NewStar Financial's (NEWS) CEO Tim Conway on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: NewStar Financial, (NEWS)

NewStar Financial, Inc. (NASDAQ:NEWS)

Q2 2014 Earnings Call

August 6, 2014 10:00 AM ET

Executives

Robert Brown – Head, Strategy and Corporate Development

Tim Conway – Chairman and Chief Executive Officer

John Bray – Chief Financial Officer

Analysts

Sameer Gokhale – Janney Capital

Steven Kwok – KBW

Operator

Good day, ladies and gentlemen. And welcome to the NewStar Financial's Q2 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Brown, Head of Investor Relations. Sir, you may begin.

Robert Brown

Thanks, Amanda. And welcome to our earnings conference call where we will be discussing our NewStar Financials second quarter 2014 results. We are pleased you could join us and thank you for participating. With me today are NewStar's Chairman and Chief Executive Officer, Tim Conway and our Chief Financial Officer, John Bray.

Before I turn the call over to Tim to discuss our results. I would like to remind you that we have posted a presentation on the Investor Relations section of our website, www.newstarfin.com. 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 the recording of the call will be available beginning at approximately 1 PM Eastern Time today. Our press release and website 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, maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements, including without limitation statements regarding future financial operating results and statements regarding loan demand and asset management activities 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.

Forward-looking statements give our current expectations and projections relating to our financial conditions, result operation, strategic plans, objectives, future performance, financing plans and business. As such, they're subject to material risk and uncertainties including the general state of the economy, our ability to compete effectively in a highly competitive industry, the market price of our stock from time-to-time and other invest opportunities available to us and impact of laws and regulations to govern non-depository commercial lenders and business generally.

More detailed information about these and other risk factors can be found in our press release issued this morning and in the Risk Factors section of our annual reports on Form 10-K as updated by any risk factors contained in our quarterly reports on Form 10-Q.

NewStar is under no obligation to update or revise its forward looking statements whether as a result of information, future events or otherwise except when required by law. NewStar plans to file its Form 10-Q with the SEC on or before August 11 and urges 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, Rob and thanks for joining the call today. As Rob, mentioned we've posted a slide presentation on our website and I'll refer on few pages during my remarks. It'll focus my comments and the key drivers of our operating performance, market conditions and steps we are taking to capitalize on strategic opportunities and enhanced shareholder value.

John Bray will then discuss the financial results in detail and I'll close with a review of our outlook for the remainder of 2014. As you can see on Pages four and five of the Slides. We had a good quarter both in terms of strong origination volume and meaningful growth in our asset management business.

This quarter's results, however were hurt by higher than usual credit cost recognized in connection with a resolution of several impaired legacy loans. Although, the cost made on financial performance resulting in the loss for the quarter, it allowed us to conclude several long-term workouts and improve our posture for another strategic initiatives.

Our results were also negatively impacted to a degree by the deconsolidation of the Arlington Fund, which we had expected to occur when we securitized its investment portfolio, that adjustment resulted in a drag and reported long growth and margin in the quarter.

As a result of these factors, we reported $1.9 million or $0.04 per share net loss for the quarter. Overall, I believe NewStar is now better positioned for the second half, as we were able to accelerate origination upsize the Arlington Fund and complete our eighth loan securitization well also resolving several legacy credits.

Loan originated since the financial crisis had performed well within our expectations as defaults have been limited to just one asset base loan and one leverage loan, which was classified as non-accruing in the second quarter. As a result, we are confident that the portfolio is stable and we believe that our track record remains outstanding.

I indicated in our last call, that we have been building excellent pipelines in our origination units and we were in fact able to carry significant momentum in to the second quarter. Loan origination volume was $3.26 million in the quarter up 19% from Q1.

Of note origination was well balanced across our platforms and our equipment finance business continued to gain momentum benefiting from the cross sale synergies that exist between the lending units.

Excluding the Arlington Fund loans ended up flat to last quarter as continued high run-off largely offset the new volume. Despite the run-off loans outstanding were up 17% from the same period last year. We continue to believe that this trend of elevated pay offs and refinancing will abate during the second half, but as admittedly persisted longer than we have expected already.

Our margin narrowed in the quarter on a GAAP basis due to debt retirement cost in the Arlington Fund warehouse as well as the higher relative cost of funds for new CLOs and lower recognition of deferred loan fees.

