Good day, and thank you for standing by. Welcome to the NewtekOne, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloane, President and CEO of NewtekOne, Inc. Please go ahead.
Good morning, and thank you very much. Appreciate everyone attending. Welcome to our First Quarter 2023 Financial Results Conference Call. Obviously, this is our first conference call as a financial holding company owning a nationally chartered technology-enabled bank, and we appreciate everyone's attendance. Our call today is gonna be quite detailed to give investors and analysts an opportunity to begin to model our organization, which is clearly a differentiated business strategy and operation, one that'll be different than any other financial holding company or bank holding company that you're familiar with. We appreciate everyone's patience. We try to give as much detail and transparency to try to set a baseline foundation so that people can begin to model up NewtekOne, a very unique, differentiated financial holding company.
Joining me on today's call is Nicholas Leger, EVP and Chief Accounting Officer, Nick Young, President and COO of Newtek Bank, N.A., and John McCaffrey, Chief Financial Officer of Newtek Bank, N.A. as well. We've also invited our analyst coverage. We have several analysts that are on the call that might participate in Q&A. Chris Nolan from Ladenburg, Crispin Love from Piper, Paul Johnson from KBW, along with Mike Garrido, Noah Ross from Compass, Bryce Rowe from B. Riley, and David Feaster from Raymond James. We welcome calls coming in on the Q&A to try to get our story out in the market to get people to follow the very unique repositioning of NewtekOne, a unique financial holding company. I'd like to call everyone's attention to the forward-looking statement on slide number one.
I should remind everybody that is not familiar with NewtekOne, our PowerPoint presentation is on the investor relations section of our website, and you could follow along. Slide number two. Our first quarter reporting as a financial holding company based upon the fact that on 6 January , we completed the acquisition of National Bank of New York City, renamed Newtek Bank, N.A., and withdrew our BDC election and ceased operating as a BDC. Important points of focus for this presentation, given that this is our first quarter. Obviously, the comparisons which Nick Ledger will talk about too as a, as a BDC has questionable relevance, obviously because it's different accounting treatment, but Nick will go into that shortly. First important point relative to the results that we released last night, we exceeded the previous first quarter basic EPS forecast of $0.41.
We came in at $0.46 basic, as well as analyst consensus. We had two analysts that reported to date. I just think just it's very difficult for people to have been able to do forecasts without this baseline. We certainly appreciate, the coverage that we've gotten so far to get out in front of this, and it's been helpful. We hope to be able to pick up more analyst coverage going forward with some of the people that are on the call. In addition to, exceeding the original EPS forecast, one of the things we're quite proud of is we demonstrated an ability to raise insured deposits, during a very difficult time with a high growth rate. Digital account opening and the utilization of brokerage CD is very important. Digital account opening has come on like gangbusters.
We'll talk about the success we had in March, April, and May. Important to note, the industry currently is somewhat plagued with asset liability management issues that are questionable. Many financial institutions have long duration fixed rate bond or loan portfolios that are not matched by time deposits. We do not have this issue. When you start to look at the metrics of return on average assets, return on tangible common equity, and capital ratios that exceed the industry norm, we're starting off with clean balance sheets, a great business model with margins, and we really do not operate to the historic industry norms of a business that's primarily predicated on low to no cost deposit costs to raise fundings on the liability side and fixed rate, low margin, but yes, low risk loans or securities. We look forward to our presentation today.
On slide number three, we continue to talk about our unique differentiated business model. We've always used the term without the use of brokers, branches, or business development officers. I think it's a real important de-designation. Many of our competitors in this space have got big dollars invested in commercial bankers that entertain, take people out for their deposits, particularly commercial deposits. We've developed our business model as a technology-enabled bank over the course of 20 years. We utilize technology, people, and processes to deliver solutions to its core commercial clientele with efficiency and high levels of service. It's not like the customer is devoid of a relationship.
For those of you that are not that familiar with Newtek and the Newtek Advantage, you'll see you'll be able to get individuals that are professionals within their product segment on screen to be able to talk on camera to our clients on a regular basis. It's just not the traditional banker, broker or BDO network that's exceptionally expensive, arguably not efficient. We're really excited about the ability of what we've built over 20 years now coming together under a financial holding company structure owning a bank. When we talk a little bit more about the Newtek Advantage, you'll be able to see what our real advantage is in the market.
Our trained solution specialists, whether they're trying to help the customer open up a bank account, obtain a small business loan, help manage hardware and software 24/7 in our data centers, both in Phoenix and in Jersey. Physical licensed insurance agency, payment processing business, which is really important. The movement of money for our business clients, exceptionally important. Our competitors really don't do this very well at the independent business owner level. Important to note, relative to our differentiated strategy is a well-managed asset liability strategy. Many of you are familiar with one of our core lending products, the SBA 7(a) loan. Today, we're out in the market at prime plus 300. That's 11.25% spread.
0.75% of the loan is government guaranteed and sold at a 10%-11% premium. You therefore you're left with a 25% uninsured but not subordinated loan participation on our books. We'll talk about the size of those. It's about a $150,000 average balance. You get tremendous diversification. That diversification gets you through good times and bad. That's what we've learned over the course of 20 years. We came into this business by acquiring a bank and putting a plan together that we believe deposits have zero duration. All of a sudden, in the last two months, everyone's waking up and going, "Wow, bank deposits have a zero duration." We saw commercial depositors line up, unfortunately at some of our industry participants, and withdraw their money.
The value of a commercial account dumping $10 million, $20 million, $30 million into a financial institution at one slug, it's very questionable what you can do with that money. Are you gonna make a car loan due in three or five years that's illiquid? Are you gonna make a residential mortgage loan that in today's prepayment expectations could be six, seven, eight years? Are you gonna do a commercial real estate loan? It's very tough. When you look at our strategy of deposit gathering, percentage of insured deposits versus uninsured, and what we do with the funds in managing liquidity, you'll see we are different. We think we've got the right model at the right time. I've said this on previous calls.
Have we entered the market at the worst of times, or have we entered the market at the best of times? Time will tell, we're very confident about what our strategy is, and it's the perfect strategy for this time in the market. We obviously have got net interest margins that exceed your typical bank and financial institutions. You'll see that the current net interest margin of the existing entity that we took on is about 225 basis points. When you could do the math and you're at 11.25 coupon on a loan and you're getting deposits at 5%, that's in excess of 6%. That's attractive, and that's the type of business that we're going to grow. We'll be diversified.
We'll be putting on some lower margin business, with current CRE type loans and current C&I type loans that are, I'll use the word conforming in nature to bank underwriting standards. That will diversify us, reduce our charge-offs and losses, but give us a diversified portfolio across the whole bank spectrum. Clearly, we've demonstrated an ability to gather and grow deposits beyond my wildest expectations. I did believe we're gonna be successful in this. After a drought of about a month and a half at finally getting our technology correct, we really appreciate the work that Apiture did with us to get our digital account opening online banking position ready. We came on like gangbusters. We're very, very pleased with how that is currently working. We're still early.
We still have a lot of work to do and a lot of development to be done there to get it to where we really need it to be. Look, going forward, you know, our business model is predicated on acquiring deposits at market cost of funds. However, it doesn't mean that we don't believe we're gonna be able to get commercial deposit accounts for checking at 1% and commercial high yield savings accounts at 3.5%, which will reduce the blend. We'll be able to do that by combining our merchant processing, our payroll, requiring operating accounts of people we lend money to, and the Newtek Advantage, which we'll talk about. That will wind up giving us further advantages in the future.
I think it's important when you look at our organization, you have to take a look at it and go, "Gee, this is a little bit like a re-IPO. Let me look at what they're looking to do going forward. Let me look at their spreads. Let me look at their margin. Let me look at their strategy. Let me look at their 20+ year track record in managing risk through 2008, 2009, and the pandemic," and say, "Is this a company that I wanna be involved with?" If you're gonna look at it like a traditional bank and go, "What is this trading times tangible book value?" You might as well go on to another conference call 'cause this is not the company for you at this point in time.
