NewtekOne Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2025

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the NewtekOne first quarter two thousand twenty five earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press 11 on your telephone.

Operator

You would then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Barry Sloane, chairman, president, and CEO. Please go ahead.

Speaker 1

Thank you very much, and welcome, everybody, to our first quarter twenty twenty five financial results conference call. Today, I'm joined by my two chief financial officers, Scott Price, the CFO of Newtek Bank National Association and Frank DeMaria, the CFO of Newtek One, the publicly traded bank holding company. For those of you who would like to follow along on our presentation, please go to our website, newtekone.com, go to the Investor Relations section and the PowerPoint presentation that we'll be addressing today is hung there. I also wanted to do a couple of honorable mentions. I wanted to thank Bryce Rowe, who recently joined us as VP of Investor Relations.

Speaker 1

He's done a terrific job in, helping put our deck and press release together and, giving a lot of data within the deck and the press release to simplify our story. And I also wanted to thank Nick Young. Nick is the former president and chief operating officer of Newtek Bank National Association. Nick, as many of you aware, has left our organization, although he's still with us until the May. We haven't banished him to the gulag.

Speaker 1

He hasn't banished us to Siberia. If you'd like to chat with him, you can get him at ny0ung@newtech1.com. Nick, over the course of approximately four years, did a great job of taking a single branch, very manual bank in Flushing, Queens, and creating our digital platform, which today does a fabulous job of opening up 15,000 accounts remotely, transferring over our lending business to the bank, getting through to regulatory audits, which we're very appreciative of. And, the mark of a great company is having a deep bench. Peter Downs, a twenty two year veteran of Newtek, the chief lending officer and former and current president of Newtek Small Business Finance, who is largely responsible for SBA business and its success over the course of two decades has been named president of Newtek Bank, and we're appreciative of having that deep bench.

Speaker 1

We did a lot of listening to shareholders and analysts recently, particularly yesterday and in the evening. We've done a lot of reshaping and structuring of the presentation, simplifying a bunch of different important issues. More importantly, we believe we'll be able to demonstrate today the really attractive progress that we've made, growing deposits, growing loan growth, being compliant, balance sheet growth, and basically moving through the cycle of establishing a portfolio at the bank level, which is very different than what you normally see in 98 to 99% of the other banks. I think one of the things that we wanna stress is the traditional metrics that are being used to analyze banks don't apply here. And I think as you go through the deck and we start to explain things a little bit in more of a granular fashion, you'll be able to appreciate that.

Speaker 1

Once again, part of our challenge is we don't really look anything like a typical bank. Most banks have bank holding companies, which is the publicly traded stock that have very little in them except the bank itself. We actually have more capital invested in other assets and in equity than we do at the bank. I think that's important to note. I think it's important to note that some of the things that differentiate us, we make loans and we sell them.

Speaker 1

It's a good mark that you can sell them. Sell them means that the loans are made in a a good manner where they go into a securitization, whether they're five zero four loans that are sold to other banks, whether or not they are SBA loans, they're done according to SBA guidelines, a business that we've been in for over two decades. Fair value, I think, has confused a lot of investors and analysts. We've been a fair value player almost our entire life, but significantly since 2014, we were a BDC. The CECL reserve accounting, which we have adopted in the bank is fairly punitive because you take the losses upfront and you don't get the benefit in the SBA business of the prime plus three coupon, except into the future.

Speaker 1

We're building a very nice portfolio of those. We still believe very strongly that a lot of the metrics we're being measured on don't hold. Banks, frankly, is a bit of an oxymoron, a growing bank. Most banks our size do not grow. They maintain themselves.

Speaker 1

So if you look at what we're doing here, we we make money. You could see that by earnings. We grow shareholder equity. We believe this is the way banks will operate in the future. Without branches, without traditional bankers.

Speaker 1

Obviously, we're all familiar with AI and the benefits that AI is gonna provide business and industry. We're doing a lot of things that utilize artificial intelligence today. And I think that we're clearly misunderstood. And as a matter of time and data and analysis, there is opportunity in NewtekOne. We feel really good about our progress.

Speaker 1

But to be frankly, we feel bad about the market's misunderstanding. And today's efforts are gonna be directed towards bridging that gap. Once again, I wanna thank you for your time and interest when we go into the presentation and investment. And either way, we appreciate you whether you like us or you're one of the 8.4 eight 1,800,000, stockholders that are currently short the stock. Let's go to slide number three.

Speaker 1

Our mission statement and purpose. Our company is all about providing business and financial solutions to its target market of independent business owners and some people call them SMEs or SMBs, small and medium sized enterprises, small and medium sized businesses. We do not do consumer loans. We do not do consumer checking. We stay away from the consumer banking side of the business.

Speaker 1

NewtekOne acquired what is known now in this Newtek Bank National Association, so it can add depository solutions and real time payments. We view ourselves as a technology enabled company that is now also a depository. That's extremely different than just measuring us on bank metrics. NewtekOne is a financial holding company regulated by the Federal Reserve, utilizing proprietary and patented advanced technological solutions to acquire clients cost effectively. We get six to nine referrals a day.

Speaker 1

This is one of the items that we hang our hat on. We look at it as we built a moat around our business. Replicating that, not an easy thing to do. The customer acquisition and the ability to solution clients on a camera is a unique differentiator. We believe we provide a menu of best in class solutions to independent business owners.

Speaker 1

It makes us cost efficient, a low cost provider, and importantly, with better margins. Once again, we position ourselves as a technology oriented financial holding company, operating a digital bank that operates exclusively using online banking with our traditional physical branches. We realized that a lot of the markets are hyper focused on credit concerns. I also think that the credit concerns are hyper focused just on the SBA seven a loan portfolio, which frankly is a fraction of our business. We have a lot of assets in the ALP business.

