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

Thank you operator, and good morning everyone and welcome to our second quarter 2023 financial results conference call. Everybody listening in, you can follow along on the PowerPoint presentation by going to our website newtekone.com; go to About, go to Investor Relations section and you will see the PowerPoint presented there. Also joining me on today’s call is Nick Leger, our Chief Accounting Officer of NewtekOne; Scott Price, our Chief Financial Officer of NewtekOne and Newtek Bank, National Association; and Nick Young, President and Chief Operating Officer of Newtek Bank. We're pleased to report in the second quarter, as a financial holding company. Obviously, for those of you that are somewhat familiar with the story, some of you are not, we recently converted from a business development corporation with the acquisition of National Bank of New York City on January 6th. Therefore, some of the usual comparisons you'll see and an earnings presentation make it a little bit more difficult. For example, comparing this quarter this year to this quarter last year when we were a BDC, given different accounting gyrations is difficult. You can obviously get that information by, looking towards our 10-Q, which will be published shortly after this call, as well as some of the financial information that we provided in the press release. I think it's also important to note that we've been now a bank for a little over six months. We acquired National Bank of New York City on January 6th, a 59 to 60 year old financial institution that had a very different business model. It was a smallish bank, a community bank, lending locally in its market, which had a big hill [ph] decline and a lot of wind in our face, and we are really thrilled that we've been able to…

Thank you, Perry, and good morning, everyone. I'll start my comments on slide 37, summarizes our capital position as of June 30th. I'd point out that the regulatory filing the holding company have not yet been filed so that those numbers are preliminary. As you can see, for both the consolidated group and the bank, we are well-capitalized, and the bank successfully deployed capital this quarter and generated nice returns, as Barry has indicated. Slide 38 outlines the summary metrics for the company's forecast for the remainder of 2023. And slides 39 through 44 provide a good amount of detail on the company's expected results for the second half of the year. The forecast assumes that we deploy a portion of our liquidity position. As you'll notice in our numbers, the asset position is considerably higher, and that's mostly due to the defensive cash position we've maintained given the market turmoil. We plan to better deploy that cash as we move throughout the year and optimize our balance sheet efficiency, as particularly as we look to our originate to sell model. I would point out that as of -- excuse me, that as more of the company's balance sheet composition shifts to the bank and its capital stack, the benefits of lower funding costs should continue to push returns higher all else equal. Our deposit costs are expected to increase as the recent Fed hike takes effect, lower cost CDs mature, and we continue to leverage our online deposit gathering platform. The company expects to continue to execute on its business strategy for the remainder of, the year similarly to the way that we executed in the second quarter. While not exact, the seasonal patterns that the company has experienced in prior years from the perspectives of loan originations and gains on sale spreads are expected to continue in the second half of 2023. So with that, I'll turn the call back over to Barry. Barry?

Thank you, Scott. Wrapping things up before we turn the call over to Nick Leger, our Chief Accounting Officer. On slide number 38, and I think it's important to note that We've got some projections and obviously, these are not easy to do in a fairly volatile environment, but you can take a look at where we think we're going to wind up for 2023 at the financial holding company, at the bank. We just like everyone to try to focus on what we believe we can hit for some very lofty goals for return on average assets, return on tangible common equity, both at the holding company as well as efficiency ratios really moving in our direction. Moving forward to slide number 45, from an investment summary perspective, you could see, where we're looking at relative to our profitability ratios and our efficiency ratios. We're maintaining our projections of $1.70 to $2. Although, I wouldn't say we're really near the midpoint, we're probably shading to the lower end of that range, but we're very comfortable with that particular number that could easily change around with respect to movements in rates or gain on sale prices. there's a lot of opportunity here. So we just want to be conservative. The second quarter quarterly dividend of $0.18, we do believe we'll be able to maintain, obviously, given our profitability through the remainder of the year, and we do want everyone to focus as a growth-oriented differentiated technology-enabled financial holding company. We're excited about what we're able to deliver in Q1 and Q2. And I now like to turn the rest of the presentation over to Nick Leger, our Chief Accounting Officer.

