Q1 2020 Earnings Call
[music].
Hello, Ladies and gentlemen, welcome to the Newtek business services score Q1, 2020 earnings Conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require any assistance during the conference. Please press star zero on your Touchtone phone.
As a reminder, this conference call is being recorded.
Now I'd like to turn the conference over to your host Mr., Barry Sloane President of net Newtek business for.
Sorry.
Thank you very much operator, and good morning. My name is very slow CEO, President founder Newtek business Services Corp stock symbol any w. tea on the NASDAQ.
This morning, a compelling me on this call is Chris towers, our Chief Accounting Officer, and Executive Vice President.
First of all I want to thank.
All of the new Tech staff that it's been working remotely a 100% of our staff has been working remotely. During this period of time 24, seven particularly focused on the P.P.P. program.
As well as payroll and other important vital services to over the 20, you get an estimated 27 million businesses. The United States. We don't have all of them we are servicing many of them.
Helping business owners have the funds necessary to provide payroll for their employees. We've estimated that the PPP funds that we have gotten each round numbers are guarantees from the S.P.A. will total approximately 130000 individual payroll checks and I'm quite proud of that and one of the thank our staff.
Working 24 seven.
For those who they are familiar with new Tech you can follow along this presentation. It is archived on our website newtek one any W.T.K. all we need dot com in the Investor Relations section I'd also like to point every once.
Forward looking statements that exists in that presentation on slide number one.
Moving forward to slide number two on first quarter 2020 highlights the company a yesterday reported a net in that and I are net investment income or loss of a penny a share.
That is an improvement of 80% over five cents a share from a quarter and your prior.
Our <unk> does not include gain on sale and a significant part of our business originating loans and selling them for gain on sale. This improvement is valuable because it pretty much indicates that without any origination and gain on sale, we're pretty close to breakeven.
Moving down to the third bullet on slide two adjusted and I came in at 21 cents a share <unk> down from 44 cents a share in the your prior obviously our March.
We pretty much shut down our lending operation from the standpoint of normal 70 business due to the Corona virus and issues on visibility that portion of our pipeline. We believed it was prudent without a lot of visibility to not fun, but otherwise I do believe that we would have a meeting or beating prior years earnings as well as been able to.
Confirm our guidance.
Let me be reported yesterday down 4.5% clearly the lower end of the decline for most Bdcs, we'll spend a lot of time in today's presentation discussing those valuations and we feel that they're incredibly are appropriate and also conservative interest out.
The equity ratio of 1.44 on March 31, 2020, or we don't see this changing much over the next two quarters, all with respect to the PPP loan business, we pretty much make alone or in almost 95% of our sales or 100% sales with no long term balance sheet.
Implications.
Slide number three shows the company's historic track record of in a v. over her life, which historically has been a positive movement in any of the despite the fact that we have clearly a setback in Q1.
On slide number four and we'll go into this a little bit deeper from a valuation perspective, particularly with seven eight portfolio for valuation purposes, we've stressed the seasoned portfolio 70 loans to the cumulative cross default.
30%, particularly given that the portfolio with season, we think that extremely conservative and we'll talk about the valuation there I never played our and have applied our historic 40% loss severity, sometimes it's been great or sometimes it's been a it's been less we've actually done several liquidations that we've talked about at or above.
The market valuations that we have historically done, which I think validates a valuation here.
On slide number five.
Important focus on the gains that we've made and and I are historically over the course of five years growing the business getting recurring cash flow. Oh. This is not involved in the recurring event of gains on sale, obviously a lot of the gains that we've accomplished in this area are based upon what I'll call. It normalize market environment are.
Our baby bonds have historically been issued at great prices are lines of credit have come down a tighter spreads in the securitization have been very helpful to us and we'll talk about where our bonds or are our what our bonds are experiencing the market relative to the collateral which we.
Think it's been enhanced by the PPP program, which will talk about in later slides. So we feel pretty good that the gains that we've made an anti.
Over the intermediate and long term will continue to advance, particularly in the next quarter.
Moving to slide number six we chatted a little bit about the disruption in March due to the Corona virus, where we pretty much made a prudent election to pause on new fundings that we had lined up for March.
Obviously at this point the focus of the lending unit, which has been a total ship to PPP loans versus 70 loans PPP loans are technically 70 loans, but they have totally different.
Characteristics.
Both in terms of balance sheet implications margin lending, which we'll talk about but I think it's important to note that we anticipate seven eight lending activity. Returning that's a different statement I might have made about a week 10 days ago. That's how quickly the landscape is changing relative to the concept of visibility.
I think it's important to note as of May 7th Theres $120 billion. According to the SBA of availability for the seven a program through the end of this year, which would include normal seven a loans and PPP loans. There was a thought process about 10 days ago that that availability would vanish immediately and be used up by PPP.
On April 29, Senators Rubio, and carton, who are Oh ranking members of the Senate Committee on small business.
Issued a letter to the U.S. department of Treasury to encourage them to have a seven a program that has enhanced the original built for the care is that there was a program that had 90% guarantees increases in loan size to 10 million and we're moving the credit elsewhere test.
I think its oh conceivable and a good possibility that 70 lending will continue through the rest of this year and potentially on better terms.
90% guarantee leaves us with less balance sheet less equity as we're able to sell the government guaranteed piece off and potentially greater margins and greater loan size.
Moving to slide number seven.
The company made a forecast and I'm sure we'll talk a lot about this in the Q when I.
For record Eni in a Anand <unk> for the second quarter 2020 based on our regular business operations and PPP lending activity, we have not put a number on that I will state that our largest quarter ever was 69 cents adjusted NII.
We need to get some more visibility, particularly getting through the month of May and maybe the first week in June to get our findings in line to be able to come out with a forecast, which will also lead into future dividends expectations as well, we feel very strong and you take a look at our our pipeline and we shouldn't expect the.
The fees to be paid for the treasury and the Espeed for that activity, we feel pretty good about our second quarter and visibility is starting to come back to us where things were pretty cloudy two to three weeks ago.
For those who the arent familiar with PPP loans.
A payroll program Protection Act.
And I don't care as a relative relative to the Corona virus aid relief and economic Security Act.
About 660 billion I believe were appropriated for PPP loans.
