Newtek Business Services Corp. Price & Performance (NEWT)

Good morning, everybody, and welcome to our Newtek NewtekOne fourth quarter and full year twenty twenty four 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 bit cleaner, a little bit of an version. We look to get through the discussion piece in about twenty to twenty five minutes and then open it up to Q and 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 praised a lot of attention to detail, which shows strong loan growth, strong [indiscernible] performance, strong ROTCE performance and really good attractive efficiency ratios. We look forward to presenting today and look forward to Turning the pages on Newtek One presentation, you can go to our website, newtek1.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 Newtek One Inc. 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 in 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 reserves and better returns to the shareholders most importantly a better product for our business customers. Three, 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. 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 30,000,000 independent business owners in The United States. We acquired a bank early in January of twenty twenty three, so we could add the 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. On slide number four, if you go to Newtek One, we've highlighted our fourth quarter financial twenty twenty four highlights all things that you could see in our press release, We came in at $0.7 per basic, $6.69 per diluted. The important metric there That's a 43% improvement over the three months from the prior year and prior quarter. Net interest income which is a growing segment of our of our cash flows and our income.

Also improved the 36% increase over the same three month period a year earlier. Obviously, a lot of our income is non interest, it's non interest income related. That's a bit of a a change from this particular industry. But as we grow the business it will be a continuing growing component. I'd also like to go down to the last bullet on this slide on Slide number four. Shareholders' equity, dollars $296,000,000 a 19% increase All the while, we're also paying a very healthy dividend to our shareholders. Annual comparisons also very attractive as you can see. $1.97 per basic, dollars $1.96 per diluted, a nice increase particularly when you take out the tax benefit from 2023. Also important to note in the final bullet, ALP, which is our acronym for alternative loan program Lending product, which is an important growing component of Newtek One, 69,000,000 in loans for the twelve months, dollars over 83,000,000 of AOP loans for 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 to midpoint. Let's move to Slide 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 metric 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, which customers. We believe that traditional bankers, branches, and cost center 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 government money market fund, A lot of our competitors are taking in deposits twenty, thirty basis points for checking. 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. [indiscernible] 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 counts probably aren't going to negative they're only going higher. So paying market rate of interest think is incredibly valuable. That's what we're building. That's what we look to get understood by the marketplace and get recognized still have very good margins on our overall business because of what we do on the asset side. Third problem. The banking industry makes loans which attempt to totally avoid credit risk. Maybe that's a bit of an exaggeration and a hyperbole. 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 twenty 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, five zero four and seven 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 on bullet number three, we get 600 to 900 unique business referrals a day. That's through our new tracker system, which is patented. From all of our alliance relationships like Morgan Stanley, UBS, might have came up with Trade Association, etcetera. Last bullet 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 at one or business savings at 3.5 without giving the customer some value. Our competitors are charging them more on fees as was none, no fee. And they're not paying the rate. We give the client through the new tech advantage. Free document storage, free web traffic analytics, free QuickBooks integration, I call your attention a recent press release we put out.

Merchant Services daily batch is in chargeback and refund information into the Nutanix bank account. The ability to connect with bank personnel, a real life person in The United States on camera. Hear that, Steph? 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. We 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 nine fifty new business checking accounts Our core business deposits grew to $216,000,000 approximately that was approximately $106,000,000 increase [indiscernible] twelvethirty onetwenty twenty three and we're pleased that these customers will win over loyalty because we're providing them value 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, NewtekOne Bank. Financial statistics for 2024. ROA 6.3%, ROTCE 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 analysts' understanding, coverage and investor base always focusing on the bottom half.

