Newtek Business Services Corp. (NASDAQ:NEWT) Q4 2022 Earnings Call Transcript

Newtek Business Services Corp. (NASDAQ:NEWT) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day and thank you for standing by. Welcome to the NewtekOne Incorporated Fourth Quarter and Full Year 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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 and Chief Executive Officer. Please go ahead, Mr. Sloane.

Barry Sloane: Thank you, operator and appreciate everyone joining today. Good morning. My name is Barry Sloane President CEO and Founder of NewtekOne. I’ll be doing the call today from Las Vegas, Nevada, where I’m at a Structured Financial Association Conference for asset backed securities. And I certainly appreciate attending the call with me today is Nick Young, our EVP and Chief Accounting Officer. Also Nicholas Young, our President and Chief Operating Officer of Newtek Bank National Association, and John McCaffrey, our Chief Financial Officer of Newtek Bank National Association. We’re excited today to close our chapter out. As a Business Development Corporation, this will be the last time that we’re reporting financial results.

As a BDC, we withdrew our BDC application with the SEC on January 6, when we acquired Newtek Bank National Association. And on a going forward basis, we’ll be reporting as a financial holding company which has been for a little less than approximately 60 days for now. Most of today’s call will focus on our final financial results as a BDC, as well as our forward projections as a financial holding company extremely important, as well as a dividend declaration that the company just made for its first quarterly declaration as well as a potential forecast of dividends going forward. So I think today is a watershed mark the transformation that many of you have been waiting for is finally complete. We’ve had a lot of things that have been transforming, shareholders have been transforming, operations have been transforming, capital has been transforming quite a bit of movement.

And we certainly look forward to beginning to pick up new analyst coverage. We picked up one this week. So, we finally are getting bank analyst coverage to be able to follow the company. I would like to clarify one thing this morning as we go forward. I think it’s important to note that the company had no earnings forecasts in 2022. We had dividend forecasts, we didn’t have earnings forecasts because we didn’t know actually when the bank transaction was going to be completed. So with that said, we want to try to move forward through the presentation, give people clarity on how we sit as of today, and explain our business and our business operations. We have a lot of new shareholders on the call that obviously are interested in investing in financial holding company, owning a very unique technology oriented bank.

And we clearly have a lot of things that are transforming. I would like to call everyone’s attention to the forward-looking statement, Slide on one on the deck. For those people who want to follow along, the deck is hung on newtekone.com NEWTKONE.com in the investor relations section, and the presentation will also be archived there. On Slide number two, we could talk about recent events we acquired National Bank of New York City on January 6, that acquisition was completed, we withdrew our application with the SEC to be regulated and report as a 40 SEC company using a different kind of accounting, 40s Act Accounting versus now we’ll be doing consolidate them 33 Act Accounting, which we welcome. And we acquired the 59-year-old Nationally Chartered Bank, known as National Bank of New York City and renamed it Newtek Bank.

We also at the same time, renamed the holding company NewtekOne. We’re going to continue to trade onto the existing stock ticker symbol NEWT. And important to note that we are a financial holding company that has positioned itself as a leading business and financial solutions company to a very important economic demographic in the United States that we refer to as independent business owners. Using an SBA definition of SMBs, it represents about 50% and uninformed GDP. It represents nine out of 10 businesses in the United States. And most of the net new job growth in the United States comes from these enterprises. So, we’ve been serving this community for a long period of time, we have been building our platform of Business and Financial Solutions for clients.

And by owning a bank and being able to put this all together in the Newtek advantage. Our plan is really very well positioned for the future. We’re excited about it. And we really look forward to reporting and developing our business model and serving our client base. I think it’s also important to note that as we go forward as a financial holding company, and we transition certain assets like Newtek Merchant Solutions, Newtek Technology Solutions, the valuation of the payroll company, the insurance company, which were part of NAV from a fair value basis will not be counted in tangible book value from an accounting perspective going forward. In fact, we believe that they’ll be going into and will report on this the end of the first quarter into the financial holding company at approximately plus or minus zero basis.

So that’s approximately about $170 million of what I would refer to as fair value, which if you look at a share count of 24 million, it’s almost $5 to $6 a share. So for those of you that are trying to look at the company based upon a multiple of tangible book on a GAAP basis, pretty hard to do. We’re definitely a different unique company, it requires a bit of a valuation. But we think we’re unique in terms of we are positioned to be able to grow our earnings over time, raise capital over time, which is what we’re able to do as a BDC. We won’t have to be dependent upon constantly selling equity, and diluting shareholders. We’re very excited about our future, and look forward to reporting on our results and telling everyone about our unique technology enabled bank, as well as differentiated financial holding company.

So let’s move to Slide number three. We renamed the company NewtekOne, which I think is appropriate because we believe we’re the one company that partners with clients to help them grow their business. We also believe we’re the one company that will make our business always more successful. So rather than do what most other financial organizations do today, maybe take deposits they make the loan. We actually give our clients and assets and that’s in the Newtek Advantage, as we talked extensively about on our January 18 presentation. The Newtek Advantage is a great solution for our business owners. We have 1.0 on our screen we’ll be developing it further and we’ll talk about the Newtek Advantage in future presentations. So we’re very excited about the advantage we realized that our clients typically go to their depository institution, three to five times a week, maybe 12 to 20 times in a given month.

And that we’re going to be able to position ourselves with our clients that they’ll be able to see number one, that we offer all these great solutions for them, without necessarily having to bring it up, they’ll be able to store their organizational documents, and they’ll be able to make payroll, they’ll be able to see their merchant processing data and statistics, they’ll be looking at web traffic statistics, they’re actually going to get an asset from the organization rather than just quote unquote, kick the depository money. So once again, very excited about the opportunity. The Newtek Advantage is a real secret sauce in the value going forward to our clients. The low hanging fruit, obviously, is the fact that will no longer be constrained by 2:1 leverage ratio as a BDC.

And the ability to raise less expensive liabilities in the fourth quarter retail deposits, which today and it’s a differential of 8.25% approximately to say 4% depository money plus borrowing commercially a $0.55 with the dollar haircut versus 100% in the bank. So, you can see that the math really works in our favor. And you’ll be able to see that particularly on a going forward basis as you analyze your earnings streams. Slide number four. So in the fourth quarter, our final period, and 2022, I think the most important lending highlights clearly one of the key features of our business historically has been the ability to execute on our SBA 7(a0 loan business in which in 2022, we funded a record 775 million of loans. That was up from 362 million.

And when you look at our growth forecasts going forward, we wanted to tone that down a little bit, not to say that we can’t produce those numbers, but we forecasted 885 million for 2023. And a little bit of an increase. So there’s clearly some upside in those particular numbers. But we wanted to be comfortable in forecasting going forward. But with 7(a) businesses clearly been a flagship. One of the benefits of our new structure as a financial holding company is greater diversification of revenue streams, and less of a dependence in gain on sale income, which has been I would refer to it as non-reoccurring income, but a reoccurring event, we’ve had gain on sale for 20 years, it’s pretty predictable, we make a loan, we sell 75% of it in the form of government guarantee into the street and a pretty good game, which was what enables us to get returns in equity net of charge offs of 30% in our business.

So it’s been a very good business for us, and that’s why we can generate return on average assets or return on tangible common equity that clearly exceeds other financial institutions. So in the fourth quarter, we did $188 million worth of loans. To be frank with you in the fourth quarter, we slowed some of our activity down to save our capital to be able to put cash resources into the bank because you really can’t move things back and forth. From a bank holding company into a bank, we actually didn’t fund any 7(a) loans in the last two calendar. 7(a) loans in the last two weeks of December, typically our busiest months. We kept the pipeline going and we rolling that forward. But I think it’s important to note that a lot of what we did in the fourth quarter of 2022 was positioning ourselves from a capital perspective and a financial perspective to become a financial holding company, as we anticipated closing the bank deal on January 6.

