Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NewtekOne Inc reported a strong Q1 2024 with core earnings of $0.38 per basic and diluted common share, exceeding the previously issued guidance.
- The company experienced significant deposit growth, with a 9% sequential increase, outpacing the average growth rate of 1.2% among U.S. based banks.
- Loan growth was also robust, with an 11% increase on a consolidated basis over Q4 2023.
- NewtekOne Inc raised its guidance for fiscal year 2024, reflecting confidence in its continued financial performance.
- The company successfully increased its quarterly dividend by 5.5% to $0.19 per share, indicating strong earnings and a positive outlook.
Negative Points
- Despite the positive earnings, the company acknowledged challenges in maintaining the high performance of financial metrics such as ROAA and ROTCE.
- The net interest margin, although improved, faces pressure from rising deposit rates, which could impact future profitability.
- There are concerns about the sustainability of high gain-on-sale margins in the competitive SBA lending market.
- Credit performance and asset quality, particularly in the SBA portfolio, require careful monitoring as the portfolio matures and potentially faces higher delinquencies.
- Operational expenses have increased as the company invests in infrastructure and technology to support growth, which could impact short-term profitability.
Q & A Highlights
Q: Can you discuss the economics of the non-conforming loans in terms of the fees generated and the reserves put up for these loans?
A: (Barry Sloane - CEO, President, Chairman) For the alternative loan program, we charge about 3.5 points gross, service for 100 basis points, and net to the joint venture at a price of 12%. We categorize credits into A, B, and C, with rates at 12%, 13%, and 14% respectively. Regarding CECL reserves, we historically estimate charge-offs at about 3%, which, considering the profitability of the fees, servicing, and funding from our joint venture partners, provides a generous return to Newtek.
Q: Regarding SBA gain on sale margins, why have they remained elevated, and how do you see them trending in 2024?
A: (Barry Sloane - CEO, President, Chairman) Our gain on sale margins are better because of our efficient operations and direct interactions with borrowers, which allows us to secure better margins. We don't anticipate significant changes in these margins as we continue to operate efficiently and the demand for our type of floating rate government paper remains strong.
Q: Could you expand on the credit performance of your portfolio and how delinquencies and NPAs might trend as the portfolio matures?
A: (Barry Sloane - CEO, President, Chairman) The loss curve for an SBA portfolio typically peaks between 18 and 40 months. We use a current value provision for future events in our CECL calculations, assuming about 8% losses, which are re-evaluated quarterly. Our reserves are higher than many competitors, reflecting our conservative approach.
Q: Can you provide insights into the expected trends in operating expenses as you continue to build out your infrastructure?
A: (Barry Sloane - CEO, President, Chairman) We anticipate that 2024 will see peak expenses relative to revenue as we invest in operations and compliance to support a scalable, technology-enabled bank. We expect to achieve better operating leverage and improved margins starting in 2025.
Q: How are you planning to fund growth at the holding company level, given that deposits must stay at the bank?
A: (Barry Sloane - CEO, President, Chairman) We plan to use our debt capacity at the holding company and create new joint ventures to fund the alternative loan program. This strategy allows us to manage growth effectively without relying on bank deposits.
Q: What are your expectations for the business checking and money market products you are rolling out?
A: (Barry Sloane - CEO, President, Chairman) We are targeting growth in our business deposit products to improve margins and lower funding costs. We believe our unique business model, which includes offering more services and better rates, will attract more customers and differentiate us from competitors.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
