NEWT - NASDAQ

Good day and thank you for standing by. Welcome to the NewtekOne, Inc. 2024 First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Barry Sloane, Chief Executive Officer. Please go ahead.

Thank you very much, and welcome, everyone, to our first quarter 2024 financial results conference call. We're very pleased to present our results to you today. Joining me on the call is Scott Price, our Chief Financial Officer of NewtekOne Inc., the publicly traded company, as well as Newtek Bank National Association; in addition, Frank DeMaria, the Chief Accounting Officer, EVP for Newtek Bank -- NewtekOne Inc. And I also have Nick Young, the President and Chief Operating Officer of NewtekOne -- Newtek Bank joining me today. For all of you that want to follow along with the PowerPoint presentation, you could do so by going to our website, newtekone.com, n-e-w-t-e-k-o-n-e dot com. While you're there, you may want to take a look at newtekbank.com and the Newtek Advantage, all valuable information to understanding our organization. We'd also like to welcome the analyst coverage, from KBW, Tim Switzer; from Raymond James, Steve Moss; from Compass Point, Merrill Ross; from Ladenburg, Chris Nolan; from B. Riley, Bryce Rowe; and last but not least, Crispin Love from Piper Sandler. This call today should illuminate a management company that is building a business. That's important to note. Take a look at all the building blocks that we put in our presentation, from growing the accounting and finance department to growing our ability to take deposits in Newtek Bank, N.A., to our ability to move our lending operation into the bank, and making a growing high quality group of loans that have generous risk reward provisions, as well as to being compliant. NewtekOne is clearly a long-term opportunity to invest in a technology-enabled business that provides business solutions and financial solutions and depository services to the 30 million independent business owners across the United States. I'd like to call everyone's attention to Slide #1 in the presentation deck, which once again you could find at our website in the Investor Relations section. Slide #1 is a note regarding forward-looking statements. Then we'll move forward to Slide #2. Clearly the biggest takeaway from our results that we published last night in our press release, the biggest takeaways from Q1 in 2024, first quarter 2024 core earnings of $0.38 per basic and diluted common share exceeded our previously issued guidance of $0.19 to $0.25 per basic and common diluted share. Also important to note that in comparison, the first quarter 2023 earnings, we reported $0.76 and $0.74. There was an income tax benefit of approximately $0.59 per basic, $0.58 per diluted, almost $0.60. Without that income tax benefit, EPS would have been $0.17 and $0.16. So we really beat on a core basis from an operating perspective year-over-year comparison by about $0.20. Conservatively we raised our guidance for fiscal year 2024 to a $1.85 to $2.05 from previous $1.80 to $2. Important to note sequentially, quarterly deposit growth at the bank, 9% growth. According to S&P Global, U.S.-based banks grew 1.2% on their deposits from December 31, 2023, to March 31, 2024. So we're clearly proud of that ability to grow deposits. Sequential loan growth also up 11%. That's on a consolidated basis at NewtekOne over Q4 2023. Also important to note that in the SBA 7(a) business, we sell 75% of the government guaranteed loans typically within the quarter that we produced them. Therefore the growth obviously would have been higher. It is important to note that this organization that has a consolidated total asset base of $1.4 billion and about $700 million of the bank really has the loan generation capability of an institution that is 4x or 5x larger. Important to note that interest margin at Newtek Bank grew sequentially by 37 basis points from 4.43% to 4.80%. Growth in NIM at banks is hard to find. Clearly we are very proud of this extraordinary accomplishment. In addition, while we're able to grow NIM, 405 basis points of loan loss reserve coverage at March 31, 2024. Growing loan loss reserves, while growing profits, not an easy thing to do. These are accomplishments we're extremely proud of. We also increased the quarterly dividend in the first quarter by 5.5% to $0.19 a share from $0.18. That was an indicative sign of confidence that these dividends will be paid out of earnings. The Board and the management feels comfortable that what we're doing is there, consistent, stable, and we'll be able to repeat it quarter after quarter. On Slide #3, we've got Newtek Bank financial summary highlights. ROAA 5.8%, ROTCE 37%, efficiency ratio 50%. I don't know where you find financial institutions or banks that have this type of performance. Frankly, people are looking at it and saying, "I don't know if this can be kept up" or "I don't believe it," but we're in our mid quarter right now, and we keep producing these kinds of numbers. And we'll continue to work hard to produce these kinds of numbers for our shareholders. Net interest margin at the bank 4.8%, up from 4.43%. Average yield on loans at the bank increased. A lot of that is based upon, I would say, an over performance in the 7(a) business. We're going to talk about the other loans that we do at the bank that prospectively are lower margin, lower yielding, and will have less charge-offs. Deposit rates increased slightly from 4.4% to 4.48%. That's a trend that probably will continue, we think, modestly, not to any great extent that will affect net interest margins. Net interest margins will be more effective by putting on lower risk, more vanilla bank-type loans in the bank to diversify the portfolio. Let's take a look at capital and credit. Moving all the way over to the right-hand side of the slide, you could see our institution continues to be well capitalized. Our Q1 returns clearly were impacted by higher volumes of loans, greater price, also higher expenses compared to the fourth quarter of 2023. I think it's important to note that NewtekOne is not an organization that's built to be a $1.5 billion financial holding company. It's projected to be much, much larger. So we're putting in the infrastructure to be able to continue to achieve growth rates in deposits, in lending, as well as the ancillary services that come out of the holding company that make us extraordinarily unique. The net interest margin and yields on loans are primarily due to a higher concentration of SBA 7(a) loans, as we're a Prime plus 3 lender. Today, that would be 11.5%. So once again, we're very, very proud of the results and the performance at Newtek Bank. Consolidating it up to the holding company, the ROAA 2.8%, ROTCE still very high at 20%. And obviously as you take a look at the difference between the holdco and the bank, clearly we've got institutional funding of the holding company. So less opportunity to take advantage of deposits which are lower costs down in the bank. We do our alternative loan program funding at the holding company, first on the balance sheet and then into joint ventures. But once again, important to note for a financial holding company, these are still extraordinary numbers that you can't find when you run your finger down the page of other financial holding companies and Newtek. Towards the bottom of the page, you could see on Slide 4, the core EPS non-GAAP. Last year, if you took out the tax benefit from the first quarter, about $1.30-ish. We're looking at a revised forecast for 2024 of $1.85 to $2.05. Clearly some nice growth there, particularly in core. We think that that growth should start to seep into the investor and analyst community, and to start to achieve a more normalized market multiple as the market and investors start to get a better understanding of our financials, our balance sheet, our income statement, and how we project going forward. Slide #5. I think this is important. I get asked, as does Scott Price, a lot of questions. Once again, very hard to compare us to a traditional bank. First of all, we offer so much more to our clients. And we do this without branches, brokers, bankers on a traditional sense, and BDOs. We're more focused on return on tangible common equity and return on average assets, not assets under management. I use the term coupon clipping. Our competitors in the banking industry, they make loans, they try to get as much noninterest-bearing deposits as they can, and they're clipping that coupon. Clearly, we have an overweighting of noninterest income versus traditional bank interest income, which we think is an envy of most other banks. But this is something that's been inherent in Newtek, and it's one in its business model for over the course of 25 years and since it became a public company in September of 2000. Our margins and returns are higher than a traditional bank and bank holding company. Important to note, we believe our credits remain strong lending to the small and medium-sized business. Now some people say, "Gee, these small business loans, aren't these really bad credits? Aren't these the credits that are going to go bad first?" Well, first of all, we've been doing this for 20 years. We've been through '08, '09. We did it through the pandemic. We understand this. But our investors are rewarded from the programs that generate an 11.5% coupon and even net of the expectation, which we believe our history and our management team has very good knowledge of how this portfolio is going to perform, provides excessive returns. That's why our ROAAs and ROTCEs are much, much higher than our competitors even while we're posting loan loss reserves that are north of currently of 4%, which we think will modify down to 3.5% when we start to diversify the portfolio into some more traditional banking types of loans. But when you look at what we're doing in the bank from a risk perspective, we love our business model much more than the deemed to be low risk, low charge-off, low margin loans that our competitors are doing hoping that their noninterest-bearing deposits don't run away into money market accounts, which is a trend that we see continuing to go on as far as the eye can see. It's way too easy to move money on a phone into the right account. So maybe I don't leave $250 -- or $2.5 million in the bank -- I mean leave $250,000, put it in a money market fund, and keep moving the money back and forth. That's where we see the trend. We're very well positioned for that. And we certainly, even with the higher cost of consumer deposits that we've got, and we're going to talk about reducing that cost of commercial deposits, we are very well situated for the risk inherent in the business industry going forward. Yes, we're able to raise deposits. We brought in approximately 6,000 depository accounts in our early stages of life. Yes, gain on sale is a reoccurring event and it's reoccurring income. I've got a beautiful slide on Slide 17 that shows this. Yes, people don't like gain on sale. They may not like it, but we've made money doing this for 20 years. We make loans and we sell them, and it generates a higher return on equity and a higher return on assets. It's a better strategy. Can a financial or a bank holding company be a growth company? Yes. We don't know how the others can do that within their model, but yes, we can be. Our alternative loan program, we'll talk about this. We've demonstrated in earlier presentations it's a 20% to 30% return on equity business for our company. It was slower in 2023 due to the issues that were occurring in the market with respect to rates, volatility, capital availability for banks. It's an important growth aspect and you could see had a great first quarter, have a great pipeline, and we think we're in pretty good shape going forward. I'd like to turn the next few slides over to Scott Price to go over 6, 7 and 8.

