Weak economy and credit performance weigh on financial results
* Reported a $2.9 million adjusted net loss in the first quarter,
or $0.06 adjusted loss per diluted share
* On a GAAP basis, reported $5.0 million net loss in the first
quarter, or $0.10 net loss per diluted share
* Increased liquidity position and reduced staffing levels to
cushion against sustained economic weakness
* Realized increases in non-performing loans and charge-offs, which
were 3.84% and 2.50%, respectively, as continued economic weakness
weighed on credit performance
* Built credit loss allowance to 2.81% to reflect continued weak
economic conditions and higher levels of non-performing loans
* Extended the agreement to acquire Southern Commerce Bank
BOSTON, May 6, 2009 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a Boston-based commercial finance company, today reported adjusted net loss for the first quarter of 2009 of $2.9 million, or $0.06 per diluted share. On a GAAP basis, the Company reported net loss of $5.0 million, or $0.10 per diluted share, which reflected $2.1 million after-tax non-cash equity compensation expense and 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.
"The first quarter was challenging for all types of lenders as continued weak economic conditions weighed on credit performance across the industry," said Tim Conway, Chairman and Chief Executive Officer. "Our credit metrics in the first quarter reflected broad-based weakness in the economy and more severe stress in certain sectors like advertising-based media and real estate. Despite the severity of this recession, however, we continue to benefit from a defensive credit strategy focused on senior debt in companies owned by private equity firms with meaningful value in the equity ownership of those companies."
"During the quarter, we also made substantial progress on our plans to acquire Southern Commerce Bank. We continue to work constructively with banking regulators to discuss the proposed acquisition and satisfy requirements for regulatory approval."
Loan Credit Quality
* The provision for credit losses was $25.3 million in the first
quarter of 2009, up from $17.9 million in the fourth quarter of
2008.
* Allowance for credit losses was $65.0 million or 2.81% of loans
at March 31, 2009, compared to $54.0 million or 2.25% at
December 31, 2008 and $36.8 million or 1.58% at March 31, 2008.
* Non-accrual loans consisted of ten loans with an aggregate
outstanding balance of $88.9 million at March 31, 2009 compared
to six loans with an aggregate outstanding balance of
$60.6 million at December 31, 2008. Additionally, the Company had
$6.5 million of other real estate owned ("OREO") comprised of a
single property as of March 31, 2009.
* Seven of the non-accrual loans and one additional accruing loan
with an aggregate outstanding balance of $61.3 million as of
March 31, 2009 were also delinquent loans.
* NewStar established $26.7 million of new specific reserves in the
first quarter of 2009 compared to $13.2 million in the fourth
quarter of 2008.
* NewStar had net charge-offs of $14.3 million or 2.50% of loans on
an annualized basis in the first quarter of 2009 compared to
$8.9 million or 1.47% of loans on an annualized basis in the
fourth quarter of 2008.
Funding and Capital
* Total cash and equivalents as of March 31, 2009 were $167 million, of which $58 million was unrestricted. Unrestricted cash increased from approximately $50 million at December 31, 2008 and restricted cash increased from approximately $84 million to $109 million. * Amended existing credit facility with Wachovia reducing the size from $350 million to $200 million and extending the maturity date of the liquidity line to June 1, 2009 (April 2009). The short term extension provides time to negotiate restructuring to improve the match between funding maturities and loan portfolio duration. * Amended existing term credit facility with Deutsche Bank reducing the size from $400 million to $250 million (January 2009). * Approximately 70% of loan assets continued to be term-funded by existing securitized term debt at attractive, locked-in spreads as of March 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 modest at 3.3x as of March 31, 2009 approximately equal to December 31, 2008. The slight decrease in leverage was due principally to repayment of advances under credit facilities.
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 March 31, 2009. * Total origination volume for the first quarter of 2009 was $18 million, of which $7 million was retained on NewStar's balance sheet and $11 million was sold to the NewStar Credit Opportunities Fund (NCOF). * Managed loan portfolio was $2.9 billion as of March 31, 2009 (down from $3.0 billion at December 31, 2008), reflecting the net impact of $18 million of new origination, which was offset by prepayments and scheduled amortization of existing loans. Managed loan portfolio was down from $3.0 billion at March 31, 2008. * Assets managed for the NCOF were $557 million at March 31, 2009, compared to $561 million at December 31, 2008 and $592 million at March 31, 2008. * Owned loan portfolio was $2.3 billion as of March 31, 2009 down from $2.4 billion at December 31, 2008. * The owned loan portfolio continued to be balanced across industry sectors and highly diversified by issuer. As of March 31, 2009, no single issuer represented more than 1% of total assets, 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 $22.2 million for the first quarter of 2009 compared to $24.4 million for the fourth quarter of 2008. * Net interest margin decreased 21 bps to 3.58% for the first quarter of 2009 compared to 3.79% for the fourth quarter of 2008 and 4.19% for the first quarter of 2008 due principally to non-payment of interest income from non-performing assets that was partially offset by an increase in credit spreads on new loans and re-pricing of existing loans.
