Earnings Call Transcript - NEWT Q4 2022

Operator, 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, CEO

Thank you, operator, and I 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. I certainly appreciate your attendance. Joining me today is Nick Young, our EVP and Chief Accounting Officer; 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 as a Business Development Corporation, and 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. Going forward, we'll be reporting as a financial holding company, which has been the case for a little less than 60 days 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. This is extremely important, as well as a dividend declaration that the company just made for its first quarterly declaration and a potential forecast of dividends going forward. Today marks a watershed moment; the transformation many of you have been waiting for is finally complete. We've had a lot of things transforming: shareholders have transformed, operations have transformed, and capital has transformed quite a bit. We certainly look forward to beginning to pick up new analyst coverage—we picked up one this week—so we are finally getting bank analyst coverage to follow the company. I want to clarify this morning that the company had no earnings forecasts in 2022. We had dividend forecasts but did not have earnings forecasts because we didn't know when the bank transaction would be completed. With that said, we hope to move forward through the presentation, giving clarity on how we sit as of today, and explain our business and operations. We have a lot of new shareholders on the call who are interested in investing in a financial holding company owning a unique technology-oriented bank. We clearly have many things transforming. I would like to call everyone's attention to the forward-looking statement on Slide 1 of the deck. For those who want to follow along, the deck is available on newtekone.com in the investor relations section, and the presentation will also be archived there. Slide 2 discusses recent events. We acquired National Bank of New York City on January 6. That acquisition was completed, and we withdrew our application with the SEC to be regulated, now reporting as a 33 Act company with a different accounting standard compared to 40 Act Accounting, which we welcome. We acquired the 59-year-old Nationally Chartered Bank, known as National Bank of New York City, and renamed it Newtek Bank. At the same time, we also renamed the holding company NewtekOne. We're going to continue to trade under the existing stock ticker symbol NEWT. It's also important to note that we are a financial holding company positioned as a leading business and financial solutions company for a vital economic demographic in the United States that we refer to as independent business owners. This, according to the SBA, represents about 50% of GDP and 9 out of 10 businesses in the U.S., along with most of the net new job growth. We have served this community for a long time and have been building our platform of Business and Financial Solutions for clients by owning a bank and putting it all together through the Newtek Advantage. Our plan is well-positioned for the future, and we are excited to report and develop our business model while serving our client base. I also think it's important to note that as we move forward as a financial holding company, and we transition certain assets like Newtek Merchant Solutions, Newtek Technology Solutions, and the valuation of the payroll and insurance companies, the fair value will not be counted in tangible book value from an accounting perspective going forward. In fact, we believe that they'll go into and will report this by the end of the first quarter into the financial holding company at approximately zero basis. So that's 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. For those trying to evaluate the company based on a GAAP basis, that's pretty hard to do. We're definitely unique, and it requires a different valuation method. But we believe we are positioned to grow our earnings over time and raise capital over time, similar to what we were able to do as a BDC, without being dependent on constantly selling equity and diluting shareholders. We're very excited about our future and look forward to reporting our results and sharing details about our unique technology-enabled bank as well as our differentiated financial holding company. Moving to Slide 3, we renamed the company NewtekOne. 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 their business more successful. Rather than doing what most other financial organizations do today—like taking deposits and making loans—we actually provide our clients with assets. That constitutes the Newtek Advantage, as we've discussed extensively in our January 18 presentation. The Newtek Advantage is a great solution for our business owners. We have developed it further and will talk about it in future presentations. We're excited about the opportunity, realizing that our clients typically go to their depository institution three to five times a week, maybe 12 to 20 times a month. We'll be able to position ourselves with our clients to show them that we offer all these great solutions without bringing them up—they'll be able to store their organizational documents, make payroll, and access their merchant processing data and statistics. They'll also be able to look at their web traffic statistics and get an asset from the organization rather than just kicking the depository money. So once again, we're very excited about this opportunity. The Newtek Advantage is a real secret sauce for providing value to our clients moving