NEWT - NASDAQ

Good day, welcome to the Newtek One, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in listening-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, President and CEO of Newtek One Inc. Please go ahead.

Good morning, and thank you very much. I appreciate everyone attending, and welcome to our first quarter 2023 financial results conference call. Obviously, this is our first conference call as a financial holding company owning a nationally chartered technology-enabled bank, and we appreciate everyone’s attendance. Our call today is going to be quite detailed to give investors and analysts an opportunity to begin to model our organization, which is clearly a differentiated business strategy and operation, one that will be different than any other financial holding company or bank holding company that you’re familiar with. So we appreciate everyone’s patience. We tried to give as much detail and transparency to try to set a baseline foundation so that people can begin to model up Newtek One, a very unique, differentiated financial holding company. Joining me on today’s call is Nicolas Ledger, EVP and Chief Accounting Officer; Nick Young, President and COO of Newtek Bank NA; and John McCaffrey, Chief Financial Officer of Newtek Bank NA as well. We’ve also invited our analyst coverage. We have several analysts that are on the call that might participate in Q&A. Chris Nolan from Ladenburg. Crispin Love from Piper, Paul Johnson from KBW, along with Mike Perito. Marel Ross from Compass, Bryce Rowe from B. Riley and David Feaster from Raymond James. So we welcome calls coming in on the Q&A to try to get our story out in the market, and we get people to follow the very unique repositioning of Newtek One, a unique financial holding company. I’d like to call everyone’s attention to the forward-looking statement on Slide #1. I should remind everybody that is not familiar with Newtek One, our PowerPoint presentation is on the Investor Relations section of our website, and you could follow along. Slide #2, our first quarter reporting as a financial holding company based upon the fact that on January 6, we completed the acquisition of National Bank of New York City, renamed Newtek Bank NA and withdrew our BDC election and ceased operating as a BDC. Important points of focus for this presentation, given that this is our first quarter. Obviously, the comparisons, which Nicholas will talk about, to as a BDC has questionable relevance, obviously, because there’s different accounting treatment, but Nick will go into that shortly. First important point relative to the results that we released last night, we exceeded the previous first quarter basic EPS forecast of $0.41. We came in at $0.46 basic as well as analyst consensus. We had 2 analysts that reported to date. I just think just – it’s very difficult for people to have been able to do forecasts without this baseline. So we certainly appreciate the coverage that we’ve gotten so far to get out in front of this and it’s been helpful. We hope to be able to pick up more analyst coverage going forward with some of the people that are on the call. So in addition to exceeding the original EPS forecast, one of the things we’re quite proud of is we demonstrated an ability to raise insured deposits during a very difficult time with a high growth rate. digital account opening and the utilization of brokered CD is very important. Digital account opening is come on like gangbusters, we talked about the success we had in March, April and May. Important to note, the industry currently is somewhat plagued with asset liability management issues that are questionable. Many financial institutions have long-duration fixed-rate bond or loan portfolios that are not matched by time deposits. We do not have this issue. And when you start to look at the metrics of return on average assets, return on tangible common equity and capital ratios that exceed the industry norm, we’re starting off with clean balance sheet, a great business model with margins, and we really do not operate to the historic industry norms of a business that’s primarily predicated on low to no-cost deposit costs to raise fundings on the liability side and fixed rate low margin, but yes, low-risk loans or securities. We look forward to our presentation today. On Slide #3, we continue to talk about our unique differentiated business model. We’ve always used the term without the use of brokers, branches or business development officers. I think it’s a real important designation. Many of our competitors in this space have got big dollars invested in commercial bankers that entertain take people out for their deposits, particularly commercial deposits. We’ve developed our business model as a technology-enabled bank over the course of 20 years. We utilize technology, people and processes to deliver solutions to its core commercial clientele with efficiency and high levels of service. So it’s not like the customer is the void of a relationship. For those of you that are not that familiar with Newtek and the Newtek advantage, you’ll see, you’ll be able to get individuals that are professionals within their product segment on screen to be able to talk on camera to our clients on a regular basis. It’s just not the traditional banker broker or BDO network that’s exceptionally expensive, arguably not efficient, and we’re really excited about the ability of what we’ve built over 20 years now coming together under a financial holding company structure owning a bank. When we talk a little bit more about the Newtek Advantage, you’ll be able to see what our real advantage is in the market and then our trained solution specialists, whether they’re trying to help the customer open up a bank account, contain a small business loan, help manage hardware and software, 24/7 in our data centers, both in Phoenix and Jersey. In state licensed insurance agency, payment processing business, which is really important in the movement of money for our business clients exceptionally important. And our competitors really don’t do this very well at the independent business over level. Important to note relative to our differentiated strategy is a well-managed asset liability strategy. So many of you are familiar with one of our core lending products, the SB 7(a) loan. Today, we’re out in the market at Prime plus 300, that’s 11.25% spread, 75% of the loan is government guaranteed and sold at a 10% to 11% premium. So therefore, you’re left with a 25% uninsured but not subordinated loan participation on our books, and we’ll talk about the size of those. It’s about 150,000 average balance, so you get tremendous diversification. And that diversification gets you through good times and bad. And that’s what we’ve learned over the course of 20 years. We came into this business by acquiring a bank and putting a plan together that we believe deposits have 0 duration. And all of a sudden, in the last 2 months, everyone’s waking up and going, "Wow, bank deposits at a 0 duration. And we saw commercial depositors line up, unfortunately, at some of our industry participants and withdraw their money. So the value of the commercial accounts dumping $10 million, $20 million, $30 million into a financial institution at one slug. It’s any question about what you can do with that money. Are you going to make a car loan doing 3 or 5 years it’s illiquid. Are you going to make a residential mortgage loan that in today’s prepayment expectations could be 6, 7, 8 years. going to do commercial real estate loan. It’s very tough. So when you look at our strategy of deposit gathering, percentage of insured deposits versus uninsured. And what we do with the funds and managing liquidity, you’ll see we are different, and we think we’ve got the right model at the right time. So I said this on previous calls, have we entered the market at the worst times or if they ended the market at the best time. Time will tell, but we’re very confident about what our strategy is, and it’s the perfect strategy for this time in the market. We obviously have got net interest margins that exceed your typical bank and financial institutions. You’ll see that the current net interest margin of the existing entity that we took on is about 225 basis points. But you could do the math and you’re at 11.25% coupon on the loan and you’re getting deposits at 5%, that’s in excess of 6%. And – that’s attractive. And that’s the type of business that we’re going to grow. Now we will be diversified. We’ll be putting on some lower margin business with current CRE type loans and current C&I type loans that are – I’ll use the word conforming in nature to bank underwriting standards. And that will diversify us – reduce our charge-offs and losses but give us a diversified portfolio across the whole bank spectrum. Clearly, we’ve demonstrated an ability to gather and grow deposits beyond my wildest expectations. I did believe we’re going to be successful in this and after a drought of about 1.5 months and finally getting our technology correct, and we really appreciate the work that Apiture did with us to get our digital account opening online banking position ready. We came on like Gangbusters and we’re very, very pleased with how that is currently working, but we’re still early. We still have a lot of work to do and a lot of development to be done there to get it to where we really need it to be. Look, going forward, we – our business model is predicated on acquiring deposits at market cost of funds. However, it doesn’t mean that we don’t believe we’re going to be able to get commercial deposit accounts for checking at 1% and commercial high-yield savings accounts at 3.5%, which will reduce the blend. And we’ll be able to do that by combining our merchant processing, our payroll, requiring operating accounts of people we lend money to, and the Newtek at damage, which we’ll talk about. So that will wind up giving us further advantages in the future. I think it’s important when you look at our organization, you have to take a look at it and go, gee, this is a little bit like a re-IPO. Let me look at what they’re looking to do going forward. Let me look at the spread, let me look at their margin, and we look at their strategy, when they look at their 20-plus year track record in managing risk through ‘08-’09 in the pandemic and say this is a company that I want to be involved with. And if you’re going to look at it like a traditional bank and what is this trading times tangible book value, you might as well go on to another conference call because this is not the company for you at this point in time. I’m not trying to dissuade people from investing in us. But when you see all the different engines and the diversified cash flows and things that we offer our customers, we’re just different. And our customers do appreciate what we do. We have a long-term reputation in the market of delivering winning solutions to clients and being leaders in various spaces, and we’re going to continue to do that with a commitment towards excellence. I’d like to move to Slide #4. I Quickly to go through Slide #4. These are some of the first quarter financial highlights. You can see in our press releases. We’re very proud of our capital ratio, the amount of cash that we’ve got on the books. And obviously, most of that cash on a consolidated basis is in the bank. Please understand