§

Investment Activity – New funded credit investments exceeded $720 million in the seasonally slower third quarter, up 76% from the same quarter last year and down 29% from last quarter.

§

Asset Growth – Managed loans and credit investments increased by $447 million to $4.6 billion, or 11%, from the prior quarter and $2.0 billion, or 80%, from the same period last year.  

§

Funding – Asset growth was supported by a combination of long term capital from the issuance of subordinated notes under an existing commitment and the issuance of new asset-backed securities.  

§

Net Interest Margin – The margin widened to 2.57% for the third quarter from 1.99% in the second quarter, as expected, due primarily to the negative impact of interest expense recognized in connection with debt prepayment in the second quarter which did not recur in the third quarter.  

§

Revenue – Total revenue¹ increased by $3.5 million to $26.7 million, or 15% from the prior quarter as a $7.4 million increase in net interest income generated from higher loan balances was partly offset by a $4 million decrease in non-interest income due primarily to unrealized losses on a total return swap.

§

Credit – Credit costs remained within expected ranges, increasing by $1.3 million from the prior quarter to $4.5 million due primarily to higher general provision expense related to loan growth, as specific provisions decreased to $1.6 million from $2.5 million in the prior quarter.

§

Stockholders Equity – Pre-tax ROAE increased to 5.3% in the third quarter from 5.2% last quarter.  

§

Strategic Initiatives – Increased pro forma assets under management by approximately $2.3 billion to $6.9 billion through the acquisition of Boston-based FOC Partners, a credit-oriented investment manager on October 7, 2015.

¹ 

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

§

Total new funded credit investments exceeded $720 million in the third quarter of 2015 compared to $1 billion in the prior quarter and $409 million in the same quarter last year.    Investment activity was driven by demand for acquisition financing derived from new middle market LBO activity and co-lending activity through our strategic relationships, combined with our emphasis on providing larger credit commitments and increasing the number of lead managed transactions.  

§

Balance sheet runoff from scheduled amortization, prepayments and sales totaled approximately $234 million, down from $419 million in the prior quarter.

§

Average yields on new loans and other credit investments in the third quarter were 6.7%, up from 6.6% in the prior quarter due primarily to an improved pricing environment during the third quarter.  

§

Loans and other investments outstanding, excluding managed assets, increased approximately 13% from the prior quarter and 67% from the third quarter of 2014. Growth in the third quarter was driven primarily by lending activity generated through our Leveraged Finance group.  

§

The Leveraged Finance loan portfolio increased by $328 million during the third quarter to almost $3.1 billion, while asset-based loan balances in our Business Credit portfolio increased 15% to $275 million, and loans and leases in our Equipment Finance portfolio increased 25% to $175 million.    

§

New equipment loan and lease volume was $31 million in the third quarter, down slightly from $35 million last quarter and up from $10 million in the third quarter of 2014, while asset-based lending activity totaling $25 million increased from $19 million last quarter, but decreased from $32 million in the comparable quarter last year.  Equipment finance and asset-based lending activity represented 12% of new loan volume retained on the balance sheet in the third quarter.    

§

Assets held in managed funds remained consistent at almost $1 billion as of September 30, 2015.

§

The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. Exposure to energy sectors was 2.2%, up from approximately 1.0% at the end of the prior quarter, reflecting highly selective investment activity in the third quarter intended to capitalize on dislocation in the sector.  As of September 30, 2015, no outstanding borrowings by a single obligor represented more than 1.21% of total loans outstanding, and the ten largest obligors comprised approximately 10.2% of the loan portfolio.

·

Net interest income increased by $7.4 million, or 47%, to $23.2 million in the third quarter compared to $15.8 million in the prior quarter as a $7.7 million increase in interest income significantly exceeded a $0.3 million increase in interest expense.  Part of the increase in net interest income was related to a favorable comparison to the prior quarter, which reflected the recognition of debt extinguishment expenses totaling approximately $3.6 million.  The balance of the increase, or approximately $3.8 million, was due to higher interest income driven by growth in earning assets.  

·

The portfolio yield remained relatively stable at 6.32% in the third quarter of 2015 compared to 6.31% in the prior quarter and 6.13% in the third quarter of 2014.  The increase in yield over the prior year was due primarily to higher yields on new loans originated.  

·

Net interest margin widened to 2.57% for the third quarter of 2015 compared to 1.99% for the prior quarter as the cost of funds decreased by 49 bps in the quarter due to the accelerated amortization of deferred financing fees in connection with the prepayment of corporate debt in the second quarter which did not recur in the third quarter.  

