NewtekOne Inc (NEWT) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Newtek Business Services Corp Third Quarter 2021 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Barry Sloane, President and CEO of Newtek Business Services Corp. Sir, Please go ahead.

Thank you, operator, and good morning, everybody, and welcome to our third quarter '21 financial results conference call. I'd also like everyone to welcome Nick Leger, our Chief Accounting Officer, that will assist me in the presentation today. I'd like to point everybody to our PowerPoint presentations that are hung on our website, newtekone.com, N-E-W-T-E-K-O-N-E.com, go to the Investor Relations section, Events and Presentations, and there are PowerPoint presentations for today, which is the third quarter 2021 financial results conference call. We also have a presentation introducing the NewtekOne dashboard, which we'll talk about.

I'd also like to point out, we may have some new investor group on the conference call that has an interest in banks. We obviously announced over 90 days ago, the acquisition subject to a proxy vote and regulatory approval of National Bank of New York City. So we might have some new investors on the call if those investors are interested in seeing information previously distributed to the investment community on what the bank might look at. There are presentations on the website for (inaudible).

We're proud to announce our results today. We think we had a terrific quarter. A lot of the results that you're going to be seeing, really are representative of the company's ability to apply technology to financial and business services solutions. We've got some terrific key performance indicators and metrics that are dedicated to demonstrate that our business is growing, is well positioned for the fourth quarter and beyond into 2022.

I'd now like to bring everyone's attention to the PowerPoint presentation that is on our Investor Relations section regarding today's particular call. On Slide #1, please note the forward-looking statement disclaimer that is there. We appreciate everyone taking the opportunity to read and review that. Moving forward to Slide #2. We've historically had a proven shareholder value creation with a track record of growth and returns. Using Friday's close, we had a year-to-date return of 73.3% through November 5 from January 1, the 1-year return, 105%, 3-year 124%, 5-year 264%, and 10-year 1,162%. Obviously, we've historically been able to, in addition to paying dividends while we were a BDC, get tremendous capital gains from the marketplace, and that's been based upon our ability to grow revenues and earnings. I believe that we feel very good about the third quarter, good about the fourth quarter coming up as well as a projected dividend for Q1 of 2022 that we'll chat about today. Once again, important to note, we do believe and anticipate that we'll be able to continue this type of performance and whether we're in a BDC form or another form, we do believe that the value will be given out to shareholders through dividends and stock price appreciation if we continue to perform as well as we've done historically.

Slide #3. Important to note that companies all across the globe and the United States are coming through the pandemic. And obviously, a lot of our comparisons are a little murky with respect to pre-pandemic results versus pandemic results versus post pandemic, which we think we're in the period now. Hope we're in that period now. We've clearly emerged from the pandemic firing in all cylinders using many levers for the business model, whether that's gain on sale from the government guaranteed portions of 7(a), servicing income, spread income off of the SBA 7(a) portfolio, which was at a record net interest income for the quarter, which we're excited about, 504 loans, non-conforming loans, payment processing, tech solutions, many, many levers we have in our Newtek Business Service Group to be able to provide dividends and earnings to our shareholders.

In addition, throughout the calendar year, we've continued to invest in our business model with technology and human labor. We've increased our lending portfolio company and NSBF, Newtek Small Business Finance headcount by 52 individuals, a 27.5% increase. We do believe, once again, we're extremely well positioned. We want to give some cautionary note to various comparisons. We got to great lengths in this particular document and discussion today, particularly when looking at lending to go back to 2019. 2019 is pre-pandemic. 2019 won't have the noise of the PPP income or loan originations, and we also believe that what we've done in the pandemic is indicative of what the company is capable of doing when unexpected situations come up, both with our negative or positive. We obviously were able to ship quickly, hire new people, put in new technology, put in new processes and procedures, which enabled us to be able to process PPP loans for our partner, the SBA and for the business community that we serve each and every day.

Slide #4 talks about some of the SBA 7(a) lending highlights. We talk about core lending. We're talking about SBA 7(a), 504 and our nonconforming business away from PPP, which that, at this point in time is behind us. From an income generation standpoint, we're obviously still servicing PPP loans to get the forgiveness for our clients but for the most part, it's important to note, as you're evaluating Newtek as an investment opportunity, the core lending business, the trajectory, the growth is what everybody should be focusing on.

Looking at the second bullet on Slide #4. Newtek's Small Business Finance funded $163 million of 7(a) loans, 3 months ended September 30, 2021. That's a 43% increase over the $114 million of 7(a) loans for the 3 months funded September 30, 2019, pre-pandemic. When you look at a 9-month number, it's $362 million loans versus $334 million, an 8.3% increase. Important to note on the fourth bullet, we had a record $102 million of SBA 7(a) loans in October, which is unusual for us because we do typically fund most of our loans and close them in the second and third months of a quarter. We're very proud that we've been able to flatten this that. We had a great October. When we say they're approved pending closing, it means that we've given a commitment letter to the borrower, that usually comes in around 90% plus or minus close rate from there on funding rate, I should say but $102 million of 7(a) loans in a month is spectacular. And I give the management team, the technology team that's providing us these enhanced technological solutions, some of them which we could chat about today, whether it's getting loan assemblers to have calendar invites from borrowers, speeding up processes from a technological data moving perspective from assembly to underwriting to credit memo to committee to closing. We've done a tremendous job in making the company more efficient. There will be other KPIs we'll talk about today to demonstrate those particular efficiencies.

