Q3 2023 NewtekOne Inc Earnings Call
[music].
Good day, and thank you for standing by while considering you tack one incorporated third quarter, its one or two or three earnings conference call.
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Please be advised today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Barry Sloane Chief Executive Officer. Please go ahead.
Good morning, everyone and welcome to our third quarter 2023 financial results Conference call. My name is Barry Sloane, President and CEO Chairman of the board of New Tech one acre NASDAQ company.
Also presenting on today's call is Nicholas Ledger, EVP, and Chief Accounting Officer, a new Tech one Scott price Chief Financial Officer of New check one and you take Bank National Association. We also have attending the call Nick Young Who's the President and Chief operating Officer, a new Tech banks.
For those who don't like to follow along in the presentation. Today. We welcome you to go to our website New Tech one dot com and EW T. K O N E Dot com, while you're there you might want to peruse, the new Tech advantage, which is our important business banking portal. However, today I would like to direct you to the Investor Relations section, where our conference call.
That is being hot.
Yeah.
Okay.
On slide number one we have a note regarding forward looking statements would like you all to be familiar with the contents of that particular slide.
On slide number two we start off with New Tech Bank National Association in summary financial highlights.
One of the things we wanted to focus on today was the bank metrics that.
Are really coming in as planned and very nicely.
Net interest margin for Q2, 2023 grew sequentially from $3, one 9% to 349%.
Turn on assets.
493% to 532% return on tangible common equity 32, 1% to 39%.
Currency ratio dropped from 58, 7% to 49.
These are metrics are typically not seeing in the banking industry, a financial holding company industry today and that is because of our unique business model with things that we do the assets that we generate are high yielding net of loss severity and frequency over time and this is the second quarter that we reported.
Paul.
Holding company owning a bank.
I think it's important to note the feedback I typically get from investors and analysts as they don't believe the numbers.
Get it I understand it these are extremely unusual performance criteria for an organization like ours, but we are a different organization or the bank and technology enabled bank of the future and we're very proud of and will continue to deliver these types of numbers quarter to quarter.
So as that continues to happen and we continue to deliver we feel that we will get better.
Better level of market acceptance and who we are and what we do also important to note. The bank itself, which is a wholly owned subsidiary of New Tech one eight.
Well capitalized with a CET one ratio of 23, eight total capital ratio of 20, 25% and leverage ratio of 14.9. So we're very very pleased with our performance for the particular quarter with sequential growth. We expect that growth in these metrics to continue I think it's also important.
To note that when you look at.
Deposit growth for the most part for quarter to quarter I would use the word it was flattish that is by design. We got several hundred million dollars currently sitting at the fed to Q4 and Q1 loan growth. So we don't need deposit growth. However, we are changing our deposit mix and Scott price, we'll talk about that later on in the.
Presentation important we are able to.
Continue to fund loan growth and you can see the loan growth ending at 27%.
For the average 31%.
Or.
The third quarter.
And an important component of what we experienced over 20 years, when we make an SBA seven loan we sell the government guaranteed piece for gain on sale the premium.
Based upon market conditions, we could talk about on the call is pretty soft right now and that has cut into our current EPS projections, but you could see over five years, or so which we'd be able to show in graphs and later on in the presentation. This is sort of trending towards the low end and the fed tightening we are hopeful that we get.
Bit of rejuvenation in this <unk>.
Premium on 70 loans. Please also note that the premium of <unk> loans or gain on sale numbers that we have are significantly greater than a lot of our competitors in the banking industry.
On slide number three we have the similar types of metrics, but for the consolidated Holdco New Tech one once again note that we have expanding.
Net interest income of 42% gain sequentially, a $5 6 million to $8 million as we start to utilize the capital in fill up the bank with assets that are higher yielding versus the old legacy low risk, but low margin assets previously were occupied.
National.
Special Bank of New York city's balance sheet also importantly provision for credit losses growing $2 5 million at $3 4 million, 33% gain there that will enable us to continue to withstand a weakening credit environment that we forecast going forward without skipping a beat in our projections looking at the net interest margin at the Holdco went from two.
2009 to $2 71, a nice expansion sequentially return on assets to point out three to $2 76 return on tangible common equity of $15 7 million to $22 eight.
And efficiency ratio 77 down to 67 eight capital ratios also strong $15. One CET one at the Holdco total capital of $17 seven and leveraged 14, six once again second quarter as a financial holding company as we continue to track like this.
EPS growth quarter to quarter, we are in very very good shape and we're proud of the results we've been able to deliver with our first two quarters and.
Owning a bank and as a financial holding company.
Slide number four a general description as to.
On January six we completed the acquisition of National Bank of New York City. So the comparisons are this year versus last year are very difficult. Because we had we were a BDC and we had BDC accountant once again important points of focus for this presentation in the evaluation of New Tech one you've got to look at the quarter over quarter.
Sequential comparisons it's extremely important in addition, we're dealing with a lot of headwinds with a lot of front loaded upfront costs as we morph into this bank because we took over 59 year old bank with 59 year old systems policies and procedures were not quite set up for what we want to do with the institution from an OCC.
Charter at National Bank.
Pleased to be able to make these transitions put the policies and procedures in place remain in compliance. It's indicative they were able to dividend out of the bank to the Holdco and out of the Holdco to investors. That's indicative of the fact that we're in a good good shape from a regulatory and compliance perspective.
And once again very very pleased with that.
Sequential growth second to third quarter also important to note. We've got the attention of the street that is learning about our business learning about our model trying to understand what we're doing by the way I would want to comment Theres 51 pages. In this deck had been criticized for it and it's too long other people tell me other things.
I would like to have in the deck. The important part is we're not going to go out reach slide verbatim some of the slides speak for themselves, but we wanted to give as much information to the analysts as soon as possible. So they can get a better understanding who we are we currently have five analysts we anticipate the six going forward extremely important for what we do particularly relative to <unk>.
Research within their own distribution systems, we've clearly demonstrated an ability to raise insured deposits quickly with high growth rate.
