Good day, and thank you for standing by. Welcome to the NewtekOne, Incorporated. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloane, Chief Executive Officer. Please go ahead.

Good morning, everyone and welcome to our third quarter 2023 financial results conference call. My name is Barry Sloane, President and CEO, Chairman of the Board of NewtekOne, Inc., a NASDAQ Company. Also presenting on today's call is Nicholas Leger, EVP and Chief Accounting Officer of NewtekOne; Scott Price, Chief Financial Officer of NewtekOne and Newtek Bank National Association. We also have attending the call Nick Young, the President and Chief Operating Officer of Newtek Bank N.A. For those of you that would like to follow along in the presentation today, we welcome you to go to our website, newtekone.com. NEWTKONE.com. While you're there, you might want to peruse the Newtek Advantage, which is our important business banking portal. However, today I'd like to direct you to the Investor Relations section where our conference call deck is being hung (ph). On Slide number 1, we have our note regarding forward-looking statements. We'd like you all to be familiar with the contents of that particular slide. On Slide number 2, we start off with Newtek Bank National Association summary financial highlights. One of the things we wanted to focus on today was the Bank metrics that are really coming in as planned and very nicely. Our net interest margin from Q2 2023 grew sequentially from 3.19% to 3.49%. Our return on assets, 4.93% to 5.32%, return on tangible common equity 32.1% to 39%, and efficiency ratio dropped from 58.7% to 49%. These are metrics you're typically not seeing in the banking industry or financial holding company industry today and that is because of our unique business model, the things that we do. The assets that we generate are high yielding net of loss severity and frequency over time. And this is the second quarter that we reported as a full bank…

Thanks, Barry, and good morning, everyone. I'd like to provide some color on the changes in our deposit levels during the quarter. I want to assure you that our actions during the quarter were measured and we ended the quarter very close to where I wanted to be. Slide 19 shows our view of bank deposits by quarter on an ending basis with a focus on changes versus the second quarter. In the first quarter, the Bank consciously brought in considerable amount of short-term brokered CDs given the liquidity crunch that occurred during that time and that raised our deposit concentration for brokered CDs to 43% of total deposits. In the second quarter, we raised significant levels of customer deposits through our digital account opening platform. And then, in the third quarter, we repaid almost $60 million of brokered CDs. When we evaluated the replacement alternatives and their pricing, we made the decision that brokered money was too expensive given our desire to change the shape of the liquidity profile of our CD portfolio. So given these conditions, we decided to partially offset the decline in brokered CDs with increased balances in our high-yield savings product, which we launched in August. We increased the rate, given the rate hike that the Fed did in July to 5.25% from 4.9%. We also changed the rate profiles across our retail CD offerings to move away from brokered money and address duration. And finally, we also made the decision to begin moving Newtek Bank -- into Newtek Bank the deposit accounts that are non-bank affiliates hold with other institutions. So with just over $200 million in liquid assets at September 30 and an average cash balance at the Fed of $190 million, it seemed imprudent to take on additional money and bear unnecessary cost to maintain a flat deposit level linked quarter. Looking forward to the short-term, we have $29 million of brokered CD capacity at September 30. We have available borrowing capacity at the FHLB of $93 million and the liquid assets that I just mentioned. We will continue to manage our net interest margin through these volatile and uncertain economic times. The five-year treasury saw as high as 5% this past month, in October from around the 4.40s. So some very much very, very big, volatile times here. So looking forward, we continue to invest in our back office and infrastructure. We begin to -- as we begin to manage our regulatory compliance risk while expanding our product offering and that will continue and really offer a scalable business later into 2024 and 2025 and beyond. So with that, Barry, I'll turn it back to you.

Thank you, Scott. And certainly appreciate Scott is a recent acquisition for Newtek. And obviously he joined our senior accounting and finance team with Nick Leger. Look, I need to point out that we do not have, this is not a management team for a $600 million bank or a $1.4 billion bank holding company. This is a management team that is built, and frankly, I think it's competitive with a $5 billion or $10 billion organization. We will get there. We will grow nicely in a controlled manner and methodically. But when you see the types of talent that we're bringing in with Scott's addition, obviously Nick Young, our Chief Operating Officer, and I want to point out that the group that worked on this deck and put these pages together, It's not easy. From Mike Schwartz, Elise Chamberlain, Nick Leger, Frank DeMaria, Scott, Nick Young, Peter Downs, I'm sure I left somebody out, don't yell at me. But I greatly appreciate the management team that currently exists. We have a couple of more pieces to the puzzle to add and we will be ready to continue to do this quarter-after-quarter. On Slide 20, NewtekOne has five loan programs. Four of them are in the Bank. SBA 7(a) in the Bank. SBA 504 in the Bank in held for sale capacity, conforming commercial and industrial business loans, you just call that a business loan. And conforming investor-owned CRE real estate loans, this is the category that's giving most banks heartburn. The portfolio that we picked up from National Bank of New York City, we'll talk about it's a real cream pump portfolio. It's low risk. It is also low margin. But in today's market, if you've got balance sheet, not a better time to put loans on your books…

