Executives
Anne G. Bork - VP of Investor Relations and Corporate Communications
Timothy J. Conway - Chairman of the Board, President & Chief Executive Officer
John K. Bray - Chief Financial Officer
Analysts
Sameer Gokhale - Keefe, Bruyette & Woods
David J. Long – William Blair & Company, L.L.C.
Jeremy Banker – Citigroup
James Shanahan – Wachovia Capital Markets, Inc.
Brian Hagler – Kennedy Capital
NewStar Financial, Inc. (NEWS) Q2 2008 Earnings Call August 6, 2008 10:00 AM ET
Operator
Welcome to the NewStar Financial's second quarter 2008 earnings call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Miss Anne Bork, VP of Investor Relations and Corporate Communications.
Anne G. Bork
Thanks to everyone for joining us on our earnings conference call where we will be discussing our second quarter 2008 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've 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 we also 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 1:00 p.m. 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 the 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, certainties 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 risks can be found on our press release issued this morning and in the Risk Factor 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 when required by law. NewStar plans to file its Form 10-K with the SEC on or before August 11th and urges its shareholders to refer to that document for 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.
Timothy J. Conway
Thanks for joining the call today to discuss our second quarter results. I’ll begin by providing my perspective on current market conditions and highlighting what I consider to be outstanding operating performance, performance that I think demonstrates solid execution in the marketplace with our customers and reflects we have taken to position NewStar to operate in these difficult markets. After I hand it over to our CFO John Bray, I’ll conclude with some comments on our business strategy in the current environment.
So let me start by focusing on market conditions. Clearly distress in the credit markets persisted in the second quarter as reduced leverage and deterioration in asset quality continued to cause problems for banks and for other lenders. The loan securitization markets are still closed and we believe that they will remain challenging well into 2009. As a result banks have dramatically reduced the availability of credit and many of our competitors have been sidelined. The constrained credit environment has clearly dampened private equity and LVO activity but it has impacted the middle market to a lesser degree. Deal flow has continued in the middle market simply because smaller deals can be completed with just one or a handful of lenders in contrast to larger deals which may require 50 or more investors.
Although volumes are lower than this time last year deal flow has picked up noticeably in the third quarter as financing terms have settled into a more predictable range. This type of environment can define a company’s reputation and create long lasting relationships to drive franchise value. It is also an environment that offers opportunities to explore strategic moves including portfolio and platform acquisitions. So let’s turn to our results which represent the third consecutive quarter in which we’ve added to the book value of the company.
Stable margins and solid credit performance drove the results. For the quarter the company generated adjusted earnings of $7.6 million or $0.16 per share. Excluding one time severance expense of $1.3 million adjusted net income would have been over $8 million. Net interest margin was stable at 417 basis points as increases in the marginal cost of funds were offset by improvements in credit spreads on new origination volume. We capitalized on the current lending environment in the second quarter originating $157 million of new loans with average spreads between 500 and 600 basis points. Senior loan devalue was typically well under 50%. That’s a risk return profile we like and while there are many opportunities to lend at wider spreads we don’t stretch for yield especially in this market.
I believe that we have been among the most active lenders in the middle market and have been building share since the dislocation in the credit markets began about a year ago. As you think about our credit outlook please bear in mind that more than 40% of our portfolio represents loans originated since the credit crisis began. Again these are loans that reflect more conservative credit profiles and more attractive yield characteristics. Our mix of loans in the second quarter shifted to 100% corporate loans as we curtailed new commercial real estate origination until we have more certainty about the funding strategy for those assets. Importantly we have significant liquidity and funding capacity to support continued growth. We demonstrated this ability of our funding platform through the renewals of warehouse lines in the addition to term funding capacity and we continue to develop other sources of capital. Our funding capacity was about $665 million at the end of the quarter.
Including capacity generated from our ability to reinvest cash from amortization and prepayment activity in the portfolio we estimate funding capacity of about $1 billion and we continue to maintain modest corporate leverage at 3.6 times compared to a longer term target of about 6 times. Finally our credit performance remains solid and was within expectations. Most key credit measures and metrics were stable or improved this quarter. Non-accruing loans, our most important measure of credit performance, was stable at $10.1 million or 42 basis points on total loans. Net charge offs were about 32% lower than the prior quarter at $2.3 million and specific reserves decreased to $2.7 million from $3.3 million. It gives us an annualized charge off rate of 38 basis points.
