NFI Novastar Finl

NovaStar Financial, Inc. (NYSE: NFI), a residential lender and mortgage Real Estate Investment Trust, today reported second-quarter 2006 results. The Board of Directors of NovaStar declared a common stock dividend of $1.40 per share, payable August 28, 2006, to shareholders of record as of August 14, 2006. In addition, the Board declared a quarterly dividend of $.55625 per share on NovaStar's 8.90% Class C Cumulative Redeemable Preferred Stock, payable October 2, 2006, to holders of record as of September 5, 2006. Second-quarter performance highlights: -- Diluted earnings per share available to common shareholders were $0.99, vs. $1.29 a year earlier, on 14 percent more diluted shares outstanding in the current quarter. -- Portfolio of loans under management was $15.9 billion, up 17 percent from a year earlier. -- Portfolio net interest income was $54.9 million, a return on assets of 1.41 percent. -- Annualized return on average common equity was 27.5 percent, vs. 34.0 percent a year ago. -- NovaStar originated a record $2.8 billion in nonconforming loans, up 19 percent vs. a year earlier. -- Cost of wholesale production declined 68 basis points, year over year, to 1.78 percent. "NovaStar continues to demonstrate strength in a challenging time for the mortgage industry. We delivered our highest quarterly loan production ever, and earnings benefited from reduced costs of production and higher coupons. Credit performance in the portfolio remains strong, and our proactive risk management strategies have protected the portfolio during a period of tightening interest rate policy," said Scott Hartman, Chief Executive Officer. Second-quarter net income available to common stockholders was $33.1 million, down 13 percent from $37.9 million a year earlier. Diluted earnings per share available to common stockholders were $0.99 on 14 percent more diluted shares outstanding. Portfolio net interest income was $54.9 million, down 1 percent when compared to the second quarter of 2005. Greg Metz, Senior Vice President and Chief Financial Officer, commented: "We saw positive trends in our mortgage banking business during the second quarter, with strengthening whole loan prices impacting the gain-on-sale from our 2006-2 and 2006-3 securitizations. In addition, we continued to see our cost of production decline, driven by a combination of expense controls and higher production. However, this improvement was offset somewhat by rising interest rates and the provision for credit losses associated with our 2006-1 and 2006-MTA1 on-balance sheet securitizations." Dividend Guidance Management reaffirmed its expectation that common dividends declared during calendar year 2006 will total at least $5.60 per share. As outlined in the table below, the REIT has approximately $104 million of taxable income from 2005 that remains to be distributed. NovaStar anticipates declaring both the third and fourth quarter dividends for 2006 prior to September 15, 2006, and paying these dividends in November and December. This should allow NovaStar to fully satisfy the distribution requirements for its 2005 taxable income. The payment of the dividend in December would represent an acceleration of the fourth quarter payment. Historically this dividend has been declared in December and paid in January. It should be noted that this will have no impact on the timing of taxability of the dividend for shareholders since the normal January dividend would also be taxable in 2006. Ultimately, however, 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 $175 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: 2005 dividend declarations to date applied to 2005 taxable income (175) ---------- Estimated 2005 REIT taxable income remaining to be distributed $104 *T For the first six months of 2006, estimated taxable income available to stockholders was $101 million. Portfolio Management Loans under management grew 17 percent year-over-year to $15.9 billion at June 30, 2006. Second-quarter annualized average return on assets in the portfolio was 1.41 percent, compared to 1.67 percent in the second quarter of 2005. NovaStar completed four securitizations in the second quarter. Two