"As expected, we had a very strong finish to the year with a significant pick-up in new business activity and another solid quarter of financial results. For the year, we originated over $1 billion in new loans, up 20% from the prior year and we increased earnings 70% to $24 million," said Tim Conway, NewStar's Chairman and Chief Executive Officer. "Although historically high levels of run-off tempered our net loan growth, I am happy with our overall strong results. Revenue growth was solid. Credit results continued to reflect variation around a long term positive trend line and our margins held up well," he added. "We completed our sixth securitization and added additional funding capacity to support our growing asset-based lending business. As a result, I believe we are well positioned to continue growing our loan origination volumes and earnings as we head into 2013," he concluded.
Managed and Owned Loan Portfolios
- Total new funded loan origination volume was approximately $401 million in the fourth quarter compared to $180 million in the prior quarter and $257 million in the fourth quarter of the prior year. Higher volumes reflected a significant increase in refinancing activity and greater demand for acquisition financing from financial sponsors amid an uptick in M&A recapitalization activity. Loan volume was over $1 billion for the full year, up 20% from $858 million in 2011.
- The managed loan portfolio remained steady at $2.4 billion as of December 31, 2012 approximately equal to September 30, 2012 as new funded loan origination was offset by loan run-off from scheduled amortization and an elevated level of prepayments of existing loans.
- The owned portfolio remained stable at $1.9 billion as of December 31, 2012 as new funded loan origination was offset by the impact of run-off from scheduled amortization and prepayments of existing loans. Net loan growth in 2012 was 5.2%, excluding real estate loans, which decreased by $94 million or 34.6% in 2012.
- The Leveraged Finance loan portfolio remained relatively stable through 2012 at approximately $1.5 billion, while asset-based loans and leases in our Business Credit portfolio increased by $85 million, or 76%, in 2012.
- Assets managed for third party institutional investors increased by 9% in the fourth quarter to approximately $559 million at December 31, 2012 compared to $515 million at September 30, 2012 due primarily to new funded loan origination. Managed assets were up approximately 8% for the year.
- Asset-based lending and equipment finance business lines originated approximately $25 million in the fourth quarter, or nearly 10% of new loan volume retained on the balance sheet.
- The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. As of December 31, 2012, no outstanding borrowings by a single obligor represented more than 1.5% of total loans outstanding, and the ten largest obligors comprised approximately 10.2% of the loan portfolio.
Net Interest Income / Margin
- Net interest income increased to $24.0 million for the fourth quarter of 2012 compared to $21.7 million for the third quarter of 2012 and $23.5 million in the fourth quarter of 2011. Net interest income for 2012 was $88.4 million, up 9.5% from $80.7 million in 2011.
- The portfolio yield increased to 6.88% in the fourth quarter compared to 6.45% in the prior quarter, and 6.61% in the fourth quarter of 2011.
- Adjusting for the negative impact of non-performing loans on a non-GAAP basis, the loan portfolio yield would have been 36 bps higher, or 7.24%.
- Net interest margin widened to 4.58% for the fourth quarter of 2012 compared to 4.22% for the third quarter of 2012 due primarily to accelerated amortization of deferred loan fees associated with the high level of loan prepayments. The margin was 4.34% for the year, up from 4.28% in 2011.
- Non-interest income was $3.8 million for the fourth quarter of 2012, up from $3.2 million for the third quarter of 2012 and $1.9 million for the fourth quarter of 2011. The change from the third quarter was due primarily to $0.8 million gain on sale of a loan, a $0.3 million increase on equity method of accounting interests, and an increase in miscellaneous fees. Gains on debt repurchases were $0.5 million in the fourth quarter of 2012, down from $1.3 million in the prior quarter.
- Non-interest income was $11.6 million for the year, up $7.5 million from $4.1 million in 2011. Non-interest income for 2011 was negatively impacted by a $5.4 million loss on the value of equity interests in certain impaired borrowers.
- Other non-interest income in the fourth quarter of 2012 consisted primarily of $0.8 million of asset management income, $0.7 million of amendment and exit fees, and $0.4 million of unused fees on revolving credit commitments.
