NewtekOne, Inc. 10-K

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 se rvicing 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 December 31, 2023 December 31, 2022 Change Loans held for sale, at fair value $ 118,867 $ 19,171 $ 99,696 Loans held for sale, at LCM 56,607 — 56,607 Loans held for investment, at fair value 469,801 505,268 (35,467) Loans held for investment, at amortized cost, net of deferred fees and costs 336,305 — 336,305 Allowance for credit losses (12,574) — (12,574) Loans held for investment, at amortized cost, net 323,731 — 323,731 Total Loans $ 969,006 $ 524,439 $ 444,567 Loans held for sale 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 $ 326,036 96.9 % $ 274,930 97.6 % $ 213,938 97.9 % $ 163,487 98.0 % Past Due 31-89 Days 4,896 1.5 % 1,401 0.5 % 1,271 0.6 % — — % Nonaccrual loans 5,373 1.6 % 5,256 1.9 % 3,350 1.5 % 3,350 2.0 % Total 336,305 100.0 % 281,587 100.0 % 218,559 100.0 % 166,837 100.0 % Allowance for credit losses (12,574) 3.7 % (8,209) 2.9 % (4,764) 2.2 % (2,189) 1.3 % At Fair Value Current $ 385,172 81.9 % $ 420,673 85.4 % $ 448,788 87.6 % $ 450,846 84.6 % Past Due 31-89 Days $ 36,455 7.8 % $ 29,743 6.0 % $ 24,530 4.8 % $ 42,197 7.9 % Nonaccrual loans $ 48,174 10.3 % $ 42,571 8.6 % $ 39,100 7.6 % $ 39,745 7.5 % Total $ 469,801 100.0 % $ 492,987 100.0 % $ 512,418 100.0 % $ 532,788 100.0 % Past due and nonaccrual loans as % of Outstanding UPB $ 84,629 75.2 % $ 72,314 76.0 % $ 63,630 73.1 % $ 81,942 76.8 % Nonperforming Assets, as a percentage of total assets Loans HFI, at amortized cost $ 5,373 0.4 % $ 5,256 0.4 % $ 3,350 0.2 % $ 3,350 0.3 % Loans HFI, at fair value 48,174 3.3 % 42,571 3.0 % 39,100 2.7 % 39,745 3.1 % Other real estate owned 1,110 0.1 % 2,828 0.2 % 3,612 0.3 % 3,516 0.3 % Total Nonperforming Assets $ 54,657 3.8 % $ 50,655 3.6 % $ 46,062 3.2 % $ 46,611 3.7 % Other Statistics All Loans HFI 90 days past due still accruing interest $ — — % $ — — % $ — — % $ — — % 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: As of December 31, 2023 HFI at Amortized Cost, net of deferred fees and costs HFS at LCM Total LTV by CRE Type Loans not backed by CRE $ 203,405 $ — $ 203,405 Loans backed by CRE 132,900 56,607 189,507 Total loans 336,305 56,607 392,912 Loans backed by CRE by type: Retail $ 40,400 $ — $ 40,400 49.7 % 1-4 Family 31,700 — 31,700 57.6 % Multifamily 29,800 — 29,800 51.3 % Industrial 23,400 — 23,400 47.3 % Office 4,100 — 4,100 48.9 % Construction and land development 1 — 51,907 51,907 83.1 % Hotel — 4,700 4,700 55.3 % Other 3,500 — 3,500 52.8 % Total Loans backed by CRE $ 132,900 $ 56,607 $ 189,507 60.3 % Unfunded commitments backed by CRE: Construction and land development 1 — 4,493 4,493 83.1 % Total CRE Exposure $ 132,900 $ 61,100 $ 194,000 60.8 % 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 December 31, 2023 Goodwill Intangible Assets Total NBNYC acquisition $ 271 $ 843 $ 1,114 Payments segment 13,814 13 $ 13,827 Technology segment 11,800 3,379 $ 15,179 Total $ 25,885 $ 4,235 $ 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 December 31, 2023 December 31, 2022 Change Capital One Lines of Credit: Capital One line of credit - guaranteed 1 $ — $ 10,500 $ (10,500) Capital One line of credit - unguaranteed 1 — 45,385 (45,385) Total Capital One — 55,885 (55,885) Other Bank Borrowings 2 : Webster NMS Note 36,628 — 36,628 SPV I Capital One Facility 16,080 — 16,080 SPV II Deutsche Bank Facility 6,799 — 6,799 SPV III One Florida Bank Facility 257 — 257 FHLB Advances 23,184 — 23,184 Total Lines of Credit 82,948 — 82,948 Parent Company Notes due 2024, 2025, 2026, and 2028 2 : 2024 5.75% Notes 38,124 37,903 221 2025 5.00% Notes 29,563 29,306 257 2025 8.125% Notes 49,433 — 49,433 2026 5.50% Notes 113,564 112,846 718 2028 8.00% Notes 38,378 — 38,378 Total 2024, 2025, 2026, and 2028 Notes 269,062 180,055 89,007 Notes Payable - Securitization Trusts 2 292,112 279,136 12,976 Notes Payable - Related Parties — 24,250 (24,250) Total $ 644,122 $ 539,326 $ 104,796 (1) 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. (2) 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: Year Ended December 31, 2023 2022 Change Net interest income after provision for credit losses $ 14,930 $ 12,292 $ 2,638 Noninterest income 176,772 92,878 83,894 Noninterest expense 146,329 66,395 79,934 Net income before taxes 45,373 38,775 6,598 Income tax (benefit)/expense (1,956) 6,464 (8,420) Net