you can’t readily move money between the bank and the financial holding company. And the net interest margin of 2.28% was based upon the legacy portfolio has done a very tight margins. So as we begin to put loans on the books in the second, third and fourth quarter, you’re going to see those margins expand and we’ve shown that in some of our slides going forward in the presentation. Slide #5. Talking about the 7(a) business, which is an important part of our business, some of the things that we needed to get done, obviously, was begin funding 7(a) loans in the bank, get the PLP status, the preferred lending status moved into the bank. Well, we were successful at doing that. It’s part of our strategy in addition to acquiring the bank on January 6. Getting the capital into the bank to get to the tangible common equity of $79 million, which we’re very appreciative of. And I’ll say that’s approximately $79 million. Obviously, we’re going to be filing our Q shortly. Newtek Bank launched digital account opening in March of 2023. When I say we launched it, yes, it was open and available, but we had a lot of tweaking to do. Obviously, acquiring a bank on January 6, the strain that I put on the quarter and the ability to deliver results like this, I’m not sure I fully appreciated by the market. I say that, that is yet to come. We also had a fairly stable portfolio, some of the things that investors are concerned about, obviously, the asset liability management, is there enough capital in the organization? Do they have a model that their margin is going to collapse going forward. So we’ve got that check. We’re good. We’re good. We’re good. We’re good. Quality of the portfolio, a slight increase in the non-accrual portfolio actually decreased as a percentage of non-accrual loans versus a total portfolio. And we’re pleased. Clearly, with rates going up 4% to 5% in a short period of time, it’s going to put stress on borrowers, but our portfolio has held up quite well. Our currency rate, which you’ll see in a future slide, is fairly stable. And it’s materially higher than what it will be in a normalized market. So we do understand that. And when you look at what we’re putting in place for CECL reserves, reserves on the bank. I think you’ll be comfortable with our projections because we’re extremely conservative. And it’s not like we haven’t seen downturns in the economy or higher levels of rates because we’ve been in this business since 2003. Our ability to raise capital as demonstrated in January raised $70 million through debt and preferred stock capital raises. Slide #6 is an interesting slide and the master term adjustment to book value at 331 due to deconversion adjustments. I think that banks and financial holding companies basically do not have valuations for asset-light businesses like merchant services, tech solutions, insurance agency and payroll, these businesses using a fair value calculation more than about $166 million. Well, they are going into our tangible book at a negative $2 million. Well, as a BDC, these were on our books at fair value and a much bigger enough, it’s almost 6% or 7%. It’s a little close to $7 a share. Now look, I’m not trying to rewrite accounting standard. It’s not what I do. But when you look at the asset valuation of Newtek One, it would be a disservice if you’re sort of a multiple to book value freak to not count these very valuable and vital businesses that generate cash flow with very little capital investment or CapEx and these are generating recurring cash flows and are part of our valuation. So dancing around here a little bit. We think these businesses are quite valuable and add to the tangible book value calculation of $7.77 a share. Slide #7. We talk about Newtek Bank being well capitalized where our total deposits were, the amount of insured deposits, 94.5%, the uninsured 5.5%. A lot of that is legacy deposits from the larger National Bank of New York City legacy borrowers and people that are close to the company. But I think it’s important to note that we did not have any of the issues of some of the regional banks or even the bigger banks that we’re really happy to say, hey, we broke even. We didn’t lose any deposits. Well, we gained deposits, and we’re still gaining deposits. And we’re able to do that because our strategy is our willingness to pay a market rate of interest. And down the road in Q3, Q4, we’ll be really focusing on bringing in those commercial accounts tied to the merchant account, the payroll account and lending and other businesses. And that will be able to further widen our NIM out, which we’re fairly excited about. In the bank, the risk-based capital, 35% that’s because we have a lot of cash. So for people that are looking for a noise, we had noise in the portfolio, blah-blah-blah. Look, we had the purchase accounting adjustments. We had CECL adjustments in Q1 to get this quarter behind us. And we also – we’re sitting on a ton of cash, and that was based upon a preparing for our SBA business going forward, particularly in the second quarter to fund it; B, given what was going on in the market, we felt it was prudent to waive in old deposits that we could. And our digital account opening worked really well. We were also able to raise some brokerage to money. I will repeat, nonredeemable, my favorite word, nonredeemable. So as a professional in the asset securitization business, understanding call features has obviously become very, very important. When you make a residential mortgage loan, the borrower has the call. Deposits can be called by the deposit at any point in time. That’s a bad business. We understand options. We understand the optionality of deposits. We understand the optionality of the loans we make to borrowers, and we price them accordingly, and we have really good margins. It’s one of the advantages of investing in an entity like Newtek One that’s got tremendous banking expertise and knowledge, but also asset securitization knowledge, risk management knowledge. We’re very proud of what we bring to the table with respect to a new and different business model. Slide #8, bank purchase accounting. We’ve clearly heard one of the provinces of some of the regional banks and I’m looking at them right now in CNBC is gee, the portfolio, you actually marked it to market net worth or the capital would go away. Good news, we really don’t have that problem. Why? We just use purchased accounting. The liabilities are marked-to the market, the assets are marked to the market. That gives us a very good starting position in addition to the fact that we’ve got these assets and liabilities that are very well managed. We do not have long-duration fixed rate assets matched by noninterest-bearing low-cost deposits, holding our breath and hope that the depositors will leave because in 3 to 5 minutes, they can move their money through a phone. We don’t have that problem. I think it’s important that a lot of these regionals are suffering and banks are suffering because on a mark-to-market basis, they don’t necessarily have that network. As I mentioned to you, the purchase accounting that we went through marketing assets and liabilities, we picked up $20 million to $25 million of liabilities from the former bank that was like 2.8. We kept those on. We’ll end up buying a 1-year bill it like 4.6%. And we wind up moving our Federal Home Loan Bank relationship over to Atlanta, of which we have an unused line, I think, $60 million, $70 million, $80 million, which will remain that. That’s our buffer in case there’s some unforeseen issue. But we’re always thinking ahead, I think that’s important when you invest in a management team. Slide #9, metrics and forecast. We maintained the guidance of $1.70 to $2. We think at this point in time, that’s prudent. We’re going to continue to monitor this and adjust it. It’s pretty hard to forecast when a 2-year moves 25 basis points in a morning or an afternoon – and the government guaranteed premium was 2% up or down from 1 quarter to the next. So you can imagine, it’s a very volatile market. However, when you look at our stock price in these numbers, it’s fairly well discounted to what I think some normalized multiple might be. And that’s where we believe we need to be looked at really at a multiple of earnings and growth in earnings. So that’s historically what this management team has been able to do. These are some of our metrics, most of which have been reconfirmed, the one that’s been reduced is the nonconforming C&I business, which has dramatically reduced down, but we were able to pick it up in other areas. Slide #10. Our position as a leading SBA lender. Once again, getting PLP status in the bank, a big win, not easy to do. It’s not a designation that every organization gets and most of them get it we would argue don’t really use it much or aren’t well suited to it. Well, we’re one of the leaders in the business, the second largest lender. I think an interesting comparison relative to banks or bank holding companies to this would be Live Oak Bank, look at their margins versus hours, look at their efficiency ratio versus ours, it’s night and day, and we like our business model. We’ve historically as a non-bank issued securitizations to asset liability match the loans. Those are going to be sitting in Newtek Business Finance, talk about that for a second. But from a risk standpoint, 152,000 average balance of the unguaranteed but not subordinated SBA 7(a) loans. So that’s diversification. Those loans are prime plus 2.75, the newer loans that we’re able to originate due to SBA regs are prime plus 3. So you got a real nice asset liability match, which we’ll talk about shortly. But I think it’s important to note that we’ve been a player in this space for 20 years. Through ‘08,’09, we think we have the data and the knowledge to manage this business through higher rate environments and tougher credit environments. But we are very big on diversification, diversification in industry, diversification in geography, diversification and provider of referrals. So we have a very good business model, and this is a really attractive return on equity business for us, and that’s why we’re able to generate these return on assets, return on equity and it’s a very hard business, frankly, to enter into it from a debt standstill. Slide #11. One of the things you’re going to see in the upcoming Q will be the diversified streams of income and segment reporting. The Newtek Bank will be a segment in and of itself, the SBLC, which is Small Business Lending Corp. So the former Newtek it did all the SBA loans? Is it a wind-down mode. And we’ll talk about that in a second. So you’re going to see that as a segment. It’s going to be basically a portfolio of loans against securitizations. Then you got the payments business, which is a $15 million, $15.5 million EBITDA business per year. Then you get the Tech Solutions business, approximately a $5 million EBITDA business per year, both sitting up at the holding company along with NSBF. And then we packaged basically everything else into another category. And there will be MD&A to be able to break out the performance characteristics of the insurance agency, payroll and other businesses that sit in there, joint ventures, things of that nature of joint ventures with respect to lending. So we’re trying to be as transparent as possible. All the categories look