NewtekOne, Inc. (NEWT) Earnings Call Transcript & Summary

[Audio Gap] Financial Institutions Group at Deutsche Bank. Welcome to our Annual Global Financial Services Conference. I'm very pleased to have Mr. Barry Sloane, President and CEO of Newtek Business Services, join us today for the presentation. Barry can walk you through about Newtek business and the performance. Newtek Business Services is an internally managed BDC. It's traded on NASDAQ under the symbol NEWT. I'll pass on to Barry. But in the meantime, if you have any questions, on your web portal, you will see a box for Q&A. Please send questions through to me, and I will ask Barry those questions after his presentation is done. With that, I would now like to hand over to Barry. Barry, over to you. Thank you. Barry? Hello?

Vik, we're just trying to reconnect with Barry.

Okay. Repeat myself or was it live? I was -- I'm not sure.

Yes. We're still live, but he got disconnected. So we're just trying to get him back.

Got it. Okay.

Please bear with us.

Sure.

Good afternoon. Vik, can you hear me now?

Barry, I can hear you more than once. Yes, I can hear you, but there's a lot of echo from your side. Maybe you have your audio as well as computer on unmute. So I can hear echo. But I don't know if that's the reason, but yes, I can hear you. Hello, can others hear me?

Vik, this is Cindy again, and yes, we can hear you. We just -- Barry got disconnected again. We're just trying to get him back.

Okay.

Okay. Vik, can you hear me now?

I can hear you loud and clear, Barry.

