Q1 2024 NewtekOne Inc Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to the NewTekOne, Inc. 2024 First Quarter 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 the session, you will need to press * 11 on your telephone. You will then hear an automated message advising that your hand is raised.
Good day, and thank you for standing by and welcome to the.
Speaker Change: The New Tech One Inc, 2024 first quarter earnings conference call.
Speaker Change: At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: You ask a question. During this session you will need to press star one one on your telephone you will they hear an automated message advising that your hand is right.
Speaker Change: Or withdraw your question. Please press star one one again.
Speaker Change: Please be advised that today's conference is being recorded.
Operator: 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 for today, Barry Sloane, Chief Executive Officer. Please go ahead.
Speaker Change: I would now like to hand, the conference over to your first speaker for today.
Speaker Change: Very slow Chief Executive Officer. Please go ahead.
Barry Scott Sloane: Thank you very much and welcome everyone to our first quarter 2024 financial results conference call. We're very pleased to present these results to you today. Joining me on the call is Scott Price, our Chief Financial Officer of Newtek One, Inc., the publicly traded company, as well as Newtek Bank National Association. In addition, Frank DiMaria, the Chief Accounting Officer, EVP for Newtek Bank, Newtek One, Inc., and I also have Nick Young, the President and Chief Operating Officer of Newtek One, excuse me, Newtek Bank, joining me today.
Speaker Change: Thank you very much and welcome everyone to our first quarter 2024 financial results Conference call. We're very pleased to present our results to you today.
Speaker Change: Joining me on the call is Scott price, our Chief Financial Officer of New Tech one.
Scott Price: A publicly traded company as well as New Tech Bank National Association. In addition, Frank de Maria the Chief Accounting Officer, EVP for New Tech Bank, New Tech One Inc.
Scott Price: Also have Nick young the President and Chief operating officer of New Tech one should.
Barry Scott Sloane: For all of you that want to follow along with the PowerPoint presentation, you could do so by going to our website, newtekone.com, N-E-W-T-E-K-O-N-E dot com. While you're there, you may want to take a look at newtekbank.com and the NewTek Advantage, all valuable information to help you understand our organization. We'd also like to welcome the analyst coverage from KBW, Tim Switzer, from Raymond James, Steve Moss, from Compass Point, Noah Ross, from Ladenburg, Chris Nolan, from B. Reilly, Bryce Rowe, and last but not least, Crispin Love from Piper Sandler.
Speaker Change: I mean do you take bank joining me today.
Speaker Change: For all of you don't want to follow along with the Powerpoint presentation. You can do so by going to our website <unk> dot com and UW Teekay <unk> dot com, while you're there you may want to take a look at new Tech Bank Dot com and the new Tech advantage all valuable information to understanding our organization will also.
Speaker Change: I'd like to welcome the analyst coverage.
Speaker Change: From K BW Tim's, what's your from Raymond James Steve Moss from Compass point Merrill Ross from Ladenburg pushed out Chris Nolan.
Speaker Change: From B Riley, Bryce Rowe and last but not least Crispin love from Piper Sandler.
Barry Scott Sloane: This call today should illuminate a management company that is building a business. That's important to note. Take a look at all the building blocks that we put in our presentation. From growing the accounting and finance department, to growing our ability to take deposits at Newtek Bank in A, to our ability to move our lending operation into the bank, and making a growing high-quality group of loans that have generous risk reward provisions, as well as to being compliant.
Speaker Change: This cooperation illuminate a management company that is building a business that's important to note.
Speaker Change: Take a look at all the building blocks that we put in our presentation.
Speaker Change: From growing the accounting and finance department to growing our ability to take deposits.
Speaker Change: So our ability to move our lending operation into the bank and making a growing high quality.
Speaker Change: Group of loans.
Speaker Change: Generous risk reward provisions as well as to being compliant.
Barry Scott Sloane: Newtek One is clearly a long-term opportunity to invest in a technology-enabled business that provides business solutions, financial solutions, and depository services to the 30 million independent business owners across the United States. I'd like to call everyone's attention to slide number one in the presentation deck, which once again you can find on our website in the investor relations section. Slide number one is a note regarding forward-looking statements. Then we'll move forward to slide number two.
Speaker Change: New check one is clearly a long term opportunity to invest in our technology enabled business that provides business solutions and financial solutions and depositary services to the 30 million independent business owners across the United States.
Speaker Change: I'll have to call everyone's attention to slide number one in the presentation deck, which once again you can find on our website in the Investor Relations section Slide number one as note regarding forward looking statements.
Speaker Change: That will move forward to slide number two.
Barry Scott Sloane: Clearly, the biggest takeaway from our results that we published last night in our press release, the biggest takeaway is from Q1 2024. First quarter 2024, core earnings of $0.38 per basic and diluted common share exceeded our previously issued guidance of $0.1925 per basic and diluted common share. Also important to note that in comparison to first quarter 2023 earnings, we reported $0.76 and $0.74. It was an income tax benefit of approximately $0.59 for basic, $0.58 per diluted, almost $0.60.
Speaker Change: Clearly the biggest takeaway from our results that we published last night.
Speaker Change: In our press release, the biggest takeaways from Q1 in 2020 for first quarter 2024 core earnings of <unk> 38 per basic and diluted common share.
Barry Scott Sloane: Without that income tax benefit, EPS would have been $0.17 and $0.16. So we really beat on a core basis from an operating perspective year-over-year comparison by about $0.20. Conservatively, we raised our guidance for fiscal year 2024 to $1.85 to $1.05 from previous $1.80 to $2. Important to note, sequentially, quarterly deposit growth at the bank was 9% growth. According to S&P Global, U.S.-based banks grew 1.2% in their deposits from December 31, 2023 to March 31, 2024, so we're clearly proud of that ability to grow deposits.
Speaker Change: Exceeded our previously issued guidance of $19 25 per basic common diluted share also important to note that in comparison to first quarter 2023 earnings we reported $76 74. It was an income tax benefit of approximately 59.
Speaker Change: For basic 58 per diluted almost 60.
Speaker Change: Without that income tax benefit EPS would have been 17 and 16. So we really beat on a core basis from an operating perspective year over year comparison by about 20.
Speaker Change: Conservatively we.
Speaker Change: Raised our guidance for fiscal year 2024 to a Buck 85 to five from previous Buck 80 to two bucks important to note sequentially quarterly deposit growth at the bank, 90% growth quarter.
Speaker Change: According to S&P Global U S. Based banks grew one 2% in the deposits from December 31, 2023 to March 31, 2024. So we are clearly proud of that ability to grow deposits sequential loan growth also.
Barry Scott Sloane: Sequential loan growth also was up 11%. That's on a consolidated basis at Newtek 1 over Q4 2023. Also important to note that in the SBA 7A business, we sell 75% of the government guaranteed loans, typically within the quarter that we produce them. Therefore, the growth obviously would have been higher.
Speaker Change: <unk> up 11% that's on a consolidated basis at New Tech one over Q4 2023 also important to note that in the SBA seven business, we sell 75% of the government guaranteed loans typically within the quarter that we produce.
Speaker Change: Therefore, the growth obviously would have been higher it is important to note that.
Barry Scott Sloane: It is important to note that this organization, which has a consolidated total asset base of $1.4 billion and about $700 million in the bank, really has the loan generation capability of an institution that is four or five times larger. It is also important to note that interest margin at Newtek banks grew sequentially by 37 basis points from 4.43 to 4.80. Growth in NIM at banks is hard to find. Clearly, we are very proud of this extraordinary accomplishment.
Speaker Change: At this organization that has a consolidated total asset base of $1 4 billion at about $700 million of the bank really has the loan generation capability of an institution that is four or five times larger.
Speaker Change: Important to note that interest margin a new Tech bank grew sequentially by 37 basis points from 443% to four eight out growth in NIM at banks is hard to find clearly we are very proud of this extraordinary.
Barry Scott Sloane: In addition, while we're able to grow NIMS, four and five basis points of loan loss reserve coverage at March 31, 2024. Growing loan loss reserves while growing profits is not an easy thing to do. These are accomplishments we're extremely proud of. We also increased the quarterly dividend in the first quarter by 5.5% to $0.19 a share from 18.
Speaker Change: Accomplishments in.
Speaker Change: In addition, while we were able to grow NIM.
Speaker Change: Five basis points of loan loss reserve coverage.
Speaker Change: At March 31, 2024 growing loan loss reserves, while growing profits not an easy thing to do these are accomplishments. We're extremely proud of we also increased the quarterly dividend in the first quarter by five 5% 19 cents a share from <unk> that was an indicative.
Barry Scott Sloane: That was an indicative sign of confidence that these dividends will be paid out of earnings. The board and the management feel comfortable that what we're doing is there, consistent, stable, and we'll be able to repeat it quarter after quarter. On slide number three, we've got Newtek Bank Financial Summary Highlights. ROAA 5.8%, ROTCE 37%, efficiency ratio 15%.
Speaker Change: Sign of confidence that these dividends will be paid out of earnings.
Speaker Change: The board and the management feels comfortable that what we're doing is theyre consistent stable and we'll be able to repeat it quarter after quarter on slide number three we've got new Tech Bank financial summary highlights.
Speaker Change: Five 8%, our OTC, 37% efficiency ratio of 15%.
Barry Scott Sloane: I don't know where you find financial institutions or banks that have this type of performance. Frankly, people are looking at it and saying, I don't know if this can be kept up, or I don't believe it. Well, we're in our fifth quarter right now, and we keep producing these kinds of numbers, and we'll continue to work hard to produce these kinds of numbers for our shareholders. The net interest margin at the bank was 4.8%, up from 4.43. Average yield on loans at the bank increased, but a lot of that is based upon, I would say, an overperformance in the 7A business. Deposit rates increased slightly from 4.4 to 4.48.
Speaker Change: Don't know, where you find financial institutions or banks that have this type of performance frankly people are looking at it and saying I don't know if this can be kept up I don't believe it well we're in our fifth quarter right now and we keep producing these kinds of numbers and we will continue to work hard to produce these kinds of numbers.
Speaker Change: For our shareholders. The net interest margin at the bank four 8% up from $4 four three average yield on loans at the bank increased.
Speaker Change: A lot of that is based upon I would say an over performance in the <unk> business, we're going to talk about the other ones that we do with the bank that prospectively are lower margin lower yielding and will have less charge offs.
Speaker Change: Deposit rates increased slightly from four four to $4 48.
Barry Scott Sloane: That's a trend that probably will continue, but we think modestly, not to any great extent, that will affect net interest margins. Net interest margins will be more effective by putting on lower risk, more vanilla bank loans in the bank to diversify the portfolio. Let's take a look at capital and credit, moving all the way over to the right-hand side of the slide. You can see that our institution continues to be well capitalized.
Speaker Change: That's a trend that probably will continue but we think modestly not to any great extent that will affect net interest margins net interest margins will be more effective by putting on lower risk more vanilla bank card loans in the bank to diversify the portfolio.
Speaker Change: Take a look at capital and credit.
Speaker Change: We over to the right hand side of the slide you can see our institution continues to be well capitalized our Q1 returns clearly where we're impacted by.
Barry Scott Sloane: Our Q1 returns clearly were impacted by higher volumes of loans, higher prices, and higher expenses compared to the fourth quarter of 2023. I think it's important to note that Newtek One is not an organization that's built to be a $1.5 billion financial holding. It's projected to be much, much larger.
Speaker Change: Higher volumes of loans greater prices also.
Speaker Change: Higher expenses compared to fourth quarter of 2023, I think it's important to note that new Tech one is not an organization that's built to be a $1 5 billion.
Speaker Change: Financial holding company.
Speaker Change: <unk> projected to be much much larger so we're putting in the infrastructure to be able to continue to achieve growth rates in deposits and lending as well as the ancillary services that come out of the holding company that make us extraordinarily unique.
Barry Scott Sloane: So we're putting in the infrastructure to be able to continue to achieve growth rates in deposits, in lending, as well as the ancillary services that come out of the holding company that make us extraordinarily rich. That interest margin and yields on loans are primarily due to a higher concentration of SBA 7A loans as we're a prime plus three lender. Today, that would be 11.5%. So once again, we're very, very proud of the results and the performance at Newtek Bank.
Speaker Change: Net interest margin and yields on loans are primarily due to a higher concentration of SBA seven loans, where prime plus three lender today that would be 11, 5%. So once again.
Speaker Change: Very very proud of the results and the performance at New Tech Bank consolidating it up to the holding company the ROA to eight our OTC, a still very high at 20% and obviously as you take a look at the difference between the Holdco and the bank clearly we've got institutional.
Barry Scott Sloane: Consolidating it up to the holding company, the ROA was 2.8, and ROTCA was still very high at 20%. And obviously, as you take a look at the difference between the holding company and the bank, clearly, we've got institutional funding up at the holding company, so less opportunity to take advantage of deposits, which are lower costs down in the bank.
Speaker Change: <unk> funding.
Speaker Change: Holding company, so less opportunity to take advantage of deposits, which are lower cost down in the bank.
Barry Scott Sloane: We do our alternative loan program funding at the holding company, first on the balance sheet and then into joint ventures. But once again, important to note, for a financial holding company, these are still extraordinary numbers that you can't find when you run your finger down the page of other financial holding companies and Newtek. At the bottom of the page, you can see on slide four, the core EPS, non-GAAP. Last year, if you took out the tax benefit from the first quarter, about $1.30-ish.
Speaker Change: We do our alternative loan program funding at the holding company first on the balance sheet and then into joint ventures, but once again important to note for a financial holding company. These are still extraordinary numbers that you can't find when you run your finger down the page of others.
