NewStar Reports Net Income of $5.0 Million, or $0.10 Per Diluted Share for the Second Quarter
Accelerating Asset and Revenue Growth Drive Higher Returns
Investment Activity - New funded credit investments exceeded $1.0 billion in the second quarter, up 68% from last quarter and 213% from the same quarter last year.Asset Growth - Managed loans and credit investments increased by $418 million to $4.2 billion, or 11%, from the prior quarter and $1.7 billion, or 70%, from the same period last year.Funding - Growth in managed assets was supported by a combination of long term capital from the issuance of senior unsecured notes totaling $300 million in April and a new $175 million credit facility, as well as managed funds. Corporate debt totaling $238 million was also retired in the second quarter, which resulted in the recognition of $3.6 million of debt extinguishment costs that are included in interest expense.Net Interest Margin - Due primarily to the negative impact of interest expense recognized in connection with debt
prepayment, the margin narrowed to 1.99% for the second quarter from 2.51% in the prior quarter. Excluding expenses related to debt extinguishment, the adjusted margin was 2.44% in the second quarter.Revenue - Total revenue1 increased by $1.7 million to $23.2 million, or 7.8% from the prior quarter as a $1.6 million decrease in net interest income, driven by accelerated recognition of interest expense in connection with debt prepayment, was more than offset by a $3.3 million increase in non-interest income from capital markets and asset management activities. Adjusted revenue was up 24% from the prior quarter, excluding the costs related to debt extinguishment.Operating Leverage - Operating expenses decreased to 1.39% of average assets in the second quarter compared to 1.44% in the prior quarter and 1.87% in the same period last year as the growth in average assets outpaced the increase
in expenses from the prior quarter.Credit - Credit costs improved as the provision for credit losses decreased by $3.8 million from the prior quarter due primarily to the mix of new loans and the impact of positive portfolio rating migration, which drove a decrease in general provision expense, as well as slightly lower specific provisions.Stockholders Equity - Pre-tax ROAE increased to 5.2% in the second quarter, or 7.4% excluding the expenses related to debt extinguishment, from 2.7% last quarter. Book value per share increased to $14.36 at the end of the second quarter, up 0.7% or $0.10 from the prior quarter due primarily to earnings retention and the impact of share repurchases.
BOSTON, Aug. 5, 2015 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (NASDAQ:NEWS) ("NewStar" or the "Company"), an internally-managed, commercial finance company, today announced financial results for its second quarter of 2015, reporting net income of $5.0 million, or $0.10 per diluted share. Adjusted net income, excluding debt extinguishment costs recognized in connection with the prepayment of corporate debt during the quarter, was $7.1 million, or $0.15 per diluted share. These results compare to net income of $2.5 million, or $0.05 per diluted share in the first quarter of 2015 and a consolidated net loss of $1.9 million, or $0.04 per diluted share in the second quarter of 2014. Operating income before income taxes was $8.6 million for the second quarter of 2015, or $12.1 million excluding debt extinguishment related expenses, compared to $4.3 million for the first quarter and a loss
of $3.1 million in the second quarter of 2014. Adjusted measures included herein are non-GAAP measures. See "Non-GAAP Financial Measures" at the end of this press release and pages 13 and 14 for reconciliations of all non-GAAP measures to the applicable GAAP measures.
Tim Conway, NewStar's Chairman and Chief Executive Officer commented on the Company's quarterly performance: "We made significant progress on our strategic priorities this quarter as growth accelerated and our returns began to reflect the benefits of operating and financial leverage. Strong asset and revenue growth in the quarter outpaced expense growth, translating directly into a lower expense ratio and higher earnings. New investment activity more than tripled, keeping us on pace to reach our volume target for the full year and driving strong asset growth. Excluding costs related to debt prepayment in the quarter, revenue was up 24%, reflecting increases in both net interest income from asset growth and fees from capital markets and asset management activities. With more than $650 million of equity capital and $600 million of long-term, unsecured debt, we have positioned the balance
sheet to provide leverage to our asset returns and to support continued growth. As a result, equity returns improved in the second quarter, increasing to 7.4% on a pre-tax basis, excluding debt extinguishment costs, and clearly highlighting the benefits of our growth strategy."Managed and Owned Investment Portfolios
Total new funded credit investments exceeded $1.0 billion in the second quarter of 2015, up from $609 million in the first quarter and $326 million in the second quarter of 2014. Higher investment activity was driven by continued 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 and increasing the number of lead managed transactions.
