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NewStar Reports Full Year And Fourth Quarter Results

Results reflect strong origination and fee income growth

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  • $4.6 million of adjusted net income in the fourth quarter or $0.18 adjusted earnings per diluted share
  • $11.9 million of adjusted net income for the year or $0.70 adjusted earnings per diluted share
  • $32.1 million net loss in the fourth quarter or $1.26 net loss per diluted share
  • $27.2 million net loss for the year or $1.65 net loss per diluted share
  • $2.0 billion of assets in managed loan portfolio, up $575 million from the third quarter
  • $234.6 million initial public offering completed on December 13, 2006
  • Credit quality stable, no loans on non-accrual status, no charge offs


Boston – February 21, 2007 – NewStar Financial, Inc. (NASDAQ: NEWS), today reported adjusted earnings for the fourth quarter 2006 of $4.6 million, or $0.18 per diluted share. Adjusted net income for the full year 2006 was $11.9 million, or $0.70 per diluted share. On a GAAP basis, the company reported a net loss of $32.1 million, or $1.26 per diluted share, for the fourth quarter and a net loss of $27.2 million for the year, or $1.65 per diluted share.


"Adjusted net income," "adjusted earnings," and other non-GAAP financial measures used in this release are defined under "Non-GAAP Financial Measures" on page 4. We have provided a reconciliation between GAAP and adjusted (non-GAAP) measures in the attached financial tables.


"Our fourth quarter and full year results exceeded our expectations," said Tim Conway, Chairman and Chief Executive Officer. "NewStar continues to see strong growth across all business lines. Credit quality is stable and our credit statistics remain favorable as our portfolio continues to season. Our bankers continued to execute very well across the business and we ended the year with great momentum that has carried into the first quarter of 2007. We grew our managed assets by 39%, or $575 million, in the fourth quarter to over $2 billion and generated better than expected fee revenue from asset management and transaction activity."


On December 13, 2006, we completed our initial public offering, raising $234.6 million through the issuance of 13.8 million shares of common stock priced at $17.00 per share. We used the proceeds of the offering to repay and terminate corporate debt of $37.5 million. We also paid down certain revolving warehouse lines of credit by approximately $50 million and invested the balance in short-term money market instruments.


Strong Origination Volume


  • Origination volume for the year was $1.4 billion, of which $158 million was syndicated, $248 million was sold to the New Star Credit Opportunities Fund (NCOF) and $1.0 billion was retained on NewStar's balance sheet.
  • Origination volume for the fourth quarter was $657 million, of which $68.4 million was syndicated, $141 million was sold to the NCOF and $447 million was retained on NewStar's balance sheet.
  • Corporate represented approximately 73% of volume in 2006, while Structured Products and Commercial Real Estate were 15% and 12%, respectively.
  • We continued to grow our proprietary direct origination platform in the fourth quarter, adding two new senior bankers and opening a new office in San Diego.


Growth in Loans and Investments


  • Gross loans and investments in debt securities held on NewStar's balance sheet increased to $1.7 billion as of December 31, 2006, an increase of $450 million from $1.3 billion at September 30, 2006.
  • Managed loan portfolio increased to $2.0 billion as of December 31, 2006, an increase of $575 million from $1.5 billion at September 30, 2006. Assets managed for the NCOF increased from $159 million as of September 30, 2006 to $283 million at year-end.
  • Our business continues to be balanced across industry sectors and highly diversified across issuers. As of December 31, 2006, no single issuer represented more than 1.5% of our loan portfolio and the ten largest issuers comprised approximately 10% of the loan portfolio.
  • We continue to be highly selective and focus on senior debt products, with 78% of the loan portfolio invested in senior secured loans and senior debt investments.


Net Interest Income / Margin


  • Net interest income before provision for credit losses was $15.5 million for the fourth quarter 2006 and $47.6 million for the year 2006 compared to $13.9 million for the third quarter 2006 and $15.2 million for the prior year.
  • Adjusted net interest margin was 4.50% for the fourth quarter 2006 and 4.48% for the full year 2006 compared to 4.55% for the third quarter 2006 and 3.84% for the year ended 2005. Net interest margin was 3.82% for the fourth quarter 2006 and 3.93% for the full year 2006 compared to 4.15% for the third quarter 2006 and 3.84% for the year ended 2005.


Revenue Growth


  • Net interest income plus non-interest income was $19.6 million for the fourth quarter 2006, up $3.7 million, or 23%, from $15.9 million in the third quarter 2006, driven principally by higher balances of earning assets and a $1.9 million increase in fee revenue arising from better than expected transaction activity.
  • Non-interest income was $4.1 million for the fourth quarter 2006, an increase of $2.1 million from $2.0 million in the prior quarter. Non-interest income was $9.7 million for the year 2006, an increase of $6.5 million from $3.1 million in the prior year. The increase was due principally to an increase in asset management fees generated by the NCOF and an increase in fee revenue arising from transaction activity, partially offset by an impairment charge on debt investments of $0.6 million.
  • Total revenue after provision for credit losses was $13.6 million in the fourth quarter 2006 and $44.7 for the full year 2006.