Speaker Change: Holding companies and new Tech.
Speaker Change: Towards the bottom of the page you can see on slide four the core EPS non-GAAP.
Speaker Change: Last year, if you took out the tax benefit from the first quarter.
Speaker Change: $1 30 ish.
Barry Scott Sloane: We're looking at a revised forecast for 2024 of $1.85 to $2.05. Clearly, there is some nice growth there, particularly in core. We think that that growth should start to seep into the investor and analyst community and start to achieve a more normalized market multiple as the market and investors start to get a better understanding of our financials, our balance sheet, our income statement, and how we project going forward. Slide number five. I think this is important. I get asked, as does Scott Price, a lot of questions.
Speaker Change: We're looking at a revised forecast for 2024.
Speaker Change: Buck 85 to 205, clearly some nice growth there, particularly in core.
Speaker Change: Think that that growth should start to seep into the investor and analyst community and to start to achieve a more normalized market multiple as the market and investors start to get a better understanding of our financials, our balance sheet or income statement and how we project going forward slide number five.
Speaker Change: I think this is important I get asked as Scott.
Speaker Change: Scott price a lot of questions. Once again very hard to compare us to a traditional bank first of all we offer so much more of our clients and we do this without branches brokers bankers in a traditional sense and videos were more focused on return on tangible common equity.
Barry Scott Sloane: Once again, it's very hard to compare us to a traditional bank. First of all, we offer so much more to our clients, and we do this without branches, brokers, bankers, in a traditional sense, and BDOs. We're more focused on return on tangible common equity and return on average assets, not asset center management. I use the term coupon clipping.
Speaker Change: Our return on average assets.
Barry Scott Sloane: Our competitors in the banking industry make loans. They try to get as much non-interest bearing deposits as they can, and they're clipping that coupon. Clearly, we have an overweighting of non-interest income versus traditional bank interest income, which we think is the envy of most other banks, but this is something that's been inherent in Newtek, and it's won in its business model for over the course of 25 years. Newtek became a public company in September of 2000.
Speaker Change: <unk> assets under management I use the term coupon clipping our competitors in the banking industry they make loans.
Speaker Change: They try to get as much noninterest bearing deposits as they can and their club in that coupon.
Speaker Change: Clearly, we have an over waiting of noninterest income versus traditional bank interest income, which we think is an envy of most other banks, but this is something that's been inherent in new tech and its one in its business model for over the course of 25 years and since it became.
Barry Scott Sloane: Our markings and returns were higher than a traditional bank and bank holdings. Important to note, we believe our credits remain strong, lending to small and medium-sized businesses. Now, some people say, gee, these small business loans, aren't these really bad loans? Aren't these the loans that are gonna go bad first?
Speaker Change: A public company in September of 2000, and our margins and returns are higher than a traditional bank and bank holding company.
Speaker Change: To note we believe our credits remained strong.
Speaker Change: Lending to the small to medium sized business now some people say gee.
Speaker Change: These small business loans arent these really bad credits R&D credits or Theyre going to go bad first well first of all we've been doing this for 20 years, we've been through <unk>, we did it through the pandemic we understand this but.
Barry Scott Sloane: Well, first of all, we've been doing this for 20 years. We've been through 08, 09, we did it through the pandemic. We understand this, but our investors are rewarded from the programs that generate an 11.5% coupon and even net of the expectation, which we believe our history and our management team have very good knowledge of how this portfolio is going to perform, provide excessive returns. That's why our ROAAs and ROTCEs are much, much higher than our competitors, even while we're posting loan loss reserves that are currently at four percent, which we think will go down to three and a half when we start to diversify the portfolio into some more traditional banking types of loans.
Speaker Change: Our investors are rewarded from the programs that generate an 11, 5% coupon and even net of the expectation, which we believe our history and our management team has very good knowledge of how this portfolio is going to perform provides.
Speaker Change: Excess of returns that's why.
Speaker Change: ROA and ROE tce's are much much higher than our competitors, even while we're posting loan loss reserves that are north currently up 4%, which we think will.
Speaker Change: Modified down to three and a half let me start.
Speaker Change: Diversify the portfolio into some.
Speaker Change: More traditional banking types of world, but when you look at what we're doing in the bank from a risk perspective wed.
Barry Scott Sloane: But when you look at what we're doing in the bank from a risk perspective, we love our business model much more than the, deemed to be, low-risk, low charge-off, low margin loans that our competitors are doing, hoping that their non-interest bearing deposits don't run away at the money market, which is a trend that we see continuing to go on as far as IT is concerned. It's way too easy to move money on a phone into the right account, so maybe I shouldn't leave $250,000, you know, over $2.5 million in the bank. I mean, at least $250,000, put it in a money market fund, and keep moving the money back and forth.
Speaker Change: We love our business model much more.
Speaker Change: Then the deemed to be low risk.
Speaker Change: Low charge off low margin loans that our competitors are doing hoping that their noninterest bearing deposits don't run away into money market accounts, which is a trend that we see continuing to go.
Speaker Change: And as far as the I can see it's way too easy to move money on a phone into the right account. So maybe I don't leave 250.
Speaker Change: Sure.
Speaker Change: $5 million in the bank.
Speaker Change: 250000 put it in a money market fund and keep moving the money back and forth, that's where we see the trends, we're very well positioned for that.
Barry Scott Sloane: That's where we see the trend. We're very well positioned for that. And we certainly, even with the higher costs... The opinions voiced in this meeting are those of the guests, and not necessarily those of 6,000 Depository, in our early stages of life. Yes, gain on sale is a reoccurring event, and it's reoccurring income.
Speaker Change: And we certainly even with the higher cost of consumer deposits that we've got and we're going to talk about reducing that cost of commercial deposits.
Speaker Change: We're very well situated for the risk inherent in the business industry going forward, yes were able to raise deposits. We brought in approximately 6000 depository accounts in our early stages of life.
Speaker Change: Yes gain on sale.
Speaker Change: Is a reoccurring event and it's reoccurring income.
Barry Scott Sloane: I've got a beautiful slide on slide 17 that shows this. Yeah, people don't like gain on sale. They may not like it,
Speaker Change: Beautiful slide on slide 17 that shows this.
Speaker Change: People don't like gain on sale.
Barry Scott Sloane: But we've made money doing this for 20 years; we make loans, and we sell them. And it generates a higher return on equity and a higher return on assets. It's a better strategy.
Speaker Change: You may not like it but we made money doing this for 20 years, we make loans that we sell them and it generates a higher return on equity and a high return on assets, it's a better strategy.
Barry Scott Sloane: Can a financial or a bank holding company be a growth company? Yes. We don't know how others can do that within their model, but yes, we can do it.
Speaker Change: Get a financial or a bank holding company would be a growth company yes.
Speaker Change: We don't know how the others can do that within their model, but yes, we can be.
Barry Scott Sloane: Our alternative loan program, we'll talk about that. As we demonstrated in earlier presentations, it's a 20 to 30% return on equity business for our company. It was slower in 2023 due to the issues that were occurring in the market with respect to rates, volatility, and capital availability for banks. It's an important growth aspect, and you can see we had a great first quarter, have a great pipeline, and we think we're in pretty good shape going forward. I'd like to turn the next few slides over to Scott Price, slides 6, 7, and 8. Thanks, Barry. Good morning, everyone.
Speaker Change: Alternative loan program, we'll talk about this we've demonstrated in earlier presentations, it's a 20% to 30% return on equity business for our company.
Speaker Change: It was slower in 2023 due to the issues that were occurring in the market with respect to that.
Speaker Change: Rates volatility capital availability for banks, it's an important growth aspect and you could see.
Speaker Change: Had a great first quarter have a great pipeline and we think we're in pretty good shape going forward.
Speaker Change: Like to turn next few slides over to Scott price to go over six seven and eight.
Scott Price: Turning to slide six, our net interest income expanded 16 basis points during the quarter despite higher deposit costs. Average earning assets increased $31.1 million, and we experienced a sizable mix shift with average cash balances declining $45 million and average loans increasing $73 million. The higher percentage of the loan portfolio in the SBA 7A product versus last quarter drove the increase in yields on loans. On the funding side, our cost of deposits on a consolidated basis increased 20 basis points as the acquired CD portfolio continues to mature at lower costs. Separately, our interest expense on borrowings was lower as we experienced swift prepayments on the NSBS 7A portfolio, which led to reductions in notes payable to the Securitization Trust.
Scott Price: Thanks, Barry Good morning, everyone turning to slide six our net interest income expanded 16 basis points during the quarter, despite higher deposit costs average, earning assets increased $31 $1 million and we experienced a sizable mix shift with average cash balances declining $45 million.
Scott Price: And average loans, increasing $73 million.
Scott Price: Higher percentage of the loan portfolio in the SBA seven day product versus last quarter drove the increase in yields.
Scott Price: On the funding side, our cost of deposits on a consolidated basis increased 20 basis points as the acquired CD portfolio continues to mature at lower costs.
Scott Price: Currently.
Scott Price: Our interest expense on borrowings was lower as we experienced Swift prepays.
Scott Price: Sps M&A portfolio, which led to adjusted reductions and notes payable to securitization trusts.
Scott Price: Slide 7 is a graphical representation of the ins and outs of net interest income, most of which I've already covered. To summarize, we were able to increase our balance sheet efficiency by deploying excess funds to originate loans. I do expect higher levels of leverage at the bank as we roll out our business checking products and continue our retail deposit gathering. Shifting to slide 8, our deposit mix was relatively unchanged, sans our high-yield savings balances staying relatively stable and CD portfolio balances increasing.
Scott Price: Slide seven is a graphical representation of the ins and outs of net interest income most of which I've already covered.
Speaker Change: To summarize.
Speaker Change: We were able to increase our balance sheet efficiency by deploying excess funds to originate loans I do expect higher levels of leverage at the bank as we rollout our business checking products and continue our retail deposit gathering.
Scott Price: Shifting to slide eight our deposit mix was relatively unchanged signs our high yield savings balances staying relatively stable CD portfolio balances increasing.
Scott Price: We expect our business checking account product and business money market product to increase at lower balances and increase at lower rates as we move into the last three quarters of the year. The maturing digital CDs during the quarter largely rolled onto the same product at similar rates. Important to note our retention that we've experienced on CDs maturing in the last few months, March and April, has been above industry standards at 90%. Barry, I'll turn the call back to you.
Scott Price: We expect our business checking account product and business money market products to increase our lower balances to increase at lower rates as we move into the last three quarters of the year.
Scott Price: The maturing digital Cds during the quarter largely irrelevant.
Scott Price: <unk> products at similar rates and important to note our retention that we've experienced on Cds maturing in the last few months March and April.
Scott Price: Ben above industry standards at 90%.
Speaker Change: Gary I'll turn the call back to you.
Barry Scott Sloane: Thank you, Scott. Slide number nine is the Newtek Advantage. This is our advantage in the market. We believe that the Newtek Advantage will become a marketplace destination for our clients. We offer customers more than just taking their deposit with the hope that they can get a loan. When a client opens up an Advantage account, they get free unlimited document storage, and they get free real-time updated web traffic analytics.
Gary: Thank you Scott Slide number nine the new take advantage. This is our advantage in the marketplace. We believe that the new ticket damage will become a marketplace destination for our clients we offer customers more than just taking their deposits with the hope that they can get alone when our COO.
Gary: Client opens up an advantage account they get free unlimited document storage they get free real time upgraded updated web traffic analytics, if theyre processing payments with us theyre going to receive real.
Barry Scott Sloane: If they're processing payments with us, they're going to receive real-time, chargeback, and batch information. They can get same-day funding. If they're a payroll client, they can make payroll directly from the business portal, the Newtek Advantage, which is extremely valuable. We believe this at www.NewTek.com.
Gary: <unk> charged back in batch information.
Gary: They can get same day funding if there were a payroll client that could make payroll directly.
Gary: The business portal, the new tech advantage extremely valuable.
Gary: We believe this.
Gary: Technology that we've developed is also something that we can package white label and resell to other financial institutions within their marketplace.
Barry Scott Sloane: We're very excited about the Newtek Advantage. We believe it gives us the ability to gather more deposits from verticals like payroll, insurance, and payment processing. Slide number 10. Artificial Intelligence. AI is going to change all companies in the United States and across the world where businesses have the opportunity to utilize AI. It's going to be extremely beneficial. It's in Newtek One's DNA.
Gary: We're very excited about the new Tech advantage, we believe it gives us the ability to gather more deposits from verticals like payroll insurance and payment processing.
Gary: Number 10.
Gary: Artificial intelligence.
Gary: Yes.
Gary: AI is going to change.
Gary: All companies in the United States and across the World where businesses have the opportunity to unify utilized AI, it's going to be extremely beneficial.
Barry Scott Sloane: We're disruptors, we're entrepreneurial, but important. We're prudent but not afraid to use these types of technologies when they can really provide tremendous efficiency. And the way the company is positioned, we're in a unique position to take advantage of these opportunities. The process of gathering data without the use of brokers, bankers, branches, and BDOs is inherent to our model, utilizing that to futureistically be able to mine the data and make decisions about which clients we should contact for various opportunities with an email message or a phone call to provide additional information, and to use AI to manage our remote customer-
Gary: New tech one's DNA.
Gary: Disruptors, we're entrepreneurial, but important where prudent but not afraid to use these types of technologies when they could really provide tremendous efficiencies and the way. The company is position we're in a unique position to take advantage of these opportunities.
