Novation Companies (NOVCQ) 8-K NovaStar Financial Announces 2004 Results

Exhibit 99.1

NovaStar Financial Announces 2004 Results

As Mortgage Loan Portfolio Continues to Grow

KANSAS CITY, Mo. – February 8, 2005 – 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								Twelve Months Ended Dec. 31
(In thousands, except per share data)	2004			2003			Change		2004			2003			Change
Earnings (GAAP) & Dividends
Net Income available to common	$	22,786		$	35,208		-35	%	$	109,124		$	111,996		-3	%
EPS available to common (diluted)	$	0.85		$	1.45		-41	%	$	4.24		$	4.91		-14	%
Return on average equity		24.3	%		52.5	%				31.7	%		46.3	%
Return on average common equity		27.6	%		52.5	%				33.3	%		46.3	%
Dividends declared per common share	$	2.65		$	1.25		112	%	$	6.75		$	5.04		34	%
Lending & Originations
Nonconforming loan production	$	2,235,029		$	1,587,357		41	%	$	8,424,361		$	5,250,978		60	%
Cost of wholesale production		2.66	%		2.42	%				2.53	%		2.40	%
Portfolio Performance
Portfolio loans under management	$	12,151,196		$	7,206,113		69	%	$	12,151,196		$	7,206,113		69	%
Portfolio net interest income		39,271			30,979		27	%		147,057			117,654		25	%
Portfolio return on average assets		1.34	%		1.88	%				1.53	%		2.25	%
Common Stock Data
High market price per share	$	56.82		$	45.25				$	67.49		$	45.25
Low market price per share	$	41.34		$	29.87				$	30.97		$	14.30
Book value per common share (diluted)	$	12.63		$	11.94		6	%	$	12.63		$	11.94		6	%

In addition to GAAP earnings, NovaStar evaluates quarterly performance using core earnings, a management measure that adjusts net income and EPS to exclude quarterly timing differences due to the accounting treatment of hedging and mortgage loans. Core earnings for the fourth quarter of 2004 were $17.5 million, compared with $30.6 million a year earlier. Core earnings per share available to common shareholders were $0.65, compared with $1.26 a share a year earlier. The following table shows core earnings:

	Fourth Quarter						Twelve Months Ended Dec. 31
	2004		2003		Change		2004		2003		Change
Core Earnings (Adjusted from GAAP)
Core earnings (Net income excluding hedging gain/loss)	$	17,539	$	30,599	-43	%	$	106,552	$	107,640	-1	%
Core earnings per share available to common shareholders, fully diluted	$	0.65	$	1.26	-48	%	$	4.14	$	4.72	-12	%

Dividends and Forward-Looking Guidance

In December, the Board of Directors declared a fourth-quarter dividend of $1.40 per common share and a special dividend of $1.25 per common share, which were paid on January 14, 2005. A total of $6.75 in dividends were declared in 2004.

NovaStar has begun offering forward-looking guidance on dividends. Dividends are determined based on REIT tax requirements and business trends at the time, so the guidance is subject to change as necessary. NovaStar today affirmed its previous guidance that management expects regular quarterly dividends during 2005 to total at least $5.60 per share, based on current business trends and expected carryover of taxable income from 2004.

The IRS is currently considering the issuance of new regulations that could potentially change the timing recognition of taxable income on certain of the company’s mortgage securities. NovaStar is evaluating the impact of this potential change and expects to disclose a year-end estimate of taxable income for 2004 in its Form 10-K. Based on the final determination of 2004 taxable income, the company may be required to pay special dividends in 2005.

Loan Originations and Portfolio Growth

Nonconforming mortgage originations increased 60 percent to a record $8.4 billion in 2004. Approximately 65 percent of NovaStar’s nonconforming loans in 2004 came from independent mortgage brokers, 25 percent through retail offices and 10 percent from a growing network of correspondent lenders. The company originated $2.2 billion in the fourth quarter, up 41 percent from a year earlier.

NovaStar’s portfolio of loans under management grew to $12.2 billion on December 31, 2004, a 69% increase from a year earlier.