All right. We're going to go old school. I've called in, and I'll see if I can get some help rotating the slides. So good afternoon, everybody. Sorry for the technical difficulties. This is Barry Sloane speaking, President, Founder, CEO of Newtek Business Services Corp. I certainly appreciate your patience and staying in there with us today. Let's go to Slide #2 for the presentation. Newtek's business purpose today is we are a business development corporation under the '40s Act -- FCC '40s Act company. And we provide financial and business solutions using state-of-the-art technologies to service over 100,000 small and medium-sized businesses all across the United States. We acquire customers using a proprietary technology called NewTracker, which allows us to track customer referrals and process the business from an operational perspective from A to Z. Management has used this technology over the course of 23 years as we were founded in 1998. Newtek has built a robust network of nationally recognized alliance partners, entities like UBS, Morgan Stanley, Stifel Bank, Navy Federal Credit Union and others, that refer business to us on a regular basis and allow us to service their customers with our solutions. Go to Slide #3. Newtek is positioned as a business solutions company of choice. Please feel free to go to our website at newtekone, N-E-W-T-E-K-O-N-E.com, and see the different types of solutions that we provide to small and medium-sized businesses. On Slide #4, we always like to point to the history of the company. As I mentioned, we've been in business for over 23 years, and we've had a really strong equity return to our publicly traded shareholders. So far, year-to-date, we're up 82.6%. We're most proud of our 10-year return over, 1,000% over that 10-year period of time. Going to Slide #5. When you look at our business model, I think it's important to note, I'd like to say we're an overnight success. It just took us 23 years to get here. The company has really developed a solution strategy and a way to process the business with customers without having to take them out for golf, lunch, dinner. It actually fit very well into the pandemic environment that we're just coming out of, which most people realize, pandemic or no pandemic, this is the future of servicing customers, whether they're consumers or small to medium-sized businesses. As a business development corporation, we have to pay out between 90% to 100% of our income to our shareholders. We have forecasted a dividend for 2021 between $3 to $3.30, midpoint of $3.15 on an annualized basis. And historically has -- and the company has historically paid those dividends, obviously out of taxable income. We're currently firing on all cylinders. So when you look at what we do for clients, we lend them money, we give them payment processing solutions, payroll health and benefits. We manage their technology. We're a [ future fit ] licensed insurance agency for all their property and casualty and business needs. So it's a real full, robust business model for SMBs. And the Small Business Administration estimates there's in excess of 30 million of these companies across the United States. On Slide #6, we talk about our dividend expectation. One of the core products that we have is we are a lender to SMBs through the SBA 7(a) program. We estimate we'll fund between $580 million to $600 million worth of loans this year. We also believe we will fund about $125 million in calendar year 2021 of SBA 504 loans. And we have reopened our nonconforming conventional loan program with the pandemic's effects dissipating. And we're really excited about this program. It will be a significant contributor in 2022 and in the second half of this year. Newtek has participated in the Payroll Protection Program, and in calendar year 2021, we forecast that we'll fund in excess of $600 million worth of loans. On Slide #7, we obviously talk about dividends currently for the first quarter. We talk about our forecast for the year, which we chatted about. We talk about our history. I think, once again, it's important to note, the dividends that we pay to our shareholders have historically been out of earnings, and we continue to do so. That is part of the company's dividend policy. Slide #8 really focuses on some of the first quarter financial highlights. And as you look at those metrics, from a 2021 to 2020 and even 2019 comparison, you could see that the company really did exceptionally well. Adjusted NII of $23.5 million or $1.05 per share for the 3 months ended March 31, a 400% increase compared to what we reported on March 31, 2020. Our debt-to-equity ratio, 1.27. Very important to note, BDCs are not allowed to leverage more than 2:1. But we're able to earn significant income, many of it on a reoccurring revenue basis, without a lot of operating leverage. Without a lot of operating leverage should demonstrate to the investor class that we're not incurring a significant amount of risk where other nonbank lenders or financial services company like banking institutions have significantly more leverage. Let's go to Slide #10. We talked about the PPP program. So that program has been around approximately for 2 years to provide funds to small- and medium-sized businesses under the CARES Act. That kept a lot of small and medium-sized businesses going during the pandemic. We funded $1.2 billion of PPP loans in 2020, and those loans were sold to third parties so they were able to leave our balance sheet, and that was about 10,500 units. And we estimate that for this calendar year, in 2021, about $600 million worth of loans, 14,000 units. So we're very proud to forecast the amount of loans that we've made to clients. Those are 24,000 units of new customers, in many cases, to Newtek. On Slide #11, we also further talked about the success that we had in the PPP program. And in addition to that, we've -- this year, unlike last year, we're active and will be active for the full calendar year at also funding 7(a) 504 nonconforming loans, plus the other 4 portfolio companies that we'll talk about in the presentation. Once again, to repeat, we're absolutely firing on all cylinders. Slide #12 talks about our 7(a) lending forecast for the first quarter. We did $104 million of 7(a)-funded loans while we did the PPP program. And we're forecasting a full $580 million to $600 million for the calendar year. Most of those fundings will come through in the second half of the year. Slide #13. Newtek Business Service Corp., the publicly traded BDC, does have an investment-grade rating, BBB+ by Egan Jones. In January, we issued $115 million, 