Q1 2024 NewtekOne Inc Earnings Call

Participants

Barry Sloane; CEO, President, Chairman; NewtekOne, Inc.

Scott Price; CFO; NewtekOne, Inc.

Tim Switzer; Analyst; Keefe, Bruyette, & Woods, Inc.

Bryce Rowe; Analyst; B. Riley Securities, Inc.

Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc.,

Steve Moss; Analyst; Raymond James & Associates, Inc.

Presentation

Operator

Good day, and thank you for standing by, and welcome to the new tech one E. 2024 first quarter earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker for today, Barry Sloane, Chief Executive Officer. Please go ahead.

Barry Sloane

Thank you very much, and welcome, everyone to our first quarter 2024 financial results conference call. We're very pleased to present our results to you today. Joining me on the call is Scott Price, our Chief Financial Officer of New Tech one, a publicly traded company as well as new tech Bank National Association. In addition, Frank DeMaria, Chief Accounting Officer, EVP for New Tech Bank. Our new tech one, Inc. And I also have Nick Young, the President and Chief Operating Officer of New Tech.
One should when you take bank joining me today for all of you that want to follow along with the PowerPoint presentation, you can do so by going to our website, new tech, one.com and UWTKONE. dot com. While you're there, you may want to take a look at new tech bank.com and the new tech advantage, all valuable information to understanding our organization would also like to welcome the analyst coverage from KBW. Tim Switzer; from Raymond James, Steve Moss; from Compass Point, No Ross; from Ladenburg Crystal, Chris Nolan; from B. Riley, Bryce Rowe. And last but not least Crispin Love from Piper Sandler.
On this call today show illuminate a management company that is building a business that's important to note, take a look at all the building blocks that we put in our presentation from growing the accounting and finance departments, growing our ability to take deposits and new tech bank and A.
So our ability to move our lending operation into the bank and making a growing high-quality group of loans that have generous risk reward provisions as well as to being compliant LeuTech. One is clearly a long-term opportunity to invest in a technology enabled business that provides Business Solutions and financial solutions and depository services. So the 30 million independent business owners across the United States.
I do want to call everyone's attention to Slide Number one in the presentation deck, which once again you can find in our website in the Investor Relations section. Slide Number one is note regarding forward-looking statements.
So I'll move forward to slide number two. Clearly, the biggest takeaway from our results that we published last night for up in our press release, the biggest takeaways from Q1 in 2024 for first quarter 2024 for core earnings of $0.38 per basic and diluted common share exceeded our previously issued guidance of $19.25 per basic and common diluted share. Also important to note that in comparison to Q1 2023 earnings, we reported $0.76 and $0.74.
There was an income tax benefit of approximately $0.59 for basic [50] per diluted share of $0.6. Without that income tax benefit, EPS would have been [17] and [16]. So we really beat on a core basis from an operating perspective year over year comparison by about $0.20 conservatively, we raised our guidance for fiscal year 2024 to above [85] to [$0.05] from previous $1.80 to $2 .
Important to note sequentially quarterly deposit growth at the bank, 9% growth according to S&P Global U.S. based banks grew 1.2% in deposits from December 31, 2023 to March 31, 2024. So we're clearly proud of that ability to grow deposits, sequential loan growth also at a level of 11%. That's on a consolidated basis at New Tech one over Q4 2023.
Also important to note that of the SBA seven a. business, we sell 75% of the government guaranteed loans typically within the quarter that we produced up. Therefore, the growth obviously would have been higher. It is important to note that this organization that has a consolidated total asset base of $1.4 billion and about $700 million of the bank really has the loan generation capability of an institution that is four or five times larger. Important to note that interest margin at New Tech banks grew sequentially by 37 basis points from [4.43] to [4.80] growth in NIM. as banks is hard to find.
Clearly, we are very proud of this extraordinary accomplishment. In addition, while we were able to grow NIM. 45 basis points of loan loss reserve coverage at March 31, 2024 for growing loan loss reserves while growing profits, not an easy thing to do, these are accomplishments, we're extremely proud of. We also increased the quarterly dividend in the first quarter by 5.5% to $0.19 a share from $0.18.
That was an indicative sign of confidence that these dividends will be paid out of earnings with the Board. And the management feels comfortable that what we're doing is they're consistent stable, and we'll be able to repeated quarter-after-quarter on slide number three, we've got new tech bank. Financial summary highlights, ROAA, 5.8% ROTCE, 37% efficiency ratio of 15%.
I don't know where you find financial institutions or banks that have this type of performance. Frankly, people are looking at it and saying, I don't know if this can be kept up. I don't believe it will run out this quarter, right? And I hope we keep producing these kinds of numbers and we'll continue to work hard to produce these kinds of numbers for our shareholders.
So net interest margin at the bank, 4.8%, up from [4.43] average yield on loans at the bank increased. A lot of that is based upon I would say an overperformance in the seven A. business. We're going to talk about the other loans that we do with the bank that prospectively are lower margin, lower yielding, and we'll have less charge-offs. Deposit rates increased slightly from [4.4] to [4.48], and that's a trend that probably will continue.
But we think modestly not to any great extent that will affect net interest margins, net interest margin will be more effective by putting on lower risk, more vanilla bank card loans in the bank to diversify the portfolio to take a look at our capital and credit for the all over to the right-hand side of the slide, you can see our institution continues to be well capitalized. Our Q1 returns clearly were were impacted by higher volumes of loans, greater price, also higher expenses compared to fourth quarter of 2023. I think it's important to note that new tech one is not an organization that's built to be a $1.5 billion financial holding company. It's projected to be much, much larger. So we're putting in the infrastructure to be able to continue to achieve growth rates in deposits and lending as well as the ancillary services that come out of the holding company that make us extraordinarily unique.
So the net interest margin and yields on loans are primarily due to a higher concentration of SBA seven a. loans were prime plus three lender today, and that would be 11.5%. So once again, we're very, very proud of the results and the performance at New Tech banks consolidating it up to the holding company. The ROA 2.8 ROTCE is still very high at 20%.
And obviously, as you take a look at the difference between the holdco and the bank, clearly we've got our institutional funding up at the holding company. So less opportunity to take advantage of deposits, which are lower cost down in the bank. We do our alternative loan program funding at a holding company first on the balance sheet and then into joint ventures. But once again, important to note for a financial holding company, these are still extraordinary numbers that you can find when you run your finger down the page of other financial holding companies and new tech on towards the bottom of the page.
You could see on slide 4, the core EPS non-GAAP last year, it took out the tax benefit from the first quarter about $1.30-ish, and we're looking at a revised forecast for 2024 of a $1.85 to [$2.05]. Clearly some nice growth there, particularly in core. We think that that growth should start to sequence to the investor and analyst community to start to achieve a more normalized market multiple as the market and investors start to get a better understanding of our financials, our balance sheet, our income statement and how we project going forward.
Slide number five, I think this is important I get asked as Scott raised a lot of questions once again, very unlike the comparison to a traditional bank. First of all, we offer so much more to our clients and we do this without branches, brokers, bankers on a traditional sense. And BDOs were more focused on return on tangible common equity and return on average assets, not assets under management I used the term coupon clipping our competitors in the banking industry that make loans, they tried to get as much non-interest bearing deposits as they can.
And they're given that coupon clearly, we have an overweighting of non-interest income versus traditional bank interest income, which we think is an envy of most other banks. But this is something that's been inherent in new tech and it's one and its business model for over the course of 25 years. And since we became a public company in September of 2000. Our margins and returns are higher than a traditional bank and bank holding company. Important to note, we believe our credit remains strong lending to the small and medium size business. Now some people say, gee, these small business loans aren't these really bad credits?
Aren't these the credits are they're going to go bad first, first of all, we've been doing this for 20 years. We've been through oh eight, oh nine. We did through the pandemic. We understand this, but our investors are rewarded from the programs that generate an 11.5% coupon and even net of the expectation, which we believe our history and our management team has very good knowledge of how this portfolio is going to perform, provides excessive returns.
That's why our ROAs and ROTCE.s are much, much higher than our competitors, even while we're posting loan loss reserves that are north of currently of 4%, which we think will modify down to 3.5% when we started diversify the portfolio into some for traditional banking types of loans. But when you look at what we're doing in the bank from a risk perspective, we love our business model much more, then they deem to be low risk, low charge of low margin loans that our competitors are doing, hoping that their non-interest bearing deposits don't run away into money market accounts, which is a trend that we see continuing to go on.
As far as the agency, it's way too easy to move money on a phone into the right accounts. So maybe I don't leave [250] over $2.5 million in the bank, mainly through our $250,000 people and a money market funds and keep moving the money back and forth. That's where we see the trends. We're very well positioned for that. And we certainly even with the higher cost of consumer deposits that we've got and we're going to talk about reducing that cost of commercial deposits. We are very well situated for the risk inherent in the business industry going forward.
Yes, we're able to raise deposits. We brought in approximately 6,000 depository accounts in our early stages of life. Yes, gain on sale is a reoccurring event and it's reoccurring income. I've got a beautiful slide on slide 17 that shows this beyond. People don't like gain on sale. They may not like it, but we made money doing this for 20 years. We make loans and we sell them and it generates a higher return on equity and a high return on assets. It's a better strategy than a financial or a bank holding company be a growth company?
Yes, we don't know how the others can do that within their model. But yes, we can be our alternative loan program. We'll talk about this. We've demonstrated in earlier presentations, it's a 20% to 30% return on equity business for our company on it was slower in 2023 due to the issues that were occurring in the market with respect to rates, volatility, capital availability for banks, it's an important growth aspect that you could see had a great first quarter have a great pipeline, and we think we're in pretty good shape going forward.
I'd like to turn the next few slides over to Scott Price to go over six seven and eight.

