Earnings Call Transcript - NEWT Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the NewtekOne, Inc. Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, President and Chief Executive Officer, Barry Sloane.

Barry Scott Sloane, CEO and President

Thank you, operator, and welcome, everyone, to the NewtekOne NASDAQ NEWT Second Quarter 2025 Financial Results Conference Call. My name is Barry Sloane, CEO and President of NewtekOne. Joining me here today on the call will be Frank DeMaria, Chief Financial Officer of NewtekOne; and Scott Price, the CFO of Newtek Bank National Association. I also want to introduce Bryce Rowe, who is not on the call, in charge of Investor Relations. Bryce joined the organization recently from the firm of B. Riley, where he represented us. Bryce, when he was there, he was the equity analyst for BDCs and banks, and has been very helpful and instrumental in shaping our presentation and deck to make it a little bit more digestible and understandable. I also want to give a couple of shout-outs to some additional new hires Andrew Kaplan, our Chief Strategy Officer, joined us from Flagstar Bank, and has been incredibly instrumental in helping us with various initiatives related to the future of our digital account opening and instant merchant account opening. I also want to announce Vik Mahajan has joined us recently. Vik has had a long-term career as an M&A banker and was our banker at Credit Suisse and Deutsche Bank. Vik is the Chief Investment Officer of the bank and has been working very closely with the bank President, Peter Downs, in buying and selling loans and particularly developing a process for moving nonperforming loans off the balance sheet. With that, I'd like to mention everyone to follow along on today's presentation. Please go to newtekone.com, go to the Investor Relations section, and the PowerPoint is available there. On Slide #2 of the PowerPoint is our note regarding forward-looking statements. Please ask everybody to familiarize yourself with that note. On Slide #3, an important part of our discussion today is really looking and focusing on what is NewtekOne? What does it do? What's our mission statement and what's our purpose? Well, it all starts off with the customer. We provide business and financial solutions to a target market of over 33 million independent business owners in the U.S. Some participants refer to them as small and medium-sized enterprises (SMEs), small and medium-sized businesses (SMBs). And recently, we acquired a federally insured depository. It's important we choose and prefer not to be looked at just like a bank holding company and bank. As you go through this presentation, you will see that we really don't look like most of the bank holding companies and banks. We're different in a variety of different ways in terms of how we approach the customer, how we provide a frictionless opportunity for the client, and the type of revenues and earnings that come through our system. So we look forward to discussing that presentation with you here today. Relative to the importance of the SMB, SME, or independent business owner class in the United States, according to the U.S. Chamber of Commerce, small businesses employ almost half of the American workforce. We believe that as things go forward, particularly with artificial intelligence, it will continue to be a very prominent part of the employment opportunity in the U.S. SMBs represent 43% of U.S. GDP, and 99% of the businesses in the United States identify themselves as small. Also important to note, according to the SBA's data, over the last 5.5 years, NewtekOne, as one of the more active 7(a) lenders through its non-bank and bank subsidiary, has supported and stabilized over 110,000 jobs. I think it's important to note that we do serve a public purpose and a public good. We're not just an SBA lender, as you'll see throughout this presentation; we do all types of loans to this particular demographic. But being an SBA lender, the definition of an SBA 7(a) loan is a loan that is not available under normal bank circumstances. As a matter of fact, there's a test called the credit elsewhere test that says these types of loans do not qualify for a normal bank loan. It's important to note that we, therefore, have greater losses and greater provisions, but net of those losses and provisions and expenses, we provide greater returns. So when comparing us to the rest of the banking industry, there are certain metrics that compare us unfavorably. NewtekOne is a financial holding company regulated by the Fed. We focus on using proprietary and patented advanced technological solutions to acquire customers and to serve them cost-effectively. Also, important to note, most bank holding companies don't have a lot of assets in them. We're extremely active as a bank holding company, evidenced by Newtek Merchant Solutions, which does about $17 million of pretax income and EBITDA, and our alternative loan program business, which has a balance sheet of around $450 million to $500 million. We do provide a full menu of best-in-class on-demand solutions to our independent business owner clientele without using traditional bankers, branches, brokers, or business development officers. Through this methodology, we picked up 19,000 depository accounts since its inception. We do loans digitally and remotely, and we also handle our clients' ability to send money, receive money, payment processing solutions, payroll solutions, and insurance. In a nutshell, we are a technology-oriented financial holding company, operating and owning a digital bank that operates exclusively using an online banking platform, which is not what you traditionally see in a bank holding company and a bank. We believe that going forward, the banking industry will tremendously benefit from technology and artificial intelligence, which we are currently embracing and utilizing. It's important to note, we think that many of the institutions that you're familiar with will not look like the