Q2 2024 NewtekOne Inc Earnings Call
Good day and thank you for standing by.
Operator: Order 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-one-one on your telephone, and you will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Barry Sloane, CEO and President. Barry?
Speaker Change: Welcome to the NewTekOne, Inc. 2nd Quarter 2024 Earnings Call.
Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-1-1 on your telephone, and you will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 11 again.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Barry Sloane, CEO and President. Barry? Barry? Barry? Barry? Barry?
Barry Sloane: Thank you, Operator, and thanks, everybody, for attending our Q1 Second Quarter 2024 Financial Results Conference Call. Joining me today is Scott Price, the Chief Financial Officer at NewTek One and NewTek Bank National Association. Also joining me is Nick Young, President and Chief Operating Officer of NewTek Bank.
Barry Sloane: Thank you, operator, and thanks, everybody, for attending our Q1 Second Quarter 2024 Financial Results Conference Call.
Speaker Change: Joining me today is Scott Price, the Chief Financial Officer at Newtek One and Newtek Bank National Association. Also attending is Nick Young, President and Chief Operating Officer of Newtek Bank.
Barry Sloane: For those who'd like to follow along to our call today, please go to our website, newtekone.com, go to the Investor Relations section under Presentations, and our PowerPoint presentation is on there today. I'd like you to draw your attention to slide number one, which is a note regarding forward-looking statements. On slide number two, today we'll be talking about significant events that occurred in Q2 2024.
Speaker Change: For those of you who would like to follow along to our call today, please go to our website, newtekone.com, go to the Investor Relations section under Presentations, and our PowerPoint presentation is on there today.
Speaker Change: I'd like you to draw your attention to slide number one on a note regarding forward-looking statements.
Speaker Change: On slide number two, today we'll be talking about significant events that occurred in Q2 2024.
Barry Sloane: We announced last night at the close of the market second quarter 2024 earnings of 43 cents per share, earnings per share basic and diluted. It is important to note that according to Bloomberg, which had a consensus of our analysts at 40 and a half cents, that was a nice beat for us. With a revenue estimate on Bloomberg of $60.6 million, I think we were about at that number. The second bullet is reconfirming 2024 full EPS guidance of $1.85 to $2.05 for basic and diluted.
Speaker Change: We announced last night at the close of the market second quarter 2024 earnings of 43 cents
Speaker Change: or HPSHARE BASIC.
Speaker Change: and Diluted Comet.
Speaker Change: It's important to note that according to Bloomberg, which had a consensus of our analysts at 40.5 cents, that was a nice beat for us. With a revenue estimate on Bloomberg of $60.6 million, I think we were about at that number.
Speaker Change: Second bullet is reconfirming 2024 full EPS guidance of above 85 to 205 for basic and diluted.
Barry Sloane: Given the events of the last few trading days, Thursday, Friday, and Monday, we are very comfortable with the range and would love to get a little bit more clarity on what's going to happen in the world before we make any adjustments to that.
Speaker Change: We are very comfortable with the range and would love to get a little bit more clarity on what's going to happen in the world before we make any adjustments to that. Important to note, quarterly deposit growth.
Barry Sloane: Important to note, quarterly deposit growth at the bank over the last quarter was approximately 17%. Second quarter sequential total loan growth over the last quarter was 13% at the bank. We find these numbers to be terrific, particularly given that the industry averages are about flat. Net interest margin was 4.83 for the three months ended June 30. Pretty flat quarter to quarter; we're comfortable with that.
Speaker Change: at the bank over the last quarter was approximately 17 percent. Second quarter sequential total loan growth over the last quarter, 13 percent at the bank.
Speaker Change: We find these numbers to be terrific, particularly given that the industry averages are about flat.
Barry Sloane: Many of you look at the net interest margin at the holding company. And I want to point out that the net interest margin at the holding company, which has the payment processor, the tech solutions, the payroll, the insurance agency, is somewhat watered down from a margin standpoint because those assets don't provide interest income. They provide the other ancillary income that skews our income in the business model to close to 65 to 70%.
Speaker Change: That interest margin 4.83 for the three months ended June 30th.
Speaker Change: Pretty flat quarter to quarter. We're comfortable with that.
Speaker Change: Many of you look at the net interest margin at the holding company, and I want to point out that the net interest margin at the holding company, the holding company, which has the payment processor, the tech solutions, the payroll, the insurance agency,
Speaker Change: is somewhat watered down from a margin standpoint because those assets don't provide interest income.
Barry Sloane: But I think when you look at the types of loans we put on the books versus the cost of funding, it is extremely attractive. I would also point out that the institutional funding of securitizations of the SBA 7A loans from the non-bank lender and NSBF is also a much higher cost of financing, and losses that are expected because of the high coupon, the gain on sale, and the business model. We're still able to deliver a right bottom line.
Speaker Change: They provide the other ancillary income that skews our income in the business model to close to 65 to 70 percent.
Speaker Change: I think when you look at the types of loans we put on the books versus the cost of funding, it is extremely attractive. I would also point out that the institutional funding of securitizations
Speaker Change: of the SBA 7A launch from the non-bank lender and NSBF is also a much higher cost of financing.
Speaker Change: The weighted average is probably SOFR plus.
Speaker Change: Unknown Speaker 2.50 to get you close to 8 versus where we are in the bank. So you can see that on a going forward basis, as our cost of funding will shift from that higher cost securitization on the old 7a portfolio into the bank, these margins will probably improve.
Speaker Change: Also important to note that we had approximately 470 basis points of loan loss reserve coverage of June 30, 2024 in the bank. At the holding company, we use fair value and estimate the losses over the course of time. 470 basis points, as many of you are aware.
Speaker Change: A small business borrower typically has seasonal characteristics with respect to the seasonality of the loan. So we'll talk a little bit about that in the call today.
Speaker Change: that we can continue to put loans on and fund ourselves the bank with higher margins, higher yielding assets.
Speaker Change: [inaudible]
Speaker Change: We continue to demonstrate that the Newtek Bank, without branches, bankers, brokers, and BDOs,
Speaker Change: Last but not least, we completed a registered public offering of $71 million of 8.5% fixed-rate notes. Obviously, that's not a low coupon, but when you generate the types of returns that we can, this cost of capital is more than adequate to finance growing earnings.
Speaker Change: and the support of our revenue model going forward.
Speaker Change: on slide number three.
Speaker Change: focusing on NewTek Bank Summary Financial Highlights.
Speaker Change: for the second quarter and previous quarters.
Speaker Change: Please observe the trends. ROAA 6.4% for the quarter. These are solid numbers. These are not numbers you see.
Speaker Change: and 95% of the other banking institutions. ROTCE for the quarter, 48.8%. Efficiency ratio declining to 42.3. We're very pleased with the performance of the second quarter.
Speaker Change: Yes, you can have growth in a financial institution that owns a depository. So we had loan growth.
Speaker Change: Ending quarter, over quarter, 14%, deposit growth, 17%, and look at the capital ratios. And once again, we're on slide number three. These are extremely healthy.
Speaker Change: So it's important to note, in many cases, these are twice the capital ratios it should be at a bank. Very well capitalized, you know, basically impacted by
Speaker Change: strong chance balances as well. And we're also pleased to note that the reserve coverage more than adequate for what we anticipate going forward at the bank from CECOL and at the holding company through NSBF through Fair Value.
Speaker Change: Slide number four, we talk about the financial summary for the holdco. Obviously, we talked about the ROAA, the ROTC, still north of 20%. Once again, you kind of get
Speaker Change: Unknown Speaker Some muted results because of the income is not from net interest income, which is why your net interest margin is 2.71 versus at the bank a much higher number with a four handle on it. Also note the capital ratios at the holding company.
Speaker Change: CT1, total capital leverage 18.7, 21.9, 14%.
Speaker Change: So at the bottom of slide four, we talk about our earnings.
Speaker Change: We're very pleased with the fact that we have 43 cents for the second quarter of 2024, year-over-year, up from 27 cents in the second quarter of 2023, and a sequential increase of 5 cents quarter-over-quarter.