We were able to grow our deposits when he took over the bank from a $140 million I think we're close to about $440 million I also want to probably state. We don't have the interest rate risk issues that are currently present in the industry with people having securities portfolios on a mark to market basis, Greg the capital down our fixed rate low yielding loans.
Our securities portfolio is about $33 million, it's all in government and agencies and I'm pretty sure that duration is less than nine months with a 5% weighted average coupon. There. So we're in very very good shape from an interest rate perspective I would also note. We are in very very good shape from a commercial real estate perspective, but more than happy to take that on in the Q&A.
Sure.
Obviously, the ROI Anr OTC capital numbers and capital ratios do speak for themselves.
Slide number five we talked about the earnings engine. So once again. Unlike a typical bank of this size in nature, which is just basically spread income and hoping to keep their deposits at or below rate of interest. We've got many earnings engines for new Tech water. We now obviously have the bank, which will become a premier earnings engine.
New Tech small business finance, which sits up at the holding company has got the legacy SBA loans and securitized structures, obviously the cost of debt on those structures are more expensive, but there is very little SG&A and you take small business finance, which is managed by the bank through a lender service provider.
We also got the merchant business, which youll see generates a very nice amount of EBITDA and.
And its consolidated subsidiaries.
Mobile money.
New Tech technology solutions, which we'll talk about that as an entity that will be divested out by the first quarter of 2025.
We also get income from our nonconforming joint venture portfolios. This is an extremely important topic today and discussion. This is the big growth engine that has been delayed due to whats occurred number one in the capital markets and getting a registration cleared with the SEC I think it was July 27th we cleared that registration statement.
To be able to issue <unk>.
Equity in debt of which we were successful in doing a debt deal towards the end of August which is now trading at a premium to issue date with 8% coupon on it.
We're also going to talk about the insurance agency, which has really made a very good effort. This year.
Obviously, situated with bank customers I believe we have increased our pre tax income from approximately 100000 to approximately 400000.
New Tech payroll solutions also an increase from a loss last year I believe two or $300000 gain. So these businesses should do very very well as they are integrated into.
Into the lending operation and integrated into the new Tech advantage on slide number six we talk about this earlier the difficult comparisons as a BDC. It's important to note. Once again, we're looking at new Tech. One. This is a system that doesn't use traditional bank branches traditional bankers traditional brokers.
Our traditional business develop officers to source business. So over the course of 20 years, we've used the new tracker system. It's our technological advantage. It's one of the ingredients to our secret sauce to enable us to get over 1000 unique business referrals of day $2 6 million in total in the database and these come to us.
Basically cost freight and these are clients that know us.
Requested a solution in one way or another and these are opportunities for us currently and on a going forward basis and that's why we can have an efficiency ratio as low as we can which actually should do better over time.
Number seven I'd like to point to.
How we are a technology enabled solutions provider that's across all the different solutions.
And deposit gathering.
We picked up about $275 million worth of digital accounts, mostly in consumer high yield savings will talk about the.
The goal for 2024, which is to bring in more transactional accounts commercial DDA as commercial lending markets, which we wanted to wait until.
The staff was set and we have a manager for that business lined up who should be joining us by the end of November.
Loan originations, we use our technology that we've developed over the course of 20 years and we are.
We are incredibly efficient in exchanging data with our clients I will go into a slide deeper in the presentation that shows you how we make a loan and what it does for our customer, but we did I believe approximately 550 units in the second quarter.
The growth in units sequentially and year over year, it's been double digits.
We just do a very good job of making the loan process as frictionless as possible and obviously, it's not easy making up a small business loan or an SBA loan, but we really develop this over the course of 20 years and do a good job at it without sacrificing credit.
Stepping in recruiting talent as I mentioned, we are close to announcing the hire of the CLO digit of the digital bank working directly for Nick Young that's going to enable us to really build out our 1% commercial demand deposit account and three 5% money market accounts for further expansion of our NIM going forward I would also look.
King to recruit a risk manager in at the holding company and down at the bank. Once again, we talked about our unique business model, replacing branches brokerage traditional bank videos, the one branch that company.
Has an existence will be closing in the month of December.
All of our business, which we've done traditionally and historically has been remote.
So we're not the company to take out to the masters or buy at lunch or dinner. Although we certainly can do that but most of our business is remote and the deposit gathering process, which we've been successful. So far we expect that to continue but to expand into the lower cost deposits of transactional commercial DDA is so that's.
Things that we could ultimately start to put metrics too and impute.
Projection of lower cost of funds going forward, which currently is not really embedded in any of our models.
Providing a superior service and product to clients. We're also looking to add.
Client experience officer, that's really important with a unique focus on the advantage, we look forward to bringing that individuals and in filling that position and importantly, we're going to spend time about the new tech advantage. They were basically customers get an asset from day one without.
Without any charge to become a client through the new tech data.
Slide number eight the new Tech advantage. What is this advantage, we talk about well it provides client analytics relationships and transactional capabilities that other banks in our space and I say that the space of independent business owners and small to medium sized businesses. We are not a consumer lender. That's important to note we do take consumer deposits.
But we're not a consumer lender the new take advantage gives our businesses a management asset upfront that can enhance their business and make them more successful the new tech advantage is very very unique to new tech.
Frankly difficult to replicate because we've owned and operate our insurance agency, our payroll business, our payment processing business, our lending business. We've been in these businesses for 10 to 20 years. Each so now we are.
Honing our skills integrating them with our software, which we'll talk about later on in our presentation and were very excited that our customers can go into the new tech advantage and communicate via video.
Camera with a new tech one specialist.
<unk> insurance agents, a payroll health and benefits specialists are lending specialist a deposit specialists.
<unk> technology solutions specialists, the payment processing specialist typically a client of a bank today, if they know one relationship banker and they can remember their names. They are lucky most have a faceless relationship with US you actually have a relationship with a phase that you can get to on demand by going in through the <unk>.