We were authorized as one of the nations largest PLP lenders during the first six months of the Sps fiscal year, we're still number two to be able to make these loans to small businesses for the purposes, and maintaining a payroll primarily and as well as paying rent than utilities PPP loans are 100% federally.
Anted that differ is with the normal 70 program, which is 70 525, which leaves us with the balance sheet of 25% of uninsured, we partnered with several large banks.
People financial as well as you'd be asked and others.
Total for this love to 100% participations in the PBP loans are that Weve originated which means we originate them fund them in our warehouse line, they're able to sell the entire asset off.
And earn an administrative fee from the SB.
This is put us in a good position, although the margins are narrower than we get for gain on sale on the government. We don't have the balance sheet applications as well and were able to turn our capital. We've currently obtained SPE trained loans, which is effectively the guarantee it goes on top of alone that enables us to make the loan to the business owner.
And so far we've experienced minimal amounts of fall out once we've obtained in each round number for 1.1 billion dollars' worth of PPP locks, we are still taking in.
Applications and opportunities for PPP loans.
We feel pretty good about the 1.1 billion dollar number and as I mentioned earlier, we estimate that we have a true the $1.1 billion of expected fundings and able to provide payroll for over 130000 employees.
Which we're quite proud of that fact to enable small and medium size business owners to pay their staff use the funds for that and to remain in business keep the infrastructure going PPP loans essentially should be thought of as a bridge for the small to medium size businesses to get through the quarantine period, which in most states appears to be somewhere within the.
Six to eight week range some states for.
And then obviously these businesses are going to need further financing, which is where additional rounds of SB eight lending come into place.
The company has done an amazing job and I once again I want to thank the staff. That's been working 24, seven tirelessly in a tough job everybody wants their money they want a quick.
It's hard to accomplish everybody. It was like 30 people trying to get through a door frame that can only fit to at a time.
But we estimate that will fund about two years worth of loan production at about two months time.
If you look at the the carriers at 660 billion dollars' worth of funding, which in a normal SB eight year might be 27 million rounded up to 30, so essentially the industry will be funding 20 years' worth of production.
And approximately.
Month, or two which is pretty remarkable from it from a dead dead start.
I think it's also important to note that we have offered 100% of all of our current borrowers upbeat.
So I do want to point out that according to survey monkey. Despite the funding name it happens to be fairly prominent survey of small and medium sized businesses. They estimated recently that only about 45% of the marketplace actually went applied for a PPP loan I think Thats does save says a lot for the resiliency of.
The entrepreneurs out there owning and operating small businesses that didnt feel what they certainly needed but also indicates we've seen a continuing trickling pipeline coming in.
People still looking for these loans and the window will be open all the way through I believe June thirtyth.
Moving to slide number eight further conversations about the care is at one of the important I noticed aspects of the cares act in what the right. The SBH Department of Treasury to make six months of cash principal and interest payments in any existing seven eight alone in regular servicing which we view it less than 120.
He days as does the treasury basically effectively less than 120 days and not in liquidation I say that from the standpoint that we've actually received $17.7 billion from the SP and the Treasury came in in the month of April to flow through our loans.
Hey, principal and interest for a month for borrowers in regular servicing and as a result, it left our SBH seven eight loans that are in the accrual portfolio at 98.6% currency rate as of April Thirtyth 22020, we'll get into this a little bit deeper we also would like.
The market to notice what our currency rate was on December 31st 29 team what was the end of the first quarter. It actually improved without these payments. So we're working very hard with a borrowers they get them position for.
What I'll call the new economy going forward and we have a lot of faith in our borrowers and entrepreneurs they'll be able to pull through this as we do in the in the American economy. I think it's important to note that the 17.7 billion opinion I payments number one allowed us to earn a full servicing income stream it allowed us to pay down securitization debt.
Which is beneficial to our note holders.
Many of our noteholders bought other small business loan financings that aren't bearing as well.
We turbo charge, the bondholders mean that.
Principle that we would normally get on the equity piece has accelerated to the bondholders are bondholders are typically well over collateralized. This is something that we've done historically over the course of 10 years, our bondholders are and will be extremely happy and that's an important aspect to the infrastructure and the reputation that we.
Built up historically in this particular market.
I think it's also important to note that the payments that are being made for our customers are welcome payments. They offer an economic benefit to our 20 175 borrowers and this will give them a nicer spike during this 30 to 60 days of shutdown.
And then we'll have four months of additional payments for them to be able to recover and come out of this economy on the other side.
On slide number nine we want to point out we'll probably addressed this in a lot of the Q and a relative to 2020 dividends, we did take our guidance back due to the issue of visibility.
To be 100%, Frank with you I can create a matrix that.
Gives me a variety of different indications.
Both beyond the initial forecast below the initial forecast at the initial forecast, but we feel very comfortable where we are relative to being able to offer shareholders, a very competitive dividend, which we've done historically, we're extremely conservative in our forecasting you could see the out thats benefited invest.
Esters, we get to the end of the presentation with respect to performance in the stock price I'll also point out that we are in internally managed BDC.
I'm, a shareholder as well I love my dividends and look forward to receiving them out of earnings.
I think that.
We look at things going forward, we're going to continue to be prudent look for further visibility in our business model. Please understand we've had a change in the business model from a say seven eight model, which has greater margins in greater balance sheet implications to being able to make alone in several 100% of it will certainly be opened to having just.
Question is about.
Our dividend policy going forward, which is determined by our board of directors.
Slide number 10, we talk about future opportunities some challenging markets.
Once again.
Want to complement the management team and the staff are really being incredible and adapting and being flexible in a new business model that was basically done fairly seamlessly to eight getting everybody work from home and then the seven a market switching over to PPP loans versus traditional M&A.
We tried to emphasize this historically and hopefully, it's becoming more and more pamarot apparent to investors our business model and the way that we do business post corona without the use of branches without the use of brokers without the use of BD OWS unlimited salesforce contact with end customers. It works.
And Lo and Behold, everyone is sort of gravitating to this model in trying to get involved we're very appreciative of what we've been able to do and a very short period of time, and we believe that business owners want to go to direct to somebody to provide financial or business solution.
In a remote location with the write software and hardware and we're excited about that we think about the solutions that we have business owners. They got to work remotely. So IP solutions is very well situated for that to be able to get them position to be able to do.
