NewStar Reports Net Income of $10.3 Million, or $0.23 per Diluted Share, for the Fourth Quarter and $28.2 Million, or $0.61 per Diluted Share, for FY 2016
- Divestiture — Sold equipment finance platform and related assets for $105 million in cash, or approximately 1.2x allocated book value, net of debt repayment, transactions fees and other retained liabilities. The transaction generated a gain of approximately $6.7 million in the fourth quarter.
- Investment Activity — New funded credit investments totaled $671 million in the fourth quarter and $1.9 billion for the full year, compared to $427 million last quarter and $3 billion for the full year in 2015.
- Managed Assets — Managed loans and credit investments increased by 1.3% from the prior quarter to more than $6.7 billion as growth in managed funds offset the impact of the equipment finance asset sale during the quarter. Excluding the impact of ABL and equipment finance divestitures in 2016, managed loans and credit investments increased $306 million, or 4.8%, from the same period last year due to new fund formation and growth in balance sheet lending programs.
- Revenue — Total revenue increased by $4.2 million, or 11.7%, from the prior quarter to $40.5 million in the fourth quarter due primarily to a gain recognized on the sale of the equipment finance platform and related assets, as well as favorable mark-to-market adjustments. Total revenue for the full year increased by $44.5 million, or 44.9%, to $143.6 million compared to $99.1 million in 2015 due primarily to gains recognized on the sales of the asset-based lending and equipment finance businesses, as well as a significant increase in asset management fee revenue and favorable mark-to-market adjustments.
- Net Interest Margin — The margin narrowed to 1.96% for the fourth quarter from 2.50% in the third quarter and 2.19% for 2016, down from 2.39% in the prior year as an increase in portfolio yield was outpaced by higher interest expense due primarily to debt prepayment expenses, increases in LIBOR index rates and wider credit spreads on new CLO issuance.
- Credit — Credit costs decreased $0.9 million from the prior period to $2.6 million and were up $9.2 million for the full year compared to 2015. Net charge-offs for fourth quarter were $18.9 million due primarily to a planned restructuring of a legacy loan, which was also placed on non-accrual status. Net charge-offs for the year were $33.0 million compared to $3.4 million for 2015 as several long-term work-outs were resolved and charge-offs were applied against previously established reserves.
- Expenses — Cost saving targets were achieved in the fourth quarter as run-rate operating expenses were reduced to $11.3 million, excluding $4.7 million of operating and transaction expenses related to the equipment finance business and $3.5 million of severance expense related to cost saving initiatives.
- Capital Management — Returned $43.0 million of capital to shareholders in 2016 through accretive share repurchases, including $34.1 million in the fourth quarter. Book value per share increased to $15.12 as of December 31, 2016, up $0.74 from the end of the prior quarter and $0.95 from the end of last year. Subsequent to year-end, NewStar also adopted a new quarterly dividend policy and declared a $0.02 dividend payable on March 17, 2017 to holders of record on March 2, 2017, marking the first dividend paid to stockholders in the company's history.
BOSTON, Feb. 14, 2017 (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 fourth quarter of 2016, reporting net income of $10.3 million, or $0.23 per diluted share. These results compare to net income of $8.6 million, or $0.19 per diluted share in the third quarter of 2016 and $4.2 million, or $0.09 per diluted share in the fourth quarter of 2015. Operating income before income taxes was $18.4 million for the fourth quarter of 2016 compared to $14.6 million for the third quarter of 2016 and $7.1 million in the fourth quarter of 2015.
The company also announced financial results for its fiscal year, reporting net income of $28.2 million, or $0.61 per diluted share for 2016 compared to $16.9 million, or $0.35 per diluted share in 2015. Income from operations before income taxes was $48.7 million for 2016 compared to $28.8 million in 2015.
