NewStar Reports Third Quarter 2010 Results
Acquisition Provides Momentum as Better Credit Performance Continues to Drive Earnings
Financial results continued to improve with adjusted net income of $6.0 million, or $0.12 per share
GAAP net income was $5.5 million, or $0.11 per share
Continued positive trend in credit performance led by lower provision for loan losses and further reductions in non-performing assets
New loan originations increased 18% to $145 million
Bolstered liquidity and added growth capital through increase in corporate debt financing to $100 million
Added new growth platform through acquisition of asset-based lender with excess funding capacity
Increased book value per share to $10.74 driven by earnings and share buyback
BOSTON, Nov. 3, 2010 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a Boston-based commercial finance company, today reported adjusted net income for the third quarter of 2010 of $6.0 million, or $0.12 per diluted share. On a GAAP basis, the Company reported net income of $5.5 million, or $0.11 per diluted share, which reflected $0.5 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.
"I am pleased with our results in the third quarter as operating performance showed steady improvement and credit costs trended lower. Our direct origination platform continued to gain momentum with double-digit growth in new loan volume in the quarter. We also expanded our national franchise through the recently announced acquisition of CORE Business Credit, an established asset-based lending platform," said Tim Conway, Chairman and Chief Executive Officer. "The acquisition marks another important milestone for the company as we begin to execute our strategy to add specialized lending platforms in attractive market segments that are consistent with our core strengths and enhance our value proposition for customers."
"The majority of our operating metrics continued to improve in the quarter and we were pleased with the quality of our earnings," added John Bray, NewStar's Chief Financial Officer. "We also increased the size of our corporate debt financing to maintain a conservative liquidity position, while also adding growth capital to support attractive investment opportunities like the acquisition of CORE Business Credit.Loan Credit Quality
The provision for credit losses decreased 79%, or $4.3 million, to $1.2 million in the third quarter of 2010 compared to $5.5 million in the second quarter of 2010.
Approximately $3.2 million of additional specific reserves were established in the third quarter of 2010, down 78%, or $11.0 million, from $14.2 million in the second quarter of 2010.
The allowance for credit losses decreased to $91.5 million, or 5.20% of loans and 71% of NPLs, at September 30, 2010, compared to $100.7 million, or 5.53% of loans, at June 30, 2010 and $101.1 million or 4.69% of loans at September 30, 2009.
One new loan was placed on non-accrual status in the third quarter of 2010.
At September 30, 2010, loans with an aggregate outstanding balance, net of charge-offs, of $128.2 million were on non-accrual status compared to loans with an aggregate outstanding balance, net of charge-offs, of $146.5 million at June 30, 2010. Non-performing assets, net of charge-offs, specific reserves and other adjustments were $131.6 million, or 40% of their aggregate face amount, as of September 30, 2010.
Non-accrual loans with an outstanding balance of $100.7 million and an additional accruing loan with an outstanding balance of $8.4 million as of September 30, 2010 were also delinquent loans.
Net charge-offs were $10.4 million, or 2.36% of loans on an annualized basis, in the third quarter of 2010 compared to $20.8 million or 4.57% of loans on an annualized basis in the second quarter of 2010.
The Company owned an interest in one property valued at $3.4 million, which was included in other real estate owned ("OREO") as of September 30, 2010.Funding and Capital
Amended an existing $75 million credit facility with Fortress to increase the size to $100 million consisting of a $50 million revolving credit facility and a $50 million term loan facility, extend its maturity to August 2014, reduce pricing and remove scheduled revolver commitment reductions.
Approximately 94% of loans were funded by long term capital at September 30, 2010.
Approximately 78% of loans were funded by securitized term debt at attractive, locked-in spreads as of September 30, 2010. 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 2.5x as of September 30, 2010, down slightly from 2.7x at June 30, 2010 due principally to repayment of advances under credit facilities and amortization of debt issued by CLO 2005-1.
