NewtekOne Inc (NEWT) 2020 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Newtek Business Services Corp. Q2 2020 Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Barry Sloane. Thank you, sir. Please go ahead.

Thank you very much, and welcome, everyone, to our second quarter 2020 financial results conference call. Joining me on today's presentation is Chris Towers, our Executive Vice President and Chief Accounting Officer. Also, for those of you that would like to follow in on the conference call's presentation, you can go to our website, newtekone.com, N-E-W-T-E-K-O-N-E.com, your business solutions company. You can go to the Investor Relations section and go to Presentations. You'll be able to follow along on the PowerPoint.

I'd like to point everyone's attention to the forward-looking statement comment on Page #1 and then move forward to Page #2.

Our second quarter 2020 financial highlights. Newtek reported at the market close yesterday record financial results across several key metrics for the 3 and 6 months ended June 30, 2020. This was a great quarter for us. We're extremely proud of the way our company shifted due to the pandemic. We had to immediately change and focus our business model to accommodate the altered economic landscape. We basically ceased our forward movement on our pipeline of SBA 7(a) loans, which has obviously been our steady business for over 17 years, and positioned ourselves to participate in the SBA and Treasury and federally sponsored PPP program. We obviously look at the shifting, and our performance is the mark of a company that is able to excel under adverse circumstances.

As we go through this presentation, please note that we've got a great second half to go through in 2020. And we also encourage our shareholders to look at Newtek on a long-term basis. We look forward to giving a forecast for 2021 that will be a little bit more normalized than the lumpy forecast that we will -- or the lumpy results that we'll have in this calendar year 2020.

We have already declared a dividend for the third quarter, which we'll talk about. We believe we'll have solid dividend distributions for the remainder of 2020. And we are releasing a forecast, which we had pulled back at the end of Q1, for adjusted NII in the range of $1.80 to $2.30. I know it's a fairly wide range. We really want to be fair and honest to our shareholders, all stakeholders and the investment community. And that range is predicated on an additional PPP program and other things that are going to be occurring going forward. We'll get into that as we get deeper into the presentation. But we feel comfortable with this range.

There's a variety of different probabilities here. I feel very comfortable on the lower end. It's conceivable we could actually take out the upper end, depending upon what gets legislated. And obviously, if you take a look at the success that we had in the PPP program economically for the second quarter, we'll talk about the next program, the likelihood of it happening, where it stands, et cetera. Company is in real good shape from a long-term perspective, both with respect to income generation and quality of the portfolio, which we'll go into.

Moving to Slide #3 to go through this fairly quickly. Total investment income, 230% increase quarter-over-quarter this year versus last. Net investment income, a change of $1.42 to $0.06 loss. NII typically excludes capital gains. The income from PPP was considered regular income, therefore hit the NII number, which is why we have a bit of an anomaly in NII and adjusted NII. Third bullet, adjusted NII, 140% increase, $1.37 per share, a record for 3 months ended June 30.

Net asset value also increased to $15.66, a nice gain over the prior quarter. We're very happy with our debt-to-equity ratio of 1.2. We aspire to keep that debt-to-equity ratio low even at the end of the third quarter. So we've got plenty of ability to lever the balance sheet in here. We could talk about our risk and why we think we are capable of holding higher levels of debt than some of my other competitors in the BDC space that have hidden leverage in their asset quality. Total investment portfolio increased by 13%.

Looking at 6 months, 123% total investment income gain 6 months this year, 6 months last year. Net investment income, $1.42 versus a loss of $0.11. Adjusted NII, $1.58 versus $1.01. I should point out that we have declared a $0.58 dividend for the third quarter. So we feel pretty good about where we are with respect to paying out dividends and paying them out of income, which is our dividend policy.

Moving to Slide #5, Paycheck Protection Program. Most of our investors listening in are very familiar with the PPP program. We've been talking about it significantly, so I'm not going to get too deep into the weeds in explaining what it is. There's information, obviously, in this PowerPoint and in previous press releases. I think it's important to reference and remind the investment community that, in addition to earning fee income, the CARES Act also provided for the payment of principal and interest on our current portfolio of SBA loans. To repeat that, this is not a deferment. This is actual cash payment made by the SBA and Treasury directly to us, so our borrowers have been relieved of that duty. It's almost like they got a capital infusion during this period of time, which is valuable, particularly given the difficult economic climate that we have.

I think as we finish off on this Slide #5, important to note, there's currently bipartisan support in Congress for the extension of the PPP program. I think this is pretty much agreed to between the Democrats, the Republicans and President Trump. There's been dialogue that they pretty much have an agreement in terms of what this will look like. Also important to note that there's $130 billion, I believe, in leftover money. So this doesn't require a new appropriation, but they're maybe going to top it off with an additional $16 million, which will be used for other SBA-type programs, which we can talk about.

Also to note that in the original CARES Act, there was $17 billion put aside for payment of principal and interest. There's still money left available for that. So if the program does get renewed, there is a possibility that our investor base will receive another 3 to 6 months' worth of P&I. That -- important to note, that doesn't need to be appropriated. So clearly, that creates less friction going forward legislatively.