On slide four, when you look at our forecasts, we’re forecasting $175 504 loans, for the 2023 guidance, we think that’s fairly not very aggressive. And obviously, we always look to clearly meet or exceed our targets. And the big growth area obviously is a non-conforming C&I loan business of which we did a securitization in January of 2022. Important to note all loans that have been done in that business originated since 2019 are performing, there’s never been a default and there’s never been a charge up in that particular portfolio. In our conforming business where we financed into financial holding company with more expensive securitization and joint venture financing but still generate generating high returns on capital which we’ll talk about.

The 7(a) in the 504 will be financed in the bank once we get the PLP status, who tend to the bank. I will also note that we will diversify our loan portfolio with I refer to as conforming C&I and conforming investors CRE loans. These are the types of loans that are pretty typical at old banks, meaning bank standards bank guidelines, greater equity contributions shorter prepay schedules and loans that are due in three years due in five years with the loans, we’re all packed with loan covenants typically are done at tighter margins. But this will diversify our portfolio, which we think is a good thing having a bar build pool of credits. Going to Slide number five. Our history as a BDC was, we paid out a lot of dividends over our life as a BDC $330 million in dividends and distributions.

And we’re proud of the fact that we were able to return that cash back to shareholders. And then going forward, we’ll able continue to maintain a dividend policy for as far as my eye can see. But obviously, share appreciation is important, we could talk about the structural differences between a BDC and a financial holding company. We paid 275 — $2.75 in dividends and distributions in 2022. And once again, I want to put a fine point on this the transition and transformation is over. We’re now a financial holding company. And we’ve been acting that way for approximately a little under 60 days. And I do want to repeat, we gave no earnings guidance in 2022. And we didn’t give any clearly for 2023 as a BDC in 2024. So I have no idea with some of these thoughts or concepts or projections are coming from.

But, I will also point out that people have been waiting for a dividend announcement as a financial holding company. So we’ll talk about the declaration. And we also have, I guess, developed the 2.4 million shares short, according to NASDAQ, in our outstanding shares, which is about 10%. And that’s a really interesting phenomena that I guess, the markets will deal with on a going forward basis. Slide number six. So on slide number six, and slide number seven, we are doing our final report, as a BDC. I must say these are not particularly impressive numbers. However, I think it is important to note for, people that are tuning into this call for the first time and trying to follow us as a bank, the adjusted net investment income for the calendar full year was obviously at a profit, we say it’s adjusted because it’s a non-GAAP number.

And the important aspect of that adjusted NII of $51.9 million is that includes gain on sale, which gain on sale from a BDC perspective is non-GAAP. So historically, our NII, with the exception of the PPT business that we did in €˜20, and 2021, we’ve always been at an NII loss. So going forward, NII will have a totally different meaning as a financial holding company, net interest income instead of net investment income. I look forward to the transition, I look forward to consolidated financials and to be able to be fully transparent, at all different verticals, with all the analysts, we put a ton of data out there. So analysts can be begin to build their own models and develop a following, we really haven’t had for the last 12 months. So we’ve kind of been floating in isolation.

And, frankly, we have lost quite a few shareholders that love that flow through structure and the full dividend, which wasn’t taxed, we got tax on the individual basis instead of us paying tax. But the results for the financial holding company are readily apparent on six and seven. I think the way we look at things, on a going forward basis, we’re pleased to say as we sit here today, we have put out an estimate of sort of where we stand with a very well capitalized bank, which will go through that, with a very well positioned financial holding company. We have great earnings projections and a great future going forward. And we think we conservatively marked our portfolio in the fourth quarter to reflect the reality that in a mark to market basis, which I have to do as a BDC is reflect the fact.

Net interest rates went up 4% to 4.5%, the cost of capital went up. So it made — and I will say this. We’ve seen despite the fact February hasn’t been particularly pretty, but January, really recouped quite a bit of value from a fair value perspective. As a matter of fact, if you look at the government guaranteed market of SBA lending, it’s actually on a gross basis of four to five points. And we think the uninsured market will somewhat follow in that footsteps. We didn’t see any major credit deterioration in that period of time. So when you look at the rationale for gain on sale from the government piece going down, the lagging amount of rates, the high volatility and velocity and re heights legging effect of the SBA business only changing in arrears on a quarterly basis really affected the prices, which we’ll talk about.

So we think there’s a lot of good things going forward with respect to Q1, our future as a financial holding company and we look forward to continue to report. On Slide number eight, we can take a look at our loan closings and pipeline. So, if you look at the top portion of it, it’s not particularly impressive, it’s flat. I think what’s important to note is, that we looked at $2.1 billion worth of loans so far in 2023. So obviously, we’re very selective, up from $1.7 billion in 2022. In units 3,597 individual businesses came to us looking for financing. Now the approval rate explained that’s approval I believe from underwriting. So, it’s important to note it’s hard to get loans, through prequel into underwriting. But we’ve really cut down loans that actually put a full credit memo together and got turned down in credit.

So, a lot more selective in picking through things, I should note that we’re typically rejecting 99 and change percent of the loans that come through that process function at the top portion of the page. So, we’re still getting a lot of demand. We’re being a lot more selective, a lot of people are in qualifying, but we believe we’re very confident that we’ll be able to hit the projection numbers out that we have in the market as we’ve also tightened up our underwriting criteria, which we’ll talk about. On Slide number nine, our first quarterly dividend declaration as a financial holding company, important to note on January 17, in our forecast to investors and analysts that call is archived, we had a $0.16 projected forecasted dividend for our first quarterly dividend.

So the Board declared an $0.18 dividend for the first quarter. It did that, in anticipation of hopefully being able to keep that dividend constant lease for the calendar year. So did that with the concept that it believes in its forecast, it believes in stability, its percentage of total earnings, I think that’s important to note. So, the headline risk was, oh, they cut the dividend. Well, it’s not like we cut the dividend in our earnings falling apart here. Matter of fact, we’re paying taxes, and we’ll talk about how our earnings flow through in the different accounting, particularly with the effects and CECL and earnings per share. These things are fairly complex, but we pick up the analyst coverage, people start to understand what we’re doing.

I feel fairly confident that the historic track record of the company has been around for 24 years, 22 years, as a public company, really has developed some great pricing solutions in the market that we just got the right financial structure for the current economic environment, which we’ll be able to demonstrate to the question in this presentation. So, the dividend that was declared, is payable on April 14, shareholders of record on April 4, that’s our first quarterly dividend as a financial holding company. And we’re hopeful and believe that dividend will be maintained quarterly for about a year, then we’ll revisit obviously, if all of a sudden our earnings go from $1.85 in the midpoint to $3 at the midpoint. We either look at increasing the dividend or maybe a share buyback in conjunction with formulas that we have to demonstrate to the regulators that dividends paid antimonial, as long as we’re earning money will be able to do dividends, both out of the holding company, and then in the bank to the holding company.

On Slide number 10, as of February 17, that was our track record versus the S&P and the Russell, I guess the market is enjoying the fact that we’re being able to, A, execute on our plan, be recognized by the Federal Reserve’s and accept their application and allow us to be a bank holding company, with financial holding company designation. And the office of Comptroller of currency, looking at our business model and feeling comfortable that we can capitalize the bank we should have been able to do and run it successfully. So the market is anticipating good things going forward. And hopefully, that will continue. On Slide number 11. One of the reasons why we switched over, you could clearly see that over the course of 10 years, Russell 2000 stocks outperformed BDC.

So this is another reason why we think this is very beneficial to shareholders, because from the category standpoint, we’re excited about potentially be added to the Russell. There were some firms on the Street that had indicated that we could pick up as much as 2.1 to 2.7 million share purchases by just being added to the Russell. I’m sure some of that activity has already occurred as people do jump in, but we haven’t been named to at this point in time. But given the market cap and a quota for the Russell, it looks like that as a good possibility of occurring. Slide number 12, valuation going forward. Obviously we talked about financial holding company being regulated by the Federal Reserve Bank of Atlanta up at the FHC area that would be NewtekOne.

