NewtekOne Inc (NEWT) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Newtek Business Services Corp.

Full Year 2019 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference may be recorded.

(Operator Instructions)

I'd now like to hand the conference over to your speaker today, Mr. Barry Sloane, President and CEO of Newtek.

Please go ahead, sir.

Good morning, everyone, and we certainly appreciate everybody attending our full year 2019 financial results conference call.

I would like to call everyone's attention to the forward-looking statement note on Slide 1 of our presentation.

For those of you that would like to follow along to our presentation, you can go to our website at newtekone, that’s newtek, N-E-W-T-E-K-O-N-E.com, and please go to the Investor Relations section.

The PowerPoint for this presentation being utilized has been hung there.

I'd like to roll everybody forward to Slide #2, and we're proud to report our full year 2019 financial highlights.

Total investment income for the year, $59.3 million, up 19.8%.

Net asset value on Dec 31, 2019 at $15.70 a share, up 3.4% from the year prior.

Net investment loss continues to narrow, an improvement of 27.5% for the calendar year over the prior year.

Adjusted net investment income, which includes realized gains, 20.1% increase from the year prior.

Debt-to-equity ratio at the end of the year, 1.36% (sic) [1.36x].

On a pro forma basis, based upon SBA loans and receivables that sort of roll over the end of a quarter and are typically liquidated subsequent to that, 1.27.

Total investment portfolio continues to grow by 21% for the year.

The pro forma number that we use for debt-to-equity explanation is on Slide #3.

On Slide #4, we wanted to give the market a better understanding of how our NAV has changed over the course of time.

Our actual annual average over the last 4 years, approximately 2.8% with a 3.4% increase in the last calendar year.

On Slide #5, we're closely focused on our GAAP NII loss.

The differentiator, obviously, one of the differentiators of the Newtek model is that we make loans and are able to sell them.

Net -- so therefore, on a net II or NII basis, gain on sale of the 7(a) guaranteed pieces, which we've done over the course of 17 years is not included in that number, but that loss continues to narrow.

That's important because, obviously, that demonstrates sort of a form of what typical BDC investors and analysts look at is sort of reoccurring.

And our cost of debt financing has continued to decline, not only as rates are declining, but as tighter spreads are occurring, particularly in the recent securitization that we've done.

We'll talk about some of our debt cost of capital in a future slide in the presentation.

We're also seeing future dividend distributions from portfolio companies, with respect to those contributions as well as future dividend contributions from our nonconforming joint venture, which we are looking to create additional JVs down the road with other partners that we have lined up.

And lastly, servicing income continues to be an important side of our business.

Once again, another stream of income that the benefit of the Newtek model comes in, which is not necessarily credit-related.

It does tend to be a reoccurring income.

And that's from the servicing of the loans portfolio, both on the 7(a) side and the nonconforming side.

On Slide #6, we talk about our 2019 dividend performance.

We had a very robust fourth quarter, $0.71 dividend, a 42% increase over the prior year.

I think it's important to note, we -- we're asked a lot of times, like, why is the fourth quarter so much better than the first quarter?

Please understand that we are a lender to the small to medium to middle market type companies.

It's a lot easier to make a loan to a business that has given you, particularly if there's issues or questions and you want to be particularly airtight when you cut their tax returns and you've got their financial statements.

It's sometimes difficult to obtain in January and February.

Because of that, our business does tend to be a second half of the year business with respect to this particular type of activity.

Company paid cash dividends in 2019 of $2.15, approximately 31% of those dividends were classified as qualified and long-term capital gains.

We think that's a significant advantage for investors that own our stock in a capital account.

When we refer to a preferential tax treatment, income that gets dividended up from the portfolio companies.

And I want to repeat.

I want to refer to it that it is income, income that gets dividended up from the portfolio companies is typically taxed at the portfolio company level once.

And then the money that comes up to the BDC is on an after-tax basis, and then gets distributed to shareholders.

So that shareholders, when they get their tax information at the end of the year, they're typically blessed with a nice surprise.

I can't predict that in the future, but I could just tell you what's happened in the past, where they basically get some tax advantage dividends, which in 2019 was approximately 31%.

I do want to note that over the past 20 quarters in our BDC history, our annual cash dividends have been between 90% to 100% of taxable income.

Dividends are paid out of income, and we endeavor and plan on continuing to maintain that policy.

On Slide #7, we wanted to compare ourselves to some of the other BDCs in the market like Ares, Hercules and Main Street.

You can see Main Street is a little bit of an outlier there in addition to where Newtek is as also an internally managed BDC.

They do have a reasonable amount of their dividends that are preferential.

That is based upon equity kickers and other things that occur within the Main Street portfolio.

And in many cases, those dividends are classified as special dividends.

Special is special.

In our case, we don't use special dividends.

We have historically had a good track record of increasing our dividends over the course of time, and we lump them into one category.

I think it's as important to note that over the past 4 years, approximately 34.8% of our dividends were classified either as long-term capital gain or qualified.

This is based upon having a very diverse business model that is not dependent upon a typical BDC portfolio that might be leveraged loans or loans with equity kickers.

On Slide #5, we talk about our historic dividend policy.

Once again, we refer to the diverse business model, the uniqueness of the model.

It's not a business model that has loans, less debt.

So it's a fairly predictable straight line stream.

And I also want to note that, historically, we've had real strong growth throughout our time frame.

I'm going to be kept an obvious here for a second.

There is a lot of headwinds in the economy and in the market today.