Gary: Assess of gathering data without the use of brokers bankers branches and videos is inherent to our model.
Gary: Utilizing that data too futuristic we'd be able to mine the data and make decisions about which clients we should contact for various opportunities Glen E mail message or a phone call to provide additional services to use AI to manage remote customer facing staff labor management is key.
Barry Scott Sloane: Labor management is key. We currently use certain software within our organization that does this today to basically ensure that our staff is consistent and comprehensive in their messaging with our existing and prospective customers. Going forward, utilizing aid, aggregate, and analyze data to be able to assist in making credit, and opening up a bank account is clearly within our future plan. On slide number 11, relative to the financial first quarter highlights. Most of this data you'll be able to read in our press release.
Gary: We currently use certain software within our organization to do this at today to basically ensure that our staff is consistent and comprehensive in their messaging with our existing and prospective customers going forward utilizing eight aggregate and analyze data to be able to assist in making credit decisions.
Gary: And opening up a bank accounts is clearly within our future plans.
Gary: On slide number 11 relative to the financial first quarter highlights.
Gary: Most of this data youll be able to read in our press release were very very pleased with how it rolled out once again, most importantly is the quarter over quarter comparison 24 versus 23 38.
Barry Scott Sloane: We're very, very pleased with how it rolled out. Once again, most importantly is the quarter over quarter comparison, 24 versus 23, 38 cents versus a core of 17 and 16 for basic and diluted common shares for Q1, 2023.
Gary: Versus a core of <unk> 17, and <unk> 16 per basic and diluted common shares for Q1 2023 important slide number 12 credit and risk management, clearly something that based upon our legacy history as a BDC.
Barry Scott Sloane: Important slide on number 12, credit and risk management. Clearly, something that, based upon our legacy history as a BDC, using fair value and certain limitations, being able to move Newtek's small business finance to the bank leaves us with accounting that needs a little bit further explanation. Newtek Small Business Finance is currently and formally the non-bank SBA 7A lender which does not make any more 7A loans; all those loans are now made down in the bank, so Newtek Small Business Finance sits up at the holding company, has about $633 million of total assets at 12-31-2023, has a capital book of $300 million, and the important aspect, if you want to track credit and trends, take a look at the Fair Value Here's the good news: It's already been written off. It's been written off the book.
Gary: <unk>.
Gary: Using fair value and certain limitations to being able to move new tech small business finance in the bank leaves us with accounting that needs a little bit further explanation there.
Gary: <unk> small business finance is currently and formerly the non bank SBA seven lender, which does not make any more <unk> loans. All of those loans are now made down in the bank. So you take small business finance.
Gary: It sits up at the holding company has about $633 million of total assets at 12, 31, 2023 as capital book of $300 million and the important aspect if you want to track credit and trends take.
Gary: Take a look at the fair value adjustment sliding all the way across the five quarters $33 million.
Gary: The big number here's the good news, it's already been written off.
Gary: It's been written off the Buck it's been written off of earnings it's already effected our past earnings and you're left with a fair value of $37 million and if you run your finger back across the page, it's fairly stable over five quarters Hasnt moved very much easier.
Barry Scott Sloane: It's been written off of earnings, it's already affected our past earnings, and you're left with a fair value of $37 million. And if you run your finger back across the page, it's fairly stable over five quarters, hasn't moved very much. These are loans that most likely will, A, re-perform and get back into payment status. Yes, non-accrual small business loans frequently do come back into payment status.
Gary: These are loans that most likely will.
Gary: Re perform and get back into payment status, yes, non accrual small business loans frequently do come back into payment status.
Barry Scott Sloane: They still sit in this particular category or may sit. However, the important part is that they may come back. Why?
Gary: Sit in this particular category or makes it. However, the important part is they may come back why theres multiple joint and several personal guarantees on these loans something that is not quite familiar to most banks or analysts or investors in this particular space.
Barry Scott Sloane: There are multiple joint and several personal guarantees on these loans, something that is not quite familiar to most banks or analysts or investors in this particular space. Also, the $37 million will, most likely, if it doesn't come back, the other choice is to liquidate the collateral. These are evaluated every quarter to mark the collateral, the market, and estimate how long it's going to take to liquidate. Is it six months? Is it 18?
Gary: Also the 37 million most likely will if it doesn't come back the other choice is to liquidate the collateral. These are evaluated every quarter.
Gary: Mark the collateral of the market.
Gary: Estimate how long it's going to take to liquidate is it six months is it <unk> is it a tough state like Illinois that might be 24 is our bankruptcy. We look at the fair value, we put the cost to liquidate and we come up with a price so.
Barry Scott Sloane: Is it a tough state like Illinois where they might be 24 and they're bankrupt? We look at the fair value, we calculate the cost to liquidate, and we come up with a price. Nobody needs to go crazy over this if, in fact, these numbers do increase. Now, this is a portfolio that's paying down, so as a percentage of the total assets in NSBF, arguably, this is only going to get bigger because the portfolio is paying down quite rapidly on the performing loans. Here's the important part. We have this in our capital.
Speaker Change: Nobody needs to go crazy over this.
Gary: If in fact these numbers do increase that this is a portfolio that's trading down so as a percentage of the total assets in SBF. Arguably this is only going to get bigger because the portfolio is paying down quite <unk>.
Gary: Rapidly of the performing loans, here's the important part we have this in our capital plan.
Barry Scott Sloane: We have this in our financial project. This is not something that we're not new to. We've owned Newtek Small Business Finance since September, excuse me, January of 2003. So it's important to understand the non-accrual portfolio, which is at fair value in NSBF. This is the non-accrual.
Gary: We have this in our financial projections. This is not something that we're not new do we've owned new Tech small business finance since September.
Gary: Accuse me January of 2003, so that's important to understand the non accrual portfolio, which is at fair value in NSP up. This is the non accrual when you look at the accrual portfolio, it's priced assuming an approximate 8% charge.
Barry Scott Sloane: When you look at the accrual portfolio, it's priced assuming an approximate 8% charge-off over the life of a new loan. A seasonal loan could be 5% or 6% because we've already experienced most of the charge-offs in the first 36 or 48 months. I would say 35 to 40% of the portfolio is, I'll say, four plus years old, all sitting in securitizations. The rest were probably vintage.
Gary: Job over the life on our new loan season alone could be five or 6% because we've already experienced most of the charge offs in the first 36 or 48 months I would say, 40%, 35% to 40% of the portfolio is I'll say four plus years old all sitting in Securitizations the restaurant.
Barry Scott Sloane: 21, 22, and a little bit in 23. Now, let's go down to Newtek Bank. So, past due 31 to 89, $12 million. Oh my God, it's $12 million. It's really not that big of a number.
Gary: Robley vintage.
Gary: 'twenty, one 'twenty, two and a little bit in 'twenty three.
Gary: Now, let's go down the new Tech Bank.
Gary: Past due 30 to 80 912 million Oh, My God, it's $12 million, it's really not.
Barry Scott Sloane: 3% of total, mind you; we sell off the government guarantees. So if you would have kept that on the books and you used your percentages, it'd probably be 2% or some 1% number. The other thing to point out is we make loans in the bank that we sell. We originate 504 loans, which we've never had a charge-up on to date. Those loans come out of the bank. We originate them and sell them. The first and the second are taken out by the bench; the Alternative Loan Program is also originated.
Gary: Number it's 3% of total mind, you we sell off the government guaranteed piece. So if you would have kept that on the books and you use your percentages it'd probably be 2% or some 1% number the other thing to point out is we make loans in the bank that we sell.
Gary: We originated 504 loans, which we've never had a charge off on to date those loans go out of the bank, we originate them and sell them.
Gary: First and seconds or taken out by debentures.
Gary: The alternative loan program loans also are originated.
Barry Scott Sloane: They go on the balance sheet briefly, then they go into joint ventures. So when you look at these numbers, these numbers are consistent with our projections. They're consistent with our plans. You'll see our currency rate is, I think, 95.5 at the bank. Look, that currency rate could go down much lower. That does not perturb us.
Gary: On the balance sheet briefly then they go into joint ventures. So when you look at these numbers. These numbers are consistent with our projections there consistent with our plans.
Gary: You'll see our currency rate is.
Gary: 95, <unk> at the bank.
Gary: But that currency rates could go down much lower.
Barry Scott Sloane: We've had currency rates of 88 or 89 percent; small businesses fall behind. Sometimes it's seasonal, sometimes the owner gets sick, and they fall behind. So these numbers are not extraordinarily high, and they're within our expectations. We're not accruing loans at $8 million in the bank. A little over 5 million of those are old National Bank of New York City loans. We'll discuss the character of those loans later. We've looked at these loans. We've analyzed them. We have a 369,000 allowance for credit. That's not a big number. It is going to get bigger, okay?
Gary: That does not return as we've had currency rates of 88 or 89% small businesses fall behind sometimes it seasonal sometimes the owner gets sick and they fall behind so these numbers are not extraordinarily high and they are within our expectations.
Gary: Non accrual loans at $8 million in the bank a little over 5 million of those are.
Gary: Old National Bank of New York City loans.
Gary: <unk> discussed the character of those loans, we've looked at these loans, we've analyzed them with 369000 allowance for credit losses. It's.
Gary: It's not a big number it is going to get bigger.
Barry Scott Sloane: However, the benefit of this is... You get a big gain on sale, you get a servicing asset, and the performing loans are on the books at 11.5%, floating a prime quarterly adjustment. Once again, our loan loss reserves are north of 4%, more than adequate to be able to hold this, and we will be and have been looking at this every single quarter. I would say credit is not understood by the market for SBA 7A loans. We've been doing this for 20 years.
Gary: However, the benefit of this is you get a big gain on sale you get a servicing asset and the performing loans are on the books at 11, 5% floating a prime.
Gary: Quarterly adjust and.
Gary: Once again, our loan loss reserves north of 4% more than adequate to be able to hold us and will be.
Gary: We'll be and have been looking at this every single quarter.
Gary: I'd say credit is not understood by the market for SBA seven loans.
Gary: We've been doing this for 20 years, we know it we understand it and we're very comfortable managing the greater reward that you get for the charge offs and delinquencies that youre going to have in this type of portfolio slide number 13 talks about quarterly lending activity obviously.
Barry Scott Sloane: We know it, we understand it, and we're very comfortable managing the greater reward that you get for the charge-offs and delinquencies that you're gonna have in this type of portfolio. Slide number 13 talks about quarterly lending activity. Obviously, we crushed it in the 7A space, an increase of 35.9% over the prior quarter in the prior year.
Gary: We crushed it in the <unk> space and increase of 35, 9% over the prior quarter in the prior year. The alternative loan program, which is important to us.
Barry Scott Sloane: The alternative loan program, which is important to us, is starting to get some nice traction, 53.8 million in Q1. We see that continuing to ramp this up, and our profitability. And in terms of total loan area, you're gonna see in the bank. Hopefully, in the second quarter, but certainly in the third or fourth, the bank's going to put on the more traditional, vanilla, low margin, low risk, low loan loss reserve, low charge types of loans that most banks lend to. But that's not our thesis.
Gary: Starting to get some nice traction $53 8 million in Q1, we see that continuing to ramp disrupt our profitability.
Gary: <unk>.
Gary: And the total loan area Youre going to see in the bank.
Gary: Hopefully in the second quarter, but certainly in the third or fourth but that's going to put on the more traditional vanilla.
Gary: Low margin low risk.
Gary: Low loan loss reserve low charge of types of loans that most of the banks lend to but thats not our thesis we do believe in a diversified portfolio.
Barry Scott Sloane: We do believe in a diversified portfolio. We think that's important, and we will have it through the purchase or origination of what I call conforming CRE and conforming C&I loans in the future. Slide number 14 addresses the loan pipeline growth. Clearly, when you look at the alternative loan program on slide 14, that's obviously our biggest delta that we have there. So as of the end of April, we have a nice pipeline of approved pending closing of 48.5 million.
Gary: We think that's important and we will have it through the purchase origination what I call conforming CRE and conforming C&I loans in the bank slide number 14 addresses the loan pipeline growth.
Gary: Clearly when you look at the alternative loan program on Slide 14, that's obviously our biggest delta that we have there so as of the end of April to nice pipeline.
Gary: Pipeline of approved pending closing of $48 5 million, 7% business looks pretty good.
Barry Scott Sloane: 7A business looks pretty good. I feel very, very good about where we are. At the bottom of slide 14, you can see the alternative loan program closings for the first four months of the year, 61 million. You could straight line that and annualize it.
Gary: Feel very very good about where we are.
Gary: At the bottom of Slide 14, you can see the alternative loan program closings through the first four months of the year $61 million you could straight line that and annualize. It we think it will wind up growing to bigger numbers.
Barry Scott Sloane: We think it'll wind up growing to bigger numbers. We actually have forecasts of that pretty conservatively going forward. Slide number 15.
Gary: And that's part of our.
Gary: Forecast, but we actually have forecasted that.
Gary: Pretty conservatively going forward.
Barry Scott Sloane: Once again, the makeup of the portfolio is important at the bank. We talk about our currency rate and the percentage of CRE composition. Obviously, the National Bank of New York City portfolio continues to get diluted as a percentage.
Gary: Slide number 15.
Gary: Once again the makeup of the portfolio is important at the bank, we talked about our currency rate per.
Gary: Percentage of CRE composition, obviously, the National Bank of New York City portfolio continues to get diluted as a percentage, we believe in geographic and industry diversification through our new tech sourcing and clearly our lending operation very scalable that will continue to grow year after year.
