·

Investment Activity – New funded credit investments exceeded $1.0 billion in the second quarter, up 68% from last quarter and 213% from the same quarter last year.

·

Asset Growth – Managed loans and credit investments increased by $418 million to $4.2 billion, or 11%, from the prior quarter and $1.7 billion, or 70%, from the same period last year.  

·

Funding – Growth in managed assets was supported by a combination of long term capital from the issuance of senior unsecured notes totaling $300 million in April and a new $175 million credit facility, as well as managed funds. Corporate debt totaling $238 million was also retired in the second quarter, which resulted in the recognition of $3.6 million of debt extinguishment costs that are included in interest expense.  

·

Net Interest Margin – Due primarily to the negative impact of interest expense recognized in connection with debt prepayment, the margin narrowed to 1.99% for the second quarter from 2.51% in the prior quarter. Excluding expenses related to debt extinguishment, the adjusted margin was 2.44% in the second quarter.

·

Revenue – Total revenue¹ increased by $1.7 million to $23.2 million, or 7.8% from the prior quarter as a $1.6 million decrease in net interest income, driven by accelerated recognition of interest expense in connection with debt prepayment, was more than offset by a $3.3 million increase in non-interest income from capital markets and asset management activities. Adjusted revenue was up 24% from the prior quarter, excluding the costs related to debt extinguishment.

·

Operating Leverage – Operating expenses decreased to 1.39% of average assets in the second quarter compared to 1.44% in the prior quarter and 1.87% in the same period last year as the growth in average assets outpaced the increase in expenses from the prior quarter.

·

Credit – Credit costs improved as the provision for credit losses decreased by $3.8 million from the prior quarter due primarily to the mix of new loans and the impact of positive portfolio rating migration, which drove a decrease in general provision expense, as well as slightly lower specific provisions.

·

Stockholders Equity – Pre-tax ROAE increased to 5.2% in the second quarter, or 7.4% excluding the expenses related to debt extinguishment, from 2.7% last quarter.  Book value per share increased to $14.36 at the end of the second quarter, up 0.7% or $0.10 from the prior quarter due primarily to earnings retention and the impact of share repurchases.  

¹ 

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

·

Total new funded credit investments exceeded $1.0 billion in the second quarter of 2015, up from $609 million in the first quarter and $326 million in the second quarter of 2014. Higher investment activity was driven by continued 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 $419.4 million.

·

Average yields on new loans and other credit investments in the second quarter were 6.56%, up from 6.07% in the prior quarter due partly to a shift in asset mix and partly to an improved pricing environment during the second quarter.  

·

Loans and investments in debt securities outstanding increased approximately 15% from the prior quarter and 50% from the second quarter of 2014. Growth in the second quarter was driven primarily by strong loan volume in our Leveraged Finance group.  

·

The Leveraged Finance loan portfolio increased by $429.6 million during the second quarter to almost $2.8 billion, while asset-based loans in our Business Credit portfolio decreased 10% to $239 million, and loans and leases in our Equipment Finance portfolio increased 23% to almost $140 million.    

·

Assets held in managed funds was consistent at nearly $1 billion as of June 30, 2015.

·

New equipment loan and lease volume was $35 million in the second quarter, up significantly from $21 million last quarter and $20 million in the second quarter of 2014, while asset-based lending activity totaling $19 million increased from $9 million last quarter, but decreased from $35 million in the comparable quarter in the prior year.  Equipment finance and asset-based lending activity represented 8% of new loan volume retained on the balance sheet in the second quarter.   

·

The owned loan portfolio remained balanced across industry sectors and highly diversified by issuer. As of June 30, 2015, no outstanding borrowings by a single obligor represented more than 1.5% of total loans outstanding, and the ten largest obligors comprised approximately 10.6% of the loan portfolio.

·

Despite an 18% increase in interest income in the second quarter, net interest income decreased to $15.8 million in the second quarter of 2015 from $17.4 million in the prior quarter due to higher interest expense driven by the accelerated amortization of deferred financing fees in connection with the prepayment of corporate debt and increased leverage as well as higher cost of funds resulting from the continuing amortization of low-cost CLO notes issued in 2007.        

·

The portfolio yield increased to 6.31% in the second quarter of 2015 compared to 6.00% in the prior quarter and 6.14% in the second quarter of 2014 due to higher yields on new loans originated and higher fee income recognized in the quarter, which was partly driven by higher prepayment levels.