Going to Slide #6. Our performance in PPP loans, $34.7 million in fees ending June 30, 2020. We believe by the close -- well, by the close of business on August 4, we funded $1.15 billion of PPP loans. We still have a few left to fund. We anticipate by August 8, that'll approximately be 10,200 new borrowers. We received, I believe, over 100,000 requests for PPP loans from different participants, adding to our enormous database of customers.

We're proud to report that we funded 2 years' worth of loan production in slightly over 4 months' time. And realistically, most of that was done within 4 weeks. So we're extremely proud of the staff, the team, the software and the methodology to basically utilize technology to process loans in a very quick fashion in accordance with policies and procedures set forth by the SBA. We partnered with our alliance partners to sell 100% participations in PPP loans, which left us with no balance sheet. We have a very small balance sheet of PPP loans. I think it's about $5 million or $6 million worth, but everything else was sold in a 100% basis.

I think it's important to note that what we did in PPP really dictates the power of the Newtek model: no branches, no brokers, no BDOs, no bankers. We fit very well in the confines of the market today where you're basically driving referrals back to professionals that are providing solutions, whether they're lending solutions, payment processing solutions, insurance solutions, technology solutions or payroll health and benefit solutions in remote locations. That's the model. It works really well, and we're clearly demonstrating that we're able to perform and execute on it.

Slide #7 talks about the CARES Act a little -- in a little bit more detail. We're hopeful that Congress will authorize the SBA to extend additional P&I payments. We chatted about that in addition to be able to earning additional fee income. There's also -- and once again, I don't want to get too much into the weeds here, but there is upside portions of the bill; Senator Rubio has a piece that would provide long-term funding and significant fee income to lenders like ourselves. There is a bill that has gotten recent support by Young and Bennet in the Senate. That would basically -- called the RESTART program, that would also provide 100% guaranteed financing through the 7(a) program.

So as a lender in this space, we believe we're in a good spot through corona, and also, obviously, having the government as your partner in many instances is helpful. Obviously, they want our portfolio to be current. They want our borrowers to be in good shape. Our borrowers employ a significant portion of the citizens of the United States. I think Americans are more and more familiar with the importance of small business. This is our market. This is our space. We think this is our time to shine.

Moving forward to Slide #8, these are some additional highlights. We had some residual funding of 7(a) loans, which we funded during the 3 months ended June 30, $17.4 million. We've announced that we're restarting our 7(a) business, extremely selective. We're looking for companies with an operating history, hard collateral, plenty of liquidity, strong guarantors, paying attention to geography. And there's plenty of businesses to provide funding to. Just to pick out a couple of categories: RV parks, marinas, boat dealers, pest control companies, staffing companies, freight companies. These are all businesses that actually are doing well.

Now we don't want to lend to overheated segments of the market. So we've got to be careful in our underwriting. But I think it's important to note, the worst of times is the best of times to make these types of loans, and we're looking forward to opening up in the second half of the year. We're indicating $150 million of funding in Q3, Q4, most of that most likely coming in Q4, as we rebuild our pipeline. And we anticipate having a robust 2021 getting back to 2019 origination levels.

We are also restarting our 504 loan program. So we're looking forward to getting some fundings there in Q3 as well as rebuilding the pipeline. And our conventional lending JV right now is on hold. We are looking to start that up in the future. We'll talk about the performance of that portfolio, which has been stellar, and we're looking to grow that business. We think that's a significant contributor to our business and our business model down the road.

On Slide #9, we talk about dividends for 2020. We just paid a Q2 dividend of $0.56 to shareholders of record on July 15, 21% increase over the second quarter 2019 cash dividend. And we declared a third quarter cash dividend payable on Sept 21. So for shareholders of record all the way out to Sept 21 get a $0.58 dividend. So with the payment of the third quarter dividend, we'll have paid $1.58 per share for the first 3 quarters, which will be a 9.7% increase. We, obviously, are looking at the second half of the year with a lot of potential variables relative to PPP, 7(a) and the portfolio, and that's why we have to come up with such a wide disparity. Obviously, I think many of you are aware, Newtek is a business development corporation. It's an internally managed BDC. What we earn, we pay out.

Second quarter of 2020 NAV discussion, we chatted about an increase in NAV, $15.66 as of June 30, 2020. As of last night's close, we clearly traded at a nice premium to the market, and we've historically done that through -- in November, it will be 6 years outstanding; most of our history.

Slide #11, just talking about future opportunities in challenging markets. We've seen tremendous changes in our economy based upon COVID. And I think COVID has done several things. Number one, it's pushed a lot of businesses that were on the cusp and weak already to an accelerated default. Number two, it's forced a lot of the trends that we've seen in the market. So when you see e-commerce further accelerating entities like social media giants, Facebook, Google, et cetera, those mediums to reach people through social media and e-commerce, obviously, becoming more and more important.

