Executive Summary / Key Takeaways

• NewtekOne is fundamentally a technology-enabled provider of business and financial solutions targeting the independent business owner (SMB) market, differentiated by its branchless digital bank and integrated service ecosystem, positioning it distinctly against traditional banks and fintechs.
• The company's business model generates outsized profitability metrics (ROAA, ROTCE, Efficiency Ratio) compared to banking peers, driven by high-margin lending activities (SBA 7a, ALP) and diversified noninterest income streams (Payments, Servicing, etc.), which management argues provide superior risk-adjusted returns despite higher expected loan losses in certain portfolios.
• Recent financial performance, including Q1 2025 results, demonstrates continued loan and deposit growth, expanding net interest margin, and robust noninterest income, supporting management's confidence in achieving its 2025 EPS guidance of $2.10 to $2.50, implying significant growth over 2024.
• Key strategic accelerators include the expansion of the Alternative Lending Program (ALP) via securitizations, growth in lower-cost business deposits leveraging the "Newtek Advantage" portal, and ongoing investment in technology and staff to enhance operational efficiency and client value proposition.
• While navigating expected credit seasoning in certain loan portfolios and facing competitive pressures, NewtekOne's strong capital position, proactive provisioning, diversified funding sources, and unique technological moat are viewed by management as critical strengths mitigating risks and supporting future growth.

A Differentiated Model for the SMB Market

NewtekOne, Inc. (NASDAQ:NEWT) operates as a financial holding company with a core mission to provide a comprehensive suite of business and financial solutions to the vast market of independent business owners and small-to-medium sized businesses (SMBs) across the United States. Unlike traditional banks that rely on physical branches and a conventional banker-led model, NewtekOne distinguishes itself through a technology-enabled, branchless approach centered around its nationally chartered digital bank, Newtek Bank, National Association, acquired in January 2023. This strategic shift from its prior structure as a Business Development Company (BDC) was driven by the desire to integrate depository solutions and real-time payments into its existing offerings, creating a more complete ecosystem for its target demographic.

The company's business model is fundamentally different from that of most banks in the $1 billion to $10 billion asset range. While traditional banks often focus on low-margin, low-charge-off assets and rely heavily on net interest income derived from low-cost deposits, NewtekOne generates a significant portion of its revenue from noninterest income, including gains on loan sales, fair value adjustments, payment processing fees, and servicing income. This allows the company to pursue high-margin lending opportunities, such as SBA 7(a) and its proprietary Alternative Lending Program (ALP), which, while potentially carrying higher expected loss rates than conventional bank loans, are structured to provide superior risk-adjusted returns.

In the competitive landscape, NewtekOne faces rivals ranging from large traditional banks offering SMB services (like JPMorgan Chase (JPM)) to specialized fintech lenders (like LendingClub (LC), Enova International (ENVA), Upstart Holdings (UPST)) and payment processors (like Block Inc. (SQ)). NewtekOne's key competitive advantage lies in its integrated platform and regulatory licenses. The "Newtek Advantage" business portal serves as a central hub, offering clients analytics, document storage, and transactional capabilities across banking, payments, and payroll – a level of integration not typically found in competitors' offerings. This technology-driven approach, supported by the patented NewTracker referral system, enables cost-effective client acquisition (generating 600-900 referrals daily) and operational efficiency, contributing to its notably low efficiency ratio compared to banking peers. While competitors like Block excel in payment processing speed and firms like Upstart leverage AI for faster lending decisions, NewtekOne's strength lies in its comprehensive, relationship-based model delivered digitally, combined with its expertise in complex lending products like SBA loans and its growing ALP. The company believes its focus on providing tangible value through services like zero-fee business checking and integrated solutions fosters customer loyalty, differentiating it from competitors whose deposit bases may be less sticky.

Financial Performance and Operational Execution

NewtekOne's financial performance reflects its unique business model, consistently demonstrating profitability metrics that significantly exceed industry averages for banks of comparable size. In the first quarter of 2025, the company reported net income of $9.4 million, or $0.35 per diluted share. While net income before taxes saw a year-over-year decrease, this was primarily attributable to a substantial increase in the provision for credit losses ($13.5 million in Q1 2025 vs. $4.0 million in Q1 2024) and higher interest expense on deposits, partially offset by a notable increase in interest income on loans.

