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spk01: changes underneath them. Management team of Ana Pavla, Justin Gavin, Virginia Wiley, and their staff underneath doing a great job. Important to note, we're not standing still. We're moving forward. We're innovating. Business owners are going to be the benefit, beneficial parties of all this innovation. And we're getting tremendous value and assets over the new tech infrastructure. On slide number 10, you can take a look at our pipeline growth. It is very, very clear that we've got had tremendous tailwinds going into the second half of the year with growth in our pipeline, particularly in the 7A space. Obviously, 504, a little bit more challenging. However, please notice the approved pending closing, which is important to be able to get us to our 150 million closings between the end of the year. We're very excited about our non-conforming conventional business, which we'll talk about later on in the presentation. On slide number 11, you can continue to see on an aggregated basis, Our pipeline is still strong, and we look forward to a very good second half of the year. There is very good loan demand for us. Now, is loan demand down overall? Well, I would say that, you know, in a tougher economy, you're tightening your guidelines, but our referral numbers are up. We're being more selective, and we're just outperforming the market in every aspect of lending, being able to find the better credits, get to the clients, give them a frictionless environment, process the business, and put the loans on the books. On slide number 12, we talk about, you know, WeView obviously is our secret sauce in all aspects of the business. And we focus on growth and loan referrals, but referrals across payment processing, payroll, tax solutions, everything that we do, very, very strong. We've got 19 years in utilizing the new tracker system in a broker, bankerless, BDO, and branchless manner. We're very, very excited about it. We've materially improved. our technological lending applications. We continue to upgrade New Tracker. We continue to be able to get great data, which we'll be able to mine in the future, which is really going to help our business. Let's move forward to slide number 12. I also want to point out, when you look at our headcount and staff on slide number 13, this is not an outsourced business. There's 480 employees that are currently on the New Tech payroll. After the bank acquisition, we expect to be north of 500. So we're not outsourcing our opportunities to third parties. Also important to note, while other companies are reporting labor reductions, we're adding a headcount. So I'm looking at a lot of the headlines. Companies are cutting staff, they're reducing. We're adding staff. Obviously, you could look into that and have a good sense that management has expectations, that it's excited, optimistic, and looks to take advantage of what other people are looking as headwinds in their face We look at it as an attractive opportunity to position ourselves for the future. Slide number 14, very important slide. So we talked about this in our last conference call, which is, you know, differences in 7 lending. And what we really wanted to begin to focus on were there are changes in the program that would affect income. We did not believe that some of these changes would affect the gain on sale prices, which you'll see on slide number 15. I'm sorry. actually down the road a little bit more, so we'll wait a little bit, we'll be a bit more patient. But I think it's important to note that our gain on sale numbers were tremendously reduced in the second quarter, but we were still able to meet, number one, the quarterly adjusted NAI projection we had out there, and actually beat the six-month projection, and we beat the street consensus for adjusted NAI in the second quarter, which is about 72 cents we came in at 75. So, We have a history of operating over 24 years through 08-09, through the pandemic, of being nimble, looking ahead, and making sure that we position ourselves correctly. So once again, looking forward to slide number 15 and talking about our performance with respect to dividends. We've had a 75% dividend in Q2, represented a 7% increase over the same quarter in the prior year. We paid $1.40 for Q1, Q2. If you look at that versus the current price, that was a very attractive yield for shareholders. And we forecasted a dividend cumulative for the third and fourth quarter. It's difficult for us to forecast with precision here because we don't know when the exact conversion will occur. You know, we're going to talk about on this call when we expect to get approval, when the bank will close shortly thereafter. So we wanted to try to give investors as much guidance as we could with the expectation that we will be able to pay a BDC dividend in Q3 and in Q4. We're forecasting a range of $1 to $1.50. At the lower end of the range, that would be $2.40 for the year. At the upper end of the range, $2.90 for the year. When we announced the deal back in August of 2021, we clearly had a tremendous transformation shareholders we talked about that in previous presentations so we've paid out three dollars and 35 cents in dividends since that time to this particular date you know you put you know another you know dollar uh to dollar fifty on top of that it's almost five bucks it's like you know the midpoint um uh close to you know four dollars and forty cents to four dollars and sixty cents for people that were upset that