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spk01: Good day, and thank you for standing by. Welcome to NewTek One Incorporated's fourth quarter and full year 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Barry Sloan, President and Chief Executive Officer. Please go ahead, Mr. Sloan.
spk05: Thank you, operator, and appreciate everyone joining today. Good morning. My name is Barry Sloan, 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 6th when we acquired New Tank Bank National Association. And on a going forward basis, we'll be reporting as a financial holding company, which we've 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. Shareholds 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 forecast in 2022. We had dividend forecasts, but no earnings forecast 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 a 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. those people that want to follow along the deck is hung on newtech1.com a-w-t-k-o-n-e.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 40s Act company using a different kind of accounting, 40s Act accounting versus now we'll be doing consolidated 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 New Tech Bank. We also at the same time renamed the holding company New Tech One. We're going to continue to trade under 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% of non-farm GDP. It represents 9 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 new take 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 new tech merchant solutions, new tech technology solutions, 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. As a matter of fact, we believe that they'll be going into, and we'll report on this at the end of the first quarter, into the financial holding company at approximately a plus or minus zero basis value. 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 gap basis, pretty hard to do. We're definitely a different, unique company. It requires a bit of evaluation, 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 were able to do as a BDC, but 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 companies. So let's move to slide number three. We renamed the company New Tech One, 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 owners more successful. So rather than do what most other financial organizations do today, maybe take deposits, maybe make them a loan, we actually give our clients an asset, and that's in the New Tech Advantage, which we talked extensively about on our January 18th presentation. The New Tech 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 new ticket advantage in future presentations. So we're very excited about the advantage. We realize 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 there. They'll be able to make payroll. They'll be able to see their merchant processing data and statistics. They'll be able to look at their web traffic statistics. They're actually going to get an asset from the organization rather than just, quote, unquote, take the depository money. So once again, very excited about the opportunity. The new tech advantage is a real secret sauce and the value going forward to our clients. The low-hanging fruit, obviously, is the fact that we'll no longer be constrained by two-to-one leverage ratio as a BDC and the ability to raise less expensive liabilities in the form of core retail deposits, which today it's a differential of, you know, eight and a quarter approximately to, say, 4% depository money, plus borrowing commercially at 55 cents and a dollar haircut. versus 100% in the bank. So you could 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 the earnings streams. Slide number four. So in the fourth quarter, 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 SB7A loan businesses, 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 the 7A business has 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 cane on sale for 20 years. It's pretty predictable. We make a loan. We sell 75% of it in the form of a government guarantee into the street at a pretty good gain. This was what enables us to get, you know, returns and equity net of, uh, net of charge to us of 30% of our business. So it's been a very good business for us. And it's why we can generate return on average assets or return on tangible common equity that clearly exceeds other financial institutions. Um, 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 7A loans in the last two calendar years. 7A loans in the last two weeks of December, those are typically our busiest months, we kept the pipeline going and we're 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 6th. On slide 4, when you look at our forecast, we're forecasting $175 million of 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 our nonconforming 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 off in that particular portfolio. The nonconforming business will be financed at the financial holding company with more expensive securitization and joint venture financing, but still generating high returns on capital, which we'll talk about. The 7A and the 504 business will be financed in the bank once we get the PLP status moved into the bank. I will also note that we will diversify our loan portfolio with what I refer to as conforming CNI and conforming investor CRE loans. These are the types of loans that are fairly typical at all banks, meaning bank standards, bank guidelines, greater equity contributions, shorter periods, prepay schedules of loans that are due in three years, due in five years with the loans. We're all packed with loan covenants and typically are done at tighter margins, but this will diversify our portfolio, which we think is a good thing having a barbelled 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 will 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 pay $2.75 in dividends and distributions in 2022. And once again, I want to, you know, put a fine point on this, the transition and transformation is over. Uh, we're now a financial holding company and we've been acting that way for approximately a little under 60 days. Um, and I, you know, do want to repeat, we gave no earnings guidance in 2022. Uh, and we didn't give any clearly for 2023 as a BDC or 2024. So I have no idea where some