NewtekOne, Inc.

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

Thank you, operator, and welcome everyone to the NewTekOne NASDAQ-NEWT Second Quarter 2025 Financial Results Conference Call. My name is Barry Sloan, CEO and President of NewTekOne. Joining me here today on the call will be Frank DiMaria, Chief Financial Officer of NewTek One, 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, while he was there, was the equity analyst for BDCs and banks, and very helpful and instrumental. in shaping our presentation and deck to make it a little bit more digestible and understandable. I also want to give a couple of shout outs to some additional new hires. Kathleen, our Chief Strategy Officer, joined us from Flagstaff Bank, has been incredibly instrumental in helping us with various near future of our digital account opening and merchant, instant merchant account opening simultaneous as well as the reverse. opening up an instant merchant account. I also want to announce Vic Mahajanin has joined us recently. Vic has had a long-term career as an M&A banker and was our banker at Credit Suisse and Deutsche Bank. Vic is 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 non-performing loans off the books in the balance sheet. With that, I'd like to mention everybody to follow along on today's presentation. Please go to newtech1.com, go to the investor relations section, and the PowerPoint is hung there. On slide number two of the PowerPoint is our note regarding forward-looking statements. Please ask everybody to familiarize yourself with that note. On slide number three, an important part of our discussion today is really looking and focusing What is New Ticklin and 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 US. Some participants refer to them as SMEs, SMBs, subject small, medium-sized enterprises, small and medium-sized businesses. And recently, we acquired a federally insured depository. It's important we choose and prefer not to be looked at just like a bank holding company, a bank, because as you go through this presentation, we really don't look like most of the bank holding companies and banks. We're different in a variety of different ways in terms of how we approach the customer, how do we provide a frictionless opportunity for the client, the type of revenues, earnings that come through our system. 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 US Chamber of Commerce, small businesses employ almost half of the American workforce. And we do think as things go forward, particularly artificial intelligence, they'll continue to be a very prominent part of the employee employment opportunity in the US. SMBs represent 43% of US GDP and 99% of the business in the United States identified themselves as small. Also important to note, according to the SBA's data over the last five and a half years, NewTek won as one of the more active 7a 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 7a 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 none 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's certain metrics that compare us in an unfavorable light. New Tech One is a financial holding company regulated by the Fed. We focus on using proprietary and patented advanced technological solutions to acquire customers and to solution them cost-effectively. Also important to note, most bank holding companies don't have a lot of assets in them. We're extremely active as a bank holding company. Evidence, New Tech Merchant Solutions that does about $17 million of pre-tax income and EBITDA, and our alternative loan program business, which has balance sheet, or I should say loans that are made in joint ventures and in various structures that are about $450 to $500 million. We do provide a full manual best in class on demand solutions to its independent business owner clientele without using traditional bankers, branches, brokers, or BDOs. Through this methodology, we picked up 19,000 depository accounts since its inception. We do loans digitally and remotely, and we also handle our clients' ability to send money, receive money, payment processing solutions, payroll solutions, and insurance. In a nutshell, we are a technology-oriented financial holding company operating and owning a digital bank that operates exclusively using an online banking platform without what you traditionally see in a bank holding company and a bank. We believe that going forward, the banking industry will tremendously benefit from technology and artificial intelligence, which we are currently embracing and utilizing. It's important to note, we think that many of the institutions that you're familiar with will not look like the current bank of today. Frankly, from our perspective, we have a belief that we are already doing, which is what they want to do. They want to acquire customers remotely. They want to, um, really automate their business. They want to use AI. These are things, as you go through the presentation, they're already in the process of doing. Slide number four, Q2 financial and operational successes. First off, we're maintaining our earnings per share guidance of $2.10 on the low to $2.50 at the 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 have 15% revenue growth in Q2 2025, 78.2 million versus 61 million in Q2 2024. Some of the other operational and financial highlights and an important part is growth in business deposits. Business deposits come in on a less expensive basis. They're more transactional, but in order to get business deposits, and we believe the non-interest bearing depository account will begin to go away over time. As a matter of fact, if you go to Coinbase and you own stable coin, you probably get two 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 integrated solution. With that, our cost of funds at the bank declined dramatically. and is forecast to continue to come down. The best is yet to come. We had a 28 basis point decline in our cost of funds. I think it came in about 3.71. 