Prepared remarks
Thank you for joining us for our first quarter 2025 final results conference call. I'm here with my two Chief Financial Officers, Scott Price from Newtek Bank National Association and Frank DeMaria from NewtekOne. If you'd like to follow along with our presentation, please visit our website newtekone.com under the Investor Relations section where you'll find the PowerPoint presentation. I'd also like to acknowledge Bryce Rowe, our new VP of Investor Relations, for his excellent work on the presentation and press release, as well as Nick Young, our former President and Chief Operating Officer of Newtek Bank National Association, who is still with us until mid-May. Nick has played a pivotal role in transforming our bank into a digital platform capable of significantly enhancing remote account openings and lending operations. I'm proud to introduce Peter Downs, who has been appointed President of Newtek Bank.
Peter brings over 22 years of experience with Newtek and has been instrumental in our SBA business's success over the past two decades. We've made significant efforts to listen to our shareholders and analysts recently, and today we will share the promising progress in growing deposits and loans and ensuring compliance while building a bank-level portfolio that stands out from typical metrics used for other banks. Traditional banking metrics may not apply to us as we have a unique structure. Unlike most banks that primarily focus on their banking operations, we have considerable capital invested in other assets, which is important to understand. We are making loans and successfully selling them, which reflects our operational effectiveness whether through securitization or compliance with SBA guidelines. Our pricing structure under the CECL Reserve accounting standard is somewhat stringent, as we account for losses upfront.
However, we continue to build a solid portfolio. We assert that traditional banking metrics are less relevant to our operations, where growth rather than maintenance is the standard. We believe in generating profits, as evidenced by our earnings and growing shareholder equity while providing an innovative approach in banking that leverages artificial intelligence for enhanced efficiency. We appreciate your support, whether you are a long-term investor or currently skeptical regarding our stock performance. Now, let’s begin with our mission statement, highlighting our commitment to offering business and financial solutions primarily to independent business owners, focusing exclusively on solutions for small and medium-sized enterprises, and steering clear of consumer banking. NewtekOne acquired Newtek Bank National Association to add depository solutions and enable real-time payments, marking our evolution into a technology-enabled service provider.
We continue to attract a significant amount of referrals daily, which we believe solidifies our competitive edge. Our fundamental aim is to provide best-in-class solutions at a lower cost with superior margins but through a digital banking model without physical branches. While there may be heightened concerns about credit, we want to emphasize that the credit issues are primarily linked to our SBA 7(a) portfolio, which represents only a fraction of our business. We also have robust assets within our ALP business and a diversified revenue stream that contributes to our success. Moving to our earnings, we achieved a diluted earnings per share of $0.35, exceeding the expected $0.31. We've maintained our earnings outlook, anticipating annual growth in EPS of 17% based on our projections. While it has become more challenging to acquire attractive credits in today's market, we are not deterred and are expanding our partnerships and channels for growth.
Although concerns about credit metrics are prevalent, we would like to highlight our profitability – a return on assets of 1.18% compared to the peer average. It's essential to understand that Q1 is typically our weakest quarter, and comparisons with the prior year’s Q4 can be misleading. The current headwinds we face include winding down losses from our non-bank SBA lending subsidiary, with a noted reduction in losses. Our Alternative Loan Program has demonstrated great success, providing quality loans with better guarantor profiles compared to our 7(a) loans. We recently completed a major securitization with substantial interest from institutional investors. As we track our earnings and deposits, we remain committed to utilizing our capital appropriately, anticipating changes in our deposit mix while managing costs effectively. We expect our shareholder equity to continue growing, demonstrating our unique position in the market.
In summary, we pride ourselves on our strong earnings potential, intelligent risk management, and the strategic value we bring to independent business owners. We are excited to share further insights as we proceed with the presentation, and I'm now handing the floor to Scott and Frank for their detailed updates.
I'm here, Barry. Thank you. Good morning, everyone. Slide 16 shows our deposit growth through and the mix as of March 31st. You'll note that deposits were relatively flat when compared to December 31st, '24, with the mix shifting to core deposits in the business and consumer spaces and slightly lower brokered funds. Our average cost of deposits at Newtek Bank was approximately 4%, and we expect that to drift down to roughly 3.8% to 3.85% for the full year of 2025. We did lower our rate on high-yield savings during the quarter, as well as our rates offered on our six-month consumer CD. It's important to note that we have approximately $250 million of consumer CDs that will mature or renew in the second quarter of 2025. Those CDs will be maturing at rates that are approximately 5%. Our current offer rate is around 4.25%. It could drift up depending on retention, and so we expect our manager's margin, as well as the weighted average rate on our deposits to drift down over the course of the year. We expect deposit growth in our business category, which is much lower cost in the consumer space, and we will be exploring the brokered market as we move through the year. This will all contribute to lower costs as we move from here and contribute to the positive carry on the SBA 7(a) loans that Barry mentioned earlier. So, with that, I'll turn the call over to Frank.
