NewStar Reports Net Income Of $8.6 Million, Or $0.19 Per Diluted Share, For The Third Quarter Of 2016

  • Investment Activity - New funded credit investments totaled $427 million in the third quarter compared to $476 million last quarter and $720 million in the same quarter last year, reflecting credit selectivity in a mixed market environment.
  • Managed Assets - Managed loans and credit investments increased slightly from the prior quarter to $6.7 billion, which was $2.0 billion, or 44.4%, higher than in the same period last year. Growth in assets from a new managed fund launched in the third quarter offset an expected decrease in assets in funds past their investment periods. New funds and separate accounts with targeted investment portfolios of $600 million were launched after the end of the third quarter.
  • Revenue - Total revenue 1 increased by $10.9 million, or 43.4%, from the prior quarter to $36.2 million in the third quarter due primarily to higher average assets, favorable mark-to-market adjustments, previously unrecorded interest income recognized in connection with the repayment of a non-performing loan at par and higher capital markets related income. 
  • Net Interest Margin - The margin widened to 2.50% for the third quarter from 2.10% in the second quarter due primarily to the impact of interest income recognized in the quarter in connection with the pay-off of a non-performing loan at par.
  • Credit - Credit performance remained within expected ranges with provision expense of $3.6 million for the third quarter, consistent with the prior quarter and $0.9 million lower than in the same period last year.
  • Expenses - Operating expenses increased by $5.2 million to $18.1 million in the third quarter compared to the prior quarter due primarily to $4.2 million of severance charges related to cost saving initiatives and approximately $1.0 million of other elevated expenses related to short-term projects.
  • Equity - Book value per share increased by $0.26 to $14.38 as of September 30, 2016 from $14.12 at the end of the prior quarter due primarily to comprehensive income totaling $11.7 million in the third quarter. Subsequent to the end of the third quarter, the company repurchased 2.5 million shares at a weighted average cost of $8.93 per share in privately negotiated transactions, which is expected to be accretive to book value per share. 
  • Divestitures - Assets and liabilities of the equipment finance business were reclassified as held-for-sale as of September 30, 2016, reflecting an ongoing process to sell that business, which has resulted in a non-binding letter of intent with a prospective buyer. 

1 Total revenue is defined as the sum of net interest income and non-interest income

BOSTON, Nov. 02, 2016 (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 2016, reporting net income of $8.6 million, or $0.19 per diluted share. These results compare to net income of $5.2 million, or $0.11 per diluted share in the second quarter of 2016 and $5.1 million, or $0.11 per diluted share in the third quarter of 2015. Operating income before income taxes was $14.6 million for the third quarter of 2016 compared to $8.8 million for the second quarter of 2016 and $8.8 million in the third quarter of 2015.

Tim Conway, NewStar's Chairman and Chief Executive Officer, commented on the Company's performance: "We continued to make progress on our key strategic priorities in the third quarter and our financial results reflected solid operating trends highlighted by a significant increase in earnings driven by strong revenue growth and stable asset quality.  Revenue increased by more than 40% over last quarter and 35% from the same quarter last year as core revenue increased, loan values recovered and we got a boost in interest income from the repayment of a non-performing loan at par.  Credit costs also remained stable within expected ranges and we absorbed elevated expenses recognized in the quarter primarily related to cost savings initiatives and strategic projects that are expected to provide future benefits. Loan demand from M&A activity remained relatively soft through the quarter.  As a result, our investment pace was below expected levels, reflecting our commitment to credit selectivity. Importantly, book value per share increased by $0.26 and, after quarter-end, we repurchased 2.5 million shares in privately negotiated transactions, which is expected to add more than $0.30 to book value."

"While I am pleased with the financial results, we also made meaningful progress on our key priorities in the quarter as we worked to streamline the business, reduce expenses and expand our asset management activities.  We completed a strategic review to explore the potential sale of our equipment finance business which resulted in a non-binding letter of intent with a prospective buyer.  That transaction is expected to close before year-end.   As a result of savings related to divestitures and other initiatives, we expect to have reduced baseline expenses by 25-30% on a run-rate basis by year end.  We also continue to make progress on our asset management strategy with the launch of two new managed funds and a separate account with target investment portfolios of approximately $1 billion.  In 2016, we have sponsored three new CLOs totaling approximately $1.3 billion, underscoring our position as a leading issuer in that key market." 

