NewtekOne Inc (NEWT) 2022 Q1 法說會逐字稿

Good morning, everybody. My name is Jayne Cavuoto, and I am the Director of Investor Relations here at Newtek Business Service Corp. Today, I would like to thank you all for attending Newtek's First Quarter 2022 Financial Results Conference Call.

I would like to now turn the call over to Barry Sloane, CEO, President, and Chairman of Newtek Business Services Corp.

Good morning, everyone, and welcome to our first quarter 2022 financial results conference call. Today on the call, thank you, Jayne Cavuoto, Director of Investor Relations. I'm also here today with Nick Leger, our Chief Accounting Officer, and we'll be making the presentation.

We're very, very excited about reporting our first quarter results. We're proud to announce that we beat analyst estimates of $0.62 adjusted NII a share for the Q1 consensus coming in at $0.72 of adjusted NII.

Would like to move everyone forward -- move everyone to the forward-looking statement slide on -- #1, please take your time, read that forward-looking statement slide at your convenience. It's important that you absorb that.

Slide #2. Historically, the company has proven shareholder value creation with a great track record of successful growth. We're projecting our returns as of March 31, 2022. Obviously, we're all aware of the financial markets have been pretty difficult in Q1. When you take a look at our 10-year returns, 5-year, 3-year and 1 year, all stellar particularly against most market indices, particularly the Russell 2000.

Our market capitalization is a little over $620 million as of today's date, and we're very excited about delivering our earnings results to you indicative of the successful track record and growth of the business, its plan and its objectives. I would like to report that in the first quarter, NEWT's total return was down 1.01%, which was better than the decline in the Russell of down 7.5% for the first quarter.

Slide #3. Obviously, important position and topical with respect to investors, investment in Newtek, as it has announced back in August its intent to acquire National Bank of New York City subject to a proxy vote and regulatory approval. On May 2, very recently, the company with confidence filed its definitive proxy statement with the SEC, seeking shareholder approval to allow the company's Board of Directors to withdraw and de-authorize its election to be regulated under the 1940s Company Act.

Important for all investors to please familiarize yourself with the proxy. It's now out in the market, will be mailed and is being mailed and sent electronically as we speak. Some of the important aspects of what's in that proxy statement -- once again, we encourage everybody to read the statement, including all the risk factors. I could be one of the only CEOs that tells people to read the risk factors both for and against a bank holding company versus a BDC on both sides.

But we have looked at the opportunity to acquire National Bank of New York City. And importantly, it increases our ability to finance ourselves going forward. It is very clear when looking at our returns, Newtek is a growth company. It's been able to grow its total rate of return. It's been able to grow its balance sheet. It's been able to grow its earnings. And historically, it's been able to grow its dividends.

So one of the primary reasons for the potential opportunity to acquire National Bank of New York City is to reduce its reliance on higher cost of commercial financing. I think it's readily apparent, particularly when you see what interest rates have done over the last couple of months, that the ability to fund its growth going forward by using core retail deposits in lieu of selling shares of stock and raising commercial debt financing at the BDC holding company would be more attractive. In addition, BDCs have a limitation of 150% asset coverage or 2:1 leverage. And a bank holding company will be able to use more debt. You can go as high as approximately 10:1, although we wouldn't start off that way.

And a bank holding company and owning a bank -- and we'll be chatting about this in future slides talking about being able to offer banking as a service and banking on demand to its client base. Importantly, we'll also talk about the value of the NewtekOne dashboard and NewTracker and the opportunity really to unlock the technologies that we built and developed over the course of 20 years and creating additional shareholder value.

Once again, very important to note that it's the same company with the same mission, the same passion, same management team, same employees, just in a different financial structure that we believe we've evaluated properly that will be beneficial not just to shareholders but all stakeholders of Newtek including our clients.

Moving to Slide #4. One of the things I think that's real important is we've developed our business model and have been able to deliver metrics that are superior to our competitors, particularly based upon the homegrown technology, the NewTracker system, the FileVault, a lot of technologies within Newtek. And we will be able to leverage our homegrown technology more in the new structure.

NewTracker, which, those of you that are familiar with our company, enables us to acquire clients really in a much easier manner. We'll talk about the referrals that we typically get in a quarter in future slides, which are terrific, but we're able to basically acquire clients with our branches, brokers, business development officers or bankers, very, very valuable.

The dashboard that we'll be developing and talking about is a great tool for our clients, and it will make their clients more successful and a tool that we believe our clients will wind up depending upon. Its potential down the road with respect to unlocking value that it may be useful for Newtek, subject to vote and approval, to be able to spin out the NewTracker technology into a JV or to license the dashboard, similar to what Live Oak Bank has done with nCino. As a matter of fact, Live Oak Bank has done a very nice job.

It recently announced the sale to Finxact, one of their equity stakes, gaining over $100 million. So they've really created terrific technology. One of the benefits of them creating a technology is they use it. So a lot of software companies create the technology, but they don't have people to use it.

When you look at our technologies, the NewTracker system, the FileVault, our way of acquiring clients, transferring data from business owner to our application, we've used it, and we've been in these businesses, in all cases, in all 5 silos, over 10 years. This will enable Newtek to be what we believe is a business-oriented, technology-enabled bank. We believe because we're going to be positioned in this manner, we should be able to run our business with lower expense ratios. Once again, branches, bankers, brokers, BDOs not necessarily required because we use technology to transfer that data. The client acquisition strategy is already in place. And we've been able to demonstrate, through some of the numbers that you're seeing, particularly in our SBA and 504 originations in Q1, as we've come through the pandemic and we've got a remote workforce, that we're actually able to use the technology, deliver the results and deliver value to our shareholders.

Slide #5. The one dashboard for all your business needs, what is that? That's the NewtekOne dashboard. NewtekOne dashboard is trademarked, and we have filed a preliminary patent on the dashboard as well. The value of the dashboard to a business owner, first thing is relationship and connectivity. They'll be able to relate to a licensed insurance agent, a payment specialist, a deposit specialist, a lending officer, a tech specialist, all silos. And value that we give to our clients, they'll be able to connect just as you see me here on the screen today talking to you. So as a technology-enabled bank, it's not just about software and nobody to talk to or, for that matter, being shipped overseas to somebody to chat with over the course of time. This will be our version of banking on demand.

