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spk07: At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloan, President and CEO of NewTekOne Inc. Please go ahead.
spk11: Good morning and thank you very much. Appreciate everyone attending and welcome to our first quarter 2023 financial results conference call. Obviously, this is our first conference call as a financial holding company owning a nationally chartered technology enabled bank and we appreciate everyone's attendance. Our call today is going to be quite detailed to give investors and analysts an opportunity to begin to model our organization, which is clearly a differentiated business strategy and operation one that will be different than any other financial holding company or bank holding company that you're familiar with so we appreciate everyone's patience we tried to give as much detail and transparency to try to set a baseline foundation so that people can begin to to model up new tech one a very unique differentiated financial holding company Joining me on today's call is Nicholas Ledger, EVP and Chief Accounting Officer, Nick Young, President and COO of NewTek Bank NA, and John McCaffrey, Chief Financial Officer of NewTek Bank NA as well. We've also invited our analyst coverage. We have several analysts that are on the call that might participate in Q&A. Chris Nolan from Lattenburg, Crispin Love from Piper, Paul Johnson from KBW, along with Mike Burrito. Noah Ross from Compass, Bryce Rowe from B. Reilly, and David Feaster from Raymond James. So we welcome calls coming in on the Q&A to try to get our story out in the market and to get people to follow the very unique repositioning of NewTekOne, a unique financial holding company. I'd like to call everyone's attention to the forward-looking statement on slide number one. I should remind everybody that is not familiar with NewTekOne, Our PowerPoint presentation is on the industrial relations section of our website, and you could follow along. Slide number two. Our first quarter reporting is a financial holding company based upon the fact that on January 6th, we completed the acquisition of National Bank of New York City, renamed New Tech Bank NA, and withdrew our BDC election and ceased operating as a BDC. Important points of focus for this presentation, given that this is our first quarter. Obviously, the comparisons, which Nick Ledger will talk about, too, as a BDC, has questionable relevance, obviously, because there's different accounting treatment, but Nick will go into that shortly. First important point relative to the results that we released last night, we exceeded the previous first quarter basic EPS forecast of 41 cents. We came in at 46 basic, as well as analyst consensus. We had two analysts that reported to date. just think just it's very difficult for people to have been able to do forecasts without this baseline so we certainly appreciate uh the coverage that we've gotten so far to get out in front of us and it's been helpful uh we hope to be able to pick up uh more analyst coverage going forward with some of the people that are on the call um so in addition to um exceeding the original eps forecast um One of the things we're quite proud of is we demonstrated an ability to raise insured deposits during a very difficult time with a high growth rate. Digital account opening and utilization of broker CD is very important. Digital account opening has come on like gangbusters. We talked about the success we had in March, April, and May. Important to note, the industry currently is somewhat plagued with asset liability management issues that are questionable. Many financial institutions have long-duration fixed-rate bonds or loan portfolios that are not matched by time deposits. We do not have this issue. When you start to look at the metrics of return on average assets, return on tangible common equity, and capital ratios that exceed the industry norm, we're starting off with clean balance sheets, a great business model with margins, and we really do not operate to the historic industry norms of a business that's primarily predicated on low to no cost deposit costs to raise fundings on the liability side and fixed rate, low margin, but yes, low risk loans or securities. We look forward to our presentation today. On slide number three, we continue to talk about our unique differentiated business model. We always use the term without the use of brokers, branches, or business development officers. I think it's a real important designation. Many of our competitors in this space have got big dollars invested in commercial bankers that entertain, take people out for their deposits, particularly commercial deposits. We've developed our business model as a technology-enabled bank over the course of 20 years. We utilize technology, people, and processes to deliver solutions to its core commercial clientele. with efficiency and high levels of service. So it's not like the customer is devoid of a relationship. For those of you that are not that familiar with NewTek and the NewTek Advantage, you'll see you'll be able to get individuals that are professionals within their product segment on screen to be able to talk on camera to our clients on a regular basis. It's just not the traditional banker, broker, or BDO network that's exceptionally expensive, arguably not efficient, And we're really excited about the ability of what we've built over 20 years now coming together under a financial holding company structure owning a bank. When we talk a little bit more about the NewTek Advantage, you'll be able to see what our real advantage is in the market. And then our trained solution specialists, whether they're trying to help the customer open up a bank account, obtain a small business loan, help manage hardware and software 24-7, in our data centers, both in Phoenix and in Jersey, Penn State Licensed Insurance Agency, payment processing business, which is really important, the movement of money for our business clients, exceptionally important. And our competitors really don't do this very well at the independent business owner level. Important to note relative to our differentiated strategy is a well-managed asset liability strategy. So many of you are familiar with one of our core lending products, the SBA 7A loan. Today we're out in the market. At prime plus 300, that's 11 and a quarter spread. Three quarters of a percent of the loan is government guaranteed and sold at a 10 to an 11% premium. So therefore, you're left with a 25% uninsured but not subordinated loan participation on our books. And we'll talk about the size of those. It's about 150,000 average balance. So you get tremendous diversification. And that diversification gets you through good times and bad. That's what we've learned over the course of 20 years. We came into this business by acquiring a bank and putting a plan together that we believe deposits have zero duration. And all of a sudden, in the last two months, everyone's waking up and going, wow, bank deposits have a zero duration. And we saw commercial depositors line up, unfortunately, at some of our industry participants and withdraw their money. So the value of commercial accounts dumping $10, $20, $30 million into a into a financial institution at one slug, it's very questionable what you can do with that money. Are you going to make a car loan due in three or five years that's illiquid? Are you going to make a residential mortgage loan that in today's prepayment expectations could be six, seven, eight years? Are you going to do a commercial real estate loan? It's very tough. So when you look at our strategy of deposit gathering, percentage of insured deposit versus uninsured, what we do with the funds and managing liquidity you'll see we are different and we think we've got the right model at the right time so i've said this on previous calls have we entered the market at the worst of times or if they entered the market at the best of times time will tell but we're very confident about what our strategy is and it's the perfect strategy for this time in the market we obviously have got net interest margin margins that exceed your typical bank and financial institutions you'll see that the current net interest margin of The existing entity that we took on is about 225 basis points. But you could do the math and you're at 11 and a quarter coupon on a loan and you're getting deposits at five, that's in excess of 6%. That's attractive. And that's the type of business that we're going to grow. Now we'll be diversified. We'll be putting on some lower margin business with current CRE type loans and current CNI type loans that are I'll use the word conforming in nature to bank underwriting standards, and that will diversify us, reduce our charge-offs and losses, but give us a diversified portfolio across the whole bank spectrum. Clearly, we've demonstrated an ability to gather and grow deposits beyond my wildest expectations. I did believe we were going to be successful in this, and after a drought of about a month and a half and finally getting our technology correct and we really appreciate the work that aperture did with us to get our digital account opening online banking position ready we came on like gangbusters and we're very very pleased with how that is currently working but we're still early we still have a lot of work to do and a lot of development to be done there to get it to where we really need it to be look going forward you know we our business model is predicated on acquiring deposits at market cost of funds. However, it doesn't mean that we don't believe we're going to be able to get commercial deposit accounts for checking at 1% and commercial high-yield savings accounts at 3.5%, which will reduce the blend. And we'll be able to do that by combining our merchant processing, our payroll, requiring operating accounts of people we lend money to, and the new tech advantage, which we'll talk about. So that will wind up giving us further advantages in the future. I think it's important when you look at our organization, you have to take a look at it and go, gee, this is a little bit like a re-IPO. Let me look at what they're looking to do going forward. Let me look at their spread. Let me look at their margin. Let me look at their strategy. Let me look at their 20 plus year track record in managing risk through 08, 09 in the pandemic and say, is this a company that I want to be involved with? And if you're going to look at it like a traditional bank and go, what is this trading times tangible book value? Uh, you might as well go on to another conference call because this is not the company for