income $ 47,329 $ 32,311 $ 15,018 Net Interest Income Year Ended December 31, 2023 2022 Change Interest income Debt securities available-for-sale $ 1,518 $ — $ 1,518 Loans and fees on loans 84,001 35,696 48,305 Interest from affiliates — 2,921 (2,921) Other interest earning assets 8,854 — 8,854 Total interest income 94,373 38,617 55,756 Interest expense Deposits 15,849 — 15,849 Notes and securitizations 40,217 21,780 18,437 Bank and FHLB borrowings 11,673 3,998 7,675 Notes payable related party — 547 (547) Total interest expense 67,739 26,325 41,414 Net interest income 26,634 12,292 14,342 Provision for credit losses 11,704 — 11,704 Net interest income after provision for credit losses $ 14,930 $ 12,292 $ 2,638 87 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: Year Ended December 31, 2023 December 31, 2022 Change Deposits 1 $ 15,849 $ — $ 15,849 Notes and securitizations: Notes payable - Securitization Trusts 23,469 10,641 12,828 2024 Notes 2,421 2,424 (3) 2025 6.85% Notes 2 — 379 (379) 2025 5.00% Notes 1,757 1,294 463 2025 8.125% Notes 3 4,335 — 4,335 2026 Notes 7,043 7,042 1 2028 Notes 4 1,192 — 1,192 Bank and FHLB Borrowings: Bank notes payable 10,995 3,998 6,997 FHLB Advances 678 — 678 Notes payable - related party — 547 (547) Total interest expense $ 67,739 $ 26,325 $ 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. For the year ended December 31, 2023 Average Balance Interest Average Yield / Rate Interest-earning assets: Interest-earning balances in other banks $ 186,566 $ 8,854 4.75 % Investment securities 31,958 1,518 4.75 Loans held for sale 120,598 17,085 14.17 Loans held for investment 783,808 66,916 8.54 Total interest-earning assets 1,122,930 94,373 8.40 Less: Allowance for credit losses on loans (3,619) Noninterest earning assets 197,612 Total assets $ 1,316,923 Interest-bearing liabilities Demand $ 23,973 $ 31 0.13 % Savings, Super NOW 143,589 7,187 5.01 Money Market 22,083 1,052 4.76 Time 168,912 7,579 4.49 Total deposits 358,557 15,849 4.42 Borrowings 674,687 51,890 7.69 Total interest-bearing liabilities 1,033,244 67,739 6.56 Noninterest-bearing deposits 531 Noninterest-bearing liabilities 60,524 Shareholders’ equity 222,624 Total liabilities and shareholders' equity $ 1,316,923 Net interest income and interest rate spread $ 26,634 1.85 % Net interest margin 2.37 % Ratio of average interest-earning assets to average interest bearing liabilities 108.68 % 89 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. For the year ended December 31, 2023 2023 vs. 2022 Increase (Decrease) Due to Rate Volume 1 Total Interest income: Interest-earning balances in other banks $ 6,192 $ 2,402 $ 8,594 Investment securities — 1,518 1,518 Loans held for sale 26,759 (36,250) (9,491) Loans held for investment 10,894 44,241 55,135 Total interest income 43,845 11,911 55,756 Interest expense: Demand — 31 31 Savings, Super NOW — 7,187 7,187 Money Market — 1,052 1,052 Time — 7,579 7,579 Borrowings 15,553 10,012 25,565 Total interest expense 15,553 25,861 41,414 Net interest income $ 28,292 $ (13,950) $ 14,342 (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 Year ended December 31, 2023/2022 Increase/(Decrease) 2023 2022 Amount Percent Dividend income $ 1,757 $ 24,657 $ (22,900) (92.9) % Loan servicing asset revaluation (3,549) (10,095) 6,546 64.8 Servicing income 18,289 13,698 4,591 33.5 Net gains on sales of loans 50,734 56,901 (6,167) (10.8) Net gain (loss) on loans under the fair value option 18,008 (26,504) 44,512 167.9 Technology and IT support income 24,916 — 24,916 — Electronic payment processing income 42,855 — 42,855 — Other noninterest income 23,762 34,221 (10,459) (30.6) Total noninterest income $ 176,772 $ 92,878 $ 83,894 90.3 % 90 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. Year Ended December 31, 2023 December 31, 2022 $ Amount $ Amount Realized gains recognized on sale of SBA loans $ 74,617 $ 73,530 Realized losses recognized on sale of SBA loans (23,883) (16,629) Net gains on sales of loans $ 50,734 $ 56,901 Year Ended December 31, 2023 December 31, 2022 # of Loans $ Amount # of Loans $ Amount SBA loans originated 1,812 $ 814,406 1,215 $ 775,572 SBA guaranteed loans sold 1,723 607,560 1,132 630,028 Average sale price as a percent of principal balance 1 110.20 % 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. For the year ended December 31, 2023 December 31, 2022 Change SBA 7(a) Unguaranteed