NewtekOne(US:NEWT)2024-08-09 19:05markdown PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=6&type=section&id=Item%201.%20Financial%20Statements) The company's total assets grew to **$1.62 billion**, while net income decreased to **$20.6 million** due to a prior year tax benefit [Consolidated Statements of Financial Condition](index=6&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) Total assets grew **13.1% to $1.62 billion**, driven by loan increases, while liabilities and equity also rose significantly Consolidated Balance Sheet Highlights (in Thousands) | Account | June 30, 2024 (Unaudited) | December 31, 2023 | | :--- | :--- | :--- | | **Total Assets** | **$1,617,004** | **$1,429,513** | | Total cash and cash equivalents | $206,338 | $184,006 | | Loans held for sale, at fair value | $179,739 | $118,867 | | Loans held for investment, at amortized cost, net | $430,731 | $323,731 | | **Total Liabilities** | **$1,343,002** | **$1,180,467** | | Total deposits | $610,425 | $463,505 | | Borrowings | $651,972 | $644,122 | | **Total Shareholders' Equity** | **$274,002** | **$249,046** | [Consolidated Statements of Income](index=7&type=section&id=Consolidated%20Statements%20of%20Income) Six-month net income decreased to **$19.8 million** due to a non-recurring 2023 tax benefit, despite increased net interest income Key Income Statement Data (in Thousands, except per share data) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 (Restated) | | :--- | :--- | :--- | | Net Interest Income | $18,032 | $10,256 | | Provision for credit losses | $9,814 | $3,893 | | Total Noninterest Income | $101,387 | $86,641 | | Total Noninterest Expense | $81,723 | $76,800 | | Net Income | $20,595 | $25,561 | | Net Income available to common shareholders | $19,795 | $24,912 | | Diluted EPS | $0.81 | $1.03 | Q2 Income Statement Data (in Thousands, except per share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 (Restated) | | :--- | :--- | :--- | | Net Interest Income | $9,126 | $5,673 | | Provision for credit losses | $5,799 | $2,575 | | Total Noninterest Income | $52,020 | $44,285 | | Total Noninterest Expense | $40,564 | $37,777 | | Net Income | $10,945 | $7,011 | | Net Income available to common shareholders | $10,545 | $6,611 | | Diluted EPS | $0.43 | $0.27 | [Consolidated Statements of Cash Flows](index=13&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities significantly improved, with financing activities providing **$155.8 million** in cash Summary of Cash Flows (in Thousands) | Cash Flow Activity | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 (Restated) | | :--- | :--- | :--- | | Net cash used in operating activities | $(35,751) | $(202,852) | | Net cash used in investing activities | $(97,763) | $(74,546) | | Net cash provided by financing activities | $155,846 | $385,820 | | **Net increase in cash and restricted cash** | **$22,332** | **$108,422** | [Notes to Consolidated Financial Statements](index=15&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail business operations, accounting policies, loan portfolio specifics, and internal control remediation efforts [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=55&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial holding company transition, **$1.6 billion** asset growth, and net income trends - The company completed its conversion to a **financial holding company** on January 6, 2023, acquiring **Newtek Bank** and consolidating former portfolio companies, now subject to **corporate income tax**[207](index=207&type=chunk) - **Newtek Bank** is currently the **largest SBA 7(a) lender** by dollar volume of loans approved, while the company's former subsidiary, NSBF, is in the process of **winding down its operations**[207](index=207&type=chunk)[211](index=211&type=chunk) [Financial Condition](index=59&type=section&id=Financial%20Condition) Total assets grew **13.1% to $1.6 billion** driven by loan growth, while nonperforming assets increased to **4.6%** Loan Portfolio Changes (in Thousands) | Loan Category | June 30, 2024 | Dec 31, 2023 | Change | | :--- | :--- | :--- | :--- | | Loans held for sale, at fair value | $179,739 | $118,867 | $60,872 | | Loans held for investment, at amortized cost, net | $430,731 | $323,731 | $107,000 | | Loans held for investment, at fair value | $415,893 | $469,801 | $(53,908) | | **Total Loans** | **$1,085,765** | **$969,006** | **$116,759** | - Nonperforming assets, including nonaccrual loans and other real estate owned, increased to **$69.9 million** (**4.6% of total assets**) at June 30, 2024, up from **$54.7 million** (**3.8% of total assets**) at December 31, 2023[227](index=227&type=chunk) [Results of Operations - Six Months Ended June 30](index=63&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20June%2030) Six-month net income decreased to **$20.6 million** due to a tax swing, despite pre-tax income growth Six-Month Performance Summary (in