you at this point in time. I'm not trying to dissuade people from investing in this, but when you see all the different engines and the diversified cash flows and things that we offer our customers, we're just different. And our customers do appreciate what we do. We have a long-term reputation in the market of delivering winning solutions to clients and being leaders in various spaces, and we're going to continue to do that with a commitment towards excellence. I'd like to move to slide number four. Quickly to go through slide number four, these are some of the first quarter financial highlights you could see in our press releases. We're very proud of our capital ratio, the amount of cash that we've got on the books. And obviously most of that cash on a consolidated basis is in the bank. Please understand you can't readily move money between the bank and the financial holding company. And then that interest margin of 2.28% was based upon the legacy portfolio. It was done at very tight margins. So as we begin to put loans on the books in the second, third, and fourth quarter, you're going to see those margins expand, and we've shown that in some of our slides going forward in the presentation. Slide number five. Talking about the 7 business, which is an important part of our business, some of the things that we needed to get done, obviously, was begin funding 7 loans in the bank. get the PLP status, the preferred lending status moved into the bank. Well, we were successful with doing that. It's part of our strategy. In addition to acquiring the bank on January 6th, getting the capital into the bank to get to the tangible common equity of $79 million, which we're very appreciative of. And I'll say that's approximately 79 million. Obviously we're going to be filing our Q shortly. New tech bank launched digital account opening in March of 2023. When I say we launched it, yes, it was open and available. but we had a lot of tweaking to do. Obviously, you know, acquiring a bank on January 6th, the strain that it put on the quarter and the ability to deliver results like this, I'm not sure are fully appreciated by the market. I say the best is yet to come. We also had a fairly stable portfolio. You know, some of the things that investors are concerned about, obviously, that's the liability management. Is there enough capital in the organization? Do they have a model that their margin's going to collapse going forward? So we've got that checked. We're good, we're good, we're good, we're good. Quality of the portfolio, a slight increase in the non-accrual portfolio, actually decreases a percentage of non-accrual loans versus total portfolio. And, you know, we're pleased. Clearly, you know, with rates going up 4% to 5% in a short period of time, it's going to put stress on borrowers, but our portfolio has held up quite well. Our currency rate, which you'll see in a future slide, is fairly stable. And it's materially higher than what it will be in a normalized market. So we do understand that. And when you look at what we're putting in place for CECL reserves, our reserves on the bank, I think you'll be comfortable with our projections because we're extremely conservative. And it's not like we haven't seen downturns in the economy or higher levels of rates because we've been in this business since 2003. Our ability to raise capital was demonstrated in January, raised $70 million through debt and preferred stock capital raises. Slide number six is an interesting slide, and we use the term adjustment to book value at 331 due to deconversion adjustments. I think that banks and financial holding companies basically do not have valuations for asset-like businesses like merchant services, tech solutions, insurance agency, and payroll. These businesses, using a fair value calculation, worth about $166 million. Well, they are going into our tangible book at a negative $2 million. Well, as a BDC, these were on our books at fair value at a much bigger number. It's almost six or seven. It's a little close to $7 a share. Now, look, I'm not trying to rewrite accounting standards. It's not what I do. But when you look at the asset valuations, of New Tech One, it would be a disservice if you're sort of a multiple-to-book value freak to not count these very valuable and vital businesses that generate cash flow with very little capital investment or capex. And these are generating reoccurring cash flows and are part of our valuation. So dancing around here a little bit, we think these businesses are quite valuable and add to the tangible book value calculation of $7.77 a share. Slide number seven, we talk about New Tech Bank being well capitalized, where our total deposits were. The amount of insured deposits, 94.5%. The uninsured is 5.5%. A lot of that is legacy deposits from larger National Bank of New York City legacy borrowers and people that are close to the company. But I think it's important to note that we did not have any of the issues of some of the regional banks or even the bigger banks that were really happy to say, hey, we broke even. You know, we didn't lose any deposits. Well, we gained deposits and we're still gaining deposits. And we're able to do that because our strategy is our willingness to pay a market rate of interest. And down the road in Q3, Q4, we'll be really focusing on bringing in those commercial accounts tied to the merchant account. the payroll account, and lending in other businesses. And that will be able to further widen their NIM out, which we're fairly excited about. You know, in the bank, the risk-based capital, 35%, that's because we have a lot of cash. So for people that are looking for noise, we had noise in the portfolio, blah, blah, blah. We had purchase accounting adjustments. We had seasonal adjustments in Q1 to get this quarter behind us. And we also were sitting on a ton of cash, and that was based upon, A, our preparing for our SBA business going forward, particularly in the second quarter to fund at B, given what was going on in the market, we felt it was prudent to waive in all the deposits that we could. And our digital account opening worked really well. We were also able to raise some broker CD money, I will repeat, non-redeemable, my favorite word, non-redeemable. So as a professional in the asset securitization business, understanding call features, has obviously become very, very important. When you make a residential mortgage loan, the borrower has the call. Deposits can be called by the depositor at any point in time. That's a bad business. We understand options. We understand the optionality of deposits. We understand the optionality of the loans we make the borrowers, and we price them accordingly, and we have really good margins. It's one of the advantages of investing in an entity like NewTekOne that's got tremendous banking expertise and knowledge, but also asset securitization knowledge, risk management knowledge. We're very proud of what we bring to the table with respect to a new and different business model. Slide number eight, bank purchase accounting. We've clearly heard one of the problems in some of the regional banks, and I'm looking at them right now on CNBC, is, gee, their portfolio, if you actually marked it to market, the net worth or the capital would go away. Good news. We really don't have that problem. Why? We just use purchased accounting. The liabilities were marked to the market, the assets were marked to the market. That gives us a very good starting position, in addition to the fact that we've got these assets and liabilities that are very well managed. We do not have long-duration fixed-rate assets matched by non-interest-bearing or low-cost deposits holding our breath and hope that the depositors won't leave because in three to five minutes, they can move their money through a phone. We don't have that problem. I think it's importantly that a lot of these regionals are suffering, and banks are suffering, because on a mark-to-market basis, they don't necessarily have that network. As I mentioned to you, the purchase accounting that we went through, marking the assets and the liabilities, we picked up $20 to $25 million of liabilities from the former bank that was like two and eight, but we kept those on. We wound up buying a one-year bill at like 4.6%. And we wound up moving our federal home loan bank relationship over to Atlanta, of which we have an unused line of, I think, $60, $70, $80 million, which will remain that. That's our buffer in case there's some unforeseen issue. But we're always thinking ahead. I think that's important when you invest in a management team. Slide number nine, metrics and forecasts. We maintain the guidance of $1.70 to $2.00. We think at this point in time, that's prudent. We're going to continue to monitor this and adjust it. It's pretty hard to forecast when a two-year moves 25 basis points in a morning or an afternoon. And the government guaranteed premium moves 2% up or down from one quarter to the next. So you can imagine it's a very volatile market. However, when you look at our stock price in these numbers, it's fairly well discounted to what I think some normalized multiple might be. And that's where we believe we need to be looked at really at a multiple of earnings and growth of earnings. So that's historically what this management team has been able to do. These are some of our metrics, most of which have been reconfirmed. The one that's been reduced is the nonconforming C&I business, which is dramatically reduced down, but we were able to pick it up in other areas. Slide number 10. Our position as a leading SBA lender. Once again, getting PLP status in the bank, a big win. Not easy to do. It's not a designation that every organization gets, and most of them that get it, we would argue, don't really use it much or aren't well suited to it. Well, we're one of the leaders in the business, the second largest lender. I think an interesting comparison relative to banks or bank holding companies to this would be Live Oak Bank. Look at their margins versus ours. Look at their Efficiency ratio versus ours, it's night and day. And we like our business model. We've historically, as a non-bank, issued securitizations to asset liability max the loans. Those are going to be sitting in New Tech Small Business Finance. We'll talk about that for a second. But from a risk standpoint, 152,000 average balance of the unguaranteed but not subordinated SBA 7A loans. Now, that's diversification. Those loans are prime plus two and three quarters. The newer loans that were able to originate due to SBA regs are prime plus three. So you get a real nice asset liability match, which