Thank you, Scott. Referring to Slide 17, we have a snapshot of our net interest margin, which has grown both year-over-year and quarter-over-quarter. Year-over-year, our net interest income rose by approximately 56%, exceeding the average earning asset growth of about 52%. On a linked quarter basis compared to Q4, the net interest margin expanded by about 24 basis points, while the year-over-year increase was 12 basis points. We've also provided a look at our adjusted net interest margin, which includes our loans and joint ventures, where the expansion would increase to about 27 basis points. The recent securitization closed in the second quarter will enhance this expansion in net interest margin due to a higher advance rate. Overall, our adjusted net interest margin is expected to continue benefiting from the ongoing growth in our ALP program. Moving to Slide 18, we are in a strong position with our net interest income making up 78% of our revenue.
Building on Barry's earlier comments, the bar chart on the right shows that our gain on the sale of loans increased during the quarter due to our decision to hold the government-guaranteed portions of loans a bit longer. In the previous quarter, we sold roughly $193 million in government-guaranteed loans, which has decreased by about 50%, totaling around $101 million this quarter. These loans are now on our balance sheet and valued according to the market, as they are backed by government bonds. This shift indicates a change between the gain on sale and the increase in the fair value of the loans. With the sale of NTS, we no longer benefit from net interest income related to tech and IT support. Nevertheless, our non-interest income remains a significant revenue source. On Slide 19, our scalability is highlighted by the inherent nature of our fully digital banking model. Even with a 42% growth in assets year-over-year, our operating expenses have stayed flat, which positions us well for future growth.
We have seen a decline in the efficiency ratio year-over-year from 71% to 62%. Moreover, due to our fully digital model, we have announced lease terminations that should positively impact expenses by around $2 million for the remainder of the year and annually thereafter. With that, operator, let's move to Q&A.
Questions and answers
Thank you. At this time, we'll conduct the question and answer session. Our first question comes from Crispin Love from Piper Sandler. Please go ahead.
Thank you. Good morning, everyone. First, just on the net gain on loans accounted for under the fair value option been elevated in recent quarters, but can you speak to how sustainable you expect those gains to be throughout 2025 with gains related to ALP loans, not the SBA side? Can you just walk through some of the math there on how you generate those gains on the ALP side? Thank you.
Sure. Crispin, on the ALP side, if you take a look at the recent securitization press release, we securitized approximately $215 million of loans with a $13.30 gross coupon. After servicing, of which we get 100 basis points of the servicing, it's $12.30. The net yield on the bonds was about 6.62%, I think, so approximately 570 basis points. So, I ask all of you analysts and investors, you have to do your own math, but we put a fair value on those loans, and we discount them back. A lot of this data is going to be in the Q, and I believe it's been in the K, in terms of what we think that the anticipated loss frequency and severity will be. In the DBRS memo and all the information that's public, you can see what the prepayment fees are. We believe our cumulative net charge will also be between 3% to 3.5%, and we have the loans valued as such. So that's how we come up with our pricing. Okay, you'll have to come up with your own pricing.
I think, you know, investors and analysts come up with their own sense of what the value is as well. But when you think about the concept of getting a 570 basis points spread per year on loans that have 5% prepay penalties for the first three years and then three in the fourth, they're not going away that quickly. Our historic charge-offs on this portfolio, I think it's currently about $580 million, is about 70 basis points. Now, we think they're going to grow over time, which is why we have them valued using our loss curves at about between 3% to 3.5%. So do we think that's sustainable? We do. We've forecasted, you know, $500 million. That's going to be a challenge. It's always a challenge. It's never easy, but that's a growing book of business. Now, the average loan size on that book is $5 million. So it's 100 units. Okay, 100 units. We did 2,400 loan units last year. We'll do 2,700 loan units approximately this year.
