NewtekOne, Inc. (NEWT) Earnings Call Transcript & Summary

Welcome to the NewtekOne Analyst and Investor Day. I would now like to introduce your host, Barry Sloane, President and CEO. Please go ahead.

Thank you, everyone, and a great day, everyone. Greatly appreciate the attendance online, which is totaling over 60 from a registration standpoint. For those in South Florida, many of you got here, kayaks and boats. So we certainly appreciate your ability to get here today in Boca. Today is our first Analyst and Investor Day as a Financial Holding Company and we're excited about it. We think we're going to be able to deliver a lot of important information that is additive to your understanding of how to financially model NewtekOne, as well as understanding our business operations. For those of you, that able to -- not present today, please go to our website, newtekone.com, go to the Investor Relations section, and you'll be able to follow along on the PowerPoint presentation that has now been hung. So once again, we greatly appreciate that. I also appreciate Scott Price joining me here today. He gets the purple heart for making here from Birmingham, Alabama in a difficult storm day. So I'd look forward to beginning. I'd like to draw everyone's attention to Slide #1 in the forward-looking statements. Is that clear then get that out of the way. And then go forward to Slide #2. I think the real importance for today's session is to be able to drill down and discuss topics about NewtekOne in areas that are difficult to cover on a quarterly earnings call or on a conference call. And many times, we have conversations with investors or analysts. And the questions really can't be answered because they don't cover reg deep, enabling us to get out to everybody at one point. So everything we're saying today is for the total audience. It's been 8-K, it's going to be archived on our website. So we're really able to get into topics that are difficult to cover in a 45-minute session on a quarterly call or in a one-on-one with an analyst or an investor. We look forward to that. I think we're going to be able to cover certain misconceptions, be able to connect some of the dots that are missing. I do think many of you are going to have a little bit of an "Aha" moment, saying, okay, now I understand why they have the confidence that they are able to in projecting the full rates, severity rates and things of that nature. But most importantly, we walk into today with tremendous confidence and comfort that over the past 15 months, we've made a really incredible transformation from a Business Development Corp., a 1940s Act company into a 1933 Act company owning and operating a OCC chartered bank. So things we're going to talk about today, which also don't come through on quarterly calls or in some of the information we provided, one, the quality and depth of management. I need to repeat, this is not the very Sloane show. Most of you are familiar with my voice. However, there's 570 employees in the company, and we're going to touch upon -- I can't hit every single manager, but we put a lot of bios in here. It's probably not extensive, but some of them are new, but they're deep. And I think you get a better feel for the quality and depth of the NewtekOne management team. Important to note, this is a management team for a $5 billion and $10 billion institution, not $1.4 billion where we stand today. We're also going to spend time on credit metrics, the history behind them and forecasting these metrics. And to give all of you an understanding that SMB or Small and Medium-sized business credit is not C*** Credit. It's not lender of last resort and we'll be able to talk about our credit thesis, how we underwrite our 20-year history and be able to share some metrics on that. Also a better understanding of NewtekOne Alternative Loan Program and its value to NewtekOne shareholders. This is important because this is really some of the alpha that gets you into higher EPS numbers beyond the dollar x or low 2s. So we'll be able to get you to understand what that program looks like, what it takes to be successful in that program and how methodically, we're going about being able to originate those types of loans. Clearly, we're going to talk -- hopefully give everyone a better understanding of the Newtek Advantage. That's our business portal that makes most importantly, our business clientele more successful, enhances their business experience and provides value to them. We're also going to talk about the technological hidden assets at our Newtek balance sheet. What makes us different? What makes us better? What makes Newtek, we think, a model as a financial institution for the future? We're going to talk about who we believe we continue to drive the types of returns that we're currently showing quarter after quarter, why our bank ROAAs and our bank ROTCEs are just extraordinary and at the highest levels and why people look at them and go, "Well, that's nice. I just don't believe you can continue to deliver those." And lastly, we hope to do that in 20 to 30 minutes and then open this up to analyst Q&A. We have 7 analysts, some of them, we appreciate them being able to get here on a kayak, Brad Tom and Steve Moss. We had 3 analysts that called me from the airport. Their flights were canceled. So I was proud to say we would have had 5 out of the 7, but we've got some other pre-questions from them. So we'll be able to address that. We also have them online. So with that, we're going to dive right into Slide #3, focusing on our management team. I'm not going to spend any time on myself. Many of you know me, have heard from me and understand that. I want to talk about Scott Price sitting here to my right, Chief Financial Officer of NewtekOne, the holding company and the bank. I can actually spend most of the time talking about Scott. He's been a great addition to the team. He passed his 1-year anniversary or I should say we passed, thank God, he didn't run away. We're pleased to have them here. There's a lot of work that needs to be done in our organization relative to building out accounting infrastructure, reporting, et cetera. But Scott was Chief Accounting Officer and Corporate Controller for IBERIABANK, a $20 billion to $30 billion bank, over 17 years experience in the financial service industry, you'll hear from Scott quite a bit today as he's presenting with me. Mike Schwartz, Chief Legal Officer. He got canceled out JFK last night, but Mike served on the company's Board as an outside director from '05 through '09, and he's been in charge of our legal. Mike's background, frankly, prior to joining Newtek as an executive and an officer basically working for law firms, litigating against public companies. So we feel very comfortable having them here clearly keeps us out of trouble with an important view towards legal and compliance issues. Peter Downs, Peter is here today, Peter works out of Orlando, a career banker, our Chief Lending Officer, sits on Boards of the bank and the publicly traded holding company. Pete prior to joining Newtek, and he's been here over 20 years, and he also hasn't runaway. And we're appreciative of everything that he does for the company. Worked for European American Bank and he ran Citibank's SPA business while he was there. And Peter worked very closely with Dan Hendel, our Director of IT and building out many of the things in lending that there's now transcending to deposit opening and other things that we'll talk about on the call. Nick Young, President and COO of Newtek Bank is here today. I asked a lot of the executives to try to be here physically. So those people that are able to come into the office will be able to interface with them and be able to have various different conversations. Nick also from IBERIABANK, I'll explain the IBERIABANK connection. But Nick, obviously, was EVP and Chief Credit Officer for IBERIABANK. And prior to that, he had Similar positions at Banco Sabadell, a very experienced credit and compliance guy, Nick, President and COO of the bank, which is operated out of Miami down on Brickell. We're broadcasting today from our corporate headquarters up in Boca in the Boca Raton Innovation Center. Julio Hernandez, who joined us recently, SVP, Compliance Officer at Newtek Bank, important fill in to make sure that we're doing everything that's appropriate for BSA, KYC, AML, working with the marketing group as well to make sure that everything we do and getting things set up is done appropriately. As a noncareer banker, I would say that I never realized how hard it was to open up a bank account. I've now become quite experienced in that. Just take my word for it. We could talk about it offline. If you want to do it in a compliant way, it's not that easy. But we're there, and we're now aggressively pursuing our own deposit and customer base for the transactional commercial bank deposit accounts, which we'll talk about, we'll be able to demonstrate some good traction in Q2 and anticipated greater traction in Q3 and 4 to reduce our cost of funds. I'm probably going to stop here, accept the name Justin Gavin. I refer to him as the straw that stirs the drink. Justin joined as a trainee, I think, 5 or 6 years ago at the earliest stages. And he's just developed into a real great addition to our organization works very closely with Nick on the deposit gathering side and Jennifer Merritt, who is the Chief Operating Officer of our digital bank, and obviously, Peter Downs. Justin embraces our strategy. He embraces our technology. There really isn't anything that we do here at Newtek, whether it's payroll, insurance, deposit taking, making loans that has a similar operational procedure that you would see at 95% of the banks or other financial institutions in the market. That's what makes us different. That's what makes us unique and requires a greater level of understanding. Please take a look at the rest of the slides, 6, 7, just to get a feel for the talent. I do want to mention Jennifer Merritt, setting up our back office for digital banking out of Wilmington, North Carolina, Jennifer's hired 19 people since she joined in November. She has the greatest hiring permanent ratio in the company, and we're happy about that. One other honorable mention, Dan Hendel, Director of IT in valuable asset test. Been here over a decade, has built all the technology, things that we'll talk about, NewTracker, Newtek's File Vault and a lot of the technologies we're talking about today. Let's go to Slide #10. I think this is an important part of the discussion today. As I've read some of the analyst reports and spoken to investors who call me up after they speak to the analysts and they go, oh, credit, like are your credits really going to hold up? Small business credits, recession, don't those things fall apart? Look, we've been doing this for over 20 years. Newtek Small Business Finance, which is the SBLC that sits up with the holding company, was acquired in January of 2003, and we've been lending in this space for 25 years. So we have a long-term history of lending money to this marketplace. I will tell you, most bankers, equity analysts and even investors do not understand small business credit lending. And our competitors are scoring go-type lenders. A credit score, they make a small loan, clients out the door. That is not Newtek. We have 13 securitizations in the market. Securitizations are sold to the most sophisticated investors with rating agencies oversight. They've been done since 2010. These investors rating agencies are extremely thorough. Looking at static pool analysis, default frequency and severity with static pool analysis, which we'll talk about today. All of our securitizations have maintained their rating have been upgraded. We have a 20-year documented track record on default history and severity. Scott's going to be talking about how we calculate CECL. And also at the NSBF level, how we calculate forecasted charge-offs going forward and how we actually write the assets down every single quarter if, in fact, they are impaired. But we're not making this stuff up. In addition, I think it's important to note, we have oversight from the OCC, the Federal Reserve, our external order RSM, the SBA, I think Abrigo is our consultant -- Do I have that right on the CECL calculation? So that's 5 entities. That's a lot of eyeballs. In addition to the fact that you've got a management team that's been in business for over 20 years, and I would say has the highest level of integrity and honesty. So I could sit here and tell you with absolute certainty we're confident we're doing everything we need to do to have the assets appropriately marked on our balance sheet, have the right CECL reserves and have the right amount of forecasted charge-offs going forward on an anticipated basis. giving all the factors. Our loan loss reserves and forecast future loss are reviewed regularly by the managing team regulators, auditors and CECL. Important to note, we are a 5 Cs-of-credit lender. So in small business, and we are a small to medium-sized independent business owner lender. No consumer loans that we're making in the portfolio. Might have 1 or 2 legacy left over from National Bank of New York City but, make no mistake about it. The technological efficiencies that we have in loan approvals do not reduce our credit quality, credit investigation write-ups and risk/reward analysis. That's extremely important. We are nothing like the Fintech lenders that you're most likely familiar with that are getting their principal back in 6 months, 12 months or 2 years, I kind of call it a little bit of musical chairs. They want to play when the music is on, but they want to be out before the music stops. We're long-term lenders. So we have to -- and we've been doing this for 20 years. So I think one of the mistakes I've heard is "Gee, you state that you're very quick to making these loans." That is true in the prequalification process. Don't mistake that for a loan approval. So we use our technology to quickly prequalify the borrower, get the good faith deposit in, lock up the guarantee number, and I'm just focusing on SBA 7(a) only at the moment, except understand the entire infrastructure is used for every type of loan, and we'll get back to that. But on 7(a), we're very quick to lock up the borrower. Borrowers typically don't get the multiple parties unless they deal with 97% of the other banks, who have a back and forth with a banker, it could take a week or 2 before they finally connect with the bank. So we have a fully automated frictionless system, which I want to talk about in the later slides. To get the borrower pre-qualed, good faith deposit in and then once you have the SBA guarantee number that came to another lender. Also important to note, these borrowers are not rate sensitive. They're payment sensitive, okay? That's why the Merchant Cash Advance business exists at 25% to 80% APRs, okay? So people say, "Well, gee, your max rate. So you must have lousy credits?" Not true, that's a fallacy. It's a fallacy that we've proven for over 20 years. What we're quick about doing is embracing the borrower making it frictionless so they can connect with all their important parties, locking up the credit, giving us to work with us and not 5 other lenders in a bake-off which documents go back and forth, e-mails. That's not Newtek. We'll get into that. Concept once again, I want to go to score and go. Score and go is sort of an SBA term. Once again, we do not do score and go, and I'll talk about that in the next slide. Slide #11. All 7(a) loans above 500,000 have a 20-page credit write-up. We're spreading financials, we're looking at historic financials, we're forecasting. We look at collateral business history, only loans under $50,000 have score predominantly. It's a business score. However, we factor in time and business, we get the tax returns, we verify them with the IRS, we get validation, we get lean, we get management history. So there's less of a write-up on a smaller loan. The loans between $50,000 and $500,000 typically have a minimum 5-page credit write-up. So it's a full analysis. Everything is personally guaranteed with a 20% owner or greater. And it's important to note, once again, in the 7(a) space, we take all available business collateral, and we will take personal collateral as well, if it's appropriate under the underwriting. I'm going to have Scott talk about CECL reserves and how we calculate that. Also important to note, when we look at the SBA business, people say, oh, those are risky loans. When you look at the coupon that you get and the gain on sale and the servicing income, the income that you get and the reserves we're able to post totally offset the higher charge-offs that you might get against the bank portfolio. I will sit here and tell you, I have much greater comfort making an SBA 7(a) loan under our guidelines that a car loan that has no margin, little room for error. And if the unemployment rate goes up, you got a mess on your hands. Same thing with the residential mortgage market. These loans have very little margin. So when you look at our ROAs and ROTCEs, you have to factor the income effect and the reserves that we're taking against the lawsuits. But the typical industry attitude towards looking at these things, I just got to look at the losses, I got to look at the charge-offs. Yes, we have greater losses and greater charge-offs. But we have dramatically greater income and greater loan loss reserves to offset that. In addition, our SBA 504 portfolio, we make a 504 loan, the SBA approves it, the CDC approves it, the SBA takes out a 40% second lien debenture. So we're left with a 50% LTV first. Now it's important to note that's against commercial real estate, but the business has to underwrite. So the business is the form of repayment. So when you look at our CRE exposure, that's exposure in a 7(a) or 504 category for ultimate collection. It's the business that forms the repayment, not a multi-tenanted CRE deal. Here's another mistake the market makes. A multi-tenanted CRE deal backed by multifamily loans or a strip mall, nonrecourse is fully dependent on that other market, an overly crowded market that's been overfinanced and arguably much more -- much more volatile in the real estate component. This is how we look at markets. This is how we look at the business. This is what our 25-year experience is Newtek, I look at Peter Downs and Nick Young, years of experience beyond that has gone into our credit understanding. So to finish Slide 11, small business lending, I call it the trifecta of credit. First of all, in all cases, the business must demonstrate they could repay the loan. Two, we get leans on all business assets and in many cases, personal assets; three, you get a personal guarantee. So the business owners themselves are willing to guarantee the loan. So we think risk/reward, it's great. Slide #12. Okay. charge-off history just the 7(a) loans only. This is at the NSBF level. Now you could see over this 10-year history, the cumulative charge-off is 4.47%. Now charge-off means off the books totally liquidated, gone. However, in this portfolio, if a loan next month or the month after, was to go into default, we would write that down. That would immediately in our income statement, immediately hit the balance sheet. It wouldn't affect the charge-off number. But we're able to look at these numbers with 20 years' worth of history and forecast what the anticipated charge-offs are expected to be. 20 years' worth of history includes 2010, 2011, the great recession that we went through. It includes the pandemic. So we don't make these numbers up when we tell the market over a 10-year period of time based on a default curve, which I'll talk about in a second. You're going to lose 8% and 8% over 10 years is different than 1% over 2. I'm just saying, you've got to be able to look at the default curve, understand the charge-offs and how it happens over the course of time. Furthermore, in our model, when we look at a loan and we forecast what the charge-offs, we look at the seasoning of the loan, we look at the collateral behind the loan. We look at the characteristics that learn to determine what our charge-off rate should be in the fair value determination of what the 7(a) portfolio is worth. So when we priced our 7(a) portfolio, which I think recently was an 18% or 19% cumulative charge-off over the remaining life. Mind you 30% to 40% of that portfolio or loans that are 3 to 4 years old. So they're already through the stress of the default curve. And we estimate that those -- the principal will be charged off. And then you have an 11.5% coupon against securitization financing, which today, ballpark is 8 something. So you got 11.5 versus 8, you've got a spread, you have very little expense. And the portfolio gets marked to the market every single quarter. Our orders look at, our internal people look at it, regulators look at it, that's -- and at the end of the next quarter, we are hopeful that we'll be able to, on a granular basis, show you what the anticipated charge-offs are in this portfolio quarter-to-quarter. It's included in our model, we just haven't gotten that granular. What's taken us a while to catch up the things. And I think -- I do believe we'll be able to go forward and do that forecast. Also important to note, these numbers, this is just for 7(a), not the other higher quality but high-return loans that we do. The 504 business is lucrative, although it's of a lower risk. The ALP business is lucrative, but it's a lower risk, we'll be able to explain that. And obviously, we're going to be able to open this up in the Q&A. Slide #13. I'm going to take the top piece, Scott's going to do the bottom piece. NSBF, which is what I just covered, when you look at the fair value adjustment of $33 million, that's already been written off in years gone by out of the income statement and the balance sheet. So you got $37 million left. And once again, this is a liquidating portfolio. There's no new loans getting made out a year. So people look at this and go, "Oh my God, it's such a high percentage of the total portfolio." It doesn't make a difference, it doesn't make a difference. The percentages are relevant. As a matter of fact, the percentage of the total portfolio is only going to go higher because it's burning down. What's relevant is, are you going to collect on the $37 million? And we look at that every single quarter. And of the performing loans, what's the forecasted charge-offs? And we'll be forecasting that. You'll be able to see the actuals versus the forecast. So there is no -- we are very transparent. We've been transparent for 20 years, but there's a lot of detail here that on today, on a call that's Reg FD, we're able to talk about it and drill into it. So that's NSBF 7(a). Scott, you could talk about the bank.