current banks of today. Frankly, from our perspective, we believe we are already doing what they want to do: acquire customers remotely, automate their business, and use AI. These are things that we are currently in the process of doing. Moving to Slide #4, Q2 financial and operational successes. First off, we're maintaining our earnings per share guidance of $2.10 on the low to $2.50 on the high, that's for calendar year 2024. Also important to note, one of the things we really don't talk enough about is revenue growth. We had 15% revenue growth in Q2 2025, $70.2 million versus $61 million in Q2 2024. Among the other operational and financial highlights, an important part is growth in business deposits. Business deposits come in on a less expensive basis. They're more transactional. But to get business deposits, we believe the noninterest-bearing depository account will begin to go away over time. As a matter of fact, if you go to Coinbase and you own stablecoin, you probably get 2% to 3% on your money. So we were very pleased that we were able to grow business deposits at the bank by $50 million sequentially, with most of the money coming in the DDA account. The reason why we're able to do that is we are getting opportunities from lending, merchant services, and payroll, all providing an integrated solution. With that, our cost of funds at the bank has declined dramatically and is forecasted to continue to come down. The best is yet to come; we had a 28 basis point decline in our cost of funds. I think it came in at around 3.71%. The net interest margin at the bank increased by 56 basis points. And once again, we're very pleased with what we've had at the bank with respect to our cost of funds. This is extremely important going forward as we are just beginning to get deposits below that risk-free rate, which I discussed earlier, which is the bill rate or NAV of a government-guaranteed money market fund. Importantly, we will discuss this on one of the slides going forward. Losses continue to shrink in Newtek Small Business Finance. In the recent quarters, we went from a $10.7 million loss to a $4.9 million loss to a $3.7 million loss. Newtek Small Business Finance was the prior non-bank SBA lender that is in a rundown mode and is held up at the holding company, which is no longer lending. The alternative loan program, which we will spend a lot of time on today, and hopefully, will be able to present this in a better light so people can understand the value of ALP, not just to our business customers, but to all our stakeholders, including shareholders. It's extremely important to note that our alternative loan program, which has now completed three securitizations successfully, is growing, has high-quality loans, and is very accretive to our earnings per share. We will be talking about our operating leverage being captured and really supporting above-average profitability. When you look at our ROAAs, ROTCEs, and expense ratios, those are extremely favorable on a comparative basis. Lastly, a portion of the $18 million of unrealized gain in Q1 did cause some level of confusion for some of our investors. I think it's important to note that from Q1 2025 to Q2, when we sold the government-guaranteed loans and moved the ALP loans off the balance sheet into the securitization, that actually eliminated certain figures. The government-guaranteed 7(a) loans were sold for cash and the ALP loans were written down at full value to par for inclusion in the equity stake in the securitization. I think it's important to note that we make loans and sell them. Most banks make loans, not at the growth rates that we do, and they hold them. We believe we're different than 95% of the other banks out there, and we're very, very excited about our business model, now operating through 10 quarters of success. We will be discussing significantly what we're doing in the ALP business in future slides, which I think should develop a better understanding of what we're doing. I think it's important to note, and we'll come back to this, the residual interest in the ALP recent securitization in the 2025 deal is marked at a 14% yield, including a loss severity and frequency or charge-off rate historically over the life of the loans at 3%. This is something that we've consistently accomplished as we've done three securitizations, one in 2022, another in 2024, and the most recent one in 2025. Moving to Slide #5, second quarter CEO highlights, for the earnings picture, basic and diluted EPS of $0.53 and $0.52, respectively. The first half basic and diluted EPS of $0.89 and $0.87 are above the midpoint of our guidance, which is $0.78 to $0.92. We're maintaining that annual EPS guidance of $2.10 to $2.50, and the midpoint implies an EPS growth rate of 17%, typically something you don't see in most bank or bank holding companies. We talked about the success in growing core deposits. We talked about the reduced headwinds from our SBA nonbank lender, Newtek Small Business Finance, with a first half '25 loss of $8.7 million— the 2024 loss for the full calendar year was $28.7 million. So clearly, you could see that we're trending in the right direction. We have a slide to cover this. And importantly to note, nonaccruals within NSBF actually declined quarter-over-quarter. The prices for SBA 7(a) loans were consistent with our fair value marks. So the 7(a) loans that we held on an unrealized basis for Q1 sold into the second quarter. There was actually a nonexistent gain transfer. We had to recognize an unrealized loss to wipe out the unrealized gain, and then we had a realized gain for cash. So this offsets one another. We actually sold approximately $22 million to $23 million of 504 loans at a price of 104.75%, with 40 basis points of servicing; also extremely profitable. It is important to note, and we talked about why we're keeping some of the government's guaranteed 7(a) loans on our books, we're actually able to pick up a prime plus 3 or a 10.5% coupon. That was one of the factors