I'm not trying to dissuade people from investing in this, but when you see all the different engines and the diversified cash flows and things that we offer our customers, we're just different. Our customers do appreciate what we do. We have a long-term reputation in the market of delivering winning solutions to clients and being leaders in various spaces, and we're gonna continue to do that with a commitment towards excellence. I'd like to move to slide number four. Quickly to go through slide number four. These are some of the first quarter financial highlights you could see in our press releases. We're very proud of our capital ratio, the amount of cash that we've got on the books, and obviously, most of that cash on a consolidated basis is in the bank.
Please understand you can't readily move money between the bank and the financial holding company. The net interest margin of 2.28% was based upon the legacy portfolio. It's done at very tight margins. As we begin to put loans on the books in the second, third, and fourth quarter, you're gonna see those margins expand, and we've shown that in some of our slides going forward in the presentation. Slide number five. Talking about the 7(a) business, which is an important part of our business. Some of the things that we needed to get done, obviously, was begin funding 7(a) loans in the bank, get the PLP status, the preferred lending status, moved into the bank. We were successful at doing that. It's part of our strategy. In addition to acquiring the bank on 6th January .
Getting the capital into the bank to get to the tangible common equity of $79 million, which we're very appreciative of. I'll say that's approximately $79 million. Obviously, we're gonna be filing our Q shortly. Newtek Bank launched digital account opening in March of 2023. When I say we launched it, yes, it was open and available, but we had a lot of tweaking to do. Obviously, you know, acquiring the bank on January 6, the strain that it put on the quarter and the ability to deliver results like this, I'm not sure are fully appreciated by the market. I say the best is yet to come. We also had a fairly stable portfolio. You know, some of the things that investors are concerned about, obviously, asset liability management. Is there enough capital in the organization?
Do they have a model that their margin's gonna collapse going forward? We've got that checked. We're good, we're good, we're good, we're good. Quality of the portfolio. A slight increase in the non-accrual portfolio. Actually decreases the percentage of non-accrual loans versus total portfolio. You know, we're pleased. Clearly, you know, with rates going up 4% to 5% in a short period of time, it's gonna put stress on borrowers, but our portfolio has held up quite well. Our currency rate, which you'll see in a future slide, is fairly stable. It's materially higher than what it will be in a normalized market.
We do understand that. When you look at what we're putting in place for CECL reserves and reserves on the bank, I think you'll be comfortable with our projections because we're extremely conservative. It's not like we haven't seen downturns in the economy or higher levels of rates because we've been in this business since 2003. Our ability to raise capital is demonstrated in January, we raised $70 million through debt and preferred stock capital raises. Slide number six is an interesting slide, and we use the term adjustment to book value at 3/31 due to deconversion adjustments. I think that banks and financial holding companies basically do not have valuations for asset-like businesses like merchant services, tech solutions, insurance agency, and payroll.
These businesses, using a fair value calculation, worth about $166 million. They are going into our tangible book at a negative $2 million. As a BDC, these were on our books at fair value at a much bigger number. It's almost six or seven. It's a little close to $7 a share. Look, I'm not trying to rewrite accounting standards. That's not what I do. When you look at the asset valuation of NewtekOne, it would be a disservice if you're sort of a multiple-to-book value freak to not count these very valuable and vital businesses that generate cash flow with very little capital investment or CapEx. These are generating reoccurring cash flows and are part of our valuation.
You know, dancing around here a little bit, we think these businesses are quite valuable and add to the tangible book value calculation of $7.77 a share. Slide number seven. We talk about Newtek Bank being well capitalized, where our total deposits were. The amount of insured deposits, 94.5%. The uninsured is 5.5%. A lot of that is legacy deposits from larger National Bank of New York City legacy borrowers and people that are close to the company. I think it's important to note that we did not have any of the issues of some of the regional banks or even the bigger banks that were really happy to say, "Hey, we broke even. You know, we didn't lose any deposits." We gained deposits, and we're still gaining deposits.
We're able to do that because our strategy is our willingness to pay market rate of interest. Down the road in Q3, Q4, we'll be really focusing on bringing in those commercial accounts tied to the merchant account, the payroll account, and lending in other businesses. That'll be able to further widen our NIM out, which we're fairly excited about. You know, in the bank, the risk-based capital, 35%. That's because we have a lot of cash. For people that are looking for net noise, though, we had noise in the portfolio, blah, blah. Look, we had purchase accounting adjustments. We had CECL adjustments in Q1 to get this quarter behind us.
We also were sitting on a ton of cash, and that was based upon, A, preparing for our SBA business going forward, particularly in the second quarter to fund it. B, given what was going on in the market, we felt it was prudent to weigh in all deposits that we could. Our digital account opening worked really well. We were also able to raise some brokerage CD money. I will repeat, non-redeemable, my favorite word, non-redeemable. As a professional in the asset securitization business, understanding call features has obviously become very, very important. When you make a residential mortgage loan, the borrower has the call. Deposits can be called by the depositor at any point in time. That's a bad business. We understand options. We understand the optionality of deposits.
We understand the optionality of the loans we make to borrowers, and we price them accordingly, and we have really good margins. It's one of the advantages of investing in an entity like NewtekOne that's got tremendous banking expertise and knowledge, but also asset securitization knowledge, risk management knowledge. We're very proud of what we bring to the table with respect to a new and different business model. Slide number eight, bank purchase accounting. We've clearly heard one of the problems in some of the regional banks, and I'm looking at them right now on CNBC, is, gee, their portfolio, if you actually marked it to market, the net worth or the capital would go away. Good news, we really don't have that problem. Why? We just use purchased accounting. The liabilities were marked to the market, the assets were marked to the market.
That gives us a very good starting position. In addition to the fact that we've got these assets and liabilities that are very well managed. We do not have long duration fixed rate assets matched by non-interest bearing or low cost deposits, holding our breath and hope that the depositors won't leave because in three to five minutes they can move their money through a phone. We don't have that problem. I think it's importantly that a lot of these regionals are suffering and banks are suffering because on a mark to market basis, they don't necessarily have that network. As I mentioned to you, the purchase accounting that we went through, marking the assets and the liabilities, we picked up $20 million to $25 million of liabilities from the former bank that was like two and an eight. Well, we kept those on.
We'll end up buying a one year bill at, like, 4.6%. We wound up moving our Federal Home Loan Bank relationship over to Atlanta, of which we have an unused line of, I think, $60 million, $70 million, $80 million, which will remain that. That's our buffer in case there's some unforeseen issue. We're always thinking ahead. I think that's important when you invest in a management team. Slide number nine, metrics and forecasts. We maintain the guidance of $1.70-$2.00. We think at this point in time, that's prudent. We're gonna continue to monitor this and adjust it. It's pretty hard to forecast when a two year moves 25 basis points in a morning or an afternoon, the government-guaranteed premium moves 2% up or down from one quarter to the next.
You can imagine it's a very volatile market. However, when you look at our stock price and these numbers, you know, it's fairly well discounted to what I think some normalized multiple might be. That's where we believe we need to be looked at really at a multiple of earnings and growth of earnings, because that's historically what this management team has been able to do. These are some of our metrics, most of which have been reconfirmed. The one that's been reduced is the non-conforming C&I business, which has dramatically reduced down, but we were able to pick it up in other areas. Slide number 10. Our position as a leading SBA lender. Once again, getting PLP status in the bank, a big win. Not easy to do. It's not a designation that every organization gets.
Most of them that get it, we would argue, don't really use it much or aren't well suited to it. Well, we're one of the leaders in the business, the second largest lender. I think an interesting comparison relative to banks or bank holding companies too, this would be Live Oak Bank. Look at their margins versus ours. Look at their efficiency ratio versus ours. It's night and day. We like our business model. We've historically as a non-bank issued securitizations to asset liability match the loans. Those are gonna be sitting in Newtek's Small Business Finance. We'll talk about that for a second. From a risk standpoint, 152,000 average balance of the unguaranteed but not subordinated SBA 7(a) loans. Now that's diversification. Those loans are prime + 2 and three quarters.
