NewStar Financial (NEWS)

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of structured products and continue to manage the remaining portfolio within our Middle Market Corporate lending group. As of March 31, 2009, this portfolio had an outstanding balance of $61.4 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle-market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to our customers’ management, enhances our due diligence, and allows significant input into our customers’ capital structure and direct negotiation of transaction pricing and terms. We employ highly experienced origination, credit and finance professionals to identify and structure our transactions. We believe that the quality of our professionals, their ability to develop creative solutions and our efficient, comprehensive credit approval process position us to be a preferred lender for mid-sized borrowers.

We operate as a single segment, and we derive revenues from two specialized lending groups:

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Table of Contents

Subsequent to December 31, 2007, we discontinued the origination of structured products. We manage the remaining structured products portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

As of December 31, 2008, our portfolio of loans and other debt products, which we refer to as our loan portfolio, totaled approximately $2.8 billion of funding commitments, representing $2.4 billion of balances outstanding and $339.2 million of funds committed but undrawn. We finance our loan portfolio through a combination of debt and equity.

As of December 31, 2008, senior debt constituted 95.3% of our portfolio. We classify our portfolio as 83.7% Middle Market Corporate and 16.3% Commercial Real Estate.

We manage the NewStar Credit Opportunities Fund, Ltd. (the “NCOF”), a private debt fund, which has the opportunity to invest in loans and other debt products originated or acquired by us. The NCOF raised $150.0 million of equity from third-party institutional investors and had a $400.0 million committed credit facility. As of December 31, 2008, the NCOF’s and NCOF CLO II’s (defined below) loan portfolio had total funding commitments and balances outstanding of approximately $598.4 million and $561.2 million, respectively. Our managed loan portfolio, which includes our loan portfolio and the loan portfolio of the NCOF, totaled approximately $3.4 billion of commitments and $3.0 billion of balances outstanding as of December 31, 2008.

On December 17, 2007, the NewStar Credit Opportunities Funding II (the “NCOF CLO II”) securitization closed. This securitization is a $560.0 million cash flow collateralized loan obligation managed by us. The NCOF CLO II is comprised of $450.0 million AAA/Aaa – rated floating rate notes, of which $161.0 million benefit from a financial guaranty. The NCOF CLO II assets include a diversified portfolio of primarily senior secured corporate loans. Concurrent with the closing of NCOF CLO II, NCOF reduced its committed credit facility from $400.0 million to $150.0 million. On October 31, 2008, the credit facility expired and was not renewed.

We specialize in providing senior debt products to mid-sized borrowers. Our loans and other debt products typically range in size from $5 million to $20 million. We also selectively arrange larger transactions, which we may hold on our balance sheet or syndicate to the NCOF and other third-parties, thereby allowing us to provide more debt capital to our customers and generate fee income while limiting our exposure. As such, from time to time our balance sheet exposure to certain loans and other debt products may exceed $20 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle-market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to our customers’ management, enhances our due diligence, and allows significant input into our customers’ capital structure and direct negotiation of transaction pricing and terms. We employ highly experienced origination, credit and finance professionals to identify and structure our transactions. We believe that the quality of our professionals, their ability to develop creative solutions and our efficient, comprehensive credit approval process position us to be a preferred lender for mid-sized borrowers.

We operate as a single segment, and we derive revenues from two specialized lending groups:

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Table of Contents

Subsequent to December 31, 2007, we discontinued the origination of structured products. We manage the remaining structured products portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

As of December 31, 2008, our portfolio of loans and other debt products, which we refer to as our loan portfolio, totaled approximately $2.8 billion of funding commitments, representing $2.4 billion of balances outstanding and $339.2 million of funds committed but undrawn. We finance our loan portfolio through a combination of debt and equity.

As of December 31, 2008, senior debt constituted 95.3% of our portfolio. We classify our portfolio as 83.7% Middle Market Corporate and 16.3% Commercial Real Estate.

