NEWTEKONE, INC. Forward-Looking Statements
The matters discussed in this report, as well as in future oral and written statements by management ofNewtek Business Services Corp. , that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, including the impact of the COVID-19 pandemic, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to: •our future operating results; •our business prospects and the prospects of our prospective portfolio companies, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic; •the impact of investments that we expect to make; •our informal relationships with third parties; •the dependence of our future success on the general economy and its impact on the industries in which we invest; •our ability to access debt markets and equity markets; •our expected financings and investments; •our regulatory structure and tax status; •our ability to operate as a BDC and a RIC; •NSBF's ability to maintain its license and PLP status under the SBA 7(a) program; •NSBF's ability to sell the guaranteed portions of SBA 7(a) loans at premiums; •the adequacy of our cash resources and working capital; •the timing of cash flows, if any, from the operations of our portfolio companies; •the timing, form and amount of any dividend distributions; •the impact of fluctuations in interest rates on our business including as a result of the decommissioning of LIBOR; •the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and •our ability to recover unrealized losses; •NSBF's ability to issue SBA 7(a) guaranteed loans; •the future authorization or reauthorization of the PPP, and our ability to participate in any such program; •our ability to comply with the laws, rules, and guidance regarding the current or any reauthorized PPP; •the effect of legal, tax and regulatory changes, including the Coronavirus Aid, Relief and Economic Security Act signed into law inDecember 2020 and the American Rescue Plan Act of 2021, signed into law inMarch 2021 ; •the ability of our SBA 7(a) borrowers to pay principal and interest, including after any deferment period granted by NSBF; and •the ability to enter into joint ventures or other financing arrangements. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1A-"Risk Factors" of Part II of this quarterly report on Form 10-Q, Item 1A-"Risk Factors" of our annual report on Form 10-K filed with theSEC onMarch 29, 2021 and under "Forward-Looking Statements" of this Item 2. 330 --------------------------------------------------------------------------------
Executive Overview
We are a leading national non-bank lender and own and control certain portfolio companies under the Newtek® brand (our "controlled portfolio companies," as defined below) that provide a wide range of business and financial solutions to SMBs. Newtek's and its portfolio companies' business and financial solutions include: Business Lending, including origination of SBA 7(a), SBA 504, and nonconforming (non SBA) conventional loans, as well as PPP loans in the second and third quarters of 2020, as well as the first quarter of 2021, Electronic Payment Processing, Managed Technology Solutions (Cloud Computing),Technology Consulting , eCommerce, Accounts Receivable and Inventory Financing, personal and commercial Insurance Services, Web Services, Data Backup, Storage and Retrieval, and Payroll and Benefits Solutions to SMB accounts nationwide across all industries. 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 every state inthe United States . and across a variety of different industries. In addition, we have developed a financial and technology based business model that enables us and our controlled portfolio companies to acquire and process our SMB 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. We believe that this technology and business model distinguishes us from our competitors. We consolidate the following wholly-owned subsidiaries:Newtek Small Business Finance, LLC Newtek Asset Backed Securities, LLC CCC Real Estate Holdings, LLC The Whitestone Group, LLC Wilshire DC Partners, LLC Wilshire Holdings I, Inc. Wilshire Louisiana BIDCO, LLC Wilshire Louisiana Partners II, LLC Wilshire Louisiana Partners III, LLC Wilshire Louisiana Partners IV, LLC Wilshire New York Advisers II, LLC Wilshire New York Partners III, LLC Wilshire Partners, LLC Exponential Business Development Co., Inc. Newtek Commercial Lending, Inc. Newtek LSP Holdco, LLC Newtek Business Services Holdco 1, Inc. Newtek Business Services Holdco 2, Inc. Newtek Business Services Holdco 3, Inc. Newtek Business Services Holdco 4, Inc. Newtek Business Services Holdco 5, Inc. (formerlyBanc-Serv Acquisition, Inc. ) Newtek Business Services Holdco 6, Inc. We are an internally-managed, closed-end, non-diversified investment company that has elected to be regulated as a BDC under the 1940 Act. In addition, forU.S. federal income tax purposes, we have elected to be treated as a RIC under the Code beginning with our 2015 tax year. As a BDC and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code. As a result, previously consolidated subsidiaries are now recorded as investments in controlled portfolio companies at fair value. NSBF is a consolidated subsidiary and originates loans under the SBA's 7(a) loan program.
