Q Overview. November 5, 2014

Transcription

1 Q Overview November 5, 2014

2 Forward Looking Statements This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding future performance, including expectations regarding increases to book value per share, expected growth and anticipated benefits from a strategic relationship with GSO and Franklin Square. 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 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 and other risk factors can be found in NewStar's filings with the Securities and Exchange Commission (the "SEC"), including Item 1A ("Risk Factors") of our 2013 Annual Report on Form 10-K, as may be updated or supplemented by any Risk Factors contained in our subsequent 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. 1

3 Management Participants Timothy J. Conway Chairman and Chief Executive Officer John K. Bray Chief Financial Officer 2

4 Timothy J. Conway Chairman and Chief Executive Officer 3

5 Strategic relationship with Blackstone / GSO and Franklin Square On November 4, 2014, NewStar Financial formed a strategic relationship with Blackstone s GSO Capital Partners and Franklin Square Capital Partners to expand the Company s middle market lending and asset management activities. The scope of the relationship includes: Cooperation among the firms across a range of business activities, including origination, asset management, and funding A long-term strategic investment from funds managed by Franklin Square and sub-advised by GSO (the Franklin Square Funds ) Under the terms of the investment, the Franklin Square Funds have committed to purchase $300 million of 10-year 8.25% subordinated notes and warrants exercisable into 12 million shares of common stock. Exercise price of $12.62 is equal to book value per share at 6/30/2014 and represents a premium to 30-day VWAP. The proceeds from the transaction will be used to support a significant increase in origination volume expected largely as a result of the strategic relationship. Expected strategic benefits include: Access to valuable new channels of origination for each business line through cross-referral and co-lending arrangements with GSO and Franklin Square Ability to provide larger capital commitments and a more complete set of financing options to clients using larger capital base and ability to co-lend with GSO and Franklin Square Additional funding through GSO and Franklin Square for anchor investments in future credit vehicles managed by NewStar to accelerate the growth of the Company s asset management platform. Assistance in expanding funding capabilities by leveraging GSO/Blackstone s banking and other investor relationships to help the Company tap new sources of capital and improve funding costs. Access to resources and scale benefits of broader GSO/Blackstone platform (company/industry/economic research, purchasing power etc.) Anticipated financial benefits of the relationship are also significant: Transaction is expected to be highly accretive to book value per share upon closing Opportunity to double origination volume and achieve scale quickly Expected benefits modeled are accretive to consensus EPS beginning in 2016 in our base case Target after-tax returns in low double-digit area Provides catalyst for other opportunities 4

6 Blackstone overview The Blackstone Group L.P. NYSE: BX Share price: $30.12 Market capitalization: $33.9 billion Total AUM: $284.4 billion Management committee Steve Schwarzman Tony James Joseph Baratta David Calhoun Bennett Goodman Jonathan Gray John Finley Tom Hill Joan Solotar Laurence Tosi Principal investment businesses Private equity (BCP) Real estate (BREP) Credit (GSO Capital Partners) Hedge fund solutions $69.9 billion AUM $80.2 billion AUM $70.2 billion AUM ~260 employees $64.2 billion AUM Blackstone highlights One of the world s leading investment firms and among the largest public alternative asset managers as measured by AUM Almost $300 billion of assets managed across a wide range of investment vehicles employing strategies focused on private equity, real estate, public debt and equity, non-investment grade credit, real assets and secondary funds, all on a global basis Source: FactSet, SNL Financial and Wall Street research reports. Note: Market data as of 10/31/14; financial data as of 09/30/14. 5

