NEWT - NASDAQ

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. Please ask everybody to familiarize yourself with that note. On Slide #3, an important part of our discussion today is really looking and focusing on what is NewtekOne? What does it do? What's our mission statement and what's our purpose? Well, it all starts off with the customer. We provide business and financial solutions to a target market of over 33 million independent business owners in the U.S. Some participants refer to them as SMEs, SMBs subject -- small and medium-sized enterprises, small and medium-sized businesses. And recently, we acquired a federally insured depository. It's important we choose and prefer not to be looked at just like a bank holding company and bank because as you go through this presentation, we really don't look like most of the bank holding companies and banks. We're different in a variety of different ways in terms of how we approach the customer, how do we provide a frictionless opportunity for the client, the type of revenues, earnings that come through our system. So we look forward to discussing that presentation with you here today. Relative to the importance of the SMB, SME or independent business owner class in the United States according to the U.S. Chamber of Commerce, small businesses employ almost half of the American workforce. And we do think as things go forward, particularly with artificial intelligence, it will continue to be a very prominent part of the employment opportunity in the U.S. SMBs represent 43% of U.S. GDP and 99% of the business in the United States identify themselves as small. Also important to note, according to the SBA's data, over the last 5.5 years, NewtekOne as one of the more active 7(a) lenders through its non-bank and bank subsidiary has supported and stabilized over 110,000 jobs. I think it's important to note that we do serve a public purpose and a public good. We're not just an SBA lender, as you'll see throughout this presentation, we do all types of loans to this particular demographic. But in being an SBA lender and the definition of an SBA 7(a) loan is a loan that is not available under normal bank circumstances. As a matter of fact, there's a test called the credit elsewhere test that says these types of loans do not qualify for a normal bank loan. It's important to note that we, therefore, have greater losses and greater provisions, but net of those losses and provisions and expense, we provide greater returns. So when we're comparing us to the rest of the banking industry, there are certain metrics that compare us in an unfavorable light. NewtekOne is a financial holding company regulated by the Fed. We focus on using proprietary and patented advanced technological solutions to acquire customers and to solution them cost effectively. Also important to note, most bank holding companies don't have a lot of assets in them. We're extremely active as a bank holding company, evidenced Newtek Merchant Solutions that does about $17 million of pretax income and EBITDA and our alternative loan program business, which has a balance sheet -- or I should say, loans that are made in joint ventures and in various structures that are about $450 million to $500 million. We do provide a full menu of best-in-class on-demand solutions to its independent business owner clientele without using traditional bankers, branches, brokers or BDOs. Through this methodology, we picked up 19,000 depository accounts since its inception. We do loans digitally and remotely, and we also handle our clients' ability to send money, receive money, payment processing solutions, payroll solutions and insurance. In a nutshell, we are a technology-oriented financial holding company, operating and owning a digital bank that operates exclusively using an online banking platform without which you traditionally see in a bank holding company and a bank. We believe that going forward, the banking industry will tremendously benefit from technology and artificial intelligence, which we are currently embracing and utilizing. It's important to note, we think that many of the institutions that you're familiar with will not look like the current bank of today. Frankly, from our perspective, we have a belief that we are already doing, which is what they want to do. They want to acquire customers remotely. They want to really automate their business. They want to use AI. These are things as you go through the presentation, that we're already in the process of doing. Slide #4, Q2 financial and operational successes. First off, we're maintaining our earnings per share guidance of $2.10 on the low to $2.50 at the high, that's for calendar year 2024. Also important to note, one of the things we really don't talk enough about is revenue growth. We had 15% revenue growth in Q2 2025, $70.2 million versus $61 million in Q2 2024. Some of the other operational and financial highlights and an important part is growth in business deposits. Business deposits come in on a less expensive basis. They're more transactional. But in order to get business deposits, and we believe the noninterest-bearing depository account will begin to go away over time. As a matter of fact, if you go to coin base and you own stablecoin, you probably get 2% to 3% on your money. So we were very pleased that we were able to grow business deposits at the bank by $50 million sequentially with most of the money coming in, in the DDA account. The reason why we're able to do that is we're getting opportunities from lending, merchant services and payroll, all an integrated solution. With that, our cost of funds at the bank