NewStar Financial, Inc. Q1 2010 Earnings Call Transcript

NewStar Financial, Inc. Q1 2010 Earnings Call Transcript
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NewStar Financial, Inc. (NEWS)

Q1 2010 Earnings Call

May 05, 2010 10:00 am ET


Colleen Banse - IR

Tim Conway - Chairman and CEO

John Kirby Bray - CFO


Sameer Gokhale - Keefe, Bruyette & Woods



Welcome to the NewStar Financial Q1 2010 earnings call. (Operator Instructions)

And now your host for today's conference, Colleen Banse, please begin.

Colleen Banse

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Thanks everyone for joining us for our earnings conference call where we will be discussing our first 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 website, Also available on our website 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 website and a recording of the call will be available beginning at approximately 1:00 p.m. Eastern Time today. Our press release and website provide details on accessing the archived call.

Also before we begin, I must 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 May 10 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.

Tim Conway

Thanks, Colleen, and thanks for joining the call today. As you are all aware, 2009 was a challenging year and we spent most of our time managing credit, reserving liquidity and reducing expenses. We made significant progress against each of these objectives in 2009 and further reduced the company's risk profile by increasing reserves, paying down short-term debt, renewing two credit facilities, adding $75 million of liquidity and executing a new CLO.

Although the economic environment is still volatile, these accomplishments have enabled us to shift our focus to providing more capital to our customers and executing on growth initiatives and generating profits.

I'm pleased to report that the company's financial results improved in the first quarter and that our outlook remains positive. Credit performed as expected and loan demand has begun to rebound. I'm also pleased to see that our progress against these objectives has provided a catalyst for the stock price, which has increased 30% since the last call.

Although still relatively modest, the loan volume improved significantly in the quarter. We originated 10 loans totaling $62 million in the quarter compared to 13 loans totaling $115 million for all of 2009. Activity has picked up noticeably in the last month, and we expect the origination volume to continue to build during the year.

Margins were negatively affected in large part by several non-recurring items or also by the higher cost of the recent CLO and the liquidity line. The non-recurring items were due to the acceleration of deferred financing fees in connection with the early retirement of debt and the reduction in the size of our credit facility with Citibank.

We expect margins to return to more normal levels in the second quarter, and John will discuss that in more detail. Before we close, I will provide some color on the yields we're seeing on new business and the implications for our margins going forward.

On our last call, I indicated that the credit outlook had improved and that we believed provision for loan loss is going to peak in the fourth quarter. We still believe that credit provisions peaked in the fourth quarter. The addition of new specific reserves, our primary measure of credit performance, declined by $18 million or 44% during the quarter and we forecast another meaningful decline next quarter.

Although we continue to operate in a challenging environment with elevated levels of non-performing assets, we expect these positive trends to continue through the year as our borrowers benefit from a rebound in the economy.

If this trend continues as expected, we would return to profitability in the second quarter and generate earnings for the full year as credit costs declined and origination volumes increased.

Our results in the first quarter reinforced our confidence in that outlook. Our credit forecast is based on the financial forecast of our borrowers and developed through detailed reviews of each name in the portfolio as well as our own view of how changes in economic conditions and industry trends may impact them. This analysis gives us confidence that our credit performance through the cycle will continue to compare favorably to peers and to recognize market benchmarks.

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