Thanks, Barry. Good morning, everyone. Turning to Slide 6, our net interest income expanded 16 basis points during the quarter despite higher deposit costs. Average earning assets increased $31.1 million, and we experienced a sizable mix shift with average cash balances declining $45 million and average loans increasing $73 million. A higher percentage of the loan portfolio in the SBA 7(a) product versus last quarter drove the increase in yields on loans. On the funding side, our cost of deposits on a consolidated basis increased 20 basis points as the acquired CD portfolio continues to mature at lower costs. Separately, our interest expense on borrowings was lower as we experienced swift prepays on the NSBF 7(a) portfolio, which led to reductions in notes payable to securitization trusts. Slide 7 is a graphical representation of the ins and outs of net interest income, most of which I've already covered. To summarize, we were able to increase our balance sheet efficiency by deploying excess funds to originate loans. I do expect higher levels of leverage at the bank as we roll out our business checking products and continue our retail deposit gathering. Shifting to Slide 8, our deposit mix was relatively unchanged, sans our high-yield savings balances staying relatively stable and CD portfolio balances increasing. We expect our business checking account product and business money market product to increase at lower balances, to increase at lower rates, as we move into the last 3 quarters of the year, the maturing digital CDs during the quarter largely relevant to the same product at similar rates. Important to note, our retention that we've experienced on CDs maturing in the last few months, March and April, have been above industry standards at 90%. Barry, I'll turn the call back to you.