Our common shares are currently listed on the Nasdaq Global Market under the symbol "NEWT".
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NSBF, a nationally licensed SBA lender under the federal Section 7(a) loan
program, has been granted PLP status and originates, sells and services SBA 7(a)
loans and is authorized to place SBA guarantees on loans without seeking prior
SBA review and approval. Being a national lender with PLP status allows NSBF to
expedite the origination of loans since NSBF 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.
As a BDC, our investment objective is to generate both current income and capital appreciation primarily through loans originated by our business finance ecosystem and our equity investments in certain portfolio companies that we control.
We target our debt investments, which are principally made through our business finance ecosystem under the SBA 7(a) program, to produce a coupon rate of prime plus 2.25% to 2.75% which enables us to generate rapid sales of guaranteed portions of SBA 7(a) loans in the secondary market. We typically structure our debt investments with the maximum seniority and collateral along with personal guarantees from portfolio company owners, in many cases collateralized by other assets including real estate. In most cases, our debt investment will be collateralized by a first lien on the assets of the portfolio company and a first or second lien on assets of guarantors, in both cases primarily real estate. All SBA loans are made with personal guarantees from any owner(s) of 20% or more of the portfolio company's equity. The amount of new debt investments, particularly SBA 7(a) loans that we originate, will directly impact future investment income. In addition, future amounts of unrealized appreciation or depreciation on our investments, as well as the amount of realized gains or losses, will also fluctuate depending upon economic conditions and the performance of our investment portfolio. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results. We typically structure our debt investments 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 debt investments have what we believe are strong protections, including default penalties, information rights and, in some cases, board observation rights and affirmative, negative and financial covenants. Debt investments in portfolio companies, including the controlled portfolio companies, have historically and are expected to continue to comprise the majority of our overall investments in number and dollar volume. While the vast majority of our investments have been structured as debt, 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. For investments in our controlled portfolio companies, we focus more on tailoring them to the long term growth needs of the companies than to return. Our objectives with these companies is to foster the development of the businesses as a part of the integrated operational platform of serving the SMB market, so we may reduce the burden on these companies to enable them to grow faster than they would otherwise and as another means of supporting their development. We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion of our portfolio on an opportunistic basis. We, our subsidiaries, or our affiliates may also agree to manage certain other funds that invest in debt, equity or provide other financing or services to companies in a variety of industries for which we may earn management or other fees for our services. We may also invest in the equity of these funds, along with other third parties, from which we would seek to earn a return and/or future incentive allocations. We may enter into new joint venture partnerships to create additional third-party capital to originate loans. Some of these transactions could be material to our business. Consummation of any such transaction will be subject to completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final definitive documentation as well as a number of other factors and conditions including, without limitation, the approval of our board of directors and required regulatory or third-party consents and, in certain cases, the approval of our shareholders. Accordingly, there can be no assurance that any such transaction would be consummated. Any of these transactions or funds may require significant management resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction. OnMarch 27, 2020 , the CARES Act was signed into law in response to the COVID-19 pandemic and established the PPP. Specifically, the CARES Act included$349 billion to establish the PPP that expanded the existing SBA Section 7(a) loan program untilJune 30, 2020 to provide 100% federally-backed loans to eligible businesses.Congress approved additional funding for the PPP of approximately$320 billion onApril 24, 2020 . As a result of the uncertain economic impact toU.S. small businesses created by the COVID-19 pandemic, the Company's Executive Committee and Lending Team temporarily shifted the focus of NSBF from originating SBA 7(a) loans to originating PPP loans beginning inMarch 2020 throughJune 30, 2020 . OnJuly 4, 2020 , a bill was passed to re-open the application window for the PPP untilAugust 8, 2020 . The first round of PPP closed onAugust 8, 2020 . 