News Column

NewStar Reports Second Quarter Consolidated Net Loss of $1.9 Million, or $0.04 Per Diluted Share

August 6, 2014

New Loan Volume – Originated new funded loan volume totaling $326 million, up $51 million or 19% from the prior quarter and up slightly from the same period last year.•Asset Management – Expanded the Arlington Fund to $409 million with additional equity invested in connection with the securitization of the program's assets, which also resulted in the deconsolidation of the Fund's assets and liabilities from NewStar's financial statements as of June 26, 2014.•Credit Costs – Provision for credit losses increased $6.8 million from the prior quarter to $12.7 million due primarily to $9.2 million of additional specific charges taken in connection with the final resolutions of three impaired loans. As a result, charge-offs were also elevated in the quarter at $13.1 million, up from $8.1 million in the prior quarter.•Asset Quality – NPA balances remained flat at $90.4 million at the end of the second quarter, while the NPA rate increased to 4.3% from the prior quarter due primarily to a $203 million decrease in the loan portfolio resulting from the deconsolidation of the Arlington Fund.•Net Interest Margin – Margin narrowed to 3.04% for the second quarter from 3.50% due primarily to the accelerated recognition of deferred financing costs in connection with the repayment of the Arlington Fund's credit facility in the second quarter and higher cost of funds from the term debt securitization completed in April 2014.•Funding – Completed eighth loan securitization totaling $348 million in April 2014 with a weighted average interest rate of Libor + 232 bps.•Stock Buyback Program – Repurchased $14.8 million of the Company's common stock under the repurchase program authorized on May 5, 2014.

BOSTON, Aug. 6, 2014 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a specialized commercial finance company, today reported a consolidated net loss of $1.9 million, or $0.04 per diluted share for the second quarter of 2014. Net loss excluding the results of the Arlington Fund, a consolidated variable interest entity ("VIE"), was $1.3 million1. These results compare to net income of $6.2 million, or $0.12 per diluted share in the first quarter of 2014 and $5.6 million, or $0.11 per diluted share in the second quarter of 2013. Operating income (loss) before income taxes was $(3.1) million for the second quarter of 2014 compared to $9.4 million in the first quarter of 2014 and $9.3 million in the second quarter of 2013.

"Credit costs were higher than expected this quarter due to the resolution of a handful of legacy impaired loans, which required us to take some higher than usual charges. Although those costs weighed on our financial performance, resulting in a small loss for the quarter, it allowed us to conclude several long term workouts," said Tim Conway, NewStar's Chairman and Chief Executive Officer. "Loan demand remained strong, however, and origination volume was up sharply from last quarter driven largely by loan demand derived from continued middle market M&A activity," he added. "Importantly, our current new business pipelines reflect a continuation of this positive trend into the typically slower summer months and the pricing environment remains relatively stable. The recent increase in the Arlington Senior Loan Program and our plans for further expansion of our asset management activities reflects our continued belief that middle market lending offers the best relative value among credit investment options and NewStar is among only a few independent commercial lenders positioned to capitalize on it," he concluded.

Managed and Owned Loan Portfolios

• Total new funded loan volume was approximately $326 million in the second quarter compared to $275 million in the prior quarter and $319 million in the second quarter of the prior year. Higher volumes reflected somewhat higher demand for acquisition financing from financial sponsors compared to the prior quarter and increasing contributions from the Company's asset-based lending and leasing business units.• Excluding loans in the Arlington Fund at March 31, 2014 and June 30, 2013, the owned loan portfolio was relatively consistent with the prior quarter, but up 17% from the second quarter of 2013, reflecting solid new loan volume in 2014.• The Leveraged Finance loan portfolio, excluding loans in the Arlington Fund at March 31, 2014 and June 30, 2013, was down 3% from the first quarter of 2014 at $1.8 billion, while asset-based loans and leases in our Business Credit portfolio increased 16% to $279 million.• Assets managed for third party institutional investors, including the Arlington Program and its predecessor, increased to $288 million at June 30, 2014 from $215 million at March 31, 2014.• Asset-based lending originated approximately $35 million and the equipment finance business originated approximately $20 million in the second quarter of 2014, or 17% of new loan volume retained on the balance sheet.• The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. As of June 30, 2014, no outstanding borrowings by a single obligor represented more than 1.6% of total loans outstanding, and the ten largest obligors comprised approximately 10.2% of the loan portfolio.

