Q4 2024 NewtekOne Inc Earnings Call
Okay.
Speaker Change: Good day and thank you for standing by welcome to the New Tech One Inc. Fourth quarter 'twenty 'twenty four earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
Speaker Change: During the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Barry Sloane President.
Speaker Change: <unk> M C. L. Berry. Please go ahead.
Barry Sloane: Good morning, everybody and welcome to our new Tech one fourth quarter and full year 2020 for final results conference call.
Speaker Change: I'd also like to introduce and mentioned that Scott price, our Chief Financial Officer will be helping me present on today's call.
This is our second full year of transitioning from a business development Corp to reporting as a financial holding company owning a nationally chartered bank.
Speaker Change: We appreciate everyone's patience enthusiasm and attention to all the information that we provided into the market over the course of the last two years today's presentation will be a bit cleaner a little bit of an abridged version and we look to get through the discussion piece and about <unk> <unk>.
Speaker Change: 20 to 25 minutes and then open it up to Q&A. So it's clearly got more condensed and with that we're asking all of you to rely upon the press release information, we put out late last night, which praise a lot of attention to detail, which show strong loan growth strong deposit growth strong R O a.
Speaker Change: They perform and structure of our OTC performance and really good attractive efficiency ratios.
Speaker Change: We look forward to presenting today and look forward to turning the pages on new Tech. One presentation. You can go to our website new check one dot com go to the Investor Relations section the Powerpoint is from there.
Speaker Change: Going to slide number two.
Speaker Change: That presentation. Please note the statements regarding forward looking comments.
Speaker Change: And then we'll move to slide number three important to note new Tech one inks mission statement and purpose.
Speaker Change: New Tech one as a technology enabled disruptive company that is wrapped in a bank holding company blanket. It's really important to note who we are and what we do we've taken our technology to acquire clients cost effectively make we believe better loans and the industry standard with better risk reward.
Ward relationships that are better for our clients because they have long amortization schedules and on a net basis give us adequate capital adequate reserves and better returns to shareholders. Most importantly, a better product for our business customers three the ability to gather liabilities and deposits that are a.
Speaker Change: More valuable to.
Speaker Change: To our shareholders because they are stickier because of the connectivity to.
Speaker Change: The relationship that the customer has written a new tech advantage our business portal.
Speaker Change: <unk> also.
Speaker Change: To the business client, because we give them a tremendous benefit for us, allowing them to give us deposits below the risk free rate.
Speaker Change: And a real better solution for all of our constituents. So we focused on our mission statement, new check one as a provider of business and financial solutions to its target market of over $30 million independent business owners in the United States. We acquired a bank early in January of 2023, So we get add depository solutions in real time.
Speaker Change: In addition to its five core verticals at the end of the day. Our goal is to make our clients the independent business owner and client more successful we are.
Speaker Change: Obviously, our position there as a financial holding company regulated by the fed and we utilized proprietary and patented advanced technological solutions to acquire customers cost effectively and provide best in class solutions independent business owners without the use of traditional bankers a traditional branch network traditional brokers or business development.
Speaker Change: Officers, we look forward to further describing our company showing our financial performance and a better explanation of why we are a technology enabled company and a disruptor similar to organizations like Uber that disrupted the taxi cab business and Amazon Dot com that disrupted the retail business in terms of how their.
Speaker Change: Transact in the marketplace today.
Speaker Change: On slide number four if you go to new Tech one we've highlighted our fourth quarter financial 2024 highlights.
Speaker Change: Things that you could see in our press release.
Speaker Change: We came in at 70 cents per basic <unk> 69 per diluted the important metric there is less.
Speaker Change: That's a 43.
Speaker Change: Percent improvement over the three months from the prior year and prior quarter net interest income, which is a growing segment of our.
Speaker Change: Of our cash flows and our income also improved to 36% increase over the same three month period, a year earlier, obviously a lot of our income is non interest non interest income related.
Speaker Change: Bit of a change from this particular industry, but as we grow the business. This will be a continuing growing component I would also like to go down to the last bullet on this slide on slide number four shareholders equity of 296, Million% to 19% increase all the while we're also playing paying a very healthy dividend to our shareholders moving to slide <unk>.
Speaker Change: Number five which is new tech won over 12 months versus the quarter. The annual comparison is also very attractive as you can see above <unk> 97 per basic above 96 per diluted a nice increase, particularly when you take out the tax benefit for 2023.
Speaker Change: Also important to note on the final bullet.
Speaker Change: <unk>, which is our acronym fertile alternative loan program.
Speaker Change: Lending product, which is an important growing component of new tech one $269 million in loans for the 12 months over $83 million of AARP launch for the 12 months once again, an important growing component.
Speaker Change: I should point out that.
Speaker Change: From an earnings perspective, according to the Bloomberg consensus above 92, so we beat that.
Speaker Change: And our midpoint prior guesstimate was about $1 95 at the midpoint.
Speaker Change: Move to slide number six I think this is an important slide to trying to educate the market analysts in their investor base on our organization and its ownership of new Tech bank and that not only do we have a unique operating methodology, but most importantly, a very unique value proposition both to shareholders.
Speaker Change: From a financial metric standpoint, and to the customer base.
Speaker Change: The three problems that we believe the banking industry is trying to navigate one.
Speaker Change: Everything is very manual manual labor manual branches and antiquated data exchange with customers, we believe that should shrink traditional.
Speaker Change: Bankers branches a question of our acquisition is too high we think we've done a good job in solving this problem and we will discuss.
Speaker Change: The banking industry has probably been our profitability is predicated on the cost of deposits being materially below the risk free treasury rate, whether that's the one month bill or a government money market fund.
Speaker Change: A lot of our competitors are taking in deposits for 2030 basis points for checking and really they're not offering the client much at all which we'll get to the bottom of this slide through the new Tech advantage.
Speaker Change: If the industry does not offer value added services to its business clients.
It runs the risk of losing these deposits and getting disc intermediate if you look at our deposit base, 75% to 80% is any insured category I always Marvel over the marketplace asking me, how many noninterest bearing deposit accounts, we have well the reality is those noninterest bearing deposit accounts, probably arent going to negative.
