UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number: 814-01035
NEWTEKONE, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
4800 T Rex Avenue, Suite 120, Boca Raton, Florida
(Address of principal executive offices)
46-3755188
(I.R.S. Employer Identification No.)
33431
(Zip Code)
(212) 356-9500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.02 per share
5.75% Notes due 2024
5.50% Notes due 2026
8.00% Notes due 2028
Trading Symbol(s)
NEWT
NEWTL
NEWTZ
NEWTI
Name of each exchange on which registered
Nasdaq Global Market LLC
Nasdaq Global Market LLC
Nasdaq Global Market LLC
Nasdaq Global Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial or accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b). ☐
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $365.7 million as of the last business day of the registrant’s second
fiscal quarter of 2023, based on a closing price on that date of $15.90 on the Nasdaq Global Market. For the purposes of calculating this amount only, all directors and executive officers of the
Registrant have been treated as affiliates.
As of March 28, 2024, there were 24,708,771 shares outstanding of the registrant’s Common Stock, par value $0.02 per share.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
NEWTEKONE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I
PART II
Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item
1.
1A.
1B.
1C.
2.
3.
4.
5.
6.
7.
7A.
Quantitative and Qualitative Disclosures About Market Risk
8.
9.
9A.
9B.
9C.
10.
11.
12.
13.
14.
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships, Related Party Transactions and Director Independence
Principal Accounting Fees and Services
PART IV
PART III
15.
Exhibits and Financial Statement Schedules
Exhibits Index
Signatures
Financial Statements
Page
9
36
72
65
75
75
75
76
78
79
105
107
107
107
111
111
111
111
111
111
111
111
113
116
116
Table of Contents
Defined Terms
We have used “we,” “us,” “our,” “our company,” and “the Company” to refer to NewtekOne, Inc. and its subsidiaries in this report. We also have used several other terms in this report, which are
explained or defined below:
Terms
1940 Act
2017-1 Trust
2018-1 Trust
2019-1 Trust
2021-1 Trust
2022-1 Trust
2023-1 Trust
2022 Notes
2023 Notes
2024 Notes
2025 6.85% Notes
2025 5.00% Notes
2025 8.125% Notes
2025 Notes
2026 Notes
2028 Notes
ABL
ACL
Investment Company Act of 1940, as amended
Newtek Small Business Loan Trust, Series 2017-1, terminated in February 2023
Newtek Small Business Loan Trust, Series 2018-1
Newtek Small Business Loan Trust, Series 2019-1
Newtek Small Business Loan Trust, Series 2021-1
Newtek Small Business Loan Trust, Series 2022-1
Newtek Small Business Loan Trust, Series 2023-1
7.50% Notes due 2022, redeemed in August 2019
6.25% Notes due 2023, redeemed in February 2021
5.75% Notes due 2024
6.85% Notes due 2025, redeemed in May 2022
5.00% Notes due 2025
8.125% Notes due 2025
Collectively, the 2025 6.85% Notes, the 2025 5.00% Notes and the 8.125% Notes due 2025
5.50% Notes due 2026
8.00% Notes due 2028
Asset based lending
Allowance for credit losses
The Company’s Acquisition of NBNYC, pursuant to which the Company acquired from the NBNYC shareholders all of the issued and
outstanding stock of NBNYC
Accounting Standards Codification, as issued by the FASB
Accounting Standards Updates, as issued by the FASB
Equity Distribution Agreement, dated June 25, 2020 by and among the Company and the placement agents, as amended on July 20, 2022
Business Development Company under the 1940 Act
The Company's board of directors
Capital One Bank, National Association
Conventional commercial and industrial loans
Internal Revenue Code of 1986, as amended
Conventional commercial real estate lending
Deutsche Bank AG
Deposit Insurance Fund of the FDIC
The Company's dividend reinvestment plan
Earnings before interest, taxes, depreciation and amortization
The Company's 2015 Stock Incentive Plan
The Company’s 2023 Stock Incentive Plan
Employee Stock Purchase Program
Securities Exchange Act of 1934, as amended
Financial Accounting Standards Board
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Fair Value
Held for investment
Held for sale
London Interbank Offered Rate
Acquisition
ASC
ASU
2020 ATM Equity Distribution Agreement
BDC
Board
Capital One
C&I
Code
CRE
Deutsche Bank
DIF
DRIP
EBITDA
2015 Stock Incentive Plan
2023 Stock Incentive Plan
ESPP
Exchange Act
FASB
Federal Reserve
FDIC
FV
HFI
HFS
LIBOR
4
LCM
NAV
NBNYC
OCC
PCD
PLP
PPP
RIC
S&P
SBA
SEC
SMB
SPV I Capital One Facility
SPV II Deutsche Bank Facility
SPV III One Florida Bank Facility
Stock Purchase Agreement
Trustee
TSO II
U.S. GAAP or GAAP
Webster
Subsidiaries and Joint Ventures
NSBF
NBL
NCL
NCL JV
Newtek Bank
Holdco 6
TSO JV
NMS
Mobil Money
NTS
SIDCO
EWS
NBC
SBL
PMT
NIA
TAM
EMCAP
Lower of amortized cost basis or fair value
Net Asset Value
National Bank of New York City, which has been renamed Newtek Bank, National Association
Office of the Comptroller of the Currency
Purchased Financial Assets with Credit Deterioration
Preferred Lenders Program, as authorized by the SBA
Paycheck Protection Program
Regulated investment company under the Code
Standard and Poor's
United States Small Business Administration
U.S. Securities and Exchange Commission
Small-and-medium sized businesses
Revolving Credit and Security Agreement between NBL SPV I, LLC, a wholly-owned subsidiary of Holdco 6, and Capital One
Revolving Credit and Security Agreement between NBL SPV II, LLC, a wholly-owned subsidiary of Holdco 6, and Deutsche Bank
Revolving Credit and Security Agreement between NBL SPV III, LLC, a wholly-owned subsidiary of Holdco 6, and One Florida Bank
Stock Purchase Agreement dated August 2, 2021, between the Company, NBNYC and certain NBNYC shareholders to acquire all of the issued
and outstanding stock of NBNYC, as amended through December 12, 2022
U.S. Bank, National Association
TSO II Booster Aggregator, L.P.
Generally accepted accounting principles in the United States
Webster Bank, N.A.
Newtek Small Business Finance, LLC, a consolidated subsidiary
Newtek Business Lending, LLC, a former wholly-owned subsidiary of Newtek Bank merged into SBL on May 2, 2023
Newtek Commercial Lending, Inc, a consolidated subsidiary
Newtek Conventional Lending, LLC, a 50% owned joint venture
Newtek Bank, National Association
Newtek Business Services Holdco 6, Inc., a consolidated subsidiary
Newtek-TSO II Conventional Credit Partners, LP, a 50% owned joint venture
Newtek Merchant Solutions, LLC (formerly Universal Processing Services of Wisconsin LLC), a consolidated subsidiary
Mobil Money, LLC, a consolidated subsidiary
Newtek Technology Solutions, Inc., a consolidated subsidiary
SIDCO, LLC dba Cloud Nine Services, a former subsidiary of NTS; SIDCO was merged into NTS on December 31, 2023
Excel WebSolutions, LLC, a former consolidated subsidiary merged into NTS on December 31, 2023
CDS Business Services, Inc. dba Newtek Business Credit Solutions, a consolidated subsidiary
Small Business Lending, LLC, a wholly owned subsidiary of Newtek Bank
PMTWorks Payroll, LLC dba Newtek Payroll and Benefits Solutions, a consolidated subsidiary
Newtek Insurance Agency, LLC, a consolidated subsidiary
Titanium Asset Management, LLC, a consolidated subsidiary
EMCAP Loan Holdings, LLC
5
POS
POS on Cloud, LLC, dba Newtek Payment Systems, a 76.8% consolidated subsidiary
6
6
Explanatory Note:
On January 6, 2023, the Company completed the Acquisition of NBNYC, a national bank regulated and supervised by the OCC. In addition, on January 6, 2023, the Company filed with the SEC a
Form N-54C, Notification of Withdrawal of Election to be Subject to the 1940 Act, and has ceased to be a BDC effective as of January 6, 2023. As a result of the foregoing, the Company is now a
financial holding company, no longer qualifies as a regulated investment company (RIC) for federal income tax purposes, and no longer qualifies for accounting treatment as an investment company.
As a result, comparisons to December 31, 2022 and December 31, 2021 include adjustments made to reconcile prior investment company accounting to the current financial holding company
accounting requirements. (See NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION)
7
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This report contains forward-looking statements that involve substantial risks and uncertainties, including the impact of COVID-19 and related changes in base interest rates and significant market
volatility on our business, our subsidiaries, our industry, and the global economy. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and
projections about the Company, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,”
“would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements
contained in this report involve risks and uncertainties, including statements as to:
•
•
•
•
•
•
•
•
•
•
•
our future operating results;
our business prospects and the prospects of our subsidiaries;
our contractual arrangements and relationships with third parties;
the dependence of our future success on the general economy and its impact on the industries in which we invest;
the ability of our business to achieve its objectives;
the impact of a protracted decline in the liquidity of credit markets on our business;
the adequacy of our cash resources and working capital;
our ability to operate as a financial holding company and our ability to operate our subsidiary Newtek Bank, a national bank regulated and supervised by the OCC, and the increased
compliance and other costs associated with such operations; and
the timing of cash flows, if any, from the operations of our subsidiaries;
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
•
•
•
•
•
•
an economic downturn could impair our and our subsidiaries’ ability to continue to operate or repay borrowings, which could adversely affect our results;
a contraction of available credit and/or an inability to access the equity markets, which could impair our lending activities;
interest rate volatility could adversely affect our results;
impacts to financial markets and the global macroeconomic and geopolitical environment, including higher inflation and its impacts;
higher interest rates and the impacts on macroeconomic conditions and our funding costs; and
the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this report and in our filings with the SEC.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-
looking statements based on those assumptions also could be inaccurate. Important assumptions include the ability of Newtek Bank to continue to originate loans under the SBA 7(a) program,
maintain PLP status, and sell guaranteed portions of SBA 7(a) loans at premiums and grow deposits; our ability to originate new loans; our subsidiaries’ ability to generate revenue and obtain and
maintain certain margins and levels of profitability; and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this
report should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Item 1A. Risk Factors”
and elsewhere in this report. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report, and while we believe such information forms, or
will form, a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into,
or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements The forward-
looking statements in this report are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.
8
ITEM 1. BUSINESS.
Prior to January 6, 2023 and during the entirety of the 2022 fiscal year, we operated as an internally managed non-diversified closed-end management investment company that was regulated as a
BDC under the 1940 Act, and was treated as a RIC under the Code for U.S. federal income tax purposes.
On January 6, 2023, we completed the Acquisition of NBNYC, a national bank regulated and supervised by the OCC, pursuant to which we acquired from the NBNYC shareholders all of the issued
and outstanding stock of NBNYC. NBNYC has been renamed Newtek Bank, National Association (“Newtek Bank”) and has become a wholly owned subsidiary of the Company. In connection with
the completion of the Acquisition, we contributed to Newtek Bank $31 million of cash and two of our subsidiaries, NBL and SBL (subsequently, NBL was merged into SBL). Upon the
consummation of the Acquisition, Newtek Bank entered into an operating agreement with the OCC concerning certain matters including capital, liquidity and concentration limits, and memorializing
the business plan submitted to the OCC.
In addition, on January 6, 2023, we filed with the SEC a Form N-54C, Notification of Withdrawal of Election to be Subject to the 1940 Act, following approval from our shareholders, and ceased to
be a BDC. As a result of the Acquisition, we are now a financial holding company subject to the regulation and supervision of the Federal Reserve and the Federal Reserve Bank of Atlanta. We no
longer qualify as a RIC for federal income tax purposes and no longer qualify for accounting treatment as an investment company.
Our Business
We are a financial holding company that is a leading business and financial solutions provider to independent business owners/SMBs. We define independent business owners (SMBs) as companies
having revenues of $1.0 million to $100.0 million, and we estimate the SMB market to be over 33 million businesses in the U.S. as of March 2023, according to the SBA. NewtekOne and its
subsidiaries provide independent business owners (SMBs) with the following Newtek® branded business and financial solutions: Newtek Bank, Newtek Lending, Newtek Payments, Newtek
Insurance, Newtek Payroll and Newtek Technology. We have an established and reliable platform that is not limited by client size, industry type, or location. As a result, we believe we have a strong
and diversified client base across the United States and across a variety of different industries. In addition, we have developed a financial and technology based business model that enables us to
acquire and process our independent business owner clients in a very cost effective manner. This capability is supported in large part by NewTracker®, our patented prospect management technology
software, which is similar to, but we believe better suited for our needs than, the system popularized by Salesforce.com and similar providers. In addition, we have recently launched the Newtek
Advantage
business and financial solutions. The Newtek Advantage allows NewtekOne clients to easily interact with NewtekOne subject matter experts in the areas of Banking, Lending, Payments, Technology,
Payroll and Insurance. We believe the Newtek Advantage will enable us to grow core retail deposits and provide an advantage to our existing and new clients. We believe that NewtekOne’s
technology and business model distinguishes us from our competitors.
OCC.
(patent pending) dashboard, for our depository and non-depository clients. The Newtek Advantage offers NewtekOne’s clients a single online dashboard to access all of NewtekOne’s
TM
As a result of the Acquisition and the Company’s filing with the SEC a Form N-54C, Notification of Withdrawal of Election to be Subject to the 1940 Act, the Company is now a financial holding
company subject to the regulation and supervision of the Federal Reserve and the Federal Reserve Bank of Atlanta. The Company no longer qualifies as a regulated investment company for federal
income tax purposes and no longer qualifies for accounting treatment as an investment company. As a result, in addition to Newtek Bank and its consolidated subsidiary, SBL, the following
NewtekOne portfolio companies and subsidiaries are now consolidated non-bank subsidiaries in the Company’s financial statements: NSBF; Newtek Merchant Solutions, LLC (NMS); Mobil Money,
LLC; CDS Business Services, Inc. d/b/a Newtek Business Credit Solutions (NBC); PMTWorks Payroll, LLC d/b/a Newtek Payroll and Benefits Solutions (PMT); Newtek Insurance Agency, LLC
(NIA); Titanium Asset Management LLC (TAM); Newtek Business Services Holdco 6, Inc (Holdco 6); Newtek Commercial Lending, Inc. (NCL); Newtek Technology Solutions, Inc. (NTS), which
includes the former entities SIDCO and EWS that were merged into NTS on December 31, 2023 and POS on Cloud, LLC, d/b/a Newtek Payment Systems (POS). In addition, as a result of
commitments made to the Federal Reserve, the Company will divest or otherwise terminate the activities conducted by NTS by January 6, 2025, subject to any extension of this date.
9
Moreover, on April 13, 2023, the Company, NSBF and the SBA entered into an agreement in connection with NSBF’s and Newtek Bank’s participation in the SBA 7(a) loan program (the "Wind-
down Agreement"). The Company’s business plan prepared in connection with the Acquisition provided for all SBA 7(a) loan originations to be transitioned to Newtek Bank and for NSBF to cease
originations of SBA 7(a) loans. Pursuant to the Wind-down Agreement, NSBF has begun to wind-down its operations and NSBF’s SBA 7(a) pipeline of new loans was transitioned to Newtek Bank
during the second quarter of 2023. During this wind-down process, NSBF will continue to own the SBA 7(a) loans and PPP Loans currently in its SBA loan portfolio to maturity, liquidation, charge-
off or (subject to SBA’s prior written approval) sale or transfer. SBL will service and liquidate NSBF’s SBA loan portfolio, including processing forgiveness and loan reviews for PPP Loans, pursuant
to an SBA approved lender service provider agreement. In addition, during the wind-down process, NSBF will be subject to minimum capital requirements established by the SBA, be required to
continue to maintain certain amounts of restricted cash available to meet any obligations to the SBA, have restrictions on its ability to make dividends and distributions to the Company, and remain
liable to the SBA for post-purchase denials and repairs on the guaranteed portions of SBA 7(a) loans originated and sold by NSBF. The Company has guaranteed NSBF’s obligations to the SBA and
has funded a $10 million account at Newtek Bank to secure these potential obligations.
On January 17, 2023, the Company changed its name from Newtek Business Services Corp. to NewtekOne, Inc.
NewtekOne’s Business and Financial Solutions Ecosystem
Newtek Lending
SBA 7(a) Lending
Our Newtek Lending platform, which generates a material portion of our revenues, includes loans originated under the federal Section 7(a) loan program, i.e., SBA 7(a) loans. The SBA is an
independent government agency that facilitates one of the nation’s largest sources of SMB financing by providing credit guarantees for its loan programs. SBA 7(a) loans are partially guaranteed by
the SBA, with SBA guarantees typically ranging between 50% and 90% of the principal and interest due. Under the SBA’s 7(a) lending program, a bank, such Newtek Bank, or a nonbank lender
licensed by the SBA (such as NSBF) underwrites a loan between $5,000 and $5.0 million for a variety of general business purposes based on the SBA’s loan program requirements. The recoveries
and expenses on the unguaranteed portions of these loans are shared pari passu between the SBA and the lender, which substantially reduces the loss severity on the unguaranteed portion of a loan for
SBA 7(a) loan investors. SBA 7(a) loans are typically between ten and 25 years in maturity and bear interest at the prime rate plus a spread from 1.50% to 6.50%. The Company estimates the duration
of these loans to be between four and five years. Since the guaranteed portions of SBA 7(a) loans carry the full faith and credit of the U.S. government, lenders may, and frequently do, sell the
guaranteed portion of SBA 7(a) loans in the capital markets, hold the unguaranteed portion and retain all loan servicing rights.
From 2012 through December 31, 2022, our subsidiary NSBF, was consistently the largest non-bank SBA 7(a) lender in the U.S. based on dollar volume of loan approvals, and, as of December 31,
2022, was the third largest SBA 7(a) lender in the United States. As of December 31, 2023 (the SBA’s first quarter of their fiscal year), when combining the loan approvals of Newtek Bank and
NSBF, we are the nation’s largest SBA 7(a) lender. Newtek Bank received PLP status in April 2023, a designation whereby the SBA authorizes the most experienced SBA lenders to place SBA
guarantees on loans without seeking prior SBA review and approval. PLP status has allowed Newtek Bank (and historically NSBF) to serve our clients in an expedited manner since we are not
required to present applications to the SBA for concurrent review and approval. All new SBA 7(a) loan originations were transitioned to Newtek Bank in April 2023. NewtekOne has a dedicated
Senior Lending Team (as defined below) that is now supporting Newtek Bank, which originates and services SBA 7(a) loans to qualifying independent business owners and follows the NewtekOne
SBA 7(a) loan business model. Prior to the Newtek Bank Acquisition, our SBA 7(a) business model was to: originate SBA 7(a) loans, sell the guaranteed portions of the SBA 7(a) loans, typically
within thirty to forty-five days of origination, and retain the unguaranteed portion until accumulating sufficient loans for investment or securitization. In a securitization, the unguaranteed portions of
SBA 7(a) loans are transferred to a special purpose vehicle (a “Trust”), which in turn issues notes against the Trust’s assets in private placements. The Trust’s primary source of income for repaying
the securitization notes is the cash flows generated from the unguaranteed portion of SBA 7(a) loans owned by the Trust. Principal on the securitization notes is paid by cash flows in excess of that
needed to pay various fees related to the operation of the Trust and interest on the debt. Securitization notes have an expected maturity of approximately five years, and the Trust is dissolved when the
securitization notes are paid in full, either at or prior to maturity. NSBF has completed thirteen (13) securitizations. Newtek Bank will continue the SBA 7(a) business model utilizing the NewtekOne
Senior Lending Team, and Newtek Bank may determine to engage in securitization transactions in the future. NSBF, which is in the process of winding-down its operations, will continue to manage
and service its portfolio of guaranteed and unguaranteed SBA 7(a) loans pursuant to a lender servicer provider agreement with SBL.
10
We believe our more than twenty years of experience as one of the largest SBA 7(a) lenders, provides us with a distinct competitive advantage over other lenders that have not overcome these
significant barriers-to-entry in our primary loan market. We originated $814.4 million of SBA 7(a) loans during 2023 and $775.6 million of SBA 7(a) loans during 2022. We believe that we will
continue to be introduced to a variety of high-quality investment opportunities through our existing loan sourcing channels and our subsidiaries’ relationships with their clients.
We have a dedicated capital markets team that sells the guaranteed portions of our SBA 7(a) loans shortly after origination and we retain the unguaranteed portions, Historically, NSBF sold SBA
guaranteed portions of SBA 7(a) loans at premiums ranging from 106% to 123% of par value, and any portion of the premium that is above 110% of par value is shared equally between NSBF and
the SBA. However, there is no guarantee that Newtek Bank will be able to continue to earn premiums of 106% to 123% on future sales of the guaranteed portions of SBA 7(a) loans or will be able to
maintain PLP status. See “Item 1A. Risk Factors - Risks Related to SBA Lending - We have specific risks associated with SBA loans.”
In addition, NSBF typically retained the unguaranteed portions of SBA 7(a) until accumulating sufficient loans for a securitization. Through NSBF’s securitization program, which began in
December 2010, NSBF successfully completed 13 securitization transactions of the unguaranteed portions of SBA 7(a) loans with Standard & Poor’s AA or A ratings and advance rates as high as
83.5% of par value. NSBF’s last securitization occurred in June 2023, when it sold (and we increased our secured borrowings by) $103.9 million of Unguaranteed SBA 7(a) Loan-Backed Notes,
Series 2023-1, consisting of $84.3 million of Class A Notes and $19.6 million Class B Notes, rated “A-” and “BBB-”, respectively, by S&P Global, Inc. Newtek Bank intends to use core deposits to
fund SBA 7(a) loans and does not currently plan to securitize the unguaranteed portions of SBA 7(a) loans it originates, but may do so in the future. In addition, Newtek Bank may determine to retain
the government guaranteed portions of SBA 7(a) loans for longer periods, pending deployment of excess capital.
We have focused on making smaller SBA 7(a) loans, approximately $1.0 million or less, in order to maintain a diversified pool of loans that are dispersed both geographically and among industries,
with a goal of limiting our exposure to regional and industry-specific economic downturns. Specifically, as of December 31, 2023, the Company’s loan portfolio consisted of 4,879 loans originated
across 50 states in 77 different industries as defined by the North American Industry Classification System (“NAICS”).
As discussed below, in addition to SBA 7(a) lending, our Newtek Lending Platform includes the following loan products originated by Newtek Bank: SBA 504 loans, C&I loans (including ABL and
owner occupied commercial real estate (CRE) and investor CRE). In addition, our alternative lending program loans (formerly referred to as non-conforming conventional loans) are originated by
NewtekOne nonbank subsidiaries and joint ventures.
Commercial Banking – Newtek Bank
We have centralized our Newtek Lending Platform within Newtek Bank (except for our alternative lending program business, discussed herein), our commercial bank. As discussed above, Newtek
Bank is originating, servicing and selling SBA 7(a) loans in a similar manner to NSBF’s historic business model and is originating and servicing SBA 504 loans, C&I loans (including ABL and
owner occupied CRE and investor CRE).
In addition, we offer depository services and solutions through Newtek Bank. Our commercial banking clients can take advantage of our full offerings via the Newtek Advantage dashboard.
Newtek Bank's business lines include:
SBA 504 Lending
Newtek Bank originates SBA 504 loans which provide long-term fixed rate financing for major fixed assets such as real estate or equipment. The maximum loan amount for a SBA 504 loan is $5.5
million.
C&I Lending, CRE Lending and ABL Lending
The Newtek Lending Platform also includes C&I Lending, which includes ABL and owner occupied CRE and investor CRE. Newtek Bank will continue to provide C&I loans and CRE loans to its
commercial customers and will originate ABL loans. Prior to the Acquisition, our subsidiary, NBC, provided receivables financing, inventory financing and health care receivables financing to
independent business owners through the sale of their trade receivables or the financing of their inventories. NBC has ceased originating new ABL loans and will manage its current portfolio in
runoff mode.
11
Third Party Loan Servicing and Loan Origination Services
SBL, a former NewtekOne portfolio company which is now a subsidiary of Newtek Bank, provides our affiliates, subsidiaries and third-parties, including banks, credit unions and government
agencies, including the FDIC, with loan servicing for SBA and non-SBA loans. In addition, SBL provides our affiliates, subsidiaries and third-parties with outsourced solutions for the entire SBA
loan origination process, including credit analysis, structuring and eligibility, packaging, closing compliance and servicing. For example, SBL originates and services loans under our alternative
lending program for our Holdco 6 subsidiary and our joint ventures (see below).
Alternative Lending Program
On May 20, 2019, the Company and its joint venture partner launched Newtek Conventional Lending, LLC (NCL JV) to provide our alternative lending program loans (formerly known as non-
conforming conventional commercial and industrial term loans) to U.S. middle-market companies and small businesses. NCL JV is a 50/50 joint venture between Newtek Commercial Lending, Inc.
(NCL) a wholly-owned subsidiary of NewtekOne, and Conventional Lending TCP Holding, LLC, a wholly-owned, indirect subsidiary of BlackRock TCP Capital Corp. (Nasdaq: TCPC). NCL JV
ceased funding new alternative lending program loans during 2020. On January 28, 2022, NCL JV closed a securitization with the sale of $56.3 million of Class A Notes, NCL Business Loan Trust
2022-1, Business Loan-Backed Notes, Series 2022-1, secured by a segregated asset pool consisting primarily of NCL JV’s portfolio of alternative lending program loans, including loans secured by
liens on commercial or residential mortgaged properties, originated by NCL JV and NBL. The Notes were rated “A” (sf) by DBRS Morningstar. The Notes were priced at a yield of 3.209%. The
proceeds of the securitization were used, in part, to repay a Deutsche Bank credit facility and return capital to the NCL JV partners.
On August 5, 2022, NewtekOne launched its second joint venture to invest in alternative lending program loans. Newtek-TSO II Conventional Credit Partners, LP (Newtek-TSO JV). NCL and TSO
II entered into a joint venture, Newtek-TSO JV, governed by the Amended and Restated Limited Partnership Agreement for the Newtek-TSO JV. NCL and TSO II each committed to contribute an
equal share of equity funding to the Newtek-TSO JV and each will have equal voting rights on all material matters. Newtek-TSO JV intends to deploy capital over the course of time with additional
leverage supported by a warehouse line of credit. The intended purpose of Newtek-TSO JV is to invest in alternative lending program loans made to middle-market companies as well as independent
business owners. Newtek-TSO JV began making investments during the fourth quarter of 2022.
Deposits and Depository Services
We are focused on growing and retaining a stable deposit base and deepening relationships with our current and prospective deposit customers by leveraging our customer-direct, easy-to-use, digital
account opening platform. Newtek Bank is a digital direct bank with no branch network that obtains retail deposits directly from customers. Following the Acquisition of NBNYC and its $137
million deposit portfolio, we launched our High Yield Savings and Retail CD product offerings in March and April of 2023. Since that time, we have grown our deposit base rapidly and have offered
competitive market rates using an accounting opening process that is straightforward with limited interaction. Newtek Bank has maintained strong customer acquisition and retention rates and expects
to continue to drive growth in retail deposits. Additionally, during 2023 we implemented a suite of software solutions that will facilitate gathering and servicing deposits from our existing and
prospective independent business owner clients, diversifying our client base. We supplement our customer deposit base with a series of wholesale funding options, which consist of product offerings
to community banks and credit unions, as well as fundings in the brokered CD market. At December 31, 2023, Newtek Bank had $519 million of total deposits, which grew approximately $382
million, or 279%, following the Acquisition. The total number of retail deposit customers at December 31, 2023 that opened accounts through our digital opening process during 2023 was over 7,500.
Newtek Payments
NewtekOne’s business and financial solutions ecosystem also includes its Newtek Payments businesses, which includes NewtekOne’s subsidiaries Newtek Merchant Solutions, LLC (NMS), Mobil
Money, LLC (Mobil Money) and POS on Cloud, LLC, d/b/a Newtek Payment Systems (POS).
NMS markets credit and debit card processing services, check approval services, processing equipment, and software. NMS utilizes a multi-pronged sales approach of both direct and indirect sales.
NMS’ primary sales efforts focus on direct sales through our Your Business Solutions Company® brand. Their indirect sales channels consist of alliance partners, principally financial institutions
(banks, credit unions, insurance companies and other related businesses), and independent sales agents across the United States. These referring organizations and associations are typically paid a
percentage of the processing
12
revenue derived from the respective merchants that they successfully refer to NMS. In 2023, NMS processed merchant transactions with sales volumes of $5.4 billion.
We believe NMS has a number of competitive advantages which we believe will enable it to effectively compete in this market. These are:
•
•
focus on non-traditional business generation: referral relationships, wholesale solicitations and financial institutions rather than independent sales agents;
seeking to be a market leader in the implementation of technology in the payment processing business;
• maintaining its own staff of trained and skilled customer service representatives; and
• marketing and selling the latest in point-of-sale technology hardware and offers processing related cyber-security services.
NMS maintains its principal customer service and sales support offices in Lake Success, New York. NMS’s personnel assist merchants with initial installation of equipment and on-going service, as
well as any other special processing needs that they may have.
NMS’ development and growth is focused on selling NMS’ services to internally generated referrals, merchant referrals identified by Newtek alliance partners and by independent sales
representatives. We believe NMS is different than most electronic payment processing companies who acquire their clients primarily through independent sales agents. NMS believes that its business
model provides it with a competitive advantage by enabling it to acquire new merchant customers at a lower cost level for third-party commissions than the industry average. NMS’ business model
allows it to own the customer as well as the stream of residual payments, as opposed to models which rely more heavily on independent sales agents.
Mobil Money provides payment processing for a merchant portfolio of taxi cabs and related licensed payment processing software.
POS is a majority owned subsidiary of NewtekOne which provides a cloud based Point of Sale system for a variety of restaurant, retail, assisted living, parks and golf course businesses, which
provides not only payments and purchase technology solutions, but also inventory, customer management, reporting, employee time clock, table and menu layouts, and ecommerce solutions as the
central operating system for an independent business owner.
Newtek Insurance
Newtek Insurance Agency (NIA), is a wholly-owned subsidiary which is a retail and wholesale brokerage insurance agency licensed in all 50 states, specializing in the sale of commercial and
health/benefits lines insurance products to independent business owners, as well as the sale of various personal lines of insurance.
Newtek Payroll
PMTWorks Payroll, LLC d/b/a Newtek Payroll and Benefits Solutions (PMT), is a wholly-owned subsidiary which offers an array of industry standard and competitively priced payroll management,
and related payment and tax reporting services to independent business owners.
Newtek Technology
Newtek Technology Solutions, Inc. (NTS) is a wholly-owned subsidiary that provides website hosting, dedicated server hosting, cloud hosting, web design and development, internet marketing,
ecommerce, data storage, backup and disaster recovery, and other related services including consulting and implementing technology solutions for enterprise and commercial clients across the U.S. as
well as SMBs. On December 31, 2023, SIDCO and EWS were merged into NTS. As a result of commitments made to the Federal Reserve, the Company will divest or otherwise terminate the
activities conducted by NTS by January 6, 2025, subject to any extension of this date.
13
Newtek Branding
We have developed our branded line of business products and financial solutions to offer a full service suite of business and financial solutions for independent business owners in the United States.
We reach potential customers through our integrated multi-channel approach featuring direct, indirect and direct outbound solicitation efforts. We continue to utilize and grow our primary marketing
channel of strategic alliance partners as well as a direct marketing strategy to independent business owner customers through our “go to market” brand, Your Business Solutions Company® and One
Solution for All Your Business Needs®. Through our web presence, www.newtekone.com, we believe we are establishing ourselves as a preferred “go-to” provider for independent business owner
financial and business solutions offered by NewtekOne® and its subsidiaries, including Newtek Bank®.
We believe that our patented NewTracker® system provides for transparency between NewtekOne and referring parties and has been material in our ability to obtain referrals from a wide variety of
sources. The NewTracker system allows us and our alliance partners to review in real time the status of any referral as well as to provide real time compliance oversight by the respective alliance
partner, which we believe creates confidence among the referred business client, the referring alliance partner and us. We own the NewTracker® patent, as well as all trademarks and other patented
intellectual property used by us and our subsidiaries. Additional referrals are obtained from individual professionals in geographic markets that have signed up to provide referrals and earn
commissions through our BizExec and TechExec Programs. In addition, we believe that the Newtek Advantage
business clientele that can make their businesses more successful and that our clients can depend on. The Newtek Advantage allows clients to access the entire suite of the NewtekOne business and
financial solutions, and provide clients analytics, relationships and transactional capability that other banks do not offer. We believe the Newtek Advantage is unique because each of our clients will
be assigned a NewtekOne relationship manager and specialist in each Newtek business line, and allow our clients to go into the Newtek Advantage and communicate via video or chat with a
NewtekOne business line specialist.
dashboard, which patent is pending, is designed to be a management tool for our
TM
Market Opportunity
We believe that the limited amount of capital and financial products available to independent business owners, coupled with the desire of these businesses for flexible and partnership-oriented sources
of capital and other financial products, creates an attractive environment for us to further expand our business and financial products ecosystem and overall brand. We believe the following factors
will continue to provide us with opportunities to grow and deliver attractive returns to shareholders.
The independent business owner SMB market represents a large, underserved market. We estimate the independent business owner/SMB market to include over 33 million businesses in the United
States. We believe that SMBs, most of which are privately-held, are relatively underserved by traditional capital providers such as commercial banks, finance companies, hedge funds and
collateralized loan obligation funds. Further, we believe that such businesses generally possess conservative capital structures with significant enterprise value cushions, as compared to larger
companies with more financing options. While the largest originators of SBA 7(a) loans have traditionally been regional and national banks, from 2012 through 2022, our subsidiary NSBF was
consistently the largest non-bank originator of SBA 7(a) loans. When combining the loan approval volume of Newtek Bank and NSBF, we ranked as the largest SBA 7(a) lender based on dollar
volume of loan approvals as of December 31, 2023, which is the SBA’s first fiscal quarter. As a result, we believe we are well positioned to provide financing to the types of independent business
owners that we have historically targeted and we have the technology and infrastructure in place presently to do it cost effectively in all 50 states and across many industries.
Increased demand for comprehensive, business-critical SMB solutions. Increased competition and rapid technological innovation are creating an increasingly competitive business environment that
requires independent business owners to fundamentally change the way they manage critical business processes. This environment is characterized by greater focus on increased quality, lower costs,
faster turnaround and heightened regulatory scrutiny. To make necessary changes and adequately address these needs, we believe that companies are focusing on their core competencies and utilizing
cost-effective outsourced solutions to improve productivity, lower costs and manage operations more efficiently. We provide critical business solutions such as electronic payment processing,
managed IT solutions, personal and commercial insurance services and full-service payroll and benefit solutions, receivables financing, funding of SBA 504 loans, which provide financing of fixed
assets such as real estate or equipment, and non-conforming (non-SBA) commercial loans. We believe that each of these market segments are underserved for independent business owners and since
we are able to provide comprehensive financial and business solutions under one (the Newtek) platform, we believe that we are well positioned to continue to realize growth from these product
offerings.
14
Competitive Advantages
We believe that we are well positioned to take advantage of opportunities to provide business and financial solutions to independent business owners due to the following competitive advantages:
Senior lending Team and Executive Officers. The key members of our Senior Lending Team, many of whom have worked together for more than ten years, each have over 25 years of experience in
finance-related fields. These lending professionals have worked together to screen opportunities, underwrite new loans and investments and manage a portfolio of loans and investments in SMBs
through two recessions, a credit crunch, the dot-com boom and bust and a historic, leverage-fueled asset valuation bubble and the COVID-19 pandemic. Each member brings a complementary
component to a team well-rounded in finance, accounting, operations, strategy, business law and executive management. We are led by our executive officers under the supervision of our Board. Our
executive officers have significant experience in our fields of operations.
Business Model Enables Attractive Risk-Weighted Return on Investment in SBA 7(a) Lending. Our SBA 7(a) loans are structured so as to permit rapid sale of the U.S. government guaranteed
portions, often within weeks of origination, and the unguaranteed portions have been successfully securitized, with the securitization notes being sold, usually within a year of loan origination. The
return of principal and premium may result in an advantageous risk-weighted return on our original investment in each loan. Newtek Bank has determined to retain the unguaranteed portions of SBA
7(a) loans, but may seek to securitize or otherwise finance these loans in the future.
State of the Art Technology. Our patented NewTracker® software enables us to board an SMB customer, process the application or inquiry, assemble necessary documents, complete the transaction
and create a daily reporting system that is sufficiently unique as to receive a U.S. patent. NewTracker® enables us to identify a transaction, similar to a merchandise barcode or the customer
management system used by SalesForce.com, then process a business transaction and generate internal reports used by management and external reports for strategic referral partners. NewTracker®
allows our referral partners to have digital access into our back office and follow on a real time, 24/7 basis the processing of their referred customers. NewTracker® has been applied to all of the
business and financial solutions we offer directly or through our subsidiaries.
Established Direct Origination Platform with Extensive Deal Sourcing Infrastructure. We have established a direct loan origination pipeline for opportunities without the necessity for financial
institutions or brokers as well as broad marketing channels that we believe allow for highly selective underwriting. We believe the combination of our brand, our portal, our patented NewTracker®
technology, and our web presence as Your Business Solutions Company® have created an extensive deal sourcing infrastructure. Although we pay fees for loan originations that are referred to us by
our alliance partners, our lending team works directly with the borrower to assemble and underwrite loans. We rarely invest in pre-assembled loans that are sold by investment banks or brokers. As a
result, we believe that our unique national origination platform allows us to originate attractive credits at a low cost. During 2023 and 2022 we funded $814.4 million and $775.6 million, respectively,
of SBA 7(a) loans. We anticipate that our principal source of loan origination opportunities will continue to be in the same types of independent business owners to which we currently provide
financing. Our executive officers and Senior Lending Team also seek to leverage our extensive network of additional referral sources, including law firms, accounting firms, financial, operational and
strategic consultants and financial institutions, with whom we have closed opportunities. We believe our current infrastructure and expansive relationships will continue to enable us to review a
significant amount of direct (or non-brokered) business opportunities.
Flexible, Customized Business and Financial Solutions for Seasoned, Independent Business Owners. While Newtek Bank’s primary focus will be to expand its lending activities by providing SBA
7(a) loans to independent business owners, we also seek to offer independent business owners a variety of attractive financial solutions, as well as cost effective and efficient business solutions, to
meet their capital needs through Newtek Bank and our nonbank subsidiaries. In particular, we offer larger loans, between $5.0 million and $15.0 million, greater than loans available with the SBA
guarantee, but with a higher interest rate to compensate for the increased risk. Unlike many of our competitors, we believe we have the business finance ecosystem that allows us to provide a
complete package of business and financial solutions for independent business owners, which allows for cross-selling opportunities and improved client retention. We expect that a large portion of
our capital will be loaned to companies that need growth capital, acquisition financing or funding to recapitalize or refinance existing debt facilities. Our lending will continue to focus on making
loans to independent business owners that:
•
•
•
have 3 to 10 years of operational history;
significant experience in management;
credit worthy owners who provide a personal guarantee for our investment;
15
•
•
show a strong balance sheet to collateralize our investments; and
show sufficient cash flow to be able to service the payments on our investments comfortably.
Although we may make loans to start-up businesses, we generally seek to avoid lending to high-risk, early-stage enterprises that are only beginning to develop their market share or build their
management and operational infrastructure with limited collateral.
Disciplined Underwriting Policies and Rigorous Portfolio Management. We pursue rigorous due diligence of all prospective loans originated through our Business Lending Platform. Our Senior
Lending Team has developed what we believe to be an extensive underwriting due diligence process, which includes a review of the operational, financial, legal and industry performance and outlook
for the prospective investment, including quantitative and qualitative stress tests, review of industry data and when necessary, consultation with outside experts regarding the creditworthiness of the
borrower. These processes continue during the portfolio monitoring process, when we will conduct field examinations, when appropriate, review all compliance certificates and covenants and
regularly assess the financial and business conditions and prospects of our borrowers. In addition, SBL, an S&P rated servicer, is a third-party servicer for commercial, SBA 7(a) and other
government guaranteed investments, whose exceptional servicing capabilities with compact timelines for loan resolutions and dispositions has attracted various third-party portfolios to SBL. SBL
services the loans funded by Newtek Bank, Holdco 6, NSBF and our joint ventures, and provides loan origination and closing services to our joint ventures and affiliates.
Prior Business Development Company History
Our predecessor was formed on June 29, 1999 under the laws of the State of New York and, on November 12, 2014, in connection with our election to be regulated as a BDC, merged with and into us
for the purpose of reincorporating under the laws of the State of Maryland.
From November 12, 2014 to January 6, 2023, we operated as a BDC and a RIC. As a BDC, we were required to meet certain regulatory tests, including the requirement to invest at least 70% of our
gross assets in “qualifying assets.” In addition, as a BDC, we were not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at
least 150% (i.e., the amount of debt may not exceed 66 2/3% of the value of our total assets). Additionally, as a RIC, we generally did not have to pay corporate-level U.S. federal income taxes on any
ordinary income or capital gains that we timely distribute to our shareholders.
Although we maintained our status as a BDC and a RIC through the entirety of our 2022 fiscal and tax years, upon completing the Acquisition, we filed with the SEC Form N-54C, Notification of
Withdrawal of Election to be Subject to the 1940 Act, and ceased to be a BDC. As a result, we are no longer subject to regulation as a BDC under the 1940 Act, and no longer qualify for tax treatment
as a RIC under the Code.
Regulation and Supervision
General
The U.S. financial services and banking industry is highly regulated. The bank regulatory regime is intended primarily for the protection of customers, the public, the financial system and the DIF,
rather than our stockholders or creditors.
The legal and regulatory regime affects virtually all aspects of our operations. Statutes, regulations and policies govern, among other things, the scope of activities that we may conduct and the
manner in which we may conduct them; our business plan and growth; our board, management, and risk management infrastructure; the type, terms, and pricing of our products and services; our loan
and investment portfolio; our capital and liquidity levels; our reserves against deposits; our ability to pay dividends, repurchase our stock or distribute capital; and our ability to engage in mergers,
acquisitions and other strategic initiatives. The legal and regulatory regime is continually under review by legislatures, regulators and other governmental bodies, and changes regularly occur through
the enactment or amendment of laws and regulations or through shifts in policy, implementation or enforcement. Changes are difficult to predict and could have significant effects on our business.
See “Item 1A Risk Factors - Risks Related to Operating as a Financial Holding Company - The banking industry is highly regulated, and the regulatory framework, together with any future
legislative or regulatory changes, may have a significant adverse effect on our operations.”
16
The material regulatory requirements that are applicable to us and our subsidiaries are summarized below. The description below, as well as other descriptions of laws and regulations in this Form 10-
K, are not intended to summarize all laws and regulations applicable to us and our subsidiaries, and are based upon the statutes, regulations, policies, interpretive letters and other written guidance
that are in effect as of the date of this Form 10-K.
Regulatory Framework
We are subject to regulation and supervision by multiple regulatory bodies. As a bank holding company electing financial holding company status, the Company is subject to the BHCA and is subject
to ongoing and comprehensive supervision, regulation, examination and enforcement by the Federal Reserve. The Federal Reserve’s jurisdiction also extends to any company that is directly or
indirectly controlled by a bank holding company.
As a national bank, Newtek Bank is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the OCC. The OCC charges fees to national banks, including
Newtek Bank, in connection with its supervisory activities.
Newtek Bank’s deposits are insured by the Depositors Insurance Fund (DIF) up to applicable legal limits. As an FDIC-insured depository institution, Newtek Bank is subject under certain
circumstances to supervision, regulation and examination by the FDIC. The FDIC charges deposit insurance assessments to FDIC-insured institutions, including Newtek Bank, to fund and support the
DIF. The rate of these deposit insurance assessments is based on, among other things, the risk characteristics of Newtek Bank. The FDIC has the power to terminate Newtek Bank’s deposit insurance
if it determines Newtek Bank is engaging in unsafe or unsound practices. Federal banking laws provide for the appointment of the FDIC as receiver in the event Newtek Bank were to fail, such as in
connection with undercapitalization, insolvency, unsafe or unsound condition or other financial distress. In a receivership, the claims of Newtek Bank’s depositors (and those of the FDIC as subrogee
of Newtek Bank) would have priority over other general unsecured claims against Newtek Bank.
During the COVID-19 pandemic, the amount of total estimated insured deposits grew very rapidly while the funds in the DIF grew at a normal rate, causing the DIF reserve ratio to fall below the
statutory minimum of 1.35%. The FDIC adopted a restoration plan in September 2020, which it amended in June 2022, to restore the DIF reserve ratio to at least 1.35% by September 30, 2028. On
October 18, 2022, the FDIC adopted a final rule to increase initial base deposit insurance assessment rates for insured depository institutions by 2 basis points, beginning with the first quarterly
assessment period of 2023. The increased assessment rate schedules will remain in effect unless and until the reserve ratio of the DIF meets or exceeds 2%. As a result of this rule, the FDIC insurance
costs of insured depository institutions, including Newtek Bank, have generally increased.
On November 29, 2023, the FDIC issued a final rule that imposes a special deposit insurance assessment on insured depository institutions in order to recover losses that the DIF has incurred in the
receiverships of Silicon Valley Bank and Signature Bank. The rule requires the payment of the special assessment over eight quarterly assessment periods beginning in the first quarter of 2024,
subject to adjustments if the total amount collected is insufficient to cover the DIF’s costs. Each quarterly special assessment is equal to 3.36 basis points (0.0336%) of the amount of an institution’s
estimated uninsured deposits that exceeded $5 billion as of December 31, 2023. As of December 31, 2023, Newtek Bank’s estimated amount of uninsured deposits was $66.5 million and therefore,
Newtek Bank is not required to pay any amount of the special assessment.
We are subject to the disclosure and regulatory requirements of the Securities Act and the Exchange Act, both as administered by the SEC. Our common stock is listed on the Nasdaq Global Market
under the ticker symbol “NEWT” and therefore we are also subject to the rules of Nasdaq Global Market for listed companies. We have adopted certain policies and procedures intended to comply
with the Nasdaq Global Market’s corporate governance rules. We will continue to monitor our compliance with all future listing standards that are approved by the SEC and will take actions
necessary to ensure that we are in compliance therewith. See “Item 1A Risk Factors - Risks Related to Operating as a Financial Holding Company - The banking industry is highly regulated, and the
regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our operations.”
17
Broad Powers to Ensure Safety and Soundness
A principal objective of the U.S. bank regulatory system is to ensure the safety and soundness of banking organizations. Safety and soundness is a broad concept that includes financial, operational,
compliance and reputational considerations, including matters such as capital, asset quality, quality of board and management oversight, earnings, liquidity, and sensitivity to market and interest rate
risk. As part of its commitment to maintain safety and soundness, at the time we acquired Newtek Bank, Newtek Bank entered into an Operating Agreement with the OCC (the “Operating
Agreement”). The Operating Agreement sets forth key parameters within which Newtek Bank must operate, such as with respect to its business plan, minimum capital, minimum liquidity, risk
management and compliance.
The banking and financial regulators have broad examination and enforcement authority. The regulators require banking organizations to file detailed periodic reports and regularly examine the
operations of banking organizations. Banking organizations that do not meet the regulators’ supervisory expectations can be subjected to increased scrutiny and supervisory criticism. The regulators
have various remedies available, which may be public or of a confidential supervisory nature, if they determine that an institution’s condition, management, operations or risk profile is unsatisfactory.
The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other
things:
•
•
•
•
•
•
•
•
•
•
require affirmative actions to correct any violation or practice;
issue administrative orders that can be judicially enforced;
direct increases in capital;
direct the sale of subsidiaries or other assets;
limit dividends and distributions;
restrict growth and activities;
set forth parameters, obligations and/or limitations with respect to the operation of our business;
assess civil monetary penalties;
remove officers and directors; and
terminate deposit insurance.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements (including the Operating Agreement) could subject us and our subsidiaries
or their officers, directors and institution-affiliated parties to a broad variety of sanctions or remedies, including those described above.
Limits on Activities and Approval Requirements
The BHCA generally restricts the Company’s ability, directly or indirectly, to engage in, or acquire more than 5% of any class of voting securities of a company engaged in activities other than those
determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets
specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than
previously permitted. The Company has elected to become a financial holding company, allowing it to engage in a broader array of financial activities than bank holding companies.
The bank regulatory regime, including through the Operating Agreement, requires that we obtain prior approval of one or more regulators for various initiatives or corporate actions, including
acquisitions or minority investments, the establishment of branches, certain dividends or capital distributions, and significant deviations from Newtek Bank’s previously approved business plan.
Regulators take into account a range of factors in determining whether to grant a requested approval, including the supervisory status of the applicant and its affiliates. Thus, there is no guarantee that
a particular proposal by us would receive the required regulatory approvals.
18
The CRA requires federal banking regulators, in their review of certain applications by banking organizations, to take into account the applicant’s record in helping meet the credit needs of its
community, including low- and moderate-income neighborhoods. Newtek Bank is subject to periodic examination under the CRA by the OCC, which will assign ratings based on the methodologies
set forth in its regulations and guidance. Less favorable CRA ratings, or concerns raised under the CRA, may adversely affect Newtek Bank’s ability to obtain approval for certain types of
applications. Newtek Bank’s latest rating by the OCC under the CRA is “Satisfactory”.
In October 2023, the Federal Reserve, the FDIC and the OCC issued a joint rule to modernize regulations implementing the CRA. Under the final rules, the agencies will evaluate bank performance
across the varied activities they conduct and communities in which they operate. This includes evaluating lending outside traditional assessment areas generated by the growth of non-branch delivery
systems, such as online and mobile banking, branchless banking and hybrid models. The final rule adopts a new metrics-based approach to evaluating bank retail lending and community development
financing, using benchmarks based on peer and demographic data. The final rule also clarifies eligible CRA activities, such as affordable housing, that are focused on low- and moderate-income,
underserved, native and rural communities. Most of the requirements of the final rule take effect January 1, 2026, while the data requirements will take effect January 1, 2027. We are continuing to
evaluate the potential impact of the new rule to our business, financial condition and results of operations, which cannot be predicted at this time.
See “Item 1A Risk Factors - Risks Related to Operating as a Financial Holding Company - The banking industry is highly regulated, and the regulatory framework, together with any future
legislative or regulatory changes, may have a significant adverse effect on our operations.”
Company as Source of Strength for Newtek Bank
Federal law and Federal Reserve policy require that a bank holding company serve as a source of financial and managerial strength for any FDIC-insured depository institution that it controls. Thus,
if Newtek Bank were to be in financial distress or to otherwise be viewed by the regulators as in an unsatisfactory condition, then the regulators could require the Company to provide additional
capital or liquidity support, or take other action, in support of Newtek Bank, even if doing so is not otherwise in the best interest of the Company.
Regulatory Capital Requirements and Prompt Corrective Action
The banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are
required to maintain a specified level of capital relative to the amount and types of assets they hold. While capital can serve as an important cushion against losses, higher capital requirements can
also adversely affect an institution’s ability to grow and/or increase leverage through deposit-gathering or other sources of funding.
The Company and Newtek Bank are each subject to generally similar capital requirements adopted by the Federal Reserve and the OCC, respectively. These requirements establish required minimum
ratios for common equity tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and a Tier 1 leverage ratio; set risk-weighting for assets and certain other items for purposes of the
risk-based capital ratios; require an additional capital conservation buffer over the minimum required capital ratios in order to avoid certain limitations on paying dividends, engaging in share
repurchases, and paying discretionary bonuses; and define what qualifies as capital for purposes of meeting the capital requirements. Specifically, the capital thresholds in order to be regarded as a
well-capitalized institution under the Basel Committee on Banking Supervision standardized approach for U.S. banking organizations are as follows: a common equity tier 1 risk-based capital ratio of
6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a Tier 1 leverage ratio of 5.0%.
The regulators assess any particular institution’s capital adequacy based on numerous factors and may require a particular banking organization to maintain capital at levels higher than the generally
applicable minimums. In this regard, and unless otherwise directed by the OCC, we have made commitments for Newtek Bank to maintain a tier 1 leverage ratio of no less than 10% and a total risk-
based capital ratio of 11.5% for the term of the Operating Agreement.
19
The Federal Deposit Insurance Act provides for a system of “prompt corrective action” (“PCA”). The PCA regime provides for capitalization categories ranging from “well-capitalized” to “critically
undercapitalized.” An institution’s PCA category is determined primarily by its regulatory capital ratios. The PCA regime requires remedial actions and imposes limitations that become increasingly
stringent as an institution’s condition deteriorates and its PCA capitalization category declines. Among other things, institutions that are less than well-capitalized become subject to increasingly
stringent restrictions on their ability to accept and/or rollover brokered deposits.
In addition to capital requirements, depository institutions are required to maintain non-interest bearing reserves at specified levels against their transaction accounts and certain non-personal time
deposits.
Regulatory Limits on Dividends and Distributions
The ability of the Company or Newtek Bank to pay dividends, repurchase stock and make other capital distributions is limited by regulatory capital rules and other aspects of the regulatory regime.
For example, a policy statement of the Federal Reserve provides that, among other things, a bank holding company generally should not pay dividends if its net income for the past year is not
sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.
Dividends and capital distributions by Newtek Bank are also limited by the regulatory regimes. For example, the Operating Agreement requires Newtek Bank to be in compliance with certain capital
levels before paying a dividend. Other laws and regulations generally applicable to national banks also limit the amount of dividends and capital distributions that may be made by a national bank
and/or require prior approval of the OCC.
Federal Home Loan Bank System
Newtek Bank is a member of the FHLB, which consists of 11 regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. Newtek Bank, as a
member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB. Newtek Bank is in compliance with this requirement with an investment in FHLB capital stock of
$168,400.00 as of December 31, 2023.
Consumer Protection
We are subject to a broad array of federal, state and local laws and regulations that govern almost every aspect of our business relationships with consumers. These laws relate to, among other things,
the content and adequacy of disclosures, pricing and fees, fair lending, anti-discrimination, privacy, cybersecurity, usury, mortgages and housing finance, lending to service members, escheatment,
debt collection, loan servicing, collateral secured lending, and unfair, deceptive or abusive acts or practices.
The CFPB is generally responsible for rulemaking with respect to certain federal laws related to the provision of financial products and services to consumers. In addition, the CFPB has examination
and primary enforcement authority with respect to federal consumer financial protection laws with respect to banking organizations with assets of $10 billion or more. Newtek Bank has assets less
than $10 billion; therefore, we are not currently subject to the examination and enforcement jurisdiction of the CFPB. However, many consumer protection rules adopted or amended by the CFPB do
apply to us and are the subject of examination and enforcement with respect to us by the OCC.
If we fail to comply with these laws and regulations, we may be subject to significant penalties, judgments, other monetary or injunctive remedies, lawsuits (including putative class action lawsuits
and actions by state and local attorneys general or other officials), customer rescission rights, supervisory or enforcement actions, and civil or criminal liability. See “Item 1A Risk Factors - Risks
Related to Operating as a Financial Holding Company - The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a
significant adverse effect on our operations.”
20
Anti-Money Laundering, Sanctions and Financial Crime
We are subject to a wide range of laws related to anti-money laundering, economic sanctions and prevention of financial crime, including the Bank Secrecy Act, the USA PATRIOT Act and economic
sanctions programs. We are required to, among other things, maintain an effective anti-money laundering and counter-terrorist compliance program, identify and file suspicious activity and currency
transaction reports, and block transactions with sanctioned persons or jurisdictions. Compliance with these laws requires significant investment of management attention and resources. These laws are
enforced by a number of regulatory authorities, including the Federal Reserve, OCC, Office of Foreign Assets Control, the Financial Crimes Enforcement Network, the U.S. Department of Justice,
Drug Enforcement Administration, and Internal Revenue Service. Failure to comply with these laws, or to meet our regulators’ supervisory expectations in connection with these laws, could subject
us to supervisory or enforcement action, significant financial penalties, criminal liability and/or reputational harm.
Third-Party Relationship Risk Management
We utilize third-party service providers to perform a wide range of operations and other functions, which may present various risks. Our regulators will expect us to maintain an effective program for
managing risk arising from third-party relationships, which should be commensurate with the level of risk and complexity of our business and our third-party relationships. If not managed effectively,
the use of third-party service providers may expose us to risks that could result in regulatory action, financial loss, litigation and reputational harm. On June 6, 2023, the FDIC, the Federal Reserve
and the OCC issued final guidance providing sound principles that support a risk-based approach to third-party risk management.
Privacy, Information Technology and Cybersecurity
We are subject to various laws related to the privacy of consumer information. For example, we and our subsidiaries are required under federal law periodically to disclose to their retail clients our
policies and practices with respect to the sharing of nonpublic client information with their affiliates and others, and the confidentiality and security of that information. In some cases, Newtek Bank
must obtain a consumer’s consent before sharing information with an unaffiliated third party, and Newtek Bank must allow a consumer to opt out of Newtek Bank’s sharing of information with its
affiliates for marketing and certain other purposes. We are also subject to laws and regulatory requirements related to information technology and cybersecurity. For example, the FFIEC, which is a
council comprised of the primary federal banking regulators, has issued guidance and supervisory expectations for banking organizations with respect to information technology and cybersecurity. In
addition, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four
business days of determining that a material cybersecurity incident has occurred and to disclose on annual basis material information regarding their cybersecurity risk management, strategy and
governance. Our regulators will regularly examine us for compliance with applicable laws, and adherence to industry best practices, with respect to these topics. For example, they will evaluate our
security of user and customer credentials, business continuity planning, and the ability to identify and thwart cyber-attacks.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial
institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently
implemented or modified their data breach notification and data privacy requirements. For example, the California Privacy Rights Act of 2020 became fully operative on January 1, 2023. We expect
this trend of state-level activity in those areas to continue, and are continually monitoring developments in the states in which our clients are located.
Limitations on Transactions with Affiliates and Loans to Insiders
Banks are subject to restrictions on their ability to conduct transactions with affiliates and other related parties under federal banking laws. For example, federal banking laws impose quantitative
limits, qualitative requirements, and collateral standards on certain extensions of credit and other transactions by an insured depository institution with, or for the benefit of, its affiliates. In addition,
most types of transactions by an insured depository institution with, or for the benefit of, an affiliate must be on terms substantially the same or at least as favorable to the insured depository
institution as if the transaction were conducted with an unaffiliated third party. Federal banking laws also impose restrictions and procedural requirements in connection with the extension of credit by
an insured depository institution to directors, executive officers, principal stockholders (including the Company) and their related interests. In addition, purchases and sales of assets between an
insured depository institution and its executive officers, directors, and principal stockholders may also be limited under such laws. The Sarbanes-Oxley Act generally prohibits loans by public
companies to their executive officers and directors. However, there is a specific exception for loans by financial institutions, such as Newtek Bank, to its executive officers and directors that are made
in compliance with federal
21
banking laws.
Acquisition of a Significant Interest in the Company
Banking laws impose various regulatory requirements on parties that may seek to acquire a significant interest in the Company. For example, the Change in Bank Control Act of 1978 would generally
require that any party file a formal notice with, and obtain non-objection of, the Federal Reserve prior to acquiring (directly or indirectly, whether alone or acting in concert with any other party) 10%
or more of any class of voting securities of the Company. Further approval requirements and significant ongoing regulatory consequences would apply to any company that (directly or indirectly,
whether alone or as part of an association with another company) seeks to acquire “control” of the Company or Newtek Bank for purposes of the BHCA. The determination whether a party “controls”
a depository institution or its holding company for purposes of these laws is based on applicable regulations and all of the facts and circumstances surrounding the investment. See “Item 1A Risk
Factors - Risks Related to Operating as a Financial Holding Company - Federal law may discourage certain acquisitions of our common stock which could have a material adverse effect on our
shareholders.”
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among
the means available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on borrowings and changes in reserve
requirements with respect to deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits. The Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue
to do so in the future. Although we conduct stress tests to measure and prepare for the impact of potential changes in monetary policy, we cannot predict with certainty the nature of future monetary
policies and the effect of such policies on our business and earnings.
NSBF’s Regulation as a Small Business Lending Company and the Transition of SBA 7(a) Lending to Newtek Bank
Our wholly-owned subsidiary, NSBF, is licensed by the SBA as an SBLC that originated loans through the SBA 7(a) Program. As a result of the Acquisition, all SBA 7(a) loan originations were
transitioned to Newtek Bank in April 2023, and NSBF ceased the origination of SBA 7(a) loans, relinquished its PLP status and is winding-down its operations. During this wind down process,
NSBF is required to continue to own the SBA 7(a) loans and PPP Loans in its SBA loan portfolio to maturity, liquidation, charge-off, or (subject to SBA’s prior written approval), sale or transfer.
NSBF is further required to continue to service and liquidate its SBA loan portfolio, including processing forgiveness and loan reviews for PPP Loans, pursuant to an SBA approved lender service
provider agreement with SBL. During the wind down process, NSBF is required to maintain minimum capital requirements established by the SBA, required to maintain certain amounts of restricted
cash available to meet any obligations to the SBA, and has restrictions on its ability to make dividends and distributions to its parent, and will remain liable to SBA for post-purchase denials and
repairs, from the proceeds generated by NSBF’s SBA loan portfolio. The Company has guaranteed NSBF’s obligations to the SBA and has funded a $10 million account at Newtek Bank to secure
these potential obligations. Any future post-purchase denials and repairs demands on NSBF could negatively impact our results of operations.
Newtek Bank has been granted PLP status. The SBA grants PLP status to certain lenders originating SBA 7(a) loans based on achievement of certain standards in lending which are regularly
monitored by the SBA. As a Preferred Lender, Newtek Bank is authorized to place SBA guarantees on SBA 7(a) loans without seeking prior SBA review and approval. Designated PLP lenders are
delegated the authority to process, close, service, and liquidate most SBA guaranteed loans without prior SBA review. PLP lenders are authorized to make SBA guaranteed loans, subject only to a
brief eligibility review and assignment of a loan number by SBA. In addition, PLP lenders are expected to handle servicing and liquidation of all of their SBA loans with limited involvement of SBA.
If Newtek Bank fails to maintain PLP status, it would have a material adverse impact on Newtek Bank’s ability to originate SBA 7(a) loans at NSBF’s historic levels. See “Item 1A. Risk Factors -
Risks Related to SBA Lending - There can be no guarantee that Newtek Bank and NSBF will be able to maintain their SBA 7(a) lending licenses.”
Pursuant to the SBA’s regulations, the SBA is released from liability on its guaranty of an SBA 7(a) loan and may, in its sole discretion, refuse to honor a guaranty purchase request in full or in part,
or recover all or part of the funds already paid in connection with a guaranty purchase, if the lender failed to comply materially with a SBA Loan Program Requirement; failed to make, close, service
or liquidate the loan in a prudent manner; placed the SBA at risk through improper action or inaction; failed to disclose a material fact to the SBA in a timely manner; or misrepresented a material fact
to the SBA regarding the loan. In certain instances, the SBA may refuse to honor a guaranty purchase request in full (referred to by the SBA as a “denial”) or in part (referred to by the SBA as a
“repair”), or recover all or part of the funds already paid in connection with a guaranty purchase. In the event of a repair or denial, liability on the guaranty, in whole or in part, would be transferred to
NSBF or
22
Newtek Bank as the originator of the loan, as the case may be. Even though NSBF has ceased originating new SBA 7(a) loans, it has retained and may be exposed to repair and denial liability to the
SBA for SBA 7(a) loans in NSBF’s portfolio. The incurrence of repairs and denials while NSBF is no longer generating income from the sales of guaranteed portions of SBA 7(a) loans can have a
material negative impact on our financial results and liquidity. In addition, changes in SBA regulations and economic factors may adversely impact NSBF’s or Newtek Bank’s repair and denial rates.
See “Item 1A. Risk Factors - Risks Related to SBA Lending - NSBF and Newtek Bank, our wholly-owned subsidiaries, are subject to regulation by the SBA, which has specific risks.”
In connection with NSBF’s 2018 examination by the SBA, NSBF entered into a voluntary agreement with the SBA pursuant to NSBF’s commitment to operate under the SBA Loan Program
Requirements. Consistent with the terms of the agreement, NSBF has established a segregated restricted cash account in the amount of $10 million to account for potential post-purchase repairs and
denials of guaranteed portions of SBA 7(a) loans, and agreed to take certain actions to, among other things, demonstrate the sufficiency of NSBF’s liquidity.
On March 30, 2023, the CFPB finalized a rule under Section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity.
We are evaluating the impact of this new rule. The rule was scheduled to take effect on August 29, 2023, and would have required compliance by October 1, 2024, April 1, 2025, or January 1, 2026,
depending on the number of covered small business loans that a covered lender originates. On July 31, 2023, the U.S. District Court for the Southern District of Texas enjoined the CFPB from
implementing and enforcing the rule with respect to American Bankers Association members, which includes the Company, pending the U.S. Supreme Court’s consideration of the constitutionality of
the CFPB’s funding structure in a separate case.
Lending Activities
We engage in various business and lending strategies in order to achieve our overall business objectives. See “Item 1A. Risk Factors – Risks Relating to Our Business and Structure.”
Lending Opportunity Characteristics
We have and will continue to target loans that generate both current income and capital appreciation. In each case, the following criteria and guidelines are applied to the review of a potential lending
opportunity; however, not all criteria are met in every single loan, nor do we guarantee that all criteria will be met in the loans we will make in the future. We have and will continue to limit our
lending to the independent business owner/SMB market.
Experienced Management with Meaningful Investment. We seek to lend to businesses in which senior or key managers have significant company-or industry-level experience and have significant
equity ownership. We have found that these more seasoned managers are more committed to the businesses’ success and more likely to manage the business in a manner that protects our investments.
Significant Invested Capital. We believe that the existence of an appropriate amount of equity in the businesses we lend to provides valuable support for our loans. In addition, the degree to which
the particular loan is a meaningful one for the businesses’ owners (and their ability and willingness to invest additional equity capital as and to the extent necessary) are also important considerations.
Appropriate Capital Structures. We seek to lend to businesses that are appropriately capitalized. First, we examine the amount of equity that is being invested by the business’ equity owners to
determine whether there is a sufficient capital cushion beneath our loans. We also analyze the amount of senior debt and collateral with lien priority over the loan. A key consideration is a strong
balance sheet and sufficient historical or projected free cash flow to service any debt we may invest.
Strong Competitive Position. We seek to lend to businesses that have developed strong, defensible product or service offerings within their respective market segment(s). These businesses should be
well positioned to capitalize on organic and strategic growth opportunities, and should compete in industries with strong fundamentals and meaningful barriers to entry. We further analyze prospective
lending opportunities in order to identify competitive advantages within their industry, which may result in superior operating margins or industry-leading growth.
23
Customer and Supplier Diversification. We expect to lend to businesses with sufficiently diverse customer and supplier bases. We believe these businesses will be better able to endure industry
consolidation, economic contraction and increased competition than those that are not sufficiently diversified. However, we also recognize that from time to time, an attractive lending opportunity
with some concentration among its customer base or supply chain will present itself. We believe that concentration issues can be evaluated and, in some instances (whether due to supplier or customer
product or platform diversification, the existence and quality of long-term agreements with such customers or suppliers or other select factors), mitigated, thus presenting a superior risk-weighted
pricing scenario.
We target our loans made through our business finance ecosystem under the SBA 7(a) program, to produce generally, a coupon rate of prime plus 3.0% to 6.50% which enables us to generate rapid
sales of the guaranteed portions of SBA 7(a) loans in the secondary market, which have historically produced gains and a yield on investment in excess of 30%.
Collateral and Sources of Repayment. We typically structure our loans with the maximum seniority and collateral along with personal guarantees from business owners, in many cases collateralized
by other assets including real estate. In most cases, our loans will be collateralized by a first lien on the assets of the business and a first or second lien on assets of guarantors, in both cases primarily
real estate. All SBA 7(a) loans are made with personal guarantees from any owner(s) of 20% or more of the business’ equity. As of December 31, 2023, substantially all of our SBA 7(a) loans at fair
value consisted of loans that were secured by first or second priority liens on the assets of the business.
•
•
First Lien Loans. Our first lien loans generally have terms of one to 25 years, provide for a variable interest rate, contain no prepayment penalties (however, the SBA will charge the
borrower a prepayment fee if the loan has a maturity of 15 or more years and is prepaid during the first three years) and are secured by a first priority security interest in all existing and
future assets of the borrower. Our first lien loans may take many forms, including revolving lines of credit, term loans.
Second Lien Loans. Our second lien loans generally have terms of five to 25 years, also primarily provide for a variable interest rate, contain no prepayment penalties (however, the SBA will
charge the borrower a prepayment fee if the loan has a maturity of 15 or more years and is prepaid during the first three years) and are secured by a second priority security interest in all
existing and future assets of the borrower. We typically take second lien positions on additional collateral when first lien positions exist. All loans are secured by a lien on all available
collateral of the business or any owner 20% or greater.
We typically structure our loans to include non-financial covenants that seek to minimize our risk of capital loss such as lien protection and prohibitions against change of control. Our loans are
typically structured to have strong protections, including default penalties, information rights and, in some cases, affirmative, negative and financial covenants.
In addition to loans originated under the SBA 7(a) program. our Newtek Lending Platform includes the following loan products originated by Newtek Bank: SBA 504 loans, C&I loans (including
ABL and owner occupied CRE and investor CRE). In addition, our alternative lending program loans (formerly referred to as non-conforming conventional loans) are originated by NewtekOne
nonbank subsidiaries and joint ventures.
SBA 504 loans provide long-term fixed rate financing for major fixed assets such as real estate or equipment. The maximum loan amount for a SBA 504 loan is $5.5 million.
C&I Lending, CRE Lending and ABL. Newtek Bank provides C&I loans, which includes ABL and owner occupied CRE and investor CRE loans, to its commercial customers.
For more information, see “ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ”
24
Equity Investments to Expand or Enhance the NewtekOne Business and Financial Solutions Ecosystem
While the vast majority of our lending opportunities have been structured as loans, we have in the past and expect in the future to make selective equity investments primarily as either strategic
investments to enhance the integrated operating platform or, to a lesser degree, under the Capco programs. Historically, for investments in our subsidiaries, we focused more on tailoring them to the
long-term growth needs of the companies than to immediate return. Our objective with these companies was to foster the development of the businesses as a part of the integrated operational platform
of serving the independent business owner market, so we may have sought to reduce the burden on these companies to enable them to grow faster than they would otherwise as another means of
supporting their development and that of the integrated whole.
In Capco investments, we have made debt investments in conjunction with being granted equity in the company in the same class of security as the business owner receives upon funding. We have
generally sought to structure our equity investments to provide us with minority rights provisions and event-driven put rights.
Loan Origination Process
The following discussion relates to the Company’s loan origination selection process in connection with SBA 7(a) lending. For more information, see “Item 7— Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” The members of our Senior Lending Team and our executive officers are responsible for all aspects of our loan origination selection
process. The discussion below describes our procedures. The stages of our selection process for loan originations are as follows:
Loan and Deal Generation/Origination
We believe that the combination of our brand, our portal, our patented NewTracker® technology, and our web presence as Your Business Solutions Company® have created an extensive loan and deal
sourcing infrastructure. This is maximized through long-standing and extensive relationships with industry contacts, commercial and investment bankers, entrepreneurs, services providers (such as
lawyers and accountants), as well as current and former clients and our extensive network of strategic alliance partners. We supplement our relationships by the selective use of advertising aimed
primarily at lending to the SMB market. We believe we have developed a reputation as a knowledgeable and reliable source of capital, providing value-added advice, prompt processing, and
management and operations support to our clients.
We market our business and financial solutions through referrals from our alliance partners such as Stifel Bank, Axiom Bank, Credit Union National Association, ENT Federal Credit Union, Legacy
Bank, Morgan Stanley Smith Barney, Flagstar Bank, Raymond James, Randolph Brooks Federal Credit Union, UBS, Meineke Dealers Purchasing Cooperative, Regions Bank, Hartford Insurance,
Bank United, US Century Bank, Anderson Capital Advisors, Transworld Business Advisors, Army Navy Federal Credit Union, Teachers Federal Credit Union, Spire Federal Credit Union, Aamco,
1800 Accountants, and True Value Company, among others using our patented NewTracker® referral system as well as direct referrals from our web presence, www.newtekone.com. The patent for
our NewTracker® referral system is a software application patent covering the systems and methods for tracking, reporting and performing processing activities and transactions in association with
referral data and related information for a variety of product and service offerings in a business-to-business environment providing further for security and transparency between referring parties.
