NewtekOne, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The quarter’s results reflect NewtekOne’s January 6 acquisition of National Bank of New York City (renamed Newtek Bank) and its conversion from a BDC and RIC to a financial holding company. Former portfolio companies are now consolidated subsidiaries, so prior-period comparisons are substantially affected by changes in scope and accounting.
Financial results and position
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Interest income | $22.6 million | $41.3 million |
| Interest expense | $16.9 million | $31.0 million |
| Net interest income | $5.7 million | $10.3 million |
| Provision for loan credit losses | $2.6 million | $3.9 million |
| Noninterest income | $46.4 million | $89.2 million |
| Noninterest expense | $40.2 million | $79.4 million |
| Net income | $6.8 million | $18.5 million |
| Net income available to common shareholders | $6.5 million | $17.9 million |
| Basic and diluted EPS | $0.26 | $0.72 |
Q2 net income and EPS were down from $13.5 million and $0.56 in Q2 2022; six-month net income and EPS were down from $23.2 million and $0.96. Noninterest income rose year over year, but expenses and income taxes also increased. Comparisons are not like-for-like because of the acquisition, consolidation changes, and accounting transition. Q2 net interest margin was 2.09%; the filing does not provide a directly comparable prior-period margin in the cited discussion.
At June 30, total assets were $1.44 billion, total liabilities $1.22 billion, and shareholders’ equity $220.7 million. Loans totaled $873.8 million; deposits were $447.4 million and borrowings were $697.4 million. Cash and cash equivalents were $256.3 million, including $66.7 million of restricted cash. The company separately reported $48.7 million of unrestricted cash, $140.9 million of interest-bearing bank deposits, and $8.2 million available on bank notes payable as unused liquidity sources.
The six-month cash flow statement reports $204.9 million used in operating activities, $72.5 million used in investing activities, and $385.8 million provided by financing activities, producing a $108.4 million increase in cash and restricted cash. However, the MD&A gives inconsistent operating and financing cash-flow figures; see investor verification items below.
Reported capital ratios exceeded stated minimums: consolidated total capital to risk-weighted assets was 15.1% versus an 8.0% minimum; Newtek Bank’s ratio was 29.4% versus an 8.0% minimum.
Material changes and management commentary
- The bank acquisition and BDC/RIC exit changed the company’s regulatory status, tax treatment, consolidated entities, and financial-statement presentation. The company is now subject to Federal Reserve oversight, while Newtek Bank is regulated by the OCC.
- Six-month noninterest income increased $41.6 million, while noninterest expense increased $49.0 million. Consolidating payments and technology businesses contributed new revenue and operating costs; formerly reported portfolio-company dividends and fair-value results also changed presentation.
- Interest expense increased $20.5 million year over year, reflecting additional borrowings, securitization financing, the new 8.125% notes, and interest-bearing deposits. The company issued $50 million of 8.125% notes due 2025 and completed a $103.9 million SBA-loan securitization in June.
- The company issued $20 million of Series A convertible preferred stock. It declared common dividends of $0.18 per share for each of the first two 2023 payments shown in the filing.
- NSBF is winding down new SBA 7(a) originations, with its new-loan pipeline transitioned to Newtek Bank. NSBF will continue to hold and service its legacy SBA and PPP portfolios, and the company will guarantee certain NSBF obligations to the SBA, supported by a funded $10 million account.
Outlook, risks, and contingencies
- No specific financial guidance or earnings forecast is provided. Management discusses economic uncertainty, higher rates, inflation, recession risk, credit availability, and depositor confidence as potential factors affecting borrowers, funding costs, liquidity, and results.
- The company depends on secondary-market purchasers and premiums for sales of guaranteed SBA loan portions. Changes in market rates or demand could reduce sale prices and lending returns. Its interest-rate simulations indicate estimated 12-month net interest income sensitivity of +3.3% for a 200-basis-point rate increase and −3.3% for a 200-basis-point decrease.
- As a Federal Reserve commitment, the company must divest or terminate its technology businesses, including NTS and EWS, within two years of becoming a financial holding company, subject to possible extension.
- At quarter-end, $46.5 million of loans were on nonaccrual status and $80.1 million were past due or nonaccrual. The allowance for credit losses on amortized-cost loans was $4.8 million. New CECL estimates rely on management judgments and economic forecasts.
- Unfunded loan commitments totaled $86.1 million. The company also disclosed ordinary-course claims and an existing FTC-related permanent injunction covering certain payment-business practices; it said no current litigation was expected to materially affect financial condition.
- A preliminary purchase-price allocation for Newtek Bank remains subject to adjustment during the acquisition measurement period. Fair-value estimates for significant Level 3 assets use management assumptions and may differ from realizable values.
Important facts investors should verify
- Reconcile cash flows: the consolidated cash flow statement reports operating cash use of $204.9 million and financing cash provided of $385.8 million; MD&A instead reports $105.5 million of operating cash use in its narrative and $105.5 million of operating cash provided in its table, alongside $75.5 million of financing cash provided. Confirm the intended MD&A figures and underlying cash-flow classification.
- Assess the durability and comparability of earnings after the acquisition, consolidation of former portfolio companies, and transition away from RIC taxation.
- Monitor deposit levels, funding costs, available liquidity, debt maturities, and compliance with debt covenants and regulatory capital requirements.
- Track credit quality, nonaccrual loans, CECL allowances, SBA portfolio runoff, and any obligations arising under the SBA wind-down agreement.
- Confirm execution and timing of the required technology-business divestitures and the potential effect on revenue and earnings.