* $0.2 million of adjusted net income in the first quarter or
$0.01 adjusted earnings per diluted share
* $2.4 million net loss in the first quarter or $0.07 net loss per
diluted share on a GAAP basis
* Recognized $9.0 million after-tax impairment in residential
mortgage-backed securities portfolio
* $2.3 billion of assets in managed loan portfolio, up 12% from
the fourth quarter
* Commercial credit quality stable, no loan charge offs
BOSTON, May 3, 2007 (PRIME NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS) today reported adjusted net income for the first quarter of 2007 of $0.2 million, or adjusted earnings of $0.01 per diluted share. On a GAAP basis, the company reported a net loss of $2.4 million, or $0.07 per diluted share. Positive operating results were offset by a $14.9 million pre-tax charge ($9.0 million after-tax) to recognize impairment in the company's residential mortgage-backed securities portfolio ("RMBS").
The company also announced that it would discontinue its investment activity in this asset class and manage the disposition of its current portfolio over time to optimize its economic value.
"A severe correction in the RMBS market offset an otherwise strong quarter for our core lending franchise," said Tim Conway, Chairman and Chief Executive Officer. "By writing down our portfolio, discontinuing further investment in this asset class and managing the portfolio to maximize recoveries over time, we believe we are taking appropriate action to reduce our risk, while maximizing the economic value of our holdings. As a result, we will be better positioned for the future. Although we are not pleased by the overall results in Q1, the growth in our core business is encouraging. Excluding the write-down, revenue was up 29% from the prior quarter driven by growth in interest income and fee revenue from asset management and syndications. Volume was strong as we grew our managed assets to nearly $2.3 billion. Commercial credit quality is performing well within expected parameters as our loan portfolio continues to season."
"Adjusted net income" and other non-GAAP financial measures used in this release are defined under "Non-GAAP Financial Measures" on page 5. We have provided a reconciliation between GAAP and adjusted (non-GAAP) measures in the attached financial tables.
Residential Mortgage-backed Securities Portfolio
* We recorded a $14.9 million pre-tax charge ($9 million
after-tax) to recognize an unrealized loss and reduce the
carrying value of our RMBS portfolio in the first quarter of
2007.
* An additional $14.1 million of pre-tax net unrealized holding
losses was taken as a charge to stockholders' equity through the
Other Comprehensive Income / Loss account.
* The carrying value of the RMBS portfolio, net of the unrealized
holding losses described above, was $101 million, or 5.4% of
total loans and investments, as of March 31, 2007.
* The portfolio was comprised of RMBS backed by pools of
collateral consisting of 1st mortgages (40%), 'closed end' 2nd
mortgages (20%), home equity lines of credit (13%), and serviced
residential lot loans (7%), as well as net interest margin
securities (19%) backed by residual interests of home equity loan
RMBS.
* Approximately $29 million, or 29%, of the portfolio, represented
securities backed by pools of mortgage loans to borrowers which
have weighted average FICO scores of 700 or better (Prime).
* Approximately $50 million, or 49%, of the portfolio represented
securities backed by pools of mortgage loans to borrowers which
have weighted average FICO scores of between 620 and 700
(Mid-Prime or Alt A).
* Approximately $22 million, or 22%, of the portfolio represented
securities backed by pools of mortgage loans to borrowers which
have weighted average FICO scores of 620 or lower (Sub-Prime).
* Approximately 47% of the RMBS portfolio is rated investment
grade by at least one recognized rating agency.
Strong Origination Volume
* Overall origination volume for the quarter was $519 million, of
which $150 million was syndicated to others, $80 million was sold
to the New Star Credit Opportunities Fund (NCOF), $11 million was
originated for the managed CLO and $278 million was retained on
NewStar's balance sheet.
* Middle Market Corporate generated approximately 82% of the new
volume in the quarter, while Commercial Real Estate and
Structured Products produced 10% and 8%, respectively.
* We continued to grow our proprietary direct origination platform
in the first quarter, adding four new senior bankers of six that
we expect to add in 2007.
Growth in Loans and Investments
* Managed loan portfolio increased to $2.3 billion as of March 31,
2007, an increase of $247 million, or 12%, from $2.0 billion at
December 31, 2006. Assets managed for the NCOF increased by $99
million, or 35%, from $283 million as of December 31, 2006 to
$382 million at March 31, 2007.