While improvement in our credit metrics continued again this quarter this does not necessarily represent a trend. We maintain our general reserve at 138 basis points and our total allowance for loan losses was 160 basis points including 22 basis points of specific reserves. Our performance on the credit side is obviously influenced by the direction of the overall economy and although we’re not technically in a recession we’re clearly in a period of economic contraction that will have an impact on commercial credit. Our credit stats have remained at the low end of historical norms and we expect them to trend towards long term historical averages over time. I interpret our favorable credit performance to our direct origination approach and the disciplined credit practices that are the hallmark of our company.
As you know we employ a defensive credit strategy with a focus on senior debt and hold limits that drive diversification across industries and issuers. Our portfolio is 95% first lien senior debt. If we use credit spreads as an indicator of the riskiness of a portfolio you can see that ours is generally more conservative than many others in our space. Despite economic conditions we are not experiencing any broad based deterioration in our portfolio but we continue to see softness in the sectors that you would expect, building products, transportation and to a lesser degree consumer sectors such as restaurant, retail and advertising based media. Although commercial real estate has become an increasing concern for some investors our real estate portfolio continues to perform well and within our expectations. As you can see on Page 14 of the slide presentation 17% of our portfolio comprises commercial real estate loans. It is focused on quality office buildings located in targeted regions with attractive demographic employment vacancy and rent characteristics. Our CRE loans were conservatively underwritten to standards that carefully considered refinancing requirements. As is typical in this market many of these loans are structured with built in extension features with fees to provide appropriate flexibility at initial maturity.
We have nominal exposure to traditional construction lending. Our current exposure to residential condo conversions is limited to a single $5.8 million loan which is de-levered to under 40% loan to value. We also have one asset held in OREO or other real estate owned totaling $7 million which has been converted to a rental and written down to fair value. We anticipate that our CRE portfolio will continue to perform within expectations through this challenging environment.
So to summarize before I hand it over to John we continue to manage the business profitably in a very difficult market. We’ve been very cautious on credit and we’re comfortable with our portfolio despite economic headwinds. We are one of the few middle market lenders who have continued to lend consistently throughout the correction. We remain focused on growth and we’re excited about our prospects.
I’m going to hand it over now to John who will give us some more detail on our financial results.
John K. Bray
My presentation will follow the slides we provided along with the earnings release out on the web. Slide 8 summarizes our financial results for the second quarter of 2008. Adjusted net income was $7.6 million which is defined as GAAP net income excluding the following after-tax adjustments, non-cash compensation expense of $1.5 million for the second quarter of 2008 related to the restricted equity grants made in connection with our Initial Public Offering. Second, the recognized loss of $200,000 on our retained residual interest on our second quarter 2007 off balance sheet transaction which has been complete written off this quarter. This resulted in an adjusted basic and diluted income per share of $0.16 which is equal to basic and diluted income per share in the first quarter.
Our share count on a weighted average basis was 48.5 million shares reflecting a full quarter of including the shares issued in conjunction with our private placement of common equity. Our results included a $700,000 after-tax severance expense in the second quarter which will be a run rate benefit in future quarters. Excluding the severance expense adjusted diluted income per share would have been $0.17. On a GAAP basis net income was $5.9 million and $0.12 per diluted share for the second quarter.
If you turn to Page 9 of the presentation our diversified funding sources totaled $3.3 billion. As you can see on the bottom right hand part of the chart we had approximately $350 million of undrawn commitments under our credit facilities as of June 30th. As you know our warehouses are not subject to mark-to-market collateral valuations. In addition we had $34 million of reinvestment capacity in existing CLOs at attractive locked in spreads as of June 30th. In the second quarter we were able to reinvest approximately $75 million into those CLOs. Unlike many of our competitors our CLOs have reinvestment periods that are significant. Our $600 million CLO done in 2007 has a six year reinvestment period, our $500 million CLO from 2006 has a five year reinvestment period. The reinvestment period for our $375 million CLO from 2005 is set to expire in October. We also have $164 million of investment capacity in our $400 million private CLO with Deutsche Bank.