Speaker Change: Slide number five, we try to talk about commonly asked questions of Newtek One.
Speaker Change: Obviously, we do speak to investors regularly. We recently attended two investor conferences, B. Riley and KBW. We also had an analyst day conference. I would tell you that the questions we get are very typical.
Speaker Change: regarding banks and bank holding companies. They talk about deposits. They talk about the concern over interest rates and the concern over loss coverage.
Speaker Change: You know, it still is a little bit of a head scratcher. There's another part to this organization, and that's how we make money. And we really have outstretched.
Speaker Change: business model that generates great returns. It's very well balanced across the board. Our business model provides for an outsized amount of non-interest income versus traditional bank net interest income. I think it's important to note that the fears in the business about credit and interest rates
Speaker Change: every single day, every single week, every single month, every single quarter.
Speaker Change: In a non-traditional way, the industry has not looked highly upon gains on sale. Well, we've had gains on sale for 20 years. And frankly,
Speaker Change: We're pleased to once again report that we really had some nice traction in lower cost business deposits. We talked about a 17% gain there. We bumped our SBA fundings for 2024 to under $35 million.
Speaker Change: Importantly, for a mission statement, our business model.
Speaker Change: It's all about making our clients more successful. That is key. If we cannot make our clients more successful, my view of it is we're not supposed to be in business.
Speaker Change: So, we bought the bank.
Speaker Change: because that gets eyeballs to the institution on a regular basis for deposits, transactional capability. We'll talk about the NewTek Advantage Business Portal.
Speaker Change: We just think we are strategically positioning Newtek One as a growth company and we're seeking to acquire a growth multiple on earnings, which we think we're earning every single quarter by demonstrating that even with
Speaker Change: Current cost of deposits higher than a typical bank.
Speaker Change: and losses that are expected because of the high coupon, the gain on sale, and the business model, we're still able to deliver a right bottom line.
Speaker Change: We completed a securitization.
Speaker Change: We did one a while ago in 2022, obviously, you know, the banking crisis kind of slowed it down a little bit, but we're back up and you'll see that our pipeline is full and robust, and we're ready to go. When you look at the alternative loan program,
Speaker Change: We get hundreds of business loan referrals every day. Approximately 80,000 paying customers, 3 million referrals in the database.
Barry Sloane: These are all business clients. They're independent business owners. That one loan that has a low monthly payment. How do they get that low monthly payment? really just like restricting the bank cover, and this is the second. We finance these securitizations through joint ventures, giving us an additional source of capital with leverage coins and a securitization facility. I'd like to thank Capital One and Deutsche Bank for helping us with the securitization and helping make this new program work for us and our borrowers.
Speaker Change: These are all business clients, they're independent business owners that want a loan that has a low monthly payment. How do they get that low monthly payment?
Speaker Change: Well, this is something that we learned from the SBA business by being in 20 years. No balloons, 10 to 25-year AMs, gives them the low payment. Also, they, um...
Speaker Change: Really Dislike Restricted Bank Covenants.
Speaker Change: They don't want to be told.
Speaker Change: Will we trade that off with a personal guarantee?
Speaker Change: and leans on old business assets as well as leans on personal assets if need be to beat the credit up.
Speaker Change: and from a cross-section of the market, from a demand standpoint, there are many...
Speaker Change: 11 institutional investors piled into the single A class, three into the triple B plus class with an 81% advance rate.
Speaker Change: Conversation, like, where's the demand?
Speaker Change: We financed these securitizations through joint ventures, gives us an additional source of capital with leverage coins and a securitization facility. I'd like to thank Capital One and Deutsche Bank for helping us do the securitization and help make this new program work for us and our borrowers.
Barry Sloane: When you look at the loan metrics, we originate these loans for approximately three to three and a half points. Very conservatively, the origination expense I'm putting in there is two, at an 80% advance rate to an investment grade. Slide number 10, second quarter financial highlights. We've talked about most of the things that are on this particular slide. The most important thing I want to emphasize is growth.
Speaker Change: When you look at the loan metrics, we originate these loans for approximately three to three and a half points. Very conservatively, the origination expense I'm putting in there is two points.
Speaker Change: but it's typically not quite that high. The AMS schedule I talked about, 20 to 25 years and no balloons.
Speaker Change: Loans are originated at the original floor and initial rate.
Speaker Change: On a weighted average, let's say it's about $8.50 for the five-year.
Speaker Change: We service for 100 basis points by the bank.
Speaker Change: The prepayment penalties in the loans, 5553, that's important because you've got a servicing asset that's not going to prepay early and you get that spread income over time.
Speaker Change: I think it's important to note that these securitizations are funded by joint ventures. They represent equity interests up at the holding company, and they're very high yielding.
Speaker Change: So this is a fairly rudimentary way for all of you to calculate yields. You can feel free to take your Excel spreadsheets and figure out what the returns are yourself. But looking at this last transaction.
Speaker Change: at 80% advance rate to an investment grade means that
Speaker Change: 80% of the spread income had no equity against it.
Speaker Change: and looking at the collateral yield of a net 11.7 against the gross 12.7, that's the servicing, that goes to Newtek, that's other income.
Speaker Change: to the yield on the bonds of 6.7%, 500 basis points.
Speaker Change: Multiply that times 4 equals 20. The equity 11.7. There's your gross that does not count for net charge-offs over the course of time and we are fairly adamant.
Speaker Change: These are materially better credits than the 7A business, so we gauge it against the severity and frequency, which we historically use it at an 8% historical charge-off.
Speaker Change: These are stronger guarantors. These are larger businesses with greater liquidity. These borrowers typically would not meet the Credit Elsewhere test under 7a. And in some cases, they have loan needs greater than the $5 million limit on 7a. So we put them in that particular bucket.
Speaker Change: We also do loans below $5 million for borrowers that want, maybe they've used up their $5 million guarantee for 7A, or they want a fixed rate, or a variety of other reasons. Maybe they don't occupy greater than 50% of the real estate. These would go into the ALP program.
Speaker Change: Moving on to slide number eight, we talked about.
Speaker Change: The second important catalyst or accelerator for the business.
Speaker Change: So ALP being one.
Speaker Change: deposit growth being the other obviously most of you are very familiar with our 7a business that's been going on for 20 years and it just keeps on keeps on going it's a little engine that can
Speaker Change: and the growth and deposits. We talked about total growth.
Speaker Change: Newtek is about 17%, the POS Growth Business Account, also about 17%. Important to note, Newtek, because of its ability to earn differently than the average bank that has very low margins,
Speaker Change: 0 default, 0 charge of assets, we are able to more generously
Speaker Change: provide depository services for our clients. Business clients and consumers dislike undisclosed fees. I challenge anybody to go online and try to find a true zero fee based account. For example,
Speaker Change: If you take a look at Chime, they talk about zero fees, but it's on a consumer savings account where you can't use the money, or can't really use it for high levels of transactions. In the fine print, they require you to have a business account that does have the fees.
Speaker Change: and many other accounts require minimum balances or they have these hidden fees somewhere. We'll be rolling out our zero fee
Speaker Change: Bank Program.
Speaker Change: with a deposit calculator to show the customers how much they're going to be saving with lower expenses, with no fees, and being able to pay them 3.5% on deposit commercial money market and 1% on checking.
Speaker Change: We've so far, I believe we've brought in about close to
Speaker Change: 1,300 to 1,700 new business banking accounts at the bank.
Speaker Change: That's good growth for us.
Speaker Change: We'll talk about our opening of our Wilmington office that will give us a lot more bandwidth in that particular area. Slide number nine, Loan Pipeline Growth. We're very pleased with the
Speaker Change: The opportunity to do a lot of loans in the second half of the year. I won't go into the math. It's fairly self-explanatory. We've also put the amount of loans that we've originated year-to-date on the bottom of slide number nine.
Speaker Change: Also important to note, we have had an origination underperformance in 504, conforming C&I and CRE.
Speaker Change: We look to correct that in the second half of the year. It's important for us to have a balanced portfolio by putting the conforming C&I and conforming C&A, and that's your basic boring bank loans with covenants that have lower margins on them.