We manage the NewStar Credit Opportunities Fund, Ltd. (the “NCOF”), a private debt fund, which has the opportunity to invest in loans and other debt products originated or acquired by us. The NCOF raised $150.0 million of equity from third-party institutional investors and had a $400.0 million committed credit facility. As of December 31, 2008, the NCOF’s and NCOF CLO II’s (defined below) loan portfolio had total funding commitments and balances outstanding of approximately $598.4 million and $561.2 million, respectively. Our managed loan portfolio, which includes our loan portfolio and the loan portfolio of the NCOF, totaled approximately $3.4 billion of commitments and $3.0 billion of balances outstanding as of December 31, 2008.

On December 17, 2007, the NewStar Credit Opportunities Funding II (the “NCOF CLO II”) securitization closed. This securitization is a $560.0 million cash flow collateralized loan obligation managed by us. The NCOF CLO II is comprised of $450.0 million AAA/Aaa – rated floating rate notes, of which $161.0 million benefit from a financial guaranty. The NCOF CLO II assets include a diversified portfolio of primarily senior secured corporate loans. Concurrent with the closing of NCOF CLO II, NCOF reduced its committed credit facility from $400.0 million to $150.0 million. On October 31, 2008, the credit facility expired and was not renewed.

We specialize in providing senior debt products to mid-sized borrowers. Our loans and other debt products typically range in size from $5 million to $20 million. We also selectively arrange larger transactions, which we may hold on our balance sheet or syndicate to the NCOF and other third-parties, thereby allowing us to provide more debt capital to our customers and generate fee income while limiting our exposure. As such, from time to time our balance sheet exposure to certain loans and other debt products may exceed $20 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle-market businesses and commercial real
estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a
variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to our customers’ management, enhances our due diligence, and allows significant input into our customers’ capital
structure and direct negotiation of transaction pricing and terms. We employ highly experienced origination, credit and finance professionals to identify and structure our transactions. We believe that the quality of our professionals, their ability
to develop creative solutions and our efficient, comprehensive credit approval process position us to be a preferred lender for mid-sized borrowers.

FACE="Times New Roman" SIZE="2">We operate as a single segment, and we derive revenues from two specialized lending groups:

2

Table of Contents

Subsequent to December 31, 2007, we discontinued the origination of structured products. We manage
the remaining structured products portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle-market businesses and commercial real
estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a
variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to our customers’ management, enhances our due diligence, and allows significant input into our customers’ capital
structure and direct negotiation of transaction pricing and terms. We employ highly experienced origination, credit and finance professionals to identify and structure our transactions. We believe that the quality of our professionals, their ability
to develop creative solutions and our efficient, comprehensive credit approval process position us to be a preferred lender for mid-sized borrowers.

FACE="Times New Roman" SIZE="2">We operate as a single segment, and we derive revenues from two specialized lending groups:

2

Table of Contents

Subsequent to December 31, 2007, we discontinued the origination of structured products. We manage
the remaining structured products portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle-market businesses and commercial real
estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a
variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to our customers’ management, enhances our due diligence, and allows significant input into our customers’ capital
structure and direct negotiation of transaction pricing and terms. We employ highly experienced origination, credit and finance professionals to identify and structure our transactions. We believe that the quality of our professionals, their ability
to develop creative solutions and our efficient, comprehensive credit approval process position us to be a preferred lender for mid-sized borrowers.

FACE="Times New Roman" SIZE="2">We operate as a single segment, and we derive revenues from two specialized lending groups:

2

Table of Contents

Subsequent to December 31, 2007, we discontinued the origination of structured products. We manage
the remaining structured products portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle-market businesses and commercial real
estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a
variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to our customers’ management, enhances our due diligence, and allows significant input into our customers’ capital
structure and direct negotiation of transaction pricing and terms. We employ highly experienced origination, credit and finance professionals to identify and structure our transactions. We believe that the quality of our professionals, their ability
to develop creative solutions and our efficient, comprehensive credit approval process position us to be a preferred lender for mid-sized borrowers.