declined dramatically and is forecast to continue to come down. The best is yet to come. We had a 28 basis point decline in our cost of funds. I think it came at about 3.71%. The net interest margin at the bank increased by 56 basis points. And once again, we're very pleased with what we've had at the bank with respect to our cost of funds. That's extremely important going forward that we're just beginning to get deposits below that risk-free rate, which I talked about, which is the bill rate or NAV of a government-guaranteed money market fund. Importantly, we'll discuss this on one of the slides going forward. Losses continue to shrink in Newtek Small Business Finance. In the recent quarters, we went from a $10.7 million loss to a $4.9 million loss to a $3.7 million loss. And Newtek Small Business Finance was the prior non-bank SBA lender that is in a rundown mode and it's held up at the holding company, no longer lending. The alternative loan program, we'll spend a lot of time on this today. And hopefully, we'll be able to position this in a better light so people can understand the value of ALP, not just to our business customers, but to all our stakeholders, including shareholders. It's extremely important to note that our alternative loan program, which has now completed 3 securitizations successfully, is growing, has high-quality loans and is very accretive to our earnings per share. We're going to talk about our operating leverage being captured and really supporting above-average profitability. When you take a look at our ROAAs, ROTCEs, the expense ratios, really extremely favorable on a comparative basis. Last bullet, a portion of the $18 million of the unrealized gain in Q1 did cause some of our investors some level of confusion. I think it's important to note that from Q1 2025 to Q2, when we sold the government-guaranteed loans and moved the ALP loans off the balance sheet into the securitization, that actually got eliminated. The government-guaranteed 7(a) loans were sold for cash and the ALP loans were written down at full value to par to go into the equity stake in the securitization. I think it's important to note, we make loans and sell them. Most banks make loans, not at the growth rates that we do and they hold them. We believe we're different than 95% of the other banks out there and we're very, very excited about our business model now operating through 10 quarters of success. We're going to talk a lot on this particular presentation about what we're doing in the ALP business in future slides, which I think should develop a better understanding of what we're doing. I think important to note, and we'll come back to this, the residual interest in the ALP recent securitization in the 2025 deal is marked at a 14% yield, including a loss severity and frequency or charge-off rate historically over the life of the loans at 3%. And this is something that we've consistently done as we've done 3 securitizations, one in 2022, one in 2024 and the more recent one, 2025-1. Moving to Slide #5, second quarter CEO highlights. For the earnings picture, basic and diluted EPS of $0.53 and $0.52, respectively. The first half basic and diluted EPS of $0.89 and $0.87 are above the midpoint of our guidance, which is $0.78 to $0.92. We're leaving that annual $2.10 to $2.50 share EPS unchanged and the midpoint implies an EPS growth rate of 17%, typically something you don't see in most bank or bank holding companies. We talked about the success in growing core deposits. We talked about the reduced headwinds from our SBA nonbank lender, Newtek Small Business Finance, with a first half '25 loss of $8.7 -- the 2024 loss for the full calendar year was $28.7 million. So clearly, you could see that we're trending in the right direction. We have a slide to cover this. And important to note, nonaccruals within NSBF actually declined quarter-over-quarter. Price of -- and that's 2024 versus 2025. Price of SBA 7(a) loans were consistent with our fair value marks. So the 7(a) loans that we held on an unrealized basis for Q1 sold into the second quarter. There was actually a nonexistent gain transfer. We had to recognize an unrealized loss to wipe out the unrealized gain, and then we had a realized gain for cash. So this offsets one another. We actually sold approximately $22 million to $23 million of 504 loans at a price of 104.75% with 40 basis points of servicing, also extremely profitable. Important to note, and we talked about why we're keeping some of the government's guaranteed 7(a) loans on our books, we're actually able to pick up a prime plus 3 or a 10.5% coupon. That was one of the factors that helped the NIM at the bank. The alternative loan program performed exceptionally well. In June and July, both Deutsche Bank and Capital One, we closed the Capital One deal today, we're pleased to say, upsized our credit facilities, which we used to fund and warehouse ALP loans before securitizations. Deutsche Bank went from $120 million to $170 million. Capital One Bank went from $60 million to $100 million. So we're excited about the ability to continue to grow this business. Profitability and operating leverage still look great. Our efficiency ratio year-over-year at the holdco, 66.3% to 60.3%. And when you look at our ROAAs and ROTCEs, exceptionally strong. Slide #6. Our annual forecasts are readily available on this particular slide. As we look at our business model, and you've heard me talk about this in previous presentations, we solve 3 primary problems in the banking industry. One, we're able to acquire deposits below the risk-free rate because of the Newtek Advantage. We give the customer