Good day and thank you for standing by. Welcome to the NewtekOne, Inc. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in 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 first speaker today, Barry Sloane, CEO and President. Please go ahead.

Thanks very much, Gerald, and good morning. And welcome to our third quarter 2024 financial results conference call. Today’s call is hosted by myself, Barry Sloane, CEO and Founder of NewtekOne; and Scott Price, the Chief Financial Officer of NewtekOne and Newtek Bank National Association. Also joining on the call is Nicolas Young, President and COO of Newtek Bank. Once again, I want to thank you all for attending. We’re very, very pleased and proud of the results for the third quarter. I want to make a couple of quick additional announcements. As many of you have seen, we put out a press release recently that we have hired Ron Lay as the Chief Technology Officer for Newtek Bank, N.A. and NewtekOne, the publicly traded holding company. We’ve also added the staff that we put out a SEC document on this, CJ Brunet. CJ previously was CIO and CTO of the publicly traded Newtek entities and was also the President and CEO of Newtek Technology Solutions. So we’ve clearly added, continue to add to our star-studded staff of a management team to be able to help us grow, manage risk. We’ll talk about that a lot on the call, but particularly with respect to information technology. I wanted to thank the management team for putting up a great performance this year, as well as support from the Board. Today’s presentation will be a little bit unconventional. We’re clearly working very hard with analysts in the street to be able to better explain what a differentiated organization like ourselves looks like. We clearly have a differentiated business model and approach to both providing business and financial solutions to independent business owners in all 50 states, something that we’ve been doing now for well over two decades. And that unconventional approach leads…

Thanks, Barry, and good morning, everyone. Slide 28 shows our yields and rates. We experienced nice margin expansion resulting from lower deposit costs as we continue to bring in lower-cost deposits from business checking and business money market accounts. We raised debt in the public markets for two consecutive quarters to, one, refinance maturing issuance, and two, fund our future investments in our ALP loans. So as you look forward, I believe that you can expect to have higher balances, but that will result in higher loan balances as well, and that’s reflected in our guidance. Turning to Slide 29, we lowered our CD rates in July and saw a decline in our CD retention numbers, which was anticipated. This was partially offset by increases in our business checking and business money market accounts. We also saw some growth in our high-yield savings accounts, which has followed through the month of October. I’ll point out again that we managed to keep our average balances on borrowings down and the costs flat. And with that, Barry, I’ll turn it back to you.

Thank you. Let’s go to Slide #31, credit and risk management, one of the favorite slides out there. Important to note, I know a lot of you look at the trends, so I think what concerns some people was a trend from Q1 2024 in small business finance to Q2 2024. Please note the dramatic decrease. We just charged these things off. We realized sometimes you can’t fight city hall, so you just write it down. Not a big deal. Fair value went from $5.2 million to $5.3 million, $4 million increase. The jump previously was more substantial from Q1 2024 to Q2 2024. I think that concerns some people. Look, when we look at the fair value of these things, that’s just equity coming back to us. Those loans are going to get liquidated. We’ve got the gain on sale. We’ve got the servicing income. We’ve marked this thing properly. That doesn’t bother us. In a banking environment, we understand why that would bother us. Also, important note, these are done at the holding company, marked to the market, with a prospective 8% cumulative charge-off going forward, despite the fact that the loans are fairly seasonal. So we feel pretty good about this. I want to remind everybody that we have $281 million of shareholder capital. Now let’s go down to the bank. The $26 million in allowance for credit loans. I also want to point out that the charge-offs went from $800,000 to $1.7 million. That is not a big deal. Now, some of you are going to focus on the non-accrual health care investment. That is a classic thing you look at as a bank and you would find it to be typically alarming. But therefore, those non-accrual loans are marked and we’re comfortable that the charge-off…