Yes. Thanks, Barry, and good morning, everyone. So at the bottom of Slide 13, we have Newtek Bank's credit metrics. A couple of things I'd point out. I'd encourage everybody to read our 10-Q and our press release from the first quarter that gives a little bit more context around the loan portfolio itself. Keep in mind that you're looking at a portfolio that was acquired and mark-to-market at the beginning of 2023 in the acquisition. Largely commercial real estate based but not large property commercial real estate. We're talking about small properties, limited, very, very, very limited rent control areas in New York City. You're also looking at a portfolio that is comprised of 7(a) loans and some small amounts of 504 loans that are held for sale. So at quarter end, we had $12 million of past dues. The nature of small business lending lends itself to or -- no pun intended, was itself to a portfolio where past dues are going to be volatile. Borrowers are going to move in and out of past due status, and that's not necessarily a reflection of impairment, so to say, when it's below 90 days. So this number will bounce around. We expect it to bounce around at least and borrowers will move in and out, but that doesn't necessarily mean that the loan is going to go back. We're going to have to issue -- put it on nonaccrual, go to foreclosure. As it relates to the $8 million that you see on the page with respect to our nonaccrual loans, $5 million of that roughly is related to acquired loans that -- where we're -- we have no additional reserves on. We believe that we're going to be -- that those loans are fully collectible. So that leaves the remaining 3, which are what I would consider on that portfolio of $500-some-odd million of loans and I think we have pretty good credit metrics as you -- if you compare us to the rest of the field. So we've got allowance for loans coverage. We got 4.1% on the page. We will talk about a little bit more about that coverage ratio and where we expect it to go from here. But as Barry said, we're well reserved, appropriately reserved. And in this case, with the problem assets that we're dealing with today, we don't feel like we have any losses that we haven't already taken on the balance sheet.

Thank you, Scott. Slide #14. We talked about the 504 loans, which are originated, held for sale. Once again, highest quality from a loss standpoint. We're going to talk about the ALP loans that we originate and put into a joint venture. Historically, we've done about $300 million in ALP loans. We're also going to talk about how we see that volume ramping up and why it should ramp up? And we've historically originated about $500 million in 504 loans. We also look to grow our conforming CRE and C&I portfolio out of the bank to have a blended risk profile at the bank. We're not a monoline bank. We're not a 7(a) lender only. We're going to have a nice balanced portfolio. I think important to note on Slide 14, we do anticipate adjusting our second half guidance to our Q2 2024 earnings call. We're doing real well through the first half of the year. We feel good about it. We're not prepared to release those numbers yet. We want to polish up the model a little bit, but we're extremely comfortable with the $0.05 increase that we made at the end of the first quarter. We're able to beat our own expectations by about $0.15 or $0.16. So we feel very good about how the market is rolling out. Obviously, there's a lot of volatility out there. So we want to be cautious and look at things quarter-to-quarter. We look forward to reporting our next quarter earnings and making adjustments to guidance. Slide #15. This is the alternative loan program joint venture, loans that were originated from 2019 and through 2021 that basically went into the transaction that is known as [ NUCL2020-2-1 ] that is modeled on [ Intex ]. This is our first long-term performance. There were 17 loans that went into the deal, total balance on the loan is about $90 million. So I think it's important to note that in that particular cohort we've only had one default and there's no charge-offs because we haven't liquidated the loan yet, but we've written that loan down, I believe, by about $3 million, Scott, in the first, about $3 million in the first quarter. Now that could adjust up a little bit based upon what we're doing to work that loan out with the borrower. But there's no other defaults. These are loans are all originated pre-COVID. And COVID was a tough time for a lot of these borrowers trust me, not everybody just had a wall. So this portfolio has performed exceptionally well. And if you go through '16, '17, you'll look at the type of data, which is important. Now I want to comment, the data that we're using for charge-offs here is what we internally refer to as PPM data. PPM, Private Placement Memorandum Data, it's the data that we use when we sell our bonds to the marketplace. So on -- we account for these things on a GAAP basis differently, particularly on an unrealized basis. We write them down quicker, but a charge-off in here doesn't occur until the loan is fully liquidated. I think that's important. However, we believe in the 7(a) portfolio, 8% plus or minus is a good number. We have a 6.7 CECL reserve and we believe that if you go to Slide #18, that in the ALP portfolio, which the credits are better, the businesses are bigger, the guarantors are stronger. Many of our borrowers take the ALP loan because they're too liquid. Many of them take the ALP loan because they need a loan better than $5 million, and SBA cuts them off there. So we make these loans, which currently average about $5 million each. It goes much as high as $15 million, they mirrored the 7(a) business because they've got a 10- to 25-year AM schedule and no Balloon with no loan covenants, but most personally guarantee. So we've taken our credit experience over 20 years and we've applied it to what we believe are bigger businesses, bigger credits and we attract borrowers that don't want bank covenants because most borrowers don't want the bank telling them what they can dividend? What they can pay themselves? How much they could lever or to give maybe monthly financials? So we give borrowers that flexibility. But in exchange, we take personal assets, corporate assets, and we have cash flows. I will tell you, we filed a 15G for our next securitization at 8:00 this morning. So I could talk about that deal, which we're going to talk about here in general terms. Hopefully, we'll have specificity sometime next week when the deal gets launched. So I think it's important to note, our credit history is very strong here. We believe these are higher-quality loans than 7(a). And when you look at the risk-reward, I think you'll be impressed. Slide #19. A hypothetical example of our alternative loan portfolio. Let's say, we had $180 million, $190 million of loans that look like this. Let's say, the weighted average net yield was 13%. We service for 100 basis points. That's 12% into the joint venture. Let's say that we sold Single-A bonds or BBB bonds in today's market at a securitization yield of 7.75% to 8%. The joint venture buys the portfolio at 12%. You have an 80% attachment point, which means that 20% of the portfolio has no debt, but it earns a 12% return with capital. 80% has no capital in it and gets approximately a 400 spread, 400 spread times 4x is 16%, 16% plus 12%, this is all hypothetical. This is Barry math. That's why I have Scott here to make sure I don't screw up. But on a gross basis -- now by the way, this does not include the 100 basis points of servicing income that we get on a loan that has prepaid penalties [ 55, 53 ] or the origination fees less the cost to originate a loan, all of which we get 100% on 100% of the loan. So you all can figure the math out. Okay? Anyway, we'll keep doing this day after day. We are currently working with our second joint venture partner. And that deal, they put up 50% of the equity, we put up 50% of the equity. I hate to tell you, investors and analysts, these deals could change over time. It's just based upon the way the market is. Maybe we get better terms, maybe we get worse terms. I can also put these on our balance sheet, but the purpose of doing it out of the joint venture is not to have the leverage on the books. And therefore, let's get securitized, we're looking at the equity method for the equity in the JV of which we own 50% of. We'll try to be as transparent as we can in the next conference call. But understand, if you look at the map here, this is a good business. And this is a business that utilizes the existing infrastructure. So the 800 referrals we got last night for NewTracker. 800 business referrals, separate businesses, no branches, no bankers, no brokers, no videos, 800 business referrals. It can go to 7(a), it can go to ALP. It can go to conforming CRE. It can go -- the customer doesn't know what they want. They just want money. That is the small to medium-sized business independent business owner, they want the best deal that we get, and we give them a frictionless environment. We pay attention to them. We give them a professional on camera. Important to note, we'll talk about that. So that's slide 19, 20. And I'm going to try to speed it up here because I've already overshot my mark. There's 9,000 banks and credit unions in the United States with over 70,000 branches. Do we really need another credit union or bank look alike that takes your money and doesn't pay you any interest? Do you hope you get a loan, that's not NewtekOne, that's not Newtek Bank. We created this opportunity because most of you in the room do not go into a bank branch, I asked you to think about that. You do business online or you want your services on demand. So when you want to talk to somebody, you want to get them. That's how you order from Amazon. That's how you do things online. You want to do it, you want the institution there when you're ready to go, and that's what you get from the Newtek Advantage. You get staff that's available on demand on camera. Slide 21, The Newtek Advantage. It's the business client's portal for success, free unlimited document storage, free updated real-time web traffic analytics, the ability to process and make payroll from the portal, must use our payroll processing solution. The ability to view daily batches monthly, quarterly, annually. So you charge batch your refunds, restaurant owner, retailer, they want to go to their bank Saturday, Sunday, at night, they could actually see the batches on a real-time basis. You don't get that in the banking industry. It doesn't exist. It does in the Advantage. You want a free cybersecurity analysis, Newtek Advantage. You want a free tax savings analysis, Newtek Advantage. You want to open up a bank account without having to go into the branch. I would say that probably eliminates 80% of the banks in the United States, you have to go into a branch, you can do it online with us, which is why we've been so thoughtful working with technology in a painful manner with our compliance staff to make sure that we can do it and not have a KYC, BSA or AML issue. As of today, we have about 7,000 consumer deposit accounts, 1,300 commercial checking, about 300 came over from National Bank of New York City, but that number is going to grow, and that's the less expensive form of deposits. Slide 22. I think you're all familiar with this. So I'm going to speed through that. Technology assets not on the balance sheet, NewTracker. Most participants would salivate to get 800 business opportunities with a customer for free, every day. Well, that's what we got last night, the Newtek Advantage we just talked about. No one is going to be able to replicate this easy because they don't own and operate the businesses. They're not interwoven into a business portal. They're not connected. It's all in the Advantage and we will shortly start to market to customers with videos, outbound calling and e-mail messaging to really let people know that they have an advantage with the Newtek Advantage, and that's why they should bank with us. Because the Advantage will give them a gateway into Newtek Bank National Association, extremely important. We have just begun this process. Newtek File Vault. It's part of the secret sauce, and we could do this in the Q&A. When you come to us for a loan and you're approved, you get a bank account without filling out a new application. You can get life insurance in 7 minutes, that's pledged to the borrower. In the near term, you're also going to get property and casualty insurance, [ about workman's ] comp, without asking, you get a merchant [ reg. ] You get a payroll quote without asking. That's where we want to be. That's where our customers want to be. They want to have a menu of things to choose from. Employee efficiency measurement tools, we got them. We're measuring people camera time, talk time. Utilization of keywords and phrases we have a software it's not ours. We have a software that allows us to monitor our staff. Are they offering the advantage? Are they thanking the client for the business? It measures the tone of the client's conversation with our staff. It says, are they mentioning these key phrases or not. And that on a real-time basis goes immediately to a manager. So if I could do a better job managing my managers, these numbers are going to skyrocket, but I got to get the managers to listen to me. So that's my plea this morning, okay. Present company excluded, of course. Okay, 24. I put this in here because this is important. A quality Board of Directors at the bank, okay? Myself, Pete, Nick, we're all officers of the bank. We all have banking experience. We're all familiar with the rules and regs. These are not pet store owners, chiropractors, these are real career bankers. Looking at Petrosky's resume. Fernando Perez-Hickman, Vice Chairman of IBERIABANK. Tom Cestare, he was EVP Chief Accounting Officer of Sovereign Bancorp, a $92 billion bank. So when you look at those 3 independents and the insiders, you have an experienced regulatory team that have either been bank officers or currently have served on bank boards. Scott, do you want to take 27 and 28?

