Good day and thank you for standing by. Welcome to the NewtekOne Incorporated Fourth Quarter and Full Year 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloane, President and Chief Executive Officer. Please go ahead, Mr. Sloane.

Thank you, operator and appreciate everyone joining today. Good morning. My name is Barry Sloane President CEO and Founder of NewtekOne. I'll be doing the call today from Las Vegas, Nevada, where I'm at a Structured Financial Association Conference for asset backed securities. And I certainly appreciate attending the call with me today is Nick Young, our EVP and Chief Accounting Officer. Also Nicholas Young, our President and Chief Operating Officer of Newtek Bank National Association, and John McCaffrey, our Chief Financial Officer of Newtek Bank National Association. We're excited today to close our chapter out. As a Business Development Corporation, this will be the last time that we're reporting financial results. As a BDC, we withdrew our BDC application with the SEC on January 6, when we acquired Newtek Bank National Association. And on a going forward basis, we'll be reporting as a financial holding company which has been for a little less than approximately 60 days for now. Most of today's call will focus on our final financial results as a BDC, as well as our forward projections as a financial holding company extremely important, as well as a dividend declaration that the company just made for its first quarterly declaration as well as a potential forecast of dividends going forward. So I think today is a watershed mark the transformation that many of you have been waiting for is finally complete. We've had a lot of things that have been transforming, shareholders have been transforming, operations have been transforming, capital has been transforming quite a bit of movement. And we certainly look forward to beginning to pick up new analyst coverage. We picked up one this week. So, we finally are getting bank analyst coverage to be able to follow the company. I would like to clarify…

Thank you, Barry. Good morning, everyone. You could find a summary of our fourth quarter 2022 results on Slide number 43 as well as the reconciliation of our adjusted net investment income, or adjusted NII on Slide number 45 and 46. For the fourth quarter 2022, we had a net investment loss of $5.4 million or $0.22 per share, as compared to a net investment income of $1.6 million or $0.7 per share in the fourth quarter of 2021. Adjusted net investment income which is find on Slide number 44 was $1.5 million or $0.6 per share in the fourth quarter of 2022 as compared to $16 million, or $0.66 per share for the fourth quarter of 2021. Focusing on fourth quarter 2022 highlights, you recognize $23.1 million of total investment income, a 6.9% decrease over the fourth quarter of 2021 total investment income of $24.8 million. The primary driver of the $1.7 million decrease in total investment income was primarily due to the $4.6 million of dividends from the portfolio companies in the fourth quarter of 2022, as compared to the $9.8 million in the fourth quarter of 2021. In addition, interest income increased by $5.2 million resulting from a year-over-year increase in the accrual loan portfolio, combined with the Prime rate increases in the calendar year of 2022, which increased 425 basis points year-over-year. Servicing income increased by 27% to $3.8 million in the fourth quarter of 2022 versus $3 million in the same quarter in 2021. Distribution from portfolio companies for the fourth quarter of 2022 totaled $4.6 million, which included $2.6 million from NMS, $1.5 million from NBL, our 504 business, 360,000 from NCL our conventional loan joint venture, and 125,000 from Mobil Money. Focusing on total expenses for the fourth quarter of 2022, which increased…

Thank you. Operator we'd like to open this up for Q&A.

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

Thanks. And good morning, Barry and Nicholas. First off just looking at your targets and origination volume targets. You're expecting significant balance sheet growth with growth in non-conforming C&I from $600 million in 2023, to about a $1 billion in 2024. I'm just curious how comfortable you are with those targets, specifically the non-conforming to C&I just as it implies significant growth and ramp, and then just kind of more broadly growth on the balance sheet, just as the credit quality outlook remains uncertain here?

