Newtek Business Services Corp. (NASDAQ:NEWT) Q2 2024 Earnings Call Transcript

Newtek Business Services Corp. (NASDAQ:NEWT) Q2 2024 Earnings Call Transcript August 7, 2024

Operator: Good day and thank you for standing by. Welcome to the NewtekOne, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker for today, Barry Sloane, CEO and President. Barry?

Barry Sloane: Thank you, operator and everybody for attending our Q1 — Second Quarter 2024 Financial Results Conference Call. Joining me today is Scott Price, the Chief Financial Officer at NewtekOne and Newtek Bank National Association. Also attending is Nick Young, President and Chief Operating Officer of Newtek Bank, N.A. For those of you who’d like to follow along to our call today, please go to our website, Newtekone.com or the Investor Relations section on the presentation, and our PowerPoint presentation is hung there today. I’d like you to draw your attention to slide number one on a note regarding forward-looking statements. On slide number two, today, we’ll be talking about significant events that occurred in Q2 2024.

We announced last night at the close of the market, second quarter 2024 earnings of $0.43 earnings per share basic and diluted comment. Important to note that according to Bloomberg, which had a consensus of our analysts at $0.405, that was a nice beat for us with a revenue estimate on Bloomberg of $60.6 million, I think we are about at that number. Second bullet is reconfirming 2024 full EPS guidance of $1.85 to $2.05 for basic and diluted. Given the events of the last few trading days, Thursday, Friday, Monday, we are very comfortable with the range, and we’d love to get a little bit more clarity on what’s going to happen in the world before we make any adjustments to that. Important to note, quarterly deposit growth at the bank over the last quarter was approximately 17%, second quarter sequential total loan growth over the last quarter 13% of the bank.

We find these numbers to be terrific, particularly given that the industry averages are about flat. Net interest margin, 4.3% for the three months ended June 30, pretty flat quarter-to-quarter. We’re comfortable with that. Many of you look at the net interest margin at the holding company. And I want to point out that the net interest margin at the holding company, the holding company, which has the payment processor, the tech solutions, the payroll, the insurance agency is somewhat watered down from a margin standpoint because those assets don’t provide interest income. They provide the other ancillary income that skews our income in the business model to close to 65% to 70%. But I think when you look at the types of loans we put on the books versus the cost of funding, it is extremely attractive.

I would also point out that the institutional funding of securitizations of the SBA 7(a) loan for the nonbank lender in NSBF, is also a much higher cost of financing. The weighted average is probably SOFR plus 250, it gets 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 7(a) portfolio into the bank, these margins will probably improve. Also important to note that we had approximately 470 basis points of loan loss reserve coverage at June 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, very generously sizable.

We’ll talk about that and the effects of that going forward. Business deposits, important to note, these are our lower cost business checking. Business money market grew by 17% accorded to $136 million from $116 million in Q1. We also have a nice slide talking about our alternative loan program, extremely important to our growth and profitability. We demonstrated a full execution through securitization. We are very, very excited about being able to demonstrate to the markets our alternative loan program securitization in recent times. NewtekOne small business finance loan portfolio, it began to experience the fold curve aging with realized unrealized losses, we’ll chat about that. These are the types of losses that are not flat, they’re not straight line.

A small business borrower typically has a seasonal characteristics with respect to the seasonality of the loan. So we’ll talk a little bit about that on the call today. NewtekOne continues to demonstrate this as our six quarters of operating history as a bank holding company, owning in a nationally chartered bank that we can continue to put loans on and fund ourselves at the bank with higher margins, higher yielding assets. And we use the term that offset current higher cost of deposits. Obviously, we will seek to generate lower cost deposits through business checking and business money market. We’re very excited about the effort here and the growth. Also, we’re obviously more than a normal bank that you’d see, and we don’t prefer to be normal to the other banking industry.

We’re different, and we’ll talk about that again on this call as we have on the six other calls. We have higher expenses for credit losses. That’s anticipated. But you’ve also got to look at the returns that we’re generating, the coupons that we’re generating, clearly offset that. And that’s why we have such high return on average assets, return on high tangible common equity that really dwarf what goes on in this particular industry. And we’re proud of the fact that we’ve been able to demonstrate this quarter after quarter now for six operating quarters. Important also to note the efficiency ratio at Newtek Bank declined to 42% of tremendous improvement. We continue to demonstrate that the Newtek Bank without branches, bankers, brokers and BDOs will demonstrate the ability to acquire business clients through our patented NewTracker referral system, process the business effectively and emphasizing our unique and internally developed technological platform.

