NEWT - NASDAQ

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 [email protected]. 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 was largely responsible for SBA business and its success over the course of two decades, has been named as President of Newtek Bank, and we're appreciative of having that deep bench. We did a lot of listening to shareholders and analysts recently, particularly yesterday and in the evening. We've done a lot of reshaping and structuring of the presentation, simplifying a bunch of different important issues. More importantly, we believe we'll be able to demonstrate today the really attractive progress that we've made, growing deposits, growing loan growth, being compliant, balance sheet growth, and basically moving through the cycle of establishing a portfolio at the bank level, which is very different than what you'd normally see in 98% to 99% of the other banks. I think one of the things that we want to stress is the traditional metrics that are being used to analyze banks don't apply here. And I think as you go through the deck and we start to explain things a little bit in more of a granular fashion, you'll be able to appreciate that. Once again, part of our challenge is we don't really look anything like a typical bank. Most banks have bank holding companies, which is the publicly traded stock that have very little in them except the bank itself. We actually have more capital invested in other assets and in equity than we do at the bank. I think that's important to note. I think it's important to note that some of the things that differentiate us, we make loans and we sell them. It's a good mark that you can sell them. Sell them means that the loans are made in a good manner, whether they go into a securitization, whether they're 504 loans that are sold to other banks, whether or not they are SBA loans, they're done according to SBA guidelines, a business that we've been in for over two decades. Fair value, I think, has confused a lot of investors and analysts. We've been a fair value player almost our entire life, but significantly since 2014, we were a BDC. The CECL Reserve accounting, which we have adopted in the bank, is fairly punitive because you take the losses up front and you don't get the benefit in the SBA business of the prime plus three coupon, except into the future. We're building a very nice portfolio of those. We still believe very strongly that a lot of the metrics we're being measured on don't hold. Banks, frankly, it's a bit of an oxymoron, a growing bank. Most banks our size do not grow, they maintain themselves. So if you look at what we're doing here, we make money. You can that by earnings, we grow shareholder equity. We believe this is the way banks will operate in the future, without branches, without traditional bankers. Obviously, we're all familiar with AI and the benefits that AI is going to provide business and industry. We're doing a lot of things that utilize artificial intelligence today. And I think that we're clearly misunderstood. And as a matter of time and data and analysis, there is opportunity in NewtekOne. We feel really good about our progress. But to be frank with you, we feel bad about the market's misunderstanding. And today's efforts are going to be directed towards bridging that gap. Once again, I want to thank you for your time and interest before we go into the presentation and investment. And either way, we appreciate you, whether you like us or you're one of the 1.8 million stockholders that are short the stock. Let's go to Slide number 3. Our mission statement and purpose. Our company is all about providing business and financial solutions to its target market of independent business owners. And some people call them SMEs or SMBs, small and medium-sized enterprises, small and medium-sized businesses. We do not do consumer loans. We do not do consumer checking. We stay away from the consumer banking side of the business. NewtekOne acquired what is known now as Newtek Bank National Association, so it can add depository solutions and real-time payments. We view ourselves as a technology-enabled company, that is now also with depository. That's extremely different than just measuring us on bank metrics. NewtekOne is a financial holding company regulated by the Federal Reserve, utilizing proprietary and patented advanced technological solutions to acquire clients cost-effectively. We get six to nine referrals a day. This is one of the items that we hang our hat on. We look at it as we've built a moat around our business. Replicating that is not an easy thing to do. The customer acquisition and the ability to solution clients on a camera is a unique differentiator. We believe we provide a menu of best-in-class solutions to independent business owners. It makes us cost-efficient, a low-cost provider, and importantly, with better margins. Once again, we position ourselves as a technology-oriented financial holding company, operating a digital bank that operates exclusively using online banking without traditional fiscal branches. We realize that a lot of the markets are hyper-focused on credit concerns. I also think that the credit concerns are hyper-focused just on the SBA 7(a) loan portfolio, which frankly is a fraction of our business. We have a lot of assets in the ALP business. We'll talk about our success in our recent securitizations. We'll talk about our merchant services business. We have a diversified stream of opportunities across the spectrum, and we love our