of these thoughts or concepts or projections are coming from, but I will also point out that, um, People have been waiting for a dividend announcement as a financial holding company. So we'll talk about that declaration. And we also have, I guess, developed a 2.4 million shares short, according to NASDAQ, in our outstanding shares, which is about 10%. And that's a fairly interesting phenomenon 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 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 a profit. We say it's adjusted because it's a non-GAAP number. And the important aspect of You know, that adjusted NII of $51.9 million, that includes gain on sale, which gain on sale from a BDC perspective is not GAAP. So historically, our NII, with the exception of the PPP business that we did in 2020 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 on all different verticals with all the analysts. We put a ton of data out there so analysts can begin to build their own models and develop a following that we really haven't had for the last 12 months. 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 taxed on an individual basis instead of us paying taxes. 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. We have a very well capitalized bank, which will go through that. We have a very well positioned financial holding company. We have great earnings projections and a great future going forward. And we think we conservatively marked their portfolio in the fourth quarter to reflect the reality that on a mark-to-market basis, which you have to do as a BDC, is reflect the fact that interest rates went up four to four and a half percent. The cost of capital went up. So it made sense. 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 footstep because 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 rate hikes, the lagging 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 continuing to report. On slide number eight, we can take a look at our loan closings and pipelines. 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, to explain, that's approval, I believe, from underwriting. So it's important to know it's hard to get loans through pre-quality 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 are typically rejecting 99 and change percent of the loans that come through that process function at the top part of the page. So we're still getting a lot of demand. We're being a lot more selective. A lot of people aren't 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 17th, in our forecast to investors and analysts, that call is archived. We had a 16-cent projected forecasted dividend for our first quarterly dividend. So the board declared an 18-cent dividend for the first quarter. It did that, you know, in anticipation of hopefully being able to keep that dividend constant, at least for the calendar year. So it did that with the concept that it believes in its forecast. It believes in its stability. It's a percentage of total earnings. I think that's important to note. So, you know, the headline risk goes, oh, they cut the dividend. Well, it's not like we cut the dividend and our earnings are, you know, falling apart here. Matter of fact, you know, we're paying taxes and we'll talk about how our earnings flow through into different accounting, particularly with the effects of seasonal earnings per share. These things are fairly complex, but when 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 that's been around for 24 years, 22 years as a public company, really has developed some great products and solutions in the market, and we've just got the right financial structure for the current economic environment, which we'll be able to demonstrate through the course of this presentation. dividend that was declared um is payable on april 14th the shareholders of record on april 4th that's our first quarterly dividend as a financial holding company and we're hopeful and believe that that dividend will be maintained quarterly for about a year then we'll revisit obviously if all of a sudden our earnings go from you know 185 in the midpoint to three dollars at the midpoint we either look at um increasing the dividend or maybe a share buyback in conjunction with formulas that we have to demonstrate to the regulators that dividends is paid out of earnings. As long as we're earning money, we'll be able to do dividends both out of the holding company and out of the bank to the holding company. On slide number 10, as of February 17th, 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, and accept their application and allow us to be a bank holding company with financial holding company designation and the option controller of the currency, looking at our business model and feeling comfortable that we can capitalize the bank, which we've 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 can 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 a category standpoint, we're excited about the potential to be added to the Russell. There are some firms on the street that have 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 it, but we haven't been named to it at this point in time. But given the market cap and the quota for the Russell, it looks like that has a good possibility of occurring. Slide number 12, valuation going forward. Obviously, we talked about a financial holding company being regulated by the Federal Reserve Bank of Atlanta up at the FHC area. That would be New Tech One. And we clearly talked about no longer reporting. As a BDC and using 40s active counting, we'll be using 33 active counting. And we're all excited about that. And we're reiterating our EPS projections of $1.70 to $2.00, $2.80 to $3.20. There's some geographic changes in there. If you take a look closely, you'll see some things have moved around a little bit. Obviously, you can see it 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 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 a billion in 2024, an important category generating high returns and equity of between 20% to 30% risk adjusted. And our joint venture partner has committed up to $100 million in equity for us to work together. The ability to lever more, we'll talk about the value of that. You'll see that our return on average assets is between 3% to 4%. Return on intangible 