Thank you, Scott. Slide #9, the Newtek Advantage. This is our advantage in the marketplace. We believe that the Newtek Advantage will become a marketplace destination for our clients. We offer customers more than just taking their deposits with the hope that they can get a loan. When a client opens up an Advantage account, they get free unlimited document storage, they get free real-time updated web traffic analytics. If they're processing payments with us, they're going to receive real-time chargeback and batch information. They can get same-day funding. If they're a payroll client, they can make payroll directly from the business portal, the New Tech Advantage. Extremely valuable. We believe this technology that we've developed is also something that we can package white label and resell to other financial institutions within their marketplace. We are very excited about the Newtek Advantage. We believe it gives us the ability to gather more deposits from verticals like payroll, insurance and payment processes. Slide #10, artificial intelligence. AI is going to change all companies in the United States and across the world. Where businesses have the opportunity to utilize AI, it's going to be extremely beneficial. It's in NewtekOne's DNA. We're disruptors, we're entrepreneurial, but important we're prudent, but not afraid to use these types of technologies when they could really provide tremendous efficiencies. And the way the company is positioned, we're in a unique position to take advantage of these opportunities. The process of gathering data without the use of brokers, bankers, branches and BDOs is inherent to our model, utilizing that data to futuristically be able to mine the data and make decisions about which clients we should contact for various opportunities with an e-mail message or a phone call to provide additional services. To use AI to manage our remote customer-facing staff, labor management is key. We currently use certain softwares within our organization that do this today to basically ensure that our staff is consistent and comprehensive in their messaging with our existing and prospective customers. Going forward, utilizing AI to aggregate and analyze data to be able to assist in making credit decisions and opening up a bank account is clearly within our future plans. On Slide #11, relative to the financial first quarter highlights, most of this data you'll be able to read in our press release. We're very, very pleased with how it rolled out. Once again, most importantly is the quarter-over-quarter comparison, '24 versus '23, $0.38 versus a core of $0.17 and $0.16 per basic and diluted common shares for Q1 2023. Important slide on #12, credit and risk management. Clearly, something that based upon our legacy history as a BDC using fair value and certain limitations to being able to move Newtek's Small Business Finance in the bank leaves us with accounting that needs a little bit further explanation. Newtek's small business finance is currently and formally the nonbank SBA 7(a) lender, which does not make any more 7(a) loans. All those loans are now made down in the bank. So Newtek's small business finance, it sits up with the holding company, has about 633 million of total assets at 12/31/2023, has capital book of $300 million. And the important aspect, if you want to track credit and trends, take a look at the fair value adjustment, sliding all the way across the 5 quarters, $33 million. Well, that's a big number. Here's the good news. It's already been written off. It's been written off the book. It's been written off of earnings. It's already affected our past earnings, and you're left with a fair value of $37 million. And if you run your finger back across the page, it's fairly stable over 5 quarters, hasn't moved very much. These are loans that most likely will, A, re-perform and get back into payment status, yes. Nonaccrual, small business loans frequently do come back into payment status. They still sit in this particular category or may sit. However, the important part is they may come back. Why? There's multiple joint and several personal guarantees on these loans, something that is not quite familiar to most banks or analysts or investors in this particular space. Also the $37 million most likely will, if it doesn't come back, the other choice is to liquidate the collateral. These are evaluated every quarter. We marked the collateral of the market. We estimate how long it's going to take to liquidate. Is it 6 months? Is it 18? Is it a tough state like in Illinois that might be 24. Is it a bankruptcy? We look at the fair value, we put the cost to liquidate, and we come up with a price. So nobody needs to go crazy over this if, in fact, these numbers do increase that this is a portfolio that's trading down. So as a percentage of the total assets in NSBF, arguably this is only going to get bigger because the portfolio is paying down quite rapidly of the performing loans. Here's the important part. We have this in our capital plan. We have this in our financial projections. This is not something that we're not new to. We own Newtek small business finance since September -- excuse me, January of 2003. So that's important to understand the nonaccrual portfolio, which is at fair value in NSBF. This is the nonaccrual. When you look at the accrual portfolio, it's priced assuming an approximate 8% charge-off over the life on a new loan. A season loan could be 5% or 6% because we've already experienced most of the charge-offs in the first 36 or 48 months. I would say 35% to 40% of the portfolio is, I'll say, 4-plus years old, all sitting in securitizations. The rest are probably vintage '21, '22 and a little bit in '23. Now let's go down the Newtek Bank. So past due, 31 to 89, $12 million. Oh my God, it's $12 million. It's really not that big of a number. It's 3% of total. Mind you, we sell off the government guaranteed piece. So if you would have kept that on the books and you used your percentages, it'd probably be 2% or some 1% number. The other thing to point out is we make loans in the bank that we sell. We originate 504 loans, which we've never had a charge-off on to date. Those loans go out of the bank. We originate them and sell them. The firsts and the seconds are taken out by debentures. The alternative loan program loans also are originated, they go on the balance sheet briefly, then they go into joint ventures. So when you look at these numbers, these numbers are consistent with our projections. They're consistent with our plans. You'll see our currency rate is, I think, 95.5% at the bank. Look, that currency rate could go down much lower. That does not return because we've had currency rates of 88% or 89%. Small businesses fall behind. Sometimes it's seasonal. Sometimes the owner gets sick and they fall behind. So these numbers are not extraordinarily high and they're within our expectations. The nonaccrual loans at $8 million in the bank. A little over $5 million of those are old National Bank of New York City