NewtekOne, Inc.

Good day, and thank you for standing by. Welcome to the NewTekOne Incorporated third quarter 2023 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone, and 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, Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to our third quarter 2023 financial results conference call. My name is Barry Sloan, President, CEO, Chairman of the Board of NewTek One Inc., a NASDAQ company. Also presenting on today's call is Nicholas Ledger, EVP and Chief Accounting Officer of NewTekOne. Scott Price, Chief Financial Officer of NewTekOne and NewTekBank National Association. We also have attending Nicole, Nick Young, the President and Chief Operating Officer of NewTekBankNA. For those of you that would like to follow along in the presentation today, we welcome you to go to our website, NewTekOne.com, N-E-W-T-E-K-O-N-E.com. While you're there, you might want to peruse the NewTek Advantage, which is our important business banking portal. However, today I'd like to direct you to the investor relations section where our conference call deck is being hung. On slide number one, we have our note regarding forward-looking statements. We'd like you all to be familiar with the contents of that particular slide. On slide number two, we start off with NewTek Bank National Association summary financial highlights. One of the things we wanted to focus on today was the bank metrics that are really coming in as planned and very nicely. Our net interest margin from Q2 2023 grew sequentially from 3.19% to 3.49%. Our return on assets, 4.93% to 5.32%. Return on tangible common equity, 32.1% to 39%. And efficiency ratio dropped from 58.7 to 49%. These are metrics you're typically not seeing in the banking industry or financial holding company industry today. And that is because of our unique business model of things that we do. The assets that we generate are high yielding net of loss severity and frequency over time. And this is the second quarter that we reported as a full bank holding company owning a bank. I think it's important to note the feedback I typically get from investors and analysts is they don't believe the numbers. I get it. I understand it. These are extremely unusual performance criteria for an organization like ours, but we are a different organization. We're the bank and technology-enabled bank of the future, and we're very proud and we'll continue to deliver these types of numbers quarter to quarter. So as that continues to happen and we continue to deliver, we feel that we'll get a better level of market acceptance in who we are and what we do. Also important to note the bank itself, which is a wholly owned subsidiary of New Tech One Inc, well capitalized with a CET1 ratio of 23.8, total capital ratio of 25%, and leverage ratio of 14.9. So we're very, very pleased with our performance for the particular quarter with sequential growth. We expect that growth in these metrics to continue. I think it's also important to note that when you look at Deposit growth, for the most part, for quarter to quarter, I would use the word it was flattish. That is, by design, we've got several hundred million dollars currently sitting at the Fed to fund Q4 and Q1 loan growth, so we don't need deposit growth. However, we are changing our deposit mix, and Scott Price will talk about that later on in the presentation. Important, we are able to continue to fund loan growth, and we could see the loan growth ending at 27%. for the average 31% for the third quarter. And an important component of what we've experienced over 20 years, when we make an SBA 7A loan, we sell the government guaranteed piece for gain on sale. The premium based upon market conditions, which we could talk about on the call, is pretty soft right now, and that has cut into our current EPS projections. But as you can see over five years or so, which we'd be able to show in graphs and later on in the presentation. This is sort of trending toward the low end, and with the end of Fed tightening, we're hopeful that we get a bit of rejuvenation in this premium on 7 loans. Please also note that the premium of 7 loans or gain on sale numbers that we have are significantly greater than a lot of our competitors in the banking industry. On slide number three, we have the similar types of metrics, but for the consolidated hold code, new tech one, Once again, note that we have expanding net interest income, a 42% gain sequentially of $5.6 million to $8 million as we start to utilize the capital and fill up the bank with assets that are higher yielding versus the old legacy low-risk but low-margin assets that previously were occupied on the National Bank of New York City's balance sheet. Also importantly, provision for credit losses growing, $2.5 million to $3.4 million, 33% gain there. That will enable us to continue to withstand a weakening credit environment that we forecast going forward without skipping a beat on our projections. Looking at the net interest margin at the holdco, went from 2.09 to 2.71, a nice expansion sequentially. Return on assets, 2.03 to 2.76. Return on tangible common equity, 15.07 to 22.8. An efficiency ratio, 77 down to 67.8. Capital ratios also strong, 15.1 CE21. At the hold code, total capital 17.7 and leverage 14.6. Once again, second quarter