* Gross loans and investments in debt securities held on NewStar's
balance sheet increased to $1.9 billion as of March 31, 2007, an
increase of $148 million from $1.7 billion at December 31, 2006.
* Our business continues to be balanced across industry sectors
and highly diversified across issuers. As of March 31, 2007, no
single issuer represented more than 1.2% of our loan portfolio
and the ten largest issuers comprised approximately 10% of the
loan portfolio.
* We continue to be highly selective and focus on senior debt
products, with 77% of the loan portfolio invested in senior
secured loans and senior debt investments.
Net Interest Income / Margin
* Net interest income before provision for credit losses was $22.0
million for the first quarter 2007 compared to $15.5 million for
the fourth quarter 2006 and $8.0 million for the first quarter
2006.
* Net interest margin was 4.50% for the first quarter 2007
compared to 3.82% for the fourth quarter 2006 and 3.85% for the
first quarter 2006. Adjusted net interest margin was 4.50% for
the first quarter 2007 compared to 4.50% for the fourth quarter
2006 and 4.46% for the first quarter 2006.
Non-Interest Income
* Non-interest income was $(10.7) million for the first quarter
2007, a decrease of $14.8 million from $4.1 million in the prior
quarter. The decrease was due principally to the impairment in
the RMBS portfolio offset by an increase in asset management fees
generated by the NCOF.
Stable Commercial Loan Credit Quality
* As of March 31, 2007, we did not have any impaired loans and had
not experienced any loan charge offs.
* As of March 31, 2007, we had an allowance for credit losses of
$22.9 million, or 1.40% of loans compared to $20.6 million, or
1.40%, at December 31, 2006 and $9.4 million or 1.24% at March
31, 2006. The increase in the allowance for credit losses is due
to higher loan balances and a slight shift in business mix and
rating profile.
* Provision expense was $2.3 million in the first quarter 2007
compared to $5.9 million in the fourth quarter 2006 and $1.4
million in the first quarter of 2006.
* One of our loans with a principal amount of $8.4 million was
delinquent as of March 31, 2007, representing a 0.51% delinquency
rate. Subsequent to March 31, 2007, this loan became current.
* The credit issue with a $10.4 million commercial security that
we disclosed in our 2006 Form 10-K continues to develop and we
are evaluating restructuring options.
Funding
* During the first quarter, we increased the capacity of our
credit facilities by $200 million and reduced the cost of funds
on these facilities.
* Total cash and equivalents as of March 31, 2007 were $191
million, of which $131 million was unrestricted.
Expenses
* Operating expenses were $13.0 million in the first quarter 2007
compared to $51.6 million in the fourth quarter 2006 and $7.0
million for the first quarter 2006. The decrease in operating
expenses from Q4 was primarily due to a $39.1 million of non-cash
compensation charge in the fourth quarter of 2006 related to
restricted stock grants made since our inception as a private
company including equity awards made in connection with our
initial public offering.
* Excluding the write-down, our adjusted efficiency ratio was 38%
in the first quarter 2007.
Conference Call and Webcast
We will host a webcast/conference call to discuss the results today at 5:00 pm Eastern Standard Time. All interested parties are invited to participate via telephone or webcast, which will be hosted through the Investor Relations section of our website 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 (800) 765-0709 approximately 5-10 minutes prior to the call. International callers should dial (913) 981-5564. All callers should reference "NewStar Financial, Inc."
For convenience, an archived replay of the call will be available through May 10, 2007 by dialing (888) 203-1112. International callers should call (719) 457-0820. For all replays, please use the passcode # 3471739. The audio replay will also be available through the Investor Relations section of our website at www.newstarfin.com.
About NewStar Financial
NewStar Financial is a specialized commercial finance company focused principally on meeting the complex financing needs of customers in the middle market through our corporate, commercial real estate, and structured products groups. Our senior banking teams call directly on customers to provide advice and finance a range of strategic transactions that may require some combination of senior secured, second lien and mezzanine financing. NewStar typically works with customers with financing needs of up to $150 million and cash flow as low as $5 million. We target 'hold' positions of up to $35 million, but may also underwrite or arrange transactions up to $100 million for syndications to other lenders.