SBA business. It's extremely profitable, and it does very well in a bank infrastructure, but it doesn't size up to typical bank metrics, and we will go into that. Let's go to Slide number 4. I refer to this as our message from the day. First quarter 2025 earnings beat, $0.35 diluted, $0.36 basic. If it wasn't for one analyst outlier at $0.53, I have no idea what they were thinking. I just don't know. It's indicative of the fact that they may not be listening to us when we do these calls. However, if you throw that out, consensus was $0.31. We previously forecast $0.28 to $0.32. I consider that a beat. We've maintained our range of $2.10 to $2.50. That would be a projected annual EPS growth of 17% using the midpoint. I would say the risk in the range and the midpoint is in volumes of loans, whether it's 7(a), whether it's the ALP loans, the Alternative Loan Program. To be frankly fair, transparent, and accurate, acquiring credits today is harder. It's trickier. There are less attractive credits in the traditional manner of acquiring clients, which means we have to bring on new alliance partners, which we're doing. There's always a regular pipeline, additional channels, and to grow that business. And we're doing that and we're comfortable with our guidance. Looking at profitability and looking at us, if you do measure us, the market seems to be forgetting our profitability, but they're hyper-focused on the credit metric. The profitability, return on assets in the first quarter, 1.18% versus the average of 90 basis points for $1 billion to $10 billion banks. That's with a heavier loan loss provision in the first quarter. We think the heavier loan loss provision is a good thing for ourselves and for our investors. We're planning ahead. It's not inconsistent what we've said for the last several quarters that we see headwinds in 2025. Also important to note, Q1 is our weakest quarter. You cannot compare Q1 revenues sequentially with the prior Q4 quarter from last year. Go back and look at our 10 or 20 years of history. The fourth quarter is always our biggest quarter by very wide margin. And our guidance implies a return on average assets of 2.45 for 2025. This is an important bullet on Slide number 4, the fourth bullet down. Headwinds from our non-bank SBA lending subsidiary are a wind down. I think it's extremely important to note that the loss from NSBF declined by more than 50% by $10.7 million to $5 million, this is a segment in our Qs. The drag on 2025 should be materially lower than a $28.7 million loss. When you look at the delta, which is almost 6 million versus the increased provision, which a good chunk of that is from loan volume growth of 9.5 to 13.5 or 4 million, one is outweighing the other. I think it's also important to note that as we've historically said, I'll talk about this when we get to Slide number 15, that these provisions and loss characteristics on an SBA portfolio that has 10 to 25-year amortizing loans in it with no balloons, there is a loss curve. And in the bank, we're going to continue to creep up that loss curve. That's why we decided to go forward, effectively double the provision, but our guidance is based upon doubling that provision from the year earlier, hopefully that should give people comfort instead of cause. Fifth bullet, Alternative Loan Program. Major success for this company, which began 2018-2019, establishing something to be able to make loans to borrowers that have bigger loan needs, that have greater liquidity. These are better quality loans than the 7(a) loans. These businesses are bigger, the guarantors are stronger. For those of you that want to get a look at the DBRS pre-sale memo, you'll see that these types of loans have FICO scores of I think 740 on average. You can see that their weighted average loan-to-value is about 50%. You can see the types of loans that go into the pool. We just did a major successful securitization. We had about eight or nine different of the largest institutional investors buy into those bonds. Very successful, with a 570 basis point spread between the net yield on the loans going into the special purpose vehicle and the yield on the bonds. That doesn't include 1% for servicing and 3.5 points of origination fee. A very profitable business. We particularly believe strongly that we're going to continue to get operating leverage. Our efficiency ratio with the hold code declined 71% to 63%. And we have a very low efficiency ratio at the bank, which I think is in the low 40s. Core deposits continue to grow. However, this year, we're going to use up the 350 or 325, 350 million of money that we held to Fed at the end of last year. So deposits will probably be flat, but the mix will change with more business deposits coming in. In the first quarter, I do believe our cost of deposits were about 3.95% down from 4.4% the year earlier. And we've got a lot of high cost CDs that Scott Price and Frank will address as they do their portion of the call. Slide number 5, projections of earnings. Obviously, we had what we call a $0.05 beat in the first quarter versus our prior projection. Q2, we're taking that down a nickel from $0.50 to $0.60. Q3, up $0.10. So now we're projecting $0.60 to $0.75 on the range. Q4, down 10 basis points. So consensus is still the same, 230, but we've changed the mix around Slide number 5. Slide number 6, extremely important to note that when you look at originations, okay, there's a hyper-focus on credit for 7(a). And we're going to talk about creditworthiness and credit