NewtekOne, Inc. Q3 FY2025 Earnings Call

Thank you, operator, and welcome participants to our Q3 2025 financial results conference call. I'm Barry Sloane, President, Founder and CEO of NewtekOne and Newtek Bank National Association. Joining me on today's call is Frank DeMaria, Chief Financial Officer of NewtekOne, the publicly traded holding company, stock symbol NEWT on the NASDAQ; and Scott Price, our Chief Financial Officer of Newtek Bank National Association. We certainly appreciate everybody attending the call today and the investment that you've made in analyzing and evaluating Newtek as an investment opportunity. We'd like everybody to try to focus today, in addition to the great financial numbers that we put out, really look at the investment in NewtekOne from a business perspective; how we raise deposits, how we make loans, how we're able to do this with low expense ratios in the marketplace and really create what we believe is a business model for the future for a technology-enabled bank. Once again, focusing on technology and efficiency in a market that we clearly see is rapidly changing. Obviously, the focus on credit quality is important. I think we'll be able to demonstrate that; our credits have stabilized, both within the bank and at the holding company through the NSBF results. We have a slide to demonstrate that. And we're also going to be able to focus on raising deposits below the risk-free rate, which we also think there will be future benefits based upon how we have positioned ourselves in the Newtek Advantage by performing payroll for our customers, merchant services for our customers connected with a bank account, which we believe is rare and unique in the marketplace today. In addition to that, as you could see from the press release, we just put out; we have some outstanding numbers for return on average assets, return on tangible common equity, and the efficiency ratio. We're excited about approaching our 3-year anniversary as a bank holding company owning a nationally chartered bank, and we're very pleased that we have been able to demonstrate our ability to manage the bank, manage risk and hit all of our strategic goals and objectives, importantly, according to plan. Investors that focus on what we're doing in the marketplace believe they'll be rewarded over the course of time. What we do believe is that we really don't compare and contrast well to $300 million to $500 million community banks. I just came from a conference sponsored by the American Bankers Association on small business finance and small businesses as a targeted marketplace. I met some of my competitors. We're just very different from them in every facet, and we'll try to illustrate that as we go through the call. We'd love for you to ask questions, such as how we can grow deposits below the risk-free rate without traditional bankers and branches? Why are nonperforming loans higher? While it's important to note that they're higher, we're still profitable. Also, why are these three things that we do very well going to continue, such as raising deposits below the risk-free rate, being able to do loans with our lending operating system in remote locations, as well as the significant progress that we've made in our Alternative Loan Program? We'll focus on that today. For those following along, please go to newtekone.com, go to the Investor Relations section, where you can find the PowerPoint presentation. Please refer to Slide #2 and note the statement regarding forward-looking statements, and ensure that message gets absorbed. Now go to Slide #3. It's always important to reemphasize the mission of the company because at the end of the day, it always comes down to the customer. If you do a good job for the customer and there are good margins in your business, you're going to do well for all your stakeholders. Our mission has not changed since the company was formed in 1998, which is to provide business and financial solutions to independent business owners all across the United States. Within this mission and having recently acquired a bank and being a bank holding company, we've opened up 22,000 depository accounts in our timeframe, and we have 10,000 borrowers in our database that we've been able to service remotely without traditional bankers, brokers, business development officers, or branches. We do payroll for 20,000 employees, and we're processing electronic payments for over $5 billion on an annualized basis. On Slide #4, focusing on who we are and our mission statement, take a look at Newtek as a technology-oriented financial holding company. We view that particular organization as we are now also a depository. That's important to note. We do not want to be compared as a traditional community bank. We don't look like one, and we don't compare like one. What we excel at is acquiring customers cost-effectively, servicing their needs with great margin, and making loans on a risk-adjusted basis. We manage credit risk; we do not avoid it. If you look at our financial statements, we typically have higher reserves. We also have higher nonaccruals. But net after that expense, we're still extraordinarily profitable. In January 2023, Newtek acquired what is now known as Newtek Bank National Association to add depository solutions. We use proprietary and patented advanced technological solutions to acquire customers cost effectively. We receive about 600 unique business referrals a day. We have a full menu of best-in-class on-demand solutions because our customers want service on demand. A typical entrepreneur and business owner doesn't necessarily want you from 9 to 5, Monday to Friday. They want you on Saturday, they want you on Sunday, they want you in the evening. We service this independent business owner clientele, which is extremely important. When you look at Slide #5, focusing on this target market of independent business owners, SMEs, SMBs, small and medium-sized enterprises, small- and medium-sized businesses, there are more than 36 million business owners in the U.S. according to the SBA. According to the U.S. Chamber of Commerce, this represents 43% of U.S. GDP. And according to the Small Business Administration's website, over the last five years, we've been able to support or stabilize over 110,000 jobs, which is the second highest amount of jobs supported by all the lenders in