332 -------------------------------------------------------------------------------- OnSeptember 5, 2020 , the Paycheck Protection Program Flexibility Act, or the "new Act", was signed into law and made significant changes to the PPP to provide additional relief for small businesses. The new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability or have been unable to operate as normal due to COVID-19 related restrictions. It extended the period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules. The new Act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness. In addition, the new Act extended the payment deferral period for PPP loans until the date when the amount of loan forgiveness is determined and remitted to the lender. For PPP recipientswho do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends. OnDecember 27, 2020 , the Economic Aid Act was enacted byCongress which provided funding for PPP loans throughMarch 31, 2021 and onJanuary 11, 2021 , the Company announced that NSBF would offer PPP loans through the end of the PPP. The Economic Aid Act was enacted byCongress in order to provide additional assistance to the hardest-hit small businesses, nonprofits, and venues that are struggling to recover from the impact of the COVID-19 pandemic. The Economic Aid Act provides funding for PPP loans throughMarch 31, 2021 and a second round of forgivable loans through the PPP for small businesses and nonprofits experiencing significant revenue losses, made programmatic improvements to PPP, funds grants to shuttered venues, and enacted emergency enhancements to other SBA lending programs. This critical assistance will provide small business owners with the capital they need to survive the pandemic and includes critical resources for the smallest businesses. The Economic Aid Act also provides additional subsidies to certain existing SBA 7(a) borrowers. OnMarch 11, 2021 , the American Rescue Plan was enacted byCongress which included an additional$7.25 billion for the PPP program. Further, onMarch 25, 2021 ,Congress passed the PPP Extension Act of 2021, which further extended the PPP throughMay 31, 2021 . During the first quarter of 2021, NSBF funded PPP loans totaling$0.4 billion . OnMay 4, 2021 , the SBA announced that PPP funding had been exhausted; however, borrowers with approved PPP loans (i.e., PPP loans with an assigned SBA loan number) may continue to have their PPP loans closed and funded by their lenders. NSBF expects to continue to close and fund the balance of its PPP loans by the end of the second quarter of 2021. NSBF intends to continue to redeploy resources used to generate PPP loans to the origination of SBA 7(a) loans. We continue to monitor legislative, regulatory, and supervisory developments related to the PPP, but there can be no assurance that the PPP will be further reauthorized, or that NSBF will be qualified to participate in any further reauthorization.
COVID-19 Developments
InMarch 2020 , the outbreak of COVID -19 was recognized as a pandemic by theWorld Health Organization and in response to the outbreak, management instituted a work from home policy until it is deemed safe to return to the office. We have and continue to assess the impact of COVID-19 on our portfolio companies. We cannot predict the full impact of the COVID-19 pandemic, including its duration inthe United States and worldwide, the effectiveness of governmental responses designed to mitigate strain to businesses and the economy and the magnitude of the economic impact of the outbreak. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and inthe United States . Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. We continue to closely monitor our portfolio companies; however, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which COVID-19 will negatively affect our portfolio companies' operating results or the impact that such disruptions may have on our results of operations and financial condition. Price Range of Common Stock Our common stock is traded on the Nasdaq Global Market under the symbol "NEWT." High and low prices for the common stock over the previous two years are set forth below, based on the highest and lowest intraday sales price per share during that period. 333 --------------------------------------------------------------------------------
Premium of High Premium of Low Sales
Price Range NAV1 Sales Price to NAV2 Price to NAV2
High Low
2019
First Quarter $20.74 $17.23 $15.31 35% 13%
Second Quarter $23.83 $19.70 $15.33 55% 29%
Third Quarter $23.99 $20.21 $15.41 56% 31%
Fourth Quarter $23.73 $20.75 $15.70 51% 32%
2020
First Quarter $23.09 $7.59 $15.00 54% (49)%
Second Quarter $18.84 $9.03 $15.66 20% (42)%
Third Quarter $20.50 $16.73 $15.13 35% 11%
Fourth Quarter $19.82 $16.24 $15.45 28% 5%
2021
First Quarter $28.63 $18.77 $16.28 76% 15%
(1) Net asset value per share is determined as of the last day in the relevant
quarter and therefore may not reflect the net asset value per share on the date
of the high and low sales prices. The values reflect net asset value per share
and are based on outstanding shares at the end of each period.
(2) Calculated as the respective high or low sales price divided by net asset
value and subtracting 1.