And we clearly talked about no longer reporting as a BDC and using 40s Act Accounting, we’ll be using 33s Act — 33 Act Accounting. And we’re all excited about that. And we reiterating our EPS projections of $1.70 and $2, to $2.80 and $3.20. There’s some geographic changes in there. If you take a look closely, you’ll see some things moved around a little bit. Obviously, you could see from the volatility in the market. And from a timing perspective also things are changing dynamically as we move forward. On Slide number 13, things to focus on capital ratios, you’ll see that the bank subsidiary is very well, very well capitalized, we’ll talk about that. The joint venture that we’ve created, which will enable us to do we believe $600 million of nonconforming loans in 2023, and $1 billion in 2024, an important category generating high returns and equity of between 20% and 30% risk adjusted.

And our joint venture partner has committed up to $100 million in equity funds to work together. The ability of lever more, we’ll talk about the value of that, you’ll see that return average assets between 3% to 4%. Return on tangible common equity, 20% to 30%. And we could do this because we’re not doing home loans, car loans, all consumer products, which frankly, the Bank of America’s, Wells Fargo’s, which scale and tight margins are able to do that business. That’s not true as well, stick to the things we do really well that we’ve developed, particularly on the lending side, over the course of 20 years. And obviously, our non-banking activities we think will really further develop payment processing, tech solutions, payroll insurance, all featured in the Newtek Advantage.

And these areas of non-bank revenue, you can see always show you projections going forward, are very valuable, and they actually have different multiples and banks aspire to get that type of activity. And you could see that our financial holding company is different unique, most financial holding companies or bank holding companies, they don’t have much up at the at that area and most of the earnings generated solely from the bank, you can see that we have a pretty good mix between the two. And we’ll demonstrate that in a future slide. On Slide number 14, key financial metrics. Once again, we talked about 7(a), we think there’s potential upside for those forecasts. But we’re comfortable with those numbers today, both on the 7(a) and the 504.

The conforming CII, and CRE loans about $140 million in 2023. Not a big number, but we’ll start to blend those basic vanilla multifamily industrial type loan, ABL loans, which are lower margin, but can now be funded with core deposits, which really couldn’t be done in a non-banking environment. And also the non-conforming C&I business that we’ve done. We had to break that a little bit through COVID. But we turn the program back on, we have a nice pipeline. You can see on the cash premium for 7(a), we’ve got to model the 10%. The market is almost the point north of that at this point in time. So those numbers are somewhat muted, and only 10.5% for 2024. New financial holding company debt raised, that’ll be the refinance of the existing baby bond debt, we have an S3 that’s been put in with the SEC, hopefully, that’ll get cleared in the near future that will enable us to do publicly traded debt.

Photo by sean pollock on Unsplash

As a financial holding company, Egan-Jones recently rated net debt BBB plus. So we’re very pleased with that rating by Egan-Jones. We are also be able to do preferred stock and also common equity, which, obviously, if you look at our projections, we don’t have a plant currently raising, that’s always based upon market conditions. But the benefit of being a financial holding company is you could use the retained earnings, and you’re not constantly raising shares, so we had to do as a BDC. As a matter of fact, my recollection is we started off as a BDC with about 15 million shares plus or minus and that grew to 24 million shares today, that’s quite a bit of share issuance, and we were still able to grow our earnings or our dividend. Well now, we could use leverage with lower cost of funds through core deposits versus a commercial financing.

This plan we’re confident will work out very nicely. Let’s go forward to Slide number 15. Bear with me for a second. Okay, so digging into the NewtekOne, that’s the financial holding company, financial summary and proforma. Couple of things want to point out once again, the earnings per share projections, those are midpoints, we range 170 to two bucks 2023 after tax and 280 to 320 in 2024. Share count flat, dividend per share, I mean that’s — if we continue on the track and hit our forecast that’s most likely the dividend that will pay that should be a qualified dividend because we’re taxed already. And as our earnings grow, we’ll either will obviously do things to benefit our shareholders through share buybacks or dividends. You can see we’re able to grow our earnings substantially at the close of the year, from about a $1.62 billion.

We believe at the end of 2023 $1.7 billion, the end of 2024 $2.1 billion, we believe that we’ll be able to grow our total assets and a balance sheet, and still stay within our plan, and financial results for the regulators. You could see the return on average assets. And this isn’t the holding company that returns on average assets, returns on average, tangible common equity, are greater at the bank, but at the holding company, we have that expensive debt. So everything’s consolidating, that includes the bank data. But obviously, things we do with the bank are typically more or profitable. With the holding company, still fairly robust numbers for a financial holding company. Net interest margin kind of skinny because of things we do up at the holding company, once again, are funded with that expensive debt, you can see the cost of funds also very high.

And you’ll see the difference between the cost of funds on a consolidated basis versus what we can do at the bank. You can see the efficiency ratio from 2023 and 2024 starts to decline. And we’re hopeful that we can get to better efficiency ratio numbers going out in the future, as we start to take advantage of the operational leverage to be the banker lists, broker lists, branch lists, BDO, with institution providing business and financial solutions to business owners. And literally just to round things out, once again, we emphasize the EPS projections for the next two years. Moving to Slide number 16. The important items on this particular slide, this is Newtek Bank National Association, you’re looking at around $216 million in capital $77 million of common equity.

And, that was an aspiration to get the bank fully funded, that slowed some of that activity down in the fourth quarter to be able to move the money around that we needed to do. And you can see that our capital ratios, this a very well capitalized bank, approximately 30% on PC versus total assets. And then you get CET1 ratio closer to 40%. So we feel pretty good about these numbers. And we’re excited about that. We’ll obviously use that capital over the course of time. Slide number 17. I think, the important aspect of this slide is to see the breakdown of income coming from the bank versus non-bank entities up with the holding company, everything will consolidate up but you could see that, it’s reasonably well balanced. So we get a lot of income coming from non-banking activity.

That’s important. Obviously, the bank’s kept the 7(a) business, the 504 business to conforming this, but you can see that the other business lines up with the holding company will be important to us and substantial, as well as the things that we can do from it from that activity for our clients. On Slide number 18. I think the important aspect here obviously is the earnings per share number on slide number 18 and dividend per share, we’ve kept this flat, that’s for just modeling purposes. But if we’re generating three bucks, we’ll look to do things for our shareholders relative to buybacks through dividends. But always keep in mind the importance of what I’ll call shareholder value. Going forward to Slide number 19. I think the important aspects on this slide would be once again looking at the growth of total assets of NewtekOne, that’s the financial holding company.

$1.06 billion, $1.7 billion, $2.2 billion and very nice growth, look at the growth in total equity $189 million we raised $20 million of preferred stock that is that calculated in $189 million, it is reflected in the $231 million for total equity, and then growing to $26 million in 2024. Next Slide number 20. I think it’s important to note, so the whole Co. financial metrics, return on common equity, close to 23% in 2024, 30% in 2023. In 2024 30.6%, return on tangible common equity 26.5%, 34 point you don’t see these of banks, you just don’t because banks don’t specialize in areas that we do which is to focus on that independent business or small to medium size business owner with all these different great assets for them to take advantage of through the Newtek Advantage the full suite of services, I will feel very good after developing this business model over the course of 20 years.

These are businesses that we’ve owned 100% of and operated some cases 10 years, some cases 15, some cases close to 20. And you can see the return on average assets consolidated 3.28% to 3.75% 2023 2024. Also important to note, look at the cost of funds fairly high, that’s going to start to decline, because the deposit story is really out in the future, we start to really work on getting deposits through our payments division, or payroll division. And really coupling deposits from a lending perspective. So, we hope to beat that we hope to get metrics, Nikel will be reporting on deposit growth on a going forward basis quarterly, to show you how many accounts we opened, how many dollars, cost of funds, et cetera. So we’re excited to be able to report that.

