In a fiscal year that saw the Small Business Administration's flagship 7(a) loan guarantee program increase approved loans more than 13%, to $31.1 billion, it's no surprise a number of high-volume lenders recorded outsized gains.
Live Oak Bank, the biggest 7(a) lender during SBA's previous 2023 fiscal year, grew its originations 9% in fiscal 2024 to $1.98 billion. Huntington Bank, which made more individual 7(a) loans than any other bank, saw its dollar volume jump nearly 12% over the past 12 months to $1.53 billion. U.S. Bank
But few banks enjoyed the kind of success Miami-based Newtek Bank achieved. The $1.6 billion-asset Newtek finished fiscal 2024 as the nation's most prolific 7(a) lender with $2.1 billion in approved loans. That total represented a 70% increase over the $1.24 billion in approvals Newtek posted in fiscal 2023.
Under 7(a), SBA provides guarantees of 75% to 85% on loans made by private-sector lenders to qualifying small businesses.
Validating the charter
Founded in 1998, Newtek
"Everything is working out very well," said Sloane, who also serves as CEO of Newtek's holding company, NewtekOne.
If there's a fly in the ointment, it stems from the performance of Newtek's stock rather than its operating results. Shares closed Thursday at $12.14, down about 12% year-to-date. Piper Sandler analyst Crispin Love gave Newtek a neutral rating in his most recent research note. Love's price target of $13 represents seven times projected 2025 earnings, a substantially lower multiple than that of many publicly traded banks.
Prior to its bank conversion, Newtek operated as a growth-oriented business development company. BDCs are specialty finance firms that invest in small and midsize businesses. Nearly two years after becoming a bank, Newtek's business model retains several prominent BDC-like features, a situation that has resulted in a sense of unease among investors, Sloane believes.
"We don't look like a bank, we don't feel like a bank, so bank investors don't know how to figure us out at this point in time," Sloane said. "If you look at our capitalization, we're much better capitalized [than most banks]. If you look at our loan loss reserves, they're six to seven times higher. If you look at the yield on our portfolio, it's significantly greater."
"Here's the dirty part," Sloane continued. "We're going to have greater charge-offs than a normal bank would have." Indeed, Newtek experienced an uptick in both charge-offs and noncurrent loans during the second quarter, according to Federal Deposit Insurance Corp. statistics. At 2.5% of total loans, Newtek's noncurrent loans were significantly higher than the industry-wide average of 0.91%, according to FDIC.
While Newtek's strategy, which focuses on serving small and medium-sized companies around the country, does involve an elevated level of risk, more than two decades of experience has taught it how to effectively underwrite and manage that risk. Sloane said. Before obtaining its banking charter, Newtek funded its business in part by securitizing loans and selling them to investors. "Every one of those securitizations has maintained its rating," Sloane said.
"Newtek's profitability and success in its SBA lending program is a matter of public record," Compass Point Analyst Merrill Ross wrote in his most recent research note. "Newtek has a 20-year history of SBA lending, and we recognize that small and midsized businesses, particularly those that resort to obtaining financing from the SBA, are more likely to fall behind on their debt service obligations."
Like Love, Ross assigned Newtek a neutral rating with a $13 price target.
Despite a track record of producing double-digit overall loan growth, including 17% for the quarter ended Sept. 30, Newtek doesn't cut corners with its underwriting, Sloane insisted. Instead, Sloane credited Newtek's results to superior technology, which allows bank and borrowers to exchange data with "far less friction."
"Part of our ability to grow is based on the technologies we've created," Sloane said. "We're still five-C's-of-credit lenders, full underwriting package, full credit memos, but we're able to extract data from borrowers very quickly. Most bankers are still using bankers, branches, brokers and business development officers."
Building the brand
According to Sloane, Newtek evaluates between 600 to 900 business opportunities a day across all its solutions, including lending, payment processing, payroll and now depository. Newtek filed names and contact information of most of those applicants in a client database, which has grown to include data on 2.5 million people. "These are potential borrowers," Sloane said. "By messaging them with some level of frequency, you build the brand."
"We are extraordinarily proud of the origination machine and processing capability that we have implemented," Sloane said. "Making the client experience unique, productive, and efficient enhances our capability to capture the best credits."
Sloane believes investors will soon warm to Newtek's model. "I think they just want to see us ride the bike a little longer, and continue to put the numbers up."
Newtek's internal figures, focused on fundings rather than loan approvals, aren't quite as gaudy as the SBA's. "In this calendar year, we'll fund approximately $935 million of 7(a) loans," a 15% increase over 2023, Sloane said. "The SBA's numbers are calculated on a different methodology using a different calendar year that also includes pipeline loans."
That's not to say Sloane is disappointed with Newtek's direction. "The momentum going forward is still very good for us," Sloane said.
