NewtekOne Inc (NEWT) 2021 Q4 法說會逐字稿

Welcome to the Newtek Business Services Corporation Full Year 2021 Earnings Conference Call. My name is Hilda, and I will be your operator for today. (Operator Instructions)

And now I will like to turn the call over to Mr. Barry Sloane, President, Founder, CEO. You may begin.

Good morning, everyone. And first and foremost, Newtek would like to send its prayers, thoughts and feelings out to the country of Ukraine and its citizens. We certainly appreciate the dilemma that they're seeing and witnessing this morning.

Welcome everyone to our Full Year 2021 Financial Results Conference Call. My name is Barry Sloane. Joining me today will be Nick Leger, our Chief Accounting Officer. I would also like to thank our accounting staff, legal staff, business leaders and to all Newtek associates that made 2021 and the results that we're about to talk about today a great year.

For those following along on the PowerPoint presentation. It can be found on our website newtekone.com, n-e-w-t-e-k-o-n-e.com in the Investor Relations section, please go to Events & Presentations. And we are ready to begin.

I first like to call everyone's attention to Slide #1 and please remind everyone to read the note regarding forward looking statements and comments. Slide #2, we always like to go over our report card, particularly as a public company. And on Slide #2, you could see that Newtek Business Service Corp. has been a very successful organization over the course of 10 years. The data that you see is the end of year data acquired from Bloomberg. And obviously the returns include capital price improvement as well as dividends.

Moving to Slide #3, as many of you are aware approximately August 2 or 3, the company announced our intent to acquire National Bank of New York City and potentially convert subject to a proxy vote and regulatory approval from a business development corporation to a bank holding company and designated financial holding company status. There's been a lot of activity in the share count. This particular document demonstrates that shareholders that owned stock, the beginning of the period, in their name, to the end of the period sold out to zero. So we asked the market participants to draw their own conclusions from this. But clearly there's been a significant amount of movement in the share from people that had a position to not having a position. Obviously, the potential transformative change that we're talking about may have caused this.

Slide #4, obviously, we're here today to talk about our 2021 performance. And clearly, we were dealing with tremendous headwinds from the 2020 and 2021 pandemic. You know, we've used the expression, we're firing on all cylinders. Simply stated, investment in Newtek Business Service Corp., you're investing in a diversified business model under the Newtek brand. People come to Newtek for loans, payment processing solutions, tech solutions, insurance agency solutions, payroll solutions, and other solutions that will make their business successful. We're real, real happy with our performance in '21. But I'm particularly happy with the momentum that we're carrying into 2022. We'll demonstrate that throughout the course of the deck.

Since January 21, 2021, NSBF which is Newtek Small Business Finance, our nonbank lending SBLC, increased its headcount by 63 individuals to 253 people at 33% increase. This headcount increases indicative of the fact that we have geared up and as you'll see in terms of units and loan volume, we're gearing up with the great operating leverage that we have to do more and more business, obviously, both in 2021. With the records that we've produced, as well as going forward into 2022.

We're looking forward to further demonstrating not just in lending, but in our other solutions area, whether it's payment processing solutions, tech solutions, payroll solutions or insurance agency solutions. If you look at every one of these individual areas, there's tremendous change in payments. There's tremendous change in how businesses are looking and seeking assistance for their technology. There's tremendous change in people that are looking for payroll and HR solutions. We are very, very well positioned for these changes going forward with our solutions that we believe very strongly make businesses more successful and make them better.

On the fourth bullet on the Slide 4, we will talk about our NewtekOne dashboard that we unveiled recently. We were really excited about the product. Important to note, we are hopeful that the company will carry forward its objectives with the proxy vote and regulatory approval to become a bank in the event, we're not a bank. The dashboard will still be available, however, without deposits but we've been working on this. We will be rolling this dashboard out in calendar year 2022.

Also to note, obviously, during the fourth quarter of 2021, we really put tremendous amounts of resources into closing and funding 7(a) loans, 504 loans or non-conventional or non-conforming conventional loan business has taken off really, really well. Obviously, in calendar year 2019, there were no PPP loans, and no PP income, it will be done in calendar year 2022. When you look at the momentum and the performance of the company, through 2020 and 2021, we're extremely excited about our future. We have great momentum going into particularly the lending vertical, based upon technology changes that we've made, staffing changes, training changes. And we've got plenty of capital to basically be able to fund our loan growth and quality portfolios going forward.

On Slide #5, some lending highlights a $190 million of 7(a) loans in the fourth quarter a 74% increase. On the year, $560 million of loans for the full 12 months, an increase of 184% over the prior year. That's the largest amount of SBA funded loans that Newtek has done. We're the second largest SBA lender in the United States after the December 31 quarter. For the SBA, that's their first quarter. For us, it's our fourth quarter. Our Newtek business lending facility which originates and creates SBA 504 loans and non-conforming loans, which go into joint ventures. The 504 portfolio closed $90 million of loans during the 12 months versus $87 million.

I would say from a metric perspective, this was an underperformance, however, we do have a very nice roll forward on some loans that we thought could or should have closed in Q4 that are rolling over into Q1. We feel really good about that. We talk about our first quarter 504 closing position in a later slide. Newtek business lending is forecasting $150 million of 504 loans for the full calendar year 2022, which will represent a 66.5% increase.

Once again important to note in the 504 business, in addition to us making the loans we have to get CDC (Community Development Corp.) approval, SBA approval, and the borrower. Everything's got to get lined up. So it's important to understand that you know, markets change, pandemic issues, staffing, legal, et cetera. And these necessarily move closing and funding dates around from time to time.

Lastly, we say goodbye to PPP, $1.9 billion of PPP loans funded. We probably forgiven in units about 75% of the total 26,500 portfolio. To remind everyone, we have sold a 100% participation certificates in almost all of our PPP financings.

