Q1 2025 NewtekOne Inc Earnings Call
Dr. Paret, Dr. Paret, Dr. Paret, Jason Katz, Dr. Paret
Good day and thank you for standing by [inaudible]
Welcome to the Newtek Wine First Quarter 2025 and its conference call. At this time, our participants are on listen only mode. After the speaker's presentation, there will be a question and intercession.
To ask a question during this session, you would need to press star 111 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 111 again.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Barry Sloane, Chairman, President and Vice, and CEO . Please go ahead.
Speaker Change: Thank you very much and welcome everybody to our first quarter, 2025 financial results conference call. Today I'm joined by my two chief financial officers, Scott Price, the CFO of Newtek Bank National Association, and Frank DiMaria, the CFO of Newtek won the publicly traded bank holding company.
Speaker Change: For those of you who would like to follow along on our presentation, please go to our website newtek1.com, go to the Investor Relations section, and the PowerPoint presentation that would be addressing today is hung there.
I also wanted to do a couple of Honorable Mentions. [inaudible]
Speaker Change: I wanted to thank Bryce Rowe, who recently joined us as the VP of Investor Relations. He saw a terrific job in helping put our deck and press release together and giving a lot of data within the deck and the press release to simplify our story.
Speaker Change: And I also wanted to thank Nick Young. Nick is the former president.
Speaker Change: and Chief Operating Officer of Newtech Bank National Association. Nick, as many of you aware, has left our organization, although he's still with us until the middle of May.
Speaker Change: We haven't banished him to the gulag. He hasn't banished us to Siberia. If you'd like to chat with him, you can get him an NY-O-U-N-G at NewTek1.com
Speaker Change: Nick over the course of approximately four years, a great job of taking a single branch.
Very Manual Bank in Flushing Queens [inaudible]
Speaker Change: and creating our digital platform which today is a fabulous job of opening up 15,000 accounts remotely transferring over.
Speaker Change: Our lending business to the bank, getting through to regulatory audits, which were very appreciative of and the market of a great company is having a deep bench Peter Downs a 22 year veteran of new tech
Speaker Change: the chief lending officer and former and current president of Newtech Small Business Finance, who was largely responsible for SBA business and the success over the course of two decades, has been named president of Newtech Bank and we're appreciative of having that deep bench.
Speaker Change: We did a lot of listening to shareholders and analysts recently, particularly yesterday and in the evening. We've done a lot of reshaping and structuring of the presentation, simplifying a bunch of different important issues.
Speaker Change: More importantly, we believe we'll be able to demonstrate today the really attractive progress that we've made, growing deposits, growing loan growth, being compliant, balance sheet growth, and basically moving through the cycle of establishing a portfolio at the bank level, which is very different.
Speaker Change: Than what you normally see in 98 to 99% of the other other banks. I think one of the things that we want to stress is the traditional metrics that are being used to analyze banks don't apply it here.
Speaker Change: And I think you should go through the deck and we start to explain things a little bit in more of a granular fashion you'll be able to appreciate that [inaudible]
Speaker Change: Once again, part of our challenge is we don't really look anything like a typical bank.
Speaker Change: Most banks have bank holding companies which is the publicly traded stock, and are very little in them except the bank itself
We actually have more capital invested in other assets [inaudible]
Speaker Change: and an equity then we do at the bank. I think that's important to note.
Speaker Change: I think it's important to note that some of the things that differentiate us, we make loans and we sell them. It's a good mark that you can sell them. Sell them means that the loans are made in a good manner where they go into a securization, whether they're 504 loans or sold to other banks.
Speaker Change: Whether or not they are SBA loans, they're not according to SBA guidelines, a business that we've been in for over two decades.
Speaker Change: Fair value, I think is confused a lot of investors and analysts [inaudible]
Speaker Change: We've been a fair value player, almost our entire life, but significantly since 2014 we were a BDC.
Speaker Change: The Cecil Reserve Accounting, which we have adopted in the bank is fairly punitive because you take the losses upfront and you don't get the benefit Okay.
Speaker Change: in the SBA business of the Prime Plus 3 coupon, acceptable to the future, rebuilding a very nice portfolio of those.
Speaker Change: We still believe very strongly that a lot of the metrics are being measured on, don't hold. Banks, frankly, is a bit of an oxymoron, a growing bank. Most banks, our size, do not grow, they maintain themselves. So, if you look at what we're doing here, we make money.
Speaker Change: You can see that by earnings. We grow shareholder equity. We believe this is the way banks will operate in the future.
Without branches, without traditional bankers [inaudible]
Speaker Change: Obviously, we're all familiar with AI and the benefits the AI is going to provide business and industry.
Speaker Change: We're doing a lot of things that utilize artificial intelligence today and I think that we're clearly misunderstood as a matter of time and data and analysis. There is opportunity in Newtek one. We feel really good about our progress.
Speaker Change: But to be frank, we feel bad about the markets misunderstanding and today's efforts are going to be directed towards bridging that gap. Once again, I want to thank you for your time and interest where you go into the presentation and investment. And either way, we appreciate you, whether you like us or you're one of the 8.4 8.8 million. Thank you very much.
Speaker Change: Stockholders that are currently short the stock. Let's go to slide number three.
Admission Statement and Purpose
Speaker Change: Our company is all about providing business and financial solutions to its target market of independent business owners and some people called SMEs or SMEs, small and medium sized enterprises, small and medium sized businesses.
Speaker Change: We do not do consumer loans. We do not do consumer checking. We stay away from the consumer banking side of the business.
Speaker Change: Newtek won't acquire what is known now in this Newtek Bank National Association, so it can add the repository solutions and real-time payments.
Speaker Change: We view ourselves as a technology-enabled company that is now also with the repository. That's extremely different than just measuring us on bank metrics.
Speaker Change: Newtek, one is a financial holding company regulated by the Federal Reserve, utilized proprietary and patented advanced technological solutions to acquire clients cost effectively.
We get $6.00 an hour for all today.
Speaker Change: This is one of the items that we hang our hat on. We look at it as we built a moat around our business.