NewTracker® allows us and our alliance partners to review in real time the status of any referral as well as to provide real time compliance oversight by the respective alliance partner, which we
believe creates confidence between the referred business client, the referring alliance partner and us.
Additional deal sourcing and referrals are obtained from individual professionals in geographic markets that have signed up to provide referrals and earn commissions through our BizExec and
TechExec Programs. The BizExecs and TechExecs are traditionally information technology professionals, CPAs, independent insurance agents and sales and/or marketing professionals. In addition,
electronic payment processing services are marketed through independent sales representatives and web technology and eCommerce services are marketed through internet-based marketing and third-
party resellers. A common thread across all business lines of our subsidiaries and subsidiaries relates to acquiring customers at low cost. We seek to bundle our marketing efforts through our brand,
our portal, NewTracker®, our web presence as Your Business Solutions Company® and one easy entry point of contact. We expect that this approach will allow us to continue to cross-sell the
business and financial solutions of our subsidiaries and subsidiaries to our customers and customers of our subsidiaries, and to build upon our extensive deal sourcing infrastructure.
25
Screening
We screen all potential loan opportunities that we receive for suitability and consistency with our underwriting criteria. See “Lending Opportunity Characteristics,” above. In screening potential loan
opportunities, our Senior Lending Team and our executive officers utilize a value-oriented lending philosophy and commit resources to managing downside exposure. If a potential lending
opportunity meets our basic underwriting criteria, a business service specialist or other member of our team is assigned to perform preliminary due diligence.
SBA Lending Procedures
Newtek Bank originates (and prior to January 6, 2023, for 20 years NSBF originated) loans under the SBA 7(a) Program (authorized by section 7(a) of the Small Business Act, 15 U.S.C. 636(a)), in
accordance with our credit and underwriting policy, which incorporates by reference the applicable regulations and the SBA Standard Operating Procedures, Lender and Development Company Loan
Program (“SOP 50 10 and 50 57”) (collectively, “SBA Loan Program Requirements”) as they relate to the financing and servicing of such loans. Following the Acquisition, NBSF continues to
service its current portfolio of SBA 7(a) loans via a lender servicer provider agreement with SBL, and new SBA 7(a) loan originations are being made by Newtek Bank. However, there can be no
guarantee that Newtek Bank and NSBF will be able to maintain their SBA 7(a) lending licenses. See “Risk Factors - Risks Related to SBA Lending - There can be no guarantee that Newtek Bank and
NSBF will be able to maintain their SBA 7(a) lending licenses.”
During the initial application process for a loan originated under the SBA 7(a) Program, a NewtekOne business service specialist assists and guides the applicant through the application process,
beginning with the submission of an online form through our customized loan portal. The online loan processing system collects required information and ensures that all necessary forms are
provided to the applicant and filled out. The system conducts automatic screenings that focus primarily on whether (i) the requested loan is for an eligible purpose, (ii) the requested loan is for an
eligible amount and (iii) the applicant is an eligible borrower. If the applicant is eligible to fill out the entire application, the online system pre-qualifies the applicant based on preset credit parameters
meeting the standards of the Company and the SBA.
Once the online form and the application materials are completed, our underwriting department (the “Underwriting Department”) becomes primarily responsible for reviewing and analyzing the
application in order to accurately assess the level of risk that would be undertaken in making a loan. The Underwriting Department is responsible for assuring that all information necessary to
prudently analyze the risk associated with a loan application has been obtained and considered. Credit files are developed and maintained with the documentation received during the application
process in such a manner as to facilitate file review during subsequent developments during the life of the loan.
Required Information
For a loan originated under the SBA 7(a) Program, the primary application document to assess eligibility is SBA Form 1919 (Borrower Information Form) (“Form 1919”). Among other things, Form
1919 requires identifying information about the applicant, loan request, indebtedness, principals, beneficial owners, current and/or previous government financing, and certain other certifications used
to determine the applicant’s eligibility. For loans submitted using a Lender’s delegated authority, the Lender may now accept the eligibility information provided by the applicant as true when
submitting a loan to SBA for validation using the newly implemented Risk Mitigation Framework.
In addition to Form 1919, the following additional information is required in order for our Underwriting Department to have the necessary information to make a decision on the loan application::
•
•
•
•
an SBA Form 413 (Personal Financial Statement), signed and dated with 120 days of submission to the SBA, for all owners of 20% or more (including the assets of the owner’s spouse and
any minor children), and proposed guarantors;
tax transcripts in accordance with SBA Loan Program Requirements and either business financial statements or tax returns for the prior three years for the applicant and any affiliates, dated
within 120 days prior to submission to SBA. Financials should consist of (a) year-end balance sheets for the last three years, including detailed debt schedule, (b) year-end profit & loss
(P&L) statements for the last three years, (c) reconciliation of net worth, (d) interim balance sheet, including a detailed debt schedule, and (e) interim P&L statements;
formation documents for all obligor entities to validate existence and structure;
the applicant’s original business license or certificate of doing business;
26
•
•
•
•
•
•
records of any loans the applicant may have applied for in the past;
signed personal and business U.S. federal income tax returns of the principals of the applicant’s business for previous three years;
personal resumes for each principal;
a brief history of the business and its challenges, including an explanation of why the SBA loan is needed and how it will help the business;
a copy of the applicant’s business lease, or note from the applicant’s landlord, giving terms of proposed lease; and
if purchasing an existing business, (a) current balance sheet and P&L statement of business to be purchased, (b) previous two years’ U.S. federal income tax returns of the business, (c)
proposed Bill of Sale including Terms of Sale, and (d) asking price with schedule of inventory, machinery and equipment, furniture and fixtures.
We view current financial information as the foundation of sound credit analysis. To that end, verification of all business income tax returns with the Internal Revenue Service is required, and after
the loan closes, we request financial statements be submitted on an annual basis. For business entities or business guarantors, we request U.S. federal income tax returns for each fiscal year-end to
meet the prior three-year submission requirement. For interim periods, management-prepared financial statements are accepted. The most recent financial information may not be more than 120 days
old at the time of submission to the SBA for approval of the loan, but we generally request that the most recent financial information not be older than 90 days in order to provide time for
underwriting and submission to SBA for guaranty approval, if required. For individuals or personal guarantors, we require a personal financial statement dated within 120 days of the application
(sixty days is preferred) and personal income tax returns for the prior three years. In connection with each yearly update of business financial information, the personal financial information of each
principal must also be updated. Spouses are required to sign all personal financial statements in order for the Underwriting Department to verify compliance with the SBA’s personal resource test. In
addition, the Underwriting Department will ensure that there has been no adverse impact on the financial condition of the applicant or its principals since the approval of the loan. If closing does not
occur within ninety days of the date on which the loan is approved, updated business and personal financial statements must be obtained and any adverse change must be addressed before the
proceeds of the loan may be disbursed. If closing does not occur within six months of the date on which the loan is approved, the applicant is generally required to reapply for the loan.
Stress Test
The standard underwriting process requires a stress test on the applicant’s interest rate to gauge the amount of increase that the applicant’s cash flow can withstand and still provide sufficient cash to
service the debt. The applicant’s cash flow is tested up to a 2% increase in interest rate. If the applicant’s debt service coverage ratio decreases to 1:1 or less than 1:1, the loan may only be made as an
exception to our Underwriting Guidelines and would require the approval of our credit committee.
Required Site Visit
No loan will be funded without an authorized representative of Newtek Bank first making a site visit to the business premises. We generally use a contracted vendor to make the required site visit but
may from time to time send our own employees to perform this function. Each site visit will generate a narrative of the business property as well as photographs of the business property. Additional
site visits will be made when a physical on-site inspection is warranted.
Credit Assessment of Applicant
Loan requests are assessed primarily based upon an analysis of the character, cash flow, capital, liquidity and collateral involved in the transaction.
Character: We require a personal credit report to be obtained on any principal or guarantor involved in a loan transaction. Emphasis is placed upon the importance of individual credit histories, as this
is a primary indicator of an individual’s willingness and ability to repay debt. Any material negative credit information must be explained in writing by the principal, and must be attached to the
personal credit report in the credit file. No loan will be made where an individual’s credit history calls into question the repayment ability of the business operation. A loan request from an applicant
who has declared bankruptcy within the ten years preceding the loan application will require special consideration. A thorough review of the facts
27
behind the bankruptcy and impact on creditors will be undertaken in determining whether the principal has demonstrated the necessary willingness and ability to repay debts. In addition, we will
examine whether the applicant and its principals and guarantors have abided by the laws of their community. Any situation where a serious question concerning a principal’s character exists will be
reviewed on a case-by-case basis. Unresolved character issues are grounds for declining a loan request regardless of the applicant’s financial condition or performance.
Cash Flow: We recognize that cash flow is the primary and desired source of repayment on any loan, and therefore is the primary focus of the credit decision. Any transaction in which the repayment
is not reasonably assured through cash flow will be declined, regardless of other possible credit strengths. At a minimum, combined EBITDA will be used to evaluate repayment ability. Other
financial analysis techniques will be employed as needed to establish the reasonableness of repayment. Where repayment is based on past experience, the applicant must demonstrate minimum
combined cash flow coverage of 1.15 times based upon the most recent fiscal year-end financial statement. A determination of the ability to repay will not be based solely upon interim operating
results. Where repayment ability is not evident from historical combined earnings (including new businesses and changes of ownership), projections will be analyzed to determine whether repayment
ability is reasonably assured. For changes in ownership, monthly cash flow forecasts will be analyzed to determine adequacy to meet all of the borrower’s needs.
For business acquisition applications, the applicant will be required to submit projections and support such projections by detailed assumptions made for all major revenue and expense categories and
an explanation of how the projections will be met. Analysis must include comparisons with relevant Risk Management Association (“RMA”) industry averages. EBITDA must be reasonably forecast
to exceed debt service requirements by at least 1.15 times, after accounting for the initial phase of operations. For change of ownership applications, projections will also be measured against the
actual historical financial results of the seller of the business concern. Projections must demonstrate repayment ability of not less than 1.15 times.
Capital: Capital is a strong traditional indicator of the financial health of a business. For going concern entities, the pro-forma leverage position, as measured by the debt to tangible net worth ratio,
may not exceed the RMA industry median or 4 to 1, whichever is greater. For change of ownership transactions, generally 25% of total project costs should be contributed as equity resulting in debt
to tangible net worth ratio of 3 to 1.
In determining the legitimacy of the business value, the loan underwriter reviews a third-party valuation prepared by a Company approved valuation firm. If the business value is found to be
acceptable, and the equity injection into the project is within our requirements as outlined herein, then the capital position will be considered satisfactory.
As a general rule, shareholder and affiliate loans may be added back to net worth only if such loans will be subordinated for the life of the SBA loan, with no principal or interest payments to be
made. Financing by the seller of the business may also be considered as equity if the loan will be placed on full standby for the life of the SBA loan. Adjustments to net worth to account for the
difference between the book value and appraised value of fixed assets may be made only when supported by a current appraisal. Appraisals on a “subject to” basis are not acceptable.
Liquidity: Liquidity, as measured by the current ratio, must be in line with the RMA industry average. An assessment of the adequacy of working capital is required. An assessment of the liquidity of
a business is essential in determining the ability to meet future obligations. Lending to cash businesses such as hotels and restaurants requires less analysis of the liquidity of the business due to the
timing of cash receipts. Industries with large receivables, payables, and inventory accounts require thorough review of the cash cycle of the business and evaluation of the applicant’s ability to
manage these accounts. The current and quick ratios and turnover of receivables, payables and inventory are measured against the RMA industry median in determining the adequacy of these
liquidity measures.
Collateral: We are required to reasonably secure each loan transaction with all worthwhile and available assets. Pursuant to SBA SOP 50 10, we may not (and will not) decline a loan if the only
weakness in the application is the value of collateral in relation to the loan amount, provided that all assets available to the business and its principals have been pledged. As set forth in SBA SOP 50
10, the SBA considers a loan to be fully secured if the lender has taken a security interest in all available fixed assets with a combined “net book value” adjusted up to the loan amounts below. For
7(a) loans, “fixed assets” means real estate, including land and structures and machinery and equipment owned by the business. “Net book value” is defined as an asset’s original price minus
depreciation and amortization.
We attempt to secure each loan transaction with as much real estate and liquid asset collateral as necessary; however, all fixed assets must be evaluated. Fixed assets are evaluated on the basis of the
net book value to determine the realizable value among collateral types. Valuation factors are applied as follows:
28
•
•
Commercial real estate — 75%
Residential real estate — 85%
• Vacant land — 50%
• Machinery & Equipment — 50%
•
Furniture & Fixtures — 10%
• Accounts receivable & inventory —10%
•
•
•
Leasehold improvements — 5%
Certificate of Deposit — 100%
Regulated Licenses — will vary dependent upon type of license and geographic area. The liquidation rate used must be fully justified.
In addition to an assessment of the criteria specified above, there are certain special industry-specific requirements that will be considered in the loan application decision.
Change of Ownership: The minimum equity injection required in a change of ownership transaction is 10%.
In the event of financing from the seller of the business, the applicant must inject not less than 10% of the project cost; the seller of the business may provide the balance on a complete standby basis
for the life of the SBA loan. Exceptions to the equity requirement are reviewed on a case-by-case basis.
For a change of ownership transaction, the application must be accompanied by a business plan including reasonable financial projections. The financial performance of the seller of the business must
be evaluated based upon three years of corporate income tax returns and a current interim financial statement. Projections for the applicant must be in line with the historical financial performance at
the business location. In cases where financial performance of the seller of the business is poor, a satisfactory explanation must be provided to detail the circumstances of performance. Projections for
the applicant must be accompanied by detailed assumptions and be supported by information contained in the business plan.
Management should have related experience in the industry and demonstrate the ability to successfully operate the business. In the absence of satisfactory related experience, an assessment of
management’s experience and capabilities, given the complexity and nature of the business, will be made. In the case of a franchise, we will generally take into account the reputation of a franchisor
for providing worthwhile management assistance to its franchisees.
We carefully review change of ownership transactions. The loan underwriter will review the contract for sale, which will be included in the credit file. The contract for sale must include a complete
breakdown of the purchase price, which must be justified through either a third party appraisal or directly by the loan underwriter through an approved valuation method specified in SBA SOP 50 10.
The contract of sale must evidence an arm’s length transaction (but transactions between related parties are permitted so long as they are on an arm’s-length basis) which will preserve the existence of
the small business or promote its sound development. In addition, a satisfactory reason for the sale of the business must be provided. The seller of the business must provide the prior three years of
business tax returns and a current interim financial statement, as applicable.
As part of due diligence for a change of ownership transaction, the closing department will order and review lien searches run on the seller as well as the borrower/buyer. If such a search identifies
any adverse information or unexpected liens, the credit will be referred back to underwriting so that a prudent credit decision may be made on the application in light of the new information.
Real Estate Transactions: Loan proceeds for the acquisition or refinancing of land or an existing building or for renovation or reconstruction of an existing building must meet the following criteria:
•
•
the property must be at least 51% owner-occupied pursuant to SBA policies; and
loan proceeds may not be used to remodel or convert any rental space in the property.
29
For new construction, the applicant must occupy 60% of the rentable property, may permanently lease to a third party up to 20% and temporarily lease an additional 20% with the intention of using
some of the additional 20% within 3 years and all of it within 10 years.
Newtek Bank’s policy regarding the use of real estate appraisals and environmental reports is intended to provide for a secure, orderly and independent process for the ordering, receipt and approval
of independent valuation and environmental reports. Commercial real estate appraisals are required on all primary collateral prior to the loan closing. In general, appraisals will be required as follows:
•
•
•
For loans greater than $500,000 secured by commercial real property; or
For loans $500,000 or less secured by commercial real property, an appraisal will be required if such appraisal is necessary for appropriate evaluation of creditworthiness.
The appraiser must be either State-licensed or State-certified (except when the property’s estimated value is over $1,000,000, when the appraiser must be State-certified) and the appraisal
report must conform to Uniform Standards of Professional Appraisal Practice (USPAP);
• Appraisal reviews are required for all commercial real estate with an appraised value of $500,000 or more conducted by a licensed/certified and independent MAI appraiser.
An environmental investigation is performed of all commercial properties upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or
debenture when SBA loan proceeds are used to acquire, refinance, or improve the real estate.
The type and depth of an environmental investigation to be performed varies with the risks of Contamination.
In general, environmental reports are required as follows:
•
•
If there is a NAICS code match to an environmentally sensitive industry identified in the applicable Appendix of SBA SOP 50 10, the environmental investigation must begin with a Phase I,
regardless of the amount of the loan. If the NAICS code begins with 457 (gas stations with or without convenience stores), the environmental investigation must begin with a Phase I and the
SBA lender must also refer to and, if applicable, comply with “Environmental Investigation Requirements for Gas Station Loans” in the applicable Appendix of SBA SOP 50 10;
If there is not a NAICS code match to an environmentally sensitive industry, or if the property is a unit in a multi-unit building, the SBA lender must proceed as follows:
◦
◦
If the loan amount is up to and including $250,000, the environmental investigation may begin with an environmental questionnaire.
If the loan amount is more than $250,000, the environmental investigation must, at a minimum, begin with an environmental questionnaire and records search with risk assessment.
Medical Professionals: In connection with a loan application relating to the financing of a medical business, all medical licenses will be verified, with the loss or non-renewal of license constituting
grounds for denial of the application. In addition, medical professionals must provide evidence of malpractice liability insurance of at least $2.0 million or the loan amount, whichever is higher.
Malpractice insurance must be maintained for the life of the loan.
Credit Package
For each loan application, the loan underwriter will prepare a credit package (the “Credit Package”). All credit and collateral issues are addressed in the Credit Package, including but not limited to,
the terms and conditions of the loan request, use of proceeds, collateral adequacy, financial condition of the applicant and business, management strength, repayment ability and conditions precedent.
The Underwriting Department will recommend approval, denial or modification of the loan application. The Credit Package is submitted to our credit committee for further review and final decision
regarding the loan application.
Other than rejections for ineligibility of the applicant, the type of business or the loan purpose, we may decline a loan application for the following reasons:
30
•
•
•
•
•
•
•
•
•
•
•
•
after taking into consideration prior liens and considered along with other credit factors, the net value of the collateral offered as security is not sufficient to protect the interest of the U.S.
Government;
lack of reasonable assurance of ability to repay loan (and other obligations) from earnings;
lack of reasonable assurance that the business can be operated at a rate of profit sufficient to repay the loan (and other obligations) from earnings;
disproportion of loan requested and of debts to tangible net worth before and after the loan;
inadequate working capital after the disbursement of the loan;
the result of granting the financial assistance requested would be to replenish funds distributed to the owners, partners, or shareholders;
the major portion of the loan requested would be to refinance existing indebtedness presently financed through normal lending channels;
credit commensurate with applicant’s tangible net worth is already being provided on terms considered reasonable;
gross disproportion between owner’s actual investment and the loan requested;
lack of reasonable assurance that applicant will comply with the terms of the loan agreement;
unsatisfactory experience on an existing loan; or
economic or physical injury not substantiated.
If a loan application is accepted, we enter the terms and conditions of the proposed SBA 7(a) loan into SBA’s ETRAN portal for review and approval. SBA will take on the responsibility for
verification of the applicant eligibility requirements using SBA’s Risk Mitigation Framework, which uses processes in place across the financial services industry. SBA’s Risk Mitigation Framework
will conduct compliance checks and should an error code be returned, we must clear the code in order to proceed. Once the code is cleared and SBA has issued an SBA loan number, we may continue
processing the loan.
The closing of a loan is handled by SBL’s closing and legal department, consisting of loan closer, in-house attorneys and paralegals, whose primary responsibility is to close the loan in accordance
with prudent lending standards and in compliance with SBA requirements thereby seeking to preserve SBA’s guaranty of repayment. Before loan proceeds are disbursed, the closing staff will review
all required documentation (including but not limited to entity documentation, proof of insurance and licensing, environmental reports and appraisals), and will verify the applicant’s required capital
injection, ensure that loan proceeds are being used as authorized and obtain required lien positions.
Maintenance of Credit Files
Loan files (consisting of credit files, due diligence, loan closing documentation) are maintained and administered in the Newtek Loan Portal and permanently stored in the Newtek File Vault. The loan
file contains all documentation necessary to show: (a) the basis and purpose of the loan, (b) compliance with policy, regulation, loan conditions (such as rate, terms of repayment, collateral), and (c)
the authority for granting the loan. The loan file is subject to review or audit by the SBA at any time. The files are organized pursuant to a specified format which facilitates the consistency and
readability of the documentation for reviewers and/or auditors. Portfolio and servicing documentation are also administered in the Newtek Loan Portal and permanently stored in the Newtek File
Vault.
Sales of Guaranteed Portions of SBA 7(a) Loans in the Secondary Market
We have a dedicated capital markets team that sells the guaranteed portions of Newtek Bank’s SBA 7(a) loans shortly after origination and Newtek Bank retains the unguaranteed portions,
Historically, NSBF sold SBA guaranteed portions of SBA 7(a) loans at premiums ranging from 106% to 123% of par value. Any portion of the premium that is above 110% of par value is shared
equally with the SBA. However, there is no guarantee that Newtek Bank will be able to continue to earn premiums of 106% to 123% on future sales of the guaranteed portions of SBA 7(a) loans or
will be able to maintain PLP status. See “Item 1A. Risk Factors - Risks Related to SBA Lending - We have specific risks associated with SBA loans.”
31
Competition
We compete for SBA 7(a) and other SMB loans with other financial institutions and various nonbank lenders, as well as other sources of funding. Additionally, competition for investment
opportunities has emerged among alternative investment vehicles, such as collateralized loan obligations, some of which are sponsored by other alternative asset investors, as these entities have begun
to focus on making investments in SMBs. As a result of these new entrants, competition for our lending opportunities may intensify. Many of these entities have greater financial and managerial
resources than we do, but we believe that they invariably lack the ability to process loans as quickly as we can and do not have the depth of our customer service capabilities. We believe we will be
able to compete with these entities primarily on the basis of our financial technology infrastructure, our experience and reputation, our deep industry knowledge and ability to provide customized
business and financial solutions, our willingness to make smaller loans than specialty finance companies, the breadth of our contacts, our responsive and efficient underwriting analysis and decision-
making processes, and the lending terms we offer.
We and our subsidiaries compete in a large number of markets for the sale of financial and business solutions to independent business owners. We compete not only against suppliers in its particular
state or region of the country but also against suppliers operating on a national or even a multi-national scale. None of the markets in which we compete are dominated by a small number of
companies that could materially alter the terms of the competition.
Our electronic payment processing subsidiaries compete with entities including Fiserv, Global Payments, Worldpay, Elavon, First National Bank of Omaha and Paymentech, L.P. Our managed
technology solutions subsidiaries competes with 1&1, Hosting.com, Discount ASP, Maxum ASP, GoDaddy®, Yahoo!®, BlueHost®, iPowerWeb®, Amazon Web Services®, Microsoft® Azure,
Google®, and RackSpace among others.
Our business finance ecosystem competes with regional and national banks and non-bank lenders. Other companies, including Intuit®, are bundling electronic payment processing, web hosting and
payroll services similar to ours in offerings that compete in the same SMB market. In addition, Newtek Bank competes with national banks, regional banks and digital banks to acquire and retain
deposits. During 2023, the growing competition for deposits in general saw U.S. banks raising rates offered on deposits, which tended to increase weighted average deposit rates. To the extent that
competition for deposits remains elevated relative to historical norms or increases from levels observed in 2023, we believe that our deposit costs could increase. Deposit costs are based on multiple
factors that impact businesses and consumers and can diverge from observed market indices (e.g. Prime or SOFR). To the extent deposit costs increase without a corresponding increase in the Prime
rate, our profitability and net interest margins can be negatively impacted.
In many cases, we believe that our competitors are not as able as we are to take advantage of changes in business practices due to technological developments and, for those with a larger size, are
unable to offer the personalized service that many independent business owners and operators desire.
While we compete with many different providers in our various businesses, we have been unable to identify any direct and comprehensive competitors that deliver the same broad suite of services
focused on the needs of the independent business owner market with the same marketing strategy as we do. We believe that some of the competitive advantages of our platform include:
•
•
•
•
•
•
compatible products such as our e-commerce offerings that we are able to bundle to increase sales, reduce costs and reduce risks for our customers and enable us to sell two, three, or four
products at the same time;
our patented NewTracker® referral system, which allows us to process new business utilizing a web-based, centralized processing point and provides back end scalability, and allows our
alliance partners to offer a centralized access point for their independent business owner clients as part of their larger strategic approach to marketing, thus demonstrating their focus on
providing a suite of services to this market in addition to their core service;
our focus on developing and marketing business solutions and financial products and services aimed at the independent business owner market;
scalability, which allows us to size our business solutions capabilities very quickly to meet customer and market needs;
the ability to offer personalized service and competitive rates;
a strategy of multiple channel distribution, which gives us maximum exposure in the marketplace;
32
•
•
high quality customer service 24/7/365 across all business lines, with a focus primarily on absolute customer service and;
a telephonic interview process, as opposed to requiring handwritten or data-typing processes, which allows us to offer high levels of customer service and satisfaction, particularly for
independent business owner who do not get this service from our competitors.
Human Capital including Senior Lending Team and Executive Officers
The long-term success of our Company depends on our people. Our team comprises experienced lending professionals, executive officers and treasury, finance, risk management, administrative
support, IT and human resources professionals.
The key members of our senior lending team (“Senior Lending Team”), many of whom have worked together for more than ten years, each have over 25 years of experience in finance-related fields.
These investment professionals have worked together to screen opportunities, underwrite new loans and manage a portfolio of loans made to independent business owner through two recessions, a
credit crunch, the dot-com boom and bust and a historic, leverage-fueled asset valuation bubble and the COVID-19 pandemic. Each member brings a complementary component to a team well-
rounded in lending, finance, accounting, operations, strategy, business law and executive management.
Our executive officers also oversees our subsidiaries and, to the extent that we may make additional equity investments in the future, the executive officers will also have primary responsibility for
the identification, screening, review and completion of such investments. We do not expect to focus our resources on investing in additional stand-alone equity investments, but may elect to do so
from time to time on an opportunistic basis, if such opportunities arise. Our CEO and Chief Lending Officer, Messrs. Sloane and Downs, have been involved together in the structuring and
management of loans and equity investments for the past 20 years.
The retention of our Senior Lending Team and executive officers is material to the management of our business. The departure of key management personnel could adversely affect our business. As
such, we believe that we offer a competitive compensation and benefits structure that we believe is attractive to our current and prospective professionals. As we hire and develop individuals, we take
succession planning into account and have succession plans in place for each of our senior leaders.
As of December 31, 2023, our workforce consisted of 528 professionals. We strive to continue to create a welcoming and inclusive work environment for our employees. We are committed to
recruiting, motivating and developing a diversity of talent and to creating an inclusive community where all individuals are welcomed, valued, respected, and heard. In order to support a culture of
learning, we provide many training opportunities for our employees to continue to build their skills and increase their effectiveness as members of a team, including offering a variety of external and
internal classes and training sessions as well as hands-on learning and one-on-one mentorship. We continue to encourage dialogue between managers and employees.
We are committed to fostering a workplace conducive to the open communication of any concerns regarding unethical, fraudulent or illegal activities. Feedback from employees on matters related to
their employment or our operations including its financial statement disclosures, accounting, internal accounting controls or auditing matters is greatly appreciated and helps to build a stronger
organization. Each director, officer, regular full-time, part-time and temporary employee of the Company has the ability to report confidentially under the Company’s whistleblower policy: (a)
questionable or improper accounting, internal controls, auditing matters, disclosure, or fraudulent business practices and (b) illegal or unethical behavior that has occurred, is ongoing, or is about to
occur of an applicable law, rule, regulation or policy of the Company. We protect the confidentiality of those making reports of possible misconduct to the maximum extent permitted by law. Our no
retaliation policy prohibits retaliation against those who report activities believed in good faith to be a violation of any law, rule, regulation or internal policy.
We maintain and ensure compliance of all directors, officers and employees to our Code of Business Conduct and Ethics (the “Code of Ethics”) which is acknowledged in writing on joining and
annually by all our employees, as a continued condition of employment. Our Code of Ethics establishes applicable policies, guidelines, and procedures that promote ethical practices and conduct by
the Company and all its employees, officers, and directors. Our Code of Ethics can be found on our website at https:/investor.newtekbusinessservices.com/corporate-governance.
33
We aim to provide a safe environment at work. During the COVID-19 pandemic, the safety of our employees, clients, customers, and vendors was at the forefront of our decisions regarding a remote
work policy. As a result, we made our offices accessible to those who preferred to work in the office and also supported a remote work environment. We have continued to support remote work as an
option. In addition to protecting the physical safety of our employees, we seek to promote a safe environment that is free of harassment or bullying. We do not tolerate discrimination and harassment
of any kind including but not limited to sexual, gender identity, race, religion, ethnicity, age, or disability, among others. We emphasize employee engagement by encouraging ongoing dialogue with
managers, colleagues and leaders. Communications are frequent and help us understand our employees’ diverse needs. We monitor our attrition and analyze reasons for leaving the Company. We
value employee feedback and make adjustments to employees’ needs and concerns as they are raised.
Available Information
We are subject to the informational requirements of the SEC and in accordance with those requirements file reports, proxy statements and other information with the SEC. The SEC maintains a web
site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the SEC’s web site is http://www.sec.gov.
Our principal offices are located at 4800 T Rex Avenue, Suite 120, Boca Raton, Florida and our telephone number is (212) 356-9500. Our website may be directly accessed at
http://www.newtekone.com. We make available through our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. These documents may be directly accessed at https://investor.newtekbusinessservices.com. Information contained on our website is not a part of this
report.
Code of Ethics
We have adopted a code of ethics pursuant to Section 5610 of the Nasdaq Corporate Governance Requirements that establishes procedures for personal investments and restricts certain transactions
by our personnel. Our code of ethics generally does not permit investments by our employees in securities that may be purchased or held by us. The code of ethics is published and available on the
Company’s website at https://investor.newtekbusinessservices.com/corporate-governance, is attached as an exhibit and is available on the EDGAR Database on the SEC’s Internet site at www.sec.gov.
You may also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov.
Privacy Principles
We are committed to maintaining the privacy of our shareholders and to safeguarding their non-public personal information. The following information is provided to help you understand what
personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our shareholders, although certain non-public personal information of our shareholders may become available to us. We
do not disclose any non-public personal information about our shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service shareholder accounts
(for example, to a transfer agent).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us.
For example:
•
•
•
pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the consolidated financial statements contained in our
periodic reports;
pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;
pursuant to Rule 13a-15 of the Exchange Act, our management must prepare a report regarding its assessment of our internal controls over financial reporting; and
34
•
pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will
continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
Other
We will be periodically examined by the SEC for compliance with the Exchange Act.
Nasdaq Global Market Requirements
We have adopted certain policies and procedures intended to comply with the Nasdaq Global Market’s corporate governance rules. We will continue to monitor our compliance with all future listing
standards that are approved by the SEC and will take actions necessary to ensure that we are in compliance therewith.
SBA Regulation of SBA 7(a) Lenders
Our wholly-owned subsidiary, NSBF, is licensed by the SBA as an SBLC that originated loans through the SBA 7(a) Program. NSBF is currently winding down its operations and is no longer
originating new SBA 7(a) loans, but remains subject to SBA regulation during its wind-down process. (See Wind-down Agreement below.) Newtek Bank is licensed to make loans under the SBA
7(a) Program.
The SBA generally reduces risks to lenders by guaranteeing major portions of qualified loans made to small businesses. This enables lenders to provide financing to small businesses when funding
may otherwise be unavailable or not available on reasonable terms. Under the SBA 7(a) Program, the SBA typically guarantees 75% of qualified loans over $150,000. The eligibility requirements of
the SBA 7(a) Program vary by the industry of the borrower and affiliates and other factors.
The SBA grants PLP status to certain lenders originating SBA 7(a) loans based on achievement of certain standards in lending which are regularly monitored by the SBA. Newtek Bank has been
granted national PLP status and originates, sells and services SBA 7(a) loans. As a Preferred Lender, Newtek Bank is authorized to place SBA guarantees on SBA 7(a) loans without seeking prior
SBA review and approval. Designated PLP lenders are delegated the authority to process, close, service, and liquidate most SBA guaranteed loans without prior SBA review. PLP lenders are
authorized to make SBA guaranteed loans, subject only to a brief eligibility review and assignment of a loan number by SBA. In addition, they are expected to handle servicing and liquidation of all
of their SBA loans with limited involvement of SBA. If Newtek Bank were to lose PLP status, it would have a material adverse impact on its ability to originate loans at current levels. See “Item 1A.
Risk Factors - Risks Related to SBA Lending - There can be no guarantee that Newtek Bank and NSBF will be able to maintain their SBA 7(a) lending licenses.”
Pursuant to the SBA’s regulations, the SBA is released from liability on its guaranty of a 7(a) loan and may, in its sole discretion, refuse to honor a guaranty purchase request in full or in part, or
recover all or part of the funds already paid in connection with a guaranty purchase, if the lender failed to comply materially with an SBA Loan Program Requirement; failed to make, close, service or
liquidate the loan in a prudent manner; placed the SBA at risk through improper action or inaction; failed to disclose a material fact to the SBA in a timely manner; or misrepresented a material fact to
the SBA regarding the loan. In certain instances, the SBA may refuse to honor a guaranty purchase request in full (referred to by the SBA as a “denial”) or in part (referred to by the SBA as a
“repair”), or recover all or part of the funds already paid in connection with a guaranty purchase. In the event of a repair or denial, liability on the guaranty, in whole or part, would be transferred to
NSBF or Newtek Bank. In addition, the growth in the number of loans made by Newtek Bank, changes in SBA regulations and economic factors may adversely impact our current repair and denial
rates. See “Item 1A. Risk Factors - Risks Related to SBA Lending - We have specific risks associated with SBA loans.”
35
On April 13, 2023, the Company, NSBF and the SBA entered into the Wind-down Agreement, pursuant to which NSBF has begun to wind-down its operations and NSBF’s SBA 7(a) pipeline of new
loans were transitioned to Newtek Bank. During this wind-down process, NSBF will continue to own the SBA 7(a) loans and PPP Loans currently in its SBA loan portfolio to maturity, liquidation,
charge-off or (subject to SBA’s prior written approval) sale or transfer. SBL will service and liquidate NSBF’s SBA loan portfolio pursuant to an SBA approved lender service provider agreement. In
addition, during the wind-down process, NSBF will be subject to minimum capital requirements established by the SBA, be required to continue to maintain certain amounts of restricted cash
available to meet any obligations to the SBA, have restrictions on its ability to make dividends and distributions to the Company, and remain liable to the SBA for post-purchase denials and repairs on
the guaranteed portions of SBA 7(a) loans originated and sold by NSBF, from the proceeds generated by NSBF’s SBA loan portfolio. The Company has guaranteed certain of NSBF’s obligations to
the SBA.
Taxation as a Financial Holding Company
As a BDC, prior to our conversion on January 6, 2023 to a financial holding company, for any taxable year in which we qualified as a RIC and satisfied the Annual Distribution Requirement, we
generally were not be subject to U.S. federal income tax on the portion of our income we distributed to our stockholders. In order to comply with these requirements, we maintained a dividend policy
of making quarterly distributions in an amount that approximated 90 - 100% of the Company's annual taxable income.
For 2023, the Company and its subsidiaries will no longer qualify as a RIC and will file a consolidated U.S. federal income tax return. Financial holding companies are subject to federal and state
income taxes in essentially the same manner as other corporations. Taxable income is generally calculated under applicable sections of the Internal Revenue Code of 1986, as amended (the “Code”),
including Sections 581 through 597 that apply specifically to financial institutions. Some modifications are required by state law and the 2017 tax legislation commonly referred to as the Tax Cuts
and Jobs Act (the "Tax Act"). Among other things, the Tax Act (i) established a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and
allowed the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limited the deduction for net interest expense incurred by U.S. corporations, (iv) allowed businesses
to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminated or reduced certain deductions related to meals and entertainment expenses,
(vi) modified the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarified the definition of a covered employee and (vii) limited
the deductibility of deposit insurance premiums. There can be no assurance as to the actual effective income tax rates impacting the amounts and timing of cash flows and the amounts of income tax
expense recorded by the Company, because such rates will be dependent upon the nature and amount of future income and expenses as well as actual investments generating investment tax credits
and transactions with discrete tax effects.
36
ITEM 1A. RISK FACTORS.
The following is a summary of the risk factors that we believe are most relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to
differ significantly from anticipated or historical results. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected. In
that case, the value of our common stock could decline and shareholders may lose all or part of their investment. You should understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events, or otherwise, unless required by law.
An investment in our securities involves risks. The following is a summary of the principal risks that you should carefully consider before investing in our securities.
Risks Related to Operation as a Financial Holding Company
• We operate in a highly regulated environment and are subject to extensive regulation and supervision as a financial holding company, and if we are found to be in violation of any of the
federal, state or local laws or regulations applicable to us, our business could suffer.
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
•
• We are no longer subject to regulation under the 1940 Act.
•
Loss of pass-through tax treatment substantially reduces net assets and income available for dividends.
Risks Related to the Economy
• Global economic, political, social and market conditions, including uncertainty about the financial stability of the United States could have a significant adverse effect on our business,
•
•
•
operating results and financial condition.
Inflation may adversely affect our business, operating results and financial condition.
Terrorist attacks, acts of war, global health emergencies or natural disasters may impact the businesses in which we invest and harm our business, operating results and financial condition.
If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lending activities and the value of our loan
portfolio value could decrease and our level liquidity and distributions could be affected adversely.
Risks Related to Our Business and Structure
• We are dependent upon our Senior Lending Team and our executive officers for our future success, and if we are unable to hire and retain qualified personnel or if we lose any member of our
Senior Lending Team or our executive officers our ability to achieve our business could be significantly harmed.
If we are unable to acquire and process clients effectively, we may be unable to achieve our investment objective.
• We could be adversely affected by the soundness of other financial institutions.
• We operate in a highly competitive market for clients, which could reduce returns and result in losses.
•
• Our business may be adversely affected if our risk management framework does not effectively identify, assess and mitigate risk.
• An inability to maintain adequate liquidity could jeopardize our business and financial condition.
• Our acquisitions and other strategic transactions, including the Acquisition, may not yield the intended benefits.
•
•
If we and our subsidiaries are unable to protect our intellectual property rights, our business and prospects could be harmed.
The development and use of Artificial Intelligence (“AI”) present risks and challenges that may adversely impact our business.
Risks Related to U.S. Federal Income Tax
• We cannot predict how new tax legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.
Risks Related to Our Securities
• Our common stock price may be volatile and may decrease substantially.
37
RISKS RELATED TO OPERATING AS A FINANCIAL HOLDING COMPANY
We have a limited operating history as a financial holding company.
Although we and our predecessor have operated since 1999, we converted to a financial holding company effective January 6, 2023. Accordingly, we have a limited operating history upon which to
evaluate our business and future prospects as a financial holding company. Our lending prospects may significantly differ from our investment prospects as a BDC, and it is difficult to predict future
operating results and to assess the likelihood of the success of our business as a financial holding company. As a new financial holding company, we may be subject to risks and levels of risk that are
often greater than those encountered by financial institutions with longer established operations and relationships. We may also require significant capital from sources other than operations.
The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, federal deposit
insurance funds, and the banking system as a whole, not for the protection of security holders. We are subject to regulation and supervision by the FDIC, OCC and Federal Reserve. The laws and
regulations applicable to us govern a variety of matters, including permissible types, amounts, and terms of loans and investments we may make, the maximum interest rate that may be charged, the
amount of reserves we must hold against deposits we take, the types of deposits we may accept, maintenance of adequate capital and liquidity, changes in the control of Newtek Bank, N.A. and us,
restrictions on dividends, and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities or acquisitions, and there is the risk that such approvals
may not be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to take, or restrict us from taking, certain actions entirely, such as actions that our regulators
deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could
result in sanctions by regulatory agencies, civil money penalties, or damage to our reputation, all of which could have a material adverse effect on our business, financial condition or results of
operations.
Federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, are continually undergoing substantial review and change. Financial
institutions generally have also been subject to increased scrutiny from regulatory authorities. These changes and increased scrutiny have resulted and may continue to result in increased costs of
doing business and may in the future result in decreased revenues and net income, reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue
providing certain products and services. Any future changes in federal and state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and
regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of
operations.
Our inability to remain in compliance with regulatory requirements could have a material adverse effect on our operations in that market and on our reputation generally. No assurance can be given
that applicable laws or regulations will not be amended or construed differently or that new laws and regulations will not be adopted, either of which could materially adversely affect our business,
financial condition or results of operations.
The USA PATRIOT Act of 2001 and the Bank Secrecy Act, or the BSA, require financial institutions to design and implement programs to prevent financial institutions from being used for money
laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with FinCEN. These rules require financial institutions to
establish procedures for identifying and verifying the identity of customers and beneficial owners of certain legal entity customers seeking to open new financial accounts. Federal and state bank
regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. Failure to comply with these regulations could result in fines or sanctions, including
restrictions on conducting acquisitions or expanding activities. During the last several years, several banking institutions have received large fines for non-compliance with these laws and regulations.
Although we have policies and procedures designed to assist in compliance with the BSA and other anti-money laundering laws and regulations, there can be no assurance that such policies or
procedures will work effectively all of the time or protect us against liability for actions taken by our employees, agents, and intermediaries with respect to our business or any businesses that we may
acquire. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could have a
material adverse effect on our business, financial condition or results of operations.
Any changes in the Presidential Administration or control of Congress also increases the likelihood of further changes to laws, regulations and supervisory practices affecting financial institutions,
which could include more stringent requirements and greater scrutiny from regulatory authorities.
38
Changes in laws, regulations, or policies may adversely affect our business.
We are unable to predict all of the ways in which any change in the regulatory environment could impact our anticipated business models or objectives. The laws and regulations governing lending,
servicing, and debt collection activities or the regulatory or enforcement environment at the federal level or in any of the states in which we anticipate operating may change at any time which may
have an adverse effect on our current or anticipated business.
For example, the federal banking agencies issued a final rule in October 2023 that largely begins to apply in January 2026 and may make it more challenging and/or costly for insured depository
institutions to achieve an Outstanding or Satisfactory CRA rating. If Newtek Bank is unable to maintain at least a “Satisfactory” CRA rating, its ability to complete the acquisition of another financial
institution or open a new branch will be adversely impacted. Newtek Bank received a rating of “Satisfactory” in its most recent CRA performance evaluation. We are unable to predict how future
legislative proposals or programs will be administered or implemented or in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or
implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our anticipated business operations.
Our inability to comply with regulatory requirements in a particular jurisdiction could have a material adverse effect on our anticipated operations in that market and on our reputation generally. No
assurance can be given that applicable laws or regulations will not be amended or construed differently or that new laws and regulations will not be adopted, either of which could materially
adversely affect our anticipated business.
We are subject to extensive regulation and supervision as a financial holding company, which may adversely affect our business.
Upon becoming a financial holding company, we became subject to a wide range of statutory and regulatory restrictions and requirements that will affect many aspects of our business, including our
lending practices, capital structure, investment practices, dividend policy and growth. We may be required to restructure, terminate or divest certain of our businesses to comply with applicable
requirements, which may impose additional costs and adversely affect our business, results of operations or financial condition. Failure to comply with laws, regulations, policies or other regulatory
guidance could result in civil or criminal sanctions by regulatory agencies, civil monetary penalties and damage to our reputation. In addition, we will be required to serve as a “source of strength” to
Newtek Bank.
Congress and federal regulatory agencies continually review banking laws, regulations, policies and other supervisory guidance for possible changes. Other changes in the laws or regulations that will
be applicable to us as a financial holding company, including changes in the interpretation or implementation of those regulations or policies, may negatively impact the profitability of our business
activities, require us to change certain of our business practices, materially affect our business model, limit the activities in which we may engage, affect retention of key personnel, require us to raise
additional regulatory capital, increase the amount of liquid assets that we hold, otherwise affect our funding profile or expose us to additional costs (including increased compliance costs). Any such
changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously
conducted or our results of operations or financial condition.
We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.
Political and public sentiment regarding financial institutions has in the past resulted and may in the future result in a significant amount of adverse press coverage, as well as adverse statements or
charges by regulators or other government officials. Press coverage and other public statements that assert some form of wrongdoing (including, in some cases, press coverage and public statements
that do not directly involve us) often result in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits. Adverse publicity, governmental scrutiny and legal and
enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our business and results of operations.
The financial services industry generally has been subject to negative publicity. Our reputation and business may be adversely affected by negative publicity or information regarding our business and
personnel, whether or not accurate or true, that may be posted on social media or other internet forums or published by news organizations. Postings on these types of forums may also adversely
impact risk positions of our clients and other parties that owe us money, securities or other assets and increase the chance that they will not perform their obligations to us or reduce the revenues we
receive from their use of our services. The speed and pervasiveness with which information can be disseminated through these channels, in particular social media, may magnify risks relating to
negative publicity.
39
The rapid dissemination of negative information through social media, in part, is believed to have led to the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank. These banks
suffered a level of deposit withdrawals within a time period not previously experienced by a financial institution. We could also be subject to rapid deposit withdrawals or other outflows as a result of
negative social media posts or other negative publicity.
Failure to comply with applicable laws, regulations or commitments, or to satisfy our regulators’ supervisory expectations, could subject us to, among other things, supervisory or enforcement
action, which could adversely affect our business, financial condition and results of operations.
If we do not comply with applicable laws, regulations or commitments, if we are deemed to have engaged in unsafe or unsound conduct, or if we do not satisfy our regulators’ supervisory
expectations, then we may be subject to increased scrutiny, supervisory criticism, governmental or private litigation and/or a wide range of potential monetary penalties or consequences, enforcement
actions, criminal liability and/or reputational harm. Such actions could be public or of a confidential nature, and arise even if we are acting in good faith or operating under a reasonable interpretation
of the law and could include, for example, monetary penalties, payment of damages or other monetary relief, restitution or disgorgement of profits, directives to take remedial action or to cease or
modify practices, restrictions on growth or expansionary proposals, denial or refusal to accept applications, removal of officers or directors, prohibition on dividends or capital distributions, increases
in capital or liquidity requirements and/or termination of Newtek Bank’s deposit insurance. Additionally, compliance with applicable laws, regulations and commitments requires significant
investment of management attention and resources. Any failure to comply with applicable laws, regulations or commitments could have an adverse effect on our business, financial condition and
results of operations.
Federal law may discourage certain acquisitions of our common stock which could have a material adverse effect on our shareholders.
Federal law may make it more difficult for someone to acquire our common stock in certain circumstances. Under federal law and subject to certain exemptions, a person, entity or group must notify
the federal banking agencies before acquiring control of a bank holding company. An acquisition of 10% or more of any class of voting stock of a bank holding company generally creates a rebuttable
presumption that the acquirer will “control” the bank holding company. In addition, a bank holding company must obtain the prior approval of the Board of Governors of the Federal Reserve System
before, among other things, acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any bank or bank holding company. These provisions could delay or
prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the market price of our common stock.
We are no longer subject to regulation under the 1940 Act.
As of January 6, 2023, we are no longer regulated as a BDC and are no longer be subject to the regulatory provisions of the 1940 Act, which is designed to protect the interests of investors in
investment companies, including certain laws and regulations related to insurance, custody, capital structure, composition of the Board, affiliated transactions, leverage limitations, and compensation
arrangements. We do, however, continue to be subject to certain 1940 Act provisions related to asset coverage in relation to the 2024 and 2026 Notes. See “Item 1A. Risk Factors - Risks Related to
Our Notes - We are subject to 150% asset coverage requirements due to covenants contained in the indentures under which the 2024 and 2026 Notes were issued.”
The withdrawal of the Company’s election to be regulated as a BDC has resulted in a significant change in our accounting and financial reporting requirements.
Due to the Company’s withdrawal of its election to be regulated as a BDC on January 6, 2023, the Company is no longer subject to FASB Accounting Standards Codification Topic 946, Financial
Services – Investment Companies, which has resulted in a significant change in our accounting and financial reporting requirements. As a BDC, we were precluded from consolidating any entity
other than another investment company that acted as an extension of our investment operations and facilitated the execution of our investment strategy or an investment in a controlled operating
company that provided substantially all of its services to us. Beginning with the first quarter of 2023, we were required to consolidate the financial statements of certain of our controlled or majority-
owned investments (now consolidated subsidiaries), which is a significant change in our accounting and financial reporting requirements. Our management has been and continues to be required to
expend significant efforts in order to implement this change in accounting and financial reporting requirements, which could adversely affect the time and attention devoted to other aspects of our
business and operations.
These significant changes in our accounting and financial reporting requirements resulted in failures by the Company to adequately and timely identify financial reporting risks and the associated
identification of key controls in connection therewith. As a result,we have identified material weaknesses in our internal controls that impacted the overall effectiveness of our internal controls over
financial reporting. We have taken actions to enhance our internal controls over financial reporting relating to the
40
material weaknesses identified as of the date of this Annual Report, and are still in the process of implementing a comprehensive remediation plan. See “Item 9A. Controls and Procedures” and “Item
1A. Risk Factors - Risks Related to Our Business and Structure - We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely
affect our ability to report our financial condition and results of operations in a timely and accurate manner, investor confidence in our company and, as a result, the value of our common stock.”
Our shareholders no longer have the protections of the 1940 Act, as the Company withdrew election to be regulated as a BDC.
Because the Company ceased to operate as a BDC, our shareholders no longer have the following protections of the 1940 Act:
• we are no longer subject to provisions of the 1940 Act prohibiting us from protecting any director or officer against any liability to the Company or our shareholders arising from willful
malfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of that person’s office;
• we are no longer required to provide and maintain an investment company blanket bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement;
• while the majority of our directors are still required to be “independent” under applicable NASDAQ regulations, we are no longer required to ensure that a majority of our directors are
persons who are not “interested persons,” as defined in the 1940 Act, and certain persons who were prevented from serving on our Board when we were a BDC are now able to serve on our
Board;
• we are no longer subject to provisions of the 1940 Act regulating transactions between BDCs and certain affiliates;
• we are no longer subject to provisions of the 1940 Act restricting our ability to issue shares below net asset value or in exchange for services or to issue warrants and options;
• we are no longer required to disclose the Company’s net asset value per share in our financial statements;
• we are no longer subject to provisions of the 1940 Act restricting our ability to change the nature of our business or fundamental investment policies without having to obtain the approval of
our shareholders;
• we are no longer subject to the provisions of the 1940 Act limiting our ability to grant stock based compensation to officers, directors and employees or to provide a profit sharing program
for them; and
• we are no longer subject to the other protective provisions set out in the 1940 Act and the rules and regulations promulgated under the 1940 Act.
In addition, we are very much affected by the legal, regulatory, tax and accounting regimes under which we operate. We periodically evaluate whether those regimes and our existing corporate
structure are the optimum means for the operation and capitalization of our business. As a result of these evaluations, we may decide to proceed with structural and organizational changes (certain of
which may require the approval of our shareholders), which could result in material dispositions of various assets, changes in our corporate form or other fundamental changes. We may incur certain
costs in completing these evaluations and may receive no benefit from these expenditures, particularly if we do not proceed with any changes.
If we are deemed to be an investment company under the Investment Company Act of 1940, we will not be able to successfully execute our business strategy.
Certain of our subsidiaries rely on Rule 3a-7 to exclude their securitization activities from the definition of an “investment company” under the 1940 Act. Additionally, the Company has determined
that, after withdrawing its election to be treated as a business development company, it is not an “investment company” because it neither holds more than 40% of its assets in “investment securities,”
nor is it primarily engaged in, or holding itself out as being primarily engaged in, the business of investing, reinvesting or trading in securities. As a part of its determination, the Company has
determined that certain of the loans held by its subsidiaries are neither securities nor “investment securities” under the 1940 Act. However, the staff of the SEC may disagree with our conclusions that
(i) loans held by us and our subsidiaries are not securities as defined in the Act and that (ii) the Company did not meet the definition of an investment company under section 3 of the 1940 Act
subsequent to our withdrawal of the election to be regulated as a BDC. If the SEC or a court determines that one or more of our subsidiaries’ activities cause us to fall within the definition of an
“investment company,” and if no exemption is available, we could be required to register under the 1940 Act. Compliance with the 1940 Act, as a registered investment company, would require us to
significantly alter our business and could impair our ability to operate as financial holding company, with potential adverse impacts on our business, and, thus, our shareholders.
41
The loss of pass-through tax treatment may substantially reduce net assets and income available for dividends and debt repayments.
Prior to January 6, 2023, we operated so as to qualify as a RIC, which generally allowed us to qualify for effective pass-through tax treatment. Upon withdrawing our election to be regulated as a
BDC, we have ceased to qualify for such pass-through tax treatment, and we will have to pay corporate-level taxes on all of our income whether or not we distribute it, which we expect will
substantially reduce the amount of income available for distribution to our shareholders and to repay our borrowings. The Company will no longer qualify as a RIC beginning with the 2023 taxable
year. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary” and “Risk Factors - Risks Related to
Converting to a Financial Holding Company” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022.
RISKS RELATED TO THE ECONOMY
Global economic, political, social and market conditions, including uncertainty about the financial stability of the United States could have a significant adverse effect on our business, operating
results and financial condition.
The current worldwide financial markets situation, as well as various social, political, economic and other conditions and events (including political tensions in the United States and around the
world, wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as natural disasters, epidemics and pandemics) may create uncertainty and have significant
impacts on issuers, industries, governments and other systems, including the financial markets, to which companies and their investments are exposed. As global systems, economies and financial
markets are increasingly interconnected, events that once had only local impact are now more likely to have regional or even global effects. Events that occur in one country, region or financial
market will, more frequently, adversely impact issuers in other countries, regions or markets, including in established markets such as the United States. These impacts can be exacerbated by failures
of governments and societies to adequately respond to an emerging event or threat.
Uncertainty can result in or coincide with, among other things: increased volatility in the financial markets for securities, derivatives, loans, credit and currency; a decrease in the reliability of market
prices and difficulty in valuing assets; greater fluctuations in spreads on debt investments and currency exchange rates; increased risk of default (by both government and private obligors and issuers);
further social, economic, and political instability; nationalization of private enterprise; greater governmental involvement in the economy or in social factors that impact the economy; changes to
governmental regulation and supervision of the loan, securities, derivatives and currency markets and market participants and decreased or revised monitoring of such markets by governments or self-
regulatory organizations and reduced enforcement of regulations; limitations on the activities of investors in such markets; controls or restrictions on foreign investment, capital controls and
limitations on repatriation of invested capital; the significant loss of liquidity and the inability to purchase, sell and otherwise fund investments or settle transactions (including, but not limited to, a
market freeze); unavailability of currency hedging techniques; substantial, and in some periods extremely high rates of inflation, which can last many years and have substantial negative effects on
credit and securities markets as well as the economy as a whole; recessions; and difficulties in obtaining and/or enforcing legal judgments.
In addition, the war between Russia and Ukraine, and resulting market volatility, could adversely affect our business, financial condition or results of operations. In response to the war between
Russia and Ukraine, the United States have imposed sanctions or other restrictive actions against Russia. The ongoing war and the measures in response could have a negative impact on the economy
and business activity globally and could have a material adverse effect on our business, financial condition, cash flows and results of operations. The severity and duration of the war and its impact on
global economic and market conditions are impossible to predict. In addition, sanctions could also result in Russia taking counter measures or retaliatory actions which could adversely impact our
business, including, but not limited to, cyberattacks targeting private companies, individuals or other infrastructure upon which our business and the business of our clients rely.
Any of the above factors, including sanctions, export controls, tariffs, trade wars and other governmental actions, could have a material adverse effect on our business, financial condition, cash flows
and results of operations and could cause the market value of our common shares and/or debt securities to decline. We monitor developments and seek to manage our investments in a manner
consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
42
Any public health emergency, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our
investments, our subsidiaries and our clients.
The extent of the impact of any public health emergency, such as the COVID-19 pandemic, on our operational and financial performance will depend on many factors, including the duration and
scope of such public health emergency, the actions taken by governmental authorities to contain its financial and economic impact, the extent of any related travel advisories and restrictions
implemented, the impact of such public health emergency on overall supply and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of
its disruption to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted. In addition, our operations may be significantly
impacted, or even temporarily or permanently halted, as a result of government quarantine measures, voluntary and precautionary restrictions on travel or meetings and other factors related to a public
health emergency, including its potential adverse impact on the health of any of our personnel. This could create widespread business continuity issues for us.
A number of factors related to a public health emergency impacting us or our borrowers, customers or business partners could materially adversely affect our business, results of operations, and
financial condition, including but not limited to:
•
•
•
•
•
•
•
increases in loan delinquencies, losses and charge-offs;
increases in borrowers seeking and being granted deferments of principal and interest payments;
collateral for loans, including real estate, may decline in value, which could cause loan losses to increase;
demand for our business products and solutions may decline, making it difficult to grow or maintain our assets and income;
net worth and liquidity of the guarantors on our loans may decline, which could cause loan losses to increase;
our risk management policies and practices may be negatively impacted by, among other things, changes in the SBA 7(a) loan program, including changes to SBA rules, regulations and SBA
standard operating procedures;
increases in cyber risk as criminals may take advantage of the changes of business practices necessitated by a public health emergency.
If the economy is unable to substantially reopen or remain reopened after a public health emergency, and high levels of unemployment continue for an extended period of time, loan delinquencies,
loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity
of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could
result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations.
Any public health emergency, pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a
significant adverse impact on us.
Economic recessions or downturns could impair our clients and our operating results.
Many of our clients may be susceptible to economic slowdowns, a prolonged period of high interest rates or recessions and may be unable to repay our debt investments during these periods. In the
past, instability in the global capital markets resulted in disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the
broadly syndicated credit market and the failure of major domestic and international financial institutions. In particular, in past periods of instability, the financial services sector was negatively
impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. In addition, continued uncertainty
surrounding the impact of trade deals between Britain and the European Union following the United Kingdom’s exit from the European Union, uncertainty in connection with economic sanctions
resulting from the ongoing war between Russia and Ukraine, and uncertainty between the United States and other countries, including China, with respect to trade policies, treaties, and tariffs, among
other factors, have caused disruption in the global markets. There can be no assurance that market conditions will not worsen in the future.
43
In an economic downturn or a prolonged period of high interest rates, we may have non-performing assets or non-performing assets may increase, and the value of our portfolio is likely to decrease
during these periods. Adverse economic conditions may also decrease the value of any collateral securing our loans. A severe recession may further decrease the value of such collateral and result in
losses of value in our portfolio and a decrease in our revenues, net income, assets and net worth. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital
markets or result in a decision by lenders not to extend credit to us on terms we deem acceptable. These events could prevent us from increasing investments and harm our operating results.
The occurrence of recessionary conditions and/or negative developments in the domestic and international credit markets may
significantly affect the markets in which we do business, the value of our investments, and our ongoing operations, costs and profitability. Any such unfavorable economic conditions, including rising
interest rates or a prolonged period of high interest rates, may also increase our funding costs, limit our access to capital markets or negatively impact our ability to obtain financing, particularly from
the debt markets. In addition, any future financial market uncertainty could lead to financial market disruptions and could further impact our ability to obtain financing.
These events could limit our investment originations, limit our ability to grow and negatively impact our operating results and
financial condition.
Recent events in the banking sector may have an adverse effect on aspects of our results of operations and the price of our common stock.
During 2023 and more recently, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States, in particular those with exposure to certain
types of depositors and large portfolios of investment securities. Silicon Valley Bank and Signature Bank were both placed into FDIC receivership resulting from significant and rapid deposit
outflows and the Federal Reserve announced it will make available additional funding to eligible depository institutions to assist banking organizations with potential liquidity needs. While our
business, balance sheet and depositor profile differs substantially from the banking institutions that are the focus of the greatest scrutiny, the operating environment and public trading prices of
financial services sector can be highly correlated, in particular in times of stress, which has, and may continue to adversely affect the trading price of our common stock. In addition, there is
uncertainty at the present time with respect to the effect that these events will have on the perceptions held by individual and commercial depositors as to the safety of deposited funds at smaller
banking institutions, which could affect Newtek Bank’s ability to maintain its levels of deposit funding. We believe that our client base and business model differs from those of the banking
organizations which are under the most scrutiny at the present time, however no assurances can be given that the effects of recent events will not have an adverse effect on our results of operations
and financial performance.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our earnings depend substantially on our interest rate spread, which is the difference between (i) the rates Newtek Bank earns on loans, securities and other earning assets and (ii) the interest rates
Newtek Bank pays on deposits and other borrowings, and its costs of capital. These rates are highly sensitive to many factors beyond our control, including general economic conditions and the
policies of various governmental and regulatory authorities. If market interest rates continue to rise, especially at the pace they did in 2022 and 2023, we will continue to face competitive pressure to
increase the rates Newtek Bank pays on deposits, which could negatively affect net interest margin.
However, we believe that our loan portfolio is less sensitive to a rising interest rate environment based on the fact that a material portion of our loan portfolio consists of SBA 7(a) loans, which are
floating rate loans that bear interest at the prime rate plus a spread from 2.25% to 3.00%, which interest rates reset on a quarterly basis. Moreover, in response to these market conditions and
consistent with its business plan, Newtek Bank has been focused on increasing its liquidity position by raising additional deposits and maintaining a significant portion of its liquidity in the form of
cash held at the Federal Reserve, as opposed to long term investments. In addition, Newtek Bank management continues to closely monitor market conditions with a focus on its asset liability
management policies, as well as closely monitoring, among other things, capital levels, to ensure compliance with regulatory guidelines and the OCC Operating Agreement.
44
Inflation may adversely affect the business, results of operations and financial condition of companies.
Recent inflationary pressures have increased the costs of capital, labor, energy and raw materials and have adversely affected consumer spending, economic growth and our clients’ operations.
Certain of our clients may be in industries that have been, or are expected to be, impacted by inflation. If such clients are unable to pass any increases in their costs along to their customers, it could
adversely affect their results and impact their ability to pay interest and principal on our loans. In addition, any projected future decreases in our clients’ operating results due to inflation could
adversely impact the fair value of those investments. Any deterioration in the quality of our assets could result in future unrealized losses and require increased loan loss reserves and therefore
negatively impact our financial condition or results of operations. The Federal Reserve raised interest rates in 2022 and 2023, and future changes to its monetary policy and the timing of them are not
certain.
While the United States and other developed economies have recently experienced higher-than-normal inflation rates, it remains uncertain whether substantial inflation will be sustained over an
extended period of time or have a significant effect on the U.S. economy or other economies. During periods of rising inflation, interest and dividend rates of any instruments we or our subsidiaries
may have issued could increase, which would tend to reduce returns to our investors. Inflationary expectations or periods of rising inflation could also be accompanied by the rising prices of
commodities which are critical to the operation of our clients as noted above. Clients may have fixed income streams and, therefore, be unable to pay their debts when they become due. The market
value of such investments may decline in value in times of higher inflation rates. Some of our investments may have income linked to inflation through contractual rights or other means. However, as
inflation may affect both income and expenses, any increase in income may not be sufficient to cover increases in expenses. Governmental efforts to curb inflation, including by raising of interest
rates, often have negative effects on the level of economic activity. There can be no assurance that continued and more widespread inflation in the United States and/or other economies or the
maintenance of higher interest rests in an effort to curb inflation will not become a serious problem in the future and have a material adverse impact on us.
Terrorist attacks, acts of war, global health emergencies or natural disasters may impact the businesses in which we invest and harm our business, operating results and financial condition.
Terrorist acts, acts of war, global health emergencies or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and
continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, global health emergencies or
natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in
turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks, global health emergencies and natural disasters are generally
uninsurable.
A failure or the perceived risk of a failure to raise the statutory debt limit of the U.S. could have a material adverse effect on our business, financial condition and results of operations.
In June 2023, the U.S. federal government suspended the federal debt limit until 2025. If Congress does not raise the debt ceiling prior to 2025, the United States could default on its obligations,
including Treasury securities that play an integral role in financial markets. A default by the United States could result in unprecedented market volatility and illiquidity, heightened operational risks
relating to the clearance and settlement of transactions, margin and other disputes with clients and counterparties, an adverse impact to investors including money market funds that invest in U.S.
Treasuries, downgrades in the U.S. credit rating, further increases in interest rates and borrowing costs and a recession in the United States or other economies. Continued uncertainty relating to the
debt ceiling could result in downgrades of the U.S. credit rating, which could adversely affect market conditions, lead to margin disputes, further increases in interest rates and borrowing costs and
necessitate significant operational changes among market participants, including us. A downgrade of the U.S. federal government’s credit rating could also materially and adversely affect the market
for repurchase agreements, securities borrowing and lending, and other financings typically collateralized by U.S. Treasury or agency obligations. Further, the fair value, liquidity and credit ratings of
securities issued by, or other obligations of, agencies of the U.S. government or related to the U.S. government or its agencies, as well as municipal bonds could be similarly adversely affected. An
increasing frequency of government shutdowns, or near shutdowns, in the United States could also lead to uncertainty as to the continued funding of the U.S. government, which could, in turn,
adversely affect the credit ratings of the United States and the market for U.S. Treasury or agency obligations. Continued adverse political and economic conditions could have a material adverse
effect on our business, financial condition and results of operations.
45
If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lending activities and our level of distributions and
liquidity could be affected adversely.
Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject
to the prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are
beyond our control. The prolonged continuation or worsening of current economic and capital market conditions could have a material adverse effect on our ability to secure financing on favorable
terms, if at all.
RISKS RELATED TO OUR BUSINESS AND STRUCTURE
We are dependent upon our Senior Lending Team and our executive officers for our future success, and if we are unable to hire and retain qualified personnel or if we lose any member of our
Senior Lending Team or our executive officers our business could be significantly harmed.
We depend on our Senior Lending Team and executive officers as well as other key personnel for the management of our and our subsidiaries’ businesses. These executive officers and employees
have critical industry experience and relationships that we rely on to implement our business plan. Our future success depends on the continued service of our Senior Lending Team and our executive
officers and the replacement of any departing individuals with others of comparable skills and experience. The departure of any of the members of our Senior Lending Team, our executive officers or
a significant number of our senior personnel could have a material adverse effect on our business. As a result, we may not be able to operate our business as we expect, and our ability to compete
could be harmed, which could cause our operating results to suffer.
We operate in a highly competitive market for clients, which could reduce returns and result in losses.
The commercial lending market to independent business owners is very competitive and is served by a variety of entities, including banks, savings and loan associations, credit unions, independent
finance companies, and nonbank lenders, including financial technology companies. The lending market to independent business owners is also highly fragmented, with a small number of lenders
capturing large shares of each market and many smaller lenders competing for the remaining market share. We compete for clients with other financial institutions and various SMB lenders, as well
as other sources of funding. Additionally, competition for clients has emerged among alternative investment vehicles, such as CLOs, some of which are sponsored by other alternative asset investors,
as these entities have begun to focus on making investments in SMBs. As a result of these new entrants, competition for our clients may intensify. Many of our competitors will be substantially larger
and have considerably greater financial, technical and marketing resources than us. For example, some competitors may have a lower cost of capital and access to funding sources that will not be
available to us. Our competitors often seek to provide financing on terms more favorable to independent business owners than we offer. Many of these competitors also have long-standing
relationships with independent business owners and may offer other forms of financing that we do not offer. In addition, some of our competitors may have higher risk tolerances or different risk
assessments than we will have. Additionally, some of our competitors may also be subject to less burdensome licensing and other regulatory requirements and, as a result, these competitors may have
advantages in conducting certain business and providing certain services and may be more aggressive in their loan origination activities. These characteristics could allow our competitors to establish
more relationships and offer better pricing and more flexible structuring than we will be able to offer. We may lose clients if we do not match our competitors’ pricing, terms and structure. If we are
forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns or may bear substantial risk of capital loss.
We may encounter greater competition as we expand our operations, and competition may also increase in more stable or favorable economic conditions. Increasing competition could also require us
to lower the rates we charge on loans in order to maintain our desired loan origination volume, which could also have a material adverse effect on our business, financial condition and results of
operations.
We could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely
execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these
transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated
at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.
46
Moreover, we may be adversely affected by the soundness of other financial institutions even when we are not directly exposed to those institutions. For example, the failures of Silicon Valley Bank,
Signature Bank and First Republic Bank in 2023 resulted in significant disruption in the financial services industry and negative media attention, which has also adversely impacted the volatility and
market prices of the securities of financial institutions and resulted in outflows of deposits for many financial institutions. Defaults by, declines in the financial condition of, or even rumors or
questions about, one or more financial institutions, financial service companies or the financial services industry generally, may lead to difficulties related to liquidity, asset quality or other problems
and could lead to losses or defaults by us or by other institutions. These problems, losses or defaults could have an adverse effect on our business, financial condition or results of operations.
If we are unable to acquire and process clients effectively, we may be unable to achieve our objectives.
Our ability to achieve our objectives depends on our Senior Lending Team’s and our executive officers’ ability to acquire clients. Accomplishing this result on a cost-effective basis is largely a
function of our marketing capabilities, our management of our client processing, our ability to provide efficient services and our access to financing sources on acceptable terms. To grow, we need to
continue to hire, train, supervise and manage new employees and to implement computer and other systems capable of effectively accommodating our growth. However, we cannot provide assurance
that any such employees will contribute to the success of our business or that we will implement such systems effectively. Failure to manage our future growth effectively could have a material
adverse effect on our business, financial condition and results of operations.
Our business model depends to a significant extent upon strong referral relationships, and our inability to maintain or further develop these relationships, as well as the failure of these
relationships to generate investment opportunities, could adversely affect our business.
We expect that members of our Senior Lending Team and our Executive Committee will maintain their relationships with intermediaries, financial institutions, investment bankers, commercial
bankers, financial advisors, attorneys, accountants, consultants, alliance partners, and other individuals within their networks, and we will rely, to a significant extent, upon these relationships to
provide us with potential clients. If our Senior Lending Team and our executive officers fail to maintain its existing relationships or develop new relationships with potential clients, we may not be
able to acquire new clients. In addition, individuals with whom members of our Senior Lending Team and our executive officers have relationships are not obligated to provide us with client
opportunities, and, therefore, there is no assurance that such relationships will generate opportunities for us.
Indebtedness could adversely affect our business and financial results.
In the past, we have had a significant amount of indebtedness. If our debt service obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional
indebtedness, more of our cash flow from operations would need to be allocated to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other
purposes. Our indebtedness also could limit our ability to execute our business plans and withstand competitive pressures and could reduce our flexibility in responding to changing business and
economic conditions.
Our ability to make payments on our debt, to repay our existing indebtedness when due, and to fund our business, operations and significant planned capital expenditures will depend on our ability to
pay with available cash or generate cash in the future. This, to a certain extent, is subject to financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, if
we cannot service our indebtedness, we may have to take actions such as utilizing available capital, limiting the origination of loans, selling assets, selling equity or reducing or delaying capital
expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of our business strategy, prevent us from entering into transactions that would otherwise
benefit our business and/or adversely affect our business and financial results. We also may not be able to refinance our indebtedness or take such other actions, if necessary, on commercially
reasonable terms, or at all.
47
To the extent we borrow money to originate new loans, changes in interest rates will affect our cost of capital and net interest margin.
To the extent we borrow money to finance client loans, our net interest margin will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we lend those
funds. General interest rate fluctuations may also have an impact on the value of our stock and our rate of return. As a result, we can offer no assurance that a significant change in market interest
rates will not have a material adverse effect on our net interest margin in the event we borrow money to finance our loans. In periods of rising interest rates, our cost of funds would increase, which
could reduce our net interest margin. Further, rising interest rates could also adversely affect our performance if we hold loans with floating interest rates, subject to specified minimum interest rates,
while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though
our interest income is not increasing in a corresponding manner as a result of such minimum interest rates. Rising interest rates could also cause clients to shift cash from other productive uses to the
payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. In addition, rising interest rates may increase pressure
on us to provide fixed rate loans, which could adversely affect our net interest margin, as increases in our cost of borrowed funds would not be accompanied by increased interest income from such
fixed-rate investments. Also, an increase in interest rates available to investors could make an investment in our common stock less attractive if we are not able to increase our dividend rate, which
could reduce the value of our common stock.