Last but not least, we completed a registered public offering of $71 million of 8.5% fixed rate notes. Obviously, that’s not a low coupon, but when you generate the types of returns that we can, this cost of capital is more than adequate to finance, growing earnings and the support of our revenue model going forward. On slide number three, focusing on Newtek Bank summary financial highlights. For the second quarter and previous quarters, please observe the trends ROAA, 6.4% for the quarter. These are solid numbers. These are not numbers you see in 95% of the other banking institutions. ROTCE for the quarter 48.8%, efficiency ratio declining to 42.3%. We’re very pleased with the performance of the second quarter. For growth, important to note, growth in a financial holding company and a bank like ours, yes, you can have growth in a financial institution that owns a depository.

So, we had loan growth ending quarter-over-quarter, 14%; deposit growth 17% and look to capital ratios. And once again, we’re on slide number three. These are extremely healthy. So, it’s important to note, in many cases, these are twice the capital ratios that you see at a bank, very well capitalized, basically impacted by strong cash balances as well. And we’re also pleased to note that the reserve coverage more than adequate for what we anticipate going forward at the bank from CECL and at the holding company through NSBF through fair value. Slide number four, we talk about the financial summary for the holdco. Obviously, we talked about the ROA, the ROTCE still north of 20%. Once again, you kind of get some muted results because of the income, if not from net interest income, which is why your net interest margin is 2.71 versus at the bank, a much higher number with a forehand on it.

Also note, the capital ratios at the holding company, CET1 total capital leverage 18.7%, 21.9%, 14%. Towards the bottom of slide four, we talk about our earnings. We’re very pleased with the fact that we had $0.43 for the second quarter of 2024, year-over-year, up from $0.27 in the second quarter of 2023 and a sequential increase of $0.05 quarter-over-quarter. Slide number five, we try to talk about commonly-asked questions on NewtekOne. 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 the questions we get are very typical regarding banks and bank holding companies. We going to talk about deposits. They talk about the concern over interest rates and the concern over loss coverage.

It still is a bit to the head scratcher. There’s another part to this organization, and that’s how we make money. And we really have outstretched business model that generates great returns. It’s very well balanced across the board. Our business model provides for an outsized amount of noninterest 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. While credit and interest rates don’t factor into a government guaranteed sale for cash. Every single day, every single week, every single month, every single quarter. In a nontraditional way, the industry has not looked highly upon gains on sale, but we’ve had gains on sale for 20 years. And frankly, it is — I’m not saying fully insulated, but it is primarily insulated from the concerns in the banking industry with respect to interest rate movements and credit rate movements.

We’re pleased to once again report that we really had some nice traction in lower cost business deposits. We talked about a 17% gain there. We bumped our SBA fundings for 2024 to $135 million. Importantly, for the mission statement, our business model, 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. So, we bought the bank because that gets eyeballs to the institution on a regular basis for deposits, transactional capability. We’ll talk about the Newtek Advantage business portal. We just think we are strategically positioning NewtekOne, as a growth company, and we’re seeking to acquire a growth multiple on earnings, which we think we’re earning every single quarter by demonstrating that even with current cost of deposits higher than a typical bank and losses that are expected because of the high coupon, the gain on sale and the business model, we’re still able to deliver the right bottom line.

We’re going to talk a lot about alternative loan program, its history and its future on slide number six. Well, we’re very pleased to announce that we completed a securitization. We did one a while ago in 2022. Obviously, the banking crisis has kind of slowed us down a little bit, but we’re back up. You’ll see that our pipeline is full and robust and we’re ready to go. When you look at the alternative loan program, what is it? First of all, let’s focus on the demand. We get hundreds of business loan referrals every day, approximately 80,000 paying customers, 3 million referrals in the database. These are all business clients, they’re independent business owners that one loan that has a low monthly payment, how do they get that low monthly payment.

Well, this is something that we learned from the SBA business by being in 20 years. No balloons, 10- to 25-year AM gives them a low payment. Also, they really just like restricted bank covenants. They don’t want to be told, “Geez, you can’t do this acquisition. Geez, you can’t dividend this money. Geez, you can’t take additional leverage. But we trade that off with a personal guarantee and lean in all business assets as well as lean on personal assets that need be to beat the credit up. And from a cross-section of the market from a demand standpoint, there are many guarantors. The guarantees are joining several and they’re full, they’re not water down guarantees that are willing to take a higher interest rate to give them the flexibility in the loans.

