NFI Novastar Finl

NovaStar Financial, Inc. (NYSE:NFI), a residential lender and mortgage Real Estate Investment Trust, today reported third quarter 2006 results. Third quarter net income available to common shareholders� was $25.3 million or $0.73 per diluted share versus $34.6 million, or $1.12 per diluted share for the comparable period in 2005. Third Quarter Results and Highlights: NovaStar declared common dividends of $1.40 per share payable on November 30, 2006 and December 29, 2006 Nonprime originations were a record $2.9 billion, up 6% vs. a year earlier Cost of wholesale production declined by 39 basis points, year over year, to 1.79% Portfolio of loans under management was $16.4 billion, up 16% from a year earlier and 3% from the second quarter Portfolio net interest income was $45.9 million, representing a return on assets of 1.12% Scott Hartman, NovaStar�s Chief Executive Officer commented: �During the third quarter we took several steps to prepare for a more adverse credit market. First, we increased reserves for our on-balance sheet transactions. Second, we increased reserves for loan repurchases from our whole loan sales. Third, we increased loss assumptions in our mortgage securities portfolio, resulting in some impairments and a reduction in unrealized gains.� In the third quarter, net income available to common shareholders� was negatively affected by several significant items: Net Earnings Income per Share Loss provision for whole loan repurchases $ 3,214� $ 0.09� Loss on derivatives held in trading account 1,954� 0.06� Mortgage securities impairments 6,072� 0.18� Early declaration of Q4 Preferred dividend 1,663� 0.05� Greg Metz, Senior Vice President and Chief Financial Officer commented: �We have observed an increase in repurchase requests from whole loan buyers and as a result, have added to our loss provision to reflect this trend. "In addition, we recorded impairments on certain securities held by our taxable REIT subsidiary (TRS). As previously discussed in our first quarter 2006 investor conference call, we transferred securities representing cash flow hedges to our TRS for REIT qualification reasons. Because swap rates decreased during the quarter, these securities were impaired with the impact reflected in our income statement. Offsetting gains in the securities collateralized by mortgages and held in the REIT are reflected in other comprehensive income.� Dividends On September 11, 2006, the Board of Directors of NovaStar announced the declaration of remaining common and preferred dividends for 2006: a common stock dividend of $1.40 per share, payable November 30, 2006, to shareholders of record as of November 20, 2006 a common stock dividend of $1.40 per share, payable December 29, 2006, to shareholders of record as of December 19, 2006 a quarterly dividend of $.55625 per share on NovaStar�s 8.90% Class C Cumulative Redeemable Preferred Stock, payable January 2, 2007, to holders of record as of December 5, 2006 NovaStar anticipates these common dividends will fully satisfy a 100% distribution of its 2005 taxable income. The payment of the common dividend in December will represent an acceleration of the fourth quarter payment. Historically this dividend has been declared in December and paid in January. Greg Metz further commented: �Our fourth quarter 2006 preferred dividend is payable in January of 2007, and would typically reduce income available to common shareholders� in the fourth quarter. Because we declared this dividend in the third quarter, it is reflected in our third quarter results and reduces income available to common shareholders� for the third quarter by $1.7 million, or approximately $0.05 per diluted share. Also, it should be noted that in the fourth quarter we will not record a charge for preferred dividends. "The early declaration of our common dividend had a similar effect on ending shareholders� equity in the third quarter. In the normal course of business, we accrue for our anticipated quarterly common dividend distribution. As such, our ending book value reflects our financial position as if the corresponding quarterly dividend had been declared in the quarter. However, given the early declaration of our fourth quarter 2006 common dividend, ending shareholders� equity for the third quarter includes a charge of $50.8 million for our estimated fourth quarter dividend distribution. The impact to book value per diluted share was $1.39.