Charge off, provisions, cost of deposits, I would argue that our deposit 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 could flee at a moment's notice. But look at the margins for NewtekOne Bank, 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 percent at 24.1%. The transition of our organization which we owned and operated for twenty seven years from inception, twenty five years of public 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 our prior forecast of $2 in earnings per share to $2.25 in a range to 2.1 and 2.5. 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 forecast. But these are ranges we're really, really comfortable with. I do want to point out that on the seveneight on $1,000,000,000 of originations in 2025 from an expectation standpoint, dollars $750,000,000 will create a government guaranteed bond, which will be sold into the market at a gain on sale. 250 think I said $750,000,000 that's $750,000,000 $250,000,000 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 program is about 120,000 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, we're national, diversification of NAICS code, It's a very, very diversified portfolio and one of which we've been in for over twenty years and have managed the eightnine crisis, the pandemic, etcetera. I think it's important to note that our company forecast takes all these items into consideration. Slide number 10 give the 2025 projections. With a midpoint of $2.3 that's nice growth over our diluted earnings per share of 1.96 Please, I point you to Slide number 10. On our PowerPoint deck. Slide number eleven and twelve 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, [indiscernible] possibly be off but there is insulation here. Let's take a look at Slide 11. In 2024 to get to our 196, 197 EPS number, we took 1.5% in charge offs again the loan portfolio.

In our guidance that we gave $210,000,000 to $250,000,000 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 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 rates goes to 3%. So almost a 50% miss in the charge off rate. It will hurt the earnings approximately by $0.5 a share once again holding everything else constant in the model. That still leaves you with a very healthy $1.8 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 years of regulatory cycles It is not our first rodeo in making loans, in participating in this business. And we're approving 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 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 for since 02/2003. [indiscernible] NewtekOne Small Business Finance, which is the non bank lend that's at the holding company. It sits at the holding company because when we acquired the bank, there's debt in securitizations 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 could see the second quarter of twenty twenty four 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 fairly new, less than twenty four months, down to 8.2%. So one more item.

The accrual portfolio in the last year paid off by $120,000,000 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 3%, 8.5% almost a 5.5% move to our customers and it almost doubles your monthly P and I. So those loans they were stressed up 2% or 3%. 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, And 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, 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 $500,000,000 of these loans. In calendar year 2025. This portfolio currently sits at $400,000,000 Originations, I believe, are close to $480,000,000 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 a 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 14. We've done $672,000,000 of five zero four loans in calendar year since our inception 2015. No charge offs since the program's inception. So when you look at the five zero four program, and you look at the AOP program, it's a little bit of the impetus with respect to creditworthiness to the seveneight 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. Not making loans. Not doing payroll payments, insurance with the company we spun off at IPM Tech Solutions in the way 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 Slide number 16, that's the PPNR at the bank. 11.3% versus an industry average of 1.261.59%. 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 e [indiscernible] It is our business model and we believe the market will appreciate that are 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, your quite familiar how well we compare 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 twelvethirty onetwenty twenty four, I think in excess of $300,000,000 I think it was $325,000,000 in deposits that almost had no margins.

So that did water down a net interest margin. Those excess deposits will be used to pay off some higher costs 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, [indiscernible] We generate income pretty close to theirs. They've got $13,000,000,000 of assets. We got two. They've got a tax rate at 11%. I think our hope co tax rate is 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 book value almost $2 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 and A. Thank you, Scott. Thanks, Mary, 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 twenty twenty four.

During the fourth quarter of twenty twenty four, 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 to the Fed rate cuts that happened in the third quarter. The latter impacted our yields on our seven portfolio as the rate cuts went into effect on October 1 for this portfolio. We also consciously gathered deposits in October and 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 seven 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 December and have cut rates further in January and February and expect balances to hold. In 2025, as Barry mentioned, expect some attrition in higher priced CDs and expect to grow business deposit balances to offset that 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 the 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 off. I'll remind everyone that the portfolio at the bank in the seven space is a new portfolio, so non accrual loans could only go up from zero. Additionally, we experienced net charge offs of $5,100,000 or 154 basis points for the quarter when annualized. And from the third quarter, that's up $3,400,000 and almost 100 basis points. Respectively. The reserve of total loans declined during the quarter as the required reserve 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, and we believe that we will be profitable should net charge offs dramatically increase. Non interest income was up $12,000,000 for the quarter which included higher gains on 7As guaranteed and unguaranteed loan sales. I would point out that our ALP portfolio grew $90,000,000 versus prior quarter, which is primary driver of the increase in the net unrealized gains.

Turning to non interest expense, salaries and benefits was down over $1,000,000 due to lower performance based compensation. Professional fees were higher on NTS disposition costs. Technology expenses were also higher due to higher 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 twenty twenty five year. Barry, I'll turn it back to you.