Excluding the Arlington Fund margin was 3.3%. NPAs were largely consistent in last quarter, as new loans being placed on non-accrual were offset by resolutions. Although, asset quality and credit metrics were disappointing. We believe the volatility and our credit cost will moderate to the balance of the year and remain within historical averages.

As John will discuss in more detail, we have worked through the vast majority of our legacy credit issues and have a small handful of names left to resolve. As we always note on these calls, credit cost can be lumpy and we can't always control timing, our results reflected that this quarter.

After increasing the size of Arlington, we began raising capital for another similar fund which is expected to close in third or fourth quarter as we continue to grow, this increasingly important aspect of our business.

Our asset management platform provides important financial and strategic benefits generating high margin fee revenue and allowing us to provide more capital to customers. Well also managing risk concentrations. This format for middle market leverage lending, pairing balance sheet lending with asset management capabilities has become increasingly important as banks continue to pull back from this market segment and institutional investor search for alternative investment options offered by direct originator such as NewStar.

As we evaluate and develop our asset management strategy. We have become increasingly existed about its potential. This is a major focus and a significant growth opportunity which would enable us to achieve better scale. As shown on Page 10, we continue to execute on our plans to level the balance sheet issuing a new $348,000 CLO at the beginning of April and increasing our corporate debt facility by another $10 million.

Corporate debt is now $238 million outstanding and we have the flexibility to increase the facility to $300 million.

Turning to market conditions beginning on Slide 11, we saw a decline in M&A activity in the quarter as loan volume derived from new LBO's fell, but we clearly gained market share as we continue to see banks pull back from the market and be more selective as they try to asses regulatory guidelines.

We are anticipating increased M&A or new money transactions in the second half and our existing pipelines reflect higher volumes. Hopefully, the higher mix of new money deals will translate into lower run off as well.

Investors continue to search for yield and the loan markets remain highly liquid. Although investors in the broadly syndicated markets have benefited in recent months from outflows in retail loan funds and a back up in the high yield market.

The middle market is often slow to react to changes in the more liquid markets and so we have seen pricing stabilize but not widened and tandem with the other markets. Despite that, we continue to believe that the middle markets offer the best relative value among credit investment options and you can see that in terms of both pricing and deal structures on Pages 13 and 14.

This quarter average yields across all of our lending platform were 5.86% consistent with 5.85% last quarter. Yields on a directly originated leverage finance loans continue to run the 6% area. Leverage ratios continue to climb in both markets as you can see on Slide 13. Lenders are accepting more leverage and deal structures as purchased prize multiples have gone higher.

The volumes are robust in the second half, as we expect it will be leverage ratios are likely to remain at these levels, but they may continue to creep a bit higher and we have to very selective. With that, I'll turn it over to John to discuss our financial results and I'll come back and talk about our outlook for the rest of the year. John?

John Bray

Thank you, Tim. Our consolidated financial results are shown on Page 16 of the presentation posted to our website. Consolidated net loss for the quarter was $1.9 million or $0.04 per basic and diluted shares. Net loss excluding the managed VIE was $1.3 million.

Outstanding shares at the end of the second quarter were 48.3 million, average basic and diluted shares were 48.9 million and the average diluted shares would have increased by an additional 3.2 million shares to 52.1 million, if we had net income in the quarter.

The next Slide talks about the deconsolidation that Tim mentioned of the Arlington Fund. On June 26, 2014 the Arlington program was completed. A $409 million term debt securitization comprised of all of the loans of the Arlington Fund, as well as a portion of the company's loans classified as held for sale.

A portion of the proceeds from this term debt securitization were used to repay all advances under the Class A and Class B notes. Following repayment, the company's membership in the Arlington Fund was redeemed and new membership interest in the Arlington program were issued to new equity investors.

As a result, the company has no ownership of financial interest in the Arlington Fund or successors except to the extent that it receives a management fee as collateral manager in the Arlington program. The company is no longer the primary beneficiary and deconsolidated the Arlington Fund and the successor the Arlington program.

From its statements of financial position beginning on June 26, 2014 and will not consolidate the Arlington program operating results or statements of financial position as of the date. As a result, our balance sheet at $630 million is presented exclusive in the Arlington Fund, while the income statements includes the results in the Arlington Fund through the closing date of CLO on June, 26.

As shown on next Slide, new originations were $326 million in the second quarter, up $15 million or 19% from the prior quarter. Loan volume was seasonally strong reflecting moderately higher acquisition financing from financial sponsors as well as increasing larger contributions from asset base lending and leasing business units.

