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NewStar Reports Net Income of $8.6 Million, or $0.19 per Diluted Share, for the Third Quarter of 2016

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  • Investment Activity — New funded credit investments totaled $427 million in the third quarter compared to $476 million last quarter and $720 million in the same quarter last year, reflecting credit selectivity in a mixed market environment.
  • Managed Assets — Managed loans and credit investments increased slightly from the prior quarter to $6.7 billion, which was $2.0 billion, or 44.4%, higher than in the same period last year. Growth in assets from a new managed fund launched in the third quarter offset an expected decrease in assets in funds past their investment periods. New funds and separate accounts with targeted investment portfolios of $600 million were launched after the end of the third quarter.
  • Revenue — Total revenue1 increased by $10.9 million, or 43.4%, from the prior quarter to $36.2 million in the third quarter due primarily to higher average assets, favorable mark-to-market adjustments, previously unrecorded interest income recognized in connection with the repayment of a non-performing loan at par and higher capital markets related income. 
  • Net Interest Margin — The margin widened to 2.50% for the third quarter from 2.10% in the second quarter due primarily to the impact of interest income recognized in the quarter in connection with the pay-off of a non-performing loan at par.
  • Credit — Credit performance remained within expected ranges with provision expense of $3.6 million for the third quarter, consistent with the prior quarter and $0.9 million lower than in the same period last year.
  • Expenses — Operating expenses increased by $5.2 million to $18.1 million in the third quarter compared to the prior quarter due primarily to $4.2 million of severance charges related to cost saving initiatives and approximately $1.0 million of other elevated expenses related to short-term projects.
  • Equity — Book value per share increased by $0.26 to $14.38 as of September 30, 2016 from $14.12 at the end of the prior quarter due primarily to comprehensive income totaling $11.7 million in the third quarter. Subsequent to the end of the third quarter, the company repurchased 2.5 million shares at a weighted average cost of $8.93 per share in privately negotiated transactions, which is expected to be accretive to book value per share. 
  • Divestitures — Assets and liabilities of the equipment finance business were reclassified as held-for-sale as of September 30, 2016, reflecting an ongoing process to sell that business, which has resulted in a non-binding letter of intent with a prospective buyer. 

1 Total revenue is defined as the sum of net interest income and non-interest income

BOSTON, Nov. 02, 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 third quarter of 2016, reporting net income of $8.6 million, or $0.19 per diluted share. These results compare to net income of $5.2 million, or $0.11 per diluted share in the second quarter of 2016 and $5.1 million, or $0.11 per diluted share in the third quarter of 2015. Operating income before income taxes was $14.6 million for the third quarter of 2016 compared to $8.8 million for the second quarter of 2016 and $8.8 million in the third quarter of 2015.

Tim Conway, NewStar's Chairman and Chief Executive Officer, commented on the Company's performance: "We continued to make progress on our key strategic priorities in the third quarter and our financial results reflected solid operating trends highlighted by a significant increase in earnings driven by strong revenue growth and stable asset quality.  Revenue increased by more than 40% over last quarter and 35% from the same quarter last year as core revenue increased, loan values recovered and we got a boost in interest income from the repayment of a non-performing loan at par.  Credit costs also remained stable within expected ranges and we absorbed elevated expenses recognized in the quarter primarily related to cost savings initiatives and strategic projects that are expected to provide future benefits. Loan demand from M&A activity remained relatively soft through the quarter.  As a result, our investment pace was below expected levels, reflecting our commitment to credit selectivity. Importantly, book value per share increased by $0.26 and, after quarter-end, we repurchased 2.5 million shares in privately negotiated transactions, which is expected to add more than $0.30 to book value."

"While I am pleased with the financial results, we also made meaningful progress on our key priorities in the quarter as we worked to streamline the business, reduce expenses and expand our asset management activities.  We completed a strategic review to explore the potential sale of our equipment finance business which resulted in a non-binding letter of intent with a prospective buyer.  That transaction is expected to close before year-end.   As a result of savings related to divestitures and other initiatives, we expect to have reduced baseline expenses by 25-30% on a run-rate basis by year end.  We also continue to make progress on our asset management strategy with the launch of two new managed funds and a separate account with target investment portfolios of approximately $1 billion.  In 2016, we have sponsored three new CLOs totaling approximately $1.3 billion, underscoring our position as a leading issuer in that key market." 

Managed and Owned Investment Portfolios

  • Total new funded credit investments were $427 million in the third quarter of 2016 compared to $476 million in the prior quarter and $720 million in the same quarter last year.  Investment activity in the third quarter of 2016 included liquid loan and middle market direct lending strategies.  Loan demand in the third quarter reflected seasonally slow activity through July and August, followed by a pick-up in September driven by refinancing activity, but remained muted overall compared to the prior quarter and last year.  M&A activity continued to reflect a cautious market sentiment amid uncertainty about the future direction of the economy, the rate environment and US elections.  
  • Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $225 million, or 5.7% of loan and investment balances at the beginning of the period, down from $343 million, or 9.5% of balances in the prior quarter.  Runoff in the third quarter included $148 million of prepayments, $27 million of loan sales and $51 million of contractual amortization compared to prepayments of $190 million, loan sales of $102 million and amortization of $51 million in the prior quarter. 
  • Average yields on new middle market loans and other directly originated credit investments in the third quarter were 6.6%, down from 7.0% in the prior quarter due partly to the impact of competition for limited deal flow in the market and disciplined credit selectivity, but remained consistent with levels in the third quarter of last year. 
  • Loans and other investments outstanding, excluding assets managed for third parties, increased by $200 million, or 5.3%, from the prior quarter.  Net loan growth in the third quarter was driven by lending activity generated through our Leveraged Finance group and an increase in loans sourced for our liquid loan strategies. Compared to the third quarter of 2015, loans and investments increased $342 million, or 9.4% due to lending activity related to both direct lending and liquid loan strategies, which was partially offset by the sale of the ABL business in the first quarter of 2016. 
  • The Leveraged Finance loan portfolio increased by $231 million during the third quarter to $3.8 billion, while loans and leases in our Equipment Finance portfolio decreased by $7 million to $158 million and were reclassified as assets held-for-sale in connection with the planned divestiture of that business.  Commercial real estate loans decreased by 57% in the third quarter to less than $18 million due to the sale of a commercial property as part of an accelerated disposition of that portfolio.  A commercial real estate loan totaling $15.8 million was also reclassified as other real estate owned (OREO) during the quarter.  
  • Assets held in managed funds increased to approximately $3.1 billion as of September 30, 2016 as a decrease in assets managed in amortizing CLOs was more than 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 1.2%, down slightly from the prior quarter.  As of September 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 9.4% of the loan portfolio.