Thanks, Barry. Turning to Slide 41, I’m going to focus my comments on the linked-quarter changes. Net interest income was up based on volumes of loans. I’ll remind everybody again that we raised debt in the public market for two sequential quarters and were able to deploy the proceeds efficiently to reduce leverage on our staging lines. The provision for credit losses was up on migration and non-accrual loans in the bank. I’ll remind everyone that the portfolio at the bank is a new portfolio, so non-accrual loans started zero at the beginning of the year and can only go up from zero. Additionally, we experienced net charge loss of 59 basis points as a percent of total loans for the quarter. That’s an annualized number. We -- but I want to reiterate that we have incorporated our credit assumptions into our forecast and our guidance and are comfortable with where we are. Non-interest income was relatively unchanged. So turning to non-interest expense, salaries and benefits was up approximately $1.9 million. Part of this was based on the decline, excuse me, increase was, I’m sorry, it was a decrease. The lower expenses and salaries and benefits was a result of lower performance based comp, as well as NTS reductions in force that occurred in the second quarter. Our professional fees were up mainly as a result of the NTS disposition, which is approximately $700,000, as well as the preparation of our tax returns. And then our other loan origination and maintenance expenses were up from higher volumes of loans originated, as well as higher serviced loan balances. Our other G&A increased on occupancy expenses and marketing expenses, increasing both $250,000 each. And then income taxes, as Barry mentioned earlier, was up $500,000 as a result of a discreet item from moving the NTS assets to held for sale. Shifting to the balance sheet, which we’ve covered mostly in the call, we did segregate the assets and liabilities associated with NTS and classify them as held for sale, given our agreement to sell them in the coming months. Our tangible book value per share was $8.93 and we believe the NTS disposition could provide $0.57 of tangible book value accretion, depending on the measurement of the consideration at the future closing date. With that, Barry, I’ll turn it back to you.

Thank you, Gerald. We’d love to take questions from our audience.

Thank you. [Operator Instructions] Up first, our first question comes from Crispin Love from Piper Sandler. The floor is yours.

Thank you, and good morning, everyone. Just first on the news of the week, can you just discuss some of the specific ways that you believe a Trump presidency can benefit Newtek? Banks absolutely rallied yesterday, including Newtek. So curious if there’s anything specific to Newtek where you’d expect the company to benefit, whether it’s related to small business overall growth or anything else pointing out, and if there could be any headwinds in a Trump presidency as well? Thank you.

Thanks, Crispin. Yeah. I think the biggest item relative to, I’ll use the word as you did, the benefit would be, it does seem that he definitely wants to minimally, and obviously, it’s got to get through the House and the Senate, maintain the corporate tax rate and not make a change on that. I think there was a risk that if there was some kind of a change in the Senate and the House and the presidency, that the corporate tax rate would change. I think that that prospectively was a risk that got removed. Now on the flip side of it, you’ve got this very interesting dynamic about tariffs and we’re sensitive to the concept of tariffs. Now I try to look at these things logically, the tariff thing, it’s a threat. It’s not definitive, but for businesses that are fairly dominant on components or selling things from China, I would say that’s a risk. Matter of fact, the Biden administration didn’t remove the tariffs either. So I think that we’re being extremely thoughtful in credit, looking to see about what-if scenarios on these types of things. I think the tax rate was the easiest thing. I would tell you that with Trump and either party, I think you’re more likely to get higher rates on the intermediate, the long end of the curve, than lower rates. You might finally get an upward sloping yield curve again, because I do think that they’re particularly in the near-term. And unfortunately, Chris, when you and I are locked into this day-to-day week-to-week quarter-to-quarter. So some of the stuff, my comments are relating to short-term and I’m going to keep away from the long-term policy effects of it. I would say tax rates, positive, good for business. That’s very important. Two, I think they’re going to get a upward sloping yield curve. So there could be pressure on the feds to lower, but inflationary expectations from an expansive standpoint, don’t go away. And then the concept of businesses that are very dependent upon inexpensive goods and services from China, Pakistan, wherever. And by the way, nobody ever talks about why it’s cheap. It’s slave labor. So there aren’t free countries, but that’s why this stuff is cheap, which that’s a whole another long-term thing. I’ll stay away from that. Those are the things we’re focused on. So I appreciate the question.

