NewtekOne - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered solid profitability with diluted EPS of $0.52 (vs. $0.35 in Q1 2025; $0.43 in Q2 2024) on strong fee revenue from an ALP securitization; efficiency improved to 60.3% and ROAA to 2.50%.
• Consensus context: EPS was essentially in line (actual $0.52 vs. S&P Global consensus $0.525*), while “Revenue” per S&P was a large beat ($92.8m* actual vs. $74.6m* estimate), driven by a $32.4m gain on residuals in securitizations; company-reported Total Income (NII+noninterest) was $70.2m.
• Management maintained 2025 EPS guidance of $2.10–$2.50 and reiterated key volume goals (e.g., ~$1.0B SBA 7(a) fundings), with a lower expected 7(a) GOS premium (~110) embedded in guidance; another ALP securitization is expected in Q4 2025.
• Strategic catalysts: expanding ALP warehouse capacity (Capital One +$40m to $100m; Deutsche Bank +$50m to $170m), integrated bank/merchant onboarding launch, and a $48.4m preferred raise that lifts Tier 1 capital pro forma to 19.2%.

What Went Well and What Went Wrong

• What Went Well

  • Executed ALP securitization ($184m notes backed by $216m ALP collateral) and recognized $32.4m gain on residuals; management plans another securitization in Q4 2025.
  • Strong bank fundamentals: business deposits +$50m q/q (19%), cost of deposits down 28 bps to 3.71%, bank NIM up 56 bps to 5.46%.
  • Strategy/tech narrative resonated; CEO: “We leverage AI…to automate complex document reviews and analyzing sales calls…faster, more consistent…lending decisions,” emphasizing a fully digital, low-cost operating model (Bank efficiency ratio 48.7%).

• What Went Wrong

  • Provision remained elevated ($9.1m) with net charge-offs cited at ~$5.1m in the bank HFI portfolio; management guided that provision likely increases in 2H 2025 as the SBA 7(a) portfolio seasons.
  • Gain-on-sale dynamics for SBA 7(a) guided lower (~110 vs. 110.91 in Q2) following SBA rule changes; management now holds 7(a) loans 60–75 days pre-sale to support NII.
  • Noninterest income had offsets: loan servicing asset revaluation remained a headwind (net loss on servicing assets -$4.4m in Q2) despite securitization gains.

Transcript

Speaker 4

Good day and thank you for standing by. Welcome to the NewtekOne, Inc. second quarter 2025 earnings conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, President and Chief Executive Officer Barry R. Sloane. Please go ahead.

Speaker 3

Thank you, operator, and welcome everyone to the NewtekOne Nasdaq NEWT Second Quarter 2025 Financial Results Conference Call. My name is Barry R. Sloane, CEO and President of NewtekOne. Joining me here today on the call will be Frank DeMaria, Chief Financial Officer of NewtekOne, and M. Scott Price, the CFO of Newtek Bank, National Association. I also want to introduce Bryce Rowe, who is not on the call, in charge of Investor Relations. Bryce joined the organization recently from the firm of B. Riley, where he represented us. Bryce, he was there with the equity analyst for BDCs and banks and very helpful and instrumental in shaping our presentation and deck to make it a little bit more digestible and understandable. I also want to give a couple of shout outs to some additional new hires.

Our Chief Strategy Officer joined us from Flagstar Bank, has been incredibly instrumental in helping us with various near future on our digital account opening and merchant into merchant account opening simultaneous as well as the reverse opening up an instant merchant account getting a. I also want to announce Vic Mahajanan has joined us recently. Vic has had a long-term career as an M&A banker and was our banker at Credit Suisse and Deutsche Bank. Vic is Chief Investment Officer of the bank and has been working very closely with the Bank President, Peter Downs, in buying and selling loans and particularly developing a process for moving non-performing loans off the books in the balance sheet. With that, I'd like to mention everybody to follow along on today's presentation. Please go to newtekone.com, go to the Investor Relations section, and the PowerPoint is hung there.

On slide number two of the PowerPoint is our note regarding forward-looking statements. Please ask everybody to familiarize yourself with that note on slide number three. Important part of our discussion today is really looking and focusing on what is NewtekOne, what does it do, what's our mission statement, and what's our purpose. It all starts off with the customer. We provide business and financial solutions to a target market of over 33 million independent business owners in the U.S. Some participants refer to them as SMEs. SMB is subject small medium sized enterprises, small and medium sized businesses, and recently we acquired a federally insured depository. It's important we choose and prefer not to be looked at just like a bank holding company. A bank because as you go through this presentation, we really don't look like most of the bank holding companies and banks.

We're different in a variety of different ways in terms of how we approach the customer, how do we provide a frictionless opportunity for the client, the type of revenues, earnings that come through our system. We look forward to discussing that presentation with you here today. Relative to the importance of the SMB, SME, or independent business owner class in the United States. According to the U.S. Chamber of Commerce, small businesses employ almost half of the American workforce. We do think as things go forward, particularly with artificial intelligence, they'll continue to be a very prominent part of the employment opportunity in the U.S. SMBs represent 43% of U.S. GDP and 99% of the business in the United States identify themselves as small.