Mobile computing.
Obviously, PPP loans, which had come to the forefront here one of the key core functions of the PPP loans is payroll, our newtek payroll and benefits solution will be able to work with these businesses immediately maybe be able to offer them discounts on payroll to be able to move their business over and to help them solve the problems.
That theyre, having with respect to payroll and health and benefits. Similarly insurance issues come up many people thought they had various types of coverage, which they don't our ability to work with companies.
In our portfolio and offer insurance solutions for health PNC extremely important making sure that get the right cyber coverages and out working from home.
Moving over to payment processing, obviously, when a new world for payment processing, we see how we'll pay Pal has done for online payments. The concept that we have being able to mobilize our clients.
Take mobile payments to improve their website and ecommerce platform.
To be able off them zero cost payment processing solutions, which we have to enable them to reduce costs will talk about our Pos on cloud solution, which is perfectly situated for the post Corona environment, We'll talk about that at a later slide.
Okay.
I think that up.
One important aspect relative to.
Our current business model and analysts and trying to figure out G.
Where's the company's leverage ratio, where their earnings coming from the fact that we at the switch from seven eight a PPP well PPP will add pieces to bridge and in the conversations that I've had with most institutional lenders number one.
People are thought to 70 in the past they think about it differently today and although it's been problems getting the money out I think that the marketplace is going to gravitate to be a bigger seven a market that actually heard many.
Large financial institutions say that going forward.
Quit on extensible, using seven a market rather than putting these loans on their balance sheet. So I think that our position.
As the second largest SPX 70 lender to the first six months of this fiscal year.
Making SP a little bit more of a household name with small to medium sized businesses and obviously there is negative and positive kind of patients go along with it on businesses are going to need growth capital and stabilization capital.
They are going to come to this market and we're well positioned to take advantage of that in the future slide number 11 as a similar slide that many of you've seen and all that presentations one important thing I'd like to point out our average loan size of 180000 on unguaranteed pieces diversification diversification diversification.
Many people on this call or in the financial community they tend to be.
Domiciled in New York, They tend to have in New York thought process in their head New York has been much harder hit on the Corona virus in for small businesses and understates very diversified book of business.
No geography that I believe is over 10 or 11%.
We have a limited amount of business that are in the New York area, We're diversified and geography, I think our motel portfolio is under 2%.
I think that the top four States, New York, Florida, Texas and California.
With obviously, New York in the top four but I think it's still under its either I'd say between 911% tops.
I think it's important to note that our portfolio is extremely resilient to situations like this once again because of diversification diversification diversification.
Moving to slide number 12.
Typically slide that we have in growth in loan referrals as many of you can see we have to change your presentation.
Referrals are little bit less relevant given the movement. The PPP, although you've gotten 70000 loan referrals in the past four weeks for PPP loan our database of customer opportunities because of this and our position on the market is extremely deep I think it's also important to note that we that other people that have sort of used referrals.
Sort of adopted our business model. So I've had people come to me and say Gee cabbage pay Pal lend the overall in your space, we disagree first of all.
The role has been limited to a lender service provider. They do not have NSP seven a license, which gives them the authority to actually make below NAV the reps and warrants all they've done as use of technology Theres, a lot more to lending and aggregating data on the front end and.
None of these entities to my knowledge actually have received the license nor do I expect that to happen in the near future, but then again, that's up to the SBA and the treasury, we value the skills that we've gotten over the last 17 years and understanding markets and understanding credits being a stellar performer in this space and utilizing and embracing technology on the.
Front end and in the middle part of the process to actually do credit analysis, so don't be confused and gathering data.
Also in untested manner relative to compliance is the same as what we've done over 17 years and that's a huge huge bridged across.
Area is pretty payments in terms of pricing supply and demand is extremely important as well you have an oversupply that could be depressed like the pre payment speeds in the pre pay him and speeds on these loans will or are expected to slow dramatically why they expected to slow dramatically not a lot of refile.
Economic activity in conventional lending also you've got a situation, where obviously the economy slowed.
You also have a situation where the principal and interest payments are now made by the government.
And not the borrower so there's less of a a likelihood of refined.
The false will go to zero because <unk> the payments are being made there shouldn't be constructive in general for the bond prices of these government guaranteed floaters that do trade at a premium.
Slide number 14, as a real important point and I altered our discussion by putting a link to a standard and Poor's article piece of research that actually came out this week talking about the fault history.
From standard and Poor's, she's probably the the leading rating agency in the space.
<unk> said the false tend to accelerate between 18 and 40 months and then they flat.
Our portfolio is 30.6 months season. We've discussed this this is a big deal we stress the portfolio for pricing at a 30 per cent default rate when the season portfolio, which could be equal to a 40 to 45 per cent default rate on a new portfolio cumulative over the life.
<unk> very high stressed out situation, we feel very good about how we price. This how we've cleaned the market and where evaluations are I would encourage everybody to take a look at the S. and P. reports Ah Ah I somebody that's been.
In the small to medium size business space.
The concept of what did you see on T.V.
Or would you mind feeling your own local market for example, in New York and dumping spirits that the United States.
And I think that there is.
A plethora of negative in economic news that basically has a view that none of these businesses are going to be able to survive in in my view. That's the first thing from the truth, Here's some interesting facts on 12 31 2019 are are.
Current portfolio a of loans, 92.21% in March 93%. So you know if the world was coming to an end and everyone was closing up and going away and just forgetting about it you know why did we have an increase in payments.
Work our portfolio, we work with these entrepreneurs they've got everything on the line they've got personal guarantees that got personal collateral pledged they're going to work really hard to open up the obviously a lot of the issues here depends upon the health situation that the entire economy in country in universe or betting on but these entrepreneur.
As the last person to throw the keys in because they've got everything on the line personal assets business assets for the entire family that are involved. So I think it's important to note in the tables that we've provided that the payments that we received in April what the portfolio up to 98.6 to recurrent these businesses are going to get a lot of relief.
The next six months they've also all been offered P.P.P. loans, I think they're going to be able to be very well positioned for coming out of this economy, where in that case, we've got a tremendous amount of government stimulus that you've seen.
What's on the consumer level on the banking level and on the business, though so we're probably more optimistic than most relative to the state of the economy going forward do we think it's going to be a v. you know media bounce back up no, but you know we're not going to.