We've increased the lower end of our 2021 7(a) funding guidance to $560 million from $550 million to $600 million for the full calendar year. And obviously, in this particular calendar year, we funded $1.9 billion of PPP loans. I think it's important to note that while we funded and believe we'll get to a record number of 7(a) loans at any given year for Newtek. We also funded $1.9 billion of PPP loans with 26,500 customers. Now I realize that many of us are sort of embedded in the financials but operationally you could see, we've really been working on all cylinders, we're significantly more operationally efficient, and we're deploying those resources into core lending which, in my opinion, portends a great growth future for our business.

Slide #5 is sort of a precursor to slides going forward. Just talking about growth, how we're well positioned. Once again, we're going to discuss our pipeline being strong, technology story being strong and growth being strong.

Slide #6 is indicative of the type of progress that we've made. Looking at the pipeline in a calendar year, ended September 30, 2021, 2020 and 2019, using the 2019 pre-pandemic comparison as being most important, particularly with notice on approved pending closing, $160 million at the end of September, we had $100 million in October. We look forward to a very good fourth quarter. I think it's also important to note that we've had significant growth in our SBA 504 business and our nonconforming conventional business moving along a little bit slower or a little bit more cautious, but still an important part of our future growth story at Newtek.

Slide #7. Important to note that we feed off of our technology, the NewTracker referral system. We've been using this system for 18 years. This makes us branchless brokerless, BDO less and bankerless, really using technology to reduce what we would call a significant amount of real estate and human labor interaction with a borrower that can really be replaced, more efficient and more accurate through the utilization of technology to the point where loan referrals received for the quarter, $72,000 versus $12,600 for the same period in 2019. Looking at the 9-month run rate, we look at $355,000 of loan referrals for the 9 months versus $41,000 for the same period in 2019. From a unit perspective, we closed 214 loan units in the recent quarter ended September 30, 2021, that's versus 149 units in 2019. So you're looking at 30% to 35% higher with respect to efficiencies.

We obviously have a very large database of existing clients that pay us as well as clients in the database. Over 1.5 million businesses have given us referral opportunities through one of the 5 particular product areas. We will spend time talking today toward the end of our presentation about our cross-selling efforts as well as a separate PowerPoint presentation detailing the NewtekOne dashboard. I'd say this will get rolled out regardless of the bank acquisition, not to say that the bank acquisition will or will not happen. It's more of a point that the dashboard from a product perspective is something that will be done with or without us as a depository. We're excited about the dashboard. We'll talk about its capability, particularly using the dashboard, subject to shareholder vote, subject to regulatory approval as a bank, very exciting product, very competitive and really puts us in a unique position. So we will be chatting about that later on in the presentation.

To wrap up this slide, once again, important to note, with 18 years' worth of history in loan assembly underwriting and using our technological expertise, we believe we are a leader in the area of small business lending, materially improved our technological assets and resources to create operational efficiencies in all these particular areas. What these efficiencies do is they improve the client experience, they enable us to process loans better, quicker and with less effort, which makes it a much easier employee experience and most importantly, makes it more efficient for bottom line earnings.

Slide #8, I do get asked quite frequently, what's happening in the small to medium-sized business community in your market. The SBA defines small and medium-sized businesses as $30 million individual unique business owners in the United States. I have to say that from a macro perspective, this particular demographic and market segment as we're going into the pandemic, people clearly were concerned about it. We are excited about the partnership that we have with the SBA as a nonbank lender and one of the leaders in all SBA lending. We feel that really that partnership creates a bit of an embedded infrastructure in us. And when you look at what the SBA has done for all businesses across the United States in terms of providing support is pretty remarkable. A couple of quick data points. Broke its record for traditional lending, $44.8 billion in funding in 2021 fiscal year. That's in addition to the $1 trillion of other COVID related rescue programs. The 7(a) program accounted for $36.5 billion. The SBA also funded $8.2 billion through its 504 program. Important to note, the SBA still has tens of billions of dollars left in its Economic Injury Disaster Loan Program, known as EIDL. They have grant programs outstanding, and they've already funded $3.8 billion. With respect to the EIDL program, the agency currently has improved more than $283 billion. Small business owners can currently apply for additional EIDL loans with its original cap of $500,000 now goes up to $2 million. We'll talk about how we're active in helping our clients through the use of these programs.

Slide #9 depicts our lending staff. In addition to growing headcount, we've significantly improved the quality, particularly at the managerial level that's worked very hard. People like Justin Gavin, Tony Zara, Virginia Wylly and others in our organization really hiring, training, bringing people into the organization that want to help build the business. Not to want to do the business that they've done in the last 5 or 10 or 15 years somewhere else but want to come in and use our technology, use our thought process, use our way of providing financial and business solutions to our customer base in a more cleaner, faster, more efficient way, building businesses or what we're looking for in our staff. So in addition to growing the FTE count, we've clearly improved the quality of our staff, both from the rank and file and managerial perspective.