We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities. If we do not
implement these techniques properly, we could experience losses on our hedging positions, which could be material. In addition, depending on the frequency and magnitude of rising interest rates,
these interest rate increases could negatively impact premiums received on the sale of guaranteed SBA loans, and further, could increase prepayment speeds on outstanding SBA loans, potentially
negatively impacting the Company’s financial results.
We may expose ourselves to risks as we engage in hedging transactions.
In the second half of 2021, we began using derivatives to hedge interest rate exposure on specific fixed rate loans originated by us or our subsidiaries until such fixed rate loans are sold or securitized.
We may continue to enter into such hedging transactions in an effort to mitigate our exposure to adverse fluctuations in interest rates and we may increase our floating rate investments to position the
portfolio for rate increases. However, we cannot assure you that such transactions will be successful in mitigating our exposure to interest rate risk or if we will continue to enter into such interest rate
hedges. Hedging transactions may also limit our ability to participate in the benefits of lower interest rates with respect to our loans. Moreover, as we engage in hedging transactions, we expose
ourselves to certain risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge
against fluctuations in the relative values of certain of our portfolio positions from changes in market interest rates. Hedging against a decline in the values of our positions does not eliminate the
possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those
same developments, thereby offsetting the decline in the value of such positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions
increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable
price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the holdings being hedged. Any such imperfect correlation may
prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against interest rate fluctuations affecting the value of
securities in our portfolio.
We are subject to stringent capital and liquidity regulations and requirements.
NewtekOne is the parent company of and a separate and distinct legal entity from Newtek Bank. Legal entity liquidity is an important consideration as there are legal, regulatory, contractual and other
limitations on our ability to utilize liquidity from one legal entity to satisfy the liquidity requirements of another, which could result in adverse liquidity events at either NewtekOne and/or Newtek
Bank. Applicable laws and regulations, including capital and liquidity requirements and the Operating Agreement, could restrict our ability to transfer funds between Newtek Bank and NewtekOne,
which could adversely affect our cash flow and financial condition. Additionally, applicable laws and regulations may restrict what NewtekOne is able to do with the liquidity it does possess, which
may adversely affect our business and results of operations.
48
Further, pursuant to the Operating Agreement we have made certain commitments to the OCC which requires Newtek Bank to hold capital incremental to the minimum required under the applicable
standards, which could also impact the Company’s ability to invest in assets. From time to time, regulators may implement changes to these capital adequacy and liquidity requirements. If we fail to
meet these minimum capital adequacy and liquidity guidelines and other regulatory requirements, our business activities, including lending, and its ability to expand could be limited. It could also
result in the Company being required to take steps to increase its regulatory capital that may be dilutive or adverse to stockholders, including limiting the Company’s ability to pay dividends to
stockholders or limiting the Company’s ability to invest in assets even if deemed more desirable from a financial and business perspective.
Federal law and Federal Reserve policy require that a bank holding company serve as a source of financial and managerial strength for any FDIC-insured depository institution that it controls. Thus,
if Newtek Bank were to be in financial distress or to otherwise be viewed by the regulators as in an unsatisfactory condition, then the federal banking regulators could require the Company to provide
additional capital or liquidity support, or take other action, in support of Newtek Bank, even if doing so is not otherwise in the best interest of the Company or its shareholders.
An inability to maintain adequate liquidity could jeopardize our business and financial condition.
Liquidity is essential to our business. Although we believe that we currently have an adequate amount of liquidity to support our business, there are a number of factors that could reduce and/or
deplete our existing liquidity position, including results of operations that are reduced relative to our projections, costs related to existing or future litigation or regulatory matters, the pursuit of
strategic business opportunities (whether through acquisition or organic) and unanticipated liabilities. Additionally, as noted above, we are subject to stringent capital and liquidity regulations and
requirements and need to manage our liquidity position at both NewtekOne and Newtek Bank within the parameters and terms set forth by applicable regulations and regulators. Newtek Bank is
subject to various legal, regulatory and other restrictions on its ability to make distributions and payments to the Company. Any inability to maintain an adequate liquidity position could adversely
affect our operations, our compliance with applicable regulations and the performance of our business.
Further, our ability to raise additional capital, should that be deemed beneficial and/or necessary, depends on conditions in the capital markets, economic conditions and a number of other factors,
including investor perceptions regarding the financial services and banking industry, market conditions, governmental activities, and our financial condition and performance. Accordingly, we may be
unable to raise additional capital if needed or on acceptable terms, which may adversely affect our liquidity, business, financial condition and results of operations.
Our acquisitions and other strategic transactions, including the Acquisition, may not yield the intended benefits.
We have historically and may continue to evaluate and consider strategic transactions, combinations, acquisitions, dispositions or alliances. These transactions could be material to our financial
condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be successful in negotiating favorable terms and/or consummating the
transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
In particular, on January 6, 2023, we completed the Acquisition of NBNYC. We anticipate that the Acquisition will continue to be transformational for the Company from both a financial and
strategic perspective. However, any acquisition (including the Acquisition), disposition or other strategic transactions involves risks, including:
• difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business, which may require ongoing investment in
development and enhancement of additional operational and reporting processes and controls;
• inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
• difficulties in retaining, training, motivating and integrating key personnel;
• diversion of management’s time and resources from our normal daily operations;
• difficulties in successfully incorporating licensed or acquired technology and rights into our platform;
• difficulties in maintaining uniform standards, controls, procedures and policies within the combined organization;
• difficulties in retaining relationships with customers, employees and suppliers of the acquired business;
• risks of entering markets in which we have no or limited direct prior experience;
• regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new
regulators with oversight over an acquired business;
49
• assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;
• failure to successfully further develop any acquired technology;
• liability for activities of the acquired or disposed of business before the acquisition or disposition, including patent and trademark infringement claims, violations of laws, regulatory
actions, commercial disputes, tax liabilities and other known and unknown liabilities;
• difficulty in separating assets and replacing shared services;
• assumption of exposure to performance of any acquired loan portfolios;
• potential disruptions to our ongoing businesses; and
• unexpected costs and unknown risks and liabilities associated with the acquisition.
Accordingly, any acquisition, disposition or other strategic transaction may not be successful, may not benefit our business strategy, may not generate sufficient revenue to offset the associated costs
or may not otherwise result in the intended benefits. Additionally, it may take us longer than expected to fully realize the anticipated benefits and synergies of these transactions (including the
Acquisition), and those benefits and synergies may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results.
Any transactions, combinations, acquisitions, dispositions or alliances may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities
and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders
and the interests of holders of our indebtedness.
In addition, we cannot assure you that any acquisition of new businesses or technology will lead to the successful development of new or enhanced products and services or that any new or enhanced
products and services, if developed, will achieve market acceptance or prove to be profitable.
Finally, we may also choose to divest certain businesses or product lines that no longer fit with our strategic objectives. If we decide to sell assets or a business, we may have difficulty obtaining
terms acceptable to us in a timely manner, or at all. Additionally, the terms of such potential transactions may expose us to ongoing obligations and liabilities.
Our business may be adversely affected if our risk management framework does not effectively identify, assess and mitigate risk.
Our risk management framework seeks to appropriately balance risk and return and mitigate our risks, including risks attributable to third parties. We have established policies intended to regularly
identify and assess our risk profile, including credit risk, pricing risk, liquidity risk, strategic risk and operational risk, and then implement appropriate processes and controls to mitigate risk.
If our risk management framework does not effectively identify, assess and/or mitigate our risk profile, we could suffer unexpected losses or be adversely affected, which could have a material
adverse effect on our business. For example, assessment of our risk profile depends, in part, upon the use of forecasting models. If these models are ineffective at predicting future losses or are
otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected. In addition, the information we use may be inaccurate or incomplete, both of which may be difficult to
detect and avoid. Additionally, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated.
Finally, our risk management framework may be deemed insufficient or inadequate by our regulators, which have in the past required, and we expect to continue to require, that we invest additional
resources into remediating any deficiencies and adversely impact our ability to operate our business until such time as the revised framework is deemed sufficient and adequate by our regulators.
50
Internal control deficiencies could impact the accuracy of our financial results or prevent the detection of fraud. As a result, shareholders could lose confidence in our financial and other public
reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent
fraud. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Any failure by us to identify future deficiencies in our internal control over financial reporting in
a timely manner or remediate any such deficiencies, could prevent us from accurately and timely reporting our financial results. Inferior internal controls could also cause investors to lose confidence
in our reported financial information, which could have a negative effect on the trading price of our common stock.
We review and update our internal controls, disclosure controls and procedures and corporate governance policies as our Company continues to evolve. In addition, we are required to comply with the
internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX). We are required to disclose changes made in our internal control and procedures
on a quarterly basis and our management is required to assess the effectiveness of these controls annually. An independent assessment of the effectiveness of our internal controls could detect
problems that our management’s assessment might not have detected. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the
expense of remediation. In the event that we are unable to maintain or achieve compliance with Section 404 of the SOX and related rules, the market price of our common stock may be adversely
affected.
We have identified material weaknesses in our internal controls over financial reporting which could, if not remediated, adversely affect our ability to report our financial condition and results
of operations in a timely and accurate manner, investor confidence in our Company and, as a result, the value of our common stock.
We have assessed the effectiveness of our internal controls over financial reporting based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated Framework (2013). Based on this assessment, we have concluded that we did not maintain effective internal controls over financial reporting as of
December 31, 2023, as a result of the material weaknesses described in “Item 9A. Controls and Procedures,” herein. We have taken actions to enhance our internal controls over financial reporting
relating to the material weaknesses identified as of the date of this Annual Report. We hired a new Chief Financial Officer in May 2023 and appointed a new Chief Accounting Officer in March 2024,
and hired a Chief Risk Officer, each with recent and significant financial holding company experience. We are still in the process of implementing other remediation measures as part of a
comprehensive remediation plan. The material weaknesses identified herein cannot be considered remediated until each control has been appropriately designed, has operated for a sufficient period of
time, and until management has concluded, through testing, that the control is operating effectively. See “Item 9A. Controls and Procedures.” We can give no assurance that a comprehensive
remediation plan will remediate the material weakness in internal control, or that additional material weaknesses or significant deficiencies in our internal controls over financial reporting will not be
identified in the future. A failure by us to timely and effectively remediate the material weaknesses could prevent us from accurately and timely reporting our financial results and could also cause
investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that are costly and could adversely affect our business and financial
results.
We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company
Accounting Oversight Board, the SEC, the OCC and the Nasdaq Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of
the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. Our efforts to comply with existing requirements, or any revised or
amended requirements, have resulted in, and may continue to result in, an increase in expenses and a diversion of management’s time from other business activities.
In addition, our failure to keep pace with any such rules, or for our management to appropriately address compliance with such rules fully and in a timely manner, exposes us to an increasing risk of
inadvertent non-compliance. While our management team takes reasonable efforts to ensure that we are in full compliance with all laws applicable to its operations, the increasing rate and extent of
regulatory change increases the risk of a failure to comply, which may result in our ability to operate our business in the ordinary course or may subject us to potential fines, regulatory findings or
other matters that may materially impact our business.
51
Our clients may be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry in which a number of our
loans are concentrated.
Our clients may be concentrated in a limited number of industries. A downturn in any particular industry in which we provide loans could significantly impact the aggregate returns we realize. If an
industry to which we provide significant loans suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our business could be affected
adversely, which, in turn, could adversely affect our financial position and results of operations.
If we and our subsidiaries are unable to protect our intellectual property rights, our business and prospects could be harmed.
The proprietary software essential to our business and that of our subsidiaries is owned by us and made available to them for their use. Our future success and competitive position will depend in part
upon our ability to maintain and protect proprietary technology used in our products and services. We will rely, in part, on patent, trade secret and trademark law to protect that technology, but
competitors may misappropriate our intellectual property, and disputes as to ownership of intellectual property may arise. We may, from time to time, be required to institute litigation to enforce the
patents, copyrights or other intellectual property rights, protect trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement. Such
litigation could result in substantial costs and diversion of resources.
RISKS RELATED TO SBA LENDING
Changes to the SBA Section 7(a) Program can negatively impact our SBA 7(a) loan origination volume.
Changes to the SBA Section 7(a) Program, including recent revisions to SBA Standard Operating Procedure SOP 50 10 7.1 (“SOP 7.1”), shifted to the SBA a PLP lender’s delegated authority in
making determinations of a borrower’s satisfaction of certain eligibility requirements to participate in the Section 7(a) Program. Potential impacts of the SOP 7.1 revisions remain unclear, including
the SBA’s ability to demonstrate that it can timely and appropriately make these eligibility determinations; and therefore, there can be no assurance that these and future SOP revisions will not
negatively impact, among other things, the volume of SBA 7(a) loans originated by PLP lenders, including Newtek Bank, which could have an adverse impact on the Company’s business, financial
condition and/or operating results.
There can be no guarantee that Newtek Bank and NSBF will be able to maintain their SBA 7(a) lending licenses.
Both Newtek Bank, N.A. and NSBF have been granted SBA 7(a) lending licenses. Additionally, prior to the Acquisition, NSBF had been granted PLP status, which allowed it to place SBA
guarantees on loans without seeking prior SBA review and approval. Newtek Bank obtained PLP status in April 2023. PLP status allows NSBF and Newtek Bank to expedite loans since they are not
required to present applications to the SBA for concurrent review and approval. While the Company intends that NBSF will continue to service its current portfolio of SBA 7(a) loans, and that new
SBA 7(a) loan originations will be made by Newtek Bank, there can be no guarantee that Newtek Bank and NSBF will be able to maintain their SBA 7(a) lending licenses. The loss Newtek Bank’s
SBA 7(a) lending license would negatively impact our results of operations.
Further, there can be no assurance that Newtek Bank will be able to maintain its status as a PLP. Newtek Bank’s loss of PLP status would adversely impact our marketing efforts and ultimately loan
origination volume which would negatively impact our results of operations.
NSBF and Newtek Bank, our wholly-owned subsidiaries, are subject to regulation by the SBA, which has specific risks.
NSBF is licensed by the SBA as an SBLC. In order to operate as an SBLC, a licensee is required to maintain a minimum regulatory capital (as defined by SBA regulations) of the greater of (1) 10%
of its outstanding loans receivable and other investments or (2) $1.0 million. Moreover, before consenting to a securitization, NSBF and other securitizers must, among other things, be considered
well capitalized by the SBA. For NSBF and other SBLC securitizers, the SBA will consider it well capitalized if it maintains a minimum unencumbered paid in capital and paid in surplus equal to at
least 10% of its assets, excluding the guaranteed portion of 7(a) loans. In addition, an SBLC is subject to certain other regulatory restrictions. Among other things, SBLCs are required to: establish,
adopt, and maintain a formal written capital plan; submit to the SBA for review a credit policy that demonstrates the SBLC’s compliance with the applicable regulations and the SBA’s Standard
Operating Procedures for origination, servicing and liquidation of 7(a) loans; submit to the SBA for review and approval annual validation, with supporting documentation and methodologies,
demonstrating that any scoring model used by the SBLC is predictive of loan performance; obtain SBA approval for loan securitization and borrowings; and adopt and fully implement an internal
control policy which provides adequate direction for effective control over and accountability for operations, programs, and resources.
52
Additionally, in connection with our 2018 examination by the SBA, NSBF entered into a voluntary agreement with the SBA to meet certain other requirements and conditions. See “Item 1A. Risk
Factors - Risks Related to SBA Lending - If NSBF or Newtek Bank fail to comply with SBA regulations in connection with the origination, servicing, or liquidation of an SBA 7(a) loan, liability on
the SBA guaranty, in whole or in part, could be transferred to NSBF or Newtek Bank.”
NSBF will remain subject to SBA regulation as it winds down its operations.
As a result of the Acquisition, all SBA 7(a) loan originations are being transitioned to Newtek Bank in April 2023, and NSBF has ceased origination of SBA 7(a) loans, relinquished its PLP status
and is winding-down its operations. During this wind down process, NSBF will be required to continue to own the SBA 7(a) loans and PPP Loans in its SBA loan portfolio to maturity, liquidation,
charge-off, or (subject to SBA’s prior written approval), sale or transfer. NSBF will be required to continue to service and liquidate its SBA Loan Portfolio, including processing forgiveness and loan
reviews for PPP Loans, pursuant to an SBA approved lender service provider agreement with SBL. During the wind down process NSBF will be required to maintain minimum capital requirements
established by the SBA, will be required to maintain certain amounts of restricted cash available to meet any obligations to the SBA, will have restrictions on its ability to make dividends and
distributions to its parent, and will remain liable to SBA for post-purchase denials and repairs, from the proceeds generated by NSBF’s SBA loan portfolio. Any future post-purchase denials and
repairs demands on NSBF could negatively impact our results of operations. In addition, the Company has agreed to guarantee NSBF’s obligations to the SBA and has deposited $10 million at
Newtek Bank to secure NSBF’s potential obligations to the SBA..
We have specific risks associated with SBA loans.
We have generally sold the guaranteed portion of SBA loans in the secondary market. Such sales have resulted in our earning premiums and creating a stream of servicing income. Sale prices for
guaranteed portions of SBA 7(a) loans can be negatively impacted by market conditions, in particular a higher interest rate environment, which can lead to higher prepayments during the period,
resulting in lower sale prices in the secondary market. A reduction in the price of guaranteed SBA 7(a) loans could negatively impact our business. There can be no assurance that we will be able to
continue originating these loans, or that a secondary market will exist for, or that we will continue to realize premiums upon the sale of the guaranteed portions of the SBA 7(a) loans.
If NSBF or Newtek Bank fail to comply with SBA regulations in connection with the origination, servicing, or liquidation of an SBA 7(a) loan, liability on the SBA guaranty, in whole or in part,
could be transferred to NSBF or Newtek Bank.
Since we sell the guaranteed portion of substantially all of our SBA 7(a) loan portfolio, we retain credit risk on the non-guaranteed portion of the SBA loans. We share pro rata with the SBA in any
recoveries. In the event of default on an SBA loan, our pursuit of remedies against a borrower is subject to SBA approval.
If we fail to comply with certain of the SBA’s regulations in connection with the origination, servicing, or liquidation of an SBA 7(a) loan, the SBA may be released from liability on its guaranty of a
7(a) loan, and may refuse to honor a guaranty purchase request in full (referred to by SBA as a “denial”) or in part (referred to by SBA as a “repair”), or recover all or part of the funds already paid in
connection with a guaranty purchase. In the event of a repair or denial, liability on the guaranty, in whole or part, would be transferred to NSBF or Newtek Bank. In addition, the growth in the number
of loans made by Newtek Bank, changes in SBA regulations and economic factors may adversely impact our current repair and denial rate. In connection with NSBF’s 2018 examination by the SBA,
NSBF entered into a voluntary agreement with the SBA pursuant to which NSBF established a segregated restricted cash account in the amount of $10 million to account for potential post-purchase
repairs and denials of guaranteed portions of SBA 7(a) loans, and take certain actions to demonstrate the sufficiency of NSBF’s liquidity and establish certain additional reporting and compliance
procedures.
Curtailment of the government-guaranteed loan programs could adversely affect our results of operations.
Although the SBA 7(a) Program has been in existence since 1953, there can be no assurance that the federal government will maintain the SBA 7(a) program, or that it will continue to guarantee
loans at current levels. Furthermore, in an effort to support our communities during the pandemic, we participated in the PPP under the CARES Act whereby we made loans to small businesses and
those loans are subject to the regulatory requirements that require forbearance of loan payments for a specified time or limit our ability to pursue all available remedies in the event of a loan default. If
the borrower under the PPP loan fails to qualify for loan forgiveness, we may be at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that
we would have otherwise extended credit. If we cannot continue originating and selling government-guaranteed loans, we will generate fewer origination fees and our ability to generate gains on the
sale of loans will
53
decrease. From time-to-time, the government agencies that guarantee these loans reach their internal budgeted limits and cease to guarantee loans for a stated time period. In addition, these agencies
may change their rules for extending loans. Also, Congress may adopt legislation that would have the effect of discontinuing or changing the SBA’s programs. Non-governmental programs could
replace government programs for some borrowers, but the terms might not be equally acceptable. If these changes occur, the volume of loans to SMBs and industrial borrowers of the types that now
qualify for government-guaranteed loans could decline, as could the profitability of these loans.
Our loans under the Section 7(a) Loan Program involve a high risk of default and such default could adversely impact our results of operations.
Loans to small businesses involve a high risk of default. Such loans are generally not rated by any statistical rating organization. Small businesses usually have smaller product lines and market shares
than larger companies and therefore may be more vulnerable to competition and general economic conditions. These businesses’ success typically depends on their management talents and efforts of
one person or a small group of persons whose death, disability or resignation would adversely affect the business. Because these businesses frequently have highly leveraged capital structures,
reduced cash flow resulting from economic downturns can severely impact the businesses’ ability to meet their obligations, which could impact our results of operations. The portions of Section 7(a)
loans to be retained by us do not benefit directly from any SBA guarantees; in an event of default, however, we and the SBA typically cooperate in collateral foreclosure or other work-out efforts and
share in any resulting collections.
The loans we make under the Section 7(a) Loan Program face competition.
There are a large number of banks and several non-bank lenders that participate in the SBA Section 7(a) Loan Program. All of these participants compete for the business of eligible borrowers.
Accordingly, we may be at a competitive disadvantage with regard to other lenders or financial institutions that may be able to achieve greater leverage at a lower cost.
A governmental failure to fund the SBA could adversely affect NSBF’s and Newtek Bank’s SBA 7(a) loan originations and our results of operations.
We are dependent upon the Federal government to maintain the SBA 7(a) Program. NSBF’s and Newtek Bank’s lending business could be materially and adversely affected by circumstances or
events limiting the availability of funds for this program. In October 2013, Congress failed to approve a budget, which, in turn, eliminated availability of funds for the SBA 7(a) program. At the time,
the government shutdown affected SBA 7(a) lenders’ ability to originate SBA 7(a) loans. More recently, the government shut down in January 2018 due to a lapse in appropriations, and the SBA
closed all non-disaster related programs and activities, including the SBA 7(a) program. The government could again fail to fund the SBA which would affect NSBF’s and Newtek Bank’s ability to
originate government guaranteed loans and to sell the government guaranteed portions of those loans in the secondary market. Any failure to fund the SBA could adversely affect NSBF’s SBA 7(a)
loan originations and our results of operations.
As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and NSBF are subject to risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and
other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. On
or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP of approximately $320 billion on
April 24, 2020. NSBF is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of
the PPP, there had been some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which may expose the Company and NSBF to risks relating to noncompliance with the
PPP. During the duration of the PPP, NSBF funded approximately 10,570 PPP loans totaling $1.19 billion.
NSBF also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by NSBF, such as an
issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP or additional or new
laws, rules, and guidance. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated,
funded, or serviced by NSBF, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to
the deficiency from the Company.
54
In addition, in order to facilitate NSBF’s involvement as an authorized lender in the PPP, during the second quarter of 2020, NSBF entered into PPP loan participation agreements where NSBF
originated PPP loans and sold participating interests to four banks. See “PPP Loan Participations.” In accordance with the terms of the PPP participation agreements and SBA regulations and
guidance, NSBF, as the originating lender, must continue to hold the PPP loan note, the PPP loan documents and service the PPP loan (i.e., retain all servicing rights). Moreover, as the originating
lender, NSBF is the party responsible to the SBA with respect to all servicing actions, including requests for advance purchases and loan forgiveness, and will be the party eligible for the guarantee
purchase of the PPP loan. NSBF has agreed that it will repurchase from the Participants on demand the Participants’ Percentage of any outstanding principal and interest under the applicable PPP
Loan under certain standard representations and warranties, including in the event of a loss due to fraud, gross negligence or willful misconduct on the part of NSBF or any failure to recover under
the SBA guarantee as a result of any deficiency in documenting or servicing such PPP Loan by NSBF.
We could be adversely affected by weakness in the residential housing and commercial real estate markets.
Weakness in residential home and commercial real estate values could impair our ability to collect on defaulted SBA loans as real estate is pledged in many of our SBA loans as part of the collateral
package.
The development and use of Artificial Intelligence (AI) present risks and challenges that may adversely impact our business.
We or our third-party vendors, clients or counterparties may develop or incorporate AI technology in certain business processes, services or products. The development and use of AI present a
number of risks and challenges to our business. The legal and regulatory environment relating to AI is uncertain and rapidly evolving, both in the United States and internationally, and includes
regulatory schemes targeted specifically at AI as well as provisions in intellectual property, privacy, consumer protection, employment and other laws applicable to the use of AI. These evolving laws
and regulations could require changes in our implementation of AI technology and increase our compliance costs and the risk of non-compliance. AI models, particularly generative AI models, may
produce output or take action that is incorrect, that result in the release of private, confidential or proprietary information, that reflect biases included in the data on which they are trained, infringe on
the intellectual property rights of others, or that is otherwise harmful. In addition, the complexity of many AI models makes it challenging to understand why they are generating particular outputs.
This limited transparency increases the challenges associated with assessing the proper operation of AI models, understanding and monitoring the capabilities of the AI models, reducing erroneous
output, eliminating bias and complying with regulations that require documentation or explanation of the basis on which decisions are made. Further, we may rely on AI models developed by third
parties, and, to that extent, would be dependent in part on the manner in which those third parties develop and train their models, including risks arising from the inclusion of any unauthorized
material in the training data for their models, and the effectiveness of the steps these third parties have taken to limit the risks associated with the output of their models, matters over which we may
have limited visibility. Any of these risks could expose us to liability or adverse legal or regulatory consequences and harm our reputation and the public perception of our business or the
effectiveness of our security measures.
In addition to our use of AI technologies, we are exposed to risks arising from the use of AI technologies by bad actors to commit fraud and misappropriate funds and to facilitate cyberattacks.
Generative AI, if used to perpetrate fraud or launch cyberattacks, could create panic at a particular financial institution or exchange, which could pose a threat to financial stability.
RISKS RELATED TO U.S. FEDERAL INCOME TAX
We cannot predict how new tax legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.
Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative
process and by the Internal Revenue Service and the U.S. Treasury Department. The current U.S. presidential administration has enacted significant changes to the existing U.S. tax rules, and there
are a number of proposals in Congress that would similarly modify the existing U.S. tax rules. The likelihood of any such legislation being enacted is uncertain, but new legislation and any U.S.
Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect the U.S. federal income tax consequences to us and our
stockholders of such qualification, or could have other adverse consequences. Stockholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative
developments and proposals and their potential effect on an investment in our securities.
55
RISKS RELATED TO OUR SUBSIDIARIES - NEWTEK MERCHANT SOLUTIONS (NMS)
We could be adversely affected if either of NMS’ two bank sponsorships is terminated.
Because NMS is not a bank, it is unable to belong to and directly access the Visa® and MasterCard® bankcard associations. The Visa® and MasterCard® operating regulations require NMS to be
sponsored by a bank in order to process bankcard transactions. A bank sponsorship is an agreement under which a financial institution that has a membership with MasterCard®, Visa® or American
Express sponsors an independent sales organization, like NMS, that markets credit card processing services to merchants who accept credit cards as a form of payment, gains access to the Visa®,
MasterCard®, and American Express networks. NMS is currently sponsored by two banks. If either of the sponsorships is terminated, and NMS is not able to secure or transfer the respective
merchant portfolio to a new bank sponsor or sponsors, the business, financial condition, results of operations and cash flows of the electronic payment processing business could be materially
adversely affected. If both the sponsorships are terminated and NMS is unable to secure a bank sponsor for the merchant portfolios, it will not be able to process bankcard transactions for the affected
portfolios. Consequently, the loss of both of NMS’ sponsorships would have a material adverse effect on our business. Furthermore, NMS’ agreements with sponsoring banks gives the sponsoring
banks substantial discretion in approving certain elements of its business practices, including its solicitation, application and qualification procedures for merchants, the terms of their agreements with
merchants, the processing fees that they charge, their customer service levels and its use of independent sales organizations and independent sales agents. We cannot guarantee that NMS’ sponsoring
banks’ actions under these agreements would not be detrimental to us.
Other service providers, some of whom are NMS’ competitors, are necessary for the conduct of NMS’ business. The termination by service providers of these arrangements with NMS or their failure
to perform these services efficiently and effectively may adversely affect NMS’ relationships with the merchants whose accounts it serves and may cause those merchants to terminate their processing
agreements with NMS.
If NMS or its processors or bank sponsors fail to adhere to the standards of the Visa® and MasterCard® bankcard associations, its registrations with these associations could be terminated and
it could be required to stop providing payment processing services for Visa® and MasterCard®.
Substantially all of the transactions NMS processes involve Visa® or MasterCard®. If NMS, its bank sponsors or its processors fail to comply with the applicable requirements of the Visa® and
MasterCard® bankcard associations, Visa® or MasterCard® could suspend or terminate its registration. The termination of NMS’ registration or any changes in the Visa® or MasterCard® rules that
would impair its registration could require it to stop providing payment processing services, which would have a material adverse effect on its business and could be detrimental to us.
On occasion, NMS experiences increases in interchange and sponsorship fees. If it cannot pass along these increases to its merchants, its profit margins will be reduced.
NMS pays interchange fees or assessments to bankcard associations for each transaction it processes using their credit, debit and gift cards. From time to time, the bankcard associations increase the
interchange fees that they charge processors and the sponsoring banks, which generally pass on such increases to NMS. From time to time, the sponsoring banks increase their fees as well. If NMS is
not able to pass these fee increases along to merchants through corresponding increases in its processing fees, its profit margins in this line of business will be reduced.
Unauthorized disclosure of merchant or cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and business losses.
Through NMS, we collect and store sensitive data about merchants and cardholders, and we maintain a database of cardholder data relating to specific transactions, including payment, card numbers
and cardholder addresses, in order to process the transactions and for fraud prevention and other internal processes. If anyone penetrates our network security or otherwise misappropriates sensitive
merchant or cardholder data, we could be subject to liability or business interruption. While we subject these systems to periodic independent testing and review, we cannot guarantee that our systems
will not be penetrated in the future. If a breach of our system occurs, we may be subject to liability, including claims for unauthorized purchases with misappropriated card information, impersonation
or other similar fraud claims. Similar risks exist with regard to the storage and transmission of such data by our processors. In the event of any such a breach, we may also be subject to a class action
lawsuit. SMBs are less prepared for the complexities of safeguarding cardholder data than their larger counterparts. In the event of noncompliance by a customer of card industry rules, we could face
fines from payment card networks. There can be no assurance that we would be able to recover any such fines from such customer.
56
NMS is liable if its processing merchants refuse or cannot reimburse charge-backs resolved in favor of their customers.
If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is “charged back” to the merchant’s bank and credited to the
account of the cardholder. If NMS or its processing banks are unable to collect the charge-back from the merchant’s account, or if the merchant refuses or is financially unable due to bankruptcy or
other reasons to reimburse the merchant’s bank for the charge-back, NMS must bear the loss for the amount of the refund paid to the cardholder’s bank. Most of NMS’ merchants deliver products or
services when purchased, so a contingent liability for charge-backs is unlikely to arise, and credits are issued on returned items. However, some of its merchants do not provide services until
sometime after a purchase, which increases the potential for contingent liability and future charge-backs. NMS and the sponsoring bank can require that merchants maintain cash reserves under its
control to cover charge-back liabilities but such reserves may not be sufficient to cover the liability or may not even be available to them in the event of a bankruptcy or other legal action.
NMS has potential liability for customer or merchant fraud.
Credit card fraud occurs when a merchant’s customer uses a stolen card (or a stolen card number in a card-not-present transaction) to purchase merchandise or services. In a traditional card-present
transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by
the customer, the card issuing bank remains liable for any loss. In a fraudulent card-not-present transaction, even if the merchant receives authorization for the transaction, the merchant is liable for
any loss arising from the transaction. Many NMS customers are small and transact a substantial percentage of their sales over the Internet or by telephone or mail orders. Because their sales are card-
not-present transactions, these merchants are more vulnerable to customer fraud than larger merchants, and NMS could experience charge-backs arising from cardholder fraud more frequently with
these merchants.
Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or counterfeit card or card number to record a false sales transaction or intentionally fails to deliver the
merchandise or services sold in an otherwise valid transaction. Anytime a merchant is unable to satisfy a charge-back, NMS is ultimately responsible for that charge-back unless it has required that a
cash reserve be established. We cannot assure that the systems and procedures NMS has established to detect and reduce the impact of merchant fraud are or will be effective. Failure to effectively
manage risk and prevent fraud could increase NMS charge-back liability and adversely affect its results of operations.
NMS payment processing systems may fail due to factors beyond its control, which could interrupt its business or cause it to lose business and likely increase costs.
NMS depends on the uninterrupted operations of our computer network systems, software and our processors’ data centers. Defects in these systems or damage to them due to factors beyond its
control could cause severe disruption to NMS’ business and other material adverse effects on its payment processing businesses.
The electronic payment processing business is undergoing very rapid technological changes which may make it difficult or impossible for NMS to compete effectively.
The introduction of new technologies, primarily mobile payment capabilities, and the entry into the payment processing market of new competitors, Apple, Inc., for example, could dramatically
change the competitive environment and require significant changes and costs for NMS to remain competitive. There is no assurance that NMS will have the capability to stay competitive with such
changes.
NMS and others in the payment processing industry have come under increasing pressures from various regulatory agencies seeking to use the leverage of the payment processing business to
limit or modify the practices of merchants which could lead to increased costs.
Various agencies, particularly the Federal Trade Commission (“FTC”), have within the past few years attempted to pressure merchants to discontinue or modify various sales or other practices. As a
part of the payment processing industry, processors such as NMS could experience pressure and/or litigation aimed at restricting access to credit card sales by such merchants. These efforts could
cause an increase in the cost to NMS of doing business or otherwise make its business less profitable and may subject NMS to assess penalties for not taking actions deemed sufficiently aggressive to
limit such practices. As a result of a litigation brought by the FTC in October 2012, NMS voluntarily entered into, and is presently operating under, a permanent injunction with respect to certain of
its business practices.
57
Increased regulatory focus on the payments industry may result in costly new compliance burdens on NMS’ clients and on NMS itself, leading to increased costs and decreased payments volume
and revenues.
Regulation of the payments industry has increased significantly in recent years. Complying with these and other regulations increases costs and can reduce revenue opportunities. Similarly, the impact
of such regulations on clients may reduce the volume of payments processed. Moreover, such regulations can limit the types of products and services that are offered. Any of these occurrences can
materially and adversely affect NMS’ business, prospects for future growth, financial condition and results of operations.
Examples include:
• Data Protection and Information Security. Aspects of NMS’ operations and business are subject to privacy and data protection regulation. NMS’ financial institution clients are subject to
similar requirements under the guidelines issued by the federal banking agencies. In addition, many individual states have enacted legislation requiring consumer notification in the event of a
security breach.
•
Anti-Money Laundering and Anti-Terrorism Financing. The U.S.A. PATRIOT Act requires NMS to maintain an anti-money laundering program. Sanctions imposed by the U.S. Treasury
Office of Foreign Assets Control, or OFAC, restrict NMS from dealing with certain parties considered to be connected with money laundering, terrorism or narcotics. NMS has controls in
place designed to ensure OFAC compliance, but if those controls should fail, it could be subject to penalties, reputational damage and loss of business.
• Money Transfer Regulations. As NMS expands its product offerings, it may become subject to money transfer regulations, increasing regulatory oversight and costs of compliance.
•
Formal Investigation. If NMS is suspected of violating government statutes, such as the Federal Trade Commission Act or the Telemarketing and Consumer Fraud and Abuse Prevention
Act, governmental agencies may formally investigate NMS. As a result of such a formal investigation, criminal or civil charges could be filed against NMS and it could be required to pay
significant fines or penalties in connection with such investigation or other governmental investigations. Any criminal or civil charges by a governmental agency, including any fines or
penalties, could materially harm NMS’ business, results of operations, financial position and cash flows. Currently, NMS is operating under an order for injunctive relief it voluntarily
entered into with the Federal Trade Commission.
RISKS RELATED TO OUR SUBSIDIARIES - NEWTEK BANK
If the credit decisioning, pricing, loss forecasting and scoring models we use contain errors, do not adequately assess risk, or are otherwise ineffective, our reputation and relationships with
customers could be harmed, our market share could decline and the value of loans held on our balance sheet may be adversely affected.
Our ability to attract clients to, and build trust in, Newtek Bank is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and likelihood of default. To conduct this
evaluation, we utilize credit decisioning, pricing, loss forecasting and scoring models that assign each loan offered through our marketplace bank a grade and a corresponding interest rate. Our models
are based on algorithms that evaluate a number of factors, including behavioral data, transactional data, bank data and employment information, which may not effectively predict future loan losses.
If we are unable to effectively segment borrowers into relative risk profiles, we may be unable to offer attractive interest rates for borrowers and risk-adjusted returns for investors.
Additionally, if these models fail to adequately assess the creditworthiness of our borrowers, we may experience higher than forecasted losses. Furthermore, as stated above, we hold loans on our
balance sheet. We periodically assess the value of these loans and in doing so we review and incorporate a number of factors including forecasted losses. Accordingly, if we fail to adequately assess
the creditworthiness of our borrowers such that we experience higher than forecasted losses, the value of the loans held on our balance sheet may be adversely affected.
We continually refine these algorithms based on new data and changing macroeconomic conditions. However, there is no guarantee that the credit decisioning, pricing, loss forecasting and scoring
models that we use have accurately assessed the creditworthiness of our borrowers, or will be effective in assessing creditworthiness in the future.
58
Similarly, if any of these models contain programming or other errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale, our loan pricing and approval process
could be negatively affected, resulting in mispriced or misclassified loans or incorrect approvals or denials of loans. If these errors were to occur, we may be obligated to repurchase the affected loans,
investors may try to rescind their affected investments or decide not to invest in loans in the future or borrowers may seek to revise the terms of their loans or reduce the use of our marketplace bank
for loans.
If collection efforts on delinquent loans are ineffective or unsuccessful, the return on investment for investors in those loans would be adversely affected and investors may not find investing
through our marketplace bank desirable.
Many of our loan products are unsecured obligations of borrowers, and they are not secured by any collateral. None of the loans facilitated on our platform are guaranteed or insured by any third
party or backed by any governmental authority in any way. We are the loan servicer for all loans supporting notes, all certificates and certain secured borrowings, and we are the loan servicer for
most, though not all, loans sold as whole loans. The ability to collect on the loans is dependent on the borrower’s continuing financial stability, and consequently, collections can be adversely affected
by a number of factors, including bankruptcy or the economic and/or social factors. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on these loans. Accordingly, we and our designated third-party servicers and collection agencies are limited in our ability to collect loans.
In addition, most investors must depend on us or our third-party servicers and collection agents to pursue collection on delinquent borrower loans. Because we make payments ratably on an investor’s
investment only if we receive the borrower’s payments on the corresponding loan, if we, or third parties on our behalf, cannot adequately perform collection services, the investor will not be entitled
to any payments under the terms of the investment. Further, if collection action must be taken in respect of a loan, we or the collection agency may charge a collection fee on any amounts that are
obtained (excluding litigation). These fees will correspondingly reduce the amounts of any payments received by an investor. Similarly, the returns to investors may be impacted by declines in market
rates for sales of charged-off loans to third-party purchasers. Ultimately, if delinquencies impair our ability to offer attractive risk-adjusted returns for investors, they may seek alternative investments
and our business may suffer.
In addition, because our servicing fees depend on the collectability of the loans, if we experience a significant increase in the number of delinquent or charged-off loans we will be unable to collect
our entire servicing fee for such loans and our revenue could be adversely affected.
RISKS RELATED TO OUR SUBSIDIARIES - NEWTEK TECHNOLOGY SOLUTIONS (NTS)
We have agreed to terminate the activities conducted by NTS.
As a result of commitments made to the Federal Reserve, the Company will divest or otherwise terminate the activities conducted by Newtek Technology Solutions, Inc., which includes the entities
of SIDCO, LLC d/b/a/ Cloud Nine Services and Excel WebSolutions, LLC after a December 31, 2023 merger, within two years of becoming a financial holding company, subject to any extension of
the two-year period. The divestiture of NTS may negatively impact the Company’s revenue and income and our ability to effectively manage our information technology systems and infrastructure
and cybersecurity risk. See “ITEM I.C Cybersecurity.”
NTS operates in a highly competitive industry in which technological change can be rapid.
The information technology business and its related technology involve a broad range of rapidly changing technologies. NTS equipment and the technologies on which it is based may not remain
competitive over time, and others may develop superior technologies that render its products non-competitive, without significant additional capital expenditures. Some of NTS’ competitors are
significantly larger and have substantially greater market presence as well as greater financial, technical, operational, marketing and other resources and experience than NTS. In the event that such a
competitor expends significant sales and marketing resources in one or several markets, NTS may not be able to compete successfully in such markets. We believe that competition will continue to
increase, placing downward pressure on prices. Such pressure could adversely affect NTS gross margins if it is not able to reduce its costs commensurate with such price reductions. There can be no
assurances that NTS will remain competitive.
59
NTS’ technology solutions business depends on the efficient and uninterrupted operation of its computer and communications hardware systems and infrastructure.
Despite precautions taken by NTS against possible failure of its systems, interruptions could result from natural disasters, power loss, the inability to acquire fuel for its backup generators,
telecommunications failure, terrorist attacks and similar events. NTS also leases telecommunications lines from local, regional and national carriers whose service may be interrupted. NTS’ business,
financial condition and results of operations could be harmed by any damage or failure that interrupts or delays its operations. There can be no assurance that NTS’ insurance will cover all of the
losses or compensate NTS for the possible loss of clients occurring during any period that NTS is unable to provide service.
NTS’ inability to maintain the integrity of its infrastructure and the privacy of confidential information would materially affect its business.
The NTS infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If its security measures are circumvented, it could jeopardize the security of
confidential information stored on NTS’ systems, misappropriate proprietary information or cause interruptions in NTS’ operations. We may be required to make significant additional investments
and efforts to protect against or remedy security breaches. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability.
The security services that NTS offers in connection with customers’ networks cannot assure complete protection from computer viruses, break-ins and other disruptive problems. The occurrence of
these problems may result in claims against NTS or us or liability on our part. These claims, regardless of their ultimate outcome, could result in costly litigation and could harm our business and
reputation and impair NTS’ ability to attract and retain customers.
NTS could be adversely affected by information security breaches or cyber security attacks.
NTS’ web and cloud services involve the storage and transmission of our customers’ and employees’ proprietary information. NTS’ business relies on its digital technologies, computer and email
systems, software, and networks to conduct its operations. NTS’ technologies, systems and networks may become the target of criminal cyber-attacks or information security breaches that could
result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of NTS or third parties with whom NTS deals, or otherwise
disrupt our or our customers’ or other third parties’ business operations. It is critical to NTS’ business strategy that its facilities and infrastructure remain secure and are perceived by the marketplace
to be secure. Although NTS believes it employs appropriate security technologies, NTS cannot guarantee that the security technologies (including data encryption processes, intrusion detection
systems) it employs or, the comprehensive risk assessments it conducts, or its other internal control procedures will assure the security of its customers’ data. If NTS’ security measures are breached
as a result of third-party action, employee error or otherwise, and as a result, its customers’ data becomes available to unauthorized parties, NTS and our other subsidiaries could incur liability and its
reputation would be damaged, which could lead to the loss of current and potential customers. In addition, NTS will be required to expend significant capital and other resources to detect, remedy,
protect against or alleviate breaches of its network and security, and it may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain
unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, NTS may be unable to anticipate these techniques or
implement adequate preventative measures. For example, in early 2018 following an unauthorized third party misappropriating three of NTS’ domain names, NTS’ management and forensic
investigators determined that attackers compromised a portion of its shared webhosting system, and may have acquired certain customer information limited to its shared webhosting customers,
and/or gained access to certain of its shared webhosting servers. In response, NTS took a range of steps designed to further secure its systems, enhance its security protections, enhance access
controls, and prevent future unauthorized activity. For more information on risks relating to cybersecurity, see “Risks Related to Cybersecurity.”
NTS’ business depends on Microsoft Corporation and others for the licenses to use software as well as other intellectual property in the managed technology solutions business.
NTS’ managed technology business is built on technological platforms relying on the Microsoft Windows® products and other intellectual property that NTS currently licenses. As a result, if NTS is
unable to continue to have the benefit of those licensing arrangements or if the products upon which its platform is built become obsolete, its business could be materially and adversely affected.
60
RISKS RELATED TO OUR SUBSIDIARIES - NEWTEK INSURANCE AGENCY (NIA)
NIA depends on third parties, particularly property and casualty insurance companies, to supply the products marketed by its agents.
NIA contracts with property and casualty insurance companies typically provide that the contracts can be terminated by the supplier without cause. NIA’s inability to enter into satisfactory
arrangements with these suppliers or the loss of these relationships for any reason would adversely affect the results of its insurance business. Also, NIA’s inability to obtain these products at
competitive prices could make it difficult for it to compete with larger and better capitalized providers of such insurance services.
If NIA fails to comply with government regulations, its insurance agency business would be adversely affected.
NIA insurance agency business is subject to comprehensive regulation in the various states in which it conducts business. NIA’s success will depend in part upon its ability to satisfy these regulations
and to obtain and maintain all required licenses and permits. NIA’s failure to comply with any statutes and regulations could have a material adverse effect on it. Furthermore, the adoption of
additional statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations could have a material adverse effect on it.
NIA does not have any control over the commissions it earns on the sale of insurance products which are based on premiums and commission rates set by insurers and the conditions prevalent
in the insurance market.
NIA earns commissions on the sale of insurance products. Commission rates and premiums can change based on the prevailing economic and competitive factors that affect insurance underwriters. In
addition, the insurance industry has been characterized by periods of intense price competition due to excessive underwriting capacity and periods of favorable premium levels due to shortages of
capacity. We cannot predict the timing or extent of future changes in commission rates or premiums or the effect any of these changes will have on the operations of NIA.
If NIA fails to comply with government regulations, its insurance agency business would be adversely affected.
NIA insurance agency business is subject to comprehensive regulation in the various states in which it conducts business. NIA’s success will depend in part upon its ability to satisfy these regulations
and to obtain and maintain all required licenses and permits. NIA’s failure to comply with any statutes and regulations could have a material adverse effect on it. Furthermore, the adoption of
additional statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations could have a material adverse effect on it.
RISKS RELATED TO OUR SUBSIDIARIES - NEWTEK PAYROLL AND BENEFIT SOLUTIONS (PMT)
Unauthorized disclosure of employee data, whether through a cyber-security breach of our computer systems or otherwise, could expose PMT to liability and business losses.
PMT collects and stores sensitive data about individuals in order to process the transactions and for other internal processes. If anyone penetrates its network security or the security of the third-party
payroll processing platform in utilizes, or otherwise misappropriates sensitive individual data, PMT could be subject to liability or business interruption. PMT is subject to laws and rules issued by
different agencies concerning safeguarding and maintaining the confidentiality of this information. Its activities have been, and will continue to be, subject to an increasing risk of cyber-attacks, the
nature of which is continually evolving. Cyber-security risks include unauthorized access to privileged and sensitive customer information, including passwords and account information of PMT’
customers. While it subjects its data systems to periodic independent testing and review, PMT cannot guarantee that its systems or the systems of the third-party payroll processing platform in utilizes
will not be penetrated in the future. Experienced computer programmers and hackers may be able to penetrate PMT’ network security or the security of its third-party payroll processing platform, and
misappropriate or compromise our confidential information, create system disruptions, or cause shutdowns. As a result, PMT’ customers’ information may be lost, disclosed, accessed or taken
without its customers’ consent. If a breach of these systems occurs, PMT may be subject to liability, including claims for impersonation or other similar fraud claims. In the event of any such breach,
PMT may also be subject to a class action lawsuit. Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could
damage PMT’ reputation, and the growth of its business could be adversely affected. For more information on risks relating to cybersecurity, see “Risks Related to Cybersecurity.”
61
PMT is subject to risks surrounding Automated Clearing House (“ACH”) payments.
Credit risk in ACH payments arises when a party to a contract fails to deposit funds required to settle the contract. This can occur if a client of PMT suffers losses, enters into bankruptcy or defrauds
PMT. In such an event, PMT could bear the financial burden of settling the customer’s contract.
PMT’s systems may be subject to disruptions that could adversely affect its business and reputation.
PMT’s payroll business relies heavily on its payroll, financial, accounting and other data processing systems. If any of these systems or any of the vendors which supply them fails to operate properly
or becomes disabled even for a brief period of time, PMT could suffer financial loss, a disruption of its business, liability to clients, regulatory intervention or damage to its reputation. PMT has
disaster recovery plans in place to protect its businesses against natural disasters, security breaches, military or terrorist actions, power or communication failures or similar events. Despite PMT’
preparations, its disaster recovery plans may not be successful in preventing the loss of client data, service interruptions, and disruptions to its operations or damage to its important facilities.
If PMT fails to adapt its technology to meet client needs and preferences, the demand for its services may diminish.
PMT operates in industries that are subject to rapid technological advances and changing client needs and preferences. In order to remain competitive and responsive to client demands, PMT
continually upgrades, enhances and expands its existing solutions and services. If PMT fails to respond successfully to technological challenges, the demand for its services may diminish.
PMT could incur unreimbursed costs or damages due to delays in processing inherent in the banking system.
PMT generally determines the availability of customer (employer) funds prior to making payments to employees or taxing authorities, and such employer funds are generally transferred in to its
accounts prior to making payments out. Due to the structure of the banking system however, there are times when PMT may make payroll or tax payments and not immediately receive the funds to do
so from the employer. There can be no assurance that the procedures PMT has in place to prevent these occurrences or mitigate the damages will be sufficient to prevent loss to its business. In
addition, PMT could incur unreimbursed costs or damages due to delays in processing customer payrolls or payroll taxes in a timely manner.
RISKS RELATED TO OUR SUBSIDIARIES - NEWTEK BUSINESS CREDIT SOLUTIONS (NBC)
An unexpected level of defaults in NBC’s accounts receivables or inventory portfolios would reduce its income and increase its expenses.
If NBC’s level of non-accrual assets in its receivable financing or inventory financing business rises in the future, it could adversely affect its revenue, earnings and cash flow. Non-accrual assets
primarily consist of receivables for which the customer has not made timely payment. In certain situations, NBC may restructure the receivable to permit such a customer to have smaller payments
over a longer period of time. Such a restructuring or non-payment by a receivables or inventory customer will result in lower revenue and less cash available for NBC’ operational activities.
NBC’s reserve for credit losses may not be sufficient to cover unexpected losses.
NBC’s business depends on the behavior of its customers. In addition to its credit practices and procedures, NBC maintains a reserve for credit losses on its accounts receivable and inventory
portfolios, which it has judged to be adequate given the receivables it purchases. NBC periodically reviews its reserve for adequacy considering current economic conditions and trends, charge-off
experience and levels of non-accrual assets, and adjusts its reserve accordingly. However, because of recent unstable economic conditions, its reserves may prove inadequate, which could have a
material adverse effect on its financial condition and results of operations.
62
RISKS RELATED TO OUR CAPCO BUSINESS
The Capco programs and the tax credits they provide are created by state legislation and implemented through regulation, and such laws and rules are subject to possible action to repeal or
retroactively revise the programs for political, economic or other reasons. Such an attempted repeal or revision would create substantial difficulty for the Capco programs and could, if ultimately
successful, cause us material financial harm.
The tax credits associated with the Capco programs and provided to our Capcos’ investors are to be utilized by the investors over a period of time, which is typically ten years. Much can change
during such a period and it is possible that one or more states may revise or eliminate the tax credits. Any such revision or repeal could have a material adverse economic impact on our Capcos, either
directly or as a result of the Capco’s insurer’s actions. Any such final state action that jeopardizes the tax credits could result in the provider of our Capco insurance assuming partial or full control of
the particular Capco in order to minimize its liability under the Capco insurance policies issued to our investors.
Because our Capcos are subject to requirements under state law, a failure of any of them to meet these requirements could subject the Capco and our shareholders to the loss of one or more
Capcos.
Despite the fact that we have met all applicable minimum requirements of the Capco programs in which we still participate, each Capco remains subject to state regulation until it has invested 100%
of its funds and otherwise remains in full legal compliance. There can be no assurance that we will continue to be able to do so. A major regulatory violation, while not fatal to our Capco business,
would materially increase the cost of operating the Capcos.
We know of no other publicly-held company that sponsors and operates Capcos as a part of its business. As such, there are, to our knowledge, no other companies against which investors may
compare our Capco business and its operations, results of operations and financial and accounting structures.
In the absence of any meaningful peer group comparisons for our Capco business, investors may have a difficult time understanding and judging the strength of our business. This, in turn, may have a
depressing effect on the value of our stock.
RISKS RELATED TO OUR SECURITIES
As of December 31, 2023, our CEO beneficially owns and has shared voting power over approximately 5.3% of our common stock, and may be able to exercise significant influence over the
outcome of most shareholder actions.
Because of his ownership of and shared voting power over our stock, Barry Sloane, our Chairman, Chief Executive Officer and President, may be able to exercise significant influence over actions
requiring shareholder approval, including the election of directors, the adoption of amendments to the certificate of incorporation, approval of stock incentive plans and approval of major transactions
such as a merger or sale of assets. This could delay or prevent a change in control of the Company, deprive our shareholders of an opportunity to receive a premium for their common stock as part of
a change in control and have a negative effect on the market price of our common stock.
Our common stock price may be volatile and may decrease substantially.
The trading price of our common stock may fluctuate substantially. The price of our common stock may be higher or lower depending on many factors, some of which are beyond our control and
may not be directly related to our operating performance. These factors include, but are not limited to, the following:
•
•
•
•
•
price and volume fluctuations in the overall stock market from time to time;
investor demand for our stock;
significant volatility in the market price and trading volume of securities of other companies in our sector, which are not necessarily related to the operating performance of these companies;
changes in regulatory policies or tax guidelines with respect to financial holding companies;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
63
•
•
•
•
changes, or perceived changes, in the value of our investments;
departures of key Company personnel;
operating performance of companies comparable to us; or
general economic conditions and trends and other external factors.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of
our stock price once a market for our stock is established, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s
attention and resources from our business.
Future issuances of our common stock or other securities, including preferred shares, may dilute the per share book value of our common stock or have other adverse consequences to our
common shareholders.
Our Board has the authority, without the action or vote of our shareholders, to issue all or part of the approximately 175,319,600 authorized but unissued shares of our common stock. Our business
strategy relies in part upon the acquisitions of businesses using the resources available to us, including our common stock. Additionally, we anticipate granting additional options or restricted stock
awards to our employees and directors in the future pursuant to the 2023 Stock Incentive Plan, which was approved by the Board in April 2023 and the Company’s shareholders on June 14, 2023. The
2023 Stock Incentive Plan reserved a maximum of 3,000,000 shares of common stock for issuance to our employees and directors, and 2,917,523 shares of common stock remain available for
issuance as of December 31, 2023. Option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms.
We may also issue additional securities, through public or private offerings, in order to raise capital. Future issuances of our common stock will dilute the percentage of ownership interest of current
shareholders and could decrease the per share book value of our common stock.
Pursuant to our amended and restated charter, our Board is authorized to classify any unissued shares of stock and reclassify any previously classified but unissued shares of stock of any class or
series from time to time, into one or more classes or series of stock, including preferred stock. If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital
structure, preferred shareholders would have separate voting rights on certain matters and might have other rights, preferences, or privileges more favorable than those of our common shareholders,
and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock
or otherwise be in your best interest. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage
ownership of our shareholders at that time will decrease, and shareholders may experience dilution.
The authorization and issuance of “blank check” preferred shares could have an anti-takeover effect detrimental to the interests of our shareholders.
Our certificate of incorporation allows our Board to issue preferred shares with rights and preferences set by the Board without further shareholder approval. The issuance of these “blank check”
preferred shares could have an anti-takeover effect detrimental to the interests of our shareholders. For example, in the event of a hostile takeover attempt, it may be possible for management and the
Board to impede the attempt by issuing the preferred shares, thereby diluting or impairing the voting power of the other outstanding common shares and increasing the potential costs to acquire
control of us. Under our certificate of incorporation, our Board has the right to issue any new shares, including preferred shares, without first offering them to the holders of common shares, as they
have no preemptive rights.
64
Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder
execution of investment strategy and impact our stock price.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Stockholder activism, which
could take many forms or arise in a variety of situations, has been increasing recently. While we are currently not subject to any securities litigation or shareholder activism, due to the potential
volatility of our stock price and for a variety of other reasons, we may in the future become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism,
including potential proxy contests, could result in substantial costs and divert management’s and our board of directors’ attention and resources from our business. Additionally, such securities
litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain
qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters. Further, our stock price could be
subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
The Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change in control of Newtek or the removal of our
directors. We are subject to the Maryland Business Combination Act. Our Board has adopted a resolution exempting from the Business Combination Act any business combination between us and
any other person, subject to prior approval of such business combination by our Board, including approval by a majority of our independent directors. If the resolution exempting business
combinations is repealed or our Board does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the
difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our stock by any person. If we amend our Bylaws to repeal the
exemption from the Maryland Control Share Acquisition Act, the Maryland Control Shares Acquisition Act may make it more difficult for a third party to obtain control of us and increase the
difficulty of consummating such a transaction.
We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our Board in three classes serving staggered three-
year terms and authorizing our Board to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, to amend our charter without
shareholder approval and to increase or decrease the number of shares of stock that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay,
defer or prevent a transaction or a change in control that might otherwise be in the best interests of our shareholders.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
All of the common stock held by our executive officers and directors, represents approximately 1,663,000 shares, or approximately 7% of our total outstanding shares as of December 31, 2023. Such
shares are generally freely tradable in the public market. Sales of substantial amounts of our common stock, or the availability of such common stock for sale, could adversely affect the prevailing
market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.
65
RISKS RELATED TO OUR NOTES
The 2024 Notes, the 2025 Notes the 2026 Notes, and the 2028 Note, together, the “Notes,” are unsecured and therefore are effectively subordinated to any secured indebtedness we have
outstanding or may incur in the future.
In July 2019, February 2021 and May 2021, we issued $63.25 million, $5.0 million and $10.0 million in aggregate principal amount of the 2024 Notes, respectively. In December 2021, we redeemed
$40.0 million in aggregate principal amount of the 2024 Notes. In January 2021, we issued $115.0 million in aggregate principal amount of the 2026 Notes. In November 2020, we issued $5.0 million
in aggregate principal amount of the 2025 6.85% Notes and in January 2021 we issued an additional $10.0 million in aggregate principal amount of the 2025 6.85% Notes. In May 2022, we redeemed
$15.0 million in aggregate principal amount of the 2025 6.85% Notes. In March 2022, we issued $15.0 million in aggregate principal amount of the 2025 5.00% Notes and in May 2022 we issued an
additional $15.0 million in aggregate principal amount of the 2025 5.00% Notes. In January 2023, we issued $50.0 million aggregate principal amount of the 2025 8.125% Notes. In August 2023, we
issued $40.0 million in aggregate principal amount of the 2028 8.00% Notes. The Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes are
effectively subordinated to any secured indebtedness we or our subsidiaries have outstanding or may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant
security). In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the existing or future secured indebtedness of
our subsidiaries may assert rights against the assets pledged to secure that indebtedness to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the
holders of the Notes.
The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The Notes are obligations exclusively of the Company and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes are not required to be guaranteed by any
subsidiaries we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes.
Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors) and holders of preferred stock, if any, of our subsidiaries will
have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we are
recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or
other liabilities of any such subsidiary senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of any of our
subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise.
The indentures under which the Notes were issued contains limited protection for holders of the Notes.
The indentures under which the Notes were issued offers limited protection to holders of the Notes. The terms of the indentures and the Notes generally do not restrict our or any of our subsidiaries’
ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the Notes. In particular, the
terms of the indentures and the Notes generally do not place any restrictions on our or our subsidiaries’ ability to:
•
issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes,
(2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes, (3) indebtedness of ours that is guaranteed by one or
more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to
our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or
other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief
granted to us by the SEC, pursuant to the indentures under which the 2024 and 2026 Notes were issued. Currently, these provisions generally prohibit us from making additional borrowings,
including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings.
See “Item 1A. Risk Factors -Risks Related to Our Notes - We are subject to 150% asset coverage requirements due to covenants contained in the indentures under which the 2024 and 2026
Notes were issued;”
66
•
•
•
•
pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated
indebtedness;
sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
enter into transactions with affiliates;
create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
• make investments; or
•
create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
In addition, the indentures do not require us to offer to purchase the Notes in connection with a change of control, asset sale or any other event. Furthermore, the terms of the indentures and the
Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do
not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity. Our ability to recapitalize, incur additional debt
and take a number of other actions that are not limited by the terms of the Notes may have important consequences for holders of the Notes, including making it more difficult for us to satisfy our
obligations with respect to the Notes or negatively affecting the trading value of the Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indentures and the Notes, including additional covenants and events of default. The issuance or
incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.
If we default on our obligations to pay other indebtedness that we may incur in the future, we may not be able to make payments on the Notes.
In the future, we may enter into agreements to incur additional indebtedness, including a secured credit facility. A default under such agreements to which we may be a party that is not waived by the
required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease
the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and
interest on such future additional indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing such future
additional indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all
the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders of other debt we may incur in the future could elect to terminate their commitments, cease
making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations
could proceed against the collateral securing the debt. Because any future credit facilities likely will have customary cross-default provisions, if the indebtedness under any future credit facility is
accelerated, we may be unable to repay or finance the amounts due.
We may choose to redeem the Notes when prevailing interest rates are relatively low.
We may choose to redeem the remaining 2024 Notes, as well as the 2025 5.0% Notes, 2026 Notes and 2028 Notes outstanding, especially if prevailing interest rates are lower than the respective
interest rates on the 2024 Notes, 2025 Notes, 2026 Notes or 2028 Notes. If prevailing rates are lower at the time of redemption, holders of the Notes may not be able to reinvest the redemption
proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Notes as
the optional redemption date or period approaches.
On February 22, 2021, the Company redeemed all $57.5 million in aggregate principal amount of the 2023 Notes on the redemption date at 100% of their principal amount ($25 per Note), plus the
accrued and unpaid interest thereon from December 31, 2020 through, but excluding, the redemption date.
67
On December 29, 2021, the Company partially redeemed $40.0 million in aggregate principal amount of the $78.25 million of 2024 Notes outstanding at 100% of their principal amount ($25 per
Note), plus the accrued and unpaid interest thereon from November 1, 2021 through, but excluding, the redemption date.
On March 31, 2022, the Company redeemed all $15.0 million in aggregate principal amount of the 2025 6.85% Notes on the redemption date at 100% of their principal amount ($25 per Note), plus
the accrued and unpaid interest thereon from February 28, 222 through, but excluding, the redemption date.
The trading market or market value of our publicly traded debt securities may fluctuate.
The 2024, 2026 and 2028 Notes are new issues of debt securities listed on the Nasdaq Global Market under the symbols “NEWTL,” “NEWTZ,” and “NEWTI,” respectively. Although the Notes are
listed on Nasdaq, we cannot assure you that a trading market for our publicly issued debt securities will be maintained. In addition to our creditworthiness, many factors may materially adversely
affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following:
•
•
•
•
•
•
the time remaining to the maturity of these debt instruments;
the outstanding principal amount of debt securities with terms identical to these debt securities;
the ratings assigned by the national statistical rating agencies;
the general economic environment;
the supply of debt securities trading in the secondary market, if any;
the level, direction and volatility of market interest rates generally; and
• market rates of interest higher or lower than rates borne by the debt securities.
You should be aware that there may be a limited number of buyers should holders of the Notes decide to sell the securities. This too may materially adversely affect the market value of the debt
securities of the trading market for the debt securities.
We are subject to 150% asset coverage requirements due to covenants contained in the indentures under which the 2024 and 2026 Notes were issued.
The 2024 and 2026 Notes were issued pursuant to a base indenture, dated as of September 23, 2015 (the “Base Indenture”), and a fourth supplemental indenture (the “Fourth Supplemental
Indenture”), dated as of July 29, 2019, and a Seventh Supplemental Indenture dated as of January 22, 2021, respectively, each between us and U.S. Bank National Association, as trustee. The Fourth
Supplemental Indenture and Seventh Supplemental Indenture include covenants requiring us to comply with (regardless of whether we are subject to) the asset coverage requirements set forth in
Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a) of the 1940 Act (or any successor provisions), to comply with (regardless of whether we are subject to) the restrictions on dividends,
distributions and purchase of capital stock set forth in Section 18(a)(1)(B) of the 1940 Act as modified by Section 61(a) of the 1940 Act and to provide financial information to the holders of the
Notes and the Trustee if we should no longer be subject to the reporting requirements under the Exchange Act. As a result, we are subject to 150% asset coverage requirements under the 1940 Act
even though, effective January 6, 2023, we are not regulated as a BDC.
Under these requirements we are only permitted to issue multiple classes of indebtedness and one class of shares senior to our common stock if our asset coverage, as defined in the 1940 Act, is at
least equal to 150% immediately after each such issuance.
The ratio of our total assets (less total liabilities other than indebtedness represented by senior securities) to our total indebtedness represented by senior securities plus preferred stock, if any, must be
at least 150%.
RISKS RELATED TO CYBERSECURITY
We could be adversely affected by information security breaches or cyber security attacks.
Our business operations and our subsidiaries’ business operations rely upon secure information technology systems for data processing, storage and reporting. Despite security and controls design,
implementation and updating, such information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or
information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition.
68
In addition, our business operations involve the storage and transmission of Newtek, customer and employee proprietary information. Our businesses rely on our digital technologies, computer and
email systems, software, and networks to conduct operations. Our technologies, systems and networks may become the target of criminal cyber-attacks or information security breaches that could
result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of us or third parties with whom we deal, or otherwise disrupt
our or our customers’ or other third parties’ business operations. Further, the use of AI by cybercriminals may increase the frequency and severity of cyber-attacks against us or our third-party
vendors and clients. It is critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure.
Although we believe we and our IT providers employ appropriate security technologies (including data encryption processes, intrusion detection systems), and conduct comprehensive risk
assessments and other internal control procedures to assure the security of our and our customers’ data, we cannot guarantee that these measures will be sufficient for this purpose. If our and our IT
provider’s security measures are breached as a result of third-party action, employee error or otherwise, and as a result our or our customers’ data becomes available to unauthorized parties, we could
incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be
required to expend significant capital and other resources to detect, remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely
manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a
target, we may be unable to anticipate these techniques or implement adequate preventative measures.
Additionally, the increased use of mobile and cloud technologies due to the increased amount of remote work resulting from the COVID-19 pandemic could heighten these and other operational risks
as certain aspects of the security of such technologies may be complex and unpredictable.
We maintain a cybersecurity risk management program that is overseen by the Chief Information Security Officer (“CISO”) of NTS. The CISO is chiefly responsible for developing, maintaining, and
enforcing cybersecurity and cyber risk-related policies; ensuring the Company and its subsidiaries satisfy requirements of relevant regulations, industry standards, and third-party risk assessment
requirements; keeping abreast of developing security threats, and helping both the Board and the board of directors of Newtek Bank understand potential security problems that might arise from the
changing threat landscape; and overseeing and implementing regular security awareness training of all employees on cybersecurity, and supporting effective communication with users to limit
security vulnerabilities. The CISO regularly reports to the Risk Committee of the Board and the risk committee of the board of directors of Newtek Bank on the state of our cybersecurity risk
management program and provides updates on cybersecurity matters. See “ITEM I.C Cybersecurity.”
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any
information security vulnerabilities. Although we have insurance in place that covers such incidents, the cost of a breach or cyber-attack could well exceed any such insurance coverage.
The failure in cyber-security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct
business effectively.
The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster
recovery systems, or consequential employee error, could have an adverse effect on our ability to communicate or conduct business, negatively impacting our operations and financial condition. This
adverse effect can become particularly acute if those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of
our data.
We and our subsidiaries depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems,
networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access, use, alteration, or destruction, such as from physical and electronic break-ins or
unauthorized tampering. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, and other information processed, stored in, and transmitted through our
computer systems and networks. Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation, regulatory penalties, client dissatisfaction
or loss, reputational damage, and increased costs associated with mitigation of damages and remediation. If unauthorized parties gain access to such information and technology systems, they may be
able to steal, publish, delete or modify private and sensitive information, including nonpublic personal information related to stockholders (and their beneficial owners) and material nonpublic
information. The systems we have implemented to manage risks relating to these types of events could prove to be inadequate and, if compromised, could become inoperable for extended periods of
time, cease
69
to function properly or fail to adequately secure private information. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other
espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being addressed appropriately. The failure of
these systems or of disaster recovery plans for any reason could cause significant interruptions in our and our subsidiaries’ operations and result in a failure to maintain the security, confidentiality or
privacy of sensitive data, including personal information relating to stockholders, material nonpublic information and other sensitive information in our possession.
A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we
conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs
may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.
Third parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certain functions and these relationships allow for the storage and processing
of our information, as well as client, counterparty, employee, and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in
unauthorized access, loss, exposure, destruction, or other cybersecurity incident that affects our data, resulting in increased costs and other consequences as described above.
In addition, cybersecurity has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches
involving certain types of personal data. For example, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that
they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on annual basis material information regarding their
cybersecurity risk management, strategy, and governance. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to
investors, regulatory intervention or reputational damage.
We and our service providers continue to be impacted by the increase in remote work in response to the global COVID-19 pandemic. Policies of extended periods of remote working, whether by us or
by our service providers, could strain technology resources, introduce operational risks and otherwise heighten the risks described above. Remote working environments may be less secure and more
susceptible to hacking attacks, including phishing and social engineering attempts. Accordingly, the risks described above are heightened under current conditions.
We and our subsidiaries are subject to risks associated with “phishing” and other cyber-attack.
Our business and the business of our subsidiaries relies upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design,
implementation and updating, ours and our subsidiaries’ information technology systems could become subject to cyber-attacks. Cyber-attacks include, but are not limited to, gaining unauthorized
access to digital systems (e.g., through “hacking”, malicious software coding, social engineering or “phishing” attempts) for purposes of misappropriating assets or sensitive information, corrupting
data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of service attacks on websites (i.e.,
efforts to make network services unavailable to intended users). Our employees have been and expect to continue to be the target of fraudulent calls, emails and other forms of activities. The result of
these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen information, misappropriation of assets, increased cybersecurity protection and insurance
costs, litigation and damage to our business relationships, regulatory fines or penalties, or other adverse effects on our business, financial condition or results of operations. In addition, we may be
required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks
related to cyber-attacks.
Our and our service providers’ increased use of mobile and cloud technologies could heighten the risk of a cyber-attack as well as other operational risks, as certain aspects of the security of such
technologies may be complex, unpredictable or beyond their control. Our and other service providers’ reliance on mobile or cloud technology or any failure by mobile technology and cloud service
providers to adequately safeguard their systems and prevent cyber-attacks could disrupt their operations and result in misappropriation, corruption or loss of personal, confidential or proprietary
information. In addition, there is a risk that encryption and other protective measures against cyber-attacks may be circumvented, particularly to the extent that new computing technologies increase
the speed and computing power available.
70
GENERAL RISK FACTORS
We may experience fluctuations in our quarterly and annual results.
We may experience fluctuations in our quarterly and annual operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment
criteria, the interest rate payable on the debt securities we acquire, the default rate of such securities, the level of portfolio dividend and fee income, the level of our expenses, variations in and the
timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results
for any period should not be relied upon as being indicative of performance in future periods.
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
We and our subsidiaries are subject to regulation by laws at the local, state, and federal levels. These laws and regulations, as well as their interpretation, could change from time to time, including as
the result of interpretive guidance or other directives from the U.S. President and others in the executive branch, and new laws, regulations and interpretations could also come into effect. For
example, the current U.S. presidential administration could support an enhanced regulatory agenda that imposes greater costs on all sectors and on financial services companies in particular. Any such
new or changed laws or regulations could have a material adverse effect on our business, and political uncertainty could increase regulatory uncertainty in the near term.