Managed and Owned Investment Portfolios

  • Total new funded credit investments were $427 million in the third quarter of 2016 compared to $476 million in the prior quarter and $720 million in the same quarter last year.  Investment activity in the third quarter of 2016 included liquid loan and middle market direct lending strategies.  Loan demand in the third quarter reflected seasonally slow activity through July and August, followed by a pick-up in September driven by refinancing activity, but remained muted overall compared to the prior quarter and last year.  M&A activity continued to reflect a cautious market sentiment amid uncertainty about the future direction of the economy, the rate environment and US elections.  
  • Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $225 million, or 5.7% of loan and investment balances at the beginning of the period, down from $343 million, or 9.5% of balances in the prior quarter.  Runoff in the third quarter included $148 million of prepayments, $27 million of loan sales and $51 million of contractual amortization compared to prepayments of $190 million, loan sales of $102 million and amortization of $51 million in the prior quarter. 
  • Average yields on new middle market loans and other directly originated credit investments in the third quarter were 6.6%, down from 7.0% in the prior quarter due partly to the impact of competition for limited deal flow in the market and disciplined credit selectivity, but remained consistent with levels in the third quarter of last year. 
  • Loans and other investments outstanding, excluding assets managed for third parties, increased by $200 million, or 5.3%, from the prior quarter.  Net loan growth in the third quarter was driven by lending activity generated through our Leveraged Finance group and an increase in loans sourced for our liquid loan strategies. Compared to the third quarter of 2015, loans and investments increased $342 million, or 9.4% due to lending activity related to both direct lending and liquid loan strategies, which was partially offset by the sale of the ABL business in the first quarter of 2016. 
  • The Leveraged Finance loan portfolio increased by $231 million during the third quarter to $3.8 billion, while loans and leases in our Equipment Finance portfolio decreased by $7 million to $158 million and were reclassified as assets held-for-sale in connection with the planned divestiture of that business.  Commercial real estate loans decreased by 57% in the third quarter to less than $18 million due to the sale of a commercial property as part of an accelerated disposition of that portfolio.  A commercial real estate loan totaling $15.8 million was also reclassified as other real estate owned (OREO) during the quarter.  
  • Assets held in managed funds increased to approximately $3.1 billion as of September 30, 2016 as a decrease in assets managed in amortizing CLOs was more than offset by an increase in assets managed in the new Arch Street fund.  
  • The owned loan portfolio remained defensively positioned - balanced across industry sectors and highly diversified by issuer. Exposure to energy sectors was less than 1.2%, down slightly from the prior quarter.  As of September 30, 2016, no outstanding borrowings by a single obligor represented more than 1.2% of total loans outstanding, and the ten largest obligors comprised approximately 9.4% of the loan portfolio.

Net Interest Income / Margin
  • Net interest income increased by $4.4 million, or 20.8%, to $25.3 million in the third quarter compared to $20.9 million in the prior quarter due primarily to $3.2 million of previously unrecorded interest income recognized in connection with the pay-off of a nonperforming loan at par and a $28.4 million increase in average loans and credit investments compared to the prior quarter.  Compared to the third quarter of last year, net interest income increased by $2.0 million, or 8.7%.
  • The portfolio yield increased to 6.77% in the third quarter compared to 6.28% the prior quarter, and 6.32% in the comparable period in the prior year.  The increase in yield was due primarily to the income recognized in connection with the pay-off of a non-performing loan at par and an increase in deferred fee amortization related to prepayments. 
  • Funding costs were 4.67% in the third quarter which was relatively consistent with 4.65% in the second quarter, but up from 4.31% in the comparable period in the prior year. 
  • As a result, net interest margin widened to 2.50% for the third quarter of 2016 compared to 2.10% for the prior quarter, but narrowed slightly from 2.57% in the third quarter of 2015.

Non-Interest Income
  • Non-interest income increased by $6.6 million to $11.0 million for the third quarter of 2016 compared to $4.4 million in the prior quarter and $3.5 million in the same period last year.  The increase was due primarily to $3.9 million of unrealized gains on loans reported at fair value and higher capital markets related fees.  Unrealized gains partly reflected the recapture of unrealized losses from prior periods as loan values increased broadly across the market driven primarily by spread tightening.
  • Non-interest income in the third quarter of 2016 was centered in asset management income of $3.4 million, $2.9 million of capital markets related fees and $3.9 million of unrealized gains (net) on loans held at fair value. 

