UPDATE 2-NewStar says Southern Commerce deal off, shares jump

* Terminates agreement to acquire Southern Commerce Bank

* Says will continue looking for acquisition alternatives

* Says pursuing ways to finance operations * Stock up as much as 15 pct (Recasts; adds analysts' comments, background, stock activity)

By Anurag Kotoky

BANGALORE, Aug 19 (Reuters) - NewStar Financial Inc (NEWS.O) said it terminated an agreement to buy Southern Commerce Bank N.A., as its applications are unlikely to be approved on favourable terms, sending its shares up as much 15 percent.

Analysts said the development did not come as a surprise given that the deal was supposed to close during the second quarter ended July 31.

NewStar had agreed to acquire Southern Commerce Bank in January in a deal valued at about $19 million at that time, and said it had applied to become a bank holding company.

NewStar was seeking to transfer assets into the bank once the company acquires it and the U.S. Federal Reserve seems to have denied that, Keefe, Bruyette and Woods analyst Sameer Gokhale told Reuters.

"The idea was that over time they (NewStar) would fund those assets with deposits... the idea was to restructure the balance sheet by buying the bank and transferring assets into the bank," Gokhale said by phone.