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

Good day and thank you for standing by. Welcome to the Newtek Investor and Analyst Conference Call. [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, President, CEO and Founder of NewtekOne. Please go ahead.

Thank you, operator. And good morning, everyone, and welcome to on NewtekOne, Inc.'s Investor and Analyst Conference Call for developing a financial thesis on NewtekOne Inc. Stock symbol NEWT on the NASDAQ. My name is Barry Sloane, President and CEO and Founder of NewtekOne, Inc. And today, joining me on the conference call will be Nick Ledger, NewtekOne Chief Accounting Officer; Nicolas Young, Newtek Bank, National Association President and Chief Operating Officer; John McCaffrey, Newtek Bank, National Association Chief Financial Officer. They're all joining me on the call today and in the future. Nick Young will be focusing on our presentation with respect to deposit growth. John McCaffrey on capital ratio, growth in both, the holding company and the bank. And Nick Ledger, who has historically been with me on these calls will be focusing on the MD&A. Welcome, everybody. I certainly appreciate everyone's attendance after the MLK weekend. For everybody that's interested in following along on the PowerPoint presentation, I suggest you go to newtekone.com, N-E-W-T-E-K-O-N-E.com. Go to the Investor Relations' section. We have a PowerPoint presentation that's [ hung ], and you'll be able to follow along on today's call. The primary purpose of today's call is, as many of you are aware, the company has recently transitioned from a BDC, Business Development Corp. with the 1940 Act status to a financial holding company and converted into a 33 Act. So a lot of different things that are changing. We're extremely constructive and positive and optimistic about our future. And we wanted to help investors and analysts that are transitioning us into a financial holding company with some performance as to where the transaction closed at as well as projections on what the financial holding company will look like. I'd like to turn everyone's attention to Slide #1 on the forward-looking statement. Obviously, in today's presentation, we have a lot of estimates and projections. We're in markets that have a tremendous amount of variability. We've given our analyst community 2 years' worth of forecast here. That's not something that we expect to do on a regular basis. I think 1 year out with quarterly breakouts is something that we can expect. However, to be able to set the tone for where we're going, utilization of capital over time, we wanted to give everybody, both investors and analysts, the best opportunity to analyze NewtekOne and very differentiated financial holding company and business solutions company going forward. I'd like to turn everyone's attention to Slide #2. NewtekOne, our newly named company we announced recently, we're going to go through a rebranding strategy. We have another call 8:30 tomorrow morning to talk about the branding as well as the unveiling of the Newtek Advantage technological solution to our customer base. But today, on Slide #2, we're going to talk a lot about how the company is positioned for growth. As you could see later on in the presentation, we're going to focus on our capital ratios. We are a very well-capitalized bank and bank holding company. You'll also be able to see recently put out press releases that we were able to -- on December 7, close in excess of $300 million in leveraged debt facilities, most of which are at the bank holding company that will give us the ability to grow our business, particularly in the nonconforming C&I loan area, an important area of growth. In addition, we recently announced that Newtek created a joint venture, Newtek-TSO, conventional credit partners. We have forecasted that we'll do between $600 million of nonconforming CI loans in 2023 to $1 billion in 2024. This will be funded with our own capital as well as the joint venture capital and to be held at the holding company. The joint venture partner has indicated a willingness to invest up to $100 million of equity in the JVs. For those of you that have invested with us over the long term and were holders with us as a BDC, I think you're familiar with the fact that a lot of the reason for the transition in addition to some of the things that we're going to talk about with the rebranding and the Newtek Advantage is the ability to use more leverage. BDCs were limited to 2:1 leverage ratio, we've historically not gone higher than 1.3:1. I think by the end of this quarter, which we haven't reported yet, it's estimated we're going to be like about 1.4 approximately. That's an unaudited number at this point in time. But you could see we're always below that required leverage ratio. And obviously, as a financial holding company, we can ultimately leverage up to 10:1. In this presentation will show you how we utilize that capital and utilize that leverage over the course of time. We also would like everyone to focus on the industry average returns. Our ROAAs of approximately 3% to 4%, we think, are extremely attractive. That's at the holding -- financial holding company level. At the bank, they're actually higher. And on the tangible -- Return on Average Tangible Common Equity of between 18% and 25%. The types of returns you typically do not see in a traditional bank or bank holding company. We're very excited about our presentation today. We've waited a long time to be able to do this, and we're very pleased with the closing of the acquisition of National Bank of New York City on January 6 that we're able to do this as of today. Important to note and the reason why we can generate these types of returns is we're not in the business of buying packaged securities or originating low-margin, high-volume primarily consumer loans that are very competitive in the market today. If we were in the residential home loan business or home equity line business or car loans or -- it would be very difficult to generate these types of ROAAs and ROATCEs. With that said, the types of things that we do, which we'll talk about today in the bank and at the bank holding company will enable us to, on a risk-reward basis, really generate high returns. And important to note, this isn't something that we just invented. We've been in these businesses for many, many years and have a real good track record of credit history with respect to these types of asset classes. Also important to note that the holding company, in addition to lending, we have nonbanking revenue using a banking parlance term, reoccurring revenue, payment processing, tech solutions, insurance agency brokerage payroll solutions, health and benefits, all to generate high returns on equity. Let's move to Slide #3. NewtekOne is a company -- is the new name of the company. We hope to actually have that officially named today. We've submitted our paperwork to the SEC on that basis, that should be accepted. And we look forward to legally transitioning the name of Newtek Business Service Corp. to NewtekOne. It's important to note that in addition to the benefits from higher leverage, lower cost of capital to fund our business, we believe we can be recognized for providing solutions to independent business owners all over the United States through the Newtek Advantage, which we'll talk a lot about today and more on our 8:30 a.m. conference call tomorrow morning. Conceptually, the NewtekOne name, which is important for branding is really appropriate because we are the one company that can help our businesses grow and make them more successful and make them more efficient. We become a partner to our clientele, not typically what your average bank does that is interested in taking their deposits and not really doing much else for them and maybe making a loan for them. You'll be able to see this when we demo the Newtek Advantage and are able to show all the solutions that we've created over the course of 20 years by operating all these different businesses and then pushing them one -- pushing all of these business