NFI Novastar Finl

NovaStar Financial, Inc. (NYSE:NFI), a residential lender and mortgage Real Estate Investment Trust, today reported first-quarter 2006 results. The Board of Directors of NovaStar declared a common stock dividend of $1.40 per share, payable May 26, 2006, to shareholders of record as of May 15, 2006. In addition, the Board of Directors declared a quarterly dividend of $.55625 per share on its 8.90% Class C Cumulative Redeemable Preferred Stock to holders of record as of June 1, 2006, payable on June 30, 2006. First-quarter performance highlights: -- Diluted earnings per share available to common shareholders was $0.69, vs. $1.19 a year earlier. First quarter 2006 net income did not include significant income from gains on sales of mortgage loans ($18.2 million in the first quarter of 2005), as the company did not complete a securitization structured as a sale in 2006. -- Loans under management were $15.0 billion, up 17 percent from a year earlier. -- Portfolio net interest income was $49.3 million, a return on assets of 1.40 percent. -- Annualized return on average common equity was 18.6 percent, vs. 36.5 percent, the decrease in 2006 was largely due to the impact of not completing a securitization structured as a sale in 2006. -- NovaStar originated $1.8 billion in nonconforming loans, down 6 percent vs. a year earlier. -- Cost of wholesale production declined 45 basis points, year over year, to 2.28 percent. "Some encouraging signs are appearing in the nonprime market: better coupons, more attractive whole-loan prices, and lower relative interest costs on the bonds we issue. The portfolio results continue to benefit from better-than-expected credit performance and our risk management strategies continue to perform well in a difficult interest rate environment," said Scott Hartman, Chief Executive Officer. First-quarter net income available to common stockholders was $22.4 million, down 33 percent from $33.5 million a year earlier. Diluted earnings per share available to common stockholders were $0.69 on 16 percent more diluted shares outstanding. Portfolio net interest income was $49.3 million, an increase of 14 percent from $43.4 million a year earlier. Greg Metz, Senior Vice President and Chief Financial Officer, stated: "As we announced earlier this year, the decision to structure two securitizations as financings for both GAAP and tax did have an impact on first quarter financial results. Portfolio net interest income was up, year over year, but net income was negatively affected by 1) the lack of accounting gain associated with an off-balance sheet securitization, which has been the typical securitization structure in the past, and 2) the recording of a $3.4 million loan loss reserve on collateral ear-marked for securitizations to be accounted for as a financing. While we continue to believe the best execution is realized from structuring a securitization as a sale for both GAAP and tax, the current interest rate environment has made it necessary to add additional qualified assets to our REIT balance sheet. These steps are being taken in order to ensure we meet the requirements necessary to maintain our tax advantaged REIT status and passing the benefits on to our shareholders." In order to qualify for REIT tax status, NovaStar must meet certain income and asset tests. These tests require a substantial majority of the company's assets to be comprised of qualified assets, or more directly, real estate related assets and cash or near cash holdings. In addition, a substantial majority of the company's income must be qualified income, or income derived from its qualified assets. The economic impact to NovaStar, of a given securitization, is similar regardless of whether it is treated as a financing or a sale for GAAP/tax purposes. However, treating the transaction as a financing for both GAAP and tax purposes adds significantly more REIT qualified assets and REIT tax qualified income than if the securitization was treated as a sale. In addition, the change in securitization methodology modifies the timing of income recognition for both GAAP and tax purposes. Dividend Guidance Management reaffirmed their expectation that common dividends declared during calendar 2006 will total at least $5.60 per share. The amount and timing of future dividends are determined by the Board of Directors based on REIT tax requirements, the company's financial condition and business trends at the time, so this dividend guidance is subject to change as necessary. Approximately $124 million in declared dividends have been applied to 2005 taxable income (see table). -0- *T Dividend Carry-over Analysis (In millions) Estimated 2005 REIT taxable income $ 279 Less: dividend declarations to date applied to 2005 taxable income (124) ----- Estimated 2005 REIT taxable income remaining to be distributed $ 155 *T In the first quarter of 2006, estimated taxable income available to common stockholders was $64 million. Portfolio Management Loans under management