news-10q_20150930.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 September 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 November 2, 2015, 45,882,700 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 September 30, 2015 and December 31, 2014

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

4

 

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

5

 

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

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

61

Item 4.

Controls and Procedures

62

 

PART II

 

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

62

Item 1A.

Risk Factors

62

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 6.

Exhibits

64

SIGNATURES

66

 

 

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;

 

·

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

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

($ in thousands, except share

and par value amounts)

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,472

 

 

$

33,033

 

Restricted cash

 

 

140,854

 

 

 

95,411

 

Cash collateral on deposit with custodian

 

 

53,738

 

 

 

38,975

 

Investments in debt securities, available-for-sale

 

 

94,328

 

 

 

46,881

 

Loans held-for-sale, net

 

 

427,418

 

 

 

200,569

 

Loans and leases, net

 

 

2,991,370

 

 

 

2,305,896

 

Deferred financing costs, net

 

 

41,606

 

 

 

26,514

 

Interest receivable

 

 

9,668

 

 

 

7,477

 

Property and equipment, net

 

 

624

 

 

 

660

 

Deferred income taxes, net

 

 

35,627

 

 

 

28,078

 

Income tax receivable

 

 

 

 

 

3,388

 

Other assets

 

 

16,574

 

 

 

24,127

 

Total assets

 

$

3,869,279

 

 

$

2,811,009

 

Liabilities:

 

 

 

 

 

 

 

 

Credit facilities

 

$

625,595

 

 

$

487,768

 

Term debt securitizations

 

 

1,890,765

 

 

 

1,193,187

 

Repurchase agreements

 

 

137,640

 

 

 

57,227

 

Senior notes

 

 

300,000

 

 

 

 

Corporate debt

 

 

 

 

 

238,500

 

Subordinated notes

 

 

189,852

 

 

 

156,831

 

Accrued interest payable

 

 

28,261

 

 

 

6,576

 

Income tax payable

 

 

3,352

 

 

 

-

 

Other liabilities

 

 

33,534

 

 

 

29,923

 

Total liabilities

 

 

3,208,999

 

 

 

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 45,846,553 in 2015 and 46,620,474 in 2014

 

 

458

 

 

 

466

 

Additional paid-in capital

 

 

745,012

 

 

 

718,825

 

Retained earnings

 

 

27,144

 

 

 

14,463

 

Common stock held in treasury, at cost $0.01 par value; 9,147,127 in 2015 and 7,581,646

   in 2014

 

 

(109,175

)

 

 

(92,724

)

Accumulated other comprehensive loss, net

 

 

(3,159

)

 

 

(33

)

Total stockholders’ equity

 

 

660,280

 

 

 

640,997

 

Total liabilities and stockholders’ equity

 

$

3,869,279

 

 

$

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

($ in thousands, except per share amounts)

 

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

54,574

 

 

$

33,907

 

 

$

141,194

 

 

$

100,570

 

Interest expense

 

 

31,345

 

 

 

14,304

 

 

 

84,764

 

 

 

40,673

 

Net interest income

 

 

23,229

 

 

 

19,603

 

 

 

56,430

 

 

 

59,897

 

Provision for credit losses

 

 

4,534

 

 

 

3,369

 

 

 

14,720

 

 

 

21,828

 

Net interest income after provision for credit losses

 

 

18,695

 

 

 

16,234

 

 

 

41,710

 

 

 

38,069

 

Non-interest income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee income

 

 

4,573

 

 

 

740

 

 

 

10,508

 

 

 

1,972

 

Asset management income

 

 

1,019

 

 

 

488

 

 

 

2,954

 

 

 

543

 

Loss on derivatives

 

 

(5

)

 

 

(10

)

 

 

(24

)

 

 

(27

)

Gain (loss) on sale of loans, net

 

 

360

 

 

 

(23

)

 

 

314

 

 

 

(189

)

Other income (expense), net

 

 

(2,455

)

 

 

2,066

 

 

 

1,295

 

 

 

9,176

 

Total non-interest income

 

 

3,492

 

 

 

3,261

 

 

 

15,047

 

 

 

11,475

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

9,561

 

 

 

7,721

 

 

 

24,004

 

 

 

23,283

 

General and administrative expenses

 

 

3,819

 

 

 

3,260

 

 

 

11,052

 

 

 

11,481

 

Total operating expenses

 

 

13,380

 

 

 

10,981

 

 

 

35,056

 

 

 

34,764

 

Operating income before income taxes

 

 

8,807

 

 

 

8,514

 

 

 

21,701

 

