NEWT - NASDAQ

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

Good morning, everyone and welcome to our third quarter 2023 financial results conference call. My name is Barry Sloane, President and CEO, Chairman of the Board of NewtekOne, Inc., a NASDAQ Company. Also presenting on today's call is Nicholas Leger, EVP and Chief Accounting Officer of NewtekOne; Scott Price, Chief Financial Officer of NewtekOne and Newtek Bank National Association. We also have attending the call Nick Young, the President and Chief Operating Officer of Newtek Bank N.A. For those of you that would like to follow along in the presentation today, we welcome you to go to our website, newtekone.com. NEWTKONE.com. While you're there, you might want to peruse the Newtek Advantage, which is our important business banking portal. However, today I'd like to direct you to the Investor Relations section where our conference call deck is being hung (ph). On Slide number 1, we have our note regarding forward-looking statements. We'd like you all to be familiar with the contents of that particular slide. On Slide number 2, we start off with Newtek Bank National Association summary financial highlights. One of the things we wanted to focus on today was the Bank metrics that are really coming in as planned and very nicely. Our net interest margin from Q2 2023 grew sequentially from 3.19% to 3.49%. Our return on assets, 4.93% to 5.32%, return on tangible common equity 32.1% to 39%, and efficiency ratio dropped from 58.7% to 49%. These are metrics you're typically not seeing in the banking industry or financial holding company industry today and that is because of our unique business model, the things that we do. The assets that we generate are high yielding net of loss severity and frequency over time. And this is the second quarter that we reported as a full bank holding company owning a bank. I think it's important to note the feedback I typically get from investors and analysts is they don't believe the numbers. I get it. I understand it. These are extremely unusual performance criteria for an organization like ours, but we are a different organization. We're the bank and technology enabled bank of the future, and we're very proud and we'll continue to deliver these types of numbers quarter-to-quarter. So as that continues to happen and we continue to deliver, we feel that we'll get a better level of market acceptance in who we are and what we do. Also important to note, the Bank itself, which is a wholly-owned subsidiary of NewtekOne, Inc., well capitalized with a CET1 ratio of 23.8, total capital ratio of 25%, and leverage ratio of 14.9%. So we're very, very pleased with our performance for the particular quarter, with sequential growth. We expect that growth and these metrics to continue. I think it's also important to note that when you look at deposit growth, for the most part for quarter-to-quarter, I would use the word it was flattish. That is, by design, we've got several hundred million dollars currently sitting at the Fed to fund Q4 and Q1 loan growth, so we don't need deposit growth. However, we are changing our deposit mix and Scott Price will talk about that later on in the presentation. Importantly, we are able to continue to fund loan growth. And you could see the loan growth ending at 27% for the average 31% for the third quarter. And an important component of what we've experienced over 20 years, when we make an SBA 7(a) loan, we sell the government guaranteed piece for gain on sale. The premium based upon market conditions, which we could talk about on the call, is pretty soft right now and that has cut into our current EPS projections. But as you could see over five years or so, which we'd be able to show in graphs and later on in the presentation, this is sort of trending toward the low end and with the end of Fed tightening, we're hopeful that we get a bit of rejuvenation in this premium on 7(a) loans. Please also note that the premium of 7(a) loans or gain on sale numbers that we have are significantly greater than a lot of our competitors in the banking industry. On Slide number 3, we have the similar types of metrics, but for the consolidated HoldCo, NewtekOne. Once again, note that we have expanding net interest income, a 42% gain sequentially of $5.6 million to $8 million as we start to utilize the capital and fill up the Bank with assets that are higher yielding versus the old legacy low-risk but low-margin assets that previously were occupied on the National Bank of New York City's balance sheet. Also importantly, provision for credit losses growing $2.5 million to $3.4 million, a 33% gain there. That will enable us to continue to withstand a weakening credit environment that we forecast going forward without skipping a beat in our projections. Looking at the net interest margin at the HoldCo went from 2.09% to 2.71%, a nice expansion sequentially. Return on assets 2.03% to 2.76%. Return on tangible common equity 15.07% to 22.8%, and efficiency ratio 77% down to 67.8%. Capital ratio is also strong 15.1 CET1, at the HoldCo total capital 17.7% and leverage 14.6%. Once again, second quarter as a financial holding company, as we continue to track like this, and our EPS growth quarter-to-quarter, we're in very, very good shape and we're proud of the results that we've been able to deliver with our first two quarters at owning a bank and as a financial holding company. On Slide number 4, a general description as to, on January 6, we completed the acquisition of National Bank of New York City. So the comparisons of this year versus last year are very difficult because we were a BDC and we had BDC accounting. Once again, important points of focus for this presentation and an evaluation of NewtekOne, you've got to look at the quarter-over-quarter sequential comparisons. It's extremely important. In addition, we're dealing with a lot of headwinds with a lot of frontloaded upfront costs