Credit Performance
  • Credit performance in the third quarter was consistent with the prior quarter and better than the same quarter last year as credit costs remained in expected ranges.
  • Provision expense was $3.6 million in the third quarter, consistent with the prior quarter and down from $4.5 million in the same quarter last year.        
  • Total net specific provision expense increased by approximately $0.8 million in the third quarter of 2016 to $3.2 million compared to $2.4 million in the prior quarter and $1.6 million in the same quarter last year. 
  • Net charge-offs in the third quarter reflected a small recovery of a previously charged-off loan compared to $6.9 million of charge-offs recognized in the prior quarter and no charge-offs in the same period last year. 
  • The allowance for credit losses was $66.4 million, or 2.29% of consolidated loans and approximately 76.0% of non-performing loans (NPLs), at September 30, 2016, compared to $64.0 million, or 2.09% of loans and approximately 66.8% of NPLs, at June 30, 2016.
  • Non-performing loans decreased by $8.6, or 9%, to $87.3 million, or 2.66% of loans and leases held for investment at September 30, 2016, compared to $95.9 million or 2.97% of loans and leases held for investment at the end of the prior period.  The decrease was due primarily to the repayment of an $8.4 million non-performing loan at par during the quarter. 
  • A commercial property valued at approximately $15.8 million was classified as OREO during the quarter.

Expenses
  • Operating expenses increased by $5.2 million to $18.1 million for the third quarter of 2016 compared to $12.8 million in the prior quarter due to approximately $1 million of expenses related to the planned sale of the equipment finance business and other short-term projects, as well as $4.2 million of severance expenses recognized in connection with cost saving initiatives.
  • As a result, expenses as a percentage of average assets increased to 1.76% of average assets in the third quarter compared to 1.29% in the prior quarter.
  • Operating expenses, excluding non-cash equity compensation and severance costs, were $12.9 million in the third quarter up from $11.9 million during the second quarter due primarily to non-recurring expenses related to the potential sale of the equipment finance business and other short-term projects. 
  • The Company had 83 full-time employees at September 30, 2016 compared to 90 full-time employees at June 30, 2016 and 122 employees at December 31, 2015.  The reduction in staffing levels reflects both the sale of the asset-based lending business, which had 26 full-time employees, and strategic initiatives to streamline operations. 
  • The company has identified additional opportunities to reorganize and streamline its operations to reduce expenses and expects to achieve run-rate savings of approximately 25-30% of the company's fiscal 2016 baseline cost base of approximately $60 million. 

Income Taxes
  • Deferred income taxes decreased $0.6 million to $29.9 million as of September 30, 2016.  The decrease in deferred income taxes was driven primarily by activity in the allowance for credit losses, equipment leasing and available for sale securities.  
  • Approximately $31.9 million and $11.7 million of the net deferred tax asset as of September 30, 2016 were related to our allowance for credit losses and incentive compensation, respectively, which was partially offset by $14.1 million of deferred tax liabilities related to the lease portfolio.

Funding and Capital
  • Total cash and equivalents as of September 30, 2016 were $406.8 million, of which $36.3 million was unrestricted.
  • Unrestricted cash increased slightly from $34.6 million at June 30, 2016, while restricted cash increased by $163.1 million to $370.5 million at September 30, 2016 due primarily to principal and interest collections on loans that were retained pending reinvestment in new loan collateral or distribution to investors on various settlement dates.
  • Advances under credit facilities decreased by $73.0 million to $492.8 million during the third quarter due primarily to the repayment of a credit facility from the proceeds of the Arch Street CLO during the quarter as well of the reclassification of a credit facility used for Equipment Finance to liabilities held-for-sale in connection with the potential sale of that business.    
  • Term debt securitization balances increased from the prior quarter by $318.5 million to $2.3 billion at September 30, 2016, reflecting the issuance of the Arch Street CLO during the third quarter.
  • As a result, total debt increased by approximately $235.8 million to $3.5 billion at September 30, 2016 and leverage increased to 5.2x compared to 4.9x at the end of the prior quarter.

Equity
  • Book value per share increased by $0.26 to $14.38 at the end of the third quarter compared to $14.12 at the end of the prior quarter due to comprehensive income totaling $11.7 million, which included $8.6 million of net income and approximately $3.0 million of unrealized securities gains. 
  • Average diluted shares outstanding were 45.8 million shares for the quarter, down from 46.0 million for the prior quarter, and total outstanding shares at September 30, 2016 were 46.7 million consistent with June 30, 2016.
  • Pre-tax returns on average equity increased to 8.7% in the third quarter from 5.4% in the prior quarter.  On an after-tax basis, returns on average equity increased to 5.2% in the third quarter from 3.2% from the prior quarter. 
  • Subsequent to the end of the third quarter, the company repurchased 2.5 million shares at a weighted average cost of $8.93 per share in privately negotiated transactions, which is expected to add more than $0.30 per share to book value. 

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."   

For convenience, an archived replay of the call will be available through November 10, 2016 by dialing 855-859-2056. International callers should call 404-537-3406. For all replays, please use the passcode 99277366. The audio replay will also be available through the Investor Relations section at www.newstarfin.com.