<unk>, we believe the advantage can be a market recognized tool and solution that ultimately we might look to <unk>.
License and spin it off to other providers I also want to mention that we will be probably announcing.
New Tech accounting, which will be a service provided to our customers.
Bye.
Other organization wanting Hydra account and we.
We think it's very beneficial for our customers to have the balance sheet and income statements slash P&L that they can refer to for all our activity extremely important over the course of time, we will integrate more of our functions with their P&L and balance sheet on slide number nine we talk about once again on a <unk>.
Oil down basis, what our client receives when they open up a new tech advantage as of today, they get on free unlimited document storage drag and drop in clinic and put documents, whether it's up or <unk>.
<unk> that wants to put pictures driver's licenses.
Rental agreements mortgage papers, whatever they want they can do that today three real time updated web traffic analytics that is available today time on average time on the site uniques today total visitors comparison to other.
Websites rankings bed is available today in the new Tech advantage for the merchant processing area, you get analytics and transactional capability. So you can get real three chargeback and batch information. If you are processing payments with us. It is important to note. So if you are processing client of <unk>.
New Tech you get that real information, you could slice and dice your data debit versus credit.
<unk> charge versus visa and Amex you could look at your pricing same day. This year same day last year. These are features that exist. Today. In addition to that if you are a payroll client you can receive the ability to make payroll directly from the business port.
Six professional relationships on camera, that's what makes new Tech special that's the new Tech advantage. So on slide number 10, we talked about the distribution of the advantage. So at the end of October we rolled the advantage out.
To 5000 existing new Tech one clients. These are clients that basically had a preexisting login from new tracker and basically by showing them. The advantage you're already getting referrals coming in but just demonstrating what we can do in these other areas because a picture is worth a thousand words.
We're able to show people that we do all these other things. So we've got approximately 5000 monthly active users. These are people that actively use the advantage going forward every lending client applying for a loan will also get the advantage and we've changed over all the new tracker customer accounts to the advantage. So any user that had a new <unk>.
Check our logging previously.
To see the advantage and there is 325000, new tracker users that have the ability to see the <unk> advantage in the past 36 months of 295000, new track users have logged in so you could see that we're putting the advantage out there we've got a lot of visibility, but I do want to note. This is a work in process, there's a lot of.
Work that needs to go with respect to integration protecting the process and making it as frictionless as possible.
On slide number 11. This is really a recap of most of the things that I've talked about today.
So I will go through this quickly, but finishing with once again, the new Tech advantage, which is our tool to go cross selling and cross marketing and an integrated manner to multiple and offer multiple solutions to customers without re creating various different data acquisition functions.
Slide number 12, Beazer, our third quarter 2023 financial highlights <unk> 38 per common share that was an increase of 46, 2% net interest income $8 1 million an increase of 42%. This is all sequentially over the prior quarter in the same year total assets were flat those are pretty much the important metric.
For the third quarter financial highlights slide number 13 looks at us for the full nine months that we've been outstanding as a financial holding company owning a bank dollars 10 per basic common share net interest income of $18 $3 million Slide number 14, we're proud to talk about our efficiency ratio.
This is what's going to give us the ability to scale and really dropped some great margins to the bottom line 49, 1% for the three months ended Sept 32023, a decrease of 16, 4%.
We believe that over time operating leverage will improve this financial leverage will improve this further technological innovation will approve this when we were able to capture additional revenue from the non bank business activities, particularly through the utilization of the advantage. We do believe however that we could get an uptick, particularly in Q4 and throughout parts of <unk>.
<unk> thousand 24, as we look to add some.
Significant expense, particularly in the area of deposit gathering.
Which is an important part obviously that will save us money down the road.
And help our NIM, but initially there are some expenses all of this is factored into our financial forecast slide number 15, we talked about our OTC and <unk> and this is for the nine months 39, 8% five 3% once again, it's a tough road to hoe here because people look at these numbers and they don't believe it.
But when we start to explain and you take a look at the <unk> business. When you look at the non conforming business. When you look at the reoccurring non capital using business. There is a payment processing insurance agency in payroll as well as the fact that we don't have the expensive too.
250000 to $500000 of your bankers running around trying to get deposits that we now know are fairly mobile and most of our deposits are basically core retail, but I think about 87% of them are under the insured amount. So we're not dealing with any big lumpy.
Commercial deposits that could fly in the middle of the night.
Slow and steady.
Pleased with where we are yes. Some of you have noticed clearly that we've reduced our slope of earnings growth look at the end of the day. This was a tough year for interest rate risk management, the cost of doing business was higher.
The other thing I want to point out is.
That's a big drag was caused by the nonconforming Len.
Lending business, which there is plenty of demand for it but it is a capital utilized and will be looking to fund that business going forward, which is why we needed the registration statement up and running we're pleased that we recently did a bond deal, which is now trading at a premium to where it was issued and once again. We believe these types of metrics are going to be indicative lead to further.
Growth in cumulative earnings per share. So we are pleased with our performance as well as pleased with the fact that we are projecting a strong Q4 and a strong calendar year 2024 slide.
Slide number 16, just some general.
Data points.
I do want to point out once again, the $40 million raise we did the 8% <unk> Ti they closed last night at $25.10 Trey.
Trading under the ticker <unk>.
Slide number 17 for some people that look at our financials when they look at book value from last year to this year and they go Wow It declined like what happened with <unk>.
Happens you're welcome BDC accounting too.
233 Act accounting, which means that things that would go into book for a BDC does not go into book as a matter of fact, I've always argued that NAV wasn't book its a mark to market valuation of all the assets, but to make a long story short our tangible book value was $7 31 a share.
But if you look at the market cap as of December 31.
<unk> merchant solutions Tech solutions, the insurance agency, it's about $166 $7 million of value. So I think it's once again important to note. If you add that back you wind up with a much higher books, if you calculate book.
Slide number 18 successes achieved by the bank.
Well capitalized bank growth in deposits.
Growing the deposits and big accounts, but in small accounts for $83 700 insured five.