together to be anything that’s under 10%, which is part of SEC and GAAP reporting requirements. Slide #12. We are able to increase all commercial loan closings to $220 million, a 12.5% increase. So when we look at that, what it is we’re looking at is this is 7(a),504, what we refer to as conforming C&I. We call it conforming because it conforms to bank underwriting standards. Unlike a 7(a) loan under SBA, which is a loan that has underwriting classifications that do not fit bank underwriting standards. That is actually the definition of a 7(a) or one of the defining characteristics and then conforming CRE lending. The former owner of the bank, based upon market conditions and their expense ratios was able to successfully run a bank at 200 to 210 basis point margins to cost of funds. So we’re pricing these loans today. We actually did on to $350 million off and maybe we’ll be $375 million to $400 million off right now for new CRE loans. For those organizations that have a full balance sheet on CRE lending and the times to make these loans provided that they’re underage current correct appraisals with the right projections and the right cap rates and the right valuations. The best loans are made in the worst markets. You get the best underwriting. There’s less competition. People aren’t falling all over themselves. It’s one of the benefits of getting out of this 0 interest rate environment with a clean slate and the clean balance sheet. Slide #13 in – this is our 7(a) premium trends where we sell 75% of the 7(a) loans. So in Q1 2023, our net premium was $1.84. The trend is up. Why is the trend up? People want assets that flow, particularly over the short end of the curve, surprise! surprise! the highest yielding part of the curve, surprise! surprise! and less painful for mark-to-market. So there’s a lot of banks out there that wish to have floating rate assets. There’s a lot of insurance companies that wish to have floating rate assets. There’s a lot of performance-based managers that wish to have floating rate assets, extremely valuable. Slide #14. This is what we call our currency rate. I would tell you that historically, over 20 years, the currency rate has traveled somewhere in the neighborhood of 90, 91, 92, it’s much higher. I mean we’re coming out of goldilocks. So these are small businesses. They do fall behind at times. It doesn’t mean the loans are bad, but at times due to seasonality. So this is a strong portfolio. Most importantly, you could see it really hasn’t moved much. The key bucket is 31 to 60, right? That’s really where you got to focus your eyes and your attention. So there’s been not a lot of movement in that 31 to 60. The current tab is the value report to the SBA, they get their own ways of doing things. But that’s really the important thing, but obviously, 61 to 90 as well. So anything that’s 30 plus is really the issue. But just because these loans start to fall behind, it does mean that the borrowers who have multiple personal guarantees every owner at a 20% or greater loss personally guaranteed alone, join several – they do it everything got to do to keep these loans going in the business call. So we feel pretty good about the currency rate. Slide #15. We talk about the non-accrual trends. These obviously are written down mark-to-market. We do this differently. Banks typically will take a nonperforming loan, and we’ll write it to 0. So if it’s 0, this doesn’t show up anywhere. We have personal guarantees and liquidate assets. We’ve been doing this for over 20 years. So these do remain on our books. This is at the Newtek mall business finance metric number, not in the bank. The bank has small amounts of loans currently that will grow. We’re going to build the portfolio in the bank. This is just at the SPLC sitting up at the holding company, but you could see important to note, one of the issues about people worrying about banks is how it’s credit holding up, you can see are doing well so far. #16 NSBF interest trend analysis. So here’s our asset liability management for NSBF to SBLC, the nonbank legacy lender in wind-down mode. First of all, important to note, you could see that we’re getting a lot of good spread income up from a year earlier to $6.5 million. Now when you look at NSBF going forward, you’re looking at approximately $500 million worth of loans against pledged to securitization of about $250 million. So there’s a lot of equity and to securitizations. And there’s very good spread income. I’ll draw your attention to Slide #17, which shows you the coupons that are paid to the bondholders. And it’s the less your 1 and the 2, and these are the 4 outstanding issues. These are numbers at, I believe, issuance date, I could be wrong on that. But no, these are dollar volumes and issuance states so they pay down. I think it’s important to note, you’re probably looking at a cost of funds somewhere in the neighborhood of 7.25%, maybe 7.5% on a blended basis. And your coupon is prime plus 2.75 on most of these loans. Going forward, it’s prime plus 3. So that’s like an 11% coupon against, call it, 7.5 350 basis points of margin. Now in NSBF, everything is outsourced to the bank and a lender service provider agreement. So it’s really just the portfolio. The portfolio of loans into securities, the securities have to get paid off first. So we’ll let cash flow goes into that. So we think this is an attractive asset, and you’ll be able to follow along in our Qs. Now in the Q that you’re going to get coming up, there’s going to be gain on sale, which is important to note because in the first quarter, we didn’t get PLP status until really the second quarter. So there were a few SBA loans originated in the bank in Q1 through the GP program, but you’re going to see gain on sale in the first quarter at NSBF. You’re going to see very little of that in NSBF in Q2, and the gain on sale will show up in the bank. Also, we’ll note that the accounting will be different. – because NSBF uses fair value accounting, the bank is going to use CECL. So on a 7(a) loan, for example, the CECL reserve will be 8%. So every time you make a loan is going to be an 8% charge upfront. That will drain and weigh on earnings, which you’ll actually see if you look at our earnings for Q2. But the coupon starts to pick up, and that’s where you get the real benefits going out when you pile big as liability management. But these are the details that the analysts will be able to work on. That’s why we’re having this call to be able to give disclosure and be able to have conversations. Slide #18, Merchant Solutions and Mobile money, really important business line for us, we have been in the business since 2002. I think it’s important to note, we’ve been in SBA loans since ‘03, Merchant Solutions since ‘02, Tech Solutions since ‘04. Insurance Agency in payroll of 15 years and depository 4 months. So yes, we’re a bit of a rookie there, but we’ve got very experienced people like Nick Young and others at the helm running that business for us, and we’re excited about it, and we’re very well positioned, particularly we’re basically dropping our lending opportunities into a lower-cost funding vehicle. I will mention the contrast of making an SBA loan in NSBF versus in the bank. So let’s say, deposits are bid, and you’re putting a loan on in today’s coupon 11.25%. So quarter of the loan stays on the balance sheet. That’s the uninsured loan participation uninsured but not subordinated fairly well asset-liability max with floating rate deposit money and a loan that has a quarterly adjusted over prime, no cap. And three quarters of the loan gets sold at a big game. So it generates cash. That’s the math in the bank. As the BDC, only 55% of that loan gets funded by our warehouse line at today’s cost would be almost 8.5%, maybe 8.75% and 45% has to be funded by selling shares by selling equity by diluting adding more share count to EPS. So even though you got to pay tax in a bank, the math just doesn’t even compare. That’s why one of the reasons why we did the transaction. In addition, we will talk about the Newtek Advantage, to be able to really provide a value-added solution to customers, unlike in my opinion, most other banks that do nothing to take the money of the customer. That’s it. And that’s a commodity. Everybody does it. And they don’t give the client anything. We will talk about the Dutch advantage and when customers are advantaged for doing business with Newtek. So getting back to Newtek Merchant Solutions and Mobile money, these are entities that will generate about $15.4 million of EBITDA. Pretax income of about $13.7 million established in 2002 – press $5.5 billion of merchant reservoir. Could you imagine if we were able to get 5% of our clients or 10% of our clients that are processing payments to a bit of a bank account, given the same-day funding, one throat to choke, one place to go to for all their business needs, that’s valuable. And that number we hope to grow over the course of time. So we believe that these are going to be future deposit gathering sources for Newtek Bank, and we’re very excited about that. Slide #19, while the payments business is extremely important to NewtekOne, we’re going to be issuing our own debit card. Therefore, we’re going to be able to get interchange. Those numbers currently are not factored into any of our financials going forward. We’re looking to grow these reoccurring fee businesses that are very beneficial both to NMS and Newtek Bank, particularly utilizing ACH. Business clients are interested in being able to move their money more cost effectively than just through interchange. And we’re going to be able to do that because we are very focused on managing the payments business and the bank. David Simon, who’s the President and Chief Operating Officer of our Payments business, is also an Executive Officer at the bank in charge of deposit acquisition and is also on the Board of the bank. David joins us from Visa and Citibank, where we had senior roles in both organizations, really knows the card business extremely well and is now positioned in the merchant acquiring side, helping us grow deposits. We realize it that most banks do not provide the tools City independent business owners to A, electronically invoice customers; and B, to pay their vendor bills. So electronic payments, moving money for our clients cost effectively with transparency, with reporting into accounting general ledgers should be a real important and vital solution that companies like ours can provide to its clients. And only the top tier banks to the top largest depositors get anything like these treasury functions, but I’m telling you the money management functions that we’re talking about whether it’s Visa Direct, MasterCard, FedNow, things of that nature are still being cooked up. We’re going to be able to offer this in one package to our clients. We’re extremely excited about it. It is part of our strategy for us. Tech Solutions what is tech solutions are going to be simply stated, we manage people’s hardware and software in two data centers, one in New Jersey, one in Phoenix. And these are a lot of different solutions, could be from managing e-mail, it could be from a website could be storing data could be managing servers. It could be managing POS systems. These are some of our forecast business we’ve been in since 2004. 