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NewStar Reports Third Quarter 2012 Net Income of $6.1 Million, or $0.11 per Diluted Share

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  • Loan Growth - New funded loan volume was approximately $180 million and loan balances at quarter-end were 5% higher than at the same time in the prior year
  • Revenue Growth – Risk-adjusted revenue[1] increased 18.5% from the same period in the prior year, but decreased 8% from the prior quarter
  • Margins – Net interest margin remained attractive at 4.22% compared to 4.21% in the prior quarter and 3.98% in the same period in the prior year
  • Credit Trends – Although credit metrics were favorable to the same period last year, NPAs and delinquencies edged slightly higher from the prior quarter and provision for credit losses increased $3.5 million
  • Expenses – Operating expenses decreased $2.7 million from the prior quarter due primarily to last quarter's charge related to settlement of litigation in connection with a problem loan
  • Building Book Value - Book value per share increased by $0.18 to $11.87 in the quarter, or $0.60 from the same time in the prior year

BOSTON, Nov. 7, 2012 (GLOBE NEWSWIRE) -- NewStar Financial, Inc. (Nasdaq:NEWS), a specialized commercial finance company, today reported net income of $6.1 million, or $0.11 per diluted share for the third quarter of 2012. These results compare to net income of $3.4 million, or $0.06 in the third quarter of 2011 and $5.6 million in the prior quarter. Income before income taxes (pre-tax income) was $10.5 million for the third quarter of 2012. That compares to $5.9 million in the third quarter of 2011 and $9.7 million in the prior quarter.

"I am pleased to report another solid quarter highlighted by an 8% increase in earnings and a $0.18 increase to book value," said Tim Conway, NewStar's Chairman and Chief Executive Officer. "Although weaker than expected loan demand and M&A activity slowed our pace of new loan origination in the quarter, I am happy with our overall strong results," he added. "I also remain optimistic that we will have a strong finish to the year as we are already experiencing a significant pick-up in activity that we expect to continue through year-end," he concluded.

Managed and Owned Loan Portfolios

  • Total new funded loan origination volume was approximately $180 million in the third quarter compared to $205 million in the prior quarter and $190 million in the third quarter of the prior year. Lower volumes reflected weaker demand for acquisition financing from financial sponsors amid a slowdown in M&A activity and overall business investment.
  • The managed loan portfolio remained steady at $2.4 billion as of September 30, 2012 approximately equal to June 30, 2012 as new funded loan origination offset loan run-off from scheduled amortization and prepayments of existing loans.
  • The owned portfolio also remained stable at $1.9 billion as of September 30, 2012 as new funded loan origination offset the impact of run-off from scheduled amortization and prepayments of existing loans. Real Estate loans decreased by 3%, while our Business Credit and Leveraged Finance loan portfolios increased by 8% and 0.4%, respectively.
  • Assets managed for third party institutional investors increased by 3% in the third quarter to approximately $515 million at September 30, 2012 compared to $498 million at June 30, 2012 due primarily to new funded loan origination.
  • Asset-based lending and equipment finance businesses originated $23 million in the third quarter, or nearly 20% of new loan volume retained on the balance sheet.
  • The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. As of September 30, 2012, no outstanding borrowings by a single obligor represented more than 1.4% of total loans outstanding, and the ten largest obligors comprised approximately 9.7% of the loan portfolio.

Net Interest Income / Margin

  • Net interest income increased to $21.7 million for the third quarter of 2012 compared to $21.4 million for the second quarter of 2012 and $18.8 million in the third quarter of last year.
  • The portfolio yield increased to 6.45% in the third quarter compared to 6.35% in the prior quarter, but was down somewhat from 6.58% in the same period in the prior year.
  • Net interest margin was stable at 4.22% for the third quarter of 2012 compared to 4.21% for the second quarter of 2012, and 3.98% in the third quarter of last year.
  • Adjusting for the negative impact of non-performing loans, the loan portfolio yield would have been 35 bps higher, or 6.80% and net interest margin would have been 4.48% for the third quarter of 2012.