Yes, I will. Thanks, Barry. So I wanted to just give a good picture of Newtek's earnings. If you look at our revenue -- total net revenue Net interest income is a disproportionately smaller makeup of our net revenue versus our peer group. That's good for us right now because we're in an interesting rate cycle where the curve is inverted. And we -- the Fed came out yesterday, gave us some new Fed speak on where we expect rates to go but rate agnostic is -- or at least largely rate agnostic is our gain on sale margins with respect to 7(a), right? If you look at over time, we've got 20 years of history. We've presented here with just over 10%. The weighted average gain on sale premium is 11%. So we get 11% return gross when we sell the guaranteed portion of the 7(a) loan. We have to book reserves against that of roughly 6.5%, 7%, 6.5%, 6.75%, right? But at the end of the day, that generates immediate capital. What do we do with that capital? We reinvest it in another 7(a) loan. So some might ask, well, why don't you hold the guaranteed portion? Doesn't that diversify your risk portfolio? Sure, it does. But if you look at the returns that we can generate on selling that guaranteed portion versus the risk diversification benefits, it largely outweighs the benefits -- the diversification benefits, so we sell, okay? And we're able -- that eventually gets to be an exponential formula because you generate capital that you're generating capital that you're generating capital, you're generating capital. So the business model works, we've proven it. We're going to continue to prove it to you. If you don't believe us, just wait, we're going to show you. But you can see here that we've got a demonstrated history of -- and this is net to us, okay? So anything over a 10% premium, we have to share with the SBA. This is net to us. Why have returns been volatile in the past? It's because the composition of our portfolio, what we're selling varies day in, day out, quarter in, quarter out. okay? We get paid different premiums depending on the term of the loan, 10 years versus 25 years. And then based on some new rules, the thresholds have changed in -- back in August but we do not have to pay certain fees to the SBA, which increases the net premium that we get to retain for lower volume loans. We have -- we can afford to pay coming back to net interest income for a minute, we can afford to fund ourselves with high rate deposits, okay? The consumer -- the retail consumer understands -- has probably a better understanding of the interest rate environment than they've ever had and the ability to buy treasuries direct presents a different competition dynamic and when you're trying to compete for funds, right? We're now competing with the treasury. We're not no longer just competing against banks. We're having to compete with [Audio Gap] demonstrated that and we've got metrics in here. We've opened a ton of retail accounts at premium price levels but we're still generating solid returns because we are a premium price lender. So will rates impact us if they change? We believe we're not going to be impacted as much mostly from the duration of our portfolio. If you look at most of our CDs are in the 6-month space, there's usually a 1 quarter lag on the loan repricing. And so with a 6-month CD product set against a prime-based quarterly reset, we feel like that interest rate risk profile is very good for us and is going to -- going to provide an interest rate risk profile that we believe is appropriate, and we're managing it, and we don't believe we're going to have a whole lot of volatility compared to others. Going to Slide 28. We wanted to give you a little bit of a better picture of our deposit picture today and where we're going. Integral to our 2024 growth plan for deposits or business customers. We've got some questions we'll answer later on around business deposits. But at the end of the day, we're a small business lender. We want to be a small business bank. And so we want the small business deposits. It provides a lower cost of funding relative to the retail side, where we're short on the commercial side, we'll supplement with retail. Importantly to note, a couple of metrics on our retail portfolio, average size of $58,000. Average size of our high-yield savings is at $61,000. So when you look at our -- on a consolidated basis, our uninsured deposit profile, we're at 14.4%. And we've -- a large part of that is related to one depositor. So in summary, I'd say that we're well positioned for where the economy is going. All along, we've had a thesis that rates could drop but we've been -- we try to be very measured about how we've gone out and obtained funding in the retail market. We try to keep those durations short to match against our loans. You pair that with the stable levels of noninterest income that we generate on gains on sales of 7(a) loans at that 11% premium. We also generate gains on sales of the 504 loans and the ALP loans. So noninterest income is our primary bread and butter when it comes to our net revenue.

Thank you, Scott. Slide 29, slides that you're familiar with, that we talked about on 29 and 30 on our calls. The one thing I want to accentuate here is the ROAAs and the ROTCEs both at the HoldCo and then at the bank are earned in a higher cost of funds environment at the bank which we believe as we grow the commercial deposits and the transactional, those margins will expand in addition to the fact that we believe we have the opportunity to grow the ALP business. So when you think about the 2 catalysts, growing ALP and bringing in demand deposit money at 2.5% to 3% versus 5.25%, there are things that are going to give us a nice boost and an accelerator. To repeat, our midpoint guidance right now is above [ 95 ]. Hopefully, what we're doing here today will be helpful to get you to understand what we're doing and where we're going. By the way, these are numbers that were created with a huge [ Gale ] in our face to take a 59-year-old bank, open it up digitally and technologically, move hundreds of employees into it, report to the OCC, report to the Fed, be in compliance become SOX-compliant, not just with one entity, but with 7. I mean we have climbed a huge hill. Now I laugh, I get people in the bank business, yes, we did a denovo. We finally -- we're profitable after 2.5 years, and I'm going like, what is wrong with me? Like we're profitable from day 1. I do want to point out one of the questions or points that came out as well, gee, you haven't grown your earnings from 2023 to 2024. 2023 was helped by a tax asset. So our core earnings in 2023 were like [indiscernible]. So we grew a lot from 2023 to what we're projecting for 2024. And as we hit our metrics for ALP and for lower transactional commercial-based deposits you could get a nice jump in 2025, which we're not ready to talk about yet, but I hope to tease you all. On Slide #31, Important to notice Scott talked about -- not holding the government pieces. That's bank stuff. We're going to bank stuff, banks not to hold assets, take deposits earn a spread. They're in the assets under management business. We believe that the trend in banking, and we believe we're ahead of the trend is going to be ROTCE and ROAA and turn your capital. Whether that's in 7(a), whether that's in ALP. Now we have a balanced portfolio. There's diversified income stream, which is a good thing across many different areas. Very few people even talk about the payments business generate $16 million a pretax province. And nobody asked me about it. There's no capital investment, it's reoccurring income. We've been in the business since 2002, okay. It's kind of a nice thing to have. We should talk about it. We want to continue to grow it. And frankly, the banking business in order to earn people's money over a money market fund is going to have to demonstrate that it can move money better. You have to give a customer banks are going to have to give a customer something other than just taking their money on noninterest bearing. I hope 4 years from now, nobody asked me a question, how many noninterest-bearing deposits do you have? Because I don't want to answer -- okay. I took their money, I paid them nothing. When I go home and it doesn't make me feel very good, to be honest with you. We want to give customers value. We want to make them more successful. I want to pay them a fair rate for their money and give them the ability to store documents, to make payroll to invoice to use payment processing and ACH and this is where the business is going. Now that 15-, 20-minute presentation took an hour, but hopefully, we answered a lot of questions.

We're going to line up the analysts, and this was really in the order just for people that lined up ahead of time. Merrill, if you're on the line, would love for you to ask your questions. If not, we could be helpful there. But if you could ask your questions, Merrill Ross from Compass Point.

She's not on, Barry. So if you want, we can go to...

I'll read them for her. Compliance. Can you describe areas or issues where operational controls have to be further developed, maintained or strengthened to stay in compliance with bank regulations or to stay in compliance with the SBAs Preferred Lender Program in the next year. How do you keep current with regulatory requirements under both regimes?

Yes, I'll take that one. So as we sit here today, we're continuing to build out our controls as a financial holding company. We have opportunities for operating efficiencies and additional operating leverage. As it relates to the regulators, we enjoy a good relationship. We believe a good relationship with our regulators. We're in constant contact with them on whatever the issue of the day is. Sometimes there's no issue of the day. But at the end of the -- when it comes down to it, we have a good relationship. We stay in contact. We monitor upcoming regulation. We have project plans to implement our compliance programs with respect to that regulation. I'd point out that we're a regulated servicer or a rated servicer. So at the end of the day, we do some special servicing for entities that I can't name. But if I name them, you'd know them in the event that they're servicing that needs to be reassigned maybe abruptly. So we believe we have very good processes, particularly around the lending aspect of our business. I mean we've been doing it for 20 years. It's what we do. And we're going to continue to look at our operating environment and make sure that we're operating efficiently and effectively.

Merrill's next question, fraud detection, what steps do you take to uncover fraud or money laundering?

I'll take this one. So BSA/AML is a core competency that a bank needs to have. We've implemented software to assist us. We have hired a team dedicated to analyzing transactions and clearing any warning signs with respect to BSA/AML. It's not only at the front end of getting our -- the customer in the door but it's also ongoing monitoring. Separately, we have fraud monitoring that we're in the process of getting [Audio Gap] software plugged into our online banking. I can't say too much about what we do because I don't want to give the bad actors kind of the road map to stealing money. But at the end of the day, we, I believe, have a solid account opening process. If you look at our operational losses given relative to the dollar volumes and the number of accounts that we opened in 2023, we're best in class. And that is a lot of that goes to Nick and Barry for the process that they set up for getting accounts in the door but best-in-class loss rates. And if anybody tells you they're not losing money on account opening, they're probably lying.