loans. We'll discuss the character of those loans. We've looked at these loans. We've analyzed them with a $369,000 allowance for credit losses. It's not a big number. It is going to get bigger, okay? However, the benefit of this is you get a big gain on sale, you get a servicing asset and the performing loans are on the books at 11.5% floating a prime quarterly adjust. And, once again, our loan loss reserves north of 4%, more than adequate to be able to hold this. And we will be and have been looking at this every single quarter. I would say credit is not understood by the market for SBA 7(a) loans. We've been doing this for 20 years. We know it. We understand it. And we're very comfortable managing the greater reward that you get for the charge-offs and delinquencies that you're going to have in this type of portfolio. Slide #13 talks about quarterly lending activity. Obviously we crushed it in the 7(a) space, an increase of 35.9% over the prior quarter and the prior year. The alternative loan program, which is important to us, starting to get some nice traction, $53.8 million in Q1. We see that continuing to ramp as well our profitability. And in the total loan area, you're going to see in the bank, hopefully in the second quarter but certainly in the third or fourth, the bank's going to put on the more traditional vanilla, low margin, low risk, low loan loss reserve, low charge-off types of loans that most of the banks lend to. But that's not our thesis. We do believe in a diversified portfolio. We think that's important, and we will have it through the purchase or origination of what I call conforming CRE and conforming C&I loans in the bank. Slide #14 addresses the loan pipeline growth. Clearly, when you look at the alternative loan program on Slide 14, that's obviously our biggest delta that we have there. So as of the end of April, it's a nice pipeline of approved pending closing of $48.5 million. 7(a) business looks pretty good. I feel very, very good about where we are. At the bottom of Slide #14, you could see the alternative loan program closings through the first 4 months of the year, $61 million. You could straight line that and annualize it. We think it will wind up growing to bigger numbers. And that's part of our forecast. But we actually have forecasted that pretty conservatively going forward. Slide #15. Once again, the makeup of the portfolio is important at the bank. We talk about our currency rate, percentage of CRE composition. Obviously the National Bank of New York City portfolio continues to get diluted as a percentage. We believe in geographic and industry diversification through our Newtek sourcing. And clearly, our lending operation very scalable, that will continue to grow year after year. Slide #16 talks about that CRE portfolio at Newtek Bank. I'd like to draw your attention towards the bottom end of Slide 16, once again, important. There are a lot of banks out there that would certainly trade by weighted average LTV for a CRE portfolio at 59.4%, and look at these lower numbers on multi, office and retail. That's driven up a little bit by the 504 lending of which the second lien gets taken out by debentures. Slide #17. Okay. Is gain on sale a reoccurring event? Well, the numbers don't lie. So let's focus on sort of what I'll call the near-term history, 2021, 2022, 2023. These are big numbers. So to tell me this isn't going to be reoccurring 5, 10, 20 years from now, you're still going to see these numbers at NewtekOne, all right? These numbers are -- they're there. We make loans, we sell them. I mean if the math ever changed, and I haven't seen it in my 2 decades of experience in the business where it didn't pay to sell the government piece, we might hold it for income. But the highest return on assets, the highest return on equity is clearly by selling the government guaranteed piece. And these are the cash premiums. Important to note for non-SBA 7(a) aficionados, anything you sell to the 11 pool assemblers above 110, the premium gets split 50-50. So when you look at the weighted average net sales price, you could see it down in the far right-hand column on Slide #17, the average over this time, 11.34% (sic) [ 111.34% ]. If you go to the next slide, the first quarter is pretty much where we've been at the 10-year average. So I mean it can go a little lower, it can go a little higher, all manageable for us in managing our business. Slide #19, everybody always forgets about the payments business. It just generates a lot of income and a lot of cash. The forecast for 2024, which we're comfortable with pretax income, $16 million; EBITDA, $16.6 million. So nice growth from the prior year. Also important to note, this business is not factored into our tangible book. That's just accounting. It was basically put in pretty much close to 0. I'll just leave it at that. And when we were holding this as a BDC and it was being marked to the market, I think we had valuations net of its debt on NAV of about $115 million. So I had one investor say, "Well, gee, did you lose all that money in equity?" No, that's just a change of accounting from NAV to bank accounting or book value accounting. And obviously it's one of the reasons why we continue to educate our analysts, our investors on a regular basis. There are a lot of accounting changes. But I think people are starting to get a handle on this and it's going to become easier to follow. Slide #20 is a breakdown within Merchant Solutions. Slide #21 is indicative of the dollars that we've recently spent to bolster our accounting and finance and compliance team. I think you could add about another $800,000 of expense to this number, which is factored into our projections. Once again, we don't aim to be a $1.5-billion bank along. This is a business that is built for scale. It's a business that industry participants are going to look at and go, how do they raise deposits without bankers, branches, brokers or BDOs. How do they make those loans the way they make them? How do they those loans at those prices? How do they do this business? It's technology. The utilization of technology and dedicated staff willing to adopt to that technology or I should say adapt to the technology and continuing to add to make sure that we could manage our risk, be compliant, have the right policies and procedures in place. I will point out, once again, when you think about where we started with a 61-year-old bank that had really no ability to open up the deposit account unless you went into the bank, loans were made primarily through a brokered network, so we had to put a lot of things in place. Well, that was 2023. We're still doing it. So against the backdrop of a lot of headwinds, this is a company that's building a business for the future to be a technology-enabled organization that could provide superior solutions to a huge economic engine and demographic in the marketplace, the independent business owner. Scott, if you can go over to Slide #22 on the financial projections, that will be appreciated.