forward. The low-hanging fruit is the fact that we will no longer be constrained by the 2:1 leverage ratio as a BDC. With our ability to raise less expensive liabilities in the fourth quarter, retail deposits are differentiating around 8.25% versus 4% for depository money, plus commercial borrowing at $0.55 with 100% in the bank. The math works in our favor, and you'll see this particularly as you analyze your earnings streams. On Slide 4, in the fourth quarter, our final period for 2022, one of the key features of our business historically has been our ability to execute on our SBA 7(a) loan business, in which we funded a record $775 million of loans in 2022, up from $362 million. When looking at our growth forecasts going forward, we wanted to tone that down a little bit—not to say we can't produce those numbers—but we are forecasting $885 million for 2023, which represents a little bit of increase. There is clearly some upside in those numbers, but we wanted to be comfortable in our forecasting. The 7(a) businesses have been a flagship for us. One of the benefits of our new structure as a financial holding company is greater diversification of revenue streams and less dependence on gain-on-sale income, which I would refer to as non-reoccurring income but also a reoccurring event. We've had gain on sale for 20 years, and it's pretty predictable—we make a loan, we sell 75% of it in the form of government guarantee on the street, and we get a pretty good gain, which has enabled us to get returns in equity net of charge-offs of 30% in our business. Therefore, it's been a very good business for us. In the fourth quarter, we did $188 million worth of loans. To be frank, in the fourth quarter, we slowed some of our activity to save our capital to funnel cash resources into the bank as you can't move things back and forth from a holding company to a bank. We didn't fund any 7(a) loans in the last two weeks of December, typically our busiest months. We kept the pipeline moving and rolled it forward, but it's important to note that much of what we did in the fourth quarter of 2022 was position ourselves from a capital and financial perspective to become a financial holding company, as we anticipated closing the bank deal on January 6. On slide 5, you can see that we paid out a total of $330 million in dividends and distributions during our BDC life. We're proud of the fact that we could return this cash back to shareholders and will continue to maintain a dividend policy for as long as I can see into the future. Share appreciation is vital, and we could talk about the structural differences between a BDC and a financial holding company. We paid $2.75 in dividends and distributions in 2022, but I think it’s important to reiterate that the transition and transformation are over; we're now a financial holding company. We've been acting in this capacity for slightly less than 60 days. I also want to make it clear that we gave no earnings guidance in 2022, and we haven't for 2023 or 2024 either as a BDC, so I have no idea where some of these thoughts, concepts, or projections are coming from. However, I will point out that people have been waiting for our dividend announcement as a financial holding company, so we'll discuss the declaration. We've also developed approximately 2.4 million shares short, or around 10% of our outstanding shares, which is an interesting phenomenon that the markets will address going forward. On Slides 6 and 7, as we do our final report as a BDC, I must say these are not particularly impressive numbers. However, it’s essential for anyone tuning into this call for the first time to understand the context. The adjusted net investment income for the calendar full year was at a profit; we say it’s adjusted because it’s a non-GAAP number. That adjusted NII of $51.9 million includes gain on sale, which is non-GAAP from a BDC perspective. Historically, our NII, aside from the PPT business we conducted in 2020 and 2021, we’ve always recorded an NII loss. Going forward, NII will have a totally different meaning as the financial holding company, shifting to net interest income instead of net investment income. I am excited about this transition and our upcoming consolidated financials, allowing us to be completely transparent with analysts, who have been waiting for a considerable amount of time to build their models and coverage, which we haven’t had for the last year. As we sit here today, we have estimated how well capitalized the bank is, and we are optimistic about the future as a financial holding company. We conservatively marked our portfolio in the fourth quarter to reflect the fact that net interest rates went up 4% to 4.5%, raising the cost of capital, which impacted our evaluations. While February hasn't been particularly pretty, January recouped quite a bit of value based on fair value calculations. If you look at the government-guaranteed market of SBA lending, it's actually grossed up four to five points. We believe the uninsured market will follow in that respect. We didn’t see any major credit deterioration during that time. When analyzing gain on sale rationales, the lagging amount of rates, high volatility, and the ceasing of flows for the SBA business dramatically affected prices, as we’ll discuss further. However, we are optimistic about Q1 and our future as a financial holding company and we look forward to continue reporting on our progress. On Slide 8, we can take a look at our loan closings and pipeline. The top portion is not particularly impressive; it appears flat. What's important to note is that we've reviewed $2.1 billion in loans so far in 2023, which is a noticeable increase from $1.7 billion in 2022. In total, 3,597 individual businesses sought financing from us. It's key to note the approval rate we’re seeing is from underwriting, and obtaining loans through pre-qualification into underwriting has become more challenging. We're being more selective, currently rejecting 99% of the loans that come through that process. Despite a lot of demand, many are not qualifying, but we remain confident that we will meet our projected numbers, as we've tightened our underwriting criteria. Slide 9 covers our first quarterly dividend declaration as a financial holding company. It's worth noting that, during our January 17 forecast to investors and analysts, we projected a $0.16 forecasted dividend for our first quarterly dividend, but the Board declared an $0.18 dividend. This was done in anticipation of maintaining that dividend for at least the calendar year, based on stability and total earnings percentage. While there was risk that it could be perceived as if we had cut the dividend, it was not a reflection of our earnings collapsing. The dividend that was declared is payable on April 14 to shareholders of record on April 4, marking our first quarterly dividend as a financial holding company. We are optimistic that this dividend will be maintained quarterly for about a year, after which it will be reassessed. Our earnings will determine whether we consider increasing the dividend or perhaps explore share buybacks based on regulatory expectations. Moving to Slide 10, as of February 17, we can see our track record versus the S&P and Russell—markets are responding positively to our ability to execute our plan and be recognized by the Federal Reserve and the Office of the Comptroller of the Currency, affirming our capacity to manage the bank successfully. On Slide 11, we observed how Russell 2000 stocks have outperformed BDCs over the past decade. This shift reinforces our confidence in the benefits this transition will bring to shareholders, as some analysts indicated that we could see as much as 2.1 to 2.7 million shares purchased upon our potential addition to the Russell. We acknowledge that some of that activity has likely occurred as people jump in, although we have not yet been named. Moving on to Slide 12, we examine future valuations. As we previously noted, we anticipate that as a financial holding company regulated by the Federal Reserve Bank of Atlanta, we would no longer report as a BDC and utilize 33 Act Accounting instead of 40 Act Accounting. We reiterate our EPS projections for earnings of $1.70 to $2, $2.80 to $3.20 over the coming periods, recognizing some geographic variations. Slide 13 focuses on our capital ratios—our bank subsidiary is very well-capitalized. We have plans to enable us to do what we believe could be $600 million of non-conforming loans in 2023 and reach $1 billion in 2024, generating high risk-adjusted returns of between 20% and 30%. Our joint venture partner has committed to providing up to $100 million in equity funds to enable these efforts. Our return on average assets is expected to be between 3% and 4%, and return on tangible common equity between 20% and 30%. We can achieve this because we refrain from doing home loans, car loans, or offering consumer products, a space dominated by larger banks with tight margins. We focus on business solutions we excel at providing, particularly on the lending side over the past 20 years. Our non-banking activities will also develop innovative payment processing, tech solutions, and payroll insurance—all part of the Newtek Advantage. The areas contributing to non-bank revenue have distinct multiples, which banks aspire to achieve. Notably, our financial holding company possesses a unique mix distinct from banks. As we transition to Slide 14, we talk about key financial metrics and our confidence in our projections, particularly with regards to 7(a), where we expect potential upside. We're comfortable with numbers presented today for both 7(a) and 504 loans, estimating around $140 million in 2023. We plan to add elements like lower-margin vanilla multifamily and industrial-type loans funded with core deposits, which we couldn’t previously offer as a non-banking entity. Additionally, we resumed our non-conforming C&I lending program that we had to stifle during the pandemic. We anticipate a solid pipeline. We project cash premiums for 7(a) to be around 10%, while the market is above that currently, sitting at nearly a point north. Financial holding company debt raised will consist of refinancing existing debt as we’ve submitted an S3 to the SEC, and we hope to see that approved soon. Egan-Jones rated our net debt at BBB+, which we are proud of as a strong rating. Ahead on Slide 15, we see the financial summary and pro forma projections. Our earnings per share (EPS) projections range from $1.70 to $2.00 for 2023 and $2.80 to $3.20 for 2024. Share count is expected to remain flat. If we manage to hit our growth targets, the dividend could likely qualify as a qualified dividend due to taxation. By growing our earnings substantially, we should be in a good position to implement share buybacks or increase dividends; we believe we'll grow from about $1.62 billion to $1.7 billion by the end of 2023, with expectations of reaching $2.1 billion by the end of 2024, while still adhering to our plan with regulators. We are expecting strong return on average assets and common equity that surpasses that of the holding company level. Our net interest margin may be tight because of the consolidation at the holding company level, but overall return expectations remain robust for a financial holding company. Moving to Slide 16, I want to emphasize that