NewtekOne(NEWT) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for NewtekOne, Inc Consolidated Statements of Financial Condition The company's total assets grew significantly due to the consolidation of Newtek Bank Consolidated Statements of Financial Condition (In Thousands) | ASSETS | March 31, 2023 (Unaudited) | December 31, 2022 (Investment Company Accounting) | |:---|:---|:---| | Cash and due from banks | $27,349 | $53,692 | | Restricted cash | $72,599 | $71,914 | | Interest bearing deposits in banks | $97,196 | — | | Total cash and cash equivalents | $197,144 | $125,606 | | Loans held for sale, at fair value | $125,639 | $19,171 | | Loans held for investment, at fair value | $532,788 | $505,268 | | Total assets | $1,249,739 | $998,902 | | LIABILITIES AND NET ASSETS | | | | Deposits: | | | | Noninterest-bearing | $22,878 | — | | Interest-bearing | $224,696 | — | | Total deposits | $247,574 | — | | Borrowings | $697,395 | $539,326 | | Total liabilities | $1,031,701 | $623,544 | | Total shareholders' equity | $218,038 | $375,358 | | Total liabilities and shareholders' equity | $1,249,739 | $998,902 | - Total assets increased by $250.8 million (25.1%) from December 31, 2022, to March 31, 2023, primarily due to the consolidation of Newtek Bank and other entities[13][14][242] - Total deposits of $247.6 million were reported at March 31, 2023, with no deposits at December 31, 2022, reflecting the acquisition of Newtek Bank[13][14][247] Consolidated Statements of Income Net income increased year-over-year, driven by higher interest and noninterest income Consolidated Statements of Income (In Thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |:---|:---|:---| | Total interest income | $18,715 | $7,743 | | Total interest expense | $14,132 | $4,667 | | Net interest income | $4,583 | $3,076 | | Provision for loan credit losses | $1,318 | — | | Net interest income after provision for loan credit losses | $3,265 | $3,076 | | Total noninterest income | $42,787 | $22,228 | | Total noninterest expense | $39,197 | $14,709 | | Income before taxes | $6,855 | $10,595 | | Income tax (benefit) expense | $(4,863) | $943 | | Net income | $11,718 | $9,652 | | Net income available to common shareholders | $11,469 | $9,652 | | Basic EPS | $0.46 | $0.40 | | Diluted EPS | $0.46 | $0.40 | - Net income increased by $2.066 million, from $9.652 million in Q1 2022 to $11.718 million in Q1 2023[16][18][251][252] - Total interest income significantly increased by $10.972 million, driven by a $10.4 million increase in loan portfolio interest income[16][253][254] - Total noninterest income increased by $20.559 million (92.5%) to $42.787 million in Q1 2023, primarily due to the consolidation of new entities and related technology/IT support and electronic payment processing income[16][252][265][269] Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2023 was slightly lower than net income due to an unrealized loss Consolidated Statements of Comprehensive Income (In Thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |:---|:---|:---| | Net income | $11,718 | $9,652 | | Other comprehensive loss, net of tax | $(82) | — | | Total comprehensive income | $11,636 | $9,652 | - Total comprehensive income for Q1 2023 was $11.636 million, including a net unrealized loss on debt securities available-for-sale of $(113) thousand before tax[19] Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased significantly due to accounting adjustments from the BDC conversion - Total shareholders' equity decreased from $375.358 million at December 31, 2022, to $218.038 million at March 31, 2023[14][21] - Significant adjustments in Q1 2023 include a $(138.043) million removal of fair value adjustments and a $(65.215) million consolidation of controlled investments due to the conversion to a financial holding company[21] - The Company issued $20.0 million in preferred stock and declared common share dividends of $(4.363) million and preferred share dividends of $(249) thousand in Q1 2023[21] Consolidated Statements of Cash Flows Cash flow from operations turned negative while financing activities provided substantial cash inflows Consolidated Statements of Cash Flows (In Thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |:---|:---|:---| | Net cash (used in) provided by operating activities | $(116,359) | $6,478 | | Net cash used in investing activities | $(23,898) | — | | Net cash provided by (used in) financing activities | $186,899 | $(29,884) | | Net increase (decrease) in cash and restricted cash | $46,642 | $(23,406) | | Cash and restricted cash—end of period | $197,144 | $163,454 | - Operating