� Portfolio Management Loans under management grew 16% year-over-year to $16.4 billion at September 30, 2006. Third-quarter annualized average return on assets in the portfolio was 1.12%, compared to 1.81% in the third quarter of 2005. Pre-tax impairments of $6.8 million were taken on portfolio assets due to both increased loss assumptions and a decrease in interest rates, as derivative contracts used to hedge interest rate volatility lost value due to lower swap rates. In addition, loss reserves for the company�s on-balance sheet portfolio were increased by $7.8 million during the third quarter. Mortgage Banking NovaStar originated $2.9 billion in nonprime loans in the second quarter, up 6% from a year earlier. Wholesale production accounted for about 91% of the originations. Average cost of wholesale production was 1.79% in the quarter, down from 2.18% a year earlier. Excluding payment option ARM products, weighted-average coupon was 9.23% in the third quarter, up from 7.50% a year earlier. Credit quality of originations was similar to the prior-year quarter, with a weighted-average FICO score of 623 and average loan-to-value ratio of 83%. In the third quarter, NovaStar completed two securitizations, NMFT 2006-4 and NMFT 2006-5 and closed the final pre-funding for both NMFT 2006-MTA1 and NMFT 2006-3. NMFT 2006-3, NMFT 2006-4 and NMFT 2006-5 were treated as a sale for accounting purposes, generating gain-on-sale income in the third quarter of $26.1 million, on total loan sales of $2.2 billion. The final pre-funding for NMFT 2006-5 of approximately $560 million, closed on October 20, 2006. The company also sold $694 million of loans into the secondary market for a $4.9 million gain, net of reserves. Liquidity and Borrowing Capacity NovaStar maintained strong liquidity and raised additional capital to fund the growth of its portfolio. As of September 30, 2006, NovaStar had borrowing capacity of $4.3 billion from major lenders. Cash and available liquidity totaled $246 million. Focus on Key Metrics In addition to full reporting under GAAP, NovaStar provides information on key performance metrics related to stockholder value: Third Quarter (Unaudited) 2006� 2005� Change � Earnings (GAAP) Net Income available to common $ 25,252� $ 34,630� -27% EPS available to common (diluted) $ 0.73� $ 1.12� -35% Return on average common equity 21.1% 28.0% � REIT Taxable Income & Dividends Est. REIT taxable income available to common $ 59,130� $ 62,105� -5% Est. REIT taxable income per common share $ 1.63� $ 2.02� -19% Dividends declared per common share $ 2.80� $ 1.40� � Mortgage Banking � Lending & Originations Nonconforming loan production $ 2,935,879� $ 2,779,316� 6% Cost of wholesale production(a) 1.79% 2.18% � Loan Sales and Securitizations Nonprime whole loan sales $ 693,776� $ 490,067� 42% Gain on nonprime whole loan sales 4,948� 4,253� 16% Mortgage loans securitized 2,174,900� 2,140,171� 2% Gain on loans securitized 26,051� 7,304� 257% � Portfolio Management � Asset Performance Loans under management $ 16,355,553� $ 14,094,048� 16% Portfolio net interest income 45,911� 63,241� -27% Portfolio return on average assets 1.12% 1.81% � Common Stock Data and Liquidity High market price per share $ 35.60� $ 42.55� Low market price per share 28.25� 30.50� Book value per common share (diluted) 12.80� 15.52� -18% Cash and available liquidity (mil.) $ 246� $ 264� � (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. The NovaStar third quarter investor conference call is scheduled for 9:00 a.m. Central time (10:00 a.m. Eastern time) on November 8, 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 1-888-802-2278 approximately 15 minutes before the scheduled start of the call. For investors unable to participate in the live event, a replay will be available until November 15, 2006 at 1-888-203-1112. The confirmation code for the replay is 4502262. A copy of the presentation is currently available on the website. About NovaStar NovaStar Financial, Inc. (NYSE: NFI) is a specialty finance company that originates, purchases, invests in and services residential nonprime 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; compliance with new accounting pronouncements; 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 September 30, 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. 