they weren't going to get their dividend anymore. They actually left a lot of dividend on the table. So with that said, we like the way we've been able to generate cash in the last four quarters since we announced the bank deal. We're optimistic and believe that the forecast that we've given on dividends, particularly in the remaining five months, presents an attractive yield to shareholders going forward. Slide number 16 talks about the comparative financials, which we acknowledge are difficult, particularly given that in the first six months of the year versus last six months of the year in 2021, there's about $50 million of PPP income that we don't get the benefit of. We do think we've transitioned nicely back into our core business with a great slope and growth position going forward with a great pipeline. So we feel very good about the financial results that we have reported in Q1 and Q2. Going to slide number 17, I think it's important to note we put up an adjusted NAI of $1.46 for the first six months of the year. Our midpoint was $1.45, so we were able to get a beat on that. And we feel very good about where we are with respect to wrapping up the end of the year. We're hopeful that we get approval from the Fed and the OCC to close the bank transaction. and we can begin to focus our efforts on a new financial structure going forward. Slide number 18 is a slide we use typically to show what a pro forma debt to equity reconciliation is. We sell quite a few government guarantees over the end of a quarter, so we have a big broker receivable. Once that broker receivable settles, our debt to equity ratio is 1.15, very low, very, very low. So you can see we're able to generate really attractive yields, really good income, on this basis with very little financial leverage. Obviously, you know, in a bank holding company structure, owning a bank will be able to get up to as much as 10 to 1, which really should be very beneficial for an extra share. Slide number 19 is a slide we typically carry over from transaction to from presentation to presentation. I think it's important to note 151,000 is the average unguaranteed retained balance. That number keeps going down and down. Very important to note that obviously, Smaller balances, greater diversification. With a 19-year track record in default history and frequency, we've done 11 securitizations. We anticipate doing one or two between now and the end of the year. Our loans are prime plus two and three quarters. That's the max rate. That's the rate that we typically get. I don't think we've made any concessions on that in 12 years. A major difference between us and other competitors in the space like Clive Oak Bank that originates loans in a brokered model and basically has to have significantly lower rates, lower gain on sale. It's just a totally different model. We're utilizing technology to acquire and process the business. They're using bankers, brokers, and VDOs. Prime rate on a full adjustment, eight and a quarter. It's real important to note. Prime plus two and three quarters prime, which is hiked from four and three quarters, up 75 basis points to five and a half. There's another anticipated raise. We'll see if that comes through or not. But obviously, This is great for in a banking environment to really be able to have a real attractive net interest margin. Slide number 20 begins to address the issue of gain on sale. And this is a slide which basically attempts to address the lag of prime rate and SOFR versus where treasuries are. So what's occurred with respect to the government guaranteed bonds that we sell into the market, which are prime-based floaters, Prime has lagged because the Fed is behind the Treasury curve. Matter of fact, just to give you an example, SOFR on July 27th was 1.53%. SOFR as of yesterday, 2.3%. Prime was four and three quarters on July 27th. Prime yesterday, five and a half percent. Now, when that prime rate change went through, our loans adjust 90 days in arrears, so that when we're selling bonds into the market, we're not able to sell the bonds at the full coupon. That's why when you go to slide number 21, you could see that we had a tremendous diminution in our gain on sale price of 9.2% for the quarter, down from 12.05% gain on sale in the first quarter, and down from 13.05% in the full calendar year. But you could take a look at the history because these are government guaranteed floaters. We do believe this is a primary determinant. There could be other determinants. That's our opinion. That's our guess. We do think that there will be a rebound in prices, maybe not in Q3, but hopefully in Q4 when Prime begins to adjust back. But once again, that's our thought. That's our opinion. But we are proud of the fact that we were able to make our numbers even with almost a 20% decline in gain on sale premiums. On slide number 22, one of our helping aspects of that was our net interest income trend. So you can see gross income for Q2 2022, sequentially from Q2 2021, almost up by $2 million, up to $8,031,000 from $6.2 million, a very nice gain, with net interest income going from $4.6 million to $5.1 million. That net interest income will improve because our loans change with a lag quarterly, but our interest income, based upon our lines of credit, change monthly. So that should be a nice catch-up next month. Slide number 23 refers to the seasoning of the portfolio. That's important to note. We do believe that most of the defaults are behind us in the default curve. Slide number 24, important note. Look at that currency rate, 98.4%. 