Sure, I would say this. So far, what we've seen relative to this particular segment of the market, a lot of borrowers that would normally go to a bank, and the good strong borrowers, they can't make the debt service coverage ratio based upon the three or five-year repayment terms of bullet. So we're really getting better quality borrowers to go into this side of it. So one could look at this and go, gee, you've never done it before. Well, we're okay with that. We're very comfortable with what our pipeline looks like and our ability to get it. We think a majority of this is going to start flowing through in the third and fourth quarter as our pipeline builds. On the flip side of it. We've probably been more conservative on the 7(a) side. So I think that we certainly could make things up on the 7(a) side, but typically, the non-conforming book does tend to be better credit. So we're more comfortable and would prefer to hit these numbers and targets and put this on our books and reduced and be a little bit more picky on the 7(a) side. But we do have the flexibility to go in either direction. So we're not totally uncomfortable with the exit numbers. Mind you, we're projecting up two years in a market where the five-year treasury moves by 50 basis points in two days. So not an easy thing to project, but we do it, we've done it for ‘23 as a public company, and we're comfortable with it. But I would, I would comment that if there is something that is less proven, it would be those volumes. But on the other hand, the ability to do these 7(a) numbers, and the 504 numbers is fairly muted as well.

Great, thanks, Barry. That's helpful. And then I guess, just the drilling a little bit deeper into credit quality. I know, you said that you might be a little bit conservative on the 7(a) volume side, but say it can grow non-conforming as much as you'd like and have to grow or grow the 7(a) side a little bit. Curious, what's your kind of big picture views are on credit quality, over the near to intermediate term? And then just related to credit quality as well. I saw on slide 27, you give the non-accruals as a percent of loans at fair value. I'm just curious if you have that number on a -- at cost basis as well?

Well, I think Chrispin as a BDC that look at the history. We’ve always had a fairly healthy in this space non-accrual number, because it's just a function of these types of credits. On the other hand, you do get paid for making these types of loans with respect to the coupon and the government guarantee and the gain on sale. I think, when we look at the current environment. It's amazing. The three and change weeks ago, people were thinking of rate cuts. Well, all of a sudden, three weeks later, they're going through the rate cuts to rate hikes. And it's like they went right through is there a middle ground? Like they raise rates a little bit more, they stop and hold it for a year or two, which is probably the likely scenario. We do not see like a braking economy. We see a slowing economy. We see certain sectors performing better than others. But no, we're not looking for -- this is not '08, '09. There's a lot of liquidity in the system. And our customer base has gotten a lot of support from EIDL loans, from PPP loans and ERC tax credits. And many of the individuals get government support as well. So we think our customer base is pretty liquid. And obviously, we are forecasting higher defaults that we've had historically, but we think we're fairly well reserved. And when you take a look at our numbers going forward from a CECL perspective, we'll have some pretty hefty reserves in that particular calculation when the loans are done on the bank using CECL. As a matter of fact, when you do CECL, which is one of the reasons why the numbers ramp, you get fairly -- you get hit fairly heavily when you make the loan because then you have the lifetime accrual and you're not putting the loans on the books at a premium anymore, you're putting it on at par, which is different than fair value that we've experienced historically. So hopefully, that gives you some background that answers your question.

Yes, yes. Thanks, Barry. That’s helpful. But just one on the nonaccrual as a percent of loans at cost, curious if you have that number handy?

I don't. I'd have to pull that out of the queue. It might be 1% or 2% higher than that number. We've written these down from a book perspective, that's important to note, and from a taxable income perspective as a BDC.

Great. Thank you, Barry. And I appreciate taking the questions.

And our next question comes from the line of Paul Johnson with KBW. Your line is now open.

Yes, good morning, Barry. Thanks for taking the question. So I just wanted to kind of clarify your comments as well as what's in the slide in terms of what your expectations are on your expected return for the JV investments. You kind of talked about a 20% to 30% consolidated net return on the JV. Is that going to be -- are we talking about the same thing as the return on your respective equity investments in the JVs? Or how should we be thinking about the return on those as you guys ramp that going forward?