Also important to note, according to the SBA's data over the last five and a half years, NewtekOne as one of the more active 7(a) lenders through its non-bank and bank subsidiary has supported and stabilized over 110,000 jobs. I think it's important to note that we do serve a public purpose and a public good. We're not just an SBA lender as you'll see throughout this presentation, we do all types of loans to this particular demographic. In being an SBA lender and the definition of an SBA 7(a) loan is a loan that is not available under normal bank circumstances. As a matter of fact, there's a test called the Credit Elsewhere test that says these types of loans do not qualify for a normal bank loan. It's important to note that we therefore have greater losses and greater provisions.

Net of those losses and provisions and expense, we provide greater returns. When we're comparing us to the rest of the banking industry, there are certain metrics that compare us in an unfavorable light. NewtekOne is a financial holding company regulated by the Fed. We focus on using proprietary and patented advanced technological solutions to acquire customers and to solution them cost effectively. Also important to note, most bank holding companies don't have a lot of assets in them. We're extremely active as a bank holding company. Evidence Newtek Merchant Solutions that does about $17 million of pre-tax income and EBITDA. Our alternative loan program business, which has balance sheet or I should say loans that are made in joint ventures and in various structures, is about $450 to $500 million.

We do provide a full menu of best-in-class on-demand solutions to its independent business owner clientele without using traditional bankers, branches, brokers, or BDOs. Through this methodology, we picked up 19,000 depository accounts since its inception. We do loans digitally and remotely, and we also handle our clients' ability to send money, receive money, payment processing solutions, payroll solutions, and insurance. In a nutshell, we are a technology-oriented financial holding company operating and owning a digital bank that operates exclusively using an online banking platform without what you traditionally see in a bank holding company and a bank. We believe that going forward, the banking industry will tremendously benefit from technology and artificial intelligence, which we are currently embracing and utilizing. It's important to note, we think that many of the institutions that you're familiar with will not look like the current bank of today.

Frankly, from our perspective, we have a belief that we are already doing what they want to do. They want to acquire customers remotely, they want to really automate their business, they want to use AI. These are things, as you go through the presentation, they're already in the process of doing. Slide number four, Q2 financial and operational successes. First off, we're maintaining our earnings per share guidance of $2.10 on the low to $2.50 at the highest. That's for calendar year 2024. Also important to note, one of the things we really don't talk enough about is revenue growth. We have 15% revenue growth in Q2 2025, $78.2 million versus $61 million in Q2 2024. Some of the other operational and financial highlights and an important part is growth in business deposits. Business deposits come in on a less expensive basis, they're more transactional.

In order to get business deposits, and we believe the non-interest-bearing depository account will begin to go away over time. As a matter of fact, if you go to Coinbase and you own stablecoin, you probably get 2% to 3% on your money. We were very pleased that we were able to grow business deposits at the bank by $50 million sequentially, with most of the money coming in in the DDA account. The reason why we're able to do that is we're getting opportunities from lending, merchant services, and payroll, all of an integrated solution. With that, our cost of funds at the bank declined dramatically and is forecast to continue to come down. The best is yet to come. We had a 28 basis point decline in our cost of funds. I think it came in about 3%.

The net interest margin at the bank increased by 56 basis points. Once again, we're very pleased with what we've had at the bank with respect to a cost of funds. That's extremely important going forward, that we're just beginning to get deposits below that risk-free rate, which I talk about, which is the bill rate or NAV of a government guaranteed money market fund. Importantly, we'll discuss this on one of the slides going forward. Losses continue to shrink in Newtek Small Business Finance. In the recent quarters, we went from a $10.7 million loss to a $4.9 million loss to a $3.7 million loss. Newtek Small Business Finance was the prior non-bank SBA lender that is in a rundown mode, and it's held up at the holding company, no longer lending.

The alternative loan program, we'll spend a lot of time applying on this today, and hopefully we'll be able to position this in a better light so people can understand the value of ALP not just to our business customers but to all our stakeholders, including shareholders. It's extremely important to note that our alternative loan program, which has now completed three securitizations successfully, is growing, has high quality loans, and is very accretive to earnings per share. We're going to talk about our operating leverage being captured and really supporting above average profitability. When you take a look at our ROA, ROTC, the expense ratios are really extremely favorable on a comparative basis. Last bullet, a portion of the $18 million of the unrealized gain in Q1 did cause some of our investors some level of confusion.

I think it's important to note that from Q1 2024 to Q2, when we sold the government guaranteed loans and moved the ALP loans off the balance sheet into the securitization, that actually got eliminated. The government guaranteed 7(a) loans were sold for cash, and the ALP loans were written down at full value to par to go into the equity stake in the securitization. I think it's important to note we make loans and sell them. Most banks make loans not at the growth rates that we do, and they hold them. We believe we're different than 95% of the other banks out there and we're very, very excited about our business model now operating through 10 quarters of success.

We're going to talk a lot on this particular presentation about what we're doing in the ALP business in future slides, which I think should develop a better understanding of what we're doing. I think important to note we'll come back to this, the residual interest in the ALP recent securitization in the 2025 deal is marked at a 14% yield, including a loss severity and frequency or charge-off rate historically over the life of the loans at 3%. This is something that we've consistently done as we've done three securitizations, one in 2022, one in 2024, and the more recent one NALP 2025-1. Moving to slide number five, second quarter CEO highlights for the earnings picture: basic and diluted EPS of $0.53 and $0.52, respectively. The first half basic and diluted EPS of $0.89 and $0.87 are above the midpoint of our guidance, which was $0.78 to $0.92.

