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NewStar Reports Net Income of $4.6 Million, or $0.11 per Diluted Share, for the Third Quarter of 2017 and Declares $0.02 Quarterly Dividend per Share

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  • Investment Activity — New funded, middle-market credit investments totaled $317 million in the third quarter, down from $460 million last quarter and up from $193 million in the same quarter last year. 
  • Managed Assets — Managed loans and credit investments at the end of the quarter increased by $660 million from the prior quarter to $7.2 billion due to the addition of two managed credit funds acquired through the purchase of Fifth Street CLO Management LLC in July 2017.
  • Net Interest Margin — The margin increased to 1.61% for the third quarter from 1.56% in the prior quarter due to a combination of rising index rates and an increase in loans as a percentage of earning assets, which was partially offset by lower deferred fee income resulting from slower prepayments.
  • Revenue — Total revenue1 in the third quarter was $21.1 million, up 4.7% from the prior quarter due primarily to higher net interest income and lower mark-to-market adjustments on loans held at fair value which was partially offset by a decrease in fee income from capital markets activities. 
  • Credit — Credit costs decreased by $1.2 million from the prior period to $1.5 million due primarily to a release of general provision, while net charge-offs increased by $1.1 million from the prior quarter to $8.6 million in the third quarter due primarily to losses recognized in connection with the resolution of two loans through sales and restructurings. 
  • Expenses — Operating expenses increased by $1.6 million, or 15.5%, from the prior quarter to $11.9 million due partly to expenses incurred in connection with strategic projects.   
  • Capital Management — Returned approximately $4.1 million to stockholders in the third quarter through share repurchases and dividends.  Book value per share increased to $15.57 as of September 30, 2017, up $0.17 from the end of the prior quarter. 
  • Quarterly Dividend — Board of Directors declared a quarterly dividend of $0.02 per share of common stock payable on December 15, 2017 to shareholders of record on November 29, 2017.
  • Sale of the Company — Entered into a definitive agreement to be acquired by First Eagle Investment Management for $11.44 in cash plus contingent value rights worth up to an estimated $0.88-$1.00 per share and, in a related transaction, agreed to sell a portfolio of investment assets, including approximately $2.4 billion of middle-market loans and other credit investments, to a newly formed fund sponsored by GSO Capital Partners.

BOSTON, Nov. 01, 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 third quarter of 2017, reporting net income of $4.6 million, or $0.11 per diluted share. These results compare to net income of $4.2 million, or $0.10 per diluted share in the second quarter of 2017 and $8.6 million, or $0.19 per diluted share in the third quarter of 2016. Operating income before income taxes was $7.7 million for the third quarter of 2017 compared to $7.2 million for the second quarter of 2017 and $14.6 million in the third quarter of 2016.

Tim Conway, Chief Executive Officer of NewStar commented: "Our results in the third quarter were solid and in line with our expectations as we maintained an active investment pace and completed the previously announced acquisition of a CLO manager, adding approximately $725 million to our assets under management.  Revenue was up nearly 5% due primarily to higher net interest income, which reflected improvement in the margin from rising index rates.  Non-interest income also improved as a reduction in negative mark-to-market adjustments more than offset a decrease in capital markets related revenues.  Provision expense was down and credit related activity was consistent with our expectations. Although expenses were somewhat higher than our target run-rate due partly to strategic costs and additional intangible amortization expenses from the recent acquisition, pre-tax earnings were up 7.6% from the prior quarter.  While I am pleased with our financial results for the quarter, I am also excited about the progress we made on our strategic objectives, which culminated in the announcement of an agreement to sell the company to First Eagle Investment Management.  As you know, our strategy has been focused on transforming the company from a balance sheet driven commercial finance company into an investment manager of third-party assets, while unlocking the value of our portfolio investments and asset management platform for stockholders. Over the last eighteen months, we have taken important steps intended to increase stockholder value by returning capital through dividends and share repurchases, growing managed assets through acquisition and new fund formation, and streamlining operations to improve efficiency.  The transactions we announced in early October are a culmination of that strategy and represent a significant milestone for the company.  I believe the transaction delivers compelling value for NewStar stockholders and also allows the Company to transition seamlessly to a larger investment platform, while maintaining continuity for customers."

