NewtekOne Inc. Q1 2023 Earnings Call
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Barry Sloane, President and CEO of <unk>. Please go ahead.
Good morning, and thank you very much I appreciate everyone attending and welcome to our first quarter 2023 financial results Conference call. Obviously this is our first conference call as a financial holding company owning a nationally chartered technology enabled bank and we appreciate everyone's attendance.
Our call today is going to be quite detail to give investors and analysts an opportunity to begin to model our organization.
This is clearly a differentiated.
<unk> business strategy.
Operation, one that'll be different than any other financial holding company or a bank holding company that you're familiar with so.
We appreciate everyone's patience, we tried to give as much detail and transparency to try to set a baseline foundation. So that people can begin to to model up new tack one a.
Very unique differentiated financial holding company.
Joining me on today's call isn't because ledger, EVP and Chief Accounting Officer.
Nick Young President and COO of New Tech Bank N, a John Mccaffery, Chief Financial Officer of New Tech Bank N a as well.
We have also invited our analyst coverage, we have several analysts are on the call that might participate in Q&A, Chris Nolan from Ladenburg Crispin Love from Piper Paul Johnson from <unk>, along with Mike Perito Merrill Ross from campus Bryce Rowe from B Riley and David Feaster from Raymond James So we welcome calls coming in on.
The Q&A to try to get.
Our story out in the market and to get people to follow.
Very unique.
Repositioning of New Tech won a unique financial holding company.
I'd like to call everyone's attention to the forward looking statement on slide number one I should remind everybody that is not familiar with new Tech won our Powerpoint presentation is on the industrial relations section of our website you can follow along.
Slide number two.
Our first quarter reporting as a financial holding company based upon the fact that on January six we completed the acquisition of National Bank of New York City renamed New Tech Bank, M&A and withdrew our BDC election and ceased operating as a BDC.
Important points of focus for this presentation given that this is our first quarter.
Obviously, the comparisons which nixle, Nick glad you will talk about <unk>.
As a BDC is questionable relevance, obviously, because there's different accounting treatment, but Nick will go into that shortly.
The first important point relative to the results that we released last night, we exceeded the previous first quarter basic EPS forecast of 41 status. We came in at 46 basic as well as analyst consensus. We had two analysts that reported to date I. Just think just it's very difficult for people to be able to do forecasts without.
This baseline so we certainly appreciate.
The coverage that we've gotten so far to get out in front of it and it's been helpful.
Hope to be able to pick up.
More analyst coverage going forward with some of the people that are on the call.
So in addition to.
Exceeding the original EPS forecast.
One of the things we're quite proud of is we demonstrated an ability to raise insured deposits.
During a very difficult time, but a high growth rate.
Digital account opening and the utilization of brokerage Cds very important.
Digital account opening is karla come on like Gangbusters, but talk about the success. We had in March April and May.
Important to note the industry currently is.
Somewhat plagued with asset liability management issues that are questionable many financial institutions have long duration fixed rate bond or loan portfolios that are not matched by time deposits. We did not have this issue.
When you start to look at the metrics of return on average assets return on tangible common equity and capital ratios that exceed the industry norm, we're starting off with clean balance sheets.
Great business model with margins and we really do not operate to the historic industry norms of a business that is primarily predicated on low to no cost deposit costs to raise fundings on the liability side.
And fixed rate.
Low margin, but yes, low risk loans or securities, we look forward to our presentation today.
On slide number three.
We continue to talk about our unique differentiated business model. We've always used the term without use of brokers branches. Our business development officers I think it's a real important designation.
Many of our competitors in this space have got big dollars invested in commercial bankers that <unk>.
Entertained take people out for their deposits, particularly commercial deposits.
We've developed our business model as a technology enabled bank over the course of 20 years, we utilized technology people and processes to deliver solutions to its core commercial clientele with efficiency and high levels of service. So it's not like the Qatar is devoid of a relationship for those of you that.
Are not that familiar with new tech and the new take advantage youll see youll be able to get.
Individuals that are professionals within their product segment on screen to be able to talk on camera to our clients on a regular basis. It's just not the traditional banker broker BDO network gets exceptionally expensive.
Arguably not efficient.
And we're really excited about the ability of what we built over 20 years now coming together under a financial holding company structure owning a bank.
When we talk a little bit more about the new take advantage youll be able to see what our real advantages in the market and then our train solution specialists, whether they are trying to help the customer open up a bank account.
Obtain a small business loan.
Help manage hardware and software at 24 seven.
And our data centers both in Phoenix.
<unk>.
Did you state license insurance agency payment processing business, which is really important and movement of money for our business clients exceptionally important and our competitors really don't do this very well at the independent business.
Important to note relative to our differentiated strategy is a well managed asset liability strategy. So many of you are familiar with one of our core lending products. The SBA <unk> loan today, we're out in the market.
At Prime plus 300, that's 11% quarter spread three quarters of a percent of the loan is government guaranteed and sold at a 10% 11% premium.
So therefore, you are left with a 25% uninsured, but not subordinated loan participations on our books and I'll talk about the size of those its about 150000 average balance. So you get tremendous diversification and that diversification gets you through good times and bad that's what we've learned over the course of 20 years.
We came into this business by acquiring a bank and putting a plan together that we believe deposits have zero duration.
And all of a sudden in the last.
Two months everyone's waking up and going Wow.
Thank you Paul.
Our duration and we saw commercial.
Positives lineup Unfortunately at some of our on.
Industry participants and withdraw their money so.
The value of commercial account dumping 10, 20 $30 million it to us and to a financial institution at one slug.
It's a great question about what you can do with that money.
So you're going to make a car loan due in three years or five years the gel liquid.
You got to make our residential mortgage loan.
In today's prepayment expectations could be 678 years.
Do commercial real estate loan very pop so when you look at our strategy of deposit gathering.
Percentage of.
Insured deposits versus uninsured and what we do with the funds and managing liquidity, you'll see we are different and we think we've got the right model at the right time. So I've said this on previous calls have we entered the market at the worst of times or at the end of the market at the best of times time will tell but we're very confident about what our strategy is and it's the perfect strategy.
For this time in the market.
We obviously have got net interest margins margins that exceed your typical banking financial institutions Youll see that the current net interest margin of the existing entity that we took on about 225 basis points.
You can do the math and you are at 11, and a quarter coupon on alone and Youre getting deposits at five <unk> and.
In excess of 6%.
That's attractive and Thats the type of business that we're going to grow now will be diversified will be putting on some lower margin business.
Current.
CRE type loans and current C&I type loans that are I'll use the word conforming nature to bank underwriting standards.
And that will diversify us reduce our charge offs and losses, but gives us a diversified portfolio across the whole.
Bank spectrum.
Clearly, we've demonstrated an ability to gathering grow deposits beyond my wildest expectations I did believe we're going to be successful in this and after a drought of about a month and a half and finally getting our technology correct and we really appreciate the work that aperture did with us to get our digital account opening online banking position ready we came on like gangbusters.
<unk>.
And we're very very pleased with how that is currently working.
But we're still early we still have a lot of work to do in order development can be done there to get it to where we really needed to be.
Look going forward.
We our business model is predicated on.
Acquiring deposits at market cost of funds. However, it doesn't mean that we don't believe we're going to be able to get.
<unk> deposit accounts for checking at 1% and commercial high yield savings account to three and a half which will reduce the blend.
And we will be able to do that by combining our merchant processing our payroll.
Requiring operating accounts of people, we lend money to and the new ticker damage, which we'll talk about so that will wind up giving us further advantages in the future I think it's important when you look at our organization you have to take a look at it and go Gee. This is a little bit like a re IPO let.
Let me look at what they're looking to do going forward. When you look at the spread if you look at the margin when you look at the strategy. When we look at their 20 plus year track record in managing risk through all 809 in the pandemic and say is this a company that I want to be involved with and.
If youre going to look at it as like a traditional bank what is this trading times tangible book value.
You might as well go onto another conference call. Because this is not the company for you at this point in time I'm not trying to dissuade people from investing in it but when you see all the different engines and the diversified cash flows and things that we offer our customers were just different and our customers do appreciate what we do we have a long term reputation in the market of delivering winning solutions to clients.