Thanks very much. I'd like to quickly conclude and go to Q and A. But before we do that, [indiscernible] Once again, I think it's important to note that NewtekOne is a growth oriented differentiated technology enabled business that has brought its technology to the bank holding company market and the OCC chartered national bank market. And we made this transition to basically offer depository solutions, which are beneficial to our [indiscernible] and to roll out the NewtekOne advantage, which is a very valuable tool for the customer base. What is that doing?

It's giving us profitability. Our ratios at the bank of ROA is 6.5% I mean these are just very, very strong numbers, particularly consolidating up to the Newtek One level. I would like to quickly go through one more slide slide number 34. When you look at market comparables of our organization, Very favorable. And many of these banks are viewed as the technology oriented banks, which in my opinion means they're able to get primarily consumer deposits online. Putting that aside, you look at our Return on average assets you look at our multiple to tangible book, you look at our multiple of earnings, and our dividend yield, it's quite compelling. So for those people that look at our stock price, there's still an interesting opportunity here. And we welcome any questions and participation. And thank you all for taking the time to spend thirty minutes with Scott and I to go over the quarter and second year of full performance for Newtek One as a federally regulated bank holding company only a nationally chartered bank. Operator, I'd like to begin the Q and A. Thank you, Barry.

At this time, we will conduct a question and answer session. As a reminder, The first question comes from Crispin Love with Piper Sandler. Crispin, your line is now open.

Thank you. Good morning, everyone. First, Barry, can you just provide a little more detail on the cadence of earnings throughout 2025.

I understand you typically have a ramp throughout the year, but curious on why the first quarter is substantially lower than the other quarters and versus the first last year?

Is it FDA gain on sale driven or is there anything else out there? Driving that? Thank you. Yes. I appreciate it, Chris. And I think that as we took a look at the quarter, and we may need to look at doing some revisions. Wanted to be extremely cautious on Q1 relative to the changes in the environment. I think it's important to note seasonally, the first quarter is always our lowest quarter. And the last quarter is always the strongest. Been asking this question for twenty years, like what's the reason why borrowers tend to want to borrow and close their loans more in the fourth quarter than in the first quarter and I still haven't an understanding as to what that seasonality is.

I would tell you that what we've seen so far, we're almost through the first two months. Production is coming in as anticipated. Pricing is At the moment, I say at the moment, because we're in a very volatile market right now. I want to be careful. But at the moment, pricing is actually better than where we cleared in the fourth quarter of last year. So we may need to revise that First quarter number again, I think we've got first quarter and we did have a typo on one of the slides. We've got the range Q1 twenty twenty five, it's $0.28 in the low, $0.32 on the high. $0.55 to $0.65 in Q2. Fifty two to '64 and 75 to 89. So that's where we are and that gives us $2.10 to 2.5 full range.

Okay, great. Thank you. So that first quarter is 32, not 18 to 22? Correct. Yes, that was a typo. I apologize for that. We had switched the slide out and it's difficult to get these things through and we did make that change. Okay, great. Thank you. And then can you just discuss some of the drivers of the $9,400,000 markup on loans accounted for under the fair value options? Just what drove the markup there in the quarter? Well, look, I think that the fair value of loans particularly for the AOP product that came in close to $90,000,000 These loans go into securitizations with huge margins. With great history and that we have them valued and there is your mark on the AOP loans. All that detail will wind up being in the Ks and the Qs. Great. Thank you very much. Appreciate you taking my questions. Thank you.

The next question comes from Steve Moss at Raymond James. Steve, your line is now open.

Good morning. Gary, I guess, Great. On credit here, I know you were talking about your charge off expectations for the upcoming year. And I was trying to follow along, but I was just thinking that the bank portfolio seasons here, I realize everything is under two years at the bank here. You're just kind of curious like how The 2% number is that just being driven primarily by the loans originated in 2023, kind of how are you thinking about the charge off expectations maybe by vintage just to get a little bit better sense of how we think about charge offs for this year and next for the bank portfolio? Yes, Steve. I appreciate the question. The SBA loss curve, which we have modeled and Stanton and Pors has done work on this, which pretty much has a ramp that goes from like eighteen months to forty four months, So We believe that the bank will start to climb that ramp. And then it flattens. And we think that what we've demonstrated on Slide 12 demonstrates that at the NSPF portfolio where it gets to a certain point. Borrowers, once they've made payments for three or four years straight, they're just less likely to default.

