NewtekOne Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the New Tech 1, Inc. 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

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

Speaker 1

Thanks very much, Gerald, and good morning, and welcome to our Q3 2024 Financial Results Conference Call. Today's call is hosted by myself, Barry Sloane, CEO, President and Founder of Newtek One and Scott Price, the Chief Financial Officer of Newtek One and Newtek Bank National Association. Also joining on the call is Nicholas Young, President and COO of Newtek Bank. Once again, I want to thank you all for attending. We're very, very pleased and proud of the results for the Q3.

Speaker 1

I want to make a couple of quick announcements. As many of you have seen, we put out a press release recently that we have hired Ron Lay as Chief Technology Officer for Newtek Bank, NA and Newtek 1, a publicly traded holding company. We've also added the staff that we put out a SEC document on this, CJ Burnett. CJ previously was CIO and CTO of the publicly traded Newtek entities and was also the President and COO of Newtek Technology Solutions. So we've clearly added, continue to add to our star studded staff of our management team to be able to help us grow, manage risk.

Speaker 1

We'll talk about that a lot on the call, but particularly with respect to information technology. I want to thank the management team for putting up a great performance this year, as well as support from the Board. Today's presentation will be a little bit unconventional. We're clearly working very hard with analysts in The Street to be able to better explain what a differentiated organization like ourselves looks like. We clearly have a differentiated business model and approach to both providing business and financial solutions to independent business owners in all 50 states, something that we've been doing now for well over 2 decades.

Speaker 1

And that unconventional approach leads to a little bit of unconventional numbers, unconventional analysis. So we're going to focus a lot about things you don't necessarily want to hear and I will try to stay away from repeating the things that are obvious in our press release. Some of the things that are obvious was recorded in one of the notes from our analysts this morning. We reported $0.45 of earnings per share for the quarter. I do want to point out that we actually had a tax charge for deferred tax liability without that, that would have knocked it up to $0.47 So we've actually and Scott will talk about this in the MD and A, without that tax charge, we probably would have had $0.02 better.

Speaker 1

The Street consensus was about $0.43 Also point out that our return on average assets at the Holdco, we'll focus on the bank as well, 2.8% consistent with recent quarters, almost 3 times the peer median. Our 2025 guidance, which we gave $2.25 midpoint of $2.125 Street consensus is currently $207 So we're extremely appreciative. I also want to point out one other item, which is important and this is something that we will spend a lot of time tackling. The provision was higher than expected. Newtek booked $6,900,000 of provision, but we're going to talk about this and specifically spend a lot of time on risk adjusted returns, which is most important.

Speaker 1

Typically, this industry does not really focus on risk adjusted returns. We do. It's been in our DNA for over 20 years. It's really what matters. People are in this industry typically invest in very low margin, low charge off assets.

Speaker 1

So we intend on working hard to continue to get industry participants more comfortable with what our financial numbers actually mean. For those of you following along in the presentation, you can go to our website, newtekone.com, Investor Relations section. We have a PowerPoint hung for this presentation. I'd like to suggest to everybody that we fast forward to Slide number 3. Significant events in Q3.

Speaker 1

We talked about the earnings beat. We didn't want to go to core, non core, just leaving it $0.45 per basic diluted, remind you about a $527,000 deferred tax charge based on the Paltalk merger with NTS, which is a divestiture, which we'll talk about, that would have added about $0.02 to that number. We confirmed our guidance, dollars 1.85 to $2.05 midpoint, dollars up $0.95 that's what we think you should focus on. We'd like to think we can gravitate more towards the upper end of that range, but that will remain to be seen. We're in an extremely volatile market.

Speaker 1

We wanted to give ourselves cushion. And at the current stock price, we think there's tremendous value based upon these types of numbers. The obvious, deposit growth 12% at the bank, loan growth 17% at the bank, net interest margin at the bank, 5.29 percent, loan loss reserve coverage, 500 basis points. You don't see these types of metrics in this industry. It doesn't exist.

Speaker 1

We understand the uncomfortability with these metrics. We're going to spend a lot of time going through it. We're making a lot of progress visiting with investors, visiting with analysts and getting us to better understand our model and we'll keep our head down and do that. The internal loan program picked up traction. That's a very important accelerator to us being able to get our EPS in the future higher into the 2s.

Speaker 1

And at one point, many of you remind me frequently that we actually had a $3 number out there. And that's based upon our ability to grow faster, which we throttled back after the 2023 banking. I'll call it banking crisis with Silicon Valley Bank, Signature Bank, Silvergate, etcetera, etcetera. We'll talk about it a little bit more in this call. Important to note the efficiency ratio, 39%.

Speaker 1

I mean, if I would go to a bank executive or bank holding company executive and I would talk to them about these ratios and tell them 65% to 70% of our income is for non interest bearing, they would salivate. They would trade their seat for my seat all day long. Our job is to get people comfortable with the model, people comfortable with risk adjusted returns and that these are going to continue to happen. It happened for 4, 7 quarters. We're going to continue to track.

Speaker 1

We feel good about this. We're not new to this rodeo. We've been doing this for over 20 years and we feel really good about where we are. Last item on Slide number 3, we completed a registered public offering of $75,000,000 of bonds, NEWTH, 5.8 coupon listed on the NASDAQ BBB plus by Egan Jones with a positive outlook. Going to Slide number 4.

Speaker 1

These are the things we've kind of hammered on. I'm going to dust over them because you've seen them. Looking at Q3 2024, ROA 6.3 percent, ROTCE 40 9 percent, efficiency ratio 39.4 These are sort of unheard of. NIM 5.29 percent, yield on loans 11.12%. And that does not include the gain on sale income that we get from selling the 7 business, become a guarantee participation, we've done for 20 years.

Speaker 1

So people don't like gain on sale, I can understand that. If gain on sale is an anomaly, because rates move up and down or spreads change, yes, but this is our business. This is what's going to continue on and on and it's a cash gain. We sell a government guaranteed piece, we get cash for it, creates capital by the way. Average rate on funding, this is interesting.

Speaker 1

We're high here. But you could see as we're gaining speed in business depository accounts, that number will start to come down. That's an execution thing. We have to get the people, the software, the process in place. We're tracking.

Speaker 1

The Q3 was the Q1, I would say we were all in. The Wilmington office is set up under our Chief Operating Officer for the Digital Bank, Jennifer Merritt, staffed with about 25 people. In addition to other people at the bank, we're going to talk about staffing. This is an organization that staffs first, ask questions later. We are poised for growth.

Speaker 1

And I do want to point out, I'm reading from a report, when growth is the problem, I'm sorry, growth is never the problem. Growth is good. It's being able to manage the growth and manage the risk. And we have a star studded management team. And look, if we had issues, we would be scaling back our growth, we'd be scaling back our projections.

Speaker 1

Otherwise, I'd be doing the wrong thing here on this call. Growth is not the problem. That is an oxymoron I'm reading directly from a report. Let's go to Slide number 5. Now this is at the Holdco.

Speaker 1

A lot of our competitors in the space that we're being managed against and I might suggest we might be better off in a technology segment than in this segment. But another time, another story, we're going to stick here. This is where we're going to be and we're going to be a standout relative to these metrics as we are today. We could clearly show, which we will on Slide number 7, how we stand out against our industry peers. But relative to today and the HoldCo had some fair value in it.

Speaker 1

It has their AOP business in it. We're going to talk about that today and provide more disclosure. We need to do an enhanced job in giving the market more information on stuff that isn't readily apparent from Ks and Qs in the presentation. Once again, ROA at the holdco 2.9. NIM grew from Q2 2024 to Q3 2024 3.08.