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 as well as Fargo's, which scale and tight margins are able to do that business, that's not for us. We'll stick to the things we do really well and 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 new tech advantage. And these areas of non-banking revenue, you can see when we 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 and unique. Most financial holding companies or bank holding companies, they don't have much up at that area, and most of the earnings are 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 7A. We think there's potential upside to those forecasts, but we're comfortable with those numbers today, both on the 7A and the 504. uh, the conforming, uh, CNI and, um, CRE loans, about 140 million in 2023, not a big number, but we'll start to blend, uh, those basic vanilla, you know, multifamily industrial type loan, um, 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 CNI business that we've done, um, You know, we had to break that a little bit through COVID, but we turned the program back on. We have a nice pipeline. You can see on the cash premium for 7A, we've got it modeled at 10. The market is almost a 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 raise. 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 as a financial holding company. Egan Jones recently rated that debt triple B plus. So we're very pleased with that rating by Egan Jones. We'll also be able to do preferred stock and also common equity, which obviously if you look at our projections, we don't have a plan to currently raise it. That only based upon market conditions. But the benefit of being a financial holding company is you could use the retained earnings. You're not constantly raising shares that 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 and grow our dividend. Well, now, We could use leverage with lower cost of funds to record deposits versus the 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 new tech one, that's the financial holding company, you know, financial summary and pro forma. A couple of things I want to point out once again. You know, 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, you know, if we continue on the track and hit our forecast, that's most likely the dividend that we'll pay. That should be a qualified dividend because we're taxed already. And as our earnings grow, we'll either, you know, we'll, 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 $1.062 billion. We believe by the end of 2023, $1.07 billion. By the end of 2024, $2.1 billion. We believe that we'll be able to grow our total assets in 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 is at the holding company. The returns on average assets or 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 up. It includes the bank data, but obviously things we do at the bank are typically more profitable. And at the holding company, still fairly robust numbers for a financial holding company. Then 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 differential 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 to 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 list, broker list, branch list, BDO list, 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 New Tech Bank National Association. You're looking at around $260 million of capital, $77 million of common equity, and that's That was our 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 could see that our capital ratios, this is a very well-capitalized bank, approximately 30% on TCE versus total assets. And then you get the 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 at the holding company. Everything will consolidate up, but you could see that it's reasonably well-balanced. We get a lot of income coming from non-banking activities. That's important. Obviously, the bank's got the 7A business, the 504 business, the conforming business, 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 that activity for our clients. On slide number 18, you know, I think the important aspect here obviously is, you know, the earnings per share number on slide number 18 and dividend per share. We've kept it flat. That's for just modeling purposes. But if we're, you know, generating three bucks, you know, we'll look to, do things for our shareholders relative to buybacks or 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 aspect 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 not calculated in $189 million. It is reflected in the $231 million for total equity and then going to $286 million in 2024. Next slide, number 20, I think important to note some Holdco 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. You don't see these in banks. You just don't because banks don't specialize in the areas that we do, which is to focus on that Independent business owner, small to medium-sized business owner with all these different great assets for them to take advantage of through the new tech advantage, the full suite of services. We'll 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, our payroll division, and really coupling deposits from a lending perspective. So we hope to beat that. We hope to get metrics. Nick Young will be reporting on deposit growth on a going forward basis quarterly to show you how many accounts we open, how many dollars, cost of funds, etc., So we're excited to be able to report that. But, you know, we're going to get this business up and running and we will clearly try to beat these expectations and early conversations with clients who've had tremendous receptivity about offering same-day funding on payments, ability to pay people through payroll faster, to move their 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 could talk about here really relates to equity at the bank. You see the growth in the equity. There really is no need for equity contributions at the bank. It's fairly self-sustaining with 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, PC ratios. At the bank, you could see more robust capital ratios. We'll be utilizing that. as we grow the balance sheet in the book of business in the bank. Slide number 23, some earnings forecasts for the holding company, return on average assets, return on change of common equity, fairly robust numbers. You know, the bank's cost of