NewStar Reports Net Income of $4.2 Million

8/2/17

BOSTON, Aug. 02, 2017 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (NASDAQ:NEWS), an internally-managed, middle market direct lender and credit-oriented asset manager, today announced financial results for its second quarter of 2017, reporting net income of $4.2 million, or $0.10 per diluted share. These results compare to net income of $1.4 million, or $0.03 per diluted share in the first quarter of 2017 and $5.2 million, or $0.11 per diluted share in the second quarter of 2016. Operating income before income taxes was $7.2 million for the second quarter of 2017 compared to $2.4 million for the first quarter of 2017 and $8.8 million in the second quarter of 2016.

Tim Conway, NewStar’s Chairman and Chief Executive Officer, commented on the Company’s performance: “Despite continued pricing pressure in the second quarter, our core earnings were solid on a cash basis, excluding negative marks totaling $3.2 million on our liquid credit portfolio. Credit costs remained in check and we continued to reduce expenses, while also taking steps to accelerate growth in managed assets and execute our capital management programs. We returned approximately $7.3 million to stockholders through accretive share repurchases and dividends. We also acquired Fifth Street’s CLO business after the close of the quarter, adding $726 million to assets under management. We now have nearly $7.3 billion of managed assets split evenly between the balance sheet and funds. The acquisition is consistent with our strategy to expand our asset management activities in ways that benefit our lending franchise and add to our value proposition by leveraging our core strengths in direct lending, securitization and credit management. It also provides an attractive way to diversify our business mix, adding to fee revenue and accelerating improvement in equity returns.”

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

Acquisition

  • Completed the previously announced acquisition of Fifth Street CLO Management LLC (“FSCM”) from Fifth Street Holdings L.P., an affiliate of Fifth Street Asset Management, Inc. (“Fifth Street”) (NASDAQ:FSAM), a publicly-traded credit-focused asset management firm.
  • Formed in 2015 by Fifth Street to manage its middle market CLO business, FSCM manages two CLOs backed by middle-market loans and holds certain interests in its sponsored CLOs primarily to comply with regulatory risk retention requirements.
  • The purchase price was approximately $16 million in cash, net of $13 million of assumed indebtedness.
  • The acquisition adds approximately $726 million to NewStar’s assets under management, increasing total AUM to approximately $7.25 billion. The transaction closed July 20, 2017.

Dividend Declaration

  • On July 31, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.02 per share of common stock to be paid on September 15, 2017, to shareholders of record at the close of business on August 29, 2017.
  • The declaration and payment of future dividends will be subject to the board’s approval.

Managed and Owned Investment Portfolios

  • Total new funded, middle-market credit investments were $460 million in the second quarter of 2017 compared to $330 million in the prior quarter and $476 million in the same quarter last year. The change from the prior quarter reflected an increase in demand for acquisition financing derived from middle market leverage buyout activity amid an increase in M&A activity. The impact of higher loan demand was tempered somewhat by an increase in market liquidity.
  • Total new liquid credit investments (rated, broadly syndicated loans) held by the Arch Street CLO and held for sale to other managed funds were $157 million in the second quarter compared to $189 million in the prior quarter.
  • Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $461 million in the second quarter, or 12.7% of loan and investment balances at the beginning of the period, up from $366 million in the prior quarter. Runoff in the second quarter included $242 million of prepayments, $170 million of loan sales and $48 million of contractual amortization compared to prepayments of $296 million, loan sales of $34 million and amortization of $37 million in the prior quarter.
  • Average yields on new middle-market loans and other directly originated credit investments in the second quarter were 6.8%, up from 6.6% in the prior quarter, but down from 7.0% in the comparable quarter last year.
  • Loans and other investments outstanding, excluding assets managed for third parties, were consistent with the prior quarter at $3.6 billion. Compared to the second quarter of 2016, loans and investments decreased by $153 million, or 4.1%, due to the sale of $165 million of equipment finance assets and a $30.8 million decrease in commercial real estate loans, which was partly offset by growth in Leveraged Finance loans.
  • The Leveraged Finance loan portfolio totaled approximately $3.6 billion at the end of the second quarter, which was consistent with the prior quarter and up $43 million from the prior year. Commercial real estate loans were less than $11 million at the end of the second quarter consistent with the prior quarter and compared to $42 at the same time last year.
  • Assets held in managed funds decreased by $79 million in the second quarter to approximately $3.3 billion and were up $327 million from the same time last year. The decrease from the prior quarter was due to expected amortization and redemption of CLOs backed by broadly syndicated loans that were past their re-investment periods.
  • The owned loan portfolio remained defensively positioned - balanced across industry sectors and highly diversified by issuer. As of June 30, 2017, no outstanding borrowings by a single obligor represented more than 1.2% of total loans outstanding, and the ten largest obligors comprised approximately 8.4% of the loan portfolio.

