NOVASTAR FINANCIAL INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2005

¨	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)

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 May 3, 2005 was 27,926,011.

NOVASTAR FINANCIAL, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2005

TABLE OF CONTENTS


Part I	Financial Information

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statement of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Table 1, Nonconforming Loan Originations and Purchases	27
	Table 2, Carrying Value of Mortgage Loans	27
	Table 3, Valuation of Individual Mortgage Securities – Available-for-Sale and Assumptions	29
	Table 4, Summary of Mortgage Securities – Available-for-Sale Retained by Year of Issue	35
	Table 5, Short-term Financing Resources	37
	Table 6, Mortgage Securities Interest Analysis	39
	Table 7, Mortgage Portfolio Management Net Interest Income Analysis	40
	Table 8, Gains on Sales of Mortgage Assets and Gains (Losses) on Derivative Instruments	42
	Table 9, Mortgage Loan Securitizations	43
	Table 10, Wholesale Loan Costs of Production, as a Percent of Principal	44
	Table 11, Reconciliation of Overhead Costs	45
	Table 12, Taxable Net Income	45
	Table 13, Summary of Servicing Operations	46
	Table 14, Contractual Obligations	49

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
	Table 15, Interest Rate Sensitivity – Market Value	51
	Table 16, Interest Rate Risk Management Contracts	53

Item 4.	Controls and Procedures	53

Part II	Other Information

Item 1.	Legal Proceedings	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Submission of Matters to a Vote of Security Holders	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOVASTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; dollars in thousands, except share amounts)


	March 31, 2005			December 31, 2004
Assets
Cash and cash equivalents	$	237,910		$	268,563
Mortgage loans – held-for-sale		585,021			747,594
Mortgage loans – held-in-portfolio		54,285			59,527
Mortgage securities – available-for-sale		530,578			489,175
Mortgage securities – trading		—			143,153
Mortgage servicing rights		47,712			42,010
Derivative instruments, net		22,595			18,841
Servicing related advances		19,594			20,190
Property and equipment, net		15,900			15,476
Other assets		54,487			56,782

Total assets	$	1,568,082		$	1,861,311

Liabilities and Stockholders’ Equity
Liabilities:
Short-term borrowings secured by mortgage loans	$	561,596		$	720,791
Short-term borrowings secured by mortgage securities		100,007			184,737
Asset-backed bonds secured by mortgage loans		48,695			53,453
Asset-backed bonds secured by mortgage securities		242,388			336,441
Junior subordinated debentures		48,428			—
Dividends payable		40,720			73,431
Due to securitizations trusts		20,102			20,930
Accounts payable and other liabilities		47,524			45,184

Total liabilities		1,109,460			1,434,967
Commitments and contingencies (Note 7)
Stockholders’ equity:
Capital stock, $0.01 par value, 50,000,000 shares authorized:
Redeemable preferred stock, $25 liquidating preference per share; 2,990,000 shares authorized, issued and outstanding		30			30
Common stock, 27,897,946 and 27,709,984 shares authorized, issued and outstanding, respectively		279			277
Additional paid-in capital		439,308			433,107
Accumulated deficit		(91,451	)		(85,354	)
Accumulated other comprehensive income		111,257			79,120
Other		(801	)		(836	)

Total stockholders’ equity		458,622			426,344

Total liabilities and stockholders’ equity	$	1,568,082		$	1,861,311

See notes to condensed consolidated financial statements.

NOVASTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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


	For the Three Months Ended March 31,
	2005			2004
Interest income:
Mortgage securities	$	40,463		$	33,196
Mortgage loans held-for-sale		20,279			15,116
Mortgage loans held-in-portfolio		1,313			2,047

Total interest income		62,055			50,359
Interest expense:
Short-term borrowings secured by mortgage loans		10,263			4,755
Short-term borrowings secured by mortgage securities		800			1,192
Asset-backed bonds secured by mortgage loans		417			364
Asset-backed bonds secured by mortgage securities		4,807			2,348
Net settlements of derivative instruments used in cash flow hedges		180			2,062
Junior subordinated debentures		140			—

Total interest expense		16,607			10,721

Net interest income before provision for credit losses		45,448			39,638
Provision for credit losses		(619	)		(146	)

Net interest income		44,829			39,492
Fee income		18,583			17,987
Gains on sales of mortgage assets		18,246			51,780
Gains (losses) on derivative instruments		14,601			(25,398	)
Premiums for mortgage loan insurance		(942	)		(626	)
Impairment on mortgage securities – available-for-sale		(1,612	)		—
Other income, net		3,587			1,108
General and administrative expenses:
Compensation and benefits		33,427			26,675
Office administration		8,890			7,163
Marketing		5,088			7,398
Professional and outside services		4,379			2,356
Loan expense		3,692			2,610
Other		4,810			3,972

Total general and administrative expenses		60,286			50,174

Income from continuing operations before income tax expense		37,006			34,169
Income tax expense		819			1,523

Income from continuing operations		36,187			32,646
Loss from discontinued operations, net of income tax		(984	)		(1,721	)

Net income		35,203			30,925
Dividends on preferred shares		(1,663	)		(1,275	)

Net income available to common shareholders	$	33,540		$	29,650

Continued


	For the Three Months Ended March 31,
	2005			2004
Basic earnings per share:
Income from continuing operations available to common shareholders	$	1.24		$	1.27
Loss from discontinued operations, net of income tax		(0.03	)		(0.07	)

Net income available to common shareholders	$	1.21		$	1.20

Diluted earnings per share:
Income from continuing operations available to common shareholders	$	1.23		$	1.24
Loss from discontinued operations, net of income tax		(0.04	)		(0.07	)

Net income available to common shareholders	$	1.19		$	1.17

Weighted average basic shares outstanding		27,766			24,655

Weighted average diluted shares outstanding		28,111			25,274

Dividends declared per common share	$	1.40		$	1.35

See notes to condensed consolidated financial statements.

Concluded

NOVASTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited; dollars in thousands, except share amounts)


	Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Other			Total Stockholders’ Equity
Balance, January 1, 2005	$	30	$	277	$	433,107	$	(85,354	)	$	79,120	$	(836	)	$	426,344

Forgiveness of founders’ notes receivable		—		—		—		—			—		35			35

Issuance of common stock, 116,735 shares		—		1		4,632		—			—		—			4,633

Issuance of stock under stock compensation plans, 71,227 shares		—		1		533		—			—		—			534
Compensation recognized under stock compensation plans		—