We continue to have a strong cash position. We had $82 million of restricted cash on our balance sheet including $46 million of it restricted cash available for reinvestment and $30 million of restricted cash available for debt service. Taken together with our unrestricted cash of $134 million our total cash available was $260 million at quarter end. As Tim mentioned earlier we have continued access to capital during this market dislocation. This quarter we completed an early renewal of our $400 million warehouse facility with Wachovia and we renewed our $75 million warehouse line with NATIXIS. We also added to our funding capacity by increasing our term debt with Deutsche Bank from $300 million to $400 million. We continue to explore various opportunities to continue bolstering our funding platform.
Slide 10 gives you a deep dive into our borrowing and funding capacity by warehouse and term debt which we have provided the last several quarters. Our unrestricted cash is down about $30 million from the first quarter. This is due to decrease in the maximum possible warehouse advance rates. Our total funding capacity was $665 million at quarter end. We had $655 million of funding capacity in our credit facilities and term debt and $10 million of unlevered cash. Including the capacity generated from our ability to reinvest cash from amortizations and prepayment activity in the existing portfolios which total about 15% a year our total capacity could support the next 12 months assuming approximately $1 billion of origination and no additional liquidity. We intend to manage this capacity to take advantage of the most optimal loan originations that we are seeing in this very attractive market.
Slide 10 titled Core Business Performance you will see our managed loan portfolio was roughly $3 billion equal with the level last quarter. Our origination volume was essentially offset by prepayments, amortization and loan sales. In 2008 the volume of the market slowed down pretty significantly and we have gained market share since many of our competitors were winding down or on the sidelines. As expected our adjusted revenue has not continued its growth since we slowed down the pace of the managed asset growth which is reflected in the right hand side of the chart. Net interest income declined slightly to $26.4 million from $26.7 million in the first quarter of 2008 which is driven primarily by the higher costs in our warehouses not yet being fully offset by new loan originations at higher spreads.
Non-interest income excluding net losses on assets was $2.6 million in the second quarter compared to $3.7 million in the first quarter primarily due to lower capital markets fees. As we discussed in the last conference call our market is becoming more club driven which is resulting in higher spreads and higher loan fees which is becoming more of an annuity. We are losing some short term one time earnings but gaining stronger annuity earnings. Adjusted revenue grew 4% year-over-year to $29 million in the second quarter of 2008. The managed portfolio had a 23% year-over-year growth.
Slide 12 describes the amount and composition of the second quarter origination volume and related revenue that the origination volume drives. Our total origination for the second quarter was $157 million. $142 million was retained on NewStar’s balance sheet, $8 million was syndicated to others and $7 million was booked for the NewStar Credit Opportunity Funds. Credit spreads and amortizing fees on new loans originated in the second quarter were greater than 5% over LIBOR and up over 150 basis points from the second quarter of 2007. We continue to get LIBOR floors in our transactions and over 10% of our portfolio now includes them.
Slide 13 talks about our credit metrics. As Tim mentioned our credit metrics were stable this quarter and we have not seen deterioration in our credit quality. Our allowance for credit losses is at $38.2 million or 160 basis points on period end loans excluding securities and loans held for sale at June 30th. At March 31st our allowance for credit losses was $36.8 million or 158 basis points. Non-accrual loans of $10 million at June 30th were essentially equal to the $9.8 million at March 31st at 42 basis points. The non-accrual loans are included in our delinquency loan rate at June 30th, they are not additive to our delinquent loans. In addition our allowance for credit losses can cover over three times the balance of our non-accrual loans in the quarter.
We established an additional $2.7 million specific reserve to reflect expected losses in the second quarter of 2008 compared to $3.5 million in the first quarter. We encourage charge offs of $2.3 million or 38 basis points of loans on an annualized basis this quarter compared to $3.3 million or 58 basis points of loans on an annualized basis in the first quarter. In addition as of June 30th we had one $7 million loan which is booked into other real estate owned as a result of a foreclosure on an impaired loan. This asset has been written down to share value. Credit remains uncertain given the slowing economy and economic conditions and charge offs may be lumpy quarter-to-quarter. However we strongly believe our highly disciplined credit monitoring process will continue to lead to better credit outcomes. In these difficult markets we have proven that our very senior portfolio has been defensively constructed.