New digital account relationships.
M&A pipeline that has grown we've been able to ship the PLP status into the bank and really good risk based capital ratios at New Tech Bank of 25% at Sept, 30, and 49, 9% tier one leverage ratio.
I'd now like to turn the presentation and discussed.
Our deposit growth breakdown trends to Scott price, our Chief Financial Officer.
Thanks, Barry and good morning, everyone.
I'd like to provide some color on the changes in our deposit levels during the quarter I want to assure you that our actions during the quarter were measured and we ended the quarter very close to where I wanted to be.
Slide 19 shows our view of bank deposits.
By quarter on an ending basis with a focus on changes versus the second quarter.
In the first quarter the bank consciously brought in considerable amount considerable amount of short term brokerage Cds given the liquidity crunch that occurred during that time.
And that raised our deposit concentration.
Brokerage Cds to 43% of total deposits in the second quarter, we raised significant levels of customer deposits through our digital account opening platform.
And then in the third quarter, we repaid almost $60 million of brokerage Cds, when we evaluated the replacement alternatives in their pricing.
Made the decision that brokered money was too expensive given our desire to change the shape of the liquidity profile of our CD portfolio.
So given these conditions, we decided to partially offset the decline in brokerage Cds with increased balances in our high yield savings product, which we launched in August.
We increased the rate given the rate hike the deferred debt in July to $5 25 from four 9%.
And we also changed the rate profiles across our retail CD offerings to move away from brokered money and address duration.
And finally, we also made the decision to begin moving new Tech bank into new Tech banks that deposit accounts that are non.
Non bank affiliates.
How old with other institutions.
Just over $200 million in liquid assets at September 30, and an average cash balance at the side of $190 million.
It seemed prudent to take on additional money and bear unnecessary cost to maintain a flat deposit level linked quarter.
Looking forward to the short term, we have $29 million of brokerage CD capacity at September 30, we have available borrowing capacity at the <unk> of $93 million and the liquid assets that I just mentioned.
We will continue to manage our net interest margin through these volatile and uncertain economic times.
Five year Treasury.
As high as 5% this past month in October from around the four forties. So some very much.
Very very big volatile timeshare.
Looking forward, we continue to invest in our back office and infrastructure.
<unk>.
<unk>.
We began to manage our regulatory compliance risk, while expanding our product offering.
And that will continue.
Really offer a scalable business later into 2024, and 2025 and beyond so with that Barry I'll turn it back to you.
Thank you Scott and <unk>.
Certainly appreciate Scott is a recent acquisition.
For a new tech and obviously he joined.
Our senior accounting and finance team with Nick Ledger.
I need to point out that.
We do not have this is not a management team for $600 million bank or a $1 4 billion Bank holding company.
As a management team that has built and frankly I think it is competitive with a five or $10 billion organization. We will get there we will grow nicely in a controlled manner and methodically, but when you see the types of talent that we're bringing in with Scott's edition, obviously, Nick Young our Chief operating officer.
And I want to point out the group that worked on this deck and put these pages together, it's not easy.
For Mike Swartz at lease Chamberlain, Nick Ledger, frankly, Maria Scott, Nick Young Peter Downs, I'm sure I'll, let somebody out don't yell at me, but.
I greatly appreciate the management team that currently exists and we have a couple of more pieces to the puzzle to add and we'll be ready to continue to do this quarter after quarter on slide number 20.
New Tech one has fight loan programs four of them are in the bank.
SBA seven eight and the bank SBA 504 in the bank in a held for sale capacity.
Conforming commercial and industrial business loans, you just call out a business loan.
And conforming investor owned CRE real estate loans. This is a category that's giving most banks heartburn.
The portfolio that we picked up from National Bank of New York City, we'll talk about it as a real.
<unk> portfolio, it's low risk. It is also low margin.
But in today's market, if you've got balance sheet, not a better time to put loans on your books because the banks are not lending.
They're shrinking they don't have the capital is the antithesis of the new Tech won and new take bank any store, it's the total antithesis.
They were at city are talking about a bank holding company and the bank growing.
There's a bit of an oxymoron. So we will spend a lot of time today talking about our nonperforming C&I business funded at the holding company.
This was probably the biggest reason for decline.
Some of our forecasts with that said I think that.
There is demand or.
Our joint venture partners are in place our lending partners are in place. However, when we do raise capital at the holding company debt and equity. It is for the utilization. This area. When you see the returns that this business throws off you'll understand why we want to feed it with additional capex because we believe it is extraordinarily accretive and it's a great risk reward.
Slide number 21.
As I've just referenced.
The inherited National Bank of New York City, CRE portfolio low loan to value low average loan size. These are New York City.
Based.
Sorry loans.
Very little exposure to office.
I mean, there is no more.
$1 $5 billion skyscraper offices portfolios. They have personal guarantees we only have one nonperforming loan and the particular portfolio. The portfolio is also a mark to market during purchase accounting the nonperforming loan. We believe we will get all of our all of our dollars back however.
This is a low margin portfolio that is asset liability matched through time deposits slide number 22 was a slide we frequently talked about once again important to note on the 708 business. Our average loan size of 133000 talked about diversification when you look at our industry.
And geography diversification I think our biggest state is Florida at 12, our fourth biggest state is in New York at around 5%. So you can see we're pretty well Diversed, and obviously, Texas and California sandwiched in between those two these are floating rate loans no caps.
Currently being originated at Prime plus three that's an 11, 5% coupon and we sell the government guaranteed piece for 90, 10% gain on sale, that's what drives that high rate of return that's what drives our net interest margin margin thats, what drives our ROA thats what drives our ROE in addition to being able to put on conforming bank loans.
In the current market at very wide spreads as well as in the future commercial demand deposits to go along with that.
Slide number 23 talks about our lending activity this is fairly.
Explanatory slide number 24 talks about the premium. Unfortunately Q3 973, that's another reason for guidance change. Some of these things. We just don't have don't have real control over interest rates.
