Description

                                                               "Business is people." Michael Milken

   Barry Sloane is 62 years old. His salary is $700m which is unchanged from 2019 and will continue at that level through 2023. He gotten cash bonuses of $1.7mm since 2019 and $2.2mm of restricted stock grants that are now worth substantially less. He owns ~1,100,000 shares of stock. In 2020, 2021 & 2022 he received dividends of ~$2.2mm, ~$3.3mm and ~$3mm. On 8/2/2021 NEWT stock was ~$35 a share and his shares were worth ~$38mm. On 8/2/2021, Mr. Sloane announced that NEWT was giving up its BDC status and becoming a C-corp to buy a bank. Book value of NEWT was ~$17 a share when he made the announcement. Mr. Sloane knew that the share price would decline as BDC investors sold - maybe to book - and it would cost him ~$20mm. He knew that the dividend would be substantially cut - it has been to $.72 - so he is getting $2mm less a year in dividends. He did it anyway because he thinks that he can make more money in the long run by NEWT owning a bank. Mr. Sloane believes that by changing the corporate structure and that by buying a bank, he can make back his give-ups. I don't think that Mr. Sloane considers the diminution in the value of his stock as a loss. I think that he considers it an investment. I have invested with him.

   The Small Business Administration estimated that there are about 6 million small businesses that employ people. Many of them have a need for money. Newtekone is in business to serve them when the rest of the banking industry is not feeling well.

   On 1/6/2023 NEWT closed on the purchase of National Bank of New York City, and the bank has since been renamed Newtek Bank, N.A. The purchase price was $20mm ($20,000,000) which was book value, and the parent added $61mm to its capital. As of 1/31/2023 it had $250mm of assets and $78mm of capital - a 30% Tier 1 capital base. It is not easy to get approval from the Office of the Comptroller of the Currency to buy a bank. The OCC studied NEWT's business plan for a year and granted them the right to buy one. The timing was very fortunate.

   NEWT estimates that it will earn $1.70 - $2.00 a share in 2023 and $2.80 - $3.20 in 2024. At 7x their low estimate for 2023, the shares at $12 are okay. If they make their low estimate for 2024, they are a little over 4x EPS and a good deal.

   NEWT has specialized in Small Business Administration loans and was the 3rd largest SBA 7(a) lender in the US. It tries to restrict its loans to ~$1mm. It tries to get wide geographic diversification. It buys SBA 7(a) loans and sells the 75% guaranteed by the US Government. It receives ~a 10% premium to face, booking that as income. It then sells or retains the 25% balance. In the past, the 10% premium was distributed to the BDC's shareholders. It will now be retained. As a BDC, NEWT was restricted to 200% leverage. The leverage ratio is much higher for a bank holding company - up to 10x. At the end of 2021, NEWT's SBA 7(a) retained portfolio was ~$371mm. It was comprised of 2,567 loans averaging ~$144m. 58 loans were 31 - 60 days past due, ~$12mm or 3.17% of the total portfolio. None were greater than 60 days past due. On 12/31/2022, the SBA 7(a) loan book was ~$463mm, comprised of 3,300 loans averaging ~$140m. ~$13mm were 31 - 60 days past due (2.7%) with no delinquencies past 60 days. In 2022 NEWT funded ~$775mm in SBA 7(a) loans. It has also funded SBA 504 loans and expects to do $175mm of these in 2023. These activities, loan servicing, conforming C&I lending and conventional real estate loans will all be housed in the bank.

   In 2019 NEWT established a 50/50 joint venture with Blackrock TCP Capital to make non-conforming loans loans to middle market and small businesses. The venture ceased making new loans in 2020. In 2022 the assets were securitized, A rated and sold at a coupon of 3.2% with the proceeds paying off the senior lender and returning capital to the partners. In August, 2022 NEWT formed a 50/50 joint venture with Towerbrook (a Soros manager spin-off) to invest in non-conforming conventional commercial loans. Total equity of $100mm was contributed. A $150mm leverage facility has been provided by an investment bank. These lending activities and all of the business services that NEWT provides will be house in the holding company.

Background

  Mr. Sloane started NEWT in 1998 and took it public on the AMEX in 1999. It had very little capital. NEWT was designed to help small businesses grow by offering them financing, data processing services, tax services, insurance, payroll and benefits services, and web solutions. As NEWT had very little capital, it resorted to using "capcos" - Certified Capital Companies - to raise funds. Capcos were authorized by eight states to promote small business growth. The capco laws allowed insurance companies to get a 100% tax credit in exchange for a debt or equity investment in a qualified small business. NEWT used these capco investments to buy small providers of business services. By 2002, NEWT had invested ~$27mm in these subs. Then in 2002 NEWT acquired Comcap Holdings, a company which specialized in small business lending. At that time, Comcap serviced $155mm of loans and had retained interests of $62mm of loans. The purchase of Comcap was financed by the a capco.

   As NEWT expanded its business, it lost money - $17mm in 2007, $13mm in 2008, $4mm in 2009. But the company continued to expand under its mission statement "To be the known business services provider to independent business owners across the globe". By 2013 the company was solidly profitable with $7.5mm of after tax profits. It had provided loans and services to over 100,000 small and medium sized businesses in a cost effective manner. Through its lending program it had done over $600mm of loans through 1,100 transactions. NEWT believed that it was the largest non-financial institution licensed by the Small Business Administration under the Section 7(a) loan program. NEWT generated SBA loans, sold the US Government guaranteed portion for ~110 of face and kept or sold the rest. As of 12/31/2013 NEWT held 675 loans with an aggregate balance of $97mm and an average balance of $144m. In addition it was also servicing a $1.1b loan portfolio.The lending program also gave NEWT a relationship with its borrowers through which it could sell its other business products.

   At year end 2013, NEWT had stockholders' equity of $77mm and ~7mm share outstanding (adjusted for a 1 for 5 split). Fin-tech companies were coming public at very fancy multiples. NEWT was selling at 4X EBITDA. Mr. Sloane realized that his company not attractive to the market. In order to attract new investors, in 2014 NEWT became a Business Development Company (BDC). The BDC structure would allow NEWT to attract investors by offering a high dividend. A better stock price would allow NEWT sell shares at book or a premium to book and expand its SBA lending business. It was a tremendous success. The company paid out very substantial dividends which drove its stock price higher. With the stock higher, NEWT was able to raise new capital at attractive rates. The stock price increased from $15.70 at year end 2013 to $35 on 8/2/21. From 12/31/2013 until 8/2/2021, investors enjoyed a 11% annual rate of return on price and a 23.8% annual rate of return with with dividends reinvested. From 8/2/2021 to today, the stock has lost 66% as its shareholder base deserted it. Hopefully, its former value will be restored.

Risks

1) It's a small-cap finance company in an unsettled market.

2) The company might lose its discipline

Catalyst

1) A better market for bank stocks

2) The realization of the company's plans