Newtek Business Services Corp. (NASDAQ:NEWT) Q2 2023 Earnings Call Transcript

Newtek Business Services Corp. (NASDAQ:NEWT) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good day and thank you for standing by. Welcome to the Newtek One, Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listening-only mode. After the speaker’s 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 speaker today, Barry Sloane, Chairman and CEO. Please go ahead.

Barry Sloane: Thank you operator, and good morning everyone and welcome to our second quarter 2023 financial results conference call. Everybody listening in, you can follow along on the PowerPoint presentation by going to our website newtekone.com; go to About, go to Investor Relations section and you will see the PowerPoint presented there. Also joining me on today’s call is Nick Leger, our Chief Accounting Officer of NewtekOne; Scott Price, our Chief Financial Officer of NewtekOne and Newtek Bank, National Association; and Nick Young, President and Chief Operating Officer of Newtek Bank. We’re pleased to report in the second quarter, as a financial holding company. Obviously, for those of you that are somewhat familiar with the story, some of you are not, we recently converted from a business development corporation with the acquisition of National Bank of New York City on January 6th.

Therefore, some of the usual comparisons you’ll see and an earnings presentation make it a little bit more difficult. For example, comparing this quarter this year to this quarter last year when we were a BDC, given different accounting gyrations is difficult. You can obviously get that information by, looking towards our 10-Q, which will be published shortly after this call, as well as some of the financial information that we provided in the press release. I think it’s also important to note that we’ve been now a bank for a little over six months. We acquired National Bank of New York City on January 6th, a 59 to 60 year old financial institution that had a very different business model. It was a smallish bank, a community bank, lending locally in its market, which had a big hill [ph] decline and a lot of wind in our face, and we are really thrilled that we’ve been able to hit the ground running with a great management team, a great business model, loyal customers, and tremendous vendors and providers that really enabled us to, I think, produce tremendous six month results for our first six months positioning the company as a financial holding company.

We’re not a NewCo, we’ve been around for almost 25 years established in 1998 privately, been published in September of 2000 and we really look forward to demonstrating that the growth that we’ve had over our history will continue. And hopefully, you’ll be able to glean that from the information that we’re going to provide for you today. Moving forward to the forward-looking statement on slide number one, we’d appreciate if everybody have an opportunity to read that. Now, going to slide number two, talking a little bit about our second quarter results as a financial holding company. We talked about completing the acquisition of National Bank of New York City on January 6th. Important points of focus for this particular presentation. First of all, we picked up bank analyst coverage within the first six months.

Mike Perito has recently picked up coverage from KBW. We appreciate his efforts. Crispin Love, a new analyst for bank coverage from Piper Sandler. Bryce Roe from B. Riley, also covering banks. And, hopefully, Raymond James will transition its coverage over from BDC coverage to a bank analyst. We’re hopeful that’ll happen in the near future. And last but not least, Chris Nolan from Ladenburg. So, we’re really appreciative. I think part of the reason why people have become more familiar with the company is the research coverage that we’ve got from the street being able to lay out what we look like in this particular mode and, getting — leaving behind the [Indiscernible] BDC type accounting. Clearly, throughout this presentation, the ability that we’ve been able to demonstrate to raise insured deposits quickly with a high growth rate.

The fact that we believe we do a really good job of interest rate risk management in a very difficult interest rate risk environment, but we don’t have long duration fixed rate bonds or loan portfolio where we do have those types of assets, they’re typically matched by time deposits. And our core product is the SBA 7(a) loan, which are prime plus 3 type coupons, which today would be 11.5. So, even as if you’re raising money in the fours or fives, it’s very attractive bid/ask spread floating rate quarterly adjust, no cap on the loans. We’ll also be able to demonstrate today and as a focus, we want investors and analysts to look at the return on average asset and return on tangible common equity ratios that we’ve been able to produce in the first and second quarters and through the first six months of the year, as a bank in the second quarter 4.9% return on average assets, that’s an exciting number that we expect to continue given our business model and what we do.

Return on tangible common equity also north of 30%. We’re proud of those numbers. Even at the HoldCo, which obviously we could talk about where the HoldCo on a consolidated basis isn’t quite as attractive. Approximately 2% return on average assets and a little over 15% return on tangible common equity. On slide number three, when we talk about our diversified streams of revenue and income, one of the benefits of an investment in NewtekOne is you get multiple streams. We are not a one trick pony, not just looking to arbitrage spread income, for example, which is typical in most of the financial institutions, holding companies, and banks that one might invest in. So, the primary engines for earnings in the bank, we look forward to declaring our first dividend from the bank in the near future.