Sale Transaction

  • On October 17, 2017, NewStar announced that it had entered into a definitive agreement to be acquired by First Eagle Investment Management ("First Eagle"), a privately-owned investment firm with approximately $116 billion in assets under management. 
  • In a related transaction, NewStar entered into a definitive agreement to sell a portfolio of investment assets, including approximately $2.4 billion of middle-market loans and other credit investments, to a newly formed investment fund sponsored by GSO Capital Partners LP, the global credit investment platform of Blackstone Group L.P.
  • Completion of the transaction is subject to shareholder approval, regulatory approval and certain consents with respect to NewStar's existing funds, as well as customary closing conditions.
  • The parties are working on obtaining the necessary approvals for closing and the Company, with the assistance of its financial advisors, is soliciting alternative proposals during a 30 day "go shop" period which runs through November 15, 2017. 

Dividend Declaration

  • On November 1, 2017 the Company's Board of Directors declared a quarterly dividend of $0.02 per share of common stock to be paid on December 15, 2017, to shareholders of record at the close of business on November 29, 2017.
  • The declaration and payment of future dividends is restricted by the terms of the merger agreement with First Eagle. 

Managed and Owned Investment Portfolios

  • Total new funded, middle-market credit investments were $317 million in the third quarter of 2017 compared to $460 million in the prior quarter and $193 million in the same quarter last year.  The change from the prior quarter reflected somewhat weaker demand for acquisition financing derived from middle market leverage buyout activity and greater selectivity due to market conditions. 
  • Total new liquid credit investments (rated, broadly syndicated loans) held by the Arch Street CLO and held for sale to other managed funds were $115 million in the third quarter compared to $157 million in the prior quarter.   The change from the prior quarter reflected a decrease in new investments held for sale. 
  • Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $286 million in the third quarter, or 8.0% of loan and investment balances at the beginning of the period, down from $461 million in the prior quarter.  Runoff in the third quarter included $229 million of prepayments, $30 million of loan sales and $27 million of contractual amortization compared to prepayments of $242 million, loan sales of $170 million and amortization of $48 million in the prior quarter. 
  • Average yields on new middle-market loans and other directly originated credit investments in the third quarter were 6.5%, down from 6.8% in the prior quarter, but up from 6.2% 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 third quarter of 2016, loans and investments decreased by $351 million, or 8.8% due primarily to the sale of $159 million of equipment finance assets and a decrease of $185 million in Leveraged Finance Loans.
  • The Leveraged Finance loan portfolio totaled approximately $3.6 billion at the end of the third quarter, which was consistent with the prior quarter and down $185 million from the end of the third quarter in the prior year. Commercial real estate loans were less than $11 million at the end of the third quarter consistent with the prior quarter and down $7 million from the same time last year.
  • Assets held in managed funds increased by $658 million in the third quarter to approximately $3.6 billion and were up $880 million from the same time last year.  The increase from the prior quarter was due to the addition of two managed funds, Exeter and Fairfield, which were acquired in connection with the purchase of Fifth Street CLO Management LLC in the third quarter.  The increase from last year also reflected the launch of the Berkeley Fund, a $500 million CLO.
  • The owned loan portfolio remained defensively positioned - balanced across industry sectors and highly diversified by issuer. As of September 30, 2017, no outstanding borrowings by a single obligor represented more than 1.1% of total loans outstanding, and the ten largest obligors comprised approximately 8.0% of the loan portfolio.