The business has developed track record, it's made its payments, Unfortunately for NSBF, it was done in in many cases in a very low rate environment. It's a floating rate portfolio without cap. So, what we've done is we've modeled 2025 going from 1.5 charger off to and then we put that stress factor in there even on a stress factor, If you took the midpoint and held everything else constant, You're still at $1.8 on a $12 and change stock price with a dividend. So I think we're in pretty good shape here, Steve. I'm really not worried about it. And is not something I'm losing sleep over. Hopefully, that's helpful.

And Barry, if I could add, Steve, we've incorporated the vintage analysis and the projections. So we feel like we've got it between 2023, 2024 and then the new portfolio coming on in 2025. That's fully baked into the projections. And so we're expecting the default rates and the severities to continue through 2025 that we experienced in the third and fourth quarters of 'twenty four. Okay. So just thinking about like the default rate And severities like we think about the 2023 vintage of stuff you originated Is that like in the 3s? I'm just trying to think about what those default figures look like when I saw them before like high twos to threes is kind of how to think about it and then [indiscernible] something lower than that kind of blending the out to two. [indiscernible] Share our model with you, Steve. To be honest with you, you're going to have to create your own. But I think it's fair to assume That [indiscernible] earlier vintage 2023 loans will more likely go before the 2024 and the new loans that we put on. Obviously, in 2025. So yes, you're moving in the right direction.

Okay. And then my other question here just in terms of also one on fee income. The drivers of the loan servicing asset revaluation, the negative $7,300,000 Yes.

That's a function of just the decay in balance primarily the seven portfolio. At NSBF. So that portfolio is not growing. And so as the portfolio winds down, we're obviously capitalizing more at the bank. We're putting more on that's that's also amortizing down That's all spent that amortization is included in that line. But that line also includes the fair value changes on servicing as well.

So Steve, I think you're hitting important point at NSBF. As that portfolio pays down, the servicing asset goes away, that's a write off, although it's non cash. Premium on the unguaranteed loans pays off, that's non cash. You write down a loan, you liquidate it, that's non cash. So you got a lot of income write off and NSBF which has been a drag on a consolidated basis, So and the other thing too is the NSBF portfolio is financed in securitization. Which is about three points higher than the bank deposit rate. So the good news about your questions is you're starting to get into the field for how this works. You follow what I'm saying?

Yes. Okay.

In a declining scenario, which it is, it's a that's a [indiscernible] on the company. And at the bank you're going to have higher charge off, but you're also putting on new loans, new vintages at higher rates that get stressed at higher rate scenarios. In the toughest markets.

Right. Okay. Appreciate all that. And just in terms of expense guide for 2025, maybe curious what kind of investments you guys are looking to make here And the drivers of expenses for '25 Steve, that's another good question. It's funny, I could sit in board meetings and I got one board member Like made comments about the expense ratio growing and then like sixty seconds later, it'll ask people whether they have enough resources. So I'm just making a sort of a joke I think the important part of it is we are a company that is growing quickly. But we are poised for growth. And we can continue to add resources in accounting and finance, in compliance, in risk management, in software, I'm knocking wood. We've had tremendous success and hopefully I haven't jinxed ourselves an area fraud problems based upon how we do our business. So We're going to continue to invest in SG and A. To make sure we could grow the business prudently manage the respective Our regulators and our Board tremendous amount of comfort and we're not doing this on the cheap.

Great. I appreciate all the color there. Thank you.

Thank you.

Thank you. Please standby for the next question. Next question comes from Tim Switzer with KBW. Your line is now open.

Hey, good morning. Thank you for taking my I had some follow ups on the credit outlook and performance here. For your guide on the less than 2% bank charge offs or 25 What's the denominator there And if it's average bank loans, it seems like the 5,000,000 charge offs this quarter were a little bit above that range. Are there any like one timers this quarter and what would be the driver? For the loss rates to improve from Q4 into '25?

You refer I'm a little bit of a loss. Could you repeat the question? Tim, I thank you.

Yes. So I guess first, what's the denominator for that less than 2% charge offs guide for '25 At the bank? Scott, could you help with that?