There's a lot of volatility, whether it's relating to interest rates or credit or whether people are going to have to work for home or not.

So forecasting is difficult.

We have recently reiterated our guidance for 2020.

We're comfortable with that.

We'll stick to that.

However, we had a stellar year last year.

Our adjusted NII was up around 20%.

Our dividend, I think, was up around a little over 19%.

I want to note -- I want to guide shareholders appropriately.

Although it's possible we might have this type of performance, I do not believe it is probable, particularly given the headwinds.

But I can assure you, we're paying attention.

We're involved.

And I think we're going to be in good shape, which is why we felt comfortable at least at this point in time, reiterating our guidance.

We keep a pretty close eye on volume in the payment processing area as well as our small- and medium-sized borrowers and how they're doing.

The SBA just came out with a program to help small- and medium-sized businesses with -- if they are affected by the coronavirus.

That's a matter of fact, I think a bill passed the House yesterday, which creates an appropriation for qualified small businesses to be able to help them along.

We certainly appreciate the recent reduction of 50 basis points in the Federal Reserve, which reduces the interest rates that our borrowers pay on our loans.

Subsequently, if you go to Slide #9, our cost of financing has gone down.

When we did our recent securitization, which is spread at approximately 183 over LIBOR.

When we priced the deal, it was a 3.84% coupon.

Today, given where LIBOR is, it's about 3.2% versus a coupon on the notes of around 7%.

So you've got approximately 380 basis point spread.

One of the highlights for last year, we did a $63 million deal of 5 3/4% notes due 2024, symbol NEWTL on the NASDAQ.

And we have maintained our A minus rating by Egan-Jones on those particular notes.

On Slide #10, some of the highlights for the quarter and the calendar year.

We funded $183 million of 7(a) loans during the final quarter, a 22% increase over the quarter and year earlier.

On the year, we had a 10.3% growth year-over-year on 7(a) loans funded.

Third bullet, we forecasted loans closing across our ecosystem in excess, I want to repeat, in excess of 25% for the ecosystem.

We review the ecosystem as the loans are coming in to our big funnel up at the holding company and either convert into a 7(a) or 504, a secured line of credit or in a nonconforming loan program, which could be funded by the joint venture or potentially by a portfolio company off -- or off with our balance sheet.

For the 3 months ended December 31, we closed a total of 2-point -- $249 million for those straight liners, and I don't recommend you do it.

It gets to about $1 billion.

I will add that the fourth quarter is a more robust quarter than other quarters.

However, we are growing the nonconforming segment, so we feel generally pretty good about what we're doing on a going-forward basis.

And in calendar year 2019, the ecosystem closed $643 million worth of loans across all the aforementioned categories in the -- on Slide #10.

The company recognized approximately $800,000 of dividend income from NCL, that is our joint venture during 2019.

On Slide #11, we talk a little bit about servicing.

This is important.

Servicing stream income, noncredit-related, a significant portion of our business.

SBL is the servicer for our joint venture at 100 basis points.

SBL also provides origination, closing and loan services to Newtek Business Lending.

And the servicing assets for the 7(a) business are capitalized at a fair market value and do earn income over the course of time as well as have some level of capitalization upon the SBA 7(a) loan being sold.

On Slide #12, we wanted to demonstrate to the markets and give them a feel for what our cost of debt capital is.

Capital One credit line for unguaranteed's prime plus 25 bps, that will be 4.5%.

On the guaranteed's prime less 75 bps, 3.5%.

We have baby bonds outstanding NEWTI.

They're 6 1/4% note due 2023.

I believe they are callable sometime this month, that is an opportunity for us.

I think I don't have the exact number handy, but there's around $50 million or $60 million approximately of those bonds outstanding.

And we did talk about our recent 2019 securitization.

We also have lines of credit at our portfolio company.

Our Newtek Merchant Solutions has a line of credit at LIBOR plus 250.

Needless to say, those are pretty low -- pretty late rates of interest.

Today, that should be beneficial to our ability to earn income and distribute dividends to our shareholders.

On Slide #13, equity utilization from our ATM.

Similar to Main, we've been able to issue shares at a premium to the market, which tends to be accretive to NAV.

We did a lot of capital raising in Q3 and Q4.

And in the first 2 months of the year before the market sort of fell off as well as us being blacked out.

And as I said, it was good capital raising for us.

You can see the dollar prices.

So last calendar year, weighted average of $22.72.

From January through February, $21.91.

Given our current ratios, we're in pretty good shape.

We prefer to issue shares at higher prices than lower prices and have plenty of capacity relative to credit lines and other access to the capital markets.

On Slide #14, highlighting our 7(a) business.

We are now the second largest SBA 7(a) lender in the United States.

17-year history of loan default and frequency in up markets, down markets and all kinds of credit changeovers during that point in time.

One of the strengths of our model, and I need to keep repeating this is our average loan size is approximately $179,000.

When you look at the unguaranteed balance that sits on our books, I think that the note here is that some of the headwinds that we're experiencing and other public companies with respect to equity declinations.

In our case, there is one beneficial aspect to it and that is when we create SBA 7(a) loans, it creates a government-guaranteed security.

Government-guaranteed securities are extremely attractive today, particularly government-guaranteed securities have flowed on a regular basis.

So at lower rates, we've seen pickups in prices in the first quarter, less forecast what those prices are at this point in time.

It's also arguable whether prepayments might slow.

Prepayments are a function, particularly of a robust economy where businesses are being sold.