And it's really just more than banking. When I think of banking, I think of deposits and loans. However, you could see that our definition of banking and business solution entails payroll, securing deposits, providing security for important documents, website traffic, being able to move money around, real data on payment processing, Visa versus Master, debit versus credit, this day this year, this day last year, this quarter this year, this quarter last year.

And it's going to be a dashboard for a business owner. That will be a terrific tool. It will be transactional and informational, and our ultimate goal will be to integrate all these aspects into a general ledger for our client base.

Next slide, please. So we talk about the dashboard, once again, a tool to enhance business, extremely unique. It's unique maybe in the marketplace but not unique to us because we've been in all these businesses and we use this technology today. Now we're just driving it up into one dashboard, one depository, repository, one single sign-on. And once again, from a relationship perspective, it allows business owners to relate not just to the one person in the institution but to multiple.

Our vision is for clients that use the dashboard to have this as a market-recognized tool and that clients will ultimately not want to be without. These are the types of the technologies that we believe we can unlock and create tremendous shareholder value down the road.

Slide #7, please. As we're going through what we call our transformation, although we're not there yet, we still have a little bit more to go, but we're excited that we plowed through about 9 months of this, we have observed shareholder activity. Someone said, "Why are you discussing people have sold shares of Newtek?" Well, first of all, I believe transparency is important, and I believe this is ultimately important to our transaction, and we ask the audience to draw their own conclusions from it.

We analyze a nonobjective beneficial owner list, and we've tracked investors that own the stock on July 20 prior to the bank announcement to January 12. And we track that through various periods of time. You could see that we've had people that had a position that went to 0, 6.2 million shares, almost 25% of the total outstanding stock. We believe this shareholder transition may or may not be indicative of selling shareholders who prefer a BDC structure over the potential conversion to a bank holding company. We point it out and look for you to make your own decision.

Slide #8, lending highlights. First bullet, most important relative to looking at the performance of Newtek and trying to see what type of trajectory that they're on. And as I read some of the reports that are out on the company and I speak to a lot of shareholders, I don't think people fully grasp the fact that the data point of funding $163 million of 7(a) loans versus $104 million in the previous quarter, which also was a record, is just pretty remarkable.

So when you look at the SBA's data, which the SBA is on a calendar year that ends September 30, so for the first 6 months of the year, we're the second largest SBA 7(a) lender in the United States. Important to note, the first quarter is a light quarter for lending. Why? Typically, at the end of the year, lenders will blow out their pipeline, they'll blow out their portfolio to meet their annual earnings, and borrowers tend to do most of their financing in the fourth quarter. There is a major seasonal component. So our ability to increase those numbers is nothing less in my opinion than remarkable.

Now we're going to get into, why is that? I mean are we just cutting credit? Are we being easier? Are we just trying to put loans on the books? The answer to that is no, no and no. So once again, this outperformance in Q1 is real important. And you can't take the $750 million and straight-line it. That's just never how our business has occurred over the course of 18 years.

Important to note, we are forecasting a $750 million origination year. We try to be conservative. That will be a 33.8% increase over the $560 million from the year prior.

Switching loan categories, which we do out of one of our portfolio companies. Newtek Business Lending, a wholly owned controlled portfolio company, closed $31 million of 504 loans for the quarter recently ended, an increase of 67% over the same quarter in the year prior. We're forecasting $150 million of 504 million closings for the full year. That will be a 66% increase. Once again, we're going to talk about the technological, operational and management changes that we've made to be able to effect this type of growth.

Important to note, the Paycheck Protection Program, which the company had to shift into, once again, a great example of us being nimble, going into the pandemic, we received approximately $50 million of fee income in the calendar year 2021, which relates to about $2.19 a share in revenue alone.

So now the expense is still there because we're using the same staff. So when you think of the $3.47 adjusted NII from last year and you take out a revenue component, because the expense hasn't changed, our ability to generate adjusted NII through the first quarter, a $0.65 dividend in Q1, which is paid out of earnings, a forecasted 75% (sic) [$0.75] dividend in Q2, equaling $1.40 of dividends, you would think that we always intend to pay the dividend out of earnings.

We're on a pretty good course for the first 6 months of the year. So we have not projected, which we normally do, a full year of BDC earnings because of the potential conversion into a bank holding company. But we asked the analyst community and the shareholder base to be aware of the fact that we think this is an outstanding first quarter. Our $0.75 forecast for Q2, we are impressed with. We will endeavor to deliver those earnings as well.

And it's really important to note, the company is tracking real, real well. So when you look at the first quarter 2021 financial results, that included $24.2 million of PPP fee income. So it made some of the comparisons a little difficult, but we did point that out in the press release.

Slide #9, performance drivers. We've made certain changes to the NewTracker platform that's enabled us to transfer the data from the borrower to our lending process in a more seamless and frictionless manner. Once again, no bankers, no brokers, no BDOs, very valuable. And this friction reduction has really increased, and you'll see this in our pipeline numbers, our ability to get to the borrower quickly, get the data exchange and prequalify borrowers that are eligible with very large numbers of referrals that are coming in.

So our ability to use technology, which we're seeing in lending, we're going to be using that technology across all the different units: payments, payroll, insurance, tech solutions, et cetera, very, very powerful tool. We are an example of a technology-oriented institution, a disruptive player, an innovator that's using technology at the same time that it's utilizing what we seem to hear and find as many organizations get the software, give it to their staff and hope for the best. And it takes years for them to integrate it.

I'd like to say we're an overnight success; it just took 20 years. There's a lot of trial and error in this. We've been really good at it. We're very, very excited about how we're positioned.

When we look at the NewTracker referral system, we're averaging, of course, across the year about 100,000. We're averaging higher referrals last year and the year before primarily because of PPP. And the first quarter came in at a lower average, but we've seen better numbers in April and May. So we feel that 100,000 referrals a quarter or 400,000 referrals a year really enables us to go through them quickly, pick out the borrowers we want to provide credit to and has really given us real good metrics and an improving capability going forward.