Slide #10 is a focus on the third quarter financial highlights. There's quite a bit of PPP noise in some of these numbers. I want to point that the important aspect for us, which we always look at is adjusted NII for those that are new to the Newtek story, and they're trying to figure out what adjusted means the adjustment of NII, which is a non-GAAP term, adds the gain on sale that we get from SBA lending, which has been a reoccurring event for this company for 18 or 19 years. So although it's not considered GAAP for a BDC, the market has begun to accept that. Our adjusted NII came in at $0.56 a share. That was an increase of 1,300% over the same quarter last year as we are reaching up our 7(a) program. Our debt-to-equity ratio of 1.37. When you take out the broker receivable at the end of the quarter, $1.24 billion. Our net asset value grew to $16.23 from $15.45. It was reduced a little bit as we begin to pay out the cash that we've received from prior earnings. Mind you, we've generated about $2.21 of adjusted NII through the first 3 quarters and have been paying that dividend out sequentially but obviously, we've got a big dividend payout coming in Q #4 which could have an effect, holding everything else constant with respect to NAV.

Slide #11, the 9-month picture. Once again, I move right to the adjusted NII of $2.81 a share. That's a 74.5% increase. Once again, as we're regenerating up the 7(a) portfolio in this particular calendar year, we have the benefit of PPP plus 7(a). We had that last year but we had it for a smaller portion. And as the pipeline is growing and the portfolio is growing and we're getting back into our core lending, all of that will end up replacing a significant portion of the PPP income. So we're excited about our future, and we were able to forecast Q1 dividend growth, which we'll talk about. Maybe that will be helpful to those that are looking for a more full picture for calendar year 2022.

Moving to Slide #13, from a metric standpoint, we -- as a BDC, are always talking about our dividend. The company has declared dividends for the full year of $3.15. That represents a 53.7% increase over those paid in 2020. We've also forecasted a first quarter 2022 dividend of $0.65 per share. Now looking at that $0.65 per share dividend that we have forecasted, for the first quarter of 2022, important to note, pre-pandemic 2019 first quarter $0.40 in 2020, somewhat pre-pandemic. The pandemic kind of came in the month of March, $0.44. So you could see that we're growing our dividend on a core basis. For those of you investors that follow our story, you typically know our second half stronger than the first, second half, even if you straight-line the $0.65 across the 4 quarters, 65x 4 represents about $2.60. If you start to play around with the math of looking at that first half represents 40% of the full year or 45%, you wind up with numbers that are a little shy of $3 or a little over $3. That's on an adjusted NII, assuming you pay 100% of the dividend out. Full year 7(a) funding forecast, we said $560 million to $600 million for 2021 of 7 (a), the $504 million, funding $125 million to $150 million for the full year that we're excited about the growth in the 504 business, we'll talk about that a little bit more. And with respect to the nonconforming conventional loans, we look forward and anticipate that we'll bring a securitization of our nonconforming product in the fourth quarter of 2021.

Moving to Slide #14, $1.05 dividend declared for Q4, payable to shareholders of record as of December 20, 2021. We've mentioned that payment of the fourth quarter dividend, 123% increase over the prior year and quarter. We talked about the 65% dividend. I think it's important to note in looking at our dividends earnings forecast for this year, the portfolio companies, and I will point out 3, in particular, Newtek Technology Solutions, Newtek Merchant Solutions, Newtek business lending, which are the 3 entities that contribute material amounts of income to the business did not distribute income to the BDC for the first 3 quarters of 2021, except for $50,000. Each one of these portfolio companies have made elections to not distribute that income and that cash. That cash can be used for other things. It can be used for lending money to the lender, so it doesn't have to sell stock. It can be used for lending money to the lender to buy back publicly traded bonds and debt. It could also be used for acquisitions that are interesting and out there. So I think it's important to note, and I realize this put a little bit of a burden on the analyst community, first 3 quarters of this year, there's been significant earnings generated from those businesses, which we'll talk about later on in the presentation, have been held both the cash and the earnings at the portfolio companies, in those portfolio company's best interest.

Slide #15, adjusted NII. We're forecasting $3.4. I want to point out, and it's important to note, we recently put out a press release on the $3.40 adjusted NII forecast. We have 4 analysts in the community, one forecasting $3.41, $3.36, one $3.36 and one $3.58. The $3.58 based upon our projections and forecast tends to be an anomaly. Obviously, everybody is going to make their own decisions, investors, analysts, et cetera, but it has tend to mess up the consensus numbers out there, which it is what it is. But we would like the investment community to follow our forecast. We like to believe that these are things that can be relied upon.

Also important to note, from a dividend and yielding perspective, there's been tremendous improvement in the BDC segment over the course of the last year. According to a recent KBW research piece put out on 11/15. It looks like last twelve months trailing, about 8.6% on the date of the research piece, which was 10/31, 7.9%. And those are for the externally managed BDCs. The internally managed BDC, in which one there's 6 -- 6.6% yield and that's last 12 months trailing. So when you equate that to our expected dividends for next year, we think we -- look like an interesting investment opportunity whether BDC or we convert into a different form, which we do look forward to.