Thank you, Barry. Good morning, everyone. You can find a summary of our second quarter 2023 results on slide number 48. We're proud to report our second quarter financial results, which is also the first full quarter reporting as a financial holding company. As you will see in the consolidated statement of operations, upon conversion from our previous BDC investment company accounting, where our portfolio companies did not consolidate in the BDC's financials, and those activities would historically be reported as dividend income from the investments of the BDC. As a financial holding company, we are now consolidating those portfolio company operations. As a result of this conversion, there is no comparable prior period consolidated financial statements to refer to with the two different types of accounting. I'd like to start with some of the highlights from our second quarter 2023 consolidated statement of operations. On a consolidated GAAP basis for NewtekOne, our first quarter -- our second quarter results are as follows. Net interest income for the second quarter was $5.7 million, which is up 23.9% from the first quarter net interest income of $4.6 million. Net interest income is comprised of $22.6 million of total interest income on loans and fees on loans, offset by $16.9 million of total interest expense. $9.1 million of the interest expense is driven by the interest expense of our notes and securitizations. In addition, $3.7 million is due to the interest from the bank from bank and FHLB borrowings and $4.1 million of interest expense on deposits. In the first quarter of 2023, the company previously implemented CECL on the Newtek Bank loans portfolio, an additional $2.6 million of provision for loan credit losses was recorded in the second quarter. Net interest income after the provision for loan credit losses is $3.1…

Thank you, Nick. Operator, we I would love to open it up to Q&A as that concludes the presentation portion of the call.

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

Thanks. Good morning. First, Barry, I was just curious if you comment on how you view credit quality to be performing in the loan book and just expectations going forward, your provision came in below your guide in the second quarter? And then also if you could just share what level non accruals were as of quarter end and then if there were any charge-offs in the quarter? Thanks.

Sure. I'll take the first part. I'll see if, Scott and Nick can help me on the second. On the first part, relative to the provision, I think in prior calls, we had talked about a 7% or 8% CECL provision, which frankly is consistent with what we did, but when you take it back to present value terms, it comes in a little bit less than that. So, we're -- we believe we're consistent with what we previously forecasted, but from an accounting standpoint, that's pretty much where it comes in at. Relative to the quality, Scott, or Nick, do you want to pick that one up?

Hey, Barry. This is Scott. I can speak to the allowance and just expand on that. We did make an accounting policy election when we bought the bank and implemented CECL that we would discount our expected losses. So, if you think about the 7(a) portfolio with an over 11% coupon and you discount that back, you can clearly see that a custom discounting, that kind of interest rate will really reduce the expected losses. So, we are susceptible to future interest rate moves and going to be a very interesting, scenario to see play out for the rest of the year. But that is the reason that, for the discrepancy between the two.

And then for the other question, the NPLs as a percentage of the loan portfolio at fair value was about 6.9%. and the realized losses for the quarter was $5.3 million.

Okay. Thanks. Did you have the NPLs at cost as well or just a fair value?

At cost, I think it's about 12.8%.

Okay, great. Thanks. And then just one other question for me. Just on the cadence of earnings in the back half of the year, I think in the third quarter, you're now expecting $0.37 in EPS previous guide was $0.43, if I'm correct, but kept the fourth quarter pretty steady at $0.69. So, just curious on your confidence in the ramp and earnings in the back half of the year, especially the fourth quarter and what the key drivers that you expect to drive that? It seems that loan growth is expected to pick up a lot in the fourth quarter. So, curious on why that is and then what else is play driving the acceleration earnings? Thanks.

Cris, I appreciate the, the question. Your fairly new to us. I think you're about six months old. But over the course of 20 years, the fourth quarter has always been our biggest quarter. We could also tell by the pipeline that we have going. And I think it was important to try to emphasize that we have a day job of growing our business. Our night job was moving over people's staff policies procedures, wire instructions, POP status, regulatory issues with two new regulators still keeping -- I mean, the headwinds that we've had in the first six months of the year, I cannot describe. It's like having three jobs. I still think we're going to probably continue to have three jobs for the rest of this year, and then maybe it'll go down to two, and then maybe it'll go down to one. So, we'll be able to focus most of the time going out in the future on the one job where we hope to be able to, hit the goal stream and outperform things a little bit better than we are today. But, we feel pretty good about the numbers. And, obviously, you've got also a fairly volatile environment with things changing quite a bit, particularly on the short end of the curve and pricing and things of that nature. So, we feel pretty good about the numbers. We've historically been a pretty good forecaster.

