news-10q_20170630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to   

 

Commission File Number: 001-33211

 

NewStar Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

54-2157878

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

500 Boylston Street, Suite 1250,

Boston, MA

02116

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 848-2500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 2, 2017, the registrant had 41,607,455 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

 

PART I

 

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

4

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

4

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

5

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016

6

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 and 2016

7

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

8

 

Notes to Condensed Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

67

Item 4.

Controls and Procedures

67

 

PART II

 

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

68

Item 1A.

Risk Factors

68

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 6.

Exhibits

69

SIGNATURES

70

 

 

2

 


Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q of NewStar Financial, Inc., contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These are statements that relate to future periods and include statements about:

 

our anticipated financial condition, including estimated loan losses;

 

our expected results of operation;

 

our growth and market opportunities;

 

trends and conditions in the financial markets in which we operate;

 

our future funding needs and sources and availability of funding;

 

our involvement in capital-raising transactions;

 

our ability to meet draw requests under commitments to borrowers under certain conditions;

 

our competitors;

 

our provision for credit losses;

 

our future development of our products and markets;

 

our ability to compete; and

 

our stock price or dividend policy.

Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance, achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others:

 

risk of deterioration in credit quality that could result in levels of delinquent or non-accrual loans that would force us to realize credit losses exceeding our allowance for credit losses and deplete our cash position;

 

risks and uncertainties relating to the financial markets generally, including disruptions in the global financial markets;

 

uncertainties relating to the market price of our common stock prevailing from time to time;

 

risk and uncertainties related to our ability to obtain external financing;

 

risk and uncertainties relating to the regulation of the commercial lending industry by federal, state and local governments;

 

our ability to minimize losses, achieve profitability, and realize our deferred tax asset; and

 

the competitive nature of the commercial lending industry and our ability to effectively compete.

For a further description of these and other risks and uncertainties, we encourage you to carefully read section Item 1A. “Risk Factors” of our Annual Report on Form 10-K, for the year ended December 31, 2016.

The forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date of this report. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law. Statements relating to past dividends or our current dividend policy should not be construed as a guarantee that any future dividends will be paid.

 

3

 


PART I. FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements.

NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

 

  

 

June 30, 2017

 

 

December 31, 2016

 

 

 

($ in thousands, except per share

and par value amounts)

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,721

 

 

$

154,480

 

Restricted cash

 

 

223,268

 

 

 

262,643

 

Cash collateral on deposit with custodians

 

 

7,564

 

 

 

7,564

 

Investments in debt securities, available-for-sale

 

 

151,426

 

 

 

119,307

 

Loans held-for-sale, net

 

 

346,626

 

 

 

144,060

 

Loans, net (including loans at fair value of $403,129 and $403,745, respectively)

 

 

3,037,363

 

 

 

3,239,191

 

Interest receivable

 

 

13,536

 

 

 

14,622

 

Property and equipment, net

 

 

239

 

 

 

274

 

Deferred income taxes, net

 

 

36,863

 

 

 

40,807

 

Income tax receivable

 

 

3,764

 

 

 

 

Goodwill

 

 

17,884

 

 

 

17,884

 

Identified intangible asset, net

 

 

405

 

 

 

572

 

Other assets

 

 

42,736

 

 

 

39,188

 

Total assets

 

$

3,931,395

 

 

$

4,040,592

 

Liabilities:

 

 

 

 

 

 

 

 

Credit facilities, net

 

$

396,139

 

 

$

445,493

 

Term debt securitizations, net

 

 

2,097,459

 

 

 

2,195,064

 

Senior notes, net

 

 

374,830

 

 

 

373,919

 

Subordinated notes, net

 

 

245,082

 

 

 

241,390

 

Repurchase agreements, net

 

 

79,269

 

 

 

55,046

 

Accrued interest payable

 

 

20,230

 

 

 

21,319

 

Income tax payable

 

 

 

 

 

12,562

 

Other liabilities

 

 

75,144

 

 

 

48,377

 

Total liabilities

 

 

3,288,153

 

 

 

3,393,170

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share (5,000,000 shares authorized;

   no shares outstanding)

 

 

 

 

 

 

Common stock, par value $0.01 per share:

 

 

 

 

 

 

 

 

Shares authorized: 145,000,000 in 2017 and 2016;

 

 

 

 

 

 

 

 

Shares outstanding 41,758,435 in 2017 and 42,820,198 in 2016

 

 

418

 

 

 

428

 

Additional paid-in capital

 

 

746,300

 

 

 

743,783

 

Retained earnings

 

 

63,417

 

 

 

59,577

 