Speaker 1

We'll talk about our success in our recent securitizations. We'll talk about our merchant services business. We have diversified stream of opportunities across the spectrum, and we love our SBA business, and it's extremely profitable. And it does very well in a bank infrastructure, but it doesn't size up to typical bank metrics, and we will go into that. Let's go to slide number four.

Speaker 1

I refer to this as our message from the day. First quarter twenty twenty five earnings beat, 35¢ diluted, 36¢ basic. If it wasn't for one analyst outlier at 53¢, I have no idea what they were thinking. I just don't know. It's indicative of the fact that they may not be listening to us when we do these calls.

Speaker 1

However, if you throw that out, consensus was 31. We previously forecast the 28 to 32. I consider that a b. We've maintained our range of $2.10 to two fifty. That would be a projected annual EPS growth of 17% using the midpoint.

Speaker 1

I would say the risk in the range and the midpoint is in volumes of loans, whether it's seven a, whether it's the AOP loans, the alternative loan program. To be frankly, fair, transparent, and accurate, acquiring credits today is harder. It's trickier. There are less attractive credits in the traditional, manner of acquiring clients, which means we have to bring on new alliance partners, which we're doing. There's always a regular pipeline, additional channels, and to grow that business.

Speaker 1

And we're doing that, and we're comfortable with our guidance. Looking at profitability, and looking at us, if you do measure us, the market seems to be forgetting our profitability, but they're hyper focused on the credit metrics. The profitability return on assets in the first quarter '1 point '1 '8 percent versus the average of 90 basis points for 1 to $10,000,000,000 banks, and that's with a heavier loan loss provision in the first quarter. We think the heavier loan loss provision is a good thing for ourselves and for our investors. We're planning ahead.

Speaker 1

It's not inconsistent what we've said for the last several quarters that we see headwinds in 2025. Also important to note, q one is our weakest quarter. You cannot compare q one revenues sequentially with with the prior q four quarter from last year. Go back and look at our ten or twenty years of history. The fourth quarter is always our biggest quarter by very wide margins.

Speaker 1

And our guidance implies a return on average assets of 2.45 for 2025. This is an important bullet on slide number four, the fourth bullet down. Headwinds from our non bank SBA lending subsidiary wind down. I think it's extremely important to note that the loss from NSPF declined by more than 50% by 10,700,000.0 to 5,000,000. This is a segment in our cubes.

Speaker 1

The drag on 2025 should be materially lower than the $28,700,000 loss. When you look at the delta, which is almost, 6,000,000 versus the increased provision, which a good chunk of that is from just, loan volume growth of nine and a half to 13 and a half or 4,000,000, 1 is outweighing the other. I think it's also important to note that as we've historically said, and we'll talk about this when we get to slide number 15, that these provisions and loss characteristics on an SBA portfolio that has ten to twenty five year amortizing loans and it was no balloons. There is a loss curve. And in the bank, we're gonna continue to creep up that loss curve.

Speaker 1

That's why we decided to go forward, effectively double the provision, but our guidance is based upon doubling that provision from the year earlier. Hopefully, that should give people comfort instead of cause. Fifth bullet, alternative loan program. Major success for this company, which began twenty eighteen, twenty nineteen establishing something to, be able to make loans to borrowers that have bigger loan needs, that have greater liquidity. These are better quality loans than the seven eight loans.

Speaker 1

These bought businesses are bigger. The guarantors are stronger. For those of you that wanna get a feel for it, take a look at the DBRS presale memo. You'll see that these types of loans have FICO scores of, I think, seven forty on average. You could see that their weighted average loan to value is about 50%.

Speaker 1

You could see the types of loans go into the pool. We just did a major successful securitization. We had about eight or nine different of the largest institutional investors buy into those bonds. Very successful for the 570 basis point spread between the net yield on the loans going into the special purpose vehicle and the yield on the bonds. That doesn't include 1% for servicing and 3.5 points of origination fee, a very profitable business.

Speaker 1

We particularly believe strongly that we're going to continue to get operating leverage. Our efficiency ratio with the HoldCo declined 71% to 63%, and we have a very low efficiency ratio with the bank, which I think is in the low forties. Core deposits continue to grow. However, this year, we're gonna use up the 350 or 325, 3 hundred 50 million of money that we held at the Fed at the end of last year. So deposits will probably be flat, but the mix will change with more business deposits coming in.

Speaker 1

In the first quarter, I do believe our cost of deposits were about 3.95 down from 4.4 a year earlier. And we've got a lot of high cost CDs that Scott Price and Frank will address, as they do their portion of the call. Slide number five, projections of earnings. Obviously, we had a what we call a 5¢ beat in the first quarter versus our prior projection. Q2, we're taking that down a nickel from 50 to 60.

Speaker 1

Q3, up 10¢. So now we're projecting 60 to 75, on the range. Q four down 10 base ten ten basis points. So consensus is still the same two thirty, but we've changed the mix around slide number five. Slide number six.

Speaker 1

Extremely important to note that when you look at originations, okay, there's a hyper focused on credit for seven a. And we're gonna talk about credit worthiness and credit quality of seven a and what makes a seven a loan. But note, the seven a the, s p five zero four business, the AOP business, these businesses have very few charge offs. Matter of fact, I don't believe as of this date I know it was as of the end of the fourth quarter, but as of this date, I don't think we've ever had a charge off on a 05/2004 loan. On the AOP program, 70 basis points of charge offs historically, I believe it says of q four.

Speaker 1

I do not have numbers as of q end of q one. CRE and c and I loans, very low charge up. These are the higher quality loans. We've actually created a slide to be able to show all the different buckets, all the different portfolios, and how they're accounted for. That's in the deck.