- Operating expenses increased by $0.9 million to $11.6 million in the fourth quarter of 2012 compared to $10.7 million in the third quarter of 2012 due to higher professional fees and workout costs.
- Operating expenses excluding non-cash equity compensation 2 were $9.7 million in the fourth quarter of 2012, or 1.8% of average assets an annualized basis, compared to $9.0 million in the prior quarter.
- The efficiency ratio excluding non-cash equity compensation 3 in the fourth quarter of 2012 was 35.0% compared to 36.1% in the prior quarter.
- The Company had 104 full-time employees as of December 31, 2012, up from 100 employees as of September 30, 2012.
- Deferred income taxes decreased to $42.5 million as of December 31, 2012 compared to $46.4 million as of September 30, 2012 due primarily to a decrease in the allowance for credit losses and related timing differences of when credit costs are recognized according to GAAP and when they are excluded for income tax.
- Approximately $24.9 million and $14.1 million of the deferred tax asset as of December 31, 2012 were related to our allowance for credit losses and equity compensation, respectively.
- Total credit costs (including provision for credit losses and losses on OREO or interests retained in connection with workouts of impaired loans) in the fourth quarter increased by $1.9 million to $5.9 million from $4.0 million in the prior quarter.
- Specific provision expense was approximately $7.9 million in the fourth quarter of 2012, up from $4.6 million in the third quarter of 2012.
- The allowance for credit losses was $50.0 million, or 2.78% of loans and approximately 69% of NPLs, at December 31, 2012, compared to $59.4 million, or 3.21% of loans and approximately 72.5% of NPLs, at September 30, 2012.
- Non-performing assets decreased by $9.2 million from the prior quarter. One new loan was placed on non-accrual status and charge-offs on non-performing assets totaled $15.3 million.
- At December 31, 2012, loans with an aggregate outstanding balance of $72.7 million, net of charge-offs, were on non-accrual status compared to loans with an aggregate outstanding balance of $81.9 million, net of charge-offs, at September 30, 2012. Non-performing assets, net of charge-offs, specific reserves and other adjustments were $85.7 million, or 54.5% of their aggregate face amount, as of December 31, 2012.
- Non-accrual loans with an outstanding balance of $41.7 million and accruing loans with an outstanding balance of $21.0 million as of December 31, 2012 were also delinquent.
- Completed a $325.9 million term debt securitization (2012-2 CLO) backed by a diversified portfolio of loans originated by NewStar. This transaction represented the company's sixth securitization.
- Amended an existing credit facility with Wells Fargo to increase its size to $175 million through the addition of a new lender and extended the maturity date to November 2017.
- Entered into a new $75 million credit facility with Wells Fargo to support continued growth in asset-based lending activity.
- Decreased the size of a credit facility with DZ Bank by $75 million to better match utilization of the credit facility for asset-based lending with its availability, while extending its maturity by two years to June 2015.
- Balance sheet leverage increased slightly to 2.49x as of December 31, 2012 from 2.47x at September 30, 2012 due primarily to the issuance of the 2012-2 CLO and increased borrowings under warehouse lines used to fund new loan origination, partially offset by CLO debt amortization and repayments of the commercial real estate repurchase agreement.
- Maintained ample liquidity with total cash and equivalents as of December 31, 2012 of $235.9 million, of which $27.2 million was unrestricted. Unrestricted cash decreased from approximately $34.2 million at September 30, 2012 and restricted cash increased from approximately $151.4 million to $208.7 million.
- Book value per share was $12.06 at the end of the fourth quarter 2012 up $0.19 from $11.87 at the end of the prior quarter and up $0.64 from $11.42 at the end of 2011 primarily due to net income and the amortization of equity compensation into stockholders' equity.
- Average diluted shares outstanding were 53.0 million shares for the quarter, which was equal to the prior quarter. Total outstanding shares at December 31, 2012 were 49.3 million, consistent with outstanding shares as of September 30, 2012.