Thanks, Barry. All makes sense. And yeah, I do get the big differences between kind of near- and long-term and the difficulty there. So that absolutely makes sense. And then just one last question for me on Slide 7of the deck, you break out a bunch of data on the bank and the consolidate company versus peers as well. And definitely appreciate your comments on risk adjusted returns and reserves, but just looking specifically at the net charge-offs at the bank, the net charge-off right there increased to 104 basis points from 54 basis points last quarter, but consolidated actually declined to 18 basis points. So can you just discuss some of the differences there, what drove the increases at the bank and the decline at the consolidated level, just general views on credit going forward and if you believe that you can kind of get risk adjusted returns to improve over the near-term?

Sure. I’m going to give a macro and I’m going to ask Scott to focus on the numbers. I don’t know how we can improve on risk adjusted returns when our ROA is where it is and our ROTCE is where it is. I mean, that’s pretty damn good. I think the biggest problem is people don’t believe it’s sustainable. I mean, if you cut those numbers in half, it would be spectacular. And I asked the audience to say, we’ve been doing this for 20 years. I mean, and we did it without deposits. We did it with more expensive funding. So our -- and we did it through 2008, 2009, and we did it through high rates and low rates. So I cannot present a more comprehensive cogent argument than that. I will also say that we, what we’re talking about today is consistent with the plan that we have put out in the marketplace to all bodies, including regulators. So this isn’t a surprise. They probably listened to our calls. I assume they do. We’re welcome. We welcome that. We’re very transparent. So I couldn’t feel the biggest surprise, frankly, has been the difficulty in getting across this concept. Now I will say this, we entered the banking market in 2023, okay? So everybody on this call is involved with banking and finance and bank holding companies. We all have post-traumatic stress syndrome. Cause we looked at Silvergate. We looked at Signature. We looked at Republican. It’s like, oh my God, here’s this new company that’s different just like these other guys say they were. They all blew up. Why is this one not going to blow up? I’m okay with that. I human nature. But I also ask those to look at, there is so much cushion in these numbers for marginally off. It’s, it’s a non-event, even if we’re up by a lot, which I don’t believe we are. I mean, I don’t believe it with Adam and say, I don’t believe we are. So I feel very good about the macro picture. Are these numbers going to grow modestly? Probably. Do we have enough capital yet? Do we have enough excessive reserves? Yes. Are they going to get used and eat enough? I mean, I don’t -- I’m telling you right now don’t expect to have this five sitting there. Number one, we’re going to add more of the lower risk, boring bank stuff to balance the portfolio and then they’re going to be utilized. So maybe Scott could add some color to the exact numbers. Scott, can you help on that?

Yeah. Thanks, Barry, and hey, Crispin. So the, the charge off ratio at, on a consolidated basis was roughly 59 basis points. So you’re looking at 59 basis points versus 104 basis points. I’ll remind you of the accounting model that we have or accounting models, plural at the holding company. We primarily have loan portfolios that are carried at fair value. So the charge-offs are actually going through unrealized losses and the non-interest income line versus the traditional bank loans where the, those charge-offs are running through the allowance. So at the end of the day, it still falls to the bottom line. It still impacts the overall level of reserves, but there’s just two different accounting models that we’re following. I’d say again, that we started out during, we started out 2024 with minimal NPAs, most of which were traditional bank loans that we purchased. And we’ve seen an increase and this is as expected. We expected an increase during the year because the SBA portfolio is maturing and they’re moving along the default curve. So we’re monitoring it. We’re not concerned. We have it baked in our forecasts. And so we’re going to deliver to you guys results and you guys are going to evaluate them. But this is a trend that we expect to continue to various point. We expect modest increases. We have the reserves. We have the capital.

Great. Thank you. I appreciate you taking my questions.

Thanks, Crispin.

Thank you for your question. Just one brief moment, please. Our next question comes from Tim Switzer from KBW. The floor is yours.

Hey. Good morning, guys. Thank you for taking my question.

Thanks, Tim.