Speaker 1

I think that'll be helpful. Deposits, we do plan on growing total deposits, for the calendar year. I think the mix will change, and we do plan on using up a lot of the cash that we have, at the holding company at the bank, excuse me, that we put on balance at the Fed. Slide number seven, important slide. When you look at net income this quarter, this year versus last, we obviously outperformed on the revenue side, particularly when you look at the pre provision net revenue.

Speaker 1

However, the provision, which we think is appropriate, it's realistic, and it's important to note based upon what we believe the world has changed in the last sixty to seventy five days that reduced, this quarter this year versus this quarter last year. But you got a nice breakout. Obviously, deposits are growing, equity is growing, tangible equity is growing, and the AOP business is growing as well. Going to the right side of the slide on page number seven, I think important items to note, we decided to put NPLs excluding NSPF and including the joint ventures, which aren't calculated because they're off balance sheet. But these are loans that we've made and indicates the credit worthiness of those loans.

Speaker 1

Much lower percentages than what you're seeing on a GAAP basis. The allowance for loans held for investment, 5.4%, fairly hefty number. Slide number eight. Growing shareholder equity. So from q one twenty twenty three when we took over the bank, $6.92 to $10.16 q 1 20 20 5.

Speaker 1

That's 47% growth in two years. That is with a material dividend paid. This is extremely unusual. If you have if you if you don't have the time to analyze and understand Newtek One, this is probably not your investment opportunity. For those that wanna take the time, look into the numbers, and have an understanding that some of the accounting permutations will straighten themselves out over time, that if you believe in what management believes in in the forecast, we're gonna continue to grind down earnings quarter over quarter, pay our dividend.

Speaker 1

This is an opportunity for you to look at. If you're gonna look at the data from a press release and in ten minutes make a decision, probably not your not your basis. Particularly, if you're looking at what I'll call the traditional bank metrics that are coming out of the call report or what you're seeing, on a GAAP basis from a press release perspective. Slide number nine, this is indicative of it. Yes.

Speaker 1

The merchant solutions business doesn't count for tangible common equity. On the other hand, it makes about 16,000,000 of EBITDA and pretax. If you put a valuation on it, low to high, it's about five point $5.45 in cash, $6.42 at the high. It would give you an adjusted tangible book. I mean, the fact of the matter is it's just not part of tangible book.

Speaker 1

But then again, there aren't too many bank holding companies our size that have an asset like this that has reoccurring cash flow. It's in a merchant acquisition space. We've owned it since 02/2002, and it just generates a lot of cash. It's a valuable asset. And most importantly, it plays into our strategy of giving merchant acquirers the ability to get real time payments in card, in Fedwire, in ACH, and see all that information in the Newtek advantage.

Speaker 1

Slide number 10, pre provision net revenue. We have superior industry leading pre provision net revenue. You know, we outperformed in q one, '20 five point 2,000,000 versus 17,100,000.0 a year prior, 47% increase. Our last twelve months, five point eight eight versus 1.26, one point three six. This is based upon things like the merchant processing business, and all of our non interest related activities.

Speaker 1

Now I will say, you know, as we're starting to put on seven loans and building that bigger portfolio, this is going to start to grow and grow and grow. And as you'll hear from Scott and Frank, we've started to retain some of the government guaranteed pieces, which add to our unrealized fair value increase for the quarter. That was a big question that everybody had. That's based upon the market price of the government guaranteed bonds. There's no major secret or hidden issue there.

Speaker 1

We typically sold everything. We've held some of that back this quarter, and we'll continue to do a little bit of that going forward. That is a change. You'll see a lot of granularity on that in the queue then when that gets released. Slide number 11, still focusing on PPNR.

Speaker 1

The prior slide was really at the holdco. This is at the bank. The bank's PPNR was 13.2% of average loans for Q1. It averaged 19% for the entire year last year versus peer average of 2.1. Bank's loan loss provision is average covered net charge offs by 3.9 times over the last four quarters.

Speaker 1

I think it's extremely important to look at PPNR to demonstrate that we've got very healthy earnings that can cover the loan loss provisions. I wanna point this out, and everyone seems to be forgetting this. The definition of an SBA seven a loan, the definition of it is a loan that does not qualify for normal lending standards at a bank. Okay? That means, in plain English, you're gonna have higher losses on the uninsured piece.

Speaker 1

The benefit you get is a government guaranteed bond that gets created on 75% of the loan that you could sell for a cash gain. Now a lot of people say, I don't like gain on sale. It's not reoccurring. It's not repetitive. It's been a reoccurring event for us for twenty years.

Speaker 1

We're gonna continue making money. We're gonna continue to sell those government guaranteed pieces if that's our our strategy going forward, and I believe it will be because it creates the greatest return on equity and greatest return on assets. And after a period of time, people will begin to get used to this. Will begin you to continue to earn money. The book value will grow.

Speaker 1

The dividend will be paid, and everybody will live happily ever after. On slide number 12, this slide is the beginning of being able to break out all the different loans and all the different buckets, so you could get a much clearer view as well as the migration over the course of 2024 to the first quarter. I think it's important to note threethirty onetwenty twenty '5, '1 point '9 billion of total loans. You can see the pie chart there. This includes the bank.

Speaker 1

It includes the non bank and it includes the joint ventures. So the joint ventures are off balance sheet, but we have a lot of loans that are in our joint ventures or in our securitizations. So it is important to understand this smallish sized bank makes a lot of loans. When you do a billion dollars of SBA seven loans, only 250,000 sits on the books of the bank. We have a lot of activity.

Speaker 1

We have more capital deployed in activities outside of the bank than in the bank. The earnings power outside of the bank is greater than what is in the bank. These are things that the metrics do not apply to NewtekOne, and that's why we don't position ourselves from a investment perspective as a bank holding company or a financial holding company. We're a company that provides financial and business solutions and also has a depository. Then one might say, why did you buy a bank?