Newtek Bank National Association holds approximately $216 million in capital with $77 million in common equity. Achieving these figures required slowing down some activities in the fourth quarter to move funds accordingly. Our capital ratios reflect solid well-capitalized status, around 30% on a PC basis versus total assets, and our CET1 ratios are approaching 40%, making us feel confident about our numbers. Slide 17 describes our income sources from the bank versus non-bank entities. We see a healthy balance of income coming from non-banking activities, which is substantial. Our bank will maintain the 7(a) and 504 business, along with conforming loans, and we're excited about how these financial solutions align with the holding company's goals. Now, to clarify on Slide 18, we see our earnings per share numbers and dividends retaining a stable model for future growth. Slide 19 shows the total asset growth of NewtekOne, anticipated at around $1.7 billion by the end of 2023, and $2.2 billion by 2024. We aim for total equity to grow from $189 million after $20 million in preferred stock issuance in mid of 2022, and we project continued growth through 2024. Slide 20 highlights significant insights into our metrics such as return on common equity and tangible equity, projected at 30% for 2023 and over 30% in 2024. Our return on average assets is also robust, with opportunities in cost reduction that will improve our efficiency ratios moving forward. We expect to report quarterly on deposit growth, including accounts opened, dollar amounts, and costs associated with those deposits. On Slide 21, we note the equity at the bank is self-sustaining without the need for further equity contributions. Slide 22 contains general metrics for the holding company, covering total assets, TC ratios within the bank as we grow our business. Slide 23 presents earnings forecasts for the holding company, maintaining robust returns across metrics. The bank’s cost of deposits will remain competitive due to our legacy from the National Bank and matched against low-cost fixed assets. Slide 24 provides a brief overview of our lengthy tenure in the SBA lending space, having securitized for almost 20 years now. Our average loan size runs around $151,000 with a diverse portfolio. In Slide 25, we discuss the premium trends, utilizing 10% of par, while firming our expectations for the fourth quarter, which had been weakened. The competitive landscape has shifted, and we intend to take advantage of upward momentum in the market. Slide 26 discusses benefits from increasing our portfolio, highlighting significant growth in interest income through Q4 2022. This trajectory should improve further with adjustment terms in our cost of deposits. However, it's important to keep in mind that this is being done through our non-bank lending, which will transition through a runoff mode. Slide 27 presents favorable trends in our non-accruals, showcasing our ability to report on a basis reflective of fair value loans. We've not experienced defaults or charge-offs in any $504 loans or conventional loans identified to date. On Slide 28, we’ve originated $401 million of 504 loans with zero defaults or charge-offs. I point out that we've also originated $132 million in non-conforming conventional loans, and that portfolio remains strong. It's crucial as we proceed to assert our reported measures to better inform the market about our operations. The perspective on our non-accrual loans remains favorable, as we find that our portfolio retains performance and minimal defaults within established lending standards. We look to grow this business consistently, aiming for stability moving forward. On Slide 29, we've tightened underwriting criteria since 2022, adapting to changes in market conditions by focusing on higher FICO and SBSS scores, leading to improved loan quality in our portfolio. We estimate a slight uptick of 10% in new loan originations compared with historic levels. In summary, our operational history and experience have positioned us well to manage these shifts effectively leading us toward success in this regulatory framework. Moving to Slide 30, our currency ratio is stable at 97%. Slide 31 depicts examples of our SBA 7(a) loans, and Slide 32 illustrates income trends, especially in risk-adjusted profit recognition. This gives a great indication of our projected earnings moving ahead. Notably, Newtek Merchant Solutions contributed around $6 million of EBITDA in 2022, and our Tech Solutions followed with $3.2-3.3 million. These figures support the integration of our SBLC within our consolidated earnings and maintain profit expectations. In Slide 34, we further detail our 504 loan operations, moving to Slide 35, which outlines returns from SBA 504 loan origination. This demonstrates our highly efficient retail pipeline. Our non-conforming conventional loan business portrayed on Slide 36 has posted strong performance with a well-established securitization history, and we anticipate boosting this business further. We have a joint venture partner who indicates that they'll invest up to $100 million in equity to fund this business. On Slide 40, we wrap up our discussion on our transformation. We aim to give insights between tangible book value versus NAV, noting differences—an estimated $170 million discrepancy due to our evolving business model. We expect these tangible book values to continue to grow, enabling us and our shareholders to capitalize effectively. We look forward to reporting our progress consistently and further enlightening our shareholders. Now I would like to pass the baton to Nick Leger, our Chief Accounting Officer, to conduct a financial review.