Loans $ 14,765 $ (19,972) $ 34,737 SBA 7(a) Guaranteed Loans (688) (6,532) 5,844 SBA 504 and Non-SBA Loans 3,931 — 3,931 Net Gain (Loss) on Loans Accounted for Under the Fair Value Option $ 18,008 $ (26,504) $ 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 Year ended December 31, 2023/2022 Increase/(Decrease) 2023 2022 Amount Percent Technology services expense $ 14,272 $ — $ 14,272 — % Electronic payment processing expense 18,327 — 18,327 — Salaries and employee benefits expense 65,708 20,186 45,522 225.5 Professional services expense 13,077 7,134 5,943 83.3 Other loan origination and maintenance expense 9,433 30,746 (21,313) (69.3) Depreciation and amortization 2,884 239 2,645 1,106.7 Loss on extinguishment of debt 271 417 (146) (35.0) Other general and administrative costs 22,357 7,673 14,684 191.4 Total other expense $ 146,329 $ 66,395 $ 79,934 120.4 % 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: For the year ended December 31, 2023 Banking $ 28,127 Technology 1,367 NSBF 17,061 Payments 12,154 Other (11,380) Consolidated net income $ 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: Actual For Capital Adequacy Purposes 1 For Consideration as Well-Capitalized NewtekOne, Inc. - December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Tier 1 Capital (to Average Assets) $ 180,829 13.6 % $ 53,363 4.0 % N/A N/A Common Equity Tier 1 (to Risk-Weighted Assets) 180,829 16.2 % 50,153 4.5 % N/A N/A Tier 1 Capital (to Risk-Weighted Assets) 180,829 16.2 % 66,870 6.0 % N/A N/A Total Capital (to Risk-Weighted Assets) 213,141 19.1 % 89,160 8.0 % N/A N/A (1) Exclusive of the capital conservation buffer of 2.5% of risk-weighted assets. 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 Actual For Capital Adequacy Purposes 1 For Consideration as Well-Capitalized Newtek Bank - December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Tier 1 Capital (to Average Assets) $ 99,253 16.6 % $ 23,893 4.0 % $ 30,026 5.0 % Common Equity Tier 1 (to Risk-Weighted Assets) 99,253 21.5 % 20,787 4.5 % 46,193 6.5 % Tier 1 Capital (to Risk-Weighted Assets) 99,253 21.5 % 27,716 6.0 % 36,955 8.0 % Total Capital (to Risk-Weighted Assets) 105,105 22.8 % 36,954 8.0 % 29,866 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: Availability as of December 31, 2023 Unrestricted cash $ 15,398 Lines of credit at other commercial banks 40,418 Newtek Bank: Interest bearing deposits in banks 137,689 FHLB borrowing availability 61,947 Lines of credit at other financial institutions 10,000 Total liquidity sources $ 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: Year Ended December 31, 2023 Year Ended December 31, 2022 Net cash used in operating activities $ (169,219) $ (62,418) Net cash used in investing activities (172,235) (11) Net cash provided by financing activities 344,974 1,175 Net increase (decrease) in cash and restricted cash 3,520 (61,254) Cash and restricted cash—beginning of period (Note 2) 125,606 186,860 Consolidation of cash and restricted cash from controlled investments and business combinations, net of cash paid 54,880 — Cash and restricted cash—end of period (Note 2) $ 184,006 $ 125,606 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. Payments due by period Contractual Obligations Total 2024 2025 2026 2027 2028 Thereafter Deposits: Demand $ 10,053 $ 10,053 $ — $ — $ — $ — $ — Checking 11,456 11,456 — — — — — Money market 15,803 15,803 — — — — — Savings 259,152 259,152 — — — — — Time deposits 167,041 54,805 63,402 28,379 19,710 745 — Webster NMS Note 1 36,881 — — — 36,881 — — FHLB Advances 23,183 7,959 8,026 2,094 5,104 — — SPV I Capital One Facility 1 16,300 — 16,300 — — — — SPV II Deutsche Bank Facility 1 6,900 6,900 — — — — — SPV III One Florida Bank Facility 1 375 — 375 — — — — Securitization Notes Payable 296,223 — — — — — 296,223 Parent Company Notes: Notes due 2024 38,250 38,250 — — — — — Notes due 2025 80,000 — 80,000 — — — — Notes due 2026 115,000 — — 115,000 — — — Notes due 2028 40,000 — — — — 40,000 — Employment Agreements 525 525 — — — — — Operating Leases 7,502 2,761 2,469 1,842 430 — — Totals $ 1,124,644 $ 407,664 $ 170,572 $ 147,315 $ 62,125 $ 40,745 $ 296,223 1 Guaranteed by the parent company 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 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 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. 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.