FACE="Times New Roman" SIZE="2">We operate as a single segment, and we derive revenues from two specialized lending groups:

2

Table of Contents

Subsequent to December 31, 2007, we discontinued the origination of structured products. We manage
the remaining structured products portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of structured products and continue to manage the remaining portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of structured products and continue to manage the remaining portfolio within our Middle Market Corporate lending group. As of December 31, 2008, this portfolio had an outstanding balance of $69.0 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers.
We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other
financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation
of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers.
We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other
financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation
of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers.
We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other
financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation
of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers.
We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other
financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation
of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of structured products and continue to manage the remaining portfolio within our Middle Market Corporate lending group. As of September 30, 2008, this portfolio had an outstanding balance of $76.4 million.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of structured products and continue to manage the remaining portfolio within our Middle Market Corporate lending group. As of June 30, 2008, this portfolio had an outstanding balance of $81.7 million comprised of six loans and three debt securities.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment and derive revenues from two specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of Structured Products and continue to manage the remaining portfolio within our Middle Market Corporate lending group. As of March 31, 2008, the remaining Structured Products portfolio had an outstanding balance of $125.1 million comprised of seven loans and five debt securities.

Overview

We are a commercial finance company that provides customized debt financing solutions to middle market businesses and commercial real estate borrowers. We principally focus on the direct origination of loans that meet our risk and return parameters. Our direct origination efforts target private equity sponsors, corporate executives, regional banks, real estate investors and a variety of other financial intermediaries to source transaction opportunities. Direct origination provides direct access to customers’ management, enhances due diligence, and allows significant input into customers’ capital structure and direct negotiation of transaction pricing and terms.

We operate as a single segment. At December 31, 2007, we derived revenues from three specialized lending groups:

Subsequent to December 31, 2007, we discontinued the origination of Structured Products and continue to manage the remaining portfolio. As part of our strategy of discontinuing this lending activity, earlier in this year, on June 29, 2007, we completed the sale of securities and loans totaling $187.9 million, including $113.9 million of RMBS holdings to a non-recourse, off-balance sheet financing vehicle and recognized a $4.4 million loss on the sale. We retained a residual interest in the assets sold, which had a fair value of $0.6 million at December 31, 2007. As of March 7, 2008, the remaining Structured Products portfolio had an outstanding balance of $123.2 million comprised of nine loans and six debt securities.

Overview

Overview

NewStar’s basic and diluted loss per share for the three and nine months ended September 30, 2007 was $0.30 and $0.27, respectively on a net loss of $10.8 million and $9.9 million, respectively compared to net income of $2.9 million and $4.9 million for the three and six months ended June 30, 2006. During the first nine months of 2007, our managed loan portfolio grew to $2.6 billion from $1.9 billion at December 31, 2006, and loans owned by the NewStar Credit Opportunities Fund, Ltd. (the “NCOF”) increased $208.1 million to $491.4 million at September 30, 2007.

On June 29, 2007, we completed the sale of investments in debt securities and loans with an amortized cost of approximately $187.9 million and recognized a $4.4 million loss on the sale. We retained a residual interest in the debt securities sold. During the three and nine months ended September 30, 2007, we recognized a loss of $28.1 million on the residual interest. The loss for the quarter was driven by the following factors; i) further deterioration in the performance of the underlying RMBS collateral assets impacting the anticipated cash flows, ii) the decision by the lender to end the reinvestment period, transitioning the facility to amortize with 100% of the cash flow used to pay down the debt, and iii) increasing of the discount rate applied to the valuation model. During the three months ended September 30, 2007, the Company increased the discount rate to 30% to reflect the general widening of spreads in the marketplace. We have made no changes to our general approach in projecting future liquidations/losses.

During the three and nine months ended September 30, 2007 the Company classified one loan with a carrying value of $7.5 million at June 30, 2007 as a troubled debt restructuring as defined by SFAS No. 15, Accounting for Debtors and Creditors for Troubled Debt Restructurings, and classified one $7.3 million loan as impaired and on non-accrual status. The Company has recorded a $4.4 million specific reserve for the $7.3 million loan it classified as impaired and on non-accrual status.

Loan portfolio yield

Loan portfolio yield, which is interest income on our loans divided by the average balances outstanding of our loans, was 9.72% and 9.76% for the three and nine months ended September 30, 2007, compared to 10.64% and 9.92% for the three and nine months ended September 30, 2006. The decrease in loan portfolio yield was primarily driven by a decrease in prevailing interest rates over the prior year and, to a lesser extent, changes in product mix and credit spreads in our loan portfolio.