Slide #17, slide on lowering the cost of capital. Important to note, the company has the ability to call existing baby bond debt. The NEWTL, the 5.75% notes due 2024 have been callable as of August 2021 without any form of core lockout or prepayment difference. The NEWTZ, the 5.5% notes due 2026, or callable after February, that make [whole] provisions for 12 months after that to diminish through the course of the year to where they're fully callable year after [that]. The company intends to use securitizations, cash on its balance sheet, which at this point in time is significant material and other capital markets tools, refinances expense of debt in whole or in part. I think this is important for our going-forward story because we do look forward to reducing expensive high cost of debt, whether as a BDC or in a bank holding company structure.

Slide #18, a slide that many of you are familiar with, once again, important to point out at the SBA's fiscal year ending September, third largest SBA lender by lending volume. Average loan size of the uninsured risk-based piece on our books, $161,000 with a floating rate with 2.75% coupon, which currently would be a 6% yield. Our net interest margins and income generated from that portfolio company has never been as high as it has been in the third quarter. We're proud of that recurring income. So that will be beneficial to us in years to come.

Slide #19 talks about the net premium trends. I want to point out that in the fourth quarter, we've got about half of our portfolio covered with 90% guaranteed loans, and those are trading at higher dollar prices. We also had $20.5 million of guaranteed portions on our books at the end of September 30 that were available for sale.

Slide #20 talks about the seasoning of our portfolio. With recent loan volumes, this probably will start to diminish and get a little bit more newer, but I think it's important to note that the existing portfolio clearly is in the belly of what we refer to with the default curve.

Slide #21 shows our currency rate. We're pleased that the currency rate actually got a little bit better through September. We aggressively work our portfolio, and we'll talk about that shortly and actually got better, improved from 6/30/2021 to 9/30/2021.

Slide #22, we talk about loan servicing metrics and functionality. We have 60 full-time employees as of September 30, servicing loans, working with our borrowers, improving their position in life through a variety of different solutions that we offer, whether it's a better way to process payments, a better way to ensure themselves, a better way to manage their technology, a better way to have a website that's more interactive, a better way to process payroll, manage human resources, whatever it might be. In addition to that, we have used the tools that are available in the marketplace to enhance the creditworthiness of our borrowers. Obviously, the PPP financing, which is now over. Our borrowers also experienced the Section 1112 payments from the Cares Act, which ended September 27. We are also securing EIDL loans for our borrowers when needed and Employee Retention Credit Program, which now can be used in addition to the PPP funding. We aggressively work with our customers to make sure that they've got all available tools to do well in the market, and it's important to note, once again, it's times like these to be partners in various different activities, particularly in our 7 (a) lending.

Slide #23, #24 for our new clients show the income and cash effects of SBA 7(a) lending. Let's quickly swing into our portfolio company review. Our SBA 504 program, which we're very proud of, we funded or closed $100 million of 504 loans through the 9 months of this calendar year, a 359% increase over the same period in '20, a 280% increase over the same period in 2019. We had 31 loans closed for $92 million of total financing. I think it's also important to note that during this period of time, we sold $41.5 million of the first liens. The second liens are taken out by the government in the form of SBA debentures, which represented about 18 units at about $1.4 million of gain on sale. We have plenty of capacity here with our funding facility from Deutsche Bank and Capital One Bank, and we're forecasting $125 million to $150 million of 504 loans for the full year of 2020, which at the midpoint would be a 57.7% increase.

Slide #27 and #28 demonstrate the high-return on equity that you get from a 504 loan. So when people look at our returns and they say, gee, how do you generate such high returns with BDC. The important aspect of that is we have these lending operating businesses under the BDC umbrella, they qualify for good BDC assets, good BDC income and these activities generate significantly higher returns on equity than buying loans, levering them, which is basically what most BDCs do. So we're proud of our business. We're proud of our model. That doesn't include the operating businesses of the portfolio companies, in Payment Solutions, in Newtek business lending, our 504 business as well as the Newtek Merchant Solutions, our payment processing business.

Slide #29, our conventional loan portfolio. As we mentioned, we look forward to a securitization coming up in the fourth quarter. We've put a balance of $87 million, all of which are current payments, 15 loans. I think we've had 2 or 3 payoff. Most of these loans are pre-pandemic. We've only had 2 loans that we funded in recent times.

Moving forward to Slide #31. Our payment processing business, an important business for us. We've been in this business since 2002. We have an enterprise value of $121 million on this business. That's obviously including debt and excess cash to give us that total enterprise value. We're forecasting EBITDA of $14 million for this business this year. We've experienced a 14.3% increase in monthly sales volume for the third quarter. Obviously, that's rebounding from the pandemic. So we look forward to increasing and better growth numbers in calendar year 2022 as we rebound. Clearly has an impact on our Mobil Money business, where we've got close to 800 or 900 cab drivers in [New York] that represent about $1.3 million of gross profit margin in a good year. That's down probably by 60% to 70%. As the airport opens up, particularly international travel, we expect a nice rebound from that particular business.