7 Franklin Square overview Franklin Square Capital Partners is the largest manager of business development companies ( BDCs ) with more than $12 billion in assets managed across its platform (1) Externally manages five BDCs, including FS Investment Corporation (NYSE: FSIC), FSIC II, FSIC III, FS Energy and Power Fund (FSEP), and FSEP II; as well as FS Global Credit Opportunities Fund, an unlisted, closed-end fund investing in global credit Pioneered the strategy of providing endowment style investment strategies to retail investors through non-traded BDCs Partnered with GSO / Blackstone Debt Funds Management LLC to sub-advise all Franklin Square BDCs Successfully completed the first public listing of a non-traded BDC (NYSE: FSIC) on April 4, 2014 FS Investment Corporation (NYSE: FSIC) FS Investment Corporation II FS Investment Corporation III AUM $4.6bn $4.2bn $252mm Launch date (listing date) 01/02/09 (04/04/14) 06/18/12 04/02/14 Market capitalization (10/31/14) $2.5bn NA NA P / TBV (10/31/14) 1.03x NA NA Management team CEO: Michael Forman CFO: William Goebel CEO: Michael Forman CFO: Michael Lawson CEO: Michael Forman CFO: Edward Gallivan, Jr. Adviser / Sub-adviser FB Income Advisor LLC / GSO/BX FSIC II Advisor, LLC / GSO/BX FSIC III Advisor, LLC / GSO/BX Yield on assets (2) 9.9% 9.4% 8.2% LTM ROE 11.0% 11.2% 5.0% (3) Equity capital $2.5bn $2.9bn $175mm Source: Company filings, SNL Financial. 1 Based on total balance sheet assets as of 12/31/2013. Includes the assets of FSIC, FSIC II and FSEP. 2 Gross portfolio yield prior to leverage (based on amortized cost). 3 Represents 1H 14 metrics. 6

8 Long-term strategic investment Investors Securities Issued Use of proceeds Investment units will be purchased by the following Funds managed by Franklin Square and sub-advised by GSO FS Investment Corporation (FSIC), FS Investment Corporation II and FS Investment Corporation III $300 million of subordinated notes and warrants exercisable for 12 million shares of NewStar common stock. Anticipate issuing $200 million of notes and the first tranche of warrants for 9.5 million shares at an initial closing by year end subject to customary closing conditions. Second tranche of warrants for 2.5 million shares is subject to shareholder approval and expected to be issued following a special meeting of stockholders at which the company will request such approval. Additional $100 million of subordinated notes will be issued within one year of the initial closing in tranches of not less than $25 million. To fund planned expansion of the company s lending and asset management platforms and related investments in credit assets. Coupon 8.25% payable in cash semi-annually, or 8.75% payable in kind (PIK-toggle) at the company s option accrued semi-annually. Original Issue Discount 2.00% Maturity 10 years from the initial closing, including with respect to additional notes issued thereafter Call Protection Warrants Callable during first three years subject to make-whole premium and then callable at 103% in year 4, 101% in year 5 and at par thereafter. Warrants exercisable for 12 million shares of NewStar common stock. Exercise Price Exercise Anti-dilution $12.62, which is equal to book value per share as of June 30, 2014 and a premium to the 30-day volume weighted average price ( VWAP ) of NewStar Stock of $ Warrants may be exercised in whole or in part by payment in cash of the aggregate exercise price or pursuant to customary net share settlement, at the holders option. Customary anti-dilution provisions providing for proportional adjustments in the event of dividends, stock splits etc. Transferability Non-transferrable prior to the first anniversary of the initial closing. Up to one-third may be transferred in year 2; two-thirds in year 3 and all warrants are freely transferable after the third anniversary of the initial closing. 7

9 Strategic relationship Lending Asset Management Funding / Operations Representative co-lending opportunities with GSO and Franklin Square NS provides first-out in GSO/FS unitranche deals NS provides ABL in tandem with GSO/FS unitranche deals NS provides senior debt and GSO / FS provides junior capital in one-stop transactions for NS sponsor clients NS and GSO/FS co-underwrite for large senior debt transactions NS participates in selective higher yielding 2 nd lien and unitranche opportunities GSO refers senior debt transactions below target yield thresholds BX REIT refers small CRE loans (<$25 million) NS provides asset-based lending and equipment leasing across broader Blackstone platform GSO and Franklin Square will consider additional funding support through anchor investments in future credit funds/vehicles $200 million of additional investment would support more than $2 billion in managed assets First investment opportunity currently under consideration Managed assets expected to grow at a faster rate than balance sheet $300 million investment is expected to support $1.5 billion of asset growth Assistance with funding strategies to support growth Tapping new sources of capital/investors Improving advance rates and cost of funds Leverage loan servicing and operations capabilities to provide administrative agency services for GSO Capital / Franklin Square transactions Access to resources of larger Blackstone platform Credit/industry/economic research and views Group purchasing 8

