•

Acquisition – Completed previously announced acquisition of Fifth Street CLO Management LLC on July 20, 2017, adding approximately $726 million of AUM.

•

Investment Activity – New funded, middle-market credit investments totaled $460 million in the second quarter, up from $330 million last quarter and compared to $476 million in the same quarter last year.  

•

Managed Assets – Managed loans and credit investments at the end of the quarter decreased slightly from the prior quarter to $6.5 billion due to the amortization and redemption of older managed CLOs issued in 2006 and 2007, which was partly offset by growth in loans held-for-sale and investments in debt securities issued by managed funds to comply with risk retention requirements.

•

Net Interest Margin – The margin increased to 1.56% for the second quarter from 1.45% in the prior quarter due to a combination of rising index rates, higher deferred loan fee amortization and an increase in loans as a percentage of earning assets.

•

Revenue – Total revenue¹ in the second quarter was consistent with the prior quarter at $20.2 million as higher net interest income, asset management fees and a gain on the sale of equity interests offset a decrease in fee income from capital markets activities and higher negative mark-to-market adjustments on loans held at fair value.  

•

Credit – Credit costs decreased $3.5 million from the prior period to $2.7 million due primarily to lower specific provision expense, while net charge-offs increased by $2.0 million from the prior period to $7.5 million in the second quarter.  

•

Expenses – Operating expenses decreased by $1.3 million, or 11.5%, from the prior period to $10.3 million as the company achieved planned cost saving targets.    

•

Capital Management – Returned approximately $7.3 million to stockholders in the second quarter through share repurchases and dividends.  Book value per share increased to $15.40 as of June 30, 2017, up $0.19 from the end of the prior quarter.  

•

Quarterly Dividend – Board of Directors declared a quarterly dividend of $0.02 per share of common stock payable on September 15, 2017 to shareholders of record on August 29, 2017.

¹ 

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

•

Completed the previously announced acquisition of Fifth Street CLO Management LLC (“FSCM”) from Fifth Street Holdings L.P., an affiliate of Fifth Street Asset Management, Inc. (“Fifth Street”) (NASDAQ: FSAM), a publicly-traded credit-focused asset management firm.  

•

Formed in 2015 by Fifth Street to manage its middle market CLO business, FSCM manages two CLOs backed by middle-market loans and holds certain interests in its sponsored CLOs primarily to comply with regulatory risk retention requirements.

•

The purchase price was approximately $16 million in cash, net of $13 million of assumed indebtedness.

•

The acquisition adds approximately $726 million to NewStar’s assets under management, increasing total AUM to approximately $7.25 billion.  The transaction closed July 20, 2017.

•

On July 31, 2017, the Company’s Board of Directors declared a quarterly dividend of $0.02 per share of common stock to be paid on September 15, 2017, to shareholders of record at the close of business on August 29, 2017.

•

The declaration and payment of future dividends will be subject to the board’s approval.  

•

Total new funded, middle-market credit investments were $460 million in the second quarter of 2017 compared to $330 million in the prior quarter and $476 million in the same quarter last year.  The change from the prior quarter reflected an increase in demand for acquisition financing derived from middle market leverage buyout activity amid an increase in M&A activity.  The impact of higher loan demand was tempered somewhat by an increase in market liquidity.  

•

Total new liquid credit investments (rated, broadly syndicated loans) held by the Arch Street CLO and held for sale to other managed funds were $157 million in the second quarter compared to $189 million in the prior quarter.  

•

Balance sheet runoff from scheduled amortization, prepayments and loan sales totaled approximately $461 million in the second quarter, or 12.7% of loan and investment balances at the beginning of the period, up from $366 million in the prior quarter.  Runoff in the second quarter included $242 million of prepayments, $170 million of loan sales and $48 million of contractual amortization compared to prepayments of $296 million, loan sales of $34 million and amortization of $37 million in the prior quarter.  

•

Average yields on new middle-market loans and other directly originated credit investments in the second quarter were 6.8%, up from 6.6% in the prior quarter, but down from 7.0% in the comparable quarter last year.  

•

Loans and other investments outstanding, excluding assets managed for third parties, were consistent with the prior quarter at $3.6 billion.  Compared to the second quarter of 2016, loans and investments decreased by $153 million, or 4.1%, due to the sale of $165 million of equipment finance

assets and a $30.8 million decrease in commercial real estate loans, which was partly offset by growth in Leveraged Finance loans.

•

The Leveraged Finance loan portfolio totaled approximately $3.6 billion at the end of the second quarter, which was consistent with the prior quarter and up $43 million from the prior year.   Commercial real estate loans were less than $11 million at the end of the second quarter consistent with the prior quarter and compared to $42 at the same time last year.