Common stock held in treasury, at cost; 15,879,742 in 2017 and 14,352,904  in 2016

 

 

(168,022

)

 

 

(152,720

)

Accumulated other comprehensive income (loss), net

 

 

1,129

 

 

 

(3,646

)

Total stockholders’ equity

 

 

643,242

 

 

 

647,422

 

Total liabilities and stockholders’ equity

 

$

3,931,395

 

 

$

4,040,592

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

($ in thousands, except per share amounts)

 

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

56,913

 

 

$

59,392

 

 

$

111,995

 

 

$

121,344

 

Interest expense

 

 

41,905

 

 

 

38,486

 

 

 

82,999

 

 

 

77,919

 

Net interest income

 

 

15,008

 

 

 

20,906

 

 

 

28,996

 

 

 

43,425

 

Provision for credit losses

 

 

2,698

 

 

 

3,623

 

 

 

8,847

 

 

 

21,336

 

Net interest income after provision for credit losses

 

 

12,310

 

 

 

17,283

 

 

 

20,149

 

 

 

22,089

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management income

 

 

3,826

 

 

 

3,543

 

 

 

7,473

 

 

 

6,984

 

Fee income

 

 

2,161

 

 

 

1,697

 

 

 

5,354

 

 

 

2,890

 

Realized loss on derivatives, net

 

 

 

 

 

(11

)

 

 

 

 

 

(18

)

Realized gain on sale of loans, net

 

 

511

 

 

 

162

 

 

 

1,207

 

 

 

55

 

Other miscellaneous income, net

 

 

1,848

 

 

 

741

 

 

 

3,346

 

 

 

2,696

 

Mark to market adjustment on fair value loans

 

 

(3,181

)

 

 

373

 

 

 

(5,950

)

 

 

268

 

Loss on total return swap

 

 

 

 

 

 

 

 

 

 

 

(6,062

)

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

 

 

14

 

 

 

(2,146

)

 

 

(100

)

 

 

(5,813

)

Gain on sale of Business Credit, net

 

 

 

 

 

 

 

 

 

 

 

22,511

 

Total non-interest income

 

 

5,179

 

 

 

4,359

 

 

 

11,330

 

 

 

23,511

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

6,747

 

 

 

8,827

 

 

 

14,184

 

 

 

19,465

 

General and administrative expenses

 

 

3,552

 

 

 

4,013

 

 

 

7,752

 

 

 

10,443

 

Total operating expenses

 

 

10,299

 

 

 

12,840

 

 

 

21,936

 

 

 

29,908

 

Income before income taxes

 

 

7,190

 

 

 

8,802

 

 

 

9,543

 

 

 

15,692

 

Income tax expense

 

 

3,038

 

 

 

3,561

 

 

 

4,009

 

 

 

6,442

 

Net income

 

$

4,152

 

 

$

5,241

 

 

$

5,534

 

 

$

9,250

 

Basic Earnings per share

 

$

0.10

 

 

$

0.11

 

 

$

0.13

 

 

$

0.20

 

Diluted Earnings per share

 

$

0.10

 

 

$

0.11

 

 

$

0.13

 

 

$

0.20

 

Dividends declared per common share

 

$

0.02

 

 

$

 

 

$

0.04

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

 


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

($ in thousands, except per share amounts)

 

Net income

 

$

4,152

 

 

$

5,241

 

 

$

5,534

 

 

$

9,250

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized securities gains (losses), net of tax expense

   (benefit) of $1,420, $644, $3,266 and $(1,255), respectively

 

 

2,078

 

 

 

932

 

 

 

4,775

 

 

 

(1,835

)

Net unrealized derivative gains (losses), net of tax expense

   (benefit) of $0, $1, $0 and $(7), respectively

 

 

 

 

 

1

 

 

 

 

 

 

(11

)

Other comprehensive income (loss)

 

 

2,078

 

 

 

933

 

 

 

4,775

 

 

 

(1,846

)

Comprehensive income

 

$

6,230

 

 

$

6,174

 

 

$

10,309

 

 

$

7,404

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

 


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Unaudited

 

  

 

NewStar Financial, Inc. Stockholders’ Equity

For the Six Months Ended June 30, 2017

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Loss, net

 

 

Common

Stockholders’

Equity

 

 

 

($ in thousands)

 

Balance at January 1, 2017

 

$

428

 

 

$

743,783

 

 

$

59,577

 

 

$

(152,720

)

 

$

(3,646

)

 

$

647,422

 

Net income

 

 

 

 

 

 

 

 

5,534

 

 

 

 

 

 

 

 

 

5,534

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,775

 

 

 

4,775

 

Common stock dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,694

)

 