About NewStar Financial

NewStar Financial Inc. (NASDAQ:NEWS) is an internally-managed, commercial finance company with approximately $6.7 billion of assets managed across two complementary business lines - middle market direct lending and asset management.  The Company's direct lending activities are focused on meeting the complex financing needs of companies and private investors in the middle markets through specialized lending groups that offer a range of flexible debt financing options to fund working capital, growth strategies, acquisition and recapitalization, as well as equipment purchases. Credit investments are originated directly through teams of experienced, senior bankers and marketing officers organized around key industry and market segments. Through its asset management platforms, NewStar offers a range of investment products employing credit-oriented strategies focused on middle market loans and liquid, tradeable credit. The Company manages approximately $1 billion of assets in a series of private credit funds that co-invest in middle market loans originated through its established leveraged finance lending platform and its strategic relationship with GSO Capital, the credit division of The Blackstone Group. Through its wholly-owned subsidiary, NewStar Capital, the Company also has more than $2 billion of assets managed across a series of CLOs that invest primarily in broadly syndicated, non-investment grade loans, as well as other sponsored funds and managed accounts that invest across various asset classes, including non-investment grade loans and bonds. 

NewStar is headquartered in Boston MA and has regional offices in Chicago IL, Darien, CT, and New York, NY. For more detailed information, please visit our website at www.newstarfin.com. 

Forward-Looking Statements

This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future performance, our expectations regarding our ability to support continued future asset growth or expense reductions, and the possibility of recovery of unrealized losses on loans held for sale.  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, strategic plans, the market price for NewStar's stock prevailing from time to time, the nature of other investment opportunities presented to NewStar from time to time, objectives, future performance, financing plans and business. As such, they are subject to material risks and uncertainties, including our ability to leverage new and future assets to support growth, the continued success of our strategic relationships; the general state of the economy; our ability to compete effectively in a highly competitive industry; our ability to integrate acquired businesses; and the impact of federal, state and local laws and regulations that govern non-depository commercial lenders and businesses generally.

More detailed information about these risk factors can be found in NewStar's filings with the Securities and Exchange Commission (the "SEC"), including Item 1A ("Risk Factors") of our 2015 Annual Report on Form 10-K, and as supplemented by any Risk Factors contained in our Quarterly Reports on Form 10-Q.  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, except as required by law. NewStar plans to file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 with the SEC on or before November 9, 2016 and urges its shareholders to refer to that document for more complete information concerning NewStar's financial results.

Non-GAAP Financial Measures

References to "total revenue" refer to net interest income plus non-interest income, and references to "core revenue" refer to total revenue excluding gain or loss on sale of business and other non-recurring items.  References to "adjusted operating expenses" refer to operating expenses, excluding severance costs and compensation expense related to restricted stock grants and option grants that are required to be included under GAAP.  NewStar management uses core revenue and adjusted operating expenses to analyze performance in support of operational and investment decisions, and NewStar believes that these measurements provide useful information to investors in their evaluation of our financial performance and condition.  Excluding non-recurring items from revenue measures and excluding expenses incurred in connection with compensation expense related to restricted stock grants and option grants each eliminate unique amounts that make it difficult to assess our core performance and compare our period over period results. Reconciliations of these non-GAAP financial measures to their respective most directly comparable GAAP measures are included on pages 13 and 14 of this release.

NewStar Financial, Inc.                  
Consolidated Balance Sheets                  
(unaudited)                  
                   
                   
    September 30,   June 30,     December 31,   September 30,  
($ in thousands)     2016       2016       2015       2015    
Assets:                  
                   
Cash and cash equivalents   $   36,266     $   34,634     $   35,933     $   57,472    
Restricted cash       370,487         207,394         153,992         140,854    
Cash collateral on deposit with custodian       7,564         7,564         61,081         53,738    
Investments in debt securities, available-for-sale       90,814         91,400         94,177         94,328    
Loans held-for-sale, net       429,718         440,099         478,785         427,418    
Loans and leases, net       3,186,998         3,113,061         3,134,072         2,991,370    
Interest receivable       14,829         15,059         13,932         9,668    
Property and equipment, net       296         366         638         624    
Deferred income taxes, net       29,881         30,443         33,133         35,627    
Income tax receivable       1,381         8,346         5,342     —    
Goodwill       17,884         17,884         17,884     —    
Identified intangible asset, net       655         738         910     —    
Other assets       53,786         24,873         21,504         16,574    
Assets held-for-sale       162,801     —     —     —    
Total assets (1)   $   4,403,360     $   3,991,861     $   4,051,383     $   3,827,673    
                   