I have a quick follow-up on the credit outlook here. More specifically about the allowance. I think you guys have historically kind of said a good, level set level for the allowance would be around 350 basis points. When should we expect the allowance to start to sort of move back down towards that level and how quickly will it get there?

Scott, would you say we might see that move in the fourth quarter, but not dramatic? I mean, it’s hard to say. It’s November 7th, but I don’t know.

Yeah.

Do you think we’re, I mean, it’s anyone’s guess, but are we at a high point?

Yeah.

Yeah., I have no idea.

Yeah. I think we’re -- look, the level of allowance relative to the loans held for investment at the bank, which is the basis on which the allowance is calculated. Is going to be heavily influenced by the level of 7(a) loans that we have on the balance sheet. Our reserves for 7(a) loans are north of 6%, and so as that concentration moves up, you’re going to see a higher shift in the allowance. Now, that being said, I’d remind you that while we reserve at north of 6%, we’re getting with this at least this quarter 10.8% -- north of 10.8% premium. So the P&L event covers it. What you’re going to see in the future, at least what we expect are additional bank loans coming on the balance sheet that are going to be more of your traditional bread and butter bank loans that are going to attract a much lower level of allowance. We have not performed, as well as we thought during the, when we started the year on bringing traditional bank loans onto the balance sheet. But we want to prudently manage our balance sheet. We want to bring on a diverse set of loans so that we’re, our risk is manageable, our risks are diversified. We’re not in any one product category to where we’re running more risk than we anticipate. So to answer your question, is 5% the peak? I think given our projections, I think that, it very well could be, but we’ve got to deliver on the bank loan production and so we expect to cover our charge offs. We’re not going to be releasing reserves unless we see that in the macro economic factors and that’ll be a function of our, our modeling. So…

Okay.

… and just to tack onto that, do I think that we’ll get there? We’ll start trickling down during the quarter. It’s possible, but I would say I’d expect it more in the -- more of a meaningful decline in 2025 than what you’ll see in 2024.

Gotcha. Okay. And you guys had a pretty good quarter on gathering your commercial low cost business deposits. What kind of drove the inflection here and what are your expectations going forward? How quickly can you grow that book?

Yeah. So that’s something that we’re very focused on and it’s really a matter of us getting the staff trained to be able to explain to clients why they should go through moving their account from brand X to us. There’s a compelling reason to do so. Take a look at that calculator. You’ll see us versus the national average. You have a good idea. So there’s a very compelling reason now to get the staff to do it, to be educated, to get on the phone. Now we’re now staffed up to do it with, with Jennifer Merritt’s group in Wilmington. She’s got people all over the country being able to do the KYC, BSA and AML work, which we’ve now got the right people. We’ve got the right software. We’ve got the right processes in place. So I just think that’s a function of time and you’re going to see us continuing to execute that. On addition to that, our Payroll and Payments unit needs to, you can’t open up a Payroll account without a bank account. You can’t open up a Payments account without a bank account. And frankly, we don’t even need to be the primary account. We just be the tertiary account. We’ve got to convince the customer that there’s a tremendous value in terms of the analytics, transactional capability and data to use us to the Advantage. It’s one place. So there’s going to be, it’s very hard for me to gauge. I feel good about it. I mean, I think we’ll continue to grow at nice dollar amounts. Obviously, you get nice big percentage increases off of a low base, but that you’re going to see us continue to pick up business accounts, particularly, I think we’ll probably put something out in the near future, launching our true honest zero fee banking account for business, business banking.

And if I could just tack on to that, Tim, I was sitting close to our BSS folks that are selling the account and we’re getting, it’s hand-to-hand combat. We’re getting the client on the phone. We’re getting on video. We’re analyzing their statements from their other institutions and we’re showing them what the value proposition is of switching to us. So we feel that it’s compelling. Then you layer on top of that, the Newtek Advantage and being able to bring everything into one view. We feel like it’s there. We’re refining our sales process as we move forward. And -- but it’s hand-to-hand combat. I mean, it’s a grind. And to Barry’s point, we’re getting the people trained. We’re getting them, we’re getting their scripts refined and we saw traction and we feel like we’re going to continue to see traction.