that helped the NIM at the bank. The alternative loan program performed exceptionally well. In June and July, both Deutsche Bank and Capital One, we closed the Capital One deal today, so we’re pleased to say, upsized our credit facilities, which we used to fund and warehouse ALP loans before securitizations. Deutsche Bank went from $120 million to $170 million. Capital One Bank went from $60 million to $100 million. We’re excited about the ability to continue to grow this business. Profitability and operating leverage still look great. Our efficiency ratio year-over-year at the holdco improved from 66.3% to 60.3%. When you look at our ROAAs and ROTCEs, they are exceptionally strong. On Slide #6, our annual forecasts are readily available on this particular slide. As we look at our business model, and you've heard me talk about this in previous presentations, we solve three primary problems in the banking industry. One, we can acquire deposits below the risk-free rate because of the Newtek Advantage. We give the customer analytics, transactional capability, and data. We enable them to send money and receive money. We have integrated solutions between the bank deposit account and a merchant account with chargebacks, refunds, batches, all in the Newtek Advantage. Additionally, you can make payroll from the Newtek Advantage. The ability to move money with us owning the payroll business, owning the merchant business, being able to do ACH, and being able to do wires allows us to position ourselves for stablecoin in the future. We’re excited about that opportunity, as we believe a lot of money will be moved over time, particularly with out-of-country transactions. Banking institutions that do not provide a real frictionless, seamless opportunity for customers to send money and receive money will be in a tough spot. Once again, you've got to provide value for the customer. I think it's also important to note that what other institutions are talking about, we are already doing. We're completely digital; there are no branches or traditional bankers. We're really doing a great job in acquiring clients. We estimate our loan book by the end of the year to be approximately 10,000 borrowers and $4.4 billion in servicing. At the bottom of Slide #6, you can see our forecast from here to the rest of the year. Our ROAA for the second quarter is 2.5%; ROTCE is 19.4%. These are outstretched numbers, and they are based upon our model. I think it's important to note, making loans and selling them is what we do. We've been doing it for 20 years. We'll probably continue this for another 20 years. It provides real returns, and it generates great risk-adjusted returns. I suggest everyone go to Slide #7 in the deck, where you can see a lot of our performance metrics, net income, diluted EPS, and pre-provision net revenue, all reflecting very, very strong Q2 financial highlights on Slide #7. It is also important to note that when you look at our capital position, we have more than adequate capital across the holding company. But also, importantly, you can see our growth, as we have the ability to utilize that capital. A lot of people or banking institutions or financial holding companies have the capital, but they can't utilize it; we have the ability to do both and to generate those types of returns. On Slide #8, you can look at our financial highlights from the bank. I'd certainly like to point out the cost of deposits declined from 3.99% to 3.71%. A lot of that’s benefited by being able to pick up the bank deposits. The net interest margin grew from 4.9% to 5.46%. I think a lot of our competitors are dreaming of net interest margins on that type of a basis. And once again, when you look at our ROAAs and ROTCEs at the bank, we stand at 3.94% ROAA, and return on tangible common equity is 35%, with more than adequate capital at the bottom of the page on Slide #8. On Slide #9, another one of our success stories is growing tangible book value per share, which increased 3.7% sequentially quarter-over-quarter and 21% year-over-year. It's extremely important; we were able to increase our tangible book value while paying a very healthy dividend. So we're excited about that. It's a great opportunity for shareholders to receive that dividend and watch the tangible book grow. On Slide #10, I think, was an important slide. We appreciate Bryce's contribution here. A lot of the investors that we met with want to see where all the assets are in a breakout, looking at the different buckets. This is extremely important from an evaluation standpoint to see what's on balance sheet and what is technically off balance sheet on a non-GAAP basis. Many of the ALP loans that are in joint ventures or in securitizations off balance sheet matter. We've historically seen 1% charge-offs in our ALP portfolio, and I think it's important to note that we are good lenders. On a risk-reward basis, we've been doing this for 20 years and have historically come out on top. Also important to note, for a little over a $1 billion bank and a little over a $2 billion holding company, we have a big operation. We believe, first of all, we do between $1.5 billion and $2 billion worth of loans a year. Because we sell off the government-guaranteed piece, we don't get full credit for that amount of activity. As I've mentioned before, we make loans and sell them. We sell the government guaranteed pieces. On the ALP loans, we create them, warehouse them, and then they get sold into a special purpose vehicle, creating a securitization that is match funded. On Slide #11, this may be one of the most important slides in the deck and maybe one of the least understood aspects of our business. When we do ALP securitizations, the residual interests are valued at a 14% yield with a 15% frequency of default and a 20% severity with a 3% charge-off. We mark these to market as we have done regularly since 2022, every quarter. Whatever premium is associated with it gets amortized. I think it's important to note when you look at