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

Everyone, this is Brad Thomas, and welcome back to The Ground Up. Today, we're back on early this morning with another CEO interview, and we're moving over to the BDC sector, or really, let's call it, the BDC/bank sector. Today, we have Barry Sloane with us. Barry is the CEO of Newtek Business services. That ticker symbol is NEWT. And Barry, it's good to see you today.

Great. Great to be here. Thanks for having me.

You bet. Well, we spoke, I guess, last quarter. Of course, we read a pretty detailed article. I guess it was the second quarter. And now we're third quarter, and just hoping we can get an update on where you are, what's happened in the earnings. And I guess, to start off, Barry. We discussed this last time we spoke about the conversion over to a bank holding company. How is that progressing? And do you have any time line for that?

We appreciate it. And what we said yesterday on our earnings call was that there's no change, and things are proceeding as we had previously forecast. We originally, in early August, gave a range of 6 to 12 months. We freshened that up yesterday by indicating it's more likely to 12 than the 6 based upon, right now, there's changes at the Federal Reserve with respect to Powell, there's changes at the OCC in terms of a new commissioner being nominated and openly appointed. And with that said, we believe that we're in good shape to do what we positioned ourselves for in August, and we're continuing down that track and putting a lot of time, energy and effort into what we believe is in the best interest of the shareholders.

Great. Well, Barry, oftentimes, I like speaking with management teams to really clear confusion. We're a little confused over what we're seeing, I guess, in the marketplace. Your NAV per share and dividend both were higher, but the market reacting negatively to third quarter results. It appears to be confusion out there. I do see you've got a couple of analysts with some different -- just kind of different opinions. I know there's one outlier. So can you talk a little bit about kind of what your performance is versus kind of maybe helping me interpret is this confusion in the marketplace?

Well, I appreciate that. Look, going into the earnings call, we, 3, 4 weeks ahead of time, stated we're going to -- we're forecasting $3.40. We reaffirmed $3.40. There were 3 analysts that had guidance around $3.40, and there was 1 analyst that had guided -- 1 said $3.58. Well, that changed the whole guidance number. So the headline on infamous publication said miss, miss, miss. We didn't miss. Not only did we not miss, but we have $1.05 dividend declared for Q4. It's $3.15 dividend for the year, $3.40. We also gave guidance for the first quarter of $0.65 as a BDC. We talked about on the call straight-lining the $0.65. That gets you to $2.60. But our first half is usually weaker than the second half, and it's either 45, 55 or 40, 60. And when you play around with those numbers, that gets you to 2 80 or a number above 3. So -- but we don't know whether we're going to be a BDC for the full year. We do believe the stock should have some, I'll call it, inherent transformational discount. Am I buying a BDC or am I buying a bank? Arguably, the market will sort that out and say what's expensive versus inexpensive. As a BDC with that kind of dividend and the average internally managed BDC clearing the market at 6.5% to 7%, you guys can figure out the math. The external ones are clearing the market at 8%, figure out the math. Now look at it in a bank context and look at the technology-enabled banks like Live Oak Bank that's approaching $100 a share and 6x book, and SoFi and LendingClub, which was at 6 and is now at 46, we think we're doing the right thing, we're paying attention, we have our head down. Here's the issue, Brad. There's a lot of noise in our company. And I will not argue, it's not easy to follow. But if you listen and you take guidance from the company, which our investors have done over 10 years, it's really worked out pretty well.

Yes. So looking at kind of your previous earnings, I noted last year, especially in 2020, you had a pretty nice -- you had a lot of exposure in the PPP lending. Does that change the story any now that there's been a decline in the PPP business?

It does, and we spent a lot of time on the call yesterday talking about the comparison of the third quarter in 2021 to the third quarter in 2019. So non-PPP, right? So we're getting the PPP noise out. The third quarter of 2021 had no PPP income. The third quarter of 2019 had no PPP income. Our originations were $161 million of fundings versus $119 million, a 43% increase. We stated on the call that we had $100 million of loans in the month of October, approved pending closing. We've never had $100 million of loans in a single month. I mean, wind that over 12 months, I'm not suggesting that we're going to do $1.2 billion. But there's growth. Look at the pipeline data that we gave in the report. There's growth. We talked a lot about growth in the core lending operation. Without PPP's history, it's gone. So when you look at the pipeline, when you look at the dividend and come up with 2 60, 2 80 or something at 3, that's for you guys to figure out because we're not giving a full year's dividend guidance when we may not be a BDC. But the nice thing is you're getting paid to wait. In the third quarter, investors got $0.90. In the fourth quarter, they got $1.05. When you look at the 10-year track record, the track record of the company because of the growth of earnings has been driven by stock price appreciation, not just the dividend coupon and growing dividends, yes. But the point here is there's a story that this is a company that puts its head down, manages its risk over 20 years through the '08, '09 credit crisis, through the pandemic, grows its earnings and dividends and manages its risk. That's the whole story here.

Yes. One other thing I want to ask you about, I'm sure you've -- we've all felt the supply chain and the labor market issues out there. Has that impacted the SBA lending side of your business? Have you seen any impact there?

I think that the economic problems across the U.S. and the globe, with respect to labor shortages inflation, it impacts everything. It doesn't impact our customers any differently than any other business out there. But it does have an impact. However, the nice thing about our client base, they're small, they're nimble, they could feel it and they could make changes on the fly versus dealing with bureaucracy, having to deal with earnings numbers and things of that nature. So our customer base is in great shape. Our currency rate and our portfolio improved from the second quarter of '21 to the third quarter of '21. So we feel pretty good. I also talked about the programs of employee retention tax credits, economic injury disaster loans that are all benefiting our clients and that we have 60 people in our servicing unit that work with our clients regularly to make sure they've got the tools that they need to get through this market in addition to our other solutions that we have.

Great. And Barry, can you remind, again, of course, I'm in Florida today, as you are as well, what's the geography? What's your lending geography?

Yes. The beautiful part of Newtek is, I go back to my MBA days, diversification, diversification, diversification and then diversification. So we have no single stake that's -- then maybe there's something in 11, but it's -- I'm going to say it's not over 10. So I would tell you the top 4 states in the U.S., California, Texas, New York and Florida, I think we're under 35%. So we're probably half of what GDP is. We are geographically dispersed and spread out. We're dispersed in industry, ZIP code and origination source. That's what's kept us in this marketplace. The other thing is our average loan size of risk in the 7(a) portfolio, 160,000.

Well, Barry, I want to thank you for jumping on this morning, and again, help us clear up this confusion. We are covering this sector now. It will be -- we're going to continue to watch this transformation into the banking sector. Thank you again for jumping on today, and we'll look to catch up with you maybe again shortly.

Thanks, Brad. Appreciate the time. Thank you.

You bet. Thank you.