Speaker Change: They're only going higher so paying market rate of interest with a sticky solution. We think is incredibly valuable that's what we're building that's what we look to get understood by the marketplace and get recognized and still have very good margins on our overall business because of what we do.
Speaker Change: On the asset side bullet number three third problem the banking industry makes loans, which attempt to totally avoid credit risk maybe that's a bit of an exaggeration in appropriately, but however, if you look at it.
Speaker Change: They provide low margin and therefore attempt to almost eliminate the aspect of credit risk management, we actually measure it we manage it and we make loans for alpha and we've been doing it for over 20 years, when I say, we make loans for alpha.
Speaker Change: Yes, we will have portfolios that have higher charge offs, we have higher provisions. However, net of these costs were at higher returns on our assets and our tangible.
Speaker Change: Common equity.
Speaker Change: And we do.
Speaker Change: Do this and rather than avoid credit risk on low margin. We believe we've got a better management, a better formula in a better way of making loans and in addition, our allowance our patient capital to our customers, we give our customers long am schedules with no balloons and the ability to repay but we do require our clients in our core.
Speaker Change: Lending products like LP viable for <unk> to provide personal guarantees and we lean the personal.
Speaker Change: When appropriate and all of the business assets very very important to note from a customer acquisition standpoint, a bullet number three.
Speaker Change: Get six to 900 unique business referrals a day.
Speaker Change: That's through our new tracker system, which is patented from all of our alliance relationships like that.
Speaker Change: Morgan Stanley UBS Martie came up with trade Association et cetera.
Speaker Change: Last bullet on this slide slide number six.
Speaker Change: Should we get the benefit of getting somebody's savings in depository account money moving account and a business account that's checking it won their business savings of three and a half without giving the customer some value our competitors are charging them more on fees.
Speaker Change: No fee and they're not paying the rate.
Speaker Change: We give the clients through the new Tech advantage pre document storage free web traffic analytics free Quickbooks integration I call your attention to a recent press release, we put out merchant services daily batches and charge back and refund information into the New Tech Bank account.
Speaker Change: The ability to connect with bank personnel, a real live person in the United States on camera.
Speaker Change: Staff on camera the ability to make payroll online obviously, you've got to use our payroll solution and our payment solution with a direct connectivity into the bank account ultra one business portal and one ecosystem.
Speaker Change: To our website take a look at our new tech advantage and see that it truly is an advantage.
Speaker Change: Through the calendar year 2024, we picked up 950, new business checking accounts are core business deposits grew to $216 million approximately.
Speaker Change: That was approximately $106 million increase from 12, 31, 2023, and we're pleased that these customers will win over loyalty, because we're providing them value for them, giving us their valuable depository relationship once again, 75% to 80% of the <unk>.
Speaker Change: That's our insured I'd like to call your attention to slide number seven New Tech Bank financial statistics for 2024.
Speaker Change: Six three our OTC, 48% efficiency ratio 42, you don't see these in the banking industry I refer to this as the top half of the bank frankly, we look at the analysts' understanding coverage and Investor base.
Speaker Change: He's focusing on the bottom.
Speaker Change: Charge off provisions cost of deposits.
Speaker Change: Would argue that our deposits paying market rates of interest are better and more sticky and ensured that zero noninterest bearing deposit base that some of our competitors that we saw in 2023 can fly at a moment's notice, but I look at the margins for a new Tech bank. The net interest margin the yield on loans I will point out our <unk>.
Speaker Change: Allowance for credit losses at four 9% plus our question on capital gives us plenty of room here to continue to operate the bank in a safe and sound manner, and importantly provide a great product to our customer and also very importantly provide a great rate of return to our shareholders and <unk>.
Speaker Change: Number eight we focus on the same types of metrics for the holding company. Yes, we are a little bit more water down but this is the consolidation of the bank up until the holding company activity still exceptionally strong per ton on average at that this has been going on for years. This is not an anomaly it's quarter after quarter same thing for return on tangible.
Speaker Change: Common equity north of 20% or 24, 1% the transition of our organization, which we owned and operated for 27 years from inception 25 years of public company continues to take place transitioning from a BDC enjoy bank holding company.
Speaker Change: We're very appreciative of the financial performance that we see on slide number eight slide number nine company forecast important to note, we bumped up our pre.
Speaker Change: <unk> forecast of $2 in earnings per share to $2 25 in our range to $2 10, and $2 50, obviously there is a lot of.
Speaker Change: Forecasting volatility in the market, we're seeing a lot of things in the news with respect to the current administration. So we've given ourselves cushion with some of the wider forecast, but these are ranges were really really comfortable with I do want to point out that on the <unk> business on a $1 billion of originations in 2025 from an <unk>.
Speaker Change: Spectation standpoint, $750 million will create a government guarantee bond, which will be sold into the market.
Speaker Change: On <unk> 250, I think I said, sorry, 50 does that $750 million $250 million will remain on our balance sheet. So as you can see the mix of assets on the balance sheet will begin to become more diverse and change. However, I would also like to point out with respect to risk measurement the average.
Speaker Change: So on the uninsured loans in.
Speaker Change: In the 708 program is about 120 to 140000.
Speaker Change: The uninsured piece that gives us a very diversified portfolio.
Speaker Change: I ask you to find a bank that's in our business greater than or equal to what our size that has such diversification in credit across the portfolio diversification of geography, where national diversification of <unk>, It's a very very diversified portfolio and one of which we've been in for over 20 years and have managed.
Speaker Change: Non crisis, the pandemic et cetera.
Speaker Change: It's important to note that our company forecast takes all of these items into consideration slide number 10.
Speaker Change: Give the 2025 projections.
Speaker Change: The midpoint of $2 three Oh, that's nice growth over our diluted earnings per share of $1 96, and then we have the break out quarter by quarter.
Speaker Change: Please.
Speaker Change: I point, you to slide number 10 on our Powerpoint deck slide number 11, and 12 are extremely important credit is clearly a sensitive area to the market. Today. So we wanted to add these two slides to give investors and analysts some comfort that our business model can withstand the stress and then.
Speaker Change: That our forecast and belief, which we feel good about.
Speaker Change: At 10 <unk>.
Speaker Change: Possibly be off that there is installation here, let's take a look at slide number 11, and 2024 to get to a 196 197 EPS number we took one 5% and charge offs against the loan portfolio and our guidance that we gave.
