NewtekOne, Inc. Depositary Shares, Non-Cumulative Perpetual Preferred Stock, Series B Q4 FY2024 earnings call

• NewtekOne is a technology-enabled disruptor operating as a bank holding company. Its mission is to provide business and financial solutions to independent business owners using advanced technology to acquire clients cost-effectively, make better loans with favorable risk-reward, and gather sticky deposits through the Newtek Advantage.
• Strong loan and deposit growth was noted, with net interest income improving 36% from the prior year's same period. Shareholders' equity increased by 19% to $296 million, and the company paid a healthy dividend.
• The banking industry faces challenges such as manual processes, deposits below risk-free rates, and low-margin loans avoiding credit risk. NewtekOne addresses these by using technology for client acquisition, offering sticky deposits with value-added services, and managing credit risk to achieve better returns.
• The NSBF portfolio is in a rundown mode, which has been a drag on consolidated earnings, but the bank segment is adding new loans with higher rates. The ALP portfolio is growing, contributing to non-interest income.

NewtekOne, Inc. has several key segments. The Newtek Bank segment showed strong financial metrics: ROAA of 6.3%, ROTCE of 48%, and an efficiency ratio of 42%. The holding company also exhibited strong performance with return on average assets and return on tangible common equity north of 20% (24.1%). The Alternative Loan Program (ALP) was a growing component, with $269 million in loans over 12 months and over $83 million in 2024. The ALP segment contributed to loan growth and was an important part of the company's overall revenue mix.

• Bumped up earnings per share forecast to a range of $2.10 to $2.50 for 2025, with a midpoint of $2.30.
• Anticipates $500 million of ALP loans in 2025, with the portfolio currently at $400 million.
• Considered risk factors in guidance, including sensitivity to higher default rates and charge-offs, but believes the company can remain profitable even with significant changes.
• Seasonality in loan origination is noted, with the first quarter typically being the lowest and the fourth quarter the strongest, but expecting revisions based on current market conditions.

• Credit risk, including potential higher charge-offs and default rates, which were modeled for sensitivity analysis.
• Impact of the NSBF portfolio rundown on consolidated earnings.
• Interest rate fluctuations and their effect on net interest margin and loan valuations.
• Seasonality in loan origination and potential mismatches between loan approvals and distributions as per SBA data.

Q: Can you provide more detail on the cadence of earnings throughout 2025?

A: Barry Sloane mentioned seasonality with the first quarter typically being the lowest and the fourth quarter the strongest. He noted that production is coming in as anticipated, with pricing potentially better than the fourth quarter of 2024, and the range for Q1 2025 is $0.28 to $0.32 low and $0.32 high.

Q: What drove the $9.4 million markup on loans accounted for under the fair value options?

A: Barry Sloane stated that the fair value of ALP loans, which go into securitizations with large margins, was the primary driver of the markup.

Q: On credit, how are charge-off expectations for 2025 driven by vintage loans?

A: Barry Sloane and Scott Price discussed the SBA loss curve, with vintage loans having different default patterns. Earlier vintages (2023) are expected to have higher charge-offs, while newer vintages (2024 and 2025) are modeled to have different trends, with the 2025 forecast assuming a charge-off rate around 2%.

Q: How does the sale of Technology Solutions to Paltalk impact first quarter book value?

A: Scott Price stated it is expected to be accretive on a tangible basis and not materially impact the first quarter.

Q: What causes the mismatch between SBA loan approvals and actual loan distribution?

A: Barry Sloane explained that SBA approval data includes loans in the pipeline that may not get funded due to various reasons like lien issues, appraisal problems, or committee rejections, leading to a disconnect between approvals and actual fundings