the spread income: the securitized ALP loans carry a weighted average coupon in the 2025 deal of 13.3%. The notes have a weighted average yield of 6.6%. When you take that 100 basis points out for servicing, it results in a 570 basis point spread. I'd ask everybody on this call: If I was to go to a bank of our size and stature and say, 'You can get 570 basis points match-funded, and you need no employees because all the loans go into a special purpose vehicle,' wouldn't that be attractive? Well, we just did this; we put together $218 million of loans and $180 million to $185 million of bonds, and we created this securitization known as NALP 2025-1. Moreover, we intend to regularly execute ALP securitizations with the loans on the balance sheet. As a matter of fact, if you liked what we did recently, we're about to do it again. We currently have $138 million of ALP loans sitting on the balance sheet. I believe you'll see another securitization again in the fourth quarter. Once the loans go into that special purpose vehicle, they get written down, the residual piece gets valued at the yields we talked about, which are market clearing yields. It’s important to note that this is extremely accretive and very valuable. This activity is used across the entire overhead of the bank and of the holding company, so we are achieving tremendous operating leverage. Also, the ALP business has an average loan size of about $5 million, whereas the average loan size in the 7(a) business is $400,000 to $450,000. The capacity to get to, let’s say, $1 billion in loans comes from 200 units. We're likely to process 2,500 to 2,700 loan units this year, which is manageable within our capability. We utilize the same pipeline for all of our lending programs, including 504, 7(a), line of credit, term, revolvers, and commercial real estate. It's that pipeline of 600 to 900 businesses a day, amounting to a $2.5 billion database, that allows us to reach customers and make them aware that we will be exploring these types of loans. On Slide #11, we have detailed the mechanics to ensure that the market understands how these assets are flowing through the income statement and the balance sheet. The unrealized gains on securitized loans that appeared in Q1 were reversed once those loans went into the securitization. Thus, the unrealized gain on the retained residual book, of which about 87% of the principal value went into rated debt instruments, represents 13% of the equity piece. The servicing asset that was created also shows up—the 100 basis points I mentioned. It's also essential to note that these loans have prepayment penalties, which keeps the loan on the books, maintaining the high coupon and preventing the borrower from prepaying. The penalty is 5% in years 1, 2, and 3, and 3% in year 4. The duration of these specific loans within the portfolio is between four to five years. All important data to consider when you're evaluating our ALP business is well-illustrated with the information on Slide #11. If you look at the net income in the securitization, it's priced at around 5.5 times cash flow. Therefore, I'd like to ask everyone on this call: Would you like to create assets and value them at 5.5 times cash flow in a business that's growing without associated expenses once it's placed in the securitization? We are excited about our business model. Moving on to Slide #12, we have previously covered credit quality. This is a slide that you've seen in the past. The nonaccrual increase in NSBF is slowing, and we've put some numbers around that. I think this is an important bullet point. As a non-bank lender, we generally retain the loans that are in default and liquidate them, rather than sell them. However, now that we’re in this business and people are hypersensitive to non-accruals—even though they get marked to market—the hit has been taken and they ultimately get converted into cash. We are in the process of selling nonperforming loans, both at NSBF and in the bank. You can expect to see some activity on this soon, which will validate our valuations but, most importantly, return capital to us and potentially put us in more normal types of ratios and metrics that we all hold on to in our hands. It is also important to point out that the ALP loans are performing well using both on and off-balance-sheet ALP balances. We maintain a 1% historic charge-off rate as of June 30, 2025. The data you see on the chart is significant as well, emphasizing not to exaggerate the NSBF portfolio, which I believe was under pressure during the so-called great financial crisis, which, in my opinion, occurred in 2021, 2022, and 2023 for SBA lending, where interest rates rose from 3% to 5% on loans that originated in that vintage year. As you approach Slide #13, it is important to note the percentage of aged loans in our portfolio less than 24 months stands at 0. Thus, we have a seasoned portfolio in place. We think the real pain from the NSBF portfolio is behind us, as the portfolio is paying down quickly. We have approximately $200 million of capital in NSBF that we believe will be freed up as these securities pay down, and we had cleanup calls, which are crucial for activities like paying off debt, buying back stock, and paying dividends—all things that shareholders appreciate. As it stands, the NSBF portfolio continues to pay down. It paid off about $102 million during the last calendar year, roughly 30%. We believe the non-accrual inflows in NSBF reached their peak in Q2 2024 and continue to decelerate, and we believe NSBF will present an important opportunity for us. It's noteworthy that many remaining loans in NSBF are, I would say, ‘trapped’ in three securitizations—the 2021, 2022, and 2023 deals. Therefore, prepayments and loan liquidations are all held for the bondholders. Once those bonds reach their cleanup call or are paid off, all this cash flow and the equity will be accessible for a variety of different uses. I would now like to have Frank DeMaria present Slide #14 and on.

