Good day and thank you for standing by. Welcome to the NewtekOne Inc. Fourth 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, Chairman, President and CEO of NewtekOne. Please go ahead.

Good morning, everyone, and welcome to our fourth quarter and full year 2023 Financial Results Conference Call. We're pleased to report our results to you this morning. My name is Barry Sloane, CEO and President and Founder of NewtekOne Inc. Joining me today on the call for presentation purposes is Scott Price, our Chief Financial Officer of Newtek Bank, National Association and NewTek, Inc. In addition, we also have Nick Young, President and CEO of Newtek Bank, NA; and Nick Ledger, EVP and Chief Accounting Officer for NewtekOne Inc. I'd like to draw your attention to slide number one, which is our fourth quarter reporting as a financial only company. Excuse me. Slide number one is the forward-looking statement. Get a chance to absorb that. Now go to slide number two. Slide number two, this is our fourth quarter and third full quarter reporting as a financial holding company. We acquired National Bank of New York City on January 6th. So it took a while for us to get a lot of the assets employees into Newtek Bank, National Association. So I think it's important when you look at year-over-year comparisons, the Q1 2024 comparison might be a little bit choppy versus the Q1 2023. And therefore, when we also look at our 2023 performance, it's very difficult to do the comparisons test as a prior BDC. However, I think it's important to focus on the quarter-over-quarter sequential comparisons. And we had a really good year and quarter-over-quarter comparison when you take a look at things like portfolio of loans growing, net interest margins expanding, and deposit growth. We also now have six analysts that are covering NewtekOne as a financial holding company. We've been able to demonstrate an ability to raise insured deposits quickly with a high growth rate…

Thanks, Barry, and good morning, everyone. I want to focus most of my comments this morning on slide eight given the time constraints that we have, but we saw a nice expansion in our net interest margin during the quarter. That's going to be driven by mostly lower funding costs on a net basis relative to the balances. We clearly issued debt in the third quarter. We used those proceeds to pay down higher cost debt. We also saw our borrowing costs or excuse me deposit costs increase 40 basis points. That's largely driven by the $92 million of CDs that re-priced in the fourth quarter. We experienced good retention on our retail CDs that re-priced and expect loans to re-price in the first and second quarters as we move through and try to eliminate the lumpiness in our CD portfolio. I point out that our loan portfolio, the yield on that portfolio in the third quarter included a prepayment penalty. So that's why you see a little bit of lumpiness in between the third and fourth quarters. We do rely on, as you can see in our deposit mix, we do rely on our high-yield savings product. We've seen nice retention in that product going forward and, excuse me, so far we've seen minimal closures and the seasonal slowness in deposit gathering is fairly muted for us with deposit levels relatively stable through today. I'd point out the comment that Barry made earlier about business checking in business accounts. We do expect to roll that out in '23, excuse me, '24 and that will provide really optimal pricing, optimal funding costs on our deposit portfolio and we expect net expansion as we go through the year into 2024. So, Barry, I'll turn it over to you.

Thank you, Scott. Appreciate it. Slide number nine, the NewTek Advantage. And I will tell you, we are doing our best to condense this presentation. I've had people say, this is amazing. We love all the data we give you. I've had other people say, would you please shorten it? I've had people say comb your hair in the middle on the left. So we're trying to get through this as much as possible. But I think it was important in our first year to give as much data as we can to the analysts to give everybody a real good chance of understanding a business model that is totally different and differentiated. But we will look to condense this going forward. I appreciate Scott bringing that up. The NewTek advantage, an extremely important aspect to why we exist, it's probably the number one reason why we elected to own a bank. And it has to do with what I'll call impression. Most people on this call, and most consumers and businesses, will go to their depository many times in a given month. They will do it for transactional reasons. And in today's environment they do it just to make sure, hey, my money is still there. My assets are there. My account is still there. Important to note, impressions. We get lots and lots of impressions from our business clients by going to the New Tech Advantage business portal, which is an entry level into the bank, as well as other solutions that are held up at the holding company. What a client receives when they open up a NewTek Advantage account, free unlimited document storage, free real-time updated web traffic analytics. And if a merchant client signs up with us, in addition to have that client connected to…