the SBA's 7(a) program. We think this market is important. We think it is valuable. We know that the top four banks and many other financial institutions, based on what I saw at these recent conferences, are trying to figure out how to bank this particular customer base, and they have to go beyond just getting their deposits, which they typically take in a noninterest-bearing fashion. We do that for this customer base, and we believe we're being rewarded for that. Slide #6 discusses the detailed numbers that we like to focus on. We take our slide rules out and our compasses and protractors to analyze all these numbers we've collected. We had a very healthy Q3 and 2025 earnings and revenue growth. When you look at Q3 basic and diluted, $0.68 and $0.67, over the course of the first nine months of the year, it's $1.57 and $1.54. The growth rates are up 47% comparatively and 22% when you look at that year-over-year comparison, with revenue growth at 19% to 16%, respectively. Important trends in book value, $11.72. Mind you, we started off in Q1 of 2023 with tangible book value of $6.92 per share, and that's grown to $11.22. So, tremendous growth in tangible book value, all while we paid a very healthy dividend to our shareholders, currently $0.19 a quarter or $0.76 for the year. We've also experienced continued success in growing core deposits. Business deposits sequentially over the quarter increased by $52 million or 17%. Consumer deposits climbed by $95 million or 12%. We're growing deposits without the use of branches, bankers, brokers, or business development officers. The next bullet talks about a very important category, which we refer to as our Newtek Alternative Loan Program. In our Alternative Loan Program, we finance that through securitizations. We use securitizations to better asset-liability match these longer-term duration-based assets. We are currently expecting an ALP securitization in the fourth quarter of 2025 that will be our largest to date, ranging from $325 million to $350 million of ALP loans. This will clearly be our biggest securitization. This will be the 17th securitization in NewtekOne's history and the fourth in this particular category. We’re excited about it and look forward to it, and it should be a very profitable endeavor for all of our shareholders. Our capital position has been bolstered and our capital structure simplified. In the recent quarter, we were pleased with the capital that we raised, issuing Series B preferred and common equity. We boosted Tier 1 capital and common equity Tier 1 by roughly $80 million and $30 million, respectively. We're pleased that we were able to boost our capital ratios to support the growth rates that we're achieving on a safe and sound basis. Regarding operating leverage, our efficiency ratio declined from 61.8% to 56.3% at the holding company, even with assets up 43%, while operating expenses increased only by 8.5%. Our return on average assets for the quarter was 3.15% and continues to trend well ahead of the industry. Payments, payroll, insurance, they are additive to earnings—a good value proposition. We'll talk about that within the confines of the presentation today. But also importantly, they're very additive to our deposit-gathering function, and they bring tremendous value to our business customers. If you're doing business with ADP, for example, you're not really connected to an ADP bank account because they're not a bank. If you're doing payments through Worldpay or Fiserv, you're not really connected to a bank. With us, we provide you one solution, fully integrated with a dashboard called the Newtek Advantage that gives you transactional capability, analytics, and data to manage your transactions. One other important item for Q3 financial highlights in NSBF, which is our nonbank lender currently in wind-down mode. This is left over from when we were a BDC. This is held up at the holding company. The loss in this business, as it is not originating and is in wind-down mode, continues to decrease, and we've got a slide to accentuate that. We incurred a $14 million loss for the first three quarters of 2025. In 2024, the full year's loss was $28.7 million. So, we're likely trending to an $18 million to $20 million type loss. This will continue to decline over time, and we have a slide to focus on that. On Slide #7, we can focus on the Q3 2025 financial highlights. We talked about return on assets, return on equity, return on tangible common equity, efficiency ratio, all very, very strong, particularly compared to industry standards. I would like to point out that our nonperforming loans to total loans at 8.1% is fairly high compared to a community bank or the banks that you typically look at. But I think it's important to note that this has already been written off or written down. The important part to notice is as we're building new portfolios, these numbers are stabilizing, and we believe our data will show that. When you adjust for the nonperforming loans, it drops to 3.8%. That figure takes out the NSBF portfolio, which was probably underwritten during one of the most difficult times for small business finance. 2021, 2022, and 2023 were challenging due to the zero interest rate environment when the prime rate was 3%. We know prime went up to 8.5% at some point. Now it's starting to come down. We think the wind is finally at our back. We're experiencing lower provisions, and we believe this is stabilizing and will be less of a headwind going forward. Slide #8 highlights Newtek Bank National Association, showing the financial highlights. Please refer to the last column for Q3 2025, with a return on average assets of 3.57%, return on tangible common equity of 32%, and an efficiency ratio rounding up to 47%. Our net interest margin stands at 5.4%. I see that the net interest margin compared to some of the top four banks just dwarfs that. This is the recurring benefit that we will see as we begin to build a bigger portfolio at the bank. Needless to say, at the bank, we're dealing with CECL, which is negatively biasing us currently because you have that big charge upfront. You won't receive that high coupon from this particular portfolio until over time. I think that due to the negative type of accounting machinations for CECL, this will be more beneficial as time goes on as we begin to utilize the balance