We are headquartered in Boston MA, with regional offices in Darien CT, Chicago IL, San Francisco CA, San Diego CA, and Charleston SC. In December of 2006, NewStar completed an Initial Public Offering. The Company's shares trade on the NASDAQ under the ticker symbol, NEWS. Please visit our website at www.newstarfin.com for more detailed transaction and contact information.
Forward-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, plans, objectives, future performance and business. As such, they are subject to material risks and uncertainties.
More detailed information about these factors is described in NewStar's filing with Securities and Exchange Commission (the "SEC"), including Item 1A ("Risk Factors") of our 2006 Form 10-K. 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. NewStar plans to file its Form 10-Q with the SEC on or before May 15, 2007 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) interest expense and amortization of deferred financing costs on corporate debt, (ii) the call premium and termination fee associated with the termination of our corporate debt, (iii) 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 (iv) general and administrative expense incurred related to the initial public offering. 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 interest expense and amortization of deferred financing costs on corporate debt and the call premium and termination fee associated with the termination of our corporate debt eliminates expenses that we do not anticipate incurring in the foreseeable future that make it difficult to assess our core performance and compare our period-over-period results. Excluding 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 general and administrative expense incurred related to our initial public offering, eliminates unique expenses 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 in this release.
References to "adjusted net interest margin" mean annualized interest income as determined under GAAP less annualized interest expense as determined under GAAP excluding interest expense and amortization of deferred financing costs on corporate debt, divided by average interest earning assets for the period.
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) the call premium and termination fee associated with the termination of our corporate debt, (ii) 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 (iii) general and administrative expense incurred related to the initial public offering divided by net revenue. Adjusted cost of funds means adjusted interest expense divided by average interest bearing liabilities for the period less the average corporate debt outstanding for the period. 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
(unaudited)
---------------------------------------------------------------------
March 31, December 31, March 31,
($ in thousands) 2007 2006 2006
---------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 131,391 $ 103,269 $ 1,579
Restricted cash 59,578 40,174 31,176
Investments in debt
securities, available-
for-sale 183,032 203,121 120,204
Loans held-for-sale 52,270 62,620 58,923
Loans, net 1,600,821 1,437,832 749,768
Deferred financing costs, net 10,989 11,614 9,885
Interest receivable 18,343 19,849 8,840
Property and equipment, net 1,051 961 935
Deferred income taxes, net 15,965 14,705 6,627
Income tax receivable 7,460 -- --
Other assets 36,877 21,047 6,931
---------- ---------- ----------
Total assets $2,117,777 $1,915,192 $ 994,868
=====================================================================
Liabilities:
Repurchase agreements $ 26,856 $ 34,535 $ 34,822
Credit facilities 852,410 625,910 435,000
Term debt 784,725 774,225 334,014
Corporate debt -- -- 37,500
Accrued interest payable 11,263 23,200 6,159
Accounts payable 403 4,315 138
Income tax payable -- 4,166 199
Other liabilities 25,241 25,426 7,153
---------- ---------- ----------
Total liabilities 1,700,898 1,491,777 854,985
Total stockholders' equity 416,879 423,415 139,883
---------- ---------- ----------
Total liabilities and
stockholders' equity $2,117,777 $1,915,192 $ 994,868
=====================================================================
NewStar Financial, Inc.
