Good day, and thank you for standing by. Welcome to the NewtekOne, Inc. First Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Barry Sloane, Chairman, President, and CEO. Please go ahead.

Thank you very much, and welcome everybody to our first quarter 205 final results conference call. Today I am joined by my two Chief Financial Officers Scott Price, the CFO of Newtek Bank National Association, and Frank DeMaria, the CFO of NewtekOne, the Publicly Traded Bank Holding Company. For those of you who would like to follow along on our presentation please go to our website newtekone.com, go to the Investor Relations section, and the PowerPoint presentation that we'll be addressing today is hung there. I also wanted to do a couple of honorable mentions. I wanted to thank Bryce Rowe who recently joined us as VP of Investor Relations. He's done a terrific job in helping put our deck and press release together and giving a lot of data within the deck and the press release to simplify our story. And I also wanted to thank Nick Young. Nick is the former President and Chief Operating Officer of Newtek Bank National Association. Nick, as many of you are aware, has left our organization, although he's still with us until the middle of May. We haven't banished him to the Gulag. He hasn't banished us to Siberia. If you'd like to chat with him, you can get him at nyoung@newtekone.com. Nick, over the course of approximately four years, did a great job of taking a single branch, very manual bank in Flushing, Queens, and creating our digital platform, which today does a fabulous job of opening up 15,000 accounts remotely, transferring over our lending business to the bank, getting through to regulatory audits, which we're very appreciative of. And the mark of a great company is having a deep bench. Peter Downs, a 22-year veteran of Newtek, the Chief Lending Officer and current President of Newtek Small Business Finance, who…

I'm here, Barry. Thank you. Good morning, everyone. Slide 16 shows our deposit growth through and the mix as of March 31st. You'll note that deposits were relatively flat when compared to 12-31, '24, with the mix shifting to core deposits in the business and consumer spaces and slightly lower brokered funds. Our average cost of deposits at Newtek Bank were approximately 4%, and we expect that to drift down to roughly 3.8% to 3.85% for the full year of 2025. We did lower our rate on high-yield savings during the quarter, as well as our rates offered on our six-month consumer CD. It's important to note that we have approximately $250 million of consumer CDs that will mature or renew in the second quarter of 2025. Those CDs will be maturing at rates that approximately 5%. Our current offer rate is around 4.25%. It could drift up, depending on retention, and so we expect our manager's margin, as well as the weighted average rate on our deposits to drift down over the course of the year. We expect deposit growth in our business category, which is much lower cost in the consumer space, and we will be exploring the brokered market as we move through the year. This will all contribute to lower costs as we move from here and contribute to the positive carry on the SBA 7(a) loans that Barry mentioned earlier. So, with that, I'll turn the call over to Frank.

Thank you, Scott. Turning to Slide 17, snapshot of our net interest margin, which has expanded year-over-year and also quarter-over-quarter. Year-over-year, net interest income increased about 56%, up from above and beyond the average earning asset increase of about 52%. And we're looking at a linked quarter basis comparing to Q4, the expansion in NIM is about 24 basis points compared to the 12 basis point increase year over year. We've also included a look at our adjusted NIM, including the loans and the JVs, which would expand NIM -- which would increase the expansion in NIM to about 27 basis points. And when thinking about the securitization that was closed in the second quarter, was closed last month that will help to increase that expansion in NIM due to the higher advance rate on the securitization. All of that, you know, our adjusted NIM should continue to benefit from the continued growth in our ALP program. Turning to Slide 18, we're in an enviable position where our net interest income comprises 78% of our revenue. Building off of Barry's comments earlier, if you look at the bar chart on the right, the top bar chart on the right, our gain on sale of loans did increase during the quarter, given the change in our cadence to hold the government guaranteed portions of the loans a little bit longer. If we're looking at the prior quarter, we sold about $193 million of government guaranteed loans, which is down about 50% to about $101 million this quarter. Those loans are now held on the balance sheet and are fair valued at the market, given their government bonds. So, that is a shift that we're seeing between the gain on sale and the increase in the fair value option on the loans. With the sale of NTS, we also no longer have the benefit of net interest income on the tech and IT support. However, we still remain -- it still remains that our non-interest income is a dominant source of our revenue. Flipping to Slide 19, our scalability is evidenced by the natural aspect of our business model, being a fully digital bank. Despite the 42% growth in assets year over year, we are seeing operating expenses remain flat, which positions us well moving forward to scale the business. We've seen an efficiency ratio decline year over year of about 9%, from 71% to 62%. Also, given our business model being fully digital, we did announce our lease terminations, which we expect should have a positive benefit by decreasing expenses about $2 million for the remainder of the year and annually going forward. With that, operator, I think we can turn to Q&A.

