Newtekone, Inc. quarterly report, Q2 FY2018

Newtek Business Services Corp. (NTWK) - Q2 2018 Filing Summary

Business Context and Reporting Period

This summary covers the Form 10-Q for Newtek Business Services Corp. (NTWK) for the quarterly period ended June 30, 2018. Newtek is a Business Development Company (BDC) that provides financing and related services to small and medium-sized businesses (SMBs). The company's portfolio consists primarily of SBA-guaranteed and unguaranteed loans, as well as controlled investments in portfolio companies.

Key Financial Metrics

Metric Q2 2018 (3 Months) YTD 2018 (6 Months) YTD 2017 (6 Months)
Total Investment Income $11.40 million $22.47 million $18.90 million
Total Expenses $13.54 million $27.38 million $22.67 million
Net Investment Loss ($2.13 million) ($4.91 million) ($3.77 million)
Net Realized & Unrealized Gains $9.76 million $20.64 million $16.61 million
Net Increase in Net Assets $7.62 million $15.73 million $12.84 million
Net Asset Value (NAV) per Share $15.06 $15.06 $15.08 (Dec 31, 2017)
Dividends Declared per Share $0.42 $0.82 $0.76
Total Assets $561.81 million $561.81 million $519.61 million (Dec 31, 2017)
Total Liabilities $279.53 million $279.53 million $241.28 million (Dec 31, 2017)
Cash and Restricted Cash $28.28 million $28.28 million $20.54 million (Dec 31, 2017)

Material Changes vs. Prior Period

  • Revenue Growth: Total investment income increased by 15.1% year-over-year for the six-month period ($22.47M vs. $18.90M), driven by higher interest income from non-affiliate investments ($10.68M vs. $8.87M) and servicing income ($4.07M vs. $3.37M).
  • Expense Increase: Total expenses rose 20.8% year-over-year ($27.38M vs. $22.67M). This was primarily due to a $1.06 million loss on extinguishment of debt in the prior year period (not present in 2018) being offset by higher interest expenses ($7.30M vs. $5.15M) and increased origination and servicing costs ($3.77M vs. $2.65M).
  • Net Investment Loss: The company reported a net investment loss for the period, as operating expenses exceeded investment income. However, this was significantly offset by net realized and unrealized gains, resulting in a positive net increase in net assets.
  • Debt Structure: The company redeemed $40.25 million of Notes due 2021 and issued $57.50 million of Notes due 2023. Bank notes payable increased to $31.00 million from $0 in the prior year-end.
  • Portfolio Composition: Total investments at fair value increased to $487.72 million from $456.69 million. Controlled investments (equity stakes in portfolio companies) represent a significant portion of the portfolio, valued at $157.24 million.

Guidance, Outlook, and Risks

  • Dividend Policy: The company declared dividends of $0.42 per share for the quarter, totaling $0.82 for the six months. This exceeds the net investment income generated, indicating the company is distributing capital in excess of current earnings (distributions in excess of net investment income totaled $5.40 million as of June 30, 2018).
  • Portfolio Performance: The portfolio includes a mix of performing and non-performing SBA unguaranteed investments. Non-performing SBA unguaranteed investments had a fair value of $14.12 million (5.00% of total unguaranteed SBA investments).
  • Liquidity: Cash and restricted cash increased to $28.28 million, providing liquidity for operations and new investments. The company utilized an At-the-Market (ATM) equity distribution agreement, issuing shares for net proceeds of $2.65 million during the period.
  • Risks: As a BDC, the company is subject to credit risk from its loan portfolio, interest rate risk, and the risk of non-performance by portfolio companies. The reliance on SBA guarantees for a portion of the portfolio mitigates some credit risk but introduces regulatory and compliance risks.

Key Facts for Investor Verification

  • Dividend Coverage: Verify the sustainability of the dividend policy given the net investment loss and the drawdown of retained earnings (distributions in excess of net investment income).
  • Debt Maturity Profile: Review the maturity schedule of the new Notes due 2023 and the remaining Notes due 2022 to assess refinancing risks.
  • Non-Performing Assets: Monitor the trend in non-performing SBA unguaranteed investments ($14.12M) and the associated fair value adjustments.
  • Controlled Investments: Assess the performance and valuation of the significant controlled investments (e.g., Universal Processing Services, Premier Payments, Newtek Technology Solutions), which make up a large portion of the portfolio's fair value.
  • Capital Raise: Track the utilization of the ATM equity program and its impact on share dilution versus capital deployment.