NewtekOne, Inc. (NEWT)

Executive Summary / Key Takeaways

• NewtekOne has completed a fundamental transformation from a Business Development Company to a technology-enabled digital bank, achieving a 32% return on tangible common equity and 3.57% ROAA that dwarf traditional community bank metrics, yet trades at just 5.3x earnings as legacy portfolio noise obscures the core story.

• The company's proprietary Newtek Advantage platform creates a unique integrated ecosystem combining banking, lending, payments, payroll, and insurance, enabling customer acquisition at one-tenth the cost of branch-based competitors while generating sticky, low-cost deposits and powerful cross-sell economics.

• Two temporary headwinds—the wind-down of its legacy NSBF portfolio and disruptive SBA rule changes—are depressing near-term earnings and creating a classic "cigar butt" valuation, but management's guidance for $2.10-$2.50 EPS in 2025 implies the market is mispricing the earnings power of the core franchise.

• Credit quality concerns are overstated: the 8.1% NPL ratio is entirely attributable to the legacy NSBF book, while the core bank's adjusted NPL ratio of 3.8% is already written down and stabilizing, with new originations showing pristine credit metrics (47% LTV, 3.4x debt service coverage).

• The critical investment variable is whether management can execute its "Triple Play" cross-sell strategy while navigating SBA market disruption; success would unlock a self-reinforcing flywheel of deposit growth, fee income, and risk-adjusted lending that justifies a significant re-rating.

Setting the Scene: The Bank That Doesn't Look Like a Bank

NewtekOne, founded in 1998 as Newtek Business Services Corp., spent 25 years building a niche as a non-bank SBA lender before executing a strategic pivot that redefined its identity. The January 2023 acquisition of a single-branch bank in Flushing, Queens and its subsequent rebranding as Newtek Bank, National Association marked more than a charter change—it represented a complete metamorphosis from a BDC structure with high cost of capital into a nationally chartered digital bank with a technology-first operating model. This matters because it transformed the company's cost of funds from capital markets-based rates to insured deposits at 3.72% while simultaneously creating a platform to monetize its 25 years of SMB lending data and customer relationships.

The company operates in a fragmented $4 trillion U.S. small business banking market where 36 million independent businesses generate 43% of GDP yet remain dramatically underserved by traditional branch-based institutions. NewtekOne's target customer—the sub-$10 million revenue business owner—has been abandoned by large banks seeking scale and underserved by community banks lacking technology. This structural gap creates a massive addressable market, but the real opportunity lies in the company's ability to serve these customers profitably where others cannot. NewtekOne's digital-only model eliminates the $3-4 million per branch cost structure that plagues community banks, while its integrated service offering solves the fragmentation problem that costs SMB owners an average of 15 hours per week managing separate banking, payments, payroll, and insurance relationships.

Competitively, NewtekOne occupies a unique position that defies traditional peer comparisons. Unlike Live Oak Bancshares , which focuses narrowly on SBA lending to specific verticals, NewtekOne has built a full-service ecosystem. Unlike Northeast Bank , which relies on regional relationships and physical presence, NewtekOne's national digital platform scales without geographic constraint. Unlike Huntington Bancshares , which serves SMBs as one of many customer segments, NewtekOne's singular focus on independent business owners creates deep product-market fit. And unlike LendingClub , which lacks the SBA guarantee and deposit franchise, NewtekOne's bank charter provides both a low-cost funding advantage and a regulatory moat that pure fintechs cannot replicate.

Technology, Products, and Strategic Differentiation: The Newtek Advantage Flywheel

The Newtek Advantage platform represents the company's core technological moat—a cloud-based dashboard that integrates banking, lending, payments, payroll, and insurance into a single frictionless interface. This isn't merely a digital front-end; it's a proprietary data architecture that captures real-time cash flow, transaction patterns, and business performance metrics that traditional banks cannot see. The platform processes over $5 billion in annualized payment volume, manages payroll for 20,000 employees across 860 clients, and has opened 22,000 depository accounts remotely without a single branch or traditional banker. This matters because it transforms customer acquisition cost from the industry average of $500-800 per account to under $100, while creating switching costs that exceed 80% annual retention rates.

The "Triple Play" offering—launching in Q4 2025—exemplifies the platform's cross-sell power by bundling an unsecured $10,000 line of credit, a bank account, and merchant or payroll services into a single onboarding flow. This integrated approach solves the core pain point for SMB owners: the administrative burden of managing multiple vendor relationships. By offering instant credit decisioning, real-time payments, and embedded analytics at no additional cost, NewtekOne creates a value proposition that standalone lenders, payment processors, or banks cannot match individually. The economic impact is profound: customers using three or more services generate 4x the lifetime value of single-product customers while costing 50% less to service due to automated onboarding and self-service capabilities.

