NEWT - NASDAQ

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

Good morning, everyone, and welcome to our fourth quarter and full year 2023 Financial Results Conference Call. We're pleased to report our results to you this morning. My name is Barry Sloane, CEO and President and Founder of NewtekOne Inc. Joining me today on the call for presentation purposes is Scott Price, our Chief Financial Officer of Newtek Bank, National Association and NewTek, Inc. In addition, we also have Nick Young, President and CEO of Newtek Bank, NA; and Nick Ledger, EVP and Chief Accounting Officer for NewtekOne Inc. I'd like to draw your attention to slide number one, which is our fourth quarter reporting as a financial only company. Excuse me. Slide number one is the forward-looking statement. Get a chance to absorb that. Now go to slide number two. Slide number two, this is our fourth quarter and third full quarter reporting as a financial holding company. We acquired National Bank of New York City on January 6th. So it took a while for us to get a lot of the assets employees into Newtek Bank, National Association. So I think it's important when you look at year-over-year comparisons, the Q1 2024 comparison might be a little bit choppy versus the Q1 2023. And therefore, when we also look at our 2023 performance, it's very difficult to do the comparisons test as a prior BDC. However, I think it's important to focus on the quarter-over-quarter sequential comparisons. And we had a really good year and quarter-over-quarter comparison when you take a look at things like portfolio of loans growing, net interest margins expanding, and deposit growth. We also now have six analysts that are covering NewtekOne as a financial holding company. We've been able to demonstrate an ability to raise insured deposits quickly with a high growth rate through digital account opening. Also important to note, we'll go into this a little further, we don't have the interest rate risk issues that are currently present in the industry, as you can take a look at how our assets liabilities are very well matched. We also believe that a return on average assets or return on tangible common equity and capital ratios when you compare them to the banking industry are well capitalized, very high, and also well reserved against. I would like to now draw everyone's attention to slide number three. So Newtek Bank, National Association summary financial highlights focusing on Q3 to Q4 growth and the fiscal year 2023. If you look at return on average assets for the year 5.76% at the bank. Obviously very, very high for a bank. It will, as we get through the presentation, explain why we're able to generate such high returns. Return on change of common equity, 35%. Efficiency ratio, approximately 50%. These are really ratios you do not see in the banking industry, and a lot of it is based upon a very unique business model that focuses on returns on shareholder equity, return on assets, and not necessarily growing a book of business, which is very typical and traditional in the banking sector. Also being able to do it at a very efficient basis. Looking at on slide number three, the margins, important to note, we obviously had increasing yield on loans as we began to add more of our Newtek type traditional loans to the bank's portfolio that we acquired. Average rates on deposits were fairly stable from Q3 2023 to Q4 2023. We might have a little bit of an uptick next year as some old, low interest bearing CDs roll off, but we feel pretty good about the future for that. And Scott Price will talk about that going forward. And importantly, our net interest margin at the bank, 3.49% to 4.43%. That's pretty high increase. And most banks right now, if they're lucky, they're stable with it growing marginally. So we're very proud of this particular accomplishment with respect to margin. All the while, our capital ratios are strong, CET1. At the end of the year 20.94%. Total capital, 22%, leverage 16.4%. So we look at why and how we're being able to do this. Obviously, we have a reliance upon the digital deposit channel for funding that worked well in 2023. We're excited about the opportunity to add the transaction of lower cost deposits around 2024. We've also maintained a very strong capital position and a prudent risk-based tolerance. And when we talk about our reserves, our reserves grew to 310 basis points at the end of the year. We hope we will gravitate up to 350 basis points in 2024. That's like six or seven times the normal reserve of a bank in our particular space. Now when you look at our loan portfolio, particularly in the 7(a) category, where we're adding assets, we're a prime plus three lender, and we're able to sell three quarters of the loan at a 10% to 11% gain on sale. Now, important to note as we go forward, we'll explain why we feel that the risk reward on those loans is well calculated, it's well documented, and that we believe these types of returns we will be able to preserve them and also be able to withhold any increases in delinquencies or charge offs as time goes forward. Slide number four, please. NewtekOne summary financial highlights. This is obviously the publicly traded holding company. Now we're transitioning more and more of the operating opportunities down into the bank where we have lower cost of funds and the ability to lever more. So we're working off of it, the holding company is the higher cost of funds that we've traditionally dealt with to run the business, but you can still see a return on average assets for the year 3.2%, return on tangible common equity, 22.7%. These are all very, very attractive numbers for a bank holding company. Average yield on loans 9.25%. Net interest margin expanded from Q3 2023 to Q4 2023, 2.62% versus 2.78%. We're proud of all these numbers. Take a look at our capital ratios, also well capitalized financial holding