We've also made major changes at the senior management level under the direction of Peter Downs. We brought Virginia Wylly in to be the Chief Operating Officer under Peter Downs, the President of Newtek Small Business Finance and Chief Lending Officer. And Virginia has a tremendous talented team of Casey Schwalbe, Anna Pavlyuk and Justin Gavin, who've done a great job with their staff during this pandemic-oriented world that we're dealing with and the Great Resignation and all that stuff. We think we've got the right mix of people. We've got the right objectives with our staff. We've got the right technology in place to really have Newtek continue on its track record of upward growth and success.

Go to Slide #10. Well, our pipeline says it all. So when you take a look at the 7(a) pipeline, across the 3 important metrics, up 70.5% for the year, up 108% in closings -- by the way, these closings early on, very valuable and the fact that these closings are occurring in month 1 and 2 of a quarter. Typically, closings tend to pile up in March, in June, always in that third month. Now we're seeing a nice steady flow throughout, very, very exciting.

The 504 pipeline, also very nice growth. The nonconforming conventional pipeline, obviously coming through the pandemic, it slowed this initiative down. We're going to talk about it. We are equally excited about this initiative as we are anything else that we're doing in the lending market. We had a great securitization exit in January of this year to talk about the types of metrics and income that can be earned off of nonconventional lending. But clearly, you could see we're on a great growth track, pipeline based upon better technology, better process, improved staff with aligned goals to ours, very excited, nothing to do with being easy on credit. To a degree, we're wiser, we're aware, we're paying attention.

Go to Slide #12 next. Thank you. Growth in loan referrals, approximately 77,000 for the month for the quarter ended March, down from the same period in 2021. PPP obviously exaggerated that. All those customers are in our database, though. We closed 247 loan units. This is -- the unit size is extremely important. 247 loan units compared to 147 units in the same period in 2021, we're getting much, much more efficient.

We have an extensive database of client opportunities, over 1.5 million referrals, picking up 400,000 per year. When you think about the concept of the dashboard for depositors, in a banking environment, being able to go to the dashboard and see all of the things that are in front of you certainly makes cross-selling and cross-marketing not only effortless. You're not really cross-selling and cross-marketing. You're just showing your wares, and people are selecting it as they do their banking business with you.

We've got 19 years of history in loan assembly, underwriting and technological expertise. We're a leader in these businesses, feel very strongly about that. The company was founded in 1998, been a public company since September of 2000, not our first rodeo. We've been through upright cycles, downright cycles, up credit, down credit. And the company has done very well navigating all volatile markets, and we're certainly in one right now.

So once again, looking at that last bullet, and I can't emphasize this enough, we have materially improved our entire business operations and are positioned for growth and success in the future.

Slide #13. We keep growing our staff. That staff growth is anticipation of more business down the road. And yes, we're adding to expenses, but we're also adding to our capacity to do more business, which we are clearly seeing as our pipelines are filling.

Slide #14. I thought this was an important slide from the prospect of the analysts and disclosure. We talked about this on calls, but I felt, you know what, I better put this down on paper, so it makes it a little bit easier for people to follow. So we have come out of a little bit of a Goldilocks period for the types of lending that we've done. And frankly, I think a lot of people are looking at their bond and equity portfolios and equating it to Goldilocks as well. During the pandemic, the CARES Act created a 90% guarantee, which ended in 2021. So all loans that you go into the SBA and get a guarantee number on, as of today, are at a 75% guarantee.

So that creates 2 issues. One, you get 15% less gain on sale. You have more capital invested in the uninsured but not subordinated participation in certificate. And important to note, bullet 2, which is a little bit more obtuse, but the fees that were paid, and it's about a 50 basis point servicing fee that was part of the CARES Act, which was waived, actually gave our guaranteed piece a 50% higher coupon, which created higher gain on sale prices. And we've stated this previously.

Once again, it's important to note, we don't see a dramatic change for us, but this will relate to longer prices. Versus, say, the 103 type price that we got last calendar year, we came in at 102.05 for Q1. And that might be under a little bit of pressure but we don't think a lot. And please don't ask me to forecast bond prices or interest rates or anything else to that matter.

It's important to note, there will not be any PPP income or financings in 2022 from an income perspective. We have had a company focus on PPP loan forgiveness throughout the course of last year. I think we've gotten kind of 26 million units. I think we've gotten about -- I'm sorry, 26 -- I mean 26,000 units. I think we've got about 23,000 of those units forgiven at this point in time. So we're getting down to the short strokes on loan forgiveness.

With that said, we've got the resources that are available for our core business. We're very excited about this. Important to note, everything that you're seeing here is in Q1 and Q2 dividend numbers and the reported earnings numbers. So this isn't a new revelation. We've got this into our models. We've got this into our forecasts. We're already dealing with it. We're very comfortable with these changes.

I just want to make one point, and that is -- well, I'll come back to it. I was going to just talk about our dividends, but I'll wait until I get to the dividend slide.

Slide 15, first quarter '22 financial highlights. You can see the headline highlights for total investment income and net investment income were dramatically affected by the lack of the $24.2 million of fee income from PPP. Same thing for adjusted NII, still with that $0.72 came in beating consensus forecast of $0.62.

Debt-to-equity ratio came in at what we consider a low, 1.17. We probably will try to take more advantage of leverage going forward. Total investment portfolio increased by 5.2%. Yes, NAV was down by 1.4%, was also up 8% last year. And given all the volatility that we've had in Q1 relative to cost of capital changes and spreads widening, we think that our NAV performance and our asset quality performance has performed extraordinarily well.

Slide #16, we talk about this transitioning. I think once again, important to note, we've been very successful in transitioning away from $50 million of PPP income, repositioning itself into our core lending products.