of these transactions, totaling $2.1 billion, were treated as a sale for accounting purposes, generating gain-on-sale income during the quarter. The other two securitizations, totaling $2.6 billion, were treated as financings for accounting purposes. Second-quarter earnings in accordance with GAAP included mark to market pretax gains of $5.6 million relating to derivative instruments and mortgage securities held in trading accounts. Also, impairments of $4.5 million were realized in the valuation of mortgage securities available-for-sale. Accounting rules for portfolio-related transactions can introduce volatility in quarterly GAAP earnings as a result of market movements, but NovaStar employs hedging to mitigate risk and manage the portfolio in the interest of long-term shareholder value. Mortgage Banking NovaStar originated $2.8 billion in nonconforming loans in the second quarter, up 19 percent from a year earlier. Wholesale production accounted for about 84 percent of the originations. Average cost of wholesale production was 1.78 percent in the quarter, down from 2.46 percent a year earlier. "We have a simple business philosophy: make good loans, minimize production costs, and target business with acceptable coupons. While continuing with the same sound practices, in a challenging business environment, we achieved production growth of 15 percent in the first half of 2006," said Lance Anderson, President and Chief Operating Officer. Excluding payment option ARM products, weighted-average coupon was 8.97 percent in the second quarter, up from 7.62 percent a year earlier. Credit quality of originations was similar to the prior-year quarter, with a weighted-average FICO score of 625 and average loan-to-value ratio of 82.4 percent. Liquidity and Borrowing Capacity NovaStar maintained strong liquidity and raised additional capital to fund the growth of its portfolio. As of June 30, 2006, NovaStar had borrowing capacity of $3.9 billion from major lenders. Cash and available liquidity totaled $190 million. Focus on Key Metrics In addition to full reporting under GAAP, NovaStar provides information on key performance metrics related to stockholder value: -0- *T Second Quarter (In thousands, except per share data) 2006 2005 Change Earnings (GAAP) Net income available to common $33,072 $37,856 -13% EPS available to common (diluted) $0.99 $1.29 -23% Return on average equity 25.0% 30.4% Return on average common equity 27.5% 34.0% REIT Taxable Income & Dividends Est. REIT taxable income $44,169 Est. REIT taxable income per common share $1.30 Dividends declared per common share $1.40 $1.40 - Lending & Originations Nonconforming loan production $2,816,586 $2,357,632 19% Cost of wholesale production (a) 1.78% 2.46% Portfolio Performance Loans under management $15,887,948 $13,607,366 17% Portfolio net interest income $54,857 $55,440 -1% Portfolio return on average assets 1.41% 1.67% Common Stock Data High market price per share $37.63 $40.40 Low market price per share $29.08 $34.06 Book value per common share (diluted) $14.26 $16.29 -12% Cash and available liquidity (mil.) $190 $343 (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 second-quarter investor conference call is scheduled for 10:00 a.m. Central time (11:00 a.m. Eastern time) on August 4, 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 call 800-289-0572 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 August 11, 2006, at 888-203-1112. The confirmation code for the replay is 4255603. About NovaStar NovaStar Financial, Inc. (NYSE: NFI) is a specialty finance company that originates, purchases, 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 and our quarterly report on form 10-Q, for the period ending March 31, 2006. 