Speaker 1

Part of that is because we're putting the LP loans on our books, not in joint ventures. In joint ventures, they don't consolidate that way. Average yield on loans, 9.32%. So, let's move forward to Slide number 6, our forecast for 2025. So we're very comfortable with a $2.25 EPS range for diluted earnings per share for next year.

Speaker 1

Between the low end of the range and the high end of the range and the midpoint, that's an 8% to 12.5% range of increase over 2024. So here is an oxymoron, an institution like this that's actually growing its bottom line in double digits. And we're comfortable with that. We think we can do that. We've done this for our entire history.

Speaker 1

Historically as a BDC and now we're in the 7th quarter, 7th, is it 3? Yes, 7th quarter of our transition into a financial holding company. We've accomplished growth in the ALT business, growth in business deposits. When we talk about our payment processing segment, nobody talks about it. You're going to see some numbers that you need to look at.

Speaker 1

It's diversification. It's a business that isn't directly tied to rate movements and credit movements. It's reoccurring income to business we've been in for over 20 years. And now that it's part of a bank, there's advantages to the customer. By the way, all of this is about the customer.

Speaker 1

If we focus on the customer, just like Apple, just like Amazon, just like the 4 seasons, we're going to win. I realize this is a financial conversation, but at the end of the day, we are very focused on a frictionless environment for the customer, with our brokers, bank traditional bankers, branches or BDOs, giving them easy technology, allowing our staff to use the greatest and latest technology, many of which we've developed ourselves in house to make the experience for the staff clean, easy, frictionless that results in transactions, which you can clearly see from the numbers. Once again, our midpoint of $2.125 for 2025, currency consensus is $2.07 We're clearly constructive about where we are. Slide number 7 is real important. I'm going to leave this to all of you to dig into this and look at it and analyze it.

Speaker 1

Look, when you look at yield on earning assets, dollars 1,000,000,000 to $3,000,000,000, dollars 3,500,000,000 commercial banks, dollars 5,530,000,000, dollars 5,650,000,000 Look at the bank, dollars 8.96 882, it's 3 to 3.50 basis points greater. Like you can't ignore that, or you choose to so far, but that doesn't include the gain on sale, the servicing income. And the other thing is this book of business is going to start to grow. So you could see we're growing the traditional bank and bank holding company type income, all at the same time continuing to get great returns on equity and assets as we make things and then sell them for gains. If you look at our profitability numbers, clearly dusting others, credit quality, which we need to tackle and cover.

Speaker 1

This is the big ugly duckling, so to speak, but we're comfortable with it. Because once again, in today's environment, we have plenty of reserves, plenty of capital, very adequate, checked on a regular basis by 2 regulators, outside auditors, internal quality control people, all historically from the banking environment. So despite the fact that these numbers are bigger on a risk adjusted basis, we win. We win all day long. And it's frankly less risky, although it's not tagged that way than making a CRE loan at 2.50 off the curve at a 65% LTV that you're totally banking and hoping that the deposits don't go away in the middle of the night and you're hoping that your banker doesn't need the spike to those deposits or that you don't have a Signature Bank or Silicon Valley Bank situation where these deposits that are discounted with risk free rate by 2 50 to 300 basis points because of that relationship and the bank arguably doesn't offer a lot, we love our model and we believe very confidently we're going to win in our model.

Speaker 1

Slide number 8, Live Oak is our North Star, great company. Please take a look at these numbers. Look at the PE ratio, look at the fact that it takes them $12,500,000,000 worth of assets at the bank versus our $914,000,000 asset size to generate net income. Something's off here. You need to take a good hard look at this.

Speaker 1

Look at the efficiency ratio. That's what you get from technology. This is the future of this business and industry. And by the way, our clients, they love speaking to our staff on camera. They love using our technology.

Speaker 1

Now I'm not telling you it's perfect. I'm not telling you our staff doesn't need to get trained better, but we're winning. We're putting on more loans. We're putting on more deposits. We're driving the numbers.

Speaker 1

And I think it's the 1st or second inning of a long game and the best is yet to come. Once again, Live Oak, Northstar, we aspire to be like them and the success they've had in the business. And I have to say, we don't compete. Yes, our assets look similar. I think we have a similar philosophy with technology.

Speaker 1

Now by the way, they create technology and spin it off for huge gains. But they don't get criticized because they get gains on sale for spinning it out. We get criticized for making a loan and selling it every day, every week, every month for the same cash gain and that's reoccurring. Well, I'd rather bet on us making loans and selling them over the next 1, 2, 3, 5 or 10 years than creating the next greatest technology like a XENO, but that's beside the point. But they got great valuation for that.

Speaker 1

We're working on it. We appreciate it. We appreciate you paying attention and doing the hard work that's required to look at making an investment in Newtek One. Slide number 9. This is the meat of the presentation today and I'm going to go through these 1 by 1.

Speaker 1

But these are some of the things that are missing, okay. Once again, I'm going to stay away from the highlights in the press release. You can all read them, you can all see the growth in deposits, you can all see the ROA, you can all see that stuff and Scott will handle that also in the MD and A and Scott Price, our great CFO. Growth in the payment segments. Let's go to Slide number 10.

Speaker 1

So look, I don't know why this constantly gets ignored, but I really can't find a lot of information on this in the market. This is a segment in our queue. Pretax income for the quarter of 32.5 percent to $5,300,000 pretax income for the 9 months of 43% to $14,200,000 forecast of pretax income for 2024, dollars 17,700,000 forecast for next year, dollars 20.25, dollars 19,600,000 Now ask why is this growing? It's a business we've been in a long time. Now the customer, it always goes back to the customer.

Speaker 1

Our customers love the fact that they're now dealing with a bank and a payments business together. There is a payments ecosystem through the Newtek Advantage. Many of you have heard me talk about the Newtek Advantage. It's on our website. We have videos.

Speaker 1

What is the Newtek Advantage? The advantage to the business client and there's 30,000,000 of them in the United States as defined by the Small Business Administration. We identify that customer base as independent business owners, small to medium sized businesses, small to medium sized enterprises. So in that identification, that customer, that business owner, they want to have analytics, they want to have data and they want to have transactional capability. So by taking our payments business, pushing it into the advantage, the client at night can do the following.

Speaker 1

They can look at their bank balance, they could see all their bill pay, money leaving their account, checks that are cash, checks that aren't. They can see their electronic billing, invoicing and the money coming back. They can see their Visa, Master, Discover, American Express charges in the Advantage. They can see their batches from the day. They can see their refunds, they can see their charge backs, everything is in the Advantage.

Speaker 1

I will tell you this is extremely unique. And we've recently passed the divide where the bank is now integrated into QuickBooks. Therefore, we are working on taking the balance sheet and the income statement and giving the customer view into QuickBooks. So if you're a business owner rather than going to 2, 3, 4 different systems or for that matter having to go to your external accountant who is in fact doing your books and records, you can go online and see everything. We have customers now that are willing to come to us.

Speaker 1

Price is not the big issue on the payment side and the deposit side, which we'll talk about, they love our no fee business accounts, no fee, no wire fee, no ACH fee, no monthly statement fee, no abandonment fee, no refund fee, go to our website, we had a calculator there, makes it very easy. It's an immediate savings, immediate savings. And they don't get 10 or 20 basis points from the top 4 banks, they get 1% on checking and 3.5% on business savings. It's a tremendous value add. This is why just in early stages, the sampling of people coming to us for our typical payment processing business is growing.