Interest income on loans surged to $34.5 million in Q1 2025, up from $25.0 million in the prior year period, driven by higher average balances of loans held for investment and held for sale, reflecting strong origination volumes in both SBA and ALP programs. Interest expense increased to $24.0 million from $18.2 million, primarily due to higher costs associated with deposits ($9.8 million vs. $5.6 million). The average cost of deposits at Newtek Bank was approximately 4% in Q1 2025, though management expects this to decline throughout 2025 as higher-cost CDs mature and lower-cost business deposits grow.

Noninterest income remained robust at $52.4 million in Q1 2025, compared to $49.4 million in Q1 2024. While net gains on sales of loans decreased ($13.0 million vs. $20.3 million) due to lower sales volumes and market premiums as the company held guaranteed portions of SBA 7a loans longer, this was more than offset by a significant increase in net gain on loans accounted for under the fair value option ($18.1 million vs. $2.8 million), driven by holding guaranteed SBA portions longer and increased ALP/504 originations. The Payments segment continued to be a strong contributor, generating $11.4 million in noninterest income in Q1 2025. Other noninterest income also increased, reflecting higher loan origination fees and gains on joint ventures. The divestiture of the Technology segment resulted in the cessation of its income contribution ($5.8 million in Q1 2024).

Total noninterest expense remained relatively stable at $41.2 million in Q1 2025. While salaries and employee benefits increased slightly due to higher benefit costs, this was largely offset by decreases in technology services expense (following the NTS sale) and professional services expense (related to the NTS disposition). Other loan origination and maintenance expenses increased commensurate with higher loan volumes.

Newtek Bank's profitability metrics remain exceptionally strong, with a Q1 2025 ROAA of 1.18% (compared to an average of 0.90% for $1B-$10B banks) and a PPNR of 13.2% of average loans (vs. a peer average of 2.1%). At the holding company level, ROAA in Q1 2025 was 1.18%, with ROTCE of 12.6%. These metrics, while influenced by the higher provision this quarter, underscore the underlying earning power of the business model.

Loan Portfolios, Credit Risk, and Capital Strength

NewtekOne manages a diverse portfolio of loans across its Banking, Alternative Lending, and NSBF segments. The Banking segment holds SBA 7a, 504, CI, and CRE loans, while the Alternative Lending segment focuses on ALP loans (held for investment or sale for securitization). The NSBF segment contains the legacy, run-off portfolio of SBA 7a loans held outside the bank.

Credit risk is a key focus for investors, particularly given the nature of SBA lending and the current economic environment. The provision for credit losses saw a significant increase in Q1 2025, reflecting higher net charge-offs, specific reserves on impaired loans, and growth in the held-for-investment portfolio at amortized cost. Non-accrual loans held for investment also increased, a trend management anticipates as the bank's relatively new 7(a) portfolio seasons along its expected loss curve. Management acknowledges that SBA 7(a) loans, by definition, are for businesses that may not qualify for traditional bank lending standards and are expected to have higher loss rates on the unguaranteed portion. However, they emphasize that this is offset by the high coupon (Prime + 3%) and the ability to sell the government-guaranteed portion for a cash gain.

The company applies the CECL accounting standard at the bank, which requires upfront provisioning for expected lifetime losses, leading to higher initial provisions as the portfolio grows. The NSBF portfolio, accounted for at fair value, also reflects losses through fair value adjustments. Management asserts that the increase in non-accruals and charge-offs is within their expectations based on two decades of experience across various economic cycles. They believe they are adequately provisioned (ACL at 5.4% of loans HFI at amortized cost at March 31, 2025) and capitalized to absorb anticipated losses.

NewtekOne and Newtek Bank maintain robust capital levels well above regulatory minimums, with the holding company reporting a CET1 ratio of 17.3% and a Total Capital ratio of 19.9% at March 31, 2025. Newtek Bank is categorized as well-capitalized, with a CET1 ratio of 13.4% and Total Capital ratio of 14.6%. This strong capital position provides a significant cushion against potential credit deterioration.