Changes to the laws and regulations governing our permitted investments may require a change to our investment strategy. Such changes could differ materially from our strategies and plans as set
forth in this report and may shift our investment focus from the areas of expertise of our Adviser. Thus, any such changes, if they occur, could have a material adverse effect on our results of
operations and the value of your investment in us.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our securities and our
ability to make distributions to our shareholders.
Our business is highly dependent on our communications and information systems. Certain of these systems are provided to us by third-party service providers. Any failure or interruption of such
systems, including as a result of the termination of an agreement with any such third party service provider, could cause delays or other problems in our activities. This, in turn, could have a material
adverse effect on our operating results and negatively affect the market price of our securities and our ability to make distributions to our shareholders.
We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number
of areas, such as environmental stewardship, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could
impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations. A variety of organizations measure
the performance of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such
assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of such ESG measures to their investment decisions.
Additionally, new regulatory initiatives related to ESG could adversely affect our business. The SEC has proposed rules that,
among other matters, would establish a framework for reporting of climate-related risks. At this time, there is uncertainty regarding the scope of such proposals or when they would become effective
(if at all). Compliance with any new laws or regulations increases our regulatory burden and could make compliance more difficult and expensive, affect the manner in which we or our subsidiaries
conduct our businesses and adversely affect our profitability.
71
The effect of global climate change may impact our operations and the operations of our subsidiaries and clients.
Climate change is widely considered to be a significant threat to the global economy. Climate change creates physical and financial risk and some we, or subsidiaries or our clients may be adversely
affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected
by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our
subsidiaries or clients if the use of energy products or services is material to their business. A decrease in energy use due to weather changes may affect some of our subsidiaries’ or clients’ financial
condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service
interruptions.
In December 2015 the United Nations, of which the U.S. is a member, adopted a climate accord (the "Paris Agreement") with the long-term goal of limiting global warming and the short-term goal of
significantly reducing greenhouse gas emissions. On November 4, 2016, the past administration announced that the U.S. would cease participation in the Paris Agreement with the withdrawal taking
effect on November 4, 2020. However, on January 20, 2021, President Joseph R. Biden signed an executive order to rejoin the Paris Agreement. As a result, some we, our subsidiaries or our clients
may become subject to new or strengthened regulations or legislation, which could increase their operating costs and/or decrease their revenues.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 1C. CYBERSECURITY.
Risk Management and Strategy
NewtekOne maintains an enterprise-wide risk-management (“ERM”) framework to identify, measure, mitigate, monitor and report material risks to NewtekOne. Our ERM process includes
participation by our senior management and employees across NewtekOne and its consolidated subsidiaries and is overseen by our Board. Cybersecurity has been identified among the material risks
in our business and the following approach has been developed to address cybersecurity.
We have developed an enterprise-wide cybersecurity risk management system and strategy to safeguard our assets and operations, including the protection of the confidentiality of nonpublic,
sensitive personal and business information and the integrity and security of our information systems, as follows:
Assessment, Identification, and Management of Material Risks:
1. Comprehensive Risk Assessments: We conduct regular and comprehensive assessments to identify potential cybersecurity risks to our organization. These assessments encompass internal
systems, networks, applications, and data repositories, as well as external threats and vulnerabilities within the broader digital ecosystem.
2. Threat Intelligence Monitoring: We continuously monitor threat intelligence sources to stay abreast of emerging cyber threats and trends. This proactive approach enables us to anticipate
potential risks and take preemptive measures to mitigate them.
3. Risk Prioritization: Following the assessment phase, we prioritize identified risks based on their potential impact on our operations, data integrity, confidentiality, and reputation. This risk-
based approach allows us to allocate resources effectively and focus on addressing the most significant threats first.
4. Mitigation Strategies: We develop and implement robust mitigation strategies tailored to address specific cybersecurity risks. These strategies may include the deployment of technical
controls, such as firewalls, intrusion detection systems, and encryption protocols, as well as the implementation of policies, procedures, and employee training programs to promote
cybersecurity awareness and adherence to best practices.
Integration into Overall Risk Management System:
Our cybersecurity risk management processes are fully integrated into our overall risk management system and corporate governance framework. This integration ensures that cybersecurity
considerations are embedded within our strategic decision-making processes and are aligned with our broader business objectives. By integrating cybersecurity into our overall risk management
system, we promote a comprehensive approach to risk mitigation and resilience-building across the organization.
72
Engagement of Assessors, Consultants, and Auditors:
1. External Expertise: We recognize the value of external expertise in assessing and enhancing our cybersecurity posture. To complement the internal capabilities of our Chief Information
Security Officer (“CISO”), Chief Technology Officer (“CTO”) and their team of professionals, we engage assessors, consultants, auditors, and other third-party experts with specialized
knowledge in cybersecurity. These external stakeholders conduct independent assessments, penetration testing, vulnerability scans, and audits to evaluate the effectiveness of our
cybersecurity controls and identify areas for improvement.
2. Continuous Improvement: The insights and recommendations provided by external assessors and consultants inform our ongoing efforts to strengthen our cybersecurity defenses. We
prioritize the implementation of their recommendations, ensuring that our cybersecurity measures remain robust and adaptive to evolving threats.
Oversight of Third-Party Service Providers:
1. Vendor Risk Management: We recognize that third-party service providers may introduce additional cybersecurity risks to our organization. As such, we have established a vendor risk
management program to assess and monitor the cybersecurity posture of our third-party vendors and partners.
2. Due Diligence: Prior to engaging with third-party service providers, we conduct due diligence assessments to evaluate their cybersecurity controls, practices, and compliance with industry
standards and regulations. This due diligence process includes assessing the vendor's security policies, procedures, incident response capabilities, and contractual obligations related to
cybersecurity.
3. Ongoing Monitoring: We continuously monitor the cybersecurity performance of our third-party vendors throughout the duration of our engagement. This includes regular assessments,
audits, and compliance reviews to ensure that vendors adhere to agreed-upon cybersecurity standards and contractual obligations.
4. Remediation and Escalation: In the event that cybersecurity risks or deficiencies are identified within our third-party vendor ecosystem, we work collaboratively with the vendor to address
and remediate these issues in a timely manner. Depending on the severity of the risk, we may escalate concerns to senior management or terminate the vendor relationship if necessary.
Governance
Our Board oversees material risks facing the Company. For some categories of risk, the Board has empowered a committee to provide more focused oversight. In the case of cybersecurity and
technology risk, the Board’s Risk Committee has that responsibility.
The Risk Committee is informed of risks from cybersecurity threats through regular reports from the Company’s management, including our CISO and CTO. Our CISO and CTO, who are employees
of our subsidiary NTS, oversee our cybersecurity risk management program. The CISO is chiefly responsible for developing, maintaining, and enforcing cybersecurity and cyber risk-related policies;
ensuring the Company and its subsidiaries satisfy requirements of relevant regulations, industry standards, and third-party risk assessment requirements; keeping abreast of developing security
threats, and helping both the Board and the Risk Committee understand potential security problems that might arise from the changing threat landscape; and overseeing and implementing regular
security awareness training of all employees on cybersecurity, and supporting effective communication with users to limit security vulnerabilities. The CISO regularly reports to the Risk Committee,
as well as the risk committee of the board of directors of Newtek Bank, on the state of our cybersecurity risk management program and provides updates on cybersecurity matters.
The Risk Committee also receives regular reports on how management identifies, assesses, and manages cybersecurity and broader technology risks. The Risk Committee reviews these reports and
discusses them with management. The Risk Committee reports to the full Board on key aspects of management’s presentations on cybersecurity and broader technology risks. All members of the
Board have access to written cybersecurity reports that are provided to the Risk Committee.
73
While our Board and Risk Committee oversee risk, our senior leadership is responsible for identifying, assessing, and managing our exposure to risks from cybersecurity threats. Accountability of our
cybersecurity program is housed within our subsidiary NTS, which is led by our CTO. Reporting to our CTO is the CISO, the individual who provides day-to-day oversight of our cybersecurity
program. Our CISO is responsible for assessing and managing material risks from cybersecurity threats, including monitoring the prevention, detection, mitigation and remediation of cybersecurity
threats. Our CISO oversees a team that regularly communicates with respect to the prevention, detection, mitigation and remediation of cybersecurity threats and incidents. The CISO’s team consists
of individuals that have knowledge, skills and expertise to respond to a cybersecurity incident. Our CISO coordinates with the Company’s and our subsidiaries’ executive officers relating to
potentially material cybersecurity incidents and regularly discusses with the Risk Committee the effectiveness of the Company’s technology security, capabilities for disaster recovery, data protection,
cyber threat detection and cyber incident response and management of technology-related compliance risks.
Our CISO is a Certified Information System Security Professional (CISSP) with decades of experience with technology in security, architecture, infrastructure and support in the financial, education,
healthcare and verticals. He is a results driven leader who has managed multimillion dollar projects and solutions to successful completion. Our CTO has over 25 years of experience in enterprise
technology services with expertise in managed services, private cloud, service operations, and security. He is committed to driving reliability of services while prioritizing robust security measures.
74
Table of Contents
ITEM 2. PROPERTIES.
We conduct our principal business activities in facilities leased from unrelated parties at market rates. Our headquarters are located in Boca Raton, Florida. Our operating subsidiaries have properties
which are material to the conduct of their business as noted below. In addition, our Capcos maintain offices in each of the states in which they operate.
Below is a list of our leased offices and space as of December 31, 2023 which are material to the conduct of our business:
Location
4800 T Rex Avenue
Boca Raton, FL 33431
1981 Marcus Avenue
Lake Success, NY 11042
14 East Washington Street
Orlando, FL 32801
1111 Brickell Avenue, Suite 135
Miami, Florida 33131
ITEM 3. LEGAL PROCEEDINGS.
Lease expiration
April 2026
April 2027
Month to Month
February 2027
Purpose
Approximate square feet
Corporate headquarters and NSBF lending operations
Lending operations, corporate operations, NY Capco offices and subsidiaries’
offices
Lending operations
Main office Newtek Bank
7,800
44,800
1,700
1,800
Refer to “NOTE 14—COMMITMENTS AND CONTINGENCIES” within the accompanying Notes to the Consolidated Financial Statements, which is incorporated by reference herein. While the
final outcomes of legal proceedings are inherently unpredictable, management is currently of the opinion that the outcomes of pending and threatened matters will not have a material effect on the
Company’s business, consolidated financial position, results of operations or cash flows as a whole. As of December 31, 2023, the Company had accrued an immaterial reserve that we believe is
appropriate to cover potential settlements.
In addition, as a result of a litigation brought by the Federal Trade Commission (the “FTC”) in October 2012, NMS voluntarily entered into, and is presently operating under, a permanent injunction
with respect to certain of its business practices.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
75
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is traded on the Nasdaq Global Market under the symbol “NEWT.” The last reported price for our common stock on March 28, 2024 was $11.00 per share.
PART II
Holders
As of March 28, 2024, there were approximately 89 holders of record of our common stock.
Sales of Unregistered Securities
We have issued shares of common stock that are not subject to the registration requirements of the Securities Act in connection with the DRIP. During the year ended December 31, 2023 and
December 31, 2022, we issued 15,700 and 95,300 shares of common stock, respectively, valued at $0.2 million and $1.6 million, respectively, to shareholders in connection with the DRIP. On
December 8, 2023, the Company terminated the DRIP.
We also issue shares of common stock that are not subject to the registration requirements of the Securities Act in connection with dividends on unvested restricted stock awards. During the years
ended December 31, 2023 and December 31, 2022 we issued an additional 18,700 and 35,500 shares, respectively, valued at $0.3 million and $0.6 million, respectively, related to dividends on
unvested restricted stock awards.
Dividends
The Company declared common dividends of $0.18 per share for the first, second, third and fourth quarters of 2023. The Company’s ability to continue to pay common stock dividends is subject to,
among other things, Board approval and limitations on capital distributions in the event of a breach of any regulatory capital buffers, with the degree of such restrictions based on the extent to which
the buffers are breached.
We can offer no assurance that we will achieve results that will permit the payment of any cash distributions. See “Item 1. Business.”
Prior to our 2023 taxable year, when the Company operated as a RIC, we were required to timely distribute to our shareholders, in respect of each taxable year, dividends for U.S. federal income tax
purposes of an amount generally at least equal to the Annual Distribution Requirement. Upon satisfying this requirement in respect of a taxable year, we generally were not subject to U.S. federal
income taxes at corporate rates on any income we distributed to our shareholders as dividends for U.S. federal income tax purposes.
76
Table of Contents
The following table summarizes our dividend declarations and distributions from January 1, 2019 through December 31, 2022, after which the Company no longer operates as a RIC:
Record Date
March 15, 2019
June 14, 2019
September 20, 2019
December 16, 2019
March 18, 2020
July 15, 2020
September 21, 2020
December 18, 2020
March 22, 2021
June 15, 2021
September 20, 2021
December 20, 2021
March 21, 2022
June 20, 2022
September 20, 2022
December 20, 2022
Payment Date
March 29, 2019
June 28, 2019
September 30, 2019
December 30, 2019
March 31, 2020
July 31, 2020
September 30, 2020
December 30, 2020
March 31, 2021
June 30, 2021
September 30, 2021
December 30, 2021
March 31, 2022
June 30, 2022
September 30, 2022
December 30, 2022
Distribution Declared
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.40
0.46
0.58
0.71
0.44
0.56
0.58
0.47
0.50
0.70
0.90
1.05
0.65
0.75
0.65
0.70
The Company has a stock-based compensation plan as discussed in NOTE 15—STOCK BASED COMPENSATION. Securities authorized for issuance under equity compensation plans as of
December 31, 2023:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
(a)
Number of securities to be issued upon
exercise of outstanding options, warrants and
rights
(b)
Weighted-average exercise price of
outstanding options, warrants and rights
(c)
Number of securities remaining available for
future issuance under equity compensation
plans (excluding securities reflected in column
(a))
None
None
77
None
None
2,257,528 shares
None
Table of Contents
Stock Performance Graph
The following graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index, the NASDAQ Composite Index, the Russell 2000, and S&P Small Cap 600 for the
period from December 31, 2018 through December 31, 2023. The graph assumes that, on January 1, 2019, a person invested $100 in each of our common stock, the Nasdaq Composite, S&P 500
Index, Russell 2000 and S&P Small Cap 600. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are
invested in like securities.
Source: Bloomberg
ITEM 6. [RESERVED].
78
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Introduction and Certain Cautionary Statements
The following discussion and analysis of our financial condition and results of operations is intended to assist in the understanding and assessment of significant changes and trends related to the
results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and
the accompanying notes as well as Item 1 - Business.
The statements in this Annual Report may contain forward-looking statements relating to such matters as anticipated future financial performance, business prospects, legislative developments and
similar matters. We note that a variety of factors could cause our actual results to differ materially from the anticipated results expressed in the forward-looking statements such as intensified
competition and/or operating problems in our operating business projects and their impact on revenues and profit margins or additional factors as described under “Risk Factors” above.
Executive Overview
Conversion to a Financial Holding Company
As of January 6, 2023, we are a financial holding company that, together with our consolidated subsidiaries, provides a wide range of business and financial solutions under the NewtekOne brand to
the independent business owner market. Effective January 6, 2023, following authorization by our shareholders, we withdrew our previous election to be regulated as a BDC under the 1940 Act. Prior
to such time, we operated as a BDC under the 1940 Act. Contemporaneously with withdrawing our election to be regulated as a BDC, on January 6, 2023, we completed the Acquisition of NBNYC,
a national bank regulated and supervised by the OCC, pursuant to which we acquired from NBNYC’s shareholders all of the issued and outstanding stock of NBNYC. NBNYC has been renamed
Newtek Bank and has become our wholly owned bank subsidiary. In connection with the completion of the Acquisition, we contributed to Newtek Bank $31 million of cash and two of our
subsidiaries, NBL and SBL (subsequently, NBL was merged into SBL). As a result of the Acquisition, we are now a financial holding company subject to the regulation and supervision of the
Federal Reserve and the Federal Reserve Bank of Atlanta. We no longer qualify as a RIC under Subchapter M of the Code for federal income tax purposes and will no longer qualify for accounting
treatment as an investment company. As a result, in addition to Newtek Bank and its consolidated subsidiary SBL, the following former portfolio companies and subsidiaries are now consolidated
non-bank subsidiaries in our financial statements: NSBF; NMS; Mobil Money; NBC; PMT; NIA; TAM; Holdco 6; NCL; NTS and POS. In addition, as a result of commitments made to the Federal
Reserve, we will divest or otherwise terminate the activities conducted by NTS, which includes SIDCO and EWS after a December 31, 2023 merger, within two years of becoming a financial holding
company, subject to any extension of the two-year period. See “Item 1A. Risk Factors – Risks Related to Operating as a Financial Holding Company – We are subject to extensive regulation and
supervision as a financial holding company, which may adversely affect our business.”
®
Effective January 13, 2023, we filed Articles of Amendment amending our Charter to change the name of the Company to “NewtekOne, Inc.”
On April 13, 2023, the Company, NSBF and the SBA entered into the Wind-down Agreement, pursuant to which NSBF has begun to wind-down its operations and NSBF’s SBA 7(a) pipeline of new
loans was transitioned to Newtek Bank. During this wind-down process, NSBF will continue to own the SBA 7(a) loans and PPP Loans currently in its SBA loan portfolio to maturity, liquidation,
charge-off or (subject to SBA’s prior written approval) sale or transfer. SBL will service and liquidate NSBF’s SBA loan portfolio pursuant to an SBA approved lender service provider agreement. In
addition, during the wind-down process, NSBF will be subject to minimum capital requirements established by the SBA, be required to continue to maintain certain amounts of restricted cash
available to meet any obligations to the SBA, have restrictions on its ability to make dividends and distributions to the Company, and remain liable to the SBA for post-purchase denials and repairs on
the guaranteed portions of SBA 7(a) loans originated and sold by NSBF, from the proceeds generated by NSBF’s SBA loan portfolio. The Company has guaranteed certain of NSBF’s obligations to
the SBA.
79
Historical Business Regulation and Taxation
Prior to January 6, 2023, we operated as an internally managed non-diversified closed-end management investment company that elected to be regulated as a BDC under the 1940 Act. As a BDC,
under the 1940 Act, we were not permitted to acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the
acquisition is made, qualifying assets represent at least 70% of the company’s total assets, and we were not permitted to issue senior securities unless the ratio of its total assets (less total liabilities
other than indebtedness represented by senior securities) to its total indebtedness represented by senior securities plus preferred stock, if any, was at least 150%. As of December 31 2022, our asset
coverage was 169%. Although we are no longer regulated as a BDC, certain covenants in our outstanding 2024 and 2026 Notes require us to maintain an asset coverage of at least 150% as long as the
2024 and 2026 Notes are outstanding. See “Item 1A. Risk Factors – Risks Related to Our Notes – We are subject to 150% asset coverage requirements due to covenants contained in the indentures
under which the 2024 and 2026 Notes were issued”.
Additionally, prior to January 6, 2023, due to our status as a BDC, we elected to be treated as a RIC for U.S. federal income tax purposes, beginning with our 2015 tax year. As an entity electing to be
treated as a RIC, we generally did not have to pay U.S. federal income taxes at corporate rates on any ordinary income or capital gains that we distributed to our shareholders as dividends. To
maintain our qualification as a RIC for U.S. federal income tax purposes, we were required to, among other things, meet certain source-of-income and asset diversification requirements (as described
below). In addition, in order to obtain tax benefits applicable to an entity treated as a RIC for U.S. federal income tax purposes, we were required to distribute to our shareholders, for each taxable
year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital
losses.
The Company and its subsidiaries no longer qualify as a RIC for U.S. federal income tax purposes and will file a consolidated U.S. federal income tax return beginning with the 2023 fiscal year.
Financial holding companies are subject to federal and state income taxes in essentially the same manner as other corporations. Taxable income is generally calculated under applicable sections of the
Internal Revenue Code of 1986, as amended (the “Code”), including Sections 581 through 597 that apply specifically to financial institutions. Some modifications are required by state law and the
2017 tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act (i) established a new, flat corporate federal statutory income tax rate of 21%,
(ii) eliminates the corporate alternative minimum tax and allowed the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limited the deduction for net interest
expense incurred by U.S. corporations, (iv) allowed businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminated or reduced
certain deductions related to meals and entertainment expenses, (vi) modified the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and
clarified the definition of a covered employee and (vii) limited the deductibility of deposit insurance premiums. There can be no assurance as to the actual effective rate because it will be dependent
upon the nature and amount of future income and expenses as well as actual investments generating investment tax credits and transactions with discrete tax effects.
From 2012 through December 31, 2022, NSBF, a wholly-owned subsidiary, was consistently the largest non-bank SBA 7(a) lender in the U.S. based on dollar volume of loan approvals, and, as of
December 31, 2022, was the third largest SBA 7(a) lender in the United States. When combining Newtek Bank and NSBF, the Company ranked as the third largest SBA 7(a) lender based on dollar
volume of loans approved as of September 30, 2023, which is the SBA's fiscal year. Historically, NSBF structured its loans so that it could both sell the government guaranteed portions of SBA 7(a)
loans and securitize the unguaranteed portions. This structure generally allowed NSBF to recover its capital and earn excess capital on each loan, typically within a year. NSBF is in the process of
winding down its operations and in April 2023 transitioned SBA 7(a) loan originations to Newtek Bank. NSBF will continue to own the 7(a) Loans and PPP Loans in its SBA loan portfolio to
maturity, liquidation, charge-off or (subject to SBA’s prior written approval) sale or transfer pursuant to the Wind-down Agreement and as described further above.
Additionally, we and our subsidiaries have historically provided a wide range of business and financial solutions to independent business owner relationships, including Business Lending, which
includes SBA 7(a) loans, SBA 504 loans and our alternative lending program loans (formerly referred to as nonconforming conventional loans), Electronic Payment Processing, Managed Technology
Solutions (Cloud Computing), Technology Consulting, eCommerce, Accounts Receivable and Inventory Financing, personal and commercial lines Insurance Services, Web Services, Data Backup,
Storage and Retrieval, and Payroll and Benefits Solutions to independent business owner relationships nationwide across all industries. We support the operations of our subsidiaries by providing
access to our proprietary and patented technology platform, including NewTracker®, our patented prospect management software. We have historically defined SMBs as companies having revenues
of $1 million to $100 million, and we have generally estimated the SMB market to be over 33 million businesses in the United States. We have historically made loans and provided business and
financial solutions to the SMB market through NSBF and our controlled
80
portfolio companies (now subsidiaries). In addition, the Company has begun to rollout the Newtek Advantage®, the One Dashboard for All of Your Business Needs®, which provides independent
business owners with instant access to a team of NewtekOne business and financial solutions experts in the areas of Business Lending, Electronic Payment Processing, Managed Technology
Solutions, personal and commercial lines Insurance Services and Payroll and Benefits Solutions. Moreover, we believe that the Newtek Advantage can provide our independent business owner clients
with analytics on their businesses, as well as transactional capabilities that other organizations do not presently offer.
Following the Acquisition, there can be no assurance regarding our continued lending prospects or operations as a financial holding company. See “Item 1A. Risk Factors – Risks Related to
Operating as a Financial Holding Company – We have a limited operating history as a financial holding company.”
Our common shares are currently listed on the Nasdaq Global Market under the symbol “NEWT”.
Newtek Bank is a national bank and nationally licensed SBA lender under the federal Section 7(a) loan program, and originates, sells and services SBA 7(a) loans. Newtek Bank has been granted
PLP status and is authorized to place SBA guarantees on loans without seeking prior SBA review and approval. Being a national lender with PLP status allows Newtek Bank to expedite the
origination of loans since Newtek Bank is not required to present applications to the SBA for concurrent review and approval. The loss of PLP status would adversely impact our marketing efforts
and ultimately our loan origination volume, which would negatively impact our results of operations. See “Item 1A. Risk Factors - Risks Related to SBA Lending - There can be no guarantee that
Newtek Bank and NSBF will be able to maintain their SBA 7(a) lending licenses” and “Item 1A. Risk Factors - Risks Related to SBA Lending - A governmental failure to fund the SBA could
adversely affect NSBF’s and Newtek Bank’s SBA 7(a) loan originations and our results of operations.”
Economic Developments
We have observed and continue to observe supply chain interruptions, significant labor and resource shortages, commodity inflation, rising interest rates, unrelated bank failures and declines in
depositor confidence in certain types of depository institutions. Additionally geopolitical events, such as trade disruptions, the ongoing war between Russia and Ukraine, the Israel conflict with
Hamas, rising tensions in Asia, and elements of economic and financial market instability in the United States, the United Kingdom, the European Union and China have led to increased economic
uncertainty. One or more of these factors may contribute to increased market volatility, may have long term effects in the United States and worldwide financial markets, and may cause economic
uncertainties or deterioration in the United States and worldwide. Additionally, in the event that the U.S. economy enters into a protracted recession, it is possible that the businesses and industries in
which our customers operate and to which we lend to could experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. While
we are not seeing signs of an overall, broad deterioration in our operating results at this time, there can be no assurance that the performance of certain of our subsidiaries and our current and
prospective borrowers will not be negatively impacted by economic conditions, which could have a negative impact on our future results.
In addition, concerns have arisen with respect to the financial condition of a number of banking organizations in the United States, in particular those with exposure to certain types of depositors,
large portfolios of investment securities and exposures to commercial real estate. On March 10, 2023 Silicon Valley Bank was closed by the California Department of Financial Protection and
Innovation and the Federal Deposit Insurance Corporation was appointed receiver of Silicon Valley Bank. On March 11, 2023, Signature Bank was similarly closed and placed into receivership and
concurrently the Federal Reserve Board announced it will make available additional funding to eligible depository institutions to assist eligible banking organizations with potential liquidity needs.
Subsequently, First Republic Bank entered FDIC receivership and its assets were sold to JPMorgan Chase Bank, N.A. While the Company’s business, balance sheet and depositor profile differ
substantially from banking institutions that are the focus of the greatest scrutiny, the operating environment and public trading prices of financial services sector securities can be highly correlated, in
particular in times of stress, which may adversely affect the trading price of the Company’s common stock and potentially its results of operations.
Income
For the fiscal year ended December 31, 2023, we generated income in the form of interest, net gains on sale of the guaranteed portions of SBA 7(a) loans originated, dividends, electronic payment
processing income, technology and IT support income, servicing income, and other fee income generated by loan originations and by our subsidiaries. We originated loans that typically have terms of
10 to 25 years and bear interest at prime plus a margin. In some instances, we received payments on our loans based on scheduled amortization of the outstanding balances. In addition, we received
repayments of some of our loans
81
prior to their scheduled maturity date. The frequency or volume of these repayments fluctuated significantly from period to period. Our portfolio activity for the fiscal year ended December 31, 2023
also reflects the proceeds of sales of guaranteed portions of SBA 7(a) loans we originated. In addition, we received servicing income related to the guaranteed portions of SBA 7(a) loans which we
originated and sold into the secondary market. These recurring fees were earned daily and recorded when earned. In addition, we generated revenue in the form of loan packaging, loan prepayment,
legal and late fees. We recorded such fees related to loans as other income. Distributions of earnings from our joint ventures were evaluated to determine if the distribution was income, return of
capital or realized gain.
We recognized realized gains or losses on loans based on the difference between the net proceeds from the disposition and the cost basis of the loan without regard to unrealized gains or losses
previously recognized. We recorded current period changes in fair value of loans and assets that were measured at fair value as a component of the net change in unrealized appreciation (depreciation)
on the loans or servicing assets, as appropriate, in the consolidated statements of operations.
Expenses
For the fiscal year ended December 31, 2023, our primary operating expenses were salaries and benefits, interest expense including interest on deposits, electronic payment processing expense,
technology services expenses, origination and servicing and other general and administrative costs, such as professional fees, marketing, referral fees, servicing costs and rent.
The Company’s Alternative Lending Program (Non-Conforming Conventional Commercial Loan Program)
NCL JV: In 2019, we launched a 50/50 joint venture, NCL JV, between NCL, a wholly-owned subsidiary of Newtek, and Conventional Lending TCP Holding, LLC, a wholly-owned, indirect
subsidiary of BlackRock TCP Capital Corp. (Nasdaq:TCPC). NCL JV provided non-conforming conventional commercial and industrial term loans to U.S. middle-market companies and small
businesses. NCL JV ceased funding new loans during 2020. On January 28, 2022, NCL JV closed a conventional commercial loan securitization with the sale of $56.3 million Class A Notes, NCL
Business Loan Trust 2022-1, Business Loan-Backed Notes, Series 2022-1, secured by a segregated asset pool consisting primarily of NCL JV’s portfolio of conventional commercial business loans,
including loans secured by liens on commercial or residential mortgaged properties, originated by NCL JV and NBL. The Notes were rated “A” (sf) by DBRS Morningstar. The Notes were priced at a
yield of 3.209%. The proceeds of the securitization were used, in part, to repay the Deutsche Bank credit facility and return capital to the NCL partners. Refer to NOTE 4—INVESTMENTS for
selected financial information and a schedule of investments of NCL as of December 31, 2023.
TSO JV: On August 5, 2022, NCL and TSO II Booster Aggregator, L.P. (“TSO II”) entered into a joint venture, TSO JV, governed by the Amended and Restated Limited Partnership Agreement for
the TSO JV. NCL and TSO II each committed to contribute an equal share of equity funding to the TSO JV and each have equal voting rights on all material matters. The TSO JV intends to deploy
capital over the course of time with additional leverage supported by a warehouse line of credit for the purpose of investing in non-conforming conventional commercial and industrial term loans
made to middle-market companies as well as small businesses. Refer to NOTE 4—INVESTMENTS for selected financial information and a schedule of investments of TSO JV as of December 31,
2023.
82
Results of Operations for the years ended December 31, 2023 and 2022
Set forth below is a comparison of the results of operations for the years ended December 31, 2023 and 2022, during which years the Company operated as both a financial holding company and a
BDC. For a comparison of the results of operations for the years ended December 31, 2022 and 2021, see the Company's Form 10-K for the year ended December 31, 2022, as filed with the SEC on
March 15, 2023.
Discussion and Analysis of Financial Condition
December 31, 2023 vs. December 31, 2022
The changes in the financial statement line items from December 31, 2022 to December 31, 2023 are impacted by the Company’s transition to a financial holding company. Controlled investments
have been removed from the balance sheet and replaced with the consolidated assets, liabilities and profits and losses of the former portfolio companies, as well as the addition of Newtek Bank
subsequent to the January 6, 2023 acquisition of NBNYC.
ASSETS
Total assets at December 31, 2023 were $1.4 billion, an increase of $430.6 million, or 43.1%, compared to total assets of $1.0 billion at December 31, 2022.
Loans
Loans held for sale, at fair value
Loans held for sale, at LCM
Loans held for investment, at fair value
Loans held for investment, at amortized cost, net of deferred fees and costs
Allowance for credit losses
Loans held for investment, at amortized cost, net
Total Loans
Loans held for sale
December 31, 2023
December 31, 2022
Change
$
$
118,867 $
56,607
469,801
336,305
(12,574)
323,731
969,006 $
19,171 $
—
505,268
—
—
—
524,439 $
99,696
56,607
(35,467)
336,305
(12,574)
323,731
444,567
Loans held for sale, at fair value increased $99.7 million during the year ended December 31, 2023, while loans held for sale, at LCM increased $56.6 million during the same period. The overall
increase was primarily the result of the consolidation of entities that were previously controlled portfolio companies that hold loans, as well as new loan originations, during 2023.
Loans held for investment
At Fair value: Loans held for investment, at fair value was $469.8 million at December 31, 2023 compared to $505.3 million at December 31, 2022. The balance consists primarily of SBA 7(a) loans
as well as $7.1 million of loans that the Company owns 100% as a result of originating the loan and subsequently repurchasing the guaranteed portion from the SBA. As discussed above, as of
January 6, 2023, the Company operates as a financial holding company. Prior to that, we operated as a BDC. As a result of the required accounting methodology changes, we prospectively adjusted
the treatment of certain loans originated by NSBF between the held for investment and held for sale categories, resulting in the decrease from December 31, 2022 to December 31, 2023.
At Amortized Cost: Loans held for investment, at amortized cost consists of Newtek Bank loans acquired as part of the Acquisition as well as new originations in 2023, which contributed to a net
increase of $336.3 million in loans.
83
Credit Quality: The following table presents an analysis of loans held for investment with credit metrics, including a breakdown by days aged:
Credit Quality Ratios
December 31, 2023
%
$
September 30, 2023
%
$
June 30, 2023
$
%
March 31, 2023
%
$
At Amortized Cost
Current
Past Due 31-89 Days
Nonaccrual loans
Total
Allowance for credit losses
At Fair Value
Current
Past Due 31-89 Days
Nonaccrual loans
Total
Past due and nonaccrual loans as % of
Outstanding UPB
Nonperforming Assets, as a percentage of total
assets
Loans HFI, at amortized cost
Loans HFI, at fair value
Other real estate owned
Total Nonperforming Assets
Other Statistics
All Loans HFI 90 days past due still accruing
interest
$
$
$
$
$
$
$
$
$
326,036
4,896
5,373
336,305
(12,574)
385,172
36,455
48,174
469,801
96.9 % $
1.5 %
1.6 %
100.0 %
3.7 %
81.9 % $
7.8 % $
10.3 % $
100.0 % $
274,930
1,401
5,256
281,587
(8,209)
420,673
29,743
42,571
492,987
97.6 % $
0.5 %
1.9 %
100.0 %
2.9 %
85.4 % $
6.0 % $
8.6 % $
100.0 % $
213,938
1,271
3,350
218,559
(4,764)
448,788
24,530
39,100
512,418
97.9 % $
0.6 %
1.5 %
100.0 %
2.2 %
87.6 % $
4.8 % $
7.6 % $
100.0 % $
163,487
—
3,350
166,837
(2,189)
450,846
42,197
39,745
532,788
98.0 %
— %
2.0 %
100.0 %
1.3 %
84.6 %
7.9 %
7.5 %
100.0 %
84,629
75.2 % $
72,314
76.0 % $
63,630
73.1 % $
81,942
76.8 %
5,373
48,174
1,110
54,657
0.4 % $
3.3 %
0.1 %
3.8 % $
5,256
42,571
2,828
50,655
0.4 % $
3.0 %
0.2 %
3.6 % $
3,350
39,100
3,612
46,062
0.2 % $
2.7 %
0.3 %
3.2 % $
3,350
39,745
3,516
46,611
0.3 %
3.1 %
0.3 %
3.7 %
—
— % $
—
— % $
—
— % $
—
— %
84
Commercial real estate exposure
The Company’s loan portfolio consists of loans to SMBs. The Company’s Loans HFI at amortized cost and Loans HFS at LCM include a total of $194.0 million of loans backed by commercial real
estate (CRE) and considered non-owner occupied as of December 31, 2023. The average loan-to-value for this CRE portfolio was 60.8%. The table below presents a detail of the loans considered
non-owner occupied CRE that are not carried at fair value:
HFI at Amortized Cost, net of deferred fees
and costs
HFS at LCM
Total
LTV
by CRE Type
As of December 31, 2023
Loans not backed by CRE
Loans backed by CRE
Total loans
Loans backed by CRE by type:
Retail
1-4 Family
Multifamily
Industrial
Office
1
Construction and land development
Hotel
Other
Total Loans backed by CRE
Unfunded commitments backed by CRE:
1
Construction and land development
Total CRE Exposure
$
$
$
$
203,405 $
132,900
336,305
40,400 $
31,700
29,800
23,400
4,100
—
—
3,500
132,900 $
— $
56,607
56,607
— $
—
—
—
—
51,907
4,700
—
56,607 $
203,405
189,507
392,912
40,400
31,700
29,800
23,400
4,100
51,907
4,700
3,500
189,507
—
4,493
4,493
132,900 $
61,100 $
194,000
1
Construction land development includes first and second lien loans. The LTD on first lien is generally 65%. Second liens are typically taken out by the SBA following project completion.
Goodwill and Intangibles
NBNYC acquisition
Payments segment
Technology segment
Total
Goodwill
December 31, 2023
Intangible Assets
Total
$
$
271 $
13,814
11,800
25,885 $
843 $
13 $
3,379 $
4,235 $
49.7 %
57.6 %
51.3 %
47.3 %
48.9 %
83.1 %
55.3 %
52.8 %
60.3 %
83.1 %
60.8 %
1,114
13,827
15,179
30,120
The Company did not have any goodwill or intangibles as of December 31, 2022, prior to the Acquisition. The $30.1 million increase in goodwill and intangible assets consists of $1.1 million
relating to the Acquisition of Newtek Bank itself, as well as $13.8 million and $15.2 million from the payments and technology segments, respectively, due to the consolidation of previously
unconsolidated portfolio companies that include goodwill and intangibles, such as customer lists and trade names, due to the Company’s reorganization related to the Acquisition.
Settlement Receivable
Settlement receivables increased $62.2 million compared to December 31, 2022. The settlement receivable arises from the guaranteed portions of SBA 7(a) loans that were traded in the period but did
not settle during the current period end and the cash was not received from the purchasing broker during the current period; the amount varies depending on loan origination volume and timing of
sales at quarter end.
85
LIABILITIES
Total liabilities at December 31, 2023, were $1.2 billion, an increase of $556.9 million, or 89.3%, compared to total liabilities of $623.5 million at December 31, 2022.
Deposits
Total deposits were $463.5 million at December 31, 2023, consisting of $10.1 million in non-interest bearing deposits and $453.5 million in interest bearing deposits. The Company did not have any
deposits as of December 31, 2022, prior to the Acquisition.
Borrowings
Borrowings Outstanding
Capital One Lines of Credit:
1
Capital One line of credit - guaranteed
1
Capital One line of credit - unguaranteed
Total Capital One
2
Other Bank Borrowings :
Webster NMS Note
SPV I Capital One Facility
SPV II Deutsche Bank Facility
SPV III One Florida Bank Facility
FHLB Advances
Total Lines of Credit
2
Parent Company Notes due 2024, 2025, 2026, and 2028 :
2024 5.75% Notes
2025 5.00% Notes
2025 8.125% Notes
2026 5.50% Notes
2028 8.00% Notes
Total 2024, 2025, 2026, and 2028 Notes
2
Notes Payable - Securitization Trusts
Notes Payable - Related Parties
Total
December 31, 2023
December 31, 2022
Change
$
— $
—
—
36,628
16,080
6,799
257
23,184
82,948
38,124
29,563
49,433
113,564
38,378
269,062
292,112
—
10,500 $
45,385
55,885
—
—
—
—
—
—
37,903
29,306
—
112,846
—
180,055
279,136
24,250
$
644,122 $
539,326 $
(10,500)
(45,385)
(55,885)
36,628
16,080
6,799
257
23,184
82,948
221
257
49,433
718
38,378
89,007
12,976
(24,250)
104,796
(1)
(2)
On October 2, 2023, the Company paid off and terminated the NSBF Capital One facility for both guaranteed and unguaranteed loans. Total combined commitments of the guaranteed and
unguaranteed lines of credit were $150.0 million at December 31, 2022.
Net of deferred financing costs.
Borrowings were $644.1 million at December 31, 2023 compared to $539.3 million at December 31, 2022. This increase was primarily due to an additional $13.0 million of notes payable-
securitization trusts, including the 2023 securitization, consolidating $82.9 million of bank borrowings from newly consolidating entities, $49.4 million of newly issued 2025 8.125% Notes, and $38.4
million of newly issued 2028 Notes. These increases were partially offset by a $55.9 million reduction on our Capital One lines of credit, and the elimination in consolidation of a prior year related
party note payable.
86
Deferred Taxes
In connection with the Company’s conversion to a financial holding company during the first quarter of 2023, the $19.2 million in net deferred tax liabilities as of December 31, 2022, stemming from
the Company’s valuation of its investments in former portfolio companies through net unrealized gains and losses were removed. Upon consolidating the assets and liabilities of the portfolio
companies, the deferred tax assets and liabilities representing the cumulative timing differences between book and tax were recorded, to the extent such assets or liabilities give rise to taxable income
or expense in future periods. The Company also recognized deferred tax assets on net operating loss (NOL) carryforwards upon consolidation. The Company evaluated all NOLS for a valuation
allowance and determined that none were required.
Results of Operations
Comparison of the years ended December 31, 2023 and 2022
Summary
For the year ended December 31, 2023, the Company reported net income of $47.33 million, or $1.89 per basic and $1.88 per diluted share, compared to net income of $32.31 million, or $1.34 per
basic and diluted share, for the year ended December 31, 2022, respectively.
The increase in net income was attributable to the following items:
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Net income before taxes
Income tax (benefit)/expense
Net income
Net Interest Income
Interest income
Debt securities available-for-sale
Loans and fees on loans
Interest from affiliates
Other interest earning assets
Total interest income
Interest expense
Deposits
Notes and securitizations
Bank and FHLB borrowings
Notes payable related party
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
$
87
Year Ended December 31,
2023
2022
Change
$
$
14,930 $
176,772
146,329
45,373
(1,956)
47,329 $
12,292 $
92,878
66,395
38,775
6,464
32,311 $
Year Ended December 31,
2023
2022
Change
$
1,518 $
— $
84,001
—
8,854
94,373
15,849
40,217
11,673
—
67,739
26,634
11,704
14,930 $
35,696
2,921
—
38,617
—
21,780
3,998
547
26,325
12,292
—
12,292 $
2,638
83,894
79,934
6,598
(8,420)
15,018
1,518
48,305
(2,921)
8,854
55,756
15,849
18,437
7,675
(547)
41,414
14,342
11,704
2,638
Interest Income
Loans and fees on loans: The $48.3 million increase in interest income on the Company’s loan portfolio was attributable to an increase in interest rates as well as the average outstanding accrual
portfolio of loans held for investment increasing to $552.3 million from $482.6 million for the years ended December 31, 2023 and 2022, respectively. The increase in the average outstanding accrual
loan portfolio resulted from the origination of new SBA 7(a) loans period over period as well as the increase in our loan portfolio due to the Acquisition, coupled with an increase in our total
commercial loan originations in 2023 compared to 2022.
Other interest earning assets: The $8.9 million increase in interest income from other interest earnings assets was attributable to rising interest rates on cash and due from banks as well as interest
bearing deposits in banks subsequent to the Acquisition that resulted in Newtek Bank earning interest on Federal Reserve Bank cash deposits.
Interest Expense
The following is a summary of interest expense by facility for the years ended December 31, 2023 and 2022:
1
Deposits
Notes and securitizations:
Notes payable - Securitization Trusts
2024 Notes
2
2025 6.85% Notes
2025 5.00% Notes
3
2025 8.125% Notes
2026 Notes
4
2028 Notes
Bank and FHLB Borrowings:
Bank notes payable
FHLB Advances
Notes payable - related party
Total interest expense
Year Ended
December 31, 2023
December 31, 2022
Change
15,849 $
— $
15,849
23,469
2,421
—
1,757
4,335
7,043
1,192
10,995
678
—
67,739 $
10,641
2,424
379
1,294
—
7,042
—
3,998
—
547
26,325 $
12,828
(3)
(379)
463
4,335
1
1,192
6,997
678
(547)
41,414
$
$
(1) Includes the interest-bearing deposit liabilities of NYNBC acquired on January 6, 2023, and the deposits added by Newtek Bank during the year ended December 31, 2023
(2) On May 2, 2022, the Company redeemed all $15.0 million in aggregate principal amount of the 2025 6.85% Notes at 100% of their principal amount ($25 per Note), plus the accrued and unpaid
interest thereon from February 28, 2022 through, but excluding, the redemption date.
(3) On January 23, 2023, the Company completed a private placement offering of $50.0 million aggregate principal amount of 8.125% notes due 2025. The Notes will mature on February 1, 2025.
The Notes bear interest at a rate of 8.125% per year, payable semiannually on February 1 and August 1 each year, commencing on August 1, 2023.
(4) On August 31, 2023, the Company completed a public offering of $40.0 million aggregate principal amount of 8.00% notes due 2028. The Notes will mature on September 1, 2028. The Notes
bear interest at a rate of 8.00% per year, payable quarterly on March 1, June 1, September 1, and December 1 each year, commencing on December 1, 2023.
The increase in interest expense period over period is primarily from additional interest expense on the Notes payable - Securitization Trusts of $12.8 million, Bank notes payable of $7.0 million,
2025 8.125% Notes of $4.3 million, and 2028 8.00% Notes of $1.2 million related to an increase in the average outstanding balance and interest rates period over period, as well as the consolidation
of additional subsidiaries associated with the Company’s withdrawal of its election to be treated as a BDC, which added $82.9 million in additional borrowings to the Company’s balance sheet as of
December 31, 2023. The Company also completed a securitization in June 2023, resulting in an additional $93.8 million of borrowings as of December 31, 2023. Additionally, in conjunction with the
Acquisition and transition to a financial holding company, the Company now holds deposit liabilities with interest-bearing deposits contributing to the increase in interest expense at December 31,
2023 of $15.8 million.
88
Provision for Credit Losses
The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the ACL on loans at a level that the Company believes is
appropriate in relation to the estimated losses inherent in the loan portfolio.
For the year ended December 31, 2023, there was a provision for loan credit losses of $11.7 million. There was no provision for credit losses for the same period in 2022 due to the change in
accounting methodology related to the conversion to a financial holding company.
Net Interest Income and Margin
Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average
interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are
derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income
on loans.
Average Balance
For the year ended December 31, 2023
Interest
Average Yield / Rate
Interest-earning assets:
Interest-earning balances in other banks
Investment securities
Loans held for sale
Loans held for investment
Total interest-earning assets
Less: Allowance for credit losses on loans
Noninterest earning assets
Total assets
Interest-bearing liabilities
Demand
Savings, Super NOW
Money Market
Time
Total deposits
Borrowings
Total interest-bearing liabilities
Noninterest-bearing deposits
Noninterest-bearing liabilities
Shareholders’ equity
Total liabilities and shareholders' equity
Net interest income and interest rate spread
Net interest margin
Ratio of average interest-earning assets to average interest bearing liabilities
186,566 $
31,958
120,598
783,808
1,122,930
(3,619)
197,612
1,316,923
23,973 $
143,589
22,083
168,912
358,557
674,687
1,033,244
531
60,524
222,624
1,316,923
$
$
$
$
$
89
8,854
1,518
17,085
66,916
94,373
31
7,187
1,052
7,579
15,849
51,890
67,739
26,634
4.75 %
4.75
14.17
8.54
8.40
0.13 %
5.01
4.76
4.49
4.42
7.69
6.56
1.85 %
2.37 %
108.68 %
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes
of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due
to volume.
Interest income:
Interest-earning balances in other banks
Investment securities
Loans held for sale
Loans held for investment
Total interest income
Interest expense:
Demand
Savings, Super NOW
Money Market
Time
Borrowings
Total interest expense
Net interest income
For the year ended December 31, 2023
2023 vs. 2022
Increase (Decrease) Due to
Rate
1
Volume
Total
$
$
6,192 $
—
26,759
10,894
43,845
—
—
—
—
15,553
15,553
28,292 $
2,402 $
1,518
(36,250)
44,241
11,911
31
7,187
1,052
7,579
10,012
25,861
(13,950) $
(1)
Includes income and expense associated with the Acquisition of NBNYC on January 6, 2023, and the associated withdrawal of the election to be treated as a BDC.
Noninterest Income
Dividend income
Loan servicing asset revaluation
Servicing income
Net gains on sales of loans
Net gain (loss) on loans under the fair value option
Technology and IT support income
Electronic payment processing income
Other noninterest income
Total noninterest income
Year ended December 31,
2023
2022
2023/2022 Increase/(Decrease)
Percent
Amount
$
$
1,757 $
(3,549)
18,289
50,734
18,008
24,916
42,855
23,762
176,772 $
90
24,657 $
(10,095)
13,698
56,901
(26,504)
—
—
34,221
92,878 $
(22,900)
6,546
4,591
(6,167)
44,512
24,916
42,855
(10,459)
83,894
8,594
1,518
(9,491)
55,135
55,756
31
7,187
1,052
7,579
25,565
41,414
14,342
(92.9)%
64.8
33.5
(10.8)
167.9
—
—
(30.6)
90.3 %
Dividend Income
For the year ended December 31, 2022, dividend income was mainly dependent on the earnings of our joint ventures. On January 6, 2023, the Company completed the previously announced
Acquisition and converted to a financial holding company. See NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION. The controlled portfolio companies have become
consolidating subsidiaries of the Company in 2023 and therefore, under the new organizational structure, their profits and losses are consolidated within the statement of operations instead of in the
form of dividend income going forward.
Loan Servicing Asset Revaluation
The Company accounts for servicing assets in accordance with ASC Topic 860-50 - Transfers and Servicing - Servicing Assets and Liabilities. The Company and Newtek Bank earn servicing fees
from the guaranteed portions of SBA 7(a) loans they originate and sell. Servicing assets for loans originated by the Company’s nonbank subsidiaries are measured at FV at each reporting date and the
Company reports changes in the FV of servicing assets in earnings in the period in which the changes occur. The valuation model for servicing assets incorporates assumptions including, but not
limited to, servicing costs, discount rate, prepayment rate, and default rate. Considerable judgement is required to estimate the fair value of servicing assets and, as such, these assets are classified as
Level 3 in our fair value hierarchy. Servicing assets for loans originated by Newtek Bank are measured at LCM and amortized based on their estimated life and impairment is recorded to the extent
the amortized cost exceeds the asset’s FV.
The increase in loan servicing asset revaluation is due to the increase in the total portfolio of investments for which we earn servicing income period over period.
Servicing Income, Net of Amortization
The increase in servicing income was related to an increase of $238.9 million in the average total loan portfolio for which we earn servicing income period over period.
Net Gains on Sales of Loans
Net gains on sales of loans for the years ended December 31, 2023 and 2022 were $50.7 million and $56.9 million, respectively.
Realized gains recognized on sale of SBA loans
Realized losses recognized on sale of SBA loans
Net gains on sales of loans
$
$
Year Ended
December 31, 2023
$ Amount
December 31, 2022
$ Amount
74,617 $
(23,883)
50,734 $
Year Ended
73,530
(16,629)
56,901
SBA loans originated
SBA guaranteed loans sold
1
Average sale price as a percent of principal balance
December 31, 2023
December 31, 2022
# of Loans
$ Amount
# of Loans
$ Amount
1,812 $
1,723
814,406
607,560
110.20 %
1,215 $
1,132
775,572
630,028
109.71 %
(1)
Realized gains greater than 110.00% must be split 50/50 with the SBA in accordance with SBA regulations. The realized gains recognized above reflect amounts net of split with the SBA.
For the year ended December 31, 2023, the average sale price as a percent of principal balance was 110.20% compared to 109.71% for the prior period. The modest increase in sales prices in 2023
resulted from an improved yield profile of the SBA 7(a) loans in comparison to other short term government guaranteed investment alternatives. The reduction in overall net gains on sales of loans
resulted from lower volumes of sales compared to the prior year.
91
During the wind-down of NSBF’s operations, NSBF will be required to continue to own its SBA 7(a) loans and PPP Loans in its SBA loan portfolio to maturity, liquidation, charge-off, or (subject to
SBA’s prior written approval) sale or transfer. In addition, NSBF will be required to continue to service and liquidate its SBA Loan Portfolio, including processing forgiveness and loan reviews for
PPP Loans pursuant to an SBA approved lender service provider agreement with SBL. The Company will continue to measure NSBF’s SBA 7(a) loan portfolio at fair value until the portfolio is
completely runoff. The Company will report both realized and unrealized gains and losses relating to the fair value adjustments on the legacy NSBF SBA 7(a) portfolio.
Net Gain (Loss) on Loans Accounted for under the Fair Value Option
Net gains (losses) on loans accounted for under the fair value option amounted to $18.0 million and $(26.5) million for the year ended December 31, 2023 and 2022, respectively.
SBA 7(a) Unguaranteed Loans
SBA 7(a) Guaranteed Loans
SBA 504 and Non-SBA Loans
Net Gain (Loss) on Loans Accounted for Under the Fair Value Option
December 31, 2023
December 31, 2022
Change
For the year ended
$
$
14,765
(688)
3,931
18,008
$
$
(19,972) $
(6,532)
—
(26,504) $
34,737
5,844
3,931
44,512
Net gain (loss) on loans accounted for under the fair value option relates to guaranteed portions of SBA loans made which the Company sells into a secondary market. Unrealized appreciation of SBA
guaranteed investments represents the fair value adjustment of guaranteed portions of loans which have not yet been sold. Unrealized depreciation represents the reversal of unrealized appreciation
when the guaranteed portions of the SBA 7(a) loans are sold. The amount of the unrealized appreciation (depreciation) is determined by the quantity of guaranteed loans held for sale at quarter end, as
well as the change in secondary market pricing conditions. During the year ended December 31, 2023, there was an increase in the gain-on-sale pricing as compared to the prior period.
Technology and IT Support Income and Electronic Payment Processing Income
In connection with the Acquisition and the withdrawal of the election to be treated as a BDC, noninterest income for the year ended December 31, 2023, included technology and IT support income,
as well as electronic payment processing income the Company generated in the ordinary course of business.
Non-Interest Expense
Technology services expense
Electronic payment processing expense
Salaries and employee benefits expense
Professional services expense
Other loan origination and maintenance expense
Depreciation and amortization
Loss on extinguishment of debt
Other general and administrative costs
Total other expense
$
$
Year ended December 31,
2023
2022
2023/2022 Increase/(Decrease)
Amount
Percent
— $
—
20,186
7,134
30,746
239
417
7,673
66,395 $
14,272
18,327
45,522
5,943
(21,313)
2,645
(146)
14,684
79,934
— %
—
225.5
83.3
(69.3)
1,106.7
(35.0)
191.4
120.4 %
14,272 $
18,327
65,708
13,077
9,433
2,884
271
22,357
146,329 $
92
Salaries and Benefits
The increase in salaries and benefits was primarily attributable to the change in reporting associated with the Acquisition and the withdrawal of the election for the Company to be treated as a BDC
on January 6, 2023. As such, the salaries and benefits of entities that were not previously consolidated are now included in the Company’s expense for the year ended December 31, 2023.
Technology Services Expenses
In connection with the Acquisition and the withdrawal of the election to be treated as a BDC, noninterest expense for the year ended December 31, 2023, includes technology services expenses that
the Company incurred in the ordinary course of business. Expenses for the year ended December 31, 2023, consist of expenses associated with web hosting and IT support of $14.3 million.
Electronic Payment Processing Expenses
In connection with the Acquisition and the withdrawal of the election to be treated as a BDC, noninterest expense for the year ended December 31, 2023 includes electronic payment processing
expenses the Company incurred in the ordinary course of business. Expenses for the year ended December 31, 2023 consists of electronic payment processing costs of $18.3 million.
Professional Fees
The increase in professional fees period over period is primarily attributable to the addition of the newly consolidated subsidiaries and entities due to the withdrawal of the election to be treated as a
BDC, which amounted to $4.6 million for the year ended December 31, 2023.
Other Loan Origination and Maintenance Expense
Origination and loan processing expenses during the year ended December 31, 2023, was $9.4 million compared to $30.7 million for the year ended December 31, 2022. The decrease was due to the
consolidation of the affiliated servicing company during the year, resulting in the elimination of the intercompany expenses.
Other General and Administrative Costs
The increase in other general and administrative costs of $14.7 million is primarily due to the Acquisition, as $14.7 million in additional expense is included in the current year from the additional
entities now being consolidated after the withdrawal of the BDC election, partially offset by the elimination of intercompany expenses between the newly consolidated entities and those previously
reported as a BDC.
Results of Segment Operations
The Company has four reportable segments Banking, Technology, NSBF, and Payments. A description of each segment and the methodologies used to measure financial performance is described in
NOTE 22—SEGMENTS in the accompanying Notes to the Consolidated Financial Statements. Net income (loss) by operating segment is presented below:
Banking
Technology
NSBF
Payments
Other
Consolidated net income
For the year ended December 31, 2023
$
$
28,127
1,367
17,061
12,154
(11,380)
47,329
93
Banking - The banking segment includes Newtek Bank as well as its consolidated subsidiary SBL. The financial results include the origination and servicing of SBA 504 loans, C&I loans, CRE loans
and ABL loans. In addition, the bank offers depository services. The results include $17.7 million of net interest income.
Technology - Technology (NTS) provides website hosting, dedicated server hosting, cloud hosting, web design and development, internet marketing, e-commerce, data storage, backup and disaster
recovery, and other related services including consulting and implementing technology solutions for enterprise and commercial clients across the U.S. The segment contributed $31.7 million of
noninterest income and $29.9 million of noninterest expense. As a result of commitments made to the Federal Reserve, the Company will divest or otherwise terminate the activities conducted by
NTS (SIDCO and EWS were merged into NTS on December 31, 2023), within two years of becoming a financial holding company, subject to any extension of the two-year period.
NSBF - Relates to NSBF’s legacy portfolio of SBA 7(a) loans held outside Newtek Bank. During the year ended December 31, 2023, NSBF originated $158.5 million in SBA 7(a) loans. The results
include $24.0 million of net interest income.
Payments - Payments, which includes NMS, POS and Mobil Money, contributed $12.2 million to consolidated net income. Within those results are $46.4 million of noninterest income resulting from
marketing credit and debit card processing services, check approval services, processing equipment, and software. The net income also included $31.6 million of noninterest expense.
Corporate and Other - Represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank
subsidiaries including NIA, PMT, non-bank lending, including Holdco 6 and our joint ventures, and elimination adjustments to reconcile the results of the operating segments to the consolidated
financial statements prepared in conformity with GAAP.
Liquidity and Capital Resources
Overview
Our liquidity and capital resources are derived from our Notes payable - related parties, 2024 Notes, 2025 5.00% Notes, 2025 8.125% Notes, 2026 Notes, 2028 Notes, securitization transactions and
cash flows from operations, including investment sales and repayments, and income earned. In the year ended December 31, 2023, our primary use of funds from operations included originations of
loans and payments of fees and other operating expenses we incurred. We may raise additional equity or debt capital through both registered offerings off of a shelf registration, including “at-the-
market”, or ATM, and private offerings of securities. On January 27, 2023, the Company submitted a Form S-3 with the SEC in order to commence the process of re-establishing an effective shelf
registration statement. The registration statement on Form S-3 was declared effective by the SEC on July 27, 2023. On November 17, 2023, the Company entered into the 2023 ATM Equity
Distribution Agreement. The 2023 ATM Equity Distribution Agreement, as amended, provided that the Company may offer and sell up to 3,000,000 shares of common stock from time to time
through the placement agents.
Regulatory Capital
The Company strives to maintain prudent capital levels to absorb risk and maximizing returns to shareholders. NewtekOne and Newtek Bank are primarily constrained by the Total Capital and
Leverage ratios given the mix of assets vis a vie capital.
Capital amounts and ratios for NewtekOne, Inc. as of December 31, 2023 are presented in the table below:
NewtekOne, Inc. - December 31, 2023
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Total Capital (to Risk-Weighted Assets)
(1)
Exclusive of the capital conservation buffer of 2.5% of risk-weighted assets.
Actual
1
For Capital Adequacy Purposes
For Consideration as Well-Capitalized
Amount
Ratio
Amount
Ratio
$
180,829
180,829
180,829
213,141
13.6 % $
16.2 %
16.2 %
19.1 %
53,363
50,153
66,870
89,160
4.0 %
4.5 %
6.0 %
8.0 %
Amount
N/A
N/A
N/A
N/A
Ratio
N/A
N/A
N/A
N/A
Capital amounts and ratios for Newtek Bank as of December 31, 2023, are presented in the table below. As of December 31, 2023, Newtek Bank was categorized as “well-capitalized” under the
prompt corrective action measures and met the capital conservation buffer requirements.
94
Newtek Bank - December 31, 2023
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Total Capital (to Risk-Weighted Assets)
Actual
1
For Capital Adequacy Purposes
For Consideration as Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
99,253
99,253
99,253
105,105
16.6 % $
21.5 %
21.5 %
22.8 %
23,893
20,787
27,716
36,954
4.0 % $
4.5 %
6.0 %
8.0 %
30,026
46,193
36,955
29,866
5.0 %
6.5 %
8.0 %
10.0 %
(1)
Exclusive of the capital conservation buffer of 2.5% of risk-weighted assets.
Public Offerings
ATM Program
On June 25, 2020, the Company entered into the 2020 ATM Equity Distribution Agreement. On July 20, 2022, the Company entered into Amendment No. 1 to the 2020 ATM Equity Distribution
Agreement. The 2020 ATM Equity Distribution Agreement, as amended, provided that the Company could offer and sell up to 6,400,000 shares of common stock from time to time through the
placement agents. From inception through December 31, 2022, we sold 3,069,754 shares of our common stock at a weighted average price of $23.02 per share. Proceeds, net of offering costs and
expenses, were $70.6 million. The Company paid the placement agents $1.4 million in compensation. The ATM program was suspended as of January 6, 2023.
The Company’s shelf registration statement on Form S-3 was declared effective by the SEC on July 27, 2023. On November 17, 2023, the Company entered into the 2023 ATM Equity Distribution
Agreement. The 2023 ATM Equity Distribution Agreement, as amended, provides that the Company may offer and sell up to three million shares of common stock from time to time through the
placement agents. The Company may, subject to market conditions, engage in activity under the current ATM program.
2028 Notes
On August 31, 2023, the Company completed a registered offering of $40.0 million in aggregate principal amount of its 8.00% 2028 Notes, which includes the underwriters’ exercise of the option
granted by the Company to purchase an additional $5.0 million in aggregate principal amount of the 2028 Notes. The Company received $38.0 million in proceeds, before expenses, from the sale of
the 2028 Notes. The Company intends to use the net proceeds from the sale of the Notes for general corporate purposes. The 2028 Notes bear interest at a rate of 8.00% per year payable quarterly on
March 1, June 1, September 1 and December 1 of each year, commencing on December 1, 2023, and trade on the Nasdaq Global Market under the trading symbol “NEWTI.” At December 31, 2023,
the Company was in compliance with all covenants related to the 2028 Notes.
2026 Notes
In January 2021, the Company and the Trustee entered into the Seventh Supplemental Indenture to the Base Indenture between the Company and the Trustee, relating to the Company’s issuance, offer
and sale of $115.0 million aggregate principal amount of 5.50% 2026 Notes, including $15.0 million in aggregate principal amount sold pursuant to a fully-exercised overallotment option. The sale of
the 2026 Notes generated proceeds of approximately $111.3 million, net of underwriter's fees and expenses. The 2026 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu
with the Company’s other outstanding and future unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2026 Notes; (iii)
effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the
extent of the value of the assets securing such indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries.
The 2026 Notes will mature on February 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after February 1, 2022, upon not less than
30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price equal to the following amounts, plus accrued and unpaid interest to, but
excluding, the redemption date: (1) 100% of the principal amount of the 2026 Notes to be redeemed plus (2) the sum of the present value of the scheduled payments of interest (exclusive of accrued
and unpaid interest to the date of redemption) on the 2026 Notes to be redeemed from the redemption date until February 1, 2023, discounted to the redemption date on a semi-annual basis (assuming
a 360-day year consisting of twelve 30-day months) using the applicable Treasury Rate plus 50 basis points; provided, however, that if the Company redeems any 2026 Notes on or after February 1,
2023 (the date falling three years prior to the maturity date of the 2026 Notes), the redemption price for the 2026 Notes will be equal to 100%
95
of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The 2026 Notes bear interest at a rate of 5.50% per year
payable quarterly on February 1, May 1, August 1 and November 1 of each year, commencing on May 1, 2021, and trade on the Nasdaq Global Market under the trading symbol “NEWTZ.” At
December 31, 2023, the Company was in compliance with all covenants related to the 2026 Notes.
2024 Notes
In July 2019, the Company and the Trustee entered into the Fourth Supplemental Indenture to the Base Indenture between the Company and the Trustee, relating to the Company’s issuance, offer and
sale of $55.0 million aggregate principal amount of 5.75% 2024 Notes. The Company granted an overallotment option of up to $8.25 million in aggregate principal amount of the 2024 Notes. The
sale of the 2024 Notes generated proceeds of approximately $53.2 million, net of underwriter's fees and expenses. In July 2019 the underwriters exercised their option to purchase $8.25 million in
aggregate principal amount of 2024 Notes for an additional $8.0 million in net proceeds. The 2024 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s
other outstanding and future unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2024 Notes; (iii) effectively subordinated
to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the
assets securing such indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries.
The 2024 Notes will mature on August 1, 2024 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after August 1, 2021, at a redemption price of
100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed
for redemption. The 2024 Notes bear interest at a rate of 5.75% per year payable quarterly on February 1, May 1, August 1, and November 1 of each year, commencing on November 1, 2019, and
trade on the Nasdaq Global Market under the trading symbol “NEWTL.” At December 31, 2023, the Company was in compliance with all covenants related to the 2024 Notes.
On February 16, 2021 and May 20, 2021, the Company issued an additional $5.0 million and $10.0 million in aggregate principal amount of its 2024 Notes, respectively. The new 2024 Notes are
treated as a single series with the prior 2024 Notes and have the same terms as the prior 2024 Notes. The existing 2024 Notes have the same CUSIP number and are fungible and rank equally with the
prior 2024 Notes.
On December 29, 2021, the Company redeemed $40.0 million in aggregate principal amount of the $78.25 million of principal amount of 2024 Notes outstanding at 100% of their principal amount
($25 per Note), plus the accrued and unpaid interest thereon from November 1, 2021 through, but excluding, the redemption date. As of December 31, 2023, the outstanding principal balance of the
2024 Notes was $38.25 million.
The Base Indenture, and each supplemental indenture thereto, contains certain covenants. The Base Indenture provides for customary events of default and further provides that the Trustee or the
holders of 25% in aggregate principal amount of the outstanding Notes may declare such Notes immediately due and payable upon the occurrence of any event of default after expiration of any
applicable grace period. Each supplemental indenture (except for the Tenth Supplemental Indenture) includes covenants requiring the Company to comply with (regardless of whether it is subject to)
the asset coverage requirements set forth in Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a) of the 1940 Act (or any successor provisions), to comply with (regardless of whether it is
subject to) the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) of the 1940 Act as modified by Section 61(a) of the 1940 Act and to provide
financial information to the holders of the Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Exchange Act. These covenants are subject to
important limitations and exceptions that are described in the Base Indenture, as supplemented by each supplemental indenture thereto. These covenants currently apply to the 2024 and 2026 Notes.
At December 31, 2023, the Company was in compliance with all covenants related to the Notes.
2025 Notes (Private Placements)
On November 27, 2020, the Company and Trustee entered into the Fifth Supplemental Indenture to the Base Indenture between the Company and the Trustee, relating to the issuance, offer and sale of
$5.0 million aggregate principal amount of its 2025 6.85% Notes. The offering was consummated pursuant to the terms of a purchase agreement among the Company and an accredited investor,
which provided for the 2025 6.85% Notes to be issued to the purchaser in a private placement in reliance on Section 4(a)(2) of the Securities Act. The net proceeds from the sale of the notes were
approximately $4.8 million, after deducting structuring fees and estimated offering expenses, each payable by the Company. The Company exercised its option to issue up to $10.0 million of
additional 2025 6.85% Notes to the purchaser, and issued $10.0 million in additional 2025 6.85%
96
Notes to the purchaser in an exempt offering in January 2021.
On March 31, 2022, the Company caused notices to be issued to the holder of its 2025 6.85% Notes regarding the Company’s exercise of its option to redeem all $15.0 million in aggregate principal
amount of the Notes on May 2, 2022. The Notes were redeemed on May 2, 2022 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from February 28, 2022
through, but excluding, May 2, 2022.
On March 31, 2022, the Company completed a private placement of $15.0 million aggregate principal amount of its 5.00% notes due 2025 (2025 5.00% Notes). The offering was consummated
pursuant to the terms of a purchase agreement dated March 31, 2022 among the Company and an accredited investor, which provided for the 2025 5.00% Notes to be issued to the purchaser in a
transaction that relied on Section 4(a)(2) of the Securities Act to be exempt from registration under the Securities Act. The net proceeds from the sale of the notes were approximately $14.5 million,
after deducting structuring fees and estimated offering expenses, each payable by the Company. The Company intends to use the net proceeds from the sale of the notes to fund investments in debt
and equity in accordance with its investment objectives and strategies. The 2025 5.00% Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with the Company’s other
outstanding and future unsecured indebtedness; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2025 5.00% Notes; (iii) effectively
subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the
value of the assets securing such indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. Under the
purchase agreement, the Company also issued an additional $15.0 million in aggregate principal amount of the 2025 5.0% Notes to the purchaser on May 2, 2022. The 2025 5.00% Notes were issued
under the Base Indenture and the Tenth Supplemental Indenture, dated as of March 31, 2022. The 2025 5.00% Notes will mature on March 31, 2025, and under the terms of the Indenture, the Notes
are redeemable at any time, at the option of the Company, at a redemption price of 100% of the outstanding principal amount thereof.
On January 23, 2023 we completed a private placement offering of $50.0 million aggregate principal amount of 8.125% notes due 2025. The net proceeds from the sale of the notes were
approximately $48.94 million after deducting estimated offering expenses payable by the Company. The Company intends to use the net proceeds from the sale of the Notes for general corporate
purposes, including payment of expenses incurred in connection with the issuance of the notes and other working capital purposes. The Notes will mature on February 1, 2025. The Notes bear interest
at a rate of 8.125% per year payable semiannually on February 1 and August 1 each year, commencing on August 1, 2023.
NSBF Capital One Facility
Prior to October 2023, NSBF maintained a $150.0 million Capital One facility to finance NSBF’s origination of unguaranteed and guaranteed portions of SBA 7(a) loans. The portion of the facility
collateralized by the government guaranteed portion of SBA 7(a) loans had an interest rate of Prime minus 0.75% and the interest rate on the portion of the facility collateralized by the non-
guaranteed portion of SBA 7(a) loans was Prime plus 0.25% . The facility provided for a 55% advance rate on the non-guaranteed portions of the SBA 7(a) loans NSBF originated, and a 90%
advance rate on the guaranteed portions of SBA 7(a) loans NSBF originated and a 90% advance rate on the guaranteed portions of SBA 7(a) loans NSBF originated. NSBF ceased originating new
loans in April 2023. On May 7, 2020, NSBF amended the facility to, among other things, extend the maturity date on which the credit facility converted into a term loan for a period of three years to
May 7, 2023, with the term loan maturing on May 7, 2025. The NSBF Capital One facility was paid off and terminated in October of 2023.
Securitization Transactions
From 2010 through June 2023, NSBF engaged in thirteen (13) securitizations of the unguaranteed portions of its SBA 7(a) loans. In the securitizations, NSBF used a special purpose entity (the
“Trust”) which is considered a variable interest entity. Applying the consolidation requirements for VIEs under the accounting rules in ASC Topic 860, Transfers and Servicing, and ASC Topic 810,
Consolidation, which became effective January 1, 2010, the Company determined that as the primary beneficiary of the securitization vehicle, based on its power to direct activities through its role as
servicer for the Trust and its obligation to absorb losses and right to receive benefits, it needed to consolidate the Trusts. NSBF therefore consolidated the entity using the carrying amounts of the
Trust’s assets and liabilities. NSBF reflects the legacy portfolio of SBA 7(a) loans and reflects the associated financing in Notes Payable - Securitization trusts on the Consolidated Statements of
Financial Condition.
97
In June 2023, NSBF completed its thirteenth securitization which resulted in the transfer of $103.9 million of unguaranteed portions of SBA loans to the 2023-1 Trust. The 2023-1 Trust in turn issued
securitization notes for the par amount of $103.9 million, consisting of $84.3 million of Class A notes and $19.6 million Class B notes, against the 2023-1 Trust assets in a private placement. The
Class A and Class B notes received an “A-” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is October 2049. The Class A and Class B notes bear interest at an
average rate of 30-day average compounded SOFR plus 3.24% across both classes.
In September 2022, NSBF completed its twelfth securitization which resulted in the transfer of $116.2 million of unguaranteed portions of SBA loans to the 2022-1 Trust. The 2022-1 Trust in turn
issued securitization notes for the par amount of $116.2 million, consisting of $95.4 million of Class A notes and $20.8 million Class B notes, against the 2022-1 Trust assets in a private placement.
