Q3 2022 Newtek Business Services Corp Earnings Call
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Good day, and thank you for standing by and welcome to New Tech Business Services Corp, Q3, 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star.
One one on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, President and CEO and founder Barry Sloane.
Good morning, everyone and appreciate you all attending our third quarter 2022 financial results Conference call.
First I would like to welcome.
John Mccaffery to the call today, John is our SVP of accounting and finance and John .
He was hired with our intent subject to regulatory approval.
I will become the Chief financial Officer of New Tech back in addition to John being on the call today is Nick Ledger.
Nick as Chief Accounting Officer of a publicly traded company New Tech business Service Corp, and he'll be doing the finance.
Part of the presentation towards the end of the call.
The voice you hear today is Barry Sloane, President CEO and founder of New Tech business Services Corp.
We have many new people that are attending today's call just a little bit of background.
<unk> was founded in 1998.
Their bedroom and in New York City apartment 120, West 18th Street apartment for base.
We reverse merged into a publicly traded company in September of 2000.
Say that because as I do a little bit accounting on my fingers and toes, we've probably done about 88% to 89 of these quarterly earnings reports and conference calls.
As I say not our first rodeo, we've been through up markets down markets up credit cycles down credit cycles up rates down rates, we've seen it all and you've got a very experienced.
Management team.
And board that has been able to manage through all of these turbulent times and turbulent waters. We also like to welcome the analyst community that has followed us.
PW Raymond James Ladenburg Thalmann encompass point, we appreciate the work that you do on our company and the reports that you put out for those of you looking to follow along on the conference call.
The presentation is located.
On our website, new tech, one dot com and EW TK, Oh, any dot com in the Investor Relations section Youll be able to follow along with the Powerpoint or you can go to the webcast in the Powerpoint is available there as well.
We think that today's call will help demonstrate that we've had through the first nine months of this year a tremendous operating performance. We're very excited about telling our story and obviously were seeing very turbulent times in the capital market and there is somewhat of a disconnect. We think between capital markets and what's actually going on within the.
And we hope to clear up some of that and depict are very strong.
Nine months recent quarter, an operating history of the company I'd like to roll forward to slide number two.
Obviously for those that have been following the company. Many of you are aware, we're going through a potential and likely transformation to acquire National Bank of New York City.
And to become a publicly traded bank holding company on August 2nd we entered into a stock purchase agreement to acquire National Bank of New York City for approximately 100% of book value. We're excited about that potential acquisition that is subject to government regulatory approval from the federal reserve to approve us as a bank holding company and the OCC.
To approve the acquisition of the bank, we've been working on that.
For over a year and believe we are very very close.
On June 1st at a special meeting of the shareholders.
Where the company issued a proxy previously we've got 89% of the votes cast at that special meeting in favor of withdrawing our election as a business development company, giving the board the authorization to withdraw that election, which potentially would free the way for us to acquire the bank and then use leverage.
To grow the bank and our business going forward.
As described in the May 2nd proxy that we put out the rationale for us transforming <unk> business service Corp, potentially from a BDC into a bank holding company has laid out very well in the proxy, but it's important to restate the rationale way back when when we announced the deal and <unk>.
Obviously, the decision to potentially pursue the bank and transform the company was made prior to that we did think that rates might rise. We did think the quality spreads might rise. We also believe that as a growth company the better financial structure to be it would be a bank holding company owning it.
But I want to make it very clear as youll see in our presentation not in the traditional way that most of the 9000 financial institutions exist today, I say that credit unions banks et cetera, we will be positioned as a bank of the future of technology enabled bank and our bank that offers real value to its clear.
Which youll see through our discussion of our technologies and you take advantage in many of the assets that we talk about in this particular presentation. So when you look at the highlights of.
The proxy statement number one bdcs are limited to leverage can't grow more than two to one and typically most bdcs kind of hovered between one to one and one five to one number to that cap basically means if youre growing which we have historically grown look at our dividend and earnings payout over the course of <unk>.
BDC life of eight years, you can see grew tremendously, particularly from 2014 2015, when we became a BDC to last year tremendous growth in earnings and dividends you always have to continue to sell shares of stock. We believe that we'll be able to use the bank's balance sheet and the appropriate leverage risk per award in there.
Banking structure to take advantage of the fact that we will not have to dilute shareholders as much and also will be able to use more cost effective debt through core deposits versus expensive BDC debt.
We view that.
As the low hanging transport transformative fruit in the transaction also importantly, leveraging the company's patented technologies new tracker the dashboard the new Tech advantage.
Some patents that are existing some of the patents that are applied in patent spending we are very very excited about this opportunity and we'll be discussing it throughout the presentation on slide number three when we talk about unlocking the value of our homegrown technology. Once again addressing the history of the company we've been in business for over two decades.
And we've grown our business without the use of brokers branches bankers, our BD, we use technology to acquire clients, we use strategic alliance relationships and we've created the new tech advantage, which would be a dashboard for business clients, which we'll talk a lot about today and we look at organizations like <unk>, who we are.
<unk> and things that they've done with Encino, and we believe that we can follow in their footsteps and unlock the technology that we've created much better.
Being a bank holding company owning a bank and also.
Spinning out some of that technology and offering it to other players in this space than just being in our current position as a BDC.
We believe that the technologies that we have the ability to unlock further shareholder value, which is not currently.
Apparent in.
In our market to our investor base as well as the new Tech advantage is really going to give our clients a very important asset and a major advantage in doing business with us versus doing business with traditional banking relationships on slide number four we talk about the new Tech difference, it's really important to be different.