We’ve already declared dividends to our shareholders up at the bank holding company. We did $0.18 in Q1, $0.18in Q2. Newtek Small Business Finance is the non-bank lender that is store we did our SBA loans out of. That business is in a rundown mode. It is segmented in our Qs. That’s the legacy portfolio of 7(a) loans. We also have, subsidiaries that are owned by the holding company, Newtek Merchant Solutions, Mobile Money, Newtek Payment Solutions, Newtek Insurance Agency, Payroll Solutions, all are profitable. We’re excited about the growth opportunities here, the cash flow they provide to the company and the earnings engine. And obviously, our joint ventures in the non-conforming program. They’re a little bit difficult these days, but we’ll soon look to get back on track as the economy is stabilizing and inverted yield curve makes that a little bit more challenging, but we feel very good about our opportunity in the non-conforming loan segment with our joint venture partners with that activity sitting up at the holding company.

On slide number four, we did talk about the comparisons that are difficult between, the current NewtekOne year-over-year versus the Newtek that existed in 2022. Obviously, difficult to compare the accounting gyration between a 33 Act Accounting and a 40 Act Accounting. On slide number five, we view ourselves as a technology-enabled solutions provider and we’re excited about that label because we think it’s accurate. We are not just a depository. The depository is one of the many things that we do for our clients to make them more successful. But clearly throughout this presentation and our Qs and our information we’re providing today, you’ll be able to see we had tremendous success in gathering deposits from a $140 million of deposits when we took over the bank, to $447 million of deposits as of June 30, 2023.

Loan originations moving the SBA 7(a) business with POP status or from Newtek Small Business Finance, non-bank lender into the bank. We got close to $200 million of 7(a). It sounds easy, yes just move everything over. Quite challenging. You have to move staff, you’ve got to move software. You’ve got to move processes, wiring capability, bank accounts, set policies and procedures up. We’re happy that we’ve been able to demonstrate that we’ve been able to hit the ground running. So, when some of these early health decline, headwinds come off our back, we believe we’ll be able to run faster, jump higher, and deliver continued improving results to our shareholders. One of the things we’ve obviously been able to do is staff and recruit with great talent.

Obviously, Nick Young, President, Chief Operating Officer of the bank, who’s here with us today was a great addition. We’ve recently been able to bring on Scott Price as Chief Financial Officer of NewtekOne HoldCo as well as Newtek Bank National Association. In addition to that, we’ve recently hired a Director of Bank Operations, in Burt Chandler who’ll be helping build out our back office for various different depository functions. People like Tom Susie [ph], John Bivona, Brian Lawn [ph], real excited, and that’s combined with the existing talent pool that we brought over from the Newtek BDC that we’re able to move into the bank. Obviously, we talked about a mantra of no branches, no brokers, no bankers, no BDO. Sometimes I get taken to task on the concept of no bankers.

The reality of it is we do not have traditional bankers or bank BDOs. What do I mean by that? The $0.25 million or $500,000 a year professionals that exist that most of the 8,000 to 9,000 financial institutions in the United States to take clients out for breakfast, lunch, dinner, golf, bowling, or whatever they do, bring in deposits and get paid those types of dollars. Well, we think that as the market transitions, to our business model and artificial intelligence and utilization of technology for deposit gathering, these types of things will be less desirable. The good news is we don’t have that. We don’t have that expense infrastructure. We’ll talk about our efficiency ratios and why we’ll be able to get better and better as time goes on.

But we don’t have the — one thing about the drag, we don’t have these types of expenses that drag us down. We currently have one branch in Flushing, New York. Our operating headquarters is in Miami, Florida. We look forward to growing our business without the use of branches, brokers, bankers, and BDOs that we currently don’t having the inspect in the expense structure and our operational processes. I think it’s important that we view ourselves and our staff view ourselves as being able to provide the superior service and products to clients. If we cannot give the customer the Newtek Advantage, which is the benefit of doing business with us, we haven’t earned it. We must earn every transaction. We must be better. We must be superior than our competitors.

That’s Newtek Advantage. The Newtek Advantage is obviously a technological platform, but just doing business with — is a Newtek Advantage. We’ll demonstrate that throughout our discussions today and how we deal with our clients every single day. We’re also going to begin to track sign-ups for the Newtek Advantage. We’ll talk about how many we have to-date and start to track, our success in this particular area beginning in Q3 and Q4. Slide number six, from a capital markets perspective, tracking our stock. For those of you that have hung in there with us, over the years, historically, we’ve been a very good performer. We obviously transitioned out of the BDC, which was extremely painful, number one from the longevity standpoint. Transitioning from a dividend paying stock into a stock that still pays a very nice dividend, but also is relying upon retained earnings and growth in price appreciation.