All right. [Operator Instructions] For your first question, it comes from the line of Christopher Nolan from Ladenburg Thalmann. Christopher, your line is open. Please ask your question.

Hey, Barry. Thank you for the detail. A couple of real basic questions, just looking forward. For the non-conforming C&I, what is the average loan amount that you guys are contemplating? I didn’t see that?

Yeah. It's a good question and probably should add it in the future. Our average loan amount is currently about $4 million. We go up to $15 million and we go as low as $0.5 million. So we get enough diversification to put into a rated structure. Our first structure which is modeled on Index had a DBRS single A rating and we look to achieve that or better going forward in the first quarter on the next securitization. But Chris, I think it's important to note, we'll do over, I think, 2,000 units this year in lending. To do a billion dollars’ worth of loans with a $4 million average, it's just, and I say just another 200 units, easy for me to say, but it's not out of reach. And we believe that the demand is there for the product because it's a long-term, it's a long-term amortizing loan with personal guarantees. And our customers like the flexibility and they're willing to pay the higher rate for that flexibility that we give them.

Got it. And then in the quarter, were there any non-performing loans? I didn't see it in the deck.

Were there any non-performing loans in the non-conforming area or just in general?

In general, please.

Yeah. So, I might ask Scott to help me with that or Nick Leger. Hey, Nick?

Yep. I'm here, Barry.

Got it. I apologize. I left your piece out. So after Chris will go through your presentation quickly. But on the -- could you talk about it NSBF, which is the legacy – so there were no non-performing loans on the 7(a) portfolio in the bank. There was only one non-performing loan from the legacy 7(a) portfolio. Were there any other non-performing loans? Well, let me go to the non-performing loans up at NSBF, let's go that sequentially. How did that, how did those numbers move? Non-performing loans, 2023, Q2 to Q3 for NSBF.

Sure. So as a reminder, loans at NSBF are on fair value for the historical portfolio that was previously at the BDC. So as of Q3 2023, in the portfolio that you'll see that's held for investment at fair value on the balance sheet. There was $70 million of non-accruals at a cost basis, which we do a DCF fair value mark on those loans. So at a fair value basis, those are at $38 million. So there's a $32 million valuation adjustment against those. So price approximately $0.54 on the dollar. On a prior quarter June 30, 2023 on a cost basis, it was $66.6 million. So quarter-over-quarter an increase of about $3.5 million at a cost basis and the price at a fair value was pretty flat quarter-over-quarter.

Great. Thanks, Nick. And then, I guess a final question…

I just wanted to ask Scott, Scott were there any other non-performers in the bank that I missed?

Barry, there were, I think, the one that we disclosed were actively working. There were two others. They're well-secured and in the process of collection. It's important to note that on those loans, they did not require any incremental reserves.

Thank you.

And then I guess my final question will be, your growing reserves, is the focus -- is there, how should we look at the reserve ratio for 2024?

Well I think in the bank we have a CECL reserve of about 6.75% against the uninsured portion of those loans. And Scott maybe you could address the reserve on the rest of the portfolio.

Yeah. I mean – yeah, if you think about the reserve methodology Chris we've got you know about a 6, call it 6.65 to 6.75 reserve ratio on 7(a). So as we increase our 7(a) concentration or percentage of the loan portfolio, that reserve percentage is going to continue to increase. So we were at I think 2.9 and change somewhere around there for the end of the quarter and I expect that to naturally gravitate higher. The portfolio that we acquired from NYC as Barry alluded earlier in his remarks was very clean and so from a CECL perspective that reserve to loans ratio was about 1.25%. So as the 7(a) portfolio increases, I expect the allowance to loans ratio to continue to increase as the 7(a) portfolio becomes a larger portion of the overall loan portfolio.

Was that a contributor to the lower 2024 EPS guidance?