Speaker Change: 10 to $2 50 for 2025, we used a little under 2% and we believe that with the flattening point that it probably will not go.
Speaker Change: Higher at all and should level off and start to go down next slide will give us some comfort there with respect to the default curve in the event that.
Speaker Change: We are all from a stress standpoint, and the charge off rate goes to 3%. So almost a 50% mis in the charge off rate. It will hurt the earnings approximately by 50 cents a share once again holding everything else constant in the model.
Speaker Change: That still leaves you with a very healthy dollars 80, particularly given the current stock price, particularly given the current dividend payout I mean, this gets to the point, where we do need people to begin to pay attention to the fact that this is a management team that although its owned and operated a bank for two.
Speaker Change: <unk> has been through two regular two years of regulatory cycle. It is not our first rodeo in making loans in participating in this business.
Speaker Change: And we are proving this year by year quarter by quarter because of the margins in our business, we're able to manage credit risk in our lending portfolio, we have the tools.
Speaker Change: We have the ability to absorb unanticipated movement beyond the expectation in credit performance and importantly still remain profitable.
Speaker Change: I think it's very very important to note I also want to note that the gain on sale is something that is a reoccurring event.
Speaker Change: Thing that we've experienced over quite a long period of time, it's not new to us so making loans selling.
Speaker Change: Selling the government guaranteed piece into the market extremely important it we've been doing it for since 2010 2003 slide number 12.
Speaker Change: New Tech small business finance, which is the non bank lender debt at the holding company.
Speaker Change: At the holding company because when we acquired the bank debt.
Speaker Change: That in Securitizations that have to remain up at the holding company. This is in a runoff mode. So in order to basically demonstrate the default curve. We looked at the net increase in non accruals before charge off quarter by quarter. So you could see the second quarter of 2024. It peaked it's declining in Q.
Speaker Change: Three declined in Q4, and we expect this to continue to decline also important to note the percentage of the portfolio, that's fairly new less than 24 months down to eight 2%. So.
Speaker Change: One more item.
Speaker Change: <unk> portfolio in the last year paid off by $120 million. So when you look at the drag of NSP App on the business because it is a run down mode.
Speaker Change: It should be less and less of a drag going forward a based on seasoning passage of time be based on the fact that the total portfolio has declined I also want to make a comment.
Speaker Change: A lot of the loans in the.
Speaker Change: Portfolio were made in low and I'll use the term zero interest rate environment.
Speaker Change: Many of US forget the fact that prime went from three five.
5%.
Speaker Change: Almost a five 5% move to our customers that it almost doubles your monthly P&I.
Speaker Change: Those loans they were stressed up to a 3% however.
As I just mentioned prime move by five points.
Speaker Change: And at the same time.
Speaker Change: Cost of inflation cost of labor very stressful time for our client base. This is where our business model works and shines obviously, the newer vintage loans distressed at higher rates. They are harder to qualify and people say well how are you able to grow our business opportunity when you think.
Speaker Change: The economy might slow credit might deteriorate or the universe of acceptable borrowers may not be as robust all things that we believe in and I believe it is the technology is.
Speaker Change: It's the technology, it's the technology.
Speaker Change: We use our technology to acquire clients on a more efficient basis, we're signing up more people diverse people were able to cut through these referrals quickly and grab the high quality clients through our <unk> of questions in the questionnaire through our secure.
Speaker Change: File vault, where we're able to grab the best credits early without having to go back and forth through a traditional banker broker BDO without E mailing pdfs back and forth. It's all automated it's the technology that our Chief information Officer has built and put us in a position which enables us to be the <unk>.
Speaker Change: One SBA lender in this space. We are excited about 12, we think theres a flattening of the loss curve and we think that.
Speaker Change: Even as the bank starts to ramp up we have enough reserves.
Speaker Change: We have enough capital and we'll be able to continue to grow our earnings pool.
Speaker Change: Slide number 13, our alternative loan program our growth business, we anticipate doing about $500 million of these loans.
Speaker Change: In calendar year 2025.
Speaker Change: This portfolio currently sits at 400 million originations, I believe or close to $480 million or charge offs. Historically in this portfolio 78 basis points.
Speaker Change: A lot of interesting data you get diversified geography diversified industry we.
Speaker Change: We have very large margins on this portfolio that should ultimately factor into NIM historically done amount of joint ventures now on the balance sheet going into Securitizations, which would give us a little bit of a different.
Speaker Change: Income and balance sheet treatment going forward.
Speaker Change: Call your attention to slide number 14, we've done $672 million of 504 loans in calendar year <unk>.
Speaker Change: Since our inception in 2015, no charge offs since the program's inception. So when you look at the 504 program and you look at the LP program. It is a little bit of the antithesis with respect to credit worthiness to the 708 program, but what we do is we look at markets. We provide loans that are.
Speaker Change: Great for our clients great experience that have the best risk reward and best Alpha. This does not exist in the banking business. We are asking investors the analyst community to look at us as a risk versus reward lender. Please learn that we are a disruptor, we're not acquiring deposits we're not.
Speaker Change: <unk> loans were not doing payroll payments insurance.
Speaker Change: With the company, we spun off our IPM Tech solutions and the way other people are doing the business.
Speaker Change: Slide number 15 P. PNR for those bank. Appreciate us. This is an important metric it basically shows that our strong core earnings and we have a greater capacity to absorb potential credit losses in the future while continuing to invest in growth for the future slide number 16, thats the PNR at the bank 11.
3% versus an industry average of one six and $1 five nine slide number 17 shows the diversification of noninterest income as a dominant source of revenue that will continue it is reoccurring you'll see it quarter after quarter, it's not going to change it's going to continue to develop.
Speaker Change: And benefit our EPS number it is our business model and we believe the market will appreciate that they're continuing to get nice dividend growth and shareholder value and give us we hope the good market premium for what we're doing in the marketplace Slide number 18 I. Thank all of you can do your your work here.
Speaker Change: Quite familiar how well we compare it to our biggest competitors one thing I do want to point out we had a lot of cash at the bank.
Speaker Change: At the end of 12, 31, 2024, I think in excess of $300 million I think it was $325 million in.
Speaker Change: In deposits that almost had no margins that did water down and net interest margin.