 

 

 

 

 

 

 

(1,694

)

Issuance of restricted stock

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares reacquired from employee transactions

 

 

(1

)

 

 

1

 

 

 

 

 

 

(822

)

 

 

 

 

 

(822

)

Repurchase of common stock

 

 

(14

)

 

 

14

 

 

 

 

 

 

(14,480

)

 

 

 

 

 

(14,480

)

Exercise of common stock options, net

 

 

1

 

 

 

777

 

 

 

 

 

 

 

 

 

 

 

 

778

 

Amortization of restricted common stock awards

 

 

 

 

 

1,729

 

 

 

 

 

 

 

 

 

 

 

 

1,729

 

Balance at June 30, 2017

 

$

418

 

 

$

746,300

 

 

$

63,417

 

 

$

(168,022

)

 

$

1,129

 

 

$

643,242

 

 

 

 

NewStar Financial, Inc. Stockholders’ Equity

For the Six Months Ended June 30, 2016

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Income, net

 

 

Common

Stockholders’

Equity

 

 

 

($ in thousands)

 

Balance at January 1, 2016

 

$

465

 

 

$

742,970

 

 

$

31,353

 

 

$

(109,245

)

 

$

(6,065

)

 

$

659,478

 

Net income

 

 

 

 

 

 

 

 

9,250

 

 

 

 

 

 

 

 

 

9,250

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,846

)

 

 

(1,846

)

Issuance of restricted stock

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Shares reacquired from employee transactions

 

 

(1

)

 

 

1

 

 

 

 

 

 

(414

)

 

 

 

 

 

(414

)

Tax benefit (expense) from vesting of restricted stock

 

 

 

 

 

(474

)

 

 

 

 

 

 

 

 

 

 

 

(474

)

Repurchase of common stock

 

 

(12

)

 

 

12

 

 

 

 

 

 

(8,668

)

 

 

 

 

 

(8,668

)

Exercise of common stock options, net

 

 

8

 

 

 

(1,767

)

 

 

 

 

 

 

 

 

 

 

 

(1,759

)

Tax benefit from exercise of stock options

 

 

 

 

 

1,293

 

 

 

 

 

 

 

 

 

 

 

 

1,293

 

Amortization of restricted common stock awards

 

 

 

 

 

1,863

 

 

 

 

 

 

 

 

 

 

 

 

1,863

 

Balance at June 30, 2016

 

$

466

 

 

$

743,892

 

 

$

40,603

 

 

$

(118,327

)

 

$

(7,911

)

 

$

658,723

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

 


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Six Months Ended June 30,

 

 

 

 

2017

 

 

 

2016

 

 

 

($ in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

5,534

 

 

$

9,250

 

Adjustments to reconcile net income to net cash used for operations:

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

8,847

 

 

 

21,336

 

Depreciation, amortization and accretion, net

 

 

(7,384

)

 

 

(4,975

)

Amortization of debt issuance costs

 

 

8,637

 

 

 

8,910

 

Equity compensation expense

 

 

1,729

 

 

 

1,863

 

Gain on sale of Business Credit, net

 

 

 

 

 

(22,511

)

Gain on sale of loans, net

 

 

(1,207

)

 

 

(55

)

Loss on total return swap

 

 

 

 

 

6,062

 

Gain on sale of equipment, net

 

 

 

 

 

(553

)

Loss on sale of CLO bonds

 

 

(18

)

 

 

 

Net change in deferred income taxes

 

 

680

 

 

 

3,974

 

Loans held-for-sale originated

 

 

(569,409

)

 

 

(143,246

)

Proceeds from sale of loans held-for-sale

 

 

380,283

 

 

 

233,109

 

Unrealized loss on loans held-for-sale, net

 

 

100

 

 

 

5,813

 

Net change in interest receivable

 

 

1,086

 

 

 

(2,570

)

Net change in other assets

 

 

2,207

 

 

 

(4,586

)

Net change in accrued interest payable

 

 

(1,089

)

 

 

1,591

 

Net change in other liabilities

 

 

(50,317

)

 

 

(16,028

)

Net cash (used in) provided by operating activities

 

 

(220,321

)

 

 

97,384

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in restricted cash

 

 

39,375

 

 

 

(53,402

)

Net change in loans and leases

 

 

245,394

 

 

 

7,369

 

Purchase of equity investments

 

 

(2,499

)

 

 

(3,706

)

Purchase of debt securities, available-for-sale

 

 

(29,613

)

 

 

 

Proceeds from debt securities, available-for-sale

 

 

5,919

 

 

 

 

Purchase of property and equipment

 

 

(20

)

 

 

(8

)

