NovaStar Financial Reports Second-Quarter Earnings Up 18% As Record $2 Billion in Loan Production Fuels Mortgage Loan Portfolio Growth

Business Wire, July 29, 2004

KANSAS CITY, Mo. -- Headline of release should read: NovaStar Financial Reports Second-Quarter Earnings Up 18% As Record $2 Billion in Loan Production Fuels Mortgage Loan Portfolio Growth (sted Reports Second-Quarter Earnings Up 30%).

The corrected release reads:

NOVASTAR FINANCIAL REPORTS SECOND-QUARTER EARNINGS UP 18% AS RECORD $2 BILLION IN LOAN PRODUCTION FUELS MORTGAGE LOAN PORTFOLIO GROWTH

June 2004 represents best loan production month in NovaStar's history

NovaStar Financial, Inc. (NYSE: NFI), a residential mortgage lender and portfolio investor, today announced it reported net income of $34.0 million available to common shareholders, an increase of 18 percent from the same period one year earlier. The Company also achieved record loan production of $2.0 billion into the mortgage loan portfolio in Second Quarter 2004. A quarterly common dividend of $1.35 per share will be payable August 26, 2004 to shareholders of record as of August 11, 2004.

"We are pleased with the continued growth of our mortgage production and mortgage loan portfolio, which again delivered attractive returns for shareholders," NovaStar Chief Executive Officer Scott Hartman said. "In the Second Quarter, we remained on track with our 2004 financial goals, tightened our focus on nonconforming loan production, and added to the leadership team that will take our business to the next level in the years to come."

Among the highlights for NovaStar's Second Quarter:

--Record loan production of $2.0 billion into the mortgage loan portfolio, a 57 percent increase from Second Quarter 2003 and an 11 percent increase from First Quarter 2004.

--June 2004 mortgage loan production of $731 million represented the best nonconforming loan production month in NovaStar's history.

--Net income available to common shareholders of $34.0 million (or $1.34 per diluted share), up from $28.7 million in Second Quarter 2003 and $29.7 million in First Quarter 2004.

--A total of $9.6 billion in loans in the Company's mortgage loan portfolio, up 87 percent from Second Quarter 2003 and 14 percent over First Quarter 2004.

--Record-high mortgage loan portfolio income (from mortgage loans and mortgage securities) of $53.7 million, an increase of 31 percent over Second Quarter 2003 and 7 percent over First Quarter 2004.

--Completion of a $1.4 billion securitization of mortgage loans in June.

NovaStar announced on July 19, 2004 that it had appointed Greg Metz as Senior Vice President and Chief Financial Officer. As NovaStar continues to grow, Mr. Metz's financial management experience as a former executive officer at one of the nation's leading bank holding companies provides NovaStar with another strong leader in the Company's management structure.

Record Loan Production Continues to Drive NovaStar's Mortgage Loan Portfolio Growth

Nonconforming loan production into the mortgage loan portfolio in the Second Quarter totaled a record $2.0 billion, a 57 percent increase from Second Quarter 2003 and an 11 percent increase from First Quarter 2004. This helped increase loans in the mortgage portfolio to $9.6 billion in the Second Quarter, feeding more loans into the securitization process and, ultimately, investments into the mortgage securities portfolio. The mortgage loan portfolio (NovaStar's loan holdings, both pre- and post-securitization) generated $53.7 million in income during the Second Quarter, an increase of 31 percent over Second Quarter 2003 and 7 percent over First Quarter 2004. NovaStar's higher earnings were attributed to the increased size of the mortgage portfolio, partially offset by lower interest income as a result of rising short-term interest rates.

"Our mortgage loan portfolio provides substantially all of NovaStar's income and drives the Company's dividends," said Mr. Hartman. "Given current production trends, we expect our mortgage loan portfolio to reach approximately $12 billion by the end of 2004, about 50 percent higher than at year-end 2003."

"Our mortgage production remains strong, despite a significant rise in interest rates. In fact, June was the highest loan production month in NovaStar history," said NovaStar President Lance Anderson. "Recent experience reinforces our belief that the nonconforming market, where NovaStar focuses, is less cyclical than the prime mortgage segment."

Branch Operations and Productivity

The Company has been successful in concentrating on branches that produce nonconforming loans, demanding better efficiency, and eliminating less productive branches from the network.

In the Second Quarter, the branch network's originations of nonconforming loans increased to $460 million, a 78 percent increase from Second Quarter 2003 and a 12 percent increase from First Quarter 2004.

"We continue to refine the network to focus on nonconforming loans flowing into NovaStar and will be aggressive in the Third Quarter about closing less productive branches," Mr. Anderson said.

Second Quarter Earnings and 2004 Earnings Guidance

Net income available to common shareholders increased 18 percent to $34.0 million in Second Quarter 2004, compared with $28.7 million in Second Quarter 2003. Profits were up 15 percent compared with First Quarter 2004. Earnings per share (EPS), fully diluted, were $1.34 in the Second Quarter, an increase of 5 percent from the same period a year earlier, after adjustment for the stock split in late 2003. Diluted EPS were up 15 percent compared with $1.17 in First Quarter 2004.