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 talk about, which is the bill rate or NAV of a government guaranteed money market fund. Importantly, we'll discuss this on one of the slides going forward. Losses continue to shrink in NewTek Small Business Finance. In the recent quarters, 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 will 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 three securitizations successfully, is growing, has high-quality loans, and is very accretive to earnings per share. We're going to talk about our operating leverage being captured and really supporting above-average profitability. When you take a look at our ROAs, ROTCs, 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 7A loans were sold for cash and the ALP loans were written down at full value to par to go into the equity stake in the securitization. I think it's important to note, we make loans and sell them. Most banks make loans, not at the growth rates that we do, and they hold them. We believe we're different than 95% of the other banks out there. And we're very, very excited about our business model now operating through 10 quarters of success. We're going to talk a lot on this particular presentation. about what we're doing in the ALP business in future slides, which I think should develop a better understanding of what we're doing. I think important to note, we'll come back to this, the residual interest in the ALP recent securitization in 2025 deal is marked at a 14% yield, including a loss of 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 three securitizations, one in 2022, one in 2024, and the more recent one, 2025-1. Moving to slide number five, second quarter CEO highlights. For the earnings picture, basic and diluted EPS of 53 and 52 cents respectively. The first half basic and diluted EPS of 89, 87 are above the midpoint of our guidance. 78 to 92 cents we're leaving that annual 210 to 250 share EPS unchanged and the midpoint implies an EPS growth rate of 17% typically something you know see in most bank or bank holding companies we talked about success and growing core deposits we talked about the reduced headwinds from our SBA a non-bank 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. So clearly you could see that we're trending in the right direction. We have a slide to cover this. And important to note, non-accruals within NSVF actually declined quarter over quarter. Price of S&P, and that's 2024 versus 2025. Price of SBA 7A loans were consistent with our fair value marks. So the 7A loans that we held on an unrealized basis for Q1 sold into the second quarter. There was actually a non-existent gain transfer. We had to recognize an unrealized loss to wipe out the unrealized gain. And then we had a realized gain for cash. So this offsets one another. We actually sold approximately 22 to 23 million of 504 loans at a price of 104 and three quarters with 40 basis points of servicing also extremely profitable important to note and we talked about why we're keeping some of the government's guaranteed 7a loans on our books we're actually able to pick up a prime plus three or a ten and a half percent coupon that was one of the factors that helped the name at the bank the alternative loan program performing exceptionally well In June and July, both Deutsche Bank and Capital One, we closed the Capital One deal today, we're pleased to say, upsized 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. When we look at our ROAs and our RTCs, exceptionally strong. Slide number six, our annual forecasts are readily available on this particular slide. As we look at our business model, and you've heard me talk about this in previous presentations, we solve three primary problems in the banking industry. We're able to acquire deposits below the risk-free rate because of the new tech 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 new tech advantage. In addition to that, you can make payroll from the new tech advantage. The ability to move money. with us owning the payroll business, owning the merchant business, being able to do ACH, being able to do wire. And we will position this organization for stablecoin in the future. We're very excited about that opportunity. We think a lot of money is going to be moved over time, particularly when you're dealing with out of country transactions. And we will be able to position ourselves for that. Banking institutions that do not give a real frictionless, seamless opportunity for customers to send money and receive money will be in a tough spot. Once again, you've got to provide value for the customer. I think it's also important to note what other institutions are talking about, we are doing. We're completely digital. There's no branches. There's no traditional bankers. We're really doing a great job in acquiring clients. Our loan book, we estimate by the end of the year, to be approximately 10,000 borrowers and 4.4 billion in servicing. At the bottom of slide number six, you could see our forecast from here to the rest of the year, our ROAA for the second quarter, two and a half percent, ROTC 19.4. Look, these are outstretched numbers and it's based upon our model. I think it's important to note, making loans and selling them is what we do. We've been doing it for 20 years. We'll probably do it for another 20 years. It provides great returns. It provides great risk adjusted returns. I suggest everyone go to slide number seven in the deck, and you could see, once again, a lot of our performance metrics, net income, diluted EPS, pre-provisioned net revenue, all the numbers that we talked about, a very, very strong Q2 financial highlights on slide number seven. Also important to note when you look at our capital position, we have more than adequate capital across the whole code. 