·

Net interest margin narrowed to 1.99% for the second quarter of 2015 compared to 2.51% for prior quarter as the cost of funds increased to 4.80% in the second quarter from 4.11% in the first quarter of 2015 reflecting the accelerated amortization of deferred financing fees in connection with the prepayment of corporate debt. Excluding the impact of expenses recognized in connection with the prepayment of corporate debt, the margin was 2.44%.  

·

Non-interest income was $7.4 million for the second quarter of 2015, up from $4.1 million for the first quarter and $1.5 million for the second quarter of 2014. The change from the first quarter was due primarily to $5.8 million of fee income from capital markets and asset management activities.  

·

Other non-interest income in the second quarter of 2015 was centered in $0.6 million of unused fees on revolving credit commitments, and an unrealized gain of $0.9 million on loans referenced by a total return swap (“TRS”) managed by the Company. It also included approximately $0.1 million of revenue related to the remaining OREO property currently being managed by the Company, which was offset by related OREO costs included in general and administrative expenses.    

·

Total credit costs in the second quarter of 2015 decreased by $3.8 million to $3.2 million from $7.0 million in the prior quarter primarily due to a decrease in the general provision for credit loss expense resulting from a combination of positive rating migration and the mix of new loan originations.     

·

Total specific provision expense in the second quarter of 2015 was approximately $2.5 million, down from $3.0 million in the prior quarter.  

·

The allowance for credit losses was $49.9 million, or 1.81% of consolidated loans and approximately 49% of NPLs, at June 30, 2015, compared to $50.7 million, or 1.97% of loans and approximately 51% of NPLs, at March 31, 2015. The change in the ratio was driven by an increase in the outstanding loan portfolio.  

·

Non-performing assets increased slightly to $105.0 million, or 3.79% as a percentage of loans at June 30, 2015 compared to $103.3 million or 4.01% of loans at the end of the prior period due to the addition of one legacy loan totaling $7.5 million to non-accrual status during the second quarter of 2015, partially offset by a $4.0 million charge off of a separate previously impaired loan.    

·

At June 30, 2015, loans with an aggregate outstanding balance of $101.9 million (net of charge-offs), or 3.69% of loans, were on non-accrual status compared to loans with an aggregate outstanding balance of $100.3 million (net of charge-offs), or 3.90% of consolidated loans at March 31, 2015.

·

Operating expenses increased approximately 12% to $11.4 million due to higher compensation expense, but decreased as a percentage of average assets to 1.39%, in the second quarter as compared to $10.2 million, or 1.44% of average assets for the prior quarter.

·

Adjusted operating expenses, excluding non-cash equity compensation were $10.6 million in the second quarter, or 1.28% of average assets on an annualized basis, compared to $9.5 million in the prior quarter, or 1.33% of average assets.

·

The Company had 107 full-time employees at June 30, 2015 compared to 101 full-time employees at March 31, 2015.

·

Deferred income taxes decreased slightly to $29.8 million as of June 30, 2015 compared to $30.4 million as of March 31, 2015.

·

Approximately $26.4 million and $9.3 million of the net deferred tax asset as of June 30, 2015 were related to our allowance for credit losses and equity compensation, respectively, which was partially offset by $7.2 million of deferred tax liabilities related to the lease portfolio.

·

Total cash and equivalents as of June 30, 2015 were $214.8 million, of which $25.3 million was unrestricted. Unrestricted cash decreased slightly from approximately $28.7 million at March 31, 2015 due primarily to the timing of cash distributions from CLO trusts. Restricted cash decreased to approximately $189.5 million at June 30, 2015 from approximately $214.9 million as of March 31, 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.

·

Entered into new $175 million warehouse credit facility in May 2015, which is used to fund leveraged finance loans.

·

Increased aggregate commitment amounts of warehouse credit facilities used to fund asset-based loans by $105 million to $340 million in June 2015 and extended the maturity date of one of the facilities totaling $175 million to June 2018.

·

Extended the maturity date to April 2019 of a credit facility to fund equipment finance leases and loans in April 2015.

·

Advances under credit facilities increased by approximately $265.0 million during the second quarter due primarily to new loan origination volume funded by warehouse lines.

