NewStar Reports Net Income of $1.2 Million, or $0.02 Per Diluted Share for the Fourth Quarter and $10.6 Million, or $0.21 Per Diluted Share for 2014
Relationship With Blackstone's GSO Capital and Franklin Square Helps Drive Strong Growth in Managed Assets as the Company Closes New Credit Fund and Begins Deploying Capital From Recent Strategic InvestmentStrategic Relationship - Closed a new $400 million managed credit fund with an anchor investment from funds sponsored by Franklin Square Capital Partners ("Franklin Square") and sub-advised by Blackstone's GSO Capital ("GSO") and completed the initial closing of their strategic investment in the Company.New Loan Volume - Originated new loan volume of $775 million in the fourth quarter and $1.8 billion for the full year, up 89% from the prior quarter and 38% from 2013.Growth - Increased total assets under management by 30% from the prior quarter and $1.0 billion from the prior year to approximately $3.8 billion. Total assets held by managed funds reached approximately $1
billion at year end.Asset Quality - Asset quality improved in the fourth quarter as NPAs decreased as a percentage of total loans, but remained stable in dollar terms. Strategy to underweight energy sectors limited exposure to approximately 1% of portfolio at year-end.Credit Costs - Provision for credit losses increased by $1.9 million from the prior quarter due primarily to the impact of net loan growth. Provision expense for the year was up $17.4 million from the prior year due primarily to specific charges recognized in connection with the resolution of legacy loans in the second quarter and strong growth in the second half of the year.Net Interest Margin - Margin narrowed to 2.90% for the fourth quarter from 3.24% in the prior quarter, and 3.17% for 2014, down from 3.90% for the prior year due primarily to increased leverage and higher cost of funds.Operating Expenses - Expenses in
the fourth quarter decreased by 2% from the prior quarter to approximately 1.65% of average assets, while full year expenses in 2014 decreased $3.9 million, or 8%, from the prior year.Stockholders Equity - Increased book value per share to $13.75 at year-end, up 8.6% or $1.09 from the end of 2013 and returned $34.6 million of capital to stockholders in 2014, or $0.74 per outstanding share, through share repurchase programs.
BOSTON, Feb. 11, 2015 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS) ("NewStar" or the "Company"), an internally-managed, specialized commercial finance company, today reported net income of $1.2 million, or $0.02 per diluted share for the fourth quarter of 2014. These results compare to net income of $5.0 million, or $0.10 per diluted share in the third quarter of 2014 and consolidated net income of $6.4 million, or $0.12 per diluted share in the fourth quarter of 2013. Operating income before income taxes was $2.2 million for the fourth quarter of 2014 compared to $8.5 million for the third quarter of 2014 and $9.4 million in the fourth quarter of 2013.
The company also reported that consolidated net income for 2014 was $10.6 million, or $0.21 per diluted share, compared to $24.6 million or $0.46 per diluted share in 2013.
Tim Conway, NewStar's Chairman and Chief Executive Officer commented on the Company's quarterly results: "In the fourth quarter, we marked several important milestones in the company's history as we continued to make progress on key strategies to improve stockholder returns. We announced a transformational strategic relationship with world class partners and have already begun to see benefits. We nearly doubled origination volume and increased assets under management by 30% to $3.8 billion in the quarter. Importantly, we also continued to differentiate our credit performance with a disciplined credit strategy that significantly under-weighted exposure to energy sectors and is expected to provide appropriate balance to our growth objectives. We also returned $35 million of capital to shareholders through stock repurchases in 2014 and increased book value per share materially. With
significant momentum carrying into 2015, we believe that we now have a clear pathway to reach pre-tax return on equity targets. Through a combination of operating leverage resulting from anticipated growth and further use of debt to prudently leverage the balance sheet, we believe that the strategic investment from Franklin Square and GSO will be accretive to returns in the fourth quarter of 2015 and that anticipated earnings growth will generate pre-tax returns on equity in the mid-teens by the second half of 2016." Managed and Owned Loan Portfolios
Total new funded loan volume was approximately $775 million in the fourth quarter, up from $409 million in the prior quarter and $549 million in the fourth quarter of the prior year (including a $218 million portfolio purchase). Higher volumes were driven partly by demand for acquisition financing derived from new middle market LBO activity and co-lending activity through our strategic relationships combined with our emphasis on providing larger credit commitments. The Company's asset-based lending and equipment finance platforms also continued to make meaningful contributions to volumes.