Slide 14 gives you a snapshot of how diverse our loan and investment portfolio is and how we’ve purposely built our portfolio to be balanced across industry sectors. Slide 15 illustrates out focus on senior debt and again illustrates the defensive nature of our portfolio. 94.6% of our portfolio is senior compared with 88.2% in the second quarter of 2007. We believe this will benefit us during the uncertain times in the credit markets. Slide 16 shows our income statement for the quarter. As I mentioned earlier adjusted net income was $7.6 million. Net interest income was $26.5 million for the second quarter compared to $26.7 million in the first quarter which was driven primarily by higher costs of funds in our warehouses not yet fully being offset by new loan originations at higher spreads. The adjusted yield and interest earning assets was 7.3% down from 8.2% in the first quarter and the adjusted spread in our cost of funds was 4% compared to 5.1% in the last quarter. Both are decreasing because of the decreasing LIBOR rate.
The net interest margin of 4.17% for the second quarter was essentially equal to the net interest margin in the first quarter of 4.19%. The margin will not start to move upwards until a significant volume of new originations at the higher spreads catches up to the magnitude of change in the warehouse rates which re-priced immediately upon renewal. Provision decreased to $3.7 million for the quarter from $4.6 million for the first quarter. The general reserve was at $1.38 million and in line with the first quarter. Adjusted non-interest income decreased $1.9 million this quarter from $3.5 million last quarter primarily due to loss on fair value of equity and securities positions and lower capital markets fees. Expenses decreased to $13.5 million in the second quarter from $14.9 million in the first quarter primarily due to lower run rate expenses based and impact of timing of certain annual employee benefits and payroll tax expenses which occurred in the first quarter. Expenses this quarter included a $1.3 million severance expense. Excluding the severance costs expenses decreased by $2.7 million from the prior quarter.
The tax rate increased due to a catch up of discreet items which were one time this quarter. The run rate for our taxes on an effective basis should be 40.8%. Slide 17 shows you our balance sheet. NewStar’s book value at quarter end was $568 million and the book value per share at June 30th was $11.71 both increasing from last quarter.
I will now turn it back to Tim.
Timothy J. Conway
So we’re excited about the direction of the company. We’ll continue to be patient and conservative because we expect the lending environment to remain favorable for some time. As an established and well capitalized platform we expect to have access to funding as well as compelling opportunities to originate new loans and acquire portfolios, platforms and people. We’re convinced that there will be long lasting changes to the markets as a result of the credit crisis. First of all funding in the capital markets will be available to a limited number of players with established platform and proven track records. Second there will be consolidation of lenders resulting in fewer players with competitive advantages derived from funding and origination capabilities and third credit will be more expensive and more conservatively structured.
I believe that our performance continues to distinguish us from others in the market and our execution through this period will establish NewStar among the winners emerging from the market turmoil.
That concludes our prepared remarks and we’re happy to open the call for questions.
Question-And-Answer Session
Operator
(Operator Instructions) We’ll take our first question from Sameer Gokhale - Keefe, Bruyette & Woods .
Sameer Gokhale - Keefe, Bruyette & Woods
John, you gave some commentary on the net interest margin. I just wanted to dig into that a little further. You referenced higher borrowing costs on renewals of your facilities. Can you give us a sense for how much higher those borrowing costs were so we can factor that in vis-à-vis your growth that’s coming on at wider lending spreads? It seems like you don’t expect the NIM to improve any time soon but would you say by the second half of 09 is a realistic estimate for when the margin should start to expand? That would be helpful.
Timothy J. Conway
The first part of your question is, what happens is when we renew the warehouses that re-pricing happens right away. If you look at the numbers and you factor out the base rate or [IE] LIBOR our funding costs increased about 19 basis points and our asset yield has not quite caught up with that on a run rate basis. I think what you will start to see is the margins start to grow more in the fourth quarter of this year and you’ll start to see that and what’s really happening is we’re moving some of the lower yielding assets out of the warehouses into the CLOs and replacing them with higher yielding assets now.
Sameer Gokhale - Keefe, Bruyette & Woods
The other question I had was on that $7 million asset that’s in other real estate loan can you give us a sense for what the circumstances were behind that repossession, what kind of property is that, where is it located, what was the original loan to value on that asset? Just some color would be helpful.