However, they could be based upon refinance or competition from community banks or commercial banks, which we have seen.

But I will tell you that the recent price action in the government-guaranteed market has been constructive over the fourth quarter.

I will also mention that given that the fourth quarter is where most of the supply of government-guaranteed loan sellers address the market that typically depresses prices.

Similarly, in the first quarter, they do -- and second and third quarters, they do tend to be higher.

On Slide #15, growth in loan referrals.

We're proud that this trend has continued.

Our loan referral grew last year year-over-year by 7.9%.

That's important because it allows us to be selective.

We're currently anticipating on the run rate of January and February, approximately $23 billion of referrals, which would be a 14% increase.

We're happy that we continue to get more opportunities to be selective, and this trend has been going on for approximately 10 years.

On Slide #16, we talk about the gain on sale.

You could see, over the course of time, it has been fairly stable, although you do have peaks and valleys.

I'd like to remind everybody that in the third quarter of 2018, the market fell off fairly sharp -- sharply where we were able to access the market, I think, at a price of 109.27.

The fourth quarter was slightly higher, 109.78.

These are approximations, and then the market tended to rebound.

And that was in 2018.

So you still had a weighted average of 10.52%.

That was primarily driven, in my opinion, by extreme robust forecasting on GDP and pickup in speeds and economic activity.

As you can see, prices have subsequently risen since that point in time that the economy has slowed modestly as well as the fact that supply of government-guaranteed loans have also slowed from an industry perspective.

On Slide #17, we look at our loan and credit portfolio.

We think in a manner that looks at loans over the course of their life.

And we have historically said that as you get into a more seasoned portfolio, defaults or nonaccruals will pick up and charge-offs will pick up as well.

And we're getting into that season portion of the portfolio.

I want to point out that our forecast includes higher charge-offs and potentially higher nonaccrual loans in our particular portfolio.

We are comfortable with that, and we analyze this on a regular basis using static pool analysis and data that we've accumulated.

Looking at Slide #18.

We have positioned ourselves in the current K and looking at our SBA portfolio and other portfolios on a more simpler way, evaluating loans because I think it created some confusion, accrual, nonaccrual.

It's been much more of an industry standard amongst BDCs as well as bank analysts, which we are -- pretty much tend ourselves to -- lend ourselves to.

So in the accrual portfolio, loans that are 100% current, 92%.

We have a portfolio of accrual loans, approximately 8%.

The definition of accrual is loans that are paying -- that will pay P&I in full.

And at this point in time, that category and that status is set where we are not relying upon the collateral to make that payment.

It's based upon solely out of cash flow.

I think that's important to note.

So that -- and our definition of accrual loans will be spelled out in our 10-K.

I will note that, that's a different definition that the SBA has used and historically what we've used in our presentations in Ks and Qs.

As of December 31, 2019, going to Slide #19, you can see the percentage of loans in accrual status about 92% and nonaccrual, 8%.

And once again, this was done primarily to try to -- and conform to more uniform practices amongst BDCs and analysts that follow banks.

Slide #20 and 21, which many of you are very familiar with, I will speed through.

See?

Finished them.

It shows cash created and gain on sale from our 7(a) activity.

Moving to portfolio company review on Slide #22.

We talk about the general characteristics of our 504 lending business on Slide #23.

On Slide #24 for SBA 504 loans regarding portfolio statistics and forecasts.

NBL, our Newtek Business Lending, has closed $120 million of SBA 504 loans through December 31 since its inception 3 years ago.

On December 31, there's only one 504 loan in a delinquency category of $264,000.

We've also forecasted 2020 SBA 504 loans of $80 million to $100 million.

Slide #25 shows the characteristics of a typical SBA 504 loan.

Slide #26 shows the return on equity of 504 loan.

All slides that are familiar and have been presented in previous presentations.

On Slide #27, we talk about our nonconforming loan program, statistics and forecasts.

We have closed $69.5 million in nonconforming loans through NCL, our joint venture since inception in May of 2019.

There were no delinquencies and defaults in this particular category.

We've also funded approximately $10 million in loans out of Newtek Business Lending.

And I think what you will begin to see, going forward, is in addition to utilizing our joint venture partners and their capital, we'll also fund loans off our balance sheet as well.

We have a forecast of nonconforming conventional loans.

And I would say that this is off of our balance sheet as well as using NCL.

That's a little bit of a typo there of approximately $300 million.

On Slide #28, and we've gone over this in previous presentations.

The benefit of the income coming off of NCL.

We get leverage on the coupon of the loans versus our cost of funds in our Deutsche Bank line of credit.

We get leverage when we do securitizations.

We get servicing income.

That's not part of the joint venture.

That's earned in SBL of 100 basis points.

Loan origination fees that are shared by the funder, either in the joint venture or off of our balance sheet.

And just indicatively, there's a 10% preferred return to JV participants that's indicative of what we think is a minimum level of equity return that our shareholders will experience off of this engagement.

Slide #29, we've engaged a DBRS for rating on our first nonconforming pool.

We're also negotiating a memorandum of understanding for $175 million of securitized takeout based on $260 million of collateral being placed into the SPV.

We're also having negotiations with 2 additional joint venture partners that have significant equity, each with a minimum contribution of $100 million.

Hopefully, this is indicative to market participants that we're excited about.

This new line of business.

Our pipeline is growing, and we've got a lot of interest in investor receptivity here.

On Slide #30, one of our portfolio companies, Newtek payment processing.