Arlington Fund (Senior Loan Program)

• The size of the Arlington Fund was increased to $409 million from an original target size of $300 million through a planned recapitalization transaction in the second quarter that included investment of additional equity from third parties and the securitization of the Fund's loan assets to provide program leverage consistent with the fund's investment strategy. In connection with the transaction, the Arlington Fund was renamed NewStar Arlington Senior Loan Program (the "Arlington Program").• On June 26, 2014, the Arlington Program completed a $409.4 million term debt securitization backed by a portfolio of middle market loans comprised of all the loans held by the Arlington Fund as well as certain of the Company's loans designated as held-for-sale. A portion of the proceeds from the transaction was used to repay outstanding advances under the Class A and B Notes of the revolving credit facility. Following repayment of all outstanding loans, the Company's membership interests in Arlington Fund were also redeemed and new membership interests in the Arlington Program were issued to other equity investors. As a result, the Company no longer has any ownership or financial interests in the Arlington Fund or its successor, the Arlington Program, except to the extent that it receives management fees as collateral manager of the Arlington Program.• Because the Company is not considered the primary beneficiary of the Arlington Program, it will not consolidate the Arlington Program's operating results or statements of financial position as of June 26, 2014 and the Company deconsolidated the Arlington Fund from its statement of financial position as of that date.• Loans managed for the benefit of the Arlington Program (and its predecessor) increased to $239.4 million as of June 30, 2014 from $165 million as of March 31, 2014. At June 30, 2014, loans held-for-sale included $14.5 million of loans intended to be sold to the Arlington Program.• The net results (after-tax) of the Fund included in NewStar's financial statements as a consolidated VIE were $0.02 million in the second quarter, down from $0.7 million in the first quarter of 2014. The Company does not expect to report further net results of the Fund in its financial statements as a consolidated VIE except as shown in prior periods.

Net Interest Income / Margin

• Net interest income decreased to $19.6 million for the second quarter of 2014 compared to $21.8 million for the first quarter of 2014 and $25.2 million in the second quarter of 2013.• The portfolio yield decreased to 6.14% in the second quarter of 2014 compared to 6.18% in the prior quarter, and 7.33% in the second quarter of 2013, reflecting the impact of lower yields on new loan volume and repricings and recognition of deferred interest income during the second quarter of 2013 on problem loans resolved during that quarter.• Net interest margin narrowed to 3.04% for the second quarter of 2014 compared to 3.50% for the first quarter of 2014 as interest expense increased $2.6 million from the first quarter due to accelerated amortization of deferred fees from the repayment of the Arlington Fund's credit facility and higher cost of funds from the term debt securitization completed in April 2014.• Excluding the Arlington Fund, the net interest margin would have been 3.30% in the second quarter.

Non-Interest Income

• Non-interest income was $1.7 million for the second quarter of 2014, down from $6.7 million for the first quarter of 2014, and up slightly from $1.5 million for the second quarter of 2013. The change from the first quarter was due primarily to gains during the first quarter of 2014 totaling $6.5 million recognized from the sale of equity retained in prior debt restructurings, which were partially offset by a $1.6 million loss during the first quarter of 2014 recognized through equity method of accounting for interests in impaired borrowers.• Other non-interest income in the second quarter of 2014 consisted primarily of $0.4 million of unused fees on revolving credit commitments, $0.2 million of amendment and exit fees, and $0.2 million of fees generated by Business Credit. It also included approximately $0.6 million of revenue related to OREO currently being managed by the Company, which was offset by related OREO costs included in general and administrative expenses.   

Credit Performance

• Total credit costs (including provision for credit losses and losses on OREO or interests retained in connection with workouts of impaired loans) in the second quarter of 2014 increased by $6.8 million to $12.7 million from $5.8 million in the prior quarter primarily due to $9.2 million of specific provisions in connection with final resolutions of three impaired loans.   • Total specific provision expense was approximately $13.9 million in the second quarter of 2014, up from $4.1 million in the prior quarter. • The allowance for credit losses was $39.1 million, or 1.87% of consolidated loans and approximately 50% of NPLs, at June 30, 2014, compared to $39.6 million, or 1.72% of loans and approximately 52% of NPLs, at March 31, 2014. • Non-performing assets were relatively consistent at $90.4 million at June 30, 2014 compared to $89.9 at the end of the prior period. Although two legacy impaired loans and one 2010 vintage loan totaling approximately $11.6 and $11.4 million, respectively, were placed on non-accrual in the quarter, they were offset by $9.3 million of repayments and net charge-offs of $13.2 million in the period. • At June 30, 2014, loans with an aggregate outstanding balance of $77.5 million (net of charge-offs), or 3.70% of loans, were on non-accrual status compared to loans with an aggregate outstanding balance of $76.6 million (net of charge-offs), or 3.33% of consolidated loans at March 31, 2014. Non-performing assets, net of charge-offs, specific reserves and other adjustments were $90.4 million, or 4.29% of loans as of June 30, 2014.

