Colleen Banse – Investor Relations
Tim Conway - Chairman and Chief Executive Officer
John Bray – Chief Financial Officer
Sameer Gokhale - Keefe, Bruyette & Woods
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» NewStar Financial, Inc. Q1 2010 Earnings Call Transcript
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Good morning and welcome to the NewStar Financial Q2 2010 earnings call. [Operator instructions.] I would now like to turn the conference over to your host for today’s call, Ms. Colleen Banse. Ma’am you may begin.
Thanks everyone for joining us for our earnings conference call where we will be discussing our second quarter 2010 results. With me today are Tim Conway, Chairman and Chief Executive Officer of NewStar Financial; and John Bray, our Chief Financial Officer.
Before I turn the call over to Tim, I want to remind you that we have posted a presentation on the Investor Relations section of our web site, www.newstarfin.com. Also available on our web site is our financial results press release which was filed on Form 8-K with the SEC this morning.
This presentation and our financial results press release contain additional materials related to this conference call that we may refer to during our remarks today, including information with respect to certain non-GAAP financial measures.
This call is also being webcast simultaneously on our web site and the recording of the call will be available beginning at approximately 1:00 p.m. Eastern Time today. Our press release and web site provide details on accessing the archived call.
Also before we begin, I need to inform you that statements in this earnings call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties and contingencies, many of which are beyond NewStar's control and which may cause actual results to differ materially from anticipated results. More detailed information about these risk factors can be found in our press release issued this morning and in the Risk Factors section as updated on our quarterly reports on Form 10-Q.
NewStar is under no obligation to, and we especially disclaim, any such obligation to update or alter our forward-looking statements whether as a result of information, future events, or otherwise, except where required by law. NewStar plans to file its Form 10-Q with the SEC on or before August 9 and urges its shareholders to refer to that document for a more complete information concerning the company's financial results.
Now I'd like to turn the call over to NewStar's Chairman and Chief Executive Officer, Tim Conway.
Thanks Colleen, and thanks for joining the call today. I’m pleased to report that our operating performance continued to improve and that we returned to profitability in the second quarter. We generated adjusted net income of $5.9 million, or $0.11 per diluted share, driven by significantly lower credit costs and margin improvement.
A return to profitability at this time is a reflection of the many steps we’ve taken over the past few years to anticipate and mitigate credit losses, add to the maturities of our assets and liabilities, enhance liquidity, and reduce costs. Our ability to preserve book value through the crisis is the result of our direct origination platform, senior debt focus, highly selective credit process, and a granular portfolio.
Q2 performance was in line with our expectations and consistent with what we began signaling in the fourth quarter of last year. Despite the increasing likelihood of a slow recovery from the recession, we expect our default rate and credit costs to continue to moderate, and we still expect to be profitable for the full year.
Of course, given the lack of vigor in the economic recovery, our earnings will remain vulnerable to potential negative credit events or a slowdown in economic growth. Conversely, as the economy improves, we would expect to see some positive credit outcomes that could provide cushion against unanticipated weakness in individual names.
In addition to posting a profit, there were several other positive developments in the second quarter. We made significant progress on our key initiatives that will drive growth and improve profitability by increasing lending activity and beginning to execute on our plans to expand the business.
Origination volume more than doubled to $123 million, compared to a plan of $55 million. Our quarterly origination volume was the highest it’s been in nearly two years. These volumes reflect the shift in our focus, from protecting the balance sheet to building the franchise, as well as a pickup in overall loan demand.
We also renewed our credit facility with Natixis and for the first time since the crisis began we were able to improve the pricing and other key terms on a bank facility. We generated substantial cash flow and enhanced our liquidity position. Unrestricted cash stood at $40 million at the end of quarter, which along with our undrawn $75 million corporate revolver represented $115 million of available liquidity.
We added staff for the first time since the fourth quarter of 2007, while continuing to effectively manage cost despite elevated workout expenses. As I mentioned on the last call, we provided long-term retention-based incentives to key personnel. These incentives are tied to performance criteria and are structured to vest at the end of a three year period. These grants are expected to replace annual grants to senior management during that time frame.
Following a surprising period of overheating during the first part of the year, resulting largely from light deal flow, loan market conditions improved in the second quarter. Volume increased due to an uptick in M&A activity and pricing improved as euro zone issues and concerns over slower economic recovery resulted in wider spreads in most of the fixed income markets.