 

 

14,780

 

Results of Consolidated Variable Interest Entity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

5,268

 

Interest expense – credit facilities

 

 

 

 

 

 

 

 

 

 

 

2,865

 

Interest expense – Fund membership interest

 

 

 

 

 

 

 

 

 

 

 

1,292

 

Other income

 

 

 

 

 

 

 

 

 

 

 

229

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

249

 

Net results from Consolidated Variable Interest Entity

 

 

 

 

 

 

 

 

 

 

 

1,091

 

Income before income taxes

 

 

8,807

 

 

 

8,514

 

 

 

21,701

 

 

 

15,871

 

Income tax expense

 

 

3,665

 

 

 

3,494

 

 

 

9,020

 

 

 

6,503

 

Net income

 

$

5,142

 

 

$

5,020

 

 

$

12,681

 

 

$

9,368

 

Basic income per share

 

$

0.11

 

 

$

0.10

 

 

$

0.27

 

 

$

0.19

 

Diluted income per share

 

 

0.11

 

 

 

0.10

 

 

 

0.26

 

 

 

0.18

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

($ in thousands, except per share amounts)

 

Net income

 

$

5,142

 

 

$

5,020

 

 

$

12,681

 

 

$

9,368

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   (benefit) of $(1,782), $(78), $(2,120) and $(54), respectively

 

 

(2,583

)

 

 

(108

)

 

 

(3,078

)

 

 

(79

)

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

   (benefit) of $(14), $4, $(38) and $0, respectively

 

 

(21

)

 

 

5

 

 

 

(48

)

 

 

(4

)

Other comprehensive income (loss)

 

 

(2,604

)

 

 

(103

)

 

 

(3,126

)

 

 

(83

)

Comprehensive income

 

$

2,538

 

 

$

4,917

 

 

$

9,555

 

 

$

9,285

 

 

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 Nine Months Ended September 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

 

 

 

 

 

 

 

 

12,681

 

 

 

 

 

 

 

 

 

12,681

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,126

)

 

 

(3,126

)

Issuance of restricted stock

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Net shares reacquired from employee transactions

 

 

(1

)

 

 

1

 

 

 

 

 

 

(597

)

 

 

 

 

 

(597

)

Tax benefit from vesting of stock awards

 

 

 

 

 

(163

)

 

 

 

 

 

 

 

 

 

 

 

(163

)

Repurchase of common stock

 

 

(12

)

 

 

12

 

 

 

 

 

 

(15,854

)

 

 

 

 

 

(15,854

)

Issuance of warrants

 

 

 

 

 

21,766

 

 

 

 

 

 

 

 

 

 

 

 

21,766

 

Exercise of common stock options

 

 

1

 

 

 

1,574

 

 

 

 

 

 

 

 

 

 

 

 

1,575

 

Tax benefit from exercise of common stock awards

 

 

 

 

 

551

 

 

 

 

 

 

 

 

 

 

 

 

551

 

Amortization of restricted common stock awards

 

 

 

 

 

2,450

 

 

 

 

 

 

 

 

 

 

 

 

2,450

 

Balance at September 30, 2015

 

$

458

 

 

$

745,012

 

 

$

27,144

 

 

$

(109,175

)

 

$

(3,159

)

 

$

660,280

 

 

 

 

NewStar Financial, Inc. Stockholders’ Equity

For the Nine Months Ended September 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

 

 

 

 

 

 

 

 

8,726

 

 

 

 

 

 

 

 

 

642

 

 

 

9,368

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(83

)

 

 

 

 

 

(83

)

Issuance of restricted stock

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net shares reacquired from employee

   transactions

 

 

 

 

 

 

 

 

 

 

 

(525

)

 

 

 

 

 

 

 

 

(525

)

Tax benefit from vesting of stock awards

 

 

 

 

 

134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134

 

Repurchase of common stock

 

 

(16

)

 

 

5

 

 

 

 

 

 

(21,725

)

 

 

 

 

 

 

 

 

(21,736

)

Exercise of warrants

 

 

3

 

 

 

15,244

 

 

 

 

 

 

(14,248

)

 

 

 

 

 

 

 

 

999

 

Exercise of common stock options

 

 

3

 

 

 

279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

282

 

Tax benefit from exercise of common stock

   awards

 

 

 

 

 

1,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,062

 

Reclassification of VIE Dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

587

 

 

 

587

 

Deconsolidation of VIE

 

 

 

 

 

 

 

 

1,887

 

 

 

 

 

 

 

 

 

(1,887

)

 

 

 