Barry Scott Sloane: We believe in geographic and industry diversification through our new tech sourcing. And clearly, our lending operation, which is very scalable and will continue to grow year after year. Slide number 16 talks about the CRE portfolio at NewTek Bank. I'd like to draw your attention to the bottom end of slide 16. Once again, important, There are a lot of banks out there that would certainly trade my weighted average LTV for a CRE portfolio at 59.4 and look at these lower numbers on multi-office and retail. That's driven up a little bit by the 504 lending, for which the second lien gets taken out by the bench. Slide number seven.
Gary: Slide number 16 talks about that CRE portfolio, New Tech bank.
Gary: Like to draw your attention towards the bottom end of slide 16, once again important.
Gary: There are a lot of banks out there that would certainly trade my weighted average LTV for CRE portfolio at $59 four and look at these lower numbers on multi office and retail that's driven up a little bit by the 504 lending of which the second lien gets taken up by debentures.
Gary: Slide number 17.
Barry Scott Sloane: Okay, is gain on sale a reoccurring event? Well, the numbers don't lie. So let's focus on sort of what I'll call the near term, 2021, 2022, 2023. These are big numbers. Tell me this isn't going to be reoccurring.
Gary: Okay.
Gary: Gain on sale of reoccurring event, well the numbers don't lie.
Gary: Let's focus on sort of what I'll call. The near term history 2021, 2022 2023. These are big numbers.
Speaker Change: Tommy this isn't going to be reoccurring.
Barry Scott Sloane: 5, 10, 20 years from now, you're still going to see these numbers at Newtek One, all right? These numbers are there. We make loans. We sell them. I mean, if the math ever changed, and I haven't seen it in my two decades of experience in the business, where it didn't pay to sell the government,
Gary: 510, 20 years from now you're still going to see these numbers at new Tech one alright. These numbers are there.
Gary: There, we make loans, we sell them.
Gary: The NAFTA ever change that I haven't seen it in my two decades experienced in the business, where it didn't pay to sell the government piece, we might hold it for income, but the highest return on assets. The highest return on equity, it's clearly by selling the government guaranteed piece and these are the cash premiums import.
Barry Scott Sloane: We might hold it for income, but the highest return on assets, the highest return on equity, It's clearly showing the government cares. And these are the cash premiums. Important to note for non-SBA 7A aficionados, anything that you sell to the 11 pool assemblers above 110, the premium gets split 50-50. So when you look at the weighted average net sales price, You'll see it down the far right-hand column on slide number 17.
Gary: To note for non SBA 700 <unk>.
Gary: <unk> itself to the 11 pool assemblers above 110, the premium gets split 50 50. So when you look at the weighted average net sales price.
Gary: You could see it down the far right hand column on slide number 17 the average.
Barry Scott Sloane: The average over this time was 11.34. If you go to the next slide, first quarter is pretty much where we've been at the 10-year average, so it can go a little lower, it can go a little higher. All manageable for us in managing our business. Slide number 19.
Gary: Over this time 11, three four if you go to the next slide but first quarter is pretty much where we've been at the 10 year average. So I mean, it can go a little lower it can go a little higher all manageable for us in managing our business slide number 19, everybody always forget about the payments.
Barry Scott Sloane: Everybody always forgets about the payments business, which generates a lot of income and a lot of cash. They forecast for 2024, which we're comfortable with, pre-tax income of 16 million, EBITDA of 16.6 million, some nice growth from the prior year. Also important to note, this business is not factored into our tangible book, you know, that's just accounting. It was basically put in pretty close to zero. I'll just leave it at that.
Gary: <unk>.
Gary: It just generates a lot of income and a lot of cash.
Gary: <unk> forecast for 2024, which we're comfortable with pre tax income 16 million EBITDA $16 6 million to nice growth from the prior year.
Gary: Important to note. This business is not factored into our tangible book.
Gary: That's just accounting it was basically put in.
Gary: Pretty much close to zero I will just leave it at that.
Barry Scott Sloane: And when we were holding this as a BDC, and it was being marked to the market, I think we had valuations net of its debt on NAV of about $115 million. So I had one investor saying, well, gee, did you lose all that money in equity? No, that's just a change in accounting from NAV to bank accounting or book value. And obviously, it's one of the reasons why we continue to educate our analysts and our investors on a regular basis. There are a lot of accounting changes, but I think people are starting to get a handle on this, and it's going to become easier to follow.
Gary: And when we were holding this as a BDC and it was being mark to the market I think we had valuations net of its debt on <unk> of about $115 million. So I had one investors, saying well Gee did you lose.
Gary: Lose all of that money in equity the just the change of accounting from AAV, two bank accounting or book value accounting and obviously, it's one of the reasons why we continue to educate our analysts or investors on a regular basis. There are a lot of accounting changes, but I think.
Gary: People are starting to get a handle on this and it should be.
Gary: Can become easier to follow slide number 20, as a breakdown within merchant solutions.
Barry Scott Sloane: Slide number 20 is a breakdown within Merchant Solutions, and slide number 21 is indicative of the dollars that we recently spent to bolster our accounting and finance and compliance team. I think you could add about another $800,000 of expenses to this number, which is factored into our projections.
Gary: <unk> 21 is indicative of the dollars that we've recently spent to bolster our accounting and finance and compliance team.
Gary: You could add about another $800000 of expense to this number which is factored into our projections. Once again, we don't aim to be a $1 $5 billion banks. Along this is a business that is built for scale. It's a business that industry participants are going to look at and go how do they raise the <unk>.
Barry Scott Sloane: Once again, we don't aim to be a $1.5 billion bank for long. This is a business that is built for scale. It's a business that industry participants are going to look at and go, how do they raise deposits without bankers, branches, brokers, or BDOs? How do they make those loans? How do they make those loans at those prices? The answer is technology.
Gary: Positive without that branch.
Gary: Bankers branches brokers of BDO, how do they make those loans the way they make them how to make those loans at those prices how do they do his business, it's technology utilization of technology and dedicated staff willingness willing to adopt to that technology I should say adapt to the technology.
Barry Scott Sloane: Utilization of technology, dedicated staff willing to adopt that technology, or I should say adapt to the technology, and continuing to add to make sure that we can manage our risk. The client, have the right policies and procedures. I will point out once again, when you think about where we started with a 61-year-old bank that had really no ability to open up a deposit account unless you went into the bank, loans were made primarily through a brokered network. So we had to put a lot of things in place. Well, that was 2023. We're still doing it. So against the backdrop of a lot of heads.
Gary: And continuing to add to make sure that we could manage the risks be compliant have the right policies and procedures in place I will point out once again, when you think about where we started with a 61 year old bank that had.
Gary: Really no ability to open up the deposit account unless you went into the bank.
Gary: Loans were made primarily through our brokerage network. So we have to put a lot of things in place that was 2023, we're still doing it so against the backdrop of a lot of headwinds. This is a company thats building a business for the future to be a technology enabled organization.
Barry Scott Sloane: This is a company that's building a business for the future, to be a technology-enabled organization that can provide superior solutions to a huge economic engine and demographic in the marketplace, the independent business owner. Scott, if you could go over to slide 22 on the financial projections, that would be appreciated. Sure, Barry.
Gary: Can provide superior solutions to a huge economic engine and demographic in the.
Gary: Please see independent business owner.
Gary: Scott If you can go over the slide 22 on the financial projections that will be appreciated.
Scott Price: Slide 22 outlines our updated guidance for the remainder of 2024. Many of the KPIs that we assumed and disclosed in our call in March remain unchanged. Our forecast assumes no change in interest rates consistent with the prior quarter, and we expect loan demand to hold in. We did widen the ranges for Q3 and Q4 in light of the soft landing the Fed is trying to pull off and the future of interest rates being data-dependent.
Scott Price: Sure Barry Slide.
Scott Price: Slide 22 outlines our updated guidance for the remainder of 2020 for many of the Kpis that we assumed and disclosed in our call in March.
Scott Price: Unchanged, our forecast assumes no change in interest rates consistent with prior quarter, we expect loan demand to hold them.
Scott Price: We did widen the range is for Q3 and Q4 in light of the soft landing the fed is trying to pull off in the future of interest rates being data dependent.
Scott Price: There are two items I want to point out regarding our results relative to our March forecast. First, our net interest income and provision expense came in on top of our expectations. And second, our non-interest expenses for the quarter came in slightly better than we forecasted. Barry, I'll turn it over to you. Thank you. Slide number 23.
Scott Price: Two items I want to point out regarding our results relative to our March forecast first net interest income and provision expense came in on top of our expectations and second our noninterest expenses for the quarter came in slightly better than we forecasted.
Scott Price: Barry I'll turn it over to you.
Barry Scott Sloane: I did make some comments about the 2023 calendar year and the investments that we made. I think I've covered most of this. Once again, against a lot of headwinds in 2023, we are very pleased and proud of our performance and the fact that we can now win a little bit less on the headwinds, and be able to continue to grow the business, with a forecast of $1.85 to $2.05, which we think is conservative for calendar year 2024.
Barry: Thank you slide number 23, I did make some comments about the 2023 calendar year and the investments that we made.
Barry: I think I've covered most of it is once again against a lot of headwinds in 2023, we are very pleased and proud of our performance and the fact that we can now with a little bit less on the headwinds be able to continue to grow the business.
Barry: With a forecast of a buck 85 to $2 five.
Barry: Which we think is conservative for calendar year two.
Barry: 2024.
Barry Scott Sloane: 2024 Initiative, continue to grow the Newtek Advantage and increase impressions. That's going to go along with our ability to bring in commercial transactions. We added about 17 heads in the commercial deposit area in Q1 2024, with another two coming in in April. Most of those heads are used for the back office of accepting transactional deposits, customer service, teaching people how to use the technology, making sure we're compliant, making sure we can surveil, all that stuff. So a major investment. All of these expenses are part of it. What will that lead to?
Barry: 2024 initiatives.
Barry: To continue to grow the new tech advantage and increased impressions, that's going to go along with our ability to bring in commercial transaction deposits.
Barry: We added about 17 heads in the commercial deposit area in Q1, 'twenty 'twenty four with another two coming in in April most.
Barry: Most of those heads are used for the back office of accepting transactional deposits customer service teaching people how to use the technology, making sure. We're compliant making sure. We can surveil all of that stuff. So a major investment all of these expenses are part of it what will that lead to future.
Barry Scott Sloane: Future growth in 1% commercial DDA and 3.5% commercial money market, which will come in from our payroll businesses, our merchant businesses, and our lending business, which we started to get some traction toward the tail end of the first quarter of 2024. You can't just be in that business without having the people, process, and the technology. We wanted to make sure we were able to do this in a compliant manner, because you don't want to make a mistake in this particular early stage. I know financial people, and I happen to be one of them, say, "Oh, why can't you bring in more of this cheaper deposit money?" Well, we will be. It'll be.
Barry: Your growth and 1% commercial DDA and three 5% commercial money market, which will come in from our payroll businesses, our merchant businesses, our lending business, which we started to get some traction towards the tail end of the first quarter 2024, you can't just be in that business without having the people.
Barry: <unk> and the technology, we wanted to make sure we were able to do this in a compliant manner.
Barry: You don't want to make a mistake in this particular early stages I know financial people and I happened to be one of them. So why can't you bring in more of this.
Barry: Moreover, this cheaper deposit money well, we will be it'll be and it's something.
Barry Scott Sloane: And it's something that we will be delivering on. We talked about this in previous calls, modestly in Q2 of 2024, but you'll start to see those. And we believe that our account, which charges no service fee for the account, no ACH fee, no wire, will earn that business from the customer with an interest-bearing rate. Our competitors can't do this. Why?
Barry: Something that we will be delivering on.
Barry: And we talked about this in previous calls modestly in Q2, and 2024, but you'll start to see those numbers churn in Q3 2024 in Q4 2024.
Barry: And we believe that our accounts.
Barry: Which charges no service fees for the account no <unk> no wire fees, we'll earn that business from the customer with an interest bearing rate our competitors can't do this why they don't have the assets that they get put on the books on a risk adjusted.
Barry Scott Sloane: They don't have the assets that they could put on the books on a risk-adjusted basis that are floating rate asset liability managed to make this thing work. So our business model is unique. It works.
Barry: The basis that are floating rate asset liability manage to make this thing work. So our business model is unique.
Barry Scott Sloane: It's worked historically in our career for those shareholders that have been patient. You've got to please excuse the transition, but it is working, and our first quarter results are indicative of it. We also look forward to NetSuite, a new financial reporting platform that will enable us to close our books earlier.
Barry: It works, it's worked historically in our career.
Barry: For those shareholders that have been patient you've got please excuse the transition, but it is working and our first quarter results are indicative of that.
Barry Scott Sloane: I think that's the second half 2024 initiative, and continuing to add high-quality people. By the time we're 24, we're obviously gonna be attending investor conferences. We plan on hosting an analyst day. I would say the date will be June 13th, 2024. We'll put out a press release, we'll give people the opportunity to register, ask as many questions as you like, and we look forward to getting together with analysts and investors at our corporate headquarters in Boca Raton. Boca Raton.
Barry: We also look forward to net suite, a new financial reporting platform that will enable us to close our books earlier I think that's the second half.
Barry: 2024 initiatives.
Barry: And <unk>.
Barry: Continuing to add high quality people 24, where obviously you're going to be attending investor conferences, we plan on hosting an analyst day.
Barry: I would say the date will be June 13, 2024, and put out a press release will give people the opportunity to register and because many questions in July and we look forward to getting together with analysts and investors in our corporate headquarters in Boca return.