It'd be different good obviously with that is our goal. That's our aim as we've demonstrated over 20 plus years in business. We believe we are a differentiator. We believe we are a disruptor and what is that new tech difference, we're going to wind up giving our clients personal banking relationships and we'll talk about that.
Analytics and the new Tech advantage software and transactional capabilities are banks simply do not have a snapshot a screenshot of the dashboard is on slide number five.
We refer to this as the new Tech advantage.
When you look down one side of the page of the screenshot those of the relationships you.
We'll get upon opening up an account.
And licensed insurance agents that you can click on and get them on camera.
Posit specialist click on them get them on camera.
Specialty click on it getting on camera.
A payroll health and benefits specialist click on again on camera technology solution specialists, what does that mean.
Whether it's <unk>.
<unk> their it remotely.
Disaster recovery whatever it might be in the technological rail we can help the customer with that merchant accounts or payment processing they'll get a specialist to help them take these imagine discover American express or ACTH. They will have the 5% to six relationships with the new Tech bank that they simply do not with the other.
Competitors in the marketplace. If they are lucky they may know our bankers somewhere.
And at the end of the day, the bankers got to bring in all these other resources and in most cases the resources are not present in the bank. If in fact, the bank does offer payroll workman's comp.
<unk>.
Our payment processing solution whatever it might be the dashboard will be a very important growth mechanism and vehicle to provide a better solution and asset to our business clients slide.
Slide number six and further discussions about the new tech advantage.
We talk about giving our business clients a management asset we believe it's unique in that.
Z to replicate because we've been in all of these businesses for over 10 plus years, that's payroll health and benefits. This is a licensed insurance agency Tech solutions company payment processor lending et cetera. These are businesses that we have people process and software that exists that are all getting pushed up into one.
Common interface, the new tech advantage, which will be integrated into our core we're very very excited about the opportunity to push the advantage out in the market to give business clients, what they really want multiple relationship with an organization with real live human beings, it's not just a piece of software and.
Actually we do think that.
Our clients want to have their deposits their payroll and their payments integrated into an accounting Sheila there is something that is out there in the future subject to regulatory approval and we'll be pushing that to get that in place.
Slide number seven.
Big question I'm asked about 15 times, a day, what's the status of regulatory approvals and timing.
A million dollar question, it's actually more than $1 million, but that is the big question.
We think the acquisition is pending approvals of the opposite of Comptroller of the currency the acquisition of the bank.
And the board of Governors of the Federal Reserve.
As well as the small business administration approving our capital plan, which historically they've done at all of the entities that we've been at.
We anticipate.
Remaining our status of the BDC through December 31, and that obviously is up to the board of New Tech.
Obviously, receiving regulatory approval to transform into a bank holding company owning them back and be collecting that Ric status, but our best guess is that status, probably we will be maintained through December 31 2022.
And obviously the final decision and the timing of the Companys discontinuous some regulation as a BDC and the withdrawal.
Our election, as a BDC and the Ric status will be determined by the board of directors as the authority and authorization granted by the shareholders.
Slide number eight this is an important slide for me and I wanted to note that the efforts of our staff and operating our business isn't fully servicing our clients with all their needs while simultaneously preparing for the openings of new Tech Bank.
And getting regulatory approval no small task I want to point out because people have set <unk> you don't know what it's like being a bank you don't know what the regulations like you don't have enough people to do this who youre going to hire.
We're ready.
We have been positioned and we brought people in that have helped new tech as a BDC throughout the course of the year and are positioned and ready to go when we're ready to open up the bank John Mccaffrey, who is joining me on this call is one of those such people, who will be chief financial officer of the bank subject to regulatory approval John's been with our organization I believe around six months.
Nick has been with our organization as Chief risk officer of the BDC for over a year.
Subject to approval that will become the president and Chief operating officer of the New Tech back Kelvin Lou has been with US I believe around nine months Calvin as Chief Digital Officer and has helped US with our technology solutions, John Resona, John joined US about three months ago, as Chief compliance Officer, Tom <unk>, who recently joined US in the last couple of weeks.
As SVP of loan administration. So these are five individuals just to give you an idea that have already been added to the payroll. Obviously those are headwinds on our numbers this year, but preparing us for growing next year. In addition to the fact, our legal expenses and the accounting expenses. The advisory expenses. These have all been somewhat of a drag on.
On our dollar performance, but positioning us for the future a tremendous investment that we are very confident will be a real good fruit for our shareholders and organizations going forward in the future. We will also talk about in this call. The lack of $50 million of fee income from PPP in 2022 versus the 2021 comparison as well.
As a change currently for the first nine months of this year for gain on sale margins to come in about three points less than they were in 2022, when you add all these things up.
It's pretty incredible what's almost $2 50 to $2.70 of earnings that existed in 2022 that didn't exist. This year, yet we still.
Hope and intend to finally distribute and dividend out in <unk>.
At $2 75, with the forecast for the fourth quarter at 70 I. Just wanted to note. This company has had a real real strong year I am very very thankful to the associates to the board.
For everything that you've done during the course of this particular calendar year in the first nine months as we report here today.
Slide number nine we put out a press release recently.
I think there is some more language in the press release that would be helpful. For people to go back and take a look at the rebranding of New Tech business Service Corp, a new check one.
Renaming the public company New Tech one really important we're the one company for all your business needs. We're the one company that makes your successful we're the one company that can help position you with analytics with relationships.
And with transactional capability that will make your business better. It's all about being number one we've had a almost <unk> three decade old philosophy that was developed way back when.
Actually prior to the company being formed and 1998, where we recognize that providing a single set of branded and financial solutions to address the needs of independent business owners in the United States was very useful we believe we can deliver the solutions that business owners need today. So we're excited about the rebranding of new Tech one.