Speaker 1

There is the advantage. Slide number 11, nice charts and graphs. I've been told about this presentation, it's too long. Some people say it's too short. Some people say it's just right.

Speaker 1

We try to take all this comments and put it together, but we want to be able to educate people. I don't know how you can ignore this business. It's very valuable. I want to make one other point about this business. When we were a BDC, it was valued at fair value.

Speaker 1

In the holding company, it's not. It was basically not part of tangible book, extremely important. We have a slide to address that. If this business, you put a 7 or 8 multiple on it, which is probably down many, many turns from a public comp, it would have $125,000,000 to $150,000,000 valuation, respectively, you figure it out, I don't do that, net of debt. But if you hypothetically use those numbers, dollars 125,000,000 $150,000,000 it's $5 or $6 a share that would go back into what you would call adjusted book.

Speaker 1

So people look at us at book, you shouldn't look at us at book. But if you haven't looked at us at book, you may want to look at this business, which is very liquid, very valuable, put a number on it and then say, yes, this is something that they could probably sell, not that you have any interest in doing that in a short period of time. And yes, it's not a loan. So it doesn't have tangible book, but it's incredibly valuable. Most financial institutions don't have things like this, particularly in the segment that we're in, which is subpar $500,000,000 of assets, which is an issue into itself because we're even below the small cap hurdle at this point in time of $500,000,000 But anyway, let's continue.

Speaker 1

Slide number 12. We put out a press release on this early redemption of the 2018 2019 securitizations. These are assets and liabilities that are and were located in Newtek Small Business Finance, a segment in our queue. What we said was, we raised the $75,000,000 we're going to take a piece of it and pay off the debt in the securitization. Why is that important?

Speaker 1

Those securitizations, the way they're structured, they trap all the P and I and they trap liquidations of ALD and reserve funds in the securitization. So by paying off the debt, which netted $18,000,000 you can see it on Slide number 12, net of the loan net of the cash reserve fund. We were able to free up approximately $68,000,000 to $69,000,000 of performing loans and $15 ish million of non performers. When you add that up together, it's a fairly healthy number. Here's the important aspect.

Speaker 1

And this is just an estimate, it's rough. But the cash flows that would come in off of that $37,000,000 $32,000,000 off of NSBF flowing into NSBF. Why is that valuable? Well, that's cash that can be used to repurchase stock. It can be used to pay off debt.

Speaker 1

It can be used to fund ALP. We have $280,000,000 of equity that is sitting in NSBF, Newtek Small Business Finance. People don't think about it, but as this is burning down or self liquidating and I've heard somebody describe it, I'm reading a report as an old legacy investment. Well, that old legacy portfolio has $280,000,000 of cash of excuse me, equity in it. Well, I don't know, I'm not sure I would call it a legacy portfolio and downplay.

Speaker 1

I think as it pays down, it's an attractive asset. Now, it's also the least attractive component to making an SBA loan of which you get a gain on sale upfront, you get a servicing asset. Now, I'd say at least attractive, the coupon on those assets are currently 11.25%. They are financed with expensive securitization debt. That activity going forward is going to be done in the bank at lower cost.

Speaker 1

Very important item to think about. Let's go to Slide number 13. We'd like to get some credit from the fact that we've been in the banking business now for 7 quarters and we've got a book value per common share going from 8.65 to 10.07 and a tangible book going from 7.35 to 9.50. That's nice growth. And once again, does not include anything, obviously from the payment processing area.

Speaker 1

14, insurance agency, which is currently in one of the segments and it's not broken out. This is something you may look at breaking out next year, but I think it's important to note, net active policy since we became a bank grew by 1429 units or 37%. Now, this is illustrating the benefit of having everything at a business owner's fingertips and being able to provide TMN Life and other insurance to people that are taking out loans. Look, you could see we do a lot of things. I wish we could do all these things simultaneously at the same time.

Speaker 1

We can. We have to continue to make our numbers quarter by quarter. We have a lot of initiatives. We prioritize them. With that said, the insurance agency business, a reoccurring fee based business, very well positioned in the advantage and as part of the new TechOne ecosystem.

Speaker 1

We now have the capability to provide T Mann Life on every business loan, which we're doing with the policy pre assigned to the loan. So it's pledged, all done automatically in a period of 7 to 10 minutes without a medical exam. Automation, the insurance agency with its automation is going to be able to provide these policies to a variety of customers, not just lending in the vertical. Let's go to Slide number 15. Many of you are familiar with the fact that we have to divest of our technology unit, which basically as we transition to a financial holding company, the company made a commitment to the Board of Governors or the Fed to divest or terminate the activities of NTS.

Speaker 1

So we're there. We have signed an agreement, it's public. We're merging it into an existing public company, currently known as Paltalk, stock symbol, PALT. Now it gets a little confusing, but I want to make a couple of comments. Paltalk will have to divest of all its business and the business of NTS will basically become Paltalk.

Speaker 1

So Paltalk will change its name to Intelligence Protective Management Systems. Stock symbol is anticipated to be IPM, NTS has 17,000 customers, it provides what the market is thirsting for. The market needs outsourced IT, particularly the SMB market or the independent business owner market that's getting hacked, they have cyber risks, they're sending they're getting interlopers going into their system, they're stealing money, they're stealing wires. This is a big need in this marketplace. So the new co, which will be public, will wind up being a pure play in this particular space.

Speaker 1

Cybersecurity, outsource, outsourced managed IT and professional services. So it'll be sort of a little, little, little, little mini AWS or Azure, but with real people that answer the phone, helping customers 20 fourseven, 365. It's a business we've been in since 2004. We really wanted the best of it. However, we're going to own 4,000,000 shares of newly created non voting preferred and we'll get $4,000,000 of cash.

Speaker 1

And there's also a potential $5,000,000 of earn out to the transaction. This most likely is scheduled for the Q1. Stay tuned. Paltalk is doing what they need to do. And we're excited about it.

Speaker 1

This year, we think NTS, which is a segment, will generate between $25,000,000 to $30,000,000 of revenues, adjusted EBITDA of $2,000,000 I suggest you take a look at PalTalk, look at the cash on the balance sheet, look at the cash that they anticipate getting from a lawsuit, add this in, I think you'll find it interesting. We'll also get one representative to the Palatok Board of Directors from Newtek. Slide number 16, I think this is the most important slide in the middle of presentation. Our credit thesis as a high margin loan originator, extremely important, high margin loan originator and risk adjusted, extremely important. We've been doing this for over 2 decades.

Speaker 1

We've done it through 2008, 2009. We've done it through the pandemic. We are good risk managers. I say that in 2008, 2009, we stopped lending for a period of time. That was a smart thing to do.

Speaker 1

During the pandemic, we stopped making SBA loans for almost 4 months because we didn't think it was prudent to do when people were told to go in their home and we didn't know what the effects of the pandemic was going to be and we switched to PPP. That turned out to be immensely profitable for the company. It shows you how nimble we were as a small company competing against the giants. We did over $2,000,000,000 of PPP loans to 26,500 customers that now happen to like us because we provided them with those funds. I want to go back to the adjusting for credit losses.

Speaker 1

Slide number 7, when you look at those yields again, the banking yields for $1,000,000,000 to $5,000,000,000 banks, dollars 5.53 yield, dollars 5.65 versus an $8.96 or $8.92 After the anticipated charge offs of we've got 20 years' worth of experience in high rate, in low rate, in small economies, in quick economies, we understand the concept of risk adjusted spread. In addition, loan loss reserves of 5%, we've already taken the pain. We've done it upfront. We monitor this quarter to quarter. Please understand this is different.

