NewStar Reports Net Income of $5.2 Million, or $0.11 Per Diluted Share, for the Second Quarter of 2016
- Investment Activity — New funded credit investments totaled $476 million in the second quarter, up from $300 million last quarter and down from $1 billion in the same quarter last year as middle market sponsored lending activity increased in the second quarter of 2016, but remained at low levels in 2016 compared to the prior year.
- Asset Growth — Managed loans and credit investments remained relatively unchanged from the prior quarter at $6.6 billion and increased $2.4 billion, or 57%, from the same period last year due to a combination of acquisitions and organic growth.
- Revenue — Total revenue1 decreased by $16.4 million, or 39.4%, from the prior quarter to $25.3 million in the second quarter due primarily to a $22.5 million gain recognized on the sale of a business in the first quarter, but increased 8.8% over the same period last year as asset growth drove net interest income higher.
- Net Interest Margin — The margin narrowed to 2.10% for the second quarter from 2.21% in the first quarter as asset yields remained stable and the cost of funds increased due primarily to the impact of the sale of the asset-based lending business, which drove a shift in the mix of debt.
- Credit — Credit performance improved in the second quarter as the provision for credit losses decreased by $14.1 million from the prior quarter due primarily to a reduction of $14.2 million in specific provision expense.
- Expenses — Operating expenses decreased by $4.2 million, or 25%, to $12.8 million in the second quarter compared to the prior quarter due to the sale of the company's asset-based lending business in the first quarter and other cost saving initiatives targeting a considerable reduction in total run-rate expenses by the end of 2016.
- Equity - Book value per share increased by $0.28 to $14.12 as of June 30, 2016 from $13.84 at the end of the prior quarter due primarily to earnings retention and accretive share repurchases.
BOSTON, Aug. 03, 2016 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (NASDAQ:NEWS) ("NewStar" or the "Company"), an internally-managed, middle market direct lender and credit-oriented asset manager, today announced financial results for its second quarter of 2016, reporting net income of $5.2 million, or $0.11 per diluted share. These results compare to net income of $4.0 million, or $0.09 per diluted share in the first quarter of 2016 and $5.0 million, or $0.10 per diluted share in the second quarter of 2015. Operating income before income taxes was $8.8 million for the second quarter of 2016 compared to $6.9 million for the first quarter of 2016 and $8.6 million in the second quarter of 2015.
Tim Conway, NewStar's Chairman and Chief Executive Officer, commented on the Company's performance: "Our results in the second quarter reflected solid core operating trends, including an increase in investment activity, stable core revenue, improved credit performance and continued progress on our strategic goals. Although loan volumes remained below target levels through the first half of the year, investment activity improved in the second quarter. Loan demand from M&A activity remained weak, however, as continued uncertainty about the potential economic impacts of geopolitical events weighed on market sentiment.
Overall, I was pleased with our financial results as earnings increased from last quarter and the comparable quarter last year. Core revenue remained steady at $25 million, excluding non-recurring items, despite the loss of revenue contributed by the asset-based lending (ABL) business, which we sold in the first quarter. Continued pressure on loan values, however, weighed on non-interest income in the quarter as we recognized additional unrealized losses on loans held for sale, which we could recover in future periods. Credit costs normalized in the second quarter as expected. We reduced non-performing assets by 16%. We also sold $34 million of real estate loans, accelerating the disposition of that portfolio. Our ability to take steps last quarter to accelerate certain workout strategies has positioned us well for the second half of the year. Importantly, book value per share also increased considerably due to accretive share repurchases and earnings retention.
We also continued to make progress on key priorities in the quarter as we worked to streamline the business, and focus on higher margin segments, including middle market direct lending and asset management. Expenses decreased by 25% from the prior quarter due to the sale of the ABL business and we have identified additional opportunities that we expect to generate a considerable reduction in total run-rate expenses by the end of 2016."