98%. We work very hard with our customers. This is a function of making sure our clients have taken advantage of PPP, EIDL loans, and ERC credits. And we're very aggressive in the servicing area. We typically have 40 to 50 professionals that work with our customers, $3 billion servicing portfolio regularly to keep them current. Unlike 08, 09, because people are concerned about recession and decline, we don't have the over leverage with our client base. We don't have clients that have excessive amounts of, I'll call it financial and operational leverage. Many of them are liquid personally as well as professionally, and that's led to an extremely high currency rate. We're appreciative of the work that our team has done with the portfolio. This obviously is current as of June 30th. To be fair and honest and transparent, We don't expect this particular rate to continue, particularly with rises in rates and inflation setting in with our client portfolio. But as we sit here today, we're in very good shape. I'd also like to point out on slide number 25, we had a significant decrease in non-accrual loans at fair value on December 31, approximately $30 million. June 30th, down to $25 million, a nice decline. Slide number 26 and 27 are classic slides that we Continue to roll over presentation to presentation. Now let's move into the portfolio company review. Slide number 29, talking about our SBA 504 loan program. We're still sticking to our $150 million forecast. Our 504 loan business is an important business to us. We have substantial lines of credit with Deutsche Bank, Capital One Bank, One Florida Bank. We look forward to having a good second half of the year. Slide number 30 talks about how that 504 business works. We're in the 504 business, unlike the 7A business, We make a loan, and typically the entire loan moves off our books. The second gets taken out through SBA to ventures. The first typically gets sold at a gain on sale into the secondary market. Slide number 31 talks about the return on equities. And the return on equity in the 504 business north of 30. The return on equity in the 7A business also north of 30%. This is how we're able to generate high ROAs as a BDC, high ROEs as a BDC, And as we demonstrate in the illustration that we'll talk about shortly, generate high ROAs and return on tangible common equity as a bank. We're very excited about our future, particularly lowering our cost of funds. But it does start off with the fact that we have a 20-year experience in these businesses generating inexpensive, great risk versus reward assets with a 19-year history in credit and financing capability to generate good returns on equity for our shareholders. Slide number 32, we talk about our non-conforming conventional loan program. Many people on this call that are familiar with us understand this business. We basically originate a type of loan, it began in 2019, that doesn't fit SBA 7 criteria. In some cases, it doesn't fit because the credit is too good. The borrower has too much liquidity, too much assets, and would fail to credit elsewhere. In some cases, it's because the loan is greater than $5 million. In some cases, it's because the borrower only occupies less than 50% of the real estate. So there's some vagary in the program. But this is a complete conventional loan. There's no government guaranteed. And as of June 30th, the balance of loans originated under this program, $84.2 million. In January of 2022, we did our first securitization. DBRS rated it. We're very excited about that transaction. which we will talk about in the next couple of slides. On slide number 33, we're saying we're currently negotiating additional JV agreements. We're anticipating getting final signatures this week with an institutional investor joint venture partner for $100 million of equity capital. We believe we can fund up to $200 million of nonconforming loans in 2022. And on a going forward basis, as we go to slide number 34, the benefits of the nonconforming conventional loan program to NewTek and its enterprise additional origination fees, additional servicing income. You typically service for 100 basis points on the full balance of the loan. These loans are hedged. We ask that liability match them in the warehouse facility. They give us great operating leverage in the pipeline because loans that don't fit 7A, 504, or EBL can fit this particular area. And this gives us diversified income streams and really allows us to leverage our existing origination platform. In the bank forecast, we think we'll do close to 400 to 600 million of loans in 2023, and between 600 million and a billion loans in 2024. NCL securitization, slide number 35. We did our securitization in January 2028. It was a 56.3 million Class A notes. The securitization, which is modeled on Intex, NCL Business Loan Trust, 2022. Notes are rated single A by Morningstar. The weighted average gross coupon, approximately 8.2% to 8.4%. The weighted average net coupon that went into the joint venture, 7.4%. That's important to note that the bond, the single A bond, had approximately a 3.2% coupon. The point here is that the net interest margin for the joint venture partners, us and our other equity partner, is north of 4%. We basically invested 37% equity capital. So here's the important aspect when you take a look at this. We've got very attractive returns on equity for NewTek and its JV partners in the double digit, net of cumulative expected defaults, severity, and