NewtekOne Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Day, and

Speaker 1

thank you for standing by. Welcome to the Newtek One, Inc. 1st Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Speaker 1

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloan, President and CEO of Newtek 1 Inc. Please go ahead.

Speaker 2

Good morning and thank you very much. I appreciate everyone attending and welcome to our Q1 2023 financial results conference call. Obviously, this is our first conference call as a financial holding company owning a nationally chartered Technology enabled bank and we appreciate everyone's attendance. Our call today is going to be quite detailed to give investors and analysts An opportunity to begin to model our organization, which is clearly a differentiated business strategy and operation, One that will be different than any other financial holding company or bank holding company that you're familiar with. So We appreciate everyone's patience.

Speaker 2

We tried to give as much detail and transparency to try to set a baseline foundation so that people can begin To model up Newtek 1, a very unique differentiated financial holding company. Joining me on today's call is Nicholas Ledger, EVP and Chief Accounting Officer Nick Young, President and COO of Newtek Bank NA And John McCaffrey, Chief Financial Officer of Newtek Bank NA as well. We've also invited our analyst coverage. We have several analysts that are on the call that might participate in Q and A, Chris Nolan from Ladenburg, Chris Benlove from Piper, Paul Johnson from KBW along with Mike Perito, Merrill Ross from Compass, Bryce Roe from B. Riley and David Theaster from Raymond James.

Speaker 2

So we welcome Call is coming in on the Q and A to try to get our story out in the market and to get people to follow The very unique repositioning of Newtek 1, a unique financial holding company. I'd like to call everyone's attention to the forward looking statement on Slide number 1. I should remind everybody that is not familiar with Newtek 1, Our PowerPoint presentation is on the Investor Relations section of our website and you could follow along. Slide number 2. Our Q1 reporting is a financial holding company based upon the fact that on January 6, we completed the acquisition National Bank of New York City renamed Newtek Bank NA and withdrew our BDC election and ceased operating as BDC.

Speaker 2

Important points of focus for this presentation given that this is our Q1. Obviously, The comparisons which Nick Lege will talk about to as a BDC has questionable relevance, Obviously, because there's different accounting treatment, but Nick will go into that shortly. First important point relative to the results that we released last night, We exceeded the previous Q1 basic EPS forecast of $0.41 We came in at $0.46 basic As well as analyst consensus, we have 2 analysts that reported to date. I just think just it's very difficult for people to have been able to do forecasts without this baseline. So we certainly appreciate the coverage that we've gotten so far to get out in front of this and it's been helpful.

Speaker 2

We hope to be able to pick up more analyst coverage going forward with some of the people that are on the call. So In addition to exceeding the original EPS forecast, one of the things we're quite proud of is we demonstrated an ability to raise insured deposits During a very difficult time with a high growth rate, digital account opening and utilization of brokered CD is very important. Digital account opening has come on like gangbusters. We talk about the success we had in March, April May. Important to note, the industry currently is somewhat plagued with asset liability management Issues that are questionable.

Speaker 2

Many financial institutions have long duration fixed rate bond or loan portfolios that are not matched by time deposits. We do not have this issue. And when you start to look at the metrics of return on average assets, return on tangible common equity and capital ratios that exceed the industry norm, We're starting off with clean balance sheets, a great business model with margins and we really do not operate To the historic industry norms of a business that's primarily predicated on low to no cost deposit costs To raise fundings in the liability side and fixed rate, low margin, but yes, low risk loans or securities. We look forward to our presentation today. On Slide number 3, we continue to talk about our unique Differentiated business model, we've always used the term without the use of brokers, branches or business development officers.

Speaker 2

I think it's a real important designation. Many of our competitors in this space have got big dollars invested in commercial bankers that Entertain, take people out for their deposits, particularly commercial deposits. We've developed our business model as a technology enabled bank Over the course of 20 years, we utilized technology, people and processes to deliver solutions to its core commercial clientele with efficiency and high levels of service. So it's not like the customer is devoid of a relationship. For those of you that Are not that familiar with Newtek and the Newtek Advantage, you'll see you'll be able to get individuals that are professionals within their product segment on screen It's exceptionally expensive, arguably not efficient, and we're really excited about the ability of what we've built over 20 years now coming together Under a financial holding company, structure owning a bank.

Speaker 2

When we talk a little bit more about the Newtek Advantage, You'll be able to see what our real advantage is in the market and then our trained solution specialists, whether they're trying to help the customer open up a bank account, Contain a small business loan, help manage hardware and software 20 fourseven In our data centers, both in Phoenix and in Jersey, Penn State License Insurance Agency, payment processing business, which is really important, the movement of money for our This client is exceptionally important and our competitors really don't do this very well at the independent business owner level. Important to note relative to our differentiated Strategy is a well managed asset liability strategy. So many of you are familiar with one of our core lending products, the SBA 7 loan. Today, we're out in the market At Prime Plus 300, that's 11.25 spread, 3 quarters of a percent of the loan is government guaranteed And sold at a 10% to an 11% premium. So therefore, you're left with a 25% uninsured, but not subordinated loan participation On our books, we'll talk about the size of those.

Speaker 2

It's about 150,000 average balance, so you get tremendous diversification. And that diversification gets you through Good times and bad, that's what we've learned over the course of 20 years. We came into this business by acquiring a bank and putting a plan together That we believe deposits have 0 duration and all of a sudden in the last 2 months, everyone's waking up and going, wow, Bank deposits have a zero duration. We saw commercial depositors line up, unfortunately, at some of our industry participants who withdraw their money. So the value of commercial accounts dumping $10,000,000 $20,000,000 $30,000,000 into a financial institution at 1 slug, It's very questionable what you can do with that money.

Speaker 2

Are you going to make a car loan due in 3 or 5 years that's illiquid? Are you going to make a residential mortgage loan that in today's prepayment expectations could be 6, 7, 8 years? Are you going to do commercial real estate loan? It's very tough. So when you look at our strategy of deposit gathering, Percentage of insured deposits versus uninsured and what we do with the funds and managing liquidity, you'll see we are different And we think we've got the right model at the right time.

Speaker 2

So I've said this on previous calls, have we entered the market at the worst of times or have we entered the market at the best of times? Time will tell, but we're very confident about what our strategy is and it's the perfect strategy for this time in the market. We obviously have got net Margins that exceed your typical bank and financial institutions. You'll see that the current net interest margin of the existing entity that we took on is about 2 25 basis You could do the math and you're at 11.25% coupon on the loan and you're getting deposits at 5% that's in excess of 6%. That's attractive and that's the type of business that we're going to grow.

Speaker 2

Now, we'll be diversified, we'll be putting on some Lower margin business with current CRE type loans and current C and I type loans that are, I'll use the word conforming in nature to bank underwriting standards and that will diversify us, reduce our charge offs and losses, but give us a diversified portfolio across the whole bank spectrum. Clearly, we've demonstrated an ability to gather and grow deposits beyond my wildest expectations. I did believe we're going to be successful in this and after A drought of about a month and a half and finally getting our technology correct, and we really appreciate the work that Aperture did with us to get Our digital account opening online banking position ready, we came on like gangbusters. And we're very, very pleased with how that is currently working, But we're still early. We still have a lot of work to do and a lot of development to be done there to get it to where we really need it to be.

Speaker 2

Look, going forward, we our business model is predicated on Acquiring deposits at market cost of funds. However, it doesn't mean that we don't believe we're going to be able to get commercial deposit accounts For checking at 1% and commercial high yield savings accounts at 3.5%, which will reduce the blend. And we'll be able to do that by combining our merchant processing, our payroll, requiring operating accounts of people we lend money to and the new Tech Advantage, which we'll talk about. So that will wind up giving us further advantages in the future. I think it's important when you look at our organization, you have to take a look at it and go, gee, this is a little bit like a re IPO.

Speaker 2

Let me look at what they're looking to do going forward. Let me look at their spreads. Let me look at their margin. Let me look at their strategy. Let me look at their 20 plus year track record in managing risk Through 'eight, 'nine and the pandemic and say, is this a company that I want to be involved with?

Speaker 2

And if you're going to look at it like What is this trading time's tangible book value? You might as well go on to another conference call because this is not the company for you at this point in time. I'm not trying to dissuade people from investing in this, but when you see all the different engines and the diversified cash flows And things that we offer our customers, we're just different. And our customers do appreciate what we do. We have a long term reputation in the market of delivering winning solutions to clients and being leaders in various spaces, we're going to continue to do that with a commitment towards excellence.