Thanks Mike Scott. I do want to mention Merrill is on the line, but I guess from a technical standpoint, she's not able to ask the questions, so I'll continue. Hopefully, we'll be able to fix that for the rest of the research analysts. Question number three from Merrill was product development. What new product services are involved with your customers that you intend to offer in the next few quarters? Well, I would say, one thing we try to [Audio Gap] want their banking really to be integrated into an accounting ledger, a P&L or balance sheet. And we offered Newtek Advantage this year with a partner 1-800Accountant. And we would envision down the road that it will be important to be able to link what we do for our customers with accounting. It's invaluable to a small business to be able to have that digitized data go right into their P&L and their balance sheet. Deposit gathering, how you're planning to build core deposits, how you describe your competitive advantage, what's the ideal deposit gathering system look like for the bank? The ideal deposit gathering system we have, it's called 80,000 paying customers and close to 3 million referrals in the database. These are people that know Newtek. Now we just made a new hire. Zach [ Kliot ] joined us, Zack is Vice President of Client Success -- I want to repeat -- Client Success and Services. You make your clients more successful, you're going to earn their business so that reaching out to these clients telephonically through e-mail, sending them videos on the Newtek Advantage, educating and training our staff, it sounds easy. It's a real pain in the butt, but we're grinding it. We're going to make it happen. So we plan on communicating in a much broader, bigger way and we haven't done it before. It's hard to believe, but it hasn't been our model. We get 800 referrals last night, and we've kind of spoiled the staff a little bit. It's like, why do I got to call anybody if this stuff is just coming in? But we want to go from 800 to a couple of thousand and beyond that. The model is really, really attractive. So deposit gathering, all the components are here, it's execution, it's just doing it every day. Birmingham, any update on your plans to office, a branch to office in Birmingham? I'll answer this question differently than most CEOs would. We hired somebody that quit in 3 weeks and they were in Birmingham. So we thought we're going to have a Birmingham office. Now you say, oh, they quit. Something must be wrong. Let me tell you, he came in here, and this is a job. You come to everybody sitting in this room or you work at a [Audio Gap] is not Monday through Friday, 9 to 5, I'm sorry. So if you're thinking about coming and you want to work Monday to Friday, 9 to 5, don't. Anyway, it happens, he left. So we replaced them, and thank God for Jennifer Merritt, who joined as Chief Operating Officer. She's setting up our office in Wilmington, North Carolina. So Scott still by himself. But we'll find somebody for Scott. Scotts in Birmingham. He's still on a central time zone. But anyway, yes, so that's what happened. So there's no Birmingham office for the near term, except for Scott. Franchise development, one of the top 3 elements describe our franchise strength, what are the top 3 elements you need to develop be more effective in growing the bank? No bankers, no brokers, no branches, no BDOs, stay true to the form. On a daily basis, I keep kind of getting dragged back into -- okay, let's offer higher rates on deposits. Let's cut our prices. And then I have to go take a walk around the block to calm down. If that's how we're doing business, we shouldn't be in business, okay? I'm just -- that's -- we have to compete by giving our clients a better experience by earning their business, not on price and not on the traditional ways of banking, lending, payment processing, payroll, insurance, et cetera. So those are the 3 elements of our franchise strengths. The way we technologically approach the customer and the way we have our staff embrace that client experience, on a camera, there's a relationship, ask friends who they know at their bank? They may know somebody, but they probably don't know too. And most people say, I have no idea. Who my relationship is with BofA or JPM or whomever. Anyway, they should at Newtek, you just go online, click on a box, you could get somebody up on a camera. Bank level operations. Scott, of various loan products offering, which are funded by deposits at the bank and which at the HoldCo?

Yes. So this is a complicated question to answer, but you really need to keep in mind the context of how the company has grown from here and the transition to a bank. So you've got the NSBF portfolio, which is predominantly our legacy 7(a) product originated -- pretty much everything originated prior to April of 2023. That's primarily been funded through private label securitizations on our part. So when you look at our balance sheet, there's the notes payable securitization trusts. That's where that funding comes from. When you look at the ALP program, that's predominantly funded at the holding company level as well and will continue to be for the foreseeable future. We're going to fund those through our baby bond issuances and any warehouse revolving lines that we have with other financial institutions. When it comes to bank loans and what we fund with deposits, it's going to be the -- the 7(a) production after April of 2023 is going to be our 504 loan production after -- in 2023 and after. And then our traditional bank lending products that we'll be originating and have originated over the last almost 1.5 years. So deposits are the primary funding engine for the 7(a) business. And we expect to grow a diversified portfolio with those deposits.

Thank you, Scott. One thing to point out on the ALP, Scott mentioned we fund the equity haircut through senior bank -- senior HoldCo debt, equity and then we ultimately with the joint venture part, they put up half the equity and then we do a securitization. And the benefit of the securitization is it's match-funded, so that means you don't [ have to worry about ] asset liability management. All our LP loans have floors at the initial rate. So the coupons can only go higher. They can't go down. And as you'll probably see sometime next week when we do our securitization, the bond rate is fixed. So we lock in that spread, and that's what gets you that great return. Commitment Committee. Scott, who approves loans at the bank level Holdco and the JVs? Is there a centralization of the function to disperse funds. Merrill's question number 8.

Yes. So we do have credit committees at each of these levels. We have one at the bank. We have one at the holding company. We also have a joint committee that we have with our JV partners, it's 50-50. So there's no one party that's truly making the decision. And we have a credit box that we have an understanding that we will underwrite to. But ultimately, the JV partner does have to approve the loan funding. We do have a central edge loan funding group that reports up to me. And yes that's where I'd leave it. One thing I do want to point out though, Barry mentioned the 8,000 referrals that we got 800 -- excuse me, I wish 8,000. Pete doesn't, but I do.

Usually I'm the exaggerator, Scott.

I know. I know. So we got 800 referrals yesterday. It's important to note when you think about credit, that 1% of those will actually make it to an actual funded loan. So when you think about our -- what we receive day in and day out and the credit box that we're trying to underwrite to when we receive all these, those are great numbers. But at the end of the day, that gets whittled down because of our prudent risk management. So I don't know that, that point has been explicitly made, but I want to make sure everybody understands that because we're not just to various point, we're not out of scoring, we're not just rubber stamping. We do make credit decisions, and we do prudent credit evaluations.

You're getting pretty good at this. I might have to go take a lunch break now, but thank you. That was a very important point, very selective. Rewarding success. How do you as an organization define success to your loan production team? How are these employees compensated and retained? What qualifies a loan officer to have a very good year? I love this question, Merrill, thank you. You really asked 9 great questions that you would never hear in a quarterly call. But I want to go to the last one first. That's the easy one. What qualifies loan officer to have a good year? We don't have loan officers, okay? We have business service specialists reporting to Justin that are involved in assembly and their relationship manager with the clients. They hold the clients' hand. They get the client to fill the document bolted up, they shepherd the loan through credit memo and underwriting, committee funding, they are the relationship manager, but they are not loan officers. This is totally different than in a typical banking institution. And the expedient way that these professionals working for Justin and others are able to operate is they're quick, it's frictionless. The Newtek Vault allows the borrower to connect their lawyer, accountant, tax preparer and controller, password protected. So it makes it very easy. I'm a business owner, I don't want to touch a document. I connect 4 people. They fill the vault up. So we get that pre-qual like that, [ liquidity split. ] That's the key because good loans trade very fast. Crappy loans go back and forth forever. So that's the part that we're fast, but do not make a mistake and say, "Oh, they're really fast." They're cutting corners, we're not cutting corners. As a matter of fact, when you put a referral in -- in the loan side, even if it came in 11:00 at night, those customers got a fact finder with a soft pull credit score, asking general 5 Cs-of-credit questions, which come back to us and using an algorithm, we can prequalify them and setup a calendar appointment with a loan assembler and an insurance person like that without having a conversation with the customer. So if you're a customer and you've experienced that, what do you come away with, Oh my God, these people are serious. The [ NEWT ] never sleeps, the [ NEWT ] is for real. Look at the technology they give me. I could drop a drag and click and put stuff in the Vault. It's safe, it's secure. Contrast that with a bank. I put a referral in, maybe it goes to a banker within a day or 2. The banker calls the person back on their cell phone. Who is this? I don't answer it, a week later, I listened to my voice mails. Oh, it was the banker. Let me call the banker back. Call the banker back, the bankers not -- I mean this isn't even close. The way that we're doing this, it's frictionless, it's quick. And we've shown this to the hundreds of institutions that we deal with. In some cases, we give them our technology, let them put the loan on their books and we just had fees for it. That's our LSP program. They go -- they said it will take us years to copy. I give a lot of credit to Pete, Justin, Dan, handled the lending team for working on this, and now we're doing this within the bank on deposits, we're going to win big on this. So, important to note, and I say this to all the other units, that are not as successful as lending but will be. None of the people in the lending unit gets spiffed or comped to close a loan. Now I realize I'm an old guy, and I'm old school, okay? So when I got a job in 1982, I was happy to get a job. And when my boss told me to do something, I just did it. I didn't say what are you going to give me? Matter of fact, I did extra. But we have to manage our team not to always have to give them money to do something. And I will tell you as I'm telling managers that are listening on to this call, I don't want to have to -- so the bottom line is there's no commission structure here. It's certainly not in lending. Do we pay loan assemblers better that work hard? Put more timing, get higher volume of loans, and we measure their quality? Yes, we pay that in a discretionary bonus, which is how I'm compensated, discretionary bonus. Matter of fact, many moons ago, I had someone say, gee, if we do this, EPS, will pay you more. I said do me a favor. Don't do that. That's The worst thing you could do. That's just my opinion. So bottom line is good managers train people, they talk to them, they listen to them. They meet their needs. They create a career plan and they will compensate them in accordance with, number one, within the context to the market, but a good performer. I would pay a good performer, 120% or 140% of what the base pay is in the market because typically, a good performer gets 2, 3, 4, 5, 10x the production, and we see that day in and day out. So you don't always have to bribe, that is an important point. Thank you, Merrill. Great set of questions. I'm sorry, we weren't able to hook it -- well actually you got 2 more. More Merrill questions. How do you handle errors and exceptions in loan processing, Scott?

Yes. So we have a exception process. We monitor the loan origination process pretty closely. We have a process for curing exceptions. Obviously, we don't want to make a loan with an exception but if one manages to slip out the door, we have an exception process. We work with the SBA to cure any deficiencies, if necessary. But we believe that based on our experience that we have a very good process for curing and preventing loans going out with exceptions.

I'm going to skip to 12 because this is an important one. CECL reserves. What's your methodology in regard to building reserves? If losses run above the expectations, what's the process to correct or rebuild?

Yes. So we have third-party software that we use to estimate our CECL reserves. We segregated primarily into SBA and non-SBA, it's kind of the first cut. When it comes to our SBA portfolio, I've said previously, I'll reiterate you've got a much higher reserve on those loans just because of the unguaranteed nature and our loss history. Barry mentioned roughly 8% cumulative charge-offs over the life of the loan. We've taken that historical data and plugged it back into our modeling. Our modeling starts there on a -- from a PD and LGD perspective, probability of default loss given default. We then project out losses and adjust for discounting. We have to discount. We made an accounting policy election to discount the losses at the loans effective interest rate, which right now is at 11.5%. So we discount those back. How would we build reserves if the economy moves one way or another, in other words. Because keep in mind, CECL is a life of loan loss estimation, okay? So we're estimating like the apply a prepayment speed based on our own historical experience. So that results in a shorter life. What happens if the economy goes a different way and the life lengthens the depths of the economy, we go into some kind of downturn, what would that look like? We're going to adjust as we see those metrics, we peg our economic forecast off of the Fed published -- what the Fed publishes usually, at least quarterly. So we update for that. We update for that quarterly. We also monitor what we're seeing in the economy, what we're seeing in our own portfolio. And if we're not seeing it in the Fed data, we'll make adjustments that we think are prudent.

And Merrill's e-mail is on Page 32 of the deck if you want to communicate with her, [email protected]. Tim Switzer, are you able to ask your questions over the line?

[Operator Instructions] And we do have a question from Tim Switzer with KBW.

Barry, can you hear me?

Loud and clear, Tim. Thank you for trying to get to the airport and give it the old college try. So thank you.

Tried my best. I wish I could be there in person. But yes, thank you for the review of Newtek, all the closures in here has been great so far. My first question on -- about Slide 12. You disclosed the charge-offs by origination year for the SBA. And the phone line cut out on me a few times, but did Scott just mention what your expected life of loan loss rate is for the SBA portfolio? Or did I mishear that. The line was cutting out.

Yes. Tim, 8% is what we've observed. If you look at Slide 12, you'll see that the percentage is based on the gross dollars of the unguaranteed originations. So we apply a probability of default and a loss given default. Over the history that's going to fluctuate based on what's going on in the economy, but we use generally speaking, in broad terms, 15% to 20% probability of default and anywhere from 30% to 40% loss severity.

Okay. That's really helpful. And if we try to look at that on an annualized basis here, I know you have the 10-year term, it's a 25-year term. what's kind of the average duration of the SBA portfolio, both in this table you provided and then in your current portfolio?

Yes. The average duration of an SBA loan is approximately 4 to 5 years. That's I'll call the average duration or the average life, which are fairly close. We've discussed this on previous calls that the default curve, particularly for a small business loan, starts to ramp in month 18 through 40, and we have all this in our own internal models to come up with that number. The 8% could be a factor of a 20% cumulative default and a 40% severity or some different combination. And that does change from time to time. It may change depending upon the mix of the loans, seasoning of the loans, but this is something that we look at and analyze every single quarter. In our 8-year history as a BDC, this was valued at fair value, which we currently do today. And it was valued on a mutual fund standard. So these are things that obviously Scott looks at, our external auditor looks at, regulators look at, our Board looks at, and these are things that can be adjusted from time to time based upon changes in the market. But one thing that's important, the NSBF portfolio is in a burn down mode. The other thing I want to point out, we're a much better company than we were 2 years ago, 5 years ago and 10 years ago. The amount of referrals that we're getting are bigger, our technology is bigger, so a lot of what you're looking at from a historical perspective is based upon the history and that factors into where Scott and his team and the external advisers come up with the CECL reserve. Which although it's [ 6%, 7% ] present value, it's approximately 8% in future value. Do I have that right, Scott?

Yes. Tim, one thing I'd point out, when you look at the charge-off information at the bank level only, keep in mind that this portfolio is, in some cases, just over a year old, not even a year old, if you're looking at first quarter data. So there is a, what I'll call, a loss emergence period that you have to factor in when you're thinking about actually seeing realized losses or charge-offs in the portfolio. When you map out the default curve and the charge-off curve, most of those charge-offs are going to happen between years, call it, 18 months to 4 years has been our experience. So -- or excuse me, 40 months. So we -- that's kind of the belly of the beast if you want to put it in that kind of term. And so you're not going to see charge-offs for the last 12 months. Going forward, we expect -- human behavior is pretty stable when you look at the mean and we expect to revert to the mean.