The way to think about that at this point is those returns are based upon income that's generated at the bank, the fee income and servicing income going forward as well as the equity in the JV. So the equity in the JV would be a subset of the total amount of income that's generated from the activity. Important to note that we really get a lot of leverage out of our intake. So we take all those referrals, and some of those referrals now go into non-conforming. Some going to 504. Some come to 7(a). And they get dispersed based upon borrower need investment for the customer, and the fee income would go into the bank. The servicing income would go into the bank, and that starts to pick up because you start to put 100 basis points of income on, and you do that going forward. That kind of compounds and ands on each other creates a nice growing stream of income. So as you and others, Paul, we appreciate you writing on us as a bank. Obviously, you are a BDC coverage, so we appreciate that. But you'll start to see the stuff starts to ramp going forward, particularly when you look at, for example, the CECL. You do a loan in Q3 and Q4, you've got a huge loan loss reserve. And you haven't got the coupon for a couple of months, right? So because you're not valuing in fair value, you're taking the hit, and that starts to flow through in the following year when you've got a really nice high coupon versus your cost of funds and your margin starts to pick up. So this is new accounting. It's new modeling. And we look forward to questions like you've asked today because it really will shine a light on what we're trying to do going forward and how this business model is going to be very advantageous to our shareholders.

Got it. Okay. Yes. So I understand it's -- obviously you were talking about 20%, 30%. We're looking at the bigger picture of what you're generating off of those portfolios for the business.

Well, thank god today, everything consolidates. So we don't have to deal with portfolio companies. Everyone is going to be able to look and have full transparency into how all these businesses are doing, and they're going to be segmented in the Ks and the Qs. And you guys are going to be able to model the business and have a better understanding of the full value creation far more easily using consolidated accounting and the right segment reporting than you historically have been able to do as a BDC. Not that the BDC is bad, but all these businesses were based upon fair value. And we reported that way, and it worked well. But now we could take advantage of lower cost of funding, diversified liabilities. We can diversify the loans that we make because now we can also add higher quality loans, which to the book will minimize on a total basis and types of loan losses. But at the end of the day, we make money on both. We'll make money on a tight margin that has 15 basis points of charge-off a year, which is what most banks do. But most banks can't grow their business because that's their whole portfolio. They're locked, we’re making residential loans, car loans. They really haven't developed the expertise that we have in these greater risk/reward type opportunity. So that's kind of where we look to hang our hat and make our mark. And then down the road, we're more effective in the deposit category, which we hope to outperform what we stated that we're going to do there. That will also pick up. So we have real good aspirations with respect to really benefiting from lower cost deposits with all the bundled solutions that we have coming out of the Advantage, diversifying our lending book to have A credits as well as less than A credit in the SBA business. So I think we're well set up for the future.

Thanks for that, Barry. Just a few more questions. I was wondering if you can, what is the update on the PLP being transferred into the bank? Or basically, what's the status with that? I mean is there going to be a need to reapply for anything? Any sort of renewal process that needs to take place and I guess how you're currently working around that?

Yes. It's in motion. And the employees are now in the bank. The loans are still being made generally out of NSBF, but we've begun to get approvals in the bank. We have funded 7(a) loans in the bank, but they're done GP versus PLP. We anticipate that transitioning over in the very near future.

Got it. Okay. Thanks for that. And then I'm just sort of wondering, it might be nice to know, and if you don't have and you can't share at the time, that's okay. But I'll ask, do you guys have any sort of stats you could share as far as service utilization of clients, customers that you guys have? What are, I guess, sort of some of the comments of crossovers opportunity of services you might have to offer between your borrowers and clients for other parts of your company?

Not at this time. It's something that we will look to report. The deck is now 40 pages-plus. And I will say that, that has been a greater challenge historically, which is one of the reasons why acquiring the bank and rolling out the Newtek Advantage is going to enable us to have business owners go to their dashboard, their business portal, which being the Newtek Advantage. Oh, gee, I didn't know I can get insurance for you all. I didn't know I could store my documents with you. Oh, I didn't know I can get this payment processing information. Wow, you've got your own PLS system. So that data will become more readily available, and we'll report that. And obviously, where historically, we haven't been able to acquire deposits when we make loans. We'll now be able to do that. So a lot of things are there in the future, and we'll be able to do that. So we appreciate the question, and it's one of the reasons for our being to be the one company for a business to be able to do more things than just one thing with us. So we feel pretty good about that.

