NewtekOne, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 11, 2023. Financial amounts below are in millions unless otherwise stated.
Business context and reporting period
On January 6, 2023, NewtekOne acquired National Bank of New York City, renamed it Newtek Bank, and withdrew its election to be a business development company (BDC). The Company is now a financial holding company, subject to Federal Reserve oversight, and no longer qualifies as a regulated investment company (RIC) or for investment-company accounting. It consolidated its former portfolio-company subsidiaries; consequently, year-over-year comparisons reflect a substantially different business and accounting basis.
NewtekOne provides banking, lending, payments, technology, insurance, and payroll services to small and medium-sized businesses. The NBNYC purchase consideration was preliminarily allocated at $21.3 million; the allocation remains subject to measurement-period adjustments.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Interest income | $18.7 | $7.7 |
| Net interest income | $4.6 | $3.1 |
| Provision for loan credit losses | $1.3 | None reported |
| Noninterest income | $42.8 | $22.2 |
| Noninterest expense | $39.2 | $14.7 |
| Income before taxes | $6.9 | $10.6 |
| Income tax benefit (expense) | $4.9 benefit | $0.9 expense |
| Net income | $11.7 | $9.7 |
| Net income available to common shareholders | $11.5 | $9.7 |
| Basic and diluted EPS | $0.46 | $0.40 |
| Net interest margin | 2.13% | Not provided on a comparable basis |
Net income rose 21% despite lower pretax income, principally because of the $4.9 million tax benefit. The effective tax rate was reported as negative 71.41%, reflecting recognition of subsidiary net operating losses and other discrete items. Noninterest income included $10.3 million of electronic payment processing income, $6.7 million of technology and IT support income, $6.5 million of loan-sale gains, and $5.9 million of fair-value-option loan gains.
At March 31, total assets were $1.250 billion, total liabilities $1.032 billion, and shareholders’ equity $218.0 million. Deposits totaled $247.6 million; borrowings were $697.4 million, versus $539.3 million at December 31, 2022. Cash and cash equivalents were $197.1 million, including $72.6 million of restricted cash. Management identified $27.3 million of unrestricted cash, $97.2 million of interest-bearing deposits, and $8.2 million of available Capital One capacity as unused liquidity sources.
Consolidated regulatory capital ratios exceeded stated minimums: Tier 1 leverage 16.5%, common equity Tier 1 18.3%, and total capital 20.4%. Newtek Bank’s respective ratios were 27.2%, 34.1%, and 35.1%. The Company reported compliance with debt covenants, including the 150% asset-coverage covenants applicable to its 2024 and 2026 Notes.
The consolidated cash-flow statement reports operating cash used of $116.4 million, investing cash used of $23.9 million, and financing cash provided of $186.9 million, for a $46.6 million increase in cash and restricted cash. However, the MD&A reports different operating and financing cash flows—$10.4 million used and $81.0 million provided, respectively—while showing the same investing cash use and net cash increase. The filing text does not clearly reconcile these figures.
Material changes versus the prior comparable period
- Reported results now include Newtek Bank and previously unconsolidated businesses; the prior-year period reflects the former BDC/investment-company structure. Comparisons of income, expenses, assets, and equity are therefore not directly comparable.
- Interest income increased $11.0 million, driven by a larger loan portfolio and the bank acquisition. Interest expense increased $9.5 million, reflecting higher borrowings, new subsidiaries, and deposit costs.
- Noninterest income increased $20.6 million, while noninterest expense increased $24.5 million. Dividend income fell $7.3 million as former portfolio-company results are now consolidated rather than reported as dividends.
- Total assets increased 25.1% from year-end, with reported loan balances up $134.0 million. The change includes acquired and newly consolidated balances, not solely organic growth.
- NewtekOne issued $50.0 million of 8.125% notes due 2025 and $20.0 million of Series A convertible preferred stock during the quarter.
Outlook, management commentary, risks, and unusual items
- Business transition: Newtek Bank is to take over new SBA 7(a) originations from NSBF. Under an April 13, 2023 agreement with the SBA, NSBF began winding down, retaining and servicing its legacy SBA 7(a) and PPP portfolio subject to SBA requirements. The Company guaranteed NSBF’s SBA obligations and agreed to create and fund a $10 million security account. Newtek Bank received SBA Preferred Lenders Program status on April 27, 2023.
- Required divestitures: Federal Reserve commitments require the Company to divest or terminate the activities of Excel WebSolutions and Newtek Technology Solutions, including SIDCO, within two years of becoming a financial holding company, subject to possible extension.
- Credit and funding risks: The Company had $110.4 million of unfunded loan commitments. Management cited economic uncertainty, higher rates, possible recession, bank-sector stress, borrower repayment risk, and dependence on secondary-market sales and premiums for guaranteed SBA loan portions. The filing reports $42.4 million of loans as nonaccrual at quarter-end; the loan table also shows $120.1 million past due or nonaccrual, a measure that includes overlapping aging categories.
- Rate sensitivity: The Company reported that a modeled 200-basis-point increase would raise net interest income by 2.7% in the first year and 6.0% in the second, but reduce economic value of equity by 2.5%. These are model estimates, not forecasts. Management noted that market rates, deposit pricing, prepayments, and other assumptions affect outcomes.
- Valuation and accounting: The legacy NSBF SBA 7(a) portfolio remains measured at fair value until runoff; servicing assets and substantial loan balances use Level 3 inputs. Changes in assumptions could materially affect reported earnings. CECL was adopted for applicable amortized-cost loans, with a $2.2 million allowance at quarter-end.
- Guidance: The filing provides no specific earnings or revenue guidance. Management said it had not observed broad operating deterioration at the time of the report but cautioned that economic conditions could adversely affect subsidiaries and borrowers.
- Other items: The Company had $49.3 million of deposits at financial institutions in excess of insured amounts. It disclosed no litigation expected to materially affect financial condition and no material changes to the risk factors in its 2022 Form 10-K. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Reconcile the cash-flow figures in the consolidated statement of cash flows with the different amounts in MD&A.
- Assess recurring earnings apart from the tax benefit, fair-value changes, loan-sale gains, and the effects of consolidation and acquisition accounting.
- Track Newtek Bank’s SBA 7(a) origination transition, PLP status, deposit stability and costs, regulatory capital, and compliance with OCC and Federal Reserve requirements.
- Monitor NSBF’s wind-down, the $10 million SBA security account, legacy loan performance, and any SBA claims or restrictions on distributions.
- Review debt maturities, variable-rate funding costs, asset-coverage covenant compliance, and the Company’s available liquidity; distinguish unrestricted from restricted cash.
- Evaluate credit quality, Level 3 fair-value assumptions, the preliminary acquisition accounting, and execution of the required technology-business divestitures.