opportunities up into 1 business portal for our customers. By offering NewTekOne's business and financial solutions through the Newtek Advantage, we're very excited. And in addition to that, we give our customers other things that they need. They need relationships. We're going to give them 6 NewtekOne professionals on the Advantage dashboard. People that they could see on a screen, see on a camera, talk to through a telephone line, chat, e-mail, have conversations with. Importantly, -- and we've been dealing in these markets for over 20 years. Clients typically go to their banking portals multiple times a week, let's say, 3 to 5 times a week, 12 to 20 times a month. And they're going to be able to go through the Newtek Advantage, see all the things that we can do for them. And we're excited because no longer will we have to hear, "Gee, I didn't know you could offer insurance; Gee, I didn't know you can handle my payroll; Gee, I didn't know you could help me with my website and develop my business further." Tomorrow, at 8:30 will be unveiling our rebranding strategy, the Newtek Advantage, we look forward to you attending that demo as well. On Slide #4, you got a nice little snapshot of what the Newtek Advantage looks like showing up on an iPad. It could show up on a mobile phone. This also will obviously be available from desktops as well. But you could see the visual image, very clean, very easy to navigate. This is 1.0. There'll be many versions of this. And although this might look really easy to do, it's pretty hard. And we'll be working on cleaning this up and perfecting it. Tomorrow is the unveiling of the branding and the advantage in terms of how it works for the demo, and we plan on doing the product launch on or around February 1. Slide #5, please. Once again, talking about the 8:30 call tomorrow. Slide #6. Some of the key financial metrics that we're talking about in our forecast with origination volumes of 7(a), 504. We talk about the conventional lending. That's the nonconforming conventional lending. We refer to it as a nonconforming because it will be held at the bank holding company. These typically have longer durations. There's no balloons on the loans. They've got 10- to 25-year [ AMs ] just like an SBA loan. They also do -- [ don't ] have typical bank covenants. So we do them up with the bank holding company. We joint venture the equity. We have leverage lines from capital partners that we talked about earlier on this call, and then we do securitizations. We did our first securitization in January of 2022, quite successful. In addition, the acquisition of the bank gives us the ability to do what I call conforming C&I and CRE loans out of the bank. Your basic bankable multifamily loan, ABL-type facilities that you're fairly consistent, tighter margins, AAA+ type credits with much, much lower default to give us a nice, diversified stream and additional capital. The ability to do that is based upon the fact that you could fund it with core deposits. Some other metrics throughout the presentation that we have here, important forecast of EPS to common shareholders. In 2023, a range of $1.70 to $2, that's after-tax earnings per share. And for 2024, you could see the growth $2.80 to $3.20. Also, the intent is not to issue shares. Now that's not to say that we won't, it depends upon where the markets go, how things lay out with respect to our ability to forecast debt and equity. You could see the bank is not going to need much capital [indiscernible] going to get any capital. It's very well capitalized at it's [ inception ] which we'll talk about. However, the holding company will be raising debt and equity as we go along. Most likely debt. That's the plan. That's what you'll see in the particular forecast. Slide #7. NewtekOne, hopefully, the newly named public company as of today and the bank, Newtek Bank National Association on Friday, January 6, first National Bank of New York City, which merged into the Florida Charter. So that bank is open and running, address, 1111 Brickell Avenue in Miami. And we're very excited about both the newly named companies. Once again, we'll take a look at the capitalizations. These are 2 well-capitalized entities. We'll be rolling out the Newtek Advantage. Important to note, NewtekOne, which was established in 1998 as a privately owned entity and publicly traded, first on the Amex in September of 2000, under stock symbol NKC. At Amex, it has only 3 symbols. We're a growth company. It's important to note that. And we've always been able to grow earnings, dividends over the course of our long history obviously not always in a straight line. There's been a couple of setbacks along the way. But for the most part, the trend has been very, very positive and very, very forward. We're very excited about how we're positioned. I think NewtekOne addresses cost efficiencies with this business model that we don't use branches, brokers, bankers. We use the term BDO standing for business development officers. It is a technology-enabled institution to help businesses grow their business. We position NewtekOne as a business solutions' company. Obviously, from a technical perspective or a financial holding company under the Bank Holding Company Act. However, when you look at the model, we don't look like any other bank, bank holding company or even a financial holding company in the marketplace. When you look at the assets that we have at the financial holding company, and the significance and the materiality of the reoccurring revenue from Payment Processing Tech Solutions, Insurance Agency Payroll and some of the joint ventures, very, very, very positive. We're very excited about this. Important to note, Newtek has historically got its opportunities through the new tracker referral system that we have a patent on that gives us referrals from alliance partners from 1,000 to 1,500 referrals today, 75,000 referrals a quarter. Therefore, we don't need the extra expense and the inefficiency of the human interaction with the customer to be able to get that client coming to us with hand raised, looking for a solution, incredibly beneficial. So once again, extremely excited about this. We're also going to address credit quality. So a lot of conversations I've had over the last several months as people's concerned about credit quality in the credit space. We're going to depict how we reserve going forward, how we're situated, and we're very, very comfortable after coming through '08, '09, surviving the pandemic crisis that we do know how to manage our risk and our accounting treatment using CECL and fair value accounting going forward, we'll show you how that breaks out, very well positioned. So we're very excited about how we are situated from a going-forward perspective. On Slide #8, NewtekOne and Newtek Bank. Basically, these are snapshots from January 2023 of where the financial holding company should come out if we were producing anything that was audited as of this moment. Obviously, these are unaudited numbers as to where we believe we are, both for the holding company -- the financial holding company and the bank. So you could see the whole financial holding company, $1.1 billion in total assets. 