Speaker Change: The excess deposits, what we used to pay off some higher cost Cds that are maturing in March April and May Slide number 19 is our comparison to we think our closest competitor.
Speaker Change: I think has done a great job in the marketplace live Oak Bank.
Speaker Change: We generate income pretty close to theirs, they've got $13 billion of assets. We've got to they've got a tax rate at 11, I think our holdco tax rate's, a little over 26%.
Speaker Change: <unk> down a little bit because we are not quite.
Speaker Change: Quite is influenced by the old.
Speaker Change: Position of National Bank of New York City, which was a New York City based in domicile Slide number 20 shows growth in book value and tangible book value almost two bucks a share.
Speaker Change: I would now like to turn this presentation over to Scott price will talk a little bit about our financial numbers in the MD&A. Thank you Scott.
Scott Price: Thanks, Barry and good morning, everyone Slide 23 shows our yields and rates on a consolidated basis. My comments will focus on performance in the fourth quarter versus the third quarter of 2024.
Scott Price: During the fourth quarter of 'twenty, four we experienced margin contraction, which was driven by a combination of positive and negative factors on the negative side we.
Scott Price: We had higher cash average balances at the fed and a full quarter impact of the fed rate cuts that happened in the third quarter. The latter impacted our yields on our <unk> portfolio as the rate cuts went into effect on October one for this portfolio.
Scott Price: We also consciously gather deposits in October and into November holding retail deposit rates steady through most of November as we observed our peers holding are dropping their offered rates on the positive side, we had growth in all loan categories and growth in the LP portfolio helped mute the impact of the drop in the SBA seven.
Scott Price: Hey rates, we also managed to grow our average balances in our business checking and money market products.
Barry Sloane: On a real retail deposits, we ended up cutting rates in November and into December and have cut rates further in January and February and expect balances to hold in 2025 as Barry mentioned, we expect some attrition and higher price Cds and expect to grow.
Barry Sloane: Our business deposit balances to offset that that attrition.
Barry Sloane: That should provide incremental lift to the net interest margin from the December levels.
Barry Sloane: The average rate on our CD portfolio that matures in the first half of.
Barry Sloane: 2025, which is mostly concentrated in the second in the second quarter.
Barry Sloane: It's almost 5%, whereas current offered rates are below $4, 45%.
Barry Sloane: Turning to the provision for credit losses.
Barry Sloane: The provision was up for a few reasons, primarily migration to non accrual and net charge offs I'll remind everyone that the portfolio at the bank.
Barry Sloane: 700 space as a new portfolio, so nonaccrual loans could only go up from zero. Additionally.
Barry Sloane: We experienced net charge offs of $5 1 million or 154 basis points for the quarter when annualized.
Barry Sloane: And from the third quarter, Thats up $3 4 million and almost 100 basis points respectively.
Barry Sloane: The reserve to total loans declined during the quarter as it required reserve reserves on impaired loans declined as a percent of exposure as Barry pointed out earlier, we have sensitized, our forecast for higher default rates and higher severities. We believe that we will be profitable shouldnt that charge offs dramatically increase.
Barry Sloane: Noninterest income was up $12 million for the quarter, which included higher gains on seven days guaranteed and non guaranteed loan sales.
Barry Sloane: I would point out that our LP portfolio grew $90 million versus prior quarter, which was the primary driver of the increase in net unrealized gains.
Barry Sloane: Turning to noninterest expense salaries and benefits was down.
Barry Sloane: The $1 million due to lower performance based compensation and professional fees were higher on NTS disposition cost technology expenses were also higher due to higher higher revenues.
Barry Sloane: On income taxes, as Barry mentioned, we had a return to provision adjustment and so our effective rate came out at around 26%, we expect 26%.
Barry Sloane: 2025 year, Barry I'll turn it back to you.
Barry Sloane: Thanks, very much I'd like to quickly.
Barry Sloane: Quickly conclude and go to Q&A, but before we do that slide number 28 investment summary.
Barry Sloane: Once again I think it's important to note that new Tech one is a growth oriented differentiated technology enabled business that it's broad it's technology to the bank holding company market and the OCC charter National Bank market and we made this transition.
Barry Sloane: To basically offer depository solutions, which are beneficial to our client base and to rollout the new Tech advantage, which is a very valuable tool for their customer base. What is that doing is giving us profitability.
Barry Sloane: Our ratios at the bank of our OE at six 5% I mean, these are just very very strong numbers, particularly.
Barry Sloane: Consolidating up to the new Tech one.
Barry Sloane: Level I would like to quickly go through one more slide slide number 34, when you look at market comparable of our organization.
Barry Sloane: Very favorable and many of these banks are viewed as the technology oriented banks, which in my opinion means they're able to get.
Barry Sloane: Primarily consumer deposits online.
Barry Sloane: That aside if you look at our return on average assets you look at our.
Barry Sloane: Multiple to tangible book you look at our multiple of earnings and our dividend yield is quite compelling.
Barry Sloane: For those people that look at our stock price there is still an interesting opportunity here and.
Barry Sloane: We welcome any questions and participation and thank you all for taking the time to spend 30 minutes with Scott <unk> to go over the quarter and second year of full.
Barry Sloane: Performance for a new tech one.
Barry Sloane: A federally regulated bank holding company owning an Ashford chartered bank operator like to begin the Q&A.
Barry Sloane: Thank you Barry at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Barry Sloane: Sure.
Speaker Change: The first question comes from Crispin Love with Piper Sandler Kristen Your line is now open.
Crispin Love: Thank you. Good morning, everyone first Barry can you just provide a little more detail on the cadence of earnings throughout 2025, I understand you typically have.
Crispin Love: Throughout the year, but curious on why the first quarter is substantially lower than the other quarters and versus the first last year is it SBA gain on sale driven or is there anything else out there driving that thank you.
Crispin Love: Yes, I appreciate it Chris and I think that.
Crispin Love: We took a look at.
Crispin Love: The quarter, and we may need to <unk>.
Crispin Love: Look at doing some revisions we wanted to be extremely cautious on Q1 relative to the changes in the environment.
Crispin Love: I think it's important to note seasonally the first quarter is always our lowest quarter in the last quarter is always the strongest.
Speaker Change: You're asking this question for 20 years.