But, we are going to get this business up and running. And we will clearly try to beat these expectations and early conversations with clients. We’ve had tremendous receptivity about offering same day funding on payments, ability to pay people through payroll faster to move the depository accounts to us. I’m excited about our future in these particular areas and the ability to ultimately get better economies relative to a pretty important category for banks today with respect to deposit funding. On Slide number 21, I think the most important thing we can talk about here really relates to equity at the bank, you can see the growth in the equity, there really is no need for equity contributions. At the bank, it’s fairly self-sustaining without our ability to retain earnings both at the bank.

And obviously at the financial holding company, which is clearly different from a BDC, that’s got to pay up between 90% and 100% in earnings. Moving forward to Slide number 22. Some general metrics for the holding company, assets, TC ratios. At the bank, you could see more robust capital ratios, we’ll be utilizing that as we grow the balance sheet and the book of business in the bank. Slide number 23. Some earnings forecasts for the holding company, return on average assets return on tangible common equity, fairly robust numbers. The bank’s cost of deposits, which you see are low because we’ve got some lower costs of deposits from the legacy National Bank in New York City. But they’re also match funded against lower costs of assets that were commercial real estate loans that were fixed.

That’s kind of a match book, where we clearly do want to grow that deposit business. Once again, I do believe that is a more between 2025 2026 story we hope to be able to beat that particular guidance that we’re getting here today. Slide number 24. For those you that are not that familiar with us as an SBA lender, we wanted to include this. You can see that we’ve been in this space for close to 20 years from 2023. That’s our history. We’ve securitized historically, which is the only way to fund our business long term. That’s fund would 12 S&P rated transactions beginning in 2010. Everything’s been held their rating or been upgraded, or average loan size, the uninsured piece on 151,000, as we get tremendous diversification. Our loans are now being done at prime plus 300, at prime plus 275, the SBA has change those rules, and it’s helping our gain on sale numbers, particularly for this calendar year.

And once again, I do want to repeat that we got more — we have better pricing right now that we put into our guides, but pricing can be pretty volatile, we wanted to be conservative. I always want to be able to over deliver and under promise. So that premium trends on Slide number 25 important. We’ve used 10% or 10% of par. As I said, we believe that number is probably a point higher. But look at the fourth quarter 8.72%. So clearly, that was low. We’ve been — we believe that’s based upon the fact that banks plus the funds were rising dramatically and these loans adjust going forward. So that negative drag carry we really do believe really diminish this. The other thing that we’re being told is the bid for these S&P Government guarantees float is picked up in Q1.

A lot of our competitors in the banking space and had difficulty in their portfolio or they’ve had to mark down assets and the floaters tend to gravitate more towards a par valuation. So, we do think that we’ve got a bounce back to equilibrium in pricing, which we would look forward to and would show up in our earnings per share numbers. Slide number 26, shows the benefits of increasing portfolio. And here’s we get that nice spread income, which we plan on benefiting from at the bank level. You could see that our, our interest income grew significantly in Q4 2022. And, frankly, as a coupon start to adjust, particularly in the first quarter, that spread income will grow, because we actually had monthly changeover on our cost of deposits commercially.

But the loans adjusted quarterly going forward. So this will pick up we should see a nice number. Although once again, to point this out, this is NSBF. This is a non-bank lender, it’ll be held at the holding company in a runoff mode. And once we get the PLP status transferred over all the origination we done at the bank using CECL accounting, which we’ll talk about a little bit as well. Slide number 27 talks about a non-accrual trends. So you can see that we’ve had a favorable trend there, these are done at fair value. I think it’s also important to note that historically, we really haven’t reported the rest of the loans that we originate, which you could see on the next slide, slide number 28. So on Slide number 28, we’ve originated $401 million of 504 loans have not experienced a single default or charge up to date.

And the company has also originated $132 million of the non-conforming conventional loans. Also no defaults or charges. So, in excess of $500 million of loans with a big zero, in non-accruals a big zero, in charge offs. So, we’ll going forward be reporting our loan business on this basis, which I think will give the market a better depiction of the fact that SBA loans are written to a different standard with a different charge off rate. However, you also get the benefit of a fairly high coupon today at prime plus 300, with where Prime is versus a potential future rate adjustment, you’re at tenants free quarter coupon. So you look at cost of funds 4%, 4.25%. That’s a very healthy net interest margin on a floating rate asset, not including the fact that you get a gain on sale on 70% of the government guaranteed pre sales.

The business we’ve done over 20 years works well for us. And we’re dedicated to it and we will continue to grow that business very nicely. On Slide number 29. We have tightened their underwriting criteria in 2022, due to changing market conditions. Clearly bringing in the higher FICO and SBSS scores. The total portfolio has increased by about 10. But understand that, that’s just 2022 originations going on to the existing book of business. So, without actually calculating what that number is, I would guess could be 20 to 25 basis points higher in SBS scores in 2022 versus historic originations. But the total portfolio is about 10 higher. We’re stressing the portfolios at current levels of rates. So we’re actually turning down quite a few more loans as a percentage.

And it’s important that one of the things we experienced during COVID is making sure that businesses can basically withstand four to eight quarters of a difficult time versus their expectations and projections going forward. Also, letting the business have the ability to liquidate collateral, or unencumbered borrowing power is by higher expense increases revenue increased. We’ve been in this business for 20 years, we’ve survived the late €˜09 and survived the pandemic. And as a non-bank lender, I think that’s quite a badge of honor, we now look forward to being able to participate in a banking environment and diversify our funding sources. Moving forward to Slide number 30. You can see that our currency ratio has held up very nicely, still at 97%.

Slide number 31 is our classic example of SBA 7(a) loans. So those people are familiar, this is how we create cash, we do 7(a) loan. And 32 is the income slide, generates that risk adjusted profit recognized. I think it’s important to point out for the analysts that are looking to model our business going forward. The primary earnings engines for NewtekOne, Newtek Merchant Solutions held up with the holding company $6 million of EBITDA approximately in 2022. Tech Solutions by $3.2 million, $3.3 million of EBITDA. Newtek Insurance Agency, Payroll Solutions also be consolidating up as an engine. The Newtek Small Business Finance, the SBLC will be up at the holding company and right off mode. We are still originating 7(a) loans out of Newtek Small Business Finance in January and February, that’ll be reflected in our Q1 earnings.

We look to move that into the bank and move the PLP status over. We’ve actually gotten 10 loans approved at the bank using GP and PLP during the process of being funded. After that we should be eligible to move that PLP status over. And then obviously Newtek Bank originating profits and then distributing and dividend in cash up through earnings. Slide number 34 talks about how we do 504 loans. 35 thoughts about the types of returns that can be gathered in SBA 504 loan origination. So you can see from 504 loan, 7(a) loans you can generate high returns on equity. Slide number 36, our non-conforming conventional loan business which we’re really proud of. This is a business that’s performed very, very well. We did a securitization, I believe it’s NCUL 2022.

It’s modeled on in text, you can look it up, we have a single default in that portfolio. And we’re looking to expand that business. You could see that on slide number 37. We have a joint venture partner that’s indicated they’ll put up to $100 million of equity to fund business out of a JV, we’ll fund the equity, they’ll fund the equity. We have leveraged lines in place, we put out a press release, we raised $300 million in Q4 to be able to leverage our business over and do these types of loans. And we’re pretty excited and we’ve cranked the model up and we started, the JV started climbing loans in the fourth quarter of 2022. But we feel that we’ll have a very robust pipeline in business. The advantage of the non-conforming loan portfolio which we’d see on slide 38, is we typically originate these loans, 3.5 origination points, 100 basis points in servicing income that’ll go into the bank, origination fees will go into the bank and loans will be funded up at the bank holding company through the JV or the holding company’s balance sheet.