we'll talk about shortly. But I think it's important to note that we've been a player in this space for 20 years. Through 08-09, we think we have the data and the knowledge to manage this business through higher rate environments. and tough for credit environments. But we are very big on diversification, diversification in industry, diversification in geography, diversification in provider of referrals. So we have a very good business model, and this is a really attractive return on equity business for us, and that's why we're able to generate these return on assets, return on equity. And it's very hard business, frankly, to enter into it from a dead standstill. Slide number 11, one of the things you're going to see in the upcoming queue will be the diversified streams of income and segment reporting. The New Tech Bank will be a segment in and of itself. The SBLC, which is Small Business Lending Corp, so the former New Tech entity that did all the SBA loans is in a wind-down mode. We'll talk about that in a second. So you're going to see that as a segment. It's going to be basically a portfolio of loans against securitizations. Then you've got the payments business, which is a 15, 15 and a half million dollar EBITDA business per year. Then you've got the tech solutions business, approximately a $5 million EBITDA business per year, both sitting up at the holding company along with NSBF. And then we packaged basically everything else into an other category. And there will be NDNA to be able to break out the performance characteristics of the insurance agency payroll and other businesses that sit in there, joint ventures, things of that nature, joint ventures with respect to lending. So we're trying to be as transparent as possible. The category is lumped together to be anything that's under 10%, which is part of SEC and GAAP recording requirements. Slide number 12, we were able to increase all commercial loan closings to $228 million, a 12.8% increase. So when we look at that, what it is we're looking at is this is 7A, 504, we refer to as conforming CNI. We call it conforming because it conforms to bank underwriting standards. Unlike a 7A loan under SBA, which is a loan that has underwriting classifications that do not fit bank underwriting standards. That is actually the definition of a 7A loan or one of the defining characteristics. And then conforming CRE lending. The Former owner of the bank, based upon A, the market conditions and their expense ratios, was able to successfully run a bank at 200 to 210 basis point margins to cost the funds. So we're pricing these loans today. We actually did want to 350 off and maybe we'll be 375 to 400 off right now for new CRE loans. For those organizations that have a full balance sheet on CRE lending and That's the times to make these loans, provided that they're underwritten, to current correct appraisals with the right projections and the right cap rates and the right valuations. The best loans are made in the worst markets. You get the best underwriting. There's less competition. People aren't falling all over themselves. It's one of the benefits of getting out of this zero interest rate environment with a clean slate and a clean balance sheet. Slide number 13. This is our 7A premium trends where we sell 75% of the 7A loans. So in Q1 2023, our net premium was $110.84. The trend is up. Why is the trend up? People want assets that float, particularly over the short end of the curve. Surprise, surprise. The highest yielding part of the curve. Surprise, surprise. And less painful from market to market. So there's a lot of banks out there that wish they had floating rate assets. There's a lot of insurance companies that wish they had floating rate assets. There's a lot of performance-based managers that wish they had floating rate assets. Extremely valuable. Slide number 14, this is what we call our currency rate. You know, I would tell you that, you know, historically over 20 years of currency rate, you know, has traveled, you know, somewhere in the neighborhood of, 90, 91, 92. It's much higher. I mean, we're coming out of Goldilocks. So these are small businesses. They do fall behind at times. It doesn't mean the loans are bad, but at times, due to seasonality. So this is a strong portfolio. Most importantly, you can see it really hasn't moved much. The key bucket is 31 to 60, right? That's really where you got to focus your eyes and your attention. So there's just been not a lot of movement in that 31 to 60. The current tab is how you report to the SBA. They've got their own ways of doing things. But that's really the important tab. But obviously, 61 to 90 as well. So anything that's 30 plus is really the issue. But just because these loans start to fall behind, it doesn't mean that the borrowers who have multiple personal guarantees, every owner at 20% or greater must personally guarantee the loan, join several. They do whatever they've got to do to keep these loans going and the business going. We feel pretty good about the currency rate. Slide number 15, we talk about the non-accrual trends. These obviously are written down mark to market. We do this differently. Banks typically will take a non-performing loan and will write it to zero. Well, if it's zero, this doesn't show up anywhere. We have personal guarantees and liquidate assets. We've been doing this for over 20 years. So these do remain on our books. This is at the NewTek Small Business Finance metric number, not in the bank. The bank has small amounts of loans currently. That will grow. We're going to build a portfolio in the bank. This is just at the SBLC, sitting up at the holding company. But you can see, important to note, you know, one of the issues about people worrying about banks is how is credit holding up. You can see ours is doing well so far. 16, NSBF interest trend analysis. So here's your asset liability management for NSBF, the SBLC, the non-bank legacy lender in wind-down mode. First of all, important to note, you could see that we're getting a lot of good spread income up from a year earlier to 6.5 million. Now, when you look at NSBF going forward, you're looking at approximately $500 million worth of loans against pledged to securitizations of about 250 million. So there's a lot of equity in those securitizations and there's very good spread income. I'll draw your attention to slide number 17, which shows you the coupons that are paid to the bondholders. That's the lesser of one and the two, and these are the four outstanding issues. These are numbers at, I believe, issuance date. I could be wrong on that, but no. These are dollar volumes at issuance date, so they pay down. I think it's important to note, you're probably looking at a cost of funds somewhere in the neighborhood of seven and a quarter, maybe seven and a half on a blended basis. And your coupon is prime plus two and three quarters on most of these loans going forward. It's prime plus three. So that's like an 11% coupon against call it seven and a half, 350 basis points of margin. Now in NSBF, everything is outsourced to the bank in a lender service provider agreement. So it's really just the portfolio, the portfolio of loans, into securities, the securities have to get paid off first. So all that cash flow goes into that. So we think this is an attractive asset, and you'll be able to follow along in our queues. Now, in the queue that you're going to get coming up, there's going to be gain on sale, which is important to note, because in the first quarter, we didn't get PLP status until really the second quarter. So there were a few SBA loans originated in the bank in Q1. through the GP program, but you're going to see gain on sale in the first quarter at NSBF. You're going to see very little of that in NSBF in Q2, and the gain on sale will show up in the bank. Also, we'll note that the accounting will be different because NSBF uses fair value accounting. The bank is going to use CECL. So on a 7 loan, for example, the CECL reserve will be 8%. So every time you make a loan, it's going to be an 8% charge upfront. That'll drain and weigh on earnings, which you'll actually see if you look at our earnings for Q2. But then that higher coupon starts to pick up, and that's where you get the real benefits going out, when you build a big-ass liability management spread. But these are the details that the analysts will be able to work on. That's why we're having this call, to be able to give disclosure and be able to have conversations. Slide number 18, merchant solutions and mobile money, really important business line for us. We've been in the business since 2002. I think it's important to note we've been an SBA lender since 03, merchant solutions since 02, tech solutions since 04, insurance agency and payroll about 15 years, and depository four months. So, yeah, we're a bit of a rookie there, but we've got very experienced people like Nick Young and others at the helm running that business for us, and we're excited about it, and we're very well positioned, particularly, you know, we're basically – um dropping our lending opportunities into a lower cost funding vehicle i i will mention the contrast of making an sba loan in msbf versus in the bank so let's say deposits are five and you're putting the loan on in today's coupon 11 and a quarter So a quarter of the loan stays on the balance sheet. That's the uninsured loan participation. Uninsured but not subordinated. Fairly well asset liability matched with floating rate deposit money and a loan that has a quarterly adjust over prime, no cap. And three quarters of the loan gets sold at a big game. So it generates cash. That's the math in the bank. At the BDC, only 55% of that loan gets funded by our warehouse line. At today's cost would be almost 8 1⁄2, maybe 8 3⁄4. And 45% has to be funded by selling shares, by selling equity, by diluting, adding more share count to EPS. So even though you've got to pay taxes in a bank, the math just doesn't even compare. That's one of the reasons why we did the transaction. In addition, and we'll talk about the new tech advantages, to be able to really provide a value-added solution to customers, unlike, in my opinion, most other banks that do nothing but take the money of the customer. That's it. And that's a commodity. Everybody does it, and they don't give the client anything. We'll talk about the NewTek Advantage and why customers are advantaged for doing business with NewTek. So getting back to NewTek Merchant Solutions and mobile money, these are entities that will generate about $15.4 million of EBITDA. Pre-tax income, about $13.7 million. Established in 2002, presses $5.5 billion in