Speaker 1

The typical, I'll call it investor in this space looks at deposits, which were high on, but that'll be coming down with the growth of the business accounts and they look at credit, which were also high on. But they're not looking at the other half of the business, like looking at a bodybuilder that's great from the way stuff has got skinny little legs. That's not our business model. You got to look at the entire body. We reject the notion that although it is totally appropriate to consider a small and medium sized business loan based on regulatory standards, a higher level of risk on a risk adjusted basis, our 20 years of experience in the category gives us the confidence that we continue to manage this risk and get higher rates of return.

Speaker 1

I am much more comfortable doing this than betting on the fact that those deposits aren't going to disappear in the middle of the night, because there is no duration on a checking account. There isn't any. So then you're betting on the stickiness. You're betting on the brand. Look, for the top 4 banks in the United States, it's great.

Speaker 1

But for everybody else, I don't know. And it's way too easy to move your money today on a phone. This is the single most important slide in the deck. When you look at our capital, when you look at our provisions for loan loss reserves and when you look at our coupon, the math is showing over 7 quarters and it's going to continue. Some of you are alarmed at the ramp up.

Speaker 1

We had a pretty heavy ramp up in Q1 from Q2, less of a ramp up in Q2 to Q3. We think this trend is going to continue because we're through what we consider the belly of the default curve. Look, I can't sit here on a principal and tell you where the economy is, but we've been or going to go. But we've been doing this for a long period of time and I would say we're very good at it. Slide number 17.

Speaker 1

This is all about scale. 360 employees at Newtek Bank. The Holdco has got $570,000,000,000 of assets. I want to read from a report. Newtek 1 is an uneasy amalgamation of the legacy portfolio of securitized 7 loans, joint ventures, which we're going to talk about and non controlled investments that dwarf its depository.

Speaker 1

That is factually not correct. First of all, I don't like the word dwarf. Secondly, the bank's got $900,000,000 of assets and $1,700,000,000 I don't know about an $800,000,000 worth, okay? That's not a dwarf. Matter of fact, it looks pretty even to me.

Speaker 1

That's GAAP. Putting that aside, we're going to talk about the holding company and what's in there. And as we're moving from joint ventures to on balance sheet funding of ALP, which we'll talk about, by the way, nobody asked me that question. Why don't you do more on balance sheet? It's all about capital allocation.

Speaker 1

We might go back and forth. We're going to do what's in the best interest of our shareholders. We are good risk managers. We've proven that over 2 decades. And at the end of the day, I have to be honest with you, you don't want to invest in the management team, you're on the wrong pole, okay?

Speaker 1

You got to have some level of comfort. We're going to be here. We're going to keep doing this. We're going to give you the comfort. We're going to be extremely nobody can say we're not transparent.

Speaker 1

The size of my deck says we are extremely transparent. Our financials say we're transparent. We got all these conferences which we talked about. Important to note, some of market participants have questioned, can they manage the risk? 24 months, we've got a Chief Strategy Officer.

Speaker 1

We've got a Chief Technology Officer. We have promoted Dan Enzo, the Chief Information Officer. We have a Chief Risk Officer. We have a Chief Financial Officer. I mean, we've got so many chiefs.

Speaker 1

There's a lot of chiefs going on here. This is a stacked company that could manage multiples of the asset size. We staff first, we ask questions later. I think that's extremely important. In the level of sophistication, it's been said, gee, you're doing this business with BDC talent.

Speaker 1

Well, I don't mean to insult Peter Downs, but before he spent 21 years here, he ran the SBA business at Citibank and had a 15 year career in the banking space, okay. We have career bankers here, Nick Young, Scott Price, Frank Di Maria, Taylor Quint. It's in the appendix. Go look at the talent we're putting in this organization. These are career bankers with an exemplary track record.

Speaker 1

This is not a small little company, very scalable. Let's go to Slide number 18. Alternative loan funding course. So we have begun to start to put the loans on our balance sheet versus in joint ventures. Some people say, why are you doing that?

Speaker 1

Well, look, first of all, it's a bit of a capital allocation issue. Operationally, it's easier to do. And we always want to do better with our joint venture partners, whoever that might be. And we have quite a bit of them we're talking to right now in the queue. Scott Pricide, Dave Leone, Director of Capital Markets, spent 2 days at ABS East Miami, we had 26 meetings.

Speaker 1

Very interesting. And we are out in the market talking to the biggest and the brightest and they know that in this space of lending and once again, I want to very much focused on the core credit. Some people look at the things we do as lender of last resort, bad credit. No, that's wrong. I say it's wrong.

Speaker 1

I'm not saying these are AAA credits. What I am saying is the borrowers appreciate a 10 to 25 year AMP and WLOAs. That AMP schedule changes the debt service coverage and it would take a loan that wouldn't fit at a bank and make it eligible for debt service. Now you said, well, gee, you're not getting your principal back, you're not reducing your risk. Well, our experience has showed this over 20 years is I'll take a personal guarantee, join several for a 20% owner or greater with liens on business and personal assets all day long over a short am and covenants.

Speaker 1

And we can absorb these losses and trade off versus the coupon. You've got a group here that is, in my opinion, looking at this business and industry in the way it needs to be looked at for the next 1, 5 10 years. The rest of the industry, 98% is in a totally different model. And it is regulatory friendly, regulatory compliant. We provide funds to SMBs all over the United States, 30% of them happen to be with the minority owned businesses and we take deposits all over the United States.

Speaker 1

Important to note, BlackRock TCP joint venture is on our books, mark to the market fair value, net of loss of area and frequency approximately 12%. Same thing for the TSO joint venture. You'll see that we've got recent AOP on our balance sheet and you'll see that going forward. From a pipeline perspective, 600 to 900 referrals today, we fund less than 1%. We think we'll have $200,000,000 AOP loans by December 31, 2024.

Speaker 1

That prospectively gives us the opportunity to do a securitization, which we saw the last time, there's a slide on it, very profitable, probably in the Q1. So we're going to go back and forth between balance sheet, JV, partnership, diversification of capital, joint ventures, senior debt, bank lines, equity, preferred, we go back and forth. Slide number 19, important. Cumulative SBA 504 and ALP loan origination volumes since 2015. So people look at these non performing loans, they go, oh my god, what are they doing?

Speaker 1

We see that there's a lot of charge offs. It scares the heck out of me. Look, you give me a set of criteria like a 5 0 4 loan that's a 60% LTV against the real estate after a second lien by the government, which doesn't sit on our balance sheet when they take it out, it's pretty clean. What do I mean by that? We have never experienced an unrealized realized loss over the life of our 504 loan program, cumulatively $632,000,000 Slide 19, 0.

Speaker 1

ALP size $394,000,000 cumulatively. We have experienced $3,000,000 unrealized losses. We haven't resolved it yet. But you could see if these were put into your matrix or whatever you do for the evaluations, which goes to the buy, I get it. Listen, I understand you have a way of looking at these businesses.

Speaker 1

We're good with that, but we need you to consider that we're a good lender. We know what we're doing. Slide number 20, alignment of interests. I put this out there, look, we're aligned. We're very aligned.

Speaker 1

I will pay for myself, went from big dividend paying stock to less dividend paying, that was so impugitive from a cash flow perspective. I've been a major investor in the company myself, going to continue to buy, very comfortable with it. Important to note, 80% to 85% of our employees now are participating in the company's stock plan. We recently did a grant, it's alignment of interest. I now have 570 owners, my employees, my shareholders, which I think is an excess of 20,000.