5.5% note due 2026. They're noncallable one, and after that, they are callable. And some of those proceeds were used to refinance higher-cost debt that we had on the books. Slide #14. We talked about some of our further lending highlights. One of our portfolio companies, NBL, Newtek Business Lending, funded $20.7 million of loans in the first quarter of 504 and $31 million in the month of April. So we're in a good pace to hit our $125 million origination plan for the calendar year. We also announced that we closed a $100 million credit facility with Deutsche Bank in addition to the $75 million credit facility with Capital One Bank just for 504 lending. Slide #15, talking about the effects of COVID. Obviously, we believe that going to the hybrid model, which many public companies and large private companies are going to, enabled us to shrink our footprint. We're able to close many offices across the country, our Irvine office, our Milwaukee office. We have closed an office in Phoenix. We actually got out a lease in New York without taking a loss on it. So we've had some nice cost-cutting initiatives with respect to COVID-19. So as we look at the business going forward on Slide #16, we look at all the different silos that we have. I refer to them as silos. We obviously spent a lot of time on this call talking about lending, which currently represents about 65% of our income and the balance sheet on the portfolio. Our merchant services business is really important to us as a portion of our NAV, about $115 million, enterprise value of about $150 million. So that represents almost 1/3 of our NAV, our payment processing business, that's a portfolio company known as Newtek Merchant Solutions. Very important business today as we see the payments' changing landscape with entities like Square and PayPal and Shopify really being major players in the market. That's a business for us that will generate about $14.5 million of [ EBITDA ]. We obviously also had a Managed Tech Solutions business that should generate about $6 million of [ EBITDA ]. So we'll talk about them a little bit more in the presentation. Slide #17 talks about our pedigree in lending. We're the largest nonbank, government-guaranteed SBA lender. Including banks, we're fourth or fifth this calendar year. We've issued 10 S&P-rated securitization since 2010. They've either been AA or single A-rated. Our loans are floating rate, quarterly adjust over prime, the average balance of $172,000. So you could see we clearly have got geographic diversification across the risk spectrum of our portfolio. And when we make an SBA 7(a) loan, 3/4 of the loan has a government guarantee on it, allows us to sell into the capital markets at a premium. As a matter of fact, if you go to Slide #19, you could see the premium trends for the government-guaranteed piece. So 75% of $1 million loan, or $750,000, historically, if you look over the course of time, it's been sold at about 11% premium. In Q1 2021, based upon the insatiable appetite of government-guaranteed floating rate notes, the premiums have been much higher. Going backward to Slide #18 for the moment. We talked about how do we [ get up ] business opportunities. I think it is important to note, in Q1 2021, we got 177,000 loan referrals per unit. It's a record number for us. We're getting a lot of referrals from our alliance partners, primarily because of how well we've done in the market, how well we service our customers and full transparency using the NewTracker system to our alliance partners. Slide #20. We talk about the seasoning of the portfolio. That's important from a risk measure. You can see that our loan portfolio in the 7(a) area is fairly well seasoned. That's important. We have an article that we posted as part of this presentation, you can see on Slide #20, that gives people a sense for where the biggest risk portion of loans are. And particularly once you get out in that 36, 37, 40th month, a good percentage of the risk is squeezed out of these loans. Slide #21 shows our currency rate in the portfolio, very well behaved coming through a pandemic. Slide #22 and 23 shows the economic and cash consequences of what happens when you make an SBA 7(a) loan. As I want to conclude here shortly and get to a Q&A opportunity for those that have patiently waited for the presentation, I think I'm going to fast forward all the way to Slide #30. We talked about Newtek Merchant Solutions. That's one of our portfolio companies, has a net asset value on our books of approximately $115 million net of debt, about $150 million, including debt. You can see the publicly traded comparisons. Those merchant business is basically giving the businesses the opportunity to take electronic payments, Visa, Mastercard, Discover, American Express, card-present, card not present on the Internet or mobile. Been in this business since 1982. Should generate about $14.5 million of expected EBITDA this year. And this is obviously an important, growing segment of the market. Another important portfolio company to focus on is our Technology Solutions business. We're indicating approximately a $6 million revenue forecast for this on Slide #33. Obviously, cloud computing, Managed Tech solutions. We manage a data center in New Jersey and Phoenix. We have over 15,000 customers that we provide 24/7 solutions to manage their hardware and software and manage their technology for them. And to conclude, I'm going to fast forward. Let's go to Slide #38. Looking at a catalyst for the company, particularly which is important trying to look at how well we've done in this particular calendar year. We're renewing our SBA 7(a) loan efforts. We're excited about the growth of Newtek Technology Solutions, that's one of our portfolio companies. We think that business is significantly growing its EBITDA number. We're very positively inclined about our Merchant Services business, Newtek Merchant Solutions with a forecast of $14.5 million to $15 million off the calendar year. So from an investment perspective, on Slide #31, we have a differentiated and diversified BDC model. We're an internally managed BDC, so we don't pay management externally. Everything is internally. So our management interests are very much aligned with shareholders. Management owns about 6.2% of the outstanding shares. We've been in the business over 23 years. There's not a lot of hidden leverage in the business model. And obviously, historically, it's been a good investment opportunity for all of our shareholders and employees and creditors as well. And with that, I'd like to turn it over to Vik to -- if we have any Q&A coming in.