Timothy J. Conway
Sameer, I don’t want to give you all the details on it and be too specific because we don’t disclose that much on specific loans but it’s in the Northeast. It was financed originally in the 75% loan to value area. We had a little bit larger loan against it than the $7 million and based on a variety of factors and primarily market conditions for the condominiums the project converted to a rental. They had some cash flow issues and we stepped in and took the property and now we’re confident that we’ve marked it to a value that it’s worth and we’ve had progress in terms of renting out the units and we’re generating cash flow on that business. I think we’re comfortable with where it is marked. It didn’t turn out exactly the way we wanted it to but we’re comfortable now with our loan to value on it going forward.
Sameer Gokhale - Keefe, Bruyette & Woods
Would you expect to sell that property in the near future just so it completely eliminates any risk of future charges against that?
Timothy J. Conway
We think it’s going to be stabilized and then somewhere maybe later this year we would look to do that.
Sameer Gokhale - Keefe, Bruyette & Woods
My last question, the delinquency rate increased sequentially. Should we read anything into that or was that just noise that really occurs with your delinquency metric?
Timothy J. Conway
First of all we measure it on 30 days delinquency which I think is a conservative number. It’s three loans and two of those loans are included in the NPA so I really don’t think it’s a measure. That movement and that measure is not something we’re worried about.
Operator
We’ll take our next question from David J. Long – William Blair & Company, L.L.C.
David J. Long – William Blair & Company, L.L.C.
In the non-interest income, the other income category, there was a negative number. Can you provide a little bit more color on that?
John K. Bray
It was a write down of an equity position, a fair value write down of an equity position.
David J. Long – William Blair & Company, L.L.C.
How much was the write down?
John K. Bray
About $380,000.
Timothy J. Conway
We haven’t done any significant amount of equity, it’s one of very few positions we have and we took a $300,000 mark on it but that’s not a meaningful part of our business.
David J. Long – William Blair & Company, L.L.C.
You said earlier in the call that deal flow picked up in the third quarter. Can you quantify that?
Timothy J. Conway
Hard to quantify. I think right now we’ve got a good pipeline and we’re on a trajectory to originate more than we did in the second quarter. We’re also interested in originating a little more of the kinds of loans we’re seeing given where we’re positioned with liquidity right now. I wouldn’t say we expect a dramatic increase but I expect an increase from the second quarter and I’d say that in terms of market volumes my feeling is the market has sort of settled in a little bit at the levels we’re at and that we’re seeing a pretty significant increase in the number of new deal opportunities out there in the market, number one. And number two I think that NewStar is seeing a very large percentage of the deals and having a chance to lead and direct the originate a large percentage of the deals in the market.
There have been a few deals now in the larger market that have been done so there are some signs of life I’d say with volumes in the market nowhere near where they were last year but certainly better than they were a couple of months ago.
Operator
We’ll take our next question from Jeremy Banker – Citigroup.
Jeremy Banker – Citigroup
I believe earlier in the call severance was referenced and I was wondering whether or not that included originators?
Timothy J. Conway
If you look back it was the remnants of structured products. We reduced our real estate business in there so there were some originators in those areas and very minimal based on a variety of factors in our core middle market business. So we have not eaten into in any way the muscle on our origination team in our core business.
Jeremy Banker – Citigroup
Roughly how many originators did that add up to?
Timothy J. Conway
If you include structured products and real estate, I’m going to say four, five.
Jeremy Banker – Citigroup
Just sticking ahead a bit LIBOR has been disconnected and the futures market in general has been looking for LIBOR to increase going forward. Is that going to impact your borrowers’ interest coverage and is there any offsetting factors we should think about?
Timothy J. Conway
As rates go up it does increase interest costs. Most of the deals that we do we’ve got it’s based on how sensitive they are to that issue. We require hedges in many of our transactions and so the borrower enters into an agreement where they fix a portion of the interest. When we stress test and look at the ability of a company to pay back its interest we’re looking at higher interest rate environments as one of the factors, so we take it into consideration and deal with it through those two factors. The other thing I see as LIBOR increases as John said 10% of our loans and a very large percentage of the new loans that we’re making have LIBOR floors typically around 3% and as we begin to see higher rates, we’re going to see an increase in margins based on the LIBOR floors that we have in these deals.
Operator
We’ll take our next question from James Shanahan – Wachovia Capital Markets, Inc.
James Shanahan – Wachovia Capital Markets, Inc.
I don’t have very many questions left, but I wanted to comment one of your prior questions from a different angle. I’ve lost it now that I wanted to refer to it. Of course it’s always that way, but I think on Form 10-Q there was a disclosure about your sensitivity to a change in interest rates being no more or less sensitive to 100 basis point increase in rates versus a decrease in rates. Is that still accurate?