Non-Interest Income

  • Non-interest income was $3.2 million for the third quarter of 2012, up from $1.8 million for the second quarter of 2012 and $3.4 million loss in the same period in the prior year. The change from the second quarter was due primarily to $1.3 million of gains on the repurchase of CLO debt in the third quarter, which was partially offset by a $0.3 million OREO write-down.
  • Other non-interest income in the third quarter of 2012 consisted primarily of $0.7 million of asset management income, $0.7 million of amendment and exit fees, and $0.4 million of unused fees on revolving credit commitments.

Expenses

  • Operating expenses decreased by $2.7 million to $10.7 million in the third quarter of 2012 compared to $13.4 million in the second quarter of 2012 due primarily to a $2.1 million charge during the second quarter (net of insurance coverage) related to settlement of litigation in connection with a problem real estate loan that was the subject of the litigation.
  • Operating expenses excluding non-cash equity compensation[1] were $9.0 million in the third quarter of 2012, or 1.7% of average assets an annualized basis.
  • The efficiency ratio excluding non-cash equity compensation[2] in the third quarter of 2012 was 36.1%
  • The Company had 100 full-time employees as of September 30, 2012.

Income Taxes

  • Deferred income taxes increased to $46.4 million as of September 30, 2012 compared to $45.2 million as of June 30, 2012 due primarily to an increase in the allowance for credit losses and related timing differences of when credit costs are recognized according to GAAP and when it is excluded for income tax.
  • Approximately $23.9 million and $14.5 million of the deferred tax asset as of September 30, 2012 were related to our allowance for credit losses and equity compensation, respectively.

Loan Credit Quality

  • Credit performance declined slightly in Q3 2012 compared to the prior quarter, but was significantly better than the same period in the prior year and reflected expected variation around a continued positive trend line.
  • Total credit costs (including provision for credit losses and losses on OREO or interests retained in connection with workouts of impaired loans) in the third quarter increased to $4.0 million, or 0.9% of average loans on an annualized basis, from $0.2 million in the prior quarter.
  • Specific provision expense was approximately $4.6 million in the third quarter of 2012, up from $2.6 million in the second quarter of 2012.
  • The allowance for credit losses was $59.4 million, or 3.21% of loans and 72.5% of NPLs, at September 30, 2012, compared to $55.3 million, or 3.02% of loans, at June 30, 2012.
  • Non-performing assets increased by $9.8 million from the prior quarter. New loans totaling $9.9 million were placed on non-accrual status and loans totaling $3.8 million were returned to performing status in the third quarter of 2012. We also took control of a $5.1 million property and classified it as OREO. The resulting $11.2 million net increase in NPAs was partially offset by a $1.4 million decrease from loan repayment activity and equity method accounting adjustments.
  • At September 30, 2012, loans with an aggregate outstanding balance of $81.9 million, net of charge-offs, were on non-accrual status compared to loans with an aggregate outstanding balance of $77.3 million, net of charge-offs, at June 30, 2012. Non-performing assets, net of charge-offs, specific reserves and other adjustments were $95.5 million, or 49% of their aggregate face amount, as of September 30, 2012.
  • Non-accrual loans with an outstanding balance of $43.1 million and accruing loans with an outstanding balance of $21.1 million as of September 30, 2012 were also delinquent.
  • Recoveries were $0.3 million and no loans were charged-off in the third quarter of 2012 compared to net charge-offs of $9.0 million, or 1.97% of loans on an annualized basis, in the second quarter of 2012.

Funding and Capital

  • Balance sheet leverage decreased slightly to 2.47x as of September 30, 2012 from 2.51x at June 30, 2012 due primarily to CLO run-off and repayments of the commercial real estate repurchase agreement, partially offset by increased borrowings under warehouse lines used to fund new loan origination.
  • Maintained ample liquidity with total cash and equivalents as of September 30, 2012 of $185.6 million, of which $34.2 million was unrestricted. Unrestricted cash increased from approximately $28.4 million at June 30, 2012 and restricted cash increased from approximately $126.9 million to $151.4 million.