Expenses

• Operating expenses declined 3% to $11.8 million in the second quarter of 2014 as compared to the first quarter of 2014.• Excluding non-cash equity compensation2, operating expenses were $11.2 million in the second quarter compared to $11.5 million in the first quarter of 2014, or 1.8% of average assets on an annualized basis for each period.• The efficiency ratio excluding non-cash equity compensation3 in the second quarter of 2014 was 52.92% compared to 40.39% in the prior quarter, reflecting lower net interest income due primarily to $1.2 million of accelerated amortization of deferred financing costs related to Arlington Fund.• The Company had 98 full-time employees as of June 30, 2014 and March 31, 2014.

Income Taxes

• Deferred income taxes decreased to $24.2 million as of June 30, 2014 compared to $27.6 million as of March 31, 2014 due primarily to charge-offs in the second quarter of 2014.• Approximately $17.3 million and $7.6 million of the deferred tax asset as of June 30, 2014 were related to our allowance for credit losses and equity compensation, respectively.

Funding and Capital

• Total cash and equivalents as of June 30, 2014 were $219.5 million, of which $53.3 million was unrestricted. Unrestricted cash increased from approximately $24.1 million at March 31, 2014 due primarily to the timing of cash distributions from CLO trusts. Restricted cash increased to approximately $166.1 million from approximately $103.6 million (excluding cash at the Arlington Fund) due primarily to timing differences in settlement dates of CLO trusts and other non-recourse, secured financing arrangements.• Advances under credit facilities (excluding the Arlington Fund at March 31, 2014) decreased by approximately $151 million due primarily to repayment of advances from the proceeds of a new term debt securitization issuance.• A credit facility provided by Wells Fargo used to fund asset based lending activity was amended during the quarter to increase the commitment amount by $25.0 million to $100.0 million with the addition of a new lender to the syndicate.• Term debt increased by approximately $193 million to $1.6 billion at June 30, 2014 due primarily to the completion of a $348.4 million term debt securitization in April 2014 (see below), which was partially offset by the repayment of CLO notes from principal collections on loans held in amortizing CLO trusts that were completed during 2006 and 2007. The corporate credit facility was amended during the second quarter to increase the commitment and the amount borrowed by $10.0 million to $238.5 million.• Completed eighth term debt securitization totaling $348.4 million in April 2014. All floating rate notes were priced at par to yield a weighted average spread of approximately Libor plus 232 bps. The Company placed various classes of rated notes totaling approximately $290 million with investors, which represented an advance rate of approximately 83% of the CLO trust's assets. • Total debt (excluding the Arlington Fund at March 31, 2014) increased by approximately $40.9 million to $1,777.5 million at June 30, 2014, which led to an increase in balance sheet leverage to 2.9x from 2.8x at March 31, 2014 (excluding the Arlington Fund at March 31, 2014). The increase was due primarily to the new CLO completed during April 2014, partially offset by run-off of loans held in CLOs completed in 2006 and 2007 and lower advances under the credit facilities with Wells Fargo.    

Equity

• On May 5, 2014, the Board of Directors authorized the repurchase of up to $20 million of the company's common stock from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares purchased will be determined by the company's management based on its evaluation of market conditions and other factors. The repurchase program, which will expire on April 30, 2015 unless extended by the Board of Directors, may be suspended or discontinued at any time without notice. As of June 30, 2014, the company had purchased $14.8 million of its common stock under the program, which was subsequently completed in July. • Book value per share was $12.62 at the end of the second quarter of 2014, down $0.14 from $12.76 at the end of the prior quarter primarily due to the net settlement of warrants to purchase common stock and net income (loss). • Average diluted shares outstanding would have been 52.1 million shares for the quarter, which was down slightly from 52.8 million shares for the prior quarter. Total outstanding shares at June 30, 2014 were 48.3 million, down from 48.9 million at March 31, 2014.

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 877-755-7419 approximately 5-10 minutes prior to the call. International callers should dial 973-200-3080. All callers should reference "NewStar Financial."   