as we morph into this Bank because we took over a 59-year-old bank with 59-year-old systems. Policies and procedures were not quite set up for what we want to do with the institution from an OCC chartered national bank. But we're very pleased to be able to make these transitions, put the policies and procedures in place, remain in compliance. It's indicative. They were able to dividend out of the bank to the HoldCo and out of the HoldCo to investors. That's indicative of the fact that we're in a good, good shape from a regulatory and compliance perspective. And once again very, very pleased with that sequential growth second to third quarter. Also important to note, we've got the attention of the Street that is learning about our business, learning about our model, trying to understand what we're doing. By the way, we do want to comment, there's 51 pages in this deck. I've been criticized for it that it's too long. Other people tell me other things they'd like to have in the deck. The important part is, I'm not going to go over each slide verbatim, some of the slides speak for themselves. But we want to give as much information to the analysts as soon as possible so they can get a better understanding of who we are. We currently have five analysts. We anticipate a sixth going forward, extremely important for what we do, particularly relative to research within their own distribution systems. We've clearly demonstrated an ability to raise insured deposits quickly with a high growth rate. We were able to grow our deposits when we took over the Bank from $140 million. I think we're close to about $440 million. I also want to proudly state we don't have the interest rate risk issues that are currently present in the industry with people having securities, portfolios that on a mark-to-market basis drag their capital down or fixed rate low yielding loans. Our securities portfolio is about $33 million. It's all in government and agencies, and I'm pretty sure that duration is less than nine months with a 5% weighted average coupon there. So we're in very, very good shape from an interest rate perspective. I'll also note we're in very, very good shape from a commercial real estate perspective and more than happy to take that on in the Q&A. Obviously, the ROAA and ROTCE capital and numbers and capital ratios do speak for themselves. On Slide number 5, we talk about the earnings engine. So once again, unlike a typical bank of this size and nature, which is just basically spread income and hoping to keep their deposits at a below rate of interest, we've got many earnings engines for NewtekOne. We now obviously have the Bank, which will become our premier earnings engine. Newtek Small Business Finance, which sits up at the holding company, it’s got the legacy SBA loans and securitized structures. Obviously, the cost of debt on those structures are more expensive, but there's very little SG&A in Newtek’s Small Business Finance, which is managed by the Bank through a lender service provider agreement. We also got the merchant business, which you'll see generates a very nice amount of EBITDA, and its consolidated subsidiaries of Mobile Money. Newtek Technology Solutions, which we'll talk about, that is an entity that will be divested of by the first quarter of 2025. We also had get income from our non-conforming joint venture portfolios. This is an extremely important topic today and discussion. This is the big growth engine that has been delayed due to what’s occurred, number one, in the capital markets and getting our registration cleared with the SEC. I think it was July 27, we cleared the registration statement to be able to issue equity and debt of which we were successful in doing a debt deal towards the end of August which is now trading at a premium to issue date with an 8% coupon on it. We're also going to talk about the insurance agency, which has really made a very good effort this year as it's obviously situated with Bank customers. I believe we've increased our pre-tax income from approximately $100,000 to approximately $400,000. Newtek Payroll Solutions also an increase from a loss last year, I believe to a $300,000 gain. So these businesses should do very, very well as they're integrated into the lending operation and integrated into the Newtek Advantage. On Slide number 6, we talked about this earlier, the difficult comparisons as a BDC. It's important to note, once again, when looking at NewtekOne, this is a system that doesn't use traditional bank branches, traditional bankers, traditional brokers, or traditional business development officers to source business. So over the course of 20 years, we've used the NewTracker system. It's our technological advantage. It's one of the ingredients to our secret sauce to enable us to get over 1,000 unique business referrals a day 2.6 million in total in the database and these come to us basically cost free. And these are clients that know us, they've requested a solution in one way or another. And these are opportunities for us currently and on a going forward basis and that's why we can have an efficiency ratio as low as we can, which it actually should do better over time. Slide number 7, I'd like to point to how we are a technology enabled solutions provider that's across all the different solutions. Obviously, in deposit gathering, we picked up about $275 million worth of digital accounts, mostly in consumer high yield savings. We'll talk about the goal for 2024, which is to bring in more transactional accounts, commercial DDAs, commercial money markets, which we wanted to wait until the staff was set. We have a manager for that business lined up who should be joining us by the end of November. Loan originations, we use our technology that we've developed over the course of 20 years and we are incredibly efficient in exchanging data with our clients. I'll go into a slide deeper in the presentation that shows you how we make a loan