Business context and reporting period
NewtekOne, Inc. (formerly Newtek Business Services Corp.; Nasdaq: NEWT) filed this Form 10-K for the fiscal year ended December 31, 2022. The results below are for the full year, not a standalone fourth quarter. Throughout 2022, the Company operated as a business development company (BDC) and regulated investment company (RIC), with financial statements prepared under investment-company accounting.
After year-end, on January 6, 2023, the Company acquired National Bank of New York City for $20 million, renamed it Newtek Bank, contributed $31 million of cash and subsidiaries NBL and SBL to the bank, withdrew its BDC election, and became a financial holding company. The Company changed its name to NewtekOne, Inc. on January 17, 2023. These are significant post-year-end changes; they are not reflected in the 2022 balance sheet or operating results.
Financial performance and position
| Metric | FY2022 / Dec. 31, 2022 | FY2021 / Dec. 31, 2021 |
|---|---|---|
| Total investment income | $86.2 million | $108.5 million |
| Net investment income (loss) | $(6.5) million; $(0.27) per share | $25.7 million; $1.13 per share |
| Net realized and unrealized gains | $38.8 million | $58.5 million |
| Net increase in net assets from operations | $32.3 million; $1.34 per share | $84.1 million; $3.69 per share |
| Dividends declared per share | $2.75 | $3.15 |
| Net assets / NAV per share | $375.4 million / $15.25 | $403.9 million / $16.72 |
| Cash / restricted cash | $53.7 million / $71.9 million | $2.4 million / $184.5 million |
| Net cash from operating activities | $(62.4) million | $140.9 million |
| Borrowings, carrying amount | $539.3 million | $472.1 million |
| Asset coverage | 169% | 184% |
Investment income fell 20.5%. PPP interest income dropped to zero from $50.0 million in 2021, while SBA 7(a) interest income, servicing income, and dividend income increased. The Company originated $775.6 million of SBA 7(a) loans, up from $560.6 million, and recognized $56.9 million of realized gains on SBA 7(a) investments, compared with $53.1 million. Average sale price on guaranteed loan portions declined to 110.02% of principal from 113.05%.
Total expenses increased to $92.7 million from $82.8 million. Interest expense rose $5.8 million to $26.3 million, reflecting higher average balances and rates on securitization and bank debt, partly offset by debt redemptions. Net unrealized depreciation was $18.6 million, versus $6.0 million of appreciation in 2021, including depreciation in SBA loans and servicing assets, partly offset by appreciation in controlled investments.
Operating cash flow was negative despite positive reported earnings. The Company attributed the outflow mainly to loan funding and timing-related changes in amounts due to participants and broker receivables, partly offset by SBA guaranteed-loan sale proceeds and principal collections. At year-end, total assets were $998.9 million and liabilities were $623.5 million. Cash and restricted cash totaled $125.6 million; the filing also reported $53.7 million of unrestricted cash and $0.9 million of unused Capital One capacity and $8.5 million available under the related-party line. Restricted cash is not generally available for unrestricted corporate use.
The SBA 7(a) portfolio had $532.8 million of unguaranteed loans at cost; $69.7 million, or 13.1%, was non-accrual, compared with $54.1 million, or 12.5%, a year earlier. The fair value of those non-accrual loans was $34.4 million. These measures describe the legacy NSBF portfolio, which the Company expected to run off after transitioning originations to Newtek Bank.
Material changes versus the prior comparable period
- PPP-related income ended: the Company reported no PPP interest income in 2022, compared with $50.0 million in 2021. Management said PPP activity was not recurring and resources had been redeployed to SBA 7(a) lending.
- SBA 7(a) originations increased about 38% year over year, while the average sale premium on guaranteed portions declined by 3.03 percentage points.
- Net investment income moved from $25.7 million of income to a $6.5 million loss; net increase in assets from operations fell from $84.1 million to $32.3 million.
- NAV per share decreased from $16.72 to $15.25, and asset coverage declined from 184% to 169%.