For convenience, an archived replay of the call will be available through August 13, 2014 by dialing 855-859-2056. International callers should call 404-537-3406. For all replays, please use the passcode 77928969. The audio replay will also be available through the Investor Relations section at www.newstarfin.com.            

About NewStar Financial

NewStar Financial Inc. (Nasdaq:NEWS) is a specialized commercial finance company focused on meeting the complex financing needs of companies and private investors in the middle market. The Company specializes in providing senior secured debt financing options to mid-sized companies to fund working capital, growth strategies, acquisition and recapitalization, as well as, equipment purchases. NewStar originates loans and leases directly through a team of experienced, senior bankers and marketing officers organized around key industry and market segments. The Company targets 'hold' positions of up to $35 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, Atlanta GA, Chicago IL, Dallas TX, Los Angeles CA, New York, NY, Portland OR and San Francisco CA. For more detailed information, please visit our website at www.newstarfin.com

Forward-Looking Statements

This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding loan demand and expansion of asset management activities. 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, the market price for NewStar's stock prevailing from time to time, the nature of other investment opportunities presented to NewStar from time to time, objectives, future performance, financing plans and business. As such, they are subject to material risks and uncertainties, including our limited operating history; 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.

More detailed information about these risk factors can be found in NewStar's filings with the Securities and Exchange Commission (the "SEC"), including Item 1A ("Risk Factors") of our 2013 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 with the SEC on or before August 11, 2014 and urges its shareholders to refer to that document for more complete information concerning NewStar's financial results.

Non-GAAP Financial Measures

Net income excluding the Arlington Fund ("Managed VIEs") is a non-GAAP performance measure that we use to assess our business without giving effect to the consolidation of the Arlington Fund in applicable periods. Although, we consolidate all of the assets and liabilities of the Arlington Fund in accordance with GAAP, our maximum exposure to loss is limited to our investments in membership interests in Arlington Fund as well as our loan receivable and any accrued management fees receivable by us from the Arlington Fund. Since these items that define our economic relationship with Arlington Fund are eliminated upon consolidation, management uses net income excluding managed VIEs to assess its core economic performance. In addition, we manage the assets of the Arlington Fund solely for the benefit of its investors and lenders. If we were to liquidate, the assets of the Arlington Fund would not be available to our general creditors, and as a result, we do not consider the assets of the Arlington Fund to be part our assets.   Conversely, the investors in the debt of Arlington Fund have no recourse to our general assets. Therefore, the Arlington Fund's debt is not considered the Company's obligation.

Net interest margin excluding the Arlington Fund means net interest income excluding the net interest income from the Arlington Fund plus the interest income from the Company's B Note with the Arlington Fund divided by average interest earning assets less the average interest earning assets of the Arlington fund plus the average balance of the Company's B Note with the Arlington Fund. A calculation of net interest margin excluding the Arlington Fund is included on page 13 of this release.

References to "risk-adjusted revenue" mean the sum of net interest income after provision for credit losses as determined under GAAP and non-interest income as determined under GAAP. NewStar management uses "risk adjusted revenue" to make operational and investment decisions, and NewStar believes that it provides useful information to investors in their evaluation of our financial performance and condition. A calculation of risk-adjusted revenue is included on page 13 of this release. 

References to "operating expenses, excluding non-cash equity compensation" mean operating expenses as determined under GAAP, excluding compensation expense related to restricted stock grants and option grants.  GAAP requires that these items be included in operating expenses. NewStar management uses "operating expenses, excluding non-cash equity compensation" 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 and option grants eliminates unique amounts that make it difficult to assess our core performance and compare our period-over-period results. A reconciliation of operating expenses, excluding non-cash equity compensation to operating expenses is included on page 13 of this release. 

1 Net Income excluding the results of the Arlington Fund is a non-GAAP measure. See "Non-GAAP Financial Measures" at the end of this press release and pages 9 and 10 for reconciliation to GAAP net income.

2 Operating expenses excluding non-cash equity compensation is a non-GAAP measure. See "Non-GAAP Financial Measures" at the end of this press release and page 13 for reconciliation of non-GAAP to GAAP measurements.

3 Efficiency ratio excluding non-cash equity compensation is a non-GAAP measure. See "Non-GAAP Financial Measures" at the end of this press release and page 13 for reconciliation of non-GAAP to GAAP measurements.