activities used $116.359 million in Q1 2023, a significant change from $6.478 million provided in Q1 2022, primarily due to SBA 7(a) loan investments funded and increases in broker receivables[25][27][317] - Investing activities used $23.898 million in Q1 2023, mainly for purchasing available-for-sale securities and increasing loans held for investment[25][27][318] - Financing activities provided $186.899 million in Q1 2023, driven by preferred stock issuance, bank borrowings, and 2025 8.125% Notes issuance, offsetting securitization note payments[25][27][319] Notes to Consolidated Financial Statements These notes detail the accounting policies and financial items following the company's transformation NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION The company transformed into a financial holding company after acquiring Newtek Bank - The Company is now a financial holding company providing business and financial solutions to SMBs, including Newtek Bank, Newtek Lending, Newtek Payments, Newtek Insurance, Newtek Payroll, and Newtek Technology[29] - On January 6, 2023, the Company acquired NBNYC for $20 million, renamed it Newtek Bank, National Association, and contributed $31 million cash and two subsidiaries (NBL, SBL) to it[30] - The Company ceased to be a BDC and RIC, becoming subject to Federal Reserve supervision, and now consolidates various non-bank subsidiaries (e.g., NSBF, Newtek Merchant Solutions, Newtek Technology Solutions)[31] - Comparisons to prior periods include adjustments to reconcile investment company accounting to financial holding company accounting, affecting stockholders' equity and cash flows[32] NOTE 2—SIGNIFICANT ACCOUNTING POLICIES This note outlines key accounting policies adopted after converting to a financial holding company - The Company applies fair value accounting to certain financial instruments, categorizing them into a three-level hierarchy based on observability of inputs (ASC Topic 820)[36] - Business combinations are accounted for under the acquisition method, recognizing identifiable assets and liabilities at fair value, with excess purchase price as goodwill (ASC 805)[41] - The Company adopted the CECL (Current Expected Credit Loss) approach for measuring credit losses on financial instruments, effective January 1, 2023, replacing the incurred loss approach[42][72] - Deferred tax assets and liabilities are computed based on temporary differences between financial statement and income tax bases, with a valuation allowance if realization is unlikely[62] - Revenue from electronic payment processing and fee income is recognized when control of goods/services is transferred to customers, reflecting expected consideration (ASC 606)[89] NOTE 3—BUSINESS COMBINATION This note details the acquisition of NBNYC for $20 million, resulting in $1.3 million of goodwill - On January 6, 2023, the Company acquired NBNYC for $20 million in an all-cash transaction, plus $1.3 million in acquisition costs[102] - The acquisition resulted in a preliminary goodwill of $1.3 million, representing the excess of purchase price over the fair value of net assets acquired[106] Preliminary Allocation of Consideration Paid for NBNYC (in thousands) | Item | Amount | |:---|:---| | Purchase price consideration | $21,322 | | Fair value of assets acquired: | | | Cash and cash equivalents | $32,574 | | Securities | $6,527 | | Loans held for investment | $159,057 | | Goodwill | $1,279 | | Core deposit intangible | $1,040 | | Other Assets | $1,631 | | Total assets acquired | $202,108 | | Fair value of liabilities assumed: | | | Deposits | $137,015 | | Borrowings | $27,972 | | Other liabilities | $15,799 | | Total liabilities assumed | $180,786 | | Fair value of net assets acquired | $21,322 | - Fair values of acquired assets and assumed liabilities are preliminary and subject to adjustment for up to one year post-acquisition[104] NOTE 4—INVESTMENTS This note details the company's portfolio of equity investments, joint ventures, and debt securities Total Investments (in thousands) | Investment Type | March 31, 2023 Cost | March 31, 2023 Fair Value | December 31, 2022 Cost | December 31, 2022 Fair Value | |:---|:---|:---|:---|:---| | Non-controlled equity investments | $1,360 | $1,360 | $1,360 | $1,360 | | Joint Ventures | $23,314 | $25,022 | $23,314 | $23,022 | | Controlled investments (Equity) | — | — | $99,195 | $241,113 | | Controlled investments (Debt) | — | — | $32,300 | $18,104 | | Total investments | $24,674 | $26,382 | $156,169 | $283,599 | - The Company's debt securities available-for-sale portfolio totaled $32.905 million at fair