Tim Conway, NewStar's Chairman and Chief Executive Officer, commented on the Company's performance: "We made significant progress on our key priorities in 2016 as we took important steps to streamline operations, reduce costs and reposition NewStar as a credit-oriented asset manager, while also returning a meaningful amount of capital to our shareholders. We sold two non-core businesses at substantial premiums, increasing our liquidity and financial flexibility. We reduced baseline expenses by 33% on a run-rate basis as of the fourth quarter, improving profitability. And, we continued to expand our asset management activities with the launch of two new credit funds and a separate account with target investment portfolios of approximately $1 billion. More than 53% of our credit investments are now held in managed funds and we doubled our management fee income in 2016."
"Our financial results reflected the progress we are making as pre-tax returns on equity exceeded 11% in the quarter. Revenue was up nearly 12% over last quarter and 46% from the same quarter last year. Credit costs remained within expected ranges. Loan demand from M&A activity rebounded and our investment pace returned to expected levels. Importantly, we returned $43 million, or 6.5% of our average equity capital, to investors in 2016 and recently declared our first quarterly dividend. The board's decision to adopt a quarterly dividend policy was intended to provide more balance to our capital management strategy, reflecting our commitment to improve the investment value of our stock."
Sale of Equipment Finance platform and related assets
- On December 1, 2016, the Company sold its equipment finance platform and related assets to Boston-based Radius Bank for $105 million in cash, net of debt repayment, transaction fees and certain retained liabilities.
- NewStar's equipment finance business was an independent provider of flexible equipment financing solutions to middle market companies nationwide. NewStar launched the business in 2011 and expanded it significantly over the last five years.
- The purchase price reflected a premium of approximately 5% of NewStar's net investment in receivables, totaling approximately $133 million, and was approximately 1.2x book value, based on allocated equity capital of 30% of net receivables.
- The sale generated a gain of approximately $6.7 million in the fourth quarter. Total transaction costs of $4.3 million were included in operating expenses.
- On February 10, 2017, the Company's Board of Directors adopted a new dividend policy and declared a quarterly dividend of $0.02 per share of common stock.
- The dividend is expected to be paid on March 17, 2017, to shareholders of record at the close of business on March 2, 2017.
- This marks the first dividend paid to stockholders in the company's history. The declaration and payment of future dividends will be subject to the board's approval.
Managed and Owned Investment Portfolios
- Total new funded credit investments were $671 million in the fourth quarter of 2016 compared to $427 million in the prior quarter and $700 million in the same quarter last year. The pace of investment accelerated somewhat in the fourth quarter as demand for acquisition financing derived from middle market leverage buyout activity improved amid an increase in M&A activity.
- New funded credit investments were approximately $1.9 billion for the full year compared to $3 billion in 2015 and $1.8 billion in 2014. The decrease in investment activity reflected credit selectivity and slack demand for acquisition financing due to a weaker M&A activity in the first three quarters of the year.
- Balance sheet runoff from scheduled amortization, prepayments and loan sales (excluding the sale of the equipment finance business) totaled approximately $405 million in the fourth quarter, or 10.2% of loan and investment balances at the beginning of the period, up from $226 million, or 5.7% of balances in the prior quarter. Runoff in the fourth quarter included $303 million of prepayments, $19 million of loan sales and $82 million of contractual amortization compared to prepayments of $148 million, loan sales of $27 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 fourth quarter were 6.65%, consistent with the prior quarter. Average yields for the full year were 6.91% compared to 6.54% in 2015.
- Loans and other investments outstanding, excluding assets managed for third parties, decreased by $381 million, or 9.6%, from the prior quarter. The decrease was due primarily to the sale of $158 million of equipment finance loans and leases (gross) and the transfer of $485 million of loans-held-for-sale into a new managed fund during the fourth quarter. Compared to the fourth quarter of 2015, loans and investments decreased by $239 million, or 6.2%, due to the sale of the ABL business in the first quarter of 2016, the sale of the equipment finance portfolio in the fourth quarter and the transfer of loans to managed funds which was partly offset by growth in the Leveraged Finance loan portfolio.
- The Leveraged Finance loan portfolio decreased by $215 million during the fourth quarter to $3.6 billion due primarily to the transfer of loans-held-for-sale to a new manage fund, but was up $367 million from the prior year due as new investment activity outpaced run-off. Commercial real estate loans decreased by 40% in the fourth quarter and by 90% for the year to less than $11 million compared to $101 at the end of 2015. The sale of equipment finance related assets reduced gross loans and leases by $158.3 million.