The Class A and Class B notes received an “A-” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is October 2049. The Class A and Class B notes bear interest at an
average rate of 30-day average compounded SOFR plus 2.97% across both classes.
In December 2021, NSBF completed its eleventh securitization which resulted in the transfer of $103.4 million of unguaranteed portions of SBA loans to the 2021-1 Trust. The 2021-1 Trust in turn
issued securitization notes for the par amount of $103.4 million, consisting of $79.7 million of Class A notes and $23.8 million Class B notes, against the 2021-1 Trust assets in a private placement.
The Class A and Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is December 2048. The Class A and Class B notes bear interest at an
average rate of adjusted SOFR plus 1.92% across both classes.
In October 2019, NSBF completed its tenth securitization which resulted in the transfer of $118.9 million of unguaranteed portions of SBA loans to the 2019-1 Trust. The 2019-1 Trust in turn issued
securitization notes for the par amount of $118.9 million, consisting of $93.5 million of Class A notes and $25.4 million Class B notes, against the 2019-1 Trust assets in a private placement. The
Class A and Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is December 2044. The Class A and Class B notes bear interest at an
average rate of adjusted SOFR plus 1.83% across both classes.
In November 2018, NSBF completed its ninth securitization which resulted in the transfer of $108.6 million of unguaranteed portions of SBA loans to the 2018-1 Trust. The 2018-1 Trust in turn
issued securitization notes for the par amount of $108.6 million, consisting of $82.9 million Class A notes and $25.7 million of Class B notes, against the assets in a private placement. The Class A
and Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is February 2044.
In December 2017, NSBF completed its eighth securitization which resulted in the transfer of $76.2 million of unguaranteed portions of SBA loans to the 2017-1 Trust. The 2017-1 Trust in turn
issued securitization notes for the par amount of $75.4 million, consisting of $58.1 million Class A notes and $17.3 million of Class B notes, against the assets in a private placement. The Class A and
Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is February 2043. On February 27, 2023, the 2017-1 Trust was terminated as a result of
NSBF purchasing the 2017-1 Trust assets, with the 2017-1 Trust’s noteholders receiving the redemption price.
Cash Flows and Liquidity
The following table summarizes the Company’s available sources of liquidity as of December 31, 2023:
Unrestricted cash
Lines of credit at other commercial banks
Newtek Bank:
Interest bearing deposits in banks
FHLB borrowing availability
Lines of credit at other financial institutions
Total liquidity sources
Availability as of
December 31, 2023
15,398
40,418
137,689
61,947
10,000
265,452
$
$
Restricted cash of $30.9 million as of December 31, 2023. The largest component is $12.4 million of restricted cash held by NSBF, which includes reserves in the event payments are insufficient to
cover interest and/or principal with respect to
98
securitizations and loan principal and interest collected which are due to loan participants. An additional $11.2 million of restricted cash is held by NewtekOne, which includes $10.0 million in an
account to fund certain of NSBF’s potential obligations to the SBA pursuant to the Wind-down Agreement in which the Company is a guarantor.
The Company generated and used cash as follows:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and restricted cash
Cash and restricted cash—beginning of period (Note 2)
Consolidation of cash and restricted cash from controlled investments and business combinations, net of cash paid
Cash and restricted cash—end of period (Note 2)
$
$
(169,219) $
(172,235)
344,974
3,520
125,606
54,880
184,006 $
(62,418)
(11)
1,175
(61,254)
186,860
—
125,606
Year Ended December 31, 2023
Year Ended December 31, 2022
During the year ended December 31, 2023, operating activities used cash of $169.2 million, consisting primarily of (i) $783.0 million of loans held for sale; (ii) an $11.8 million decrease in due to
participants which arises when loan payments are received in the current period but not processed in time to have funds remitted to the participant during the current period; the amount varies
depending on payment volume and timing at quarter end; (iii) a $62.2 million increase in broker receivables which arise from the guaranteed portions of SBA 7(a) loans that were traded in the period
but did not settle during the current period end and the cash was not received from the purchasing broker during the current period; the amount varies depending on loan origination volume and
timing of sales at quarter end; and (iv) $14.6 million in contributions to non-consolidating joint ventures. These uses of cash were offset by (i) $695.5 million of proceeds from the sale of loans and
(ii) $12.2 million of principal payments received from loans held for sale.
Cash used by investing activities primarily comprised $27.2 million used to purchase available-for-sale securities and $169.0 million in the net increase in loans held for investment, at cost, partially
offset by a $29.3 million in the net decrease in loans held for investment, at fair value.
Net cash provided by financing activities was $345.0 million consisting primarily of a (i) $19.5 million issuance of preferred stock, (ii) $324.7 million net increase in deposits; (iii) $103.9 million of
issuances of securitization trusts; (iv) $50.0 million of issuances of the 2025 8.125% Notes and (v) $40.0 million of issuances of the 2028 8.00% Notes. These sources of cash were offset by (i) $90.8
million of principal payments related to securitization notes payable and $78.7 million of net payments under our bank notes payable.
In association with the January 6, 2023 Acquisition and election to withdraw the Company’s status as a BDC, the Company’s newly consolidated subsidiaries’ cash was added to the balance sheet of
the Company for the year ended December 31, 2023.
99
Contractual Obligations
The following table represents the Company’s obligations and commitments as of December 31, 2023. Amounts represent principal only and are not shown net of unamortized debt issuance costs.
See NOTE 12—BORROWINGS.
Contractual Obligations
Deposits:
Demand
Checking
Money market
Savings
Time deposits
1
Webster NMS Note
FHLB Advances
1
SPV I Capital One Facility
1
SPV II Deutsche Bank Facility
1
SPV III One Florida Bank Facility
Securitization Notes Payable
Parent Company Notes:
Notes due 2024
Notes due 2025
Notes due 2026
Notes due 2028
Employment Agreements
Operating Leases
Totals
1
Guaranteed by the parent company
Unfunded Commitments
Total
2024
2025
2026
2027
2028
Thereafter
Payments due by period
$
$
10,053 $
11,456
15,803
259,152
167,041
36,881
23,183
16,300
6,900
375
296,223
38,250
80,000
115,000
40,000
525
7,502
1,124,644 $
10,053 $
11,456
15,803
259,152
54,805
—
7,959
—
6,900
—
—
38,250
—
—
—
525
2,761
407,664 $
— $
—
—
—
63,402
—
8,026
16,300
—
375
—
—
80,000
—
—
—
2,469
170,572 $
— $
—
—
—
28,379
—
2,094
—
—
—
—
—
—
115,000
—
—
1,842
147,315 $
— $
—
—
—
19,710
36,881
5,104
—
—
—
—
—
—
—
—
—
430
62,125 $
— $
—
—
—
745
—
—
—
—
—
—
—
—
—
40,000
—
—
40,745 $
—
—
—
—
—
—
—
—
—
—
296,223
—
—
—
—
—
—
296,223
At December 31, 2023, the Company had $125.4 million of unfunded commitments consisting of $20.4 million in connection with its SBA 7(a) loans, $81.0 million in connection with its SBA 504
loans, $13.1 million in connection with its alternative lending program loans, and $10.9 million relating to commercial and industrial loans. The Company funds these commitments from the same
sources it uses to fund its other loan commitments.
Guarantees
The Company is a guarantor on several warehouse lines of credit as noted in the above table under Contractual Obligations. Refer to NOTE 12—BORROWINGS to the consolidated financial
statements for the amounts outstanding, line availability, and term. The Company is also a guarantor on an NMS term loan facility. At December 31, 2023, the Company determined that it is not
probable that payments would be required to be made under the guarantees. The Company is also a guarantor on certain of NSBF’s potential obligations to the SBA pursuant to the Wind-down
Agreement. Specifically, pursuant to the Wind-down Agreement, the Company has guaranteed NSBF’s obligations to the SBA for post-purchase repairs or denials on the guaranteed portion of 7(a)
Loans sold by NSBF on the secondary market or servicing/liquidation post-purchase repairs or denial, and has funded a $10.0 million restricted cash account at Newtek Bank to secure these potential
obligations.
100
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could materially differ from those
estimates. We have identified the following items as critical accounting policies for the fiscal year ended December 31, 2023.
Fair Value Measurements
For the fiscal year ended December 31, 2023, we valued instruments for which market quotations are readily available at their market quotations. However, a readily available market value did not
exist for many of the instruments in our portfolio, and we valued these instruments at fair value as determined in good faith by our management under our valuation policy and process. We may have
sought pricing information with respect to certain of our instruments from pricing services or brokers or dealers in order to value such instruments. We also employed independent third party
valuation firms for certain of our instruments for which there is not a readily available market value.
Due to the inherent uncertainty of determining the fair value of our instruments that do not have a readily available market value, the fair value of the instruments may differ significantly from the
values that would have been used had a readily available market value existed for such instruments and may differ materially from values that may ultimately be received or settled.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). ASC
820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels for disclosure purposes.
The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and gives the lowest priority to unobservable inputs (Level 3). The
levels of the fair value hierarchy are as follows:
Level 1
Level 2
Level 3
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active
exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-
counter markets.
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that
are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market
or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt
securities, derivative contracts and loans held-for-sale.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests
in securitizations, residential mortgage servicing assets, warrant liabilities, joint ventures, guaranteed loans held at fair value, and highly structured or long-term derivative contracts.
Valuation of Instruments
Level 1 assets and liabilities were valued using quoted market prices. Level 2 assets and liabilities were valued using market consensus prices that are corroborated by observable market data and
quoted market prices for similar assets and liabilities. Level 3 assets and liabilities were valued at fair value as determined in good faith by the Board, based on input of management, the audit
committee and independent valuation firms that were engaged at the direction of the Board to assist in the valuation of certain portfolio investments without a readily available market quotation at
least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process.
For certain investments, the Company generally calculated the fair value of the investment primarily based on the NAV of the entity and adjusted the fair value for other factors that would affect the
fair value of the investment. The Company used this valuation approach for its investment in its joint ventures.
101
Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from
the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments
are generally subject to legal and other restrictions or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or
liquidation sale, the Company may realize significantly less than the value at which such investment had previously been recorded.
The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the
markets in which the investments are traded. See NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION under the heading “Fair Value Measurements” and NOTE 9—FAIR
VALUE MEASUREMENTS for a detailed discussion of determining fair value, including pricing validation processes.
We believe our portfolio as of December 31, 2023 and December 31, 2022 approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on
those reporting dates.
As of January 6, 2023, the Company no longer qualifies as a regulated investment company for federal income tax purposes and no longer qualifies for accounting treatment as an investment
company and therefore, we no longer fair value the investments in our portfolio companies. During this wind-down of NSBF’s operations, NSBF will be required to continue to own its SBA 7(a)
loans and PPP Loans in its SBA loan portfolio to maturity, liquidation, charge-off, or (subject to SBA’s prior written approval), sale or transfer. In addition, NSBF will be required to continue to
service and liquidate its SBA Loan Portfolio, including processing forgiveness and loan reviews for PPP Loans, pursuant to an SBA approved lender service provider agreement with SBL. The
Company will continue to measure NSBF’s SBA 7(a) loan portfolio at fair value until the portfolio is completely runoff. The Company reports both realized and unrealized gains and losses relating to
the fair value adjustments on the legacy NSBF SBA 7(a) portfolio.
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for credit losses and the reserve for unfunded commitments. As a result of the Company’s Acquisition the adoption of ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and its related amendments, we developed a methodology for estimating the
reserve for credit losses. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss. The CECL approach requires an estimate of the
credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss
event was “incurred.” The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical
loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally,
the Company considers forecasts about future economic conditions that are reasonable and supportable. The reserve for unfunded commitments represents the expected credit losses on off-balance
sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company.
The reserve for unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.
Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance
required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and
requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio and other financial assets to which CECL
applies, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for
credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. Going forward, the impact of utilizing the CECL
approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics, and quality of our loan portfolio, as well as the prevailing economic conditions
and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility in the reserve for credit losses, and therefore, greater volatility to our reported earnings.
102
Consideration of losses occurs when serious doubt regarding the repayment of the loan is present. For real estate loans, current appraisals will aid in determining the amount to be charged off. For
commercial loans, collateral valuations and borrower guarantees should be considered; however, weight to these two sources should be limited. Once a deficiency in collateral is determined, a reserve
equal to the deficiency should be made immediately to the Allowance for Credit Losses (ACL). A charge off should be made within 90 days if a full analysis confirms the deficiency cannot be
covered via additional collateral or resources of the borrower or guarantors.
Nonaccrual Loans
As a general rule, the Company does not accrue interest, amortize deferred net loan fees or costs, or accrete discount on any loan (1) which is maintained on a cash basis because of deterioration in
the financial condition of the borrower, (2) for which payment in full of principal or interest is not expected, or (3) upon which principal or interest has been in default for a period of 90 days or more
unless the asset is both well secured and in the process of collection.
A loan is “well secured” if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt
(including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is “in the process of collection” if collection of the asset is proceeding in due course either (1)
through legal action, including judgement enforcement procedures, or (2) in appropriate circumstances, through collections efforts not involving legal action which are reasonably expected to result in
repayment of the debt or in its restoration to a current status in the near future.
A non-accrual loan may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and
interest, or (2) when it otherwise becomes well secured in the process of collection. If any interest payments received while the asset was in nonaccrual status were applied to reduce the recorded
investment in, or the amortized cost basis of, the asset, as applicable, the application of these payments to the asset’s recorded investment or amortize cost basis, as applicable should not be reversed
(and interest income should not be credited) when the asset is returned to accrual status.
Valuation of Servicing Assets
For the fiscal year ended December 31, 2023, the Company accounted for servicing assets in accordance with ASC Topic 860-50 - Transfers and Servicing - Servicing Assets and Liabilities. The
Company and Newtek Bank earn servicing fees from the guaranteed portions of SBA 7(a) loans they originate and sell. Servicing assets for loans originated by the Company’s nonbank subsidiaries
are measured at FV at each reporting date and the Company reports changes in the FV of servicing assets in earnings in the period in which the changes occur. The valuation model for servicing
assets incorporates assumptions including, but not limited to, servicing costs, discount rate, prepayment rate, and default rate. Considerable judgement is required to estimate the fair value of
servicing assets and as such these assets are classified as Level 3 in our fair value hierarchy. Servicing assets for loans originated by Newtek Bank are measured at LCM and amortized based on their
estimated life and impairment is recorded to the extent the amortized cost exceeds the asset’s FV.
Income Recognition
For the fiscal year ended December 31, 2023, management reviewed all loans that became 90 days or more past due on principal or interest or when there was reasonable doubt that principal or
interest would be collected for possible placement on management’s designation of non-accrual status. Interest receivable was analyzed regularly and reserved against when deemed uncollectible.
Interest payments received on non-accrual loans were recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans were restored
to accrual status when past due principal and interest was paid and, in management’s judgment, were likely to remain current, although there may have been exceptions to this general rule if the loan
had sufficient collateral value and was in the process of collection.
In addition, under the PPP that began in the second quarter of 2020, the SBA reimbursed the Company for originating loans. Such SBA reimbursements are included as interest income on PPP loans.
Such fees are accounted for under ASC-310 Receivables and deferred until the loan was sold to one of our Participants. Income earned in connection with the PPP should not be viewed as recurring.
NSBF funded the balance of its PPP loans by the end of July 2021. NSBF has redeployed the resources used to generate PPP loans to the origination of SBA 7(a) loans.
For the fiscal year ended December 31, 2023, we received servicing income related to the guaranteed portions of SBA loan investments which we sell into the secondary market. These recurring fees
were earned and recorded daily. Servicing income was earned for the full term of the loan or until the loan is repaid.
103
For the fiscal year ended December 31, 2023, we received a variety of fees from borrowers in the ordinary course of conducting our business, including packaging fees, legal fees, late fees and
prepayment fees. All other income was recorded when earned.
For the fiscal year ended December 31, 2023, distributions of earnings from our joint ventures were evaluated to determine if the distribution is income, return of capital or realized gain.
Following our conversion to a financial holding company, we generate income in the form of interest, servicing and other fee income on the loans we and Newtek Bank originate. In addition, our
portfolio companies have become consolidating subsidiaries of NewtekOne in 2023 and therefore, under the new organizational structure, their income is consolidated within the statement of
operations going forward along with our joint ventures. With the inclusion of NMS, NIA, PMT, and NTS, we now report Technology and IT Support Income and Electronic Payment Processing
Income on our consolidated statements of income, and we include insurance commissions income and payroll processing income within Other Noninterest Income.
Determination of Provision for Income Taxes and Related Accounts
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are
subject to income taxes in the United States. We file income tax returns in approximately 47 jurisdictions: federal, state, and local. The laws and regulations of each jurisdiction are complex and may
be subject to different interpretations. Significant judgments and estimates are required in determining consolidated income tax expense for each jurisdiction. Our interpretations of tax laws are
subject to audits by various jurisdictions. Potential difference in the interpretation or changes in the tax laws may result in additional accrual of income tax expense or benefit, which could be material
to our reported results. We consistently monitor new and reassess existing tax laws for changes and adjust our tax estimates accordingly.
Our provision for income taxes is comprised of current and deferred income taxes. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of
revenue and expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent results of operations. In projecting future taxable income, we begin with historical
results adjusted for changes in accounting policies and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income, the reversal of temporary differences,
and the implementation of feasible and prudent tax planning strategies. These assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we
are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
At least annually, we consider existing evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. We currently hold deferred tax asset
attributes related to net operating tax loss carryforwards. We perform regular assessments to determine whether our tax attributes are realizable. As of December 31, 2023, we continue to believe it is
more likely than not that the benefit for certain state net operating loss carryforwards will not be realized.
For additional information regarding our provision for income taxes, refer to NOTE 21—INCOME TAXES.
Recently Adopted Accounting Pronouncements and New Accounting Standards
Refer to NOTE 2—SIGNIFICANT ACCOUNTING POLICIES for information on recently adopted accounting pronouncements and new accounting standards.
Off Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance
sheets. These transactions may include commitments to extend credit, standby letters of credit, and the construction phase of SBA 504 loans, which involve, to varying degrees, elements of credit risk
and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The SBA 504 loans are expected to partially draw, if not fully draw. All off-balance sheet commitments
are included in the determination of the amount of risk-based capital that the Company and Newtek Bank are required to hold.
104
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial
letters of credit is represented by the contractual or notional amount of those instruments. The Company manages risk of exposure to credit losses under these commitments by subjecting them to
credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.
Further information related to financial instruments can be found in Note 14 (Commitments and Contingencies) of the Company’s audited consolidated financial statements included in Item 8 of this
Form 10-K.
Recent Developments
The Company performed a review of events subsequent to the balance sheet date through the date the financial statements were issued and determined that there were no such events requiring
recognition or disclosure in the financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We consider the principal types of risk in our business activities to be fluctuations in interest rates, the ability to raise funds (deposits, debt, and or equity) to fund our operations, and the availability
of the secondary market for our SBA loans. Risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor
these risks and limits by means of reliable administrative and information systems and other policies and programs.
The Company’s interest rate profile on loans is based on a mix of fixed and variable rates. The same is true for its sources of funding (deposits, warehouse lines of credit, securitization trust notes,
public notes, etc.). Some of our assets and liabilities are match funded, meaning that the interest rate and duration profiles are closely linked. Managing interest rate risk with matched funding means
that movements in interest rates are expected to largely offset between income from assets and expenses on liabilities. For the remainder of our balance sheet, we largely take a portfolio approach to
managing interest rate and liquidity risk that is inherently imprecise.
NewtekOne depends on the availability of secondary market purchasers of our loans held for sale, but primarily for the guaranteed portions of SBA loans and the premium received on such sales to
support its lending operations. Sale prices for guaranteed portions of SBA 7(a) loans could be negatively impacted by market conditions, in particular a higher interest rate environment, which
typically lead to higher prepayments during the period, resulting in lower sale prices in the secondary market. A reduction in the price of guaranteed portions of SBA 7(a) loans or disruptions in the
markets to which we sell could negatively impact our business.
The Company’s invested cash (includes cash and cash equivalents and restricted cash) of approximately $184.0 million is subject to changes in the Federal Funds rate set by the Federal Open Market
Committee. We do not purchase or hold derivative financial instruments for trading purposes. All of our transactions are conducted in U.S. dollars and we do not have any foreign currency or foreign
exchange risk. We do not trade commodities or have any commodity price risk.
We believe that we have placed our cash investments and their equivalents, which include deposits at other institutions, with high credit-quality financial institutions. As of December 31, 2023, cash
deposits in excess of insured amounts totaled approximately $37.2 million. The Company and its non-bank subsidiaries have deposit accounts at Newtek Bank that total $55.6 million, of which $52.8
million is uninsured.
105
Interest rate risk is a significant market risk and can result from timing and volume differences in the repricing of rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes
in the general level of market interest rates and changes in the shape and level of market yield curves. The Company manages the interest rate sensitivity of interest-bearing liabilities and interest-
earning assets in an effort to minimize the adverse effects of changes in the interest rate environment balanced against maximizing profit. Management of interest rate risk is carried out primarily
through strategies involving available-for-sale securities, loan and lease portfolio, and available funding sources.
The Newtek Bank board of directors has established an Asset/Liability Committee (the “ALCO Committee”) to oversee the implementation of an effective process for managing the risk profile
inherent in Newtek Bank’s balance sheet and related business activities as well as the ongoing monitoring and reporting thereon. Risks inherent in Newtek Bank’s balance sheet include interest rate
risk (i.e., the risk to liquidity and capital resulting from changes in interest rates), liquidity risk (the risk to the availability of funds to execute its business strategy and meet its obligations), and
similar risks. The ALCO Committee, subject to Newtek Bank board approval, is responsible for establishing policies, risk limits and capital levels (collectively “ALM Policies”) as well overseeing
and monitoring compliance therewith. Newtek Bank’s ALM Policies set forth a risk management framework relating to managing liquidity, managing fluctuations in interest rates, capital
management, investments, and hedging and the use of derivatives. The ALCO Committee and Newtek Bank’s board may implement additional policies and procedures relating to these areas in order
to manage risk to an appropriate level.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time period. The Company analyzes interest rate sensitivity position to manage the risk associated with interest rate movements
through the use of two simulation models: economic value of equity (“EVE”) and net interest income (“NII”) simulations. These simulations project both short-term and long-term interest rate risk
under a variety of instantaneous parallel rate shocks applied to a static balance sheet. The EVE simulation provides a long-term view of interest rate risk because it analyzes all of the Company’s
future cash flows. EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change
in the economic value of shareholders’ equity as interest rates change.
EVE and NII simulations are completed routinely on Newtek Bank’s balance sheet and presented to the ALCO Committee. Other positions outside of Newtek Bank are typically match funded or
hedged with instruments that have similar terms and/or interest rate features. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a
range of assumptions. The numerous assumptions used in the simulation process are provided to the ALCO Committee on at least an annual basis. Changes to these assumptions can significantly
affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in
spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or
other factors. Simulation analysis is only an estimate of interest rate risk exposure at a particular point in time. The Company regularly models various forecasted rate projections with non-parallel
shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or
depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile. Regular, robust modeling of various interest rate outcomes allows the
Company to properly assess and manage potential risks from various rate shifts.
Estimated Changes in EVE and NII. The table below sets forth, as of December 31, 2023, the estimated changes in our (i) EVE that would result from the designated instantaneous changes in the
forward rate curves; and (ii) NII that would result from the designated instantaneous changes in the U.S. Treasury yield curve, Prime Rate and the Secured Overnight Finance Rate. Computations of
prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be
relied on as indicative of actual results.
Basis Point ("bp") Change in
Estimated Increase/Decrease in Net Interest Income
Estimated Percentage Change in EVE
Interest Rates
+200
+100
-100
-200
12 Months Beginning December 31, 2023
12 Months Beginning December 31, 2024
As of December 31, 2023
15.4%
7.7
(7.6)
(15.4)
106
16.0%
8.0
(7.7)
(15.6)
1.8%
1.0
(1.0)
(2.2)
Rates are increased instantaneously at the beginning of the projection. The Company is asset sensitive, as the Company’s variable rate loan portfolio reprices the full amount of the assumed change in
interest rates, while fixed-rate Company notes will reprice on maturity and the retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. Interest rates do
not normally move all at once or evenly over time, but management believes that the analysis is useful to understanding the potential direction and magnitude of net interest income changes due to
changing interest rates.
The EVE analysis shows that the Company would theoretically modestly increase market value in a rising rate environment. The EVE asset sensitivity results from the combination of fixed-rate debt
and variable-rate debt which funds the variable-rate loan portfolio outside of Newtek Bank.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements and related notes begin on Page F-1, which are included in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES. .
(a) Evaluation of Disclosure Controls and Procedures:
As of December 31, 2023 (the end of the period covered by this report), management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Exchange Act).
Based on the evaluation of our disclosure controls and procedures management concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2023, due to
certain factors including identified material weaknesses. A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will be presented or not detected on a timely basis.
Based on additional analysis and other procedures performed by management, management concluded that the Consolidated Financial Statements included in this report fairly present in all material
respects the Company’s financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with U.S. GAAP. See the discussion below under
“Management’s Report on Internal Control Over Financial Reporting” for further information regarding the material weaknesses identified, as well as “NOTE 24—SELECTED QUARTERLY
FINANCIAL DATA (UNAUDITED)” to our consolidated financial statements included in “Item 15. Exhibits and Financial Statement Schedules” of this Form 10-K for further information regarding
the 2023 prior period adjustments.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) and for performing an assessment of the effectiveness of ICFR as of
December 31, 2023, as such term is defined in Exchange Act Rule 13a-15(f). ICFR is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP. The Company’s ICFR includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the Board
; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
107
Management assessed the effectiveness of our ICFR based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control —
Integrated Framework (2013). Based on this assessment, management concluded that the Company did not maintain effective ICFR as of December 31, 2023, as a result of the material weaknesses
described below.
Material Weaknesses in Internal Control Over Financial Reporting
The material weaknesses that were identified are as follows:
•
•
•
•
Significant Unusual Transactions – As noted in Item 1. Business, the Company completed the Acquisition and converted from a BDC to a financial holding company effective January 6,
2023, which caused a major restructuring within the Company, including a transition from being regulated under the 1940 Act and no longer qualifying for accounting treatment as an
investment company, which resulted in a significant change in the Company’s accounting and financial reporting requirements for the year ended December 31, 2023. Given the effect of the
Acquisition on the Company’s accounting and reporting requirements, the Company expended considerable capital and resources and engaged a reputable, national public accounting firm to
assist management with this transition. Ultimately, the Company did not adequately or appropriately identify and assess changes and resulting risks that could significantly impact the system
of internal control. This material weakness impacted the consolidation of the control investments that occurred on January 6, 2023 and the three subsequent interim periods, specifically
goodwill and intangibles, net deferred tax assets, income taxes receivable, income tax expense, additional paid in capital, non-interest income and expense, and EPS. It also could affect all
transaction cycles within the financial statements.
SOX Governance Program – Further adding to the complexity of the significant unusual transactions, the Company’s previously unconsolidated portfolio companies became consolidated
subsidiaries subject to the heightened standards of ICFR required by a SEC registrant under SOX 404 for the first time. While the Company engaged a reputable, national public accounting
firm to prepare for this transition and the Acquisition, as noted above, there were significant delays in the documentation of the internal control environment’s processes, resulting in
inadequate and untimely identification of financial reporting risks and the associated identification of key controls. This material weakness in our control environment impacted the overall
effectiveness of our ICFR and also contributed to the Company adjusting its previously issued quarterly financial statements for 2023 as discussed in “NOTE 24—SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)” to our consolidated financial statements. This material weakness could affect all transaction cycles within the financial statements.
Knowledge, Skills, and Experience of Staff – Given the conversion to a financial holding company, the knowledge, skills, and experience of Company staff that comprised those with a
financial reporting oversight role consisted of individuals with experience at a public investment company and/or BDC, in positions with less financial reporting oversight at public
companies, and/or limited public accounting experience auditing public financial holding companies. This impacted the overall effectiveness of the Company’s ICFR and also contributed to
the Company adjusting its previously issued quarterly condensed financial statements for 2023, as discussed in “NOTE 24—SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)” to our consolidated financial statements. This material weakness could affect all transaction cycles within the financial statements.
Information Technology General Controls (ITGC) – In the course of completing the Company’s assessment of ICFR as of December 31, 2023, management identified a number of
deficiencies related to the design and operating effectiveness of ITGCs for information systems that comprised part of the Company’s system of ICFR and are relevant to the preparation of
the Company’s consolidated financial statements (such information technology systems are referred to as the “Affected IT Systems”). These deficiencies in the design and operating
effectiveness of the controls involved logical access and program change management that are intended to ensure that access to financial applications and data are adequately restricted to
appropriate personnel, and that changes affecting the financial applications and underlying account records are identified, authorized, tested and implemented appropriately. The material
weakness was due to system limitations as a result to the age of the technology, which resulted in management’s inability to generate details of configuration, changes, and settings to
evidence the operating effectiveness of ITGCs. Management has concluded that deficiencies in ITGC logical access and related program change management, including controls intended to
ensure that access rights are compatible with job duties (segregation of duties) and to test changes to relevant information systems, existed and therefore represented a material weakness.
This material weakness could affect all transaction cycles within the financial statements.
108
• Management Review Controls – Management identified deficiencies due to the design and operating effectiveness of management review controls, including documentation and the level of
precision. The deficiencies related to control gaps, unmitigated risks, untimely review, insufficient documentation, improper testing procedures, and inconsistent performance frequency of
certain controls. This includes ITGCs that did not operate effectively due to insufficient management review controls related to the precision of the review, completeness and accuracy and
insufficient evidence of report lists, and the parameters used to generate such report lists. The Company did not sufficiently document and deploy appropriate control activities through
policies that establish what is expected and in procedures that put policies into action which resulted in a material weakness. This material weakness could affect all transaction cycles within
the financial statements.
•
•
•
Completeness and Accuracy of Information Produced by the Entity (“IPE”) – Management identified deficiencies due to a lack of available and reliable IPE, including multiple control gaps.
The control gaps are related to reports extracted from Affected IT Systems that were not verified for completeness and accuracy. These deficiencies related to untimely review, insufficient
documentation, improper testing procedures, and ineffective design of certain controls. Management did not sufficiently select and develop IPE control activities that contribute to the
mitigation of risks to achieve the reduction of risk to acceptable levels which resulted in a material weakness. This material weakness could affect all transaction cycles within the financial
statements.
NTS System Conversion – NTS’s system of record for webhosting revenue was converted during the first quarter of 2023 and certain changes made to the sunsetting system and the newly
implemented system to which it was converted were not tested and approved in a separate environment prior to being placed into production, which is a program change management ITGC.
As it specifically relates to this system conversion, the deficiencies in the aforementioned change management controls resulted in this material weakness as management did not develop
sufficient general control activities over technology to support the achievement of the conversion’s objectives. This material weakness impacted other assets, retained earnings, technology
services expense, and technology and IT support income.
NTS Revenue Cycle – Multiple controls over revenue recognition at NTS were not designed and implemented appropriately and/or did not operate effectively. As it specifically relates to this
deficiency, there was excessive turnover in the NTS controller role which led to the deficiencies in design, implementation, and operating effectiveness of the controls. Management did not
consistently retain individuals in that financial reporting oversight role resulting in a material weakness This material weakness impacted other assets, retained earnings, technology services
expense, and technology and IT support income.
(c) Audit Report of the Registered Public Accounting Firm.
RSM US LLP, our independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023,
as stated in its report, which is included under “ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this annual report on Form 10-K, which is consistent
with management’s report on ICFR as set forth above.
(d) Changes in Internal Control over Financial Reporting.
Except as described below under “Remediation Process,” there were no changes in the Company’s ICFR (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recently
completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
Remediation Process
While certain actions have been taken to enhance the Company’s ICFR relating to the material weaknesses identified as of the date of this report, we are still in the process of implementing our
comprehensive remediation plan. Accordingly, the previously identified material weaknesses cannot be considered remediated until each control has been appropriately designed, has operated for a
sufficient period of time, and until management has concluded, through testing, that the control is operating effectively.
Following the identification of the material weaknesses described above, with the oversight of the Audit Committee, we commenced a process to remediate the underlying causes of those material
weaknesses, enhance the control environment and strengthen our ICFR. The initial steps that the Company has taken to-date, and will continue to take, with respect to remediation of the material
weaknesses identified are summarized below:
•
The hiring of senior financial management and additional qualified finance and accounting resources, including:
109
◦
◦
◦
◦
The hiring of a Chief Financial Officer in May 2023 with significant financial holding company experience and prior experience as a Chief Accounting Officer of a financial holding
company, who was appointed to and is serving as the Company’s Principal Financial Officer as of April 1, 2024;
The appointment of a new Chief Accounting Officer with significant financial holding company experience and prior experience as a Chief Accounting Officer of a bank holding
company who is serving as the Company’s Principal Accounting Officer as of April 1, 2024;
The hiring and appointment of a Chief Risk Officer with significant financial holding company experience and prior experience as a Chief Audit Executive of a bank holding
company who began employment on April 1, 2024;
The recent and anticipated hiring of additional qualified finance and accounting resources, as well as providing appropriate training to the relevant current and/or prospective control
owners.
•
•
•
•
Improving the design, operation, and monitoring of control activities and procedures to address ICFR requirements, including:
Improvements to the financial reporting process and control activities, including strengthening reconciliation controls;
The expansion of the responsibilities of the Company’s third-party internal audit provider; and
The continuing evaluation of the Company’s third-party vendors whose role is the facilitation of the timely documentation and related evaluation of the design and operating
effectiveness of IFCR under SOX 404 and commensurate with the complexity of a well-diversified financial holding company who actively participates in the capital markets.
◦
◦
◦
Improving the design, operating effectiveness, and documentation of management review controls and controls designed to verify the completeness and accuracy of data and IPE used in
financial reporting. These activities include the development of new management review controls, training, and education for process owners on audit requirements, and the creation of
review templates to properly document evidence of management review in addition to building a data governance framework for data used in financial reporting.
Implementing a new ERP system, along with other technology, that interfaces with other internal systems and are designed to ensure only authorized individuals can access certain modules
and perform certain duties based on their role and responsibilities. Detailed processes and automated controls are maintained in the systems in an effort to ensure all control activities
conform with our risk and control matrix, and to limit manual intervention and the risk of human error.
Implementing new financial reporting software with (i) greater preventative controls that address completeness and accuracy of information produced by the Company and (ii) data
connections that are directly tied to source systems and are explicitly linked to the future data governance framework.
• Management has been actively engaged in the implementation of a remediation plan designed to ensure that controls contributing to remediation of our ITGC material weakness are designed
appropriately and will operate effectively, which include but are not limited to the following:
Enhancing information technology governance policies and procedures;
◦
◦ Designing and implementing control activities and procedures around user and administrator access and program change management;
◦
◦ Hiring of additional qualified information technology resources and providing appropriate t training to the relevant control owners.
Procuring and implementing technology to facilitate change management and logical access to systems; and
The status of our remediation plan is being, and will continue to be, reported by management to the Audit Committee on a regular basis. In addition, management has assigned executive owners to
oversee the remedial changes to the overall design of the Company’s internal control environment and to address the root causes of our material weaknesses.
As management continues to evaluate and strive to improve the Company’s ICFR, management may take additional measures to address these control deficiencies or modify the previously disclosed
remediation plan. While management intends to resolve all of the material weaknesses, no assurance can be provided that these remediation efforts will be successful, that the Company’s internal
controls over financial reporting will be effective as a result of these efforts by any particular date, nor is it certain whether additional actions will be required.
110
ITEM 9B. OTHER INFORMATION.
Trading Arrangements
On June 16, 2023, Salvatore Mulia, a member of our Board, entered into a written plan for the sale of an aggregate 9,000 shares of common stock. The plan is intended to satisfy the affirmative
defense conditions of Rule 10b5-1(c) under the Exchange Act. The plan commenced on September 21, 2023 and terminates on September 22, 2024.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2024 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days following the end of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2024 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days following the end of our fiscal year.
In November 2023, the Company adopted a Clawback Policy in accordance with Section 10D of the Exchange Act and Rule 10D-1 promulgated thereunder.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2024 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days following the end of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2024 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days following the end of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2024 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than 120 days following the end of our fiscal year.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements.
111
Table of Contents
(a)(2) No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial statements.
(a)(3) Exhibits.
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
112
Table of Contents
Number
Description
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.1
10.2
10.3
10.4
Amended and Restated Articles of Incorporation of Newtek Business Services Corp. (Previously filed in connection with Pre-Effective Amendment No. 3 to the Registrant’s
Registration Statement on Form N-2 (File No. 333-191499) filed on November 3, 2014, and incorporated by reference herein).
Amended Bylaws of NewtekOne, Inc. (Incorporated by reference to Exhibit 99.1 of NewtekOne, Inc.''s Current Report on Form 8-K, filed January 24, 2023).
Newtek Conventional Lending II, LLC Limited Liability Company Agreement (Incorporated by reference to Exhibit 3.3 to Newtek’s Form 10-Q for the quarter ended March
31, 2021 (File No. 814-01035), filed May 13, 2021.
Form of Common Stock Certificate (Incorporated by reference to Exhibit 99.5 to Registrant’s Registration Statement on Form N-14 (File No. 333-195998), filed September 24,
2014).
Description of Securities filed herewith.
Base Indenture, dated as of September 23, 2015, between Newtek, as issuer, and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit d.2 to
Newtek’s Post-Effective Amendment No. 1 to its Registration Statement on Form N-2, No. 333-204915, filed September 23, 2015).
Fourth Supplemental Indenture, dated as of July 29, 2019, between Newtek, as issuer, and U.S. Bank, National Association, as trustee (Incorporated by reference to Exhibit d.8
to Newtek’s Post-Effective Amendment No. 7 to its Registration Statement on Form N-2, No. 333-224976, filed July 29, 2019).
Form of Global Note with respect to the 5.75% Notes due 2024 (Incorporated by reference to Exhibit d.8 to Newtek’s Post-Effective Amendment No. 7 to its Registration
Statement on Form N-2, No. 333-224976, filed July 29, 2019).
Fifth Supplemental Indenture, dated as of November 27, 2020, relating to the 6.85% Notes due 2025, by and between the Company and U.S. Bank, National Association, as
trustee (Incorporated by reference to Exhibit 4.2 to Newtek’s Current Report on Form 8-K, filed November 27, 2020).
Sixth Supplemental Indenture, dated as of January 6, 2021, relating to the 6.85% Notes due 2025, by and between the Company and U.S. Bank, National Association, as trustee
(Incorporated by reference to Exhibit 4.3 to Newtek’s Current Report on Form 8-K filed January 6, 2021).
Seventh Supplemental Indenture dated of January 22, 2021 between Newtek Business Services Corp. and U.S. Bank National Association, as trustee (Incorporated by reference
to Exhibit 4.1 to Newtek’s Current Report on Form 8-K filed January 22, 2021).
Form of 5.50 % Notes due 2026 (Incorporated by reference to Exhibit 4.2 to Newtek’s Current Report on Form 8-K filed January 22, 2021).
Eighth Supplement Indenture dated of February 16, 2021 between Newtek Business Services Corp. and U.S. Bank National Association, as trustee (Incorporated by reference
to Exhibit 4.3 to Newtek’s Current Report on Form 8-K filed February 16, 2021).
Form of 5.75 % Notes due 2024 (Incorporated by reference to Exhibit 4.4 to Newtek’s Current Report on Form 8-K filed February 16, 2021).
Tenth Supplemental Indenture, dated as of March 31, 2022 relating to the 5.00% Notes due 2025, by and between the Company and U.S. Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.2 to Newtek’s Current Report on Form 8-K, filed March 31, 2022).
Form of Dividend Reinvestment Plan (Previously filed in connection with Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No.
333-191499) filed on November 3, 2014, and incorporated by reference herein).
Guaranty, dated as of February 28, 2011, by and between Newtek Business Services, Inc. and Sterling National Bank (Incorporated herein by reference to Exhibit 10.10.2 to
Newtek Business Services, Inc.’s Current Report on Form 8-K (File No. 001-16123), filed March 3, 2011).
Fourth Amended and Restated Loan and Security Agreement, dated as of May 11, 2017, by and among Newtek Small Business Finance, LLC, Capital One, National
Association and UBS Bank USA as Lenders, and Capital One, National Association as Administrative Agent, Sole Bookrunner and Sole Lead Arranger (Incorporated by
reference herein to Exhibit 10.1 to Newtek’s Current Report on Form 8-K, filed May 16, 2017).
Second Amended and Restated Guaranty of Payment and Performance, dated as of May 11, 2017, delivered by Newtek Business Services Corp. in favor of Capital One,
National Association, in its capacity as administrative agent, and the Lenders under the Fourth Amended and Restated Loan and Security Agreement (incorporated by reference
herein to Exhibit 10.2 to Newtek’s Current Report on Form 8-K, filed May 16, 2017).
113
Table of Contents
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Revolving Credit and Security Agreement, dated as of July 31, 2018, by and among Newtek Business Lending, LLC and Capital One, National Association (Incorporated by
reference to Exhibit k.4 to Post-Effective Amendment No. 2 to Newtek’s Registration Statement on Form N-2, No. 333-224976, filed August 31, 2018).
Guaranty of Payment and Performance, dated as of July 31, 2018, by and among Newtek and Capital One, National Association (Incorporated by reference to Exhibit k.5 to
Post-Effective Amendment No. 2 to Newtek’s Registration Statement on Form N-2, No. 333-224976, filed August 31, 2018).
Omnibus Amendment No. 3 to Loan Documents, dated as of September 13, 2019, by and among Newtek Small Business Finance, LLC, Capital One, National Association and
UBS Bank USA as Lenders, and Capital One, National Association as Administrative Agent filed herewith.
Amended and Restated Form of Custody Agreement dated as of October 30, 2015 by and between Newtek Business Services Corp. and U.S. Bank National Association
(Incorporated herein by reference to Exhibit 99.1 to Newtek Business Services Corp.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 814-
01035) filed on November 5, 2015.
Membership Purchase Agreement, dated July 23, 2015, by and among Newtek Business Services Corp., Newtek Business Services Holdco1, Inc., Premier Payments LLC and
Jeffrey Rubin (Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K (File No. 814-01035), filed on July 29, 2015).
Omnibus Amendment No. 2 to Loan Documents, dated as of June 24, 2019, by and among Newtek Small Business Finance, LLC, and UBS Bank USA, as lender, and Capital
One, National Association as Administrative Agent (Incorporated by reference to Exhibit 10.1 to Newtek’s Current Report on Form 8-K, filed June 24, 2019).
Credit Agreement dated November 8, 2018, by and among Universal Processing Services of Wisconsin LLC and Premier Payments LLC, and the several banks and other
parties from time to time parties thereto as lenders and Webster Bank, National Association. (Incorporated by reference herein to Exhibit k.6 to Newtek’s Post-Effective
Amendment No. 3 to its Registration Statement on Form N-2, No. 333-224976, filed December 14, 2018).
Parent Guaranty Agreement, dated November 8, 2018, by and among the Company and Webster Bank, National Association. (Incorporated by reference herein to Exhibit k.7 to
Newtek’s Post-Effective Amendment No. 3 to its Registration Statement on Form N-2, No. 333-224976, filed December 14, 2018).
Limited Liability Agreement, dated as of November 27, 2018, by and between Newtek Commercial Lending, Inc. and Conventional Lending TCP Holdings LLC (Incorporated
by reference to Exhibit 10.1 to Newtek’s Current Report on Form 8-K filed November 29, 2018).
Omnibus Amendment No. 4 to Loan Documents, dated as of May 7, 2020, by and among Newtek Small Business Finance, LLC, Capital One, National Association and UBS
Bank USA as Lenders and Capital One, National Association as Administrative Agent (incorporated by reference to Exhibit 10.1 to Newtek’s Current Report on Form 8-K,
filed May 11, 2020).
Stock Purchase Agreement by and among Newtek Business Services Corp. and the Sellers named in Schedule A thereto (incorporated by reference to the Company’s Current
Report on Form 8-K, filed August 2, 2021).
Mortgage Warehouse Loan and Security Agreement, by and between NBL SPV III, LLC and One Florida Bank, dated September 21, 2021 (incorporated by reference to
Exhibit 10.1 to Newtek’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (File No. 814-010305), filed November 12, 2021).
Master Repurchase Agreement, by and between NBL SPV II, LLC and Deutsche Bank AG, dated March 18, 2021 (incorporated by reference to Exhibit 10.1 to Newtek’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (File No. 814-010305), filed November 12, 2021).
Newtek Business Services Corp. 2015 Stock Incentive Plan (incorporated by reference to Exhibit 4.4 to Newtek’s Registration Statement on Form S-8 (File No. 333-212679),
filed July 26, 2016).
Form of Restricted Stock Award Agreement - 2015 Stock Incentive Plan, filed herewith.
NewtekOne 2023 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Newtek’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (File No.
001-36742), filed August 7, 2023).
Form of Restricted Stock Award Agreement - 2023 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Newtek’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2023 (File No. 001-36742), filed November 9, 2023).
NewtekOne 2023 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to Newtek’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023
(File No. 001-36742), filed August 7, 2023).
114
Table of Contents
10.23
10.24
10.25
14.1
21.1
23.1
31.1
31.2
32.1
32.2
97.1
Employment Agreement by and between NewtekOne, Inc., Newtek Bank N.A., and M. Scott Price dated as of May 16, 2023 (incorporated by reference to Exhibit 10.1 to
Newtek’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (File No. 001-36742), filed November 9, 2023).
Amendment to Employment Agreement by and between NewtekOne, Inc., Newtek Bank N.A., and M. Scott Price dated as of July 1, 2023 (incorporated by reference to Exhibit
10.2 to Newtek’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (File No. 001-36742), filed November 9, 2023).
Form of Change in Control Agreement. filed herewith.
Code of Ethics (Previously filed in connection with Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-191499) filed on
November 3, 2014, and incorporated by reference herein).
Subsidiaries of the Registrant filed herewith.
Consent of Independent Registered Public Accounting Firm.
Certification by Principal Executive Officer required by Rule 13a-14 under the Securities Exchange Act of 1934, as amended, furnished herewith.
Certification by Principal Financial Officer required by Rule 13a-14 under the Securities Exchange Act of 1934, as amended, furnished herewith.
Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 filed herewith.
NewtekOne Clawback Policy, filed herewith.
115
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Date: April 1, 2024
Date: April 1, 2024
Date: April 1, 2024
NEWTEKONE, INC.
By:
By:
By:
/S/ BARRY SLOANE
Barry Sloane
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
/S/ M. SCOTT PRICE
M. Scott Price
Chief Financial Officer
(Principal Financial Officer)
/S/ FRANK DEMARIA
Frank DeMaria
Chief Accounting Officer
(Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/S/ BARRY SLOANE
Barry Sloane
/S/ M. SCOTT PRICE
M. Scott Price
/S/ FRANK DEMARIA
Frank DeMaria
/S/ RICHARD SALUTE
Richard Salute
/S/ SALVATORE MULIA
Salvatore Mulia
/S/ GREGORY ZINK
Gregory Zink
/S/ PETER DOWNS
Peter Downs
/S/ FERNANDO PEREZ-HICKMAN
Fernando Perez-Hickman
/S/ HALLI RAZON-FEINGOLD
Halli Razon-Feingold
Title
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
116
Date
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
NEWTEKONE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Report of Independent Registered Public Accounting Firm (PCAOB ID: 49)
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Statements of Financial Condition as of December 31, 2023 and 2022
Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Changes in Shareholders’ Equity for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
F-1
PAGE NO.
F-2
F-5
F-7
F-9
F-11
F-12
F-14
F-16
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of NewtekOne, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of NewtekOne, Inc. and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated
statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated
financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of
December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our
report dated April 1, 2024 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2023, due to
the adoption of Accounting Standard Codification (“ASC”)Topic 326, Financial Instruments—Credit Losses.
Registered Investment Company to Financial Holding Company
As discussed in Note 1 to the consolidated financial statements, the Company ceased being an investment company subject to accounting guidance ASC 946, Financial Services - Investment
Companies and ASC 810, Consolidations became effective for the Company on January 6, 2023. Therefore, controlled investments previously carried at fair value became subsidiaries of the
Company and consolidated utilizing historical cost basis.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit
committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-2
Valuation of loans held for sale and loans held for investment, measured at fair value – Accrual and Non-accrual loans
As described in Notes 2, 5, 7 and 9 to the consolidated financial statements, the Company has loans held for sale and loans held for investment, which are measured at fair value using unobservable
inputs and assumptions, and as such the Company’s loans held for sale and loans held for investment, which are measured at fair value as of December 31, 2023 are classified as level 3 within the fair
value hierarchy as described in Note 9. Determining the fair value of the Level 3 loans held for sale and loans held for investment, which are measured at fair value requires management to make
significant judgments about the valuation methodologies and inputs and assumptions used in the fair value calculation, including, but not limited to, historical credit losses, discounts for lack of
marketability, underlying cash flows, and the impact of economic conditions. As of December 31, 2023, total Level 3 loans held for sale and loans held for investment, which are measured at fair
value had a fair value of $118.5 and $469.8 million, respectively.
We identified the valuation of level 3 loans held for sale and loans held for investment, which are measured at fair value as a critical audit matter because of the judgments necessary for management
to select and apply valuation techniques and assumptions, the high degree of auditor judgment involved, and the extensive audit effort involved in testing the valuations. Our audit procedures related
to the valuation of the Company’s level 3 loans held for sale and loans held for investment, which are measured at fair value included the following, among others:
• We obtained an understanding of and evaluated the methods and assumptions management uses to value the loans held for sale and loans held for investment, which are measured at fair
value - accrual and non-accrual loans.
• We tested the completeness and accuracy of information used in the valuations by agreeing the total amount of schedules to the trial balance.
• With the assistance of our valuation specialists, we evaluated the reasonableness of the methods and assumptions used by management in the valuation of accrual loans (discount rate, default
rate, prepayment rate, cost of servicing, etc.) and performed a recalculation for a sample of loans to ensure validity of the valuation model.
• With the assistance of our valuation specialists, we evaluated the reasonableness of the methods and assumptions used by management in the valuation of non-accrual loans (prepayment rate,
probability of default, time to liquidate and discount rate).
• We tested management’s estimates to evaluate the reasonableness of the fair market value of collateral used by management in the valuation of non-accrual loans for a sample of loans, by
validating the source of information used by management with the relevant internal or external information from which it was derived. Additionally, we recalculated the present value of
expected cashflows and compared it with the value of loans determined by management.
Valuation of servicing assets
As described in Notes 2, 7 and 9 to the consolidated financial statements, servicing assets are measured at fair value. The Company’s servicing assets are measured at fair value using unobservable
inputs and assumptions, and as such the Company’s servicing assets as of December 31, 2023 are classified as Level 3 within the fair value hierarchy as described in Note 9. Determining the fair
value of the Level 3 servicing assets requires management to make significant judgments about the valuation methodologies and inputs and assumptions used in the fair value calculation, including,
but not limited to, discount rate, servicing costs, default rate, prepayment rate, and the impact of economic conditions. As of December 31, 2023, total Level 3 servicing assets had a fair value of
$39.7 million.
We identified the valuation of servicing assets as a critical audit matter because of the judgments necessary for management to select and apply valuation techniques and assumptions, the high degree
of auditor judgment involved, and the extensive audit effort involved in testing the valuations. Our audit procedures related to the valuation of the servicing assets included the following, among
others:
• We obtained an understanding of and evaluated the methods and assumptions management uses to value the servicing assets.
• We tested the completeness and accuracy of information used in the valuations by agreeing the total principal balance of the loans sold in the schedules to the loan subledger.
• With the assistance of valuation specialists, developed an independent estimate of fair value for servicing assets or tested management’s fair value estimates as of December 31, 2023.
• We reviewed the significant assumptions (e.g. discount rate, prepayment rate, default rate and servicing cost) used by externally engaged valuation specialist for reasonableness.
Allowance for credit losses on loans
As described in Notes 2 and 5 to the consolidated financial statements, the allowance for credit losses on loans is established through a provision for credit losses and represents an amount which, in
management’s judgment, will be adequate to absorb losses on existing loans. The Company’s consolidated allowance for credit losses on loan balances was $12.6 million at December 31, 2023. The
allowance for credit losses on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share
risk characteristics are evaluated on an individual basis.
F-3
The Company uses the discounted cash flow method to estimate expected credit losses for all loan portfolio segments measured on a pool basis wherein payment expectations are adjusted for
estimated prepayment speeds, probability of default (PD), and loss given default (LGD). The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to
utilize when modeling lifetime PD. This analysis also determines how expected PD and LGD will react to forecasted levels of the loss drivers. Management utilizes various economic indicators such
as changes in unemployment rates, gross domestic product (GDP), and other relevant factors as loss drivers and has determined that, due to historical volatility in economic data, four quarters
currently represents a reasonable and supportable forecast period, followed by a four-period reversion to historical mean levels for each of the various economic indicators. The allowance evaluation
also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii) delinquency and other credit
quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of the Company’s business impacting the loan portfolio, (v) and other external factors, that may include, but are not
limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster. The development of the loan loss allocation for pools of
loans with similar risk characteristics requires a significant amount of judgment by management and the assumptions utilized are subject to changing economic conditions.
We identified the Company’s allowance for credit losses on loans as a critical audit matter, specifically the economic forecasts and qualitative factors, because they involved complex auditor
judgment in the evaluation of the Company’s assumptions. Additionally, complex auditor judgment was required to examine the methodology that underpins the allowance for credit losses on pools
of loans with similar risk characteristics. This includes modeling of PD, LGD, economic forecasts, and qualitative factors. Our audit procedures related to this critical audit matter included the
following, among others:
• We tested the completeness and accuracy of data used by management in determining inputs to the PD and LGD, and the loss rate model used for SBA 7(a) loans by agreeing those inputs to
internal or external information sources.
• We evaluated management’s judgments used in the identification of peer banks for PD and LGD calculations, by comparing peer banks to external information sources.
• We evaluated management’s forecasts of future economic indicators for reasonableness, which included unemployment, housing price index, and national GDP growth, among others, by
comparing these forecasts to external and internal information sources.
/s/ RSM US LLP
Hartford, Connecticut
April 1, 2024
F-4
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of NewtekOne, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited NewtekOne, Inc. and its subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weaknesses described below on the
achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the
Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2023, and the related notes to the consolidated financial statements and our report dated April 1, 2024 expressed an unqualified opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's
assessment:
•
•
•
•
Significant Unusual Transactions – The Company converted from a business development company (BDC) to a financial holding company (FHC) effective January 6, 2023. The Company
did not adequately or appropriately identify and assess changes and resulting risks that could significantly impact the system of internal control resulting from this conversion. This material
weakness impacted the consolidation of the control investments that occurred on January 6, 2023, and the three subsequent interim periods, specifically goodwill and intangibles, net deferred
tax assets, income taxes receivable, income tax expense, additional paid in capital, non-interest income and expense, and earnings per share. This material weakness could affect all
transaction cycles within the consolidated financial statements.
SOX Governance Program – The Company’s controlled investments which were previously unconsolidated portfolio companies became consolidated subsidiaries subject to internal control
over financial reporting (ICFR) for the first time. There were significant delays in the documentation of the internal control environment’s processes, resulting in inadequate and untimely
identification of financial reporting risks and the associated identification of key controls over financial reporting. This material weakness in the control environment impacted the overall
effectiveness of the Company’s ICFR and contributed to the Company adjusting its previously issued quarterly financial statements for 2023 as discussed in “Note 24 – Selected Quarterly
Financial Data (Unaudited)” to the consolidated financial statements. This material weakness could affect all transaction cycles within the consolidated financial statements.
Knowledge, Skills, and Experience of Staff – Certain Company staff in financial reporting oversight roles had insufficient knowledge, skills, and experience for a public FHC. This impacted
the overall effectiveness of the Company’s ICFR and contributed to the Company adjusting its previously issued quarterly financial statements for 2023, as discussed in “Note 24- Selected
Quarterly Financial Data (Unaudited)” to the consolidated financial statements. This material weakness could affect all transaction cycles within the consolidated financial statements.
Information Technology General Controls (ITGC) – There were a number of deficiencies related to the design and operating effectiveness of ITGCs for information systems that comprised
part of the Company’s system of ICFR and are relevant to the preparation of the Company’s consolidated financial statements. These deficiencies in the design and operating effectiveness of
the ITGCs involved logical access and program change management which are intended to ensure that access to financial applications and data are adequately restricted to appropriate
personnel, and that changes affecting the financial applications and underlying account records are identified, authorized, tested and implemented appropriately. Deficiencies in ITGC logical
access and related program change management, including controls intended to ensure that access rights are compatible with job duties (segregation of duties) and to test changes to relevant
information systems, existed and therefore represented a material weakness. This material weakness could affect all transaction cycles within the consolidated financial statements.
F-5
• Management Review Controls – There were deficiencies in the design and operating effectiveness of management review controls, including documentation and the level of precision. The
deficiencies related to control gaps, unmitigated risks, untimely review, insufficient documentation, improper testing procedures, and inconsistent performance frequency of certain controls.
This includes ITGC deficiencies in the precision of review, completeness and accuracy of reports used in management reviews, and the parameters used to generate such reports. This
material weakness could affect all transaction cycles within the consolidated financial statements.
Completeness and Accuracy of Information Produced by the Entity (“IPE”) – There were deficiencies due to a lack of available and reliable IPE, including multiple control gaps. The control
gaps are related to reports extracted from certain information technology systems that were not verified for completeness and accuracy. These deficiencies related to untimely review,
insufficient documentation, improper testing procedures, and ineffective design of certain controls. Management did not sufficiently select and develop IPE control activities that contribute
to the mitigation of risks to achieve the reduction of risk to acceptable levels which resulted in a material weakness. This material weakness could affect all transaction cycles within the
consolidated financial statements.
Newtek Technology Solutions (NTS) System Conversion – NTS’s system of record for webhosting revenue was converted during the first quarter of 2023 and certain changes made to the
former and current systems were not tested and approved in a separate environment prior to being placed into production. As it relates to this system conversion, management did not develop
sufficient general control activities over program change management to support the achievement of the conversion’s objectives, resulting in a material weakness. This material weakness
impacted other assets, retained earnings, technology services expense, and technology and IT support income.
NTS Revenue Cycle – There were deficiencies in design, implementation and operating effectiveness of the NTS revenue recognition controls. Management did not retain consistent
individuals with the appropriate skills knowledge and expertise in that financial reporting oversight role resulting in a material weakness. This material weakness impacted other assets,
retained earnings, technology services expense, and technology and IT support income.
•
•
•
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended
December 31, 2023 of the Company, and this report does not affect our report dated April 1, 2024 on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in
the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Hartford, Connecticut
April 1, 2024
F-6
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, except for Per Share Data)
ASSETS
December 31, 2023
Financial Holding Company
December 31, 2022
Investment Company
Cash and due from banks
Restricted cash
Interest bearing deposits in banks
Total cash and cash equivalents
Debt securities available-for-sale, at fair value
Loans held for sale, at fair value
Loans held for sale, at LCM
Loans held for investment, at fair value
Loans held for investment, at amortized cost, net of deferred fees and costs
Allowance for credit losses
Loans held for investment, at amortized cost, net
Federal Home Loan Bank and Federal Reserve Bank stock
Settlement receivable
Joint ventures, at fair value (cost of $37,864 and $23,314), respectively
Controlled investments (cost of $0 and $131,495), respectively
Non-control investments (cost of $796 and $1,360), respectively
Goodwill and intangibles
Right of use assets
Deferred tax asset, net
Servicing assets
Other assets
Total assets
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
LIABILITIES AND SHAREHOLDERS’ EQUITY
Borrowings
Dividends payable
Lease liabilities
Deferred tax liabilities, net
Due to participants
Accounts payable, accrued expenses and other liabilities
Total liabilities
Commitment and contingencies (Note 14)
$
$
$
Shareholders' Equity:
Preferred stock (par value $0.02 per share; authorized 20 shares, 20 shares issued and outstanding)
Common stock (par value $0.02 per share; authorized 200,000 shares, 24,680 and 24,609 shares issued and outstanding,
respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of income taxes
F-7
See accompanying notes to consolidated financial statements.
15,398 $
30,919
137,689
184,006
32,171
118,867
56,607
469,801
336,305
(12,574)
323,731
3,635
62,230
40,859
—
728
30,120
5,701
5,230
39,725
56,102
1,429,513 $
10,053 $
453,452
463,505
644,122
4,792
6,952
—
23,796
37,300
1,180,467
19,738
492
200,913
28,051
(148)
53,692
71,914
—
125,606
—
19,171
—
505,268
—
—
—
—
—
23,022
259,217
1,360
—
6,484
—
30,268
28,506
998,902
—
—
—
539,326
—
7,973
19,194
35,627
21,424
623,544
—
492
354,243
20,623
—
Total shareholders' equity
Total liabilities and shareholders' equity
$
249,046
1,429,513 $
375,358
998,902
F-8
See accompanying notes to consolidated financial statements.
Interest income
Debt securities available-for-sale
Loans and fees on loans
Loans and fees on loans - PPP loans
Interest from affiliates
Other interest earning assets
Total interest income
Interest expense
Deposits
Notes and securitizations
Bank and FHLB borrowings
Notes payable related party
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Dividend income
Loan servicing asset revaluation
Servicing income
Net gains on sales of loans
Net gain (loss) on loans under the fair value option
Technology and IT support income
Electronic payment processing income
Other noninterest income
Total noninterest income
Noninterest expense
Salaries and employee benefits expense
Technology services expense
Electronic payment processing expense
Professional services expense
Other loan origination and maintenance expense
Depreciation and amortization
Loss on extinguishment of debt
Other general and administrative costs
Total noninterest expense
Net income before taxes
Income tax expense (benefit)
Net income
Dividends to preferred shareholders
Net income available to common shareholders
Earnings per common share:
Basic
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except for Per Share Data)
2023
Financial Holding Company
2022
Investment Company
2021
Investment Company
Year ended December 31,
$
1,518 $
— $
84,001
—
—
8,854
94,373
15,849
40,217
11,673
—
67,739
26,634
11,704
14,930
1,757
(3,549)
18,289
50,734
18,008
24,916
42,855
23,762
176,772
65,708
14,272
18,327
13,077
9,433
2,884
271
22,357
146,329
45,373
(1,956)
47,329
(1,454)
45,875
35,696
—
2,921
—
38,617
—
21,780
3,998
547
26,325
12,292
—
12,292
24,657
(10,095)
13,698
56,901
(26,504)
—
—
34,221
92,878
20,186
—
—
7,134
30,746
239
417
7,673
66,395
38,775
6,464
32,311
—
32,311
$
1.89 $
1.34 $
F-9
See accompanying notes to consolidated financial statements.
—
25,951
49,989
3,026
—
78,966
—
18,591
1,536
388
20,515
58,451
—
58,451
9,896
(6,778)
11,307
53,113
11,477
—
—
10,295
89,310
17,866
—
—
5,610
29,506
304
1,552
7,454
62,292
85,469
1,327
84,142
—
84,142
3.69
Diluted
$
1.88 $
1.34 $
3.69
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
F-10
See accompanying notes to consolidated financial statements.
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, except for Per Share Data)
Net income
Other comprehensive loss before tax:
Net unrealized loss on debt securities available-for-sale during the period
Other comprehensive loss before tax
Income tax benefit
Other comprehensive loss, net of tax
Comprehensive income
Year ended December 31,
2023
Financial Holding
Company
2022
Investment Company
2021
Investment Company
$
$
47,329 $
32,311 $
(201)
(201)
53
(148)
47,181 $
—
—
—
—
32,311 $
84,142
—
—
—
—
84,142
F-11
See accompanying notes to consolidated financial statements.
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, except for Per Share Data)
Common stock
Preferred stock
Shares
Amount
Shares
Amount
Addition-al
paid-in
capital
Accumul-
ated other
comprehe-
nsive income
(loss)
Accumulated
undistributed
earnings
Retained
earnings
Total equity
375,358
— $
Balance at December 31, 2022
24,609 $
492
— $
— $
354,243 $
— $
20,623 $
Conversion from BDC to Bank Holding
Company Adjustments:
Change in presentation
Removal of fair value adjustments
Consolidation of controlled investments
Reassessment of deferred tax assets and
liabilities
DRIP shares issued
Stock-based compensation expense, net of
forfeitures
Dividends declared related to RSA, net of
accrued dividends forfeited
Purchase of vested stock for employee
payroll tax withholding
Restricted stock awards, net of forfeitures
ESPP issuances
Issuance of Preferred stock
Preferred stock issuance costs
Dividends declared common shares
($0.18/share)
Dividends declared preferred shares
($12.27/share)
Net income (loss)
Other comprehensive loss, net of tax
Balance at December 31, 2023
—
—
—
—
16
—
16
(17)
52
4
—
—
—
—
—
—
24,680 $
—
—
—
—
—
—
—
(1)
1
—
—
—
—
—
—
—
492
—
—
—
—
—
—
—
—
—
—
20
—
—
—
—
245
—
—
—
—
—
—
—
20,000
(507)
—
20,623
(138,043)
(57,961)
19,266
216
2,828
218
(533)
—
56
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(20,623)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(143)
—
—
—
—
(138,043)
(57,859)
19,266
216
2,828
(218)
—
—
—
—
—
—
(534)
1
56
20,000
(507)
(17,463)
(17,463)
—
—
—
20 $
—
—
—
19,738 $
—
—
—
200,913 $
—
—
(148)
(148) $
—
—
—
— $
(1,454)
47,329
—
28,051 $
(1,454)
47,329
(148)
249,046
F-12
See accompanying notes to consolidated financial statements.
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, except for Per Share Data)
Balance at December 31, 2021
DRIP shares issued
Stock-based compensation expense
Dividends Declared related to RSA
Purchase of vested stock for employee payroll tax withholding
Issuance of common stock, net of offering costs
Restricted stock awards
Dividends declared common shares
RIC tax reclassification
Net increase resulting from operations:
Net investment income
Net realized gain on investments
Net unrealized depreciation on investments
Balance at December 31, 2022
Common stock
Shares
Amount
Additional paid-in-
capital
Accumulated
undistributed
earnings
Total equity
24,159 $
95
—
—
(38)
107
286
—
—
—
—
—
24,609 $
483 $
3
—
—
—
2
4
—
—
—
—
—
492 $
367,663 $
1,611
2,511
646
(826)
2,017
(4)
—
(19,375)
—
—
—
354,243 $
35,741 $
—
—
(646)
—
—
—
(66,158)
19,375
(6,476)
57,346
(18,559)
20,623 $
403,887
1,614
2,511
—
(826)
2,019
—
(66,158)
—
(6,476)
57,346
(18,559)
375,358
F-13
See accompanying notes to consolidated financial statements.
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Net unrealized appreciation on joint ventures and non-control investments
Net unrealized appreciation on controlled investments
Net realized gain (loss) on controlled investments
Net (gain) loss on loans accounted for under the fair value option
Net unrealized depreciation on servicing assets
Net unrealized depreciation (appreciation) on derivative transactions
Net gain on sales of loans
Net accretion of premium/discount
Loss on extinguishment of debt
Amortization of deferred financing costs
Provision for credit losses
Allowance for doubtful accounts
Stock compensation expense
Deferred income tax (benefit) expense
Depreciation and amortization
Proceeds from sale of loans held for sale
Purchase of loans held for sale from affiliate
Purchase of loans held for sale
Sale of loans to affiliate
Funding of loans held for sale
Funding of controlled investments
Funding of non-control/affiliate investment
Principal received on loans held for sale
Principal received from controlled investments
Principal received from non-control investments
Return of investment from controlled investments
Other, net
Changes in operating assets and liabilities:
Settlement receivable
Income tax receivable
Dividends receivable
Due to/from related parties
Other assets
Dividends payable
Due to participants
Accounts payable, accrued expenses and other liabilities
Other, net
Net cash used in operating activities
Cash flows from investing activities:
2023
Financial Holding
Company
Year Ended December 31,
2022
2021
Investment Company
Investment Company
$
47,329 $
32,311 $
84,142
(3,219)
—
—
(18,008)
3,549
699
(50,734)
(675)
271
4,052
11,704
3,637
2,828
(4,800)
2,884
695,461
(5,279)
—
—
(783,035)
—
—
12,235
—
—
—
—
(62,230)
(4,040)
493
(165)
7,432
4,776
(11,832)
(22,552)
—
(169,219)
—
(24,321)
—
26,504
10,095
(183)
(56,901)
—
417
2,494
—
—
—
6,464
239
691,219
—
(2,404)
—
(775,577)
(53,198)
(360)
74,287
6,970
—
48,709
3,257
44,537
—
—
2,778
1,816
—
(110,598)
9,021
6
(62,418)
—
(2,829)
1,266
(11,477)
6,778
183
(53,113)
—
1,552
2,654
—
397
—
1,327
304
1,203,475
—
(9,096)
5,394
(1,289,572)
(55,270)
—
77,070
750
54
34,856
2,851
8,193
—
—
677
800
—
128,340
1,194
23
140,923
F-14
See accompanying notes to consolidated financial statements.
NEWTEKONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31,
2023
2022
2021
Net decrease in loans held for investment, at fair value
Net increase in loans held for investment, at cost
Contributions to joint ventures
Purchase of fixed assets
Return of capital - non-control investments
Net increase in Federal Home Loan and Federal Reserve Bank stock
Purchases of available-for-sale securities
Acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Net (paydowns) borrowings on bank notes payable
Net increase in deposits
Repayment of Federal Home Loan Bank advances
Proceeds from common shares sold, net of offering costs
Proceeds from preferred stock, net of offering costs
Net repayments under related party line of credit
Proceeds from 2024 Notes
Proceeds from 2025 6.85% Notes
Proceeds from 2025 5.00% Notes
Proceeds from 2025 8.125% Notes
Proceeds from 2026 Notes
Proceeds from 2028 8.00% Notes
Redemption of 2023 Notes
Redemption of 2024 Notes
Redemption of 2025 6.85% Notes
Payments on Notes Payable - Securitization Trusts
Issuance of Notes Payable - Securitization Trusts
Dividends paid, net of dividend reinvestment plan
Payments of deferred financing costs
Proceeds from common stock issued under ESPP
Purchase of vested stock for employee payroll tax withholding
Net cash provided by financing activities
Net increase (decrease) in cash and restricted cash
Cash and restricted cash—beginning of period (Note 2)
Consolidation of cash and restricted cash from controlled investments and business combinations, net of cash paid
Cash and restricted cash—end of period (Note 2)
Non-cash operating, investing and financing activities:
Foreclosed real estate acquired
Dividends declared but not paid during the period
Issuance of common shares under dividend reinvestment plan
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
$
$
$
$
$
$
F-15
See accompanying notes to consolidated financial statements.
29,349
(169,003)
(14,550)
(458)
564
(2,112)
(27,167)
11,142
(172,235)
(78,663)
324,705
(4,895)
—
19,493
—
—
—
—
50,000
—
40,000
—
—
—
(90,780)
103,860
(14,147)
(4,650)
51
—
344,974
3,520
125,606
54,880
184,006 $
2,978 $
4,363 $
219 $
9,108 $
6,884 $
—
—
—
(11)
—
—
—
—
(11)
5,885
—
—
2,019
—
12,800
—
—
30,000
—
—
—
—
—
(15,000)
(82,817)
116,210
(64,544)
(2,552)
—
(826)
1,175
(61,254)
186,860
—
125,606 $
3,466 $
2,118 $
1,614 $
18,344 $
— $
—
—
—
—
—
—
—
—
—
(36,339)
—
—
50,007
—
(12,640)
15,000
10,000
—
—
115,000
—
(57,500)
(40,000)
—
(75,432)
103,430
(70,144)
(5,295)
—
(1,575)
(5,488)
135,435
51,425
—
186,860
2,171
—
1,923
20,131
—
Table of Contents
NEWTEKONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
The Company is a financial holding company that is a leading provider of business and financial solutions to SMBs and provides SMBs with the following Newtek® branded business and financial
solutions: Newtek Bank, Newtek Lending, Newtek Payments, Newtek Insurance, Newtek Payroll and Newtek Technology.