Speaker Change: Replicating that, not an easy thing to do. The customer acquisition and the ability to solution clients on a camera is a unique differentiator. We believe we provide a menu of best and client solutions to defend the business owners and makes us
A low cost provider and importantly with better Martians [inaudible]
Speaker Change: Once again, we position ourselves a technology-oriented financial holding company operating a digital bank that operates exclusively using online banking with our traditional physical branches.
Speaker Change: We realize that a lot of the markets are hyper focused on credit concerns. I also think that the credit concerns are hyper focused just on the SBA 7a loan portfolio, which frankly is a fraction of our business. [inaudible]
We have a lot of assets in the ALP business [inaudible]
We'll talk about our success in our recent...
Speaker Change: Securitization. We'll talk about our merchant services business. We have diversified stream of opportunities across the spectrum.
Speaker Change: and we love our SBA business and it's extremely profitable and it does very well in a bank infrastructure, but it doesn't size up to typical bank metrics and we will go into that.
Let's go to slide number four.
I refer to this as our message from the day.
1st quarter 2025 earnings beat
35 cents colluded 36 cents
Basic.
Speaker Change: It wasn't for one analyst outlier at 53 cents, I have no idea what they were thinking [inaudible]
I just don't know [inaudible]
Speaker Change: It's indicative of the fact that they may not be listening [inaudible]
to us when we do these calls. However, [inaudible]
Speaker Change: If you throw that out, consensus was 31. We previously forecast the 28th to 32. I consider that a B.
We've maintained a range of 210 to 250.
Speaker Change: That would be a projected annual EPS for a 17% using the midpoint. I would say the risk and the range and the midpoint is in volumes of loans, whether it's seven A, whether it's AOP loans, you'll turn a loan program.
to be frankly fair, transparent and accurate.
Speaker Change: Applier in credits today is harder, it's trickier. There are less attractive credits in the traditional. [inaudible]
Thank you.
Speaker Change: Manor of Query Clients, which means we have to bring on new alliance partners.
Speaker Change: which we're doing is always a regular pipeline additional channels and to grow that business and we're doing that and we're comfortable with our guidance.
Speaker Change: Looking at profitability and looking at us if you do measure us the market seems to be forgetting our profitability but they're hyper focused on the credit metrics. [inaudible]
Profitability, Returning Assets in the first quarter, 1.18%
Speaker Change: versus the average of 90 basis points for one to $10 billion banks. [inaudible]
Speaker Change: We think to have your loan loss provision is a good thing for ourselves for ourselves.
and for our investors.
Speaker Change: We're planning ahead. It's not inconsistent what we said for the last several quarters that we see headwinds in 2025. Also important to note, Q1 is our weakest quarter.
You cannot compare Q1 revenues sequentially.
with the prior Q4 quarter from last year.
Speaker Change: Go back and look at our 10 or 20 years of history. The fourth quarter is always our biggest quarter by very white margins. [inaudible]
Speaker Change: and our guidance implies a return of average assets of 2.45 for 2025.
Um...
Speaker Change: This is an important bullet on slide number four, the fourth bullet down. Headwinds from our non-bank SB to the Atlantic of City are in a wind down.
Speaker Change: I think it's extremely important to note that the loss from NSBF declined by more than 50%. I $10.7 million to $5 million. This is a segment in our tubes. The drag on 2025 should be materially lower than a $28.7 million loss.
which is almost...
6 million.
Speaker Change: versus the increased provision, which a good chunk of that is from
Speaker Change: just loan volume growth of nine and a half to thirteen and a half or four million. One is outweighing the other. I think it's also important to note that as we've historically said, we'll talk about this when we get to slide number 15 that. We'll talk about that.
These
Speaker Change: Provisions and Lost Characteristics on an SBA portfolio that has 10 to 25 year amortizing loans and it would no balloons. There is a lost curve and in the bank we're going to continue to creep up that lost curve.
Speaker Change: That's why we decided to go forward, technically double the provision but our guidance is based upon doubling that provision from the year earlier. Hopefully that you give people comfort instead of cause.
Speaker Change: that have greater liquidity. These are better quality loans than the 7-8 loans.
Speaker Change: These bought businesses are bigger, the guarantors are stronger. For those of you that want to get a feel for it, take a look at the DPRS presale memo. You'll see that these types of loans have Michael scores of I think $7.40 on average.
Speaker Change: You could see that their weighted average loan to value is about 50%.
Speaker Change: You can see the types of loans to go into the pool. We just did a major successful securitization. We had about eight or nine different of the auditions to show investors. [inaudible]
Speaker Change: by into those bonds. Very successful for the 570 basis point spread between the net yield on the loans going into the special purpose vehicle and the yield of the bonds. That doesn't include 1% for servicing and 3.5 points of origination fee, a very profitable business. [inaudible]
Speaker Change: We particularly believe strongly that we're going to continue to get operating leverage our efficiency ratio with the whole code to client 71% to 63% and we have a very low efficiency ratio with the bank, which I think is in the low 40s. [inaudible]
Speaker Change: deposits continue to grow. However, this year, we're going to use it up with 350 or 325, 350 million of money that we held at the end of the last year. So deposits will probably be flat, but the mix will change.
Speaker Change: with more business deposits coming in in the first quarter. I do believe our cost of deposits were about 3.95 down from 4.4 the earlier we've had a lot of high cost CDs that Scott Price and Frank will address.
Scott Price: as they do their portion of the call. Slide number five projections of earnings. Obviously we had a what we call a five cent B in the first quarter versus our prior projection to two. We're taking that down and equal. We're taking that down and equal. We're taking that down and equal.
from 50 to 60.
Q3, up 10 cents.
So now we're projecting 60 to 75 on the range.
Scott Price: Q4 down 10 basis 10 basis points so consensus is still the same 230 but we've changed the mix around slide number five slide number six
Scott Price: It's extremely important to note that when you look at originations, okay, there's a hyperfocus on credit for 7a and we're going to talk about credit worth and it's a credit quality of 7a and what makes a 7a low, but note.
