news-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2015

OR

o

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)

(617) 848-2500

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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  x    No  o

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  x    No  o

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

 

Large accelerated filer

 

¨

 

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨

 

Smaller reporting company

 

¨

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

As of August 4, 2015, 45,722,954 shares of common stock, par value of $0.01 per share, were outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

 

PART I

 

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

3

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

4

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

5

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2015 and 2014

6

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

7

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

37

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 4.

Controls and Procedures

57

 

PART II

 

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 6.

Exhibits

59

SIGNATURES

61

 

 

1


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;

·

the anticipated timing of the closing of the additional investment by the Franklin Square Funds;

·

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.

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:

·

acceleration 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;

·

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

·

our ability to obtain external financing;

·

the regulation of the commercial lending industry by federal, state and local governments;

·

risks and uncertainties relating to our limited operating history;

·

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, as amended, for the year ended December 31, 2014.

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.

 

2


PART I. FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements.

NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

($ in thousands, except share

and par value amounts)

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,308

 

 

$

33,033

 

Restricted cash

 

 

189,529

 

 

 

95,411

 

Cash collateral on deposit with custodian

 

 

42,552

 

 

 

38,975

 

Investments in debt securities, available-for-sale

 

 

108,454

 

 

 

46,881

 

Loans held-for-sale, net

 

 

338,304

 

 

 

200,569

 

Loans and leases, net

 

 

2,688,971

 

 

 

2,305,896

 

Deferred financing costs, net

 

 

33,485

 

 

 

26,514

 

Interest receivable

 

 

10,590

 

 

 

7,477

 

Property and equipment, net

 

 

652

 

 

 

660

 

Deferred income taxes, net

 

 

29,762

 

 

 

28,078

 

Income tax receivable

 

 

218

 

 

 

3,388

 

Unsettled trade receivables

 

 

16,734

 

 

 

396

 

Other assets

 

 

21,998

 

 

 

23,731

 

Total assets

 

$

3,506,557

 

 

$

2,811,009

 

Liabilities:

 

 

 

 

 

 

 

 

Credit facilities

 

$

634,923

 

 

$

487,768

 

Term debt securitizations

 

 

1,543,955

 

 

 

1,193,187

 

Repurchase agreements

 

 

99,210

 

 

 

57,227

 

Senior notes

 

 

300,000

 

 

 

 

Corporate debt

 

 

 

 

 

238,500

 

Subordinated notes

 

 

138,215

 

 

 

156,831

 

Accrued interest payable

 

 

13,940

 

 

 

6,576

 

Unsettled trade payables

 

 

93,211

 

 

 

78

 

Other liabilities

 

 

25,726

 

 

 

29,845

 

Total liabilities

 

 

2,849,180

 

 

 

2,170,012

 

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 2015 and 2014;

 

 

 

 

 

 

 

 

Shares outstanding 45,774,024 in 2015 and 46,620,474 in 2014

 

 

458

 

 

 

466

 

Additional paid-in capital

 

 

743,563

 

 

 

718,825

 

Retained earnings

 

 

22,002

 

 

 

14,463

 

Common stock held in treasury, at cost $0.01 par value; 9,075,332 in 2015 and 7,581,646

   in 2014

 

 

(108,096

)

 

 

(92,724

)

Accumulated other comprehensive income (loss), net

 

 

(550

)

 

 

(33

)

Total stockholders’ equity

 

 

657,377

 

 

 

640,997

 

Total liabilities and stockholders’ equity

 

 

3,506,557

 

 

 

2,811,009

 

 

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

3


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

($ in thousands, except per share amounts)

 

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

46,871

 

 

$

33,536

 

 

$

86,620

 

 

$

66,663

 

Interest expense

 

 

31,085

 

 

 

13,868

 

 

 

53,419

 

 

 

26,369

 

Net interest income

 

 

15,786

 

 

 

19,668

 

 

 

33,201

 

 

 

40,294

 

Provision for credit losses

 

 

3,208

 

 

 

12,652

 

 

 

10,186

 

 

 

18,459

 

Net interest income after provision for credit losses

 

 

12,578

 

 

 

7,016

 

 

 

23,015

 

 

 

21,835

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee income

 

 

4,777

 

 

 

462

 

 

 

5,935

 

 

 

1,232

 

Asset management income

 

 

1,015

 

 

 

30

 

 

 

1,935

 

 

 

55

 

Loss on derivatives

 

 

(10

)

 

 

(13

)

 

 

(19

)

 

 

(17

)

Loss on sale of loans, net

 

 

(31

)

 

 

 

 

 

(46

)

 