Speaker 1

We bought a bank because the customer goes to their bank interface three to five times a week, 12 to 20 times a month, and that's a great interface for us to be able to provide real value through the Newtek advantage to the customer base. Slide number 13. This is an important slide. A more important slide as well as slide number 15. I think the nice thing about slide number 13 is it excludes NSPF.

Speaker 1

Some people say why excluding NSBF? Well, we have to be honest with ourselves and our shareholders and the Newtek Small Business Finance portfolio made a lot of loans in '21, '20 '2, and '23, which was I'll refer to it as zero rate environment, a three to 4% prime environment. Well, prime went up to eight and a half. I think it's currently at seven and a half. You cannot have a four to 5% rate shock to a business and not have it affect its charge loss.

Speaker 1

Important to note, those nonaccrual that are sitting up at NSPF, they've already hit book. They've already charged off against earnings. And guess what? We've earned through that. And as you'll see from slide 15, that drag is beginning to diminish.

Speaker 1

I think it's important that the growing NPL levels are within the company's expectations and business plans and are consistent with the company's loan origin aeration history over the course of time as a BDC and prior to a BDC. Once again, the definition of an SBA loan is one that should generate higher losses. And I have to talk about the emphasis on credit. I'll call it the overemphasis. I always think about the Casablanca movie with Humphrey Bogart standing in front of the police officer, and the police officer saying, oh my god, there's gambling going on in that casino.

Speaker 1

Oh my god, you have higher losses than in the traditional bank. Well, yes. It's because we make loans with higher margins. And in a CECL environment, you get hit with that reserve upfront. You don't get the prime plus three coupon for years later as you build the portfolio.

Speaker 1

But everybody that knows and understands CECL, ultimately, this leverages it out, it reverses itself, and the coupon starts to come in. So, yes, there is gambling in the casino. Not to say that making an SBA loan, which we've got over two decades of history. We've got 13 securitizations in the market. None of them have been downgraded that we don't know how these particular portfolios perform.

Speaker 1

So we're proud of this business. We're comfortable with this business. We have enough loan loss provision. We have enough capital, and the business makes a lot of money. We look forward to getting to slide 15.

Speaker 1

One other aspect of NPLs. NPLs on an SBA portfolio given that the loans are ten years amortizing to twenty five years amortizing without a balloon. These NPLs hang around longer. So the weighted average seasoning on our NPLs is, like, eighteen to forty months. They don't go away that quickly.

Speaker 1

They hang around. And that's because we chase the p g's. These are business owners that have personal and business assets. They file multiple bankruptcies. It's hard to get through the liquidation process.

Speaker 1

So early on, as you're building a portfolio and loans are migrating into this category, the liquidations don't happen that fast. So we're ramping up the default curve. But what you're gonna see on 15 is that ultimately you get to a number, and that starts to decline. It will show that on slide number 15. Slide number 14 breaks out a lot of things I just stated.

Speaker 1

94% of our loan loss reserves are attributed to the SBA seven a portfolio. This will show the percentage mix of loans at n b and a, the percentage mix of n b and a loans that are held for investment, and the percentage mix of the allowance for credit losses, all on slide number 14. Slide number 15, I'll say this is my favorite slide. We've said this historically, when we had really material increases in non accruals, particularly q two twenty twenty four. We indicated that we believe in the not too near distant future, this would start to decline.

Speaker 1

So as we go to slide fifteen, fifteen eight, 12 two, eight eight, five seven. So we're starting to see this burn down. The NSBF loss, which is segmented, $10,700,000 loss q four twenty twenty four, '4 point '9 million loss q one twenty twenty five. This company is in a wind down. There's approximately $200,000,000 of capital in this business.

Speaker 1

The loans are sitting in a securitization, so the cash flow is used to pay off bonds. We called two bonds recently. There's three bonds left. Those will get called. That'll free up the cash.

Speaker 1

It'll free up the equity. These are all valuable things. If you don't get into the weeds in understanding this part of the business, you're on the wrong conference call. There's a Citibank call down the block. There's a lot of small other banks to look at.

Speaker 1

We just don't look like them. So if you wanna do the work, at this point, I would say you'd be pretty well paid for the work that you're gonna do. There's an interesting opportunity here. % of the NSBF portfolio is aged twenty four months or more. We do believe the law should continue to decrease as balances continue to decline.

Speaker 1

I'll also note that this portfolio is 41% of loans on the balance sheet on a GAAP basis, and it's now down to 21%. I'd now like to and hopefully, we fixed our technical problem, with Scott Price. I'd like to turn this, rest of the presentation over to Scott Price and Frank. Scott, are you there?

Speaker 2

I'm here, Barry. Thank you. Good morning, everyone. Slide 16 shows our deposit growth through and the mix as of March 31. You'll note that deposits were relatively flat when compared to twelvethirty onetwenty four with the mix shifting to core deposits in the business and consumer spaces and slightly lower brokered funds.

Speaker 2

Our average cost of deposits at Newtek Bank were approximately 4%, and we expect that to drift down to roughly 3.8% to 3.85% for the full year of 2025. We did lower our rate on high yield savings during the quarter as well as our rates offered on our six month consumer CD. It's important to note that we have approximately $250,000,000 of consumer CDs that will mature or renew in the second quarter of twenty twenty five. Those CDs will be maturing at rates that approximate, approximate 5%. Our current offered rate is around four and a quarter.

Speaker 2

It could drift up, depending on retention. And so we expect our our net interest margin as well as the offered rate or, excuse me, the weighted average rate on our, on our deposits to drift down, over the course of the year. We expect deposit growth in our business category, which is much lower cost in the consumer space, and we will be exploring the brokered market as we move through the year. This will all contribute to lower costs as we move from here and contribute to the positive carry on the SBA seven loans that Barry mentioned earlier. So with that, I'll turn the call over to Frank.