The 7-8-B SB 504 Business, the ALP Business Business, the ALP Business Services Corp,
Scott Price: These businesses have very few charges. As a matter of fact, I don't believe as of this date.
Scott Price: I know it was as of the end of the fourth quarter, but as of this date, I mean we've ever had a charge drop [inaudible]
on the final four of them.
Scott Price: On the ALP program, 70 basis points of charge drops historically, I believe it is of Q4. I do not have numbers as of two and if you want.
Scott Price: CRE and C&I loans, very low charge. These are the higher quality loans. We've actually created a slide to be able to show all the different buckets, all of the different portfolios and how they're accounted for. That's in the deck. I think that'll be helpful.
Deposits, would you plan on growing? [inaudible]
Scott Price: Total Deposit for the calendar year, I think the mix will change and we do plan on using up a lot of the cash that we have at the holding company.
Scott Price: at the bank, excuse me, but then we put on balance at the fence.
Scott Price: Slide number seven, important slide. When you look at net income this quarter this year versus last, we obviously have performed on the revenue side particularly when you look at the pre provision that revenue. However, the provision which we think is appropriate. It's not appropriate.
It's realistic.
Scott Price: and it's important to note based upon what we believe the world has changed in the last 60 to 75 days that reduced this quarter this year versus this quarter last year.
Scott Price: But you've got a nice breakout. Obviously the positives are growing, equity is growing, tangible equity is growing and the ALP businesses growing as well So, um, um,
going to the right side of the slide on.
Scott Price: on page number seven. I think important items to note. We decided to put NPLs.
Scott Price: excluding NSBF and including the joint ventures which are calculated because they're all upality.
Scott Price: These are loans that we've made and indicates the creditworthiness of those loans. Much lower percentages than what you're seeing on a gap basis. The allowance for loans helps your investment 5.4% fairly hefty number. [inaudible]
Slide number 8
Growing Shareholder Equity [inaudible]
Scott Price: So from Q1, 2023, we took over the bank $6.92 to $10.16, Q1, 2025, but 47% growth in two years that is with a material dividend paid. This is extremely unusual.
Speaker Change: If you don't have the time to analyze and understand Newtek 1,
but this is probably not your investment opportunity. [inaudible]
Speaker Change: For those that want to take the time, look into the numbers and have an understanding that some of the accounting permutations will straighten themselves out over time [inaudible]
Speaker Change: that if you believe in what management believes in and the forecast, we're gonna continue to grind out earnings quarter over quarter, pay our dividend, this is an opportunity for you to look at. If you're gonna look at the data for a press release and in 10 minutes make a decision, it's probably not your basis.
Speaker Change: Particularly if you're looking at what I'll call the traditional bank metrics that are coming out of the call report or what you're seeing on a gap basis for a press release perspective.
Speaker Change: Slide number nine. This is indicative of it. Yes, the merchant solutions business doesn't count for tangible common equity. On the other hand, it makes about 16 million of Ebola and pre-tax. [inaudible]
It's about $5.5 and 45 cents in cash.
Speaker Change: $6.42 at the high. It will give you an adjusted tangible book. I mean the fact of the matter is it's just not part of tangible book.
Speaker Change: like this that has reoccurring cash flow. It's an emerging acquisition space. We've owned it since 2002 and it just generates a lot of cash. It's a valuable asset. And most importantly, it plays into our strategy of giving merchant acquires the ability to get real-time payments in card and fed wire in a CH and see all that information in the Newtech Advantage. [inaudible]
Speaker Change: Slide number 10, Pre-Provision Net Revenue. We have superior industry leading pre-provision at Revenue. We outperformed in Q1, 25.2 million or 17.1 million year prior, 47% increased.
Our last 12 months
5.88 versus 1.26 to 1.36.
It's just based upon things like the Marching Processing Business Business Services Corp
and all of our non-interest [inaudible]
Related Activities. Now, I will say-
You know, as you're starting to put...
on 7-A-London
and building that bigger portfolio. Folio.
Speaker Change: This is going to start to grow and grow and grow. And as you'll hear from Scott and Frank,
Speaker Change: We thought it to retain some of the government guarantee pieces which add to our unrealized
Speaker Change: Fair value increase for the quarter. That was a big question everybody had.
Speaker Change: That's based upon the market price of a government guaranteed bonds. There's no major secret or hidden issue there where we typically sold everything. We've helped some of that back this quarter and will continue to do a little bit of that going forward. That is a change. You'll see a lot of granularity on that in the queue that when that gets released. [inaudible]
Speaker Change: Slide number 11, still focusing on PPM, and R, the prior slide was really at the hold co. This is at the bank.
The Bank.
Speaker Change: PPRR was 13.2% of average loans for Q1, Savage 19% for the entire year, last year, November's peer average of 2.1%
Speaker Change: Banks' loan loss provision is averaged, covered net charge to us by 3.9 times over the last four quarters. I think it's extremely important to look at PPR to demonstrate that we've got very healthy earnings that can cover the loan loss provisions.
I want to point this out [inaudible]
Speaker Change: and everyone seems to be forgetting this. The definition of an SBA 7A loan.
Speaker Change: The definition of it is a loan that does not qualify for normal lending standards at a bank.
Speaker Change: Okay, that means in plain English, you're going to have higher losses on the unassured piece. The benefit you get is a government guaranteed bond that gets created on 75% of the loan that you could sell for a cash gain. Now, a lot of people say, I don't like getting on sale.
It's not reoccurring, it's not repetitive [inaudible]
Speaker Change: It's been a reoccurring event for us for 20 years. We're going to continue making money. We're going to continue to sell those government guarantee pieces if that's our strategy going forward. And I believe it will be because it creates the greatest return in equity and greatest return on assets.
Speaker Change: And after a period of time, people will begin to get used to this, will begin to earn money, the book value will grow, the dividend will be paid and everybody will have happily ever after.
Speaker Change: I'm slide number 12. This slide is the beginning of being able to break out.
All the different loans and all the different buckets.
Speaker Change: So you could get a much clearer view as well as the migration over the course of 2024 to the first quarter. I think it's important to know.