Consolidated Statements of Operations
(unaudited)
---------------------------------------------------------------------
Three Months Ended
------------------------------------
($ in thousands, except per March 31, December 31, March 31,
share amounts) 2007 2006 2006
---------------------------------------------------------------------
Net interest income:
Interest income $ 45,488 $ 39,243 $ 18,916
Interest expense 23,537 23,766 10,966
----------- ----------- -----------
Net interest income 21,951 15,477 7,950
Provision for credit losses 2,312 5,941 1,403
----------- ----------- -----------
Net interest income after
provision for credit losses 19,639 9,536 6,547
Non-interest income:
Fee income 2,553 3,006 810
Asset management income 964 692 67
Gain on derivatives 84 73 257
Loss on investments in debt
securities (14,862) (846) --
Other income 544 1,178 439
----------- ----------- -----------
Total non-interest income (10,717) 4,103 1,573
Operating expenses:
Compensation and benefits 10,532 47,738 5,354
Occupancy and equipment 492 486 380
General and administrative
expenses 1,939 3,380 1,272
----------- ----------- -----------
Total operating expenses 12,963 51,604 7,006
----------- ----------- -----------
Income (loss) before income
taxes (4,041) (37,965) 1,114
Income tax expense (benefit) (1,595) (5,911) 473
----------- ----------- -----------
Net income (loss) (2,446) (32,054) 641
After tax adjustments:
Extinguishment of corporate
debt expense (a) -- 2,805 730
IPO related compensation and
benefits expense (b) 2,682 33,202 --
IPO related general and
administrative expense (c) -- 621 72
----------- ----------- -----------
Adjusted net income $ 236 $ 4,574 $ 1,443
=========== =========== ===========
Net income (loss) per share:
Basic $ (0.07) $ (1.26) $ 0.05
Diluted $ (0.07) $ (1.26) $ 0.05
Weighted average shares
outstanding: (d)
Basic 36,257,589 25,376,446 11,776,539
Diluted 36,257,589 25,376,446 12,297,822
Adjusted net income per share:
Basic $ 0.01 $ 0.18 $ 0.12
Diluted $ 0.01 $ 0.18 $ 0.12
Adjusted weighted average shares
outstanding: (4)
Basic 36,257,589 25,376,446 11,776,539
Diluted 36,841,994 25,910,522 12,297,822
(a) Includes interest expense for the 2006 periods, call premium,
termination fee and deferred finance costs associated with the
Company's corporate debt which was repaid on December 20, 2006.
(b) Non-cash compensation charge related to restricted stock grants
made since our inception as a private company, including equity
awards made in connection with the initial public offering.
(c) General and administrative expense related to the Company's
initial public offering.
(d) Weighted average shares for all periods reflect the conversions
and reverse split that occurred at the IPO.
NewStar Financial, Inc.
Selected Financial Data
(unaudited)
------------------------------------------------------------------
Three Months Ended
------------------------------------
March 31, December 31, March 31,
($ in thousands) 2007 2006 2006
----------------------------- ---------- ---------- ----------
Performance Ratios:
Return on average assets (0.50) % (7.83) % 0.31 %
Return on average equity (2.34) (50.91) 2.30
Net interest margin, before
provision 4.50 3.82 3.85
Efficiency ratio 115.40 263.57 79.16
Credit Quality and Leverage
Ratios:
Delinquent loan rate (at
period end) 0.51 0.57 --
Non-accrual loan rate -- -- --
Net charge off rate -- -- --
Allowance for credit losses
ratio (at period end) 1.40 1.40 1.24
Equity to assets (at period
end) 19.68 22.11 14.06
Debt to equity (at period
end) 3.99 x 3.39 x 6.01 x
Average Balances:
Loans and other debt
products, gross $1,812,027 $1,525,105 $ 817,623
Interest earning assets 1,976,185 1,606,785 837,428
Total assets 1,988,910 1,623,952 851,051
Interest bearing liabilities 1,525,081 1,328,178 721,995
Equity 424,063 249,773 113,021
Allowance for credit loss
activity:
Balance as of beginning of
period $ 20,570 $ 14,629 $ 8,035
Provision for credit losses 2,312 5,941 1,403
Net charge offs -- -- --
---------- ---------- ----------
Balance as of end of period $ 22,882 $ 20,570 $ 9,438
========== ========== ==========
Supplemental Data (at period
end):
Investments in debt
securities, gross $ 210,634 $ 217,314 $ 127,605
Loans held-for-sale, gross 52,698 63,277 59,670
Loans held-for-investment,
gross 1,632,105 1,467,038 764,135
---------- ---------- ----------
Loans and investments in
debt securities, gross 1,895,437 1,747,629 951,410
Unused lines of credit 336,978 302,856 149,588
Standby letters of credit 8,719 6,990 4,442
---------- ---------- ----------
Total funding commitments $2,241,134 $2,057,475 $1,105,440
========== ========== ==========
Loan portfolio $1,895,437 $1,747,629 $ 951,410
Loans owned by NewStar
Credit Opportunities Fund 382,354 283,378 41,443
---------- ---------- ----------
Managed loan portfolio $2,277,791 $2,031,007 $ 992,853
========== ========== ==========
Loans held-for-sale, gross $ 52,698 $ 63,277 $ 59,670
Loans held-for-investment,
gross 1,632,105 1,467,038 764,135
---------- ---------- ----------
Total loans, gross 1,684,803 1,530,315 823,805
Deferred fees, net (10,182) (10,468) (6,241)
Allowance for loan losses (21,530) (19,395) (8,874)
---------- ---------- ----------
Total loans, net $1,653,091 $1,500,452 $ 808,690
========== ========== ==========
Book value per share $ 11.50 $ 11.68 $ 9.26
NewStar Financial, Inc.
