Good day and thank you for standing by. Welcome to the NewtekOne, Inc. Second Quarter 2024 Earnings 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 first speaker for today, Barry Sloane, CEO and President. Barry?

Thank you, operator and everybody for attending our Q1 -- Second Quarter 2024 Financial Results Conference Call. Joining me today is Scott Price, the Chief Financial Officer at NewtekOne and Newtek Bank National Association. Also attending is Nick Young, President and Chief Operating Officer of Newtek Bank, N.A. For those of you who'd like to follow along to our call today, please go to our website, Newtekone.com or the Investor Relations section on the presentation, and our PowerPoint presentation is hung there today. I'd like you to draw your attention to slide number one on a note regarding forward-looking statements. On slide number two, today, we'll be talking about significant events that occurred in Q2 2024. We announced last night at the close of the market, second quarter 2024 earnings of $0.43 earnings per share basic and diluted comment. Important to note that according to Bloomberg, which had a consensus of our analysts at $0.405, that was a nice beat for us with a revenue estimate on Bloomberg of $60.6 million, I think we are about at that number. Second bullet is reconfirming 2024 full EPS guidance of $1.85 to $2.05 for basic and diluted. Given the events of the last few trading days, Thursday, Friday, Monday, we are very comfortable with the range, and we'd love to get a little bit more clarity on what's going to happen in the world before we make any adjustments to that. Important to note, quarterly deposit growth at the bank over the last quarter was approximately 17%, second quarter sequential total loan growth over the last quarter 13% of the bank. We find these numbers to be terrific, particularly given that the industry averages are about flat. Net interest margin, 4.3% for the three months ended June 30, pretty flat quarter-to-quarter. We're…

Thanks, Barry. Good morning, everyone. Now turning to slide 12, our net interest margin contracted 12 basis points during the quarter, driven by increased leverage and higher cash balances. We raised over $70 million in our bond offering at the end of May and paid down warehouse lines of credit. We were left with about $20 million of excess cash, which we deployed into accounts earning approximately 5%. We successfully retired our bond issuance that matured on August 1. Now turning to slide 13. At the bank, we experienced deposit growth from our business customers of about $20 million during the quarter, which have a much lower cost in our retail products. Our CD campaign brought in over $79 million mostly in six-month paper, which will reprice in the fourth quarter. We expect about $70 million of CDs to reprice in the third quarter or mature and have about $100 million to reprice in the fourth quarter. These funds have a weighted average cost of around 5% and will provide a cost savings opportunity going forward. Given these factors and the market turmoil over the last few days, we're monitoring the bond market, and we keep a close eye on the pricing of our competitors. As far as deposits going forward, it's included in our forecast, and I'll cover that in a few slides. So, I'll turn the call back over to Barry.

Thank you, Scott. Slide 14, the Newtek Advantage, our proprietary business portal for its clients to take advantage of patent pending, which provides Newtek's clients with analytics, relationships, transactional capability to other financial institutions do not. We believe that on a going-forward basis, our industry must do other things for the customer than just take their money, maybe take them out to lunch or dinner for the relationship and hope they get a loan. I say that because it's way too easy to move your money on a phone. Very easy to do so, and people are not going to keep, and I say people the business community, they're just not going to just leave those balances in there because the people are nice. You're going to have to give that customer value, things like pre unlimited document storage, free real-time updated web traffic analytics, free real-time credit card processing and chargeback data right in the business portal, the ability to make payroll in the business part. So we'll talk more about the advantage in future slides. It is a great tool. Our clients enjoy it, and it's working well, and we continue to update it and make it more valuable where it becomes the business portal for its clients, and we will look to in the future white label it for other financial institutions. Slide number 15, credit risk management. A company that went public in September of founded in 1998, we do know how to manage credit. We are familiar with these credits. We've been through the ups and downs. Now when you look at the bank and you look at small business finance, there's two different ways of dealing with the losses. Small business finance is fair value. So important to note, their value adjustment, which, in…