And being leaders in various spaces, and we're going to continue to do that with our commitment towards towards excellence.
Move to slide number four.
Could be to go through slide number four these are some of the first quarter financial highlights you can see in our press releases were very proud of our capital ratio the amount of cash that we've got on the books.
And obviously most of that cash on a consolidated basis isn't bank. Please understand you can't readily move money between the bank and the financial holding company.
And the net interest margin of $2 two 8% was based upon the legacy portfolio has done a very tight margin. So as we begin to put loans on the books in the second third and fourth quarter, you're going to see those margins expand that we've shown that.
Some of our slides going forward in the presentation.
Slide number five.
Talking about the <unk> business, which is an important part of our business.
Some of the things that we needed to get done obviously was begin funding <unk> loans in the bank get the PLP status the preferred lending status moved into the bank. While we were successful at doing that as part of our strategy. In addition to acquiring the bank on January six.
Getting the capital into the bank to get to the tangible common equity of $79 million, which we're very appreciative of I'll say thats approximately $79 million. Obviously, we are going to be filing our Q shortly.
Bank launched digital account opening in March 2023, when I say, we launched it yes. It was open and available, but we have a lot of tweaking to do.
<unk>.
Acquiring a bank on January 6th.
The strain that are put on the quarter and the ability to deliver results like this.
I am not sure I fully appreciated by the market I would say to that is.
Yet to come.
Yes.
We also had a fairly stable.
Portfolio.
Some of the things that investors are concerned about obviously asset liability management is there enough capital in the organization do they have a model that margin is going to collapse going forward. So we've got that checks were.
Good were good were good were good.
Quality of the portfolio.
A slight increase in the non accrual portfolio actually decreased as a percentage of nonaccrual loans versus the total portfolio.
And we're pleased clearly with rates going up 4% to 5% in a short period of time, it's going to put stress on borrowers, but our portfolio has held up quite well.
Currency rate, which youll see in a future slide is fairly stable.
And it's materially higher than what it will be in a normalized market. So we do understand that and when you look at what we're putting in place for seasonal reserves.
Our reserves on the bank I think youll be comfortable with.
Our projections, because we're extremely conservative and it's not like we haven't seen downturns in the economy or higher levels of rates because we've been in this business since 2003.
Our ability to raise capital as demonstrated in January $17 million through debt and preferred stock capital raises.
Slide number six is an interesting slide and we use the term adjusted book value of $3 31, due to deconversion adjustments I think that.
Banks and financial holding companies.
Basically do not have <unk>.
Valuations for asset light businesses like merchant services <unk> solutions insurance agency.
And payroll.
These businesses.
Using a fair value calculation.
It's about $166 million they are going into our tangible book at a negative $2 million.
<unk> as a BDC. These were on our books at fair value at a much bigger number its almost six or seven so close to $7 a share not look I'm not trying to rewrite accounting standard is that what I did but when you look at the asset valuation.
New Tech one it would be a disservice, if you're sort of a multiple to book value break to not count.
These very valuable and vital businesses that generate cash flow with very little capital investment or capex.
These are generating reoccurring cash flows and are part of our evaluation. So.
Answering around here a little bit we think these businesses are quite valuable and add to the tangible book value calculation of $7 77 a share.
Slide number seven.
We talk about the bank being well capitalized.
Our total deposits were the amount of insured deposits.
94, 5% the uninsured five and a half a lot of that is legacy deposits from larger.
National Bank of New York City legacy borrowers and people that are close to the company, but I think it's important to note that.
We did not have any any issues of some of the regional banks or even the bigger banks.
We're really happy to say, Hey, we broke even.
Lose any deposits well, we gained deposit and we're still gaining deposits.
And we were able to do that because our strategy is our willingness to pay market rate of interest.
And down the road in Q3, Q4, we'll be really focusing on bringing in those commercial accounts tied to the merchant account the payroll account and lending and other businesses and that will be able to further widen our NIM at which we're fairly excited about.
In the bank the risk based capital at 35%, that's because we have a lot of cash.
For people that are looking for that noise, though we had noise in the portfolio Blah-blah-blah look we had purchase accounting adjustments, we had seasonal adjustments in Q1.
To get this quarter behind Us and we also were sitting on a ton of cash and that was based upon a.
Preparing for our SBA business going forward, particularly in the second quarter to fund it be.
Given what was going on in the market. We felt it was prudent to wait and all the deposits that we could and our digital account opening worked really well.
We were also able to raise some brokerage CD money I will repeat non redeemable my favorite word non redeemable so as a <unk>.
Professional.
Asset securitization business understanding call features has obviously become very very important.
When you make a residential mortgage so the bar has the call deposits can be called by the deposit at any point in time that is a bad business.
We understand options, we understand the optionality of deposits.
I understand the optionality of the loans, we make the borrowers and we priced them accordingly, and we have really good margins. It is one of the advantages of <unk>.
Investing in an entity like new Tech one that's got tremendous banking expertise and knowledge, but also asset securitization knowledge risk management knowledge, we're very proud of what we bring to the table with respect to a new and different business model.
Slide number eight.
Bank purchase accounting.
We've clearly heard one of the problems with some of the regional banks and I'm looking at them right now on CNBC is G.
Portfolio actually marked it to market.
Net worth or the capital to go away good news.
Really don't have that problem, why which would just use purchased accounting liabilities were mark to market. The assets were marked to the market that gives us a very good starting position. In addition to the fact that we've got.
These assets and liabilities that are very well managed we did not have.
Long duration fixed rate assets matched by non interest bearing and low cost deposits holding our breath and hope that the positives will leave because in three to five minutes. They can move their money through a vote.
We don't have that problem I think it is importantly that.
Lot of these regional suffering and banks are suffering because on a mark to market basis. They don't necessarily have that network as I mentioned to you.
Purchase accounting that we went through marketing the assets and liabilities we picked up.
$20 million to $25 million of liabilities from our former bank. There was like $2 eight we kept those will end up buying a one year bill it like four 6%.
Wanted up moving our federal home loan bank relationship over to Atlanta, which we have an unused line I think 60 to $70 million to $80 million, which will remain that that's our that's our buffer in case there is some unforeseen issue.
But we're always thinking ahead that that gets importantly.
And our management team slide.
Slide number nine metrics and forecast, we maintain the guidance of about $72.
We think at this point in time that is prudently we're going to continue to monitor this adjusted it's pretty hard to forecast, where the two year moves 25 basis points.
Or an afternoon.
And the government guaranteed.
Premium was 2% up or down from one quarter to the next so you can imagine it's a very volatile market. However, when you look at our stock price in these numbers, it's fairly well discounted to what I think some normalized.
Multiple might be and Thats, where we believe we need to be looked at really at a multiple of earnings and growth of earnings because that's historically, what this management team has been able to do.
Can you just some of our metrics most of which have been reconfirmed. The one that's been reduced at the nonconforming C&I.
Business, which has dramatically reduced down, but we were able to pick it up in other areas.
Slide number 10.
Sure.
Our position as a leading SBA lender.
Once again getting PLP status in the bank, a big win not easy to do.
It's not a designation that every organization get most of that get it. We would argue don't really use as much or aren't well suited to it well we're one of the leaders in the business.
Second largest lender I think an interesting comparison relative to.
Banks are bank holding companies do this would be live oak bank look at their margins versus ours look at their efficiency ratio versus ours, It's night and day and we like our business model.
We have historically as a non bank.
Issued securitizations to asset liability matched the loans those are going to be sitting in new take small business finance to talk about that for a second but from a risk standpoint, 152000 average balance of the guarantee but not subordinated sba's M&A loans that's diversification.
Those loans are prime plus two and three quarters. The newer loans that we're able to originate good SBA regs are prime plus three so you've got a real nice asset liability match, which will talk about shortly but I think it's important to note that.
We've been a player in this space for 20 years through <unk> nine we think we have the data.
And the.
The knowledge to manage this business through higher rate environments.
And tougher credit environment.