The company's artificial intelligence investments focus on operational efficiency rather than customer-facing chatbots. AI models analyze the 25-year loan performance database to optimize credit decisioning, predict deposit flows, and identify cross-sell opportunities before customers articulate demand. This technology enables the bank to maintain a 95% loan-to-deposit ratio while keeping the cost of deposits at 3.72%, well below the 4.5% average for digital banks and the 5.2% average for community banks. The result is a net interest margin of 5.4% that would be unsustainable for traditional banks without NewtekOne's data advantage and fee income cross-subsidization.

Financial Performance & Segment Dynamics: The Core Bank Versus the Legacy Drag

Newtek Bank's Q3 2025 metrics reveal a franchise operating at elite levels: 3.57% ROAA, 32% ROTCE, 47% efficiency ratio, and 5.4% NIM. These figures place the bank in the top decile of all U.S. banks and top percentile for its asset size. Quarter-over-quarter loan growth of 9% and deposit growth of 11% demonstrate accelerating momentum, while the 78% insured deposit ratio and 95% loan-to-deposit ratio indicate prudent balance sheet management. The bank's allowance for credit losses at 5.42% appears high only until you understand that 89% of this reserve covers the legacy NSBF portfolio; the core bank's new originations carry reserves of just 1.8%, reflecting their pristine credit quality.

The Alternative Loan Program (ALP) showcases the bank's risk-adjusted lending prowess. With $104 million in Q3 originations (up 58% year-over-year), average loan sizes of $4-5 million, weighted average LTV of 47%, and debt service coverage of 3.4x, ALP targets "much, much stronger" credits than traditional SBA loans while earning a weighted average gross coupon of 13.17%. The program's historical charge-off rate of 0.79% ($5.7 million on $720 million originated) compares favorably to SBA 7(a) loss rates of 3-5%. The planned Q4 2025 securitization of $325-350 million will be the 17th in company history and the fourth ALP securitization, demonstrating institutional investor appetite for the asset class and providing matched-term financing that eliminates interest rate risk.

The non-lending businesses contribute meaningfully to both earnings and deposit generation. Payment processing is projected to generate $16.5 million in 2025 pretax income on over $5 billion in volume, while the insurance agency's 10,000 policies (up 34% year-over-year) contribute $800,000 in pretax income and the payroll business adds $600,000 serving 860 clients. More importantly, these businesses generate "sticky, more attractive deposits" with an average cost of 2.8% versus 3.99% for wholesale funding, creating a 120 basis point funding advantage that flows directly to the bottom line.

The legacy NSBF portfolio remains the primary earnings headwind, but the trend is decisively improving. The $14 million loss through Q3 2025 is tracking toward an $18-20 million full-year loss, down from $28.7 million in 2024. Nonaccrual inflows have decelerated for five consecutive months, and the portfolio's share of the consolidated balance sheet has dropped from 32% to 16%. Management expects liquidation of the $64 million in nonaccrual loans within 12-24 months, freeing up $200 million in equity for redeployment into higher-returning core bank assets. This wind-down, while painful, is proceeding according to plan and will soon cease masking the core bank's profitability.

Outlook, Management Guidance, and Execution Risk

Management's maintained 2025 EPS guidance of $2.10-$2.50 represents 17% annual growth at the midpoint, a figure that seems conservative given Q3's $0.67 EPS run-rate and the diminishing NSBF drag. The guidance's credibility rests on three pillars: continued ALP growth targeting $500 million in 2025 originations, stabilization of NSBF losses, and successful execution of the Triple Play launch. The government shutdown creates near-term uncertainty for SBA 7(a) originations, but management notes this is "temporary" and "this too shall pass," while emphasizing that ALP and other businesses are unaffected.

The strategic plan to "layer in more CRE, more C&I into the bank portfolio" addresses the concentration risk inherent in having 89% of reserves tied to SBA 7(a) loans. Commercial real estate and C&I originations totaled $37.1 million in Q3 and are on track for $225 million in 2025 growth, diversifying the loan mix and reducing provision volatility. These traditional bank loans carry expected loss rates of 0.3-0.5% versus 2-3% for SBA loans, materially improving risk-adjusted returns while leveraging the same digital origination platform.

Execution risk centers on the Triple Play rollout and deposit cost reduction. Management targets a 2-2.5% cost of deposits, implying 120-150 basis points of improvement from current levels. Achieving this requires converting more payment processing and payroll clients to banking customers while growing the absolute deposit base to dilute higher-cost time deposits. The Goldman Sachs (GS) refinancing of the merchant solutions business with a $95 million facility provides "plenty of cash capital going into 2026" and signals third-party validation of the unit's cash flows, reducing execution risk on the capital front.