Speaker 2

I'd like to move to Slide number 4. Quickly to go through Slide number 4, these are some of the Q1 financial highlights you can see in our press releases. We're very proud of Our capital ratios, the amount of cash that we've got on the books, and obviously, most of that cash on a consolidated basis is in the bank. Please understand you can't readily move money between the bank and the financial holding company. And the net interest margin of 2.28% Based upon the legacy portfolio, it's done at very tight margins.

Speaker 2

So as we begin to put loans on the books in the second, third and fourth quarter, you're going to see those margins expand and we've shown that in some of our slides going forward in the presentation. Slide number 5. Talking about the 7 business, which is an important part of our business, some of the things that we needed to get done obviously was Begin funding 7 loans in the bank, get the POP status, the preferred lending status moved into the bank. Well, we were successful in doing that as part of our strategy in addition to acquiring the bank on January 6. Getting the capital into the bank To get to the tangible common equity of $79,000,000 which we're very appreciative of, and I'll say that's approximately $79,000,000 Obviously, we're going to be filing our Queue shortly.

Speaker 2

Newtek Bank launched digital account opening in March of 2023. When I say we launched it, yes, it was open and available, We had a lot of tweaking to do. Obviously, acquiring a bank on January 6, the strain that it put on the quarter and the ability to deliver results like this, I'm not sure or fully appreciated by the market. I say that that is yet to come. We also had a fairly stable portfolio.

Speaker 2

Some of the things that investors are concerned about, obviously, they had some liability management. Is there enough capital In the organization, do they have a model that their margin is going to collapse going forward? So we've got that checked. We're good, we're good, we're good, we're good. Quality of the portfolio, a slight increase in the non accrual portfolio actually decreased as a percentage of non accrual loans versus total portfolio.

Speaker 2

And we're pleased. Clearly, with rates going up 4% to 5% in a short period of time, it's going to put stress on borrowers, but our portfolio That's held up quite well. Our currency rate, which you'll see in a future slide, is fairly stable. And it's materially higher than what it will be in a normalized market. So we do understand that and when you look at what we're putting in place for CECL reserves Our reserves on the bank, I think you'll be comfortable with our projections because we're extremely conservative and it's not like we haven't seen Downturns in the economy or higher levels of rates because we've been in this business since 2003.

Speaker 2

Our ability to raise capital is demonstrated in January, we raised $70,000,000 through debt and preferred stock capital raises. Slide number 6 is an interesting slide and we use the term adjustment to book value at threethirty 1 due to deconversion adjustments. I think that Banks and financial holding companies basically do not have valuations for asset light businesses like merchant services, Tech Solutions, Insurance Agency and Payroll. These businesses using a fair value calculation Worth about $166,000,000 Well, they are going into our tangible book at a negative $2,000,000 Well, As a BDC, these were on our books at fair value at a much bigger number. It's almost $6 or $7 a little close to $7 a share.

Speaker 2

Now look, I'm not trying to rewrite accounting standards, it's not what I do. But when you look at the asset valuation Newtek 1, it would be a disservice if you're sort of a multiple to book value freak to not count These very valuable and vital businesses that generate cash flow with very little capital investment or CapEx, And these are generating reoccurring cash flows and are part of our valuation. So dancing around here a little bit, we think these businesses are quite valuable and add to the tangible book value calculation of $7.77 a share. Slide number 7, we talk about Newtek Bank being well capitalized, where our total deposits were. The amount of insured deposits, 94.5 percent, the uninsured is 5.5 percent, a lot of that is legacy deposits from larger National Bank of New York City Legacy borrowers and people that are close to the company.

Speaker 2

But I think it's important to note That we did not have any of the issues of some of the regional banks or even the bigger banks that were really happy to say, hey, we broke even. We didn't lose any deposits. Well, we gained deposits and we're still gaining deposits. And we're able to do that because Our strategy is our willingness to pay market rate of interest and down the road in Q3, Q4 will be really focusing on bringing in those Commercial accounts tied to the merchant account, the payroll account and lending and other businesses. And that will be able to further widen our NIM out, which we're fairly excited about.

Speaker 2

In the bank, the risk based capital, 35%, that's because we have a lot of cash. So for people that are looking for net noise, so we had noise in the portfolio, Blah, blah, blah. Look, we had purchase accounting adjustments. We had CECL adjustments in Q1 to get this quarter behind us. And we also were sitting on a ton of cash and that was based upon, A, preparing for our SBA business going forward, Particularly in the Q2 to fund it, B, given what was going on in the market, we felt it was prudent to wait on all the deposits No, we could.

Speaker 2

And our digital account opening worked really well. We were also able to raise some brokered CD money. I will repeat, Non redeemable, my favorite word, non redeemable. So as a professional in the asset securitization business, understanding call features It's obviously become very, very important. When you make a residential mortgage loan, the borrower has the call.

Speaker 2

Deposits Can be called by the depositor at any point in time. That's a bad business. We understand options. We understand the optionality of deposits. We understand the optionality of the loans we make to borrowers and we price them accordingly and we have really good margins.

Speaker 2

It's one of the advantages of Investing in an entity like Newtek One that's got tremendous banking expertise and knowledge, but also asset securitization knowledge, Risk management knowledge, we're very proud of what we bring to the table with respect to a new and different business model. Slide number 8, Bank purchase accounting. We've clearly heard one of the problems in some of the regional banks and I'm looking at them right now on CNBC is, gee, Your portfolio, if you actually market to market, the net worth or the capital would go away. Good news, We really don't have that problem. Why?

Speaker 2

We just use purchased accounting. The liabilities were marked to the market, the assets were marked to the market. That gives us a very good starting position. In addition to the fact that we've got these assets and liabilities that are very well managed. We do not have long duration fixed rate assets matched by Non interest bearing and low cost deposits holding our breath and hope that the depositors won't leave because in 3 to 5 minutes they can move their money through a phone.

Speaker 2

We don't have that problem. I think it's importantly that a lot of these regionals are suffering and banks are suffering because on a mark to market basis, They don't necessarily have that network. As I mentioned to you, the purchase accounting that we went through marking the assets and the liabilities, we picked up $20,000,000 to $25,000,000 of liabilities from the former bank that was like $28,000,000 but we kept those on. We wound up buying a 1 year bill with like 4.6% We wound up moving our Federal Home Loan Bank relationship over to Atlanta, of which we have an unused line of I think $60,000,000 $70,000,000 $80,000,000 which will remain that, that's our buffer in case there's some unforeseen issue. We're always thinking ahead and I think that's important when you invest in a management team.

Speaker 2

Slide number 9, metrics and forecasts. We maintain the guidance of $1.70 to $2 We think at this point in time that's prudent. We're going to continue to monitor this and adjust it. It's pretty hard to forecast when a 2 year moves 25 basis points In a morning or an afternoon. And the government guaranteed premium was 2% up or down from 1 quarter to the next.

Speaker 2

So you can imagine It's a very volatile market. However, when you look at our stock price in these numbers, it's fairly well discounted to what I think Some normalized multiple might be and that's where we believe we need to be looked at really at a multiple of earnings and growth of earnings. So that's historically what this management team has been able to do. These are some of our metrics, most of which have been reconfirmed. The one that's been reduced is the non conforming C Business which is dramatically reduced down, but we were able to pick it up in other areas.

Speaker 2

Slide number 10, Our position is a leading SBA lender. Once again, getting PLP status in the bank, a big win, not easy to do. It's not a designation that every organization gets and most of them get it, we would argue don't really use it much Sure, aren't well suited to it. Well, we're one of the leaders in the business, the 2nd largest lender. I think an interesting comparison relative to Banks or bank holding companies do this would be Live Oak Bank, look at their margins versus ours, look at their efficiency ratio versus ours, it's night and day and we like our business model.

Speaker 2

We've historically as a non bank issued securitizations to asset liability max Loans, those are going to be sitting in Newtek Small Business Finance, we'll talk about that for a second, but from a risk standpoint, dollars 152,000 average balance of the Unguaranteed, but not subordinated SBA 7 loans. Now that's diversification. Those loans are prime plus 2.75. The newer loans that We're able to originate due to SBA regs of prime plus 3. So you get a real nice asset liability match, which we'll talk about shortly.

