NewtekOne Inc (NEWT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Newtek Business Services Corp. Full Year 2020 Earnings Conference Call. (Operator Instructions)

Please be advised that today's call is being recorded. (Operator Instructions)

I would now like to hand the call over to Barry Sloane, President and CEO of Newtek Business Services Corp. Please go ahead.

Thank you, operator. And wanted to welcome everyone to our full year 2020 financial results Conference Call. I'd first like to also welcome to the call, Nick Leger. Nick is our new Chief Accounting Officer. And Nick, I'd like to thank you and your entire team, particularly Elise Chamberlain for helping us obviously get this 10-K out the door and helping us close out our year. We had a pretty quick transition in February, but we're thrilled to have you in this position and you joining me for the call today.

I think also this is a good demonstration of Newtek being nimble and having a deep bench of talent, which we've always been able to have and being able to promote people and be ready right on the spot. We're very proud of our results today for the calendar year of 2020, plus our forecast going forward.

Today's results are a reflection of the 420 employees that work for Newtek. They've done a great job. The one thing I could say, particularly given the current environment that we're in, the reason why we've been able to do as well as we have been able to perform in 2020, and our forecast going forward, is because we care. We care about our clients. We care about our alliance partners, and we work really hard to achieve great results every single day.

I'd like to position everybody to the PowerPoint presentation that is hung on our website in the Investor Relations section. You can follow along with the presentation in the IR section from the PowerPoint. And we could take a look at the forward-looking statement -- disclaimer.

And then go forward to Slide #2, always important that we try to start off with our historic performance as Newtek is a 23-year old company, established publicly in September of 2000. If you take a look at our historic financial results, and these numbers are as reported by Bloomberg: our 10-year return, 405%; 5-year return, 136%; 3-year return, 45.6%. Last year, obviously, was a tough year for ourselves and BDCs, negative 1.5%. But if you go take a look at what we've been able to do so far year-to-date through March 22. And it includes reinvested dividends, but I don't believe the dividends have actually included in that number. It may or may not, 33%. So we've clearly been outpacing all indices and our competitors. Once again, I give credit to our staff.

Moving forward to Slide #3, really focusing on Newtek's business model. Well, 2020 was a real challenging year. We were able to shift our business model quickly to meet the needs and the demands of our clients in the marketplace. I think Newtek has proven that it's systematically vital in its partnership with the U.S. government to the economy during this pandemic. I think that Washington and really, everybody -- well, across the United States really is the importance of small business and it employs 40% to 50% of the workforce. And we partner with the government in our SBA programs and some of the other things that we do to really help small and medium-sized businesses, the engine of economic growth.

In calendar year 2020, we paid an annual dividend of $2.05. This paid out of taxable income. It was the first time we actually had a decrease in our history of being BDC, and in light of the unprecedented market conditions on a per share basis. We thought it was a fairly light decrease. I believe in our first year of operations, we originally came out with a dividend forecast of $1.53. So one of the reasons why our company and our stock has performed well as we've been able to increase our earnings over our history, and subsequently our dividend.

We're currently firing on all cylinders. We've got many, many levers in the BDC portfolio that help generate income and generate dividend. And as the U.S. economy begins to open, we have a renewed focus on all of our drivers. We think we're very well positioned in 2021 with our business -- our company's financial and business solutions. And we're really excited about it. We're going to go through the presentation today, and we've got forecast across several key metrics that will demonstrate future growth.

Going to Slide #4. The company has increased its 2021 annual dividend forecast from originally $2 to $2.50 to $2.40, $2.90, a midpoint of $2.65, which is an increase of 29% over the previously given guidance. Adjusted NII, obviously, the first quarter comes up pretty quickly, 5 or 6 weeks, what we reported. So Nick, we'll have some quick work to do here.

The company anticipates achieving a record adjusted net income for the first quarter. We don't know what that is yet. Obviously, we're still closing out the quarter, but we clearly think it will be north of 1% adjusted NII. A lot of that is based upon the renewed focus on 7(a) lending as the economy opens up, help from our portfolio companies as well as success in the PPP program. We are looking at a full year 2021 7(a) loan fundings. We stated at $600 million. I'd like to make that a range of $580 million to $600 million, in SBA 504 fundings. We are forecasting around $35 million to $40 million for the first quarter of 2021 and approximately $125 million of 504 in fundings for the full year. And we'll talk about what we did last year as 2020 and 504 fundings, what you're beginning. These are one of the cylinders we're talking about that ex -- helps the core business continues to grow and round out the breadth of our offerings to clients as well as the basis of earnings and dividends for our shareholders.

We're also excited about our nonconforming conventional loan program. We're in the process of negotiating 2 new JV agreements. They're actually done. We're in the documentation phase. Hope to finalize them shortly and start better not conforming conventional loan program, another one of those important cylinders. In PPP lending, we anticipate funding between $350 million and $400 million of PPP loans by March 31. If Congress extends the PPP program through June 30, which has passed The House, and is anticipated to pass The Senate. Newtek's small business finance that believes can ultimately fund about $500 million. I will point out that the loan size for this particular draw, much smaller than the first row. So some of the metrics that you saw relative to the fee income probably will be skewed to the higher side.

To clarify that that's on a fee per loan basis since a lot of the loans were smaller and fall into the smaller bucket.

On Slide #5, focusing on full year 2020 financial highlights. Net investment income of $32 million or $1.51 a share, a huge increase, obviously, based upon the PPP income coming through. Important to note that the PPP income is viewed as sort of GAAP-based income for BDC or gain on sale that we get from 7(a) of selling the government-guaranteed piece, is qualified income, but it's not considered part of NII. So therefore, you've got different disparities. This will make for different comparisons as we go forward.

But I just think it's important to note that all this income is good income, qualifies for the dividend. And we're proud to be able to shift our business, and there's many levers in our organization to be able to provide all the solutions, both financial and business to our large audience of 30 million businesses in the United States.