We're leaving that annual $2.10 to $2.50 per share EPS unchanged, and the midpoint implies an EPS growth rate of 17%, typically something you don't see in most bank or bank holding companies. We talked about the success in growing core deposits. We talked about the reduced headwinds from our SBA non-bank lender Newtek Small Business Finance, with a first half 2025 loss of $8.7 million. The 2024 loss for the full calendar year was $28.7 million. Clearly, you could see that we're trending in the right direction. We have a slide to cover this, and important to note non-accruals within SBF actually declined quarter over quarter. Price of SBA, and that's 2024 versus 2025 price of SBA 7(a) loans, were consistent with our fair value marks.

The 7(a) loans that we held on an unrealized basis for Q1 sold into the second quarter, there was actually a non-existent gain transfer. We had to recognize an unrealized loss to wipe out the unrealized gain, and then we had a realized gain for cash. This offsets one another. We actually sold approximately $22 million to $23 million of 504 loans at a price of 104 and three-quarters, with 40 basis points of servicing. Also extremely profitable. Important to note, and we talked about why we're keeping some of the government's guaranteed 7(a) loans on our books, we're actually able to pick up a prime plus three or a 10.5% coupon. That was one of the factors that helped the NIM at the bank, the alternative loan program performing exceptionally well. In June and July, both Deutsche Bank and Capital One, we closed the Capital One deal today.

We're pleased to say upsized their credit facilities, which we use to fund and warehouse ALP loans before securitizations. Deutsche Bank went from $120 million to $270 million. Capital One Bank went from $60 million to $100 million. We're excited about the ability to continue to grow this business. Profitability and the operating leverage still look great. Our efficiency ratio year over year at the Holdco, 66.3% to 60.3%. We look at our ROAS and our TCE, exceptionally strong, slide number six. Our annual forecasts are readily available on this particular slide. As we look at our business model, and you've heard me talk about this in previous presentations, we solve three primary problems in the banking industry. One, we're able to acquire deposits below the risk-free rate because of the Newtek Advantage. We give the customer analytics, transactional capability, and data.

We enable them to send money and receive money. We have integrated solutions between the bank deposit account and a merchant account with chargebacks, refunds, batches, all in the Newtek Advantage. In addition to that, you can make payroll from the Newtek Advantage. The ability to move money with us, owning the payroll business, owning the merchant business, being able to do ACH, being able to do wire, and we will position this organization for stablecoin in the future. We're very excited about that opportunity. We think a lot of money is going to be moved over time, particularly when you're dealing with out-of-country transactions, and we will be able to position ourselves for that. Banking institutions that do not give a real frictionless, seamless opportunity for customers to send money and receive money will be in a tough spot. Once again, you've got to provide value for the customer.

I think it's also important to note what other institutions are talking about, we are doing. We're completely digital. There's no branches, there's no traditional bankers. We're really doing a great job in acquiring clients. Our loan book, we estimate by the end of the year to be approximately 10,000 borrowers and $4.4 billion in servicing. At the bottom of slide number six, you could see our forecast from here to the rest of the year. Our ROA for the second quarter, 2.5%. ROTC, 19.4%. Look, these are outstretched numbers and it's based upon our model. I think it's important to note making loans and selling them is what we do. We've been doing it for 20 years. We'll probably do it for 20 years. It provides great returns, it provides great risk-adjusted returns.

I suggest everyone go to slide number seven in the deck and you could see once again a lot of our performance metrics. Net income, diluted EPS, pre-provision net revenue, all the numbers that we talked about. A very, very strong Q2 financial highlights on slide number seven. Also important to note when you look at our capital position, we have more than adequate capital across the whole company. Also importantly, you could see our growth. We have the ability to utilize that capital. A lot of people or banking institutions, we or financial holding companies, they have the capital but they can't utilize it. We have the ability to do both and to generate those types of returns. On slide number eight, you could look at our financial highlights from the bank. I'd certainly like to point out the cost of deposits declining from 3.99% to 3.71%.

A lot of that's benefited by being able to pick up the bank deposits. Net interest margin grew from 4.9% to 5.46%. I think a lot of our competitors are dreaming of net interest margins on that type of a basis. Obviously, once again when you look at our ROAAs, our ROTC, this is at the bank. 3.94% ROAA, return on tangible common equity 35% with more than adequate capital at the bottom of the page on slide number eight. On slide number nine, another one of our success stories is growing tangible book value per share, increased 3.7% sequentially quarter over quarter and 21% year over year. Extremely important. We're able to increase our tangible book value while paying a very healthy dividend. We're excited about that. It's a great opportunity for shareholders to get that dividend and watch tangible book grow.

