NewtekOne, Inc.

Good day, and thank you for standing by. Welcome to the NewTek One, Inc. fourth 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. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising 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 first speaker today, Barry Sloan, president, founder, and CEO. Barry, please go ahead.

Good morning, everybody, and welcome to our NewTekOne fourth quarter and full year 2024 final results conference call. I would also like to introduce and mention that Scott Price, our chief financial officer, will be helping me present on today's call. This is our second full year of transitioning from a business development corp to reporting as a financial holding company owning a nationally chartered bank. We certainly appreciate everyone's patience, enthusiasm, and attention to all the information that we provided into the market over the course of the last two years. Today's presentation will be a little bit cleaner, a little bit of an abridged version. We look to get through the discussion piece in about 20 minutes. 20 to 25 minutes, and then open it up to Q&A. So it's clearly more condensed. And with that, we're asking all of you to rely upon the press release information we put out late last night, which pays a lot of attention to detail, which shows strong loan growth, strong deposit growth, strong ROAA performance, strong ROTCE performance, and really good attractive efficiency ratios. We look forward to presenting today and look forward to turning the pages on NewTekOne presentation. You can go to our website, NewTekOne.com, go to the investor relations section. The PowerPoint is hung there. Going to slide number two on that presentation, please note the statement regarding forward-looking comments. And then we'll move to slide number three. Important to note NewTekOne Inc.' 's mission statement and purpose. NewTek One is a technology-enabled disruptive company that is wrapped in a bank holding company blanket. It's really important to note who we are and what we do. We've taken our technology to acquire clients cost-effectively, make, we believe, better loans than the industry standard with better risk-reward relationships that are better for our clients because they have long amortization schedules, and on a net basis, give us adequate capital adequate reserves and better returns to the shareholders most importantly a better product for our business customers three the ability to gather liabilities and deposits that are a more valuable to our shareholders because they're stickier because of the connectivity to the relationship that the customer has through the new tech advantage our business portal um also to the business clients because we give them a tremendous benefit for us allowing them to give us deposits below the risk-free rate and a real better solution for all of our constituents. So when we focus on our mission statement, NewTekOne is a provider of business and financial solutions to its target market of over 30 million independent business owners in the United States. We acquired a bank early in January of 2023 so we could add depository solutions and real-time payments in addition to its five core verticals. At the end of the day, our goal is to make our client, the independent business owner and client more successful. We obviously are positioned as a financial holding company regulated by the Fed, and we utilize proprietary and patented advanced technological solutions to acquire customers cost effectively and provide best-in-class solutions to independent business owners without the use of traditional bankers, a traditional branch network, traditional brokers or business development officers. We look forward to further describing our company, showing our financial performance and a better explanation of why we are a technology enabled company and a disruptor similar to organizations like Uber that disrupted the taxi cab business and amazon.com that disrupted the retail business in terms of how their clients transact in the marketplace today. But slide number four, if you go to NewTekOne, we've highlighted our fourth quarter financial 2024 highlights, all things that you could see in our press release. We came in at 70 cents per basic, 69 per diluted. The important metric there is less than 43% improvement over the three months from the prior year and prior quarter. Net interest income, which is a growing segment of our cash flows and our income, also improved a 36% increase over the same three-month period a year earlier. Obviously, a lot of our income is non-interest income related. That's a bit of a change from this particular industry. But as we grow the business, this will be a continuing growing component. I would also like to go down to the last bullet on this slide, on slide number four. Shareholders' equity, $296 million, a 19% increase. All the while, we're also paying a very healthy dividend to our shareholders. Moving to slide number five, which is NewTek 1 over 12 months versus the quarter. The annual comparison is also very attractive, as you can see. $1.97 per basic, $1.96 per