Sure, Barry. Thank you. I wanted to give a picture of how our deposit mix changed quarter-over-quarter. I also want to point out that we brought in about $40 million plus of deposits that we had at other banks from our affiliates. We've been earning less than Fed funds on those deposits and we brought them in and we're able to earn fed funds and deploy them in higher costs and excuse me higher yielding assets as well as avoid raising outside deposits. We did reopen in August our high-yield savings product. That you'll see a full quarter's impact in the net interest margin and deposit costs from those increases. We also increased the rate on those deposits during the third quarter, so you see a full quarter impact in the fourth quarter. And then finally, at the bank, we saw a weighted average cost of deposits of 4.4%, which is slightly down from 4.44%. We will continue to optimize our funding base. We're going to prudently manage that through a combination of retail deposits, wholesale deposits, whether those be brokered or listing service. And we'll also tap the FHLB if we need short-term liquidity. But we are a deposit-growing franchise. We want relationships. And as Barry mentioned and I mentioned earlier, business checking is where we want to be. The deposits are sticky, the relationships are sticky, and that's where we feel like we can offer the most to our clients. Barry, I'll turn it over to you.

Thanks, Scott. Slide number 14, important from a lending activity perspective, and we have been reporting that our pipeline continues to grow based upon our unique business model of acquiring referrals from partners, as well as our efficiencies in making loans using technology, but not cutting corners on a fintech type basis but doing the underwriting. Total SBA loans funded $260 million, a 24.2% increase over the prior quarter. I think that's a) we do have some seasonality there. The fourth quarter is typically our strongest. But the industry for SBA lending was flat. We were the number one originator in Q4 calendar year, 2023, by loan volume for SBA 7(a). We're very proud of that fact. In addition, the SBA loan portfolio at Newtek Bank reached $169. 6 million. Those uninsured loan participations, and there's probably some government guaranteed in there are typically prime plus three loans. You can see 11.5% floating rate quarterly adjust, no cap, real attractive, sell the government guaranteed piece at a 10 to 11 point gain gets a really nice return, even posting, you know, a high CECL reserve of 6.75% upfront, which obviously was far more. I'll use the word punitive than what we used to do as a non-bank lender where we didn't have that CECL reserve. Importance of the note, we're forecasting $925 million in 7(a) loan fundings 13.5% increase in calendar year 2024. We also had a good year in 504 loans, $60.5 million of 504 loans for the three months, a big increase over the prior quarter, total loan closings of $142 million ending December 31, 2023. We closed the record $1.1 billion of loans across all products, and we hope to do about 1.4 billion in this coming calendar year 2024. 15 is our pipeline. You can see…

Thanks, Barry. I'm going to keep my comments brief. I will point out that the comparisons year-over-year are virtually difficult given the change in accounting model and the fact that we're consolidating our previously unconsolidated investments. I do want to focus my comments on the non-interest components of our P&L quarter-over-quarter since I feel like I've at least tried to cover the net interest margin sufficiently. We did see increases quarter-over-quarter in non-interest revenue mostly from higher loan volumes which include origination fees on loans that we've elected the fair value option on. We also saw increased gains and valuations on the loan portfolio from higher originations in the 7(a) portfolio. On the non-interest expense side we saw increases due to prepayment penalty. We terminated one of our warehouse lines in the fourth quarter. We also saw slight increases in our salaries and benefits costs. And then also we saw higher loan origination expenses for our loans under the fair value option. So with that I'll turn it over to the operator for questions.

Thank you. [Operator Instructions] And our first question is going to come from the line of Crispin Love with Piper Sandler. Your line is open. Please go ahead.

Thanks. Good morning, Barry and Scott. Hope you're well. First, just looking at your guidance on page 23, the EPS projections show a meaningful ramp through the year. And I know you typically build on EPS through the year, but I saw it last year included some of the elevated expenses early in the year from converted to a bank. So just curious if there's anything to call out on the expense or revenue side in the first quarter for 2024 prior to building later in the year or as a business as usual?

Sure. Scott, I'll throw out two items and then maybe you cut some other thoughts. One item, Crispin, obviously for Q1 2023, we had the NOL that affected the earnings. And the other thing is most of the loans that originated in Q1 2023 were done in Newtek small business finance. So there was no CECL reserve. It was done at fair value. So by being in a bank and reserving that loan loss reserve up front, it really knocks your earnings down precipitously early on, but then you pick it up out in the future, at least with respect to that aspect. Scott, any other thoughts you might have regarding the seasonality and the ramp up?