·

Non-interest income was $3.5 million for the third quarter of 2015, down from $7.4 million for the second quarter and up $3.3 million from the third quarter of 2014. The change from the second quarter was due primarily to a decline in the value of a reference portfolio of syndicated loans underlying a total return swap, requiring the recognition of a

$3 million charge to earnings to write-down the fair value of the referenced portfolio.  At September 30, 2015, the reference portfolio underlying the swap had an unrealized loss of approximately $1.8 million.     

·

Other non-interest income in the third quarter of 2015 was centered in $3.4 million of capital markets fees, $1.0 million of asset management fees, $0.7 million of unused fees on revolving credit commitments, and a gain on the sale of loans of $0.4 million. It also included an impairment charge of approximately $0.5 million related to an equity position held by the Company.      

§

Total credit costs in the third quarter of 2015 remained within expected ranges, increasing $1.3 million to $4.5 million from $3.2 million in the prior quarter due primarily to an increase in general provision related to loan growth.  

§

Total specific provision expense decreased by approximately $0.9 million in the third quarter of 2015 to $1.6 million compared to $2.5 million in the prior quarter.  

§

The allowance for credit losses was $54.5 million, or 1.76% of consolidated loans and approximately 51% of NPLs, at September 30, 2015, compared to $49.9 million, or 1.81% of loans and approximately 49% of NPLs, at June 30, 2015. The change in the ratio was driven primarily by an increase in the loan portfolio.  

§

Non-performing assets increased slightly to $107.7 million, or 3.48% as a percentage of loans at September 30, 2015 compared to $105.0 million or 3.79% of loans at the end of the prior period due to the addition of one legacy loan totaling $7.0 million to non-accrual status during the third quarter of 2015.  

§

Operating expenses increased by approximately $2 million to $13.4 from $11.4 million due to higher accrued compensation expense.  

§

Expenses as a percentage of average assets were 1.45% in the third quarter compared to 1.39% of average assets for the prior quarter.

§

Adjusted operating expenses, excluding non-cash equity compensation were $12.5 million in the third quarter compared to $10.6 million in the second quarter.  

§

The Company had 110 full-time employees at September 30, 2015 compared to 107 full-time employees at June 30, 2015.

§

Deferred income taxes increased to $35.6 million as of September 30, 2015 compared to $29.8 million as of June 30, 2015 due primarily to changes in the timing differences between when depreciation on leased equipment in our Equipment Finance portfolio is recognized for book and tax purposes.

§

Approximately $25.8 million and $9.6 million of the net deferred tax asset as of September 30, 2015 were related to our allowance for credit losses and equity compensation, respectively, which was partially offset by $2.9 million of deferred tax liabilities related to the lease portfolio.

§

Total cash and equivalents as of September 30, 2015 were $198.3 million, of which $57.5 million was unrestricted. Unrestricted cash increased from approximately $25.3 million at June 30, 2015 due primarily to the timing of cash distributions from CLO trusts. Restricted cash decreased to approximately $140.9 million at September 30, 2015 from approximately $189.5 million as of June 30, 2015 as restricted cash in the 2015-1 CLO was employed in new investments, as well as timing differences in settlement dates of CLO trusts and other non-recourse, secured financing arrangements.

§

Advances under credit facilities decreased by approximately $10 million during the third quarter as the repayment of advances under warehouse lines from the proceeds of two new securitizations were mostly offset by additional advances to fund new lending activity.  

§

Increased the commitment amounts of two warehouse credit facilities agented by Citi and Wells Fargo by $75 and $50 million to $275 million and $475 million, respectively.  

§

Term debt securitizations increased from the prior quarter by approximately $347 million to $1.9 billion at September 30, 2015.  The increase was due primarily to the issuance of asset-backed notes totaling approximately $405 million through a new CLO Trust and a new securitization of equipment loans and leases, which was partly offset by continued amortization of the 2007-1 CLO.  

§

Completed a $398 million term debt securitization through the issuance of asset-backed notes through a new CLO trust 2015-2.  The notes were backed by a diversified portfolio of commercial loans originated by our Leveraged Finance group.  The Company retained all of the membership interests and a portion of the Class E notes, totaling $70.1 million.

§

Completed a $100 million equipment lease securitization through the issuance of $82.9 million of asset-backed notes backed by a diversified portfolio of equipment loans and leases totaling approximately $100.1 million originated through our Equipment Finance group.  The Company retained all of the membership interests and Class B notes totaling $40.6 million.  

§

$50 million of additional subordinated notes were issued in the quarter under an existing commitment from funds managed by GSO Capital and Franklin Square.  An additional $25 million was drawn after the end of the quarter, leaving a $25 million remaining to be drawn by December 2015.  