On January 6, 2023, the Company completed the Acquisition of NBNYC, a national bank regulated and supervised by the OCC, pursuant to which the Company acquired from NBNYC’s
shareholders all of the issued and outstanding stock of NBNYC for $20 million, plus reimbursement of certain expenses. NBNYC has been renamed Newtek Bank, National Association and has
become a wholly owned subsidiary of the Company. In connection with the completion of the Acquisition, the Company contributed to Newtek Bank $31 million of cash and two of the Company’s
unconsolidated subsidiaries, NBL and SBL (NBL was subsequently merged into SBL). Upon the consummation of the Acquisition, Newtek Bank entered into an operating agreement with the OCC
concerning certain matters including capital, liquidity and concentration limits, and memorializing the business plan submitted to the OCC.
Included in the Operating Agreement were the contribution of two subsidiaries to Newtek Bank which also occurred on January 6, 2023: SBL and NBL (NBL was subsequently merged into SBL on
May 3, 2023).
In addition, on January 6, 2023, the Company filed with the SEC a Form N-54C, Notification of Withdrawal of Election to be Subject to the 1940 Act (“Withdrawal of Election”), and has ceased to
be a BDC effective as of January 6, 2023. As a result of the Acquisition and the Withdrawal of Election, the Company’s accounting and financial reporting requirements changed in the following
ways:
1. The Company no longer qualifies as a regulated investment company (RIC) for federal income tax purposes and no longer qualifies for accounting treatment as an investment company, and
2. The Company is now a financial holding company subject to the regulation and supervision of the Federal Reserve and the Federal Reserve Bank of Atlanta and also subject to the related
FASB ASC Topics for financial holding companies and depository institutions.
Following these changes, as of and for the year ended December 31, 2023 NewtekOne reports on a consolidated basis the financial condition and results of operations for the following consolidated
subsidiaries: Newtek Bank; SBL; NSBF; NMS; Mobil Money; NBC; PMT; NIA; TAM; Holdco 6; NCL; EWS; and NTS. Our investment in POS is treated as a non-controlling interest and is
included on our consolidated financial statements. In addition, as a result of commitments made to the Federal Reserve, the Company will divest or otherwise terminate the activities conducted by
NTS, which includes SIDCO and EWS after a December 31, 2023 merger, within two years of becoming a financial holding company, subject to any extension of the two-year period. As of the date
of this filing, the Company has concluded that the assets, liabilities and operations of NTS do not qualify for Discontinued Operations.
Moreover, on April 13, 2023, the Company, NSBF and the SBA entered into an agreement in connection with NSBF’s and Newtek Bank’s participation in the SBA 7(a) loan program (the "Wind-
down Agreement"). The Company’s business plan prepared in connection with the Acquisition provided for all SBA 7(a) loan originations to be transitioned to Newtek Bank and for NSBF to cease
originations of SBA 7(a) loans. Pursuant to the Wind-down Agreement, NSBF has begun to wind-down its operations and NSBF’s SBA 7(a) pipeline of new loans was transitioned to Newtek Bank
during the second quarter of 2023. During this wind-down process, NSBF will continue to own the SBA 7(a) loans and PPP Loans currently in its SBA loan portfolio to maturity, liquidation, charge-
off or (subject to SBA’s prior written approval) sale or transfer. SBL will service and liquidate NSBF’s SBA loan portfolio, including processing forgiveness and loan reviews for PPP Loans, pursuant
to an SBA approved lender service provider agreement. In addition, during the wind-down process, NSBF will be subject to minimum capital requirements established by the SBA, be required to
continue to maintain certain amounts of restricted cash available to meet any obligations to the SBA, have restrictions on its ability to make dividends and distributions to the Company, and remain
liable to the SBA for post-purchase denials and repairs on the guaranteed portions of SBA 7(a) loans originated and sold by NSBF. The Company has guaranteed NSBF’s obligations to the SBA and
has funded a $10 million account at Newtek Bank to secure these potential obligations.
F-16
Table of Contents
As a result of the Acquisition and its effects as described above, comparisons to prior periods include adjustments made to reconcile prior investment company accounting to the current financial
holding company accounting requirements. For example, the statement of changes in stockholders’ equity includes adjustments for changes in presentation between accumulated undistributed
earnings and additional paid in capital, removal of fair value adjustments on entities that are now consolidating entities, and the reassessment of deferred tax assets and liabilities relating to the
consolidation of the previous portfolio companies investments. The statement of cash flows includes an adjustment to the opening cash balance for the cash from the previously unconsolidated
subsidiaries.
The Company’s results of operations for the three and twelve months ended December 31, 2023 include the results of operations of Newtek Bank on and after January 6, 2023. Results for the period
prior to January 6, 2023 do not include the results of operations of NBNYC.
On January 17, 2023, the Company changed its name from Newtek Business Services Corp. to NewtekOne, Inc.
Except as otherwise noted, all financial information included in the tables in the following footnotes is stated in thousands, except per share data.
Consolidation
The consolidated financial statements include the accounts of NewtekOne, its subsidiaries and certain VIEs. Significant intercompany balances and transactions have been eliminated. The Company
considers a voting rights entity to be a subsidiary and consolidates it if the Company has a controlling financial interest in the entity. VIEs are consolidated if NewtekOne has the power to direct the
activities of the VIE that significantly impact financial performance and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE (i.e.,
NewtekOne is the primary beneficiary). The determination of whether the Company is the primary beneficiary of a VIE is reassessed on an ongoing basis. Investments in companies which are not
VIEs but in which the Company has more than minor influence over the operating and financial policies, are accounted for using the equity method of accounting. Investments in VIEs, where
NewtekOne is not the primary beneficiary of a VIE, are accounted for using either the equity method of accounting. The maximum potential exposure to losses relative to investments in VIEs is
generally limited to the investment balance. Refer to NOTE 4—INVESTMENTS.
Reclassifications
Certain prior period amounts, to the extent comparable, have been reclassified to conform to the current period presentation.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the reporting period. The level of
uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are complete. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents. Invested cash is held exclusively at financial institutions of high
credit quality. As of December 31, 2023, cash deposits in excess of insured amounts totaled $37.2 million. The Company has not experienced any losses with respect to cash balances in excess of
insured amounts and management does not believe there was a significant concentration of risk with respect to cash balances as of December 31, 2023.
Restricted cash
Restricted cash includes amounts due on SBA loan-related remittances to third parties, cash reserves established as part of agreements with the SBA, cash reserves associated with securitization
transactions, and cash margin as collateral for derivative instruments. As of December 31, 2023, total restricted cash was $30.9 million.
F-17
Table of Contents
Interest bearing deposits in banks
The Company’s interest bearing deposits in banks reflects cash held at other financial institutions that earn interest.
The following table provides a reconciliation of cash, restricted cash, and interest bearing deposits in banks as of December 31, 2023 and 2022:
Cash and due from banks
Restricted cash
Interest bearing deposits in banks
Cash and restricted cash
Debt securities, available for sale
December 31, 2023
December 31, 2022
$
$
15,398 $
30,919
137,689
184,006 $
53,692
71,914
—
125,606
The Company’s securities portfolio primarily consists of available for sale debt securities held by Newtek Bank that are classified as “available for sale” and carried at their estimated fair value, with
any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. The fair values of our instruments are affected by changes in market
interest rates and credit spreads. In general, as interest rates rise and/or credit spreads widen, the fair value of instruments will decline. As interest rates fall and/or credit spreads tighten, the fair value
of instruments will rise. The Company evaluates available-for-sale instruments in unrealized loss positions at least quarterly to determine if an allowance for credit losses is required.
Purchases and sales of debt securities are accounted for on a trade-date basis.
Loans
Held for Investment
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are classified as held for investment.
At amortized cost, net of deferred fees and costs: Loans are reported at their principal amount outstanding, net of charge-offs, deferred origination costs and fees and purchase premiums and
discounts. Loan origination and commitment fees and certain direct and indirect costs incurred in connection with loan originations are deferred and amortized to income over the life of the related
loans as an adjustment to yield. Premiums or discounts on purchased portfolios are amortized or accreted to income using the level yield method over the remaining period to contractual maturity.
Currently, all LHI at amortized cost, net of deferred fees and costs are originated and carried at Newtek Bank and have a weighted average life of five years. Newtek Bank originates SBA 7(a) loans,
under its PLP status, and typically sells the guaranteed portions and holds the unguaranteed portions for investment. Newtek Bank also holds CRE and C&I loans for investment. The net amount of
deferred fees and costs as of December 31, 2023 was $1.2 million.
At fair value: On a quarterly basis, management determines the fair values of the retained unguaranteed portions of SBA 7(a) loans HFI, and unrealized changes in FV are recognized in the income
statement. The loans within this portfolio were originated by NSBF. Refer to the “Fair Value Option” section below for further information on loans HFI carried at FV under the FV option.
Held for Sale
Management designates loans as HFS based on its intent to sell loans, or portions of loans, in established secondary markets or to participant banks and credit unions. Salability requirements of
government guaranteed portions include, but are not limited to, full disbursement of the loan commitment amount. The Company occasionally transfers loans between the HFS and HFI classifications
based on its intent and ability to hold or sell loans. Management’s intent to sell may be impacted by secondary market conditions, loan credit quality, or other factors.
F-18
Table of Contents
At lower of amortized cost basis or fair value: Both mortgage and non-mortgage loans classified as HFS are carried at the LCM. If the amortized cost basis of a loan exceeds FV, a valuation
allowance should be established for the difference. Currently, HFS loans at LCM are carried at Newtek Bank. This includes the government guaranteed portion of SBA 7(a) loans and SBA 504 loans.
Management may also make a determination to market for sale certain CRE and C&I loans on a loan by loan basis.
At fair value: The Company originates alternative lending program loans (formerly referred to as our nonconforming conventional loans), which are either HFS or HFI, via its nonbank subsidiaries,
and joint ventures. Nonconforming loans are carried at FV. The Company also originated SBA 504 loans HFS prior to the Acquisition through its nonbank subsidiaries. SBA 504 loans HFS held at
Holdco 6 are accounted for under the FV option. Alternative lending program loans are held at Holdco 6, NCL JV, and TSO JV and are also accounted for under the FV option. Additionally, the
existing government guaranteed portion of SBA 7(a) loans held at NSBF are also HFS at FV. Refer to the “Fair Value Option” section below for further information on loans HFS carried at FV under
the FV option.
Fair Value and the Fair Value Option
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement
date. In determining fair value, management used various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and gives the lowest priority to unobservable inputs (Level 3). The
levels of the fair value hierarchy are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active
exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter
markets.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less
frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, derivative contracts
and loans held-for-sale.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential
mortgage servicing assets, warrant liabilities, joint ventures, guaranteed loans held at fair value, and highly structured or long-term derivative contracts.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or a liability’s categorization within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or liability. The Company assesses the levels of assets and liabilities at each measurement date. There were no transfers to or from Level
3 of the fair value hierarchy for assets and liabilities during the year ended December 31, 2023 or 2022.
Level 1 investments were valued using quoted market prices. Level 2 investments were valued using market consensus prices that are corroborated by observable market data and quoted market
prices for similar assets and liabilities.
F-19
Table of Contents
The Company has two joint venture investments. For TSO JV, the Company calculates the fair value of the investment based on the NAV of the entity. The fair value of the investment is equivalent to
50% of the total NAV of the JV, which represents the Company’s share of the entity and is based upon the practical expedient method permitted under ASC 820. For NCL JV, the Company uses a
discounted cash flow methodology and adjusts the NAV of the entity by a fair value adjustment for the fixed rate debt liability.
Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from
the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments
are generally subject to legal and other restrictions or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or
liquidation sale, the Company may realize significantly less than the value at which such investment had previously been recorded.
The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the
markets in which the investments are traded. In addition recent changes in inflation and base interest rates, supply chain disruptions, significant market volatility, risk of recession, recent economic
and market events, unrelated bank failures and declines in depositor confidence in depository institutions, the ongoing war between Russia and Ukraine and general uncertainty surrounding the
financial and political stability of the United States, United Kingdom, the European Union and China could further negatively impact the fair value of the Company’s investments after December 31,
2023, in addition to other circumstances and events that are not yet known.
The Company applies fair value accounting to certain of its financial instruments in accordance with ASC Topic 820 — Fair Value Measurement (“ASC Topic 820”). ASC Topic 820 defines fair
value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC Topic 820, the Company has categorized its financial
instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy. Fair value is a market-based measure considered from the perspective of the
market participant who holds the financial instrument rather than an entity-specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions reflect
those that management believe market participants would use in pricing the financial instrument at the measurement date.
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is
new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models or inputs that are less
observable or unobservable in the market the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value was
greatest for financial instruments classified as Level 3.
Any changes to the valuation methodology are reviewed by management to confirm that the changes are appropriate. As markets change, new products develop and the pricing for products becomes
more or less transparent, the Company will continue to refine its valuation methodologies. See further description of fair value methodology in NOTE 9—FAIR VALUE MEASUREMENTS.
Loans for which the FV option were elected are measured at FV and classified as either HFS or HFI, as outlined above. Not electing FV generally results in a larger discount being recorded on the
date of the sale. This discount will subsequently be accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this election in
alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with accounting standards, any loans for which FV was previously elected continue to be
measured as such. Interest income is recognized in the same manner on loans reported at FV as on non-FV loans, except in regard to origination fees and costs which are recognized immediately upon
FV election. The changes in FV of loans are reported in noninterest income as Net gain (loss) on loans accounted for under the fair value option. FV of loans includes adjustments for historical credit
losses, market liquidity, and economic conditions.
Allowance for Credit Losses – Loans
Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) approach requires an estimate
of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net,
lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is uncollectible. Expected recoveries do not exceed
the aggregate of amounts previously charged-off and expected to be charged-off.
F-20
Table of Contents
The allowance is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are
evaluated on an individual basis, which generally includes larger non-accruing commercial loans.
The discounted cash flow (“DCF”) method is used to estimate expected credit losses for all loan portfolio segments measured on a collective (pool) basis. For each loan segment, cash flow
projections are generated at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, probability of default, and loss given default. The modeling of
prepayment speeds is based on a combination of historical internal data and peer data.
Regression analysis of historical internal and peer data is used to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected
probability of default and loss given default will react to forecasted levels of the loss drivers. The SBA 7(a) loan portfolio is the single loan pool where management solely utilizes historical internal
data to determine the loss rate as an input to the model. The data utilized represents the most recent economic cycle and management determines the loss rate by analyzing defaulted principal and net
charge offs to calculate the historical loss rate. For all loan pools utilizing the DCF method, management utilizes various economic indicators such as changes in unemployment rates, gross domestic
product, real estate values, and other relevant factors as loss drivers. For all DCF models, management has determined that due to historic volatility in economic data, four quarters currently
represents a reasonable and supportable forecast period, followed by a four-quarter reversion to historical mean levels for each of the various economic indicators.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the
instrument level. Specific instrument effective yields are calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield
to produce an instrument-level Net Present Value (“NPV”). An allowance is established for the difference between the instrument’s NPV and amortized cost basis.
The allowance evaluation also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii)
delinquency and other credit quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of the Company's business impacting the loan portfolio, and (v) other external factors, that
may include, but are not limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster. Significant management
judgment is required at each point in the measurement process.
Arriving at an appropriate level of allowance involves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated regularly
based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration. While management uses available information to
recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. Management estimates the
allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. The Company’s
historical credit loss experience provides the basis for the estimation of expected credit losses, supplemented with peer loss information, and results in expected probabilities of default and expected
losses given default. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix,
delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, production metrics, property values, or other relevant factors.
Expected losses are applied to loans grouped in portfolio segments, which are pools of loans aggregated based on type of borrower and collateral which is generally based upon federal call report
segmentation. Portfolio segments have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled. These portfolio segments are as follows:
Commercial Real Estate: The commercial real estate portfolio is comprised of loans to borrowers on small offices, owner-occupied commercial buildings, industrial/warehouse properties, income
producing/investor real estate properties, and multi-family loans secured by first mortgages. The Company’s underwriting standards generally target a loan-to-value ratio of 75%, depending on the
type of collateral, and requires debt service coverage of a minimum of 1.2 times.
Commercial & Industrial: The commercial & industrial portfolio consists of loans made for general business purposes consisting of short-term working capital loans, equipment loans and unsecured
business lines.
F-21
Table of Contents
SBA 7(a): The SBA 7(a) portfolio includes loans originated under the federal Section 7(a) loan program. The SBA is an independent government agency that facilitates one of the nation’s largest
sources of SMB financing by providing credit guarantees for its loan programs. SBA 7(a) loans are partially guaranteed by the SBA, with SBA guarantees typically ranging between 50% and 90% of
the principal and interest due. Under the SBA’s 7(a) lending program, a bank or other lender may underwrite loans between $5,000 and $5.0 million for a variety of general business purposes based
on the SBA’s loan program requirements. The guaranteed portion of the loans are held for sale and carried at LCM and therefore are not subject to CECL. The unguaranteed portion of the loans that
are held on balance sheet at amortized cost are subject to CECL.
Individually Evaluated Loans: Loans that do not share risk characteristics with existing pools are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent,
financial loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and management expects repayment of the
financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the
asset as of the measurement date. When repayment is expected to be from the operation of the collateral or going concern, the specific credit loss reserve is calculated as the amount by which the
amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is
calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair
value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Accrued Interest. Accrued interest receivable balances are presented within other assets on the consolidated balance sheet. Accrued interest is excluded from the measurement of the allowance for
credit losses, including investments and loans. Generally, accrued interest is reversed when a loan is placed on non-accrual or is written-off. Current year accrued interest is reversed through interest
income while accrued interest from prior years is written-off through the ACL. Historically, we have not experienced uncollectible accrued interest receivable on investment debt securities.
Allowance for off-balance sheet credit exposures. The exposure is a component of other liabilities in the consolidated balance sheet and represents the estimate for probable credit losses inherent in
unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit and standby and commercial letters of credit. The process used to
determine the allowance for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A
charge (credit) to provision for credit losses on the consolidated statements of income is made to account for the change in the allowance on off-balance sheet exposures between reporting periods.
Allowance for Credit Losses – Available-for Sale (“AFS”) Debt Securities
The impairment model for AFS debt securities differs from the CECL approach utilized for financial instruments measured at amortized cost because AFS debt securities are measured at fair value.
For AFS debt securities in an unrealized loss position, Newtek Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its
amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities AFS that
do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a
rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment
indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows should be
estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of
cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is
less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the AFS security is
uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of December 31, 2023, the Company determined that the unrealized loss positions in the AFS securities
were not the result of credit losses, and therefore, an allowance for credit losses was not recorded.
Allowance for Doubtful Accounts
Technology: The allowance for doubtful accounts is established by management through provisions for bad debts charged against income. Amounts deemed to be uncollectible are charged against the
allowance for doubtful accounts and subsequent recoveries, if any, are credited to income.
F-22
Table of Contents
The amount of the allowance for doubtful accounts is inherently subjective, as it requires making material estimates which may vary from actual results. Management’s ongoing estimates of the
allowance for doubtful accounts are particularly affected by the performance of the client in their ability to provide the Company with future receivables coupled with the collections of their current
receivables. The allowance consists of general and specific components. The specific component relates to a client’s aggregate net balance that is owed to the Company that is classified as doubtful.
The general component covers non-classified balances and is based on historical loss experience.
A client’s aggregate net balance is considered uncollectible when, based on current information and events, it is probable that the Company will be unable to collect the receivable payments or the
Company has greatly reduced the amount of receivables to be purchased. The Company’s charge-off policy is based on a client-by-client review for which the estimated uncollectible portion is
charged off against the corresponding client’s net balance and the allowance for doubtful accounts.
At December 31, 2023 the allowance for doubtful accounts was $1.0 million. There was no allowance for doubtful accounts as of December 31, 2022 prior to the Acquisition.
Settlement Receivable
Settlement receivable represents amounts due from third parties for guaranteed portions of SBA 7(a) loans which have been sold at year-end but have not yet settled. The guaranteed portion of SBA
7(a) principal balances that have been sold but not yet settled at December 31, 2023 was $56.5 million. The settlement receivable also includes $5.7 million of premiums, which have been recognized
in Net Gains on Sales of Loans.
Goodwill and Intangible Assets
Goodwill is an indefinite lived asset, which is not amortized and is instead subject to impairment testing, at least annually. Intangible assets, such as customer merchant accounts, with finite lives are
amortized over an estimated useful life of 66 to 120 months. (See NOTE 8—GOODWILL AND INTANGIBLE ASSETS.)
The Company considers the following to be some examples of indicators that may trigger an impairment review outside of its annual impairment review: (i) significant under-performance or loss of
key contracts acquired in an acquisition relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of the acquired assets or in the Company’s
overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased
competitive pressures; (v) a significant decline in the Company’s fair value for a sustained period of time; and (vi) regulatory changes. In assessing the recoverability of the Company’s goodwill and
customer merchant accounts, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These include
estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company, the period over which cash flows will occur, and determination
of the Company’s cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and conclusions on impairment.
Leases - Right of use assets and lease liabilities
Under ASC 842, operating lease expense is generally recognized on a straight-line basis over the term of the lease. The Company has entered into operating lease agreements for office space with
remaining contractual terms up to three years, some of which include renewal options that extend the leases for up to 10 years. These renewal options are not considered in the remaining lease term
unless it is reasonably certain the Company will exercise such options. The operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the rate implicit in the leases generally is not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental
borrowing rate at the lease commencement date and commensurate with the remaining lease term. Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on
a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Leases with an initial term of 12 months or less are not recorded on the balance
sheet and are excluded from our weighted-average remaining lease term.
F-23
Table of Contents
Transfers and Servicing of Financial Assets
For a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860, which, at the time of the transfer, requires that the transferred assets qualify as recognized
financial assets and the Company surrender control over the assets. Such surrender requires that the assets be isolated from the Company, even in bankruptcy or other receivership, the purchaser have
the right to pledge or sell the assets transferred and the Company not have an option or obligation to reacquire the assets.
Assets related to transactions that do not meet ASC Topic 860 — Transfers and Servicing (“ASC Topic 860”) requirements for accounting sale treatment are reflected in the Company’s consolidated
statements of assets and liabilities as investments and the sale proceeds are recognized as a liability.
Assets owned by securitization trusts and included in the Company’s consolidated financial statements. The creditors of the special purpose entities have received security interests in such assets and
such assets are not intended to be available to the creditors of the Company. From 2010 through December 31, 2023, NSBF engaged in thirteen (13) securitizations of the unguaranteed portions of its
SBA 7(a) loans. A securitization uses a special purpose entity (the “Trust”), which is considered a variable interest entity. Applying the consolidation requirements for VIEs under the accounting rules
in ASC Topic 860, Transfers and Servicing, and ASC Topic 810, Consolidation, which became effective January 1, 2010, the Company determined that as the primary beneficiary of the securitization
vehicles, based on its power to direct activities through its role as servicer for the Trusts and its obligation to absorb losses and right to receive benefits, it needed to consolidate the Trusts. The
Company therefore consolidates the entities using the carrying amounts of the Trusts’ assets and liabilities and reflects the assets in SBA 7(a) Unguaranteed Loans and reflects the associated
financing in Notes Payable - Securitization trusts on the Consolidated Statements of Assets and Liabilities.
The Company accounts for servicing assets in accordance with ASC Topic 860-50 - Transfers and Servicing - Servicing Assets and Liabilities. The Company and Newtek Bank earn servicing fees
from the guaranteed portions of SBA 7(a) loans they originate and sell. The Company has also recorded servicing assets/liabilities on loans sold where the Company retained an obligation to service
the loan sold. Servicing assets for loans originated by the Company’s nonbank subsidiaries are measured at FV at each reporting date and the Company reports changes in the FV of servicing assets in
earnings in the period in which the changes occur. The valuation model for servicing assets incorporates assumptions including, but not limited to, servicing costs, discount rate, prepayment rate, and
default rate. Considerable judgement is required to estimate the fair value of servicing assets and as such these assets are classified as Level 3 in our fair value hierarchy. Servicing assets for loans
originated by Newtek Bank are measured at LCM and amortized based on their estimated life and impairment is recorded to the extent the amortized cost exceeds the asset’s FV.
Accounts Receivable
Accounts receivable represent amounts owed to the Company by third parties for electronic payment processing, technology services and related residuals. The Company estimates losses on accounts
receivable based on known troubled accounts and historical experience of losses incurred.
Accrued Interest Receivable
Upon the Acquisition and adoption of CECL, the Company made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within
other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued our policy to
write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due. Historically, the Company has not experienced
uncollectible accrued interest receivable on investment securities.
F-24
Table of Contents
Derivative Instruments
The Company uses derivative instruments primarily to economically manage the fair value variability of fixed rate assets and liabilities caused by interest rate fluctuations. Derivative instruments
consist of interest rate futures and are held at fair value on the balance sheet. Collateral posted with our futures counterparties is segregated in the Company’s books and records. Interest rate futures
are centrally cleared by the Chicago Mercantile Exchange (“CME”) through a futures commission merchant. Interest rate futures that are governed by an ISDA agreement provide for bilateral
collateral pledging based on the counterparties’ market value. The counterparties have the right to re-pledge the collateral posted but have the obligation to return the pledged collateral, or, if the
Company agrees, substantially the same collateral as the market value of the interest rate futures change.
The Company is required to post initial margin and daily variation margin for interest rate futures that are centrally cleared by CME. CME determines the fair value of our centrally cleared futures,
including daily variation margin. Effective January 3, 2017, CME amended its rulebooks to legally characterize daily variation margin payments for centrally cleared interest rate futures as settlement
rather than collateral. As a result of this rule change, variation margin pledged on the Company’s centrally cleared interest rate futures is settled against the realized results of these futures.
Fixed Assets
Fixed assets, which are composed of merchant processing terminals, software, telephone systems, computer equipment, automobile, website and leasehold improvements, are stated at cost less
accumulated depreciation and amortization. Depreciation of fixed assets is provided on a straight-line basis using estimated useful lives of the related assets ranging from three to seven years.
Amortization of leasehold improvements is provided on a straight-line basis using the lesser of the useful life of the asset, which is generally three to five years, or lease term.
Due to Participants
Due to participants represents amounts due to third party investors in the SBA guaranteed portion of SBA 7(a) and PPP loans. When the Company receives principal payments, including PPP loan
forgiveness, after the loan has been either partially or fully sold to the participant, the remittances received by the Company are either owed in part or in full to the participant and amounts are
recorded as a liability on the consolidated statements of financial condition.
Dividends to Shareholders
Dividends and distributions to the Company's stockholders are recorded on the declaration date. The timing and amount to be paid out as a dividend or distribution is determined by the Company's
Board each quarter.
Loan Interest Income Recognition and Changes in Fair Value
Held for Investment
At Amortized Cost, net of deferred loan fees and costs: Interest on loans is generally recognized on a daily accrual basis at the applicable interest rate. Interest is not accrued on loans that are more
than 90 days delinquent on payments, and any interest that was accrued but unpaid on such loans is reversed from interest income at that time, or when deemed to be uncollectible. Interest
subsequently received on such loans is recorded as interest income or alternatively as a reduction in the amortized cost of the loan if there is significant doubt as to the collectability of the unpaid
principal balance. Loans are returned to accrual status when principal and interest amounts contractually due are brought current and future payments are reasonably assured.
At FV: In accordance with accounting standards, any loans for which FV was previously elected continue to be measured as such. Interest income is recognized in the same manner on loans reported
at FV as on non-FV loans, except in regard to origination fees and costs which are recognized immediately upon FV election. The changes in FV of loans are reported within noninterest income as
Net gain (loss) on loans accounted for under the fair value option. FV of loans includes adjustments for historical credit losses, market liquidity, and economic conditions. The Company values
performing accrual loans on a pool basis. Loans that have experienced credit deterioration are valued individually based on resolution plans developed by the Company based on timing and amount of
expected future cash flows from all sources of repayment, including both cash flows of the borrower as a going concern as well as the liquidation of collateral and pursuit of personal guarantees.
F-25
Table of Contents
Held for Sale
At LCM: Net unrealized losses, if any, on loans without a FV election, are recognized through a valuation allowance and recorded as a charge to Other noninterest income. The cost basis of loans HFS
includes unamortized loan origination fees and costs. The pro-rata portion, based on the percent of the total loan sold, of the remaining deferred fees and costs are recognized as an adjustment to the
gain on sale. Not electing FV generally results in a larger discount being recorded on the origination date. This discount will subsequently be accreted into interest income over the underlying loan’s
remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue.
If the transfer is accounted for as a sale, the loans are derecognized from the Company’s consolidated balance sheet and a gain or loss is recognized in net gains on sales of loans line item on the
consolidated statements of income. The gain on sale recognized in income is the sum of the premium on the guaranteed loan and the FV of the servicing assets recognized, less the discount recorded
on the unguaranteed portion of the loan retained. If the transfer does not satisfy the aforementioned control criteria, the transaction is recorded as a secured borrowing with the transferred loans
remaining on the Company’s consolidated balance sheet and proceeds recognized as a liability.
At FV: In accordance with accounting standards, any loans for which FV was previously elected continue to be measured as such. Interest income is recognized in the same manner on loans reported
at FV as on non-FV loans, except in regard to origination fees and costs which are recognized immediately upon FV election. The changes in FV of loans are reported within noninterest income as
Net gain (loss) on loans accounted for under the fair value option. FV of loans includes adjustments for historical credit losses, market liquidity, and economic conditions.
Non-Interest Income
Dividend income: Dividend income is recognized on an accrual basis for equity securities to the extent that such amounts are expected to be collected or realized. In determining the amount of
dividend income to recognize, if any, from cash distributions on equity securities, we assess many factors, including the joint ventures’ and non-controlled equity investments’ cumulative
undistributed income and operating cash flow. Cash distributions from equity securities received in excess of such undistributed amounts are recorded first as a reduction of our investment and then as
a realized gain on investment.
Servicing income: The Company earns servicing income related to the guaranteed portions of SBA 7(a) and ALP loan investments sold into the secondary market. These recurring servicing fees are
earned and recorded daily. Servicing income is earned for the full term of the loan or until the loan is repaid.
Technology and IT support income
Our technology segment sells a range of services and goods, including managed IT services, product and procurement services, professional services, webhosting, secure private cloud hosting, and
backup disaster recovery. Our technology segment sells hardware and software products on both a stand-alone basis without any services and as solutions bundled with services. When our technology
segment provides a combination of hardware and software products with the provision of services, it separately identifies its performance obligations under its contract with the customer as the
distinct goods (hardware and/or software products) or services that will be provided. The total transaction price for an arrangement with multiple performance obligations is allocated at contract
inception to each distinct performance obligation in proportion to its stand-alone selling price. The stand-alone selling price is the price at which it would sell a promised good or service separately to
a customer. Our technology segment estimates the price based on observable inputs, including direct labor hours and allocatable costs, or uses observable stand-alone prices when they are available.
Our technology segment’s professional services include the design and implementation of a wide range of IT products and services. Such services are typically provided by us or third-party sub-
contractor vendors on a stand-alone basis.
Revenue is measured based on the consideration specified in a contract with a customer. Our technology segment recognizes revenue when it satisfies a performance obligation by transferring control
of a product or service or by arranging for the sale of a vendor’s products or service to a customer. Our technology segment recognizes revenue from sale of services as its technology segment
performs the underlying services, typically based on time and materials basis based upon hours incurred for the performance completed to date for which we have the right to consideration. Our
technology segment recognizes revenue on sales of goods at a point in time when customer takes control of goods, which typically occurs when title and risk of loss have passed to the customer. Our
technology segment recognizes revenue on a gross basis for each of its services and product offerings principally because it is primarily responsible for fulfilling the promise to provide specified
goods or service and it has discretion in establishing the price of specified good or service.
F-26
Table of Contents
Electronic payment processing income: Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps:
1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when or as the Company satisfies a performance obligation
Revenue is recognized net of taxes collected from customers, which are subsequently remitted to governmental authorities.
NMS’s revenue is primarily derived from electronic payment processing and related fee income.
Electronic payment processing and fee income is derived from NMS’s electronic processing of credit and debit card transactions that are authorized and captured through third-party networks.
Typically, merchants are charged for these processing services by applying a percentage to the dollar amount of each transaction plus a flat fee per transaction. Certain merchant customers are charged
miscellaneous fees, including fees for handling charge-backs or returns, monthly minimum fees, statement fees and fees for other miscellaneous services. Revenues derived from the electronic
processing of MasterCard®, Visa®, American Express® and Discover® sourced credit and debit card transactions are reported gross of amounts paid to sponsor banks.
NMS's performance obligations are to stand ready to provide holistic electronic payment processing services consisting of a series of distinct elements that are substantially the same and have the
same pattern of transfer over time. NMS’s promise to its customers is to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the customers’ use
(i.e., number of payment transactions processed, number of cards on file, etc.); as such, the total transaction price is variable. The Company allocates the variable fees charged to the day in which it
has the contractual right to bill under the contract.
ASU 2014-09, "Revenues from Contracts with Customers (“Topic 606”)" (“ASC 606”) requires that the Company determine for each customer arrangement whether revenue should be recognized at
a point in time or over time. For the quarter ended December 31, 2023, substantially all of the Company’s revenues were recognized at a point in time.
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as permitted by ASC 606, the Company has elected to
exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. As described above, the Company’s most
significant performance obligations consist of variable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure
exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required
for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
Receivable fees; Receivable fees are derived from the funding (purchase) of receivables from the Company’s finance clients. The Company recognizes revenue on the date receivables are purchased
at a percentage of face value as agreed to by the client. The Company also has arrangements with certain of its clients whereby it purchases the client’s receivables and charges a fee at a specified rate
based on the amount of funds advanced against such receivables. The funds provided are collateralized and the income is recognized as earned which occurs as time passes.
Realized gains or losses on joint ventures: Realized gains or losses on joint ventures are measured by the difference between the net proceeds from the disposition and the cost basis of investment,
without regard to unrealized gains or losses previously recognized. The Company reports current period changes in the fair value of joint venture investments as a component of the net change in
unrealized appreciation (depreciation) on joint ventures in the consolidated statements of operations
Other: The Company earns a variety of fees from borrowers in the ordinary course of conducting its business, including packaging, legal, late payment and prepayment fees. All other income is
recorded when earned. Other income is generally non-recurring in nature and earned as “one time” fees in connection with the origination of new loans with non-affiliates.
F-27
Table of Contents
Electronic Payment Processing Costs
Electronic payment processing costs consist principally of costs directly related to the processing of merchant sales volume, bank processing fees and costs paid to third-party processing networks.
Such costs are recognized at the time the merchant transactions are processed or when the services are performed.
In addition to costs directly related to the processing of merchant sales volume, electronic payment processing costs also include residual expenses. Residual expenses represent fees paid to third-
party sales referral sources. Residual expenses are paid in accordance with contracted terms. These are generally linked to revenues derived from merchants successfully referred to the Company and
that begin using the Company for merchant processing services.
Such residual expenses are recognized in the Company’s consolidated statements of income. During the quarter ended December 31, 2023, the Company partnered with two sponsor banks for
substantially all merchant transactions. Substantially all merchant transactions were processed by one merchant processor.
Technology Services Expenses
Costs of services and goods sold include product costs, outbound and inbound freight costs, and direct time and materials in delivering service and goods to customers.
Selling and administrative expenses include salaries and wages for staff who are not directly associated with delivering services, bonuses and incentives, employee-related expenses, facility-related
expenses, marketing and advertising expense, depreciation of property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other
operating expenses.
Stock – Based Compensation
The Company accounts for its equity-based compensation plans using the fair value method, as prescribed by ASC Topic 718 – Stock Compensation. Accordingly, for restricted stock awards, the
Company measures the grant date fair value based upon the market price of the Company’s Common Stock on the date of the grant and amortizes this fair value to salaries and benefits ratably over
the requisite service period or vesting term on a straight line basis. Forfeitures are recognized as incurred.
Income Taxes
Deferred tax assets and liabilities are computed based upon the differences between the financial statement and income tax basis of assets and liabilities using the enacted tax rates in effect for the
year in which those temporary differences are expected to be realized or settled. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not
be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Such deferred tax assets and liabilities recorded on the
statement of financial condition were a deferred tax asset, net of $5.2 million at December 31, 2023 and a deferred tax liability, net of $19.2 million at December 31, 2022, respectively.
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are
subject to income taxes in the United States and its political subdivisions. Significant judgments and estimates are required in determining the consolidated income tax expense.
The Company’s U.S. federal and state income tax returns prior to fiscal year 2020 are generally closed, and management continually evaluates expiring statutes of limitations, audits, proposed
settlements, changes in tax law and new authoritative rulings. Interest and penalties assessed by tax jurisdictions for income tax matters are presented as income tax expense on the consolidated
statement of income.
Formerly, as a RIC ending with the Company’s December 31, 2022 fiscal year end, the Company was not subject to corporate level income tax. Beginning on January 1, 2023 with the start of the
2023 fiscal year, the Company no longer qualifies as a RIC and will be subject to corporate level income tax. See NOTE 21—INCOME TAXES.
F-28
Table of Contents
Segments
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management has determined that the Company has four reportable operating segments: Banking, Non-Bank SBA 7(a) Lending, Technology, and
Payments as discussed more fully in NOTE 22—SEGMENTS. In determining the appropriateness of a segment definition, the Company considers the criteria of FASB ASC 280, Segment Reporting.
Business Combinations
Business combinations are accounted for under the acquisition method, in which the identifiable assets acquired and liabilities assumed are generally measured and recognized at fair value as of the
acquisition date, with the excess of the purchase price over the fair value of the net assets acquired recognized as goodwill. Items such as acquired income-tax related balances are recognized in
accordance with other applicable GAAP, which may result in measurements that differ from fair value. Business combinations are included in the consolidated financial statements from the respective
dates of acquisition. Historical reporting periods reflect only the results of legacy Company operations. Acquisition-related costs are expensed in the period incurred and presented within the
applicable non-interest expense category. Additional information regarding the Company’s acquisitions can be found within NOTE 3—BUSINESS COMBINATION.
Fair Value of Assets Acquired and Liabilities Assumed
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, reflecting
assumptions that a market participant would use when pricing an asset or liability. In some cases, the estimation of fair values requires management to make estimates about discount rates, future
expected cash flows, market conditions, and other future events that are highly subjective in nature and are subject to change.
Recently Adopted Accounting Pronouncements
Beginning in 2023, the Company applies accounting standards applicable to our current status as a financial holding company.
Current Expected Credit Losses (Topic 326)
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326) and in April 2019, the FASB issued ASU
2019-04 Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (collectively, “CECL”). CECL
changed how entities measure potential credit losses for most financial assets and certain other instruments that are not measured at fair value. CECL replaced the “incurred loss” approach under
existing guidance with an “expected loss” model for instruments measured at amortized cost. While ASU 2016-13 does not require any particular method for determining the CECL allowance, it does
specify the allowance should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, and reasonable and supportable
forecasts for the duration of each respective loan. CECL was effective for the Company beginning January 1, 2023; however, the Company continues to measure NSBF’s SBA 7(a) loan portfolio at
fair value and intends to do so until the portfolio is completely runoff. Following the Acquisition on January 6, 2023, the Company owns and consolidates Newtek Bank, which applies CECL.
Troubled Debt Restructurings and Vintage Disclosures (ASU 2022-02)
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The purpose of this guidance is twofold.
First, the guidance eliminates TDR recognition and measurement guidance that has been deemed no longer necessary under CECL. The guidance also adds a requirement to incorporate current year
gross charge-offs by origination year into the vintage tables. With respect to the TDR impacts, under CECL, credit losses for financial assets measured at amortized cost are determined based on the
total current expected credit losses over the life of the financial asset or group of financial assets. Due to the Acquisition, any aspects of credit deterioration to include modifications to loans for
borrowers experiencing financial difficulty were captured in purchase accounting and the allowance as of the Acquisition date. Therefore, credit losses on financial assets that have been modified as
TDRs would have largely been incorporated in the allowance upon initial recognition. Under ASU 2022-02, the Company will evaluate whether loan modifications previously characterized as TDRs
represent a new loan or a continuation of an existing loan in accordance with ASC Topic 310, Receivables. The guidance also added new disclosures that require an entity to provide information
related to loan modifications that are made to borrowers that are deemed to be in financial difficulty. Following the Acquisition on January 6, 2023, the Company owns and consolidates Newtek
Bank, which adopted the ASU on January 1, 2023, on a prospective basis. The impact of these amendments was not material.
F-29
Table of Contents
New Accounting Standards
In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820),” which clarifies the guidance in Topic 820 when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value
in accordance with Topic 820. The amendments affect all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. ASU 2022-03 is
effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities the amendments are effective for fiscal
years beginning after December 15, 2024, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or
made available for issuance. An entity that qualifies as an investment company under Topic 946 should apply the amendments in ASU No. 2022-03 to an investment in an equity security subject to a
contractual sale restriction that is executed or modified on or after the date of adoption. The Company does not expect any material impact from adopting ASU No. 2022-03 on the consolidated
financial statements.
Improvements to Reportable Segment Disclosures (ASU 2023-07)
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The purpose of this guidance is to improve reportable
segment disclosure, primarily through enhanced disclosures about significant segment expenses. This ASU requires that an entity disclose, on an interim and annual basis, significant segment
expenses that are regularly provided to the CODM and are included within the reported measure of segment profit or loss. This ASU also requires an entity to disclose, on an interim and annual basis,
other segment items by reportable segment, including a qualitative description of the composition of those items. This “other” category is defined as the difference between segment profit or loss and
segment revenue less significant segment expenses. Entities are also required to disclose the title and position of the individual, or the name of the group or committee, identified as the CODM. The
amendments are effective on January 1, 2024, for annual reporting, and January 1, 2025, for interim reporting, with early adoption permitted. The amendments must be applied using a retrospective
approach. Management does not expect the impact of these amendments to be material.
Improvements to Income Tax Disclosures (ASU 2023-09)
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The purpose of this guidance is to enhance the rate reconciliation and
income taxes paid disclosures. This ASU requires that an entity disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items that
meet a quantitative threshold. For the state and local income tax category of the rate reconciliation, entities must disclose a qualitative description of the states and local jurisdictions that make up the
majority (greater than 50 percent) of the category. For the income taxes paid disclosures, entities will be required to disclose, on an annual basis, the amount of income taxes paid (net of refunds
received) disaggregated by federal, state, and foreign taxes. The amendments are effective on January 1, 2025, with early adoption permitted. The amendments must be applied using either a
prospective or retrospective approach. Management does not expect the impact of these amendments to be material.
Business Combinations—Joint Venture Formations (ASU 2023-05)
In August 2023, the FASB issued ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60).
The amendments in this Update address the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The objectives of the amendments
are to (1) provide decision-useful information to investors and other allocators of capital (collectively, investors) in a joint venture’s financial statements and (2) reduce diversity in practice. The
amendments in this Update are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Additionally, a joint venture that was formed before January
1, 2025, may elect to apply the amendments retrospectively if it has sufficient information. Early adoption is permitted in any interim or annual period in which financial statements have not yet been
issued (or made available for issuance), either prospectively or retrospectively. Management does not expect the impact of these amendments to be material.
F-30
NOTE 3—BUSINESS COMBINATION:
Acquisition of NBNYC
On January 6, 2023, the Company completed the Acquisition of NBNYC, a national bank regulated and supervised by the OCC, pursuant to which the Company acquired from the NBNYC
shareholders all of the issued and outstanding stock of NBNYC for $20 million, in an all-cash transaction. The Company also agreed to pay the seller’s acquisition costs of approximately $1.3
million. NBNYC has been renamed Newtek Bank and has become a wholly owned subsidiary of the Company. In connection with the completion of the Acquisition, the Company contributed to
Newtek Bank $31 million of cash and two of the Company’s subsidiaries, NBL and SBL (NBL was subsequently merged into SBL). Upon the consummation of the Acquisition, Newtek Bank
entered into an operating agreement with the OCC concerning certain matters including capital, liquidity and concentration limits, and memorializing the business plan submitted to the OCC.
The NBNYC transaction is accounted for in accordance with ASC 805, Business Combinations, and the Company has performed a purchase price allocation under the acquisition method. Under
ASC 805, if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements
provisional amounts for the items for which the accounting is incomplete. During the measurement period, which shall not exceed one year from the acquisition date, the acquirer shall adjust the
provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the
measurement of the amounts recognized as of that date.
The purchase price, including costs incurred by the Company on behalf of the seller directly associated with the Acquisition, was preliminarily allocated to net assets acquired. Final allocation has
been obtained and the purchase allocations finalized at December 31, 2023. The following table summarizes the allocation of consideration paid for the fair value of assets acquired and liabilities
assumed from NBNYC:
F-31
Table of Contents
The following table provides a final allocation of consideration paid for the fair value of assets acquired and liabilities assumed from NBNYC as of January 6, 2023:
Purchase price consideration
Fair value of assets acquired:
Cash and due from banks
Interest-bearing deposits in banks
Total cash and cash equivalents
Available-for-sale securities (at fair value)
Other investments
Loans receivable
Federal Reserve Bank stock, at cost
Federal Home Loan Bank stock, at cost
Accrued interest receivable
Deferred income taxes
Goodwill
Core deposit intangible
Other assets
Total assets
Fair value of liabilities assumed:
Deposits:
Demand
Savings, Super NOW, and Money Market
Certificates of deposit
Total deposits
Advances from the Federal Home Loan Bank
Accrued expenses and other liabilities
Total liabilities
$
$
$
$
21,281
29,138
3,284
32,422
5,004
1,226
159,155
54
1,470
353
495
271
1,040
399
201,889
21,878
10,975
104,162
137,015
27,817
15,776
180,608
In connection with the Acquisition, the Company recorded $0.3 million of goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is an
asset representing the acquired future economic benefits such as synergies that are not individually identified and separately recognized (i.e., it is measured as a residual). The amount of goodwill
recognized is also impacted by measurement differences resulting from certain assets and liabilities not being recorded at fair value (e.g., income taxes, employee benefits). In accordance with ASC
805-30-30-1, the measurement of goodwill occurs on the Acquisition Date and, other than qualifying measurement period adjustments, no adjustments are made to goodwill recognized as of the
Acquisition Date until and unless it becomes impaired.
ASC 805 provides for a period of time during which the acquirer may adjust provisional amounts recognized at the acquisition date to their subsequently determined acquisition-date fair values,
referred to as the “measurement period.” Adjustments during the measurement period are not limited to just those relating to assets acquired and liabilities assumed but apply to all aspects of business
combination accounting (e.g., the consideration transferred). Measurement-period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period
in which they are determined. Prior period information is not revised, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been
completed at the acquisition date. In accordance with ASC 805, the Company recorded a measurement period adjustment and decreased goodwill by $1.0 million related to the finalization of the
consideration transferred.
F-32
Table of Contents
Information regarding the allocation of goodwill to the Company’s reportable segments, as well as the carrying amounts and amortization of the core deposit intangible, can be found within NOTE 22
—SEGMENTS and NOTE 8—GOODWILL AND INTANGIBLE ASSETS, respectively. None of the goodwill is tax deductible. Described below are the methods used to determine the fair values
of the significant assets acquired and liabilities assumed in the NBNYC Acquisition.
Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term
maturities.
Investment securities available-for-sale. Quoted market prices for the securities acquired were used to determine their fair values. If quoted market prices were not available for a specific security,
then quoted prices for similar securities in active markets were used to estimate the fair value.
Loans. Each loan was assessed individually. The fair values for loans were estimated using a discounted cash flow methodology that considered factors including the type of loan and the related
collateral, classification status, fixed or variable interest rate, remaining term, amortization status, and current discount rates. In addition, the probability of default, loss given default, and prepayment
assumptions that were derived based on loan characteristics, historical loss experience, comparable market data, and current and forecasted economic conditions were used to estimate expected credit
losses. The discount rates used for loans and leases were based on current market rates for new originations or comparable loans and leases and include adjustments for liquidity. The discount rate did
not include credit losses as that was included as a reduction to the estimated cash flows. We determined the fair value of the PCD loans using the asset and income approach. We used the income
approach for PCD loans where there was evidence that the borrower may be able to continue to service the loan and more likely than not continue to pay. We used the asset approach for PCD loans
when the loan is on non-accrual status. Acquired loans were marked to fair value and adjusted for any PCD gross up as of the Acquisition Date.
Core Deposit Intangible. CDI is a measure of the value of non-interest-bearing and interest-bearing checking accounts, savings accounts, and money market accounts that are acquired in a business
combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an
alternative source of funding. The CDI relating to the NBNYC Acquisition will be amortized over an estimated useful life of 10 years using the sum of years digits depreciation method. The
Company evaluates such identifiable intangibles for impairment when an indication of impairment exists.
Deposit Liabilities. The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the Acquisition date. The fair values for time deposits were
estimated using a discounted cash flow methodology that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Borrowings. The estimated fair value of borrowed funds is based on bid quotations received from securities dealers or the discounted value of contractual cash flows with interest rates currently in
effect for borrowed funds with similar maturities.
PCD loans.
Purchased loans that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans and leases, the initial estimate of expected credit losses is recognized
in the ACL on the date of acquisition using the same methodology as other loans and leases held-for-investment. The following table provides a summary of loans and leases purchased as part of the
NBNYC Acquisition with credit deterioration and associated credit loss reserve at acquisition:
Par value (unpaid principal balance)
ACL at acquisition
Non-credit (discount)
Fair Value
$
$
42,443
(870)
(1,559)
40,014
Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. Transaction costs include expenses associated with legal, accounting,
regulatory, and other transition services rendered in connection with acquisition, travel expense, and other non-recurring direct expenses associated with acquisitions.
The Company incurred transaction costs related to the NBNYC Acquisition during the years ended December 31, 2023, 2022 and 2021 of $0.2 million, $2.3 million and $1.3 million, respectively .
These costs have been included in the Consolidated Statement of Operations in Professional Services Expense.
F-33
Table of Contents
NOTE 4—INVESTMENTS:
Investments consisted of the following at:
Debt securities available-for-sale, at fair value
Federal Home Loan Bank and Federal Reserve Bank stock
Non-controlled investments
Joint ventures
Controlled investments:
Equity
Debt
Total investments
The Company’s Non-Conforming Conventional Loan Program
December 31, 2023
December 31, 2022
Cost
Fair Value
Cost
Fair Value
$
$
32,372 $
3,635
796
37,864
—
—
74,667 $
32,171 $
3,635
728
40,859
—
—
77,393 $
— $
—
1,360
23,314
99,195
32,300
156,169 $
—
—
1,360
23,022
241,113
18,104
283,599
NCL JV: On May 20, 2019, the Company and its joint venture partner launched NCL JV to provide non-conforming conventional commercial and industrial term loans to U.S. middle-market
companies and small businesses. NCL JV is a 50/50 joint venture between NCL a wholly-owned subsidiary of the Company, and Conventional Lending TCP Holding, LLC, a wholly-owned, indirect
subsidiary of BlackRock TCP Capital Corp. (Nasdaq: TCPC). NCL JV ceased funding new loans during 2020. On January 28, 2022, NCL JV closed a conventional commercial loan securitization
with the sale of $56.3 million of Class A Notes, NCL Business Loan Trust 2022-1, Business Loan-Backed Notes, Series 2022-1, secured by a segregated asset pool consisting primarily of NCL JV’s
portfolio of conventional commercial business loans, including loans secured by liens on commercial or residential mortgaged properties, originated by NCL JV and NBL. The Notes were rated “A”
(sf) by DBRS Morningstar. The Notes were priced at a yield of 3.209%. The proceeds of the securitization were used, in part, to repay NCL JV’s credit facility and return capital to the NCL JV
partners.
The following tables show certain summarized financial information for NCL JV:
Selected Statement of Assets and Liabilities Information
Cash
Restricted cash
Investments in loans, at fair value (amortized cost of $68,404 and $78,785, respectively)
Other Assets
Total assets
Securitization notes payable
Other liabilities
Total liabilities
Net assets
Total liabilities and net assets
F-34
December 31, 2023
(Unaudited)
December 31, 2022
(Unaudited)
612 $
3,298
70,083
1,614
75,607 $
38,805 $
905
39,710
35,897
75,607 $
791
2,362
78,595
1,807
83,555
49,273
1,109
50,382
33,173
83,555
$
$
$
$
Table of Contents
Selected Statements of Operations Information
Interest and other income
Total expenses
Net investment income
Unrealized (depreciation) appreciation on investments
Net increase (decrease) in net assets resulting from operations
2023
(Unaudited)
Year Ended December 31,
2022
(Unaudited)
2021
(Unaudited)
$
$
6,160 $
2,524
3,636
1,869
5,505 $
6,966 $
2,916
4,050
(4,494)
(444) $
6,300
2,612
3,688
282
3,970
TSO JV: On August 5, 2022, NCL and TSO II Booster Aggregator, L.P. (“TSO II”) entered into a joint venture, TSO JV, governed by the Amended and Restated Limited Partnership Agreement for
the TSO JV. TSO JV began making investments in non-conforming conventional commercial and industrial term loans during the fourth quarter of 2022. NCL and TSO II each committed to
contribute an equal share of equity funding to the TSO JV and each have equal voting rights on all material matters. TSO JV intends to deploy capital over the course of time with additional leverage
supported by a warehouse line of credit. The intended purpose of TSO JV is to invest in non-conforming conventional commercial and industrial term loans made to middle-market companies as well
as small businesses.
The following tables show certain summarized financial information for TSO JV:
Selected Statement of Assets and Liabilities Information
Cash
Restricted cash
Investments in loans, at fair value (amortized cost of $62,695 and $21,038, respectively)
Other assets
Total assets
Bank notes payable
Other liabilities
Total liabilities
Net assets
Total net assets
Selected Statements of Operations Information
Interest and other income
Total expenses
Net investment income (loss)
Unrealized appreciation on investments
Realized loss on investments
Realized gain (loss) on derivative transactions
Unrealized gain (loss) on derivative transactions
Net increase in net assets resulting from operations
December 31, 2023
December 31, 2022
(Unaudited)
(Unaudited)
$
$
$
$
4,401 $
1,183
66,689
1,374
73,647 $
29,636 $
1,092
30,728
42,919
73,647 $
2023
(Unaudited)
Year Ended December 31,
2022
(Unaudited)
2021
(Unaudited)
$
$
3,823 $
4,430
(607)
2,580
(16)
399
(911)
1,445 $
101 $
385
(284)
1,412
—
—
218
1,346 $
1,046
498
22,449
2,034
26,027
12,950
206
13,156
12,871
26,027
—
—
—
—
—
—
—
—
F-35
Table of Contents
Transactions with Affiliated Companies
An affiliated company is an unconsolidated entity in which the Company has an ownership of 5% or more of its voting securities. Transactions related to our joint ventures and non-controlled
investments for the year ended December 31, 2023 were as follows:
Company
Joint Ventures
Newtek Conventional Lending, LLC
Newtek TSO II Conventional Credit Partners,
LP
Total Joint Ventures
Non-Control Investments
EMCAP Loan Holdings, LLC
Biller Genie Software, LLC
Total Non-Control Investments
Total Affiliate Investments
Debt Securities Available-for-Sale
$
$
$
$
$
Fair Value at
December 31,
2022
Purchases (Cost)
Principal
Received
Return of
Investment
Net Realized
Gains/(Losses)
Net Unrealized
Gains/(Losses)
Fair Value at
December 31,
2023
Interest and
Other Income
Dividend
Income
16,587 $
248 $
6,435
23,022 $
14,302
14,550 $
1,000 $
360
1,360 $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
2,565 $
19,400 $
— $
1,641
—
— $
722
3,287 $
21,459
40,859 $
—
— $
—
1,641
(564) $
—
(564) $
— $
—
— $
(68) $
—
(68) $
368 $
360
728 $
— $
—
— $
116
—
116
24,382 $
14,550 $
— $
(564) $
— $
3,219 $
41,587 $
— $
1,757
The following tables summarize the amortized cost and fair value of available-for-sale securities by major type as of December 31, 2023:
U.S. Treasury notes
Government agency debentures
Total available for sale securities
At December 31 , 2023
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
$
$
29,372 $
3,000
32,372 $
—
—
—
$
$
67
134
201
$
$
29,305
2,866
32,171
There was $0.2 million accrued interest receivable on available-for-sale securities at December 31, 2023, and is included in Other assets in the accompanying Consolidated Statements of Financial
Condition.
During the year ended December 31, 2023, no securities were sold or settled.
F-36
Table of Contents
Unrealized Losses
The following tables summarize the gross unrealized losses and fair value of available-for-sale securities by length of time each major security type has been in a continuous unrealized loss position:
U.S. Treasury notes
Government agency debentures
Total
$
$
29,304 $
2,867
32,171 $
67 $
134
201 $
Less Than 12 Months
12 Months or More
At December 31 , 2023
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses Number of Holdings
1
2
3
—
—
— $
— $
—
— $
Total
Fair Value
29,304 $
2,867
32,171 $
Unrealized Losses
67
134
201
$
$
Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit-related factors or non-credit-related factors. The evaluation considers the extent to
which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period
of time sufficient to allow for any anticipated recovery in fair value. These unrealized losses are primarily the result of non-credit-related volatility in the market and market interest rates. Since none
of the unrealized losses relate to marketability of the securities or the issuers' ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient
period of time to recover unrealized losses, none of the losses have been recognized in the Company’s Consolidated Statements of Income.
Contractual Maturities
The following table summarizes the amortized cost and fair value of available-for-sale securities by contractual maturity:
Maturing within 1 year
Total available for sale securities
Other information
At December 31 , 2023
At December 31, 2022
Amortized Cost
Fair Value
Amortized Cost
Fair Value
$
$
32,372 $
32,372 $
32,171 $
32,171 $
— $
— $
The following table summarizes Newtek Bank’s available-for-sale securities pledged for deposits, borrowings, and other purposes:
Pledged for deposits
Pledged for borrowings and other
Total available for sale securities pledged
At December 31 , 2023
At December 31, 2022
$
$
—
30,730
30,730
$
$
—
—
—
—
—
F-37
Table of Contents
NOTE 5—LOANS:
Loans held for investment
Loans held for investment included SBA 7(a) loans originated by NSBF and Newtek Bank, as well as CRE and C&I loans originated by Newtek Bank. The following tables shows the Company’s
loan portfolio by industry for loans held for investment, at fair value and loans held for investment, at amortized cost:
Food Services and Drinking Places
Specialty Trade Contractors
Professional, Scientific, and Technical Services
Ambulatory Health Care Services
Merchant Wholesalers, Durable Goods
Administrative and Support Services
Amusement, Gambling, and Recreation Industries
Repair and Maintenance
Merchant Wholesalers, Nondurable Goods
Truck Transportation
Personal and Laundry Services
Fabricated Metal Product Manufacturing
Food Manufacturing
Construction of Buildings
Accommodation
Motor Vehicle and Parts Dealers
Social Assistance
Support Activities for Mining
Transportation Equipment Manufacturing
Building Material and Garden Equipment and Supplies Dealers
Food and Beverage Stores
Rental and Leasing Services
Nursing and Residential Care Facilities
Educational Services
Other
Total
Commercial Real Estate
Commercial & Industrial
Small Business Administration
Total Loans
Deferred fees and costs
Loans held for investment, at amortized cost, net of deferred fees and costs
Loans Held for Investment, at Fair Value
December 31, 2023
December 31, 2022
Cost
Fair Value
Cost
Fair Value
43,779 $
40,193
36,248
27,291
21,873
21,319
21,289
15,886
15,623
15,590
12,867
12,439
10,233
9,868
9,259
9,046
8,857
8,455
7,687
7,384
7,026
6,764
6,182
5,368
102,037
482,563 $
43,955 $
35,451
35,377
26,633
21,152
19,521
22,839
17,005
15,573
12,113
13,584
13,205
8,714
9,890
10,162
9,382
9,721
7,754
7,999
6,781
7,306
7,178
6,709
5,636
96,161
469,801 $
47,012 $
42,082
39,910
27,275
22,164
22,352
23,812
16,993
16,183
23,673
12,949
13,483
10,756
11,252
11,476
10,071
9,150
10,426
8,272
8,098
5,711
7,417
8,187
5,838
118,251
532,793 $
Loans Held for Investment, at Amortized Cost
December 31, 2023
December 31, 2022
163,803 $
8,191
163,918
335,912
393
336,305 $
47,198
38,059
38,086
25,151
22,004
20,827
24,928
17,165
15,312
18,071
13,333
14,032
8,873
10,194
10,428
9,536
9,857
8,615
8,445
7,689
5,857
7,647
8,697
6,133
109,131
505,268
—
—
—
—
—
—
$
$
$
$
F-38
Table of Contents
Past Due and Non-Accrual Loans
The following tables summarize the aging of accrual and non-accrual loans by class:
30-59 Days Past
Due and
Accruing
60-89 Days Past
Due and
Accruing
90 or more Days
Past Due and
(1)
Accruing
Non- accrual
Total past Due
and Non-
accrual
Current
Total Carried at
Amortized Cost
Total Loans Accounted
for Under the Fair
Value Option
Total Loans Held
for Investment
As of December 31, 2023
At amortized cost
SBA
Commercial Real Estate
Commercial & Industrial
Total, at amortized cost
Deferred fees and costs
Total, at amortized cost net of deferred fees
and costs
Allowance for credit losses
Total, at amortized cost, net
At fair value
SBA
Total loans held for investment
$
$
$
$
$
3,637
948
—
4,585
$
311
—
—
311
20,380
24,965
$
$
16,075
16,386
$
$
$
$
—
—
—
—
$
$
$
752
4,621
—
$
4,700
5,569
—
5,373
$
10,269
$
159,218
158,234
8,191
325,643
$
$
$
$
163,918
163,803
8,191
335,912
393
336,305
$
$
$
(12,574)
323,731
$
—
—
—
—
—
—
—
—
—
—
$
$
48,174
53,547
$
$
84,629
94,898
$
$
385,172
710,815
$
323,731
$
$
469,801
469,801
$
$
$
$
$
$
163,918
163,803
8,191
335,912
393
336,305
(12,574)
323,731
469,801
793,532
(1)
Represents loans that are considered well secured and in the process of collection.
As of December 31, 2022
30-59 Days Past Due
and Accruing
60-89 Days Past Due
and Accruing
90 or more Days
Past Due and
Accruing
Non- accrual
Total past Due and
Non-accrual
Current
Total Carried at
Amortized Cost
Loans Accounted for
Under the Fair Value
Option
Total Loans
SBA
$
18,681 $
12,754 $
— $
34,433 $
65,868 $
439,400 $
— $
505,268 $
505,268
The Company identified five loans that did not share similar risk characteristics with the loan segments identified in NOTE 2—SIGNIFICANT ACCOUNTING POLICIES and evaluated them for
impairment individually. The unpaid contractual principal balance and recorded investment for the loans individually assessed was $5.3 million with an allowance of $0.1 million as of the year ended
December 31, 2023.
Credit Quality Indicators
Newtek Bank uses internal loan reviews to assess the performance of individual loans. An independent review of the loan portfolio is performed annually by an external firm. The goal of Newtek
Bank’s annual review of each borrower’s financial performance is to validate the adequacy of the risk grade assigned.
Newtek Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing
grades and grade 5 is special mention. Collectively, grades 6 through 7 represent classified loans in Newtek Bank’s portfolio. The following guidelines govern the assignment of these risk grades:
Exceptional (1 Rated): These loans are of the highest quality, with strong, well-documented sources of repayment. These loans and leases will typically have multiple demonstrated sources of
repayment with no significant identifiable risk to collection, exhibit well-qualified management, and have liquid financial statements relative to both direct and indirect obligations.
Quality (2 Rated): These loans are of very high credit quality, with strong, well-documented sources of repayment. These loans and leases exhibit very strong, well defined primary and secondary
sources of repayment, with no significant identifiable risk of collection and have internally generated cash flow that more than adequately covers current maturities of long-term debt.
F-39
Table of Contents
Satisfactory (3 Rated): These loans exhibit satisfactory credit risk and have excellent sources of repayment, with no significant identifiable risk of collection. These loans and leases have documented
historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. They have adequate secondary sources to
liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.
Acceptable (4 Rated): These loans show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or
loss. These loans and leases may have unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to
minor operational issues, financial trends, or reliance on projected performance. They may also contain marginal or unproven secondary sources to liquidate the debt, including combinations of
liquidation of collateral and
liquidation value to the net worth of the borrower or guarantor.
Special mention (5 Rated): These loans show signs of weaknesses in either adequate sources of repayment or collateral. These loans and leases may contain underwriting guideline tolerances and/or
exceptions with no mitigating factors; and/or instances where adverse economic conditions develop subsequent to origination that do not jeopardize liquidation of the debt but substantially increase
the level of risk.
Substandard (6 Rated): Loans graded Substandard are inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral. Loans and leases classified as
Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; are characterized by the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. These loans and leases are consistently not meeting the repayment schedule.
Doubtful (7 Rated): Loans graded Doubtful have all the weaknesses inherent in those classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the
debt has been placed on non-accrual status, and no definite repayment schedule exists. Once the loss position is determined, the amount is charged off.
Loss (8 Rated): Loss rated loans are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the asset has absolutely no
recovery or salvage value, but rather that it is not practical or desirable to defer writing off this credit even though partial recovery may be affected in the future.
F-40
Table of Contents
The following tables present asset quality indicators by portfolio class and origination year as of December 31, 2023.
SBA 7(a) Unguaranteed, net of deferred
fees and costs
Risk Grades 1-4
Risk Grades 5-6
Risk Grade 7
Risk Grade 8
Total
SBA, at fair value
Risk Grades 1-4
Risk Grades 5-6
Risk Grade 7
Risk Grade 8
Total
Commercial Real Estate
Risk Grades 1-4
Risk Grades 5-6
Risk Grade 7
Total
Commercial & Industrial
Risk Grades 1-4
Risk Grades 5-6
Risk Grade 7
Total
Total
December 31, 2022
SBA
Risk Grades 1-4
Risk Grades 5-6
Risk Grade 7
Total
Allowance for Credit Losses
2023
2022
2021
2020
2019
Prior
Total
Term Loans Held for Investment by Origination Year
$
$
$
$
$
$
$
$
$
$
$
161,263 $
2,655
—
—
163,918 $
34,289 $
349
—
—
34,638 $
53,567 $
—
—
53,567 $
6,174 $
—
—
6,174 $
— $
—
—
—
— $
151,929 $
8,968
—
149
161,046 $
28,224 $
—
—
28,224 $
— $
—
—
— $
— $
—
—
—
— $
53,998 $
5,813
—
17
59,828 $
14,590 $
948
—
15,538 $
— $
—
—
— $
— $
—
—
—
— $
27,870 $
1,257
—
22
29,149 $
— $
910
—
910 $
— $
—
—
— $
— $
—
—
—
— $
52,175 $
11,764
—
16
63,955 $
8,888 $
2,284
—
11,172 $
— $
—
—
— $
— $
—
—
—
— $
94,751 $
25,727
—
707
121,185 $
49,771 $
4,621
—
54,392 $
2,017 $
—
—
2,017 $
161,263
2,655
—
—
163,918
415,012
53,878
—
911
469,801
155,040
8,763
—
163,803
8,191
—
—
8,191
258,297 $
189,270 $
75,366 $
30,059 $
75,127 $
177,594 $
805,713
2022
2021
2020
2019
2018
Prior
Total
171,948 $
698
—
172,646 $
66,113 $
3,633
—
69,746 $
34,116 $
595
—
34,711 $
69,563 $
5,400
—
74,963 $
55,376 $
6,772
—
62,148 $
70,669 $
20,273
112
91,054 $
467,785
37,371
112
505,268
See NOTE 2—SIGNIFICANT ACCOUNTING POLICIES for a description of the methodologies used to estimate the ACL.
F-41
Table of Contents
The following table details activity in the ACL for the year ended December 31, 2023:
Beginning Balance
1
Adjustment to Beginning Balance due to PCD marks
Charge offs
Recoveries
Provision
Ending Balance
Commercial Real Estate Commercial & Industrial
— $
$
774
—
—
634
1,408 $
— $
96
—
—
218
314 $
$
Small Business
Administration
Total
— $
—
—
—
10,852
10,852 $
—
870
—
—
11,704
12,574
1
Given the January 6, 2023 transition to a financial holding company, the Company established an ACL with the beginning balance representing the purchased credit deteriorated loans acquired
through the NBNYC Acquisition. There were no charge-offs or recoveries on the loans held for investment, at amortized cost during the year ended December 31, 2023.
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
The Company did not make any loan modifications to borrowers experiencing financial difficulty that would require disclosure, such as principal forgiveness, term extension, or interest rate
reductions during the year ended December 31, 2023. Additionally there were no troubled debt restructurings under legacy U.S. GAAP during the year ended December 31, 2023.
Loans held for sale
SBA 504 First Lien
SBA 504 Second Lien
SBA 7(a)
SBA 7(a) Partials
ALP
Subtotal
Deferred fees and costs
Loans held for sale, net of deferred fees and costs
December 31, 2023
December 31, 2022
At FV
At LCM
At FV
At LCM
$
$
66,387 $
20,757
262
104
31,357
118,867
—
118,867 $
38,787 $
5,741
64
11,237
—
55,829
778
56,607 $
— $
—
287
18,884
—
19,171
—
19,171 $
—
—
—
—
—
—
—
—
F-42
Table of Contents
NOTE 6—TRANSACTIONS WITH AFFILIATED COMPANIES AND RELATED PARTY TRANSACTIONS:
Due to/from affiliated companies
The following table summarizes the amounts due to and due from affiliated companies as of December 31, 2023 and December 31, 2022:
1
Due to affiliated companies
2
Due from affiliated companies
Total due to/due from affiliated companies
1
Included within Other Assets
2
Included within Accounts payable, accrued expenses, and other Liabilities
Notes payable - related parties
The following table summarizes our Notes payable - related parties as of December 31, 2023 and December 31, 2022.
Notes payable - related parties
$
$
$
December 31, 2023
158
7
151
$
$
December 31, 2022
1,338
1,211
127
December 31, 2023
—
$
December 31, 2022
24,250
Following the January 6, 2023 Acquisition and related consolidation of the Company’s previously unconsolidated portfolio companies, the Company no longer has notes payable with related parties
on its statements of financial condition for December 31, 2023. All notes payable with related parties that existed as December 31, 2022 now eliminate in consolidation.
Transactions with joint ventures and non-control investments
Refer to NOTE 4—INVESTMENTS for a schedule of transactions with our joint ventures and non-control equity investments.
The following table summarizes the income earned from our joint ventures for the periods ended December 31, 2023, December 31, 2022 and December 31, 2021:
1
Servicing income
Newtek Bank Deposits
For the years ended December 31,
$
2023
1,240 $
2022
840 $
2021
752
At December 31, 2023, Newtek Bank, in the normal course of business, had deposits from certain of the Company’s officers, directors and their associated companies totaling $5.6 million.
Other Transactions with Related Parties
The nephew of the Chief Executive Officer of the Company is employed by one of the Company’s consolidated subsidiaries and earned annual compensation in excess of $125 thousand during 2023,
2022 and 2021. The sister of a Director and the Chief Admin Officer is employed by one of the Company’s consolidated subsidiaries and earned annual compensation in excess of $125 thousand
during 2023.
NOTE 7—SERVICING ASSETS:
Servicing assets held by NSBF and Newtek Bank, including its subsidiary SBL, are measured at fair value and lower of cost or market, respectively. The Company earns servicing fees from the
guaranteed portions of SBA 7(a) loans it originates and sells. As of December 31, 2023 the Company services $1.8 billion in SBA 7(a) loans and $63.5 million in ALP loans. Refer to NOTE 9—
FAIR VALUE MEASUREMENTS for a rollforward of servicing assets at fair value.
F-43
Table of Contents
The following tables summarizes the fair value and valuation assumptions related to servicing assets at December 31, 2023 and December 31, 2022:
Unobservable Input
Amount
December 31, 2023
Weighted
Average
Range
Minimum
Maximum
Amount
December 31, 2022
Weighted
Average
Range
Minimum
Maximum
Servicing Assets at FV:
1
Discount factor
Cumulative prepayment rate
Average cumulative default rate
Servicing Assets at LCM:
1
Discount factor
Cumulative prepayment rate
Average cumulative default rate
$
29,336
$
30,268
10,389
13.50 %
22.50 %
19.00 %
13.50 %
29.76 %
19.14 %
13.50 %
22.50 %
19.00 %
13.50 %
22.50 %
19.00 %
13.50 %
22.50 %
19.00 %
13.50 %
75.00 %
20.00 %
—
16.50 %
25.00 %
25.00 %
— %
— %
— %
16.50 %
25.00 %
25.00 %
— %
— %
— %
16.50 %
25.00 %
25.00 %
— %
— %
— %
Total
$
39,725
$
30,268
(1)
Determined based on risk spreads and observable secondary market transactions.
