Newtek Business Services Corp. (Newtek) 10-Q Summary
Business Context and Reporting Period
Company: Newtek Business Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2016
Business Model: Newtek is an internally managed, closed-end, non-diversified investment company. Its strategy focuses on generating current income through debt investments (primarily SBA 7(a) loans) and dividend income from equity investments in controlled portfolio companies. The company utilizes taxable subsidiaries to hold equity securities while maintaining Regulated Investment Company (RIC) status.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Investment Income | $14,017 | $10,356 |
| Total Expenses | $19,478 | $15,127 |
| Net Investment Loss | $(5,461) | $(4,771) |
| Net Realized and Unrealized Gains | $16,437 | $19,650 |
| Net Increase in Net Assets | $10,976 | $14,879 |
| Net Asset Value (NAV) per Share | $14.11 | $14.06 (Dec 31, 2015) |
| Total Assets | $376,682 | $352,430 (Dec 31, 2015) |
| Total Liabilities | $172,254 | $148,481 (Dec 31, 2015) |
| Cash and Cash Equivalents | $3,221 | $4,308 (Dec 31, 2015) |
Material Changes vs. Prior Period
- Investment Portfolio Growth: Total investments at fair value increased from $266.9 million at December 31, 2015, to $305.8 million at June 30, 2016. This growth was driven by significant additions to SBA unguaranteed non-affiliate investments and controlled investments.
- Expense Increase: Total expenses rose by approximately 29% year-over-year (from $15.1M to $19.5M). This increase was primarily due to a $1.487 million loss on lease recorded in the current period, which was not present in the prior year. Salaries and benefits also increased by roughly 13%.
- Debt Structure: The company issued Notes due 2021 totaling $38.6 million during the period, which were not present at the end of 2015. Conversely, bank notes payable decreased from $29.1 million to $25.1 million.
- Realized Gains: Net realized gains on non-affiliate investments were $13.8 million for the six months ended June 30, 2016, compared to $15.0 million in the prior year period.
Guidance, Outlook, and Risks
- Dividend Policy: The company declared dividends of $0.70 per share for the six-month period. Distributions are generally made in cash or reinvested in shares. The company intends to distribute net capital gains annually but may retain them for investment, treating them as deemed distributions for tax purposes.
- Share Repurchase: The previous share repurchase program terminated on June 3, 2016, after the company repurchased 70,000 shares for approximately $866,000. A new program was approved on May 11, 2016, authorizing the repurchase of up to 150,000 shares, with an expected termination date of November 11, 2016. No shares were repurchased under the new program in the second quarter.
- Investment Strategy: The company continues to focus on SBA 7(a) loans and controlled investments in data processing, hosting, and related services. A notable new investment was made in June 2016 in ADR Partners, LLC (banc-serv), a wholly-owned subsidiary providing SBA lending solutions, for $5.4 million.
- Risks and Contingencies:
- Non-Performing Loans: The portfolio includes non-performing SBA unguaranteed investments valued at $6.6 million (fair value) as of June 30, 2016. Valuation of these assets relies on discounted cash flow analysis of underlying collateral.
- Lease Accounting: The company anticipates that the adoption of new lease accounting standards (ASU 2016-02) will result in the recognition of additional assets and liabilities on the balance sheet.
- Concentration: A significant portion of the portfolio is concentrated in "Controlled Investments" (56.3% of total investments), which are equity stakes in companies where Newtek owns more than 25% of voting securities.
Key Facts for Investor Verification
- Lease Loss Impact: Verify the nature and one-time nature of the $1.487 million "Loss on lease" expense, as it significantly impacted the net investment loss for the period.
- Controlled Investment Valuation: Review the fair value methodology for controlled investments, which represent over half of the total investment portfolio and are valued using significant management judgment (Level 3 inputs).
- Debt Maturity Profile: Assess the impact of the new $38.6 million "Notes due 2021" on future liquidity and interest expense obligations.
- Non-Performing Asset Recovery: Monitor the recovery rates and valuation adjustments for the $6.6 million in non-performing SBA unguaranteed investments.
- Share Repurchase Activity: Track execution of the new share repurchase program authorized in May 2016 to gauge management's view on share price and capital allocation.