Speaker 2

I think it's important to note That, we've been a player in this space for 20 years through 2008,009. We think we have the data And the knowledge to manage this business through higher rate environments and tougher credit environments, We are very big on diversification, diversification in industry, diversification in geography, Diversification and provider of referrals. So we have a very good business model and this is a really attractive Return on equity business for us and that's why we're able to generate these return on assets, return on equity and it's very hard business, frankly, to enter into it from a That's Dan still. Slide number 11, one of the things you're going to see in the upcoming Q will be the diversified streams of income and segment reporting. The Newtek Bank will be a segment in and of itself.

Speaker 2

The SBLC, which is Small Business Lending Corp. So the former Newtek Entities that all the SBA loans is in a wind down mode. We'll talk about that in a second. So you're going to see that as a segment. It's going to be Basically a portfolio of loans against securitizations.

Speaker 2

Then you got the payments business, which is a $15,000,000 $15,500,000 EBITDA business per year. Then you get the Tech Solutions business, approximately a $5,000,000 EBITDA business per year, Both sitting up at the holding company along with NSBF and then we packaged basically everything else into And other category and there will be MD and A to be able to break out the performance characteristics of the insurance agency, payroll and other Businesses that sit in there, joint ventures, things of that nature, joint ventures with respect to lending. So we We're trying to be as transparent as possible. The category is lumped together to be anything that's under 10%, which is part of SEC and GAAP recording requirements. Slide number 12, we were able to increase all commercial loan closings to $220,000,000 a 12.8 percent increase.

Speaker 2

So When we look at that, what it is we're looking at is, this is 7a, 504, what we refer to as conforming C and I. We call it conforming because it conforms To bank underwriting standards, unlike a 7 loan under SBA, which is a loan that has Underwriting classifications that do not fit bank underwriting standards, that is actually the definition of a 7 loan or one of the defining characteristics and then conforming CRE lending. The former owner of the bank Based upon A, the market conditions and their expense ratios, I was able to successfully run a bank 200 basis point to 210 basis point margins to cost of funds. So we're pricing these loans today. We actually did want to 3.50 off and maybe We'll be $375,000,000 to $400,000,000 off right now for new CRE loans.

Speaker 2

For those organizations that have a full balance sheet on CRE lending and best times to take these loans provided that they're underwritten to current correct appraisals With the right projections and the right cap rates and the right valuations, the best loans are made in the worst markets. You get the best underwriting. There's less competition. People aren't falling all over themselves. It's one of the benefits of getting out of this 0 interest rate environment with a clean slate and a clean balance sheet.

Speaker 2

Slide number 13, This is our 7 premium trends where we sell 75% of the 7 loans. So in Q1 2023, our net Premium was $110.84 The trend is up. Why is the trend up? People want assets that flow, Particularly over the short end of the curve, surprise, surprise, the highest yielding part of the curve, surprise, surprise and less painful from mark to market. So there's a lot of banks out there that wish they had floating rate assets.

Speaker 2

There's a lot of insurance companies that wish they had floating rate assets. There's a lot of performance based managers at which they have floating rate assets, extremely valuable. Slide number 14, this is what we call our currency rate. I would tell you that Historically, over 20 years, the currency rate has traveled somewhere in the neighborhood of 90, 91, 92, it's much higher. I mean, we're coming out of Goldilocks.

Speaker 2

So these are small businesses. They do fall behind at times. It doesn't mean the loans are bad, but at times due to seasonality. So this is a strong portfolio. Most importantly, You could see it really hasn't moved much.

Speaker 2

The key bucket is 31 to 60, right? That's really where you got to focus your eyes and your attention. So there's just been not a lot of movement in that 31 to 60. The current tab is how you report to the SBA. They get their own ways of Doing things, but that's really the important thing, but obviously 61 to 90 as well.

Speaker 2

So anything that's 30 plus is really the issue. But Just because these loans start to fall behind, it doesn't mean that the borrowers who have multiple personal guarantees, every owner at 20% or greater must personally guarantee the loan join several. They do whatever they got to do to keep these loans going in the business call. So we feel pretty good about the currency rate. Slide number 15, we talk about the non accrual trends.

Speaker 2

These obviously are written down mark to market. We do this differently. Banks typically will take a non performing loan and we'll write it to 0. Well, if it's 0, this doesn't show up anywhere. We have personal guarantees to liquidate assets.

Speaker 2

We've been doing this for over 20 years. So these do remain on our books. This is at the Newtek Small Business Finance metric number, not in the bank. The bank has small amounts of loans currently that will grow. We're going to build a portfolio in the bank.

Speaker 2

This is just at the SBLC sitting up at the holding company, but you could see Important to note, one of the issues about people worrying about banks is how is credit holding up. You could see ours is doing well so far. 16, NSBF interest trend analysis. So here's your asset liability management for NSBF, the SBLC, the non bank Legacy lender in wind down mode. First of all, important to note, you could see that we're getting a lot of good spread income, up From a year earlier to $6,500,000 Now when you look at NSBF going forward, You're looking at approximately $500,000,000 worth of loans against pledged to securitizations of about $250,000,000 So there's a lot of equity in those securitizations And there's very good spread income.

Speaker 2

I draw your attention to Slide number 17, which shows you The coupons that are paid to the bondholders, that's the lesser of 1 and the 2 and these are the 4 outstanding issues. These are numbers at, I believe issuance date, I could be wrong on that, but no, these are dollar volumes at issuance dates, so they pay down. I think it's important to note, you're probably looking at a cost of funds somewhere in the neighborhood of 7.25%, Maybe 7.5 on a blended basis and your coupon is prime plus 2.75 on most of these loans going forward, It's prime plus 3. So that's like an 11% coupon against call it 7.5, 3.50 basis points Margin, now in NSBF, everything is outsourced to the bank in a lender service provider agreement. So it's really just the portfolio.

Speaker 2

The portfolio of loans into securities, the securities have to get paid off first. So, I'll let cash flow goes into that. So, we think this is an attractive asset and you'll be able to follow along in our queues. Now, in the queue that you're going to get coming up, there's going to be gain on sale, which is important to note because in the Q1, We didn't get PLP status until really the Q2. So there were a few SBA loans originated in the bank in Q1 through the GP program, But you're going to see gain on sale in the Q1 at NSBF.

Speaker 2

You're going to see very little of that in NSBF in Q2 and the gain on sale will show up in the bank. Also, we'll note that the accounting will be different because NSBF uses fair value accounting, the bank is going to use CECL. So on a 7 loan, for example, the CECL reserve will be 8%. So every time you make a loan, there's going to be an 8% charge upfront. That will drain and weigh on earnings, which you'll actually see if you look at our earnings for Q2, but then the higher coupon starts to pick up and that's where you get the real benefits going out We feel like big asset liability management spread.

Speaker 2

But these are the details that the analysts will be able to work on. That's why we're having this call to be able to give disclosure and be able to have conversations. Slide number 18, merchant solutions and mobile money, really important Business line for us, we've been in the business since 2002. I think it's important to note, we've been an SBA lender since 2003, Merchant Solutions since 2002, tech solutions since 2004, insurance agency and payroll about 15 years and depository 4 months. So, yes, we're a bit of a rookie there, but we've got very experienced people like Nick Young and others at the helm running that business And we're excited about it and we're very well positioned, particularly we're basically Dropping our lending opportunities into a lower cost funding vehicle.

Speaker 2

I will mention The contrast of making an SBA loan in NSBF versus in the bank. So let's say Deposits are 5 and you're putting the loan on in today's coupon 11.25. So a quarter of the loan stays on the balance sheet The uninsured loan participation, uninsured but not subordinated, fairly well asset liability maxed with floating rate deposit money and a loan that has a quarterly adjust over prime, no GAAP and 3 quarters of the loan gets sold at a big game. So it generates cash. That's the math in the bank.

Speaker 2

At the BDC, only 55% of that loan gets funded by our warehouse line. At today's cost would be almost 8.5%, Maybe 8.75 percent. So and 45% has to be funded by selling shares, by selling equity, By diluting adding more share count to EPS. So even though you got to pay tax in a bank, the math just doesn't even compare. That's why one of the reasons why we did the transaction.

Speaker 2

In addition, we'll talk about the Newtek Advantage to be able to really provide a value added Solution to customers, unlike in my opinion most other banks that do nothing but take the money of the customer. That's it. And that's A commodity, everybody does it and they don't give the client anything. We'll talk about the Newtek advantage and why customers are advantaged for doing business with Newtek. So getting back to Newtek Merchant Solutions and Mobile Money, these are entities that will generate about $15,400,000 of EBITDA.