The newer loans that we're able to originate due to SBA regs are prime plus three. You got a real nice asset liability match, which we'll talk about shortly. I think it's important to note that we've been a player in this space for 20 years through 08, 09. We think we have the data and the knowledge to manage this business through higher rate environments and tougher credit environments. We are very big on diversification. Diversification in industry, diversification in geography, diversification in provider of referrals. We have a very good business model, and this is a really attractive return on equity business for us, and that's why we're able to generate these return on assets, return on equity. It's a very hard business, frankly, to enter into it from a dead standstill. Slide number 11.
One of the things you're gonna see in the upcoming Q will be the diversified streams of income and segment reporting. The Newtek Bank will be a segment in and of itself. The SBLC, which is Small Business Lending Corp., the former Newtek entity that did all the SBA loans is in a wind down mode, and we'll talk about that in a second. You're gonna see that as a segment. It's gonna be basically a portfolio of loans against securitizations. You got the payments business, which is a $15.5 million EBITDA business per year. You got the tech solutions business, approximately a $5 million EBITDA business per year, both sitting up at the holding company along with NSBF. We packaged basically everything else into an other category.
There will be MD&A to be able to break out the performance characteristics of the insurance agency payroll and other businesses that sit in there, joint ventures, things of that nature, joint ventures with respect to lending. We try to be as transparent as possible. All the categories lumped together to be anything that's under 10%, which is part of, you know, SEC and GAAP recording requirements. Slide number 12. We were able to increase all commercial loan closings to $228 million, a 12.8% increase. When we look at that, you know, what it is we're looking at is this is 7(a), 504, what we refer to as conforming C&I. We call it conforming because it conforms to bank underwriting standards.
Unlike a 7(a) loan under SBA, which is a loan that has underwriting classifications that do not fit bank underwriting standards. That is actually the definition of a 7(a) loan or one of the defining characteristics. Conforming CRE lending. The former owner of the bank, based upon the market conditions and their expense ratios, was able to successfully run a bank, you know, at 200-210 basis point margins to cost of funds. We're pricing these loans today. We actually did one at 350 off, and maybe we'll be 375-400 off right now for new CRE loans.
For those organizations that have a full balance sheet on CRE lending, and that's the times to make these loans, provided that they're underwriting to current correct appraisals with the right projections and the right cap rates and the right valuations. The best loans are made in the worst markets. You get the best underwriting. There's less competition. People aren't falling all over themselves. It's one of the benefits of getting out of this zero interest rate environment with a clean slate and a clean balance sheet. Slide number 13. This is our 7(a) premium trends where we sell 75% of the 7(a) loans. In Q1 2023, our net premium was $110.84. The trend is up. Why is the trend up? People want assets that float, particularly over the short end of the curve. Surprise, surprise.
The highest yielding part of the curve, surprise. Less painful from mark to market. There's a lot of banks out there that wish they had floating rate assets. There's a lot of insurance companies that wish they had floating rate assets. There's a lot of performance-based managers that wish they had floating rate assets. Extremely valuable. Slide number 14. This is what we call our currency rate. You know, I would tell you that, you know, historically, over 20 years of currency rate, you know, has traveled, you know, somewhere in the neighborhood of, you know, 90, 91, 92. It's much higher. I mean, we're coming out of Goldilocks. These are small businesses. They do fall behind at times. It doesn't mean the loans are bad, but at times, due to seasonality... This is a strong portfolio.
Most importantly, you could see it really hasn't moved much. The key bucket is 31 to 60, right? That's really where you got to focus your eyes and your attention. There's just been not a lot of movement in that 31 to 60. The current tab is this is how you report to the SBA. They got their own ways of doing things. That's really the important tab. Obviously 61 to 90 as well. Anything that's 30+ is really the issue. Just because these loans start to fall behind, it doesn't mean that the borrowers who have multiple personal guarantees, every owner that 20% or greater must personally guarantee the loan, join several. They do whatever they gotta do to keep these loans going and the business going. We feel pretty good about the currency rate.
Slide number 15, we talk about the non-accrual trends. These obviously are written down mark to market. We do this differently. Banks typically will take a non-performing loan, and we'll write it to zero. Well, if it's zero, this doesn't show up anywhere. We have personal guarantees and liquidate assets. We've been doing this for over 20 years. These do remain on our books. This is at the Newtek Small Business Finance metric number, not in the bank. The bank has small amounts of loans currently. That will grow. We're gonna build a portfolio in the bank. This is just at the SBLC, sitting up at the holding company. You could see, important to note, you know, one of the issues about people worrying about banks is how is credit holding up. You could see ours is doing well so far. 16. NSBF interest trend analysis.
Here's your asset liability management for NSBF, the SBLC, the non-bank legacy lender in wind down mode. First of all, important to note, you could see that we're getting a lot of good spread income, up from a year earlier to $6.5 million. When you look at NSBF going forward, you're looking at approximately $500 million worth of loans against pledge to securitizations of about $250 million. There's a lot of equity in those securitizations, and there's very good spread income. I'll draw your attention to slide number 17, which shows you the coupons that are paid to the bond holders. It's the lesser of one and the two, and these are the four outstanding issues. These are numbers at, I believe, issuance date. I could be wrong on that.
No, these are dollar volumes at issuance date, so they pay down. I think it's important to note, you're probably looking at a cost of funds somewhere in the neighborhood of 7.25%, maybe 7.5% on a blended basis. Your coupon is prime plus 2.75% on most of these loans. Going forward, it's prime plus 3%. That's like 11% coupon against quote 7.5%, 350 basis points of margin. Now in NSBF, everything is outsourced to the bank in a lender service provider agreement. It's really just a portfolio. It's a portfolio of loans into securities. The securities have to get paid off first. All that cash flow goes into that. We think this is an attractive asset, and you'll be able to follow along in our Qs.
In the Q that you're gonna get coming up, there's gonna be gain on sale, which is important to note because in the first quarter we didn't get PLP status until really the second quarter. There were a few SBA loans originated in the bank in Q1 through the GP program, but you're gonna see gain on sale in the first quarter at NSBF. You're gonna see very little of that in NSBF in Q2. The gain on sale will show up in the bank. We'll note that the accounting will be different because NSBF uses fair value accounting. The bank is gonna use CECL. On a 7(a) loan, for example, the CECL reserve will be 8%.
Every time you make a loan, there's gonna be an 8% charge upfront that'll drain and weigh on earnings, which you'll actually see if you look at our earnings for Q2. That higher coupon starts to pick up and that's where you get the real benefits going out when you build a big ass liability management spread. These are the details that the analysts will be able to work on. That's why we're having this call to be able to give disclosure and be able to have conversations. Slide number 18, Merchant Solutions and Mobile Money. Really important, business line for us. We've been in the business since 2002. I think it's important to note we've been an SBA lender since 2003, Merchant Solutions since 2002, Tech Solutions since 2004, insurance agency and payroll about 15 years and depository four months.
Yeah, we're a bit of a rookie there, but we've got very experienced people like Nick Young and others at the helm running that business for us. We're excited about it and we're very well positioned. Particularly, you know, we're basically dropping our lending opportunities into a lower cost funding vehicle. I will mention the contrast of making an SBA loan in NSBF versus in the bank. Let's say deposits are 5% and you're putting the loan on at today's coupon 11.25%. A quarter of the loan stays on the balance sheet. That's the uninsured loan participation. Uninsured but not subordinated, fairly well asset liability matched with floating rate deposit money and a loan that has a quarterly adjust over prime, no cap.
Three-quarters of the loan gets sold at a big gain, so it generates cash. That's the math in the bank. At the BDC, only 55% of that loan gets funded by our warehouse line. At today's cost would be almost 8.5%, maybe 8.75%. And 45% has to be funded by selling shares, by selling equity, by diluting, adding more share count to EPS. Even though you got to pay tax in a bank, the math just doesn't even compare. That's why one of the reasons why we did the transaction. In addition, we'll talk about the Newtek Advantage to be able to really provide a value-added solution to customers, unlike in my opinion, most other banks that do nothing but take the money of the customer. That's it. That's a commodity.