 

(166

)

Other income, net

 

 

1,678

 

 

 

1,017

 

 

 

3,750

 

 

 

7,110

 

Total non-interest income

 

 

7,429

 

 

 

1,496

 

 

 

11,555

 

 

 

8,214

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

7,710

 

 

 

7,803

 

 

 

14,443

 

 

 

15,562

 

General and administrative expenses

 

 

3,734

 

 

 

3,852

 

 

 

7,233

 

 

 

8,221

 

Total operating expenses

 

 

11,444

 

 

 

11,655

 

 

 

21,676

 

 

 

23,783

 

Operating income (loss) before income taxes

 

 

8,563

 

 

 

(3,143

)

 

 

12,894

 

 

 

6,266

 

Results of Consolidated Variable Interest Entity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

2,615

 

 

 

 

 

 

5,268

 

Interest expense – credit facilities

 

 

 

 

 

1,987

 

 

 

 

 

 

2,865

 

Interest expense – Fund membership interest

 

 

 

 

 

697

 

 

 

 

 

 

1,292

 

Other income

 

 

 

 

 

221

 

 

 

 

 

 

229

 

Operating expenses

 

 

 

 

 

189

 

 

 

 

 

 

249

 

Net results from Consolidated Variable Interest Entity

 

 

 

 

 

(37

)

 

 

 

 

 

1,091

 

Income (loss) before income taxes

 

 

8,563

 

 

 

(3,180

)

 

 

12,894

 

 

 

7,357

 

Income tax expense (benefit)

 

 

3,563

 

 

 

(1,325

)

 

 

5,355

 

 

 

3,009

 

Net income (loss)

 

$

5,000

 

 

$

(1,855

)

 

$

7,539

 

 

$

4,348

 

Basic income (loss) per share

 

$

0.11

 

 

$

(0.04

)

 

$

0.16

 

 

$

0.09

 

Diluted income (loss) per share

 

 

0.10

 

 

 

(0.04

)

 

 

0.15

 

 

 

0.08

 

 

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

4


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

($ in thousands, except per share amounts)

 

Net income (loss)

 

$

5,000

 

 

$

(1,855

)

 

$

7,539

 

 

$

4,348

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   (benefit) of $(414), $(94), $(338) and $24, respectively

 

 

(599

)

 

 

(143

)

 

 

(490

)

 

 

29

 

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

   (benefit) of $(2), $4, $(24) and $3, respectively

 

 

(2

)

 

 

(6

)

 

 

(27

)

 

 

(9

)

Other comprehensive income (loss)

 

 

(601

)

 

 

(149

)

 

 

(517

)

 

 

20

 

Comprehensive income (loss)

 

$

4,399

 

 

$

(2,004

)

 

$

7,022

 

 

$

4,368

 

 

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

5


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Unaudited

 

 

 

NewStar Financial, Inc. Stockholders’ Equity

For the Six Months Ended June 30, 2015

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Loss, net

 

 

Common

Stockholders’

Equity

 

 

 

($ in thousands)

 

Balance at January 1, 2015

 

$

466

 

 

$

718,825

 

 

$

14,463

 

 

$

(92,724

)

 

$

(33

)

 

$

640,997

 

Net income

 

 

 

 

 

 

 

 

7,539

 

 

 

 

 

 

 

 

 

7,539

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(517

)

 

 

(517

)

Issuance of restricted stock

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Net shares reacquired from employee transactions

 

 

(1

)

 

 

1

 

 

 

 

 

 

(587

)

 

 

 

 

 

(587

)

Tax benefit from vesting of stock awards

 

 

 

 

 

(158

)

 

 

 

 

 

 

 

 

 

 

 

(158

)

Repurchase of common stock

 

 

(12

)

 

 

12

 

 

 

 

 

 

(14,785

)

 

 

 

 

 

(14,785

)

Issuance of warrants

 

 

 

 

 

21,766

 

 

 

 

 

 

 

 

 

 

 

 

21,766

 

Exercise of common stock options

 

 

1

 

 

 

1,275

 

 

 

 

 

 

 

 

 

 

 

 

1,276

 

Tax benefit from exercise of common stock awards

 

 

 

 

 

235

 

 

 

 

 

 

 

 

 

 

 

 

235

 

Amortization of restricted common stock awards

 

 

 

 

 

1,611

 

 

 

 

 

 

 

 

 

 

 

 

1,611

 

Balance at June 30, 2015

 

$

458

 

 

$

743,563

 

 

$

22,002

 

 

$

(108,096

)

 

$

(550

)

 

$

657,377

 

 

 

 