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 Nine Months For the Three Months Ended September 30, Ended September 30, � 2006� � 2005� � 2006� � 2005� General and administrative expenses $ 147,671� 140,666� $ 49,052� 44,409� Mortgage portfolio management general and administrative expenses (11,666) (11,929) (2,640) (4,174) Loan servicing general and administrative expenses � (25,866) � (25,185) � (7,671) � (8,531) Mortgage lending general and administrative expenses 110,139� 103,552� 38,741� 31,704� Direct origination costs classified as a reduction in gain-on-sale 16,201� 29,565� 5,273� 11,497� Other lending expenses � (35,195) � (27,627) � (11,953) � (8,782) Wholesale overhead costs 91,145� 105,490� 32,061� 34,419� Premium paid to broker, net of fees collected � 32,819� � 44,593� � 14,461� � 17,134� Total wholesale cost of loan production $ 123,964� $ 150,083� $ 46,522� $ 51,553� � Wholesale loan production, principal (A) $ 6,531,096� $ 6,173,552� $ 2,603,516� $ 2,365,296� Total cost of wholesale production, as a percentage � 1.90% � � 2.43% � � 1.79% � � 2.18% (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. NovaStar Financial, Inc. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (dollars in thousands, except per share amounts) (unaudited) � For the Three Months Ended For the Nine Months Ended 9/30/2006� 6/30/2006� 9/30/2005� 9/30/2006� 9/30/2005� NovaStar Financial, Inc. Income Statement Data � Interest income $ 138,044� $ 124,954� $ 87,878� $ 341,231� $ 220,866� Interest expense 75,366� 65,262� 25,036� 167,557� 58,597� Fee income 7,671� 6,888� 7,448� 22,129� 24,845� Gains on sales of mortgage assets 27,709� 23,285� 9,691� 51,027� 60,462� Gains (losses) on derivative instruments (6,877) 6,140� 6,522� 7,854� 13,275� Impairment on mortgage securities available-for-sale (6,796) (4,488) (8,328) (13,249) (10,066) General and administrative expenses 49,052� 51,551� 44,409� 147,671� 140,666� Income from continuing operations before tax expense (benefit) 30,298� 41,852� 36,952� 91,736� 119,229� Income tax expense (benefit) 1,813� 5,848� (1,708) 2,677� (693) Income from continuing operations 28,485� 36,004� 38,660� 89,059� 119,922� Income (loss) from discontinued operations, net of income tax 94� (1,269) (2,367) (1,717) (8,907) Preferred dividends (3,327) (1,663) (1,663) (6,653) (4,989) Net income available to common shareholders 25,252� 33,072� 34,630� 80,689� 106,026� � Basic earnings per share Income from continuing operations available to common shareholders $ 0.73� $ 1.04� $ 1.21� $ 2.47� $ 3.95� Income (loss) from discontinued operations, net of income tax $ -� $ (0.04) $ (0.08) $ (0.05) $ (0.31) Net income available to common shareholders $ 0.73� $ 1.00� $ 1.13� $ 2.42� $ 3.64� Diluted earnings per share Income from continuing operations available to common shareholders $ 0.73� $ 1.03� $ 1.20� $ 2.45� $ 3.90� Income (loss) from discontinued operations, net of income tax $ -� $ (0.04) $ (0.08) $ (0.05) $ (0.30) Net income available to common shareholders $ 0.73� $ 0.99� $ 1.12� $ 2.40� $ 3.60� Dividends declared per common share $ 2.80� $ 1.40� $ 1.40� $ 5.60� $ 4.20� Dividends declared per preferred share $ 1.11� $ 0.56� $ 0.56� $ 2.23� $ 1.67� Book value per diluted share $ 12.80� $ 14.26� $ 15.52� $ 12.80� $ 15.52� As of 9/30/2006� 6/30/2006� 9/30/2005� NovaStar Financial, Inc. Balance Sheet Data Mortgage loans - held for sale $ 1,532,755� $ 1,490,495� $ 1,231,280� Mortgage loans - held in portfolio 2,391,914� 2,454,759� 42,480� Mortgage securities - available for sale 428,787� 429,972� 541,948� Mortgage securities - trading 270,925� 118,765� -� Total assets 5,136,136� 5,069,922� 2,230,345� Borrowings 4,345,593� 4,344,662� 1,531,891� Stockholders' equity 542,648� 564,406� 557,385� For the Three Months Ended For the Nine Months Ended 9/30/2006� 6/30/2006� 9/30/2005� 9/30/2006� 9/30/2005� Other Data: Servicing portfolio $ 16,355,553� $15,887,948� $14,094,048� $16,355,553� $14,094,048� Nonconforming loans sold to third parties $ 693,777� $ 434,065� $ 490,067� $ 1,486,832� $ 717,262� Loans securitized in transactions structured as sales $ 2,174,900� $ 1,711,844� $ 2,140,171� $ 4,265,688� $ 5,889,460� Loans securitized in transactions structured as financings $ 138,690� $ 2,425,370� $ -� $ 2,564,060� $ -� Percent of securitized loans covered by mortgage insurance 52% 55% 51% 52% 51% Weighted average coupon of mortgage loans - held for sale 9.05% 8.70% 7.59% 9.05% 7.59% Weighted average coupon of mortgage loans - held in portfolio 8.23% 