quality of 7(a) and what makes a 7(a) loan. But note, the 7(a), the SBA 504 business, the ALP business, these businesses have very few charges. As a matter of fact, I don't believe as of this date, I know it was as of the end of the fourth quarter, but as of this date, I don't think we've ever had a charge off on a 504 loan. On the ALP program, 70 basis points of charge-offs historically, I believe it's as of Q4. I do not have numbers as of Q1. CRE and C&I loans, very low charge-off. These are the higher quality loans. We've actually created a slide to be able to show all the different buckets, all the different portfolios and how they're accounted for. That's in the deck. I think that'll be helpful. Deposits, we do plan on growing total deposits for the calendar year. I think the mix will change and we do plan on using up a lot of the cash that we have at the holding company -- at the bank, excuse me, that we put on balance at the Fed. Slide number 7, important slide. When you look at net income this quarter, this year versus last, we obviously have performed on the revenue side, particularly when you look at the pre-provision net revenue. However, the provision, which we think is appropriate, it's realistic, and it's important to note based upon what we believe the world has changed in the last 60 to 75 days that reduced this quarter this year versus this quarter last year. But you've got a nice breakout. Obviously, deposits are growing, equity is growing, tangible equity is growing, and the ALP business is growing as well. Going to the right side of the slide on Page number 7, I think important items to note, we decided to put NPLs excluding NSBF and including the joint ventures, which are in-calculated because they're off balance sheet. So these are loans that we've made and it indicates the creditworthiness of those loans. Much lower percentages than what you're seeing on a GAAP basis. The allowance for loans held for investment, 5.4%, fairly hefty number. Slide number 8, growing shareholder equity. So from Q1, 2023, when we took over the bank, $6.92 to $10.16 Q1, 2025. That's 47% growth in two years. That is with a material dividend paid. This is extremely unusual. If you don't have the time to analyze and understand NewtekOne, this is probably not your investment opportunity. For those that want to take the time, look into the numbers and have an understanding that some of the accounting permutations will straighten themselves out over time. That if you believe in what management believes in, in the forecast, we're going to continue to grind out earnings quarter over quarter, pay our dividend. This is an opportunity for you to look at. If you're going to look at the data for a press release and in 10 minutes make a decision, it's probably not your basis. Particularly if you're looking at what I'll call the traditional bank metrics that are coming out of the call report or what you're seeing on a GAAP basis from a press release perspective. Slide number 9, this is indicative of it. Yes, the merchant solutions business doesn't count for tangible common equity. On the other hand, it makes about $16 million of EBITDA in pretax. If you put a valuation on it, low to high, it's about $5.45 in cash, $6.42 at the high. It will give you an adjusted tangible book. The fact of the matter is it's just not part of tangible book. But then again, there aren't too many bank holding companies our size that have an asset like this that has reoccurring cash flow. It's in the merchant acquisition space. We've owned it since 2002. And it just generates a lot of cash. It's a valuable asset. And most importantly, it plays into our strategy of giving merchant acquirers the ability to get real-time payments in card, in Fedwire, in ACH, and see all that information in the Newtek advantage. Slide number 10, pre-provision net revenue. We have superior industry-leading pre-provision net revenue. We outperformed in Q1, $25.2 million versus $17.1 million a year prior, 47% increase. Our last 12 months, $5.88 versus $1.26 and $1.36. This is based upon things like the merchant processing business and all of our non-interest-related activities. Now, I will say, you know, if you're starting to put on 7(a) loans and building that bigger portfolio, this is going to start to grow and grow and grow. And as you'll hear from Scott and Frank, we've started to retain some of the government-guaranteed pieces, which add to our unrealized fair value increase for the quarter. That was a big question that everybody had. That's based upon the market price of the government-guaranteed bonds. There's no major secret or hidden issue there. We typically sold everything. We've held some of that back this quarter, and we'll continue to do a little bit of that going forward. That is a change. You'll see a lot of granularity on that in the Q when that gets released. Slide number 11, still focusing on PPNR. The prior slide was really at the holdco. This is at the bank. The bank's PPNR was 13.2% of average loans for Q1. It's averaged 19% for the entire year last year versus a peer average of 2.1%. The bank's loan loss provision is averaged covered net charges by 3.9 times over the last four quarters. I think it's extremely important to look at PPNR to demonstrate that we've got very healthy earnings that can cover the loan loss provisions. I want to point this out, and everyone seems to be forgetting this. The definition of an SBA 7(a) loan, the definition of it is a loan that does not qualify for normal