Speaker Change: $3.31, 2025, $1.9 billion of total loans. You can see the pie chart there. This includes the bank. It includes the non-bank and it includes the joint ventures. [inaudible]
So the joint ventures are all balance sheet [inaudible]
Speaker Change: But we have a lot of loans that are in our joint ventures or in our securitizations. So it is important to understand
this
Smolishized Bank makes a lot of loans. [inaudible]
Speaker Change: When you do a billion dollars of SP-70 loans, only 250,000 shits are in the books of the bank. We have a lot of activity. We have more capital deployed.
Speaker Change: In activities outside of the bank, then in the bank, the earnings power outside of the bank is greater than what is in the bank.
Speaker Change: These are things that the metrics do not apply to Newtek 1, and that's why we don't position ourselves from an investment perspective as a bank holding company or a financial holding company.
Speaker Change: where a company that provides financial and business solutions and also has a depository.
Speaker Change: Then one might say, well, why did you buy a bank? We bought a bank because the customer goes to their bank interface three to five times a week 12 to 20 times a month and that's a great interface for us to be able to provide real value through the new tech advantage to the customer base
Speaker Change: Slide number 13, this is an important slide, a more important slide as well as slide number 15.
Speaker Change: I think the nice thing about slide number 13 is it excludes NSBF. Some people say why excluding NSBF? Well, we have to be honest with ourselves and our shareholders and the Newtek Small Business Finance portfolio.
Speaker Change: Made a lot of loans in 21, 22, and 23, which was all referred to as zero rate environment, a three to four percent prime environment. Well, prime went up to eight and a half, I think it's currently a seven and a half, you cannot have.
a 4% to 5% rate shocked to a business. [inaudible]
and not have it affect.
It's charged with us. Important to note.
Speaker Change: Those non accruals that are sitting up at MSPF, they've already hit book, they've already tried to go up against earnings and guess what? We've earned through that.
Speaker Change: And as you'll see from slide 15, that drag is beginning to diminish.
Speaker Change: I think it's important that the growing NPL levels are within the company's expectations and business plans and are consistent with the company's load-or-rich and erasure in history over the course of time as the BDC and prior to a BDC [inaudible]
Speaker Change: Monday. Once again, the definition of an SBA loan is one that should generate higher losses. And I have to
Speaker Change: Talk about the emphasis on credit, the outlaw of the overemphasis [inaudible]
Speaker Change: I always think about the Casablanca movie with Humphrey Bogart standing in front of the police officer and the police officer saying, oh my God, there's gambling going on in that casino, oh my God, you have higher losses than in the traditional bank, well yes, it's because we make loans with higher margin.
Speaker Change: And in a Cecil environment, you get hit with that reserve upfront. You don't get the prime plus three coupon for years later as you build a portfolio. But everybody that knows and understands Cecil ultimately this. [inaudible]
Speaker Change: A leverage is out, it reverses itself, and the coupon starts to come in. So yes, there is gambling in the casino, not to say that making an SBA loan which we've got. So, let's go ahead and see what's going on.
Over two decades of history,
Speaker Change: We've got 13 securitizations in the market none of them have been downgraded that we don't know how these particular portfolios perform [inaudible]
Speaker Change: We're proud of this business. We're comfortable with this business. We have enough loan loss provision. We have enough capital and the business makes a lot of money. We look forward to getting to slide 15. One other aspect of NPL's. [inaudible]
Speaker Change: NPLs in an SBA portfolio, given that the loans are 10 years advertising to 25 years advertising without a balloon. These NPLs hang around longer. So the way to the average seasoning on our NPLs is like 18 to 40 months. They don't go away that quickly.
Speaker Change: They hang around and that's because we chase the PG's these are business owners that have personal and business assets they file multiple bankruptcies it's hard to get through the liquidation process
Speaker Change: So early on as you're building a portfolio and loans are migrating into this category, the liquidations don't happen that fast.
Speaker Change: So we're ramping up to the fold curve, but what you're going to see on 15 is that ultimately you get to a number and that starts to decline and we'll show that on slide number 15
Speaker Change: Slide number 14, breaks out, a lot of things I just stated, 94%
Speaker Change: of our loan-loss reserves are attributed to the SBA-7A political Liam.
Speaker Change: This will show the percentage mix of loans at NBNA, the percentage mix of NBNA loans that are helped for investment, and the percentage mix of the allowance for credit losses, all on the slide, number 14.
Speaker Change: Slide number 15, I'll say this my favorite slide. We've said this historically.
When we had...
really material increases in non accruals, particularly Q2 2024.
Speaker Change: We indicated that we believed in an not too near distant future, this would start to decline. So as we go to slide 15, 15, 8, 12, 2, 8, 8, 5, 7, so we're starting to see this burn down.
The NSBF Laws, which is segmented. The NSBF Laws,
Speaker Change: 10.7 million dollar lost Q4, 2024, 4.9 million lost Q1 2025. This company is going to wind down.
Speaker Change: There's approximately $200 million of capital in this business. The loans are sitting in a securitization, so the cash flow is used to pay off bonds.
Speaker Change: We called two bonds recently. There's three bonds left. Those who get called that'll free up the cash. It'll free up the equity. These are all valuable things if you don't get into
Speaker Change: The weeds in understanding this part of the business. You're on the wrong conference call. There's a Citibank call down the block.
Speaker Change: There's a lot of small other banks to look at. We just don't look like them. So if you want to do the work
Speaker Change: Now, at this point, I would say you'd be pretty well paid for the work that you're going to do. There's an interesting opportunity here. 100% of the NSP portfolio is aged 24 months or more. We do believe the law should continue to decrease as balances continue to decline. I'll also note that this portfolio is 41%.
Speaker Change: of Loans on the balance sheet on a gap basis, and it's now down to 21%.
Speaker Change: I'd now like to, and hopefully we fixed our technical problem with Scott Price. I'd like to turn this rest of the presentation over to Scott Price and Frank. Scottie there.
Scott Price: I'm here, Barry. Thank you. Good morning, everyone. Slide 16 shows are deposit growth through and the mix as of March 31st.