sheet more, particularly with SBA 7(a) lending, keeping some loans on our balance sheet rather than selling them all off. That's a strategy that we've observed others in the space being quite successful with. Look at our quarter-over-quarter loan growth, 9% held for investment, deposits up 11%. I'm reading research reports from other banks our size that are being compared against, they're growing by 2%, 3%, and they're getting rave reviews. I don't know what the problem with us is, but we will keep persevering, and I'm sure we will get there eventually. Look at our capital ratios—very strong, sitting at 11%, up to close to 15% on the three key leverage ratios. Once again, very important, the allowance for credit losses stands at 5.42%. We have the reserves that will support higher losses and greater charge-offs. Slide #9 illustrates tangible book value per share growth. We discussed this earlier—a real tremendous increase. All the while, we have paid a healthy annual dividend to our shareholders of $0.76, or $0.19 per quarter. As you can see, tangible book value is increasing materially from $6.92 to $11.22. We're very proud of the growth in this tangible book value number. Slide #10 reflects deposits. We've talked about the growth in deposits, and we're currently at approximately 3.72% on deposits. We think that number can maybe get down to 2% to 2.5%. That will depend upon the merchant business, payroll business, insurance agency, and the lender helping clients embrace their depository account along with all the other things we do. From a risk standpoint, 78% of our deposits are insured, very valuable with a loan-to-deposit ratio of 95%. Slide #11 discusses the Alternative Loan Program, extremely important to NewtekOne, which is currently conducted at the holding company. This program was developed in 2019. Historically, our charge-offs have remained below 1%. I believe we had $5.7 million of charge-offs historically, and $720 million of total loans originated. It's important to understand the purpose of this program. We have a funnel to lend money to businesses. When the referrals come in, customers often do not know what the best loan might be for them; it could be a revolver, a 7(a) loan, a 504 loan, or it could be what we refer to as the Newtek Alternative Loan Program, which has similar characteristics to a 7(a) loan in that it offers a 10-year or 25-year fully amortizing amount of principal with no balloon, but the credits are much stronger. We have guarantors that range from $5 million to $100 million on Alternative Loan Program loans. Our average loan size is about $4 million to $5 million. So, we see significant growth opportunity here. If we do 200 units of Alternative Loan Program loans, that's $1 billion of loans. We believe there's great growth opportunities here, and, as we've shown in future slides, it's a very profitable opportunity. It's important to note that Newtek, unlike these other $300 million to $500 million banks, makes loans and sells them or securitizes them. Other banks hold them, partly because they cannot replace them. We have a machine that makes loans and sells them. We have a machine that acquires deposits. This model has been developed for over two decades, except that on the depository side, it's somewhat new. Yet we show we are capable of acquiring deposits at attractive rates. I believe it's crucial to analyze this Alternative Loan Program business. As previously mentioned, we're about to conduct our fourth securitization in Q4 2025, which will be the largest ever. Slide #12 will provide metrics for these types of loans. These have high FICO scores, with a weighted average loan-to-value of 47%, a debt service coverage ratio on average of 3.4x, and a weighted average gross coupon of 13.17%. The weighted average spread is to the base rate, which is the 5-year treasury. These loans are typically fixed or five-year notes that adjust at the margin, and they can't decrease in value. They also have prepayment penalties of 5% in the first 36 months and 3% in months 36 to 48, which ensures that they are not prepaid. We aim to maintain that spread income over a long period. We focus on diversification across states and industries. Let's move to Slide #13. We have the securitizations on our books. On Slide 13, the 2022-1 deal has been paid off. We had all the cash flows backing the bonds repay the bonds. Thus, the bonds no longer exist. The security holders are very happy; they received their money back, and we rolled these loans into a new transaction. The 2024-1 was our next deal, done with a joint venture partner, similar to 2022-1. You can take a look at the Alternative Loan Program loans, the weighted average yield, notes in securitization, and the spread—the weighted average rate of 6.72%. Now the critical part is the gross spread before the servicing fee and after the servicing fee, as we are the servicer. It’s a strong servicing stream because of the call protection. The servicing lasts for an extended period, at 496 basis points on 2024-1. The recent deal was at 5.68%. We believe the spreads we’ll achieve next year will likely be closer to the 5.68%. Once you have the business running and the loans enter the securitization structure, there are no costs. Consequently, we leverage the infrastructure across the entire business line and incorporate these loans. While the cost of funding is greater in a securitization, it's match-funded, easing concerns over interest rate risk. When I approach a banker and say, you can get 568 basis points of spread after the servicing fee without any costs associated, they'd likely jump at the opportunity. Well, good news—we have it. It's our program, and we have a track record of success. Our alliance partners are progressively becoming familiar with the business, and we think this will be a growth area for the company moving forward. Slide #14 gives the status of the three completed Alternative Loan Program securitizations. 