We're not going down the toilet right away I think we're going to do just fine.
I think it's also important to know for those people that are familiar with new tech.
Our assets are more to the market every single loan whether it's in a cruel or nonaccrual alone is in our 10 K. and too. So it's all marked to the market. There's no reserves you don't need reserve, because you're marking it to the market. We believe done so on a very conservative basis, we've been doing this over the course of 17 years on slide number six.
Scene and.
17.
And 18, not going to go too much <unk>, except for the first slide Sim car was a alone that a non investment banking.
Research piece put out by a short shell or highlighted that we did he had no belief that there was a value on this particular loan which is to me.
[laughter] puts the evaluation is research or her researchers zero because I don't know how you could value alone without looking into the loan file and seeing what the collateral is there, but sim cards, an interesting loan. This was alone that we had repurchased from the S.B.A. repurchase from the S.B.A. doesn't necessarily mean, you're gonna have losses and thinking about it someone was 400.
Two days past due in liquidation it paid off on full on 430. In addition to paying off on full we're able to collect $450000 a pass interest $25000 and late fees and you $5000 in <unk> legal fees. So we actually got income above the mark Nexus of.
$500000 I think it's important to note that once again, it's companies been around 20 years publicly traded company than an E.S.P. 70 business for 17 years, we have a lot of people with a lot of eyes. On this all these assets are marked to the market with a mutual fund I towards that.
Ah Fogo data centers also loan that paid off.
In full this loan was severely pass do.
Paid off and fall within 100% alone was also repurchased.
Slide number 18 Mitchell auto repair another situation you know [noise].
<unk>.
The investment community in particular have just looked it like the last month and thinking it's Armageddon well you know why are people paying their load off well there's value in the business there's value in the real estate.
There's value in what these businesses have done over the past 310, 30 years and that's why when they've got their personal guarantee on it they got their personal assets pledged they've got their business assets pledged they will buy these loans back from us. So we could read <unk> once again.
All of our nonaccrual loans Mark to the market all of our cruel loans mark to the market.
But I remember a 19 and 20 I won't go over there in our presentations on a regular basis quickly going through portfolio Company review.
Over 22, we talk about our conventional loan programs are conventional loan program beginning in March and clearly through the second quarter is been suspended based upon.
Lack of visibility. However, we're proud to state that are conventional loan business has done well $92 million of closed and committed we full called nonconforming conventional loans, let me define nonconforming conventional loans.
Non 795 on for an S.B. program not seven A. no guarantee your support of any of any kind.
Totally current so we never situation, where bar's going Hmm I'm not paying this they got personal guarantees on the loans their personal collateral there's a lot of equity underneath the loans I believe as of May have 14, or 15 unit I think there's only one bar or <unk> that we know is extremely liquid that has not made there.
And yet we expect that to come in portfolios performed very well. This portfolio was financed by our joint venture new tick conventional ending and also finance on our balance.
But I think it's important to node Bible for funding and conventional on funding or clearly be suspended at least through.
Second quarter and did get suspended in March so that change some of our obviously our business model.
Moving to new tick merchant solutions, we've got data in here I don't think in Guinea more transparent than having this data and I look at this payment processing data on a regular basis because it gives me a very good feel for what's going on in the economy to actually see a level of these and Mastercard American express transactions that are going through the portfolio.
We've maintained the sport fair evaluate 115 million, we value P.U.S. on cloud an $850000 and.
[noise] moving to slide number 24 were able to track our our processing volume show for the for the first quarter. It declined by about 11% over the same period in 2019.
In March the processing volume was down by 23% now you're starting to see the effects of business shut downs in the Corona virus April and pretty much. Most businesses were shot you know retail and restaurant environment, 37% decline. We believe this is the low point as states are now beginning to open up.
The processing volume in the first six business days and May 2020.
Increased by 21% over the first business days in April 2020, So we're starting to come out of this.
She stage like Georgia, Pennsylvania.
And many other states starting to open up their business. We think we will see a bounce back we have one portfolio in a in a company called mobile money. The entire portfolio is newer cab drivers with the amount of traffic coming through Newark, Obviously, you know, we probably only had maybe five or 10% of the drivers on the road.
Because there were no planes coming in that a bit clearly affected our evaluation in this particular segment, but obviously, we believe once those airports open up that will bounce back as well so certain segments were softer certain segments were stronger obviously, giving you. These averages <unk>, we're making an estimate that <unk>.
Round about 20% May that's just an estimate and forecast or thinking the adjusted EBITDA for the merchant <unk> marching solutions business, which includes payments as well as a mobile money, maybe 10 per cent, maybe 15% you know we didn't believe that represented Ah argh.
Rationale to take evaluation hit, but we will look at this on a quarterly on a quarterly basis, we do expect a rebound than impressing business, we're going to talk about P.L.S. on cloud I think it's also important to know.
How many of you are going to feel real comfortable walking into a store and giving them. A 50 dollar bill and getting your money back in paper currency or coins I think that's less and less so I think this is going to continue to increase the amount of touching go credit card use and things of that nature, which I think.
Will be very bullish for this particular space.
Moving the slide number 25, new tech payment systems or P.L.S. on the cloud I think it's important to note and acquisition we did toward the tail end of last year when planning rolling out P.L.S. on cloud to our alliance partners in a white labels solution. What this is going to enable a business to do is to have their own.
<unk>, which can be white labeled for you know credit Union payment systems Bank payment systems investment Bank payment system. So you get the brands of the alliance partner right on the P.L.S. point of sale system, that's what P.Y. stands for.
Payment integrating Woody commerce, well, what does that mean well the business is doing business online like a restaurant or retail the data that's coming in from an E. commerce will integrate with the P.L.S. and you get one reporting mechanism and R.P.L.S. on cloud integrate to several different accounting systems and also in a great old food delivery services like no breach grub door to.
<unk>.
I said it integrates with general Ledger accounting systems, and we'll also integrate with our own payroll solution. So the data will be pushed from time in attendance on the P.L.S. right into our ISO payroll to give a business owner complete solution. In addition to that when you're doing payroll you look at Workman's comp you look at health insurance.
One beautiful complete solution.