Speaker Change: They'll balance the portfolio, give us diversification in the bank.
Speaker Change: that that will in turn.
Speaker Change: Produce the Cecil Reserve on those types of loans, so our reserves will start to come down.
Speaker Change: We look at about three and a half plus or minus as the normal CESA reserve just to be in balance. So when that starts coming down, don't freak out. Those reserves are there to be utilized.
Speaker Change: and there are smaller reserves on higher credit worthy, lower margin conforming CRE and C&I loans.
Speaker Change: Slide number 10, second quarter financial highlights. We've talked about most of the things that are on this particular slide. The most important thing I want to impress is growth. Q2 2023 EPS.
Speaker Change: just significantly lower. I think it was $0.27 to $0.43. I believe we take out the tax effect for 2023 EPS. We're somewhere about $1.03, $1.07.
Speaker Change: This year our midpoint is $1.95. I mean, this is a growth business and a growth vehicle that bought a bank on January 6th of 2023, hit the ground running, immediately made profits, and is on a ramp.
Speaker Change: Slide number 11, these are the six-month highlights. We talked about that and it was a major tax effect in Q1. There was a tax effect in Q4. I think the important aspect here, he's got 81 cents for six months.
Speaker Change: for 2024 and 44 when you take out that tax benefit in Q1. So you can see there is growth and we think this is being missed by the market.
Speaker Change: I'd like to now go to Scott Price for slide number 12.
Barry Sloane: Turning to slide 12, our net interest margin contracted 12 basis points during the quarter, driven by increased leverage and a higher cash balance.
Scott Price: Thanks Barry. Good morning everyone. Turning to slide 12, our net interest margin contracted 12 basis points during the quarter, driven by increased leverage and higher cash balances.
Scott Price: We raised over $70 million in our bond offering at the end of May and paid down warehouse lines of credit.
Speaker Change: We were left with about $20 million of excess cash, which we deployed into accounts earning approximately 5%. We successfully retired our bond issuance that matured on August 1st.
Speaker Change: Turning to slide 13, at the bank, we experienced deposit growth from our business customers of about $20 million during the quarter.
Speaker Change: which have a much lower cost than our retail products. Our CD campaign brought in over $79 million, mostly in six-month paper, which we'll reprice in the fourth quarter.
Speaker Change: We expect about $70 million of CDs to reprice in the third quarter, or mature, and have about $100 million.
Speaker Change: to reprice in the fourth quarter.
Speaker Change: These funds have a weighted average cost of around 5% and will provide a cost savings opportunity.
Speaker Change: going forward.
Speaker Change: Given these factors and the market turmoil over the last few days, we're monitoring the bond market.
Speaker Change: We keep a close eye on the pricing of our competitors.
Speaker Change: As far as deposits going forward, it's included in our forecast and I'll cover that in a few slides. So I'll turn the call back over to Barry.
Barry Sloane: Thank you, Scott. Slide 14, the Newtek Advantage, our proprietary business portal for its clients.
Barry Sloane: Newtek Advantage is a patent pending which provides Newtek's clients with analytics, relationships, transactional capability other financial institutions do not. We believe that on a going forward basis.
Speaker Change: Our industry must do other things for the customer than just take their money.
Speaker Change: Unknown Speaker Maybe take them out to lunch or dinner for the relationship and hope they get along. I say that because it's way too easy to move your money on a phone.
Speaker Change: Unknown Speaker Very easy to do so, and people are not going to keep, I say people of business community, they're just not going to just leave those balances in there, because the people are nice, you're going to have to give.
Speaker Change: that customer value. Things like free unlimited document storage, free real-time updated web traffic analytics.
Speaker Change: Free real-time credit card processing and chargeback data right in the business portal.
Speaker Change: The ability to make payroll in the business portal.
Speaker Change: So we'll talk more about the Advantage in future slides.
Speaker Change: It is a great tool.
Speaker Change: Our clients enjoy it and it's working well and we continue to update it.
Speaker Change: and make it more valuable where it becomes the business portal for its clients and we will look to in the future.
Speaker Change: White label it for other financial institutions.
Speaker Change: Slide number 15, Credit Risk Management.
Speaker Change: Company that went public in September of 2000, founded in 1998. We do know how to manage credit. We are familiar with these credits. We've been through the ups and downs.
Speaker Change: When you look at the bank and you look at small business finance, there's two different ways of dealing with the losses. Small business finance is fair value. So, important to note.
Speaker Change: Fair Value Adjustment.
Speaker Change: which, in other words, would be a charge off for the quarter from Q1 2024 to Q2 2024, call it approximately $5 million charge off.
Speaker Change: So we have the charge-off. Most importantly, we made the number. We can absorb it. The business can absorb higher charge-off. The other thing I want to point out is, if you go across the whole slide,
Speaker Change: and it was 31.7 million to 38, but that's over 1, 2, 3, 4, 5 quarters, okay? There is your fair value adjustment.
Speaker Change: Now to go to fair value.
Speaker Change: People go, oh, 46 million, that's a lot. Well, here's the good news. It's already been written off of earnings. It's already been written off the balance sheet, and guess what? Those loans will be liquidated for cash.
Speaker Change: and that will go right into the holding company, and that's just less dollars that we need for things like stock buybacks, dividends, reducing our debt load, etc., etc.
Speaker Change: The other thing I want to point out is, at the NSBF,
Speaker Change: We've got a performing loan portfolio with 11 and a quarter coupons.
Speaker Change: Those higher coupons partially absorbs charge-offs you're going to see. And we are looking at the sweet spot of the default curve on that elbow portfolio, particularly with 21, 22, and 23 cohort years. Now let's move down to the bank.
Speaker Change: The bank had non-accrual loans of $13.5 million. Everyone's hair is going to be on fire. Oh my God, I went from $8 million.
Speaker Change: We sold most of that is from the National Bank of New York City portfolio.
Speaker Change: We sold $3 million, not in Q2, but in Q3. Okay, so that number is probably a little bit over $10 million.
Speaker Change: Well, obviously, I don't know what's going to happen in the third quarter yet, but that number is knocked down. I would say
Speaker Change: There should not be any material change in the charge off number in 2-3 from that loan sale. Those are all National Bank of New York City. I think the majority of those loans are loans that we acquired and acquired them through purchase accounting.
Speaker Change: As you can see, where our charge-offs are, also important to note, the allowance for credit losses is $21 million and 4.7%. Also, it's important to look at...
Speaker Change: the past dues, so we went from $12 million to $7.4 million. All these things cycle through. So, you know, the bullpen has now been reduced for charge-offs there as well.
Barry Sloane: to slide 16. We talked about the 470 basis points of the CECL reserve at the bank, and we talked about adding more conforming C&I and C&E loans, which will reduce that reserve. Once again, it is important to note that we're very comfortable with our projections, which assume our knowledge of the 20-year history. I hate to disappoint everybody, but if you've got a slide rule, or you're looking for a straight line, it's tough for us.
Speaker Change: Let's go to slide number 16.
Speaker Change: We talked about the 470 basis points of the CESA reserve at the bank, talked about adding more conforming C&I and C&E laws which will reduce that reserve. Once again, important to note that we're very comfortable with our projections.
Speaker Change: These projections assume our knowledge of the 20-year history. I hate to disappoint everybody, but if you've got a slide rule or you're looking for a straight line...
Barry Sloane: It's just a fact of life. However, over the course of 20 years, it's a company that's been able to grow its business, develop its business line, and, we think, develop the real model going forward for the industry without bankers, brokers, BDOs, or branches.
Speaker Change: It's tough with us. It's just a fact of life. However, over the course of 20 years, it's a company that's been able to grow its business, develop its business line, and we think develop the real model going forward for the industry without bankers, brokers, BDOs, or branches.
Speaker Change: Slide number 17 talks about our merchant business. We tend to forget about our great merchant solutions business. It's forecast to do about $16 million of EBITDA with $16 million of pre-tax.
Speaker Change: Thank you.
Speaker Change: No interest income there. It's all reoccurring revenue. We've been in that business since 2022. Slide number 18, diversification of earnings.