·

Total debt increased by approximately $428 million to $3.1 billion at September 30, 2015, which led to an increase in balance sheet leverage to 4.8x from 4.1x at June 30, 2015. The increase was due primarily to the company’s issuance of subordinated notes and asset-backed securities in connection with two securitization transactions.  

·

Book value per share increased $0.04 to $14.40 at the end of the third quarter of 2015, up from $14.36 at the end of the prior quarter due primarily to comprehensive income for the quarter, which reflected approximately $2.6 of unrealized losses on securities recorded in other comprehensive income. Book value per share increased 13.1% from the same quarter of last year.

·

The company purchased 0.07 million shares of its common stock in the third quarter for an aggregate purchase price of $0.8 million under the stock repurchase program authorized in August 2014.

·

Average diluted shares outstanding were 48.2 million shares for the quarter, down from 48.5 million for the prior quarter, and total outstanding shares at September 30, 2015 were 45.8 million, consistent with June 30, 2015.

·

Pre-tax returns on average equity increased to 5.3% in the third quarter, from 5.2% in the prior quarter.

Robert K. Brown

500 Boylston St., Suite 1250

Boston, MA 02116

P. 617.848.2558

F. 617.848.4390

rbrown@newstarfin.com

September 30,

June 30,

December 31,

September 30,

($ in thousands)

2015

2015

2014

2014

Assets:

Cash and cash equivalents

$

57,472

$

25,308

$

33,033

$

111,611

Restricted cash

140,854

189,529

95,411

131,805

Cash collateral on deposit with custodian

53,738

42,552

38,975

-

Investments in debt securities, available-for-sale

94,328

108,454

46,881

21,023

Loans held-for-sale, net

427,418

338,304

200,569

46,863

Loans and leases, net

2,991,370

2,688,971

2,305,896

2,045,338

Deferred financing costs, net

41,606

33,485

26,514

21,207

Interest receivable

9,668

10,590

7,477

5,236

Property and equipment, net

624

652

660

698

Deferred income taxes, net

35,627

29,762

28,078

25,427

Income tax receivable

-

218

3,388

5,216

Unsettled trade receivables

-

16,734

396

-

Other assets

16,574

21,998

23,731

32,530

Total assets

$

3,869,279

$

3,506,557

$

2,811,009

$

2,446,954

Liabilities:

Credit facilities

$

625,595

$

634,923

$

487,768

$

284,348

Term debt securitizations

1,890,765

1,543,955

1,193,187

1,225,653

Repurchase agreements

137,640

99,210

57,227

57,371

Senior notes

300,000

300,000

-

-

Corporate debt

-

-

238,500

238,500

Subordinated notes

189,852

138,215

156,831

-

Accrued interest payable

28,261

13,940

6,576

7,426

Unsettled trade payables

-

93,211

78

-

Income tax payable

3,352

-

-

-

Other liabilities

33,534

25,726

29,845

25,562

Total liabilities

3,208,999

2,849,180

2,170,012

1,838,860

Total stockholders' equity

660,280

657,377

640,997

608,094

Total liabilities and stockholders’ equity

$

3,869,279

$

3,506,557

$

2,811,009

$

2,446,954

Three Months Ended

September 30,

June 30,

December 31,

September 30,

($ in thousands, except per share amounts)

2015

2015

2014

2014

Net interest income:

Interest income

$

54,574

$

46,871

$

35,601

$

33,907

Interest expense

31,345

31,085

17,102

14,304

Net interest income

23,229

15,786

18,499

19,603

Provision for credit losses

4,534

3,208

5,280

3,369

Net interest income after provision for credit losses

18,695

12,578

13,219

16,234

Non-interest income (loss):

Fee income

4,573

4,777

495

740

Asset management income

1,019

1,015

511

488

Loss on derivatives

(5

)

(10

)

(12

)

(10

)

Gain (loss) on sale of loans

360

(31

)

(41

)

(23

)

Other (loss) income

(2,455

)

1,678

(1,212

)

2,066

Total non-interest income (loss)

3,492

7,429

(259

)

3,261

Operating expenses:

Compensation and benefits

9,561

7,710

7,100

7,721

General and administrative expenses

3,819

3,734

3,652

3,260

Total operating expenses

13,380

11,444

10,752

10,981

Operating income before income taxes

8,807

8,563

2,208

8,514

Results of Consolidated VIE

-

-

-

-

Income before income taxes

8,807

8,563

2,208

8,514

Income tax expense

3,665

3,563

982

3,494

Net income

$

5,142

$

5,000

$

1,226

$

5,020

Net income  per share:

Basic

$

0.11

$

0.11

$

0.03

$

0.10

Diluted

$

0.11

$

0.10

$

0.02

$

0.10

Weighted average shares outstanding:

Basic

45,744,881

45,912,304

47,571,956

47,899,685

Diluted

48,238,467

48,535,763

50,527,250

50,803,293

For the Nine Months

Ended September 30,

($ in thousands, except per share amounts)

2015

2014

Net interest income:

Interest income

$

141,194

$

100,570

Interest expense

84,764

40,673

Net interest income

56,430

59,897

Provision for credit losses

14,720

21,828

Net interest income after provision for credit losses

41,710

38,069

Non-interest income:

Fee income

10,508

1,972

Asset management income

2,954

543

Loss on derivatives

(24

)

(27

)

Gain (loss) on sale of loans

314

(189

)

Other income

1,295

9,176

Total non-interest income

15,047

11,475

Operating expenses:

Compensation and benefits

24,004

23,283

General and administrative expenses

11,052

11,481

Total operating expenses

35,056

34,764

Operating income before income taxes

21,701

14,780

Results of Consolidated VIE

Interest income

-

5,268

Interest expense - credit facilities

-

2,865

Interest expense - Fund membership interest

-

1,292

Other income

-

229

Operating expenses

-

249

Net results from Consolidated VIE

-

1,091

Income before income taxes

21,701

15,871

Income tax expense

9,020

6,503

Net income

$

12,681

$

9,368

Net income per share:

Basic

$

0.27

$

0.19

Diluted

$

0.26

$

0.18

Weighted average shares outstanding:

Basic

46,138,595

48,500,868

Diluted

48,705,481

51,897,255

Three Months Ended

September 30,

June 30,

December 31,

September 30,

($ in thousands)

2015

2015

2014

2014

Performance Ratios:

Return on average assets

0.56

%

0.61

%

0.19

%

0.82

%

Return on average equity

3.10

3.05

0.79

3.28

Pre-tax return on average equity (ROAE)

5.31

5.23

1.42

5.56

Net interest margin, before provision

2.57

1.99

2.90

3.24

Operating expenses as a percentage of average total assets

1.45

1.39

1.65

1.79

Efficiency ratio

50.07

49.30

58.94

48.03

Portfolio yield

6.32

6.31

5.97

6.13

Credit Quality Ratios:

Delinquent loan rate for loans 60 days or more

past due (at period end)

0.93

%

1.67

%

1.84

%

1.07

%

Delinquent loan rate for accruing loans 60 days

or more past due (at period end)

0.28

-

-

-

Non-accrual loan rate (at period end)

3.48

3.69

3.70

3.67

Non-performing asset rate (at period end)

3.48

3.79

3.84

4.25

Annualized net charge off rate (end of period loans)

-

0.58

0.59

0.11

Annualized net charge off rate (average period loans)

-

0.56

0.59

0.10

Allowance for credit losses ratio (at period end)

1.76

1.81

1.84

1.99

Capital and Leverage Ratios:

Equity to assets

17.06

%

18.75

%

22.80

%

24.85

%

Debt to equity

4.76

4.13

3.32

2.97

Book value per share

$

14.40

$

14.36

$

13.75

$

12.73

Average Balances:

Loans and other debt products, gross

$

3,422,587

$

2,975,756

$

2,365,225

$

2,193,343

Interest earning assets

3,579,431

3,179,911

2,531,808

2,398,564

Total assets

3,664,525

3,297,290

2,582,340

2,433,159

Interest bearing liabilities

2,882,669

2,595,877

1,919,677

1,794,368

Equity

658,375

657,133

616,440

607,686

Allowance for credit loss activity:

Balance as of beginning of period

$

49,947

$

50,739

$

41,910

$

39,099

General provision for credit losses

2,925

725

2,946

1,586

Specific provision for credit losses

1,609

2,483

2,334

1,783

Net (charge offs) recoveries

-

(4,000

)

(3,497

)

(558

)

Balance as of end of period

$

54,481

$

49,947

$

43,693

$

41,910

Three Months Ended

September 30,

June 30,

December 31,

September 30,

($ in thousands)

2015

2015

2014

2014

Supplemental Data (at period end):