Adjusted NII of $43.4 million or $2.05 a share. That was a decline of 12% on a per share basis. We paid out basically what we earned, which we're proud to do. Total investment income of $92 million for the 12 months, an increase of 55% of a total investment income of $59.3 million for December 31, 2019. Debt-to-equity of about 1.35 at December 31. This will be vacillating throughout the year up and down, but that's a very reasonable, manageable number for us to adhere to.

Total investment portfolio increased by 1.8% to $671 million at December 31, 2020. Our net asset value decline on a year-over-year basis, we still believe that there's pandemic effects that reduced valuation, although we also believe that the stimulus that we're having in the economy is certainly improving all asset values, and we do -- and hope that we can anticipate seeing the NAV rise again in the future.

I will comment that NAV up significantly from the end of the first quarter where we really reduced a lot of asset valuations. I think we're about [15 08] in Q1 of 2020. So we had an increase from Q1 and increased sequentially also from Q3, which we'll talk about on the call.

Slide #6. We chatted about NII being driven by in 2020, $1.2 billion of PPP loans. And for the 12 months adjusted NII was declined primarily based upon reduced 7(a) funding. We actually suspended all lending activities from -- at the beginning of March, which hurt the first quarter portfolio. We did not build a pipeline in the second quarter. So it's almost as if we didn't lend for 6 months out of the year. We think that was prudent. We think that was the right thing to do. We had limited visibility on the pandemic, a lot of government officials, as you could see, changing their predictions: mask, no mask; shutdown, no shutdown. They had problems figuring out what to do as well. We paused. We do that for the long term. It's a company that's been in the business over 23 years, and we always look to do the prudent thing for all of our stakeholders. And obviously, that includes our shareholders.

Slide #7 talks about the payment protection program. I won't spend much time on that. We've done that in prior calls.

Slide #8 as we discussed, we did $1.2 billion of PPP loans in calendar year 2020, picked up about 10,500 new borrowers. On a comparative basis, we did a lot of units last year and a lot of loans. If you add up 7(a) PPP and nonconforming and funded for, you probably got to about $1.5 billion, a lot of activity, okay? There's a lot of people working really, really hard. Working evenings, working 6, 7 days a week. We really -- we did a great job, and I'm very, very pleased and proud of the work that our staff put into service our community, which is the business clientele across the United States.

In addition to funding the loans, we estimate that 130,000 borrowers' employees were retained. We funded about 2 years' worth of loan production in about 6 months of time. We're able to go into our own portfolio and offer all of our borrowers of PPP loan. And we partnered with a lot of financial institutions that have been alliance partners for many years to sell 100% participations.

On the third round, the PPP, we anticipate, which we're right in the middle of funding between $350 million to $400 million at March 31. And we hope that Congress extends the program just a little bit more time to put some more loans through when we get to the $500 million mark.

In the 7(a) space, I would say this was an underperformance. But I also would point out, the resources are spread across different businesses in lending. And we obviously had a shifting of our resources, a lot shifted, obviously, into the PPP program. And also, in looking to close transactions in Q4, you've got appraisals moving around, leans popping up with borrowers that are unexpected due to the pandemic. Economy, it looks like they're open and then they're getting shut, such as things that occurred in California. New York and Illinois, on that basis, you might have a loan that might look good when you took it in because you think things are opening up. And then you get to the table and boom, all of a sudden, some lean show up, some liquidity vanishes, and it makes sense not to do that kind of a loan, such as the volatility in lending and forecasting.

But once again, as a company that's been doing this for over 23 years public since September of 2000, we're proud to historically have been able to deliver what we put out into the market, even if you've got to have different levers going up, some levers going down. It's just -- it's a diversified model that works very, very well.

Slide #10, we talk about some more lending highlights. We talked about our 504 business, and we closed $87.2 million of 504 loans. We're forecasting approximately $35 million to $40 million for the first quarter. We're looking at a full year of $125 million. We renewed our $75 million line of credit with Capital One for 504 loans. We also announced yesterday, we closed on a new $100 million facility at Deutsche Bank. Obviously, we believe very strongly that business is going to be growing, and we're happy to say that NBL contributed $1.6 million in dividend income in the fourth quarter of 2020. We hope that trend continues, that would give us $5 million or $6 million of dividend potentially for this calendar year. That's an engine we historically have not been able to have on a regular basis and relied upon.

On Slide #11, we talked about our dividend payout, some of the stuff we've already covered. Most important aspect here, once again, is an increase in our expectation of a -- midpoint of a dividend range of $2.65. Once again, the company has historically paid its distributions in the form of dividends of taxable income.

On Slide #12, something that's forward-looking. Obviously, COVID was a problem, but there are certain positive things that have come out of COVID. One, we've demonstrated to ourselves and our staff that we're able to work remotely, and really do not need that very large real estate footprint. We've had leases that have expired, about to expire or should expire within the next 12 to 18 months. In San Antonio, Milwaukee, Irvine, all of those offices are now gone. We have a New York City lease that we believe will be sublet without a loss at the end of this month. Phoenix, our office lease was combined. We shrunk our footprint, and we've maintained our office space in our data center, the online data center, saved us quite a bit of money. In Indiana, we have 2 leases that will expire coming up, and we'll probably have that staff work remotely. So this is one of the positive aspects of COVID, obviously, relating to being able to cut money spent on real estate.

In addition, we've employed certain tools like time tracker to work with our staff. Time tracker is a tool that will enable us to observe worker productivity and most importantly, reward them for their benefits. So workers that are on the phone, making outbound calls, speaking to customers and denoting what they do within their workday will be rewarded for their efforts. We've seen tremendous results for that in 2020, and we think this is going to continue throughout 2021. We also believe that with Newtek and its portfolio companies, employees clearly have benefited from not having to commute commutation time, we don't think is well served. We don't think it's healthy, putting even the pandemic aside, and to give somebody an extra 5 hours to 10 hours of ability to work from home, we think is valuable. Obviously, a lot of discussion and debate going on amongst CEOs and companies out there as to what they're going to do going forward. But I think that we're going to work with our staff and find out what works best for them.