21 from a segment reporting, you’ll see this in our Qs, corporate and other. I’m not going to get too detailed on this. I’m going to try to keep this call moving. A lot of information. I appreciate you following along. I’m just trying to give the analysts a good sense to be able to follow us going forward. Slide #22, Newtek Alliance partnerships. Many of you that are not familiar with the story, don’t understand how we are broken this branchless bank list and video as well, that’s because as an overnight success, and it just took us 20 years to get there. We’ve added major organizations and form alliances with us, and these alliances pass referrals to us of referrals a frozen for my client wants a small business loan. My clients want a workman’s comp solution. My clients are interested in your payments platform. So whether it’s UBS’ Wealth Management system, Morgan Stanley, we have 3,300, 3,400 Morgan Stanley financial advisers that have a new tracker account passing those referrals. That’s almost – I think it’s greater than 10% penetration. UBS, I think we’ve got 1,500 out of 6,000. These are great penetration rates. Navy Federal Credit Union, Credit Union in the world, Randolph Brooks over 1 million members. This is how we get our business. No bankers, no brokers, no BDOs, and we basically give them a revenue share. We service their customer, and they are very happy with these are long-standing relationships. We recently added two relationships, on a bank with over $100 billion in total assets, major players, second, a large nationwide insurance carrier with 1 million clients with a newsletter that they message on a weekly basis, will be part of that newsletter. We look forward to announcing the name shortly. Slide #23. A lot of people focus on us just as a 7(a) lender. Well, we’re not a 7(a) lender only anymore. We obviously do 504 loans. We do non-conforming conventional loans, and we have a really good track record in this area. $450 million of 7(a) loans in 2017, there is been no charge-offs to date on a joint venture is $145 million non-current portfolio, no charge-offs to date. Slide #24. When you talk about tightening underwriting criteria, you’re going to look for greater FICO scores. You’ve got to make sure the business got greater amounts of liquidity. You’re going to stress the businesses to rates going up even from current levels, and you’re going to make sure that they have got enough working capital to survive the bumps in the road, lending the businesses that can liquidate collateral of unencumbered borrowing power enables them to survive unexpected consequences. Slide #25 is the one we’ve had in our deck for 25 years. I’m not going to focus on it too much, but basically shows you how you could generate returns on equity in these businesses that are north of 30%. This is the cash created when you do a 7(a) loan and you sell the government-guaranteed piece, which we will continue to do as a business strategy. And Slide #27 is the income and expense aspect of the SBA 7(a) business. Slide #27 is the 504 business, #28 as well. The 504 business, you actually have no balance sheet. All our 504 loans are going to be made in the bank going forward and originated in a held-for-sale category. So they will be mark-to-the-market held for sale. These loans are originated between fees and the gain on sale margins you typically can make between 3% to 6% to 7% on the conventional first and the debenture gets taken out by the SBA. #29 benefits to the non-conforming conventional loan program, once again, diversification, diversification, diversification. Higher level of credit than 7(a). This is done at the holding company, that’s what we call it non-conforming. It’s funded through joint venture equity and securitization lines and we anticipate $250 million of funding in 2023. We also believe the return on equity in this business between 20% to 30% between origination fees that are gained at the bank servicing fees that are gained to the bank as well as the spread income that’s held up with the holding company by a warehouse lines and securitization. Slide #30, the Newtek Advantage, we talk a lot about this. This is our future. This is where our big bet is this is a differentiated model. If we fail at this, we’re just left with a bank that does a really good job at lending out money with lower-cost deposits and leverage, but this is the game changer here. So why should people bank with Newtek? Well, because they get the Newtek advantage. We’re going to give them analytics relationships and transactional capabilities, other banks typically do not get. So when you sign up for the advantage first thing you get is you get document storage. So you can store all your organizational documents in the advantage today. Then you get web traffic analytics. What bank does them, none that I know of, what your bounce rate is? How many people went to your sent yesterday, average time on the site, analyzes your site effective or not. And if they need help, they could speak to a Newtek specialist that can enhance their site, enhance their security, enhance the effectiveness of the site, enhance our ability to take payments. So we got storage, we have web traffic analytics, payment processing data. We could show them batches from the day earlier, chargebacks, refunds, Visa versus master. Amex versus Visa, debit versus credit, all those analytics right through the advantage, go to the advantage and make payroll through the advantage, big win. We were looking to also add Newtek tax and Newtek accounting. Hopefully, we will have these rolled out in this calendar year, maybe next, but hopefully, this year. They’ll be white-labeled from an experience provider in the space with our clients want to see their bank balances on their general ledger. They want to see their payments in their general ledger. They want to see their payroll on the general ledger. That’s the Newtek advantage. This is what banks are going to need to do going forward, okay? So if we’re not successful at it, somebody else will be because customers are tired of giving their money to banks, getting zero on their interest and getting nothing else. I mean that’s a bit of an exaggeration, but it’s not that much of an exaggeration. There in line is a Newtek advantage. We own and operate all these businesses. We’re not laying the customer off of third parties. So to invest in us, you do need to have as Warren Buffet would put it a long-term horizon. I’m not investing for the next quarter or two. I’m investing for the next 3, 5, 10 and 15 years. And we believe we’ve developed these assets and now we’re slowing them together. Slide #31. We declared our first dividend as a financial holding company, paying $0.18 a share. We hope to continue that. That would be $0.72 for the year and a fairly high dividend yield. 32 is the metrics on the model. 33 shows our capital ratios, which are really high. Obviously, they are higher at the bank than they are at the consolidated holding company makes perfect sense. Obviously, the bank right now has got a lot of capability to leverage balance sheet. So when you sort of look at the noise and the numbers of Q1, whatever, just remember, Newtek bank has got a lot of capital, has a lot of cash has been put to work yet. So it’s got a lot of earnings power there. So let’s go to Slide 34.And on Slide 34, a couple of things that are important to note. The returns on tangible common equity returns on assets, you can see the net interest margins growing cost of funds actually declining. That’s because we’re reducing our dependency on bank lines versus deposits. There is – that’s not even fully baked. That will get fully baked as more and more of the securitizations pay down and more and more of a lot of our lending businesses are financed by deposits and not using as much equity as we’ve done historically. But you could see by the metrics in the numbers here, these are not numbers you see in a bank. Therefore, you shouldn’t be managing us or investing in us whether you like the ratio to book or do however you want to calculate book from a GAAP standpoint. Slide #35. These slides demonstrate the fact that you got a lot of non-banking activities that are generating a lot of income, not typical. Most bank holding companies are – have very little in them. That’s not the case of NewtekOne. We have a lot of them. We’ve got a joint ventures in them. We’ve got a payments business, tax solutions and the growing opportunities of payroll and insurance. Slide #36. The focus there should be obviously on the earnings per share, the dividend per share. I swallowed pretty hard when I put these numbers out, I do so with trepidation. The volatility of forecasting, I think investors do take for granted, the volatility that’s out there in the market, how difficult it is to do. Historically, we’ve had a good idea of doing this. A lot of this is based upon what goes on, frankly, from an industry perspective. We are lumped into this industry. And I look at Newtek One, and I’m going – the problems that were encountered at the Signature banks, the Valley, the Silicon Valley, first, they have nothing to do with NewtekOne, we’re both in the same business and industry. But we don’t do the poses the way they do. We didn’t have this Cadreon bankers taking people to Pebble Beach and wherever to play golf or deposits to make loans. We don’t have big trade assets, I mean – but yet, we’re lumped into that. We get it. But that is going to determine things well, we will work through that. At the end of the day, we believe the cream rises to the crop, and we will get through it. But that’s the thing that prospectively could drag these numbers down. It will be what it will be. 37, 38 million more balance sheet information. 39 pro forma forecast for the bank, it’s a very well-capitalized bank that’s now able to return an earnings versus the BDC model or everything has to get distributed. We put an org chat on 41 for analysts to be able to see world and nuts and bolts are. And then looking at the investment summary. Once again, we ask the markets to look at us as a multiple of earnings, on a multiple of book and the capability of our ability to grow these earnings over time. The fact that you’re investing in a company that’s been around for 2 decades, and it’s managed risk through all times. And frankly, we’ve got a differentiated business model that totally fits into the current environment, which is low cost or no cost deposits will not be the secret sauce for banks. I can’t tell you, in 2022, how many times I was asked about non-interest-bearing deposits and core deposits. Well, it turns out core wasn’t so core and paying zero isn’t a benefit. I would question whether these low-cost deposits that are out there on the books of the major money center banks are an asset or not. – whatever sticks is an asset or whatever moves is not. That’s a squeeze on the neck. And we’re already at the higher number, and we put out those dollars at higher coupons, net of charge-offs, we’ve got 20 years’ worth of experience in loan loss reserves and fair value valuations and we still have a great margin. There is the difference. It’s just entirely different what we do on the deposit side and what we do on the asset side. And most importantly, what we offer our customers as a core value, and that’s the Newtek of data. So with that, I’d like to turn the presentation over to Nick Ledger.

