NewStar Reports Net Income of $4.0 Million, or $0.09 Per Diluted Share for the First Quarter of 2016
- Investment Activity — New funded credit investments totaled $300 million in the first quarter, down from $705 million last quarter and $609 million for the same quarter in the prior year due to an increase in credit selectivity and a slowdown in overall market activity.
- Divestiture — Sold NewStar Business Credit LLC ("NSBC"), the company's asset-based lending subsidiary, for approximately 1.27x book value, or approximately $112 million in cash, net of debt repayment, fees and expenses. The transaction generated a gain of approximately $22.5 million and net proceeds of more than $117 million, which included retention of excess cash and transaction proceeds.
- Asset Growth — Managed loans and credit investments decreased by $330 million to $6.6 billion, or 4.7%, from the prior quarter due primarily to the sale of the Company's asset-based lending business, but increased $2.8 billion, or 75%, from the same period last year due to a combination of acquisition activity and organic growth. Excluding the impact of the sale of the Company's asset-based lending subsidiary, managed loans and credit investments increased by $14 million from the prior quarter as new investment activity was mostly offset by runoff.
- Revenue — Total revenue1 increased by $14.0 million, or 51%, from the prior quarter to $41.7 million in the first quarter due primarily to the gain recognized on the sale of the Company's asset-based lending business. The impact of the gain was partly offset by a $1.9 million increase in losses on a total return swap referencing a portfolio of loans and $1.1 million increase in losses recognized on loans-held-for-sale due to a decrease in market values.
- Net Interest Margin — The margin narrowed to 2.21% for the first quarter from 2.45% in the fourth quarter as an increase in the cost of funds outpaced increases in the portfolio yield due primarily to the issuance of additional higher cost subordinated notes and the impact of a full quarter of interest expense on senior notes issued in November 2015.
- Credit — Provision expense was elevated in the first quarter due primarily to a rapidly developing credit event that led to a $5.0 million charge-off and additional reserves established on two legacy loans in connection with restructuring strategies and related activity. Net charge-offs in the first quarter were $7.3 million.
- Funding — Completed thirteenth loan securitization, issuing $256 million of CLO notes and repaid approximately $237 million of debt in connection with the sale of the asset-based lending business. Issued the final $25 million of subordinated notes under a previous commitment and added a $375 million warehouse credit facility to support the launch of a new managed fund.
1 Total revenue is defined as the sum of net interest income and non-interest income
BOSTON, May 04, 2016 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (NASDAQ:NEWS) ("NewStar" or the "Company"), an internally-managed, commercial finance company, today announced financial results for its first quarter of 2016, reporting net income of $4.0 million, or $0.09 per diluted share. These results compare to net income of $4.2 million, or $0.09 per diluted share in the fourth quarter of 2015 and $2.5 million, or $0.05 per diluted share in the first quarter of 2015. Operating income before income taxes was $6.9 million for the first quarter of 2016 compared to $7.1 million for the fourth quarter and $4.3 million in the first quarter of 2015.
Tim Conway, NewStar's Chairman and Chief Executive Officer commented on the Company's performance: "With the sale of our asset-based lending subsidiary at the end of the quarter, we continued to transform the company from a bank-styled diversified commercial finance business into a more specialized middle market direct lender with a focus on managing assets for institutional investors. The transaction generated an attractive financial return, while demonstrating the intrinsic value of our direct lending platforms. It also added significantly to our liquidity position, enhancing our ability to pursue other strategic priorities. The additional liquidity allows us the flexibility to re-invest in our higher margin core lending and asset management businesses, which I believe are better positioned to capitalize on favorable long-term market trends, including a reduction in banks' leveraged lending activities and growing interest among institutional investors in middle market private debt.