On Slide #6, we talked about this previously, addition to staff, I think it's important to note that we have brought in some new management in the lending space for all the 4 products, okay. It's important to note once again, the way we do our business, big funnel up at the top, the referrals come in, and then our business service specialists and management team sites. Is it a 7(a) loan is it a 504 loan? Is it a nonconforming loan is a secured line of credit. So you've got a very big funnel to get the referrals in the front end decides what is best for the customer and what's suited to their needs and demands obviously to make a good credit.

So on a positive note, the addition of Justin Gavin, Jessye Brem, Scott Shulman, and I'm forgetting somebody at the moment, to that management team, I'll have to come back to that one. But that management team has done a great job, which you'll see, as you look at the portfolio, growth and the pipeline growth this quarter and time this year, this quarter and time last year. So we have had staff turnover for some company staff turnover is bad. In our case, a turnover that we've been involved with in the past, I would say year and a half, it's really put a very talented team in place that has similar goals and metrics for both personal and professional growth that the company has. So we feel very good about our staff and our training going forward. In the press release, we indicated I think it was north of 3,200 management training hours for lending staff, we're very proud of that.

Slide 7 gives you a good idea of what our efforts are doing and what we think is the operationally leverageable and scalable lending business 57,000 referral units for the quarter in 2021, compared to 92,000 in 2020. For the year 413,000 in referrals for the 12 months, for 239 for the same period in 2020 and unit close is important to note. We're closing more units. That's a big deal. 282 on units in the 3 months ended December 31, '21 Compared to 122 units for the year 761 units, versus 215 units. And this is all based on 7(a) data.

Once you get into the non-conforming conventional loan business, you're looking at average loan size, that could be around $5 million plus or minus. I think it's very important to note that in order to get the very significant material volumes, you really don't have to do a lot of units. And that big referral funnel that's coming in the front end is going to create that type of activity. So when you think of the non-conforming business, and we'll talk about that going forward, putting that on to the referral infrastructure, the assembly infrastructure, the underwriting infrastructure, tremendous opportunities for operating leverage.

Newtek's database of customer opportunities to see as extensive with over 1.5 million referrals in the database. We'll talk about the NewtekOne dashboard and their ability to cross sell but more importantly, provide a quality solution to our independent business owners all across the United States. Once again, it's important to note that the dashboard that we're going to provide is going to give business owners a tool that is going to enable them to be more successful in their business, both for data information and transaction. Important to note, with a 19-year track record of loan assembly, underwriting and technological expertise, we have materially improved their processes across the board to be much, much better in the lending business, closing out 2021 and clearly going into calendar year 2022. We're excited about the growth potential and all the possibilities.

Slide #8 talks about our financial highlights, total investment income up 17.7%. For the year, net investment income was a decrease of 25.8%. The explanation there is the delta of the PPP income that came in in 2020 versus 2021 because the gain on sale is included. So on a positive note. Clearly, we had significantly greater adjusted ANNI -- or ANII for the calendar year of $3.47 versus the prior year of $2.05. However, the PPP income in calendar year 2020 dwarfed everything else. We did very little bit of our core business. Core business coming online, or back to basics, or growing very exciting.

I do want to point out the $3.47 was a nickel better than consensus. Analysts of 4 analysts estimates at $3.42. And we've previously forecast $3.40 for the year.

Debt-to-equity ratio of 1.19 at December 31. It's one of our lower debt-to-equity numbers in recent quarters and recent years, we feel pretty good about reducing our leverage at this point in time, it is likely that that leverage number will bounce back up. Once again total investment portfolio increased 13.1%. Important to note that, you know BDCs have a hard time growing their total asset size because they're constrained. When they're trading below NAV, we obviously traded a premium to NAV. So being a BDC, it's important to have a real strong stock price to be able to continue to raise equity and debt to grow the business. Net asset value of $403 million crossed over the $400 million mark, an increase of 8.2% per share on a year-over-year basis.

Slide #9, the adjustment ANII trend, obviously, big $3.47 adjusted ANII. Look, I would say that we have not given full year guidance as a BDC for the calendar year, there's good reason for that. We may not be a BDC for the full year. We have indicated that we think that the third quarter would be the most likely yes, but that's up to our work, obviously, with the regulatory bodies, which we're going to work with them and take give them as much time as they need to make the appropriate decisions to work with us to make sure that everything goes smoothly, and we've got the best plan in place. So we have declared for the board a $0.65 dividend.

In the first quarter, we have forecasted a $0.65 dividend. In the second quarter, that's $1.30 for the first 6 months, which I think is a good, formidable forecast going forward. You know, typically, we've had better second half's than the first half's. There is -- and maybe this is the understatement of the day, a lot of uncertainty and volatility in the markets today. So, you know, trying to figure out what the third and fourth quarter of the year look like, looks like at this point in time, we're going to, you know, hold that back at this point in time. But once again, when you look at the trends, when you look at the pipelines, when you look at the efficiencies, the areas that we're in, and frankly, the fact that the businesses that were involved with, these are not international businesses, they're independent business owners, primarily with the U.S. focus.

We do we do think we're in in pretty good shape here. So we would like the market to obviously look at the company's historical performance over trend to over 10 years, how things are trending, the processes and training that we put in place technological improvements, we're pretty excited about 2022.

Slide #10 dividends, which we're just talking about, obviously $3.15 in 2021 was a 53% increase over 2020. We talked about our First Quarter 2022 dividend declared $0.65, forecasted $0.65 cents in Q2. The declared dividend is a 30% increase. I think you'll look at some metrics that we have going forward for Q1. Very, very strong, very, very strong. So we're all excited. Obviously, about finishing what we're doing here today, but also reporting our first quarter performance as well.

You know, going back, 2021, clearly, we put up some great numbers, you could see that what we talked about, but those numbers without great challenges. And I think that one has to look at the company and say this is a company that is flexible, that is nimble, that's forward thinking and is able to make these adjustments. And these are things that we've done over the course of 20 years as a as a public company.