Scott Price

Thanks, very good morning, everyone. Turning to slide 6, our net interest income expanded 16 basis points during the quarter. Despite higher deposit costs. Average earning assets increased $31.1 million, and we experienced a sizable mix shift, with average cash balances declining $45 million and average loans increasing $73 million, a higher percentage of the loan portfolio in the SBA seven a. product versus last quarter drove the increase in yields on loans.
On the funding side, our cost of deposits on a consolidated basis increased 20 basis points as the acquired CD portfolio continues to mature lower costs. Separately, our interest expense on borrowings was lower as we experienced with prepays on the NSBF. seven a. portfolio, which led to reductions in notes payable to securitization trusts.
Slide 7. As a graphical representation of the ins and outs of net interest income, most of which I've already covered. To summarize, we were able to increase our balance sheet efficiency by deploying excess funds to originate loans. I do expect higher levels of leverage at the bank as we roll out our business checking products and continue our retail deposit gathering.
Shifting to slide 8, our deposit mix was relatively unchanged towards our high-yield savings balances staying relatively stable and CD portfolio balances increasing. We expect our business checking account product and business money market products increase at lower on balances to increase at lower rates as we move into the last three quarters of the year, the maturing digital CDs during the quarter largely rolled on to the same product at similar rates.
Important to note, our retention that we've experienced on CDs maturing in the last few months, March and April, I've been above industry standards at 90%.
Barry, I'll turn the call back to you.