Managed and Owned Investment Portfolios
- Total new funded credit investments were $476 million in the second quarter of 2016 compared to $300 million in the prior quarter and $1 billion in the same quarter last year. Investment activity in the second quarter of 2016 included $107 million of loans sourced for the Arch Street fund and reflected a modest pick-up in middle market sponsored lending activity compared to the prior quarter, but remained muted compared to last year. M&A activity continued to reflect a cautious market sentiment amid uncertainty about the future direction of the economy, including the potential impact of developing geopolitical events.
- Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $343 million, or 9.5% of the loan balances at the beginning of the period, up from $170 million, or 4.5% of balances in the prior quarter. Runoff in the second quarter included $190 million of prepayments, $102 million of loan sales and $51 million of contractual amortization compared to prepayments of $80 million, loan sales of $49 million and amortization of $41 million in the prior quarter.
- Average yields on new middle market loans and other directly originated credit investments in the second quarter were 7.0%, down from 7.4% in the prior quarter due partly to the impact of competition for limited deal flow in the market, but up from 6.56% in the second quarter of last year.
- Loans and other investments outstanding, excluding assets managed for third parties, increased by $37.8 million, or 1%, from the prior quarter. Net loan growth in the second quarter was driven by lending activity generated through our Leveraged Finance group. Compared to the second quarter of 2015, loans and investments increased $548 million, or 17%, due to a combination of acquisition activity and organic growth, which was partially offset by the sale of the ABL business.
- The Leveraged Finance loan portfolio increased by $85.6 million during the second quarter to $3.6 billion, while loans and leases in our Equipment Finance portfolio decreased by $10.2 million to $165.2 million. Commercial real estate loans decreased by 47% in the second quarter to less than $42 million due to the sale of commercial mortgage loans as part of an accelerated disposition of that portfolio. A commercial real estate loan totaling $23.8 million was also reclassified as held-for-sale during the quarter in connection with a strategy to further reduce exposure to this asset class.
- New equipment loan and lease volume was $11 million in the second quarter, down slightly from $13 million last quarter and down from $35 million in the second quarter of 2015,
- Assets held in managed funds increased slightly to approximately $3.0 billion as of June 30, 2016 as a decrease in assets managed in amortizing CLOs was offset by an increase in assets managed in the new Arch Street fund.
- The owned loan portfolio remained defensively positioned - balanced across industry sectors and highly diversified by issuer. Exposure to energy sectors was less than 2%, down slightly from the prior quarter. As of June 30, 2016, no outstanding borrowings by a single obligor represented more than 1.2% of total loans outstanding, and the ten largest obligors comprised approximately 9.6% of the loan portfolio.
Net Interest Income / Margin
- Net interest income decreased by $1.6 million, or 7.2%, to $20.9 million in the second quarter compared to $22.5 million in the prior quarter due primarily to a $174 million decrease in average loans and credit investments compared to the prior quarter. The decrease was due primarily to the sale of the company's asset-based lending business at the end of the first quarter, which was partly offset by growth in the leveraged finance loan portfolio. Compared to the second quarter of last year, net interest income increased by $5.1 million, or 32.4%, due to a 25.7% increase in average earning assets and an 11 bp improvement in net interest margin.
- The portfolio yield remained consistent with the prior quarter at 6.28% and decreased slightly from 6.31% from the second quarter of 2015.
- Funding costs increased to 4.65% in the second quarter compared to 4.56% in the prior quarter, and 4.80% in the comparable period in the prior year. The change from the first quarter was due to a shift in the composition of debt resulting from the repayment of warehouse credit facilities in connection with the sale of the company's asset-based lending business, as well as the issuance of $25 million of subordinated notes in the first quarter. The decrease in funding costs from the comparable period in the prior year is primarily the result of $3.6 million of accelerated costs recognized in connection with the extinguishment of debt in the year prior.
- As a result, net interest margin narrowed to 2.10% for the second quarter of 2016 compared to 2.21% for the prior quarter and 1.99% in the second quarter of 2015.