Slide #11 talks about the 1.19 debt-to-equity ratio. And then as many of you are familiar with our model, we sometimes sell government guaranteed pieces, which settled in the first week or second week of the next quarter. So I mean those, that leverage basically goes away fairly quickly and we would have been at 1.1. So we're really putting up some great numbers without a lot of leverage.

As many of you know, we redeemed $40 million on Slide #12 of the NEWTL outstanding baby bond notes with no prepayment penalties. You can join us recently maintain their BBB plus rating on our notes and debt. And there's also the NEWTZ notes $115 million 5.50% due 2026 that are callable after Feb 2022. And then there were make whole provisions for one year after that.

Slide #13. Obviously, the market should be concerned about companies managing their interest rate risk and interest rate risk exposure. Once again important to remind everybody that our SBA 7(a) portfolio floats quarterly over prime but no cap. And our liabilities in the warehouse line with Capital One also are floating rate and the rate on our securitizations are floating rate. So we have a very nice asset liability match on both sides.

We also did a recent securitization of the joint venture of a non-conforming conventional loans. This is a very good template going forward for our business that we'd like the analysts and the investment community to begin to focus on in the category of well what if, like, what if Newtek can grow this business which we intend to do? What if this becomes valuable and important? And what are the margins in this business?

Well, we wound up issuing a little over $56 million of notes I believe, which are rated single a but DVRs. With a fixed coupon of 3.187%, the net coupon on the portfolio was 7.2%, the gross coupon 8.2%. We keep the servicing spread 100% of that on all the loans, but the joint venture is split between us and our joint venture partner. Really a very good transaction for us, and should serve as a template for what we can do going forward, obviously subject to the volume. Important to note those loans were season. And as of this date, they're all currently performing, which is valuable, all of them except for 2 or 3 were originated pre-pandemic.

In the calendar year of 2021, I believe that's when it began, the Board of Management decided it was prudent to hedge the interest rate risk in the 504 portfolio in the nonconforming portfolio, I go back to having good foresight and maybe luck and good timing to begin a hedging program. 504 loans are typically fixed for 5 years, and then they adjust at a spread over a 5-year index with a margin. And our non-conforming conventional loans are typically structured the same way fixed for 5 years or a term, then to the full adjustment without a cap and a floor. So it's important to note that the hedging is basically for the duration. During the time the portfolio was hedged.

We successfully hedge our portfolio in calendar 2021 would realize that gain of 644,000 and then I can find portfolio once it got securitized that it was asset liability matched with a fixed rate coupon realized a hedging gain of $1 million when the securitization was closed. Slide #14 is our typical slide that we talked about in with our SBA pedigree. Point to note are our average loan size is coming down 156,000 per unit that's the uninsured portion of the loans that government guaranteed pieces are sold in the market and again, and that uninsured portfolio is typically in non-recourse securitizations that are adjusting the loans are prime plus 2 and 3 quarters no caps, which is approximately a 6% cost to the borrower and a 6% earned coupon to ourselves.

I would like to point out also that the secondary market pricing, which you can see on Slide 15 remain strong without getting too much into the weeds and this is in the past history. It was one of the reasons for the high 13.05 premium was the fact that there was 50 basis points on additional coupon for SBA lenders like ourselves because of the pandemic adjustments in various Biden and Trump programs that benefit is going away. Prices still remains strong. Not quite at that number, but certainly not far from it and significantly above the 10.78 mind you a mix between 10-year paper and 25-year paper determines this as well as market conditions.

But essentially, it's a full faith and credit government-guaranteed floater with a big determinant of price changes is prepayment. Important to note on Slide 15, the final bullet. The company had $59.3 million in guaranteed portions of 7(a) loans on its balance sheet that are available for sale. So this, if sold in Q1, will produce a gain on sale from that portfolio. Slide #16, we successfully did our 11th securitization of the uninsured portions of our SBA portfolio, which cleans out our Capital One Bank line created $79.7 million of Class A notes there were A rated and $23.8 million of Class B notes that were BBB rated by Standard & Poor's.

Very nice advance rate, and we're proud of the execution. We want to make sure that we thank the great work that Deutsche Bank and Capital One Bank did on this particular transaction. deal. I think it sold out in a day or 2. We had to close the books down almost 4.5 to 1 oversubscribed on the A class. Once again, these are nonrecourse financings.

Slide #17, an important new slide to the deck Newtek mall business finance, that's the 7(a) lender that basically has its loans in the Capital One Bank line and then into securitizations. Take a look at the net interest income trend, which I think is very, very valuable. This is good quality reoccurring income that is added. So when you look at Q4, 2021 and you look at the net interest income, $4.7 million, that's the highest number we've ever had. And obviously, that will reoccur throughout the year next year, up from $3.1 million to the prior year and $3.6 million in Q4 2019.

Obviously, we didn't do many loans in 2020 and you have attrition on the portfolio. So we're very happy and proud about this additional stream of income continuing to grow on a going-forward basis. This type of spread income is valuable to Newtek. We anticipate, as we grow the non-conforming business out of the JVs, we'll pick up that type of spread income, we'll talk about that in a slide going forward.

Once again, really excited, particularly when we look at our pipeline progress going forward, which you can see on Slide #18. So we've got the pipeline on the 7(a) to 504 and the non-conforming conventional. So on the 7(a), important to note that as of 2023, '22, we've already closed $68 million of 7(a) loans. We have an approved pending closing a $155 million. If you go back to calendar years 2018, 2019, I'll throw 2020 out for the most part because we kind of dumped the March portfolio 2021, an $80 million, a $90 million, a $100 million closed year in the first quarter, which is typically light.

You could see where we're going to have a heck of a good Q1 for the SBA 7(a) portfolio. And as you go down, you could see the growth in Prequal in the total growth. The total side of the portfolio in 7(a) of 67% over the prior year. In the 504 unit, you've got the same type of numbers. We've got $15.6 million closed. You've got a lot of approved pending closing. You know I'm hopeful that we'll get to a $30 million or $40 million closed number in the first quarter. We're looking to do a $150 million of closed or funded loans in calendar year 2022 from 504.