analytics, transactional capability and data. We enable them to send money and receive money. We have integrated solutions between the bank deposit account and a merchant account with chargebacks, refunds, batches, all in the Newtek Advantage. In addition to that, you can make payroll from the Newtek Advantage. The ability to move money with us owning the payroll business, owning the merchant business, being able to do ACH, being able to do wire, and we will position this organization for stablecoin in the future. We're very excited about that opportunity. We think a lot of money is going to be moved over time, particularly when you're dealing with out-of-country transactions, and we will be able to position ourselves for that. Banking institutions that do not give a real frictionless, seamless opportunity for customers to send money and receive money will be in a tough spot. Once again, you've got to provide value for the customer. I think it's also important to note what other institutions are talking about, we are doing. We're completely digital. There are no branches. There are no traditional bankers. We're really doing a great job in acquiring clients. Our loan book, we estimate by the end of the year to be approximately 10,000 borrowers and $4.4 billion in servicing. At the bottom of Slide #6, you could see our forecast from here to the rest of the year. Our ROAA for the second quarter, 2.5%; ROTCE, 19.4%. Look, these are outstretched numbers, and it's based upon our model. I think it's important to note, making loans and selling them is what we do. We've been doing it for 20 years. We'll probably do it for another 20 years. It provides great returns. It provides great risk-adjusted returns. I suggest everyone go to Slide #7 in the deck, and you could see, once again, a lot of our performance metrics, net income, diluted EPS, pre-provision net revenue, all the numbers that we talked about a very, very strong Q2 financial highlights on Slide #7. Also important to note, when you look at our capital position, we have more than adequate capital across the holdco. But also importantly, you could see our growth. We have the ability to utilize that capital. A lot of people or banking institutions or financial holding companies, they have the capital, but they can't utilize it. We have the ability to do both and to generate those types of returns. On Slide #8, you could look at our financial highlights from the bank. I'd certainly like to point out the cost of deposits declining from 3.99% to 3.71%. A lot of that's benefited by being able to pick up the bank deposits. Net interest margin grew from 4.9% to 5.46%. I think a lot of our competitors are dreaming of net interest margins on that type of a basis. And obviously, once again, when you look at our ROAAs, our ROTCEs, this is at the bank, 3.94% ROAA, return on tangible common equity, 35% with more than adequate capital at the bottom of the page on Slide #8. On Slide #9, another one of our success stories is growing tangible book value per share increased 3.7% sequentially quarter-over-quarter and 21% year-over-year. Extremely important, we were able to increase our tangible book value while paying a very healthy dividend. So we're excited about that. It's a great opportunity for shareholders to get that dividend and watch the tangible book grow. Slide #10, I think, was an important slide. We appreciate Bryce's contribution here. A lot of the investors that we met up with, they want to see where all the assets are in a breakout, looking at the different buckets. This is extremely important from an evaluation standpoint to see what's on balance sheet, what is technically off balance sheet on a non-GAAP basis, but a lot of the ALP loans that are in joint ventures or in securitizations off balance sheet, they matter. We've had historically 1% charge-offs in our ALP portfolio. And I think it's important to note that we're a good lender. On a risk- reward basis, we've been doing this for 20 years. We've historically come out on top. Also important to note, for approximately a little over $1 billion bank and a little over $2 billion holding company, we have a big operation. We believe, first of all, we do between $1.5 billion and $2 billion worth of loans a year. So I think it's -- because we sell off the government guaranteed piece, we don't get full credit for that "amount of activity." Once again, we make loans and we sell them. We sell the government guaranteed pieces. And on the ALP loans, we create them, we warehouse them and then they get sold into a special purpose vehicle and create a securitization that is match funded. Slide #11, may be one of the most important slides in the deck and maybe one of the most least understood aspects of our business. Number one, when we do ALP securitizations, the residual interests are valued at a 14% yield with a 15% frequency of default and a 20% severity with a 3% charge-off. We mark these to market as we've done regularly since 2022, every quarter. And basically, whatever premium is associated with it gets amortized. I think it's important to note when you look at the spread income, the securitized ALP loans carry a weighted average coupon in the 2025 deal of 13.3%. The notes have a weighted average yield of 6.6%. Now when you take the 100 basis points out for servicing, it's a 570 basis point spread. So I would ask everybody on this call, if I was to go to a bank of our size and our stature and say, you can get 570 basis points match funded and you need no employees because all the loans go into a special purpose vehicle. So there's no expense underneath that. Isn't that