Speaker Change: What's the reason why borrowers tend to want to borrow and close their loans more in the fourth quarter than in the first quarter and I still haven't gotten an understanding as to what that seasonality is.
Speaker Change: I would tell you that.
Speaker Change: From what we've seen so far and we're almost through the first two months production is coming in as anticipated.
Speaker Change: Pricing is.
Speaker Change: At the moment and I say at the moment, because we are in a very volatile market right now so I want to be careful but at the moment pricing is actually better than where we cleared in the fourth quarter of last year. So we may need to revise that.
Speaker Change: First quarter number again, I think we've got first quarter and we did have a typo on one of the slides we've got the range Q1 2025.
Speaker Change: <unk> thousand eight <unk> in the low 32 on the high were $55 to 65 in Q2, 52% to $64 75 to 89. So that's where we are and that gives us $2 10 to two and a half full range.
Speaker Change: Okay, great. Thank you so that first quarter is 28 to 32, not 18 to 22.
Speaker Change: Correct, Yes that was a typo apologize for that we have to switch to slide out.
Speaker Change: Okay.
Speaker Change: Always difficult to get these things through and we didn't make that change.
Speaker Change: Okay, great. Thank you and then can.
Speaker Change: Can you just discuss some of the drivers of the nine 4 million markup on loans accounted for under the fair value option, just what drove the mark up there in the quarter.
Speaker Change: Well look I think that the fair value of loans, particularly for the MLP product that came in close to $90 million.
Speaker Change: These loans go into Securitizations with <unk>.
Speaker Change: Huge margins.
Speaker Change: With great history, and we have them value in there as you Mark up on the A&P loans.
Speaker Change: All of that detail will wind up being in the Ks and Qs.
Speaker Change: Great. Thank you Barry I appreciate you taking my questions.
Speaker Change: The next question comes from Steve Moss at Raymond James Steve. Your line is now open.
Steve Moss: Good morning.
Speaker Change: Ill.
Speaker Change: Gary I guess it was okay.
Speaker Change: Hey, Barry.
Speaker Change: On credit here I know you were talking about your charge off expectations for the upcoming year and I was trying to follow along but I was just thinking about the bank portfolio seasons here.
Speaker Change: I realize everything is under two years at the bank here.
Speaker Change: Can you just kind of curious like how the 2% number.
Speaker Change: Is that just being driven primarily by the loans originated in 2023, just kind of how are you thinking about the charge off expectations maybe by vintage.
Speaker Change: To get a little bit better sense of how we think about charge offs for this year and next for the bank portfolio.
Steve Moss: Steve I appreciate the question.
Steve Moss: The SBA loss curve, which we have modeled and standard and poors has done work on this which pretty much has a ramp that goes from like 18 months to 44 months. So.
Steve Moss: We believe that the bank will start to climb that ramp and then it flattens and we think that what we've demonstrated on slide 12 demonstrates that at the NSP up portfolio, where it gets to a certain point.
Speaker Change: Borrowers once they've made payments for three or four year straight there just less likely to default.
Steve Moss: <unk> has.
Steve Moss: Develop.
Track record, it's made its payments.
Steve Moss: Unfortunately for <unk>.
Steve Moss: Yes, it was done.
Steve Moss: In many cases in a very low rate environment, that's a floating rate portfolio without a cap so.
Steve Moss: What we've done is we've modeled 2025 going from one of the net charge off to two and then we put that stress factor in there which.
Steve Moss: Even on a stress factor.
Steve Moss: If you took the midpoint and Eric holder held everything else constant.
Steve Moss: We're still at $1 80 on a $12 and change stock price with a dividend so.
Steve Moss: I think we're in pretty good shape here, Steve I'm really not worried about it and this is not something I'm, losing sleep over it.
Barry Sloane: Hopefully that is helpful and Barry if I could add Steve we've incorporated the vintage analysis and our projections. So we.
Speaker Change: We feel like we've got it between $23 24, and then the new portfolio coming on in 'twenty five.
Barry Sloane: That's fully baked into the projections and so we're expecting.
Barry Sloane: The default rates in the severity is to continue through.
Barry Sloane: Through 2025 that we experienced in the third and fourth quarters of 2004.
Barry Sloane: Okay. So just thinking about like the default rates.
Barry Sloane: Severity is like.
Barry Sloane: Think about the 2023 vintage of stuff you had originated.
Is that like in the in the threes. So I'm just trying to think about what does the bulk sales looked like when I saw them before like high twos or threes is kind of how to think about them in.
Barry Sloane: <unk> organisers something lower than that kind of blend any attitude.
Barry Sloane: Yes.
Barry Sloane: Great.
Barry Sloane: Our model with you Steve to be honest with you youre going to have to create your own but I think it's fair to assume that the earlier vintage 2023 loans will more likely go for the 2024 and the loans that we put on obviously in 2025, so yes, youre moving in the right direction.
Barry Sloane: Okay and then my.
Barry Sloane: Other question here just in terms of also one on fee income.
Barry Sloane: Drivers of the loan servicing asset revaluation, the negative $7 3 million.
Barry Sloane: Yes, that's a function of just the decay in balance primarily the <unk> portfolio and Sps.
Barry Sloane: So that portfolio is not growing.
Barry Sloane: So as the.
Barry Sloane: Portfolio winds down we're obviously capitalizing more at the bank, we're putting more on that.
Barry Sloane: That's also.
Barry Sloane: Amortizing down.
Barry Sloane: I'll spend that amortization is included in that line.
Barry Sloane: But that line also includes the fair value changes on servicing as well.
Barry Sloane: So Steve I think youre hitting important point at NSP App.
Barry Sloane: As that portfolio pays down the servicing asset goes away that's a write off although it's noncash.
Barry Sloane: Premium on the guaranteed loans pays off that's noncash youre right down alone you liquidate it that's noncash so you've got a lot of income right off and NSP App, which has been a drag on the consolidated basis. So.
Barry Sloane: And the other thing too is the <unk> portfolio is financed in securitization, which is about three points higher than the bank deposit rate.
Barry Sloane: The good news about your questions is you're starting to get into the feel for how this works.
Barry Sloane: What I'm, saying.
Barry Sloane: Yes, Okay NSE.
Barry Sloane: NSP.
Barry Sloane: In a declining scenario, which it is.