20% type TCE ratio, 20% type CET1 ratio and total capital also in that 20% range. When you look at the bank, very well capitalized, $245 million of total assets and total capital ratio of approximately 40%. Once again, Newtek Bank, a wholly owned Florida nationally chartered institutions. Also one thing I want to point out, if you look at $1.1 billion of assets, important to note, we'll probably originate somewhere in the neighborhood of $1.5 billion of loans next year, somewhere even in between $1.5 billion and $2 billion. So if you look at the balance sheet -- but that's because we sell off a lot of the government guarantee. It's important to note, we've got the sophistication of the management team, the systems and the capability of a $3 billion to $5 billion banks. So there's a tremendous amount of operational and financial leverage that are inherent in our start today, which is why we felt it was important to roll some of these numbers out through the end of 2024. Slide #9, please. Take a look at our ROAAs. This is for the financial holding company, important to note. Obviously, some of the statistics in the bank will be different than in the financial holding company, the financial holding company is unique in that, a, most bank holding companies and financial holding companies have very few assets. And relative to the assets and the debt, there's just not a lot up there. Not the case with NewtekOne. As a matter of fact, when you look at the fair value of our merchant business and our Tech Solutions business, as a BDC, those averaged about $150 million worth. Those are going to be going into the new entity at a cost basis, I'm going to say plus or minus around 0 using the accounting treatment. So those will not be part of our tangible book value, important to note. So take a look at those ROAAs for 2023, 2024, obviously, very high, better numbers in 2024 as we start to utilize the capital, utilize the opportunity for more financial leverage. Also important to note that bank cost of deposits, a lot of low cost of deposits, and that's going to increase in the second year. We'll talk about our deposit strategy and when that actually start to kick in to give us a real benefit to how we're doing business. But you could see deposits becoming a more important part of our business in 2024. We got a lot of inexpensive deposits picking up National Bank of New York City, that it's a long-term depository positions asset match to the portfolio going in. And those, obviously, over time will start to roll up. Once again, earnings per share forecast, $1.70 to $2 2023, $2.80 to $3.20 in 2024. Slide #10. Important slide, once again, it really shows this is a very diversified business model with a lot of levers. You can see the revenue breakdown, fairly even with respect to financial holding company and bank, or I'll call nonbanking activities versus banking activities. And you could start to see in the second year, the bank as you start to utilize some of that leverage, begins to take over more relative to the pretax net income breakdown. But I think it's important to note, the holding company of NewtekOne, the financial holding company contributes, it's diversified. When you look at all the income streams, you get gain on sale, you get good margin from the bank. We'll talk about the NIM at the bank. You get good margins on the joint ventures, particularly for the nonconforming loan business. And the deposit story, we think, will start to kick in out in the out years, possibly the latter half of 2024, certainly in 2025, 2026. And talking about the deposit strategies, the ability to get lower cost deposits from the payments processing business, from the payroll business and all the referrals that come into the network. So there's a lot of levers to pull, a lot of growth opportunities in NewtekOne. Slide #11, as we start to get into the meat and potatoes of the financial analysis. NewtekOne, the financial holding company's forecast for the end of 2023 and the end of 2024, when you see the fiscal year 2022 and that's approximately where we closed the transaction. Once again, these are all pro forma-based, pre-audited approximate total assets close to $1.1 billion, equity, $244 million. Looking at fiscal year 2023, some of the important aspects when you're looking at some of the balance sheet information here. Once again, we talked about the EPS numbers, range $1.70 to $2. Average share count you see pretty much just staying consistent. Dividends per share, Important to note, there's been no dividend declaration. I wouldn't even say this is a forecast. However, we have indicated to the capital markets that a financial holding company that's a growth financial holding company like ourselves should at some point in time, have about a 4% yield. So you all can figure out your own numbers as the stock price moves around, obviously, here's the good news. For a growth company that earnings keep growing, we love to pay out dividends. I'm a shareholder. I like getting those dividends as well. So what we experienced as a BDC, we started off dividends, I think in the first year, somewhere in the $1.50 range. In 2021, we actually got over $3. This year between dividends and distributions, I think close to $2.70 for the full year. So obviously, we're now going into a taxable situation, and this dividend is qualified versus the prior dividend, which is ordinary income, that makes a big difference. And importantly, we're retaining earnings. So you could see that equity is growing. $273.8 million in equity at the end of fiscal year 2023, up from $244 million to $323 million estimate in 2024. And take a look at those net interest margins. And these are net interest margins on Slide #11 at the holding company. When we get down to the next slides going forward, you see at the bank, they're obviously much wider and they'll continue to expand because currently, our cost of funds using the typical nonbank cost of funds that have dominated our organization historically have been expensive. It's one of the reasons why we thought this move clearly made some sense. One other important point to note, none of the numbers we have here is factoring in specifically a potential $15 million to $25 million net operating loss carryforward that we might be able to utilize. So that's something that is out there. We'll get further clarification on that as we go forward. Slide #12, this is just the bank, Newtek Bank, National Association, forecasting for end 2022, 2023, 2024, obviously, the end 2022 pro forma we estimate $246 million of assets, $78 million of total equity contribution. We put quite a bit of equity into the bank to start off, paid a purchase price of $20 million to the seller, also paid a big dividend in Q4. So we did a great job of getting the capital available for the bank and getting us ready for business going forward. You could take a look at those 2022 pro forma unaudited numbers relative to total risk-based capital of around 40%. That gives us a lot of opportunity to grow that bank over the course of time. On Slide #12, I'd like to note, the bank will be using CECL for its accounting methodology for establishing reserves. $19.6 million will hit the expense line for the bank in the calendar year 2023. We'll talk about that. We think that's -- that gives us a lot of cushion, particularly given an expected increase in loan quality as the economy sinks into, I'll use the term, a lower growth rate for 2023 and 2024 versus where we've been. So the changeover in accounting from 40's Act Accounting, 33 Act Accounting certainly leads us with a lot of interesting changes, but I think it's important to note that we think that using CECL at the bank level and fair value accounting up at the holding company for Newtek Small Business Finance, which will reside up at the holding company, really leaves us in a very conservative position relative to particularly estimating loan loss reserves over the course of time as well as charge-offs. Other things to note when you see the return on average assets, 5.56% in year 1, 4.55% in year 2. Returns on equity's really very high. I think some people look at this and go, "You can't do that" or what. So fine. Looking at our cost of funds. I mean, if you show just to most people, we look at these cost of funds go, "God, it's a terrible bank." We'll get better at this over time as time goes on, this gives us a lot of cushion and a lot of room to improve upon as we go forward, particularly in the area of deposit gathering, which to be fair, we're kind of a virgin in this particular area. But I think we'll -- shouldn't say I think I'm confident, we'll get better at this over the course of time, teach our team how to be able to work with clients, particularly when showing them the advantage. The advantage is something that we're going to give to nonbank customers to encourage them to give us their deposits into margin pool, whether they're payroll clients, paying a processing clients, tech solution clients, I think it's