John K. Bray
What you’ll see in the 10-Q that we filed this quarter is really the only change that’ll happen is because the amount of LIBOR floors that we’ve put in we will make more money if rates goes up because of the floors then if rates went down. So we protected ourselves if there was a compression in LIBOR and so you’ll see that disclosure in the 10-Q we file in the next couple of days.
James Shanahan – Wachovia Capital Markets, Inc.
And in order of magnitude?
John K. Bray
I haven’t signed off on it. It probably is 30% greater but I’ve been kind of going through the final numbers that are going to show in the queue, so you’ll see those.
James Shanahan – Wachovia Capital Markets, Inc.
Another question that I had related to, just to make sure that I was clear on this point and I want to make sure I have it right, the severance that you referred to, the $1.3 million in severance in the June quarter, that would appear in the comp and benefits line, the $9.6 million?
John K. Bray
That’s correct.
James Shanahan – Wachovia Capital Markets, Inc.
I did the math based upon the reduction in census that you’ve been talking about here in recent calls, maybe 30 full time equivalents and I don’t see there being a meaningful decrease in the average cost. I guess I’m figuring that the run rate for comp and benefits probably below $9 million for the September quarter. So that’s my first question. And then how might you anticipate that growing in coming quarters?
John K. Bray
Below $9 million, your math is very good. I think what you’ll see is it will be driven more by if we see opportunities in the market to do some selective hiring on the origination front.
Timothy J. Conway
We cut costs and we look at it all the time based on repositioning of real estate and the discontinuation of structured products, market conditions were such that we had lower outstandings than we had planned a little while back. We got some efficiencies out in terms of the way we follow the portfolio and so forth without changing our metrics. So we like where our expenses are now and our productivity I think that as we look at the market going forward and the opportunities we’re seeing we believe that at this point from here we’re likely to grow our origination capabilities and probably consistent with that our expense base consistent with the revenues we’re going to generate and the growth we’re going to generate from that. So I think we’re comfortable in terms of how much cost we’ve taken out and right now I think if anything we’re looking at growing and building from here opportunistically based on where we see the margin.
James Shanahan – Wachovia Capital Markets, Inc.
One final question if you don’t mind please, I guess this one’s probably for Tim. I was speaking with a market participant, I don’t think it’s a direct competitor of yours but they might have some overlap and he commented that, this was about two months ago that “NewStar was virtually out of the market”. Obviously there was some origination volume this quarter and so this individual was mistaken but perhaps there was a part of the market that you’ve backed away from and he might be referring to that part of the market.
Timothy J. Conway
I appreciate you raising that. I think people talk about all these competitors in the marketplace and I think the thing to do is to look at the numbers and if you go back and look at how many deals we’ve done since the correction, you’ll find that we are clearly one of the top and very small handful of players that has consistently stayed in the marketplace. I think we’ve done about 70 deals since we felt like the correction really hit and about $1.2 billion of volume. So we have been very consistent. Our customers would tell you that and we’re very selective. So there’s a lot of deals we look at, second liens, mezzanine, stretch deals, over-levered deals, certain sectors that we don’t do. That’s always been the case and we’re not going to be the lender for everybody out there but we’re very proud of the fact that we’ve actually stayed very consistently in the market. I think it’s a huge advantage for us over the next few years because we’ve enhanced our relationships.
I don’t pay too much attention to what other people are saying out there. In real estate I would agree with them, we didn’t do any real estate because those assets are very difficult to fund right now and so until we get better visibility on how we’re going to fund them, we’re going to be slower or not doing any new real estate and in structured products we’ve discontinued that. But in our core business we have been and continue to be very active.
We slowed down a little bit in terms of volumes purposely in the first half based on wanting to see where the market settled out, where spreads came in and where our liquidity position was, but we stayed in the market and now we’ve starting to increase our volumes consistent with that.
Operator
We’ll take our next question from Brian Hagler – Kennedy Capital.
Brian Hagler – Kennedy Capital
I guess you commented on your expectations for third quarter origination volume to be slightly more than the second quarter. Can I just get your thoughts on, I know prepayments are hard to predict, but what your thought are on the other side of that equation?
