NewStar Reports Third Quarter Results
Continued Solid Earnings Generated From Defensive Balance Sheet
* Earned $7.4 million of adjusted net income in the third quarter,
or $0.15 of adjusted earnings per diluted share
* On a GAAP basis, earned $7.6 million of net income in the third
quarter, or $0.16 of net income per diluted share, increasing book
value per share to $11.91
* Continued to capitalize on a favorable lending environment,
originating $178 million of new loans with conservative credit
profiles and average yields of greater than 540 bps above LIBOR
* Extended maturity and received commitment for renewal of existing
warehouse line with Citi, reducing size from $400 million to
* Experienced moderate decline in credit performance, reflecting
increased risks from slowing economic activity and continued
constraints on credit availability
BOSTON, Nov. 5, 2008 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a Boston-based commercial finance company, today reported adjusted net income for the third quarter of 2008 of $7.4 million, or $0.15 per diluted share. On a GAAP basis, the Company reported net income of $7.6 million, or $0.16 per diluted share, which reflected a $1.1 million after-tax non-cash equity compensation expense related to the 2006 IPO, offset by $1.3 million to reflect the tax impact of timing differences related to the recognition of losses on a prior asset sale.
"Adjusted net income" and other non-GAAP financial measures used in this release are defined under "Non-GAAP Financial Measures" on page 4. Reconciliations between GAAP and adjusted (non-GAAP) measures can be found in the attached financial tables.
"In a market environment as uncertain as we have just experienced, I am pleased to report another solid quarter of operating performance and financial results," said Tim Conway, Chairman and Chief Executive Officer. "We continued to benefit from actions taken since the summer of 2007 to position the company defensively with a lower expense base, a liquid balance sheet and a funding platform with appropriate flexibility to support operations through a sustained period of stress in the capital markets. We will continue to manage cautiously to preserve liquidity and protect book value while the risk of prolonged weakness in the macro environment remains elevated."
"NewStar delivered solid financial results in the third quarter led by continued widening in loan spreads, better fee income and strong expense management," said John Kirby Bray, Chief Financial Officer. "The balance sheet continued to reflect conservative leverage with ample liquidity. With a commitment from Citi to renew our warehouse credit facility at $300 million, we will continue to have sufficient funding capacity and financial flexibility to support our planned origination activity."
Funding and Capital
* NewStar had $683 million of funding capacity, with approximately
$530 million of available borrowing capacity under its credit
facilities and existing term debt securitizations (CLOs) as of
September 30, 2008.
* Over 70% of loan assets were funded by term debt at attractive,
locked-in spreads as of September 30, 2008.
* Total cash and equivalents as of September 30, 2008 were
$238 million, of which $133 million was unrestricted.
* Extended maturity of existing warehouse line with Citi and
received commitment for renewal subject to usual and customary
conditions. In connection with the renewal, we will reduce the
size of the credit facility from $400 million to $300 million.
Other key terms of Citi's commitment include changes in advance
rates and pricing at levels that are consistent with terms of
other recent comparable financing arrangements.
* Overall origination volume for the third quarter of 2008 was
$178 million, of which $133 million was retained on NewStar's
balance sheet, $42 million was either syndicated or held for sale
and $3 million was held for sale to the NewStar Credit
Opportunities Fund (NCOF).
* Credit spreads and amortizing fees on new loans originated in the
third quarter continued to improve, with average yields of greater
than 540 bps above LIBOR, which is an increase of more than 195bps
from the third quarter of 2007.
* Corporate lending represented 100% of the new volume in the
Managed and Owned Loan Portfolios
* Managed loan portfolio was $3.0 billion as of September 30, 2008,
equal to the level at June 30, 2008, reflecting the net impact of
$178 million of new origination, which was offset by prepayments
and scheduled amortization of existing loans. Managed loan
portfolio was up 14% from $2.6 billion as of September 30, 2007.
* Assets managed for the NCOF were $570 million at September 30,
2008, down from $593 million at June 30, 2008 and up 16% from
$491 million at September 30, 2007.
