Business Context and Reporting Period
Company: Newtek Business Services Corp. (NewtekOne, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Business Model: Newtek is an internally managed Business Development Company (BDC) and Regulated Investment Company (RIC). It operates as a leading national non-bank lender to small and medium-sized businesses (SMBs), primarily through its subsidiary Newtek Small Business Finance (NSBF) under the SBA 7(a) program. The company also holds controlling interests in portfolio companies providing payment processing, technology solutions, insurance, and payroll services.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total Assets | $653.3 million | $519.6 million |
| Total Investments (Fair Value) | $541.1 million | $456.7 million |
| Total Debt | $331.6 million | $216.3 million |
| Total Net Assets | $287.4 million | $278.3 million |
| Net Asset Value (NAV) per Share | $15.19 | $15.08 |
| Investment Income | $49.5 million | $38.9 million |
| Total Expenses | $57.0 million | $46.8 million |
| Net Investment Loss | $(7.5) million | $(7.9) million |
| Net Increase in Net Assets from Operations | $35.7 million | $39.0 million |
| Net Realized and Unrealized Gains | $43.2 million | $46.9 million |
| Dividends Declared per Share | $1.80 | $1.64 |
Liquidity: As of December 31, 2018, the company held $2.3 million in unrestricted cash and $29.0 million in restricted cash. Unused borrowing capacity included approximately $25.5 million under the Capital One facility and $22.9 million under related party notes.
Material Changes vs. Prior Period
- Loan Originations: NSBF originated approximately $469.2 million in SBA 7(a) loans in 2018, an increase from $385.9 million in 2017.
- Investment Income Growth: Total investment income increased by $10.6 million (27%) year-over-year, driven by higher interest income ($5.1M increase) and dividend income ($2.9M increase) from controlled portfolio companies.
- Expense Increases: Total expenses rose by $10.2 million. Interest expense increased by $4.7 million due to new 2023 Notes and securitization trusts, partially offset by the redemption of 2021 Notes. Salaries and benefits increased by $1.8 million due to headcount growth at NSBF.
- Debt Structure: The company redeemed all $40.3 million of its 2021 Notes in March 2018 and issued $57.5 million of 6.25% Notes due 2023 in February 2018. Total debt increased significantly to support loan growth.
- Asset Coverage: The asset coverage ratio was 185% as of December 31, 2018, well above the regulatory minimum of 150% (reduced from 200% following shareholder approval in July 2018).
Guidance, Outlook, Risks, and Unusual Items
- Market Conditions: Management noted that sale prices for guaranteed portions of SBA 7(a) loans were negatively impacted in the second half of 2018 by a higher interest rate environment, leading to higher prepayments and lower secondary market premiums. This trend could negatively impact future business results.
- Cybersecurity Incident: In early 2018, a controlled portfolio company, Newtek Technology Solutions (NTS), experienced a cybersecurity breach where an unauthorized third party misappropriated three domain names and potentially accessed customer information. This resulted in unrealized depreciation of $3.9 million on the NTS investment.
- Portfolio Company Performance: Significant unrealized depreciation was recorded for BSP (banc-serv Partners, LLC) totaling $4.9 million, resulting in a fair value of zero, due to declining financial performance and an FBI investigation. Conversely, NMS (Newtek Merchant Solutions) saw unrealized appreciation of $13.3 million.
- Regulatory Changes: The company successfully reduced its asset coverage requirement from 200% to 150% effective July 27, 2018, allowing for increased leverage capacity.
- Outlook: The company expects to continue expanding its business finance platform and controlled portfolio companies. It maintains a variable distribution policy targeting 90-100% of estimated annual taxable income.
Key Facts for Investor Verification
- SBA Loan Premiums: Verify the trend in secondary market sale prices for SBA guaranteed loans, as declining premiums directly impact realized gains and future profitability.
- Asset Coverage Ratio: Monitor the asset coverage ratio (currently 185%) to ensure compliance with the 150% minimum requirement under the 1940 Act, especially given the increased leverage capacity.
- Controlled Portfolio Valuations: Review the fair value determinations for controlled portfolio companies (e.g., NMS, NTS, BSP), as these are Level 3 assets subject to significant management judgment and recent volatility.
- Cybersecurity Remediation: Assess the ongoing costs and reputational impact of the NTS cybersecurity breach and the FBI investigation into BSP.
- Debt Maturities: Note the maturity profile of debt, including the 2023 Notes ($57.5M) and securitization trusts, to evaluate refinancing risks.