So the answer to your question is, obviously, and I appreciate the question, because it puts us on record. We believe that our earnings and our projections are real and they're sustainable. Needless to say, anybody that tells you they can 100% accurately predict the future, they're full of it. Okay, this is extremely difficult. We've seen public companies pull their guidance, no guidance, miss badly. You know, we took this bank from a dead start and built a real solid business opportunity in it, which I hate to say we're not getting a lot of credit from for our technological business, opening up 15,000 bank accounts, moving the lending business in, going through two regulatory audits, hiring people. And by the way, you know, people coming in and out, that's just a natural thing. People come and go all the time. So yes, I believe it's sustainable. The 7(a) business, we've been in for over two decades. So we know it pretty well. We know it at high rates, low rates, good markets, 08, 09. We've seen a lot of these shows before. So I do appreciate the question. Thank you.
Great. No, I appreciate all the color there. And then just, just secondly on the management changes, late April, you've made a few changes: President, CFO, some other shifts and roles. You, in your prepared mark, you did call out your deep edge, but can you speak to the rationale and timing of some of those moves? Also, your views on splitting the CFO roles between the bank and the holding company. And do you think there are more changes to come? Do you need to bring in anyone else for certain roles? Or do you feel like you're in a good place today?
Great question. As you could tell, I'm fairly plain spoken. Sometimes I say things that aren't necessarily politically appropriate. The one thing I will tell you, yeah, there's going to be plenty of changes. Okay. That's the only thing I could predict. And I, and I say that from the standpoint that markets change, people change, the world changes, and we make decisions to flow with that. Relative to the splitting of the CFO role. The bank obviously is an extremely important part of what we do. And Scott's going to be hyper-focused on that. He's going to pick up more of those responsibilities relative to ALCO deposit gathering. Not that he didn't have them previously, but it's good for Scott to have a smaller sphere. As you could tell, we do a lot of things here. So it's not like, you know, people aren't working 30 hours a week. They really have to work a lot to be able to get the job done.
Frank DeMaria, who's Chief Accounting Officer for everything, easily fits into the CFO role at the holding company because he was involved in all the accounting. So there's nothing strange or unusual here. Feel free to call him. You got his email. He hasn't banished us. We haven't banished him. We're all friends. He loves us. He built a tremendous opportunity, and he's been given another opportunity at a larger organization. When he's ready to talk about it, he'll tell you where he's going, but it was done on very friendly terms. The one thing you brought about was changes in personnel. That freaks everybody out. It doesn't freak me out. I say that we hold people accountable. This is not an easy place. I tell staff this, and I tell Newtek isn't for everybody. We're a disruptor. We're an innovator. We do things differently. People come here thinking that it's going to be a piece of cake. They're going to do what they did at other organizations for five years.
It's not the same. It's different. It's just a whole different organization. So, I do think we're going to continue to have change, but I will tell you that I've got five key executives that have been here at the top of the company for 10 to 20 years. I've got many employees. My top professional sales and marketing person has been here for over 20 years. The head of liquidations has been here 14 or 15 years. Peter Downs has been in the organization since 2003, and he took over as President of the Bank. I did try to talk him out of it. I said, I'm not paying you anymore. Do you really want to do this job? And he said, yes, I want to do it because we're going to prove everybody wrong. That's Newtek. You've given me two questions that, for me, were down the middle of the plate. I appreciate it. Thank you, Crispin.
Thanks, Barry. I appreciate all the answers there.
Hey, good morning. Hope you guys are doing well. Can you help us parse through the various pieces that drove the $18 million of fair value gains this quarter? I know there is that $5.7 million benefit sequentially from the lower NSBF losses, but this line item, it still doubled quarter over quarter when ALP originations are about two-thirds the level of Q4, and I think spreads kind of generally widened in Q1. Can you help us parse through the different pieces there? What drove that?
Sure. So, a couple of things, Tim. I would disagree that spreads widened. If you notice, number one, we wound up in our ALP securitization getting an 85% advance rate, and then we sold a BB class with another two points. So, we got much more leverage on that securitization, and we got very good execution on the bonds as well. So, that actually worked to our favor. In the Qs, you're going to get a lot of breakouts specifically. Frank or Scott, do you know what the gain on sale was for the SBA piece of the puzzle that everyone's so wigged out about?
Yes, it was just shy of $8 million.
Okay. So, Tim, $8 million is in government guarantees, just patient certificates that ultimately will get sold into the market that we're keeping on the books for the high coupon and the spread income that the market loves so much for a period of time, and then it'll get sold.
Okay. For the SBA piece, was the $8 million from originations this quarter? If I look at your 10-K from '24, there is a total gain of $493,000 for the SBA 7(a) guaranteed loans. How did we arrive at the $8 million for Q1?