Thanks, Barry. Appreciate taking my questions. That's all I had.

Thank you.

[Operator Instructions] Your next question is from the line of Michael Perito from KBW. Your line is now open.

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

Thanks, Mike.

Just one quick follow-up on the guidance just on the margin assumption, the 10.75%, just wondering if you could take that a layer deeper for us. I mean, it seems like I've looked around at some of the banks that sell a good amount of this paper, including yourselves. And it seems like the secondary environment was pretty stable in the second quarter after some volatility, the two month -- the two quarters before that? And just wondering, you know, why does that feel like the right level based on what seeing today for the back half of the year for selling the loans and what gives you kind of some confidence around that number a bit below where you've been historically, but obviously a bounce back from where you were in in the second quarter.

Sure. Mike, and I appreciate the question. I'm going to try to dig out a page in the deck that focuses on our sort of history of gain on sale prices. I think the major difference between us and their organizations is the fact that we're dealing directly with borrowers. Slide number 22 really goes back and shows sort of the history of our net premium trends. And you can see there's not -- there's some volatility there, but it's not like -- with the exception of 2021 where the SBA had zero fees in the middle, and we've got up to 13%. I mean, you're really pretty much looking at about a 1.5 point swing plus or minus. Relative to pricing going forward, we feel very good about, on a going forward basis, our loans being priced at prime plus 300. That's the only rate that we do. So, unlike a lot of our competitors in the space that have different rates for different people, we have one rate. It's prime plus 3. We deal directly with the borrower. There's no broker and there's no expensive banker in the middle of the transaction, and we're able to quickly ascertain what the borrower's needs are. We give them a long M schedule. We close the deal, and we give them a lot of other things, which is why I believe they do the loan. So, I think when you look at where the market is, the current price that we've used is based upon a very recent mix of loans that we sold. I think also, Mike, it's important to note and maybe people that aren't day-to-day in the businesses, we are a 25 year loan by commercial real estate, getting it sold into the market at 114, 115, 116, of which it gets split. And then a 10 year deal that's got backed by commercial real estate sells at 110 or 111. So when you look at the mix and the blend of real estate back versus non real estate back, That changes things. Big loans versus small loans changes the discount. So, it's not that easy a formula to figure out, but we're pretty good at making the guesses and we obviously look at where the entire market is going, and the market right now seems to be pretty good. The other thing that's really important also is from a portfolio perspective, when are the rates changing? So, our legacy portfolio in NSPF is primarily at prime plus two and three quarters. Our new loan since the change was put in place is prime plus three. That's why we're also getting better prices holding everything else constant. The extra 25 basis points makes a difference. Hopefully, that was helpful.

It was. Thank you. And then just a few more for me, and I apologize. I kind of all over the place, but just one last one on the guide. The jumping share count in the fourth quarter, I just wanted to confirm, is it safe -- that that's just kind of like equity grant or stock comp related stuff, right? That's just an assumption you guys are making around that. Nothing more?

It's a good catch, Mike. You're very thorough, and I appreciate that. I think that is a plug number in terms of something we may or may not do. I'm not sure we need to do it, but know that that's not comp. That would prospectively be a raise, but We've got access to debt markets. We've got access to equity markets, and that's kind of how we manage our guidance going forward. So, I can tell you that that counts will occur. That's just the best guess, and that kind of helps us get to these numbers. If that's helpful, I hope it is helpful. Obviously, our goal--

Yes. No. I mean, it is -- I guess so -- I guess, maybe that's a opens up a broader question then. It's just I mean, do you guys as it stands today, do you feel you need to add some type of capital at the bank sub in the fourth quarter potentially given your rates or?