Book Value

  • Book value per share was $11.87 at the end of the third quarter 2012 up from $11.69 at the end of the prior quarter primarily due to net income for the quarter and the amortization of equity compensation into stockholders' equity.

Share Count

  • Average diluted shares outstanding were 53.0 million shares for the quarter, which was up slightly from 52.6 million shares for the prior quarter. Total outstanding shares at September 30, 2012 were 49.4 million, consistent with outstanding shares as of June 30, 2012.

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 14, 2012 by dialing 800-585-8367. International callers should call 404-537-3406. For all replays, please use the passcode 50027276. The audio replay will also be available through the Investor Relations section at www.newstarfin.com.

About NewStar Financial

NewStar Financial (Nasdaq:NEWS) is a specialized commercial finance company focused on meeting the complex financing needs of companies and private investors in the middle market. The Company specializes in providing senior secured debt financing options to mid-sized companies to fund working capital, growth strategies, acquisition and recapitalization, as well as, equipment purchases. NewStar originates loans and leases directly through a team of experienced, senior bankers and marketing officers organized around key industry and market segments. The Company targets 'hold' positions of up to $35 million and selectively underwrites or arranges larger transactions for syndication to other lenders.

NewStar is headquartered in Boston MA and has regional offices in Darien CT, Atlanta GA, Chicago IL, Dallas TX, Los Angeles CA, Philadelphia, PA, Portland OR and San Francisco CA. For more detailed information, please visit our website at www.newstarfin.com.

The NewStar Financial, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=4044

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, strategic plans, objectives, future performance, financing plans and business. As such, they are subject to material risks and uncertainties, including our limited operating history; the general state of the economy; our ability to compete effectively in a highly competitive industry; 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 2011 Annual Report on Form 10-K, as supplemented by the 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, 2012 with the SEC on or before November 9, 2012 and urges its shareholders to refer to that document for more complete information concerning NewStar's financial results.

Non-GAAP Financial Measures

References to "risk-adjusted revenue" mean the sum of net interest income after provision for credit losses as determined under GAAP and non-interest income as determined under GAAP. NewStar management uses "risk adjusted revenue" to make operational and investment decisions, and NewStar believes that it provides useful information to investors in their evaluation of our financial performance and condition. A calculation of risk-adjusted revenue is included on pages 11 and 12 of this release.

References to "operating expenses, excluding non-cash equity compensation" mean operating expenses as determined under GAAP, excluding compensation expense related to restricted stock grants and option grants. GAAP requires that these items be included in operating expenses. NewStar management uses "operating expenses, excluding non-cash equity compensation" 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 the financial results and expenses incurred in connection with the compensation expense related to restricted stock grants and option grants eliminates unique amounts that make it difficult to assess our core performance and compare our period‑over‑period results. A reconciliation of operating expenses, excluding non-cash equity compensation to operating expenses is included on pages 11 and 12 of this release.

[1] Risk-adjusted revenue is a non-GAAP measure calculated as the sum of net interest income after provision for credit losses and non-interest income. See "Non-GAAP Measurements" at the end of this press release and page 11 for reconciliation of non-GAAP to GAAP measurements.

[2] Operating expenses excluding non-cash equity compensation is a non-GAAP measure. See "Non-GAAP Measurements" at the end of this press release and page 11 for reconciliation of non-GAAP to GAAP measurements.

[3] Efficiency ratio excluding non-cash equity compensation is a non-GAAP measure. See "Non-GAAP Measurements" at the end of this press release and page 11 for reconciliation of non-GAAP to GAAP measurements.