Securitization Shows Market Support

In support of its portfolio growth, NovaStar securitized $2.5 billion in nonconforming loans in the fourth quarter, retaining non-rated securities with attractive risk-adjusted yields. The company securitized $8.3 billion in loans during 2004.

“NovaStar continues to deliver mortgage deals that perform well for bondholders, allowing us to build successful relationships with leading investment banks and institutional investors. These mortgage-backed securities provide attractive returns for the investors who fund the continued growth of our portfolio and provide non-recourse, matched funding for our shareholders,” said Michael L. Bamburg, Senior Vice President and Chief Investment Officer.

Liquidity and Borrowing Capacity

NovaStar strengthened its liquidity in the fourth quarter by raising an additional $70 million in equity capital and issuing NIMs with net proceeds of $26 million. As of December 31, 2004, NovaStar had committed borrowing capacity of $3.7 billion from major lenders. Cash and available liquidity totaled $268 million.

Investor Conference Call

The NovaStar fourth-quarter investor conference call is scheduled for 3:30 p.m. Central Time (4:30 p.m. Eastern Time) on February 8, 2005. The conference call will be web cast live and will be archived on the company’s website. In order to participate in the call, contact 1-800-565-5442 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 February 15 at 1-888-203-1112. The conformation code for the replay is 919782.

About NovaStar

NovaStar Financial, Inc. (NYSE:NFI) is one of the nation’s leading lenders and investors in residential mortgages. The company specializes in single-family, nonconforming 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 news release may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including general economic conditions, fluctuations in interest rates, fluctuations in losses due to default on the Company’s mortgage loans, the availability of nonconforming residential mortgage loans, the availability and access to financing and liquidity resources, and other risk factors outlined in the Company’s 2003 annual report on Form 10-K (available on the Company’s website or by request to the Investor Relations Contact). Other factors not presently identified may also cause actual results to differ. We continuously update and revise our estimates based on actual conditions experienced. It is not practicable to publish all such revisions and, as a result, no one should assume that results projected in or contemplated by the forward-looking statements included above will continue to be accurate in the future.

Investor Relations Contact

Jeffrey A. Gentle

816.237.7424

Media Contact

Mike Enos

816.237.7597

NovaStar Financial Inc.

Reconciliation of GAAP Income to Core Income

(Dollars in thousands, except per share data)

	2003														2004
	1Q			2Q			3Q			4Q			Year		1Q			2Q			3Q			4Q			Year
Tax effected Net Mark to Market for derivatives in trading account	$	(1,269	)	$	(2,116	)	$	(4,506	)	$	103		(7,789	)	$	(4,331	)	$	7,783		$	(2,572	)	$	2,675		$	3,556
GAAP Net Income		22,959			28,721			25,108			35,208		111,996			30,925			35,626			24,388			24,450			115,389
Preferred Dividend													—			(1,275	)		(1,663	)		(1,663	)		(1,663	)		(6,265	)
GAAP Net Income Available to Common Shareholders		22,959			28,721			25,108			35,208		111,996			29,650			33,963			22,725			22,786			109,124
Mark to Market adjustment of Derivative Instruments - previous qtr.		(4,253	)		(1,269	)		(2,116	)		(4,506	)	(12,145	)		103			(4,331	)		7,783			(2,572	)		984
Mark to Market adjustment of Derivative Instruments - current qtr.		1,269			2,116			4,506			(103	)	7,789			4,331			(7,783	)		2,572			(2,675	)		(3,556	)
Adjustment to Compute Core Income		(2,984	)		847			2,390			(4,609	)	(4,356	)		4,433			(12,114	)		10,355			(5,247	)		(2,572	)
Core Income Available to Common Shareholders (D)		19,975			29,568			27,498			30,599		107,640			34,083			21,849			33,080			17,539			106,552
Fully Diluted GAAP EPS		1.07			1.28			1.09			1.45		4.91			1.17			1.34			0.89			0.85			4.24
Fully Diluted Core EPS		0.93			1.32			1.19			1.26		4.72			1.35			0.86			1.30			0.65			4.14
Fully Diluted Shares		21,528			22,430			23,049			24,342		22,821			25,274			25,377			25,455			26,937			25,763

(D)

Core income is not a measure of income in accordance with generally accepted accounting principles (GAAP). It is calculated as GAAP income less net unrealized gains/losses on trading account derivatives, plus unrealized gains/losses on trading account derivatives from the previous reporting period. Management believes that core income can provide relevant information regarding the current earnings power of the company.