People have said why haven't you done this before.
When you think about businesses there.
Their relationship with their bank it is extremely important.
It's direct it's a relationship they typically go to 345 times, a week 20 times, a month and launching the advantage at the same time is the right time to really unleash the power of what we've done and developed over the course of 20 years, we're very very excited about that subject to approval, we hope to have a call.
One we have today to talk about the actual technology, a new tech advantage and share it even prior to the opening of the bank prior to the opening of the bank New Tech advantage, one that will be unveiled and our clients will be able to have access to that so we're very very excited about that will be redefining redo.
Redesigning our corporate website at new Tech one dot com so stay tuned for that once again this rebranding strategy real important very targeted two independent business owners at the SBA by its records indicates there is $30 million of them in the United States moving forward to slide number 10 and folk.
<unk> on the third quarter.
Third quarter financial highlights.
<unk> funding for Q3 dollars 7 million loans $223 million, which represents a 36% increased $163 million a year. Prior also in units very important we're doing more units with lower loan balances overall, we take small business finance funded $3 to $55 million of units a record again up from 290.
<unk> for the same period last year.
<unk> record fundings over nine months $586 million versus $362 million from.
From January one October 31 funds a record $650 million.
Because of that.
Trend in.
Funding track record, we bumped our guidance up to $775 million through the end of this particular calendar year.
We funded $64 million of loans during October that first month is always important.
Also important to note that even though we have increased our fundings we've done it without reducing the credit quality of our borrowers was actually tightened our credit standards. The weighted average FICO score in Sps recent securitization was 725 months guarantors versus the weighted average FICO score on the portfolio at 12 months.
31, 2021 of 704.
Once again, we talked about our premium gain on sale for the quarter nine 4% slightly up from the prior quarter sequentially.
Sequentially in September and the second quarter of 2022.
So we go to slide number 11, obviously, we believe our growth is based upon technology, we have a frictionless way to acquire loan opportunities our borrowers love. It they don't have to chase down bankers brokers or bdo's, they put a referral and they get a fact finder it comes back almost.
Depending upon how quickly information pass this back and forth can come back within a half an hour an hour.
If they come back with the right answers we immediately.
Our loan appointment.
When theyre available none of them were available when they are available we don't tell them, we're showing up on Monday Tuesday Wednesday in the middle of their workday, we give them a calendar and they've got the full gamut of calendar to pick to get a real live person on a camera to help them assemble their loan with our final goal no E mails with pdfs attached.
Secure file bolt it works really well a frictionless way to get those best credits in real quick we're getting 1000 1500 referrals a day that's the big funnel. It's important to note those referrals can be for <unk> 500 for non conforming and in the future subject to regulatory approval, when and if and hopefully as well.
Most likely we believe it will be on a bank conforming C&I loans and conforming cereal, it's important to note the new tracker system.
That's been our system over 20 years.
It's been great for US we have over one actually is over $2 million 2 million referrals that we've historically gotten through new tracker.
About 75000, a quarter and these are referrals that can basically go into any particular loan product or category also important to note. We've made some really good changes through the pandemic all reporting to Peter Downs, who is a 22 year veteran of new Tech actually no I'm, sorry that was the summer of 2000.
Three so approaching 20 year veteran chip or Peter Downs, Chief lending officer the company.
Slide number 12 talks about our pipeline growth you could see the numbers real real exciting.
Both for <unk>, and the nonconforming business, which we'll talk about five of them more kind of flattish. However, the fundings are setting records both through October 31, which we'll talk about and our estimation through the calendar year Slide number 13 also.
Talks about the full pipeline through October 31 up 17%.
<unk> talks about growth in loan referrals talks about the units.
The referral system the way to acquire clients cost effectively with alliance relationships like UBS Morgan Stanley Raymond James When he came up with trade Association true value. These are referral partners that have been with us for long periods of time, we do a great job of servicing them and helping their clients get loans get workman.
Comp insurance get a payment processing solution get an ecommerce solution get a payroll health and benefits solution. That's the core nature of our business brokers BDO list and Branchless.
Slide number 15, we talk about dividends, obviously as a <unk> company, we must pay out between 90% to 100% of our earnings in the form of dividends and we have to do that as a Ric we cannot retain any earnings that will be an advantage to us converting into a bank holding company and the bank less need to constantly sell to <unk>.
Shares when stock prices high spread and the shift of sales here our stock price is low you probably rather do it with debt and you also probably rather do with core deposits than expensive commercial funding as a BDC.
We are forecasting a Q4 2022 cash distribution of <unk> 70, a share important to note that in the event that we get approval, which we hope in the near term in the quarter.
We will look to distribute all of our income for the quarter as well as spillover income. So it's important to get to that 100% Mark. So for those of you that are used to seeing distributions at a lower level than the income with a with a gap in there. Our goal is to get to that 100% mark not be under and potentially be over if we need to.
Just to make sure that we don't have an issue with the Ric status I think it's really important to note that.
Sometimes take calls from investors, it's a G.
You've distributed earnings historically out of capital that Hasnt happened I don't know where people get some of the numbers, sometimes but I get a lot of questions. Some of them are quite bizarre, but that's what I wanted to clear up today.
I also want to note that.
Subject to the forecast being accurate.
The dividends and distributions for the full calendar year paid in cash would be estimated to be $2 75.
Slide number 16.
Once again, focusing on the third quarter financial highlights total investment income $23 6 million.
Versus 12 four.
In the quarter year prior 90% increase.
Net investment income Penny a share.
That's an increase of loss.
30, or 103% increase adjusted NII 15 million versus.