 
NewStar Financial, Inc.
Consolidated Balance Sheets
(unaudited)
 
       
 June 30,March 31,December 31,June 30,
($ in thousands)2014201420132013
Assets:        
Cash and cash equivalents$ 53,321$ 24,063$ 43,401$ 83,390
Restricted cash  166,149  103,571  167,920  228,330
Investments in debt securities, available-for-sale  16,545  22,544  22,198  21,099
Loans held-for-sale, net  44,314  30,045  14,831  20,894
Loans and leases, net  2,034,940  2,080,553  2,095,250  1,743,163
Deferred financing costs, net  22,442  20,132  21,386  19,527
Interest receivable  6,764  7,080  7,415  8,547
Property and equipment, net  748  765  833  334
Deferred income taxes, net  24,624  27,574  30,238  32,144
Income tax receivable  9,398  607  2,007  10,722
Other assets  31,670  41,980  24,983  25,761
Subtotal  2,410,915  2,358,914  2,430,462  2,193,911
Assets of Consolidated Variable Interest Entity (VIE):        
Cash and cash equivalents    --  --  457
Restricted cash    5,723  1,950  1,160
Loans, net    163,988  171,427  84,329
Deferred financing costs, net    938  997  1,067
Interest receivable    793  1,079  459
Other assets    808  946  252
Total assets of Consolidated VIE    172,250  176,399  87,724
Total assets$ 2,410,915$ 2,531,164$ 2,606,861$ 2,281,635
         
Liabilities:        
Credit facilities$ 149,025$ 300,508$ 332,158$ 249,717
Term debt  1,570,961  1,378,313  1,412,374  1,295,079
Repurchase agreements  57,515  57,739  67,954  27,761
Accrued interest payable  4,430  4,275  6,333  7,467
Accounts payable  380  584  588  1,023
Other liabilities  19,503  20,226  19,623  24,917
Subtotal  1,801,814  1,761,645  1,839,030  1,605,964
Liabilities of Consolidated VIE:        
Credit facilities    114,844  120,344  51,185
Accrued interest payable - credit facilities    438  434  292
Subordinated debt - Fund membership interest    30,000  30,000  21,791
Accrued interest payable - Fund membership interest    180  843  349
Accounts payable    --  --  247
Other liabilities    --  --  71
Total liabilities of Consolidated VIE:    145,462  151,621  73,935
Total liabilities  1,801,814  1,907,107  1,990,651  1,679,899
NewStar Financial, Inc. stockholders' equity  609,101  622,148  615,552  601,601
Retained earnings of Consolidated VIE    1,909  658  135
Total stockholders' equity  609,101  624,057  616,210  601,736
Total liabilities and stockholders' equity$ 2,410,915$ 2,531,164$ 2,606,861$ 2,281,635
 
 
NewStar Financial, Inc.
Consolidated Statements of Operations
(unaudited)
 
         
 Three Months Ended
 June 30,March 31,December 31,June 30,
($ in thousands, except per share amounts)2014201420132013
Net interest income:        
Interest income$ 33,536$ 33,127$ 32,283$ 34,891
Interest expense  13,868  12,501  12,173  9,908
Net interest income  19,668  20,626  20,110  24,983
Provision for credit losses  12,652  5,807  2,309  4,330
Net interest income after provision for credit losses  7,016  14,819  17,801  20,653
         
Non-interest income:        
Fee income  462  770  1,079  1,183
Asset management income  30  25  511  652
Loss on derivatives  (13)  (4)  (12)  (45)
Gain (loss) on sale of loans  --  (166)  --  45
Other income  1,017  6,093  2,239  (374)
Total non-interest income  1,496  6,718  3,817  1,461
Operating expenses:        
Compensation and benefits  7,803  7,759  7,652  8,735
General and administrative expenses  3,852  4,369  4,541  4,034
Total operating expenses  11,655  12,128  12,193  12,769
Operating income (loss) before income taxes  (3,143)  9,409  9,425  9,345
Results of Consolidated VIE        
Interest income  2,615  2,653  2,430  900
Interest expense - credit facilities  1,987  878  853  334
Interest expense - Fund membership interest  697  595  571  349
Other income  221  8  17  16
Operating expenses  189  60  64  4
Net results from Consolidated VIE  (37)  1,128  959  229
Income (loss) before income taxes  (3,180)  10,537  10,384  9,574
Income tax expense (benefit)  (1,325)  4,334  4,024  3,930
Net income (loss)$ (1,855)$ 6,203$ 6,360$ 5,644
Non-GAAP after tax adjustments to net income:        
Net results of Consolidated VIE 22  (664)  (587)  (135)
Interest income from loan to Consolidated VIE (1) 209  220  199  109
Interest income from Fund membership interest (2) 194  58  58  34
VIE management fee (3) 145  157  147  49
Fund membership interest dividend  --  --  50  --
Net income (loss) excluding managed VIE$ (1,285)$ 5,974$ 6,227$ 5,701
         
