NewStar Reports Net Income of $4.2 Million, or $0.09 per Diluted Share, for the Fourth Quarter and $16.9 Million, or $0.35 per Diluted Share, for FY 2015
Strong growth in managed assets and revenue drives improved financial results for 2015 despite market headwinds in second half of year
- Investment Activity — New funded credit investments exceeded $700 million in the fourth quarter and $3 billion for the full year, down slightly from the prior quarter and up 71% for the full year compared to 2014.
- Asset Growth — Managed loans and credit investments increased by $2.3 billion to $6.9 billion, or 51%, from the prior quarter and $3.6 billion, or 106%, from the same period last year due primarily to acquisition activity and continued growth in the company's loan portfolio.
- Revenue — Total revenue1 increased by $1.0 million, or 4%, from the prior quarter to $27.7 million in the fourth quarter as net interest income increased by $1.1 million and non-interest income fell slightly. Higher interest income was driven by a 10% increase in average interest earning assets, while increases in fee revenue centered in a $2.7 million increase in asset management fees and a $2.0 million gain on the sale of equity interests were offset by a $1.3 million decrease in capital markets fees and a $3.3 million increase in unrealized losses recognized on a total return swap and loans held-for-sale compared to the third quarter. Revenue increased $8.2 million, or 9%, for the year led by higher fee income from capital markets and asset management activities and increased interest income driven by loan growth, which was partly offset by $9.6 million of unrealized losses on a total return swap and loans held-for-sale recognized in the third and fourth quarters.
- Net Interest Margin — The margin narrowed to 2.45% for the fourth quarter from 2.57% in the third quarter, and 2.39% for 2015, down from 3.17% in the prior year as increases in the portfolio yield were offset by higher leverage and the cost of long-term debt issued during the year.
- Funding — Asset growth in the fourth quarter was supported by a combination of advances under credit facilities and long term capital from the issuance of $25 million of subordinated notes, which was available under an existing commitment, and $80 million of unsecured senior notes.
- Credit — Credit costs decreased slightly from the prior quarter and were down $8.7 million or 32% for the full year. Net charge-offs reflected a recovery in the fourth quarter and were $3.4 million for 2015, down from $25.3 million in 2014.
- Stockholders Equity — Pre-tax ROAE was 4.3% in the fourth quarter and 4.4% for the full year compared to 5.3% last quarter and 2.9% in 2014.
- Corporate Developments — Acquired Boston-based FOC Partners, a credit-oriented investment manager on October 7, 2015. Acquisition had a net neutral contribution to consolidated earnings in the fourth quarter due primarily to the impact of transaction costs and the timing of revenue recognition.
1 Total revenue is defined as the sum of net interest income and non-interest income
BOSTON, Feb. 10, 2016 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (NASDAQ:NEWS) ("NewStar" or the "Company"), an internally-managed, commercial finance company, today announced financial results for its fourth quarter of 2015, reporting net income of $4.2 million, or $0.09 per diluted share. These results compare to net income of $5.1 million, or $0.11 per diluted share in the third quarter of 2015 and $1.2 million, or $0.02 per diluted share in the fourth quarter of 2014. Operating income before income taxes was $7.1 million for the fourth quarter of 2015 compared to $8.8 million for the third quarter and $2.2 million in the fourth quarter of 2014.
The company also announced financial results for its fiscal year, reporting net income of $16.9 million, or $0.35 per diluted share for 2015 compared to $10.6 million, or $0.21 per diluted share in 2014. Operating income before income taxes was $28.8 million for 2015 compared to $18.1 million in 2014.