Speaker 2

Pre tax income about $13,700,000 established in 2,002 presses $5,500,000,000 of merchant processing. Could you imagine if we were able to get 5% of our clients or 10% of our clients that are processing payments to open up a bank account, given same day funding, One throat to choke, one place to go to for all their business needs, that's valuable. And that number we hope to grow over the course of time. So we believe that these are going to be future deposit gathering sources for Newtek Bank and we're very excited about that. Slide number 19.

Speaker 2

While the payments business is extremely important to Newtek One, we're going to be issuing our own debit card. Therefore, we're going to be able to get interchange. Those numbers currently are not factored into any of our financials going forward. We're looking to grow these Reoccurring fee businesses that are very beneficial, both to NMS and Newtek Bank, particularly utilizing ACH. Business clients are interested in being able to move their money more cost effectively than just through interchange.

Speaker 2

And we're going to be able to do that because we are very focused on managing the payments business and the bank. David Simon, who is the President and Chief Operating Officer of our payments business, is also an Executive Officer at the bank In charge of deposit acquisition and is also on the Board of the bank. David joins us from Visa and Citibank, where he had senior roles in both organizations. Really knows The card business extremely well and is now positioned in the merchant acquiring side, helping us grow deposits. We realize that most banks do not provide the tools to the independent business owners to A, electronically invoice customers and b) to pay their vendor bills.

Speaker 2

So electronic payments, moving money for our clients cost effectively with transparency, With reporting into accounting general ledgers should be a real important and vital solution that companies like ours can provide to its clients And only the top tier banks to the top largest depositors get anything like these treasury functions. But I'm telling you, The money management functions that we're talking about, whether it's Visa Direct, Mastercard Send, FedNow, things of that nature Are still being cooked up. We're going to be able to offer this in one package to our clients. We're extremely excited about it. It is part of our strategy.

Speaker 2

Tech Solutions. A lot of people say, what is Tech Solutions? We're going to be simply stated, we manage people's hardware and software in 2 data centers, 1 in New Jersey, 1 in Phoenix. And these are a lot of different solutions, could be for managing email, could be from a website, could be storing data, could be managing Servers, it could be managing POS systems. These are some of our forecast business we've been in since 2004.

Speaker 2

21 from a segment reporting, you'll see this in our Qs, corporate and all other. I'm not going to get too detailed in this. I'm going to try to Keep this call moving. A lot of information. I appreciate you following along.

Speaker 2

I'm just trying to give the analysts a good sense to be able to follow us going forward. Slide number 22, Newtek Alliance Partnerships. Many of you that are not familiar with the story don't understand how we are brokerless, Branch list, bank list and BDO list. Well, that's because as an overnight success and it just took us 20 years to get there, We've added major organizations that form alliances with us and these alliances pass referrals to us. What are referrals?

Speaker 2

Referrals in the form of my client wants a small business My clients want to workmans' comp solution. My clients are interested in your payments platform. So whether it's UBS's Wealth Management System, Morgan Stanley's, We have 3,300, 3,400 Morgan Stanley Financial Advisors that have a new tracker account passing us referrals. That's almost I think it's greater than 10% penetration. UBS, I think we've got 1500 out of 6,000.

Speaker 2

These are great penetration rates. Navy Federal Credit Union, the largest credit union in the world, Randolph Brooks, over a 1000000 members. This is how we get our business. No bankers, no brokers, no BDOs. And we basically Give them a revenue share, we service their customer and they're very happy with.

Speaker 2

These are long standing relationships. We recently added 2 relationships, 1 a bank with over 1,000,000,000 in total assets, major players second, a large nationwide insurance carrier with 1,000,000 clients with a newsletter that they message On a weekly basis, we'll be part of that newsletter. We look forward to announcing the names shortly. Slide 23, a lot of people focus on us just as a 7 lender. Well, we're not a 7 lender only anymore.

Speaker 2

We obviously do 504 loans, we do non conforming conventional loans and we have a really good track record in this area. Dollars 450,000,000 of 7 loans in 2017, there's been no Charge offs to date on our joint venture is $145,000,000 non core portfolio, no charge offs to date. Slide number 24, when you talk about tightening underwriting criteria, you're going to look for greater FICO scores. You're going to make sure the business get greater amounts of liquidity. You're going to stress The business is to rates going up even from current levels and you're going to make sure that they've got enough working capital to survive the bumps in the road.

Speaker 2

Letting the businesses that can liquidate collateral of unencumbered borrowing power enables them to survive unexpected consequences. Slide number 25 is a slide we've had in our decks for 25 years. I'm not going to focus on it too much, but basically shows you how you can generate Returns on equity in these businesses that are north of 30%. This is the cash created when you do a 7 loan and you sell the government guaranteed piece, which we will continue to do as a business strategy. And Slide number 27 is the income and expense aspect of the SBA 7A business.

Speaker 2

Slide number 27 is the 504 business, 28 as well. The 504 business, you actually have no balance sheet. All our 504 loans are going to be made in the bank going forward and originated in a held for sale category. So they will be marked to the market held for sale. These loans are originated between the fees and the gain on sale margins.

Speaker 2

You typically can make between 3% to 6% to 7% on the conventional first and the debenture gets taken out by the SBA. 29, benefits of the non conforming conventional loan program, once again diversification, diversification, diversification. Higher level of credit than 7 this is At the holding company, that's why we call it non conforming. It's funded through joint venture equity and securitization lines And we anticipate $250,000,000 of funding in 2023. We also believe the return on equity in this business is between 20% to 30% Between origination fees that are gained at the bank, servicing fees that are gained at the bank as well as the spread income that's held up at the holding company by a warehouse line and Slide number 30, the Newtek Advantage.

Speaker 2

We talk a lot about this. This is our future. This is where Our big bet is this is a differentiated model. If we fail at this, we're just left with a bank that does a really good job at lending out money with Lower cost deposits and leverage, but this is the game changer here. So why should people bank with Newtek?

Speaker 2

Well, because they get the Newtek advantage. We're going to give them analytics, relationships and transactional capabilities other banks typically do not get. So when you sign up for the Advantage, first thing you get You should get document storage. So you could store all your organizational documents in the Advantage today. Then you get web traffic analytics.

Speaker 2

What bank does that? None that I know of. What's your bounce rate is? How many people went to your site yesterday? Average time on the site?

Speaker 2

Analyzes your site effective or not. If they need help, they could speak to a new tech specialist that can enhance their site, Enhance their security, enhance the effectiveness of the site, enhance our ability to take payments. So we got storage, we have web traffic analytics, Payment processing data, we could show them batches from the day earlier, chargebacks, refunds, Visa versus Master, Amex versus Visa, debit versus credit, all those analytics right through the Advantage. Go to the Advantage and make payroll Through the Advantage, big win. We were looking to also add Newtek Tax and Newtek Accounting.

Speaker 2

Hopefully, we'll have these rolled out in this calendar year, maybe next, but hopefully this year. They'll be white labeled from an experienced provider in the space. I mean, our clients want to see their bank balances on their general ledger. They want to see their payments in the general ledger. They want to see their payroll on their general ledger.

Speaker 2

That's the Newtek Advantage. This is what banks are going to need to do going forward, okay? So if we're not successful at it, somebody else will be, because customers are tired of giving their money to banks, getting 0 on their interest and getting nothing else. I mean, that's a bit of an exaggeration, But it's not that much of an exaggeration. Therein lies the Newtek Advantage.

Speaker 2

We own and operate all these businesses. We're not laying the customer off of 3rd parties. So To invest in us, you do need to have, as Warren Buffett would put it, a long term horizon. I'm not investing for the next quarter or 2. I'm investing for the next 3, 5, 10 15 years.

Speaker 2

And we believe we've developed these assets and now we're selling them together. Slide number 31, we declared our 1st dividend as a financial holding company paying $0.18 a share. We hope to continue that. That would be $0.72 for the year and a fairly high dividend yield. 32 is the metrics on the model.

Speaker 2

33 shows our capital ratios, which are really high. Obviously, they're higher at the bank And they are at the consolidated holding company, makes perfect sense. Obviously, the bank right now has got a lot of Capability to leverage balance sheet. So when you sort of look at the noise and the numbers of Q1, whatever, just remember, Newtek Bank has got a lot of capital, has a lot of cash, hasn't been put to work yet. So it's got a lot of earnings power there.