Everybody does it and they don't give the client anything. We'll talk about the Newtek Advantage and why customers are advantaged for doing business with Newtek. Getting back to Newtek Merchant Solutions and Mobile Money, these are entities that will generate about $15.4 million of EBITDA. Pre-tax income about $13.7 million. Established in 2002. Processed $5.5 billion of merchant processing volume. Could you imagine if we were able to get 5% of our clients or 10% of our clients that are processing payments to open up a bank account, give them same-day funding, one throat to choke, one place to go to for all their business needs? That's valuable. That number we hope to grow over the course of time.
We believe that these are gonna be future deposit gathering sources for Newtek Bank and we're very excited about that. Slide number 19. Why the payments business is extremely important to NewtekOne. We're gonna be issuing our own debit card, therefore we're gonna be able to get interchange. Those numbers currently are not factored into any of our financials going forward. We're looking to grow these reoccurring fee businesses that are very beneficial both to NMS and Newtek Bank, particularly utilizing ACH. Business clients are interested in being able to move their money more cost effectively than just through interchange. We're gonna be able to do that because we are very focused on managing the payments business and the bank.
David Simon, who's the president and chief operating officer of our payments business is also an executive officer at the bank in charge of deposit acquisition and is also on the board of the bank. David joins us from Visa and Citibank, where he had senior roles in both organizations. Really knows the card business extremely well and is now positioned in the merchant acquiring side, helping us grow deposits. We realize that most banks do not provide the tools to the independent business owners to, A, electronically invoice customers and B, to pay their vendor bills. Electronic payments, moving money for our clients cost effectively with transparency, with reporting into accounting general ledgers should be a real important and vital solution that companies like ours can provide to its clients. Only the top tier banks to the top largest depositors get anything like these treasury functions.
I'm telling you, the money management functions that we're talking about, whether it's Visa Direct, Mastercard Send, FedNow, things of that nature, are still being cooked up. We're gonna be able to offer this in one package to our clients. We're extremely excited about it. It is part of our strategy. Tech solutions. A lot of people think, what is tech solutions gonna be? Simply stated, we manage people's hardware and software in two data centers, one in New Jersey, one in Phoenix. These are a lot of different solutions. It could be from managing email, it could be from a website, it could be storing data, it could be managing servers, it could be managing POS systems. These are some of our forecast business we've been in since 2004. 21 from a segment reporting. You'll see this in our Qs, corporate and all other.
I'm not going to get too detailed in this. I'm going to try to keep this call moving. A lot of information. I appreciate you following along. I'm just trying to give the analysts a good sense to be able to follow us going forward. Slide number 22, Newtek Alliance Partnerships. Many of you that are not familiar with the story don't understand how we are brokerless, branchless, bankerless, and BDO-less. That's because as an overnight success, and it just took us 20 years to get there, we've added major organizations that form alliances with us, and these alliances pass referrals to us. What are referrals? Referrals in the form of my client wants a small business loan. My client wants a workman's comp solution. My client's interested in your payments platform. Whether it's UBS's wealth management system, Morgan Stanley's.
We have 3,300, 3,400 Morgan Stanley financial advisors that have a NewTracker account passing us referrals. That's almost I think it's greater than 10% penetration. UBS, I think we've got 1,500 out of 6,000. These are great penetration rates. Navy Federal Credit Union, the largest credit union in the world. Randolph Brooks, over one million members. This is how we get our business. No bankers, no brokers, no BDOs. We basically give them a revenue share. We service their customer, and they're very happy with. These are longstanding relationships. We've recently added two relationships, one, a bank with over $100 billion in total assets, major player. Second, a large nationwide insurance carrier with 1 million clients with a newsletter that they message on a weekly basis, will be part of that newsletter.
We look forward to announcing the name shortly. Slide number 23. A lot of people focus on us just as a 7(a) lender. Well, we're not a 7(a) lender only anymore. We obviously do 504 loans. We do non-conforming conventional loans. We have a really good track record in this area. $450 million of 7(a) loans in 2017. There's been no charge to us to date. On joint ventures, a $145 million non-conforming portfolio, no charge to us to date. Slide number 24. When you talk about tightening underwriting criteria, you're gonna look for greater FICO scores. You're gonna make sure the business get greater amounts of liquidity. You're gonna stress the businesses to rates going up even from current levels. You're gonna make sure that they've got enough working capital to survive the bumps in the road.
Lending the businesses that can liquidate collateral of unencumbered borrowing power enables them to survive unexpected consequences. Slide number 25 is a slide we've had in our decks for 25 years. I'm not gonna focus on it too much, but basically shows you how you can generate returns on equity in these businesses that are north of 30%. This is the cash created when you do a 7(a) loan and you sell the government guaranteed piece, which we'll continue to do as a business strategy. Slide number 27 is the income and expense aspect of the SBA 7(a) business. Slide number 27 is the 504 business, 28 as well. The 504 business, you actually have no balance sheet. All our 504 loans are gonna be made in the bank going forward and originated in a held for sale category.
They will be marked to the market and held for sale. These loans are originated between the fees and a gain on sale margins. You typically can make between 3%-6%-7% on the conventional first, and the debenture gets taken out by the SBA. 29 benefits of the non-conforming conventional loan program. Once again, diversification, diversification. Higher level of credit than 7(a). This is done at the holding company. That's why we call it non-conforming. It's funded through joint venture equity and securitization lines, and we anticipate $250 million of funding in 2023.
We also believe the return on equity in this business between 20%-30%, between origination fees that are gained at the bank, servicing fees that are gained at the bank, as well as the spread income that's held up at the holding company via warehouse line and securitization. Slide number 30, the Newtek Advantage. We talk a lot about this. This is our future. This is where our big bet is. This is our differentiated model. If we fail at this, we're just left with a bank that does a really good job at lending out money with lower cost deposits and leverage, but this is the game changer here. Why should people bank with Newtek? Well, 'cause they get the Newtek Advantage. We're gonna give them analytics, relationships, and transactional capabilities other banks typically do not get.
When you sign up for the Newtek Advantage, first thing you get is document storage, you can store all your organizational documents in the Newtek Advantage today. You get web traffic analytics. What bank does that? None that I know of. What your bounce rate is. How many people went to your site yesterday? Average time on the site. Analyzes your site, effective or not. If they need help, they can speak to a Newtek specialist that can enhance their site, enhance their security, enhance the effectiveness of the site, enhance their ability to take payments. We got storage, we have web traffic analytics. Payment processing data. We could show them batches from the day earlier. Chargebacks, refunds, Visa versus Master, Amex versus Visa, debit versus credit, all those analytics right through the Newtek Advantage. Go to the Newtek Advantage and make payroll through the Newtek Advantage. Big win.
We were looking to also add Newtek Tax and Newtek Accounting. Hopefully, we'll have these rolled out in this calendar year, maybe next, but hopefully this year. That'll be white labeled from an experienced provider in the space. I mean, our clients wanna see their bank balances on their general ledger. They wanna see their payments in their general ledger. They wanna see their payroll on their general ledger. That's the Newtek Advantage. This is what banks are going to need to do going forward, okay? If we're not successful at it, somebody else will be, because customers are tired of giving their money to banks, getting zero on their interest, and getting nothing else. I mean, that's a bit of an exaggeration, but it's not that much of an exaggeration. Therein lies the Newtek Advantage. We own and operate all these businesses.
We're not laying the customer off to third parties. To invest in us, you do need to have, you know, as Warren Buffett would put it, a long-term horizon. I'm not investing for the next quarter or two. I'm investing for the next three, five, 10, and 15 years. We believe we've developed these assets, and now we're sewing them together. Slide number 31. We declared our first dividend as a financial holding company, paying $0.18 a share. We hope to continue that. That would be $0.72 for the year at a fairly high dividend yield. 32 is the metrics on the model. 33 shows our capital ratios, which are really high. Obviously, they're higher at the bank than they are at the consolidated holding company. Makes perfect sense.
Obviously, the Bank right now has got a lot of capability to leverage balance sheets. You know, when you sort of look at the noise or the numbers or Q1, whatever, just remember, Newtek Bank's got a lot of capital, has a lot of cash, hasn't been put to work yet, so it's got a lot of earnings power there. Let's go to slide 34. At slide 34, a couple of things that are important to note. Returns on tangible common equity, returns on assets. You can see the net interest margins growing. Cost of funds actually declining. You know, that's because we're reducing our dependency on bank lines versus deposits. You know, that's not even fully banked.