Frank M. DeMaria, CFO

Thanks, Barry. Turning to Slide 15. We provide some context around the held-for-investment loan portfolio at the bank. We account for the bank's held-for-investment portfolio on a cost basis compared to the fair value accounting that's applied to our other loan portfolios. 61% of the bank's held-for-investment portfolio consists of unguaranteed SBA 7(a) loans, which were built from the first half of '23 when the bank began originating 7(a) loans. Prior to that, the 7(a) loans were originated by our non-bank lender. The bank has been building an allowance for credit losses against that portfolio, more than 90% of which is related to the unguaranteed 7(a) book, which currently carries an allowance equal to 8.3% of unguaranteed 7(a) balances. 70% of the 7(a) allowance is characterized as collectively assessed, of which less than 5% of the total ACL is related to qualitative adjustments, while 30% of the ACL is allocated against individually assessed loans. Although our ACL continues to grow, it is building at a lower rate than in previous quarters, resulting in a sequential decrease in the provision, which continues to more than cover net charge-offs. Moving to deposits on Slide 16. Barry discussed the success we're having on the business deposit front, which was up $50 million sequentially and now represents almost 30% of deposits. We saw another meaningful move lower in our cost of deposits and believe the cost could continue to decline if we succeed in executing on business deposit growth. Our loan-to-deposit ratio is above 90%, and nearly 80% of our deposits are insured. We're using deposits to fund loan growth as the bank's bond portfolio is only $14 million on a $1.3 billion bank balance sheet. On Slide 17, we highlight NewtekOne's strong pre-provision earnings profile, which is a function of the wider lending spreads we capture, our healthy levels of fee income fueled by selling, securitizing, and servicing loans, and the brokerless branch with operating infrastructure that's scalable by design. As we layer on more securitizations and build the ALP business, the already impressive level of pre-provision earnings could improve. The last thing to reiterate on this slide is, as Barry mentioned, the year-over-year revenue growth is 15%.