I will also comment that our non-lending portfolio companies, Newtek Merchant Solutions, Newtek Solutions, back on path to achieve $20 million of EBITDA in 2022. Although we talk a lot about lending as sort of a flagship opportunity, going forward, these other businesses and business solutions that we have under the umbrella, incredibly valuable both to shareholders and to our customer base.

I will point out that NMS, NTS and NBL all made contributions to our first quarter 2022 dividend. Nick Leger will report on that. I believe it was in excess of $7 million of dividends.

Cross-selling efforts across our business and financial solutions are expected subject to stockholder approval and regulatory vote through the NewtekOne dashboard.

Slide #17, dividends. So we paid a $0.65 dividend in Q1. We have forecasted a $0.75 dividend in Q2. That's $1.40. Once again, if you want to try to figure out Q3 and Q4, which we're not going to be giving those forecasts at this point in time based upon the potential changes with the bank holding company, but those of you that are following us from an analyst perspective and forecasting for the year and those of you that are investors, are trying to figure out what things look like going forward, you certainly can take a look at what we did in the first 6 months of the year and forecast going forward.

I will tell you, as I looked at -- for analysts who've followed us, the expected adjusted NII for the year, 2.39, 2.68, 2.71, 2.90, averaging 2.67 adjusted NII. I'll let you draw your own conclusion.

We're extremely proud of our 6-month year-over-year dividend growth forecast particularly given that we lost all that PPP fee income for our results for this year.

Let's move forward to Slide #19. Got it. Okay. So we look at increasing interest rates, and we want to just generally talk about what this means for the business, the markets. Obviously, it's extremely topical particularly coming right off of Chairman Powell's comments yesterday. We've historically done a very good job of managing rates in a rising and a falling rate environment. our 7(a) portfolio is a quarterly floater over prime, no cap. Our lines of credit are also floating rate.

Our securitizations for the 7(a) are floating rate. We believe that our margins and durations are appropriately matched. About 18 months ago, we began a hedging program on SBA 504. Either we're brilliant or lucky or a little bit of both. I'm impressed with the way that this has been very well managed by Brian Moon and our treasury function. And you could see some of the results are based upon the hedges that we've done, both in hedging our portion of our nonconforming loan portfolio in the JV and 504 loans.

But I think that this is very indicative of a company that does a good job of managing risk in the marketplace. When we securitized the $87 million portfolio in the joint venture, the securitization was done and sold at a fixed rate bond securitization coupon of 3.18%. The net coupon was 7.2%. The gross coupon was 8.2%. 100 basis points of servicing goes to SBL. We get 100 basis points of that. But you could see we had a 400 basis point asset liability match. The loans have floors in them. And when they adjust, most likely they have a propensity to adjust upward. This is called good asset liability management.

Let's move on to Slide #19. We talked about our proxy filing. We once again strongly recommend everybody read the proxy and all the aspects to it. But you'd think in a rising rate environment that being -- taking the assets that we have and being able to finance the growth with core deposits, some of which are checking-oriented and don't move in lockstep with treasury rates, as well as being able to use more leverage and not having to sell shares of stock, which effectively dilute earnings per share would make a tremendous amount of sense in addition to reducing reliance on higher cost of commercial funding, which we're still able to get without question.

So when you see a rising rate environment, what does this mean for Newtek potentially as a bank holding company versus a BDC? Today, you've got value a 5-year treasury that's about 3%. A AAA-rated, asset-backed security is going to yield you 4%. So when you look at the benefits of a BDC versus a bank, the time you don't want to be selling shares is when banks -- is when stock prices are lower and when you want to have core retail deposits, when rates are rising. So we welcome all of you reading the proxy, taking all these factors into consideration.

Slide #20, important slide because our constituents -- a big constituency we have is our workforce. We have an extremely competitive working environment and landscape post-COVID. The work-at-home hybrid model works for us. We began that in April. One of the key aspects of it is everybody is onscreen. And we have methods of tracking that and watching that, and we'll be pushing for further and further compliance down the road. But everybody is onscreen. Why is that important? We want to have a relationship with our clients. Our clients don't have to be onscreen, but our workers do. And we give them the flexibility to work out of their home but to report to the office on a portion of their time.

We've been adding new staff that is accepting, excited and interested in our model, which gives them the flexibility to work from home and also have the camaraderie, the training and the collaboration from going into an office setting. We think we've got the right mix. The metrics that we've delivered in the first quarter are indicative about that as well as how well we performed during the pandemic, particularly in 2021, doing 15,000 PPP loans as well as $540 million to $550 million of SBA 7(a) loans, a record number of fundings and clearly a record number of units. And that's just in the 7(a) category. Obviously, we're thrilled with how we've been able to do that in the other 4 silos as well.

Slide #21 is a common slide. You've seen it. We always update the average loan size, $155,000. That is coming down. We're very pleased with that. We like diversification.

Slide #22. This just talks about the trending on prices. Important to note, we have $59 million, almost $60 million of guaranteed portions of 7(a) on its balance sheet, as of 3/31, available for sale.

Slide #23, very important trend. This is our net interest income. Interest income less expense, it grew by $1 million per quarter year-over-year. So obviously, that's reoccurring. We'll be continuing to add to the portfolio now that we're back in the origination business. So we're very excited about this trend in our business model.

Slide #24, you can see our seasoning became a little bit more current because we add new loans and size to the portfolio. That comes down. We have a very nice seasoned portfolio that should be through a major portions of the Volcker.

Slide #25. Don't mean to jinx ourselves, maybe this as good as it gets, but for the types of loans that we do, I want to point out that type of a currency ratio is extraordinary. And we're very, very pleased with the work that our servicing unit has done on our portfolio. I believe we've got in excess of 48 people that are servicing our portfolio of loans, which I think is $2.9 billion to $3 billion. Very pleased with how well our portfolio has performed. With that said, we are coming into a more difficult period, but we try to be as transparent as we can be in this area. This is great news.

26. 49 full-time employees in our servicing area, $2.9 billion, S&P rated, both SBL and NSBF. We service portfolios for the FDIC, have done that for over 10 years and the credit union regulator, NCUA. We talk about the things that we've done for our customers.