NewStar Financial, Inc.
Consolidated Balance Sheets
(unaudited)
September 30, June 30, December 31, September 30,
($ in thousands) 2012 2012 2011 2011
Assets:
Cash and cash equivalents $34,176 $28,394 $18,468 $27,604
Restricted cash 151,387 126,943 83,815 74,610
Investments in debt securities, available-for-sale 20,803 18,335 17,817 11,431
Loans held-for-sale, net 48,534 52,527 38,278 31,192
Loans and leases, net 1,761,391 1,746,803 1,699,187 1,676,651
Deferred financing costs, net 12,405 13,526 11,997 12,608
Interest receivable 8,917 8,506 9,857 8,702
Property and equipment, net 520 636 740 837
Deferred income taxes, net 46,436 45,237 47,902 47,120
Income tax receivable -- 2,948 293 5,494
Other assets 23,907 20,802 18,029 20,075
Total assets $2,108,476 $2,064,657 $1,946,383 $1,916,324
Liabilities:
Credit facilities $396,318 $363,129 $214,711 $161,909
Term debt 1,009,953 1,045,749 1,073,105 1,095,977
Repurchase agreements 40,778 41,480 64,868 67,554
Accrued interest payable 3,177 3,564 2,853 2,040
Accounts payable 228 378 430 717
Income tax payable 2,452 -- -- --
Other liabilities 68,934 33,318 26,654 30,739
Total liabilities 1,521,840 1,487,618 1,382,621 1,358,936
Total stockholders' equity 586,636 577,039 563,762 557,388
Total liabilities and stockholders' equity $2,108,476 $2,064,657 $1,946,383 $1,916,324
NewStar Financial, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ended
September 30, June 30, December 31, September 30,
($ in thousands, except per share amounts) 2012 2012 2011 2011
Net interest income:
Interest income $30,812 $30,611 $30,877 $29,500
Interest expense 9,074 9,180 7,371 10,683
Net interest income 21,738 21,431 23,506 18,817
Provision for credit losses 3,712 159 4,314 4,408
Net interest income after provision for credit losses 18,026 21,272 19,192 14,409
Non-interest income:
Fee income 1,074 1,069 1,563 573
Asset management income 718 727 684 697
Gain (loss) on derivatives (57) (186) (35) 252
Gain on sale of loans -- 32 -- 20
Other income (loss) 1,451 163 (318) 1,862
Total non-interest income 3,186 1,805 1,894 3,404
Operating expenses:
Compensation and benefits 7,832 8,067 7,823 7,706
General and administrative expenses 2,843 5,291 3,245 4,190
Total operating expenses 10,675 13,358 11,068 11,896
Income before income taxes 10,537 9,719 10,018 5,917
Income tax expense 4,471 4,102 3,650 2,508
Net income $6,066 $5,617 $6,368 $3,409
Net income per share:
Basic $0.13 $0.12 $0.13 $0.07
Diluted $0.11 $0.11 $0.12 $0.06
Weighted average shares outstanding:
Basic 47,379,468 47,320,839 47,442,907 47,942,803
Diluted 52,921,668 52,644,476 52,166,449 52,618,806
NewStar Financial, Inc.
Consolidated Statements of Operations
(unaudited)
Nine Months Ended September 30,
($ in thousands, except per share amounts) 2012 2011
Net interest income:
Interest income $90,945 $84,803
Interest expense 26,607 27,582
Net interest income 64,338 57,221
Provision for credit losses 6,752 12,998
Net interest income after provision for credit losses 57,586 44,223
Non-interest income:
Fee income 3,398 1,507
Asset management income 2,188 1,951
Gain (loss) on derivatives (258) 277
Gain (loss) on sale of loans (418) 128
Other income (loss) 2,866 (1,690)
Total non-interest income 7,776 2,173
Operating expenses:
Compensation and benefits 23,101 22,321
General and administrative expenses 11,627 10,542
Total operating expenses 34,728 32,863