Loan volume was approximately $1.8 billion for the full year, up 38% from $1.3 billion in 2013.
Average yields on new loans and leases in the fourth quarter were 6.16%, up from 5.81% in the prior quarter.
Loans outstanding increased approximately 20% from the prior quarter and the fourth quarter of 2013, excluding loans in the Arlington Fund at December 31, 2013. Growth was driven primarily by strong new loan volume in 2014, particularly in the fourth quarter as pre-payments slowed.
The Leveraged Finance loan portfolio increased by $372 million during the fourth quarter to more than $2.1 billion, while asset-based loans in our Business Credit portfolio increased 27% to $287 million, and loans and leases in our Equipment Finance portfolio increased 28% to almost $100 million.
Assets managed for third party institutional investors increased to nearly $1 billion at December 31, 2014 from approximately $450 million at September 30, 2014 due primarily to the launch of a new $400 million credit fund, which will co-invest in new loans originated by the Company. In connection with the launch of our strategic relationship, funds sponsored by Franklin Square Capital Partners and sub-advised by GSO Capital participated among a group of investors in the Company's new credit fund.
Asset-based loan origination was approximately $39 million and new equipment finance loans and leases totaled approximately $25 million in the fourth quarter of 2014, or 14% of new loan volume retained on the balance sheet. The combined volume of $64 million in the fourth quarter was up 53% from the prior quarter.
The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. As of December 31, 2014, no outstanding borrowings by a single obligor represented more than 1.4% of total loans outstanding, and the ten largest obligors comprised approximately 10.2% of the loan portfolio.Net Interest Income / Margin
Despite a 5% increase in interest income in the fourth quarter, net interest income decreased to $18.5 million from $19.6 million in the third quarter of 2014 due to a combination of higher leverage and increasing cost of funds due partly to the issuance of new subordinated notes. For 2014, interest income increased approximately 6% due to loan growth, but net interest income fell to $79.5 million from $86.8 million in 2013 as the increase in interest income was more than offset by higher interest expense, which reflected the continuing amortization of low-cost CLO notes issued in 2006 and 2007 and the issuance of new, higher cost debt in 2014.
The portfolio yield decreased to 5.97% in the fourth quarter of 2014 compared to 6.13% in the prior quarter and 6.37% in the fourth quarter of 2013. The portfolio yield for 2014 was 6.09% down from 6.68% in 2013. The change reflected the impact of lower yields on new loan volume in the first three quarters of 2014.
Net interest margin narrowed to 2.90% for the fourth quarter of 2014 compared to 3.24% for the prior quarter as interest expense increased $2.8 million from the third quarter due to the issuance of the subordinated notes and increased borrowings under credit facilities. The margin was 3.17% for the year, down from 3.90% in 2013 due to higher debt levels and increased cost of funds.Non-Interest Income
Non-interest income (loss) was $(0.3) million for the fourth quarter of 2014, down from $3.3 million for the third quarter of 2014 and $3.8 million for the fourth quarter of 2013. The change from the third quarter was due primarily to a loss of $0.7 million recognized on the transfer of certain loans to a new credit fund and an unrealized loss of $0.9 on loans referenced by a total return swap ("TRS") managed by the Company, as well as adjustments totaling $0.2 million upon resolution of an OREO property that was sold during the fourth quarter.
Non-interest income for the full year was $11.2 million, down from $13.6 million for 2013 due primarily to the items in the fourth quarter described above, as well as, lower asset management and loan structuring/amendment fees, which were partially offset by gains on the sale of equity interests in 2014.
Other non-interest income in the fourth quarter of 2014 was centered in $0.5 million of unused fees on revolving credit commitments, $0.1 million of amendment and exit fees, and $0.2 million of other asset-based lending fees generated by Business Credit. It also included approximately $0.2 million of revenue related to the remaining OREO currently being managed by the Company, which was offset by related OREO costs included in general and administrative expenses. Credit Performance
Although the provision expense increased somewhat in the fourth quarter due primarily to loan growth, credit costs remained within expected ranges and at levels we believe are consistent with the current stage of the business cycle. The Company has been largely insulated from the recent collapse of oil commodity prices and has under-weighted energy sectors as part of its credit strategy. Loans to companies in energy sectors, as a result, were limited to 1% of total loans as of year-end.
Total credit costs in the fourth quarter of 2014 increased by $1.9 million to $5.3 million from $3.4 million in the prior quarter primarily due to an increase in the general allowance for credit losses driven by loan growth and a $0.6 million increase in specific provision.