Slide number 10 I think was an important slide. We appreciate Bryce's contribution here. A lot of the investors that we met up with, they want to see where all the assets are in a breakout. Looking at the different buckets, this is extremely important from an evaluation standpoint to see what's on balance sheet, what is technically off balance sheet on a non-GAAP basis. A lot of the ALP loans that are in joint ventures or in securitizations or balance sheet, they matter. We've had historically 1% charge-offs in our ALP portfolio. I think it's important to note that we're a good lender on a risk reward basis. We've been doing this for 20 years. We've historically come out on top. Also important to note for approximately a little over a $1 billion bank and a little over $2 billion holding company. We have a big operation.

We believe first of all we do between $1.5 billion and $2 billion worth of loans a year. I think it's because we sell off the government guaranteed piece, we don't get full credit for that "amount of activity." Once again we make loans and we sell them. We sell the government guaranteed pieces and on the ALP loans we create them, we warehouse them and then they get sold into a special purpose vehicle and create a securitization that is match funded. Slide number 11 may be one of the most important slides in the deck and maybe one of the most, most least understood aspects of our business. Number one, when we do ALP securitizations the residual interests are valued at a 14% yield with a 15% frequency of default and a 20% severity with a 3% charge-off.

We mark these to market as we've done regularly since 2022 every quarter. Basically whatever premium is associated with it gets amortized. I think it's important to note when you look at the spread income the securitized LP loans carry weighted average coupon in the 2025 deal of 13.3%, denotes have a weighted average yield of 6.6%. Now when you take the 100 basis points out for servicing, it's a 570 basis point spread. I would ask everybody on this call if I was to go to a bank our size and our statute and say you can get 570 basis points match funded and you need no employees because all the loans go into a special purpose vehicle. There's no expense underneath. Isn't that attractive?

We just did this and we put I think $218 million loans, $180 million, $185 million of bonds and we created this securitization known as NALP 2025-1. Also we intend to regularly execute ALP securitizations with the loans on the balance sheet. As a matter of fact, if you like what we did recently, we're about to do it again. We've got $138 million of ALP loans currently sitting on a balance sheet. I think you'll see another securitization again in the fourth quarter. Once the loans go into that special purpose vehicle, they get written down. Then the residual piece gets valued at the yields that we talked about which are market clearing yields. Once again, important to note, this is extremely accretive, very valuable. This activity is used from the entire overhead of the bank and of the holding company. We're getting tremendous operating leverage.

Also, the ALP business has an average loan size of about $5 million. In the 7(a) business, the average loan size is $400,000 to $450,000. The ability to get through, I'll make up the number, $1 billion of loans, it's 200 units. We'll do probably 2,500 to 2,700 loan units this year, totally within our capability. We take the same pipeline that we use for all of our lending programs: 504, 7(a) line of credit, which would be C&I loans, both term and revolvers, and CRE. If that pipeline of 600 to 900 rolls a day, $2.5 billion in the database, we're able to reach customers and let them know that we will do these types of loans. On slide number 11, we have detailed the mechanics to make sure that the market understands how these assets are flowing through the income statement and the balance sheet.

The unrealized gains on securitized loans that appear in Q1 were reversed when those loans went into the securitization. The unrealized gain on the retained residual book, of which about 87% of the principal value went into rated debt instruments, the 13% is the equity piece servicing asset that was created, also shows up. That's the 100 basis points I talked about. Also important to note, these loans have prepayment penalties, which keeps the loan on the books, keeps the high coupon, and it keeps the borrower from prepaying. It's a 5% penalty in year one, 5% in year two, 5% in year three, and 3% in year four. The duration of these particular loans in the portfolio is between four and five years. All important data to think about when you're looking at our ALP business, particularly with this information.

On slide number 11, if you look at the net income in the securitization, it's probably priced at about 5.5 times cash flow. I ask everybody on this call, would you like creating assets and value in them at 5.5 times cash flow in a business that's growing without expense associated with it once it's put into the securitization? We like the business a lot. Let's go to slide number 12, credit quality. We've talked about this. It's a slide that you've seen in the past. The non-accrual increase in NHBF is slowing. We put some numbers around that. I think this is an important bullet number three. As a non-bank lender, we generally retain the loans that are in default and liquidate them; we didn't sell them well.

Now that we're in this business and people are very hypersensitive to non-accrual, even though they get marked to the market, the hit's been taken and they ultimately get turned into cash. We're in the process of selling non-performing loans both at NSBF and in the bank. I think you'll start to see some activity on this in the near future, which will validate our valuations. Most importantly, we'll return capital to us and maybe put us in more normal types of ratios and metrics that we all hold onto in our hands. Once again, important to note the LP loans performing well. Using the on and off balance sheet LP balances, we have a 1% historic charge-off rate as of 6-30-2025.

Some of the data that you see on the chart here is important not to exaggerate the NSBF portfolio, which frankly, when I get asked questions about the great financial crisis, the great financial crisis in my opinion was 2021, 2022, and 2023 for SBA lending, where rates basically rose between 3% to 5% on loans that originated in that vintage year. We took quite a bit of losses on those, on that particular portfolio. I think as you go to the next slide on 13, important to note the percentage of portfolio aged loans less than 24 months: zero. We have a seasoned portfolio in there. We think the real pain of the NSBF portfolio is behind us. The portfolio is paying down quickly. We have approximately $200 million of capital in NSBF that we, I believe, will be freeing up as these securities pay down.