NewStar Financial, Inc. Stockholders’ Equity

For the Six Months Ended June 30, 2014

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Income, net

 

 

Retained

Earnings of

Consolidated VIE

 

 

Common

Stockholders’

Equity

 

 

 

($ in thousands)

 

Balance at January 1, 2014

 

$

487

 

 

$

655,143

 

 

$

2,624

 

 

$

(43,271

)

 

$

569

 

 

$

658

 

 

$

616,210

 

Net income

 

 

 

 

 

 

 

 

3,706

 

 

 

 

 

 

 

 

 

642

 

 

 

4,348

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

Issuance of restricted stock

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net shares reacquired from employee

   transactions

 

 

 

 

 

 

 

 

 

 

 

(522

)

 

 

 

 

 

 

 

 

(522

)

Tax benefit from vesting of stock awards

 

 

 

 

 

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

139

 

Repurchase of common stock

 

 

(11

)

 

 

 

 

 

 

 

 

(14,868

)

 

 

 

 

 

 

 

 

(14,879

)

Exercise of warrants

 

 

3

 

 

 

15,244

 

 

 

 

 

 

(14,248

)

 

 

 

 

 

 

 

 

999

 

Exercise of common stock options

 

 

3

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64

)

Tax benefit from exercise of common stock

   awards

 

 

 

 

 

1,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,036

 

Reclassification of VIE Dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

587

 

 

 

587

 

Deconsolidation of VIE

 

 

 

 

 

 

 

 

1,887

 

 

 

 

 

 

 

 

 

(1,887

)

 

 

 

Amortization of restricted common stock

   awards

 

 

 

 

 

1,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,227

 

Balance at June 30, 2014

 

$

483

 

 

$

672,721

 

 

$

8,217

 

 

$

(72,909

)

 

$

589

 

 

$

 

 

$

609,101

 

 

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

6


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Six Months Ended June 30,

 

 

 

 

2015

 

 

 

2014

 

 

 

($ in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,539

 

 

$

4,348

 

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

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

10,186

 

 

 

18,459

 

Depreciation and amortization and accretion

 

 

(4,733

)

 

 

(6,476

)

Amortization of debt issuance costs

 

 

11,025

 

 

 

3,096

 

Equity compensation expense

 

 

1,611

 

 

 

1,227

 

Loss on sale of loans

 

 

46

 

 

 

166

 

Unrealized gain on total return swap

 

 

(2,064

)

 

 

 

Gain on sale of equipment

 

 

(140

)

 

 

 

Loss from equity method investments

 

 

 

 

 

795

 

Net change in deferred income taxes

 

 

(2,043

)

 

 

4,691

 

Loans held-for-sale originated

 

 

(265,466

)

 

 

(76,243

)

Proceeds from sale of loans held-for-sale

 

 

168,556

 

 

 

46,758

 

Unrealized loss on loans held-for-sale

 

 

421

 

 

 

 

Net change in interest receivable

 

 

(3,113

)

 

 

651

 

Net change in other assets

 

 

(9,250

)

 

 

(13,962

)

Net change in accrued interest payable

 

 

7,364

 

 

 

(2,337

)

Net change in accounts payable and other liabilities

 

 

(4,361

)

 

 

(395

)

Consolidated Variable Interest Entity:

 

 

 

 

 

 

 

Amortization of debt issuance costs

 

 

 

 

 

1,244

 

Depreciation and amortization and accretion

 

 

 

 

 

(315

)

Net change in interest receivable

 

 

 

 

 

1,079

 

Net change in other assets

 

 

 

 

 

946

 

Net change in accrued interest payable

 

 

 

 

 

(172

)

Net change in accounts payable

 

 

 

 

 

587

 

Net cash used in operating activities

 

 

(84,422

)

 

 

(15,853

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in restricted cash

 

 

(94,118

)

 

 

1,771

 

Net change in loans

 

 

(336,076

)

 

 

48,360

 

Purchase of debt securities, available-for-sale

 

 

(62,157

)

 

 

 

Proceeds from debt securities, available-for-sale

 

 

 

 

 

6,000

 

Proceeds from sale of other real estate owned

 

 

185

 

 

 

 

Acquisition of property and equipment

 

 

(101

)

 

 

(46

)

Consolidated Variable Interest Entity:

 

 

 

 

 

 

 

Net change in loans

 

 

 

 

 

171,427

 

Net change in restricted cash

 

 

 

 

1,950)

 

VIE cash dividends

 

 

 

 

 

(671

)

Net cash provided by (used in) investing activities

 

 

(492,267

)

 

 

228,791

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options, net

 

 