Yes, Tim, the average loan balances were projected [indiscernible] Are right at just under $1,000,000,000 Okay. But that denominator is the bank loan portfolio. Correct.

Okay. Look at some of the metrics we put out there, for the AOP loans, those are done at fair value. They're typically in securitization, but the loss rates are de minimis. Same thing for five zero four. So this is most of that stretch you're going to see is on the seveneight portfolio where you get the benefit of the gain on sale and what the [indiscernible] that come out of the upfront fee that the borrower pays and the ongoing fee for risk from the actual coupon of the loans.

Okay. And if we look at the $5,000,000 of charge offs, you stated for this quarter, it seems like that's above that 2% range. Like were there any like one one timers in there? And what are the drivers for it to improve looking into 2025? Go ahead, Scott. If you have a I'll appoint if you have a point on that, you can go first. Yes.

I think the important point to note Tim, is that we do have plans for continued diversification of the loan portfolio into 2025. In the fourth quarter, we originated or we gathered I want to say it was around $45,000,000 to $50,000,000 of conventional bank loans during the quarter? We expect that continue to that trend at that pace to continue into into 2025 and throughout 2025 as we try to diversify the portfolio and water down the 7A portfolio. So you've got a function of of that playing into the 2025 expectations. As it pertains to 2024, and what we observed in the fourth quarter, we're always going to have one or two loans that might be bigger than the 115,000 to 150,000 that Barry quoted earlier on the average 7A side. And when those go bump in the night, they're lumpy. We have that that bank portfolio it's got larger loan average sizes than the seven, eight portfolio. So those things happen. We're not seeing anything in the non 7A portfolio that gives us any reason for concern. And on the 7A side, we're tracking along as we expected and are going to continue continue to model it, but we feel like we have the trend pegged for 2025.

Okay, got it. And Barry, it's still a little difficult to kind of see the underlying credit performance given the seasoning of the book and the growth [indiscernible] Can you tell us from your point of view is the pace of which the loans are Deteriorating. Is that in line with your historical patterns that you've seen over the last fifteen, twenty years at Newtek or like is any better or worse? How are you seeing that You go into different credit cycles, right? So I think the credit cycle going into 2019, 2020, 2021 and 2022 was very strong. And now you're seeing a deterioration of that credit cycle just based upon the stress level of rates. As I said on the call, rate levels are higher I think what's important to note is [indiscernible] given The performance, particularly the NSBF portfolio, which experienced quite a bit of stress in 2023 and 2024, we're still able to make our numbers. So I do want to point out So you and everybody on the call. First three questions are all about credit. They're all about losses. I get it. [indiscernible] there's another half to the business, which is an income based business And that is able to offset these types of numbers.

So what I can tell you We're not in an eight, nine scenario.

Although the rate stress on the portfolio for the older vintage clearly has shown its ugly head in the NSBF numbers. And frankly, I think if you go back to the summer, most people thought we were going to get a 2% rate [indiscernible] in the second half of this year and maybe a 2% rate cut in 2025, and all of a sudden everyone's changed their mind, although maybe not in the last week, I don't know.

Dan, to answer your your question, Tim, We are very comfortable with the numbers that we put out on a risk and reward basis And if you're asking me, do I think that our portfolio and the industry portfolio has experienced higher defaults and higher charge offs, the answer is yes.

Okay. That's helpful. And then the last question I have is, we're looking at your non interest income guidance. And the guide for the $500,000,000 of ALT origination, I know exactly should that flow through the income statement? And like what's the [indiscernible] And I think this is probably slightly related, like what are the assumptions behind Your gain or loss for the loans accounted for under fair value. Yes. Look, I think you can create your own models. We don't create them for you and we don't give out our models. I think what you could do is you could take a look at where the market clearing yield on these assets are, where they go into securitizations, In the past, I've given out slides that show you what the net coupon is what the gross coupon is. The capitalization of the servicing asset is because those loans have five fifty five, three prepaid penalties. You could see on the 2024 deal, which is public information, you can get the presale memo from DBRS. We had an $11.7 net coupon, dollars $12.7 gross coupon. 100 basis points The bonds were sold at about a 6.6%, 6.7% market clearing yield.