So, this year-to-date, new 14.06, the S&P Regional Bank Index to carry down 15.57. So, we’ve outperformed the banking index by almost 30 points. We’re very proud of that accomplishment and achievement and have even outperformed the Russell 2000. For those of our legacy investors in BDCs, you could buy a T Bill today at 5.5%. So, I don’t know what’s so attractive about the 9% ordinary income that a BDC pays without a lot of capital appreciation. I understand that a lot of people like that dividend. We still pay a very nice dividend. It’s about a 4% yield. It’s also taxed at a qualified rate. And, hopefully, we’ll be able to get back to the types of performance once we’ve turned over — continue to turn over the stockholder base. According to the NASDAQ online information that I’ve received, that it’s not completed yet, the institutional ownership of our stock is up to about 31%.

That is going to continue to grow as we get all the filings through August. But that’s where we are as of today, and we’re excited about that. On slide number seven, we talked about a differentiated business model. Some of the things we’ve talked about, obviously, in the former six slides, well managed asset liability strategy. We do understand that most deposits have zero duration, but on a going forward basis, the ability to get more deposits on commercial demand deposit accounts with our NewtekOne 1% account and 3.5% on commercial high yield savings to be able to work with our payroll business. Our payments business and our lending business to gathering deposits is something that will start to track beginning Q3 and Q4. That will take a very, attractive NIM and make it even more attractive and provide a stickiness to those particular deposits.

When you take a look at our net interest margins, these are margins that exceed typical bank and financial institutions. We talked about our ROA and ROTC. We can’t say it enough. This is why we are an interesting opportunity for investors that want to invest in technology-enabled banks, technology-enabled solutions providers to the all-important independent business owner community in the United States. We’ve obviously done a real good job for the first six months of the year, demonstrating we were able to shift and gather deposits and make loans. We will, going forward, be able to demonstrate the ability to bring in deposits for all these different verticals as well as the basis and understanding of the Newtek Advantage. On slide number eight, we talk about our second quarter financial highlights.

With our previously issued forecasted guidance of $0.26 per common share, net interest income of $5.7 million, that was an improvement sequentially over the $4.6 million. This is at the NewtekOne level. Total assets up from $1.2 billion to $1.4 billion. I think it’s important to note here, we’ll talk about this going forward. We’re $1.4 billion of asset, but we’ve got an infrastructure that we believe actually can be a much, much bigger financial institution without having to add the additional expense to it, and that’s where our efficiency ratios are going to grow. As a matter of fact when we when we make loans, even though the balance sheet and the SBA only grows by 25% of the loan, please understand that we think this year will probably do about $1.25 billion worth of loans and in the past, with the PPP business going on, we are closed $1.25 billion, $1.5 billion.

So, we’ve got an infrastructure that could do a big, big amount of business and can really handle a much bigger financial institution. People, process, software will be able to manage it, which should really help grow our earnings per share for our customer bases. Total borrowings flat, $6.97 million. One of the drags on our business relative to return on tangible common equity and return on assets is the amount of liquidity that we’re currently carrying. So, you could see $256 million, including $66.7 million of restricted cash at June 30. I think we’re carrying about $250 million of cash sitting at the Fed. So, not much of a margin on that, but we’re trying to keep the excess liquidity. That’s the cash that we’ll need that’ll carry us from a deposit perspective pretty much through the end of the year.

So, we’ve really accomplished a lot of our goals relative to deposits. As you can see, we’ve got really nice risk based capital ratios and Tier 1 leverage ratios as well. On slide number nine, those are the financial highlights for the six months, $0.72 for the for the first six months of the year. We are a second half company. We have always been that way. Net interest income of $10.3 million for the six months ended June 30th 2023. Slide number 10 focuses really on Newtek Bank National Association, just really drilling into the bank. Ensured deposits 90% of total deposits. It’s enviable position. I’m not sure we’ll always be able to stay that way because we will have some larger customers coming into us, which we’ll have to try to satisfy, but we do want to be careful obviously, because those deposits can move quickly as we’ve seen, with the Silicon Valley Bank and Signature Bank issues, but we’re very proud of our ability to raise deposits without having to rely upon just a few customers.