Total cash and equivalents as of September 30, 2010 were $183.9 million, of which $29 million was unrestricted. Unrestricted cash decreased from approximately $40 million at June 30, 2010 and restricted cash increased from approximately $147 million to $155 million.Managed and Owned Loan Portfolios
Total origination volume for the third quarter of 2010 was $145 million, which reflected improving demand for loans and increased lending activity.
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 September 30, 2010.
The managed loan portfolio was $2.3 billion as of September 30, 2010 (down from $2.4 billion at June 30, 2010), reflecting the net impact of prepayments and scheduled amortization of existing loans, as well as charge-offs, which was partially offset by new loan origination. Managed loan portfolio was down from $2.7 billion at September 30, 2009.
Assets managed for the NCOF were $500 million at September 30, 2010, down 5% from June 30, 2010 and down from $544 million at September 30, 2009.
The owned loan portfolio was $1.8 billion as of September 30, 2010 down slightly from June 30, 2010.
The owned loan portfolio continued to be balanced across industry sectors and highly diversified by issuer. As of September 30, 2010, no outstanding borrowings by a single issuer represented more than 1.5% of total loans outstanding, and the ten largest issuers comprised approximately 10% of the loan portfolio.Net Interest Income / Margin
Net interest income before provision for credit losses was $17.8 million for the third quarter of 2010 compared to $19.1 million for the second quarter of 2010.
Net interest margin decreased 12 bps to 3.63% for the third quarter of 2010 compared to 3.75% for the second quarter of 2010 and 4.16% for the third quarter of 2009 due principally to non-accrual loans and an increase in the cost of borrowings.
Adjusting for the impact of non-performing loans, the portfolio yield would have been 65 bps higher and net interest margin would have been 4.28%. Non-Interest Income
Non-interest income was $2.5 million for the third quarter of 2010 compared to $4.7 million for the second quarter of 2010, and $0.1 million for the third quarter of 2009.
Non-interest income in the third quarter of 2010 consisted primarily of $0.9 million of asset management income, $0.7 million of unused fees on revolving credit commitments and $0.4 million of structuring fees.Expenses
Operating expenses were up slightly to $10.0 million in the third quarter of 2010 compared to $9.5 million in the second quarter of 2010.
The Company had 63 employees as of September 30, 2010.Income Taxes
Deferred tax asset declined to $50.2 million as of September 30, 2010 from $54.9 million as of June 30, 2010 and $56.4 million as of December 31, 2009. At September 30, 2010, the deferred tax asset was driven principally by differences in the timing of when credit costs and equity compensation expenses are recognized according to GAAP and when they are deductible for income tax.
Approximately $36 million and $13 million of the deferred tax asset as of September 30, 2010 was related to our allowance for credit losses and equity compensation, respectively.Book Value
Book value per share was $10.74 at the end of the third quarter up from $10.53 at the end of the prior quarter primarily due to net income and share repurchases during the quarter.Share Count
Average diluted shares outstanding were 50.3 million shares for the quarter compared to 51.7 million shares for the prior quarter. Total outstanding shares at September 30, 2010 were 50.9 million compared to 51.6 million at June 30, 2010.
Repurchased 695,873 shares of common stock at an average price of $6.93 during the third quarter and a total of 972,072 shares of common stock at an average price of $6.87 as of September 30, 2010 since the share repurchase program was launched.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 877-755-7419 approximately 5-10 minutes prior to the call. International callers should dial 973-200-3080. All callers should reference "NewStar Financial."
For convenience, an archived replay of the call will be available through November 6, 2010 by dialing 800-642-1687. International callers should call 706-645-9291. For all replays, please use the passcode 16795363. 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 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 2009 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 with the SEC on or before November 9, 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: 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; 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.
Adjusted return on average assets means adjusted net income divided by average assets for the period. 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. 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
September 30,June 30,December 31,September 30,
($ in thousands)2010201020092009Assets:
Cash and cash equivalents
Investments in debt securities, available-for-sale
Loans held-for-sale, net
Deferred financing costs, net
Property and equipment, net
Deferred income taxes, net
Income tax receivable