Liquidity is managed through a combination of deposits, borrowings, and cash balances. Total assets stood at $2.14 billion at March 31, 2025, funded by $966.3 million in deposits and $774.0 million in borrowings. Deposits saw a slight decrease in Q1 2025, but management expects growth in lower-cost business deposits to offset maturing higher-cost CDs throughout the year. Borrowings increased, reflecting the issuance of $30 million in 8.375% notes due 2030 and increased utilization of bank facilities, partially offset by the maturity of the 2025 5.00% notes and reductions in securitization debt. The company also maintains significant cash balances and access to lines of credit and FHLB funding.

Strategic Initiatives, Outlook, and Risks

NewtekOne's strategic focus remains on leveraging its technology and integrated model to drive growth and enhance profitability. Key initiatives include:

• Expanding the ALP Program: The ALP is a significant growth engine, with management targeting $500 million in originations in 2025. The successful closing of the third ALP securitization in April 2025 ($184 million rated notes backed by $216 million collateral) demonstrates the viability of this funding strategy, which provides attractive margins (approximately 570 basis points spread on the recent deal) and leverages existing infrastructure.
• Growing Business Deposits: The company is actively working to increase lower-cost business checking and money market accounts by highlighting the value proposition of its zero-fee accounts and the integrated services available through the Newtek Advantage portal. Investment in staff and technology, including the new Wilmington office, supports this effort.
• Diversifying the Loan Portfolio: Management plans to increase originations of conforming C&I and CRE loans at the bank to balance the portfolio mix, which is expected to lead to a lower overall CECL reserve-to-loan ratio over time.
• Enhancing Technology and Integration: Continued investment in the Newtek Advantage, integration with platforms like QuickBooks, and development of capabilities like same-day payroll and merchant funding aim to deepen client relationships and operational efficiency.
• Managing the NSBF Wind-down: The NSBF portfolio is expected to continue its run-off, with non-accrual inflows decelerating and the overall drag on earnings diminishing in 2025 compared to 2024.

Based on its performance and strategic initiatives, NewtekOne forecasts 2025 diluted earnings per share in a range of $2.10 to $2.50, with a midpoint of $2.30. This implies a projected annual EPS growth of 17% over 2024, despite an anticipated doubling of the loan loss provision year-over-year. Management's confidence in this outlook is grounded in expected loan growth volumes (projecting 2,700 loan units in 2025), improving deposit costs, diminishing drag from NSBF, and the profitability of the ALP and non-lending segments.

However, the investment thesis is not without risks. The primary risks include potential credit deterioration beyond current expectations, particularly if macroeconomic conditions worsen significantly. While management believes their provisioning and capital are adequate, unexpected increases in charge-offs could impact earnings. Interest rate risk, while partially mitigated by the asset-sensitive nature of the variable-rate loan portfolio and match-funded securitizations, could still affect margins depending on the timing and magnitude of rate changes and deposit repricing betas. Execution risk on strategic initiatives, such as successfully growing business deposits and diversifying the loan portfolio, could impact financial targets. Competition from both traditional and fintech players remains intense, potentially pressuring pricing and market share. Dependence on the secondary market for selling guaranteed SBA portions also presents a risk if market conditions deteriorate.

Conclusion

NewtekOne presents a compelling investment narrative centered on its evolution into a technology-enabled financial holding company uniquely positioned to serve the SMB market. By leveraging its digital bank, integrated service ecosystem, and expertise in high-margin lending, the company has demonstrated the ability to generate profitability metrics significantly exceeding those of traditional banking peers. The strategic focus on expanding the ALP, growing lower-cost business deposits through the Newtek Advantage, and diversifying its loan portfolio underpins management's confident outlook for double-digit EPS growth in 2025. While the inherent credit risk in certain lending portfolios and the complexities of its multi-faceted business model require careful consideration, NewtekOne's strong capital base, proactive risk management approach, and commitment to technological innovation provide a foundation to navigate potential headwinds. For investors willing to look beyond conventional banking metrics and appreciate the value of a diversified, high-margin, technology-driven financial solutions provider, NewtekOne offers a unique opportunity for growth and attractive returns.