•

Assets held in managed funds decreased by $79 million in the second quarter to approximately $3.3 billion and were up $327 million from the same time last year.  The decrease from the prior quarter was due to expected amortization and redemption of CLOs backed by broadly syndicated loans that were past their re-investment periods.  

•

The owned loan portfolio remained defensively positioned - balanced across industry sectors and highly diversified by issuer. As of June 30, 2017, no outstanding borrowings by a single obligor represented more than 1.2% of total loans outstanding, and the ten largest obligors comprised approximately 8.4% of the loan portfolio.

•

Net interest income increased by $1.0 million to $15.0 million in the second quarter compared to $14.0 million in the prior quarter.  Compared to the second quarter of last year, net interest income decreased by $5.9 million, or 28.2%.  The decrease was due primarily to a decrease in average loan balances and higher cost of funds driven partly by rising LIBOR index rates.  

•

The portfolio yield was 6.43% in the second quarter up from 6.29% in the prior quarter and 6.28% in the comparable period in the prior year.  

•

Funding costs were 5.08% in the second quarter, up from 4.99% in the first quarter and 4.65% in the comparable period in the prior year due to increasing LIBOR index rates, changes in the mix of debt and higher average cost of funds for new CLO issuance.  

•

As a result, the net interest margin widened to 1.56% for the second quarter of 2017 compared to 1.45% for the prior quarter and 2.10% in the second quarter of 2016.    

•

Non-interest income decreased by $1.0 million to $5.2 million for the second quarter of 2017 compared to $6.2 million in the prior quarter and $4.4 million in the same period last year. The change reflected a $1.0 million decrease in capital markets-related fee income and negative mark to market adjustments totaling $3.2 million compared to negative adjustments of $2.8 million in the prior quarter offset by differences in other miscellaneous income.

•

Other non-interest income items in the second quarter of 2017 were centered in asset management fees of $3.8 million and $1.8 million of other income.  

•

Provision expense was $2.7 million in the second quarter, down from $6.1 million in the prior quarter, and down from $3.6 million in the same quarter last year.        

•

Total net specific provision expense decreased by approximately $3.0 million in the second quarter to $3.3 million compared to $6.3 million in the prior quarter and $2.4 million in the same quarter last year.  Provisioning activity in the second quarter included a $2.0 million specific charge in connection with the expected sale of a borrower in connection with the resolution of a long-term work-out.  

•

Net charge-offs in the second quarter of 2017 were $7.5 million compared to $5.5 million in the prior quarter.

•

The allowance for credit losses was $47.3 million, or 1.75% of consolidated loans and approximately 49.7% of non-performing loans (NPLs), at June 30, 2017, compared to $52.1 million, or 1.85% of consolidated loans and approximately 50.7% of NPLs, at March 31, 2017.  

•

Non-performing loans decreased by $7.7 million to $95.1 million, or 3.06% of loans held for investment at June 30, 2017, compared to $102.8 million or 3.18% of loans held for investment at the end of the prior quarter due primarily to charge-off activity.  

•

Total operating expenses for the second quarter decreased by $1.3 million to $10.3 million compared to $11.6 million in the prior quarter, reflecting targeted cost savings from actions taken over the last twelve months to streamline operations.  

•

As a result, expenses as a percentage of average assets under management decreased to 0.64% in the second quarter compared to 0.68% in the prior quarter.

•

Adjusted operating expenses, which excludes non-cash equity compensation and severance costs, were $9.4 million in the second quarter down from $10.8 million during the first quarter.  

•

The Company had 66 full-time employees at June 30, 2017 compared to 69 full-time employees at March 31, 2017 and 90 employees at June 30, 2016.  The reduction in staffing levels during 2016 reflects the sale of the asset-based lending and equipment finance businesses, as well as other related strategic initiatives to streamline operations.  

•

Deferred income taxes decreased $3.7 million to $36.9 million as of June 30, 2017.  The decrease was driven primarily by charge-off activity in the allowance for credit losses and timing differences related to compensation expense recognition.  

•

Approximately $23.7 million and $6.7 million of the net deferred tax asset as of June 30, 2017 were related to our allowance for credit losses and incentive compensation, respectively.

•

Total cash and equivalents as of June 30, 2017, were $273.0 million, of which $49.7 million was unrestricted.

•

Unrestricted cash increased to $49.7 million at June 30, 2017, from $15.4 million at the end of the prior quarter due primarily to cash management activities.  Total available liquidity was $67.3 million at June 30, 2017, including unrestricted cash and $17.6 million of collateralized availability under credit facilities.  

