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.