Of our total funded volume for the quarter $3.18 million was retained by new stock, $8 million was originated directly for the Arlington Fund and of the amount retained by NewStar approximately $15 million was included in loans held for sale balance at the end of the second quarter, which is anticipated of being conveyed to the Arlington Fund.

The $318 million retained by NewStar was comprised $264 million of leverage finance loans, $20 million of equipment leases and loans and $35million of asset-based loans.

Continuing in Page 18 of the presentation, total consolidated revenue was $21.3 million for the quarter and consolidated net interest income was $19.6 million. Newer loans originated in the quarter, had an average yield of 5.9% reflecting attractive relative value compared to the other fixed income investment alternatives.

Non-interest income was $1.7 million for the second quarter down from $6.7 million in the prior quarter. Last quarter included $6.5 million gain from the sale of equity interest obtained in connection work out several impaired loans.

As of June 30, we had less than 10 equity interest that were obtained in connection with various debt restructurings, these positions had a book value of approximately $16 million at the end of the second quarter. The majority of the equity positions that we own are carried in a normal value, but we believe, they also offer potential upside in future quarters as we've seen this quarter and in prior quarters.

The net interest margin this quarter we have provided two Slides on Page 19 and 20. Which show the role forward of the net interest margin. The first shows the margin on a GAAP basis and the second shows the margin excluding the consolidation of the Arlington Fund, which is more meaningful moving forward.

On a GAAP basis, the margin narrowed to 3% for Q2 compared to 3.5% for the first quarter as net interest income decreased primarily due to higher cost of funds from the accelerated amortization of financing cost included in consolidation from the repayment of the Arlington Fund credit facility and for other reasons that I will discuss on next Slide.

If we look at the second Slide, you can see the margin without consolidation was 3.3%, down 3.59%. The drop was due primarily to the relatively higher cost funds from the new 2014-1 CLO and low deferred income, which varies quarter-to-quarter depending on pre-payment pace.

The difference between the GAAP margin and the adjusted margin is due primarily to the accelerated amortization deferred fee is related to repayment of the Arlington Fund credit facility and the relatively high cost membership interest in the fund that was characterized as debt.

The yield on our performing loan portfolio 6.37% for the second quarter, the drag for NPA reduced CLO portfolio of approximately 23 basis points to 6.14%. Our cost of funds was up to 3.25% for the second quarter in a GAAP basis and was 3.04% excluding the consolidation of the Arlington Fund.

If you turn in the next Slide, the credit performance. I'll highlight what happened credit results during the quarter. Total provision for the quarter for credit losses was $12.7 million up from 45.8 million last quarter. We recorded $13.9 million in net specific provision in Q2 of the $13.9 million specific provision recorded, $9.2 represents the final resolution of three impaired loans, which were in a long-term work.

The allowance for credit losses was $39.1 million which was relatively flat as compared to last quarter. If you exclude the Arlington assets from last quarter, the allowance ratio would have been 1.81% March, 31 compared to 1.87% at the end of the second quarter.

Our two OREO properties had an aggregate value of $13 million as of June, 30 and our non-performing loan rate was 3.7% which compares to 3.6% last quarter, if you exclude the Arlington loan fund in both quarters.

We've added a new page this quarter, which provides additional detail about the composition and the characterization of our NPA's. The book in the top left breaks out the loans on non-accrual by loan size, the bottom shows the vintage of non-accruals. The vast majority of the legacy pre-2009 reflecting strong performance since then, as we've only placed two loans originated since then on non-accrual.

The top right box provides property types out of our two OREO properties. The next Slide provides greater detail regarding the industry mix of our loan portfolio. Our own loan portfolio was slightly down as compared to last quarter, as originations were offset by runoff, but up 17% from the same quarter in previous years.

Our managed portfolio loans which is made up of the Arlington program, the NewStar credit opportunities funds totaled $288 million up from $215 million last quarter. As I mentioned before, at June 30 we also had $14.5 million of loans for sale going to Arlington.

The largest single obligor concentration was 1.6% of the total loan portfolio. Top 10 obligors represented approximately 10.2% of the total portfolio and just under 98% of our portfolio was comprised senior secured first lien loans.

On Slide 24, you can see that 88% of our portfolio at $630 million was originated post crisis. Moreover all of our business credit portfolio at 90% of our leverage financed portfolio was originated post crisis. This is continued to trend up from a year ago and the total portfolio is 80% post crisis and leverage finance was 82%.