We have cleanup calls, which will be very useful to doing things like paying off debt, buying back stock, paying dividends, all the things that shareholders really like and enjoy. The NSBF portfolio continues to pay down. It paid off during the last calendar year about $120 million, $102 million, roughly 30%. We do believe the non-accrual inflows in the NSBF hit their peak in Q2 2024, continue to accelerate, and we think that NSBF is going to wind up being an important opportunity for us once again. A lot of the remaining loans in NSBF are, I'll use the word trapped, in pre-securitization, the 2021 deal, 2022 deal, 2023 deal. Prepayments, loan liquidation, or held for the bondholders. Once those bonds hit their cleanup quote, are paid off and get released. All this cash flow and the equity will be freed up for a variety of different uses.

I'd now like to have Frank DeMaria present slide number 14 and on.

Speaker 0

Thanks Barry. Turning to slide 15, we provide some context around the held for investment loan portfolio at the bank. We account for the bank's held for investment portfolio on a cost basis compared to the fair value accounting that's applied to our other loan portfolios. 61% of the bank's held for investment portfolio consists of unguaranteed SBA 7(a) loans, which is built from 1H 2023 when the bank began originating 7(a) loans. Prior to that, the 7(a) loans were originated by our non-bank lender. The bank's been building an allowance for credit losses against that portfolio, more than 90% of which is related to the unguaranteed 7(a) book, which currently carries an allowance equal to 8.3% of unguaranteed 7(a) balances.

70% of the 7(a) allowance is characterized as collectively assessed, of which less than 5% of the total ACL is related to qualitative adjustments, and 30% of the ACL is held against individually assessed loans. While our ACL continues to build, it's building at a lower rate than in previous quarters, resulting in a sequential decrease in the provision, which continues to more than cover net charge-offs. Moving to deposits on slide 16, Barry talked about the success we're having on the business deposit front, which were up $50 million sequentially and now represent almost 30% of deposits. We saw another meaningful move lower in our cost of deposits and believe the cost could continue to decline if we continue to execute on business deposit growth. Our loan to deposit ratio is north of 90%, and nearly 80% of our deposits are insured.

We're using deposits to fund loan growth as the bank's bond portfolio is only $14 million on a $1.3 billion bank balance sheet. On slide 17, we highlight NewtekOne's strong pre-provision earnings profile, which is a function of the wider lending spreads. We capture our healthy levels of fee income fueled by selling, securitizing, and servicing loans and the brokerless, branchless operating infrastructure that's scalable by design. As we layer on more securitizations and build the ALP business, the already impressive level of pre-provision earnings could improve. Last thing to reiterate on this slide, as Barry mentioned, the year-over-year revenue growth is 15%. Slide 18 supports the scalable operating infrastructure. Comments I just made, the balance sheet climbed 37% over the last year while operating expenses were up just 4%. The efficiency ratio once again improved on a year-over-year basis.

We believe we have the infrastructure to manage a much larger balance sheet. With that, I'll turn it back to Barry for slide 19.

Speaker 3

Thank you. Slide 18. The average net premium from SBA 7(a) loans for second quarter 2025, we averaged 110.91. I think it's important to note that the SBA changed some of its rules and regulations, and we believe that the market claim premium, government guaranteed 7(a)s for the rest of the year in the second half will be about 110. I think it's important to note we have this in our earnings guidance; that's extremely important. The big differential in price is based upon there's a 55 basis points. See that there's some loans that we have in the pipe that will be available without the 55 basis point fee. The SBA put it back in to basically better balance its loss reserves, which frankly makes a lot of sense. I just want to point out we are guiding to a lower gain on sale from approximately 111 to 110.

It's in our numbers and it's in our guidance. I also want to point out the ALP loan originations for the second half of 2025 are expected to approximate $250 million. That is also in our midpoint of $210 million to $250 million. On slide number 19, another Bryce Rowe original adjusted net margin. This is basically a good analysis of really taking a look at, and obviously it's non-GAAP, but all the loans that we have both on the balance sheet and off the balance sheet to basically give us, you know, I guess what I would refer to as an adjusted NIM. The adjusted NIM, when you start to add on the ALP loans that are in joint ventures and then the 2025 deal, gets you about 3.51%.

We do believe that's going to continue to grow, particularly as we grow the ALP business, which is on a pretty good growth track right now and does extremely well for the organization. With that, operator, we're now open to Q and A.

Speaker 4

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by as we compile our Q and A roster. Our first question will come from Tim Switzer from KBW. Your line is now open.

Hey, good afternoon guys.

How are you doing?

Speaker 3

Good, Tim, how are you doing?

All right, thanks for taking my questions. The first question I have is on the deposit trends with the growth and the commercial deposits and lower deposit costs overall. Can you talk about some of the drivers there? What helped bring in I think about $50 million of growth on the commercial deposit side, and then what are your expectations going forward for that initiative and then bringing down the deposit costs going forward.

Thank you, Tim. I think that what's important for our organization is to be in the grade as it is 1%. Our business savings is 3.5% and it's truly a zero fee opportunity. Through the Newtek Advantage we give clients a tremendous benefit in merchant services and in payroll. People back and forth with this solution. I think the days of getting a depository found where it isn't linked to a solution for a business that sends and receives money is a problem. We had a lot of success, particularly in the lending arena, where our borrowers are making payments out of a Newtek Bank account. To be frank with you, we need to improve the utilization we've opened up. I think the total business account portfolio is about 4,000.