Net Interest Income / Margin

  • Net interest income increased by $1.0 million to $15.0 million in the second quarter compared to $14.0 million in the prior quarter. Compared to the second quarter of last year, net interest income decreased by $5.9 million, or 28.2%. The decrease was due primarily to a decrease in average loan balances and higher cost of funds driven partly by rising LIBOR index rates.
  • The portfolio yield was 6.43% in the second quarter up from 6.29% in the prior quarter and 6.28% in the comparable period in the prior year.
  • Funding costs were 5.08% in the second quarter, up from 4.99% in the first quarter and 4.65% in the comparable period in the prior year due to increasing LIBOR index rates, changes in the mix of debt and higher average cost of funds for new CLO issuance.
  • As a result, the net interest margin widened to 1.56% for the second quarter of 2017 compared to 1.45% for the prior quarter and 2.10% in the second quarter of 2016.

Non-Interest Income

  • Non-interest income decreased by $1.0 million to $5.2 million for the second quarter of 2017 compared to $6.2 million in the prior quarter and $4.4 million in the same period last year. The change reflected a $1.0 million decrease in capital markets-related fee income and negative mark to market adjustments totaling $3.2 million compared to negative adjustments of $2.8 million in the prior quarter offset by differences in other miscellaneous income.
  • Other non-interest income items in the second quarter of 2017 were centered in asset management fees of $3.8 million and $1.8 million of other income.

Credit Performance

  • Provision expense was $2.7 million in the second quarter, down from $6.1 million in the prior quarter, and down from $3.6 million in the same quarter last year.
  • Total net specific provision expense decreased by approximately $3.0 million in the second quarter to $3.3 million compared to $6.3 million in the prior quarter and $2.4 million in the same quarter last year. Provisioning activity in the second quarter included a $2.0 million specific charge in connection with the expected sale of a borrower in connection with the resolution of a long-term work-out.
  • Net charge-offs in the second quarter of 2017 were $7.5 million compared to $5.5 million in the prior quarter.
  • The allowance for credit losses was $47.3 million, or 1.75% of consolidated loans and approximately 49.7% of non-performing loans (NPLs), at June 30, 2017, compared to $52.1 million, or 1.85% of consolidated loans and approximately 50.7% of NPLs, at March 31, 2017.
  • Non-performing loans decreased by $7.7 million to $95.1 million, or 3.06% of loans held for investment at June 30, 2017, compared to $102.8 million or 3.18% of loans held for investment at the end of the prior quarter due primarily to charge-off activity.

Expenses

  • Total operating expenses for the second quarter decreased by $1.3 million to $10.3 million compared to $11.6 million in the prior quarter, reflecting targeted cost savings from actions taken over the last twelve months to streamline operations.
  • As a result, expenses as a percentage of average assets under management decreased to 0.64% in the second quarter compared to 0.68% in the prior quarter.
  • Adjusted operating expenses, which excludes non-cash equity compensation and severance costs, were $9.4 million in the second quarter down from $10.8 million during the first quarter.
  • The Company had 66 full-time employees at June 30, 2017 compared to 69 full-time employees at March 31, 2017 and 90 employees at June 30, 2016. The reduction in staffing levels during 2016 reflects the sale of the asset-based lending and equipment finance businesses, as well as other related strategic initiatives to streamline operations.