And you can see that from our pipeline, you could see that from this particular securitization. For those of you that want the details on the securitization, it could go to DBRS’s website, you can see what at the bottom of slide number six, an ALP business leaner trust 2024-1. DBRS we’ll be able to provide that prefunded memo, which will give you a lot of details and data on the collateral why these loans exist, what the breakout is. But going to the math, $190.5 million of collateral backing $154 million of investment-grade rated notes institutional investors filed into the a single A Class, three into the BBB+ class with an 81% advance rate. The bids we got were in excess of $370 million. And this is the second asset securitization that we’ve done.

We’ve historically done 15 rated securitizations. All of them have held or been upgraded. On slide number seven, it covered this a little bit in the prior conversation, like where is the demand where I went over the demand. We financed these securitizations through joint ventures, gives us an additional source of capital with leverage orient and securitization facility. I’d like to thank Capital One and of Deutsche Bank for helping us do the securitization and help make this new program work for us and our borrowers. When you look at the loan metrics, we originate these loans for approximately 3 to 3.5 points. Very conservatively, the origination expense I’m putting in there is 2 points, but it’s typically not quite that high. The AM schedule, I talked about 20 to 25 years and no balloons.

Loans are originated at the original floor initial rate on a weighted average, let’s say, it’s about 850 to the five-year. We service for 100 basis points by the bank. The prepayment penalties and the lows, 5.53. That’s important because you’ve got a servicing asset that’s not going to prepare and you get that spread income over time. I think it’s important to note that these securitizations are funded by joint ventures. They represent equity interest up at the holding company and they’re very high yielding. So, this is a fairly rudimentary way for all of you to calculate yield. You could feel free to take your excel spreadsheets and figure out what the returns are yourself, but looking at this last transaction, an 80% advance rate to an investment grade means that 80% of the spread income had no equity against it.

And looking at the collateral yield of a net 117 against the gross 127, that’s the servicing that goes to [indiscernible] other income. To the yield on the bonds of 6.7% is 500 basis points, Multiply that times four, equals 20, the equity 117, the interest gross that does not account for net charge-offs over the course of time, and we are fairly adamant. These are materially better credits than the 7(a) business. So we gauge it against the severity and frequency, which we historically used that at an 8% historical charge-offs. These are stronger guarantors, these are larger businesses with greater liquidity. These borrowers typically would not meet the credit elsewhere test under 7(a). And in some cases, the loan needs greater than the 5 million limit on 7(a).

So, we put them in that particular bucket. We also do loans below $5 million for borrowers that want — maybe they’ve used up their $5 million guarantee for 7(a) or they want to fix 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. Moving to slide number eight. We talked about the second important catalyst or accelerator for the business. The ALP being one, deposit growth being the other. Obviously, most of you are very familiar with our 7(a) business that’s been going on for 20 years, and it just keeps on going. It’s a little engine that can. And the growth in deposits, we talked about total growth was about 17%. And deposit 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 margin, zero to fall, zero charge-off assets, we are able to more generously 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 0 fee-based account. For example, if you take a look at China, they talk about 0 fees, but it’s on a consumer savings account, where you can’t use the money or can’t release it for high levels of transactions in the fine print, they require you to have a business account that does have the fees and many other accounts require minimum balances or they have these hidden fees somewhere. We’ll be rolling out our zero-fee bank program 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.

We so far — I believe we brought in about close to 1,300 to 1,700 new business banking accounts at the bank. That’s good growth for us. 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 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. Also important to note, we have had an origination underperformance in 504, conforming C&I and CRE. 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 CRE and that’s your basic boring bank loans with covenants that have lower margins on them.

But they’ll balance the portfolio, give us diversification in the bank. That will, in turn, reduce the CECL reserve on those types of loans. So, our reserves will start to come down. We look at about 3.5 plus or minus as the normal CECL reserve just to be in balance. So that’s why it’s coming down to free those reserves are there to be utilized, and there are smaller reserves on higher credit worthy, lower margin conforming CRE and C&I loans. Slide number 10, second quarter financial highlights. We 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 just significantly lower. I think it was $0.27 to $0.43. I believe we take out the tax effect for 2023 EPS were somewhere about $1.03, $1.07.