Speaker 2

So Let's go to Slide 34. And on Slide 34, a couple of things that are important to note. Returns on tangible common equity, returns on assets, you can see the net interest margins growing, Cost of funds actually declining, that's because we're reducing our dependency on Banklines versus deposits, there's and that's not even fully banked. That will get fully banked as more and more of the securitizations paid down and more and more A lot of our lending businesses are financed by deposits and not using as much equity as we've done historically. But you could see by the metrics and the numbers here, these are not numbers you see in a bank.

Speaker 2

Therefore, you shouldn't be managing us For investing in us whether you like the ratio to book or not, however you want to calculate book from a GAAP standpoint. Slide 35, these slides demonstrate the fact that you got a lot of non banking activities They're generating a lot of income, that's typical. Most bank holding companies have very little income. That's not the case with Newtek One. We have a lot of them.

Speaker 2

We've got a joint ventures in them, we've got a payments business, tax solutions and the growing opportunities of payroll and insurance. Slide number 36, the focus there should be obviously on the earnings per share, the dividend per share. I swallow pretty hard when I put these numbers out. I do so with trepidation. The volatility of forecasting, I think investors do take for granted the volatility that's out there in the market and how difficult it is to do.

Speaker 2

Historically, we've had a good Idea of doing this, a lot of this is based upon what goes on frankly from an industry perspective. We are lumped into this industry. And I look at Newtek One and I'm going the problems that were encountered At the Signature Banks, the Silicon Valley, first, they have nothing to do with Newtek 1. We're both in the same business and industry, but we don't do deposits the way they do. We didn't have this cadre of bankers taking people to Pebble Beach We're able to play golf with deposits or make loans.

Speaker 2

We're going to have big trade assets, I mean, but yet we're lumped into that. We get it. But that is going to determine things for a while, but we'll work through that. At the end of the day, we believe the cream rises to the crop and we'll get through it. But That's the thing that prospectively could drag these numbers down.

Speaker 2

It will be what it will be. 37, 38 more balance sheet information. 39 pro form a forecast for the bank. It's a very well capitalized Bank is now able to return earnings versus the BDC model where everything had to get distributed. We put an orchard on 41 For analysts to be able to see where all the nuts and bolts are, and then looking at the investment summary, once again, we ask the markets to look at us.

Speaker 2

There's some multiple of earnings, some multiple of book and the capability of our ability to grow these earnings over time. The fact that you're investing in a company that's been around for 2 decades and has managed risk through all times, and frankly, has got a differentiated business model that Totally fits into the current environment, which is low cost or no cost deposits, will not Be the secret sauce for banks. I can't tell you in 2022 how many times I was asked about non interest bearing deposits and core deposits. Well, it turns out core wasn't so core and paying 0 isn't a benefit. I would question whether these low cost deposits That are out there on the books of the major money center banks are an asset or not.

Speaker 2

Yes, whatever sticks is an asset, but whatever moves is not. That's a squeeze on the net. And we're already at the higher number and we put out Those dollars at higher coupons, net of charge offs, we've got 20 years worth of experiences in loan loss reserves and fair value valuations, We still have a great margin. There's the difference. It's just entirely different, what we do on the deposit side And what we do on the asset side and most importantly, what we offer our customers as a core value, And that's the Newtek advantage.

Speaker 2

And with that, I'd like to turn the presentation over to Nick Legere.

Speaker 3

Thank you, Barry, and good morning, everyone. You can find a summary of our Q1 2023 results on Slide number 44. We are proud to report our Q1 financial results for the first time As you'll see in the consolidated statement of operations, upon conversion from our previous BDC Investment Company Accounting, Where our portfolio companies did not consolidate into the BDC's financials and those activities would historically be reported as a dividend income From the investments of the BDC, now as a financial holding company, we are now consolidating those portfolio company operations into our financials. As a result of this conversion, there is no comparable prior period consolidated financial statements to refer to with the 2 different types of accounting. I'd like to start with some highlights from our Q1 2023 consolidated statement of operations.

Speaker 3

On a consolidated GAAP basis for Newtek 1, Inc, Our first quarter results are as follows. Net interest income for the Q1 was $4,600,000 which is comprised of $18,700,000 of total interest income expenses driven by the interest expense on the notes and securitizations. In addition, dollars 3,900,000 is due to the interest from the bank and FHLB borrowings and $1,500,000 of interest expense on deposits. In the Q1 of 2023, the company has implemented CECL on Newtek Bank's loan portfolio, resulting in a $1,300,000 provision for loans on loan credit losses. The net interest income after the provision for loan credit losses is 3,300,000 Focusing on total non interest income of $42,800,000 $4,400,000 is a result of servicing income, $6,500,000 of net gains on the sale of loans, dollars 6,700,000 from technology and IT support income, $10,300,000 from the electronic payment processing income, dollars 5,900,000 of net gain on loans accounted for underneath fair value option and $6,000,000 of other non interest income.

Speaker 3

Going back to the $6,500,000 of net gains on the sales of the loans, which is comprised of the realized gains recognized from the sale of the guaranteed portions of SBA 7 loans during the Q3 totaled 14,000,000 In the Q1 of 2023, NSBF sold 248 loans for $109,500,000 at an average premium of 10.84%. Realized losses on the SBA 7 loans for the Q1 of 2023 was 7,500,000 Moving down to non interest expense of $39,200,000 which is primarily comprised of $19,100,000 of salaries and employee benefits For the consolidated financial holding company, dollars 4,500,000 is a result of electronic payment processing expenses, $3,800,000 from the technology expense expenses, dollars 3,400,000 of professional service expenses, $2,800,000 of other loan origination and maintenance expenses and $4,600,000 of other general administrative costs. This resulted in pre tax net income for the 1st 3 months of 2023 of $6,900,000 In In connection with the financial holding company conversion from a tax perspective, the conversion from a BDC, which was a flow through tax structure filing as a RIC and where the dividends to shareholders were taxed as ordinary income since we were required to pay out 90% to 100% of the income In the form of a dividend, which is primarily deemed as ordinary income, we are now a taxable entity as a financial holding company.

Speaker 3

The company will no longer be filing as a RIC for the calendar year 2023 and we will file as a C Corp. With this conversion, we are now able to utilize, When appropriate, NOL carry forwards. These are primarily from the previously unconsolidated portfolio companies. The establishment of the DTA was recorded to the P and L in the Q1 of 2023. We recorded a $34,000,000 deferred tax asset Resulting from these federal NOLs, which is a one time event and will not be reoccurring.

Speaker 3

The $7,000,000 income tax benefit from the NOLs It was offset by the $2,000,000 income tax expense provision, which was recorded in the Q1 on the $6,900,000 of pretax net income at the financial holder company's effective tax rate. This resulted in a net income tax benefit of $4,800,000 This type of noise in the financials will be leveled out over current quarters. Consolidated net income for the Q1 of 2023 was $11,700,000 or $0.46 per basic earnings per share. I would like to now turn the call back over to Barry.

Speaker 2

Thank you, Nick. Operator, I'd like to open it up to the analyst community for Q and A. Thank you.

Speaker 1

Thank you. At this time, we will now conduct the question and answer session. Our first question comes from Crispin Love of Piper Sandler. Your line is now open.

Speaker 4

Thanks. Good morning, everyone. First, can you just speak to the loan demand that you're seeing from your borrowers and your appetite to continue to grow at a fast Cliff, looking at your origination guidance, it looks to be down about 25% from your previous guide for 2023, mostly driven by the lower non conforming C and I. So just curious if you can speak to what's driving the key differences And lower non conforming expectations.

Speaker 2

Sure. I think that and Christopher, thanks for joining. Couple of things. 1, I was going to take this piece by piece. In the 7 portfolio opportunity that comes in through our referral system, we are rejecting about 10% more of loans that are in the underwriting going into committee to normal.

Speaker 2

Obviously, We've got to be concerned about rising rates and people being able to make debt service coverage ratio, etcetera. So I think that That's just an interesting fact. Now the other thing I would say is the movement of POP from the bank to From the SBLC to the bank, it seems like, oh, I'll just take my pencil out. I can't explain how disruptive that was So I don't think that we're going to at the moment make any adjustments to those volumes. But right now, the ability to amortize a loan over 10 to 25 years under the 7 program Takes borrowers that banks are going to push out of that portfolio into this program.