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 Wholesale Cost of Loan Production (dollars in thousands, except wholesale loan 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 Six Months For the Three Months Ended June 30, Ended June 30, ----------------------- ----------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- General and administrative expenses $ 96,853 $ 92,519 $ 51,551 $ 47,036 Mortgage portfolio management general and administrative expenses (9,026) (7,755) (4,700) (4,581) Loan servicing general and administrative expenses (18,195) (16,653) (8,594) (8,781) ----------- ----------- ----------- ----------- Mortgage lending general and administrative expenses 69,632 68,111 38,257 33,674 Direct origination costs classified as a reduction in gain-on- sale 10,928 21,427 5,322 11,206 Other lending expenses (21,493) (18,467) (12,490) (8,383) ----------- ----------- ----------- ----------- Wholesale overhead costs 59,067 71,071 31,089 36,497 Premium paid to broker, net of fees collected 18,358 27,459 12,096 15,260 ----------- ----------- ----------- ----------- Total wholesale cost of loan production $ 77,425 $ 98,530 $ 43,185 $ 51,757 =========== =========== =========== =========== Loan production, principal (A) $3,927,580 $3,808,256 $2,425,785 $2,105,236 Total cost of loan production, as a percentage 1.97% 2.59% 1.78% 2.46% ---------------------------------------------------------------------- (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. *T -0- *T ---------------------------------------------------------------------- NovaStar Financial, Inc. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (dollars in thousands, except per share amounts) (unaudited) For the For the Three Months Ended Six Months Ended -------------------------------- --------------------- 6/30/2006 3/31/2006 6/30/2005 6/30/2006 6/30/2005 ---------- ---------- ---------- ---------- ---------- NovaStar Financial, Inc. Income Statement Data Interest income $124,954 $78,233 $71,012 $203,187 $132,988 Interest expense 65,262 26,929 16,995 92,191 33,561 Fee income 6,888 7,570 8,119 14,458 17,397 Gains on sales of mortgage assets 23,285 34 32,525 23,319 50,771 Gains (losses) on derivative instruments 6,140 8,591 (7,848) 14,731 6,753 Impairment on mortgage securities available-for- sale (4,488) (1,965) (126) (6,453) (1,738) General and administrative expenses 51,551 45,302 47,036 96,853 92,519 Income from continuing operations before tax expense (benefit) 41,852 21,353 43,293 63,205 86,015 Income tax expense (benefit) 5,848 (4,326) (519) 1,522 2,406 Income from continuing operations 36,004 25,679 43,812 61,683 83,609 Loss from discontinued operations, net of income tax (1,269) (1,651) (4,293) (2,920) (8,887) Preferred dividends (1,663) (1,663) (1,663) (3,326) (3,326) Net income available to common shareholders 33,072 22,365 37,856 55,437 71,396 Basic earnings per share Income from continuing operations available to common shareholders $1.04 $0.74 $1.46 $1.78 $2.83 Loss from discontinued operations, net of income tax $(0.04) $(0.05) $(0.15) $(0.09) $(0.31) Net income available to common shareholders $1.00 $0.69 $1.31 $1.69 $2.52 Diluted earnings per share Income from continuing operations available to common shareholders $1.03 $0.74 $1.44 $1.77 $2.80 Loss from discontinued operations, net of income tax $(0.04) $(0.05) $(0.15) $(0.09) $(0.31) Net income available to common shareholders $0.99 $0.69 $1.29 $1.68 $2.49 Dividends declared per common share $1.40 $1.40 $1.40 $2.80 $2.80 Dividends declared per preferred share $0.56 $0.56 $0.56 $1.12 $1.12 Book value per diluted share $14.26 $14.30 $16.29 $14.26 $16.29 As of ---------------------------------- 6/30/2006 3/31/2006 6/30/2005 ----------- ---------- ----------- NovaStar Financial, Inc. Balance Sheet Data Mortgage loans - held for sale $1,490,495 $890,704 $1,074,108 Mortgage loans - held in portfolio 2,454,759 2,526,966 48,569 Mortgage securities - available for sale 429,972 445,395 543,911 Mortgage securities - trading 118,765 54,280 - Total assets 5,069,922 4,263,920 2,149,092 Borrowings 4,344,662 3,563,587 1,443,152 Stockholders' equity 564,406 546,227 580,619 For the Three Months Ended -------------------------------------- 6/30/2006 3/31/2006 6/30/2005 ------------ ------------ ------------ Other Data: Servicing portfolio $15,887,948 $15,129,446 $13,607,366 Nonconforming loans sold to third parties $434,065 $358,991 $227,195 Loans securitized in transactions structured as sales $1,711,844 $378,944 $1,649,289 Loans securitized in transactions structured as financings $2,425,370 - - Percent of securitized loans covered by mortgage insurance 