Barry Scott Sloane, CEO and President

Slide 18 supports the scalable operating infrastructure comments I just made. The balance sheet climbed 37% over the last year, while operating expenses were only up 4%, and the efficiency ratio once again improved on a year-over-year basis. We believe we have the infrastructure necessary to manage a much larger balance sheet. And with that, I will turn it back to Barry for Slide 19. Thank you for that. Moving on to Slide 19 for the average net premium from SBA 7(a) loans; for the second quarter of 2025, we averaged 110.91. I think it’s notable that the SBA changed some its rules and regulations, and we believe that the market's clean premium for government-guaranteed 7(a)s for the rest of the year will end around 110. It’s essential to mention that this information is in our earnings guidance—extremely important. The significant differential in price is based upon a 55 basis points fee; there are some loans that we have in the pipeline that will be available without the 55 basis point fee. The SBA put it back in to better balance its loss reserves, which frankly, makes a lot of sense. So, I want to highlight that we are guiding to a lower gain on sale, approximately $111 million to $110 million, but it's in our numbers and in our guidance. I also want to share that ALP loan originations for the second half of 2025 are expected to approximate $250 million; this is included in our midpoint of $210 million to $250 million. On Slide #19, another Bryce Rowe original, adjusted net margin. This is basically a good analysis of really taking a look at—although it’s non-GAAP—all the loans that we have, both on the balance sheet and off the balance sheet, to give us what I would call an adjusted NIM. Therefore, the adjusted NIM, when you add on the ALP loans that are in joint ventures and then the 2025 deal, becomes about 3.51%. We do believe that's going to continue to grow, particularly as we expand the ALP business, which is on a prosperous growth track right now and does extremely well for the organization. With that, operator, we're now open to Q&A.

Operator, Operator

Our first question will come from Tim Switzer from KBW.

Timothy Jeffrey Switzer, Analyst

The first question I have is on the deposit trends with the growth in the commercial deposits and lower deposit costs overall. Can you talk about some of the drivers there? What helped bring in, I think it was that $50 million of growth on the commercial deposit side? And then what are your expectations going forward for that initiative and then bringing down deposit costs?

Barry Scott Sloane, CEO and President

Thank you, Tim. Look, I think that what's important for our organization is to maintain competitive deposit accounts. Our business checking account yields around 1%, while our business savings is at 3.5%, and it provides a truly zero-fee opportunity. Through the Newtek Advantage, we give our clients a tremendous benefit in merchant services and payroll, all in an integrated solution. I think the days of receiving a depository account without a linked solution for a business that sends and receives money are numbered. We've had a lot of success, particularly in the lending arena, where our borrowers make payments out of a Newtek Bank account. To be frank with you, we need to improve the utilization. We've opened up— I think the total business account portfolio stands at about 4,000. However, there’s a lower level of utilization on those accounts that we would like, but we're going to work on that. Furthermore, on the payment side, doing payment processing comes back to the bank account. Similarly, when it comes to payroll, that also links back to the bank account. In addition to being able to provide a bank account, it’s a zero-fee account that offers a higher interest rate. We're taking the customers’ banking depository information, running it through our software, and conducting analyses on where they can save money. Therefore, from a technological standpoint, when they access the Newtek Advantage, they can view bank information— ACH, Fedwires, possibly other transactions. They can also see their card-related information, chargebacks, refunds, and daily batches. They can make payroll through the Newtek Advantage. All these elements are fully integrated and essential to our strategy. I would also like to add that we will selectively offer a line of credit linked to a bank account, which will be part of our comprehensive strategy to provide the best all-around solutions for our SMB, SME, and independent business owner client base.