Thanks for the color.

Thank you for your question. One brief moment, please. Our next question comes from Steve Moss from Raymond James. The line is yours.

Good morning, guys.

Good morning.

Maybe just starting here with the or following up on the growth and demand deposits. Is the growth here primarily just on the new originations as the customers come in that, you now are operational in Wilmington and having better integration? Just kind of curious how to -- how we think about those dynamics?

Steve, I, excuse me, I think that Wilmington is the source of compliance, surveillance, getting the accounts open, doing our and I say that, obviously, it’s under our BSA officer, Sarah Limones, who’s not in Wilmington, but she works very closely, obviously with a compliance manager, Julio Hernandez, the President of the Bank, Nick Young, and Jennifer. So that’s the back office. But I think the way we look at the business and the growth, it’s how do you get the ads back? How do you get the customer in the batter’s box to pay attention? Say, hey, you need to look at our account and why you should have it with us primarily or secondarily versus them. That’s not what Wilmington does or the compliance team. That is done by our team that’s booking and boarding merchant accounts, Payroll accounts, and very importantly in lending. So now in lending, we are now requiring that when the account is open and we’re funding loans, that money is using that account. This is all new to us. And it sounds like it’s easy. I’m a financial guy too. Unfortunately, I have to put my operating pants on, but you got to train people to do this. It does take time. So Justin Gavin’s team that handles the front end of lending, managing his team. And that was what Scott was referring to, getting people comfortable on an automated basis. Steve, when you apply for a loan in our portal, the data ports over to be able to open up a bank account. So we don’t have to ask the customer twice for two accounts. I don’t think you’ve got that. I’m going to -- I’ve got my legal hat on in almost most of the banks in the United States. It’s…

Okay. Great. Appreciate all that. And then in terms of the insurance business, just kind of curious if you could quantify the revenue you’re generating from insurance these days.

I don’t know if we give that out, but I would say broadly, it’s a $3 million to $4 million type revenue business, very comfortably.

$3 million to $4 million a year?

Yes, sir. Yes.

Okay. Appreciate that.

I would love to have that broken out. Sooner than later, and maybe someday we break out next year, but it’s valuable, it’s reoccurring, it’s differentiated, it fits in well with the business model and those businesses are very highly valued by the marketplace today.

Okay. Great. And then in terms of the share repurchase authorization that was announced earlier this week, just kind of curious, what are your thoughts and plans for using that and just any color there?

Yeah. That’s a tough question. I wanted to make sure people were aware of it. Look, I think we have really high returns on equity, which you can see from our business model and we’re in the growth business. We wanted to have it available. I mean, obviously, we’re looking at our share price. We want to make sure investors understand where it is. One could argue when you look at the comps versus a Live Oak or other industry comps, we are at a below industry multiple. One could argue it should be there. One could argue it should be less. One could argue it should be more. So I would say that that’s not -- it’s a tool. We’re going to use it. If things get a little wacky, we will. And obviously, we’ll buy low, sell high. But I mean, I think it’s just something to add into the quiver, if that’s all. And ultimately, we’re going to figure out balance between dividends and buyback and things of that nature. But I think it’s very important to note, we’re a growing company and we’re going to be raising debt capital. I just don’t think I get over-exaggerated about it. But it is something we are open to and we’ll use at the right time.

Okay. Appreciate that. And then last question for me, Scott, I think you said, the credit costs and the marks on the fair value loan go through non-NII [ph] or other income. I’m kind of curious, if you could quantify what the marks were on the fair value portfolio this quarter versus last that go through income?

Steve, I’m going to have to follow up with you on that one. I don’t have that one specifically at my fingertips. I apologize.

Okay. No problem. Appreciate it. Thank you very much, guys.

Thank you for your question. [Operator Instructions] One brief moment, please, as we prepare the queue. Our next question comes from Christopher Nolan of Ladenburg Thalmann & Co. The floor is yours.

