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 loan volume. The company’s former portfolio companies and subsidiaries, such as Newtek Small Business Finance (NSBF), have also been consolidated into Newtek’s financial statements.

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 restrictions on the types of assets it could acquire and the amount of leverage it could use.

Now that Newtek is a financial holding company, it is no longer subject to the BDC regulations and no longer qualifies as a RIC. Instead, Newtek and its subsidiaries are subject to federal and state income taxes like other corporations.

SBA Lending and Alternative Lending

Historically, NSBF was the largest non-bank SBA 7(a) lender in the U.S. based on loan volume. However, as part of the wind-down of NSBF’s operations, the company’s SBA 7(a) loan originations have been transitioned to Newtek Bank.

In addition to SBA lending, Newtek has also originated loans through its Alternative Lending Program (ALP). These loans have terms of 10 to 25 years, bear fixed interest rates that reset every five years, and have prepayment penalties. Prior to July 2024, Newtek originated ALP loans with the intent to sell them to a joint venture. However, during the third quarter of 2024, Newtek decided to originate ALP loans with the intent to securitize them through its subsidiary, Newtek ALP Holdings.

Economic Developments

Newtek has observed several 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

For 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 income, and other fees. The company’s primary operating expenses included salaries and benefits, interest expense, electronic payment processing expense, technology services, loan origination and servicing, and other general and administrative costs.

Segment Performance

Newtek has five reportable segments: Banking, Alternative Lending, Technology, NSBF, and Payments. The Banking segment, which includes Newtek Bank and its subsidiary, generated $52.0 million in net income for the year ended December 31, 2024, up from $28.1 million the previous year. This increase was primarily due to Newtek Bank originating the majority of loans in 2024, compared to 2023 when NSBF originated most of the loans.

The Alternative Lending segment, which includes Newtek ALP Holdings and its subsidiaries, reported net income of $59.7 million, up significantly from $14.0 million the previous year. This increase was driven by growth in ALP loan originations and securitizations.

The Technology segment, which includes Newtek’s technology subsidiary NTS, reported net income of $0.1 million, down from $1.4 million the previous year. Newtek divested NTS on January 2, 2025, as part of its commitments to the Federal Reserve.

The NSBF segment, which includes the legacy portfolio of SBA 7(a) loans held outside of Newtek Bank, reported a net loss of $28.7 million due to the wind-down of NSBF’s operations.

The Payments segment, which includes Newtek’s payment processing subsidiaries, reported net income of $16.2 million, up from $12.2 million the previous year, driven by growth in payment processing revenue.

Liquidity and Capital Resources

Newtek’s liquidity and capital resources come from its deposits, parent company notes, securitization transactions, and earnings and cash flows from operations, including loan sales and repayments. The company may also raise additional equity or debt capital through registered offerings and private placements.

As of December 31, 2024, Newtek had $483.8 million in available liquidity sources, including unrestricted cash, lines of credit, and borrowing availability from the Federal Home Loan Bank and other financial institutions. The company also had $28.2 million in restricted cash, primarily related to NSBF’s securitizations and loan principal and interest collections due to loan participants.

Newtek’s regulatory capital ratios, including Tier 1 Capital, Common Equity Tier 1, and Total Capital, all exceeded the minimum requirements for well-capitalized institutions as of December 31, 2024.

Public Offerings and Stock Repurchase Program

Newtek has utilized various public offering and stock repurchase programs to raise capital and manage its share count. In 2023, the company entered into a new at-the-market (ATM) equity distribution agreement, which allows it to offer and sell up to 3 million shares of common stock. In 2024, Newtek sold 1.1 million shares through the ATM program, raising $13.8 million in net proceeds.

Additionally, in November 2024, Newtek’s board of directors approved a new stock repurchase program, authorizing the company to repurchase up to 1 million shares of its common stock over the next 12 months.

Debt Issuances

Newtek has also raised debt capital through the issuance of various notes, including the 2029 8.50% Notes and the 2029 8.625% Notes, which were issued in 2024 and raised a combined $142.4 million in net proceeds. The company also has outstanding 2026 Notes, 2028 Notes, and 2027 Notes, among others.

Contractual Obligations and Unfunded Commitments

As of December 31, 2024, Newtek had $1.7 billion in total contractual obligations, including $1.0 billion in deposits, $375.1 million in parent company notes, and $189.2 million in securitization notes payable. The company also had $107.1 million in unfunded commitments, primarily related to its SBA 7(a), SBA 504, and commercial and industrial loan programs.

Critical Accounting Policies and Estimates

Newtek has identified several critical accounting policies and estimates, including the valuation of loans at fair value, the allowance for credit losses, and the valuation of servicing assets. These areas require significant judgment and assumptions from management, and changes in these estimates could have a material impact on the company’s financial statements.

Conclusion

Newtek’s transition to a financial holding company has resulted in significant changes to its business structure and regulatory environment. The company has maintained a strong capital position and liquidity profile, which should help it navigate the current economic uncertainties. However, Newtek’s future performance will depend on its ability to effectively manage its lending activities, control costs, and adapt to the evolving regulatory landscape as a financial holding company.