When you look at some of our competitors like square square doesn't have a a a payroll unit and there's a there's a lot of advantages that we have we are not just software where software combined with staff in remote locations and able to service the customer that's what small to medium sized businesses needs. They <unk>.
<unk> don't want to do everything directly with a website.
Slide number 26, our technology portfolio companies, we have three of them I.P.M. cloud nine new tick manage text solutions are very proud of the turn around in new Tech manage text solutions for forecasting three and a half the four and a half million of even better. This year, that's up from 203020 19 836000.
You know where a typical company we had to be mobile.
In a thing or snap all of a sudden 450 people are working off line.
That store it staff that backup they gotta be secure you have to be able to move critical data information with D.P.N.S. They want to put them on Microsoft, though 365, they want to be able to <unk> backup in two different locations. We can do all that so we're very very optimistic about our ability to be very good in the space and the one interesting thing about being lost.
I think all of you would probably had some issues whether it's your phone or your.
Laptop or whatever relative to being able to do your business. So we're going to be able to go in with a big database with customers.
I will offer those solutions to them.
Number 27 also just.
Talks further about what we did in Phoenix based operation by the way Scottsdale was a typo the aligned data center, we're using is in Phoenix.
We've invested $2.4 million new hardware new software, we're very excited about what we plan on doing in this space for growth, which is one about a partner company's new take manage tech solutions 28 talks about the opportunity and cloud I think it's important to note we can <unk>.
Can manage workloads, an Amazon <unk>, Google as well as our in our own data center. So it's not you know on on situation give us your technology give us your hardware software and improve your security improve your mobility and reduce your costs clearly our ability to work with payroll benefits is very valuable in the current environment.
A lotta people have a ton of questions they want to change their insurance.
Going to be well positioned right. There slide number 30 talks about the historic returns have you been able to afford investors extremely attractive I would suggest you take a look at our history over the five years, you know and those five years there wasn't a corona virus, but you can see our stock has declined similar to what we have today, we've always been able to bounce back.
Obviously, we're an unprecedented situation, which is a pandemic with health but.
As all of you are trying to figure out your investment thesis going forward at the end of the day, you basically got to invest in companies, which strategies going forward vision and management teams and I'm proud of what new tick is presenting today to the investment community.
Concluding on slide number 13 note when internally manage P.D.C. So we're not trying to grow just for growth itself just to get asset management fees. Our interest every much aligned with shareholders management on 6.3% of the outstanding shares were not new been around since 1998, we've lived through it while eight or nine and I didn't get a government bailout.
We don't have we believe on a risk on to balance sheet. There's no.
C.D.O. equity or derivatives oil and gas exposure, we're very appreciative of the opportunity to present to you today, given what occurred to a lot of companies in this market, we think well positioned to proceed and go forward and with that I'd like to turn the rest of the presentation over to Chris towers.
Thank you Bang. Good morning, everyone. You can find a summary of our first quarter 2020 results on slide 40 of the presentation as well as a reconciliation of our adjusted net investment income or adjusted and I on slide 35.
The first quarter 2020, we had a net investment loss of $282000 or one cent per share.
Two a net investment loss of $1 million or five cents per share in the first quarter of 2019, it's an 80% improvement on a per share basis, adjusted and I, which is defined [noise].
On the slide was $4.3 million or 21 cents per share for the first quarter of 2020, that's compared to $8.3 million.44 per share for the first quarter of 2019, that's a 52% decrease our per share basis.
Focusing on first first quarter 2020 highlights, we recognize $15.8 million and total investment income So 14.8 increase over the first quarter of 2019.
Service servicing interest and dividend income, where the primary drivers for the increase was interesting come increasing by 7.5%, resulting from a year over year increase in performing loan portfolio.
Servicing income increased by 11 point is set to $2.7 million in the first quarter of 2020 versus $2.4 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $1.1 billion to $1.3 billion.
Distributions from portfolio companies. So the quarter included 3.75 million from and M.S. $75000 from I.T.M. $250000 from Citgo and $307000 from new Tech conventional lending.
Total expenses increased by $1.3 million.
Year over year, or 9% total interest expense increased by point $4 million and the first quarter of 2020, primarily due to higher average outstanding debt bounces.
Origination loan processing costs from SBL increased by $450000, primarily due to increased headcount headcount an overall compensation level.
Well business lending L.C. or SBL is one of new text Holyoke controlled portfolio companies and as a lender service provider that starting January 120, 19 provides SBF as loan origination in long processing services.
Realize gains recognize from the sale of guaranteed portions of S.B.A. loans sold during the first quarter totaled $5 million as compared to $9.7 million during the same quarter and 2019.
And the first quarter of 2020, we sold 67 loans for $38.1 million at an average premium of 10.9%.
As compared to 117 loan sold during the first quarter of 2019 for $74.1 million at an average premium of 11 point O., 9%.
Realize losses on S. being investments for the first quarter of 2019, and 2020 were 400 $400000.
Overall are operating results for the first quarter resulted in a net decrease in that assets of $7.3 million.35 per share and we ended the quarter with now have a $15 per share now like technical back the battery.
Thank you, Chris we'd like to open up the call to your name.
Ladies and gentlemen, if you have a question at this time. Please I started the number one on your touch tone telephone.
Question has been.
Please please.
Please press the pound key.
You first responses from Mickey lean.
Please go ahead.
Good morning, everyone.
And thanks for taking the time to explain so.
Situation very just quickly.
Look at the slide as you were talking.
Soft in March.
I have data that shows that there were also so often.
Which is a little confusing because these are government guaranteed and there's there's a low loan origination volume. So you would expect to supply and demand imbalanced actually improve their pricing. So can you just described the market.
Yeah.
Sure a Mickey appreciate the question and I I do want to add that the S.B.A. is done an amazing job. During this crisis, just phenomenal and although it's easy to sit in the bleachers sent your question doesn't address that at all but you know a lotta people think they're critical of everything.
[laughter]. This is not the time to be critical this at the time too.
Be proud of what we've been able to do here and I do want to compliment the the S.B.A. on their efforts and working with us now.
Here's the you know a little technical issue however, well.
Historically, they've contracted with an entity called Colson, which I believe that will be changing out in the very near future well cofunds located in downtown Brooklyn. So Unfortunately, most of the pool assemblers I'm, saying like almost all of them had difficulty in clearing bonds.