That'll get fully banked as more and more of the securitizations pay down and more and more of a lot of our lending businesses are financed by deposits and not using as much equity as we've done historically. You could see by the metrics and the numbers here, these are not numbers you see in a bank. Therefore, you shouldn't be managing us or investing in us whether you like the ratio to book or not, or however you wanna calculate book from a GAAP standpoint. Slide number 35. These slides demonstrate the fact that you got a lot of non-banking activities that are generating a lot of income. Not typical. Most bank holding companies have very little in them. That's not the case with NewtekOne. We have a lot in them. We've got our joint ventures in them.
We got our payments business in them, tax solutions, and the growing opportunities of payroll and insurance. Slide number 36. The focus there should be obviously, on the earnings per share, the dividend per share. You know, I swallow pretty hard when I put these numbers out. I do so with trepidation. You know, the volatility of forecasting. I think investors do take for granted the volatility that's out there in the market, how difficult it is to do. Historically, we've had a good idea of doing this. You know, a lot of this is based upon what goes on, frankly, from an industry perspective. We are lumped into this industry.
You know, I look at NewtekOne, and I'm going, the problems that were encountered at the Signature Bank, the Valley, the Silicon Valley, they have nothing to do with NewtekOne. Like we're both in the same business and industry, but we don't do deposits the way they do. We didn't have this cadre of bankers taking people to Pebble Beach and wherever to play golf with deposits to make loans. We didn't have big trade assets. I mean, yet we're lumped into that. We get it. You know, that is gonna determine things for a while. We'll work through that. You know, at the end of the day, we believe the cream rises to the crop, and we'll get through it. That, that's the thing that perspectively could drag these numbers down.
It'll be what it'll be. 37, 38, more balance sheet information. 39, pro forma forecast for the bank. You can see it's a very well-capitalized bank that's now able to return earnings versus the BDC model, where everything had to get distributed. We put an org chart on 41 for analysts to be able to see where all the nuts and bolts are. Looking at the investment summary. Once again, we ask the markets to look at us. There's some multiple of earnings, some multiple of book, and the capability of our ability to grow these earnings over time. The fact that you're investing in a company that's been around for two decades and has managed risk through all times.
Frankly, has got a differentiated business model that totally fits into the current environment, which is low-cost or no-cost deposits, will not be the secret sauce for banks. I can't tell you in 2022 how many times I was asked about non-interest-bearing deposits and core deposits. Well, it turns out core wasn't so core, and paying zero isn't a benefit. I would question whether these low-cost deposits that are out there on the books of the major money center banks are an asset or not.
Yeah, whatever sticks is an asset, but whatever moves is not. That's a squeeze on the NIM. You know, we're already at the higher number, and we put out those dollars at higher coupons net of charge-offs. We've got 20 years' worth of experiences in loan loss reserves and fair value valuations, and we still have a great margin. There's the difference. It's just entirely different what we do on the deposit side and what we do on the asset side, and most importantly, what we offer our customers as a core value. That's the Newtek Advantage. With that, I'd like to turn the presentation over to Nicholas Leger.
Thank you, Barry. Good morning, everyone. You can find a summary of our first quarter 2023 results on slide number 44. We're proud to report our first quarter financial results for the first time reporting as a new financial holding company. As you'll see in the consolidated statement of operations, upon conversion from our previous BDC investment company accounting, where our portfolio companies did not consolidate into the BDC's financials and those activities would historically be reported as a dividend income from the investments of the BDC. As a financial holding company, we are now consolidating those portfolio company operations into our financials. As a result of this conversion, there is no comparable prior period consolidated financial statements to refer to with the two different types of accounting. I'd like to start with some highlights from our first quarter 2023 consolidated statement of operations.
On a consolidated GAAP basis for NewtekOne, Inc., our first quarter results are as follows: Net interest income for the first quarter was $4.6 million, which is comprised of $18.7 million of total interest income on loans and fees on loans, offset by $14.1 million of total interest expense. $8.8 million of the interest expense is driven by the interest expense on the notes and securitizations. $3.9 million is due to the interest from the bank and FHLB borrowings and $1.5 million of interest expense on deposits. In the first quarter of 2023, the company has implemented CECL on Newtek Bank's loan portfolio, resulting in a $1.3 million provision for loans on loan credit losses. The net interest income after the provision for loan credit losses is $3.3 million.
Focusing on total non-interest income of $42.8 million, $4.4 million is a re-result of servicing income, $6.5 million of net gains on the sale of loans, $6.7 million from technology and IT support income, $10.3 million from the electronic payment processing income, $5.9 million of net gain on loans accounted for underneath the fair value option, and $6 million of other non-interest income. Going back to the $6.5 million of net gains on the sales of the loans, which is comprised of the realized gains recognized from the sale of the guaranteed portions of SBA 7(a) loans during the quarter, total of $14 million.
In the first quarter of 2023, NSBF sold 248 loans for $109.5 million at an average premium of 10.84%. Realized losses on the SBA 7(a) loans for the first quarter of 2023 was $7.5 million. Moving down to non-interest expense of $39.2 million, which is primarily comprised of $19.1 million of salaries and employee benefits for the consolidated financial holding company. $4.5 million is a result of electronic payment processing expenses, $3.8 million from the technology expenses, $3.4 million of professional service expenses, $2.8 million of other loan origination and maintenance expenses, and $4.6 million of other general administrative costs.
This results in a pre-tax net income for the first three months of 2023 of $6.9 million. In connection with the financial holding company conversion from a tax perspective, the conversion from a BDC, which was a flow-through tax structure filing as a RIC, where the dividends to shareholders were taxed as ordinary income, since we were required to pay out 90% to 100% of the income in the form of a dividend, which is primarily deemed as ordinary income, we are now a taxable entity as a financial holding company. The company will no longer be filing as a RIC for the calendar year of 2023. We will file as a C Corp.
With this conversion, we are now able to utilize, when appropriate, NOL carryforwards. These are primarily from the previously unconsolidated portfolio companies. The establishment of the DTA was recorded to the P&L in the first quarter of 2023. We recorded a $34 million deferred tax asset resulting from these federal NOLs, which is a one-time event and will not be recurring. The $7 million income tax benefit from the NOLs was offset by the $2 million income tax expense provision, which was recorded in the first quarter on the $6.9 million of pre-tax net income at the financial holding company's effective tax rate.
This resulted in a net income tax benefit of $4.8 million. This type of noise in the financials will be leveled out over the current quarters. Consolidated net income for the first quarter of 2023 was $11.7 million or $0.46 per basic earnings per share. I would like to now turn the call back over to Barry.
Thank you, Nick. Operator, I'd like to open it up to the analyst community for Q&A. Thank you.
Thank you. At this time, we will now conduct the 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. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Crispin Love of Piper Sandler. Your line is now open.
Thanks. Good morning, everyone. First, can you just speak to loan demand that you're seeing from your borrowers and your appetite to continue to grow at a fast clip? Looking at your origination guidance, it looks to be down about 25% from your previous guide for 2023, mostly driven by the lower non-conforming C&I. Just curious if you can speak to what's driving the key differences and lower-
Sure
non-conforming expectations.
Sure. I think that. Crispin, thanks for joining. Couple of things. One, I'll sort of take this piece by piece. In the seven/eight portfolio of opportunity that comes in through our referral system, we are rejecting about 10% more of loans that are in underwriting going into committee than normal. Obviously, you know, we've gotta be concerned about rising rates and people being able to make debt service coverage ratio, et cetera. I think that that's just an interesting fact. Now, the other thing I would say is the movement of PLP from the SBLC to the bank, it seems like, oh, you know, I'll just take my pencil out. You know, I can't explain how disruptive that was to our flow.
I don't think that, you know, we're going to, at the moment, make any adjustments to those volumes. Right now, the ability to amortize a loan over 10 to 25 years under the 7(a) program takes borrowers that banks are going to push out of their portfolio into this program. We're still constructive and optimistic on 7(a) loan growth. Relative to the other categories, it's a great time to have capital and to be able to make great loans in a great environment. This is when you're supposed to be making a lot of loans. The concept of loan demand is very interesting. You know, we look at GDP moving up or down ±1% or 2%.