To be perfectly honest and frank, there's a lower level of utilization on those accounts than we like, but we're going to get there. Also, on the payment side, you're doing payment processing. It comes with a bank account. You're doing payroll. It comes with a bank account. Now, in addition to offering the bank account, it's a zero fee account, it's a higher rate account. We are able to take the customer's banking depository information, run it through our software, and do an analysis as to where they will save money. From a technological standpoint, when they go to the Newtek Advantage, they could look at the bank information, ACHs, Fed wires, maybe send a fee stablecoin. They can also see their on card, their refunds, their chargebacks, their batches. From that day they can make payroll from the Advantage. All of this ties in.

I also think on a selective basis we're going to be offering a line of credit and a bank account that is going to be part of our full arsenal to provide the SMB, SME, and independent business owner client base the best of all solutions. That's our focus. Okay, great.

That was really helpful, and I apologize if I'm missing this somewhere, but.

What were your total charge-offs this.

Quarter for your held for investment portfolio?

Frank, did you help with that one?

Speaker 0

Yeah, it was $5 million, Tim.

Okay, so pretty flat with last quarter.

Yeah, 5.1 to be exact.

Speaker 3

Exactly.

Okay, exactly the same as last quarter. The other question I had.

You guys did a really good.

Job of last quarter, helping us kind of break down the various drivers that went through that net fair value line item. Obviously, it was a negative $11.8 million this quarter. I know that securitization or the securitized loans had an impact on that, and the reversal from the held for sale SBA loans last quarter.

Can you give us the different pieces?

Of that and particularly what the gain was on ALP loans this quarter?

Brian, I'm going to let you do that with the numbers and the debits and the credits.

Speaker 0

That's fine. Tim, the previous unrealized gains, as Barry mentioned earlier on the ALP loans, was $35.1 million. That was reversed, which is the primary component, as you mentioned, of that.

Speaker 3

$11.7 net by reverse. Frank, you mean written down to zero, right? In other words, correct. Written down to par set by the loss. That's right. Written down to par. We're not double counting.

Speaker 0

That's right. No, that's okay. They were written down, as Barry mentioned, sold into the securitization that ultimately results in a net gain that you see, about $32.4 million on the value of the equity interest for the quarter. The ALP loan gains were about $6.3 million. That kind of helps offset. It's part of the offset of that loss as well as the 7(a) unguaranteed loans that are also being held on the books before they get sold.

Okay, great.

Speaker 3

Thank you, guys. Thank you.

You're welcome.

If you go to slide number 12 and you look across the numbers, you could see that we've got a lot of stability here. I do want to point out, with a good chunk of the bank health or investment portfolio being fairly mature. Higher accru.

Speaker 0

Barry, I think we lost you there.

Speaker 3

You may have to repeat that.

Speaker 4

Pardon me, please stand by. Mr. Sloane, are you able to hear us? Pardon me, please stand by. Your conference will resume momentarily. Hi, Mr.

Speaker 0

Sorry, I think you're back.

Speaker 3

Operator, are we reconnected?

Speaker 4

Yes, are you able to hear us again?

Speaker 3

I hear you, yeah. Okay, I don't know if it came through, but I wanted to point out on slide number 12, there's a lot of stability when you run your finger across NPLs on and off balance sheet and ex NSBF. We ex NSBF because we do believe that's a runoff portfolio and a tough portfolio. With that said, the provision at the bank for the second quarter was down from the first quarter, and that's just a function of not having non-accruals roll into the book. We do believe that will pick back up. It's expected. We're reserved for it. The reserves are basically almost capital, basically because if you have a loss it goes right against the reserve. We feel good about the business. We're not overly concerned about the credit aspects of the portfolio because of the reserves. Next question. Operator.

Speaker 4

Thank you. Our next question will come from Crispin Love from Piper Sandler. Your line is now open.

Thanks. Good afternoon. I just want to follow up on the net gain and residual and securitizations line. $32 million in the quarter. I'm just curious on the go forward there, will those only occur when you do ALP securitization? I'm just curious what's changed there and then what we should expect going forward.

Speaker 3

Yes, that is good. Frank, you can answer.

Speaker 0

Yeah, I was going to say what's changed there is this is the first time that we've done this and own 100% of the residual. In contrast, previously we were doing those through 50/50 joint ventures. The difference there is those would go through that joint venture and non-controlled interest line. We do anticipate doing these type of structures in the future. That's the difference there between the.

Speaker 3

Two prior ALP securitizations.

Okay, thanks. On the SBA rule changes that went into effect June 1, you cited the margin impacts, the gain on sale margin impacts. I'm curious on volumes, would you expect a drop off in volumes in the 7(a) product? I'm curious on just your overall thoughts on the changes and if you've seen any noticeable differences in the past couple of months since they went into effect.