Although our overall results were dominated by the financial gains from the sale of the asset-based lending business, our core operating performance was negatively impacted by a combination of broad market forces. Investment activity was dampened by both weak loan demand and greater selectivity as market activity slowed amid a period of heightened volatility and we were somewhat more cautious. Lower loan volume resulted in a decrease in capital markets fees and we took marks on loans held for sale due to broad based declines in asset values. I do not believe the elevated level of credit costs in the quarter were a signal of broader deterioration in the credit environment and remain comfortable with how the portfolio is positioned and performing. Overall, I am pleased with our ability to manage through the volatility and headwinds we have seen for the past six months and I am encouraged by a significant improvement in market conditions in the second quarter that could provide some tailwind into the second half of 2016."
Sale of Asset-based Lending Subsidiary, NewStar Business Credit LLC
- On March 31, 2016, the Company sold its asset-based lending subsidiary, NewStar Business Credit LLC ("NSBC"), to Sterling National Bank, a wholly-owned subsidiary of Sterling Bancorp, for 1.27x book value, or approximately $112 million in cash, net of debt repayment, fees and certain transaction expenses.
- NSBC provided flexible, working capital financing solutions to middle market companies nationwide. Its loans were structured primarily as revolving lines of credit that allowed companies to borrow against estimated liquidation values of their working capital assets such as accounts receivable and inventory.
- The NSBC platform was acquired in late 2010 from American Capital and expanded significantly over the last five years.
- The transaction was structured as a sale of ownership interests in NSBC and generated net proceeds of more than $117 million, which included retention of excess cash and net proceeds from the sale.
- The sale generated a gain of approximately $22.5 million in the first quarter. Total transaction costs of $2.5 million were included in operating expenses.
- NSBC had gross loans of totaling approximately $331 million as of March 31, 2016 when it was sold. It had a staff of 26 and a run-rate expense base of approximately $7.2 million. It contributed approximately $3.7 million to net income in 2015.
Managed and Owned Investment Portfolios
- Total new funded credit investments were $300 million in the first quarter of 2016 compared to $705 million in the prior quarter and $609 million in the same quarter last year. The decrease in investment activity reflected an overall slowdown in market activity and an increase in the Company's selectivity due to heightened volatility across the credit markets and uncertainty about the future direction of the economy.
- Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $170 million, or 4.5% of the loan balances at the beginning of the period, down sharply from $402 million, or 11.4% of balances in the prior quarter. Runoff in the first quarter included $80 million of prepayments, $49 million of loan sales and $41 million of contractual amortization compared to prepayments of $311 million, loan sales of $45 million and amortization of $45 million in the prior quarter.
- Average yields on new loans and other credit investments in the first quarter were 7.4%, up from 6.8% in the prior quarter, reflecting both greater credit selectivity and an improved pricing environment during the period.
- Loans and other investments outstanding, excluding assets managed for third parties, decreased by $96 million, or 2.5% from the prior quarter due primarily to the sale of the Company's asset-based lending business, which had loans totaling $342 million in the prior period. Excluding the impact of the sale, loans and other investments outstanding increased by $246 million, or 7.1%, from the prior quarter despite slower new investment activity as runoff abated. Net loan growth in the first quarter was driven by lending activity generated through our Leveraged Finance group and the purchase of a $139 million portfolio that was previously managed through a total return swap which matured at the end of the quarter. Compared to the first quarter of 2015, loans and investments increased $924 million, or 32.9% due to a combination of acquisition activity and organic growth, which was partly offset by the sale of NSBC.
- The Leveraged Finance loan portfolio increased by $266 million during the first quarter to $3.5 billion, while loans and leases in our Equipment Finance portfolio increased slightly to $176 million.
- New equipment loan and lease volume was $13 million in the first quarter, up slightly from $12 million last quarter and down from $21 million in the first quarter of 2015.
- Assets held in managed funds decreased by $144 million to approximately $3 billion as of March 31, 2016 due to the termination of a total return swap program that referenced a $163 million loan portfolio and amortization of certain managed CLOs. The decrease was partly offset by the formation of the Arch Street fund, which added assets totaling $89.2 million.
- The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. Exposure to energy sectors was 2.5%, up slightly from the prior quarter. As of March 31, 2016, no outstanding borrowings by a single obligor represented more than 1.2% of total loans outstanding, and the ten largest obligors comprised approximately 9.9% of the loan portfolio.