frequency. And for NewTek as the originator of the loans through NewTek business lending, we're able to get servicing income of 100 basis points in the whole size of the portfolio and origination fees. We're excited about this business. This gives us another engine, and we believe that this is going to be very beneficial to us going forward. And we expect to complete the bank acquisition, the bank holding company transaction. And even as a BDC, we've experienced some nice income benefits from this. So we plan on levering our operational infrastructure, track record, and securitization expertise to grow our nonconforming conventional loan portfolio while continuing to remain focused on growing our 7A and 504 loan programs. Moving forward on slide number 36, one of our important businesses, New Tech Merchant Solutions. We had a combined equity fair value of $120 million as of June 30th. You know, from a comparative standpoint, many of you are aware that a company, Evo, a publicly traded company, which is acquired by Global, I believe the multiple is about 18 times EBITDA, very attractive. We believe we have our business conservatively marked, and we feel good about that valuation. This is an important business to us, particularly as we become and anticipate and hope to become a bank holding company. Slide number 37, NewTek Technology Solutions, our cloud computing technology service provider, providing all types of technology solutions and advantages to our independent customer base. This has been a difficult first half for us. Supply chain issues materially affected results for the first six months. We expect the run rate to improve in the second half of the year, so we've reduced our forecast to 4.2 million of EBITDA for the full calendar year, but we do expect a run rate For the second half, they get bumped up to about $3 million of EBITDA. We are very excited, obviously, about cloud solutions and cloud services. You can take a look at some of our products on slide number 38, which shows what we can provide into the marketplace through new tech technology solutions. Slide number 39, many of you are aware, we own a POS provider solution we're excited about. POS on cloud, we have a 51% interest in that particular entity. Extremely competitive to Square, Clover, and other systems in the marketplace. It's an all-encompassing payment system that can be white-labeled for our partners, that can process payments, integrate with e-com, integrate with food delivery services, integrate with GL accounting software like Xero, Square, Sage, integrates into our own payroll solution. So we're able to do payroll directly from the time of attendance function in the POS. We look forward to growing POS on cloud. Slide number 40, we talk about our payroll and benefits business and our insurance agency. We're excited that both payroll benefits and insurance estimate profitability in 2022. These will be consolidating entities and we'll be giving more disclosure on these businesses going forward. We've carried these businesses for a long period of time and we're fairly confident with their position in the dashboard and being able to margin pool that these businesses will begin to grow at the rates of success that we've had in lending, payments, and tech solutions going forward. So to conclude on slide number 41 with respect to a primary discussion on our performance for Q2, we're very excited about the numbers we've been able to deliver, and we are hopeful and anticipate that we're going to receive regulatory approval during the third quarter of calendar year 22 from the Fed and the OCC and close our transactions shortly thereafter. I would now like to, before I turn the presentation over to Nick, quickly go through a presentation that we have in the investor relations section of our website, newtech1.com, talking about the update on the pending acquisition of National Bank of New York City. So if you could please go to our website and take a look at that deck. I think this is important because obviously I think many of our investors without much forward guidance on us as a BDC, are trying to get some feel for what NewTek will look like as a bank holding company and a bank going forward. Once again, I want to report that we've been one year into the process of filing, pre-filing applications and discussions with the Fed for bank holding company approval and the OCC that are working in tandem to get us approved, and that We're pretty excited about our future going forward. We feel very strongly this is in the best interest of shareholders. And I want to point out that with respect to information on this particular illustration, dated August 3rd, 2022, I want to point everyone's attention to slide number one in the forward-looking statements, and slide number two, notes regarding projected financial information. Important that that gets digested and that these projections and targets are unaudited and presented for illustrative purposes. On slide number three, the acquisition of National Bank of New York City. We anticipate being made for $20 million of cash at one time's book. National Bank of New York City, located in Flushing, New York, has been around and established since the 50s. We certainly appreciate the opportunity to make this acquisition. It's a very clean bank with a clean portfolio. And we believe that the publicly traded company owning National Bank of New York City and merging our lending operations into the bank should really give us very interesting and positive results for