Sure, Barry. Thank you. Slide 20 outlines our updated guidance for the remainder of 2024. We've updated our origination volumes and adjusted our guidance for the next two quarters. We have assumed a 0.25 point rate cut for '24. We expect 11% premiums on SBA 7(a) loans for the next two quarters. We did trim our loan production expectations for the rest of the year, but important to note, we are reaffirming our $1.85 to $2.05 EPS for the year. As Barry alluded to earlier, there are a lot of moving pieces to our results that include loan production, gain on losses -- gains and losses on sales of loans and the related margins and also include performance from our payments and other nonbank businesses. I would point out that we completed our ALP securitization in late July, which does factor into the guidance we've issued, and we do expect to have a positive impact given the success that we had there for the third quarter. We have built in expectations of higher expenses in the second half of the year as our investments in our infrastructure to support our business deposit accounts continue. And if I could, while I've got the mic, I will hit the quarter-over-quarter performance, which appears on slide 28. Ultimately, net interest income was slightly higher on increased liquidity and leverage. The provision for loan losses was up $1.8 million versus the prior quarter, which included some charge-offs, but also largely was attributable to the increase in percentage of 7(a) loans at the bank. If we shift to noninterest income, our net gains on sales of loans were up on higher volumes of loans sold, and important to note, our electronic payments processing business came in with higher revenue due to the acquisition of a customer with multiple accounts. Expenses during the quarter were -- expenses were down versus prior quarter with multiple positives and negatives, the most notable of which was higher – excuse me -- higher professional services expenses in the first quarter related to our annual audit, which contributed to the large decrease in that line item, mainly around $2 million. We did experience higher payment processing expenses in light of our newly acquired customers. But important to note, we have included these trends into the remainder of the year forecast. Barry, I'll turn it back to you.

Thank you. Slide number 22. Obviously, looking at 2023, it's important that we still look back a little bit. I am very pleased with the management team, the accounting team, the legal team, the entire staff of Newtek that really had a lot of headwinds in growing a business. And I think that we tend not to understand that appreciation. The National Bank of New York City was a very clean, but 61-year-old bank that has virtually no digital transactional deposit acquisition capability. I used the term purchase loans from brokerage. If you use some originated as well. And basically, the broker gave the bank alone in the met the credit, it worked. That was the way we're generating assets, and it worked well for the bank for -- given what the bank's strategy was. We overcame operational and software change that established our business model and strategy, which listening to this call, you realize it is entirely different. We launched the Newtek Advantage. We took deposits in digitally without branches. We made major enhancements to the accounting staff and regulatory compliance, changing from a business development corporation into a 1933 at company, huge undertaking. All of those old portfolio companies now have to comply with SOX consolidation, the amount of automation for the business and data migration, just enormous. And that was done while we made money in 2023. So, in 2024, we're continuing to build out the Newtek Advantage to continue to make it the best business portal in the market today. We're beginning to demonstrate now that we've got management and staff in place that we could gather business deposits and show the customer that we can do more for them than just take their money and maybe take them out to launch. Most of them really…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Crispin Love of Piper Sandler. Your line is now open.

Thank you. Good morning. Good morning, Barry. Good morning, Scott. Hope you're well. Just first off, on the 2024 guide. EPS at a headline level here is unchanged, but you are expecting lower originations, lower held for investment loans and a lower margin guide. And can you just give some detail on where you're making that up? It would seem that this would drive lower NII, but as you all know, NII is a relatively small part of your income. So curious on specific areas in noninterest income, where you're most bullish on in the back half of the year to get to that guide?

Cris, may I give you a generalization? I would say it's in the ALP business, which is picking up steam, particularly for the third quarter. We have a couple of interesting opportunities in the merchant services area, which I think will pick up steam. And that's where I think we're going to outperform.

All right. thanks, Barry. And then just one more on the guide. You made some comments earlier in the call about the recent volatility in the broader markets, potentially impacting your guide keeping it steady. Can you just discuss how the events and volatility over the last kind of five or so trading days impacted the guide versus what your expectations might have been a week ago or at Investor Day. And did that impact the changes at all in the quarterly cadence of the guide being a little bit lower in the third quarter before kind of accelerating in the fourth?