diluted. A nice increase, particularly when you take out the tax benefit from 2023. Also important to note on the final bullet, ALP, which is our acronym for Alternative Loan Program Lending Product, which is an important growing component of NewTekOne, 269 million in loans for the 12 months, over 83 million of ALP loans for the 12 months. Once again, an important growing component. I should point out that from an earnings perspective, according to the Bloomberg consensus, $1.92, so we beat that. And our midpoint prior guesstimate was about $1.95 at the midpoint. Let's move to slide number six. And I think this is an important slide to trying to educate the market. analysts and their investor base on our organization and its ownership of NewTek Bank. And that not only do we have a unique operating methodology, but most importantly, a very unique value proposition, both to shareholders from a financial metrics standpoint and to the customer base. The three problems that we believe the banking industry is trying to navigate. One, everything is very manual, manual labor, manual branches, and antiquated data exchange with customers. We believe that traditional bankers, branches, and customer acquisition is too high. We think we've done a good job in solving this problem, and we'll discuss. The banking industry's profitability is predicated on the cost of deposits being materially below the risk-free treasury rate, whether that's the one-month bill or a government money market fund. A lot of our competitors are taking in deposits 20, 30 basis points for checking. And really, they're not offering the client much at all, which we'll get to the bottom of this slide through the new tech advantage. If the industry does not offer value-added services to its business clients, I think it runs the risk of losing these deposits and getting disintermediated. If you look at our deposit base, 75% to 80% is in the insured category. I always marvel over the marketplace asking me how many non-interest bearing deposit accounts we have. Well, the reality is those non-interest bearing deposit accounts probably aren't going to negative. They're only going higher. So paying a market rate of interest with a sticky solution, we think is incredibly valuable. That's what we're building. That's what we look to get understood by the marketplace and get recognized and still have very good margins on our overall business because of what we do on the asset side. Bullet number three, third problem. The banking industry makes loans which attempt to totally avoid credit risk. Maybe that's a bit of an exaggeration and a parable. But however, if you look at it, they provide low margin and therefore attempt to almost eliminate the aspect of credit risk management. We actually measure it, we manage it, and we make loans for alpha, and we've been doing it for over 20 years. When I say we make loans for alpha, yes, we will have portfolios that have higher charge-offs. We have higher provisions. However, net of these costs, we earn higher returns on our assets and our tangible common equity. And we do this, and rather than avoid credit risk on low margin, we believe we've got a better management, a better formula, and a better way of making loans. And in addition, our loans are patient capital to our customers. We give our customers long AM schedules with no balloons and the ability to repay, but we do require our clients in our core lending products like ALP 504 and 7A to provide personal guarantees and we lean the personal assets when appropriate and all the business assets. Very, very important to note. From a customer acquisition standpoint in bullet number three, we get six to 900 unique business referrals a day. That's through our new tracker system, which is patented from all of our alliance relationships like a Morgan Stanley UBS money came up with trade association, etc Let's pull it on this slide slide number six Why should we get the benefit of getting somebody's savings and depository account money moving account in a business account? That's checking it one or business savings at three and a half without giving the customer some value our competitors are Charging them more on fees. Ours was none, no fee. And they're not paying the rate. We give the client through the NewTek advantage. Free document storage, free web traffic analytics, free QuickBooks integration. I call your attention to a recent press release we put out. Merchant services, daily batches, and chargeback and refund information into the NewTek bank account. The ability to connect with bank personnel, a real-life person in the United States on camera. Hear that, staff? On camera. The ability to make payroll online. Obviously, you've got to use our payroll solution and our payment solution with a direct connectivity into the bank account. All through one business portal and one ecosystem. Go to our website, take a look at the new tech advantage, and see that it truly is an advantage. Through the calendar year 2024, we picked up 950 new business checking accounts. Our core business deposits grew to $216 million, approximately... That was