deposits, which you see here are low because we've got, you know, some lower cost of deposits from the legacy national bank in New York City, but they're also match funded against lower cost of assets that or commercial real estate loans that were fixed. That's kind of a matched book. But we clearly do want to grow that deposit business. Once again, I do believe that is more of a 2025, 2026 story. We hope to be able to beat that particular guidance that we're giving here today. Slide number 24. For those of 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 funded with 12 S&P rated transactions beginning in 2010. Everything's been held their rating or been upgraded. Our average loan size is the uninsured piece, 151,000. So we get tremendous diversification. Our loans are now being done at prime plus 300, not prime plus 275. The SBA has changed those rules and that's helping our gain on sale numbers, particularly for this calendar year. And once again, I do want to repeat that we've got more, we have better pricing right now than we put into our guidance, but pricing can be pretty volatile. We want it to be conservative. I always want to be able to over, over deliver and, um, under promise. So net premium trends on slide number 25 important, we've used 10% or, you know, um, 10% of par. As I've said, we believe that number is probably a point higher. But look at the fourth quarter, 8.72. So clearly, that was low. We believe that's based upon the fact that banks' cost of funds were rising dramatically, and these loans adjust going forward. So that negative drag carry, we really do believe, really diminished this. The other thing that we're being told is the bid for these S&P government-guaranteed floaters picked up in Q1. A lot of Our competitors in the banking space have had difficulty in their portfolio. 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 a portfolio, and there's where you get that nice spread income, which we plan on benefiting from at the bank level. You could see that our interest income grew significantly in Q4 2022. And frankly, as the coupons 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, and 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 originations will be done at the bank using CECL accounting, which we'll talk about a little bit as well. Slide number 27 talks about our 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 can 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 a charge off to date. And the company has also originated 132 million of the non-conforming conventional loans, Also, no defaults or charge-offs. So an excess of $500 million of loans with a big zero in 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, a prime plus 300 would wear prime is versus you know a potential future rate adjustment you're at you know 10 and three quarter coupons so you look at you know cost of funds four four and a quarter that's a very healthy uh 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 piece so the business we've done over 20 years it 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 the 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, you know, 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 SBSS scores in 2022 versus 2020. 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, you know, one of the things we experienced during COVID is making sure that businesses can basically withstand four to eight quarters of, you know, a difficult time versus their expectations and projections going forward. Also letting the business have the ability to liquidate collateral and unencumbered borrowing power, survive higher expense increases and revenue increases. We've been in this business for 20 years. We've survived 08-09 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 the 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 7A loans. For those people who aren't familiar, this is how we create cash when we do a 7A 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 NewTek One, NewTek Merchant Solutions held up at the holding company, $6 million of EBITDA, approximately in 2022. Tech Solutions, about $3.2, $3.3 million of EBITDA. NewTek Insurance Agency Payroll Solutions also will be consolidating up as an engine. The NewTek Small Business Finance, the SPLC, will be up at the holding company in runoff mode. We are still originating 7A loans out of NewTek Small Business Finance in January and February. That will 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, non-PLP. They're in 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 dividending cash up through earnings. Slide number 34 talks about how we do 504 loans. 35 talks about the types of returns that can be gathered in SBA 504 loan origination. So you can see from 504 loans, 7A loans, we can generate high returns on equity. Slide number 36, our nonconforming 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 Intex. You can look it up. We don't have a single default in that portfolio. And we're looking to expand that business. You can 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 leverage 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 the JV started calling loans in the fourth quarter of 2022. And we feel that we'll have a very robust pipeline in business. The advantage of the nonconforming loan portfolio, which we see on slide 38, is we typically originate these loans at three and a half origination points, 100 basis points of servicing income. That'll go into the bank. The origination fees will go into the bank, and the 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. They're typically fixed for five years, and they adjust over the five-year treasury with a floor at the origination rate. We believe they have a four to five year duration. And once again, we anticipate really good volumes in these. There's 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 gross 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 of their infrequency. And so for the portfolio has performed very well, primarily based upon the fact that all loans have personal guarantees similar to the SBA program, and we typically lean towards loans that have strong guarantors. So we talked a little bit more about the program on slide number 39, talking about the 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, Nick