Yes, if you want to build your own curves, God bless you, you could use our curves. But if you want to build your own curves, you could take 8% and you can go 1.5, 1.5, 1.5 and then start to ramp it down. I mean, that's something you could play around with. I think at the end of the day, our financials going forward over the next several years, are not going to be driven by those charge-offs in the next 36 or 48 months. They're going to be driven by the deposits. They're going to be driven by the ALP business and everything else we're doing, the advantage, the other REIT. I think if the purposes of modeling, you certainly can take the 8 and run it out. Scott talked about the belly. The belly is probably 70% of the charge-offs within that window. Now I'm going to tell you, we are not going to do this every single quarter, okay? So this is it, peekaboo. Okay? We're going to model it. We've got 5 people looking over our shoulder and once again, 7(a) is in a rundown, CECL, just like every other bank has got to be looked at and modeled and evaluated. A lot of that is going to be based upon current business, not what we did 3, 4, 5, 6 years ago or pre-COVID. So we'll work with, obviously, the analyst community in giving you our forecast and then you could test this every single quarter to see how our guesses looked.

Okay. Great. I appreciate all the detail there. I have a couple of other questions on the SBA. One, are there any loans in the HFI portfolio? And if so, how much that are guaranteed or do you only retain the unguaranteed portion? And then looking forward, there's been some banks talking about how small businesses are feeling the impact of interest rates when they roll over new loans or it's kind of a tempered loan demand a little bit. How do you guys think about both loan volume and then credit performance if we have rates higher for longer?

Yes. Let me talk about the last item. People look at our growth and go, Oh my God, they're growing and everybody else is flat and the credit looks bad going forward. So something must be wrong at Newtek because why are they growing and everybody else isn't? Well, then you haven't listened to most of my presentation today, which is, hey, we have tons of customers to talk to and introduce the fact that they get 10 to 25 year out, most business owners don't know what they can get in the market. That's why the merchant cash advance business exists. That's why OnDeck Capital Exists. Why would somebody pay 40%, 50%, 80% APY, if they can get better -- so my point here is, we are known, we take market share. We don't advertise that. We're an SBA lender. We're just a lender. It can go to one of four different buckets. So I think you have to -- well, you don't have to do anything, but we would like the market which hasn't yet accepted the fact that because we do our business differently than banks, we are getting more looks, we're able to convert the best quality clients, skim the cream, make the loans, grow the -- look, I add a couple of alliance. I had a couple of hundred billion-dollar banks to referral partners, we're going to get more loans. I mean -- and we just added a couple, I mean it's just math. And the ones that we put on a year or 2 ago they're getting more familiar with us, we're getting better penetration, we're now allowed to go into their branches because they've experienced what we're doing. A growth story is an oxymoron in the banking business. That's one of our problems. We are a growth company in an industry that has no growth. That basically does no risk to low-risk loans and fees itself on not paying depositors a fair rate for a treasury back. Effectively investment, but we're different. That's what we're trying to get the market to understand. Tim, what was the first part of your question because I kind of missed that?

Yes, I was just wondering if you guys have any guaranteed loans in the HFI portfolio?

Occasionally, there'll be a partial funding that is not available for sale. But no, we have very little interest in holding a government guaranteed piece on our books. We get a much greater return on selling it. Now, you would say, why do you sell it and other banks don't? I'll give you one reason. They're doing it at prime plus 1 and the gain on sale will be 5 points or 4 points. So they can't justify it. So they rather have it on their books for spread income and because 95% of the market analyzes them on the spread income and on the risk-based capital. So that's why they hold it. We have an entirely different model, which we believe the investor community will get used to quarter-by-quarter as we continue to put these numbers up as they did in the BDC market, mind you, if you go back and look at us as a BDC. When we did the transformation in 2014, the initial capital raise was a 17-point discount to NAV. We traded at a premium to NAV for most of our 8 years and traded north of 2 to 1 at point in time. And that's because the BDC investor ultimately said, you know what, they did increase their earnings, they did increase their dividend and that's what we're going to do here. And the one thing that investors can't ignore is cash and earnings.

Right, okay. And I don't want to take up too much time. I know there's probably a lot of other people in the queue, so I'll jump back in. Just one last question. A key thing here that you guys have been focusing on this year is trying to win the core business operating accounts of your customers. And I would imagine you're trying to steal share largely from the universal mega cap banks? And then the small business owner is probably also with the community bank across the street. You guys have touched on this a little bit, but what are the strategies? Beyond just like Newtek Advantage, what are your strategies on winning these customers over, retaining these accounts? And more importantly, like, are there any targets you can provide for us that we should be monitoring over the next few years as you guys work on this initiative?

Yes. So Item # 1.0 is getting the deposits from people we lend money to. And we're having a lot of success in that. We'll demonstrate that at the upcoming quarterly earnings call in August and then quarter-by-quarter. So that's number one. Then the next question you want to ask is, are those deposits sticking. Okay, because you put the money in the account and then like could they take the money out? In order for that not to occur, we have to be able to talk to the client and demonstrate to the client that we have a really good value with no ACH fees, no wire fees, no statement fees. And they also get the advantage, free document storage and blah-blah-blah and all other stuff, that's 1.0. 2.0, if we do payroll for them, we can give them the same day paid to their employees. That's even measurably invaluable because the depository account is in the bank. So money is in the bank, we pay the employees. They can't ACH it out. ADP can do that, but they can do with risk paychecks with a -- we can do that riskless. That's a huge advantage, and it's sticky. When you do your payroll, you do your payment processing. These are sticky deposits. We've seen Silicon Valley Bank, Signature Bank, First Republic, those big commercial deposit accounts, they thought that the banker making a lot of money, 100 of that relationship, that relationship without the window in an afternoon. That's how fast those customers move. So a small business deposit in short of a 250,000 that's integrated into your payroll into your payments has immeasurable valuable long term, both to us. And so that's -- so those are the things in the near term, look at how much deposits come in from lending. And then hopefully, in payroll, those are the 2 important parts. And hopefully, my payments guys are listening on the call. So they'll get with the program, too and start to bring those deposits in. Because we process $5.5 billion of payments for customers. So the money comes in and then we send it to Bank of America, Wells Fargo. And we said, well, what are you getting paid for these? Zero. Zero? Yes, zero. So why are you leaving it there? Why don't you leave it with us, at least 1%, no fees and you can put it into a commercial money market at 3.5. You blend that to 2.5. It's a lot better than 5.25 or 5.5. So this is the strategy. This is what we're going to do. And logic dictates we should be good at it, but it's going to take time. Still got to train staff, got to train people, got to get the message out, got to get the videos done. And Nick, everything's got to go through a compliance.

[indiscernible]

Jim Young. Infrastructure, very important. We have to hire people, got to put them in seats, they've got to train them. I know as a former finance guy, it looks easy. I'll just go do it. No, it's not. It takes a little while. And we're very pleased with the progress we're making. Tim, thank you for your questions. Appreciate it. Steve Moss from Raymond James, we're going to give you a microphone, Steve. And you get the Purple Heart award for actually being able to land your plane. But it was West Palm you cheated. If you were to land in Fort Lauderdale, which was closed, that would have been a feat.

That would have never happened.

Steve Moss for Raymond James.

Well, thanks, Barry, for having me here. Good to make it in by the skin of my teeth last night. But maybe just starting with the guidance here, you teased us with business trends. Just kind of curious the -- before you've seen the upside here is some component of it, the securitization? Is it the 504 business, just those dynamics.

Yes, I appreciate it. So I'd rather you guys all leave your guidance until we get to the quarter. I probably have investors see that would like to have you change it. But I think that we had a good quarter, particularly in the alternative loan business, which we really haven't factored that much income into the projections. Deposit taking is going to take a little bit longer because we want to make sure we do it right and we do it in a compliant manner. Pricing on 7(a) has been good for the quarter, and it looks like our volumes are good. So I have one investor that keeps beating me up because we only moved our guidance up $0.01 on a $0.16 outperformance. And I didn't really have an answer from except I'd just rather do this methodically over time. And I could sit here and scratch my head and go a $13 stock price at $1.95, I don't know. It's not a hotdog stand, but we're a business that is positioned for growth. It is growing, been around for a long period of time. So we'll get there. But I mean, I don't think you're going to see anything earth shattering off of the current guidance for 2024 but I think we're well positioned for 2025. Hopefully, that's helpful.

Yes. And then maybe just on the securitization, how do we kind of size that up, think about that coming to market?

So we filed the 15G, so that allows me to talk a little bit about it. I would hope that we -- and this would be -- I mean our first deal was tiny. $87, $90 million a collateral, $57 million in bonds that were very lumpy this deal will be 2x the size. So if you have an institutional bond deal that breaches the $100 million mark, you get a lot more interest in it. And I think the hypothetical example that I gave relative to what the net coupon is, 11.75% to 12% gross up 100 basis points for servicing. You want to put a capitalization rate on that servicing. Now when the loans go into the securitization, Steve, that spread income to an equity stake in the joint venture. So I believe what we're going to be doing quarter-to-quarter is valuing the equity stake. I don't think you'll see that big of a jump with that equity stake based upon some of the numbers should be fairly valuable. If you were to say to me, when do I take an equity stake in a joint venture like this should be somewhere between 12% to 15% net of expected charge-offs would be a good estimate. By the way, that's one of the benefits of being able to do this under FD. You're able to actually talk about what this is and figure things out in your model. But I think that what I want to focus on for ALP going forward is, I think we'll do about 2,000 loan units this year, okay? But on those 2,000 loan units with predominantly them being in the 7(a) space, they average $500,000. So in the ALP space, the average is $5 million. So to get you all a little bit frothy, which I did in the past, and I got beaten up for it back in -- when we bought the bank and we aggressively put out numbers because I thought we could actually do $1 billion worth of loans out of the chute but that's when rates were 0, and we didn't have a banking crisis. And we put our foot on the brake because capital became near and dear until things settle out. To me, that's called prudent management. Other people like saying, how come we're not growing as fast? But it is what it is. We live for another day. But if you could do 200 units, you could do $1 billion of loans a year. If you do 100 units, you're doing $500 million of loans a year. And you look at the math in this, this gets very, very attractive. But it's important to note, we don't have to do a lot to get to $0.5 billion of loans because it's the same referral system. It's the same staff. People tell me appropriately so. And Nick, we need more underwriters, we may need more assemblers but it's not big numbers. That infrastructure exists. And I also want to tell you an important thing about the infrastructure, what's valuable in the infrastructure. We have 13 securitizations with an institutional investor base that buys our bonds. We have rating agencies that know us, we have underwriters that know us, we have securitization structures. All that's built. That's like a manufacturing plan. So now we're taking advantage of the fact that we've had the access to capital markets, another important question, which I get asked from time to time. Hopefully, not stealing any one's thunder. Will you ever do these out of the bank? We have enough things going on in the bank. Right now that we want to make the regulators comfortable and happy with what we're doing, how we can manage things. These are typically not bank assets for the following reasons: One, they have longer durations or average life, which requires asset liability matching. Two, they have no loan covenants. People look at them and say, well, where is the covenants? Well, there aren't any. But by the way, there's no loan covenants in the SBA 7(a) loan either. But because it's an SBA 7(a) loan, it's been around for 60 years, it's really not that much of an issue. Although getting bank regulators appropriately to understand our loan loss reserves, which are currently maybe 7, 8, 10x what our normal loan loss reserve will be or to tell them, there will be losses going forward, which are in our projections, that wasn't an easy feat to do. I think they understood when they approved our application that we lend money to small and medium-sized businesses and communities in all 50 states. That's a healthy thing. That's what the banking system is for. And that 30% of our loans go to women and minority-owned businesses. Well, that's what the banking system is for. So we actually are making money, we're overcapitalized and we're serving a community that the other big guys don't even go near. I mean it's fascinating. The top 4 guys I don't think show up in the -- I know they don't they show up in the top 10 in this type of lending. And I don't think they show up at the top 20. So there just like -- it don't pass. Let's hope that continues.

Okay. Appreciate that. And then just kind of thinking about -- you mentioned the larger guys and you mentioned the referral partnerships earlier. How do you structure those referral partnerships? Is there a white label for the bank? Or just kind of curious along those lines.

It's for white label or the bank.

A lot of conversations. They're equity-based partnerships. Obviously, the earlier ones were the hardest to do because they were done with little to less of a track record than we have today. So going forward, they should get easier and easier to do. And in the perfect world, Also, they wake up and I've got a higher stock price, and that will help, too. Because when I raise equity at better rates and get more leverage and everyone's happy. So I think that with the amount of profits that are in the deal, we're more than happy to share them with joint venture partners who were loyal, and we we've developed a track record of being, I think one of the top lenders in this space in the marketplace. I would argue there is not a lender that's had its team together for 20 years. We have a 20-year track record. And that's why people say, could you give me more data? How much more data do you want? In my BDC 10-K, we listed every single home with a price on it. I mean there's a lot of information we provide. But the question that you ask is important because I can't snap my fingers and produce that partner, like we did a capital raise in the bond market 10 days ago, and that was done -- I mean, it was some prep work of about 30 days prior. But literally, it was almost done within 3 days once everything was cleared. It was a go blooming on with the market, raised $72 million. This is different. It's a different transaction, it takes a lot of time. But we have a regular pipeline, and we feel pretty good about where we are, and I'll be more comfortable as well Scott giving more guidance when we solidify some of those deals going forward. I get asked that question about visibility. I'll have more visibility in 2025 on ALP than I do at this moment. But I'm in the red zone.