8.08% 10.02% 8.23% 10.02% NovaStar Financial, Inc. LOAN ORIGINATION DATA (dollars in thousands) (unaudited) � For the Three Months Ended For the Three Months Ended As a % As a % As a % 9/30/2006� of Total 6/30/2006� of Total 9/30/2005� of Total Non-conforming loan origination volume Non-conforming Wholesale (A) $ 2,671,330� 91% $ 2,363,205� 84% $2,099,238� 76% Correspondent/Bulk (A) 51,958� 2% 198,810� 7% 203,950� 7% Retail (B) 212,591� 7% 254,571� 9% 476,128� 17% Total non-conforming production volume 2,935,879� 100% 2,816,586� 100% 2,779,316� 100% � # of funding days in the quarter 63� 64� 64� Average originations per funding day $ 46,601� $ 44,009� $ 43,427� � (A) 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. � (B) Branch production volumes are considered a part of our retail operations and are included within the retail production volumes shown above. � For the Three Months Ended 9/30/06 Weighted Average Coupon Weighted Average LTV Weighted Average FICO Percent of Total � Summary by Credit Grade 660 and above 7.93% 84.5% 700� 27% 620 to 659 8.83% 84.8% 639� 23% 580 to 619 9.27% 84.4% 599� 25% 540 to 579 9.66% 81.3% 559� 17% 539 and below 10.04% 77.7% 527� 8% � 8.93% 83.4% 623� 100% � Summary by Program Type 2-Year Fixed 9.47% 83.9% 607� 46% 2-Year Fixed 40/30 8.95% 83.2% 619� 19% 30-Year Fixed 8.80% 78.4% 616� 11% 2-Year Fixed Interest-only 8.41% 83.4% 656� 11% 30/15-Year Fixed 11.49% 99.6% 660� 4% 30-Year MTA 2.00% 79.9% 699� 4% 40/30-Year Fixed 8.60% 78.3% 624� 2% Other Products 8.89% 79.7% 636� 3% � 8.93% 83.4% 623� 100% � Weighted Average Coupon without MTA 9.23% � Note: The origination data on this report includes loans secured by second mortgages. NovaStar Financial, Inc. (NYSE:NFI), a residential lender and mortgage Real Estate Investment Trust, today reported third quarter 2006 results. Third quarter net income available to common shareholders' was $25.3 million or $0.73 per diluted share versus $34.6 million, or $1.12 per diluted share for the comparable period in 2005. Third Quarter Results and Highlights: -- NovaStar declared common dividends of $1.40 per share payable on November 30, 2006 and December 29, 2006 -- Nonprime originations were a record $2.9 billion, up 6% vs. a year earlier -- Cost of wholesale production declined by 39 basis points, year over year, to 1.79% -- Portfolio of loans under management was $16.4 billion, up 16% from a year earlier and 3% from the second quarter -- Portfolio net interest income was $45.9 million, representing a return on assets of 1.12% Scott Hartman, NovaStar's Chief Executive Officer commented: "During the third quarter we took several steps to prepare for a more adverse credit market. First, we increased reserves for our on-balance sheet transactions. Second, we increased reserves for loan repurchases from our whole loan sales. Third, we increased loss assumptions in our mortgage securities portfolio, resulting in some impairments and a reduction in unrealized gains." In the third quarter, net income available to common shareholders' was negatively affected by several significant items: -0- *T Net Earnings Income per Share ------------------------ Loss provision for whole loan repurchases $3,214 $0.09 Loss on derivatives held in trading account 1,954 0.06 Mortgage securities impairments 6,072 0.18 Early declaration of Q4 Preferred dividend 1,663 0.05 *T Greg Metz, Senior Vice President and Chief Financial Officer commented: "We have observed an increase in repurchase requests from whole loan buyers and as a result, have added to our loss provision to reflect this trend. "In addition, we recorded impairments on certain securities held by our taxable REIT subsidiary (TRS). As previously discussed in our first quarter 2006 investor conference call, we transferred securities representing cash flow hedges to our TRS for REIT qualification reasons. Because swap rates decreased during the quarter, these securities were impaired with the impact reflected in our income statement. Offsetting gains in the securities collateralized by mortgages and held in the REIT are reflected in other comprehensive income." Dividends On September 11, 2006, the Board of Directors of NovaStar announced the declaration of remaining common and preferred dividends for 2006: -- a common stock dividend of $1.40 per share, payable November 30, 2006, to shareholders of record as of November 20, 2006 -- a common stock dividend of $1.40 per