But we are very big on diversification diversification and industry diversification and geography diversification and provider of referrals. So we have a very good business model and this is a really attractive.
Return on equity business for Us and Thats why we were able to generate these return on assets return on equity and its very hard business frankly to enter into it from a debt that standstill.
Slide number 11, one of the things youre going to see in the upcoming key will be the diversified streams of income and segment reporting the new take bank.
It will be a segment in and of itself.
The SPL C, which is small business lending corp. So the former new tech.
Entities did all the SBA loans is in a wind down mode, and we'll talk about that in the second so youre going to see that as a segment it is going to be.
Basically a portfolio of loans against Securitizations.
Then you've got the payments business, which is a <unk>.
<unk> $15 $5 million EBIT business per year.
You've got the Tech solutions business, approximately a $5 million EBIT business per year boats sitting up at the holding company along with NSP.
And then we packaged basically everything else into another category and there will be and DNA to be able to breakout the performance characteristics of the insurance agency payroll and other.
Businesses that sit in their joint.
Joint ventures things of that nature of joint ventures with respect to lending. So we're trying to be as transparent as possible. All the category is lumped together it would be anything that's under 10%, which is part of <unk>.
<unk> GAAP reporting requirements.
Slide number 12.
We were able to increase all commercial loan closings to $220 million or 12, 5% increase so when we look at that what it is.
So we're looking at is this is 75 before we refer to as conforming C&I recall conforming because it can force to bank underwriting standards.
A <unk> loan under SBA, which is alone that has underwriting classifications that do.
Do not fit bank underwriting standard that is actually the definition of <unk>.
One of the defining characteristics and then conforming CRE lending.
The former owner of the bank.
Based upon market conditions and their expense ratios.
Was able to successfully run a bank.
200 to 210 basis point margins to cost of funds.
So we're pricing these loans today, we actually did one to $3 50 off and maybe will be $3 75 to $400 right now for new CRE loans.
For those organizations that have a full balance sheet on CRE lending.
That's the time to make these loans provided that they are underwritten to current correct appraisals with the right projections and the right cap rates and the right valuations.
<unk> loans were made.
And the worst markets you get the best underwriting Theres less competition people aren't falling all over themselves. It's one of the benefits of getting out of this zero interest rate environment with a clean slate and a clean balance sheet slide number.
Yes.
13.
<unk>.
This is our <unk> premium trends, where we sell 75% of the <unk> loans. So in Q1 2023, our net premium was $110 80 for the trend is up.
As the trend up.
People want assets that flow, particularly over the short end of the curve.
Surprise surprise, the highest yielding part of the curve surprise surprise and less painful for mark to market.
So there's a lot of bank debt that I wish they had floating rate assets.
Lot of insurance companies that wish to have floating rate assets. There's a lot of performance based managers. They wish they had floating rate assets.
Extremely valuable.
Slide number 14.
This is what we call our currency rate.
I would tell you that.
Historically over 20 years of currency rate.
Has traveled.
Somewhere in the neighborhood of.
990, 192, its much higher I mean, we're coming out of goldilocks. So.
Can you just roll businesses, they do fall behind the times. It doesn't mean the loans are bad but at times due to the seasonality. So this is a strong portfolio and most importantly, you can see it really hasnt moved much of the key bucket is 31% to 60 right. That's really where you got to focus your eyes and your attention.
So there's just been not a lot of movement in that 31% to 60.
The current tab is value reports at the SBA, they get they're always doing things, but that's really the important thing, but obviously 61 to 90 as well so anything it's 30 pluses is really the issue but just.
Just because these loans start to fall behind it does mean that the borrowers who have.
Multiple personal guarantee is that we all wanted it to 20% or greater must personally guarantee the loan joined several they do whatever they got to do to keep these loans going in the business call. So we feel pretty good about the currency rate.
Slide number 15, we talk about the non accrual trends.
These obviously are written down mark to market. We do this differently banks typically you'll take a nonperforming loan and we're right at zero.
Zero this doesn't show up anywhere we have personal guarantees and liquidate assets. We've been doing this for over 20 years. So these do remain on our books is it the new tech small business finance.
Metric number not in the bank.
The bank has small amounts of loans currently that will grow we're going to build a portfolio in the bank. This is just at the plc sitting up at the holding company, but you can see important to note one of the issues about people worrying about bank just how it is credit holding up you could see actually is doing well so far.
<unk> NSP interest trend analysis, so here's your asset liability management for NSP U S plc, the non bank legacy lender in wind down mode first of all important to note you could see that.
We're getting a lot of good spread income up.
From a year earlier to $6 5 million.
Now when you look at NSP up going forward.
Youre looking at approximately $500 million worth of loans against pledged to securitizations of about $250 million. So there's a lot of equity in the securitization and.
Theres very good spread income.
I'll draw your attention to slide number 17, which shows you.
The coupons that are paid to the bondholders and the lesser of one and the two and these are the GOR outstanding issues. These are numbers at I believe issuance date I could be wrong on that but these are dollar volumes at issuance dates so they pay down I think it's important to note.
Looking at our cost of funds somewhere in the neighborhood.
700, a quarter.
Maybe seven and a half on a blended basis.
And your coupon is prime plus two and three quarters on most of these loans going forward, it's prime plus three.
So that's like an 11% coupon against call it seven and a half 250 basis points of margin now in NSP.
Everything is outsourced to the bank and a lender service provider agreement. So it's really just the portfolio.
Portfolio of loans into securities.
Pete.
The security you have to get paid off first.
Cash flow goes into that.
So we think this is an attractive asset and you'll be able to follow along and our Qs.
Now in the Q that youre going to get coming up there's going to be gain on sale, which is important to note because in the first quarter, we didn't get PLP status until really the second quarter. So there were a few SBA loans originated in the bank in Q1 through the GP program, but youre going to see gain on sale in the first quarter.
At NSP App.
Youre going to see very little of that in NSP up in Q2, and the gain on sale of show up in the bank.
Also I will note that the accounting will be different.
NSP App uses fair value accounting the bank is going to use seasonal so on a <unk> loan for example, the seasonal reserve will be 8%. So every time, we make allows them to an 8% charge upfront that will drain and weigh on earnings which you'll actually see if you look at our earnings for Q2, but.
The higher coupon and starts to pick up and Thats, where you get the real benefit is going out when you build a big asset liability management spread but these are the details at the analyst will be able to work on and that's why we're having this call to be able to give disclosure and be able to have conversations.
Slide number 18 merchant solutions and mobile money really important.
Business line for US we've been in the business since 2002, I think it's important to note we've been an SBA lenders and so three merchant solutions and so to tech solutions and so for insurance agency payroll of about 15 years and depository for months.
So.
Yes, we're a bit of a rookie there, but we've got very experienced people like.
Nick Young and others at the helm running that business for us and we're excited about it and we're very well positioned particularly.
Were you basically.
Dropping our lending opportunities into a lower cost funding vehicle.
I will mention.
The contrast of making an SBA loan and MSP app.
Versus.
In the bank.
So let's say.
Deposit survive.
And youre putting alone on.
In today's coupon 11, and a quarter so a quarter the loan stays on the balance sheet. That's the uninsured loan participation uninsured, but not subordinated fairly well asset liability matched with floating rate deposit money and it alone that has a quarterly adjust over prime no gap.
And three quarters. It alone gets sold at a big gain so it generates cash.
That's the math.
In the bank.
At the BDC only 55% of that loan gets funded by our warehouse line.
At today's cost would be almost eight five.
Maybe eight three quarters, so and 45% has to be funded by selling shares.
By selling equity.
By diluting, adding more share count the EPS.
So even though you've got to pay taxes on the bank.
The math just doesn't even compare.
That's why one of the reasons why we did the transaction. In addition, we will talk about the new take advantage to be able to really provide a value added solution to customers. Unlike in my opinion, most other banks that do nothing but take the money of the customer let's say.
And Thats, a commodity everybody does it and they will give the client anything we'll talk about the new take advantage.
My customers are advantage for doing business with new Tech.
So we're getting back to the new <unk> merchant solutions and mobile money. These are entities that.