and what it does for our customer. But we did, I believe, approximately 550 units in the second quarter. The growth in units sequentially and year-over-year has been double-digits. We just do a very good job of making the loan process as frictionless as possible. And obviously, it's not easy making a small business loan or an SBA loan, but we've really developed this over the course of 20 years and do a good job at it without sacrificing credit. Staffing and recruiting talent. As I mentioned, we are close to announcing a hire of the COO of the digital bank working directly for Nick Young. That's going to enable us to really build out our 1% commercial demand deposit account and 3.5% money market accounts for a further expansion of our NIM going forward. And we're also looking to recruit a Risk Manager in at the holding company and down at the Bank. Once again, we talked about our unique business model, replacing branches, brokers, traditional bank BDOs. The one branch that the company has in existence will be closing in the month of December. All of our business, which we've done traditionally and historically has been remote. So we're not the company that take you out to the Masters or buy you lunch or dinner, although we certainly can do that, but most of our business is remote and the deposit gathering process, which we've been successful at so far, we expect that to continue but to expand into the lower cost deposits of transactional commercial DDAs. So that's things that we could ultimately start to put metrics to and impute a projection of lower cost of funds going forward, which currently is not really embedded in any of our models. Providing a superior service and product to clients, we're also looking to add a Client Experience Officer. That's really important with a unique focus on the advantage. We look forward to bringing that individual in and filling that position. And importantly, we're going to spend time about the Newtek Advantage today, where basically customers get an asset from day one without any charge to become a client through the Newtek Advantage. Slide number 8, the Newtek Advantage. What is this advantage we talk about? Well, it provides client analytics, relationships, and transactional capabilities at other banks in our space, and I sit at the space of independent business owners and small and medium sized businesses. We are not a consumer lender, that's important to note. We do take consumer deposits, but we're not a consumer lender. The Newtek Advantage gives our businesses a management asset upfront that can enhance their business and make them more successful. The Newtek Advantage is very, very unique to Newtek. It's very difficult to replicate because we've owned and operate our insurance agency, our payroll business, our payment processing business, our lending business. We've been in these businesses for 10 to 20 years each. So now we are honing our skills, integrating them with our software, which we'll talk about later on in our presentation. And we're very excited that our customers can go into the Newtek Advantage and communicate via video and on camera with a NewtekOne specialist, a licensed insurance agent, a payroll health and benefit specialists, a lending specialists, a deposit specialist, a technology solutions specialist, a payment processing specialist. Typically, a client of a bank today, if they know one relationship banker and they can remember their names, they're lucky. Most have a faceless relationship. With us, you actually have a relationship with a face that you can get to on demand by going in through the Advantage. We believe the Advantage could be a market recognized tool and solution that ultimately we might look to license and spin it off to other providers. I also want to mention that we will be probably announcing Newtek Accounting, which will be a service provided to our customers by another organization, 1-800Accountant. And we think it's very beneficial for our customers to have a balance sheet, an income statement/P&L that they could refer to for all our activity. Extremely important over the course of time, we'll integrate more of our functions with their P&L and balance sheet. On Slide number 9, we talk about once again on a drill-down basis, what a client receives when they open up a Newtek Advantage account. As of today, they get on free unlimited document storage, drag and drop and click and put documents whether it's a consumer that wants to put pictures, drivers licenses, rental agreements, mortgage papers, whatever they want, they can do that today. Free real-time updated web traffic analytics, that is available today. Average time on the site, unique today, total visitors, comparison to other websites, rankings that is available today in the Newtek Advantage. For the merchant processing area, you get analytics and transactional capabilities. So you can get a real free chargeback and batch information, if you are processing payments with us. That is important to note. So if you are a processing client of Newtek, you get that real information. You could slice and dice your data, debit versus credit, master charge versus Visa and Amex. You could look at your processing same day this year, same day last year. These are features that exist today. In addition to that, if you're a payroll client, you can receive the ability to make payroll directly from the business portal. Six professional relationships on camera, that's what makes Newtek special, that's the Newtek Advantage. So on Slide number 10, we talked about the distribution of the Advantage. So at the end of October, we rolled the Advantage out to 5,000 existing NewtekOne clients. These are clients that basically had a pre-existing login from NewTracker. And basically, by showing them the Advantage, we're already getting referrals coming in by just demonstrating what we can do in these other areas, because a picture is worth a thousand words, we're able to show people that we do all these other things. So we've had approximately 5,000 monthly active users. These are people that actively use the Advantage. Going forward, every lending client applying for a loan will also get the Advantage. And we've changed over all the NewTracker customer accounts to the Advantage. So any user that had a NewTracker login previously is able to see the Advantage. And there's 325,000 NewTracker users that have the ability to see the Newtek Advantage in the past 36 months. 