·

Term debt decreased from the prior quarter by approximately $29 million to $1.5 billion at June 30, 2015 due primarily to repayment of CLO notes from principal collections on loans held in our 2007 CLO trust.

·

Completed $300 million offering of 7.25% senior notes due 2020 (the “2020 Notes”) in April 2015. Net proceeds of approximately $294 million were used to prepay existing corporate debt totaling $238.3 million.  Excess proceeds of approximately $55 million were available for general corporate purposes and expected to be used to support loan growth.  

·

Total debt increased by approximately $319.3 million to $2.7 billion at June 30, 2015, which led to an increase in balance sheet leverage to 4.1x from 3.7x at March 31, 2015. The increase was due primarily to the completion of the offering of the 2020 Notes.    

·

Book value per share increased $0.10 to $14.36 at the end of the second quarter of 2015, up from $14.26 at the end of the prior quarter due primarily to net income for the quarter. Book value per share increased 13.8% from the same quarter of last year.

·

The company purchased 0.4 million shares of its common stock in the second quarter for an aggregate purchase price of $3.9 million under the stock repurchase program authorized in August 2014. This plan was completed on July 21, 2015 as a result of additional repurchases with an aggregate purchase price of approximately $0.8 million.

·

Average diluted shares outstanding were 48.5 million shares for the quarter, down from 49.4 million for the prior quarter, and total outstanding shares at June 30, 2015 were 45.8 million, down from 46.0 million at March 31, 2015.

·

Pre-tax returns on average equity increased to 5.2% in the second quarter, or 7.4% excluding expenses recognized in connection with debt prepayment, from 2.7% in the prior quarter.

Robert K. Brown

Brian J. Fischesser

500 Boylston St., Suite 1250

500 Boylston St., Suite 1250

Boston, MA 02116

Boston, MA 02116

P. 617.848.2558

P. 617.848.2512

F. 617.848.4390

F. 617.848.4398

rbrown@newstarfin.com

bfischesser@newstarfin.com

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2015

2015

2014

2014

Assets:

Cash and cash equivalents

$

25,308

$

28,666

$

33,033

$

53,321

Restricted cash

189,529

214,853

95,411

166,149

Cash collateral on deposit with custodian

42,552

49,082

38,975

—

Investments in debt securities, available-for-sale

108,454

79,891

46,881

16,545

Loans held-for-sale, net

338,304

149,609

200,569

44,314

Loans and leases, net

2,688,971

2,496,564

2,305,896

2,034,940

Deferred financing costs, net

33,485

29,397

26,514

22,442

Interest receivable

10,590

8,394

7,477

6,764

Property and equipment, net

652

613

660

748

Deferred income taxes, net

29,762

30,376

28,078

24,624

Income tax receivable

218

103

3,388

9,398

Unsettled trade receivables

16,734

11,795

396

—

Other assets

21,998

20,917

23,731

31,670

Total assets

$

3,506,557

$

3,120,260

$

2,811,009

$

2,410,915

Liabilities:

Credit facilities

$

634,923

$

369,894

$

487,768

$

149,025

Term debt securitizations

1,543,955

1,572,484

1,193,187

1,332,461

Repurchase agreements

99,210

79,760

57,227

57,515

Senior notes

300,000

—

—

—

Corporate debt

—

238,300

238,500

238,500

Subordinated notes

138,215

136,578

156,831

—

Accrued interest payable

13,940

10,656

6,576

4,430

Unsettled trade payables

93,211

40,632

78

1,588

Other liabilities

25,726

15,668

29,845

18,295

Total liabilities

2,849,180

2,463,972

2,170,012

1,801,814

Total stockholders' equity

657,377

656,288

640,997

609,101

Total liabilities and stockholders’ equity

$

3,506,557

$

3,120,260

$

2,811,009

$

2,410,915

Three Months Ended

June 30,

March 31,

December 31,

June 30,

($ in thousands, except per share amounts)

2015

2015

2014

2014

Net interest income:

Interest income

$

46,871

$

39,749

$

35,601

$

33,536

Interest expense

31,085

22,334

17,102

13,868

Net interest income

15,786

17,415

18,499

19,668

Provision for credit losses

3,208

6,978

5,280

12,652

Net interest income after provision for credit losses

12,578

10,437

13,219

7,016

Non-interest income (loss):