Yes, it's a great question, Crispin. And it's funny. Given what happened Thursday and Friday and yesterday, would anybody have cared if I increased my guidance. So with that said, we try to put guidance out there that people can count on and rely upon. I would also comment that I didn't really think we were going to have a Thursday, Friday and Monday. It's hard to predict these things. So, our midpoint is $1.95. And as of yesterday, we had a $12.50 stock price. If you believe in the business, that's -- I'm not going to say whether it's high or low, let everybody else figure that out, that's an abnormal multiple. So, I think that from my perspective, it's important for people to expect the unexpected. I can't tell you, Norton Chairman Powell or anybody tells what's going to happen in the month of August or September. We only make our best educated guesses. It will be foolish for me to think that the market is totally wrong here. So, market got a little bit more concerned about things, typically tends to be a good forecaster. And therefore, we just held the guidance. It just made sense to do that.

Thanks, Barry. I appreciate the color, and that's all I have for questions. Thank you.

Thank you, Crispin. Appreciate it.

Thank you. Our next question comes from the line of Tim Switzer of KBW. Your line is now open.

Hey, good morning. Thank you for taking my questions.

Morning, Tim.

Could you explain your comment a couple of minutes ago about the shift in EPS going from Q3 into Q4 being driven by some to the ALP program, did the securitization close in Q3? Like should that impact the Q3 EPS at all? And -- or is it more at the time of originations when you recognize most of the revenue from that program.

Yeah. Tim, first of all, I really appreciate the question, because investors and you're there to be a purveyor of the data that we put out what this is not kind of not like a straight line. It's going down in Q3 and then up in Q4. We have a lot of different factors internally with respect to joint ventures, transition from one venture into another that could potentially change gain on sales margins in one quarter or another. So many things I really can't go into because they're still in a formation category. But I would tell you that the way to look at our organization isn't necessary at top and I know the market looks at things quarter-to-quarter. We look at it more or less over the course of time. We feel very comfortable that Q3 and Q4 together will get us within the margin that we gave it to. If the market wanted to flatten things out, we understand it. But we think that there could be some things that might weigh on the earnings in Q3 that we'll be able to recoup in Q4. So, it's really just a timing difference. I mean, the funny thing is, if you think about the reality of the business, does it really make a difference whether something happens in September 15 versus October 15. Well, the reality is that the way the market works and the accounting principles work it does. So, we have spent a lot of time. We knew this would be a question. We are comfortable with the guidance that we put out and we think the market should follow that.

Okay. But can you help us understand the mechanics, I guess, of what that driver is going to be from Q3 to Q4? It sounds like it's mostly on the noninterest income side. And is that...?

Yeah. From the noninterest income side, and it could also be relative to -- could also be relative to the default curve in credit losses as well. Those are the two things. And then the other item could also be the deposit gains. Those are the three things right now that are causing volatility to be able to bring in lower cost of deposits or some extraordinary gains, things of that nature.

Okay. Your comment on the default curve. Does that imply either higher provision or lower -- or I guess, higher net losses on the tender value loans?

I don't know I got to get to September 30.

Okay.

I wish I had a crystal ball. I wish I did. But let me tell you, the last thing I want to do is miss a number. I've been doing this for over two decades, and that's happened pretty infrequently. So, I understand we are frustrating the investor and analyst community by having a business model that does this. I just ask you to do the best that you can, and you can rest assured that we're going to do the best that we can to make sure we deliver that number right in the middle of where we expect to be for the calendar year.

Okay. Got it. And then other noninterest income jumped up about $6 million this quarter. It was a bit above the typical range. What was the drivers there?

Big driver is the alternative loan program. We did a lot of loans. When you go and look at some of the math I put out and you look at the value of those loans, they're very valuable.

Okay. Okay. That's all for me. Thank you, guys.

Thank you.

[Operator Instructions] One moment for our next question. Our next question comes from the line of Steve Moss of Raymond James. Your line is now open.