$12 3 million also an increase little higher debt to equity ratio when you get the <unk>.
Broker receivable out as it should clear within a week to 10 days that number gets knocked down to one six.
Total investment portfolio increased.
Down a little bit 16th forward not really alarming considering the cost of capital increases that we've experienced in Q3 I think it is important to note for comparisons versus the consensus. These are the numbers that we have based upon.
When our K B W report from eight eight Raymond James report from eight eight companies report from 811.
Adjusted NII <unk> <unk> report 54.
For the quarter Raymond.
Raymond James 65.
<unk> 57.
As I calculate that that average is 58 to meet <unk> beat NII.
NII negative a penny arcade VW negative a penny Raymond James negative <unk> Compass point.
We averaged setup is negative five also.
My calculation based upon those reports.
Slide number 17.
Financial highlights nine months ended September 30. These were all fairly ugly comparisons I think the important issue here relative to the ugly comparisons is the $50 million of fee income from PPP PPP.
<unk> was a tremendous opportunity and benefit.
People could argue whether or not.
This was a useful tool for government spending thats not my job our job is to.
Do our job participate in the licensing continue the Michigan as an SBA lender, which was to put this money out of the businesses, which 65% of the funds needed to go to employees for payroll in order to get loan forgiveness, and we did that we did that to about the tune of $2 billion with 26000 customers. However.
Net income had to be shifted back to our core business, so $50 million of income.
Take that out of the equation at the current share count that's about two bucks a share.
The other thing I want to point out, which we'll do in pricing. Shortly is the gain on sale margin of three point, so I'll try to draw the comparisons I think the important part to note is we have made a tremendous changeover in 2020 to.
Preparing to acquire a bank preparing to become a bank holding company getting staff in place.
<unk>.
Software in place potentially for a bank opening repositioning the company to get back to its core operating business of $785 for nonconforming lending getting those lending.
Agreements back in place.
As well as having this tremendous headwind of no PPP fee income.
And a three point differentiator on if you round it to 800 million that will be $600 million of gain on sale, that's almost $18 million of profit or about 72 cents a share major difference and this is what I was talking about at the beginning of the conversation.
We're very excited about how our company has performed in this calendar year, we're very well positioned for the future.
And eventually growth stocks or people with an imagination that likes to buy low and sell high might look at new tech as an opportunity, but obviously that choice will be up to the people listening on the call the investment community.
Slide 18 is a common slide we have in the pro forma debt to equity reconciliation.
Slide number 19 also a common slide please note that the average loan size of the uninsured loan participations on our balance sheet keeps declining 150000, we like small loans, we like diversification important to note.
Most of those loans are sitting in nonrecourse, securitizations and new Tech small business finance or they are sitting in our capital one line.
We go to slide number 20.
This is what I was referring to on the net premium trends. So this goes back to 2018, but if you really look for sort of an equilibrium probably over the course of 10 years. The equilibrium price on these prime plus floaters are somewhere between 110, and a half and may be 112, maybe it averages one time in half, 111%, maybe a little shade above that but.
Obviously for the first nine months of this year, we've been averaging 10 decibel load to last year of $13 five three points.
On an $800 million, a year and I'm rounding up from $775 million guidance that 600 million of government guaranteed three points, that's $18 million of pre tax profit. It's almost <unk> 70, a share well that has to be made up somewhat so we're very proud of the performance that we've had.
In addition on slide number 21, another headwind that we've had is the fact that prime has been lagging the treasury market and it's been lagging.
Short term rates as well, which we've been basically been financing historically over LIBOR. So.
NSP up net interest trend, even though the gross interest keeps growing as rates rise, which we're happy about but our cost of funds, which is adjusting monthly is hitting us where the quarterly adjust on the loans are lagging.
Next year will be the year for catch up and I think it's important to note.
As we talk about in our press release and in parts of this discussion.
We're looking at probably in the first quarter of next year, our portfolio, having a coupon of 10 to 10, 5%. If you go to a bank rate, which is typically where the higher cost of bank deposit money is going to you are looking at three 5% three in a quarter to 3%, 4%, that's a pretty good NIM, particularly given that 75%.
Of the loans and the 700 business.
A big premium for gain on sale, we like our business, we like our model we've been in this for over 20 years, we manage it well the trend should bode well for us in 2023 and 2022 I get asked this question a lot.
How do you protect yourself in the current environment, meaning rates rising and there is some level of credit deterioration and we basically acknowledged that we have been tightening our underwriting criteria as we anticipated that the goldilocks scenario.
Aggressive monetary and fiscal policy with some point come to an end. So how do you come back that higher FICO in spss scores.
Two underwriting with stress test at higher levels of interest rates starting points loans that youre, putting on the books today are being stressed up 2% to 3% at the current levels of rates. The newer loans frankly in these climates tend to be better performing loans in the older loans I think it is important to note when we make these loans we want to make.
Sure that the business has got a very substantial amount of excess liquidity in the event that the historic and the future projections are missed its important to note SBA loans or loans or to make the businesses. It's a business well, it's a C&I loan and if the business cannot show that it can make payments and service the debt either on historic performance.
Or projections that alone does not get made so we look to lend to businesses that can liquidate collateral have unencumbered borrowing power to survive.
Unknown circumstances things that just don't work out as well as they had planned so they can get through the tough economic time in climate like I said, we've been doing this for 20 years up cycles down cycles up credit there are credit up rates down rates.
First rodeo slide number 23.
You can see our currency rate on our accrual portfolio still remains very high I have to say, we don't expect it to remain this high I said that in the last quarter youre going to start to see some deterioration here as rates and inflation creeps into it. We do think we will have higher charge offs that we've experienced over the last two years, that's clearly a factor.