Speaker 2

So we're still constructive and optimistic on 7 loan growth. Relative to the other categories, it's a great time to have capital And to be able to make great loans in a great environment, this is when you're supposed to be making a lot of loans. Now the concept of loan demand is very interesting. We look at GDP moving up or down plus or minus 1% or 2%. I mean, it's such a small number, but yet people go crazy over it.

Speaker 2

So Here's my point. If we do our jobs, there's plenty of good borrowers to be able to pick through and find that our model will generate them. So I'm not overly concerned about us Being able to find greater credits, we will probably have to kiss a lot more frauds, but because of our model, which is sort of non broker BDO oriented. We're actually able to do that and scale quite additionally.

Speaker 4

All right. Thanks, Barry. And then another question on the income statement. Can you you went over it a little bit on the call, but can you just explain what the net Gains on loans accounted under the fair value option are and if you would consider that to be core earnings, I think the comments you made imply that that fair value option would be going away in the Q2. Is that correct?

Speaker 4

And would you expect a similar amount of that those fair value adjustments to Part of gain on sale revenue going forward or am I thinking about that incorrectly?

Speaker 2

No, I think you're thinking about it correctly, but it will go up as well as down. So, I think that is core. It's part of Our model versus others and that we believe, in that particular portfolio of assets marking the market is important. So, I would say that is a core movement in both directions. Just like the write down in the 4th quarter It was important because based on how market conditions work.

Speaker 4

So that fair value line is going to be sticking around, but it Could go up, could go down just depending on the quarter?

Speaker 2

Absolutely. Yes. And that's pertaining to Newtek Small Business Finance.

Operator

All right. Thank you, Barry.

Speaker 2

Thank you.

Speaker 1

One moment please. Our next question comes from Christopher Nolan of Ladenburg Thalmann and Co. Your line is now open.

Speaker 5

Hey, guys. Thanks for taking my question. On Newtek Advantage, given the seizures of multiple banks over the last month, I think the risk calculation by depositors has changed to a degree, in terms of the bank that they deal with. Why should a depositor have not only the deposit relationship, but also all these operational things such as Managing their websites, payment processing, everything within the organization institution, which potentially could be seized over the weekend by the regulators.

Speaker 2

Chris, the only thing I can tell you is with 24 years' worth of experience in dealing with these customers, We do know what they like. We do know what they don't like. And it's a bit of a crazy time right now. With respect to our organization, we're well capitalized. We've been around for 24 years.

Speaker 2

We have a really good solid Business plan and model and we do have relationships with the clients that they can get to us. I think conceptually, the small business owner today has multiple parties that they wind up dealing with. They might deal with GoDaddy for their website, Fiserv. I mean, so one would say, gee, I'm a small business owner. I like diversification.

Speaker 2

We get it. They may not look to do and by the way, We're under no false pretense that they're going to do everything with us per se. However, we had a client recently, for example, They were having problems with their technology. They didn't know whether it was their POS system, their gateway or their payment processor, okay. I would tell you it is just my opinion only that the media is greatly exaggerating the issue with The banking crisis.

Speaker 2

Now, I don't think it's a crisis. I do think it's a bit of a change in NIM over the course of time, which is going to change profitability. But the concept of it being a crisis, I think, is overblown and I'm hopeful they kind of get tired of this, to be honest with you, because I don't see them as helping. With respect to what we've seen in talking to our clients, We have clients that are ready to move the depository accounts to us because we process their payments and because they do their payroll and there's one organization for them to watch and follow and monitor. Problem is with Silicon Valley and Signature, There was absolutely no time, no advance warning for anybody to make a change.

Speaker 2

I mean, people lined up at the door almost in 2 days and it was done. So It's a huge problem for the business and the industry that this business and industry is going to have to deal with in some way, shape or form and maybe All FDIC insured deposits is one of the ways to reduce anxiety. But I will tell We're obviously not JPMorgan, but we had little to no customers leaving and look at all the deposits we were able to gather.

Speaker 5

Thanks, Barry. And I guess as a follow-up, given all the turmoil in the banking industry, have the regulators Requested or higher capital ratios for Newtek Bank?

Speaker 2

So I mean Newtek Bank is risk based capital. I think it's between 30% to 40%. So I don't know how much higher they want to go.

Speaker 5

I'm saying it's lower threshold actually.

Speaker 2

Oh, you mean to reduce it?

Speaker 5

Yes. I'm just trying to see whether or not there's an elevated level of minimum

Speaker 2

I appreciate that. No matter of fact, Without going over the line, our projections that we have in the market are based upon the original plan And we're comfortable with those projections. So you could infer what you like from that. But no, we've had no changes or any Cause of concern about what we're doing, how we're doing it or how we're managing our business, none whatsoever. Okay.

Speaker 2

Thank you for taking my questions.

Speaker 1

Thank you. One moment please. Our next question comes from Bryce Roe from B. Riley. Your line is now open.

Speaker 6

Thanks a lot. Good morning. Wanted to maybe start with deposit levels that you're showing here Post Q1 relative to the forecast and then Barry also get an understanding of How the current, I guess, capital structure of the debt might change over the next year? Will you continue to Hold the unsecured notes on your balance sheet that existed when you were BDC.

Speaker 2

Sure. So Bryce, 2 important questions. Number 1, we exceeded our deposit Gathering capability in the Q1, after a very slow start. So I had some sweaty palms and some sleepless nights, But we really came on like gangbusters and it's still coming in like crazy. So I feel very comfortable about our deposit Raising capability, I mean, one of the things we're going to have to think about is, do we let some of the brokered deposits off that are non redeemable, for some of these lower duration type deposits that are coming in.

Speaker 2

So that's something we'll need to think about. But for the most part, I don't see that changing. We're very pleased with the mix of money that's coming in and how it's coming in and Types of customers. Relative to the other question, I think that right now, We're in compliance. We've got headroom.

Speaker 2

We're comfortable with it. So, we're just going to keep monitoring the markets and the situation and We've got that factored into our projections going forward. So now we're in good shape on that and I can't tell you, put it this way, if I could figure out whether the next 100 basis points to 200 basis points of rate movements, where they're going to be, I'd be able to answer that question, which is why people have tried to get me to Answer certain questions like how do I know? I can make a guess, but I certainly didn't predict Signature Bank in Silicon Valley. I don't know if that makes me dumb or not, but I didn't quite see it coming.

Speaker 2

But no, I think we're in good shape, and I think that right now that's Core funding that can sit out there as long as we stay in compliance and we'll be able to do that. That's not a problem.

Speaker 6

Okay. And then maybe just one more around the deposits and I've got another question or 2. But in the forecast here, you're showing, Let's call it $244,000,000 of deposits at the end of the second quarter. You highlight there being $300,000,000 plus At the end of April, so just making sure we're thinking about it correctly that you expect some runoff based on Some of those broker deposits or maybe the forecast is just a bit conservative?

Speaker 2

I think, we're going to need to take a step back and look at, do we want to return some of these deposits because we've had so much success or Make certain adjustments in the model. As you can imagine, we've I've got Accounting and Legal and Professional Department that is drinking a lot of coffee in the last couple of days. So, I think that's just something to keep an eye on. On a good note, we've got a unique, I'll say problem, I say problem We're getting a lot of deposits and you can go to our website, take a look at where we are. I mean, we're not over the market.

Speaker 2

We're One of the higher payers, but we also can put money to use with a great NIM. So, that's just something we're going to have to figure out From an asset liability standpoint, so I would tell you that what you see in the projection might need to be changed or adjusted and modified as we get through the quarter. Okay.

Speaker 6

Okay. Just switching topics here, you made note of valuations On the control investments as a BDC versus now as a financial holding company, essentially, the fair value Got wiped away with the accounting change. Can you talk about and helpful to see What projections are from an EBITDA perspective for both NMS and Newtek Technology? Can you talk about how those valuations as a BDC will come to as for those control investments, Especially relative to those 2 bigger, bigger control investments or former control investments?

Speaker 2

Well, I think that the one thing I would say is, I try to be realistic. And for me to project, huge growth in those two organizations at this point Would be contrary to what the Presidents and Chief Operating Officer have told me they're going to do from a budgetary perspective. So basically, what you see there is what we've approved from a budget. Am I happy with what I'll call flat to maybe down some and reoccurring? No.