Good morning.

Good morning.

Good morning, Barry. Maybe just starting with the comment you made about the 504 loan, just with origination underperformance this quarter. Just curious, like maybe give a little color on some of the underlying factors and just kind of why you think it will pick up here in the second half.

Yeah. I appreciate that. And Scott, we reduced the guidance for 504 for the year, correct? So was it...

175.

Okay. So, Steve, it's a really good question. One of the things that we pay attention to in the bank is the diversification of the portfolio. So, we believe that given where we were in the balance or a little overweighted on 7(a). And I don't think I'm being very clear here. We just increased our guidance on 7(a). So, what I'm telling you is we're going to be able to add to conforming C&I and conforming CRE in the third and fourth quarters to balance that out. We were not able to execute on that as well as we thought in Q1 and Q2. So, it really has to do with making sure we stay within our existing guidelines. And we had to curtail some of the 504 loans, we actually had the capability to do it, but we lay it off to third parties and got smaller amounts of fees rather than put them on the books.

Okay. Got you. And then in terms of just the -- the other question I have here is just on the Newtek small business finance portfolio. I realize it's a small portfolio, but the balance are pretty meaningfully quarter-over-quarter, and I was thinking of that portfolio as being in the runoff. I know some of those loans have draws there. Just kind of curious, is this kind of the peak level here just given since there's a fair value adjustment that would pressure impacts NII there?

I think it will begin to flatten out. That is my guess at this point in time based upon what we think the curves are and the seasoning. So, it's -- I think that our guidance factors into those numbers, and I do believe it should flatten out here. So, we had a bump. So, if you go back and you look, it was fairly muted, right? Q2 '23, Q3 '23. Q4, when you look at that FV adjustment, same thing next quarter and then you had a jump I think you could see a repeat of that in the next quarter and then it could start to go down.

Okay. Got you. And then in terms of the -- in terms of just on nonperformers here, what is the full nonperforming number for the quarter -- last quarter is $56.4 million. Just kind of trying to tie up my numbers here.

At NSBF?

Everything combined.

Okay. 46 and 13 -- 46 million? Is that right, Scott? Would you add to...

I would add those two together. So, Steve, if you look at slide 15, you've got the fair value of the NSBF portfolio at $46.6 million. You've got nonaccruals at $13.6 million. So, the sum of those two, which is approximately $60 million. Keeping in mind that you got about $3 million coming off at the bank given the loan sale, Barry mentioned.

Right. Okay.

And Steve, one other thing that's real important here, and this is where we get caught up in traditional bank metrics. There is in excess of $300 million of alternative loan program loans that are all performing. So that doesn't factor into any of these numbers.

Right.

Now the reason why it doesn't is they're in joint ventures, they don't consolidate and they're an equity interest. But the other thing, too, is we have 504 loans of which historically probably done close to $400 million to $500 million over our life that we sold to third parties that have no charge-offs and no defaults. So, one of the things that's difficult for us in the comparison, which I think is why we trade where we are. And I can't change it, and I'm not going to change it. All we're going to do is make money in three quarter is the comparisons to the bank's existing historical bank model on these ratios, they don't foot.

Right.

Thank you for in that question. Thank you very much for asking that question.

Steve, I'd also point out that our -- we've taken into account all NPAs at the bank and included those in our allowance calculations. So, I think I feel like the company has appropriately reserved for the losses on the bank portfolio.

Right. And the cadence is definitely consistent with what you guys signaled before. Okay. I appreciate all the color here. Thank you very much, Scott.

Thank you, Steve.

One moment for our next question. Our next question comes from the line of Christopher Nolan of Ladenburg Thalmann. Your line is now open.

Hey, guys. Following up on Steve's question, how much does the total nonperforming loan volumes impact reserving or the provisioning for the quarter.

Scott, do you want to answer that one?

