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Why Shares of Newtek Business Services Are Plummeting Today

What happened

Shares of Newtek Business Services (NASDAQ: NEWT) traded roughly 30% lower as of 11:30 a.m. EDT today, after the business development company (BDC) announced an acquisition and a huge strategic shift in its business model.

So what

Newtek announced on Monday that it plans to pay $20 million in cash to acquire the one-branch National Bank of New York City, a federally chartered bank, and convert from a BDC to a bank holding company.

National Bank of New York City comes with more than $200 million in assets, including $149 million of high-cost deposits and $175 million of loans, the majority of which are in commercial real estate. The combined companies will have more than $1.1 billion in total assets when the acquisition closes.

"Newtek believes this Acquisition and conversion to a bank holding company has the capacity to significantly reduce risk, provide enhanced shareholder value, and provide greater flexibility to serve our business clientele in the future in ways we cannot under our current structure," CEO Barry Sloane said in a statement.

Image source: Getty Images.

Now what

By ending its status as a BDC, Newtek will no longer have to abide by certain restrictions such as a 2:1 debt-to-equity ratio, which will allow it to increase leverage. It believes that as a bank holding company, it will be able to operate more like its new peer group, which includes big names such as Live Oak Bancshares (NASDAQ: LOB), SoFi Technologies (NASDAQ: SOFI) and Lending Club (NYSE: LC).

That would obviously be great if the company could do this, but leaving its BDC status also means that Newtek no longer has to pay almost all of its net income out in dividends, which might turn off some of its existing investors, who also could be worried about the execution risks associated with the big transition.

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Bram Berkowitz owns shares of LendingClub and has the following options: long October 2021 $30 calls on LendingClub. The Motley Fool owns shares of and recommends Live Oak Bancshares and SoFi Technologies, Inc. The Motley Fool has a disclosure policy.


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