Slide #13, we issued the largest bond deal that we've got to date, NEWTC trading on the NASDAQ, $115 million offering, sold out very quickly. Issue was rated BBB+ by Egan Jones. A significant amount of the proceeds were used to retire the company's outstanding [6.25] notes due 2023.

Slide #14. As we look forward, I think once again, we've demonstrated and emphasized that we are adaptable and flexible in our business model and being able to work remotely. And we think we're going to get more and more efficiencies and economies out of that. We also think that our business model is ideal for a post-coronavirus economy without the use of branches, brokers, business development offices and a limited sales force. We're able to speak to end customers and provide them the solutions that they need. On a going-forward basis, the branchless broker-less, BDO-less, bankers' providers of financial and business solutions are going to be major winners. Most customers don't want to go into a branch we see a salesperson. They'd rather do it telephonically. They'd rather do it on demand. This is the business model with the company has been setting itself up for over the course of 20 years. I'd like to say we're not an overnight success. It just took about 20 years, and we believe that the market is finally moving our way in terms of what we do and how we do it. We don't just do it with the software and the technology, but we do it with a have to know how to use the software and technology, extremely important.

We look at what we're doing in the IT market. Providing virtual desktop, remote mobile computing, very valuable. We obviously -- our loan products are really catching steam right now is SBA programs that we're very involved with as the #1 nonbank SB lender in the United States, third largest, including banks, clearly becoming more and more mainstream and valuable to many different businesses.

The Newtek insurance agency really relooking at people's risk out there and being able to provide different solutions, whether it's for health or P&C, many of these existing policies need to be relooked at and checked due to what occurred in the pandemic. We've got some great payment processing solutions, which we'll talk about, that are really designed very much for this new explosion in e-commerce, whether it's our billing software for commercial billing, our new tech payment systems go take a look at our new website, Newtek payment systems.com that we can white label or brand for our alliance partners. A lot of exciting products and some new hires and payments that we'll be talking about.

Slide #15. As we talked about, largest nonbank SBA lender, third largest, including banks, long history in the business. We're not new to the rodeo. We've been lending for over 18 years. We've issued 10 rated securitizations, all of them have maintained their rating have been upgraded by Standard & Poor's. Love diversification. We'll talk about that from a credit standpoint. We're not a lender that's got a lot of gas stations or restaurants. It's very diverse. And diversity was really important in the pandemic, not being overly positioned in the densely populated geographies of New York, Los Angeles and Chicago. Very, very helpful to us, very helpful during this pandemic.

I should point out, one of the things to talk about on the 7(a) area, particularly for the analysts, pricing of 7(a) loans really doing very, very well, particularly in the first quarter. So we can talk about that in the Q&A. But I think that we have a lot of good variables and metrics that are moving in our favor.

Slide #16, growth in loan referrals, an important slide. We've received an excess of 329,000 loan referrals and units for the 12 months last year, almost 102,000 in the fourth quarter. It's a database of customers. It's very deep. Cross-selling efforts are being realized. We've got an 18-year track record of loan assembly underwriting and technological expertise, making a leader in the area of lending, using technology. And we look forward to returning to a lending process. It's more normalized, where we're not that focused on PPP, and really expanding our breadth of lending opportunities. People do compare us to fintechs because of the success that we've had in integrating technology to lending solutions. However, we really don't believe that we're comparable to an OnDeck or Kabbage or Lendio. It's more than just a piece of software. You've got to have staff. You've got to have credit people. You've got to have servicing people. These businesses need that mentoring and guidance and help, although we do have products, particularly at the very small balance area where you can kind of get quick funding on small dollar amounts. Lending is and will always be a credit story. And we have done a great job of melding our credit experience with technology.

Going to Slide #17, important aspect of seasoning. We talked about this previously. We're moving into the belly of the default curve, 35.6 months, weighted average seasoning on the portfolio. We believe that approximately 60% of defaults occur between 24 and 48 months. And there's a nice article there from Standard and Poor's that also talks about the fold curves.

Slide #17 point out the currency rate of our portfolio, it's 95.2%. I think this will be a little challenging as we go through the pandemic. But as we've demonstrated in previous calls to those that are familiar with our business, businesses will possibly get behind or get in trouble for periods of time. But due to the multiple personal guarantees of owners with all personal and business assets pledged to a loan, many of these loans that go into "defaulted" category actually come back and fully pay. So we feel our portfolio is in real good shape. We're proud of our performance. Our servicing team headed up by Gary Golden and Al Spada, Robert Haas have been extremely helpful in working with our borrowers, mentoring them and doing what's required to keep those businesses going and pointed in a very positive direction.

Slide #18 and 19 are slides we've historically left in our deck. They talk about the cash creation and the economic loan sale without getting too much into the weeds, which we'll probably report in Q1. Prices are significantly up in the 7(a) market.

Moving forward to Slide #22, this is what a 7(a) loan looks like. For those investors that are not familiar, we leave this up here. If you get to your homework to explain what a 7(a) loan is and how it works.

Slide #22 is -- obviously, gets to the point, very high-return on equity business. Because when you make a 7(a) loan, you get origination fees, you get servicing income, and you typically get a gain on sale. And we've experienced that. And you're left with no balance sheet in 504 lending. In the 7(a) business, you are left for the balance sheet, is the SBA required you to keep at least 25% of the uninsured piece on the books. With the current relief act that's in place, the guarantees are actually 90%. So we're left with a 10% piece and leaves us in a much more profitable situation. With additional leverage because you've got less equity in the deal and also a higher gain on sale because you're selling a higher premium of 90% versus 75% into the market.