I think it's important to note, most of these programs, with the exception of the employee retention credit program, have come and gone. So the benefits that our borrowers were getting from this, most of them, I'm not saying every single one, but most of them have gotten the benefits that ended last June.

So the good news is we've worked with the tools that we had. We kept our clients liquid, well capitalized. We encourage them to downsize, get rid of things that don't make sense. We were an active servicer and partner on the lending side, and it's really shown from that currency rate.

Slide #27, our classic slides that we've had for the last 19 years. I won't spend too much time on them. 28 as well.

Let's go through the portfolio company review. 504 program. So we talked about $31.4 million of closed loans for the quarter, up from $18.8 million, and we're projecting a 66.5% increase for the year. We have plenty of capacity with our lending lines to put more of this business on. Slide #31 shows the economics of a 504 loan, 32 as well.

Let's go to Slide #33. We talked about the nonconforming conventional loan program done through joint ventures. We talked about a securitization of $56.3 million of notes, NCL Business Loan Trust 2022, our joint venture partner and Newtek extremely happy with that execution.

Slide #34. The goal in the nonconforming conventional loan area, we're very close to finalizing a new agreement with an institutional investor for $100 million of equity capital. We're excited about it. We've got a forecast of $300 million of nonconforming conventional loans in 2022. For those of you that want to try to develop an income model for this, if you look at the securitization that we did, it required 35% to 38% of equity underneath it, there's a 400 basis point asset liability management spread going forward. So you could see that the equity returns are in excess of double digit, not including 100 basis points of servicing fee that we get. So this is a very attractive program for us.

Thinking about the growth of this program, these loans typically average $5 million. So for $5 million, 200 units, and we'll do probably 800 to 900 loan units this year, 200 units in this category gets you $1 billion worth of loans. And once again, we're using that big funnel where we're getting 100,000 referrals a quarter, 400,000 a year. A lot of those referrals fit NCL, 504, 7(a) slot in the future, subject to my favorite disclaimer: proxy vote and regulatory approval. This goes into a bank. That's where the conforming CRE and the conforming C&I loans will come into. Very exciting future for a growth opportunity for Newtek and all of its shareholders.

Slide #35, the benefits of the nonconforming conventional loan program, origination fees, servicing income. It's really a great platform for us, and we're excited. Once again, we talked about the big funnel, loans coming in and putting them into each category. You could see how we get tremendous leverage over an existing infrastructure and cost of doing business as it is. So by adding these other programs, potentially using core deposits to finance them really puts us in a great spot. We are very excited about our future in whichever way it turns out.

Slide #37. Valuation on -- thank you, Newtek Merchant Solutions, that business has rebounded. I believe EBITDA last year, 2021, about $13.8 million. We're forecasting about $15.1 million for the combined of NMS and Mobil Money together.

38, rebound of payment processing volume, 8.8% increase. The effects of the pandemic seem to be waning. Consumer spending is still pretty strong. We're very, very excited about the NMS business and equally excited about our POS system, on Slide #39. We believe that our POS system will be a big winner and future source of growth for us. We developed a POS system for a fraction of what some of our competitors have done, and we believe it's extremely competitive and clearly replace existing users of Square and Clover. I won't get too much into the details here because we have a lot of data to cover.

Slide #40, our managed tech solutions forecast, about $6 million of EBITDA for the calendar year. Once again, another business with a growth opportunity, security risk assessment just keeps growing. Our alliance partners are picking it up. We're excited about our positioning in being able to offer technology solutions to alliance partners and their client base.

On Slide #42. We've gotten some nice lift in the last 12 months from our insurance agency and payroll units. Clearly, I want to give a shout-out to Shannon Vestal and Sam Razon, both Directors of Payroll Operations, and Kyle Sloane and Melissa Walker and the insurance agency. We are looking forward to both payroll, benefits and the insurance agency delivering positive EBITDA numbers for 2022.

Slide #43. 10-year track record of overperforming against the indices during all types of time. Management interests aligned of 5.6% of the outstanding shares. I look at that, and people say, "Well, why are you getting out of this BDC thing?" I like dividends. I like earnings. I like total returns. Well, what's most important for me and my seat is to do what's best for all the shareholders and all the stakeholders. And we've analyzed that and making a suggestion to shareholders as they look at the proxy and they read it that this might and should be something that shareholders strongly consider. Management's interests are very much aligned with shareholders in making suggestions to them.

Company has proven to be nimble. That's really important. The market in the second half of 2022 and 2023 is entirely different than 2020 and 2021. And we've proven that we can operate well very quickly in difficult times and difficult market conditions, just like we got through the pandemic in '08 and '09. So we've studied the markets and particularly a rising rate environment, commercial financing. We believe we've made very good recommendations from management team to the Board, the Board has supported those recommendations, and we look forward to our shareholders continuing to support us in all of our efforts and endeavors.

We have a diversified business model providing multiple streams of income. We are not just a 7(a) lender, and we do a lot of things here. We have a lot of clients. We really do a good job and have got multiple streams of income, very, very valuable.

We've used technology as a solutions provider to be a disruptor as we were for the first 14 years of our lives and the last 7 or 8 years as a BDC and potentially going forward as a technology-enabled bank. We believe that subject to the shareholder vote and regulatory approval, we have a great opportunity to unlock the value in this technology that is somewhat hidden in the BDC construct that we built over 18 years. And by positioning and transitioning the company into a bank holding company, we think it's in the best interest of shareholders. Once again, before I turn this presentation over to Nick Leger, I want to remind everybody to please read the proxy statement dated May 2.

I would also like to comment that once Nick is done, we are going to have a Q&A. We have a different conference call provider today, so our format is a little bit different. (Operator Instructions)

With that, I'd like to turn the rest of the presentation over to Nick Leger. I got that right. We have 3 Nicks in the company now. So Nick Leger, our Chief Accounting Officer. Thank you, Nick.

Thank you, Barry, and good morning, everyone. You can find a summary of our first quarter 2022 results on Slide #45 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide #47.