Important to note, we've got to pay attention to that as well. When you look at what we do in IT, we provide small- and medium-sized businesses the ability to work [mobily], securely and remotely. Let us manage your IT. Health and benefits area, clearly, major changes and shifts, particularly with health care. We are able to give businesses the ability through a cloud-based payroll solution and health and benefits solution to shift over to us at far less expensive matters and far more efficient than their legacy sales-oriented Paychex and ADP model.

Obviously, in insurance, tremendous changes in policies. We're able to work with them remotely, just as Geico does, to help small- and medium-sized businesses look at their insurance risks. And then obviously, in the payment space, tremendous shift to the e-commerce landscape. We're able to help businesses with contactless payments, our Newtek payment systems, which we'll talk about through POS on cloud. We're really very well positioned to help businesses meet the challenges in a post-COVID world.

Slide #12 talks about sort of our pedigree in the 7(a) landscape. We're still the second largest SBA 7(a) lender as of June 30, including banks; largest nonbank lender; 10-year history of rated securitizations, both AA and A. Everything has upheld their rating. Many other lenders in the small business space are experiencing tremendous stress. We are not. We'll probably put out some data in the near future, talking about how well our securitizations have held up.

Once again, important to note, the average loan size in the portfolio is a beautiful $179,000 per uninsured piece in the portfolio. That gives us great diversification with geography and risk. You could see how important risk diversification is when it comes to geography and it comes to industry type. Obviously, I really wouldn't want to have a lot of small luncheonettes in Manhattan today. That would be fairly devastating; or for that matter, gymnasiums in New Jersey. So the diversification that we have in our portfolio is fantastic. This is why you do it. It's extremely valuable, and it's worked well for our portfolio metrics, which you'll see.

Moving to Slide #13, growth in loan referrals. For this calendar year, we're going to be using units versus dollars. The dollars are a little bit skewed based upon PPP issues. But you could see, we've been overwhelmed with loan referrals. We've received an excess of 100,000 in units for 6 months. 80,000 came in the second quarter. We're really, really thrilled about our model. This is great for customer acquisition. Our database of customer opportunities is very deep, well over 1 million SMBs in our database to be able to market to and cross-sell. We look at our company versus other fintech companies like OnDeck Capital, Kabbage, Lendio. OnDeck recently wound up merging into another public company for about $90 million. I think their portfolio is rapidly approaching a 40% delinquency rate.

Look, I've got to say that if they're getting a $90 million valuation for technology, I'm very proud of what we built here at Newtek as well as our ability to manage credit for over 17 years, particularly during the '08, '09 cycle and the current cycle. All of these providers have got interesting technologies on the front end, but they really do not do a credit analysis. They don't do credit work like our technologies do. We're a real 50-state lender, and we're able to do this across multiple different business silos.

Slide #14. Net premium trends in a normal 7(a) environment are important to us. We talked about the slowing of prepayments and the potential increase in prices, which we were constructive on. Looking out in the third quarter, we're seeing prices for 10-year paper north of 1.11, and we're looking at prices of the longer dated 25-year paper north of 1.17. The splits are between 1.11, 1.12; on larger pools you get a bit of a discount, but the premium trends for some of the guaranteed sales, real strong.

Slide #15 talks about the seasoning of our portfolio. We're now at 32.6 months. We've shared an S&P analysis on seasoning of portfolios and the issue of businesses being able to survive that default curve and how it really flattens out after 40 months. We're very comfortable with the mark on the portfolio, which we'll talk about, as well as our ability to liquidate loans and to be able to earn a great dividend for our shareholders going forward.

Slide #16 shows our delinquency rates and trends as of 12/31 to 3/31. We actually improved our currency rate almost to 94% even through the period of March, dealing with the concern about COVID, which really began in February and March. Obviously, with the payments from the government went up to 99% current. We feel pretty good about our customers. We are speaking and reaching out aggressively from a servicing standpoint to all of them. We're preparing them for October when these payments may cease. We're working with them. We've got dialogue going with respect to them contracting where need to, expanding where they need to, working on cost control. We are a very active, aggressive servicer.

I can tell you that historically, one of the things that the fintechs typically don't do is they don't service. We do. We work with clients. We make sure on a going-forward basis that they're doing what's best for their business to be able to meet their responsibility to us and the U.S. government.

Slide #17 is an example which we do tend to give about liquidation. We use a 40% severity, which is our historic severity on loss on the portfolio, including cost to collect and interest. This was a client that went bad on August of 2017. Actually, that's when we provided them the funding. It was a national digital billboard company, been around for 20 years. They ran into trouble. We're able to sell all of the assets and get all of our money back, 100% recovery.

Slide #18 is a slide we've used for close to 17 years. It shows the net cash created on the 7(a) loan. Slide #19 shows the income treatment.

Moving into a portfolio company review as we get back into the 504 business, we wanted to demonstrate to newbies to our story about the way a 504 loan works, how you get a first conventional second lien provided by the government, which gets taken out by the government. A great product for borrowers. They get a 90% loan to value against commercial real estate with extremely low interest rates. I think the second debenture by the government has got a 2 handle. I think it's like 2.75% with a 20-year term on it. We typically lend at a fixed 5%, at a higher rate, but the blended rate is close to 4% with the long am schedule. So it's a great loan for a borrower. We like this business. Capital One Bank has a facility with us to be able to warehouse it, and the SBA takes out the second. We typically sell to conventional first. Slide #22 shows the return on equity for that type of business.