Next I would like to discuss our capital liquidity positions, which are highlighted on Slide 25 and is intended some perspective on the outlook for the funding markets. We continue to maintain a strong capital base with common equity build to 25% of total assets on June 30, as we mentioned during last quarter's call. In April, we completed our eighth securitization totaling approximately $350 million.

We amended our ABL credit facility at Wells Fargo to increase the commitment by $25 million to $100 million. During the second quarter, we also increased our corporate debt facility by $10 million to $238.5 million under the same terms in general conditions. In addition, we completed a $409 million Arlington program, program CLO as mentioned earlier.

At the end of the second quarter, we had approximately $82 million of liquidity comprised of $53 million of unrestricted cash, $28 million of undrawn collateral size availability up our warehouse facilities. Substantially all of our outstanding debt is classified either as medium or long-term at the end ABL facility with DZ Bank, $37 million of capability, ABL facility with Wells Fargo in our Wells Fargo leasing facility and lastly $275 million of capacity in our Wells Fargo leverage finance facility.

As demonstrated by our 2014-1 CLO funded in April, in the Arlington program CLO, we remained very confident about our ability to access additional funding and plan to continue to be a programmatic issuer of CLOs.

If you turn to the balance sheet Slide, you can see the cash increase primarily due to timing difference in settlement dates CLO trusts and other non-recourse financing. Loans were approximately $2.1 billion. Term debt increased to approximately $1.6 billion due to the completion of the 2014-1 CLO partially offset by the amortization of the 2006 and 2007 CLOs.

Loans managed for the benefit of Arlington were $239 million as of June 30 up from $165 million at the end of first quarter.

Our book equity value at quarter end was approximately $609 million, book value per share was $12.62 at the end of the second quarter reflecting Q2's loss in addition during the second quarter, approximately $1 million warrants which were schedule to expire in June, if unexercised were settled into almost 300,000 shares which negatively impacted book value per share by $0.08.

During the second quarter, we repurchased 1.1 million shares of our common stock at a weighted average price of $13.03 and completed the repurchase program in June with a repurchase of an additional 400,000 shares.

My last Slide, the net income statement presents our income for the quarter. As I mentioned, consolidated net loss is $1.9 million for the quarter and consolidated net interest income was $19.6 million which I covered earlier during the discussion, net interest income revenue in credit.

Expenses declined 3% to $11.8 million for the quarter. The net results of the Arlington Fund included in NewStar's Financial statement is a consolidated VIE were close to zero, but impacted income statement line items. Tax rate for the quarter just over 41%, expected tax rate to be about 41% for 2014.

Net income excluding the VIE showed the economic impact NewStar's income statement, if we do not consolidate the entire financial results of Arlington which would have resulted a non-GAAP net loss of $1.3 million for the quarter.

I'll now turn to Tim.

Tim Conway

Thanks, John. So as we've said we had mix results this quarter, highlighted by strong long volume and growth in our assets management activities, but overshadowed by higher than usual credit cost.

Our outlook for the remainder of the year was largely unchanged, but include adjustments to reflect our year-to-date credit cost and run off rates. As you can see on Page 29 of the presentation, we expect loan volume to grow by up 15% in 2014 reflecting higher loan demand from our customers and our ability to take larger pieces of deals, which we have been doing in recent quarters.

We expect deals in our target markets to remain stable through the second half of the year expected range for new loan yields is 5.75% to 6.25% which is consistent with the second quarter actual results in our current pipeline. Run off in 2013 was exceptionally high at 40%, this is continued into 2014.

We anticipated slowdown, but we have increased our expected run off slightly to between 35% and 45% for the year. The cost of funds picked up to 2.97% in Q1 and 3.25% in Q2. It is expected to stabilize in a range of 3% to 3.25%. Marginal all-in interest rate on CLO financing is expected to be approximately LIBOR plus 250 basis points.

Funding cost and higher leverage will play some modest pressure on margins, which we estimated between 3.25% and 3.5%. Although provision expense is been higher than expected to the first half of the year. We expect these cost to moderate and normalized throughout the second. As a result, we have adjusted our guidance for the full year to a range of 100 basis to 125 basis points to reflect actual cost in the first half and our outlook for levels to the balance of the year.

As John mentioned, we have now completed share repurchases totaling $20 million under the last program. That program completed and the stock trading levels that we believe under value the company, we are likely to consider another program. I'll conclude my comments by saying I'm very optimistic about the prospects for the company and that we are focused on a number of exciting initiatives to accelerate growth, increase the scale of the company and enhance shareholder value. I look forward to providing more detail about these initiatives with you, over the next several quarters and with that, we are happy to take any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sameer Gokhale with Janney Capital. Your line is open.