In the nonconforming space, we've got a nice pipeline that's building. We're very close to closing. Our second JV, our first JV was dormant throughout the pandemic last year. We have a second and third party, third in closed negotiations. We're going to forecast about $300 million in these loans, which will be funded by 50-50 joint ventures. I think that's a very conservative forecast and one that can be met and is obtainable.

On Slide #19, that's a total pipeline growth across all the different businesses. On Slide #20 shows the seasoning of the 7(a) portfolio and we do like the fact the portfolio is getting more and more seasoned. Defaults tend to accelerate within the first 4 years of a portfolio, particularly from 18 to 40 months, and then they flattened. So we feel pretty good about the seasoning of our portfolio being helpful. Slide #21, we're proud of. If you take a look at the 12/31/21 dates, there's nothing greater than 60 in the portfolio. And the nonaccrual portfolio went down year-over-year.

Given a pandemic, COVID affected, business affected shutdown, we feel very good about the portfolio that's been originated in our 18-year, 19-year history at Newtek small business finance. So we're really pleased with what's going on in the portfolio from origination and from a servicing perspective. On Slide #22, we have 44 full-time employees that service our portfolio. The size of the portfolio is approximately $3.1 billion at these 31. It was higher, obviously, because we've gotten forgiveness on a sizable amount of PPP loans. Important to note that we are a Standard & Poor's rated servicer both for SBL and NSBF.

We also service portfolios for 2 government regulators, the FDIC and the National Credit Union Administrator (NCUA) that regulates all credit unions and 75 other banking entities. We worked very hard through the course of the last 2 years as the government shut down businesses and industries and really limited the amount of commerce for some of our clients. So we helped our clients with PPP financing, EIDL loans, EIDL as well as employment retention tax credit program, which is still going on. These programs help keep our borrowers healthy and very well positioned for 2022 going forward.

Let's go to Slide #25, portfolio company review. Important to note the key entities in this review, Newtek Merchant Solutions, Newtek Technology Solutions, Newtek Insurance Agency, Newtek Payroll Solutions, also Newtek Business lending that we talked about, that does the 504 and participates in originating those loans and selling them into the joint ventures and Newtek Business Credit, which is DBA for CDS. On Slide #26, here are some of the important data for the 504 loan program. And it talks about what we accomplished in calendar year 2021. On a going forward basis, we're looking to close or fund approximately $150 million of 504 loans, which would be a big increase over 2021. So that will be the 2022 forecast of a $150 million or a 66% increase over the 2021 fundings or closings.

We have the capacity to do these loans with a $100 million facility from Deutsche Bank, a $75 million facility from Capital One Bank, a $20 million facility with One Florida Bank, which helps us through construction, financing. Also, important to note, we sold approximately $64.6 million in 24 units the 7(a) loans to third-party investors for a gain on sale of over $2 million for the 12 months. So when you look at the 504 business on Slide #27, you've got a typical structure of a loan in terms of what the first is funded by NBL. And then you've got the second lien that we fund that gets taken out by government debentures, borrower injection of 10%. But we're left with the 50% first. We don't fund the loan until the government takeout is in place.

Slide #28 talks about the return on investment, which we could see that the 504 business is profitable, like our 7(a) business is profitable, like our non-conforming business is profitable. These are all businesses that are providing high returns on equity, and we are excited about these businesses, the businesses that we're in that we've successfully managed for over a decade provide higher returns on equity, which is why our stock price has been a stellar performer over the course of 10 years.

Slide #29, a little bit of a deeper dive into conventional loan portfolio, what we call nonconforming conventional loans. We're really happy to announce that we successfully securitized our portfolio of $86.6 million, 17 loans. DBRS was the rating agency. For those of you that are interested in more details on that securitization, you can go to DBRS's website, take a look at the presale agreement, which I still believe is up there. Obviously, the pandemic slowed the initiatives down, both with ourselves and joint venture partners. We're up and running, and we're forecasting conservatively $300 million. We'd love to beat that number, but that's where we are in 2022. And we said we're currently negotiating 3 JV agreements, which would give us tremendous capital powder to clearly fund between, say, $500 million to $1 billion worth of these loans in the foreseeable future. We're very, very excited about this business.

On Slide #38 -- 30, excuse me, we talk about the benefits of non-conforming conventional loans. And this is important in the contract of looking at Newtek and trying to analyze the cash flows from the different areas, whether it's the merchant processing business, whether it's the Tech Solutions business, whether it's the 7(a) business with its gain on sale, it's servicing income and spread income from its portfolio. And now you've got the non-conforming conventional loan business where we can earn origination fees prior to going into the JV or out of the JV, additional servicing income of a 100 basis points for servicing these loans, which goes into SBL. We have the opportunity, obviously to manage the interest rate risk through a hedging portfolio. And then once the loans go into a securitization, you're pretty much match funded.

And what the NCL or non-conforming convention alone business does is it leverages our existing origination platform, which allows for increased revenue off of fixed expenses. So when you look at the overall operating plan, once again, big funnel, lots of referrals. And when we're in the market, we don't say, "Oh, come to Newtek, we're a 7(a) lender." We're a lender. How do we lend 10- to 25-year AM loans, no balloons, no covenants, must personally guarantee the loan, willingness to give you a high advance in the primary collateral, and we indicate a single-digit interest rate. That brings businesses to us.

They can ultimately wind up in any one of these 4 buckets that exist today. Down the road, we're hopeful that we're successful with a proxy vote and regulatory authority. The Newtek brand will also be able to make regular bank loans that are more consistent with bank type lending practices with lower cost of deposit funding to fund that so that you've got a full menu for independent business owners. And you've got a full menu as businesses mature and graduate through the cycle and get better and better and qualify for different types of financing.