This year, our midpoint is $1.95. I mean this is a growth business and a growth vehicle that [indiscernible] on January 6, 2023, hit the ground running, immediately made profits and is on a ramp. 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 is got $0.81 for six months for 2024 and 44% when you take out that tax benefit in Q1. So, you could see there is growth, and we think this is being missed by the market. I’d like to now go to Scott Price for slide number 12. Scott, you’re muted.

Scott Price: Thanks, Barry. Good morning, everyone. Now turning to slide 12, our net interest margin contracted 12 basis points during the quarter, driven by increased leverage and higher cash balances. We raised over $70 million in our bond offering at the end of May and paid down warehouse lines of credit. 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 1. Now turning to slide 13. At the bank, we experienced deposit growth from our business customers of about $20 million during the quarter, which have a much lower cost in our retail products. Our CD campaign brought in over $79 million mostly in six-month paper, which will reprice in the fourth quarter.

We expect about $70 million of CDs to reprice in the third quarter or mature and have about $100 million to reprice in the fourth quarter. These funds have a weighted average cost of around 5% and will provide a cost savings opportunity going forward. Given these factors and the market turmoil over the last few days, we’re monitoring the bond market, and we keep a close eye on the pricing of our competitors. 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 to take advantage of patent pending, which provides Newtek’s clients with analytics, relationships, transactional capability to other financial institutions do not. We believe that on a going-forward basis, our industry must do other things for the customer than just take their money, maybe take them out to lunch or dinner for the relationship and hope they get a loan. I say that because it’s way too easy to move your money on a phone. Very easy to do so, and people are not going to keep, and I say people the 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 that customer value, things like pre unlimited document storage, free real-time updated web traffic analytics, free real-time credit card processing and chargeback data right in the business portal, the ability to make payroll in the business part. So we’ll talk more about the advantage in future slides. It is a great tool. Our clients enjoy it, and it’s working well, and we continue to update it and make it more valuable where it becomes the business portal for its clients, and we will look to in the future white label it for other financial institutions. Slide number 15, credit risk management. A company that went public in September of founded in 1998, we do know how to manage credit. We are familiar with these credits.

We’ve been through the ups and downs. Now 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, their value adjustment, which, in other words, would be a charge-off for the quarter from Q1 2024 to Q2 2024 called approximately $5 million charge-off. So, we had 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, it was $31.7 million to 38%, but that’s over one, two, three, four, five quarters, okay? There is your fair value adjustment. Now to go to fair value, 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 and that will go right into the holding company, and that’s just less dollars that we need for things like stock buyback, dividends, reducing our debt load, et cetera, et cetera. The other thing I want to point out is at the NSBF, we’ve got a performing loan portfolio with 11.25 coupons. 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 older portfolio, particularly with ’21, ’22 and ’23 cohort years. Now let’s move down to the bank. The bank had nonaccrual loans of $13.5 million.

everyone’s hair is going to be on fire. Oh, my God. I went from $8 million. Well, we sold most of that is from the National Bank of New York City portfolio. We sold $3 million not in Q2, but in Q3, okay? So that number is probably a little bit over $10 million. 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 there should not be any material change in the charge-off number in Q3 from that loan sale to all National Bank of New York City. I think the majority of those loans are loans that we acquire and acquire them through purchase accounting. 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 important to look at the past dues to from $12 million or $7.4 million.

All these things cycle through. So, the bull pen has now been reduced for charge-offs there as well. To slide number 16. We talked about the 470 basis points of the CECL reserve at the bank. We talked about adding more conforming C&I and CRE loans, which will reduce that reserve. Once again, important to note that we’re very comfortable with our projections. 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, it’s tough with us. It’s just a back of life. However, over the course of 20 years since the 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.

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 pretax. No interest income there. It’s all recurring revenue within that business in 2022. Slide number 18, diversification of earnings. 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 peak, and we appreciate what our team does in the bank. We are going to diversify the bank assets with lower margins, lower charge-offs to forming bank loans, and we’re going to continue to automate Newtek Advantage and the way that we take in merchant accounts, payroll accounts and convert them over to banking accounts.

The alternative loan program business, very attractive. We’ve been able to demonstrate it with a full cycle to this new investor group that’s getting to know us. It provides gain on sale. It provides net interest income, while the loans are sitting in the warehouse and servicing income. Once the loans go into a joint venture and securitize, 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 joint venture or securitization. Obviously, throughout things out, we’ve got our payment processing merchant business. 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.