Net cash provided by (used in) investing activities

 

 

258,556

 

 

 

(49,747

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Inputs from exercise of stock options, net

 

 

778

 

 

 

(1,767

)

Tax benefit from exercise of stock options

 

 

 

 

 

1,293

 

Tax expense from vesting of restricted stock

 

 

 

 

 

(474

)

Payment of dividends on common stock

 

 

(1,694

)

 

 

 

Advances on credit facilities

 

 

260,300

 

 

 

1,112,409

 

Repayment of borrowings on credit facilities

 

 

(310,900

)

 

 

(1,379,952

)

Issuance of term debt

 

 

303,000

 

 

 

255,750

 

Borrowings on term debt

 

 

 

 

 

27,600

 

Repayment of borrowings on term debt

 

 

(402,076

)

 

 

(95,089

)

Borrowing on subordinated notes

 

 

 

 

 

24,500

 

Borrowings on repurchase agreements

 

 

25,764

 

 

 

2,881

 

Repayment of borrowings on repurchase agreements

 

 

(1,541

)

 

 

(34,681

)

Release of cash collateral

 

 

 

 

 

53,517

 

Payment of deferred financing costs

 

 

(1,323

)

 

 

(5,841

)

Purchase of treasury stock

 

 

(15,302

)

 

 

(9,082

)

Net cash used in financing activities

 

 

(142,994

)

 

 

(48,936

)

Net decrease in cash during the period

 

 

(104,759

)

 

 

(1,299

)

Cash and cash equivalents at beginning of period

 

 

154,480

 

 

 

35,933

 

Cash and cash equivalents at end of period

 

$

49,721

 

 

$

34,634

 

8

 


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

Unaudited

 

 

 

Six Months Ended June 30,

 

 

 

 

2017

 

 

 

2016

 

 

 

($ in thousands)

 

Supplemental cash flows information:

 

 

 

 

 

 

 

 

Interest paid

 

$

84,088

 

 

$

76,328

 

Taxes paid, net of refund

 

 

19,663

 

 

 

4,652

 

Transfer of loans, net to loans-held-for-sale, at fair value

 

 

13,540

 

 

 

56,989

 

Unsettled trades payable

 

 

57,495

 

 

 

32,859

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9

 


NEWSTAR FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

Note 1. Organization

NewStar Financial, Inc. is an internally-managed, commercial finance company with $6.5 billion of assets managed across two complementary business lines- middle market direct lending and asset management. The Company’s direct lending activities are focused on meeting the complex financing needs of companies and private investors in the middle market by offering a range of flexible debt financing options. Through its asset management platforms, NewStar offers a range of investment products employing credit-oriented strategies focused on middle market loans and liquid, tradeable credit. The Company manages approximately $1.3 billion of assets in a series of private credit funds that co-invest in middle market loans originated through its established leveraged finance lending platform and its strategic relationship with GSO Capital, the credit division of The Blackstone Group. Through its wholly-owned subsidiary, NewStar Capital, the Company also has more than $2 billion of assets managed across a series of CLOs that invest primarily in broadly syndicated, non-investment grade loans, as well as other sponsored funds and managed accounts that invest across various asset classes, including non-investment grade loans and bonds.  

These lending activities require specialized skills and transaction experience, as well as a significant investment in personnel and operating infrastructure. To meet these demands, our loans are originated directly by teams of credit-trained bankers. These teams are supported by centralized credit management and operating platforms. This structure enables us to leverage common standards, systems, and industry and professional expertise across the two segments.

The Company targets its marketing and origination efforts at private equity firms, mid-sized companies, corporate executives, banks and a variety of other referral sources and financial intermediaries to develop new customer relationships and source lending opportunities. The Company's origination network is national in scope and it targets companies with business operations across a broad range of industry sectors. The Company employs highly experienced bankers and credit professionals to identify and structure new lending opportunities and manage customer relationships. The Company believes that the quality of its professionals, the breadth of their relationships and referral networks, and their ability to develop creative solutions for customers position it to be a valued partner and preferred lender for mid-sized companies and private equity funds with middle market investment strategies.

The Company's emphasis on direct origination is an important aspect of its marketing and credit strategy. The Company's national network is designed around specialized origination channels intended to generate a large set of potential lending opportunities. That allows the Company to be highly selective in its credit process and to allocate capital to market segments that we believe represent the most attractive opportunities. The Company's direct origination network also generates proprietary lending opportunities with yield characteristics that we believe would not otherwise be available through intermediaries. In addition, direct origination provides the Company with direct access to management teams and enhances its ability to conduct detailed due diligence and credit analysis of prospective borrowers. It also allows the Company to negotiate transaction terms directly with borrowers and, as a result, advise its customers on financial strategies and capital structures, which it believes benefits its credit performance.

