NewtekOne, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023; financial statements are unaudited. Amounts below are in U.S. dollars. Unless stated otherwise, financial amounts are in millions.
Business context and comparability
NewtekOne provides banking, lending, payments, technology, insurance and payroll services to small and medium-sized businesses. On January 6, 2023, it acquired National Bank of New York City, now Newtek Bank, withdrew its BDC election and became a financial holding company. It also ceased qualifying as a RIC for tax purposes. Former portfolio companies are now consolidated subsidiaries, and accounting and reporting changed substantially. Accordingly, comparisons with 2022 are not fully like-for-like; the 2023 results include acquired and newly consolidated businesses.
Financial performance and position
| Metric | Q3 2023 | Nine months 2023 | Prior comparable period |
|---|---|---|---|
| Net interest income | $8.1 | $18.3 | Q3 2022: $2.6; nine months 2022: $8.6 |
| Provision for credit losses | $3.4 | $7.3 | No comparable provision reported in 2022 |
| Noninterest income | $42.9 | $132.1 | Q3 2022: $25.3; nine months 2022: $72.9 |
| Noninterest expense | $34.5 | $113.9 | Q3 2022: $16.5; nine months 2022: $46.8 |
| Net income | $10.0 | $28.5 | Q3 2022: $11.4; nine months 2022: $34.5 |
| EPS, basic and diluted | $0.38 | $1.10 | Q3 2022: $0.47; nine months 2022: $1.43 |
Quarterly net interest margin was 2.71%; the nine-month margin was 2.31%. For the nine months, total interest and noninterest income was $200.1 million. The filing does not present this sum as a single revenue measure.
- Nine-month net income fell $6.0 million year over year despite higher reported noninterest income and net interest income after credit provision. Higher expenses, credit provision and taxes contributed to the decline. The comparisons are affected by the 2023 consolidation changes.
- Nine-month net gains on loan sales were $32.5 million, down from $50.0 million. Servicing income was $13.3 million, up from $9.9 million; fair-value-option loan gains were $12.6 million versus a $12.4 million loss.
- At September 30, total assets were $1.38 billion, deposits $432.6 million, borrowings $648.7 million, total liabilities $1.15 billion and shareholders’ equity $227.0 million. Loans totaled $884.6 million across held-for-sale and held-for-investment categories.
- Cash and cash equivalents were $223.7 million, including $70.7 million of restricted cash. Management reported $205.0 million of unused liquidity sources: $137.3 million of interest-bearing bank deposits, $52.1 million of undrawn revolver and facility availability, and $15.6 million of unrestricted cash.
- Operating cash flow was negative $116.7 million and investing cash flow negative $123.0 million for the nine months; financing provided $315.5 million. Cash and restricted cash ended at $223.7 million.
- Newtek Bank’s September 30 regulatory ratios included 23.8% Tier 1 capital to risk-weighted assets and 25.0% total capital to risk-weighted assets. The filing states the bank was “well-capitalized” and met capital conservation buffer requirements.
Material changes, outlook and risks
- NSBF is winding down SBA 7(a) originations, with new SBA 7(a) lending transitioned to Newtek Bank. NSBF retains and services its legacy SBA 7(a) and PPP portfolios during runoff. The company has guaranteed certain SBA obligations and set aside $10.0 million of restricted cash for potential obligations.
- The Federal Reserve commitments require divestiture or termination of the activities of NTS, its subsidiary SIDCO, and EWS within two years of becoming a financial holding company, subject to possible extension.
- Management said it was not seeing broad deterioration in operating results, but warned that recession, inflation, higher rates and funding costs, market volatility, depositor confidence, credit-market access, SBA program changes, and the ability to maintain lending, deposits, liquidity and capital could adversely affect performance. Dependence on secondary-market buyers and premiums for guaranteed SBA loan sales is also a risk.
- The company reported $98.0 million of unfunded lending commitments. It had $52.0 million of nonaccrual loans and additional past-due loans; reported aging includes loans considered well secured and in collection. Management recorded an $8.2 million allowance for credit losses on loans at amortized cost.
- No specific financial guidance or quantitative earnings outlook is provided in the supplied filing text. The company reported a $0.5 million legal reserve and stated that pending matters were not expected to have a material overall effect, while acknowledging outcomes are uncertain. A permanent FTC injunction continues to apply to certain NMS business practices.
- After quarter-end, the company paid off and terminated NSBF’s Capital One lines on October 2, 2023, recording a $0.3 million debt-extinguishment loss. It gave notice on November 7, 2023, that it would terminate the dividend reinvestment plan.
Important facts for investors to verify
- Assess 2023 results on a comparable basis, separating organic performance from the bank acquisition, consolidation and accounting changes.
- Track Newtek Bank’s deposit growth, deposit pricing, liquidity, regulatory capital, and compliance with OCC and Federal Reserve requirements.
- Review credit quality, nonaccrual and delinquency trends, CECL assumptions, charge-offs, and the runoff of NSBF’s legacy loan portfolio.
- Monitor borrowing costs, maturities, securitization performance and access to secondary markets for SBA loan sales.
- Evaluate the required technology-business divestitures, SBA wind-down obligations, legal matters and the effect of terminating the DRIP on capital and shareholder distributions.