Scott Price: You'll note that deposits were relatively flat when compared to 12.31.24, with the mix shifting to court deposits in the business and consumer spaces and slightly lower broker funds.
Scott Price: Our average cost of deposits at Newtech Bank were approximately 4% and we expect that to drift down to roughly 3.8 to 3.85% for the 4-year 2025.
Scott Price: We did lower our rate on high yield savings during the quarter, as well as our rates offered on our six month consumer CD.
Scott Price: It's important to note that we have approximately $250 million of consumer CDs that will mature or renew in the second quarter of 2025.
Scott Price: Those CD's will be maturing at rate at approximate, approximate 5%
Scott Price: Our current offer rate is around four and a quarter. It could drift up depending on retention. And so we expect our manager's margin, as well as the offer rate, or excuse me, the weighted average rate on our deposits to drift down over the course of the year.
Scott Price: We expect deposit growth in our business category, which is much lower cost in the consumer space and we will be exploring the broker market as we move through the year.
Scott Price: This will all contribute to lower costs as we move from here and contribute to the positive carry on the SBA7A loans that <expletive> Barry mentioned earlier. So with that, I'll turn the call over to Frank.
Brent: Thank you, Scott. Turning to slide 17. Snaps out of our net interest margin, which is expanded year over year and also quarter over quarter.
Speaker Change: Year over year net income increased about 56% up from above and beyond the average earning asset increase of about 52% and we're looking at a link quarter basis.
Speaker Change: comparing to Q4, the expansion in NIM is about 24 basis points compared to the 12 basis point increase year over year.
Speaker Change: We've also included a look at our adjusted name, including the loans in the JVs, which would increase the expansion in them to about 27 basis points.
Speaker Change: And when thinking about the securitization that was closed in the second quarter, it was closed last month, that will help to increase that expansion in NIM to the higher advanced rate on the securitization.
Speaker Change: All of that, you know, our adjusted name should continue to benefit from the continued growth in our ALP program.
Turning the flight 18
Speaker Change: We're in an enviable position where net interest income comprises 78% of our revenue.
Speaker Change: Building off of Barry's comments earlier, if you look at the bar chart on the right, the top bar chart on the right.
Speaker Change: Arganan Cell of Loans, it increased during the quarter, given the change in our cadence to hold the government guaranteed portions of the loans out a little bit longer.
Speaker Change: If we're looking at the prior quarter, we sold about $193 million of government guaranteed loans, which is down about 50% to about 101 million this quarter
Speaker Change: Those loans are now held on the balance sheet and are fair valued at the market, given they are government bonds. So that is a shift that we are seeing between the gain on sale and the increase in the fair value option on the loans.
Speaker Change: With the sale of NTS, we also no longer have the benefit of an interest income on the tech and IT support. However, it still remains that our non interest income is a dominant source of our revenue. Thank you.
Speaker Change: Putting this slide 19, our scalability is evidenced by the natural aspect of our business model being a fully digital bank.
despite the 42% growth in assets
Speaker Change: Year over year, we are seeing expenses operating expenses remain flat, which positions us well moving forward to scale the business. We've seen an efficiency ratio decline year over year of about 9% from 71 to 62% and also.
Speaker Change: Given that, given our business model being fully digital, we did announce our least terminations, which we expect to have a positive benefit by decreasing expenses, about $2 million for the remainder of the year and annually going forward.
with that operator, I think we can turn to Q&A.
Speaker Change: Thank you. At this time, we conduct the question and answer session. As a reminder, to ask a question, you need to press Star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 1 1 again.
Police standby while the comparator Q&A roster.
Thank you.
Speaker Change: A first question comes from Crispin Love from Piper Sandler, please go ahead.
Crispin Love: Thank you. Good morning, everyone. First, just on the neck gain on loans accounted for under the fair value option, been elevated in recent quarters, but can you speak to how sustainable you expect those gains to be throughout 2025 with gains related to ALP loans, not the SBA side, and can you just walk through through some of the math there on how you generate those gains on the ALP side? Thank you.
Chirps
Crispin Love: Crispin on the ALP side. If you take a look at the recent securitization press release, we securitize approximately 215 million of loans.
with a 13.30 gross coupon.
Crispin Love: After servicing of which we get a hundred basis points of the servicing, it's 12.3L
The
Net Yield.
Crispin Love: on the bonds was about 6.62 I think, so approximately 570 basis points.
So
You know, quite high.
Crispin Love: As all of you analysts and investors, you have to your own math, but we put fair value on those loans.
Crispin Love: And we discount them back. A lot of this data is going to be in the queue. And it's been in the I believe it's been in the K in terms of what we fake that we think that the anticipated loss frequency and severity will be.
Crispin Love: in the DBRS memo and all the information that's public, you can see what the prepayments speeds are. We believe our cumulative net charge will also be between three to three and a half percent.
Crispin Love: and we have the loans valued, et cetera. That's how we come up with our pricing.
Okay, you'll have to come up with your own pricings [inaudible]
Crispin Love: I think, you know, investors analysts come up with their own sense of what the value is as well But when you think about the concept of getting a 570 basis point spread for a year on loans that have 5% prepay penalties
Crispin Love: for the first three years and then three and the fourth, they're not going away that quickly.
Crispin Love: At Restorant, charge also on this cordfolio. I think it's currently about 580 million is about 70 basis points. Now we think they're going to grow over time
Crispin Love: which is why we have them valued using our lost curves at about between three to three and a half percent so. .
Crispin Love: Do we think that's sustainable? We do. We forecasted 500 million. That's going to be a challenge. It's always a challenge. It's never easy, but that's a growing book of business. Now
Crispin Love: The average long size on that book is five million. So it's a hundred units. Okay, it's a hundred units. We did twenty four hundred loan units last year.
We'll do 2700 loan units approximately this year.
Crispin Love: So the answer to your question is obviously and I appreciate the question because it
Crispin Love: It puts us on record. We believe that our earnings and our projections are real and they're sustainable. Needless to say, anybody that tells you they can 100% accurately predict the future, they're full of it.