The size of financing commitments depends on various factors, including the type of loan, the credit characteristics of the borrower, the economic characteristics of the loan, and the Company's role in the transaction. The Company also selectively arranges larger transactions that it may retain on its balance sheet or syndicate to other lenders, which may include funds that it manages for third party institutional investors. By syndicating loans to other lenders and the Company's managed funds, it is able to provide larger financing commitments to its customers and generate fee income, while limiting its risk exposure to single borrowers.

The Company’s operations were divided into two reportable segments that represent its core businesses, Commercial Lending and Asset Management.

The Commercial Lending segment represents our direct lending activities which are focused on providing a range of flexible senior secured debt options to mid-sized companies with annual cash flow (EBITDA) typically between $15 million and $50 million owned by private equity investment funds and managed by established professional alternative asset managers.

The Asset Management segment represents our investment advisory activities which are focused on providing opportunities for qualified investors to invest in a range of credit funds managed by the Company. The Asset Management segment manages a series of private credit funds that co-invest in middle market loans originated through its established direct lending platform. Additionally, through its wholly-owned subsidiary, NewStar Capital, the Company also manages assets across a series of CLOs that invest primarily in broadly syndicated loans, as well as other sponsored funds and managed accounts that invest across various liquid, non-investment grade asset classes, including broadly syndicated loans and bonds.

 

 

10

 


Note 2. Summary of Significant Accounting Policies

Basis of Presentation

These interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries (collectively, “NewStar”) and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All significant intercompany transactions have been eliminated in consolidation. These interim condensed financial statements include adjustments of a normal and recurring nature considered necessary by management to fairly present NewStar’s financial position, results of operations and cash flows. These interim condensed financial statements may not be indicative of financial results for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The estimates most susceptible to change in the near-term are the Company’s estimates of its (i) allowance for credit losses, (ii) recorded amounts of deferred income taxes, (iii) fair value measurements used to record fair value adjustments to certain financial instruments, (iv) valuation of investments, (v) determination of other than temporary impairments and temporary impairments and (vi) impairment of goodwill and identified intangible assets. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Prior Period Reclassification

Prior period amounts are reclassified wherever necessary to confirm with current period presentation.  

Segment Reporting

Due to the continued expansion of our asset management activities, through new fund formation and the acquisition of NewStar Capital, the Company reassessed its classification of reporting as a single segment under ASC 280, Segment Reporting.  Based on this evaluation, beginning in January 2016, the Company determined that reporting the results of its Commercial Lending and Asset Management as two segments would better reflect how the Company is now managed and how information is internally reviewed.  For complete segment information, see Note 15.

Recently Adopted Accounting Standards

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740). ASU 2015-17 eliminates the requirement to separate deferred income tax liabilities into current and non-current classification in a classified balance sheet. It further requires that all deferred income taxes be classified as non-current in a classified balance sheet. ASU 2015-17 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2016. The Company adopted ASU 2015-17 on January 1, 2017.  The adoption of ASU 2015-17 did not have an impact on its consolidated financial statements as the Company does not classify its deferred income tax liabilities into current and non-current on its Consolidated Balance Sheet.

In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting (Topic 323).  ASU 2016-07 eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. ASU 2016-07 is effective for interim and annual periods in fiscal years beginning after December 15, 2016. The Company adopted ASU 2016-07 on January 1, 2017. The adoption of ASU 2016-07 did not impact its consolidated financial statements, as the Company does not currently have any equity method investments.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718).  ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. ASU 2016-09 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2016. The Company adopted ASU 2016-09 on January 1, 2017 and elected to continue to estimate forfeitures. The Company’s adoption was prospective, therefore, prior periods have not been adjusted. The adoption of ASU 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise. For the first quarter of 2017, the adoption of ASU 2016-09 resulted in a decrease to the provision for income taxes, primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock. The presentation of excess tax benefits in the statement of cash flows shifted to an operating activity from the prior classification as a financing activity.

11

 


In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. ASU 2016-19 includes amendments to provide guidance clarification and references corrections and provide minor structural changes to headings or minor editing to text to improve usefulness and understandability. ASU 2016-19 is effective for annual periods and interim periods within that reporting period beginning after December 31, 2016.  The Company adopted ASU 2016-19 as of January 1, 2017. The adoption of ASU 2016-19 did not have a material impact on its consolidated financial statements.  

Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual and interim periods beginning after December 15, 2017, while earlier application is permitted only for annual and interim periods beginning after December 31, 2016. In March, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. The update clarifies that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and is an agent when it does not control the specified good or service before it is transferred to the customer. The effective date and transition of ASU 2016-08 is the same as the effective date and transition of ASU 2014-09. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, which provides additional clarification and improvements for the following areas: loan guarantee fees, contract costs-impairment testing, provision for losses on construction-type and production-type contracts, cost capitalization guidance, and disclosure requirements. The effective date and transition of ASU 2016-20 is the same as the effective date and transition of ASU 2014-09. The Company has established a team which continues to evaluate and document the possible impacts of the standard, including potential changes to the accounting for investment management services performed, and also consider any reporting, tax and operational implications. The Company has not yet finalized its transition method and does not expect the provisions of ASU 2014-09 to result in any material changes to the timing of when revenue is recognized. The Company plans to adopt this standard effective January 1, 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825-10).  ASU 2016-01 amends existing guidance related to the accounting for certain financial assets and liabilities. These amendments, among other things, require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-01 will have on results from operations and financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 amends existing guidance related to the accounting for leases. These amendments, among other things, require lessees to account for most leases on the balance sheet while recognizing expense on the income statement in a manner similar to existing guidance.  For lessors the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. ASU 2016-02 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company has performed a preliminary analysis of ASU 2016-02. The adoption of ASU 2016-02 is expected to impact the balance sheet of the Company, as both the value of the leased office space as well as the current value of future lease liabilities will be recorded, however the evaluation has not yet been completed. The Company plans to adopt this standard effective January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). ASU 2016-13 sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ASU 2016-13 requires enhanced disclosures, including qualitative and quantitative requirements, to help understand significant estimates and judgments used in estimating credit losses, as well as provide additional information about the amounts recorded in the financial statements. ASU 2016-13 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2019, with early adoption permitted after annual and interim periods within that reporting period beginning after December 31, 2018. ASU 2016-13 mandates a modified retrospective transition method for all entities.  The Company is currently in the scoping and evaluating phase of the adoption of ASU 2016-13.

12

 


In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 provides guidance on the classification of certain cash receipts and cash payments for presentation in the statement of cash flows. ASU 2016-15 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-15 will have on results from operations or financial position.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control. ASU 2016-17 changes the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. ASU 2016-17 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2016-17 on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown on the statement of cash flows and that the statement of cash flows explain changes in restricted cash during the period. ASU 2016-18 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2017, with early adoption permitted. However, adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its financial statements and expects the impact to be disclosure only.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2017. The Company is currently evaluating the impact that the adoption of ASU 2017-01 will have on our consolidated financial statements.  

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  ASU 2017-04 simplifies the measurement of goodwill impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04 an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2017-04 on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities.  ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU 2017-08 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2018, with early adoption permitted. ASU 2017-08 will be adopted using a modified retrospective approach, with the cumulative effect adjustment recognized to retained earnings as of the beginning of the period of adoption. Entities are also required to provide disclosures about a change in accounting principle in the period of adoption. The Company is currently evaluating the potential impact of ASU 2017-08 on our consolidated financial statements.

 

 

Note 3. Disposition Activities

Sale of NewStar Equipment Finance assets and related platform

On December 1, 2016, the Company sold the assets of NewStar Equipment Finance (“Equipment Finance”) and related platform to a third party and exited the business. The sale of Equipment Finance assets was the result of the Company’s decision to exit businesses with economic models increasingly challenged by competition from banks and other lenders with access to lower cost funding.  The sale resulted in a gain of $6.7 million, before transaction related costs of $4.3 million. The net gain was recorded in non-interest income on the consolidated statement of operations. In connection with the sale of the assets of Equipment Finance, the Company established a $1.4 million contingent liability to cover any potential credit indemnification costs resulting from actual credit losses incurred on the assets sold.  As of June 30, 2017, this amount was reduced to $1.0 million. This liability reflects management’s best estimate of losses, taking into consideration the individual credit quality and borrower activity since origination and the anticipated residual value of the assets sold. As of June 30, 2017, the Company had not been notified or required to pay for any credit losses on the assets sold. The initial indemnification is capped at $10.0 million of actual credit losses and is reduced to $8.0 million at December 31, 2017, then further reduced to $5.0 million at December 31, 2018, $3.0 million at December 31, 2019 and zero as of December 31, 2020.  

13

 


Sale of NewStar Business Credit LLC

On March 31, 2016, the Company sold its asset based lending business, NewStar Business Credit LLC (“Business Credit”) to a third party. The sale resulted in a gain of $22.5 million, before transaction related costs of $2.5 million. The net gain was recorded in non-interest income on the accompanying consolidated statement of operations.