value as of March 31, 2023, primarily consisting of U.S. Treasury notes and Government agency debentures[121] - Unrealized losses on available-for-sale securities totaled $198 thousand at March 31, 2023, primarily due to non-credit-related market volatility and interest rate changes[122] - NCL JV and TSO JV are 50% owned joint ventures focused on non-conforming conventional commercial and industrial term loans[116][118] NOTE 5—LOANS HELD FOR INVESTMENT This note breaks down the loan portfolio, credit quality, and allowance for credit losses Loan Portfolio by Type (in thousands) | Loan Type | March 31, 2023 Fair Value | December 31, 2022 Fair Value | |:---|:---|:---| | Loans held for investment, at fair value | $532,788 | $505,268 | | Loans held for investment, at amortized cost, net | $164,639 | — | | Total Loans | $697,426 | $505,268 | - As of March 31, 2023, total past due and non-accrual loans amounted to $120.092 million, with $42.380 million on non-accrual status[128] - The Allowance for Credit Losses (ACL) at March 31, 2023, was $2.189 million, established due to the transition to a financial holding company and the acquisition of purchased credit deteriorated (PCD) loans[145] - The Company uses an internal grading system (1-8) to rank loan quality, from Exceptional (1) to Loss (8), with grades 6-7 representing classified loans[133][140] NOTE 6—TRANSACTIONS WITH AFFILIATED COMPANIES AND RELATED PARTY TRANSACTIONS This note summarizes transactions with affiliated companies, including joint ventures and investments Affiliate Investments (in thousands) | Company | Fair Value at Dec 31, 2022 | Net Unrealized Gains/(Losses) | Fair Value at Mar 31, 2023 | Dividend Income | |:---|:---|:---|:---|:---| | Newtek Conventional Lending, LLC | $16,587 | $2,315 | $18,900 | $484 | | Newtek TSO II Conventional Credit Partners, LP | $6,435 | $(313) | $6,122 | — | | EMCAP Loan Holdings, LLC | $1,000 | — | $1,000 | $20 | | Biller Genie Software, LLC | $360 | — | $360 | — | | Total Affiliate Investments | $24,382 | $2,002 | $26,382 | $504 | - Amounts due from affiliated companies decreased from $1.3 million at December 31, 2022, to $0.1 million at March 31, 2023[148] - Newtek Business Services Holdco 6, Inc. purchased a $5.3 million loan from Newtek Conventional Lending, LLC during Q1 2023[148] NOTE 7—SERVICING ASSETS This note details the company's servicing assets derived from SBA 7(a) loans - Servicing assets are measured at fair value, with changes reported in earnings[149] - As of March 31, 2023, the Company services $1.6 billion in SBA 7(a) loans[149] Servicing Assets and Valuation Assumptions (in thousands) | Date | Fair Value | Unobservable Input | Weighted Average | Minimum | Maximum | |:---|:---|:---|:---|:---|:---| | March 31, 2023 | $33,351 | Discount factor | 14.50 % | 14.50 % | 14.50 % | | | | Cumulative prepayment rate | 25.00 % | 25.00 % | 25.00 % | | | | Average cumulative default rate | 20.00 % | 20.00 % | 20.00 % | | December 31, 2022 | $30,268 | Discount factor | 16.50 % | 16.50 % | 16.50 % | | | | Cumulative prepayment rate | 25.00 % | 25.00 % | 25.00 % | | | | Average cumulative default rate | 25.00 % | 25.00 % | 25.00 % | - Servicing fee income for Q1 2023 was $4.4 million, up from $3.2 million in Q1 2022[149] NOTE 8—GOODWILL AND INTANGIBLE ASSETS This note details goodwill and intangible assets arising from acquisitions and consolidations Goodwill (in thousands) | Item | March 31, 2023 | December 31, 2022 | |:---|:---|:---| | NBNYC acquisition | $1,279 | — | | Other goodwill | $19,910 | — | | Total goodwill | $21,189 | — | Intangible Assets (in thousands) | Item | March 31, 2023 Net Carrying Amount | December 31, 2022 Net Carrying Amount | |:---|:---|:---| | Core Deposits | $989 | — | | Customer lists | $5,923 | — | | Total intangible assets | $6,912 | — | - Amortization expense for intangible assets was $0.4 million for Q1 2023[151] - The remaining estimated aggregate future amortization expense for intangible assets is $6.912 million, with $1.207 million expected in the remainder of 2023[152] NOTE 9—FAIR VALUE MEASUREMENTS This note details the company's fair value measurements using a three-level hierarchy - Fair value is defined as the exit price in an orderly transaction between market participants, categorized into Level 1 (quoted active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[153][154][155] Fair Value Measurements at March 31, 2023 (in thousands) | Assets | Total Fair Value | Level 1 | Level 2 | Level 3 | |:---|:---|:---|:---|:---| | Debt securities available-for-sale | $32,905 | $29,102 | $3,803 | — | | Loans held for sale, at