the future. On slide number four, you can take a look at an illustration of what the target total asset would be, total asset size for the publicly traded holding company. We think it'll come in somewhere around 1.2 billion. And if you take a look at the capitalization rates, obviously, This will be a projected, targeted, well-capitalized bank holding company. And NewTek Bank in and of itself will start off in a very well-capitalized position. Slide number five, we wanted to give the market and the audience a feel for the types of return on average assets and return on average total common equity that we can get for shareholders. These are not normal numbers that you'd see in a typical traditional billion-dollar bank holding company with a smaller bank underneath it. But we'll be able to generate these types of targets because the types of businesses that we've been able to develop over the course of 20 years are attractive. The SBA 7A business, the 504 business, the actual businesses that are going to set up at the holding company that generate reoccurring income that are non-credit related will all be very beneficial and accrue. We're targeting an earnings per share in our first full calendar year between $2 and $2.20. In our second full calendar year of 2024, the target earnings per share after tax between $3 and $3.20. We do believe these are obtainable based upon the work that we've done. However, this is an illustration. There's a lot of pieces moving around. There's interest rates moving around. There's quality spreads moving around. But we're comfortable being able to put these numbers out and believe that these are reasonable targets. On slide number six, you can take a look at the revenue breakdown. And the purpose of this particular slide is to demonstrate we're a unique bank. There aren't too many banks that have the assets of a payment processor, tech solutions company, payroll company, insurance agency. sitting up at a bank holding company. And you can see you get a real nice diversification of income stream from bank lending as well as opportunities that are coming in from the portfolio companies that are going to be held at the bank holding company. At slide number seven, we go back to our new tech advantage in the dashboard. The one dashboard your business will ever need that we provide you with Relationships, look at those relationships, six or seven relationships. You get a relationship manager, insurance agent, payment specialist, loan specialist. These are all people you can click on, get them on camera. You get analytics. You get analytics in payment processing. You get analytics in web traffic information, stuff you don't get at your typical bank. We're very excited about delivering the new tech advantage. We have partners that are interested in working with us, and we look forward to web traffic information, stuff you don't get at your typical bank. We're very excited about delivering the new tech advantage. We have partners that are interested in working with us, and we look forward to further developing and rolling it out. Important to note, all the things we have here, they exist. Most of these things, we've been in operation for over 10 years. Now these units are being pushed up into our dashboard and delivered to customers with a single sign-on, one interface, giving our clients the ability to see all the things that we can do for them in the area of relationships, analytics, and transaction capability. At slide number eight, we talk about our staffing. We're very well positioned and situated to grow this business. You can see some of the talented people that currently exist. These units are being pushed up into our dashboard and delivered to customers with a single sign-on, one interface, giving our clients the ability to see all the things that we can do for them in the area of relationships, analytics, and transaction capability. At slide number eight, we talk about our staffing. We're very well positioned and situated to grow this business. You can see some of the talented people that currently exist. on the payroll are part of our budget going forward. I've had people say, well, you don't know what it's like running a bank, and you're not fully staffed, and you don't know what the costs are. I don't think that's a good bet to make. We know what it's like to be staffed. We know what the costs are. We have great people, if you look at slide number eight or nine, that are very experienced in the banking environment. We've got top shelf advisors between our legal firm, people that have helped us with our application, investment banking relationships. If you go back and you look at our historic returns over the long term, not a good bet to bet against NewTek. We do appreciate our loyal investors that have stuck with us, particularly through the recent times in this transition. We're excited about our future. It's also important to note as we go to slide number 10, management interests are aligned with shareholders. Really important to note. This management team board, we love dividends, and we love that time being a BDC. However, things change. Markets change. This is the best structure for us going forward. We're really excited about, and we've historically been able to outperform the Russell and the S&P, and our earnings have really been strong, even in the first six months of the year. So with that said, I'd like to now transition the remaining portion of this call to Nick Ledger, our Chief Accounting Officer. Nick, take it away.