Crispin Love: Okay, this is extremely difficult. We've seen public companies pull their guidance, no guidance, miss badly, you know, we took this bank from a dead start.
Crispin Love: and built a real solid business opportunity in it, which I hate to say we're not getting on a credit from...
Crispin Love: for our technological business, opening up 15,000 bank accounts, moving the lending business in, going through two regulatory audits, hiring people, and by the way, you know, people coming in and out, that's just a, that's natural.
Crispin Love: That sure is a national thing. People come and go all the time. So, um...
Crispin Love: Yes, I believe it's sustainable. The 7-8 business we've been in for over two decades, so we know it pretty well. We know it in a high rate, low rates.
Good, good markets, 0809.
Crispin Love: We've seen a lot of these shows before so I do appreciate the question. Thank you
It's great, but no, I appreciate all the color there and then-
Speaker Change: Just, just secondly, on the management changes late April , you've made a few changes, President, CFO , some other shifts and roles. In your prepared remarks, you did call out your deep badge, but can you speak to...
Speaker Change: The rationale and timing of some of those moves, also your views on splitting the CFO roles between the bank and the holding company. Do you think there's more changes to come? Do you need to bring in anyone else for certain roles? Are you feeling like you're in a good place today? No, no. No. No. No. No. No. No. No. No.
Great question.
Speaker Change: As you could tell, I'm fairly plain spoken. Sometimes they say things that aren't necessarily politically appropriate. The one thing I will tell you yet there's going to be plenty of changes.
Speaker Change: Okay, that's the only thing I could predict, and I say that from the standpoint that market change, people change, the world changes and we make decisions to flow with that.
Speaker Change: relative to the splitting of the CHFO role. The bank obviously is an extremely important part of what we do, and...
Scott Price: Scott's going to be hyper focused on that and he's going to pick up [inaudible]
Scott Price: more of those responsibilities relative to how code deposit gathering. Not that they didn't have them previously but it's good for Scott to have a smaller sphere. You could tell we do a lot of things here so it's not like a lot of things.
You know...
Scott Price: People aren't, you know, or working 30 hours a week. They really have to work a lot to be able to get the job done.
Scott Price: He easily fits into the CFO role at the holding company because he was involved in all the accountings. So there's nothing strange unusual here [inaudible]
Scott Price: Nick Young, and feel free to call him. You got his email. He hasn't banished us. We haven't banished him. We're all friends. He loves us [inaudible] We're all friends. We're all friends. We're all friends. We're all friends.
Scott Price: He built a tremendous opportunity and he's been given another opportunity and a larger organization. When he is ready to talk about it, he'll tell you where he's going but it was done on very friendly terms. The one thing you brought about was changes in personnel.
Speaker Change: That freaks everybody out. Doesn't break me out. I mean, I say that we hold people accountable and this is not an easy place. I tell staff this and I tell
Scott Price: Newtek isn't for everybody, or it's a disruptor or an innovator, we do things differently, so...
Scott Price: People come here thinking that it's going to be a piece of cake, they're going to do what they did at other organizations for
Scott Price: five years to me. It's not the same. It's different. It's just a whole different organization. So, I do think we're going to continue to have change, but I will tell you that, you know, I've got five key executives that have been here at the top of the company for 10 to 20 years. I've got I've got many employees. What's up? [inaudible]
Scott Price: Professional Sales and Marketing person spending over 20 years. [inaudible]
Scott Price: and a liquidation has been here 14 or 15 years. Peter Downs has been in the organization since 2003 and he took over as president of the bank. I did try to talk him out of it. I said I'm not paying anymore. You really want to do this job.
Scott Price: and he said, yeah, I want to do it because we're going to prove everybody wrong. And, um...
Crispin Love: That's Newtek, right? I really, you've given me two questions that for me were down the middle of the, down the middle of the plate. I appreciate it. Thank you, Chris. Thank you.
Thanks very appreciate all the answers there. Thank you.
Thank you.
Speaker Change: Our next question comes from Tim Switzer from KBW, please go ahead.
Thank you. Good morning. Hope you guys are doing well. Thank you.
Tim Switzer: Can you help us parse through the various pieces that throw the $18 million a pair of value gains this quarter? I know there's that...
Tim Switzer: $5.7 million benefits sequentially from the lower NSBF losses, but this line item is still double quarter
When ALP Originations are about two-thirds the level.
Tim Switzer: of Q4, and I think spreads kind of generally widened in Q1. So can you help us kind of partially with a different piece of their what-throwed fat?
Sure, so a couple of things Tim, I would...
Speaker Change: Disagree that spreads wide, and if you notice, number one, we wound up.
in our ALP Securitization.
Speaker Change: We got very good execution on the bonds as well. So that actually worked to our favor. In the cues, we're going to get a lot of breakout specifically.
Scott Price: Frank, Scott, you know what the gain on sale was for the SBA piece of the puzzle that everyone so wigged out about? They always just shy of $8 million.
Okay, so Tim, $8 million are in government guarantees.
Tim Switzer: Just patient certificates that ultimately will get sold into the market. They were keeping on the books for the high coupon and the spreading come that the market months so much for a period of time and then it'll get sold.
Speaker Change: Over to the SBA piece, could you was that from origination this quarter and it's you had an $8 million in the SBA origination if I look at it.
Speaker Change: You're 10K from 24, you got a total 493 [inaudible]
$1,000 gain.
Speaker Change: for the SBA-7A guaranteed loans. How do we get the 8 million for Q1?
Speaker Change: it's mostly from this quarter and it just depends upon the volume and the market price which was market price to the market price we don't we don't make the market price and it's just based upon the volume so you could do the math and yeah they said you'll see it you'll see it in the queue when it comes out next week
Speaker Change: Okay. Are you able to help us kind of quantify the impact of the ALP loans originally this quarter on revenue and maybe what was the average fair value premium on that? Yeah.
Speaker Change: You've got to do your own modeling. We do our modeling. We put a lot of detail and data into what our assumptions are in the cues, but I can't give you my model. You won't give me your model. I can't give you my model. [inaudible]
Speaker Change: Gotcha. Okay. And then there's been some changes at the SBA recently for mostly the loans below $1,000,000.