Balance sheet runoff from scheduled amortization, prepayments and sales totaled approximately $419.4 million.
Average yields on new loans and other credit investments in the second quarter were 6.56%, up from 6.07% in the prior quarter due partly to a shift in asset mix and partly to an improved pricing environment during the second quarter.
Loans and investments in debt securities outstanding increased approximately 15% from the prior quarter and 50% from the second quarter of 2014. Growth in the second quarter was driven primarily by strong loan volume in our Leveraged Finance group.
The Leveraged Finance loan portfolio increased by $429.6 million during the second quarter to almost $2.8 billion, while asset-based loans in our Business Credit portfolio decreased 10% to $239 million, and loans and leases in our Equipment Finance portfolio increased 23% to almost $140 million.
Assets held in managed funds was consistent at nearly $1 billion as of June 30, 2015.
New equipment loan and lease volume was $35 million in the second quarter, up significantly from $21 million last quarter and $20 million in the second quarter of 2014, while asset-based lending activity totaling $19 million increased from $9 million last quarter, but decreased from $35 million in the comparable quarter in the prior year. Equipment finance and asset-based lending activity represented 8% of new loan volume retained on the balance sheet in the second quarter.
The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. As of June 30, 2015, no outstanding borrowings by a single obligor represented more than 1.5% of total loans outstanding, and the ten largest obligors comprised approximately 10.6% of the loan portfolio.Net Interest Income / Margin
Despite an 18% increase in interest income in the second quarter, net interest income decreased to $15.8 million in the second quarter of 2015 from $17.4 million in the prior quarter due to higher interest expense driven by the accelerated amortization of deferred financing fees in connection with the prepayment of corporate debt and increased leverage as well as higher cost of funds resulting from the continuing amortization of low-cost CLO notes issued in 2007.
The portfolio yield increased to 6.31% in the second quarter of 2015 compared to 6.00% in the prior quarter and 6.14% in the second quarter of 2014 due to higher yields on new loans originated and higher fee income recognized in the quarter, which was partly driven by higher prepayment levels.
Net interest margin narrowed to 1.99% for the second quarter of 2015 compared to 2.51% for prior quarter as the cost of funds increased to 4.80% in the second quarter from 4.11% in the first quarter of 2015 reflecting the accelerated amortization of deferred financing fees in connection with the prepayment of corporate debt. Excluding the impact of expenses recognized in connection with the prepayment of corporate debt, the margin was 2.44%.Non-Interest Income
Non-interest income was $7.4 million for the second quarter of 2015, up from $4.1 million for the first quarter and $1.5 million for the second quarter of 2014. The change from the first quarter was due primarily to $5.8 million of fee income from capital markets and asset management activities.
Other non-interest income in the second quarter of 2015 was centered in $0.6 million of unused fees on revolving credit commitments, and an unrealized gain of $0.9 million on loans referenced by a total return swap ("TRS") managed by the Company. It also included approximately $0.1 million of revenue related to the remaining OREO property currently being managed by the Company, which was offset by related OREO costs included in general and administrative expenses.Credit Performance
Total credit costs in the second quarter of 2015 decreased by $3.8 million to $3.2 million from $7.0 million in the prior quarter primarily due to a decrease in the general provision for credit loss expense resulting from a combination of positive rating migration and the mix of new loan originations.
Total specific provision expense in the second quarter of 2015 was approximately $2.5 million, down from $3.0 million in the prior quarter.
The allowance for credit losses was $49.9 million, or 1.81% of consolidated loans and approximately 49% of NPLs, at June 30, 2015, compared to $50.7 million, or 1.97% of loans and approximately 51% of NPLs, at March 31, 2015. The change in the ratio was driven by an increase in the outstanding loan portfolio.
Non-performing assets increased slightly to $105.0 million, or 3.79% as a percentage of loans at June 30, 2015 compared to $103.3 million or 4.01% of loans at the end of the prior period due to the addition of one legacy loan totaling $7.5 million to non-accrual status during the second quarter of 2015, partially offset by a $4.0 million charge off of a separate previously impaired loan.