It into our forecast we've seen this before we do not believe this is always <unk>. We think it has a lesser issue with respect to that our clients still have a reasonable amount of liquidity in the economy is still on a pretty good footing, but once again, we just want to be careful that we have a very good feel for these mark.
<unk>, we've been in them for over two decades, we know how this works it sort of hurts rodeo were very experienced people, making these decisions slide number 24, and 25 of illustrations that we've existed for those 88.
Our conference calls and really demonstrate the economics of a <unk> loan.
I'd number 27, the SBA 504 loan program important to note through October 31, we closed $101 million of SBA 504 loans, a record we're forecasting $150 million of loans closings for the full year that would also be a record we have plenty of credit availability on our lines as we sit here today could be up.
To grow this business, we like the five of our business quite a bit it's alone. That's made for most people that are familiar with it it's a 90% LTV with a 40% second taken out by government debentures. So we're left with a 50% LTV against commercial real estate first and.
<unk> personal guarantees and good positive debt service coverage ratios on slide number 28.
New Tech business lending is the entity that originates the five O four loans and the NCL loans. So these are the non <unk> loans. Historically, we don't really report this portfolio because they are done out of out of controlled portfolio companies. However, we thought it was important to demonstrate to the market.
Out of 388 million loans that have originated since 2017 and $132 5 million that originated in 2019, we have not experienced any defaults or charge offs to date in excess of $500 million worth of allowance no deposits no charge offs were very proud of our portfolio performance. In this particular category slide number 29 depicts what a final.
For loan looks like slide number 30 talks about the return on equity in this business, which is very hot as well as the <unk> business, which is why as a bank holding company owning a bank. We believe we can generate really high ROI as and really high ROA TCE, we're excited about.
How we would look as a bank for those of you that are familiar with our company on the Investor Relations section. There was an old illustration I'll point out old that'll have to get updated but it's all based on old data of where we think the bank might look at at that point in time for Aro <unk> and Aro TCE high numbers.
Could take a look at that slide number 31 talking about our nonconforming conventional lending program.
We've been in the business since 2019, we're in this business because it's very accretive we get tremendous operating leverage out of being able to do loans that don't fit the SBA box. So when we use the term nonconforming, we're referring to it nonconforming to a <unk> or a fiber for our government programs. So we did a securitization.
In January $81 million worth of loans that was 16 units rated by <unk>. They are in a trust you could take a look at how that portfolio is performing no defaults no delinquencies, it's doing really really well and this was our first example of a real good exit in our financing and a good Roe.
Slide number 32, we talk about expanding this program I want to note.
That we've made some tremendous headway in this calendar year in a tough market, obviously not that easy to attract.
Capital things are moving along quite quite quickly but.
We have a transaction.
With a joint venture partner the joint venture.
Is funded by a $15 billion asset management company to provide up to $100 million of equity capital. We will match that equity capital, we have and we're prepared to close on $150 million leverage facility from well known investment Bank. We believe that we can grow that facility to greater numbers as well.
And we.
We do believe as we move forward to slide number 33 and.
And the rationale for growing this nonconforming conventional loan business, which will be done at the BDC level through controlled portfolio companies or in a bank holding company out of the bank. We are looking to originate about $600 million of these loans in 2023 1 billion in 2024 once again would you expect.
<unk> will be funded through joint ventures helped the bank holding company. This will give us additional origination fees additional servicing income the ability to asset liability matched alone. While we are in the credit warehouse facility through hedging that we've done historically as well as once they go into securitization totally match funded.
Slide number 34, we continue to talk about the securitization that we did on January 28, 2022 slide.
Slide number 35 would go to another one of our <unk>.
Successful controlled portfolio companies that was established in 2002, our merchant processing business, we generated EBITDA of a little over 14 million I think was about 14 and a half million all of our payments business last year. We've had some nice growth this year up to $60 million of EBITDA with a very reasonable multiple on that business and that's an important part.
Our ecosystem of being able to offer value to our customers to help them move money Bill invoice.
Use Pos systems, and Allstate are they already commerce to be able to take payments.
And use the payment processing system very important function of the bank.
I'd number 36, new Tech technology solutions in Phoenix space.
<unk> computing business, we're forecasting 4 million of EBITDA between that and the <unk> business about $20 million of me, but both businesses will be held up at the bank holding company slide.
Slide number 37, many people aren't aware of the fact that we own 60% of an organization that provides.
Pos.
To our customers that can be white labeled for our alliance partners and we're really excited about the growth and the opportunity and competing against toast square and others to be able to provide this attractive software slide number 38, two other important portfolio companies that we believe will really experienced tremendous growth based upon their positioning in the new tech.
Advantage.
New Tech payroll benefit solutions and new Tech insurance agencies. These are businesses that will consolidate.
And our financials going forward if in fact, we get regulatory approval become a bank holding company and a bank important to note everything will consolidate so all the accounting will changeover from <unk> accounting to 33 Act accounting and we plan on being very transparent so it'll be financials on a bank financials on insurance financials on payroll.
And everybody will be able to do there in depth evaluation going to slide number 39 from an investment summary perspective, and some of things where I turn the call over to Nick Ledger important to note and I really wanted to emphasize this we've been publicly traded since 2000 and the company was established in 1998 I'm one of the original founders import.
To note the insiders of new Tech on approximately 6% of the outstanding shares. So our interests are very much aligned with shareholders.
As we've talked about we believe very strongly that the best opportunity for New Tech business Service Corp, future New Tech one will be to unlock the value of its technology and its built over 19 years, which will be much easier to do and display as a bank holding company and offer much greater rewards to its current customer base.