Things like government shutdowns and things of that nature Slide number 25. This is an important one.
Client receives when applying for a loan with new tick back some of these changes are fairly new.
<unk> handler.
Cheap.
<unk>.
Director.
Does a great job has been with us for over a decade.
And we have now dramatically automated some of the things we're doing in lending I'll talk about that.
He goes into new tracker. It it takes about eight data points name address phone number how do you get to the client if they have any special suggestions.
Automatically shouldn't affect wired to the business owner, which allows.
Yeah.
US to gather the information with the swap book credit score and if biopsies of credit Quest generic takes about I'll say five minutes to do that once that backfired Youre is completed we get instant feedback to the business owner, allowing them to schedule remote on camera appointment provided that they go to the top of the list with respect to the software.
Score.
And they get a specialist to assist them in the loan application. They also typically get a prequalification notice the business owner at the same time received a actionable quote for workman's comp and.
In a BOP policy also known as a business owner policy our package policy along with.
An appointment for a licensed insurance agent. So all of these things within approximately 15 or 20 minutes somebody going online in the middle of the night without talking about <unk>.
Respectively.
Get a prequalification could.
Could get two appointments for an insurance agent.
And a lone assembler.
It could get a quote on a workman's comp policy and our BOP policy now on a going forward basis. Upon completion of the loan application without being asked for additional documentation.
The business owner could actually have an open business account, which is BSA AML <unk> approved without having a conversation with the client about the account and then upon the part of your conversation with the customer, particularly for the due diligence aspect of it.
That will be opened and activate most of these features were instituted in September of 2023 herein lies the new tech advantage.
Frictionless relationship with the customer gathering data not having to ask for the data multiple times and making multiple product offerings.
Slide number 26.
Industry comparisons to various public market companies look I think the one thing Thats lost upon the market relative to new Tech first of all look at all these different entities. I believe these are all technologically enhanced banks, that's where I look at the comparison.
Two.
We pay a dividend they don't or they pay a small dividend.
We're in a format I think of four to five to four 5% dividend, depending upon where the stock prices.
We're not getting credit for that.
At the growth rate look at the growth rates, we've talked about here. So we shouldn't be trading at the low end of the multiple where it.
It wants to trade.
That's up to the analysts, but if we keep hitting these quarter to quarter numbers with these rotc's. These ROE is everything will take care of itself. So we feel very good about what we've done how were positioned and look the market's certainly not the greatest market for banking investors a matter of fact, most bank investors.
Stand on your head and they will buy the stock, but we are on the radar screen, we're talking to a lot of them and if we continue to perform everything will take care of itself slide number 27, one of our important businesses that sits up at the holding company.
New Tech payments, which owns <unk> merchant solutions and mobile money, we think payments is a huge opportunity for banks going forward and we think it'll be a big revenue generator instead of red headed stepchild up.
We've owned this business since 2002, we just kind of a slang expressions of soup right. So what does that mean, we underwrite we do of refunds and charge backs, we do around customer service.
As a non bank we use other banks that have been sponsored which we continue to do today, but basically we do everything that a a payments organization would have to do for their clients. We also have new products like same day funding in the merchant space.
Zero cost processing.
We have some interesting.
E Commerce platforms and all of these consolidate up to new Tech payments will talk about the profitability here, which we had a pretty good year and but things like electronic billing same day funding also a very very valuable for deposit gathering and we will be and we currently do that but obviously on a limited basis until we get the transactional.
Management team and staff in place, but we're very excited about the payments growth moving money and this being a major revenue sources. We also have issued a new.
Visa debit card for all of our commercial banking clients slide number 28 talks about the profitability of this business that we've been in since 2022 the.
The expectation for.
Pre tax income $14 2 million EBITDA of $15 5 million.
For NMS mobile money and Pos on cloud, we do on our own Pos.
POS software once again on slide 29, we talk about really how important payments is going to be to the banking industry and we're set up very very well products like that now as I said electronic billing same day funding.
Okay.
Payroll can all become valuable solutions to our clients and new Tech one.
Technology solutions on slide number 30 expected pre tax $2 1 million EBITDA of $4 1 million.
Look once again as we put more clients into the advantage when they start to use storage will be able to engage with other conversations about helping them manage their hardware and software in two of our data centers. It's a business we've been in since 2004, we know it well and we look forward to continue to offer.
New Tech technology solutions, as a product offering to our clients even in the event that we have to spin it to our shareholders.
Slide number 31.
This is an important slide focusing on the nonconforming conventional loan business. So.
Both.
New Tech business lending, which currently got merged into small business lending and new Tech Bank. Historically has originated $502 million of loan since 2017 and no charge offs.
And its joint ventures, which just does the nonconforming loan program of originated $194 4 million, we have not experienced any charge offs to date. This is really really important. So when you look at the returns that we'll talk about in a future slide Youll see why this is an important growth area.
Portable can be for new Tech won and new Tech Bank and why that over the course of time, if we do go to the capital markets. That's what the money is used more prudently and extremely uncertain banking environment in calendar year 2023, and anybody that says this banking environment wasn't uncertain hasnt been paying attention.
Between Silicon Valley Bank signature bank.
Republic Bank et cetera, first Republic bank, clearly what's difficult market.
We finally got our registration proved through the SEC and we were able to tap the debt market. So we're very very pleased as to how we're performing in the market, but that's a growth area that should give us extraordinary returns going forward.
Slide number 32, 33 34, all slides we've talked about previously 35 as well 36 is a new slide. This is an important understanding of the potential profitability of the nonconforming lending business and we just tried to boil it down with the simple million dollar alone by the way we're currently out on.
And the street had higher gross yields were actually about $13 five gross maybe the 13th and three quarters.
The bank gets 1% in servicing income.
We typically get net origination fees of $2 83, but gross it's about three 5%.
Typically.
Those those fees are going into the bank and the Holdco.
<unk> are sold at a spread into the five year Treasury at T. Plus 300, Thats typically where a single a securitization would trade at.