Sure, Barry. Slide 22 outlines our updated guidance for the remainder of 2024. Many of the KPIs that we assumed and disclosed in our call in March remain unchanged. Our forecast assumes no change in interest rates, consistent with prior quarter, and we expect loan demand to hold in. We did widen the ranges for Q3 and Q4 in light of the soft landing the Fed is trying to pull off, again the future of interest rates being data dependent. There are 2 items I want to point out regarding our results relative to our March forecast. First, our net interest income and provision expense came in on top of our expectations. And second, our noninterest expenses for the quarter came in slightly better than we forecasted. Barry, I'll turn it over to you.

Thank you. Slide #23. I did make some comments about the 2023 calendar year and the investments that we made. I think I've covered most of this. Once again, against a lot of headwinds in 2023, we are very pleased and proud of our performance and the fact that we could now, with a little bit less on the headwinds, be able to continue to grow the business with a forecast of $1.85 to $2.05, which we think is conservative for calendar year 2024. 2024 initiatives, to continue to grow the Newtek Advantage and increased impressions. That's going to go along with our ability to bring in commercial transaction deposits. We added about 17 heads in the commercial deposit area in Q1 2024 with another 2 coming in in April. Most of those heads are used for the back office of accepting transactional deposits, customer service, teaching people how to use the technology, making sure we're compliant, making sure we can surveil, all that stuff. So a major investment, all of these expenses are part of it. What will that lead to? Future growth in 1% commercial DDA and 3.5% commercial money market, which will come in from our payroll businesses, our merchant businesses, our lending business, which we started to get some traction towards the tail end of the first quarter 2024. You can't just be in that business without having the people, process and the technology in order to make sure we were able to do this in a compliant manner because you don't want to make a mistake in this particular early stages. I know financial people, and I happen to be one of them, so now, why can't you bring in more of this cheaper deposit money? Well, we will be. It will be. And it's something that we will be delivering on, and we talked about this in previous calls, modestly in Q2 in 2024. But you'll start to see those numbers turn in Q3 2024 and Q4 2024. And we believe that our account, which charges no service fee for the account, no ACH fee, no wire fee, will earn that business from the customer with an interest-bearing rate. Our competitors can't do this. Why? They don't have the asset that they could put on the books on a risk-adjusted basis that are floating rate asset liability manage to make this thing work. So our business model is unique. It works. It's worked historically in our career for those shareholders that have been patient. You've got to please excuse the transition, but it is working and our first quarter results are indicative of that. We also look forward to NetSuite, a new financial reporting platform, that will enable us to close our books earlier. I think that's the second half 2024 initiative and continuing to add high-quality people. '24, we're obviously going to be attending investor conferences. We plan on hosting an Analyst Day. I would say the date will be June 13, 2024. We'll put out a press release. We'll give people the opportunity to register, ask as many questions as you like. And we look forward to getting together with analysts and investors in our corporate headquarters in Boca Raton. We also believe in the second quarter of 2024 we'll be able to show a cleaner, more normalized year-to-year growth comparison without the tax effect that we dealt with in Q1. Continuing to maintain our dividend policy, and I think importantly, we exist to make our clients more successful. We exist to have a better experience for our clients. We exist for our clients to interact with their important business and financial solutions provider in a way that has less friction and to improve their business on a regular basis. Otherwise, we haven't earned it. Slide #25 gives a comparison where NewtekOne sits on market multiples, yield. Obviously if we look at these things, with the exception of the transition and a lack of understanding, to us these things don't make sense, but these have a way of working themselves out. Today's conference call is a way to get these things to work out, to get people to have a better understanding of who we are, what we do, what our numbers mean, and to stick to it. Slide #26. Most banks desire what we already have. They love to have a lot of noninterest income. They love to not have the interest rate risk management. They love to have NIMs that we have. They like to have the loan, but we've got all these things. Now it's important to continue to operationally execute on the strategy and get the message out. We're very, very excited about our future business. Raising commercial core deposits will increase margins, lower cost of funds. We do believe the Newtek Advantage, once we have those deposits, will become the gold standard in banking for deposit gathering because the customers want more from the institutions they do business with. They just don't want to give their money up and not get paid a fair rate of interest. We've overcome a lot of difficult hurdles. And while there are a few left, the finish line is in sight. Slide #27, before we go to Q&A, I mean you can't ignore these numbers. I mean you can, but I don't see how that's very helpful to ignoring the profitability of the bank and of the holdco versus our competitors in the marketplace. Eventually, there'll be a better understanding. People will get comfort that we can continue to raise deposits, continue to make loans, make sure that we're managing our risk and we have the right amount of reserves. Even though our losses are higher, our income is materially higher. And on a net-net basis, we have higher ROAAs and ROTCEs. We are excited about being able to bump our guidance up a little bit. We think that's conservative. We look forward to continue to pay dividends, which will be declared by the Board out of earnings. We have a current dividend yield of 6.8%. That's a bit of a head scratcher for me, but get it while it's hot. And I think it's important to note, Newtek is a growth-oriented, differentiated, technology-enabled business solutions company, and it's also a depository. And we look forward to opening up the Q&A. Thank you, operator.

Thank you, Mr. Sloane. [Operator Instructions] Our first question comes from the line of Crispin Love of Piper Sandler.

This is Brad [indiscernible] for Crispin Love. Can you just remind us some of the economics on the nonconforming loans that you're earning on day 1 in terms of fees you are generating there? And how much CECL reserves are you putting up as well on these loans?

On the alternative loan program, we historically called it nonconforming, we changed it to alternative loan program to make sure it's just better understood. Yes, you know what, I forgot to do the MD&A. I apologize. Let me answer this question, then we'll go back to Scott's MD&A. Sorry about that. So let me answer this -- your questions, and we'll go to the MD&A. So on the ALP loans, basically we're on the street today at about 3.5 points gross. We service for 100 basis points, and the loans are net to the joint venture at a price of 12%. So we're about 13% gross. We have A, B and C credits. We're 12%, 13% and 14% gross. Now regarding CECL reserves, they've done up at the holding company. So we have an estimated charge-off historically on those loans over that 3%. So given the profitability of the fees, the servicing and the funding from our joint venture partners, it does provide a generous return to NewtekOne.

And then just following up, I know you guys mentioned on the call, but on the SBA gain on sale margins, can you speak a little more on what is cap gain on sale margins elevating even north of 11% in the first quarter, which is higher than most peers? And how is the demand for your paper? How would you expect margin to trend through 2024 in the current rate environment?

So if you look at, say, primary competitor Live Oak who doesn't have the gain on sale margins, when you're basically originating loans through brokers and bankers, they work for the borrower. And it's much more competitive. It's much more manual. And because we're incredibly efficient, work closely with our borrowers, we're able to get better margins. We've been matching rate for 12 years. We don't cut it. We get to the borrower quickly. We get the data processed quickly. We make them an offer, and that's why our margins are better. Operator, I've got to apologize to the group. I messed up my order. So Scott was supposed to do his MD&A, and I'd like to revert back to Scott Price, if I can, before I do any more questions.