Important to note, we have a portfolio of Mobil Money and Mobil Money, which at one point in time, had internal and external staff working on the portfolio.

For the most part, that's been eliminated in Mobil Money, for the most part, is simply a portfolio of accounts.

So Newtek Merchant Solutions and Mobil Money, basically, on a going-forward basis, given that Mobil Money is just a portfolio of accounts are now combined.

Or processing approximately $5.8 billion in processing volume in 2019.

Our adjusted EBITDA forecast is $16.2 million.

We're putting an 8.3 multiple on that forecast to come up with an equity fair market value of approximately $125 million.

The enterprise value, which is debt less any cash on the balance sheet.

There is significant cash there, nets us to $134 million in enterprise value.

The multiple comes in against the enterprise value.

We've looked at the enterprise value in other publicly traded processing companies, and you could see that we think we are appropriately valued.

On Slide #31, these are some things that, to be frank with you, we try not to get in too much of the weeds here as a BDC portfolio companies are not consolidated.

There's a reason for that.

But there are certain things that it's difficult for the market and analysts to forecast.

We've talked previously about the concept of looking at Newtek as P times Q. What's the price of the government-guaranteed portfolio versus what's the quantity of government-guaranteed loans?

And although I continue to say this, and we'll continue to do so because it is what happens, we need to be looked at a little differently.

So in the processing business, we've resolved the long-term litigation, a favorable verdict.

We were able to win on all counts.

But that was a significant drag in legal expenses if you straight line it, it was approximately $0.5 million a year, $2.5 million over 5. That will no longer hit our processing business.

We've also closed our Wisconsin office with the acquisition of Premier Payments.

We were able to consolidate and move the entire -- well, most of the operation is in late success.

We've also got staff in some of the other satellite offices, but the Wisconsin office is closed, which will ultimately reduce real estate costs as well as employee head count.

Slide #32, we talked about in the past, POS on Cloud.

This is an important part of our future, being able to provide to, number one, our alliance partners and to end users, a state of the art POS system, which will be good for restaurants, retail, assisted living facilities.

We have government agencies that use POS on Cloud in their parks and cafeterias and at special events.

We are be able to give this POS system to our alliance partners.

They'll be able to put it into their clients as blankety-blank bank payment systems or blankety-blank credit union payment system.

So why is that interesting?

We give our alliance partners a branded payment system.

What does this payment system do?

It allows them to take electronic payments at point of purchase.

It allows them to use a time clock in the POS, which will -- the data will be pushed into Newtek Payroll Solutions, which in turn has the capability, through our insurance agency, to offer workman's comp, health insurance to our customers.

The big benefit that our alliance partners get is they're able to get the account for the payments account, whether it's card present or online.

The payment systems will integrate with our online capability of our clients, will also feed data into the GL.

I believe we have QuickBooks Online, and we'll have Xero online and other accounting systems.

In addition, our agency will be able to offer workman's comp and health insurance, which is followed in our current payroll system.

So this is a big opportunity for us.

The market is shifting.

As you could see by many POS providers in the market that have huge valuations.

And we have the distribution, we have the payment system.

We have a relationship with alliance partners.

This is a good fit for our growth going forward.

Slide #33, our technology portfolio company.

We started to address this in the last couple of quarters.

Newtek Technology Solutions, which is our managed service provider out in Phoenix, we are now comfortable forecasting 2020, $3 million to $4 million of EBITDA.

That's a tremendous turnaround from '18 and '19.

We also have other portfolio companies, IPM, providing professional tech solutions and C9, both have provided dividends up to the BDC, which we've distributed to shareholders.

On Slide #34, going back to our Phoenix operation.

We've enhanced our data center presence.

We've moved to a new data center, aligned data center.

We made acquisitions of hardware and software, significantly upgraded our space.

We've actually been running 2 data centers, I believe, over the last 6 months and paying rent on both.

So we had rent that is duplicative.

This change in data center duplicity as well as eliminating the higher cost data center result in $2.4 million per year.

We're there -- therefore, comfortable with this forecast of $3 million to $4 million of adjusted EBITDA in 2020, a significant increase over $203,000 in 2019.

I want to repeat.

This income will be taxed, or gets distributed up will be income.

That's after-tax income, that gets distributed to shareholders, and it comes in the form of a preferential dividend -- preferential tax rate dividend as qualified or prospectively long-term capital gains.

35 talks about the opportunity in cloud services.

36 talks about an investment in Newtek.

So look, the investment in Newtek is an investment in a company that's been publicly traded since September 2000, founded in 1998.

So at long-term management in place, it has had 10-year returns that are pretty strong, 25% a year, 800% over that period of time.

5-year returns, 200%.

3-year returns, 88%.

1-year return, 42%.

I need to add, obviously, a lot of people on this call are shareholders.

We've had a rough first quarter as many other companies have as well.

We are typically not a great first quarter stock with respect to our quarterly dividend payout or adjusted NII.

As I said earlier, a lot of our income is generated from our loan activity.

We do less loans in the first quarter because it's hard to get tax returns and, in many cases, impossible as well as audited financial statements.

So trying to understand why we don't do a lot of business in the first quarter versus the fourth quarter or the rest of the year, hopefully, should be a helpful illumination.

On Slide #38, we look at this our investment summary.

We're an internally managed BDC.

They're a bit of a rare commodity.

Interests are much aligned with shareholders.

Compensation comes out of the business.

There's no separate management fee that gets paid out or no incentive to accumulate assets under management and get higher management fees.

Once again, diversified business model.