Look at the net interest margin growth. So, before we took over, the bank was 2.7%. Now, that was just starting to layer on, our business model jumping 3.61%. There’s not too many banks that could state that their net interest margin grew by 90 to a 100 basis points in the first six months of the year. Most banks are going the other way. And we believe this is going to continue to expand. We’ll talk about the National Bank of New York City Portfolio, what it looks like, the quality of the portfolio, but it was fairly thin margin. Not a lot of expenses in the bank, a very simple, small local community bank. We talked about our ROTCE or ROA efficiency ratio of 58.7%. That’s a good number, but we do think by the end of the year, that might trend down to as low as 50%, and we believe we can get there.

Here’s our risk-based ratio, Tier 1 leverage ratio also, paired on slide number 10, really good numbers. Slide number 11, we talk about the efficiency ratio again. Operational leverage will help that, financial leverage will help that, further technological innovation, which is in process. We haven’t been able to get everything. We need to get done in the first six months of the year. I do think we’ll have probably another 12 months of building, that’s all built into our numbers. So, we’re going to have some headwinds until we get this bank exactly to where we need it to be, technologically, and from a process standpoint. And we’re really excited about the ability to capture additional revenue from the non-bank business activities. Very exciting about that.

Slide 12, we talked about our ROTCE and ROAA as well. These are going to be great precursors for growing our EPS down the road. Slide number 13 talks about our historical lending most of our 7(a) lending, I should say all of it was done in Newtek Small Business Finance. It’s now in a runoff mode at the holding company. We’re able to move our POP status into the bank. We also began funding SBA 504 and C&I loans in the bank in the first six months of the year. At the close, we infused $79 million of capital. We think the capital of the bank could grow to an exit of a $100 million. That’s a very nice growth in the first year of owning and operating a bank. Most banks had, frankly, start up and, arguably, we don’t view ourselves as startup, but we really have to change the business model.

We have to change the software of so many things that we have to put in motion, staffing, etcetera. So, we’re obviously good at multitasking, with the hill to climb, with the headwinds, the markets don’t wait for you. And we’ve got greater things ahead of us once we put more — some of these items in place. We were able to raise $70 million of capital in the first quarter, despite a tough market, $50 million of debt, $20 million of convertible preferred shares from an institutional investor. Slide number 14 talks about our efficiencies and lending, very, very important. Closed 773 loans for the six months, a 29.5% increase in loan units over the year prior. In dollars, it was 11.2%. I think it’s really important to note, we use technology, not bankers, brokers, branches, or BDOs to help grow the business.

And we’ve been doing this for a long period of time. We do so efficiently, effectively, and with good risk management. This loan productivity capability, particularly, as we look to do more investor based CRE, more C&I loans. This is going to be valuable that we can demonstrate the ability to grow the balance sheet and gain on sale. Once again, the keys to our growth, technology, people, process, no bankers, brokers, BDOs, or branches. Slide number 15 talks about what some people consider our eyesore, a tangible common book value of $7.05 per share per share. We’re not ashamed of it. We just don’t think it has that much relevant value. Although most people tell me that it does. Okay, it’s fine. This is what it is. I think it’s important to note that we’ve got a lot of assets on our books; Newtek Merchant Solutions, Newtek Tech Solutions, Newtek Insurance Agency, Newtek Payroll.

And as a BDC had a fair value of a $166.7 million transferring over into the deconversion, it has a negative tangible book value. However, those businesses generate a lot of cash. Matter of fact, when you look at some of the projections going forward, it generates kind of close to half the income of the business, but yet it doesn’t show up in book value. It’s because we’re different. NewtekOne isn’t like other financial institutions. It basically almost have one trade. We make loans, we have deposits, we clip coupons. That’s not us. We have diversified stream of income. We offer a real value and advantage to our customers so they stay with us and keep coming back and refer a friend is a different opportunity than investing with other types of bank holding companies, financial holding companies, or banks.

As a matter of fact, we look at ourselves as a business and financial solutions provider that also provides depository services to our clients. We’re really excited about what we’re doing. We’re comfortable that in this structure, we’ll hopefully, and the anticipation grow our earnings and dividends over time, and that will drive the stock price, whatever the multiple of book might be. We were able to demonstrate this in the BDC market with our points in time. We traded for significant amounts of time over 2 to 1. And I could recall people telling me in the BDC market, you’ll never trade above NAV. Well, we broke that mode by growing dividends and growing earnings and being successful. On slide number 16, you could see the deposit growth over that six month period of time, 220%.