We do hedge these loans to typically fixed for five years they adjust, over the five-year treasury will floor at the origination rate, we believe that before the five-year duration. And once again, we anticipate really good volumes and these is good investor demand even at fairly high rates. Today we’re on the Street at 10.5 to 11 gross for the A credit, 11 to 11.5 for the B, 12.5 to 13 for the C type credit. Those are the growth rates we service for 100 basis points. And then they go into the joint venture. We believe that we generate practically 20% to 30% returns in equity, net of anticipated loss severity and frequency. And so for the portfolio has performed very well primarily based upon the fact that we’ll loans have personal guarantees similar to the SBA program.

And we typically lean towards loans without strong guarantors. So we talk a little bit more about the program on Slide number 39 talking about securitization that we did, which will model our future exits over. On Slide number 40. As we wind up our discussion before we go into the financial criteria, that Nick Leger will report on. What a difference 60 days, we say 60 days through under 60 days, but we’re clearly operating as a BDC. So we’re looking forward to reporting for the first quarter of 2023 tangible book versus NAV, the major differences I talked to you about before, there’s about $170 million of value between the market value of the Payments Business, Tech Solutions, business, payroll and insurance that are winded going into the financial holding company, it will go into the basis of plus or minus zero versus a fair market value on NAV.

So, obviously, most banks and bank holding companies don’t own a lot of these assets. They’re basically filled with home mortgages and home equity lines and car loans, things that all account is tangible book. And our loans count as tangible book. These assets, that grow of reoccurring income very valuable, actually greater market multiples in typical bank, they’re going in and not adding to tangible book. So that’s something that we’ll have to address and maybe create a non-GAAP statistic is adjusted book value. Then you’ll look at after tax net income or EPS versus net investment income and adjusted net investment as well. We definitely enjoyed our days of BDC. We’ve hit a lot of dividends, but we’re happy to get rid of all those metrics and criteria that made it difficult to evaluate who we are what we do.

We paid, healthy dividend distribution over our life, and will continue to pay what we think is a top quartile type dividend of 4%. That’s not secret, we’ve been talking 4% for 12 months. So for people to be surprised that this is a dividend at the current stock price, but anyway, people are going to have their own takes on things. But we just laid the information out and give a lot of information on these particular calls, and help people pay attention and listen, but these are things that we’ve been talking about for 12 months. When you look at deposits versus a commercial bank line, as I said, let’s say I use round number deposits of 4%. Versus right now, if I drew on my commercial bank lines, its 8.25%, I only get $0.55 on the dollar, which means we got to use $0.45 of equity in order to grow up to keep raising equity, and keep diluting shareholders.

Totally different story. So between the lower cost of funds, the ability to lever up to 10:1 over the course of time, very, very beneficial structure going forward. And obviously, the fourth quarter €˜22 gains on sale premiums versus the current expected prices, markedly different. I think, we pretty much soar decade lows in Q4. That’s when everything for those people tried to do anything in the capital markets in the month of December, we had to do our market. That was clearly a low point. And the market seems to bounce back nicely in the month of January. So we look forward to a bounce back and gain and sale prices, as well as the value of loans of which NSBF will be valued on a fair value basis. So we should get some recoupment of value there as well.

On Slide number 41, from an investment summary perspective, we would love the market to focus on us a financial holding company that we operate a little under 60 days, well capitalized entity that our first rodeo, been a public company for 22 years, we’ve been able to manage all different in trade environments, credit environments, these projections are based upon what we’ve been able to do in the market with assets that are really generating higher returns risk adjusted than what a normal bank does. And we’ve worked hard at developing these businesses, it’s been a 20-year history in the 7(a) business and the 504 business. We’ve been in the payments business for 20 years. So when you take a look at the Newtek Advantage, and see that our customers are going to be able to pick and choose and get a real asset, eventually bring a deposit.

So, we’re fairly comfortable with these projections, we hope to be able to deliver them and actually hopefully be able to beat them. We’re very comfortable declaring, our first quarterly dividend as a financial holding company at $0.18. That’s based upon the fact that we’re confident that we can produce these numbers. And this is a nice payout ratio versus their earnings. And important to note that we’re a growth oriented, differentiated technology enabled financial holding company. We look forward to continue delivering the types of results that we’ve done. Most importantly, we appreciate the opportunity for you to listen in today. So we can disseminate information that people can make investment decisions on which frankly had been a void for the last 12, almost 18 months.

And we declared that we were going to go in this direction. And we couldn’t do it because we didn’t know when we’d get approved. We didn’t know what would be approved. Well, now we know it has been approved. We know we are approved, we own the bank. It’s just a different story. And this is the beginning of a new period and quite transformational. We look forward and say goodbye to 40s Act Accounting, the BDC structure, and a lot of investors that want to buy in a technology enabled bank and we think we’re well positioned to really succeed this particular structure. Now I’d like to pass the baton to Nick Leger, our Chief Accounting Officer, to do a financial review.

Nicholas Leger: Thank you, Barry. Good morning, everyone. You could find a summary of our fourth quarter 2022 results on Slide number 43 as well as the reconciliation of our adjusted net investment income, or adjusted NII on Slide number 45 and 46. For the fourth quarter 2022, we had a net investment loss of $5.4 million or $0.22 per share, as compared to a net investment income of $1.6 million or $0.7 per share in the fourth quarter of 2021. Adjusted net investment income which is find on Slide number 44 was $1.5 million or $0.6 per share in the fourth quarter of 2022 as compared to $16 million, or $0.66 per share for the fourth quarter of 2021. Focusing on fourth quarter 2022 highlights, you recognize $23.1 million of total investment income, a 6.9% decrease over the fourth quarter of 2021 total investment income of $24.8 million.

The primary driver of the $1.7 million decrease in total investment income was primarily due to the $4.6 million of dividends from the portfolio companies in the fourth quarter of 2022, as compared to the $9.8 million in the fourth quarter of 2021. In addition, interest income increased by $5.2 million resulting from a year-over-year increase in the accrual loan portfolio, combined with the Prime rate increases in the calendar year of 2022, which increased 425 basis points year-over-year. Servicing income increased by 27% to $3.8 million in the fourth quarter of 2022 versus $3 million in the same quarter in 2021. Distribution from portfolio companies for the fourth quarter of 2022 totaled $4.6 million, which included $2.6 million from NMS, $1.5 million from NBL, our 504 business, 360,000 from NCL our conventional loan joint venture, and 125,000 from Mobil Money.

Focusing on total expenses for the fourth quarter of 2022, which increased by 5.1 million compared to Q4 of 2021. That is mainly driven by higher interest related costs due to the 425 basis point increase in the Prime rate, which was 3.25% at 12 31 2021 and increased to 7.5% at 12 31 2022. Realize gains recognized from a sale to guaranteed portions of the SBA loans sold during the fourth quarter, totaled $15.4 million as compared to $18.1 million during the same quarter in 2021. In the fourth quarter of 2022, SBF sold 252 loans for $144.8 million at an average premium of 8.72% as compared to 223 loans sold during the fourth quarter of 2021 for $126.6 million, at an average premium of 12.28. The decrease in realized gains is attributed to lower average premium prices in the secondary market when comparing to the fourth quarter of 2021.

NSBF sold 13% more units in the fourth quarter of 2022, as compared to the fourth quarter 2021. Realized losses on SBA non-affiliate investments for the fourth quarter of 2022 was $8.5 million as compared to $3.1 million in the fourth quarter of 2021. Overall, our operating results for the fourth quarter of 2022 resulted in a net decrease in net assets of $2.2 million or $0.9 per share. And we ended the quarter with NAV per share of $15.25 I would now like to turn the call back to Barry.

Barry Sloane: Thank you. Operator we’d like to open this up for Q&A.

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Q&A Session

Operator: Our first question comes from the line of Crispin Love with Piper Sandler. Your line is now open.