No. We did not change our reserve or loss metrics for 2024. I think if you dig into the 2024 guidance, we're trying to really invest measuredly in our back office so that we can create stable, sticky deposit relationships with our business customers, whether they come in the form of money market accounts or our business checking accounts. And in order to be able to manage those products, we have to have the right infrastructure for compliance reasons. So that's one aspect of it. We have a lot of, we're not an easy puzzle to figure out at times with all the different products and all the different accounting methods that we have. But that was one of the drivers. But I would say that the loss content on the portfolio has not changed year-over-year.

Okay. That's it for me. Thank you very much.

Thanks, Chris.

One moment for our next question. And for our next question, it comes from Michael Perito from KBW. Please go ahead.

Hey. Good morning, guys. Thanks for taking my questions.

Thank you, Mike.

I wanted to just follow up on the last question just about the EPS guide. And I apologize if I missed this, but can you maybe share a bit about what macro kind of assumptions you guys are using around rates and credit just in that forecast?

I think that from a credit perspective, I believe we are reserving for double what we've received for charge offs over the last five years. That's both from the CECL perspective as well as the fair value of the NSBF portfolio. For example, Mike, the NSBF portfolio, which is [Technical Difficulty] holding company, is valued at fair value. I believe, Nick, the market clearing yield was 8.5 for the third quarter, net of a 19% default rate and a 45% severity. So after those charge-offs, and that's a season portfolio, 38 months, we think we're hitting these assets very hard. And frankly, when you look at doing the loans in the bank, from an upfront perspective, it's far less profitable using CECL accounting than fair value, because you've got that upfront hit up front on the 7(a). So I think we are very comfortable doubling expectation of recent history to believe that will hold. Secondly, for rates, our rate forecast, give or take, is up another 25 basis points to 50 basis points and then flat.

Okay. So, just a couple of follow-ups to that and thanks for that Barry. So just to be clear, the doubling, it sounds like a conservative assumption around credit, but just does that, but that from a macro perspective, I mean, is that just kind of a normalization of charge-offs given, the rate on these credits is now north of 11% and you just assume charge-off activity to kind of drift higher normally or is there an actual kind of macro credit deterioration assumption driving that? And then secondly, just on the rate, so I mean, it would be fair for us to think that there could be some upside to guidance if rate cuts materialized because it sounds like you guys have a pretty higher for longer assumption driving your ‘24 EPS guide at this point.

Yeah. I think that some of those numbers -- put it this way higher for longer we agree is not a good thing. And it's not a good thing for anybody, and it's not particularly great for us either. I think on the credit side, one thing I will say Mike, we've been doing this for 20 years and we're getting better and better at it. So I think we look at our history and I think that we have factored into a weakening economy, not just a normalization of what we're doing.

Okay.

So I feel very good about our reserve position. You look at our reserve position versus other lenders, and I think you'll see that we've got more reserves than they do. I believe that's the case on the SBA stuff. And unfortunately for rates, we do think that the short end, I think they will be somewhat reluctant to drop rates in the near term and I wouldn't be surprised if we get another rate hike or two, particularly given that the commodities keep pushing up, particularly oil. So we'll see.

Yeah. I tend to, sorry, go ahead.

Sorry. I just wanted to add on to the credit discussion. Keep in mind that the portfolio at the bank is essentially a new portfolio. So there is a lead time to when we'll start incurring charge-offs on that portfolio. We can't take them before the loan goes bad. So there's got to be a seasoning of the portfolio. And that's just the nature of migrating from a fair value approach that we had at the old BDC to the bank accounting that we're having to apply CECL too.

Okay. That's helpful, guys. Thanks for sending me on that. And then just on these non-conforming C&I loans, I wonder if you guys can help me out a little bit. I feel like I don't have the full picture here. I mean – could you -- it seems like it's expensive to kind of fund and hold these loans at the HoldCo. Wouldn't it make more sense from an efficiency standpoint just to hold them at the bank sub and fund them with deposits and other wholesale borrowings. I'm just trying to understand kind of the dynamics of that. I mean, because the new slide you guys put in kind of obviously shows some ROE potential that's significant, but I'm just trying to figure out like why that's the most kind of efficient way to fund this business and is it correct to assume, I think you said this Barry, I just want to make sure I heard it right, that the $40 million of proceeds, give or take, that is expected to really stay all at the HoldCo to fund these loans. So there's not really an expectation to dividend any of that down to the bank sub, which I wouldn't think because you don't really need banks up capital. I just want to make sure I heard that right.

Yeah. The last part you did hear that right. 100% for sure. And I think, the first part is, there's always another participant at the table and that's the regulators. And when we set ourselves up to get our approval, I think it was important for us to lay out what we wanted to do in a simple most vanilla manner that we can. And we don't have the history in this area of lending that we've got in the SBA 7(a) side. So this is something that might be doable down the road, but for now, there's enough margin in it that it works up at the holding company. It's not the cost of capital that is going to drive this. It's the availability of capital.