Slide #33, we talk about our payment systems, POS on cloud. Without getting too much into the weeds here because this could be a longer conversation, and we have a whole web page and website devoted to newtekpaymentsystems.com. Please go take a look at it. Important to note, this isn't just a POS that takes a payment. It's a POS that makes the business more efficient. It makes it more efficient in processing payroll, processing payments, integrating with e-commerce, integrating with food delivery services, integrating with general ledger accounting softwares, deducting money from a 401(k), very, very valuable system. We look forward to growing this side of the business as well.

Slide #34. In our technology portfolio area, we're proud to report that we've bumped up our 2021 EBITDA forecast of about $6.5 million. If you go back to 2020 when these businesses were broken out individually, you're probably looking at around $3.5 million of EBITDA combined. So we've had tremendous growth in this calendar year. We're excited about the business. I would suggest for those people looking to see what we do in this area, please go to our website, newtektechnologysolutions.com. I'd like to point out that the businesses are primarily infrastructure as a service, backup as a service, disaster recovery as a service, software -- security as a service, secure e-mail, hybrid cloud, public cloud, private cloud, very important business segment for us and will be an important segment as we look to roll potentially subject to shareholder vote and regulatory approval to be able to provide data storage solutions in a banking environment for our customers. We currently do that today in lending across many of our businesses. So that business has approximately 17,000 paying customers.

Slide #37, to round out the full suite, Newtek Payroll and Benefits Solutions, Newtek Insurance Solutions. We're excited about both of these businesses, and we are confident that they'll fit very well into that NewtekOne dashboard.

Let us go to the PowerPoint on our website entitled The NewtekOne Dashboard. I've been asked a lot of questions about the dashboard. I've been asked, gee, is this special? What makes a difference than other dashboards, what makes it unique. So I quickly wanted to go through a couple of screenshots. These are obviously screenshots that at the moment, are not operational. We look forward to the dashboard being operational, hopefully, in Q2 of 2022. When you go to Slide #39, this would be the primary interface on the dashboard and then it enables one to do is to see all the things that Newtek currently does for its customers merged into one dashboard, one single sign-on. The NewtekOne dashboard is the one dashboard for all your business needs. The purpose of giving this dashboard to prospectively a banking customer or a Newtek BDC customer is to give them the ability to have all their critical business functions in one place. First of all, to sign up for the function as well as to see the function, see the array, transact, it really does many different things, which I'll talk about at the conclusion of the presentation. Look, if we do ultimately position ourselves as a bank holding company, you'll be able to see all the different account balances, lending balances, merchant processing information, which we'll talk about in these forward slides. Looking at the efficiency of the website from an e-commerce solution, being able to make payroll from the dashboard, manage workmen's comp, health insurance, have HR tools on the dashboard, be able to purchase all the insurance needs from workmen's comp to a BOP to cyber liability and importantly storing all of the corporate documents. Tax returns, Articles of Incorporation, insurance policies, leasing agreements, all those important corporate documents that are held elsewhere in multiple places, one single sign-on. We're very excited about the dashboard going forward.

I'd like to turn everyone's attention to what is Slide #3. That will give you just a quick glimpse of depository nature. This obviously will -- I'll use the word ultimately be available in mobile in the event that we're a bank or obviously online. It will be something that could be used for viewing balances as well as moving money around, bill pay and all statements will be stored in the dashboard.

Slide #4 is a view of a loan that a client may have with us. So if you take a look at the payments upcoming, take a look at the statements, the interest rates, the due dates. Whatever information is needed will be on that lending dashboard.

Slide #5, the Merchant Solutions section. I've got a few slides here. So for those businesses that are taking payments, whether through credit card or ACH, whether it's Visa, Master, Discover, American Express, they'd be able to see the breakdown of all the different card types. They'll be able to see the different payment dates per transaction. They'll be able to see all the statements. They'll be able to look at how their sales are growing from month-to-month, quarter-to-quarter, year-over-year.

Going to Slide #6. They'll actually to be able to take a look at batches of payment processing information and be able to drill in and review those particular batches.

Slide #7. They'll actually be able to drill down and look at the actual payments for the credit card and see all of those payments going directly into their account. Important to note, our solutions are intended, and we anticipate and expect they'll all be able to be integrated into accounting GLs like QuickBooks, Xero, et cetera.

Slide #8, Newtek Payroll Solutions. They'll be able to make payroll directly from the dashboard, see all payroll information, whether that's taxes that are escrowed, taxes due that are coming up, employee salary, be able to sign off on payroll, right from the dashboard, be able to purchase payroll from Newtek. So I think it's important to note, as clients come to us, if we're a bank for depository services, we can also offer them the payroll solution right on the dashboard, we'll be able to margin pool across all these different items.

Tech Solutions. This will give our clients real-time data to the website, how effective is that website. These are all things we do today. So this isn't fairy tale. This isn't something we're trying to do in the future. Every solution we've talked about we currently do today. So you'll be able to go to our dashboard, look at how many people visited the site yesterday. How many of them were unique visitors, the average time on the site, the bounce rate, the activity from organic search, from SEO, tremendous information coming in from the dashboard. And the storage component, looking at all the important documents that one might have, Articles of Incorporation, operating agreement, workmen's comp policy, general liability, listing of all buy sell agreements, real estate leases, et cetera.