fair value | $125,639 | — | $125,639 | — | | Loans held for investment, at fair value | $532,788 | — | — | $532,788 | | Servicing assets | $33,351 | — | — | $33,351 | | Total assets | $754,581 | $29,102 | $129,442 | $571,015 | | Liabilities: | | | | | | Derivative instruments | $624 | — | $624 | — | - The change in net gain/loss on Level 3 loans accounted for under the fair value option included $6.1 million in gains on SBA unguaranteed non-affiliate investments and $0.9 million in unrealized depreciation on servicing assets for Q1 2023[162] - The Company's investments in TSO JV and NCL JV are measured at fair value using NAV and are not classified within the fair value hierarchy[162][163] NOTE 10—DEPOSITS This note details the company's deposit liabilities following the acquisition of Newtek Bank Deposits by Type (in thousands) | Deposit Type | March 31, 2023 | |:---|:---| | Non-interest-bearing: | | | Demand | $22,878 | | Interest-bearing: | | | Checking | $784 | | Money market | $25,770 | | Savings | $16,700 | | Time deposits | $181,442 | | Total interest-bearing | $224,696 | | Total deposits | $247,574 | - Time deposits, money market, and interest-bearing checking obtained through brokers totaled $106.763 million[169] - Aggregate amount of deposit accounts that exceeded the FDIC limit was $13.357 million[169] - Scheduled maturities for time deposits show $104.922 million maturing in the remainder of 2023[171] NOTE 11—BORROWINGS This note details the company's borrowings, which increased due to new notes and credit lines Borrowings by Type (in thousands) | Borrowing Type | March 31, 2023 Outstanding | Weighted Average Interest Rate | December 31, 2022 Outstanding | Weighted Average Interest Rate | |:---|:---|:---|:---|:---| | Bank Lines of Credit | $147,797 | 7.90 % | $55,885 | 7.25 % | | FHLB Advances | $24,531 | 2.20 % | — | — | | 2024 Notes | $37,958 | 5.75 % | $37,903 | 5.75 % | | 2025 5.00% Notes | $29,365 | 5.00 % | $29,306 | 5.00 % | | 2025 8.125% Notes | $49,040 | 8.13 % | — | — | | 2026 Notes | $113,025 | 5.50 % | $112,846 | 5.50 % | | Notes payable - Securitization Trusts | $248,577 | 6.85 % | $279,136 | 6.19 % | | Total | $697,395 | 6.69 % | $539,326 | 6.11 % | - Total borrowings increased by $158.069 million from December 31, 2022, to March 31, 2023[172][248] - The Company completed a private placement of $50.0 million aggregate principal amount of 8.125% notes due 2025 in January 2023, with net proceeds of approximately $48.94 million[172] - Total interest expense related to borrowings for Q1 2023 was $11.1 million, compared to $26.3 million in Q1 2022[176] NOTE 12—DERIVATIVE INSTRUMENTS This note describes the use of interest rate futures to manage fair value variability - The Company uses interest rate futures to economically manage fair value variability of fixed rate assets[177] Derivative Instruments Outstanding (in thousands) | Contract Type | March 31, 2023 Fair Value Liability | Remaining Maturity (years) | |:---|:---|:---| | 5-year Swap Futures | $624 | 0.25 | Net Realized Gains (Losses) and Unrealized Appreciation (Depreciation) on Derivatives (in thousands) | Contract Type | Q1 2023 Unrealized Appreciation/(Depreciation) | Q1 2023 Realized Gain/(Loss) | Q1 2022 Unrealized Appreciation/(Depreciation) | Q1 2022 Realized Gain/(Loss) | |:---|:---|:---|:---|:---| | 5-year Swap Futures | $197 | $(693) | $183 | $445 | NOTE 13—COMMITMENTS AND CONTINGENCIES This note outlines operating commitments, legal matters, guarantees, and unfunded commitments Operating and Employment Commitments (in thousands) | Year | Operating Leases | Employment Agreements | Total | |:---|:---|:---|:---| | 2023 | $2,163 | $2,131 | $4,294 | | 2024 | $2,820 | $363 | $3,183 | | 2025 | $2,585 | — | $2,585 | | 2026 | $2,035 | — | $2,035 | | 2027 | $479 | — | $479 | | Total | $10,082 | $2,494 | $12,576 | - The Company is a guarantor on several credit facilities, including SPV I Capital One ($19.3 million owed), SPV II Deutsche Bank ($7.1 million owed), SPV III One Florida Bank ($13.7 million owed), and the Webster Facility ($39.9 million outstanding)[185][186][187][188] - Unfunded commitments as of March 31, 2023, totaled $110.4 million, comprising $14.3 million in SBA 7(a) loans, $81.7 million in SBA 504 loans, and $14.4 million in commercial and industrial loans[189] NOTE 14—STOCK BASED COMPENSATION This note details the company's stock-based compensation plan and related expenses - The Company accounts for equity-based compensation using the fair value method (ASC Topic 718)[190] - As of March 31, 2023, $5.1 million of total unrecognized compensation expense