Servicing fee income earned for the years ended December 31, 2023, 2022, and 2021 was $18.3 million, $13.7 million, and $11.3 million, respectively.
NOTE 8—GOODWILL AND INTANGIBLE ASSETS:
Goodwill
The following table summarizes changes in the carrying amount of goodwill:
Banking
Payments
Technology
Total goodwill
$
$
December 31, 2023
271
13,814
11,800
25,885
$
$
$
$
December 31, 2022
—
—
—
—
The Company did not have any goodwill as of December 31, 2022 as a BDC. On January 6, 2023, the Company consolidated its previously unconsolidated portfolio companies and completed the
Acquisition, which resulted in goodwill of $25.6 million and $0.3 million, respectively. The goodwill in the payments and technology segments was generated from acquisitions prior to 2022 by the
legal entities within those segments.
F-44
Table of Contents
Intangible Assets
The following table summarizes intangible assets:
Core Deposits
Payments Customer Lists
Technology Customer Lists
Total intangible assets
Gross carrying
Amount
At December 31, 2023
Accumulated
Amortization
Net Carrying
amount
Gross carrying
Amount
At December 31, 2022
Accumulated
Amortization
Net Carrying
amount
$
$
1,040
8,575
6,525
16,140
$
$
(197)
(8,562)
(3,146)
(11,905)
$
$
843
13
3,379
4,235
$
$
—
—
—
—
$
$
—
—
—
—
$
$
—
—
—
—
The Company did not have any intangible assets as of December 31, 2022 as a BDC. On January 6, 2023, the Company consolidated its previously unconsolidated portfolio companies and completed
the Acquisition, which resulted in intangible assets. As of December 31, 2023, the Company had $3.4 million of intangible assets relating to previously unconsolidated portfolio companies and $0.8
million on core deposits at Newtek Bank.
Amortization expense for the year ended December 31, 2023 was $1.5 million and is included in Depreciation and amortization on the Consolidated Statements of Income. There was no amortization
expense for the years ended December 31, 2022 and
2021 since there were no intangible assets prior to the Acquisition.
The remaining estimated aggregate future amortization expense for intangible assets as of December 31, 2023 is as follows:
2024
2025
2026
2027
2028
Thereafter
Total
$
$
Amortization Expense
655
622
601
580
560
1,217
4,235
F-45
Table of Contents
NOTE 9—FAIR VALUE MEASUREMENTS:
The following tables present fair value measurements of certain of the Company’s assets and liabilities measured at fair value and indicates the fair value hierarchy of the valuation techniques utilized
by the Company to determine such fair values as of December 31, 2023 and December 31, 2022:
Assets:
Debt securities available-for-sale
U.S. Treasury notes
Government agency debentures
Loans held for sale, at fair value
Loans held for investment, at fair value
1
Other real estate owned
Non-controlled/affiliate investments
Servicing assets
Joint ventures
Total assets measured at fair value
Liabilities:
3
Equity warrants
Derivative instruments
2,3
Total liabilities measured at fair value
(1)
Included in Other Assets on the Consolidated Statements of Financial Condition.
(2)
Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.
(3)
Included in Other Liabilities on the Consolidated Statements of Financial Condition.
Assets:
Loans held for sale, at fair value
Loans held for investment, at fair value
Controlled investments
1
Other real estate owned
Non-control investments
Servicing assets
2
Joint ventures
Total assets
Fair Value Measurements at December 31, 2023
Total
Level 1
Level 2
Level 3
$
$
$
$
29,305 $
2,866
118,867
469,801
1,110
728
29,336
40,859
692,872 $
141 $
630
771 $
29,305 $
—
—
—
—
—
—
—
29,305 $
— $
—
— $
— $
2,866
—
—
—
—
—
—
2,866 $
— $
630
630 $
—
—
118,867
469,801
1,110
728
29,336
40,859
660,701
141
—
141
Fair Value Measurements at December 31, 2022
Total
Level 1
Level 2
Level 3
$
$
19,171 $
505,268
259,217
3,529
1,360
30,268
23,022
841,835 $
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
19,171
505,268
259,217
3,529
1,360
30,268
—
818,813
(1)
Included in Other Assets on the Consolidated Statements of Financial Condition.
(2)
The Company’s investment in TSO JV and NCL JV are measured at fair value using NAV and have not been classified in the fair value hierarchy. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Financial Condition.
F-46
Table of Contents
The following tables represents the changes in the investments, servicing assets and liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2023 and 2022:
Fair value, December 31, 2022
Additions/(removal) of entities consolidating
after Conversion to BHC
Reclasses between loans at FV and LCM
Sales
Principal payments received
Foreclosed real estate acquired
SBA loans, funded
ALP loans, funded
Additions
Purchases and repurchases of loans
Capital contributions/(distributions)
Change in valuation due to:
Changes in valuation inputs or assumptions
Other factors
Loans HFI,
at FV
Loans HFS,
at FV
Controlled
Investments
Joint Ventures
Servicing Assets
Non-Control
Investments
Warrant
2
Liabilities
Other Real Estate
1
Owned
$
505,268 $
19,171 $
259,217 $
23,022 $
30,268 $
1,360 $
— $
3,529
Year Ended December 31, 2023
—
5,879
(23,783)
(77,966)
(2,978)
38,889
—
—
9,728
—
69,745
(28,513)
(180,784)
(6,233)
—
167,124
69,835
—
5,279
—
(259,217)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,550
—
—
—
—
—
—
—
2,617
—
—
—
—
—
—
—
—
—
—
—
(564)
—
—
—
—
—
—
—
311
—
—
13,515
1,249
469,801 $
3,931
(688)
118,867 $
—
—
— $
3,287
—
40,859 $
1,847
(5,396)
29,336 $
(68)
—
728 $
(170)
—
141 $
—
—
(4,248)
—
2,978
—
—
—
—
—
—
(1,149)
1,110
Fair value, December 31, 2023
$
(1)
(2)
Included in Other Assets on the Consolidated Statements of Financial Condition.
Included in Other Liabilities on the Consolidated Statements of Financial Condition.
Year Ended December 31, 2022
Loans HFS, at
fair value
Controlled Investments
Servicing Assets
Non-Control
Investments
Other Real Estate
1
Owned
Loans HFI, at fair value
$
424,417 $
(19,972)
72,970 $
(6,532)
230,935 $
27,174
28,008 $
—
Fair value, December 31, 2021
Net change in unrealized appreciation (depreciation) on investments
Change in net unrealized deprecation on servicing assets due to:
Changes in valuation inputs or assumptions
Other factors
Realized gain (loss)
SBA unguaranteed non-affiliate investments, funded
Foreclosed real estate acquired
Purchase of investments
Purchase of loans from SBA
Sale of investment
Return of investment
Principal payments received on debt investments
Additions to servicing assets
Fair value, December 31, 2022
—
—
(16,629)
189,769
(3,466)
—
2,404
—
—
(71,255)
—
505,268 $
—
—
61,176
585,803
—
—
—
(691,219)
—
(3,027)
—
19,171 $
—
—
—
—
—
47,046
—
—
(38,968)
(6,970)
—
259,217 $
(2,129)
(7,966)
—
—
—
—
—
—
—
—
12,355
30,268 $
$
1,000 $
—
—
—
—
—
—
360
—
—
—
—
—
1,360 $
2,354
(402)
—
—
(353)
—
3,466
—
—
(1,536)
—
—
—
3,529
(1)
Included in Other Assets on the Consolidated Statements of Financial Condition.
F-47
Table of Contents
The following tables provide a summary of quantitative information about the Company’s Level 3 fair value measurements as of December 31, 2023 and December 31, 2022. In addition to the inputs
noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The tables below are not
intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements at December 31, 2023 and December 31, 2022.
Fair Value as of
December 31, 2023
Unobservable Input
Weighted
1
Average
Range
Minimum
Maximum
Assets:
Held for investment, at fair value - accrual loans
Held for investment, at fair value - non-accrual
loans
Held for sale, at fair value
Joint Ventures
Non-control equity investments
1
Servicing assets
Other real estate owned
Liabilities:
Equity warrants
$
$
$
$
$
$
$
$
$
421,627 Market yields
Cumulative prepayment rate
Average cumulative default rate
48,174 Market yields
Cumulative prepayment rate
Average cumulative default rate
118,867 Market yields
Cumulative prepayment rate
Average cumulative default rate
40,859 Market yields
Cost of equity
Weighted average cost of capital
368 Market yields
360 Cost basis
29,336 Market yields
Cumulative prepayment rate
Average cumulative default rate
1,110 Appraised value
141 Expected volatility
Dividend yield
Risk free rate
7.75 %
22.50 %
19.00 %
7.39 %
— %
30.00 %
6.85 %
61.03 %
20.00 %
8.00 %
12.00 %
8.50 %
10.00 %
N/A
13.50 %
22.50 %
19.00 %
N/A
43.00 %
5.20 %
3.88 %
7.75 %
22.50 %
19.00 %
7.39 %
— %
30.00 %
6.50 %
55.60 %
20.00 %
8.00 %
10.00 %
7.50 %
8.00 %
N/A
13.50 %
22.50 %
19.00 %
N/A
43.00 %
5.20 %
3.88 %
7.75 %
22.50 %
19.00 %
7.39 %
— %
30.00 %
7.75 %
75.00 %
20.00 %
8.00 %
14.00 %
9.50 %
12.00 %
N/A
13.50 %
22.50 %
19.00 %
N/A
43.00 %
5.20 %
3.88 %
(1)
$29.3 million of servicing assets at held at FV and $10.4 million of servicing assets are held at LCM. Refer to NOTE 7—SERVICING ASSETS.
F-48
Table of Contents
Assets:
SBA unguaranteed non-affiliate investments -
accrual loans
SBA unguaranteed non-affiliate investments - non-
accrual loans
1
Controlled equity investments
Controlled debt investments
Non-control equity investments
Servicing assets
Other real estate owned
Fair Value as of
December 31, 2022
Unobservable Input
Weighted
1
Average
Range
Minimum
Maximum
$
$
$
$
$
$
$
$
470,835 Market yields
Cumulative prepayment rate
Average cumulative default rate
34,433 Market yields
Average cumulative default rate
2
241,113 EBITDA multiples-TTM
2
EBITDA multiples-NTM
2
Revenue multiples
2
Book value multiples
2
Weighted average cost of capital
18,104 Market yields
1,000 Market yields
360 Recent transaction
30,268 Market yields
Cumulative prepayment rate
Average cumulative default rate
3,529 Appraised value
7.90 %
25.00 %
25.00 %
8.87 %
30.00 %
8.00x
6.90x
2.46x
1.00x
13.20 %
10.00 %
10.00 %
N/A
16.50 %
25.00 %
25.00 %
N/A
7.90 %
25.00 %
25.00 %
8.87 %
30.00 %
7.50x
6.00x
0.80x
0.80x
11.50 %
10.00 %
8.00 %
N/A
16.50 %
25.00 %
25.00 %
N/A
7.90 %
25.00 %
25.00 %
8.87 %
30.00 %
8.50x
7.50x
3.20x
1.20x
23.60 %
10.00 %
12.00 %
N/A
16.50 %
25.00 %
25.00 %
N/A
(1)
(2)
Weighted by relative fair value.
The Company valued $145.6 million of investments using a combination of EBITDA, trailing twelve months (“TTM”) and next twelve months (“NTM”), and revenue multiples in the overall
valuation approach, which included the use of market comparable companies. The Company valued $95.3 million of investments using only discounted cash flows.
F-49
Table of Contents
Estimated Fair Value of Other Financial Instruments
GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Consolidated Statements of Financial Condition. The carrying amounts and estimated fair values
of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:
$
$
Financial Assets:
Cash and due from banks
Restricted cash
Interest bearing deposits in banks
Debt securities available-for-sale, at fair value
Loans held for sale, at fair value
Loans held for sale, at LCM
Loans held for investment, at fair value
Total loans held for investment, at amortized cost, net
of deferred fees and costs
Federal Home Loan Bank and Federal Reserve Bank
stock
Joint ventures, at fair value
Non-control investments
Financial Liabilities:
Time deposits
Borrowings
Financial Assets:
Cash and due from banks
Restricted cash
Loans held for sale, at fair value
Loans held for investment, at fair value
Controlled investments
Non-control investments
Financial Liabilities:
Borrowings
Carrying Amount
Level 1
December 31, 2023
Fair Value Amount by Level:
Level 2
Level 3
Total Fair Value
15,398 $
30,919
137,689
32,171
118,867
56,607
469,801
336,305
3,635
40,859
728
167,041
644,122
15,398 $
30,919
137,689
29,305
—
—
—
—
—
—
—
—
—
— $
—
—
2,866
—
—
—
—
3,635
—
—
168,542
187,555
— $
—
—
—
118,867
56,733
469,801
337,133
—
40,859
728
—
454,239
15,398
30,919
137,689
32,171
118,867
56,733
469,801
337,133
3,635
40,859
728
168,542
641,794
Carrying Amount
Level 1
December 31, 2022
Fair Value Amount by Level:
Level 2
53,692 $
71,914
—
—
—
—
— $
—
—
—
—
—
Level 3
Total Fair Value
— $
—
19,171
505,268
259,217
1,360
53,692
71,914
19,171
505,268
259,217
1,360
—
152,162
388,226
540,388
53,692 $
71,914
19,171
505,268
259,217
1,360
539,326
F-50
Table of Contents
NOTE 10—DEPOSITS:
The following table summarizes deposits by type:
Non-interest-bearing:
Demand
Interest-bearing:
Checking
Money market
Savings
Time deposits
Total interest-bearing
Total deposits
Time deposits, money market, and interest-bearing checking obtained through brokers
Aggregate amount of deposit accounts that exceeded the FDIC limit
Demand deposit overdrafts reclassified as loan balances
Certificates of deposit in excess of $0.25 million totaled $20.1 million at December 31, 2023.
The following table summarizes the scheduled maturities of time deposits:
2024
2025
2026
2027
2028
Thereafter
Total time deposits
$
$
$
$
$
December 31, 2023
December 31, 2022
10,053
$
11,456
15,803
259,152
167,041
453,452
463,505
53,548
66,511
53
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
54,805
63,402
28,379
19,710
745
—
167,041
NOTE 11—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITES:
The following table details the components of accounts payable, accrued expenses and other liabilities at December 31, 2023 and December 31, 2022:
Loan related remittances due to SBA and participants
Accrued payroll and related expenses
Accrued interest
Funds in process to PMT's payroll customers
Loan processing, servicing and other loan related expenses
1
SBA repair & denial reserve
Good faith deposits
Other
Total accounts payable, accrued expenses and other liabilities
December 31, 2023
December 31, 2022
3,577 $
1,349
4,114
5,060
3,793
3,063
893
15,451
37,300
70
3,051
2,846
—
2,059
—
—
13,398
21,424
$
$
1
The Company may be exposed to repair and denial liability to the SBA for SBA 7(a) loans in its portfolio. The Company established a loss contingency reserve in accordance with ASC 450-20. To
determine the reserve the Company utilizes probability of default and loss given default rates, which are consistent with the assumptions used in its cash flow projections when estimating the fair
value of loans. These factors are applied to the outstanding balances of guaranteed SBA 7(a) loans as well as a rate of repurchase based on historical experience.
F-51
Table of Contents
NOTE 12—BORROWINGS:
At December 31, 2023 and December 31, 2022, the Company had borrowings composed of the following:
Bank Lines of Credit:
1
Capital One line of credit - guaranteed
1
Capital One line of credit - unguaranteed
2
Webster NMS Note
2
SPV I Capital One Facility
2
SPV II Deutsche Bank Facility
2
SPV III One Florida Bank Facility
FHLB Advances
Notes issued by Parent Company:
2,3
2
2024 Notes
2
2025 5.00% Notes
2025 8.125% Notes
2
2026 Notes
2028 Notes
Notes payable - related parties
Notes payable - Securitization Trusts
2,4
2,5
Total
December 31, 2023
December 31, 2022
Commitments
Borrowings
Outstanding
Weighted Average
Interest Rate
Commitments
Borrowings
Outstanding
Weighted Average
Interest Rate
$
$
— $
—
54,871
60,000
50,000
30,000
113,891
38,250
30,000
50,000
115,000
40,000
—
296,223
878,235 $
—
—
36,628
16,080
6,799
257
23,184
38,124
29,563
49,433
113,564
38,378
—
292,112
644,122
— % $
— %
7.94 %
8.20 %
10.04 %
9.50 %
2.13 %
5.75 %
5.00 %
8.13 %
5.50 %
8.00 %
— %
7.84 %
7.04 % $
150,000 $
—
—
—
—
—
—
38,250
30,000
—
115,000
—
50,000
283,143
666,393 $
10,500
45,385
—
—
—
—
—
37,903
29,306
—
112,846
—
24,250
279,136
539,326
6.75 %
7.75 %
—
—
—
—
—
5.75 %
5.00 %
— %
5.50 %
— %
6.72 %
6.19 %
6.11 %
(1)
(2)
(3)
(4)
(5)
Total combined commitments of the guaranteed and unguaranteed lines of credit were $150.0 million at December 31, 2022. The Capital One line of credit was paid off and terminated in October
of 2023.
Net of deferred financing costs.
On January 23, 2023 the Company completed a private placement offering of $50.0 million aggregate principal amount of 8.125% notes due 2025, payable semiannually on February 1 and August
1 each year, commencing on August 1, 2023. The Notes will mature on February 1, 2025.
On August 31, 2023, the Company completed a registered offering of $40.0 million in aggregate principal amount of its 8.00% 2028 Notes payable quarterly on March 1, June 1, September 1 and
December 1 of each year, commencing on December 1, 2023. The 2028 Notes trade on the Nasdaq Global Market under the trading symbol “NEWTI.”
At December 31, 2023 and 2022, the net assets of the consolidated Trusts totaled $14.8 million and $14.1 million, respectively.
F-52
Table of Contents
Outstanding borrowings that are presented net of deferred financing costs, which include the bank lines of credit, the 2024, 2025, 2026, and 2028 Notes, and the Notes payable - Securitization Trusts
consisted of the following:
Bank Lines of Credit:
Webster NMS Note
SPV I Capital One Facility
SPV II Deutsche Bank Facility
SPV III One Florida Bank Facility
Notes issued by Parent Company:
2024 Notes
2025 5.00% Notes
2025 8.125% Notes
2026 Notes
2028 Notes
Notes Payable - Securitization Trusts
Principal balance
December 31, 2023
Unamortized deferred
financing costs
Net carrying
1
amount
Principal balance
December 31, 2022
Unamortized deferred
financing costs
Net carrying
amount
36,881
16,300
6,900
375
38,250
30,000
50,000
115,000
40,000
296,223
(253)
(220)
(101)
(118)
(126)
(437)
(567)
(1,436)
(1,622)
(4,111)
36,628
16,080
6,799
257
38,124
29,563
49,433
113,564
38,378
292,112
—
—
—
—
38,250
30,000
—
115,000
—
283,143
—
—
—
—
(347)
(694)
—
(2,154)
—
(4,007)
—
—
—
—
37,903
29,306
—
112,846
—
279,136
(1)
Net of deferred financing costs. Negative borrowings outstanding are the result of the facilities being paid down to zero principal balance as of December 31, 2023 while the associated deferred
financing costs remain.
At December 31, 2023 and December 31, 2022, the carrying amount of the Company’s borrowings under the Capital One, Deutsche Bank, Webster, and One Florida lines of credit, and the Notes
payable - Securitization Trusts, approximates fair value due to their variable interest rates.
At December 31, 2023, the carrying amount of Newtek Bank’s FHLB borrowings includes a $0.2 million purchase accounting adjustment from the current principal amount to reach a balance sheet
value of $23.2 million.
The fair values of the fixed rate 2028 Notes, 2026 Notes and 2024 Notes are based on the closing public share price on the date of measurement as included in the chart below.
2028 Notes
2026 Notes
2024 Notes
December 31, 2023
December 31, 2022
Closing Price
Fair Value
Closing Price
Fair Value
$
25.04 $
23.75
24.99
40,070
109,250
38,235
n/a
24.83
24.80
n/a
114,218
37,944
These borrowings are not recorded at fair value on a recurring basis. The fixed rate 2025 Notes are held at par as of December 31, 2023 and December 31, 2022.
Total interest expense including unused line fees and amortization of deferred financing costs related to borrowings for the year ended December 31, 2023, 2022, and 2021 was $51.9 million, $26.3
million and $20.5 million, respectively.
NSBF Capital One Facility
Prior to October 2023, NSBF maintained a $150 million Capital One facility to finance the origination of the unguaranteed and guaranteed portions of SBA 7(a) loans NSBF originated. The portion
of the facility collateralized by the government guaranteed portion of SBA 7(a) loans was Prime minus 0.75% and the interest rate on the portion of the facility collateralized by the non-guaranteed
portion of SBA 7(a) loans was Prime plus 0.25%. The facility provided for a 55% advance rate on the non-guaranteed portions of the SBA 7(a) loans NSBF originates and a 90% advance rate on the
guaranteed portions of SBA 7(a) loans NSBF originated. On May 7, 2020, NSBF amended the facility to, among other things, extend the maturity date on which the credit facility converted into a
term loan for a period of three years to May 7, 2023, with the term loan maturing on May 7, 2025. The NSBF Capital One facility was paid off and terminated in October of 2023.
F-53
Table of Contents
For the years ended December 31, 2023, 2022 and 2021, interest expense including amortization of related deferred financing costs was $11.0 million, $4.0 million and $1.5 million, respectively.
2028 Notes
On August 31, 2023, the Company completed a registered offering of $40.0 million in aggregate principal amount of its 8.00% 2028 Notes, which includes the underwriters’ exercise of the option
granted by the Company to purchase an additional $5.0 million in aggregate principal amount of the 2028 Notes. The Company received $38.0 million in proceeds, before expenses, from the sale of
the 2028 Notes. The Company intends to use the net proceeds from the sale of the Notes for general corporate purposes. The 2028 Notes bear interest at a rate of 8.00% per year payable quarterly on
March 1, June 1, September 1 and December 1 of each year, commencing on December 1, 2023, and trade on the Nasdaq Global Market under the trading symbol “NEWTI.” At December 31, 2023,
the Company was in compliance with all covenants related to the 2028 Notes.
For the year ended December 31, 2023 interest expense including amortization of related deferred financing costs was $1.2 million. No interest expense was incurred during the year ended December
31, 2022 and 2021.
2026 Notes
In January 2021, the Company closed a public offering of $115.0 million aggregate principal amount of 5.50% Notes due 2026, including $15.0 million in aggregate principal amount sold pursuant to
a fully-exercised overallotment option. The sale of the 2026 Notes generated proceeds of approximately $111.3 million, net of underwriter's fees and expenses. The 2026 Notes will mature on
February 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after February 1, 2022. The 2026 Notes bear interest at a rate of 5.50% per
year payable quarterly on February 1, May 1, August 1 and November 1 of each year, commencing on May 1, 2021, and trade on the Nasdaq Global Market under the trading symbol “NEWTZ.”
For the years ended December 31, 2023, 2022 and 2021, interest expense including amortization of related deferred financing costs was $7.0 million, $7.0 million and $6.7 million, respectively.
2025 Notes
On November 27, 2020, the Company closed an exempt offering of $5.0 million in aggregate principal amount of its 2025 6.85% Notes. The offering was consummated pursuant to the terms of a
purchase agreement dated November 27, 2020 among the Company and an accredited investor. The purchase agreement provided for the 2025 6.85% Notes to be issued to the Purchaser in a private
placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The 2025 6.85% Notes were scheduled to mature on November 30, 2025 and could be
redeemed in whole or in part at any time. The 2025 6.85% Notes bear interest at a rate of 6.85% per year payable quarterly on February 28, May 31, August 31 and November 30, of each year,
beginning February 28, 2021. Total net proceeds received after deducting structuring fees and estimated offering expenses was $4.8 million. The Company exercised its option to issue up to
$10.0 million of additional 2025 6.85% Notes to the purchaser, and issued $10.0 million in additional 2025 6.85% Notes to the purchaser in an exempt offering in January 2021.
On March 31, 2022, the Company caused notices to be issued to the holder of its 2025 6.85% Notes regarding the Company’s exercise of its option to redeem all $15.0 million in aggregate principal
amount of the Notes on May 2, 2022. The Notes were redeemed on May 2, 2022 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from February 28, 2022
through, but excluding, May 2, 2022.
No interest expense was incurred during the year ended December 31, 2023. For the years ended December 31, 2022 and 2021, interest expense including amortization of related deferred financing
costs was $0.4 million and $1.1 million, respectively.
On January 23, 2023 we completed a private placement offering of $50.0 million aggregate principal amount of 8.125% notes due 2025. The net proceeds from the sale of the notes were
approximately $48.94 million, after deducting estimated offering expenses payable by the Company.
2024 Notes
On July 25, 2019, the Company closed a public offering of $55.0 million in aggregate principal amount of its 2024 Notes. The 2024 Notes will mature on August 1, 2024 and may be redeemed in
whole or in part at any time or from time to time at Newtek’s option on or after August 1, 2021. The 2024 Notes bear interest at a rate of 5.75% per year payable quarterly on
F-54
Table of Contents
August 1, November 1, February 1 and May 1, of each year, beginning November 1, 2019. Total net proceeds received after deducting underwriters’ discount and expenses was $53.3 million. The
2024 Notes are listed on the Nasdaq Global Market under the trading symbol “NEWTL” and were rated “A-“ by Egan-Jones. A portion of the proceeds were used to redeem the outstanding 2022
Notes. In August 2019, the underwriters exercised their option to purchase an additional $8.25 million in aggregate principal amount of the 2024 Notes resulting in an additional $8.0 million in net
proceeds.
On February 16, 2021 and May 20, 2021, the Company issued an additional $5.0 million and $10.0 million in aggregate principal amount of its 2024 Notes, respectively. The new 2024 Notes are
treated as a single series with the prior 2024 Notes and have the same terms as the prior 2024 Notes. The existing 2024 Notes have the same CUSIP number and are fungible and rank equally with the
prior 2024 Notes.
On December 29, 2021, the Company redeemed $40.0 million in aggregate principal amount of the $78.25 million in aggregate principal amount of the Notes on the redemption date of December 29,
2021 at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon from November 1, 2021, through, but excluding, the redemption date. As a result of the partial
redemption of the 2024 Notes, the Company recorded a $0.6 million loss on extinguishment of debt during the year ended December 31, 2021, equivalent to the redeemed portion of the remaining
balance of unamortized deferred financing costs as of the redemption date.
For the years ended December 31, 2023, 2022, and 2021 interest expense including amortization of related deferred financing costs was $2.4 million, $2.4 million, and $4.7 million, respectively.
2023 Notes
On February 21, 2018, the Company closed a public offering of $50.0 million in aggregate principal amount of its 2023 Notes. In February 2018, the underwriters exercised their option to purchase
an additional $7.5 million in aggregate principal amount of the 2023 Notes. Total net proceeds received after deducting underwriters’ discount and expenses was $55.2 million. The 2023 Notes were
listed on the Nasdaq Global Market under the trading symbol “NEWTI.” A portion of the proceeds were used to redeem the outstanding 2021 Notes. The 2023 Notes were scheduled to mature on
March 1, 2023 and could be redeemed in whole or in part at any time or from time to time at Newtek’s option on or after March 1, 2020. The 2023 Notes bore interest at a rate of 6.25% per year
payable quarterly on March 1, June 1, September 1 and December 1, of each year, beginning June 1, 2018.
On February 22, 2021, the Company redeemed all $57.5 million in aggregate principal amount of the 2023 Notes on the redemption date of February 22, 2021, at 100% of their principal amount ($25
per Note), plus the accrued and unpaid interest thereon from December 1, 2020, through, but excluding, the redemption date. As a result of the redemption of the 2023 Notes, the Company recorded a
$1.0 million loss on extinguishment of debt during the year ended December 31, 2021, equivalent to the balance of unamortized deferred financing costs as of the redemption date.
No interest expense was incurred during the years ended December 31, 2023 and 2022. For the year ended December 31, 2021 interest expense including amortization of related deferred financing
costs was $0.5 million.
Notes Payable - Securitization Trusts
Since 2010, NSBF has engaged in securitizations of the unguaranteed portions of its SBA 7(a) loans. In the securitization, it uses a special purpose entity (the “Trust”) which is considered a variable
interest entity. Applying the consolidation requirements for VIEs under the accounting rules in ASC Topic 860, Transfers and Servicing, and ASC Topic 810, Consolidation, which became effective
January 1, 2010, the Company determined that as the primary beneficiary of the securitization vehicle, based on its power to direct activities through its role as servicer for the Trust and its obligation
to absorb losses and right to receive benefits, it needed to consolidate the Trusts. NSBF therefore consolidated the entity using the carrying amounts of the Trust’s assets and liabilities. NSBF reflects
the assets in SBA 7(a) Unguaranteed Non-Affiliate Investments and reflects the associated financing in Notes Payable - Securitization trusts on the Consolidated Statements of Financial Condition.
In December 2017, NSBF completed its eighth securitization which resulted in the transfer of $76.2 million of unguaranteed portions of SBA loans to the 2017-1 Trust. The 2017-1 Trust in turn
issued securitization notes for the par amount of $75.4 million, consisting of $58.1 million Class A notes and $17.3 million of Class B notes, against the assets in a private placement. The Class A and
Class B notes received an “A” and “BBB-” rating by S&P, respectively, with a final maturity date of the notes is February 2043. On February 27, 2023, the 2017-1 Trust was terminated as a result of
NSBF purchasing the 2017-1 Trust assets, with the 2017-1 Trust’s noteholders receiving the redemption price.
F-55
Table of Contents
In November 2018, NSBF completed its ninth securitization which resulted in the transfer of $108.6 million of unguaranteed portions of SBA loans to the 2018-1 Trust. The 2018-1 Trust in turn
issued securitization notes for the par amount of $108.6 million, consisting of $82.9 million Class A notes and $25.7 million of Class B notes, against the assets in a private placement. The Class A
and Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is February 2044. The Class A and Class B notes bear interest at a rate of adjusted
SOFR plus 1.83% across both classes.
In October 2019, NSBF completed its tenth securitization which resulted in the transfer of $118.9 million of unguaranteed portions of SBA loans to the 2019-1 Trust, The 2019-1 Trust in turn issued
securitization notes for the par amount of $118.9 million, consisting of $93.5 million of Class A notes and $25.4 million Class B notes, against the assets in a private placement. The Class A and
Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is December 2044. The Class A and Class B notes bear interest at a rate of adjusted
SOFR plus 1.83% across both classes.
In December 2021, NSBF completed its eleventh securitization which resulted in the transfer of $103.4 million of unguaranteed portions of SBA loans to the 2021-1 Trust, The 2021-1 Trust in turn
issued securitization notes for the par amount of $103.4 million, consisting of $79.7 million of Class A notes and $23.8 million Class B notes, against the assets in a private placement. The Class A
and Class B notes received an “A” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is December 2044. The Class A and Class B notes bear interest at a rate of adjusted
SOFR plus 1.92% across both classes.
In September 2022, NSBF completed its twelfth securitization which resulted in the transfer of $116.2 million of unguaranteed portions of SBA loans to the 2022-1 Trust. The 2022-1 Trust in turn
issued securitization notes for the par amount of $103.4 million, consisting of $95.4 million of Class A notes and $20.8 million Class B notes, against the 2022-1 Trust assets in a private placement.
The Class A and Class B notes received an “A-” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is October 2049. The Class A and Class B notes bear interest at an
average rate of 30-day average compounded SOFR plus 2.97% across both classes.
In June 2023, NSBF completed its thirteenth securitization which resulted in the transfer of $103.9 million of unguaranteed portions of SBA loans to the 2023-1 Trust. The 2023-1 Trust in turn issued
securitization notes for the par amount of $103.9 million, consisting of $84.3 million of Class A notes and $19.6 million Class B notes, against the 2023-1 Trust assets in a private placement. The
Class A and Class B notes received an “A-” and “BBB-” rating by S&P, respectively, and the final maturity date of the notes is October 2049. The Class A and Class B notes bear interest at an
average rate of 30-day average compounded SOFR plus 3.24% across both classes.
For the years ended December 31, 2023, 2022 and 2021, interest expense including amortization of related deferred financing costs and discount was $23.5 million, $10.6 million, and $5.5 million,
respectively.
At December 31, 2023 and 2022, the assets of the consolidated Trusts totaled $14.8 million and $14.1 million, respectively. The liabilities of the consolidated Trusts totaled $296.2 million and $283.1
million, respectively.
Note Payable - Related Parties
In June 2015, the Company entered into the Related Party RLOC. Maximum borrowings under the Related Party RLOC were $38.0 million.
In June 2017, the Related Party RLOC was amended to increase maximum borrowings to $50.0 million. The outstanding balance had an interest rate equal to 1 month LIBOR (with a floor of 0.50%)
plus 6.0% or a rate equal to the greater of the Prime Rate or 3.5% plus 5.0%. In November 2018, the Related Party RLOC was amended to reduce the interest rate to the lesser of 1 month LIBOR plus
2.5% or the Prime Rate plus 1.5%.
For the years ended December 31, 2022 and 2021, interest expense was $0.5 million and $0.4 million, respectively. For the year ended December 31, 2023, $0.0 interest expense was included in the
consolidated financial statements on related party notes payable.
F-56
Table of Contents
Total expected principal repayments on the Company’s borrowings for the next five fiscal years and thereafter are as follows:
Year Ending December 31,
2024
2025
2026
2027
2028
Thereafter
Borrowings
53,109
104,701
117,094
41,985
40,000
296,223
653,112
$
$
NOTE 13—DERIVATIVE INSTRUMENTS:
The Company historically uses derivative instruments primarily to economically manage the fair value variability of certain fixed rate assets caused by interest rate fluctuations and overall portfolio
market risk. The following is a breakdown of the derivatives outstanding as of December 31, 2023 and December 31, 2022:
Contract Type
1
Notional
Asset
2
Liability
Maturity (years)
Notional
Asset
Liability
Maturity (years)
5-year Treasury Futures
$
(27,869) $
— $
630
0.25 years $
— $
— $
—
—
December 31, 2023
Fair Value
Remaining
December 31, 2022
Fair Value
Remaining
(1)
(2)
Shown as a negative number when the position is sold short.
Shown in Accounts Payable, Accrued Expenses, and Other Liabilities in the accompanying consolidated balance sheets.
The following table indicates the net realized gains (losses) and unrealized appreciation (depreciation) on derivatives as included in Other Noninterest Income in the consolidated statements of
operations for the years ended December 31, 2023, 2022 and 2021:
Contract Type
5-year Treasury Futures
Unrealized
Appreciation/(Depreciation)
$
(699) $
Realized Gain/(Loss)
Unrealized
Appreciation/(Depreciation)
Realized Gain/(Loss)
Unrealized
Appreciation/(Depreciation)
Realized Gain/(Loss)
834 $
183 $
445 $
(183) $
590
December 31, 2023
Year Ended
December 31, 2022
December 31, 2021
Collateral posted with our futures counterparty is segregated in the Company’s books and records. Historically, the Company’s counterparty has held cash margin as collateral for derivatives, which is
included in restricted cash in the consolidated balance sheets. Interest rate futures are centrally cleared by the Chicago Mercantile Exchange (“CME”) through a futures commission merchant. The
Company is required to post initial margin and daily variation margin for interest rate futures that are centrally cleared by CME. CME determines the fair value of our centrally cleared futures,
including daily variation margin. Variation margin pledged on the Company’s centrally cleared interest rate futures is settled against the realized results of these futures.
NOTE 14—COMMITMENTS AND CONTINGENCIES:
Operating and Employment Commitments
The Company leases office space and other office equipment in several states under operating lease agreements which expire at various dates through 2027. Those office space leases which are for
more than one year generally contain scheduled rent increases or escalation clauses. In addition, during 2023, the Company entered into one-year employment agreements with its named executive
officers.
F-57
Table of Contents
The following summarizes the Company’s obligations and commitments, as of December 31, 2023 for future minimum cash payments required under operating lease and employment agreements:
Year
2024
2025
2026
2027
2028
Thereafter
Total
Operating Leases
1
Employment Agreements
Total
$
$
2,761 $
2,469
1,842
430
—
—
7,502 $
525 $
—
—
—
—
—
525 $
3,286
2,469
1,842
430
—
—
8,027
(1)
Employment agreements with certain of the Company’s named executive officers
Legal Matters
The Company and its subsidiaries are routinely subject to actual or threatened legal proceedings, including litigation and regulatory matters, arising in the ordinary course of business. Litigation
matters range from individual actions involving a single plaintiff to class action lawsuits and can involve claims for substantial or indeterminate alleged damages or for injunctive or other relief.
Regulatory investigations and enforcement matters may involve formal or informal proceedings and other inquiries initiated by various governmental agencies, law enforcement authorities, and self-
regulatory organizations, and can result in fines, penalties, restitution, changes to the Company’s business practices, and other related costs, including reputational damage. At any given time, these
legal proceedings are at varying stages of adjudication, arbitration, or investigation, and may relate to a variety of topics.
Assessment of exposure that could result from legal proceedings is complex because these proceedings often involve inherently unpredictable factors, including, but not limited to, the following:
whether the proceeding is in early stages; whether damages or the amount of potential fines, penalties, and restitution are unspecified, unsupported, or uncertain; whether there is a potential for
punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether
discovery or other investigation has begun or is not complete; whether material facts may be disputed or unsubstantiated; whether meaningful settlement discussions have commenced; and whether
the matter involves class allegations. As a result of these complexities, the Company may be unable to develop an estimate or range of loss.
The Company evaluates legal proceedings based on information currently available, including advice of counsel. The Company establishes accruals for those matters, pursuant to ASC 450, when a
loss is considered probable and the related amount is reasonably estimable. While the final outcomes of legal proceedings are inherently unpredictable, management is currently of the opinion that the
outcomes of pending and threatened matters will not have a material effect on the Company’s business, consolidated financial position, results of operations or cash flows as a whole. As of December
31, 2023, the Company had accrued an immaterial reserve that we believe is appropriate to cover potential settlements.
As available information changes, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly. The Company’s estimates are subject to
significant judgment and uncertainties, and the matters underlying the estimates will change from time to time. In the event of unexpected future developments, it is possible that an adverse outcome
in any such matter could be material to the Company’s business, consolidated financial position, results of operations, or cash flows as a whole for any particular reporting period of occurrence.
In addition. as a result of a litigation brought by the Federal Trade Commission (the “FTC”) in October 2012, NMS voluntarily entered into, and continues to operate under, a permanent injunction
with respect to certain of its business practices.
Unfunded Commitments
At December 31, 2023, the Company had $125.4 million of unfunded commitments consisting of $20.4 million in connection with its SBA 7(a) loans, $81.0 million in connection with its SBA 504
loans, $13.1 million in connection with its alternative lending program loans, and $10.9 million relating to commercial and industrial loans. The Company anticipates these commitments will be
funded from the same sources it used to fund its other loan commitments.
F-58
Table of Contents
NOTE 15—STOCK BASED COMPENSATION:
Stock Plans
The Company accounts for its stock-based compensation plan using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards,
the Company measures the grant date fair value based upon the market price of its Common Stock on the date of the grant and amortizes the fair value of the awards as stock-based compensation
expense over the requisite service period, which is generally the vesting term.
The Compensation, Corporate Governance and Nominating Committee of the Board approves the issuance of awards of restricted stock to employees and directors pursuant to the 2023 Stock
Incentive Plan, which was approved by the Board in April 2023 and the Company’s shareholders on June 14, 2023. No new awards may be granted under the 2015 Stock Incentive Plan, which was
terminated by the Board in April 2023. The following table summarizes the restricted stock issuances under the 2015 and 2023 Stock Incentive Plans, net of shares forfeited, if any:
1
Restricted Stock authorized under the plan
Net restricted stock (granted)/forfeited during:
Year ended December 31, 2020 and prior
Year ended December 31, 2021
Year ended December 31, 2022
Year ended December 31, 2023
Total net restricted stock (granted)/forfeited
2
2023 Plan
3.0 million
2015 Plan
1.5 million
—
—
—
(82)
(82)
(223)
(215)
(251)
28
(661)
(1)
(2)
No stock options were granted under the 2015 or 2023 Stock Incentive Plan.
The 2023 Stock Incentive Plan provides for an initial share reserve of up to 3.0 million shares of Common Stock.
Awards of restricted stock granted under the 2015 and 2023 Stock Incentive Plans generally vest over a one- to three-year period from the grant date; awards of restricted stock granted under the 2023
Stock Incentive Plan to non-employee directors generally vest over a one-year period. The fair value is expensed over the service period, starting on the grant date.
Stock-based compensation
For the years ended December 31, 2023, 2022, and 2021, the Company recognized total stock-based compensation expense of $2.8 million, $2.5 million, and $2.1 million, respectively.
As of December 31, 2023, there was $3.6 million of total unrecognized compensation expense related to unvested shares of restricted stock granted. This compensation expense is expected to be
recognized over a remaining weighted-average period of approximately 1.7 years as of December 31, 2023.
Shares outstanding
As of December 31, 2023, the Company has 345 thousand shares outstanding related to grants of restricted stock awards. The awards were issued at a weighted average grant date fair value of
$19.18. In addition, there are 44 thousand shares outstanding relating to dividends on unvested restricted stock awards as of December 31, 2023.
During the years ended December 31, 2023 and 2022, additional shares were issued related to dividends on unvested shares of restricted stock granted as follows:
Dividends on Unvested Shares of Restricted Stock Grants
Year Ended December 31, 2023
Year Ended December 31, 2022
# of Shares
19
$ of Shares
$263
# of Shares
35
$ of Shares
$646
F-59
Table of Contents
NOTE 16—SHAREHOLDERS EQUITY:
Preferred Stock
On February 3, 2023, we entered into a Securities Purchase Agreement with Patriot Financial Partners IV, L.P., and Patriot Financial Partners Parallel IV, L.P. in respect of 20 thousand shares of the
Company’s Series A Convertible Preferred Stock, par value $0.02 per share, in a private placement transaction. The aggregate purchase price was $20.0 million. Each share of Series A Preferred
Stock was issued at a price of $1.0 thousand per share and is convertible at the holder’s option into 47.54053782 shares of the Company’s Common Stock. The Company had not issued preferred
stock prior to February 3, 2023.
Warrants for Common Stock
On February 3, 2023, the Company issued warrants to Patriot to purchase, in the aggregate, 47.54 shares of Common Stock for $21.03468 per share. The Warrants are exercisable in whole or in part
until the ten year anniversary of the closing of the transaction and may be exercised for cash or on a “net share” basis, with the number of shares withheld determined based on the closing price of the
Common Stock on the date of such exercise. Warrants are included in Other Liabilities on the Consolidated Statements of Financial Condition.
Common Stock
2020 ATM Program
On June 25, 2020, the Company entered into the 2020 ATM Equity Distribution Agreement. On July 20, 2022, the Company entered into Amendment No. 1 to the 2020 ATM Equity Distribution
Agreement. The 2020 ATM Equity Distribution Agreement, as amended, provided that the Company may offer and sell up to 6.4 million shares of common stock from time to time through the
placement agents. The ATM program was suspended as of January 6, 2023, when the Company did not have an effective shelf registration statement in place. The following table summarizes the total
shares sold and net proceeds received under the 2020 ATM Equity Distribution Agreement:
Shares sold
Net weighted average price per share
Net proceeds
Year Ended December 31, 2023
Year Ended December 31, 2022
Year Ended December 31, 2021
$
$
—
— $
— $
107
19.12 $
2,054 $
1,940
25.91
50,261
The Company used the net proceeds for funding investments in debt and equity securities in accordance with its investment objective and strategies.
2023 ATM Program
The Company’s shelf registration statement on Form S-3 was declared effective by the SEC on July 27, 2023. On November 17, 2023, the Company entered into the 2023 ATM Equity Distribution
Agreement. The 2023 ATM Equity Distribution Agreement, as amended, provided that the Company may offer and sell up to 3.0 million shares of common stock from time to time through the
placement agents. The Company may, subject to market conditions, engage in activity under the current ATM program.
Dividends and Distributions
On February 3, 2023, the Company issued 20 thousand shares of the Company’s Series A Convertible Preferred Stock, par value $0.02 per share, in a private placement transaction. The aggregate
purchase price was $20.0 million. Each share of Series A Preferred Stock was issued at a price of $1.0 thousand per share and is convertible at the holder’s option into 47.54 shares of the Company’s
Common Stock. During the year ended December 31, 2023 the Company had $1.5 million in dividends on its preferred stock. No preferred dividends were paid during the year ended December 31,
2022.
F-60
Table of Contents
The Company’s dividends and distributions on the Company’s common shares are recorded on the declaration date. On November 7, 2023, the Company issued a 30-day notice of its termination of
the DRIP. The following table summarizes the Company’s dividend declarations and distributions during the years ended December 31, 2023 and 2022:
Date Declared
Year ended December 31, 2023
February 27, 2023
June 27, 2023
September 27, 2023
December 11, 2023
Year ended December 31, 2022
December 20, 2021
April 20, 2022
August 30, 2022
November 17, 2022
NOTE 17—REGULATORY CAPITAL:
Record Date
Payment Date
Amount Per Share
Cash Distribution
DRIP Shares
Issued
DRIP
Shares Value
April 4, 2023
July 10, 2023
October 10, 2023
December 29, 2023
March 21, 2022
June 20, 2022
September 20, 2022
December 20, 2022
April 14, 2023
July 21, 2023
October 20, 2023
January 12, 2024
March 31, 2022
June 30, 2022
September 30, 2022
December 30, 2022
$
$
$
$
$
$
$
$
0.18 $
0.18 $
0.18 $
0.18 $
0.65 $
0.75 $
0.65 $
0.70 $
4,291
4,293
4,293
4,371
15,361
17,634
15,325
16,224
6 $
4 $
6 $
— $
9 $
21 $
21 $
45 $
72
73
71
—
225
374
323
692
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following:
to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and
client needs; comply with relevant laws, regulations, and supervisory guidance; to achieve optimal ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders.
Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common
Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
Regulatory capital rules adopted in July 2013 and fully phased in as of January 1, 2019, which are referred to as the Basel III rules, impose minimum capital requirements for bank holding companies
and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with consolidated
assets of more than $3 billion. In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain the fully phased in
“capital conservation buffer” of 2.5% on top of its minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1 risk-based capital, but the buffer applies to all
three measurements (common equity Tier 1 risk-based capital, Tier 1 capital and total capital). The capital conservation is equal to 2.5% of risk-weighted assets.
Capital amounts and ratios for NewtekOne, Inc. as of December 31, 2023 are presented in the table below:
NewtekOne, Inc. - December 31, 2023
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Total Capital (to Risk-Weighted Assets)
(1)
Exclusive of the capital conservation buffer of 2.5% of risk-weighted assets.
Actual
1
For Capital Adequacy Purposes
For Consideration as Well-Capitalized
Amount
Ratio
Amount
Ratio
$
180,829
180,829
180,829
213,141
13.6 % $
16.2 %
16.2 %
19.1 %
53,363
50,153
66,870
89,160
4.0 %
4.5 %
6.0 %
8.0 %
Amount
N/A
N/A
N/A
N/A
Ratio
N/A
N/A
N/A
N/A
Capital amounts and ratios for Newtek Bank as of December 31, 2023, are presented in the table below. As of December 31, 2023, Newtek Bank was categorized as “well-capitalized” under the
prompt corrective action measures and met the capital conservation buffer requirements.
F-61
Table of Contents
Newtek Bank - December 31, 2023
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Total Capital (to Risk-Weighted Assets)
Actual
1
For Capital Adequacy Purposes
For Consideration as Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
99,253
99,253
99,253
105,105
16.6 % $
21.5 %
21.5 %
22.8 %
23,893
20,787
27,716
36,954
4.0 % $
4.5 %
6.0 %
8.0 %
29,866
30,026
36,955
46,193
5.0 %
6.5 %
8.0 %
10.0 %
(1)
Exclusive of the capital conservation buffer of 2.5% of risk-weighted assets.
NOTE 18—EARNINGS PER SHARE:
Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could
occur upon the exercise of stock options, to the extent outstanding, or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in
the net income of the Company.
Basic earnings per share:
Net income available to common shareholders
Weighted-average basic shares outstanding
Basic earnings per share
Diluted earnings per share:
Net income, for diluted earnings per share
Total weighted-average basic shares outstanding
3
Add effect of dilutive warrants and restricted stock awards
Total weighted-average diluted shares outstanding
Diluted earnings per share
Anti-dilutive warrants and restricted stock awards
2023
Financial Holding
Company
1,2
December 31,
2022
2021
4
Investment Company
4
Investment Company
$
$
$
$
45,875
24,263
1.89
45,875
24,263
85
24,348
1.88
1,153
$
$
$
$
32,311
24,198
1.34
32,311
24,198
—
24,198
1.34
—
$
$
$
$
84,142
22,795
3.69
84,142
22,795
—
22,795
3.69
—
(1)
(2)
(3)
(4)
For the years ended December 31, 2023, the convertible preferred stock was not included in the diluted share count because the result would have been anti-dilutive under the if-converted method.
For the years ended December 31, 2023, the Warrants have an anti-dilutive impact on earnings per share.
Incremental diluted shares from restricted stock awards under the treasury stock method.
Per ASC 260-10-15-3, presentation of EPS was not required for investment companies that comply with the requirements of ASC 946, or in the financial statements of wholly-owned subsidiaries.
EPS presentation disclosures are now required as the Company is no longer subject to FASB Topic 946 as a financial holding company.
NOTE 19—LEASES:
Under ASC 842, operating lease expense is generally recognized on a straight-line basis over the term of the lease. The Company has entered into operating lease agreements for office space with
remaining contractual terms up to three years, some of which include renewal options that extend the leases for up to 10 years. These renewal options are not considered in the remaining lease term
unless it is reasonably certain the Company will exercise such options. The operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the rate implicit in the leases generally is not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental
borrowing rate at the lease commencement date and commensurate with the remaining lease term. Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on
a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Leases with an initial term of 12 months or less are not recorded on the balance
sheet and are excluded from our weighted-average remaining lease term.
F-62
The following table summarizes supplemental cash flow and other information related to our operating leases:
Cash paid for amounts included in the measurement of lease liabilities (operating cash flows)
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases
1
Total lease costs
1
Included in Other general and administrative costs on the consolidated statements of operations.
The following table represents the maturity of the Company’s operating lease liabilities as of December 31, 2023:
2023
$2,693
2.88 years
5.50%
$3,124
Year Ended December 31,
2022
$1,886
4.41 years
4.73%
$1,000
2021
$1,555
5.30 years
4.55%
$894
Maturity of Lease Liabilities
2024
2025
2026
2027
2028
Thereafter
Total future minimum lease payments
Less: Imputed interest
Present value of future minimum lease payments
NOTE 20—BENEFIT PLANS:
Defined Contribution Plan
$
$
$
2,761
2,469
1,842
430
—
—
7,502
(550)
6,952
The Company’s employees participate in a defined contribution 401(k) plan (the “Plan”) adopted in 2004 which covers substantially all employees based on eligibility. The Plan is designed to
encourage savings on the part of eligible employees and qualifies under Section 401(k) of the Code. Under the Plan, eligible employees may elect to have a portion of their pay, including overtime
and bonuses, reduced each pay period, as pre-tax contributions up to the maximum allowed by law. The Company may elect to make a matching contribution equal to a specified percentage of the
participant’s contribution, on their behalf as a pre-tax contribution.
For the years ended December 31, 2023, 2022 and 2021, the Company matched 50% of the first 2% of employee contributions, resulting in $0.4 million, $0.1 million and $0.1 million in expense,
respectively.
Employee Stock Purchase Plan (ESPP)
On June 14, 2023, the Company's stockholders approved the ESPP. The initial aggregate number of shares of common stock that may be purchased under the ESPP will not exceed 0.2 million shares.
Under the terms of the ESPP, employees may authorize the withholding of up to 15% of their eligible compensation to purchase our shares of common stock, not to exceed $25 thousand of common
stock for any calendar year. The purchase price per shares acquired under the ESPP will never be less than 85% of the fair market value of the lesser of our common stock on the offering date or
purchase date. The Compensation, Corporate Governance and Nominating Committee of our Board of Directors in its discretion may terminate the ESPP at any time with respect to any shares for
which options have not been granted and has the right to amend the ESPP with stockholder approval within 12 months before or after the adoption of the amendment. The difference between the
common stock’s fair value and the employee’s discounted purchase price is expensed at the time of purchase. The following table summarizes the Company’s ESPP activity during the year ended
December 31, 2023:
F-63
Commencement date
End date
Shares purchased
Weighted average share price
Total purchased
NOTE 21—INCOME TAXES:
Year Ended December 31, 2023
Offering Period 1
$
$
10/1/2023
12/15/2023
4
13.05
51
The Company elected to be treated as a RIC under the Code beginning with the 2015 tax year and, through the year ended December 31, 2022, operated in a manner so as to continue to qualify for
the tax treatment applicable to RICs. The Company filed its final RIC tax return for the year ended December 31, 2022. While the Company operated as a RIC, it was required to distribute
substantially all of its respective net taxable income each tax year as dividends to its shareholders. Accordingly, for the period December 31, 2022, no provision for federal income tax was made in
the financial statements. For 2023, the Company no longer qualifies as a RIC and instead will file a consolidated U.S. federal income tax return. Financial holding companies are subject to federal and
state income taxes in essentially the same manner as other corporations.
One of the Company’s former consolidated holding companies is undergoing a NYS tax audit for the fiscal years ended December 31, 2020 and December 31, 2021.
Effective Tax Rate and Net Operating Losses
The effective tax rate was (4.31)% for the years ended December 31, 2023. The effective tax rate differs from the federal tax rate of 21% for the years ended December 31, 2023 due primarily to the
recognition of subsidiary federal net operating losses (“NOLs”) expected to be realized in a federal consolidated return setting and other discrete items.
At December 31, 2022, the Company had NOLs in the amount of $35.4 million. Certain of these NOLs ($4.6 million) expire in 2029 through 2037 with the remainder NOLs ($30.8 million) having
indefinite lives. The Company expects to apply $23.8 million of the total NOLs against 2023 taxable income and will carry forward the remaining balance of $11.6 million to apply against future
taxable income. The Tax Cuts & Jobs Act of 2017 limits the amount of net operating loss utilized each year after December 31, 2020 to 80% of taxable income.
The Company’s and its subsidiaries’ federal income tax returns are generally open to review by the tax authorities for the tax years ended in 2019 and beyond. However, the Company’s NOLs
continue to be subject to review by tax authorities in the period utilized notwithstanding origination in closed periods.
The Company does not have any material interest and penalties recorded in the income statement for the years ended December 31, 2023, 2022 and 2021.
The components of income tax expense for the year ended December 31, 2023, were as follows:
Current income tax expense:
Federal
State
Total current expense
Deferred income tax expense:
Federal
State
Total deferred expense
Total income tax expense
F-64
2023
Amount
1,251
1,593
2,844
(4,318)
(482)
(4,800)
(1,956)
$
$
Income taxes for financial reporting purposes differ from the amount computed by applying the statutory federal income tax rate of 21% as shown in the following table:
Tax on income computed at statutory federal income tax rate
Increase (decrease) in taxes resulting from:
State income tax, net of federal tax effect
Non-deductible expenses
Realization of net operating loss carryforwards
DTA realization due to change in taxpayer status
Other, net
Income tax expense
Effective tax rate
Significant components of the Company’s net deferred tax asset at December 31 are listed below:
Deferred tax assets:
Allowance for Credit Losses
Lease Liabilities
Other
Purchase Accounting, net
Stock Compensation
Loans
Federal and state net operating losses, net of federal tax effect
Total deferred tax assets
Deferred tax liabilities:
Investments
Servicing Rights
Right of Use Assets
Goodwill and Intangible Assets
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
The following table provides details of the expiration dates for Company’s net operating loss carryforwards at December 31, 2023:
Net operating losses - federal
Expiring:
Years ended 2029 - 2035
Years ended 2036 - 2043
Never
Total
F-65
2023
$
$
2023
2022
3,313 $
1,832
1,669
331
396
2,677
2,428
12,646
650
2,737
1,502
2,330
197
7,416
5,230 $
December 31, 2023
Deferred Tax Asset Balance
9,528
911
788
(7,430)
(5,550)
(203)
(1,956)
(4.31)%
—
—
—
—
—
—
—
—
19,194
—
—
—
—
19,194
(19,194)
—
—
2,428
2,428
$
$
$
$
NOTE 22—SEGMENTS:
The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time to time. Accordingly,
the Company operates four reportable segments for management reporting purposes as discussed below:
Banking - Newtek Bank originates, services and sells SBA 7(a) loans in a similar manner to NSBF’s historic business model (see Non-Bank Lending below) and originates and services SBA 504
loans, C&I loans, CRE loans and ABL loans. In addition, Newtek Bank offers depository services.
NSBF - relates to NSBF’s legacy portfolio held outside Newtek Bank, no new originating activity takes place. NSBF’s legacy portfolio consists of SBA 7(a) Loans, a material portion of which reside
in securitization trusts.
Payments - Includes NMS, POS and Mobil Money. NMS markets credit and debit card processing services, check approval services, processing equipment, and software and:
– Assist merchants with initial installation of equipment and on-going service, as well as any other special processing needs that they may have.
– Handles payment processing for Mobil Money’s merchant portfolio of taxi cabs and related licensed payment processing software.
–
POS is a provider of a cloud based Point of Sale (POS) system for a variety of restaurant, retail, assisted living, parks and golf course businesses, which provides not only payments and
purchase technology solutions, but also inventory, customer management, reporting, employee time clock, table and menu layouts, and ecommerce solutions as the central operating system
for an SMB.
Technology - NTS provides website hosting, web design and development, dedicated server hosting, cloud hosting, internet marketing, ecommerce, data storage, backup and disaster recovery, and
other related services including consulting and implementing technology solutions for enterprise and commercial clients across the U.S. As a result of commitments made to the Federal Reserve, the
Company will divest or otherwise terminate the activities conducted by NTS within two years of becoming a financial holding company, subject to any extension of the two-year period.
Corporate and Other - The information provided under the caption “Corporate and Other” represents operations not considered to be reportable segments and/or general operating expenses of the
Company, and includes the parent company, other non-bank subsidiaries including Newtek Insurance and Newtek Payroll, and elimination adjustments to reconcile the results of the operating
segments to the condensed consolidated financial statements prepared in conformity with GAAP.
The following table provide financial information for the Company's segments:
As of and for the year ended December 31, 2023
Interest income
Interest expense
$
Net interest income/(loss)
Provision for loan credit losses
Net interest income after provision for loan
credit losses
Noninterest income
Noninterest expense
Income before taxes
Income tax expense (benefit)
Net income
Assets
Banking
Technology
NSBF
Payments
Corporate and
Other
Eliminations
Consolidated
34,349 $
16,625
17,724
11,704
6,020
92,129
58,375
39,774
11,647
28,127
— $
246
(246)
—
(246)
31,692
29,850
1,596
229
1,367
50,823 $
26,796
24,027
—
24,027
25,142
32,108
17,061
—
17,061
2,087 $
3,577
(1,490)
—
(1,490)
46,422
31,600
13,332
1,178
12,154
11,625 $
25,006
(13,381)
—
(13,381)
92,059
29,265
49,413
(15,010)
64,423
(4,511) $
(4,511)
—
—
—
(110,672)
(34,869)
(75,803)
—
(75,803)
94,373
67,739
26,634
11,704
14,930
176,772
146,329
45,373
(1,956)
47,329
$
683,202 $
23,404 $
633,207 $
51,819 $
726,002 $
(688,121) $
1,429,513
F-66
Table of Contents
NOTE 23—SUPPLEMENTAL FINANCIAL DATA:
During the years ended December 31, 2022 and 2021 when we operated as a BDC, in accordance with the SEC’s Regulation S-X and GAAP, we were not permitted to consolidate any subsidiary or
other entity that is not an investment company, including those in which we have a controlling interest.
We had two unconsolidated subsidiaries that met at least one of the significance conditions under Rule 1-02(w) of Regulation S-X during certain periods presented for which we were previously
required, pursuant to Rule 3-09 of Regulation S-X, to attach separate financial statements as exhibits to the Form 10-K for the years ended December 31, 2022 and 2021. Refer to our 2022 Form 10-K
filed March 15, 2023 and exhibits thereto.
NOTE 24—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summary of Revisions to Prior Period Quarterly Consolidated Financial Statements
As of January 6, 2023, the Company is no longer subject to Financial Accounting Standard Board Accounting Standards Codification (FASB) Topic (ASC) 946 Financial Services – Investment
Companies, which resulted in a significant change in the Company’s accounting and financial reporting requirements for the year ended December 31, 2023. For example, the Company is required to
consolidate the financial statements of what was previously referred to as our controlled or majority-owned investments together with those already consolidated by the Company. In accordance with
ASC 946, prior to January 6, 2023, the Company was required to account for investments, loans and other receivables at fair value. For fiscal year ended December 31, 2023, the Company is now
required to account for debt securities under ASC 320, loans and other receivables, including modifications and restructurings under ASC 310, and must apply the current expected credit loss model
to each of these financial instruments under ASC 326. Additionally, management continues to elect the fair value option of accounting under ASC 825 for certain financial instruments. Finally, as a
result of the conversion, the Company no longer qualifies as a RIC for federal income tax purposes, and no longer qualifies for accounting treatment as an investment company, therefore management
has been required to expend significant efforts in order to implement these changes in accounting and financial reporting requirements.
The Company’s condensed comparative financial statements have been adjusted to correct errors made in the Company’s financial statements previously issued for the first, second, and third quarters
of 2023. These adjustments include the following adjustments for the year-to-date period ended September 30, 2023:
1. Accounting for deferred loan origination fees and costs, net, under ASC 310 resulting for the year-to-date period ended September 30, 2023, in (a) a $5.1 million and $5.7 million decrease in
non-interest income and non-interest expense, respectively, and (b) net increases to pretax income of $0.6 million (the Company was not applying the standard to its SBA 7(a) HFI at
amortized cost or to its SBA 504 HFS at LCM portfolios);
2. Calculating EPS under ASC 260 (a) exclude stock compensation awards from average basic shares outstanding and (b) adjust average diluted shares to reflect the (i) treasury stock method
for stock compensation awards and warrants and (ii) the if-converted method for preferred stock and (c) adjusting the allocation under the two-class method to align with the contractual
limitations for preferred stock, all of which result in quarterly increases per share for both basic and diluted EPS for the first three quarters of 2023;
3. Establishing net deferred net tax assets and income taxes receivable under ASC 740 in conjunction with the common control transaction, as of January 6, 2023, specifically to recognize (a)
the book tax differences on the inside basis of the assets and liabilities that were consolidated as of that date (b) net amounts receivable from tax authorities and © deferred tax assets arising
from a change in taxpayer filing status in conjunction with the Reorganization, all of which resulted in increased net deferred tax assets and income taxes receivable of $10.0 million and an
increase to additional paid in capital of $2.9 million and an income tax benefit of $7.1 million. The results of these adjustments impacted period end balances on the statements of financial
condition and year-to-date amounts on the statements of income for each period presented;
4. Establishing certain servicing assets under ASC 860 in conjunction with the common control transaction and servicing assets that stemmed from loan originations that occurred following
January 6, 2023, resulting in a $1.0 million increase in non-interest income and a $1.5 million increase in servicing assets; and
5. An adjusting opening balance sheet entry in conjunction with common control transaction to correct (a) net understatements of goodwill and intangibles and stockholders’ equity resulting in
respective increases of $3.9 million and (b) amortization of intangible assets.
F-67
Table of Contents
The year-to-date and quarterly impact of these adjustments for the periods presented are outlined in the unaudited tables below.
Statements of Financial Condition (Unaudited)
Assets
Cash and due from banks
Loans held for investment, at amortized cost,
1
net
Goodwill & intangibles
Deferred tax asset, net
Servicing assets
Other assets
All other assets
Total assets
Liabilities and Shareholders' Equity
Liabilities:
Deposits
Accounts payable, accrued expenses and
other liabilities
All other liabilities
Total liabilities
$
$
$
Shareholders' Equity:
All Other Equity
Retained Earnings
APIC
Total shareholders’ equity
September 30, 2023
June 30, 2023
March 30, 2023
1
As Reported
Adjustment
As Adjusted
1
As Reported
Adjustment
As Adjusted
1
As Reported
Adjustment
As Adjusted
223,692 $
— $
223,692 $
256,333 $
— $
256,333 $
197,143 $
— $
272,725
27,157
8,656
36,774
48,430
760,720
653
4,154
7,599
1,517
1,418
—
273,378
31,311
16,255
38,291
49,848
760,720
213,501
27,595
4,622
35,754
46,670
852,150
294
4,072
8,005
484
1,541
—
213,795
31,667
12,627
36,238
48,211
852,150
164,639
28,101
4,706
33,351
49,850
767,933
9
3,990
8,120
328
1,629
—
197,143
164,648
32,091
12,826
33,679
51,479
767,933
1,378,154 $
15,341 $
1,393,495 $
1,436,625 $
14,396 $
1,451,021 $
1,245,723 $
14,076 $
1,259,799
432,559 $
— $
432,559 $
447,357 $
— $
447,357 $
247,574 $
— $
247,574
36,509
682,063
1,151,131
20,045
14,267
192,711
227,023
162
—
162
—
7,935
7,244
15,179
15,341 $
36,671
682,063
1,151,293
20,045
22,202
199,955
242,202
37,512
730,541
1,215,410
20,026
9,075
192,114
221,215
1,393,495 $
1,436,625 $
162
—
162
—
6,990
7,244
14,234
14,396 $
37,674
730,541
1,215,572
20,026
16,065
199,358
235,449
44,912
734,727
1,027,213
20,147
7,047
191,316
218,510
1,451,021 $
1,245,723 $
—
—
—
—
6,832
7,244
14,076
14,076 $
44,912
734,727
1,027,213
20,147
13,879
198,560
232,586
1,259,799
Total Liabilities & Shareholders Equity
$
1,378,154 $
1
Certain amounts labeled “As Reported” have been reclassified to conform to current period presentation.
F-68
Table of Contents
December 31, 2023
September 30, 2023
June 30, 2023
March 31, 2023
As Reported
1
As Reported
Adjustment
As Adjusted
1
As Reported
Adjustment
As Adjusted
1
As Reported
Adjustment
As Adjusted
Statements of Income
for the Quarterly Periods (Unaudited)
Interest income
Interest expense
Net interest income
Provision for credit losses
Noninterest income
Net gains on sales of loans
Technology and IT support income
Other noninterest income
Noninterest expense
Salaries and benefits
Depreciation and amortization
Other loan origination and maintenance expense
Other noninterest expense
Income tax expense (benefit)
Net income
Weighted average number of shares outstanding
Basic
Diluted
Earnings (loss) per common share
Basic
Diluted
$
$
$
$
$
26,369
18,068
8,301
4,365
17,252
6,460
25,395
14,535
613
2,503
20,558
4,623
26,736 $
18,659
8,077
3,446
12,718
5,499
24,683
15,300
812
3,405
15,028
3,011
— $
—
—
—
1,033
(123)
(2,786)
(1,574)
(82)
(1,569)
—
405
$
26,736
18,659
8,077
3,446
13,751
5,376
21,897
13,726
730
1,836
15,028
3,416
22,553 $
16,880
5,673
2,575
13,208
6,459
26,761
19,418
832
3,559
16,340
2,524
— $
—
—
—
156
(88)
(2,211)
(1,044)
(82)
(1,246)
—
71
$
22,553
16,880
5,673
2,575
13,364
6,371
24,550
18,374
750
2,313
16,340
2,595
18,715 $
14,132
4,583
1,318
6,526
6,709
29,552
19,119
873
2,827
16,378
(4,863)
— $
—
—
—
(159)
—
(272)
(46)
(82)
(46)
—
(7,089)
10,211
$
9,975 $
944 $
10,919
$
6,853 $
158 $
7,011
$
11,718 $
6,832 $
24,259
24,342
0.43
0.43
$
$
24,663
24,663
0.38 $
0.38 $
(386)
(250)
0.05 $
0.05 $
24,277
24,413
0.43
0.43
$
$
24,607
25,588
0.26 $
0.26 $
(343)
(1,282)
24,264
24,306
0.01 $
0.01 $
0.27
0.27
$
$
24,609
25,237
0.46 $
0.46 $
(386)
(356)
0.30 $
0.28 $
18,715
14,132
4,583
1,318
6,367
6,709
29,280
19,073
791
2,781
16,378
(11,952)
18,550
24,223
24,881
0.76
0.74
Interest income
Interest expense
Net interest income
Provision for credit losses
Noninterest income:
Net gains on sales of loans
Technology and IT support income
Other noninterest income
Noninterest expense:
Salaries and benefits
Depreciation and amortization
Other loan origination and maintenance expense
Other noninterest expense
Income tax expense (benefit)
Net income
Weighted average number of shares outstanding
Basic
Diluted
Earnings (loss) per common share
Basic
Diluted
Statements of Income
for the YTD Periods Ended (Unaudited)
For the nine months ended
September 30, 2023
For the six months ended
June 30, 2023
1
As Reported
Adjustment
As Adjusted
1
As Reported
Adjustment
As Adjusted
68,004
49,671
18,333
7,339
32,452
18,667
80,994
53,837
2,517
9,791
47,746
671
—
—
—
—
1,030
(211)
(5,267)
(2,664)
(246)
(2,861)
—
(6,612)
68,004
49,671
18,333
7,339
33,482
18,456
75,727
51,173
2,271
6,930
47,746
(5,941)
41,268
31,012
10,256
3,893
19,734
13,168
56,313
38,537
1,705
6,386
32,718
(2,339)
—
—
—
—
(3)
(88)
(2,483)
(1,090)
(164)
(1,292)
—
(7,018)
$
$
$
28,545 $
7,935 $
36,480
$
18,571 $
6,990 $
24,626
24,626
1.10 $
1.10 $
(371)
(290)
0.36 $
0.36 $
24,255
24,336
1.46
1.46
$
$
24,608
25,423
0.72 $
0.72 $
(364)
(1,125)
0.31 $
0.31 $
41,268
31,012
10,256
3,893
19,731
13,080
53,830
37,447
1,541
5,094
32,718
(9,357)
25,561
24,244
24,298
1.03
1.03
1
Certain amounts labeled “As Reported” have been reclassified to conform to current period presentation.
F-69
Table of Contents
NOTE 25—NEWTEKONE, INC. - PARENT COMPANY ONLY:
The following balance sheets, statements of income and statements of cash flows are for NewtekOne, Inc. and should be read in conjunction with the consolidated financial statements and the notes
thereto.
Statement of Financial Condition
December 31, 2023
Assets
Cash and balances due from depository institutions:
Loans and lease financing receivable
Investments in and receivables due from subsidiaries and associated companies
Premises and fixed assets (including capitalized leases)
Other assets
Total assets
Liabilities and shareholders' equity
Borrowings with a remaining maturity of one year or less:
Other borrowed money with a remaining maturity of more than one year
Other liabilities
Total liabilities
Preferred stock
Common stock
Additional paid in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholder's equity
Interest income
Interest expense
Net interest loss
Noninterest income:
Dividends
All other operating income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Other expenses
Total noninterest expense
Net Income before equity in undistributed income of subsidiaries
Income tax benefit
Income (loss) before undistributed income of subsidiaries
Equity in undistributed income (losses) of subsidiaries and associated companies:
Net income (loss)
Statement of Income
F-70
$
$
$
$
13,871
4,786
392,519
64
20,159
431,399
38,124
253,888
59,495
351,507
19,493
490
314,187
(254,278)
79,892
431,399
For the year ended
2023
2,319
18,797
(16,478)
60,317
(2,345)
57,972
9,365
10,962
20,327
21,167
(14,837)
36,004
26,813
62,817
Table of Contents
Cash flows from operating activities:
Net income (loss)
Provisions for deferred income taxes
Gain (loss) on sale of assets
Equity in Undistributed (earnings) losses of subs
Net change in other liabilities
Net change in other asset
Other, net
Net cash provided (used by operating activities
Cash flow from investing activities
Payments for investments in and advances to subsidiaries
Outlays for business acquisitions
Other, net
Net cash provided (used) by investing activities
Cash flow from financing activities
Proceeds from issuance of long-term debt
Proceeds from issuance of preferred stock
Dividends paid
Other, net
Net cash provided (used) by financing activities
Net (decrease) increase in cash and restricted cash
Cash and restricted cash - beginning of period
Cash and restricted cash - end of period
Borrowings and Maturities
Statement of Cash Flows
For the year ended
2023
$
$
62,817
(5,814)
539
(26,813)
(40,414)
(10,759)
7,570
(12,874)
(96,265)
(21,322)
14
(117,573)
90,000
19,493
(14,147)
(2,826)
92,520
(37,927)
51,798
13,871
Refer to NOTE 12—BORROWINGS for a schedule of borrowings that includes the notes issued by the parent company. Refer to the Liquidity and Capital Resources section of the MD&A under the
Contractual Obligations section for a schedule of maturities.