Total specific provision expense in the fourth quarter was approximately $2.4 million, up from $1.8 million in the prior quarter.
The allowance for credit losses was $43.7 million, or 1.84% of consolidated loans and approximately 50% of NPLs, at December 31, 2014, compared to $41.9 million, or 1.99% of loans and approximately 54% of NPLs, at September 30, 2014. The change in the ratio was driven by a combination of charge-offs recognized during the year, net loan growth and an increase in loans held for sale (which are reported at fair value).
Non-performing assets were consistent at $91.0 million, but decreased to 3.84% as a percentage of loans at December 31, 2014 compared to $90.0 million or 4.25% of loans at the end of the prior period.
At December 31, 2014, loans with an aggregate outstanding balance of $87.8 million (net of charge-offs), or 3.70% of loans, were on non-accrual status compared to loans with an aggregate outstanding balance of $77.1 million (net of charge-offs), or 3.67% of consolidated loans at September 30, 2014.Expenses
Operating expenses decreased approximately 2% to $10.8 million in the fourth quarter of 2014 as compared to the third quarter and were down 8%, or approximately $4 million, for the full year compared to 2013. The full year change was due primarily to a decrease of $2.3 million in compensation related expenses and a $1.5 million reduction in administrative expenses related to OREO properties. Operating expenses were approximately 1.65% of average assets in the fourth quarter of 2014.
Excluding non-cash equity compensation1, operating expenses were $10.0 million in the fourth quarter, or 1.54% of average assets on an annualized basis, compared to $10.4 million in the prior quarter.
The Company had 98 full-time employees at December 31, 2014 and September 30, 2014.Income Taxes
Deferred income taxes increased to $28.1 million as of December 31, 2014 compared to $25.4 million as of September 30, 2014 due primarily to the increase in our allowance for credit losses.
Approximately $23.9 million and $10.0 million of the net deferred tax asset as of December 31, 2014 were related to our allowance for credit losses and equity compensation, respectively, which was partially offset by deferred tax liabilities related to the lease portfolio.Funding and Capital
Total cash and equivalents as of December 31, 2014 were $128.4 million, of which $33.0 million was unrestricted. Unrestricted cash decreased from approximately $111.6 million at September 30, 2014 due primarily to the use of cash to fund new loan origination and the timing of cash distributions from CLO trusts. Restricted cash decreased to approximately $95.4 million at December 31, 2014 from approximately $131.8 million as of September 30, 2014 due primarily to timing differences in settlement dates of CLO trusts and other non-recourse, secured financing arrangements.
Advances under credit facilities increased by approximately $203 million during the fourth quarter due primarily to increases in new loan origination volume.
Corporate debt increased by approximately $157 million through the issuance of $200 million of subordinated notes as part of a strategic relationship with Blackstone's GSO Capital and Franklin Square Partners.
Completed Clarendon Fund CLO, a $400 million middle market CLO, anchored by an investment from funds sponsored by Franklin Square Partners and sub-advised by Blackstone's GSO Capital in January 2015. This was the Company's tenth CLO issuance and was structured to comply with new risk retention requirements.
Increased a warehouse credit facility used to finance leveraged finance loans by $100 million to $375 million in January 2015.
Term debt decreased by approximately $32 million to just under $1.2 billion at December 31, 2014 due primarily to the repayment of CLO notes from principal collections on loans held in amortizing CLO trusts.
Total debt increased by approximately $327.6 million to $2,133.5 million at December 31, 2014, which led to an increase in balance sheet leverage to 3.3x from 3.0x at September 30, 2014. The increase was due primarily to higher advances under the credit facilities with Wells Fargo and DZ Bank, and the issuance of the subordinated notes. Equity
Book value per share increased $1.02 to $13.75 at the end of the fourth quarter of 2014, up from $12.73 at the end of the prior quarter due primarily to warrants issued in connection with the subordinated notes. Book value per share increased 8.6% from the end of last year and has increased at a compound annual rate of approximately 5% over the last five years.
The company purchased 1.2 million shares of its common stock in the fourth quarter for an aggregate purchase price of $12.9 million, consisting of $2.7 million of shares purchased under the stock repurchase program authorized in August 2014 and an additional $10.2 million of its common stock through a privately negotiated transaction with an unaffiliated third party.
The Company returned approximately $34.6 million of capital to stockholders in 2014, or $0.74 per outstanding share as of year-end, through share repurchases.
Average diluted shares outstanding were 50.5 million shares for the quart