 

 

Note 4. Loans Held-for-Sale, Loans, Leases and Allowance for Credit Losses

As of June 30, 2017 and December 31, 2016, loans held-for-sale consisted of the following:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

($ in thousands)

 

Leveraged Finance

 

$

350,016

 

 

$

146,126

 

Lower cost or market adjustment

 

 

(259

)

 

 

(160

)

Gross loans held-for-sale

 

 

349,757

 

 

 

145,966

 

Deferred loan fees, net

 

 

(3,131

)

 

 

(1,906

)

Loans held-for-sale, net

 

$

346,626

 

 

$

144,060

 

These loans are carried at the lower of aggregate cost, net of any deferred origination costs or fees, or fair value.  

At June 30, 2017, loans held-for-sale consisted of loans with an aggregate outstanding balance of $350.0 million that were intended to be sold to credit funds managed by the Company. The Company sold loans with an outstanding balance totaling $34.7 million to entities other than credit funds managed by the Company for an aggregate gain of $0.1 million during the six months ended June 30, 2017.  The Company sold loans with an outstanding balance of $129.4 million for a net loss of $0.09 million to entities other than credit funds managed by the Company during the six months ended June 30, 2016.

As of June 30, 2017, and December 31, 2016, loans consisted of the following:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

($ in thousands)

 

Leveraged Finance (1)

 

$

3,099,400

 

 

$

3,308,926

 

Real Estate

 

 

10,673

 

 

 

10,624

 

Gross loans

 

 

3,110,073

 

 

 

3,319,550

 

Deferred loan fees and discount, net

 

 

(25,898

)

 

 

(29,423

)

Allowance for loan losses

 

 

(46,812

)

 

 

(50,936

)

Total loans, net

 

$

3,037,363

 

 

$

3,239,191

 

 

 

(1)

Includes loans at fair value of $ 403.1 million and $403.7 million, respectively.  

The Company holds broadly syndicated loans in our fair value portfolio as part of our liquid credit strategy, which by nature tend to experience higher prepayment and refinancing rates compared to our middle market loans. As a result this portfolio may be more actively managed to optimize performance.

The Company provides commercial loans to customers throughout the United States. The Company’s borrowers may be susceptible to economic slowdowns or recessions and, as a result, may have a lower capacity to make scheduled payments of interest or principal on their borrowings during these periods. Although the Company has a diversified loan portfolio, certain events may occur, including, but not limited to, adverse economic conditions and adverse events affecting specific clients, industries or markets, that could adversely affect the ability of borrowers to make timely scheduled principal and interest payments on their loans.

The Company internally risk rates loans based on individual credit criteria on at least a quarterly basis. Borrowers provide the Company with financial information on either a quarterly or monthly basis. Loan ratings as well as identification of impaired loans are dynamically updated to reflect changes in borrower condition or profile. A loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement. Impaired loans include all non-accrual loans, loans with partial charge-offs and loans which are troubled debt restructuring (“TDR”).

14

 


The Company utilizes a number of analytical tools for the purpose of estimating probability of default and loss given default for its lending groups. The quantitative models employed by the Company in its Leveraged Finance business utilize Moody’s KMV RiskCalc credit risk model in combination with a proprietary qualitative model, which generates a rating that maps to a probability of default estimate. For real estate loans, the Company utilizes a proprietary model that has been developed to capture risk characteristics unique to the lending activities in that line of business. Together, these models produce a suggested obligor risk rating which corresponds to a probability of default and also produces a loss given default. In each case, the probability of default and the loss given default are used to calculate an expected loss for those lending groups. Prior to the sale of the Equipment Finance assets, management used similar models for its Equipment Finance portfolio as its Leveraged Finance group. Prior to the sale of Business Credit, management utilized a proprietary model that produced a rating that corresponded to an expected loss, for the Business Credit portfolio.

Loans which are rated at or better than a specified threshold are typically classified as “Pass”, and loans rated worse than that threshold are typically classified as “Criticized”, a characterization that may apply to impaired loans, including TDR. As of June 30, 2017, $101.8 million of the Company’s loans were classified as “Criticized,” all of which were impaired loans, and $3.0 billion were classified as “Pass”. As of December 31, 2016, $118.7 million of the Company’s loans were classified as “Criticized” all of which were impaired loans, and $3.2 billion were classified as “Pass”.

When the Company determines a loan is impaired, the Company will evaluate the loan individually and, if necessary, establish a specific allowance. The loan will be analyzed and may be placed on non-accrual status. If the asset deteriorates further, the specific allowance may increase, and ultimately may result in a loss and charge-off.