I mean, it's such a small number, but yet people go crazy over it. Here's my point: If we do our jobs, there's plenty of good borrowers to be able to pick through and find, and our model will generate them. I'm not overly concerned about us being able to find greater credits. We will probably have to kiss a lot more frogs, but because of our model, which is sort of non-broker BDO-oriented, we're actually able to do that and scale quite efficiently.
All right. Thanks, Barry. Another question on the income statement. Can you went over it a little bit on the call, but can you just explain what the net gains on loans accounted under the fair value option are, and if you would consider that to be core earnings? I think the comments you made, imply that that fair value option would be going away in the second quarter. Is that correct? Would you expect a similar amount of that, those fair value adjustments to be part of gain on sale revenue going forward, or am I thinking about that incorrectly?
No, I think you're thinking about it correctly, but it'll go up as well as down. You know, I think that is core. That's part of our model versus others, in that we believe, in that particular portfolio of assets, marking the market is important. No, I would say that's, I would say that is a core movement in both directions. Just like the write down in the fourth quarter was important, because based on how market conditions were.
that fair value line is gonna be sticking around, but it could go up, could go down, just depending on the quarter?
Absolutely. Yep. That's pertaining to Newtek's small business finance.
All right. Thank you, Barry.
Thank you.
One moment, please. Our next question comes from Christopher Nolan of Ladenburg Thalmann & Co. Your line is now open.
Hey, guys. Thanks for taking my question. On Newtek Advantage, given the seizures of multiple banks over the last month, I think the risk calculation by depositors has changed to a degree, in terms of the bank that they deal with. Why should a depositor have not only the deposit relationship, but also all these operational things such as managing their websites, payment processing, everything, with an organization institution which potentially could be seized over the weekend by the regulators?
Chris, the only thing I can tell you is with 24 years' worth of experience in dealing with these customers, we do know what they like. We do know what they don't like. You know, it's a, it's a bit of a crazy time right now. With respect to our organization, we're well capitalized. We've been around for 24 years. We have a really good solid business plan and model, and we do have relationships with the clients that, you know, they can, they can get to us. I think conceptually, the small business owner today has multiple parties that they wind up dealing with. They might deal with GoDaddy for their website, Fiserv. I mean, one would say, "Gee, I'm a small business owner. I like diversification." We get it. They may not look to do...
By the way, we're under no false pretense that they're gonna do everything with us, per se. However, we had a client recently, for example, they were having problems with their technology. They didn't know whether it was their POS system, their gateway, or their payment processor, okay? I would tell you, and it's just my opinion only, that the media is greatly exaggerating the issue with quote-unquote, the banking crisis. Now, I don't think it's a crisis. I do think it's a bit of a change in NIM over the course of time, which is gonna change profitability. You know, the concept of it being a crisis, I think, is overblown.
I'm hopeful they kinda get tired of this, to be honest with you, 'cause I don't see them as helping. With respect to what we've seen in talking to our clients, we have clients that are ready to move their depository accounts to us because we process their payments and because they do their payroll. There's one organization for them to watch and follow and monitor. The problem is with Silicon Valley and Signature, there was absolutely no time, no advance warning for anybody to make a change.
I mean, people lined up at the door almost two days, and it was done. It's a huge problem for the business and the industry that this business industry is gonna have to deal with in some way, shape, or form. It may be, you know, all FDIC-insured deposits is one of the ways to reduce that anxiety. I will tell you know, we're obviously not JP Morgan, but we had little to no customers leaving, and look at all the deposits we were able to gather, so.
thanks, Barry. I guess as a follow-up, given all the turmoil in the banking industry, have the regulators requested or higher capital ratios for Newtek Bank?
I mean, Newtek Bank is risk-based capital. I think it's between 30%-40%. I don't know how much higher they wanna go.
I'm saying a lower threshold, actually.
Oh, you mean to reduce it?
Yeah. I'm just trying to see whether or not there's a, elevated level of minimum capital that they might require. I know.
Oh. Oh, I appreciate that. Yeah, no, matter of fact, you know, without going over the line, our projections that we have in the market are based upon the original plan, and we're comfortable with those projections. You could infer what you like from that. No, we've had no changes or any cause of concern about what we're doing, how we're doing it, or how we're managing our business. None whatsoever.
Okay. Thank you for taking my questions.
Thank you.
Thank you. One moment, please. Our next question comes from Bryce Rowe from B. Riley. Your line is now open.
Thanks a lot. Good morning. Wanted to maybe start with the deposit levels that you're showing here post first quarter relative to the forecast. Barry, also get an understanding of how, you know, the current, I guess, capital structure of the debt might change over the next year. Will you continue to hold the unsecured notes on your balance sheet that existed when you were a BDC?
Sure. Bryce, two important questions. Number one, we exceeded our deposit gathering capability in the first quarter after a very slow start. I had some sweaty palms and some sleepless nights. We really came on like gangbusters, and it's still coming in like crazy. I feel very comfortable about our deposit-raising capability. I mean, one of the things we're gonna have to think about is, do we let some of the brokered, quote-unquote, deposits off that are non-redeemable for some of these lower duration type deposits that are coming in? That's something we'll need to think about. For the most part, I don't see that changing. We're very pleased with the mix of money that's coming in and how it's coming in and the types of customers.
Relative to the other question, I think that right now we're in compliance. We've got headroom. We're comfortable with it. We're just gonna keep, you know, monitoring the markets and the situation, and we've got that factored into our projections going forward. No, we're in good shape on that. I can't tell you p ut it this way. If I could figure out whether the next 100 or 200 basis points of rate movements, where they're gonna be
I'd be able to answer that question, which is why people have tried to get me there. Answer certain questions like, how do I know? You know, I can make a guess, but, you know. I certainly didn't predict Signature Bank in Silicon Valley. I don't know if that makes me dumb or not, but I didn't quite see it coming. No, I think, I think we're in good shape. I think that right now that's core funding that can sit out there as long as we stay in compliance and we'll be able to do that. That's not a problem.
Okay. Then maybe just one more around the deposits, and I've got another question or two.
Sure.
In the forecast here you're showing, let's call it $244 million of deposits at the end of the second quarter. You highlight, you know, there being $300 million plus at the end of April. Just making sure we're thinking about it correctly that you expect some runoff based on some of those broker deposits or maybe the forecast is just a bit conservative.
I think, you know, we're gonna need to take a step back and look at, you know, do we wanna return some of these deposits because we've had so much success or make certain adjustments in the model. As, as you can imagine, I've got an accounting and legal and professional department that is drinking a lot of coffee the last couple of days. I think that's just something to keep an eye on. On a good note, we've got a unique, I'll say problem.
I say problem. It's we're getting a lot of deposits. You know, you can go to our website, take a look at where we are. I mean, we're not over the market. We're one of the higher payers, but we also can put money to use with a great NIM. That's just something we're gonna have to figure out from an asset liability standpoint. I would tell you that what you see in the projection might need to be changed or adjusted and modified as we get through the quarter.
Okay. Okay. Just switching topics here. You made note of valuations on the control investments as a BDC versus, you know, now as a financial holding company. Essentially, you know, the fair value, you know, got wiped away with the accounting change. Helpful to see what projections are from an EBITDA perspective for both NMS and Newtek Technology. Can you talk about how those valuations as a BDC were come to, you know, as for those control investments, you know, especially relative to those two bigger control investments or former control investments?
Well, I think that, you know, the one thing I would say is I try to be realistic. For me to project, huge growth in those two organizations at this point would be contrary to what the presidents and chief operating officers have told me they're gonna do from a budgetary perspective. Basically, what you see there is what we've approved from a budget. Am I happy with what I'll call, flat to maybe down some in recurring? No. Are, you know, are they happy? They shouldn't be. I also think that it's realistic. With that said, I mean, those are goals that we believe are achievable, which is why we put them out there.