Speaker 1

I work for you, I work for the employees, I work for creditors, I work for everybody. It's a great situation. We're happy. We have alignment of interest, right? People in our organization are personally involved with the company's interests are aligned.

Speaker 1

Slide number 21, I'm going to ask everybody to read the press release. On deposits, I'll leave that to Scott. 0 fee bank account. We've researched this. We believe there are few to no choices for 0 fee bank accounts.

Speaker 1

Our clients have the opportunity to use our depository accounts with lower expenses, higher interest, use our deposit calculator. 0 really means 0. There's no hidden fees. There's no minimums. We're going to be announcing this.

Speaker 1

We think this is going to be a big deal. Think we're going to get a lot of deposits. We could take deposits without anybody going into a bank branch, can't find a bank branch here, you could do it online, a big, big deal, big opportunity. Slide 22 speaks for itself. Once again, please read the press release.

Speaker 1

Slide 23, we've got tremendous pipeline growth. We're good on all our numbers. Sep 30, 2024, I want to point out, we have $120,000,000 of ALP loss on our balance sheet, mostly funded with cash, equity, no leverage and the entity HoldCo 6, which is broken out in our financials, we created a DBA called Newtek Alternative Loan Program Holdings. That will make it easier to define the AOP business. So the AOP segment in our Qs going forward, I'd like to suggest that we use that DBA.

Speaker 1

I don't know if we're going to get an ISP Q or the future, but we start talking about ALP, have that broken out separately. 24, we've talked about in previous calls, same thing for 2025. 26, obvious, read the press release, talks about guidance, talks about where we came in. 27, 9 month numbers. Scott, please take over for 201829.

Speaker 2

Thanks, Barry, and good morning, everyone. Slide 28 shows our yields and rates. We experienced nice margin expansion resulting lower deposit costs as we continue to bring in lower cost deposits from business checking and business money market accounts. We raised debt in the public markets for 2 consecutive quarters to 1 refinance maturing issuance and 2, fund our future investments in our ALP loans. So as you look forward, I believe that you can expect to have higher balances, but that will result in higher loan balances as well and that's reflected in our guidance.

Speaker 2

Turning to Slide 29, we lowered our CD rates in July and saw a decline in our CD retention numbers, which was anticipated. This was partially offset by increases in our business checking and business money market accounts. We also saw some growth in our high yield savings accounts, which is followed through the month of October. I'll point out again that we managed to keep our average balances on borrowings down and the cost flat. And with that, Barry, I'll turn it back to you.

Speaker 1

Thank you. Let's go to Slide 31, Credit and Risk Management, one of the favorite slides out there. Important to note, I know a lot of you look at the trends. So I think what concerns some people was a trend from Q1 2024 at Small Business Finance to Q2 2024. Please note the dramatic decrease.

Speaker 1

We just charge these things off. We realize sometimes you can't fight City Hall, so you just write it down. It's not a big deal. Fair value went from $5,200,000 to $5,300,000 $4,000,000 increase. The jump previously was more substantial from Q1 2024 to Q2 2024.

Speaker 1

And I think that concerns some people. Look, when we look at the fair value of these things, that's just equity coming back to us. Those loans are going to get liquidated. We've got the gain on sale. We've got the servicing income.

Speaker 1

We've marked this thing properly. So that doesn't bother us. In a banking environment, we understand why that would bother us. Also important note, these are done at the holding company, mark to the market with a perspective 8% cumulative charge off going forward, despite the fact that the loans are fairly seasoned. So we feel pretty good about this.

Speaker 1

I want to remind everybody that we have $281,000,000 of shareholder capital. Now let's go down to the bank. The $26,000,000 in allowance for credit loss. I also want to point out that the charge offs went from $800,000 to $1,700,000 That is not a big deal. Now some of you are going to focus on the non accrual held through investment.

Speaker 1

That is a classic thing you look at as a bank and you would find it to be typically alarming. But therefore, those non accrual loans are marked and we're comfortable that the charge off there is the right number as well as adding to the credit losses. So we've covered this for capital. We've covered it for income. And unless we make a mistake, which we've been doing this for 20 years, where our liquidation amounts are dramatically off of where we are.

Speaker 1

And we've got checks and balances up the yin yang to make sure, God forbid, that that doesn't happen. This isn't a problem for us. The allowance for credit losses divided by total held for investment, 5%. Non accruals, HFI of total loans, 3.8%. Somewhere somebody wrote that our non accruals are going faster than the portfolio.

Speaker 1

Sorry, not accurate. Slide number 32, adequate loan loss reserves talk about 5%. Final paragraph on Slide 32 talks about risk adjusted returns once again, high capital levels, high levels of income generation, lucrative business margins. Nobody in this market in my view talks about business margins. Obviously, we do not look at Newtek.

Speaker 1

Notice my description. We provide business solutions and financial solutions to this demographic of independent business owners and we're also a depository, okay. That's who we are. And we utilize technology so people can access us, get a seamless experience, get somebody on a camera from the comforts of their business or their home and get their solution provided for them and deal with a company that's got an expertise in what their needs are. Slide 33 talks about diversification of earnings.

Speaker 1

Slide 34 is important because for those of you that are looking at our deposits and saying why they're so high, these numbers will come down more to the industry standard of discounted deposits to the risk free rate. However, ours will be sticky because we can provide payroll, we can provide payment processing, we give them the advantage, they get analytics, they get transactional capability. These accounts are going to move away in the middle of the night. And they're also small accounts, but not Silicon Valley accounts for $10,000,000 $20,000,000 $30,000,000 with a fancy CFO who wants to get taken to Pebble Beach, where the drop of a hat moves his money over yet. These are small and medium sized businesses.

Speaker 1

You look at our percentage of insured deposits, I think they're about 70% plus or minus. So we now have the staff, the management, the software in place, which we've demonstrated in Q3, the growth in business deposit accounts growing as a percentage. Slide number 35, these are the metrics for 2024. Important to note, our projection for 20 we kept it wide 68% to 76%, midpoint will be 72%, 72% plus the 126%, probably gets to higher than the current midpoint. We're leaving our midpoint, leave it alone.

Speaker 1

Thank you. Slide number 36, we are positioned for growth. I think you're all familiar with this. Slide number 37, important how do we grow investor interest. Scott and I have been going to KBW, B.

Speaker 1

Riley, Raymond James at upcoming conferences in New York this week, KBW, Piper again. We did an Analyst Day meeting. It's on our website. Please listen to it. A lot of good information.

Speaker 1

We have 6 sell side analysts that have coverage on Newtek. We engage with regular quotes. People are getting familiar with this model and this doesn't happen at the drop of a hat instantly. One might argue there's an interesting opportunity here. Others might argue, I don't get it, it's too complicated, I don't want to do the work, no mods.

Speaker 1

We get it, it's not for everybody. We're going to continue to execute on our business plan and provide a high quality financial and business solution to our growing database of customers and that's what it's all about. There's 2,600,000 referrals in the database, approximately 80,000 paying customers. I will also add the Board of Directors has approved the stock buyback for 1,000,000 shares. Slide number 38, fairly self explanatory.

Speaker 1

I'm not going to go into it. Slide number 39, the ratios that are in the PowerPoint. And most importantly, I have a note here, Scott, MD and A.