related to unvested restricted shares is expected to be recognized over a weighted-average period of approximately 2.3 years[192] - Total stock-based compensation expense for Q1 2023 was $0.7 million, compared to $0.8 million for Q1 2022[193] - The Equity Incentive Plan was terminated in April 2023, with a new plan to be considered by shareholders[192] NOTE 15—EARNINGS PER SHARE This note presents the earnings per share calculations using the two-class method Earnings Per Share Calculation (in thousands, except per share data) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |:---|:---|:---| | Net income | $11,718 | $9,652 | | Net income available to common shareholders | $11,469 | $9,652 | | Basic EPS | $0.46 | $0.40 | | Weighted average shares outstanding | 24,609 | 24,156 | | Total adjustments to weighted average shares outstanding | 628 | — | | Diluted weighted average shares outstanding | 25,237 | n/a | | Diluted EPS | $0.46 | n/a | - The Company issued 20,000 shares of Series A Convertible Preferred Stock for $20.0 million, convertible into 47.54053782 shares of Common Stock per preferred share[195] - Warrants were issued to purchase 47,540 shares of Common Stock at $21.03468 per share[195] NOTE 16—LEASES This note details the company's operating lease liabilities recognized under ASC 842 - Operating lease expense is recognized on a straight-line basis over the lease term (ASC 842)[196] Operating Lease Information | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |:---|:---|:---| | Cash paid for amounts included in lease liabilities | $709 | $461 | | Weighted-average remaining lease term | 3.63 years | 4.91 years | | Weighted-average discount rate | 5.64 % | 4.76 % | | Total lease costs | $949 | $239 | Maturity of Lease Liabilities (in thousands) | Year | Amount | |:---|:---| | 2023 | $2,163 | | 2024 | $2,820 | | 2025 | $2,585 | | 2026 | $2,035 | | 2027 | $479 | | Thereafter | — | | Total future minimum lease payments | $10,082 | | Less: Imputed interest | $(938) | | Present value of future minimum lease payments | $9,144 | NOTE 17—DIVIDENDS AND DISTRIBUTIONS This note summarizes the company's dividend declarations and distributions for the quarter Dividend Declarations and Distributions | Period | Date Declared | Amount Per Share | Cash Distribution (in thousands) | DRIP Shares Issued | DRIP Shares Value (in thousands) | |:---|:---|:---|:---|:---|:---| | Three months ended March 31, 2023 | February 27, 2023 | $0.18 | $4,291 | 6 | $72 | | Three months ended March 31, 2022 | December 20, 2021 | $0.65 | $15,361 | 9 | $225 | - An additional $0.1 million in shares were issued for dividends on unvested restricted stock awards in both Q1 2023 and Q1 2022[200] NOTE 18—INCOME TAXES This note explains the significant change in the company's income tax status - The Company ceased to be a RIC and became subject to corporate-level income tax as a financial holding company starting January 1, 2023[204][348] - The effective tax rate for Q1 2023 was (71.41)%, differing from the 21% federal rate due to subsidiary net operating losses and other discrete items[207] - At December 31, 2022, the Company had $34.2 million in federal net operating losses (NOLs), with $4.6 million expiring between 2029-2037 and $29.6 million having indefinite lives[208] - Deferred tax liabilities were $3.5 million at March 31, 2023, down from $19.2 million at December 31, 2022, reflecting the accounting change[346] NOTE 19—SEGMENTS This note outlines the company's four reportable operating segments and their financial results - The Company operates four reportable segments: Banking, Non-Bank SBA 7(a) Lending (NSBF), Payments, and Technology[211] - The Banking segment includes Newtek Bank, NBL, and SBL, originating and servicing various loans and offering depository services[211][288] - The NSBF segment relates to legacy SBA 7(a) loan portfolios held outside the bank, with no new origination activity[212] Segment Net Income (Loss) for Q1 2023 (in thousands) | Segment | Net Income (Loss) | |:---|:---| | Banking | $(2,483) | | Technology | $182 | | NSBF | $13,547 | | Payments | $2,664 | | Corporate and other | $(2,193) | | Consolidated net income | $11,718 | NOTE 20—SUBSEQUENT EVENTS This note details the NSBF Wind-down Agreement and Newtek Bank's new lending status - On April 13, 2023, NSBF and the SBA entered an agreement for NSBF to wind down its SBA 7(a) loan originations, transitioning them to Newtek Bank[219] - NSBF will continue to own, service, and liquidate its existing SBA 7(a) and PPP loan portfolio, subject to SBA approval for sales/transfers[219] - Newtek Bank received Preferred