Thousands) | Metric | 2024 | 2023 (Restated) | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $18,032 | $10,256 | $7,776 | | Provision for credit losses | $9,814 | $3,893 | $5,921 | | Net Gains on Sales of Loans | $42,856 | $19,731 | $23,125 | | Net Income Before Taxes | $27,882 | $16,204 | $11,678 | | Income Tax Expense/(Benefit) | $7,287 | $(9,357) | $16,644 | | **Net Income** | **$20,595** | **$25,561** | **$(4,966)** | [Results of Operations - Three Months Ended June 30](index=70&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20June%2030) Q2 net income increased to **$10.9 million**, driven by higher net interest income and loan sale gains Three-Month Performance Summary (in Thousands) | Metric | Q2 2024 | Q2 2023 (Restated) | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $9,126 | $5,673 | $3,453 | | Provision for credit losses | $5,799 | $2,575 | $3,224 | | Net Gains on Sales of Loans | $22,564 | $13,364 | $9,200 | | Net Income Before Taxes | $14,783 | $9,606 | $5,177 | | **Net Income** | **$10,945** | **$7,011** | **$3,934** | - The average sale price of the guaranteed portion of SBA loans increased to **111.02%** of principal balance in Q2 2024 from **110.15%** in Q2 2023, reflecting higher demand[300](index=300&type=chunk) [Liquidity and Capital Resources](index=77&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$293.8 million** available, and Newtek Bank is well-capitalized - Total available liquidity sources as of June 30, 2024, were **$293.8 million**, including unrestricted cash, bank lines of credit, and FHLB borrowing availability[344](index=344&type=chunk) - In May/June 2024, the company completed a registered offering of **$71.9 million** of its 8.50% Notes due 2029, receiving net proceeds of **$69.6 million**[320](index=320&type=chunk) Newtek Bank Capital Ratios - June 30, 2024 | Ratio | Actual Ratio | Well-Capitalized Requirement | | :--- | :--- | :--- | | Tier 1 Capital (to Average Assets) | 13.6% | 5.0% | | Common Equity Tier 1 (to RWA) | 17.1% | 6.5% | | Tier 1 Capital (to RWA) | 17.1% | 8.0% | | Total Capital (to RWA) | 18.3% | 10.0% | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=87&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate, funding, and secondary market risks, with NII projected to increase in rising rates - The company's main market risks include interest rate fluctuations, liquidity/funding risk, and secondary market availability for SBA loans[383](index=383&type=chunk) Interest Rate Sensitivity Analysis - June 30, 2024 | Rate Change (bp) | Estimated % Change in NII (12 Months) | Estimated % Change in EVE | | :--- | :--- | :--- | | +200 | 12.8% | 1.8% | | +100 | 6.5% | 1.0% | | -100 | (6.0)% | (0.9)% | | -200 | (11.9)% | (1.6)% | [Item 4. Controls and Procedures](index=89&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls were ineffective due to material weaknesses in ICFR, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2024, due to **material weaknesses in ICFR** identified in the 2023 Form 10-K[397](index=397&type=chunk) - Remediation efforts are underway, including **hiring three CPAs** for the finance/accounting department and **two for the risk department**, implementing **new Governance, Risk and Compliance (GRC) technology**, and establishing a **monthly SOX Steering Committee**[400](index=400&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=92&type=section&id=Item%201.%20Legal%20Proceedings) Routine legal proceedings are not expected to materially impact financial condition; a subsidiary operates under a 2012 FTC injunction - Management believes that pending and threatened legal matters will not have a **material effect** on the company's business or financial position[405](index=405&type=chunk) - Subsidiary Newtek Merchant Solutions (NMS) is operating under a **permanent injunction** related to a 2012 Federal Trade Commission (FTC) litigation[405](index=405&type=chunk) [Item 1A. Risk Factors](index=92&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred in the risk factors since the 2023 Form 10-K filing - No **material changes** have occurred in the risk factors since the filing of the 2023 Form 10-K[406](index=406&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=92&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Dividend Reinvestment Plan (DRIP) was terminated in December 2023, with no shares issued in 2024 - The Dividend Reinvestment Plan (DRIP) was **terminated** in December 2023, and no shares were issued under this plan during the first half of 2024[407](index=407&type=chunk) [Item 5. Other Information](index=92&type=section&id=Item%205.%20Other%20Information) A board member established a Rule 10b5-1 trading plan for **9,000 shares**, active until September 2024 - A board member, Salvatore Mulia, entered into a **Rule 10b5-1 trading plan** for the sale of **9,000 shares** of Common Stock, which is active until September 22, 2024[409](index=409&type=chunk)