Net Interest Income / Margin

  • Net interest income increased by $0.6 million to $15.6 million in the third quarter compared to $15.0 million in the prior quarter due primarily to rising LIBOR index rates.  Compared to the third quarter of last year, net interest income decreased by $9.7 million, or 38.2%.  The decrease was due primarily to a decrease in average loan balances and portfolio yield, as well as higher cost of funds.  
  • The portfolio yield was 6.44% in the third quarter, which was consistent with 6.43% in the prior quarter and down from 6.77% in the comparable period in the prior year. 
  • Funding costs were 5.21% in the third quarter, up from 5.08% in the second quarter and 4.67% 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 1.61% for the third quarter of 2017 compared to 1.56% for the prior quarter and narrowed from 2.50% in the third quarter of 2016.   

Non-Interest Income

  • Non-interest income increased by $0.3 million to $5.5 million for the third quarter of 2017 compared to $5.2 million in the prior quarter and $11.0 million in the same period last year. The quarterly change reflected a $2.3 million decrease in mark to market adjustments, which was partially offset by a $1.1 million decrease in capital markets fees, a $0.5 million increase in unrealized losses on loans held-for-sale and differences in other miscellaneous income items.
  • Other non-interest income items in the third quarter of 2017 were centered in asset management fees of $3.5 million and $2.0 million of other income. 

Credit Performance

  • Provision expense was $1.5 million in the third quarter, down from $2.7 million in the prior quarter and $3.6 million in the same quarter last year.        
  • Total net specific provision expense increased by approximately $0.6 million in the third quarter to $3.9 million compared to $3.3 million in the prior quarter and $3.2 million in the same quarter last year.  Total provisioning activity reflected the release of $2.4 million of general reserves. 
  • Net charge-offs in the third quarter of 2017 were $8.6 million compared to $7.5 million in the prior quarter. Charge-offs were related to losses recognized on a restructuring completed in the quarter and the sale of a borrower, which resulted in the payoff of a loan and resolved a long-term workout. 
  • The allowance for credit losses was $40.2 million, or 1.52% of consolidated loans and approximately 38.7% of non-performing loans (NPLs), at September 30, 2017, compared to $47.3 million, or 1.75% of consolidated loans and approximately 49.7% of NPLs, at June 30, 2017. 
  • Non-performing loans increased by $8.7 million to $103.8 million, or 3.39% of loans held for investment at September 30, 2017, compared to $95.1 million or 3.06% of loans held for investment at the end of the prior quarter due primarily to the classification of one new loan on non-accrual status, which was partially offset by the resolution of a long term work-out and charge-off activity.   

Expenses

  • Total operating expenses for the third quarter increased by $1.6 million to $11.9 million compared to $10.3 million in the prior quarter.  
  • As a result, expenses as a percentage of average assets under management increased to 0.67% in the third quarter compared to 0.64% in the prior quarter.
  • Adjusted operating expenses, which excludes non-cash equity compensation, were $11.0 million in the third quarter up from $9.4 million during the second quarter. 
  • The Company had 69 full-time employees at September 30, 2017 compared to 66 full-time employees at June 30, 2017 and 83 employees at September 30, 2016.  The reduction in staffing levels since 2016 reflects the sale of the equipment finance business and other related strategic initiatives to streamline operations. 

Income Taxes

  • Deferred income taxes decreased $4.8 million to $32.1 million as of September 30, 2017.  The decrease was driven primarily by the allowance for credit losses.
  • Approximately $19.2 million and $7.0 million of the net deferred tax asset as of September 30, 2017 were related to our allowance for credit losses and incentive compensation, respectively.

Funding and Capital

  • Total cash and equivalents as of September 30, 2017, were $314.2 million, of which $62.5 million was unrestricted.
  • Unrestricted cash increased to $62.5 million at September 30, 2017, from $49.7 million at the end of the prior quarter due primarily to cash management activities.  Total available liquidity was $73.3 million at September 30, 2017, including unrestricted cash and $10.8 million of collateralized availability under credit facilities. 
  • Restricted cash increased by $28.4 million to $251.7 million at September 30, 2017 due primarily to timing differences related 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 $60.8 million to $457.0 million during the third quarter due primarily to lending activity and discretionary cash management activities.
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