At the end of a reporting period, the Company holds mortgage loans awaiting securitization. The Company also holds derivative instruments, used to hedge interest rate risk in the mortgage loans. GAAP accounting standards require these mortgage loans to be carried on the balance sheet at the lower of cost or market, and any gain taken upon sale (next quarter). However, changes in value of the derivatives are recognized through the income statement. This creates a timing difference when the asset and hedge gain/loss are recognized in different periods.

The Company’s core income measure attempts to match the change in value of mortgage loans awaiting securitization with the change in value of derivative instruments used to hedge interest rate risk. Core income, as defined by the Company, excludes current period valuation adjustments to derivatives in its trading account and includes valuation adjustments to derivatives in its trading account from the prior reporting period. This adjustment to GAAP income essentially moves the gain/loss in its trading account derivatives into the following period when the mortgage loans being hedged are sold through securitization.

NovaStar Financial, Inc.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

(dollars in thousands, except per share amounts)

(unaudited)

	For the Three Months Ended								For the Twelve Months Ended
	12/31/2004			9/30/2004			12/31/2003(B)		12/31/2004			12/31/2003(B)
NovaStar Financial Inc. Income Statement Data
Interest income	$	60,200		$	59,789		$	46,318	$	224,024		$	170,420
Interest expense		16,790			14,350			9,965		52,590			40,364
Fee income		29,556	(A)		24,692	(A)		15,620		102,756	(A)		68,341
Gains on sales of mortgage assets		21,581			46,415			36,343		144,950			144,005
Gains (Losses) on derivative instruments		8,914			(19,536	)		1,493		(8,905	)		(30,837	)
Impairment on mortgage securities available-for-sale		(7,210	)		(2,575	)		—		(15,902	)		—
General and administrative expenses		74,822	(A)		69,862	(A)		44,059		271,125	(A)		174,408
Income before tax expense (benefit)		22,931			24,364			43,900		124,873			134,856
Income tax expense (benefit)		(1,898	)		(1,547	)		8,692		5,376			22,860
Net income from continuing operations		24,829			25,911			35,208		119,497			111,996
Net loss from discontinued operations		(379	)		(1,523	)		—		(4,108	)		—
Preferred dividends		(1,664	)		(1,663	)		—		(6,265	)		—
Net income available to common shareholders		22,786			22,725			35,208		109,124			111,996
Basic earnings per share
Net income available to common shareholders from continuing operations	$	0.87		$	0.97		$	1.49	$	4.47		$	5.04
Net loss from discontinued operations	$	(0.01	)	$	(0.06	)	$	—	$	(0.16	)	$	—
Net income available to common shareholders	$	0.86		$	0.91		$	1.49	$	4.31		$	5.04
Diluted earnings per share
Net income available to common shareholders from continuing operations	$	0.86		$	0.95		$	1.45	$	4.40		$	4.91
Net loss from discontinued operations	$	(0.01	)	$	(0.06	)	$	—	$	(0.16	)	$	—
Net income available to common shareholders	$	0.85		$	0.89		$	1.45	$	4.24		$	4.91
Dividends declared per common share	$	2.65		$	1.40		$	1.25	$	6.75		$	5.04	(C)
Dividends declared per preferred share	$	0.56		$	0.56		$	—	$	2.11		$	—
Book value per diluted share	$	12.63		$	11.70		$	11.94	$	12.63		$	11.94

(A) A primary reason for the increase in these categories from the prior year is due to the addition of branches as operating units of the Company after December 31, 2003 that formerly operated under limited liability agreements.

(B) Adjusted to reflect the change in accounting for stock based compensation as discussed in our earnings release dated December 17, 2003.

