Newtek’s Transition to a Financial Holding Company

Newtek, a company that provides business and financial solutions to independent business owners, has undergone a significant transformation. Effective January 6, 2023, the company withdrew its previous election to be regulated as a business development company (BDC) and became a financial holding company. This means Newtek is now subject to regulation and supervision by the Federal Reserve and the Federal Reserve Bank of Atlanta.

As part of this transition, Newtek acquired Newtek Bank, a national bank that has become Newtek’s wholly-owned subsidiary. Newtek Bank is now the largest SBA 7(a) lender in the United States based on the dollar volume of loans approved.

Historical Business Regulation and Taxation

Prior to becoming a financial holding company, Newtek operated as a BDC, which meant it had to meet certain requirements to maintain its status as a regulated investment company (RIC) for tax purposes. As a BDC, Newtek was subject to various restrictions on the types of assets it could acquire and the amount of debt it could issue.

Now that Newtek is a financial holding company, it no longer qualifies as a RIC and will file a consolidated U.S. federal income tax return starting in 2023. Financial holding companies are subject to federal and state income taxes in a similar manner to other corporations.

Newtek’s Business and Financial Solutions

Newtek and its subsidiaries have historically provided a wide range of business and financial solutions to independent business owners, including:

• Business Lending (SBA 7(a) loans, SBA 504 loans, and ALP loans)
• Electronic Payment Processing
• Managed Technology Solutions
• Accounts Receivable and Inventory Financing
• Personal and Commercial Lines Insurance Services
• Payroll and Benefits Solutions

With the divestiture of its Managed Technology Solutions subsidiary, Newtek will no longer provide those services directly but will refer clients to a third-party provider and earn a referral fee.

Economic Developments

Newtek has observed various economic developments that could impact its business, including commodity inflation, rising interest rates, bank failures, and geopolitical events. While Newtek is not currently seeing broad deterioration in the economy, it acknowledges that these factors could negatively affect its subsidiaries and borrowers, which could, in turn, impact Newtek’s future results.

Income and Expenses

In the fiscal year ended December 31, 2024, Newtek generated income from interest, net gains on loan sales, dividends, electronic payment processing, technology and IT support, servicing, and other fees. The company’s primary operating expenses included salaries and benefits, interest expense, electronic payment processing, technology services, loan origination and servicing, and other general and administrative costs.

The Alternative Lending Program (ALP)

Newtek has originated loans under its ALP since 2019. These loans have terms between 10 and 25 years, bear fixed interest rates that reset every five years, and have prepayment penalties. Newtek has previously sold ALP loans to joint ventures but has recently decided to originate ALP loans with the intent to securitize them through its subsidiary, Newtek ALP Holdings.

Discussion and Analysis of Financial Condition

As of December 31, 2024, Newtek’s total assets were $2.1 billion, an increase of 44.1% compared to the prior year. This was primarily due to an increase in loans held for sale and loans held for investment.

Loans held for sale increased by $253.4 million, driven by new loan originations in the ALP and SBA loan programs. Loans held for investment increased by $267.7 million, primarily due to new originations at Newtek Bank.

The company’s credit quality metrics showed an increase in nonperforming assets as a percentage of total assets, from 3.8% in 2023 to 4.6% in 2024. This was largely due to an increase in nonaccrual loans, particularly in the SBA 7(a) loan portfolio.

Newtek’s goodwill and intangible assets decreased from $30.1 million in 2023 to $14.8 million in 2024, primarily due to the divestiture of its Technology segment.

Liabilities and Financing

Total liabilities at December 31, 2024, were $1.8 billion, an increase of 49.4% compared to the prior year. This was primarily driven by a $508.6 million increase in deposits, as Newtek Bank focused on growing its deposit base to fund future balance sheet growth and increase liquidity.

Newtek’s borrowings increased from $644.1 million in 2023 to $708.0 million in 2024, due to additional borrowings on its various credit facilities and the issuance of $142.3 million in new senior notes.

The company’s regulatory capital ratios remained strong, with Newtek and Newtek Bank both exceeding the well-capitalized thresholds set by regulators.

Results of Operations

For the fiscal year ended December 31, 2024, Newtek reported net income of $50.9 million, or $1.97 per basic and $1.96 per diluted share, compared to net income of $47.3 million, or $1.89 per basic and $1.88 per diluted share, in the prior year.

The increase in net income was primarily driven by higher noninterest income, particularly from net gains on loan sales and electronic payment processing. This was partially offset by an increase in noninterest expense, mainly due to higher salaries and employee benefits.

Newtek’s net interest margin increased from 2.37% in 2023 to 2.87% in 2024, reflecting higher yields on interest-earning assets and a favorable shift in the company’s funding mix.

Segment Performance

Newtek’s five reportable segments are Banking, Alternative Lending, Technology, NSBF, and Payments. The Banking segment, which includes Newtek Bank, saw a significant increase in net income, from $28.1 million in 2023 to $52.0 million in 2024, driven by growth in net interest income.

The Alternative Lending segment, which includes Newtek’s ALP program, also reported a substantial increase in net income, from $14.0 million in 2023 to $59.7 million in 2024, primarily due to higher gains on the sale of ALP loans.

The Technology segment, which includes the company’s Managed Technology Solutions business, saw a decline in net income from $1.4 million in 2023 to $0.1 million in 2024, as Newtek prepared to divest this unit.

The NSBF segment, which includes the legacy SBA 7(a) loan portfolio, reported a net loss of $28.7 million in 2024, compared to net income of $17.1 million in 2023, due to the wind-down of NSBF’s operations.

The Payments segment, which includes Newtek’s electronic payment processing businesses, saw an increase in net income from $12.2 million in 2023 to $16.2 million in 2024, driven by growth in noninterest income.

Liquidity and Capital Resources

Newtek’s primary sources of liquidity and capital are its deposits, parent company notes, securitization transactions, and cash flows from operations, including loan sales and repayments. As of December 31, 2024, the company had $483.8 million in available liquidity sources, including unrestricted cash, lines of credit, and borrowing capacity at Newtek Bank.

The company has been active in the public debt markets, issuing $142.3 million in new senior notes in 2024 to support its growth and operations. Newtek also has an active at-the-market (ATM) equity program, which it may use to raise additional capital as needed.

Newtek’s regulatory capital ratios remained strong, with the company and Newtek Bank both exceeding the well-capitalized thresholds set by regulators. This provides the company with the flexibility to continue growing its business and supporting its independent business owner clients.

Outlook and Risks

Newtek’s transition to a financial holding company presents both opportunities and challenges. The company’s expanded product offerings and access to the banking system may allow it to better serve its clients, but it also faces increased regulatory oversight and compliance requirements.

The economic uncertainties and potential for a protracted recession could also impact Newtek’s borrowers and the performance of its loan portfolio. The company’s ability to maintain its SBA 7(a) lending license and PLP status, as well as the availability of funding for the SBA program, are also critical to its future success.

Overall, Newtek’s transformation into a financial holding company represents a significant milestone in the company’s history. By leveraging its diverse business lines, strong capital position, and focus on serving independent business owners, Newtek is well-positioned to navigate the challenges and capitalize on the opportunities ahead.