* The owned loan portfolio continued to be balanced across industry
sectors and highly diversified by issuer. As of September 30,
2008, no single issuer represented more than approximately 1% of
total assets, excluding loans held-for-sale, and the ten largest
issuers comprised approximately 10% of the loan portfolio.
* The composition of the owned loan portfolio continued to
focus on senior debt with 95% invested in 1st lien senior secured
loans and debt investments at September 30, 2008.
Net Interest Income / Margin
* Net interest income before provision for credit losses was
$25.0 million for the third quarter of 2008 compared to
$26.5 million for the second quarter of 2008 and $24.6 million for
the third quarter of 2007.
* Net interest margin decreased 27 bps to 3.90% for the third
quarter of 2008 compared to 4.17% for the second quarter of 2008
and 4.29% for the third quarter of 2007 due principally to the
impact of declining LIBOR rates. The benefit from the timing
difference between asset and liability repricing tied to LIBOR
continued to diminish in the third quarter. The contribution from
earnings on excess cash also declined due to both the lower rate
environment, as well as management's decision to limit investments
of excess cash to lower risk asset classes such as U.S. Treasury
* Non-interest income was $5.5 million for the third quarter of
2008 compared to $1.6 million for the second quarter of 2008, and
$(21.8) million for the third quarter of 2007.
* Adjusted non-interest income, excluding the impact of the
write-down on the retained residual interest in prior periods, was
$5.5 million in the third quarter of 2008 compared to $1.9 million
in the second quarter of 2008 and $6.3 million in the third
quarter of 2007.
* Adjusted non-interest income in the third quarter of 2008
consisted primarily of $1.7 million of asset management income,
$1.0 million of syndication related revenue recorded in gain on
sale of loans, $0.7 million gain on rate protection products sold
to clients, $0.3 million of structuring and placement fees,
$0.2 million of syndication and agency fees, and $0.2 million of
Loan Credit Quality
* The provision for credit losses was $12.0 million in the third
quarter of 2008, up from $3.7 million in the second quarter of
* Allowance for credit losses was $44.9 million or 1.87% of loans at
September 30, 2008, compared to $38.2 million or 1.60% at
June 30, 2008 and $31.9 million or 1.62% at September 30, 2007.
* Non-accrual loans consisted of three loans with an aggregate
outstanding balance of $26.4 million at September 30, 2008
compared to two loans with an aggregate outstanding balance of
$10.1 million at June 30, 2008. Additionally, the Company had one
$7.1 million asset at September 30, 2008 which was other real
estate owned ("OREO") as a result of a foreclosure on an impaired
* There were no delinquent loans as of September 30, 2008
* NewStar established $11.5 million specific reserves in the third
quarter of 2008 compared
to $2.7 million in the second quarter of
* NewStar had net charged-offs of $5.3 million or 0.87% of loans on
an annualized basis in the third quarter of 2008 compared to
$2.3 million or 0.38% of loans on an annualized basis in the prior
* Operating expenses decreased to $8.5 million in the third quarter
of 2008 from $13.5 million in the second quarter of 2008,
reflecting a lower expense base, no severance expense in the third
quarter and lower compensation expense.
Conference Call and Webcast
NewStar will host a webcast/conference call to discuss the results today at 10:00 am Eastern Time. All interested parties are invited to participate via telephone or webcast, which will be hosted through the Investor Relations section at www.newstarfin.com. Please visit the website to register for the webcast and test your connection prior to the call. You can also access the conference call by dialing 877-681-3377 approximately 5-10 minutes prior to the call. International callers should dial 719-325-4839. All callers should reference "NewStar Financial."
For convenience, an archived replay of the call will be available through November 12, 2008 by dialing 888-203-1112. International callers should call 719-457-0820. For all replays, please use the passcode 4420840. The audio replay will also be available through the Investor Relations section at www.newstarfin.com.