- Borrowings rose by approximately $67.3 million on a carrying-value basis. The Company issued $30.0 million of 5.00% notes due 2025 and completed a $116.2 million SBA securitization; it also redeemed $15.0 million of 6.85% notes due 2025.
- The Company’s post-year-end conversion fundamentally changes its regulatory, tax, accounting, and consolidation framework. From 2023, controlled operating subsidiaries are to be consolidated, the Company will no longer qualify for RIC pass-through tax treatment, and it will no longer apply investment-company accounting to its portfolio companies.
Outlook, management commentary, risks, and unusual items
- Management said it did not see broad deterioration in operating results at the time of filing, but cited inflation, labor and supply constraints, rising rates, recession risk, geopolitical uncertainty, and market volatility as potential pressures on borrowers, loan values, funding costs, and loan-sale premiums.
- Newtek Bank was expected to transition SBA 7(a) originations from NSBF and management anticipated the bank would obtain SBA Preferred Lender Program status in the first quarter of 2023. The filing gives no numerical earnings or revenue guidance. Delays or failure to obtain the status or maintain the SBA license could reduce loan volumes and gains from loan sales.
- Newtek Bank’s OCC operating agreement includes business-plan, capital, liquidity, risk-management, and concentration requirements. The Company committed that the bank maintain at least a 10% Tier 1 leverage ratio and an 11.5% total risk-based capital ratio during the agreement. Regulators may restrict distributions, growth, or transfers of liquidity among legal entities; the parent may also be required to support the bank.
- The Company committed to divest or terminate EWS and NTS, including SIDCO, within two years of becoming a financial holding company, subject to possible extension. It also expects NSBF to cease new SBA 7(a) originations and wind down its portfolio while retaining servicing duties and potential SBA repair or denial liabilities.
- On February 28, 2023, lenders waived an event of default under the Capital One facility tied to NSBF’s net income for the quarter ended December 31, 2022. The filing does not provide the covenant calculation or the income shortfall; verify the waiver’s scope, conditions, and continuing compliance.
- Post-year-end financing included $50.0 million of 8.125% notes due 2025, issued in January 2023, and a $20.0 million preferred-stock placement in February 2023. The Company declared a $0.18-per-share quarterly cash dividend in February 2023; future dividends are not assured and are subject to regulatory and capital constraints.
- Credit and valuation are material risks. Most investments were Level 3, requiring significant unobservable assumptions; the auditor identified valuation of investments and servicing assets as critical audit matters. SBA guarantees may be denied or repaired if program requirements are not met, and the Company retains credit exposure on unguaranteed loan portions.
- Auditors gave an unqualified opinion on the 2022 financial statements and internal controls; management also concluded controls were effective. The filing reports no litigation expected to have a material impact on the Company’s financial condition. A $6.2 million judgment in a separate portfolio-company matter had no gain recorded, and collection is uncertain.
Important facts for investors to verify
- Review the complete audited statements and notes, particularly the effect of the bank acquisition, subsidiary consolidation, CECL adoption, and transition away from fair-value investment-company accounting in 2023.
- Track Newtek Bank’s SBA license and PLP status, loan originations, guaranteed-loan sale premiums, deposit growth, and compliance with OCC capital, liquidity, and concentration requirements.
- Reconcile the Capital One waiver with NSBF’s quarter-end results and facility covenants; monitor the facility’s 2023 maturity/conversion terms and other near-term obligations.
- Assess liquidity by legal entity, including restrictions on bank-to-parent transfers, restricted cash, cash held above insured limits, and the funding available for lending and debt service.
- Monitor legacy NSBF non-accruals, SBA repairs and denials, PPP runoff, servicing income, and the adequacy of restricted reserves.
- Evaluate debt costs and maturity exposure, including securitization liabilities, the 2024 and 2026 notes, the 2025 notes, and the new 8.125% notes; the 2024 and 2026 note covenants retain a 150% asset-coverage requirement.
- Confirm the timing and financial impact of required EWS and NTS divestitures, as well as the sustainability of dividends after the loss of RIC tax status.