No, nothing at the bank. Nothing. The holding company listen, the other thing too is if money is available to you at a fair price, you can make money off via take it. So, I believe, frank, with you, I'm less enthusiastic about selling shares. There would be a debt, although the debt markets haven't been really that in the last month or so. So, it's a really hard thing to do this, which I'm sure you could appreciate. Like, I don't know, or is bank holding company debt going to be able are you going to be able to do it at 7.5 or 9.5 in the fourth quarter? I have no idea. It's hard to tell. And I'm not sure we need it. So, as we do this, what we try to do is put our best guesses out there and we always want to never overpromise and underdeliver. So, obviously, that's a little bit of a drag, but I wouldn't say that that's something that you can absolutely count on at this point.

Okay. So, from here, you're right. It's a conservative assumption that you might add some capital at the holding company level at some point, but that might not happen?

Might not happen. And clearly, I don't need it at the bank. And the only capital I needed the holding company would be to do the non-conforming loans because there's nothing else that needs or eats capital.

Okay. Perfect. Thank you, Barry. And then just two more. Just on the I believe in past conversations, Barry, you've talked a little bit about, you know, the credit on the, the NSBF portfolio, particularly some of the vintages that happened during the pandemic, you know, based on where the kind of gain gains and losses were on the felines around fair value. It didn't really seem like there was any credit deterioration, but I was wondering if you could just spend a minute talking about any delinquency trends in the SBF book that that you guys are seeing? I mean, it's kind of a -- you drafted a little bit in, I think, in the prior question, but just wondering if you can go kind of a layer deeper on that for us?

Sure. And I think the NSBF portfolio, we have at fair value. So, the NSBF portfolio does not have what I would call, you know, a traditional bank loan loss reserve. I believe we've got that portfolio valued at a from here and a good chunk of it is seasoned. 20% cumulative, default rate. That's going forward and approximately 45% -- so I mean, we've got that portfolio fairly conservatively valued. Nick, was the market clearing yield on that like, 8.4% net of those charge offs?

Yes. That's correct, 8 4%.

Okay. So, net of charging off historically over time, that amount of charge off, and I would say 40% of the portfolio is three to four years old. We think that portfolio is fairly conservatively valued. So, now if you were to ask me, well what do you think of the environment going forward? The one thing I can almost bank on, it will not be as good as the one we're coming at, I which means I'm probably wrong, but from a Goldilocks scenario, you couldn't have had a better economic climate, particularly when our customer pays for PPP and EIDL loan, see credits, of which, by the way, we're still working that with customers. So, I just think that it's going to get a little worse. The other thing too, it's just a season portfolio. it's only to look uglier and uglier as time goes on. And I want to brace you and other people for that. I mean, it doesn't get any better because you're not anything new to it, right? It's only going to get worse from a percentage standpoint. I also want to point out, when I look at like non accruals, right? And I think this is really important for the 7(a) business. The only thing that really matters is fair value. The original cost is irrelevant. Now why do I say it's irrelevant? We already took the charge. Similarly, we already got the gain on sale and you have a nice high coupon. So, I let people say, oh my god. It's 13%. Well, first of all, the other thing is we've gone through COVID where you couldn't foreclose on stuff, and we chase personal guarantees. So, unlike a bank that when the thing goes bad, they just bang it out. This is a non-bank asset, and it's driven at a non-bank level. So, it's going to look very different than in a bank environment. I just want to point that out. And the other thing is we look at losses over the life of the portfolio, not in any given year. So, like we're very comfortable with CECL, which is sort of similar, but not exactly. But I think I think these things you're pointing out are very important differentiators between NewtekOne and most of the organizations that are in this particular structure.

Got it. Very helpful. And then sorry to ask so many, but just a couple quick ones. Just on the, the loan portfolio buckets. maybe this is a question for Nick or Scott, but just can you remind us, I know the NSPF, the answer is no, but as we think about go-forward provisioning costs. Do all the other buckets, the loans that amortized cost, the conventional loans, does everything kind of flow through a CECL provision other than the SPF bucket? I apologize, kind of a basic question. I just want to make sure I have it right?

Scott, I'll let you take that one.