Speaker Change: At the bank, we look going forward to get the benefit from additionally lower cost of business accounts. That's a growth area for us. Two, continued growth in SBA lending. I hate to say it, I don't take it for granted. Double digit growth in SBA lending when the industry is flat to down, not a small feat.
Speaker Change: and we appreciate what our team does in the bank.
Speaker Change: We are going to diversify the bank assets with lower margin, lower charge-off, conforming bank loans. We're going to continue to automate the Newtek Advantage and the way that we take in merchant accounts, payroll accounts, and convert them over to banking accounts.
Speaker Change: The Alternative Loan Program business, very attractive.
Speaker Change: We've been able to demonstrate it with a full cycle to this new investor group that's getting to know us.
Speaker Change: It provides gain-on-sales, it provides net interest income while the loans are sitting in the warehouse.
Speaker Change: and Servicing Income. Once the loans go into a joint venture and securitized,
Speaker Change: You don't get the gross interest income. It comes out through the value of the residual or the spread income while it's in the warehouse line to be pushed into a j-venture or securization.
Speaker Change: Obviously, to round things out, we've got our payment processing merchant business.
Speaker Change: We have our Newtek technology solutions divestiture, which is a requirement of our application with the Federal Reserve. We expect to have an update shortly on that.
Speaker Change: Also, insurance and payroll solutions, non-bank subsidiaries, really a growth engine.
Speaker Change: We will be rolling out in the near future same-day payroll. We're able to do this because you have a payroll business.
Speaker Change: Unknown Speaker But as the affiliation with the bank, because we can do that, we could actually have the business put the money in the account on Monday and pay the employees on Monday. That's a big deal. That's why we do this. Same thing for payment processing.
Speaker Change: to give the merchant same-day funding. Insurance agency, provide our client validation.
Speaker Change: that the current policies that they have, whether personal or business, have the right premium, the right coverage, at the right price.
Speaker Change: We also look forward to rolling out our Newtek library, which will be an educational tool inside of Newtek to educate all our team on our banking products, our lending products, our payment products, and have videos that go out to our client base.
Speaker Change: Stay tuned.
Speaker Change: Slide number 19, important ads.
Speaker Change: Newtek hired Jennifer Merritt on November 23 as Chief Operating Officer of the Digital Bank.
Speaker Change: We opened up our Wilmington, North Carolina office in July of 2024. We've hired approximately 25 professionals to service commercial banking accounts. This is a business that we've had to not open up the floodgates.
Speaker Change: because we want to make sure we've got the team in place, okay. It's very, very important. And since January 6, we've opened service and managed over 8,000 distinct banking accounts. Very impressive.
Scott Price: Sure, Barry. Thank you. Slide 20 outlines our updated guidance for the remainder of 2024. We've updated our origination volumes and adjusted our guidance for the next two quarters based on performance from our payments and other non-bank businesses. I would point out that we completed our ALP securitization in late July, which does factor into the guidance we've issued, and we do expect it to have a positive impact given the success that we had there for the third quarter. We have built in expectations of higher expenses in the second half of the year as our investments in our infrastructure to support our business deposit accounts continue.
Speaker Change: Scott, would you like to handle number 20?
Scott Price: Sure, Barry. Thank you. Slide 20 outlines our updated guidance for the remainder of 2024. We've updated our origination volumes and adjusted our guidance for the next two quarters.
Scott Price: We have assumed a quarter point rate cut for 24. We expect 11% premiums on SBA 7A loans for the next two quarters.
Speaker Change: We did trim our loan production expectations for the rest of the year, but important to note, we are reaffirming our $1.85205 EPS for the year.
Speaker Change: As Barry alluded to earlier, there are a lot of moving pieces to our results that include loan production, gains and losses on sales of loans, and the related margins, and also include performance from our payments and other non-bank businesses.
Barry Sloane: I would point out that we completed our ALP securitization in late July , which does factor into the guidance we've issued.
Speaker Change: And we do expect to have a positive impact given the success that we had there for the third quarter. We have built-in expectations of higher expenses in the second half of the year as our investments in our infrastructure to support our business deposit accounts continue.
Speaker Change: And if I could, while I've got the mic, I will hit the quarter over quarter performance, which appears on slide 28.
Speaker Change: Ultimately net interest income was slightly higher on increased liquidity and leverage. The provision for loan losses was up.
Speaker Change: $1.8 million versus the prior quarter, which included some charge-offs, but also largely was attributable to the increase in the percentage of 7A loans at the bank.
Speaker Change: If we shift to non-interest income, our net gains on sales of loans were up on higher volumes of loans sold. And important to note, our electronics payment, electronic payments processing business came in with higher revenue due to the acquisition of a customer with multiple loans.
Speaker Change: Expenses were down versus prior quarter with multiple positives and negatives, the most notable of which was higher professional services expenses in the first quarter related to our annual audit, which contributed to the large decrease in that line item, mainly around $2 million.
Speaker Change: We did experience higher payment processing expenses in light of our newly acquired customers, but important to note we have included these trends into the remainder of the year forecast. Barry, I'll turn it back to you.
Barry Sloane: Thank you. Slide number 22. Obviously, looking at 2023, it's important that we still look back a little bit.
Speaker Change: I'm very pleased with the management team, the accounting team, the legal team, the entire staff of Newtek that really had a lot of headwinds in growing a business, and I think that we tend not to understand that appreciation.
Speaker Change: The National Bank of New York City was a very clean but 61-year-old bank that had virtually no digital transactional deposit acquisition capability.
Speaker Change: I use the term purchase loans from brokers, you can use the term originated as well, but basically the broker gave the bank the loan, if it met the credit it worked, that was the way for generating assets and it worked well for the bank.
Speaker Change: for giving what the bank's strategy was.
Speaker Change: We overcame operational and software changes in establishing our business model and strategy, which, listening to this call, you realize it is entirely different.
Speaker Change: We launched the Newtek Advantage. We took deposits in digitally without branches.
Speaker Change: We made major enhancements to the accounting staff and regulatory compliance, changing from a business development corporation into a 1933 Act company, huge undertaking. All of those quote unquote old portfolio companies.
Speaker Change: Now has to comply with SOX, consolidation, the amount of automation for
Speaker Change: The business and data migration, just enormous.
Speaker Change: and that was done while we made money in 2023. So in 2024, we're continuing to build up the Newtek advantage to continue to make it the best business portal in the market today. We're beginning to demonstrate now that we've got management and staff in place that we could gather business supplies and show the customer.
Speaker Change: that we can do more for them than just take their money and maybe take them out to lunch. Most of them really don't want to go out to lunch today anyway.
Speaker Change: We're expanding our ability to look at payment processing as money movement. What do I mean by that? Businesses today, it's more than just giving a business the ability to take Visa, Massachusetts, Discover, American Express. The business wants to go to one portal.
Unknown Speaker: have everything migrated into their accounting GL like QuickBook.
Speaker Change: have everything get migrated into their accounting GL like a QuickBooks. The business today wants to see, in one view,
Speaker Change: The bills they pay, the money that came in through invoicing, what happened with ACH, FED, CARD, look at the analytics, look at the chargebacks, refunds, that given day, all in one portal, and look how much money they've got in the bank.
Speaker Change: Newtek Advantage.
Speaker Change: We are migrating to NetSuite, a new financial reporting platform. We are hopeful that will finalize itself in 2024. And I think that clearly further expansion and enhancement of continued regulatory compliance. You'll see in the
Speaker Change: In the appendix, we talked about all the new management hires we've made, and we continue to have some in the bullpen.
Speaker Change: Slide number 23, Growing Investor Interest, just attended the KBW Conference, the O'Reilly Conference will be going to Raymond James and Piper Conferences in the near future. We hosted an analyst presentation, which you can find on our corporate website.
Speaker Change: We continue to educate and familiarize ourselves with the investment community.
Speaker Change: and the analyst. This is not an easy company to follow. I'm sure I got a few smiles on the other.
Speaker Change: End of this call today. We appreciate the work that you've done in helping the market analyze us in a non-traditional of quality financial institutions model. We refer to ourselves as a company that provides business and financial solutions to independent business owners.