Once again, no balloons, long AM schedule means for the borrower, lower payments, and it really is working very well and the additions of non-conforming conventional loans and the ability to use the brand to put assets, qualifying assets into the bank extremely exciting.

So on Slide #31, I believe we covered this. I jumped the gun a little bit. We talked about the securitization that we did very, very useful and beneficial. One other thing that's important, in all of these loan categories, 7(a), 504, secured line of credit, not conforming conventional and bank lending. Our referrals encompass a wide swath of women minority-owned businesses and loans to oral communities because of how we aggregate these opportunities branchless brokerless, BDO environment using technology and Alliance partners to refer to us, gives us these opportunities. So we're extremely excited about servicing independent business owner communities and the communities where these people live in all areas, whether they're men, women, transgender, rural, urban, we're very excited about our potential future.

Slide #31 talks about our merchant processing valuation. We expect our growth to begin to return back to this business coming off of the pandemic. Slide #33, just a couple of points to consider. 23.2% increase in monthly sales volume for the fourth quarter compared to the fourth quarter of 2021. We're hopeful that increased consumer spending will continue. We -- also, we have a significant portfolio of taxi drivers in North that's been tremendously affected by the lack of international travel. That business of 1 point through up $1.2 million, $1.3 million of cash flow. That has been diminished, I think, last year down to like $300,000. So there's a lot of upside in these various different businesses that we're in.

I will also state that we had a significant management realignment in 2021, which we believe will bear a lot of fruit this year. David Simon named as President and Chief Operating Officer of Newtek Merchant Solutions, and he's repositioned a very strong management team along with Mike Campbell, who is in charge of all underwriting risk and policies and procedures today, which will be valuable, particularly as we are hopeful that we will morph into a bank at some point in time in the future, once again, subject to shareholder vote and regulatory approval.

When I go to Slide #32, when we look at our Newtek payment systems and what is referred to also legally as POS on cloud. We are very excited about this system. For those of you who want to learn more about it, go to newtekpaymentsystems.com on the website. There's a lot to go over. I don't want to spend too much time on the call today to go over, but here's what I'm very comfortable with. When you look at Square and you look at Clover, our software, our system, it's just better. We are processor agnostic. It's fully integrated into the GL for payroll, for payments, we are able to integrate a full range of benefits into the system. It could be branded for any channel partner like an ISO, a community bank, a credit union, which Square and Clover do not do. This is a winning product for us. We're very excited about this and see it as a future opportunity for growth.

Slide #35, we talk about our technology business, Newtek Technology Solutions, 2021, revenue $41.1 million, EBITDA of $5.4 million that's versus $4.3 million last year. So we're really excited. We have a very aggressive growth forecast. I am hopeful that we will deliver that of $7 million. The ability to offer 2 independent business owners, security as a service, advice and consulting protect solutions, professional services and to be able to give our facilities out to independent business owners that can't afford a CTO or a CIO or really can't afford to have servers on-prem nor would they really know how to manage them.

We do this business for a 3- to 5-person medical or dental office, and we also do it for larger players as well with a particular emphasis and focus going forward on financial institutions and clearly commercial enterprises. So we're very excited about this business. We believe in it. It's great and businesses today need to be able to store their data and information technology in a safe and secure place that's current and up-to-date, particularly when you see all the cyberattacks going on right now, we play a very important role.

Not to say that Amazon and Azure don't do this, but they really don't do it for smaller businesses. And in Amazon's case, you kind of need to use their development tools and their software. The 30 million SMBs as the SBA would define it, they're not going to Amazon per se, they can, but it's extremely expensive, and they really don't have the ability to relate to the Amazon cloud. We can help them with that. By the way, if they want to be in the Amazon cloud, we could help them get into the Amazon cloud with our advice and consulting. We can help them get into the Azure cloud. We can help them manage their solution on their on-prem, or to use our facilities in Phoenix or New Jersey, Extremely excited about the future of our tech solutions business.

I'm going to fast forward now to 38. We talked about payroll and benefits. This is a changing environment. I mean, when you look at all the regulatory changes, customers need help, we're there 24/7, and we're very excited about our staff being able to help people in remote locations on video screen and available to our customers. We believe we don't need branches. We don't need brokers. We don't need bankers. We don't need BDOs. We need the current team of people that are currently set up the way they were doing the business in the pandemic to be able to serve independent business owners in all areas, 24/7. We're really excited about that.

Let's go to Slide #39, NewtekOne dashboard, the one dashboard for all your business needs, which will be available if we are hopefully successful in acquiring National Bank of New York City and even without it, the dashboard will be launched. The dashboard is currently in process, and it is very much of an aggregation tool. That's important to know. So with that said, payroll, web traffic data, the storage function, the data information and storage function, the lending tools, the payment processing information, it all exists today. We're going to drive this up into one single sign on one dashboard, and this is going to be the dashboard that's going to make businesses more successful. It's going to make them better. It's going to make them more informed. There'll be parts of this dashboard that will wind up being transactional. That is our goal. Will that be available in 1.0 or 2.0 or 3.0, still remains to be seen. But we're very excited about our initiative.

And as we foray into the world of banking software and banking systems, we've gotten a tremendous education. And once again, bank or no bank dashboard will be rolled out. We're really excited about it and we're looking forward to moving forward in this particular area. On Slide #40, this is a screenshot of what the dashboard will look like. So I think it's really important. It's the one dashboard for all your business needs. As you go down the left-hand column, extremely important. Number one, your Newtek team.

So when you go into one of the competing banks, community big banks, et cetera, who do you talk to? Well, you go to the dashboard, you'll have a relationship manager and you'll have a payment specialist, you have an insurance specialist. You'll have a payroll health and benefit specialist. You'll have a tech specialist or lending specialist and if we're a bank, but depository specials. So you will be able to go on the system and communicate via video with anybody on your team. So it's not like you're walking into one of these big banks today that's happy to take your deposits and not giving you much for it and maybe occasionally making you alone, but really not doing a lot else for you.