Timothy Jeffrey Switzer, Analyst

And then I apologize if I’m missing this somewhere, but what were your total charge-offs this quarter for your held-for-investment portfolio?

Barry Scott Sloane, CEO and President

Frank, could you help with that one?

Frank M. DeMaria, CFO

Yes, it was $5 million, Tim.

Timothy Jeffrey Switzer, Analyst

Okay. So pretty flat with last quarter?

Frank M. DeMaria, CFO

Yes, $5.1 million to be exact.

Timothy Jeffrey Switzer, Analyst

Okay. So exactly the same as last quarter. And then the other question I had is you guys did a really good job last quarter of helping us break down the various drivers that went through that net fair value line item. Obviously, it was a negative $11.8 million this quarter. I know that the securitized loans had an impact on that and the reversal from the held-for-sale SBA loans last quarter. Can you give us the different pieces of that and particularly what the gain was on ALP loans this quarter?

Barry Scott Sloane, CEO and President

Frank, I'm going to let you handle that with the numbers and the debits and the credits.

Frank M. DeMaria, CFO

Yes, that’s fine. So Tim, the previous unrealized gains, as Barry mentioned earlier, on the ALP loans amounted to $35.1 million. So that was reversed, which represents the primary component of that $11.7 million loss.

Barry Scott Sloane, CEO and President

By reverse, Frank, you mean written down to zero, right? In other words...

Frank M. DeMaria, CFO

Correct. Written down to par...

Barry Scott Sloane, CEO and President

Which means it offsets by the loss.

Frank M. DeMaria, CFO

That’s right; it was written down to par... This means it will offset the loss. We also had a net gain of approximately $32.4 million on the value of the equity interest. For the quarter, the ALP loan gains amounted to about $6.3 million. So that helps offset the loss, as well as the 7(a) unguaranteed loans that were also being held on the books before they get sold.

Barry Scott Sloane, CEO and President

Tim, also, if you check Slide #12, you can see that we've got a lot of stability here. Now I do want to point out that a significant portion of the bank's held-for-investment portfolio is fairly mature, allowing us to manage it efficiently.

Frank M. DeMaria, CFO

Barry, I believe we lost you there. I think you may have to repeat that.

Operator, Operator

Pardon me, please standby. Mr. Sloane, are you able to hear us? Pardon me, please standby. Your conference will resume momentarily.

Frank M. DeMaria, CFO

Barry, I think you are back.

Barry Scott Sloane, CEO and President

Operator, are we reconnected?

Operator, Operator

Yes. Are you able to hear us again?

Barry Scott Sloane, CEO and President

I hear you. Yes. So I don't know if it came through, but I wanted to point out that there’s a lot of stability when you run your finger across the non-performing loans on and off balance sheet, excluding NSBF. We excluded NSBF because we believe that portfolio is in runoff mode and is challenging. With that said, the provision at the bank for the second quarter was down from the first quarter, a function of not having nonaccruals roll into the book. We do believe that will pick back up. It’s expected, and we're reserved for it. The reserves operate basically as capital because if you have a loss, it goes right against that reserve. Therefore, we feel very confident about the business. We're not extremely concerned about the credit aspects of the portfolio because of the strong reserves.

Operator, Operator

Our next question will come from Crispin Love from Piper Sandler.

Crispin Elliot Love, Analyst

I just want to follow up on the net gain in residual and securitizations line. So $32 million in the quarter. I'm curious about whether those will only occur when you do ALP securitizations. Just curious about what's changed there and what we should expect following this.

Barry Scott Sloane, CEO and President

Yes. That is— go ahead, Frank, you can answer the question.