Crispin Love : Thanks. And good morning, Barry and Nicholas. First off just looking at your targets and origination volume targets. You’re expecting significant balance sheet growth with growth in non-conforming C&I from $600 million in 2023, to about a $1 billion in 2024. I’m just curious how comfortable you are with those targets, specifically the non-conforming to C&I just as it implies significant growth and ramp, and then just kind of more broadly growth on the balance sheet, just as the credit quality outlook remains uncertain here?

Barry Sloane: Sure, I would say this. So far, what we’ve seen relative to this particular segment of the market, a lot of borrowers that would normally go to a bank, and the good strong borrowers, they can’t make the debt service coverage ratio based upon the three or five-year repayment terms of bullet. So we’re really getting better quality borrowers to go into this side of it. So one could look at this and go, gee, you’ve never done it before. Well, we’re okay with that. We’re very comfortable with what our pipeline looks like and our ability to get it. We think a majority of this is going to start flowing through in the third and fourth quarter as our pipeline builds. On the flip side of it. We’ve probably been more conservative on the 7(a) side.

So I think that we certainly could make things up on the 7(a) side, but typically, the non-conforming book does tend to be better credit. So we’re more comfortable and would prefer to hit these numbers and targets and put this on our books and reduced and be a little bit more picky on the 7(a) side. But we do have the flexibility to go in either direction. So we’re not totally uncomfortable with the exit numbers. Mind you, we’re projecting up two years in a market where the five-year treasury moves by 50 basis points in two days. So not an easy thing to project, but we do it, we’ve done it for €˜23 as a public company, and we’re comfortable with it. But I would, I would comment that if there is something that is less proven, it would be those volumes.

But on the other hand, the ability to do these 7(a) numbers, and the 504 numbers is fairly muted as well.

Crispin Love: Great, thanks, Barry. That’s helpful. And then I guess, just the drilling a little bit deeper into credit quality. I know, you said that you might be a little bit conservative on the 7(a) volume side, but say it can grow non-conforming as much as you’d like and have to grow or grow the 7(a) side a little bit. Curious, what’s your kind of big picture views are on credit quality, over the near to intermediate term? And then just related to credit quality as well. I saw on slide 27, you give the non-accruals as a percent of loans at fair value. I’m just curious if you have that number on a — at cost basis as well?

Barry Sloane: Well, I think Chrispin as a BDC that look at the history. We’ve always had a fairly healthy in this space non-accrual number, because it’s just a function of these types of credits. On the other hand, you do get paid for making these types of loans with respect to the coupon and the government guarantee and the gain on sale. I think, when we look at the current environment. It’s amazing. The three and change weeks ago, people were thinking of rate cuts. Well, all of a sudden, three weeks later, they’re going through the rate cuts to rate hikes. And it’s like they went right through is there a middle ground? Like they raise rates a little bit more, they stop and hold it for a year or two, which is probably the likely scenario.

We do not see like a braking economy. We see a slowing economy. We see certain sectors performing better than others. But no, we’re not looking for — this is not ’08, ’09. There’s a lot of liquidity in the system. And our customer base has gotten a lot of support from EIDL loans, from PPP loans and ERC tax credits. And many of the individuals get government support as well. So we think our customer base is pretty liquid. And obviously, we are forecasting higher defaults that we’ve had historically, but we think we’re fairly well reserved. And when you take a look at our numbers going forward from a CECL perspective, we’ll have some pretty hefty reserves in that particular calculation when the loans are done on the bank using CECL. As a matter of fact, when you do CECL, which is one of the reasons why the numbers ramp, you get fairly — you get hit fairly heavily when you make the loan because then you have the lifetime accrual and you’re not putting the loans on the books at a premium anymore, you’re putting it on at par, which is different than fair value that we’ve experienced historically.

So hopefully, that gives you some background that answers your question.

Crispin Love: Yes, yes. Thanks, Barry. That’s helpful. But just one on the nonaccrual as a percent of loans at cost, curious if you have that number handy?

Barry Sloane: I don’t. I’d have to pull that out of the queue. It might be 1% or 2% higher than that number. We’ve written these down from a book perspective, that’s important to note, and from a taxable income perspective as a BDC.

Crispin Love: Great. Thank you, Barry. And I appreciate taking the questions.

Operator: And our next question comes from the line of Paul Johnson with KBW. Your line is now open.

Paul Johnson: Yes, good morning, Barry. Thanks for taking the question. So I just wanted to kind of clarify your comments as well as what’s in the slide in terms of what your expectations are on your expected return for the JV investments. You kind of talked about a 20% to 30% consolidated net return on the JV. Is that going to be — are we talking about the same thing as the return on your respective equity investments in the JVs? Or how should we be thinking about the return on those as you guys ramp that going forward?

Barry Sloane: The way to think about that at this point is those returns are based upon income that’s generated at the bank, the fee income and servicing income going forward as well as the equity in the JV. So the equity in the JV would be a subset of the total amount of income that’s generated from the activity. Important to note that we really get a lot of leverage out of our intake. So we take all those referrals, and some of those referrals now go into non-conforming. Some going to 504. Some come to 7(a). And they get dispersed based upon borrower need investment for the customer, and the fee income would go into the bank. The servicing income would go into the bank, and that starts to pick up because you start to put 100 basis points of income on, and you do that going forward.

That kind of compounds and ands on each other creates a nice growing stream of income. So as you and others, Paul, we appreciate you writing on us as a bank. Obviously, you are a BDC coverage, so we appreciate that. But you’ll start to see the stuff starts to ramp going forward, particularly when you look at, for example, the CECL. You do a loan in Q3 and Q4, you’ve got a huge loan loss reserve. And you haven’t got the coupon for a couple of months, right? So because you’re not valuing in fair value, you’re taking the hit, and that starts to flow through in the following year when you’ve got a really nice high coupon versus your cost of funds and your margin starts to pick up. So this is new accounting. It’s new modeling. And we look forward to questions like you’ve asked today because it really will shine a light on what we’re trying to do going forward and how this business model is going to be very advantageous to our shareholders.

Paul Johnson: Got it. Okay. Yes. So I understand it’s — obviously you were talking about 20%, 30%. We’re looking at the bigger picture of what you’re generating off of those portfolios for the business.

Barry Sloane: Well, thank god today, everything consolidates. So we don’t have to deal with portfolio companies. Everyone is going to be able to look and have full transparency into how all these businesses are doing, and they’re going to be segmented in the Ks and the Qs. And you guys are going to be able to model the business and have a better understanding of the full value creation far more easily using consolidated accounting and the right segment reporting than you historically have been able to do as a BDC. Not that the BDC is bad, but all these businesses were based upon fair value. And we reported that way, and it worked well. But now we could take advantage of lower cost of funding, diversified liabilities. We can diversify the loans that we make because now we can also add higher quality loans, which to the book will minimize on a total basis and types of loan losses.

But at the end of the day, we make money on both. We’ll make money on a tight margin that has 15 basis points of charge-off a year, which is what most banks do. But most banks can’t grow their business because that’s their whole portfolio. They’re locked, we’re making residential loans, car loans. They really haven’t developed the expertise that we have in these greater risk/reward type opportunity. So that’s kind of where we look to hang our hat and make our mark. And then down the road, we’re more effective in the deposit category, which we hope to outperform what we stated that we’re going to do there. That will also pick up. So we have real good aspirations with respect to really benefiting from lower cost deposits with all the bundled solutions that we have coming out of the Advantage, diversifying our lending book to have A credits as well as less than A credit in the SBA business.

So I think we’re well set up for the future.

Paul Johnson: Thanks for that, Barry. Just a few more questions. I was wondering if you can, what is the update on the PLP being transferred into the bank? Or basically, what’s the status with that? I mean is there going to be a need to reapply for anything? Any sort of renewal process that needs to take place and I guess how you’re currently working around that?