Non-Interest Income
* Non-interest income was $6.3 million for the first quarter of 2009 compared to $8.6 million for the fourth quarter of 2008, and $3.2 million for the first quarter of 2008. * Non-interest income in the first quarter of 2009 consisted primarily of a $3.3 million gain on repurchase of debt, $3.0 million net gain on sale of an equity instrument, $0.8 million of asset management income and $0.3 million of agency fees, partially offset by $1.3 million decline in fair value of OREO and $0.9 million decline in fair value of equity instruments.
Expenses
* Operating expenses were $9.9 million in the first quarter of 2009 compared to $7.9 million in the fourth quarter of 2008, and $14.9 million in the first quarter of 2008. The increase in the first quarter of 2009 as compared to the fourth quarter of 2008 was due principally to $0.7 million of costs incurred in connection with the potential acquisition of Southern Commerce Bank, N. A, severance costs of $0.4 million in the first quarter and the partial reversal of incentive compensation accrual in the fourth quarter.
Other Developments
* Entered into two amendments to the stock purchase and sale agreement with Dickinson Financial Corporation to purchase Southern Commerce Bank, N. A. to extend the agreement to June 1, 2009 and to fix the purchase price at either $17 million or $15.5 million if Dickinson exercises its option to elect to have the transaction treated as an asset sale under Section 338 of the Internal Revenue Code.
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 877-604-9675 approximately 5-10 minutes prior to the call. International callers should dial 719-325-4934. All callers should reference "NewStar Financial."
For convenience, an archived replay of the call will be available through May 15, 2009 by dialing 888-203-1112. International callers should call 719-457-0820. For all replays, please use the passcode 2507542. 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 and Charleston SC. 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=4044
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, strategic plans, objectives, future performance and business, including our proposed acquisition of Southern Commerce Bank and application to become a bank holding company. As such, they are subject to material risks and uncertainties, including receipt of required regulatory approvals to become a bank holding company and acquire Southern Commerce Bank; 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, including increased regulation by the FDIC and OCC if we become a bank holding company.
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 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 Form 10-Q for the quarter ended March 31, 2009 with the SEC on or before May 11, 2009 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 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) 2009 2008 2008
--------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 57,581 $ 50,279 $ 165,220
Restricted cash 108,889 84,163 67,456
Residual interest in
securitization -- -- 308
Investments in debt
securities,
available-for-sale 2,676 3,025 30,805
Loans held-for-sale -- -- 65,287
Loans, net 2,234,467 2,328,812 2,271,030
Deferred financing costs, net 19,611 21,003 18,081
Interest receivable 8,640 10,608 13,215
Property and equipment, net 1,112 1,252 1,461
Deferred income taxes, net 29,794 31,238 13,051
Income tax receivable 6,268 -- --
Other assets 37,730 41,142 42,030
----------- ----------- -----------
Total assets $ 2,506,768 $ 2,571,522 $ 2,687,944
====================================================================
Liabilities:
Credit facilities $ 378,870 $ 411,267 $ 553,800
Term debt 1,503,616 1,524,171 1,519,725
Accrued interest payable 3,544 9,773 11,000
Income tax payable -- 353 668
Accounts payable 417 1,049 749
Other liabilities 42,227 43,354 41,636
----------- ----------- -----------
Total liabilities 1,928,674 1,989,967 2,127,578
Total stockholders' equity 578,094 581,555 560,366
----------- ----------- -----------
Total liabilities and
stockholders' equity $ 2,506,768 $ 2,571,522 $ 2,687,944
====================================================================
NewStar Financial, Inc.