We'll generate about $15 4 million of EBITDA.
Pre tax income of about $13 7 million established in 2002 presses fiber to a $1 billion of merchant browser client could you imagine if we were able to get 5% of our clients are 10% of our clients that are processing payments to open a bank account given the same day funding one throat to choke one place to go for all their business needs that.
<unk> and that number we hope to grow over the course of time.
So we believe that these are going to be future deposit gathering sources for new Tech Bank and we're very excited about that.
Slide number 19, while the payments business is extremely important to new tech one.
To be issuing our own debit card therefore, we're going to be able to get interchange those numbers currently or not.
Factored into any of our financials going forward.
We're looking to grow these reoccurring fee businesses that are very beneficial both to NMS, New Tech bank, particularly utilizing ACTH.
Business clients are interested in being able to move their money more cost effectively.
Through interchange.
And we're going to be able to do that because we are very focused on managing the payments business and the bank David Simon Who's the President and Chief operating officer of our payments business is also an executive officer at the bank and charge a deposit acquisition and is also on the board of the bank David joins us from <unk>.
Citibank, we had senior roles in both organizations really knows the card business extremely well and is now positioned in the merchant acquiring side, helping us grow deposits.
We realized it than most banks do not provide the tools to the independent business owners to a electronically invoice customers and b to pay their vendor builds so electronic payments moving money for our clients cost effectively with transparency with reporting into accounting General ledgers.
Be a real important and vital solution that companies like ours can provide to its clients and only the top tier banks.
So the top largest depositors get anything like these treasury functions, but I'm, telling you the money management functions that we're talking about whether its visa direct Mastercard says fed now things of that nature are still being cooked up we're going to be able to offer. This in one package to our clients. We're extremely excited about it it is part of our.
Strategy.
<unk> solutions.
What is tech solutions, whether it be some simply stated we managed people's hardware and software in two data centers, one in New Jersey, one in Phoenix and these are a lot of different solutions can be for managing email could be from our website could be storing data could be managing.
Servers, it could be managing Pos system. So these are some of our forecast business we've been in since 2004.
'twenty one from a segment reporting you'll see this in our Qs corporate and all other I'm not going to get too detailed Dennis I'm going to try to keep this.
Paul moving a lot of information I appreciate youre following along I'm, just trying to give the analysts a good sense to be able to follow us going forward slide number 22, New Tech Alliance partnerships.
Many of you that aren't familiar with the story don't understand how we are brokers Branchless bank.
<unk> as well.
Because as an overnight success and it just took US 20 years to get there.
We've added major organization to form alliances with us and these alliances pass referrals to us.
Referrals referrals in the form of my client wants a small business loan my clients once a workman's comp solution. My clients are interested in your payments platform.
So whether it's UBS is wealth management system Morgan Stanley 's, we have 3300 3400 Morgan Stanley financial advisers that are a new tracker accounts passing us referrals that's almost.
I think it is greater than 10% penetration UBS I think we've got 500 out of 6000. These are great penetration rates.
Navy Federal credit Union largest credit Union in the World Randolph Brooks over 1 million members. This is how we get our business no bankers brokers know BDO.
We basically give them a revenue share we service their customer and they are very happy with these are long standing relationships. We've recently added two relationships one bank with over $100 billion.
And total assets major players second a large nationwide insurance carrier with 1 million clients with a newsletter that they message on a weekly basis will be part of that newsletter, we look forward to announcing the named shortly.
Slide 23, a lot of people focus on is just as a <unk> lender well, we're not a seven day lender only anymore.
We obviously do 504 loans, we do nonconforming conventional loans and we have a really good track record in this area $450 million of <unk> launch in 2017, Theres been no charge offs to date.
Joining venture is $145 million on corn portfolio no charge offs to date.
Slide number 24, when you talk about tightening underwriting criteria you are going to look for greater FICO scores, we want to make sure the business got greater amounts of liquidity youre going to stress the businesses to rates going up even from current levels and youre going to make sure that they've got enough working capital to survive the bumps in the road letting the businesses that can liquidate.
Lateral of unencumbered borrowing power enables them to survive unexpected consequences slide number 25 is a slide we've had in our decks for 25 years I'm not going to focus on it too much but basically shows you how you could generate returns on equity in these businesses that are north of 30%. This is the cash created when you do a <unk> loan and you sell the government guarantee.
<unk> PS, which we will continue to do as a business strategy.
Slide number 27 is the income and expense aspect of the SP <unk> business.
Slide number 27, as a viable for business 28 as well.
The 504 business, you actually have no balance sheet or fiber for long as you're going to be made in the bank going forward and originated in a held for sale category. So they will be mark to the market held for sale.
These loans are originated.
Between fees and a gain on sale margins you typically can make between.
Three to six 7% on the conventional first and the debenture gets taken out by the SBA.
29 benefits of the nonconforming conventional loan program once again diversification diversification diversification higher level of credits and <unk>. This is done at the holding company. That's why we call. It non conforming it's funded through joint venture equity and securitization lines and we anticipate 250.
Millions of funding in 2023, we also believe the return on equity in this business between 20% to 30% between origination fees that are data at the bank servicing fees that are against the bank as well as the spread income that's held up at the holding company via warehouse lines and securitization.
Slide number 30, the new Tech advantage, we talk a lot about this this is our future and this is where our big bet is this is a differentiated model.
If we fail at this we're just left with a bank that does a really good job at lending out money with.
Lower cost deposits in leverage but this is the game changer here. So why should people bank with new tech well because they get the new tech advantage, we're going to give them analytics relationships and transactional capabilities other banks typically do not yet.
So when you sign up pretty advantaged first thing you get is you get documents storage. So you could store all your organizational documents in the advantage today than you get web traffic analytics.
What bank does them.
I know.
What's your bounce rate is how many people want to yourself yesterday average time on the site analyzes your site effective or not.
Need help they can speak to a new tech specialists that can enhance their site and hit their security and it's the effectiveness of the site and enhanced our ability to take payments.
So we've got storage, where web traffic analytics payment processing data.
We can show them batches from a day earlier charge backs refunds visa versus master.
Amex versus visa debit versus credit all those analytics right through the advantage.
What are the advantage or make payroll through the advantage big when we were looking to also add new tech tax <unk> accounting hopefully we'll have these rolled out in this calendar year, maybe next but hopefully this year.
It'd be white label from an experienced provider in the space I mean is that clients want to see their bank balances.
General Ledger, but want to see their payments and a general lift they want to see their payroll on the general Ledger that is the new Tech advantage. This is what banks are going to need to do going forward. Okay. So if we're not successful at it somebody else will be because customers are tired of giving their money to banks getting zero on their interest in <unk>.
Nothing else may not.
A bit of an exaggeration, but it's not that much of an exaggeration therein lies the new tech advantage, we own and operate all of these businesses were not letting the customer off the third parties. So.
To invest in US you do need to have.
As well as bucket would put it a long term horizon and not investing for the next quarter or two I'm investing for the next three 510 15 years and we believe we've developed these assets and now we're showing them together.
Slide number 31.
Declared our first dividend as a financial holding company paying 18 cents a share we hope to continue that.
That would be 72 for the year and a fairly high dividend yield.
To reduce the metrics on the model.
33 shows our capital ratios, which are really high obviously, they're higher at the bank and they are at the consolidated holding company.
Perfect sense, obviously, the bank right now it's got a lot of <unk>.
<unk> ability to leverage balance sheet. So.
When you sort of look at the noise of the numbers of Q1, whatever just remember new Tech banks got a lot of capital has a lot of cash has been put to work yet. So it's got a lot of earnings power there.
So.
Let's go to slide 34.
Sure.
And on slide 30 for a couple of things that are important to note.
Returns on tangible common equity returns on assets you can see the net interest margins growing.
Cost of funds actually declining.
And that's because we're reducing our dependency.
On bank lines versus deposits.
That's not even fully baked that'll get fully baked.
More and more of the securitization is paid down and more and more a lot of our lending businesses are financed by deposits and not using as much equity as we've done historically, but you can see by the metrics and the numbers here.
