Business Context and Reporting Period
Newtek Business Services, Inc. reported results for the three and nine months ended September 30, 2014. The filing was signed by Newtek Business Services, Corp.; the filing explains that the predecessor, Newtek Business Services, Inc., merged into the successor on November 12, 2014. Financial amounts below are in U.S. dollars; statement amounts are generally in millions unless noted.
Newtek served small and midsize businesses through electronic payment processing, SBA and other small-business financing and servicing, web hosting and technology, and insurance, payroll and other businesses.
Financial Results and Key Metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $38.2 million | $34.8 million | $112.4 million | $105.9 million |
| Income before taxes | $4.5 million | $2.0 million | $9.0 million | $7.0 million |
| Consolidated net income | $2.6 million | $1.8 million | $5.3 million | $4.8 million |
| Reported diluted EPS | $0.34 | $0.24 | $0.71 | $0.68 |
- Revenue increased 9.8% in Q3 and 6.1% for the first nine months. Pretax income rose 132% in Q3 and 28% year to date; reported net income attributable to Newtek was $2.644 million for Q3 and $5.429 million for nine months, versus $1.820 million and $5.114 million, respectively, in 2013.
- Q3 was led by Small Business Finance: segment revenue rose 45% to $10.9 million and pretax income increased 146% to $4.2 million. Nine-month segment revenue rose 33% to $31.2 million and pretax income rose 82% to $10.8 million.
- Electronic payment processing revenue grew 3% in Q3; processing margin (revenue less processing costs) improved to 16.1% from 14.6%. Nine-month revenue was nearly flat and margin edged down to 15.5% from 15.6%.
- Managed Technology Solutions revenue fell 14% in Q3 and 10% year to date, reflecting fewer hosting plans amid competition. Segment pretax income fell 9% in Q3 and 12% year to date.
Cash flow and liquidity: For the nine months, operating cash flow was $16.3 million, versus cash used of $1.3 million in 2013; investing used $25.2 million and financing provided $0.7 million. Cash declined $8.1 million to $4.4 million. Restricted cash was $15.5 million and is not generally available for unrestricted corporate use. Management reported $6.8 million of available line capacity at September 30.
Balance sheet and debt: Total assets were $203.2 million, liabilities $120.0 million and equity $83.2 million at September 30. Notes payable totaled $97.9 million, including $52.3 million associated with securitization trusts; capital leases were $0.5 million. Total notes payable were $101.4 million at December 31, 2013. The company reported compliance with applicable financial covenants.
Material Changes, Outlook and Risks
- Small Business Finance growth reflected higher SBA loan originations and sales, stronger loan-sale premiums, and expansion of servicing portfolios. Nine-month originations were $136.9 million versus $120.0 million; loan sales were $104.8 million versus $90.2 million. Aggregate servicing portfolio reached $1.08 billion, up 74% year over year.
- Management said additional funding would be needed to maintain SBA lending at then-current levels; inability to secure it could require lower originations. Management also noted weaker results in business-services segments and a need for additional capital. No numerical earnings guidance is provided.
- On October 29, 2014, after quarter-end, Capital One increased NSBF’s revolving facility from $27 million to $50 million and extended its maturity to May 2018. On November 12, the successor completed the BDC conversion in conjunction with a public stock offering; the supplied filing text does not state the offering proceeds.
- In June, Newtek refinanced Summit debt with a four-year Capital One facility. The payoff triggered a $1.905 million charge for remaining debt discount and deferred financing costs; management said the refinancing lowered the term-loan rate from 15% to Prime plus 2.5%.
- Fair-value estimates for SBA loans held for investment rely on significant Level 3 assumptions. The company reported $973,000 of charge-offs on those loans in the first nine months and a $1.640 million total fair-value loss on SBA loans in that period. Loan credit quality, valuation assumptions and loss experience warrant attention.
- Payment-processing risks included merchant charge-backs of approximately $673,000 through September 30 and $986,000 through October 27. The company described recovery efforts and collateral and guarantees, and did not expect a material adverse effect. Other disclosed matters included NCMIC litigation, an FTC complaint involving a subsidiary, and a payroll-processing settlement; management stated pending legal matters were not expected to materially affect the company.
- Other risks cited include dependence on the SBA loan secondary market and loan-sale premiums, interest-rate movements, competition in web hosting, and the need for additional funding. Management described the secondary market as robust at the reporting date but noted disruption could materially reduce SBA lending and profitability.
Investor Verification Priorities
- Verify post-quarter funding, public-offering proceeds, BDC transition terms and the successor company’s liquidity and capital position.
- Assess SBA portfolio credit quality, non-accrual and restructured loans, charge-offs, collateral recovery assumptions and the sensitivity of Level 3 fair values.
- Reconcile restricted versus unrestricted cash, available borrowing capacity, debt maturities, covenants and the funding needed to sustain planned loan originations.
- Track charge-back recoveries and the outcomes or potential exposure from the NCMIC, FTC and payroll-related proceedings.
- Check the earnings attribution presentation: the filing reports Q3 consolidated net income of $2.589 million, a $55,000 non-controlling-interest line, and $2.644 million attributable to Newtek; verify the presentation and reported EPS numerator.
- Confirm share-count and per-share comparisons on the filing’s retrospectively adjusted basis following the 1-for-5 reverse split effective October 22, 2014.