going to be something that there's a lot of room for improvement on, but it's important to note another one of our important levers here. Efficiency ratio is also important at the bank, starting off at 59.4%, going down to 52%, a technology-enabled bank that doesn't have to continue to add brokers, bankers, BDOs or branches is the way to go in the future. So our ability to acquire opportunities through the NewTracker referral system digitally, through telemarketing, through our branding strategy is going to continue to get efficiency ratios that will continue to plummet. We look forward to focusing on this and talking about how we can do this on a lower and lower cost basis going forward. Slide #13. We talk a lot about this because it's clearly one of the concerns about waiting into the waters today with companies like ourselves that are in the credit business. So clearly, we had a huge interest rate increase as you can see on Slide 13, in calendar year 2022. And as well as inflation and our customers have to absorb this. So the forecast of loan charge-offs and reserves we believe are well built into our financial forecast. As we said before, the bank will adopt CECL, Newtek Small Business Finance, which is the nonbanking subsidiary of NewtekOne will be up at the holding company. The originations will be done out of the bank. Newtek Small Business Finance will be in a runoff mode. And those loans, for the most part, are currently pledged to securitizations. That portfolio will be fair valued and we been marked to the market, which we've historically done. I think it's important to note that the estimated lifetime charge-off for that portfolio will probably remain at about 8%. We happen to think that's conservative given that, that portfolio is probably 3-plus years seasoned at this point in time. The current default rate at the end of the recent Q was 25%. We might actually drop that down to 20%. That's up for discussion with the accounting team and the Board. And the estimated severity is about 40%, which is what we've come in historically at. Once again, the CECL reserve is targeted at 3.5% to 4.5% as a range for the total bank loan portfolio. And we believe that between the estimates of fair value, the history that we have in the portfolio, the history that we've had through '08, '09, the management team has been together 20 years. We think we've got ourselves plenty of cushion to survive even if we have a difficult credit environment in front of us. Slide #14. People look at Newtek as an SBA lender. That is the furthest thing from the truth. We're a business solutions company. Now with respect to lending, all those referrals that come in, 1,000 a day that are coming through the NewTracker system, those are referrals that just want financing. Some of those borrowers historically wanted a multifamily loan, we couldn't fit them. Some of them wanted along with a lower rate of interest and we're willing to amortize the loan over 5 years instead of 10 to 25, we couldn't do it. Some of the credits were too good. They were the credits [indiscernible]. So the ability to own a bank and to do conforming CRE, conforming C&I, very important. And important to note, Newtek through Newtek Business Lending, has originated SBA 504 loans, which are typically stronger credits. We've never experienced any default or charge-off on loans originated since 2017. Also, its joint venture in the nonconforming loans, people think it's not conforming, it' a bad credit. Those loans are all personally guaranteed to [indiscernible] typically very strong. We've originated $132 million worth of those loans historically. We have not experienced 1 default or charge-off to date. We're out on the street in that market today, [ 10.5 ] gross, [ 11.5 ] gross, [ 12.5 ] grows, [ 3.5 ] points. So you could see the returns on equity of that business, very high, very strong. NewTek Bank is targeting to originate approximately $125 million to $150 million to grow the portfolio in the bank of $300 million of conforming -- so it's not non-conforming, that's a typo, conforming CRE and C&I loans in 2023. This gives the bank portfolio nice diversification of [indiscernible] portfolio of 7(a) uninsured, 504 loans, conforming C&I, conforming CRE, and it gives us a nice, diversified income stream. Clearly, we're excited about being able to diversify our risk across the lending spectrum. We talked about efficiency ratios. I think that was fairly clear, Newtek Bank's main office, 1111 Brickell Avenue, the One Bank branch, Flushing, New York. We don't plan on hiring a new business bankers. We don't plan on employing business development officers. We received 1000, 1,500 unique business referrals a day. We have 80,000 paying customers. We received 75,000 unique business referrals per quarter. We have 2.2 million business referrals in our database. We have plenty of people to talk to and great solutions to offer to. We're so happy we're able to have this conversation today because now it's time to block and tackle. Slide #16. NewtekOne, pro forma, forecasted consolidated balance sheet. I won't go too much into this. A lot of this information's for analysts and investors to ponder over. But the one item to take a look at is total equity. So on the pro forma, unaudited December 2022, $244 million, look at that growth. That's the benefit of being able to retain earnings. So for those people that are wondering where all the dividends are growing, we're keeping some back at the bank and some is going to [ uncle Sam ]. But on an overall basis, we feel confident that this will benefit shareholders in the long term. Slide #17, taking a look at our ratios of the holding company at NewtekOne on a going-forward basis. You could see the purpose of this is to demonstrate the utilization of capital over time. You can see we're still very well capitalized. You can also see that the business is growing through loan growth, not buying packaged securities, very important, we're able to -- we have an origination machine here. It's a great machine. It's been developed, pulped, pruned over the course of 20 years. Because of that, we're able to get higher return on average assets, high return average time on total common equity. We'll be able to grow not up to the top of the limits, but we'll be able to develop, obviously, a great EPS as well as pay a nice dividend to our shareholders. Important to note, for me, this is obviously something I've got to get used to with respect to the different terminology in the accounting. I've been used to BDC and [indiscernible] for 8 years now. So I have think twice about -- gee, all of a sudden growth in revenues is important. Not a calculation I think we've supplied here in any of the decks, but it looks like revenues on a consolidated basis for 2023, about $340 million I don't have that number for 2022. I have to reconfigure it in the BDC accounting, which might be difficult, but I can do that. And in 2024, it looks like it will grow to about $420 million, that's a forecast. So you could see all of a sudden, we'll be talking about revenue growth and other things. And historically, in the BDC vernacular, we really never talked about too much. Slide #18. NewtekOne forecasts a consolidated income statement, a lot of interesting information here. We're currently estimating a 28% marginal tax rate. Once again, focus on the earnings per share, up $1.70 to $2 year 1, $2.80 to $3.20 year 2. There's an estimate of the dividend. Once again, very to be clear. This is not declared. I wouldn't even say it's forecasted. It is a plug number. Depending upon where the stock is, the Board will look at getting together and figuring out the exact dividend policy and [ declarations ] going forward for the financial holding company. Important to note, obviously, what we are doing here today is totally consistent with what we have given to the bank regulators, and it's a plan that we obviously have given to them as part of the application and one that we're thoroughly comfortable with at this point in time. Slide #19. This is a little bit of a further breakout. We've given