So is it correct for us to believe that for the foreseeable future here, there might be additional kind of debt needs at the HoldCo to fund this depending on the environment right? I mean if the economics remain attractive is it fair for us to assume that you would come back and raise more debt to fund these loans if that was the situation a year or year and a half, whatever the timeline is from now?

Yeah, that would be desirable, yes. And I think that we have revolvers that we've paid down. We're in a good cash position. And one of the things I think you asked in the last call was the capital raise of equity, that's out. So there's no capital raise for this calendar year for equity. So I mean, we put it in because we didn't know whether it would be a debt market. Obviously we're pleased that there is a debt market for us and we'll continue to grow the business methodically.

Yeah. No, I mean the 8% rate is actually like for the product that was, I think, pretty attractive on it. Obviously, it's still more expensive than anything incremental that you could fund with that the bank sub. But I appreciate that commentary. And then – so just my last question is you guys mentioned the loan size, the personal guarantees. Can you just give us a little bit more color kind of about what these loans are for these non-conforming C&I loans? Like what use case or I don't know how general it is and if it's broad I apologize but just any kind of examples which would be helpful as we think about that portfolio growing near term here?

Yeah. This would be an owner operator that owns a business. It's a cash flowing business and they prefer fixed versus floating and they really want flexibility for utilization of proceeds and don't want to be told by the banking institution that they have loan covenants, they can't dividend certain amount of money, they can't lever up, they can't do an acquisition that they constantly have to go back and forth to the bank. We prefer, and it's been our experience in the SBA space, that we take personal guarantees, we take personal and commercial assets for deposits, excuse me, for leans, And that's put us in a secure position where we haven't had any charge-offs at all for the -- since we began the program in 2019.

Okay. All right, guys, Thank you for the color on the guidance and macro and on the non-conforming loans. I appreciate it.

Thank you.

[Operator Instructions] And for your next question, it comes from the line of Scott Sullivan from Raymond James. Scott, your line is open. Please ask your question.

Hey, Barry. Thanks to you and your team for taking my call. A lot of my questions were sort of covered by the prior reps. And I was wondering, if you could sort of speak a little bit more on the non-conforming products. We meant to sort of view this as a unique and kind of a special driver going forward.

Yeah, I mean, I think this particular product is unique. It fits our model of client acquisition. So we get a thousand referrals a day and there are borrowers that want 7 million, 8 million. There are borrowers that want fixed rate, there are borrowers that have used up their $5 million of SBA guarantee. There are borrowers that only occupy 45% of the real estate instead of 50 and a fraction. They can't get an SBA loan. So then we're able to offer them this particular loan. The credits -- we believe are stronger because the businesses do tend to be bigger. The wherewithal of the personal guarantees, which I will tell you the capital markets does not understand. The rating agencies don't understand them. We've been in the business of lending with personal guarantees for 20 years. We use them. We hold the borrower's feet to the fire, and we get their full attention on them. So we're able to charge a very healthy rate. And in the current market, it is -- we've got a nice pipeline that's now building and growing given that recent capital raise. That capital raise stand-alone could enable us to do 200 million somewhat of these particular loans through joint ventures.

That's terrific. And yeah, for me, I think you guys have created a very interesting new banking model. And I just wish you continued success.

Appreciate it, Scott. Thank you.

One moment for our next question. And for our next question comes from the line of Bryce Roe from B. Riley. Bryce, your line is open. Please ask your question.

Thanks. Good morning. Hey, Barry. Wanted to just ask about the potential spin of new technology solutions. Is that contemplated in your guidance for ‘24 and any kind of thought process around why and possibly when? I know you said by the end of 1Q ‘25, but just any more clarity on that would be helpful. Thanks.

Sure. Bryce, we like the business a lot. And right now, although, different things can occur, I think it's our intention to offer that as a dividend to shareholders. Now, I would say that I hope to do it tax-free. So therefore, the effects of the business on a consolidated basis will flow through the full calendar year of 2024, and anything else probably will be at 2025 event.

Okay. Appreciate that. I think all the other questions were asked and answered. Thank you.

Thank you.

All right. So presenters, there are no further questions at this time. I would like to turn the conference back to the CEO, Barry Sloane for closing remarks.

Certainly appreciate everybody attending today. We had a very full call. And we'll continue to keep our head down, plow forward, and deliver the results that you expect from us. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.