And Steve, just to clarify, when Barry was talking about equity, that was primarily geared towards the joint venture partners. When you think about the referral relationships that we have, right, they span across financial institutions, maybe they don't provide our product, maybe some do, but we -- they want to partner with us. We also have nonfinancial institution referral relationships as well that we get referrals through. But we typically will pay some kind of referral fee to that partner based on the success of the -- either the bank account closing, if it's a deposit relationship. If it's a loan, the loan actually closing and making it through a certain period of time after closing. So I hope that helps.

That is helpful. And then just in terms of thinking about here, on the nonconforming side, on the ALP. When you look at the customer profile today, has it changed versus has it improved just given there's -- the banking system is tighter, just kind of what's that borrower profile look like these days? And how are you feeling about underwriting versus maybe 12 months ago?

It improved dramatically for a few reasons. One, our systems got to get used to being able to talk about it to direct customers and referral partners. So to get -- it always takes time to get that out in the market. Now I will tell you the shape of the yield curve has also made it easier because you got a yield curve where the short end of the curve is high, long end is low. So with Prime at 8.5 and our SBA loan is prime plus 3, so it's 11.5. It's a lot easier to get somebody to take 12 or 13 or 14 fixed when the floater is that high. So it's actually a pretty good environment for us to get these rates. The other thing, too, is we back these rates up with spreads, so if you follow the securitization market, the securitization market blew out by about 125 to 135 basis points during, I'll call it, the recent increase in rates. Recently, the ABS market for securities is on fire. So it's coming back in. That's very helpful to our profitability to us and our joint venture partners but we've still been able to get the wider spreads from borrowers, which is indicative that the borrowers find a lot of value to the loan.

Okay. That's helpful. And then in terms of just on the regulatory environment, it's definitely gotten tougher this year from talking to many other banks. Kind of curious, what are the pain points maybe you guys are seeing? Are you feeling extra scrutiny, how is lending in this environment for you guys?

I'll start off and then I'll pass it to Scott. The one thing I would say is your CET1 ratio is 17.2, and your capital shows 20.3, and your leverage ratio is close to 14, you're not on the top of the list. Our liquidity is off the charts. We're asset liability matched. We don't have long term. So all the problems that the banks have, I'm not saying we don't have any problems. But we don't have the mainstream problems that 95% of the banks have. And we've been able to also enjoy profits. So we've been very blessed. Regulatory environment, which could change in a moment's notice. It's been very constructive relative to our overall capitalization, our exams, which have been getting too deep the open satisfactory. So no, we're pleased with the relationship with both the OCC and the Fed. They've actually been great partners so far. I'll be honest with you. People say, when the banking business, the regulator are going to -- they get to the phone. They actually talk to us ahead of time on things based upon experience in other areas, this has been fine, not a problem.

Okay. Good to hear. And then just thinking longer term here, as you leverage up the balance sheet, how do we think about your targeted capital ratios? Like what are the minimums you want to keep things like that?

Yes. So we expect to be above the well-capitalized thresholds for sure. Depending on our foresight and where we believe the economy is going. I would say we're going to adjust as needed. As it pertains to a targeted ratio. It's a little bit hard for me to say, one, because we'll maybe update that later in the second quarter call. But I think that if you look at where we are today, the liquidity profile, we want to maintain a prudent capital level to make sure that we're -- the regulators are comfortable with the risk that we're taking also considering the reserves that we have on the balance sheet. So the minimums, absolute minimums are going to be the well-capitalized thresholds, but we do expect to be in excess of that.

Okay. And last one for me. Just in terms of the Newtek Solutions spinoff, just curious on any update you guys can give us on that?

Right. So Newtek Technology Solutions, which is a wholly owned subsidiary of the HoldCo, which we have elected as part of application to divest of it. The target date is January. We do have an opportunity that we're pursuing. Right now, data centers and managing data center space is on fire. It's just off the charts. We have a lot of capacity in ours. I'm very optimistic that when we divest of it, our preference would be to continue to participate in its upside without having control over it. And that will hopefully satisfy the regulators, but still keep us invested in it. We'll still feed it. It will still manage our IT, that was some of our goals so that there'll be no change in IT movement or anything in that nature. Management team stays in place. We just won't "own it" and "control it, " will be a passive investor. So that's kind of what we're looking to do. I'll leave it to Scott and others to figure out what the accounting treatment will be for it. Not sure it will consolidate. We haven't figured that out yet, it might be equity method. But that is a very valuable asset right now. There is not a data center business, whether it's brick-and-mortar or managing hardware and software that is not incredibly valuable.

Great. Appreciate all the commentary here.

Thanks, Steve. Brad Capuzzi, are you on the line? From Piper (sic) [ Piper Sandler ]

Brad, your line is now open.

Yes. Can you hear me?

Loud and clear, Brad, thank you for joining. Appreciate it.

Yes. Awesome. I really appreciate the in-depth interview or Investor Day. So yes, I just want to start off in the alternative loan program, can you discuss the biggest opportunities and areas that you are most excited about that will help you reach 2024 origination guidance of $400 million compared to the $62 million of closings through April?

Sure. I would tell you that I believe, by the end of June, we'll probably be at about $120 million. So it's ramping and I would also say that whether we get to $400 million or it's $300 million, it's $250, probably won't change our guidance much for the most part. Given that we really discounted the profitability of that business, we're still working through the puts and takes, and we'll have that polished up on our quarterly earnings call. I think that our ability to execute in the marketplace, and I'll say, working backward, the current securitization deal, funding lines from warehouse providers, joint venture equity, all that is in motion. But I think that I'm optimistic that the success, I think, we'll have in this upcoming securitization is going to continue to draw attention to the fact that when we started this business in 2019, and we had nothing. We had no pots, no pans, no plates, no food, okay? So 5 years, we developed a track record. We've really picked up steam in the last couple of months as the markets have healed. By the way, when I say the markets have healed, number one, the ABS markets performed very well. But there haven't been too many banks that I'm aware of that enable to raise money at the holding company level. So the fact that we raised money in August last year, we just did a very attractive 5-year, $25 par bond that our friends at KBW, Raymond James led in the capital raise. That emboldens us to be able to grow this business because that's where the capital comes to grow it. So it's part of the whole equation. Now we feel that once the market has a better understanding of the profitability of this business, which is what that capital goes to. So I don't need that capital, up at the HoldCo except really for this business. Everything else is fine. Everything else will flow through. So that would be some of the determining factors. So stay tuned. We're excited about this 15G that we filed this morning. We've actually had some investors without putting the details out. So and we'll sharpen up that number at the end of the quarter with earnings as well.

Awesome. That was super helpful. Just going on to the next question, what are the key reasons why the alternative loan program sits at the nonbank subsidiary? And do you envision a future where the program could be part of the bank, which could lead to lower finance costs through deposits?

I see it being financed at the HoldCo probably through maybe the end of 2026. We're respectful of the regulators wanting to see us drive the car, and that means the 7(a) business, the 504 business deposits, they want to see us being successful there before we come up with something that they're not quite familiar with new and different and the track record will be further baked. So we'll be in the foreseeable future financing this business with expensive securitizations, joint venture partners, HoldCo debt. But you could see, it makes money there. So if this ultimately winds up getting done in a bank, that's a big, big win because you're financing with lower cost deposits and the margins are there. I know how difficult it is to explain this business to you guys, investors, analysts, rating agencies, warehouse lines of credit, securitization buyers. We had a question coming in this morning, why do we change a program from nonconforming to ALP? It's really not that complicated. Nonperforming sounds -- nonconforming sounds -- ind I made a mistake. Nonconforming sounds like nonperforming, which it's not. And anything with the name non and it is bad. So I take credit for giving it that crappy name. So we haven't changed anything except the name. We now call it the alternative loan program. And if you look up with wikipedia because I'm not that smart, I look at wikipedia and the alternative means actually not in a bank. So that's why we call it the Alternative Loan Program. But we'd love to put it in a bank and we don't see it for the near term.

Got you. Makes sense. And I know you got to my next question. I know you guys highlighted this during the Investor Day, but more of a competitive dynamics. Can you just discuss recent trends in the SBA gain on sale margins and how you've been able to outperform many of the peers with regards to margins in the low double digits compared to peers in the mid- to high single digits in recent quarters?

Yes. So it's interesting. So if you look at like Live Oak Bank, we don't really -- when I say we don't really compete with them. It's very rare that one of our customers talks to them and us. Their customers typically speaking to a business development officer or an intermediary that calls up an officer at the bank that submits a loan package. We, on the other hand, are going direct to business owners and telling them that we can give them a 10- to 25-year loan period end the story, not an SBA loan. So a loan that typically winds up on the doorstep of a Celtic Bank, a Byline bank or a Live Oak Bank goes through a broker who auctions the loan off to 2 or 3 or 4 parties at the same time. And they're all competing with each other on a bunch of different areas, where we are structuring a loan for the customer. I mean, we've just been doing this without change for our entire history at work. So no brokers, no bankers, no BDOs, no branches. That's -- that's -- it's no more -- now if they want to try to compete with us, god bless them. 20 years of visiting banks and credit unions and investment banks and trade associations and getting contracts and teaching people how to use it, plus the valuable NewTracker System that gives full transparency to the referral partner or [indiscernible] the partner can actually see what's going on with the loan 24 hours a day, 7 days a week, the frictionless environment of Newtek's Vault. I mean, they could try and we've actually seen one of our competitors that bought a Fintech lender that tries to do the business, we are. By the way, their loan volumes are going through the roof. I think they're going to have some problems here, we're not.

Got you. Yes, makes sense. And then, again, I know you guys touched on deposit and where you guys kind of think in the near term and longer term. But can you just kind of reiterate what your long-term deposit strategy is? You've paid attractive rates to customers, which has helped increase deposits. But how do you expect the deposit strategy to shift for both consumers and business customers going forward?

I think -- look, I would tell you that our consumer deposits are going to be based upon high rate offering and/or getting the deposits of the business owners. So I think we have a benefit that business owners have personal accounts, too, and that they save money and many of them put money in the banks, we have to learn and teach our staff to ask for the personal deposits as well as the business deposits. And the business deposits speak for ourselves, I'm adamant we have a better account. There are lies in the Newtek Advantage, free document storage, the ability to do payroll, payment processing, web traffic analytics and Nick and I have his conversation about, it's not inexpensive for us to wire money or ACH money or to maintain an account. But at the end of the day, I'll go back to being a nonbank lender, it's still cheaper to prime with a 55% advance rate, which is 8.5 and it's still cheaper than 5.25 consumer high-yield account or a CD at 5.5. So even with the expense, we're much better off with these transactional accounts. Plus, once again, they get the advantage, oh, oh, I didn't know you did insurance. I didn't know you did payroll. I didn't know that I can go to you for Newtek account and get my books and records or free tech. I didn't know that. Well, we actually today have over 300,000 businesses that have a NewTracker account. And when they go to the NewTracker account with their username and password, they see the advantage. They see it. And we're starting to get questions, what is this advantage? What is it? So we're in the process of creating training videos within the company and videos that we could send to customers and videos that we could send to noncustomers. Easier said and number, you'll see that happening. We're now with the infrastructure that Nick Young and Jennifer has put in place by hiring, training, like and we have a Wilmington office, but I don't think we have the furniture in yet, right? Here you go. So the office is opening up this week. And we have a lot of good conversations about furniture, okay? But I mean I know it sounds easy to the financial people like, okay, just open up an office. No, it takes time. And it takes time to hire the people and train them and put them in a seat and make sure they don't make a mistake. So a lot of good things ahead of us. We're very excited. Brad, do you have any other questions?

Just one more. And just I appreciate you guys in this has been super helpful. So just the last question for me. How would you expect your deposit betas to trend relative to other tech forward bank peers in the downgrade cycle if we start to see the Fed at the cut rates?

Yes. It's a great question. I don't believe that we will trend any differently than the crude that you referenced. So in a down rate scenario, our betas would follow suit. If you look at the deposit pricing and the competitive landscape and considered my comments earlier, deposit pricing, as we've tested with different rates and different terms appears to be more closely linked, at least on the term deposit CD side to treasuries. So just because the Fed starts cutting , we've tried to create a good mix of deposits between our high-yield savings product and our CDs. I feel like that's balanced today. Will the deposit profile for us change over time, of course, it will. But the fact that deposit pricing and the consumer is more educate about their investment alternatives. And we have -- we offer a high-yield savings product where you can get your money out if you need it, right? With a CD, you're going to have to pay a penalty. Treasury you can just sell and get your money back. You've got a short turnaround time to get it back, and you might write some principle. At the end of the day, we're competing just like every other bank. We're competing with banks for funds. So we can afford to pay higher spreads based on where Prime is today. If there's a divergence between treasuries and prime, then we're going to have to look at some analytics and make some decisions. but where we see things going largely tracking with the industry.

Thank you, Scott, and thank you, Brad. Appreciate it. Chris Nolan, are you with us from Ladenburg?

[Operator Instructions] Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Barry, thank you very much for hosting the event. It's very helpful, and it's quite informative. Many of my questions have been asked, but one key issue is I keep coming back to the deposit gathering, specifically the core deposit. And since you're making some of these loans leveraging your platform, why don't they stay within the bank? Why don't people basically take a loan from you guys and have a new deposit account where the cash goes in?