Slide #23. Our 504 program, which we're real happy. Once again, these things do take time. Tony Zara's team has done a terrific job in getting us on track. We're forecasting $35 million to $40 million of fundings in Q1 at a $1.6 billion dividend contribution, $125 million of 504 loans for this calendar year. And we're really appreciative of Capital One Bank providing us historic financing in this particular area as well as a new funding partner, Deutsche Bank.

Slide #24. What we refer to as Newtek conventional lending NCL, which is our joint venture portfolio with BlackRock TCP. That particular joint venture was suspended during the pandemic, we have not turned it back on yet. Portfolio has performed very well. There's only 1 loan, I believe, that is behind in that particular portfolio. It's really done very well. It's a fully guaranteed borrower guaranteed portfolio, 65% owner-occupied commercial real estate, and that will most likely wind up getting contributed to a securitization down the road.

On Slide #26, prospective joint ventures. We've got 2 institutional partners. We're finalizing our documents, and we're excited about that. We're excited about relaunching our conventional lending business through JVs.

Slide #27, talking about our payment processing business. We have a fair -- equity fair value of $111 million on that. There's some comparisons in the market of other payment processors. We're very constructive, obviously, about this particular segment. On Slide number 28, looking at points to consider as to why 2020 was a tough area for us. In the payment space, we do have a reasonable amount of customers that were in the New York area. We're starting to see recovery there as that market is opening up. We're also seeing recovery as -- there's a tremendous increase in consumer spending at local and state economies, particularly with the consumer checks going out from COVID relief bills. We anticipate seeing good growth in 2021. We've added senior talent to the management team, which we'll chat about shortly. We also have a portfolio of taxi drivers that was severely impacted. That's about $1.3 million of cash flow, which amounts for a good chunk of the decline. So we look forward to the airlines opening back up, air travel picking up and being able to recoup some of the income from that particular segment.

Slide #29, we announced yesterday the hiring of David Simon, Chief Operating Officer of NMS. David is going to be supporting our President, Mike Campbell, in his efforts to grow the business and directly reporting to the CEO of that unit. Very excited about David's hire. David, 25 years' experience, senior jobs. Visa and Citigroup, where he was basically responsible for the small business segment, customer experience, had a very senior job at One Bank West, which is now CIT bank. David brings us A class talent, A class managerial experience, and is going to be really working to improve all aspects of the operational side of our payments business. David will also be sitting on our Management Committee at the BDC and helping us grow BDC activities over the course of time.

Andrew Jadatz, another hire we announced. Great experience, SVP, Product Development. Came to us from Bank of America is going to make sure that our products are best in breed. Shown excellent SVP business development recent higher, he wants to make sure that they get distributed to our channel partners and our very large customer base that we have in the portfolio of over 2 million entities in the database. And probably 900,000 to 1,000 -- maybe close to 1 million in the new tracker system at this point in time, and probably close to 100,000 paying customers.

So we're really excited about Shawn, Andrew and David, refer to them as a class of '21, and we think they're going to give our payments business a tremendous lift.

Slide #30. We talked about our payment processing, POS solution, Newtek payment systems. Really welcome people on the call to go to the website, newtekpaymentsystems.com. It's an all-encompassing system, can process payments, integrates with e-commerce, integrates with all food delivery services, integrates with 3 major software accounting GLs, Xero, QuickBooks and Sage. Also integrates with our payroll solutions. So automatically, time and attendance function fully populates their payrolls, so we can provide you payroll. Workman's comp, health and benefits, 1 full solution. Depository alliance partners are going to be able to manage and operate accounts for payroll and payments distributed through run 401(k) and partnering with our software.

Slide #30. Our technology portfolio companies. We're excited about our turnaround in NPS, our Phoenix based cloud computing portfolio company that provides managed services. We have recently announced that we've merged all of our tech units into 1 particular unit. We've had some tremendous cost savings. We performed with a $4.3 million of adjusted EBITDA in 2020. And we are forecasting 2021 to come in somewhere between $5 million to $6 million of EBITDA. We're excited about our tech business, when people say, well, geez, what is it? Look, we provide solutions that independent business owners who can't afford a CIO can't afford a they come to us, we manage their hardware and software 24/7 through virtual desktop, through storage, through disaster recovery. All their key operating systems can be managed in our cloud. We can also manage workloads in Azure, AWS, Google. We can manage workloads on-prem. We're here to help businesses manage their technology with more safety, security and a lower cost. You can wrap that all up into cloud services or cloud computing. We have a slide to talk about that on Slide 33.

Also, equally excited about our payroll benefit solutions and our insurance agency. We've really added some great talent. We positioned ourselves, adding Samantha Razon to the payroll unit, adding Rick Carpenter, Kathryn Ingram, on the insurance side. We've recently done a nice webinar on talking to independent business owners about the future of payroll and benefits and how we can help them. We're very excited about these businesses. We think that they're going to be able to provide a contribution to our full bundle. We're excited about our lineup. We're excited about our staff positions. We think these 2 units are going to make a nice contribution to our company in calendar year 2021.

Moving to Slide #34, 35 and 36 in conclusion. When we look at Newtek, and obviously, these calls are primarily meant to address analysts and the investor community. And we look at risk and reward, we compare ourselves to other BDCs. We compare ourselves to other investments. Look at that history of performance for our stock, look at the amount of leverage that we have, which we do not think is significant at all. Look at the quality of the portfolio. We have a diversified business model allows for alternative streams of different forms of income. We've got technological solutions that are really important and in vogue for businesses going forward. And we believe shareholders can realize long-term rewards to our unique infrastructure and business methodology.

We've historically been able to grow our dividend on a regular basis. We've got diversified forms of income. And we're really doing a lot of things that are helping us from an operational perspective with respect to cost reduction, utilizing technology and improving the client experience.