Net interest margin

Net interest margin, which is net interest income divided by average interest earning assets, was 4.29% and 4.33% for the three and nine months ended September 30, 2007 compared to 4.15% and 4.02% for the three and nine months ended September 30, 2006. The primary factors impacting net interest margin are changes in our product mix, debt to equity ratio, prevailing interest rates, credit spreads and cost of borrowings. In December 2006, we repaid $37.5 million of corporate debt which bore interest at LIBOR + 7.0% per annum.

Efficiency ratio

Our efficiency ratio, which is total operating expenses divided by net interest income before provision for credit losses plus total non-interest income, was 526.87% and 113.65% for the three and nine months ended September 30, 2007, up from 53.94% and 60.19% for the three and nine months ended September 30, 2006. The increase in our efficiency ratio for the three months ended September 30, 2007 was primarily due to $2.0 million of impairment charges on investments in debt securities and the $28.1 million loss on the residual interest, partially offset by a significant increase in net interest income and fee income resulting from the significant growth in our loan portfolio. The increase in our efficiency ratio for the nine months ended September 30, 2007 was primarily due to $18.3 million impairment charges on investments in debt securities and the $28.1 million loss on the residual interest, partially offset by a significant increase in net interest income and fee income resulting from the significant growth in our loan portfolio.

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Allowance for credit losses

Allowance for credit losses ratio, which is allowance for credit losses divided by outstanding gross loans excluding loans held-for-sale, was 1.62% as of September 30, 2007 and 1.36% as of September 30, 2006. The allowance for credit losses at September 30, 2007 included a specific reserve of $4.4 million and a general reserve of $27.5 million.

Delinquent loan rate

Delinquent loan rate is defined as total delinquent loans divided by outstanding gross loans. As of September 30, 2007, the delinquent loan rate was 0.37%.

Non-accrual loan rate

Non-accrual loan rate, which is defined as total balances outstanding of loans in non-accrual status divided by our loans held for investment. Loans are put on non-accrual status if they are 90 days or more past due or if management believes that there is reasonable doubt as to collectibility in the normal course of business. The non-accrual loan rate was 0.37% as of September 30, 2007.

Net charge off rate

Net charge off rate as a percentage of loan portfolio, which is defined as charge offs net of recoveries divided by our loans held for investment. A charge off occurs when management believes that all or part of the principal of a particular loan is no longer recoverable and will not be repaid. As of September 30, 2007 we did not have any charge offs in our loan portfolio.

Return on average assets

Return on average assets, which is net income divided by average total assets, was not meaningful for the three and nine months ended September 30, 2007 as we had net losses. Return on average assets for the three and nine months ended September 30, 2006 was 0.86% and 0.60%.

Return on average equity

Return on average equity, which is net income divided by average equity, was not meaningful for the three and nine months ended September 30, 2007 as we had net losses. Return on average equity for the three and nine months ended September 30, 2006 was 7.09% and 4.65%.

Overview

NewStar’s basic and diluted income per share for the three and six months ended June 30, 2007 was $0.09 and $0.03, respectively, on net income of $3.4 million and $1.0 million, respectively compared to net income of $1.3 million and $2.0 million for the three and six months ended June 30, 2006. During the first six months of 2007, our managed loan portfolio grew to $2.5 billion from $1.9 billion at December 31, 2006. During the first six months of 2007, loans owned by the NewStar Credit Opportunities Fund, Ltd. (the “NCOF”) increased $165.8 million to $449.1 million at June 30, 2007. On June 29, 2007, the Company completed the sale of investments in debt securities and loans with an amortized cost of approximately $187.9 million and recognized a $4.4 million loss on the sale. The Company retained a 14.3% residual interest in the debt securities sold.

Loan portfolio yield

Loan portfolio yield, which is interest income on our loans divided by the average balances outstanding of our loans, was 9.65% and 9.71% for the three and six months ended June 30, 2007, compared to 9.80% and 9.63% for the three and six months ended June 30, 2006. The decrease in loan portfolio yield was primarily driven by an increase in prevailing interest rates over the prior year and, to a lesser extent, changes in product mix and credit spreads in our loan portfolio.