Speaker 3

Thank you, Scott. Turning to slide 17, snapshot of our net interest margin, which has expanded year over year and also quarter over quarter. Year over year net interest income increased about 56%, up from above and beyond the average earning asset increase of about 52%. And I'm looking at a linked quarter basis comparing to Q4, the expansion in NIM is about 24 basis points compared to the 12 basis point increase year over year. We've also included a look at our adjusted NIM, including the loans and the JVs, which would expand NIM, which would increase the expansion in NIM to about 27 basis points.

Speaker 3

And when thinking about the securitization that was closed in the second quarter, was closed last month, that will help to increase that expansion in NIM due to the higher advanced rate on the securitization. All of that, you know, our adjusted NIM should continue to benefit from the continued growth in our ALP program. Turning to slide 18, we're in an enviable position where our net interest income comprises 78% of our revenue. Building off of Barry's comments earlier, if you look at the bar chart on the right, the top bar chart on the right, our gain on sale of loans did increase during the quarter given the change in our cadence to hold the government guaranteed portions of the loans a little bit longer. If we're looking at the prior quarter, we sold about $193,000,000 of government guaranteed loans, which is down about 50% to about 101,000,000 this quarter.

Speaker 3

Those loans are now held on the balance sheet and are fair valued at the market, given their government bonds. So that is a shift that we're seeing between the gain on sale and the increase in the fair value option on the loans. With the sale of NTS, we also no longer have the benefit of the net interest income on the tech and IT support. However, it still remains that our non interest income is a dominant source of our revenue. Flipping to slide 19, our scalability is evidenced by the natural aspect of our business model being a fully digital bank.

Speaker 3

Despite the 42 growth in assets year over year, we are seeing expenses, operating expenses remain flat, which positions us well moving forward to scale the business. We've seen an efficiency ratio decline year over year of about 9% from 71% to 62%. And also given that given our business model being fully digital, did announce our lease terminations, which we expect should have a positive benefit by decreasing expenses about $2,000,000 for the remainder of the year and annually going forward. With that, operator, I think we can turn to Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press 1 1 on your telephone and wait for your name to be announced. Our first question comes from Crispin Love from Piper Sandler. Please go ahead.

Speaker 4

Thank you. Good morning, everyone. First, just on the net gain on loans accounted for under the fair value option, been elevated in recent quarters. But can you speak to how sustainable you expect those gains to be throughout 2025 with gains related to ALP loans, not the SBA side? And can you just walk through some of the math there on how you generate those gains on the ALP side?

Speaker 4

Thank you.

Speaker 1

Sure. Crispin, on the ALP side, if you take a look at the recent securitization press release, we securitized approximately two fifteen million dollars of loans with a 13.3 o gross coupon. After servicing, of which we get a hundred basis points of the servicing, it's 12.3 o. The net yield on the bonds was about 6.62, I think. So approximately 570 basis points.

Speaker 1

So, you know, I I ask all of you analysts and investors, you have to do your own math. But we put, fair value on those loans, and we discount them back. A lot of this data is gonna be in the queue, and it's been in the I believe it's been in the k in terms of what we state that we think that the anticipated loss frequency and severity will be. In, the DBRS memo, and all the information that's public, you could see what the prepayment speeds are. We believe our cumulative net charge offs will be between three to three and a half percent, and, we have the loans valued as such.

Speaker 1

So that's how we come up with our pricing. Okay? You'll have to come up with your own pricing. I think, you know, investors, analysts come up with their own sense of what the value is as well. But when you think about the concept of getting a 570 basis point spread per year on loans that have 5% prepay penalties for the first three years and then three in the fourth, they're not going away that quickly.

Speaker 1

Our historic charge offs on this portfolio, I think it's currently about 580,000,000, is about 70 basis points. Now we think they're gonna grow over time, which is why we have them valued using our loss curves at about between three to three and a half percent. So do we think that's sustainable? We do. We forecasted, you know, 500,000,000.

Speaker 1

That's gonna be a challenge. It's always a challenge. It's never easy, but that's a growing book of business. Now the average loan size on that book is 5,000,000. So it's a hundred units.

Speaker 1

K? It's a hundred units. We did 2,400 loan units last year. We'll do 2,700 loan units approximately this year. So the answer to your question is, obviously, and I appreciate the question because it it puts us on record.

Speaker 1

We believe that our earnings and our projections are real, and they're sustainable. Needless to say, anybody that tells you they can 100% accurately predict the future, they're full of it. Okay. This is extremely difficult. We've seen public companies pull their guidance, no guidance, miss badly.

Speaker 1

You know, we took this bank from a dead start and built a real solid business opportunity in it, which I hate to say we're not getting a lot of credit from for for our technological business, opening up 15,000 bank accounts, moving the lend this lending business in, going through to regulatory audits, hiring people. And by the way, you know, people coming in and out, that's just a that's just that's natural. That's just a natural thing. People come and go all the time. So, yes, I believe it's sustainable.

Speaker 1

The seven eight business, we've been in for over two decades, So we know it pretty well. We know it in high rates, low rates, good good markets, o eight, o nine. We've we've seen a lot of these shows before. So I do appreciate the question. Thank you.

Speaker 4

Great, Bert. No, I appreciate all the color there. And then just secondly on the management changes late April, you've made a few changes, President, CFO, some other shifts in roles. In your prepared remarks, did call out your deep edge. But can you speak to the rationale and timing of some of those moves?

Speaker 4

Also, your views on splitting the CFO roles between the bank and the holding company? And do you think there's more changes to come? Do you need to bring in anyone else for certain roles? Or you feel like you're in a good place today?

Speaker 1

Great question. As you could tell, I'm fairly plain spoken. Sometimes I say things that aren't necessarily politically politically appropriate. But one thing I will tell you, yeah, there's gonna be plenty of changes. Okay?