ledger will report on, you know, what a different 60 days. We say 60 days, a little 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 difference I talked to you about before it is about $170 million of value between the market value of the payments, business tech solutions, business, payroll and insurance that are wind up going into um 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 as tangible book now loans count as tangible book these assets that throw off reoccurring income very valuable and actually greater market multiples than typical bank, they're going in and not adding to tangible books. So that's something that we'll have to address and maybe create a non-GAAP statistic is adjusted book value. Then you look at after-tax net income or EPS versus net investment income and adjusted net investment income. Well, we definitely enjoyed our days at BDC. We paid a lot of dividends, but we're happy to get rid of all those metrics and criteria that made it difficult to evaluate We are what we do. We paid a healthy dividend distribution over our life and we'll continue to pay what we think is a, you know, top quartile type dividend of 4%. That's not a 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, you know, but anyway, people are going to have their own takes on things, but we just lay the information out and give a lot of information on these particular calls. I hope 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 a round number, deposits are 4%, versus right now, if I draw on my commercial bank line, it's 8.25, I only get 55 cents on the dollar, which means I've got to use 45 cents of equity, and in order to grow, I have to keep raising equity and keep diluting shareholders. Totally different story. So between the lower cost of funds, the ability to lever, 10 to 1 over the course of time very very beneficial structure going forward and obviously um you know the fourth quarter 22 gains on sale premiums versus the current expected prices markedly different i think you know we pretty much saw uh you know decade lows in q4 that's on everything for those people that tried to do anything in the capital markets in the month of december we had to do our market that was that was clearly a low point um and the market seems to bounce back nicely and on to January. So we look forward to a bounce back in gain and fail prices, as well as the value of loans of which NSPF 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, the financial holding company that we've operated a little under 60 days. We're all capitalized entity. Not our first rodeo. We've been a public company for 22 years. We've been able to manage all different interest rate 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 7A business and the 504 business. We've been in the payments business for 20 years. So when you take a look at the new tech advantage, and see that our customers are going to be able to pick and choose and get a real asset, eventually bring their deposits over. We're fairly comfortable with these projections, and 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 earnings. And important to note that we're a growth-oriented, differentiated, technology-enabled financial holding company. And 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 have been, you know, 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 what 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 in this particular structure and Now I'd like to pass the baton to Nick Ledger, our Chief Accounting Officer, to do a financial review.
spk00: Thank you, Barry. Good morning, everyone. You can find a summary of our fourth quarter 2022 results on slide number 43, as well as a 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 22 cents per share, as compared to a net investment income of $1.6 million or $0.07 per share in the fourth quarter of 2021. Adjusted net investment income, which is defined on slide number 44, was $1.5 million or $0.06 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, we recognized $23.1 million of total investment income, a 6.9% decrease over the fourth quarter of 2021's 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 mobile 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. Realized gains recognized from the sale of the guaranteed portions of the SBA loan 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, NSBF 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 of 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 9 cents 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.
spk02: Thank you. Operator, we'd like to open this up to Q&A. Thank you.
spk01: As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from the line of Crispin Love with Piper Sandler. Your line is now open.
spk08: 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 CNI from 600 million in 2023 to about a billion in 2024. I'm just curious how comfortable you are with those targets, specifically the non-conforming CNI, just as it implies significant growth and ramps. And then just kind of more broadly growth on the balance sheet, just as the credit quality outlook remains uncertain here.
spk05: 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 they're good, strong borrowers, they can't make the debt service coverage ratio based upon the three- or five-year repayment terms are 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 7A side. So I think that we certainly could make things up on the 7A 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 reduce and be a little bit more picky on the 7A side. But we do have the flexibility to go in either direction. So we're not totally uncomfortable with the aggregate numbers. Mind you, we're projecting out 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 years of public company, and we're comfortable with it. But 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 due to these 7A numbers and the 504 numbers is fairly muted as well.
spk08: Great. Thanks, Barry. That's helpful. And then I guess just drilling a little bit deeper into credit quality. I know you said that you might be a little bit conservative on the 7A volume side, but say you can't grow nonconforming as much as you'd like and have to grow or grow the 7A side a little bit. Curious what 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.
