So I think we are very comfortable doubling expectation of recent history to believe that will hold. Secondly, for rates, our rate forecast, give or take, is up another 25 basis points to 50 basis points and then flat.
Michael Perito: Okay. So, just a couple of follow-ups to that and thanks for that Barry. So just to be clear, the doubling, it sounds like a conservative assumption around credit, but just does that, but that from a macro perspective, I mean, is that just kind of a normalization of charge-offs given, the rate on these credits is now north of 11% and you just assume charge-off activity to kind of drift higher normally or is there an actual kind of macro credit deterioration assumption driving that? And then secondly, just on the rate, so I mean, it would be fair for us to think that there could be some upside to guidance if rate cuts materialized because it sounds like you guys have a pretty higher for longer assumption driving your ‘24 EPS guide at this point.
Barry Sloane: Yeah. I think that some of those numbers — put it this way higher for longer we agree is not a good thing. And it’s not a good thing for anybody, and it’s not particularly great for us either. I think on the credit side, one thing I will say Mike, we’ve been doing this for 20 years and we’re getting better and better at it. So I think we look at our history and I think that we have factored into a weakening economy, not just a normalization of what we’re doing.
Michael Perito: Okay.
Barry Sloane: So I feel very good about our reserve position. You look at our reserve position versus other lenders, and I think you’ll see that we’ve got more reserves than they do. I believe that’s the case on the SBA stuff. And unfortunately for rates, we do think that the short end, I think they will be somewhat reluctant to drop rates in the near term and I wouldn’t be surprised if we get another rate hike or two, particularly given that the commodities keep pushing up, particularly oil. So we’ll see.
Michael Perito: Yeah. I tend to, sorry, go ahead.
Scott Price: Sorry. I just wanted to add on to the credit discussion. Keep in mind that the portfolio at the bank is essentially a new portfolio. So there is a lead time to when we’ll start incurring charge-offs on that portfolio. We can’t take them before the loan goes bad. So there’s got to be a seasoning of the portfolio. And that’s just the nature of migrating from a fair value approach that we had at the old BDC to the bank accounting that we’re having to apply CECL too.
Michael Perito: Okay. That’s helpful, guys. Thanks for sending me on that. And then just on these non-conforming C&I loans, I wonder if you guys can help me out a little bit. I feel like I don’t have the full picture here. I mean – could you — it seems like it’s expensive to kind of fund and hold these loans at the HoldCo. Wouldn’t it make more sense from an efficiency standpoint just to hold them at the bank sub and fund them with deposits and other wholesale borrowings. I’m just trying to understand kind of the dynamics of that. I mean, because the new slide you guys put in kind of obviously shows some ROE potential that’s significant, but I’m just trying to figure out like why that’s the most kind of efficient way to fund this business and is it correct to assume, I think you said this Barry, I just want to make sure I heard it right, that the $40 million of proceeds, give or take, that is expected to really stay all at the HoldCo to fund these loans.
So there’s not really an expectation to dividend any of that down to the bank sub, which I wouldn’t think because you don’t really need banks up capital. I just want to make sure I heard that right.
Barry Sloane: Yeah. The last part you did hear that right. 100% for sure. And I think, the first part is, there’s always another participant at the table and that’s the regulators. And when we set ourselves up to get our approval, I think it was important for us to lay out what we wanted to do in a simple most vanilla manner that we can. And we don’t have the history in this area of lending that we’ve got in the SBA 7(a) side. So this is something that might be doable down the road, but for now, there’s enough margin in it that it works up at the holding company. It’s not the cost of capital that is going to drive this. It’s the availability of capital.
Michael Perito: So is it correct for us to believe that for the foreseeable future here, there might be additional kind of debt needs at the HoldCo to fund this depending on the environment right? I mean if the economics remain attractive is it fair for us to assume that you would come back and raise more debt to fund these loans if that was the situation a year or year and a half, whatever the timeline is from now?
Barry Sloane: Yeah, that would be desirable, yes. And I think that we have revolvers that we’ve paid down. We’re in a good cash position. And one of the things I think you asked in the last call was the capital raise of equity, that’s out. So there’s no capital raise for this calendar year for equity. So I mean, we put it in because we didn’t know whether it would be a debt market. Obviously we’re pleased that there is a debt market for us and we’ll continue to grow the business methodically.
Michael Perito: Yeah. No, I mean the 8% rate is actually like for the product that was, I think, pretty attractive on it. Obviously, it’s still more expensive than anything incremental that you could fund with that the bank sub. But I appreciate that commentary. And then – so just my last question is you guys mentioned the loan size, the personal guarantees. Can you just give us a little bit more color kind of about what these loans are for these non-conforming C&I loans? Like what use case or I don’t know how general it is and if it’s broad I apologize but just any kind of examples which would be helpful as we think about that portfolio growing near term here?
Barry Sloane: Yeah. This would be an owner operator that owns a business. It’s a cash flowing business and they prefer fixed versus floating and they really want flexibility for utilization of proceeds and don’t want to be told by the banking institution that they have loan covenants, they can’t dividend certain amount of money, they can’t lever up, they can’t do an acquisition that they constantly have to go back and forth to the bank. We prefer, and it’s been our experience in the SBA space, that we take personal guarantees, we take personal and commercial assets for deposits, excuse me, for leans, And that’s put us in a secure position where we haven’t had any charge-offs at all for the — since we began the program in 2019.
Michael Perito: Okay. All right, guys, Thank you for the color on the guidance and macro and on the non-conforming loans. I appreciate it.
Barry Sloane: Thank you.
Operator: [Operator Instructions] And for your next question, it comes from the line of Scott Sullivan from Raymond James. Scott, your line is open. Please ask your question.
Scott Sullivan: Hey, Barry. Thanks to you and your team for taking my call. A lot of my questions were sort of covered by the prior reps. And I was wondering, if you could sort of speak a little bit more on the non-conforming products. We meant to sort of view this as a unique and kind of a special driver going forward.