Barry Scott Sloane: We also believe in the second quarter of 2024, we'll be able to show a cleaner, more normalized year-to-year growth comparison without the tax effect that we dealt with in Q1, continuing to maintain our dividend policy, and, I think importantly, we exist to make our clients more successful; we exist to have a better experience for us. We exist for clients to interact with their important business and financial solutions provider in a way that has less friction and to improve their business on a regular basis.
Barry: Boca Raton, we also believe in the second quarter of 2024 will be able to show a cleaner more normalized year to year growth comparison without the tax effect that we dealt with in Q1.
Barry: Continuing to maintain our dividend policy and I think importantly, we exist to make our clients more successful.
Barry: We exist to have a better experience for our clients, we exist where clients to interact with their important business in financial solutions provider in a way that has less friction.
Barry: To improve their business on a regular basis, otherwise we haven't earned it.
Barry Scott Sloane: Otherwise, we have an. Slide number 25 gives a comparison where Newtek One sits on market multiples, yield, and obviously, we look at these things. With the exception of the transition and a lack of understanding, these things don't make sense to us, but they have a way of working themselves out. Today's conference call is a way to get these things to work out, to get people to have a better understanding of who we are, what we do, and what our numbers mean. Stick to it. Slide number 26.
Barry: Slide number 25 gives a comparison, where new tech one sits on market multiples yield obviously, we look at these things with the exception of the transition and a lack of understanding the us These things don't make sense, but these have a way of working themselves out today's conference call is a.
Barry: Way to get these things to work out to get people to have a better understanding of who we are what we do what our numbers need to stick stick to it.
Barry: Slide number 26, most banks desire what we already have.
Barry Scott Sloane: Most banks desire what we already have. They'd love to have a lot of non-interest income. They'd love to not have the interest rate risk management. They'd love to have the NIMS that we have.
Barry: They'd love to have a lot of noninterest income.
Barry: Love to not have the interest rate risk management they'd love to have nims that we have they'd like to have the loan what we've got all these things now it's important to continue to operationally execute on our strategy and get the message out we're very very excited about our future business raising commercial core deposits.
Barry Scott Sloane: They'd like to have the loan, but we've got all we need now. Now it's important to continue to operationally execute on the strategy and get the message out. We're very, very excited about our future business. Raising commercial core deposits will increase margins, lower cost of funds, and I believe the Newtek Advantage, once we have those deposits, will become the gold standard in banking for deposit gathering because customers want more from the institutions they do business with. They just don't want to give their money up and act at cost, a fair rate of interest. We've overcome a lot of difficult hurdles, although there are a few left. The finish line is in sight.
Barry: We'll increase margins lower cost of funds.
Barry: We do believe the new Tech advantage once we have those deposits will become the gold standard in banking for deposit gathering because the customers want more from the institutions. They do business with they just don't want to give their money and not get paid a fair rate of interest.
Barry: We've overcome a lot of difficult hurdles and while there are a few left.
Barry Scott Sloane: Slide number 27, before we go to Q&A. I mean, you can't ignore these numbers. I mean, you can, but I don't see how that's very helpful in ignoring the profitability of the bank and of the holdco versus our competitors in the market. Eventually, there'll be a better understanding, people will get comfortable that we can continue to raise deposits, continue to make loans, make sure that we're managing our risk, and we have the right amount of reserves, even though our losses are higher, our income is materially higher We are excited about being able to bump our guidance up a little bit, but we think that's still conservative.
Barry: Finish line is in sight slide number 27 before we go to Q&A.
Barry: I mean, you can't ignore these numbers I mean, you can but.
Barry: I don't see how.
Barry: That's very helpful to ignoring the profitability of the banking of the holdco versus our competitors in the marketplace.
Barry: Essentially there'll be a better understanding people will get comfort that we can continue to raise deposits continue to make loans.
Barry: Make sure that we're managing our risk and we have the right amount of reserves, even though our losses are higher income is materially higher and on a net net basis, we have a higher ROA and ROE Tcs.
Barry: We are excited about being able to bumped our guidance up a little bit we think thats conservative we look forward to continue to pay dividends, which will be declared by the board out of earnings.
Barry Scott Sloane: We look forward to continuing to pay dividends, which will be declared by the board out of earnings. We have a current dividend yield of 6.8%, which is a bit of a head-scratcher for me, but buy it while it's hot. And I think it's important to note Newtek is a growth-oriented, differentiated, technology-enabled business solutions company that is also a depositor, and we look forward to opening up the Q&A. Thank you, operator. Thank you, Mr. Sloane. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
Barry: We have a current dividend yield of six 8% a bit of a head scratcher for me, but.
Barry: Get it while it's hot.
Barry: And I think it's important to note new tech is a growth oriented differentiated technology enabled business solutions company and it was also a depository.
Speaker Change: And we look forward to opening up to Q&A.
Speaker Change: Thank you operator.
Speaker Change: Thank you Mr <unk>.
Speaker Change: At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
Speaker Change: Withdraw your question. Please press star one one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Operator: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A rough. Our first question comes from the line of Crispin Love from Piper Sandler. Your line is now open. Hi, this is Brad Kapustian for Crispin Love.
Speaker Change: Our first question from that line of Crispin Love of Piper Sandler Your line is now open.
Speaker Change: Hi, This is Brad on for Christian.
Crispin Elliot Love: Thanks for taking the question. Can you just remind us some of the economics on the non-conforming loans you're earning on day one in terms of fees you're generating there? And how much CESA reserves are you putting up as well on these loans? Sure, I appreciate the question. On the alternative loan program, we historically called it nonconforming. We changed it to the alternative loan program to make sure it's just better understood. Yeah, you know what? I forgot to do the MD&A. I apologize. Let me answer this question, then we'll go back to Scott's MD&A. Sorry about that.
Brad: Thanks for taking the question can you just remind us some of the economics on the nonperforming loans that you're earning on day. One in terms of fees you are generating there and how much see some reserves are you putting up as well on these lines.
Speaker Change: Sure I appreciate the question on the alternative loan program.
Speaker Change: We.
Speaker Change: Historically called at Nonconforming, we change it to alternative loan program to make sure. It is.
Speaker Change: Uh huh.
Speaker Change: Better understood.
Speaker Change: Yeah, you know what I forgot to do the MD&A.
Speaker Change: Let me ask this question then we'll go back to Scotts MD&A, sorry about that so let me answer your questions and we'll go to the MD&A.
Barry Scott Sloane: So let me answer your questions, then we'll go to the MD&A. So on the ALP loans, basically, we're on the street today at about three and a half points gross. We service for 100 basis points, and the loans are net to the joint venture at a price of 12%, so we're about 13% gross. We have A, B, and C credits.
Speaker Change: <unk>.
Speaker Change: So on the E. L. P loans basically were on the street today at about three five points gross we service for 100 basis points and the loans are net to the joint venture.
Speaker Change: At a price of 12% so about 13% growth, we have a b and C credits.
Barry Scott Sloane: We're 12, 13, and 14% gross now. Regarding Cecil Reserve, they've done up the whole income. So we have an estimated charge-off rate historically on those loans of about 3%. So given the profitability of the fees, the servicing, and the funding from our joint venture partners, it does provide a generous return to Newtek One. Awesome, I appreciate that. And then just falling off.
Speaker Change: We're 12, 13, and 14% growth now regarding seasonal reserves had done up at the holding company. So we have a.
Speaker Change: The estimated charge off historically on those loans of about 3%.
Speaker Change: So given the profitability of the fees to servicing.
Speaker Change: The funding from our joint venture partners. It does provide a generous returned to new Tech point.
Speaker Change: Okay.
Speaker Change: Awesome I appreciate that and then just just following up I know you guys mentioned on the call, but on the SBA gain on sale margins can you speak a little more on what has kept gain on sale margins elevated even north of 11% in the first quarter, which is higher than most peers and how is the demand for your paper how would you expect margins to trend through 2024 and at current.
Barry Scott Sloane: I know you guys mentioned on the call, but on the SB&A gain on sale margins, could you speak a little more on what has kept gain on sale margins elevated even north of 11% in the first quarter, which is higher than most peers, and what is the demand for your paper? How would you expect margins to trend through 2024 in a current rate environment? Well, it's a great question. So if you look at, say, the primary competitor, Live Oak, who doesn't have the gain on sale market, when you're basically originating loans through brokers and bankers, they work for the borrower. And it's much more competitive. It's much more manual.
Speaker Change: The rate environment.
Speaker Change: Hello.
Speaker Change: It's a great question. So if you look at say.
Speaker Change: Primary competitor, a LIBOR, who doesn't have the gain on sale margins.
Speaker Change: When youre basically originating loans through brokers and bankers they work for the borrower.
Speaker Change: And it's much more competitive its much more manual and because we are incredibly efficient work closely with our borrowers were able to get better margins. We've been match rate for 12 years, we don't cut it.
Barry Scott Sloane: And because we're incredibly efficient and work closely with our borrowers, we're able to get better margins. We've been maxed out rate. 12 years, we don't cut it; we get to the borrower quickly, we get the data processed quickly, we make them an offer, and that's why our margins are better. Awesome, I appreciate and appreciate the answers. Thank you. Operator, I've got to apologize to the group. I messed up my order so Scott was supposed to do his MD&A, and I'd like to revert back to Scott Price if I can before I ask any more questions.
Speaker Change: We get to the borrower quickly we get the data process quickly, we make them an offer and that's why our margins are better.
Speaker Change: Awesome I appreciate I appreciate the answers and that's it for me.
Speaker Change: Thank you operator, I've got to apologize to the group.
Speaker Change: Messed up my orders so.
Speaker Change: Scott was supposed to do is M DNA and I'd like to revert back to Scott price, if I can't provide you any more questions.
Barry Scott Sloane: Yeah, Barry, thanks. Real quick, I just wanted to head off a potential question. I just wanted to cover the changes in provision expense for the quarter. Provision expense is higher, excuse me, lower, as a result of the 7A production at the bank. We did have some first quarter charge-offs that we covered in our provision expense, but the majority of the provision expense, at least almost $3 million, was driven by a higher loan balance.
Scott Price: Yes, Thanks real quick I just wanted to add also potential question.
Scott Price: Just wanted to cover the changes in provision expense for the quarter.
Speaker Change: The provision expense is higher as or excuse me lower as a result of the seven day production of the bank.
Scott Price: We did as first quarter charge offs are recovered in our provision expense.
Scott Price: But the majority of the provision expense at least almost $2 million was driven by higher loan balances.
Scott Price: The remainder between provision for balances and charge-offs was some specific reserves. We feel like we're prudently reserving and are not concerned about the non-accrual amounts that we have in the pool. Operator, we'll turn it back to you for the next question. Thank you.
Scott Price: As a remainder between provision for balances and charge offs was.
Scott Price: Some specific reserves, we feel like we are prudently reserved.
Speaker Change: And are not concerned about that.
Scott Price: Non accrual loans, we have in the portfolio.
Speaker Change: Operator, I'll turn it back to you for the next question.
Speaker Change: Thank you please standby for our next question.
Operator: Please stand by for our next question. Our next question comes from the line of Tim Switzer of KBW. Your line is now open. Hey, good morning.
Speaker Change: Our next question comes from the.
Speaker Change: Line of Penn Swett, Sir of <unk>. Your line is now open.
Timothy Jeffrey Switzer: Thanks for taking my question. My first question is, could you expand on your comments about the gain on sale premiums here, and you know, were there certain trends in Q1 that maybe were elevated? The premiums and margins you guys are able to receive as, you know, the forward rate expectations moved lower earlier in the quarter. And did that cause you to maybe sell more loans than you typically would to take advantage of that?
Penn Swett: Hey, good morning, Thanks for taking my question.
Penn Swett: Good morning.
Barry Scott Sloane: And should we expect that to kind of... step back down a little bit in Q2 since rate expectations have moved back up? Yeah, I do appreciate the question. I think that we check the markets fairly frequently, and at the moment, I would say they're fairly stable. You can take a look at what we have for the cash premium.
Penn Swett: My first question is could you expand on your comments about the gain on sale premiums here and where there are certain trends in Q1 that maybe elevated.
Penn Swett: The premiums and margins you guys are able to receive the forward rate expectations moved lower earlier in the quarter and did that.
Penn Swett: Cause you to maybe sell more loans than you typically would take advantage of that and should we expect that to kind of.
Penn Swett: Step back down a little bit in Q2 since rate expectations have moved back up.
Speaker Change: Yes, I do appreciate the question I think that.
Speaker Change: We check the market's fairly frequently and.
Speaker Change: We are at the moment I would say.
Speaker Change: They are fairly fairly stable.
Speaker Change: You could take a look at.
Speaker Change: We have forecast premium now cash premium is also a function of.
Barry Scott Sloane: Now, the cash premium is also a function of whether you have longer-dated paper or shorter-dated paper. And if you notice, despite the fact that rates have risen, the price of the SBA 7A paper has gone higher. And that's because there is tremendous demand right now for floating-rate government-carry speed paper off the short end of the curve. So forecasting the price of the premium is not an easy task. The question that came in earlier is important relative to on a competitive basis.
Speaker Change: Do you have longer dated paper shorter dated paper.
Speaker Change: And if you notice.
Speaker Change: The fact that rates have risen.
Speaker Change: Prices of the SBA 700 paper has gone higher.
Speaker Change: And Thats because there is a tremendous demand right now for floating rate paper.
Speaker Change: Paper off the short end of the curve.