It's mostly from this quarter, and it just depends upon the volume and the market price. The market price is the market price. We don't make the market price, and it's just based upon the volume. So, you could do the math, and as I said, you'll see it in the Q when it comes out next week.
Okay. Are you able to help us kind of quantify the impact of the ALP loans originated this quarter on revenue, and maybe what was the average fair value premium on that?
You've got to do your own modeling. We do our modeling. We put a lot of detail and data into what our assumptions are in the Qs, but I can't give you my model. You won't give me your model. I can't give you my model.
Got you. Okay. And then there's been some changes at the SBA recently, mostly for loans below a million dollars. Can you talk about the impact of the return of that 55 basis point lender service fee on the industry, and maybe how it would impact gain on sale margins?
I appreciate it, Tim. One other thing. Did you see that they're looking to do $10 million loans on manufacturing?
Say that again, Barry?
There's a bill in Congress to increase the loan size from $5 million to $10 million on manufacturing loans. So, that's item number one. Item number two, supplies have started to shrink in the secondary market, which tends to be lifting prices, as well as supply and demand issues and prepayment speed slowing, which also is lifting prices. Those are the positive aspects of trying to figure out what the gain on sale would be. The negative aspects, which you're referring to is, and we've already factored it into our forecast, two things that the SBA is trying to do. One, bring the program back to a zero subsidy. I mentioned the first part because the current administration, although it's made some changes to, I'll use the word, tighten underwriting guidelines, which we never loosened, and it gets important to note. They want to get this back to a zero subsidy. So, one item is the upfront fee that borrowers pay that has nothing to do with us, about 2.5 points, they've inserted back.
It makes sense. If you're insuring and you're providing a government guarantee, you should get a premium for it. The other aspect is the 55 basis points, which you're referring to, which basically reduces our coupon net to the investors. That's probably on a net basis somewhere between a 0.5 to 1 point to a point difference in price on gain on sale. We have that factored into our projections, and there are ways to deal with that. A lot of it's based upon the 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; it could affect, once again, holding everything else constant. That's really important. In Q3 and Q4, it could have an effect on gain on sale, holding everything else constant.
Got it. That was very helpful. That sounds like a similar impact to what some of your competitors have said, too. There was another change by the SBA as well, going back to requiring full underwriting for these smaller dollar loans. What is the lift required for Newtek compared to what you guys are doing previously, if anything? And then it seems like this could maybe be an opportunity for Newtek to take market share from competitors who are maybe newer to the space that haven't had to deal with this before, which I know Newtek has historically.
Yes, I appreciate that. Look, they have eliminated the score and gold lender. That's sort of a slang expression like, I'm going to put a credit score on it, I'm not going to do a full credit memo, and I get a government guarantee. That is going to dramatically reduce the competitors, particularly the non-bank lenders that don't have the infrastructure and the staff. I mean, I know one non-bank lender that's got like 20 or 25 employees. I don't know how you do this business with that because they're getting brokered loans. They have a couple of underwriters look at them. They pay the broker a fee. I mean, so I think it will, from a competitive advantage standpoint over the long term, I think it will be helpful to us. We're going to continue to do our business, and we've never loosened our underwriting guidelines on those types of loans anyway. We always went to the full gamut, so we appreciate the question.
Yes, thank you for all the color, Barry. Appreciate it.
Good morning, Barry. Maybe just following up on the SBA loans here, you know, how long that you realize that fair value gain, how long do you guys plan to hold the loans on balance sheet for? And I'm just kind of curious, like, how we think about the amortization of that gain, you know, if it's for an extended period?
I appreciate it, Steve. I think it will not be for an extended period. I can't tell you whether it will be one month, two months, or three months, but it won't be for a long period of time. If you follow our projections, I think that's a good guide.
Okay. In terms of the credit situation, Barry, you mentioned that last year was definitely tougher for the NSBF portfolio. My question is about the vintages from around 2021 and 2022 compared to the current SBA loan originations. It seems like a challenging environment for SBA loans right now. What reassures you that the credit performance of the more recent vintages will be better than the NSBF performance?
Yes, that's an important question, Steve. It's a bit of a balancing act. First, regarding the current loans at the bank, we expect to see increased charge-offs and non-accruals. That's why we nearly doubled the provision from $26 million to about $50 million for the entire year. Loans issued in a 7.5% prime environment, where you're testing fluctuations of 3%, are in a stronger position for underwriting compared to those underwritten at 3% to 4%. The drag from NSBF will significantly lessen over time. Additionally, we are actively paying down debt since most of those loans fall under securitization, which will eliminate the interest expenses related to NSBF. There are several factors at NSBF that will reduce the drag from $28.5 million, and if you were to average it out, you would see it come down to $20 million. This represents a significant difference at NSBF. You will need to have a perspective on this to assess our earnings forecast.