Because of Colton issues and issues of having to deliver physical certificates and signatures and that was a primary cause for their being a market dislocation.
In the month of March in in the month of April I do see that shoring up we did a little bit of selling in April and we're able to clear we had some product left over from the prior prior corner that we hold onto a but no I think from a pure evaluation standpoint.
These are premium bonds, the gum and guaranteed.
And it prepayments beads aren't a 22 or 24, but there are lower numbers.
Putting supply and demand side that should affect the bounce back in price.
I agree moving on to P.P.P. and this is sort of a subsequent event.
And then they recognize there's limitations as to what you can say, but.
Standing is that.
Collecting loaned administration fees, which will be at the B.D.C. level and.
1% of 5% of the loan depending on its size right could you describe.
Accounting for those fees to be.
Book those fees as the earned or whether you capitalize them and then advertise them over the loans to your life.
Important question first item, we we've sold 100% of.
The loan in the former participation certificate to third parties and the fees are earned for the purpose of putting alone together and putting it on on a license. So it and obviously, it's early so I'll put the qualifier on it that.
Owners haven't signed off on this but you know in our conversations internally. These fees will be earned upon the funding day they'll be paid in cash by the S.B.A., that's still to be determined but the the law indicated fairly expeditious manner.
Manner in which those cash fees will be paid and they'll be those fees should be earned in the current quarter I think it's important to note.
Some people you know wonder you know, where we're selling these that they're all they're all sold at par.
And you know.
They're all sold at par. So basically you know when trying to come up with some kind of an income model you could you know figure, it's one three or five.
Right.
And so there are parties out they're interested in in holding this one person paper.
It's it's it's a little surprising.
[noise] it's done.
Okay, so very since P.P.P. doesn't require.
You just said it doesn't require use of your capital and Meanwhile, your legacy loan programs were sort of one.
So at least for now what what's the outlook for new ticks.
For the balance.
So yeah, maybe you're asking the questions that really are are valuable to investors and.
Created sort of a lack of disability that we really haven't been able to address up until this point, we're not getting a lot of disability, but we're giving what we can.
When we originate the P.P.P. long, we funded and then we and then we sell it expeditiously so that.
There's you know I'll say virtually no balance sheet. We've got currently for different funding partners funding partners have availability beyond what we've got P.P.P. numbers for so you can imagine that they're they're fairly deep I've got one funding partner that's fairly small that.
We'll keep us with you know maybe a five or 10 million dollar balance sheet at the end of it but practically all of our funding partners are buying 100%.
Okay. These are folks that or I guess, they're just looking at this given the guarantees.
Like money market investments for them.
Well look a a financial institution can pledge this at the federal reserve for 35 basis points, Yeah. So and they can also put it on their books at zero risk based capital with unlimited leverage. So you know when you think about this Mickey and this is once again you know looking at at the company and all of a sudden this.
Program gets thrust on us weird may have a 4% rate on Friday, or 50 basis points raid on Tuesday, and back to a one person at a rate on Thursday, whereas you know me the the way that the United States reacted in this crisis I think financially although it's been heavily criticized has been just.
Terrific once again I want to compliment the Senate the house the administration, the S.B.A. and the Treasury.
So I perfect and what you see on T.V. is everything is bad.
Accurate not everything is bad there's a lot of good things going on out there will come out of it.
For what it's worth I stopped watching T.V., but.
And could you at least give us a blended.
Weighted average between the one I mean, there's a big difference between 1% fee.
Well, let me, let borrowers my sense, it's probably closer to the five.
The one.
Well look let me let me comment on this because I want to be careful you know relative to forecasting and what's going to fund and what's not going to fund so.
You know as of this state we funded are closed which I think also is a a great number about $650 million to $670 million worth the 1.1 billion. So we've been.
Working at light speed.
The S.B.A. statistics indicate that round to the average loan was at the lower end of the wrong in that would be in the 5% bucket I think you could indicate that round, one which closer to the bigger loans from an average I mean look I at this point.
I'd really prefer to wait until June.
You know you could come up with different averages and forecasts and ranges, but we we would just prefer to wait until.
That amounts been funded that we'd been reimburse from the S.B.A. with cash in the bank and we can then move on from there. The one thing that has come to fruition as we got up.
17 point 17 plus million dollar payment from the Treasury for our portfolio, which makes makes is very happy and ER portfolios, 98.6%. Currently so that's one act that's passed through in round trip. This will happen to this will happen as well.
Alright.
And appreciate your time.
Thank you Mickey.
Thank you Unix response system loop.
KBW go ahead please.
Hey, good morning, Barry.
<unk> you're doing.
Doing all right. So just kind of following up on on what made you were saying I mean, just because of the obviously ended up to the P.D.P. program just want to reiterate we said you 100% below the you guys originating are being sold X. The like you said five to 10.
The smaller partners that you're we're partnering with right.
Yeah, so the balance sheet won't grow in this activity by more than.
Five or $10 million plus we've also sold governments that we had in the line so I'll leverage might actually go down.
Okay Gotcha.
Holding everything else constant.
Yeah <unk>, yes.
And then actually just on the <unk> kind of just the housekeeping question, but on the the referral volume for exclusively S. or 70 loans in in one Q. do you have that number on hand or is it kind of mixed in with the P.P. So it's hard to delete between the two.
Could you repeat that again <unk> on the referral volume yeah, It's I look I would say.
I would say that well, we've historically done.
Over the course of four or five years relative to referral volume growing I mean.
The day, they wouldn't be useful in other words, because if people came in and said they were looking for.
A 10 million dollar normal seven Ain't loan, we just we stored it. So we did it just it's just not useful right now I <unk> I can't tell you that.
From a modeling standpoint.
The S.B.A. business is now a very common name and work that a lot of business owners did didn't know about new Tech has also become more prominent in the space with a variety of different new referral partners look I would say you know to be Frank with you we drop a couple of balls, but not many and we made a lot of new friends. So I.
That we're gonna probably suspend the whole.
Referral volume number for you know another quarter and then we'll pick it back up but I'm I'm confident that our numbers are are great and it's gonna, it's going to grow up so I know, but I.
Not not real relevant I would say those 70000 are.