295,000 NewTracker users have logged in. So you could see that we're putting the Advantage out there. We've got a lot of visibility. But I do want to note this is a work in process. There's a lot of work that needs to go with respect to integration, protecting the process, and making it as frictionless as possible. On Slide number 11, this is really a recap of most of the things that I've talked about today. So I will go through this quickly, but finishing with once again, the Newtek Advantage, which is our tool to go cross-selling and cross-marketing in an integrated manner and offer multiple solutions to customers without recreating various different data acquisition functions. On Slide number 12, these are our third quarter 2023 financial highlights. $0.38 per common share, that was an increase of 46.2%. Net interest income $8.1 million, an increase of 42%. This is all sequentially over the prior quarter in the same year. Total assets were flat. Those are pretty much the important metrics for the third quarter financial highlights. Slide number 13 looks at -- us for the full nine months that we've been outstanding as a financial holding company owning a bank, $1.10 per basic common share. Net interest income of $18.3 million. Slide number 14, we're proud to talk about our efficiency ratio. This is what's going to give us the ability to scale and really drop some great margins to the bottom line. 49.1% for the three months ended Sep 30, 2023, a decrease of 16.4%. We believe that over time, operating leverage will improve this, financial leverage will improve this, further technological innovation will improve this, and we'll be able to capture additional revenue from the non-bank business activities, particularly through the utilization of the Advantage. We do believe, however, that we could get an uptick, particularly in Q4 and throughout parts of 2024, as we look to add some significant expense, particularly in the area of deposit gathering, which is an important part. Obviously, that will save us money down the road and help our NIM, but initially there are some expenses. All of this is factored into our financial forecast. Slide number 15, we talked about our ROTCE and ROAA and this is for the nine months 39.8%, 5.3%. Once again, it's a tough road to hoe here because people look at these numbers and they don't believe it. But when we start to explain and you take a look at the 7(a) business, when you look at the non-conforming business, when you look at the reoccurring non-capital using businesses of payment processing, insurance agency and payroll, as well as the fact that we don't have the expensive, $250,000 to $500,000 a year bankers running around trying to get deposits that we now know are fairly mobile and most of our deposits are basically core retail. I think about 87% of them are under the insured amounts so we're not dealing with any big lumpy commercial deposits that can fly in the middle of the night. Slow and steady, we're very pleased with where we are. Yes, some of you have noticed clearly that we've reduced our slope of earnings growth. Look, at the end of the day, this was a tough year for interest rate risk management. The cost of doing business was higher. The other thing I want to point out is that a big drag was caused by the non-conforming lending business, which there's plenty of demand for it, but it is a capital utilizer. And we'll be looking to fund that business going forward, which is why we needed the registration statement up and running. We're pleased that we recently did our bond deal, which is now trading at a premium to where it was issued. And once again, we believe these types of metrics are going to be indicative that lead to further growth in cumulative earnings per share. So we are pleased with our performance, as well as pleased with the fact that we're projecting a strong Q4 and a strong calendar year 2024. Slide number 16, just some general important data points. I do want to point out once again the $40 million raise we did, the 8%, the NEWTI, they closed last night at $25.10, trading under the ticker NEWTI. Slide number 17, for some people that look at our financials and they look at book value from last year to this year and they go, wow, it declined, like what happened? Well, what happened is, we went from BDC accounting to 33 Act accounting, which means that things that would go into book for a BDC do not go into book. As a matter of fact, I've always argued that NAV wasn't book. It's a mark to market valuation of all the assets. But to make a long story short, our tangible book value was $7.31 a share. But if you look at the market cap as of December 31, between merchant solutions, tech solutions, the insurance agency, it's about $166.7 million of value. So I think it's once again important to note if you add that back, you wound up with a much higher book. If you constantly book that way. Slide number 18, successes achieved by the bank, well capitalized bank, growth in deposits, not growing the deposits, in big accounts but in small accounts, 83.7% are insured, 5,000 new digital account relationships, a 7(a) pipeline that's grown, we've been able to shift the PLP status into the Bank and really good risk-based capital ratios at Newtek Bank of 25% at Sep 30 and 14.9% Tier 1 leverage ratio. I'd now like to turn the presentation and discuss our deposit growth breakdown trends to Scott Price, our Chief Financial Officer.