Sameer Gokhale – Janney Capital

I want to just clarify one thing, the impact of the accelerated interest expense. How much was that during the quarter because you talk about the increase of $2.6 million from the first quarter, but I was trying to specifically just get that piece and somewhere I missed it? So how much was just that piece on the accelerated interest expense this quarter?

John Bray

$1.1 million.

Sameer Gokhale – Janney Capital

$1.1 million. Okay, thank you. John. The other thing was, so it looks like the Arlington Fund being deconsolidated. I mean, the simple rationale seems to be that, you securitized loans from in there, used the cash to pay down your interest in the fund and as result of that, you'll be deconsolidating the fund.

Now what was again the rationale for actually entering into this transaction, did you feel you've got very favorable funding in that securitization transaction relative to where the funding cost were at, if you can just talk about the rationale behind that, that would be helpful.

John Bray

Well, the fund is just an important compliment to our core business, it's part of our asset management business. When we start to fund and ramp it up, we use the warehouse and once it gets to a certain size, we securitize it and because we have no capital at risk committed to the fund after we do the securitization, is no longer consolidated on our balance sheet, which is what our objective was and our plan going into the transaction.

During the warehouse phase, we provide some capital to the warehouse and so we have consolidate it and basically, that's the our off balance sheet asset management business. It did do a very attractive securitization in the market place and we think the returns on that investment for the investors in that fund will be attractive and it's important now strategically because we can commit more capital to our customers.

Sameer Gokhale – Janney Capital

Okay, so going forward also to the extent we have other funds, we should expect something similar, you build the loans up within the fund, with funded by warehouse facility and at some point, you securitize those loans and then pay off your interest, so we should expect this kind of, this will play out in future transactions as well, future funds and the way they're structured.

Tim Conway

That's probably the case, it certainly could happen, it would depend whether we had any credit support for the warehouse or any other aspect of the transaction, but I would expect other funds would look very similar in terms the way they were accounted for during the buildup of the fund.

Sameer Gokhale – Janney Capital

Okay and then Tim, the NPA formation and if you look at the chart on Page 8, the bottom left-hand side, you can see that NPA or I would say new non-accruals since we're talking about NPA formation. The new non-accrual levels better to be low levels, but if you look at some of the trend over the last few quarters, two or three quarters, they seem to be a little bit larger compared to a what we've seen prior to that, trending since 2010.

So it doesn't sound like from your commentary that you think that this is, pointed which credit is turning necessarily and so I was trying to reconcile the two things, I mean some of these things maybe lumpy, but if I just look at kind of NPA formation of the new non-accruals, where they come in over the few quarters seems to be on average a bit higher, so how should we think about that?

Tim Conway

It's very simple and that its, it really is legacy assets that we've been working for a long time and as we worked them through the end, some of them have gone non-performing very little of it. We've had two defaults since the crisis, a very little of it is from these NPA's other than legacy loans, the runoff been high in our and so the denominator for outstanding loans hasn't grown that much.

Some of those legacy loans NPA as we resolve them, the percentage ratio has gone up. I'm not worried about credit at all and we're down to a very small handful of names that fallen to that legacy category at this point.

Sameer Gokhale – Janney Capital

Okay and then just last question and I'll hop back in the queue, but the management fees for the Arlington Fund going forward, we should just think about it as 50 basis points for the loans outstanding in the fund, right?

Tim Conway

Right.

Sameer Gokhale – Janney Capital

Okay, terrific. So I'll get back in the queue, then. Thank you.

Tim Conway

Thanks, Sameer.

Operator

(Operator Instructions) Our next question comes from Steven Kwok – Keefe Bruyette. Your line is open.

Steven Kwok – KBW

Great, thanks for taking my questions. First question, just wanted to follow up on the credit commentary. Are there any specific loans on your watch list, whether it's in the legacy or post crisis book?

Tim Conway

Yes, there are always some names on our watch list in various categories of performance.

Steven Kwok – KBW

Is it possible to get a better picture of around number of loans and how big they are?

Tim Conway

We don't provide the detail of our entire watch list. I think, we give pretty full disclosure around on, NPAs, TDR's, etc and where we have them marked. I would repeat what I said to Sameer and that is, what you see is predominantly deals that were in the legacy portfolio, that continues to be the case and throughout the watch list.