55% 54% 48% Weighted average coupon of mortgage loans - held for sale 8.70% 8.55% 7.52% Weighted average coupon of mortgage loans - held in portfolio 8.08% 7.95% 10.00% For the Six Months Ended ------------------------- 6/30/2006 6/30/2005 ------------ ------------ Other Data: Servicing portfolio $15,887,948 $13,607,366 Nonconforming loans sold to third parties $793,056 $227,195 Loans securitized in transactions structured as sales $2,090,788 $3,749,289 Loans securitized in transactions structured as financings $2,425,370 - Percent of securitized loans covered by mortgage insurance 55% 48% Weighted average coupon of mortgage loans - held for sale 8.70% 7.52% Weighted average coupon of mortgage loans - held in portfolio 8.08% 10.00% ---------------------------------------------------------------------- *T -0- *T ---------------------------------------------------------------------- NovaStar Financial, Inc. LOAN ORIGINATION DATA (dollars in thousands) (unaudited) For the Three Months Ended -------------------------------- As a % of 6/30/2006 Total 3/31/2006 (A) ----------- ------ ------------- Non-conforming loan origination volume Non-conforming Wholesale (B) $2,363,205 84% $1,473,521 Correspondent/Bulk (B) 198,810 7% 112,614 Retail 254,571 9% 248,690 ----------- ------ ------------- Total non-conforming production volume 2,816,586 100% 1,834,825 =========== ====== ============= # of funding days in the quarter 64 62 =========== ============= Average originations per funding day $44,009 $29,594 =========== ============= Retail loan origination volume Non-conforming Sold to non-affiliates $38,412 12% $47,440 Held by NMI 254,571 77% 248,690 ----------- ------ ------------- Total non-conforming 292,983 89% 296,130 ----------- ------ ------------- Conforming 37,298 11% 66,747 ----------- ------ ------------- Total retail production volume $330,281 100% $362,877 =========== ====== ============= For the Three Months Ended -------------------------- As a % As a % of of Total 6/30/2005 Total ------ ----------- ------ Non-conforming loan origination volume Non-conforming Wholesale (B) 80% $1,872,385 79% Correspondent/Bulk (B) 6% 83,501 4% Retail 14% 401,746 17% ------ ----------- ------ Total non-conforming production volume 100% 2,357,632 100% ====== =========== ====== # of funding days in the quarter 64 =========== Average originations per funding day $36,838 =========== Retail loan origination volume Non-conforming Sold to non-affiliates 13% $151,226 21% Held by NMI 69% 401,746 56% ------ ----------- ------ Total non-conforming 82% 552,972 77% ------ ----------- ------ Conforming 18% 160,988 23% ------ ----------- ------ Total retail production volume 100% $713,960 100% ====== =========== ====== --------------------------------------------------------------------- (A) Does not include approximately $991 million in bulk purchased MTA loans during the period. (B) Starting in April of 2006 correspondent loans purchased on a flow basis are being included in the wholesale channel. Prior periods have been reclassified to reflect this change. ---------------------------------------------------------------------- For the Three Months Ended 6/30/06 ---------------------------------- Weighted Weighted Weighted Percent Average Average Average of Coupon LTV FICO Total -------- -------- -------- ------- Summary by Credit Grade 660 and above 7.67% 83.2% 701 29% 620 to 659 8.55% 83.3% 639 22% 580 to 619 9.04% 83.4% 598 25% 540 to 579 9.43% 80.8% 559 16% 539 and below 9.85% 77.4% 527 8% ------- 8.66% 82.4% 625 100% ======== ======== ======== ======= Summary by Program Type 2-Year Fixed 9.20% 83.1% 606 48% 2-Year Fixed Interest-only 8.16% 81.2% 659 13% 3-Year Fixed 8.58% 77.2% 615 1% 3-Year Fixed Interest-only 8.12% 81.0% 658 0% 5-Year Fixed 7.95% 75.0% 643 0% 5-Year Fixed Interest-only 7.52% 74.9% 680 0% 15-Year Fixed 9.44% 80.9% 643 1% 30-Year Fixed 8.55% 76.8% 621 11% 30-Year Fixed Interest-only 7.86% 75.2% 648 1% Other Products 9.21% 85.8% 631 21% Option ARM (MTA) 1.95% 78.3% 700 4% ------- 8.66% 82.4% 625 100% ======== ======== ======== ======= Weighted Average Coupon 8.97% ======== ---------------------------------------------------------------------- *T