For the first quarter of 2022, we had net investment income of $973,000 or $0.04 per share as compared to a net investment income of $15.2 million or $0.68 per share in the first quarter of 2021. Please note that income related to the PPP of $24.2 million is included in the first quarter 2021 investment income. Adjusted NII, which is defined on Slide $46, was $17.3 million or $0.72 per share in the first quarter of 2022 as compared to $23.5 million or $1.05 per share for the first quarter of 2021.

Focusing on our first quarter 2022 highlights, we recognized $20.3 million in total investment income, a 41.2% decrease over the first quarter of 2021 total investment income of $34.7 million. The primary driver of the decrease in total investment income was primarily due to the $24.2 million in fees from the PPP in 2021.

Dividends from portfolio companies of $8.5 million in Q1 2022 helped to offset the decrease of PPP fees. In addition, interest income increased by $1.1 million, resulting from a year-over-year increase in the accrual loan portfolio.

Servicing income increased by 14.6% to $3.2 million in the first quarter of 2022 versus $2.7 million in the same quarter of 2021.

Distributions from portfolio companies for the first quarter 2022 totaled $7.8 million, which included $4.5 million from NMS, $1.5 million from NTS, $525,000 from NBL, our 504 business, and $1.3 million from NCL, our conventional loan joint venture as compared to no distribution from portfolio companies in the first quarter of 2021.

Total expenses for the first quarter decreased by $100,000 quarter-over-quarter mainly driven by lower interest-related costs. Realized gains recognized from the sale of the guaranteed portion of SBA loans sold during the first quarter totaled $17.2 million as compared to $8.9 million during the same quarter in 2021.

In the first quarter of 2022, NSBF sold 221 loans for $122.6 million at an average premium of 12.05% as compared to 107 loans sold during the first quarter of 2021 for $57.8 million at an average premium of 13.28%. The increase in realized gains is attributable to higher SBA 7(a) loan origination volume in the first quarter of 2022 when compared to the first quarter of 2021. As I mentioned earlier, income related to the PPP is included in investment income, not realized gains.

Realized losses on SBA non-affiliate investments for the first quarter of 2022 was $1.9 million as compared to $1.5 million in the first quarter of 2021.

Overall, our operating results for the first quarter of 2022 resulted in net increase in net assets of $9.7 million or $0.40 per share, and we ended the quarter with NAV per share of $16.49.

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

Thank you. Jayne, 1 more time. Could you go over the kind of call-in?

Sure. Okay. (Operator Instructions) Okay. I actually have the first question here from Paul Johnson. Okay. Paul, you should be able to ask your question.

Paul, you might be on mute.

Paul, can you unmute your line?

There we go. Can you hear me now?

Yes, we got you.

Yes.

Thank you.

Okay. Sorry about that. I had to press a few times. Yes. The first one is just, can shareholders, I guess, expect -- the dividend that you just recently declared, $0.75 for the second quarter, should we expect that to be the final dividend as far as the BDC goes?

Good question, Paul. We have publicly stated that we believe that our best guess, subject to the vote and approval, we would look to have the bank transaction closed in the third quarter. So with that said, there would likely be some true-up between that dividend paid and when the transaction would close. So I would say our guess, and it's only a guess, is that this will not be the last dividend from a BDC perspective.

Got it. And then just asking about the JV. I'm just curious, you're obviously getting close to getting the new JV started with the new partner this quarter. Does the partner -- do they provide any sort of capital or resources into the relationship? Or is this viewed as more of just kind of a capital provider in this type of investment?

I think the JV partners that we've historically had relationships with like BlackRock TCP and the new entity going forward, they're sophisticated, they're knowledgeable. They have equal say in the management of the JV going forward with respect to credit and securitization and financings. So they do provide a lot of expertise. Obviously, this is primarily our area of credit understanding. However, they do provide a lot of expertise outside of that, that we value.

Got it. Appreciate that. And then just on the trends as far as activity in this quarter, obviously, pretty high for the first quarter of the year. Would you say that's just more of a function of borrower demand? Or is this something potentially like a more efficient SBA? Or are you just being more active with originations coming out of the BDC? What exactly is driving, I guess, the higher activity for this time of the year?

Sure. If you look at the SBA league tables, which came out, I believe, towards the end of April, we looked at the top originators and they were pretty flat. As a matter of fact, I'm not positive, but I think Live Oak who was #1, I believe, was, I'm going to say flat to slightly down according to SBA statistics. So we think there is good business demand when you reach out to businesses and make them aware that you're in the market. But it's not overwhelming, and it does not support the amount of funding that we're doing. The amount of fundings we're doing, we believe, is really better supported by our market presence, our technology and our ability to convert and get to more of these clients and the best clients and pick the best credits quickly.

So we do think -- this is a tremendous outperformance relative to the marketplace that will continue. Clearly, the second quarter pipeline is up. So we're very excited about the future in this area of business. And in addition, the technological advances that we've made with respect to data transfer, from borrower to application to approval, to make it seamless and frictionless will be something that we will further develop and drive into payments, payroll, tech solutions and insurance.

Got it. Appreciate that. And then I think I talked about this a little bit last quarter with you. I'm just curious about how the dynamic and the relationship kind of works with as far as rates moving higher this year and the forward rate curve moving higher. How does that generally play through your borrowers for, I guess, the relationship of prepayments? Does that generally cause borrowers to prepay faster or slower? What's that relationship like you've seen in the past?

Yes. And I appreciate the question. I think it's important for everybody to have an understanding. On the servicing side, we have been trumpeting for at least 6 months now to borrowers to be aware of the fact that rates will be rising in the future. So it's important for businesses to prepare.

It's funny, one of the questions that gets posed to Powell is, so why not 75%? And it's like, at the end of the day, his job isn't to like just play around with the capital markets. There are businesses and consumers out there that have floating rate loans. And doing it slower over time to allow them to adjust for the fact that their expense is going to go higher is a good thing. So that's one of the things that we're doing.