Sure. Last question, I leave there. Just wondering maybe to get your thoughts and you touched on some of the things, obviously, through your remarks. Just I guess how are things progressing now that the merger is closed? I mean do you feel things are on track? Do you think things are ahead of schedule? What are your, -- or I guess, your confidence in the projections you guys provided in terms of like efficiency ratios? And would you expect, I guess, provide any sort of incremental update there as far as your projections throughout the quarter?

Yes. I do think things like efficiency ratio, we'll be out there projecting -- and not projecting, but coming up with those numbers. Obviously, at the moment, you got a lot of things moving around. Like you just brought up, for example, the PLP status, right? So we had some income in the first quarter that might go to NSBF that would normally be in the bank. So I think in the second quarter and the third quarter, you'll get a better sense of income and expense being put together. We obviously do have Reg W policy and issues that we'll be dealing with as well, but we'll be able to report that. Because I think when you think about our business model, brokerless, branchless, BDOs and bankers and the capital that we've got, we will be able to deliver really attractive efficiency ratios going forward. We're an organization that has people available to our clients. They're on camera. They have a personal relationship with these people. It's virtual, but that's the world we're in now. The world going forward is still our customers want to have somebody to talk to versus just typing data into a piece of software into an endless weight. So we'll be able to do that, and we feel pretty good about the business model. And really giving -- I mean we give a lot of information out. We've been complemented on that. We're going to continue to do that. So I appreciate the question, and that is really one of the values that we believe we're going to be able to derive. But I will tell you, it's a heck of a lot easier for me to get on this call and talk about it than to actually execute on it. So we have a lot of work to do, and we'll get there. We have a history of being able to deliver those types of results and do it. It just -- it takes time.

And our next question comes from the line of Scott Sullivan with Raymond James. Your line is now open.

Thank you. Hey, Barry, congratulations to you and your team. You guys definitely had the vision on the SMB opportunities at the time back then and building, I think, the best mousetrap at the time using the BDC structure. I kind of like an analogy here that you're graduating now top of your class from a sort of intensive master's PhD program and, again, kind of skating to where the puck is going, which I think might be the best structure of financial bank holding. So with that preamble, I've got a couple of questions. Really, how relevant is this Q4 report to the future?

Well, I think -- Scott, I appreciate it. I think that it's a mark in time, and it's really the handoff into the financial holding company. So we obviously -- we paid out, I think, a $17 million dividend on December 31. We paid the owner of the bank $20 million, pushed $51 million of capital into the organization. And that -- really, we have to get that done because that's what we put in our application. That's we have to deliver on. So I think that people looking at -- first of all, I don't know how people are coming up would be met or beat. I don't know where I got these earnings numbers from, but they didn't even for me. So with that said, as you sit here and look at the company today from an investment perspective, we have put out into the market that we have, a well-capitalized bank. We have a very well-positioned financial holding company. We're now regulated by two great regulators, the Federal Reserve and the OCC. Our status is positionally have a good pipeline. We raised capital in the markets in January, a pretty tough time to raise capital, both preferred from an institutional investor and bonds with our BBB+ rating. So we're in a good spot. Now we've got obviously a transition going on. We're moving people into the bank. We're changing payroll. Shareholders are transitioning despite the fact that we've talked for 12 to 18 months about a 4% yield without putting a dividend number on it because that would be imprudent. I mean today, we're able to cross over the concept of being imprudent by having the Board actually declare the number and declare the number based upon the earnings because it would be imprudent to really talk…

Terrific. And you touched on this a bit, but can you give us more color into the state of your customers, the SMB market?