Speaker 2

Thanks, Barry. Turning to Slide 41, I'm going to focus my comments on the linked quarter changes. Net interest income was up based on volumes of loans. I remind everybody again that we raised debt in the public market for 2 sequential quarters and we're able to deploy the proceeds efficiently to reduce leverage on our staging lines. The provision for credit losses was up on migration and non accrual loans in the bank.

Speaker 2

I'll remind everyone that the portfolio at the bank is a new portfolio, so non accrual loans, where it started 0 at the beginning of the year and can only go up from 0. Additionally, we experienced net charge offs of 59 basis points as a percent of total loans for the quarter. That's an annualized number. And we but I want to reiterate that we have incorporated our credit assumptions into our forecast and our guidance and are comfortable with where we are. Non interest income was relatively unchanged.

Speaker 2

So turning to non interest expense, salaries and benefits was up approximately $1,900,000 Part of this was based on the decline excuse me, increase was I'm sorry, it was a decrease. The lower expenses and salaries and benefits was a result of lower performance based comp as well as NTS reductions in force that occurred in the 2nd quarter. Our professional fees were up mainly as a result of the NTS disposition, which is approximately $700,000 as well as the preparation of our tax returns. And then our other loan origination and maintenance expenses were up from higher volumes of loans originated as well as higher serviced loan balances. Our other G and A increased on occupancy expenses and marketing expenses increasing both $250,000 each.

Speaker 2

And then income taxes, as Barry mentioned earlier, was up $500,000 as a result of a discrete item from moving the NTS assets to held for sale. Shifting to the balance sheet, which we've covered mostly in the call, we did segregate the assets and liabilities associated with NPSs and classified them as held for sale given our agreement to sell them in the coming months. Our tangible book value per share was $8.93 and we believe the NPS disposition could provide $0.57 of tangible book value accretion depending on the measurement of the consideration at the future closing date. With that, Barry, I'll turn it back to you.

Speaker 1

Thank you. Gerald, we'd love to take questions from our audience.

Operator

Thank you. Our first question comes from Crispin Love from Piper Sandler. The floor is yours.

Speaker 3

Thank you and good morning everyone. Just first on the news of the week, can you Barry, can you just discuss some of the specific ways that you believe a Trump presidency can benefit Newtek? Thanks absolutely rallied yesterday, including Newtek. So curious if there's anything specific to Newtek where you'd expect the company to benefit, whether it's related to small business, overall growth or anything else pointing out and if there could be any headwinds in the Trump presidency as well? Thank you.

Speaker 1

Thanks, Chris. I think the biggest item relative to I'll use the word as you did, the benefit would be it does seem that he definitely wants to minimally and obviously it's got to get through the House and the Senate maintain the corporate tax rate and not make a change on that. I think there was a risk that if there was some kind of a change in the Senate and the House and the presidency, that the corporate tax rate would change. I think that prospectively was a risk that got removed. Now on the flip side of it, you've got this very interesting dynamic about tariffs.

Speaker 1

And we're sensitive to the concept of tariffs. Now I try to look at these things logically. The tariff thing, it's a threat, it's not definitive. But for businesses that are fairly dominant on components or selling things from China, I would say that's a risk. Matter of fact, the Biden administration didn't remove the tariffs either.

Speaker 1

So I think that we're being extremely thoughtful in credit, looking to see about what if scenarios on these types of things. I think the tax rate was the easiest thing. I would tell you that with Trump and either party, I think you're more likely to get higher rates on the intermediate, the long end of the curve than lower rates. You might finally get an upward sloping yield curve again, because I do think that they're particularly in the near term. And unfortunately, Crispin, you and I are locked into this day to day, week to week, quarter to quarter.

Speaker 1

So some of this stuff, my comments are relating to short term and I'm going to keep away from the long term policy effects of it. I would say tax rate is positive, good for business, that's very important. 2, I think you're going to get an upward sloping yield curve. So there could be pressure on the Fed to lower, but inflationary expectations from an expansion standpoint don't go away. And then the concept of businesses that are very dependent upon inexpensive goods and services from China, Pakistan, wherever.

Speaker 1

And by the way, nobody ever talks about why it's cheap. It's slave labor, because they aren't free countries. That's why the stuff is cheap, which that's a whole another long term thing, I'll stay away from that. Those are the things we're focused on. So I appreciate the question.

Speaker 3

Thanks. All makes sense. And yes, I do get the big differences between kind of near and long term and the difficulty there. So it absolutely makes sense. And then just one last question for me on Slide 7 of the deck, you break out a bunch of data on the bank and the consolidated company versus peers as well.

Speaker 3

And definitely appreciate your comments on risk adjusted returns and reserves. But just looking specifically at the net charge offs at the bank, The net charge off rate there increased to 104 basis points from 54 basis points last quarter, but consolidated actually declined to 18 basis points. So can you just discuss some of the differences there? What drove the increases at the bank and the decline at the consolidated level? Just general views on credit going forward and if you believe that you can kind of get risk adjusted returns to improve over the near term?

Speaker 1

Sure. I'm going to give a macro and I'm going to ask Scott to focus on the numbers. I don't know how we can improve on risk adjusted returns when our ROA is where it is and our ROTCE is where it is. I mean, that's pretty damn good. I think the biggest problem is people don't believe it's sustainable.

Speaker 1

I mean, if you cut those numbers in half, would be spectacular. And I asked the audience to say, we've been doing this for 20 years. I mean, and we did it without deposits. We did it with more expensive funding. So our and we did it through 'eight, 'nine and we did it through high rates and low rates.

Speaker 1

So I cannot present a more comprehensive cogen argument than that. I will also say that we what we're talking about today is consistent with the plan that we have put out in the marketplace to all bodies, including regulators. So this isn't a surprise. They probably listened to our call, they assume they do. We're welcome.

Speaker 1

We welcome that. We're very transparent. So I couldn't feel the biggest surprise, frankly, has been the difficulty in getting across this concept. Now I will say this, we entered the banking market in 2023, okay. So everybody on this call is involved with banking and bank holding companies.

Speaker 1

We all have post traumatic stress syndrome because we looked at Silvergate, we looked at Signature, we looked at Republican, it's like, oh my God, here's this new company that's different, just like these other guys say they were, they all blew up, why is this one not going to blow up? I'm okay with that. It's human nature. But I also ask those to look at there is so much cushion in these numbers. If we're marginally off, it's a non event.

Speaker 1

Even if we're up by a lot, which I don't believe we are, I mean, I say I don't believe it, with adamancy, I don't believe we are. So I feel very good about the macro picture. Are these numbers going to grow modestly? Probably. Do we have enough capital?

Speaker 1

Yes. Do we have enough excessive reserves? Yes. Are they going to get used and eaten up? I mean, I don't I'm telling you right now, don't expect to have these 5 sitting there.

Speaker 1

Number 1, we're going to add more of the lower risk, boring bank stuff to balance the portfolio and then they're going to be utilized. So maybe Scott could add some color to the exact numbers. Scott, can you help on that?

Speaker 2

Yes. Thanks Barry and hey, Kristen. So the charge off ratio at on a consolidated basis was roughly 59 basis points. So you're looking at 59 versus 104. I'll remind you the accounting model that we have or accounting models plural.

Speaker 2

At the holding company, we primarily have loan portfolios that are carried at fair value. So the charge offs are actually going through unrealized losses in the non interest income line versus the traditional bank loans where those charge offs are running through the allowance. So at the end of the day, it still falls to the bottom line. It still impacts the overall level of reserves, but there's just 2 different accounting models that we're following. I'd say again that we started out during we started out 2024 with minimal NPAs, most of which were traditional bank loans that we purchased.