2022 is gone, and 2024 is on the books, while 2025-1 is also on the books. This will provide insight into the original balances, notes paid down, and whether we completed this with a partner. Mentions of joint venture partners show they invested alongside us from first loss. We know how these valuations trade and mark them correctly. All this data is found in our Qs. It's a 14% yield with a 15% frequency over the life of the pool and a 20% severity that equates to a 3% historical charge-off. This is how we derived our valuations. Slide #15 focuses on Newtek Bank National Association Credit Quality. We think this slide is important because it illustrates we are building this portfolio, remembering we acquired the bank with $180 million in total assets. Today, we're looking at about $1.4 billion in total assets. We are in the process of building a new portfolio; however, like any lending business, when you build a new portfolio—particularly in the types of loans we undertake—there tends to be an uptick in nonperforming loans and charge-offs, but this is beginning to level off. Most importantly, we believe the allowance for credit losses will adequately cover the nonperforming loans. Therefore, we are pleased with the performance; there are no surprises here. This performance has developed according to plan. For those concerned about our trajectory, we believe our performance speaks for itself. We have individuals who root for us and some who root against us. However, looking back over the past 25 years, that hasn't been a sound bet. We are very satisfied with our management team, our relationships with regulatory authorities, and our various providers and warehousing line securitization investors. We just returned from an ABSE conference. We held three to four meetings in two days, and we couldn't be more delighted with the business performance. Moving to Slide #16, we discuss the SBA 7(a) loan portfolio of Newtek Bank. A significant aspect here is there’s a concentration of 7(a) loans combined with the allowance for credit losses, which makes up 89%. We believe we will begin layering in more commercial real estate and conventional lending into the bank portfolio, leveling it out. We are excited about this initiative, and that too is according to plan. Slide #17 discusses NSBF—our former nonbank SBLC Small Business Lending Corp., a licensed nonbank SBA lender. For some of you who may not know, when we acquired the bank, we were unable to put these assets into the bank due to debt obligations. These loans are currently seated in securitizations. We hold three securitizations that still exist: 2021, 2022, and 2023, although the 2021 is callable, and we intend to explore options for a cleanup call shortly. This legacy nonbank subsidiary hosts a portfolio in wind-down mode. Note the increase in nonaccrual loans from Q3 2024; this is decreasing. While it's still increasing, it's doing so at a slower rate. The aging of this portfolio means these are seasoned loans that are less likely to default. In our accruing portfolio, with $215 million held in securitizations and $140 million against them in bonds, the nonaccruals at fair value should liquidate over the next 12 to 24 months, generating cash and providing opportunities for dividends, share buybacks, debt repayments, and more. Regarding NSBF equity, it's at $256 million. Observe that NSBF loans as a percentage of the total consolidated NewtekOne balance sheet are shrinking: 32% in Q3 2024, down to 16% in Q3 2025. Thus, this loss is significantly declining. As previously discussed, we estimate our loss will be $28.7 million for 2024 while trending at roughly $18 million to $20 million this calendar year. Performing loans are also paying down. When they pay down, if they're in secured loans, they pay off the debt. But outside of that securitization, we have about $55 million that will cancel. We believe the nonaccrual inflows in the portfolio have decelerated for five consecutive months. We're satisfied with that as well. Slide #18 emphasizes operating leverage captured. This centers around the efficiency ratio, which declined from 61.8% to 56.3% at the holding company. At the bank, we believe we are around 46% or 47%. We're pleased with that context. This is in light of total assets growing, revenues rising, but operating expenses not rising at an equal pace. Slide #19 covers subsidiary contributions. Our payment processing business is expected to contribute $16.5 million of pretax income in 2025. We expect greater contributions from a deposit perspective, with data forthcoming in the next quarter. In insurance policies, we have 10,000 policies in 2025, which is a 34% year-over-year increase. We anticipate the insurance agency to contribute about $800,000 pretax. Our payroll business is expected to contribute about $600,000 pretax. Payroll clients are currently 860, with 20,000 employees we handle payroll for, and that business is growing nicely. All three of these segments are excellent complements to our depository and should be part of the total treasury management system, which we provide through the Newtek Advantage. We all believe that these business lines will continue to contribute growth in business deposits and attract more stable, appealing deposits. One final item: we will launch a new offering—not a new product, but a new offering called the NewtekOne Triple Play, which will offer a customer an unsecured line of credit for up to $10,000, provided they are credit approved along with a merchant and payroll account. So, you receive a line of credit, a bank account, and a merchant and payroll account all simultaneously—NewtekOne’s Triple Play. The last slide, Slide #20, discusses the capital we raised this past quarter. We appreciate the investment from Patriot Financial, which exchanged $20 million of Series A convertible and an additional $10 million cash investment for shares, which are locked up for 24 months. Patriot sits on the Board of the bank and provides a solid viewpoint. We're grateful for such a sophisticated institutional bank investor expressing faith in our organization. Secondly, we issued $50 million of fixed reset noncumulative preferred perpetual stock and an additional $50 million in issuance. We also refinanced the Newtek Merchant Solutions business through Goldman Sachs Alternatives, totaling $95 million in financing. This took out a little over $30 million in financing. This gives us sufficient cash capital going into 2026 to pay off our unsecured debt, WTZs, and other obligations in the future. We are very well positioned going into 2026. And with that, operator, I'd like to turn this over to Q&A, where I'll have my CFOs and team to answer any questions we might have from investors or analysts.

