Novation Holdings Inc. · OTC:NOHO
Novation — NovaStar Financial — Q1 2006 Earnings Presentation
26 slides from Novation's earnings presentation, May 5, 2006
Slide 1: NovaStar Financial 2006 First Quarter Earnings Conference Call
NovaStar Financial (NYSE-NFI) www.novastarmortgage.com 2006 First Quarter Earnings Conference Call May 5, 2006
Slide 2: Safe Harbor Statement
Safe Harbor Statement 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 st
Slide 3: Opening Comments & NovaStar Financial REIT Test Discussion
Opening Comments & NovaStar Financial REIT Test Discussion Scott Hartman, CEO
Slide 4: Overview of Issues
Overview of Issues NovaStar (REIT) aggressively hedges the interest rate risk embedded in our mortgage securities portfolio Due to rates rising almost 4% during the past 24 months, the cash flow from our hedges has substantially increased while the cash flow from the mortgage securities portfolio ha
Slide 5: The Math
The Math Securitization strategy and example Every $1B of loan “on-balance sheet” would generate $70 million to $80 million of good REIT income per year NFI mortgage securities represent the same “economic” interest, but less taxable income Mtg securities = 5% of loan balance * 20% yield = $10 milli
Slide 6: Steps Taken to Solve the Problem
Steps Taken to Solve the Problem Step 1 - Put loans on NFI (REIT) balance sheet to create more good REIT income and assets $1 billion purchase of payment option ARMS Structure 2006-1 as on-balance sheet financing Financial impact of Step 1 Inconsistent GAAP results due to change in securitization st
Slide 7: Steps Taken to Solve the Problem
Steps Taken to Solve the Problem Step 2 – Reduce hedge income in REIT by moving “hedge” securities to taxable REIT subsidiary (TRS). Because of securitization structure, we can move the securities containing hedge cash flows to TRS Impact of Step 2 Hedge cash flow is now taxed in TRS (slight drag on
Slide 8: Steps Taken to Solve the Problem: GAAP Impairment Issues
Steps Taken to Solve the Problem Impact of Step 2 – GAAP Impairment Issues Our securities are well hedged with embedded derivatives Strategy doesn’t change security cash flow but changes GAAP accounting and impairment risk for the “mortgage only” security Rates up 100bp would create a gain in the “h
Slide 9: Hypothetical investment: base vs +100 basis points impairment
Hypothetical investment Base +100 Basis _ Impairment Mortgage Securities Value with Hedges 50,000 48,500 50,000 (1,500) Total Change in Value (1,500) Mortgage Securities Value with No Hedges 32,000 22,000 32,000 (10,000) Change in Value (10,000) Hedges 18,000 26,500 18,000 - Change in Value 8,500
Slide 10: Going Forward in 2006
Going Forward in 2006 Taxable income numbers are rough estimates and rates could rise further, creating more hedge income We are closely monitoring and may need to take additional steps Options include Structure another securitization of NovaStar collateral as a financing Purchasing additional mortg
Slide 11: Results of Operations
Results of Operations Greg Metz, CFO
Slide 12: Summary of Key Performance Metrics
Summary of Key Performance Metrics (in thousands, except per share data) First Quarter (Unandited) 2006 2005 Change Earnings (GAAP) Net Income available to common $22,365 $33,540 -33% EPS available to common (diluted) $0.69 $119 -42% Retum on average equity 173% 31.8% Retum on average common equity
Slide 13: Summary of Key Performance Metrics
‘Summary of Key Performance Metrics (In thousands, excep tper share data) (Unaudited) Morigage Banking - Lending & Originations Nonconformingloan production! Cost of wholesale production? Portfolio Management — Asset Performance Loansunder management Mortgage secuities AFS yield ‘Mortgage lending ne
Slide 14: Effect of change in Securitization Structures
Effect of change in Securitization Structures
Slide 15: 2006 Dividend Guidance
2006 Dividend Guidance 2006 Common Dividends of at Least $5.60 per Share
Slide 16: Mortgage Banking
Mortgage Banking
Slide 17: Production
Production Production down 6% Yr/Yr, down 20% Sequentially * * Excludes $991 million in MTA bulk purchases
Slide 18: Spreads
Spreads *Excluding MTA 7.4 %* 2.0 % 545 bps 8.7 %* 5.0 % 372 bps
Slide 19: Production Credit Characteristics
Production Credit Characteristics
Slide 20: Portfolio Management
Portfolio Management
Slide 21: Net Interest Income and ROA trends
NowSrax 700 200% con 1.80% 1.00% E00 1.40% Ae 1.20% 2 100% § = 0.60% 200 z 040% 10.0 a.20% 2 00% Mar04 Jun04 Sep-04 Dec-04 Mar0S Jun-0§ Sep-05 Dec-05 Mar06 =a Net interest Income 0A
Slide 22: Static Pool Cumulative Losses
Static Pool Cumulative Losses
Slide 23: Portfolio trends
Portfolio trends Size of portfolio should be relatively stable over the next year Over time, ROA’s should come down to a normalized range of 1.00% to 1.25% Increases in the price of the nations housing stock continues to drive excellent credit performance
Slide 24: Questions
Questions
Slide 25: Appendix
Appendix
Slide 26: Cost of Wholesale Production
Cost of Wholesale Production