•

Restricted cash decreased by $86.1 million to $223.3 million at June 30, 2017 due primarily to cash collections on assets held in CLOs and other special purpose vehicles (SPVs) ahead of settlement dates, when restricted cash is disbursed to various stakeholders, including the Company.

•

Advances under credit facilities increased by $22.0 million to $396.1 million during the second quarter due primarily to lending activity and discretionary cash management activities.

•

Term debt securitization balances decreased from the prior quarter by $44.5 million to $2.1 billion at June 30, 2017.

•

As a result, total debt increased slightly to $3.2 billion at June 30, 2017 and leverage stayed the same at 5.0x for the end of the second quarter.

•

Book value per share increased by $0.19 to $15.40 at the end of the second quarter compared to $15.21 at the end of the prior quarter due primarily to accretive share repurchases and retained earnings.  

•

Average diluted shares outstanding totaled 41.3 million for the quarter, down from 41.8 million for the prior quarter, and total outstanding shares at June 30, 2017 were 41.8 million compared to 42.3 million at March 31, 2017.

•

The Company repurchased 629,997 shares at an average cost of $10.29, or approximately $6.5 million, and paid dividends totaling $0.8 million in the second quarter.    

•

Pre-tax returns on average equity increased to 4.5% in the second quarter from 1.5% in the prior quarter.  On an after-tax basis, returns on average equity increased to 2.6% in the second quarter from 0.9% from the prior quarter.  

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2017

2017

2016

2016

Assets:

Cash and cash equivalents

$

49,721

$

15,374

$

154,480

$

34,634

Restricted cash

223,268

309,368

262,643

207,394

Cash collateral on deposit with custodians

7,564

7,564

7,564

7,564

Investments in debt securities, available-for-sale

151,426

127,543

119,307

91,400

Loans held-for-sale, net

346,626

255,961

144,060

440,099

Loans and leases, net

3,037,363

3,148,767

3,239,191

3,113,061

Interest receivable

13,536

13,724

14,622

15,059

Property and equipment, net

239

254

274

366

Deferred income taxes, net

36,863

40,582

40,807

30,443

Income tax receivable

3,764

4,334

—

8,346

Goodwill

17,884

17,884

17,884

17,884

Identified intangible asset, net

405

488

572

738

Other assets

42,736

43,858

39,188

24,873

Total assets

$

3,931,395

$

3,985,701

$

4,040,592

$

3,991,861

Liabilities:

Credit facilities, net

$

396,139

$

374,116

$

445,493

$

565,799

Term debt securitizations, net

2,097,459

2,141,949

2,195,064

2,009,184

Senior notes, net

374,830

374,374

373,919

373,006

Subordinated notes, net

245,082

243,236

241,390

237,696

Repurchase agreements, net

79,269

57,973

55,046

64,625

Accrued interest payable

20,230

32,652

21,319

19,664

Income tax payable

—

—

12,562

—

Other liabilities

75,144

118,394

48,377

63,164

Total liabilities

3,288,153

3,342,694

3,393,170

3,333,138

Total stockholders' equity

643,242

643,007

647,422

658,723

Total liabilities and stockholders’ equity

$

3,931,395

$

3,985,701

$

4,040,592

$

3,991,861

Three Months Ended

June 30,

March 31,

December 31,

June 30,

($ in thousands, except per share amounts)

2017

2017

2016

2016

Net interest income:

Interest income

$

56,913

$

55,082

$

64,217

$

59,392

Interest expense

41,905

41,094

43,529

38,486

Net interest income

15,008

13,988

20,688

20,906

Provision for credit losses

2,698

6,149

2,635

3,623

Net interest income after provision for credit losses

12,310

7,839

18,053

17,283

Non-interest income (loss):

Asset management income

3,826

3,647

3,062

3,543

Fee income

2,161

3,193

1,442

1,697

Loss on derivatives, net

—

—

(153

)

(11

)

Gain (loss) on sale of loans, net

511

696

(2,131

)

162

Other miscellaneous income

1,848

1,498

1,327

1,114

Mark to market adjustment on fair value loans

(3,181

)

(2,769

)

1,830

373

Net unrealized gain (loss) on loans held-for-sale

14

(114

)

7,751

(2,519

)

Gain on sale of Business Credit and Equipment Finance assets

—

—

6,655

—

Total non-interest income

5,179

6,151

19,783

4,359

Operating expenses:

Compensation and benefits

6,747

7,437

10,704

8,827

General and administrative expenses

3,552

4,200

8,758

4,013

Total operating expenses

10,299

11,637

19,462

12,840

Income from operations before income taxes

7,190

2,353

18,374

8,802

Income tax expense

3,038

971

8,044

3,561

Net income

$

4,152

$

1,382

$

10,330

$

5,241

Earnings per share:

Basic EPS

$

0.10

$

0.03

$

0.23

$

0.11

Diluted EPS

$

0.10

$

0.03

$

0.23

$

0.11

Weighted average shares outstanding:

Basic

41,216,013

41,789,915

43,732,133

46,010,918

Diluted

41,283,296

41,827,138

43,780,606

46,010,918

Dividends declared per common share

$

0.02

$

0.02

$

—

$

—

Year Ended June 30,

($ in thousands, except per share amounts)

2017

2016

Net interest income:

Interest income

$

111,995

$

121,344

Interest expense

82,999

77,919

Net interest income

28,996

43,425

Provision for credit losses

8,847

21,336

Net interest income after provision for credit losses

20,149

22,089

Non-interest income (loss):

Asset management income

7,473

6,984

Fee income

5,354

2,890

Loss on derivatives, net

-

(18

)

(Loss) gain on sale of loans, net

1,207

55

Other miscellaneous income

3,346

2,696

Mark to market adjustment on fair value loans

(5,950

)

268

Loss on total return swap

-

(6,062

)

Unrealized gain (loss) on loans held-for-sale, net

(100

)

(5,813

)

Gain on sale of divested business and assets

-

22,511

Total non-interest income

11,330

23,511

Operating expenses:

Compensation and benefits

14,184

19,465

General and administrative expenses

7,752

10,443

Total operating expenses

21,936

29,908

Income from operations before income taxes

9,543

15,692

Income tax expense

4,009

6,442

Net income

$

5,534

$

9,250

Earnings per share:

Basic EPS

$

0.13

$

0.20

Diluted EPS

$

0.13

$

0.20

Weighted average shares outstanding:

Basic

41,507,113

46,157,363

Diluted

41,567,028

46,157,363

Three Months Ended

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2017

2017

2016

2016

Performance Ratios:

Return on average assets

0.42

%

0.14

%

0.98

%

0.53

%

Return on average equity

2.60

0.87

6.26

3.19

Pre-tax return on average equity (ROAE)

4.50

1.47

11.14

5.36

Net interest margin, before provision

1.56

1.45

1.96

2.10

Operating expenses as a percentage of average AUM

0.64

0.68

1.15

0.78

Operating expenses as a percentage of average total assets

1.05

1.19

1.84

1.29

Efficiency ratio

51.02

57.78

48.09

50.82

Portfolio yield

6.43

6.29

6.53

6.28

Credit Quality Ratios:

Delinquent loan rate for loans 60 days or more

past due (at period end)

0.45

%

0.65

%

0.64

%

0.07

%

Delinquent loan rate for accruing loans 60 days

or more past due (at period end)

—

—

—

—

Non-accrual loan rate (at period end)

3.06

3.18

2.99

2.97

Non-performing asset rate (at period end)

3.04

3.65

3.45

2.98

Annualized net charge off (recovery) rate (end of period loans)

0.97

0.69

2.26

0.86

Annualized net charge off (recovery) rate (average period loans)

0.88

0.65

1.98

0.75

Allowance for credit losses ratio (at period end)

1.75

1.85

1.76

2.09

Capital and Leverage Ratios:

Equity to assets

16.36

%

16.13

%

16.02

%

16.50

%

Debt to equity

4.96

4.96

5.11

4.93

Book value per share

$

15.40

$

15.21

$

15.12

$

14.12

Average Balances:

Loans and other debt products, gross

$

3,541,958

$

3,541,036

$

3,904,115

$

3,789,878

Interest earning assets

3,869,500

3,916,700

4,192,123

3,997,586

Total assets

3,931,395

3,979,213

4,196,793

3,992,135

Interest bearing liabilities

3,306,672

3,338,294

3,588,650

3,328,485

Equity

643,242

647,598

656,282

660,997

Assets under management (AUM)

6,503,448

6,948,574

6,758,842

6,612,840

Allowance for credit loss activity:

Balance as of beginning of period

$

52,081

$

51,408

$

66,366

$

67,292

General provision for credit losses

(600

)

(115

)

1,430

1,207

Specific provision for credit losses

3,298

6,264

2,498

2,416

Net (charge offs) recoveries

(7,494

)

(5,476

)

(18,886

)

(6,872

)