10 Q results - key themes Financial Results Generated net income of $5.0 million, or $0.10 per diluted share Net interest margin widened to 3.24% in Q3 from 3.04% in Q2 primarily due to non-recurring expenses related to debt retirement for the Arlington Fund in the prior quarter and the elimination of related interest expense through deconsolidation of the fund Provision expense decreased $9.3 million to $3.4 million in Q3 Growth Originated $409 million of new funded loan volume in the third quarter compared to $326 million in the prior quarter and $284 million in the same period last year Assts under management grew by $119 million to more than $2.5 billion Run-off remained elevated and tempered net loan growth Liquidity and Funding Credit Performance Market Conditions Cash increased from $219 million to $243 million, of which, $112 million was unrestricted Called the 2006 CLO and redeemed all outstanding notes at par Completed the $20 million repurchase program authorized in May 2014 and repurchased additional $1.8 million of the Company s shares under the $10 million stock repurchase program authorized in August 2014 Credit costs returned to levels more typical for the current stage of the business cycle as expected Specific credit provision expense decreased to $1.8 million and was related to previously impaired loans NPAs were consistent with last quarter at $90 million, reflecting $2.7 million of new non-accruing loans offset by $1.9 million of loans returned to performing and $1.3 million of repayments. Market conditions weakened in Q3 as overall volume fell 41% from Q2 Increasing volatility in the leveraged finance markets triggered by geopolitical tensions, Fed moves and equity market volatility led to more investor caution. Despite lower market volumes, yields on NewStar s new loan volume remained consistent with last quarter at 5.86% 9

11 Q performance summary FY 2011 FY 2012 FY 2013 Q Q Q YTD 2014 Actual Actual Actual Actual Actual Actual Funded Loan Volume $ 858 $ 1,031 $ 1,299 $ 275 $ 326 $ 409 $ 1,010 New Loan Yields 7.30% 6.60% 5.75% 5.85% 5.86% 5.81% 5.84% Run-off Rate 29.4% 38.4% 40.9% 47.8% -51.7% -52.6% -50.7% Net Loan Growth (Sequential) 7.9% -0.5% 26.2% -0.3% -8.6% 0.9% -8.0% Portfolio Yield 6.50% 6.54% 6.68% 6.18% 6.14% 6.13% 6.12% Cost of Funds 2.72% 2.52% 2.84% 2.97% 3.25% 3.16% 3.17% Net Interest Margin 4.28% 4.34% 3.90% 3.50% 3.04% 3.24% 3.24% Non-interest Income 0.68% 0.61% 0.68% 1.16% 0.29% 0.59% 0.66% Provision Expense 0.97% 0.67% 0.49% 1.00% 2.15% 0.61% 1.26% Expenses 2.33% 2.26% 2.17% 1.93% 1.87% 1.79% 1.86% Excluding Non-cash Equity Compensation 1.91% 1.99% 1.83% 1.78% 1.70% 1.76% Leverage Loans $ 1,884 $ 1,874 $ 2,365 $ 2,358 $ 2,155 $ 2,175 $ 2,175 1 As a % of average loans, gross (excluding equity method accounting and write-downs of equity / OREO) 2 As a % of average loans, gross 3 Expressed as a % of average assets 10

12 Operating performance trends (in $ millions) New Funded Loan Origination $1,299 $1,340 $1,031 $858 (in $ millions) $1,747 Loan and Investment Portfolio $1,884 $1,874 $2,365 $2,175 Arlington Fund: $337 mm $ LTM Q /30/2014 (in $ millions) Adjusted Net Income Book Value per Share $24.0 $24.6 $12.66 $12.73 $12.7 $15.1 $9.4 $10.96 $11.42 $ YTD Q /30/2014 Note: Adjusted net income excludes interest expense and amortization of deferred financing costs on corporate debt, call premium and termination fee associated with the termination of corporate debt, compensation expense related to restricted stock grants and equity awards made in connection with the IPO, earnings generated from the assets sold in the second quarter of 2007, and the loss and expenses incurred in connection asset sale in the second quarter of 2007 and the change in fair value of the residual interest. 11

