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, such as having at least 70% of its assets in qualifying assets and maintaining a certain asset coverage ratio. As a BDC, Newtek also elected to be treated as a regulated investment company (RIC) for tax purposes, which allowed it to avoid paying corporate income taxes on the income it distributed to shareholders.

Now that Newtek is a financial holding company, it no longer qualifies as a RIC and will file a consolidated federal income tax return, subject to the same tax rules as other corporations.

Newtek’s Business and Financial Solutions

Newtek and its subsidiaries provide a wide range of business and financial solutions to independent business owners (SMBs), including:

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

Newtek supports these operations by providing access to its proprietary technology platform, including its patented prospect management software, NewTracker®.

Economic Developments and Outlook

Newtek is closely monitoring various economic factors, such as commodity inflation, rising interest rates, bank failures, and geopolitical events, which have led to increased economic uncertainty. While Newtek is not currently seeing broad deterioration in the economy, it acknowledges that these factors could negatively impact the performance of its subsidiaries and its current and prospective borrowers, which could, in turn, have a negative impact on Newtek’s future results.

Financial Performance

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, for the previous year.

The increase in net income was primarily driven by:

• Higher net interest income after provision for credit losses
• Increased noninterest income, particularly from net gains on sales of loans and electronic payment processing income
• Partially offset by higher noninterest expenses, such as salaries and employee benefits, and the non-recurring nature of the income tax benefit in 2023 when the company converted to a financial holding company

Loans and Credit Quality

Newtek’s loan portfolio consists of loans held for sale (at fair value and lower of cost or market) and loans held for investment (at fair value and amortized cost). As of December 31, 2024, the total loan portfolio was $1.39 billion, an increase of $423.2 million compared to the previous year.

The increase in loans held for sale was primarily due to new originations of ALP and SBA loans, while the increase in loans held for investment at amortized cost was the result of new originations by Newtek Bank.

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

Goodwill and Intangibles

Newtek’s goodwill and intangible assets decreased from $30.1 million at the end of 2023 to $14.8 million at the end of 2024, primarily due to the divestiture of its technology segment (NTS) on January 2, 2025.

Liquidity and Capital Resources

Newtek’s primary sources of liquidity and capital are deposits, parent company notes, securitization transactions, and earnings and cash flows from operations, including loan sales and repayments. 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.

Newtek’s regulatory capital ratios remained strong, with the company’s Tier 1 Capital (to Risk-Weighted Assets) ratio at 17.0% and its Total Capital (to Risk-Weighted Assets) ratio at 19.7% as of December 31, 2024.

Equity and Debt Offerings

Newtek has access to additional equity and debt capital through registered offerings, including “at-the-market” (ATM) programs, as well as private offerings of securities. In 2023, the company filed a new shelf registration statement and entered into a new ATM Equity Distribution Agreement, which allows it to offer and sell up to 3 million shares of common stock.

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

Newtek has also issued various debt securities, including the 2029 8.50% Notes and the 2029 8.625% Notes, which were issued in 2024 and trade on the Nasdaq Global Market.

Segment Performance

Newtek reports its financial results across five operating segments:

1. Banking: Includes Newtek Bank and its subsidiary, which originate, sell, and service SBA 7(a) loans, SBA 504 loans, and other commercial loans, as well as offer deposit services.
2. Alternative Lending: Includes Newtek’s ALP loan origination and securitization activities.
3. Technology: Includes Newtek’s technology services business, which was divested on January 2, 2025.
4. NSBF: Includes the legacy portfolio of SBA 7(a) loans held outside of Newtek Bank, which is in the process of being wound down.
5. Payments: Includes Newtek’s electronic payment processing services.

The Banking and Alternative Lending segments were the primary drivers of Newtek’s profitability in 2024, while the NSBF segment reported a loss due to the wind-down of its operations.

Risks and Outlook

Newtek’s transition to a financial holding company exposes the company to increased regulation and supervision, which may adversely affect its business. Additionally, the company faces risks related to its SBA lending activities, such as the potential loss of its SBA 7(a) lending license and PLP status, as well as the potential for a governmental failure to fund the SBA, which could impact its loan originations.

Overall, Newtek’s financial performance in 2024 was solid, with growth in key areas such as net interest income, noninterest income, and loan originations. However, the company faces ongoing economic uncertainties and regulatory challenges as it navigates its new role as a financial holding company. Newtek’s ability to effectively manage these risks and continue to provide value to its independent business owner clients will be crucial to its future success.