We actually did the deal in January of 'twenty, two it was I think 185.
To LIBOR swaps, so spreads obviously widened that's widened the business out so the cost of the securitization financing is approximately seven 6% to four 6% a fairly generous spread but to make a long story short.
Looking at around.
415 of 420 basis points of margin with 30% equity and frankly in securitization as we think we might be able to get up to a higher number but when you look at the pre tax return on equity. These are fairly eye-popping boat in year, one and then in subsequent years, which is just the capital being utilized.
And we split this with our joint venture partners. So we use a joint venture partnerships, we have warehousing lines up at the holding company extremely profitable and the debt raise we recently.
Acquired the funds at the end of August are going to wind up going into this business primarily.
Slide number 37 gradually talk about how this business works, we anticipate funding approximately 110 million of nonconforming conventional loans to 2023, we started off with a much higher expectation when the capital markets were much more lift.
Liquid and lucrative before all the banking issues hit the market.
Once again, we estimate the return on equity of between 20%, 30% net of anticipated losses.
38 quarterly dividend declaration to our public shareholders in 18.
Dividend was paid on October 22023.
So item at 39 are important projections for Q4 23 for the whole fiscal year and then for 2024. So we have a 2023 EPS projection of above 60 to $1 80, and 2024 projection of a buck $80 to two bucks the only thing I could say to the investment community.
He is.
Have some patients the metrics are there we're going to be methodical about what we do here and we're not going to.
Really in danger of the manufacturing plant in the machine. This is a machine that is built for the long term to company. It's been around for 25 years. We survived the way <unk> survive the pandemic I remember measure very visually during the pandemic the stock getting started off at 18 19 at one point, we traded at 7% or $8 handle and boom.
But we're right back as a BDC, so I mean I.
I think for those of you that are sophisticated equity investors, we know that stocks move in various different ways. The market is getting to know us. They are getting used to us they're getting to understand the business model and Theres 51 page deck helps people get us there. So the next couple of slides.
40.
41.
Talks about our dividend our EPS for the calendar year.
Our balance sheet.
See on slide 42, total equity keeps growing we're obviously proud of that.
Forecasted balance sheet at the bank you can see the bank's equity continues to grow our regulators like that too.
Now, let's go to slide 44, so when we look at our future and we say Hey, this is a good spot that we're in our business model projects and performs high returns. Please understand we bought a 59 year old bank lacking current software policies and procedures digital capability and scale build capacity for deposits or loans. So we are doing.
On the run and we're meeting our expectations, we're meeting regulatory requirements and we were able to deliver good metrics to the market.
That wishing a new banking team, we are pleased to add real high quality people for the banking industry that are adopting what we do.
It's a well capitalized bank and bank holding company.
What occurred in 2023 was not the best thing for us with an inverted yield curve as well as a different cap difficult capital market for banks.
The existing book of business required, although we feel good about it.
Great credit problems.
There's not a lot of margin in it.
Our registration statement became effective late July so really we were kind of.
Locked into not being able to raise equity or debt capital pretty much until August and then when that window opened up we were able to hit the market for that where good we'll be able to use that capital in the market.
Important to note the new Tech advantage development, which we talked about is going to be very beneficial, particularly to the reoccurring income and low capital utilization of payments payroll insurance and other entities. We're excited about rebuilding our nonconforming loan growth, which will be able to build that portfolio up we think we'll have a good fourth quarter.
Order of about $60 million of loan fundings.
So 2020 for an important year for the creation of commercial business core deposit transactional accounts, which will increase our net interest margin and lower cost of funds continue to add higher margin SBA loans, which was at 20 Years' worth of experience and we continue to add plenty of reserves to be able to cushion us again.
<unk> that we have going forward about credit deterioration we're.
We're excited about the new take advantage, becoming the gold standard in banking, which we think is going to generate activity and it's a technology that is a non balance sheet type item that can be very beneficial to shareholders down. The road. We do plan on announcing new significant bank Howard of hires that are already built into our earnings forecast.
I think it's important that we plowed through the difficult hurdles.
Getting the applications approved getting through our original audits.
Being able to take deposits, which I can't tell you how many times people say how are you going to take the products that youre going to take to Bob as well look we figured it out we're able to take deposits how are you going to move.
The PLP with the SBA well, we got that done too. So we're we're moving in the right place. We're really pleased about it slide number 45 is somewhat repetitive of what we said today.
And I wanted to try to get through this as quickly as possible and open this up to Q&A.
Alright, as a reminder to ask a question. Please 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 stand by we'll be compile the Q&A roster.
For your first question comes from the line of Christopher Nolan from Ladenburg Thalmann. Christopher Your line is open. Please ask your question.
Barry Thank you for the.
Detail couple a real basic question just looking forward for the nonconforming C&I what is the average loan amount that you guys are contemplating within soon.
Yes, it's a good question and probably should have added in the future.
Our average loan amount is currently about $4 million, we go up to $15 million and we go as low as $5 million.
So we get enough diversification to put into a rated structure. Our first structure, which is a model that index and the <unk> single a rating and we look to achieve that or better going forward in the first quarter on the next securitization, but but but Chris I think it's important to note.
We will do well over I think 2000 units this year in lending to do $1 billion worth of large with a $4 million average.
Hey, just another 200 units easy for me to say, but it's not out of reach and we believe that the demand is there for the product because it's a long term, it's a long term amortizing loan with personal guarantees.
And our customers like the flexibility and they're willing to pay the higher rate for that flexibility that we get.
Got it and then in the quarter were there any nonperforming loans that didn't see it in the deck.
Were there any nonperforming loans in the nonconforming area or just in general in general please.
Yes, so I might ask Scott to help me with that or Nick Ledger.
Hey, Nick.
Yes, yes, okay.
Got it.
I apologize I left your piece.
So after Chris will go through your presentation quickly but.
On the.
Could you talk about at NSP, App, which is the legacy.
There were no nonperforming loans.