Net interest margin

Net interest margin, which is net interest income divided by average interest earning assets, was 4.22% and 4.35% for the three and six months ended June 30, 2007 compared to 3.81% and 3.84% for the three and six months ended June 30, 2006. The primary factors impacting net interest margin are changes in our debt to equity ratio, prevailing interest rates, credit spreads and cost of borrowings.

Efficiency ratio

Our efficiency ratio, which is total operating expenses divided by net interest income before provision for credit losses plus total non-interest income, was 65.73% and 81.68% for the three and six months ended June 30, 2007, up from 57.88% and 64.74% for the three and six months ended June 30, 2006. The increase in our efficiency ratio was primarily due to $16.3 million impairment charges on investments in debt securities, offset by a significant increase in net interest income and fee income, as a result of the significant growth in our loan portfolio.

Allowance for credit losses

Allowance for credit losses ratio, which is allowance for credit losses divided by outstanding gross loans excluding loans held-for-sale, was 1.40% as of June 30, 2007 and 1.27% as of June 30, 2006.

Delinquent loan rate

Delinquent loan rate is defined as total delinquent loans divided by outstanding gross loans. As of June 30, 2007, we did not have any delinquent loans.

Return on average assets

Return on average assets, which is net income divided by average total assets, was 0.62% and 0.09% for the three and six months ended June 30, 2007. Return on average assets for the three and six months ended June 30, 2006 was 0.49% and 0.41%.

Return on average equity

Return on average equity, which is net income divided by average equity, was 3.22% and 0.46% for the three and six months ended June 30, 2007. Return on average equity for the three and six months ended June 30, 2006 was 3.62% and 3.08%.

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Overview

NewStar’s basic and diluted loss per share for 2007 was $0.07 on a net loss of $2.4 million compared to net income of $0.6 million for 2006. During the first quarter of 2007, our managed loan portfolio grew to $2.3 billion from $2.0 billion at December 31, 2006. During the first quarter of 2007, loans owned by the NewStar Credit Opportunities Fund, Ltd. (the “NCOF”) increased $99.0 million to $382.4 million at March 31, 2007.

Loan portfolio yield

Loan portfolio yield, which is interest income on our loans divided by the average balances outstanding of our loans, was 9.80% for 2007, an increase from 9.31% for 2006. The increase in loan portfolio yield was primarily driven by an increase in prevailing interest rates over the prior year and, to a lesser extent, changes in product mix and credit spreads in our loan portfolio.

Net interest margin

Net interest margin, which is net interest income divided by average interest earning assets, was 4.50% for 2006 and 3.85% for 2006. The primary factors impacting net interest margin are changes in our debt to equity ratio, prevailing interest rates, credit spreads and cost of borrowings. In December 2006, we paid down our corporate debt, which will temporarily lower our debt-to-equity ratio and increase our net interest margin in the near term.

Efficiency ratio

Our efficiency ratio, which is total operating expenses divided by net interest income before provision for credit losses plus total non-interest income, was 115.40% for 2007, up from 79.16% for 2006. The increase in our efficiency ratio was primarily due to the $14.9 million impairment on investments in debt securities, offset by a significant increase in net interest income and fee income, as a result of the significant growth in our loan portfolio.

Allowance for credit losses

Allowance for credit losses ratio, which is allowance for credit losses divided by outstanding gross loans excluding loans held-for-sale, was 1.40% as of March 31, 2007 and 1.24% as of March 31, 2006.

Delinquent loan rate

Delinquent loan rate, which is total delinquent loans divided by outstanding gross loans, was 0.51% as of March 31, 2007. As of March 31, 2007, one of our loans with a principal amount of $8.4 million was delinquent.

Return on average assets

Return on average assets, which is net income divided by average total assets, was not meaningful for the three months ended March 31, 2007 as we had a net loss due to the impairment charge related to our residential mortgage-backed securities portfolio. Return on average assets for 2006 was 0.31%.

Return on average equity

Return on average equity, which is net income divided by average equity, was not meaningful for the three months ended March 31, 2007 as we had a net loss due to the impairment charge related to our residential mortgage-backed securities portfolio. Return on average equity for 2006 was 2.30%.

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