NewtekOne, Inc. Q1 FY2024 earnings call

Introduction

• Barry Sloane welcomed everyone to the call, introduced the team, and mentioned accessing the presentation on the website.

Financial Results

• Q1 2024 core earnings of $0.38 per basic and diluted common share exceeded guidance. Raised FY 2024 guidance to $1.85 to $2.05.
• Newtek Bank saw 9% sequential deposit growth, 11% sequential loan growth, NIM grew 37 basis points to 4.80%. ROAA 5.8%, ROTCE 37%.
• Increased quarterly dividend by 5.5% to $0.19 per share.

Newtek Advantage & AI

• Newtek Advantage offers features like document storage, web traffic analytics, etc. AI used in data gathering, credit decisions, and labor management.

Credit & Risk Management

• Details on nonaccrual loans, CECL reserves, and seasoning of SBA portfolios.

Lending Activity

• 7(a) space up 35.9% QoQ, alternative loan program $53.8M in Q1. Gain on sale as recurring income with historical data showing consistent premiums.

Newtek Bank had strong financials: ROAA 5.8%, ROTCE 37%, efficiency ratio 50%. Net interest margin at the bank was 4.8%, up from 4.43%. Sequential deposit growth at the bank was 9%, and sequential loan growth was 11%. SBA 7(a) loans had 75% sold within the quarter they were produced. Consolidated ROAA was 2.8% and ROTCE was 20%.

Forward-Looking

• Conservatively raised FY 2024 guidance to $1.85 to $2.05 from previous $1.80 to $2.
• Net interest income and provision expense came in above expectations; noninterest expenses slightly better than forecasted.
• Widened ranges for Q3 and Q4 due to Fed's soft landing efforts, interest rates data-dependent.
• Expect loan demand to hold in, with continued investment in infrastructure and products.

Risks

• Deposit costs increasing, though acquired CD portfolio maturing at lower costs.
• Interest rate risk and potential impact on CRE assets.
• Credit performance risks, including potential charge-offs in SBA portfolios as they season.
• Regulatory and compliance risks in rolling out new products and managing headcount.

Q: Could you remind us some of the economics on the nonconforming loans that you're earning on day 1 in terms of fees you are generating there? And how much CECL reserves are you putting up as well on these loans?

A: On the alternative loan program, ALP loans have gross fees, servicing, and joint venture funding; CECL reserves based on historical charge-off estimates.

Q: Can you speak a little more on what is causing gain on sale margins elevating even north of 11% in the first quarter, which is higher than most peers? And how is the demand for your paper? How would you expect margin to trend through 2024 in the current rate environment?

A: Higher margins due to efficiency, competitive with primary competitors; production driven by demand and process improvements.

Q: Could you guys also expand on your comments around the credit performance of the portfolio? And could you maybe review how like the seasoning of an SBA portfolio trends over time as the portfolio matures? How should we expect delinquencies and NPAs to trend for the bank portfolio that has more recently originated versus the NSBF portfolio that's currently held for sale?

A: Loss curve peaks at 18-40 months; CECL reserves prudently set based on historical data.

Q: Are you able to quantify maybe the pace of increase over the next -- I mean, if your loan portfolio, the weighted average life is less than 12 months, charge-offs don't peak until at least 24 months or so. Can you project that the pace of increase, the charge-offs, as we move over the next few years? And where does it peak?

A: Approximately 70% of the charge-offs within 18 months to 40 months; charge-offs to level out if economic conditions equal.

Q: I mean, I think you guys alluded to this in some of the prepared remarks, but expenses have gone up as you kind of built out the infrastructure. Is there any maybe like nonrecurring in this level of expenses, whether it be in the salary and benefits line or in that professional services line?

A: Expenses peaked, investing for future margins; holding company to use debt for funding alternative loan program.

Q: Barry, from your perspective, where do you see the bank sector going in general?

A: Industry faces challenges with CRE and asset liability management; short rates expected to change, impacting CRE.

Q: Barry, you mentioned -- or maybe it might have been Scott, that with regard to SBA originations here that you were kind of like, I guess, what’s the effect of driving efficiencies. Given your guidance here, holding it steady after a strong quarter in my mind on the SBA origination front, just kind of curious if maybe internally, are you at capacity in the short to intermediate term for your SBA originations?

A: Not at capacity, using alliance partners; production driven by demand and process improvements.

Q: And then in terms of -- just circling back to the seasoning of the portfolio, I hear you guys in terms of the 8% loss content discounted back. Maybe just kind of thinking about it, delinquencies, if I look at them here on a trailing 12-month basis from loan balances around roughly 9%, call it, curious how we think about as things season and you hit whether it's the 18- to 40-month time range, what is kind of like that peak delinquency number you guys expect, kind of the peak nonperforming type number in terms of the originations or the portfolio?

A: Currency rate at 90 plus or minus; loans purse-guarantee with collateral, within charge-off realm.

Q: And then just one more question on the business check-in and business money market you guys are rolling out here. Just kind of curious did you share any thoughts on internal targets you may have for those products? Or how you're thinking about that performance over the next 12 months?

A: Expect to roll out in earnest, pilot with select customers; expect $150M-$300M in business deposits, key is retention of funds.