Barry Sloane: Yes. It’s in motion. And the employees are now in the bank. The loans are still being made generally out of NSBF, but we’ve begun to get approvals in the bank. We have funded 7(a) loans in the bank, but they’re done GP versus PLP. We anticipate that transitioning over in the very near future.

Paul Johnson: Got it. Okay. Thanks for that. And then I’m just sort of wondering, it might be nice to know, and if you don’t have and you can’t share at the time, that’s okay. But I’ll ask, do you guys have any sort of stats you could share as far as service utilization of clients, customers that you guys have? What are, I guess, sort of some of the comments of crossovers opportunity of services you might have to offer between your borrowers and clients for other parts of your company?

Barry Sloane: Not at this time. It’s something that we will look to report. The deck is now 40 pages-plus. And I will say that, that has been a greater challenge historically, which is one of the reasons why acquiring the bank and rolling out the Newtek Advantage is going to enable us to have business owners go to their dashboard, their business portal, which being the Newtek Advantage. Oh, gee, I didn’t know I can get insurance for you all. I didn’t know I could store my documents with you. Oh, I didn’t know I can get this payment processing information. Wow, you’ve got your own PLS system. So that data will become more readily available, and we’ll report that. And obviously, where historically, we haven’t been able to acquire deposits when we make loans.

We’ll now be able to do that. So a lot of things are there in the future, and we’ll be able to do that. So we appreciate the question, and it’s one of the reasons for our being to be the one company for a business to be able to do more things than just one thing with us. So we feel pretty good about that.

Paul Johnson: Sure. Last question, I leave there. Just wondering maybe to get your thoughts and you touched on some of the things, obviously, through your remarks. Just I guess how are things progressing now that the merger is closed? I mean do you feel things are on track? Do you think things are ahead of schedule? What are your, — or I guess, your confidence in the projections you guys provided in terms of like efficiency ratios? And would you expect, I guess, provide any sort of incremental update there as far as your projections throughout the quarter?

Barry Sloane: Yes. I do think things like efficiency ratio, we’ll be out there projecting — and not projecting, but coming up with those numbers. Obviously, at the moment, you got a lot of things moving around. Like you just brought up, for example, the PLP status, right? So we had some income in the first quarter that might go to NSBF that would normally be in the bank. So I think in the second quarter and the third quarter, you’ll get a better sense of income and expense being put together. We obviously do have Reg W policy and issues that we’ll be dealing with as well, but we’ll be able to report that. Because I think when you think about our business model, brokerless, branchless, BDOs and bankers and the capital that we’ve got, we will be able to deliver really attractive efficiency ratios going forward.

We’re an organization that has people available to our clients. They’re on camera. They have a personal relationship with these people. It’s virtual, but that’s the world we’re in now. The world going forward is still our customers want to have somebody to talk to versus just typing data into a piece of software into an endless weight. So we’ll be able to do that, and we feel pretty good about the business model. And really giving — I mean we give a lot of information out. We’ve been complemented on that. We’re going to continue to do that. So I appreciate the question, and that is really one of the values that we believe we’re going to be able to derive. But I will tell you, it’s a heck of a lot easier for me to get on this call and talk about it than to actually execute on it.

So we have a lot of work to do, and we’ll get there. We have a history of being able to deliver those types of results and do it. It just — it takes time.

Operator: And our next question comes from the line of Scott Sullivan with Raymond James. Your line is now open.

Scott Sullivan: Thank you. Hey, Barry, congratulations to you and your team. You guys definitely had the vision on the SMB opportunities at the time back then and building, I think, the best mousetrap at the time using the BDC structure. I kind of like an analogy here that you’re graduating now top of your class from a sort of intensive master’s PhD program and, again, kind of skating to where the puck is going, which I think might be the best structure of financial bank holding. So with that preamble, I’ve got a couple of questions. Really, how relevant is this Q4 report to the future?

Barry Sloane: Well, I think — Scott, I appreciate it. I think that it’s a mark in time, and it’s really the handoff into the financial holding company. So we obviously — we paid out, I think, a $17 million dividend on December 31. We paid the owner of the bank $20 million, pushed $51 million of capital into the organization. And that — really, we have to get that done because that’s what we put in our application. That’s we have to deliver on. So I think that people looking at — first of all, I don’t know how people are coming up would be met or beat. I don’t know where I got these earnings numbers from, but they didn’t even for me. So with that said, as you sit here and look at the company today from an investment perspective, we have put out into the market that we have, a well-capitalized bank.

We have a very well-positioned financial holding company. We’re now regulated by two great regulators, the Federal Reserve and the OCC. Our status is positionally have a good pipeline. We raised capital in the markets in January, a pretty tough time to raise capital, both preferred from an institutional investor and bonds with our BBB+ rating. So we’re in a good spot. Now we’ve got obviously a transition going on. We’re moving people into the bank. We’re changing payroll. Shareholders are transitioning despite the fact that we’ve talked for 12 to 18 months about a 4% yield without putting a dividend number on it because that would be imprudent. I mean today, we’re able to cross over the concept of being imprudent by having the Board actually declare the number and declare the number based upon the earnings because it would be imprudent to really talk about.

I don’t think impatient shareholders understand that. But for people that like dividends, it’s great. But the reality of it is stocks are able to retain earnings and generate high return on common equity. You’re better off. I mean look what we can do with that money. It’s funny shareholders just say, “Well, gee, what did you do with your dividend?” Well, I held it in cash? Well, how did that do against inflation? Or I put it in the stock market that was down 20%. So I mean the reality of it is we’re still going to pay a very nice dividend, which will be qualified. We’re going to retain earnings, which is very beneficial to the company so we don’t have to dilute as much as we used to. And we’ve done the math. That’s going to work long term. And we will hit our metrics.

That’s where our head is at. That’s where our goals are at. And we start to hit these numbers, all of a sudden, you get your following, and that’s where we’re at. Right now, we’re picking up some institutions, which is valuable. Hopefully, we get included in the Russell, which will be very valuable. Hopefully, the 2.4 million short sellers will have realized, well, gee, now the dividend is declared and the party is over and the Seeking Alpha headlines are behind us and don’t do what they got to do with their 2.4 million shares short.

Scott Sullivan: Terrific. And you touched on this a bit, but can you give us more color into the state of your customers, the SMB market?

Barry Sloane: Well, look, it’s interesting in that our customers, they’re affected. Everybody is affected. The employees are affected. Customers are affected. To state that nobody is affected by a 450-basis-point interest rate hike would be just ridiculous. So for people not to expect a reevaluation of assets is just silly. I mean I don’t know where their heads are at. But it just doesn’t work that way. If you went to college, you got to figure out the cost of capital is higher. You run it through the model, and the assets are worth less. It just is what it is. Getting down to our business customers. Look, I have to say our business clients are there. Operators are entrepreneurs. And through COVID, a lot of people changed the way they do things.

They reevaluated their businesses. They got much more efficient. They got rid of things that were, frankly, wasteful because they were afraid they didn’t know whether this is going to be their last meal or they can leave their house. So a lot of them got more efficient. On the other hand, a lot of them didn’t. I say a lot of them, it’s a small percentage on the extreme that are good operators. And they’re going to have to deal with the fact that their interest expense is higher, and they’re going to have to be able to make those payments. However, a lot of them really got bailed out by the government subsidies of those three programs. So they’re in pretty good shape, and that’s kind of showing up in our numbers. Although we do anticipate that we’ll get back to more normalized historical charge-offs over time, and we think we’ve got the right math because we’ve done this for 20 years.

So we’ve seen the stream ’08-’09, and we’ve seen the pandemic numbers. So we think we’ve got the right numbers in our models and the right reserves, and we’ll be able to manage this. And our customers who we speak to from a servicing perspective, I think we have people in our servicing department, so we’re talking to our customers. Unlike most banks where they make a loan, they won’t have a conversation. That’s not been our school, and we are very communicated with our borrowers. And we’re speaking to them regularly, particularly when we noticed that their payments are lower. We’re CH money out of the account. The money is not there on the 1st. We know we need to make a phone call.