No. I mean, if you look at the loan production volumes, Crispin, as we go through the year, the first quarter is just naturally a slower time for businesses. Most everything ramps up in the second quarter. So we've seen this pattern over time over the company's history and so you know we're just trying to be transparent with you guys and help you build out your models as you get to know us better. But this is what we expect and this is what we've seen over time.

Perfect, yeah. I appreciate the detail there and the seasonality. And then the second question for me, just on credit quality, saw your comments that credits remain strong, but just curious if you could just put some numbers around that. Just looking at the consolidated portfolio, can you just discuss what you're seeing and dealing with these non-accruals and different losses, if there are any, and those expectations as you move through the next few quarters?

Sure. So when we look at the consolidated portfolio, it's important to take them in sections. Item number one is NSBF. NSBF is a very large portfolio of loans that are sitting in securitizations. The securitization cost of funds is much, much higher than where we are for the bank cost of funds. With respect to the credit worthiness of that particular book of business, which I believe is about 400 million of current pay loans and I think 70 million of face, I think it's about 35 million of fair value. So the important part is that portfolio has already been written off the balance sheet in the income statement for the non-accruals. That portfolio is probably 40% season 36 to 38 months. And the rest of it, when I say season, you know, it's through the belly of the default curve. So 60% of the portfolio is probably, you know, 2019, 2020, 2021, 2022, 2023 type origination sitting in NSBF. We have an assumption that that's going to default at a 19% rate and approximately a 45% to 50% severity. So that's hit pretty heavily. And even after that loss frequency and severity, and this is usually not a conversation that we have with the bank analysts because you guys all look at this stuff this way. That portfolio I believe is on the books at a 7.75 yield, floating rate over prime. So bottom line, that's just marked very well, even with the expectation of high charge-offs on that portfolio going forward. Major difference between the way we do our business versus a traditional bank, traditional bank, low margin, many in cases fixed rate, and the way they make their money is frankly by not paying savers a full rate on their deposits. We have the opposite. We do high rate, but very well reserved. Now, when going into the bank, we have a 6.75% CECL reserve and a brand new portfolio. So portfolio looks great in the bank. I don't think we have any defaulted loans from the 7(a) portfolio in the bank. That's going to happen. But we have a very high reserve on that. Then you've got the CRE portfolio which we just did purchase accounting on in January 6th. This is very well booked. I think that's really important to get across to you, the other analysts, and investors when they look at our organization relative to what the quality of portfolio. Obviously, there's going to be a lot more detail in the K, but just as an overview, this is a very good quality portfolio. And we're going to add investor-based CRE at current market spreads, and investor-based C&I at current market spreads. It's a great time to have capital and make loans.

Okay. Thanks, Barry. I appreciate you taking my questions.

Thanks, Chris.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Tim Switzer with KBW. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking my question. You guys gave a lot of good color on the guidance. You just touched on it a few minutes ago. But could you maybe talk about what the puts and takes are and guides that would maybe drive it from the low end to the high end over the course of the year?

Yeah, Tim, I'm going to focus on the asset side. I'll let Scott talk about the deposit side. On the asset side, a lot of it has to do with the alternative loan program. And we're probably going to need to spend more time with the analysts, maybe at the analyst day, or just with investors to explain what that program is. But that program is done at the holding company in terms of the funding. And it does require more capital utilization than down at the bank. So the volumes there, because the alternative loan program generates fee income, because it is a portfolio that is originated at the bank level, basically sold into the holdco. And there is a gain on sale aspect to it because it goes into joint ventures with other funding partners. And it's levered and issued out and financed long-term through securitizations. So that's a big item. The other one would be the price of the government guaranteed market which is moving in that direction and the ability to do that volume. So I think on the asset side it's doing more ALP loans, hitting our numbers in good pricing on 7(a). I'll let Scott handle the deposit side and the expenses.