share, payable December 29, 2006, to shareholders of record as of December 19, 2006 -- a quarterly dividend of $.55625 per share on NovaStar's 8.90% Class C Cumulative Redeemable Preferred Stock, payable January 2, 2007, to holders of record as of December 5, 2006 NovaStar anticipates these common dividends will fully satisfy a 100% distribution of its 2005 taxable income. The payment of the common dividend in December will represent an acceleration of the fourth quarter payment. Historically this dividend has been declared in December and paid in January. Greg Metz further commented: "Our fourth quarter 2006 preferred dividend is payable in January of 2007, and would typically reduce income available to common shareholders' in the fourth quarter. Because we declared this dividend in the third quarter, it is reflected in our third quarter results and reduces income available to common shareholders' for the third quarter by $1.7 million, or approximately $0.05 per diluted share. Also, it should be noted that in the fourth quarter we will not record a charge for preferred dividends. "The early declaration of our common dividend had a similar effect on ending shareholders' equity in the third quarter. In the normal course of business, we accrue for our anticipated quarterly common dividend distribution. As such, our ending book value reflects our financial position as if the corresponding quarterly dividend had been declared in the quarter. However, given the early declaration of our fourth quarter 2006 common dividend, ending shareholders' equity for the third quarter includes a charge of $50.8 million for our estimated fourth quarter dividend distribution. The impact to book value per diluted share was $1.39." Portfolio Management Loans under management grew 16% year-over-year to $16.4 billion at September 30, 2006. Third-quarter annualized average return on assets in the portfolio was 1.12%, compared to 1.81% in the third quarter of 2005. Pre-tax impairments of $6.8 million were taken on portfolio assets due to both increased loss assumptions and a decrease in interest rates, as derivative contracts used to hedge interest rate volatility lost value due to lower swap rates. In addition, loss reserves for the company's on-balance sheet portfolio were increased by $7.8 million during the third quarter. Mortgage Banking NovaStar originated $2.9 billion in nonprime loans in the second quarter, up 6% from a year earlier. Wholesale production accounted for about 91% of the originations. Average cost of wholesale production was 1.79% in the quarter, down from 2.18% a year earlier. Excluding payment option ARM products, weighted-average coupon was 9.23% in the third quarter, up from 7.50% a year earlier. Credit quality of originations was similar to the prior-year quarter, with a weighted-average FICO score of 623 and average loan-to-value ratio of 83%. In the third quarter, NovaStar completed two securitizations, NMFT 2006-4 and NMFT 2006-5 and closed the final pre-funding for both NMFT 2006-MTA1 and NMFT 2006-3. NMFT 2006-3, NMFT 2006-4 and NMFT 2006-5 were treated as a sale for accounting purposes, generating gain-on-sale income in the third quarter of $26.1 million, on total loan sales of $2.2 billion. The final pre-funding for NMFT 2006-5 of approximately $560 million, closed on October 20, 2006. The company also sold $694 million of loans into the secondary market for a $4.9 million gain, net of reserves. Liquidity and Borrowing Capacity NovaStar maintained strong liquidity and raised additional capital to fund the growth of its portfolio. As of September 30, 2006, NovaStar had borrowing capacity of $4.3 billion from major lenders. Cash and available liquidity totaled $246 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 Third Quarter (Unaudited) 2006 2005 Change Earnings (GAAP) Net Income available to common $25,252 $34,630 -27% EPS available to common (diluted) $0.73 $1.12 -35% Return on average common equity 21.1% 28.0% REIT Taxable Income & Dividends Est. REIT taxable income available to common $59,130 $62,105 -5% Est. REIT taxable income per common share $1.63 $2.02 -19% Dividends declared per common share $2.80 $1.40 Mortgage Banking - Lending & Originations Nonconforming loan production $2,935,879 $2,779,316 6% Cost of wholesale production(a) 1.79% 2.18% Loan Sales and Securitizations Nonprime whole loan sales $693,776 $490,067 42% Gain on nonprime whole loan