A TDR that performs in accordance with the terms of its restructuring may improve its risk profile over time. While the concessions in terms of pricing or amortization may not have been reversed and further amended to “market” levels, the financial condition of the borrower may improve over time to the point where the rating improves from the “Criticized” classification that was appropriate immediately prior to, or at, restructuring.

A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impairment of a loan is based upon (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price, or (iii) the fair value of the collateral if the loan is collateral dependent, depending on the circumstances and our collection strategy. Impaired loans are identified based on the loan-by-loan risk rating process described above. It is the Company’s policy during the reporting period to record a specific provision for credit losses and/or partial or full charge off for all loans for which we have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms.

As of June 30, 2017, the Company had investments, net of charge-offs in impaired loans with a balance of $121.8 million. Impaired loans with an aggregate outstanding balance of $94.9 million have been restructured and classified as TDRs. At June 30, 2017, additional funding commitments for TDRs totaled $5.4 million. As of June 30, 2017, the aggregate carrying value of equity investments in certain of the Company’s borrowers in connection with troubled debt restructurings totaled $9.9 million. Impaired loans with an aggregate outstanding balance of $95.1 million were also on non-accrual status. These non-accrual loans had a carrying value of $88.7 million before specific reserves. For impaired loans on non-accrual status, the Company’s policy is to reverse the accrued interest previously recognized as interest income subsequent to the last cash receipt in the current year. The recognition of interest income on the loan only resumes when factors indicating doubtful collection no longer exist and the non-accrual loan payment status has been brought current. During the three and six months ended June 30, 2017, the Company charged off $7.5 million and $13.0 million, respectively of non-accruing loan balances.  During the three months ended June 30, 2017, the Company placed no new loans on non-accrual status. During the six months ended June 30, 2017, the Company placed loans with an aggregate outstanding balance of $8.5 million on non-accrual status. During the three and six months ended June 30, 2017, the Company recorded $3.3 million and $9.6 million, respectively, of net specific provisions for impaired loans. At June 30, 2017, the Company had a $16.4 million specific allowance for impaired loans with an aggregate outstanding balance of $79.1 million. At June 30, 2017, additional funding commitments for impaired loans totaled $8.3 million. The Company’s obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower’s compliance with the terms of the credit agreement, or if the borrower is not in compliance additional funding commitments may be made at the Company’s discretion. As of June 30, 2017, the Company had loans totaling $14.1 million on non-accrual status which were greater than 60 days past due and classified as delinquent by the Company. Included in the $16.4 million specific allowance for impaired loans was $1.8 million related to delinquent loans.  

As of December 31, 2016, the Company had investments, net of charge offs in impaired loans with a balance of $133.4 million. At that date, impaired loans with an aggregate outstanding balance of $114.8 million had been restructured and classified as TDR. As of December 31, 2016, the aggregate carrying value of equity investments in certain of the Company’s borrowers in connection with troubled debt restructurings totaled $9.9 million. Impaired loans with an aggregate outstanding balance of $99.2 million were also on non-accrual status. These non-accrual loans had a carrying value of $92.9 million before specific reserves. During 2016, the Company charged off $25.7 million of outstanding non-accrual loans. During 2016, the Company placed loans with an aggregate outstanding

15

 


balance of $27.1 million on non-accrual status and no loans were returned to performing status. During 2016, the Company recorded $24.8 million of net specific provisions for impaired loans. At December 31, 2016, the Company had a $19.8 million specific allowance for impaired loans with an aggregate outstanding balance of $73.5 million. At December 31, 2016, additional funding commitments for impaired loans totaled $11.9 million. As of December 31, 2016, loans to two borrowers totaling approximately $21.1 million were on non-accrual status and were greater than 60 days past due and classified as delinquent by the Company. Included in the $19.8 million specific allowance for impaired loans was $7.9 million related to delinquent loans.

A summary of impaired loans is as follows:

 

 

 

Investment, Net of

Charge-offs

 

 

Investment, Net

of Unamortized

Discount/Premium

 

 

Unpaid

Principal

 

 

 

($ in thousands)

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

121,822

 

 

$

115,207

 

 

$

151,190

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

133,413

 

 

$

126,839

 

 

$

154,879

 

 

 

 

 

 

Recorded

Investment with a

Related Allowance

for Credit Losses

 

 

Recorded

Investment, net,

with a Related

Allowance for

Credit Losses

 

 

Recorded

Investment

without a Related

Allowance for

Credit Losses

 

 

Recorded

Investment, net,

without a Related

Allowance for

Credit Losses

 

 

 

($ in thousands)

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

79,116

 

 

$

74,497