Investments in debt securities, gross

$

108,318

$

117,318

$

53,098

$

24,298

Loans held-for-sale, gross

431,811

342,035

202,369

47,107

Loans held-for-investment, gross

3,090,290

2,765,706

2,370,255

2,103,858

Loans and investments in debt securities, gross

3,630,419

3,225,059

2,625,722

2,175,263

Unused lines of credit

484,721

439,161

317,583

303,643

Standby letters of credit

8,082

8,416

7,911

8,637

Total funding commitments

$

4,123,222

$

3,672,636

$

2,951,216

$

2,487,543

Loans held-for-sale, gross

$

431,811

$

342,035

$

202,369

$

47,107

Loans held-for-investment, gross

3,090,290

2,765,706

2,370,255

2,103,858

Total loans, gross

3,522,101

3,107,741

2,572,624

2,150,965

Deferred fees, net

(50,201

)

(31,758

)

(23,176

)

(17,479

)

Allowance for loan losses - general

(29,314

)

(26,519

)

(22,258

)

(19,460

)

Allowance for loan losses - specific

(23,798

)

(22,189

)

(20,725

)

(21,825

)

Total loans, net

$

3,418,788

$

3,027,275

$

2,506,465

$

2,092,201

Nine Months Ended September 30,

($ in thousands)

2015

2014

Performance Ratios:

Return on average assets

0.52

%

0.50

%

Return on average equity

2.58

2.03

Net interest margin, before provision

2.35

3.24

Operating expenses as a percentage of average total assets

1.43

1.86

Efficiency ratio

49.05

48.15

Portfolio yield

6.19

6.12

Credit Quality Ratios:

Annualized net charge off rate (end of period loans)

0.17

1.38

Annualized net charge off rate (average period loans)

0.18

1.27

Average Balances:

Loans and other debt products, gross

$

3,049,205

$

2,311,986

Interest earning assets

3,214,755

2,515,976

Total assets

3,277,018

2,518,916

Interest bearing liabilities

2,602,713

1,890,302

Equity

657,673

616,390

Allowance for credit loss activity:

Balance as of beginning of period

$

43,693

$

41,854

General provision for credit losses

7,647

2,092

Specific provision for credit losses

7,073

19,736

Net charge offs

(3,932

)

(21,772

)

Balance as of end of period

$

54,481

$

41,910

Three Months Ended

September 30,

June 30,

December 31,

September 30,

($ in thousands)

2015

2015

2014

2014

Performance Ratios:

Adjusted pre-tax return on average equity (ROAE)

7.39

%

Adjusted net interest margin, before provision

2.44

Adjusted operating expenses as a percentage of average total assets

1.36

1.28

1.53

1.70

Consolidated Statement of Operations  Adjustments (1):

Interest income

$

54,574

$

46,871

Interest expense

31,345

31,085

Plus: accelerated amortization of expenses (2)

-

3,557

Adjusted interest expense

31,345

27,528

Adjusted net interest income

23,229

19,343

Total non-interest income

3,492

7,429

Adjusted revenue

26,721

26,772

Provision for credit losses

4,534

3,208

Total operating expenses

13,380

11,444

Adjusted income before income taxes

8,807

12,120

Adjusted income tax expense

3,665

5,043

Adjusted net income

$

5,142

$

7,077

Adjusted net income per share:

Basic

$

0.11

$

0.15

Diluted

$

0.11

$

0.15

Operating expenses

$

13,380

$

11,444

$

10,752

$

10,981

Less: non-cash equity compensation expense (3)

839

881

789

569

Adjusted operating expenses

$

12,541

$

10,563

$

9,963

$

10,412

Average Balances:

Equity

$

658,375

$

657,133

Plus: accelerated amortization of expenses (after tax) (2)

519

Adjusted equity

$

658,375

$

657,652

Three Months Ended

September 30,

June 30,

December 31,

September 30,

2015

2015

2014

2014

Risk-adjusted revenue

Net interest income after provision for credit losses

$

18,695

$

12,578

$

13,219

$

16,234

Non-interest income

3,492

7,429

(259

)

3,261

Risk-adjusted revenue

$

22,187

$

20,007

$

12,960

$

19,495

(1)

Adjustments are pre-tax, unless otherwise noted.

(2)

Accelerated amortization of deferred financing fees related to early repayment of corporate credit facility.

(3)

Non-cash compensation charge related to restricted stock grants and option grants.

Nine Months Ended September 30,

($ in thousands)

2015

2014

Performance Ratios:

Operating expenses as a percentage of average total assets

1.33

1.76

Consolidated Statement of Operations  Adjustments(1):

Operating expenses

$

35,056

$

35,013

Less: non-cash equity compensation expense (2)

2,450

1,796

Adjusted operating expenses

$

32,606

$

33,217

Nine Months Ended September 30,