Income Taxes

  • Deferred income taxes decreased $3.7 million to $36.9 million as of June 30, 2017. The decrease was driven primarily by charge-off activity in the allowance for credit losses and timing differences related to compensation expense recognition.
  • Approximately $23.7 million and $6.7 million of the net deferred tax asset as of June 30, 2017 were related to our allowance for credit losses and incentive compensation, respectively.

Funding and Capital

  • Total cash and equivalents as of June 30, 2017, were $273.0 million, of which $49.7 million was unrestricted.
  • Unrestricted cash increased to $49.7 million at June 30, 2017, from $15.4 million at the end of the prior quarter due primarily to cash management activities. Total available liquidity was $67.3 million at June 30, 2017, including unrestricted cash and $17.6 million of collateralized availability under credit facilities.
  • Restricted cash decreased by $86.1 million to $223.3 million at June 30, 2017 due primarily to cash collections on assets held in CLOs and other special purpose vehicles (SPVs) ahead of settlement dates, when restricted cash is disbursed to various stakeholders, including the Company.
  • Advances under credit facilities increased by $22.0 million to $396.1 million during the second quarter due primarily to lending activity and discretionary cash management activities.
  • Term debt securitization balances decreased from the prior quarter by $44.5 million to $2.1 billion at June 30, 2017.
  • As a result, total debt increased slightly to $3.2 billion at June 30, 2017 and leverage stayed the same at 5.0x for the end of the second quarter.

Equity

  • Book value per share increased by $0.19 to $15.40 at the end of the second quarter compared to $15.21 at the end of the prior quarter due primarily to accretive share repurchases and retained earnings.
  • Average diluted shares outstanding totaled 41.3 million for the quarter, down from 41.8 million for the prior quarter, and total outstanding shares at June 30, 2017 were 41.8 million compared to 42.3 million at March 31, 2017.
  • The Company repurchased 629,997 shares at an average cost of $10.29, or approximately $6.5 million, and paid dividends totaling $0.8 million in the second quarter.
  • Pre-tax returns on average equity increased to 4.5% in the second quarter from 1.5% in the prior quarter. On an after-tax basis, returns on average equity increased to 2.6% in the second quarter from 0.9% from the prior quarter.

About NewStar Financial

NewStar Financial Inc. (NASDAQ:NEWS) is an internally-managed, commercial finance company with $6.5 billion of assets at June 30, 2017, managed across two complementary business lines – middle market direct lending and asset management. The Company’s direct lending activities are focused on meeting the complex financing needs of companies and private investors in the middle markets through specialized lending groups that offer a range of flexible debt financing options. Credit investments are originated directly through teams of experienced, senior bankers with expertise in key industry sectors. Through its asset management platforms, NewStar offers a range of investment products employing credit-oriented strategies focused on middle market loans and liquid, tradeable credit. The Company manages approximately $1.3 billion of assets in a series of private credit funds and separate accounts that co-invest in middle market loans originated through its established leveraged finance lending platform and its strategic relationship with GSO Capital, the credit division of The Blackstone Group. Through its wholly-owned subsidiary, NewStar Capital, the Company also has more than $2 billion of assets managed across a series of CLOs that invest primarily in broadly syndicated, non-investment grade loans, as well as other sponsored funds and managed accounts that invest across various asset classes, including non-investment grade loans and bonds.

NewStar is headquartered in Boston MA and has regional offices in Chicago, IL, Darien, CT, and New York, NY. For more detailed information, please visit our website at www.newstarfin.com

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