Revenues
We generate revenue in the form of interest, dividend, servicing and other fee
income on debt and equity investments. Our debt investments typically have terms
of 10 to 25 years and bear interest at prime plus a margin. In some instances,
we receive payments on our debt investments based on scheduled amortization of
the outstanding balances. In addition, we receive repayments of some of our debt
investments prior to their scheduled maturity date. The frequency or volume of
these repayments fluctuates significantly from period to period. Our portfolio
activity also reflects the proceeds of sales of securities. We receive servicing
income related to the guaranteed portions of SBA investments which we originate
and sell into the secondary market. These recurring fees are earned daily and
recorded when earned. In addition, we may generate revenue in the form of
packaging, prepayment, legal and late fees. We record such fees related to loans
as other income. Dividends are recorded as dividend income on an accrual basis
to the extent that such amounts are payable by the portfolio company and are
expected to be collected. Dividend income is recorded at the time dividends are
declared. Distributions of earnings from portfolio companies are evaluated to
determine if the distribution is income, return of capital or realized gain. In
addition, under the PPP that began in the second quarter of 2020, the SBA
reimburses the Company for originating loans and such SBA reimbursements are
included as interest income on PPP loans. Income earned in connection with the
PPP should not be viewed as recurring. The first round of PPP closed on August
8, 2020 . Congress enacted the Economic Aid Act on December 27, 2020 , which
provided funding for PPP loans through March 31, 2021 and subsequently enacted
the PPP Extension Act of 2021, which further extended the PPP through May 31,
2021 . On May 4, 2021 , the SBA announced that PPP funding had been exhausted;
however, borrowers with approved PPP loans (i.e., PPP loans with an assigned SBA
loan number) may continue to have their PPP loans closed and funded by their
lenders. NSBF expects to continue to close and fund the balance of its PPP loans
by the end of the second quarter of 2021. NSBF intends to continue to redeploy
resources used to generate PPP loans to the origination of SBA 7(a) loans. There
can be no guarantee that the program will be reauthorized or that, if
reauthorized, NSBF will be qualified to participate. See "Recent Developments -
Exhaustion of PPP Funding."
We recognize realized gains or losses on investments based on the difference
between the net proceeds from the disposition and the cost basis of the
investment without regard to unrealized gains or losses previously recognized.
We record current period changes in fair value of investments and assets that
are measured at fair value as a component of the net change in unrealized
appreciation (depreciation) on investments or servicing assets, as appropriate,
in the consolidated statements of operations.
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Our primary operating expenses are salaries and benefits, interest expense, origination and servicing and other general and administrative costs, such as professional fees, marketing, referral fees, servicing costs and rent. Since we are an internally-managed BDC with no outside adviser or management company, the BDC incurs all the related costs to operate the Company. Guarantees The Company is a guarantor on the Sterling Receivable and Inventory Facility atNBC . Maximum borrowings under the Sterling Receivable and Inventory Facility are$35.0 million . The Sterling Receivable and Inventory Facility matures inAugust 2022 and automatically renews annually. AtMarch 31, 2021 , total principal owed byNBC was$9.6 million . In addition, the Company deposited$0.75 million to collateralize the guarantee. AtMarch 31, 2021 , 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 NBL Facility. Maximum borrowings under the NBL Facility are$75.0 million with an accordion feature to increase maximum borrowings to$150.0 million . The lenders' commitments terminate inNovember 2022 , with all amounts due under the NBL Facility maturing inNovember 2023 . AtMarch 31, 2021 , total principal owed by NBL was$41.1 million . AtMarch 31, 2021 , 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 Webster Facility, a term loan facility between NMS withWebster Bank with an aggregate principal amount up to$50.0 million . The Webster Facility matures inNovember 2023 . AtMarch 31, 2021 , total principal outstanding was$28.0 million . AtMarch 31, 2021 , the Company determined that it is not probable that payments would be required to be made under the guarantee.