Yes. So, as you think about the portfolio, you've got the traditional NB-NYC portfolio. And if you go back to the first quarter, you can see that we reserved about 1.25% on that portfolio. Keep in mind that we did have one loan that we were watching, it looks like, that loan could be coming to resolution in the future. And so we're monitoring that situation, but we don't expect any losses. And in fact, we expect performance better than what we had originally projected. So, that's one item to note. I think as you think about portfolio going forward, we generated about $48 million of unguaranteed 7(a) loans during the period. And so as you look at the provisioning on that portfolio, you have to take into account the discounting. I can't I can't emphasize that enough, particularly in the volatile rate scenarios that we find ourselves in today. So, as rates move up, our allowance naturally has a propensity to go down all else equal. So, that's just the -- that is the math and the accounting that, that we've elected. So, when you look at it, Barry mention the 7% to 8%, you just count it back, you're looking at somewhere anywhere 650 to 675 base, prior to the Fed move. So I think you can expect that kind of provisioning, as we move forward. understanding that if rates hikes do go in, we will -- that number will most likely come down.

Perfect. Thank you. And then just lastly, and this will be quick, but just do you have, -- Scott, do you have the -- or Nick, do you have the average earning assets for the quarter. And can you just confirm that what the average kind of full quarter NIM was? I just want to make sure I have it right.

Yes. So, we're looking at, total interest earning assets for 6/30 quarter end, at about a $1.89 billion.

Do you have the average for the quarter though by chance?

That's that is the average.

Okay. Sorry. I thought you said quarter end.

Yes. Sorry. Yes, for the quarter ended, 6/30. so a $1.89 million average daily balance for interest earning assets net interest margin, at 2.09 for the consolidated company.

Perfect. Thank you guys. Sorry for all the questions, but I appreciate you taking them.

Thank you.

[Operator Instructions] Your next question comes from the line of Bryce Roe from B. Riley. Your line is now open.

Thanks and good morning. Wanted to start maybe on this concept of the guide and know the seasonality that you that you've seen in the past, Barry. So, you've got forecast that operating expenses consolidated coming down in the back half of the year. And then you also are showing the NTS and NMS pre-tax incomes going up pretty considerably in the back half of the year. Just curious how you would kind of characterize the seasonality of that or just capturing operating efficiencies as you move further away from the move from BDC to Bank?

NMS is clearly a seasonality particularly with third and fourth quarter. MTS I think that there were, right, the issues, particularly in technology where given the economy in Q1 and Q2, a lot of people delayed projects, and we think are coming back on stream. Regarding the lending, we're fairly confident about the volumes. Obviously, once again, it is hard to forecast, but we feel very good about it. Relative to the operational expenses, we're just getting much more efficient at this particular business. So, when you look at it as a percentage of things from a efficiency ratio, we're really just getting a lot more leverage out of our operations and our business, putting more -- and that, will be a challenge. We'll be more technology solutions. We're I'm very confident. in the NMS because we're just looking at the seasonal factors there.

Okay. Okay. That's helpful. And then I think, Barry, in in your in your prepared remarks, you talked about a dividend from the bank to the holding company. just wanted to wanted to make sure I heard that correctly. And can you can you speak to kind of the dynamic there, especially considering that you put equity into the bank when you close the transaction?

Sure. So, with my Chief Legal Officer on the right shoulder here, imaginary, the only party that can declare a bank dividend is the Board of Directors, and it has to be approved by the regulators. But I'd say with confidence that, this is something that we plan to do, and we are in compliance and subject to those two authorities approving it. I think it's something that the market can expect. And I would hope, as somebody that's going to recommend this, both to the regulatory authorities and the Board that a 50% ratio might be something that one can expect from the bank to the HoldCo, paid out of profits, of course. And the HoldCo dividend, which we set is somewhere around 30%-ish, 33% and 300%. So, that's kind of what our thoughts are there.

And reason for doing that is to kind of help manage capital at the HoldCo. I mean, you just talked about really not needing incremental capital at the Holdco. So, just curious how you would use that capital at the whole Holdco level?

Yes. It would be used for the non-business primarily, that's a big need for it. Could also be used to pay down debt as well.

Okay. Okay. I appreciate it Barry. I think all my other questions we're asked and answered. Thanks.

Okay. Thank you.

Your next question comes from the line of Scott Sullivan from Raymond James. Your line is open.