company CET1 16.49%, total capital 19.6%, leverage 15.6%. Also important to note we were able to deliver a $1.70 on diluted earnings per share, a $1.71 on basic earnings per share for the calendar year. That was the midpoint of our guidance. We continue to encourage the market and analysts to follow our quarterly guidance and our annual guidance. Obviously, 2023 was a challenging year, about midpoint through the year, based upon issues that were relating to the banking industry, Silicon Valley Bank, Signature Bank Issues, First Republic issues. It made it for a more difficult year. We slowed down our alternative loan program. That program which you'll see in our pipeline reports coming up is back into full gear and that should restore some of the growth. Needless to say you can see these numbers. We're growing very well. But with that particular program in place that is very much capital driven, we believe that we'll be able to get back to higher growth rates in the future. Slide number five. These are common questions about NewtekOne that I've had with investors, just about why is your stock trading at the current market multiple? Why don't people understand? So I'm going to go through some of these that I think will be helpful. First of all, we don't have a desire to operate like a traditional bank. We have a lot more to offer to our clients than just taking their deposits and hoping they get along. And we really look nothing like a small community bank. First of all, we're an OCC-chartered national bank. We take deposits using digital account opening and remote deposits and are able to do so in a compliant rapid manner with much lower costs than the traditional way of hiring bankers, brokers, and BDOs. Important to note we are focused on return on tangible common equity and ROAA. Now what I refer to is the assets under management traditional bank model where you make loans, get deposits, typically not interest bearing deposits which we think going forward there will be less and less of that in this particular industry. And basically making loans, selling them, and getting various streams of income in which we'll talk about. Clearly we have an overweighting of noninterest income versus traditional bank interest income. Gain on sale, payment processing income, servicing income, income from the insurance agency growing, payroll growing, and NewTek technology solutions which will be divested up between now and January of 2024. Our margins and returns are much higher than that of a traditional bank because of the way we lend on a risk-adjusted basis with more than adequate reserves and floating rate assets that work really well a) for our customers and b) for our shareholders. Many times I'm suggesting, gee, you went to the small business market. And we think small business credit is going to get weaker. We've been lending for over 20 years to this space. We've been through 08, 09. We've been through the pandemic. We understand this market. We have static pool analysis going back over this period of time, we have 12 securitizations in the market. We have a very good handle on what our losses, delinquencies should be, and we are very confident that our reserves are more than adequate. This is not a new situation. We know and understand small business credit. We were questioned whether we were able to raise deposits for $340 million last year up from I think $140 million when we took over the bank. The ability to raise lower-cost transactional-based deposits will be able to demonstrate that. And Scott may talk a little bit about that in his presentation. But that will definitely be a Q2, Q3, and Q4 event where we start to really grow that side of the business. We've had to put people, process, technology, and compliance in place. We hired Jennifer Merritt, as COO with Digital Bank. She's brought in a great team of people, and we've got the compliance department in there with Sarah Limones from the BSA officer and we recently brought in our compliance manager, Julio Hernandez. So we're excited about our ability to grow that side of the business, but we can't make an error in this space, so we've done it prudently, and that should drop the cost of funds over time and improve our margins. Gain on sale. People say, oh, gain on sale. Nobody likes gain on sale. Gain on sale for NewTek has been going on for 20 years. Quarter-by-quarter, go look at the K's and Q's. We originate loans, we sell them into the market. So our gain on sale isn't like a portfolio of securities in a bank or insurance company. Rates go down, bond prices go up, and you sell them for a gain. This is clearly a reoccurring event. However, it's not spread income that's traditional, and we do believe it's valuable and gives us the first wide stream of income. Yes, a bank or financial holding company can be a growth vehicle, which is sort of unheard of in the market and kind of unheard of in a banking perspective without just doing the traditional bank trade of acquiring another bank, getting bigger, squeezing out the expenses. Not that that might not be an opportunity for us in the future, but it's not our core reason for existing today. Also important to note, we really strongly suggest that investors get to know What we do in payment processing solutions, tech solutions, insurance solutions, and payroll solutions. Please visit our website. Slide number six talks about the different earnings engines for NewTek across different areas. So we have a very attractive diversified stream of income flowing up to the holding company. New tech bank divining up. Small business finance is the legacy portfolio in runoff with very few operating expenses against it. The other businesses are fairly well self-described in our case and on our website. I'd now like to turn slide number seven and eight to Scott Price, who will talk about the data on these two slides. Scott?