as a financial holding company, as we continue to track like this and our EPS grows quarter to quarter, we're in very, very good shape and we're proud of the results we've been able to deliver with our first two quarters owning a bank and as a financial holding company. On slide number four, a general description is to, you know, on January 6th, we completed the acquisition of National Bank of New York City. So the comparisons of this year versus last year are very difficult because we were a BDC and we had BDC accountants. Once again, important points of focus for this presentation and an evaluation of NewTekOne, you've got to look at the quarter over quarter sequential comparisons. It's extremely important. In addition, we're dealing with a lot of headwinds with a lot of front-loaded upfront costs as we morph into this bank, because we took over a 59-year-old bank with 59-year-old systems, policies, and procedures. We're not quite set up for what we want to do with the institution from an OCC, Chartered National Bank. We're very pleased to be able to make these transitions, put the policies and procedures in place, remain in compliance. It's indicative that we're able to dividend out of the bank to the Holdco. and out of the hold code to investors. That's indicative of the fact that we're in a good shape from a regulatory and compliance perspective. And once again, very, very pleased with that sequential growth second to third quarter. Also important to note, we've got the attention of the street that is learning about our business, learning about our model, trying to understand what we're doing. By the way, I do want to comment, there's 51 pages in this deck. I've been criticized for it that it's too long. Other people tell me other things they'd like to have in the text. The important part is I'm not going to go over each slide verbatim. Some of the slides speak for themselves. But we want to give as much information to the analysts as soon as possible so they can get a better understanding of who we are. We currently have five analysts. We anticipate a sixth going forward. Extremely important for what we do, particularly relative to research within their own distribution systems. We've clearly demonstrated an ability to raise and short deposits quickly with a high growth rate. We were able to grow our deposits when we took over the bank from $140 million. I think we're close to about $440 million. I also want to proudly state we don't have the interest rate risk issues that are currently present in the industry with people having securities portfolios that on a mark-to-market basis drag their capital down or fixed-rate low-yielding loans. Our securities portfolio is about $33 million. It's all in government and agencies, and I'm pretty sure the duration is less than nine months with a 5%. weighted average coupon there. So we're in very, very good shape from an interest rate perspective. I'd also note we're in very, very good shape from a commercial real estate perspective and more than happy to take that on in the Q&A. Obviously, the ROAA and ROTC capital and numbers and capital ratios do speak for themselves. On slide number five, we talked about the earnings engine. So once again, unlike a typical bank of this size in nature, which is just basically spread income and hoping to keep their deposits at a below rate of interest. We've got many earnings engines for NewTekOne. We now obviously have the bank, which will become our premier earnings engine. NewTek Small Business Finance, which sits up at the holding company, has got the legacy SBA loans and securitized structures. Obviously, the cost of debt on those structures are more expensive, but there's very little SG&A in NewTek Small Business Finance, which is managed by the bank through a lender-service provider agreement. We also got the merchant business, which you'll see generates a very nice amount of EBITDA and it's consolidated subsidiaries of mobile money. New tech technology solutions, which we'll talk about, that is an entity that will be divested of by the first quarter of 2025. We also get income from our non-conforming joint venture portfolios. This is an extremely important topic today in discussion. This is the big growth engine. that has been delayed due to what's occurred, number one, in the capital markets and getting our registration cleared with the SEC. I think it was July 27th we cleared the registration statement to be able to issue equity and debt, of which we were successful in doing a debt deal toward the end of August, which is now trading in a premium to issue date with an 8% coupon on it. We're also going to talk about the insurance agency, which has really made a very good effort this year as it's obviously situated with bank customers. I believe we've increased our pre-tax income from approximately $100,000 to approximately $400,000. New tech payroll solutions, also an increase from a loss last year, I believe, to a $300,000 gain. So these businesses should do very, very well as they're integrated into the lending operation and integrated into the new tech advantage. On slide number six, we talked about this earlier, the difficult comparisons as a BDC. It's important to note, once again, when looking at NewTekOne, this is a system that doesn't use traditional bank