Tim Conway, NewStar's Chairman and Chief Executive Officer commented on the Company's performance: "We continued to make significant progress on our strategic priorities in 2015 despite market headwinds in the second half of the year. We achieved most of our key objectives related to investment activity, our competitive position, scale, credit and profitability. We originated more than $3 billion of new investments and, importantly, led more transactions than ever for our clients, ranking us fourth in the league tables for middle market sponsored lending for the year. We achieved our scale objectives, growing managed assets by $3.5 billion to nearly $7 billion at year end. As a result, fee revenue from capital markets and asset management activities exceeded $16 million for the year. Our credit performance was also strong as provision expense decreased to 57 bps of average assets for the year. Excluding market-related, unrealized losses that we recognized in the second half of the year, our core earnings have grown and profitability has improved each quarter as we expected. Pre-tax operating income was $29 million for the year after recognizing almost $10 million of unrealized losses in the third and fourth quarters. And, while I am proud of what we accomplished, I am equally frustrated by our stock price performance and the impact of market headwinds on the pace of progress toward our longer term profitability objectives."
"As we head into 2016 and a period of increasing uncertainty, I believe that the Company is well positioned with significant financial flexibility and a defensive investment portfolio that is 95% first lien senior debt and highly diversified with little exposure to stressed industry sectors like energy. Our acquisition of FOC Partners also reflects our increased focus on less capital intensive, fee-based businesses like asset management. We now have the scale, resources and cash flow to be more flexible. As a result we are better positioned than ever to manage through different market conditions and capitalize on opportunities. With our stock trading at a deep discount to book value and an increasingly uncertain outlook for financial markets and economic conditions in 2016, we can consider a wider range of strategy and capital allocation options to enhance shareholder value, including additional share repurchases and dividends, as well as potential dispositions of assets that are not part of our core strategy."
Managed and Owned Investment Portfolios
- Total new funded credit investments were $705 million in the fourth quarter of 2015 compared to $720 million in the prior quarter and $775 million in the same quarter last year. The pace of investment activity slowed somewhat in the fourth quarter as demand for acquisition financing derived from new middle market leveraged buyout activity weakened due primarily to continued volatility in the financial markets and concerns about economic conditions that weighed on investor sentiment.
- New funded credit investments exceeded $3.0 billion for the full year, up 71% from $1.8 billion in 2014.
- Balance sheet runoff from scheduled amortization, prepayments and sales totaled approximately $402 million, or 11.4% of the loan balances at the beginning of the period, up from $234 million, or 7.5% of balances in the prior quarter. Run-off in the fourth quarter included $311 million of prepayments, $45 million of loans sales and $45 million of contractual amortization compared to prepayments of $165 million, loans sales of $26 million and amortization of $44 million in the prior quarter.
- Average yields on new loans and other credit investments in the fourth quarter were 6.8%, up from 6.7% in the prior quarter reflecting an improved pricing environment during the period.
- Loans and other investments outstanding, excluding assets managed for third parties, increased by $207 million, or 6% from the prior quarter and $1.2 billion, or 46% from the end of 2014. Net loan growth in the fourth quarter was driven by lending activity generated through our Leveraged Finance and Business Credit groups.
- The Leveraged Finance loan portfolio increased by $141.6 million during the fourth quarter to $3.2 billion, while asset-based loan balances in our Business Credit portfolio increased 25% to $342 million, and loans and leases in our Equipment Finance portfolio held steady at $173 million.
- New equipment loan and lease volume was $12 million in the fourth quarter, down from $31 million last quarter and $25 million in the fourth quarter of 2014, while asset-based lending activity totaled $67 million up from $25 million last quarter and $39 million in the comparable quarter last year. Equipment finance and asset-based lending activity represented 15% of new loan volume retained on the balance sheet in the fourth quarter.
- Assets held in managed funds grew to more than $3.1 billion as of December 31, 2015, reflecting the acquisition of FOC Partners, which added nearly $2.3 billion to managed assets at acquisition.
- The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. Exposure to energy sectors was 2.1%, consistent with the prior quarter. As of December 31, 2015, no outstanding borrowings by a single obligor represented more than 1.2% of total loans outstanding, and the ten largest obligors comprised approximately 9.3% of the loan portfolio.
Net Interest Income / Margin
- Net interest income increased by $1.1 million, or 5%, to $24.4 million in the fourth quarter compared to $23.2 million in the prior quarter as a $6.0 million increase in interest income significantly exceeded a $4.9 million increase in interest expense. The increase in interest income was due primarily to a 10% increase in average interest earning assets for the fourth quarter compared to the prior period.