Nicholas Leger, Chief Accounting Officer

Thank you, Barry. Good morning, everyone. You can find a summary of our fourth quarter 2022 results on Slide 43, as well as the reconciliation of our adjusted net investment income on Slides 45 and 46 for the quarter. Our fourth-quarter 2022 net investment loss was $5.4 million, or $0.22 per share, compared to a net investment income of $1.6 million, or $0.07 per share, for the same period in 2021. The adjusted net investment income found on Slide 44 was $1.5 million, or $0.06 per share in Q4 2022, versus $16 million, or $0.66 per share for Q4 2021. Key highlights include total investment income of $23.1 million, which exhibits a 6.9% decrease from Q4 2021's total investment income of $24.8 million. The primary driver for this decrease stemmed from $4.6 million of dividends from our portfolio companies in Q4 2022, compared to $9.8 million in Q4 2021. In addition, interest income grew by $5.2 million, driven by an overall increase in the accrual loan portfolio alongside Prime rate hikes in 2022, which rose by 425 basis points. Servicing income surged by 27% to $3.8 million, up from $3 million in Q4 2021. Distribution from our portfolio companies for Q4 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. As we focus on Q4 2022 total expenses, they increased by $5.1 million from Q4 2021, mostly due to heightened interest-related costs associated with the Prime rate's 425 basis point increase—from 3.25% at year-end 2021 to 7.5% at year-end 2022. Realized gains from the sale of guaranteed portions of SBA loans reached $15.4 million in Q4 2022, down from $18.1 million for Q4 2021. Our operating results in Q4 2022 led to a net asset decrease of $2.2 million, or $0.09 per share, with an NAV per share at $15.25. I would now like to turn the call back to Barry.

Barry Sloane, CEO

Thank you. Operator, we would now like to open the call for Q&A.

Operator, Operator

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

Crispin Love, Analyst

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 $1 billion in 2024. I'm just curious about your comfort level with those targets, specifically the non-conforming to C&I as it implies significant growth and ramp, and then just more broadly growth on the balance sheet, just as the credit quality outlook remains uncertain here?

Barry Sloane, CEO

Sure, I would say this. So far, what we've seen relative to this segment of the market—is that a lot of borrowers who would normally go to a bank can't meet the debt service coverage ratios based on the three- or five-year repayment terms. Therefore, we're acquiring some stronger borrowers into this side of our offering. While one could look at this and think, 'Gee, you've never done it before,' we are comfortable with the pipeline and how it appears. We believe that most of this loan activity will flow through in the third and fourth quarters as our pipeline builds up. On the flip side of things, we've probably been a bit more conservative on the 7(a) side. We think we can make up for this on that side, but the non-conforming book does attract better credit qualities overall, making us more comfortable with the targets. We’re flexible to explore adjustments in either direction as the market fluctuates. However, these are projections in an environment where the five-year treasury can shift by 50 basis points in two days, so making reliable projections isn’t straightforward.

Crispin Love, Analyst

Great, thanks, Barry. That's helpful. And then I guess just drilling a bit deeper into credit quality. I understand you said that you might be conservative on the 7(a) volume side, but you can expand non-conforming as needed. Curious about your broader views regarding credit quality over the near to intermediate term.

Barry Sloane, CEO

I think as a BDC, our history shows we've maintained a fairly healthy non-accrual number, reflecting the nature of these credits. Meanwhile, we are compensated for making these loans with respect to the coupon and the government guarantee. Regarding the current environment, a few weeks ago there were speculations about rate cuts, and now it seems that we're on track for rate hikes. There's no indication of a significant economic downturn; rather, we see a slower economy with certain sectors performing well. Though we're anticipating higher default rates than historically seen, we believe we've prepared adequately with reserves. We'll have substantial reserves based on the CECL requirements incorporated into our new accounting for bank loans, and this is our approach moving forward.

Crispin Love, Analyst

Yes, thanks, Barry. That's helpful. But just one more question on the non-accrual loans at cost; do you have that number handy?

Barry Sloane, CEO

I don't have that number off the top of my head, but it could be 1% or 2% higher than what I mentioned earlier. We've written down these numbers from a book perspective, and that comes from our treatment as a BDC.

Crispin Love, Analyst

Great, thank you, Barry. I appreciate the answers.

Operator, Operator

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

Paul Johnson, Analyst

Yes, good morning, Barry. Thanks for taking my question. I just want to clarify your comments as well as what's been outlined in the slide concerning your expectations for your returns on the JV investments. You did mention a 20%-30% consolidated net return on the joint ventures. Is that referring to the return on equity for the respective equity investments in the JVs?