- Assets held in managed funds increased by $483 million, or 16%, in the fourth quarter to approximately $3.6 billion at year-end due to the formation of a new $500 million managed fund. For the full year, assets held in managed funds increased by 14% as growth in AUM from new fund formation assets more than offset a decrease in assets managed in funds past their investment periods.
- The owned loan portfolio remained defensively positioned - balanced across industry sectors and highly diversified by issuer. As of December 31, 2016, no outstanding borrowings by a single obligor represented more than 0.8% of total loans outstanding, and the ten largest obligors comprised approximately 7.6% of the loan portfolio.
Net Interest Income / Margin
- Net interest income decreased by $4.6 million to $20.7 million in the fourth quarter compared to $25.3 million in the prior quarter due primarily to $3.2 million of previously unrecorded interest income recognized during the third quarter in connection with the pay-off of a nonperforming loan at par. Compared to the fourth quarter of last year, net interest income decreased by $3.7 million, or 15.1%.
- For the full year, net interest income increased $8.6 million, or 10.6% due primarily to higher average balances and improvement in the portfolio yield.
- The portfolio yield was 6.53% in the fourth quarter compared to 6.77% the prior quarter and 6.33% in the comparable period in the prior year. The decrease in yield from the prior quarter was due primarily to the non-recurring income recognized during the third quarter in connection with the pay-off of a non-performing loan at par and an increase in deferred fee amortization related to prepayments. The increase from the prior year reflects the impact of higher yielding new credit investments.
- Funding costs were 4.83% in the fourth quarter, which was relatively consistent with 4.67% in the third quarter, but up from 4.32% in the comparable period in the prior year due to acceleration of capitalized financing fees in connection with early debt retirement, increasing LIBOR index rates and higher average cost of funds for new CLO issuance.
- As a result, the net interest margin narrowed to 1.96% for the fourth quarter of 2016 compared to 2.50% for the prior quarter and 2.45% in the fourth quarter of 2015. The net interest margin was 2.19% for the full year compared to 2.39% last year.
- Non-interest income increased by $8.8 million to $19.8 million for the fourth quarter of 2016 compared to $11.0 million in the prior quarter and $3.3 million in the same period last year. The increase reflected a $6.7 million gain recognized on the sale of the equipment finance platform and related assets as well as an increase of $7.3 million in net unrealized gains on loans held for sale.
- Other non-interest income items in the fourth quarter of 2016 were centered in asset management fees of $3.1 million and $1.4 million of capital markets-related fees.
- Non-interest income increased by $35.9 million to $54.3 million for the full year of 2016 compared to $18.4 million last year. The increase reflected $29.2 million of gains recognized on divestitures and an increase of $6.7 million of asset management fees.
- Provision expense remained within expected ranges in the fourth quarter at $2.6 million, down from $3.6 million in the prior quarter and $3.7 million in the same quarter last year.
- Total provision expense for 2016 was $27.5 million, or 0.71% of average loans and investments during the year, up from $18.4 million, or 0.57% of average loans and investments in 2015 due primarily to the accelerated disposition of certain commercial real estate loans and the resolution of legacy impaired loans in the first quarter of 2016.
- Total net specific provision expense decreased by approximately $0.7 million in the fourth quarter of 2016 to $2.5 million compared to $3.2 million in the prior quarter and $2.4 million in the same quarter last year. Specific provision expense was $24.8 million for the full year compared to $9.5 million last year.
- Net charge-offs in the fourth quarter of 2016 were $18.9 million compared to a small recovery in the prior quarter. Charge-off activity in the fourth quarter was due primarily to the restructuring of a legacy impaired loan for which specific reserves had previously been established to cover the charge-off. Although the remaining $12.7 million balance of the restructured loan was performing, it was placed on non-accrual status on a discretionary basis until the company demonstrates further progress on its turnaround strategy. Net charges-offs for the year were $33.0 million, or 0.88% of average loans compared to $3.4 million, or 0.11% of average loans in 2015.