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 number eight, you could look at our financial highlights from the bank. I'd certainly like to point out the cost of deposits declining from 3.99 to 3.71. A lot of that's benefited by being able to pick up the bank deposits. Net interest margin grew from 4.9 to 5.46. I think a lot of our competitors are dreaming of net interest margins on that type of a basis. And obviously, once again, when you look at our ROAAs, our ROTCs, this is at the bank, 3.94 ROAA, return on tangible common equity, 35% with more than adequate capital at the bottom of the page on slide number eight. On slide number nine, another one of our success stories is growing tangible book value per share. Increased 3.7% sequentially quarter over quarter and 21% year over year. Extremely important, we 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. watch tangible book grow slide number 10 i think was an important slide we appreciate bryce's contribution here a lot of the investors that we met up with they want to see where all the assets are in a breakout looking at the different buckets this is extremely important from an evaluation standpoint to see what's on balance sheet what is technically off balance sheet on an on-gap basis but a lot of the aop loans that are in joint ventures or in securitizations or balance sheets, 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 a billion-dollar bank and a little over a $2 billion holding company, We have a big operation. We believe, first of all, we do between a billion and a half 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 quote unquote amount of activity. Once again, we make loans and we sell them. We sell the government guaranteed pieces and on the ALP loans, we create them, we warehouse them, and then they get sold into a special purpose vehicle and create a securitization that is match funded. Slide number 11 may be one of the most important slides in the deck and maybe one of the most least understood aspects of our business. Number one, when we do AOP 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 points 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 loans. 180, 185 million of bonds, and we created this securitization known as NALP 2025-1. Also, we intend to regularly execute ALP securitizations with the loans on the balance sheet. As a matter of fact, if you like what we did recently, we're about to do it again. We've got 138 million of ALP loans currently sitting on a balance sheet. I think you'll see another securitization again in the fourth quarter. Once the loans go into that special purpose vehicle, they get written down, then the residual piece gets valued at the yields that we talked about, which are market clearing yields. Once again, important to note, this is extremely accretive, very valuable, 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 7A business, the average loan size is 400 to 450,000. So the ability to get to, I'll make up the number, a billion dollars 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, 7A, line of credit, which would be C&I loans, both term and revolvers, and CRE. It's that pipeline of six to 900 business roles a day, two and a half million in database that we're able to reach customers and let them know that we will do these types of loans. On slide number 11, we have detailed the mechanics to make sure that the market understands how these assets are flowing through the income statement and the balance sheet. The unrealized gains on securitized loans that appear in Q1 were reversed when those loans went into the securitization. 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 one, 5% in year two, 5% in year three, and 3% in year four. The duration of these particular loans in the portfolio is between four to five years. All important data to think about when you're looking at our ALP business, particularly with this information on slide number 11. If you look at the net income in the securitization, it's probably priced at about five and a half times cash flow. So I ask everybody on this call, would you like creating assets and valuing them at five and a half times cash flow in a business that's growing without expense associated with it once it's put into the securitization. We like the business a lot. Let's go to slide number 12, credit quality. We've talked about this. It's a slide that you've seen in the past. The non-accrual increase in NSBF is slowing. We put some numbers around that. I think this is an important bullet, number three. As a non-bank lender, We generally retain the loans that were 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 hits been taken and they ultimately get turned into cash. We are in the process of selling non-performing loans, both at NSBF and in the bank. I think you'll start to see some activity on this in the near future, which will validate our valuations, but most importantly, return capital to us, and maybe put us in more normal types of ratios and metrics that we all hold onto in our hands. Once again, important to note the LP loans performing well using the on and off balance sheet LP balances. We have a 1% historic charge off rate as of June 30, 2025. And some of the data that you see on the chart here is important not to exaggerate the NSBF portfolio, which frankly, When I get asked questions about the great financial crisis, the great financial crisis, in my opinion, was 21, 22, and 23 for SBA lending, where rates basically rose between 3% to 5% on loans that originated in that vintage year. So we took quite a bit of losses on that particular portfolio. And I think as you go to the next slide on 13, important to note, The percentage of portfolio H loans less than 24 months, zero. 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 have cleanup calls, which will be very useful to doing things like paying off debt, buying back stock, paying dividends, all the things that shareholders really like and enjoy. So the NSBF portfolio continues to pay down. It paid off during the last calendar year about $102 million, roughly 30%. We do believe the amount of accrual inflows in the NSBF hit their peak in Q2 2024, continued to accelerate, and we think that NSBF is going to wind up being an important opportunity for us. Once again, a lot of the remaining loans in NSBF are, I'll use the word, trapped in free securitization. The 2021 deal, 2022 deal, 2023 deal. So prepayments, loan liquidations are all held for the bondholders. So once those bonds hit their cleanup quote 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 Frankie Maria present slide number 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 7A loans. which is built from the first half of 23 when the bank began originating 7A loans. Prior to that, the 7A loans were originated by our non-bank lender. The bank's been building an allowance for credit losses against that portfolio, more than 90% of which is related to the unguaranteed 7A book, which currently carries an allowance equal to 8.3% of unguaranteed 7A balances. 70% of the 7A 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 of 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.