Lenders Program (PLP) status on April 27, 2023, granting it delegated authority for SBA-guaranteed loans[219] - The Company has guaranteed NSBF's obligations to the SBA and agreed to fund a $10 million account to secure these obligations[219] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, highlighting its transformation Forward-Looking Statements This section cautions that the report contains forward-looking statements involving risks - Statements in the report that are not historical facts are forward-looking and involve substantial risks and uncertainties[221] - Forward-looking statements relate to future operating results, business prospects, contractual arrangements, economic dependence, ability to achieve objectives, liquidity, and compliance costs as a financial holding company[222] - Risks include economic downturns, credit market contractions, interest rate volatility, and impacts from global macroeconomic and geopolitical environments[222] Executive Overview The company became a financial holding company after acquiring Newtek Bank in January 2023 - As of January 6, 2023, NewtekOne became a financial holding company, providing business and financial solutions to the SMB market, following the acquisition of NBNYC (Newtek Bank)[224] - The Company withdrew its BDC election and ceased to be a RIC, now subject to Federal Reserve supervision and corporate income tax[224][227] - NSBF, historically a top SBA 7(a) lender, is winding down operations, with originations transitioning to Newtek Bank, which has PLP status for expedited loan processing[228][229] Economic Developments The company faces risks from supply chain issues, inflation, and financial market instability - The Company observes supply chain interruptions, labor shortages, commodity inflation, rising interest rates, and financial market instability[230] - Concerns about banking organizations' financial condition, including recent bank failures (e.g., Silicon Valley Bank, Signature Bank), may increase market volatility and adversely affect the Company's stock and operations[231] - A protracted recession could impair subsidiaries' operations and borrowers' ability to repay, potentially increasing defaults[230] Income and Expenses Income is generated from interest, loan sales, dividends, and fees from various services - Income for Q1 2023 was generated from interest, net gains on SBA 7(a) loan sales, dividends, electronic payment processing, servicing, and other fees[232] - Primary operating expenses for Q1 2023 included salaries and benefits, interest expense (including deposits), electronic payment processing, technology services, and other general and administrative costs[234] - Realized gains or losses on investments were recognized based on the difference between net proceeds and cost basis, while fair value changes were recorded as unrealized appreciation/depreciation[233] Guarantees The company provides guarantees on several credit facilities for its special purpose vehicles - As of March 31, 2023, the Company was a guarantor on the Receivable and Inventory Facility at NBC, with $2.2 million principal owed (facility repaid in April 2023)[235] - The Company guarantees the SPV I Capital One Facility ($19.3 million owed), SPV II Deutsche Bank Facility ($7.1 million owed), SPV III One Florida Bank Facility ($13.7 million owed), and the Webster Facility ($39.9 million outstanding)[236][237] - As of March 31, 2023, the Company determined it was not probable that payments would be required under these guarantees[236][237] Non-Conforming Conventional Commercial Loan Program The company participates in non-conforming commercial lending through joint ventures - NCL JV, a 50/50 joint venture, ceased funding new non-conforming conventional commercial and industrial term loans in 2020[238] - TSO JV, a new joint venture formed in August 2022, intends to invest in non-conforming conventional commercial and industrial term loans to middle-market and small businesses[239] Unfunded Commitments The company had over $110 million in unfunded commitments at the end of the quarter - As of March 31, 2023, the Company had $110.4 million in unfunded commitments[240] - These commitments include $14.3 million for SBA 7(a) loans, $81.7 million for SBA 504 loans, and $14.4 million for commercial and industrial loans[240] Discussion and Analysis of Financial Condition Total assets, deposits, and borrowings increased significantly due to the company's transformation - Total assets increased by $250.8 million (25.1%) to $1.2 billion at March 31, 2023, primarily due to the conversion to a financial holding