Thank you, Barry, and good morning, everyone. You can find a summary of our first quarter 2023 results on Slide #44. We are proud to report our first quarter financial results for the first time reporting as a new financial holding company. As you’ll see in the consolidated statement of operations upon conversion from our previous BDC investment company accounting, where our portfolio companies did not consolidate into the BDC’s financials and those activities would historically be reported as a dividend income from the investments of the BDC. Now as a financial holding company, we are now consolidating those portfolio company operations into our financials. As a result of this conversion, there is no comparable prior period consolidated financial statements to refer to with the two different types of accounting. I’d like to start with some highlights from our first quarter 2023 consolidated statement of operations. On a consolidated GAAP basis for NewtekOne, Inc., our first quarter results are as follows: Net interest income for the first quarter was $4.6 million, which is comprised of $18.7 million of total interest income on loans and fees on loans offset by $14.1 million of total interest expense. $8.8 million of the interest expense is driven by the interest expense on the notes and securitization. In addition, $3.9 million is due to the interest from the bank and FHLB borrowings and $1.5 million of interest expense on deposits. In the first quarter of 2023, the company has implemented CECL on Newtek Bank’s loan portfolio, resulting in a $1.3 million provision for a loan credit losses. The net interest income after the provision for loan credit losses is $3.3 million. Focusing on total non-interest income of $42.8 million, $4.4 million as a result of servicing income, $6.5 million of net gains on the sale of loans, $6.7 million from technology and IT support income, $10.3 million from the electronic payment processing income. $5.9 million of net gain on loans accounted for under the fair value option and $6 million of other noninterest income. Going back to the $6.5 million of net gains on the sales of the loans, which is comprised of the realized gains recognized from the sale of the guaranteed portions of SBA 7(a) during the quarter totaled $14 million. In the first quarter of 2023, NSBF sold 248 loans for $109.5 million at an average premium of 10.84%. Realized losses on the SBA 7(a) loans for the first quarter of 2023 was $7.5 million. Moving down to non-interest expense of $39.2 million, which is primarily comprised of $19.1 million of salaries and employee benefits for the consolidated financial holding company, $4.5 million as a result of electronic payment processing expenses, $3.8 million from the technology expenses, $3.4 million of professional service expenses, $2.8 million of other loan origination and maintenance expenses and $4.6 million of other general and administrative costs. This resulted in a pretax net income for the first 3 months of 2023 of $6.9 million. In connection with the financial holding company conversion from a tax perspective, the conversion from a BDC, which was a flow-through tax structure filing as a RIC and where the dividends to shareholders were taxes ordinary income since we are required to pay out 90% to 100% of the income in the form of a dividend, which is primarily deemed as ordinary income, we are now a taxable entity as a financial holding company. The company will no longer be filing as a RIC for the calendar year 2023, and we will file at a C corp. With this conversion, we are now able to utilize when appropriate NOL carryforwards. These are primarily from the previously unconsolidated portfolio companies. The establishment of the DTA was recorded to the P&L in the first quarter 2023. We recorded a $34 million deferred tax asset resulting from these federal NOLs, which is a one-time event and will not be reoccurring. The $7 million income tax benefit from the NOLs was offset by the $2 million income tax expense provision, which was recorded in the first quarter on the $6.9 million of pretax net income at the financial holding company’s effective tax rate. This resulted in a net income tax benefit of $4.8 million. This type of noise in the financials will be leveled out over current quarters. Consolidated net income for the first quarter of 2023 was $11.7 million or $0.46 per basic earnings per share. I would like to now turn the call back over to Barry.

