NewtekOne, Inc.

Good day and thank you for standing by. Welcome to the new Tech One, Inc. fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloan, Chairman, President, and CEO of NewTekOne. Please go ahead.

Good morning, everyone, and welcome to our fourth quarter and full year 2023 Financial Results Conference call. We're pleased to report our results to you this morning. My name is Barry Sloan, CEO and President and Founder of NewTekOne, Inc. Joining me today on the call for presentation purposes is Scott Price. our Chief Financial Officer of NewTek Bank National Association and NewTek, Inc. In addition, we also have Nick Young, President and CEO of NewTek Bank, N.A., and Nick Ledger, EVP and Chief Accounting Officer for NewTek One, Inc. I'd like to draw your attention to slide number one, which is our fourth quarter reporting as a financial holding company. Excuse me, slide number one is the forward-looking statement. Get a chance to absorb that. Now go to slide number two. Slide number two, this is our fourth quarter and third full quarter reporting as a financial holding company. We acquired National Bank of New York City on January 6th, so it took a while for us to get a lot of the assets, employees into NewTek Bank National Association. So I think it's important when you look at year-over-year comparisons, the Q1 2024 comparison might be a little bit choppy versus the Q1 2023. And therefore, when we also look at our 2023 performance, it's very difficult to do the comparisons just as a prior BDC. However, I think it's important to focus on the quarter-over-quarter sequential comparisons. And we had a really good year and quarter-over-quarter comparison when you take a look at things like portfolio of loans growing, net interest margins expanding, and deposit growth. We also now have six analysts that are covering NewTekOne as a financial holding company. We've been able to demonstrate an ability to raise insured deposits quickly with a high growth rate through digital account opening. Also important to note, we'll go into this a little further, we don't have the interest rate risk issues that are currently present in the industry, as you can take a look at how our assets liabilities are very well matched. We also believe that a return on average assets or return on tangible common equity and capital ratios when you compare them to the banking industry are well capitalized, very high, and also well reserved against. I'd like to now draw everyone's attention to slide number three. So NewTek Bank National Association summary financial highlights focusing on Q3 to Q4 growth and the fiscal year 2023. If you look at return on average assets for the year, 5.76% at the bank, obviously very, very high for a bank. It will, as we get through the presentation, explain why we're able to generate such high returns. Return on change of common equity, 35%. Efficiency ratio, approximately 50%. These are really ratios you do not see in the banking industry, and a lot of it is based upon a very unique business model that focuses on returns on shareholder equity, return on assets, and not necessarily growing a book of business, which is very typical and traditional in the banking sector. Also being able to do it at a very efficient basis. Looking at on slide number three, the margins, important to note, we obviously had increasing yield on loans as we began to add more of our new tech type traditional loans. to the bank's portfolio that we acquired. Average rates on deposits were fairly stable from Q3 2023 to Q4 2023. We might have a little bit of an uptick next year as some old, low-interest-bearing CDs roll off, but we feel pretty good about the future for that, and Scott Price will talk about that going forward. And importantly, our net interest margin at the bank, 3.49% to 4.43%. That's pretty high. increase and most banks right now if they're lucky they're stable or they're growing marginally so we're very proud of this particular accomplishment with respect to margin all the while our capital ratios are strong cet1 at the end of the year 20.94 total capital 22 percent leverage 16.4 so we look at you know why and how we're being able to do this obviously we have a reliance upon the digital deposit channel for funding. It worked well in 2023. We're excited about the opportunity to add the transactional lower cost deposits throughout 2024. We've also maintained a very strong capital position and a prudent risk-based tolerance. And when we talk about our reserves, our reserves grew to 310 basis points at the end of the year. We hope we'll gravitate up to 350 basis points in 2024. That's like six or seven times the normal reserve of a bank in our particular space. Now, when you look at our loan portfolio, particularly in the 7A category where we're adding assets, we're a prime plus three lender and we're able to sell three quarters of the loan at a 10 to 11% gain on sale. Now, important to note as we go forward, we'll explain why we feel that the risk reward on those loans is well calculated it's well documented and that we believe these types of returns we will be able to preserve them and also be able to withhold any increases in delinquencies or charge-offs as time goes forward slide number four please new tech one summary financial highlights this is obviously the publicly traded holding company now we're transitioning more and more of the of the operating opportunities down into the bank where we have lower cost of funds and the ability to lever more. So working off of it, the holding company is the higher cost of funds that we've traditionally dealt with to run the business. But you can still see a return on average assets for the year, 3.2%. Return on tangible common equity, 22.7%. These are all very, very attractive numbers for a bank holding company. Average yield on loans, 9.25%. And net interest margin expanded from Q3 2023 to Q4 2023, 2.62% versus 2.78%. We're proud of all these numbers. Take a look at our capital ratios. Also, well-capitalized financial holding company, CET1, 16.49, total capital 19.6, leverage 15.6. Also important to note, we were able to deliver $1.70 on diluted earnings per share, $1. 71 on basic earnings per share for the calendar year. That was the midpoint of our guidance. We continue to encourage the market and analysts to follow our quarterly guidance and our annual guidance. Obviously, 2023 was a challenging year. About midpoint through the year, based upon issues that were relating to the banking industry, Silicon Valley Bank, signature bank issues, virtual public issues, It made it for a more difficult year, and we slowed down our alternative loan program. That program, which you'll see in our pipeline reports coming up, is back into full gear, and that should restore some of the growth. Needless to say, you can see these numbers. We're growing very well. But with that particular program in place that is very much capital-driven, we believe that we'll be able to get back to higher growth rates in the future. Slide number five. These are common questions about NewTek One that I've had with investors, just about why is your stock trading at the current market multiple? Why don't people understand? So I'm gonna go through some of these, I think it'll be helpful. First of all, we don't have a desire to operate like a traditional bank. We have a lot more to offer to our clients than just taking their deposits and hoping they get a loan. And we really look nothing like a small community bank. First of all, we're an OCC-charted national bank. We take deposits using digital account opening and remote deposits and are able to do so in a compliant, rapid manner with much lower costs than the traditional way of hiring bankers, brokers, and BDOs. Important to note, we're focused on return on tangible common equity and ROAA, not what I refer to as the assets under management traditional bank model, where you make loans, Get deposits, typically not interest-bearing deposits, which we think going forward there'll be less and less of that in this particular industry. And basically making loans, selling them, and getting various streams of income in, which we'll talk about. Clearly we have an overweighting of non-interest income versus traditional bank interest income. Gain on sale, payment processing income, servicing income, income from the insurance agency growing, payroll growing, and new technology solutions, which will be divested up between now and January of 2024. Our margins and returns are much higher than that of a traditional bank because of the way we lend on a risk-adjusted basis with more than adequate reserves and floating weight assets that work really well, A, for our customers, and B, for our shareholders. Many times I'm suggesting, gee, you went to the small business market, and we think small business credit is going to get weaker. We've been lending for over 20 years to this space. We've been through 08, 09. We've been through the pandemic. We understand this market. We have static pool analysis going back over this period of time. We have 12 securitizations in the market. We have a very good handle on what our losses are. delinquencies should be, and we are very confident that our reserves are more than adequate. This is not a new situation. We know and understand small business credit. We were questioned whether we were able to raise deposits. Well, we did for $340 million last year, up from I think $140 million when we took over the bank. The ability to raise lower-cost transactional-based deposits, we'll be able to demonstrate that, and Scott may talk a little bit about that in his presentation, but that will definitely be a Q2, Q3, and Q4 event where we start to really grow that side of the business. We've had to put people, process, technology, and compliance in place. We hired Jennifer Merritt as COO of a digital bank. She's brought in a great team of people, and we've got the compliance department in there with Sarah Limones from the BSA officer and we recently brought in our compliance manager Julio Hernandez so we're excited about our ability to grow that side of the business but we can't make an error in this space so we've done it prudently and that should drop the cost of funds over time and improve our margins gain on sale people say oh gain on sale nobody likes gain on sale gain on sale for new tech has been going on for 20 years. Quarter by quarter, go look at the Ks and Qs, we originate loans, we sell them into the market. So our gain on sale isn't like a portfolio of securities in a bank or insurance company. Rates go down, bond prices go up, and you sell them for a gain. This is clearly a reoccurring event. However, it's not spread income that's traditional, and we do believe it's valuable and gives us a diversified stream of income. Yes, a bank or financial holding company can be a growth vehicle, which is sort of unheard of in the market and kind of unheard of from a banking perspective without just doing the traditional bank trade of acquiring another bank, getting bigger, squeezing out the expenses. Not that that might not be an opportunity for us in the future, but it's not our core reason for existing today. Also important to note, we really strongly suggest that investors get to know what we do in payment processing solutions, tax solutions, insurance solutions, and payroll solutions. Please visit our website. Slide number six talks about the different earnings engines for NewTek across different areas. So we have a very attractive, diversified stream of income flowing up to the holding company. NewTek Bank divvying up. Small business finance is the legacy portfolio in runoff with very few operating expenses against it. The other businesses are fairly well self-described in our case and on our website. I'd now like to turn slide number seven and eight to Scott Price, who will talk about the data on these two slides. Scott?