Speaker Change: Can you talk about the impact of the return of that 55 basis point lender service fee on the industry and maybe how it would impact like gain on sale margins?
Speaker Change: I appreciate it Tim. One other thing that you see that they're looking to do $10 million loans on manufacturing.
Say that again, Barry.
Barry Sloane: There's a bill in Congress to increase the loan size from $5 million to $10 million on manufacturing loans.
Barry Sloane: So that's item number one, item number two, supplies have started to shrink in the secondary market which tends to be lifting prices as well as
Barry Sloane: Supplying demand issues and prepayments speed slowing which also is lifting prices those are the positive aspects of trying to figure out what to gain on sale would be the negative aspects which you're referring to is and we've already factored it into our forecast
Um...
Barry Sloane: Two things that the SBA is trying to do, one, bring the program back to a zero subsidy.
Barry Sloane: I mentioned the first part, because the current administration, although it's made some changes to I'll use the word tighten underwriting guidelines which we never loosened and get some point to know.
Barry Sloane: They want to get this back to a zero subsidy. So one item is the upfront fee that borrowers pay that money to do with us, about two and a half points, David Surrey's back. It makes sense if you're ensuring and you're providing a government guarantee, you should get a premium for it.
Barry Sloane: The other aspect is the 55 basis points which you're referring to which basically reduces our coupon net to the investors.
That's probably on a net basis.
Some work between...
Barry Sloane: I have a point to a point difference in price on gain on sale.
We have this factored into our projections.
Barry Sloane: and there are ways to deal with that a lot of it's based upon a mix of 10-year paper versus 25-year paper, volume increases and things of that nature. But that could have an effect holding everything else constant, not being nimble, not adjusting now. I will also state that
Barry Sloane: It probably won't have much of an effect at all on Q2 prices because you get to guarantee and you get your pipeline. It could affect once again holding everything else constant. That's really important into 3 and 2, 4. It could have an effect on gain on sale holding everything else constant. It could have an effect on gain on sale holding everything else constant. That's really important. That's really important.
Speaker Change: Yeah, that was very helpful. Sounds like a similar impact to what some of your competitors have said too. There was another change by the SBA as well going back to requiring full underwriting for the smaller dollar loans.
Speaker Change: What is the lift required for Newtek compared to what you guys are doing previously, if anything? And then it seems like this could maybe be an opportunity for Newtek to take market share from competitors or maybe newer to the space that haven't had to deal with this before.
on which I know Newtek has historically. [inaudible]
Yeah, I appreciate that look.
Speaker Change: They have eliminated the score and gold lenders. That's sort of a...
Speaker Change: Kind of a slang expression like I'm going to put a credit score on it. I'm not going to do a full credit memo and I get a government guarantee that is going to from Natically reduced the competitors particularly the non bank lenders that don't have
Speaker Change: The infrastructure and the staff. I mean, I know one non-bank lender has got like 20 or 25 employees. I don't know how you do this business with that because they're getting broker loans.
Speaker Change: They have a couple of underwriters. Look at them. They pay the broker a fee. I mean, so.
Speaker Change: I think it will, from a competitive advantage standpoint over the long term, I think it will be helpful to us, but you know, we
Speaker Change: We're going to continue to do our business and we've never we were never we've never loosened our underwriting guidelines. [inaudible]
Speaker Change: on those types of loans anyway. We always went to the full gamut, so we appreciate the question.
Speaker Change: Yeah, thank you for all the color, Barry. Appreciate it. Thank you, Tim.
Speaker Change: Thank you. As a reminder, to ask a question you would need to press star one on one of your telephone and wait for your name to be announced.
Speaker Change: Our next question comes from Steve Moss from Raymond James, please go ahead.
Good morning.
Good morning, Steve.
Steve Moss: Morning, Barry. Maybe just following up on the SBA loans here, you know, how long that you realize that fair value gain, how long do you guys plan to hold the loans on Bounce Sheet 4, and you're just kind of curious, like, how we think about the amortization of that gain, you know, if it's for an extended period.
Speaker Change: Appreciate it, Steve. I think it will not be for an extended period.
I can't tell you whether ... [inaudible]
Speaker Change: It'll be one month, two months, or three months, but it won't be for a long period of time. It shouldn't, if you follow our projections, I think that's a good guide.
Okay.
and then in terms of the-
Barry Sloane: I guess the other thing, just kind of thinking about it, Barry here, in terms of-
You know, you highlighted that, you know, there's...
Definitely some tougher credit year for the NSBS portfolio.
last year.
And I guess...
Barry Sloane: My question here is, I think about like those advantages being, let's call it 2021, 2022, and foster minus versus the current originations of SBA loans. Kind of feels like a bit of a tougher environment for me here in the current situation for SBA loans, so I'm curious like. [inaudible]
Barry Sloane: What gives you comfort that credit performance for the more recent villages will be better versus the NSBF performance?
Yeah, that's, that's a key question, Stephen.
A little bit of a sea saw here, so number one .
The Current Lones
at the bank.
We believe you're going to keep having
Barry Sloane: Increased charge-offs and non-accruals. Now, that's why we almost doubled the provision. I think the provision went from 26 million to about 50 million for the whole calendar year almost double now
Barry Sloane: With that said, Loans that are originated in a 7.5% prime environment where you're testing them, you know, up three and down three are in much better shape to qualify for the underwriting.
then loans that are underwritten at 8.
Speaker Change: 3-4% Prime. Now, the drag at NSBF.
Speaker Change: is going to dramatically diminish over time. The other thing to us understand, we keep paying down debt because most of those loans are insecurities. So the interest expense is going to go away at NSBF. So there's a lot.
Speaker Change: going on at NSBF to reduce the drag, which was 28 and a half million in a few straight lines, which I'm not suggesting, but if you straight line, you're at 20. Okay, so there's a major difference there at NSBF. That's the work that.
Speaker Change: You've got to have an opinion on that one way or another if you're going to figure out what the arranged for it just is.
for us at the bank.
We're.