Speaker 1

That's the only thing I could predict. And I and I say that from the standpoint that markets change, people change, the world changes, and we make decisions to flow with that relative to the splitting of the, CFO role. The bank obviously is an extremely important part of what we do, and Scott's gonna be hyper focused on that. He's gonna pick up more of those responsibilities relative to ALCO deposit gathering. Not that he didn't have them previously, but it it's good for Scott to have a smaller sphere.

Speaker 1

As you could tell, we do a lot of things here. So it's not like, you know, people aren't you know, are working thirty hours a week. They really have to work a lot to be able to get the job done. Frankly, Maria, who's chief accounting officer for everything, easily fits into the CFO role at the holding company because he was involved in all the accounting. So there's nothing strange or unusual here.

Speaker 1

Nick Young, and feel free to call him. You got his email. He hasn't vanished us. We haven't vanished him. We're all friends.

Speaker 1

He loves us. He built a tremendous opportunity, and he's been given another opportunity at a larger organization. When he is ready to talk about it, he'll tell you where he's going, but it was done on very friendly terms. The one thing you brought about was, you know, changes in personnel. That freaks everybody out.

Speaker 1

Doesn't freak me out. I mean, I I say that we hold people accountable, and this is not an easy place. I tell staff this, and I tell Newtek isn't for everybody. We're a disruptor. We're an innovator.

Speaker 1

We do things differently. So people come here thinking that it's gonna be a piece of cake. They're gonna do what they did at other organizations for five years to it's not the same. It's different. It's just a whole different organization.

Speaker 1

So, I, you know, I do think we're gonna continue to have change, but I will tell you that, you know, I've got five key executives that have been here at the top of the of the company for ten to twenty years. I've got I've got many employees. My top professional sales and marketing person has been here for over twenty years. Head of liquidations has been here fourteen or fifteen years. Peter Downs has been in the organization since 02/2003, And he took over as president of the bank.

Speaker 1

I did try to talk him out of it. I said, I'm not paying you anymore. Do you really wanna do this job? And he said, yeah. I wanna do it because we're gonna prove everybody wrong.

Speaker 1

And, that's Newtek. So I I I really, you've given me two questions that for me were down the middle of the down the middle of the plate. I appreciate it. Thank you, Crispin.

Speaker 4

Thanks. I appreciate all the the answers there.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Tim Switzer from KBW. Please go ahead.

Speaker 5

Hey. Good morning. Hope you guys are doing well.

Speaker 1

Thanks, Tim. Can you

Speaker 5

help us parse through the various pieces that drove the $18,000,000 of fair value gains this quarter? I know there's that $5,700,000 benefit sequentially from the lower NSBF losses, but this line item, it still doubled quarter over quarter when ALP originations were about two thirds the level of Q4, and I think spreads kind of generally widened in Q1. So I can you help us kinda parse through different pieces there? What drove that?

Speaker 1

Sure. So a couple of things, Tim. I would disagree that spreads widened. You notice, number one, we wound up, in our AOP securitization getting an 85% advance rate, and then we sold a double b class with another two points. So we got much more leverage on that securitization, and, we got very good execution on the bonds as well.

Speaker 1

So that actually worked to our favor. In the queues, you're gonna get a lot of breakout specifically. Frank or Scott, do you know what the gain on sale was for the, SBA piece of the puzzle that everyone's so wigged out about?

Speaker 3

Yeah. It was just shy of $8,000,000.

Speaker 1

Okay. So so, Tim, eight million dollars are in government guaranteed participation certificates that ultimately will get sold into the market that we're keeping on the books for the high coupon and the spread income that the market loves so much for a period of time, and then it'll get sold.

Speaker 5

Okay. For the SBA piece, could could you was that from originations this quarter? And if you had an $8,000,000 from the SBA originations, if I look at your 10 from, from '24, you get a total $493,000 gain for the SBA seven a guaranteed loans. Mhmm. How do we get to 8,000,000 for q one?

Speaker 1

It's mostly from this quarter, and it just depends upon the volume and the market price, which was the market price is the market price. We don't we don't make the market price, and it's just based upon the volume. So you could do the math and, yeah, as I said, you'll see it you'll see it in the queue when it comes out next week.

Speaker 5

Okay. And are are you able to help us kinda quantify the impact of the ALP loans originated this quarter on revenue and maybe what was, the average fair value premium on that?

Speaker 1

You've gotta do your own modeling. We do our modeling. We put a lot of detail and data into what our assumptions are in the queues, but I I can't give you my model. You won't give me your model. I can't give you my model.

Speaker 5

Gotcha. Okay. And then there's been some changes at the SBA, recently for mostly for loans below a million dollars. Can you talk about the impact of the return of that 55 basis point lender service fee on the industry and maybe how it would impact like gain on sale margins? I appreciate it, Tim.

Speaker 5

One other thing,

Speaker 1

did you see that they're looking to do $10,000,000 loans on manufacturing?

Speaker 5

Say that again, Barry.

Speaker 1

There's a bill in congress to increase the loan size from 5,000,000 to 10,000,000 on manufacturing loans. So that that's item number one. Item number two, supplies have started to shrink in the secondary market, which tends to be lifting prices as well as supply and demand issues and prepayment speeds slowing, which also is lifting prices. Those are the positive aspects of trying to figure out what the gain on sale would be. The negative aspects, you're referring to, is and we've already factored it into our forecasts.

Speaker 1

Two things that the SBA is trying to do. One, bring the program back to a zero subsidy. I mentioned the the first part because the current administration, although it's made some changes to I'll use the word tighten underwriting guidelines, which we never loosen. I think it's important to know. They want to get this back to a zero subsidy.

