NewStar Reports Fourth Quarter 2009 Results
Credit Costs Weigh on Results, But Outlook Improves
Net loss driven by continued elevated provision for credit losses
Allowance for loan losses reached 5.68% of loans, but improving credit outlook may signal peak
Expenses decreased by approximately $1.4 million from third quarter levels
Completed repositioning of balance sheet with a conservative liquidity buffer and improved maturity profile
Announced $10 million share repurchase programBOSTON, Feb. 17, 2010 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a Boston-based commercial finance company, today reported an adjusted net loss for the fourth quarter of 2009 of $11.5 million, or $0.23 per diluted share. On a GAAP basis, the Company reported a net loss of $13.4 million, or $0.27 per diluted share, which reflected $1.9 million after-tax non-cash equity compensation expense related to the 2006 IPO.
"Adjusted net income (loss)" and other non-GAAP financial measures used in this release are defined under "Non-GAAP Financial Measures" on page 5. Reconciliations between GAAP and adjusted (non-GAAP) measures can be found in the attached financial tables.
"Although our results in the quarter continued to reflect substantial additions to the allowance for loan loss reserves, the credit outlook for the Company has improved and provision for credit losses has likely peaked," said Tim Conway, Chairman and Chief Executive Officer. "In 2009, we took a series of important steps to reduce costs and reposition the balance sheet with a conservative liquidity buffer and an improved maturity profile. We also continued to make new loans and work with our customers to manage our existing portfolio. As a result, the Company is well positioned to increase lending activity and we expect to return to profitability in 2010," he added.
"We achieved important funding and liquidity objectives through the issuance of $75 million of revolving credit notes and the completion of a milestone $275 million securitization," added John Bray, NewStar's Chief Financial Officer. "Those transactions greatly strengthen the Company's funding platform and position us well to participate in the economic recovery and take additional steps to enhance shareholder value."Loan Credit Quality
The provision for credit losses was $39.0 million in the fourth quarter of 2009 compared to $32.6 million in the third quarter of 2009.
Approximately $40.0 million of new specific reserves were established in the fourth quarter of 2009 compared to $33.3 million in the third quarter of 2009.
The allowance for credit losses increased to $114.5 million, or 5.68% of loans, at December 31, 2009, compared to $101.1 million, or 4.69%, at September 30, 2009 and $54.0 million or 2.25% at December 31, 2008.
Four loans totaling $51.5 million as of December 31, 2009 were placed on non-accrual status in the fourth quarter of 2009. One of the four loans placed on non-accrual status in the fourth quarter of 2009 was a $9.9 million commercial real estate loan as of December 31, 2009. The other three loans were to companies operating in the financial services, media, and building materials industry sectors.
At December 31, 2009, loans to 19 borrowers were on non-accrual status with an aggregate outstanding balance, net of charge-offs, of $162.7 million compared to 22 loans with an aggregate outstanding balance, net of charge-offs, of $147.6 million at September 30, 2009. Non-accruing loans, net of charge-offs, specific reserves and other adjustments were $122 million, or 53.8% of their aggregate face amount, as of December 31, 2009.
Eleven of the non-accrual loans with an outstanding balance of $104.0 million and three additional accruing loans with an aggregate outstanding balance of $19.9 million as of December 31, 2009 were also delinquent loans.
Net charge-offs increased to $25.7 million, or 5.06% of loans on an annualized basis, in the fourth quarter of 2009 compared to $17.8 million or 3.27% of loans on an annualized basis in the third quarter of 2009. Net charge-offs for the full year in 2009 were 3.61% of loans.
The Company owned interests in two properties valued at $5.7 million (net of a non-controlling interest) and $3.7 million, respectively, which were included in other real estate owned ("OREO") as of December 31, 2009.Funding and Capital
Completed a $275 million CLO on January 7, 2010 that is scheduled to mature on July 30, 2018. Proceeds from the transaction were used to repay all outstanding borrowings under the DB Term Funding credit facility and certain advances under the Company's warehouse line of credit with Citi.
Entered into a note agreement with an institutional investor on January 5, 2010 establishing a $75 million revolving credit facility with a maturity date of July 5, 2013. The facility was undrawn as of December 31, 2010.
Amended an existing credit facility with Citi to extend the maturity date to November 2010, reduce the size of the facility from $300 million to $150 million (with approximately $67 million drawn as of December 31, 2009), and reduce the advance rate, while maintaining pricing terms and the Company's ability to fund advances under approximately $125 million of revolving credit and delayed draw term loans.
Approximately 85% of loans were funded by long term capital at December 31, 2009.
Approximately 67% of loans were funded by securitized term debt at attractive, locked-in spreads as of December 31, 2009. The ability to re-invest collections from repayments and amortization of certain of these loans represents a continuing source of funding.