Thank you. At this time, we'll conduct the question and answer session. [Operator Instructions] Our first question comes from Crispin Love from Piper Sandler. Please go ahead.

Thank you. Good morning, everyone. First, just on the net gain on loans accounted for under the fair value option been elevated in recent quarters, but can you speak to how sustainable you expect those gains to be throughout 2025 with gains related to ALP loans, not the SBA side? Can you just walk through some of the math there on how you generate those gains on the ALP side? Thank you.

Sure. Crispin, on the ALP side, if you take a look at the recent securitization press release, we securitized approximately $215 million of loans with a $13.30 gross coupon. After servicing, of which we get 100 basis points of the servicing, it's $12.30. The net yield on the bonds was about 6.62%, I think, so approximately 570 basis points. So, you know, I ask all of you analysts and investors, you have to do your own math, but we put a fair value on those loans and we discount them back. A lot of this data is going to be in the Q, and I believe it's been in the K, in terms of what we think that the anticipated loss frequency and severity will be. In the DBRS memo and all the information that's public, you can see what the prepayment fees are. We believe our cumulative net charge will also be between 3% to 3.5%, and we have the loans valued as such. So that's how we come up with our pricing. Okay, you'll have to come up with your own pricing. I think, you know, investors and analysts come up with their own sense of what the value is as well. But when you think about the concept of getting a 570 basis points spread per year on loans that have 5% prepay penalties for the first three years and then three in the fourth, they're not going away that quickly. Our historic charge offs on this portfolio, I think it's currently about $580 million, is about 70 basis points. Now, we think they're going to grow over time, which is why we have them valued using our loss curves at about between 3% to 3.5%. So do we think that's sustainable? We do. We've forecasted, you…

Great. No, I appreciate all the color there. And then just, just secondly on the management changes, late April, you've made a few changes, President, CFO, some other shifts and roles. You, in your prepared mark, you did call out your deep edge, but can you speak to the rationale and timing of some of those moves? Also your views on splitting the CFO roles between the bank and the holding company. And do you think there's more changes to come? Do you need to bring in any more out anyone else for certain roles? Or you feel like you're in a good place today?