13 Credit trends normalized in Q3 as expected Credit Costs 1 Allowance for Loan Losses $30.0 $27.0 $ % $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 ($5.0) ($10.0) Q1 10 $8.2 $5.5 $6.3 $4.6 $4.3 $2.9 $4.0 $5.9 $6.2 $5.8 $1.2 $2.4 $(0.8) $0.2 $0.7 $1.4 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 $12.7 Q2 14 $3.4 Q3 14 $120.0 $100.0 $80.0 $60.0 $40.0 $ % 5.00% 4.00% 3.00% 2.00% 1.00% ($15.0) General Provision Specific Provision $0.0 Q1 10 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q % Writedown of Retained Equity/OREO Credit Costs General Reserve Specific Reserve ALLL / Loans Non-performing Assets Charge-offs $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q NPA New Non-accruals NPA Rate Q2 Q % 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% (5.0) Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Net Charge-offs Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Charge-off Rate Q4 13 Q1 14 Q2 14 Q % 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% 1 Credit costs include provision for loan losses and write-downs of OREO and any equity positions retained in connection with workouts of impaired loans 12

14 John K. Bray Chief Financial Officer 13

15 Summary of Q financial results Three Months Ended September 30, June 30, December 31, September 30, ($ in thousands, except per share amounts) Net income (loss) $ 5,020 $ (1,855) $ 6,360 $ 6,437 Non-GAAP after tax adjustments to net income: Net results of Consolidated VIE - 22 (587) (523) Interest income from loan to Consolidated VIE (1) Interest income from Fund membership interest (2) VIE management fee (3) Fund membership interest dividend Net income (loss) excluding managed VIE $ 5,020 $ (1,285) $ 6,227 $ 6,207 Net income (loss) per share: Basic $ 0.10 $ (0.04) $ 0.13 $ 0.13 Diluted $ 0.10 $ (0.04) $ 0.12 $ 0.12 Net income (loss) excluding managed VIE per share: Basic $ 0.10 $ (0.03) $ 0.13 $ 0.13 Diluted $ 0.10 $ (0.03) $ 0.12 $ 0.12 Weighted average shares outstanding: Basic 47,899,685 48,881,893 48,673,204 48,613,236 Diluted 50,803,293 48,881,893 53,016,813 52,718,067 (1) Interest income earned by NewStar from the B Note with Arlington Fund which is eliminated in consolidation of the VIE. (2) Interest income earned by NewStar from its membership interest in Arlington Fund which is characterized as debt for consolidation and eliminated in consolidation of the VIE. (3) Management fee earned by NewStar which is eliminated in consolidation of the VIE. 14

16 Origination expected to exceed 2013 levels $ in millions New Loan Origination Revenue LTM Q3 14 Origination: $1.6 billion 1 $1,299 $184 $100.0 $100.3 $858 $1,031 $257 $977 $227 $91.1 $18.7 $85.2 $4.1 $11.6 $13.5 $72.7 $250 $11.7 $555 $200 $608 $775 $1,115 $750 $72.4 $81.2 $88.4 $86.8 $61.0 $ YTD 3Q14 Loan Portfolio NewStar Credit Opportunities Fund and Arlington Fund YTD 3Q14 Net Interest Income Non-Interest Income 1 Includes $218 million portfolio purchase in Q

17 Net interest margin analysis Portfolio yield was consistent at 6.13% compared to from 6.14% in the prior quarter Cost of funds decreased to 3.16% from to 3.25% in the prior quarter primarily due to the elimination of interest expense related to the Arlington Fund, which was deconsolidated at the end of the second quarter Margin widened due primarily to the elimination of fund level interest expense and discrete items in the second quarter that did not recur, including the acceleration of deferred financing costs in connection with the repayment of the Arlington Fund warehouse facility Q NIM 3.04% Base Rate Impact + Interest Income + Interest Expense + Deferred Fee Income + Other + Arlington Fund Deconsolidation = NIM -0.02% % % % % % = +0.20% Changes in LIBOR Slight decrease in yield of interest earning assets due to spread compression and mix of assets Increase in average CLO debt Lower warehouse borrowings offset by higher unused fee Increase amortization of capitalized fees Increase in corporate debt Acceleration of deferred loan fees due to loan prepayments Partly offset by recognition of related capitalized origination expense Decrease in interest income Lower W/H advances Decrease in amortization of financing fees Elimination of subordinated fund membership interest expense Q NIM 3.24% 16