Barry Sloane: That's a weight on the company.
Barry Sloane: And at the bank.
Barry Sloane: Youre going to have.
Barry Sloane: Higher charge offs, but youre also putting on new loans, new vintages at higher rates that gets stressed at higher rates scenarios.
Barry Sloane: <unk> loans are made in the toughest markets.
Speaker Change: Right. Okay I appreciate all that and just in terms of.
Barry Sloane: The.
Barry Sloane: Expense guide for 2025.
Speaker Change: Maybe curious what kind of investments you guys are looking to make here.
Barry Sloane: And the drivers.
Barry Sloane: And so the 25.
Barry Sloane: Steve It's another good question.
Barry Sloane: It's funny I could sit in board meetings and I kept one board member.
Barry Sloane: Make comments about the expense ratio growing and then like 60 seconds later unless people whether they have enough resources. So I'm, just making up sort of a joke.
Barry Sloane: I think the important part of it is.
Barry Sloane: We are a company that is growing quickly, but we are poised for growth and we can continue to add resources in accounting and finance and compliance and risk management in software I'm, knocking wood, we've had tremendous success.
Barry Sloane: I Havent jinx ourselves and area fraud problems based upon how we do our business. So.
Barry Sloane: We're going to continue to invest in SG&A to make sure that we could grow the business prudently manage the risk that gives our regulators and our board tremendous amount of comfort and we're not doing this on the cheap.
Speaker Change: Great I appreciate all the color there. Thank you.
Barry Sloane: Thank you.
Speaker Change: Thank you. Please standby for the next question next question comes from Ken Zerbe with Kobe W. Your line is now open.
Ken Zerbe: Hey, good morning. Thank you for taking my questions I had some follow ups on the credit outlook and performance here.
Ken Zerbe: Could you guide on the less than 2% bank charge offs were $25.
Ken Zerbe: The denominator there.
Ken Zerbe: And if it's average bank loans it seems like the $5 million charge offs. This quarter were a little bit above that range or are there any like one timers this quarter and what would be the driver.
Ken Zerbe: Loss rates to improve from Q4 into 'twenty five.
Speaker Change: Are you refer you refer.
Speaker Change: Bit of a loss could you repeat the question Tim Thank you.
Speaker Change: Yes, so I guess first what's the denominator for that less than 2% charge offs guide for 'twenty five.
Speaker Change: At the bank could you help with that.
Speaker Change: Yes, Tim the average loan balances were projecting.
Speaker Change: Right at.
Speaker Change: Or just under $1 billion.
Speaker Change: Okay, but that denominator is the bank loan portfolio correct.
Speaker Change: Okay.
Speaker Change: Look at some of the metrics, we put out there.
Speaker Change: Or is it.
Speaker Change: The L. P loans those are done at fair value that typically in securitization, but the loss rates are de Minimis same thing for viable forward. So this is most of that.
Speaker Change: From scratch, you're going to see is on the 708 portfolio, where you get the benefit of the gain on sale and what the government agency gets as they get fees that come out of the upfront fee the borrower pays and the ongoing fee for risk from.
Speaker Change: From the from the actual coupon of the loans.
Speaker Change: Okay, and if we look at that $5 million of charge offs. You you stated for this quarter. It seems like thats above that 2% range like were there any like one time reason there and what are the drivers for it to improve looking into 2025.
Scott Price: Go ahead Scott.
Scott Price: Our point, but if you have a point on that you can go first yeah I think the important point to note is that we do have plans for continued diversification of the loan portfolio.
Scott Price: 2025 in the fourth quarter, we originated or we gathered.
Scott Price: I want to say it was around $45 million to $50 million of conventional bank loans during the quarter.
Scott Price: We expect that continue to.
Scott Price: That trend at that pace to continue and to.
Scott Price: And the 2025 throughout 2025, as we try to diversify the portfolio.
Scott Price: Water down the <unk> portfolio. So you have got a function of.
Scott Price: Of that playing into the 2025 expectations as it pertains to 2024.
Scott Price: And what we observed in the fourth quarter.
Scott Price: We're always going to have one or two loans that.
Scott Price: It might be bigger than the 115000.
Scott Price: 150000 that very quoted earlier on the average seven side.
Scott Price: And when those go bump in the mine and the Knights are lumpy.
Scott Price: We have that that bank portfolio.
Scott Price: Scott larger loan average sizes than than the 700 portfolio. So those things happen, we're not seeing anything in the non <unk> portfolio that gives us any reason for concern.
Scott Price: And on the 700 side, we're tracking along.
Scott Price: As we expected and our.
Scott Price: To continue to.
Scott Price: Continue to model it, but we feel like we have the trend.
Scott Price: For 2025.
Speaker Change: Okay got it and Barry it's still a little difficult to kind of see the underlying credit performance given the seasoning of the book and the growth. There can you tell us from your point of view.
Scott Price: The pace of which the loans are.
Speaker Change: Okay.
Speaker Change: Deteriorating is that in line with your historical patterns that <unk> seen over the last 15 20 years at new tech or would like any better or worse or are you seeing that.
Speaker Change: You go into different credit cycles right. So.
Speaker Change: I think the credit cycle going into 2019, 2021, and 'twenty two was very strong and now youre seeing a deterioration of the credit cycle just based upon.
Speaker Change: Distressed level of rates.
Speaker Change: <unk> said on the call rate levels are higher I think what's important to note is that given.
Speaker Change: The performance, particularly at the SPF portfolio, which experienced quite a bit of stress in 2023, and 2024, we're still able to make our numbers. So.
Speaker Change: Do want to point out to you in.
Speaker Change: Everybody on the call first three questions are all about credits they are all about losses I get it but there is another half to the business, which is an income based business and that is able to offset.
Speaker Change: These types of numbers so.
Speaker Change: What I can tell you is we're not.
Speaker Change: In an OE <unk> scenario although.
Speaker Change: The rate stress on the on the portfolio to the older vintage clearly has shown.
Speaker Change: Its ugly head in the <unk> numbers and frankly, I think if you go back to the summer most people thought we were going to get a 2% rate cut.
Speaker Change: In the second half of this year, and maybe a 2% rate cut in 2025 and all of a sudden everyone's changed their mind, although maybe not in the last week I don't know.
Speaker Change: To answer your question.