Thanks, Barry, and good morning, everyone. I want to focus most of my comments this morning on slide eight, given the time constraints that we have. But we saw a nice expansion in our net interest margin during the quarter. That's going to be driven by mostly lower funding costs on a net basis relative to the balances. We clearly issued debt in the third quarter. We used those proceeds to pay down higher cost debt. We also saw our deposit costs increase 40 basis points. That's largely driven by the $92 million of CDs that repriced in the fourth quarter. We experienced good retention on our retail CDs that repriced and expect loans to reprice in the first and second quarters as we move through and try to eliminate the lumpiness in our CD portfolio. I'd point out that our loan portfolio, the yield on that portfolio in the third quarter included a prepayment penalty. So that's why you see a little bit of lumpiness in between the third and fourth quarters. We do rely on, as you can see in our deposit mix, we do rely on our high-yield savings product. We've seen nice retention in that product going forward. So far, we've seen minimal closures, and the seasonal slowness in deposit gathering is fairly muted for us with deposit levels relatively stable through today. I'd point out the comment that Barry made earlier about business checking and business accounts. We do expect to roll that out in 23 – excuse me, 24, and that will provide really optimal pricing, optimal funding costs on our deposit portfolio, and we expect NIM expansion as we go through the year into 24. So Barry, I'll turn it over to you.