Slide #23 talks about our conventional lending portfolio and our joint venture with BlackRock TCP. We have a portfolio in the JV as well as on our balance sheet, approximately $92 million, 100% current as of June 30, 2020. This is an attractive portfolio. It's kept loans in different markets, strength of the personal guarantors, liquidity of the personal guarantors. The fact that the personal guarantors have got multiple businesses, very well heeled, has kept this portfolio performing. We've actually got 1 restaurant in the portfolio that is in New York City. It has been closed, won't probably open until April, but they have enough liquidity to continue to keep us current throughout the whole process. And that's the value proposition of our underwriting, to make sure we lend to really good businesses.

I think it's important to note, when you look at the current economic crisis that we're in, this is a crisis that is caused by a pandemic, and it's basically been caused by the government shutting down businesses and restricting commerce. Clearly, the initial shutdown was caused to bend the curve in northeastern regions like Connecticut, New York and New Jersey. Some states, particularly in the Sun Belt, when given the opportunity to open, have opened, have stayed opened. Their curve peers, early stages have begun to flatten, which makes us optimistic that eventually, the virus and the government shutdowns will be less and less. Obviously, going back to school is a key issue here, opening up the economy is a key issue, and also being safe is a key issue.

I think the point I want to make here is this is a very unique situation for lenders where lenders typically encounter defaults because you've got a weak economy without much stimulation, whether -- either created by the government or the own inertia of the business climate. This is an economy where the businesses are shut and can't open. And that's not 100%. It's in spotty geographies, and it's in spotty industries. So it's a market that we think has a very good chance of recovering, recovering well, and we are extremely constructive on our business model going forward, which we'll talk about. And when we look at what we've done in the conventional loan portfolio, if you lend money to good businesses with good value and good guarantors and owners, you can come out okay.

Slide #24 talks about our payments business. Obviously, this business has been affected, particularly with a reasonable percentage of retail restaurants. Thank goodness it's not dominated by that. But it looks like we're on a run rate for $1 million to $2 million of EBITDA per month for the remainder of 2020, which we're very pleased about.

And going forward, on Slide #25, this is good data for anybody interested just in economics and business. The Visa, MasterCard and American Express receipts for our clients, down 23% in March, 37% in April, 27% in May, 14% in June, 5% in July. Now I will say, we're early in August. But the first 5 days of August are indicating things are slowing again. And I think they're slowing again -- not dramatically, maybe -- and once again, these are 5 days. So I wouldn't say that this is particularly valid. But you've got the unemployment benefits that might slow down consumer spending. You've got some PPP that might be running out. So it is clear that government stimulus is still required to continue to bridge this economy to when the pandemic is less of an effect and a drag on business.

We're looking for a 10% to 15% decline in the NMS EBITDA. One of our portfolio companies, Mobil Money, has a major impact. That company is primarily dominated by newer cab drivers. Traffic in the Newark Airport was down 90% to 95%. That clearly affected this business, which should throw off close to $1 million in free cash flow. And right now, that's on a run rate of probably $100,000. But there's obviously upside from that, and we look forward to air traffic recovering and newer cab drivers having more opportunity.

Slide #26 gives a good indication of where we see the future of payments. We acquired POS on Cloud. We're very excited about having our own branded POS system. The long and the short of it is, our POS system is an all-encompassing system that can process payments, integrate with an e-commerce website, in other words, pull up a menu for a business or pull up a retail e-commerce purchase chart from a QR code. Both the e-commerce and the store present combined and integrate into a GL accounting software. We integrate with all food delivery services like Uber Eats, Grubhub, DoorDash. We also have time and attendance on the POS, which integrates right into our payroll solution systems, enabling us to offer payroll, workman's comp, health and benefits. One complete system. We can brand this for all of our financial institutions. We're excited about rolling out and hitting on Newtek payment systems going forward.

Slide #27, on Newtek technology portfolio companies. We have 3 of them: Newtek Technology Solutions, our cloud-computing managed service business out in Phoenix; IPM, based out of New York; and Cloud Nine, based out in Louisville, Kentucky. These businesses are doing well. Forecasted 2020 EBITDA, $3 million to $4 million. That's up from a $203,000 forecast -- actual number in 2019.

We are obviously excited about the opportunities in cloud services, particularly working with the small- to medium-sized business clientele. We talked about payroll and benefit solutions. We think we can help businesses significantly as we move into this COVID-dominated world and where customers and businesses want more cloud-based solutions and want to have their employees have availability to that cloud-based site to take a look at their own benefits and payroll information.