Consolidated Statements of Operations
(unaudited)
--------------------------------------------------------------------
Three Months Ended
---------------------------------------
($ in thousands, except March 31, December 31, March 31,
per share amounts) 2009 2008 2008
--------------------------- ----------- ----------- -----------
Net interest income:
Interest income $ 35,925 $ 45,845 $ 51,988
Interest expense 13,765 21,445 25,324
----------- ----------- -----------
Net interest income 22,160 24,400 26,664
Provision for credit
losses 25,307 17,930 4,611
----------- ----------- -----------
Net interest income
after provision for
credit losses (3,147) 6,470 22,053
Non-interest income:
Fee income 493 866 1,532
Asset management income 787 1,457 1,651
Gain on derivatives 144 1,366 56
Gain (loss) on sale of
loans and debt securities -- (1) (786)
Loss on investments in
debt securities -- (1) (258)
Loss on residual interest
in securitization -- -- (323)
Other income 4,898 4,958 1,284
----------- ----------- -----------
Total non-interest income 6,322 8,645 3,156
Operating expenses:
Compensation and benefits 5,627 4,172 11,500
Occupancy and equipment 780 718 835
General and administrative
expenses 3,501 3,054 2,564
----------- ----------- -----------
Total operating expenses 9,908 7,944 14,899
----------- ----------- -----------
Income (loss) before income
taxes (6,733) 7,171 10,310
Income tax expense
(benefit) (1,783) 4,417 4,168
----------- ----------- -----------
Net income (loss) $ (4,950) $ 2,754 $ 6,142
=========== =========== ===========
After tax adjustments to
net income (loss):
IPO related compensation
and benefits expense (1) 2,051 2,102 1,193
Loss on assets sold and
retained residual
interest (2) -- 258 192
----------- ----------- -----------
Adjusted net income (loss) $ (2,899) $ 5,114 $ 7,527
=========== =========== ===========
Net income (loss) per share:
Basic $ (0.10) $ 0.06 $ 0.13
Diluted $ (0.10) $ 0.06 $ 0.13
Weighted average shares
outstanding:
Basic 48,778,526 48,510,697 47,787,965
Diluted 48,778,526 48,510,697 47,787,965
Adjusted net income (loss)
per share:
Basic $ (0.06) $ 0.11 $ 0.16
Diluted $ (0.06) $ 0.11 $ 0.16
Adjusted weighted average
shares outstanding:
Basic 48,778,526 48,510,697 47,787,965
Diluted 48,778,526 48,510,697 47,787,965
(1) 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.
(2) Loss and expenses incurred in connection with the sale of assets
comprised of 50 debt securities and two loans during Q2 2007,
permanent impairments on these assets, the change in fair value
of the residual interest in these assets, and the impact on the
effective tax rate. The change in effective tax rate was applied
retrospectively.
NewStar Financial, Inc.
Selected Financial Data
(unaudited)
--------------------------------------------------------------------
Three Months Ended
---------------------------------------
($ in thousands, except March 31, December 31, March 31,
per share amounts) 2009 2008 2008
--------------------------- ----------- ----------- -----------
Performance Ratios:
Return on average assets (0.79)% 0.42% 0.94%
Return on average equity (3.44) 1.88 4.53
Net interest margin,
before provision 3.58 3.79 4.19
Efficiency ratio 34.79 24.04 49.96
Loan portfolio yield 6.05 7.40 8.44
Credit Quality Ratios:
Delinquent loan rate
(at period end) 2.65% 0.69% 0.14%
Delinquent loan rate for
accruing loans 60 days
or more past due (at
period end) 0.09 -- --
Non-accrual loan rate
(at period end) 3.84 2.52 0.42
Annualized net charge
off rate 2.50 1.47 0.58
Allowance for credit
losses ratio (at period
end) 2.81 2.25 1.58
Capital and Leverage Ratios:
Tier 1 risk based
capital (1) 21.94% 21.86% N/A
Total risk-based
capital (2) 23.21 23.12 N/A
Equity to assets 23.06 22.62 20.85%
Debt to equity 3.26x 3.33x 3.70x
Book value per share $ 11.76 $ 12.00 $ 11.54
Average Balances:
Loans and other debt
products, gross $ 2,391,487 $ 2,431,109 $ 2,429,392
Interest earning assets 2,513,341 2,560,126 2,562,405
Total assets 2,544,764 2,613,730 2,633,221
Interest bearing
liabilities 1,916,508 1,966,631 1,993,106
Equity 583,346 582,630 545,588
Allowance for credit loss
activity:
Balance as of beginning
of period $ 53,977 $ 44,933 $ 35,487
General provision for
credit losses (1,409) 4,726 1,083
Specific provision for
credit losses 26,716 13,204 3,528
Net charge offs (14,271) (8,886) (3,335)
----------- ----------- -----------
Balance as of end of
period $ 65,013 $ 53,977 $ 36,763
=========== =========== ===========
Supplemental Data (at
period end):
Investments in debt
securities, gross $ 6,772 $ 6,839 $ 33,118
Loans held-for-sale, gross -- -- 67,277
Loans held-for-investment,
gross 2,316,930 2,402,309 2,321,357
----------- ----------- -----------
Loans and investments in
debt securities, gross 2,323,702 2,409,148 2,421,752
Unused lines of credit 316,917 339,230 404,054
Standby letters of credit 32,011 32,358 24,615
----------- ----------- -----------
Total funding commitments $ 2,672,630 $ 2,780,736 $ 2,850,421
=========== =========== ===========
Loan portfolio $ 2,323,702 $ 2,409,148 $ 2,421,752
Loans owned by NewStar
Credit Opportunities Fund 557,491 561,241 591,571
----------- ----------- -----------
Managed loan portfolio $ 2,881,193 $ 2,970,389 $ 3,013,323
=========== =========== ===========
Loans held-for-sale, gross $ -- $ -- $ 67,277
Loans held-for-investment,
gross 2,316,930 2,402,309 2,321,357
----------- ----------- -----------
Total loans, gross 2,316,930 2,402,309 2,388,634
Deferred fees, net (19,225) (20,998) (17,406)
Allowance for loan losses -
general (35,080) (36,786) (30,127)
Allowance for loan losses -
specific (28,158) (15,713) (4,785)
----------- ----------- -----------
Total loans, net $ 2,234,467 $ 2,328,812 $ 2,336,316
=========== =========== ===========
(1) Tier 1 risk-based capital ratio is defined as Tier 1 capital
divided by risk weighted assets.