At June 30, 2015, loans with an aggregate outstanding balance of $101.9 million (net of charge-offs), or 3.69% of loans, were on non-accrual status compared to loans with an aggregate outstanding balance of $100.3 million (net of charge-offs), or 3.90% of consolidated loans at March 31, 2015.Expenses
Operating expenses increased approximately 12% to $11.4 million due to higher compensation expense, but decreased as a percentage of average assets to 1.39%, in the second quarter as compared to $10.2 million, or 1.44% of average assets for the prior quarter.
Adjusted operating expenses, excluding non-cash equity compensation were $10.6 million in the second quarter, or 1.28% of average assets on an annualized basis, compared to $9.5 million in the prior quarter, or 1.33% of average assets.
The Company had 107 full-time employees at June 30, 2015 compared to 101 full-time employees at March 31, 2015.Income Taxes
Deferred income taxes decreased slightly to $29.8 million as of June 30, 2015 compared to $30.4 million as of March 31, 2015.
Approximately $26.4 million and $9.3 million of the net deferred tax asset as of June 30, 2015 were related to our allowance for credit losses and equity compensation, respectively, which was partially offset by $7.2 million of deferred tax liabilities related to the lease portfolio.Funding and Capital
Total cash and equivalents as of June 30, 2015 were $214.8 million, of which $25.3 million was unrestricted. Unrestricted cash decreased slightly from approximately $28.7 million at March 31, 2015 due primarily to the timing of cash distributions from CLO trusts. Restricted cash decreased to approximately $189.5 million at June 30, 2015 from approximately $214.9 million as of March 31, 2015 as restricted cash in the 2015-1 CLO was employed in new investments, as well as timing differences in settlement dates of CLO trusts and other non-recourse, secured financing arrangements.
Entered into new $175 million warehouse credit facility in May 2015, which is used to fund leveraged finance loans.
Increased aggregate commitment amounts of warehouse credit facilities used to fund asset-based loans by $105 million to $340 million in June 2015 and extended the maturity date of one of the facilities totaling $175 million to June 2018.
Extended the maturity date to April 2019 of a credit facility to fund equipment finance leases and loans in April 2015.
Advances under credit facilities increased by approximately $265.0 million during the second quarter due primarily to new loan origination volume funded by warehouse lines.
Term debt decreased from the prior quarter by approximately $29 million to $1.5 billion at June 30, 2015 due primarily to repayment of CLO notes from principal collections on loans held in our 2007 CLO trust.
Completed $300 million offering of 7.25% senior notes due 2020 (the "2020 Notes") in April 2015. Net proceeds of approximately $294 million were used to prepay existing corporate debt totaling $238.3 million. Excess proceeds of approximately $55 million were available for general corporate purposes and expected to be used to support loan growth.
Total debt increased by approximately $319.3 million to $2.7 billion at June 30, 2015, which led to an increase in balance sheet leverage to 4.1x from 3.7x at March 31, 2015. The increase was due primarily to the completion of the offering of the 2020 Notes.Equity
Book value per share increased $0.10 to $14.36 at the end of the second quarter of 2015, up from $14.26 at the end of the prior quarter due primarily to net income for the quarter. Book value per share increased 13.8% from the same quarter of last year.
The company purchased 0.4 million shares of its common stock in the second quarter for an aggregate purchase price of $3.9 million under the stock repurchase program authorized in August 2014. This plan was completed on July 21, 2015 as a result of additional repurchases with an aggregate purchase price of approximately $0.8 million.
Average diluted shares outstanding were 48.5 million shares for the quarter, down from 49.4 million for the prior quarter, and total outstanding shares at June 30, 2015 were 45.8 million, down from 46.0 million at March 31, 2015.
Pre-tax returns on average equity increased to 5.2% in the second quarter, or 7.4% excluding expenses recognized in connection with debt prepayment, from 2.7% in the prior quarter.Conference Call and Webcast
NewStar will host a webcast/conference call to discuss the results today at 10:00 am Eastern Time. All interested parties are invited to participate via telephone or webcast, which will be hosted through the Investor Relations section at www.newstarfin.com. Please visit the website to register for the webcast and test your connection prior to the call. You can also access the conference call by dialing 877-755-7419 approximately 5-10 minutes prior to the call. International callers should dial 973-200-3080. All callers should reference "NewStar Financial."
For convenience, an archived replay of the call will be available through August 12, 2015 by dialing 855-859-2056. International callers should call 404-537-3406. For all replays, please use the passcode 87670729. The audio replay will also be available through the Investor Relations section at www.newstarfin.com.About