Scott Sullivan: Fantastic. I appreciate that. And you might have touched on this also, but speak a little bit further on your pro forma on tangible common equity?

Barry Sloane: Yes. Look, I think depending upon how you define this, not including an adjustment. And if you include the preferred stock in there, you’re probably looking at — and I haven’t done the calculation, but you’re probably looking at $8 or $9, including the preferred stock in there. But that wouldn’t be common, that’s just equity. But I think that if you were to add back $170 million on 24 million shares, it’s almost $6. So you could basically say it doesn’t work. But then again, if you want to buy a bank at 0.1 book or a book or 0.8, there’s, I’d say 8,000 — there’s 4,000 of them you could buy. They just don’t grow. So if you want a growth organization, you’re going to have to look at one like ours, where we have a payments business, a tech solutions business.

And only so the businesses that generate reoccurring income that don’t suck up capital. And therefore, they should be part of the valuation. But you shouldn’t — in the accounting, gaps as you 0 amount, or we could put them in with goodwill, but that’s still not going to make it when you get to that tangible common equity. But then again, we don’t have a balance sheet — well, actually, I wouldn’t say a balance sheet, we don’t have assets that hit the balance sheet, and that’s just the accounting treatment. So people, similar to how they understood us as a BDC and traded at a premium to BDC over most of our BDC life. I believe that we’ll explain what we’re doing, and we’ll show the earnings numbers, and we’ll keep growing those earnings. That’s their desire.

That’s our forecast. That’s our aspiration. And that’s capital asset price. You grow the earnings, you grow the dividend. People are going to reward you with a higher stock price. They’re going to get — by the way, you’ve got to deliver the numbers. So it’s not like we’re saying don’t put the price up there without delivering the numbers. But you start delivering those numbers, and you show earnings growth, which banks aren’t able to show. You look at the return on average assets or return on tangible common equity at most banks, they’re not near these numbers. So that’s the difference. So we hit those ROAA numbers and the ROTCE numbers, price will follow.

Scott Sullivan: Perfect. Well, again, congratulations, and best of luck.

Operator: Our next question comes from the line of Bryce Rowe with B. Riley Financial. Your line is open.

Bryce Rowe: Thanks. Good morning, Barry. I appreciate the discussion here this morning and all the questions from the other guys. I wanted just to kind of dive into your sources of fee income that you lay out, I guess, on Slide 17, bank versus non-bank entities. I think you touched on this a little bit with Paul’s question, but curious if you could just walk through kind of what the driver of the growth is at the bank. I would assume it’s more gain on sale. And then the — just the sources of non-bank fee income that you show there on Slide 17. Thanks.

Barry Sloane: Sure. Thank you. So the growth on the non-bank side is a lot of it is from the return on equity for the JVs, and we’re going to put a lot of equity into that business. We don’t show in the forecast material growth in payments, tech solutions, insurance and payroll. I think we’ll get down to some more granular numbers going forward as we report the first quarter and start to put marks out there, but I do appreciate the question. In the bank, you’re going to get growth from the SBA business. Though frankly, we muted the volumes, and we also have muted currently gain on sale numbers in the forecast versus what the current market is. But you’re also going to get value from the servicing aspect of the non-conforming business and the fee income.

So now in the event that were lower in those numbers, we will have lower capital raising needs up at the holding company if that makes any sense. So we’ll be doing less issuance. We’ll have more capital because there is capital that goes into the non-conforming business. It does eat capital because it’s more of the traditional non-bank type financing, where you got to put up equity, you got a commercial bank line, you do the securitization. It generates great returns, but the capital is expensive. I mean down the road as a thought process of that business was never able to go into the bank, and it might down the road if we can get the regulators comfortable with our projections. We didn’t want to do that starting off a bank. We just wanted to keep the bank very simple, very vanilla.

But so far, our track record in history is pretty good. But right now, using commercial financing, that’s a pretty big driver of growth. In the event that that’s not the case, we have capital to do a lot of other things that did pay creative dividends, buy back shares. If we felt strong about the 7(a) business, put more money into the 7(a) business. You’re dealing with a fairly volatile environment. What a different 60 days makes. We talked about that relative to us becoming a financial holding company versus being a BDC. But also the difference between December and January was night and day in the capital markets. Now February has been a little bit softer, but it looks like things are starting to turn around again because we’re starting to see hints of a little bit of softness in here.

So I’m not — I was never a believer that was going to be cutting rates anytime soon, and I’m not a believer that we’re going to go much past 25 or 50. I think we’ll go up there, and we’ll sit there for probably a long period of time. And the Fed’s go just look at the math, but you can’t raise interest rates by this amount of money without the economy slowing, and it will.

Bryce Rowe: Got it. That’s all I had, Barry, appreciate the time.

Operator: And our last question, one moment, comes from the line of Steve Alesio, Investor. Sir, your line is open.

Unidentified Analyst : Okay. I hope this isn’t too low level for this discussion. Back in January for the bank savings account was supposed to be 4.15% and then gradual increases and CDs. And what it ended up with was the savings account is 4.5%, which is the same interest rate on the shorter-term CDs, 1, 3 and 6 months and then the 9, 12 2-year €“ 1 and 2-year CDs all have a 4.6% interest. And I don’t know, did it just become an accounting nightmare to have all the different interest rates. I was just kind of interested in knowing why the change?

Barry Sloane: Appreciate it. And look, it’s a very competitive environment right now for deposits. So at the moment, we want to make sure that we can compete. Those deposit rates are for consumer high-yield savings and consumer CDs. Our high-yield savings for commercial accounts is 3.5. And the CD rates, I think you’ll see are going up. Now on a relative basis, it’s still a heck of a lot better than the commercial finance rates that we’ve historically paid, which are currently 8.25, probably going up to 8 3/4 with the Fed’s next rate increase. So I think from our standpoint, no, it’s not — thank god we’ve got a great CFO in John McCaffrey in the bank and Nick Leger as the President and the COO, keeping an eye on things. We’ve got the right software in place for the purchases coming on stream. So we’re able to manage it’s not a problem at all.

Unidentified Analyst : Okay. I guess I was just interested as to why they’re all the same rate, though. It kind of didn’t make sense to me when the change — the plan was for them to gradually increase with the length of the CD. Maybe I didn’t pose that very well?

Barry Sloane: No, I think you posed it well, and one might also look at the market and go, it doesn’t make any sense either because the yield curve is inverted. And the overnight rate for banks is 4.5 or greater. 1-year treasury bills right now, I think you can get a 5% yield. So the only thing I can tell you is those rates are very much pegged to where the competition is in the competitive market for bank financing, not necessarily pegged to what you think a normalized yield curve should be.

Operator: Thank you. At this time, I’d like to hand the conference back over to Mr. Barry Sloane for closing remarks.

Barry Sloane: Well, I appreciate all the analysts we had. We are hopeful that we’ll pick up coverage maybe 4 to 6 over time with bank analysts. And I think that’s going to really help tell a story of a bank that’s different, a financial holding company that’s different and a company that’s positioned to take advantage of the future, providing financial and business solutions to this particular important demographic. And I say that to be able to service independent business owners with feet on the Street sales force with branches, with commercial bankers. Business owners today, they want their solution on demand. They want to go online if they wake up late in the evening or on a weekend. They want to get somebody they could talk to on a camera.

We’re positioned well for that business in the future. And the products and the solutions that we have are frankly better suited to that customer today. So we’re clearly ahead of the curve, we’re ahead of our time, and we’re going to grow into a really exciting company. We appreciate the following, the attention, and we appreciate all the analysts and investors that joined the call today. So thank you very much.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Barry Sloane: Thank you.