Stable Credit Quality


  • As of December 31, 2006, we did not have any impaired loans, loans on non-accrual status and had not experienced any loan charge offs.
  • As of December 31, 2006, we had an allowance for credit losses of $20.6 million, or 1.40% of loans compared to $14.6 million, or 1.36%, at September 30, 2006 and $8.0 million or 1.27% at December 31, 2005. The increase in the allowance for credit losses is due to higher loan balances and a slight shift in business mix and rating profile.
  • Provision expense was $5.9 million in the fourth quarter 2006 and $12.5 million for the full year 2006 compared to $2.4 million in the third quarter 2006 and $7.8 million for the year 2005. The increase in provision expense was driven principally by higher origination volumes and loan balances at December 31, 2006.
  • One of our loans with a principal amount of $8.4 million became delinquent in the fourth quarter 2006, representing a 0.57% delinquency rate. The loan remained delinquent as of December 31, 2006.
  • At December 31, 2006, debt investments were classified as available-for-sale and were carried at market/fair value. As of December 31, 2006, we had two debt investments with a combined carying value of $6.2 million which our valuation methodologies determined to have other than temporary impairment.


Funding


  • In December 2006, we raised $234.6 million in gross proceeds through an initial public offering.
  • We used a portion of the proceeds to terminate the corporate debt and to pay down a portion of the warehouse lines of credit.


Expenses


  • Operating expenses were $51.6 million in the fourth quarter 2006 and $74.3 million for the full year 2006 compared to $8.6 million in the third quarter 2006 and $20.0 million for the prior year. The increase in operating expenses is primarily due to a $39.1 million non-cash compensation charge related to restricted stock grants made since our inception, including equity awards made in connection with the initial public offering.
  • Our adjusted efficiency ratio was 45.2% in the fourth quarter 2006 and 50.8% for the full year 2006. Our efficiency ratio was 263.6% in the fourth quarter 2006 and 129.7% for the full year 2006.


Conference Call and Webcast


We will host a webcast/conference call to discuss the results today at 10:00 am Eastern Standard Time. All interested parties are invited to participate via telephone or webcast, which will be hosted through the Investor Relations section of our website 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 (800) 289-0544 approximately 5-10 minutes prior to the call. International callers should dial (913) 981-5533. All callers should reference "NewStar Financial, Inc."


For convenience, an archived replay of the call will be available through February 28, 2007 by dialing (888) 203-1112. International callers should call (719) 457-0820. For all replays, please use the passcode # 601246. The audio replay will also be available through the Investor Relations section of our website at www.newstarfin.com.


About NewStar Financial


NewStar Financial is a specialized commercial finance company focused exclusively on meeting the complex financing needs of customers in the middle market through our corporate, commercial real estate, and structured products groups. Our senior banking teams call directly on customers to provide advice and finance a range of strategic transactions that may require some combination of senior secured, second lien and mezzanine financing. NewStar typically works with customers with financing needs of up to $150 million and cash flow as low as $5 million. We target 'hold' positions of up to $35 million, but may also underwrite or arrange transactions up to $100 million for syndications to other lenders.


We are headquartered in Boston MA, with regional offices in Darien CT, Chicago IL, San Francisco CA, San Diego CA, and Charleston SC. In December of 2006, NewStar completed an Initial Public Offering. The Company's shares trade on the NASDAQ under the ticker symbol, NEWS. Please visit our website at www.newstarfin.com for more detailed transaction and contact information.


Forward-Looking Statements


This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this release are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. As such, they are subject to material risks and uncertainties.


More detailed information about these factors is described in NewStar's filing with Securities and Exchange Commission (the "SEC"). NewStar is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. NewStar plans to file its Form 10-K with the SEC on or before March 31, 2007 and urges its shareholders to refer to that document for more complete information concerning NewStar's financial results.


Non-GAAP Financial Measures


References to "adjusted net income" and "adjusted earnings per share" mean net income or earnings per share, respectively, as determined under GAAP, excluding the following items: (i) interest expense and amortization of deferred financing costs on corporate debt, (ii) the call premium and termination fee associated with the termination of our corporate debt, (iii) compensation expense related to restricted stock grants made since our inception, including equity awards made in connection with the initial public offering and (iv) general and administrative expense incurred related to the initial public offering. GAAP requires that these items be included in net income. NewStar management uses "adjusted net income" and "adjusted earnings per share" to make operational and investment decisions, and NewStar believes that they provide useful information to investors in their evaluation of our financial performance and condition. Excluding interest expense and amortization of deferred financing costs on corporate debt and the call premium and termination fee associated with the termination of our corporate debt eliminates expenses that we do not anticipate incurring in the foreseeable future that make it difficult to assess our core performance and compare our period over period results. Excluding compensation expense related to restricted stock grants made since our inception, including equity awards made in connection with the initial public offering and general and administrative expense incurred related to our initial public offering, eliminates unique expenses that make it difficult to assess our core performance and compare our period over period results. A reconciliation of adjusted net income to net income is included on page 7 of this release.


References to "adjusted net interest margin" mean annualized interest income as determined under GAAP less annualized interest expense as determined under GAAP excluding interest expense and amortization of deferred financing costs on corporate debt, divided by average interest earning assets for the period.


Adjusted return on average assets means adjusted net income divided by average assets for the period. Adjusted return on average equity means adjusted net income divided by average equity for the period. Adjusted efficiency ratio means operating expenses determined in accordance with GAAP less (i) the call premium and termination fee associated with the termination of our corporate debt, (ii) compensation expense related to restricted stock grants made since our inception, including equity awards made in connection with the initial public offering and (iii) general and administrative expense incurred related to the initial public offering divided by net revenue. Adjusted cost of funds means adjusted interest expense divided by average interest bearing liabilities for the period less the average corporate debt outstanding for the period. The adjusted ratios exclude unique expenses that make it difficult to assess our core performance and compare our period-over-period results.


A reconciliation of our adjusted financial measures to their GAAP equivalents is included on page 9 of this release. NewStar's adjusted financial measures should not be considered as alternatives to financial measures determined in accordance with GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies.





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