Thanks, Barry. Hey, Tim. I think it's important to note that you know we're a different animal as we continue to try to help everyone understand our business model. Importantly, it's important to understand where we've come from. Barry mentioned the NSBF securitizations earlier. Those will most likely be coming up for a potential clean-up call during the quarter. So we're going to evaluate those going forward. We've got some alternative scenarios built into our forecast where we could potentially bring those in. So I think you've got, you know, some -- we've got to figure out how -- we're currently figuring out how we're going to fund those if we decide to exercise. So that's going to be a pretty big mix shift. You know, and then there's a question of how we would fund it. Would it be in the bank? Would it be through some other kind of wholesale funding that's more of a public nature? So we're evaluating all of that. It's certainly some wide disparities between those funding costs. If you think about deposits and we have we raised a whole lot of deposits a year ago and those you know range anywhere from you know six months to one year to two year tenors. And if you look at where we are in the curve and what's happened to rates since, we're going to have natural increases in rates as we move through time just because we're refinancing a lumpy CD portfolio. So that's a variable that has to be considered. And then we keep on harping on the fact that we want to roll out business checking during the year. That's a rollout. So we believe that we can generate very good volumes and we believe that we are currently demonstrating that we have the ability to manage the risk. And so we don't know how much we're going to get off of that and at what cost, but we do have assumptions in there. We believe that we'll bring in business deposits, at least from a checking standpoint, at 1%, potentially offering an excess funding account like a money market account that would pay a higher rate. And then we're going to see how the economy lands. I mean this entire forecast is based on a static rate environment. So no changes to rates. The Fed's trying to pull off a soft landing. We'll see how they do. But with the short-term nature of our loans being priced off of prime on the 7(a) portfolio, we're asset-sensitive and we have a lot of variables to consider. I know I tried to give you enough. I wish I could give you a two-sentence answer, but unfortunately we're just not that kind of company.

No, no, that was helpful. Thank you. The last question I had was, could you guys expand on your comments around the SBA premium guides are earning year to date is pretty high. You know, how is competition looking in the space with your peers? And I guess it's like what's driving the upside there and do you think it's sustainable?

Yeah, I think in the government guaranteed market, we talk about the shape of the yield curve. There's no better place to be on the yield curve than on the short end. And he got a short end government guaranteed floater. So I can't tell you how many times I get into conversations with people over pricing of 7(a) government guaranteed, trying to figure out what it's going to be. Also, I will tell you, supply and demand are extremely important. So if you get a big seller in here, can really push prices down. So we feel pretty good about where we're currently priced. We don't see major movements in Fed activity. I do believe, however, that if rates begin to drop, these loans are quarterly adjusted. So when rates are going higher, it actually hurts Newtek relative to the frequency of the adjustments versus when rates are falling. There's a bit of a lag and that's helpful to us because we're able to maintain that higher coupon. I think in terms of loan volumes, we try to emphasize this. We don't look like anybody else in the market. So the way that we're acquiring credits, assembling loans, putting them through underwriting, using our technology to extract a full plethora of data from customers in as frictionless, effortless manner as possible is what differentiates us. So we see our growth in 7(a) volume actually being one of the market leaders taking market share from other people. So, you know, we like this kind of double digit, low double digit growth in 7(a). It's prudent. It meets our resource capability and meets our business plan. So we feel pretty good about it.

Great. Thank you, guys, for all the color.

Thank you, Tim.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open. Please go ahead.

Hey, guys. Am I correct that there were no net charge-offs in the quarter?

Scott, you want that one?

On the bank portfolio, that is correct. We did see a couple of loans in the bank, a few 7(a) that are microloans that are showing signs of weakness. We also saw a few loans that were from the acquired portfolio that we expect 100% recovery on that are showing some weakness, but no charge-offs at the bank.

And a follow-up, following your answers to Crispin's question on the guidance for the first quarter, if I understand correctly, that's really for an upfront CECL Reserve. Is that correct for small business lending?

That's one of the big differentiators in that, in calendar year 2023, there was no CECL reserve.

Okay, on that basis, where should we think about the loan-loss reserve ratio following that?