Speaker Change: So forecasting the prices of the premium is not an easy is not an easy task.
Speaker Change: Question that came in earlier I think is important relative to on a competitive basis.
Barry Scott Sloane: We do this business in a more efficient, quicker, frictionless manner that allows us to get a good price from our client and get the business closed, relative to, you know, the volatility of pricing. As I mentioned previously, we're kind of in the midpoint of the 10-year range of where prices can be. And that can fluctuate from one side to another depending upon whether you're doing 10-year paper which trades, you know, from 109 to 112 to the 30 to the 25-year paper backed by commercial real estate which could trade at 113, 114, 115 or higher. And then you're splitting the premium.
Speaker Change: We do this business in a more efficient quicker frictionless manner that allows us to get a wholesome praise from our client and get the business closed.
Speaker Change: Relative to.
Speaker Change: The volatility of Av.
Speaker Change: Pricing as I mentioned previously were.
Speaker Change: Kind of in the mid point of the 10 year range.
Speaker Change: As can be and that can fluctuate from one side to another depending upon whether youre doing 10 year paper, which trades you're only up.
Speaker Change: From 109 to $1 12 to the 30 until the 25 year paper backed by commercial real estate, which could trade at 113, 114, 115 or higher and then you are splitting a premium so hopefully that helps answer your question.
Barry Scott Sloane: So hopefully, that helps answer your question. I would just strongly suggest that you use the guidance that Scott has given us on a going forward basis to get to where you need to be. And Tim, just to add to what Barry said, we sold in excess of what we anticipated because we generated more production. It's not a function of the market, but of production.
Speaker Change: I would strongly suggest that you use the guidance that Scott has given on a going forward basis to get to where you need to be.
Speaker Change: And Tim just to tack on to what Barry said.
Speaker Change: We sold.
Speaker Change: Excess of what we anticipated because we generated more production.
Barry Scott Sloane: So we are continuing to work on our business model, and our operations to put more units through the pipeline. And we expect that number, the pipeline, to grow so that we can produce more units. But production this quarter is a function of demand and a function of the improvements we continue to make in efficiencies and has nothing to do with the marketplace or the pricing dynamics that you mentioned. Great, yeah, that was really helpful. And could you guys also expand on your comments around the credit performance of the portfolio? And could you maybe review it?
Speaker Change: Not a function of the market.
Speaker Change: But for production.
Speaker Change: So we are continuing to see.
Speaker Change: Work on our business model, our operations to put more.
Speaker Change: Units through the pipe.
Speaker Change: We expect that number the pipe to grow so that we can produce more units.
Speaker Change: But the production this quarter is a function of demand.
Speaker Change: And a function of the improvements we continue to make inefficiencies and had nothing to do with.
Speaker Change: With the marketplace.
Speaker Change: The marketplace or.
Speaker Change: The pricing dynamics that you mentioned.
Speaker Change: Great, Yes that was really helpful.
Speaker Change: And could you guys also expand on your comments around <unk>.
Speaker Change: Credit performance of the portfolio and could you maybe review.
Barry Scott Sloane: I like how the seasoning of an SBA portfolio trends over time as the portfolio matures, you know, like how should we expect delinquencies and NPAs to trend for the bank portfolio that is more recently originated versus the NSBF portfolio that's currently held for sale. Yeah, I think that the loss curve on a 7a portfolio, with which we have two decades of experience, is, at its highest point between 18 months and 40 months, you probably have, and I use the word lost.
Speaker Change: I would like the seasoning of an SBA portfolio trends over time as the portfolio matures.
Speaker Change: Like how should we expect delinquencies in Npa's the trend.
Speaker Change: For the bank portfolio that is more recently originated versus the NSP ERF portfolio. That's currently held for sale.
Speaker Change: Yes, I think that the loss curve on a 7% portfolio, which we have two decades of experience.
Speaker Change: Is.
Speaker Change: At its highest point between 18 months and 40 months.
Speaker Change: Probably half.
Speaker Change: Use the word loss curve, that's probably the point, where most of the loans would go into default.
Barry Scott Sloane: That's probably the point where most of the loans would go into default, and based upon our accounting at the bank, you would then be marking that to market as an unrealized loss. So, fairly, you know, fairly current and up to date, depending upon whether we believe these loans are not collectible based upon the collateral, or they can't come back and re-perform.
Speaker Change: Based upon our accounting at the bank.
Speaker Change: You will then be marking it to market and unrealized loss so generally.
Speaker Change: Fairly current and up to date, depending upon whether we believe okay.
Speaker Change: These loans are not collectible based upon the collateral or they can't come back and re perform.
Barry Scott Sloane: I think it's important to note that when we, and I'll let Scott talk about how we do our CECL calculation. First of all, it's. On the 7A portfolio, it's a current value provision for a future event, so we're using approximately 8% to get discounted back. I'll let Scott go into this, but that's re-evaluated every single quarter based on what we see, complicated processes, models, and third-party consultants that evaluate that. That's relative to banks, CECL reserves, and where we are.
Speaker Change: I think it's important to note that when we I'll, let Scott talk about how we do our seasonal calculation.
Speaker Change: First of all it's a it's a.
Speaker Change: On the 700 portfolio, it's a current value provision for a future event. So we're using approximately 8% that gets discounted back I'll, let Scott go into but that's reevaluated every single quarter based on what we see complicated processes.
Speaker Change: Models.
Speaker Change: Third party consultants that evaluate back that's relative to the banks seasonal reserves and where we are and I would tell you that our seasonal reserves are much higher than our competitors in this space Scott you have anything to add or subtract to that.
Barry Scott Sloane: And I would tell you that our CECL reserves are much higher than our competitors in this space. Scott, do you have anything to add or subtract to that? No, I think you, the only thing I'd add is that as we project out our losses, we do have probabilities of default and losses given default that we expect, right? And that curve is based on, as Barry referenced, 20 years of history.
Scott Price: The only thing I'd add is that.
Scott Price: As we project out our losses.
Scott Price: We do have probabilities of default and loss given default that we expect.
Scott Price: The bank portfolio is coming up on one year old, and so to connect the dots for everybody with credit kind of peaking for a loan at between months 24 and 40, you can expect that non-accruals, non-performers, and past dues have the opportunity to increase from here. That's expected, and we're prudently reserved for those.
Scott Price: And that curve is based on as Barry referenced 20 years of history.
Scott Price: The bank portfolio is this.
Scott Price: Yes.
Scott Price: Coming up on one year old and so to connect the dots for everybody.
Scott Price: With <unk>.
Speaker Change: Credit kind of peaking.
Speaker Change: For alone between months $24 40, you can expect that.
Speaker Change: The non.
Speaker Change: Non accruals nonperformer past dues have the opportunity to increase from here.
Barry Scott Sloane: So if you contrast that in the bank with more of a traditional bank accounting model versus the fair value accounting model that we have, we project out losses. So basically, when we fair value our loans, we project losses, reduce cash flows for those, and then we discount those back. So the losses are essentially already captured in the fair value marks, as Barry pointed out, particularly on the non-accrual loans, and our loss rates that we're assuming on the performing portfolio are in line with the same loss rates that we use for our seashores. Yeah, and I want to give you an example of a situation.
Speaker Change: That's expected and we are prudently reserved.
Speaker Change: So if you contrast that in the bank with more of a traditional bank accounting model versus the fair value accounting model that we have we project out losses. So we basically when we fair value our loans, we project losses and reduced cash flows for those and then we discount those back so the losses.
Speaker Change: Are essentially already captured in the fair value marks this very pointed out, particularly on the non accrual loans.
Speaker Change: And our loss rates that were assuming on the performing portfolio.
Speaker Change: Are in line with the same loss rates that we use for our C stores.
Speaker Change: Yes, and I want to give I wanted to give you. An example of a situation.
Barry Scott Sloane: Borrowed takes out a loan in 2021 or 2022. It's a floating rate loan. They've now experienced several hundred basis points of what I'm going to call a rate shock. And they certainly haven't been able to adjust to it, maybe in recent months, you know, higher rates for longer have put stress on them. But I got to remind you, this business owner has personally guaranteed joint and several every 20% owners. There are multiple guarantors on many of these loans.
Speaker Change: Borrowed takes that alone in 2021, and 2022 to floating rate loans that were experienced several hundred basis points of what I'm going to call a rate shock.
Speaker Change: And they necessarily haven't been able to adjust to it maybe in current months higher for longer has put stress on this but I got to remind you this business owner.
Speaker Change: Has personally guarantee joint and several every 20% owners theres multiple guarantors on many of these loans in certain cases, they've got personal assets pledged as well as business assets. So even though they fall behind in their delinquent as we work with borrowers and we have a very.
Barry Scott Sloane: In certain cases, they've got personal assets as well as business assets. So even though they fall behind in their delinquent payments, as we work with borrowers and we have a very smart and aggressive servicing group, we'll encourage people to liquidate collateral, stay current, because it's the business that's a form of repayment. It's very different than a CRE loan that's non-recourse, where if it goes upside down, okay, I lose my equity, I'm flipping the keys. Or, for that matter, a consumer loan on a car where the value of the car is upside down, I'm unemployed, and I have no way of coming back.
Speaker Change: Smart and aggressive servicing group will encourage people to liquidate collateral stay current because it's the business that's a form of repayment.
Speaker Change: It's very different than a CRE loan that is non recourse, where if it goes upside down okay. I lost my equity I'm flipping the keys or for that matter, our consumer loan on a car with a value of cars upside down I'm unemployed I have no way of coming back.
Barry Scott Sloane: So I think our 20 years' worth of experience in managing these portfolios, understanding that these are businesses with personal assets behind them, is extremely important. And we do anticipate. And I'm glad Scott brought this up.
Speaker Change: <unk>.
Speaker Change: Our 20 Years' worth of experience in managing portfolios understanding that these are businesses with personal assets behind it extremely important and we do anticipate and glad Scott brought this up first of all it's a brand new portfolio.
Barry Scott Sloane: First of all, it's a brand new portfolio. So the fact that we finally have some delinquencies and some bad loans, well, you know, we started off; they're all new loans, so of course, they're going to get worse. But this is not something that we don't have experience managing. We've managed it for 20 years, and our loanless reserves are for the next year or two, but they're for the term of the loan. And we have done securitization 12, 13 times in this particular space than a Model 1 Intech to give us the data to be able to understand the scenarios of performance in this particular space.
Speaker Change: The fact that we finally have some delinquencies and some bad loans well we started off they are all new.
Speaker Change: So of course, they're going to get worse.
Speaker Change: But this is not something that we don't have experience managing we manage it for 20 years and our loan loss reserves.
Speaker Change: The next year or two.
Speaker Change: For the term of the loan and we have done securitization.
Speaker Change: 12, 13 times in this particular space that amount of one <unk> that give us the data to be able to understand.
Speaker Change: The scenarios of performance in this particular space.
Barry Scott Sloane: So hopefully, that's also helpful. I won't argue that it's very hard for you and others to figure out, you know. What is this going to project?
Speaker Change: Hopefully that's also also helpful. I won't argue that it's very hard for you and others to figure out.
Speaker Change: Okay.
Speaker Change: What is this going to project too.
Barry Scott Sloane: You do have a management team that is very much aligned with the interests of the shareholders. Take a look at our proxy, see what our bonuses were for last year, see what our stock ownership is. This is important to us. This is something we've done, building a business over two decades. Great. Yeah, that was a good color.
Speaker Change: You do have a management team that is very much aligned with the interests of the shareholders take a look at our proxy or bonuses were for last year see what our stock ownership is this important to US is something we've done building a business over two decades.
Barry Scott Sloane: Are you able to quantify maybe the pace of increase over the next few years? I mean, if your loan portfolio's weighted average life is less than 12 months, charge-offs don't peak until at least 24 months or so. Can you project the pace of increase in charge-offs as we move over the next few years? Where does it peak?
Speaker Change: Great Yeah. Those good color are you able.
Speaker Change: To quantify maybe the pace of increase over the next I mean, if your loan portfolio. The weighted average life is less than 12 months.
Speaker Change: Charge offs don't pick till at least 24 months or so can.
Speaker Change: Can you projected.
Speaker Change: Pace of increase the charge offs as we move over the next few years.
Barry Scott Sloane: Is it at that 350 ACL mark you talked about in the press release? Or how should we think about that? I think you'll have approximately 70% of the charged jobs within 18 months to 40 months now. If I would have said that prior to COVID, I would have been dead wrong. You know, because COVID created PPP, tax credit programs, EIDL loans, so. But on the laws curve...
Speaker Change: Or does it peak is it at that $3 50, ACL Mark you talked about in the press release or how should we think about that I.
Speaker Change: I think you'll have approximately 70% of the charge offs.
Speaker Change: Within 18 months too.
Speaker Change: 40 months now.
Speaker Change: If I would've said that prior to Covid I would've been dead wrong.
Speaker Change: Because COVID-19 created PPP.
Speaker Change: Tax credit programs, the IDL loans so.
Speaker Change: But on the loss curve.
Barry Scott Sloane: The new business typically does not default early, okay? And that's when, from a seasoning perspective, you're going to get hold of everything else. That's when you're going to get most of it right. And just to tack on that, Tim, we would expect the charge-offs to kind of level out and stop increasing if all economic conditions are equal. Okay, that's perfect. Thank you, guys. Thank you for your questions. Please stand by for our next question. Our next question comes from the line of Bryce Rowe of B Riley. Your line is now open. Thanks. Good morning.
Speaker Change: The new business typically does not default early okay.