(2) Total risk-based capital ratio is defined as the sum of Tier 1
capital and Tier 2 capital divided by risk-weighted assets.
NewStar Financial, Inc.
Non-GAAP Data
(unaudited)
--------------------------------------------------------------------
Adjusted
---------------------------------------
Three Months Ended
---------------------------------------
March 31, December 31, March 31,
($ in thousands) 2009 2008 2008
--------------------------- ----------- ----------- -----------
Performance Ratios:
Return on average assets (0.46)% 0.78% 1.15%
Return on average equity (2.02) 3.49 5.55
Efficiency ratio 31.37 19.32 43.46
Net interest margin,
before provision 3.58 3.79 4.19
Yield on interest earning
assets 5.80 7.12 8.16
Credit Quality and Leverage
Ratios (at period end):
Equity to assets 23.06 22.62 20.85
Consolidated Statement of
Operations Adjustments (1):
Non-interest income $ 6,322 $ 8,645 $ 3,156
Plus: loss on assets sold
and retained residual
interest (2) -- -- 323
----------- ----------- -----------
Adjusted non-interest
income $ 6,322 $ 8,645 $ 2,833
=========== =========== ===========
Operating expenses $ 9,908 $ 7,944 $ 14,899
Less: IPO related
compensation and benefits
expense (3) 973 1,561 1,798
----------- ----------- -----------
Adjusted operating
expenses $ 8,935 $ 6,383 $ 13,101
=========== =========== ===========
Average Balances:
Assets $ 2,544,764 $ 2,613,730 $ 2,633,221
Less: assets sold and
residual interest (2) -- -- 631
----------- ----------- -----------
Adjusted assets $ 2,544,764 $ 2,613,730 $ 2,632,590
=========== =========== ===========
Interest earning assets $ 2,513,341 $ 2,560,126 $ 2,562,405
Less: assets sold and
residual interest (2) -- -- 631
----------- ----------- -----------
Adjusted interest earning
assets $ 2,513,341 $ 2,560,126 $ 2,561,774
=========== =========== ===========
Consolidated Balance Sheet
Adjustments
Assets $ 2,506,768 $ 2,571,522 $ 2,687,944
Less: assets sold and
residual interest (2) -- -- 308
----------- ----------- -----------
Adjusted assets $ 2,506,768 $ 2,571,522 $ 2,687,636
=========== =========== ===========
(1) Adjustments are pre-tax.
(2) On June 29, 2007, the Company completed the sale of assets
comprised of 50 debt securities and two loans and retained a
residual interest in these assets. The adjustment represents the
financial impact of the sold assets and residual interest.
(3) 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.
NewStar Financial, Inc.
Portfolio Data
(unaudited)
--------------------------------------------------------------------
($ in thousands) March 31, 2009 December 31, 2008 March 31, 2008
--------------- ---------------- ---------------- ----------------
Portfolio Data:
First mortgage $ 378,162 16.3% $ 370,810 15.4% $ 398,700 16.5%
Senior secured
asset-based 35,207 1.5 40,969 1.7 54,547 2.2
Senior secured
cash flow 1,804,417 77.7 1,884,862 78.2 1,808,177 74.7
Senior
subordinated
asset-based 57,336 2.5 64,156 2.7 108,052 4.5
Senior
subordinated
cash flow 8,182 0.3 8,182 0.3 13,746 0.6
Second lien 33,311 1.4 33,086 1.4 32,048 1.3
Mezzanine/
subordinated 7,087 0.3 7,083 0.3 6,482 0.2
---------- ----- ---------- ----- ---------- -----
Total $2,323,702 100.0% $2,409,148 100.0% $2,421,752 100.0%
========== ===== ========== ===== ========== =====
Middle Market
Corporate $1,926,055 82.9% $2,016,447 83.7% $1,996,073 82.4%
Commercial
Real Estate 397,647 17.1 392,701 16.3 425,679 17.6
---------- ----- ---------- ----- ---------- -----
Total $2,323,702 100.0% $2,409,148 100.0% $2,421,752 100.0%
========== ===== ========== ===== ========== =====