We're not numbers you see in our bank.
Therefore, you shouldnt be managing us are investing whether you like the ratio to book or not.
However, you want to calculate book from a GAAP standpoint.
Slide number 35 these slides demonstrate.
The fact that you've got a lot of non banking activities. They are generating a lot of income that typical most bank holding companies are have very little and that's not the case of new Tech. One we have a lot of them go to joint ventures, and then we've got our payments business in Tech solutions and the.
The growing opportunities of payroll and insurance.
Slide number 36, the focus there should be obviously.
On the earnings per share the dividend per share.
I swallowed pretty hard when I put these numbers out.
So with trepidation.
Volatility of forecasting.
I think investors.
If you take for granted the volatility that's out there in the market are difficult. It is to do historically you had a good idea of doing this.
A lot of this is based upon what goes on frankly from an industry perspective, we are lumped into this industry.
And.
I look at new Tech, one and I'm going.
<unk> that were encountered at the signature banks the valley.
The Silicon Valley.
First of all they have nothing to do with new Tech one.
Both on the same business and industry.
But we don't do deposits the way they do we didn't have this cadre of bankers, taking people that pebble beach in wherever to play golf with deposits to make loans.
We're not fixed rate assets.
But yet we're lumped into that we get but.
That.
It is going to determine things for a while but we'll work through that at the end of the day, we believe the cream rises to the crop and we will get through it but that that's the thing that prospectively could drag these numbers down it'll be what it'll be.
37% 38 more balance sheet information.
39 pro forma forecast for the bank.
Very well capitalized bank.
Now able to return Aaron earnings versus the BDC model, where everything has to get distributed.
<unk> chartered 41 for analysts to be able to see where all the nuts and bolts are.
And then looking at the investment summary, once again, we ask the markets to look at us.
There is a multiple of earnings multiple of book and the capability of our ability to grow these earnings over time.
That youre investing in a company that's been around for two decades and has managed risks through all times.
And frankly, we've got a differentiated business model that totally fits into that.
Current environment, which is low cost or no cost deposits.
We will not be the secret sauce for banks I can't tell you.
In 2022, how many times I was asked about noninterest bearing deposits core deposits well it turns out core wasn't so GOR.
And paying zero isn't a benefit.
I would question, whether these low cost deposits.
That are out there on the books for the major money center banks or an asset or not yes, whatever sticks as an asset.
Ever moves is not.
That's a squeeze on the net and we.
We're already at the higher number.
We put out.
Those dollars at higher coupons net of charge offs. So we've got 20 years worth of experience as low loan loss reserves at fair value valuations and we still have a great margin.
There is a difference.
It's just entirely different what we do on the deposit side and.
And what we do.
Asset side and most importantly, what we offer our customers is a core value.
And that's the new take advantage of with that I'd like to turn the presentation over to Nick Ledger.
Thank you Mac and good morning, everyone.
You can find a summary of our first quarter 2023 results on slide number 44.
We are proud to report our first quarter financial results for the first time reporting as a new financial holding company and Youll see in the consolidated statement of operations upon conversion from our previous BDC investment company accounting, where our portfolio companies did not consolidate into the bdc's financials and those activities with historically.
We reported as of dividend income from the investments of the BDC now as a financial holding.
We are now consolidating those portfolio company operations into our financials.
As a result of this conversion there is no comparable prior period consolidated financial statements referred to with the two different types of accounting.
I'd like to start with some highlights from our first quarter 2023 consolidated statement of operations.
On a consolidated GAAP basis for New Tech One Inc. Our first quarter results are as follows.
Net interest income for the first quarter was $4 6 million, which is comprised of $18 7 million of total interest income on loans and fees on loans offset by $14 1 million of total interest expense.
$8 8 million of interest expense is driven by the interest expense on the notes in the securitization. In addition, $3 9 million is due to the interest from the banking assets.
B borrowings and $1 5 million of interest expense on deposits and.
In the first quarter of 2023, the company has implemented seasonal on new Tech banks loan portfolio, resulting in a $1 $3 million provision for loans on loan credit losses.
The net interest income after the provision for loan credit losses is $3 3 million.
Focusing on total non interest income of $42 8 million $4 4 million as a result of servicing income $6 5 million of net gains on the sale of loans.
$6 7 million from technology and support income.
$10 3 million from the electronic payment processing income.
$5 9 million of net gain in net gain on loans accounted for under the fair value option.
$6 million of other non interest income.
Going back to the $6 5 million of net gains on the sales of the loans, which is comprised of the realized gains recognized from the sale of the guaranteed portions of SBA seven loans.
Quarter totaled $14 million in the first quarter of 2023, and Sps sold 248 loans for $109 $5 million at an average premium of $10 eight 4%.
Realized losses on the SBA seven loans for the first quarter of 2023 was $7 5 million.
Moving down to non interest expense of $39 2 million, which is primarily comprised of $119 1 million of salaries and employee benefits for the consolidated financial holding company five to $4 5 million as a result of electronic payment processing expenses.
$3 8 million from the technology expenses.
$3 4 million of professional service expenses.
$2 8 million of other loan origination and maintenance expenses and $4 6 million of other general administrative costs.
This resulted in pre tax net income for the first three months of 2023 of $6 9 million.
In connection with the financial holding company conversion from a tax perspective, the conversion from a BDC, which was a flow through tax structure filing is a Rick <unk>.
Dividends to shareholders with taxes ordinary income since we were required to pay out 90% to 100% of the income in the form of a dividend, which is primarily deemed as ordinary income. We are now a taxable entity as a financial holding company.
The company will no longer be filing as a ric for the calendar year 2023, and we will file a a C corp.
With this conversion we are now able to utilize when appropriate NOL carryforwards.
Primarily from the previously unconsolidated portfolio companies.
The establishment of the DTA was recorded to the P&L in the first quarter of 2023, we recorded a $34 million deferred tax asset, resulting from these federal Nols, which is a onetime event and will not be reoccurring.
$7 million income tax benefit from the Nols was offset by the $2 million income tax expense provision, which was recorded in the first quarter on the $6 9 million of pretax net income at the financial hold the company's effective tax rate.
This resulted in a net income tax benefit of $4 $8 million. This type of noise in the financials will be leveled out over the current quarters.
Consolidated net income for the first quarter of 2023 was $11 7 million or <unk> 46 per basic earnings per share.
I would like to now turn the call back over to Barry.
Thank you Nick operator like to open it up to the analyst community for Q&A. Thank you.
Thank you at this time, we will now conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Crispin Love of Piper Sandler Your line is now open.
Thanks, Good morning, everyone.
First can you just speak to loan demand that youre seeing from your borrowers in your your appetite.
Continue to grow at a fast clip looking at your origination guidance it looks to be down about 25% from your previous guide for 2023, mostly driven by the lower nonconforming C&I. So just curious if you can speak to what's driving the key differences and lower nonconforming expectations.
Sure I think that.
And Chris Thanks for joining.
Couple of things one.
And also to take this piece by piece.
In the <unk> portfolio.
Our opportunity that comes in through a referral system.
We are rejecting about 10% more.
Both loans that are in the underwriting going into committee than normal.
Obviously.
We've got to be concerned about rising rates and people being able to make debt service coverage ratio et cetera.
So I think that.
That's just an interesting fact that the other thing I would say is the movement of PLP.
From the bank to.
Two from me.
When the SPL seat to the bank it seems like.
I'm, taking my pencil out.
I can't explain how disruptive that was to our flow. So I don't think that.
We're going to at the moment make any adjustments to those volumes but.
Right now the ability to amortize alone over 10% to 25 years under the <unk> program takes borrowers at banks are going to push out of that portfolio into this program. So we're still constructive and optimistic on <unk> loan growth.
Relative to the other categories.
It's it's a great time to have capital at.
To be able to make great loans in a great environment.
This is when you're supposed to be making a lot of loans. So the concept of loan demand is very interesting.
We look at GDP, moving up or down plus or minus one or 2% I mean, it's such a small number but yet people go crazy over it. So here's my point, if we do our jobs, there's plenty of good borrowers to be able to pick through and find that our model will generate them. So I'm not overly concerned about us being able to find great greater credit.