Speaker Change: Question, Tim we are very comfortable with the numbers that we put out on a risk reward basis, and if youre asking me.
Speaker Change: Do I think that our portfolio in the industry portfolio has experienced higher defaults and higher charge offs. The answer is yes.
Okay. That's helpful.
Speaker Change: And then the last question I had is if we're looking at your noninterest income guidance in the guide for the $500 million of LP origination.
Speaker Change: Or how exactly should that flow through the income statement and like what's your expected revenue you have from that and then I think this is probably slightly related like what are the assumptions behind.
Speaker Change: Your gain or loss for the loans accounted for under fair value.
Speaker Change: Yes look I think you can create your own models, we don't create them for you and we don't give out our models.
Speaker Change: I think what you can do is you could take a look at.
Speaker Change: We're the market clearing yield on these assets or where they go into securitizations in the past I've given out slides that show you what the net coupon is with the gross coupon is.
Speaker Change: But the capitalization of the servicing asset is because those loans at 5553 prepaid penalties.
Speaker Change: You could see on the 2024 deal, which is public information you can get the presale memo from D. Brs, We had an 11 70 net coupon 12 70 gross coupon that's 100 basis points.
Speaker Change: The bonds were sold at about a 666, 7% market clearing yield that's 500 basis points with with.
Speaker Change: Pure leverage no equity in it and an 11, 7% coupon so.
Speaker Change: No I think youre going to have to figure out that yourself on the model and Youll see it in the case in the Qs.
Speaker Change: Alright, Thank you guys.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Speaker Change: Withdraw your question. Please press star one again, please standby for the next question.
Speaker Change: The next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Christopher Nolan: Hi, Thanks for taking my questions.
Speaker Change: Sale of technology solutions to <unk>.
Speaker Change: Was that expected to be accretive to first quarter book value.
Speaker Change: On a tangible basis, yes.
Speaker Change: And we don't expect we don't expect much in the way of.
Speaker Change: Gain or loss, we don't believe it's going to be material in the first quarter.
Speaker Change: Okay great.
Sorry, Christopher Criss, just relative to where we were at 12 31.
Speaker Change: And then on the topic of tangible book I noticed.
Speaker Change: The last quarter's tangible book value of $9 50 has been restated down to $8 93 as for third quarter 2024.
Speaker Change: Yes.
Speaker Change: Just a note on that.
Speaker Change: And the initial.
Speaker Change: And the.
Speaker Change: Slide deck that was published we had included in tangible book value.
Speaker Change: The assets that essentially.
Speaker Change: The intangibles at MTS as though they were already sold so we've revised that.
Speaker Change: That's obviously not the case they would just came out of the intangible line item in <unk>.
Speaker Change: That's held for sale.
Speaker Change: Okay. Thank you.
Speaker Change: And then I didn't hear it I know you guys give the seven day fundings for full year 2024, do you have for fourth quarter.
Speaker Change: Fourth quarter fundings for <unk>, Yes, please yes, I can get that for you give me just a moment.
I want to say it was around 207, it was north of $270 million or right at $270 million in.
Speaker Change: Total guaranteed and non guaranteed balances.
Speaker Change: Great. Thanks, Scott our final question more strategic question.
Speaker Change: Congratulations on the strong profitability and.
Speaker Change: Given all the noise you guys are still delivering.
Speaker Change: And the EPS is.
Equally excited with dividend and I know that you are.
Speaker Change: We're plowing capital back into the balance sheet to grow the book.
Speaker Change: But could you give us some thoughts in terms of when you might think of increasing the dividend.
Speaker Change: Yes, it's a good it's a good question I would say this and this is a decision thats made by the board and the board only I think that.
Speaker Change: The dividend currently at the current stock price is pretty generous in that dividend was set at a point in time, where.
Speaker Change: Stock prices materially higher and when.
Speaker Change: When you look at our return on tangible common equity.
Speaker Change: And utilization of dividend and capital.
Speaker Change: <unk>.
Speaker Change: I don't want to get ahead of ourselves because it's really a board decision but.
Speaker Change: Given where the stock prices.
Speaker Change: Raising that dividend and the scarcity of capital value may not be something that I'm, particularly in advocate out but that will be a board decision not mine.
Barry Sloane: And Barry on the topic of valuations I mean, you guys are trading at a material discount to peers, but your returns are strong.
Barry Sloane: And traditionally banks have covered in the past typically are valued more on the deposit base.
Barry Sloane: Right.
Barry Sloane: And if thats the case whats the advantage of being a bank.
Barry Sloane: Where does the other structure helped more valued on earnings we're total return or something.
Barry Sloane: You are right now, it's not happening if I lose shareholders. So be it that's not happening, but the value of being a bank and I. Appreciate the question very much.
Barry Sloane: Listen I appreciate all the work and all the questions you are the only one that really thats talked about the returns.
Barry Sloane: I've got three questions and everyone's like digging into.
Barry Sloane: Losses in the credit and that maybe that's a mark is concerned we're going to continue to work through it but.
Barry Sloane: The advantage of being a bank was back to that new Tech advantage, it's depository relationship with the customer it's the value of being really.
Barry Sloane: State of the art in real time payments in the payment space the connectivity in being able to connect ACTH fed wire card to a depository account from a payroll.
Barry Sloane: Payroll perspective being able to connect.
Barry Sloane: Payroll business to a depository account. Thanks for example to ADP and Paychex haven't done or won't do.
Barry Sloane: Even some of the advanced payment processors like.
Barry Sloane: Paypal stripe they don't own.
Barry Sloane: And operate a bank I think that ultimately is going to be a differentiator for us and the others see our customers go to their depository three to five times a week 12 months to 20 times a month that gives them a lot of connectivity and a lot of stickiness and enables us to get money below the risk free rate I got asked me. This question does it.
Barry Sloane: Just bearing account have a likelihood of going down and interest rates are up.
Speaker Change: And what does the bank give the customer for their non interest bearing accounts outside of maybe a ticket to the masters or bowling or a dinner.
Barry Sloane: Going into a branch.
Barry Sloane: So this may take some time, but we're going to keep grinding it out.
Barry Sloane: Keep growing shareholder value paying a dividend and eventually.
Barry Sloane: Hope to have a lot of different questions on this call similar to the ones you've asked today.