Slide #31 is indicative of our historical stock performance. As you could see, the company has been a stellar performer over 5 years, 3 years. 5-year return, 200%; 3-year return, 88.4%; last year, 42%. Our 10-year return, about 800%, which equates to about 25% per year. So I guess, if you all go back and you look at our history, our stock does tend to be volatile. And we've had many dips like we've had this year. I think we hit a low of $7.58. But the company has got a great management team that's got a history of being here 5, 10, 15 years. We stick together. We figure out as operators and entrepreneurs with an ownership mentality of these businesses, how to make it work, how to overcome adversity, how to shift, how to give the marketplace what it needs given that point in time.

Slide #32 is a current event. The SEC held an open meeting yesterday to vote on a rule proposal that would amend a number of disclosure delivery and advertising requirements for mutual funds and BDCs. Here's the important aspect of it. Commissioners voted on a proposal that is now out for comment for 60 days. That would allow acquiring mutual funds to basically exclude the AFFE disclosure fee from their bottom line. I know this sounds a little complicated. I'll try to simplify it in CEO talk. Institutional investors have not been able to buy BDCs pretty much since June of 2014 when the former SEC chairperson decided that the expense ratios for running the business, whether it was an internally managed expense, which is ridiculous; or an external fee, needed to be doubly calculated to keep neutral funds from buying other mutual funds and having investors paying fees twice.

To make a long story short, my interpretation of this open meeting is that the commissioners are putting out for comment to allow institutional investors to acquire up to 10% of their total assets in BDCs. Number one, that would increase the shareholder base. Number two, what happened in 2014 was it excluded BDCs from being involved in the Russell and the S&P 500. This is a potential game changer for BDCs, and we're very excited about it. We hope this happens and prospectively, would take a market clearing yield in BDCs and prospectively tighten as it would significantly widen the investor base from one that is dominated by retail with some institutional investment to more institutional investment.

Moving to Slide #33, this is an important slide, risk for reward. We have historically stated that we believe we have less risk than the average BDC. I think that's relevant because when you compare -- look at a market clearing yield, a Main Street, which has had market clearing yields of 6 and then at times, 8, currently, I believe. And you've got other BDCs that have market clearing yield, like Ares at 11 or Apollo at ridiculous numbers. A lot of that is based upon the risk inherent in the portfolio.

I think it's once again important to note, our assets, not highly leveraged. We don't have SBIC debt. As a matter of fact, a lot of our overhang at the end of the quarter is based on government-guaranteed obligations that get liquidated. So we operate at a much lower leverage. We have a diversified portfolio with average credit risks in the loan book of 179,000 floating rate. It's an asset class we've managed over 17 years. And therefore, I think that when you look at what's the right market clearing yield for Newtek, we think it's important to take into consideration what the risk is inherent in the portfolio for that market clearing yield.

And when you look at a portfolio of assets that are based upon leveraged loans that require 5 -- 4, 5, 6x EBITDA turns, means those businesses must grow. They must grow. This is a tough environment for growth. Even if you get a rebound, it's a tough environment for growth. So we understand the discount that's applied to others. Relative to us, we're in a low growth to no growth type lending environment. That's what we look at. Obviously, businesses that are growing, we don't penalize them. We just don't give them excessive leverage on the advance rate. But I also obviously look at our portfolio, and people believe and it is accurate that these businesses are less liquid. They have less access to capital. The counterbalance to that is, look at what the treasury and the SBA and Congress has done to provide P&I payments, to provide PPP money, to provide another round of PPP money, we think we're in pretty good shape here. And we think that the historic risk view of a portfolio like ours is somewhat overstated.

Now I do want to comment, our portfolio of loans is very different than a typical fintech lender that makes a loan in 48 hours. We do 20-page credit writeups. We take all available collateral. We have multiple guarantors of the business owners, anybody over 20%. We take liens on personal assets, corporate assets, and we're typically looking at operators that have been around for a couple of years versus start-ups. Entirely different. We'd like you to take a close look at Newtek as a 17-year manager of risk in its portfolio.

Then moving to Slide [#24]. Once again, it's just a quick investment summary. And now I would like to turn the presentation over to Chris Towers.

Thank you, Barry, and good morning, everyone. You can find a summary of our second quarter 2020 results on Slide 36 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slides 38 and 39.

For the second quarter of 2020, we had net investment income of $29.7 million or $1.42 per share as compared [to NII] of $1.1 million or $0.06 per share in the second quarter of 2019. Please note that income related to the PPP is included in investment income in 2020.

Adjusted NII, which is defined on Slide 37, was $28.5 million or $1.37 per share in the second quarter of 2020 as compared to $11 million or $0.57 per share for the second quarter of 2019, so 140% increase on a per share basis.

Focusing on second quarter 2020 highlights. We recognized $46.7 million in total investment income, a 230% increase over the second quarter of 2019. Interest income related to fees from the PPP was the primary driver for the increase. We recognized $34.7 million of income related to the origination of PPP loans on $1.1 billion of PPP originations during the quarter.

Servicing income increased by 10.9% to $2.8 million in the second quarter of 2020 versus $2.5 million in the same quarter last year, which was attributable to the average servicing portfolio growing from $1.1 million (sic - $1.3 billion) at June 30, 2019, to $1.3 billion at June 30, 2020.