18 Credit performance Provision for loan losses decreased to $3.4 million in Q3 from $12.7 million in Q primarily due to Q2 charges totaling $9.2 million recognized on three legacy impaired loans NPAs decreased slightly to $90.0 million, or 4.3% of loans, from $90.4 million, or 4.3% of loans, in the prior quarter. One legacy impaired loan totaling $2.7 million was placed on non-accrual status in Q3 and offset by one $1.9 million loan returned to performing and repayments of $1.2 million The allowance for credit losses increased slightly to $41.9 million, or 1.99% of loans, as of September 30, 2014 due primarily to a $2.8 million increase of general provision expense Allowance for credit losses as a percentage of non-accruing loan balances was approximately 54% as of September 30, 2014 Credit Metrics $ in thousands Three Months Ended September 30, June 30, December 31, September 30, Delinquent loan rate for loans 60 days or more past due (at period end) 1.07 % 1.06 % 0.22 % 0.31 % Delinquent loan rate for accruing loans 60 days or more past due (at period end) Non-accrual loan rate (at period end) Non-performing asset rate (at period end) Annualized net charge off rate (end of period loans) Annualized net charge off rate (average period loans) Allowance for credit losses ratio (at period end) Allowance for credit losses Balance as of beginning of period $ 39,099 $ 39,599 $ 40,445 $ 38,959 General provision for credit losses 1,586 (1,204) 464 (65) Specific provision for credit losses 1,783 13,856 1,845 2,446 Net (charge offs) recoveries (558) (13,152) (900) (895) Balance as of end of period $ 41,910 $ 39,099 $ 41,854 $ 40,445 17

19 Loan and investment portfolio, by industry Largest single obligor concentration was only 1.6% of the owned loan portfolio Top ten obligors represented approximately 10.3% of the owned loan portfolio CRE portfolio decreased to 5.1% of the owned loan portfolio $ in millions, outstanding as of 9/30/2014 CRE-Office, $69, 3% CRE-Retail, $22, 1% Mfg - Cons. Durable, $115, 5% CRE-Multi-Family, $18, 1% Financial Services, $116, 5% Building Materials, $47, 2% Commercial Real Estate 5% Mfg - Cons. Non Durable, $259, 12% Healthcare, $170, 8% Other 15% Consumer / Retail 27% Retail, $23, 1% Restaurants, $114, 5% Consumer Svcs, $79, 4% Industrial/Other, $357, 16% Industrial 23% Media 6% Printing/Publishing, $52, 2% Auto/Transportation, $93, 4% Business Services 23% Cable/Telecom, $63, 3% Broadcasting, $5, <1% Entertainment/Leisure, $8, <1% Tech Svcs, $52, 2% Environmental Svcs, $57, 3% Marketing Svcs, $35, 2% Energy/Chemical Svcs, $54, 2% Other Business Svcs, $359, 17% 1 All figures represent loans and investments, gross 2 Sum of percentages may not total 100% due to rounding 18

20 89% of loan and investment portfolio 1 originated since 2008 $700 Loan Portfolio 1, by Vintage $ in millions, outstanding as of 9/30/2014 $600 $569 $607 $500 $400 $382 $300 $200 $140 $157 $100 $- $81 $81 $44 $1 $14 $ Pre-crisis loans totaled $237 million, or 11% of the total loan portfolio Pre-crisis CRE loans comprised 25% of total pre-crisis loans 89% of the Loan Portfolio was originated post-crisis 100% of the Business Credit and 90% of the Leveraged Finance loan portfolio were originated post-crisis 1 Excludes Equipment Finance leases and loans, which were all originated in

21 Capital and liquidity Strong capital base with common equity equal to 24.9% of total assets Liquidity was $147.0 million at 9/30/14 comprised of approximately $111.6 million of unrestricted cash and $35.4 million of undrawn collateralized availability under warehouse credit facilities Called CLO notes at par $400 $ in millions Warehouse Credit Facilities $632 million of Total Credit Commitments Total Debt Commitments: $2.1 billion Term Debt / Securitization $1.24 billion O/S as of 9/30/14 Corporate Debt $239 million $350 Advances / Notes O/S Unused W/H Capacity $300 $275 $250 $200 $150 $100 $125 $28 $100 $34 $75 $169 $345 $263 $339 $290 $239 $50 $97 $66 $59 $106 $57 $- ABL W/H (DZ Bank) ABL W/H (Wells Fargo Capital) $16 Lease-backed W/H (Wells Fargo) LevFin W/H (Wells Fargo) CRE Repo (Macquarie) CLO CLO CLO CLO Institutional Term Loan Notes: CLO balances include all classes of notes, net of retained notes and equity interests, as well as, repurchases. Reinvestment periods for CLO has expired and the trust is amortizing. 20