Crispin, it's a good question. I don't believe for our purposes because it's very different. The non-bank lenders in the space are having a lot of difficulty. They don't have the staff, they don't have the capability to comply with the new changes. We're very proud of the fact that we are totally comfortable. We're not changing our guidance for $1 billion of 7(a) for the year. By the way, when I say we're going to $110 million, you know the mix could change between a 10-year paper and a 25-year paper, which could change the gain. Right now we're not making a change. We do believe, and I've said this before, it's a harder market to find good credits as well as tariffs, which clearly were an issue in April and less of an issue today.

I think that slowed down the borrowing appetite of a lot of customers, and that's beginning to change. When you see these tariff deals, people are more optimistic. We feel pretty good about the second half of the year.

Great, thank you, Barry.

I appreciate you taking my question. Frank DeMaria, thank you.

Speaker 4

Thank you. As a reminder to ask a question, please press star 11. Our next question will come from Mark Silk from Silk Investment Advisors. Your line is open. Please check that your line is not on mute. Mark Silk, your line is now open. Thank you. We will move on to our next question. Our next question will come from Steve Moss from Raymond James. Your line is now open.

Speaker 3

Good afternoon. Good afternoon, Steve. Barry. How's it going? Barry, maybe just starting with the.

Extended holding period for seven loans. Kind of curious, like, you know, how do we think about that? Is that just, you know, a small timing difference, or is it going to be, you know, a little longer in duration?

I think you're referring to the NPLs, right? Not the foaming wells.

Oh, I thought I maybe I misread that.

I thought I read that there's a.

Little extended period for holding 7(a).

Oh, you're holding them on the balance sheet. Got it. We're looking at a holding period of 60 to 75 days, maybe 90. Rolling into the next quarter, we still intend on selling them for cash gains. We found that this is a good strategy for us. It's helping our net interest income. I think you're looking at 60 to 75 days. Okay, got you. In terms of, I'm not sure I heard you correctly.

Did you say you're still sticking with $1 billion in SBA originations for the current year expectations?

Correct? Yes, sir. Okay, got it. In terms of just thinking about the.

In terms of thinking about expenses here, just kind of curious as to what you think for back half expenses. Should they be relatively stable, or, you know, I know you have investments obviously ongoing, so maybe that drives up expenses. Just kind of curious how to think about that.

Hopefully flattish. I think when we looked at our expenses for Q2 2025 versus Q2 2024, I think there was only a 4% increase. It's one of my favorite topics, Steve, when the expense things come to my desk from consultants and staff and things of that nature. I would say flattish would be a good guesstimate. Okay, got you.

Maybe if we could just go back to the net gain on residuals and securitization. You had $32.4 million. You are holding the entire residual, which to me looks like that was $32 million based on the bullet where you closed a $184 million securitization backed by $216 million in out loans. Basically, am I thinking about this correct? You hold the equity interest. You are judging what the cushion is in terms of that $32 million extra cushion, and you are putting a 14% discount, did.

I hear that correctly? Yeah, 14% discount with a 15% default frequency over the life and a 20% severity, which will be a 3% charge-off. After that charge-off, you get to the 14%.

Okay.

The book value, I believe, is around $35 million.

Speaker 0

Okay.

Speaker 3

We look at this a variety of different ways. One of the things I think that's important is as that portfolio seasons, two things are going to happen. You're getting closer to being an attractive prepay when the prepay penalties wear off. You're also getting the cash flow from the interest income, less the interest expense. I think what you'll see is when you do the math, it's pretty close. I'm not saying it's positive or negative, but it's pretty close. If you look at the valuation, it's approximately 5.5 times income.

Okay.

Okay.

That's everything for now.

Thank you very much. Thank you, Steve.

Speaker 4

Thank you. Our next question will come from Christopher Nolan from Ladenburg Thalmann and Company. Your line is open, Barry, on you.

Comments that you expect the provision to go higher in the second half of the year, if I heard you correctly.

Speaker 3

Yes. Yeah.

Where should we expect the reserve ratio to go? That's allowance relative to period end loans.

Yeah, that's a good question. You know, the other thing too, and I do appreciate the question. The funny thing about the business, and I'm not a career banker, but that provision, to me, that's like capital. I like a big provision, it breaks out a lot of people, just to be frank with you. Matter of fact, when people reduce the provision, in many cases the stock goes up because people think that people are forecasting bluer skies ahead. I like having the cushion. Also, even with that cushion and that provision, we're still good on our numbers, which I think is attractive performance. I do believe that for most of the calendar year we're probably going to be, I'm going to give you a range, 4.5% to 5.5% now.

One thing I will tell you, some of that may change as we look to grow the CRE book as a bigger percentage and the CNI book. The traditional bank loans due in five years. Full covenant package, full. Both those loans have much lower provisions than the 7(a) business. I think the 7(a) business currently accounts for about 90% of the total provision. I think it's 92%.

Yeah.

In the past, the regulators viewed loan loss provisions as reserve capital or capital as well. They sort of put the brakes on banks in terms of not over provisioning. Are you seeing from the regulators that they're giving you more flexibility in terms of how much you're willing to provision?