Speaker Change: And Thats wind from a seasoning perspective, youre going to get holding everything else constant that's when you're going to get most of the write downs.
Speaker Change: And just to tack on to that then we would expect charge offs to kind of level out.
Speaker Change: Stop increasing if economic conditions are equal.
Speaker Change: Okay. That's perfect. Thank you guys.
Speaker Change: Thank you for your question. Please standby for our next question.
Speaker Change: Our next question comes from the line of Brian <unk> of B Riley. Your line is now open.
Bryce Wells Rowe: Sorry to belabor the call here, but I do want to try to get a couple questions in. Number one, I think you guys alluded to this in some of the prepared remarks, but expenses have gone up as you've kind of built out the infrastructure. Is there any, maybe, like non-recurring expenses at this level of expenses, you know, whether it be in the salary and benefits line or in that professional services line? Just trying to get a good feel for how the operating expenses are going to run, obviously acknowledging that the balance sheet is going to continue to grow, but just trying to calibrate what the expense growth might look like.
Brian: Thanks, Good morning, sorry to belabor the call here, but I do want to try to get a couple of questions then.
Brian: Number one I think.
Brian: You guys alluded to this in some of the prepared remarks, but but but expenses have gone up as you've kind of built out the infrastructure.
Brian: Is there is there any maybe like nonrecurring.
Brian: In this in this level of expenses, whether it be in the salary and.
Brian: Benefits line or in that professional services line, just trying to get a good feel for how the expense. The operating expenses are going to we're going to run.
Brian: Obviously.
Brian: Acknowledging that the balance sheet is going to continue to grow but just trying to trying to kind of calibrate what the expense growth might look like.
Bryce Wells Rowe: I think Bryce, and I'll let Scott finish this off, this year, as a percentage of revenue, we're probably going to have the peak amount, and we hope this will be the peak amount of expense, as we continue to build that cross, and continue to make sure that we've got all the right things required for a scalable, technology-enabled bank to compete in a different way in the marketplace. So we're hopeful that we will start to get the benefits of operating leverage in 2025 and beyond.
Speaker Change: I think I think price and I'll, let Scott finish up on this.
Speaker Change: This year.
Speaker Change: As a percentage of revenue, we're probably going to have the peak amount well.
Scott Price: We hope this will be the peak amount of expenses is.
Scott Price: We continue to build out processes continue to make sure that we've got all the right things required for a scalable technology enabled bank to compete in.
Scott Price: In a in a different way in the marketplace. So we're hopeful that we start to get the benefits of operating leverage in 2025 and beyond.
Bryce Wells Rowe: But we think. It's you look at all the bodies we're bringing in here, the software, the consultants to help us make sure we're doing exactly what we need to do. I talked about headwinds in 2023. They're a little less, but still fairly strong in 2024.
Scott Price: But we think it's.
Scott Price: You look at all the bodies, we're bringing in here.
Scott Price: The software.
Scott Price:
Scott Price: Our consultants to help us make sure we're doing exactly what we need to do.
Scott Price: We I talked about headwinds in 2023.
Scott Price: There are a little less but still fairly strong in 2024, that's factored into our EPS forecast and we think we'll get better margins next year in 2025, Scott anything to add or subtract to that.
Barry Scott Sloane: That's factored into our EPS forecast, and we think we'll get better margins next year in 2025. Scott, anything to add or subtract to that? Yeah, Bryce, it's a good question, and I want to reiterate what Barry just said, that we do have an expense forecast, and it is included in our guidance, and so we assure you that the forecast includes the current quarter and future quarter expenses.
Scott Price: Yes.
Scott Price: That's a good question and I did want to reiterate what Barry just said in that.
Scott Price: We do have an expense forecast and that is included in our guidance and so we assure you that the <unk>.
Scott Price: <unk> forecast includes.
Scott Price: The current quarter and future quarter expenses.
Barry Scott Sloane: I will say, just to add to what Barry said and maybe slightly modify it, we will have increased expenses from here, but the returns that we're going to be earning are going to definitely outweigh any expense increases we have. So I don't want you to think that this was a surprise to us.
Speaker Change: I will say just to add onto what Barry said, maybe slightly modify it.
Speaker Change: We will have increased expenses from here, but the returns that we're going to be earning are going to definitely outweigh any expense increases we have.
Speaker Change: So I don't want you to think that yes.
Scott Price: As I said earlier, we're slightly better than where we forecasted. I'd point out that, and reiterate what Barry said, we are continuing to invest in our operations teams, whether that be in lending, whether that be in deposit operations, whether that be in some of our fee-generating businesses. We have headcount increases across all of those. And we're investing for the future; we're investing for higher margins by rolling out our business deposit products so that we can ensure that we comply.
Speaker Change: This was a surprise to us as I said earlier, where we're slightly better than where we forecasted.
Speaker Change: I would point out that.
Speaker Change: And reiterate what Barry said, we are continuing to invest in our operations teams whether that be in lending.
Speaker Change: Whether that be in deposit operations, whether that be in some of our fee generating businesses.
Speaker Change: Had.
Speaker Change: Head count increases across all of those and we're investing for the future we're investing for.
Speaker Change: Higher margins as well.
Speaker Change: Hey of rolling out our.
Scott Price: And we keep, you know, in the middle of the road with respect to regulation. And then I point out that, you know, there are some seasonal aspects to this. We did have payroll tax resets this quarter. We had one month of merit increases that went in.
Speaker Change: Business deposit products, so that we can ensure that we comply.
Speaker Change: And we keep.
Speaker Change: In the middle of the road with respect to regulation.
Speaker Change: And then I would point out that there are some seasonal aspects to this we did have.
Speaker Change: Payroll tax resets this quarter, we had one month's merit increases that went in so you'll see a follow through increase.
Scott Price: So we'll, we'll, you'll see a follow-through increase increase in the future. And then, you know, we also are looking at a pretty outsized performance year in terms of EPS growth. And in order to be able to keep this institution operating like a much larger institution than it is, we're going to have to make sure that we are competing in the talent war. And so we factored all that into the forecast. This is not a surprise to me. It's not a surprise to Barry.
Speaker Change: The increase in the future and then.
Speaker Change: We also.
Speaker Change: We're looking at a pretty outsized performance here in terms of EPS growth and were in order to be able to keep this institution operating.
Speaker Change: Like a much larger institution than it is.
Speaker Change: We're going to have to make sure that we are competing in the tower work and so we factored all that into the forecast.
Barry Scott Sloane: And I think we're on top of it. As it relates to one-time items, I would say that there was a slight bump quarter over quarter and professional. So that was due to our annual audit.
Speaker Change: This is not a surprise to me, it's not a surprise to berry.
Speaker Change: And I think were on top of it.
Speaker Change: As it relates to one time items I would say that there was a slight bump.
Speaker Change: Bump quarter over quarter in professional.
Scott Price: But we're rationalizing our expenses as it pertains to audits, financial accounting, and compliance, and expect that we will not have a repeat going forward. All right, that's helpful. And then maybe a question about the kind of capital structure on a consolidated basis. I mean, you all are talking about nice, nice deposit growth at the bank. Just and you're also talking about increases in the alternative loan program and assume those will kind of make their way over to, you know, the holding company's balance sheet as opposed to sitting at the bank when it's all said and done. Can you talk about how you're going to fund that at the holding company level? Because I assume that deposits have to stay at. Yeah, they do.
Speaker Change: Most of that was due to.
Speaker Change: Our annual audit, but we're rationalizing our expenses as it pertains to.
Speaker Change: So audits financial accounting compliance.
Speaker Change: Compliance and expect that we will.
Speaker Change: Not have a repeat going forward.
Speaker Change: Okay.
Speaker Change: Alright Thats helpful.
Speaker Change: And then maybe a question about kind of capital structure on a consolidated basis.
Speaker Change: I mean, you all are talking about nice nice deposit growth at the bank.
Speaker Change: And Youre also talking about <unk>.
Speaker Change: Increases in the alternative loan program.
Speaker Change: And assume those will kind of make their way over to the holding company's balance sheet as opposed to sitting at sitting at the bank now when it's all said and done can you talk about how youre going to fund that at the holding company level, because I assume the deposits have to stay at the bank.
Bryce Wells Rowe: And I think, Bryce, that we have expectations of being able to use debt up at the holding company. We do have room to be able to do that. And that's where we will be able to fund our growth in addition to creating new joint ventures to be able to fund the alternative loan program business. The capital is primarily needed for that, and not much else at this point in time. Okay, and then, and Barry, when I, when I look at him,
Speaker Change: Yes, they do and I think price to that.
Speaker Change: We have expectations of being able to use that up at the holding company.
Speaker Change: We do have room to be able to do that and.
Speaker Change: That's where we will be able to fund our growth in addition to creating new joint ventures.
Speaker Change: To be able to fund the alternative loan program business.
Speaker Change: The capital was primarily needed for that and not much else at this point in time.
Speaker Change: Okay, and then when I look at.
Barry Scott Sloane: You know, the balance sheet that you lay out on a consolidated basis, and you've got, you know, several different buckets of loans, a couple of which are held for sale. You know, I think we can all identify what is held at the bank and the held for investment bucket amortized cost. But will those migrate eventually into the balance sheets of the joint venture, just trying to, you know, trying to identify what each of those buckets actually are? Yeah, and Bryce, it's a good question.
Speaker Change: The balance sheet that you lay out on a consolidated basis and you've got several different buckets of loans, a couple of which are held for sale.
Speaker Change: I think we can all identify what is held at the bank.
Speaker Change: Held for investment bucket amortized cost.
Speaker Change: But while those while those migrate eventually into the.
Speaker Change: The balance sheet.
Speaker Change: The joint venture just trying to kind of trying to identify what each of those buckets.
Speaker Change: Yeah and price it's a good it's a good question I think that.
Barry Scott Sloane: I think that our goal, SANS, the Alternative Loan Program, is to have all the lending done in the, All right, very little. We have some legacy loans still at the holding company that will pay off or get sold or filed for construction. But for the most part, the only thing that would be at the holding company in lending would be ALP. And the rest of the activity will be down at the bank, where we get a lower cost of funding and, obviously, better leverage. All right, I'll leave it there. I appreciate the comments.
Price: Our goal.
Speaker Change: <unk> Z alternative loan program.
Speaker Change: Is to have all the lending done in the bank.
Speaker Change: Very little we have some legacy loans still at the holding company that will pay off or get sold or filed for construction.
Speaker Change: But for the most part the only thing that would be at the Holdco in lending would be a L. P and the rest of the activity will be down at the bank, where we get lower cost of funding.
Speaker Change: Obviously better leverage.
Speaker Change: Okay Alright.
Speaker Change: Alright ill leave it there I appreciate the comment.
Bryce Wells Rowe: Thank you. Thank you for your questions. Please stand by for our next question. Our next question comes from the line of Christopher Nolan and Glerg Bauman. Your line is now open.
Speaker Change: Thank you for your question. Please standby for our next question.
Speaker Change: Our next question comes from the line of Christopher Nolan.
Christopher Nolan: Your line is now open.
Christopher Nolan: Hey guys, thank you for including the detail and the asset quality. Very helpful. Hey, Barry, from your perspective, where do you see the bank sector going in general? It's a tough industry. I'm just going to be frank with you.
Christopher Nolan: Hey, guys. Thank.
Christopher Nolan: Thank you for including the details on the asset quality.
Christopher Nolan: Quarter very helpful Information, Hey, Barry from your perspective, where do you see the bank sector going in general.
Barry Scott Sloane: And this is from somebody that just got into it. So, you know, I always try to answer honestly and transparently. It's an industry that right now, it's feasting on low-cost deposits. It's far easier to move money today, from bank to bank and do it on your phone, and even corporate treasurers are realizing, "gee, I only need to keep a couple of bucks in my checking account, and I could move the rest of it into a money market account."
Barry: It's a tough industry I'm, just going to be Frank with you and this is from somebody that just got into it so.
Speaker Change: Try to answer honestly and transparently.
Barry: It's an industry currently that right now it's feasted on low cost deposits.
Barry: And so far.
Speaker Change: Far easier to move money today.
Barry: Bank to bank and doing it on your phone.
Barry: And even corporate treasurers are realizing yet I only need to keep a couple of bucks in my checking account and I can move the rest of it into a money market account I can just get the money back and forth.
Barry Scott Sloane: I could just get the money back and forth so that. The deposit side is where banks have made money, not on the asset side. And what happened in 08-09 is the regulators and the banking industry said, OK, we've just got up, really tightened up on the risk profile for credit. So everyone's piled into this small bucket of car loans, residential mortgage loans, CRE loans, C&I loans that don't have a lot of margin. So I think you know, I'm, you know, I'm talking about an industry I just got into. It's not gonna be an easy industry to make a lot of money.
Barry: So that.
Barry: The deposit side is where banks have made money not on the asset side and what happened in <unk>, Illinois.
Barry: The regulators and the banking industry said, okay. We've just got it.
Barry: Really tighten up on the risk profile for credit so everyone's piled into the small bucket of car loans residential mortgage loans.
Barry: Sorry loans C&I loans that don't have a lot of margin so I think.
Barry: I'm talking about an inch Greg just got into it's not going to be an easy industry to make a lot of money at.
Barry Scott Sloane: I was thinking more along the lines of where you see a healthy industry in terms of asset quality and so forth. You know, there are a lot of concerns about commercial real estate in general, but I think that the industry will be able to raise its capital. I do not believe short rates are going to remain here for that much longer, and that's going to reduce the pressure on CRE assets, which is really where there are two problems with the industry relative to health.