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

Thank you, Scott. And certainly appreciate Scott is a recent acquisition for Newtek. And obviously he joined our senior accounting and finance team with Nick Leger. Look, I need to point out that we do not have, this is not a management team for a $600 million bank or a $1.4 billion bank holding company. This is a management team that is built, and frankly, I think it's competitive with a $5 billion or $10 billion organization. We will get there. We will grow nicely in a controlled manner and methodically. But when you see the types of talent that we're bringing in with Scott's addition, obviously Nick Young, our Chief Operating Officer, and I want to point out that the group that worked on this deck and put these pages together, It's not easy. From Mike Schwartz, Elise Chamberlain, Nick Leger, Frank DeMaria, Scott, Nick Young, Peter Downs, I'm sure I left somebody out, don't yell at me. But I greatly appreciate the management team that currently exists. We have a couple of more pieces to the puzzle to add and we will be ready to continue to do this quarter-after-quarter. On Slide 20, NewtekOne has five loan programs. Four of them are in the Bank. SBA 7(a) in the Bank. SBA 504 in the Bank in held for sale capacity, conforming commercial and industrial business loans, you just call that a business loan. And conforming investor-owned CRE real estate loans, this is the category that's giving most banks heartburn. The portfolio that we picked up from National Bank of New York City, we'll talk about it's a real cream pump portfolio. It's low risk. It is also low margin. But in today's market, if you've got balance sheet, not a better time to put loans on your books because the banks are not lending, they are shrinking, they don't have the capital. It is the antithesis of the NewtekOne and Newtek Bank NA story. It's the total antithesis. The fact that we're at sitting here talking about a bank holding company in a bank growing is a bit of an oxymoron. So we will spend a lot of time today talking about a nonconforming C&I business founded at the holding company. This is probably the biggest reason for decline of some of our forecasts. With that said, I think that there's demand, our joint venture partners are in place, our lending partners are in place. However, when we do raise capital at the holding company, both in debt and equity, it's for the utilization in this area. And when you see the returns that this business throws off, you'll understand why we want to feed it with additional capital, because we believe it's extraordinarily accretive and it's a great risk reward. Slide number 21, as I've just referenced, the Inherited National Bank of New York City, CRE portfolio, low loan to value, low average loan size. These are New York City based CRE loans, very little exposure to office, and trust me, there's no $1.5 million skyscraper offices in these portfolios. They have personal guarantees. We only have one non-performing loan in the particular portfolio. The portfolio is also mark to market. During purchase accounting, the non-performing loan, we believe we'll get all of our dollars back. However, this is a low margin portfolio that is asset liability matched through time deposits. Slide number 22 is a slide we frequently have talked about. Once again, important to note on the 7(a) business, our average loan size is $133,000. Talk about diversification. When you look at our industry and geography diversification, I think our biggest state is Florida at 12. Our fourth biggest state is New York at around 5%. So you could see we're pretty well diverse and obviously Texas and California sandwiched in between those two. These are floating rate loans, no caps. Currently being originated at Prime plus 3%, that's an 11.5% coupon. We sell the government guaranteed piece for a 9% to 10% gain on sale. That's what drives that high rate of return. That's what drives our net interest margin, that's what drives our ROAA, that's what drives our ROE. In addition to being able to put on conforming bank loans in the current market at very wide spreads as well as in the future, get commercial demand deposits to go along with that. Slide number 23 talks about our lending activity. This is fairly explanatory. Slide number 24 talks about the premium. Unfortunately, Q3, 9.73%. That's another reason for guidance change. Some of these things we just don't have real control over. Interest rates and things like government shutdowns and things of that nature. Slide number 25, this is important. What a client receives when applying for a loan with Newtek Bank. Now some of these changes are fairly new. Dan Hendel, our Chief -- IT Director, does a great job. He’s been with us for over a decade, and we have now dramatically automated some of the things we're doing in lending. I'll talk about that. When a lead goes into NewTracker, it takes about 8 data points, name, address, phone number, how to get to the client, if they have any special suggestions. We automatically send a fact-finder to the business owner, which allows us to gather the information with a soft pull credit score and a five C's of credit