merchant browser time. Could you imagine if we were able to get 5% of our clients or 10% of our clients that are processing payments to open up a bank account, give them same-day funding, one throat to choke, one place to go to for all their business needs? That's valuable. And that number we hope to grow over the course of time. So we believe that These are going to be future deposit gathering sources for NewTek Bank, and we're very excited about that. Slide number 19, why the payments business is extremely important to NewTek One. We're going to be issuing our own debit card. Therefore, we're going to be able to get interchange. Those numbers currently are not factored into any of our financials going forward. We're looking to grow these reoccurring fee businesses that are very beneficial, both to NMS and NewTek Bank. particularly utilizing ACH. Business clients are interested in being able to move their money more cost-effectively than just through interchange. And we're going to be able to do that because we are very focused on managing the payments business and the bank. David Simon, who's the president and chief operating officer of our payments business, is also an executive officer at the bank in charge of deposit acquisition. and is also on the board of the bank. David joins us from Visa and Citibank, where he had senior roles in both organizations. Really knows the card business extremely well and is now positioned in the merchant acquiring side, helping us grow deposits. We realize that most banks do not provide the tools to the independent business owners to A, electronically invoice customers, and B, to pay their vendor bills. So electronic payments, moving money for our clients, cost effectively, with transparency, with reporting into accounting general ledgers, should be a real important and vital solution that companies like ours can provide to its clients. And only the top tier banks to the top largest depositors get anything like these treasury functions. But I'm telling you, the money management functions that we're talking about, whether it's Visa Direct, MasterCard, FedNow, things of that nature, are still being cooked up. We're going to be able to offer this in one package to our clients. We're extremely excited about it. It is part of our strategy. Tech solutions. A lot of people think, what is tech solutions? We're going to be simply saying that we manage people's hardware and software in two data centers, one in New Jersey, one in Phoenix. And these are a lot of different solutions. It could be from managing email. It could be from a website. It could be storing data. It could be managing servers. It could be managing POS systems. These are some of our forecasts. Business we've been in since 2004. 21, from a segment reporting, you'll see this in our queues, corporate and all other. I'm not going to get too detailed in this. I'm going to try to keep this call moving. A lot of information. I appreciate you following along. I'm just trying to give the analysts a good sense to be able to follow us going forward. Slide number 22, new tech alliance partnerships. Many of you that are not familiar with the story don't understand how we are brokerless, branchless, bankerless, and BDO-less. That's because as an overnight success, and it just took us 20 years to get there, we've added major organizations that form alliances with us. And these alliances pass referrals to us. What are referrals? Referrals in the form of my client wants a small business loan. My client wants a workman's comp solution. My client's interested in your payments platform. So whether it's UBS's wealth management system, Morgan Stanley's, We have 3,300, 3,400 Morgan Stanley financial advisors that have a new tracker account passing us referrals. That's almost... I think it's greater than 10% penetration. UBS, I think we've got 1,500 out of 6,000. These are great penetration rates. Navy Federal Credit Union, the largest credit union in the world. Randolph Brooks, over a million members. This is how we get our business. No bankers, no brokers, no BDOs. And we basically... Give them a revenue share. We service their customer, and they're very happy with it. These are long-standing relationships. We've recently added two relationships. One, a bank with over $100 billion in total assets, major player. Second, a large nationwide insurance carrier with 1 million clients with a newsletter that they message on a weekly basis. We'll be part of that newsletter. We look forward to announcing the name shortly. for 23 a lot of people focus on us just as a 7a lender well we're not a 7a lender only anymore we obviously do 504 loans we do non-conforming conventional loans and we have a really good track record in this area 450 million of 7a loans in 2017 there's been no charge loss to date on a joint venture is 145 million on current portfolio no charge loss to date slide number 24 When you talk about tightening underwriting criteria, you're going to look for greater FICO scores. You're going to make sure the business gets greater amounts of liquidity. You're going to stress the businesses to rates going up, even from current levels. And you're going to make sure that they've got enough working capital to survive the bumps in the road. Letting the businesses that can liquidate collateral of unencumbered borrowing power enables them to survive unexpected consequences. Slide number 25 is a slide we've had in our decks for 25 years. I'm not going to focus on it too much, but it basically shows you how you can generate returns on equity in these businesses that are north of 30%. This is the cash created when you do a 7A loan and you sell the government guaranteed piece, which we will continue to do as a business strategy. And slide number 27 is the income and expense aspect of the SBA 7A business. Slide number 27 is the 504 business, 28 as well. The 504 business, you actually have no balance sheet. All our 504 loans are going to be made in the bank going forward and originated in a held for sale category. So they will be marked to the market, held for sale. These loans are originated between the fees and the gain on sale margins. You typically can make between 3% to 6% to 7% on the conventional first, and the venture gets taken out by the SBA. 29, benefits of the nonconforming conventional loan program. Once again, diversification, diversification, diversification. Higher level of credit than 7A. This is done at the holding company. That's why we call it nonconforming. It's funded through joint venture equity and securitization lines, and we anticipate $250 million of funding in 2023. We also believe the return on equity in this business is between 20% to 30% between origination fees that are gained at the bank, servicing fees that are gained at the bank, as well as spread income that's held up at the holding company by a warehouse line and securitization slide number 30 the new tech advantage we talk a lot about this this is our future this is where our big bet is this is a differentiated model if we fail at this we're just left with a bank that does a really good job at lending out money with lower cost deposits and leverage but this is the game changer here so why should people bank with new tech well because they get the new tech advantage We're going to give them analytics, relationships, and transactional capabilities other banks typically do not get. So when you sign up for the advantage, first thing you get is you get document storage. So you can store all your organizational documents in the advantage today. Then you get web traffic analytics. What bank does that? None that I know of. What your bounce rate is. How many people went to your site yesterday? Average time on the site. Analyzes your site effective or not. If they need help, they can speak to a new tech specialist that can enhance their site, enhance their security, enhance the effectiveness of the site, enhance our ability to take payments. So we've got storage. We have web traffic analytics. Payment processing data. We could show them batches from the day earlier, chargebacks, refunds, Visa versus Master, Amex versus Visa, debit versus credit, all those analytics right through the advantages. Go to the advantage and make payroll through the advantage. Big win. We were looking to also add new tech tax and new tech accounting. Hopefully we'll have these rolled out in this calendar year, maybe next, but hopefully this year. That'll be white labeled from an experienced provider in the space. I mean, our clients want to see their bank balances on their general ledger. They want to see their payments in the general ledger. They want to see their payroll on the general ledger. That's the new tech advantage. This is what banks are going to need to do going forward, okay? So if we're not successful at it, somebody else will be because customers are tired of giving their money to banks, getting zero on their interest, and getting nothing else. I mean, that's a bit of an exaggeration, but it's not that much of an exaggeration. Therein lies the new tech advantage. We own and operate all these businesses. We're not laying the customer off with third parties. So to invest in us, you do need to have As Warren Buffett would put it, a long-term horizon. I'm not investing for the next quarter or two. I'm investing for the next 3, 5, 10, and 15 years. And we believe we've developed these assets, and now we're sewing them together. Slide number 31, we declared our first dividend as a financial holding company, paying $0.18 a share. We hope to continue that. That would be $0.72 for the year and a fairly high dividend yield. 32 is the metrics on the model. 