Obviously.
BDC dividend investors.
Have been rewarded with high dividend during this window of time, but realistically they've had fairly perfect information with respect that we're no longer going to be distributing 9100% of our income out in many of our BDC investors are retail and they want the dividend and really don't Wanna hear about anything else.
We appreciate that we understand that.
I happened to be a shareholder and I havent to be a major beneficiary and I enjoyed those dividends. However, the new structure will allow for increased total participation number one bdcs are excluded from the S&P 500. The Russell 2000, I think it's important to note we've had estimates from researchers that.
Right that or there could be about 2 million shares of new tech buying just going into the Russell 2000 alone I wouldnt rely upon that statement do your own research, but however, going into the Russell without market cap quite a lot of institutional buying in addition, institutional investors really have a hard time buying bdcs because of the.
A F&B issue a lot of people don't know about this they don't understand it they don't know what it means well I don't want to get too much into the weeds here, but we are an internally managed BDC not externally managed BDC, which is an advantage by the way so we don't.
Further our net as management participants taking fees out of the entity or dividends or after those fees with that said.
Because we are internally managed it's the SG&A that hit this number it makes it very difficult for institutional investors to actually own new tech or other bdcs. So we do believe that this is going to open up the box to a lot of.
Additional investors to new Tech.
We are looking forward to.
Declaring which we have not yet, but we have forecasted a 70.
Cash distribution for the fourth quarter.
And obviously thats coming up rather quickly because we're already in November so the return on that cash.
Cash returned to pretty high so.
We look at going forward, if we get the regulatory approvals, which we.
Hopeful are eminent but anything can happen.
I've said to many people this isn't a horseshoe as close as nothing till you get the letter you never know you there.
So once that occurs we will try to turn around and provide earnings forecast for 2023 and 2024, we've given some idea of what that could generally look at by the August 2nd or third.
Discussion if you go to the Investor Relations section I think.
The thing is labeled August 4th presentation.
When that's when it's been put up but anyway. So look for that to work in second third or fourth day, you'll get a feel but I think importantly, we put that out there'll be some nice guidance for the market. We haven't been able to do that at this point in time, because we want to know what the final structure is subject to regulatory approval. We're also hopeful that our sell side analysts would transfer coverage for BDC analysts the bad.
So we don't have a lot of guidance out there it's been very difficult.
So earnings multiples are depressed for both Bdcs in bank stocks firms and obviously, we talked about gain on sales margins being the breath and legs and prime so lots of headwinds with that said I hope we've been able to eliminate.
The quarter and the performance year to date and how excited we are about our future. Despite the fact that it's a tough news channel have there, but we still feel pretty good about it.
And we're very optimistic about our future I would now like to turn the financial review over to Nick Ledger, Our Chief Accounting Officer.
Thank you Barry.
You can find a summary of our third quarter 2022 results on slide number 41, as well as a reconciliation of our adjusted net investment income or adjusted NII on slide number $43 44.
For the third quarter 2022, we had a net investment income of $205000, a one cent per share as compared to a net investment loss of $6 7 million or <unk> 30 per share in the third quarter of 2021 at 103% increase on a per share basis.
Please note that income related to the PPP of $269000 is included in the third quarter 2021 net investment income.
Adjusted NII, which is defined on slide number 42 was $15 million or <unk> 62 per share in the third quarter of 2022 as compared to $12 6 million or <unk> 50, 666 56 per share for the third quarter of 2021.
Focusing on third quarter 2022 highlights we recognized $23 6 million in total investment income, which is the 93% increase over the third quarter of 2021 total investment income of $12 4 million.
A primary driver of the increase in total investment income was primarily due to $7 2 million of dividends from the portfolio companies in the third quarter of 2022.
In addition interest income increased by $1 $7 million, resulting from a year over year increase in the accrual loan portfolio.
Other income increased by $1 8 million in the third quarter of 2022 compared to Q3, 2021, resulting mainly from a year over year increase in SBA seven loan origination volume.
Servicing income increased by 28, 24% to $3 $6 million in the third quarter of 2022 versus $2 $8 million in the same quarter of 2021.
Distributions from portfolio companies for the third quarter of 2022 totaled $7 2 million, which included $43 5 million from NMS $165 million from NBL off cycle for business.
$360000 from NCL.
Conventional joint venture.
$720000 from Ams and $150000 from mobile money and that is compared to the third quarter of 2021, where there were no distributions from portfolio companies.
Focusing on expenses total expenses for the third quarter of 2022 increased by $4 3 million compared to Q3, 2021, mainly driven by higher interest related costs, an increase in SBA seven loan referral fees due to higher loan origination volume and loan origination and processing costs.
Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the third quarter of 2022 totaled $19 6 million as compared to $22 4 million during the same quarter in 2021.
The third quarter of 2022, and SPF sold 321 loans for $172 $4 million on an average.
Premium of 945%.
Compared to 205 loans sold during the third quarter of 2021 for $148 million at an average premium of $13 or 4%. The decrease in realized gain was attribute to lower average premium prices in the secondary market when comparing to the third quarter of 2021.
In SPF sold 56, 5% more units in the third quarter of 2022 as compared to the third quarter of 2021.
As I mentioned earlier income related to the PPP, including investment income not unrealized gains.
Realized losses on SBA non affiliate investments for the third quarter of 2022 was $4 9 million as compared to $3 $2 million in the third quarter of 2021.
Overall, our operating results for the third quarter of 2022 resulted in a net increase and net assets of $11 4 million or <unk> 47 per share and we ended the quarter with <unk> per share of $16 <unk>.
I would now like to turn the call back to Barry.