Net Interest Income / Margin

  • Net interest income increased by $4.4 million, or 20.8%, to $25.3 million in the third quarter compared to $20.9 million in the prior quarter due primarily to $3.2 million of previously unrecorded interest income recognized in connection with the pay-off of a nonperforming loan at par and a $28.4 million increase in average loans and credit investments compared to the prior quarter.  Compared to the third quarter of last year, net interest income increased by $2.0 million, or 8.7%.
  • The portfolio yield increased to 6.77% in the third quarter compared to 6.28% the prior quarter, and 6.32% in the comparable period in the prior year.  The increase in yield was due primarily to the income recognized in connection with the pay-off of a non-performing loan at par and an increase in deferred fee amortization related to prepayments. 
  • Funding costs were 4.67% in the third quarter which was relatively consistent with 4.65% in the second quarter, but up from 4.31% in the comparable period in the prior year. 
  • As a result, net interest margin widened to 2.50% for the third quarter of 2016 compared to 2.10% for the prior quarter, but narrowed slightly from 2.57% in the third quarter of 2015.

Non-Interest Income

  • Non-interest income increased by $6.6 million to $11.0 million for the third quarter of 2016 compared to $4.4 million in the prior quarter and $3.5 million in the same period last year.  The increase was due primarily to $3.9 million of unrealized gains on loans reported at fair value and higher capital markets related fees.  Unrealized gains partly reflected the recapture of unrealized losses from prior periods as loan values increased broadly across the market driven primarily by spread tightening.
  • Non-interest income in the third quarter of 2016 was centered in asset management income of $3.4 million, $2.9 million of capital markets related fees and $3.9 million of unrealized gains (net) on loans held at fair value. 

Credit Performance

  • Credit performance in the third quarter was consistent with the prior quarter and better than the same quarter last year as credit costs remained in expected ranges.
  • Provision expense was $3.6 million in the third quarter, consistent with the prior quarter and down from $4.5 million in the same quarter last year.        
  • Total net specific provision expense increased by approximately $0.8 million in the third quarter of 2016 to $3.2 million compared to $2.4 million in the prior quarter and $1.6 million in the same quarter last year. 
  • Net charge-offs in the third quarter reflected a small recovery of a previously charged-off loan compared to $6.9 million of charge-offs recognized in the prior quarter and no charge-offs in the same period last year. 
  • The allowance for credit losses was $66.4 million, or 2.29% of consolidated loans and approximately 76.0% of non-performing loans (NPLs), at September 30, 2016, compared to $64.0 million, or 2.09% of loans and approximately 66.8% of NPLs, at June 30, 2016.
  • Non-performing loans decreased by $8.6, or 9%, to $87.3 million, or 2.66% of loans and leases held for investment at September 30, 2016, compared to $95.9 million or 2.97% of loans and leases held for investment at the end of the prior period.  The decrease was due primarily to the repayment of an $8.4 million non-performing loan at par during the quarter. 
  • A commercial property valued at approximately $15.8 million was classified as OREO during the quarter.

Expenses

  • Operating expenses increased by $5.2 million to $18.1 million for the third quarter of 2016 compared to $12.8 million in the prior quarter due to approximately $1 million of expenses related to the planned sale of the equipment finance business and other short-term projects, as well as $4.2 million of severance expenses recognized in connection with cost saving initiatives.
  • As a result, expenses as a percentage of average assets increased to 1.76% of average assets in the third quarter compared to 1.29% in the prior quarter.
  • Operating expenses, excluding non-cash equity compensation and severance costs, were $12.9 million in the third quarter up from $11.9 million during the second quarter due primarily to non-recurring expenses related to the potential sale of the equipment finance business and other short-term projects. 
  • The Company had 83 full-time employees at September 30, 2016 compared to 90 full-time employees at June 30, 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 run-rate savings of approximately 25-30% of the company's fiscal 2016 baseline cost base of approximately $60 million. 

Income Taxes

  • Deferred income taxes decreased $0.6 million to $29.9 million as of September 30, 2016.  The decrease in deferred income taxes was driven primarily by activity in the allowance for credit losses, equipment leasing and available for sale securities.  
  • Approximately $31.9 million and $11.7 million of the net deferred tax asset as of September 30, 2016 were related to our allowance for credit losses and incentive compensation, respectively, which was partially offset by $14.1 million of deferred tax liabilities related to the lease portfolio.

Funding and Capital

  • Total cash and equivalents as of September 30, 2016 were $406.8 million, of which $36.3 million was unrestricted.
  • Unrestricted cash increased slightly from $34.6 million at June 30, 2016, while restricted cash increased by $163.1 million to $370.5 million at September 30, 2016 due primarily to principal and interest collections on loans that were retained pending reinvestment in new loan collat
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