33 shows our capital ratios, which are really high. Obviously, they're higher at the bank than they are at the consolidated holding company. Makes perfect sense. Obviously, the bank right now has got a lot of capability to leverage balance sheets. So, you know, when you sort of look at the noise and the numbers or Q1, whatever, just remember New Tech Bank's got a lot of capital, has a lot of cash. hasn't been put to work yet. So it's got a lot of earnings power there. So let's go to slide 34. And on slide 34, a couple of things that are important to note. Your returns on tangible common equity, returns on assets, you can see the net interest margins growing, cost of funds actually declining. You know, that's because we're reducing our dependency on bank lines versus deposits. That's not even fully banked. That'll get fully banked as more and more of the securitization is paid down and more and more of a lot of our lending businesses are financed by deposits and not using as much equity as we've done historically. But you can see by the metrics and the numbers here, these are not numbers you see in a bank. Therefore, you shouldn't be managing us or investing in us whether you like the ratio to book or not, however you want to calculate book from a GAAP standpoint. Slide number 35, these slides demonstrate the fact that you've got a lot of non-banking activities that are generating a lot of income, not typical. Most bank holding companies have very little in them. That's not the case with NewTek One. We have a lot of them. We've got a joint ventures in them. We've got a payments business in them, tech solutions. and the growing opportunities of payroll and insurance. Slide number 36, the focus there should be obviously on the earnings per share, the dividend per share. You know, I swallow pretty hard when I put these numbers out. I do so with trepidation, you know, the volatility of forecasting. I think investors do take for granted the volatility that's out there in the market, how difficult it is to do. Historically, we've had a good idea of doing this. You know, a lot of this is based upon what goes on, frankly, from an industry perspective. We are lumped into this industry. And, you know, I look at New Tech One, and I'm going, the problems that were encountered at the signature banks, the Valley, the Silicon Valley, First, they have nothing to do with New Tech One. We're both in the same business and industry. But we don't do deposits the way they do. We didn't have this cadre of bankers taking people to Pebble Beach and wherever to play golf or deposits or make loans. We didn't have fixed-rate assets. But yet, we're lumped into that. We get it. But that is going to determine things for a while. But we'll work through that at the end of the day. We believe the cream rises to the crop, and we'll get through it. That's the thing that prospectively could drag these numbers down. It'll be what it'll be. 37, 38 more balance sheet information. 39 pro forma forecast for the bank. You can see it's a very well capitalized bank that's now able to return earnings versus the BDC model where everything had to get distributed. We put an org chart on 41 for analysts to be able to see where all the nuts and bolts are. And then looking at the investment summary, once again, we asked the markets to look at us. There's a multiple of earnings, not multiple of book, and the capability of our ability to grow these earnings over time. The fact that you're investing in a company that's been around for two decades and has managed risk through all times. And frankly, we've got a differentiated business model that totally fits into the current environment, which is Low-cost or no-cost deposits will not be the secret sauce for banks. I can't tell you in 2022 how many times I was asked about non-interest-bearing deposits or core deposits. Well, it turns out core wasn't so core, and paying zero isn't a benefit. I would question whether these low-cost deposits that are out there on the books of the major money center banks are an asset or not. Yeah, whatever sticks is an asset, but whatever moves is not. That's a squeeze on the net. And we're already at the higher number, and we put out those dollars at higher coupons, net of charge loss. We've got 20 years' worth of experiences in loan loss reserves and fair value valuations. We still have a great margin. There's the difference. It's just entirely different what we do on the deposit side and what we do from the asset side, and most importantly, what we offer our customers as a core value. And that's the new tech advantage. And with that, I'd like to turn the presentation over to Nick Ledger.
spk00: Thank you, Barry, and good morning, everyone. You can find a summary of our first quarter 2023 results on slide number 44. We're proud to report our first quarter financial results for the first time reporting as a new financial holding company. As you'll see in the consolidated statement of operations, upon conversion from our previous BDC investment company accounting, where our portfolio companies did not consolidate into the BDC's financials, and those activities would historically be reported as a dividend income from the investments of the BDC, now as a financial holding company, we are now consolidating those portfolio company operations into our financials. As a result of this conversion, there is no comparable prior period consolidated financial statements refer to with the two different types of accounting i'd like to start with some highlights from our first quarter 2023 consolidated statement of operations on a consolidated gap basis for new tech one inc our first quarter results are as follows net interest income for the first quarter was 4.6 million which is comprised of 18.7 million of total interest income on loans and fees on loans offset by 14.1 million of total interest expense $8.8 million of the interest expense is driven by the interest expense on the notes and securitization. In addition, $3.9 million is due to the interest from the bank and FHLB borrowings, and $1.5 million of interest expense on deposits. In the first quarter of 2023, the company has implemented CECL on NewTek Bank's loan portfolio, resulting in a $1.3 million provision for loan credit losses. The net interest income after the provision for loan credit losses is $3.3 million. Focusing on total non-interest income of $42.8 million, $4.4 million is the result of servicing income, $6.5 million of net gains on the sale of loans, $6.7 million from technology and IT support income, $10.3 million from the electronic payment processing income, $5.9 million of net gain on loans accounted for underneath the fair value option, and $6 million of other non-interest income. Going back to the $6.5 million of net gains on the sales of the loans, which is comprised of the realized gains recognized from the sale of the guaranteed portions of SBA 70 loans during the first quarter, totaled $14 million. In the first quarter of 2023, NSBF sold 248 loans for $109.5 million at an average premium of 10.84%. Realized losses on the SBA 7A loans for the first quarter of 2023 was $7.5 million. Moving down to non-interest expense of $39.2 million, which is primarily comprised of $19.1 million of salaries and employee benefits for the consolidated financial holding company, $4.5 million is a result of electronic payment processing expenses, $3.8 million from the technology expenses, $3.4 million of professional service expenses, $2.8 million of other loan origination and maintenance expenses, and $4.6 million of other general administrative costs. This resulted in a pre-tax net income for the first three months of 2023 of $6.9 million. In connection with the financial holding company conversion from a tax perspective, the conversion from a BDC, which was a flow-through tax structure filing as a RIC, and where the dividends to shareholders were taxed as ordinary income since we were required to pay out 90% to 100% of the income in the form of a dividend, which is primarily deemed as ordinary income, we are now a taxable entity as a financial holding company. The company will no longer be filing as a RIC for the calendar year 2023, and we will file as a C-Corp. With this conversion, we are now able to utilize, when appropriate, NOL carry forwards. These are primarily from the previously unconsolidated portfolio companies. The establishment of the DTA was recorded to the P&L in the first quarter of 2023. we recorded a $34 million deferred tax asset resulting from these federal NOLs, which is a one-time event and will not be reoccurring. The $7 million income tax benefit from the NOLs was offset by the $2 million income tax expense provision, which was recorded in the first quarter, on the $6.9 million of pre-tax net income at the financial holder company's effective tax rate. This resulted in a net income tax benefit of $4.8 million. This type of noise in the financials will be leveled out over current quarters. Consolidated net income for the first quarter of 2023 was 11.7 million or 46 cents per basic earnings per share. I would like to now turn the call back over to Barry.
spk11: Thank you, Nick. Operator would like to open it up to the analyst community for Q&A. Thank you.
spk07: Thank you. At this time, we will now conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Crispin Love of Piper Sandler. Your line is now open.
spk06: Crispin Love, Piper Sandler, Thanks. Good morning, everyone. First, can you just speak to the loan demand that you're seeing from your borrowers and your appetite to continue to grow at a fast clip? Looking at your origination guidance, it looks to be down about 25% from your previous guide for 2023, mostly driven by the lower non-conforming CNIs. So just curious if you can speak to what's driving the key differences and lower non-conforming expectations.
spk11: Sure. I think that... Chris, thanks for joining. A couple of things. One, I'll take this piece by piece. In the 7A portfolio of opportunity that comes in through our referral system, we are rejecting about 10% more of loans that are in the underwriting going into committee than normal. Obviously, you know, we've got to be concerned about rising rates and people being able to make debt service coverage ratio, et cetera. Um, so I think that that's just an interesting fact. Now, the other thing I would say is the movement of PLP from the bank to, from the, from the SBLC to the bank, it seems like, Oh, you know, just let's take my pencil out. You know, I can't explain how disruptive that was to our flow. So, I don't think that we're going to, at the moment, make any adjustments to those volumes. But right now, the ability to amortize a loan over 10 to 25 years under the 7A program takes borrowers that banks are going to push out of their portfolio into this program. So we're still constructive and optimistic on 7A loan growth. Relative to the other categories, it's a great time to have capital. and to be able to make great loans in a great environment. This is when you're supposed to be making a lot of loans. Now, the concept of loan demand is very interesting. We look at GDP moving up or down plus or minus 1% or 2%. I mean, it's such a small number, but yet people go crazy over it. So here's my point. If we do our jobs, there's plenty of good borrowers to be able to pick through and find, and our model will generate them. So I'm not overly concerned about us being able to find greater credits. We will probably have to kiss a lot more frogs, but because of our model, which is sort of non-broker BDO oriented, we're actually able to do that in scale quite efficiently.