Liabilities:                  
                   
Credit facilities, net (1)   $   492,758     $   565,799     $   832,686     $   614,831    
Term debt securitizations, net (1)       2,327,717         2,009,184         1,821,519         1,872,480    
Senior notes, net (1)       373,462         373,006         372,153         293,759    
Subordinated notes, net (1)       239,543         237,696         209,509         184,200    
Repurchase agreements, net (1)       52,591         64,625         96,224         136,976    
Accrued interest payable       31,021         19,664         18,073         28,261    
Income tax payable   —     —     —         3,352    
Other liabilities       170,380         63,164         41,741         33,534    
Liabilities held-for-sale       44,158     —     —     —    
Total liabilities (1)       3,731,630         3,333,138         3,391,905         3,167,393    
Total stockholders' equity       671,730         658,723         659,478         660,280    
Total liabilities and stockholders' equity   $   4,403,360     $   3,991,861     $   4,051,383     $   3,827,673    
                   
(1) Prior quarters have been adjusted to reflect the adoption of ASU 2015-03.       -                
                   

 
NewStar Financial, Inc.                    
Consolidated Statements of Operations                    
(unaudited)                    
                     
                   
  Three Months Ended    
  September 30,   June 30,   December 31,     September 30,    
($ in thousands, except per share amounts)   2016       2016       2015       2015      
Net interest income:                  
Interest income $   65,155     $   59,392     $   60,591     $   54,574      
Interest expense     39,897         38,486         36,222         31,345      
Net interest income     25,258         20,906         24,369         23,229      
Provision for credit losses     3,570         3,623         3,667         4,534      
Net interest income after provision for credit losses     21,688         17,283         20,702         18,695      
               
Non-interest income (loss):                  
Asset management income     3,353         3,543         3,707         1,019      
Fee income     2,946         1,697         2,999         4,573      
Loss on derivatives     (13 )       (11 )       (5 )       (5 )    
(Loss) gain on sale of loans, net     (19 )       162         154         360      
Other miscellaneous income      4,231         1,114         3,144         585      
Loss on total return swap   —     —         (4,121 )       (2,955 )    
Unrealized gain (loss) on loans held-for-sale       468         (2,146 )       (2,568 )       (85 )    
Total non-interest income      10,966         4,359         3,310         3,492      
Operating expenses:                  
Compensation and benefits     13,175         8,827         11,905         9,561      
General and administrative expenses     4,894         4,013         4,967         3,819      
Total operating expenses     18,069         12,840         16,872         13,380      
Income from operations before income taxes     14,585         8,802         7,140         8,807      
Income tax expense      5,941         3,561         2,931         3,665      
Net income   $   8,644     $   5,241     $   4,209     $   5,142      
                   
Earnings per share:                  
Basic EPS  $   0.19     $   0.11     $   0.09     $   0.11      
Diluted EPS   $   0.19     $   0.11     $   0.09     $   0.11      
                   
Weighted average shares outstanding:                  
Basic     45,812,139         46,010,918         45,601,534         45,744,881      
Diluted     45,812,139         46,010,918         46,954,059         48,238,467      
                     

 
NewStar Financial, Inc.          
Consolidated Statements of Operations          
(unaudited)          
           
       
    For the Nine Months Ended September 30,  
($ in thousands, except per share amounts)     2016       2015    
Net interest income:          
Interest income   $   186,499     $   141,194    
Interest expense       117,816         84,764    
Net interest income       68,683         56,430    
Provision for credit losses       24,906         14,720    
Net interest income after provision for credit losses       43,777         41,710    
           
Non-interest income (loss):          
Asset management income       10,337         2,954    
Fee income       5,836         10,508    
Loss on derivatives       (31 )       (24 )  
Gain on sale of loans, net       36         314    
Other miscellaneous income        7,195         2,271    
Loss on total return swap       (6,062 )       (470 )  
Unrealized loss on loans held-for-sale       (5,345 )       (506 )  
Gain on sale of Business Credit       22,511     —      
Total non-interest income        34,477         15,047    
Operating expenses:          
Compensation and benefits       32,640         24,004    
General and administrative expenses       15,337         11,052    
Total operating expenses       47,977         35,056    
Income from operations before income taxes       30,277         21,701    
Income tax expense        12,383         9,020    
Net income     $   17,894     $   12,681    
           
Earnings per share:          
Basic EPS    $   0.38     $   0.27    
Diluted EPS   $   0.38     $   0.26    
           
Weighted average shares outstanding:          
Basic       46,216,047         46,138,595    
Diluted       46,216,047         48,705,481    
           

 
NewStar Financial, Inc.                  
Selected Financial Data                  
(unaudited)                  
                   