As we position ourselves as NewtekOne, which is new branding, with a much wider universe of customers that are now talking to us, much wider than before as a BDC, it's like night and day of people that wanna come to us because of the many things that we can help them with. I think those businesses will flourish. The ability to deposit money in someone's account same day on the merchant side. The ability to store one's data is gonna lead to other questions. Where do you have your servers? Who's managing them? What do you pay? Well, you're better off using us to do that 24/7. What about your mail? You know. I feel pretty good about those relative to the concept of, you know, the valuations.
I just think that as a BDC, I can't tell you how many people have said, "You're never gonna trade above NAV." I remember our coming out deal. We converted from a 1933 Act into a 1940 Act. I think we raised money at like a 15-17-point discount to NAV. Then, you know, pretty much the rest is history. At one point, we traded as high as 2.5 to NAV. 2.5 x 1, which is unheard of for a BDC. I think even the Main Street Capital only got to, like, two to one at one point in time. You know, we're gonna need to hopefully get the market comfortable that even though these businesses don't have quote-unquote "loans," which would flow into tangible.
If I sold the businesses for cash, the cash would count as tangible. That if they wanna look at some measure of, you know, what the liquidation value of the business should be, which is really what they're looking at from a book standpoint, in my opinion, not what it can generate from an earnings standpoint. I certainly understand why that's important as a bank, but it's not important relative to our strategy and how we do our business. We think that some add back or recognition or bigger multiple on tangible book is warranted. That's just an opinion. That's, you know. The market's gonna have to sort that out. The one thing that I do know, and I said this when we were a BDC. If you grow your earnings and you grow your dividend, the stock price will follow. I don't care what the book value is.
Yep. All right. Well, I'll step back in queue, Barry. Appreciate the time.
Thank you.
Thank you. One moment, please. Our next question comes from Paul Johnson at KBW. Your line is now open.
Yeah. Good morning, Barry. congratulations on the first quarter under your belt as a officially as a bank.
Thanks.
I missed part of the call, so I apologize if you talked about this already. In the last presentation and the results for last quarter, you included some guidance for 2024. I'm just wondering if, you know, if that's still good or if that's basically under reevaluation, obviously, because kind of recent events in the market. Yeah, any sort of commentary you can kind of provide on your sort of previous guidance for 2024?
Yeah. I'd meant to put that in my notes. It's buried somewhere in this big stack of papers here, but I missed it. I'm glad you asked the question. Now, we've decided to and I'm gonna use this term appropriately, withdraw that because, as I mentioned earlier, you know, with the two-year moving 25 basis points in the morning or an afternoon, it's pretty hard to forecast the next couple of quarters versus a year out. In addition to that, you know, the cost of capital has changed dramatically. I, you know, I could say that, you know, we're just not gonna change it, but I think it's. I'm gonna be very clear. We're withdrawing that.
Okay. No, that's clear. I appreciate that.
Yeah.
Then, kind of bigger picture, I mean, you know, if you could kind of snap your fingers today and, you know, get your wishes in terms of, you know, what you would like the portfolio to look like, you know, in one year from now, maybe two years from now, do you have any kind of idea in your mind, you know, what you sort of expect the long-term percentage of, you know, the portfolio to be in terms of SBA loans versus, you know, other loans, commercial, CRE, et cetera?
Sure. I think that, at the bank level, important to note that, it'll be diversified between 7(a), 504, non-conforming C&I and conforming CRE. you know, on the 7(a) side, and I will say this with respect to the uninsured piece. Okay. you know, I'm glad your question made me think about something else. A lot of people look at the bank as a little bank, but I mean, this little bank is gonna do a lot of loans because the 7(a) business, you do $875 million worth of loans, you know, only 200 and change show up on the balance sheet.
You still have the resources to do that amount of loans and get that amount of gain on sale and get that amount of return on equity and profit out of it. Now I wanna go back to answer your question. So we'll make over $1 billion of loans this year. Doesn't make. Most $500 million banks or $600 million, they don't do that, right? Okay. Now let me go back to your question. The balance sheet should be pretty diversified.
Maybe the biggest concentration is 7(a) at 30%-35%, but the rest of it'll be broken up evenly between 504, which is there for sale, not for permanent, conforming C&I and conforming CRE you know, we're gonna balance the 7(a) side off, which could have, like, an 8% CECL adjustment to blend it at 3.5%-4%. The other loans obviously have a much lower reserve or CECL just because of the quality of the loans.
Yep. That makes sense.
From a bank perspective, very diversified. Then at the NewtekOne level, you'll have the non-conforming in the securitizations. You're gonna get the merchant services business, the tech solutions business. We get payroll and insurance on track of recurring cash flows without having to put capital in. It becomes a very compelling model, we think.
Got it. Appreciate that. One or two more questions. The realized loss on the SBA loans this quarter that Nick mentioned, I believe you said $7.5 million. I just wanna make sure I'm clear. Is that the actual loss that was charged on the portfolio, or is there any kind of like, you know, one-time sort of CECL adjustments that, you know, were made, you know, due to the merger in the quarter?
Nick, could you answer that?
Yeah. Those were the legacy NSBF loans that are at fair value. Those are not any of the loans that are in the Bank as a result of CECL.
Got it. Okay. That's the actual realized loss for the SBA portfolio. Then I guess my last question, you know, just kind of the, you know, in terms of, you know, how the merger is going, I mean, do you feel like at this point, you know, the bank and, you know, sort of all the back office technology, et cetera, you know, is that, you know, pretty much fully integrated at this point?
Or, you know, do you still kind of feel like you're working on some, you know, loose ends to tie everything together? Then I guess along with that, the PLP sort of, you know, temporary disruption in the quarter. Obviously, moving that over to the bank was a little bit challenging. Is that pretty much over with at this point? You know, I guess in all, does it seem like, you know, everything is set and integrated the way you'd like it to be?
I just still think we got some work to do, Paul, you know, in the second quarter. I think the, you know, some of the projections you'll see have us better in the third or the fourth quarters. I still think there is some work to be done relative to continuing to bolster the staff. I mean, the other thing, obviously we're going through original examinations. I mean, I'm a financial guy as well, but unfortunately, for the last 24 years, I've been thrust into this operational role. The amount of I could use the word distractions, but no, we're standing up this entity almost from scratch because the prior bank didn't look and do anything like we're doing.
It really didn't have tremendous digital deposit gathering. The amount of loans they did versus what we do. I mean, it's night and day. I mean, we fund hundreds of loans a quarter. Maybe they funded 10 or 20. And you can't get into the bank before the deal closes. Now there's still. I wanna say, I am incredibly appreciative of, you know, all the associates in the company that really have worked immeasurably hard to get us where we need to be. No, I would say there's still gonna be a drag in the second quarter.
Got it. Appreciate that. That's all for me. Thanks for taking my question.
Thank you.
Thank you. One moment, please. Our next question comes from Scott Sloane of RL. Your line is now open.
Hey, Barry Sloane. Congratulations on really crafting a unique and elegant solution, so, in a very tough time. Absolutely congrats on that. I'm wondering if you could speak a little bit more in terms of asset liability growth. You've mentioned obviously deposit momentum has been, you know, astounding in a, in a very tough, you know, almost bubble-like money market situation. If you could speak to the deposit growth as well as the liability growth.
Sure. I think on the deposit side, if you are able to pay a fair market rate for deposits, and that rate is determined by what you could see on a bank rate or a GOBankingRates rate or, you know, by just googling, you know, best high-yield savings accounts, et cetera, you'll get money. You know, we've had success in drawing in insurable deposits. You know, those deposits that are coming to us, you know, are considered, depending upon the channel, you know, non-brokered and core. Although we are not under the delusion that those deposits are very rate sensitive. We're okay with that because it's part of our model. We pay a market rate of interest, not a problem.
Matter of fact, it's astounding how we're able to raise these deposits in this particular manner. I think we show well. We have a good history. I think the bank is about 60 years old. We've been around for 24 years, so we've got, you know, being a public company, people are comfortable, and we've seen that. Particularly, we've seen that in the worst of times. I say that, I don't know how. You know, in my lifetime, and I'm 63, I've never heard such discussion about bank runs and people being concerned about. The good news is, in the worst of times, we're able to really fund our funding needs, and that's a big deal. That. We have reduced our dependency on commercial funding rates.