analysts and investors a lot of data. We wanted to get a transformation to bank analysts as soon as possible because we've obviously had very few forecasts without knowing when this transaction would close for us as a BDC. So getting this information out, real important. And we want to try to give as much information as we possibly could. So Slide #19 kind of gives a feel for what's coming through the bank versus what's coming through the nonbanking entities at the holding company. I think this is valuable for the analysts to look at. Once again, we do plan on calling quarter-to-quarter at the bank and the holding company level. NewtekOne -- On Slide #20, pro forma forecast on the financial holding company balance sheet. Now this is unique because it is without the bank. I think it's important to note, this is just what's going on at the holding company. I think that will help everyone take a look at -- see what's going on just once again, at the holding company without the bank. Slide #21 is a pro forma and forecast for the bank subsidiary, its balance sheet. It's important to note where we see deposit growth going. We feel comfortable with that. We think that's steady growth without any excesses. We also want to point out the equity growth of the businesses as we earn money over the course of time. Slide #22. We're pleased that recently Egan Jones, an actually recognized rating agency rated our senior debt BBB+ in a report. We're happy about that, obviously, and look forward to continue to maintain an investment-grade rating up at the financial holding company. Slide #23. We try not to pay too much attention to the stock price, although it's clearly important for us to pay attention to it. For some strange reason, we've got a very material short interest in the stock as of December 15 of almost 1.7 million shares with a long data cover. The only example I can give for this is people think that -- and people don't understand that we're going to pay taxes and we're going to retain some earnings, and we're not going to pay as big a dividend as a bank holding company or a financial holding company, that would be a surprise to me. And we have seen this transition before we transitioned into a BDC as a 33 Act company. We saw tremendous transformation with shareholders. Now BDCs can't be in the Russell 2000. They can't be in the S&P 500 or 600. We are hopeful that we can get picked up in the Russell. There have been industry analysts that have estimated that could create about 2 million shares of stock buying. And we think this is just important to keep an eye on. Slide #24. We've invited quite a few bank analysts at the call today. Hopefully, they attended. We are currently researched in the street by KBW, Raymond James, Landenberg and Compass. 3 of the analysts are BDC analysts, one is a journalist, obviously transitioning over to being able to report as a bank or financial holding company will be important to us, and we hope to get that transformation at some point in time in the near future. I have investors that look at the Bloomberg and Yahoo forecast for 2023. First of all, we haven't issued any guidance for 2023 as a BDC. This is the first guidance we're giving as a financial holding company. So I have no idea what those numbers are. And nobody should be forecasting this to BDC. I think it's important to note, I've also got questions since January 6, what are you going to do with the BDC? Okay? There is no BDC anymore. We withdrew our positioning as a BDC with the SEC on January 6. We put an 8-K out on that. We will not file a 40's Act tax return. And it was fairly clear, and we want to clarify this, people think there's some kind of a structure that you're going to eliminate as a BDC. So as of January 6, we became a financial holding company. We're a taxpayer, and that's the structure. There's no longer a BDC in the Newtek portfolio whatsoever. Once again, important to note, it's the same business but in a different financial structure that we believe is much better suited. Number one, for client awareness of what we do and how we can help them; two, from being able to access all varieties of capital from the capital markets in terms of core deposits and be able to attract lower cost of capital. We believe it's being regulated by the Federal Reserve at the financial holding company and the OCC at the bank is an asset to us. It will help us monitor, manage and control our risk going forward, which we're fine with. And we think the trade-off of being able to access diversified funding sources for the business in all markets is very valuable. So we're no longer as vulnerable to certain markets as we have been. We have diversified, not only diversified the deposit side but also on the asset side because now the portfolio is diversified, and we could generate good returns on those businesses and blend the portfolio out. We're also excited that we can achieve a valuation that's markedly different than a traditional bank holding company if we're able to meet our financial forecast and grow our earnings over time. On Slide #25, I'd like to point out for -- and we love being a BDC. It was great. It's great for us, great for shareholders. People got a lot of dividends. We'll be talking about that in our upcoming calls, how many dividends we paid out, and we anticipate paying out a lot of dividends going forward. But when you look at the 10-year return over the Russell 2000 for companies that are able to retain their earnings versus the S&P BDC Index, we just believe it's a better financial structure for us than what we do. So going to Slide #26. Important to note, and then we'll go right into Q&A. This is not NewtekOne's first rodeo. We've been publicly traded since 2000, established in 1998. Bootstrap company with a strong core business that's proven to be nimble, particularly through the pandemic and the '08, '09 crisis and being able to operate in different financial structures. This company doesn't always take the easy road, but it takes the right road and it takes the right road for the long-term success of all of its stakeholders, it's employees, it's creditors and it's equity holders. Obviously, there's also a tremendous correlation as the insiders own approximately 6% of the outstanding shares. So we're not devoid from shareholders. And our equity compensation will go up if the stock does well. We're very much tied to that. We hope that we could be added to the Russell 2000. We'll see if that happens. Obviously, financial holding companies and bank holding stocks tend to be favored by institutional investors that typically will not buy BDCs because of the AFFE issue. The AFFE as mentioned issue makes it very difficult for institutional investors to invest in BDCs, which is primarily why it's a retail product. We talk about management's interest being aligned. We talk about future dividends being qualified for ordinary income, a very diversified stream of asset origination going forward as well as deposit mix. We'll be using consolidated accounting. Everything is going to consolidate up. That is going to make my life and everybody on this phone call's life -- my team that will be rolling out at the end of the first quarter when we talk about the financial holding company numbers. Nick Young, John McCaffrey, Nick ledger, very big strong management team here to take NewtekOne, and Newtek Bank going forward to be a very exciting, true technology-enabled bank. One last point to talk about, value stocks versus growth stocks. Everybody knows road stocks are currently out of favor, everyone's running towards value stocks. I don't know, I was always talking to buy low and sell high. And the fact of the matter is growth stocks like ourselves have really gotten beaten up pretty badly. It's a good opportunity to take a look at what we presented here today as a financial thesis. I realize this is the first time many of you have seen this information. So it might be a little bit difficult to ask some questions, but we would certainly like to open up this call to Q&A. So operator, if we could go to Q&A, that would be terrific.