                   
    Three Months Ended  
    September 30,     June 30,     December 31,   September 30,  
($ in thousands)     2016       2016       2015       2015    
Performance Ratios:                  
Return on average assets     0.84 %     0.53 %     0.42 %     0.56 %  
Return on average equity       5.16         3.19         2.52         3.10    
Pre-tax return on average equity (ROAE)       8.71         5.36         4.28         5.31    
Net interest margin, before provision       2.50         2.10         2.45         2.57    
Operating expenses as a percentage of average AUM       1.09         0.78         1.06         1.21    
Operating expenses as a percentage of average total assets       1.76         1.29         1.68         1.45    
Efficiency ratio       49.88         50.82         60.96         50.07    
Portfolio yield       6.77         6.28         6.33         6.32    
                   
Credit Quality Ratios:                  
Delinquent loan rate for loans 60 days or more                  
past due (at period end)     0.50 %     0.07 %     0.84 %     0.93 %  
Delinquent loan rate for accruing loans 60 days                  
or more past due (at period end)   —           —            0.26         0.28    
Non-accrual loan rate (at period end)       2.66         2.97         3.43         3.48    
Non-performing asset rate (at period end)       3.12         2.98         3.44         3.48    
Annualized net (recovery) charge off rate (end of period loans)       (0.01 )       0.86         (0.07 )   —        
Annualized net charge off rate (average period loans)       -          0.75         (0.06 )   —        
Allowance for credit losses ratio (at period end)       2.29         2.09         1.81         1.76    
                   
Capital and Leverage Ratios:                  
Equity to assets     15.25 %     16.50 %     16.12 %     17.06 %  
Debt to equity (1)       5.19         4.93         5.05         4.70    
Book value per share   $   14.38     $   14.12     $   14.17     $   14.40    
                   
Average Balances:                  
Loans and other debt products, gross   $   3,818,252     $   3,789,878     $   3,792,173     $   3,422,587    
Interest earning assets       4,019,721         3,997,586         3,951,302         3,579,431    
Total assets       4,095,296         3,992,135         3,986,034         3,664,525    
Interest bearing liabilities       3,399,977         3,328,485         3,327,106         2,882,669    
Equity       666,530         660,997         661,339         658,375    
Assets under management       6,609,920         6,612,840         6,340,199         4,388,610    
                   
Allowance for credit loss activity:                  
Balance as of beginning of period   $   64,043     $   67,292     $   54,481     $   49,947    
General provision for credit losses       336         1,207         1,244         2,925    
Specific provision for credit losses       3,234         2,416         2,422         1,609    
Net (charge offs) recoveries       46         (6,872 )       579     —      
Reclass of Equipment Finance to Assets held-for-sale       (1,293 )   —         —         —      
Balance as of end of period   $   66,366     $   64,043     $   58,726     $   54,481    
                   
                   
    Three Months Ended  
    September 30,     June 30,     December 31,     September 30,    
($ in thousands)     2016       2016       2015       2015    
Supplemental Data (at period end):                  
Investments in debt securities   $   96,931     $   97,837     $   100,943     $   108,318    
Loans and leases, held-for-sale (2)       593,640         446,462         485,874         431,811    
Loans held-for-investment       3,281,727         3,227,799         3,243,580         3,090,290    
Loans and investments in debt securities       3,972,298         3,772,098         3,830,397         3,630,419    
Deferred fees, net (3)       (60,918 )       (64,003 )       (65,104 )       (50,201 )  
Allowance for loan losses - general       (29,705 )       (30,655 )       (31,506 )       (29,314 )  
Allowance for loan losses - specific       (36,160 )       (32,880 )       (26,753 )       (23,798 )  
Total loans and investments in debt securities, net   $   3,845,515     $   3,644,560     $   3,707,034     $   3,527,106    
                   
                   
Unused lines of credit       287,172         283,802         601,805         484,721    
Standby letters of credit       8,754         6,339         8,696         8,082    
Total unfunded commitments   $   295,926     $   290,141     $   610,501     $   492,803    
                   
(1) Prior quarters have been adjusted to reflect the adoption of ASU 2015-03.                  
(2) Includes gross equipment loans and leases, held-for-sale with an outstanding balance of $158.3 million at September 30, 2016, which is included in Assets held-for-sale.      
(3) Includes deferred fees, net related to equipment loans and leases held-for-sale of $20.3 million at September 30, 2016.              
                   