Well, look, it's interesting in that our customers, they're affected. Everybody is affected. The employees are affected. Customers are affected. To state that nobody is affected by a 450-basis-point interest rate hike would be just ridiculous. So for people not to expect a reevaluation of assets is just silly. I mean I don't know where their heads are at. But it just doesn't work that way. If you went to college, you got to figure out the cost of capital is higher. You run it through the model, and the assets are worth less. It just is what it is. Getting down to our business customers. Look, I have to say our business clients are there. Operators are entrepreneurs. And through COVID, a lot of people changed the way they do things. They reevaluated their businesses. They got much more efficient. They got rid of things that were, frankly, wasteful because they were afraid they didn't know whether this is going to be their last meal or they can leave their house. So a lot of them got more efficient. On the other hand, a lot of them didn't. I say a lot of them, it's a small percentage on the extreme that are good operators. And they're going to have to deal with the fact that their interest expense is higher, and they're going to have to be able to make those payments. However, a lot of them really got bailed out by the government subsidies of those three programs. So they're in pretty good shape, and that's kind of showing up in our numbers. Although we do anticipate that we'll get back to more normalized historical charge-offs over time, and we think we've got the right math because we've done this for 20 years. So we've seen the stream '08-'09, and we've seen the pandemic numbers. So we think we've got the right numbers in our models and the right reserves, and we'll be able to manage this. And our customers who we speak to from a servicing perspective, I think we have people in our servicing department, so we're talking to our customers. Unlike most banks where they make a loan, they won't have a conversation. That's not been our school, and we are very communicated with our borrowers. And we're speaking to them regularly, particularly when we noticed that their payments are lower. We're CH money out of the account. The money is not there on the 1st. We know we need to make a phone call.

Fantastic. I appreciate that. And you might have touched on this also, but speak a little bit further on your pro forma on tangible common equity?

Yes. Look, I think depending upon how you define this, not including an adjustment. And if you include the preferred stock in there, you're probably looking at -- and I haven't done the calculation, but you're probably looking at $8 or $9, including the preferred stock in there. But that wouldn't be common, that's just equity. But I think that if you were to add back $170 million on 24 million shares, it's almost $6. So you could basically say it doesn't work. But then again, if you want to buy a bank at 0.1 book or a book or 0.8, there's, I'd say 8,000 -- there's 4,000 of them you could buy. They just don't grow. So if you want a growth organization, you're going to have to look at one like ours, where we have a payments business, a tech solutions business. And only so the businesses that generate reoccurring income that don't suck up capital. And therefore, they should be part of the valuation. But you shouldn't -- in the accounting, gaps as you 0 amount, or we could put them in with goodwill, but that's still not going to make it when you get to that tangible common equity. But then again, we don't have a balance sheet -- well, actually, I wouldn't say a balance sheet, we don't have assets that hit the balance sheet, and that's just the accounting treatment. So people, similar to how they understood us as a BDC and traded at a premium to BDC over most of our BDC life. I believe that we'll explain what we're doing, and we'll show the earnings numbers, and we'll keep growing those earnings. That's their desire. That's our forecast. That's our aspiration. And that's capital asset price. You grow the earnings, you grow the dividend. People are going to reward you with a higher stock price. They're going to get -- by the way, you've got to deliver the numbers. So it's not like we're saying don't put the price up there without delivering the numbers. But you start delivering those numbers, and you show earnings growth, which banks aren't able to show. You look at the return on average assets or return on tangible common equity at most banks, they're not near these numbers. So that's the difference. So we hit those ROAA numbers and the ROTCE numbers, price will follow.

Perfect. Well, again, congratulations, and best of luck.

Our next question comes from the line of Bryce Rowe with B. Riley Financial. Your line is open.

Thanks. Good morning, Barry. I appreciate the discussion here this morning and all the questions from the other guys. I wanted just to kind of dive into your sources of fee income that you lay out, I guess, on Slide 17, bank versus non-bank entities. I think you touched on this a little bit with Paul's question, but curious if you could just walk through kind of what the driver of the growth is at the bank. I would assume it's more gain on sale. And then the -- just the sources of non-bank fee income that you show there on Slide 17. Thanks.