There's 6 different entities that are currently comprising the dividend, and we hope to get greater diversification and participation from them down the road.

We've increased our NAV historically.

We've increased our dividend historically.

And we've got a management team that's been through a lot of different lending cycles and interest rate cycles.

And we wanted to thank you.

And I'm going to turn the presentation over to Chris Towers, and then we'll do Q&A.

Thank you, Barry, and good morning, everyone.

You can find a summary of our fourth quarter 2019 results on Slide 40 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 42.

For the fourth quarter of 2019, we had a net investment loss of $3 million or $0.15 per share as compared to a net investment loss of $1.1 million or $0.06 per share in the fourth quarter of 2018.

Adjusted NII, which is defined on Slide 41, was $13.5 million or 68% -- $0.68 per share in the fourth quarter of 2019 as compared to $10.8 million or $0.57 per share in the fourth quarter of 2018.

That was a 19% improvement on a per share basis.

Focusing on fourth quarter 2019 highlights.

We recognized $15.4 million in total investment income, a 4.8% increase over the fourth quarter of 2018.

Interest, servicing and other income were the primary drivers for this increase, with interest income increasing by 10%, resulting from a year-over-year increase in the accrual loan portfolio.

Servicing income increased by 13.1% to $2.6 million in the fourth quarter of 2019 versus $2.3 million in the same quarter last year, which is attributable to the average servicing portfolio, growing from $1 billion to $1.2 billion at December 31, 2019.

Other income increased 30.2% for the fourth quarter 2019, resulting mainly from a year-over-year increase in originations volume.

Distributions from portfolio companies for the quarter included $3.6 million from NMS, $750,000 from IPM, $50,000 from SIDCO, $100,000 from Mobil Money and $394,000 from Newtek Conventional Lending.

Total expenses increased by $2.6 million quarter-over-quarter or 16.4%.

Salaries and benefits decreased by 34% primarily due to NSBF employees being hired by small business lending LLC or SBL, one of Newtek's wholly owned controlled portfolio companies on January 1, 2019.

SBL is a lender service provider that effective January 1, 2019, provides NSBF with loan origination and loan processing functions performed by its employees.

NSBF charged -- SBL charged NSBF $3.2 million in the fourth quarter for these services, which is reflected on the statement of operations as origination and loan processing from a related party.

Total interest expense increased by $800,000 in the fourth quarter of 2019 primarily due to higher average outstanding debt balances.

Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the fourth quarter totaled $17.3 million as compared to $13.1 million during the same quarter in 2018.

In the fourth quarter of 2019, we sold 199 loans for $135.1 million at an average premium of 10.73% as compared to 158 loans sold during the fourth quarter of 2018 were $108.6 million at an average premium of 9.97%.

Realized losses on SBA loans for the fourth quarter of 2019 were $1.7 million as compared to $1 million in the fourth quarter of 2018.

Overall, our operating results for the fourth quarter resulted in a net increase in net assets of $12.7 million or $0.64 per share, and we ended the quarter with NAV per share of $15.70.

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

Thank you, operator.

I'd like to open up the call to questions.

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

Couple questions, Barry.

I do appreciate that you and your team have managed Newtek for a long time.

You've seen ups and downs.

So I want to ask about what your expectations are, given all the noise around the COVID virus.

You do have borrowers in industries like restaurants and laundries and ambulatory health care.

Those are places where we would expect folks to maybe avoid at least for a few months.

And I would imagine payment processing could be impacted, too.

So in the past, when we've been in a down cycle, how have these borrowers performed?

Mickey, great question, and we appreciate it.

Look, I think part of that question revolves around class within an industry code.

I think number one thing to point out, we are very diversified.

I don't believe we've got an industry -- a specific industry class code that's greater than 8%.

So we try to stay diversified.

So far, in the payments area, and I do ask fairly regularly.

I've been checking payments this year, last year, and I do it on a daily basis or how are we doing for the month.

The consumer has been pretty flattish at this point in time.

Now I will tell you, last week, and I was on planes a lot.

Air traffic, busy, was at a conference, the place was sold out.

I did fly in on JetBlue yesterday, and for the first time in a long time, that plane was 75% occupied.

I think from our standpoint, we are thankful and appreciative that Congress, through the House yesterday, apportioned a plan, which the SBA will be providing assistance to smaller businesses that are affected by the coronavirus.

So our business owners will be able to go and get very, very low cost, attractive financing, which the SBA has done from time to time.

We've seen this with hurricanes.

We've seen this with storms and disasters.

So that's something we're going to pay close attention to.

The only way lenders like ourselves do well in these particular areas is, number one, we're a collateralized lender.

We have personal guarantees, and we went people to that.

And we do have a lot of tools in the toolbox, depending upon the SOP, standard operating procedure, of the SBA to work with borrowers.

But we speak to them.

We communicate them.

We're actively servicing these accounts.

And I'll say, at the moment, we haven't seen it.

Now I do believe that could change pretty sharply.

You've got a situation where, I think, there's a school closing in Riverdale, New York.

You've got more reports of companies telling people to work out of their homes.

It's going to have an effect.

We're on top of it.

We're working with borrowers.

And I believe this too shall pass and hopefully pretty quickly.

Barry, that's helpful.

And I understand.

Just one more question.

SBA 7(a) premiums were very solid in January and February, up pretty meaningfully from the end of 2019.

I haven't seen data, let's say, for the early part of March.

And I know you don't want to be offering price discovery.

But at least directionally, how are premiums behaving very recently, given more news about the virus?