were $15.0 billion at March 31, 2006, up 17 percent from a year earlier. First-quarter annualized average return on assets in the portfolio was 1.40 percent, compared to 1.36 percent in the first quarter of 2005. NovaStar did not execute a major securitization or sale of whole loans in the first quarter. On April 28, 2006, NovaStar securitized $1.4 billion in nonconforming loans, which was accounted for as a financing for both GAAP and tax purposes. First-quarter earnings in accordance with GAAP included mark to market pretax gains of $5.8 million relating to derivative instruments and impairments of $2.0 million in the valuation of securities. Accounting rules for portfolio-related transactions can introduce volatility in quarterly GAAP earnings as a result of market movements in interest rates, but NovaStar employs hedging to mitigate risk and manage the portfolio in the interest of long-term shareholder value. Mortgage Banking Excluding approximately $991 million in MTA bulk purchases, NovaStar originated $1.8 billion in nonconforming loans in the first quarter, down 6 percent from a year earlier. Wholesale production accounted for 76 percent of first-quarter originations. Average cost of wholesale production was 2.28 percent in the quarter, down from 2.73 percent a year earlier. "Our market remains extremely competitive, but NovaStar benefited from lower costs in the first quarter and also experienced modest improvement in coupons. We remain cautiously optimistic regarding nonprime origination activity in 2006," said Lance Anderson, Chief Operating Officer. Excluding payment option ARM products, which typically carry a one-month teaser rate of less than 2%, weighted-average coupon was 8.73 percent in the first quarter, up from 7.63 percent a year earlier. Credit quality of originations was similar to the prior-year quarter, with a weighted-average FICO score of 628 and average loan-to-value ratio of 81.3 percent. Liquidity and Borrowing Capacity NovaStar maintained strong liquidity and raised additional capital to fund the growth of its portfolio. As of March 31, 2006, NovaStar had borrowing capacity of $4.3 billion from major lenders. Cash and available liquidity totaled $172 million. In the first quarter, the company issued 426,181 common shares through its dividend reinvestment and direct purchase program, for net proceeds of $11.4 million. Subsequent to the closing of the first quarter, NovaStar raised an additional $35 million of capital through the issuance of trust preferred securities. Focus on Key Metrics In addition to full reporting under GAAP, NovaStar provides information on key performance metrics related to stockholder value: -0- *T First Quarter (In thousands, except per share data) 2006 2005 Change Earnings (GAAP) Net income available to common $ 22,365 $ 33,540 -33% EPS available to common (diluted) $ 0.69 $ 1.19 -42% Return on average equity 17.3% 31.8% Return on average common equity 18.6% 36.5% REIT Taxable Income & Dividends Est. REIT taxable income available to common shareholders $ 63,842 Est. REIT taxable income available to common shareholders (per common share) $ 1.95 Dividends declared per common share $ 1.40 $ 1.40 - Lending & Originations Nonconforming loan production $ 1,834,825 $ 1,947,851 -6% Cost of wholesale production (a) 2.28% 2.73% Portfolio Performance Loans under management $14,981,503 $12,838,967 17% Mortgage securities AFS yield 30.4% 27.3% Mortgage lending net interest yield 2.95% 2.92% Common Stock Data High market price per share $ 33.80 $ 48.15 Low market price per share $ 25.70 $ 32.40 Book value per common share (diluted) $ 14.30 $ 13.57 5% (a) As required by Regulation G, a reconciliation of cost of production to the most directly comparable GAAP financial measure is set forth in the table attached as Exhibit 1 to this press release. *T The NovaStar first-quarter investor conference call is scheduled for 10:00 a.m. Central time (11:00 a.m. Eastern time) on May 5, 2006. The conference call will be webcast live and archived on the Company's website at www.novastarmortgage.com. To participate in the call, please contact 888-202-2422 approximately 15 minutes before the scheduled start of the call. A copy of the presentation slides will be available on the website by 9:00 a.m. Central time (10:00 a.m. Eastern time). For investors unable to participate in the live event, a replay will be available until May 12, 2006, at 888-203-1112. The confirmation code for the replay is 9343347. About NovaStar NovaStar Financial, Inc. (NYSE:NFI) is a specialty finance company that originates, purchases, sells, invests in and services residential nonconforming loans. The company specializes in single-family mortgages, involving borrowers whose loan size, credit details or other circumstances fall outside conventional mortgage agency guidelines. A Real Estate Investment Trust (REIT) founded in 1996, NovaStar efficiently brings together the capital markets, a nationwide network of mortgage brokers and American