Also insurance and payroll solutions, nonbank subsidiaries, really a growth engine. We will be rolling out in the near future same-day payroll. We’re able to do this because you have a payroll business, 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 to give the merchant same-day funding, insurance agency, provide our client validation that the current policy that they have, whether personal or business at the right premium, the right coverage at the right price. 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 and lending products or payment products and the videos that go out to our client base.

Stay tuned. Slide number 19, important add. Newtek hired Jennifer Merritt November 23 as Chief Operating Officer of the Digital Bank. 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 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, would you like to handle over 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. We have assumed a 0.25 point rate cut for ’24. We expect 11% premiums on SBA 7(a) loans for the next two quarters. We did trim our loan production expectations for the rest of the year, but important to note, we are reaffirming our $1.85 to $2.05 EPS for the year. As Barry alluded to earlier, there are a lot of moving pieces to our results that include loan production, gain on losses — gains and losses on sales of loans and the related margins and also include performance from our payments and other nonbank 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 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. And if I could, while I’ve got the mic, I will hit the quarter-over-quarter performance, which appears on slide 28. Ultimately, net interest income was slightly higher on increased liquidity and leverage. The provision for loan losses was up $1.8 million versus the prior quarter, which included some charge-offs, but also largely was attributable to the increase in percentage of 7(a) loans at the bank. If we shift to noninterest income, our net gains on sales of loans were up on higher volumes of loans sold, and important to note, our electronic payments processing business came in with higher revenue due to the acquisition of a customer with multiple accounts.

Expenses during the quarter were — expenses were down versus prior quarter with multiple positives and negatives, the most notable of which was higher – excuse me — 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. 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. I am 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. The National Bank of New York City was a very clean, but 61-year-old bank that has virtually no digital transactional deposit acquisition capability. I used the term purchase loans from brokerage. If you use some originated as well. And basically, the broker gave the bank alone in the met the credit, it worked. That was the way we’re generating assets, and it worked well for the bank for — given what the bank’s strategy was.

We overcame operational and software change that established our business model and strategy, which listening to this call, you realize it is entirely different. We launched the Newtek Advantage. We took deposits in digitally without branches. We made major enhancements to the accounting staff and regulatory compliance, changing from a business development corporation into a 1933 at company, huge undertaking. All of those old portfolio companies now have to comply with SOX consolidation, the amount of automation for the business and data migration, just enormous. And that was done while we made money in 2023. So, in 2024, we’re continuing to build out 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 deposits and show the customer that we can do more for them than just take their money and maybe take them out to launch.

Most of them really don’t want to go out to lunch today anyway. 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 Master, Discover, American Express. The business wants to go to one portal. Have everything getting migrated into their accounting GL like a QuickBooks. The business today wants to see in one view 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, Newtek Advantage. 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 appendix, we talked about all the new management hires we’ve made, and we continue to have some in the butane. Slide number 23, growing investor interest. Just attended the KBW conference to the O’Reilly conference will be going to Raymond James and type of conferences in the near future. We hope at an Analyst Day presentation, which you can find on our corporate website. We continue to educate and familiarize ourselves with the investment community and the analysts. This is not an easy company to follow. I’m sure I got a few smiles on the other end of this call today. We appreciate the work that you’ve done in helping the market analyze us in a nontraditional, I’ll call it financial institutions model.

We refer to ourselves as a company to provide business and financial solutions to independent business owners. We’re regularly engaging in calls with institutions. We’re continuing to maintain our dividend policy, which is current price extremely attractive, and we’re going to execute on our business plan, most importantly, be able to demonstrate that we can grow this business, manage credit, 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. First and foremost, we use Live Oak Bank with tremendous amount of admiration. I do believe they were formed in ’08 or ’09, and they have developed a great track record for positioning itself in the market.

But we thought it was reasonable to assume in our format, which is 18 months old, about 18 years, 18 months versus LEM that’s been around for 14 years, what our market trades look like metrics. ROAA at the bank, 0.98 to 6.4%. ROTCE 48% versus 12.55%, efficiency ratio of 59% versus 42%, $11.7 billion in assets to $808 million. Net income, they’re almost twice as much, but then again, they’re 6 or 7 times our size. So, an $11 billion bank holding company, $11.8 billion versus $1.6 billion holding company. P/E ratios of 17 to 6.6. 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 and a company like NewtekOne, which is doing similar things, creating assets and selling them for gains, can achieve these types of income levels.