Barry Sloane

Thank you, Scott. Slide number nine, the new tech advantage. This is our advantage in the marketplace we believe that the new take advantage will become a market place destination for our clients. We offer customers more than just taking their deposits with the hope that they can get alone, when a client opens up an advantage account, they get free unlimited document storage.
They get free real-time, upgraded updated web traffic analytics. If they're processing payments with us, they're going to receive real time chargeback and batch information, they can get same-day funding. If there are payroll clients, they can make payroll directly from the business portal. The new tech advantage extremely valuable.
We believe this on our technology that we've developed is also something that we can package white label and resell to other financial institutions within their marketplace. And we're very excited about the new tech advantage. We believe it gives us the ability to gather more deposits from verticals like payroll, insurance and payment processing.
Slide number 10, artificial intelligence on AI is going to change all companies in the United States and across the world where businesses have the opportunity to unify to utilize AI, it's going to be extremely beneficial. It's in new tech ones. Dna were disruptors or entrepreneurial, but important were prudent, but not afraid to use these types of technologies when they could really provide tremendous efficiencies and the way the Company is positioned for a unique position to take advantage of these opportunities.
The process of gathering data without the use of brokers, bankers, branches and BDOs is inherent to our model utilizing that data to futuristically be able to mine that data and make decisions about which clients we should contact for various opportunities from an email message or a phone call to provide additional services to use AI to manage our remote customer facing staff. Labor management is key.
We currently use certain softwares within our organization that do this at today to basically ensure that our staff is consistent and comprehensive in their messaging with our existing and prospective customers going forward, utilizing AI to aggregate and analyze data to be able to assist in making credit decisions and opening up a bank account is clearly within our future plans.
On slide number 11, relative to the Financial first quarter highlights, most of this data you'll be able to read in our press release, we're very, very pleased with how it rolled out. Once again, most importantly is the quarter over quarter comparison, '24 versus '23 $0.38 versus a core of [17] and [16] per basic and diluted common shares for Q1 2023.
Important slide on number 12, credit and risk management. Clearly something that based upon our legacy history as a BDC using fair value and certain limitations to being able to move Newtek Small Business Finance in the bank leaves us with accounting that needs a little bit further explanation. Newtek Small Business Finance is currently and formerly the non-bank SBA seven a. lender, which does not make anymore seven a. loans. All those loans are now made down in the bank.
So Newtek Small Business Finance arm sits up at the holding company has about $633 million of total assets at [1231] 2023 for capital book of $300 million. And the important aspect, if you want to track credit and trends, take a look at the fair value adjustment, sliding all the way across the five quarters, $33 million. That's a big number.
Here's the good news. It's already been written off. It's been written off the book. It's been written off of earnings sorry effect in our past earning and you're left with a fair value of $37 million. If you run your finger back across the page, it's fairly stable over five quarters hasn't moved very much. These are loans that most likely will a re-performing get back into payment status.
Yes, nonaccrual small business loans frequently do come back into payment status. They still sit in this particular category or makes it. However, the important part is they may come back why there's multiple joint and several personal guarantees on these loans something that is not quite familiar to most banks or analysts or investors in this particular space.
Also the $37 million most likely will if it doesn't come back, the other choice is to liquidate the collateral. These are evaluated every quarter. We mark the collateral, the market. We estimate how long it's going to take to liquidate is it six months is it 18, is it a tough state like Illinois that might be '24 in our bankruptcy, we look at the fair value. We put the cost to liquidate and we come up with a price. So nobody needs to go crazy over this if in fact, these numbers to increase that this is a portfolio that's a trading down.
So as a percentage of the total assets in SPF arguably is only going to get bigger because the portfolio is paying down quite rapidly of the performing loans because the important part we have this in our capital plan. We have this in our financial projections. This is not something that we're not new to. We own Newtek Small Business Finance since September, -- January of 2003.
So that's important to understand the nonaccrual portfolio, which is at fair value in NSBF. This is the nonaccrual. When you look at the accrual portfolio, it's priced assuming an approximate 8% charge-off over the life on a new loans have seasoned loan could be 5% or 6% because we've already experienced most of the charge-offs in the first 36 or 48 months, I would say 40 -- 35% to 40% of the portfolio is, I'll say, four-plus years old, all sitting in securitizations The rest will probably vintage '21, '22 and a little bit in '23.
Now let's go down the new tech bank. So past due [31] to [89] $12 million or $12 million. It's really not an enormous number. It's 3% of total Mind you we sell off the government guaranteed piece. So if you would have kept that on the books and you use your percentages, probably 2% or some 1% number.
The other thing to point out is we make loans in the bank that we sell. We originate five or four loans, which we've never had a charge-off on to date. Those loans go out of the bank. We originate them and sell them. The first and the second are taken out by debentures. The alternative loan program loans also are originated. They go on the balance sheet briefly, then they go into joint ventures. So when you look at these numbers, these numbers are consistent with our projections.
They're consistent with our plans. You'll see our currency rate is [95.5%] at the bank. Look that currency rate could go down much lower. That does not return as we've had currency rates of 88% or 89% small businesses fall behind. Sometimes it's seasonal. Sometimes the owner gets sick and they fall behind. So these numbers are not extraordinarily high and they're within our expectation.