On the 700 portfolio in the bank there was only one nonperforming loan from the legacy 708 portfolio.
Are there any other nonperforming loans.
Let me go to the nonperforming loans up at NSP App, let's go that sequentially, how does that how does that added out numbers move nonperforming loans.
23, Q2 to Q3 for NSP M. Sure. So as a reminder, loans that Sps are on fair value for the historical portfolio that was previously at the BDC.
So as of Q3 2023.
In the portfolio that Youll see thats held for investment at fair value on the balance sheet, there was $70 million of non accruals.
A cost basis, which we do a DCF fair value Mark on those loans. So on a fair value basis, those are at $38 million.
$32 million valuation adjustment against those so price approximately 54 cents on the dollar on a prior quarter June 32023 on a cost basis was $66 6 million so quarter over quarter, an increase of about $3 5 million at a cost basis and the price on a fair value.
<unk> was pretty flat quarter over quarter.
Great. Thanks, Nick Thanks, and then I guess final question.
I just wanted to ask Scott Scott were there any other non performers in the bank that I missed.
Barry There were I think the one that we disclosed we're actively working there is there were two others. They are well secured and in the process of collection. It's important to note that on those loans.
I did not require any incremental reserves.
Thank you Becky.
And then I guess my final question will be.
Youre growing reserves as the focus is there.
How should we look at the reserve ratio for 2024.
Well I think.
In the bank, we have a seasonal reserve of about six and three quarter percent.
Against the uninsured portion of those loans.
And.
Scott maybe you could address the reserve on the rest of the portfolio.
Yes.
Yes, if you think about the.
Our reserve methodology, Chris we've got.
About a six 665 to 675 reserve ratio on <unk>.
As we.
Increase our <unk>.
Concentration quote unquote.
Percentage of Salon portfolio.
That reserve percentage is going to continue to increase so we were at I think 2.9 and change.
Somewhere around there.
For the end of the quarter and I expect that to naturally gravitate higher the portfolio that we acquired from EMEA NYSE as Barry alluded earlier in his remarks was very clean and so from a seasonal perspective.
That <unk>.
<unk> to loans ratio was about 1.25%.
So as the 700 portfolio increases I expect the allowance to loans ratio to continue to increase.
As the 780.
700 portfolio becomes a larger portion of the overall loan portfolio.
Is that a contributor to the lower 2024 EPS guidance.
No we did not change our reserve or loss metrics for 2024, I think if you dig in to the 2020 for guidance.
We're trying to really invest measuredly and our back office, so that we can create.
Stable sticky deposit relationships with our business customers.
They come in the form of money market accounts four hour.
Our business checking accounts and in order to be able to manage those products, we have to have the right infrastructure.
For compliance reasons so.
That's one aspect of it.
A lot of we're not an easy.
Puzzled to figure out a times with all the different products.
And all the different accounting methods that we have but.
That was one of the drivers, but I would say that the loss content on the portfolio has not has not changed year over year.
Great. That's it for me thank you very much.
Thanks, Chris.
One moment for our next question.
And for our next question comes from the line of Michael Perito from <unk>. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Mike.
I wanted to just follow up on that last question just about the EPS guide.
And I apologize if I missed this but can you maybe share a bit about what macro kind of assumptions you guys are using around rates and credit just in that forecast.
I think that.
From a credit perspective.
I believe we are.
<unk>.
Reserving for double.
What we've received for charge offs over the last five years, that's both from a seasonal perspective as well as.
Yeah.
The fair value of the NSP up portfolio for example, Mike.
<unk> portfolio, which is at the holding company is valued at fair value.
Believed Nick the market clearing yield was eight five for the third quarter.
Net.
A 19% default rate.
And a 45% severity. So after those charge offs and that's a seasoned portfolio of 38 months of we think we are.
Hitting these assets very hard and.
And frankly, when you look at doing the loans in the bank.
From an upfront perspective is far less profitable using seasonal accounting and fair value because you've got that upfront hit upfront on the <unk>.
So I think we are very comfortable.
Doubling expectation of recent history to believe that will hold.
For rates.
Our rate forecast give or take.
Is up another 25% to 50 basis points and then flat.
Okay.
So just a couple of follow ups to that and thanks for that Barry So just to be clear the doubling it sounds like a conservative assumption around credit, but just.
Does that is that from a macro perspective, I mean is that just kind of a normalization of charge offs given.
The rate on these credits is now north of 11% and you just assume charge off activity the kind of drift higher normally or is there actual kind of macro credit deterioration assumption driving that and then secondly, just on the.
Right. So I mean, it would be fair for us to think that there could be some upside to guidance if rate cuts materialize because it sounds like you guys have a pretty higher for longer.
<unk> driving your 24 EPS guide at this point.
Yes, I think that.
Some of those numbers put it this way higher for longer we agree is not a good thing.
<unk>.
Is that a good thing for anybody and it's not particularly great for us either.
I think on the credit side.
One thing I will say Mike.
We've been doing this for 20 years, and we're getting better and better at it.
No.
I think we look at our history.
And I think that we have factored into a weakening economy not just in normal normalization of what we're doing okay.
So I feel very good about our <unk>.
Your position you look at our reserve position versus other lenders.
And I think you'll see that we've.
Got more reserves than they do I believe that's the case on the SBA stopped.
And unfortunately for rates, we do think that the short end.
I think they will be somewhat reluctant to drop rates in the near term and I wouldn't be surprised.
If we get another rate hike or two particularly given that the commodities keep pushing up particularly oil so it looks like yes, yes.
I tend to sorry go ahead, Scott sorry, I, just I just wanted to add on to the credit discussion and keep in mind that.
The portfolio at the bank is essentially a new portfolio. So there is a lead time to when we will start incurring charge offs on that portfolio we have to.
Can't take them before the loan because Pat.
So there's got to be a seasoning of the portfolio.
And.
That's just the nature of of migrating from a fair value approach that we had at <unk> two to the bank accounting and that were having to play a seasonal too.
