Business context and reporting period
Newtek Business Services Corp. (the filing issuer; the request identifies Newtekone, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company operated as an internally managed business development company (BDC) and regulated investment company (RIC), focused on SBA lending and financial and business services for small and midsize businesses. Its planned acquisition of National Bank of New York City (NBNYC) and transition toward a bank holding company remained subject to regulatory approvals.
Key financial metrics
Amounts below are in millions except per-share data and ratios. The filing presents investment-company income rather than conventional operating revenue; it does not provide a clear gross-margin measure.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Investment income | $19.2 | $36.6 | $39.6 | $71.3 |
| Net investment income (loss) | ($2.3) | $15.5 | ($1.3) | $30.7 |
| Net realized and unrealized gains | $15.8 | $1.8 | $24.5 | $16.8 |
| Increase in net assets from operations | $13.5 | $17.4 | $23.2 | $47.5 |
| Operations per share | $0.56 | $0.77 | $0.96 | $2.12 |
| Dividends declared per share | $0.75 | $0.70 | $1.40 | $1.20 |
At June 30, total assets were $1,026.3 million, total liabilities $631.8 million, and net assets $394.5 million. NAV was $16.31 per share, down from $16.72 at December 31, 2021. Investments at fair value totaled $757.1 million. Total borrowings, at carrying value, were $511.8 million; the reported asset coverage ratio was 176% against a 150% minimum. Six-month interest expense was $10.5 million, versus $10.0 million a year earlier.
Six-month operating cash flow was a use of $65.2 million, versus $122.3 million provided in 2021. Cash plus restricted cash ended at $126.0 million, down from $186.9 million at year-end; unrestricted cash was $4.2 million and restricted cash $121.9 million. Management reported $27.9 million available under the Capital One facility and $19.6 million under the related-party line. Restricted cash is not generally available for ordinary corporate liquidity needs.
Material changes versus the prior comparable period
- Investment income declined 47% in Q2 and 44% for the first half, principally because PPP loan income ended after the company finished funding those loans in July 2021. PPP interest income had been $25.5 million in Q2 2021 and $49.7 million in the first half of 2021.
- Net investment income turned negative, while reported operating gains remained positive. First-half operating results fell to $23.2 million from $47.5 million, despite realized gains on SBA 7(a) investments rising to $35.2 million from $18.8 million.
- SBA 7(a) activity expanded: originations were $200.6 million in Q2 and $363.9 million in the first half, compared with $94.3 million and $198.6 million, respectively, in 2021. Average gain-on-sale prices declined to 109.21% in Q2 and 110.32% for the first half, from 114.00% and 113.71%.
- Unrealized depreciation increased to $11.2 million for the first half from $2.0 million in 2021, including lower fair values for SBA guaranteed and unguaranteed investments and servicing assets.
- At June 30, unguaranteed SBA loans on non-accrual had $50.6 million cost and $25.4 million fair value, compared with $54.1 million and $30.5 million at year-end. Non-accrual loans represented 10.8% of the unguaranteed SBA portfolio balance, down from 12.5%.
Outlook, commentary, risks and unusual items
- Management said it had not seen broad deterioration in portfolio-company results, but flagged uncertainty from inflation, rising interest rates, supply-chain and labor disruption, market volatility, COVID-19 effects, and the Russia-Ukraine conflict. Management warned that recessionary conditions could impair borrowers and increase defaults.
- Management attributed lower SBA loan sale premiums to the rising-rate environment, lagging Prime-rate adjustments and quarterly loan-rate resets. SBA rule changes effective August 1, 2022 revised maximum variable rates by loan size; the company was evaluating the potential effect.
- The company planned to acquire NBNYC for $20 million in cash, subject to adjustments and regulatory approvals, and anticipated approvals in the third or early fourth quarter of 2022. The agreement could be terminated in specified circumstances, including failure to close by November 2, 2022; a $0.2 million termination fee may apply in certain cases. Leaving BDC/RIC status would change its regulatory and tax treatment and could reduce its dividend capacity.
- On August 5, 2022, after quarter-end, NCL formed a 50/50 conventional-lending joint venture with TSO II. The company also expanded its ATM authorization in July to up to 6.4 million shares, with 3,437,661 shares available for sale as of August 5. A June repurchase program authorized up to 500,000 shares through December 21, 2022; none had been repurchased by June 30.
- Debt actions included issuing $30 million principal of 5.00% notes due 2025 and redeeming $15 million of 6.85% notes due 2025, with a $0.4 million extinguishment loss. The company reported compliance with debt covenants. Its BDC asset coverage was 176% at quarter-end.
- Unusual earnings composition: Q2 net investment loss of $2.3 million was outweighed by $15.8 million of realized and unrealized gains. Dividend income from controlled portfolio companies rose sharply, but management cautioned that such income depends on portfolio-company performance and may not recur at the same level.
- Other notable matters include $22.3 million of unfunded SBA 7(a) commitments; a $6.2 million nondischargeable judgment obtained in January 2022 in the BSP litigation, with no recovery gain recorded and no assurance of collection; and a continuing FTC injunction concerning certain NMS business practices. Management stated no current litigation was expected to materially affect financial condition.
Most important facts for investors to verify
- Confirm the status and terms of NBNYC regulatory approvals, the acquisition timetable, and the consequences for BDC/RIC status, taxes and dividends.
- Assess whether recurring SBA 7(a), servicing and controlled-company income can replace nonrecurring PPP income and sustain dividends, given first-half net investment loss and declared distributions exceeding operating results.
- Review credit quality, non-accrual and watch-list trends, portfolio-company concentration, and the assumptions supporting Level 3 fair values; most investments rely on significant unobservable inputs.
- Check liquidity and borrowing capacity after considering restricted cash, loan origination funding, securitization obligations, upcoming facility maturities and the $22.3 million of unfunded commitments.
- Track SBA secondary-market pricing and rate changes, the 176% asset coverage cushion, and any dilution from ATM share sales or repurchases above NAV.