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NewStar Reports First Quarter Results

Strong core business performance is offset by write-down of residential mortgage-backed securities portfolio

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  • $0.2 million of adjusted net income in the first quarter or $0.01 adjusted earnings per diluted share
  • $2.4 million net loss in the first quarter or $0.07 net loss per diluted share on a GAAP basis
  • Recognized $9.0 million after-tax impairment in residential mortgage-backed securities portfolio
  • $2.3 billion of assets in managed loan portfolio, up 12% from the fourth quarter
  • Commercial credit quality stable, no loan charge offs


Boston – May 3, 2007 – NewStar Financial, Inc. (NASDAQ: NEWS), today reported adjusted net income for the first quarter of 2007 of $0.2 million, or adjusted earnings of $0.01 per diluted share. On a GAAP basis, the company reported a net loss of $2.4 million, or $0.07 per diluted share. Positive operating results were offset by a $14.9 million pre-tax charge ($9.0 million after-tax) to recognize impairment in the company's residential mortgage-backed securities portfolio ("RMBS").


The company also announced that it would discontinue its investment activity in this asset class and manage the disposition of its current portfolio over time to optimize its economic value.


"A severe correction in the RMBS market offset an otherwise strong quarter for our core lending franchise," said Tim Conway, Chairman and Chief Executive Officer. "By writing down our portfolio, discontinuing further investment in this asset class and managing the portfolio to maximize recoveries over time, we believe we are taking appropriate action to reduce our risk, while maximizing the economic value of our holdings. As a result, we will be better positioned for the future. Although we are not pleased by the overall results in Q1, the growth in our core business is encouraging. Excluding the write-down, revenue was up 29% from the prior quarter driven by growth in interest income and fee revenue from asset management and syndications. Volume was strong as we grew our managed assets to nearly $2.3 billion. Commercial credit quality is performing well within expected parameters as our loan portfolio continues to season."


"Adjusted net income" and other non-GAAP financial measures used in this release are defined under "Non-GAAP Financial Measures" on page 5. We have provided a reconciliation between GAAP and adjusted (non-GAAP) measures in the attached financial tables.


Residential Mortgage-backed Securities Portfolio


  • We recorded a $14.9 million pre-tax charge ($9 million after-tax) to recognize an unrealized loss and reduce the carrying value of our RMBS portfolio in the first quarter of 2007.
  • An additional $14.1 million of pre-tax net unrealized holding losses was taken as a charge to stockholders' equity through the Other Comprehensive Income / Loss account.
  • The carrying value of the RMBS portfolio, net of the unrealized holding losses described above, was $101 million, or 5.4% of total loans and investments, as of March 31, 2007.
  • The portfolio was comprised of RMBS backed by pools of collateral consisting of 1st mortgages (40%), 'closed end' 2nd mortgages (20%), home equity lines of credit (13%), and serviced residential lot loans (7%), as well as net interest margin securities (19%) backed by residual interests of home equity loan RMBS.
  • Approximately $29 million, or 29%, of the portfolio, represented securities backed by pools of mortgage loans to borrowers which have weighted average FICO scores of 700 or better (Prime).
  • Approximately $50 million, or 49%, of the portfolio represented securities backed by pools of mortgage loans to borrowers which have weighted average FICO scores of between 620 and 700 (Mid-Prime or Alt A).
  • Approximately $22 million, or 22%, of the portfolio represented securities backed by pools of mortgage loans to borrowers which have weighted average FICO scores of 620 or lower (Sub-Prime).
  • Approximately 47% of the RMBS portfolio is rated investment grade by at least one recognized rating agency.


Strong Origination Volume


  • Overall origination volume for the quarter was $519 million, of which $150 million was syndicated to others, $80 million was sold to the New Star Credit Opportunities Fund (NCOF), $11 million was originated for the managed CLO and $278 million was retained on NewStar's balance sheet.
  • Middle Market Corporate generated approximately 82% of the new volume in the quarter, while Commercial Real Estate and Structured Products produced 10% and 8%, respectively.
  • We continued to grow our proprietary direct origination platform in the first quarter, adding four new senior bankers of six that we expect to add in 2007.