1,276

 

 

 

(64

)

Tax benefit from exercise of stock options

 

 

235

 

 

 

1,036

 

Proceeds from exercise of warrants

 

 

 

 

 

999

 

Tax benefit (expense) from vesting of stock awards

 

 

(158

)

 

 

139

 

Borrowings on credit facilities

 

 

1,198,269

 

 

 

634,859

 

Repayment of borrowings on credit facilities

 

 

(1,051,114

)

 

 

(817,992

)

Issuance of term debt

 

 

426,550

 

 

 

289,500

 

Borrowings on term debt

 

 

31,500

 

 

 

65,900

 

Repayment of borrowings on term debt

 

 

(107,283

)

 

 

(196,812

)

Issuance of senior notes

 

 

300,000

 

 

 

 

Borrowings on repurchase agreements

 

 

75,551

 

 

 

 

Repayment of borrowings on repurchase agreements

 

 

(33,568

)

 

 

(10,439

)

Repayment of corporate debt

 

 

(238,500

)

 

 

 

Payment of cash collateral

 

 

(3,577

)

 

 

 

Payment of deferred financing costs

 

 

(14,845

)

 

 

(4,149

)

Purchase of treasury stock

 

 

(15,372

)

 

 

(15,401

)

 

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

7


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

Unaudited

 

 

 

Six Months Ended June 30,

 

 

 

 

2015

 

 

 

2014

 

 

 

($ in thousands)

 

Consolidated Variable Interest Entity:

 

 

 

 

 

 

 

 

Repayment of borrowings on credit facilities

 

 

 

 

 

(120,344

)

Repayment of borrowings on subordinated debt

 

 

 

 

 

(30,000

)

Payment of deferred financing costs

 

 

 

 

 

(250

)

Net cash provided by (used in) financing activities

 

 

568,964

 

 

 

(203,018

)

Net increase (decrease) in cash during the period

 

 

(7,725

)

 

 

9,920

 

Cash and cash equivalents at beginning of period

 

 

33,033

 

 

 

43,401

 

Cash and cash equivalents at end of period

 

$

25,308

 

 

$

53,321

 

Supplemental cash flows information:

 

 

 

 

 

 

 

 

Interest paid

 

$

46,055

 

 

$

28,272

 

Interest paid by VIE

 

 

 

 

 

4,763

 

VIE cash distribution

 

 

 

 

 

671

 

Taxes paid

 

 

3,432

 

 

 

1,445

 

Increase (decrease) in fair value of investments in debt securities, available for sale

 

 

(828

)

 

 

53

 

 

8


NEWSTAR FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

Note 1. Organization

NewStar Financial, Inc. is an internally-managed, commercial finance company with specialized lending platforms focused on meeting the complex financing needs of companies and private investors in the middle market. The Company is also a registered investment adviser and provides asset management services to institutional investors through a series of managed credit funds that co-invest in certain types of loans originated by the Company. Through its specialized lending platforms, the Company provides a range of senior secured debt financing options to mid-sized companies to fund working capital, growth strategies, acquisitions and recapitalizations, as well as, purchases of equipment and other capital assets.

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 and leases are originated directly by teams of credit-trained bankers and experienced marketing officers organized around key industry and market segments. These teams represent specialized lending groups that are supported by centralized credit management and operating platforms, which enables us to leverage common standards, systems, and industry and professional expertise across multiple businesses.

The Company directs its marketing and origination efforts to private equity firms, mid-sized companies, corporate executives, banks, real estate investors 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 focuses on companies operating across a broad range of industry sectors. The Company employs highly experienced bankers, marketing officers 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. Its national network is designed around specialized origination channels intended to generate a large set of potential lending opportunities. That allows each lending platform 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 Company typically provides financing commitments to companies in amounts that range in size from $10 million to $50 million. 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 our risk exposure to single borrowers. From time to time, however, the Company's balance sheet exposure to a single borrower may exceed $30 million.

NewStar offers a set of credit products and services that have many common attributes, but which are highly specialized by lending group and market segment. Although both the Leveraged Finance and Business Credit lending groups structure loans as revolving credit facilities and term loans, the style of lending and approach to credit management is highly specialized. The Equipment Finance group broadens the Company's product offering to include a range of lease financing options. The operational intensity of each product also varies by lending group.