branches, traditional bankers, traditional brokers, or traditional business development officers to source business. So over the course of 20 years, we've used the new tracker system. It's our technological advantage. It's one of the ingredients to our secret sauce to enable us to get over 1,000 unique business referrals a day, 2.6 million in total in the database. And these come to us basically cost free. And these are clients that know us. They've requested a solution in one way or another. And these are opportunities for us currently and on a going forward basis. And that's why we can have an efficiency ratio as low as we can, which actually should do better over time. Slide number seven, I'd like to point to how we are a technology enabled solutions provider. That's across all the different solutions. Obviously in deposit gathering, We picked up about $275 million worth of digital accounts, mostly in consumer high-yield savings. We'll talk about the goal for 2024, which is to bring in more transactional accounts, commercial DDAs, commercial lending markets, which we wanted to wait until the staff was set, and we have a manager for that business lined up who should be joining us by the end of November. Loan originations, we use our technology that we've developed over the course of 20 years. And we are incredibly efficient in exchanging data with our clients. I'll go into a slide deeper in the presentation that shows you how we make a loan and what it does for our customer. But we did, I believe, approximately 550 units in the second quarter. The growth in units sequentially in year over year has been double digits. We just do a very good job of making the loan process as frictionless as possible. And obviously, it's not easy making a small business loan or an SBA loan, but we've really developed this over the course of 20 years and do a good job at it without sacrificing credit. Staffing and recruiting talent, as I mentioned, we are close to announcing a hire of a COO of the digital bank working directly for Nick Young. That's going to enable us to really build out our 1% commercial demand deposit account and 3.5% money market accounts for further expansion of our NIM going forward. And we're also looking to recruit a risk manager in at the holding company and down at the bank. Once again, we talked about our unique business model, replacing branches, brokers, traditional bank BDOs. The one branch that the company has in existence will be closing in the month of December. All of our business, which we've done traditionally and historically, has been remote. So, you know, we're not the company to take you out to the Masters or buy you lunch or dinner, although we certainly can do that. But most of our business is remote, and the deposit gathering process, which we've been successful at so far, we expect that to continue, but to expand into the lower-cost deposits of transactional commercial DDAs. So that's things that we can ultimately start to put metrics to and impute a projection of lower-cost funds going forward, which currently – is not really embedded in any of our models. Providing a superior service and product to clients. We're also looking to add a client experience officer. That's really important with a unique focus on the advantage. We look forward to bringing that individual in and filling that position. And importantly, we're going to spend time about the New Tech Advantage Day where basically customers get an asset from day one without any charge to become a client through the New Tech Advantage. Slide number eight, the NewTek Advantage. What is this advantage we talk about? Well, it provides client analytics, relationships, and transactional capabilities at other banks in our space. And I say that the space of independent business owners and small to medium-sized businesses. We are not a consumer lender. That's important to note. We do take consumer deposits, but we're not a consumer lender. The NewTek Advantage gives our businesses a management asset upfront that can enhance their business and make them more successful. The New Tech Advantage is very, very unique to New Tech. It's very difficult to replicate because we've owned and operate our insurance agency, our payroll business, our payment processing business, our lending business. We've been in these businesses for 10 to 20 years each. So now we are honing our skills, integrating them with our software, which we'll talk about later on in our presentation, and we're very excited that our customers can go into the New Tech Advantage and communicate via video and on camera with a New Tech One specialist, a licensed insurance agent, a payroll health and benefits specialist, a lending specialist, a deposit specialist, a technology solution specialist, a payment processing specialist. Typically, a client of a bank today, if they know one relationship banker and they can remember their names, they're lucky. Most have a faceless relationship with us You actually have a relationship with a face that you can get to on demand by going in through the advantage. We believe the advantage could be a market recognized tool and solution that ultimately we might look to license and spin it off to other providers. I also want to mention that we will be probably announcing a new tech accounting, which will