Our first question comes from Tim Switzer of KBW.

First one I have is just on credit trends real quick. Could you guys update us on what you’re seeing in the market? There’s obviously been some disruption in a bit of a credit cycle. And I’m curious, are there any certain areas where you’re seeing more pressure in terms of like industry or geographies relative to others?

Yes. So Tim, regarding credit trends, we do believe this is an economy of haves and have-nots. That’s kind of been the case for a while. And we've experienced quite a bit of stress and strain and uncertainty in the small business community. With rates spiking up, we're starting to see some rate relief now. We appreciate the drop in rates as well as the inflation pressures. We are staying away from the volatile businesses and industries where they are commodity-based. Anything relating to oil and gas and transportation is a difficult category, as is agriculture. The consumer side remains strong, so long as equity market values are holding or appreciating. We believe spend will continue, and our portfolio is flattening out, primarily driven by seasoning. Remember, we've been a lender in this space for over 25 years. So we have substantial experience, having seen it through high rates, low rates, inflation, and deflation. We also have a strong sense from our portfolio of customers and payment processing and payroll.

That’s helpful. And then there are no slides on updated guidance this quarter. Are you still confident in the previous guide for $0.65 to $0.80 for Q4?

Yes, that’s a good question, Tim. I would say this: right now, we have a government shutdown. If the government opens within two weeks, I wouldn't foresee any dramatic changes. However, I can’t bet on that. This is a pretty volatile and uncertain situation. So we don’t have a reason to pull our guidance, but we hope people invest in us not necessarily on Q4's results, but from the standpoint of the business model, looking at book valuations and things of that nature. Just to be totally candid, we can't adhere strictly to the previous guidance amid the government shutdown.

