Novation Holdings Inc. · OTC:NOHO
Novation — NovaStar Financial — Q4 2006 Earnings Presentation
22 slides from Novation's earnings presentation, Feb 20, 2007
Slide 1: NovaStar Financial 2006 Fourth Quarter Earnings Conference Call
NovaStar Financial (NYSE-NFI) www.novastarmortgage.com 2006 Fourth Quarter Earnings Conference Call February 20, 2007
Slide 2: Safe Harbor Statement
Safe Harbor Statement This Presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management’s beliefs, estimates, projections, and assumptions with respect to, among other things, the Company’s future operatio
Slide 3: Presentation Overview
Presentation Overview Q4 Earnings Overview Credit Review 2007 Outlook Mortgage Banking Portfolio Strategies Taxable income analysis Detailed Q4 Earnings review
Slide 4: Q4 2006 Earnings Review
Q4 2006 Earnings Review GAAP loss of $0.39 / share Credit-related charges REIT charges (pre-tax = after-tax) Mortgage securities impairments – ($17M) Loan loss reserve increase for on-balance sheet deal 06-1 Q4 - ($10M) TRS charges Increase to loan buy-back reserve – ($13M) Other non-credit items Se
Slide 5: Credit Review
Credit Review Keys to good loan performance Stable housing market (systemic risk) Appropriate underwriting guidelines Appropriate exceptions to guidelines Solid appraisal management process Ability to identify and eliminate unacceptable layered risk Strong servicing operation
Slide 6: Credit Review
Credit Review How do we improve performance? Housing market is beyond our control Tightened underwriting guidelines both in: Loan characteristics that impact performance, and LTV, FICO, Documentation Type, DTI, etc Policies on verification of critical information Seasoning of funds, property seasoni
Slide 7: Credit Review
Credit Review Why do we expect these changes will improve performance? Q4 2005 through end of 2006 production was run against new, tighter guidelines Impact was positive; but not sufficient Conclusion: Need to identify and eliminate unacceptable levels of layered risk within our guidelines
Slide 8: Credit Review
Credit Review Identifying and reducing layered risk using NovaStar’s Risk Assessment Score (NRAS) Computed NRAS on all loans originated from the Q4 2005 through the end of 2006 Eliminated the highest risk scores from production and appended performance data from fourth quarter 2005 through year end
Slide 9: Mortgage Banking Trends
Mortgage Banking Trends Q4 2006 costs / production were good Gain-on-sale margins continue to be tight when adjusted for risks Premium recapture Loan buyback Rates still need to come up (or credit risk go down) More lenders continue to go out of business – good for remaining competitors We expect 20
Slide 10: 2007 Mortgage Banking Outlook
2007 Mortgage Banking Outlook Expect to grow NovaStar retail platform via integration of acquired assets (Q4) First half 2007 production could be lower as brokers adjust to tighter guideline implementation Expect better quality and economics during the year Still need to continue focus on cost contr
Slide 11: Portfolio Strategies for 2007
Portfolio Strategies for 2007 Generally constructive on 2007 subprime investment given guideline changes, tighter appraisal processes and pricing improvement Housing price direction still unknown Move up the capital structure Allocate more capital to CDO equity (BBB mortgage securities / CDS) Sell a
Slide 12: Portfolio Strategy - 2007
Portfolio Strategy - 2007 Consequences Higher rated mortgage securities investments are held in the taxable REIT subsidiary (TRS) Doesn’t generate REIT taxable income, earnings in TRS creates capital for reinvestment Mortgage securities financed with CDOs have a much longer duration than normal subp
Slide 13: Taxable income dynamics
Taxable income dynamics “REIT-only” taxable income drives dividend distribution requirements At year-end 2006 the tax/GAAP income difference was approximately $370 million We expect that this difference will reverse from 2007 – 2011 as the securitizations are called that caused the high taxable inco
Slide 14: Dividend strategy
Dividend strategy (2008+) Little / no required dividend distributions starting in 2008 Dividend strategy set by NFI Board Any dividends will be driven by our cost of equity and investment opportunities Can retain approximately $370M of capital in REIT without paying taxes Retained earnings in the RE
Slide 15: Q4 2006 vs Q4 2005 income summary
($ in thous., except per share data) Net interest income Gain on sales of mortgage assets Gains (losses) on derivative instruments Impairment on mortgage securities - AFS Other income (expense), net General & administrative expenses Net income available to common Diluted EPS. $ $ Q4 ‘06 50,913 (9,27
Slide 16: Gain on sales of mortgage assets breakdown
(In thousands) REO Loan Sales Recourse on Loan Sales Securitization Q4 "06 Q4 "05 $(2,980) $ (151) 11,186 2,479 (22,120) (1,516) 4,636 3,874 $(9,278) $4,686
Slide 17: 2007 Dividend Distributions
2007 Dividend Distributions
Slide 18: Production
Production 10.2b 9.3b 8.4b 2006 production excludes Q1 MTA bulk purchase of $991M
Slide 19: Cost of Production
Cost of Production See exhibit 1 for Reg. G disclosure on non-GAAP item
Slide 20: 2007 Capital Planning
2007 Capital Planning Liquidity $154M of cash and available liquidity as of Dec. ‘06 Cash on hand plus expected cash generated by portfolio is sufficient for dividend payments during the year and business operations Additional equity required to grow the investment portfolio and take advantage of go
Slide 21: Questions
Questions
Slide 22: Reconciliation of GAAP G&A Expenses to Cost of Loan Production
eset? INovastar Financial ne. JRecorelistion of GAAP General and Administrative Expenses to Ceet of Loan Preduetion (ollarsin housands, exceptloan producion as 3 percentage [The ling table is areconliation ofoverhead cost included in ourcostofprodusion te ganeral and lamiisratve expences, presented