NewtekOne, Inc.

Good day, and thank you for standing by. Welcome to the NewTek One, Inc. second quarter 2024 earnings call. At this time, all participants are in a 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 1-1 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1, 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Barry Sloan, CEO and President. Barry?

Thank you, operator, and thanks, everybody, for attending our Q1 second quarter 2024 financial results conference call. Joining me today is Scott Price, the Chief Financial Officer at NewTek One and NewTek Bank National Association. Also attending is Nick Young, President and Chief Operating Officer of NewTek Bank NX. For those of you who'd like to follow along to our call today, please go to our website, NewTekOne, N-E-W-T-E-K-O-N-E.com. Go to the investor relations section under presentations, and our PowerPoint presentation is hung there today. I'd like you to draw your attention to slide number one on a note regarding forward-looking statements. On slide number two, today we'll be talking about significant events that occurred in Q2 2024. We announced last night at the close of the market, second quarter 2024 earnings of 43 cents, earnings per share basic and diluted common. Important to note that according to Bloomberg, which had a consensus of our analysts at 40.5 cents. That was a nice beat for us. With a revenue estimate on Bloomberg of 60.6 million, I think we were about at that number. Second bullet is reconforming 2024 full EPS guidance of $1.85 to $2.05 for basic and diluted. Given the events of the last few trading days, Thursday, Friday, Monday, we are very comfortable with the range. And we'd love to get a little bit more clarity on what's going to happen in the world before we make any adjustments to that. Important to note, quarterly deposit growth at the bank over the last quarter was approximately 17%. Second quarter, sequential total loan growth over the last quarter, 13% at the bank. We find these numbers to be terrific, particularly given that the industry averages are about flat. Net interest margin, 4.83 for the three months ended June 30th. Pretty flat quarter to quarter. We're comfortable with that. Many of you look at the net interest margin at the holding company. And I want to point out that the net interest margin at the holding company, the holding company, which has the payment processor, the tech solutions, the payroll, the insurance agency, is somewhat watered down from a margin standpoint because those assets don't provide interest income. They provide the other ancillary income that skews our income in the business model to close to 65 to 70%. But I think when you look at the types of loans we put on the books versus the cost of funding, it is extremely attractive. I would also point out that the institutional funding of securitizations of the SBA 7A loans from the non-bank lender and NSBF is also a much higher cost of financing. The weighted average is probably SOFR plus 250. It gets you close to eight versus where we are in the bank. So you could see that on a going forward basis, As our cost of funding will shift from that higher cost securitization on the old 7A portfolio into the bank, these margins will probably improve. Also important to note that we had approximately 470 basis points of loan loss reserve coverage at June 30th, 2024 in the bank. At the holding company, we use fair value and estimate the losses over the course of time. 470 basis points, as many of you are aware, Very generous, very sizable. We'll talk about that and the effects of that going forward. Business deposits, important to note, these are our lower cost business checking. Business money market grew by 17% in the quarter to 136 million from 116 million in Q1. We also have a nice slide talking about our alternative loan program, extremely important to our growth and profitability. We demonstrated a full execution through securitization. We are very, very excited about being able to demonstrate to the markets alternative loan program securitization in recent times. New tech small business finance loan portfolio began to experience a default curve aging with realized and unrealized losses. We'll chat about that. These are the types of losses that are not flat. They're not straight lines. A small business borrower typically has seasonal characteristics with respect to the seasonality of the loan. So we'll talk a little bit about that in the call today. NewTekOne continues to demonstrate, this is our six quarters of operating history as a bank holding company, owning in a nationally chartered bank, that we can continue to put loans on and fund ourselves with the bank with higher margins, higher yielding assets. And we use the term that offset current higher cost of deposit obviously we will seek to generate lower cost deposits through business checking and business money market we're very excited about the effort here and the growth also we're obviously uh more than a normal bank that you see and we don't prefer to be normal to the other banking industry we're different and we'll talk about that again on this call as we have on the six other calls we have higher expenses for credit losses. That's anticipated. But you've also got to look at the returns that we're generating, the coupons that we're generating, clearly offset that. And that's why we have such high return on average assets, return on high tangible common equity that really dwarf what goes on in this particular industry. And we're proud of the fact that we've been able to demonstrate this quarter after quarter, now for six operating quarters. Important also to note the efficiency ratio at NewTek Bank declined to 42% of tremendous improvement. We continue to demonstrate that the NewTek Bank, without branches, bankers, brokers, and BDOs, will demonstrate the ability to acquire business clients through our patented new track or referral system, process the business effectively, and emphasizing a unique and internally developed technological platform. Last but not least, we completed a registered public offering of $71 million of 8.5% fixed rate notes. Obviously, that's not a low coupon, but when you generate the types of returns that we can, this cost of capital is more than adequate to finance growing earnings and the support of our revenue model going forward. On slide number three, focusing on NewTek Bank summary financial highlights for the second quarter and previous quarters, Please observe the trends. ROAA, 6.4% for the quarter. These are solid numbers. These are not numbers you see in 95% of the other banking institutions. ROTCE for the quarter, 48.8%. Efficiency ratio declining to 42.3. We're very pleased with the performance of the second quarter. For growth, important to note, growth in a financial holding company and a bank like ours Yes, you can have growth in a financial