NewtekOne, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Company Overview: NewtekOne is a technology-oriented financial holding company serving small and medium-sized enterprises, operating a digital bank with online banking and providing a full menu of financial solutions digitally.
• Q2 Financial Successes: 15% revenue growth to $70.2 million in Q2 2025, maintained EPS guidance of $2.10 to $2.50 for 2024, growth in business deposits, reduced losses in Newtek Small Business Finance.
• CEO Highlights: Basic and diluted EPS of $0.53 and $0.52 in Q2, first half EPS above guidance midpoint, core deposits growth, reduced headwinds from Newtek Small Business Finance, ALP performed well with credit facilities upsized, efficiency ratio improved.
• ALP Securitization: Residual interests valued at 14% yield, weighted average coupon on ALP loans 13.3%, notes yield 6.6%, creating operating leverage.
• Credit Quality: Newtek Small Business Finance portfolio paying down, nonaccrual inflows decelerating, ALP loans with 1% historic charge-off rate.

Segment Performance

• Newtek Merchant Solutions: Generates about $17 million of pretax income and EBITDA.
• Alternative Loan Program: Loans made in joint ventures and structures amount to approximately $450 million to $500 million.
• Business Deposits: Grew by $50 million sequentially, with cost of funds at the bank declining 28 basis points to 3.71%, and net interest margin increasing by 56 basis points.
• Newtek Small Business Finance: Losses have shrunk, with recent quarters seeing losses reduce from $10.7 million to $3.7 million.
• Alternative Loan Program (ALP): Performed exceptionally well, with credit facilities from Deutsche Bank upsized from $120 million to $170 million and from Capital One Bank upsized from $60 million to $100 million.

Guidance

• Maintained EPS guidance for 2024 at $2.10 to $2.50.
• Anticipates ALP loan originations in the second half of 2025 to approximate $250 million.
• Expects continued growth in business deposits and further reduction in deposit costs.
• Expectation of provision picking back up but reserves are sufficient to cover potential losses.

Risks

• Newtek Small Business Finance still faces challenges with nonperforming loans, though the pain is behind.
• Regulatory and market risks related to SBA loan rule changes and competition in acquiring good credits.
• Potential impact of SBA regulation changes on 7(a) loan volumes and gains on sale.

Question and Answer

• Q: On deposit trends and drivers, what helped bring in $50 million of growth on the commercial deposit side and expectations going forward? A: Barry Sloane and Frank DeMaria discuss commercial deposit growth due to integrated solutions in merchant services, payroll, and lending, with expectations of continued growth and further cost reduction.
• Q: On charge-offs and ALP loan gains? A: Frank DeMaria provides details on charge-offs being $5 million (flat quarter-over-quarter) and ALP loan gains of about $6.3 million.
• Q: On SBA rule changes and volumes? A: Barry Sloane talks about SBA rule impacts not significantly affecting volumes, with no change to 2024 7(a) loan guidance of $1 billion.
• Q: On provision and dividend? A: Barry Sloane discusses provision picking back up but reserves being sufficient, and no immediate plans to increase the dividend.
• Q: On stock P/E and business sources? A: Barry Sloane explains stock valuation differences due to complexity and unique business model, with business sources including integrated payroll, payment, and lending solutions.