Merrily driven to beat P.P.P.B.P. gotcha, Okay, yeah that that that that's what I thought I just wanted to make sure and then just got a second point on that it is you're expecting the seven day to pick up more towards the back of the year correct. So kind of to have 2020 event rather than than anything in the next quarter or even maybe a little bit.
Three q. right because of the P.D.P., yeah, <unk> important to know and I think it's also important to note that the second quarter in the first half as usually weaker than the second half. So I think that you know if you can put any kind of a typical number in the second half if you're trying to forecast we've decided not to do this so I mean, you guys can do and I.
That's just want to get a feel for it but you know just to go out into the third or fourth quarter, but I mean, you know if you put any kind of a 70 volume in there with any kind of pricing.
And actually salvage is a year that in most cases, particularly nvtc world or in financials is just in the toilet.
Yeah, that's right okay.
Okay, and then kind of switching over to the payment or the the principal and interest payments from the S.B.A.S.B.A. on the the current cruel.
Portfolio I think on that slide I think it's 15, you kind of list that there's there's 15 loans that are either little bit pass do or or or further and so.
We should expect that.
Less subtracting out the I think it's 80000 that would be transferred the liquidation the less should be funded with p. and I payments from U.S.B.A., so that would be another.
Yep, just under five <unk>.
Number goes high for bye Bye Bye Bye Gotcha 5 million a balanced, but then you and I I definitely lower okay.
And then lastly on that portfolio I mean coming out of this we're kind of.
I mean, the question has to remain what what what the demand for businesses and borrowers has been since the those the the borrowers have gone back to work I mean, obviously, just trying to get Red normalize lost rate on some of these following the six months payments from the S.B.A.. So I I know.
You gave the slide of saying that that 30 per cent cumulative.
But during this the the cumulative gross defaulted, 30% with a 40% lost <unk>, which should imply roughly 12%.
Moved to Los rates on the portfolio can you speak more to that coming out of this event and what.
Kind of business demand has been for borrowers.
Well first thing I I, you know in addressing valuation I I think that is I'll use the word fair and I think particularly when you oppose it against the.
Literature that we put out the chose these curves really flattening based upon seasoning and I think that for those you there really aren't immersed in dealing with small businesses and entrepreneurs. They are an extremely resilient class that you got to come in everyday they got to make their payroll and unlike <unk>.
A lot of consumers that are in many cases living paycheck to paycheck, the small and medium size business. Operator, you know in my opinion can survive a a month or two or three of zero now when I say that I'm not talking about 100% of the pie, but a pretty big percentage of them and.
I think that's that's what we're seeing now relative to loan demand coming out of this.
A lot of them have built up net worths, they've got four one k.'s. They got retirement plans and you know they believe in themselves. They believe in their business, they're going to tap into those additional resources.
To give them whatever equity is required to bridge this and to be able to borrow.
If need be from you know the next you know S.B.A. program that comes out and we do have a lotta people today, we seem that and we were were holding these situations, but there is clearly a pent up demand for for capital and you know this is a classic downturn from the standpoint that you will.
Lose weaker entities. There's no question that you will lose weaker entities and.
You know the entities that are around they're going to do better because they have dealt less competition. So there's gonna be loan demand I I believe there'll be loan demand.
Okay Gotcha, Yeah, I was kind of just looking for.
Hadn't anecdotal references from the businesses themselves in terms of kind of consumer demand for their products or Oh make that just in terms of their ongoing kind of cash flows.
It's a little early well with with respect to cash flows the interesting thing Luke and we we showed this week we pulled in a lot of cash in March.
From businesses that wanted to get closer to current so you know that they could benefit from you know being in in regular servicing and you know that was very beneficial. We did I don't know very few deferments in the month of March a lotta people didn't immediately we told people make your payment. So you can still.
How would affirm and down the road if you need because you can't get unlimited deferment and the S.B. program I think you're allowed one.
So you know Dustmen I don't know did like 10, or 15, and I could recall and they were all short term just to get people get to people current but.
For the most part these business owners you know they've got savings they've got their not going paycheck to paycheck no when I say that I'm not talking about 100% I'm talking about 80, 85, maybe 90, but they've they've got valuable businesses infrastructure and some of them got.
You know marginal restaurants, or marginal coffee shops, or marginal and they're going to go out there's going to be there's gonna be businesses that shot I I don't think it's one I don't think it's three in 10 or foreign time.
Okay Gotcha, that's that's super helpful. And then this one last one really quick just kind of on what the the actual individual alone you highlighted the not cool loans paid off on slide 16 to 18 in the interest that is recovered from those recognize in the interest income or is it <unk> like should we expect that to be.
He kind of an interest recovery because I mean.
Just given the size it looks like it would be roughly like 8% to 10%. The the interest income that you guys receive on on.
Basis, they just want to kind of see if we should look at bat, it's kind of one time, if we look at low you know <unk> <unk> <unk> interest yields coming in on two q.
I think it <unk> you know the one good question is that you know these loans are now you know cash current we should have a much higher interest income that comes off of that existing portfolio portfolio will shrink a little bit I still think we'll probably have you know 8% type prepayments speeds, but.
You know a lot of the portfolio got that cash infusion, which will be the full interest coupon as well as servicing.
Okay, Gotcha, and that's all that you.
Thank you.
Thank you your next responses.
Raymond James Please go ahead.
Hi, guys.
I'm not going on over his every first one go to the dividend momentarily and then I'll put some other questions.
Is it the comment intend obviously in the presentation you talked about the annual distribution the pilots, but is it the <unk> intent to pay a cash dividend during the second quota U.S. delaying when you declare that because of lack the visibility or is it more the intent right now and stuff to pay out kind of more in the second half.
As as I've thing works out and and maybe <unk> skip the the the the the the normal dividend, but you would avoided clad for the second quarter.
You don't Robert like number one <unk>. The the board is going to determine that I I am a board member and you know we kind of get more visibility is every day that goes on I think that.
You know, we clearly if god investors that look forward to receiving some cash payment you don't want a quarterly basis, you know given that we think that the second quarter could be a very big quarter, you know and normally we pretty much. We we kind of keep that given in very close to what an eye on I.S. right.
That's the store, but [laughter] whatever was historic almost goes out the window now I think that you know from our perspective.