Now what's happening from a dynamic perspective is, inflation is up, asset values are up, and it will lead to, we believe, faster prepays and slower prepays, and that's one of the potential depressants on price. Like do I think we're going like 110? No. It doesn't really work that way, and it's not that sharp. But I would expect to see slightly higher prepays. And the coupons on the bonds obviously, they've actually been somewhat depressed in the first quarter and potentially in the second quarter because up until yesterday, you couldn't get the full coupon because of prime, right? But investors' cost of capital was higher. So it's actually had somewhat of a depressing effect on prices.

I don't like to just give you really a hypertechnical answer on a bunch of things. But I don't see any major changes. I think prepays will be a little faster. I don't think you'll see 113s, but I don't think you're going to see 110s.

Got it. Yes, I appreciate that. I understand it's a complicated subject, so appreciate that. Lastly, I know I generally ask this every quarter, but given that you guys have had a lot of hiring growth, obviously in anticipation of closing the merger and potentially the bank conversion, is there -- as far as salary expense goes, I mean is this a pretty sustainable level, $5 million or so per quarter? Or would you expect that to moderate downward at all?

I think for -- Nick, would you say for conservatism, that's probably a good number for the next couple of quarters?

Yes.

Yes.

Okay. Our next question is here in.

You may be on mute whomever that is.

Was that to me? Unfortunately, the conference call system was talking to me at the same time. So I can't...

Yes.

Yes.

So on the outlook for lending, I mean obviously, the $750 million, the $150 million 504s, how are you looking at that now given you expect higher prepays? I think there may be higher prepays, which really is these higher defaults, right, because that's what drives the prepaid cycle in guaranteed 7(a)s. So what's your comfort level of growing the book that much with -- at a time when you expect prepays and defaults to be rising? And how does that balance?

So I want to be as crystal clear as I can. I didn't use defaults; you did, which is fine. And would rising rates put more pressure on borrowers? Certainly could. I would say that this is probably one of the most liquid environments that we've ever seen for business owners coming out of PPP, ERC credits, idle financing, et cetera. I believe that, that aspect will clearly cushion borrowers.

Another aspect, Robert, that will cushion borrowers will be the increased prices of the real estate, which I think is about 55% to 60% of our portfolio, to be able to cushion them in the event that they need to sell. Now what we've seen in Q1 so far from a pricing perspective is that it's been fairly modest. I mean there have not been tremendous changes in price because there's a pretty good demand for government-guaranteed floaters.

So to be frank with you, this is such a volatile environment. So I'm in agreement, defaults should go higher, but I don't think markedly. I think prepays will go up, which prospectively could put a damper on prices. Value of collateral is materially higher, and the value of the businesses are materially higher. Those 2 things, I believe, offset the default number.

Okay. I appreciate it. (inaudible) my second question is (inaudible) kind of following up to the previous question. (inaudible) is it the expectation -- I realize this is a Board question because I remember the Board, [so] I'll ask anyway. Is it the expectation that you wait to the close of the [transaction] (inaudible) the election or (inaudible) the election shortly after, presuming -- and I think you will receive approval from shareholders. There must be advantages to doing it earlier as well.

It's a good question, Robert. I think that I have one vote, so it's just one vote. I mean intuitively, my thought process would be that the election would be exercised at the time of the close of the transaction. But that's entirely up to the Board. You just heard my guess on May 5, which I have the right to change.

Fair enough, fair enough.

How was that for covering myself? But no, I think no, that's a very good question. That would be my guess, which sort of leads into, do you think we're going to, provided we get the vote, do change? So let's talk about that as a possibility or a probability or however you want to look at it. Do you think there's another -- I mean I think there's more likely than not another dividend payment for the quarter, maybe 2. But that's just based upon my guess as to what I think could happen, which is kind of out of my hands because there's a lot of other people that are going to be making those decisions.

Fair point. It's just obviously the earlier that you do it, the earlier you get rid of the AFFE issue about deterring some institutions to buy the stock. But at the margin, anyway, last question if I got -- in the proxy, which I did read, there's multiple comments about obviously various things being annual elections, right? So I mean the BDC election is an annual election, [BHC] election is an annual election, when you file your tax return. If you convert in the third quarter sometime, is the result that you end up paying corporate taxes for the full year? Or is it only a partial step given that it's an annual tax return election rather than something that's done day-to-day?

Nick, it's up -- our guess would be it's up until the time that you withdraw the election. And so it's not necessarily for the calendar year. It's up until the time of the election, but I would have to check with our tax experts, but that would be my best guess. Nick, would you guess the same or different?

Yes, correct. We pull back the election and file our final BDC/RIC return. We will then convert into a C corporation for the remaining year.

Okay. The next question, I have a [Stephen Nimmo].

I'm largely inquiring about Newtek's intentions for the post-bank holding company conversion. I've got 2 quick questions. First one is once the BHC conversion finishes, how quickly will Newtek leverage up its balance sheet? And what is the ultimate maximum level of leverage the banking operation will use?

And the second question is, what factors and considerations will Newtek use to decide how much leverage is appropriate? And what net interest margin could Newtek earn on this leverage?

I appreciate the question, [Stephen]. So a couple of things. One, the only way that question could be answered would be based upon where we get final guidance from the OCC on our application and the business plan that we provide because the regulators have got a tremendous say in how we run the business. We have provided an illustration previously. I believe it went out early March, which I still believe is on our website at this point in time. We shall sort of give you an indicative amount of capital that's there.

I think that we will grow the business prudently just as we've managed our own business over the course of time. I don't think just -- it wouldn't be prudent to just all of a sudden zoom right up and use all of that excess capacity. And we'll also tell you that we've got a lot of experienced people that will be on the Board and on the ALCO committee.

So we feel pretty comfortable about the ability to, prudently with our management tools, grow into the capital, utilize it over the course of time and grow the business prudently. The illustration that we put out, I will also remind you, was in a different interest rate environment, so a lot of things and variables have changed. But I still think that's a reasonable assumption based upon when we put it out to base some of the answers to your questions on.

I think you're on mute, [Stephen].

Yes. I think the last question was -- I don't think you touched on that, was just how much expected net interest margin could Newtek expect to earn?