22 Balance sheet as of September 30, 2014 September 30, June 30, December 31, September 30, ($ in thousands) Assets: Cash and cash equivalents $ 111,611 $ 53,321 $ 43,401 $ 87,972 Restricted cash 131, , , ,299 Investments in debt securities, available-for-sale 21,023 16,545 22,198 22,032 Loans held-for-sale, net 46,863 44,314 14,831 15,793 Loans and leases, net 2,045,338 2,034,940 2,095,250 1,828,193 Deferred financing costs, net 21,207 22,442 21,386 21,949 Interest receivable 5,236 6,764 7,415 9,952 Property and equipment, net Deferred income taxes, net 25,427 24,624 30,238 30,658 Income tax receivable 5,216 9,398 2,007 8,102 Other assets 32,530 31,670 24,983 32,181 Subtotal 2,446,954 2,410,915 2,430,462 2,331,454 Assets of Consolidated Variable Interest Entity (VIE): Restricted cash 1,950 2,009 Loans, net 171, ,218 Deferred financing costs, net 997 1,011 Interest receivable 1, Other assets 946 4,290 Total assets of Consolidated VIE 176, ,426 Total assets $ 2,446,954 $ 2,410,915 $ 2,606,861 $ 2,468,880 Liabilities: Credit facilities $ 284,348 $ 149,025 $ 332,158 $ 162,280 Term debt 1,464,153 1,570,961 1,412,374 1,502,700 Repurchase agreements 57,371 57,515 67,954 27,476 Accrued interest payable 7,426 4,430 6,333 3,182 Accounts payable ,486 Other liabilities 24,947 19,503 19,623 42,585 Subtotal 1,838,860 1,801,814 1,839,030 1,739,709 Liabilities of Consolidated VIE: Credit facilities 120,344 93,048 Accrued interest payable - credit facilities Subordinated debt - Fund membership interest 30,000 25,061 Accrued interest payable - Fund membership interest Total liabilities of Consolidated VIE: 151, ,243 Total liabilities 1,838,860 1,801,814 1,990,651 1,858,952 NewStar Financial, Inc. stockholders' equity 608, , , ,270 Retained earnings of Consolidated VIE Total stockholders' equity 608, , , ,928 Total liabilities and stockholders equity $ 2,446,954 $ 2,410,915 $ 2,606,861 $ 2,468,880 21

23 Q income statement Three Months Ended September 30, June 30, December 31, September 30, ($ in thousands) Net interest income: Interest income $ 33,907 $ 33,536 $ 32,283 $ 30,370 Interest expense 14,304 13,868 12,173 11,703 Net interest income 19,603 19,668 20,110 18,667 Provision for credit losses 3,369 12,652 2,309 2,381 Net interest income after provision for credit losses 16,234 7,016 17,801 16,286 Non-interest income: Fee income ,079 1,050 Asset management income Loss on derivatives (10) (13) (12) (45) Gain (loss) on sale of loans (23) Other income 2,066 1,017 2,239 3,534 Total non-interest income 3,261 1,496 3,817 5,131 Operating expenses: Compensation and benefits 7,721 7,803 7,652 7,405 General and administrative expenses 3,260 3,852 4,541 4,120 Total operating expenses 10,981 11,655 12,193 11,525 Operating income (loss) before income taxes 8,514 (3,143) 9,425 9,892 Results of Consolidated VIE Interest income - 2,615 2,430 1,991 Interest expense - credit facilities - 1, Interest expense - Fund membership interest Other income Operating expenses Net results from Consolidated VIE - (37) Income (loss) before income taxes 8,514 (3,180) 10,384 10,766 Income tax expense (benefit) 3,494 (1,325) 4,024 4,329 Net income (loss) $ 5,020 $ (1,855) $ 6,360 $ 6,437 Non-GAAP after tax adjustments to net income: Net results of Consolidated VIE - 22 (587) (523) Interest income from loan to Consolidated VIE (1) Interest income from Fund membership interest (2) VIE management fee (3) Fund membership interest dividend Net income (loss) excluding managed VIE $ 5,020 $ (1,285) $ 6,227 $ 6,207 (1) Interest income earned by New Star from the $20.4 million B Note w ith Arlington Fund which is eliminated in consolidation of the VIE. (2) Interest income earned by New Star from its membership interest in Arlington Fund w hich is characterized as debt for consolidation and eliminated in consolidation of the VIE. (3) Management fee earned by New Star w hich is eliminated in consolidation of the VIE. 22