Balance as of end of period

$

47,285

$

52,081

$

51,408

$

64,043

Three Months Ended

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2017

2017

2016

2016

Supplemental Data (at period end):

Investments in debt securities

$

159,248

$

133,803

$

126,050

$

97,837

Loans, held-for-sale

349,757

258,430

145,966

446,462

Loans held-for-investment

3,110,072

3,227,895

3,319,550

3,227,799

Loans and investments in debt securities

3,619,077

3,620,128

3,591,566

3,772,098

Deferred fees, net

(36,851

)

(36,278

)

(38,072

)

(64,003

)

Allowance for loan losses - general

(30,449

)

(31,020

)

(31,165

)

(30,655

)

Allowance for loan losses - specific

(16,363

)

(20,559

)

(19,771

)

(32,880

)

Total loans and investments in debt securities, net

$

3,535,414

$

3,532,271

$

3,502,558

$

3,644,560

Unused lines of credit

306,113

313,712

326,051

283,802

Standby letters of credit

6,825

8,053

8,239

6,339

Total unfunded commitments

$

312,938

$

321,765

$

334,290

$

290,141

Year Ended June 30,

($ in thousands)

2017

2016

Performance Ratios:

Return on average assets

0.28

%

0.46

%

Return on average equity

1.73

2.83

Net interest margin, before provision

1.43

2.16

Operating expenses as a percentage of average total assets

1.11

1.49

Operating expenses as a percentage of average AUM

0.66

0.89

Efficiency ratio

54.40

44.68

Portfolio yield

5.81

6.29

Credit Quality Ratios:

Annualized net charge off (recovery) rate (end of period loans)

0.84

0.88

Annualized net charge off (recovery) rate (average period loans)

0.70

0.76

Average Balances:

Loans and other debt products, gross

$

3,871,931

$

3,870,980

Interest earning assets

4,081,983

4,049,018

Total assets

3,970,657

4,039,606

Interest bearing liabilities

3,472,392

3,405,268

Equity

646,110

658,037

Assets under management (AUM)

6,744,338

6,766,031

Allowance for credit loss activity:

Balance as of beginning of period

$

51,408

$

58,726

General provision for credit losses

(715

)

2,278

Specific provision for credit losses

9,562

19,058

Net charge offs

(12,970

)

(14,200

)

Reversal due to sale of Business Credit

-

(1,819

)

Balance as of end of period

$

47,285

$

64,043

Three Months Ended

June 30,

March 31

December 31,

June 30,

($ in thousands)

2017

2017

2016

2016

Performance Ratios:

Consolidated Statement of Operations  Adjustments (1):

Operating expenses

$

10,299

$

11,637

$

19,462

$

12,840

Less: non-cash equity compensation expense (2)

870

857

921

913

Less: severance expenses

—

—

3,519

—

Adjusted operating expenses

$

9,429

$

10,780

$

15,022

$

11,927

Adjusted operating expenses as a percentage of average total assets

0.96

%

1.10

%

1.42

%

1.20

%

Three Months Ended

June 30,

March 31

December 31,

June 30,

2017

2017

2016

2016

Risk-adjusted revenue

Net interest income after provision for credit losses

$

12,310

$

7,839

$

18,053

$

17,283

Non-interest income

5,179

6,151

19,783

4,359

Risk-adjusted revenue

$

17,489

$

13,990

$

37,836

$

21,642

(1) Adjustments are pre-tax, unless otherwise noted.

(2) Non-cash compensation charge related to restricted stock grants.

Six Months Ended June 30,

($ in thousands)

2017

2016

Performance Ratios:

Consolidated Statement of Operations  Adjustments(1):

Operating expenses

$

21,936

$

29,908

Less: non-cash equity compensation expense (2)

1,727

1,863

Less: severance costs

—

—

Adjusted operating expenses

$

20,209

$

28,045

Adjusted operating expenses as a percentage of average total assets

1.03

%

1.41

%

Six Months Ended June 30,

2017

2016

Risk-adjusted revenue

Net interest income after provision for credit losses

$

20,149

$

22,089

Non-interest income

11,330

23,511

Risk-adjusted revenue

$

31,479

$

45,600

(1) Adjustments are pre-tax.

(2) Non-cash compensation charge related to restricted stock grants.

June 30,

March 31,

December 31,

June 30,

($ in thousands)

2017

2017

2016

2016

Portfolio Data: (Balance Sheet AUM)

Leveraged Finance

$

3,608,404

99.7

%

$

3,609,467

99.7

%

$

3,580,942

99.7

%

$

3,565,363

94.5

%

Real Estate

10,673

0.3

10,661

0.3