Good question. Look, I think that when I -- when we look at our competitors in the banking space, we see fairly tight margins. Without putting a number on it, the return on equity and the return on assets in our business are materially greater. Once again, I would point to that illustration that's publicly available information to be helpful. But it's -- we're not -- we will have a lot of what I'll refer to as conventional assets in the bank. We think that's important. That gives us diversification. It balances out the whole portfolio.

But the (inaudible), for example, that generates on a coupon a net interest margin that's pretty wide. Same thing for the 504 business. So you're looking at NIMs that are probably well in excess of 4%. So I mean I think that one of the benefits of what we do is taking some of these businesses that are going to go into the bank and benefiting from being able to use core deposits versus commercially the fund deposits to be able to grow the business and then to use the leverage prudently as well over time.

Okay. So just to wrap up my question, do you think Newtek would probably leverage up slowly and cautiously, but the extra leverage would earn a lot more net interest margin than most other banking operations would?

Yes.

Okay. The next question comes from [Steven Blumrosen]. [Steven], you should be able to speak. Just check your mute. Steven , you're on mute.

On mute. Can you hear me now?

Yes.

Yes, you're coming through now.

I'm going to read this because I take this very seriously, and I hope you'll bear with my reading voice. I'm a retired shareholder who needs my dividend stream to pay my bills and help provide for future generations of my family. I'm not a graduate of Ross Business School or any other business school yet I feel fairly comfortable about the financial fundamentals of NEWT. And I'm wondering why we have to choose between NEWT as a bank holding company and NEWT as a BDC. Couldn't there be a separate organization -- sorry, this is -- NEWT a technology company. Couldn't there be a separate organization that would be a BDC within the NEWT family of companies?

From -- your comment about shareholders who cashed out indicates to me that they were thinking along the lines I was, that their dividends were becoming more uncertain. Personally, I think NEWT is well aware of the concern of investors about continuing dividends, and I'm looking forward perhaps optimistically to dividends from a bigger company. And I'd just like your thoughts about those things.

Yes. [Steven], I appreciate it. And I think as evidence that we care about all of our shareholders, the ones that are in the majority, the ones that are in the minority, the ones that are in the middle, is that we want to hear everyone's thoughts and opinions and make ourselves available. So I appreciate your comments.

I think that the Board, when it looks at these types of decisions, makes decisions based upon the best interests of all of the shareholders. With that said, I think you pointed out that we have the opportunity to continue to grow and get bigger as a bank holding company -- excuse me, for a minute. Unfortunately, they're conducting the annual sprinkler test, so bear with me for 1 second. Got it. I'm unmuted. Okay. Can you hear me?

Yes.

Okay. Great. So [Steven], as we get bigger and continue to grow, which you've demonstrated over 10 years, whatever the dividend payout philosophy of the company is or in whatever form, we hope that we'll continue to pay greater and greater dividends. I think it's important to note that we look at the company and put it in the form that we think is best suited to get a total return to its shareholders. And that was why the Board decided to make this recommendation. Board's interests are aligned with the shareholders. And that's the best answer I can give to you at this point in time.

Jayne, any other questions?

Yes, we have one more question. I've just allowed to talk...

Hey, Barry. This is Scott with Raymond James. First, just to comment, congrats, kudos on the fabulous loan growth throughout all your different product offerings. And to that, I was wondering if it would be possible to rank those loan types in terms of expectations for growth for '22 and beyond.

Yes. Scott, I appreciate the question. Yes. We've been fairly tight on guidance. I think I can kind of give you a feel for the second quarter, but I can't go beyond that. And a lot of it is just the transformation of the company, and we're just trying not to go too far out.

However, I think that for the 7(a) business, probably look at, I'd say, $180 million to $200 million of fundings for the second quarter. I think the 504 business will be similar to the first quarter, probably $30 million of closings approximately.

And we have given annual forecasts, 7(a) business coming in at a conservative $750 million and the 504 business coming in at a conservative $150 million. So that's pretty much where we are for the calendar year for both businesses in 7(a) and 504.

Then our non-conforming business, a lot of it depends upon our being able to get our JV wrapped up, which we're really working at an accelerated pace right now, and hope to do $300 million in the second half of the year. That one might be a tad aggressive.

Okay. That's fantastic. And the new JV, how does that stack up in terms of the SBA in terms of net to the bottom line in terms of -- for a $1 million loan?

Yes. It's a great question, Scott. I think the one thing about the JVs, in a BDC format and most likely in a bank holding format, they show up as equity investments. So they'll actually be -- they'll be generating basically dividend and distribution income. However, it does provide the servicing income, which is valuable. Well, I'll throw out, just for a round number, $1 billion of loan originations that you're servicing at 1%, it comes out to be quite a material number on a reoccurring basis without that portion of a capital contribution. And then you've got the spread income, which we talked about earlier, and then the equity that goes into the JV.

So we're very optimistic about the business. But that business, which we have not given future guidance on, could be extremely beneficial and give the company really additional engines.

Fantastic. And it seems to me that your special sauce in the lending side is definitely NewTracker. Would I be correct in that assumption?

Yes. And to expand upon it, it's NewTracker from the standpoint of acquiring clients and getting referrals, which is probably what's most visible. However, NewTracker has been updated and improved to where an alliance partner and internal managers at NewTracker can see every e-mail, every text, every phone call that's recorded, frictionlessly and seamlessly get to borrowers directly, get them a fact finder, which can get filled out quickly, and get an appointment set.

We book about 150 to 175 appointments a day with clients with no human interaction. So that's totally different than walking into a Bank of America branch as a small business owner or calling up an 800 number for Bank of America and trying to get a business loan. It's like night and day. And we're able to get the data, transfer it into a secure FileVault and, in a very frictionless manner, prequalify a client. So now the client's working with you to get a loan. Different than going to a broker that takes a loan package and auctions it off to 3 or 4 or 5 banks or funders.

Those are all the questions. Barry?

Great. Everyone, thanks very much for the participation. We always appreciate the questions. We look forward to reporting our second quarter and making progress on our business plans and our business model. Thank you very much.