spk05: Well, I think, Chris, as a BDC, to go back and look at the history, we've always had you know a fairly healthy in this space uh not a cruel number because it's just a function of you know these types of credits on the other hand you do get um paid for making these types of loans with respect to the coupon and the government guarantee and and the gain on sale i think when you look at the current environment it's amazing that three and change weeks ago people were thinking of rate cuts well all of a sudden three weeks later they're going from a rate cuts to rate hikes. And it's like they went right through, isn't 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 breaking economy. We see a slowing economy. We see certain sectors performing better than others. But no, we're not looking for, you know, 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 got government support as well. So we think our customer base is pretty liquid. And obviously, we are forecasting higher defaults than 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 at the bank using CECL. As a matter of fact, when you do do CECL, which is one of the reasons why the numbers ramp, 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 of the premium anymore. You're putting it on a par, which is different than fair value that we've experienced historically. So hopefully that, that gives you some, some background that answers your question.
spk08: Yeah. Yeah. Thanks very much. But just one on the, the non-accrual as a percent of loans at cost. Curious if you have that number handy.
spk05: I don't, I'd have to pull that out of the, out of the queue. It might be a percent or two higher than that number. We've, written these down from a book perspective that's important to note and from an um taxable income perspective on the uh as a bdc great thank you barry and i appreciate you taking the questions thank you thank you one moment for our next question please
spk01: And our next question comes from the line of Paul Johnson with KBW. Your line is now open.
spk04: Yeah, good morning, Barry. Good morning, everyone. Thanks for taking my question. So I just wanted to kind of clarify your comments as well as what's in the slides 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 return. net return on the JV? Is that going to be, are we talking about the same thing as the return on, you know, your respective equity investment in the JVs, or how should we be thinking about the return on those as you guys ramp that going forward?
spk05: The way to think about that at this point is those returns are based upon income that's generated at the bank specific 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 intakes. So we take all those referrals and some of those referrals now go into non-conforming, some go into 504, some go into 7A. they get dispersed based upon borrower need and best fit for the customer and um you know 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 adds on each other and 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 Cecil. You do a loan in Q3 or 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. Now, 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, you know, 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.
spk04: Got it. Okay. Yeah. So I understand. Obviously, when you're talking about 20%, 30%, we're looking at the bigger picture of what you're generating off of those portfolios for the business.
spk05: Well, thank God today everything consolidates. So we don't have to deal with portfolio companies. Everyone's 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 that. 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 was bad, but all these businesses were based upon their value and we reported that way and it worked well. 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 the 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. They're all making residential loans, car loans. They really haven't developed the expertise that we have in these greater risk reward type opportunities. So that's kind of where we look to hang our hat, make our mark. And then down the road, we're more effective in a deposit category, which we hope to outperform what we stated that we're going to do there. That'll 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 eight credits as well as lesser than eight credits in the SBA business. So I think we're well set up for the future.
spk04: 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? 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.
spk05: Yeah, 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 7A loans in the bank, but they're done GP versus PLP. We anticipate that transitioning over in the very near future.
spk04: Okay, thanks for that. And then I'm just sort of wondering, you know, it might be nice to know if you don't have it or you can't share in time, that's okay. But I'll ask, you know, do you guys have any sort of stats And you can share as far as, you know, service utilization of, you know, clients, you know, customers that you guys have. You know, what are, I guess, sort of some of the common sort of crossovers, opportunity of services you might have to offer, you know, between your borrowers and, you know, clients from other parts of your company?
spk05: Not at this time. It's something that we will look to report. You know, the deck's now 40 pages plus, so. 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 new tech advantage is going to enable us to have business owners go to their dashboard or their business portal, which being the new tech advantage. Oh, gee, I didn't know I can get insurance from you. Oh, I didn't know I could store my documents with you. Oh, gee, I didn't know I can get this. payment processing information. Wow, you've got your own POS system. So that data will become more readily available and we'll report that. And obviously, you know, we're historically, you know, we haven't been able to acquire the pot until 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 one of the reasons for our being to be you know, the one company for a business to be able to do more things than just, you know, one thing with us. So we feel pretty good about that.