We realized that the market is in a Missouri show-me type of an attitude, but we look forward to getting to the seventh quarter, the eighth quarter, the ninth quarter, the 10th quarter and continuing to demonstrate that we could generate these types of returns similar to what we’ve done over two decades as a publicly traded company. 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 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 to mind you, we’ve got 80,000 paying customers, they had $3 million in the database, and we have no fee depository account that just is terrific.

Now that the staff is 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. Also charge-offs typically found in the same industry. We don’t hide it high. But when you net it against the income, it’s a much greater return. I am much more comfortable from a risk reward perspective in our business model that in a model that has a cost of funds of 2% to 2.5%, low margin to low-return assets and hoping the Fed drops rates for the yield curve shifts. That’s not our business. It’s not our model. We are a very well-capitalized bank. I think that isn’t down the part of the market. We have a lot of cushion here that makes me comfortable and makes the regulators comfortable.

The ALP program, very positive for growth in development. The Newtek Advantage is very positive for growth in development. The machine that we’ve developed in 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 in 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 challenge is because we’re not just getting them from people we don’t know when they hear that. So, look, we’ve overcome difficult hurdles. 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.

And with that, welcome, everybody, who want to take a look at the appendance. And operator, we will open it up to Q&A.

Q&A Session

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] 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 you are expecting lower originations, lower held for investment loans and a lower margin guide. And 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 curious on specific areas in noninterest income, where you’re most bullish on in the back half of the year to get to that guide?

Barry Sloane: Cris, may I 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. And that’s where I think we’re going to outperform.

Crispin Love: All right. thanks, Barry. And then just one more on the guide. You made some comments earlier in the call about the recent volatility in the broader markets, potentially impacting your guide keeping it steady. Can you just discuss how the events and 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?

Barry Sloane: Yes, it’s a great question, Crispin. And it’s funny. 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 I didn’t really think we were going to have a Thursday, Friday and Monday. It’s hard to predict these things. So, our midpoint is $1.95. And as of yesterday, we had a $12.50 stock price. If you believe in the business, that’s — I’m not going to say whether it’s high or low, let everybody else figure that out, that’s an abnormal multiple. So, I think that from my perspective, it’s important for people to expect the unexpected. I can’t tell you, Norton Chairman Powell or anybody tells what’s going to happen in the month of August or September.

We only make our best educated guesses. It will be foolish for me to think that the market is totally wrong here. So, 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.

Crispin Love: Thanks, Barry. I appreciate the color, and that’s all I have for questions. Thank you.

Barry Sloane: Thank you, Crispin. Appreciate it.

Operator: Thank you. 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.

Barry Sloane: 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 to the ALP program, did the securitization close in Q3? Like should that impact the Q3 EPS at all? And — or is it more at the time of originations when you recognize most of the revenue from that program.

Barry Sloane: Yeah. Tim, first of all, I really appreciate the question, because investors and you’re there to be a purveyor of the data that we put out what this is not kind of not like a straight line. It’s going down in Q3 and then up in Q4. We have a lot of different factors internally with respect to 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 isn’t necessary at top 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.

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 the reality of the business, does it really make a difference whether something happens in September 15 versus October 15. 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 would be a question. We are comfortable with the guidance that we put out and we think the market should follow that.

Tim Switzer: Okay. But can you help us understand the mechanics, I guess, of what that driver is going to be from Q3 to Q4? It sounds like it’s mostly on the noninterest income side. And is that…?

Barry Sloane: Yeah. From the noninterest income side, and it could also be relative to — could also be relative to the default curve in credit losses as well. Those are the two things. And then the other item could also be the deposit gains. Those are the three things right now that are causing volatility to be able to bring in lower cost of deposits or some extraordinary gains, things of that nature.

Tim Switzer: Okay. Your comment on the default curve. Does that imply either higher provision or lower — or I guess, higher net losses on the tender value loans?

Barry Sloane: I don’t know I got to get to September 30.

Tim Switzer: Okay.

Barry Sloane: I wish I had a crystal ball. 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 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 going to 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.

Tim Switzer: Okay. Got it. And then other noninterest income jumped up about $6 million this quarter. It was a bit above the typical range. What was the drivers there?

Barry Sloane: Big driver is the alternative loan program. We did a lot of loans. When you go and look at some of the math I put out and you look at the value of those loans, they’re very valuable.

