Good day, and thank you for standing by. Welcome to the NewtekOne, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 Sloane.

Thank you, operator, and welcome, everyone, to the NewtekOne NASDAQ NEWT Second Quarter 2025 Financial Results Conference Call. My name is Barry Sloane, CEO and President of NewtekOne. Joining me here today on the call will be Frank DeMaria, Chief Financial Officer of NewtekOne; and 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, when he was there, he was the equity analyst for BDCs and banks, been 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 Andrew Kaplan, our Chief Strategy Officer, joined us from Flagstar Bank, has been incredibly instrumental in helping us with various [Audio Gap] future of our digital account opening and merchant -- instant merchant account opening simultaneous as well as the reverse, opening up an instant merchant account, getting [Audio Gap]. I also want to announce Vik Mahajan has joined us recently. Vik has had a long-term career as an M&A banker and was our banker at Credit Suisse and Deutsche Bank. Vik is the 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 nonperforming 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 #2 of the PowerPoint is our note regarding forward-looking statements.…

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 the first half of '23 when the bank began originating 7(a) loans. Prior to that, the 7(a) loans were originated by our non-bank lender. The bank has 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 branch with 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. The 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% and 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. And with that, I'll turn it back to Barry for Slide 19.

Thank you [Technical Difficulty] Slide 18 for 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 clean 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 fee 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. So I just want to point out, we are guiding to a lower gain on sale from approximately $111 million to $110 million, but 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 #19, another Bryce Rowe row 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, I guess, what I would refer to as an adjusted NIM. So 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%. And 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&A.

[Operator Instructions] Our first question will come from Tim Switzer from KBW.

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

Thank you, Tim. Look, I think that what's important for our organization is to [Technical Difficulty] account is 1%, our business savings is 3.5%, and it's truly a 0 fee opportunity. And through the Newtek Advantage, we give our clients a tremendous benefit in merchant services and in payroll all in integrated solution. So I think the days of getting a depository account where it isn't linked to a solution for a business that send and receive 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. And to be perfectly honest and frank, there's a lower level of utilization on those accounts that we like, but we're going to get there. Also on the payment side, you're doing payment processing, will it comes to the bank account? You're doing payroll, will it comes to the bank account? Now in addition to offering the bank account, it's a 0 fee account. It's a higher rate account. We are able to take the customers' banking depository information, run it through our software and do an analysis as to where they will save money. Now from a technological standpoint, when they go to the Newtek Advantage, they can look at the bank information ACHs, Fedwires, maybe [Technical Difficulty] bank. They can also see their -- on card, their refunds, their chargebacks, their batches from that day. They can make payroll from the advantage. And 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, and that's our focus.

And then I apologize if I'm missing this somewhere, but what were your total charge-offs this quarter for your held for investment portfolio?

Frank, could you help with that one?

Yes, it was $5 million, Tim.

Okay. So pretty flat with last quarter?

Yes, $5.1 million to be exactly.

Okay. So exactly the same as last quarter. And then the other question I had is 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. And obviously, it was a negative $11.8 million this quarter. And I know that 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?

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

Yes, that's fine. So Tim, the previous unrealized gains, as Barry mentioned earlier, on the ALP loans was $35.1 million. So that was reversed, which is the primary component, as you mentioned, of that $11.7 million...

By reverse, Frank, you mean written down to 0, right? In other words...

Correct. Written down the par...

Which means it will offset by the loss.

That's right. Written down the par...

I think it's important to know that I had a couple of investors -- actually you're double counting and we're not double counting...

No that's okay. And 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. So that kind of helps offset -- that's part of the offset of that loan -- of that loss as well as the 7(a) unguaranteed loans that are also being held on the books before they get sold.

And Tim, also, I think if you go to Slide #12 and you look across the numbers, you could see that we've got a lot of stability here. Now I do want to point out with a good chunk of the banks held for investment portfolio being fairly mature [Technical Difficulty].

Barry, I think we lost you there. You may have to repeat that.

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

Barry, I think you are back.

Operator, are we reconnected?

Yes. Are you able to hear us again?

I hear you. Yes.

Okay.

So I don't know if it came through, but I wanted to point out on Slide #12, there's a lot of stability when you run your finger across of 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 nonaccruals roll into the book. We do believe that, 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. So we feel good about the business. We're not overly concerned about the credit aspects of the portfolio because of the reserves.

Our next question will come from Crispin Love from Piper Sandler.

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

Yes. That is -- go ahead, Frank, you can answer the question.

Yes, I was going to say. So what's changed there is this is the first time that -- Crispin, that we've done this and own 100% of the residual. In contrast, previously, we were doing those through 50-50 joint ventures. So the difference there is those would go through that joint venture and noncontrolled interest line. We do anticipate doing these type of structures in the future, but that's the difference there between the 2 prior ALP securitizations.

And then just on the SBA rule changes that went into effect June 1, you cited the margin impacts, the gain on sale margin impacts. But I'm curious on volumes. Would you expect a drop-off in volumes in the 7(a) product. Curious on just your overall thoughts on the changes and then 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)s for the year. And by the way, when I say we're going to 110, the mix could change between the 10-year paper and a 25-year paper, which could change the gain. But 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 are less of an issue today, I think 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. So we feel pretty good about the second half of the year.