questionnaire. It takes about, I'll say, 5 minutes to do that. Once that fact finder is completed, we get instant feedback to the business owner, allowing them to schedule a remote on-camera appointment provided that they go to the top of the list with respect to the soft pull credit score and they get a specialist to assist them in the loan application. They also typically get a pre-qualification notice. The business owner at the same time receives an actionable quote for workers comp and a BOP policy also known as a business owner's policy or a package policy along with an appointment for a licensed insurance agent. So all of these things within approximately 15 or 20 minutes, somebody going online in the middle of the night without talking to anybody can prospectively get a pre-qualification, could get two appointments for an insurance agent and a loan assembler and can get a quote on a workman's comp policy and a BOP policy. Now, on a going forward basis, upon completion of the loan application without being asked for additional documentation, The business owner can actually have an open business account, which is BSA, AML, and KYC approved, without having a conversation with the client about the account. And then upon the further conversation with the customer, particularly for the due diligence aspect of it, the account will be open and activated. Most of these features were instituted in September of 2023. Herein lies the Newtek Advantage. A frictionless relationship with the customer, gathering data, not having to ask for the data multiple times, and making multiple product offers. Slide number 26, industry comparisons to various public market companies. Look, I think the one thing that's lost upon the market relative to Newtek, first of all, look at all these different entities. I believe these are all technologically enhanced banks. That's where I look at the comparison. Two, we pay a dividend, they don't, or they pay a small dividend. We're at a 4.25% to 4.5% dividend, depending upon where the stock price is. We're not getting credit for that. Look at the growth rate. Look at the growth rates we've talked about here. So we shouldn't be trading at the low end of the multiple. Where it wants to trade, that's up to you. That's up to the analyst. But if we keep hitting these quarter-to-quarter numbers with these ROTCEs, these ROAAs, everything will take care of itself. So we feel very good about what we've done, how we're positioned, and look, the market's certainly not the greatest market for bank investors. As a matter of fact, most bank investors, you could stand on your head and they won't buy the stock. But we're on the radar screen. We're talking to a lot of them. And if we continue to perform, everything will take care of itself. Slide number 27, one of our important businesses that sits up at the holding company, Newtek Payments, which owns Newtek Merchant Solutions and Mobil Money. We think Payments is a huge opportunity for banks going forward. And we think it will be a big revenue generator instead of a redheaded stepchild. We've owned this business since 2002. We use kind of a slang expression, it's a super ISO. What does that mean? We underwrite, we do a refunds and charge backs, we do our own customer service. As a non-bank, we use other banks as a [indiscernible] sponsor, which we continue to do today. But basically we do everything that a payments organization would have to do for their clients. We also have new products like same day funding in the merchant space, zero cost processing. We have some interesting e-commerce platforms and all of these consolidate up to Newtek Payments. We'll talk about the profitability here, which we had a pretty good year in. But things like electronic billing, same day funding, also are very, very valuable for deposit gathering. And we will be -- and we currently do that, but obviously on a limited basis until we get the transactional management team and staff in place but we're very excited about the Payments growth, moving money and this being a major revenue source. We also have issued a new Visa debit card for all of our commercial banking clients. Slide number 28 talks about the profitability of this business that we've been in since 2022. The expectation for a pre-tax income, $14.2 million, EBITDA $15.5 million for NMS, Mobil Money and POS on Cloud. We do own our own POS software. Once again on Slide 29, we talk about really how important Payments is going to be to the banking industry and we're set up very, very well. Products like FedNow, as I said electronic billing, same day funding and payroll can all become valuable solutions to our clients and NewtekOne. Newtek Technology Solutions on Slide number 30, expected pre-tax $2.1 million, EBITDA of $4.1 million. Look, once again, as we put more clients into the advantage and they start to use storage, we'll be able to engage with other conversations about helping them manage their hardware and software in two of our data centers. It's a business we've been in since 2004. We know it well and we look forward to continue to offer Newtek Technology Solutions as a product offering to our clients even in the event that we