lending standards at a bank. That means, in plain English, you're going to have higher losses on the uninsured piece. The benefit you get is a government-guaranteed bond that gets created on 75% of the loan that you could sell for a cash gain. Now, a lot of people say, I don't like gain on sale. It's not reoccurring. It's not repetitive. It's been a reoccurring event for us for 20 years. We're going to continue making money. We're going to continue to sell those government guaranteed pieces if that's our strategy going forward. And I believe it will be because it creates the greatest return on equity and greatest return on assets. And after a period of time, people will begin to get used to this. We'll continue to earn money. The book value will grow. The dividend will be paid. And everybody will live happily ever after. On Slide number 12, this slide is the beginning of being able to break out all the different loans and all the different buckets so you could get a much clearer view, as well as the migration over the course of 2024 to the first quarter. I think it's important to note there's a 3-31, 2025, $1.9 billion of total loans. You could see the pie chart there. This includes the bank. It includes the non-bank. And it includes the joint ventures. So the joint ventures are all balance sheets. But we have a lot of loans that are in our joint ventures or in our securitizations. So it is important to understand this smallish-sized bank makes a lot of loans. When you do a billion dollars of SB 7(a) loans, only $250,000 sits on the books of the bank. We have a lot of activity. We have more capital deployed in activities outside of the bank than in the bank. The earnings power outside of the bank is greater than what is in the bank. These are things that the metrics do not apply to NewtekOne. And that's why we don't position ourselves from an investment perspective as a bank holding company or a financial holding company, or a company that provides financial and business solutions and also has a depository. Then one might say, well, why did you buy a bank? We bought a bank because the customer goes to their bank interface three to five times a week, 12 to 20 times a month. And that's a great interface for us to be able to provide real value through the Newtek Advantage to the customer base. Slide number 13, this is an important slide. A more important slide as well is Slide number 15. I think the nice thing about slide number 13 is it excludes NSBF. Some people say, why are you excluding NSBF? Well, we have to be honest with ourselves and our shareholders and the Newtek Small Business Finance Portfolio made a lot of loans in '21, '22, and '23, which I'll refer to as a zero rate environment, a three to four percent prime environment. Well, prime went up to 8.5%. I think it's currently at 7.5%. You cannot have a 4% to 5% rate shock to a business and not have it affect its charge loss. Important to note, those non-accruals that are sitting up at NSBF, they've already hit book, they've already charged off against earnings, and guess what? We've earned through that. And as you'll see from Slide 15, that drag is beginning to diminish. I think it's important that the growing NPL levels are within the company's expectations and business plans and are consistent with the company's loan duration history over the course of time as a BDC and prior to a BDC. Once again, the definition of an SBA loan is one that should generate higher losses. And I have to talk about the emphasis on credit. I'll call it the overemphasis. I always think about the Casablanca movie with Humphrey Bogart standing in front of the police officer and the police officer is saying, oh, my God, there's gambling going on in that casino. Oh, my God, you have higher losses than in the traditional bank. Well, yes, it's because we make loans with higher margins. And in a CECL environment, you get hit with that reserve up front. You don't get the Prime plus three coupons for years later as you build a portfolio. But everybody that knows and understands CECL, ultimately this leverages out, it reverses itself, and the coupon starts to come in. So yes, there is gambling in the casino. Not to say that making an SBA loan, which we've got over two decades of history, we've got 13 securitizations in the market, none of them have been downgraded, that we don't know how these particular portfolios perform. So we're proud of this business. We're comfortable with this business. We have enough loan loss provision. We have enough capital. And the business makes a lot of money. We look forward to getting to Slide 15. One other aspect of NPLs. NPLs in an SBA portfolio, given that the loans are 10 years amortizing to 25 years amortizing without a balloon, these NPLs hang around longer. So the weighted average seasoning on our NPLs is like 18 to 40 months. They don't go away that quickly. They hang around. And that's because we chase the PGs. These are business owners that have personal and business assets. They file multiple bankruptcies. It's hard to get through the liquidation process. So early on as you're building a portfolio and loans are migrating into this category, the liquidations don't happen that fast. So we're ramping up the default curve. But what you're going to see on 15 is that ultimately you get to a number and that starts to decline. And we'll show that on Slide number 15. Slide number 14 breaks out a lot of things I just stated. 