Speaker Change: We're regularly engaging in calls with institutions.
Speaker Change: Current Price Extremely Attractive
Speaker Change: And we're going to execute on our business plan, most importantly, be able to demonstrate that we can grow this business, manage credit.
Speaker Change: Bring in low-cost deposits and be an innovator and a disruptor in the marketplace. To do business like no other institution in our industry does it. I want to go to slide number 24. This is a new slide for us. I think it's important.
Speaker Change: First and foremost, we use Live Oak Bank with tremendous amount of admiration.
Speaker Change: I do believe they were formed in 08 or 09, and they have a...
Speaker Change: developed a great track record for positioning itself in the market.
Speaker Change: We thought it was reasonable to assume
Speaker Change: In our format, which is 18 months old, not 18 years, 18 months, versus LEM that's been around for 14 years, what our market traits look like or metrics?
Speaker Change: ROAA
Speaker Change: at the bank, 0.98 to 6.4, ROTC 48% versus 12.55, efficiency ratio 59 versus 42, 11.7 billion in assets to 808 million.
Speaker Change: Net income, they're almost twice as much, but then again, they're six or seven times our size. An $11 billion bank holding company, $11.8 billion versus a $1.6 billion holding company.
Barry Sloane: pp ratios of 17 to 6.6, we could generate these types of returns, similar to what we've done over two decades as a publicly traded company. Slide number 25.
Speaker Change: P-E ratios of 17 to 6.6.
Speaker Change: Hopefully, those of you can get comfortable that a company like Live Oak, which has done great things in creating technology and selling them for gains.
Speaker Change: and a company like Newtek One, which is doing similar things, creating assets and selling them for gains.
Speaker Change: can achieve these types of income levels. We realize...
Speaker Change: that the market is in a Missouri show me type of an attitude, but we look forward.
Speaker Change: to getting to the seventh quarter.
Speaker Change: the 8th quarter, the 9th quarter, the 10th quarter, and continuing to demonstrate.
Speaker Change: that we could generate these types of returns similar to what we've done over two decades as a publicly traded company.
Barry Sloane: Once again, I want to try to emphasize, we have a business model that delivers high returns on higher margins that offsets things like. That's not our business. That's not our model. We are a very well-capitalized bank. I think that isn't dawned upon the market. We have a lot of cushion here that makes.
Speaker Change: Slide number 25, once again I want to try to emphasize we have a business model that delivers high returns to higher margins that offset things like
Speaker Change: Currently higher cost deposits, which we think will come down as we're able to demonstrate greater traction and bring in the lower cost commercial deposits, mind you.
Speaker Change: We've got 80,000 paying customers, we've got 3 million in the database, and we have an OP depository account that just...
Speaker Change: is terrific. Now that the staff's in place, we should be able to get that message out, particularly with a digitized messaging platform with respect to videos and things of that nature.
Speaker Change: Also, charge was typically found in the same industry. We don't hide it. It's higher.
Speaker Change: But when you net it against the income, it's a much greater return.
Speaker Change: I am much more comfortable from a risk-reward perspective in our business model than in a model that has a cost of funds of two to two and a half percent, low margin to no low return assets, and hoping the Fed drops rates or the yield curve shifts.
Speaker Change: That's not our business. That's not our model. We are a very well capitalized bank. I think that is adorned upon the market. We have a lot of cushion here that makes
Speaker Change: Me Comfortable makes the regulators comfortable. The ALP program is very positive for growth and development. The Newtek Advantage is very positive for growth and development.
Barry Sloane: The machine that we've developed at SBA Lending, where we think we are state-of-the-art and very good. There are other competitors in the business that are actually starting to move into our market, but it's a different way to acquire clients. Totally different than we've built over 20 years. So I welcome those trying to solve challenges because we're not just getting them from people we don't know on the internet. So look, we've overcome difficult hurdles.
Speaker Change: Unknown Speaker The machine that we've developed at SBA Landing where we think we are state of the art and very good. There are other competitors in the business that are actually
Speaker Change: started to move into our market, but it's a different way to acquire clients, totally different than we've built over 20 years. So I welcome those trying to challenges because we're not just getting them from people we don't know on the internet.
Barry Sloane: While there are a few left, the finish line is clearly in sight. Slide number 26. I want to leave everybody with the fact that we are a growth-oriented, differentiated, technology-enabled business solutions company that is also in the positive.
Speaker Change: So look, we've overcome difficult hurdles, and while there are a few left, the finish line is clearly in sight. Slide number 26. I want to leave everybody with the fact that we are a growth-oriented, differentiated, technology-enabled business solutions company that is also a depository.
Speaker Change: And with that,
Speaker Change: Welcome everybody to go take a look at the appendage and operator. We will open it up to Q&A.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: One moment, please.
Speaker Change: Our first question comes from the line of Crispin Love of Piper Sandler. Your line is now open.
Crispin Love: Thank you. Good morning. Good morning, Barry. Good morning, Scott. Hope you're well. Just first off on the 2024 guide, EPS at a headline level here is unchanged, but
Speaker Change: but you are expecting lower originations, lower...
Speaker Change: , which helps for investment loans and a lower margin guide. Can you just give some detail on where you're making that up? It would seem that this would drive lower NII. But as you all know, NII is a relatively small part of your income, so...
Speaker Change: Curious on specific areas in non-interest income where you're most bullish on in the back half of the year to get to that guide.
Speaker Change: Christopher, I'll give you a generalization. I would say it's in the ALP business, which is picking up steam, particularly for the third quarter. We have a couple of interesting opportunities in the merchant services area, which I think will pick up steam.
Barry Sloane: and that's where I think we're going to outperform.
Speaker Change: And that's where I think we're going to outperform.
Chris: All right, thanks, Barry. And then just one more on the guide. You made some comments early in the call.
Speaker Change: about the recent volatility in the broader markets.
Chris: potentially impacting your guide, keeping it steady. Can you just discuss how the events in volatility over the last kind of five or so trading days impacted the guide versus what your expectations might have been a week ago or at investor day? And did that impact the changes at all in the quarterly cadence of the guide being a little bit lower in the third quarter before kind of accelerating in the fourth? Unknown Speaker
Speaker Change: Yeah, it's a great question, Crispin, and you know, it's funny.
Speaker Change: Given what happened Thursday and Friday and yesterday, would anybody have cared if I increased my guidance? So with that said, we try to put guidance out there that people can count on and rely upon. I would also comment that
Speaker Change: I didn't really think we were going to have a Thursday, Friday, and Monday.
Barry Sloane: It's hard to predict these things, so, that's, I'm going to, I'm not going to say whether it's high or low, let everybody else figure that out.
Speaker Change: You know, it's hard to predict these things. So...
Speaker Change: Our midpoint is $1.95, and as of yesterday, we had a $12.50 stock price.
Speaker Change: If you believe in the business.
Speaker Change: So, I think that, from my perspective, it's important for people to, you know, expect the unexpected. I can't tell you, nor can Chairman Powell or anybody else, you know, what's going to happen in 2020.
Chairman Powell: from the month of August or September . We only make our best educated guesses.
Chairman Powell: It would be foolish for me to think that the market is totally wrong here, so.
Speaker Change: Market got a little bit more concerned about things, typically tends to be a good forecaster, and therefore we just held the guidance. It just made sense to do that.
Speaker Change: Thanks, Barry. I appreciate the call and that's all I have for questions. Thank you. Thank you, Crispin. Appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Tim Switzer of KBW. Your line is now open.
Tim Switzer: Hey, good morning. Thank you for taking my questions.
Speaker Change: Morning, Tim.
Tim Switzer: Could you explain your comment a couple of minutes ago about the shift in EPS going from Q3 into Q4 being driven by some stuff the ALP program did the securitization closing Q3 like
Speaker Change: Did that impact the Q3 EPS at all, or is it more at the time of origination is when you recognize most of the revenue from that program?