Speaker 1

So one item is the upfront fee that borrowers pay that have nothing to do with us, about two and a half points, they've insured it back. It makes sense. If you're insuring and you're providing a government guarantee, you should get a premium for it. The other aspect is the 55 basis points which you're referring to, which basically reduces our coupon net to the investors. That's probably on a net basis somewhere between a half a point to a point difference in price on gain on sale.

Speaker 1

We have that factored into our projections, and there are ways to deal with that. A lot of it's based upon mix of ten year paper versus twenty five year paper, volume increases, and things of that nature. But that could have an effect holding everything else constant, not being nimble, not adjusting. Now I will also state that probably won't have much of an effect at all on q two prices because you get the guarantee and you get your pipeline. It could affect once again holding everything else constant.

Speaker 1

That's really important in Q three and Q four. It could have an effect on gain on sale holding everything else constant.

Speaker 5

Got it. That was that was very helpful. Sounds like a similar impact to what some of your competitors have said too. There there was another change by the SBA as well, going back to requiring full underwriting for these smaller dollar loans. What is the lift required for Newtek compared to what you guys are doing previously, if anything?

Speaker 5

And then it it seems like this could maybe be an opportunity for Newtek to take market share from competitors who are maybe newer to the space that haven't had to, deal with this before, which I know Newtek has, historically.

Speaker 1

Yeah. I appreciate that. Look. They have eliminated the scoring gold lenders. That's sort of a kind of a slang expression like, I'm gonna put a credit score on it.

Speaker 1

I'm not gonna do a full credit memo, and I get a government guarantee. That is going to dramatically reduce the competitors, particularly the nonbank lenders that don't have the the infrastructure and the staff. I mean, I I know one nonbank lender that's got, like, 20 or 25 employees. I I don't know how you do this business with that, because they're getting brokered loans. They have a couple of underwriters look at them.

Speaker 1

They pay the broker a fee. I mean so I think it will from a competitive advantage standpoint over the long term, I think it will be helpful to us. But, you know, we we're gonna continue to do our business, and we've never we were never we've never loosened our underwriting guidelines on on those types of loans anyway. We always went to the full full gamut. So we we appreciate the question.

Speaker 5

Yeah. Thank you for all the color, Barry. Appreciate it. Thank you, Tim.

Operator

Thank you. Our next question comes from Steve Moss from Raymond James. Please go ahead.

Speaker 6

Good morning.

Speaker 1

Good morning, Steve.

Speaker 6

Good morning, Barry. Maybe just following up on the SBA loans here. How long that you realize that fair value gain, how long do you guys plan to hold the loans on balance sheet for? And just kind of curious like how we think about the amortization of that you know, if it's for an extended period.

Speaker 1

Appreciate it, Steve. I think it will not be for an extended period. I can't tell you whether it'll be one month, two months or three months, but it won't be for it won't be for a long period of time. It shouldn't if you follow our projections, I think that's a good guide.

Speaker 6

Okay. And then in terms of the, I guess the other thing, just kind of thinking about it Barry here in terms of, you highlighted that there's definitely some tougher credit year for the NSPF portfolio last year. And I guess my question here is I think about like those vintages being, let's call it 2021, '20 '20 '2 plus or minus versus the current originations of SBA loans kind of feels like a bit of a tougher environment for me here in the current situation for SBA loans. So I'm curious, like, what gives you comfort that credit performance for the more recent vintages will be better versus the NSBF performance?

Speaker 1

Yeah, that's a key question, Steven. A little bit of a seesaw here. So number one, the current loans at the bank, we believe you're gonna keep having increased charge offs and non accruals. Now that's why we almost doubled the provision. I think the provision went from 26,000,000 to about 50,000,000 for the whole calendar year, almost double.

Speaker 1

Now, with that said, loans that are originated in a seven and a half percent prime environment where you you're testing them, you know, up three and down three are in much better shape to qualify for the underwriting than loans that are underwritten at a, you know, three to 4% prime. Now the drag at NSBF is gonna dramatically diminish over time. The other thing too is understand we keep paying down debt because those loan most of those loans are in securitizations. So the interest expense is gonna go away at NSBF. So there's a lot going on at NSBF to reduce the drag, which was 28 and a half million.

Speaker 1

And if you straight lined, which I'm not suggesting, but if you straight lined it, you're at 20. Okay? So there's a major difference there at NSBF. That's the work that you have to have an opinion on that one way or another if you're gonna figure out what the earnings forecast is for us. At the bank, we're I have said this in q two last year, q three, q '4.

Speaker 1

Go back to the transcripts. I have said we're gonna be in a tougher credit environment. Lo and behold, we're in a tougher credit environment. And that's putting Trump aside for the moment and all the changes that the administration is doing and the uncertainty. So a, the way to manage this, which our team's got two decades of experience, it's capital, it's provision, and margin.

Speaker 1

Okay? So I strongly believe that our ability to manage through this from a risk perspective is better. I wanna flip it one thing because you brought to light something I thought about. On the deposit side, if you were a depositor, where would you be more likely to leave to go to a four twenty rate on a government money market fund? At a one and a half to 2% at a bank that's paying you that and charging you for all those fees, where would you be most likely to leave or migrate your money or where you're paying 4%?

Speaker 1

So here's my opinion. We're paying a market rate of interest on deposits. That means, in my humble opinion, those deposits are stickier as long as we pay a market rate that's close to the government money market rate. If I had to rely on low cost deposits in the market where you can move money with a click of the mouse, swipe of a finger, I'd be nervous. That's more risky than what we're doing.

Speaker 1

And we've got good NIMs because on a risk adjusted basis, despite the over exaggeration of, oh my god, every, you know, conference call, it's all about the SBA portfolio and credit. And and meanwhile, we got a lot of other things going on here, but I get it. That's that's what everybody wants to focus on. We're gonna go through this. And over the course of time, all of these curves will mature.