Distributions from portfolio companies for the quarter included $1.65 million from NMS, $75,000 from IPM, $250,000 from SIDCO and $293,000 from Newtek Conventional Lending, which is our joint venture.

Total expenses increased by $1.7 million quarter-over-quarter or 11.3%, mainly driven by increases in professional fees, compensation-related costs and other loan administrative expenses.

Realized gains recognized for the sale of the guaranteed portions of SBA loans sold during the second quarter totaled $1.7 million as compared to $13 million during the same quarter in 2019. In the second quarter of 2020, NSBF sold 18 loans for $1.7 million at an average premium of 7% as compared to 170 loans sold during the second quarter of 2019 for $96 million at an average premium of 11.52%. The decrease was attributed to our shift to PPP originations during the second quarter of 2020. As I mentioned earlier, income related to the PPP is included in investment income, not in realized gains.

Realized losses on SBA non-affiliate investments for the second quarter of 2020 were $2.9 million and $971,000 during the second quarter of 2019. Overall, our operating results for the second quarter resulted in a net increase in net assets of $25.5 million or $1.22 per share, and we ended the quarter with NAV per share of $15.66.

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

Thank you, Chris. Operator, let's open it up to questions.

(Operator Instructions) And your first question comes from the line of Mickey Schleien with Ladenburg.

I hope everything is well on your end. Barry, there was a strong rally in 7(a) prices in the second quarter, although I didn't see it in Slide 14. How much of that do you think may have been due to a scarcity factor? And how do you see the supply-demand equation unfolding as you and other lenders restart your 7(a) originations?

Sure. Mickey, there is a scarcity factor. I think you're going to have a scarcity factor as far as the eye can see. I think that the other thing that -- let me take this in pieces. I would say the most dominant issue for pricing is that new loans that are made are also made currently with 6 months of principal and interest, so that there's very few prepayments in the first 6 months. So prepayments have dramatically slowed, and that's bolstered the market.

I think that from a supply and demand perspective, because of PPP, a lot of the assets that were drawn to making 7(a) loans are being pushed into this segment. I don't really see that supply and demand changing. The other thing I would point out is, in the current interest rate environment that's very flat, these particular bonds offer very good yields to other structured products or other investments that financial institutions have to make. So I think I see decent price stability for a while. Now these aren't off-the-charts prices. Prices have been higher than this in the past, but I think that -- I think this is decent.

By the way, this also, Mickey, factors in the fact that there are people who think that default rates will spike down the road, too. So you kind of have -- you do have 2 dynamics in here. But I think steady prices on a net basis for us between, I'm going to say 1.10 and 1.12, I think are on the horizon.

I understand. Just one follow-up question. Commercial real estate makes up over half of your collateral. I'd like to understand what the typical loan to value is on those loans. And how concerned or what is your level of concern that the pandemic may permanently impair at least some of their value, such as restaurants, which is your third largest segment?

Sure. So a couple of things. One, focusing on restaurants as the third largest segment, it's still a small piece of the portfolio. And not all restaurants are created equal. I would say probably greater than 50% of our restaurants have got commercial real estate behind it. And that's valuable because the restaurants that are thriving have their own lots, have pickup at the curb and drive-through. And that's the trend going forward.

As a matter of fact, if you look at a company like Dickey's Barbecue, their revenues are up 17% because they don't have most of the real estate for in-room dining. I think that our commercial real estate sector from a collateral perspective is totally different than an income-producing piece of real estate like an office building or a strip mall, multi-tenanted. Ours are very much tethered to the business. So the valuations haven't soared with excess leverage going into securitizations, and they typically don't decline as much either because they're very much tied to the operating business.

So we've liquidated. And to be honest with you, I've been surprised, like Peter Downs, Chief Lending Officer, has mentioned to me over the last 4 months that we've had these contracts on business's commercial real estate and loans and I'm going, that stuff's going to close. Closes. It's closing. It's like, wow, like they're sticking to the valuations, they're sticking to the bid because there is a very significant portion of the United States of America that's got -- there's $5 trillion or $6 trillion of liquidity sitting out there, looking to put money to work. So there's money coming into stuff, money coming out of stuff. So we feel pretty good. We've been able to liquidate things at very good values in the last 4 months when you figure people would walk or reneg. No, not the case.

As a matter of fact, with all this liquidity out there, and we could argue, who's going to pay for it down the road, there's a good bid for things. And even for some of these restaurants, new people are going to want to come in when things open up and take over the infrastructure and start up again because the demand is there. There's a ton of money and liquidity sitting for when the government opens things up, people adhere to doing things safely and the fear of going outside is reduced. So we're -- we know we're going to take a hit here like everybody else. But when I say that, we've already marked the portfolio down, which is a seasoned portfolio of 32.6 months, to a 30% cumulative gross default from here with a 40% severity. I think we -- our balance sheet is a very, very well-adjusted balance sheet.