have to spin it to our shareholders. Slide number 31, this is an important slide focusing on the non-conforming conventional loan business. So both Newtek Business Lending, which currently got merged into Small Business Lending, and Newtek Bank historically has originated $502 million of loans since 2017 and no charge loss. In its joint ventures, which just does the non-conforming loan program, it has originated $194.4 million. We have not experienced any charge offs to date. This is really, really important. So when you look at the returns that we'll talk about in a future slide, you'll see why this is an important growth area, how profitable it can be for NewtekOne and Newtek Bank, and why that over the course of time, if we do go to the capital markets, that's what the money is used for. Prudently, in an extremely uncertain banking environment, in calendar year 2023, and anybody that says this banking environment wasn't uncertain hasn't been paying attention between Silicon Valley Bank, Signature Bank, Republic Bank, et cetera, First Republic Bank, clearly was a difficult market. We finally got our registration approved through the SEC, and then we were able to tap the debt market. So we're very, very pleased as to how we're performing in the market but that's a growth area that should give us extraordinary returns going forward. Slide number 32, 33, 34, all slides we talked about previously, 35 as well. 36 is a new slide. This is an important understanding of the potential profitability of the non-conforming lending business. And we just tried to boil it down with the simple million dollar loan. By the way, we're currently out on the street at higher gross yields. We're actually at about 13.5 gross, maybe to 13 and three quarters. The bank gets 1% in servicing income. We typically get, it's net origination fees of 2.83, but gross it's about 3.5%. Typically, those fees are going into the bank and the HoldCo. The loans are sold at a spread into the five-year treasury at T plus 300, that's typically where a single A securitization would trade at. We actually did a deal in January of ‘22. It was I think 185 to LIBOR swaps. So spreads obviously have widened. That's widened the business out. So the cost of securitization financing is approximately 7.6. The 4.6 is a fairly generous spread. But to make a long story short, you're looking at around 415 basis points to 420 basis points of margin with 30% equity and frankly in securitizations we think we might be able to get up to a higher number. But when you look at the pre-tax return on equity, these are fairly eye popping, both in year one and then in subsequent years, which is just the capital being utilized and we split this with our joint venture partners. So we use the joint venture partnerships. We have warehousing lines up at the holding company, extremely profitable. And the debt raise we recently acquired the funds at the end of August are going to wind up going into this business primarily. Slide number 37, we granularly talk about how this business works. We anticipate funding approximately $110 million in non-conforming conventional loans in 2023. We started off with a much higher expectation when the capital markets were much more liquid and lucrative before all the banking issues hit the market. Once again, we estimate the return on equity between 20% to 30%, net of anticipated losses. 38, quarterly dividend declaration to our public shareholders of $0.18. Dividend was paid on October 20, 2023. Slide number 39 are important projections for Q4 of ‘23 for the whole fiscal year and then for 2024. So we have a 2023 EPS projection of a $1.60 to a $1.80 and a 2024 projection of $1.80 to $2. The only thing I could say to the investment community is have some patience. The metrics are there. We're going to be methodical about what we do here, and we're not going to really endanger the manufacturing plants of the machine. This is a machine that's built for the long term. It's a company that's been around for 25 years. We survived the 08-09. We survived the pandemic. I remember very visually during the pandemic, the stock, I think, started off at ’18-‘19. At 1 point, we traded at a $7 or $8 handle, and boom, it went right back as a BDC. So I think for those of you that are sophisticated equity investors, we know that stocks move in various different ways. The market is getting to know us. They're getting used to us. They're getting to understand the business model. And this 51-page deck hopefully will get us there. So the next couple of Slides, 40, 41, talks about our dividend, our EPS, the calendar year, our balance sheet. You can see on Slide 42, total equity keeps growing. We're obviously proud of that. Forecasted balance sheet at the bank, you can see the bank's equity continues to grow. Our regulators like that too. Now let's go to Slide 44. So when we look at our future and we say, hey, this is a good spot that we're in, our business model projection performs high returns. Please understand we've got a 59-year-old bank lacking current software policies and procedures, digital capability, and scale build capacity for deposits or loans. So we're doing this on the run and