But in the dashboard, you could see in addition to the things that banks do, user deposit information, user lending information, your credit card data will be available to you, chargebacks, refunds, processing data, how much Visa, how much Master, how much American Express, how much debit, how much credit. Looking at all your batches. Our goal is to be able to get into the dashboard and be able to allow you to make your payroll. So you can actually see who you're making the payroll too. You could see the money coming out for the workman's comp. You could see the money coming up for the health insurance. You could see the money coming up for the 401(k), all in the dashboard because we are a payroll processor and solutions company for our clients.

The data bolt storing data, storing documents for businesses, helping to manage the business, insurance policies by sale agreements, operating agreements, secretary certificates, all of that stored safely and security in the dashboard. Very, very exciting tool. Futuristically, we'd certainly love to maybe be in the tax business, digital bookkeeping business. It's on the drawing board. I don't have a specific time. We have a lot of initiatives, which you could tell by the length of this call today. So that is something that we'll get to it.

The big differentiator here is our dashboard is going to make our clients better and more successful, and it's not just software. It's software and people. They may not take that for breakfast, lunch and dinner or play golf. They may not bring into a fancy branch, but they'll be available on screen when you need them on demand. the NewtekOne dashboard, Newtek technology-enabled bank, we're really excited about what we're doing here. Slide #41 in conclusion, an investment in Newtek Business Service Corp. as a BDC or potentially as a financial holding company, which we are hopeful for. You've got a proven track record. We've outperformed the Russell and the S&P 500 for over a decade. Management's interest aligned.

I mean I heard people say, "Gee, why are you doing this bank deal." Management is very much in line with the shareholder base. We love dividends and we love capital appreciation. And I don't kind of get the difference between if the stock price goes up for capital and you sell a little piece of and you get your dividend and you make it, what's the difference? It's total return. But that's for other people that decide not me. At the end of the day, we are looking to enhance shareholder value for all shareholders, and we're very excited about what we're doing and the historic returns that we have provided to shareholders.

Yes, it includes dividends, but it also includes a significant amount of capital appreciation, which based upon what we're doing in the business within the business is very material. We've used technology in our world as a disruptor, okay? So we've never been your typical BDC and if we move forward with the bank, we won't be a typical bank either. In the event we're successful in our quest to obtain a proxy not regulatory approval, we believe it's in the best interest of our clients and stakeholders. And we really appreciate the opportunity to present to you today.

I'd like to turn the remaining portion of the financial review of our fourth quarter and annual results to Nick Ledger, our Chief Accounting Officer.

Thank you, Barry. Good morning everyone. You can find the summary of our Fourth Quarter 2021 results on Slide #43 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide #45.

On Slide #43, for the Fourth Quarter 2021, we had a net investment income of $1.6 million or $0.07 per share as compared to a net investment income of $850,000 or $0.04 per share in the fourth quarter of 2020. That's a 75% increase on a per share basis. Adjusted NII, which is defined on Slide #44, was $16 million or $0.68 per share in the fourth quarter of 2021 as compared to $9.6 million or $0.44 per share in the fourth quarter of 2020. Focusing on Fourth Quarter 2021 highlights, we recognized $24.8 million in total investment income, a 67.7% increase over the fourth quarter of 2020 total investment income of $14.8 million.

Dividends from portfolio companies, interest income and other income were the primary drivers for this increase, with interest income increasing by $1.4 million, resulting from a year-over-year increase in the accrual loan portfolio. Other income increased by $3.3 million for the fourth quarter 2021, resulting mainly from a year-over-year increase in SBA 7(a) loan origination volume. Servicing income increased by 7.2% to $3 million in the fourth quarter of 2021 versus $2.8 million in the same quarter in 2020. Distributions from portfolio companies for the fourth quarter 2021 totaled $9.75 million, which included $6 million from NMS, $3.5 million from NBL, our 504 business and $250,000 from MTS as compared to $4.175 million in the fourth quarter of 2020.

Moving on to expenses, total expenses for the fourth quarter increased by $9.2 million quarter-over-quarter mainly driven by an increase in the SBA 7(a) loan referral fees due to high loan origination volume is related costs, factional fees and loan origination and processing costs. Realized gains recognized from the sale of the guaranteed portion of the SBA loans sold during the fourth quarter totaled $18.1 million as compared to $11.4 million during the same quarter in 2020. In the Fourth Quarter 2021, NSBF sold 223 loans for $126.6 million at an average premium of 12.28% as compared to a 123 loans sold during the fourth quarter of 2020 for $85.1 million at an average premium of 11.42%.

The increase in realized gains was attributed to higher SBA loan origination volume in the fourth quarter of 2021, combined with higher average premium prices when comparing to the fourth quarter of 2020. Realized losses on SBA non-affiliate investments for the fourth quarter of 2021 was $3.5 million as compared to $2.7 million for the fourth quarter of 2020. Overall, our operating results for the Fourth Quarter 2021 resulted in a net increase in net assets of $20 million or $0.84 per share, and we ended the quarter with NAV per share of $16.72.

I'd like to turn the call back over to Barry.

Thank you, Nick. Operator, we will start the Q&A.

(Operator Instructions). And we have a question from Paul Johnson from KBW.

Just have a few for you today. I'm curious as far as what you're seeing with your portfolio in terms of credit trends, just subsequent to the expiration of the CARES Act last year in September, if that's changed at all, if that's approved or any sort of significant developments there?

Yes. I think that if you look at the results for the majority of the portfolio stopped receiving the CARES payments in probably March, April time frame. And I think that people looked at that as, gee, that's -- first of all, none of these things are permanent. And these businesses took these funds in because in many cases, they were very limited by government action to open up or wearing masks or a variety of different things they had to do because these things matter.