Yes, Barry, thanks. Real quick, I just wanted to head off the potential question. I just wanted to cover the changes in provision expense for the quarter. The provision expense is higher -- excuse me, lower as a result of the 7(a) production at the bank. We did have some first quarter charge-offs that we covered in our provision expense, but the majority of the provision expense, at least almost $3 million, was driven by higher loan balances. The remainder between provision for balances and charge-offs was some specific reserves. We feel like we're prudently reserved and are not concerned about the nonaccrual loans that we have in the portfolio. Operator, we'll turn it back to you for the next question.

Please stand by for our next question. Our next question comes from the line of Tim Switzer of KBW.

My first question is, could you expand on your comments about the gain on sale premiums here? And were there certain trends in Q1 that may be elevated the premiums and margins you guys are able to receive as the forward rate expectations moved lower earlier in the quarter? And did that cause you to maybe sell more loans than you typically would to take advantage of that? And should we expect to kind of step back down a little bit in Q2 since rate expectations have moved back up?

Yes. I do appreciate the question. I think that we check the markets fairly frequently. And at the moment, I would say they're fairly stable. You could take a look at what we have for cash premium. Now cash premium is also a function of, do you have longer-dated paper or shorter-dated paper. And if you notice, despite the fact that rates have risen, prices of the SBA 7(a) paper has gone higher. And that's because there is a tremendous demand right now for floating rate coming down to favor off the short end of the curve. So forecasting the prices of the premium is not an easy task. The question that came in earlier I think is important relative to on a competitive basis, we do this business in a more efficient, quicker, frictionless manner that allows us to get a wholesome price from our client and get the business close relative to the volatility of pricing. As I mentioned previously, we're kind of in the midpoint of the 10-year range of where prices can be. And that can fluctuate from one side to another, depending upon whether you're doing 10-year paper, which trades anywhere from 109 to 112 to the 30 -- to the 25-year paper backed by commercial real estate, which could trade at 113, 114, 115 or higher. And then you're splitting a premium. So hopefully, that helps answer your question. I would just strongly suggest that you use the guidance that Scott has given on a going-forward basis to get to where you need to be.

Yes. And Tim, just to tack on to what Barry said, we sold in excess of what we anticipated because we generated more production. It's not a function of the market, but for production. So we are continuing to work on our business model, our operations, to put more units through the pipe, and we expect that number -- the pipe to grow so that we can produce more units. But the production this quarter is a function of demand and a function of the improvements we continue to make in efficiencies and had nothing to do with the marketplace or the pricing dynamics that you mentioned.

And could you guys also expand on your comments around the credit performance of the portfolio? And could you maybe review how like the seasoning of an SBA portfolio trends over time as the portfolio matures? How should we expect delinquencies and NPAs to trend for the bank portfolio that has more recently originated versus the NSBF portfolio that's currently held for sale?

Yes. I think that the loss curve on a 7(a) portfolio, which we have 2 decades of experience, is at its highest point between 18 months and 40 months. You probably have -- and I used the word loss curve. That's probably the point where most of the loans would go into the fold. Based upon our accounting at the bank, you would then be marking that to market in an unrealized loss. So it's fairly current and up-to-date depending upon whether we believe these loans are noncollectible based upon the collateral or they can't come back and re-perform. I think it's important to note that when we -- and I'll let Scott talk about how we do our CECL calculation. First of all, it's a -- on the 7(a) portfolio, it's a current value provision for a future event. So we're using approximately 8% that gets discounted back. I'll let Scott go into this. But that's reevaluated every same quarter based on what we see, complicated processes, models and third-party consultants that evaluate that. That's relative to the bank's CECL reserves and where we are. And I would tell you that our CECL reserves are much higher than our competitors in this space. Scott, do you have anything to add or subtract to that?

No. I think you -- the only thing I'd add is that as we project out our losses, we do have probabilities of default and losses given default that we expect, right? And that curve is based on, as Barry referenced, the 20 years of history. The bank portfolio is coming up on one year old. And so to connect the dots for everybody, with credit kind of peaking for a loan at between months 24 and 40, you can expect that nonaccruals, nonperformers, past dues, have the opportunity to increase from here. That's expected and we're prudently reserved for those. So if you contrast that in the bank with more of a traditional bank accounting model versus the fair value accounting model that we have, we project out losses. So we basically -- when we fair value our loans, we project losses, we reduce cash flows for those and then we discount those back. So the losses are essentially already captured in the fair value marks, as Barry pointed out, particularly on the nonaccrual loans. And our loss rates that we're assuming on the performing portfolio are in line with the same loss rates that we use for our CECL reserves.

Yes. And I want to give you an example of the situation. Borrower takes a loan in 2021 or 2022. It's a floating rate loan. They've now experienced several hundred basis points of what I'm going to call a rate shock. And they necessarily haven't been able to adjust to it. It may be in current months, higher for longer has put stress on this. But I got to remind you, this business owner has personally guaranteed joint and several every 20% owners. There's multiple guarantors on many of these loans. In certain cases, they've got personal assets might as well as business assets. So even though they fall behind and they're delinquent, as we work with borrowers, we have a very smart and aggressive servicing group. We'll encourage people to liquidate collateral, stay current because it's the business that's a form of repayment. It's very different than a CRE loan that's not recoursed, where if it goes upside down, okay, unless my equity come flipping the keys. Or, for that matter, a consumer loan on a car with the value of car is upside down, I'm unemployed, I have no way of coming back. So I think our 20 years' worth of experience in managing the portfolios, understanding that these are businesses with personal assets behind it, extremely important. And we do anticipate -- and I'm glad Scott brought this up. First of all, it's a brand new portfolio. So the fact that we finally have some delinquencies and some bad loans, well, we started off, they're all new loans. So of course, they're going to get worse. But this is not something that we don't have experience managing. We've managed it for 20 years, and our loan loss reserves are for the next year or 2 for the term of the loan. And we have done securitizations 12x, 13x in this particular space that are modeled on Intex that give us the data to be able to understand the scenarios of performance in this particular space. So hopefully that is also helpful. I won't argue that it's very hard for you and others to figure out what is this going to project to. You do have a management team that is very much aligned with the interest of the shareholders. Take a look at our proxy, our bonuses were for last year, see what our stock ownership is. It is important to us, it is something we've done building a business over 2 decades.