Non-GAAP Data
(unaudited)
------------------------------------
Adjusted
---------------------------- ------------------------------------
Three Months Ended
------------------------------------
March 31, December 31, March 31,
2007 2006 2006
---------------------------- ---------- ---------- ----------
Performance Ratios:
Return on average assets 0.05 % 1.12 % 0.69 %
Return on average equity 0.22 7.27 5.18
Efficiency ratio 81.21 45.19 61.36
Net interest margin, before
provision 4.50 4.50 4.46
Cost of funds 6.26 6.44 5.75
Average Balances:
Interest bearing
liabilities $1,525,081 $1,328,178 $ 721,995
Less: corporate debt -- 33,016 37,500
---------- ---------- ----------
Adjusted interest bearing
liabilities $1,525,081 $1,295,162 $ 684,495
========== ========== ==========
Consolidated Statement of
Operations Adjustments
(a):
Interest expense $ 23,537 $ 23,766 $ 10,966
Less: interest &
amortization related to
corporate debt -- 2,728 730
---------- ---------- ----------
Adjusted interest expense $ 23,537 $ 21,038 $ 10,236
========== ========== ==========
Operating expenses $ 12,963 $ 51,604 $ 7,006
Less:
Corporate debt prepayment
fees -- 1,425 --
IPO related compensation
and benefits expense (b) 3,841 39,129 --
IPO related general and
administrative
expense (c) -- 968 72
---------- ---------- ----------
Adjusted operating expenses $ 9,122 $ 10,082 $ 6,934
========== ========== ==========
(a) Adjustments are pre-tax.
(b) Non-cash compensation charge related to restricted stock grants
made since our inception as a private company, including equity
awards made in connection with the initial public offering.
(c) General and administrative expense related to the Company's
initial public offering.
NewStar Financial, Inc.
Portfolio Data
(unaudited)
--------------------------------------------------------------------
($ in thousands) March 31, 2007 December 31, 2006
---------------------------- ------------------ ------------------
Portfolio Data:
First mortgage $ 243,637 12.9 % $ 216,888 12.4 %
Senior secured asset-based 56,449 3.0 50,566 2.9
Senior secured cash flow 1,162,643 61.3 1,082,048 61.9
Senior subordinated asset-
based 279,941 14.8 247,456 14.2
Senior subordinated cash
flow 55,782 2.9 35,161 2.0
Second lien 64,731 3.4 70,875 4.1
Subordinated 31,533 1.7 43,916 2.5
Mezzanine 721 -- 719 --
---------- ------ ---------- ------
Total $1,895,437 100.0 % $1,747,629 100.0 %
========== ====== ========== ======
Corporate $1,286,088 67.9 % $1,183,107 67.7 %
Structured Products 341,894 18.0 333,787 19.1
Commercial Real Estate 267,455 14.1 230,735 13.2
---------- ------ ---------- ------
Total $1,895,437 100.0 % $1,747,629 100.0 %
========== ====== ========== ======
--------------------------------------------------------------------
($ in thousands) March 31, 2006
---------------------------- ------------------
Portfolio Data:
First mortgage $ 92,359 9.7 %
Senior secured asset-based 39,249 4.1
Senior secured cash flow 613,887 64.5
Senior subordinated asset-
based 104,161 11.0
Senior subordinated cash
flow 19,000 2.0
Second lien 37,000 3.9
Subordinated 45,754 4.8
Mezzanine -- --
---------- ------
Total $ 951,410 100.0 %
========== ======
Corporate $ 658,242 69.2 %
Structured Products 195,809 20.6
Commercial Real Estate 97,359 10.2
---------- ------
Total $ 951,410 100.0 %
========== ======