Yes, that's fair enough. Can you maybe elaborate on your ability to originate or process some loans that were approved before the SBA shutdown? Can you explain that and maybe provide a timeline on the potential impact of the shutdown on your originations and loan sales if it stretches to Thanksgiving?

Sure. Given that we've been doing this for a long time, beginning in September, we start to cover our portfolio. We can estimate what will be closing throughout October and possibly into November. While we can't provide a guaranteed number, we are still taking in applications. Also, there’s a provision in the SBA's SOP that allows you to bridge a borrower through this period and then roll it into a 7(a) loan. It's tough to predict the impact this will have, but we know how to navigate through these shutdowns; we've experienced them over more than two decades, and we have the necessary tools. We are currently providing bridge financing to borrowers to facilitate their transition into a 7(a) loan.

Okay. I got it. And then the last question I have is, can you provide the Tier 1 and total capital risk-based ratios for the holding company? I don’t believe I saw that in the release or Slide 10.

Yes. Currently, Tim, we're looking at about 12.5% on leverage at the holding company and just shy of 16% on total risk-based capital.

Our next question comes from the line of Crispin Love of Piper Sandler.

Just following up on the shutdown, Barry, did you pull PLP numbers ahead of the shutdown in September for potential SBA 7(a) loans in your pipeline? If so, what volume could you expect from those pulls in the fourth quarter?

I don’t have the specific number, but we did pull product, covering loans that will likely fund about 45 days from when we get the PLP number. So, we are probably covered for half the quarter. But I also want to point out, Crispin, that our loan mix is changing. The AOP has seen more commercial real estate and conventional lending. So, yes, we are in a tough time, but this too shall pass. It’s only a quarter. I know we are all focused on the next quarter and, naturally, we react accordingly. But this too shall pass, and frankly, many lenders have exited the 7(a) space due to the changes in the SBA program. Others have dropped out, but we’ve weathered these storms over time.

Okay, great. And then regarding the $29 million in loans under the fair value option included in the revenue line item for the quarter. Can you discuss the main drivers and what you expect moving forward as it can be fairly volatile, especially with the significant securitization coming in the fourth quarter?

Yes, Frank, I believe that's a mix of government loans and Alternative Loan Program loans, but I’ll let you provide further insight on that, Frank.

Yes, Crispin, you’re correct. We’re ramping up for the upcoming securitization. Thus, a significant portion of that this quarter is related to that event. Just as you observed last quarter, you will notice a shift in the fair value line as we finalize the securitization and pull the residual onto the balance sheet. You’ll see that again, as you mentioned, in the subsequent quarter. Much of that relates to originations that back the inventory for the securitization. Additionally, some other 7(a) guarantees are being held for a longer duration due to the shutdown, but we intend to continue selling them once the government reopens.

Okay, perfect. I just wanted to ensure I understood the guidance accurately. You are not pulling the guidance but not reaffirming it. Is it mainly a timing issue of whether the gain on sale revenue hits in 4Q, 1Q, or beyond rather than anything more substantial?

I can’t comment on that. It's tough to forecast accurately. I truly can't provide insight on it at this time. However, I will say that with a stock price around a 10 or 11 handle, does it really make a difference? You don't need to respond to that, but that’s my viewpoint.

Our next question comes from the line of Steve Moss of Raymond James.

Barry, can you provide some insights into customer demand or confidence within the SBA program? I realize the SBA closure may have affected your readings, but how do you feel about the current pipeline and potential activities in the lending space?

Steve, that's a significant question, and it speaks to this particular market. At present, lenders are leaving the space, and it’s becoming mor difficult to secure loans. When asked about my perspective last quarter regarding the changes the agency made and whether it would affect originations, I initially didn't believe it would. Now it has impacted us. It’s becoming a tougher lending environment. One issue concerns merchant cash advance lending, which we cannot refinance, and a second is for those ownership chains where even a 1% stakeholder cannot prove U.S. citizenship—these individuals cannot obtain an SBA loan. You’d be surprised by the number of applicants who fall into this category. Conversely, we have customers who insist they are citizens and have the proper documentation, but our database indicates otherwise, so we can't extend them loans. I should also mention that we’ve had borrowers approved for financing, but due to uncertainty in the marketplace and various tariffs, they aren't pursuing it. Overall, originations will become more challenging.

I appreciate all that information. I also noticed you mentioned diversifying your bank balance sheet. What does that imply for the future? What type of loans are you considering adding? Will some of the Alternative Loan Program loans potentially end up on the bank balance sheet?