spk06: All right. Thanks, Barry. And then another question on the income statement. You went over it a little bit on the call, but can you just explain what the net gains on loans accounted under the fair value option are, and if you'd consider that to be core earnings. I think the comments you made imply that that fair value option would be going away in the second quarter. Is that correct, and would you expect a similar amount of those fair value adjustments to be part of gain-on-sale revenue going forward, or am I thinking about that incorrectly?
spk11: No, I think you're thinking about it correctly, but it'll go up as well as down. So, you know, I think that is core. It's part of... our model versus others, and that we believe in that particular portfolio of assets, marking the market is important. So I would say that is a core movement in both directions, just like the write-down in the fourth quarter was important because based on market conditions were.
spk06: So that fair value line is going to be sticking around, but it could go up, could go down, just depending on the quarter?
spk11: Absolutely.
spk06: Absolutely. Yep.
spk11: And that's pertaining to new tech small business finance.
spk03: All right.
spk11: Thank you, Barry.
spk03: Thank you. One moment, please.
spk07: Our next question comes from Christopher Nolan of Leidenberg and Thalman & Co. Your line is now open.
spk04: Hey guys, thanks for taking my question. On NewTek Advantage, given the seizures of multiple banks over the last month, I think the risk calculation by depositors has changed to a degree in terms of the bank that they deal with. Why should a depositor have not only the deposit relationship but also all these operational things such as managing their websites, payment processing, everything? with an organization institution, which potentially could be seized over the weekend by the regulators.
spk11: Chris, the only thing I can tell you is with 24 years worth of experience in dealing with these customers, we do know what they like. We do know what they don't like. And you know, it's a, it's a bit of a crazy time right now. Um, with respect to our organization, we're well capitalized. We've been around for 24 years. Um, we have a really good solid business plan and model, and we do have relationships with the clients that, you know, they can, they can get to us. Um, I think conceptually, um, the small business owner today has multiple parties that they wind up dealing with. They might deal with GoDaddy for their website, Fiserv. I mean, so one would say, gee, I'm a small business owner. I like diversification. We get it. They may not look to do... By the way, we're under no false pretense that they're going to do everything with us, per se. However, we had a client recently, for example, they were having problems with their technology. They didn't know whether it was their POS system, their gateway, or their payment processor. I would tell you it is just my opinion only that... the media is greatly exaggerating the issue with quote unquote, the banking crisis. Now I don't think it's a crisis. I do think it's a bit of a change in them over the course of time, which is going to change profitability. But you know, the concept of it being a crisis I think is overblown and I'm hopeful they kind of get tired of this to be honest with you because I don't see them as, as helping with respect to what we've seen in talking to our clients. We have clients that are ready to move their depository accounts to us because we process their payments and because they do their payroll. And there's one organization for them to watch and follow and monitor. Problem is with Silicon Valley and signature, there was absolutely no time, no advance warning for anybody to make a change. I mean, people lined up at the door almost two days and it was done. So It's a huge problem for the business and the industry that this business and industry is going to have to deal with in some way, shape or form. And maybe, you know, all FDIC insured deposits is one of the ways to reduce that anxiety. But I will tell you, you know, we're obviously not JP Morgan, but we had little to no customers leaving and look at all the deposits we were able to gather. So.
spk04: Thanks, Barry. And I guess as a follow-up, given all the turmoil in the banking industry, have the regulators requested or higher capital ratios for NewTek Bank?
spk11: So, I mean, NewTek Bank is risk-based capital. I think it's between 30% to 40%. So I don't know how much higher they want to go.
spk04: I'm saying a lower threshold, actually.
spk11: Oh, you mean to reduce it?
spk04: Yeah, I'm just trying to see whether or not there's an elevated level of minimum capital that they might require. Oh, I appreciate that.
spk11: No, no, matter of fact, you know, without going over the line, our projections that we have in the market are based upon the original plan, and we're comfortable with those projections. So you could infer what you like from that. But no, we've had no changes or any cause of concern. about what we're doing, how we're doing it, or how we're managing our business. None whatsoever. Okay. Thank you for taking my questions.
spk03: Thank you. Thank you. One moment, please.
spk07: Our next question comes from Bryce Rowe from B Riley. Your line is now open.
spk10: Thanks a lot. Good morning. Wanted to maybe start with the deposit levels that you're showing here post first quarter relative to the forecast, and then very also get an understanding of how the current, I guess, capital structure of the debt might change over the next year. Will you continue to hold the unsecured notes on your balance sheet that existed when you were a BDC?
spk03: Sure.
spk11: So, Bryce, two important questions. Number one, we exceeded our deposit gathering capability in the first quarter after a very slow start. So, I had some sweaty palms and some sleepless nights. But we really came on like gangbusters, and it's still coming in like crazy. I feel very comfortable about our deposit raising capability. I mean, one of the things we're going to have to think about is do we let some of the brokered, quote unquote, deposits off that are non-redeemable for some of these lower duration type deposits that are coming in? So that's something we'll need to think about. But for the most part, I don't see that changing. We're very pleased with the mix of money that's coming in and how it's coming in and the types of customers. Relative to the other question, I think that right now we're in compliance. We've got headroom. We're comfortable with it. So we're just going to keep, you know, monitoring the markets and the situation. And we've got that factored into our projections going forward. So no, we're in good shape on that. And I can't tell you, put it this way, if I could figure out whether the next 100 or 200 basis points of rate movements where they're going to be, I'd be able to answer that question, which is why people have tried to get me to answer certain questions like, how do I know? I can make a guess, but I certainly didn't predict Signature Bank and Silicon Valley. I don't know if that makes me dumb or not, but I didn't quite see it coming. But, no, I think we're in good shape, and I think that right now that's core funding that can sit out there as long as we stay in compliance and we'll be able to do that. That's not a problem.
spk10: Okay. And then maybe just one more around the deposits, and I've got another question or two. But in the forecast here, you're showing, let's call it $244 million of deposits at the end of the second quarter. You highlight there being $300 million plus at the end of April. So just making sure we're thinking about it correctly, that you expect some runoff based on some of those broker deposits, or maybe the forecast is just a bit conservative?
spk11: I think, you know, we're going to need to take a step back and look at, you know, do we want to return some of these deposits because we've had so much success, or make certain adjustments in the model. As you can imagine, I've got an accounting and legal and professional department that is – drinking a lot of coffee the last couple of days. So I think that's just something to keep an eye on. On a good note, we've got a unique, I'll say problem. I say problem. We're getting a lot of deposits. And, you know, you can go to our website, take a look at where we are. I mean, we're not over the market. We're one of the higher payers, but we also can put money to use with a great nymph. So that's just something we're going to have to figure out from an asset liability standpoint. So I would tell you that what you see in the projection might need to be changed or adjusted and modified as we get through the quarter. Okay. Okay.
spk10: Um, just switching topics here. You, you made note of valuations on the control investments as a BDC versus, you know, now with the financial holding company, essentially, you know, the, the fair value, um, you know, got, got, got, got wiped away with the accounting change. Um, Can you talk about, and helpful to see what projections are from an EBITDA perspective for both NMS and new technology, can you talk about how those, you know, how those valuations as a BDC were come to, you know, for those control investments, especially relative to those two bigger control investments or former control investments?