company and the acquisition of Newtek Bank[241][242] - Loans held for sale increased by $106.5 million, and loans held for investment at amortized cost increased by $164.6 million, reflecting new originations and the acquisition of Newtek Bank loans[243][244] - Goodwill and intangibles increased by $28.1 million, comprising $2.3 million from the Newtek Bank acquisition and $25.8 million from consolidating previously unconsolidated portfolio companies[245] - Total deposits were $247.6 million at March 31, 2023, with no deposits at December 31, 2022, due to the Newtek Bank acquisition[247] - Borrowings increased by $158.069 million to $697.4 million, driven by increased Capital One lines of credit, consolidated bank borrowings, and new 2025 8.125% Notes[248] Results of Operation Net income grew year-over-year, driven by higher noninterest income from consolidated entities - Net income for Q1 2023 was $11.72 million ($0.46 diluted EPS), up from $9.65 million ($0.40 diluted EPS) in Q1 2022[251] - Net interest income increased by $1.507 million to $4.583 million, driven by a $10.4 million increase in loan portfolio interest income[253][254] - Total noninterest income increased by $20.559 million (92.5%) to $42.787 million, largely due to consolidated technology, IT support, and electronic payment processing income[265][269] - Total noninterest expense increased by $24.488 million to $39.197 million, primarily due to the consolidation of subsidiaries' salaries, benefits, and electronic payment processing costs[252][271][272][273] - Net realized gains on sales of SBA loans decreased to $6.5 million in Q1 2023 from $15.3 million in Q1 2022, despite higher loan origination volume[276][278] - Net unrealized appreciation (depreciation) on joint ventures was $2.002 million in Q1 2023, a significant improvement from a $(2.321) million loss in Q1 2022[284] Liquidity and Capital Resources The company maintains liquidity through credit facilities, notes, and cash flows - Liquidity is derived from Capital One Facility, various Notes, securitization transactions, and cash flows from operations[292] - As of March 31, 2023, unused liquidity sources included $8.2 million from the Capital One facility, $97.2 million in interest-bearing deposits, and $27.3 million in unrestricted cash[314] - Operating activities used $10.4 million in cash in Q1 2023, while financing activities provided $81.0 million, primarily from preferred stock issuance, bank borrowings, and new 2025 8.125% Notes[317][319] Consolidated Capital Ratios (in thousands) | Capital Ratio (March 31, 2023) | Actual Amount | Ratio | Minimum Requirement Amount | Ratio | |:---|:---|:---|:---|:---| | Tier 1 Capital (to Average Assets) | $184,667 | 16.5 % | $46,207 | 4.0 % | | Common Equity Tier 1 (to Risk-Weighted Assets) | $184,667 | 18.3 % | $45,479 | 4.5 % | | Tier 1 Capital (to Risk-Weighted Assets) | $184,667 | 18.3 % | $60,639 | 6.0 % | | Total Capital (to Risk-Weighted Assets) | $206,594 | 20.4 % | $80,852 | 8.0 % | Bank Capital Ratios (in thousands) | Capital Ratio (March 31, 2023) | Actual Amount | Ratio | Minimum Requirement Amount | Ratio | |:---|:---|:---|:---|:---| | Tier 1 Capital (to Average Assets) | $77,076 | 27.2 % | $11,325 | 4.0 % | | Common Equity Tier 1 (to Risk-Weighted Assets) | $77,076 | 34.1 % | $10,176 | 4.5 % | | Tier 1 Capital (to Risk-Weighted Assets) | $77,076 | 34.1 % | $13,568 | 6.0 % | | Total Capital (to Risk-Weighted Assets) | $79,265 | 35.1 % | $18,090 | 8.0 % | Critical Accounting Policies and Estimates Key estimates include fair value measurements, CECL adoption, and servicing asset valuation - Fair value measurements are critical, especially for investments without readily available market values, requiring significant management judgment and independent valuation firms[326][331] - The adoption of CECL for allowance for credit losses is a critical policy, requiring estimates of expected credit losses over the life of loans based on past events, current conditions, and forecasts[337][338] - Valuation of servicing assets at fair value involves considerable judgment, incorporating assumptions like servicing costs, discount rates, prepayment rates, and default rates[339] - Income recognition policies for loans, servicing income, and various fees are critical, as is the accounting for deferred tax assets and liabilities following the change in tax status[340][342][343][346] Off Balance Sheet Arrangements The company had no off-balance sheet arrangements as of the reporting date - There were no off-balance sheet arrangements as of March 31, 2023[355] Recent Developments NSBF is winding