One of these things we covered, digital account openings in the quarter, 36,100 new client relationships, I believe, that was within the quarter. I think we picked up 45,100 depository accounts from the time we picked up, and owned the bank. Slide number 17 [ph], nice slide breaking out our bank deposit growth, and we’ll get a little bit more granular as we go forward in our presentation and our presentation skills going forward. But you could see about 21% of brokered CDs, we want to get that number down. But we are within our business plan at this point in time, so we’re comfortable with that. We have an unused line of credit at the Federal Emerald Bank of Atlanta. I think it’s about $70 million. So, as we get that number down and we get the Federal Home Loan Bank number, we keep that at zero, we’ll always have that nice emergency capability in the event some unforeseen circumstance happens.

But importantly, we’ve been able to raise the non-brokered retail CDs, total savings deposits, and do so in an insured manner. On slide number 18, I think this is important. We are not just a an SBA 7(a) lender, although it is our flagship product. And for those of you that aren’t familiar with 7(a) lending, there’s no fees, the current coupon at our rates of prime plus 3, is 11.5% loading rate quarterly adjust. In addition to that, 75% of the loan is government guaranteed, and we typically sell it at approximately a 10% premium plus or minus. That’s what helps drive our return on equity or return on assets. The SB 504 loan, which we have slides in this presentation that cover the types of return on equity, an important product that goes into the bank today.

We also I use the word conforming commercial and industrial business loans, conforming relates to conforming the bank underwriting and standards, also conforming investor owned CRE loans, non-owner occupied investor type deals. We’ve actually had success putting both of these categories on at spreads of 350 or greater to the curve. Our non-conforming C&I loans are funded at the holding company and joint some of our balance sheet. We exit out via securitizations. This is also a 20% to 30% ROE business. Slide number 19, we inherited a National Bank New York City Portfolio. This is a five Borough New York City Portfolio Brooklyn, Bronx, Queens, Staten Island — Bronx Brooklyn, Queens, Staten Island. I forgot something, but it’s Manhattan. Sorry, Manhattan.

One more borough there. You’re looking at an average loan size of $1 million to $2 million. The former bank owners and management did a great job. Low loan to values, personal guarantees. There’s no real imminent balloons coming up. These are going to roll over the next 12 to 48 months, primarily asset liability managed with time deposits. This portfolio was marked to the market during purchase accounting in Q1, think that’s important to note. There’s one non-performing loan in the crowd. This obviously is skinny margins, but good quality. And we’re appreciative of picking this portfolio up, but it’s not our business going forward, that low margin type business. We think we could do better making, these types of loans at wider spreads and given our investor base and the other things we do for our clients, we do believe that we’ll be able to get margin.

We’re not always out there to win on price. We’re in out there to win on enabling our clients to be more successful, giving them longer aims, giving them additional products and services, and giving them the Newtek Advantage. Slide number 20 is a typical slide for us that we’ve had relative to what you could look at in a portfolio that we’re building at the bank. And one that currently exists at Newtek Small Business Finance in the bank holding company. Slide number 21 talks about all lending activity, total commercial loan closings for the three months ended $251 million. So, you could see as we’re ramping up or a clip of about a $1 billion of loans if you straight line that. Obviously, you could see what we did in 7(a) on slide number 21.

You could see what we did on 504. And in the quarter, we originated $25 million of non SBA 7(a) loans for the three months ended June 30th 2023. For those of you that followed the 7(a) business, our premiums were down from the prior quarter, 10.15, that adds some volatility to our range stream, obviously, but it’s just something that we’ve dealt with for 20 years and have managed it. pretty well. The current trend is up, and that’s a function of rates rising. Matter of fact, we think we’ll get, and hope to get a nice kick in the fourth quarter. The loan increases that we’ve got in July based upon the Fed raising their rate on the existing portfolio doesn’t kick in until October. So, everything at NSBF doesn’t adjust because it’s a quarterly adjust.

So, one of the headwinds I’m talking about is our funds adjust monthly per se, particularly in the securitization. But the loans are just quarterly. So, we’ll get a nice bump in Q4 with a more fuller coupon, and new loans that we’re putting on the books in the quarter are done at the fuller coupon, but that’s just how the SBA business works. Suddenly, as rates are going down, you got a little wind at your back and now the wind as rates are rising, unfortunately, is in our face. Slide number 23 is, our attempt at putting out what we think are the better market comms for organizations that own financial institutions and really focus on technology enablement, whether it’s in the deposit gathering phase or the lending phase, there really isn’t an entity that’s much like us.

The most closest one probably is Live Oak Bank, a terrific institution with a great business model and plan. but you could see the types of earnings and multiples that are out there when these organizations are successful. Slide number 24, the importance of payments, thanks to two things effectively. They make loans and they move money. Most banks do not really move money well for the independent business owner. That’s our target. or small to medium sized business, that’s our target. The fact that we own a payments business for over 20 years is really going to be tremendously helpful. And the legacy business is really as a super ISO. But to be able to do items for our clients like same day funding, putting the money into Newtek Depository account, ecommerce solutions, our own POS, same day funding, electronic billing, using bill pay and embedding our debit card in the bill pay.