be a service provided to our customers by, uh, another organization, one 800 account. And, um, We think it's very beneficial for our customers to have a balance sheet, an income statement slash P&L that they can refer to for all our activity. Extremely important. Over the course of time, we'll integrate more of our functions with their P&L and balance sheet. On slide number nine, we talk about, once again, on a drill-down basis, what a client receives when they open up a new tech advantage account. As of today, they get free unlimited document storage. Drag and drop and click and put documents, whether it's a consumer that wants to put pictures, driver's licenses, rental agreements, mortgage papers, whatever they want, they could do that today. Free real-time updated web traffic analytics, that is available today. Average time on the site, uniques today, total visitors, comparison to other websites, rankings, that is available today in the New Tech Advantage. For the merchant processing area, you get analytics and transactional capabilities. So you get real, free chargeback and batch information if you're processing payments with us. That's important to note. So if you're a processing client of NewTek, you get that real information. You could slice and dice your data, debit versus credit, master charge versus Visa and Amex. You could look at your processing same day this year, same day last year. These are features that exist today. In addition to that, if you're a payroll client, you can receive the ability to make payroll directly from the business portal. Six professional relationships on camera, that's what makes NewTek special. That's the NewTek Advantage. So on slide number 10, we talked about the distribution of the Advantage. So at the end of October, we rolled the Advantage out to 5,000 existing NewTek One clients. These are clients that basically had a pre-existing login from NewTracker. And basically, by showing them the advantage, we're already getting referrals coming in by just demonstrating what we can do in these other areas, because a picture is worth a thousand words. We're able to show people that we do all these other things. So we've had approximately 5,000 monthly active users. These are people that actively use the advantage going forward. Every lending client applying for a loan will also get the advantage. and we've changed over all the NewTracker customer accounts to the Advantage. So any user that had a NewTracker login previously is able to see the Advantage, and there's 325,000 NewTracker users that have the ability to see the NewTrack Advantage in the past 36 months. 295,000 NewTrack users have logged in. So you can see that we're putting the Advantage out there. We've got a lot of visibility, but I do want to note this is a work in process. There's a lot of work that needs to go with respect to integration, protecting the process, and making it as frictionless as possible. On slide number 11, this is really a recap of most of the things that I've talked about today. So I will go through this quickly, but finishing with, once again, the New Tech Advantage, which is our tool to go cross-selling and cross-marketing in an integrated manner and offer multiple solutions to customers without recreating various different data acquisition functions. On slide number 12, these are our third quarter 2023 financial highlights. 38 cents per common share, that was an increase of 46.2%. Net interest income, 8.1 million, an increase of 42%. This is all sequentially over the prior quarter in the same year. Total assets were flat. Those are pretty much the important metrics for the third quarter financial highlights. Slide number 13 looks at us for the full nine months that we've been outstanding as a financial holding company owning a bank, $1.10 per basic common share, then interest income $18.3 million. Slide number 14, we're proud to talk about our efficiency ratio. This is what's going to give us the ability to scale and really drop some great margins to the bottom line. 49.1% for the three months ended, step 30, 2023, a decrease of 16.4%. We believe that over time, Operating leverage will improve this. Financial leverage will improve this. Further technological innovation will improve this. We'll be able to capture additional revenue from the non-bank business activities, particularly through the utilization of the advantage. We do believe, however, that we could get an uptick, particularly in Q4 and throughout parts of 2024, as we look to add some significant expense, particularly in the area of deposit gathering, which is an important part. Obviously, that'll save us money down the road and help our NIM. But initially, there are some expenses. All of this is factored into our financial forecast. Slide number 15, we talked about our ROTC and ROAA. And this is for the nine months, 39.8%, 5.3%. Once again, it's a tough road to hoe here because people look at these numbers and they don't believe it. But when we start to explain and you take a look at the 7A business, When you look at the non-conforming business, when you look at the reoccurring non-capital using businesses of payment processing, insurance agency and payroll, as well as the fact that we don't have the expensive, you know, $250,000 to $500,000 a year bankers running around trying