Tim Switzer: Okay. Okay. That’s all for me. Thank you, guys.

Barry Sloane: Thank you.

Operator: [Operator Instructions] One moment for our next question. Our next question comes from the line of Steve Moss of Raymond James. Your line is now open.

Steve Moss: Good morning.

Barry Sloane: Good morning.

Steve Moss: Good morning, Barry. Maybe just starting with the comment you made about the 504 loan, just with origination underperformance this quarter. Just curious, like maybe give a little color on some of the underlying factors and just kind of why you think it will pick up here in the second half.

Barry Sloane: Yeah. I appreciate that. And Scott, we reduced the guidance for 504 for the year, correct? So was it…

Scott Price: 175.

Barry Sloane: Okay. So, Steve, it’s a really good question. One of the things that we pay attention to in the bank is the diversification of the portfolio. So, we believe that given where we were in the balance or a little overweighted on 7(a). And I don’t think I’m being very clear here. We just increased our guidance on 7(a). 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 had to curtail some of the 504 loans, we actually had the capability to do it, but we lay it off to third parties and got smaller amounts of fees rather than put them on the books.

Steve Moss: Okay. Got you. And then in terms of just the — the other question I have here is just on the Newtek small business finance portfolio. I realize it’s a small portfolio, but the balance are 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 would pressure impacts NII there?

Barry Sloane: I think it will begin to flatten out. 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 our guidance factors into those numbers, and I do believe it should flatten out here. So, 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, same thing next quarter and then you had a jump I think you could see a repeat of that in the next quarter and then it could start to go down.

Steve Moss: Okay. Got you. And then in terms of the — in terms of just on nonperformers here, what is the full nonperforming number for the quarter — last quarter is $56.4 million. Just kind of trying to tie up my numbers here.

Barry Sloane: At NSBF?

Steve Moss: Everything combined.

Barry Sloane: Okay. 46 and 13 — 46 million? Is that right, Scott? Would you add to…

Scott Price: 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 nonaccruals at $13.6 million. So, the sum of those two, which is approximately $60 million. Keeping in mind that you got about $3 million coming off at the bank given the loan sale, Barry mentioned.

Steve Moss: Right. Okay.

Barry Sloane: And Steve, one other thing that’s real important here, and this is where we get caught up in traditional bank metrics. There is in excess of $300 million of alternative loan program loans that are all performing. So that doesn’t factor into any of these numbers.

Steve Moss: Right.

Barry Sloane: Now the reason why it doesn’t is they’re in joint ventures, they don’t consolidate and they’re an equity interest. But the other thing, too, is we have 504 loans of which historically probably done close to $400 million to $500 million over our life that we sold to third parties that have no charge-offs and no defaults. So, 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 in three quarter is the comparisons to the bank’s existing historical bank model on these ratios, they don’t foot.

Steve Moss: Right.

Barry Sloane: Thank you for in that question. Thank you very much for asking that question.

Scott Price: Steve, I’d also point out that our — we’ve taken into account all NPAs at the bank and included those in our allowance calculations. So, I think I feel like the company has appropriately reserved for the losses on the bank portfolio.

Steve Moss: Right. And the cadence is definitely consistent with what you guys signaled before. Okay. I appreciate all the color here. Thank you very much, Scott.

Scott Price: Thank you, Steve.

Operator: One moment for our next question. Our next question comes from the line of Christopher Nolan of Ladenburg Thalmann. Your line is now open.

Christopher Nolan: Hey, guys. Following up on Steve’s question, how much does the total nonperforming loan volumes impact reserving or the provisioning for the quarter.

Barry Sloane: Scott, do you want to answer that one?

Scott Price: Yeah. Chris, it’s a good question. And unfortunately, it’s not a very straightforward answer because we go through a detailed analysis of the nonperforming portfolio, which is going to include a full collateral analysis going to include where the borrower is in terms of either pass-through payments, past due fees, et cetera. And also take into account where — 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. We have a policy where we reserve $0.50 on the dollar. The majority of the assets that are in nonaccrual 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 through these analyses. And that’s on — that’s across the company.

Christopher Nolan: Yeah.

Barry Sloane: The other thing, Chris, I would tell you we take into effect the actual collateral behind each loan, and it’s done on a loan-by-loan basis. It’s 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 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 six to 18 months.

Christopher Nolan: Great. Thank you. And then based on your earlier comments on the forward guidance, is it fair to say that we should expect flat gain on sale in the second year? Or maybe I’m misinterpreting that.