approximately $106 million increase from 12-31-2023. And we're pleased that these customers will win over loyalty because we're providing them value for them giving us their valuable depository relationship. Once again, 75 to 80% of deposits are insured. I'd like to call your attention to slide number seven, NewTek Bank, financial statistics for 2024. ROA 6.3, ROTC 48%, efficiency ratio 42. You don't see these in the banking industry. I refer to this as the top half of the bank. Frankly, we look at the analyst understanding coverage and investor base, always focusing on the bottom half, charge off, provisions, cost of deposits. I would argue that our deposits paying market rates of interest are better and more sticky and insured than that zero non-interest bearing deposit base that some of our competitors have that we saw in 2023 can flee at a moment's notice. But look at the margins for NewTek Bank, the net interest margin, the yield on loans. I will point out our allowance for credit losses at 4.9% plus our cushion on capital gives us plenty of room here to continue to operate the bank in a safe and sound manner and importantly, provide a great product to our customer And also, very importantly, provide a great rate of return to our shareholders. The next slide on number eight, we focus on the same types of metrics for the holding company. Yes, they are a little bit more watered down, but this is the consolidation of the bank up into the holding company activity. Still exceptionally strong return on average assets. This has been going on for years. This is not an anomaly. It's quarter after quarter. Same thing for return on tangible common equity north of 20%. at 24.1%. The transition of our organization, which we owned and operated for 27 years from inception, 25 years of the company, continues to take place transitioning from a BDC into a bank holding company. We're very appreciative of the financial performance that we see on slide number eight. Slide number nine, company forecast. Important to note, we bumped up a prior forecast of $2 in earnings per share to $2.25 in a range to $2.10 and $2.50. Obviously, there is a lot of forecasting volatility in the market. We're seeing a lot of things in the news with respect to the current administration. So we've given ourselves cushion with some of the wider forecasts. But these are ranges we're really, really comfortable with. I do want to point out that on the 7A business, on a billion dollars of originations, in 2025 from an expectation standpoint, 750 million will create a government guaranteed bond, which will be sold into the market at a gain on sale. 250, I think I said 750,000, that's 750 million. 250 million will remain on our balance sheet. So as you can see, the mix of assets on the balance sheet will begin to become more diverse and change. However, I would also like to point out with respect to risk measurement, The average balance on the uninsured loans in the seven, eight programs, about 120 to 140,000. That's the uninsured piece that gives us a very diversified portfolio. I would ask you to find a bank that's in our business greater than or equal to of our size that has such diversification in credit across the portfolio, diversification of geography or national diversification of NAICS code. It's a very, very diversified portfolio. And one of which we've been in for over 20 years and have managed the 08-09 crisis, the pandemic, et cetera. I think it's important to note that our company forecast takes all these items into consideration. Slide number 10 gives the 2025 projections with a midpoint of 2.30. That's nice growth over our diluted earnings per share of 1.96. And then we have the breakout quarter by quarter. Please, I point you to slide number 10 on our PowerPoint deck. Slide number 11 and 12 are extremely important. Credit is clearly a sensitive area to the market today. So we wanted to add these two slides to give investors and analysts some comfort that our business model can withstand the stress. And in the event that our forecast and belief, which we feel good about, could possibly be off, that there is insulation here. Let's take a look at slide number 11. In 2024, to get to our 196-197 EPS number, we took 1.5% in charge-offs against the loan portfolio. And our guidance that we gave, 210 to 250 for 2025, we used a little under 2%, and we believe that was the flattening point, that it probably will not go higher at all and should level off and start to go down next slide will give us some comfort there with respect to the default curve in the event that we are off from a stress standpoint and the charge-off rate goes to three percent so almost a fifty percent miss in the charge-off rate it'll hurt the earnings approximately by fifty cents a share once again holding everything else constant in the model uh that still leaves you with a very healthy dollar 80 particularly given the current stock price particularly given the current dividend payout i mean this gets to the point where we do need people to begin to pay attention to the fact that this is a management team that although it's owned and operated