The nonaccrual loans at $8 million in the bank, a little over $5 million of those are Old National Bank of New York City loans will discuss the character of those loans. We've looked at these loans. We've analyzed them with a $369,000 allowance for credit losses. It's not a big number. It is going to get bigger.
Okay. However, the benefit of this is you get a big gain on sale, you get a servicing asset and the performing loans are on the books at 11.5% floating at prime, our quarterly adjust and once again, our loan loss reserves north of 4% more than adequate to be able to hold this. And we'll be we will be and have been looking at this every single quarter. I would say credit is not understood why the market for SBA seven a. loans. We've been doing this for 20 years. We know it. We understand it, and we're very comfortable managing the greater reward that you get for the charge-offs and delinquencies that you're going to have in this type portfolio.
Slide number 13 talks about quarterly lending activity. Obviously, we crested in the seven a. space, an increase of 35.9% over the prior quarter in the prior year. The alternative loan program, which is important, it was starting to get some nice traction $53.8 million in Q1. We see that continuing to ramp. This will help our profitability. And on a total loan area, you're going to see in the bank, hopefully in the second quarter.
But certainly in the third or fourth, the bank is going to put on the more traditional vanilla of low margin, low risk, low loan loss reserve, low charge-off types of loans that most of the banks lend to. But that's not our thesis. We do believe in a diversified portfolio. We think that's important and we will have it through the purchase origination of what I call conforming CRE and conforming C&I loans in the bank.
Slide number 14 addresses the loan pipeline growth. Clearly, when you look at the alternative loan program on Slide 14. That's obviously our biggest delta that we have there. So as of the end of April to nice our pipeline of approved pending closing of $48.5 million, seven A business looks pretty good. I feel very, very good about where we are at the bottom of slide 14, you could see the alternative loan program closings through the first four months of the year, $61 million. You could straight line that and annualize it. We think it will wind up growing to bigger numbers and that's part of our forecast, but we actually have forecasted that pretty conservatively going forward.
On slide number 15, once again, the makeup of the portfolio is important at the bank. We talk about our currency rate percentage of CRE composition. Obviously, the National Bank of New York City portfolio continues to get diluted as a percentage. We believe in geographic and industry diversification through our new tech sourcing and clearly our lending operation very scalable that will continue to grow year after year.
Slide number 16 talks about that CRE portfolio of new tech banks I'd like to draw your attention towards the bottom end of Slide 16. Once again important, there are a lot of banks out there that would certainly trade my weighted average LTV per CRE portfolio at [59.4] and look at these lower numbers on multi office and retail, that's driven up a little bit by the fiber for lending of which the second lien gets taken out by debentures, slide number 17.
Okay. Is gain on sale or reoccurring events?
Well, the numbers don't lie. So let's focus on sort of what I'll call the near term history, 2021, 2022, 2023. These are big numbers. And I tell me this isn't going to be reoccurring 5, 10, 20 years from now, you're going to see these numbers add new tech one for right? These numbers are there. We make loans, we sell them. I mean, if the math ever change and I haven't seen it in my two decades of experience in the business where it didn't pay to sell the government piece, we might hold it for income, but the highest return on assets, the highest return on equity.
It's clearly by selling the government-guaranteed piece. And these are the cash premiums Important to note for non SBA seven a. aficionados, anything you sell to the 11 pool assemblers above one 10, the premium gets split 50/50. So you look at the weighted average net sales price, you could see it down the far right-hand column on slide number 17, the average over this time, [11.34]. If you go to the next slide, the first quarter is pretty much where we've been at the 10-year average. So I mean it can go a little lower, it can go a little higher, all manageable for us in managing our business.
Slide number 19, everybody always forgets about the payments business. It just generates a lot of income and a lot of cash, the forecast for 2024 for which we're comfortable with pretax income, $16 million EBITDA, $16.6 million to nice growth from the prior year. Also important to note, this business is not factored into our tangible book on that's just accounting.
It was basically put in and I feel pretty much close to zero. I'll just leave it at that on and when we were holding this as a BDC and it was being marked to the market I think we had valuations net of its debt on NAV of about $115 million. So I had one investor say, Well, gee, to do lose all that money in equity, though it's just the change of accounting from NAV to bank accounting or book value accounting. And obviously is one of the reasons why we continue to educate our analysts our investors on a regular basis. There are a lot of accounting changes, but I think people are starting to get a handle on this, and it's going to become easier to follow.
Slide number 20 is a breakdown within Merchant Solutions. Slide number 21 is indicative of the dollars that we recently spent to bolster our accounting and finance and compliance team I think you could add about another $800,000 of expense to this number, which is factored into our projections. Once again, we don't aim to be a $1.5 billion bank for long. This is a business that is built for scale. It's a business that industry participants are going to look at and go.
How do we raise deposits with the bank branch bankers, branches, brokers or BDOs, how they make those loans the way they make them and make those loans those prices can they do his business is technology utilization of technology, dedicated staff willing that's willing to adopt. So that technology, I should say, adapt to the technology on and continuing to add to make sure, but we could manage our risks be compliant, have the right policies and procedures in place.
I will point out once again, when you think about where we started with a 61 year old bank that had and really no ability to open up a deposit account unless you went into the bank loans were made primarily through a brokerage network. So we had to put a lot of things in place that was 2023. We're still doing it. So against the backdrop of a lot of headwinds, this is a company that's building a business for the future to be a technology-enabled organization that can provide superior solutions to a huge economic engine and demographics in the marketplace. The independent business owner, Scott, if you go over the slide 22 on the financial projections that will be appreciated