Well, Mickey, thank you for that because that's helpful.

You've helped with the forecast.

But look, premium pricing, and I'm kind of giving you stuff that's -- what you've observed was accurate as of yesterday.

That's about all I could say.

What you've observed was accurate as of yesterday.

Our next question comes from Marc Silk with Silk Investment Advisors.

Barry, can you hear me?

Marc, yes.

I'm on a cell phone.

So hopefully, the reception is fine.

So first of all, actually, I see you on CNBC.

I see you on CNBC all the time.

Can you quantify if that strategy is working right now?

Sure.

Well, it is because you saw me.

So I -- look, I think that the campaign where we have a fairly modest spend, and we've been doing it for 5 or 6 years has been beneficial.

And recently, I would say, over the last 9 months, been working with Natasha Gordon, our Chief Revenue Officer, have done some additional work on our website to do a better job of capturing that inquiry through more aggressive activity in terms of live chat with respect to software, making sure that referrals that are going through the website are hitting business service specialists immediately.

And I would say, number one, the reason why you've noticed it is we've shifted some of our spend, which was almost exclusively cable news, MSNBC, CNN and Fox to do some on CNBC, which tends to be more expensive in Bloomberg, which actually is less expensive.

So it's giving us different people, different notoriety.

It's creating activity.

People looking at us.

And the thing I'll tell you about advertising, it's an investment.

It's a capital investment, and we expense it from an accounting standpoint immediately, but it does build over time.

And we can pretty much quantify that, for the most part, it's breaking even.

Although I'm totally confident that, that spend is generating a lot of activity that is hidden, and we haven't quite been able to quantify.

So we're comfortable with that spend for the foreseeable future.

But I do believe we're going to start to -- with our big database, which we really haven't utilized, start to pay more attention to using digital techniques.

So we think there's upside, obviously, what we're doing.

We've got over 800,000 referrals that have gone into NewTracker.

We're still getting, I’d say, 275 to 300 a day.

So we feel pretty good about where we are.

Okay.

So with this coronavirus, are you seeing more inquiry?

So basically, business owners know that eventually things are going to stop for a while or slow down for a while.

Are they trying to jump the gun here and saying, you know what, I don't need money now, but I might need money if it gets worse.

So is there a possibility that maybe more incoming inquiries are going to happen or have been happening?

Yes.

So we've got 2 things going on.

Obviously, we've turned the spigot on for the nonconforming sector, and we've also got a lot of more businesses that are looking for loans and some of these avenues are shut off.

So this is going to be more difficult, I think, for noncollateralized lenders.

We are very much a collateralized lender.

And there's no question we're going to be seeing people looking for that funding.

And that's why we're paying more attention to things like personal credit scores and SLA scores, which are business credit.

So all of a sudden, we see strains on businesses where they can't pay their bills or they're slowing things down.

You got to pay attention on a real-time basis.

So the answer is, we got to be exceptionally careful today and pay attention to the geographies where the viruses are affected, and we got to be a little bit more careful.

There's no -- this is -- there's -- I've made comments, there's no question that this thing is not -- it's not 1 or 2 -- it's not a 1 or 2 week event.

This is going to be with us for a while, and it will slow things down.

We feel like we're on top of it and paying attention.

I mean you've done a great job mitigating risk in the past.

So I just -- it sounds like you're putting a few more elements like exactly, right, like where people's credit scores change quickly.

And like you said, you're going after -- you're watching areas that are affected.

So on the government SBA potential boost of helping out, does that like a -- is that like a tide lifting all boats, meaning that if that happened, you could potentially get more interest or that just goes to a specific few SBA lenders?

Yes, I'm glad you asked the question because I probably wasn't clear.

Those are not loans that we make.

We don't touch that.

Those borrowers go directly to the small business administration and the loans, which are -- tend to be small in nature and focus on working capital liquidity are made directly to the business.

This is like hot off the press but traditionally those disaster relief type loans tend to be 20-year type repayments with like way below market rates of interest.

Okay.

And then last question, you obviously -- you talked about your other businesses, and I've asked you this a few years ago.

Besides, obviously, the SBA loan, which you have obviously done a great job on, what part of the business are you hoping for or expecting for that will be your number 2 business, let's say, 2 or 3 years down the line?

Yes.

So I'm going to pick one, and I'm going to get 3 people mad at me more.

So yes, look, I think that it's easier for me just at least to discuss the ones that are a little bit bigger and a little bit more robust on a quicker path.

I think that the business that we have uniqueness in and, as a major differentiator, we've had issues with it, obviously, by some of the numbers is the tech business.

People are readily spending money on technology.

We're in the early innings.

We're very well set up.

I brought in a new manager.

I think he's 7, 8 months in, maybe 9. He's really changed the culture.

It's been night and day.

And the good news is, managers that come into the organization have got to fit into sort of what our strategy is.

So when you think about technology, somebody that wants to do business with, feet on the street salespeople, value-added [REITs].

I mean the bottom line is that's a market that's going to grow.

The tech spend's going to grow, and our customers have got to make changes.

And when I say that we're not competing with Azure and Google, I want to be clear here, or AWS.

Smaller businesses, they have a hard time dealing with those entities, and those entities really aren't set up to do business with them.

I want to point out.

We will manage workloads in AWS and manage workloads in Azure.

They don't have to use our data center or -- and the client can have a hybrid setup.

They could be on-prem, and they could be in one of those entities or in our facility.

A lot of options.

That's the one that's probably got the most upside.