So when you look at our portfolio performance, which we covered in one of the slides, we're very, very pleased. And we think that businesses and Newtek is kind of an example and really took the opportunity to pay attention, get rid of necessary expenses and position themselves for our businesses to be done in the future. So we think the trends are pretty good now. Today is all of a sudden a new day, lots changed. Consumer spending has been incredibly strong up until I would even say yesterday. I mean I'm seeing that in the payments' numbers. So if this is not overly punitive, meaning that if we have oil at $125 bucks a barrel for 6 months that will be a problem, I would presume to a degree.

But I think so far, we're in good shape. I mean, the future is a little bit more uncertain with what's happened yesterday. But right now, we feel pretty good about the quality of the portfolio where our clients are. I mean we knocked out everything 60 days and over and non-accruals went down. So we feel pretty good about where we are as well. And I always tell you the value of the collateral is very strong right now.

Secondly, you guys have grown your staff pretty significantly last year. I'm just wondering, do you expect that kind of rate of hiring to continue into this year or do you think you've kind of reached a point where you're pretty satisfied with the staff that you have today?

It's a great question. Myself and the lending team, led obviously by Anthony Zara and Peter Downs, look at headcount regularly. But we've got the right staff size and the capacity to lean into the business. Now as we grow the NCL business, we'll probably need to add a few selected people but not a lot because you got to remember the NCL business, you've got bigger volumes in our units. So the other thing I would tell you on the servicing side, hopefully, loan forgiveness and PPP will diminish. So we'll be able to shift resources around.

I think we're in pretty good shape. I think the most important story to tell is we significantly increased what I think was our SG&A last year and we're able to cover it. And I think that based upon what we're looking at for Q1 and Q2, we're able to handle it. And we think we get a tremendous amount of leverage through the NCL opportunity as well as we get leverage in the event we're successful in the acquisition of National Bank of New York City.

Appreciate that. I just have a few more, and I'll hop back in the queue and few others ask questions. I'm curious on the JVs that you talked about with new partners and potentially forming those and growing those over time. How do you plan funding the JVs? Is that going to be essentially cash on your balance sheet or potentially assets from the portfolio or how? What's the plan in terms of just getting those JVs started?

Sure. It's a great question, Paul. I appreciate you asking because I think that a lot of people don't fully understand the value and capability of the JVs. And the way we currently do it today, which is what we would continue to do as a BDC and frankly be not much different than if we were -- had that asset at a bank holding company would be by a combination of debt and equity. And they're typically 50-50 equity pieces, and we have leverage financing from different partners. And we've got term sheets and offers on that now.

So the loan growth would basically be funded on balance sheet by the equity investment of Newtek Business Service Corp. into the joint venture.

Got it. And then lastly, I was hoping maybe you could just kind of maybe talk about the effect of inflation and how you've seen that kind of flow through your portfolio companies or maybe even how you expect that to kind of flow through this year? Any sort of effect that that's had on your portfolio or maybe even your underwriting process? Just any kind of color there would be helpful.

Yes. I think that inflation is a good thing for the payments business I need to say that because it's just dastardly, but it increases the volume and you've got a lot of fixed expense there. So for the payments business, it's good; for the insurance agency, it's good; for the payroll business, it's good; so for the business services business, it's great.

Now in the lending business, it can be problematic if in fact, it drives rates up a material amount. And I'd say that driving up rates a material amount does put pressure on businesses that don't have the price elasticity. So where we begin to see certain strains from borrowers typically is when you have a very material rate shock. But it's nothing that we -- I mean, we've been doing this for in the SBA space since 2003. So it's nothing that we haven't seen before. It's stuff that we modeled in all of our models. And not overly concerned about inflation as being problematic for our overall business, which is why it's great to have all these diversified streams.

Yes. Appreciate that. Actually, one more question, just a housekeeping thing on for Nick. He mentioned that I think I just missed it. But could you just verify the realized losses on the SBA loans in the fourth quarter?

In the fourth quarter, yes, $3.5 million for the fourth quarter.

Okay. I appreciate that. All right. That's all for me. Congratulations on a really active quarter in a really active 2021. Hopefully, we see more this year.

Thank you very much.

The next question comes from Mickey Schleien from Ladenburg.

Okay. Barry, most of my questions were already asked, but just a couple more. You mentioned that SBA 7(a) prices weakened in the fourth quarter as the government's fee waiver ended. Following that, how do you view pricing developing this year? And what do you expect for demand as interest rates rise?

Yes. The prices, Mickey, on the bonds have actually been not as good as all 113 and change, but not too far from that. So without putting a number on it, the need and appetite for government, full-facing credit government-guaranteed floater in the current environment is desirous and prices have held up pretty well. I -- to be frank, but you don't have a forecast or a number for Q1 but we'll probably be there in about 5 weeks with the way things are going. So I don't see major changes.

You know, if you want to do some modeling anywhere between 111% and maybe 112.5%. I'm just giving you a very wide range. But I don't have any further information relative to the mix of the portfolio. And I want to emphasize the change in the pricing was based upon the fact that there's 50 basis points less in coupon that we're selling. So the flip side of it is the demand for the full faith and credit government-guaranteed floater is pretty high, and that's what's keeping prices stellar.

And how about demand for the loans in terms of originations, Barry? In other words, when you look at your long history and let's say interest rates climb, they could climb a couple of hundred basis points in the relatively near future. How does that impact demand by your borrowers for TEP?

It's a great question, Mickey. It's still because of the fact that we are a 10- to 25-year amortized lender, we are a better alternative than a conventional bank loan. Obviously, we're higher rate than they are, but it's the stretching out of the payments that's immeasurably invaluable. So higher rate environments don't tend to dissuade the universe of opportunity. And you could see that from our pipeline, which has been growing throughout very material significant rate increases over the land, it's not declining and we're closing and the credits are good and the economy is good. So no, we do not see a problem with loan demand, I would say, on a Newtek specific basis.

I understand. Just a follow-up on the credit quality questions. Could you give us a sense of how your borrowers revenues and margins trended in 2021? And do you expect those to be sustainable in 2022? That's a good one. I think that too early to tell, to date, there's been a lot of pricing elasticity. And I guess that people going into a restaurant with a higher bill and they're paying. So far, we see people from a rent standpoint, being able to afford rent hikes and other expenses.