In comparison to us to other BDCs, we're one of the few that trades at a significant premium to NAV. We're one of the few that's been able to grow the dividend. We clearly have a different business model. And it's clearly a different-looking BDC. But if you actually look up the definition of a BDC, it is providing financing to small and medium-sized businesses and mentoring. And that's what we do. I think people are investing in Newtek as a BDC, clearly is a diversification from other BDCs, taking advantage of the tax benefit that we get. But a lot of the other BDCs are overly concentrated, clearly. In leveraged loans, mezz debt, things that have hidden inherent risk in the asset quality. We believe our assets don't quite have that risk, and we don't have that leverage inherent.

In addition to that, we're able to generate high returns on equity due to our lending business, having velocity, being able to make loans and sell them off for gain as well as the portfolio companies kicking in and growing over the course of their history.

On Slide #36, if you look at catalysts for going forward, renewed 7(a) efforts, growth in this 504 business, resume joint venture lending activity in the conventional loan market. These are all things that are really attractive catalysts. The return to growth of our processing business, looking at a $14.5 million adjusted EBITDA target. And lastly, we're still hopeful that the AFFE proposal that will allow financial institutions, a better access to buying BDCs without the expense ratio messing up their portfolios. I do think that is important. I will also add that one of our catalysts is piercing the $500 million market cap level, which was done recently, and over $500 million -- obviously, a lot of institutions that can't buy under $500 million are now able to take a look at us.

Going to slide #37. Once again, differentiated diversified BDC model internally managed. Our interest is very much aligned with shareholders. Everything we do is in the BDC. There are no external fees getting paid out. We're not new to this business. It's an experienced team, our Chief Lending Officer been in the company over 10 years. Peter Downs. I think he's going on as 18th year.

A lot of experience in working together to put this team together. Interest is very much aligned with shareholders, 6% of the outstanding shares are owned by management. Once again, no derivative securities in BDC, SBA leverage. We don't invest CDOs or loans with equity carrers.

I'd like to turn this remaining portion of the portfolio over to Nick Leger. Nick?

Thank you, Barry, and good morning, everyone. You can find a summary of our fourth quarter 2020 results on Slide 39 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 41. For the fourth quarter of 2020, we had net investment income of $850,000 or $0.04 per share as compared to a net investment loss of $3 million or $0.15 per share in the fourth quarter 2019, a 126.7% increase on a per share basis.

Adjusted NII, which is defined on Slide 40, was $9.6 million or $0.44 per share in the fourth quarter 2020 and as compared to $13.5 million or $0.68 per share for the fourth quarter 2019. Focusing on fourth quarter 2020 highlights, we recognized $14.8 million in total investment income, a 3.9% decrease over the fourth quarter of 2019. The decrease was driven by a decrease in interest income, which was attributed to the decrease in the prime rate. And a decrease in other income, which is attributed to the decrease in fourth quarter loan origination volume year-over-year.

Servicing income increased by 7.7% to $2.8 million in fourth quarter 2020 versus $2.6 million in the same quarter last year. Distributions from portfolio companies for the quarter included $2.35 million from NMS; $1.6 million from NBL, our 504 business; $75,000 from IPM; $150,000 from Sidco; and $393,000 from Newtek conventional lending, our joint venture with BlackRock TCP.

Total expenses decreased by $4.5 million quarter-over-quarter or 24.5%, mainly driven by a decrease in interest expense, loan referral fees and other G&A expenses such as advertising. Realized gains recognized from the sale of the guaranteed portion of SBA loans sold during the fourth quarter totaled $11.4 million as compared to $17.3 million during the same quarter in 2019. In the fourth quarter of 2020, we sold 123 loans for $85.1 million at an average premium of 11.42% as compared to 199 loans sold during the fourth quarter of 2019 for $135.1 million at an average premium of 10.73%. The decrease was attributed to lower loan origination volume in the fourth quarter of 2020, offset by higher average premium prices when comparing to the prior year fourth quarter.

Realized losses on SBA nonaffiliate investments for the fourth quarter of 2020 was $2.7 million as compared to $1.7 million in the fourth quarter of 2019. Overall, our operating results fourth quarter resulted in a net increase in net assets of $15.9 million or $0.73 per share, and we ended the quarter with NAV per share of $15.45.

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

Thank you, Nick. Operator, we'd like to open up the call to any questions.

(Operator Instructions) Our first question comes from Robert Dodd with Raymond James.

Congrats, Barry you and your team, getting a very tricky year. Some questions on multiple elements of lending on PPP first, if I can. You've given the fee structure now where it can be above 5%, if the loan is small enough, effectively. Do you expect your blended fee rate on those loans to be north of 5%? I mean you said in your comments, you expected the loans to be on the smaller side.

Yes. I think that, Robert, a better way to think about it without having everything signed you delivered at this point. I think we were about 3.2% in 2020 on a weighted average. I wouldn't skew it north of the 5%. But I'd say somewhere between the 4% and the 5% is probably not a bad way to guess at this point.

Got it. On the 7(a) side, I mean (inaudible), is the reactivation of the PPP program in Q1. Is -- should we expect the 7(a) originations to be a little bit more muted in Q1 and maybe more back-end loaded, given last time PPP kind of took away from your ability to -- because of just a number of hours in the day to originate 7(a)? Or is it going to be a more normal 7(a) year laid on top of the PPP?

I think that's -- it's an important question because, number one, we typically do have a back-ended 7(a) anyway. And I mean the reality of PPP is, it uses a lot of resources. And this was no different than prior years, or 2020, where the forms change, the rules change, the calculation change. So I do think that you will have a traditional back-ended emphasis. But we've also made some changes to process. We've tried to hire and staff up. That's also not an easy thing to do in the current market. I think that your overall thought process that it's more back-ended is accurate. I think it's very fair and very accurate. We anticipate that there'll be less PPP activity in the second half of the year. We'll still be servicing. It will probably start to trail off in May, we hope, maybe June. But it's definitely -- the 7(a) story will be more back ended.

Got it. I appreciate it. And then the tough question, to your point, I mean, pricing in 7(a), the premium today is extremely tight. I mean what's your view on how that could go? I mean, there's a lot of moving parts as we go through the year. But any idea of how that's going to shake out?