Barry Sloane, CEO

Yes, indeed. At this point, those returns are based on income generated at the bank—fee income and servicing income—alongside the equity in the JVs. The equity in the JVs would be a portion of the total amount of income generated. Fair point—the leverage from our intake allows us to capitalize on referrals, directing them into the appropriate segments like non-conforming or 504. The income generated compounds over time, enhancing returns, particularly under a new accounting methodology. This is a nuanced discussion, and we welcome queries that illuminate how we've structured our business model for better shareholder outcomes.

Paul Johnson, Analyst

Got it. I appreciate it for the insight on that. Now what is the update on the PLP being transferred into the bank? Is there any renewal process that must occur, or are you working around that requirement?

Barry Sloane, CEO

Yes, that’s currently in motion. Employees are now integrated into the bank. We’re still originating loans through NSBF but have started getting approvals within the bank. Loans are being issued GP versus PLP for now, but we anticipate making the full transition soon.

Paul Johnson, Analyst

Got it. Thank you so much. Finally, any stats on service utilization of your clients or crossover opportunities you envision between borrowers and clients across your different service offerings?

Barry Sloane, CEO

Not at the moment, but we will track this moving forward. The deck is comprehensive, but it remains a challenge historically. The bank acquisition and launch of Newtek Advantage will facilitate better client insights as they access their dashboard. We aim to enhance client knowledge regarding additional services like insurance, document storage, and our payment processing. The future will reflect a well-rounded banking model where our clients can leverage our suite of solutions effectively.

Paul Johnson, Analyst

Thank you. I’ll leave it there.

Operator, Operator

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

Scott Sullivan, Analyst

Thank you, Barry. Congratulations to you and your team. You had the vision regarding the SMB opportunities at the right time and built what I believe is the best mousetrap using the BDC structure. I liken it to graduating top of your class from an intensive program, skating to where the puck is heading. How relevant is this Q4 report to the future?

Barry Sloane, CEO

Scott, I appreciate it. I think it's a mark in time, particularly as we transition into a financial holding company. We paid out a $17 million dividend on December 31 and allocated $20 million toward purchasing the bank. This was necessary to fulfill our application commitments. So, it may be misleading to analyze this report with earnings numbers pegged to a previous structure. We did release guidance showing that we are well-capitalized and positioned within our upcoming initiatives. We should be aware that transitioning shareholders might still carry misunderstandings despite advocating a 4% yield. Our goal is to validate our projections proceeding as a financial holding company.

Scott Sullivan, Analyst

Can you provide more color about the state of your customers in the SMB market?

Barry Sloane, CEO

Indeed, the customers are impacted by economic conditions. While most clients are resilient, some have been forced to reevaluate their business strategies due to rising interest rates. Operators and entrepreneurs observed some inefficiencies caused by COVID, increasing their operational efficiencies. Unfortunately, some remain challenged by higher interest payment obligations. Yet, many businesses received government subsidies and liquidity, ensuring that they are relatively stable. When we anticipate higher normalized charge-offs, we believe our robust reserves will accommodate potential issues moving forward. We have modeled these outcomes based on historical performance. Our servicing approach keeps us in touch with clients and enables solutions before problems arise.

Scott Sullivan, Analyst

Excellent, appreciate that insight.

Operator, Operator

And our last question comes from Bryce Rowe with B. Riley Financial. Your line is open.

Bryce Rowe, Analyst

Thanks. Good morning, Barry. I appreciate the discussion. I want to delve into your sources of fee income, particularly on Slide 17. It seems like the growth driver at the bank is more related to gain on sale, correct? What do you foresee as the sources of non-bank fee income?

Barry Sloane, CEO

Absolutely. The non-bank income growth primarily emerges from the JVs, where we are keen to allocate equity. Currently, we are projecting conservative growth for payments, tech solutions, insurance, and payroll. More granular forecasts will emerge as we file Q1 results and track performance. In the bank, we anticipate seeing growth through 7(a) loans, though we’re not as hopeful for volume as before, reflecting conditions in the current market.

Bryce Rowe, Analyst

Got it. That’s all I had, Barry. Appreciate your time.

Operator, Operator

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

Barry Sloane, CEO

I appreciate all the analysts who joined. We hope to pick up coverage—potentially four to six new bank analysts. This will be integral to portraying our value as a distinctive bank. Our strategies focus on delivering financial and business solutions for independent business owners, emphasizing virtual accessibility and reliable service. We're ahead of the curve and are excited about the future. Thank you all for your attention.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a wonderful day.