I do believe that we're still dealing with supply chain issues that will wind up having some effect on business and business credit. I think I -- if I was to tell you anything else, I don't think I'd be telling you what's truthful here. So you've got an environment that is really volatile. It's changing rapidly and businesses that are smart and nimble do well, which, frankly, we have 44 people in our servicing department. We are all over our clients right now with the employment retention tax credit thing, which I would say a lot of our businesses don't know that they're eligible for.

So we work very hard, not just in getting people money but giving them these other solutions that make their business better and that's why we've been able to lend money for '18 or '19 years in a space that typically people they get in, they get their fingers blown off and they get out. This -- we've really put a mark in working with our client base to make them more successful, not just in giving them money but in helping them grow and develop their business with the best solutions.

I appreciate that I understand. Barry, my last question. Thinking about sort of secular trends, are you seeing opportunities developing amongst small and medium-sized businesses to service the alternative energy market. I'm just thinking about companies that may go out the houses to service solar panels or wall chargers for electric cars, things of that nature? And can that displace historically loans that you used to make to gas stations, for example.

Yes, it's a good question. Look, that is going to happen. Right now, we would be -- we typically do not -- we're not a venture lender. I think it's important to note that. But there is no question, we've seen an unbelievable amount of entrepreneurship and we talk about charging stations, solar panels, CBD, cannabis, but we're seeing a lot of economic changes going on, industry changes. And yes, we think these are burgeoning markets. It's not typically what we have any interest in lending to.

Our next question comes from Matt Tjaden from Raymond James.

First one, maybe for you, Nick, apologies if I missed it during the prepared remarks. Can you give the breakdown of dividend income in the quarter? And then as a follow-up maybe for you, Barry, kind of expectations for the dividend income line in 2022?

Yes, I'll take the latter and I'll let Nick do the former. So I'll do the latter first. The expectation for dividend income is we have declared a $0.65 dividend for Q1. We have forecasted a $0.65 dividend for Q2. If you look at the momentum that we've got in the business with respect to 7(a) loans rolling over, the projections of the portfolio companies -- we think we're in pretty good shape. Now, we've been reluctant and we did say this earlier in the call to forecast Q3, Q4. We don't know whether it will be a bank. We don't know whether it will be a BDC.

But I do think the company has historically trended to be higher in earnings in the second half than the first. I also cautioned that we have a lot of volatility just looking at what's going on in the market today with rates, gas, stuff like that. So we're a little conservative on that. What I will say is, given that we think the bank transaction is not a second quarter. We don't think the bank transaction second quarter transaction. It may be a third quarter transaction. If it's a third quarter transaction, we probably would pay a dividend consistent with what we normally do as a BDC.

Now, that's a guess that might change. I might retract that. But knowing our customer base, our investor base, we want to reward our investors with that. Going beyond that, I couldn't. But I think you're going to have to do your own projections. I appreciate the work that our 4 analysts have done because you guys do have adjusted NII projections for the calendar year, all 4 of you. After this call, hopefully, maybe you'll look at them a little bit closer. But yes, I keep an eye on that pretty well.

Nick, can you answer Matt's questions on the dividends from last year?

Yes. So from -- there was $6 million in dividends from NMS, $3.5 million from NBL, and $250,000 from NTS.

Got it. Appreciate that. Barry, maybe as a follow-up to you on the bank holding conversion company timing. Any sense you can give us as to when we might expect to see a proxy statement.

I should have been prepared for that question actually. The answer is I can't really give you a time frame. I think from our perspective, the most important thing that we can do here is make sure when the proxy goes out, the people are just really well informed with everything that we know. So that's kind of what we're studying right now. I'd prefer it to be sooner than later. But I think the deeper that we get into the transaction, we're in it. We're in it pretty deep at this point. And I can say that we have not encompassed any road bump at all that's caused us to say no.

Now I'd say that with all humility because until the regulators sign off on a final plan, you don't have a final plan. And we're in discussions with them, and we've made certain adjustments to date and things of that nature. But nothing that's changed the company and the Board's position that we like the deal that we did and are hopeful that shareholders will follow through with our belief that this makes sense. They'll have to do that evaluation based upon what's in the proxy, which is basically a vote on being a BDC or not being a BDC.

I know I didn't answer your question, Matt, but hopefully, I gave you a little bit of color that's useful.

Yes. Fair enough. Last one for me kind of continuing on that theme. Barry, maybe at a high level, now that both of the baby bonds are fully callable. How are you thinking about a refi or a call of those heading into the conversion?

I think that it makes most sense for us to get a little bit further along. And I think that one way to think about it would be that if you speculate that the third quarter is likely, then in all likelihood that would be less callable and more callable. I don't want to box myself in here and say that we won't call it tomorrow or we will call it tomorrow. But I think as you try to analyze this and make your own guesses, what are you going to refinance into and refinance out of. I will say, if you look at the way that baby bond debt and bank holding company debt is evaluated by the rating agencies, they're actually not too dissimilar.

So I think that as you try to figure out that, I think the likelihood, obviously, of callability with the bank deal being definitive at some point in time are not being definitive, will be the real determinant as to when those bonds go. Now, we did pay off $40 million of an issue that was callable because we had excess cash. We believe the coupon was high. We wanted to reduce our leverage. And I think that's indicative of the fact that this company is confident of what its forecasted beliefs are going forward, if that's helpful at all.

Thank you. At this moment, we show no further questions. I would like to turn the call back to Mr. Sloan for any other remarks.

Great. I want to thank everybody for attending the call today. I know this is a tough day. A lot of activity in the market. We had a great 2021 and we are very, very optimistic about 2022. Look forward to working with each and every one of you on whatever your needs or objectives are. Thank you very much for your time and attention today. Thank you, operator.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.