spk04: Sure. Last question. I'll leave it there. Just wondering maybe to get your thoughts and touched on some things, obviously, through your remarks, just, you know, I guess, how are things progressing now that the merger is closed? I mean, do you feel things are on track? Do you see if things are ahead of schedule? What are your – I guess your confidence in the projections you guys provided in terms of efficiency ratios? Would you expect, I guess, providing a sort of incremental update there as far as your projections throughout the quarter?
spk05: Yeah, I do think things like efficiency ratio, we will be out there projecting and not projecting, but coming up with those numbers. Obviously, at the moment, you've got a lot of things moving around. You just brought up, for example, the PLP status, right? So I've got some income in the first quarter that might go to NSPF that would normally be in the bank. So I think in the second quarter and the third quarter, you'll get um a better sense of you know income and expense being put together uh we obviously do have uh red w policy and uh 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 bench branchless bediolis and bankrollis uh and the capital that we've got we 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 can have personal relationships 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 screen. So you know, we'll be able to do that. And, um, we feel pretty good about the business model and really giving, I mean, we give a lot of information. We've been complimented on that. We're going to, 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, um, 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've, We have a history of being able to deliver those types of results and do it. It just takes time.
spk01: Thank you. One moment for our next question. And our next question comes from the line of Scott Sullivan with Raymond James. Your line is now open.
spk06: 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's going, which I think might be the best structure of financial bank holding today. So with that preamble, I've got a couple questions. Really, how relevant is this Q4 report to the future?
spk05: 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, you know, we obviously, we paid out I think a $17 million dividend on December 31. We paid the owner of the bank, $20 million. We pushed $51 million of capital into the organization, you know, and that really, we have to get that done. Cause that's, we put in our application. That's what you have to deliver on. So I think that, um, you know, people looking at, um, first of all, I don't know how people are coming up with, we met or repeat that. I don't know where they got these earnings numbers from, but they didn't get it from me. So, um, 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 positional. We 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 triple B plus 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, you know, 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 that are able to retain earnings and generate high return on common equity, you're better off. I mean, look at what we can do with that money. You know, it's funny. I'd shareholder say, well, gee, what did you do with your dividend? Well, you know, I held it in cash. Well, how'd that do against inflation? Or they put it in the stock market that was down 20%. So, I mean, the reality of it is, um, we're still going to pay a very nice dividend, which will be qualified. Uh, 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, um, you know, we've done the math that's, that's going to work longterm and we will hit our metrics. um you know 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 know you get your you get your following and that's where we're at right now we're you know we're picking up some institutions uh which is valuable um hopefully we get included in the russell which will be very valuable hopefully um the 2.4 million short seller will uh have realized well gee now the dividend is declared and the party's over and the seeking alpha Headlines are behind us, and they'll do what they got to do with their 2.4 million share short.
spk06: Terrific. And you touched on this a bit, but can you give us more color into the state of your customers, the SMB market?
spk05: Well, look, it's interesting, you know, in that our customers are affected. Everybody's affected. The employees are affected. Customers are affected. to state that nobody is affected by a 450 basis point interest rate height would be just ridiculous. So, you know, for people not to expect a reevaluation of assets is just silly. I mean, I don't know where they, where their heads are at, but it just doesn't work that way. If you, you know, 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, um, I have to say, our business clients are their operators or entrepreneurs. And through COVID, a lot of people changed the way they do things. They re-evaluated 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 was going to be their last meal or they could 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 aren't 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-ups over time, and we think we've got the right math because we've done this for 20 years, so we've seen the extreme 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 in our customers who we speak to from a servicing perspective. I think we have 40 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 schooling. We are very communicative with our borrowers and we're speaking to them regularly, particularly when we noticed that their payments are slower, you know, and we're, money out of the account. The money's not there on the first. We know we need to make a phone call.
spk06: 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.