Slide 18, the average net premium from SBA 7A loans. For second quarter 2025, we averaged 110.91. I think it's important to note that the SBA changed some of its rules and regulations. And we believe that the market claim premium government guaranteed 7As 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 to 110, 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 to 250. On slide number 19, another Bryce Rowe original, adjusted net margin. This is basically a good analysis of really taking a look at, and obviously it's not a gap, but all the loans that we have, both on the balance sheet and off the balance sheet, to basically give us, you know, I guess what I would refer to as an adjusted NIM. 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%. 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.

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

Hey, good afternoon, guys.

How are you doing? Good, Tim. How are you? Doing all right. Thank you for taking my questions. 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 about $50 million of growth on the commercial deposit side? And then, you know, 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 be in the business capacity If the account is 1%, our business savings is 3.5%, and it's truly a zero-fee opportunity. And through the new technology, we give our clients a tremendous benefit in merchant services and in payroll. We will be back and forth with a solution. So, you know, I think the days of getting a depository account where it isn't linked to a solution for a business to 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 that 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 know, you're doing payment processing. Well, it comes with a bank account. You're doing payroll. Well, it comes with a bank account. Now, in addition to offering the bank account, it's a zero fee account. It's a higher rate account. We are able to take the customer's banking depository information, run it through our software and do an analysis as to where they will save money. Now, from a technological standpoint, when they go to the NewTek Advantage, they could look at the bank information, ACHs, FedWires, They can also see on card their refunds, their chargebacks, their batches from that bank. 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.

Okay, great. That was really helpful. 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 talk about one?

Yeah, it was $5 million, Tim.

Okay, so pretty flat with last quarter?

Yeah, 5.1 to be exact, exactly.

okay so exactly the same as last quarter um 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 the various drivers that went through um that net fair value line item um and obviously it was you know a negative 11.8 million this quarter um and i know that 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?

