10-Q: NewtekOne Reports Strong Q2 Earnings Amid Strategic Shifts

NewtekOne, Inc. reported increased net income for Q2 2025, driven by higher interest income and significant gains from a new securitization, despite rising credit loss provisions.

Summary

• Net income for the three months ended June 30, 2025, increased to $13.7 million ($0.52 diluted EPS) from $10.9 million ($0.43 diluted EPS) in Q2 2024.
• Net income for the six months ended June 30, 2025, rose to $23.1 million ($0.87 diluted EPS) from $20.6 million ($0.81 diluted EPS) in the same period of 2024.
• Total assets increased by $66.3 million, or 3.2%, to $2.126 billion at June 30, 2025, from $2.059 billion at December 31, 2024.
• Loans held for sale at fair value increased by $142.3 million to $514.6 million, primarily due to holding guaranteed portions of SBA 7(a) loans longer and new originations.
• Loans held for investment at amortized cost, net, increased by $133.8 million to $725.2 million, driven by increased originations.
• Total deposits grew by $110.2 million to $1.084 billion at June 30, 2025, with interest-bearing deposits accounting for $1.043 billion.
• Total borrowings decreased by $50.7 million to $657.3 million, mainly due to maturities and repayments of certain notes and facilities, partially offset by new issuances.
• A new securitization closed on April 23, 2025, generating a net gain on residuals of $31.5 million for the six months ended June 30, 2025.
• The company divested its Newtek Technology Solutions, Inc. (NTS) subsidiary on January 2, 2025, impacting technology-related income and expenses.
• The provision for credit losses significantly increased to $22.6 million for the six months ended June 30, 2025, compared to $9.8 million in the prior year, due to higher net charge-offs and specific reserves.

Sentiment

Score: 7

Explanation: The company demonstrated strong net income growth driven by strategic securitization gains and increased interest income. While there are concerns regarding increased credit loss provisions and nonaccrual loans, the overall financial performance, robust capital position, and active capital management initiatives suggest a positive outlook. The divestiture of NTS streamlines operations, focusing on core banking and lending.

Positives

• Net income increased by 25% for the three months and 12% for the six months ended June 30, 2025, demonstrating strong profitability growth.
• Interest income from loans and fees on loans increased by $6.6 million (Q2) and $16.1 million (6 months) due to higher average loan balances and new originations.
• A significant net gain of $31.5 million on residuals in securitizations was recognized from the new NALP Business Loan Trust 2025-1 securitization.
• The company's total assets grew by 3.2% to over $2.1 billion, indicating balance sheet expansion.
• Deposits increased by $110.2 million, enhancing the company's liquidity position and funding base.
• Newtek Bank is categorized as well-capitalized under prompt corrective action measures, with strong capital ratios (Tier 1 Capital to Average Assets at 11.4% and Total Capital to Risk-Weighted Assets at 14.2%).
• The company successfully issued $30.0 million in aggregate principal amount of 8.375% Notes due 2030, diversifying its funding sources.

Negatives

• Provision for credit losses increased significantly to $9.1 million for Q2 2025 (from $5.8 million in Q2 2024) and $22.6 million for the six months (from $9.8 million in 2024), driven by higher net charge-offs and specific reserves.
• Net loss on loan servicing assets increased to $(4.355) million for Q2 2025 (from $(1.862) million in Q2 2024) and $(8.007) million for the six months (from $(3.597) million in 2024), primarily due to the wind-down of NSBF's loan portfolio.
• Net gains on sales of loans decreased by $7.0 million for Q2 2025 and $14.4 million for the six months, attributed to lower sales volumes and reduced market premiums on SBA 7(a) loans.
• Technology and IT support income ceased after the sale of NTS, resulting in a $5.2 million (Q2) and $10.9 million (6 months) reduction in noninterest income.
• Other noninterest income decreased by $4.4 million for Q2 2025 and $2.7 million for the six months, partly due to lower loan origination fees and net unrealized losses on joint ventures.
• Nonaccrual loans for loans held for investment at amortized cost increased to $45.9 million at June 30, 2025, from $24.3 million at December 31, 2024.
• The average sale price for SBA 7(a) loans as a percent of principal balance decreased slightly to 110.41% in Q2 2025 from 111.02% in Q2 2024, indicating lower demand.

Risks

• Future operating results are subject to economic downturns, which could impair subsidiaries' ability to operate or repay borrowings.
• A contraction of available credit and/or inability to access equity markets could impair lending and business activities.
• Financial markets and the global macroeconomic and geopolitical environment, including higher inflation, tariffs, and conflicts, could adversely affect business.
• Higher interest rates could impact macroeconomic conditions and funding costs.
• Changes to the SBA 7(a) loan program, including revisions to SBA Standard Operating Procedure (SOP), could affect operations.
• There is no guarantee Newtek Bank will maintain its SBA 7(a) lending license and Preferred Lenders Program (PLP) status, which would adversely impact marketing and loan origination volume.
• A governmental failure to fund the SBA could adversely affect Newtek Bank's SBA 7(a) loan originations.
• The company is subject to extensive regulation and supervision as a financial holding company, leading to increased compliance and operational costs.
• The company is subject to 150% asset coverage requirements due to covenants in certain outstanding debt, which could restrict operations.
• The fair value of Level 3 investments, such as loans held for sale and investment, requires significant management judgment and estimation, and actual values may differ significantly from recorded values.

Future Outlook

Management expects to continue increasing its liquidity position by raising additional deposits and maintaining a significant portion of liquidity in cash held at the Federal Reserve. The company will closely monitor market conditions, asset liability management policies, and capital levels to ensure compliance with regulatory guidelines. The impact of the recently signed H.R. 1 One Big Beautiful Bill Act on consolidated financial statements is currently being evaluated, but a material impact is not anticipated. The company continues to source joint venture partners for its Alternative Lending Program, while also originating ALP loans with the intent to securitize through its subsidiary Newtek ALP Holdings or hold for investment.