That's helpful color, Barry. And may -- it just generated another question in my mind. Is there a geographic component to your answer? In other words, I'm down here in South Florida. And frankly, there is a lot of boarded-up stores. And I don't know if they're ever going to be filled again. There's a Staples that's been empty for years not far from my location. So are you -- when you underwrite loans that are collateralized by commercial real estate, are there parts of the country that you're avoiding or parts of the country that you prefer?

Diversification, diversification, diversification. It's funny. Mickey, I couldn't predict the pandemic. Nobody was able to predict this. So we love diversification. And when you look at our geographies and you look at our industries, I'm pretty sure, and this does vary. Sometimes it's a little bit over 10%, but mostly everything is under 10%. And we've been blessed, like look at my merchant portfolio. You think about merchant portfolio, you think about restaurants and retail, those things are crushed. But look at my merchant portfolio.

So the value of our business model, getting referrals in from financial institutions, not brokers, not bankers, not -- diversification is the greatest. We're not that smart to be able to predict that Governor Murphy is going to say, "You can't go in a gym." And then Cuomo's going to say, "can't go in a restaurant. Broadway is not opening." Who would have ever predicted that New York City would be shut down from world travelers? So based upon that, we live and die based upon diversification. We have a diversified portfolio. We diversify our risk, and that enables us to stay in the game. And we've got loans in many states, in many jurisdictions, and thank God, we're pretty spread out. And also, importantly, we're not dominated.

Our portfolio is not an urban portfolio. That's not to say that I don't have some things in some of the urban areas. But most of these loans are not in -- and I'm obviously familiar with Miami and New York City, for sure. But no, they're not -- we do not have concentrations there.

And your next question comes from the line of Fred Cannon with KBW.

Barry, first of all, I'm glad to hear things are going well during this difficult time. I wanted to talk -- if you could talk a little bit about the outlook for further PPP lending. We had tremendous takeup with the first round. Then when Congress extended, it slowed down. Curious what your thinking is in this next bill, what would be necessary to kind of kick-start real volume growth back into the PPP program.

Sure. So the good news, Fred, is I have -- as a CEO, I spend an inordinate amount of time reading every single article I can find on the Internet and watching all mediums on TV. So I read this, I look at the -- and I try to gather a consensus. It is apparent to me from Mitch McConnell, Pelosi, Mnuchin and the President, this program, although it has flaws, is deemed to be a success. And they realize that this is the quickest way to get the money in the hands of the SMB market, and they realize how vital it is. And yes, I heard Ron Johnson on TV this morning talk about there's plenty of people that have got the money, and they haven't spent it, which is apparently true.

But it definitely liquefies a part of the economy, which, according to the Small Business Administration, is 50% of nonfarm GDP. So that Senator Cardin, Senator Rubio, who chair small business in the Senate, very much for the program; Chabot, Velázquez in the House, positive. This is part of the Heroes Act. It's part of the Senate Bill. Under the assumption something is going to get done, which I have to say is more likely than not despite the posturing, I just -- I can't fathom both parties not getting some things done despite the fact both seem to be dug in.

With that said, I think you wind up with a $190 billion program. It gives businesses a second bite of the apple, if their revenues are down 50%, which I think a large amount of them can do. I think if there were 4,000 to 5,000 lenders the first time around, they're only going to be 60% of the lenders this time around. I think some lenders won't participate again, which is probably good for us. I can't see this being as -- I'd say this, attractive because the universe is smaller, fees have been cut, but it will still provide a very good return on equity for the work that we have to put in because of the 17-year investment that Newtek has invested in its infrastructure and technology and staffing.

We do earn the money here. This is not a gift. There was 10 weeks where 180 people were working 7 days a week and 14, 16 hours a day. But I think that this is more likely than not. We've had to give fairly wide range of guidance here and we do move 100% of the assets off the books.

I guess just as part of that, what do you think -- if it is $190 billion, needs to be part of the package so that $190 billion actually gets lent?

Yes. Great question. Here's the key. Instead of a 50% reduction, make it 25%. That's the best -- and by the way, the House Bill says 10, I think that Rubio's got it at 50. So if they were able to get that down from 50, that money is going to get put into the market.

Okay. That's very helpful because that's something to watch out for, Barry. The only -- kind of another big question. It looks like the Fed is going to keep rates down for an indefinite period, at least the next couple of years, and including the long end of the curve, which is floating around 50 basis points. If we have this structure of the yield curve for the next, I don't know, through 2022, how do you feel that affects your business?

Okay. So Fred, I am the contrarian. And I hate to say it, but I know what the Fed Governor is saying. I might be the only person in the world that actually thinks rates are primarily driven by market participants. I realize that the Fed can push things around. But with the amount of borrowing that needs to be done, I -- first of all, I don't think rates are going to skyrocket, but I think you're going to get -- listen, we've seen the Fed Chairman change rates quickly, change his mind quickly, in a period of a quarter or 2, going from tightening to easing.

So let me say this. You -- we've been around for 17 years. There are certain things that work better with rates rising. With rates rising, I get higher interest income. I don't have a lot of leverage. That's a good thing because I don't have the debt. Prospectively, if the economy gets heated, speeds pick up, I get less of a gain on sale. And maybe my servicing income goes down. With a better economy, maybe I get less defaults, higher liquidation value. It doesn't -- to be honest with you, and we've been through cycles up and down, we're pretty well-matched. It doesn't lean one way or another for us. I do believe that.