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

Yeah, 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 net unrealized loss.

By reversed, Frank, you mean written down to zero, right? In other words, the gain is offset by the loss.

That's right. I think it's important to note that.

I've had a couple of investors say, gee, you're double counting. No, we're not double counting. That's right.

No, that's okay. And they were written down, as Barry mentioned, certain for 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. It's part of the offset of that loan, of that loss loss. as well as the 7A unguaranteed loans that are also being held on the books before they get sold.

Okay, great. Thank you, guys. Thank you. You're welcome.

And, Tim, also, I think if you go to slide number 12 and you look across the number, 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 bank's health or investment portfolio being fairly mature,

Barry, I think we lost you there. You may have to repeat that. And pardon me, please stand by. Mr. Sloan, are you able to hear us? Pardon me. Please stand by. Your conference will resume momentarily. Operator, are we reconnected?

Yes. Are you able to hear us again?

I hear you. Yeah.

Okay.

So I don't know if it came through, but I wanted to point out on slide number 12, there's a lot of stability when you run your finger across 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 non-accruals roll into the 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. Next question operator.

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

Good afternoon. I just want to follow up on the net gain and residual and securitizations line. 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.

Yeah, 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 non-controlled interest line. We do anticipate doing these type of structures in the future, but that's the difference there between the two prior ALP securitizations.

Okay, thanks. And then just on the SBA rule changes that went into effect June 1st, 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 7a product? I'm 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.

Chris, that's a good question. I don't believe for our purposes, because It's very different than non-bank lenders in the space are having a lot of difficulty. Um, they don't have the staff. They don't have the capability to comply with the new, uh, changes. We're very proud of the fact that we are totally comfortable. We're not changing our, our guidance for a billion dollars of seven days for the year. And by the way, when I say we're going to one 10, You know, 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.

Great. Thank you, Barry. I appreciate you taking my question.

And Frank, too. Thank you. Thank you. And as a reminder, to ask a question, please press star 1-1. Our next question will come from Mark Silk from Silk Investment Advisors. Your line is open. Please check that your line is not on mute. And again, Mark Silk, your line is now open. Thank you. We will move on to our next question. Our next question will come from Steve Moss from Raymond James. Your line is now open.

Good afternoon. Can you answer that, Steve?

How's it going? Barry, maybe just starting with the extended holding period for 7A loans. Kind of curious, like, you know, how do we think about that? Is that just, you know, a small timing difference or is it going to be, you know, a little longer in duration?

I think you're referring to the NPLs, right? Non-performing loans?

Oh, I thought maybe I misread that. I thought I read that. There's a little extended period for holding 7A guaranteed.

Oh, you're holding them on the balance sheet. Got it. Yeah, we're looking at a holding period of 60 to 75 days, maybe 90, but rolling into the next quarter. We still intend on selling them for cash gains. We found that this is a good strategy for us. It's helping our net interest income. So I think you're looking at 60 to 75 days.

Okay, got you. 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.

Okay, got you. 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, you know, I know you have investments obviously ongoing, so maybe that drives up expenses. Just kind of curious how you think about that.

Hopefully, flattish. I think when we looked at our expenses for Q2 2025 versus Q2 2024, I think there was only a 4% increase. 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.

Okay. Got you. And maybe if we could just go back to the net gain on residuals and securitization. So you had... $32.4 million, you know, is you have, you're holding the entire residual, which to me looks like that was $32 million based on the bullet where you close $184 million securitization backed by $216 million in outblowns. So basically, am I thinking about this correct? It's 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 up 14% discount. Did I hear that correctly? Yeah.

14% discount with a 15% default frequency over the life and a 20% severity, which will be a 3% charge off that after that charge off, you get to the 14%. Okay. And, and Steve, the book value I believe is around 35 million. Okay. 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, two 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. And I think what you'll see is when you do the math, I'm not saying it's positive or negative, but it's pretty close. Okay. And if you look at the valuation, it's approximately five and a half times income.