Fee income

4,777

1,158

495

462

Asset management income

1,015

920

511

30

Loss on derivatives

(10

)

(9

)

(12

)

(13

)

Loss on sale of loans

(31

)

(15

)

(41

)

—

Other income (loss)

1,678

2,072

(1,212

)

1,017

Total non-interest income (loss)

7,429

4,126

(259

)

1,496

Operating expenses:

Compensation and benefits

7,710

6,733

7,100

7,803

General and administrative expenses

3,734

3,499

3,652

3,852

Total operating expenses

11,444

10,232

10,752

11,655

Operating income (loss) before income taxes

8,563

4,331

2,208

(3,143

)

Results of Consolidated VIE

Interest income

—

—

—

2,615

Interest expense - credit facilities

—

—

—

1,987

Interest expense - Fund membership interest

—

—

—

697

Other income

—

—

—

221

Operating expenses

—

—

—

189

Net results from Consolidated VIE

—

—

—

(37

)

Income (loss) before income taxes

8,563

4,331

2,208

(3,180

)

Income tax expense (benefit)

3,563

1,792

982

(1,325

)

Net income (loss)

$

5,000

$

2,539

$

1,226

$

(1,855

)

Net income (loss) per share:

Basic

$

0.11

$

0.05

$

0.03

$

(0.04

)

Diluted

$

0.10

$

0.05

$

0.02

$

(0.04

)

Weighted average shares outstanding:

Basic

45,912,304

46,769,864

47,571,956

48,881,893

Diluted

48,535,763

49,406,234

50,527,250

48,881,893

For the Six Months

Ended June 30,

($ in thousands, except per share amounts)

2015

2014

Net interest income:

Interest income

$

86,620

$

66,663

Interest expense

53,419

26,369

Net interest income

33,201

40,294

Provision for credit losses

10,186

18,459

Net interest income after provision for credit losses

23,015

21,835

Non-interest income:

Fee income

5,935

1,232

Asset management income

1,935

55

Loss on derivatives

(19

)

(17

)

Loss on sale of loans

(46

)

(166

)

Other income

3,750

7,110

Total non-interest income

11,555

8,214

Operating expenses:

Compensation and benefits

14,443

15,562

General and administrative expenses

7,233

8,221

Total operating expenses

21,676

23,783

Operating income before income taxes

12,894

6,266

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

12,894

7,357

Income tax expense

5,355

3,009

Net income

$

7,539

$

4,348

Net income per share:

Basic

$

0.16

$

0.09

Diluted

$

0.15

$

0.08

Weighted average shares outstanding:

Basic

46,338,715

48,806,441

Diluted

48,963,588

52,492,687

Three Months Ended

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2015

2015

2014

2014

Performance Ratios:

Return on average assets

0.61

%

0.36

%

0.19

%

-0.29

%

Return on average equity

3.05

1.57

0.79

(1.20

)

Pre-tax return on average equity (ROAE)

5.23

2.67

1.42

(2.05

)

Net interest margin, before provision

1.99

2.51

2.90

3.04

Operating expenses as a percentage of average total assets

1.39

1.44

1.65

1.87

Efficiency ratio

49.30

47.50

58.94

55.57

Portfolio yield

6.31

6.00

5.97

6.14

Credit Quality Ratios:

Delinquent loan rate for loans 60 days or more

past due (at period end)

1.67

%

1.68

%

1.84

%

1.06

%

Delinquent loan rate for accruing loans 60 days

or more past due (at period end)

—

—

—

—

Non-accrual loan rate (at period end)

3.69

3.90

3.70

3.70

Non-performing asset rate (at period end)

3.79

4.01

3.84

4.29

Annualized net charge off rate (end of period loans)

0.58

—

0.59

2.52

Annualized net charge off rate (average period loans)

0.56

—

0.59

2.25

Allowance for credit losses ratio (at period end)

1.81

1.97

1.84

1.87

Capital and Leverage Ratios:

Equity to assets

18.75

%

21.03

%

22.80

%

25.26

%

Debt to equity

4.13

3.65

3.32

2.92

Book value per share

$

14.36

$

14.26

$

13.75

$

12.62

Average Balances:

Loans and other debt products, gross

$

2,975,756

$

2,683,211

$

2,365,225

$

2,360,864

Interest earning assets

3,179,911

2,817,452

2,531,808

2,583,346

Total assets

3,297,290

2,887,434

2,582,340

2,542,411

Interest bearing liabilities

2,595,877

2,205,096

1,919,677

2,040,371

Equity

657,133

657,090

616,440

621,113

Allowance for credit loss activity:

Balance as of beginning of period

$

50,739

$

43,693

$

41,910

$

39,599

General provision for credit losses

725

3,997

2,946

(1,204

)

Specific provision for credit losses

2,483

2,981

2,334

13,856

Net (charge offs) recoveries

(4,000

)

68

(3,497

)

(13,152

)

Balance as of end of period

$

49,947

$

50,739

$

43,693

$

39,099

Three Months Ended

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2015

2015

2014

2014

Supplemental Data (at period end):

Investments in debt securities, gross

$

117,318

$

87,318

$

53,098

$

19,298

Loans held-for-sale, gross

342,035

150,987

202,369

44,456

Loans held-for-investment, gross

2,765,706

2,572,202

2,370,255

2,090,862

Loans and investments in debt securities, gross

3,225,059

2,810,507

2,625,722

2,154,616

Unused lines of credit

439,161

330,041

317,583

297,622

Standby letters of credit

8,416

7,974

7,911

7,694

Total funding commitments

$

3,672,636

$

3,148,522

$

2,951,216

$

2,459,932

Loans held-for-sale, gross

$

342,035

$

150,987

$

202,369

$

44,456

Loans held-for-investment, gross

2,765,706

2,572,202

2,370,255

2,090,862

Total loans, gross

3,107,741

2,723,189

2,572,624

2,135,318

Deferred fees, net

(31,758

)

(27,080

)

(23,176

)

(17,469

)

Allowance for loan losses - general

(26,519

)

(26,230

)

(22,258

)

(18,552

)

Allowance for loan losses - specific

(22,189

)

(23,706

)

(20,725

)

(20,043

)

Total loans, net

$

3,027,275

$

2,646,173

$

2,506,465

$

2,079,254

Six Months Ended June 30,

($ in thousands)

2015

2014

Performance Ratios:

Return on average assets

0.49

%

0.34

%

Return on average equity

2.31

1.41

Net interest margin, before provision

2.24

3.26

Operating expenses as a percentage of average total assets

1.42

1.90

Efficiency ratio

48.43

48.21

Portfolio yield

6.18

6.15

Credit Quality Ratios:

Annualized net charge off rate (end of period loans)

0.29

2.05

Annualized net charge off rate (average period loans)

0.29

1.83

Average Balances:

Loans and other debt products, gross

$

2,822,886

$

2,358,956

Interest earning assets

2,984,837

2,561,513

Total assets

3,088,377

2,552,492

Interest bearing liabilities

2,409,303

2,070,424

Equity

657,229

620,323

Allowance for credit loss activity:

Balance as of beginning of period

$

43,693

$

41,854

General provision for credit losses

4,722

506

Specific provision for credit losses

5,464

17,953

Net charge offs

(3,932

)

(21,214

)

Balance as of end of period

$

49,947

$

39,099

Three Months Ended

June 30,

March 31,

December 31,

June 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

1.28

1.33

1.53

1.78

Consolidated Statement of Operations  Adjustments (1):

Interest income

$

46,871

Interest expense

31,085

Plus: acclereated amortization of expenses (3)

3,557

Adjusted interest expense

27,528

Adjusted net interest income

19,343

Total non-interest income

7,429

Adjusted revenue

26,772

Provision for credit losses

3,208

Total operating expenses

11,444

Adjusted income before income taxes

12,120

Adjusted income tax expense

5,043

Adjusted net income

$

7,077

Adjusted net income per share:

Basic

$

0.15

Diluted

$

0.15

Operating expenses

$

11,444

$

10,232

$

10,752

$

11,844

Less: non-cash equity compensation expense (4)

881

730

789

563

Adjusted operating expenses

$

10,563

$

9,502

$

9,963

$

11,281

Average Balances:

Equity

$

657,133

Plus: acclereated amortization of expenses (after tax) (3)

519

Adjusted equity

$

657,652

Three Months Ended

June 30,

March 31,

December 31,

June 30,

2015

2015

2014

2014

Risk-adjusted revenue

Net interest income after provision for credit losses

$

12,578

$

10,437

$

13,219

$

6,947

Non-interest income

7,429