Okay.
That's helpful guys. Thanks sentiment on that and then just on the nonconforming C&I loans I was wondering if you guys can help me out a little bit I feel like I'm not I don't have the full picture here I mean can you.
It seems like it's expensive to kind of fund and hold these loans at the Holdco like what does it make more sense from an efficiency standpoint, just to hold them at the bank sub and fund them with deposits and other wholesale borrowings I am just trying to understand kind of the dynamics of that I mean, because do the new slides you guys put in kind of obviously show some.
Some roe potential that that's significant but I'm just trying to figure out like why that's the most efficient way to fund.
<unk> this business and is it correct to assume I think you said this is Barry I just wanted to make sure I heard it right that the $40 million of proceeds give or take that is expected to really stay all at the Holdco to fund. These loans. So there's not really an expectation of dividend any of that down to the banks up which I Wouldnt think because you don't really need banks up capital I, just want to make sure I heard that right.
Yes. The last part you did hear that right, 100% for sure and I think the first part is there's always another participant at the table and Thats the regulators and.
When we set ourselves up to get our approval.
I think it was important for us to lay out.
What we wanted to do and as simple most vanilla manner that we can and.
We don't have the history in this area of lending that we've got in the SBA seven eight side. So this is something that might be doable down the road, but for now there's enough margin in it that it works up at the holding company its not the cost of capital that is going to drive this it's the availability of capital.
So is it is it correct for us to believe that for the foreseeable future here there might be.
Additional kind of debt needs at the Holdco to fund this depending on the environment right. I mean, if the economics remain attractive is it fair for us to assume that you would come back and raise more debt to fund. These loans if that was the situation a year year and a half whatever the timeline is from now.
Yes that would be that would be desirable, yes, and I think that we have revolvers that we paid down.
We're in a good cash position.
And one of the things I think you asked in the last call was the capital raise of equity that's out so theres no capital raise.
This calendar year for equity so we put it in because we didn't know whether it would be a debt market. Obviously, we're pleased that there is a debt market.
For us and.
We will continue to grow the business methodically yeah, no I mean, the 8% rate is actually like for the product. It was was I think pretty attractive on that just obviously it is still more expensive than anything incremental that you could fund with that the banks up but no I appreciate that.
Commentary and then so just my last question is you guys mentioned the loan size. The personal guarantees can you just give us a little bit more color kind of about what these loans are for these nonconforming C&I loans like what use case or I don't know how general it isn't if it's broad I apologize, but just any kind of examples but just would be helpful. As we think.
About that portfolio growing near term here.
Yes, this would be an owner operator.
That owns a business, it's a cash flowing business.
And they prefer fixed versus floating and they really want flexibility for utilization of proceeds.
And don't want to be told.
By the banking institution that they have loan covenants, they cant dividend certain amount of money.
They can't lever up they cant do an acquisition that they constantly have to go back and forth to the bank, we prefer and it's been our experience in the SBA space that we.
Take personal guarantees, we take personal and commercial assets.
For deposits excuse me for liens and that's put us in a secured position where we haven't had any charge offs at all for the.
Since.
We began the program in.
2019.
Okay, Alright, guys. Thank you for the color on the guidance and the macro and on the nonperforming loans I appreciate it.
<unk>.
Once again, if you'd like to ask a question. Please press star one one on your telephone keypad.
And for our next question comes from the line of Scott Silicon from Raymond James Scott. Your line is open. Please ask your question.
Hey, Barry Thanks.
Thanks to you and your team for taking my call.
A lot of my questions were sort of covered.
Okay.
Right.
I was wondering if you could sort of.
Speak a little bit more on <unk>.
Nonconforming products.
Can we sort of view this as a unique.
Kind of a special driver going forward.
Yes, I mean I think the.
<unk>.
This particular product is unique it fits our model of client acquisition. So we get.
Referrals a day.
And there are borrowers that one 7 million 8 million their borrowers that want fixed rate their borrowers that have used up their $5 million of SBA guarantee there are borrowers that only occupy 45% of the real estate instead of 50 and a fraction they can't get an SBA loan.
So then we're able to offer them this particular loan.
Credits.
We believe our stronger because the businesses do tend to be bigger.
Wherewithal of the personal guarantees, which I will tell you the capital markets does not understand the rating agencies don't understand them well.
We've been in this we've been in the business of lending with personal guarantees for 20 years, we use them.
We hold the borrowers speak to the buyer and we get their full attention on them. So.
We're able to charge a very healthy rate.
And you are in the current market is.
It's where we've got a nice pipeline, that's still building growing given that recent capital raise that capital raised.
Dan Malone could enable us to do $200 million somewhat of these of these particular allowance through through joint ventures.
That's terrific.
And yes, I think for me. Thank you guys have created very interesting new banking model.
<unk>.
I just wish you continued success.
Okay.
I appreciate it Scott Thank you.
Yeah.
One moment for our next question.
And for our next question comes from the line of price Raw from B Riley price. Your line is open. Please ask your question.
Thanks, Good morning, Hey, Barry.
Wanted to just ask about the.
The potential spin new Tech technology solutions.
Contemplated in it.
In your guidance for 'twenty for any any kind of kind of thought process thought process around.
Lie and possibly win I know you said by the end of <unk> 'twenty five but.
Any more clarity on that would be helpful. Thanks sure.
Sure.
We like the business a lot.
And right now although.
Different things can occur I think it's our intention to offer that as a dividend to shareholders now I would say that.
I hope to do a tax free.
So therefore, the effects of the business on a consolidated basis will flow through.
The full calendar year of 2024, and anything else probably will be a 2025 of them.
Okay. Okay.
Appreciate that and I think all my other questions were asked and answered. Thank you.
Thank you.
Alright, so presenters there are no further questions at this time I would now like to turn the conference back to CEO, Barry Sloane for closing remarks.
Certainly appreciate everybody attending today with a very poor coal and.
We'll continue to keep our head down plow forward and deliver the results that you would expect from US. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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