 
NewStar Financial, Inc.          
Selected Financial Data          
(unaudited)          
           
           
    Nine Months Ended September 30,  
($ in thousands)     2016       2015    
Performance Ratios:          
Return on average assets     0.59 %     0.52 %  
Return on average equity       3.61         2.58    
Net interest margin, before provision       2.25         2.35    
Operating expenses as a percentage of average total assets       1.58         1.43    
Operating expenses as a percentage of average AUM       0.95         1.19    
Efficiency ratio       46.51         49.05    
Portfolio yield       6.38         6.19    
           
Credit Quality Ratios:          
Annualized net charge off rate (end of period loans)       0.58         0.17    
Annualized net charge off rate (average period loans)       0.50         0.18    
           
Average Balances:          
Loans and other debt products, gross   $   3,896,966     $   3,049,205    
Interest earning assets       4,082,501         3,214,755    
Total assets       4,066,659         3,227,018.00    
Interest bearing liabilities       3,405,781         2,602,713    
Equity       661,365         657,673.00    
Assets under management       6,718,832         3,942,108    
           
Allowance for credit loss activity:          
Balance as of beginning of period   $   58,726     $   43,693    
General provision for credit losses       2,614         7,647    
Specific provision for credit losses       22,292         7,073    
Net charge offs       (14,154 )       (3,932 )  
Reclass due to sale of Business Credit and transfer of Equipment Finance to Assets held-for-sale       (3,112 )       -     
Balance as of end of period   $   66,366     $   54,481    
           

 
NewStar Financial, Inc.                    
Non-GAAP Selected Financial Data                    
(unaudited)                    
                     
                     
    Three Months Ended    
    September 30,   June 30,   December 31,   September 30,    
($ in thousands)     2016       2016       2015       2015      
Performance Ratios:                    
Adjusted operating expenses as a percentage of average total assets     1.25 %     1.20 %     1.60 %     1.36 % .  
                     
Consolidated Statement of Operations   Adjustments (1) :                    
Operating expenses   $   18,069     $   12,840     $   16,872     $   13,380      
Less: non-cash equity compensation expense (2)       959         913         823         839      
Less: severance expenses       4,197     —       —         —          
Adjusted operating expenses   $   12,913     $   11,927     $   16,049     $   12,541      
                     
    Three Months Ended    
    September 30,   June 30,   December 31,   September 30,    
      2016       2016       2015       2015      
Core revenue                    
Net interest income    $   25,258     $   20,906     $   24,369     $   23,229      
Non-interest income       10,966         4,359         3,310         3,492      
Add back: Loss (gain) on total return swap   —         —             4,121         2,955      
Core revenue   $   36,224     $   25,265     $   31,800     $   29,676      
                     
    Three Months Ended    
    September 30,   June 30,   December 31,   September 30,    
      2016       2016       2015       2015      
Risk-adjusted revenue                    
Net interest income after provision for credit losses   $   21,688     $   17,283     $   20,702     $   18,695      
Non-interest income       10,966         4,359         3,310         3,492      
Risk-adjusted revenue   $   32,654     $   21,642     $   24,012     $   20,007      
                     
(1) Adjustments are pre-tax, unless otherwise noted.                    
(2) Non-cash compensation charge related to restricted stock grants and option grants.                     
                     

 
NewStar Financial, Inc.          
Non-GAAP Selected Financial Data          
(unaudited)          
           
           
    Nine Months Ended September 30,  
($ in thousands)     2016       2015    
Performance Ratios:          
Adjusted Efficiency ratio     39.70 %     45.62 %  
           
Consolidated Statement of Operations   Adjustments (1) :          
Operating expenses   $   47,977     $   35,056    
Less: non-cash equity compensation expense (2)       2,822         2,450    
Less: severance costs       4,197     —        
Adjusted operating expenses   $   40,958     $   32,606    
           
           
    Nine Months Ended September 30,  
      2016       2015    
Core revenue          
Net interest income    $   68,683     $   56,430    
Non-interest income       34,477         15,047    
Less: Gain on sale of Business Credit       (22,511 )   —        
Add back: Loss (gain) on total return swap       6,062         470    
Core revenue   $   86,711     $   71,947    
           
           
    Nine Months Ended September 30,  
      2016       2015    
Risk-adjusted revenue          
Net interest income after provision for credit losses   $   43,777     $   41,710    
Non-interest income       34,477         15,047    
Risk-adjusted revenue   $   78,254     $   56,757    
           
(1) Adjustments are pre-tax.          
(2) Non-cash compensation charge related to restricted stock grants and option grants.           