- The portfolio yield remained relatively stable at 6.33% in the fourth quarter of 2015 compared to 6.32% in the prior quarter and 5.97% in the fourth quarter of 2014. The portfolio yield for 2015 was 6.27%, up from 6.09% in 2014, which reflected the impact of new credit investments with higher yields made in 2015.
- Funding costs remained consistent at 4.32% in the fourth quarter compared to 4.31% in the prior quarter, but increased from 3.53% in the comparable period in the prior year. For 2015, funding costs were 4.35% compared to 3.12% in 2014 due primarily to the issuance of 7.25% senior notes during the year.
- Net interest margin narrowed to 2.45% for the fourth quarter of 2015 compared to 2.57% for the prior quarter and 2.90% in the fourth quarter of 2014 due primarily to higher leverage for the sequential quarter comparison and a combination of leverage and a higher cost of funds due partly to the issuance of long term debt during 2015.
- Non-interest income was $3.3 million for the fourth quarter of 2015, down slightly from $3.5 million for the third quarter and up from $0.3 million in the fourth quarter of 2014. The change from the third quarter was due primarily to the recognition of unrealized losses totaling $6.5 million on loans-held-for sale and a total return swap, as well as a decrease in capital markets fees of $1.3 million from the previous quarter, which was offset by an increase in asset management income of $2.7 million and a $2.1 million gain on the sale of equity interests held by the Company. At December 31, 2015, the reference portfolio underlying the swap had an unrealized loss of approximately $5.1 million.
- Other non-interest income in the fourth quarter of 2015 was centered in $0.8 million of unused fees on revolving credit commitments, $0.3 million of administrative agency fees and $0.2 million of amendment fees.
- Non-interest income for the full year was $18.4 million, up $6.9 million or 60% from $11.2 million in 2014 led by a $9.0 million increase in capital markets fees and a $5.6 million increase in asset management income, which was partly offset by a reduction of approximately $4.7 million in gains on the sale of equity interests and lower OREO income.
- Provision expenses remained within expected ranges in the fourth quarter and at levels for the year we believe are consistent with the current stage of the business cycle. The Company has been somewhat insulated from the collapse in 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 2.1% of total loans at year end.
- Total credit costs in the fourth quarter of 2015 decreased by $0.9 million to $3.7 million from $4.5 million in the prior quarter due primarily to a shift in the mix of assets.
- Total specific provision expense increased by approximately $0.8 million in the fourth quarter of 2015 to $2.4 million compared to $1.6 million in the prior quarter.
- Total provision expense for 2015 was $18.4 million, or 0.57% of average loans and investments during the year, down from $27.1 million, or 1.17% of average loans in 2014.
- Charge-offs of $0.1 million were more than offset by recoveries totaling $0.7 million in the fourth quarter. Net charge-offs for the year were $3.4 million, or 0.11% of average loans down sharply from $25.3 million, or 1.1% of average loans in 2014.
- The allowance for credit losses was $58.7 million, or 1.81% of consolidated loans and approximately 53% of NPLs, at December 31, 2015, compared to $54.5 million, or 1.76% of loans and approximately 51% of NPLs, at September 30, 2015.
- Non-performing assets increased slightly to $111.3 million, or 3.44% as a percentage of loans at December 31, 2015 compared to $107.7 million or 3.48% of loans at the end of the prior period due to the addition of one legacy loan totaling $7.7 million and a $0.4 million equipment lease to non-accrual status during the fourth quarter of 2015.
- Operating expenses increased by approximately $3.5 million to $16.9 for the fourth quarter from $13.4 million in the prior quarter due to higher compensation expense related to the acquisition of FOC Partners.
- As a result, expenses as a percentage of average assets increased to 1.68% over average assets in the fourth quarter compared to 1.45% for the prior quarter.
- Adjusted operating expenses, excluding non-cash equity compensation were $16.1 million in the fourth quarter compared to $12.5 million in the third quarter.
- The Company had 122 full-time employees at December 31, 20