Yes, Steve, diversification is extremely critical. We see many opportunities in straight C&I line of credit lending and CRE loans. One of the strategies I intend to suggest to my team is to plan an Analyst Day session in December or early January right after the new year to provide better guidance moving ahead. When assessing total loan originations across Alternative Loan Program, CRE, and C&I lines of credit, while we were once well-known as an SBA 7(a) lender, that is continuously changing. We appreciate the program—it’s excellent—but it will now be part of a diversified approach to develop our franchise in the SMB marketplace. Currently, the uninsured balance sheet is probably sitting around 44% to 45%. We aim to reduce that a little, while desiring significant growth in the ALP business which is highly profitable—larger credits, larger customers, and returns equal to those experienced in the 7(a) business.

Regarding the substantial upcoming securitization, do you foresee this being a typical run rate of $300 million plus in the future? Could we expect more than two a year?

Good question. I would like to maintain it at two a year and aim for larger transactions. This is the first time we've conducted two Alternative Loan Program securitizations in a single calendar year. Our goal is to do two a year while increasing transaction sizes—the larger pools are better. There’s more diversification, and you receive better responsiveness from investors. So, yes, I would appreciate that question and would like to execute larger deals. Our average loan size is $4.5 million to $5 million. While it doesn’t encompass a lot of credits, we aggregate about 2,500 to 2,700 credits. When doing 200 credits, this requires considerable effort, as the process to originate a $1 million loan is similar to that for a larger loan.

Okay, that’s helpful. Now, referencing your 3-year anniversary approaching in January—what kind of flexibility should we expect after that milestone, if any?

That's a good question, Steve. You can expect to see better execution from us on the deposit side and improved execution on the Alternative Loan Program side in terms of volume. However, there will be no change in the product mix, which is significant. You will see a bank and a bank holding company that may be more familiar to you in analyzing the metrics than what you've seen until now. That’s our goal: to provide more insight and transparency.

There was certainly a lot of information in the deck. I’m still digesting it; putting it another way, with the 3-year anniversary and your leverage currently at 12.5%, could we expect that to gradually come down to around 9% or 10% within the next two to three years?

We do plan on utilizing the balance sheet more and employing more leverage. I appreciate your question on that. While it won't be a dramatic shift, it’s vital to note that both investors and regulators want to ensure we possess the capabilities, management team, systems, software, and policies to manage our business and its growth. Many said we couldn’t grow this quickly and succeed with our endeavors. Well, we're still here, and our plans remain intact. As I’ve mentioned in numerous calls, we're operating according to plan on nonperforming loans, capital levels, and growth. With our 3-year anniversary approaching, we aim to continue growing while helping the market better recognize our accomplishments.

Our next question comes from the line of Hal Goetsch of B. Riley Securities.

You mentioned during the call that some SBA lenders are exiting the market. Can you provide insight into that trend? What factors are contributing to this exodus? You’ve managed to take market share. What’s your long-term outlook for SBA lenders and your ability to capture more share? Also, regarding the Alternative Loan Program, is the government shutdown affecting that program?

Certainly, Harold. This is public information: BayFirst, one of the top 20 lenders, has exited the market. Their business transitioned to an entity named Banesco. This was partly triggered by recent SBA changes in underwriting scores. Many competitors entered the space post-PPP as technology providers, but they really couldn’t meet the comprehensive lending requirements in a regulated environment. That’s the only specific name I can mention due to publicavailable information, but we are aware that several other lenders are receding due to this environment—and we see that in our hiring interviews. Our Alternative Loan Program remains unaffected by this situation. We may experience some decline in 7(a) loan volumes over the next couple of quarters, but we believe we will still deliver strong performance in the market. For the Alternative Loan Program business, we're targeting approximately $350 million to $400 million in AOP loans for this calendar year, and I'm optimistic we’ll hit that. Looking ahead, I believe we could aim for $500 million to $600 million for next year, although I have not formally discussed that with my COO.

Okay. If I may ask a follow-up: the LTVs on the Alternative Loan Program loans appear quite favorable. Could you refresh my memory regarding the collateral backing those loans?