Balance sheet leverage was 3.0x as of December 31, 2009, down slightly from 3.1x at September 30, 2009 due principally to repayment of advances under credit facilities.
Total cash and equivalents as of December 31, 2009 were $177 million, of which $40 million was unrestricted. Unrestricted cash increased from approximately $31 million at September 30, 2009 and restricted cash increased from approximately $110 million to $137 million.Managed and Owned Loan Portfolios
The composition of the owned loan portfolio continued to reflect a focus on senior debt with 96% invested in 1st lien senior secured loans and debt investments at December 31, 2009.
Total origination volume for the fourth quarter of 2009 was modest, which reflected the Company's continued preference to preserve liquidity and weak demand for loans.
The managed loan portfolio was $2.6 billion as of December 31, 2009 (down from $2.7 billion at September 30, 2009), reflecting the net impact of prepayments and scheduled amortization of existing loans, as well as charge-offs, which was offset by modest new loan origination. Managed loan portfolio was down from $3.0 billion at December 31, 2008.
Assets managed for the NCOF were $543 million at December 31, 2009, down 2% from September 30, 2009 and down from $561 million at December 31, 2008.
The owned loan portfolio was $2.0 billion as of December 31, 2009 down slightly from September 30, 2009.
The owned loan portfolio continued to be balanced across industry sectors and highly diversified by issuer. As of December 31, 2009, no outstanding borrowings by a single issuer represented more than 1.5% of total loans outstanding, and the ten largest issuers comprised approximately 8.3% of the loan portfolio.Net Interest Income / Margin
Net interest income before provision for credit losses was $24.4 million for the fourth quarter of 2009 compared to $24.5 million for the third quarter of 2009.
Net interest margin increased 15 bps to 4.31% for the fourth quarter of 2009 compared to 4.16% for the third quarter of 2009 and 3.79% for the fourth quarter of 2008 due principally to a decrease in the base rates (Libor) of the Company's liabilities and an increase in credit spreads through the re-pricing of existing loans and use of Libor floors, which was partially offset by the impact of higher non-performing loans and financing costs related to the Citi renewal.Non-Interest Income
Non-interest income was $4.4 million for the fourth quarter of 2009 compared to a $0.1 million for the third quarter of 2009, and $8.6 million of income for the fourth quarter of 2008.
Non-interest income in the fourth quarter of 2009 consisted primarily of a $3.1 million gain on repurchase of debt, $0.7 million of asset management income, $0.5 million of unused fees and $0.3 million of agency fees, which was partially offset by a $0.4 million loss on an equity investment.Expenses
Operating expenses decreased by approximately $1.4 million to $9.6 million in the fourth quarter of 2009 from $10.9 million in the third quarter of 2009 due principally to lower workout and severance expenses.
Headcount was reduced from 68 as of September 30, 2009 to 61 at December 31, 2009. Headcount has been reduced by approximately 55% from its peak of 137 as of January 2008.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 877-548-7905 approximately 5-10 minutes prior to the call. International callers should dial 719-325-4865. All callers should reference "NewStar Financial."
For convenience, an archived replay of the call will be available through February 20, 2010 by dialing 888-203-1112. International callers should call 719-457-0820. For all replays, please use the passcode 3561840. 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 and Chicago IL. For more detailed transaction and contact information please visit www.newstarfin.com.
The NewStar Financial, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4044Forward-Looking Statements
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, strategic plans, objectives, future performance, financing plans and business. As such, they are subject to material risks and uncertainties, including our limited operating history; the current dislocation in the credit markets and the general state of the economy; 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 businesses generally.
More detailed information about these risk factors can be found in NewStar's filings with the Securities and Exchange Commission (the "SEC"), including Item 1A ("Risk Factors") of our 2008 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 Annual Report on Form 10-K for the year ended December 31, 2009 with the SEC on or before March 16, 2010 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; and ii) the losses incurred in connection with 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 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 retained residual interest) less annualized interest expense as determined under GAAP, divided by average interest earning assets (excluding 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 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 and ii) the change in fair value of the residual interest. 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 11 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 (unaudited) December 31,September 30,December 31,
($ in thousands)200920092008Assets:
Cash and cash equivalents
Restricted cash 136,884 109,618 84,163
Investments in debt securities, available-for-sale 4,183 3,859 3,025
Loans held-for-sale, net 15,736 3,072 --
Loans, net 1,878,978 2,041,087 2,328,812
Deferred financing costs, net 18,557 19,219 21,003
Interest receivable 7,949 8,442 10,608
Property and equipment, net 976 976 1,252
Deferred income taxes, net 56,449 56,863 31,238
Income tax receivable 7,260 603 --
Other assets 33,252 32,703 41,142Total assets
Term debt 1,523,052 1,567,864 1,524,171
Accrued interest payable 2,774 3,408 9,773