Hey, good morning, Barry and congrats to you and the team on, really continuing this transition rather elegantly. So, my comments and questions come from a slightly different perspective, as I've really been fortunate enough to be an advisor and portfolio manager for clients, and been involved with Newt's since the early BBC days, as you know, and frankly, as everyone knows, you crushed it. You guys have really done an outstanding job. So, the natural turn towards the banking side now. My question has to do with scalability and perhaps Blue Sky Runway under some, I think, some exciting assumptions, at least that I have. I see a lack of financial stress. I see a potential eventual de-inversion of the yield curve. Obvious, as you talked about tech developments, AI and other that are, in my opinion, are going to lead to a huge productivity boom, possibly a decade long. So, question after that ramble is what's a Blue Sky Runway for you guys in terms of growth rate, loan growth, et cetera, with the special sauce that you prove in in terms of your process and, under these macro assumptions?

Sure. Well, I think I think that, if you look at the roadmap, which relates to people processing software, no bankers, no brokers, no BDOs, no branches, the market can visualize as the management team can that we could grow the revenue stream without matching dollar-for-dollar with expenses, then the future is pretty bright. And I want to be real clear about this. A lot of people say, well, why did you buy a bank? Do you want to leverage the deposits? Well, that's just a fact of the banking business, but -- to the ability to communicate and deliver bundle services with margin pooling that actually give that customer a tremendous advantage. So, like, here's a simple thing. Document storage, okay? We've had this and used it to make loans forever. If you bank with us, You can see your document. This is a Newtek advantage. Your consumer could be your insurance policies, your photos, your driver's license, your rental agreements, if you're a business that your article says, that's free. That's free. It's a benefit. You can go to the advantage and look at your web traffic analytics that's changing everything. That's great. And then you have -- and I love asking this question to anybody. Who do you know at your bank? Half the time, they say, I don't know anybody. The other half the time they could name one person, maybe, and that one person can't do anything, except hand them off to somebody else at the bank, to do whatever it is they need to get done. That's not the case with the Newtek Advantage. You get six relationships, so you get the analytics. See, I mean, there's so many things. That's why I'm very excited about the model, how we're positioned. It's different unique, and it's very hard to replicate. Because over 20 years, we've owned the payments business. We've owned a Tech Solutions business. We've owned it in so we owned all these things. You're not just stuff slapped together and hoping they work well. So, that's kind of where I see that Blue Sky without getting into the numbers of the map. Now, when you look at the ROAA and the ROTCE, that's where people are going to have to look at this and go, okay. I can actually compute this into numbers.

That's very helpful. Thank you. One last question. Could you speak to any -- often talked about now, loan office exposure?

Did you say a loan office?

Office. Office, right.

Yes. I believe that the National Bank of New York City portfolio might have had maybe 15 million-ish, but these are not These are not skyscrapers. These are like medical offices, $1 million to $1.5 million balances. So there's no -- I mean, we're blessed. We don't have that type of exposure in the portfolio.

That's very helpful. Yes. As I said we don't get many opportunities to sort of get in at the ground floor of a of a new bank. with new techniques and expertise without all the legacy baggage. So, congratulations.

Thank you, Scott. I appreciate it.

There are no further questions. Please go ahead.

No, operator. I appreciate it. I are there any -- I don't think there's any other questions that I'm seeing?

We just one have from Christopher Nolan from Ladenburg Thalmann & Co. Your line is now open.

Chris, thank you for being patient.

Given that it does have a very differentiated business model, are you finding more resistance from bank regulators who are having a difficult time getting their hands around your business?

It wouldn't have surprised me if in fact, the regulators would pause. And so far, we haven't seen that at all. So, I would say we've been blessed that everything we said we're going to do and our plan we've done, including excessive amounts of capital. Good performance. So, no, the answer is it wouldn't have surprised me if that occurred. It just has not, and we don't see any hints of that occurring, at least--

Got it. Okay. Thank you.

There are no further questions now. You may continue for closing remarks, Mr. Sloane.

I can't thank everybody enough. And I appreciate everyone being patient, take down the call and get their questions in. So, thank you all very much. Look forward to reporting Q3 and Q4, and delivering everything one step at a time. Thanks so much. Have a good day.

This concludes today's conference call. Thank you all for attending. You may now disconnect.