NewtekOne, Inc. 8.50% Fixed Rate Senior Notes due 2029 Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Honorable Mentions: Thanks to Bryce Rowe and Nick Young; Peter Downs named President of Newtek Bank.
• Financial Performance: First quarter 2025 earnings beat with $0.35 diluted EPS, $0.36 basic; beat consensus of $0.31. Maintained EPS range $2.10 to $2.50, projected annual EPS growth 17% midpoint.
• Business Differentiators: Technology-enabled financial holding company, digital bank with no traditional branches, unique customer acquisition with 6-9 referrals/day.
• Profitability: Return on assets 1.18% in Q1 vs average 90 basis points for $1B-$10B banks. Bank's loan loss provision covered net charges 3.9 times over last four quarters. NSBF loss wind down, drag on 2025 materially lower.

Segment Performance

• SBA 7(a) Loans: Over two decades of history, with securitizations. Loss characteristics include higher losses but government guarantees. NPLs in this portfolio have a weighted average seasoning of 18 to 40 months.
• Alternative Loan Program (ALP): Major success with securitizations, better quality loans (average FICO 740, weighted average loan-to-value ~50%). Recent securitization had an 85% advance rate.
• Merchant Solutions: Generates ~$16 million of EBITDA in pretax, valuable asset with recurring cash flow.
• Bank Deposits and Lending: Core deposits growing, mix shifting to more business deposits. Average cost of deposits at Newtek Bank ~4%, expected to drift down. Pre-provision net revenue (PPNR) strong; bank's PPNR was 13.2% of average loans in Q1, averaging 19% for the prior year vs peer average 2.1%.

Guidance

• EPS: Maintained EPS range $2.10 to $2.50, projected annual growth 17% midpoint.
• Loan Volumes: Challenges in acquiring credits, need for new alliance partners, but comfortable with guidance.
• Deposits and NIM: Expect deposit growth in business category, NIM expanded year-over-year and quarter-over-quarter; adjusted NIM to benefit from ALP program and securitization.

Risks

• Credit Concerns: Hyper-focus on credit metrics, particularly SBA 7(a) loans, but profitability strong.
• Loan Acquisition: Harder to acquire attractive credits, need for new alliance partners.
• Market Misunderstanding: Misunderstanding of company's business model and metrics compared to traditional banks.

Q: On net gain on loans accounted for under fair value option and sustainability of gains, especially ALP loans.

A: Barry Sloane discussed ALP securitization, advance rates, charge-offs, and sustainability, mentioning experience with SBA business over two decades.

Q: Management changes, rationale, timing, splitting CFO roles.

A: Barry Sloane talked about changes being natural, splitting CFO roles for focus, and expecting more changes as markets evolve.

Q: Parsing fair value gains, impact of SBA changes.

A: Scott Price and Barry Sloane discussed gain on sale from SBA loans, impact of SBA changes like lender service fee and loan size increase, and competitive advantage.

Q: Duration of holding loans for fair value gain, credit performance of recent SBA vintages.

A: Barry Sloane said fair value gains won't be extended, comfort in current SBA loan underwriting in higher rate environment, and NSBF drag reduction.

Q: Breaking down fair value gains by segments.

A: Scott Price and Barry Sloane discussed gains from SBA government guarantees, ALP loans, and servicing.