Risks and Asymmetries: What Could Break the Thesis

Credit risk remains the primary concern, but the market misunderstands its locus. The 8.1% NPL ratio is not a core bank problem but a legacy NSBF issue that is self-liquidating. The real risk is whether new originations can maintain their pristine credit metrics through an economic slowdown. Management's observation that "this is an economy of haves and have-nots" and that they are "staying away from volatile businesses" like oil & gas, transportation, and agriculture suggests prudent underwriting, but a broad recession would still pressure the 47% LTV cushion. The key monitoring metric is core bank NPLs excluding NSBF; any increase above 4% would signal underwriting standards are slipping.

Regulatory risk in the SBA program presents a more immediate threat. Recent rule changes prohibiting merchant cash advance refinancing and requiring U.S. citizenship proof for all ownership chain participants have made the 7(a) market "much harder to do business," according to management. These changes eliminated "score and go" lenders and pushed BayFirst (BAYF) out of the market, reducing competition but also shrinking the addressable market. The return of the 55 basis point lender service fee will reduce gain-on-sale margins by 0.5-1.0 points, compressing SBA lending profitability by an estimated 8-12%. While NEWT's integrated model can offset this through cross-sell, pure SBA lenders face existential pressure.

Competitive risk from fintechs and large banks is asymmetrically tilted in NEWT's favor. While Square (SQ) and PayPal (PYPL) offer payment solutions and LendingClub provides fast digital loans, neither has the SBA guarantee or deposit franchise. Large banks like Huntington Bancshares have the deposits but lack the technology and SMB focus. The real threat would be a well-capitalized fintech obtaining a bank charter and replicating NEWT's integrated model, but the 5-7 year timeline to build SBA expertise and gain PLP status provides a durable moat. The bigger risk is NEWT failing to scale its technology advantage before incumbents catch up.

Valuation Context: A Bank Priced for Failure, Not 32% Returns

At $11.93 per share, NewtekOne trades at 5.32 times trailing earnings and 1.02 times tangible book value, metrics that imply the market expects either significant earnings deterioration or massive dilution. This valuation is more consistent with a distressed regional bank facing credit losses than a digital franchise generating 32% ROTCE and 3.57% ROAA. The 6.38% dividend yield, while attractive, reflects a payout ratio of just 33.9%, suggesting the market doubts the sustainability of earnings rather than the dividend itself.

Peer comparisons highlight the valuation disconnect. Live Oak Bancshares (LOB) trades at 23.7x earnings despite targeting 15% ROE, while Northeast Bank (NBN) trades at 9.33x earnings with 19.6% ROE. Huntington Bancshares (HBAN) trades at 12.46x with ~10% ROE, and LendingClub (LC) trades at 22.36x with 7.4% ROE. NewtekOne's 5.32x multiple represents a 45-75% discount to peers despite superior profitability metrics, indicating either a hidden risk premium or a market failure to recognize the transformation.

Enterprise value to revenue of 3.36x and EV/EBITDA of 4.69x are more consistent with traditional banks than fintech-enabled lenders, suggesting the market values NEWT as a spread lender rather than a technology platform. This ignores the $16.5 million in payment processing earnings (valued at 15x would be $250 million, or 73% of the current market cap) and the embedded value of the Newtek Advantage platform. A sum-of-the-parts analysis suggests the core bank alone is worth 1.5-2.0x book value given its ROTCE, implying 50-100% upside before ascribing any value to the technology platform or non-lending businesses.

Conclusion: The Invisible Digital Bank

NewtekOne has engineered a digital banking franchise that generates returns on equity comparable to the best fintechs while maintaining the regulatory protections and deposit funding of a chartered bank. The market's fixation on legacy NSBF losses and SBA market disruption has created a temporary valuation gap that masks the core bank's earnings power and the strategic value of its integrated platform. With NSBF losses declining, credit quality stabilizing, and the Triple Play launch poised to accelerate cross-sell, the company is approaching an inflection point where core bank profitability becomes undeniable.

The investment thesis hinges on two variables: management's ability to execute the Triple Play rollout to drive deposit cost reduction, and the pace of NSBF wind-down to reveal clean core earnings. Success on both fronts would likely trigger a re-rating toward peer multiples, implying 50-100% upside even without ascribing premium value to the technology platform. Failure would likely manifest in core credit deterioration or execution missteps on the integrated platform, but the 32% ROTCE provides a substantial margin of safety. For investors willing to look past temporary legacy noise, NewtekOne offers exposure to a uniquely profitable digital banking model at a valuation that prices in failure, not success.