Pure leverage, no equity in it, and 11.7 net coupon.

So I think you're going to have to figure out that yourself on the model and you'll see it in the Ks and the Qs.

Okay. Thank you guys.

The next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.

Hi. Thanks for taking my questions. The sale of Technology Solutions to [indiscernible] was that expected to be accretive to first quarter book value?

On a tangible basis, yes. And we don't expect much in the way of of gain or loss. We don't believe it's going to be material in the first quarter.

Okay, great.

Sorry, Chris, just relative to where we were at twelvethirty one. Great.

And then on the topic of tangible book, I noticed last quarter's tangible book value of $9.5 has been dollars as for third quarter twenty twenty four.

Yes. We just to note on that, in the in the initial In the initial slide deck that was published, we had included intangible book value, the assets that essentially the intangibles at NPS as though they were already sold So we've revised that because that's obviously not the case. They just came out of the [indiscernible] assets held for sale.

Okay. Thank you. And then I didn't hear it. I know you guys give the seven fundings for full year 2024. Do you have them for fourth quarter?

Fourth quarter fundings for seven Yes, please.

Yes, I can get that for you. Give me just a moment. I want to say it was around $270,000,000 it was north of $270,000,000 right at $270,000,000 total guaranteed and unguaranteed balances.

Great. Thanks, Scott. Final question, more a strategic question. Congratulations on the strong profitability and given all the noise you guys are still delivering And the EPS is easily exceeding the dividend. And I know that you're plowing capital back into the balance sheet to grow the book.

But could you give us some thoughts in terms of when you might think of increasing the dividend?

Yes, it's a good question. I would say this and this is a decision that's made by the Board and the Board only. I think that the dividend currently at the current stock price is pretty generous and that dividend was set at a point in time where the stock price was materially higher. And when you look at our utilization of [indiscernible] I don't want to get ahead of ourselves because it's really a board decision, but Given where the stock price is, Raising that dividend and the scarcity of capital value may not be something that I'm particularly an advocate of, but that will be a Board decision and not mine.

And Barry, on the topic of valuations, I mean, you guys are trading at material discount to peers, but your returns are strong.

And traditionally, banks I've covered in the past typically are valued more on the deposit base.

Right.

And if that's the case, what's the advantage of being a bank Would another structure help where you're more valued on earnings or total return or something? Telling you right now it's not happening. If I lose shareholders, so be it. That's not happening. But the value of being a bank, and I appreciate the question very much, And I also, I appreciate all the work and all the questions. You're the only one really that's talked about I mean, I've had three questions and everyone's like digging into the losses and the credit. And maybe that's the market's concern. We're going to continue to work through it. But the advantage of being a bank was back to that new tech advantage its depository relationship with the customer. It's the value of being really state of the art in real time payments in the payments space, the connectivity and being able to connect ACH Fedwire card to a depository account From a payroll perspective, being able to connect the payroll business to a depository account. Things for example, that ADP and Paychex haven't done or won't do. Even some of the advanced payment processors like PayPal or Stripe, I mean they don't own and operate a bank.

I think that ultimately is going to be a differentiator for us and the others. See, our customers go to their depository three to five times a week, 12 to 20 times a month. That gives them a lot of connectivity and a lot stickiness and enables us to get money below the risk free rate. I got to ask you this question. Does a non interest bearing account have a likelihood of going down in interest rate or up? And what does the bank give the customer for the non interest bearing account? Outside of maybe a ticket to the masters, [indiscernible] bowling or a dinner. Or going into a branch. So this may take some time but we're going to keep grinding it out keep growing shareholder value, paying a dividend, and eventually We hope to have a lot of different questions on this call similar to the ones you've asked today. All right. Thanks guys.

Know I haven't made a lot of friends on this, but that's not my job. My job is to just sell the facts the way they are.

It's a complicated story.

That's absolutely true. And that's going to [indiscernible] to settle in and for people to get comfortable and to understand what we're doing. It is complicated and we're transitioning portfolios and business from a BDC the bank. So we're patient. I mean, we haven't we're liquid, we're in good shape, we're hitting our numbers, we're hitting our marks. We're telling people what the facts are. I'm basically saying my losses are going higher. I don't know how many bank CEOs or bank holding are actually telling the analysts losses are going higher next year.