Look, when we talk about the dashboard and the importance of it to the company, whether it's a BDC or as a bank. The Newtek dashboard harnesses the power of Newtek, and it gives you the ability to monitor and visualize your business on real-time in one place. It's also the one dashboard that's going to help you track your key performance indicators across banking, lending, processing, bill pay, payroll, website, accounting and other important information. The dashboard will also be customizable. We look to add things like tax and digital bookkeeping at some point in time. It also gives us the ability to bring in third-party provider information. Maybe you've got bank accounts or business elsewhere. I've had people say, gee, I've seen in other places. This isn't unique. I beg to differ. You look at entities like Yodlee and Finicity, they're aggregators of data, but it's not their data, it's not their solution. They're just pulling data and putting it into one place. We have something that's well beyond that. It will be a tool for a business owner that doesn't really want to go away from us because of the value-add that we give them. Looking at the center of the NewtekOne dashboard, as I said, these are services that are currently provided by Newtek, directly by Newtek. It gives you the ability to transact directly from the dashboard, and that dashboard is customizable.

Moving forward to Slide #40, investment summary. Look, we've consistently outperformed the Russell and the S&P over a decade, not an easy thing to do in all different kinds of markets. If you're looking at us for our lending talent and expertise, we've been doing this over 19 years through 2 of the worst credit moments, the '08, '09 credit crisis as a nonbank lender and the current pandemic, which was extremely challenging. Our interests are very much aligned with shareholders. Management and the Board own 5.1% of the outstanding shares. We do what's in the shareholders' best interest. Our interests are aligned. We've demonstrated an ability to succeed in all different markets. Most importantly, the company thesis is predicated upon this great segment of the market that's very favorable, both in Washington on Main Street, independent business owners, small and medium-sized businesses. We've used technology as a solutions provider to be a disruptor in our industry demographic, whether it's a BDC or another corporate structure, and we will always be an innovator. That's one thing Newtek has been. We've always been an innovator, which really underscores the reason why we've been able to perform the way we have.

I appreciate your time today. I'd like to turn the financial review over to Nick Leger, Chief Accounting Officer.

Thank you, Barry, and good morning, everyone. You can find a summary of our third quarter 2021 results on Slide 42 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 44 and 45. For the third quarter of 2021, we had a net investment loss of $6.7 million or $0.30 per share as compared to a net investment income of $1.7 million or $0.08 per share in the third quarter of 2020. Please note that income related to the PPP is included in investment income. Adjusted NII, which is defined on Slide 43, was $12.6 million or $0.56 per share in the third quarter of 2021 as compared to $900,000 or $0.04 per share in third quarter 2020.

Focusing on third quarter 2021 highlights, we recognized $12.4 million in total investment income, which is a 16.7% decrease over the third quarter of 2020's total investment income of $14.9 million. Interest income related to the fees from the PPP was the primary driver for the decrease. We recognized $269,000 of income related to the origination of PPP loans on $6.4 million of PPP loan originations during the third quarter 2021 as compared to $3.1 million of income recognized in the third quarter of 2020 on $82.5 million of PPP loan originations. There were no distributions from portfolio companies in the third quarter of 2021 as compared to $2.2 million in the third quarter of 2020.

Moving on to expenses. Total expenses increased by $5.8 million quarter-over-quarter or a 43.7% increase, mainly driven by an increase in SBA 7(a) loan referral fees due to higher loan origination volume, also interest related costs and other loan administrative expenses. Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the third quarter totaled $22.4 million as compared to $1.6 million during the same quarter in 2020. In the third quarter of 2021, NSBF sold 205 loans for $148 million at an average premium of 13.04% as compared to 16 loans sold during the third quarter of 2020 for $11.8 million at an average premium of 11.79%. The increase in realized gains is attributable to higher SBA 7(a) loan origination volume in the third quarter 2021, combined with higher average premium prices when compared to the third quarter of 2020. As I mentioned earlier, income related to the PPP is included in investment income, not in realized gains.

Moving on to realized losses on the SBA nonaffiliate investments for the third quarter of 2021 was $3.2 million as compared to $2.4 million in the third quarter of 2020. Overall, our operating results for the third quarter of 2021 resulted in a net increase in net assets of $16.6 million or $0.74 per share, and we ended the quarter with NAV per share of $16.23.

I would now like to turn the call back over to Barry.

Thank you, Nick. Operator, we'd like to open up the call to Q&A.

(Operator Instructions) We have our first question from the line of Richard Molinsky from Max Ventures.

Congratulations on continuing to execute. I just have a couple of quick questions. Is there any plans for any distribution of dividends from the portfolio companies, is the first question. The second one, what is the earliest time that possibly this acquisition with National Bank of New York City could go through? What's the earliest? When is the latest date? Because I think that would be a major benefit based on your track record, getting that deal done?