sales 4,948 4,253 16% Mortgage loans securitized 2,174,900 2,140,171 2% Gain on loans securitized 26,051 7,304 257% Portfolio Management - Asset Performance Loans under management $16,355,553 $14,094,048 16% Portfolio net interest income 45,911 63,241 -27% Portfolio return on average assets 1.12% 1.81% Common Stock Data and Liquidity High market price per share $35.60 $42.55 Low market price per share 28.25 30.50 Book value per common share (diluted) 12.80 15.52 -18% Cash and available liquidity (mil.) $246 $264 (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 third quarter investor conference call is scheduled for 9:00 a.m. Central time (10:00 a.m. Eastern time) on November 8, 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 1-888-802-2278 approximately 15 minutes before the scheduled start of the call. For investors unable to participate in the live event, a replay will be available until November 15, 2006 at 1-888-203-1112. The confirmation code for the replay is 4502262. A copy of the presentation is currently available on the website. About NovaStar NovaStar Financial, Inc. (NYSE: NFI) is a specialty finance company that originates, purchases, invests in and services residential nonprime 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; compliance with new accounting pronouncements; 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 September 30, 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 Nine Months For the Three Months Ended September 30, Ended September 30, ----------------------- ----------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- General and administrative expenses $ 147,671 140,666 $ 49,052 44,409 Mortgage portfolio management general and administrative expenses (11,666) (11,929) (2,640) (4,174) Loan servicing general and administrative expenses (25,866) (25,185) (7,671) (8,531) ----------- ----------- ----------- ----------- Mortgage lending general and administrative expenses 110,139 103,552 38,741 31,704 Direct origination costs classified as a reduction in gain-on- sale 16,201 29,565 5,273 11,497 Other lending expenses (35,195) (27,627) (11,953) (8,782) ----------- ----------- ----------- ----------- Wholesale overhead costs 91,145 105,490 32,061 34,419 Premium paid to broker, net of fees collected 32,819 44,593 14,461 17,134 ----------- ----------- ----------- ----------- Total wholesale cost of loan production $ 123,964 $ 150,083 $ 46,522 $ 51,553 =========== =========== =========== =========== Wholesale loan production, principal (A) $6,531,096 $6,173,552 $2,603,516 $2,365,296 Total cost of wholesale production, as a percentage 1.90% 2.43% 1.79% 2.18% ---------------------------------------------------------------------- (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 Nine Months For the Three Months Ended Ended -------------------------------- --------------------- 9/30/2006 6/30/2006 9/30/2005 9/30/2006 9/30/2005 ---------- ---------- ---------- ---------- ---------- NovaStar Financial, Inc. Income Statement Data Interest income $138,044 $124,954 $87,878 $341,231 $220,866 Interest expense 75,366 65,262 25,036 167,557 58,597 Fee income 7,671 6,888 7,448 22,129 24,845 Gains on sales of mortgage assets 27,709 23,285 9,691 51,027 60,462 Gains (losses) on derivative instruments (6,877) 6,140 6,522 7,854 13,275 Impairment on mortgage securities available-for- sale (6,796) (4,488) (8,328) (13,249) (10,066) General and administrative expenses 49,052 51,551 44,409 147,671 140,666 Income from continuing operations before tax expense (benefit) 30,298 41,852 36,952 91,736 119,229 Income tax expense (benefit) 1,813 5,848 (1,708) 2,677 (693) Income from continuing operations 28,485 36,004 38,660 89,059 119,922 Income (loss) from discontinued operations, net of income tax 94 (1,269) (2,367) (1,717) (8,907) Preferred dividends (3,327) (1,663) (1,663) (6,653) (4,989) Net income available to common shareholders 25,252 33,072 34,630 80,689 106,026 Basic earnings per share Income from continuing operations available to common shareholders $0.73 $1.04 $1.21 $2.47 $3.95 Income (loss) from discontinued operations, net of income tax $- $(0.04) $(0.08) $(0.05) $(0.31) Net income available to common shareholders $0.73 $1.00 $1.13 $2.42 $3.64 Diluted earnings per share Income from continuing operations available to common shareholders $0.73 $1.03 $1.20 $2.45 $3.90 Income (loss) from discontinued operations, net of income tax $- $(0.04) $(0.08) $(0.05) $(0.30) Net income available to common shareholders $0.73 $0.99 $1.12 $2.40 $3.60 Dividends declared per common share $2.80 $1.40 $1.40 $5.60 $4.20 Dividends declared per preferred share $1.11 $0.56 $0.56 $2.23 $1.67 Book value per diluted share $12.80 $14.26 $15.52 $12.80 $15.52 *T -0- *T As of ----------------------------------- 9/30/2006 6/30/2006 9/30/2005 ----------- ----------- ----------- NovaStar Financial, Inc. Balance Sheet Data Mortgage loans - held for sale $1,532,755 $1,490,495 $1,231,280 Mortgage loans - held in portfolio 2,391,914 2,454,759 42,480 Mortgage securities - available for sale 428,787 429,972 541,948 Mortgage securities - trading 270,925 118,765 - Total assets 5,136,136 5,069,922 2,230,345 Borrowings 4,345,593 4,344,662 1,531,891 Stockholders' equity 542,648 564,406 557,385 *T -0- *T For the Three Months Ended ---------------------------------------- 9/30/2006 6/30/2006 9/30/2005 -------------- ------------ ------------ Other Data: Servicing portfolio $16,355,553 $15,887,948 $14,094,048 Nonconforming loans sold to third parties $693,777 $434,065 $490,067 Loans securitized in transactions structured as sales $2,174,900 $1,711,844 $2,140,171 Loans securitized in transactions structured as financings $138,690 $2,425,370 $- Percent of securitized loans covered by mortgage insurance 52% 55% 51% Weighted average coupon of mortgage loans - held for sale 9.05% 8.70% 7.59% Weighted average coupon of mortgage loans - held in portfolio 8.23% 8.08% 10.02% For the Nine Months Ended ---------------------------- 9/30/2006 9/30/2005 ------------- -------------- Other Data: Servicing portfolio $16,355,553 $14,094,048 Nonconforming loans sold to third parties $1,486,832 $717,262 Loans securitized in transactions structured as sales $4,265,688 $5,889,460 Loans securitized in transactions structured as financings $2,564,060 $- Percent of securitized loans covered by mortgage insurance 52% 51% Weighted average coupon of mortgage loans - held for sale 9.05% 7.59% Weighted average coupon of mortgage loans - held in portfolio 8.23% 10.02% *T -0- *T NovaStar Financial, Inc. LOAN ORIGINATION DATA (dollars in thousands) (unaudited) For the Three Months Ended ------------------------------------- As a % As a % of of 9/30/2006 Total 6/30/2006 Total ----------- ------ ----------- ------ Non-conforming loan origination volume Non-conforming Wholesale (A) $2,671,330 91% $2,363,205 84% Correspondent/Bulk (A) 51,958 2% 198,810 7% Retail (B) 212,591 7% 254,571 9% ----------- ------ ----------- ------ Total non-conforming production volume 2,935,879 100% 2,816,586 100% =========== ====== =========== ====== # of funding days in the quarter 63 64 =========== =========== Average originations per funding day $46,601 $44,009 =========== =========== For the Three Months Ended -------------------------- As a % 9/30/2005 of Total ------------- ----------- Non-conforming loan origination volume Non-conforming Wholesale (A) $2,099,238 76% Correspondent/Bulk (A) 203,950 7% Retail (B) 476,128 17% ------------- ----------- Total non-conforming production volume 2,779,316 100% ============= =========== # of funding days in the quarter 64 ============= Average originations per funding day $43,427 ============= (A) 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. (B) Branch production volumes are considered a part of our retail operations and are included within the retail production volumes shown above. *T -0- *T For the Three Months Ended 9/30/06 --------------------------------------- Weighted Weighted Weighted Percent Average Average Average of Coupon LTV FICO Total --------- --------- -------- ------- Summary by Credit Grade 660 and above 7.93% 84.5% 700 27% 620 to 659 8.83% 84.8% 639 23% 580 to 619 9.27% 84.4% 599 25% 540 to 579 9.66% 81.3% 559 17% 539 and below 10.04% 77.7% 527 8% ------- 8.93% 83.4% 623 100% ========= ========= ======== ======= Summary by Program Type 2-Year Fixed 9.47% 83.9% 607 46% 2-Year Fixed 40/30 8.95% 83.2% 619 19% 30-Year Fixed 8.80% 78.4% 616 11% 2-Year Fixed Interest-only 8.41% 83.4% 656 11% 30/15-Year Fixed 11.49% 99.6% 660 4% 30-Year MTA 2.00% 79.9% 699 4% 40/30-Year Fixed 8.60% 78.3% 624 2% Other Products 8.89% 79.7% 636 3% ------- 8.93% 83.4% 623 100% ========= ========= ======== ======= Weighted Average Coupon without MTA 9.23% ========= Note: The origination data on this report includes loans secured by second mortgages. *T