Are you able to quantify maybe the pace of increase over the next -- I mean, if your loan portfolio, the weighted average life is less than 12 months, charge-offs don't peak until at least 24 months or so. Can you project that the pace of increase, the charge-offs, as we move over the next few years? And where does it peak? Is it at that 350 ACL mark you talked about in the press release? Or how should we think about that?

I think you'll have approximately 70% of the charge-offs within 18 months to 40 months. Now if I would have said that prior to COVID, I would have been dead wrong. Because COVID created PPP, tax credit programs, EIDL loan. So -- but on the loss curve, the new business typically does not default early, okay? And that's when from a seasoning perspective, you're going to get -- holding everything else constant, that's when you're going to get most of the write-downs.

And just to tack on to that, Tim, we would expect the charge-offs to kind of level out and stop increasing if all economic conditions are equal.

Our next question comes from the line of Bryce Rowe of B. Riley.

Sorry to belabor the call here, but I do want to try to get a couple of questions in. Number one, I mean, I think you guys alluded to this in some of the prepared remarks, but expenses have gone up as you kind of built out the infrastructure. Is there any maybe like nonrecurring in this level of expenses, whether it be in the salary and benefits line or in that professional services line? Just trying to get a good feel for how the expense -- the operating expenses are going to run obviously acknowledging that the balance sheet is going to continue to grow. But just trying to kind of calibrate what the expense growth might look like.

I think price -- and I'll let Scott finish up on this. This year, as a percentage of revenue, we're probably going to have the peak amount -- well, we hope this will be the peak amount of expenses as we continue to build our processes, continue to make sure that we've got all the right things required for a scalable technology-enabled bank to compete in a different way in the marketplace. So we're hopeful that we start to get the benefits of operating leverage in 2025 and beyond. But we think if you look at all the bodies we're bringing in here, the software, the consultants to help us make sure we're doing exactly what we need to do, we -- I talked about headwinds in 2023. They're a little less, but still fairly strong in 2024. That's factored into our EPS forecast. And we think we'll get better margins next year in 2025. Scott, anything to add or subtract to that?

Yes. Bryce, it's a good question, and I want to reiterate what Barry just said in that we do have an expense forecast, and it is included in our guidance. And so we assure you that the forecast includes the current quarter and future quarter expenses. I will say, just to add on to what Barry said and maybe slightly modify it, we will have increased expenses from here. But the returns that we're going to be earning are going to definitely outweigh any expense increases we have. So I don't want you to think that this was a surprise to us. As I said earlier, we're slightly better than where we forecasted. I'd point out that -- and reiterate what Barry said, we are continuing to invest in our operations teams, whether that be in lending, whether that be in deposit operations, whether that be in some of our fee generating businesses. We had headcount increases across all of those. And we're investing for the future. We're investing for higher margins in the way of rolling out our business deposit products so that we can ensure that we comply and we keep in the middle of the road with respect to regulation. And then I'd point out that there are some seasonal aspects to this. We did have payroll tax resets this quarter. We had one month of merit increases that went in. So we'll -- you'll see a follow-through increase in the future. And then we also are looking at a pretty outsized performance year in terms of EPS growth. And we're -- in order to be able to keep this institution operating like a much larger institution than it is, we're going to have to make sure that we are competing in the talent work. And so we factored all that into the forecast. This is not a surprise to me. It's not a surprise to Berry. And I think we're on top of it. As it relates to one-time items, I would say that there was a slight bump quarter-over-quarter in professional. Most of that was due to our annual audit. But we're rationalizing our expenses as it pertains to audits, financial accounting, compliance, and expect that we will not have a repeat going forward.

And then maybe a question about kind of capital structure on a consolidated basis. I mean you all were talking about nice deposit growth at the bank. Just -- and you're also talking about increases in the alternative loan program and assume those will kind of make their way over to the holding company's balance sheet as opposed to sitting at the bank when it's all said and done. Can you talk about how you're going to fund that at the holding company level because I assume the deposits have to stay at the bank?

Yes, they do. And I think, Bryce, that we have expectations of being able to use debt up at the holding company. We do have room to be able to do that and that's where we'll be able to fund our growth in addition to creating new joint ventures to be able to fund the alternative loan program business. The capital is primarily needed for that and not much else at this point in time.

And then, Barry, when I look at the balance sheet that you lay out on a consolidated basis, and you've got several different buckets of loans, a couple of which are held for sale, I think we can all identify what is held at the bank and held for investment bucket, amortized cost. But will those migrate eventually into the balance sheet of the joint venture? Just trying to identify what each of those buckets actually are.

Yes. And Bryce, it's a good question. I think that our goal, sans the alternative loan program, is to have all the lending done in the bank, all right? Very little, we have some legacy loans still at the holding company that will pay off or get sold, or file for construction. But for the most part, the only thing that would be at the holdco in lending would be ALP, and the rest of the activity will be down at the bank where we get lower cost of funding and obviously better leverage.

Our next question comes from the line of Christopher Nolan at Ladenburg Thalmann.

Thank you for including the detail in the asset quality in this quarter. Very helpful information. Barry, from your perspective, where do you see the bank sector going in general?