Steven Kwok – KBW

Got it and then just on your share count, in this quarter I guess we didn't have the $3.2 million of dilution and then you repurchased back $400,000 post quarter end. How should we think about this share count going forward?

John Bray

I mean, if we had earnings – what we – if you take the endings shares plus the $3. 2 million you can't calculate, is where we bought the averaging of the share count because the way we book the average. So to get to where it should be diluted would be at around just a little north of $52 million.

Steven Kwok – KBW

Okay, that should be the number that used for the third quarter?

John Bray

Yes, I mean it depends to some degree, what happens with the stock price and things of that nature.

Tim Conway

It's a little bit some ins and outs to that account, but it's not – we don't see anything in the near-term that I would say is going to meaningfully change that number.

Steven Kwok – KBW

Okay and then around capital management, you spoke a little bit about potentially instantly another share repurchase plan, are there any limiting factors around how much you can buyback or in terms of what are determining factors about how much you'll look to buyback?

Tim Conway

While there's always, one factor as always where we are in the quarter, what we can disclose and not disclose and we can't say much about it and that's an issue, but we would there are some restrictions in some of our loan agreements at least one, that would restrict at a certain level, how much we could buyback, we have lots of flexibility underneath that at this point in time to do more.

Steven Kwok – KBW

Okay, great. Thanks for taking my questions.

Tim Conway

Thank you, Steven. Appreciated.

Operator

Actually, we have a follow-up from Sameer Gokhale with Janney Capital. Your line is open.

Sameer Gokhale – Janney Capital

Yes, thanks just a couple of other ones. In terms of the loans held for sale, I think you referenced a number, I don't remember what that was off hand, so if you mind just going over that, that would be helpful and then, so we should assume in Q3, there will be a gain on sale as you sell those loans to the Arlington Fund, is that, how that's going to work?

John Bray

No, in loans held for sale at the end of the quarter, we were about $15 million that will be transferred to Arlington but really just gets transferred at net book, so there is no gain or loss?

Sameer Gokhale – Janney Capital

Okay.

John Bray

There shouldn't be, anyway.

Sameer Gokhale – Janney Capital

Okay.

John Bray

And in fact, it's already happened.

Sameer Gokhale – Janney Capital

Because you already marked them to market, is that what you're saying?

John Bray

I mean in loans held for sale, everything is marked to market as you look at it.

Sameer Gokhale – Janney Capital

Yes, okay and then in terms of Tim, your commentary about can I say, the leverage that you're seeing in middle market loans. I mean, I know when you look at industry averages of course a lot is lost, specifically as far as your business, but because in chart you showed kind of industry leverage, which on deals which seems to be still below 2007 levels, but pretty close to.

I mean, it seems like we're almost back to the point, where loans are being made on very loose terms and at high leverage. So within that context, I mean you still expect to see pretty healthy volumes going forward. So I'm trying to reconcile the two, I mean I think the intuitive answer it might be, well in your market where you focus on high quality credit, you're not taking on that much leverage on new deals, but it just seems a little bit sort of inconsistent, what your guidance is for growth and expectations there relative to the leverage in the broader, for middle market loans.

So if you mind just discussing that, that would be helpful.

Tim Conway

Yes, I think the markets have been until the last few months have been frothy and certainly leverage ratios are high in all of the markets. And I some cases approaching 2007 levels. Our leverage and our portfolio is lower than these numbers and because we are selected and we are directly originating, but I think beside from our own portfolio in general there is a lot of liquidity in the marketplace, but what we are seeing right now is a, I'd say a leveling of leverage and pricing.

The broadly syndicated markets are backed up a little bit with the equity market, with the high yield market backing up and some outflows from retail funds and I think, there's going to be more volume in the second half. We are starting to see an increase in genuine M&A deal flow, which is new money transactions, which doesn't result as much run off.

So I think that, the supply-demand factor is right now are actually more favorable than they were, my guess is that leverage flattens out, where it is at these levels and you got to be really careful and you got to focus on the right situations and there's lots of business, you can do in these markets, when it gets a lot higher from here.

I'd say, you got to be really careful. So no one knows, where it's going to go, but I think is leveling off.

Sameer Gokhale – Janney Capital

Okay, great. Thanks for that commentary.

Tim Conway

Thanks, Sameer.

Operator

I'm showing no further questions at this time. I'd like to hand the call back to Robert Brown for closing remarks.

Robert Brown

Great. Thank you, that'll conclude our second quarter 2014 earnings call. Thank you for participating.

Operator

Ladies and gentlemen. Thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone have a great day.

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