down its SBA loan originations, which are transitioning to Newtek Bank - On April 13, 2023, NSBF and the SBA entered into an agreement for NSBF to wind down its SBA 7(a) loan originations, transitioning them to Newtek Bank[357] - NSBF will continue to own, service, and liquidate its existing SBA 7(a) and PPP loan portfolio, with the Company guaranteeing NSBF's obligations to the SBA[357] - Newtek Bank began funding and servicing SBA 7(a) loans in April 2023 and received Preferred Lenders Program (PLP) status on April 27, 2023[357] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations and SBA secondary market availability - Principal market risks include fluctuations in interest rates and the availability of the secondary market for SBA loans[359] - The Company's lending rates (prime plus margin) are matched to its cost of funds (prime or LIBOR plus margin) to manage interest rate risk[360] - A significant change in market interest rates will materially affect income; rising rates could improve net investment income, while falling rates could reduce it more quickly than interest expense[360] - Secondary market conditions, especially higher interest rates, could negatively impact sale prices and premiums for guaranteed portions of SBA 7(a) loans[361] Estimated Changes in Net Interest Income (NII) and Economic Value of Equity (EVE) as of March 31, 2023 | Basis Point ("bp") Change in Interest Rates | Estimated Increase/Decrease in Net Interest Income (12 months beginning March 31, 2023) | Estimated Increase/Decrease in Net Interest Income (12 months beginning March 31, 2024) | Estimated Percentage Change in EVE (As of March 31, 2023) | |:---|:---|:---|:---| | +200 | 2.7% | 6.0% | 2.5% | | +100 | 1.3% | 2.8% | 1.8% | | -100 | (1.1)% | (2.8)% | 0.3% | | -200 | (2.2)% | (5.5)% | (0.6)% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023 - As of March 31, 2023, disclosure controls and procedures were evaluated and deemed effective, providing reasonable assurance of timely and accurate information reporting[371] - No material changes in internal controls over financial reporting occurred during the period covered by the report[372] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not involved in any litigation expected to have a material financial impact - The Company is not currently involved in any litigation matters expected to have a material impact on its financial condition[375] - Holdco 5 obtained a $6.2 million non-dischargeable judgment against Kerri Agee in January 2022, related to a former controlled portfolio company (BSP)[376] - NMS operates under a permanent injunction from the Federal Trade Commission (FTC) since October 2012 regarding certain business practices[377] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the 2022 Form 10-K - Readers should carefully consider risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2022[378] - No material changes to the risk factors have occurred since the Annual Report on Form 10-K[378] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered equity sales through the Dividend Reinvestment Plan - The Company issues common stock not subject to Securities Act registration requirements through its DRIP[379] - For Q1 2023, 5,800 shares valued at $0.1 million were issued under the DRIP, compared to 8,900 shares valued at $0.2 million in Q1 2022[379] - Additionally, 4,700 shares valued at $0.1 million were issued in Q1 2023 for dividends on unvested restricted stock awards, compared to 4,108 shares valued at $0.1 million in Q1 2022[380] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred[381] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - No mine safety disclosures are applicable[382] Item 5. Other Information There is no other information to report under this item for the period - No other information to report[383] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q report - Exhibits include Amended and Restated Articles of Incorporation, Bylaws, Articles Supplementary, Investor Rights Agreement, and Registration Rights Agreement[384] - Certifications by the Principal Executive Officer and Principal Financial Officer are filed herewith (31.1*, 31.2*, 32.1**, 32.2**)[384] - Interactive Data Files (XBRL) for financial statements and notes are included[384] Signatures The report is certified by the company's authorized officers as of May 11, 2023 - The report is signed by Barry Sloane, Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer)[388] - The report is signed by Nicholas Leger, Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)[388] - The report was signed on May 11, 2023[388]