Newtek Business Services Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. The filing identifies the registrant as Newtek Business Services Corp.; the request metadata names Newtekone, Inc.
Business context and reporting period
The company is an internally managed business development company and regulated investment company focused on small- and medium-sized businesses. Its platform combines SBA lending with controlled businesses providing payment processing, technology, insurance, payroll and related services. The filing describes a planned acquisition of National Bank of New York City (NBNYC), subject to regulatory approval, as part of a proposed transition to a bank holding company.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total investment income | $23.6 million | $12.4 million | $63.2 million | $83.7 million |
| Net investment income (loss) | $0.2 million | $(6.7) million | $(1.1) million | $24.0 million |
| Net increase in net assets from operations | $11.4 million | $16.6 million | $34.5 million | $64.1 million |
| Operations per share | $0.47 | $0.74 | $1.43 | $2.85 |
| Dividends declared per share | $0.65 | $0.90 | $2.05 | $2.10 |
- Investment income is not conventional operating revenue for this BDC. The filing does not provide a conventional gross margin measure.
- Nine-month operating cash flow was a use of $127.6 million, versus cash provided of $151.7 million in 2021. The filing attributes the 2022 use largely to SBA loan funding and timing-related decreases in amounts due to participants, partly offset by loan-sale proceeds and principal collections.
- At September 30, total assets were $1.007 billion, investments at fair value were $785.6 million, total liabilities were $614.7 million, and net assets were $391.8 million. NAV was $16.04 per share, down from $16.72 at December 31, 2021.
- Debt and related-party borrowings totaled $545.5 million, up from $472.1 million at year-end. This included $298.1 million of securitization notes, $67.5 million of bank borrowings, and $150,000 of related-party notes. The weighted-average interest rate on total borrowings was 5.00%, compared with 3.38% at year-end.
- Reported unrestricted cash was $7.4 million and restricted cash was $74.8 million. Management reported unused liquidity of $27.5 million under the Capital One facility and $18.9 million under the related-party line. Restricted cash is not equivalent to freely available cash.
- Asset coverage was 171%, above the 150% minimum applicable to the company. The company reported compliance with debt covenants.
- Unguaranteed SBA investments included $58.9 million at cost in non-accrual status, with fair value of $31.1 million; non-accrual loans represented 11.8% of the unguaranteed SBA portfolio by balance.
Material changes versus comparable periods
- Q3 investment income rose by $11.2 million year over year, primarily reflecting higher SBA 7(a) interest, servicing and other income, plus $7.2 million of dividend income from controlled businesses. Nine-month investment income fell by $20.5 million, mainly because PPP interest income of $50.0 million in 2021 did not recur in 2022.
- Nine-month operations declined to $34.5 million from $64.1 million, despite higher realized gains on SBA loan sales. Net investment income shifted from $24.0 million of income to a $1.1 million loss, while net unrealized results shifted from $2.3 million of appreciation to $14.8 million of depreciation.
- Q3 operations included $14.8 million of realized gains on SBA 7(a) loans, versus $19.3 million a year earlier. The reported gain-on-sale premium was 109.46% of principal, down from 113.04%; management cited rising rates, lagging loan-rate resets and market conditions.
- Nine-month SBA 7(a) originations rose to $586.9 million from $362.6 million. The servicing portfolio reached $2.217 billion from $1.839 billion, supporting higher servicing income.
- Interest expense increased by $2.2 million for the nine months, reflecting higher average borrowing balances and rates and additional securitization and bank debt. The company issued $30 million of 5.00% notes due 2025 and redeemed $15 million of 6.85% notes due 2025.
Outlook, risks and unusual items
- Bank acquisition: The proposed NBNYC acquisition requires regulatory approvals. Management anticipated receiving approvals in Q4 2022, but the purchase agreement allows termination if the transaction has not closed by January 3, 2023 or approvals are denied. The stated cash consideration is $20 million, subject to adjustments; the agreement also contemplates a distribution of certain property and excess tangible common equity to the sellers. The company cautions that closing and successful operation as a bank holding company are not assured.
- If the transition proceeds, the company expects to discontinue BDC regulation and lose RIC pass-through tax treatment. Management said it expected to remain a BDC and RIC in the near term and continue its existing dividend policy; no earnings or dividend guidance is provided.
- A new equal-partner Newtek-TSO conventional lending joint venture was formed in August 2022 and was expected to begin investing in Q4 2022. NCL completed a $56.3 million loan securitization in January 2022; its net assets fell to $32.5 million from $58.9 million at year-end, including unrealized loan depreciation.
- Management cited inflation, supply-chain and labor constraints, rising interest rates, recession risk, market volatility, COVID-19 effects, and geopolitical uncertainty. It reported no broad deterioration in portfolio-company results at the time of filing, but warned that borrower performance and investment values could worsen.
- Most investment values rely on Level 3 estimates and unobservable inputs; forced-sale proceeds could be materially below reported fair value. The filing also notes declining SBA secondary-market sale premiums and valuation sensitivity to interest rates and loan performance.
- The company had $15.3 million of unfunded SBA loan commitments. It reported a $6.2 million nondischargeable judgment in litigation related to a former portfolio company, but gave no assurance of recovery and recorded no gain contingency. Management said no current litigation was expected to have a material financial impact.
- PPP-related income is described as nonrecurring. A $0.4 million loss on extinguishment of debt was recorded in 2022 following the redemption of the 2025 6.85% notes.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the NBNYC acquisition obtained required approvals and closed, and the resulting effects on regulation, taxes, capital needs and dividends.
- Trends in SBA loan non-accruals, credit losses, recoveries and loan-sale premiums, including sensitivity to higher interest rates.
- Whether cash generation, available credit and restricted-cash requirements can support loan originations, debt service, unfunded commitments and distributions.
- How much reported earnings and NAV depend on controlled-company dividends, realized loan-sale gains and Level 3 fair-value estimates rather than recurring net investment income.
- The trajectory of borrowing costs, securitization balances, refinancing obligations and asset coverage as debt and interest rates change.
- Progress and funding terms for the Newtek-TSO joint venture and the outlook for NCL’s loan portfolio and securitization-related liabilities.