spk04: Thank you, Barry, and good morning, everyone. You can find a summary of our second quarter 2022 results on slide number 43, as well as a reconciliation of our adjusted net investment income or adjusted NII on slide number 45. For the second quarter 2022, we had a net investment loss of $2.25 million. or a loss of $0.09 per share as compared to a net investment income of $15.5 million or $0.69 per share in the second quarter of 2021. Please note that the income related to the PPP of $25.5 million is included in the second quarter 2021 investment income. Adjusted NII, which is defined on slide number 44, was $18.1 million or $0.75 per share in the second quarter of 2022. as compared to $27 million or $1.20 per share for the second quarter of 2021. Focusing on second quarter 2022 highlights, we recognize $19.2 million in total investment income, a 47.6% decrease over the second quarter of 2021, total investment income of $36.6 million. The primary driver for the decrease of total investment income was primarily due to the $25.5 million in fees from the PPP in 2021. Dividends from portfolio companies of $5 million in Q2 2022 helped offset the decrease of the PPP fees. In addition, interest income increased by $1.8 million, resulting from a year-over-year increase in the accrual loan portfolio. Other income increased by $1.1 million in the second quarter of 2022 compared to Q2 of 2021, resulting mainly from a year-over-year increase in SBA 7A loan origination volume. Servicing income increased by 14.4% to $3.2 million in the second quarter of 2022 versus $2.8 million in the same quarter of 2021. Dividends from portfolio companies for the second quarter of 2022 totaled $5 million, which included 3.1 from NMS, 1.35 million from NBL, our 504 business, $360,000 from NCL, our conventional loan joint venture, and $150,000 from mobile money. Compared to the second quarter of 2021, there were no distributions from portfolio companies. Total expenses for the second quarter of 2022 increased slightly by $400,000 compared to Q2 2021, mainly driven by higher interest-related costs. Realized gains recognized in the sale of the guaranteed portions of SBA loans sold during the second quarter totaled $21.3 million as compared to $14.1 million during the same quarter in 2021. In the second quarter of 2022, NSBF sold 338 loans for $190.3 million at an average premium of 9.2% as compared to 142 loans sold during the second quarter of 2021 for $87.4 million at an average premium of 14%. The increase in realized gains was attributed to higher SBA 7A loan origination volume in the second quarter of 2022 when comparing to the second quarter of 2021. As I mentioned earlier, income related to the PPP is included in investment income, not in realized gains. Realized losses on SBA non-affiliate investments for the second quarter of 2022 was $1.4 million, as compared to $2.7 million in the second quarter of 2021. Overall, our operating results for the second quarter of 2022 resulted in a net increase in net assets of $13.5 million, or $0.56 per share, and we ended the quarter with NAV per share of $16.31. I would now like to turn the call back to Barry.
spk01: Thank you, Nick. Operator, we'd love to open it up to Q&A.
spk03: Thank you so much. And again, as a reminder, to ask a question, you will need to press star 1 1 on your telephone.
spk02: And please stand by while we compile the Q&A roster. Your first question comes from the line of Paul Johnson. from KBW. Please go ahead and ask your question. Taking my questions. Good morning, everyone on the call.
spk05: Mentioned a lot of names there earlier. Anyway, I was hoping, I don't know if there's any way to quantify potentially the impact, just kind of quarter over quarter, either, you know, what earnings would have been this quarter or potentially what kind of the benefit would be next quarter just from the increase in the prime rate during the second quarter?
spk01: Yeah, so, Paul, it's a tough one because that would require us to sort of forecast what the bond price is going to be and the capital markets are going to do with respect to pricing. So, You know, I do think with respect to the roll forward, you're probably going to get a lag on that coupon. So you kind of have a partial adjustment between the two recent rate hikes. But the full adjustment of, for example, the three quarters of a point that we just had in prime, this is the second three quarters, that's a fourth quarter event with respect to quote gross coupon off the portfolio but you could see that we're getting short-term movements in the expense but not the full benefit of the portfolio with respect to gain on sale um you know with our portfolio mix um I don't believe we've ever had a gain on sale that's been lower than the number we had in the second quarter going back over a seven years, you could actually see that in the chart. Is it fair for me to say, gee, I think that'll be the floor? I can't say that, although I'm optimistic that we should do better from that number. Hopefully that's somewhat helpful.