- Non-interest income decreased by $14.8 million to $4.4 million for the second quarter of 2016 compared to $19.2 million in the prior quarter and $7.4 million in the same period last year. The decrease from the prior quarter was due primarily to the recognition of a $22.5 million gain on the sale of the company's asset-based lending business during the first quarter of 2016, which was partly offset by lower losses recognized on loans held for sale and a total return swap during the second quarter. Losses recognized on loans held for sale and the total return swap decreased by $7.6 million in the second quarter compared to the prior quarter, which reflected continued pressure on loan values during the second quarter and the termination of the swap at the end of the prior quarter.
- Other non-interest income in the second quarter of 2016 was centered in asset management income of $3.5 million and $1.5 million of capital markets related fees. A decrease of approximately $0.9 million in unused commitment fees and other miscellaneous fees related to the asset-based lending business was largely offset by higher capital markets fees.
- Credit performance improved in the second quarter as credit costs normalized, as expected, following elevated levels of credit costs recognized in the prior quarter.
- Provision expense was $3.6 million in the second quarter, a decrease of $14.1 million compared to the elevated levels in the prior quarter.
- Total net specific provision expense decreased by approximately $14.2 million in the second quarter of 2016 to $2.4 million compared to $16.6 million in the prior quarter, reflecting stable asset quality.
- Charge-offs were $6.9 million in the second quarter of 2016 compared to $7.3 million in the prior quarter and $4 million in the second quarter of 2015. Charge-offs in the quarter were applied against previously established specific reserves.
- The allowance for credit losses was $64.0 million, or 2.09% of consolidated loans and approximately 66.8% of non-performing loans (NPLs), at June 30, 2016, compared to $67.3 million, or 2.19% of loans and approximately 59% of NPLs, at March 31, 2016.
- Non-performing assets decreased 16% to $96.2 million, or 2.98% of loans and lease assets held for investment at June 30, 2016, compared to $114.7 million or 3.63% of loans and lease assets held for investment at the end of the prior period. The decrease was due primarily to the resolution of a legacy loan resulting in a $12 million repayment and charge-offs of $6.9 million as noted above.
- Two loans totaling $9.2 million were placed on non-accrual status in the second quarter.
- Operating expenses decreased by $4.2 million, or 25%, to $12.8 million for the second quarter of 2016 compared to $17.1 million in the prior quarter due to the impact of the sale of the company's asset-based lending business and other cost initiatives.
- Expenses as a percentage of average assets decreased to 1.29% of average assets in the second quarter compared to 1.68% in the prior quarter.
- Adjusted operating expenses, excluding non-cash equity compensation, were $11.9 million in the second quarter down from $16.1 million during the first quarter.
- The Company had 90 full-time employees at June 30, 2016 compared to 95 full-time employees at March 31, 2016 and 122 employees at December 31, 2015. The reduction in staffing levels reflects both the sale of the asset-based lending business, which had 26 full-time employees, and strategic initiatives to streamline operations.
- The company has identified additional opportunities to reorganize and streamline its operations to reduce expenses and expects to achieve considerable additional run-rate savings by the end of 2016.
- Deferred income taxes decreased $3.2 million to $30.4 million as of June 30, 2016. The decrease in deferred income taxes related to activity in the allowance for credit losses and available for sale securities.
- Approximately $30.2 million and $11.1 million of the net deferred tax asset as of June 30, 2016 were related to our allowance for credit losses and incentive compensation, respectively, which was partially offset by $12.9 million of deferred tax liabilities related to the lease portfolio.
Funding and Capital
- Total cash and equivalents as of June 30, 2016 were $242 million, of which $34.6 million was unrestricted. Unrestricted cash decreased from approximately $150.70 million at March 31, 2016, due primarily to receipt of cash proceeds from the sale of the asset-based lending subsidiary during the previous quarter, which was used to pay-down warehouse debt and re-invest in new loans. Restricted cash increased by approximately $52.0 million at June 30, 2016 from approximately $155.3 million as of March 31, 2016 due primarily to principal and interest collections on loans that was retained pending reinvestment in new loan collateral or distribution on various settlement dates.
- Advances under credit facilities increased by approximately $27.3