And these are things I’d like to be said. I would say, yeah, they’re in place. Now it takes time. It takes time to get them done, get them integrated, get the software providers to get them in place, but these are going to be amazing value adds to our client base. And it’s going to give them a reason to do business with new [Indiscernible] allows them to — [Technical Difficulty]. Effectively for a commercial enterprise. This is invaluable, and we think that we will rise to the top in this particular area. Once again, our goal in moving money is to make the business more successful, not just take your money and keep a depository account. Slide number 25 talks about some of the math at our Merchant Solutions business. It’s obviously material.

We expect to do about $15.4 million of EBITDA in our payments units, NMS, mobile money, and POS on top. Slide number 26. Once again, we talked about why payments are important to NewtekOne and to our clients. We will shortly be announcing the issuance of the Newtek Visa Bank debit card, which will give us the ability to access Visa and direct payment rails with that card. And, obviously, these types of businesses are reoccurring fee businesses that can benefit NMS and Newtek Bank, and non-capital intensive. Once again, we realize it’s extremely important to our business owners to be able to move money quickly, efficiently, with really good reporting mechanisms. Obviously, we’re all aware of the products like FedNow. Look, FedNow is not going to be snap your fingers, and it’s all in place.

It’s going to take place over time. But as these markets grow and move, we are positioned for it with people, process, and software. Slide number 27 [ph], Newtek Technology Solutions. There is a typo on this slide. The expectation for EBITDA, $3.7 million for the calendar year. Pre-tax income, $2.6 million. This is a great solution. This will most likely be spun-off over the next 18 or so months, to shareholders in some way, shape, or form, but it’s a valuable opportunity for us. We plan on continuing to maintain a relationship with Newtek Technology Solutions. Slide number 28, [Technical Difficulty] no charge offs to-date on this particular portfolio. I will say we have actually had a default recently. However, with the collateral we’ve got, no charge off to-date.

29 is a typical slide that we’ve shown for 20 years. Cash gain on sale on 7(a). Slide 30 talks about the revenue and the accounting income up to 7(a) loan. Number 31, how our 504 loans are structured, how the income flows through on a 504 loan on slide number 32. On slide number 33, non-conforming business, originating loans today, 3.5 points in fee. Obviously, the recent increases in rates were probably at 11.5% gross, 12.5% gross, 13.5% gross, extremely attractive. We make the loans through warehouse and I’m going to joint venture partners, put them into securitization. A very attractive business for us and we do believe that this business will get regened up now as the capital market are opening to us. This is a capital-intensive business at the holding company.

Slide number 34, the Newtek Advantage. We’ll be talking more and more about the Advantage in presentations going forward in Q3 and Q4. We’d love to suggest that you go on our website, really learn everything you need to know about the Newtek Advantage. This is why customers, SMBs, independent business owners should do business with us. We give Newtek’s clients, analytics, relationships, and transactional capability that other banks just simply do not have. We actually give them an asset day one that they don’t have to pay for that can enhance their business operation and make them more successful. For example, when you go to the Newtek Advantage, you can get a licensed insurance salesperson, a payments person, a depository person, a lending person, all these things are available through the Newtek Advantage and to communicate with them via video.

We believe the advantage can be a market recognized tool This is one of the things that we will spin off to other community banks, credit unions, and an organization that want to be able to provide these types of solutions in their own brands and their customers with us behind them. We think this is a tremendous opportunity. We’re also going to talk about as we have in the past We look to launch, Newtek Accounting where we’ll be able to provide customers a P&L or an income statement and a balance sheet to them. I think that’s important for, a business owner to be able to eventually tied deposits, payments, and payroll into an accounting function. This is a progressive institution that’s looking to meet and exceed the current needs of businesses, but those needs that are going to be need to be met going forward to compete in the environment.

So, we are forward thinking. We’re putting these things in place. We’re excited about our future. We’ll be talking about the launch of Newtek Accounting in the near future. To-date, we’ve opened up 280 Newtek Advantage accounts. That is a slow off. That’ll begin to pick up in Q3and Q4 as we continue to enhance the advantage and market. We wanted to make sure that we are getting the bugs out, polishing up the software, the people, and the process. Slide number 35, we declared an $0.18 dividend for the second quarter. The dividend was paid on July 21 shareholder of record on July 10th. Slide number 36 are some of the key assumptions, that are in some of the forward projections that you’ll see going forward. At this point, I’d like to turn this portion of the presentation over to Scott Price, Chief Financial Officer of NewtekOne and Newtek Bank NA.