[Operator Instructions] Our first question comes from the line of Christopher Nolan with Ladenburg Thalman.

Barry, thank you for the detail. Two questions. The first is the efficiency ratio is a little higher in the pro forma efficiency ratio. Well, in 2023, is that reflecting sort of a major marketing push advertising and so forth, which is going to be elevated in the first year?

I think the bigger issue, Chris, relative to the efficiency ratio declining over time is we've got a management team, overhead and staff today, like right now that can handle probably a balance sheet that's 3 to 4 to 5x bigger than this today. So we have the expense, but the income generation will have to take place over the course of the next several quarters. So you could see the efficiency ratio starts to go down in 2024. We think it will go down further in 2025, et cetera. So I think the best way to think about it is when you look at how we're starting off the bank and the financial holding company, a lot of capital, well positioned. And every key slot is filled in. In other words, the President, Chief Operating Officer, the Chief Digital Officer, the Chief Financial Officer, the Chief Compliance Officer, the BSA officer, every key slot at this institution is filled, we're ready for this. So that's -- you're correct. It's basically because we are very over-expensed and haven't begun to generate the assets that we're going to generate and utilize the capital.

And then my follow-up question really is on the presentation we expect for quarterly earnings. Should we expect a separate income statement and balance sheet for the holding company and for the bank? Or -- just trying to get a little guidance as to how to build the model.

Nick Ledger, do you want to answer that? I think I would say yes, but before I volunteer his services, I think I better ask them that question. I believe the answer to that is yes. So Nick, would we be able -- I would assume between yourself and John will be able to give that type of guidance.

Yes, that is correct.

Our next question comes from the line of [ Steve Olisuf ], private investor.

Barry, just a quick question regarding the 4% dividend. Is that based on like some type of average share price? Or is it based on NAV?

