NewtekOne, Inc. Depositary Shares, Non-Cumulative Perpetual Preferred Stock, Series B Q2 FY2025 earnings call

Introductions and Background

• CEO Barry Sloane introduced key team members like Chief Strategy Officer Andrew Kaplan and Chief Investment Officer Vik Mahajan, highlighting their contributions. Emphasized the company's technology-oriented nature as a financial holding company with a digital bank.

Q2 Financial and Operational Successes

• Maintained EPS guidance of $2.10 to $2.50 for 2024. Achieved 15% revenue growth in Q2 2025. Experienced growth in business deposits, with a $50 million sequential increase. Saw reduced losses in Newtek Small Business Finance. The alternative loan program had credit facilities upsized from Deutsche Bank ($120M to $170M) and Capital One Bank ($60M to $100M). Efficiency ratio improved at the holdco from 66.3% to 60.3%.

CEO Highlights

• Basic and diluted EPS in Q2 were $0.53 and $0.52 respectively, with first half EPS above the guidance midpoint. Core deposits grew, and headwinds from Newtek Small Business Finance reduced. Upsized credit facilities for the alternative loan program, and profitability and operating leverage remained strong.

Business Model

• Solves 3 primary problems in banking: acquiring deposits below risk-free rate, integrated solutions (deposit, merchant, payroll, etc.), and being completely digital with no branches. Utilizes proprietary technology and AI.

Financial Highlights

• At the bank, ROAA was 3.94% and ROTCE was 35% with more than adequate capital. Tangible book value per share increased 3.7% quarter-over-quarter and 21% year-over-year.

ALP Securitization Details

• Residual interests in ALP securitizations valued at 14% yield with 15% default frequency and 20% severity leading to 3% charge-off. Securitized ALP loans had a weighted average coupon of 13.3%, notes yield 6.6%, with $218 million of loans securitized in NALP 2025-1. ALP loan originations expected to be approximately $250 million in the second half of 2025.

Credit Quality

• Nonaccruals in Newtek Small Business Finance slowing, with the portfolio being seasoned and paying down quickly. Capital in NSBF expected to free up as securities pay down.

Newtek Merchant Solutions generated about $17 million of pretax income and EBITDA. The alternative loan program business has loans in the range of $450 million to $500 million. Business deposits grew by $50 million sequentially, with noninterest-bearing depository accounts and a transactional nature contributing to this growth. Revenue in Q2 2025 was $70.2 million, representing a 15% increase from Q2 2024's $61 million.

Earnings Per Share

• Maintained EPS guidance of $2.10 on the low end to $2.50 at the high for calendar year 2024.

Revenue

• Q2 2025 showed 15% revenue growth, and this growth is part of the ongoing performance.

ALP Loan Originations

• Expect ALP loan originations in the second half of 2025 to approximate $250 million.

Gain on Sale

• Guiding to a lower gain on sale from SBA 7(a) loans, moving from approximately $111 million to $110 million.

Regulatory and Market Risks

• Non-bank lenders in the SBA space facing challenges complying with new SBA rule changes. Potential for the provision to increase in the second half of 2025. The complex business model may lead to market misunderstanding, contributing to the stock trading at a lower P/E compared to the industry.

Q: Tim Switzer from KBW asked about deposit trends, drivers of $50M commercial deposit growth, and expectations for deposit costs going forward.

A: Barry Sloane mentioned integrated solutions, 0-fee accounts, and utilization improvement needed. Business savings account at 3.5%, 0 fee, with integration of merchant services and payroll.

Q: Tim Switzer asked about total charge-offs in the held-for-investment portfolio.

A: Frank DeMaria responded it was $5 million in Q2, similar to the previous quarter.

Q: Crispin Love from Piper Sandler asked about net gain in residual and securitizations and SBA rule changes impact on volumes.

A: Frank DeMaria explained reversal of unrealized gains and ALP loan gains of about $6.3M. Barry Sloane stated no significant volume drop in 7(a) product, still guiding to $1B in 7(a) loans for the year.

Q: Stephen Moss from Raymond James asked about extended holding period for 7(a) loans and expense expectations.

A: Barry Sloane said holding period is 60 to 75 days, and expenses are expected to be flattish. Frank DeMaria added on net gain in residuals and securitization.

Q: Christopher Nolan from Ladenburg Thalmann & Co. asked about provision expectations and regulator flexibility.

A: Barry Sloane expected provision ratio 4.5% to 5.5%, and regulators have been comfortable with current provision levels. He also mentioned no immediate plans to increase dividend.

Q: Marc Silk from Silk Investment Advisors asked about stock P/E vs industry and business deposits from payroll and payment.

A: Barry Sloane attributed low P/E to being disruptive and complex business model. Explained integrated solutions for bank and merchant accounts, 0-fee, and analytics as drivers of business deposits.