The freshly minted Newtek Bank doubled its deposit base during the first quarter, its first reporting period since converting from a business development company, by relying almost entirely on certificates of deposit, CEO Barry Sloane said Tuesday.
NewtekOne, Newtek Bank's Boca Raton, Florida-based corporate parent, completed its acquisition of the $208 million-asset National Bank of New York City on Jan. 6. In its first three months under new management, Newtek Bank grew deposits from $120 million at year end 2022 to $251 million on March 31, according to Sloane. Though Newtek is paying 5% on its certificates, it is receiving substantially more interest on the small and mid-size commercial loans it originates, Sloane said.
"Time deposits that are non-redeemable, where you pay a rate, are very valuable," Sloane said.
Newtek provided the deposit data as well as selected other operating metrics in a press release updating stakeholders on the company's first-quarter performance.
Tuesday's report should go a long way toward quieting questions investors and analysts raised about Newtek's ability to generate enough deposits to fund its high-volume Small Business Administration 7(a) lending operation, Paul Johnson, an analyst for Keefe Bruyette & Woods, said Tuesday.
"This is a new bank," Johnson said of Newtek. "They're growing it from the ground up…I'm definitely more positive given the rate of [deposit] growth they've had."
If a bank had issued a similar report at the start of 2022 — before the Federal Reserve began raising interest rates and before a series of runs at prominent banks — it would likely have raised eyebrows and generated skepticism, due to such heavy use of time deposits. Now though, it appears that Newtek's strategy may be the new normal as a battered industry is forced to reassess the value of large concentrations of demand deposits.
"Directionally, CDs are absolutely going to increase," Neil Stanley, founder and CEO of The CorePoint, a bank consulting firm in Omaha, Nebraska, said Tuesday. "In an ultra-low interest rate environment, trying to get someone to lock up their money didn't make sense. I call the rates now non-trivial."
CDs are considered non-redeemable since they have a contractual maturity. Depositors pay a penalty for early withdrawals, so CDs are considered less volatile than deposit types that customers can withdraw whenever they wish. The tradeoff is that depositors expect higher interest rates in return for locking up their money.
"Since banks are never going to generate enough non-interest deposits to fund the lending they do...wouldn't it be nice if some deposits had a contractual maturity, rather than deposits you can withdraw at whim," Stanley said.
Newtek agreed to acquire National Bank of New York City for $20 million in cash in August 2021. Investors, who valued the dividends Newtek paid out as a business development company,
Created by Congress in 1980, business development companies are a class of tax-advantaged registered investment companies that are required to invest at least 70% in U.S. companies with a market capitalization of $250 million or less. Sloane insisted the company would ultimately generate more value as a bank, with more flexibility to retain earnings — and a lower cost of funds.
On Tuesday, Newtek forecast a solid first-quarter performance, noting a 12% year-over-year increase in loan closing, including those of its signature Small Business Administration 7(a) loan product. Newtek is the number-two 7(a) lender in the country by dollar volume, with $697 million of fiscal 2023 originations as of April 3, according to SBA statistics. It trails only Live Oak Bancshares, which was credited with $827.8 million of originations in the same period.
Newtek is projecting earnings of approximately $0.41 per share for the first quarter. Its outstanding share count as of March 14 topped 24.6 million, which would translate to cash earnings of $10.1 million.
The report was "probably slightly better than what I was expecting, mainly from the deposit growth in the quarter," Johnson said. "They're talking about continuing to grow more deposits, the same type of CD deposits, from their SBA borrowers. This was a big question after they announced the [bank acquisition] deal. Simply, how much and how quickly could they grow deposits."
Newtek reported Tuesday that it had opened just under 400 new deposit accounts through digital channels. It expects to add to that number in the second quarter as SBA borrowers, as well as clients from its payments business, open accounts in greater numbers.
According to Shana Hennigan, chief business officer at fintech Raisin, which works with partner banks to boost deposits, market volatility has caused consumers to reassess their tolerance for risk "and has made savings and good old fashioned CDs attractive again – especially in a rate environment with coupons not seen since the early aughts."
Sloane believes banks have "undervalued" CDs in favor of lower-cost deposits or noninterest transaction accounts. Stanley, who began his banking career in 1984, when time deposits comprised close to 55% of total domestic deposits (they now make up just under 10% according to Federal Deposit Insurance Corp. statistics), echoed the point.
"Most bankers act like CDs are somehow not good business, with only marginal bankers participating in CDs," Stanley said.
Sloane expects the deposit market to get more competitive, but he remains confident in Newtek's ability to adjust. "If you go online, pay a market rate of interest and develop your technology so it's frictionless, you'll get deposits," Sloane said.
Despite Tuesday's positive signal regarding deposits, Newtek still has work to do selling its business model to investors and regulators, said Johnson, who recently reduced his earnings estimates for the company.
"They're a very active lender. They're a high-volume lender," Johnson said. "That's primarily because of the gain-on-sale business for them. They sell off the entire guaranteed portion of their loans. They're only retaining the unguaranteed portion. That allows them to generate a fairly high volume of SBA loans throughout the year."
As a result of that strategy, Newtek's portfolio will inevitably hold a high concentration of unguaranteed SBA loan balances. "There aren't any other banks out there that have a loan portfolio or company structure similar to Newtek's," Johnson said. "It has yet to be seen how the risk of that type of loan portfolio is received in the market and what type of valuation it gets.I think they've gotten off to a good start, but there's some risk to the story."
Unguaranteed SBA loans comprise 25% to 30% of Newtek's loan portfolio, "but we've been doing [SBA lending] for 20 years and we're really good at it," Sloane said. Newtek is also active in commercial real estate, non-guaranteed commercial lending and SBA 504 loans, Sloane added.
"We do have a diversified portfolio.]," Sloane said. "In addition, the average uninsured 7(a) loan is $150,000. We have no state concentrations. We have no industry concentrations... We're comfortable where we are."
In addition to its deposit-gathering efforts during the first quarter, Newtek fortified its capital position, selling $50 million in two-year notes, as well as $20 million in convertible preferred stock to Patriot Financial Partners.