Income before income taxes 30,634 13,533
Income tax expense 12,869 5,752
Net income $17,765 $7,781
Net income per share:
Basic $0.38 $0.16
Diluted $0.34 $0.15
Weighted average shares outstanding:
Basic 47,358,070 48,329,503
Diluted 52,614,546 53,115,709
NewStar Financial, Inc.
Selected Financial Data
(unaudited)
Three Months Ended
September 30, June 30, December 31, September 30,
($ in thousands) 2012 2012 2011 2011
Performance Ratios:
Return on average assets 1.16% 1.10% 1.32% 0.71%
Return on average equity 4.15 3.93 4.50 2.41
Net interest margin, before provision 4.22 4.21 4.77 3.98
Efficiency ratio 42.95 57.65 43.57 53.53
Portfolio yield 6.45 6.35 6.61 6.58
Credit Quality Ratios:
Delinquent loan rate for loans 60 days or more past due (at period end) 3.48% 2.08% 5.34% 4.72%
Delinquent loan rate for accruing loans 60 days or more past due (at period end) 1.14 -- 0.46 0.47
Non-accrual loan rate (at period end) 4.43 4.22 5.61 5.83
Non-performing asset rate (at period end) 5.13 4.66 5.61 5.83
Annualized net charge off rate (end of period loans) (0.07) 1.97 2.89 2.10
Annualized net charge off rate (average period loans) (0.06) 1.88 2.89 2.12
Allowance for credit losses ratio (at period end) 3.21 3.02 3.52 4.10
Capital and Leverage Ratios:
Equity to assets 27.82% 27.95% 28.96% 29.09%
Debt to equity 2.47x 2.51x 2.40x 2.38x
Book value per share $ 11.87 $ 11.69 $ 11.42 $ 11.27
Average Balances:
Loans and other debt products, gross $ 1,896,862 $ 1,936,689 $ 1,852,525 $ 1,778,988
Interest earning assets 2,051,456 2,045,907 1,954,471 1,877,897
Total assets 2,072,051 2,060,119 1,916,742 1,900,623
Interest bearing liabilities 1,416,689 1,447,422 1,328,051 1,286,503
Equity 580,934 574,324 561,825 560,821
Allowance for credit loss activity:
Balance as of beginning of period $ 55,334 $ 64,129 $ 73,038 $ 78,040
General provision for credit losses (899) (2,464) 3,918 (1,922)
Specific provision for credit losses 4,611 2,623 396 6,330
Net (charge offs) recoveries 305 (8,954) (13,240) (9,410)
Balance as of end of period $ 59,351 $ 55,334 $ 64,112 $ 73,038
Supplemental Data (at period end):
Investments in debt securities, gross $ 25,298 $ 25,298 $ 25,298 $ 17,298
Loans held-for-sale, gross 49,015 53,258 38,837 31,786
Loans held-for-investment, gross 1,848,318 1,830,208 1,820,193 1,781,917
Loans and investments in debt securities, gross 1,922,631 1,908,764 1,884,328 1,831,001
Unused lines of credit 256,696 261,663 252,288 241,902
Standby letters of credit 6,398 6,506 6,462 8,768
Total funding commitments $ 2,185,725 $ 2,176,933 $ 2,143,078 $ 2,081,671
Loan portfolio $ 1,922,631 $ 1,908,764 $ 1,884,328 $ 1,831,001
Loans owned by NewStar Credit Opportunities Fund 515,164 497,750 517,596 499,780
Managed loan portfolio $ 2,437,795 $ 2,406,514 $ 2,401,924 $ 2,330,781
Loans held-for-sale, gross $ 49,015 $ 53,258 $ 38,837 $ 31,786
Loans held-for-investment, gross 1,848,318 1,830,208 1,820,193 1,781,917
Total loans, gross 1,897,333 1,883,466 1,859,030 1,813,703
Deferred fees, net (28,556) (29,198) (57,865) (33,212)
Allowance for loan losses - general (21,190) (21,887) (23,022) (19,126)
Allowance for loan losses - specific (37,662) (33,051) (40,678) (53,522)
Total loans, net $ 1,809,925 $ 1,799,330 $ 1,737,465 $ 1,707,843
NewStar Financial, Inc.
Selected Financial Data
(unaudited)
Nine Months Ended September 30,