24 Strategic investment timing and financial reporting $200 million of subordinated notes and first tranche of warrants for 9.5 million shares expected to issued at or near year-end Second tranche of warrants for 2.5 million shares expected to be issued following special stockholders meeting in Q Additional $100 million of notes issued within first anniversary of initial closing Accounting considerations Balance Sheet Income Statement Sub Notes ($300mm in principal) Sub Notes recorded as a long-term liability Initial carrying value equal to proceeds received, less initial fair value of Warrants Initial carrying value to be determined upon issuance Liability accretes to par at constant yield Interest payments expensed through earnings Accretion to par over time is recorded through earnings as a non-cash charge 8.25% cash coupon Accretion expense Warrants (12 million shares) Recorded as equity derivative within shareholders equity equal to fair value at inception Fair value at inception to be determined upon issuance Carrying value will be held constant, regardless of future stock price movements Increase to BVPS equal to fair value of equity warrants divided by shares outstanding (pro forma share count does not change) Not subject to mark-to-market Settlement or expiry has no impact on income statement Treasury stock method used for diluted EPS purposes (dilution only occurs if/when share price is above warrant exercise price) 23

25 Timothy J. Conway Chairman and Chief Executive Officer 24

26 FY 2014 Outlook FY 2011 FY 2012 FY 2013 Q Q Q YTD 2014 Actual Actual Actual Actual Actual Actual Revised FY 2014 Guidance Funded Loan Volume $ 858 $ 1,031 $ 1,299 $ 275 $ 326 $ 409 $ 1,010 $ 1,300 $ 1,500 New Loan Yields 7.30% 6.60% 5.75% 5.85% 5.86% 5.81% 5.84% 5.75% 6.25% Run-off Rate 29.4% 38.4% 40.9% 47.8% -51.7% -52.6% -50.7% 35.0% 45.0% Net Loan Growth (Sequential) 7.9% -0.5% 26.2% -0.3% -8.6% 0.9% -8.0% 0.0% 5.0% Portfolio Yield 6.50% 6.54% 6.68% 6.18% 6.14% 6.13% 6.12% 6.00% 6.25% Cost of Funds 2.72% 2.52% 2.84% 2.97% 3.25% 3.16% 3.17% 3.00% 3.25% 1 Net Interest Margin 4.28% 4.34% 3.90% 3.50% 3.04% 3.24% 3.24% 3.25% 3.50% 2 Non-interest Income 0.68% 0.61% 0.68% 1.16% 0.29% 0.59% 0.66% 0.50% 0.75% 3 Provision Expense 0.97% 0.67% 0.49% 1.00% 2.15% 0.61% 1.26% 1.00% 1.25% Expenses 2.33% 2.26% 2.17% 1.93% 1.87% 1.79% 1.86% 1.75% 2.00% Excluding Non-cash Equity Compensation 1.91% 1.99% 1.83% 1.78% 1.70% 1.76% Leverage Loans $ 1,884 $ 1,874 $ 2,365 $ 2,358 $ 2,155 $ 2,175 $ 2,175 $ 2,350 $ 2,500 1 As a % of average loans, gross (excluding equity method accounting and write-downs of equity / OREO) 2 As a % of average loans, gross 3 Expressed as a % of average assets 25

27 Impact of strategic relationship on outlook ($ in millions) 2014 guidance Strategic relationship impact Lo Hi Funded loan volume $1,300 $1,500 Originations expected to more than double with larger capital commitments and ability to offer more complete financing options to clients New loan yields 5.75% 6.25% New loan characteristics expected to be largely consistent with current originations Run-off rate 35.0% 45.0% Unchanged Net loan growth 0.0% 5.0% Loan portfolio expected to grow at 25% CAGR Portfolio yield 6.00% 6.25% Overall portfolio yield profile expected to remain consistent Cost of funds 3.00% 3.25% Cost of funds to increase initially due to the subordinated debt, but moderate over time as additional senior debt increases as % of total Net interest margin 3.25% 3.50% NIM to decrease initially due to the subordinated debt, but widen over time as cost of funds declines Non-interest income 0.50% 0.75% Management fees and other non-interest income expected to increase with higher growth of credit funds 2 1 Provision expense 1.00% 1.25% Credit costs are expected to moderate and remain consistent with current expectations 3 Operating expenses 1.75% 2.00% Meaningful efficiency ratio improvement due to operating leverage as platform scales further Leverage 3.3x 3.5x Higher leverage achieved by using proceeds of investment to capitalize new financing subsidiaries Loans $2,350 $2,500 Loan portfolio expected to more than double within two years of investment Managed loan portfolio $2,750 $2,900 Assets managed for third parties expected to grow to several billion within two 4 years from closing Pre-tax ROE 3.43% Targeting double digit pre-tax ROEs within two years of investment 1 As a % of average loans, gross (excluding equity method accounting and write-downs of equity / OREO) 2 As a % of average loans, gross 3 Expressed as a % of average assets 4 Represents YTD pre-tax annualized ROE 26