Speaker 2

Are they happy? They shouldn't be. But I also think that it's realistic. So with that said, I mean, those are Goals that we believe are achievable, which is why we put them out there. But as we position ourselves As Newtek 1, which is new branding with a much wider universe of customers that are now talking to us much wider Then before as a BDC, it's like night and day.

Speaker 2

People that want to come to us because of the many things that we can help them with. I think those businesses will flourish. The ability to deposit money in someone's account same day on the merchant side,

Speaker 7

The

Speaker 2

ability to store one's data is going to lead to other questions. Where do you have your servers? Who's managing them? What do you pay? You're better off using us to do that 20 fourseven.

Speaker 2

What about your mail? So I feel pretty good about those relative to the concept of the valuations. I just think that as a BDC, I can't tell you how many people said you're never going to trade above NAV. And I remember our coming out Deal we converted from 33 Act into a 40, I think we raised money like a 15 to 17 point discount to NAV and then Pretty much the rest is history. At one point, we traded as high as 2.5 to NAV, 2.5 times 1, which doesn't hurt for a BDC.

Speaker 2

I think even the Mighty Maine only got to like 2 to 1 at one point in time. But we're going to need to hopefully Get the market comfortable that even though these businesses don't have loans, which would flow into tangible. And if I sold the businesses for cash, the cash would count as tangible. That if they want to look at some measure What the liquidation value of the business should be, which is really what they're looking at from a book standpoint in my opinion, not what it can generate from an earnings standpoint, but I certainly understand why that's important as a bank, but it's not Important relative to our strategy and how we do our business, we think that some add back or recognition or Bigger multiple on tangible book is warranted, but that's just an opinion. The market is going to have to sort that out, but the one thing that I do know I said this when we were a BDC.

Speaker 2

If you grow your earnings and you grow your dividend, the stock price will follow. I don't care what the book value is.

Speaker 1

Our next question comes from Paul Johnson of KBW. Your line is now open.

Speaker 7

Yes. Good morning, Barry. Congratulations on the Q1 under your belt as a officially as a bank. I missed part of the call, so I apologize if you talked about this already. But in the last presentation and The results for last quarter, you included some guidance for 2024.

Speaker 7

I'm just wondering if that's still good or if that's Basically under reevaluation, obviously, because it's kind of recent events in the market. But, yes, any sort of Commentary you can kind of provide on your sort of previous guidance for 2024?

Speaker 2

Yes. I had meant to put that in my notes. It's Buried somewhere in this big stack of papers here, but I missed it. So I'm glad you asked the question. Now we've decided to I'm going to use this term I'll probably withdraw that because, as I mentioned earlier, with the 2 year moving 25 basis points in the morning or in the afternoon, It's pretty hard to forecast the next couple of quarters versus a year out.

Speaker 2

In addition to that, the cost of capital has changed dramatically. I could say that we're just not going to change it, but I think it's I'm going to be very clear, we're withdrawing that.

Speaker 7

Okay. That's clear. I appreciate that. And then Kind of bigger picture, I mean, if you could kind of snap your fingers today and get your wishes in terms of what you would like Portfolio look like in a year from now, maybe 2 years from now. Do you have any kind of idea in your mind what you sort of expect The long term percentage of the portfolio to be in terms of SBA loans versus other loans, commercial, CRE, etcetera?

Speaker 2

Sure. I think that at the bank level, important to note That, it will be diversified between 7a, 504, non conforming C and I and conforming CRE. So, on the 7 side, and I will say this with respect to the uninsured piece, Okay. So I'm glad your question made me think about something else. A lot of people look at The bank is a little bank, but I mean this little bank has been doing a lot of loans because the 7 business, you do $875,000,000 worth of loans, Only 200 and change show up on the balance sheet, but you still have the resources to do that amount of loans and get that amount of gain on sale and get that amount of Return on equity and profit out of it.

Speaker 2

But now I want to go back to answer your question. I mean, so we'll make over $1,000,000,000 of loans this year. It doesn't make most $500,000,000 banks or $600,000,000 they don't do that, right? Okay, now let me go back to your question. The balance sheet should be pre diversified And maybe the biggest concentration is 7a30% to 35%, but the rest of it will be broken up evenly Between 504, which is there for sale, not for permanent, conforming C and I and conforming CRE.

Speaker 2

So We're going to balance the 7 side off, which could have like an 8% CECL adjustment to Blended at 3.5% to 4%. So the other loans obviously have a much lower Reserve or CECL just because of the quality of the loans. Yes, that makes sense. So the fact is very diversified. And then at the new TechOne level, you'll have the non conforming in the securitizations.

Speaker 2

You're going to get the merchant services business, the Tech Solutions business. We get payroll and insurance on track of reoccurring cash flows without having to put capital in, it becomes a very compelling model we think.

Speaker 7

Got it. Appreciate that. 1 or 2 more questions. The realized loss on the SBA loans this quarter that Nick mentioned, I believe you $7,500,000 I just want to make sure I'm clear. So is that the actual loss that was charged on the portfolio?

Speaker 7

Or is there any kind of like One time sort of CECL adjustments that were made due to the merger in the quarter?

Speaker 2

Nick, could you answer that?

Speaker 3

Yes. So those were the legacy NSBF loans that are at fair value. Those are not any of the loans that are in the bank as a result of

Speaker 4

CECL. Got it.

Speaker 7

Okay. So that's the actual realized loss for the SBA And then, I guess my last question, just kind of be in terms of How the merger is going? I mean, do you feel like at this point, the bank and sort of all the back office technology, etcetera, is that Pretty much fully integrated at this point or do you still kind of feel like you're working on some loose ends to Tie everything together. And then I guess along with that, the PLP sort of temporary disruption in the quarter, obviously moving that over to the bank It was a little bit challenging, but is that pretty much over with at this point? I guess, in all, does it seem like everything is Setting and integrated the way you'd like it to be?

Speaker 2

I just don't think we got some work to do, Paul, In the second quarter, I think the some of the projections you'll see That was better in the 3rd or the 4th quarters. I still think there is some work to be done relative to Continuing to bolster the staff, I mean, the other thing, obviously, we're going through original examinations. So I don't know if you can I mean, I'm a financial guy as well, but unfortunately, for the last 24 years, I've been trusted in this operational role? And The amount of, I could use the word distractions, but we've got to we're standing up this entity almost from scratch because the Pryor Bank didn't look and do anything like we're doing. It really didn't have tremendous digital deposit gathering, The amount of loans they did versus what we do, I mean, it's night and day.

Speaker 2

I mean, we fund 100 of loans a quarter, Maybe they funded 10 or 20. So and you can't get into the bank before the deal closes. So, there's still I want to say I am incredibly appreciative of All the associates in the company that really have worked immeasurably hard to get us where we need to be. But no, I would say There's still going to be a drag in the Q2.

Speaker 7

Got it. Appreciate that. That's all for me. Thanks for taking my question.

Speaker 2

Thank you.

Speaker 1

Thank you. One moment please. Our next question comes from Scott Sullivan of RJ. Your line is now open.

Speaker 8

Hey, Barry. Congratulations on really crafting a unique and elegant solution. So In a very tough time, so absolutely congrats on that. I'm wondering if you could speak a little bit more In terms of asset liability growth, you've mentioned obviously deposit momentum has been astounding in a very Tough, almost bubble like money market situation. So if you could speak to the deposit growth as well as the liability growth?

Speaker 2

Sure. I think on the deposit side, if you are able to pay A fair market rate for deposits and that rate is determined by what you could see on a bank rate or a go bank rate or But just Googling best high yield savings accounts, etcetera, you'll get money. And we've had success in drawing in insurable deposits. And Those deposits that are coming to us are not considered Depending upon the channel, non brokered and core, although we are not under the delusion That those deposits are very rate sensitive, but we're okay with that because it's part of our model. We pay a market rate of interest, not a problem.

Speaker 2

Matter of fact, It's astounding how we're able to raise these deposits in this particular manner. I think We show well. We have a good history. I think the bank is about 60 years old. We've been around for 24 years.

Speaker 2

So we've got Being a public company, people are comfortable and we've seen that. Particularly, we've seen that in the worst of times. So I say that I don't know how in my lifetime and I'm 63, I've never heard Such discussion about bank runs and people being concerned about. So the good news is in the worst of times, we're able to Really fund our funding needs and that's a big deal. And that so we have reduced our dependency On commercial funding rates, then you hear, which is in the marketplace, that the larger institutions, They're going to reduce their amount of lending.