Thank you, Nick. Operator, I’d like to open it up to the analyst community for Q&A.

Thank you. [Operator Instructions] Our first question comes from Crispin Love of Piper Sandler. Your line is now open.

Thanks. Good morning, everyone. First, can you just speak to the loan demand that you’re seeing from your borrowers and your appetite to continue to grow at a fast clip. Looking at your origination guidance, it looks to be down about 25% from your previous guide for 2023 and mostly driven by the lower nonconforming C&I. So just curious if you can speak to what’s driving the key differences and lower non-conforming expectations?

Sure. I think – Crisp, thanks for joining. A couple of things. One, I’ll take this piece by piece. In the 7(a) portfolio of opportunity that comes in through our referral system, we are rejecting about 10% more of loans that are in underwriting going into committee than normal. Obviously, we’ve got to be concerned about rising rates and people being able to make debt service coverage ratio, etcetera. So I think that that’s just an interesting fact. Now the other thing I would say is the movement of PLP from the bank to – from the SBLC to the bank, it seems like, just pick my pencil out. I can’t explain how disruptive that was to our flow. So I don’t think that we’re going to, at the moment, make any adjustments to those volumes. But right now, the ability to amortize the loan over 10 to 25 years under the 7(a) program takes borrowers that banks are going to push out of their portfolio into this program. So we’re still constructive and optimistic on 7(a) loan growth. Relative to the other categories, – it’s a great time to have capital and to be able to make great loans in a great environment. This is when you slice making a lot of loans. Now the concept of loan demand is very interesting. We look at GDP moving up or down, plus or minus 1% or 2%. I mean, it’s such a small number, but yet people go crazy over it. So here’s my point. If we do our jobs, there is plenty of good borrowers to be able to pick through and find that our model will generate them. So I’m not overly concerned about us being able to find greater credits. We will probably have to kiss a lot more frogs. But because of our model, which is sort of non-brokered BDO oriented, we’re actually able to do that in scale quite efficiently.

Alright. Thanks, Barry. Another question on the income statement. Can you – you went over it a little bit on the call, but can you just explain what the net gains on loans accounted under the fair value option are? And if you’d consider that to be core earnings. I think the comments you’ve made imply that, that fair value option would be going away in the second quarter. Is that correct? And would you expect a similar amount of those fair value adjustments to be part of gain on sale revenue going forward? Or am I thinking about that incorrectly?

No, I think you’re thinking about it correctly, but it will go up as well as down. So I think that is core. It’s part of our model versus others and that we believe in that particular portfolio of assets, marking to market is important. So I would say that is a core movement in both directions. Just like the write-down in the fourth quarter was important because based on how market conditions were.

So that fair value line is going to be sticking around, but it could go up, could go down just depending on the quarter?

Absolutely. Yes. And that’s pertaining to Newtek more business finance.

Alright. Thank you, Barry.

Thank you.

[Operator Instructions] Our next question comes from Christopher Nolan of Ladenburg Thalmann & Co. Your line is now open.

Hey, guys. Thanks for taking my question. On Newtek Advantage, given the seizures of multiple banks over the last month, I think the risk calculation by depositors has changed to a degree in terms of the bank that they deal with. Why should a depositor have not only the deposit relationship, but also all these operational things such as managing their websites payment processing, everything with an organization institution, which potentially could be seized over the weekend by the regulators.

Chris, the only thing I could tell you is with 24 years’ worth of experience in dealing with these customers. We do know what they like. We do know what they don’t like. And it’s a bit of a crazy time right now. With respect to our organization, we’re well capitalized. We’ve been around for 24 years. We have a really good solid business plan and model. And we do have relationships with the clients that they can get to us. I think conceptually, the small business owner today has multiple parties that they wind up dealing with. They might deal with GoDaddy for their website, Fiserv. I mean so one would say, gee, I’m a small business owner, I like diversification. We get it. They may not look to do – by the way, we’re under no falls pretest they are going to do everything with us per se. However, we had a client recently, for example, they were having problems with their technology. They didn’t know whether it was their POS system, their gateway or their payment processor, okay? I would tell you, it is just my opinion only that the media is greatly exaggerating the issue with the banking crisis. Now I don’t think it’s a crisis. I do think it’s a bit of a change in NIM over the course of time, which is going to change profitability. But the concept of it being a crisis, I think, is overblown. And I’m hopeful they kind of get tired than this, to be honest with you, because I don’t see them as helping. With respect to what we’ve seen in talking to our clients, – we have clients that are ready to move the depository accounts to us because we process their payments and because they do their payroll, and there is one organization for them to watch and follow and monitor, problem is with Silicon Valley and Signature, – there was absolutely no time, no advanced warning for anybody to make a change. I mean, people lined up at the door almost 2 days, and it was done. So it’s a huge problem for the business in the industry that this business industry is going to have to deal with in some way, shape or form and maybe all FDIC insured deposits is one of the ways to reduce anxiety, but I will tell you, we’re obviously not JPMorgan, but we had little or no customers leaving and look at all the deposits we were able to gather.

Thanks, Barry. And I guess as a follow-up, given all the turmoil in the banking industry, have the regulators requested or higher capital ratios for Newtek bank?

So I mean Newtek Bank is risk-based capital, I think it’s between 30% to 40%. So I don’t know how much higher they want to go.

Lower threshold, actually

You mean to reduce it?

Yes. I’m just trying to see whether or not there is an elevated level of minimum capital that they might earn.

I appreciate that. No, no matter of fact. – without going over the line, our projections that we have in the market are based upon the original plan, and we’re comfortable with those projections. So you could confirm what you like from that. But now we’ve had no changes or any cause of concern about what we’re doing, how we’re doing it or how we’re managing our business none whatsoever.

Okay, thank you for taking my questions.

Thank you.

Thank you. One moment please. Our next question comes from Bryce Rowe from B. Riley. Your line is now open.

Thanks a lot. Good morning. I wanted to maybe start with the deposit levels that you are showing here post first quarter relative to the forecast. And then they also get an understanding of how the current I guess capital structure of the debt might change over the next year. Will you continue to hold the unsecured notes on your balance sheet that existed when you were BDC?

Sure. So, Bryce, two important questions. Number one, we exceeded our deposit gathering capability in the first quarter after a very slow start. So, I had some sweaty palms and some sleepless nights. But we really came on like gangbusters, and it’s still coming in like crazy. So, I feel very comfortable about our deposit raising capability. I mean one of the things we are going to have to think about is, do we let some of the brokered “deposits” that are not redeemable for some of these lower duration type deposits that are coming in. So, that’s something we will need to think about. But for the most part, I don’t see that changing. We are very pleased with the mix of money that’s coming in and how it’s coming in and the types of customers. Relative to the other question, I think that right now we are in compliance. We have got headroom. We are comfortable with it. So, we are just going to keep monitoring the markets and the situation. And we have got that factored into our projections going forward. So, now we are in good shape on that. And I can’t tell you – put it this way, of I could figure out whether the next 100 basis points or 200 basis points of rate improvements, where they are going to be, I would be able to answer that question, which is why people have tried to get me to answer certain questions like, how do I know, I can make a guess. But I certainly didn’t predict Signature Bank and Silicon Valley. If that makes me dumb or not, but I didn’t quite see it coming. But no, I think we are in good shape and I think that right now, that’s core funding that can sit out there as long as we stay in compliance, and we will be able to do that, that’s not a problem.

Okay. And then maybe just one more around the deposits. And I have got a got another question or two. But in the forecast here, you are showing, let’s call it $244 million of deposits at the end of the second quarter, you highlighted, there being $300 million plus, at the end of April. So, just making sure we are thinking about it correctly, that you expect some runoff based on some of those broker deposits, or maybe the forecast is just a bit conservative?

I think we are going to need to take a step back and look at, do you want to return some of these deposits, because we have had so much success or make certain adjustments in the model. As you can imagine, I have got an accounting and legal and professional department that is drinking a lot of coffee. So, I think that’s just something to keep an eye on. On a good note, we have got a unique, I will say problem, it’s a problem. It’s, we are getting a lot of deposits. And you can go to our website and take a look at where we are. I mean we are not over the market, we are one of the higher payers, but we also can put money to use with a great NIM. So, that’s just something we are going to have to figure out from an asset liability standpoint. So, I would tell you that what you see in the projection might need to be changed or adjusted and modified as we get through the quarter.

Okay. Just switching topics here, you made note of valuations on the control investments as a BDC versus now as a financial holding company, essentially. Now, the fair value got wiped away with the accounting change. Can you talk about – and helpful to see what projections are from an EBITDA perspective for both NMS and Newtek Technology? Can you talk about how those valuations as a BDC will come to, for those control investments, especially relative to those two bigger control investments or former control investments?