attractive? Well, we just did this, and we put, I think, $218 million of loans, $180 million, $185 million of bonds, and we created this securitization known as NALP 2025-1. Also, we intend to regularly execute ALP securitizations with the loans on the balance sheet. As a matter of fact, if you like what we did recently, we're about to do it again. We've got $138 million of ALP loans currently sitting on the balance sheet. I think you'll see another securitization again in the fourth quarter. Once the loans go into that special purpose vehicle, they get written down, then the residual piece gets valued at the yields that we talked about, which are market clearing yields. Once again, important to note, this is extremely accretive, very valuable. And this activity is used from the entire overhead of the bank and of the holding company. So we're getting tremendous operating leverage. Also, the ALP business has an average loan size of about $5 million. In the 7(a) business, the average loan size is $400,000 to $450,000. So the ability to get to -- I'll make up the number, $1 billion of loans, it's 200 units. We'll do probably 2,500 to 2,700 loan units this year, totally within our capability. And we take the same pipeline that we use for all of our lending programs. 504, 7(a), line of credit, which would be C&I loans, both term and revolvers and CRE. It's that pipeline of 600 to 900 business a day, $2.5 billion of database that we're able to reach customers and let them know that we will do these types of loans. On Slide #11, we have detailed the mechanics to make sure that the market understands how these assets are flowing through the income statement and the balance sheet. The unrealized gains on securitized loans that appeared in Q1 were reversed when those loans went into the securitization. So the unrealized gain on the retained residual book, of which about 87% of the principal value went into rated debt instruments. The 13% is the equity piece. Servicing asset that was created also shows up. That's the 100 basis points I talked about. Also important to note, these loans have prepayment penalties, which keeps the loan on the books, it keeps the high coupon and it keeps the borrower from prepaying. It's a 5% penalty in year 1, 5% in year 2, 5% in year 3 and 3% in year 4. The duration of these particular loans in the portfolio is between 4 to 5 years. All important data to think about when you're looking at our ALP business, particularly with this information on Slide #11. If you look at the net income in the securitization, it's probably priced at about 5.5x cash flow. So I ask everybody on this call, would you like creating assets and valuing them at 5.5x cash flow in a business that's growing without expense associated with it once it's put into the securitization. We like the business a lot. Let's go to Slide #12, credit quality. We've talked about this. It's a slide that you've seen in the past. The nonaccrual increase in NSBF is slowing. We put some numbers around that. I think this is an important bullet #3. As a non-bank lender, we generally retain the loans that are in default and liquidated them. We didn't sell them. Well, now that we're in this business and people are very hypersensitive to non-accruals, even though they get marked to the market, the hit has been taken and they ultimately get turned into cash. We are in the process of selling nonperforming loans, both at NSBF and in the bank. I think you'll start to see some activity on this in the near future, which will validate our valuations, but most importantly, return capital to us and maybe put us in more normal types of ratios and metrics that we all hold on to in our hands. Once again, important to note, the ALP loans are performing well using the on and off-balance sheet ALP balances. We have a 1% historic charge-off rate as of June 30, 2025. And some of the data that you see on the chart here is important not to exaggerate the NSBF portfolio, which will frankly, when I get asked questions about the great financial crisis. The great financial crisis, in my opinion, was '21, '22 and '23 for SBA lending, where rates basically rose between 3% to 5% on loans that are originated in that vintage year. So we took quite a bit of losses on those -- on that particular portfolio. And I think as you go to the next slide on 13, important to note, the percentage of portfolio aged loans less than 24 months, 0. So we have a seasoned portfolio in there. We think the real pain of the NSBF portfolio is behind us. The portfolio is paying down quickly. We have approximately $200 million of capital in NSBF that we believe will be freeing up as these securities pay down, and we had cleanup calls, which are very useful to doing things like paying off debt, buying back stock, paying dividends, all the things that shareholders really like and enjoy. So the NSBF portfolio continues to pay down. It paid off during the last calendar year, about $102 million or roughly 30%. We do believe the nonaccrual inflows in the NSBF hit their peak in Q2 2024, continue to decelerate. And we think that NSBF is going to wind up being an important opportunity for us. Once again, the remaining -- a lot of the remaining loans in NSBF are, I'll use the word, trapped in 3 securitizations, the 2021 deal, 2022 deal, 2023 deal. So prepayments, loan liquidations are all held for the bondholders. So once those bonds hit their cleanup call or paid off and get released, all this cash flow and the equity will be freed up for a variety of different uses. I'd now like to have Frank DeMaria present Slide #14 and on.

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.