Barry Sloane: Yeah, Tim, first of all, I really appreciate the question because, um, Unknown Speaker If the market wanted to flatten things out, we understand it, but we think that there could be some things that might weigh on earnings in Q3 that we'll be able to recoup in Q4. So it's really just the timing. I mean, the funny thing is, if you think about the reality of the business, does it really make a difference whether something happens on September 15, versus October 15?
Tim Switzer: Yeah, Tim, I first of all, I really appreciate the question because
Speaker Change: investors and you know you're you're there to be you know a purveyor of the data that we put out you know geez what this is not it's kind of not like a straight line it's it's going down in q3 and then up in q4 we have a lot of different
Tim Switzer: factors internally with respect to
Tim Switzer: joint ventures, transition from one venture into another that could potentially change gain on sales margins in one quarter or another. So many things I really can't go into because they're still in a formation category. But I would tell you that the way to look at our organization
Tim Switzer: is a necessary topic, and I know the market looks at things quarter to quarter. We look at it more or less over the course of time. We feel very comfortable that Q3 and Q4 together will get us within the margin that we gave it to.
Tim Switzer: If the market wanted to flatten things out, we understand it. But we think that there could be some things that might weigh on the earnings in Q3 that we'll be able to recoup in Q4. So it's really just a timing difference. I mean, the funny thing is, if you think about
Barry Sloane: Well, the reality is that the way the market works and the accounting principles work, it does. So we have spent a lot of time, we knew this should be a question, and we are comfortable with the guidance that we put out and think the market will.
Barry Sloane: The deposit gains. Those are the three things right now that are causing volatility to be able to bring in lower costs of deposits or some, some extraordinary gains, things of that nature.
Speaker Change: Okay, your comment on the default curve, does that imply either higher provision or lower or I guess higher net losses on the federal value loans?
Barry Sloane: I don't know. I've got to get to September 30th.
Speaker Change: I wish I had a crystal ball, I wish I had a crystal ball.
Speaker Change: I wish I did. But let me tell you, the last thing I want to do is miss a number. I've been doing this for over two decades. And that's happened pretty infrequently. So I understand we are frustrating.
Tim Switzer: the investor and analyst community by having a business model that does this. I just ask you to do the best that you can, and you can rest assured that we're gonna do the best that we can to make sure we deliver that number right in the middle of where we expect to be for the calendar year.
Unknown Speaker: Okay, okay. That's all for me. Thank you, guys. Thank you.
Speaker Change: Okay, okay. That's all for me. Thank you, guys.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Operator: Our next question comes from the line of Steve Moss of Raymond James. Your line is now open.
Speaker Change: Our next question comes from the line of Steve Moss of Raymond James. Your line is now open.
Barry Sloane: Hey Steve, good morning.
Steve Moss: Yeah, I appreciate that. And Scott, we reduced the guidance for 504 for the year, correct? That's correct.
Tim Switzer: Unknown Speaker 175. Unknown Speaker Okay, so Steve, it's a really good question. One of the things that we pay attention to in the bank.
Barry Sloane: We believe that given where we were in the balance, we're a little overweighted on 7A. Now, I don't think I'm being very clear here.
Barry Sloane: We just increased our guidance on 7A. So what I'm telling you is we're going to be able to add to conforming C&I and conforming CRE in the third and fourth quarters to balance that out. We were not able to execute on that as well as we thought in Q1 and Q2. So it really has to do with making sure we stay within our existing guidelines, and we have to curtail some of the 504 loans.
Speaker Change: We believe that, given where we were in the balance.
Speaker Change: We're a little overweighted on 7A.
Tim Switzer: in the third and fourth quarters to balance that out. We were not able to execute on that as well as we thought in Q1 and Q2. So it really has to do with making sure we stay within our existing guidelines and we have to curtail.
Tim Switzer: Some of the 504 loans, we actually had the capability to do it, but we laid it off to third parties and got smaller amounts of fees rather than put them on the books.
Unknown Speaker: got it. And then, in terms of just the
Tim Switzer: Okay.
Unknown Speaker: The other question I have here is just on the Newtek Small Business Finance portfolio. I realize it's a small portfolio, but the balances are up pretty meaningfully quarter over quarter, and I was thinking of that portfolio as being in the runoff. I know some of those loans have draws there. Just kind of curious, is this kind of the peak level here, just given since there's a fair value adjustment that, you know, I'm pretty sure impacts NII there? I
Speaker Change: And then in terms of just the
Speaker Change: The other question I have here is just on the Newtek small business finance portfolio. I realize it's a small portfolio, but the balances are up pretty meaningfully, quarter over quarter, and I was thinking of that portfolio as being in a runoff.
Speaker Change: I know some of those loans have draws there.
Speaker Change: I'm just kind of curious, is this kind of the peak level here, just given since there's a fair value adjustment that, you know, wouldn't, I'm pretty sure impacts NI either.
Speaker Change: I think it'll be, I think it'll begin to flatten out.
Speaker Change: That is my guess at this point in time based upon what we think the curves are and the seasoning. So it's, I think that
Unknown Speaker: are guidance factors into those numbers. And I do believe it should flatten out here. So, you know, we had a bump. So if you go back and you look, it was fairly muted, right? Q2-23, Q3-23, Q4, when you look at that FV adjustment. I think you could see a repeat of that in the next quarter and then.
Speaker Change: and I do believe it should flatten out here. So, you know, we had a bump.
Speaker Change: So if you go back and you look, it was fairly mute, right?
Speaker Change: Q2-23, Q3-23, Q4, when you look at that FV adjustment.
Speaker Change: Same thing next quarter and then he had a jump.
Speaker Change: I think you could see a repeat of that in the next quarter and then it could start to go down.
Speaker Change: In terms of just on non-performers here, what is the full non-performing number for the quarter? Last quarter was 56.4 million, just kind of trying to tie up my numbers here.
Speaker Change: at NSBF.
Speaker Change: Everything combined.
Speaker Change: Okay.
Scott Price: 6 and 13. Is that right, Scott?
Speaker Change: 46 and 13
Scott Price: Would you, would you add those two together? I would add those two together. So, Steve, if you look at slide 15, you've got the fair value of the NSBF portfolio at $46.6 million, and you've got non-accruals at $13,000. $1.6 million, so the sum of those two, which is approximately $60 million. Right, keeping in mind that you know, you got about 3 million coming off at the bank given the one sale Barry. There's an excess of 300 million of that are all performing. So that doesn't factor into any of these numbers.
Scott Price: Is that right, Scott? Would you add those together? I would add those two together. So, Steve, if you look at slide 15, you've got the fair value of the NSBF portfolio at $46.6 million. You've got non-accruals at $13.
Speaker Change: Right. Okay. And Steve, one other thing that's real important here, and this is where we get...
Speaker Change: caught up in traditional bank metrics.
Speaker Change: There's an excess of $300 million of
Speaker Change: that are all performing.
Speaker Change: So that doesn't factor into any of these numbers.
Speaker Change: Right. Now, the reason why it doesn't is they're in joint ventures, they don't consolidate and they're in equity interests.
Speaker Change: but the other thing too is we have 504 loans of which historically we've probably done close to
Speaker Change: that have no charge-offs and no defaults.
Speaker Change: So, I'm...
Speaker Change: One of the things that's difficult for us in the comparison, which I think is why we trade where we are and I can't change it and I'm not going to change it. All we're going to do is make money every quarter is the comparisons to the bank existing historical bank model on these ratios. They don't foot.
Speaker Change: Thank you for asking that question. Thank you very much for asking that question.
Speaker Change: We've taken into account all NPAs at the bank and included those in our allowance calculations.
Unknown Speaker: I think you, I feel like the company has appropriately reserved for the losses on the bank. Unknown Speaker Right.
Speaker Change: I feel like the company has appropriately reserved for the losses on the bank portfolio.
Unknown Speaker: Right. And the cadence is definitely consistent with what you guys said before. Okay. I appreciate all the calls here. Thank you very much, guys.
Speaker Change: Right. And the cadence definitely, you know, consistent with what you guys said before. Okay. I appreciate all the call here. Thank you very much, guys.
Operator: One moment for our next question.
Steve Moss: Thank you, Steve.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Christopher Nolan of Leidenberg-Dalman. Your line is now open.