It's another good question, frankly. You know, we've been in the banking business now for 10 quarters and people said, oh gee, the other regular. Listen, it's been a very solid relationship. They haven't, like the three little bears said, it's too hot or too cold. They seem to be comfortable with really where we are now. I want to be very clear here. I think that one of the reasons we were an attractive application candidate is because we do the loan that the banking industry in many cases doesn't want to do. That's to SMEs, SMBs with higher provisions and the fact that we've got 20 years worth of experience or no, and by the way, great question. We're not. What a lot of banks do is they lower the provision to go the income up. That's not where we're at, where our heads are at.

I mean, we like the provision. After doing this for 20 years, we think this is the right provision. Okay.

Given that you're really over earning the dividend, is it possible we could see a little increase in dividend?

I don't know. I think we're the Rodney Dangerfield of stocks right now. The dividend is very healthy and I think we'd be more likely to do other things than increase the dividend at this point. I mean, we're well above where the average bank is and we're very hopeful that the type of presentation we made today, I've gotten a lot more help, a lot more clarity, will get people to better understand what we're trying to do. I won't tell you that it's not complicated as it is, but it makes money. We do what makes money.

Okay, thank you, thanks for the answers.

Thank you.

Speaker 4

Thank you. Our next question will come from Mark Silk from Silk Investment Advisors. Your line is open.

Okay, here we go. Barry, you hear me now?

Speaker 3

Yeah, right. Anytime. Twist your arm, Mark. Yep.

Switch from a cell phone to a landline for question number one. As a shareholder I'm perplexed that your stock trades to the P/E around 5 or 6 while the industry trades higher. Can you explain why you think that is?

We are also getting better at telling our story. We put out a lot of information. It's just a lot of parts to what we're doing. Part of it is because we're disruptive. Here's an organization that took over a manual, one branch bank, opened up 19,000 depository accounts, funded 2,500 unique borrowers digitally, has 350 customer-facing people on camera, and is using AI to synthesize data into reports instead of manual inputs. I just think that the market doesn't, we don't look like anybody else. The other thing, you know, we'll talk about doing this. We're doing it. I mean, I got a comment like program or private credit? Google private credit. Google alternative loans. All these money managers are talking about doing it and they're doing deals with banks. They're really doing syndicated bank loans or leveraged bank loans. We're actually doing it.

We've been doing it since 2019. I think that this is just going to take time for people to get comfortable with. Look at the accounting, get a better understanding of it. Look at the metrics, quarter to quarter. I went to a conference recently. I had a very sophisticated, extremely bright individual say to me, "Barry, what if you don't make any loans next quarter, will you lose money?" I said, "Yeah, if Apple doesn't sell any iPhones and GM doesn't sell any cars, they're going to lose money too." We make loans and we sell them. That's the business model. That's what we've done for 20 years, and it generates high returns in equity even after loan losses and provisions for that. I think that's part of the problem, which is different. We look different.

People have warned me that this wouldn't be a bed of roses or a bowl of cherries, and they were right. We're making money, we've got capital, and we're going to continue to do this. If you keep earning money and you keep paying a dividend, at some time when people are more comfortable with it, they'll jump in and participate. We're okay with that. The other thing I would say is the investment group that we're in, which are community-based banks. That's a tough comp for us, particularly if you're looking at the traditional metrics. We don't score as well as I would like to have scored.

Okay, that's a fair assessment. I'm trying to, maybe you can give us some color. Are you getting your business, let's break this down. Are you getting your business from.

Your payroll and payment?

As far as new bank accounts, are you getting new bank accounts because of the payroll processing and the payment processing? Obviously you get them both, but maybe give us, show us where a lot of it's coming from. Obviously you're getting some from maybe your high, you know, your high return on checking accounts. Maybe give us some color there as how this mesh of the business is really paying off.

In the near future you will see us announcing and launching the technology. When you open the bank account, you get an approved merchant account. One application, one process, but two accounts. Important to note, we're not charging people, they're no fee. It's not like we're giving them something that they're not aware of. Now they could do both things and take advantage of the Newtek Advantage. By the way, you can't process an electronic payment without a bank account. Why not use our bank account? That's zero fee and provides better analytics upfront. Same thing for payroll, same thing for lending. Having these things fully integrated is very important. It's not a Wells Fargo situation where we're charging customers unwittingly or unknowingly. We're giving them an open account to use or not use and not charging it for them. I think it's not open without their knowledge.

It is open. We then contact them and tell them it's available. They then sign the application to activate it. Now we could show, hey, you don't have to go further, it's available. Here's a great cost, here's a great integration, here's a great analytics. Come look at the Newtek Advantage. We give the customer an advantage to putting all these things together. It's a little bit similar to Shopify. You don't unbundle all the stuff or, frankly, what Amazon does, where everything comes together in one unique, integrated model for the customer.

Okay, that sounds interesting. Thanks for answering my questions.

Speaker 0

Thank you.

Speaker 4

Thank you. I am showing no further questions from our phone lines. I would now like to turn the conference back over to Barry R. Sloane for any closing remarks.

Speaker 3

Thank you very much, everybody, for attending. Appreciate it. We look forward to reporting our next quarter and continuing to generate the types of earnings and returns that you've now gotten used to. Once again, want to greatly thank my Senior Management Team. I know I named a few people, but I can't name them all. They do a great job for all of our stakeholders, shareholders, customers, and employees. Thank you very much. Have a great day.

Speaker 4

Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect, everyone. Have a great day.