Richard, on the second question, we originally back in August, give an indication 6 to 12 months, at this point, I believe that given the timetable, I think we're probably going to be closer to the 12 months. And therefore, this is just a guess at this point and it's a total guess based upon the creation of a proxy of votes, discussions with regulators and obviously, we know that there's a lot of changes going on at the Federal Reserve and the OCC right now. So I think that you're looking at a third quarter would be the best guess for a close. And regarding the dividends, what the portfolio companies do at the end of each quarter is make a decision in their best interests, whether or not to distribute dividend income up and best use of that. So the portfolio companies have been able to work with the BDC to provide funding. They're generating quite a bit of cash, the projection for NMS this calendar year is $14 million, projection for NTS $6.5 million. The projection for Newtek business lending, those 2 numbers are EBITDA numbers. Newtek business lending as a lender of say between $4 million to $5 million. So the reasonable amount of income generated from those businesses and cash that it can basically provide the BDC to lend or prospectively use that cash to buy back debt that's expensive, which is, I guess, part of an overall plan that we disclosed today. So I can state for the first 3 quarters, that's where we wound up, and we'll see what happens next quarter. And those -- that cash and that earnings can also be distributed at any point in time. They don't go away. In the BDC world, the portfolio companies have the opportunity to retain for periods of time and then distribute. Don't have that luxury at the BDC, and I call it a luxury, it's also a benefit to shareholders because they get a more full amount of the dividend. But given that we have a $3.15 quite healthy dividend this year, and projected adjusted NII of 340, we think we've had a pretty good year so far.

Your next question is from the line of Mickey Schleien with Ladenburg.

Barry, this year lenders, including Newtek, have had a lot of positive trends providing tailwinds, including things like the strong economic growth and a very low default environment. I'm thinking next year will be more challenging with forecast for lower growth and the Fed already announcing that they're going to end quantitative easing and potentially, they'll start to tighten. I'd like to understand how you're thinking about those risks in terms of managing Newtek's balance sheet next year?

Mickey, thanks, and it's an important question. I think that what we're seeing -- and we all know it's a strange. It's kind of a country that's split down the middle. We've got tremendous loan growth needs. And you could see it from our pipeline, both in October. So there's plenty of businesses right now that have optimism, they're flush with cash. So we don't see loan demand being weaker. Relative to interest rates and interest rate changes, we've been somewhat surprised. We made a decision to hedge the 504 portion of our portfolio, which is a fixed component and the nonconforming portion of our portfolio [wasn't] a fixed component. And I think that's worked out well for us. But even the last couple of days have been somewhat surprising with high PPI numbers and rates still seem low because the government keeps buying bonds back and keeping rates low and providing liquidity. So I think that we are in good shape for next year. $3.4 would be a lofty number if we remain as a BDC for the full calendar year but given the $0.65 projection in Q1, I think we'll have a very good year for next year, particularly given where market clearing dividend yields are for most BDCS, looking at this as a BDC. If we do convert to a bank, obviously, the financial technology-enabled banks, [Libor] banks, the lending clubs, the SOFR, et cetera, those are trading at different multiples, and there's exciting opportunities there as well for us. So whichever way we go, we're excited about our future. And the small and medium-sized business market is very strong right now.

Barry, do you think your demand profile for loans is a leading indicator? And perhaps the market is just underestimating how strong the economy could be next year?

The market is underestimating the strength of the economy, particularly with the amount of COVID dollars that are still out there, other government stimulants, these are unprecedented numbers and the Fed's insistence on keeping interest rates low. So I think that the government interaction in the market and assistance to consumers and individuals will further propel the economy.

Alright. Just a couple more questions. You mentioned the retained earnings of the controlled portfolio companies to help them fund their growth. In your first quarter 2022 guidance for the dividend as a BDC, what have you assumed for capital retention in those controlled portfolio companies?

Mickey, I appreciate the question. I can't give you that breakout at the moment.

Okay. And my last question. If you could just remind us the restricted cash on the balance sheet. I think it has to do with PPP. Just where is that cash going to go? And when is it going to be used?

Yes, the cash on the balance sheet that falls into the restricted category is primarily from PPP loans that are basically forgiven money, comes from the government and then we distribute it to the participation certificate holders, which sets off balance sheet for us. So that money moves off our balance sheet.

Over 1, what period of time?

Pretty quickly.

Our next question is from the line of Matt Tjaden with Raymond James.

A first one, kind of following up on the bank holding company conversion timing. Based on your earlier commentary, is it fair to expect that the 2Q and 3Q dividends next year will be paid on a BDC structure?

I would think that if that holds, Q1 and Q2 are highly likely. That gets you to July 1. So if the conversion occurred in July, August or September, so I don't want to forecast this, but there may or may not be additional dividends paid before the final conversion.

That's helpful. Another one for me, maybe following up on the portfolio company dividends. Would you expect any portfolio company dividends ahead of the conversion or kind of continue to retain capital?

I think that, obviously, that depends upon -- I would think that those will wind up being utilized in some way, shape or form to continue to fund loan growth, which is growing to pay down expensive baby bond debt. I think those targets are out there for the utilization of that capital.

Last one for me, maybe on the 7(a) funding levels. I know it's a little early. Any high-level color you can give on where you're expecting 2022 fundings to kind of settle out in relation to maybe 2019 or 2021 levels?

Yes. I think that we'll probably look at a lower end of the boundary of $700 million. We haven't given that out yet, but I'm okay using $700 million at the low end of the boundary.

The next one, we have the line of Paul Johnson with KBW.