Scott Price

Cervarix, Slide 22 outlines our updated guidance for the remainder of 2020 for many of the KPI.s that we assumed and disclosed in our call in March remain unchanged. Our forecast assumes no change in interest rates. Consistent with prior quarter, we expect loan demand to hold them.
We did widen the ranges for Q3 and Q4 in light of the soft landing, the Fed is trying to pull off and the future of interest rates being data dependent. There are two items I want to point out regarding our results relative to our March forecast. First, our net interest income and provision expense came in on top of our expectations. And second our noninterest expenses for the quarter came in slightly better than we forecasted.
Barry, I'll turn it over to you.

Barry Sloane

Thank you. Slide number 23, I did make some comments about the 2023 calendar year and the investments that we made some I think I've covered most of this once again against a lot of headwinds in 2023, we are very pleased and proud of our performance and the fact that we can now with a little bit less on the headwinds, be able to continue to grow the business with a forecast of a $0.85 to $2.5, which we think is conservative for calendar year 2024.
2024 initiatives to continue to grow the new tech advantage and increased impressions that's going to go along with our ability to bring in commercial transaction deposits. We added about 17 heads in the commercial deposit area in Q1 2024 with another two coming in in April.
Most of those heads are used for the back office of accepting transactional deposits, customer service, teaching people how to use the technology, making sure we're compliant, making sure we can surveil all that stuff. So a major investment, all of these expenses are part of it. What will that lead to future growth in 1% commercial DDA and 3.5% commercial money market, which will come in from our payroll businesses.
Our merchant businesses, our lending business, which we started to get some traction towards the tail end of the first quarter 2024. We can't just be in that business without having the people process and technology wanted to make sure we were able to do this in a compliant manner because you don't want to make a mistake in this particular early stages.
I know financial people and I happen to be one of them saying, well, why can't you bring in more of this for this cheaper deposit money where we will be it will be, and it's something that we will be delivering on. So and we talked about this in previous calls, modestly in Q2 in 2024, but you'll start to see those numbers turn in Q3, 2024 and Q4 2024. And we believe that our accounts which charges no service fee for the account, no ACH and no wire fee will earn that business from the customer with an interest bearing rate.
Our competitors can't do this, why they don't have the assets that they could put on the books on a risk adjusted basis that our floating rate asset liability manage to make this thing work. So our business model is unique. It works. It's worked historically in our career for those shareholders that have been patient. You've got to please excuse the transition, but it is working and our first quarter results are indicative of and we also look forward to Net Suite a new financial reporting platform that will enable us to close our books earlier.
I think that's a second half 2024 initiative and continuing to add high-quality people, '24, we're obviously going to be attending investor conferences. We plan on hosting an Analyst Day, I would say the date will be June 13, 2024. We'll put out a press release will give people the opportunity to register ask as many questions as you like, and we look forward to getting together with analysts and investors in our corporate headquarters in Boca return our book over time.
We also believe in the second quarter of 2024, we'll be able to show a cleaner, more normalized year-over-year growth comparisons without the tax effect that we dealt with in Q1 on continuing to maintain our dividend policy. And I think importantly, we exist to make our clients more successful. We exist to have a better experience for our clients. We exist for clients to interact with their important business and financial solutions provider in a way that has less friction and to improve their business on a regular basis. Otherwise, we haven't earned it.
Slide number 25 gives a comparison where new tech one sits on market multiples yield. Obviously, we look at these things with the exception of the transition and a lack of understanding, does these things don't make sense, but these have a way of working themselves out today's conference call is a way to get these things to work out to get people to have a better understanding of who we are, what we do, what our numbers need to stick.
Thanks, drilling. Slide number 26, most banks desire what we already have. They love to have a lot of noninterest income. They love to not have the interest rate risk management. They'd love to have names that we have. They'd like to have the loan. We've got all these things. Now it's important to continue to operationally execute on the strategy and get the message out for very, very excited about our future business. Raising commercial core deposits will increase margins, lower cost of funds.
And we do believe the new tech advantage once we have those deposits will become the gold standard in banking for deposit gathering because the customers want more from the institutions they do business with. They just don't want to give their money up and that get paid a fair rate of interest. We've overcome a lot of difficult hurdles. And while there are a few left, Finish Line is in sight.
Slide number 27 before we go to Q&A, I mean you can ignore these numbers. I mean, you can, but I don't see how that's very helpful to ignoring the profitability of the bank and of the holdco versus our competitors in the marketplace. Eventually, there will be a better understanding people get comfort that we can continue to raise deposits, continue to make loans, make sure that we're managing our risk and we have the right amount of reserves, even though our losses are higher, income is materially higher.
And on a net net basis, we have higher ROAs in our OTCs. We are excited about being able to bump their guidance up a little bit. We think that's conservative. We look forward to continue to pay dividends, which will be declared by the Board out of earnings. We have a current dividend yield of 6.8%. That's a bit of a head-scratcher for me, but I get it while it's hot, and I think it's important to note, new tech is a growth oriented differentiated technology-enabled business solutions company. That is also the depository, and we look forward to opening up the Q&A. Thank you, operator?

Question and Answer Session

Operator

(Operator Instructions) Crispin Love of Piper Sandler.

This is Barak Fuzeon for Crispin Love. Thanks for taking the question. Can you just remind us some of the economics on the non-conforming loans you're earning on day one in terms of fees you're generating there and how much see some reserves are you putting up as well on these loans care?

Barry Sloane

Appreciate the question on the alternative loan program we historically called it nonconforming, we changed it to alternative loan program to make sure it could better understood on, you know what I forgot to do. The MDNA. outage. I let me answer this question, then we'll go back to Scott's MD&A. Sorry about that.
So let me answer this your questions, and we'll go to the MD&A. So on the ALP. loans, basically we are on the street today at about 3.5 points gross. We service for 100 basis points and the loans are net to the joint venture at a price of 12%. So about 13% growth. We have a., b and c credits we're 12%, 13% and 14% growth.
Now regarding CECL reserve done at the holding company. So we have a estimated charge-offs historically on those loans of about 3%. So given the profitability of the fees to servicing any funding from our joint venture partners, it does provide a generous return to new debt.

One, Austin, I appreciate that. And then just following up, I know you guys mentioned on the call, but on the SBA gain on sale margins, you speak a little more on what has kept gain-on-sale margins elevated even north of 11% in the first quarter, which is higher than most peers?
And how is the demand for your paper? How would you expect margins to trend through 2024, the current rate environment?

Barry Sloane

Well, it's a great question. So if you look at, say our primary competitor or label who doesn't have the gain on sale margins when you're basically originating loans through brokers and bankers, they work for the borrower and it's much more competitive. It's much more manual. And because we're incredibly efficient work closely with our borrowers, we're able to get better margins. We've been match rate for 12 years. We don't cut it. We get to the borrower quickly. We get the data processed quickly. We make them an offer, and that's why our margins are better.

Awesome. I appreciate I appreciate the answers. That's it for me.

Barry Sloane

Thank you, operator. I've got to apologize to the group. I messed up my water. So Scott was posted was MD&A, and I'd like to revert back to Scott Price if I can't do any more questions.

Scott Price

Yes, very Thanks. Real quick. I just wanted to add also potential question. I just wanted to cover the changes in provision expense for the quarter, the provision expense is higher, as or excuse me, lower as a result of the seven day production at the bank. We did have some first quarter charge-offs that we covered in our provision expense.
But the majority of the provision expense at least almost $3 million was driven by higher loan balances, the remainder between provision for balances and charge-offs was and specific reserves. We feel like we're prudently reserved and are not concerned about the the nonaccrual months that we have in the portfolio.
Operator, we'll turn it back to you for the next question, Paul.

Operator

Tim Switzer of KBW.