Barry Sloane: Go ahead, Scott. From seven, you mean from seven. We say flat sequentially or flat?

Scott Price: Flat sequentially, yeah, in third quarter.

Barry Sloane: Go ahead, Scott.

Scott Price: I’d say, Chris, we’re expecting on balance, pretty similar production numbers for the third quarter, slightly higher. So, I would say the premium on loans for the quarter was 11.02%. We’re expecting 11% for the third. So, I think on 7(a), that’s what you can expect. The ALP program has some — we’re expecting volumes to come in there. Those prices are — that production can also drive results. So, I don’t want to get too myopic on 7(a) 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.

Christopher Nolan: Great. Final question. Given the new hire for business deposits, what’s your thinking in terms of how to bundle services that the 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 second half of the year, same-day payroll. So, because we — our 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 wait until Monday, for example. So that is the type of thing. 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 all the batches that occurred in addition to any ACH money that came in or Fed money that came in, et cetera.

So, these are all things that are on the drawing board, and we will roll them out over the course of time. A lot of it is based upon having the right software interface with clients for the client experience as well as training the staff, which we are in full gear on. I can’t tell you it’s going to happen. It can’t happen quick enough.

Christopher Nolan: Great. That’s it for me. Thank you.

Barry Sloane: Thank you, Chris.

Operator: Thank you. Our next question comes from the line of Bryce Rowe from B. Riley. $Your line is now open.

Bryce Rowe: Thanks. Good morning. I wanted to 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 the — 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 some of your lending products, especially the 7(a) 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, put a lot of — put commercial real estate aside to put a lot of stress on business owners where the ’21,’22 and ’23 vintage loans, which were done when prime was at 3%, 4% and 5%, is now 8.5%. Now I don’t know, priced — 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, and 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-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 higher for longer scenario. I mean, I scratch my hand a little bit. 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. Unless the Dow Jones down 1,000 points a couple of days in a row, then maybe you might think of it as an emergency, but the Nikkei was down 12%, now was up 10%. I mean it’s pretty volatile. 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 within our range at a 12 handle stock price. This isn’t a bad place to be.

Bryce Rowe: Yeah. I hear you. I tend to agree. In terms of another comment you made, I think Scott said that you all have baked in just 125 basis point cut into maybe into your forecast or into the guidance. How do you think about multiples of 25 basis point cuts and how that might affect the range?

Barry Sloane: Yeah. So, it’s a good question. So, I don’t know what the market thinks about most banks. And when people talk about rate cuts or hikes, they never qualified. Is it SOFR? Is it the whole curve? Is there a shift, et cetera. 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 in longer rates. I think from our prospect, the valuation on the portfolio, and this is really important, if short rates were to be cut, we would pick up a basis point to basis point coupon on our securitized debt, which I think is close to $200 million, okay? The SBA loans typically lag on a quarterly basis. So, depending upon whether the rate cut is September 1 is September 30, you could have the same coupon on the SBA portfolio on January on December 31 as you’ve got 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 is very good. We believe we’re fairly agnostic to rates going, and that’s where we try to be up or down. We’re not sitting here like most of the financial institutions frame for rate cuts that we need rate cuts to bail us out. Because, look, 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%, it depends upon what happens in the rest of August. But if rates came down by 25 institutional securitized debt on the SBA NSP upfront portfolio would come down.

The coupon of the portfolio itself may lag because it’s quarterly adjust. 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 up for CDs would come down. I think everything else pretty much remains steady.

Scott Price: And Bryce, just to tack on to that. If you go back to my comments on the transcript ready, you’ll see that we got about $170 million of CDs repricing or maturing in the next six months. So that will provide opportunity to flow those changes through. 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 and we’re thinking about it.

Bryce Rowe: Okay. Okay. Last one for me. Just 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 kind of the drop-dead date for that?

Barry Sloane: The date in the application is Q1 2024.

Bryce Rowe: Okay. ’24, ’25 you mean?

Barry Sloane: I’m sorry, ’25. I only had a half a cup of coffee. Thank you, Bryce. I appreciate that. I need a lot of help here.

Bryce Rowe: All right. Thank you, guys.

Barry Sloane: Thank you.

Operator: 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.

End of Q&A:

Barry Sloane: We can’t thank everybody for participating, particularly the analysts, and we appreciate the thoughtful and 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.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.

Barry Sloane: Thank you.