Putting that aside, the payments business looks great.

And I think we've made some changes in payroll and insurance that will also bear fruit this year.

So if you -- if I had to pick one, and I'm going to get 3 people mad at me, I'll pick tech.

Okay.

And then the last thing, more of a PSA.

I was -- I saw a fly on the wall, someone came out with a negative, maybe a short seller was trying to come after you, which is -- that's fine.

That's what makes markets.

But I've been a shareholder since 2006, and I've invested average down during the financial crisis.

And if this is a fraud, I think that's the biggest misnomer out there considering since 2015, my shareholders have received $11.69 dividend, and you've done a very good job controlling costs and growing this business.

So I think the proof is in the pudding.

And again, I've been a very happy shareholder since 2006.

My clients are extremely happy, and that's all I can say.

That's the truth.

So good luck going forward, and I know it's going to be rocky road this year, but I feel very confident that you'll be able to persevere.

Our next question comes from Robert Dodd with Raymond James.

I’ve couple questions.

Portfolio companies first and then the 7(a) business.

On NMS, you highlighted a couple cost savings.

I mean the legal expense go away, closing the Wisconsin office, et cetera.

But if I'm right, the $10.9 million pretax in the back of the presentation for 2020, the x forecast would be down year-over-year.

So can you tell us what the driver of that is, given the cost savings that are going to flow through this year?

Yes.

So are you -- Robert, are you asking me about the EBITDA forecast of $16 million for payments and Mobil Money, is that what you're asking?

Effectively, yes.

Right.

I mean what I'm looking at is actually the pretax which is in the back of the presentation...

Robert, here's where I am.

I stand by the forecast.

That's a forecast of revenue and expense.

I stand by the forecast.

It's a portfolio company.

We don't consolidate it.

I've tried to give -- see, the problem with giving you a little peek under the hood is you want to put your whole body under there.

And I love you, Robert, but that's what I got.

And we're very comfortable with the forecast.

I understand that it is indeed my instinct to climb under the hood.

So moving on to the next one, the tech business...

And by the way, you're always welcome.

You're always welcome.

On the tech business, and you just gave us some color on that, that you're optimistic there.

Obviously, if you hit your forecast on that, that would be a big improvement year-over-year.

Would it be the plan to distribute that EBITDA or after-tax, pretax, however we want to -- or to retain it for reinvestment given your -- you seem quite excited about that business and it might have some growth capital needs.

So Robert, I would say the historic trend of the company over time has been to pay out earnings as they come in.

I don't believe we're going to have significant capital needs in that business because we just spend a significant amount.

But again, you never know, till the big account comes in, they want us to buy hardware and software for them.

It's a long-term opportunity.

So that could change.

Those decisions on dividends are made at the Board level of each portfolio company, which has a separate and different Board than the Board of the BDC.

Got it.

Appreciate it.

And then just on the 7(a) business, and we go back to the last quarter call, you had a couple of tough months in there and you sounded quite optimistic.

Clearly, you have fourth quarter, there was a lot of growth, and you did a lot of 7(a) loans.

So can you tell -- I mean on the last quarter you said there were some internal issues, and then you were avoiding some loans because of you didn't like the credit quality metrics.

So can you tell us into the fourth quarter, either what you did internally with systems or what changed to really accelerate that, I think, arguably, maybe a bit faster even than you thought it could because last quarter, you said it could take 3 to 6 months to sort out?

Yes.

So Robert, I appreciate that.

Look, the comment about management changes and repositioning, we have -- we've got 4 different buckets that are now -- 4 different receptacles for different loan programs.

And when your business is growing in each of these different buckets, at one point you had one person that was managing 26 people.

Well, that person wind up needing help.

So then you divide that up into 3. Well, you got to get them situated.

You got different reporting responsibilities.

You got to get used to the different systems.

So financially, I -- God, I wish it was that easy just to shift things around, but you've got human beings, you've got interaction, you've got systems, you've got reporting, et cetera.

So look, we're still in the process of working through efficiencies with respect to management changes because we obviously needed different than additional underwriters.

We've needed different assemblers in the loan area.

And we're still working through those issues.

We are not totally where we need to be at this point in time.

When you say troubled categories, one category that's been difficult for us is transportation.

And this is the world that we live in, right?

So pre-Amazon dominating transportation or -- you got a lot of transportation companies and you figure, geez, it's a great business because the economy is robust, et cetera.

But all of a sudden, you got problems with insurance.

You can't hire truckers.

You got a couple of litigation issues that caused businesses problems with people getting sued.

And so that's been one of our tougher categories.

On a good note, and our exposure is modest there at a category -- at one of the categories that we've had tough times in.

So we try to keep on top of this on a real-time basis.

We try to be nimble.

But I don't think we're out of the woods yet relative to -- we're nowhere near 100% of where we need to be relative to, gee, my 504 process is down.

My NCL process is completely down.

My 7(a) process is completely down.

Plus, you now have this whole new issue that everybody in the world is adjusting to which is the coronavirus.

But as I said, we're kind of on top of things.

We're appreciative of House in passing that bill that's going to help our borrowers out and give them whatever liquidity they need to come through this.

And frankly, I feel pretty good about our borrowers and entrepreneurs being extremely nimble in dealing with the issues that they have to.

Because in our case, Robert, they're all in.

They got their personal guarantees.

They got their house on the line.

They're personally guaranteed doing several.

So they've got everything on the line to make sure that these loans work out.

And that's -- hopefully, that answered your question.