Net income (loss) per share:        
Basic$ (0.04)$ 0.13$ 0.13$ 0.12
Diluted$ (0.04)$ 0.12$ 0.12$ 0.11
         
Net income (loss) excluding managed VIE per share:        
Basic$ (0.03)$ 0.12$ 0.13$ 0.12
Diluted$ (0.03)$ 0.11$ 0.12$ 0.11
         
Weighted average shares outstanding:        
Basic  48,881,893  48,730,152  48,673,204  47,965,873
Diluted  48,881,893  52,789,947  53,016,813  52,599,708
         
(1) Interest income earned by NewStar from the B Note with Arlington Fund which is eliminated in consolidation of the VIE.
(2) Interest income earned by NewStar from its membership interest in Arlington Fund which is characterized as debt for consolidation and eliminated in consolidation of the VIE. 
(3) Management fee earned by NewStar which is eliminated in consolidation of the VIE.
 
 
NewStar Financial, Inc.
Consolidated Statements of Operations
(unaudited)
 
     
 Six Months Ended June 30,
($ in thousands, except per share amounts)20142013
Net interest income:    
Interest income$ 66,663$ 65,031
Interest expense  26,369  19,095
Net interest income  40,294  45,936
Provision for credit losses  18,459  5,048
Net interest income after provision for credit losses  21,835  40,888
     
Non-interest income:    
Fee income  1,232  1,541
Asset management income  55  1,379
Loss on derivatives  (17)  (86)
Gain (loss) on sale of loans  (166)  72
Other income  7,110  1,658
Total non-interest income  8,214  4,564
Operating expenses:    
Compensation and benefits  15,562  17,615
General and administrative expenses  8,221  8,065
Total operating expenses  23,783  25,680
Operating income before income taxes  6,266  19,772
Results of Consolidated VIE    
Interest income  5,268  900
Interest expense - credit facilities  2,865  334
Interest expense - Fund membership interest  1,292  349
Other income  229  16
Operating expenses  249  4
Net results from Consolidated VIE  1,091  229
Income before income taxes  7,357  20,001
Income tax expense  3,009  8,203
Net income$ 4,348$ 11,798
Non-GAAP after tax adjustments to net income:    
Net results of Consolidated VIE  (642)  (135)
Interest income from loan to Consolidated VIE (1)  429  109
Interest income from Fund membership interest (2)  252  34
VIE management fee (3)  302  49
Net income excluding managed VIE$ 4,689$ 11,855
     
Net income per share:    
Basic$ 0.09$ 0.25
Diluted$ 0.08$ 0.22
     
Net income excluding managed VIE per share:    
Basic$ 0.10$ 0.25
Diluted$ 0.09$ 0.22
     
Weighted average shares outstanding:    
Basic  48,806,441  47,663,365
Diluted  52,492,687  52,931,260
     
(1) Interest income earned by NewStar from the B Note with Arlington Fund which was eliminated in consolidation of the VIE
(2) Interest income earned by NewStar from its membership interest in Arlington Fund which was characterized as debt for consolidation and eliminated in consolidation of the VIE. 
(3) Management fee earned by NewStar which was eliminated in consolidation of the VIE.
 
 
NewStar Financial, Inc.
Selected Financial Data
(unaudited)
 
         
 Three Months Ended
 June 30,March 31,December 31,June 30,
($ in thousands)2014201420132013
Performance Ratios:        
Return on average assets  (0.29)%  0.98%  1.01%  1.04%
Return on average equity  (1.20)  4.05  4.12  3.74
Net interest margin, before provision  3.04  3.50  3.41  4.68
Efficiency ratio  55.57  42.72  49.13  47.77
Portfolio yield  6.14  6.18  6.37  7.33
         
Credit Quality Ratios:        
Delinquent loan rate for loans 60 days or more past due (at period end)  1.06%  1.51%  0.22%  1.15%
Delinquent loan rate for accruing loans 60 days or more past due (at period end)  --   --   --   0.65
Non-accrual loan rate (at period end)  3.70  3.33  3.04  2.49
Non-performing asset rate (at period end)  4.29  3.82  3.60  3.17
Annualized net charge off rate (end of period loans)  2.52  1.42  0.15  2.32
Annualized net charge off rate (average period loans)  2.25  1.41  0.17  2.25
Allowance for credit losses ratio (at period end)  1.87  1.72  1.80  2.07
         