So Chris, it's a great question. And upfront, we have now instituted an ability that when the client opens up an account, we don't have to ask them for any additional data -- I'm sorry, when they're approved for a loan, they don't have to ask for any additional data to get the bank account. So I think you'll see in this quarter that the amount of money coming from lending clients is going to increase. Then the question is, why doesn't the money stick? I think over the course of time, as we demonstrate to customers how to use the account that there's less fees associated with the account that they can get somebody on the phone on a camera, they'll be more comfortable utilizing the account. Is part of this is just a function of time. And I will tell you, in the first quarter of this year and the fourth quarter of last year, we didn't have an office. Jennifer Merritt, just joined us in November. We didn't have the 19 additional FTEs in place. So I think what you're going to see from Nick and Jennifer and Justin and the team is we have an incredibly fertile customer base that will move their money to a -- here's the important part, it's just a better account. We're not asking them to move it because they like us because we're taking the lunch. We're certainly not taking them to the masters. But the account is a better account. Matter of fact, the training materials that we have show them it's higher income and lower expense, and we're currently working on a typical $10,000, $20,000, $30,000, $40,000 account [ showing them ] what the customer would save over 0 interest and wire fees. And they can do this calculation themselves, we might even create our own piece of software that calculates it for the client, is what you pay for wire, how many wires you do, is the interest rate. This is actually what you would say from taking your money from Bank of America, who gives you 0 and charges you $25 for an ACH and $50 for an account and move it to the Newtek account. Now on a good note, when you look at our coupon on the loans, as Scott pointed out, coupon is much higher. I can pay more. It's hard to believe. We could pay more for deposits than any of those entities because our assets risk-adjusted are better. This concept of risk-adjusted assets ultimately I think will flow through the banking industry because they can't -- I don't see how they're going to make money on these no risk to low-risk, low-margin assets. So we're just looking at the whole industry differently. And it's -- it's confusing, not easy to absorb. But look, it's a fact. The ROAAs and the ROTCEs that we're delivering and will continue to deliver quarter after quarter, they don't lie. But Chris, I will tell you operationally, we just got to get the people in the seats. We've got to get them trained, we'll get there. But I think your point is right. We have a very fertile account base. Now we're going to have to execute on it.

And as a follow-up question, then I'll get back in the queue. I commend you for hiring management from IBERIABANK because I covered IBERIA for a while in the day. It is an excellent deposit gathering machine well franchise. So I think you have a great management team there. I'd like to hear from Scott, given his experience with that franchise, what does he see as the capabilities needed for Newtek to grow its deposit base and lower deposit costs.

Chris, thank you for the direct question. As I think about in contrast, IBERIA and the strategy there with here they are very, very, very different. IBERIA was more of a relationship bank focused on really bankers. And that was really the primary acquisition point at a great time at IBERIA. I enjoyed working for Daryl and for Anthony. And I believe that it was a very successful franchise. The value proposition I see here is really more geared towards, at least from an investor standpoint, the lending that we do, and we have a huge opportunity with deposits. The relationship is much different, if I contrast the organizations. We have a digital account opening platform on the retail side that IBERIA eventually did acquire, but didn't really pursue much because the rates paid on those deposits are much higher than your average commercial or consumer account. We also have a digital account opening capability for business deposits now, which is huge and not many banks in the industry have that capability. And if they do have it, they're not exploiting it at least what I believe would be what the market potential would be. So I think you're dealing with 2 very different strategies. I think that we have the right strategy in place for managing the risk at opening. I think we have the right strategy in place and are putting it in place to -- for the acquisition of business accounts, Barry is right. We have to help our business customers understand how to leverage the account. We can compete with the market because we are offering more contact with the company, with our bank because we have the tools to be able to do so. And if you look at our target market, we're talking about small to medium-sized businesses, okay? Between -- at banker hours, 8 to 5, our clients are not wanting to call their bank. They're wanting to service their customers at that time. So we offer more customer service through the hours that they're actually having to work on the business, which is nights and weekends versus most of your traditional banks that are going to only be open from 8 to 5, you can probably get your banker, but he's probably going to be on the golf course doing something else other than working and I'll get back to you between the hours of 8 and 5. So I think you got 2 different paradigms that need to be evaluated. I think the value proposition for us is here at Newtek, I think it's immense. I think we have a huge opportunity and I think our -- we know what our clients need at the end of the day. We have individuals here that have worked in for small businesses. We have individuals here who understand what small business needs in order to work. And it's availability and it's customer service when they have the time to get to us, quite frankly.

Thanks, Scott. I think, Chris, did you say you want to go back in the queue? Or you have anything else?

I'm okay. Thank you for taking my question.

Okay. I'm going to go out of order here. Brad Thomas from iREIT.

Thank you very much. Good to be here today. I was going to say you save the best for last. But actually, I'm not the best at last, but I'm the sleepiest. I think I had an hour worth of sleep. So we'll get through these. Thank you again for having me. First off, loan volume growth has outperformed overall in recent quarters, which is no small achievement given borrowers are paying higher interest rates than they have in a long time. And you only recently completed your acquisition of the bank, as you mentioned earlier. And net interest margins remained strong at 3.5%. But this has yet to translate into proportional earnings growth. What needs to happen or is already in motion at Newtek for that change?

Yes. So I think the best way to look at it, Brad, is look at the differential, and we tried to highlight this in the deck. If you look at the returns at the bank versus the holding company, the bank is really where we're going, largely, okay? There's going to be some holding company activity that continues on. But at the end of the day, the funding profile for the bank is really where the future earnings growth can be, and that's where we're going to earn more net interest income. So it's going to take time, right, because that NSBF portfolio is going to wind down and so we have essentially inherent. We have -- there's some level of enterprise value, in my opinion, that hasn't been tapped yet because we haven't been able to shift the funding paradigm from a nonbank lender to a bank lender, and that's going to happen over time.

Yes. Let me just -- one other thing to add, Brad, which we touched on earlier. Our midpoint EPS for this year is like $1.95, if you take out the tax asset and the tax gain from last year is $1.20. So earnings jumped precipitously this year's forecast versus last year. And we also anticipate a better number for 2025, which we haven't had yet. Scott's point, which is important, the more activity we can transfer down into the bank for lower cost of funds and leverage, the better off we'll be. But I think clearly, we have $1.20 to above $1.95, that's pretty good growth. I mean this -- if we hit numbers and we haven't gone out there for 2025 in the 2s, this is unheard of in the banking business. But you're right, they're all flat maybe, flat deposits, flat loan growth, and I'd say maybe. Got it. sorry.

Great. Of course, you know I'm dividend focused. We cover a lot of different income alternatives, so this one is really correlated on income. For longer-term investors that were around pre-pandemic, the current earnings guidance of $1.90 to $2 per share is similar to the dividend payments of 2019, which was pre-pandemic. Although distributions in those year under the BDC model aren't a perfect representation of total earnings, it's in the same ballpark. So first off, are we missing anything from an earnings perspective? Or is that correct for the time being?

Yes, that's a tough comparison, and we sort of talk about that. The -- I'm going to use the word distribution in 2023 because a lot of that cash that was distributed to shareholders' return on capital. We did a lot of cleanup as a BDC. So the cash pay was near that number, but most of it was return of principal. Then you look at 2023, and we had the tax benefit. So we have no excuse. Transitioning out of the BDC into the financial holding company, the only thing I can tell you is noise. So I'm thrilled to be in 2024, and I'll be even more thrilled in 2025. And maybe this is why we are trading where we're trading because there's just a lot of misunderstanding. The other thing is the distribution, if it was a dividend, would be taxed an ordinary income. Our current dividend is qualified. So clearly, I would tell you to be fair the retail investor base that was very dividend focused, which we probably lost between 30% to 50% of our shareholders because of this transformation and because they really just wanted an 8%, 9% and 10% coupon was a problem with this tremendous transition. But obviously, I'm a shareholder, too, a material. I love the dividend. People said, "Oh, you're doing this because you're going to get paid more as a bank." Well, actually, look at the proxy. Okay? That hasn't happened. And I gave up my dividend. So I always say I'm either dumb, love pain or I'm smart. It's 1 of those 3 items. Hopefully, it will -- the third one will kick in. I do believe we're going to get there. But just it takes time in this transition. And this has taken longer than I thought it would.

Great. Next question, of course, on real estate. I love the real estate industry. We cover all the REITs, majority of the equity REITs and mortgage REITs. Just returned from REITweek in New York last week. So I talked to a lot of CEOs up there. So I want to ask you, Barry, this question. Most of your commercial real estate exposure, I know you mentioned earlier, you're a business lender, not a commercial real estate lender in your earlier remarks. However, most of your real estate exposures, bank level's tied to retail, multifamily and industrial in that order with office near the bottom at only 2%. It's a good job there. The loan-to-value of 60% is reasonable given those exposures. That said, in a recession, what do you think happens to the roughly $200 million of commercial real estate exposure the bank has? And I'd just love to get your opinion on just the broader commercial real estate market in general.

So first on the $200 million, I'm going to focus on the $120 million we acquired from National Bank in New York City. This was a family-owned bank. It was a lifestyle bank and the owner just -- he knew New York real estate like the back of his hand. And these are loans that are typically Brooklyn, Bronx, Queens, some Manhattan, average balance, $1.5 million, $2 million. And most of them had PGs, and they were done at low loan to values at very tight margins. Nothing that we would do. But it worked for him. He had a very low expense ratio and he clipped coupons. I believe that these assets, being I'm going to use the word multitenanted, although they're retail store with a couple of apartments on the top, there's a lot of mixed use here. Even if we lose 20% or 25% of value, we'll get made whole. We'd used purchase accounting in the first quarter of 2023, so I would say we probably mark to market on half of the bad move in real estate. And I don't have a good outlook for commercial real estate. Now obviously, it depends upon the market. These aren't New York City office buildings or skyscrapers. And if you have to be in an office building, Miami is okay because there's an incredible demand. But you can't raise rates by this amount of money with the cap rate not changing and the borrower needs to have new equity to be able to survive. So I think there's going to be a lot of pain for people that have this type of exposure. Now I'm assuming the other $80 million is mostly the 504 portfolio. Scott, is that right? Okay. Okay. So let me focus on the 504 portfolio. When we make a 504 loan, number one, the business must underwrite. So the business is repaying the loan. And it's typically 1.25 debt service coverage or better. And at the same time, the SBA approves it and the CDC approves it. So we're left with a 50% LTV CRE first. We typically get 2 points. We also get 2 points on the loan that gets taken out, right, which typically goes within, I'll say, 180 days, maybe 90 days. And then we -- I will tell you, we've historically sold those loans, and we hedge them. So we take no market risk. We're hedging them with commensurate T-note futures 103, 104, so very profitable. Short-term hold, everything is held for sale, so that's kind of the CRE portfolio. So I would put it this way. It's probably not bad to take CRE exposure today where rates are high. I just don't like CRE exposure when rates were at 1, 2 or 3. And that's the problem, I think, for the market. So you have to look at the cohort here, when it was originated, when it was underwritten. And this is where that low loan to value really saves you because if you were doing loans at [ 70 or 80 ] in the 0% to 1% or 2% rate environment, you're hurting. And there's no guarantee. Borrowers flip the keys. I lose the equity. It's gone anyway. Not the case in our loans.

Great. And last question, and we've touched on this a little bit. It seems like your deposit gathering techniques have worked well. I know personally, you looked at your CD rates and similar products, and they were very competitive. Do you expect that to continue? And what benefits has it created or competitive advantage versus your old BDC model?

So if I think about the advantages versus the BDC model, obviously, the lower rate paid, you're looking at, even if you take a blend of business in retail and assume something that's a little bit more -- a lot more weighted towards retail, you're at 5%. Barry mentioned the 7.75% versus 8.5% funding cost outside of a bank. So that 3-plus percent is where 2.5% to 3% spread is really where the value is. As it pertains to our deposit gathering techniques, it is incredibly efficient. I would argue probably one of the most efficient in the industry, particularly when you match up against that the low levels of losses -- fraud losses that we've had being all online. So from my perspective, I firmly believe that we're in -- we have the right systems, processes and people to take advantage of the consumer deposit base and the business deposit base. I expect that to continue. We're going to do the best we can to gather these business deposits. It's a core strategy for us and core to our success in 2025 and beyond. And we'll supplement with retail to the extent we need. We have the wholesale market available to us, whether it's brokered CDs or listing service CDs, other products that we can offer to our business customers that are, if you look at the mix, reasonably priced but higher than what we can gain from our business customers. So we'll supplement with retail. If the retail market locks up, we have plenty of opportunity with the wholesale market. So I feel very good about the strategy. I expect it to continue, and we'll respond accordingly based on the returns.

Thank you, Brad. Appreciate it. Last questioner from the analysts, and then we will open it up to investors. If they have any questions. I don't know if Bryce Rowe is with us from B. Riley. He got canceled on his flight. He sent me an e-mail this morning. I do have his questions ahead of time if he's not online.

I do not see Bryce online.