Speaker 2

And we've seen an increase and this is as expected. We expected an increase during the year because the SBA portfolio is maturing and they're moving along the default curve. So we're monitoring it. We're not concerned. We have it baked in our forecasts.

Speaker 2

And so we're going to deliver to you guys results and you guys are going to evaluate them. But this is a trend that we expect to continue to various point. We expect modest increases. We have the reserves. We have the capital.

Speaker 3

Okay. Thank you and appreciate you taking my questions.

Speaker 1

Thanks, Krista.

Operator

Thank you for your question. Just one brief moment please. Our next question comes from Tim Switzer from KBW. The floor is yours.

Speaker 4

Hey, good morning guys. Thank you for taking my questions.

Speaker 1

Thanks Tim. I have

Speaker 4

a quick follow-up on the credit outlook here. More specifically about the allowance, I think you guys have historically kind of said a good level set level for the allowance would be around 3 50 basis points. When should we expect the allowance to start to sort of move back down towards that level and how quickly will it get there?

Speaker 1

Scott, would you say we might see that move in the Q4, but not dramatic? I mean, it's hard to say it's November 7, but I don't know. Do you think we're I mean, it's anyone's guess, but are we at that point? I have no idea.

Speaker 2

Yes. I think we're look, the level of allowance relative to the loans held for investment at the bank, which is the basis on which the allowance is calculated is going to be heavily influenced by the level of 7 loans that we have on the balance sheet. Our reserves for 7 loans are north of 6%. And so as that concentration moves up, you're going to see a higher shift in the allowance. Now that being said, I'd remind you that while we reserve at north of 6%, we're getting at least this quarter, 10.8% north of 10.8% premium.

Speaker 2

So the P and L event covers it. What you're going to see in the future, at least what we expect are additional bank loans coming on the balance sheet that are going to be more of your traditional bread and butter bank loans that are going to attract a much lower level of allowance. We have not performed as well as we thought during the when we started the year on bringing traditional bank loans onto the balance sheet. But we want to prudently manage our balance sheet. We want to bring on a diverse set of loans so that our risk is manageable, our risks are diversified, we're not in any one product category to where we're running more risk than we anticipate.

Speaker 2

So to answer your question, is 5% the peak? I think given our projections, I think that it very well could be, but we've got to deliver on the bank loan production. And so we expect to cover our charge offs. We're not going to be releasing reserves unless we see that in the macroeconomic factors and that'll be a function of our modeling. Okay, great.

Speaker 2

And just to tack on to that, do I think that we'll get there, we'll start trickling down during the quarter? It's possible, but I would say I'd expect it more in the more of a meaningful decline in 2025 than what you'll see in 2024.

Speaker 4

Got you. Okay. And you guys had a pretty good quarter on gathering your commercial low cost business deposits. What kind of drove the inflection here? And what

Speaker 1

are your

Speaker 4

expectations going forward? How quickly can you grow that book?

Speaker 1

Yes. So that's something that we're very focused on. And it's really a matter of us getting the staff trained to be able to explain to clients why they should go through moving their account from Brand X to us. There's a compelling reason to do so. Take a look at that calculator, you'll see us versus the national average.

Speaker 1

You have a good idea where so there's a very compelling reason now to get the staff to do it, to be educated, to get on the phone. Now we're now staffed up to do it with Jennifer Merits Group in Wilmington, she's got people all over the country being able to do the KYC, BSA and AML work, which we've now got the right people, we've got the right software, we've got the right processes in place. So I just think that's a function of time and you're going to see us continuing to execute that. On addition to that, our payroll and payments unit needs to you can't open up a payroll account without bank account. You can't open up a payments account without a bank account.

Speaker 1

And frankly, we don't even need to be the primary account, we just need a tertiary account. We've got to convince the customer that there's a tremendous value in terms of the analytics, transactional capability and data to use us to the advantage, it's one place. So there's going to be it's very hard for me to gauge. I feel good about it. I mean, I think we'll continue to grow at nice dollar amounts.

Speaker 1

Obviously, you get nice big percentage increase of below base, but that you're going to see us continue to pick up business accounts, particularly and they'll probably put something out in the near future launching our true honest zero fee banking account per business, business bank.

Speaker 2

And if I could just back on to that, Tim, I was sitting close to our BSS folks that are selling the account. And I mean, we're get it's hand to hand combat. We're getting the client on the phone, we're getting on video, we're analyzing their statements from their other institutions and we're showing them what the value proposition is of switching to us. So we feel that it's compelling. Then you layer on top of that the New Tech Advantage and being able to bring everything into one view.

Speaker 2

We feel like it's there. We're refining our sales processes as we move forward. And, but it's hand to hand combat. I mean, it's a grind. And to Barry's point, we're getting the people trained.

Speaker 2

We're getting them we're getting their scripts refined. And we saw traction and we feel like we're going to continue to see traction.

Speaker 4

Thanks for the color.

Operator

Thank you for your question. One brief moment please. Our next question comes from Steve Moss from Raymond James. The line is yours.

Speaker 5

Good morning, guys. Good morning. Maybe just starting here with the or following up on the growth in demand deposits. Is the growth here primarily just on the new originations as the customers come in that you now are operational in Wilmington and have better integration. Just curious how we think about those dynamics?

Speaker 5

Steve,

Speaker 1

excuse me. I think that Wilmington is the source of compliance, surveillance, getting the accounts open, doing our kick. And I'd say that obviously, it's under our BSA officer, Sarah Lemones, who is not in Wilmington, but she works very closely obviously with our compliance manager, Julio Hernandez, our President of the Bank, Nick Young and Jennifer. So that's the back office. But I think the way we look at the business and the growth, it's how do you get the add backs?

Speaker 1

How do you get the customer in the batter's box to pay attention, say, hey, you need to look at our account and why you should have it with us primarily or secondarily versus them. That's not what Wilmington does or the compliance team. That is done by our team that's booking and boarding merchant accounts, payroll accounts and very importantly in lending. So now in lending, we are now requiring that when the account was open and we're funding loans, that money is using that account. This is all new to us.

Speaker 1

It sounds like it's easy. I'm a financial guy too. Unfortunately, I have to put my operating pants on, but you got to train people to do this, and it does take time. So Justin Gavin's team that handles the front end of lending is managing his team. And that was what Scott was referring to, getting people comfortable on an automated basis.

Speaker 1

Steve, when you apply for a loan in our portal, the data ports over to be able to open up a bank account. So we don't have to ask the customer twice for 2 accounts. I don't think you've got that. I'm going to I've got my legal hat on in almost most of the banks in the United States. It's done automatically.

Speaker 1

So I think what you're going to see from us is slowly, steadily that tortoise is going to keep grinding it out and we're going to get these customers in. In addition, opening up merchant accounts, payroll accounts, the existing lending accounts, 80,000 paying customers in the book. Now if the product is better, which we're fairly adamant it is, particularly when you go to that mortgage calculator, it's going to happen. It's only a function of how fast, how quick and when. I'm very appreciative of the questions we're getting from you, Steve and others here, because you're starting to focus on what is this been, why is Newtek One and the bank going to win?

Speaker 1

It's because the way we put these things together, the customer wins. If the customer wins, we win, shareholders win. And now you can get a feel for we have this, we don't our cost of customer acquisition, this is why you look at the efficiency ratio, is very low. We get 600 to 900 referrals a day. Banks would love that.

Speaker 1

Banks would love to get rid of all their expense of their traditional bankers and their branches and we do it very differently. So that's I think one of the differences in the model.