(Operator Instructions) Our next question comes from the line of Luke Wooten with KBW.

First question is actually just on the SBA 7(a) loan pipeline.

I know historically, you guys have included that slide that kind of details the open referrals, prequalified loans and such for the total pipeline.

Do you mind just running off those numbers?

Yes.

So given some of the changes that I just discussed with Robert, it's been more difficult for us to disseminate pipeline issues.

For example, as loans are coming in from a prequalified perspective now, one of the issues that we're addressing is which program is this borrower and this loan best situated for.

So we're in a pause position on that.

What I can tell you, our referrals are up significantly.

We've just given the market a forecast of growth across the ecosystem, which is fairly robust.

And I think that's all we could do at this point in time.

The problem is, as I report pipelines, loan could go in a committee and winds up is better situated for another area.

So I didn't want to put anything out there relative to a 7(a) pipeline that ultimately goes into a different bucket.

Okay.

That's helpful.

And then I wanted to switch over kind of just on -- I mean you kind of touched on it earlier, but just trends in the credit community and just kind of ongoing trends.

It seems like the portfolio seasoning kind of moved a step back from last quarter.

It was 28.9 months, and now it's 28.5 months, and just kind of -- it sounded like the realized losses were a little bit higher this quarter.

And obviously, a lot of these loans are priced for a lot of that, the estimated losses, but just kind of wanted to hear what your thoughts were on trends for trending credit overall.

Well, I think that -- and we said this when -- way back when we were looking at 35 basis points of annual charge-off, but that's not where we're going to be.

I think that we'll have charge-off numbers that more accurately reflect close to 1.5% of the portfolio.

You could use that as a guide.

You may want to use it as a guide.

I don't know if that's helpful or not.

But we've got the charge-offs all factored into our forecast.

We feel very comfortable with the business model relative to what you're going to get from 7(a) and the other business segments.

I think relative to credit, I got to tell you, Luke, it's too hard to tell right now.

And I think I like a lot of other people that are on this call, we're watching the news every night.

We're trying to get our arms around things.

It's constructive.

China is the lead player here.

If you believe their information, and I'd like to, I'd like to think that if they were lying, I think, the globe would -- although they haven't -- it doesn't necessarily mean that they'll adhere to it.

But I think China, hopefully is forthright this time.

Situation in China appears to be plateauing.

And I think that's what we're looking for here because people try to gauge how bad is this going to be?

Clearly, I think there's nobody doesn't feel the hysteria is is greater than the reality, but nobody wants to be the hysterical person that contracts it.

So we certainly understand when people are overly cautious, when they wear masks, when they don't want to go out, when they basically cancel vacations.

It's going to have an effect.

I do think it's going to be short-lived, and that means, 1, 2, 3 quarters.

It's not going to be 1, 2 or 3 years.

That's my guess.

And our borrowers, which are typically collateralized borrowers, will be able to get through these times, particularly with government assistance.

Okay.

That's definitely helpful.

And then this is kind of just a side note.

In your -- on the loan distribution by category, do you guys have outside exposure to any of the hospitality industry?

Or I don't know if it's broken out and anywhere I can find.

What do we got, Chris?

It's typically like 2%.

I mean it's usually pretty low, but I could be wrong.

Say that percent again, sorry?

I missed it.

What do you got the motels, Chris?

Restaurants?

Motels.

I think motel portfolio -- hotel/motel portfolio is about 2%.

2%.

Okay.

That's helpful.

And then the last thing I wanted to...

And that's a tough category.

And we have, historically, avoided that category in robust up markets.

So it's a tough category.

A lot of business acquisitions are done there.

So we've kept the low profile there.

I will -- we'll circle back later.

I don't think I'm too off on that number.

Okay.

That's helpful.

And then the last thing I wanted to touch on was just the equity issuances from the ATM the past couple of quarters.

I mean you talked about it a little bit earlier.

It sounded like 3Q and 4Q have definitely been higher than normal.

And with the pricing that you're currently seeing in the market, maybe taking a step back on that, but just kind of want to get your thoughts on the uses of that ATM.

I mean I think you still said you had about -- I think it was just over 1 million in the shares outstanding under the current issuance, but just wanted to hear what your thoughts were on for the rest of 2020.

Yes.

Look, I think from an issuance standpoint and a management standpoint, right now, look at the debt market.

We've done baby bonds with KBW.

I don't know, but I would love to be able to look at our current 6 1/4%.

We don't have, in my opinion, much leverage at all.

So we have plenty of room here.

I think the important note is we don't need to push stock out.

And I will tell you, I've had retail and some institutional investors that talk about Main Street strategy of constantly issuing.

And I mean that doesn't make any -- I mean it helps, but it doesn't make any sense to me.

We don't issue shares for the sake of issuing shares.

Yes.

No, it makes sense.

And then actually, just final one.

Do you mind, Chris, just identifying what the dollar amount of the charge-offs were?

I think you gave it a little bit earlier, but just wanted to make sure I got that number right?

In the NSBF front?

Q4 of 2019 was $1.7 million and Q4 2018 was $1 million.

And Luke, I think, once again, I want to repeat, those numbers will be significantly higher this year, and I think we can sustain that with where we currently forecasted.

I'm showing no further questions in queue at time.

I'd like to turn the call back to Mr. Sloane for closing remark.

All right.

Well, we certainly appreciate everyone attending the call, particularly with what's going on in the markets.

Good luck to everybody, and we look forward to reporting at the end of Q1.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.