NewStar Financial, Inc. ( NEWS)

Q3 2010 Earnings Call

November 03, 2010 10:00 am ET


Colleen Banse - Managing Director

Tim Conway - Chairman and CEO

John Bray - CFO


Sameer Gokhale - KBW



Welcome to the NewStar Financial Q3 2010 Earnings Conference Call. At this time, all participants are in listen-only mode. (Operator Instructions) As a reminder, this conference maybe recorded.

I would now like to turn the conference over to today’s host, Ms. Colleen Banse. Ma’am, you may begin.

Colleen Banse

Thanks everyone for joining us for our earnings conference call, where we will be discussing our third 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 recording of the call will be available beginning at approximately 1 pm Eastern Time today. Our press release and website provide details on accessing in the archived call.

Also before we begin, I need to inform you that statements in this earnings call, which are not historical facts, maybe 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 or required by law.

NewStar plans to file its Form 10-Q with the SEC on or before November 9th, and urges its shareholders to refer to that document for more complete information concerning the company’s financial results.

Now, I would like to turn the call over to NewStar’s Chairman and Chief Executive Officer, Tim Conway.

Tim Conway

Thanks, Colleen, and thank you all for joining the call today. I am pleased to report that we had another very good quarter. Our operating performance continued to improve, volume and yields increased and we made significant progress executing on our strategic plan. The strategic plan is straightforward, our number one priority is to build income momentum as credit costs normalize and we increase the volume of new business with attractive deals.

Our second priority is to begin to re-lever the balance sheet and free up excess capital to fund growth. Thirdly, we want to broaden and diversify the existing platform into markets that are consistent with our core strengths and generate solid double-digit after-tax returns.

During the quarter, we generated net income of $6 million, or $0.12 per diluted share. Book value per share increased $0.21 to $10.74. Origination volumes again exceeded our plan increasing to $145 million and we put on the new loans at attractive deals. The average yield on loans booked in the third quarter was 7.1%, up meaningfully from 6% in the second quarter.

We believe the 7% yield on senior secured debts are attractive relative to other fixed income asset classes and highlight the value of our direct origination capabilities. Comparably rated public high yield bonds for example, which have longer tenure and are typically subordinated to senior loans, are trading at about 8%.

Although we have seen some tightening in loan spreads over the last month or so, we expect pricing to be attractive for the foreseeable future as a way of refinancing roles and at a time, when CLO capacity begins to run off.

As we build volume, we continue to add origination staff, we recently hired 20-year middle market veteran Jeffrey Catrett, who is a Managing Director on our Chicago office. I now believe that we are well positioned to maintain the momentum we have established in origination and continue to increase volumes into 2011.

Credit continues to improve in the third quarter, but at a slower pace that we had seen in the first half. We expect to see continued firming in the portfolio performance, but the recovery will be slower in past recoveries given the persistent unemployment and housing problems associated with this cycle.

We believe the commercial real estate is largely stabilized. We are paid out three real estate loans totaling $26 million in the quarter; one was paid at par and the others at levels above, where we had them reserved.

As always, we point out that our credit cost could be lumpy. While the economy is still fragile, the credit markets have stabilized to the point, where we are in a position to evaluate, how our credit perform to the cycle. We continue to believe that our track record has outperformed the industries as well as our peers.

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