NewStar Reports Consolidated Net Income of $6.4 Million, or $0.12 Per Diluted Share for the Fourth Quarter and $24.6 Million, or $0.46 Per Diluted Share for 2013
Operating Performance Highlighted by Strong Loan Growth and Consistent Earnings
Loan Growth - Loans outstanding were $2.37 billion, up 15% from the prior quarter and 26% for the full year.
New Loan Volume - New funded loan volume was $549 million, including a portfolio purchase, in the fourth quarter and $1.3 billion for the year, up 26% from 2012.
Credit Costs - Provision for credit losses were consistent with the prior quarter and down $2.9 million, or 23%, for the full year.
Asset Quality - NPAs increased to 3.6% of loans from 2.7% for the prior quarter, but were down from 4.8% of loans at December 31, 2012.
Revenue - Risk-adjusted revenue1 was up slightly from the prior quarter and 4% higher for the year due to an increase in fee revenue and lower credit costs.
Net Interest Margin - Margin widened slightly to 3.41% for the fourth quarter from 3.35% in the prior quarter, but narrowed to 3.90% from 4.34% for the year as improvement in portfolio yield was more than offset by higher cost of funds and leverage.BOSTON, Feb. 12, 2014 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a specialized commercial finance company, today reported consolidated net income of $6.4 million, or $0.12 per diluted share for the fourth quarter of 2013. Net income excluding the results of the Arlington Fund, a consolidated variable interest entity ("VIE"), was $6.2 million2. These results compare to net income of $6.4 million, or $0.12 per diluted share in the third quarter of 2013 and $6.2 million, or $0.12 per diluted share in the fourth quarter of 2012. Operating income before income taxes was $9.4 million for the fourth quarter of 2013 compared to $9.9
million in the third quarter of 2013 and $10.3 million in the fourth quarter of 2012.
The company also reported that consolidated net income for 2013 increased to $24.6 million, or $0.46 per diluted share, compared to $24.0 million, or $0.45 per diluted share in 2012. Net income excluding the results of the Arlington Fund was $24.3 million or $0.46 per diluted shares for 2013.
"I am pleased to report that we finished the year with another quarter of solid operating results highlighted by strong loan growth and consistent earnings. Origination volume increased to $1.3 billion for the year and net loan growth was 26%. Earnings for the year increased nearly 3%," said Tim Conway, NewStar's Chairman and Chief Executive Officer. "We also continued to make significant progress on other key objectives through the year, including re-levering the balance sheet, launching a new managed credit fund, and significantly reducing NPAs," he added. "On the funding side, we completed several milestone transactions, increasing balance sheet leverage to 3.2x and received a BB- rating from S&P. Our stock has also performed well as the market continues to recognize the value of asset origination platforms like NewStar," he concluded.Managed and Owned Loan Portfolios
Total new funded loan volume was approximately $549 million in the fourth quarter compared to $284 million in the prior quarter and $401 million in the fourth quarter of the prior year. Higher volumes reflected increased demand for acquisition financing from financial sponsors compared to the prior period and the impact of a portfolio purchase. Loan volume was approximately $1.3 billion for the year up 26% from $1.0 billion for 2012.
Origination volume in the fourth quarter included the purchase of $218 million of seasoned loans from the NewStar Credit Opportunities Fund, which was completed as of December 17, 2013 (the "NCOF portfolio purchase"). The portfolio included a mix of revolving credit facilities and term loans in which the fund was a co-lender with NewStar. Term loans were purchased at a price equal to the par value of the loans and revolving credit facilities were purchased at a discount to par.
Consolidated loans increased by 15% from the prior quarter and 26% since the end of 2012, reflecting the purchase of loans from the NewStar Credit Opportunities Fund and new loan volume, as well as, the consolidation of loans managed in the Arlington Fund.
Excluding loans in the Arlington Fund, the owned loan portfolio increased 14% from the prior quarter and 17% from the end of last year to $2.2 billion as of December 31, 2013.
The Leveraged Finance loan portfolio, excluding loans in the Arlington Fund, increased by $246 million during the fourth quarter of 2013 to over $1.8 billion, while asset-based loans and leases in our Business Credit portfolio increased 4% to $237 million.
Assets managed for third party institutional investors, including the Arlington Fund, decreased to $266 million at December 31, 2013 reflecting the sale of assets from the NewStar Credit Opportunities Fund.
Asset-based lending and equipment finance business lines originated approximately $12 million and $20 million, respectively, in the fourth quarter of 2013, or 11% of new loan volume retained on the balance sheet, excluding the NCOF portfolio purchase.