Speaker Change: Alright, Thanks, guys I know I haven't made a lot of friends on this but that's not my job my job is to just sell the facts the way they are.
Speaker Change: It's a complicated story.
Speaker Change: Slowly true and Thats going to take time to settle in and people will get comfortable and to understand what we're doing it is complicated and we're transitioning portfolios in business from the BDC Ingo Bank. So we're patient I mean, we haven't.
Speaker Change: Liquid we're in good shape, we're hitting our numbers, we're hitting our marks.
Speaker Change: We're telling people what the facts on basically saying my losses are going higher.
Speaker Change: How many bank Ceos or bank holdings are actually telling the analysts losses are going higher next year.
Speaker Change: Well.
Speaker Change: We can catch up offline.
Speaker Change: Okay. Thank you very much appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Mike Carrier Manav with Freedom broker. Your line is now open.
Speaker Change: Hello, everyone.
Speaker Change: Hey, Mike how are you.
Speaker Change: Yes, Brian Thank you.
Speaker Change: For taking my question. My first question is on <unk>.
Speaker Change: Funding structure.
Speaker Change: Land to grow deposits balances by $250 million.
Speaker Change: In 2025.
Speaker Change: Net interest income guidance assumes 60% growth in blank interest, earning assets must expand by at least that much.
Speaker Change: So it appears to be a funding mismatch.
Speaker Change: This signal a shift toward.
Speaker Change: Corporate borrowings.
Speaker Change: And the second question, how do you assess the impact of recent yield curve steepening or the past few months.
Speaker Change: Thank you.
Speaker Change: So a lot of the loan growth growth is funded by lines of credit and securitization on a match funded basis.
Speaker Change:
Speaker Change: The loans that are funded at the bank or the <unk> the fiber for.
Speaker Change: For which are originated and then sold the second lien gets taken out by debentures. The first lien gets sold with a 50% LTV.
Speaker Change: And then.
Speaker Change: On the conforming CRE and C&I are funded by bank deposits. So I think what you did pick up as the LP loans are funded at the holding company through Securitizations, but because of the margins that I laid out earlier and I just came from an asset backed security conference.
Speaker Change: And in the West.
Speaker Change: We've got a deal that we hope to be bringing at the end of the first or the beginning of the second quarter. That's I'll use the word hypothetical it will be funded is there so that will be where a lot of the.
Speaker Change: A L. P loans will be funded relative to the concept of the yield curve steepening.
Speaker Change: The yield curve steepening would be beneficial to most banks that do benefit from that I would say, we're fairly agnostic and our business model to rates going higher rates going lower.
Speaker Change: Or.
Speaker Change: An inversion of the curve Steepening curve, we prefer the curve.
Speaker Change: <unk>.
Speaker Change: Slightly but it won't make a huge difference.
Speaker Change: In our business or in our business model although.
Speaker Change: Particularly where are the consumer high yield savings deposits are versus prime which would relate to a little bit of a steepening. It would be somewhat beneficial in that area and you might actually get better gain on sale for the sale of the government guaranteed bonds in the <unk> business, but we.
Speaker Change: We basically tried to position the company to be rate agnostic up or down or steepening of flattening.
Speaker Change: And I would point out that we have $350 million of cash on hand at year end, which needs to be deployed and so that will account for some of the funding mismatch that you mentioned.
Speaker Change: Yeah.
Speaker Change: Okay got it and one more question.
Speaker Change: Based on <unk> data.
Speaker Change: Non accruals significantly exceed.
Speaker Change: We feel alone and distribution.
Speaker Change: What caused.
Of course this.
Speaker Change: Mitch.
Speaker Change: Can you walk me through the approval process from SBA approval to actual loan origination.
Speaker Change: Yes.
Speaker Change: Yes, My guess my guess is Mike what you are looking at is SBA data.
Speaker Change: Which the SBA data means.
Speaker Change: Go in and you get what's called a guaranteed number or a PLP number that shows up.
Speaker Change: Those loans are forward. They are in the pipeline some get funded and closed and others do not and they ultimately get eliminated so.
Speaker Change: If youre looking at approval data from the SBA statistics, there is a disconnect between the approval data and current fundings.
Speaker Change: Yeah, but.
Speaker Change: There is both approvable enter distribution data.
Speaker Change: I mean that.
Speaker Change: Approval amount.
Speaker Change: Scientifically exit.
Speaker Change: The amount of distributions or origination and this means that you have.
Speaker Change: Some shortage in your funding structure or maybe.
Speaker Change: Yes every everybody equals of buyers management.
Speaker Change: Yes, so every lender when they get.
Speaker Change: Our loan application and they put it through the process. They put it in the underwriting and then they get a guaranteed number that doesn't mean that loan funds, sometimes alone doesn't get approved in committee, sometimes when you go to close it lean pops up that wasn't disclosed.
Speaker Change: Appraisal doesn't come in so I think the point I was trying to make is that I believe that the.
Speaker Change: <unk>.
Speaker Change: The information that you are looking at where the disconnect between approvals.
Speaker Change: And between fundings. There is a disconnect that's true for new Tech and every other SBA lender based on how the program works.
Speaker Change: Okay. Thank you guys.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes the question and answer session I would now like to turn it back to Barry Sloane for closing remarks.
Speaker Change: Well I want to thank everybody for participating greatly appreciate.
Speaker Change: The work that people are putting in and for the investment community that has invested in our company over the long term we greatly appreciate the interest in the patients.
Speaker Change: We believe strongly that we've got the risk and reward.
Speaker Change: Measured correctly.
Speaker Change: And our two years of operating this business.
Speaker Change: Far more confident today than when we did the acquisition relative to how we sit in the marketplace and.
Speaker Change: I think that the market will discover that having an organization that.
Speaker Change: Doesn't do things manually and does things using technology automation to exchange data make loans take deposits without that infrastructure is extremely important that the types of loans that we make which are risk adjusted returns that we've done for over 20 years and we've been through.
Speaker Change: <unk> and other types of markets, we do know how to.
Speaker Change: Effectively use our tools, our resources to be able to manage the risk effectively.
Speaker Change: We thank everybody for participating and look forward to reporting our first quarter earnings going forward. Thank you very much.
Speaker Change: Again, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Thanks.