Thank you Nick operator, we'll open up for Q&A now.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone. Please standby we compile the Q&A roster.
And again that is star one one if you'd like to ask a question.
One moment for my first question.
And our first question comes from Scott Sullivan from Raymond James Your line is now open.
Thanks very much.
Congrats on a great quarter.
Thank you Scott.
I am wondering if you could give us some color on loan demand.
The growth has been.
Clearly outstanding, especially in light of.
Current situations, we're dealing with here.
Massive.
Rate hikes.
And.
Questions.
Hospital recession next year.
And.
Obviously, we've talked about.
Repairing for.
Nonperforming loans, which.
Yeah.
Certainly helpful, but I'm very curious in terms of.
Your conversations with current customers or future customers.
Both in SBA and non SBA more conventional bank lending.
What kind of appetite are you seeing on the horizon.
You know for your loan book Thanks sure.
<unk>.
I think it's.
When people talk about loan demand they always think about it in the aggregate.
When you think about.
Our bank of America.
Big Bank I mean, they they absolutely are they're almost the market because they're that big.
We have the opportunity given how we're set up using technology to pick and choose what we think are the best credits. So even though the market is softer than <unk>.
One you are able to get much better terms from the borrower number two people that might not have thought about borrowing now come into the borrowing realm and those are clients that are typically stronger borrowers they have more assets.
They have more.
Commercial real estate, there more unencumbered things that they can pledge and have better businesses. So the goal is to continue to be selective.
Pay attention to the things that we talked about but we are fortunate that we're not struggling to get opportunities. So we're able to pour through those opportunities you can get the best opportunities. In addition, these are times, where you've got.
The bank lenders that were tripping over themselves to do loans at 2.5% to 3% rates or three and a half all of a sudden they're like risk off they don't want to they don't really want to put money out there.
And I think that.
In economies that.
Our declining or declining or not increasing at a faster rate or declining at a slow rate, there's still really good credits out there.
And that's what we excel at making sure we pick those best credit so plenty alone demand plenty of opportunity to make money.
So charge offs may not be 50 basis points.
Maybe there's 75, maybe they go up to one maybe they were a little higher on an annual basis, but when you look at the coupons that we can charge, which is what we've experienced over 20 years and really paying attention and realizing that and our best guess at this point in time, we are not always going on this.
This is nothing close to OE or not.
Unfortunately, the risk has been shifted to the government of a commercial enterprise and consumers, so commercial enterprises and consumers and their balance sheet. Unlike <unk>, we're actually in pretty good shape. It's a government that's got all the debt at the fed level and.
And potentially budget deficits at the state level. So our customers are actually in pretty good shape from a balance sheet perspective question. As you know will consumers continue to spend there is still a lot of liquidity out there. So no. We feel good about there being enough great credits to make good loans with better terms.
Great. That's very helpful and if you could sort of have your.
Wish list in terms of the loan mix.
Would you prefer to have.
At the same level of SBA versus non SBA.
And how would you think that.
Forward.
Yeah, I think that we're going to have a real good year.
We're trying to.
Finish nailing down a few.
Funding commitments, which we think will do here in the next couple of weeks.
For the Nonconforming book, which Diversifies US now when we say nonconforming.
Those are typically borrowers that.
One bigger loans.
Have stronger personal guarantees have more liquidity than the SBA book, So we would like to.
Clearly continue to grow as we've grown into seven day, but use the operating leverage that we've got existing in the company to put on more viable for more nonconforming and if we are blessed with the regulatory approval put on conforming C&I.
CRE in the bank, so really have a very diverse portfolio and now you've covered almost all angles of the lending spectrum. So you've got businesses of different maturation points that you've continued to lend to them as they get better and better and grow and get bigger.
That's terrific. Thanks, so much.
Thank you.
And one moment our next question.
And our next question comes from Jim Collins from myself Senior capital Partners. Your line is now open.
Thank you good morning, Barry.
I Wonder if you can on the.
Question on a little bit of a geeky question, sorry, but on the dividend. So this is slide 16.
Mhm.
If this transaction.
If everything is approved.
Yes.
As planned.
Essentially as I understand that you basically have to sort of push all the retained earnings back out.
And so my question correctly you can't.
So then that would be.
That would be as of September 30th correct, because it's been there.
Those that distribution would have been made by 12 31.
So then for your full year 'twenty two earnings.
It wouldn't be included or am I misunderstanding that process.
Let me lay this out and then tell me if I've answered. The question. The 70 <unk> forecast that we have made this a forecast at that declaration yet for a distribution for Q4 is an estimate of Q4 earnings plus any spillover to get to the 100% Mark.
Through December 31.
2022.
Okay.
So.
In the event that the board declares that dividend and then declares.
That is going to throw his election as a BDC the goal would be to distribute.
Every dollar of income, including anything Thats been retained historically, which does require work at an estimate that the company has been at work and doing.
But it hasnt fully wrapped up yet.
Okay.
When and if they do.
Derisking occurs.
All of that income is paid to the shareholders. So look you think about it 2021 was a banner year and our shareholders participated in that by getting the benefit of the earnings because theres a BDC you pay it all out but some of it modest amounts.
Retained from that year and years prior et cetera, et cetera by the way that's kind of the way the market likes it.
Don't give it all out but most of it out and you are kind of between 90 and 100%. However to conclude you want to pay 100 to 101% to 102% out just to make sure that you don't Miss.
Exactly and then that that figure is the one that you would be including.
In the 10-K, which obviously will take gives you much to fall I'm just I'm just wondering if yes. If it's all done by 12 31, then there's no like catch up if you want to call. It that in <unk> 'twenty three you really will have it all out.