Speaker 5

Okay, great. Appreciate all that. And then in terms of the insurance business, just kind of curious if you could quantify the revenue you're generating from insurance these days?

Speaker 1

I don't know if we give that out, but I would say broadly it's a $3,000,000 to $4,000,000 type revenue business very comfortably.

Speaker 5

$3,000,000 to $4,000,000 a year?

Speaker 1

Yes, sir.

Speaker 5

Okay. Appreciate that.

Speaker 1

I would love to have that broken out sooner than later and maybe someday we break out next year. But it's valuable, it's reoccurring, it's differentiated, it fits in well with the business model and those businesses are very highly valued by the marketplace today.

Speaker 5

Okay, great. And then in terms of the share repurchase authorization that was announced earlier this week, just kind of curious what are your thoughts and plans for using that and just any color there?

Speaker 1

Yes, that's a tough question. I wanted to make sure people are aware of it. Look, I think we have really high returns on equity, which you could see from our business model and we're in the growth business. We wanted to have it available. I mean, obviously, we're looking at our share price.

Speaker 1

We want to make sure investors understand where it is. One could argue when you look at the comps versus the Live Oak or other industry comps, we are at a below industry multiple. One could argue it should be there, one could argue it should be less, one could argue it should be more. So I would say that that's not it's a tool, we're going to use it. If things get a little wacky, we will.

Speaker 1

And obviously, so buy low, sell high. But I mean, I think it's just something that add into the quiver, that's all. I know ultimately, we're going to figure out balance between dividends and buyback and things of that nature. But I think it's very important to note, we're a growing company and we're going to be raising debt capital. And I just don't think I'd get over exaggerated about it, but it is something we are open to and we'll use at the right time.

Speaker 5

Okay. Appreciate that. And then last question for me, Scott, I think you said the credit costs and the marks on the fair value loan go through non II, I was just or other income. Kind of curious if you could quantify what the marks were on the fair value portfolio this quarter versus last that flow through income?

Speaker 2

Steve, I'm going to have to follow-up with you on that one. I don't have that one specifically in my fingertips. I apologize.

Speaker 5

Okay. No problem. Appreciate it. Thank you very much guys.

Operator

Thank you for your question. Our next question comes from Christopher Nolan of Ladenburg Thalmann and Co. The floor is yours.

Speaker 6

Hi. A clarification on Page 7 of the deck, net charge offs, average loans for the holding company shows 18 bps. Scott, is that correct? That is not an annualized number, correct?

Speaker 2

That's correct. I said that a few times earlier. It's 59 basis points approximately.

Speaker 1

Okay. And then on

Speaker 6

the same line for the bank, is that also not an annualized number or is

Speaker 2

that That is an annualized number. That's all this the bank for the Q3 was pulled from S and O excuse me, from S and P Global Capital IQ. So that's calculated off the call report and is annualized.

Speaker 6

Okay, great. So it's just a going forward, given how much discretion do you guys have in terms of the reserve ratio? Obviously, the reserve is growing. I'm just trying to get an understanding in terms of is this all algorithm driven or is there a good part of it that is part of your discretion?

Speaker 2

Yes. I'd say, Chris, that it's a mixed bag. We do have calculations that we apply. But the biggest influencer that we have is the level of production across the portfolio and the concentrations. I tried to I can't reiterate that enough that as we move through time, we do expect more traditional bank loans to come on the balance sheet that will cause that reserve to loans coverage ratio go down from here.

Speaker 2

So that's again, I can't reiterate it enough. Are we is the peak 5 maybe, maybe not depending on our loan production for the quarter, but we intend to diversify our loan production. It's been in our business plan that we present to our board. We're going to continue to operate with that business plan. In terms of the algorithm, there's a quantitative and a qualitative.

Speaker 2

The qualitative is where we exercise judgment and we evaluate a host of factors between economic projections, trends, etcetera. So So it's I can't give you an exact answer, but I can only answer it qualitatively that it's mixed, but and we do have some level of judgment.

Speaker 6

Great. I guess this is a general question from management. Given you guys do operate a differentiated business model and we're about a year, 18 months ever since Silicon Valley Bank and Signature and so forth went down. Are you seeing sort of more strict regimen from the bank supervisors on banks in general or sort of business as usual? I mean, I only ask this because we have a commercial real estate bubble out there and it hasn't really gone through the banking system yet.

Speaker 6

I'm just trying to see from your perspective if you're seeing anything changing on the regulatory

Speaker 1

front? Chris, I'm going to answer that. I want to go back a little bit to the thing on the reserves because I think it's been an important addition here. When we make a loan that's a 7 loan, for example, in the Q4, we get hit with that CECL charge upfront. And as we're building a portfolio, we keep putting a big CECL that's a direct hit to income, to capital, etcetera.

Speaker 1

But the activity happens down the road. So from an income standpoint, this is punitive. Down the road, it lightens up. So if all of a sudden down the road, you're going to focus on the fact that the reserves are coming out and getting less, we don't look at that as an issue. That's what they're there for.

Speaker 1

As I say in the business, the sardines are there for eating, not just for looking at them. But I think it's very important because it is misunderstood the way our business works, particularly given that these loans have got long durations and the losses occur way out in the future. So it's just something to think about. Now to answer your question with respect to Silicon Valley Bank and Signature Bank, So one thing that almost has nothing to do with us. The first question that we're typically asked is, are you involved in crypto and banking as a service?

Speaker 1

No. No. Okay. So they're not from our perspective, not an issue. But I can tell you that for institutions that are involved in banking as a service or crypto, it is an issue that they're looking at.

Speaker 1

They're not fond of it. Then you got that CRE exposure, which I do agree with that there hasn't really been that much of a reckoning on that to date. We also don't have that issue. I think in our model, they look at a lot of the things that you guys are looking at. And given how we manage the risk and have the reporting and have staff first and ask questions later and prepared for it with a lot of high quality people, I feel like we're in pretty good shape.

Speaker 1

Relative to the industry in general, in the event that I happen to be right and there is a tremendous movement as money starts to go from FDIC insured deposits more in the money market funds, which we've clearly seen with sweep accounts in the investment banking world where sweeping money at 10 or 20 basis points into an account, it's a problem. I think there's going to be more and more of a focus on it and giving depositors the ability to technologically move their money easier into better bank accounts. 2nd half automatically, but it's kind of happening on a stealth basis. So you look at, for example, the rates that some organizations are charging, which we do for consumer high yield savings, I don't know how they're supporting that because they're not earning it on the asset side, we are. So even at these higher rates, which we believe will come down, we think we're in a good spot.

Speaker 1

But from a regulatory environment, I think the regulators are focused on crypto, banking as a service and they are very focused on the banks of obviously being able to fund themselves. And that's why you have to have a lot of different levers to be able to do that. Okay. Thank you for taking my questions, guys. Thank you.

Operator

Thank you for your question. This concludes the question and answer session. I would now like to turn it back to Barry Sloane, CEO and President for closing remarks.

Speaker 1

Thank you so much. Greatly appreciate the opportunity. I feel very strongly about where we were for the quarter, where we're making our progress. If I was able to look back on January 23 and look forward 7 quarters and say this is where we'd be at, I'd tell you, boy, I'd be very pleased. We're making great progress.

Speaker 1

We're making great strides. Business model is in place. Our job right now is to get out there, educate, continue to be right on our forecast and expectations. And as I've said before, we're very experienced in this particular space and comfortable with it, And we look forward to delivering these kinds of results in the future. Thank you.

Operator

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 Q3 2024
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