Guarantees
The Company is a guarantor on the SPV I Capital One Facility. Maximum borrowings under the SPV I Facility are $60.0 million. The lender’s commitments terminate in November 2024, with all
amounts due under the SPV I Facility maturing in November 2025. At December 31, 2023, total principal owed by SPV I was $16.3 million. At December 31, 2023, the Company determined that it
is not probable that payments would be required to be made under the guarantee.
The Company is a guarantor on the SPV II Deutsche Bank Facility. Maximum borrowings under the SPV II Deutsche Bank Facility are $50.0 million. The Deutsche Bank Facility matures in
November 2024. At December 31, 2023, total principal owed by SPV II was $6.9 million. At December 31, 2023, the Company determined that it is not probable that payments would be required to
be made under the guarantee.
The Company is a guarantor on the SPV III One Florida Bank Facility. Maximum borrowings under the SPV III One Florida
F-71
Table of Contents
Bank Facility are $30.0 million. The One Florida Bank Facility matures in May 2025. At December 31, 2023, total principal owed by SPV III was $0.4 million. At December 31, 2023, the Company
determined that it is not probable that payments would be required to be made under the guarantee. On April 27, 2023, the SPV III One Florida Bank Facility was amended to increase maximum
borrowings under the line to $30.0 million.
The Company is a guarantor on the Webster Facility, a term loan facility between NMS with Webster Bank with an aggregate principal amount up to $54.9 million. The Webster Facility matures in
November 2027. At December 31, 2023, total principal outstanding was $36.6 million. At December 31, 2023, the Company determined that it is not probable that payments would be required to be
made under the guarantee.
The Company is a guarantor on certain of NSBF’s potential obligations to the SBA pursuant to the Wind-down Agreement. Specifically, pursuant to the Wind-down Agreement, the Company has
guaranteed NSBF’s obligations to the SBA for post-purchase repairs or denials on the guaranteed portion of 7(a) Loans sold by NSBF on the secondary market or servicing/liquidation post-purchase
repairs or denial, and has funded a $10.0 million restricted cash account at Newtek Bank to secure these potential obligations.
NOTE 26—SUBSEQUENT EVENTS:
Dividends
On March 19, 2024, the Company declared a first quarter 2024 cash dividend of $0.19 per share, which is payable on April 15, 2024 to shareholders of record as of April 1, 2024.
F-72
Exhibit 4.2
DESCRIPTION OF SECURITIES
As of December 31, 2023, NewtekOne Inc. (the “Company,” “we,” “our,” or “us”) had two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as
amended: (1) our common stock and (2) our debt securities.
Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Annual Report on Form 10-K to which this Description of Securities is attached as an exhibit.
A. Common Stock, $0.02 par value per share
As of December 31, 2023, the authorized capital stock of the Company consisted of 200,000,000 shares of stock, par value $0.02 per share, of which all are designated as common stock
except for the 20,000 shares which are designated as Series A Convertible Preferred Stock. Our common stock is traded on the Nasdaq Global Market under the ticker symbol “NEWT.”
All shares of our common stock have equal rights as to earnings, assets, voting, and distributions and, when they are issued, will be duly authorized, validly issued, fully paid and non-
assessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board and declared by us out of assets legally available therefor. Shares of our common
stock have no preemptive, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our
liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other
liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all
matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess
exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and
holders of less than a majority of such shares will be unable to elect any director.
Under our charter, our Board is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock without obtaining stockholder approval. Our charter also
provides that the Board, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that we have authority to issue.
Options and Restricted Stock
The Compensation, Corporate Governance and Nominating Committee of the Board approves the issuance of awards of restricted stock to employees and directors pursuant to the 2023
Stock Incentive Plan, which was approved by the Board in April 2023 and the Company’s shareholders on June 14, 2023.
The 2023 Stock Plan permits us to issue awards of stock options and restricted shares of common stock in an aggregate amount of up to 3,000,000 issued and outstanding shares of common
stock as of the effective date of the 2023 Plan. The Compensation, Corporate Governance and Nominating Committee believes that restricted shares of common stock is the best method of
encouraging stock ownership in the Company by eligible participants by giving them a proprietary interest in the Company’s performance, which more closely aligns compensation with the
Company’s performance and provides a means to attract and retain persons of outstanding ability in key positions with the Company.
Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law.
Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses
Our charter authorizes us, to the maximum extent permitted by Maryland law to indemnify any present or former director or officer or any individual who, while serving as our director or
officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner
or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in such capacity and to pay or reimburse
their reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the maximum extent permitted by Maryland law, to indemnify any present or former director or
officer or any individual who, while serving as our director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity
from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of us in any of
the capacities described above and any of our employees or agents or any employees or agents of our predecessor.
Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful in the defense of any
proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made
a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1)
was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received unless, in either case, a court
orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a
written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written
undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.
Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws
The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquirer to acquire us by means of a tender offer,
proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to
negotiate first with our Board. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the
negotiation of such proposals may improve their terms.
Classified Board of Directors
Our Board is divided into three classes of directors serving staggered three-year terms. The first expires in 2024, the second class expires in 2025, and the third class expires in 2026. Upon
expiration of their current terms, directors of each class will be elected to serve for three-year terms and until their successors are duly elected and qualify and each year one class of directors will be
elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to
elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.
Election of Directors
Our charter and bylaws provide that the affirmative vote of the holders of a plurality of the outstanding shares of stock entitled to vote in the election of directors cast at a meeting of
stockholders duly called and at which a quorum is present will be required to elect a director. Pursuant to our charter our Board may amend the bylaws to alter the vote required to elect directors.
Number of Directors; Vacancies; Removal
Our charter provides that the number of directors will be set only by the Board in accordance with our bylaws. Our bylaws provide that a majority of our entire Board may at any time
increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than twelve. Our charter provides that, at such
time as we have at least three independent directors and our common stock is registered under the Securities Exchange Act of 1934, as amended, we elect to be subject to the provision of Subtitle 8 of
Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the board of directors. Accordingly, at such time, except as may be provided by the Board in setting the terms of
any class or series of preferred stock, any and all vacancies on the Board may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do
not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and
qualifies. Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the
election of directors.
Action by Stockholders
Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or (unless the charter provides for stockholder action by
less than unanimous written consent, which our charter does not) by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our bylaws regarding the
calling of a stockholder-requested special meeting of stockholders
discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board and the proposal of business to be considered by stockholders
may be made only (a) pursuant to our notice of the meeting, (b) by the Board or (c) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures
of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the
Board at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the Board or (3) provided that the Board has determined that directors will be elected at the meeting, by
a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.
The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our Board a meaningful opportunity to consider the qualifications of the proposed
nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board, to inform stockholders and make recommendations about such
qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board any power to disapprove stockholder
nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder
proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal
without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
Calling of Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our Board and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain
procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written request of
stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a
Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter
generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our charter
also provides that certain charter amendments, any proposal for our conversion, whether by charter amendment, merger or otherwise and any proposal for our liquidation or dissolution requires the
approval of the stockholders entitled to cast at least a majority of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by a majority of our continuing
directors (in addition to approval by our Board), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The “continuing directors” are defined in
our charter as (1) our current directors, (2) those directors whose nomination for election by the
stockholders or whose election by the directors to fill vacancies is approved by a majority of our current directors then on the Board or (3) any successor directors whose nomination for election by
the stockholders or whose election by the directors to fill vacancies is approved by a majority of continuing directors or the successor continuing directors then in office.
Our charter and bylaws provide that the Board will have the exclusive power to make, alter, amend or repeal any provision of our bylaws. At meetings of our shareholders held on July 26,
2018, August 2, 2019, July 10, 2020 and September 30, 2022 (collectively, the “Meetings”), the Board recommended that the Company’s shareholders approve an amendment to the Company’s
Articles of Amendment and Restatement (the “Charter Amendment”). The shareholder proposals, if passed, would have allowed Company shareholders to amend the Company’s bylaws by the
affirmative vote of the holders of a majority of all votes entitled to be cast (the “Charter Amendment Proposals”). The Company’s shareholders failed to pass the Charter Amendment Proposals at
each of the Meetings. The Board continues to believe that allowing the Company’s shareholders to amend its Bylaws by the affirmative vote of a majority of all the votes entitled to be cast on the
matter is in the Company’s best interests. Therefore, the Company intends to resubmit the Charter Amendment Proposal at the Company’s next meeting of shareholders.
No Appraisal Rights
Except with respect to appraisal rights arising in connection with the Control Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that
stockholders will not be entitled to exercise appraisal rights unless a majority of the Board shall determine such rights apply.
Control Share Acquisitions
The Maryland General Corporation Law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by
a vote of two-thirds of the votes entitled to be cast on the matter (the “Control Share Act”). Shares owned by the acquirer, by officers or by directors who are employees of the corporation are
excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the
acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of
the following ranges of voting power:
a.
b.
one-tenth or more but less than one-third;
one-third or more but less than a majority; or
a majority or more of all voting power.
c.
The requisite stockholder approval must be obtained each time an acquirer crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the Board of the corporation to call a special meeting of stockholders to be held within 50 days of
demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses
of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may redeem for fair
value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and
limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of
stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to
vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.
The Control Share Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or
exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Act any and all acquisitions by any person of our shares of stock. There can
be no assurance that such provision will not be amended or eliminated at any time in the future. As a result, we will amend our bylaws to be subject to the Control Share Act only if the Board
determines that it would be in our best interests and, after notification.
Business Combinations
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the
most recent date on which the interested stockholder becomes an interested stockholder (the “Business Combination Act”). These business combinations include a merger, consolidation, share
exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
d.
e.
any person who beneficially owns 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation.
A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which the stockholder otherwise would have become an interested
stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions
determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation
and approved by the affirmative vote of at least:
f.
g.
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business
combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash
or other consideration in the same form as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder
becomes an interested stockholder. Our Board has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination
Act, provided that the business combination is first approved by Board. This resolution may be altered or repealed in whole or in part at any time; however, our Board will adopt resolutions so as to
make us subject to the provisions of the Business Combination Act only if the Board determines that it would be in our best interests If this resolution is repealed, or the Board does not otherwise
approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
B. Debt Securities
•
•
•
5.75% Notes due 2024 (the “2024 Notes”);
5.50% Notes due 2026 (the “2026 Notes”); and
8.00% Notes due 2028 (the “2028 Notes”).
The 2024 Notes
In July 2019, we issued $55.0 million in aggregate principal amount of 5.75% notes due 2024 (the “2024 Notes”). In August 2019, we closed on an additional $8.25 million in aggregate
principal amount of the 2024 Notes pursuant to a fully-exercised overallotment option granted to the underwriters. The total net proceeds to us, after deducting underwriting discounts and offering
expenses, were approximately $61.3 million.
On February 16, 2021 and May 20, 2021, the Company issued an additional $5.0 million and $10.0 million in aggregate principal amount of its 2024 Notes, respectively. The new 2024
Notes are treated as a single series with the prior 2024 Notes and have the same terms as the prior 2024 Notes. The existing 2024 Notes have the same CUSIP number and are fungible and rank
equally with the prior 2024 Notes.
On December 29, 2021, the Company partially redeemed $40.0 million in aggregate principal amount of the $78.25 million of 2024 Notes outstanding at 100% of their principal amount ($25
per Note), plus the accrued and unpaid interest thereon from November 1, 2021 through, but excluding, the redemption date. As of December 31, 2021, the outstanding principal balance of the 2024
Notes was $78.25 million.
The 2024 Notes were issued under a base indenture (the “Base Indenture”), dated September 23, 2015, by and between the Company and U.S. Bank National Association (the “Trustee”), as
supplemented by the fourth supplemental indenture, dated as of July 29, 2019 (the “Fourth Supplemental Indenture”, and together with the Base Indenture and the Third Supplemental Indenture, the
“2024 Notes Indenture”). The 2024 Notes bear interest at a rate of 6.25% per year payable quarterly on February 1, May 1, August 1, and November 1 of each year, beginning on November 1, 2019.
The 2024 Notes will mature on August 1, 2024. The 2024 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after August 1, 2021. We have listed the
2024 Notes on The Nasdaq Global Select Market under the trading symbol “NEWTL.”
The 2026 Notes
In January 2021, we issued $115.0 million in aggregate principal amount of 5.50% notes due 2026 (the “2026 Notes”). The 2026 Notes including $15.0 million in aggregate principal amount
sold pursuant to a fully-exercised overallotment option. Total net proceeds received after deducting underwriters’ discount and expenses was approximately $111.3 million. As of December 31, 2021,
the outstanding principal balance of the 2026 Notes was $115.0 million.
The 2026 Notes were issued under the Seventh Supplemental Indenture (the “Seventh Supplemental Indenture”) to the Indenture, dated as of September 23, 2015, between the Company and
the Trustee (the “Base Indenture”, and together with the Seventh Supplemental Indenture, the “2026 Notes Indenture”). The 2026 Notes will mature on February 1, 2026 and may be redeemed in
whole or in part at any time or from time to time at our option on or after February 1, 2022. The 2026 Notes bear interest at a rate of 5.50% per year payable quarterly on February 1, May 1, August 1
and November 1, of each year, beginning May 1, 2021. The 2026 Notes are listed on the Nasdaq Global Market under the trading symbol “NEWTZ.”
The 2024 Notes and 2026 Notes
Set forth below is a summary of the material terms of the 2024 Notes and the 2026 Notes. All references to the "Notes" refer to the 2024 Notes and the 2026 collectively and to the "Indenture" refer
to the 2024 Notes Indenture and the 2026 Notes Indenture collectively.
General
The Indenture provides that any debt securities proposed to be sold may be issued under the Indenture in one or more series.
The Indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the Indenture, when a single trustee is acting for all debt
securities issued under the Indentures, are called the “indenture securities.” The Indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different
series of indenture securities. See “— Resignation of Trustee” below. At a time when two or more trustees are acting under the Indenture, each with respect to only certain series, the term “indenture
securities” means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the Indenture, the powers and
trust obligations of each trustee will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the Indenture, then the indenture
securities for which each trustee is acting would be treated as if issued under separate indenture.
Except as described under “— Events of Default” and “— Merger or Consolidation” below, the Indenture does not contain any provisions that give you protection in the event we issue a large
amount of debt or we are acquired by another entity.
We refer you to the applicable prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants, as applicable,
that are described below, including any addition of a covenant or other provision providing event risk protection or similar protection.
We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous
issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.
Optional Redemption
The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after August 1, 2020, in the case of the 2024 Notes and February 1, 2022, in the case of the
2026 Notes, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount
of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to the date fixed for redemption.
If we redeem only some of the Notes, the trustee or, with respect to global securities, DTC will determine the method for selection of the particular Notes to be redeemed, in accordance with the
Indenture and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after
the date of redemption, interest will cease to accrue on the Notes called for redemption.
Global Securities
Each Note will be issued in book-entry form and represented by a global security that we deposit with and register in the name of The Depository Trust Company, New York, New York, known as
DTC, or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of
these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all the Notes represented by a global security, and investors will be permitted to own only beneficial
interests in a global security. For more information about these arrangements, see “Description of Notes — Book-Entry Procedures” below.
Termination of a Global Security
If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold
the certificated Notes directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on
termination to their own names, so that they will be holders.
Payment
We will pay interest to the person listed in the trustee’s records as the owner of the Notes at the close of business on a particular day in advance of each due date for interest, even if that person no
longer owns the Note on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest
period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price
of the Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued
interest.”
Payments on Global Securities
We will make payments on the Notes so long as they are represented by a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those
policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those
payments will be governed by the rules and practices of the depositary and its participants, as described under “Description of Notes — Book-Entry Procedures.”
Payments on Certificated Securities
In the event the Notes become represented by certificated securities, we will make payments on the Notes as follows. We will pay interest that is due on an interest payment date to the holder of
the Notes as shown on the trustee’s records as of the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable
trustee in New York, New York and/or at other offices that may be specified in the Indenture or a notice to holders against surrender of the Note.
Alternatively, at our option, we may pay any cash interest that becomes due on the Notes by mailing a check to the holder at his, her or its address shown on the trustee’s records as of the close of
business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.
Payment When Offices Are Closed
If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation
will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the Indenture, and no interest will accrue on the payment
amount from the original due date to the next day that is a business day.
Events of Default
Holders will have rights if an Event of Default occurs in respect of the Notes, as described later in this subsection. The term “Event of Default” in respect of the Notes means any of the following:
•
We do not pay the principal of (or premium, if any, on) any Note on its due date and such default is not cured within 5 days of its due date.
An Event of Default for the Notes does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other Indenture. The trustee may withhold
notice to the holders of the Notes
of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of the holders.
•
•
•
•
We do not pay interest on any Note when due, and such default is not cured within 30 days of its due date.
We remain in breach of any other covenant with respect to the Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either
the trustee or holders of at least 25.0% of the principal amount of the Notes.
We file for bankruptcy, or certain other events of bankruptcy, insolvency, or reorganization occur and, in the case of certain orders or decrees entered against us under any bankruptcy
law, such order or decree remains undischarged or unstayed for a period of 90 days.
With respect to the 2024 and 2026 Notes only, on the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage, as defined in the 1940
Act, of less than 100% after giving effect to any exemptive relief granted to us by the SEC.
Remedies if an Event of Default Occurs
If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the Notes may declare the entire principal amount of all the Notes to be
due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority
in principal amount of the Notes if (1) we have deposited with the trustee all amounts due and owing with respect to the Notes (other than principal that has become due solely by reason of such
acceleration) and certain other amounts, (2) any other Events of Default have been cured or waived, and (3) we have deposited with the trustee a sum sufficient to pay all sums paid or advanced by
the trustee and the reasonable compensation, expenses, disbursements, and advances of the trustee, its agents, and counsel as required under the Indenture in connection with the rescinded Event of
Default.
The trustee is not required to take any action under an Indenture at the request of any holders unless the holders offer the trustee protection from expenses and liability reasonably satisfactory to it
(called an “indemnity”). If indemnity reasonably satisfactory to the trustee is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting
any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any
right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before a holder is allowed to bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforce its rights or protect its interests relating to the Notes, the
following must occur:
•
a holder must give the trustee written notice that an Event of Default has occurred and remains uncured;
However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.
•
•
•
the holders of at least 25% in principal amount of all the Notes must make a written request that the trustee take action because of the default and must offer the trustee indemnity,
security or both reasonably satisfactory to it against the cost and other liabilities of taking that action;
the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity and/or security; and
the holders of a majority in principal amount of the Notes must not have given the trustee a direction inconsistent with the above notice during that 60-day period.
Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture and the Notes, or else specifying
any default.
Waiver of Default
The holders of a majority in principal amount of the Notes may waive any past defaults other than a default:
•
in the payment of principal (or premium, if any) or interest; or
Merger or Consolidation
•
in respect of a covenant that cannot be modified or amended without the consent of each holder.
Under the terms of the Indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity.
However, we may not take any of these actions unless all the following conditions are met:
•
where we merge out of existence or convey or transfer our assets substantially as an entirety, the resulting entity must agree, in a supplemental indenture, to be legally responsible for
our obligations under the Notes and the Indenture;
Modification or Waiver
•
•
the merger or sale of assets must not cause a default on the Notes and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-
default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default for this purpose would also
include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded;
and
we must deliver to the trustee certain certificates and documents and an opinion of counsel.
There are three types of changes we can make to the Indenture and the Notes issued thereunder.
Changes Requiring Holders' Approval
First, there are changes that we cannot make to your Notes without holders' specific approval. The following is a list of those types of changes:
•
change the stated maturity of the principal of or interest on the Notes;
Changes Not Requiring Approval
•
•
•
•
•
•
reduce any amounts due on the Notes;
reduce the amount of principal payable upon acceleration of the maturity of a Note following a default;
change the place or currency of payment on a Note;
impair a holders right to sue for payment;
reduce the percentage of holders of Notes whose consent is needed to modify or amend the Indenture; and
reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the Indenture or to waive certain defaults.
The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the
Notes in any material respect.
Changes Requiring Majority Approval
Any other change to the Indenture and the Notes would require the following approval:
•
if the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes; and
In each case, the required approval must be given by written consent.
•
if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series
affected by the change, with all affected series voting together as one class for this purpose.
The holders of a majority in principal amount of any series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our
covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “Description of
Notes — Modification or Waiver — Changes Requiring Your Approval.”
Further Details Concerning Voting
When taking a vote, we will use the following rules to decide how much principal to attribute to the Notes:
The Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption. The Notes will also not be
eligible to vote if they have been fully defeased as described later under “Description of Notes — Defeasance — Full Defeasance.”
We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to vote or take other action under an Indenture. However, the
record date may not be more than 30 days before the date of the first solicitation of holders to vote on or take such action. If we set a record date for a vote or other action to be taken by holders of the
Notes, that vote or action may be taken only by persons who are holders of the Notes on the record date and must be taken within eleven months following the record date.
The trustee shall not be deemed to have notice of any default or Event of Default unless (i) written notice of any event which is in fact such a default is received by the trustee at the corporate trust
office of the trustee and such notice references the Notes and the Indenture or (ii), in the case of a Default or Event of Default in the payment of the principal of (or premium, if any) or interest, if any,
on any Notes, a responsible officer of the trustee has actual knowledge thereof.
Defeasance
The following defeasance provisions will be applicable to the Notes. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all
principal and interest, if any, on the Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the
event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from certain covenants under the Indenture relating to the
Notes. The consequences to the holders of the Notes would be that, while they would no longer benefit from certain covenants under the Indenture, and while the Notes could not be accelerated for
any reason, the holders of Notes nonetheless would be guaranteed to receive the principal and interest owed to them.
Covenant Defeasance
Under current U.S. federal income tax law and the Indenture, we can make the deposit described below and be released from some of the restrictive covenants in the Indenture under which the
Notes were issued. This is called “covenant defeasance.” In that event, holders would lose the protection of those restrictive covenants but would gain the protection of having money and government
securities set aside in trust to repay Notes. In order to achieve covenant defeasance, the following must occur:
•
Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of cash and U.S. government or U.S. government
agency notes or bonds that will, in the written opinion of a nationally recognized accounting firm, generate enough cash to make interest, principal and any other payments on the Notes
on their various due dates;
If we accomplish covenant defeasance, holders can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. In fact, if
one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default,
you may not be able to obtain payment of the shortfall.
•
we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be
taxed on the Notes any differently than if we did not make the deposit;
•
•
•
we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’
certificate stating that all conditions precedent to covenant defeasance have been complied with;
defeasance must not result in a breach or violation of, or result in a default under, the Indenture or any of our other material agreements or instruments;
no default or event of default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency, or reorganization
shall occur during the next 90 days.
Full Defeasance
If there is a change in U.S. federal income tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes (called “full defeasance”) if we put in
place the following other arrangements for you to be repaid:
•
Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of money and U.S. government or U.S. government
agency notes or bonds that will, in the written opinion of a nationally recognized accounting firm, generate enough cash to make interest, principal and any other payments on the Notes
on their various due dates;
If we ever did accomplish full defeasance, as described above, holders would have to rely solely on the trust deposit for repayment of the Notes. Holders could not look to us for repayment in the
unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If Notes were
subordinated as described later under “Description of Notes — Indenture Provisions — Ranking,” such subordination would not prevent the trustee under the Indenture from applying the funds
available to it from the deposit referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such Notes for the benefit of the subordinated debtholders.
•
•
•
•
we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal income tax law or an IRS ruling that allows us to make the above deposit
without causing you to be taxed on the Notes any differently than if we did not make the deposit. Under current U.S. federal income tax law the deposit and our legal release from the
Notes would be treated as though we paid a holder its share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for Notes and
holders would recognize gain or loss on the Notes at the time of the deposit;
we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’
certificate stating that all conditions precedent to defeasance have been complied with;
defeasance must not result in a breach or violation of, or constitute a default under, the Indenture or any of our other material agreements or instruments; and
no default or event of default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency, or reorganization
shall occur during the next 90 days.
Other Covenants
In addition to any other covenants described in applicable prospectus supplement or accompanying prospectus, as well as standard covenants relating to payment of principal and interest,
maintaining an office where payments may be made or securities can be surrendered for payment, payment of taxes by the Company and related matters, the following covenants will apply to the
Notes:
•
With respect to the Notes, we agree that for the period of time during which the 2024 and 2026 Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section
61(a) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring
additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings.
See “Risk Factors — Because we have received the approval of our stockholders, we are subject to 150% asset coverage beginning after July 26, 2018” in this Form 10-K.
Form, Exchange and Transfer of Certificated Registered Securities
•
•
We agree that for the period of time during which the 2024 and 2026 Notes are outstanding, pursuant to Section 18(a)(1)(B) as modified by Section 61(a) of the Investment Company
Act or any successor provisions thereto of the Investment Company Act, the Company will not declare any dividend (except a dividend payable in stock of the issuer), or declare any
other distribution, upon a class of the capital stock of the Company, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or
distribution, or at the time of any such purchase, the Company has an asset coverage (as defined in the Investment Company Act) of at least the threshold specified in Section 18(a)(1)
(B) as modified by Section 61(a) of the Investment Company Act or any successor provisions thereto of the Investment Company Act, as such obligation may be amended or
superseded, after deducting the amount of such dividend, distribution or purchase price, as the case may be, and in each case giving effect to (i) any exemptive relief granted to the
Company by the Commission, and (ii) any SEC no-action relief granted by the Commission to another business development company (or to the Company if it determines to seek such
similar no-action or other relief) permitting the business development company to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)
(1)(B) as modified by Section 61(a) of the Investment Company Act, as such obligation may be amended or superseded, in order to maintain such business development company’s
status as a regulated investment company under Subchapter M of the Code.
If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of
the Notes and the trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and
unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all
material respects, in accordance with applicable U.S. GAAP.
If registered Notes cease to be issued in book-entry form, they will be issued:
•
only in fully registered certificated form;
Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed and
as long as the denomination is equal to or greater than $25.
•
•
without interest coupons; and
unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.
Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent for registering Notes in the names of holders transferring
Notes. We may appoint another entity to perform these functions or perform them ourselves.
Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the
transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.
We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.
If we redeem any of the Notes, we may block the transfer or exchange of those Notes selected for redemption during the period beginning 15 days before the day we mail the notice of redemption
and ending on the day of that mailing, in order to determine and fix the list of holders to prepare the mailing. We may also refuse to register
transfers or exchanges of any certificated Notes selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any Note that will be partially
redeemed.
If registered Notes are issued in book-entry form, only the depositary will be entitled to transfer and exchange the Notes as described in this subsection, since it will be the sole holder of the
Notes.
Resignation of Trustee
The trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. In the event that two or more persons are acting as
trustee with respect to different series of Indenture securities under the Indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.
Indenture Provisions — Ranking
The Notes will be designated as Senior Securities and, therefore, Senior Indebtedness under the Indenture. Senior Indebtedness is defined in the Indenture as the principal of (and premium, if any)
and unpaid interest on:
•
our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for money borrowed, that we have designated as “Senior
Indebtedness” for purposes of the Indenture and in accordance with the terms of the Indenture (including any Indenture securities designated as Senior Indebtedness), and
As unsecured obligations of the Company designated as Senior Indebtedness under the Indenture, the Notes will rank:
•
•
•
•
•
renewals, extensions, modifications and refinancings of any of this indebtedness.
pari passu, or equal, with any of our existing and future unsecured indebtedness;
senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;
effectively subordinated, or junior, to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to
the extent of the value of the assets securing such indebtedness; and
structurally subordinated, or junior, to all existing and future indebtedness and other obligations of any of our subsidiaries or financing vehicles, if any.
The 2028 Notes:
On August 31, 2023, the Company completed a registered offering of $40.0 million in aggregate principal amount of its 8.00% 2028 Notes, which includes the underwriters’ exercise of the
option granted by the Company to purchase an additional $5.0 million in aggregate principal amount of the 2028 Notes. The Company received $38.0 million in proceeds, before expenses, from the
sale of the 2028 Notes. The 2028 Notes bear interest at a rate of 8.00% per year payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing on December 1, 2023.
The 2028 Notes will mature on September 1, 2028. The 2028 Notes trade on the Nasdaq Global Market under the trading symbol “NEWTI.” At December 31, 2023, the Company was in compliance
with all covenants related to the 2028 Notes. The 2028 Notes were be issued under an Indenture, dated as of August 31, 2023 (the “2028 Notes Base Indenture”), between the Company and U.S.
Bank Trust Company, National Association, as Trustee (the “Trustee”), as supplemented by a supplemental indenture dated as of August 31, 2023 (the “First Supplemental Indenture” and together
with the 2028 Notes Base Indenture, the “2028 Notes Indenture.”)
Set forth below is a summary of the material terms of the 2028 Notes. All references to the “Notes” are to the 2028 Notes and all references to the “Indenture” are to the 2028 Notes Indenture.
The Notes are the senior unsecured obligations of NewtekOne. There is no sinking fund for the Notes. No recourse will be had for the payment of principal of or interest on any Note, for any
claim based thereon, or otherwise in respect thereof, against any shareholder, employee, agent, officer or director as such, past, present or future, of NewtekOne or of any successor person.
Optional Redemption of the Notes
The Notes will be redeemable at the Company’s option, in whole or in part, at any time and from time to time, on or after September 1, 2025, upon not less than 15 days nor more than 60 days
written notice to holders prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest
payments otherwise payable thereon for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption. The Company must provide notice to the Trustee of any
redemption no later than 5 days prior to when notice is sent to holders, unless some shorter period is reasonably agreed to by the Company and the Trustee.
If the Notes are held in book-entry form through DTC, the Company may provide notice in any manner permitted or required by DTC.
Prior to any redemption date, the Company will deposit with the Trustee or a paying agent an amount of money sufficient to pay the redemption price of, and (except if the redemption date is an
interest payment date) accrued interest on, the Notes which are to be redeemed on such date.
Unless the Company defaults in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the Notes called for redemption. If fewer than all of the Notes
of any series are to be redeemed, the particular Notes to be redeemed will be selected by the Company, not more than 60 days prior to the redemption date, from the outstanding Notes not previously
called for redemption, in compliance with the policies and procedures of the Trustee and the requirements of the DTC, as applicable, provided that the unredeemed portion of the principal amount of
any Note will be in an authorized denomination (which will not be less than the minimum authorized denomination) for such Note.
In addition, the Company may at any time purchase Notes by tender, in the open market or by private agreement, subject to applicable law.
The Notes are not subject to repayment at the option of the holder at any time prior to the maturity date and not entitled to any sinking fund.
Ranking of the Notes
The Notes are the senior unsecured obligations of the Company and rank equally in right of payment with any other existing or future senior unsecured obligations (including the 2024 Notes
and the 2026 Notes). The Notes are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the Company’s assets securing such indebtedness. The
Notes are senior in right of payment to any unsecured and subordinated indebtedness of the Company that is subordinated in right of payment to the Notes.
Events of Default; Waivers
The following events are “Events of Default” with respect to the Notes:
a. Default for 30 days in any interest payment in respect of the Notes;
b. Default in any principal or premium payment at maturity of the Notes;
c. Default in the deposit of any sinking fund when and as due by the terms of the Notes;
d. Default in the performance or breach of any covenant or warranty of the Company in the Indenture for 90 days after the receipt of a notice of default;
e. Default by the Company under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company having an aggregate principal amount outstanding of at
least $8,000,000, whether such indebtedness now exists or is created or incurred in the future, which default (i) constitutes a failure to pay any portion of the principal of such indebtedness
when due and payable after the expiration of
any applicable grace period or (ii) results in such indebtedness becoming due or being declared due and payable prior to the date on which it otherwise would have become due and payable
without, in the case of clause (i), such indebtedness having been discharged or, in the case of clause (ii), such indebtedness having been discharged or such acceleration having been rescinded
or annulled; provided, that for purposes of the Indenture, the term “indebtedness” shall not include any indebtedness or obligations of subsidiaries of the Company that is guaranteed by the
Company; and
f. Bankruptcy, insolvency or reorganization of the Company.
If an Event of Default relating to the Notes has occurred and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Notes of such series
may declare the principal amount of the Notes to be due and payable immediately. No such declaration is required, however, with respect to an Event of Default triggered by bankruptcy, insolvency
or reorganization. Subject to certain conditions, this declaration may be annulled by the holders of a majority in principal amount of the Notes. In addition, the holders of a majority in principal
amount of Notes of all affected series (voting as one class except in the case of Events of Default regarding a default in any principal, premium or interest payment or deposit of any sinking fund, as
to which each series so affected will vote as a separate class) may waive any past default with respect to the Notes of such series. The Trustee shall not be deemed to have knowledge or notice of the
occurrence of any default or event of default, unless a responsible trust officer of the Trustee shall have received written notice from the Company or a holder describing such default or event of
default and stating that such notice is a notice of default or event of default.
Modification and Waiver
Without the consent of any holders of any Notes, the Company, when authorized by a board resolution, and the Trustee, at any time and from time to time, may enter into one or more
supplemental indentures, in form satisfactory to the Trustee, for any of the following purposes:
a.
b.
a.
b.
c.
d.
e.
f.
g.
h.
i.
to evidence the succession of another person to the Company and the assumption by any such successor of the covenants of the Company in the Indenture and in the Notes; or
to add to the covenants of the Company for the benefit of the holders of all or any series of debt securities, including the Notes (and if such covenants are to be for the benefit of less than all
series of debt securities, stating that such covenants are expressly being included solely for the benefit of such series), or to surrender any right or power conferred upon the Company
pursuant to the Indenture; or
to add any additional Events of Default for the benefit of the holders of all or any series of debt securities (and if such additional Events of Default are to be for the benefit of less than all
series of debt securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); or
to add to or change any of the provisions of the Indenture to such extent as will be necessary to permit or facilitate the issuance of debt securities, including the Notes, registrable or not
registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Notes in uncertificated form; or
to add to, change or eliminate any of the provisions of the Indenture in respect of one or more series of debt securities under the Indenture, provided that any such addition, change or
elimination (i) will neither (A) apply to any such securities of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (B)
modify the rights of the holder of any such securities with respect to such provision or (ii) will become effective only when there is no such securities outstanding; or
to secure the Notes or provide for guarantees of the Notes; or
to establish the form or terms of debt securities of any series under the Indenture as permitted pursuant thereto; or
to evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee with respect to the debt securities of one or more series, including the Notes, and to add
to or change any of the provisions of the Indenture as will be necessary to provide for or facilitate the administration of the trusts thereunder by more than one Trustee; or
to comply with any requirements of the SEC in connection with qualifying the Indenture under the Trust Indenture Act; or
to cure any ambiguity, to correct or supplement any provision in the Indenture which may be defective or inconsistent with any other provision therein; or
to supplement any of the provisions of the Indenture to the extent necessary to permit or facilitate the defeasance and discharge of any series of debt securities pursuant to the Indenture;
provided that any such
j.
k.
l.
m.
action will not adversely affect the interests of the holders of securities of any series issued under the Indenture in any material respect; or
to make provisions with respect to conversion or exchange rights of holders of securities of any series; or
to add, delete from or revise the conditions, limitations or restrictions on issue, authentication and delivery of securities; or
to conform the terms of the Notes or the Indenture with the description set forth in this prospectus supplement or with the requirements of the Trust Indenture Act; or
to make any other provisions with respect to matters or questions arising under the Indenture, provided that such action pursuant to this clause will not adversely affect the interests of the
holders of debt securities of any series, including the Notes, in any material respect.
With the consent of the holders of not less than a majority in principal amount of the outstanding Notes of each series affected by such supplemental indenture, by act of such holders delivered
to the Company and the Trustee, the Company, when authorized by a board resolution, and the Trustee may enter into one or more supplemental indentures for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the holders of Notes of such series under the Indenture; provided,
however, that no such supplemental indenture will, without the consent of the holder of each outstanding Note affected thereby:
a.
change the stated maturity of the principal of, or any installment of principal of or interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or reduce the amount of the principal of any Note which would be due and payable upon a declaration of acceleration of the maturity thereof pursuant
to the terms of the Indenture, adversely affect any right of repayment at the option of the holder of any security issued under the Indenture, or change any place of payment where any Note or
any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity thereof (or, in the case of redemption,
on or after the redemption date), or
reduce the percentage in principal amount of the outstanding Notes of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with certain provisions of the Indenture or certain defaults thereunder and their consequences) provided for in the Indenture, or
c. modify any of the provisions of this paragraph or certain provisions of the Indenture relating to waivers of past defaults and waivers of certain covenants, except to increase any such
b.
percentage or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the holder of each outstanding Note affected thereby; provided,
however, that this clause will not be deemed to require the consent of any holder with respect to changes in the references to “the Trustee” and concomitant changes in this paragraph, or the
deletion of this proviso, in certain circumstances.
A supplemental indenture which changes or eliminates any covenant or other provision of the Indenture which has expressly been included solely for the benefit of one or more particular series
of debt securities, or which modifies the rights of the holders of debt securities of such series with respect to such covenant or other provision, will be deemed not to affect the rights under the
Indenture of the holders of debt securities of any other series.
In connection with any modification, amendment, supplement or waiver in respect of the indenture or the notes, we must deliver to the Trustee an officers’ certificate and an opinion of counsel,
each stating (i) that such modification, amendment, supplement or waiver is authorized or permitted pursuant to the terms of the indenture and the notes, and (ii) that all related conditions precedent to
such modification, amendment, supplement or waiver have been complied with; and (iii) that such supplemental indenture will be valid and binding upon the Company in accordance with its terms.
Consolidation, Merger and Sale of Assets
The Indenture provides that the Company may not consolidate with or merge into another person or convey, transfer or lease its properties and assets substantially as an entirety to another
person or permit any person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company unless: (i) in case the
Company will consolidate with or merge into another person or convey, transfer or lease its properties and assets substantially as an entirety to another person, the person formed by
the consolidation or into which the Company is merged or the person which acquires by conveyance or transfer, or which leases the properties and assets of the Company substantially as an entirety,
(a) is a corporation organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and (b) expressly assumes by supplemental indenture,
executed and delivered to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Notes and the performance or observance of every covenant of the
Indenture on the part of the Company to be performed or observed; and (ii) immediately after giving effect to the transaction, no Event of Default and no event which, after notice or lapse of time or
both, would become an Event of Default will have occurred and be continuing under the Indenture, and the Company has delivered to the Trustee an officers’ certificate and an opinion of counsel as
required by the indenture.
Certain Restrictive Covenants
Sale or Issuance of Voting Stock of the Bank
The Indenture provides that the Company may not effect a “Sale of the Bank.”. For purposes of the Indenture:
“Sale of the Bank” means (i) the sale, transfer, lease or conveyance by the Company, or an issuance of stock by the Material Bank Subsidiary, in either case resulting in ownership by the
Company of securities that provides it with less than 80% of the Material Bank Subsidiary’s outstanding voting equity securities, calculated on the basis of voting power; provided, that, a merger of
the Company or the conveyance, transfer or lease of all or substantially all of the Company’s properties and assets will not constitute a Sale of the Bank so long as the Company satisfies the
conditions described under the heading “—Consolidation, Merger and Sale of Assets” or (ii) the lease, sale, assignment or transfer of all or substantially all of the Material Bank Subsidiary’
properties and assets to any person (other than the Company) in a single transaction or series of related transactions, unless, upon such lease, sale, assignment or transfer, the Company will own,
directly or indirectly, at least 80% of the issued and outstanding Voting Stock of that person.
“Voting Stock” means stock which ordinarily has voting power for the election of directors, managers, trustees or equivalent of such corporation, whether at all times or only so long as no
senior class of stock has such voting power by reason of any contingency.
“Material Bank Subsidiary” for purposes of the Indenture means Newtek Bank, National Association or any successor thereof and any other subsidiary of the Company that (x) is a “bank” as
defined in Section 3 of the Federal Deposit Insurance Act and (y) that has consolidated assets equal to 30% or more of the Company’s consolidated assets.
Limitation Upon Liens on Certain Capital Stock
The Indenture provides that the Company will not create, assume, incur or suffer to be created, assumed or incurred or to exist, any pledge, encumbrance or lien, as security for indebtedness for
borrowed money upon any shares of Voting Stock of a Material Bank Subsidiary (or securities convertible into, or options, warrants or rights to subscribe for or purchase shares of such Voting Stock),
directly or indirectly (except for directors’ qualifying shares), without making effective provision whereby the Notes will be equally and ratably secured with any and all such indebtedness if, treating
such pledge, encumbrance or lien as a transfer of the shares of, or securities convertible into or options, warrants or rights to subscribe for or purchase shares of, Voting Stock of a Material Bank
Subsidiary subject thereto to the secured party and after giving effect to the issuance of the maximum number of shares of Voting Stock of a Material Bank Subsidiary issuable upon the exercise of all
such convertible securities, options, warrants or rights, the Company would not continue to own at least 80% of the issued and outstanding Voting Stock of a Material Bank Subsidiary; provided,
however, that, notwithstanding the foregoing, the Company may incur or suffer to be incurred or to exist upon such capital stock:
(1) liens upon any such shares of Voting Stock to secure indebtedness of the Company or a Material Bank Subsidiary as part of the purchase price of such shares of Voting Stock, or incurred
prior to, at the time of or within 120 days after acquisition thereof for the purpose of financing all or any part of the purchase price thereof;
(2) liens for taxes, assessments or other government charges or levies (A) which are not yet due or payable without penalty, (B) which the Company is contesting in good faith by appropriate
proceedings so long as the Company has set aside on its books such reserves as shall be required in respect thereof in accordance with generally accepted accounting principles or (C) which secure
obligations of less than $1,000,000 in amount;
(3) lien of any judgment, if that judgment (A) is discharged, or stayed on appeal or otherwise, within 60 days, (B) is currently being contested in good faith by appropriate proceedings so
long as the Company has set aside on its books such reserves as shall be required in respect thereof in conformity with generally accepted accounting principles or (C) involves claims of less than
$1,000,000; or
(4) any pledge or lien on the Voting Stock of a Material Bank Subsidiary to secure a loan or other extension of credit by a Material Bank Subsidiary.
In case the Company proposes to create, assume, incur or suffer to be created, assumed or incurred or to exist, any pledge, encumbrance or lien, as security for indebtedness for borrowed
money, upon any shares of Voting Stock of a Material Bank Subsidiary (or securities convertible into, or options, warrants or rights to subscribe or purchase shares of such Voting Stock), directly or
indirectly, other than as permitted by the Indenture, the Company will give prior written notice to the Trustee, and will prior to or simultaneously with such pledge, encumbrance or lien, by a future
supplemental indenture delivered to the Trustee, in form satisfactory to it, effectively secure all the Notes equally and ratably with such indebtedness, by pledge, encumbrance or lien of such Voting
Stock. Such supplemental indenture must contain the provisions, concerning the possession, control, release and substitution of encumbered and pledge property and securities and other appropriate
matters which are required or permitted by the Trust Indenture Act (as in effect at the date of execution of such supplemental indenture) to be included in a secured indenture qualified under the Trust
Indenture Act and may also contain such additional and mandatory provisions permitted by the Trust Indenture Act as the Company will deem advisable or appropriate.
Waiver of Covenants
The Company may omit in any particular instance to comply with any term, provision or condition described under headings “—Sale or Issuance of Voting Stock of the Bank” and “—
Limitation Upon Liens on Certain Capital Stock” with respect to the Notes if before the time for such compliance, the Holders of at least a majority in principal amount of the Notes outstanding, by
act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver will extend to or affect such term,
provision or condition except to the extent so expressly waived, and, until such waiver becomes effective, the obligations of the Company and the rights and protections of the Trustee in respect of
any such term, provision or condition will remain in full force and effect.
Defeasance and Discharge
The defeasance provisions of the Indenture apply to the Notes. The “defeasance” provisions of the Indenture provide that the Company may terminate some of the Company’s obligations with
respect to any series of Notes by depositing with the Trustee as trust funds a combination of money and U.S. government obligations sufficient to pay the principal of or premium, if any, and interest
on, the securities of such series as they come due. Defeasance is permitted only if, among other things, the Company delivers to the Trustee an officers’ certificate and opinion of counsel on the terms
described in the Indenture.
The Indenture also provides that the Company is entitled to cause the Indenture to cease to be of further effect (a “satisfaction and discharge”), with certain limited exceptions, if (i) either (a) all
securities under the Indenture, with certain exceptions, have been delivered to the Trustee for cancellation or (b) all such securities not delivered to the Trustee for cancellation (x) have become due
and payable or (y) will become due and payable at their stated maturity within one year or (z) are to be called for redemption within one year under arrangements satisfactory to the Trustee and the
Company (in the case of (x), (y), or (z) above) has deposited or caused to be deposited with the Trustee as trust funds money sufficient to pay the principal of or premium, if any, and interest on, such
securities as they come due or are to be redeemed, (ii) the Company has paid or caused to be paid all other sums payable under the Indenture by the Company and (iii) the Company has delivered the
Trustee an officers’ certificate and opinion of
counsel stating that all conditions precedent provided for in the Indenture relating to the satisfaction and discharge of the Indenture have been complied with.
Further Issuances
The amount of notes the Company can issue under the Indenture is unlimited. The Company issued the Notes in the initial aggregate principal amount of $35,000,000. However, the Company
may, without the consent of holders, create and issue further notes, which notes may be consolidated and form a single series with the Notes and may have the same terms as to interest rate, maturity,
covenants or otherwise; provided that if any such additional notes are not fungible with the Notes for U.S. federal income tax purposes, such additional notes will have a separate CUSIP or other
identifying number.
Notices
Notices to holders of Notes will be given by first-class mail to the addresses of such holders as they appear in the note register. Where notices are to be provided to a holder of a global security,
the notice will be deemed sufficiently given if provided to the depositary for such security pursuant to its applicable procedures.
Governing Law
The Notes and the Indenture are governed by and construed in accordance with the laws of the State of New York.
1 2015 STOCK INCENTIVE PLAN RESTRICTED STOCK AWARD AGREEMENT NOTICE OF GRANT Newtek Business Services Corp. (the “Company”) hereby grants to [*] (the “Participant”), an award (the “Award”) of restricted shares of Company Common Stock, par value $0.02 per share (“Restricted Stock”) subject to the fulfillment of the vesting conditions and other conditions set forth in the attached: (i) Newtek Business Services Corp. 2015 Stock Incentive Plan (the “Plan”) and (ii) Terms and Conditions of Restricted Stock Award (the “Terms and Conditions”). This Award is granted under and governed by the Plan and is subject to all of the terms and conditions contained in the Plan and this Restricted Stock Award Agreement (the “Award Agreement”), including the Terms and Conditions. Subject to the provisions of the Plan and the Terms and Conditions, the principal features of this Award are as follows: Grant Number: [*] No. of Shares of Restricted Stock Subject to Award: [*] Award Date: [*] Vesting Commencement Date: The first day after the Award Date that is the 15th day of a calendar month. Vesting: Award will Fully (100%) Vest [*] Months Following the Vesting Commencement Date. Dividends: During the period beginning with the Vesting Commencement Date and continuing until the Award is Vested, to the extent declared by the Company’s Board of Directors, Participant will be entitled to receive on the dividend payment dates dividends on the Restricted Stock in the form of shares of Common Stock which will be subject to the same restrictions and risk of forfeiture as the Restricted Stock; such shares will vest and become nonforfeitable on the Vesting Date. You do not have to accept the Award. If you wish to decline your Award, you should promptly notify the Corporate Secretary (Michael A. Schwartz or his successor) of your decision in writing at mschwartz@thesba.com.
2 As provided in the Plan and in this Award Agreement, this Award may terminate before the scheduled vest date of the Award. For example, if Participant’s termination of Continuous Service (as defined in the Plan, Section 2.l) occurs before the date this Award vests, this Award will terminate at the same time as such termination of Continuous Service. Important additional information on vesting and forfeiture of the Restricted Stock covered by this Award, including those due to changes in employment/service is contained in the Plan and Terms and Conditions. IN WITNESS WHEREOF, the Company and the Participant have executed this Award Agreement, in duplicate, to be effective as of the Award Date. Dated: [*] NEWTEK BUSINESS SERVICES CORP. By: ______________________________ Barry Sloane, CEO Newtek Business Services Corp. PARTICIPANT By: _____________________________ [*] I, Participant, understand that this Award is (i) subject to all of the terms and conditions of this Award Agreement (including the attached Terms and Conditions) and of the Plan, (ii) not considered salary, nor is it a promise for future grants under the Plan, (iii) not a term or condition of my employment/service with the Company (or one of its Subsidiaries), and (iv) made at the sole discretion of the Company.
NEWTEKONE, INC. CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT (this “Agreement”) is made by and between NEWTEKONE, INC. (the “Company”) and [*] (the “Executive”) (the Company and the Executive are each a “Party” and collectively, the “Parties”) and is entered into as of the [*] day of [*] (the “Effective Date”). WHEREAS, The Company and the Executive wish to enter into this Agreement to set forth the compensation and benefits that the Executive will be eligible to receive in the event that the Executive’s employment with the Company terminates following a Change in Control (defined herein). NOW, THEREFORE, in consideration of the mutual covenants and conditions contained in this Agreement, the Parties agree as follows: 1. Defined Terms: When used anywhere in the Agreement, the following terms shall have the meaning set forth herein. (a). “Board” shall mean the Board of Managers of the Company. (b). “Change in Control” shall mean any one of the following events: (i) the consummation of a sale of all or substantially all of the Company’s assets (other than to an Affiliate); (ii) the acquisition following the Effective Date of ownership, holding or power to vote more than 25% of the Company's voting shares by any person or persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934); (iii) the acquisition of the ability to control the election of a majority of the Board by any person or persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934), other than (A) the Company, (B) any employee benefit plan or related trust sponsored by the Company or its Affiliates or (C) any underwriter temporarily holding securities pursuant to an offering; (iv) the acquisition of a controlling influence over the management or policies of the Company by any person or by persons acting as a "group" (within the
meaning of Section 13(d) of the Securities Exchange Act of 1934); or (v) during any period of two consecutive years, individuals (the “Continuing Managers”) who at the beginning of such period constitute the Board (the “Existing Board”) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Existing Board was approved by a vote of at least two-thirds of the Continuing Managers then in office shall be considered a Continuing Manager, unless such approval was a result of an actual or publicly threatened solicitation of proxies by a person other than the Board. For purposes of defining Change in Control, the term “person” refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding. (c). “Good Reason” shall mean any of the following events, which has not been consented to in advance by the Executive in writing: (i) a material diminution of the Executive’s responsibilities or duties, (ii) a relocation of the Executive’s principal place of employment by more than 60 miles from its location at the Effective Date or (iii) a material reduction by the Company in the Executive’s base salary or the aggregate level of employee
2 benefits made available to the Executive from those being provided as of the date immediately preceding the Change in Control. In each such event listed in (i) through (iii) above, the Executive shall give the Company written notice thereof by no later than thirty (30) days after the initial occurrence of the event or condition allegedly constituting Good Reason which shall specify in reasonable detail the circumstances constituting Good Reason. There shall be no Good Reason with respect to any such event or condition cured by the Company within thirty (30) days after such notice. If the Company fails to cure such event or condition within this thirty (30) day period, Executive must terminate employment under this provision within sixty (60) days after the cure period has expired (and thereafter the Executive may no longer terminate his employment for a Good Reason based upon the event or condition that was not cured). (d). “Just Cause” shall mean the Executive’s (i) refusal, incompetence, intentional failure or neglect to perform the stated duties of the Executive’s employment (other than by reason of the Executive’s physical or mental illness or impairment); (ii) personal dishonesty, breach of fiduciary duty, fraud, embezzlement or misconduct with respect to the business or affairs of the Company or its affiliates; (iii) willful dishonesty or misrepresentation with respect to the Executive’s educational or employment history; (iv) indictment, conviction of or a plea of nolo contendere to a felony or of any crime involving dishonesty or moral turpitude; (v) breach of any material obligation under the Company’s human resources policies, including the Code of Business Code and Ethics, Insider Trading Policy or policies concerning confidential information; (vi) refusal to abide by or comply with the directives of the Board or the Company’s Chief Executive Officer, so long as those directives are lawful and ethical; (vii) willful violation of any law, rule or
regulation (other than traffic violations or similar offenses); or (viii) the Executive’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity required by the Executive’s job description or the Executive’s loss of any governmental or self- regulatory license that is reasonably necessary for the Executive to perform his or her duties or responsibilities, in each case, as determined by the Board in its sole discretion. 2. Eligibility for Change in Control Payment. If (a) a Change in Control is consummated, and (b) within twelve (12) months following such Change in Control (the “Protection Period”), (i) the Company terminates the Executive’s employment for any reason (other than for Just Cause or the Executive’s death or disability) or (ii) the Executive resigns for Good Reason (each, a “Qualifying Termination”), the Executive shall be eligible to receive the Change in Control Payment, pursuant to the terms hereof. 3. Change in Control Payment. Upon a Qualifying Termination and subject to Section 4, the Executive will be eligible for [*] months of the Executive’s [*] in effect at the time of termination, payable on the first pay period following the 30th day after the termination of employment (the “Payment Date”). 4. Release and Waiver of Claims. As further consideration for the amounts to be paid by the Company to the Executive under this Agreement, the Executive will be required to execute and deliver to the Company, by no later than the Payment Date, and not revoke prior to the Payment Date, a general release and waiver of all legal claims against the Company, any affiliated or related entity, and their representatives in a form satisfactory to the Company (the “Release” ). No payments or benefits
3 will be provided hereunder unless the Release is valid and fully effective and cannot be revoked as of the Payment Date. 5. Other Severance Agreements and Policies. The Change in Control Payment provided to the Executive pursuant to this Agreement is in lieu of, and not in addition to, any benefits to which the Executive may otherwise be entitled under any other agreement between the Executive and the Company in respect of severance or termination pay or benefits (other than such pay or benefits payable with respect to cash or equity-based incentive arrangements), or any Company severance plan, policy or program, or other corporate documents of any type, including any individually negotiated severance provisions as part of any offer letter or employment agreement between the Company and the Executive (collectively, “Other Agreements”). The Change in Control Payment provided in this Agreement is intended to supersede and replace any severance pay and benefits (other than such pay or benefits payable with respect to cash or equity-based incentive arrangements) to which the Executive may otherwise be entitled as a result of any termination from employment, and by executing this Agreement the Executive agrees to waive, forego and forever relinquish any right or entitlement to receive compensation or benefits under any Other Agreements. This waiver and relinquishment is in consideration for the right to the Change in Control Payment under the terms of this Agreement, which is in addition to, the compensation and benefits that the Executive would otherwise be eligible to receive, and applies whether or not the Executive actually receives the Change in Control Payment hereunder. 6. Tax Matters. (a). Tax Liability. The Company makes no representation as to the tax consequences to the Executive of the transactions contemplated by this Agreement, which will be the sole responsibility of the Executive. The Company makes no
representation or undertaking regarding the treatment of any tax withholding in connection with this Agreement or payments made hereunder, including with regard to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The Company or any successor does not commit, and is not under any obligation, to structure the Agreement to reduce or eliminate the Executive’s tax liability. All payments or benefits provided under this Agreement are subject to any applicable employment or tax withholdings or deductions. As a condition precedent to the Executive receiving any payments under this Agreement, the Executive (or his or her beneficiaries) hereby authorizes the Company, any successor thereto, and/or the purchaser in a Change in Control, as applicable, to withhold from the cash payable to the Executive an amount sufficient to satisfy any tax withholding obligation, whether federal, state, local or non-U.S., including any and all employment tax obligations. (b). Section 409A of the Code. The Parties hereby agree that it is their intention that all payments or benefits provided under this Agreement be exempt from, or if not so exempt, comply with, Section 409A of the Code and the Treasury Regulations and other guidance promulgated thereunder (“Section 409A”) and this Agreement shall at all times be interpreted accordingly. Notwithstanding any other provision in this Agreement to the contrary, the Company and any successor thereto will have the right, in its sole discretion, to adopt such amendments to this Agreement or take such other actions (including amendments and actions with retroactive effect) as it determines is necessary or appropriate for this Agreement to
4 comply with Section 409A. Each payment the Executive may receive under this Agreement will be treated as a “separate payment” for purposes of Section 409A. To the extent that any payments hereunder are subject to Section 409A, the following shall apply, to the extent required by Section 409A: (a) in no event may the Executive designate, directly or indirectly, the calendar year of any payment to be made hereunder; (b) in no event will the Executive be considered to have terminated employment with the Company for purposes of receipt of the Change in Control Payment hereof, unless the Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A; (c) neither the Company nor any successor thereto nor the Executive will have the right to accelerate or defer the delivery of any payments except to the extent specifically permitted or required by Section 409A; (d) in the event that the Executive is a “specified employee” within the meaning of Section 409A, payments which constitute a “deferral of compensation” under Section 409A and which would otherwise become due during the first six months following the Executive’s separation from service (as defined in Section 409A) shall be delayed and all such delayed payments shall be paid no earlier than the date that is six (6) months following the Executive’s separation from service (or, if earlier, the date of death). 7. Successors and Assigns; Transferability of this Agreement. The terms of this Agreement are binding upon the executors, administrators, heirs, successors and transferees of the Executive. The Executive will not assign any of his or her rights hereunder without the prior written consent of the Company, which consent may be withheld in the Company’s sole discretion. The Company may not assign its respective obligations under this Agreement without the written consent of the Executive, unless the assignment is to an
affiliate of the Company or to a purchaser or successor in a Change in Control. 8. Termination. This Agreement shall terminate on the next December 31 following the Effective Date; provided that, on the first December 31 following the Effective Date, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), unless previously terminated, this Agreement shall be automatically extended for one additional year, from year to year unless at least 30 days prior to any Renewal Date, the Company shall give notice to the Executive that the Agreement shall not be so extended, in which case this Agreement shall terminate on such next December 31 (the “Expiration Date”); provided, that no such notice may be provided by the Company to the Executive during the Protection Period. 9. No Implied Employment Contract. The Agreement will not be deemed (a) to give the Executive any right to be retained in the employ of the Company or its successors, or (b) to interfere with the right of the Company or its successors to discharge the Executive at any time and for any reason, which right is hereby reserved. 10. Confidentiality. The Executive will not, at any time whether during or after the Executive’s termination of employment, (i) disclose to anyone, without proper authorization from the Company, or (ii) use, for the Executive’s or another’s benefit, any confidential or proprietary information of the Company or its subsidiaries, which may include trade secrets, business plans or outlooks, financial data, marketing or sales programs, customer lists, brand formulations, training and operations manuals, products or price strategies, mergers, acquisitions, and/or Company or its
5 subsidiaries’ personnel issues. The Executive is hereby notified that the immunity provisions in Section 1833 of title 18 of the United States Code provide that an individual cannot be held criminally or civilly liable under any federal or state trade secret law for any disclosure of a trade secret that is made (1) in confidence to federal, state or local government officials, either directly or indirectly, or to an attorney, and is solely for the purpose of reporting or investigating a suspected violation of the law, (2) under seal in a complaint or other document filed in a lawsuit or other proceeding, or (3) to the Executive’s attorney in connection with a lawsuit for retaliation for reporting a suspected violation of law (and the trade secret may be used in the court proceedings for such lawsuit) as long as any document containing the trade secret is filed under seal and the trade secret is not disclosed except pursuant to court order. Nothing in this Section 10 is intended to, and shall not, restrict or limit the Executive from exercising the Executive’s protected rights or restrict or limit the Executive from providing information in response to a subpoena, other legal process or to a governmental or regulatory body or in the event of litigation between the Executive and the Company or its affiliates, or prohibit the Executive from making statements or engaging in any other activities or conduct protected by the National Labor Relations Act. For the avoidance of doubt, nothing herein shall be construed to prevent or limit the Executive from recovering a bounty or award for providing information to any governmental authority concerning any suspected violation of law. 11. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 12. Administration and Interpretation. Any question or dispute regarding the interpretation of this Agreement will be decided in the sole discretion of the Board (excluding the Executive from any such deliberations) and such determination will be final, conclusive and binding on all Parties. 13. Corporate Authority. Company represents and warrants that the execution and delivery of this Agreement has been duly and properly authorized by the Board and that when so executed and delivered this Agreement shall constitute the lawful and binding obligation of the Company. 14. Amendments; Waiver. No amendments or additions to this Agreement or waiver of any provision of this Agreement shall be binding unless made in writing and signed by all of the Parties, except as herein otherwise specifically provided. 15. Headings; Section References. The section headings in this Agreement are inserted only as a matter of convenience and in no way define, limit or interpret the scope of this Agreement or of any particular section. Unless otherwise indicated, all sections referred to herein are sections of this Agreement. 16. Applicable Law. Except to the extent preempted by Federal law, the laws of the State of New York shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise, without regard to conflict of laws principles thereof.
6 17. Entire Agreement. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the Parties, shall constitute the entire agreement between the Parties hereto with respect to the matters addressed herein and shall supersede all previous agreements with respect to such matters. 18. Counterparts/Electronic Signatures. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all of the parties reflected hereon as the signatories. Photographic, faxed or PDF copies of such signed counterparts may be used in lieu of the originals for any purpose. The words “executed,” “signature,” “signatories,” and words of like import in this Agreement or in any signed amendment or other modification hereof (including waivers and consents) shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. 19. Federal Deposit Insurance Act Compliance. Anything in this Agreement to the contrary notwithstanding, the Company will not be obligated to make any payment hereunder that would be prohibited as a “golden parachute payment” or “indemnification payment” under Section 18(k) of the Federal Deposit Insurance Act. 20. Clawback/Recapture Policy. Any compensation that is awarded, earned or
vested by the Executive pursuant to this Agreement is subject to any policies, including any clawback, recoupment or stock ownership policies, which are in effect at the Company from time to time. Any portion of such compensation that is awarded, earned or vested by the Executive pursuant to this Agreement is subject to forfeiture, recovery by the Company or other action pursuant to any policies which the Company may adopt from time to time pursuant to laws or regulations, including without limitation, any such policy which the Company may be required to adopt under applicable law. [Signature page follows]
[Signature Page to Change in Control Agreement] IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and year first hereinabove written. NEWTEKONE, INC. By: Barry Sloane, Chief Executive Officer EXECUTIVE By: [*]
NEWTEKONE, INC.
SUBSIDIARIES
Name of Company
CCC Real Estate Holdings, LLC
CDS Business Services, Inc. dba Newtek Business Credit
Solutions
Mobil Money, LLC
Newtek Bank, National Association
NBL SPV I, LLC
NBL SPV II, LLC
NBL SPV III, LLC
NBSH Holdings, LLC
Newtek Asset Backed Securities, LLC
Newtek Business Services Holdco 6, Inc.
Newtek Commercial Lending, Inc.
Newtek Insurance Agency, LLC
Newtek Merchant Solutions, LLC
Newtek Small Business Finance, LLC
Newtek Technology Solutions, Inc.
PMTWorks Payroll, LLC dba Newtek Payroll and Benefits
Solutions
POS on Cloud, LLC, dba Newtek Payment Systems
Small Business Lending, LLC
Titanium Asset Management, LLC
Wilshire DC Partners, LLC
Wilshire Louisiana Bidco, LLC
Wilshire Louisiana Partners II, LLC
Wilshire Louisiana Partners III, LLC
Wilshire New York Partners III, LLC
State of Incorporation/Organization
Delaware
Delaware
New York
Florida
Delaware
Delaware
Delaware
New York
New York
New York
New York
District of Columbia
New York
New York
New York
New York
Kentucky
New York
New York
District of Columbia
Louisiana
Louisiana
Louisiana
New York
Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (No. 333-237974) on Form S-3 of NewtekOne Inc. of our report dated April 1, 2024, relating to the consolidated financial statements of NewtekOne Inc. (the Company) and the effectiveness of the Company's internal control over financial reporting (on which our report expresses an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of material weaknesses), appearing in this Annual Report on Form 10-K of NewtekOne Inc and Subsidiaries for the year ended December 31, 2023. We also consent to the reference to our firm under the heading “Experts" in such Prospectus. /s/ RSM US LLP Hartford, Connecticut April 1, 2024
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Barry Sloane, certify that:
1. I have reviewed this annual report on Form 10-K of NewtekOne, Inc. (the “registrant”).
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 1, 2024
/S/ BARRY SLOANE
Barry Sloane
Principal Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, M. Scott Price, certify that:
1. I have reviewed this annual report on Form 10-K of NewtekOne, Inc. (the “registrant”).
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 1, 2024
/S/ M. SCOTT PRICE
M. Scott Price
Principal Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K for the year ended December 31, 2023 (the “Report”) of NewtekOne Inc.(the “Company”), as filed with the Securities and Exchange
Commission on the date hereof, I, Barry Sloane, as Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company.
Date: April 1, 2024
/S/ BARRY SLOANE
Barry Sloane,
Principal Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K for the year ended December 31, 2023 (the “Report”) of NewtekOne, Inc. (the “Company”), as filed with the Securities and Exchange
Commission on the date hereof, I, M. Scott Price, as Principal Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company.
Date: April 1, 2024
/S/ M. SCOTT PRICE
M. Scott Price,
Principal Financial Officer
-1- NEWTEKONE, INC. CLAWBACK POLICY I. BACKGROUND NewtekOne, Inc. (the “Company”) has adopted this policy (this “Policy”) to provide for the recovery or “clawback” of certain incentive compensation in the event of a Restatement (as defined below). This Policy is intended to comply with, and will be interpreted to be consistent with, the requirements of the Nasdaq Stock Market (“Nasdaq”) Listing Rule 5608 (the “Listing Standard”). Certain terms used in this Policy are defined in Section VIII below. II. STATEMENT OF POLICY The Company shall recover reasonably promptly the amount of erroneously awarded Incentive-Based Compensation in the event that the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a “Restatement”). The Company shall recover erroneously awarded Incentive-Based Compensation in compliance with this Policy except to the extent provided under Section V below. III. SCOPE OF POLICY A. Covered Persons and Recovery Period. This Policy applies to Incentive-Based Compensation received by a person: (cid:0) after beginning service as an Executive Officer, (cid:0) who served as an Executive Officer at any time during the performance period for that Incentive-Based Compensation, (cid:0) while the Company has a class of securities listed on a national securities exchange, and (cid:0) during the three completed fiscal years immediately preceding the date that the Company is required to prepare a Restatement (the “Recovery Period”). Notwithstanding this look-back requirement, the Company
is only required to apply this Policy to Incentive-Based Compensation received on or after October 2, 2023.
-2- For purposes of this Policy, Incentive-Based Compensation shall be deemed “received” in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive-Based Compensation award is attained, even if the payment or grant of the Incentive- Based Compensation occurs after the end of that period. B. Transition Period. In addition to the Recovery Period, this Policy applies to any transition period (that results from a change in the Company’s fiscal year) within or immediately following the Recovery Period (a “Transition Period”), provided that a Transition Period between the last day of the Company’s previous fiscal year end and the first day of the Company’s new fiscal year that comprises a period of nine to 12 months will be deemed a completed fiscal year. C. Determining Recovery Period. For purposes of determining the relevant Recovery Period, the date that the Company is required to prepare the Restatement is the earlier to occur of: (cid:0) the date the board of directors of the Company (the “Board”), a committee of the Board, or the officer or officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare a Restatement, and (cid:0) the date a court, regulator, or other legally authorized body directs the Company to prepare a Restatement. For clarity, the Company’s obligation to recover erroneously awarded Incentive-Based Compensation under this Policy is not dependent on if or when a Restatement is filed. D. Method of Recovery. Without limiting Section III, the Compensation, Corporate Governance and Nominating Committee of the Company’s Board of Directors (the “Committee”) will have discretion in determining how to accomplish recovery of erroneously awarded Incentive-Based Compensation under this Policy, recognizing that different means of recovery may be appropriate in different
circumstances. IV. AMOUNT SUBJECT TO RECOVERY A. Recoverable Amount. The amount of Incentive-Based Compensation subject to recovery under this Policy is the amount of Incentive-Based Compensation received that exceeds the amount of Incentive-Based Compensation that otherwise would have been received had it been determined based on the restated amounts, computed without regard to any taxes paid. B. Covered Compensation Based on Stock Price or TSR. For Incentive-Based Compensation based on stock price or total shareholder return (“TSR”), where the amount of erroneously awarded Incentive-Based Compensation is not subject to mathematical recalculation directly from the information in a Restatement, the recoverable amount shall be determined by the Committee based on a reasonable estimate of the effect of the Restatement on the stock price or TSR upon which the Incentive-Based Compensation was received. In such event, the
-3- Company shall maintain documentation of the determination of that reasonable estimate and provide such documentation to Nasdaq. V. EXCEPTIONS The Company shall recover erroneously awarded Incentive-Based Compensation in compliance with this Policy except to the extent that the conditions set out below are met and the Committee has made a determination that recovery would be impracticable: A. Direct Expense Exceeds Recoverable Amount. The direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered; provided, however, that before concluding it would be impracticable to recover any amount of erroneously awarded Incentive-Based Compensation based on expense of enforcement, the Company shall make a reasonable attempt to recover such erroneously awarded Incentive-Based Compensation, document such reasonable attempt(s) to recover, and provide that documentation to Nasdaq. B. Recovery from Certain Tax-Qualified Retirement Plans. Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder. VI. PROHIBITION AGAINST INDEMNIFICATION Notwithstanding the terms of any indemnification arrangement or insurance policy with any individual covered by this Policy, the Company shall not indemnify any Executive Officer or former Executive Officer against the loss of erroneously awarded Incentive-Based Compensation, including any payment or reimbursement for the cost of insurance obtained by any such covered individual to fund amounts recoverable under this Policy. VII. DISCLOSURE The Company shall file all disclosures with respect to this Policy and recoveries under this Policy in accordance with the requirements of the U.S. Federal securities laws, including the
disclosure required by the applicable Securities and Exchange Commission (“SEC”) filings. VIII. DEFINITIONS Unless the context otherwise requires, the following definitions apply for purposes of this Policy: “Executive Officer” means the Company’s Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Chief Lending Officer, Chief legal Officer, any vice-president of the Company in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policymaking function, or any other person who performs similar policymaking functions for the Company. Executive officers of the Company’s subsidiaries are deemed Executive Officers of the Company if they
-4- perform such policymaking functions for the Company. Policymaking function is not intended to include policymaking functions that are not significant. Identification of an Executive Officer for purposes of this Policy will include at a minimum executive officers identified pursuant to 17 CFR 229.401(b). “Financial Reporting Measures” means any of the following: (i) measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures, (ii) stock price and (iii) TSR. A Financial Reporting Measure need not be presented within the Company’s financial statements or included in a filing with the SEC. “Incentive-Based Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure. IX. ADMINISTRATION; AMENDMENT; TERMINATION. All determinations under this Policy will be made by the Committee, including determinations regarding how any recovery under this Policy is effected. Any determinations of the Committee will be final, binding and conclusive and need not be uniform with respect to each individual covered by this Policy. The Committee may amend this Policy from time to time and may terminate this Policy at any time, in each case in its sole discretion. X. EFFECTIVENESS; OTHER RECOUPMENT RIGHTS This Policy shall be effective as of December 1, 2023. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company and its subsidiaries and affiliates under applicable law or pursuant to the terms of any similar policy or similar provision in any employment agreement, equity award agreement or similar agreement. Adopted November 16, 2023