Scott Price: Thank you, Perry, and good morning, everyone. I’ll start my comments on slide 37, summarizes our capital position as of June 30th. I’d point out that the regulatory filing the holding company have not yet been filed so that those numbers are preliminary. As you can see, for both the consolidated group and the bank, we are well-capitalized, and the bank successfully deployed capital this quarter and generated nice returns, as Barry has indicated. Slide 38 outlines the summary metrics for the company’s forecast for the remainder of 2023. And slides 39 through 44 provide a good amount of detail on the company’s expected results for the second half of the year. The forecast assumes that we deploy a portion of our liquidity position.

As you’ll notice in our numbers, the asset position is considerably higher, and that’s mostly due to the defensive cash position we’ve maintained given the market turmoil. We plan to better deploy that cash as we move throughout the year and optimize our balance sheet efficiency, as particularly as we look to our originate to sell model. I would point out that as of — excuse me, that as more of the company’s balance sheet composition shifts to the bank and its capital stack, the benefits of lower funding costs should continue to push returns higher all else equal. Our deposit costs are expected to increase as the recent Fed hike takes effect, lower cost CDs mature, and we continue to leverage our online deposit gathering platform. The company expects to continue to execute on its business strategy for the remainder of, the year similarly to the way that we executed in the second quarter.

While not exact, the seasonal patterns that the company has experienced in prior years from the perspectives of loan originations and gains on sale spreads are expected to continue in the second half of 2023. So with that, I’ll turn the call back over to Barry. Barry?

Barry Sloane: Thank you, Scott. Wrapping things up before we turn the call over to Nick Leger, our Chief Accounting Officer. On slide number 38, and I think it’s important to note that We’ve got some projections and obviously, these are not easy to do in a fairly volatile environment, but you can take a look at where we think we’re going to wind up for 2023 at the financial holding company, at the bank. We just like everyone to try to focus on what we believe we can hit for some very lofty goals for return on average assets, return on tangible common equity, both at the holding company as well as efficiency ratios really moving in our direction. Moving forward to slide number 45, from an investment summary perspective, you could see, where we’re looking at relative to our profitability ratios and our efficiency ratios.

We’re maintaining our projections of $1.70 to $2. Although, I wouldn’t say we’re really near the midpoint, we’re probably shading to the lower end of that range, but we’re very comfortable with that particular number that could easily change around with respect to movements in rates or gain on sale prices. there’s a lot of opportunity here. So we just want to be conservative. The second quarter quarterly dividend of $0.18, we do believe we’ll be able to maintain, obviously, given our profitability through the remainder of the year, and we do want everyone to focus as a growth-oriented differentiated technology-enabled financial holding company. We’re excited about what we’re able to deliver in Q1 and Q2. And I now like to turn the rest of the presentation over to Nick Leger, our Chief Accounting Officer.

Nicholas Leger: Thank you, Barry. Good morning, everyone. You can find a summary of our second quarter 2023 results on slide number 48. We’re proud to report our second quarter financial results, which is also the first full quarter reporting as a financial holding company. As you will see in the consolidated statement of operations, upon conversion from our previous BDC investment company accounting, where our portfolio companies did not consolidate in the BDC’s financials, and those activities would historically be reported as dividend income from the investments of the BDC. As a financial holding company, we are now consolidating those portfolio company operations. As a result of this conversion, there is no comparable prior period consolidated financial statements to refer to with the two different types of accounting.

I’d like to start with some of the highlights from our second quarter 2023 consolidated statement of operations. On a consolidated GAAP basis for NewtekOne, our first quarter — our second quarter results are as follows. Net interest income for the second quarter was $5.7 million, which is up 23.9% from the first quarter net interest income of $4.6 million. Net interest income is comprised of $22.6 million of total interest income on loans and fees on loans, offset by $16.9 million of total interest expense. $9.1 million of the interest expense is driven by the interest expense of our notes and securitizations. In addition, $3.7 million is due to the interest from the bank from bank and FHLB borrowings and $4.1 million of interest expense on deposits.

In the first quarter of 2023, the company previously implemented CECL on the Newtek Bank loans portfolio, an additional $2.6 million of provision for loan credit losses was recorded in the second quarter. Net interest income after the provision for loan credit losses is $3.1 million for the second quarter of 2023. Focusing on total non-interest income of $46.4 million, $4.3 million as a result of servicing income $13.2 million of net gains on sale of loans, $6.5 million from technology and IT support income, $10.7 million from electronic payment processing income, $4.4 million of net gain on loans accounted for under the fair value option, and $6.1 million of other non-interest income. Going back to the $13.2 million of net gains on the sale of loans, which comprised of the realized gains recognized from the sale of the guaranteed portions of SBA 7(a) loans sold during the second quarter totaled $18.5 million.