spk05: Yeah, that's very helpful, and I understand it's a difficult question to answer, so I appreciate that. My next question is just kind of around I guess how you look at sort of a risk as you're underwriting the portfolio, you know, any given quarter. Is there any point during the cycle where, you know, you would begin to shift your origination strategy to focus on potentially like a higher quality subset of the 7A market, you know, such as, you know, a point in time like today where Risks are obviously increasing. Recession or no recession, it seems to be a fairly telegraphed flow down just primarily due to the quantitative tightening that's ongoing. So I'm just curious how you evaluate credit quality and business risk in an environment like this.
spk01: So I think that one way to evaluate it is, and I think this is important to note, there are businesses that have adjusted and adapted to the changing environment to where they've actually, they're in a better spot post-pandemic than they were pre-pandemic. They really looked at their business and they analyzed it. So part of it is to, in conversations with the client, ask them in the underwriting process, what have they done to adjust prospectively to rising rates going forward? How liquid are they? What do they plan on doing with respect to costs of labor and running their business? Do they see those pressures? But also, it's very important that if you're anticipating a downturn in revenues, does the business have enough liquidity to be able to weather 12 to 24 months of any kind of a reduction in revenue? How are they able to reduce expenses to be able to maintain their cash flows and service their debt? The good news with respect to our business model is we're seeing tremendous amounts of opportunity to be able to pick through the best credits. There are certain markets and industries we're more sensitive to, particularly what I'll call leisure, retail, hospitality, where the cost of labor is difficult, hiring is difficult, and that's affecting numbers. You also want to be really, really careful in looking at the 2021 history or recent quarters where you kind of had a little bit of a Goldilocks environment that might change, particularly if demand changes. So we've been very pleased that our underwriting has, I'll call it, tightened. We're doing smaller loans. We're getting more diversification, which we're big fans of because that is clearly a risk reducer. Diversification across units, geography, and industry. You want to be Careful in particular industries like transportation that are, you know, or energy costs or energy shortages could be really problematic and disruptive, particularly with supply chain issues. You just need to be a lot more thoughtful when you go through the underwriting process for approval.
spk05: Yeah, that makes sense. And that's a great answer. Great color there. Appreciate that. Last few questions. I'm assuming just as we're probably in the final quarters here, you know, as a BDC, we can expect you're pretty much expecting to be paying out 100% of NII at this point. So just want to make sure I'm looking at the dividend forecast, $1 to $1.50 for second half of this year. I think that should be a fairly good approximation of what you expect for earnings in the second half.
spk01: Yeah, I think that... Well, we will be pretty close to the top end. I mean, at this point, it does not pay to retain because you've ultimately got to pay. You have to pay it out when you withdraw the election. So I think that the very wide range that you're showing dividends will be pretty close to what I'll call the full payout.
spk05: Got it. Got it. My last question is, It kind of just has to do with the bank, and I'm not sure how much you're able to answer at this point, but I'm just curious around sort of the legacy SBA portfolio. I guess your current SBA portfolio today, which will reside outside the bank. Just going forward, will that portfolio, I mean, as that sort of runs off, how do you sort of intend to use the proceeds from that? Do you kind of expect to use that to just drop down funding, I guess, into the bank, or is that kind of something that will sit sort of on the parent company balance sheet that's on JVs and other investments? Just curious about what the expectations are for that as that continues to wind down over the years.
spk01: Sure. So I think... What's been difficult, I think, for us to get across to the investment community is we've historically had to fund SBA 7A growth and 504 loan growth by selling a dollar of stock, which reduces your EPS because you're increasing your share count.
spk02: You see that.