Timothy J. Conway
We’re seeing about 15%, 10% of which is really baked into the way we structure our deals which is that they amortize and they have excess cash flow recaptured so when we do a deal we build in a de-leveraging component to the structure and about 10% of our portfolio amortizes a year and about 5% we’ve seen continued refinancing based on generally an M&A activity and the sale of an asset that we’ve lent to. That has continued. It was about 10% before the correction and now it’s about 5%. I think 15% is a pretty good number.
Brian Hagler – Kennedy Capital
You also mentioned earlier that this market may produce some opportunities to acquire platforms I believe you said. I was interested in hearing your thoughts on what type of platforms you may be interested in and your capacity to participate in any acquisitions and would you rather just bring over the producers rather than acquire the platform?
Timothy J. Conway
I think we’re always going to do it in a way that generates the most shareholder value so that’s always the way we’re going to look at it. We don’t need to do it, we can grow organically but we do want to be opportunistic and we are seeing opportunities and we’ll look at numerous opportunities and I think where we see opportunities that are high return investments and where we get the kind of funding we want to get along with it, we would consider those if we like the returns. It really is going to be based on what we view as our core strength and competency which is as a direct originator of loans in the middle market with great credit expertise and ability to fund the loans and to directly originate.
I think that as we see add-ons to that, not in any way, shape or form, a change from that core strategy that we can structure in a way that we really protect any downside and get good returns on it, we’ll do that. If it’s easier and a better opportunity to pick up people we will certainly look at that first. But I believe and certainly as I said be patient and conservative over the next period of time, we think there are going to be some compelling opportunities that we may take advantage of if they generate great returns for us.
Brian Hagler – Kennedy Capital
I guess I perceive that comment to be more from the production side, but it sounds like there may be opportunities to diversify your funding base as well?
Timothy J. Conway
We have seen opportunities to buy or look at portfolios or platforms where the seller financing comes with that and that would probably be a part of anything that would be interesting to us at this point.
Brian Hagler – Kennedy Capital
What about like a bank platform?
Timothy J. Conway
I think that’s a good question. As you would expect, we’ve done a lot of work on that. We’ve studied it. I think we understand it really well. I think we have experience in the management team here working in banks. We’re comfortable with our current funding but I think that we are looking at and will continue to look at opportunities to diversify funding and I think that I personally believe the loan securitization markets for the kind of deals that we do will come back. We’re not counting on that in the near term but that that will be available to us. But also that depository funding and strategy is something that we need to look at and will probably be an important part of the way we fund ourselves over time.
Brian Hagler – Kennedy Capital
Last question, how much traditional capacity do you have in your NewStar Opportunities Fund?
Timothy J. Conway
It’s really close to capacity other than run off right now. We’ve put the money out we’ve had no charge offs, no delinquencies, no credit issues in that and very good performance. We’ll think about how we expand that but right now other than run off has really been fully invested.
Operator
We’ll take a follow up question from Sameer Gokhale - Keefe, Bruyette & Woods.
Sameer Gokhale - Keefe, Bruyette & Woods
I guess Brian asked my question about the possibility of the company buying a bank which seems like it would be a smart strategy in this kind of environment but on another note one of the things I was curious about is structured products is in the area where you seem to have stopped originating loans but it seems like this is an environment where other companies in their specialty finance sector, just to take auto finance as an example, could be an area where they rely on the securitization markets for funding and we know that that market has been pretty challenged and it could be good opportunities to lend to those kind of smaller specialty finance companies. Would you at some point consider getting back into that business, not perhaps the business of buying assets as you were doing in structured products but perhaps originating loans within the structured products business?
Timothy J. Conway
The answer is no because first of all you can’t fund those assets very easily and second, we had issues with it with our RMBS. I’d say the third thing is that we take small positions in our deals, we hold a small position I think. The opportunities that we think are out there that are attractive today require slightly bigger hold positions than we’re willing to take as well. I think just strategically and looking at where we are, what our core strengths are, I do not see us getting back into structured products even though I agree with you that that’s an area that is pretty under-banked right now and there are some opportunities, but we’re not going to be getting into that.
Operator
At this time there are no further questions. I’d also like to turn the call back over to Ms. Anne Bork for any additional or closing remarks.
Anne G. Bork
We’d like to thank everybody for taking the time to join us on our call this morning. Please have a great day.
Timothy J. Conway
Thank you.
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