Okay. So you feel like in some ways, you're somewhat hedged in terms of what goes up and what goes down if we have rates in this environment.

No question about it. If you got inflation, my fee-oriented businesses do better, too.

(Operator Instructions) Your next question comes from the line of Matt Tjaden with Raymond James.

First question on the $180 million to $230 million adjusted NII range. I know you said that embedded some level of a PPP renewal. Does that also embed a renewal of the 6-month P&I coverage by the SBA?

Not really. And I say that, Matt, from a standpoint that if we didn't get additional P&I coverage, the businesses would be on their own. And I don't think it would affect 2020 numbers at all. It may affect 2021. I shouldn't say it may, it probably will, but it wouldn't affect 2020.

Great. I think then kind of as a follow-up to that. If that 6-month P&I coverage isn't extended, is there any color you can give on kind of how we would expect delinquencies to shake out? Would that be an immediate spike right after the extension runs out or kind of a gradual buildup?

Yes. Matt, I want to change my answer to the first question. As I thought about it, once again, it all depends on the variability: vaccine, no vaccine. It's really hard to guess. But it could affect -- it could slightly affect interest income. It could slightly affect servicing income. As you go from a 99% currency rate to a lower number, it's just -- I don't see it making an immediate adjustment, but I kind of want to try to be factual on that.

Now what was the second question again?

Just specifically on the delinquency front, if that P&I coverage isn't extended, kind of how would we expect that to shake out?

I think you would see -- well, there's 2 ways to think about it. I tell this to people and I don't think it absorbs, but that's okay. A business that's gotten 6 months of principal and interest, okay, the debt's taken care of. It's like a capital infusion. They're getting their principal paid, they're getting their interest paid for 6 months. We've spoken to our clients. They are managing this situation. The entrepreneurial ones, first of all, they've all partially guaranteed the loans in multiple ways. And many of them have downsized their business, they've reduced their expenses, so that a lot of them are getting rid of excessive things that they were using for growth. Which is, frankly, the reason why most of these entities don't make it is because they overextend themselves. They position themselves for growth that isn't there.

I think that what you would see is a gradual reduction of the currency rate over the course of time. This would not affect our balance sheet. And over the course of multiple years, it prospectively would have some weight on charge-offs. But frankly, we've looked at this. We've modeled it and doesn't -- we think we have it. I think the big issue is, we've taken it on the -- we think we've taken the right measure on the balance sheet. But relative to affecting income over time, we think that our business will be able to grow through it, even if there is no more PPP.

Okay. And then just last question for me on the $150 million in SBA 7(a) loans. Any color you can give on how you arrived at that number? And kind of what underlying economic and government stimulus assumptions are embedded within that?

So first, I'll make a joke. Pete Downs and I took out a coin and flipped it in the air. No, I hate to say that -- let me tell you, look, I've been doing this for 20 years as a public company. Forecasting today in this environment, it's almost impossible. I don't know, is New York open/closed? Is New Jersey open/closed? Is California open or closed? It's just -- it's almost impossible to determine. So we looked at the pipeline. We looked at what we think is going to close this quarter. There's plenty of demand. That's not a problem. I'm very comfortable with the $150 million. I hope I don't regret that I've said that because we got to pick and choose. By the way, we're going to be sitting here in December or November ready to close loans, and all of a sudden, I got an appraisal on a business that's different, or something popped up from the customer that they didn't relay to us because of what's happened in COVID. You know what I'm saying? So really hard to tell.

I think when we look at the $150 million, it's half of what we did last year. Now we've also arguably started a little bit later. I think it's a number we are comfortable with, and that's why -- that's how we came to it. A number that we were comfortable doing without having to stretch for credits or make loans in segments that we don't particularly like, which -- I mean, we had a pipeline in March. We just decided we're not going to close those. And some of those loans, we're not closing. I mean loans that we were prepared to move forward with in March, some of them, they're not happening. They're in bad geographies. They're in bad businesses. But more importantly, the business owners have not shown the entrepreneurial instincts to be able to manage the environment, and that's what we look for.

(Operator Instructions) And at this time, there are no further audio questions. Are there any closing remarks?

None whatsoever. I clearly wanted to thank everybody, particularly the analysts for the questions. They were great. We certainly appreciate the interest in the company and the stock. This is a tough time. We're in a tough market. We are dealing with a business segment and sector that does and has received and acquired government help. I think that will happen.

I think that we are positive on things going forward because we believe that the economy being properly bridged will come out of this with minimal amounts of damage and actually wind up moving forward because we're transitioning into a more efficient economy. And this has forced businesses to change the way they do things, to get rid of nonproductive processes, softwares, technologies and assets and be leaner for the going forward. Let's just hope we can grow through this, pay off the debt and move on to happier times.

Stay healthy, everyone. Thank you, operator.

And thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.