Well, I think that the one thing I would say is I would try to be realistic. And for me to project, huge growth in those two organizations at this point would be contrary to what the Presidents and Chief Operating Officer told me they are going to do from a budgetary perspective. So, basically, what you see there is what we have approved from a budget. Am I happy with what I will call flat to maybe down some and reoccurring, no. Are they happy, they shouldn’t be. But I also think that it’s realistic. So, with that said, I mean those are goals that we believe are achievable, which is why we put them out there. But as we position ourselves as NewtekOne, which is new branding, with a much wider universe of customers that are now talking to us much wider than before, as a BDC. It’s like night and day, people want to come to us because of the many things that we can help them with. I think those businesses will flourish. The ability to deposit money in someone’s in account, same day on the merchant side. The ability to store one’s data is going to lead to other questions. Where do you have these servers, who is managing them, what do you pay, are you better off using us to do that 24/7, what about your mail. So, I feel pretty good about those relative to the concept of the valuations. I just think that as a BDC, I can’t tell you how many people said, you are never going to trade above NAV. And I remember coming out, we only converted 33x into a 40x, we raised money like a 15 to 17 point discount to NAV. And then pretty much the rest is history. At one point, we traded as high as 2.5 to NAV, 2.5 times one, which is unheard of for BDC. I think even a mighty man only got to like two to one at one point in time. But we are going to need to hopefully, get the market comfortable that even though these businesses don’t have “loans” which would flow into tangible. And if I sold the businesses for cash, the cash would count as tangible. That if they want to look at some measure of what the liquidation value of the business should be, which is really what you are looking at from a book standpoint in my opinion, not what it can generate from an earnings standpoint. But I certainly understand why that’s important as a bank. But it’s not important relative to our strategy and how we do our business. We think that some add-back or recognition or bigger multiple intangible book is warranted. But that’s just an opinion, it’s the market is going to have to sort that out. But the one thing that I do know and I have said this when we were a BDC. If you grow your earnings, and you grow your dividend, the stock price will follow. I don’t care what the book value is.

I will step back and see you Barry, appreciate the time.

Thank you.

Thank you. One moment, please. Our next question comes from Paul Johnson of KBW. Your line is now open.

Yes. Good morning, very congratulations on the first quarter under your belt as a – officially as a bank. I missed part of the call, so I apologize if you had talked about this already. But in the last presentation and the results for last quarter, you included some guidance for 2024. I am just wondering if that’s still good, or if that’s basically under reevaluation, obviously, because it’s kind of recent events in the market. But any sort of commentary you can kind of provide on your sort of previous guidance for 2024?

Yes. I have meant to put that in my notes. It’s buried somewhere in this big stack of papers here, but I missed it. So, I am glad you asked the question. Now, we have decided to – I am going to use this term, I would probably withdraw that, because as I mentioned earlier, with the 2 year moving 25 basis points in the morning or in afternoon, it’s pretty hard to forecast the next couple of quarters versus a year out. In addition to that, the cost of capital has changed dramatically. So, I could say that, we are just not going to change it, but I think it’s – I wanted to be very clear where we are drawing that.

Okay. Now that’s clear and I appreciate that. And then kind of bigger picture. I mean if you could kind of snap your fingers today and get your wishes in terms of what you would like portfolio to look like in a year from now and maybe 2 years from now? Do you have any kind of idea in your mind, what you sort of expect the long-term percentage of the portfolio to be in terms of SBA loans versus other loans, commercial, CRE, etcetera?

I think that at the bank level, important to note that it will be diversified between 7(a), 504, conforming C&I and conforming CRE. So, on the 7(a) side, and I will say this with respect to the uninsured, piece, okay. So, I am glad your question maybe think about something else. A lot of people look at the bank as a little bank. But I mean this little bank is going to do a lot of loans, because the 7(a) business, you do $875 million worth of loans, only 200 and change show up on the balance sheet. But you still have the resources to do them in loans, and get that amount of gain on sale and get that amount of return on equity and profit out of it. But now I want to go back to answer your question. The – I mean so we will make over $1 billion of loans this year. That doesn’t make most $500 million banks or $600 million, they don’t do that, right, okay. Now, I will go back to your question. The balance sheet should be pre-diversified. And maybe the biggest concentration is 7(a), and 30% to 35%. But the rest of it will be broken up evenly between 504, which is there for sale, not for permanent, conforming C&I and conforming CRE. So, we are going to balance the 7(a) side off, which could have like an 8% seasonal adjustment to blend in at 3.5% to 4%. So, the other ones obviously have a much lower reserve or CECL just because of the quality of the loans.

Yes. That makes sense…

Very diversified. And then at the NewtekOne level, you will have the non-conforming in the securitizations. You are going to get the merchant services business and tech solutions business. We get payroll and insurance on track of re-occurring cash flows, without having to put capital in. It becomes a very compelling model.

Got it. Appreciate that. One or two more questions, the realized loss on the SBA loans this quarter that Nick mentioned, and I believe you said $7.5 million. I just want to make sure I am clear. So, is that the actual loss that was charged on the portfolio, or is there any kind of like, one-time sort of CECL adjustments that were made due to the merger in the quarter?

Nick, could you answer that?

Yes. So, those were the legacy NSBF loans that are at fair value. Those are not any of the loans that are in the bank as a result of CECL.

Got it. Okay. So, that’s the actual realized loss for the SBA portfolio. And then I guess my last question just kind of the, in terms of how the merger is going. I mean do you feel like at this point the bank and sort of all the back office technology, etcetera, is that pretty much fully integrated at this point, or do you still kind of feel like you are working on some loose ends to tie everything together. And then I guess along with that, the PLP sort of temporary disruption in the quarter, obviously, moving that over to the bank was a little bit challenging. But is that pretty much over with at this point? I guess does it seem like everything is settled and integrated the way you would like it to be?

I still think we got some work to do, Paul, in the second quarter. And I think the – some of the projections, you will see have us better in the third of the fourth quarters. I still think there is some work to be done relative to continuing to bolster the staff. I mean the other thing, obviously, we are going through original examinations. So, I don’t know if you can – I am a financial guy as well. But unfortunately, for the last 24 years, I have been pushed into this operational role. And the amount of – I can used the word distractions, but we have got a – we are standing up this entity almost from the scratch because the prior bank didn’t look and do anything like we are doing. It really didn’t have tremendous digital deposit gathering. The amount of loans they did versus what we do, I mean it’s night and day. I mean we fund hundreds of loans a quarter, it’s maybe like 1 to 10 or 20. So and you can’t get into the bank before the deal closes. So, there is still, I want to say I am incredibly appreciative of all the associates in the company that really have worked immeasurably hard to get us where we need to be. But now I would say, there is still going to be a drag in the second quarter.

Got it. Appreciate that. That’s all for me. Thanks for taking my question.

Thank you.

Thank you. One moment please. Our next question comes from Scott Sullivan of RJ. Your line is now open.

Hi Barry. Congratulations on really crafting a unique and elegant solution, so in a very tough time, so absolutely congrats on that. I am wondering if you could speak a little bit more in terms of asset liability growth. You have mentioned, obviously, deposit momentum has been astounding in a very tough, almost bubble like money market situation. So, if you could speak to the deposit growth, as well as the liability growth?

