NovaStar Financial Announces 2004 Results As Mortgage Loan Portfolio Continues to Grow

Business Wire, Feb 8, 2005

KANSAS CITY, Mo. -- NovaStar Financial, Inc. (NYSE:NFI), a residential lender and mortgage Real Estate Investment Trust, reported 2004 net income available to common shareholders of $109 million, down 3 percent from record earnings of $112 million in 2003. Earnings per share were $4.24 in 2004, on a larger number of shares outstanding, down 14 percent from $4.91 per share in 2003. The company's portfolio of mortgage loans under management increased to $12.2 billion at year-end 2004, up 69 percent from $7.2 billion a year earlier. Net interest income on the portfolio was $147 million for the full year, up 25 percent compared with $118 million in 2003.

Net income available to common shareholders in the fourth quarter of 2004 was $23 million, down 35 percent from $35 million a year earlier. Earnings per share were $0.85, down 41 percent from $1.45 per share in the prior-year period. Although market conditions and the interest rate environment in the fourth quarter of 2004 were more challenging than the very favorable conditions in 2003, NovaStar's performance was solid. Net income for the 2004 fourth quarter represented a return on average common equity of 27.6 percent, compared with 52.5 percent for the comparable prior-year quarter.

"NovaStar again achieved significant growth in loans under management during the period, generating record portfolio income and dividends," said Scott Hartman, Chief Executive Officer. "In addition, we made the key investments in personnel and infrastructure necessary to help us attain our goal of a $50 billion mortgage portfolio, he added."

Highlights of fourth-quarter 2004 performance:

--A quarterly dividend of $1.40 per common share, plus a special dividend of $1.25 per share, which were paid January 14, 2005, resulting in a record $6.75 per share of dividends distributed for 2004.

--Production of $2.2 billion in nonconforming loans, up 41 percent from the fourth quarter of 2003.

--Portfolio net interest income of $39 million, an increase of 27 percent from a year earlier.

--Annualized return on average assets in the portfolio of 1.34 percent in the fourth quarter, compared with 1.88 percent on a smaller portfolio a year earlier.

Focus on Key Metrics

"Although 2004 presented challenges, our core business was strong. Buoyed by record production levels in the nonconforming mortgage market, we added $8.4 billion of value-creating assets to our mortgage portfolio, the most productive year in NovaStar's history. As a result, the portfolio increased by 69 percent, leading to a 34 percent increase in dividends declared during the year," said Greg Metz, Senior Vice President and Chief Financial Officer. "A volatile rate environment contributed to declines in earnings as measured by GAAP, because of non-cash impairments in our mortgage securities portfolio and the gain associated with securitization," Metz added.

In addition to full reporting under GAAP, NovaStar began providing information in 2004 on key performance metrics related to shareholder value:

Summary of Key Performance Metrics
               (unaudited)
                                                   Fourth Quarter
(In thousands, except per share data)           2004       2003 Change

Earnings (GAAP) & Dividends
 Net Income available to common              $22,786    $35,208   -35%

 EPS available to common (diluted)             $0.85      $1.45   -41%
 Return on average equity                       24.3%      52.5%
 Return on average common equity                27.6%      52.5%

 Dividends declared per common share           $2.65      $1.25   112%

Lending & Originations

 Nonconforming loan production            $2,235,029 $1,587,357    41%
 Cost of wholesale production                   2.66%      2.42%

Portfolio Performance
 Portfolio loans under management        $12,151,196 $7,206,113    69%
 Portfolio net interest income                39,271     30,979    27%
 Portfolio return on average assets             1.34%      1.88%

Common Stock Data
 High market price per share                  $56.82     $45.25
 Low market price per share                   $41.34     $29.87
 Book value per common share (diluted)        $12.63     $11.94     6%


Summary of Key Performance Metrics
               (unaudited)
                                           Twelve Months Ended Dec. 31
(In thousands, except per share data)           2004       2003 Change

Earnings (GAAP) & Dividends
 Net Income available to common             $109,124   $111,996    -3%

 EPS available to common (diluted)             $4.24      $4.91   -14%
 Return on average equity                       31.7%      46.3%
 Return on average common equity                33.3%      46.3%

 Dividends declared per common share           $6.75      $5.04    34%

Lending & Originations

 Nonconforming loan production            $8,424,361 $5,250,978    60%
 Cost of wholesale production                   2.53%      2.40%

Portfolio Performance
 Portfolio loans under management        $12,151,196 $7,206,113    69%
 Portfolio net interest income               147,057    117,654    25%
 Portfolio return on average assets             1.53%      2.25%

Common Stock Data
 High market price per share                  $67.49     $45.25
 Low market price per share                   $30.97     $14.30
 Book value per common share (diluted)        $12.63     $11.94     6%