a bank for two years and has been through two regular two years of regulatory cycles it is not our first rodeo in making loans in participating in this business um and we're proving this year by year, quarter by quarter. Because of the margins in our business, we're able to manage credit risk in the lending portfolio. We have the tools. We have the ability to absorb unanticipated movements beyond the expectation in credit performance and, importantly, still remain profitable. I think it's very, very important to note. I also want to note that the gain on sale is something that is a reoccurring event. It's something that we've experienced over years. quite a long period of time. It's not new to us. So making loans, selling the government-guaranteed piece into the market, extremely important. We've been doing it since 2003. Slide number 12. NewTek Small Business Finance, which is the non-bank lender that's at the holding company. It sits at the holding company because when we acquired the bank, there's debt insecurizations that have to remain up at the holding company this is in a runoff mode so in order to basically demonstrate the default curve we looked at the net increase in non-accruals before charge off quarter by quarter so you can see the second quarter of 2024 it peaked it's declining in q3 declining q4 and we expect this to continue to decline also important to note the percentage of the portfolio that's fairly new less than 24 months down to 8.2 percent so One more item. The accrual portfolio in the last year paid off by $120 million. So when you look at the drag of NSBF on the business, because it is a rundown mode, it should be less and less of a drag going forward. A, based on seasoning, passage of time. B, based on the fact that the total portfolio has declined. I also want to make a comment. A lot of the loans in the NSBF portfolio were made in low, and I'll use the term zero interest rate environments. Many of us forget the fact that prime went from three to eight and a half percent, almost a five and a half percent move to our customers. That almost doubles your monthly P&I. So those loans, they were stressed up to a three percent. However, as I just mentioned, prime moved by five points. And at the same time, you had cost of inflation, cost of labor, very stressful time for our client base. This is where our business model works and shines. Obviously, the newer vintage loans are stressed at higher rates. They're harder to qualify. People say, well, how are you able to grow a business opportunity when you think the economy might slow? Credit might deteriorate or the universe of acceptable borrowers may not be as robust. All things that we believe in and I believe in. It's the technology. It's the technology. It's the technology. We use our technology to acquire clients on a more efficient basis. We're signing up more people, diverse people. We're able to cut through these referrals quickly and grab the high quality clients through our five c's of questions in the questionnaire through our secure file vault we're able to grab the best credits early without having to go back and forth through a traditional banker broker bdo without emailing pdfs back and forth it's all automated it's the technology that our chief information officer has built and put us in the position which enables us to be the number one sba lender in the space we are excited about 12 We think there's a flattening of the loss curve, and we think that even as the bank starts to ramp up, we have enough reserves, we have enough capital, and we'll be able to continue to grow our earnings pool. Slide number 13, our alternative loan program, a growth business. We anticipate doing about 500 million of these loans in calendar year 2025. This portfolio currently sits at 400 million. Originations, I believe, are close to $480 million. Our charge-offs historically in this portfolio, 78 basis points. A lot of interesting data. You get diversified geography, diversified industry. We have very large margins on this portfolio. That should ultimately factor into NIM. Historically, we've done them out of joint ventures. Now on the balance sheet, going into securitizations, which will give us a little bit of different income and balance sheet treatment going forward. I'd like to call your attention to slide number 14. We've done 672 million of 504 loans in calendar year since our inception 2015. No charge loss since the program's inception. So when you look at the 504 program and you look at the AOP program, it's a little bit of the antithesis with respect to creditworthiness to the 7 program. But what we do is we look at markets We provide loans that are great for our clients, great experience, that have the best risk-reward and best alpha. This does not exist in the banking business. We are asking investors, the analyst community, to look at us as a risk-versus-reward lender. Please learn that we are a disruptor. We're not acquiring deposits. We're not making loans. We're not doing payroll payments, insurance. other people are doing the business slide number 15 ppnr for those bank aficionados this