Great question. As you could tell, I'm fairly plain spoken. Sometimes I say things that aren't necessarily politically appropriate. The one thing I will tell you, yeah, there's going to be plenty of changes. Okay. That's the only thing I could predict. And I, and I say that from the standpoint that markets change, people change, the world changes, and we make decisions to flow with that. Relative to the splitting of the CFO role. The bank obviously is an extremely important part of what we do. And Scott's going to be hyper-focused on that. He's going to pick up more of those responsibilities relative to ALCO deposit gathering. Not that he didn't have them previously, but it's good for Scott to have a smaller sphere. As you could tell, we do a lot of things here. So it's not like, you know, people aren't, you know, are working 30 hours a week. They really have to work a lot to be able to get the job done. Frank DeMaria, who's Chief Accounting Officer for everything, easily fits into the CFO role at the holding company because he was involved in all the accounting. So there's nothing strange or unusual here. Feel free to call him. You got his email. He hasn't banished us. We haven't banished him. We're all friends. He loves us. He built a tremendous opportunity, and he's been given another opportunity at a larger organization. When he's ready to talk about it, he'll tell you where he's going, but it was done on very friendly terms. The one thing you brought about was changes in personnel. That freaks everybody out. It doesn't freak me out. I say that we hold people accountable. This is not an easy place. I tell staff this, and I tell Newtek isn't for everybody. We're a disruptor. We're an innovator. We do things differently. People come here thinking that it's going to be a piece of cake. They're going to do what they did at other organizations for five years. It's not the same. It's different. It's just a whole different organization. So, I do think we're going to continue to have change, but I will tell you that I've got five key executives that have been here at the top of the company for 10 to 20 years. I've got many employees. My top professional sales and marketing person has been here for over 20 years. The head of liquidations has been here 14 or 15 years. Peter Downs has been in the organization since 2003, and he took over as President of the Bank. I did try to talk him out of it. I said, I'm not paying you anymore. Do you really want to do this job? And he said, yes, I want to do it because we're going to prove everybody wrong. That's Newtek. You've given me two questions that, for me, were down the middle of the plate. I appreciate it. Thank you, Crispin.

Thanks, Barry. I appreciate all the answers there.

Thank you. Our next question comes from Tim Switzer from KBW. Please go ahead.

Hey, good morning. Hope you guys are doing well. Can you help us parse through the various pieces that drove the $18 million of fair value gains this quarter? I know there is that $5.7 million benefit sequentially from the lower NSBF losses, but this line item, it still doubled quarter over quarter when ALP originations are about two-thirds the level of Q4, and I think spreads kind of generally widened in Q1. Can you help us parse through the different pieces there? What drove that?

Sure. So, a couple of things, Tim. I would disagree that spreads widened. If you notice, number one, we wound up in our ALP securitization getting an 85% advance rate, and then we sold a BB class with another two points. So, we got much more leverage on that securitization, and we got very good execution on the bonds as well. So, that actually worked to our favor. In the Qs, you're going to get a lot of breakouts specifically. Frank or Scott, do you know what the gain on sale was for the SBA piece of the puzzle that everyone's so wigged out about?

Yes, it was just shy of $8 million.

Okay. So, Tim, $8 million are in government guarantees, just patient certificates that ultimately will get sold into the market that we're keeping on the books for the high coupon and the spread income that the market loves so much for a period of time, and then it'll get sold.

Okay. For the SBA piece could you -- was that from originations this quarter? You had an $8 million from the SBA originations. If I look at your 10-K from '24, you got a total $493,000 gain for the SBA 7(a) guaranteed loans. How did we get the $8 million for Q1?

It's mostly from this quarter, and it just depends upon the volume and the market price. The market price is the market price. We don't make the market price, and it's just based upon the volume. So, you could do the math, and as I said, you'll see it in the Q when it comes out next week.

Okay. Are you able to help us kind of quantify the impact of the ALP loans originated this quarter on revenue, and maybe what was the average fair value premium on that?

You've got to do your own modeling. We do our modeling. We put a lot of detail and data into what our assumptions are in the Qs, but I can't give you my model. You won't give me your model. I can't give you my model.

Got you. Okay. And then there's been some changes at the SBA recently, mostly for loans below a million dollars. Can you talk about the impact of the return of that 55 basis point lender service fee on the industry, and maybe how it would impact gain on sale margins?

I appreciate it, Tim. One other thing. Did you see that they're looking to do $10 million loans on manufacturing?

Say that again, Barry?