Yeah. Chris, it's a good question. And unfortunately, it's not a very straightforward answer because we go through a detailed analysis of the nonperforming portfolio, which is going to include a full collateral analysis going to include where the borrower is in terms of either pass-through payments, past due fees, et cetera. And also take into account where -- how long we think the loan will take to liquidate. So, we do that on a loan-by-loan basis on loans above $50,000 for loans that are below. We have a policy where we reserve $0.50 on the dollar. The majority of the assets that are in nonaccrual are above that $50,000 threshold. And so at least in nominal terms. So, I mean, it's -- I wish it was a cookie-cutter answer, but it's -- we get very detailed when we go through these analyses. And that's on -- that's across the company.

Yeah.

The other thing, Chris, I would tell you we take into effect the actual collateral behind each loan, and it's done on a loan-by-loan basis. It's extremely thorough. Obviously, some of this comes from our BDC training where these assets were treated as if they were securities and had to be done to a very strict standard. I think the important aspect to note is when you look at the fair value of the $46 million, that's written off the books, it's written off the income, and that will be converted into cash over the next six to 18 months.

Great. Thank you. And then based on your earlier comments on the forward guidance, is it fair to say that we should expect flat gain on sale in the second year? Or maybe I'm misinterpreting that.

Go ahead, Scott. From seven, you mean from seven. We say flat sequentially or flat?

Flat sequentially, yeah, in third quarter.

Go ahead, Scott.

I'd say, Chris, we're expecting on balance, pretty similar production numbers for the third quarter, slightly higher. So, I would say the premium on loans for the quarter was 11.02%. We're expecting 11% for the third. So, I think on 7(a), that's what you can expect. The ALP program has some -- we're expecting volumes to come in there. Those prices are -- that production can also drive results. So, I don't want to get too myopic on 7(a) when ALP certainly drives results as well as well as 504. So, I think that those three buckets, essentially are going to dictate how much in terms of realized premiums and mark-to-market gains we have.

Great. Final question. Given the new hire for business deposits, what's your thinking in terms of how to bundle services that the Newtek Advantage can offer to better attract low-cost business deposits. Thanks.

Yeah. One of the areas, Chris, will be -- and hopefully, we'll push this out second half of the year, same-day payroll. So, because we -- our payroll processor, I think we have 20,000 employees in the payroll bureau. Many employees like getting paid as early as possible. They want to get their paycheck on a Friday versus wait until Monday, for example. So that is the type of thing. On the payment processing side, we process over -- close to $6 billion of volume and the ability to move the money into the client's account same day, very valuable as well as show the client in their banking portal, what their chargebacks were, their refunds all the batches that occurred in addition to any ACH money that came in or Fed money that came in, et cetera. So, these are all things that are on the drawing board, and we will roll them out over the course of time. A lot of it is based upon having the right software interface with clients for the client experience as well as training the staff, which we are in full gear on. I can't tell you it's going to happen. It can't happen quick enough.

Great. That’s it for me. Thank you.

Thank you, Chris.

Thank you. Our next question comes from the line of Bryce Rowe from B. Riley. $Your line is now open.

Thanks. Good morning. I wanted to follow up on Tim's question there, Barry, about the comments you made about the default curve. Clearly, a pretty fluid macro backdrop we have at this point. Is that kind of the -- maybe the answer to that question? Just a lot of uncertainty, a lot of fluidity. Are you all maybe providing a little bit more upfront for some of your lending products, especially the 7(a) now that we're seeing the uncertainty increase?