About NewStar Financial
NewStar Financial (Nasdaq:NEWS) is a specialized commercial finance company focused on meeting the complex financing needs of companies and private investors in the middle markets. The Company specializes in providing senior secured debt financing for the acquisition or recapitalization of mid-sized companies and commercial real estate. NewStar originates loans directly through a team of experienced, senior bankers organized around key industry and market segments. The Company targets 'hold' positions of up to $20 million and selectively underwrites or arranges larger transactions for syndication to other lenders.
NewStar is headquartered in Boston MA and has regional offices in Darien CT, Chicago IL, San Diego CA, and Charleston SC. For more detailed transaction and contact information please visit www.newstarfin.com.
This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. As such, they are subject to material risks and uncertainties, including our limited operating history; the fact that we have yet to be profitable; the current dislocation in the credit markets and the general state of the economy; the rapid expansion of our business since inception; our ability to compete effectively in a highly competitive industry; and the impact of federal, state and local laws and regulations that govern non-depository commercial lenders and
More detailed information about these factors is described in NewStar's filings with the Securities and Exchange Commission (the "SEC"), including Item 1A ("Risk Factors") of our 2007 Annual Report on Form 10-K, as supplemented by the Risk Factors contained in our Quarterly Reports on Form 10-Q. NewStar is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. NewStar plans to file its Form 10-Q for the quarter ended September 30, 2008 with the SEC on or before November 10, 2008 and urges its shareholders to refer to that document for more complete information concerning NewStar's financial results.
Non-GAAP Financial Measures
References to "adjusted net income" and "adjusted earnings per share" mean net income or earnings per diluted share, respectively, as determined under GAAP, excluding the following items: i) compensation expense related to restricted stock grants made since our inception as a private company, including equity awards made in connection with the initial public offering; ii) earnings generated from the assets sold in the second quarter of 2007 and the retained residual interest in these assets; and iii) the loss and expenses incurred in connection with the asset sale in the second quarter of 2007 and the change in fair value of the residual interest, including the impact on our effective tax rate. GAAP requires that these items be included in net income. NewStar management uses "adjusted net income" and "adjusted earnings per share" to make operational and investment decisions, and NewStar
believes that they provide useful information to investors in their evaluation of our financial performance and condition. Excluding the financial results and expenses incurred in connection with the assets sold during the second quarter of 2007 and the compensation expense related to restricted stock grants made since our inception as a private company, eliminates unique amounts that make it difficult to assess our core performance and compare our period-over-period results. A reconciliation of adjusted net income to net income is included on page 7 of this release.
References to "adjusted net interest margin" mean annualized interest income as determined under GAAP (excluding interest income generated from the assets sold in the second quarter of 2007 and the retained residual interest) less annualized interest expense as determined under GAAP (excluding interest expense incurred from the assets sold in the second quarter of 2007), divided by average interest earning assets (excluding the assets sold in the second quarter of 2007 and the retained residual interest for the period.)
Adjusted return on average assets means adjusted net income divided by average assets for the period excluding the assets sold in the second quarter of 2007 and the retained residual interest. Adjusted return on average equity means adjusted net income divided by average equity for the period. Adjusted efficiency ratio means operating expenses determined in accordance with GAAP less i) compensation expense related to restricted stock grants made since our inception as a private company; ii) earnings generated from the assets sold in the second quarter of 2007 and the retained residual interest; and iii) the loss and expenses incurred in connection with the asset sale in the second quarter of 2007 and the change in fair value of the residual interest. Adjusted cost of funds means adjusted interest expense divided by average interest bearing liabilities for the period and the credit
facility funding for the assets sold in the second quarter of 2007. The adjusted ratios exclude unique expenses that make it difficult to assess our core performance and compare our period-over-period results.
A reconciliation of our adjusted financial measures to their GAAP equivalents is included on page 9 of this release. NewStar's adjusted financial measures should not be considered as alternatives to financial measures determined in accordance with GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies.
NewStar Financial, Inc.
Consolidated Balance Sheets
September 30, June 30, December 31, Septembe