Real estate loans increased by $13 million, or 12%, during the quarter to $123 million, or 5.2% of consolidated loans as we originated one new real estate loan.
The owned loan portfolio (excluding the Arlington Fund) remained balanced across industry sectors and highly diversified by issuer. As of December 31, 2013, no outstanding borrowings by a single obligor represented more than 1.4% of total loans outstanding, and the ten largest obligors comprised approximately 9.5% of the loan portfolio.Arlington Fund
Loans managed for the benefit of the Arlington Fund and consolidated into NewStar's results increased to $173 million as of December 31, 2013 from $130 million as of September 30, 2013.
Borrowings under the Fund's warehouse credit facilities were approximately $120 million and the Fund's membership interests characterized as debt in accordance with GAAP were $29 million at December 31, 2013.
The net results (after-tax) of the Fund included in NewStar's financial statements as a consolidated VIE were $0.6 million in the fourth quarter, or approximately $0.01 per share, up from $0.5 million in the third quarter of 2013.Net Interest Income / Margin
Net interest income increased to $21.1 million for the fourth quarter of 2013 compared to $19.5 million for the third quarter of 2013 and $24.0 million in the fourth quarter of 2012. Net interest income for 2013 was $86.8 million down from $88.4 million in 2012 as increased interest income was more than offset by higher interest expense due to increasing cost of funds and higher leverage.
The portfolio yield increased to 6.37% in the fourth quarter of 2013 compared to 6.33% in the prior quarter, and 6.88% in the fourth quarter of 2012. The portfolio yield for 2013 was 6.68% up from 6.54% in 2012 as the negative impact of non-accruing loans decreased.
Net interest margin widened to 3.41% for the fourth quarter of 2013 compared to 3.35% for the third quarter of 2013 as net interest income increased $1.6 million from the third quarter and interest expense increased $0.8 million. The increase in interest income was due primarily to higher average interest earning assets and improvements in the portfolio yield. The increase in interest expense reflected higher average borrowings due primarily to the completion of a new term debt securitization and advances under warehouse lines, as well as, the consolidation of the Arlington Fund's debt. The margin was 3.90% for the year, down from 4.34% in 2012 as higher debt levels and increases to the cost of funds offset improvements in the portfolio yield.Non-Interest Income
Non-interest income was $3.8 million for the fourth quarter of 2013, down from $5.1 million for the third quarter of 2013, and $3.8 million for the fourth quarter of 2012. The change from the third quarter was due primarily to certain items in the prior quarter that did not recur in the fourth quarter, including a $1.1 million increase in the value of an equity position retained in connection with a restructuring of an impaired loan, a $0.5 million decrease in income recognized through equity method of accounting for interests in impaired borrowers and a $0.4 million gain on a debt repurchase during the third quarter of 2013.
Non-interest income was $13.6 million for the year, up $2.0 million from $11.6 million for 2012 due primarily to positive valuation adjustments and gains on interests retained in connection with restructurings of impaired loans, as well as, the recognition of revenue from OREO currently being managed by the Company, which prior to 2013, was reported net of related expenses and is now recognized on a gross basis in the Company's financial results. Lower gains on debt repurchases partly offset those benefits.
Other non-interest income in the fourth quarter of 2013 consisted primarily of $0.5 million of asset management income, a $0.7 million gain recognized on the sale of an equity position in a borrower, $0.6 million of placement and structuring fees, $0.5 million of unused fees on revolving credit commitments, and $0.3 million of amendment and exit fees. It also included approximately $0.7 million of revenue related to OREO currently being managed by the Company. Expenses
Operating expenses increased by $0.7 million to $12.2 million in the fourth quarter of 2013 compared to $11.5 million in the third quarter of 2013 due to slightly higher compensation, general and administrative expenses, and operating expense related to OREO currently being managed by the Company, which, prior to 2013, was reported net of related revenue as part of non-interest income and is now recognized as an expense on a gross basis in the Company's financial results.
Operating expenses excluding non-cash equity compensation3 were $11.5 million in the fourth quarter of 2013, or 1.8% of average assets on an annualized basis, compared to $10.8 million in the prior quarter.
The efficiency ratio excluding non-cash equity compensation4 in the fourth quarter of 2013 was 46.2% compared to 43.8% in the prior quarter.
The Company had 101 full-time employees as of December 31, 2013 and at September 30, 2013.Income Taxes
Deferred income taxes decreased to $30.2 million as of December 31, 2013 compared to $30.7 million as of September 30, 2013 due primarily to a decrease in the allowance for credit losses, as well as the related timing differences of when credit costs are recognized according to GAAP and when they are excluded for income tax.