There's a bill in Congress to increase the loan size from $5 million to $10 million on manufacturing loans. So, that's item number one. Item number two, supplies have started to shrink in the secondary market, which tends to be lifting prices, as well as supply and demand issues and prepayment speed slowing, which also is lifting prices. Those are the positive aspects of trying to figure out what the gain on sale would be. The negative aspects, which you're referring to is, and we've already factored it into our forecast, two things that the SBA is trying to do. One, bring the program back to a zero subsidy. I mentioned the first part because the current administration, although it's made some changes to, I'll use the word, tighten underwriting guidelines, which we never loosened, and it gets important to note. They want to get this back to a zero subsidy. So, one item is the upfront fee that borrowers pay that has nothing to do with us, about 2.5 points, they've inserted back. It makes sense. If you're insuring and you're providing a government guarantee, you should get a premium for it. The other aspect is the 55 basis points, which you're referring to, which basically reduces our coupon net to the investors. That's probably on a net basis somewhere between a 0.5 to a 1 point to a point difference in price on gain on sale. We have that factored into our projections, and there are ways to deal with that. A lot of it's based upon mix of 10-year paper versus 25-year paper, volume increases, and things of that nature. But that could have an effect, holding everything else constant, not being nimble, not adjusting. Now, I will also state that it probably won't have much of an effect at all on Q2 prices, because you get the guarantee and you get your pipeline. It could affect, once again, holding everything else constant. That's really important. In Q3 and Q4, it could have an effect on gain on sale, holding everything else constant.

Got it. That was very helpful. That sounds like a similar impact to what some of your competitors have said, too. There was another change by the SBA as well, going back to requiring full underwriting for these smaller dollar loans. What is the lift required for Newtek compared to what you guys are doing previously, if anything? And then it seems like this could maybe be an opportunity for Newtek to take market share from competitors who are maybe newer to the space that haven't had to deal with this before, which I know Newtek has historically.

Yes, I appreciate that. Look, they have eliminated the score and gold lender. That's sort of a slang expression like, I'm going to put a credit score on it, I'm not going to do a full credit memo, and I get a government guarantee. That is going to dramatically reduce the competitors, particularly the non-bank lenders that don't have the infrastructure and the staff. I mean, I know one non-bank lender that's got like 20 or 25 employees. I don't know how you do this business with that because they're getting brokered loans. They have a couple of underwriters look at them. They pay the broker a fee. I mean, so I think it will, from a competitive advantage standpoint over the long term, I think it will be helpful to us. We're going to continue to do our business, and we've never loosened our underwriting guidelines on those types of loans anyway. We always went to the full gamut, so we appreciate the question.

Yes, thank you for all the color, Barry. Appreciate it.

[Operator Instructions] Our next question comes from Steve Moss from Raymond James. Please go ahead.

Good morning, Barry. Maybe just following up on the SBA loans here, you know, how long that you realize that fair value gain, how long do you guys plan to hold the loans on balance sheet for? And I'm just kind of curious, like, how we think about the amortization of that gain, you know, if it's for an extended period?

Appreciate it, Steve. I think it will not be for an extended period. I can't tell you whether it will be one month, two months, or three months, but it won't be for a long period of time. If you follow our projections, I think that's a good guide.

Okay. And then in terms of the -- I guess the other thing, just kind of thinking about it, Barry, here, in terms of, you know, you highlighted that, you know, there's definitely some -- a tougher credit year for the NSBF portfolio last year. And I guess my question here is, I think about, like, those vintages being, let's call it 2021, 2022, plus or minus, versus the current originations of SBA loans, kind of feels like a bit of a tougher environment for me here in the current situation for SBA loans. So I'm curious, like, what gives you comfort that credit performance for the more recent vintages will be better versus the NSBF performance?