Tim Switzer

Hey, good morning. Thanks for taking my questions. Were on that. My first question is could you expand on your comments about the gain on sale premiums here? And were there certain trends in Q1 that may be elevated the premiums and margins you guys are able to receive, whereas, you know, the forward rate expectations moved lower earlier in the quarter into that and cause you to maybe sell more loans than you typically would take advantage of that? And should we expect that kind of step back down a little bit in Q2 since rate expectations have moved back up?

Barry Sloane

Yes, I do appreciate the question. I think that on we check the markets fairly frequently and we're at the moment, I would say they're fairly fairly stable on you could take a look at on we have for cash premium. Now. Cash premium is also a function of do you have longer-dated paper shorter-dated paper on?
And if you notice despite the fact that rates have risen, some prices of the SBA seven a. paper has gone higher. And that's because there is a tremendous demand right now for floating rate and government paper off the short end of the curve. So forecasting the prices of the premium is not an easy is not an easy task.
The question that came in earlier, I think is important relative to on a competitive basis. We do this business in a more efficient, quicker, frictionless manner that allows us to get a wholesome price from our clients and get the business closed relative to the volatility of pricing. As I mentioned previously, we're kind of in the mid point of the 10-year range where prices can be.
And that can fluctuate from one side to another, depending upon whether you're doing 10-year paper, which trades you only have from [1.9] to [1.12] to 30 -- until the 25-year paper backed by commercial real estate, which could trade at [1.13], [1.14], [1.15] or higher, and then you're splitting a premium. So hopefully that helps answer your question. I would just strongly suggest that you use the guidance that Scott has given on a going forward basis to get to where you need to be.

Scott Price

And Tim, I'd just to tack on to what Barry said, we sold in excess of what we anticipated because we generated more production. It's not a function of the market, but for production. So we are continuing to work on our business model, our operations to put more units through the pipe, and we expect that number the pipe to grow so that we can produce more units.
But the production this quarter is a function of demand and a function of the improvements we continue to make in efficiencies and had nothing to do with the with the marketplace and the marketplace or Unum the pricing dynamics that you mentioned.

Tim Switzer

Great. Yes, that was really helpful on. And could you guys also expand on your comments around the credit performance of the portfolio? And could you maybe review how like the seasoning of an SBA portfolio trends over time as the portfolio matures? Like how should we expect delinquencies and NPAs to trend for the bank portfolio that has more recently originated versus the NSBF. portfolio that's currently held for sale?

Barry Sloane

I think that the loss curve on a seven day portfolio, which we have two decades of experience is at its highest point between 18 months and 40 months. You probably have I used the word loss curve. That's probably the point where most of the loans would go into default based upon our accounting and the bank, you would then be marking that to market an unrealized loss.
So fairly fairly current and up to date, depending upon whether we believe these loans are not collectible based upon the collateral or they can't come back and re perform, I think it's important to note that were weak down? I'll let Scott talk about how we do our CECL calculation. First of all, it's a on seven a portfolio. It's a current value provision for a future event. So we're using approximately 8%. That gets discounted back.
I'll let Scott go into this, but that's free evaluated every single quarter based on what we see complicated processes models and third party consultants that evaluate that. That's relative to the bank's CECL reserves and where we are. And I would tell you that our CECL reserves are much higher than our competitors in this space. Scott, do you have anything to add or subtract to that?

Scott Price

No, I think you knew the only thing I'd add is that as we project out our losses. We do have probabilities of default and loss given default that we expect, right. And that curve is based on, as Barry referenced, 20 years of history and the bank portfolio is what is coming up on one year old and so to connect the dots for everybody with a credit kind of peaking for a loan at between months 24 and 40, you can expect that that nonaccruals nonperformers past dues have the opportunity to increase from here, and that's expected and we're prudently reserved for the cause.
So if you contrast that in the bank with more of a traditional bank accounting model versus the fair value accounting model that we have, we project out losses. So we basically when we fair value, our loans. We project losses, reduced cash flows for those, and then we discount those back. So the losses are essentially already captured in the fair value marks. That's very pointed out, particularly on the nonaccrual loans and our loss rates that we're assuming on the performing portfolio, our in line with the same loss rates that we used for our CECL reserve.

Barry Sloane

And I want to give I want to give you an example of a situation. Borrower takes it alone in 2021 or 2022 to floating rate loan. If they'll experience several hundred basis points of what I'm going to call a rate shock. And they certainly haven't been able to adjust to what it was maybe in current months higher for longer has put stress on this, but I got to remind you this business owner has personally guaranteed joint and several every 20% owners.
There's multiple guarantors on many of these loans. In certain cases, they've got personal assets plates as well as business assets. So even though they fall behind in their delinquents as we work with borrowers, we have a very smart and aggressive servicing group will encourage people to liquidate collateral, stay current goods, the business, that's a form of repayment. It's very different than a CRE loan that's non-recourse where for goes upside down.
Okay. Unless my equity come flipping the keys or for that matter, a consumer loans on a car with a value eCommerce upside down, I'm unemployed. I have no way of coming back. So I think you're 20 years worth of experience in managing portfolios, understanding that these are businesses with personal assets behind it, extremely important. And we do anticipate and glad that brought this up.
First of all, it's a brand new portfolio. So the fact that we finally have some delinquencies and some bad loans, well, we started off, they're all new openings. So of course, they're going to get worse. But this is not something that we don't have experience managing. We've managed it for 20 years and our loan loss reserves are for the next year or two for them for the term of the world. And we have done securitizations 12, 13 times in this particular space.
That amount of on intakes that give us the data to be able to understand the scenarios of performance in this particular space. So hopefully, that's settled also also helpful. I won't argue that it's very hard for you and others to figure out. I was just going to project two. You do have a management team that is very much aligned with the interests of the shareholders take a look at our proxy. Our bonuses were for last year, too. And our stock ownership is this important to us is something we've done building a business over two decades Great.