Approximately $20.4 million and $8.5 million of the deferred tax asset as of December 31, 2013 were related to our allowance for credit losses and equity compensation, respectively.Loan Credit Quality
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 of 2013 decreased by $0.1 million to $2.3 million from $2.4 million in the prior quarter.
Specific provision expense was approximately $1.8 million in the fourth quarter of 2013, down from $2.4 million in the prior quarter.
The allowance for credit losses was $41.9 million, or 1.80% of consolidated loans and approximately 59% of NPLs, at December 31, 2013, compared to $40.4 million, or 2.01% of loans and approximately 97% of NPLs, at September 30, 2013. The decrease in the allowance as a percentage of consolidated loans partly reflects the increase in loans held by the Arlington Fund that are consolidated into NewStar's results and the impact of the NCOF portfolio purchase, for which an allowance for credit losses was not established at acquisition as the transaction was recorded at fair value in accordance with GAAP.
Non-performing assets increased by $29.6 million, or 54%, from the prior quarter as three legacy impaired loans totaling approximately $36.0 million were placed on non-accrual and one loan totaling $5.3 million was returned to accrual status. Net charge-offs on non-performing assets totaled $0.9 million in the quarter.
At December 31, 2013, loans with an aggregate outstanding balance of $70.7 million (net of charge-offs), or 3.04% of consolidated loans, were on non-accrual status compared to loans with an aggregate outstanding balance of $41.7 million (net of charge-offs), or 2.07% of loans at September 30, 2013. Non-performing assets, net of charge-offs, specific reserves and other adjustments were $84.2 million, or 3.60% of consolidated loans as of December 31, 2013.Funding and Capital
Total cash and equivalents as of December 31, 2013 were $213.3 million, of which $43.4 million was unrestricted. Unrestricted cash decreased from approximately $88.0 million at September 30, 2013 as cash was used primarily to partly fund new loan origination, including the NCOF portfolio purchase. Restricted cash decreased from approximately $274.3 million to $167.9 (excluding cash at the Arlington Fund) million due primarily to timing differences in settlement dates of CLO trusts and other non-recourse, secured financing arrangements. Restricted cash at the Arlington Fund totaled $2.0 million.
Advances under credit facilities increased by approximately $197 million to partly fund net loan growth. A credit facility provided by Wells Fargo used to fund leveraged finance activity was amended during the quarter to increase the commitment amount by $100.0 million to $275.0 million.
Advances under a repurchase agreement increased by approximately $40 million to partly fund a new commercial mortgage and other commercial real estate loans that were previously funded in a term debt securitization. The repurchase agreement with Macquarie Bank Limited was amended in October to extend the maturity date by one year to June 2017 and to provide $25.5 million of additional advances for existing eligible assets, which also provided $15.0 million to fund an additional commercial mortgage loan and released $41.1 million of previously restricted cash from principal collections held as collateral.
Term debt decreased by approximately $90 million at December 31, 2013 due primarily to the retirement of notes issued through a term debt securitization completed in 2005 that were called in October at par.
Total debt increased by approximately $151.7 million to $1,962.2 million at December 31, 2013, which drove an increase in balance sheet leverage to 3.2x from 3.0x at September 30, 2013. The increase was due primarily to the higher advances under the leveraged finance credit facility with Wells Fargo, the additional advances under the credit facility with Macquarie, and an increase in borrowing by the Arlington Fund. Book Value
Book value per share was $12.68 at the end of the fourth quarter of 2013, up $0.15 from $12.53 at the end of the prior quarter and up $0.62 from $12.06 at the end of the fourth quarter of 2012 primarily due to net income, the amortization of equity compensation into stockholders' equity and an increase in the value of investments in debt securities.Share Count
Average diluted shares outstanding were 53.0 million shares for the quarter, which was up slightly from 52.7 million shares for the prior quarter. Total outstanding shares at December 31, 2013 were 48.7 million, equal to September 30, 2013.Conference Call and Webcast
NewStar will host a webcast/conference call to discuss the results today at 10:00 am Eastern Time. All interested parties are invited to participate via telephone or webcast, which will be hosted through the Investor Relations section at www.newstarfin.com. Please visit the website to register for the webcast and test your connection prior to the call. You can also access the conference call by dialing 877-755-7419 approximately 5-10 minutes prior to the call. International callers should dial 973-200-3080. All callers should reference "NewStar Financial."