Thanks, Steve. I appreciate it. So NAV, no more. So NAV, obviously, is a -- it's a BDC term. We'll leave that in the past. One of the questions that might be on people's tongues is approximately what they think the tangible book value might be. And I think you could put a range of that between, say, $9 and $11 a share as we sit here today. I think the 4% is based upon the market value of the stock at the time, it's declared. And I also have to state that is just one individual's thoughts at this point in time, and that can be only declared by the Board of the financial holding company, and that will take place at some point in time in the future. But I think that what we've tried to indicate to our long-term shareholders is that a financial holding company with growth prospects like ours should aspire to pay a dividend approximate. Now also the stock price goes up, you wouldn't assume that we're automatically going to adjust the dividend. You know what I'm saying? But I think from a targets' standpoint, yes.

Our next question comes from the line of Michael Perito with KBW.

Just 2 for me, and you guys touched on it a little bit when walking through the depth. I was hoping we could spend a little bit more time on it. Just relative to when you guys announced the bank transaction today, obviously, the deposit market competitively has changed a lot. And I was curious if maybe just to start you could spend a minute on some of the areas where I know you outlined kind of the expected cost of deposits in your projections. But maybe taking a layer deeper, some of the areas where you expect to be able to have some luck generating some funding what some of the initiatives or you have -- that you're working on there?

Thank you, Mike. And I appreciate that question. One that I will say relative to when we started this transaction of versus where we are today, a lot has happened over the last 12 to 18 months. Quality spreads have widened just in general, okay? And obviously, rates have gone up. So it's a little bit of a double whammy. With that said, what we found in the banking market is those real low cost, 0 cost deposits, they're harder to come by. Now with that said, the ability that we have, we believe, is unique. In other words, my ability, for example, I got 15,000 payment-processing accounts. My ability to offer those accounts same-day funding to put the money in their account the same day because we own the processor, we see the receivable and can deposit the money and have our software in the process of being set up to do that is a big deal because many of those accounts have their money pushed into a 0 interest rate checking account. So if we give them the NewtekOne account, which will be our demand-deposit account, or give some bonus for moving the money in, I can margin pool what I'm earning on the payment processing residual and the payments account. In addition to that, we'll give those clients a debit card to be able to prospectively pay bills using the Visa Direct [ rails ]. So we are head and shoulders over where, frankly, we think other market participants, we'll be able to take advantage of that. Now do I think others can do it? They can, but it's very hard for these large institutions to be able to get these units to work with each other, they get the technologies to work with one another. So these are all the things that we have, have planned. Here's another area. We process payroll for I think, 10,000 to 11,000 employees. Well, if those employees want to open up a NewtekOne bank account, I can move their money from their employer into their account on the same day. So by combining these solutions, we become a winner. And also, once again, the ability for us to margin pool to pay a little bit more for deposits and to change payroll, payments, give away a free terminal, a POS system, months of payroll, we're in a much better position to acquire these deposits. Now let's go to lending, where historically, we haven't been able to do anything on lending. Now we're going to be very careful. We're not going to poach deposits of our financial partners. We have the new tracker system that will make sure that does not happen and we could easily monitor that, audit it and record it. But we're going to be starting to get core deposits in where we're making loans. So we made, I don't know, 1,300 unit loans in just the 7(a) business alone. So we think that our ability to gather deposits will be there. Now the execution, the easiest thing for me to do is talk about it. The hard thing to do is actually get the staff to implement it, get the compliance in place, make sure it's done according to all the regs and rules. But that's the goal. And we don't have that really baked into the '23, '24 numbers. However, trust me, we're pushing on that right now.

Great. That's helpful color. And then just secondly, and you kind of led there a little bit, but just I was looking at Slide 11 and listening to the prepared remarks. And obviously, you guys have plenty of capital even in the '24 projections, right, still operating with kind of almost 12% leverage ratio. Just I was curious if you could maybe provide a little bit more color about how you're thinking about the balance of kind of originate for sale versus originate held for investment and kind of the work on that capital over time? And do you expect to operate with -- I don't know if you guys have said this explicitly, but kind of what's the kind of more normalized capital ratio is, even if it takes like 25%, 26% for you guys to get there? Just as we try to think about that kind of 3-year type of asset growth potential and the mix of origination for sale and held for investment, some context there would be helpful.

Yes. I think, Mike, if you look at our 24-year history, 22 years as a public company, not sticking our nose over the line of [indiscernible] which has always been helpful to us. So leaving some level of cushion is important and valuable. I think that what we want to be able to do is demonstrate that we can do this business. We can generate these ROAAs these ROATCEs and show the market that this makes sense for us. Now relative to -- I'll use the term, gain on sale for the SBA 7(a), that generates the highest return on equity for us. And as long as that's the case, we're going to continue to do that. And we also -- in the BDC world where I could remember the vernacular, you'll never trade above NAV. No one's going to understand your business. You're totally different, you're totally unique, and we live with this every single day. So we wound up at points in times trading, I think we got as close as high as 2.5:1 over NAV. I don't even think the grandfather of old BDC's Main Street ever got that high. But I think that relative to multiple book raising capital, I think we always want to keep that nice cushion to be well capitalized. We want to demonstrate to the market, we can generate these numbers. We've taken a big hit on the chin based upon this transformation. And Mike, I appreciate you joining today's call because we're very appreciative of the coverage we've received in the past from BDC analysts and now having bank analysts like yourself and Chris and David Feaster on the call are important to us going forward. Hopefully, you'll pick coverage up on us. And people could begin to follow us because no one's been able to follow us from a financial perspective for a long period of time. So we greatly appreciate your questions and your participation. But we're always going to try to stay above on the well-capitalized area. By the way, we don't need to squeeze leverage to generate these numbers. That's the important part. Because our business model we believe, and we say this with you some level of humility because we're going to be able to attract deposits without using human beings running around, taking people out for lunch or for that matter, making loans who have no idea how to make the loan because our people make the loan, they're on a screen. You'll get that demo tomorrow as to how we're going to relate to our clients. It's attractive, it's great. It's more efficient, it's on demand when the customer wants it, not when the banker wants to make an appointment with the customer. So because of that, the goal always to leave a cushion of capital to protect against these unknown, unforeseen strained circumstances that do tend to happen in our life.