At the bank, I mentioned in Q2 last year, and reiterated in Q3 and Q4, that we were heading into a tougher credit environment, and that's what we're experiencing now, in addition to the current political landscape and the resulting uncertainty. The way to navigate this, leveraging our team's two decades of experience, is through capital, provisions, and margins. I am confident in our risk management capabilities. I also want to emphasize a point you raised: regarding deposits, if you are a depositor considering a move to a 4.20% rate in a government money market fund versus earning 1.5% to 2% at a bank with fees, it's understandable to think about the best option for your money. In my view, we are offering a market rate of interest on deposits, which should lead to more stable deposits as long as we remain competitive with government money market rates. In an environment where funds can easily be transferred online, relying on low-cost deposits can be quite risky.
We have solid net interest margins despite the common focus on the SBA portfolio and credit issues. While it may seem like that's the primary concern, there are many other factors at play. We'll navigate through this period, and over time, all these variables will stabilize, and we'll be just fine. That’s my perspective. We're prepared in the bank. We're aware of the challenges ahead, but we must continue explaining our model and showcasing what sets us apart from traditional bank holding companies that primarily offer low-risk loans with minimal charge-offs, relying heavily on deposit retention.
Okay, and maybe I'll just follow up on the SBA portfolio. Could you share with us what the cumulative losses for that portfolio in the last two years have been?
It would depend upon the vintage year, Steve, but what I can tell you is our CECL calculations assume, and it changes depending upon the vintage year, over the future is about an 8% cumulative charge-off. Now, if that grows, those charge-offs are going to occur over the course of multiple years, so it's not all going to hit. See, in a normal credit card portfolio, a car loan portfolio, a loan goes bad, boom, it gets liquidated and charged off and it's gone. With us, these hang around for long periods of time. If you go back and you look at all our public filings, you'll see we've always earned money, we've always paid a dividend, but the NPLs do hang around for long periods of time because we have a duty in the SBA world to collect on it. It's different in the other areas of lending.
Okay, and then I guess if I could go back to the fair value gain, the $18 million. If we could just break out the segments, I guess I missed a part there. $8 million was from the SBA loans being held for sale, and then the remaining, or roughly $8 million, let's call it, and then the remaining $10 million, where did that come from?
Maybe Frank and Scott can chime in here. I think it would be servicing gains, possible servicing gains, could be gains from 504, as well as fair value of ALP loans.
That's right, Barry. It's the fair value of ALP is the majority of that. Just to reiterate my comments earlier, the fact that that number, and Tim, you mentioned it earlier, on the SBA fair value increase so much is just given the fact that we are, as Steve and Barry discussed here, holding those loans this quarter. We won't be holding them for too long, but just the fact that there's more balance, principal balance on the books this quarter is increasing that SBA number. We're still pricing them to the market as we've always done.
Okay. And then I guess the one more for me here, just in terms of the earnings ramp throughout the year, I'm assuming that there's just more of a weighting towards gain on sale income later in the year. Is that kind of a fair way to characterize the higher range for the fourth quarter versus the first quarter?
A better way to characterize it, Steve, is that as the year goes on, we do more loans in Q2 than in Q1, Q3 than in Q2, Q4 than in Q3. And when we make a loan, it has inherent value in it. 75% of it is a government-guaranteed bond, which we're able to sell. An ALP loan is originated based upon our capability at very large spreads to cost the funds. So yes, the answer is yes. And by the way, this is entirely different from how a normal bank operates. And we don't want to be a normal bank. They have really lousy returns on equity and returns on assets.
My questions have been asked and answered. Thank you.
Thank you, Chris. All right. Thank you. I appreciate everyone's interest and looking into the company. The questions were great today. It's in depth. We may have disagreements, but we have strong opinions on what we're doing. We've been operating in this space for over two decades. We're good stewards of risk. And we do think we're coming into a difficult time in the market and the environment, and we don't take that lightly. But we're very well prepared for it. We've weathered these storms and flourished in them, and we think we're well positioned to do that going forward. I want to thank the management team. I want to thank Scott and Frank and Bryce and everybody that helped put the presentation on together. We have a lot of new data for people to look at and analyze and look forward to producing the Q, which will give people a lot more information. So, thank you very much. I want to thank the analysts for their questions and participation. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.