Okay. All right. Question number one, Scott, you've talked about the allowance likely declining from 4% of all loans at the bank, which implies the SBA portfolio -- the non-7(a) portfolio should grow and the next could influence all loans. How should we think about the growth of the non-7(a) portfolio? How are those loans sourced? And if we were to break down all the loans, do you think the 7(a) loan settles once the portfolio reaches a seasonal level?

So as it pertains to the traditional bank products, I believe, in the first quarter deck, we published our expectations for the full year. We're not in a position to update those for the full year today, but I would expect that as we reiterated our guidance and didn't change those levels that the production's geared towards the last 3 quarters of the year. Those loans command to reserve, call it, for a broad brush assumption, 1.25%. When it comes to the 7(a) portfolio and where we would expect that to land at a kind of, what I'll call, a full pool approach for the 7(a) product. I think 6.75% thereabouts is where we'll land. That assumes the current interest rate environment and the current economic environment stays steady.

Second Bryce question, you've noted ALP loans held at the holding company could determine where EPS falls within your range. What are the determining factors in the pace of ALP loan growth? In addition to the rate of ALP loans, you earn an upfront fee on those loans, amortized over the life, what do you expect the flow of ALP loans to look like, originate, transferred into JV, securitized. We did cover some of this. I'm going to have Scott handle the accounting on the upfront fees for amortization. We are going to polish up these numbers for Q2. I do think we're going to be able to do $250 million to, I know this is wide, $400 million of the ALP loans this year. We've already done $120 million. I mean I'd like to think we can get to the upper end of that band. I think we've got the JV money, the lines of credit, securitized. Everything is lined up. But just to be conservative, until it's banked, we're not there yet. But putting that aside, I put a $250 million to $400 million range, and I put the probabilities between $300 million to $400 million greater than 50%. I've discussed what those factors are. The good news is we just did this bond raise. We are a lot of cash at the holding company. We have a lot of cash at the bank. We probably have too much cash. But whatever, it's okay, won't kill us. Scott, you want to talk about the accounting for the upfront fees?

Yes. So with the ALP program, we elect fair value. So that requires us to obviously mark the loan at fair value, but the typical accounting model of deferring loan origination fees and costs doesn't apply when you've elected fair value. So all those costs and expenses are recognized upfront on the ALP product.

Great. Scott, noninterest income is a large component of your revenue. Tech, IT support, electronic payment processing and others comprise a meaningful portion of noninterest income. At what pace will these line items grow and why?

I think it's important to remember that with respect to technology income, that we had to sell that business. So that's a revenue line item that will eventually go away. Barry mentioned the opportunity that we have, so I'm not going to reiterate those points. As it pertains to payments, we've made a lot of management changes in the payments business, and I expect that company to perform better at least from a bottom line perspective. Our projections this year, which are baked into the EPS assumptions that we provided at the first quarter call, I would expect those to grow in the double digits on a net income before tax contribution basis. With respect to noninterest income in total, though, I'll beat the drum again in case people didn't hear me or you talked for the last few hours. Gains on sales of loans will happen in the future. They're going to happen. We give you the loan production numbers we expect. We've given you the amount of money, the premium we expect to collect. That's a source of noninterest income, so that's there. It's going to continue. We expect it to continue and so you got to -- you can't talk about our noninterest income without talking about gain on sale.

Scott, you've had to build infrastructure since converting to a bank holding company. Where are you in that process? How should we think about expense growth? At what point does it level off? Is there an internal target for operating expenses and assets?

Yes. So we are very, very busy with a lot of initiatives across the company, some of which pertain to converting to a bank, others of which can deal with just trying to gain some level of operating efficiency. We, as an institution, have to evolve and are evolving and have made tremendous process -- progress since we bought the bank, as Barry mentioned, 59-year-old bank with -- maybe not -- quite 59-year-old processes, but not too far from it. So we have a tremendous opportunity on the expense side to reduce expenses. We -- at the same time, we do have projects where we will have to spend money. We're -- inflation is here. We're dealing with it just like everybody else. The war for talent is still alive and well. So as it pertains to expenses, where are we in, in terms of evolving our processes? I'd say we're probably around 80% as we sit here today in terms of our journey to getting to where we believe we need to be given our near-term growth opportunities and the regulatory factors that have to be considered. It's important to note that this is a journey, and it doesn't end once we get to 100% because of the bar. Guess what? It goes higher as does the compliance burden as does regulators' expectations. So as we grow, there's going to be a level of incremental spend that has to be there. That's -- we'd be foolish to say that it's going to stay constant. I'd also point out that with our noninterest expense and the fact that we elect fair value on our 504 loans held for sale and our ALP loans, there are variable expenses included in our noninterest expense that are driven by the level of loan production that we have on 504 and ALP. So to say that it should be pegged off of maybe noninterest expense to assets, that's one way to look at it, but it's very hard to do those comparisons when you consider that we elect fair value a lot more often than certainly peers of our size and the peers that we've referenced in the earnings deck.

Scott, question 5 from Bryce with the rollout of deposit products and deposit gathering functionality. Do you expect deposit growth to outpace loan growth? And if so, how do you plan to deploy the excess cash?

So with respect to that, that's a good question. When it comes to deploying the excess cash, where we are in the interest rate cycle right now and where we have deposits priced, it's really not a driver of, in my opinion, not really a detriment to EPS. It's pretty much breakeven because when you look at us earning cash at the Fed at 5.4%, putting on new deposits at anywhere from 5.25% for high-yield savings or from 5.35% to 5.55% on our 6-month CDs it's almost a net push, and it's really negligible to the extent that we have -- we get more funding from maybe the more expensive CDs. So it doesn't hurt us. It does put a little bit more pressure on the leverage ratio. But we're going to continue to optimize how we look at funding ourselves. Do we have the ability to pay down existing debt across the company. We certainly look to do that. I want to emphasize something, though. We're not -- if you look at the returns on our loan investments, it far outpaces what we can earn in the securities market. And we would prefer to invest at least -- and hold that dry powder for the future instead of going out and buying a bond and being like every other bank in the country that has interest rate risk, fluctuations in our equity. It's just not worth it.

Scott, last analyst question from Bryce. Your operating model is somewhat unique among commercial banks. On top of that, Newtek's in the early stage of its life cycle. Would you consider issuing more specific balance sheet and income statement guidance for investors to have a better understanding of what gets [ newed ] into its EPS guidance range? I told them to ask that by the way.

Thanks. Look, I think what we provided this past quarter is what you can expect from us from EPS guidance, and we're giving you the drivers. It'd be great if we just publish our model and make you all's jobs easier, but we're not going to do that. And look, we -- part of our business model, I mean, it is a bit of our trade secret, right? We have a secret sauce that not many companies, not many banks have, and that's our value proposition. So we're in a -- banking is a bit of a commodity, right? I mean we offer -- we're going to lend money. We try to supplement that commodity with customer service and good products. But at the end of the day, while we operate in a commoditized business, we do stand out with our business model. I think we have provided the investing community with plenty of information in order to be able to build the model. And look, we -- if you have questions and things that we need to focus on or discuss like we have today to provide you with more knowledge about how to model us -- because it's complicated. I mean I've been here a year and Barry joked about having to explain it. I mean I'm finally feeling like I'm an expert at this company, and I've had to really live it and breathe it for the last year. So it's not an easy thing to -- I sympathize with you guys. It's not easy. And we're always willing to have a conversation. We're always willing to put more in the deck, but I don't -- there's just not a lot of incremental benefit to us including more information.

We certainly opened that comuna today to a big extent. Operator, would love to open up the call to see if there's any investors that have questions. Obviously, it's been a heck of a morning. I'm pleased we're on the right timetable. But if there's any investors that are on the call -- we had about 60 registrants. Every analyst got a chance to ask their questions. We certainly appreciate their participation. But if there are any investors that have questions, please, operator, open up the Q&A to them.

[Operator Instructions] Our question comes from Matt Fedorjaka with Royce.

All insights have been super helpful. Just had one quick question. Wanted to ask about referral partners. Is there any sort of heavy concentration that we should be concerned about in terms of the top 3 or 4 partners that you guys -- referrals to? Can you maybe give us some numbers on what percentage of total referrals they make up or just more clarity on just how much concentration there are from like the top 2 or 3 firms that provide you referrals?

Matt, I appreciate that. I think that what we look at relative to our referral partners is clearly concentration amongst the gross referrals because we do have the opportunity, frankly, to pick and choose the deals that we want. We're very diverse. We're diverse geographically. We're diverse by ZIP code. And I don't believe there's any one referral partner that if they went away, that would dramatically reflect our earnings. I believe if we lost one, they'd easily be replaced. There's always new warming up in the bullpen. I will tell you, it's very rare that we lose a material player. To give you an idea, UBS has been over a decade; Morgan Stanley, over a decade. So the bigger name referral partners that we have, they typically are with us for a long period of time. The other thing, too, is we don't require exclusivity. We could. We could negotiate it. I find that these negotiations with referral partners or -- they're almost a waste of time. As a matter of fact, they're basically at-will agreements, which means we've got to do well every single day, and we prefer it that way. So no, we're not overly concerned about concentration. It's pretty much across the board. We do have certain spots, primarily not in the lending space, where we're very diverse. There's probably -- Pete, would you say the borrower base is at 4,000, 5,000? So obviously, we have a very diverse borrower base there. There's probably certain concentrations in some of the portfolio companies that are of an issue, but nothing of any major consequence that we're concerned about losing. Any other questions, Matt?

No, all good for me.

Our next question is a follow-up from Tim Switzer with KBW.

Can you hear me?

Yes, I hear you.

Yes. Just one quick one for me. And sorry if this was covered previously. I had to jump off temporarily. But how should we expect the capital structure of Newtek to evolve over time? Is there any optimization available you see maybe with like your debt holdings or preferreds? How do you see the capital structure overall between those 2 in the common stock over time?

So I think, Tim, from our perspective in the near term, I think that we're pretty liquid up at the holding company. Because of our returns on our assets at the HoldCo, we're able to pay fairly generous rates on capital, whether it's preferred or 5-year non-call bonds. We do prefer to stay away from issuing equity, although if institutions were to come in and want to take a position, we're certainly always open to that. We have an ATM in the market that we can utilize for that type of activity. I think that the biggest growth from a balance sheet perspective will most likely be from the alternative loan program. And if we continue to do joint ventures, it's not going to grow that precipitously. We clearly want to try to avoid selling common shares at these current prices, which that's obviously a bias. And with the recent transactions we've done in the market, we don't need to.

Got you. That's very clear. And previously, you guys were disclosing, I think, the customer adoption trends, the Newtek Advantage. Do you guys plan to continue providing that data going forward? And then more generally, with this launching in October, what has been the customer feedback? And like are there specific products or services that customers are using more or less on the platform? It seems like you mentioned the insurance business quite a bit or payroll quite a bit. Are those ones that customers seem to be more interested in? And that's all for me.

Yes. The best thing that happened to me today outside of this meeting was, all of a sudden, I had a conversation with one of my executives that said his team keeps asking about the Newtek Advantage, which means that they trend the videos that we're starting to put in place. We'll grow that level of awareness. I think that the advantage being a gateway into the bank account and to being able to open up large quantities of transactional business, checking and commercial money market accounts, it's going to be extremely important to the growth of the Advantage. I think the metrics regarding the Advantage is really a third and fourth quarter type activity. As I mentioned to you, we currently have over 300,000 customers who come to us. Like let me give you an example. The 800 customers last night that put a referral into the system, they're all going to see the Newtek Advantage. Now I don't have the exact number, but I believe we probably got somewhere in the neighborhood of 40,000 business accounts that have documents stored with us that can be accessed through the Newtek Advantage. Now it's a free service. I won't say that they're that active in replacing and moving documents around, but they've got documents in the Advantage. So it's a good question. It's something we're going to need to get our arms around from a reporting standpoint. But I think one of the ways to gauge it is to look at each of the individual business units and begin to see the growth in deposits, loans, tech, payroll, payments, et cetera. I think one of the tasks that I have is -- and it's not easy, is to get the internal staff to begin to sell the concept of the Newtek Advantage. I will be transparent as I always am. I think this company has been spoiled with the fact that we get 800 referrals a day and don't have to work for it. It comes in the door. Now we are changing the culture to where people have to get on telephones, have conversations and explain why our solutions are great. And that's got to get beyond the current referral opportunities. These people that are referring to us. They know we're great for making a loan, for payments, for health insurance individually. Now we've got to get them to appreciate the fact that they have a business portal that's incredibly advantageous to them. The core of that is the deposit gathering, which needs to be established, reinstituted and enforced with the customer. Hopefully, that's helpful.

And our next question is a follow-up from Christopher Nolan with Ladenburg Thalmann.

No follow-up for me.

I'm showing no further questions over the phone line at this time.

Well, I can't thank you enough for the participation. We have over 60 people that registered online. The call's archived. I think we are able to cover material that, I think, people will be able to, a, put pieces to the puzzle together better, be more transparent with comfort with respect to credit. We've indicated that we look forward to the quarter where we do some guidance revision and give a little bit more definition to our forecast of loan losses going forward and have been able to really dig very much into the value proposition as to why we exist and why we're different than the 9,000 other depositories. So I can't thank you enough for the participation. Scott, I thank you, Halli Razon, Jayne Cavuoto, Pete, everybody that worked on this, Nick. This was a lot of work but very worthwhile, and we look forward to reporting a great quarter in August. Thank you very much. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.