Although, the Company operates as a single segment, it derives revenues from lending activities and asset management services across four specialized lending groups that target market segments in which it believes that it has competitive advantages:

·

Leveraged Finance, provides senior, secured cash flow loans and, to a lesser extent, second lien and unitranche loans, which are primarily used to finance acquisitions of mid-sized companies with annual cash flow (EBITDA) typically between $10 million and $50 million by private equity investment funds managed by established professional alternative asset managers;

·

Business Credit, provides senior, secured asset-based loans primarily to fund working capital needs of mid-sized companies with sales revenue typically totaling between $25 million and $500 million;

9


·

Real Estate, provides first mortgage debt primarily to finance acquisitions of commercial real estate properties typically valued between $10 million and $50 million by professional commercial real estate investors;

·

Equipment Finance, provides leases, loans and lease lines to finance equipment purchases and other capital expenditures typically for companies with annual sales of at least $25 million; and

·

Asset Management, provides opportunities for qualified institutions to invest in credit funds managed by the Company with strategies to co-invest in loans originated by its Leveraged Finance lending group.

 

 

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 and (v) determination of other than temporary impairments and temporary impairments. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2014.

Prior Period Reclassification

Certain prior period disclosure amounts have been reclassified to conform to current period presentation. Unsettled trade receivables and Unsettled trade payables are no longer included in Other assets and Other liabilities, respectively, and are presented separately in the Company’s balance sheets.

Consolidation

On June 26, 2014, the NewStar Arlington Senior Loan Program LLC (the “Arlington Program”) completed a $409.4 million term debt securitization comprised of all of the loans of NewStar Arlington Fund LLC (“Arlington Fund”) as well as a portion of the Company’s loans classified as held-for-sale. A portion of the proceeds from this term debt securitization were used to repay all advances under the Class A Notes and the Class B Notes. Following repayment, the Class A Notes and the Class B Notes were redeemed. The Company’s membership interests in Arlington Fund were also redeemed and new membership interests in the Arlington Program were issued to its equity investors. The Company acts as collateral manager for the Arlington Program. As a result of the repayment of the Company’s advances as the Class B lender under the warehouse facility and the redemption of its membership interests in the Arlington Fund, the Company has no ownership or financial interests in the Arlington Fund or its successors except to the extent that it receives management fees as collateral manager of the Arlington Program. Additionally, the Arlington Program employs an independent investment professional who is responsible for investment decision making on behalf of the program. As a result, the Company deconsolidated the Arlington Fund from its statement of financial position beginning on June 26, 2014. The Company is not the primary beneficiary of the Arlington Program and has not consolidated the Arlington Program’s operating results or statements of financial position as of that date.

Recently Issued Accounting Standards

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for the interim or annual period beginning after December 15, 2015. Adoption of ASU 2015-03 will not have an impact on the Company's results of operations but will reduce its total assets and liabilities by an equal amount within its statement of financial position.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 changes the way reporting entities evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (c) variable interests in a VIE held by related parties of a reporting entities require the reporting entity to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The

10


new consolidation guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2015. At the effective date, all previous consolidation analyses that the guidance affects must be reconsidered. This includes the consolidation analyses for all VIEs and for all limited partnerships and similar entities that previously were consolidated by the general partner even though the entities were not VIEs. Early adoption is permitted, including early adoption in an interim period. If a reporting entity chooses to early adopt in an interim period, adjustments resulting from the revised consolidation analyses must be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of ASU 2015-02 will have on results from operations or financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a framework that replaces existing revenue recognition guidance. ASU 2014-09 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of ASU 2014-09 will have on results from operations or financial position.

 

 

Note 3. Loans Held-for-Sale, Loans, Leases and Allowance for Credit Losses

Although the Company operates as a single segment, it derives revenues from lending activities and asset management services across four specialized lending groups that target market segments in which it believes it has competitive advantages:

·

Leveraged Finance, provides senior, secured cash flow loans and, to a lesser extent, second lien and unitranche loans, which are primarily used to finance acquisitions of mid-sized companies by private equity investment funds managed by established professional alternative asset managers;

·

Business Credit, provides senior, secured asset-based loans primarily to fund working capital needs of mid-sized companies;

·

Real Estate, provides first mortgage debt primarily to finance acquisitions of commercial real estate properties;

·

Equipment Finance, provides leases, loans and lease lines to finance equipment purchases and other capital expenditures; and

·

Asset Management, provides opportunities for qualified institutions to invest in credit funds managed by the Company with strategies to co-invest in loans originated by its Leveraged Finance lending group.

Loans classified as held-for-sale may consist of loans originated by the Company and intended to be sold to third parties (including credit funds managed by the Company). At June 30, 2015 loans held-for-sale consisted of $342.0 million of leveraged finance loans.

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

As of June 30, 2015 and December 31, 2014, loans held-for-sale consisted of the following:

 

 

 

June 30,

2015