Tim Switzer

That was good color. Are you able to quantify maybe the pace of increase over the next? I mean, if your loan portfolio, the weighted average life is less than 12 months, your charge-offs don't pick till at least 24 months or so. Can you projected that the pace of increase the charge offs as we move over the next few years? And where does it peak? Is it at that [350] ACL, Mark, you talked about in the press release or how should we think about that?

Barry Sloane

I think you'll have approximately 70% of the charge-offs within 18 months to 40 months. Now I would have said that prior to COVID, I would have been dead wrong because COVID created PP. three tax credit programs, EIDL. loans. So but on the loss curve, the new business typically does not default early. Okay. And that's when from a seasoning perspective, you're going to get holding everything else constant, that's when you're going to get most of the write-downs.

Scott Price

And just to tack onto that, Tim, we would expect the charge-offs to kind of level out and stop increasing all economic conditions are equal.

Tim Switzer

Okay.
That's perfect.
Thank you, guys.

Operator

Bryce Rowe of B. Riley.

Bryce Rowe

Thanks. Good morning and sorry to belabor the call here, but I do want to kind of get a couple of questions. And number one, I mean, I think you guys alluded to this in some of the prepared remarks, but but expenses have gone up as you've kind of built out the infrastructure.
Is there there any maybe like nonrecurring in this and this level of expenses, whether it be and the salary and benefits line or in that professional services line, just trying to get a good feel for how the expense the operating expenses are going to are going to run. You obviously acknowledging that the balance sheet's going to continue to grow but just kind of trying to trying to calibrate what the expense growth might look like.

Barry Sloane

I think I think, Brian, I'll let Scott finish up on this this year as a percentage of revenue, we're probably going to have the peak amount. Well, we hope this will be the peak amount of expenses as we continue to build out processes continuing to make sure that we've got all the right things required for a scalable, technology-enabled bank to compete in a in a different way in the marketplace.
So we're hopeful that we start to get the benefits of operating leverage in 2025 and beyond. But we think if you look at all the bodies we're bringing in here on the software on the consultants to help us make sure we're doing exactly what we need to do on. We talked about headwinds in 2023 on there, a little less, but still fairly strong in 2024. That's factored into our EPS forecast and we think we'll get better margins next year in 2025.
Scott, anything to add or subtract to that yet?

Scott Price

Bryson so that's a good question. And I did want to reiterate what Barry just said and that, you know, we do have an expense forecast and it is included in our guidance and so we assure you that the forecast includes the current quarter and future quarter expenses.
I will say. Just to add on to what Barry said, maybe slightly modify it, we will have increased expenses from here, but the returns that we're going to be earning are going to definitely outweigh any expense increases we have. So I don't want you to think that this was a surprise to us. As I said earlier, we're slightly better than where we forecasted. I'd point out that and reiterate what Barry said, we are continuing to invest in our operations teams, whether that be in lending, whether that be in deposit operations, whether that be in some of our fee-generating businesses.
We had headcount increases across all of those and we're investing for the future. We're investing for higher margins in the way of rolling out our business deposit products so that we can ensure that we comply and we keep in the middle of the road with respect to regulation. And then I'd point out that, you know, there are some seasonal aspects to this. We did have payroll tax resets this quarter, we had one month of merit increases that went in. So we'll you'll see a follow through increase increases in the future.
And then some We also are looking at a pretty outsized performance here in terms of EPS growth and where in order to be able to keep this institution operating like a much larger institution than it is, we're going to have to make sure that we are competing in the talent war. And so we factored all that into the forecast.
This is not a surprise to me. It's not a surprise Barry, and I think we're on top of it as it relates to one-time items. I would say that there was a slight bump quarter over quarter and professional much of that was due to our annual audit. But Joe, we're rationalizing our expenses as it pertains to So audits, financial accounting compliance, and I expect that we will not have a repeat going forward.

Bryce Rowe

Okay.
That's helpful.
And then maybe a question about kind of capital structure on a consolidated basis and then you all are talking about nice nice deposit growth at the bank just and you're also talking about increases in the alternative loan program and assume those will kind of make their way over to the holding company's balance sheet as opposed to sitting at sitting at the bank when it's all said and done, can you talk about how you're going to fund that at the holding company level? Because I assume the deposits have to stay at the back?

Barry Sloane

Yes, they do. I think, price that we have expectations of being able to use our debt up at the holding company, and we do have room to be able to do that. And that's where we will be able to fund our growth in addition to creating new joint ventures and to be able to fund the alternative loan program business from the capital is primarily needed for that and not much else at this point in time.

Bryce Rowe

Okay. And Barry, when I when I look at the balance sheet, that you lay out on a consolidated basis and you've got several different buckets of loans, you know, a couple of which are held for sale. And I think we can all identify what is held at the bank in the held-for-investment bucket amortized costs, but what does what does migrate eventually into the balance sheet of the joint venture? Just trying to kind of trying to identify what each of those buckets actually are.

Barry Sloane

Yes. And pricing, it's a good question. I think that our goal sans the alternative loan program is to have all the lending done in the bank, right, very little. We have some legacy loans still at the holding company that will pay off or get sold that are filed for construction on but for the most part, the only thing that would be at the hold co in lending would be ALP. and the rest of the activity will be down at the bank where we get lower cost of funding, obviously better leverage.

Bryce Rowe

Okay.
All right.
I'll leave it there and appreciate the comments.
Thank you.

Operator

Christopher Nolan, Ladenburg Thalmann .

Christopher Nolan

Hey, guys. Um, thank you for including the detail on the asset quality in this quarter. Very helpful information very from your perspective, where do you see the bank sector going in general?

Barry Sloane

It's a tough industry. I'm just going to be frank with you. And this is from somebody that just got into it. So I always tried to answer honestly and transparently on. It's an industry currently that right now it's the still on low cost deposits. It's far easier to move money today from bank to bank, but doing it on your phone and even corporate treasurers are realizing yet I only need to keep a couple of bucks in my checking account and I can move the rest of it into a money market account, I guess, get the money back and forth.
So that the deposit side is where banks have made money now on the asset side and what happened in oh eight, oh nine is the regulators and the banking industry said okay, we've just got to we've really tightened up on the risk profile for credit. So everyone's piled into this small bucket of car loans, residential mortgage loans, CRE loans, C&I loans that don't have a lot of margin. So I think I'm talking about an injury. I just got into it's not going to be an easy industry, make a lot of money.