spk05: Yeah, look, I think, you know, depending upon, you know, how you define this, you know, not including an adjustment. And if you include the preferred stock in there, you're probably looking at, and I haven't done, I haven't done the calculation, but you're probably looking at, you know, eight or nine bucks, 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 six bucks. So now you can, you could basically say it doesn't work. But then again, if you want to buy a bank at, you know, 1.1 a book, or a book, or a .8, there's 8,000, I'd say 8,000, there's 4,000 of them you could buy. They just don't grow. So, you know, 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 to 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, gap says you zero them out. Or we could put them in with goodwill, but that's still not going to make it, you know, when you, quote, get to that tangible common equity. But then again, you know, we don't have, you know, a balance sheet that, 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 PDC, 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 our desire. That's our forecast. That's our aspiration. And, you know, that's, you know, capital asset pricing. You grow the earnings, you grow, you grow the dividend. People are going to reward you with a higher stock price. They're not, they're going to, you know, get comfortable. By the way, you got to deliver the numbers. So it's not like we're saying, you know, don't, don't put the price up there without delivering 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 of most banks, they're not near these numbers. So that's the difference. So we hit those ROAA numbers and the ROTC numbers, the price will follow. Perfect.
spk06: Well, again, congratulations and best of luck. Thank you very much.
spk01: Thank you. One moment for our next question. Our next question comes from the line of Bryce Rowe with B. Riley Financial. Your line is open.
spk07: 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. a bank versus non-bank entities. I think you touched on this a little bit with Paul's question, but I'm 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, you know, gate on sale. And then just the sources of non-bank fee income that you show there on slide 17. Thanks.
spk05: Sure. Thank you. 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. And frankly, we muted the volumes. And we also have muted currently in 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 we're 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, I financing where you got to put up equity, you got a commercial bank line, you do a securitization, it generates great returns, but the capital is expensive. I mean, down the road as a thought process, if that business was ever able to go into the bank and it might down the road, um, 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 you know, so far track record in history is pretty good. Um, but right now using commercial financing, uh, That's a pretty big driver of growth. In the event that that's not the case, we'd have capital do a lot of other things. They'd pay greater dividends, buy back shares. If we felt stronger about the 7A business, put more money into the 7A business. You're dealing in a fairly volatile environment. You know, what a difference 60 days makes. We talk 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's been a little softer, but it looks like things are starting to turn around again because, you know, we're starting to see hints of a little bit of softness in here. So I'm not – I was never a believer that Fed 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 going to just look at the math. But you can't raise interest rates by this amount of money without the economy slowing, and it will.
spk07: Got it. That's all I had, Barry. I appreciate the time.
spk05: Bryce, thanks for joining. I appreciate you participating today. Thank you.
spk01: Thank you. And our last question, one moment. It comes from the line of Steve Alessia, investor. Sir, your line is open.
spk03: Okay. Thanks, Barry. I hope this isn't too low level for this discussion. But back in January, for the bank, the savings account was supposed to be 4.15%, and then gradual increases on the CDs, and... What it ended up with was the savings account is 4.5%, which is the same interest rate on all the shorter-term CDs, one, three, and six months. And then the nine, 12, two-year, one and two-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.
spk05: I 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 three and a half. 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 eight and a quarter, probably going up to eight and three quarters 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 McCaffery in the bank and Nick Ledger. 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, no, we're able to manage.
spk03: It's not a problem at all. Okay. I guess I was just interested as to why they're all the same rate, though. that it kind of didn't make sense to me when the change was, the plan was for them to gradually increase with the length of the CD. Maybe I didn't pose that very well.
spk05: No, no, I think you posed it well. And, you know, one might also look at the market and go, it doesn't make any sense either because the yield curve's inverted. And, you know, the overnight rate you know, for banks is, you know, four and a half or greater. One year treasury bills right now, I think you can get it 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.
spk03: Okay.
spk05: All right. Well, thank you very much. Thank you very much. Appreciate it.
spk01: Thank you. At this time, I'd like to hand the conference back over to Mr. Barry Sloan for closing remarks.
spk05: Well, I appreciate all the analysts we had. We are hopeful that we'll pick up coverage from maybe four to six 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 of providing financial and business solutions to this particular important demographic. And I say that, um, can be able to service independent business owners with feet on the street, Salesforce with branches, uh, with commercial bankers, business owners today. Um, they want their solution on demand. They want to go online. If they wake up in late in the evening or on a weekend, they want to get somebody that 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.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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