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

Thank you, Scott. Appreciate it. Slide number nine, the NewTek Advantage. And I will tell you, we are doing our best to condense this presentation. I've had people say, this is amazing. We love all the data we give you. I've had other people say, would you please shorten it? I've had people say comb your hair in the middle on the left. So we're trying to get through this as much as possible. But I think it was important in our first year to give as much data as we can to the analysts to give everybody a real good chance of understanding a business model that is totally different and differentiated. But we will look to condense this going forward. I appreciate Scott bringing that up. The NewTek advantage, an extremely important aspect to why we exist, it's probably the number one reason why we elected to own a bank. And it has to do with what I'll call impression. Most people on this call, and most consumers and businesses, will go to their depository many times in a given month. They will do it for transactional reasons. And in today's environment they do it just to make sure, hey, my money is still there. My assets are there. My account is still there. Important to note, impressions. We get lots and lots of impressions from our business clients by going to the New Tech Advantage business portal, which is an entry level into the bank, as well as other solutions that are held up at the holding company. What a client receives when they open up a NewTek Advantage account, free unlimited document storage, free real-time updated web traffic analytics. And if a merchant client signs up with us, in addition to have that client connected to a bank account where you can deposit the money same day. They will receive real free time charge batch, and all debit versus credit, visa versus master, all that information right in the business portal. If they are a payroll client, they can make payroll directly from the business portal. And important relationships. Relationships still matter. So although we are a technology enabled bank, you can get our staff on camera 24-7, 365, in all these different verticals. Extremely important. There is a real advantage to doing business with NewTek. That's the NewTek Advantage. On slide number 10, we talk about, there's 340,000 users that have the ability to see the NewTek Advantage. Those are the current users that have a username and password to our NewTracker system that now displays the advantage. So we have approximately 5,000 monthly active users that are going in and logging in at least once a month. So we're getting these impressions month after month, time after time. It gives us the ability to communicate with webinars, podcasts, and really make NewTek the destination point, an authority for all of their business activities to learn about things like tax or payroll initiatives or whatever might be an important topical business. This is not your local community bank or even major money center bank. We offer things to independent business owners that they've been starving for most of their most of their active lives. Slide number 11. Fourth quarter and full year 2023 highlights. Look, I think it's important to note, we've sort of laid a lot of this out in the data in the early slides. The full year 2023, we came at a 1.71 basic common, a 1.70 diluted. We're proud of the fact that we're able to hit a midpoint. It's pretty hard to forecast when you're first getting in the business. We had a lot of changes, a lot of changes. Going from a BDC with 1940s back to accounting into banking accounting caused a lot of issues for us to be able to track, follow, make those updates. I'm proud of what we've been able to accomplish in all aspects this calendar year. On slide number 12, we talk about the enhancements that we've made. I say the team enhancements. Obviously, we welcome Scott Price joining us as Chief Financial Officer, Principal Financial Officer, joined us approximately mid-year, May 2023. Nick Ledger, our EVP and Chief Accounting Officer. He's been with us a while, a 2015 veteran. Frank DeMaria joining us, extremely helpful, beneficial, a store-work in that group, SVP accounting and finance. Jon Shanfield joining us to help us with our reporting performance management, both from a financial metrics perspective as well as an operational metrics perspective. Julio Hernandez joining us as SVP compliance officer. Matthew Sauli, another TI, January of 2024. We're migrating to NetSuite and we have a lot of efficiencies so we could be able to report with less spread sheet transitional risk, done on a more automated basis, really just be a better institution. This is a management team that isn't a management team for a $700 million bank or $1.4 billion bank holding company. This is a management team for a much, much, much larger institution with much greater foresight and direction, and that's where we're going. I will say, unfortunately, or fortunately, these are not inexpensive hires, not inexpensive talent. This is all front-loaded, and these are the types of things that affect our returns early on despite the fact that I would argue ROAAs, ROTCs, and efficiency ratios are built to last. And as we grow, I do think we have a good chance of these things expanding in the future. Scott, if you can handle 13, I would appreciate that.