Growth in Loans and Investments


  • Managed loan portfolio increased to $2.3 billion as of March 31, 2007, an increase of $247 million, or 12%, from $2.0 billion at December 31, 2006. Assets managed for the NCOF increased by $99 million, or 35%, from $283 million as of December 31, 2006 to $382 million at March 31, 2007.
  • Gross loans and investments in debt securities held on NewStar's balance sheet increased to $1.9 billion as of March 31, 2007, an increase of $148 million from $1.7 billion at December 31, 2006.
  • Our business continues to be balanced across industry sectors and highly diversified across issuers. As of March 31, 2007, no single issuer represented more than 1.2% 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 77% 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 $22.0 million for the first quarter 2007 compared to $15.5 million for the fourth quarter 2006 and $8.0 million for the first quarter 2006.
  • Net interest margin was 4.50% for the first quarter 2007 compared to 3.82% for the fourth quarter 2006 and 3.85% for the first quarter 2006. Adjusted net interest margin was 4.50% for the first quarter 2007 compared to 4.50% for the fourth quarter 2006 and 4.46% for the first quarter 2006.


Non-Interest Income


  • Non-interest income was $(10.7) million for the first quarter 2007, a decrease of $14.8 million from $4.1 million in the prior quarter. The decrease was due principally to the impairment in the RMBS portfolio offset by an increase in asset management fees generated by the NCOF.


Stable Commercial Loan Credit Quality


  • As of March 31, 2007, we did not have any impaired loans and had not experienced any loan charge offs.
  • As of March 31, 2007, we had an allowance for credit losses of $22.9 million, or 1.40% of loans compared to $20.6 million, or 1.40%, at December 31, 2006 and $9.4 million or 1.24% at March 31, 2006. 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 $2.3 million in the first quarter 2007 compared to $5.9 million in the fourth quarter 2006 and $1.4 million in the first quarter of 2006.
  • One of our loans with a principal amount of $8.4 million was delinquent as of March 31, 2007, representing a 0.51% delinquency rate. Subsequent to March 31, 2007, this loan became current.
  • The credit issue with a $10.4 million commercial security that we disclosed in our 2006 Form 10-K continues to develop and we are evaluating restructuring options.


Funding


  • During the first quarter, we increased the capacity of our credit facilities by $200 million and reduced the cost of funds on these facilities.
  • Total cash and equivalents as of March 31, 2007 were $191 million, of which $131 million was unrestricted.


Expenses


  • Operating expenses were $13.0 million in the first quarter 2007 compared to $51.6 million in the fourth quarter 2006 and $7.0 million for the first quarter 2006. The decrease in operating expenses from Q4 was primarily due to a $39.1 million of non-cash compensation charge in the fourth quarter of 2006 related to restricted stock grants made since our inception as a private company including equity awards made in connection with our initial public offering.
  • Excluding the write-down, our adjusted efficiency ratio was 38% in the first quarter 2007.


Conference Call and Webcast


We will host a webcast/conference call to discuss the results today at 5:00 pm 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) 765-0709 approximately 5-10 minutes prior to the call. International callers should dial (913) 981-5564. All callers should reference "NewStar Financial, Inc."


For convenience, an archived replay of the call will be available through May 10, 2007 by dialing (888) 203-1112. International callers should call (719) 457-0820. For all replays, please use the passcode # 3471739. 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 principally 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.


Contact:

Robert K. Brown

500 Boylston Street, Suite 1600

Boston, MA 02116

P 617.848.2558

F 617.848.4399

rbrown@newstarfin.com


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"), including Item 1A ("Risk Factors") of our 2006 Form 10-K. 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-Q with the SEC on or before May 15, 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 diluted 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 as a private company, 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 as a private company, 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 as a private company, 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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