families financing their homes. NovaStar is headquartered in Kansas City, Missouri, and has lending operations nationwide. For more information, including quarterly portfolio data, please visit our website at www.novastarmortgage.com. Certain matters discussed in this release constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are those that predict or describe future events and that do not relate solely to historical matters. Forward-looking statements are subject to risks and uncertainties and certain factors can cause actual results to differ materially from those anticipated. Some important factors that could cause actual results to differ materially from those anticipated include: our ability to generate sufficient liquidity on favorable terms; the size, frequency and structure of our securitizations; interest rate fluctuations on our assets that differ from our liabilities; increases in prepayment or default rates on our mortgage assets; changes in assumptions regarding estimated loan losses and fair value amounts; changes in origination and resale pricing of mortgage loans; our compliance with applicable local, state and federal laws and regulations or opinions of counsel relating thereto and the impact of new local, state or federal legislation or regulations or opinions of counsel relating thereto or court decisions on our operations; the initiation of margin calls under our credit facilities; the ability of our servicing operations to maintain high performance standards and maintain appropriate ratings from rating agencies; our ability to expand origination volume while maintaining an acceptable level of overhead; our ability to adapt to and implement technological changes; the stability of residual property values; the outcome of litigation or regulatory actions pending against us or other legal contingencies; the impact of losses resulting from natural disasters; the impact of general economic conditions; and the risks that are from time to time included in our filings with the SEC, including our Annual Report on Form 10-K, for the year ended December 31, 2005. Other factors not presently identified may also cause actual results to differ. This document speaks only as of its date and we expressly disclaim any duty to update the information herein. -0- *T Exhibit 1 NovaStar Financial Inc. Reconciliation of GAAP General and Administrative Expenses to Total Cost of Wholesale Production (dollars in thousands, except wholesale production as a percentage) ---------------------------------------------------------------------- The following table is a reconciliation of overhead costs included in our cost of wholesale production to general and administrative expenses, presented in accordance with accounting principles generally accepted in the United States of America (GAAP) and the resulting cost of production. We believe this presentation provides useful information regarding our financial performance because it more accurately reflects the direct costs of loan production and allows us to monitor the performance of our core operations, which is more difficult to do when looking at GAAP financial statements, and provides useful information regarding our financial performance. Management uses this measure for the same purpose. However, this presentation is not intended to be used as a substitute for financial results prepared in accordance with GAAP. For the Three Months Ended March 31, ----------------------- 2006 2005 ----------- ----------- General and administrative expenses $ 49,332 $ 50,612 Mortgage portfolio management general and administrative expenses (4,326) (3,174) Loan servicing general and administrative expenses (9,601) (7,872) Branch operations general and administrative expenses (4,030) (5,130) ----------- ----------- Mortgage lending general and administrative expenses 31,375 34,436 Direct origination costs classified as a reduction in gain-on-sale 5,606 10,221 Other lending expenses (9,825) (10,377) ----------- ----------- Wholesale overhead costs 27,156 34,280 Premium paid to broker, net of fees collected 5,434 11,226 ----------- ----------- Total cost of wholesale production $ 32,590 $ 45,506 =========== =========== Wholesale production, principal (A) $1,429,718 $1,669,930 Total cost of wholesale production, as a percentage 2.28% 2.73% ---------------------------------------------------------------------- (A) Includes loans originated through NovaStar Home Mortgage, Inc. and purchased by our wholesale division in NovaStar Mortgage, Inc. Only the costs borne by our wholesale division are included in the total cost of wholesale production. NovaStar Financial, Inc. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (dollars in thousands, except per share amounts) (unaudited) For the Three Months Ended -------------------------------------- 3/31/2006 12/31/2005 3/31/2005 ----------- ----------- ----------- NovaStar Financial, Inc. Income Statement Data Interest income $ 78,293 $ 78,503 $ 62,055 Interest expense 27,104 22,170 16,607 Fee income 8,900 6,156 10,722 Gains on sales of mortgage assets 764 6,366 18,246 Gains on derivative instruments 8,591 4,880 14,601 Impairment on mortgage securities available-for-sale (1,965) (7,553) (1,612) General and administrative expenses 49,332 48,459 50,612 Income from continuing operations before tax expense (benefit) 19,427 22,703 39,092 Income tax expense (benefit) (5,043) (6,772) 1,574 Income from continuing operations 24,470 29,475 37,518 Loss from discontinued operations, net of income tax (442) (1,366) (2,315) Preferred dividends (1,663) (1,664) (1,663) Net income available to common shareholders 22,365 26,445 33,540 Basic earnings per share Income from continuing operations available to common shareholders $ 0.70 $ 0.89 $ 1.29 Loss from discontinued operations, net of income tax $ (0.01) $ (0.04) $ (0.08) Net income available to common shareholders $ 0.69 $ 0.85 $ 1.21 Diluted earnings per share Income from continuing operations available to common shareholders $ 0.70 $ 0.88 $ 1.27 Loss from discontinued operations, net of income tax $ (0.01) $ (0.04) $ (0.08) Net income available to common shareholders $ 0.69 $ 0.84 $ 1.19 Dividends declared per common share $ 1.40 $ 1.40 $ 1.40 Dividends declared per preferred share $ 0.56 $ 0.56 $ 0.56 Book value per diluted share $ 14.30 $ 15.08 $ 13.57 As of -------------------------------------- 3/31/2006 12/31/2005 3/31/2005 ----------- ----------- ----------- NovaStar Financial, Inc. Balance Sheet Data Mortgage loans - held for sale $ 890,704 $ 1,291,556 $ 585,021 Mortgage loans - held in portfolio 2,526,966 28,840 54,285 Mortgage securities - available for sale 445,395 505,645 530,578 Mortgage securities - trading 54,280 43,738 - Total assets 4,263,920 2,335,734 1,568,082 Borrowings 3,563,587 1,619,812 1,001,114 Stockholders' equity 546,227 564,220 458,622 For the Three Months Ended -------------------------------------- 3/31/2006 12/31/2005 3/31/2005 ----------- ----------- ----------- Other Data: Servicing portfolio $15,129,446 $14,030,697 $12,860,740 Nonconforming loans sold to third parties $ 358,991 $ 420,836 $ - Loans securitized $ 378,944 $ 1,731,570 $ 2,100,000 Percent of securitized loans covered by mortgage insurance 54% 53% 45% Weighted average coupon of mortgage loans - held for sale 8.55% 8.11% 7.64% NovaStar Financial, Inc. LOAN ORIGINATION DATA (dollars in thousands) (unaudited) For the Three Months Ended ------------------------------------------------------- As a As a As a % of % of % of 3/31/2006 (A) Total 12/31/2005 Total 3/31/2005 Total ----------- ----- ---------- ------ --------- ----- Non-conforming loan origination volume Non- conforming Wholesale $1,403,650 76% $1,645,769 75% $1,471,746 76% Corre- spondent/ Bulk 182,485 10% 200,393 9% 184,858 9% Retail 248,690 14% 352,177 16% 291,247 15% ---------- ------ ---------- ------ ---------------- Total non- conforming production volume 1,834,825 100% 2,198,339 100% 1,947,851 100% ========== ====== ========== ====== ================ # of funding days in the quarter 62 60 62 ========== ========== ========== Average origi- nations per funding day $ 29,594 $ 36,639 $ 31,417 ========== ========== ========== Retail loan origination volume Non- conforming Sold to non- affiliates $ 47,440 13% $ 139,393 23% $ 285,190 35% Held by NMI 248,690 69% 352,177 59% 291,247 35% ---------- ------ ---------- ------ ---------------- Total non- conforming 296,130 82% 491,570 82% 576,437 70% ---------- ------ ---------- ------ ---------------- Conforming 66,747 18% 109,823 18% 246,840 30% ---------- ------ ---------- ------ ---------------- Total retail production volume $ 362,877 100% $ 601,393 100% $ 823,277 100% ========== ====== ========== ====== ================ (A) Does not include approximately $991 million in bulk purchased MTA loans during the period. ---------------------------------------------------------------------- For the Three Months Ended 3/31/06 (A) -------------------------------------- Weighted Weighted Weighted Average Average Average Percent Coupon LTV FICO of Total ----------- ------- ---------- ------- Summary by Credit Grade 660 and above 7.66% 82.2% 701 31% 620 to 659 8.39% 82.1% 640 24% 580 to 619 8.88% 82.0% 599 22% 540 to 579 9.37% 79.9% 560 16% 539 and below 9.72% 76.2% 527 7% ------- 8.53% 81.3% 628 100% =========== ======= ========== ======= Summary by Program Type 2-Year Fixed 8.90% 81.4% 608 57% 2-Year Fixed Interest-only 7.90% 80.9% 663 16% 3-Year Fixed 8.54% 78.5% 614 1% 3-Year Fixed Interest-only 7.47% 75.0% 670 1% 5-Year Fixed 7.72% 77.3% 671 0% 5-Year Fixed Interest-only 7.46% 75.9% 664 0% 15-Year Fixed 9.25% 80.7% 646 1% 30-Year Fixed 8.30% 76.3% 635 11% 30-Year Fixed Interest-only 7.89% 80.4% 678 0% Other Products 9.62% 89.4% 652 10% Option ARM (MTA) 1.86% 75.4% 706 3% ------- 8.53% 81.3% 628 100% =========== ======= ========== ======= Weighted Average Coupon Excluding MTA 8.73% =========== (A) Does not include approximately $991 million in bulk purchased MTA loans during the period. *T