You know she would ask me that question couple of weeks ago, maybe my leverage was going up I might have had a different answer then I have today I think that we're gonna I I don't have a specific answer for you today cause the board determines that I really think that we're going to try to get investors. Some <unk>.
<unk>, they can count on but I'm I'm hopeful and I say this I'm hopeful that.
That investors come away with you know only neutec this year, and saying well given the Corona virus.
They pay me a pretty good dividend their portfolio held up and.
You know turned out given that this is a tough space to being put angels.
Small and medium size business. This worked out pretty well. So we're gonna be judicious I'll, probably have more Claire clarity on that beginning of June you know like to understand you know from the S.B.A. For example, when we're going to receive that payment. So you know I feel really uncomfortable Oh, yeah, we're gonna make a cash payment.
I don't I didn't get the cash back from the government yet so as you could see I'm being very careful about that but we feel very strongly about the model the earnings and what we're doing I think investors, we'll wind up being pretty happy with our cash dividend performance as well as how well our portfolio held up and that's important to.
We're partners with the government.
God.
<unk> yeah.
That that kind of high class.
The one I mean, you just mentioned it again.
You two weeks ago, you'd given a different items that India per pad Coleman's you talked about you know you'd do expect B.S.P. eight market to come back down in the second half of the yet, but if we you know actually that two three weeks ago, you might not except that so.
Things are moving really fast enough.
Very nice, but <unk> you see over those two weeks what is it that's changed your confidence level. So much in <unk> <unk> <unk> <unk> being since this question about the fact that that's the traditional program come back <unk>.
I Love that question two weeks ago, everybody believed the money would run out in 10 minutes.
There's no money.
The whole 310 billion in the second would be gone, which means you need legislation to appropriate new 70 money right.
Well low and behold the money still out there there's 120 billion left.
That could be used for seven eight through the end of this year and then it will most likely get re legislated I've also seen the Rubio Carton letter you hear things from Pelosi. Another politicians. The program is a bipartisan program.
Ah The administration is talking about growth and going forward you know in another round of of stimulus, which I believe and hope the S.B. It would be would be part of it important to know what the Rubio Bill was part of the original cares act that portion of it.
It would have gone to 90% with 10 million dollar limits and you know you availability to not have credit elsewhere that got pulled because I think what the administration wanted to do what they wanted to do bridging first to bridge everybody get paychecks out there get money to consumers do.
<unk> and then go with you know stimulus after the fact, so number one the availability under the seven a program to what I'm hearing from Washington, Three you know loan demand from businesses that indicates to me that we'll get back into a normalized environment I Gotta tell you something else, we really covered a lot in my payment sector looking at the first sick.
<unk> business days of of May versus April and you could see it as people and things are opening up people are going out and there you know their house and they're starting to spend so those are the things that give me a give me the confidence that there will be a.
Seven a business at some point in time in the in the you know and the rest of the year.
So I appreciate it call it thank you bye.
Yeah.
Thank you Unix responses from Scott Sullivan of Raymond James. Please go ahead.
Yeah, Thanks, which I can recall [noise].
One comment and two questions real quick we all know this was really kind of a def con situation. So you know personally a hat tip <unk>.
<unk>.
Aside for Congress to come together and on this would I think was a very elegant bill.
And also really huge congratulations to you and your staff your team for helping such an important and vital component of the U.S. economy and you guys should obviously in my opinion be very proud.
So first question is what's your goal here now.
<unk>.
[noise] Oh boy.
[noise], Yeah and that that's a good question Scott because they're working real hard you know the clients appreciate them. We appreciate them. We've we've got to keep them going keep them in their seat.
Keep them hydrated keep.
Just keeping going at a very high pace.
To get the money out and then deal with the concept of loan forgiveness on these loans in addition to that.
I have to payroll staff payments staff Tech staff.
Insurance staff discount sort of going to be helping out in the program and working with businesses to get their payroll costs down to get better health insurance policies to get other insurance policies that they need to improve their technology for working from remotely in from home. So we have goals that are will.
Beyond what is sitting right in the face and the one thing that was very constructive about this crisis, which is destructive across the board, which I think our staff realized that the business owners out there, they're just like them and these are people that really need to them they need their help they needed them to process their paperwork and.
Money in their hands her payroll that was a very positive thing that was hard to get across the people that are staff helps businesses. Every single day. That's what we do we help people and you know getting the staff to recognize it was frankly easy during this pandemic. So those are.
Those are the primary goals for the corner and then you know this too will n., most likely by June and will shift back into what we normally do which is helping businesses, but albeit a different pace.
Great appreciate that.
<unk> recruit large number of new customers.
Than introduced through in or helping now.
What kind of cross pollen is in.
Do you think you could see.
<unk> <unk> <unk> last response, what kind of.
Lift could you see where your other small business owners.
I've told my step I think this is you know kind of a once in a lifetime opportunity where businesses now that or you know in many cases not fully functional not fully operational not really focused on revenue growth.
To really focusing on the expense to focus and and having the best solution.
Ah and to get them to make changes this as a once in a lifetime.
Opportunity for a business owner that can sit there and and looked at I have the best technology can they work remotely can they work remotely securely.
Are they storing or they do they have hot backup are they using the right payment processing solution should they go to a zero cost model should they improve their website I mean, you know we impressed upon.
Restaurants for example to take ecommerce well a lot of them hadn't Oh I didn't want to spend a thousand dollars or $2000 on a new website that would've been the best investment they ever made.
<unk>.
Be able to order online and have curbside pickup they would've been able to stay in businesses. The business that don't have curbside pickup they really got hurt.
He got hurt.
That's.
Great. Thank you so much you.
Thank you Scott.
Thank you.
She went no further questions in the <unk> I would tend to conference back over to their he's known.
Thank you very much and look we appreciate the opportunity to present everybody. Once again, one I think you know all the the new tick associates I want to think the small business administration all aspects of government investors that have hung in there with us.
And you know we look forward to giving a you know further further guidance. The important aspect is really tough time in a tough segment of the of the Mark of the economy I think we're very well positioned going forward and we look forward to providing the types of returns that the community as Ms become accustomed to with investing in new deck.
Thank you well.
Thank you for joining us today.
Cities Conference call you may now disconnect.
[music].