we're meeting our expectations, we're meeting regulatory requirements, and we're able to deliver good metrics to the market. Establishing a new banking team, we're pleased to add real high quality people from the banking industry that are adopting what we do. It's a well-capitalized bank and bank holding company. Obviously, what occurred in 2023 was not the best thing for us with an inverted yield curve as well as a difficult capital market for banks. The existing book of business we acquired, although, we feel good about it not creating credit problems, it's not a lot of margin in it. A registration statement became effective late July. So really we were kind of locked into not being able to raise equity or debt capital pretty much until August and then when that window opened up we were able to hit the market for debt. We're good. We'll be able to use that capital in the market. Important to note the Newtek Advantage development which we talked about is going to be very beneficial particularly to the reoccurring income and low capital utilization of payments, payroll, insurance, and other entities. We're excited about rebuilding our non-conforming loan growth, which we will be able to build that portfolio up. We think we will have a good fourth quarter of about $60 million of loan fundings. Also 2024, an important year for the creation of commercial business core deposit transactional accounts which will increase our net interest margin and lower our cost of funds. Continue to add higher margin SBA loans which we've had 20 years' worth of experience, and we continue to add plenty of reserves to be able to cushion us against, concerns that we have going forward about credit deterioration. We're excited about the Newtek Advantage becoming the gold standard in banking, which we think is going to generate activity. And it's a technology that is a non-balance sheet type item that can be very beneficial to shareholders down the road. We do plan on announcing new significant bank hours -- the hires are already built into our earnings forecast. I think it's important that we have plowed through the difficult hurdles, getting the applications approved, getting through our original audits, being able to take deposits, which I can't tell you how many times people say, how are you going to take deposits, how are you going to take deposits? Well, look, we figured it out. We're able to take deposits. How are you going to move the PLP with the SBA? Well, we got that done too. So we're moving in the right place. We're really pleased about it. Slide number 45 is somewhat repetitive of what we said today. And I wanted to try to get through this as quickly as possible and open this up to Q&A.

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

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

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

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

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

In general, please.

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

Yep. I'm here, Barry.

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

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

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

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

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

Thank you.

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

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

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

Was that a contributor to the lower 2024 EPS guidance?

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

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

Thanks, Chris.

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

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

Thank you, Mike.

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

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

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

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

Okay.

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

Yeah. I tend to, sorry, go ahead.

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

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

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

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

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

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

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

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

Thank you.

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

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

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

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

Appreciate it, Scott. Thank you.

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

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

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

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

Thank you.

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

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