Speaker 1

They'll work itself out, and we'll be just fine. But that's my answer. We are provisioned in the bank. We'll do the Humphrey Bogart thing next quarter to, oh my god. There's gambling in that casino.

Speaker 1

Oh my god. They're they're creating a new portfolio that's ramping up the credit curve. Non accruals are growing. And by the way, they don't go away that quickly because we chase them. So I think it's very important to try, not necessarily you, but investors, to try to understand our model, see what we're doing differently, look at the presentation and see what we're doing and why it doesn't apply to a traditional bank holding company that's got nothing at the holding company except for the bank who basically makes no risk to low risk loans with low charge offs and their entire business is predicated on the hope that those depositors stick in the bank.

Speaker 6

Okay. And maybe just follow-up on the SPF portfolio. Could you share with us what the cumulative losses for that portfolio in the last two years have been?

Speaker 1

It would depend upon the vintage year, Steve. But what I can tell you is our CECL calculations assume, and it it it, you know, it changes depending upon the vintage year. Over the future is about an 8% cumulative charge off.

Speaker 6

Now Okay.

Speaker 1

If that grows, that's gonna those charge offs are gonna occur over the course of multiple years. So it's not all gonna hit. See, a normal in a normal credit card portfolio, a car loan portfolio, loan goes bad, boom. It gets liquidated and charged off, and it's gone. With us, these hang around for long periods of time.

Speaker 1

If you go back and you look at all our public filings, you'll see we've always earned money. We've always paid a dividend, but the NPLs do hang around for long periods of time because we have a duty in the SBA world to collect on it. It's different in the other areas of lending.

Speaker 6

Okay. And then I guess if I could go back to the fair value gain, $18,000,000 if we could just break out the segments. I guess I missed the part there. 8,000,000 was from the SBA loans being held for sale and then the remaining or roughly 8,000,000, let's call it. And then the remaining 10,000,000, where did that come from?

Speaker 1

I'm gonna and maybe Frank and Scott can chime in here. Think it's it would be servicing, possible servicing gains could be gains from five zero four as well as fair value of ALP loans.

Speaker 3

That's right, Barry. It's the fair value of ALP is the majority of that. And just to reiterate my comments earlier, the fact that that number and Tim, you mentioned it earlier on the SBA fair value increase so much is just given the fact that we are, as Steve and Barry discussed here, holding those loans this quarter. So to Barry's point, you know, won't be holding them for too long, but just the fact that there's more balance, principal balance on the books this quarter is increasing that SBA number. We're still pricing them to the market as we've always done.

Speaker 6

Okay. And then I guess the one more for me here just in terms of the earnings ramp throughout the year. I'm assuming that there's just more of a weighting towards gain on sale income later in the year? Is that kind of a fair way to characterize the higher range for the fourth quarter earnings versus

Speaker 1

the first? Yeah. Better way to characterize it, Steve, is that as the year goes on, we do more loans in q two than q one, q '3 than q two, q '4 than q three. And when we make a loan, it has inherent value in it. 75 of it is government guaranteed bond, which we're able to sell.

Speaker 1

An ALPA loan is originated based upon our capability at very large spreads to cost of funds. So, yeah, the answer is, yeah. And and by the way, this is entirely different than how a normal bank operates. And and we don't wanna be a normal bank. They have really lousy returns on equity and returns on assets.

Speaker 1

Alright.

Speaker 6

Well, appreciate all the call here. I'll step back. Thanks, Barry.

Speaker 1

Thank you. Okay.

Operator

Thank you. Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead.

Speaker 2

My questions have been asked and answered. Thank you.

Speaker 1

Thank you, Chris.

Operator

Alright. I am showing no further questions at this time. I will turn it over to Barry Sloan for closing remarks.

Speaker 1

Alright. Thank you. I appreciate everyone's interest and looking into the company. The questions were great today. It's in-depth.

Speaker 1

We may have different we have disagreements, but we have strong opinions on what we're doing. We've been operating in this space for over two decades. We're good stewards of risk, and we do think we're coming into a difficult time in the market and the environment, and we don't take that lightly. But we're very well prepared for it. We've weathered weathered these storms and flourished in them, and we think we're well positioned to do that going forward.

Speaker 1

So I wanna thank the management team. I wanna thank, Scott and Frank and Bryce and everybody that helped put the presentation on together. We have a lot of new data for people to look at and analyze and look forward to producing the queue, which will give people a lot more information. So thank you very much. I wanna thank the analysts for their questions and participation.

Speaker 1

Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Speaker 1

Thank you.

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Key Takeaways

  • NewtekOne reported Q1 EPS of $0.35 diluted, beating consensus of $0.31, and reaffirmed full-year EPS guidance of $2.10–$2.50 (17% growth), projecting a 2.45% ROA in 2025 versus a 0.9% peer average.
  • The wind-down of its non-bank SBA lending subsidiary (NSPF) cut losses by over 50% to $5 million in Q1, and that drag is expected to shrink further as portfolio balances decline and securitization bonds are called.
  • Its Alternative Loan Program securitization achieved a 570 basis-point spread (13.3% gross coupon vs. ~6.6% bond yield), driving fair-value gains, improving hold-co efficiency from 71% to 63%, and boosting pre-provision net revenue.
  • Newtek’s fully digital, AI-enabled bank grew assets 42% year-over-year while keeping operating expenses flat, expanded net interest margin ~24 basis points sequentially, and lowered deposit costs to ~3.95% with a shift toward core business deposits.
  • The diversified loan portfolio (SBA 7(a), 504 and ALP) maintains historically low charge-off rates outside NSPF; rising NPLs align with CECL loss-curve expectations and are projected to decline with seasoning.
A.I. generated. May contain errors.
Earnings Conference Call
NewtekOne Q1 2025
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