spk11: Well, I think that... You know, the one thing I would say is I try to be realistic. And for me to project huge growth in those two organizations at this point would be contrary to what the presidents and chief operating officers have told me they're going to do from a budgetary perspective. So basically what you see there is what we've approved from a budget. Am I happy with what I'll call flat to maybe down some and reoccurring? No. No. Are they happy? They shouldn't be. But I also think that it's realistic. So with that said, I mean, those are goals that we believe are achievable, which is why we put them out there. But as we position ourselves as New Tech One, which is new branding, with a much wider universe of customers that are now talking to us, much wider than before as a BDC, it's like night and day. people that want to come to us because of the many things that we can help them with. I think those businesses will flourish. The ability to deposit money in someone's account same day on the merchant side. The ability to store one's data is going to lead to other questions. Where do you have your servers? Who's managing them? What do you pay? You're better off using us. do that 24 7 what about your mail you know so i feel pretty good about those relative to the concept of you know the valuations um i just think that as a bdc i can't tell you how many people said you're never going to trade above nav and i remember our coming out uh deal we converted from 33 act into a 40. uh i think we raised money like a 15 to 17 point discount to nav and then Pretty much the rest is history. At one point, we traded as high as 2.5 to NAV, 2.5 times 1, which is unheard of for a BDC. I think even the Mighty Maine only got to 2 to 1 at one point in time. We're going to need to hopefully get the market comfortable that even though these businesses don't have quote-unquote loans, which would flow into tangible. If I sold the businesses for cash, the cash recount is tangible. If they want to look at some measure of, you know, what the liquidation value of the business should be, which is really what they're looking at from a book standpoint, in my opinion, not what it can generate from an earning standpoint, but I certainly understand why that's important as a bank, but it's not important relative to our strategy and how we do our business. We think that some ad back or recognition or bigger multiple intangible book is warranted, but that's, that's just an opinion. That's, you know, The market's going to have to sort that out. But the one thing that I do know, and I said this when we were at BDC, if you grow your earnings and you grow your dividend, the stock price will follow. I don't care what the book value is. Yep.
spk10: All right. Well, I'll step back into you, Barry. Appreciate the time.
spk03: Thank you. Thank you. One moment, please.
spk07: Our next question comes from Paul Johnson, a KBW your lines now open.
spk01: Yeah, good morning. Very congratulations on the 1st quarter under your belt as a officially as a bank. I missed part of the call, so I apologize if you talk about this already, but. In the last presentation and the results for last quarter, you included some guidance for 2024. I'm just wondering if, you know, if that's still good or if that's basically under reevaluation, obviously, because kind of recent events in the market. But, yeah, any sort of commentary you can kind of provide on your sort of previous guidance for 2024?
spk11: Yeah, I meant to put that in my notes. buried somewhere in this big stack of papers here, but I missed it. So I'm glad you asked the question. Now we, we've decided to, I'm going to use this term appropriately withdraw that because as I mentioned earlier, you know, with the two year moving 25 basis points in the morning or an afternoon, it's pretty hard to forecast the next couple of quarters versus a year out. In addition to that, you know, the cost of capital has changed dramatically. So I, I, I could say that we're just not going to change it, but I think it's – I want to be very clear. We're withdrawing that.
spk01: Okay. No, that's clear. I appreciate that. And then kind of bigger picture, I mean, if you could kind of snap your fingers today and get your wishes in terms of what you would like the portfolio to look like in a year from now, maybe two years from now, Do you have any kind of idea in your mind, you know, what you sort of expect the long-term percentage of, you know, the portfolio to be in terms of SBA loans versus, you know, other loans, commercial, CRE, et cetera?
spk11: Sure. I think that at the bank level, important to note that it will be diversified between 7A, 504, not conforming C&I, conforming CRE. So, you know, on the 7A side, and I will say this with respect to the uninsured piece, okay? So, you know, I'm glad your question made me think about something else. A lot of people look at the bank as a little bank, but, I mean, this little bank is going to do a lot of loans because the 7A business, you do $875 million worth of loans, You know, only 200 and change show up on the balance sheet. But you still have the resources to do that amount of loans and get that amount of gain on sale and get that amount of return on equity and profit out of it. But now I want to go back to answer your question. So we'll make over a billion dollars of loans this year. It doesn't make most 500 million dollar banks or 600. They don't do that. Right. OK, now let me go back to your question. The balance sheet should be pretty diversified. And, you know, maybe the biggest concentration is 7A at 30% to 35%. But the rest of it will be broken up evenly between 504, which is there for sale, not for permanent, conforming C&I and conforming CRE. So, you know, we're going to balance the 7A side off, which could have like an 8% CISO adjustment, to blend it at 3.5% to 4%. So the other loans obviously have a much lower reserve or CECL just because of the quality of the loans.
spk01: Yep, that makes sense.
spk11: So from a financial perspective, very diversified. And then at the new tech one level, you'll have the nonconforming in the securitizations. You're going to get the merchant services business, the tech solutions business. We get payroll and insurance on track of reoccurring cash flows without having to put capital in. it becomes a very compelling model, we think.
spk01: Got it. Appreciate that. One or two more questions. The realized loss on the SBA loans this quarter that Nick mentioned, I believe he said $7.5 million. I just want to make sure I'm clear. So is that the actual loss that was charged on the portfolio, or is there any kind of like know one-time sort of cecil adjustments that you know were made you know due to the merger in the quarter nick could you answer that yes so those were the uh legacy nsbf loans that are uh at fair value those are not any of the loans that are in the bank as a result of cecil got it okay so that that's the actual realized loss for the sba portfolio um and then um I guess my last question, you know, just kind of be, you know, in terms of, you know, how the merger is going, I mean, do you feel like at this point, you know, the bank and, you know, sort of all the back office technology, et cetera, you know, is that, you know, pretty much fully integrated at this point? Or, you know, do you still kind of feel like you're working on some, you know, loose ends to tie everything together? And then I guess along with that, the PLP sort of, you know, temporary disruption in the quarter. Obviously, moving that over to the bank was a little bit challenging, but is that pretty much over with at this point? I guess, in all, does it seem like everything is set and integrated the way you'd like it to be?
spk11: I just don't think we've got some work to do, Paul, in the second quarter. I think some of the projections you'll see have us have us better in the third or the fourth quarters. I still think there is some work to be done relative to continuing to bolster the staff. I mean, the other thing, obviously, we're going through original examinations. So I don't know if you could, I mean, I'm a financial guy as well, but unfortunately, for the last 24 years, I've been thrust into this operational role. And the amount of, uh, I could use the word distractions, but no, we've got to, we we're standing up this entity almost from scratch because the prior bank didn't look and do anything like we're doing. It really didn't have tremendous, the digital deposit gathering, um, the amount of loans they did versus what we do. I mean, it's night and day. I mean, we fund hundreds of loans a quarter. Maybe they funded 10 or 20. Um, And you can't get into the bank before the deal closes. So there's still, I want to say I am incredibly appreciative of all the associates in the company that really have worked immeasurably hard to get us where we need to be. But no, I would say there's still going to be a drag in the second quarter.
spk01: Got it. Appreciate that. That's all for me. Thanks for taking my question.
spk11: Thank you.
spk03: Thank you. One moment, please.
spk07: Our next question comes from Scott Sullivan of RJ. Your line is now open.
spk05: Hey, Barry. Congratulations on really crafting a unique and elegant solution in a very tough time. Absolutely. Congrats on that. I'm wondering if you could speak a little bit more in terms of asset liability growth. You've mentioned, obviously, deposit momentum has been astounding in a very tough, almost bubble-like money market situation. So if you could speak to the deposit growth as well as the liability growth. Sure. I think
spk11: I think on the deposit side, if you are able to pay, um, a fair market rate for deposits and that rate is determined by what you could see on a bank rate or a go bank rate or, um, you know, but just Googling, you know, best high yield savings accounts, et cetera, you'll get money. And, um, you know, we've had success in drawing in insurable deposits and, uh, you know, those deposits that are coming to us you know are considered um depending upon the channel you know non-broker and core um although we are not under the delusion that those deposits are very rate sensitive but we're okay with that because it's part of our model we pay a market rate of interest not a problem matter of fact i it's astounding how we're able to raise these deposits in this particular manner. I think we show well. We have a good history. I think the bank is about 60 years old. We've been around for 24 years, so we've got, you know, being a public company, people are comfortable, and we've seen that. Particularly, we've seen that in the worst of times. So I say that. I don't know how... In my lifetime, and I'm 63, I've never heard such discussion about bank runs and people being concerned about it. So the good news is, in the worst of times, we're able to really fund our funding needs, and that's a big deal. So we have reduced our dependency on commercial funding rates. Then you hear, which is in the marketplace, that the larger institutions – they're going to reduce their amount of lending. Well, that's not great for, you know, a lot of non-bank lenders. So I think from our standpoint, no concerns about being able to fund our business out of the bank. We've got plenty of capital in the bank, 78-ish million of capital in the bank. You know, we have a lot of cash right now. We're waiting for the SBA loans to close for the quarter. We'll use that up. We'll sell a government guaranteed piece of note. So we're going to be able to fund that growth out of the bank. And I'm very pleased with the execution on the deposit gathering strategy. Now, the second leg of that execution will be, which I'm not saying is a second quarter event. Hopefully it's third and fourth with respect to utilization on NewTek Advantage, the ability to get payments accounts, to open up deposits, payroll accounts, et cetera. That will reduce... the cost of the high cost and make them more sticky so we're not under a delusion because we're getting all these deposits that they're in love with us okay they they like us we're credible we pay them i'll call a market rate of interest all right fantastic and in terms of them and margins can you speak to uh the effect
spk05: as your, you know, somewhat new tech process moves out? And is there any, you know, AI overlay in there?