Well, it's hey, we can catch up offline. Okay. Thank you very much. Appreciate it. Okay, Sid.

Thank you. Our next question comes from Mike Paramanov with Freedom Broker. Your line is now open.

Hello, everyone.

Hey, Mike. How are you?

Yes, I'm fine. Thank you.

Thank you for taking my question. My first question is on funding structure. You plan to grow deposit balances by €250,000,000 in 2025. And interest income guidance assumes 50% growth implying interest earning assets must expand by at least that much.

So it appears to be a funding mismatch. Thus, this signal a shift toward corporate borrowings? And the second question, how do you assess the impact of of recent yield curve steepening over the past few months?

So a lot of the loan growth, the AOP growth is funded by lines of credit and securitization on a match funded basis. The loans that are funded at the bank are the seven the five zero four, which are originated and then sold. The second lien gets taken out by debentures, the first lien gets sold with a 50% LTV. And then the conforming CRE and C and I are funded by bank deposits. So I think what you did pick up is the ALP loans are funded at the holding company through securitizations.

But because of the margins that I laid out earlier, and I just came from an asset backed security conference out in the West. We've got a deal that we hope to be bringing at the end of the first or the beginning of the second quarter that's I'll use the word hypothetical. It will be funded there. So that will be where a lot of the ALP loans will be funded. Relative to the concept of the yield curve steepening, The yield curve is deepening would be beneficial to most banks that do benefit from that I would say we're fairly agnostic in our business model to rates going higher rates going lower, or an inversion of the curve or receipt from the curve. We prefer the curve a steep Slightly, but it won't make a huge difference in our business or in our business model. Although particularly where the consumer high yield savings deposits are versus Prime, which would relate to a little bit of a deepening, it would be somewhat beneficial in that area. You might actually get better gain on sale for the sale of the government guaranteed bonds in the seven business. But we basically try to position the company to be rate agnostic up or down or steepening or flattening.

And I'd point out that we have $350,000,000 of cash on hand at year end, which needs to be deployed And so that will account for some of the funding mismatch that you mentioned.

Okay, Derek. And one more question. Based on SBA data, loan approvals significantly exceed actual loan distribution. What causes this mismatch and can you walk me through the approval process from SBA approval to actual loan origination? Thank you. Yes. My guess is Mike, that what you're looking at is SBA data, which the SBA data means you go in and you get what's called a guarantee number or appeal number that shows up. Those loans are forward they're in the pipeline, Some get funded and closed and others do not and they ultimately get eliminated. So I think if you're looking at approval data, from the SBA statistics, there is a disconnect between the approval data and current fundings.

Yes, but there is both approval and distribution data. And I mean that approval amount significantly exceed the amount of distribution or origination And does this mean that you have some shortage in your funding structure. Or maybe Yes, everybody has [indiscernible] Yes.

So every lender when they get loan application in put it through the process, put it into underwriting and then they get a guarantee number. That doesn't mean that loan [indiscernible] Sometimes the loan doesn't get approved in committee Sometimes when you go to close it, a lien pops up that wasn't disclosed The appraisal doesn't come in. So I think the point I was trying to make is that I believe that The information that you're looking at with the disconnect between approvals and between fundings there is a disconnect. That's true for Newtek and every other SBA lender based on how the program works.

Okay. Thank you, guys.

Thank you.

Thank you. This concludes the question and answer session. I would now like to turn it back to Barry Sloan for closing remarks.

Well, I want to thank everybody for participating, greatly appreciate the work that people are putting in and for the investment community that has invested in our company over the long term. We greatly appreciate the interest and the patience. We believe strongly that we've got the risk and reward measured correctly. In our two years of operating this business, far more confident today than when we did the acquisition. Relative to how we sit in the marketplace. And I think that the market will discover that having an organization that doesn't do things manually and does things using technology, automation to exchange data, make loans, take deposits, without that infrastructure is extremely important. That the types of loans that we make, which are risk adjusted returns that we've done over twenty years and we've been through 'eight, 'nine and other types of markets We do know how to effectively use our tools, our resources to be able to manage the risk effectively.

So we thank everybody for participating and look forward to reporting our first quarter earnings going forward. Thank you very much.

Program and you may now disconnect.