Sure. So a couple of factors, Robert, and I know you've developed a nice model in this particular area. Number one think about the difference between the $75 million and the $90 million for the whole calendar year. You're going to get $90s million through September, and then you probably go back to $75 million. The second item was some of the pricing issues are based upon the fact that some of the fees that are normally charged by the government to borrowers have gone by the wayside, so that it creates a higher coupon. The third item is the -- this prepayment speed expectations, which were muted in 2020 as people didn't think that there would be a lot of prepays. We actually saw some decent prepayments, believe it or not. It's a -- we're in a strange scenario. Unfortunately, we all get glued into the TV set, and it's like, oh, my God, the world is coming to an end. A lot of people have a lot of cash in the bank because of government programs, and I'll just -- I'll leave it at that. And I do expect speeds to increase, and that could depress prices. I do not expect these prices to continue at this level. And Robert, that could be the first time you've never heard me say that. Usually, I tend to be a bit of a pricing bull. But no, there is reason to think that prices will not hold the levels, if they will, in the first quarter. And we'll disclose what those levels are, obviously, in our upcoming call, in 5 or 6 weeks.

Got it. I appreciate it. One more on lending, if I can, and then I'll go back in the queue. On the 504 side. I mean yes, -- sorry, $87 million closed in 2020. The target is obviously for that to go up. Can you reconcile for me, though, with the $87 million close that NBL generated a $1.6 million dividend. But you said in your prepared remarks, the target's $125 million for this year, but the dividend could be in 5% to 6% range. Obviously, that's a much greater increase in dividend than it is in closing. Is that related to -- obviously, these loans have to season in certain ways? Is it related to that? Or is it just that the dividend is going to increase because now you've kind of covered the cost, if you will, NBL?

Yes. So the income stream comes from origination fees, which you get on the first and the second at the time of the loan closing, whether it -- there's some construction in there or not. So that's earned upfront. Then you've got the carried interest, which now with additional warehousing lines and a bigger portfolio, will be able to carry those assets. And then you've got the third aspect, which is the amount of seasoning. So the sooner the loans are fully funded, seasoned up, typically within a quarter, then the debentures take out the second loan, that's basically government funding. And then we sell the first loan, and there is an insatiable appetite right now. But the 50% LTV, multiple guarantor, [1.2] debt service coverage or greater. Once we've been able to sell those at net prices of $104 million to $104.5 million.

Our next question comes from Harold Elish with UBS.

Barry, congratulations. Question sort of in a bigger-picture sense. I mean Newtek has had extraordinary success in joint venturing and in partnering with its various banks and financial institutions in order to generate the leads that's been successful and then closing. And I guess the question is, as the financial world changes, and there are more online vendors. I mean are there still potential new partners that you could add to the platform that you think would be accretive? Or sort of has all the low-hanging fruit been picked and is a question of just generating leads out of the existing relationships?

Yes. Harry, I think that we like to look at ourselves as somebody that's not just come to the party lately and put up some software and say, hey, we could do this stuff and it's making a loan, it's an algorithm. I think people that lent based on instant algorithms, they got hurt in 2020. Many of them wind up getting sold emerged like OnDeck. There's another lender too, I can't remember which one it was. So I think that there's plenty of growth opportunity for us in this space because, number one, it's constantly evolving. And the other important aspect of what we do is it's not just software. And it's easier to make a PPP loan that doesn't have a credit aspect to it than what we do in 504, in 7(a) and in nonconforming. Also, if you look at the network of referrals that we have, those are not referrals that are coming from keywords or paid for search, the stuff that's just coming to us reputationally. So I think we're very well positioned for growth. And then you put the other solutions on top of it, which -- historically, we haven't done the best job in monetizing, but that's clearly on the plate, some of the people that we're bringing into the organization and hiring. This is going to be our year to make major investments in talent to be able to reinvest back into the business environment. So no, I'm not concerned about the competition at all. As a matter of fact, I particularly don't think the competition performed that well. And the big financial institutions are realizing it's much easier to partner with or look at the asset creation that we have and try to start it from scratch.

(Operator Instructions)

Our next question comes from Paul Johnson with KBW.

I just have a few. I was wondering you can just kind of broadly comment on PPP this time around versus the first round last year and how that's gone and any of the changes that have been made to the qualifying borrowing base, if that's increased demand this time around? Or any changes you'd like to talk about there?

Yes. Paul, it's been a -- you'd like to think that it gotten significantly better second time around. And there were parts of it that did get better and there are parts of it that I think the government and lenders like ourselves still struggle with. I think the part that got significantly better was the fact that we were able to pretty much automate at the inception of the program to be able to get certain customers into the system that didn't have complicated structures. A lot of these independent business owners have got multiple LLCs with multiple tax IDs, and they use a sell security code in different places. And what it did was it put -- from a software perspective, to get the guarantee number very difficult and a lot of error messages popped up. And it was hard -- it was kind of harder to get people qualified this time than last time. On the other hand, last time we had to stand this program up from a dead start. So we have a lot of things already built so that the client experience of filling out an app and filling up a file vault and having our closers trained, and staff trained to use the software and know what it takes to get the thing through is much, much better. So I think that the ability to get the dollars and put them out much better, the changing landscape for example, independent contractors and sole proprietors, the changing rules, being able to go from 1 set of funding guidelines to a much higher evaluation in midstream, saying, today is the form and then 45 days later, changing the form. So in most aspects, this -- once again, I think, will be a successful opportunity for us. I did believe and predicted that this would not be as -- and it's not. I mean from a funding standpoint and dollars out the door, much less -- there would be much fewer dollars out the door in what they call funding program 3 than in funding program 1 and 2. That's just a fact. And why is that? All of these businesses are okay. They're doing fine. I mean they're in regions that didn't shutdown. They're in certain industries that are doing well. So it will be interesting. We look forward to reporting our numbers in the first quarter that will shed a little bit of a light on exactly what happened and the breakdown. A lot of smaller borrowers came in this time that did not participate in round one, and -- in round one, 2, a lot of bigger borrowers did not participate because I couldn't qualify for the revenue decline.