spk11: You know, it's an interesting thing. You know, it was funny. I was listening to Charlie Munger talk about artificial intelligence, and he made a comment. I said, you want to have artificial intelligence, you have to have somebody that's intelligent to set the artificial intelligence. So, it's got to start somewhere, right? I think that what we do does lend itself to that. I mean, I would be delusional at the moment given all the things that we have to do to say we're there, but we are approaching the customer with an air towards having that intelligence because we have the data. So, for example, when you apply for a loan, we take your merchant statement, we take your insurance policies. We have the ability to take advantage of that. Then you might say, currently, why aren't you doing that? And that's in the plan. And that's, frankly, up for us to be able to artfully call clients using that old technology called a phone. Phones are still really good today. Scott, I like phones. To actually have a verbal communication with a client and then show our pretty faces on the camera. Notice I'm talking to my staff as well. To connect with the client and say, hey, I see what you're doing, and by the way, we can help you. Not too hard. I'll call that our version of artificial intelligence.
spk05: Fantastic. And any comments on the syndication market? I guess Visa, Visa, gain on sale, as far as you can see?
spk11: Yeah, I mean, right now the market for the government guaranteed pieces is very strong because it's a government guaranteed floater that investors – don't have to worry about duration risk or marking it to market. And where they're being criticized for, you know, not having asset interest rate sensitive assets on their balance sheet, they could diversify with this. So that market's been pretty strong, despite the fact there was a little bit of disruption where a signature bank was one of the pool assemblers. Now they've got taken over. They're still in the business, but there was some questions as to what would happen with them. And there was another market maker that recently left the business as well. So against that backdrop, the market's actually held up pretty well.
spk10: Perfect.
spk05: Last question. Given your market cap, size, et cetera, what's your personal speculation on a Russell 2000 inclusion?
spk11: Well, you know, we're hopeful. We certainly have the market cap, and, you know, Our designation as a financial holding company owning a bank was recently changed by them from a closed-end fund, so we're hopeful that would be very useful and valuable to us, but we don't know. Terrific.
spk03: Thanks for the call. Thank you. One moment, please. Our next question comes from Sean Paul Adams from Raymond James.
spk07: Your line is now open.
spk08: Hey, guys. Good morning. Can you explain your plans for the legacy BDC baby bond, which contains a 1940 Act leverage compliance covenant in the documentation? It would appear that it would have to be a priority given the leverage parameters today for the business.
spk11: It's not. We're in complete compliance and We've certified that with the trustee. And I also, I will also, let me finish on, I will also add that we have covenants with Capital One Bank, Deutsche Bank. I mean, there's four or five institutions. So we're in complete compliance with those covenants.
spk08: Very helpful.
spk03: Thank you. Thank you. Thank you. One moment, please.
spk07: Our next question comes from the line of Steven Nemo. Your line is now open.
spk09: Hi. I'm an individual investor, and I've been doing my own due diligence, and I have a few questions lined up for today. So this might be a repeat. I didn't hear quite clearly of the last question, but NewTek has the 2024 and 2026 notes outstanding, Newt L and Newt Z, and these have covenants that bind NewTek to the 150% asset coverage requirement under the 1940 Act. But NewTek is no longer BDC, so that seems to suggest that unless those notes are paid down or got rid of in some way, NewTek won't be able to leverage up the balance sheet. up to the typical 10 to 1 of banks. So what are NewTek's plans regarding new C and new L in the near future? Sure. Steve, I appreciate the question.
spk11: Right now, those have been factored into the projections that we have in the market. So we always hope, though it doesn't always happen that way, and respect that the community, because we've been doing this for over two decades, analyzes what we put out there, and that's already factored into those particular tests. And I'm not sure you heard the prior answer, but we're in complete compliance, we're aware of those tests, and we'll be able to manage those tests with respect to what we have in the market.
spk09: Okay. Great. I have two more quick questions. So when NewTek issues a loan, it has the choice to sell the SBA guaranteed portion and retain the unguaranteed portion on the balance sheet. But going forward as a bank, will the loan book be comprised of entire SBA loans or just of the unguaranteed pieces or something in between? I feel like the percentage of the loan book that's unguaranteed pieces is a number that's worth reporting for investors.
spk11: I'm not sure I understand the question. What was the question?
spk09: So, as a bank, a new type would have loans as assets. Right. Will these loans be entire SBA loans, or will they be just the unguaranteed portions that are not sold off? Okay.
spk11: So, I'll just focus on the 7 business. When a 7 loan is made, it's a whole loan and you've got two participations, a government guaranteed participation and an uninsured participation. So what sits on their books is the uninsured participation in the 7 loan. Typically we sell the government guaranteed participation into pool assemblers who pool them and aggregate them and they pay premiums for that.
spk09: Okay. So going forward, um, it's going to be or probably going to be the unguaranteed pieces that are retained on the books.
spk11: Correct. The current strategy is to, which is what we've done for 20 years, and it's been a reoccurring event, is to make the loan, sell the government-guaranteed piece. We think that's the highest return on equity for us and the best way to manage our capital.
spk09: Okay. One last quick question, and this is related to the unguaranteed loan pieces. So what are NewTek's plans regarding securitization trusts going forward? The language in some recent news seems to suggest their legacy, and so NewTek won't issue any more securitization trusts and notes on the unguaranteed portions anymore. What are the plans going forward on that?
spk11: So the references to legacy, we try to refer to the legacy assets that are in NewTek small business finance, which are in a rundown mode. And there is a current position of uninsured loan participations in NewTek small business finance in the warehouse line that I'll use the word not to get ahead of ourselves, it could be securitized.
spk09: Okay. So by saying legacy, it doesn't rule out the possibility of issuing more securitization trusts in the future?
spk11: No. I mean, it's unlikely we would do it out of the bank because right now the bank has about a 350 basis point interest funding advantage as well as not having to raise equity. You follow me?
spk09: Yeah.
spk11: Let me just finish, Stephen. Going forward, the SBA loans will be done out of the bank and NSBF with its legacy securitizations, loans against securitized debt, will be in a runoff mode. So all the gain on sale will be done at the bank. Hopefully that's answers your question.
spk09: Right. It's a better economic choice to keep the loans rather than try to sell them again.
spk11: Well, when you do a securitization, it's actually treated as a finance since 2010. So I think the better way maybe to state that is financing the uninsured loan participations in a bank is far more effective than financing them currently through securitizations.
spk03: Okay. Okay. Thank you.
spk09: Thank you for your time. Sure.
spk11: And Stephen, once again, you know, if you go back and you read the transcript, we talked about when you do it out of the NSBF and before acquiring the bank, you only got a 55% advance rate and you're paying, you know, eight and a quarter, eight and a half percent on the rate. So 45% to maintain your ratios in the BDC had to be funded with equity. So to fund a million dollar loan, You needed $450,000 of equity and $550,000 of expensive leveraged bank debt. Now you can fund it with 5%, 100% deposit money. Does that make sense?
spk09: Yes. That's all for today.
spk11: Okay. Thank you.
spk09: Thank you.
spk11: All right. Hallie, I think that's the last question, right, operator? It is. Well, I appreciate all the input, all the questions, a lot to digest here today, a lot of reading to do. And we welcome the opportunity to report again next quarter. Thank you very much, everyone. Thanks for your participation.
spk07: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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