Net Interest Income / Margin
- Net interest income decreased by $1.9 million, or 7.6%, to $22.5 million in the first quarter compared to $24.4 million in the prior quarter as a $3.2 million increase in interest expense exceeded a $1.4 million increase in interest income. The increase in interest income was due primarily to a 3.7% increase in average interest earning assets for the first quarter. The increase in interest expense reflected higher average debt balances in the first quarter and an increase in the cost of funds due partly to the issuance of senior notes totaling $80 million in November 2015 and $25 million of subordinated notes in the first quarter.
- The portfolio yield decreased to 6.28% in the first quarter of 2016 compared to 6.33% in the prior quarter and 6.00% in the first quarter of 2015. The decrease reflected lower amortization of deferred loans fees due to a decrease in runoff, which was partly offset by a continued positive trend in yields on new investments.
- Funding costs increased to 4.56% in the first quarter compared to 4.32% in the prior quarter, and 4.11% in the comparable period in the prior year. The change from the prior period was due primarily to the issuance of higher cost senior notes totaling $80 million in November 2015 and $25 million of subordinated notes in the first quarter. The increase in funding costs from the comparable period in the prior year also reflected the issuance of senior notes totaling $300 million in April 2015.
- As a result, net interest margin narrowed to 2.21% for the first quarter of 2016 compared to 2.45% for the prior quarter and 2.51% in the first quarter of 2015.
- Non-interest income increased by $15.8 million to $19.2 million for the first quarter of 2016 compared to $3.3 million in the prior quarter and $4.1 million in the same period last year. The increase reflected a $22.5 million gain on the sale of NSBC, which was partly offset by the recognition of unrealized losses totaling $3.7 million on loans-held-for sale and $6.1 million of realized losses on a portfolio of loans referenced by a total return swap that matured during the quarter.
- Other non-interest income in the first quarter of 2016 was centered in asset management income of $3.4 million, $0.5 million of placement and amendment fees, $0.2 million of unused fees on revolving credit commitments, $0.4 million of business credit fees and $0.6 million of gain on equity instruments held by the Company as a result of a loan that had been previously restructured.
- Provision expense was $17.7 million in the first quarter, an increase of $14.0 million compared to the prior quarter. This was higher than expected due primarily to a credit event that developed rapidly and resulted in a $5 million charge-off. The addition of specific reserves to several legacy loans in connection with restructuring strategies and related activity also contributed to the increase. Despite the elevated level of credit costs in the first quarter, however, we do not believe it represents a signal of broader credit deterioration. Each situation reflected a unique set of facts and circumstances that drove the timing and amount of losses recognized in the quarter.
- Total net specific provision expense increased by approximately $14.2 million in the first quarter of 2016 to $16.6 million compared to $2.4 million in the prior quarter.
- Charge-offs were $7.3 million in the first quarter of 2016, reflecting the credit event mentioned previously and the final charge-off of a legacy loan totaling $1.1 million against a previously established specific reserve. It also included a $1.3 million charge-off on commercial real estate loans that were reclassified as loans held-for-sale.
- The allowance for credit losses was $67.3 million, or 2.19% of consolidated loans and approximately 59% of NPLs, at March 31, 2016, compared to $58.7 million, or 1.81% of loans and approximately 53% of NPLs, at December 31, 2015.
- Non-performing assets increased slightly to $114.7 million, or 3.63% of loans held for investment and repossessed equipment at March 31, 2016 compared to $111.5 million or 3.44% of loans held for investment and repossessed equipment at the end of the prior period.
- Three loans totaling $10.2 million were placed on non-accrual status in the first quarter.
- Operating expenses were consistent with the prior quarter at $17.1 million, but included $2.5 million of transaction costs related to the sale of a subsidiary.
- As a result, expenses as a percentage of average assets remained consistent at 1.68% of average assets in the first quarter consistent with the prior quarter.
- Adjusted operating expenses, excluding non-cash equity compensation, were $16.1 million in the first quarter, consistent with the fourth quarter.
- The Company had 95 full-time employees at March