is an important metric it basically shows that our strong core earnings and we have a greater capacity to absorb potential credit losses in the future while continuing to invest in growth for the future slide number 16 that's the ppnr at the bank 11.3 percent versus an industry average of 1.26 and 1.59 Slide number 17 shows the diversification of non-interest income as a dominant source of revenue. That will continue. It is reoccurring. You'll see it quarter after quarter. It's not going to change. It's going to continue to develop and benefit our EPS number. It is our business model, and we believe the market will appreciate that they're continuing to get nice dividends, growth in shareholder value, and give us, we hope, the good market premium for what we're doing in the marketplace. Slide number 18, I think all of you could do your work here. You're quite familiar how well we compare it to our biggest competitors. One thing I do want to point out, we had a lot of cash at the bank at the end of 12-31-2024, I think in excess of 300 million, I think it was 325 million in deposits that almost had no margins. That did water down our net interest margin. Those excess deposits will be used to pay off some higher cost CDs that are maturing in March, April, and May. Slide number 19 is our comparison to, we think, our closest competitor, who we think has done a great job in the marketplace, Live Oak Bank. We generate income pretty close to theirs. They've got $13 billion of assets. We've got two. They've got a tax rate at 11. I think our whole tax rate's a little over 26%. That came down a little bit because we are not quite as influenced by the old position of National Bank of New York City, which was New York City based in domicile. Slide number 20 shows growth in book value and tangible value, almost two bucks a share. I would now like to turn this presentation over to Scott Price, who will talk a little bit about our financial numbers and the MD&X. Thank you, Scott.

Thanks, Barry, and good morning, everyone. Slide 23 shows our yields and rates on a consolidated basis. My comments will focus on performance in the fourth quarter versus the third quarter of 2024. During the fourth quarter of 2024, we experienced margin contraction, which was driven by a combination of positive and negative factors. On the negative side, we had higher cash average balances at the Fed and a full quarter impact of the Fed rate cuts that happened in the third quarter. The latter impacted our yields on our 7A portfolio as the rate cuts went into effect on October 1st for this portfolio. We also consciously gathered deposits in October and end of November, holding retail deposit rates steady through most of November as we observed our peers holding or dropping their offered rates. On the positive side, we had growth in all loan categories, and growth in the ALP portfolio helped mute the impact of the drop in the SBA 7A rates. We also managed to grow our average balances in our business checking and money market products. On our retail deposits, we ended up cutting rates in November and into December and have cut rates further in January and February and expect balances to hold. In 2025, as Barry mentioned, we expect some attrition in higher price CDs and expect to grow business deposit balances to offset that attrition. That should provide incremental lift to the net interest margin from the December levels. The average rate on our CD portfolio that matures in the first half of 2025, which is mostly concentrated in the second quarter, is almost 5%, whereas current offered rates are below 4.45%. Turning to the provision for credit losses, The provision was up for a few reasons, primarily migration to non-accrual and net charge-offs. I'll remind everyone that the portfolio at the bank in the 7A space is a new portfolio, so non-accrual loans could only go up from zero. Additionally, we experienced net charge-offs of 5.1 million or 154 basis points for the quarter when annualized. And from the third quarter, that's up 3.4 million and almost 100 basis points, respectively. The reserve of total loans declined during the quarter as the required reserves on impaired loans declined as a percent of exposure. As Barry pointed out earlier, we have sensitized our forecast for higher default rates and higher severities. We believe that we will be profitable should net charge-offs dramatically increase. Non-interest income was up $12 million for the quarter, which included higher gains on 7As, guaranteed and unguaranteed loan sales. I would point out that our ALP portfolio grew $90 million versus prior quarter, which is a primary driver of the increase in the net unrealized gains. Turning to non-interest expense, salaries and benefits was down over $1 million due to lower performance-based compensation, and professional fees were higher on NTS disposition costs. Technology expenses were also higher due to higher revenues. On income taxes, as Barry mentioned, we had a return to provision adjustment, and so our effective rate came out at around 26%. We expect 26% for the 2025 year. Barry, I'll turn it back to you.