(C) On January 29, 2003, a $0.165 special dividend related to 2002 taxable income was declared per common share.

	As of
	12/31/2004		9/30/2004		12/31/2003
NovaStar Financial, Inc. Balance Sheet Data
Mortgage loans - held for sale	$	780,217	$	1,026,776	$	697,992
Mortgage loans - held in portfolio		59,527		65,833		94,717
Mortgage securities - available for sale		489,175		462,487		382,287
Total assets		1,895,079		1,894,857		1,399,957
Borrowings		1,295,422		1,414,184		1,005,516
Stockholders’ equity		427,489		376,125		300,224

	For the Three Months Ended									For the Twelve Months Ended
	12/31/2004			9/30/2004			12/31/2003			12/31/2004			12/31/2003
Other Data:
Servicing portfolio	$	12,151,196		$	11,073,505		$	7,206,113		$	12,151,196		$	7,206,113
Loans sold for cash - Non-conforming wholesale	$	—		$	—		$	—		$	—		$	151,210
Loans securitized	$	2,500,000		$	2,759,716		$	1,668,780		$	8,329,804		$	5,319,435
Percent of securitized loans covered by mortgage insurance		45	%		45	%		58	%		45	%		58	%
Weighted average coupon of mortgage loans held-for-sale		7.7	%		7.6	%		7.9	%		7.7	%		7.9	%

NovaStar Financial, Inc.

LOAN ORIGINATION DATA

(dollars in thousands)

(unaudited)

	For the Three Months Ended
	12/31/2004		As a % of Total		9/30/2004		As a % of Total		12/31/2003		As a % of Total
Non-conforming loan origination volume
Non-conforming
Wholesale	$	1,485,429	66	%	$	1,561,414	64	%	$	1,041,705	65	%
Correspondent/Bulk		313,838	14	%		286,513	12	%		74,049	5	%
Retail		435,762	20	%		579,485	24	%		471,603	30	%
Total non-conforming production volume		2,235,029	100	%		2,427,412	100	%		1,587,357	100	%
# of funding days in the quarter		61				64				61
Average originations per funding day	$	36,640			$	37,928			$	26,022
Retail loan origination volume
Non-conforming
Sold to non-affiliates	$	432,532	31	%	$	514,949	29	%	$	371,174	20	%
Retained by NMI		435,762	31	%		579,485	33	%		471,603	26	%
Total non-conforming	$	868,294	62	%	$	1,094,434	62	%	$	842,777	46	%
Conforming		532,320	38	%		671,711	38	%		994,736	54	%
Total retail production volume	$	1,400,614	100	%	$	1,766,145	100	%	$	1,837,513	100	%

NovaStar Financial, Inc.

SELECTED NON-CONFORMING LOAN ORIGINATION DATA

(Unaudited)

	For the Three Months Ended 12/31/04
	Weighted Average Coupon		Weighted Average LTV		Weighted Average FICO	Percent of Total
Summary by Credit Grade
660 and above	7.06	%	85.2	%	700	30	%
620 to 659	7.36	%	83.4	%	639	24	%
580 to 619	7.80	%	82.1	%	599	19	%
540 to 579	8.30	%	78.9	%	559	18	%
539 and below	8.84	%	77.7	%	528	9	%
	7.66	%	82.4	%	625	100	%
Summary by Program Type
2-Year Fixed	7.80	%	82.9	%	612	67	%
2-Year Fixed Interest-only	6.92	%	82.9	%	667	15	%
3-Year Fixed	7.37	%	80.3	%	620	3	%
3-Year Fixed Interest-only	6.60	%	79.5	%	662	1	%
5-Year Fixed	6.98	%	74.9	%	645	1	%
5-Year Fixed Interest-only	6.78	%	78.9	%	674	0	%
15-Year Fixed	7.95	%	74.3	%	637	2	%
30-Year Fixed	7.58	%	77.9	%	635	9	%
30-Year Fixed Interest-only	7.49	%	76.4	%	648	0	%
Other Products	9.85	%	93.7	%	673	2	%
	7.66	%	82.4	%	625	100	%