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

Thanks, Scott. Slide number 14, important from a lending activity perspective, and we have been reporting that our pipeline continues to grow based upon our unique business model of acquiring referrals from partners, as well as our efficiencies in making loans using technology, but not cutting corners on a fintech type basis but doing the underwriting. Total SBA loans funded $260 million, a 24.2% increase over the prior quarter. I think that's a) we do have some seasonality there. The fourth quarter is typically our strongest. But the industry for SBA lending was flat. We were the number one originator in Q4 calendar year, 2023, by loan volume for SBA 7(a). We're very proud of that fact. In addition, the SBA loan portfolio at Newtek Bank reached $169. 6 million. Those uninsured loan participations, and there's probably some government guaranteed in there are typically prime plus three loans. You can see 11.5% floating rate quarterly adjust, no cap, real attractive, sell the government guaranteed piece at a 10 to 11 point gain gets a really nice return, even posting, you know, a high CECL reserve of 6.75% upfront, which obviously was far more. I'll use the word punitive than what we used to do as a non-bank lender where we didn't have that CECL reserve. Importance of the note, we're forecasting $925 million in 7(a) loan fundings 13.5% increase in calendar year 2024. We also had a good year in 504 loans, $60.5 million of 504 loans for the three months, a big increase over the prior quarter, total loan closings of $142 million ending December 31, 2023. We closed the record $1.1 billion of loans across all products, and we hope to do about 1.4 billion in this coming calendar year 2024. 15 is our pipeline. You can see we're in good shape across the board, particularly with the alternative loan program, which I would say is a differentiator for extended growth. The SBA business, we have that down pretty PAT. We've been involved in that for 20 years. The alternative loan program has been growing through difficult times, that being a pandemic and a banking crisis since 2017. We also important to note in the bank to conforming investor CRE loans and conforming business loans, non-government programs, all that in the bank. Slide number 16, this is important because people want to know about the credit. That's one of the things I keep getting asked about. So when you look at the total loan portfolio at Newtek Bank NA 12-31-2023, outstanding balances of $401 million, unfunded commitments of $46 million. Those are primarily 504 loans. I want to quickly just talk about 504 loans from a risk standpoint. It's important to note that the 504 business for us is originate and sell. The second lien is taken out by the CDC and funded by government debentures. So we're getting very high returns on the coupon, gain on sale, and even in the construction process for prime plus two or prime plus three, floating rate plus fees for a short-term loan. And we don't look at these as being extraordinarily risky with relative to lease-up risk because these are owner-occupied. And I want to point out owner-occupied CRE is entirely different than investor CRE, and it needs to be looked at that way. First of all, our experience in small business lending over 20 years is first of all the loan must meet repayment terms by the business. That's backstop number one. The business is repaying the loan. It must meet it based upon historical projections. Number two, personal guarantees. So the owners of these businesses are personally guaranteeing the loan. Then you've got the real estate, really, for recovery. Unlike these office buildings, these multifamilies, everyone is exaggerating the CRE problem. By the way, the problem in itself is not an exaggeration, it really exists. It just really doesn't, we believe, pertain to our particular portfolio. So when you look at our portfolio on slide number 16, it's got a real good currency rate, the percentage of CRE compensation on the old legacy National Bank of New York City portfolio, which was very well underwritten, also went through purchase accounting adjustments on January 6th of last year. So you're not looking at valuations based upon '20, you know, '20, 2019, 2018. These are recent valuations. So I think that when you look at the portfolio, the National Bank of New York City portfolio, which we'll talk about in the next slide, doing very well. The CRE loans that we have in our SBA lending business basically provide recovery if the business can't pay the loan off. It's not the real estate that's repaying the loan, and you got PG's. On slide number 17, this will give you a pretty good exposure, a picture of what the portfolio looks like. So we have $193 million in total CRE, $56 million are construction loans made under the 504 program. We don't fund these loans until we have a takeout from the CDC on the second lien. So, yes, we have construction risks. These deals are typically bonded. We fund this for five or six years. We've done very well in the 504 loan portfolio, which I'll talk about. And you have the debenture taken out by the CDC, which had taken out by government funding. Very important to know. CRE loans not made under the 504 program, 132 million. Then look at the portfolio, very diverse across industry types. Look at the LTVs, 51.33% on multi. Office, these are tiny offices. I mean, these are average loan size on the National Bank of New York City portfolio is a 1.5 million to 2 million. These are not skyscrapers. And these are basically local New York City based real estate loans. Slide number 18 rehashes the quality of what we've been able to do in 504. We've originated $555 million 7(a) SBA 504 loans since 2017. No charge off to date. And in the alternative loan program, which used to be known as the nonconforming loan program, We changed it to ALP. We haven't experienced any charge offs to date originating loans since 2019. Slide number 19 talks about gain on sale of the SBA 7(a)s. We finished up the year at 110.2. First quarter looked pretty good. It's up market lease. We've had an increase in prices, and that's just based upon investors wanting to own assets at the short end of the yield curve floating rate. Slide number 20, important to note, this is our payments business. We're excited about our 2024 forecast. We're losing some amortization and depreciation. Pre-tax income jumped of hopefully 16 million for the calendar year, up from 12.9 million in the year [indiscernible]. The insurance agency, a nice increase. Now, the