My first question, you addressed the timing of the merger, which I appreciate but I was wondering if you have any other updates in terms of how conversations and meetings go on with regulators and how progress has been tracking along with the merger process, if you're able to provide any of that. Yes.

That's a no, no. I'll speak like our current and former President. I don't divulge conversations within, yes, I couldn't do that. But I think that one can assume that we are on target and nothing has changed from recent conversations that we have, that we've had with the public markets.

And then for the dashboard, the NewtekOne dashboard, how far along are you with the launch of the product? Is that something that you're expecting to have ready to go and launch kind of around the time of the closing of the merger? Or do you expect there to be a little bit more time and investment required to get that up and running?

Yes. There's no question that we will have the dashboard, and I'll use this word in some form at the time of the closing of the transaction. We'd like to have the dashboard ahead of time in some functional use prior to that because we plan on using the dashboard, whether we're a BDC or whether we're a bank. So obviously, you wouldn't have the depository component, but the value to the dashboard is to give the business owner a tool. Now we think that the bank issue makes it special. Because if you think about businesses, they're constantly moving money, wiring money, dealing with the bank sort of as core. So the bank makes the dashboard more relevant but even without the bank, the dashboard would be a great tool for businesses. So we hope to have it available in some form or not maybe as early as the second quarter.

I appreciate that. And one question on the expense side for this quarter, salaries, in fact, it obviously came in quite a bit lower than the previous quarter. I would just kind of expect as you guys have made a lot of hires, expanding the company and getting ready for potentially the bank merger and possibly making more hires as time goes on here. Is that -- would you expect that to be kind of an anomaly quarter and potentially run maybe higher $4 million to $5 million or so similar to the previous quarters? Or do you see this quarter as kind of a potentially a good run rate?

I think we might see those expenses notch up.

Understood. And then on the balance sheet, just curious, so where -- could you provide any kind of level maybe of where you're comfortable potentially running your leverage debt to equity? I understand pro forma, you guys are around 1.2, but it looks like you're set up for a pretty active quarter of this quarter in 4Q. If that turns out to be true and 200-plus of SBA originations, do you expect there to be any kind of limitation from the leverage aspect?

Look, I would say this. We try to pay attention to what the market accepts. I will recall a conversation, I think it was 3 or 4 years ago with one of our analysts. And I think we were at like 0.83, and then the convention was 0.79, and they said, how high would you go? I said 0.99. I said it's not a problem managing that. I was saying that somewhat tongue-in-cheek. In other words, I would never want to go that high because the market wouldn't appreciate it. Now one of the reasons why we run higher than most is because that broker receivable, it overlaps at the end of each quarter. So I mean, I think that we're very mindful of what the market thinks is risky versus not despite the fact that we have a different opinion over managing risk. I mean we've managed 4x leverage on our balance sheet before we were a BDC, and we did fine. We survived the '08, '09 credit crisis. So I think to answer your question, we may have a little bit more leverage in Q4 but then again, we may also be able to pay down some of the baby bond debt. So we're swapping one data instrument for the other.

Got it. So it doesn't sound like it should be something that would slow down originations for the quarter. Is that right?

No, no, not at all.

And then lastly, just a broader question. I was wondering if there's anything you can speak to that's in the infrastructure bill or the Build Back Better plan or any, I guess, any piece of legislation that's been floated out there that you've identified as being beneficial for the SBA lending program.

Yes. The one thing that I have heard, and I only say this because the bill changes every day, what's in it, what's not in it. At one point in time, I understood that at a fairly nominal cost, and I say that also tongue-in-cheek, I think it was about $1 billion. The Build Back Better had a draft in it that created 90% versus the current 75%, subject every year to the budget being approved, meaning that the program would for a 5-year window based upon BBB, Build Back Better, be a 90% program for the 7(a) program. In addition, it would also waive certain fees. So you get a higher advance rate, you get higher prices on bonds, which would be favorable. Put it this way, whether it occurs or not, it's indicative of -- it's indicative of the government favoring small and medium-sized businesses, SBA lending, et cetera. And I think that from our perspective, I think that it's quite of a coin flip as to whether -- put it this way. If BBB gets done, I think it's more likely than not that it gets in there, but that's pure speculation on my part. And I couldn't tell you whether the recent draft has it in there or not or for that matter what the recent draft is.

(Operator Instructions) We have our next question from the line of Adam Morton with RBC.

Not really a numbers question here, but just looking down the line as you guys hopefully transition to a bank, do you see any other opportunities in a bank structure that would be like lending areas that typically and historically, you have not been in that you could actually branch into when you become a bank -- if you become a bank, as you say.

Yes. So I need to be somewhat circumspect about talking about the bank because I'm very limited to what I could say although I do believe that having the ability to diversify lending programs with a lower cost of capital would be overall beneficial. In other words, it will enable us to meet our return on equity guidelines and diversify the risk away from some of the programs that we have today.

But you can't really comment on that.

I can't comment whether we would do it or not. So it's not up to me fully. It's up to regulatory authorities but your suggestion sounds like it makes sense.

There are no further questions at this time. Mr. Sloane, please continue.

I appreciate everyone's attendance and investment in Newtek. We look forward to reporting Q4 and continuing our successful record. So thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.