Speaker Change: and putting Trump aside for the moment, and all the changes that the administration is doing and the uncertainty. So, A, the way to manage this, which our teams got two decades of experience.
capital, its provision and margin.
Speaker Change: Okay, so I strongly believe that our ability to manage through this from a risk perspective is better. I want to flip it one thing because you brought to light something I thought about on the positive side.
If you are a depositor,
Speaker Change: Where would you be more likely to lead to go to a 420 rate on a government money market fund? At a 1.5% to 2% at a bank that's paying you that and charging you for all those fees, where would you be most likely to leave or migrate your money or where you're paying 4%.
Speaker Change: So here's my opinion. We're paying a market rate of interest on deposits. That means in my humble opinion.
Speaker Change: Those deposits are stickier, as long as we pay a market rate, that's close to the government money market rate.
Speaker Change: Police, if I have to rely on low cost deposits in the market where you can move money.
Speaker Change: with a click on the mouse swipe of a finger, I'd be nervous. [inaudible]
Speaker Change: That's more risky than what we're doing and we've got good names [inaudible]
Speaker Change: because on a risk-adjusted basis, despite the over-exaggeration of, oh my god, every, you know, conference call, it's all about the SBA portfolio and credit and
Speaker Change: And meanwhile, we got a lot of other things going on here, but I get it. Everybody wants to focus on we're going to go through this and over the course of time. All of these curves will mature. They'll work itself out and will be just fine, but. [inaudible]
That's my answer. We are provisioned in the bank.
Um...
Speaker Change: We'll do the Humphrey Bogart thing next quarter to, oh my God, there's gambling in that casino. Oh my God, they're creating a new poor voileo that's ramping up the credit curve. Non accruals are growing. And by the way, they don't go away that quickly because we chase them. So
I think it's very important to try…
Speaker Change: Not to insult you, but investors to try to understand our model.
Speaker Change: See what we're doing differently. Look at the presentation and see what we're doing and why it doesn't apply.
Speaker Change: to a traditional bank holding company that's got nothing at the holding company except for the bank who basically makes no risk to low risk loans with low charge drops and your entire business is predicated on the hope that those depositors stick in the bank. [inaudible]
Speaker Change: Okay, and maybe I just follow up on the SPS portfolio. Could you share with us what the cumulative losses for that portfolio in the last two years have been? Thank you.
Over, the future is about an 8% cumulative charge over.
Now, don't come.
If that grows [inaudible]
Speaker Change: That's going to, those charge-offs are going to occur over the course of
Speaker Change: Multiple years so it's not all going to hit see a normal in a normal a credit card portfolio a car alone portfolio long goes bad both it gets liquid data and charged off and it's gone
with us.
Speaker Change: These hang around for long periods of time. If you go back and you look at all our public filings, you'll see we've always earned money We've always paid a dividend, but the NPLs do hang around for long periods of time because we have a duty in the SBA world to collect on it. It's different in the other areas.
of London.
Speaker Change: Okay. And then I guess if I could go back to the fair value gain, the 18 million.
Speaker Change: If could just break out the segments, I guess I missed a part there. Eight million was from the SBA loans being held for sale and then the remaining or roughly eight millions call it and then the remaining 10 million, where did that come from? I don't know, I don't know.
Speaker Change: and maybe Frank and Scott can chime in here. I think it would be servicing, hospital servicing gains, could be gains from 504 as well as fair value of ALP loans.
That's right, Barry. It's the fair value of ALP.
Speaker Change: is the majority of that. And just to reiterate my comments earlier, you know, the fact that that number and Tim, you mentioned it earlier, on the SBA for a value increase so much is just given the fact that we are as Stephen Barry discussed here holding those loans this quarter. So
to Barry's point, you know.
Speaker Change: Won't be holding them for too long, but just the fact that there's more balance, pencil balance on the books this quarter is increasing that that SBA number. We're surprising them to the market as we've always done.
Okay.
and then I guess the-
Speaker Change: One more for me here, just in terms of the earnings ramp .
throughout the year.
Speaker Change: I'm assuming that there's just more of a weighting towards gain on sale income later in the year. Is that kind of a fair way to characterize, you know, the higher range for the fourth quarter earnings versus the first. Yeah, better way to characterize it, Steve is that. Yeah, yeah, yeah, yeah, yeah, yeah, yeah.
Speaker Change: At the year goes on, we do more loans into 2 than Q1, Q3 and Q2, Q4 and Q3, and when we make a loan, it has inherent value in it.
Speaker Change: 75% of it is Government Guaranteed Bond, which were able to sell. An ALP loan is originated based upon our capability at very large breads to cost the funds. So yeah, the answer is yeah, and by the way, this is entirely different than how a normal bank operates. [inaudible]
and we don't want to be a normal back. [inaudible]
Barry Sloane: All right, appreciate all the color here. I'll step back. Thanks very. Thank you.
Thank you.
Speaker Change: Our next question comes from Christopher Nolan, from Leninburg, Daumen. Please go ahead.
My questions have been asked and answered. Thank you.
Thank you, Chris.
Speaker Change: Alright, I am showing no for the questions at this time, I'll return it.
over to Barry Sloane for closing remarks.
Barry Sloane: Work. Thank you. I appreciate everyone's interest and looking into the company. The questions were great today. It's in depth.
Barry Sloane: We may have disagreements, but we have strong opinions on what we're doing. We've been operating in this space for over two decades. We're good stewards of risk. And we do think we're coming into a difficult time in the market and the environment and we don't take that lightly. [inaudible]
Barry Sloane: Well, we're very well prepared for it. We've weathered whether these storms and flourished in them and we think we're well positioned to do that going forward so We're going to do that.
I want to thank the management team.
I want to thank Scott and Frank and Brace and...
Barry Sloane: Everybody to help put the presentation on together. We have a lot of new data for people to look at and analyze and look forward to producing the queue which will give people a lot more information. So thank you very much. I want to thank the analysts for their questions and participation. Thank you.
Barry Sloane: Thank you for your participation in today's conference. It does conclude the program. You may now disconnect.
Thank you.