Yes. No, that's helpful. But -- and if I could actually sneak 1 more in because you kind of mentioned -- I was curious what your thoughts are. But you mentioned how selling the SBA 7(a) at this point, it's the most ROE attractive option. There's -- we've seen quite a few banks kind of bet on either side of the line there. We have some that hold, some that sell, some that do both. And just curious if you can maybe expand on your position a little bit more as to why that's the most value attractive option at this point to sell your 7(a) production.

Yes. Thank you, Mike. One of my, I'll call it, theoretical competitors in this space by loan volume, users, brokers, bankers and BDOs, okay? That's how they originate loans. As a matter of fact, they boldly say, [indiscernible] we're going to hire 12 more bankers and want to hire 50 or 70 between now and the end of the year. And I'll like scratch them my head and going, okay, that's great. So because they use brokers and bankers, when they -- I'll use the word purchase loan, I use that first as a differentiator between originating a loan directly with the customer because [indiscernible]. Number one, they've got to pay -- I wanted 2-point fee, which we always push back against. I think our average fee paid to third parties about 75 basis points, and we hope that goes down going forward. They've got to pay the lowest rate on the loan with the worst credit criteria because they're basically participating in an auction because the brokers are brokers are off the 3 or 4 different participants. So we've been previously to November, prime plus 2 and 3 quarters and today, the SBA expanded that margin to prime plus 300. So our gain on sale margins are typically, I'm going to say 3 points higher than all of those competitors. They don't really have a choice to sell it. One could argue they can't get any gain on sale. When you factor all their costs in. So because our margins are better because of how we do our business, much more efficient, using in-house specialists like you'll see in the demo tomorrow, our margins are better, our business model is better, and therefore, I don't believe we will pierce the recent declines that we've seen in prices. I hope we're at the lows. These are pretty much the lowest mark that we've seen in 20 years. That's what happened when the Fed raises rates 4%, and these things lag because they only increase every quarter. So they've been lagging behind. So we feel pretty good about the margins and gain on sale. I don't think you'll see us holding these positions.

[Operator Instructions] Our next question comes from David Feaster with Raymond James.

Just following up on Mike's line of questioning. Obviously, funding is the name of the game for banks and bank valuations. I was just hoping, could you maybe talk a bit more about the timing of some of the deposit growth in those initiatives that you highlighted? You said it's not in 2023 or '24 numbers yet. But like is this combined offering that you talked about in place, like what investments do we need to make this work? Is it a tech integrating some of the technology? And then just kind of curious how the sales process is going and what the early read from your clients is on you becoming a bank.

Well, I think -- so David, look, first of all, this is great for me. So I'm obviously being introduced to banking investors, banking analysts like yourself and Mike and Chris, and it's been great from that perspective. I think that -- and understanding what's the focus. So when you look at the typical and traditional bank and you talk about financial institutions, there's 7,000, 8,000, 9,000 of them out there. They're all typically fighting their asset composition as the same. It's residential loans, it's conforming C&I, it's conforming CRE, and they're all fighting over that. Now we have a benefit because we generate, we think, and we've had 20 years of experience, greater risk-reward assets. Now on the deposit side, and we say this with some level of humility because we've never done this before. But we believe with confidence, we're going to be able to execute, but we didn't want to put that in the projections. So I'll be asking Nick Young, the President and Chief Operating Officer, put him on the spot in future presentations to show us those deposit, deposit growth over time, what's coming in, what's the rate? How much is coming in high-yield savings, how much is coming in, in commercial DDAs, consumer DDAs, what's coming in from Internet based, what's coming in from being able to convert merchant accounts, payroll accounts, lending accounts, et cetera, et cetera. So the important aspect, David, is there is nothing that we do not have today that will enable us to affect the strategy of raising lower-cost deposits. I have 2.2 million customers in my referral database. I get 75,000 a quarter, although some of those I have to say, I can't touch, which is fine, but I've got plenty of people to talk to that are, frankly, sitting in top 4 bank relationships getting 0 on their money that could move over to us in 5 or 10 minutes into a high-yield account. That technology will be in place. So the key question is, hey, Barry, what is it going to take to make that happen? It's management, hopefully that's listening on this call to me saying, this is something that we've got to execute on. We've got to be good on it. We owe it to our customers. We owe it to our stakeholders, and frankly, it's what's best for everybody because those clients should be taking advantage of the Newtek Advantage, which means getting paid more for their money, but still attractive and lowering our overall cost deposits from the more hot money. I think what you're going to see in our model is a lot of the money that's coming in, in the first 2 quarters or so is that Internet-based deposit. But this is a strategy we believe we can execute on. You'll see in our demo tomorrow, how we're able to talk to clients, we're training our staff as we speak, but we just want to be very modest in being able to depict that growth.

Okay. That's helpful. And then I guess, obviously, I know you've been pretty conservative in these forecasts. There's a lot of sources of upside. But I guess if you step back and think about this, where do you see the most opportunity? Is it the funding side, is it a faster pace of growth? Just curious, what do you think is the biggest lever for you to exceed these forecasts?