($ in thousands) 2012 2011
Performance Ratios:
Return on average assets 1.17% 0.55%
Return on average equity 4.13 1.86
Net interest margin, before provision 4.22 4.07
Efficiency ratio 48.29 55.33
Portfolio yield 6.37 6.37
Credit Quality Ratios:
Annualized net charge off rate (end of period loans) 0.83 1.86
Annualized net charge off rate (average period loans) 0.82 1.87
Average Balances:
Loans and other debt products, gross $ 1,904,355 $ 1,777,485
Interest earning assets 2,034,212 1,878,825
Total assets 2,032,532 1,875,643
Interest bearing liabilities 1,409,637 1,272,219
Equity 574,844 559,811
Allowance for credit loss activity:
Balance as of beginning of period $ 64,112 $ 84,781
General provision for credit losses (2,050) (5,388)
Specific provision for credit losses 8,802 18,386
Net charge offs (11,513) (24,741)
Balance as of end of period $ 59,351 $ 73,038
NewStar Financial, Inc.
Non-GAAP Data
(unaudited)
Adjusted
Three Months Ended
September 30, June 30, December 31, September 30,
($ in thousands) 2012 2012 2011 2011
Performance Ratios:
Efficiency ratio 36.09% 49.50% 35.00% 44.21%
Consolidated Statement of Operations Adjustments(1):
Operating expenses $ 10,675 $ 13,358 $ 11,068 $ 11,896
Less: non-cash equity compensation expense (2) 1,680 1,856 2,179 2,072
Adjusted operating expenses $ 8,995 $ 11,502 $ 8,889 $ 9,824
(1) Adjustments are pre-tax.
(2) Non-cash compensation charge related to restricted stock grants and option grants.
Three Months Ended
September 30, June 30, December 31, September 30,
2012 2012 2011 2011
Risk-adjusted revenue
Net interest income after provision for credit losses $ 18,026 $ 21,272 $ 19,192 $ 14,409
Non-interest income (loss) 3,186 1,805 1,894 3,404
Risk-adjusted revenue $ 21,212 $ 23,077 $ 21,086 $ 17,813
NewStar Financial, Inc.
Non-GAAP Data
(unaudited)
Adjusted
Nine Months Ended
September 30, September 30,
($ in thousands) 2012 2011
Performance Ratios:
Efficiency ratio 40.72% 43.98%
Consolidated Statement of Operations Adjustments(1):
Operating expenses $ 34,728 $ 32,863
Less: non-cash equity compensation expense (2) 5,363 6,740
Adjusted operating expenses $ 29,365 $ 26,123
(1) Adjustments are pre-tax.
(2) Non-cash compensation charge related to restricted stock grants and option grants.
NewStar Financial, Inc.
Portfolio Data
(unaudited)
($ in thousands) September 30, 2012 June 30, 2012 December 31, 2011 September 30, 2011
Portfolio Data:
First mortgage $205,207 10.7% $210,683 11.0% $252,927 13.4% $252,311 13.8%
Senior secured asset-based 199,247 10.4 184,303 9.7 114,585 6.1 109,084 6.0
Senior secured cash flow 1,465,568 76.2 1,460,507 76.5 1,439,181 76.4 1,402,856 76.6
Other 52,609 2.7 53,271 2.8 77,635 4.1 66,750 3.6
Total $1,922,631 100.0% $1,908,764 100.0% $1,884,328 100.0% $1,831,001 100.0%
Leveraged Finance $1,520,601 79.1% $1,515,257 79.4% $1,501,175 79.7% $1,457,512 79.6%
Real Estate 205,206 10.7 210,698 11.0 271,381 14.4 270,736 14.8
Business Credit 196,824 10.2 182,809 9.6 111,772 5.9 102,753 5.6
Total $1,922,631 100.0% $1,908,764 100.0% $1,884,328 100.0% $1,831,001 100.0%
CONTACT: For information contact: Colleen M. Banse 500 Boylston St., Suite 1250 Boston, MA 02116 P. 617.848.2502 F. 617.848.4390 cbanse@newstarfin.com Brian J. Fischesser 500 Boylston St., Suite 1250 Boston, MA 02116 P. 617.848.2512 F. 617.848.4398 bfischesser@newstarfin.com

Source:NewStar Financial, Inc.