We established a 50/50 joint venture,NCL , betweenNewtek Commercial Lending, Inc. , a wholly-owned subsidiary of Newtek, andConventional Lending TCP Holding, LLC , a wholly-owned, indirect subsidiary ofBlackRock TCP Capital Corp. (Nasdaq:TCPC).NCL provided non-conforming conventional commercial and industrial term loans toU.S. middle-market companies and small businesses.NCL ceased funding new loans during 2020 due to the COVID-19 pandemic. Refer to NOTE 3-INVESTMENTS for selected financial information and a schedule of investments ofNCL as ofMarch 31, 2021 . Unfunded Commitments
At
AtMarch 31, 2021 ,NCL had$91,000 of unfunded commitments in connection with partial funding of certain of its non-conforming conventional commercial and industrial term loan investments.Newtek Commercial Lending, Inc. will fund 50% ofNCL's total unfunded commitments.Newtek Commercial Lending, Inc. will fund these commitments from the same sources it uses to fund its other investment commitments. Loan Portfolio Asset Quality and Composition The following tables set forth distributions of the cost basis of the Company's SBA 7(a) loan portfolio atMarch 31, 2021 andDecember 31, 2020 , respectively, in thousands. The tables include loans in which NSBF owns 100% as a result of NSBF originating the loan and subsequently repurchasing the guaranteed portion from the SBA. The total of 100% NSBF-owned loans atMarch 31, 2021 andDecember 31, 2020 is$18.2 million and$16.9 million , respectively. 335 --------------------------------------------------------------------------------
Distribution by Business Type
As of March 31, 2021
Business Type # of Loans Balance Average Balance % of Balance
Existing Business 1,949 $ 344,425 $ 177 81.4 %
Business Acquisition 289 57,407 207 13.6 %
Start-Up Business 220 21,453 96 5.1 %
Total 2,458 $ 423,285 $ 172 100.0 %
As of December 31, 2020
Business Type # of Loans Balance Average Balance % of Balance
Existing Business 1,850 $ 342,636 $ 185 81.5 %
Business Acquisition 275 56,797 207 13.5 %
Start-Up Business 222 20,965 96 5.0 %
Total 2,347 $ 420,398 $ 179 100.0 %
Distribution by Borrower Credit Score
March 31, 2021 Credit Score # of Loans Balance Average Balance % of Balance 500 to 550 19$ 4,022 $ 212 1.0 % 551 to 600 60 15,887 265 3.8 % 601 to 650 314 64,229 205 15.2 % 651 to 700 746 120,616 162 28.4 % 701 to 750 765 128,765 168 30.4 % 751 to 800 485 81,638 168 19.3 % 801 to 850 66 8,023 122 1.9 % Not available 3 105 35 - % Total 2,458$ 423,285 $ 172 100.0 %December 31, 2020 Credit Score # of Loans Balance Average Balance % of Balance 500 to 550 19$ 4,038 $ 213 1.0 % 551 to 600 61 16,435 269 3.9 % 601 to 650 316 64,564 204 15.4 % 651 to 700 704 119,077 169 28.3 % 701 to 750 717 125,217 175 29.8 % 751 to 800 462 82,507 179 19.6 % 801 to 850 65 8,451 130 2.0 % Not available 3 109 36 - % Total 2,347$ 420,398 $ 179 100.0 % 336
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Distribution by Primary Collateral Type
Collateral Type # of Loans Balance Average Balance % of Balance
Commercial Real Estate 955$ 220,403 $ 231 52.1 % Machinery and Equipment 418 78,645 188 18.6 % Accts Receivable and Inventory 271 45,198 167 10.7 % Residential Real Estate 541 40,739 75 9.6 % Other 90 29,370 326 6.9 % Unsecured 141 5,481 39 1.3 % Furniture and Fixtures 28 1,857 66 0.4 % Liquid Assets 14 1,592 114 0.4 % Total 2,458$ 423,285 $ 172 100.0 % December 31, 2020 Collateral Type # of Loans Balance Average Balance % of Balance Commercial Real Estate 933$ 218,958 $ 235 52.1 % Machinery and Equipment 403 78,356 194 18.6 % Residential Real Estate 259 44,270 171 10.5 % Accounts Receivable and Inventory 500 39,406 79 9.4 % Other 89 30,653 344 7.3 % Unsecured 124 5,421 44 1.3 % Furniture and Fixtures 25 1,695 68 0.4 % Liquid Assets 14 1,639 117 0.4 % Total 2,347$ 420,398 $ 179 100.0 %
Distribution by Days Delinquent
March 31, 2021 Delinquency Status # of Loans Balance Average Balance % of Balance Accrual Current 2,213$ 351,626 $ 159 83.0 % 31 to 60 days 39 10,948 281 2.6 % 61 to 90 days 19 7,016 - 1.7 % 91 days or greater 1 821 821 0.2 % Non-accrual 186 52,874 284 12.5 % Total 2,458$ 423,285 $ 172 100.0 %December 31, 2020 Delinquency Status # of Loans Balance Average Balance % of Balance Accrual Current 2,071$ 340,756 $ 165 81.1 % 31 to 60 days 62 12,679 205 3.0 % 61 to 90 days - - - - % 91 days or greater 32 11,520 360 2.7 % Non-accrual 182 55,443 305 13.2 % Total 2,347$ 420,398 $ 179 100.0 % 337
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