Hi. Clarification on Page 7 of the deck, net charge-off average loans for the holding company shows 18 bps. Scott, is that correct? That is not an annualized number, correct?

That’s correct. I said that a few times earlier. It’s 59 basis points approximately.

Okay. And then on the same line for the bank, is that also not an annualized number or…

That is an annualized number. That’s -- that -- all this, the bank for the third quarter was pulled from S&O, excuse me, from S&P Global, Capital IQ, so that’s calculated off the call report and is annualized.

Okay. Great. So, just to say, going forward, given -- how much discretion do you guys have in terms of the reserve ratio? Obviously, the reserve is growing. I’m just trying to get an understanding in terms of if it’s all algorithm-driven or is there a good part of it that is part of your discretion?

Yeah. I’d say, Chris, that it is a mixed bag. We do have calculations that we apply, but the biggest influencer that we have is the level of production across the portfolio and the concentrations. I try to -- I can’t reiterate that enough, that as we move through time, we do expect more traditional bank loans to come on the balance sheet that will cause that reserve-to-loans coverage ratio to go down from here. So that’s, again, I can’t reiterate it enough. Is the peak 5? Maybe, maybe not, depending on our loan production for the quarter, but we intend to diversify our loan production. It’s been in our business plan that we present to our Board. We’re going to continue to operate with that business plan. In terms of the algorithm, there’s a quantitative and a qualitative. The qualitative is where we exercise judgment and we evaluate a host of factors between economic projections, trends, et cetera. So I can’t give you an exact answer, but I can only answer it qualitatively, that it’s mixed, but -- and we do have some level of judgment.

Great. I guess this is a general question for management. Given you guys do operate a differentiated business model, and we’re about a year, 18 months, ever since Silicon Valley Bank and Signature and so forth went down. Are you seeing sort of more strict regimen from the bank supervisors on banks in general or sort of business as usual? And I only ask this, because we have a commercial real estate bubble out there and it hasn’t really gone through the banking system yet. I’m just trying to see from your perspective, if you’re seeing anything changing on the regulatory front.

Chris, I’m going to answer that. I want to go back a little bit to the thing on the reserves, because I think it’s an important addition here. When we make a loan, that’s a 7(a) loan, for example, in the fourth quarter, we get hit with that CECL charge up front. And as we’re building a portfolio, we keep putting that big CECL, that’s a direct hit to income, to capital, et cetera. But the activity happens down the road. So from an income standpoint, this is punitive. Down the road, it lightens up. So if all of a sudden down the road, you’re going to focus on the fact that the reserves are coming out and getting less, we don’t look at that as an issue. That’s what they’re there for. As I say in the business, they’re there for eating, not just for looking at them. But I think it’s very important because it is misunderstood the way our business works, particularly given that these loans have got long durations and the losses occur way out in the future. So it’s just something to think about. Now to answer your question with respect to Silicon Valley Bank and Signature Bank. So one thing that almost has nothing to do with us. The first question that we’re typically asked is, are you involved in crypto and banking as a service? No, no. Okay. So they’re not. From our perspective, not an issue. But I could tell you that for institutions that are involved in banking as a service or crypto, it is an issue that they’re looking at. They’re not fond of it. Then you got that CRE exposure, which I do agree with that. There hasn’t really been that much of a reckoning on that to-date. We…

Okay. Thank you for taking my questions, guys.

Thank you.

Thank you for your question. This concludes the question-and-answer session. I would now like to turn it back to Barry Sloane, CEO and President for closing remarks.

Thank you so much. Greatly appreciate the opportunity. I feel very strongly about where we were for the quarter, where we’re making our progress. If I was able to look back on January 23rd and look forward seven quarters and say this is where we’d be at, I’d tell you, boy, I’d be very pleased. We’re making great progress. We’re making great strides. The business model is in place. Our job right now is to get out there, educate, continue to be right on our forecasts and expectations. And as I said before, we’re very experienced in this particular space and comfortable with it and we look forward to delivering these kinds of results in the future. Thank you.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.