Look, I think, Bryce, it's important for us to be pragmatic and realistic when we do this, so investors can earn what's expected. And I think when you think about what's occurred in the interest rate market, higher for longer, put a lot of -- put commercial real estate aside to put a lot of stress on business owners where the '21,'22 and '23 vintage loans, which were done when prime was at 3%, 4% and 5%, is now 8.5%. Now I don't know, priced -- the Fed cut rates by 50 or 75 or 100 between now and the end of the year? I have no idea. I don't know if you do, but I don't. So, I think that -- and I'm going to reiterate this, and I really appreciate the work, and I know this is difficult for you guys and for investors. But the reality of it is we're still netting out very healthy returns, but almost all the questions came in on the charge-off expectation, which is fine, but we are telling you, and we've said this previously that they were going to ramp up a, based upon the seasoning and then we've also got this higher for longer scenario. I mean, I scratch my hand a little bit. There were discussions on an emergency Fed cut yesterday. Well, I don't have a crystal ball. I just don't see -- this isn't an emergency. Unless the Dow Jones down 1,000 points a couple of days in a row, then maybe you might think of it as an emergency, but the Nikkei was down 12%, now was up 10%. I mean it's pretty volatile. So, it's hard for us to forecast what's out there. We're doing the best that we can, and we try to be conservative. And this is something that within our range at a 12 handle stock price. This isn’t a bad place to be.

Yeah. I hear you. I tend to agree. In terms of another comment you made, I think Scott said that you all have baked in just 125 basis point cut into maybe into your forecast or into the guidance. How do you think about multiples of 25 basis point cuts and how that might affect the range?

Yeah. So, it's a good question. So, I don't know what the market thinks about most banks. And when people talk about rate cuts or hikes, they never qualified. Is it SOFR? Is it the whole curve? Is there a shift, et cetera. So, I mean, our internal belief is that short rates over the next two to three years are more likely to go down than up, and I don't know how much room there is in longer rates. I think from our prospect, the valuation on the portfolio, and this is really important, if short rates were to be cut, we would pick up a basis point to basis point coupon on our securitized debt, which I think is close to $200 million, okay? The SBA loans typically lag on a quarterly basis. So, depending upon whether the rate cut is September 1 is September 30, you could have the same coupon on the SBA portfolio on January on December 31 as you've got on October 1. But that's sort of up to the SBA when they put the changes through. So, these are the types of things that we have to figure out as we're coming up with a forecasting model and your question is very good. We believe we're fairly agnostic to rates going, and that's where we try to be up or down. We're not sitting here like most of the financial institutions frame for rate cuts that we need rate cuts to bail us out. Because, look, I don't know how many we're going to get or I assume we're going to get at least one before the election. But I don't know if it's a quarter. I don't know if it's 50%, it depends upon what happens in the rest of August. But if rates came down by 25 institutional securitized debt on the SBA NSP upfront portfolio would come down. The coupon of the portfolio itself may lag because it's quarterly adjust. I would tell you our deposit rates would come down, particularly on the consumer money market most likely in competition with the rest of the market. Our deposit rates, we made an adjustment yesterday on up for CDs would come down. I think everything else pretty much remains steady.

And Bryce, just to tack on to that. If you go back to my comments on the transcript ready, you'll see that we got about $170 million of CDs repricing or maturing in the next six months. So that will provide opportunity to flow those changes through. And also, as Barry alluded to, you got $250 million of consumer high yield savings that has the potential to reprice as well. So that's at the bank level. If you look at the holding company and everything outside of the bank, we're fairly match funded. The NSBF portfolio is securitized and reprices off of SOFR. So, you've got maybe some basis difference between prime and SOFR. And then, we've got the fixed rate bonds at the parent company that are mostly funding our ALP program, which is fixed rate. So, I feel like we're in really good shape to weather changes in interest rates. We just wanted to make sure we were trying to telegraph to you guys that we're watching it and we're thinking about it.

Okay. Okay. Last one for me. Just can you remind us the timing of, I guess, the requirement for the disposition of the technology piece of the business. I know you guys said you're going to have an update here shortly, but what is kind of the drop-dead date for that?

The date in the application is Q1 2024.

Okay. '24, '25 you mean?

I'm sorry, '25. I only had a half a cup of coffee. Thank you, Bryce. I appreciate that. I need a lot of help here.

All right. Thank you, guys.

Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Barry Sloane, CEO and President, for closing remarks. End of Q&A:

We can't thank everybody for participating, particularly the analysts, and we appreciate the thoughtful and insightful questions on the quarter. We look forward to continuing to deliver on our numbers and demonstrating that we've got the right model in the right place at the right time for this particular industry. So, thank you very much.

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

Thank you.