I think on the deposit side, if you are able to pay a fair market rate for deposits, and that rate is determined by what you could see on a bank rate or a go-bank rate or by just Googling, best high yield savings accounts, etcetera, you will get money. And we have had success in drawing in insurable deposits. And those deposits that are coming to us are considered depending upon the channel non-broker and core. Although we are not under the delusion, but those deposits are very rate sensitive. But we are okay with that because it’s part of our model. We pay a market rate of interest, not a problem. Now in fact, it’s astounding how we are able to raise these deposits in this particular manner. I think we show well, we have a good history. I think the bank is about 60-years-old. We have been around for 24 years, so we have got, being a public company, people are comfortable, and we have seen that. Particularly, we have seen that in the worst of times. So, I would say that, I don’t know how in my lifetime and I am 63 years old, I have never heard such discussion about bank runs and people being concerned about. So, the good news is, in the worst of times, we are able to really fund our funding needs. And that’s the big deal. And that – so we have reduced our dependency on commercial funding, right. So, then you hear, which is in the marketplace, but the larger institutions, they are going to reduce their amount of lending. Well, that’s not great for a lot of non-bank lenders. So, I think from our standpoint, no concerns about being able to fund our business out of the bank. We have got plenty of capital in the bank, $78 ish million of capital in the bank. We have a lot of cash right now. We are waiting for the SBA loans to close for the quarter. We use that up. We will sell the government guaranteed piece, and that’s where we are going to be able to fund that growth out of the bank. And I am very pleased with the execution on deposit gathering strategy. Now, the second leg of that execution will be, which I am not saying as a second quarter, again, hopefully it’s third quarter and fourth quarter with respect to utilization and Newtek Advantage, the ability to get payments accounts, to open up deposits, payroll accounts, etcetera. That will reduce the cost of the high costs and make them more sticky. So, we are not under a delusion, because we are getting all these deposits that they are in love with us, okay. They like us. We are credible. We pay them, I will call a market rate of interest.

Right. Fantastic. And in terms of NIM and margins, can you speak to the effect as your somewhat Newtek process moves out? And is there any AI overlay in there?

It’s an interesting thing. It was funny, I was listening to Charlie Munger talk about artificial intelligence. And he made a comment I have said, you don’t have artificial intelligence yet for somebody that’s intelligent, to set the artificial intelligence. So, it’s got to start somewhere, right. I think that what we do does lends itself to that. I mean I would be delusional at the moment given all the things that we have to do to say, we are there. But we are approaching the customer with an air towards having that intelligence because we have the data. So, for example, when you apply for a loan, we take your merchant statement. We take your insurance policies. We have the ability to take advantage of that. Then you might say, currently, why aren’t you doing that, and that’s in the plan. And that’s frankly, up for us to be able to artfully quote clients using that old technology called the phone. Phones, phones are still really good today, so I like phones. We actually have a verbal communication with a client, and then show our pretty faces on the camera. Notice, I am talking to my staff as well, to connect with the client say, hey. I see what you are doing and by the way, we can help you, not too hard. That’s I will call that our version of artificial intelligence.

Fantastic. Any comments on the syndication market, I guess vis-à-vis the game on sale as far as you can see.

Yes. I mean right now the market for the government guaranteed pieces is very strong, because it’s a government guaranteed floater that investors don’t have to worry about duration risk for marking to market. And where they are being criticized for not having assets, interest rate sensitive assets on their balance sheet, they could diversify with this. So, that market has been pretty strong, despite the fact there was a little bit of disruption, where Signature Bank was one of the pool assemblers. Now, they have got taken over. They are still in the business. But there were some questions as to what would happen with them. And there was another market maker that recently left the business as well. So, against that backdrop, the markets actually held up pretty well.

Perfect. Last question, given your market cap size, etcetera what’s your personal speculation on a Russell 2000 inclusion?

Well, we are hopeful. We certainly have the market cap. And our designation as a financial holding company owning a bank was recently changed by them from a close dents on. So, we are hopeful that would be very useful and valuable to us, but we don’t know.

Terrific. Thanks for the color.

Thank you. One moment please. Our next question comes from Sean-Paul Adams from Raymond James. Your line is now open.

Hey guys. Good morning. Can you explain your plans for the legacy BDC baby bond, which contains the 1940x leverage compliance covernant in the documentation. It would appear that you would have to be a priority given the leveraging parameters today for the business.

It’s not we are in complete compliance. And we certify that with the trustee. And I will also – let me finish Sean. I will also add that we have covenants with Capital One Bank. I mean there is four or five institutions. So, we are in complete compliance with those covenants.

Very helpful. Thank you.

Thank you.

Thank you. One moment please. Our next question comes from the line of Steven Nemo. Your line is now open.

Hi. I am an individual investor and I have been doing my own due diligence and I have a few questions lined up for today. So, this might be a repeat. I didn’t hear it quite clearly the last question, but Newtek has 2024 and 2026 notes outstanding, needs [indiscernible]. And these have covenants that binds Newtek to the 150% assets coverage requirements under the 1940 Act. But Newtek is no longer a BDC, so that seems to suggest that unless those notes are paid down or got where they have been some way, you won’t be able to leverage up the balance sheet up to the typical 10 to one of the bank. So, what are Newtek’s plans regarding new C and new L in the near future?

Sure. Steve, appreciate the question. Right now, those have been factored into the projections that we have in the market. So, we always hope, though it doesn’t always happen that way, and respect that the community because we have been doing this for over two decades. NOIs, we have put out there and that’s already factored into those particular tests. And I am not sure you heard the prior answer, but we are in complete compliance. We are aware of those tests. And we will be able to manage through those tests with respect to what we have in the market.

Okay. Great. I have two more quick questions. So, when Newtek issues a loan, it has the choice to sell the SBA guaranteed portion and retain the unguaranteed portion on the balance sheet. But going forward does the bank, will the loan book be comprised of entire SBA loans, or just have the unguaranteed pieces or something in between? I feel like the percentage of the loan book, but unguaranteed pieces is a number that’s worth reporting for investors.

I am not sure I understand the question. What was the question?

So, as the bank, Newtek would have loans of assets. Will these loans be entire SBA loans, or will they be just the unguaranteed portions that are not sold off?

Okay. So and I will just focus on the 7(a) business. When a 7(a) loan is made, it’s a whole loan and you have got to participations government guaranteed participation, and an uninsured participation. So, what sits on their books is the uninsured participation in the 7(a) loan. Typically, we sell the government guarantee participation into pool assemblers who pull them and aggregate them and they pay premiums for that.

Okay. So, going forward, it’s going to be or probably going to be the unguaranteed pieces that are retained on the books, and…?

Yes. The current strategy is to, which is what we have done for 20 years. And it’s been a re-occurring event is to make the loan sell them guaranteed piece, we think that’s the highest return on equity for us and the best way to manage our capital.

Okay. One last quick question and this is related to the unguaranteed loan pieces. So, what are Newtek’s plans regarding securitization trusts going forward? The language in some recent news seems to suggest they are legacy. And so Newtek won’t issue any more securitization trusts and notes on the unguaranteed portions anymore. What are the plans going forward on that?

So, when the references to legacy, we try to refer to the legacy assets there in Newtek Small Business Finance, which are in a rundown mode. And there is a current position of uninsured loan participations in Newtek Small Business Finance in the warehouse line, that I will use the word not to get ahead of ourselves it could be securitized.

Okay. So, by legacy those – so by saying legacy, it doesn’t rule out the possibility of issuing more securitization trusts in the future?

No, I mean it’s unlikely we would do it out of the bank, because right now, the bank has about a 350 basis point interest funding advantage as well as not having to raise equity. Do you follow me?

Yes.

So, let me just finish, Steven. Going forward, the SBA loans will be done out of the bank and NSBF with its legacy securitizations, loans against securitized debt will be in a runoff mode. So, all of [indiscernible] will be done at the bank. Hopefully that answers your question.

Right. It’s the better economic choice to keep the loans rather than try to sell them again.

Well, when you do a securitization, it’s actually treated as a finance since 2010. So, I think the better way maybe to state that is financing you on a short loan participations in a bank is far more effective than financing them currently through securitization.

Okay. Thank you. Thank you for your time.

Sure. And Steven once again, if you go back and you read the transcript, we talked about when you do it out of the NSBF and before acquiring the bank, you only got a 55% advance rate. And you are paying, 8.25% and 8.5% on the rate. So, 45% to maintain your ratios in the BDC had to be funded with equity. So, the $500 million loan, you need to put $50,000 of equity, and $550,000 of expensive leveraged bank debt. Now, you could fund it with 5% to 100% deposit money. Does that make sense?

Yes. That’s all for today, I have.

Okay. Thank you.

Thank you.

Alright. I think that’s last question, right, operator?

It is.

Well, I appreciate all the input, all the questions, a lot to digest here today, a lot of reading to do. And we welcome the opportunity to report again next quarter. Thank you very much everyone. Thanks for your participation.