94% of our loan loss reserves are attributed to the SBA 7(a) portfolio. This will show the percentage mix of loans at NBNA, the percentage mix of NBNA loans that are held for investment, and the percentage mix of the allowance for credit losses. All on slide number 14. Slide number 15. I'll say this is my favorite slide. We've said this historically. When we had really material increases in non-accruals, particularly Q2 2024, we indicated that we believed in the not too near distant future, this would start to decline. So if you go to slide 15, $15,800, $12,200, $8,800, $5,700. So we're starting to see this burn down. The NSBF loss, which is segmented, $10.7 million loss Q4 2024, $4.9 million loss Q1 2025. This company is in a wind down. There's approximately $200 million of capital in this business. The loans are sitting in a securitization. So the cash flow is used to pay off bonds. We called two bonds recently. There's three bonds left. Those will get called. That'll free up the cash. It'll free up the equity. These are all valuable things. If you don't get into the weeds in understanding this part of the business, you're on the wrong conference call. There's a Citibank call down the block. There's a lot of small other banks to look at. We just don't look like them. So if you want to do the work, at this point I would say you'd be pretty well paid for the work that you're going to do. There's an interesting opportunity here. 100% of the NSBF portfolio is aged 24 months or more. We do believe the loss should continue to decrease as balances continue to decline. I'll also note that this portfolio is 41% of loans on the balance sheet on a GAAP basis, and it's now down to 21%. I'd now like to, and hopefully we fixed our technical problem with Scott Price. I'd like to turn this rest of the presentation over to Scott Price and Frank. Scott, are you there?

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 know, $500 million. That's going to be a challenge. It's always a challenge. It's never easy, but that's a growing book of business. Now, the average loan size on that book is 5 million. So it's 100 units. Okay, 100 units. We did 2,400 loan units last year. We'll do 2,700 loan units approximately this year. So the answer to your question is, obviously, and I appreciate the question, because it puts us on record. We believe that our earnings and our projections are real, and they're sustainable. Needless to say, anybody that tells you they can 100% accurately predict the future, they're full of it. Okay, this is extremely difficult. We've seen public companies pull their guidance, no guidance, miss badly. You know, we took this bank from a dead start and built a real solid business opportunity in it, which I hate to say we're not getting a lot of credit from for our technological business, opening up 15,000 bank accounts, moving the lending business in, going through two regulatory audits, hiring people. And by the way, you know, people coming in and out, that's just a, that's just, that's natural. That's just a natural thing. People come and go all the time. So yes, I believe it's sustainable. The 7(a) business, we've been in for over two decades. So we know it pretty well. We know it at high rates, low rates, good, good markets, 08, 09. We've, we've seen a lot of these shows before. So I do appreciate the question. Thank 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 margin. So I strongly believe that our ability to manage through this from a risk perspective is better. I want to flip it, one thing, because you brought to light something I thought about. On the deposit side, if you are a depositor, where would you be more likely to leave to go to a 420 rate on a government money market fund? At a 1.5% to 2% at a bank that's paying you that and charging you for all those fees, where would you be most likely to leave or migrate your money, or where you're paying 4%? So here's my opinion. We're paying a market rate of interest on deposits. That means, in my humble opinion, those deposits are stickier. As long as we pay a market rate that's close to the government money market rate. If I had to rely on low-cost deposits in the market where you can move money with the click of a mouse, swipe of a finger, I'd be nervous. That's more risky than what we're doing. And we've got good NIMS, because on a risk-adjusted basis, despite the over-exaggeration of, oh my God, every conference call, it's all about the SBA portfolio and credit. And meanwhile, we've got a lot of other things going on here. But I get it. That's what everybody wants to focus on. We're going to go through this. And over the course of time, all of these curves will mature, they'll work itself out, and we'll be just fine. But that's my answer. We are provisioned in the bank. We'll do the Humphrey Bogart thing next quarter, too. Oh my God, there's gambling in that casino. Oh my God, they're creating a new portfolio that's ramping up the credit curve. Non-accruals are growing. And by the way, they don't go away that quickly, because we chase them. So I think it's very important to try, not just only you, but investors, to try to understand our model, see what we're doing differently, look at the presentation and see what we're doing and why it doesn't apply to a traditional bank holding company that's got nothing at the holding company except for the bank, who basically makes no-risk to low-risk loans with low charge-offs. And your entire business is predicated on the hope that those depositors stick in the bank.

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.