spk01: unsecured, secured probably five or six, those businesses can be fund almost 100% out of the bank with retail deposits. That's, even though you're paying tax, it's immeasurably beneficial, immeasurably. And that activity should be in the bank. Now, the legacy portfolio, as we have said previously, NewTek Small Business Finance, the licensed non-bank lender, that is designed, and we're still waiting for obviously final approval on everything, but we believe, based upon conversations, to sit up at the bank holding company in a runoff mode. So those loans are in securitizations. Those will run down. So the new business will be in the bank. The other business will be up at the bank holding company in a runoff mode. And that, we believe, also will be attractive because we'll be able to ultimately harvest the equity that's sitting in that particular relationship over time. So we do think that primarily using core deposits versus securitization and other, you know, interim funding amounts will be immeasurably beneficial. We still will be utilizing securitization at the bank holding company and may actually do securitizations out of the bank from time to time from a diversification standpoint.
spk05: Got it, that makes sense, yeah. Those are all my questions this morning and appreciate you having me on. Thank you.
spk03: Thank you so much.
spk02: And again, if you would like to ask a question, press power one on your telephone keypad. And we have our next question from the line of Adam Morton. of RBC, please go ahead.
spk06: That's in the quarter. Just kind of looking forward as we're in this new paradigm, I guess, with the Fed, what do you think is, if you could just talk about, you know, unlocking value as a bank for, you know, owning a bank for shareholders, how does that kind of just summarize some of the points on what that might look like?
spk01: Sure, Adam. I appreciate the question because today NewTek has primarily five lines of business that they do operate primarily independently from each other. And by being able to get our client base to focus on the fact that we do all these things without having to have human activity talk about them or coordinate them, to be able to message them. So the NewTek Advantage or the dashboard is going to be illuminating to our customer base. The dashboard or the NewTek Advantage is going to be right there as we open up their depository account, as we're able to margin pool. Look, my payment processing clients today, they have their deposit elsewhere. My payroll accounts, they have their deposits elsewhere. The ability to margin pool and give breaks on web hosting, terminals, hosting plans, payroll. These things are going to be very beneficial to clients and the analytical tools that they're going to get. So they're going to get a lot of things in one place that they typically go to two, three, four, five times a week, 12 times a month to be able to see it in front of them. In addition, When they compare what we do versus their current depository, it's night and day. The depositories don't give the customers anything. They take their money, and maybe we'll make them alone. With us, they're going to get analytical tools to run their business. Futuristically, we believe that we'll be able to integrate most of these things into one GL. We currently have GL integrations today that we'll be able to illuminate. They're going to realize that they've got a full team of professional solution providers where they don't get that today, whether it's the top four banks or the several thousand community banks or the super regionals. So in addition to that, we currently have got existing financial institutions that have said, gee, we want your dashboard, would you white label it for us? So we become the backend bureau. So I could take a small community bank that can't afford to do all of these services, and I could put them in business overnight, and I could provide payroll to their clients, I could provide payments to their clients, I can provide insurance to their clients, all under their brand. And unlocking that value from a software and technological perspective, in addition to being a great product tool, we think will bring great shareholder value. It'll be similar to what I think Liboq has been able to do with Encino, where they've spun out these technologies, but sort of in a very different manner. We'll be very much behind the software. So we bring software, people, and process to the customer base. We think that putting these tools that we've developed over 20 years in a banking environment is going to be easier for our clients to see, it's going to be easier for our clients to access, and it's going to be easier for our employees to deliver those solutions to the customer base. So that's, we talk about unlocking, which is, you know, it's a simple word, you know, with a few syllables to it, but there's a lot more behind it. And that's what we mean by unlocking value.
spk06: Yeah, that makes a lot of sense. Thank you so much. Thank you. Appreciate it.
spk03: Thank you so much, and we don't have any more questions.
spk01: I would now like to turn the conference over to bring you further good news from NewTek.
spk03: For closing remarks.
spk01: Well, we know that was a mouthful, and we appreciate getting that in within an hour, and we really appreciate your attendance. We had a lot of people on this call today, bigger numbers than I've ever seen before, and very, very thankful to the audience, to the questions. to the analysts that joined. We had two analysts put out reports on us this morning, and we appreciate the updates and look forward to our next report and look forward to bringing you further good news from NewTek. Have a great day, everyone. Thank you.
spk03: Thank you, presenters, and this concludes today's conference call.
spk02: Thank you for participating, and you may now disconnect. The conference will begin shortly.
spk07: To raise your hand during Q&A, you can dial star 11. Thank you. Raise your hand during Q&A. You can dial star one.
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