,906       10,125       12,646       5,182  

Loan expense

      11,375       9,562       7,549       6,544  

Professional and outside services

      6,106       2,978       3,724       1,464  

Other

      8,874       4,970       4,491       2,323  
    
 
 
 

Total general and administrative expenses

      169,889       82,916       89,506       47,022  
    
 
 
 

Income before income tax expense

      73,991       60,004       42,620       32,904  

Income tax expense

      7,440       8,324       6,994       4,183  
    
 
 
 

Net income

      66,551       51,680       35,626       28,721  

Dividends on preferred shares

      (2,938 )     —         (1,663 )     —    
    
 
 
 

Net income available to common shareholders

    $ 63,613     $ 51,680     $ 33,963     $ 28,721  
    
 
 
 

Basic earnings per share

    $ 2.56     $ 2.41     $ 1.36     $ 1.32  
    
 
 
 

Diluted earnings per share

    $ 2.51     $ 2.35     $ 1.34     $ 1.28  
    
 
 
 

Weighted average basic shares outstanding

      24,817       21,402       24,978       21,800  
    
 
 
 

Weighted average diluted shares outstanding

      25,338       21,996       25,377       22,430  
    
 
 
 

Dividends declared per common share

    $ 2.70     $ 2.54     $ 1.35     $ 1.25  
    
 
 
 

 

See accompanying notes to consolidated financial statements.

 

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