We will probably have to kiss a lot.
More fraud, but because of our model, which is sort of non broker BDO oriented.
Label to do that and scale quite efficiently.
Alright, Thanks, Barry and then.
Another question on the income statement can you you went over it a little bit on the call, but can you just explain what the net gains on loans accounted under the fair value option are and if you would consider that to be core earnings I think the comments you made.
That that fair value option would be going away in the second quarter is that is that correct and would you expect a similar amount of that those fair value adjustments to be part of gain on sale revenue going forward or am I thinking about that incorrectly.
I think youre thinking about it correctly, but it'll go up as well as down so.
I think that is core that's part of.
Our model versus others and that we believe.
In that particular portfolio of assets, marking to market is important so I would say that I would say that as a core movement in both directions, just like the write down in the fourth quarter was.
What is important because based on our market conditions work.
So that fair value line is going to be sticking around but you could go up could go down just depending on the quarter.
Absolutely yes.
And that's that's pertaining to new tech small business finance.
Alright, Thank you Barry.
Thank you.
Yes.
One moment please.
Okay.
Our next question comes from Christopher Nolan of Ladenburg Thalmann <unk> co. Your line is now open hey, guys.
Thanks for taking my question.
On new took advantage.
Given the seizures of multiple banks over the last month I think the risk calculation.
<unk> has changed to a degree.
In terms of the bank that they deal with.
Why should a depositor not only the deposit relationship but also all of these operational things, which is managing their websites payment processing everything.
With an organization or institution, which.
Potentially it could be seized over the weekend.
<unk>.
Chris joining I can tell you is with 24 years worth of experience in dealing with these customers.
We do know what they like we do know what they don't like and.
It's a bit of a crazy time right now.
With respect to our organization.
Well capitalized we have been around for 24 years.
Really good solid business plan and model and we do have relationships with the clients that they can they can get to us.
I think conceptually.
The small business owner today has multiple parties that they wind up dealing with.
They might deal with godaddy for their website.
Fiserv I mean, so one would say gee.
I'm, a small business owner I like diversification, we get it they may not look to do.
By the way, we're under no false pretense that theyre going to do everything with us per se. However.
We had a client recently for example.
They were having problems with their technology. They didn't know whether it was their Pos system their gateway of their payment processor. Okay.
I would tell you is it's just my opinion only.
That the media is greatly exaggerating the issue with quote unquote.
Banking crisis now I don't think its a crisis I do think it's a bit of a change in NIM over the course of time, which is going to change profitability, but the concept of it being a crisis I think is overblown and I am hopeful they kind of get tired of it needs to be honest with you because I don't see them as is helping with.
Respect to what we've seen and talking to our clients.
We have clients that are ready to move the depository accounts to us because we process their payments and because they do their payroll and Theres one organization for them to watch and follow on monitoring.
Problem is with Silicon Valley and signature.
There was absolutely no time, no advance warning for anybody to make a change I mean people lined up at the door almost two days and it was done so.
It's a huge problem for the business in the industry that this business an industry, it's going to have to deal with in some way shape or form it may be.
All FDIC insured deposits is one of the ways.
Reduced.
Zaidi, but I will tell you.
We're obviously not jpmorgan, but we.
We had little or no customers, leaving and look at all the deposits we were able to gather.
<unk>.
Thanks, Barry and I guess as a follow up.
Given all the turmoil in the banking industry has the regulators.
Our requested or.
Higher capital ratios for you took back.
So I mean, you take bank risk based capital I think it's between 30% to 40%. So I don't know how much higher they want to go.
I'm, saying lower threshold actually Oh, you mean to reduce it.
Yes, I'm, just trying to see whether or not theres, a elevated level of minimum capital that they are.
I appreciate that you know no matter of fact.
<unk>.
Without without going over the line our projections that we have in the market are based upon the original plan.
And we're comfortable with those projections so you could.
And for what you like from that but now we've got we've had no changes or any cause of concern about what we're doing how we're doing it or how we are managing our business none whatsoever.
Thank you for taking my questions. Thank you.
Thank you one moment please.
Our next question comes from Bryce Rowe from B Riley. Your line is now open.
Thanks, a lot good morning.
Wanted to.
So maybe start with the deposit levels that youre that youre showing here post first quarter relative to the forecast and then very also get an understanding of how.
The current I guess capital structure of the debt.
It might change over the next year will you continue to hold the.
Unsecured notes on your on your balance sheet that existed when you were a BDC.
Sure so price to two important.
Questions number one we exceeded.
Our deposit gathering capability in the first quarter after a very slow start so I had.
Some sweaty palms, and some sleepless nights.
But we really came on like gangbusters, and it's still coming in like Crazy. So I feel very comfortable about our deposit raising capability I mean, one of the things we're going to have to think about is.
Do we let some of the brokered quote unquote deposits off that are non redeemable.
For some of these lower duration type deposits that are coming in.
That's something we'll need to think about but the most part I don't see that changing and we're very pleased with the mix of money that's coming in and how it is coming in and the types of customers.
Relative to the other question.
I think that right now.
We're in compliance we've got headroom, we're comfortable with it. So we're just going to keep monitoring the markets and the situation and we've got that factored into our projections going forward. So now.
We're in good shape on that and I can't tell you.
Put it this way if I could figure out whether the next 100 or 200 basis points of rate movements, where theyre going to be I would be able to answer that question, which is why people have tried to get me to answer certain.
Questions like how do I know.
Hi.
I can make a guess.
I, certainly I, certainly didn't predict signature bank and Silicon Valley.
I don't know if that makes me them or not but I didn't didn't quite see it coming but no I think I think we're in good shape, but I think that right now.
Core funding that can can sit out there as long as we stay in compliance and we will be able to do that that's not a problem.
Okay.
And then maybe just one more around the deposits and I've got I've got another question or two but for sure.
In the forecast here, you're showing let's call it $244 million of deposits at the end of the second quarter, you highlight there being $300 million plus at the end of April So just just making making sure we're thinking about it correctly that you expect some run off based on some of those some of that.
Broker deposits or maybe maybe the forecast is just a bit conservative.
I think.
We're going to need to take a step back and look at do we want to return some of these deposits because we've had so much success or make certain adjustments in the model.
As you can imagine.
We've got.
In accounting and legal and professional department that is.
Drinking a lot of coffee.
So.
I think thats, just something to keep an eye on it on a good note.
We've got a unique I'll say problem, it's a problem.
We're getting a lot of deposits and.
You can go to our website and take a look at where we are I mean, we're not over the market, where one of the higher payers, but we also can put money to use with a great NIM. So.
That's just something we're going to have to figure out from an asset liability standpoint. So I would tell you that what you see in the projection might need to be changed or adjusted and modified as we get through the quarter.
Okay. Okay.
Just switching topics here you made note of.
Evaluations on the control investments as a BDC versus now as a financial holding company essentially.
The fair value.
Got that got got wiped away with the accounting change.
Can you talk about and helpful to see what projections are from an EBITDA perspective for both MF and new Tech technology.
Can you talk about how those how those valuations as a BDC.
We're come to for those contracts.
Joel investments, especially.
Especially relative to those two bigger bigger control investments of a former controlling lessons.
Well I think that.
The one thing I would say is I tried to be.
Realistic.
Dan.
For me that.
Project.
Huge growth in those two organizations at this point would be contrary to what the President and Chief operating Officer told me, they're going to do from a budgetary perspective. So basically what you see there is what we have approved from a budget.
Happy with what I'll call <unk>.
Flat to maybe down some and reoccurring no.
They are happy.
Shouldn't be.
But I also think that it's realistic so with that said I mean those are.
Goals that we believe are achievable, which is why we put them out there, but as we position ourselves.
As new Tech, one, which is new branding with a much wider universe of customers that are now talking to is much wider than before as a BDC is like night and day.
People that want to come to us because of the many things that we can help them with.
I think those businesses will flourish the ability to deposit money in someone's in account same day on the merchant side.
The.