Okay. Appreciate that. And then just -- you partly touched on this in your answer to Robert's question. But I'd just like to get your thoughts around any possible extension of the higher guarantee rate for the 7(a) loans as well as the support for challenged borrowers, P&I payments. If that's possible or if you expect that to revert back to the normal levels of scheduled?

I would say, and this is a total guess on my part, it's speculation, but most people that know me, I never have a hard time making a speculative guess. I just want to emphasize. It's just a guess. I think that we're going to return to normal levels post the end of September. I think we see a very robust economy. We see an economy that is unbelievably stimulated with more to come with infrastructure. So I think that there will be tensions on the right versus the left to further provide financing in this year. And now let me do, on the other hand, there are certain businesses and categories that have gotten heard pretty bad, and you kind of can't deny that: restaurants, dry cleaners, gymnasiums, maybe there's some special carve-out. The 1 positive thing I could say relative to our demographic that we serve. It's probably the only area in Washington where there's bipartisan support. Democrats and Republicans love small business. They typically get along well together on the committees. And they're typically both in favor of doing things to help out independent business owners. So that's something that we gain from. But I do not think past September 30, will be at [90]. What do I think, and it's a guess on my part. It could go either way. I mean if you would have asked me, would there be another PPP program or the first one, I might just now. So I think we'll go back to a more normalized environment. And that's what we're preparing for. We're also expecting the unexpected, as always.

Sure. Sure. I appreciate that as well. And 2 more, if I may. I'm just on that point for some of the more challenged borrowers, like restaurants, any sort of entertainment company or hotels. I'm just curious if you have any kind of like high-level comments on the underlying performance of those borrowers and those sort of challenged COVID-impacted sectors, and what you're seeing?

Well, yes. I mean, look, we are very aggressive in conversations with our clientele. And so we've got a pretty good feel for it. I think that a lot of the restaurants, in particular, entrepreneurs, where they could do outdoor dining, they did it. And it got them through. A lot of them received a lot of aid. There's actually a very large grant program that will be administered by the SBA for restaurants and hospitality and category, they call it shuttered venues. So that was legislated in the last COVID, I believe, so that there's still a lot of financial aid available to those seriously affected industries. And the PPP program actually gave a little bit of a higher advance rate to restaurants and hospitality. I think that what these businesses did, they worked out deals with the landlord. They reduced all the expenses that they could to survive and get to the other side. And in our world, we look at lending -- and our lending criteria, it's important that the guarantors have got additional liquidity, additional resources of personal assets, which are pledged effectively to the loan through the guarantee. In some cases, they're secured by a lien to be able to get them through the tough time. We're happy about is, it does appear that most of these markets are open. We're also happy that we have like our motel portfolio, I think, in the 7(a) is less than 2%. Our convenience store and gas station, I think, is less than 2%. We're probably bigger in restaurants. But our restaurants tend to be not franchise but secured by real estate. So we've got that behind it. I think what's going to happen, everyone, I think, is surprised at how resilient the economy has been and how quickly it's bounced back. And that's kind of what we've seen in the portfolio. Not to say that we won't see adverse effects throughout calendar year 2021, but it's not going to be as bad as we once thought.

Sure. And that's obviously positive to hear for that, sector specifically. And last one, kind of a broader question, but I'm just curious kind of where the small business owner kind of stands today, in terms of like investments in technology, tech solutions. We've obviously had a rapid acceleration of tech adoption pretty much over every facet of the business today due to COVID. And small businesses that probably were not already making these investments before COVID might have a harder time doing so today. I'm just curious, does the opportunity still exist, and perhaps where does it exist to offer these kind of solutions to your borrowers today? And have you seen increased demand from business owners for these types of business services that you guys provide?

Yes. I think that capital always has a cost, and it's scarce. I think that when you think about the tech solutions, what we offer in tech solutions is the ability for them to basically manage their hardware and software over the course of time rather than have a CTO, CIO buying servers, buying PCs, having somebody in-house, load software into computers and try to protect themselves with the software from a security standpoint versus paying us on a monthly basis to do it. In the payment space, these point of sales solutions have become more and more prevalent through, which you see like a square we have those solutions as well. We think that our solutions are more robust, and they provide human talent in addition to having a great software, hardware on someone's desk. So I think what you're going to wind up seeing from these independent business owners is that they're going to have to innovate. They're going to have to have e-commerce sites, for example. I can't tell you how many businesses in 2019 would say, geez, I want to spend $3,000 or $4,000 for an e-commerce site for food delivery or for pickup at the curb, and how badly they wished they would have done that. So in our case, the ability to -- for credit-worthy entities to finance it over the course of time to get them back on to the feed. If you're a restaurant today and you're not delivering food or having pickup at the curb, you're not -- you get a much higher return on capital on it. And versus having somebody come in your real estate sit down and dine. It's just -- it's night and day. That's your high return on equity business right there. If you make a great quality product than you could deliver and have somebody come and pick it up. That's where you're growing. So that's really where we fit in as a solutions provider.

There are no further questions on the phone.

Okay. Operator, I've got one more analyst, Mickey Schleien from Ladenburg. Wasn't able to make the call. So I'm just going to read off his questions quickly and try to answer them. Mickey Schleien's first question. How does the potential for workers to remain working at home beyond the pandemic, permanently affect your outlook for credit quality for those borrowers depending upon their demand, for example, dry cleaner restaurant focused on lunch?

Those are challenged businesses. I'd be honest with you, the dry cleaner thing is a tough 1 that I've bought about and examined because at the end of the day, people just -- they're not dressing up. They were in sweats, t-shirts, jeans. Restaurant, on the other hand, as I just discussed with Paul, they're going to have the ability to adapt and do something differently. But those restaurants that lived off of the luncheon crowd in the New York City or in Chicago, they're going to have a challenge because we don't see a size of the commuter base coming back into those offices in the near term.