Christopher Nolan: Hey guys, following up on Steve's question, how much does the total non-performing loan volumes impact reserving or the provisioning?
Speaker Change: for the quarter.
Scott Price: Scott, do you want to answer that one? Yeah, Chris, it's a good question and unfortunately it's it's not a very straightforward answer because we we go through a detailed analysis of the non-performing portfolio.
Unknown Speaker: which is going to include a full collateral analysis, going to include, you know, where the borrower is in terms of either past due payments, past due fees, etc. And also take into account how long we think the loan will take to liquidate. So we do that on a loan by loan basis on loans above $50,000. For loans that are below that, we have a policy where we reserve $0.50 on the dollar.
Scott Price: Which is going to include a full collateral analysis, going to include, you know, where the borrower is in terms of either past due payments, past due fees, etc. And also take into account, you know,
Scott Price: where how long we think the loan will take to liquidate so
Speaker Change: We do that on a loan-by-loan basis on loans above $50,000 for loans that are below. We have a policy where we reserve 50 cents on the dollar. The majority of the assets that are in non-accrual are above that $50,000 threshold and so
Unknown Speaker: The majority of the assets that are in non-accrual are above that $50,000 threshold, and so, at least in nominal terms. So, I mean, it's, I wish it was a cookie-cutter answer, but it's, we get very detailed when we go, and that's across the company.
Speaker Change: and at least in nominal terms, so I mean it's, I wish it was a cookie cutter answer, but it's, we get very detailed when we go through these analyses.
Speaker Change: And that's on, that's across the company.
Christopher Nolan: Yeah, the other thing, Chris, I would tell you we've taken to affect the actual collateral behind
Chris: Each loan and it's done on a loan by loan basis.
Speaker Change: extremely thorough. Obviously some of this comes from our BDC training where these assets were treated as if they were securities and had to be done to a very strict standard. I think the important aspect to note is when you look at the fair value
Unknown Speaker: That's written off the books, it's written off the income, and that will be converted into cash over the next 6 to 18 months.
Christopher Nolan: of the $46 million, that's written off the books, it's written off the income, and that will be converted into cash over the next
Unknown Speaker: Great, thank you. Um, and then based on your earlier comments on the four guidance, is it fair to say that we should expect a flat gain on sale in the second year? Or maybe I'm misinterpreting?
Scott Price: 6 to 18 months.
Speaker Change: Great, thank you. And then based on your earlier comments on the Ford guidance, is it fair to say that we should expect flat gain on sale in the second year? Or maybe I'm misinterpreting that.
Unknown Speaker: From from seven, you mean from seven? No, you know that we say flat flat sequentially or flat. I'll fly sequentially in the third quarter.
Speaker Change: It's probably...
Speaker Change: from from seven you mean from seven no you know that we say flat flat sequentially or flat
Speaker Change: I'll fly sequentially in the third quarter.
Scott Price: Bye-bye.
Scott Price: I'd say we're expecting on balance pretty similar production numbers for the third quarter, slightly higher.
Speaker Change: So, I would say, you know, the premium on loans for the quarter was 11.02%. We're expecting 11% for the third. So, I think on 7A, that's what you can expect. You know, the ALP program
Speaker Change: has some, you know, we're expecting volumes to come in there.
Unknown Speaker: those prices are that production can also drive results. So I don't want to get too myopic on 7a when ALP certainly drives results as well as well as 504. So I think that those three buckets essentially are going to dictate how much in terms of realized premiums and mark to market gains we have.
Scott Price: you know, those prices are, that production can also drive results. So I don't want to get too myopic on 7a when ALP certainly drives results as well, as well as 504.
Scott Price: So I think that those three buckets essentially are going to dictate how much in terms of realized premiums and mark-to-market gains we have.
Barry Sloane: Great. Final question. Given the new hire for business deposits, what's your thinking in terms of how to bundle services that the new tech advantage can offer to better attract low-cost business deposits? Yeah, one of the areas Chris will be
Speaker Change: Great. Final question. Given the new hire for business deposits, what's your thinking in terms of how to bundle services that Newtek Advantage can offer to better attract low-cost business deposits? Thanks.
Barry Sloane: Yeah, one of the areas, Chris, will be, and hopefully we'll push this out in the second half of the year, same day payroll. So because we are a payroll processor, I think we have 20,000 employees in the payroll bureau. Many employees like getting paid as early as possible. They want to get their paycheck on a Friday versus having to wait until Monday, for example. So that is the type of thing. On the payment processing side, we process close to $6 billion in volume.
Scott Price: Yeah, one of the areas, Chris, will be.
Chris: And hopefully we'll push this out second half of the year, same day payroll. So, because we are payroll processor, I think we have 20,000 employees in the payroll bureau.
Speaker Change: Many employees like getting paid as early as possible. They want to get their paycheck on a Friday versus having to wait until a Monday, for example.
Barry Sloane: And the ability to move the money into the client's account the same day is very valuable, as well as to show the client in their banking portal what their chargebacks were, and their refunds. Great, that's it from me, thank you.
Scott Price: So that is the type of thing.
Speaker Change: Bye-bye. Bye. Bye.
Speaker Change: Unknown Speaker On the payment processing side, we process over close to $6 billion of volume, and the ability to move the money into the client's account, same day, very valuable, as well as show the client in their banking portal what their chargebacks were, their refunds.
Scott Price: all the batches that occurred in addition to any.
Speaker Change: ACH money that came in, Fed money that came in, etc.
Scott Price: These are all things that are on the trying board and we will roll them out.
Speaker Change: Over the course of time, a lot of it's based upon having the right software interface for clients.
Scott Price: for the client experience, as well as training the staff, which we are in full gear on. I can't tell you how quickly it's going to happen, it can't happen quick enough.
Speaker Change: Great, that's it for me, thank you.
Speaker Change: Thank you, Chris.
Operator: Our next question comes from the line of Bryce Rowe from B Riley. Your line is now open.
Chris: Thank you.
Speaker Change: Our next question comes from the line of Bryce Rowe from B Riley. Your line is now open.
Bryce Rowe: Thanks. Good morning.
Barry Sloane: Follow up on Tim's question there, Barry, about the comments you made about the default curve. Clearly, a pretty fluid macro backdrop we have at this point. Is that kind of maybe the answer to that question? Just a lot of uncertainty, a lot of fluidity. Are you all maybe providing a little bit more up front for some of your lending products, especially the 7a, you know, now that we're seeing the uncertainty increase?
Bryce Rowe: Thanks. Good morning. Wanted to.
Bryce Rowe: Follow-up on Tim's question there, Barry, about the comments you made about the default curve.
Speaker Change: Clearly a pretty fluid macro backdrop we have at this point.
Speaker Change: Is that kind of maybe the answer to that question? Just a lot of uncertainty, a lot of fluidity. Are you all maybe providing a little bit more upfront for...
Speaker Change: Some of some of some of your lending products, especially the 7a, you know now that we're seeing the uncertainty increase
Barry Sloane: Look, I think, Bryce, it's important for us to be pragmatic and realistic when we do this so investors can earn what's expected. And I think when you think about what's occurred in the interest rate market higher for longer, putting a lot of commercial real estate aside, and putting a lot of stress on business owners where the 21, 22, and 23 vintage loans which were done when Prime was at three, four, and five percent are now eight and a half. Now, I don't know Bryce, does the Fed cut rates by 50 or 75 or 100 between now and the end of the year? I have no idea why.
Chris: Look, I think, Bryce, it's important for us to be pragmatic and realistic when we do this so investors can earn what's expected. And I think when you think about what's occurred,
Bryce: in the interest rate market higher for longer.
Speaker Change: Put a lot of, put commercial real estate aside, put a lot of stress on business owners where the 21, 22, and 23 vintage loans
Barry Sloane: I don't know if you do, but I don't. So, um, I think that, And I'm going to I'm going to reiterate this. I really appreciate the work, and I know this is difficult for you guys and for investors. But the reality of it is, we're still netting out very healthy returns. But almost all the questions came in on the charge of expectation, which is fine. But we are telling you, and we've said this previously, that they were going to ramp up based upon the seasoning. And then we've also got this higher for longer scenario.