The ability to store one's data is going to lead to other questions, where do you have your servers, who is managing them what do you pay you.
You're better off using us to do that 24, seven what about your mail.
So I feel pretty good about those relative to the concept of the valuations.
I, just think that as a BDC I can't tell you how many people said you're never going to trade above NAV.
And I remember are coming out.
Deal, we converted 33 act into a 40.
Did we raised money in like a 15 to 17 point discount to NAV and then.
Pretty much the rest is history at one point, we traded as high as two and a half to two.
Two five times, one which is unheard of for a BDC I think even the Mighty main only got to like two to one at one point in time, but.
We're going to need to hopefully get the market comfortable that even though these businesses don't have quote unquote loans, which would flow into tangible and if I sold the business for cash the casualty cowens tangible.
If they want to look at some.
Measure.
What the liquidation value of the business should be which is really what youre looking at from a book standpoint in my opinion.
Not what it can generate from an earnings standpoint, but I certainly understand why that's important as a bank.
But it's not.
Important relative to our strategy and how we do our business.
We think that.
Some add back of recognition or bigger multiple on tangible book is warranted.
Just an opinion.
The market is going to have to sort that out but the one thing that I do know.
Said this when we were a BDC.
You grow your earnings and you grow your dividend the stock price will follow I don't care, what the book value is.
Yep.
Alright, well ill step back in queue I appreciate the color.
Thank you.
Thank you one moment please.
Our next question comes from Paul Johnson with <unk>. Your line is now open.
Yes, good morning, Mary Congratulations on the.
First quarter under your belt.
Officially as a bank.
Okay.
I missed part of the call. So I apologize if you talked about this already but.
In the last presentation.
Results for last quarter included some guidance for 2024 I'm just wondering if that's still.
Good or if thats basically under reevaluation, obviously, because it's kind of recent events in the market.
But yes, any any sort of.
Commentary you can kind of provide on your previous guidance for 2024.
I had meant to put that in my notes. It's buried somewhere in this big stack of papers here, but I missed it. So I'm glad you asked the question are we.
We've decided to I'm going to use this term appropriately withdraw that because.
As I mentioned earlier with the two year, moving 25 basis points in the morning or an afternoon.
Pretty hard to forecast the next couple of quarters versus a year out in addition to that.
The cost of capital has changed dramatically so.
I could say that.
Just not going to change it but I think it is.
I'm going to be very clear, we're withdrawing that.
Okay, No that's clear I appreciate that.
Yes.
And then.
Kind of bigger picture I mean.
If you could kind of snap your fingers today and.
Get your wishes in terms of what you would like the portfolio to look like.
And a year from now maybe two years from now.
Do you have any kind of idea in your mind, what you sort of expect the long term percentage of the portfolio to be in terms of SBA loans versus other loans commercial.
Sorry et cetera.
Sure I think that.
At the bank level important to note that.
It'll be diversified between <unk> 500 for nonconforming conforming C&I conforming CRE.
So.
On the <unk> side.
We'll stay this with respect to the uninsured piece okay. So.
Im glad you.
Your question, maybe think about something else a lot of <unk>.
Look at the.
The bank has a little bank, but I mean, this little bank has been through a lot of loans because the <unk> business.
Can you do $875 million worth of loans.
Only 200 change show up on the balance sheet.
You still have the resources to do that amount of loans and get that amount of gain on sale and get that amount of return on equity and profit out of it but now I want to go back to answer your answer your question.
The.
So we will we will.
Make over $1 billion of loans this year.
Doesn't make most $500 million banks are 600, they don't do that right. Okay. Now let me go back to your question the.
The balance sheet should be pretty diversified and maybe the biggest concentration is seven a 30% to 35%, but the rest of it will be broken up easy evenly between 504, which is therefore for sale not permanent.
Conforming C&I and conforming CRA so.
We're going to balance the southern <unk> side off which could have like an 8% seasonal adjustment.
To blend in a three 5% to 4%.
So the other ones, obviously, you have a much lower.
Reserve risk just because of the quality of the loans.
Yes, so that makes them very diversified and then at the new Tech one level, you'll have the nonconforming in the Securitizations youre going to get the merchant services business. The Tech solutions business, we get payroll and insurance on draft of reoccurring.
Cash flows without having to put capital and it becomes a very compelling model we think.
Got it I appreciate that.
Sure.
I'm wondering two more questions.
The realized loss on the SBA loans this quarter that Nick mentioned I believe you said seven 5 million I just wanted to make sure Im clear. So is that the actual loss that was charged in the portfolio or is there any kind of like.
A one time sort of seasonal adjustments that are made due to the merger in the quarter.
Nick could you answer that.
Yes.
Those were the legacy Sps loans that are at fair value of those or not any of the loans that are in the bank as a result of seasonal.
Got it okay. So that's the actual realized loss for the SBA.
Portfolio.
And then.
I guess my last question just kind of be in terms of how the merger is going I mean do you feel like at this point.
The bank and sort of all the back office technology et cetera is that pretty much fully integrated at this point or do you still kind of feel like youre working on some.
Loose ends to tie everything together and then I guess along with that.
PLP sort of.
Temporary disruption in the quarter, obviously moving that over to the bank was a little bit challenging but is that pretty much over with at this point.
I guess.
Does it seem like you know everything is.
<unk> integrated the way you'd like it to be.
So I think we've got some work to do Paul.
In the second quarter.
And I think the some of the projections you will see.
It was better in the third or the fourth quarters.
I still think there is some work to be done relative to.
Continuing to bolster their staff.
I mean, the other thing obviously, we're going through.
Original examinations so.
I don't know if youll get it I'm, a financial guy as well, but unfortunately.
For the last 24 years I've expressed this application overall.
And.
The amount of.
Could use the word distractions, but now we've got it.
Standing up this entity almost from scratch because the prior bank didn't look and do anything like we're doing it really didn't have tremendous digital deposit gathering.
Loans, they did versus what we do I mean, it's night and day I mean, we fund hundreds of loans a quarter.
They funded 10 or 20.
So and you can't get into the bank before the deal closes.
No.
So there is still I want to say I am incredibly appreciative of.
All of the associates in the company that really have worked and measurably hard.
To get us, where we need to be but no I would say there is.
Still going to be a drag in the second quarter.
Okay.
Got it I appreciate that that's all for me thanks for taking my questions. Thank.
Thank you.
Okay.
Uh huh.
Thank you one moment please.
Our next question comes from Scott Sullivan of RBC. Your line is now open.
Yes.
Hey, Barry.
Congratulations on a really crafting a unique an elegant solution so from a very tough time.
Absolutely congrats on that I'm wondering if you could.
Speak a little bit more in terms of asset liability growth.
You mentioned, obviously deposit momentum has been.
Astounding in a very tough almost bubble like money market situation.
Situation so.
If you could speak to the deposit growth as well as the liability growth.
I think I'll take on the deposit side, if you are.
Able to pay.
A fair market rates for deposits.
That rate is determined by what you could see on a bank right or a go bank grade ore.
But just googling.
Best.
High yield savings accounts et cetera, Youll get money.
<unk>.
We've had success in drawing in insurable deposits and.
No.
Those deposits that are coming to us.
Considered.
Depending upon the channel non broker and core.
Although we are not under the delusion that those deposits are very rate sensitive, but we're okay with that because it's part of our model we pay a market rate of interest not a problem a matter of fact.
Hi.
It's astounding, how we're able to raise these deposits in this in this particular manner.
We show well, we have a good history.
I think the bank is about 60 years old we've been around for 24 years. So we've got.
Being a public company.
We're comfortable and we've seen that particularly.
We've seen that in the worst of times, so I say that.
I don't know how.
Yes.
My lifetime, and I'm 63, I've never heard.
Such discussion about bank runs and people being concerned about so the good news is in the worst of times, we're able to really fund our funding needs and Thats, a big deal and that so we have reduced our dependency on commercial funding rates venue here.
Which is in.
In the marketplace.
The larger institutions.
They're going to reduce their amount of lending well that's not great for.
A lot of non bank lenders so.
I think from our standpoint.