Speaker 2

Well, that's not great for a lot of non bank lenders. So I think from our standpoint, no concerns about being able to fund our business out of the bank. We've got plenty of capital in the bank, dollars 78 ish million of capital in the bank. We have a lot of cash right now. We're waiting for the SBA loans to close for the quarter.

Speaker 2

We'll use that up. We'll sell a government guaranteed piece of notes. So we're going to be able to fund that growth Out of the bank, and I'm very pleased with the execution on deposit gathering strategy. Now, the second leg of that execution We'll be which I'm not saying is a second quarter event, hopefully it's 3rd 4th with respect to utilization of Newtek Advantage, the ability to Get payments accounts, open up deposits, payroll accounts, etcetera. That will reduce the cost of the high cost and make them more sticky.

Speaker 2

So we're not under a delusion because we're getting all these deposits that they're in love with us, okay? They like us. We're credible. We pay them, I'll call a market rate of interest.

Speaker 8

All right. Fantastic. And in terms of NIM and margins, can you speak to the effect as your somewhat new tech process moves out? And is there any AI overlay in there?

Speaker 2

It's an interesting thing. It was funny. I was listening to Charlie Munger talk about artificial intelligence and He made a comment. I said, you don't have artificial intelligence yet to somebody that's intelligent to set the artificial intelligence. So it's got to start somewhere, right?

Speaker 2

I think that what we do does lend itself to that. I mean, I would be delusional at the moment given all the things that we have to do to say we're there, but we are approaching the customer With an air towards having that intelligence because we have the data. So for example, when you apply for a loan, We take your merchant statement. We take your insurance policies. We have the ability to take advantage of that.

Speaker 2

Then you might say, currently, why aren't you doing that? And that's in the plan. And that's frankly up for us to be able to artfully quote clients using that old technology called a phone. Phones are still really good today. Scott, I like phones.

Speaker 2

Actually, I have a verbal communication with a client and then show I have pretty faces on the camera. Notice I'm talking to my staff as well to connect with the clients and say, hey, I see what you're doing. And by the way, we can help you, not too hard. That's I'll call that our version of artificial intelligence.

Speaker 8

Fantastic. And any comments on the syndication market, I guess, vis a vis the gain on sale as far as you can see?

Speaker 2

Yes. I mean, right now, the market for the government guaranteed pieces is very strong because it's a government guaranteed floater That investors don't have to worry about duration risk or marking it to market and whether being criticized for not having asset Interest rate sensitive assets on their balance sheet, they could diversify with this. So that market has been pretty strong despite the fact there was a little bit of disruption Where Signature Bank was one of the pool assemblers, now they've got taken over, they're still in the business, but there were some Questions as to what would happen with them and there was another market maker that recently left the business as well. So against that backdrop, the market has actually held up pretty well.

Speaker 8

Perfect. Last question. Given your market cap size, etcetera, What's your personal speculation on a Russell 2,000 inclusion?

Speaker 2

Well, We're hopeful. We're hopeful. We certainly have the market cap And our designation as a financial holding company owning a bank was recently changed by them From a closed end fund, so we're hopeful that would be very useful and valuable to us, but we don't know.

Speaker 8

Terrific. Thanks for the call.

Speaker 1

Thank you. One moment please. Our next question comes from Sean Paul Adams from Raymond James. Your line is now open.

Speaker 2

Hey, guys. Good morning. Can you explain your plans for the legacy BDC Baby Bond, which contains the 1940 Act Leverage compliance covenant in the documentation. It would appear that it would have to be a priority given the leverage parameters today for the business. It's not we're in complete compliance and we've certified that with the trustee.

Speaker 2

And I will also let me finish on. I will also add that we have covenants with Capital One Bank, Deutsche Bank, I mean, there's 4 or 5 institutions. So we're in complete compliance with those covenants. Very helpful. Thank you.

Speaker 2

Thank you.

Speaker 1

Our next question comes from the line of Steven Nimmo. Your line is now

Operator

open. Hi. I'm an individual investor and I've been doing my own due diligence and I have a few questions lined up for today. So This might be a repeat. I didn't hear it quite clearly as the last question, but Newtek has the 2024 and 2026 Note outstanding, MUT L and MUT D, and these have covenants that binds Newtek to the 150% Assets coverage for firemen under the 1940 Act, but Newtek is no longer a BDC.

Operator

So That seems to suggest that unless those notes are paid down or gotten rid of in some way, Newtek won't be able to leverage up the balance sheet Up to the typical 10 to 1 of things. So what are Newtek's plans regarding NuD and NuD L in the near future?

Speaker 2

Sure. Steve, I appreciate the question. Right now, those have been factored into the projections that we have in the market. So we always hope, although it doesn't always happen that way and respect that the community, because we've been doing this for over 2 decades, Analyze what we put out there and that's already factored into Those particular tests and I'm not sure you heard the prior answer, but we're in complete compliance, we're aware of those tests And we'll be able to manage those tests with respect to what we have in the market.

Operator

Okay, great. I have Two more quick questions. So when Newtek issues a loan, it has the choice to sell the SBA guaranteed portion and retain the unguaranteed portion on the balance sheet. But going forward as a bank, will the loan book be comprised of entire SBA loans are just of the unguaranteed pieces or something in between. I feel like the percentage of the loan book, but Unguaranteed pieces is a number that's worth reporting for investors.

Speaker 2

I'm not sure I understand the question. What was the question? So as a

Operator

bank, Newtek Woodhouse loans as assets. Right. Will these loans be entire SBA loans or will they be just the unguaranteed portions that are not sold off? Okay. So

Speaker 2

I'll just focus on the 7 business. When a 7 loan is made, it's a whole loan and you've got 2 participations, a government guaranteed participation and an uninsured participation. So what sits on their books is the uninsured participation In the 7 loan, typically we sell the government guaranteed participation into pool assemblers who pool them and aggregate them and they pay Premiums

Operator

for that. Okay. So going forward, It's going to be or probably going to be the unguaranteed pieces that are retained on the books

Speaker 2

Correct. The current strategy is to which is what we've done for 20 years And it's been a reoccurring event is to make the loan, sell the government guaranteed piece. We think that's the highest return on equity for us and the best way to manage our capital.

Operator

Okay. One last quick question and this is related to the unguaranteed loan pieces. So what are Newtek's plans regarding securitization trust going forward? The language in some recent news seems to suggest They're legacy and so Newtek won't issue any more securitization trusts and notes on the unguaranteed portions anymore. What are the plans going forward on that?

Speaker 2

So the references to legacy, we try To the legacy assets that are in Newtek Small Business Finance, which are in a rundown mode. And There is a current position Of uninsured loan participations in Newtek Small Business Finance in the warehouse line that I'll use the word not to get ahead of ourselves that could be securitized.

Operator

Okay. So by legacy, it so by saying legacy, it doesn't rule out The possibility of issuing more securitization trusts in the future?

Speaker 2

No. I mean, it's unlikely we would do it out of the bank because right now the

Operator

Yes.

Speaker 2

So let me just finish, Stephen. Going forward, Loans against securitized debt will be in a runoff mode. So all the gain on sale will be done at the bank. Hopefully that Answers your question, but

Operator

Right. It's a better economic choice to keep the loans rather than try to sell them again.

Speaker 2

Well, when you do a securitization, it's actually treated as a finance since 2010. So, I think the better way maybe to state that is Financing the uninsured loan participations in a bank is far more effective than financing them currently through securitization.

Operator

Okay. Okay. Thank you. Thank you for your time.

Speaker 2

Sure. And Stephen, once again, if you go back and you read the transcript, we talked about when you do it out of the NSBF and before Acquiring the bank, you only got a 55% advance rate and you're paying 8.25% or 8.5% on the rate. So 45% To maintain your ratios in the BDC had to be funded with equity. So to fund the $1,000,000 loan, you need $450,000 of equity And $550,000 of expensive leverage bank debt. Now you could fund it with 5%, 100% deposit money.

Speaker 2

Does that make sense?

Operator

Yes. That's all for today. I have. Okay. Thank you.

Operator

Thank you.

Speaker 3

All

Speaker 2

right. Hallie, I think that's last question, right, operator?

Speaker 1

It is.

Speaker 2

Well, I appreciate all the input, all the questions, a lot to digest here today, a lot of reading to do. And we welcome the opportunity to report again next quarter. Thank you very much everyone. Thanks for your participation.

Speaker 1

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
NewtekOne Q1 2023
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