 
NewStar Financial, Inc.                                          
Portfolio Data                                          
(unaudited)                                          
                                           
    September 30,     June 30,     December 31,       September 30,    
($ in thousands)   2016     2016     2015     2015    
                                           
Portfolio Data: (Balance Sheet AUM)                                          
Senior secured cash flow   $   3,225,482       81.2 % $   3,193,364       84.7 % $   3,008,829       78.6 % $   2,880,473      79.30 %  
Broadly syndicated    $ 389,260       9.8     $ 167,198       4.4     —    0.0     —     0.0    
Senior secured asset-based (1)       187,688       4.7         189,674       5.0         534,979       14.0         471,781       13.0    
First mortgage       17,742       0.5         41,501       1.1         100,732       2.6         100,590       2.8    
Other       152,126       3.8         180,361       4.8         185,857       4.8         177,575       4.9    
Total   $   3,972,298       100.00 % $   3,772,098       100.00 % $   3,830,397       100.0 % $   3,630,419      100.0 %  
                                           
Leveraged Finance   $   3,796,267       95.6 %     3,565,363       94.5 % $   3,214,131       83.9 % $   3,080,004       84.8 %  
Business Credit   —       —      —       —          342,281       9.0         274,617       7.6    
Real Estate       17,742       0.4         41,501       1.1         100,732       2.6         100,590       2.8    
Equipment Finance (1)       158,289       4.0         165,234       4.4         173,253       4.5         175,208       4.8    
Total   $   3,972,298       100.0 % $   3,772,098       100.0 % $   3,830,397       100.0 % $   3,630,419      100.0 %  
                                           
Managed Portfolio (AUM)                                          
Commercial Lending                                          
Loans held-for-investment (2)   $   2,892,467       43.5 % $   3,060,601       46.6 % $   3,243,580   $   46.7 % $   3,090,290      67.10 %  
Loans held-for-sale (1)(2)       593,640       8.9         446,462       6.80         485,874       7.0         431,811       9.40    
Total Commercial Lending   $ 3,486,107     52.4 % $  3,507,063     53.4 % $  3,729,454     53.7 % $ 3,522,101      76.50 %  
                                           
Asset Management                                          
Middle Market Direct Lending                                           
Investments in debt securities (2)   $   96,931       1.5 % $   97,837       1.5 % $   100,943       1.4 % $   108,318       2.30 %  
Arlington Program (3)       397,319       6.0         397,932       6.2         401,794       5.8         395,370       8.60    
Clarendon Fund (3)       397,916       6.0         401,078       6.0         397,852       5.7         392,281       8.50    
Credit Opportunities Fund (3)       11,300       0.2         11,611       0.2         24,926       0.4         23,694       0.50    
Sub-total Middle Market Direct Lending       903,466       13.6 %     908,458       13.9 %     925,515       13.3 %     919,663       19.9 %  
Liquid/Tradeable Credit                                          
Arch Street (3)       389,260       5.9 %     167,198       2.5 %     -       -               
Avery Street (3)       63,893       1.0         98,043       1.5         123,765       1.8     —     —     
Emerson Place (3)       104,265       1.6         142,691       2.1         163,575       2.3     —     —     
Hull Street (3)       498,870       7.5         501,195       7.6         499,428       7.2     —     —     
Lime Street (3)       241,687       3.6         245,775       3.7         251,628       3.6     —     —     
Longfellow Place (3)       500,341       7.5         500,319       7.6         502,038       7.2     —     —     
Staniford Street (3)       397,912       6.0         398,442       6.0         400,074       5.8     —     —     
TRS Fund (2,4)   —         -      —       —          163,399       2.4         163,857       3.60    
Other (3)       66,678       1.0         114,074       1.7         190,590       2.7     —     —     
Sub-total Liquid/Tradeable Credit       2,262,906       34.0 %     2,167,737       32.7 %     2,294,497       33.0 %     163,857       3.60 %  
Total Managed Assets   $   6,652,479       100.0 % $   6,583,258       100.0 % $     6,949,466       100.0 % $     4,605,621       100.0 %  
                                           
(1) Equipment Finance has been moved to held-for-sale as of September 30, 2016.  
(2) Managed assets owned by NewStar Financial Inc. include investments in debt securities, loans held-for-sale (LHFS), assets held-for-sale, and loans held-for-investment, as well as loans referenced by a total return swap managed in the TRS Fund. Cash and other consolidated assets of NewStar Financial Inc. are excluded.   
(3) Managed assets include loans, cash and other investments held by funds and managed by NewStar Financial and its affiliates.                             
(4) TRS Fund was structured as a total return swap that references a portfolio of broadly syndicated loans.  NewStar earns net interest income and retains the risk of the reference assets.  The TRS matured on March 31, 2016.        
Robert K. Brown500 Boylston Street, Suite 1250Boston, MA 02116617.848.2558rbrown@newstarfin.com

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