Management Comments

• We are a financial holding company that, together with our consolidated subsidiaries, provide a wide range of business and financial solutions under the Newtek and NewtekOne brands to the independent business owner (SMB) market.
• Our target market is owners and prospective owners of SMBs and our services are offered online and in some cases delivered and fulfilled by our staff via video and voice calls.
• Unlike traditional financial and bank holding companies, the majority of our income is driven and influenced by noninterest income, specifically gains on sales and market value adjustments on loans.
• Newtek Bank management continues to closely monitor market conditions with a focus on its asset liability management policies, as well as closely monitoring, among other things, capital levels, to ensure compliance with regulatory guidelines and the OCC Operating Agreement.
• We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.

Industry Context

The company operates as a financial holding company focused on providing business and financial solutions to small-and-medium sized businesses (SMBs), a segment often underserved by traditional large banks. Its strategy of generating a majority of income from noninterest sources, particularly loan sales and market value adjustments, differentiates it from conventional financial institutions. The divestiture of its technology solutions segment aligns with its core banking and lending focus post-conversion to a financial holding company. The company's continued reliance on SBA 7(a) lending and its PLP status positions it as a key player in government-backed small business financing, subject to changes in SBA regulations and funding. The securitization of ALP loans reflects a common strategy in alternative lending to manage liquidity and risk.

Comparison to Industry Standards

• Newtek Bank is ranked as the second largest SBA 7(a) lender based on dollar volume of loans approved, indicating strong performance relative to other SBA lenders.
• The company's average sale price on SBA 7(a) loans as a percent of principal balance was 110.94% for the six months ended June 30, 2025, which, while slightly lower than the prior year's 111.12%, remains above the 110.00% threshold where gains are split with the SBA, demonstrating continued strong premiums.
• The company's capital ratios (e.g., Newtek Bank's Tier 1 Capital to Average Assets at 11.4% and Total Capital to Risk-Weighted Assets at 14.2%) exceed the 'well-capitalized' thresholds (5.0% and 10.0% respectively), indicating robust financial health compared to regulatory benchmarks for banks.
• The increase in nonaccrual loans and provision for credit losses suggests a potential deterioration in loan portfolio quality or a more conservative approach to loss provisioning compared to prior periods, which warrants close monitoring against industry averages for similar loan portfolios.

Corporate Governance

Legal Proceedings

• The company and its subsidiaries are routinely subject to actual or threatened legal proceedings, including litigation and regulatory matters, arising in the ordinary course of business.
• NMS voluntarily entered into, and continues to operate under, a permanent injunction with the Federal Trade Commission (FTC) since October 2012, regarding certain business practices.

Related Party Transactions

• Newtek Bank holds FDIC insured deposits from certain of the company's officers, directors, and their associated companies, totaling $5.412 million at June 30, 2025 ($4.297 million FDIC insured, $1.115 million non-FDIC insured).
• The company earned servicing income and dividend income from its joint ventures (NCL JV, TSO JV) and other non-control investments (EMCAP Loan Holdings, Biller Genie Software, Intelligent Protection Management Corp.).
• Barry Sloane, the company's President, Chairman, and CEO, serves on the IPM board of directors as the company's representative following the NTS sale.
• The company is referring clients to IPM for Managed Technology Solutions and earning a finders fee pursuant to a referral promotion agreement.

Stakeholder Impact

• Shareholders: Positive impact from increased net income and earnings per share, potential for future capital returns through the stock repurchase program, and potential dilution from the ATM program. Preferred shareholders continue to receive regular dividends.
• Employees: Increased salaries and employee benefits expense, including bonus accruals and higher medical/insurance costs, indicating continued investment in human capital. Stock-based compensation plans (restricted stock awards, ESPP) provide incentives.
• Customers (SMBs): Continued access to a wide range of business and financial solutions, including lending, payments processing, payroll, and insurance services, through the Newtek and NewtekOne brands. The Newtek Advantage portal offers enhanced analytics and transactional capabilities.
• Creditors: Borrowings decreased overall, and the company remains in compliance with all debt covenants, indicating sound financial management and ability to meet obligations. New securitization provides additional funding for ALP loans.
• Regulatory Authorities: The company continues to operate under extensive regulation and supervision as a financial holding company, with Newtek Bank categorized as 'well-capitalized', demonstrating adherence to regulatory standards.

Next Steps

• Continue to monitor market conditions and manage asset liability policies, capital levels, and regulatory compliance.
• Evaluate the impact of the H.R. 1 One Big Beautiful Bill Act on consolidated financial statements.
• NCL JV's NCL Business Loan Trust 2022-1 is expected to be terminated in August 2025.
• Continue to source JV partners for the Alternative Lending Program and originate ALP loans for securitization or held for investment.

Key Dates

Recommendation

The company demonstrated strong financial performance with increased net income and strategic gains from securitization, indicating effective execution of its business model post-conversion to a financial holding company. Its capital position is robust, exceeding regulatory requirements. However, the significant increase in provision for credit losses and nonaccrual loans warrants caution, suggesting potential headwinds in loan portfolio quality. The divestiture of the technology segment, while strategic, impacts revenue diversification. Given the mixed signals of strong profitability alongside rising credit risks, a 'hold' recommendation is appropriate, advising investors to monitor credit quality trends and the effectiveness of new loan originations and securitization strategies.

Keywords

Financial Holding Company, SBA Lending, Small Business Loans, Banking, Alternative Lending, Securitization, Credit Losses, Deposits, Loan Origination, Financial Services, Payments Processing, SEC Filing, 10-Q