How do you expect to manage credit risk in the gasoline station segment?

Very carefully. This is a segment I haven't loved for 10 years because I do believe in the growth of the electronic car, electronic vehicle. And we have very little exposure, and we only typically look at these stations to the ones that are the best of breed, best and biggest quality. So very difficult to manage, not a fan of credit to gas stations.

How do you expect 7(a) and file full pricing environment to behave once the Fed begins to raise rates?

I think that the 7(a), and we talked about this with Robert, could come under pressure if the economy picks up and the speeds pick up, which may reduce the prepayment -- may increase the prepayment expectation and reduced prices appetite from banks or insurance companies. The BB high-yield bond spread is like 2.5%. So there's a huge demand for loans, and our loans are great risk reward. And we're happy about that.

What cause NBL dividend to be higher than you anticipated what outlook for 2021?

We did chat about that on the call. Basically, it's called execution, getting the borrower, getting the loan closed, working with the SBA to get them to approve it in the CDC. So it was really execution. And we look forward to Tony's team, Tony Zara's team continuing to execute and bring us these loans in.

What underpins the higher dividend 2021 forecast, what changed from your previous guidance?

I think the biggest issue there, obviously, is, a, firing on all cylinders, and the contribution from PPP.

At what level do you anticipate to equity be in 2021? Mickey's last question.

I think we'll be hovering around the 1.3 to 1.35 number. It may blip up in a quarter and it might be lower. We have -- we did some capital raising in the first quarter that should help and the income coming from PPP in Q1 versus the $0.50 dividend should also help as well. But we're not overly concerned about leverage, we manage it well. I mean we are a BDC. So we're always going to go here to leverage issues. But if we weren't a BDC an entity like ours, would probably be levered 2x, 3x, 4x, 5x that it is today with comfortable -- comfort in doing so. We can't do it. We're not going to do it. But if we were able to do it. So we're not concerned about [1.35, 1.5], we're not concerned about it at all.

Operator, if there's no more questions, I think we can end the call then.

We actually have a question from Scott Sullivan with Raymond James.

Congratulations on the call. We know you don't really can't give guidance out over a year. But how can we think about business in '22 possibly without PPP? And to that, what areas of your business are showing really the best growth and potential from your purchase?

Great. Look, Scott, I think that right now, we're on a good spot, particularly for 2021. We've got this new guidance out there. We'll be updating that guidance on a regular basis as we go through the year. My focus right now is actually on 2022. And I say that from the standpoint that I feel real good about 2021, and what we have in the pipe and what we have out there, particularly given all the ranges very, very, very comfortable with it.

Going out in 2022, I've got to make sure that we are more efficient in 7(a). That we're more efficient in 504. That we launch NCL. That we get the payments business back on the growth track. That our cloud computing and managed-tech solutions business gets on a growth path. That we can get the payroll and the insurance agency to be contributors. We certainly have a lot of customers. You got 200,000 to 300,000 referrals last year. A lot of people have talked to, lot of conversations. And if the staff does what they need to do and they contribute, which is what we've experienced over 20 years, they're going to build Newtek into a much bigger and better company, not for only its shareholders but for themselves because they're going to participate in that. And for our customers that will also participate in our ability to fund them so they can grow and hire more people. It's a it's a good story if you think about what we do. But we are definitely focused on 2022 right now.

That's great. Can you give us any color on what percentage of your customers use more than 1 product beyond the loans?

Scott, I would probably say it's still at a low level, maybe 5%, 10%. I think that we have got to develop the ability to outbound call and communicate. And that's easier said than done. You could do it digitally, you could do it with video. But at the end of the day, in my opinion, people don't buy stuff off of an e-mail that they might buy it off of video and call you back. Or if you're contacting them digitally, they might come to you when they need it. But at the end of the day, we have got to talk to clients. And they know us. We're connected. We're there. That -- that's the biggest thing that needs to improve. And by the way, you and I probably say that to our kids. I don't know if you've got any, but do you need to send that person? How about talking to them? I still think that -- and maybe I'm a little old school, but I still think our business owners want to have a conversation. I don't think -- and I'd say this to my insurance agency, people aren't buying insurance policies just by sending them an e-mail. I mean they want to talk to you. So that's something we've got to work on. And I think if we get there, I think the sky is the limit. Because we have a lot of relationships right now that we can capitalize on. We're just scratching the surface.

That's great. And could you put some flesh on the bones on the JV comments, please?

Yes. I mean I'm excited about them. They're 2 major institutional players, we may never be able to release, and I'm not sure about that. But significant capital contributions. And we're just finishing up the JV documents. People have a tremendous appetite right now, as you can imagine, for assets. And we could make them. And not only can we make them, but the risk reward and the returns are great, as evidenced by what we've done from a stock price perspective. The purpose of the JVs is never taking capital for granted as I certainly look at our stock trading pattern over the last year because of the pandemic. This gives us the ability to partner with great institutions, sharing the benefits of the systems and the team that we put up over 20 years and share on the returns. So that's the purpose of these ventures to go, work with people that have got unlimited amounts of capital and need to put it up. And they also give us different -- these are real smart people. They give us different ideas and thought process, and it helps grow the business. So we're excited about that. I hope these -- I hope we can announce somewhere in the second quarter that we're open for business, and up to $15 million loans with tiny minimal amortization schedules, up to 25 years, no financial covenants. Obviously, we charge healthy rates for those benefits, but we're comfortable with it.

Operator, anybody else?

There are no further questions.

Well, operator, thank you. Nick, thank you, and your team. And I want to thank all of our analysts and investors that listened in today and followed us, and we certainly appreciate your loyalty and your investment. We look forward to being right back here in 5 to 6 weeks and giving you a good report for Q1. Thank you very much.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.