So, I think that you need to focus, Chris, on the fact that we're originating mostly 7(a) loans. If you look at the mix of production we expect over time, I want to point out that the 504 production is typically, we have a fair value option election on those, so we carry those at fair value at origination because we intend to sell them. Same with the alternative lending program. So really the reserve applies to the 7(a) portfolio that we retain as well as the conforming bank loans. The conforming bank loans carry a reserve on a weighted average basis of about 1.25%. And the 7(a) production, keep in mind that the $925 million we're projecting is the full 100% of the loan. We keep 25% of that. And of the 25% that we keep, we put about a 6.75%, call it, reserve on that. So if you look at the balance between 7(a) and that we retain 25% of the 925 and the conforming bank loans we're going to naturally go higher as an overall allowance to loans coverage up from where we already are which is you know high for the industry. I'd point out that there's a reason that that reserve is high. There's a reason we set aside reserves because we will need to use them. We are going to have charge-offs. That will happen. But I hope that everybody understands and looks at the level of reserves relative to the industry and we have adequate reserves to cover it. They're appropriate and we also have plenty of capital. So we believe we're well positioned. We believe we're managing risk prudently And a charge-off will happen. There's a reason we have that higher reserves.

All right. I appreciate the guidance information. It's very detailed. And I appreciate the work going into the presentation. I would really appreciate going forward if we can get a lot more detail on the credit metrics. 60 days plus non-received delinquencies, net charge-offs for the current quarter, as well as, you know, the drivers for any changes in the reserves. That's just [indiscernible].

Noted.

Thank you, Chris.

Thank you. [Operator Instructions] One moment for our next question. And our next question is going to come from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.

Good morning. How are you?

Good morning, Steve. Good, thank you.

Maybe just going to on the 7(a) side of things, you know, curious here, I see your pre-qualified is up modestly, flashed up modestly, but your approved loans and underwritings are pretty significant. Just curious, you know, if you're seeing any mixed shift or some of the drivers of that.

Yeah, and I appreciate your pointing that out. I know my Chief Lending Officer will be happy you asked that question, as well as Justin Gavin, who manages that part of the business. What we've been able to do through the utilization of technology is to really clean out the prequels pretty quickly. So we're able to get to the best credits in rapid-fire and get them into underwriting. So I think it's important that, that is a -- although it looks like it's weak, it's actually a sign of strength. The other thing I want to state is we did many, many more loans. I don't know if the number is handy. I don't know if Scott does but or maybe Nick Ledger. We did many more loans in units in calendar 2023 than 2022. I think we approached in 7(a) , I'd say we approached 2,000, I know we had a couple of quarters in excess of 500 units per. So I think what you've looked at is it's an efficiency, it's not a negative. We feel pretty good about getting loads in and out of prequel right away and getting them into underwriting.

Yeah, Barry, just to expand on that we had about a 50% increase in units over the course of '23. So to your point, technology enabled us to increase that throughput. So, and quite frankly, with minimal increases to head count.

Okay, that's helpful. And then in terms of the clean-up call here that you guys mentioned, sorry if I missed the number, but how large could that be? Is that the full 400 or so million that was mentioned earlier? Or just to tie that around?

Yes, well, no, no, no. It's not that many. So it's the 2018 and 2019 deal. It is subject to SBA's approval. It's subject to us putting a funding line in place, which we're kind of operating from scratch. We did not hit the call in the current quarter. It might happen in the next, I should not in the current quarter, in the current month. It might happen next month. And it would be a call of around 40 million to 45 million in bonds. And one thing that's important, what it would do is since all those loans and securitizations, all the principal goes to pay down the debt. What would happen if you clean it up is now you get the P&I, it's flowing down into NSBF and it's available for other uses. So we've got a lot of capital that's in there right now that could be used for other purposes.

Okay great. Those are my two questions at the moment. I really appreciate all the color here.

Thank you.

Thank you. I would now like to hand the conference back over to Barry Sloane for closing remarks.

Well, we can't thank everybody enough. We did try to speed it up. I think Scott and I will regroup again for the next quarter to see if we can condense and get a little bit more concrete. And maybe we'll have a bit of an appendix available for other investors that want more detailed information. Now, I would say the amount of information that we give out, it's a strength of the business. We have many different business lines that are providing cash flow and capital to the overall strategy. And we're proud of what we do and we look always forward to telling our story each quarter. So thank you once again. We look forward to having a good first quarter as well. Thank you.

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