It's a tough industry. I'm just going to be frank with you and this is from somebody that just got into it. So I always try to answer honestly and transparently. It's an industry currently that right now, it's feasted on low-cost deposits. And it's far easier to move money today from bank to bank and doing it on your phone. And even corporate treasurers are realizing, I only need to keep a couple of bucks in my checking account and I can move the rest of it into a money market account. I can just get the money back and forth so that the deposit side is where banks have made money, not on the asset side. And what happened in '08, '09 is the regulators in the banking industry said, "Okay, we've just got to really tighten up on the risk profile for credit." So everyone's piled into the small bucket of car loans, residential mortgage loans, CRE loans, C&I loans that don't have a lot of margin. So I think I'm talking about an interest rate I just got into. It's start going to be an easy industry to make a lot of money in.

I was thinking more along lines sort of where do you see the healthy industry in terms of asset quality and so forth, given there are a lot of concerns about commercial real estate in general?

Okay. I think that the industry will be able to get its capital. I do not believe short rates are going to remain here for that much longer, and that's going to reduce the pressure on CRE assets, which is really where -- right now, there's the 2 problems with the industry relative to health and that would be CRE, and that's very much rate driven. And the other aspect of it is obviously asset liability management because as long as bills are yielding 5%, there's going to be more pressure to migrate money into government guaranteed money market funds versus bank account.

[Operator Instructions] Our next question comes from the line of Steve Moss of Raymond James.

Barry, you mentioned -- or maybe it might have been Scott, that with regard to SBA originations here that you were kind of like, I guess, what’s the effect of driving efficiencies. Given your guidance here, holding it steady after a strong quarter in my mind on the SBA origination front, just kind of curious if maybe internally, are you at capacity in the short to intermediate term for your SBA originations? Just kind of curious as to why that number is being revised higher, to put it that way.

Yes. No, Steve, I'm looking for the loan pipeline for 7(a). And it's up on pre-qual 15%, in underwriting 54%. Now the accrued pending closing is pretty flat. That's because we're becoming more efficient, and we're getting the loans in and out quickly. But no, we are not at capacity. We've gotten more alliance partners that are realizing we could help put them in the business, help them make loans either for their license or ours, and the business model of us using alliance relationships and getting referrals continues to grow and outperform the BDO broker and banker model.

The only thing I'd tack on to that, Steve, and it's a good question, the -- where we are in terms of soft landing, no soft landing, what's going to happen, it feels a little bit early to increase our production for the year in light of that uncertainty. So we decided that was the most prudent course of action. Could there be upside? Sure, but depending on where the economy, it could easily go the other way. So that was the thought process.

And then in terms of -- just circling back to the seasoning of the portfolio, I hear you guys in terms of the 8% loss content discounted back. Maybe just kind of thinking about it, delinquencies, if I look at them here on a trailing 12-month basis from loan balances around roughly 9%, call it, curious how we think about as things season and you hit whether it's the 18- to 40-month time range, what is kind of like that peak delinquency number you guys expect, kind of the peak nonperforming type number in terms of the originations or the portfolio?

I mean you could see what I'll call, the currency rate on that portion of the portfolio. By the way, that's going to be blended in with the AAA quality loans that banks normally do that have got low margins, et cetera. But I mean, you could see the currency rate at 90 plus or minus. We hope it doesn't get there, but that's not inconceivable. But that's over time. And I would tell you for doing this for 20 years on lower volumes in the earlier phases of our life, we've seen it. That doesn't mean that you're going to have extraordinary charge-offs. I think it's just trying to say that if you do see it, you don't need to head for the balcony or the wind to focus because the loans are purse-guarantee, there's collateral behind it, and it's within the realm of what these charge-offs are. The other thing too, Steve, is when you're looking at the charge-offs, these are spread out. It's a big number, right? But these are spread out. These are not bank loans that are doing 2 years, 3 years or 5 years. These are spread out over fairly lengthy periods of time, and we're actually putting new business on an old business on. Once again, we've got all the models after 20 years of doing this to be able to really analyze the static pool to make sure that we've got the right reserves against these loans.

And then just one more question on the business check-in and business money market you guys are rolling out here. Just kind of curious did you share any thoughts on internal targets you may have for those products? Or how you're thinking about that performance over the next 12 months?

Scott, do you want to share some of those numbers if you have them?

Yes, Steve. So we expect to roll out in earnest, we have run a pilot with some select customers. We've got $20 million of balances, I believe, as at quarter end. We believe that we can generate $150 million of business deposits and that could be on the low side. The high side could be, $300 million is not inconceivable. What I'd say is the real question that we're going to be grappling with, as we get to know how this product performs with our customer base, is what kind of retention we have on those funds. And that's something that we're going to be learning as we go along. We've certainly put our best foot forward in estimating how much a typical customer will retain in our bank. But we believe that, that is our key to profitability improvement going forward, to Barry's point, offering products and services to small businesses what we do. We invest in America. And we're confident that the innovation of the American business person is going to continue, and we want to offer products and services to enable them as much as possible to succeed. We will have features with our -- with this product that we believe will be competitive, particularly on price. Certainly, we don't have the same budget as some of the big guys do with slick apps and interfaces, et cetera. But we believe price is where we can compete, and we can make -- we can give business owners opportunities to work in their business instead of on their business. So that's what we believe we're going to offer with this product, like I said, anywhere from $150 million to $300 million, plus or minus. And so we're going to see how it plays out, and we'll be updating the market as we move forward.

This does now conclude our question-and-answer period. I would like to pass it back over to Barry Sloane for closing remarks.

Well, we certainly appreciate everyone's attendance, the thoroughness of the questions. We've obviously tried to work hard to condense it, but there's a lot of information that, obviously, the marketplace wants. We want to make sure that you have that. And feel free to e-mail or call with any other questions you might have. But once again, thank you for your attention and your thoughtful questions. We appreciate it. Thank you very much.