Capital and Leverage Ratios:        
Equity to assets  25.26%  24.65%  23.64%  26.37%
Debt to equity  2.92 x  3.01 x  3.18 x  2.73 x
Book value per share  $ 12.62  $ 12.76  $ 12.66  $ 12.39
         
Average Balances:        
Loans and other debt products, gross  $ 2,360,864  $ 2,347,674  $ 2,160,762  $ 1,958,041
Interest earning assets  2,583,346  2,528,474  2,457,831  2,159,458
Total assets  2,542,411  2,557,241  2,491,492  2,176,675
Interest bearing liabilities  2,040,371  1,905,993  1,838,145  1,522,542
Equity  621,113  620,467  613,007  605,059
         
Allowance for credit loss activity:        
Balance as of beginning of period  $ 39,599  $ 41,854  $ 40,445  $ 45,499
General provision for credit losses  (1,204)  1,710  464  (2,120)
Specific provision for credit losses  13,856  4,097  1,845  6,450
Net charge offs  (13,152)  (8,062)  (900)  (10,870)
Balance as of end of period  $ 39,099  $ 39,599  $ 41,854  $ 38,959
         
Supplemental Data (at period end):        
Investments in debt securities, gross  $ 19,298  $ 25,298  $ 25,298  $ 25,298
Loans held-for-sale, gross  44,456  30,205  14,897  21,028
Loans held-for-investment, gross  2,090,862  2,302,007  2,325,144  1,882,769
Loans and investments in debt securities, gross  2,154,616  2,357,510  2,365,339  1,929,095
Unused lines of credit  297,622  303,794  326,231  263,874
Standby letters of credit  7,694  6,791  6,880  5,443
Total funding commitments  $ 2,459,932  $ 2,668,095  $ 2,698,450  $ 2,198,412
         
Loans held-for-sale, gross  $ 44,456  $ 30,205  $ 14,897  $ 21,028
Loans held-for-investment, gross  2,090,862  2,302,007  2,325,144  1,882,769
Total loans, gross  2,135,318  2,332,212  2,340,041  1,903,797
Deferred fees, net  (17,469)  (18,444)  (17,130)  (16,982)
Allowance for loan losses - general  (18,552)  (19,843)  (18,099)  (17,682)
Allowance for loan losses - specific  (20,043)  (19,339)  (23,304)  (20,747)
Total loans, net  $ 2,079,254  $ 2,274,586  $ 2,281,508  $ 1,848,386
 
 
NewStar Financial, Inc.
Selected Financial Data
(unaudited)
 
     
 Six Months Ended June 30,
($ in thousands)20142013
Performance Ratios:    
Return on average assets  0.34%  1.11%
Return on average equity  1.41  3.95
Net interest margin, before provision  3.26  4.44
Efficiency ratio  48.21  50.57
Portfolio yield  6.15  6.98
     
Credit Quality Ratios:    
Annualized net charge off rate (end of period loans)  2.05  1.72
Annualized net charge off rate (average period loans)  1.83  1.72
     
Average Balances:    
Loans and other debt products, gross  $ 2,358,956  $ 1,901,328
Interest earning assets  2,561,513  2,097,311
Total assets  2,552,492  2,150,600
Interest bearing liabilities  2,070,424  1,487,041
Equity  620,323  601,976
     
Allowance for credit loss activity:    
Balance as of beginning of period  $ 41,854  $ 49,964
General provision for credit losses  506  (1,820)
Specific provision for credit losses  17,953  6,868
Net charge offs  (21,214)  (16,053)
Balance as of end of period  $ 39,099  $ 38,959
 
 
NewStar Financial, Inc.
Non-GAAP Selected Financial Data
(unaudited)
 
         
 Three Months Ended
 June 30,March 31,December 31,June 30,
($ in thousands)2014201420132013
Performance Ratios:        
Net interest margin excluding the Arlington Fund, before provision  3.30%  3.59%  3.49%  4.79%
Efficiency ratio  52.92  40.39  46.15  43.85
         
Consolidated Statement of Operations Adjustments (1):        
Net interest income  $ 19,599  $ 21,806  $ 21,116  $ 25,200
Plus:        
Interest income from loan to Consolidated VIE   359  373  325  185
Consolidated VIE net interest loss  69  --  --  --
Less: Consolidated VIE net interest income  --  1,180  1,006  217
Adjusted net interest income  $ 20,027  $ 20,999  $ 20,435  $ 25,168
         
