Wall Street seems perplexed by NewtekOne, Inc. The company's stock trades at a baffling discount, its dividend yield sits at a head-scratching 6.8%, and analysts keep asking the same questions, struggling to fit this unconventional institution into the traditional banking mold. But what if NewtekOne isn't trying to fit in at all? What if they're deliberately playing a different game, one Wall Street hasn't quite figured out yet?

A careful analysis of NewtekOne's recent Q1 2024 earnings transcript reveals a fascinating truth: this isn't your grandpa's bank. NewtekOne isn't content with clipping coupons on low-margin loans and relying on fickle non-interest bearing deposits. They're building a technology-enabled business solutions ecosystem, centered around the unique needs of the independent business owner, and generating remarkable returns in the process.

One key aspect that seems to be flying under the radar is NewtekOne's masterful management of risk in their SBA 7(a) loan portfolio. While analysts worry about the inherent risk in small business loans, particularly in the face of a potential economic downturn, NewtekOne isn't flinching. They're embracing the high-yield, high-charge-off nature of this market, confident in their ability to mitigate losses and generate outsized returns.

This confidence stems from two decades of experience in the SBA lending space. They've weathered the storms of the 2008 financial crisis and the COVID-19 pandemic, emerging with a deep understanding of the intricacies of small business credit and a robust static pool analysis to inform their projections.

Here's where things get interesting. While the industry standard for CECL reserves on a typical loan portfolio hovers around a paltry 1%, NewtekOne is maintaining a whopping 4% reserve against their SBA loans. This might seem excessive at first glance, but it's a deliberate strategic move, reflecting their understanding of the inherent volatility of this market segment.

NewtekOne's CEO, Barry Sloane, emphasizes the key differentiator in their credit approach: personal guarantees. Unlike traditional CRE loans that are often non-recourse, NewtekOne's SBA loans are backed by the personal assets of the business owners. This significantly reduces the risk of complete loss, providing a powerful incentive for borrowers to stay current on their loans.

Sloane provides further insight into the dynamics of the SBA loan market, explaining that the highest point of default typically occurs between 18 and 40 months. This "loss curve," as he calls it, reflects the reality that new businesses are less likely to default early on, but face increased pressure as they navigate the challenging early stages of growth.

Here's where NewtekOne's deep experience and proactive approach shine. They've developed sophisticated models and utilize third-party consultants to evaluate their CECL reserves every quarter, ensuring they stay ahead of the curve and adequately provision for potential losses. This rigorous approach, coupled with their insistence on personal guarantees, creates a powerful risk mitigation strategy.

But it's not just about minimizing losses. NewtekOne is also playing a brilliant game on the revenue side, leveraging their unique business model to generate high yields and lucrative gain-on-sale premiums.

They're achieving this by streamlining the loan origination process, bypassing the traditional broker and banker networks that often drive down margins. By utilizing technology to efficiently gather data and connect directly with borrowers, NewtekOne is able to offer competitive rates while still capturing generous spreads.

The numbers speak for themselves. NewtekOne's Q1 2024 earnings show a net interest margin growth of 37 basis points, a remarkable achievement in the current interest rate environment. This expansion is largely driven by their high concentration of SBA 7(a) loans, currently yielding a prime plus 3% (or 11.5%) coupon.

Their gain-on-sale premiums are equally impressive, consistently hovering above 11%, significantly outpacing industry peers. This is a direct result of their efficient, frictionless loan origination process, allowing them to capture a greater portion of the premium pie.

But the story doesn't end there. NewtekOne's Q1 transcript reveals an intriguing future development: the imminent rollout of their business checking and money market accounts. This move, designed to attract lower-cost commercial deposits, could be the catalyst for even greater margin expansion and profitability.

This initiative is closely tied to their innovative NewTek Advantage platform, a business solutions portal that provides customers with a range of valuable services, from document storage and web traffic analytics to real-time payment processing information and payroll management tools.

By bundling these services with competitive interest rates on their business deposit accounts, NewtekOne is poised to disrupt the traditional banking model, offering independent business owners a comprehensive financial ecosystem that goes far beyond basic banking needs.

The company projects they could generate between $150 million and $300 million in business deposits over the next 12 months. This influx of lower-cost funding, coupled with their continued growth in high-yield SBA and alternative lending, will further fuel their impressive ROAA and ROTCE, numbers that are already leaving traditional banks in the dust.

Hypothesis

Here's a bold hypothesis: NewtekOne's current stock price undervalues the company by a significant margin. The market is fixated on short-term concerns about rising delinquencies and potential charge-offs, failing to grasp the company's long-term strategic vision and robust risk mitigation strategy.

Numbers

Loan Growth and Net Interest Margin Expansion

NewtekOne is experiencing substantial loan growth, particularly in their high-yield SBA 7(a) loan portfolio. This growth, combined with their efficient loan origination process and strategic management of risk, is fueling impressive net interest margin expansion.

Wall Street is missing the forest for the trees. NewtekOne isn't just another bank; it's a technology-enabled business solutions powerhouse, strategically positioned to capitalize on the immense potential of the independent business owner market. Their deep experience in SBA lending, coupled with their innovative approach to risk management and customer engagement, is a recipe for long-term success. The question is, how long will it take for Wall Street to catch on?

"Fun Fact: NewtekOne's NewTek Advantage platform offers free unlimited document storage to its customers. That's right, unlimited! For small businesses drowning in paperwork, this is a game-changer, making NewtekOne a true partner in their success."