NewtekOne, Inc. Q1 FY2025 earnings call

Key Points

• Mission: Provide business and financial solutions to independent business owners, focusing on technology-enabled services and avoiding consumer banking.
• Acquisition: NewtekOne acquired Newtek Bank National Association for depository solutions and real-time payments.
• Management Changes: Peter Downs became President of Newtek Bank, and Nick Young departed. Bryce Rowe joined as VP of Investor Relations.
• Earnings: Q1 2025 earnings beat with diluted EPS of $0.35, beating consensus. Maintained EPS guidance range of $2.10 to $2.50.
• Profitability: Return on assets in Q1 was 1.18%, and PPNR at the bank averaged 19% of loans last year vs. peer average of 2.1%.
• ALP Success: Successful securitization of ALP loans with 85% advance rate, generating profitable operations.
• NSBF Wind Down: NSBF loss declined over 50% from Q4 2024, with the business in a wind down phase.

NewtekOne has multiple segments. At the holding company level, pre-provision net revenue (PPNR) was $25.2 million in Q1 2025, a 47% increase from the prior year. The bank's PPNR was 13.2% of average loans for Q1, with an average loan loss provision covering net charges by 3.9 times over the last four quarters. Deposits at Newtek Bank were relatively flat compared to year-end 2024, with a shift to core deposits and average cost of deposits around 4%, expected to drift down. The ALP business saw a successful securitization with an 85% advance rate, and the NSBF segment's loss declined over 50% from Q4 2024.

Guidance

• Maintained EPS guidance range of $2.10 to $2.50, projecting 17% annual EPS growth using the midpoint.
• Acknowledged challenges in acquiring attractive credits but stated they are working on new alliance partners to grow loan volumes.
• Expected return on average assets of 2.45 for 2025.
• Noted that the risk in the guidance range is tied to loan volumes, particularly with 7(a) and ALP loans.

Risks

• Difficulty in acquiring attractive credits, requiring new alliance partners to grow loan volumes.
• Market hyper-focus on credit metrics while forgetting profitability.
• Impact of regulatory changes, such as potential effects on gain on sale margins for SBA loans, including efforts to return the SBA program to zero subsidy and changes in underwriting guidelines.

Q: About net gain on loans accounted for under fair value option and sustainability.

A: Barry Sloane discussed ALP securitization details, noting an 85% advance rate and profitable operations. Stated earnings are sustainable despite challenges, citing over two decades of experience in the 7(a) business.

Q: On management changes and CFO roles.

A: Barry Sloane talked about reasons for management changes, splitting CFO roles where Scott Price focuses on the bank and Frank DeMaria handles the holding company, noting more changes may occur as markets evolve.

Q: Parsing fair value gains.

A: Barry Sloane and Scott Price discussed breakdown of gains, with $8 million from SBA government guarantees held temporarily, and ALP securitization contributing to fair value gains.

Q: On SBA loan credit performance and fair value gain holding.

A: Barry Sloane addressed credit performance of recent SBA loan vintages, noting provisions are appropriate, and fair value gains on SBA loans are held temporarily for spread income before sale.