[Operator Instructions] Our next question will come from Marc Silk from Silk Investment Advisors. Please check that your line is not on mute. And again Marc Silk your line is now open. Our next question will come from Steve Moss from Raymond James.

Barry, maybe just starting with the extended holding period for 7(a) loans. Just kind of curious like how do we think about that? Is that just a small timing difference? Or is it going to be a little longer in duration?

I think you're referring to the NPLs, right, nonperforming loans?

I thought -- maybe I misread that. I thought I read that there's a little extended period for holding 7(a) guaranteed.

You're holding them on the balance sheet. Got it. Yes, we're looking at a holding period of 60 to 75 days, maybe 90, but rolling into the next quarter. We don't -- 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. So I think you're looking at 60 to 75 days.

And then 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 expectation?

Correct. Yes sir.

And then in terms of just thinking about the -- in terms of just thinking about expenses here, just kind of curious as to what you think for back half expenses? Should they be relatively stable? Or I know you have investments obviously ongoing, so maybe that drives up expenses. Just kind of curious how we think about that.

Hopefully, flattish. I think when we looked at our expenses for Q2 2025 versus Q2 2024, I think it was only a 4% increase. So 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. But I would say flattish would be a good guesstimate.

And maybe if we could just go back to the net gain on residuals and securitization. So you had $32.4 million you have -- you're holding the entire residual, which to me looks like that was $32 million based on the bullet where you closed $184 million securitization backed by $216 million in out loans. So basically, am I thinking about this correct is like you hold the equity interest, you're 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?

Yes, 14% discount with a 15% default frequency over the life and a 20% severity, which will be a 3% charge-off. That -- after that charge-off, you get to the 14% and Steve, the book value, I believe, is around $35 million. And we look at this a variety of different ways. One of the things I think that's important is as you -- as that portfolio seasons, okay, 2 things are going to happen. You're getting closer to being an attractive prepay when the prepay penalties wear off, but 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. And if you look at the valuation, it's approximately 5.5x income.

Our next question will come from Christopher Nolan from Ladenburg Thalmann & Co.

Barry, on your comments that you expect the provision to go higher in the second half of the year, if I heard you correctly. Where should we expect the reserve ratio to go? It's -- in that allowance relative to period-end loans?

Yes, that's a good question. The other thing to -- 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. So I like a big provision. It breaks out a lot of people, just to be frank with you. As a 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. And 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 the 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 C&I book. The traditional bank loans due in 5 years, full covenant package, full book. 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%.

Yes. In the past, the regulators viewed loan loss provisions as reserve capital or capital as well. And they sort of put the brakes on banks in terms of not overprovisioning. 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, we've been in the banking business now for 10 quarters. And people said, "Oh, gee," the -- listen, it's been a very solid relationship. They haven't -- like the 3 little bears that it's too high 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 loans that the banking industry, in many cases, doesn't want to do. And that's to SMEs, SMBs with higher provisions and the fact that we've got 20 years' worth of experience. So no -- by the way, great question. We're not -- what a lot of banks do is they lower the provision to boost the income up. That's not 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. And given that you're really overearning the dividend, is it possible we could see a little increase in dividend?

I don't know. I think with the Rodney Dangerfield of stocks right now. So no, I tell you the truth, 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 have gotten a lot more help, a lot more clarity, we'll get people to better understand what we're trying to do. It's -- and I won't tell you that it's not complicated as it is, but it makes money. So we do what makes money.

And our next question will come from Marc Silk from Silk Investment Advisors.

For question number one, as a shareholder, I'm perplexed that your stock trades at a P/E around 5 or 6, while the industry trades higher. Can you explain why you think that is?

I think we're [Technical Difficulty] we're 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 were disruptive. Here's an organization that took over a manual one branch bank, opened up 19,000 depository accounts, funds 2,500 unique borrowers digitally, has 350 customer-facing people on camera 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. And the other thing, people 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. So 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 mean, I went to a conference recently. I had a very sophisticated, extremely bright individual say to me, well, Barry, what if you don't make any loans next quarter? Will you lose money? And I said, yes, 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 on equity even after loan losses and provisions for that. So I think that's part of the problem, which is different. We look different. People have warned me that this wouldn't be a better roses or a bowl of cherries, and they were right. But we're making money. We've got capital, and we're going to continue to do this. And 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 it. 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.

And then I'm trying to -- maybe you can give us some color. So are you getting your business -- so let's break this down. So 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 is coming from. And then obviously, you're getting some from maybe your high return on checking accounts. So maybe give us some color there as how this mesh of the business is really paying off.

So 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 for 2 accounts. Important to note, we're not charging people, there is no fee. So it's not like we're giving them something that they're not aware of, but now they can do both things and take advantage of the Newtek Advantage. By the way, you can't process an electronic payment without a bank account. So why not use our bank account that's 0 fee and provides better analytics upfront. Same thing for payroll. Same thing for lending. So having these things fully integrated, 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. And I'd say 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. But 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. So 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.

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Barry Sloane for any closing remarks.

Thank you very much, everybody, for attending. I 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. And once again, I 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.

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