Amortization of restricted common stock

   awards

 

 

 

 

 

1,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,796

 

Balance at September 30, 2014

 

$

478

 

 

$

673,662

 

 

$

13,237

 

 

$

(79,769

)

 

$

486

 

 

$

-

 

 

$

608,094

 

 

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

6


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

 

Nine Months Ended September 30,

 

 

 

 

2015

 

 

 

2014

 

 

 

($ in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

12,681

 

 

$

9,368

 

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

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

14,720

 

 

 

21,828

 

Depreciation, amortization and accretion

 

 

(6,977

)

 

 

(9,062

)

Amortization of debt issuance costs

 

 

14,944

 

 

 

4,796

 

Equity compensation expense

 

 

2,450

 

 

 

1,796

 

(Gain) loss on sale of loans

 

 

(314

)

 

 

189

 

Unrealized loss on total return swap

 

 

971

 

 

 

 

Gain on sale of equipment

 

 

(471

)

 

 

 

Loss on other real estate owned

 

 

82

 

 

 

 

Loss from equity method investments

 

 

 

 

 

845

 

Net change in deferred income taxes

 

 

(5,394

)

 

 

3,551

 

Loans held-for-sale originated

 

 

(490,601

)

 

 

(169,104

)

Proceeds from sale of loans held-for-sale

 

 

263,231

 

 

 

137,072

 

Unrealized loss on loans held-for-sale

 

 

506

 

 

 

 

Net change in interest receivable

 

 

(2,191

)

 

 

2,179

 

Net change in other assets

 

 

6,587

 

 

 

(10,354

)

Net change in accrued interest payable

 

 

21,685

 

 

 

659

 

Net change in accounts payable and other liabilities

 

 

6,304

 

 

 

5,233

 

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) provided by operating activities

 

 

(161,787

)

 

 

2,365

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in restricted cash

 

 

(45,443

)

 

 

36,115

 

Net change in loans

 

 

(692,212

)

 

 

37,681

 

Purchase of debt securities, available-for-sale

 

 

(85,020

)

 

 

(5,000

)

Proceeds from debt securities, available-for-sale

 

 

33,000

 

 

 

6,000

 

Proceeds from sale of other real estate owned

 

 

3,211

 

 

 

 

Acquisition of property and equipment

 

 

(129

)

 

 

(59

)

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

 

 

(786,593

)

 

 

247,443

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options, net

 

 

1,575

 

 

 

282

 

Tax benefit from exercise of stock options

 

 

551

 

 

 

1,062

 

Proceeds from exercise of warrants

 

 

 

 

 

999

 

Tax benefit (expense) from vesting of stock awards

 

 

(163

)

 

 

134

 

Advances on credit facilities

 

 

1,934,949

 

 

 

1,026,523

 

Repayment of borrowings on credit facilities

 

 

(1,797,122

)

 

 

(1,074,333

)

Issuance of term debt

 

 

824,167

 

 

 

289,500

 

Borrowings on term debt

 

 

43,500

 

 

 

94,100

 

Repayment of borrowings on term debt

 

 

(170,089

)

 

 

(331,821

)

Issuance of senior notes

 

 

300,000

 

 

 

 

Borrowing on subordinated notes

 

 

50,000

 

 

 

 

 

Borrowings on repurchase agreements

 

 

125,012

 

 

 

 

Repayment of borrowings on repurchase agreements

 

 

(44,599

)

 

 

(10,583

)

Repayment of corporate debt

 

 

(238,500

)

 

 

 

Posting of cash collateral

 

 

(14,763

)

 

 

 

Payment of deferred financing costs

 

 

(25,248

)

 

 

(4,617

)

Purchase of treasury stock

 

 

(16,451

)

 

 

(22,250

)

7


NEWSTAR FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

Unaudited

 

 

 

Nine Months Ended September 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

 

 

972,819

 

 

 

(181,598

)

Net increase (decrease) in cash during the period

 

 

24,439

 

 

 

68,210

 

Cash and cash equivalents at beginning of period

 

 

33,033

 

 

 

43,401

 

Cash and cash equivalents at end of period

 

$

57,472

 

 

$

111,611

 

Supplemental cash flows information:

 

 

 

 

 

 

 

 

Interest paid

 

$

63,079

 

 

$

39,581

 

Interest paid by VIE

 

 

 

 

 

4,763

 

VIE cash distribution

 

 

 

 

 

671

 

Taxes paid

 

 

7,285

 

 

 

3,664

 

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

 

 

(5,193

)

 

 

(133

)

 

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

 

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, first out, 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 t