In the second quarter of 2023, Newtek Bank and NSPF sold 566 loans for $154.5 million at an average premium of 10.15%. Realized losses on the SBA 7(a) loans for the second quarter of 2023 was $5.3 million. Moving down to non-interest expense of $40.2 million, which is primarily comprised of $19.4 million of salaries and employee benefits for the consolidated financial holding company, $4.8 million is a result of electronic payment processing expenses, $3.5 million from the technology service expenses, $3.2 million of professional service expenses, and $3.6 million of other loan origination and maintenance expenses, and $4.9 million of other general administrative costs. Pre-tax net income for the second quarter of 2023 is $9.3 million and on an after-tax basis, consolidated net income for the second quarter of 2023 was $6.8 million or $0.26 per share.

I would now like to turn the call back to Barry.

Barry Sloane: Thank you, Nick. Operator, we I would love to open it up to Q&A as that concludes the presentation portion of the call.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Crispin Love from Piper Sandler. Your line is now open.

Crispin Love: Thanks. Good morning. First, Barry, I was just curious if you comment on how you view credit quality to be performing in the loan book and just expectations going forward, your provision came in below your guide in the second quarter? And then also if you could just share what level non accruals were as of quarter end and then if there were any charge-offs in the quarter? Thanks.

Barry Sloane: Sure. I’ll take the first part. I’ll see if, Scott and Nick can help me on the second. On the first part, relative to the provision, I think in prior calls, we had talked about a 7% or 8% CECL provision, which frankly is consistent with what we did, but when you take it back to present value terms, it comes in a little bit less than that. So, we’re — we believe we’re consistent with what we previously forecasted, but from an accounting standpoint, that’s pretty much where it comes in at. Relative to the quality, Scott, or Nick, do you want to pick that one up?

Scott Price: Hey, Barry. This is Scott. I can speak to the allowance and just expand on that. We did make an accounting policy election when we bought the bank and implemented CECL that we would discount our expected losses. So, if you think about the 7(a) portfolio with an over 11% coupon and you discount that back, you can clearly see that a custom discounting, that kind of interest rate will really reduce the expected losses. So, we are susceptible to future interest rate moves and going to be a very interesting, scenario to see play out for the rest of the year. But that is the reason that, for the discrepancy between the two.

Nicholas Leger: And then for the other question, the NPLs as a percentage of the loan portfolio at fair value was about 6.9%. and the realized losses for the quarter was $5.3 million.

Crispin Love: Okay. Thanks. Did you have the NPLs at cost as well or just a fair value?

Nicholas Leger: At cost, I think it’s about 12.8%.

Crispin Love: Okay, great. Thanks. And then just one other question for me. Just on the cadence of earnings in the back half of the year, I think in the third quarter, you’re now expecting $0.37 in EPS previous guide was $0.43, if I’m correct, but kept the fourth quarter pretty steady at $0.69. So, just curious on your confidence in the ramp and earnings in the back half of the year, especially the fourth quarter and what the key drivers that you expect to drive that? It seems that loan growth is expected to pick up a lot in the fourth quarter. So, curious on why that is and then what else is play driving the acceleration earnings? Thanks.

Barry Sloane: Cris, I appreciate the, the question. Your fairly new to us. I think you’re about six months old. But over the course of 20 years, the fourth quarter has always been our biggest quarter. We could also tell by the pipeline that we have going. And I think it was important to try to emphasize that we have a day job of growing our business. Our night job was moving over people’s staff policies procedures, wire instructions, POP status, regulatory issues with two new regulators still keeping — I mean, the headwinds that we’ve had in the first six months of the year, I cannot describe. It’s like having three jobs. I still think we’re going to probably continue to have three jobs for the rest of this year, and then maybe it’ll go down to two, and then maybe it’ll go down to one.

So, we’ll be able to focus most of the time going out in the future on the one job where we hope to be able to, hit the goal stream and outperform things a little bit better than we are today. But, we feel pretty good about the numbers. And, obviously, you’ve got also a fairly volatile environment with things changing quite a bit, particularly on the short end of the curve and pricing and things of that nature. So, we feel pretty good about the numbers. We’ve historically been a pretty good forecaster.

Crispin Love: Thanks, Barry. Appreciate taking my questions. That’s all I had.