Christopher Nolan

I was thinking more along the lines forward of where do you see the healthy industry in terms of asset quality and so forth on kicking in there? A lot of concerns about commercial real estate in general.

Scott Price

I think that on the industry will be able to get its capital. I do not believe short rates are going to remain here for that much longer. And that's going to reduce the pressure on our CRE assets, which is really where right now, there's the two problems with the industry relative to health and that would be CRE and that's very much rate driven. And the other aspect of it is obviously asset liability management because as long as bills are yielding 5%, there's going to be more pressure to migrate money into money, government guaranteed money market funds of personal bank account. So for me, thank you.

Christopher Nolan

Thank you.

Operator

Steve Moss of Raymond James.

Steve Moss

Good morning. Pointed out a varied morning, but a very you mentioned, we know or maybe, Scott, that with regard to SBA originations here on it, but you were kind of like, I guess what's the effect of driving efficiencies on given your guidance here to hold steady after a strong quarter in my mind on the SBA origination front, just kind of curious if maybe internally are you at capacity in the short to intermediate term for your SBA originations. Just kind of curious as to why that number isn't being revised higher balance.

Barry Sloane

Yes. No, Steve, I'm looking for the loan pipeline for seven day and on, it's up on prequalify 15% in underwriting, 54%. Now the approved pending closing is pretty flat because we're becoming more efficient and work or getting the loans in and out quickly. But now we are not we are not at capacity on.
We've got more alliance partners that are realizing we could help put them in the business on help them make loans either for their license or how the business model of us using alliance relationships and getting referrals continues to grow and outperform the BDO broker and banker model.

Scott Price

The only thing I'd tack onto that, Steve, and it's a good question on the where we are in terms of soft landing, no soft landing, what's going to happen. It feels a little bit early to increase increase our production for the year in light of that uncertainty. So we decided that that was the most prudent course of action.
Could there be upside. Sure. But depending on where the economy, it can easily go the other way. So that's that was the thought process.

Steve Moss

Okay. Great. Appreciate all that. Appreciate that color there. And then in terms of. Yes, just circling back to the seasoning of the portfolio, I hear you guys in terms of the 8% loss content discounted back, maybe just kind of thinking about it delinquencies, if I look at them here on a trailing 12-month basis from loan balances around roughly 9% call it curious how we think about as things ease and you hit whether it's the 18 to 40 month time range. What is kind of like that peak delinquency number you guys expect kind of the peak nonperforming type number on in terms of the originations portfolio.

Barry Sloane

I think you could you could see what I'll call the currency rate on that of that portion of the portfolio. By the way that's going to be blended in with, you know, the triple-A quality loans that banks currently do that have got low margins, et cetera. But and I mean you could see the currency rate in 90 plus or minus. We hope it doesn't get there, but that's not inconceivable.

Steve Moss

Yeah.

Barry Sloane

Okay. But that's over at some time. And I would tell you for doing this for 20 years on lower volumes and in earlier phases of our light, we've seen it on that doesn't mean that you're going to have extraordinary charge offs. I think it's just trying to say that if you do see it, you don't need to head for the head for the for the balcony or the with the focus on because the loans are personally guaranteed the collateral behind it. It's within the realm of what these charge-offs are.
The other thing too, it is when you're looking at the charge-offs, these are spread out. It's a big number like, but these are spread out. These are these are not bank loans that are due in two years, three years or five years. These are spread out over a fairly lengthy periods of time. And we're actually putting new business on an old business on once again, we've we've got all the models after 20 years of doing this to be able to really analyze the static pool to make sure that we've got the right reserves against these loans.

Steve Moss

Right. Okay. Appreciate that color there. And then just one more question on the business checking and business money market you guys are rolling out here. Just kind of curious, did you share any thoughts on internal targets you may have for those products or how you're thinking about that our performance over the next 12 months. Scott, do you want to share some of those numbers if you have them?

Scott Price

Yes, Steve. So we expect to roll out in earnest. We have we have run a pilot with some select customers. We've got $20 million of balances, I believe, as of quarter end, and we believe that we can generate $150 million of business deposits.
And could that could be on the low side, the high side could be in $300 million. It is not inconceivable what I'd say and the real question that we're going to be grappling with as we get to know how this product performs with our customer base is what kind of retention we have on those funds. And that's something that we're going to be learning as we go along with certainly put our best foot forward in estimating how much a typical customer will retain in our bank. And so we believe that that is our key to profitability improvement going forward to various point offering products and services to small businesses.
What we do I mean, we invest in America and we're confident that the the innovation of the American business person is going to continue and we want to offer products and services to enable them as much as possible. The SUCCEED we will have features with our with this product that we believe will be competitive, particularly on price.
And certainly we don't have the same budget as some of the big guys do with slick apps and interfaces, et cetera. But we believe prices where we can compete and we can make we can give business owners opportunities to work in their business instead of under business. And so that's that's what we believe we're going to offer with this product, like I said, anywhere from $150 million to $300 million plus or minus. And so we're going to we're going to see how it plays out, and we'll be updating the market closely as we move forward.

Steve Moss

Great. Thank you very much. Appreciate all the color, Sami, thanks for hanging in there with us.
Thank you.

Operator

This does now conclude our question and answer period. I would like to pass it back over to Mr. Brown for closing remarks.

Barry Sloane

While we certainly appreciate everyone's attendance, the thoroughness of the questions on we've obviously tried to work hard to condense it, but there's a lot of information that obviously the marketplace wants to want to make sure that you have that on and feel free to e-mail or call with any further questions you might have. But once again, thank you for your attention and your thoughtful questions. We appreciate it. Thank you very much.

Operator

Thank you.
This does conclude today's presentation. You may now disconnect.