Speaker Change: I was thinking more along lines forward of where do you see the healthy industry in terms of asset quality and so forth.
Speaker Change: Okay Youre welcome.
Speaker Change: In terms of our commercial real estate in general.
Speaker Change: I think that.
Speaker Change: The industry will be able to.
Speaker Change: Get its capital I do not believe short rates are going to remain here for that much longer.
Speaker Change: That's going to reduce the pressure.
Speaker Change: On CRE assets, which is really where right now there's the two problems with the industry relative to health and that would be CRE and that's very much rate driven.
Barry Scott Sloane: And that would be CRE, and that's very much rate-driven. And the other aspect of it is, obviously, asset-liability management. Because as long as bills are yielding 5%, there's going to be more pressure to migrate money into government-guaranteed money market funds versus a bank account.
Speaker Change: And the other aspect of it is obviously asset liability management, because as long as bills are yielding 5%, there's going to be more pressure to migrate money into mining government guaranteed money market funds. So first of all bank accounts.
Barry Scott Sloane: Okay, that's it for me, thank you. Thank you. Thank you for your questions. As a reminder, to ask a question, simply press star 11 on your telephone and wait for your name to be announced.
Speaker Change: So for me thank you.
Speaker Change: Thank you.
Speaker Change: Thank you for your questions as a reminder to ask a question simply press Star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.
Operator: To withdraw your question, please press star 11 again. Please stand by for our next question. Our next question comes from the line of Steve Moss of Raymond James. Your line is now open. Good morning.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Steve Moss of Raymond James Your line is now open.
Stephen M. Moss: Good morning.
Stephen M. Moss: Or does it vary.
Stephen M. Moss: [inaudible] Morning, Barry, you mentioned, you know, or maybe it's got that with regard to SBA originations here, that you were kind of like, I guess, words to the effect of driving efficiencies. Given your guidance here, holding it steady after a strong quarter, in my mind, on the SBA origination front, just kind of curious if maybe internally, are you at capacity in the short to intermediate term for your SBA Just kind of curious as to why that number isn't being revised higher, to put it that way.
Stephen M. Moss: Good morning, Barry you mentioned or maybe if I, just Scott with regard to SBA originations here.
Speaker Change: That you were kind of like I guess, where it's effective.
Speaker Change: Driving efficiencies.
Speaker Change: Given your guidance here holding a steady after a strong quarter in my mind on the SBA origination front, just kind of curious if maybe internally are you at capacity in the short to intermediate term.
Speaker Change: For your SBA originations, just kind of curious as to.
Speaker Change: Why that number isn't being revised higher to the seller.
Barry Scott Sloane: Yeah, no, Steve, I'm looking for the loan pipeline for 7A. And it's up on prequalification 15% and underwriting 54%. Now, the approved pending closing is pretty flat. That's because we're becoming more efficient, and we're getting the loans in and out quickly. But no, we are not at capacity.
Speaker Change: No Steve I'm looking for the loan pipeline for <unk> and <unk>.
Speaker Change:
Speaker Change: It's up.
Speaker Change: On pre qual, 15% and underwriting 54% now the approved pending closing is pretty flat, that's because we're becoming more efficient and more.
Speaker Change: We're getting the loans in and how quickly.
Speaker Change: But.
Speaker Change: No we're not we're not at capacity.
Barry Scott Sloane: We've got more alliance partners that realize we could help put them in the business, help them make loans either for their license or ours. And the business model of us using alliance relationships and getting referrals continues to grow and outperform the BDO broker and banker model. The only thing I'd add to that, Steve, and it's a good question, where we are in terms of a soft landing, no soft landing, what's going to happen, it feels a little bit early to increase our production for the year in light of that uncertainty. But we decided that it was the most prudent course of action. Could there be an upside?
Speaker Change: We've got more alliance partners that are realizing.
Speaker Change: We could help put them in.
Speaker Change: In the business.
Speaker Change: <unk> helped them make loans either there.
Speaker Change: License or hours and the business model of us using.
Speaker Change: Alliance relationships and getting referrals.
Speaker Change: <unk> to grow and outperform the BDO broker and bankable.
Speaker Change: The only thing I'd tack onto that Steve and it's a good question.
Speaker Change: Yes.
Speaker Change: Where we are in terms of soft landing those soft landing what's going to happen.
Speaker Change: It feels a little bit early.
Speaker Change: Kris.
Speaker Change: <unk> increased our production for the year in light of that uncertainty so.
Speaker Change: We decided that that was the most prudent course of action.
Scott Price: Sure. But depending on where the economy is, it could easily go the other way. So that's that was the thought process. Okay, great. Appreciate all that. Appreciate that color there.
Speaker Change: Could there be upside sure but.
Speaker Change: But depending on where the economy is.
Speaker Change: Italy go the other way so that's.
Speaker Change: That was the thought process.
Stephen M. Moss: And then in terms of, you know, just circling back to the season of the portfolio, I hear you guys in terms of the, you know, 8% loss content discounted back, maybe just kind of, you know, thinking about it, you know, delinquencies, if I look at them here on a trailing 12 month basis from loan balances, around roughly 9% call it, you know, curious how we think about as things season and you hit whether it's the 18 to 40 month time range, what is kind of like that pink peak delinquency number you guys expect kind of the peak not forming type number in terms of the the originations right portfolio? I mean, you could see what I'll call the currency rate on that portion of the portfolio.
Speaker Change: Okay. Great appreciate all that I appreciate that color there and then in terms of.
Speaker Change: Just circling back to the seasoning of the portfolio I hear you guys in terms of the 8%.
Speaker Change: Our loss content discounted back maybe just kind of.
Speaker Change: Thinking about it.
Speaker Change: Delinquencies if I look at him here on a trailing 12 month basis from loan balances around roughly 9% call. It.
Speaker Change: Curious, how we think about as things season, and you hit whether its the 18 to 40 months time range, what is kind of like the peak peak.
Speaker Change: Peak delinquency number you guys expect kind of peak non performing type number.
Speaker Change: In terms of the new originations.
Speaker Change: Yeah.
Speaker Change: I mean do you could you could see.
Speaker Change: What I'll call the currency rate on that portion of the portfolio and Oh by the way that's going to be blended in with.
Stephen M. Moss: Now, by the way, that's going to be blended in with The AAA Quality Loan. Thanks only because I've got low margins, etc. But, um, I mean, you could see the currency rate, you know, at 90 plus or minus. We hope it doesn't get there, but that's not inconceivable.
Speaker Change: The AAA quality loans that banks currently do that I've got low margins et cetera, but.
Speaker Change: I mean, you could see the.
Speaker Change: Currency rate.
Speaker Change: At 90, plus or minus we hope it doesn't get there, but that's not inconceivable.
Barry Scott Sloane: I am. Okay. But that's over. Okay, that's all time. And I will tell you, for doing this for 20 years, at lower volumes and earlier phases of our lives, we've seen it.
Speaker Change: Okay.
Speaker Change: Over time.
Speaker Change: Time, and I would tell you.
Speaker Change: We're doing this for 20 years.
Barry Scott Sloane: That doesn't mean that you're going to have extraordinary charge drops. I think it's just trying to say that if you do see it, you don't need to head for the balcony or the windows because the loans are personally guaranteed. There's collateral behind it, and it's within the realm of what these charges are. The other thing, too, Steve, is that when you're looking at the charge-offs, these are spread out. It's a big number, right, but these are spread out. These are not bank loans that are due in two years, three years, or five years.
Speaker Change: On lower volumes in the earlier phases of our life, we've seen it.
Speaker Change: That doesn't mean that youre going to have extraordinary charge offs I think it's just trying to say that if you do see it.
Speaker Change: You don't need to head for the <unk>.
Speaker Change: For the balcony or the way the focus.
Speaker Change: Because the loans are guaranteed the collateral behind it and it's within the realm of <unk>.
Speaker Change: What these charge offs or the other thing too.
Speaker Change: Steve is.
Speaker Change: When youre looking at the charge offs. These are spread out it's a big number right, but these are spread out.
Speaker Change: These are not bank loans that are doing.
Speaker Change: Two years three years or five years.
Barry Scott Sloane: These are spread out over fairly, you know, lengthy periods of time, and we're actually putting new business on and old business on. Once again, we've got all the models after 20 years of doing this to be able to really analyze the static pool to make sure that we've got the right reserves against these loans. Okay, I appreciate that color there.
Speaker Change: Spread out over a fairly lengthy periods of time.
Speaker Change: Putting new business on an old business on once again.
Speaker Change: We've got all the models after 20 years.
Speaker Change: This could.
Speaker Change: To be able to really analyze the static pool to make sure that we've got the right reserves against these loans.
Stephen M. Moss: And then just one, one more question on the business checking and business money market you guys are rolling out here. Just kind of curious if you could share any thoughts on internal targets you may have for those products or how you're thinking about that performance over the next 12 months. Scott, would you want to share some of those numbers if you have them? Yeah, Steve.
Speaker Change: Right.
Speaker Change: Okay I appreciate that color there.
Speaker Change: And then just one quick one more question on the business checking and business money market. You guys are rolling out here just kind of curious did you share any thoughts on internal targets you may have for those products or how youre thinking about that performance over last 12 months.
Speaker Change:
Speaker Change: Scott you want to share some of those numbers if you have them.
Scott Price: Yes, Steve.
Scott Price: So we expect to roll out in earnest. We have run a pilot with some select customers. We've got $20 million of balances, I believe, at quarter end. We believe that we can generate $150 million of business deposits. And that could be on the low side. The high side could be $300 million. It is not inconceivable.
Scott Price: So we expect to rollout in earnest, we have we have run a pilot with some select customers. We've got $20 million of balances I believe as of quarter end.
Scott Price: We believe that we can generate $150 million of business deposits.
Speaker Change: And could that could be on the low side.
Speaker Change: The high side could be.
Speaker Change: 300.
Speaker Change: It is not inconceivable.
Scott Price: What I'd say, the real question that we're going to be grappling with as we get to know how this product performs with our customer base is what kind of retention we have on those funds. And that's something that we're going to be learning as we go along. We've certainly put our best foot forward in estimating how much a typical customer will retain in our bank, but we believe that that is our key to profitability improvement going forward.
Speaker Change: What I'd say is the real question that we're going to be grappling with as we get to know how this product performs with our customer base is what kind of retention we have on on those funds.
Scott Price: And that's something that we're going to be learning as we go along we certainly.
Scott Price: Put our best foot forward and estimating how.
Scott Price: How much typical customer will retain in our bank.
Scott Price: So we believe that that is our key to profitability improvement going forward to various <unk> offering.
Scott Price: To Barry's point, offering products and services to small businesses is what we do. We invest in America, and we're confident that the innovation of the American businessperson is going to continue, and we want to offer products and services to enable them as much as possible to succeed. We will have features with this product that we believe will be competitive, particularly on price. Certainly, we don't have the same budget as some of the big guys do with slick apps and interfaces, etc., but we believe price is where we can compete, and we can give business owners opportunities to work in their business instead of on their business.
Scott Price: Products and services to small businesses, what we do.
Scott Price: We reinvest in America.
Scott Price: And we're confident that the.
Scott Price: The innovation of the American business person is going to continue and we don't want to offer products and services to enable them as much as possible to succeed.
Scott Price: We will have features with our with this product that we believe will be competitive particularly on price.
Scott Price: Certainly we don't have the same budget as some of the big guys do with.
Scott Price: Slick apps and interfaces et cetera, but.
Scott Price: But we believe prices, where we can compete and we can make.
Scott Price: Jim give business owners opportunities to work in their business instead of on your business.
Scott Price: So that's what we believe we're going to offer with this product, like I said, anywhere from 150 to 300 million, plus or minus, and so we're going to, we're going to see how it plays out, and we'll be updating the market as we move forward. Great. Thank you very much. I appreciate all the color.
Scott Price: So that's that's what we believe we're going to offer with this product.
Scott Price: Anywhere from 150 to 300 million plus.
Scott Price: Plus or minus and so we're going to be.
Scott Price: We're going to see how it plays out and we'll be updating the market as we as we move forward.
Speaker Change: Great. Thank you very much I appreciate all the color.
Stephen M. Moss: Thank you for hanging in there with us. Okay. I apologize.
Speaker Change: Thank you thanks for hanging in there whether it's thank you okay I apologize. Thank you for your question.
Operator: Thank you for your question. This does now conclude our question and answer period. I would like to pass it back over to Mr. Sloane for closing remarks. Well, we certainly appreciate everyone's attendance and the thoroughness of the questions. We've obviously tried to work hard to condense it, but there's a lot of information that, obviously, the marketplace wants; we want to make sure that you have that.
Speaker Change: This does now conclude our question and answer period, I would like to pass it back.
Speaker Change: Now for a closing remark.
Barry Scott Sloane: And, you know, feel free to email or call with any other questions you might have. But once again, thank you for your attention and your thoughtful questions. We appreciate it. Thank you very much. Thank you. This does conclude today's presentation. You may now disconnect.
Speaker Change: Well, we certainly appreciate everyone's attendance the thoroughness of the questions.
Speaker Change: We've obviously tried to work hard to condensate, but theres a lot of information that obviously.
Speaker Change: Obviously, the marketplace launch we want to make sure that you have that and feel free to.
Speaker Change: Email or call with any questions you might have but once again. Thank you for your attention and your thoughtful questions. We appreciate it. Thank you very much.
Speaker Change: Thank you. This does conclude today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Thank you.
Speaker Change: [music].