to get deposits that we now know are fairly mobile. And most of our deposits are basically core retail. I think about 87% of them are under the insured amount, so we're not dealing with any big lumpy uh commercial deposits that can fly in the middle of the night um slow and steady we're very pleased with where we are yes some of you have noticed clearly that we've reduced our slope of earnings growth look at the end of the day this was a tough year for interest rate risk management the cost of doing business was higher um the other thing i want to point out is that a big drag was caused by the non-conforming uh lending uh business which There's plenty of demand for it, but it is a capital utilizer. And we'll be looking to fund that business going forward, which is why we needed the registration statement up and running. We're pleased that we recently did our bond deal, which is now trading at a premium to where it was issued. And once again, we believe these types of metrics are going to be indicative that lead to further growth in cumulative earnings per share. So we are pleased with our performance as well as pleased with the fact that we're projecting a strong Q4 and a strong Q5. calendar year 2024. Slide number 16, just some general important data points. I do want to point out once again the $40 million raise we did, the 8%, the NEWTI, they closed last night at $25.10, trading under the ticker NEWTI. Slide number 17, for some people that look at our financials and they look at book value from last year to this year and they go, wow, it declined, like what happened? Well, what happens is you went from BDC accounting to 33 Act accounting, which means that things that would go into book for a BDC did not go into book. As a matter of fact, I've always argued that NAV wasn't book. It's a mark-to-market valuation of all the assets. But to make a long story short, our tangible book value is $7.31 a share. But if you look at the market cap as of December 31, between merchant solutions, tech solutions, the insurance agencies, about $166.7 million of value. So I think it's, once again, important to note, if you add that back, you wind up with a much higher book, if you calculate book that way. Slide number 18, successes achieved by the bank, well-capitalized bank, growth in deposits, Not growing the deposits, you know, in big accounts, but in small accounts, 83.7 are insured. 5,000 new digital account relationships. A 7A pipeline that's growing. We've been able to shift the PLP status into the bank. And really good risk-based capital ratios at NewTek Bank of 25% at SEP 30 and 14.9% tier one leverage ratio. I'd now like to turn the presentation and discuss our deposit growth breakdown. friends to Scott Price our Chief Financial Officer.

Thanks Barry and good morning everyone. I'd like to provide some color on the changes in our deposit levels during the quarter. I want to assure you that our actions during the quarter were measured and we ended the quarter very close to where I wanted to be. Slide 19 shows our view of bank deposits by quarter on an ending basis with a focus on changes versus the second quarter. In the first quarter, the bank consciously brought in a considerable amount of short-term brokered CDs, given the liquidity crunch that occurred during that time. And that raised our deposit concentration for brokered CDs to 43% of total deposits. In the second quarter, we raised significant levels of customer deposits through our digital account opening platform. And then in the third quarter, we repaid almost $60 million of brokered CDs. When we evaluated the replacement alternatives and their pricing, we made the decision that brokered money was too expensive given our desire to change the shape of the liquidity profile of our CD portfolio. So given these conditions, we decided to partially offset the decline in brokered CDs with increased balances in our high-yield savings product, which we launched in August. We increased the rate given the rate hike that the Fed did in July to 525 from 4.9%. We also changed the rate profiles across our retail CD offerings to move away from brokered money and address duration. And finally, we also made the decision to begin moving NewTek Bank into NewTek Bank to deposit accounts that our non-bank affiliates hold with other institutions. So with just over $200 million in liquid assets at September 30 and an average cash balance at the Fed of $190 million, It seemed imprudent to take on additional money and bear unnecessary costs to maintain a flat deposit level linked quarter. Looking forward to the short term, we have $29 million of brokered CD capacity at September 30th. We have available borrowing capacity at the FHLB of $93 million and the liquid assets that I just mentioned. We will continue to manage our net interest margin through these volatile and uncertain economic times. Five-year Treasury saw as high as 5% this past month in October from around the 440s. So some very big, volatile times here. So looking forward, we continue to invest in our back office and infrastructure. As we begin to manage our regulatory compliance risk while expanding our product offering, and that will continue. and really offer a scalable business later into 2024 and 2025 and beyond. So with that, Barry, I'll turn it back to you.