Frank M. DeMaria, CFO

Yes, I was going to say. The change here is this is the first time, Crispin, that we've owned 100% of the residual. Previously, we were working through 50-50 joint ventures. The difference is that those would go through that joint venture and non-controlled interest line. We do anticipate continuing to structure these types of opportunities in the future, but that's the difference between the two prior ALP securitizations.

Crispin Elliot Love, Analyst

And then just on the SBA rule changes that went into effect June 1, you cited the margin impacts and gain on sale margin impacts. But I'm curious about volumes. Would you expect a drop-off in volumes in the 7(a) product? What are your overall thoughts on these changes, and have you noticed any noticeable differences in the past couple of months since they were implemented?

Barry Scott Sloane, CEO and President

Crispin, that's a good question. I don’t believe we will experience that because our purposes are quite different. Non-bank lenders in the space struggle significantly; they are lacking the staff and the capability to comply with the new changes. We’re proud of our position as we're totally comfortable. We’re not changing our guidance of $1 billion on 7(a)s for the year. By the way, when I suggest we will see 110, the mix could shift between the 10-year and 25-year paper, which could influence the gain. However, for now, we won’t instigate a change. We believe— and I’ve mentioned this before— it is a more challenging market to find good credits and tariffs, which were an issue in April, have lessened now. This affects borrowing appetites, but we’re seeing increased optimism. Therefore, we feel confident about the second half of the year.

Operator, Operator

Our next question will come from Marc Silk from Silk Investment Advisors.

Marc Silk, Analyst

For question number one, as a shareholder, I'm perplexed that your stock trades at a P/E around 5 or 6, while the industry trades at higher rates. Can you explain why you think that is?

Barry Scott Sloane, CEO and President

I think we're making improvements at conveying our narrative—our developing story. We generate earnings through many diverse aspects. This organization has taken over a manual one-branch bank, opened up 19,000 depository accounts, lends to 2,500 unique borrowers digitally, has 350 customer-facing personnel on camera, and employs AI solutions to improve reporting rather than relying on manual inputs. I believe that the market doesn't fully grasp our uniqueness right now. Furthermore, we are addressing aspects that many others are discussing, and frankly, we’re executing them. I recently attended a conference where a sophisticated, incredibly bright individual asked me: “What if you don't make any loans next quarter?” And I replied, “Yes, if Apple doesn't sell any iPhones and GM doesn't sell any cars, they'll also lose money.” We manufacture loans and then sell them. That's our business model— it's been for 20 years, and it yields high returns on equity, even after taking into account losses and provisions. This disparity in understanding seems to complicate how we are perceived. The investment group that we belong to, which includes community-based banks, serves as tough competition. We aren’t graded as favorably as we would like when compared to traditional metrics. However, we're generating profit, we have capital, and we will continue this approach.

Marc Silk, Analyst

Could you provide more insight? Are you securing your business primarily through your payroll and payment processing? Are new accounts emerging largely due to these services? Could you break down where most of the accounts are stemming from and identifying which area is providing the strongest contributions?

Barry Scott Sloane, CEO and President

In the near future, we will announce and roll out technology where, when you open a bank account, you will also receive approval for a merchant account in one seamless process—one application. It's essential to note that this won’t incur fees. This is not an effort to mislead customers; we will provide them an account that is openly available, offers substantial cost benefits, thorough integration. They won't need to look further. Moreover, you cannot process electronic payments without a bank account. Why not utilize our zero-fee bank account that provides superior analytics? The same holds true for payroll and lending. Thus, having all these features fully integrated is crucial. We are leveraging similar tactics to platforms like Shopify, which don't unbundle services, and what Amazon does, where everything is bundled together with value for customers.

Operator, Operator

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Barry Sloane for any closing remarks.

Barry Scott Sloane, CEO and President

Thank you very much, everybody, for attending. I appreciate it. We look forward to reporting in our next quarter and continuing to generate the types of earnings and returns that you've come to expect. Once again, I want to greatly thank my senior management team. I know I named a few people, but I can’t name them all; they do an excellent job for all our stakeholders—shareholders, customers, and employees. Thank you very much. Have a great day.

Operator, Operator

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