NewStar Reports Second Quarter Consolidated Net Loss of $1.9 Million, or $0.04 Per Diluted Share
Strong Growth in Loan Origination and Continued Expansion of Asset Management Activities Offset by Elevated Credit Costs From the Resolution of Impaired Loans
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 mil