28 Summary Announced strategic relationship with best-in-class partners Relationship expected to be strong catalyst for growth that will drive earnings and better returns for shareholders Company business model expected to evolve into hybrid lending and asset management platform similar to an internally managed permanent capital vehicle without regulatory leverage constraints Evaluating options to align organizational approach and legal form with evolving asset management strategy Operating results were inline with expectations Generated strong origination volume Credit costs normalized as expected Asset yields were consistent with prior quarter 27

29 APPENDIX 28

30 Non-GAAP Financial Measures Net income excluding the Arlington Fund ( Managed VIEs ) is a non-gaap performance measure that we use to assess our business without giving effect to the consolidation of the Arlington Fund. Although, we consolidate all of the assets and liabilities of the Arlington Fund in accordance with GAAP, our maximum exposure to loss is limited to our investments in membership interests in Arlington Fund as well as our loan receivable and any accrued management fees receivable by us from the Arlington Fund. Since these items that define our economic relationship with Arlington Fund are eliminated upon consolidation, management uses net income excluding managed VIEs to assess its core economic performance. In addition, we manage the assets of the Arlington Fund solely for the benefit of its investors and lenders. If we were to liquidate, the assets of the Arlington Fund would not be available to our general creditors, and as a result, we do not consider the assets of the Arlington Fund to be part our assets. Conversely, the investors in the debt of Arlington Fund have no recourse to our general assets. Therefore, the Arlington Fund s debt is not considered the Company's obligation. References to net interest margin excluding the Arlington Fund means net interest income excluding the net interest income from the Arlington Fund plus the interest income from the Company s B Note with the Arlington Fund divided by average interest earning assets less the average interest earning assets of the Arlington fund plus the average balance of the Company s B Note with the Arlington Fund. A calculation of net interest margin excluding the Arlington Fund is included on page 33 of this presentation. 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 page 33 of this presentation 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 page 33 of this presentation. 29

31 Non-GAAP Financial Measures Three Months Ended September 30, June 30, December 31, September 30, ($ in thousands) Performance Ratios: Net interest margin excluding the Arlington Fund, before provision 3.24 % 3.30 % 3.49 % 3.41 % Efficiency ratio Consolidated Statement of Operations Adjustments (1): Net interest income $ 19,603 $ 19,599 $ 21,116 $ 19,533 Plus: Interest income from loan to Consolidated VIE Consolidated VIE net interest loss Less: Consolidated VIE net interest income - - 1, Adjusted net interest income $ 19,603 $ 20,027 $ 20,435 $ 18,893 Operating expenses $ 10,981 $ 11,844 $ 12,257 $ 11,535 Less: non-cash equity compensation expense (2) Adjusted operating expenses $ 10,412 $ 11,281 $ 11,514 $ 10,804 Consolidated Average Balances Adjustments Interest earning assets $ 2,398,564 $ 2,583,346 $ 2,457,831 $ 2,310,809 Plus: Average balance of loan to Consolidated VIE - 19,433 15,889 11,122 Less: VIE average interest earning assets - 167, , ,423 Adjusted interest earning assets $ 2,398,564 $ 2,435,033 $ 2,319,755 $ 2,199,508 Risk-adjusted revenue Net interest income after provision for credit losses $ 16,234 $ 6,947 $ 18,807 $ 17,152 Non-interest income 3,261 1,717 3,834 5,149 Risk-adjusted revenue $ 19,495 $ 8,664 $ 22,641 $ 22,301 (1) Adjustments are pre-tax. (2) Non-cash compensation charge related to restricted stock grants and option grants. 30