Operating expenses  $ 11,844  $ 12,188  $ 12,257  $ 12,773
Less: non-cash equity compensation expense (2)  563  664  743  1,178
Adjusted operating expenses  $ 11,281  $ 11,524  $ 11,514  $ 11,595
         
Consolidated Average Balances Adjustments        
Interest earning assets  $ 2,583,346  $ 2,528,474  $ 2,457,831  $ 2,159,458
Plus: Average balance of loan to Consolidated VIE  19,433  20,129  15,889  8,884
Less: VIE average interest earning assets  167,746  175,299  153,965  59,608
Adjusted interest earning assets  $ 2,435,033  $ 2,373,304  $ 2,319,755  $ 2,108,734
         
         
 Three Months Ended
 June 30,March 31,December 31,June 30,
 2014201420132013
Risk-adjusted revenue        
Net interest income after provision for credit losses  $ 6,947  $ 15,999  $ 18,807  $ 20,870
Non-interest income  1,717  6,726  3,834  1,477
Risk-adjusted revenue  $ 8,664  $ 22,725  $ 22,641  $ 22,347
 
(1) Adjustments are pre-tax.
(2) Non-cash compensation charge related to restricted stock grants and option grants. 
 
 
NewStar Financial, Inc.
Non-GAAP Selected Financial Data
(unaudited)
 
     
 Six Months Ended June 30,
($ in thousands)20142013
Performance Ratios:    
Efficiency ratio  45.75  45.36
     
Consolidated Statement of Operations Adjustments(1):    
Operating expenses  $ 24,032  $ 25,684
Less: non-cash equity compensation expense (2)  1,227  2,775
Adjusted operating expenses  $ 22,805  $ 22,909
     
     
 Six Months Ended June 30,
 20142013
Risk-adjusted revenue    
Net interest income after provision for credit losses  $ 22,946  $ 41,105
Non-interest income  8,443  4,580
Risk-adjusted revenue  $ 31,389  $ 45,685
     
(1) Adjustments are pre-tax.
(2) Non-cash compensation charge related to restricted stock grants and option grants. 
 
 
NewStar Financial, Inc.
Portfolio Data
(unaudited)
 
                 
($ in thousands)June 30, 2014March 31, 2014December 31, 2013June 30, 2013
                 
Portfolio Data:                
First mortgage$ 109,781  5.1%$ 122,803  5.2%$ 123,029  5.2%$ 121,982  6.3%
Senior secured asset-based  280,899  13.0  242,683  10.3  239,314  10.1  207,808  10.8
Senior secured cash flow  1,718,706  79.8  1,938,372  82.2  1,948,965  82.4  1,533,999  79.5
Other  45,230  2.1  53,652  2.3  54,031  2.3  65,306  3.4
Total$ 2,154,616  100.0%$ 2,357,510  100.0%$ 2,365,339  100.0%$ 1,929,095  100.0%
                 
Leveraged Finance$ 1,766,238  82.0%$ 1,994,607  84.6%$ 2,005,325  84.8%$ 1,606,029  83.3%
Business Credit  278,597  12.9  240,100  10.2  236,985  10.0  201,084  10.4
Real Estate  109,781  5.1  122,803  5.2  123,029  5.2  121,982  6.3
Total$ 2,154,616  100.0%$ 2,357,510  100.0%$ 2,365,339  100.0%$ 1,929,095  100.0%
                 
                 
Managed loan portfolio                
NewStar Financial, Inc. Loan portfolio$ 2,154,616  $ 2,192,290  $ 2,192,694  $ 1,844,068  
Loans owned by Arlington Program  239,435    --   --    --  
Loans owned by Arlington Fund (1)  --    165,220    172,645    85,027  
Loans owned by NewStar Credit                 
Opportunities Fund  48,260    50,179    93,263    446,377  
Total$ 2,442,311  $ 2,407,689  $ 2,458,602  $ 2,375,472  
                 
(1) Consolidated as a Variable Interest Entity for periods prior to June 26, 2014

CONTACT: Robert K. Brown500 Boylston St., Suite 1250 Boston, MA 02116 P. 617.848.2558 F. 617.848.4390 rbrown@newstarfin.comBrian J. Fischesser500 Boylston St., Suite 1250 Boston, MA 02116 P. 617.848.2512 F. 617.848.4398 bfischesser@newstarfin.com



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Source: NewStar Financial, Inc.


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