insurance agency and the payroll business are going to be benefiting from the bank relationship. So we hope to a) open up a ton of accounts where people looking to insure themselves, they see it, it's there. We'll talk in future calls about the connectivity between the agency and the lender, the connectivity between the payroll company and the lender, and both these entities in connection to the bank. Both of these entities are held up at NewtekOne at the HoldCo. Slide number 23, basically the key financial metrics projections for 2023 in the model, what we had for 2024 projection and forecast and what we did for 2023 for the quarter and the fourth and for the full year in 2023. You could get a good feel for where we're going. We're forecasting for 2024, $1.80 to $2 in basic and diluted common shares for the calendar year. We've got them spread out quarter by quarter. There is seasonality here. There is a ramp up here. We really ask the analyst community to pay attention to what we believe are the seasonal reasons. Slide number 24, companies invested in 2023 and 2024 for growth. Look, I talked a lot about the dollars that we put into building the Newtek Advantage, operating in a compliant manner, software, hardware, consultants, advisors, a lot of money spent up front. And those investment initiatives are going to continue. So these are all built into our model, they're all built into our forecast. We feel very comfortable with these numbers and but we do want you to understand as we grow, we believe we're going to be able to take advantage of the scale. This is a management team, not for a $700 billion bank and $1.4 billion holding company. We believe the team can grow to $5 or $10 billion in size. Slide number 25, many investors are interested in how we are going to begin to get investor interest. I am going to give you the one biggest thing. It is blocking and tackling and putting up these types of numbers every quarter. I can part my hair on the side. I can put my hair in the middle. I can shave my head, okay. If we keep putting up numbers like this, I think the market will react differently to us. And it takes time for analysts to get comfortable with the model, for investors to believe these are the numbers that we can deliver. They've never seen a bank or a bank holding company operate in this manner. We had a really terrific year from my perspective. We got through our, you know, fed compliance reporting and our OCC compliance reporting well. Our business modeling plan is intact. We plan on attending investor conferences. We plan on hosting an analyst day in the second quarter. We're going to continue to show that year-over-year growth comparisons. Once again, I'll point out Q1 could be a little choppy with the NOL and is also not really having seasonal calculations, but we do anticipate a decent number, I think it's $0.22 to $0.23 for Q1, diluted and basic EPS for the first quarter. We're excited about our business going forward. Slide number 26, when you look at market multiples, triumph is sort of a bit of anomaly, although I would like to think that we have a triumph type growth aspirations and expectations when you look at our ROAAs and our ROTCEs and our efficiency ratios. But even throwing that out, you're looking at around a 9.2% median type earnings multiple, which is not what we're currently dealing with as we currently look at the marketplace. Slide number 27 and 28, look, we feel really good about where we are in the marketplace. We are excited about the opportunity. I think I've expressed most of these items in the summary that I've discussed throughout the presentation today. On slide number 28, I want to enhance and point out that for fiscal year 2023, the bank of which more and more activity is flowing into, ROAA 5.76%, ROTCE 35%, efficiency ratio 50%. You just don't get these kind of numbers in a community bank. HoldCo 3.25% for ROAA; ROTCE 22.7%, efficiency ratio 74%. These will get better as we begin to leverage and more opportunities go down into the bank. Also important to note, obviously we're a dividend paying company, $0.18 a share. I wish the dividend yield was lower because that would mean we'd have a higher stock price. But even with that, you got a 6.4% current yield as of March 1, and it's probably not far from that today. An investment in NewtekOne is a growth-oriented, differentiated, technology-enabled business solutions company that is also a depository. That's important to note. We are also a depository. We are not like 95% to 98% of the other banks that are out there. With that, I'd like to turn the remaining portion of the presentation over to Scott Price to the MD&A.

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

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

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

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

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

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

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

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

Thanks, Chris.

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

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

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

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

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

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

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

Thank you, Tim.

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

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

Scott, you want that one?

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

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

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

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

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

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

Noted.

Thank you, Chris.

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

Good morning. How are you?

Good morning, Steve. Good, thank you.

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

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

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

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

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

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

Thank you.

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

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