Bryce: which were done when Prime was at 3, 4, and 5% is now 8 and a half.
Speaker Change: Now, I don't know, Bryce, does the Fed cut rates by 50 or 75 or 100 between now and the end of the year? I have no idea. I don't know if you do, but I don't. So I think that, and I'm going to reiterate this.
Speaker Change: I really appreciate the work and I know this is difficult for you guys and for investors.
Speaker Change: But the reality of it is.
Price: We're still netting out very healthy returns.
Speaker Change: But almost all the questions came in on the charge-off expectation, which is fine, but we are telling you, and we've said this previously, that they were going to ramp up, A, based upon the seasoning, and then we've also got this hire for longer scenario. I mean, I scratched my head a little bit.
Barry Sloane: I mean, I scratch my head a little bit. You know, there were discussions on an emergency Fed cut yesterday. Well, I don't have a crystal ball. I just don't see that this isn't an emergency. Unless the Dow goes down a thousand points a couple of days in a row, then maybe you might think of it as an emergency, but you know, the Nikkei was down 12, and now it was up 10. I mean, it's pretty volatile.
Speaker Change: You know, there were discussions on an emergency Fed cut yesterday. Well, I don't have a crystal ball. I just don't see, this isn't an emergency.
Speaker Change: Unless the Dow goes down a thousand points a couple of days in a row, then maybe you might think of it as an emergency. But you know, the Nikkei was down 12, now it was up 10, I mean, it's pretty volatile. So
Barry Sloane: So, it's hard for us to forecast what's out there. We're doing the best that we can, and we try to be conservative. And this is something that, you know, within our range, at a 12-handle stock price. This ain't a bad place to be.
Speaker Change: It's hard for us to forecast what's out there. We're doing the best that we can.
Speaker Change: and we try to be conservative and this is something that, you know, within our range at a 12 handle stock price, this ain't a bad place to be.
Barry Sloane: Yeah, I hear you tend to agree. In terms of another comment you made, Scott said that you all have baked in just one 25 basis point cut into maybe your forecast or into the guidance. How do you think about, you know, multiples of 25 basis point cuts? You know, and how that might affect the rate? Yeah, so
Speaker Change: Yeah, I hear you. I tend to agree.
Speaker Change: In terms of, you know, another comment you made, I think Scott said that you all have baked in just one 25 basis point cut.
Speaker Change: into maybe into your forecast or into the guidance, how do you how do you think about, you know, multiples of 25 basis point cuts? You know, and how that might affect the the range?
Barry Sloane: Yeah, so it's a good question. So I don't know what the market thinks about, you know, most banks and when people talk about rate cuts or high rates, they never qualify. Is it SOFR? Is it the whole curve? Is there a shift? Etc.
Speaker Change: Yeah, so it's a good question.
Speaker Change: So I don't know what the market thinks about, you know, most banks and when people talk about rate cuts or hikes, they never qualify. Is it so far? Is it the whole curve? Is there a shift, etc. So I mean, our internal belief is that short rates over the next
Barry Sloane: So I mean, our internal belief is that short rates over the next two to three years are more likely to go down than up. And I don't know how much room there is for longer rates. I think from our prospect, you know, the valuation on the portfolio, and this is really important. If short rates were to be cut, we would pick up, basis point for basis point, a coupon on our securitized debt, which I think is close to $200 million, okay?
Chris: two to three years are more likely to go down than up. And I don't know how much room there is.
Chris: in longer rates.
Speaker Change: I think from our prospect, you know, the valuation on the portfolio, and this is really important.
Speaker Change: If short rates were to be cut, we would pick up
Barry Sloane: The SBA loans typically lag on a quarterly basis, so depending upon whether the rate cut is September 1 or September 30. You could have the same coupon on the SBA portfolio in January, on December 31, as you do on October 1, but that's sort of up to the SBA when they put the changes through. So these are the types of things that we have to figure out as we're coming up with a forecasting model. And your question; your question is very good.
Chris: You could have the same coupon on the SBA portfolio on January 8th.
Speaker Change: on December 31, as you've got on October 1.
Speaker Change: But that's sort of up to the SBA when they put the changes through. So these are the types of things that we have to figure out as we're coming up with a forecasting model and your question Your question is very good. We are we believe we're fairly agnostic
Barry Sloane: We are, believe we're fairly agnostic, praying for a that we need rate cuts to bail us out. Because look, I don't, I don't know how many we're going to get, or I assume we're going to get at least one before the election. But I don't know if it's a quarter. I don't know if it's 50.
Speaker Change: has been so good to us, that we need rate cuts to bail us out. Because look, I don't know how many we're gonna get, I assume we're gonna get at least one before the election, but I don't know if it's a quarter, I don't know if it's 50, it depends upon what happens in the rest of August . But,
Barry Sloane: It depends upon what happens in the rest of August. But, if rates came down by 25, our institutional securitized debt on the SBA and SBF runoff portfolio would come down as well. The coupon on the portfolio itself may lag because it's quarterly adjusted. I would tell you our deposit rates would come down, particularly on the consumer money market, most likely in competition with the rest of the market. Our deposit rates, we made an adjustment yesterday on it for CDs so that they would come down. I think everything else pretty much remains steady.
Speaker Change: If rates came down by 25, our institutional securitized debt on the SBA and SBF runoff portfolio would come down. The coupon on the portfolio itself may lag because it's quarterly adjust.
Speaker Change: I would tell you our deposit rates would come down, particularly on the consumer money market, most likely, in competition with the rest of the market. Our deposit rates, we made an adjustment yesterday on them for CDs, would come down.
Scott Price: And Bryce, just to add to that, if you go back to my comments when the transcript's ready, you'll see that we got about $170 million of CDs repricing or maturing in the next six months. So that'll provide opportunity to flow those changes through.
Speaker Change: in the next six months. So that'll provide opportunity to flow those those changes through.
Scott Price: And also, as Barry alluded to, you got $250 million of consumer high-yield savings that has the potential to reprice as well. So that's at the bank level. If you look at the holding company and everything outside of the bank, we're fairly match funded. The NSBF portfolio is securitized and reprices off of SOFR. So you've got maybe some basis difference between prime and SOFR. And then we've got the fixed rate bonds at the parent company that are mostly funding our ALP program, which is fixed rate. So I feel like we're in really good shape to weather changes in interest rates. We just wanted to make sure we were trying to telegraph to you guys that we're watching it.
Speaker Change: And also, as Barry alluded to, you've got $250 million of consumer high-yield savings that
Barry Sloane: has a potential to reprice as well. So that's at the bank level. If you look at the holding company and everything outside of the bank, we're fairly match funded.
Speaker Change: The NSBF portfolio is securitized and repriced off of SOFR.
Speaker Change: So you've got maybe some basis difference between prime and SOFR.
Unknown Speaker: Okay, okay. Last one for me. Can you remind us the timing of, I guess, the requirement for the disposition of the technology piece of the business? I know you guys said you're going to have an update here shortly, but what is the kind of drop-dead date for that?
Unknown Speaker: The date in the application is Q1 2024. 24, 25 you mean. I'm sorry, 25. I only had a half cup of coffee.
Unknown Speaker: Thank you, Bryce. I appreciate that. I need a lot of help here. Yes. All right. Thank you, guys.
Speaker Change: Okay.
Speaker Change: 24, 25, you mean. I'm sorry, 25. I only had a half a cup of coffee. In 2025. Thank you, Bryce, I appreciate that. I need a lot of help here, yes. All right, thank you, guys.
Barry Sloane: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Barry Sloane, CEO and President, for closing remarks.
Speaker Change: Thank you.
Barry Sloane: We can't thank everybody enough for participating, particularly the analysts, and we appreciate the thoughtful, insightful questions on the quarter. We look forward to continuing to deliver on our numbers and demonstrating that we've got the right model in the right place at the right time for this particular industry. So, thank you very much.
Speaker Change: demonstrating that we've got the right model in the right place at the right time for this particular industry. So thank you very much.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.