institution that owns a depository. So we had loan growth ending quarter, over quarter, 14%. Deposit growth, 17%. And look at the capital ratios. Once again, we're on slide number three. These are extremely healthy. So it's important to note, in many cases, these are twice the capital ratios that you'd see at a bank. Very well capitalized. basically impacted by strong cash balances as well. And we're also pleased to note that the reserve coverage more than adequate for what we anticipate going forward at the bank from CECL and at the holding company through NSBF through Fair Value. Slide number four, we talk about the financial summary for the hold code. Obviously, we talked about the ROA, the ROTC statement, Your OTC still north of 20%. Once again, you kind of get some muted results because of the income. It's not from net interest income, which is why your net interest margin is 2.71 versus at the bank, a much higher number with a forehand on it. Also note the capital ratios at the holding company. CT1, total capital leverage, 18.7, 21.9, 14%. Toward the bottom of slide four, we talked about our earnings. We're very pleased with the fact that we had 43 cents for the second quarter of 2024. Year over year, up from 27 cents in the second quarter of 2023, and a sequential increase of 5 cents quarter over quarter. Slide number five, we try to talk about commonly asked questions of NewTekOne. Obviously, we do speak to investors regularly. Recently attended two investor conferences, B. Riley and KBW. We also had an analyst day conference. I would tell you that the questions we get are very typical regarding banks and bank holding companies. They talk about deposits. They talk about the concern over interest rates and the concern over loss coverage. You know, it's a little bit of a head scratcher. There's another part to this organization, and that's how we make money. And we really have outstretched business model that generates great returns. It's very well balanced across the board. Our business model provides for an outsized amount of non-interest income versus traditional bank net interest income. I think it's important to note that the fear is in the business about credit and interest rates. Well, credit and interest rates don't factor into a government guaranteed sale for cash. every single day, every single week, every single month, every single quarter. In a nontraditional way, the industry has not looked highly upon gains on sale. Well, we've had gains on sale for 20 years. And frankly, it is, I'm not saying fully insulated, but it is primarily insulated from the concerns in the banking industry with respect to interest rate movements and credit rate movements. We're pleased to once again report that we really had some nice traction in lower-cost business deposits. We talked about a 17% gain there. We bumped our SBA fundings for 2024 to under $35 billion. Importantly, for a mission statement, our business model is all about making our clients more successful. That is key. If we cannot make our clients more successful, my view of it is we're not supposed to be in business. We bought the bank because that gets eyeballed to the institution on a regular basis for deposits, transactional capability. We'll talk about the New Tech Advantage business portal. We just think we are strategically positioning New Tech One as a growth company, and we're seeking to acquire a growth multiple on earnings, which we think we're earning every single quarter by demonstrating that even with current cost of deposits higher than a typical bank. And losses that are expected because of the high coupon, the gain on sale, and the business model, we're still able to deliver a right bottom line. We're going to talk a lot about our Alternative Loan Program, its history, and its future on slide number six. Well, we're very pleased to announce that we completed a securitization We did one a while ago in 2022. Obviously, you know, the banking crisis kind of slowed us down a little bit, but we're back up and you'll see that our pipeline is full and robust and we're ready to go. When you look at the alternative loan program, what is it? First of all, let's focus on the demand. We get hundreds of business loan referrals every day. Approximately 80,000 paying customers, 3 million referrals in the database. These are all business clients. They're independent business owners. That one loan that has a low monthly payment. How do they get that low monthly payment? Well, this is something that we learned from the SBA business by being in 20 years. No balloons, 10 to 25-year AMs gives them the low payment. Also, they really dislike restrictive bank covenants. They don't want to be told, geez, you can't do this acquisition. Geez, you can't dividend this money. Geez, you can't take additional leverage. But we trade that off with a personal guarantee and liens in all business assets, as well as liens on personal assets if need be to beat the credit up. And from a cross-section of the market, from a demand standpoint, there are many guarantors. The guarantees are joint and several, and they're full. They're not watered-down guarantees. that are willing to take a higher interest rate to give them the flexibility in the loans. And you can see that from our pipeline. You can see that from this particular securitization. For those of you that want the details on the securitization, if you go to DBRS's website, you can see what at the bottom of slide number six, NALP Business Loan Trust 2024-1. DBRS will be able to provide that pre-funded memo, which will give you a lot of details and data on the collateral, why these loans exist, what the breakout is. But, you know, going to the math, $190.5 million of collateral, backing $154 million of investment-grade rated notes, 11 institutional investors filed into the A, single A class, three into the triple B plus class with an 81% advance rate. The bids we got were an excess of $370 million. And this was the second asset securitization that we've done. We've historically done 15 rated securitizations. All of them have held or been upgraded. On slide number seven, I covered this a little bit in the prior conversation, like where is the demand? Well, I went over the demand. We financed these securitizations through joint ventures. gives us an additional source of capital with leverage lines and a securitization facility. I'd like to thank Capital One and Deutsche Bank for helping us do the securitization and help make this new program work for us and our borrowers. When you look at the loan metrics, we originate these loans for approximately three to three and a half points. Very conservatively, the origination expense I'm putting in there is two points, but it's typically not quite that high. The AM schedule I talked about, 20 to 25 years and no balloons.

Loans are originated at the original floor and initial rate.