Okay. Okay. That's everything for now. Thank you very much.

Thank you, Steve. Thank you. Our next question will come from Christopher Nolan from Ladenburg, Salomon & Co. Your line is open.

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

Yeah, that's a good question. You know, and the other thing, too, And I do appreciate the question. The funny thing about the business, and I'm not a career banker, but that provision to me, that's like capital. So I like a big provision. It breaks out a lot of people, just to be frank with you. Matter of fact, when people reduce the provision, in many cases, the stock goes up because people think that people are forecasting bluer skies ahead. I like having the cushion. And also even with that cushion and that provision, we're still good on our numbers, which I think is, you know, 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 four and a half to five and a half. Now, one thing I will tell you, some of that may change as we look to grow the CRE book as a bigger percentage and the CNI book, the traditional CNI, bank loans, due in five years, full covenant package, full book. Those loans have much lower provisions than the 7A business. Matter of fact, I think the 7A business currently accounts for about 90% of the total provision. I think it's about 92%.

Yeah, in the past... the regulators viewed loan loss provisions as reserve capitals or capital as well. And they put the brakes on banks in terms of not over provisioning. Are you seeing from the, 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, um, you know, we've been in the banking business now for 10 quarters and people said, Oh, gee, the other regular, listen, it's been a very solid relationship. They haven't, like the three little bears that it's too hot or too cold. They seem to be comfortable with really where we are. Now, I want to be very clear here. I think that one of the reasons we were an attractive application candidate is because we do the loans at 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 and i 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 where our heads are at i mean no we like the provision after doing this for 20 years we think this is the right provision okay and given that you're really over earning the dividend um

Is it possible we could see a little increase in dividend?

I don't know. I think we're the Rodney Dangerfield of stocks right now. 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 I've gotten a lot more help, a lot more clarity. We'll get people to better understand what we're trying to do. And I won't tell you that it's not as complicated as it is, but it makes money. So we do what makes money.

Okay. Thank you for the answers.

Thank you.

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

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

Yeah, right. I think it's time to switch on, Mark.

Yep, switch from a cell phone to a landline. For question number one, as a shareholder, I'm perplexed that your stock traded a PE around five or six while the industry trades higher. Can you explain why you think that is?

I think we're different. 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 we're disruptive. Here's an organization that took over a manual one-branch bank, opened up 19,000 depository accounts, fund 20,000. 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, you know, 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. Oh, all these money managers are talking about doing it and they're doing deals with banks. They're really doing syndicated bank loans or leverage 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, yeah, if Apple doesn't sell any iPhones and GM doesn't sell any cars, they're going to lose money too. We make loans and we sell them. That's the business model. That's what we've done for 20 years. And it generates high returns and 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, you know, this wouldn't be a bed of 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, you know, if you keep earning money and you keep paying a dividend at some time when people are more comfortable with it, don't 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.

Okay, that's a fair assessment. And then I'm trying to – maybe you can give us some color. 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 show us where a lot of it's 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, but two accounts. Important to note, We're not charging people. There are 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 new tech advantage. By the way, you can't process an electronic payment without a bank account. So why not use our bank account at zero fee and provides better analytics up front? Same thing for payroll. Same thing for lending. So having these things fully integrated, very important, not limited. 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 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 the great cost. Here's the great integration. Here's the great analytics. Come look at the new tech advantage. So we give the customer an advantage to putting all these things together. It's a little bit similar to Shopify where you don't unbundle all the stuff. More frankly, what Amazon does where everything comes together in one unique integrated model for the customer.

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

Thank you. Thank you. And I am showing no further questions from our phone lines, and I'd like to turn the conference back over to Barry Sloan 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 appreciate. Once again, I want to greatly thank my senior management team. I know I named a few people, but I can't name them all. They do a great job for all of our stakeholders, shareholders, customers, and employees. Thank you very much. Have a great day.

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