Certainly. DBRS is our rating agency, and they've produced a quality presale report with detailed descriptions of the loans and their underwriting processes. Anyone interested should reach out to myself or Bryce Rowe, and DBRS will happily provide that information. Generally, these loans are accompanied by business valuations through appraisals. Approximately 65% of our loans typically have commercial real estate liens attached. If there isn’t a commercial real estate lien, we assess intellectual property, machinery, equipment, inventory, and above all, personal guarantees—everyone holding 20% equity or more must personally guarantee the loans. This leads us to secure assets like marketable securities, real estate assets, and sometimes even private residences as part of the loan terms. Borrowers prefer these loans due to the longer amortization period, essentially offering them equity, as they can preserve the principal over extended period.

Our next question comes from the line of Christopher Nolan of Ladenburg Thalmann & Company.

Barry, what are your thoughts on increasing the dividend?

That’s a great question, but always a challenging one. We take pride in having one of the best dividend-paying stocks in the market. As a shareholder myself, I value the dividend. I would say candidly, we are not receiving a considerable valuation increase for the dividend increment. If faced with a decision to increase the dividend versus pursue stock buybacks, our inclination might lean towards buying back stock to boost shareholder value. However, we might find ourselves in a situation where we do nothing. The likelihood of a near-term dividend increase appears slim.

I appreciate the healthy capital ratios. Do you feel any pressure from regulators regarding maintaining higher capital ratios due to your unconventional business model?

I would have anticipated that would be the case, but the answer is no. Regulators generally do not advise you on what you should do; they inform you of what you cannot do. Nothing regarding our current capital level has been imposed from regulators. To be frank, the elevated levels were a management decision we made during our early operations. We wanted to demonstrate to the market that we are well-capitalized, with a sizable allowance for credit losses—we know how to run a bank. As a nonbanker leading a bank, I've brought in highly experienced personnel across all necessary aspects. That’s been beneficial. Not everyone will stay; I've been asked whether changes will occur in my management team. My response is that encouraging continuous development will be essential for maintaining the motivation and drive our team has shown. We will continue to build this platform together and enhance it. I attribute our successes to the management team overseeing the delivery of these outcomes. They have done an outstanding job. We plan to utilize our balance sheet and access more capital as we go forward.

Final point: it’s clear that your business model is both unique and profitable. Given your current engagement in both technology and traditional banking, do you see your model evolving toward a FinTech model?

I appreciate the question, Chris. First, let’s set aside the comparisons. I look at organizations such as LendingClub, Live Oak, or SoFi. Many of these firms spent years without much growth until the market became familiar and comfortable with their models, and suddenly their sizes and valuations jumped—there might be a perceived misalignment between valuation multiples and their actual performance. With LendingClub, they dabble in small business lending, but it's minor. Compare that to a company like Innova, which does not own a bank; they trade at a high multiple against our current valuation. The difference lies in familiarity. However, the investors who dedicate time to our business are impressed by what we’re doing. According to NASDAQ, 52% of our shareholder base is institutional investors, but I suspect it’s more like 65% or 70%. Keep in mind, there are 10 million shares in float with 2.5 million short—something seems off about that. There are people who appreciate our stock, and then there are those who are pessimistic because of the short interest. We will figure out the valuation issue at some point. In the meantime, we are building an exceptional business: we’ve created 22,000 digital depository accounts, onboarded 10,000 lending clients, and process payroll for 20,000 employees. We facilitate transactions quickly, efficiently, and at lower costs. We certainly hope that the market understands what we provide. At the start of my presentation, I encouraged you to focus on the business model. If you like the business, you should appreciate the stock.

My question relates to clarification on the math: you mentioned $1.2 trillion in assets, is that correct?

At the bank, it’s currently $1.4 billion, while at the holding company, it’s approximately $2.4 billion.

And you began with $300 million, correct?

Yes, the National Bank started with approximately $180 million in total assets when we acquired it.

So effectively, your model transitioned from a BDC raising capital quarterly to primarily relying on deposits now, is that accurate?

Yes, that's correct.

And with 78% of that considered guaranteed deposits, does that mitigate the risk of withdrawals?

Indeed. Our deposit base is around $1.2 billion. While we still have other liabilities, an increasing portion of our liabilities will stem from deposit gathering. We will work on growing the balance sheet and the bank's earnings.

I’m showing no further questions at this time. I would now like to turn it back to Barry for closing remarks.

I want to thank everybody for attending. I really appreciate the work the analysts have done and the great questions, thoughtful, insightful, forward-thinking—both for us and for the industry. Bryce and I are always available along with Frank and Scott to help answer any questions you might have. So thank you very much.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.