That's the that would most likely be the intention yes.
Okay that helps that clarifies a lot. Thank you very much Gary.
I appreciate the question.
Do you have a question that is star 111 moment, our next question.
And our next question comes from Paul Johnson from <unk>. Your line is now open.
Okay.
Yes. Good morning, guys. Hopefully you can hear me okay. Thanks for taking my question.
Just one quick clarification.
Just wanted to let you know my estimate was 63 cents versus 54 that you mentioned, so I'm not I'm not quite sure what is there.
There is some steel information that youre looking at but just wanted to clear do you do you have an August day report call.
Yes, well I don't know if sometime in September and believe in EMEA have updated the estimates.
Okay, well, we did it at the August 8th report.
That's where we are but that's neither here nor there, but that's that's why I went over this this morning.
Gotcha Okay.
Alright.
One thing I just wanted to ask on I mean as far as.
The approval rating for the loans in your portfolio.
The timing of standards that you started to make I guess for Andrew underwrite.
Underwriting practices I mean are these.
Systematic changes that you've made to the system for.
Everything in terms of the.
The new Tech tracker system, you know more and more I would say Richie.
Disciplined changes that you've made to the underwriting system at new Tech or are these more of just kind of discretionary manual sort of tightening standards that youre, making across the across the company.
I think your question is do you use a computer generated algorithm or is their individual discretion.
By human beings at a loan committee level.
Yes, and yes.
Yes, the answer would be.
Later so.
We still believe at this point that it's important that we use human credit committee as a matter of fact, our regulators require that whether that's the SBA or in the future as a bank.
And we believe historically that.
Looking at things.
At the moment.
From a human perspective.
It does work and.
That said.
FICO scores have improved.
Our average loan size has gone down from a diversification perspective.
<unk>.
Sure.
Time to close.
Deals when they come in.
Quick and based upon our technology. So our data is showing us that the technological things that we've put in place are working but important to note there is still.
Human Committee that ultimately makes loan decisions whether to approve or not.
Got it.
I'm just curious I mean, so does that mean as you're tightening the standards. It has seen a lot of lenders in the market are doing the same thing kind of in this environment does that mean youre also giving up on spread in pricing for the loans that you're originating or are they still coming in around what you.
Historically originated at $2 75 to 300 basis point spread.
No we havent cut our rate and that's because we don't use brokers or bankers at auction loans, often put us in competition.
We offer our customers 10 to 25 year am schedules no covenants.
They must personally guaranteed loan they must pledge all personal and business asset that's our program.
It goes into the Hopper.
We don't really discuss rate with them.
We ultimately discuss payment and proceeds and that's what we went on.
Got it I appreciate it.
And then.
It's a little bit difficult to.
No. It's the small business economy is really feeling a slowdown or not at the moment I'm just curious how much interaction you do have with with borrowers and.
In terms of.
The information that you get from them projections potentially how frequently do you get that sort of information in and are we at the point, where companies are reducing expenses, reducing head count or at least trends that you're noticing at all for your borrowers.
So.
I think that.
Up until September 30th.
We really didn't see much movement.
Do believe that we've seen changes in October and November absolutely part of it is when you turn your T V. In the midterm elections, how could you be positive.
When you turn the TV on overall inundated through various forms of media about how bad things are definitely turned your negative and also the economic data of rising rates and inflation and things of that nature. So we do believe that will finally begin to see the slowdown we've seen a little bit of that in the payments.
Space, but not dramatically so consumer spending is still pretty strong and it'll be interesting to see what happens with Christmas spending control too early to tell but.
We've definitely seen October and November is different than September .
Obviously with the seasonal adjustments factored in.
We're starting to see.
A slow down as these rate hikes and inflation issues do eat into people's excess liquidity and savings.
Got it thanks, that's great color.
We'll be watching closely of course and my last question.
Was just on the the.
Fully a yield for next quarter actually in the fourth quarter.
So in the press release.
You gave some guidance next year sure 10, 10, 5% yields on the debt the debt portfolio. This coming quarter. I was wondering if you could potentially provide any sort of guidance I don't think it should be quite in that 10% range, but any sort of estimation and B L.
Yeah.
Well first of all I think that.
The SBA changed.
Its regs, so we will be out at.
And our currently added prime plus three on.
On our loans, so we're going to pick up another 25 basis points.
And.
It's really hard to determine what pricing is going to be particularly going into the end of the year, particularly with another December price hike etcetera etcetera. So.
We're kind of trying to figure out what that <unk>.
Gain on sale might be I think somewhere between.
One O nine and $1 10, and a half Mike.
As a range might be useful but.
It's hard to forecast at this point in time.
Yes, Rishi I was actually referring to the yield on your different key debt portfolios, so one of them or selling them.
In January and gain in January I realize that's pointing out where your head is that right.
But you know in January it's going to be north of 10.
But.
It gets a little complicated because.
Whatevers on the books does not get to 75 basis point right rate hike until January one so on that basis, it's whatever prime was.
At the end of September .
So.
I'm going to thank you probably around nine in the quarter.
Got it kind of helpful. Those are all my questions.
Sure that'd be today.
Paul Thanks, I appreciate your help I realize it's.
We haven't made it that easy with all of this transition and noise. So I appreciate all the work that you've done thank you.
Thank you and I'm showing no further questions I would now like to turn the call back over to Barry Sloane for closing remarks.
Great well I appreciate everyone attending.
We look forward to making some more progress on our transaction and hopefully that will really give investors a clearer view as to what we see as being.
A really constructive future for <unk> business Service Corp, and all its stakeholders. So I want to thank everyone for attending particularly those that joined and ask questions. We appreciate it. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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