You hear, which is, you know, in the marketplace, that the larger institutions, they're going to reduce their amount of lending. That's not great for, you know, a lot of non-bank lenders. I think from our standpoint, no concerns about being able to fund our business out of the bank. We've got plenty of capital in the bank, $78-ish million of capital in the bank. You know, we have a lot of cash right now. We're waiting for the SBA loans to close for the quarter. We'll use that up. We'll sell a government guarantee piece. We're gonna be able to fund that growth out of the bank.
I'm very pleased with the execution on the deposit gathering strategy. The second leg of that execution will be, which I'm not saying is a second quarter event. Hopefully, it's third and fourth with respect to utilization of Newtek Advantage, the ability to get payments accounts to open up deposits, payroll accounts, et cetera. That will reduce the cost of the high cost and make them more sticky. We're not under a delusion because we're getting all these deposits that they're in love with us. Okay? They like us. We're credible. We pay them, I'll call a market rate of interest.
Right. Fantastic. In terms of NIM and margins, can you speak to the effect as your, you know, somewhat Newtek process smooths out? Is there any, you know, AI overlay in there?
You know, it's an interesting thing. You know, it was funny. I was listening to Charlie Munger talk about artificial intelligence, he made a comment. I said, you want to have artificial intelligence, you have to have somebody that's intelligent to set the artificial intelligence. It's got to start somewhere, right? I think that what we do does lend itself to that. I mean, I would be delusional at the moment, given all the things that we have to do to say we're there. We are approaching the customer with an air towards having that intelligence because we have the data. For example, when you apply for a loan, we take your merchant statement. We take your insurance policies. We have the ability to take advantage of that. You might say, currently, why aren't you doing that? That's in the plan.
That's frankly up for us to be able to artfully call clients using that old technology called the phone. Phones are still really good today. Scott, I like phones. To actually have a verbal communication with a client and then show our pretty faces on the camera. Notice I'm talking to my staff as well to connect with the client and say, "Hey, I see what you're doing. By the way, we can help you." Not too hard. I'll call that our version of artificial intelligence.
Fantastic. Any comments on the syndication market, I guess vis-a-vis the gain on sale as far as you can see?
Yeah. I mean, right now the market for the government guaranteed pieces is very strong because it's a government guaranteed floater that investors don't have to worry about duration risk or marking it to market. Where they're being criticized for, you know, not having interest rate sensitive assets on their balance sheet, they could diversify with this. That market's been pretty strong, despite the fact there was a little bit of disruption where Signature Bank was one of the pool assemblers. Now they've got taken over. They're still in the business. There was some questions as to what would happen with them. There was another market maker that recently left the business as well. Against that backdrop, the market's actually held up pretty well.
Perfect. Last question. Given your market cap size, et cetera, what's your personal speculation on a Russell 2000 inclusion?
Well, you know, we're helpful. We're hopeful. We certainly have the market cap. Our designation as a financial holding company owning a bank was recently changed by them from a closed-end fund. We're hopeful that would be very useful and valuable to us, but we don't know.
Terrific. Thanks for the call.
Thank you. One moment, please. Our next question comes from Sean Paul Adams from Raymond James. Your line is now open.
Hey, guys. Good morning. Can you explain your plans for the legacy BDC baby bond, which contains a 1940 Act leverage compliance covenant in the documentation? It would appear that it would have to be a priority given the leverage parameters today for the business.
It's not. We're in complete compliance, and we've certified that with the trustee.
Okay. All right.
Let me finish, Sean. I will also add that we have covenants with Capital One Bank, Deutsche Bank. I mean, there's four or five institutions. We're in complete compliance with those covenants.
Very helpful. Thank you.
Thank you.
Thank you. One moment, please. Our next question comes from the line of Stephen Nemo . Your line is now open.
Hi. I'm an individual investor, and I've been doing my own due diligence, and I have a few questions lined up for today. This might be a repeat. I didn't hear it quite clearly as the last question, Newtek has the 2024 and 2026 notes outstanding, NEWTL and NEWTZ. These have covenants that bind Newtek to the 150% asset coverage requirement under the 1940 Act. Newtek is no longer a BDC. That seems to suggest that unless those notes are paid down or gotten rid of in some way, Newtek won't be able to leverage up the balance sheet up to the typical 10 to 1 of banks. What are Newtek's plans regarding NEWTZ and NEWTL in the near future?
Sure. Steve, I appreciate the question. Right now, those have been factored into the projections that we have in the market. We always hope, although it doesn't always happen that way, and respect that the community, because we've been doing this for over two decades, analyzes what we put out there. That's already factored into those particular tests. I'm not sure you heard the prior answer, but we're in complete compliance. We're aware of those tests, and we'll be able to manage to those tests with respect to what we have in the market.
Okay. Great. I have two more quick questions. When Newtek issues a loan, it has the choice to sell the SBA guaranteed portion and-
Right.
retain the unguaranteed portion on the balance sheet. Going forward as a bank, will the loan book be comprised of entire SBA loans or just of the unguaranteed pieces or something in between? I feel like the percentage of the loan book, but unguaranteed pieces is a number that's worth reporting for investors.
I'm not sure I understand the question. What was the question?
As a bank, Newtek would have loans as assets.
Right.
Will these loans be entire SBA loans, or will they be just the unguaranteed portions that are not sold off?
Okay. I'll just focus on the 7(a) business. When a 7(a) loan is made, it's a whole loan, and you've got two participations, a government guaranteed participation and an uninsured participation. What sits on their books is the uninsured participation in the 7(a) loan. Typically, we sell the government guaranteed participation into pool assemblers who pool them and aggregate them, and they pay premiums for that.
Okay. going forward, it's gonna be or probably gonna be the unguaranteed pieces that is retained on the books and so.
Correct. Yeah. We The current strategy is to, which is what we've done for 20 years, it's been a recurring event, is to make the loan, sell the government-guaranteed piece. We think that's the highest return on equity for us and the best way to manage our capital.
Okay. One last quick question, this is related to the unguaranteed loan pieces. What are Newtek's plans regarding securitization trusts going forward? The language in some recent news seems to suggest they're legacy. Newtek won't issue any more securitization trusts and notes on the unguaranteed portions anymore. What are the plans going forward on that?
When the reference was to legacy, we try to refer to the legacy assets that are in Newtek Small Business Finance, which are in a rundown mode.
Okay.
There is a current position of uninsured loan participations in Newtek Small Business Finance in the warehouse line that I'll use the word not to get ahead of ourselves, but could be securitized.
Okay. By saying legacy, it doesn't rule out the possibility of issuing more securitization trusts in the future.
No. I mean, it's unlikely we would do it out of the bank because right now the bank has about a 350 basis point interest funding advantage as well as not having to raise equity. You follow me?
Yeah.
Let me just finish, Steven. Going forward, the SBA loans will be done out of the bank and NSBF with its legacy securitizations, loans against securitized debt will be in a run-off mode.
Okay.
gain on sale will be done at the Bank. Hopefully, that's answers your question, but.
Right. It's a, it's a better economic choice to keep the loans rather than try to sell them again.
When you do a securitization, it's actually treated as a finance since 2010. I think the better way maybe to state that is financing the uninsured loan participations in a bank is far more effective than financing them currently through securitization.
Okay. Thank you for your time.
Sure. Steven, once again, you know, if you go back and you read the transcript, we talked about when you do it out of the NSBF and, before acquiring the bank, you only got a 55% advance rate, and you were paying, you know, 8.25%, 8.5% on the rate. 45% to maintain your ratios in the BDC had to be funded with equity. To fund a million-dollar loan, you needed $450,000 of equity and $550,000 of expensive leveraged bank debt. Now, you could fund it with 5%, 100% deposit money. Does that make sense?
Yes. I, that's all for today.
Okay. Thank you.
Thank you.
All right. Hallie, I think that's last question, right, operator?
It is.
Well, I appreciate all the, all the input, all the questions. A lot to digest here today, a lot of reading to do. We welcome the opportunity to report again next quarter. Thank you very much, everyone. Thanks for your participation.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.