Yes, that's a key question, Steve. And a little bit of a seesaw here. So, number one, the current loans at the bank, we believe you're going to keep having increased charge-offs and non-accruals. Now, that's why we almost doubled the provision. I think the provision went from $26 million to about $50 million for the whole calendar year. Almost doubled. Now, with that said, loans that are originated in a 7.5% prime environment, where you're testing them, you know, up 3% and down 3%, are in much better shape to qualify for the underwriting than loans that are underwritten at a 3% to 4% prime. Now, the drag at NSBF is going to dramatically diminish over time. The other thing, too, is understand we keep paying down debt because most of those loans are in securitization. So the interest expense is going to go away at NSBF. So there's a lot going on at NSBF to reduce the drag, which was $28.5 million, and if you straight-lined it, which I'm not suggesting, but if you straight-lined it, you're at $20 million. So there's a major difference there at NSBF. That's the work that -- you have to have an opinion on that one way or another if you're going to figure out what the earnings forecast is for us. At the bank, we're -- I have said this in Q2 last year, Q3, Q4. Go back to the transcripts. I have said we're going to be in a tougher credit environment. Lo and behold, we're in a tougher credit environment. That's putting Trump aside for the moment and all the changes that the administration is doing and the uncertainty. So, A, the way to manage this, which our team's got two decades of experience, is capital, is provision, and…

Okay. And maybe I'll just follow up on the SBA portfolio. Could you share with us what the cumulative losses for that portfolio in the last two years have been?

It would depend upon the vintage year, Steve, but what I can tell you is our CECL calculations assume, and it changes depending upon the vintage year, over the future is about an 8% cumulative charge-off. Now, if that grows, those charge-offs are going to occur over the course of multiple years, so it's not all going to hit. See, in a normal credit card portfolio, a car loan portfolio, loan goes bad, boom, it gets liquidated and charged off and it's gone. With us, these hang around for long periods of time. If you go back and you look at all our public filings, you'll see we've always earned money, we've always paid a dividend, but the NPLs do hang around for long periods of time because we have a duty in the SBA world to collect on it. It's different in the other areas of lending.

Okay, and then I guess if I could go back to the fair value gain, the $18 million, if we could just break out the segments, I guess I missed a part there. $8 million was from the SBA loans being held for sale, and then the remaining, or roughly $8 million, let's call it, and then the remaining $10 million, where did that come from?

Maybe Frank and Scott can chime in here. I think it would be servicing, possible servicing gains, could be gains from 504, as well as fair value of ALP loans.

That's right, Barry. It's the fair value of ALP is the majority of that. And just to reiterate my comments earlier, the fact that that number, and Tim, you mentioned it earlier, on the SBA for a value increase so much is just given the fact that we are, as Steve and Barry discussed here, holding those loans this quarter. So to Barry's point, we won't be holding them for too long, but just the fact that there's more balance, principal balance on the books this quarter is increasing that SBA number. We're still pricing them to the market as we've always done.

Okay. And then I guess the one more for me here, just in terms of the earnings ramp throughout the year, I'm assuming that there's just more of a waiting towards gain on sale income later in the year. Is that kind of a fair way to characterize the higher range for the fourth quarter versus the first quarter?

A better way to characterize it, Steve, is that as the year goes on, we do more loans in Q2 than Q1, Q3 than Q2, Q4 than Q3. And when we make a loan, it has inherent value in it. 75% of it is government guaranteed bond, which we're able to sell. An ALP loan is originated based upon our capability at very large spreads to cost the funds. So yes, the answer is yes. And by the way, this is entirely different than how a normal bank operates. And we don't want to be a normal bank. They have really lousy returns on equity and returns on assets.

All right. Well, appreciate all the call here. I'll step back. Thanks, Barry.

Thank you. Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead.

My questions have been asked and answered. Thank you.

Thank you, Chris.

All right. I am showing no further questions at this time. I will turn it over to Barry Sloan for closing remarks.

All right. Thank you. I appreciate everyone's interest and looking into the company. The questions were great today. It's in depth. We may have disagreements, but we have strong opinions on what we're doing. We've been operating in this space for over two decades. We're good stewards of risk. And we do think we're coming into a difficult time in the market and the environment, and we don't take that lightly. But we're very well prepared for it. We've weathered these storms and flourished in them, and we think we're well positioned to do that going forward. I want to thank the management team. I want to thank Scott and Frank and Bryce and everybody that helped put the presentation on together. We have a lot of new data for people to look at and analyze and look forward to producing the Q, which will give people a lot more information. So, thank you very much. I want to thank the analysts for their questions and participation. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.