No concerns about being able to fund our business out of the bank, we got plenty of capital in the bank $78 million of capital in the bank.
Yes.
We have a lot of cash right now waiting for the SBA loans to close for the quarter, we'll use that up we'll sell the government guaranteed piece and that's where we're going to be able to fund that growth out of out of the bank and I'm very pleased with the execution.
On the deposit gathering strategy now the second leg of that execution will be which I'm not saying is a second quarter event hopefully its third and fourth with respect to utilization of new tech advantage the ability to.
Get payments accounts to open up deposits payroll accounts et cetera that will reduce the.
The cost of the high cost and make them more sticky.
So we're not under a delusion because we are getting all these deposits that they are in love with us okay.
Like us we're credible we pay them.
I will call a market rate of interest.
Alright.
Fantastic and in terms of NIM in margins can you speak to the effect as you are.
Somewhat new tech process smooth out and is there any.
Eight.
AI overlay in there.
It's an interesting thing.
Plenty of listening to Charlie Munger talk about artificial intelligence and he made a comment I said don't have artificial intelligence for somebody that's been intelligence to set the artificial intelligence. So it's got to start somewhere right.
I think that what we do does lend itself to that.
I would be delusional at the moment given all the things that.
We have to do to say were there, but we are approaching the customer.
With an air towards.
Having that intelligence because we have the data. So for example, when you apply for a loan we take your merchant segment, we take your insurance policies.
We have the ability to take advantage of that.
Then you might say currently why aren't you doing that and that's in the plan and Thats frankly up for us to be able to artfully core clients.
Using that old technology called the phone.
[laughter] phones <unk> phones are still really good today, Scott I like bonds.
Actually I have a verbal communication with the client and then show.
Pretty faces on the camera.
Listen I'm talking to my staff as well to connect with the client and say hey.
I see what youre doing and by the way we can help you.
Not too hard that I'll call that our version of artificial intelligence.
Fantastic.
And any comments on the syndication market I guess.
Visa gain.
Gain on sale.
As far as you can see.
Yes, I mean right now the market for the government guaranteed pieces is very strong because it's a government guaranteed floater that investors don't have to worry about duration risk are marking it to market and where they're being criticized for not having asset.
Interest rate sensitive assets on their balance sheet. They can diversify with just so that market has been pretty strong. Despite the fact, there was a little bit of disruption.
Signature Bank was one of the pool assemblers now they've got taken over there is still in the business, but there was some.
Question, just to what would happen with them and there was another market maker that recently left the business as well so against that backdrop. The market has actually held up pretty well.
Perfect last question.
Given your market cap size et cetera.
What's your personal speculation on a Russell 2000 inclusion.
Well.
But we're hopeful.
We we.
We certainly have the market cap.
And.
Our designation as a.
Financial holding company owning a bank was recently changed them from our closed end funds. So we're hopeful that would be.
Very useful and valuable to us, but we don't know.
Terrific. Thanks for the call.
Thank you one moment please.
Our next question comes from Sean Paul Adams from Raymond James Your line is now open.
Hey, guys good morning.
Can you explain your plans for the legacy BDC baby bonds.
Which contains a 1940 act leverage compliance covenant and the documentation.
It would appear that it.
It would have to be a priority given the leverage parameters today for the business.
It's not we're in complete compliance and.
We certified that with the trustee.
And so I will also let let me finish up I would also add that we have covenants with.
Capital One bank Deutsche Bank.
Four or five institutions. So we're in complete compliance with those covenants.
Very helpful. Thank you.
Thank you one moment please.
Okay.
Yeah.
Yeah.
Our next question comes from the line of Stephen Nemo Your.
Your line is now open.
Hi.
And then Thats all in last year, and I've been doing my own due diligence and I have a few questions lined up for today.
No.
This might be a b piece I didn't hear it quite clearly the last question.
Can you talk to us.
2024 and 2020.
Outstanding New talent.
And these have covenant, but buying new tech to the 150% asset coverage requirements under the 19 Ford yet, but new tech is no longer a BDC. So.
That seems to suggest that.
Notes are paid down or.
That are in some way.
I won't be able to leverage up the balance sheet.
Up to the typical tend to want to bank.
<unk> plans are starting to see an Intel and the near future.
Sure Steve I appreciate the question.
Right now.
Those have been factored into the projections that we have in the market. So we always have.
Although it doesn't always happen that way and respect that the community because they've been doing this for <unk>.
Over two decades.
Annualized we put out there and thats already factored into.
Those particular tests and.
So I'm not sure you heard the prior answer, but where we're in complete compliance we're aware of those tests and we'll be able to manage to those tests with respect to what we have in the market.
Okay.
Great.
Two more quick question.
When new tech issues alone and has the choice to sell.
The guaranteed portion and takes beyond guaranteed portion on the balance sheet going forward does the bank all of the loan book be comprised of entire SBA loans are just beyond guaranteed pieces or something in between.
The percentage of the loan book, but on guaranteed pieces Theres, a number thats worth reporting on for investors.
I'm not sure I understand the question what was the question.
So that's.
The banks can you talk about how loans with assets.
Right.
These loans the entire SBA loans or will they be just on guaranteed portions that are not sold off.
So.
And I'll just focus on the 700 business when a 7% loan is made it as a whole loan and you've got two participations of government guaranteed participation and an uninsured participation. So it sits on their books.
Is the uninsured participation in the <unk> loan.
Typically we sell the government guaranteed participation into pool assembler to pull them in aggregate them and they paid premiums for that.
Okay, so going forward.
It's going to be.
We are going to be beyond guaranteed pieces that are retained on the books and Thats correct.
The current strategy.
<unk> strategy is to which is what we've done for 20 years and it's been a reoccurring event is to make the loan and sell the government guaranteed piece. We think that's the highest return on equity for us and the best way to manage our capital.
Okay.
One last quick question and this is related to the on guaranteed flung pieces.
What are the new text plans regarding securitization trust going forward. The language in some recent news seems to suggest their legacy and so when you take won't issue any more securitization trusts and notes on the <unk>.
Guaranteed portions anymore.
What what are the plans going forward on that.
So.
References to legacy we try to refer to the legacy assets that are in new Tech small business finance, which are in our run download.
And.
There is.
There is a.
Our current position of.
Uninsured loan participations and new Tech small business finance in the warehouse line.
I'll use the word not to.
Get ahead of ourselves, but could be securitized.
Okay.
Yeah.
Uh huh.
Okay.
So by legacy.
So I think legacy it doesn't rule out the possibility of issuing more securitization trust in the future.
I mean, it's unlikely we would do it out of the bank because right now the bank has about a 350 basis point.
Interest funding advantage as well as not having to raise equity you follow me.
Yeah. So so.
Let me, let me just finish statements going forward.
SBA loans will be done out of the bank.
And Sps with its legacy Securitizations loans against securitized debt will be in a runoff mode.
So all of the gain on sale will be done at the bank hopefully that answers your question, but.
Alright, Thats, a better economic choice too.
Keeps the loan rather than trying to sell to and Ken.
Well when you do a securitization is actually treated as a finance since 2010 so.
I think the better way maybe to state that is.
Financing your uninsured loan participation in a bank.
As far more effective than financing them currently through securitization.
Okay. Okay. Thank you.
Thank you for your time.
Sure and Stephen once again, if you go back and you read the transcript we talked about when you do it out of the NSP App.
Before acquiring the bank.
You've only got a 55% advance rate.
And youre paying eight quarter eight 5% on the rate.
So 45% to maintain your ratios in the BDC has to be funded with equity.
To fund the million dollars alone.
$450000 of equity.
And $550000 of expensive leverage bank debt.
Now you can fund it with 5%, 100% deposit money so that makes sense.
Yes.
Okay.
That's all for today.
Okay. Thank you. Thank you.
Alright.
I think thats, our last question operator.
It is.
Well I appreciate all the.
All the input all the questions a lot to digest here today, a lot of reading to do.
<unk>.
We welcome the opportunity to.
Reported again next quarter. Thank you very much everyone. Thanks for your participation.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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Okay.
Yes.
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Okay.
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