Sure. Thank you. So the growth on the non-bank side is a lot of it is from the return on equity for the JVs, and we're going to put a lot of equity into that business. We don't show in the forecast material growth in payments, tech solutions, insurance and payroll. I think we'll get down to some more granular numbers going forward as we report the first quarter and start to put marks out there, but I do appreciate the question. In the bank, you're going to get growth from the SBA business. Though frankly, we muted the volumes, and we also have muted currently gain on sale numbers in the forecast versus what the current market is. But you're also going to get value from the servicing aspect of the non-conforming business and the fee income. So now in the event that were lower in those numbers, we will have lower capital raising needs up at the holding company if that makes any sense. So we'll be doing less issuance. We'll have more capital because there is capital that goes into the non-conforming business. It does eat capital because it's more of the traditional non-bank type financing, where you got to put up equity, you got a commercial bank line, you do the securitization. It generates great returns, but the capital is expensive. I mean down the road as a thought process of that business was never able to go into the bank, and it might down the road if we can get the regulators comfortable with our projections. We didn't want to do that starting off a bank. We just wanted to keep the bank very simple, very vanilla. But so far, our track record in history is pretty good. But right now, using commercial financing, that's…

Got it. That’s all I had, Barry, appreciate the time.

And our last question, one moment, comes from the line of Steve Alesio, Investor. Sir, your line is open.

Okay. I hope this isn't too low level for this discussion. Back in January for the bank savings account was supposed to be 4.15% and then gradual increases and CDs. And what it ended up with was the savings account is 4.5%, which is the same interest rate on the shorter-term CDs, 1, 3 and 6 months and then the 9, 12 2-year – 1 and 2-year CDs all have a 4.6% interest. And I don't know, did it just become an accounting nightmare to have all the different interest rates. I was just kind of interested in knowing why the change?

Appreciate it. And look, it's a very competitive environment right now for deposits. So at the moment, we want to make sure that we can compete. Those deposit rates are for consumer high-yield savings and consumer CDs. Our high-yield savings for commercial accounts is 3.5. And the CD rates, I think you'll see are going up. Now on a relative basis, it's still a heck of a lot better than the commercial finance rates that we've historically paid, which are currently 8.25, probably going up to 8 3/4 with the Fed's next rate increase. So I think from our standpoint, no, it's not -- thank god we've got a great CFO in John McCaffrey in the bank and Nick Leger as the President and the COO, keeping an eye on things. We've got the right software in place for the purchases coming on stream. So we're able to manage it's not a problem at all.

Okay. I guess I was just interested as to why they're all the same rate, though. It kind of didn't make sense to me when the change -- the plan was for them to gradually increase with the length of the CD. Maybe I didn't pose that very well?

No, I think you posed it well, and one might also look at the market and go, it doesn't make any sense either because the yield curve is inverted. And the overnight rate for banks is 4.5 or greater. 1-year treasury bills right now, I think you can get a 5% yield. So the only thing I can tell you is those rates are very much pegged to where the competition is in the competitive market for bank financing, not necessarily pegged to what you think a normalized yield curve should be.

Thank you. At this time, I'd like to hand the conference back over to Mr. Barry Sloane for closing remarks.

Well, I appreciate all the analysts we had. We are hopeful that we'll pick up coverage maybe 4 to 6 over time with bank analysts. And I think that's going to really help tell a story of a bank that's different, a financial holding company that's different and a company that's positioned to take advantage of the future, providing financial and business solutions to this particular important demographic. And I say that to be able to service independent business owners with feet on the Street sales force with branches, with commercial bankers. Business owners today, they want their solution on demand. They want to go online if they wake up late in the evening or on a weekend. They want to get somebody they could talk to on a camera. We're positioned well for that business in the future. And the products and the solutions that we have are frankly better suited to that customer today. So we're clearly ahead of the curve, we're ahead of our time, and we're going to grow into a really exciting company. We appreciate the following, the attention, and we appreciate all the analysts and investors that joined the call today. So thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Thank you.