Q2 2020 Newtek Business Services Corp Earnings Call
[noise] excuse me, ladies and gentlemen did he operator Kitties conference you scheduled to begin momentarily until that time your lifestyle again place music hold thank you for your patience.
[music].
20 earnings Conference calls at this time, all participants are in a listen only no <unk>.
After the speakers presentation, there will be a question intercession. Please be advised at today's conference as being recorded to ask a question. During the session you won't be depressed or one of your telephone if you require any further assistance police Crestar zero I would know like the hand the conference over to your speaker today, Mr. Barry phone.
Thank you Sir please go ahead.
Thank you very much and welcome everyone to our second quarter, 20th 20th financial results Conference call.
Joining me on today's presentation is Chris towers are executive Vice President and Chief accounting for sure.
So for those of you that would like to follow in.
On the conference calls presentation, you can go to our website new Tech one dotcom any W. T E. K O N E Dot Com your business solutions company you can go to the Investor Relations section.
And go to presentations, you'll be able to follow along on the Powerpoint.
I'd like to point everyone's attention to the forward looking statement comment on page number one.
And then move forward to page number two.
Our second quarter 2020 financial highlights New Tech reported at the market clothes yesterday record financial results across several key metrics for the three and six months ended June 30th 2020.
This was a great quarter for us we're extremely proud of the way our company shifted due to the pandemic, we had to immediately change and focus our business model to accommodate the altered economic landscape.
We basically ceased are forward movement on our pipeline that SBA seven eight loans, which is obviously been hour studied business for over 17 years.
And.
Positioned ourselves to participate in the S. P. A N treasury and a federally sponsored pizza P program. We obviously look at the shifting and our performance has to Mark of a company that is able to exhale under adverse circumstances.
You know as we go through this presentation. Please note that we've.
Got a great second half to go through in 2020, and we also encourage our shareholders to look at new check on a longterm basis, we look forward to giving a forecast for 2021 that'll be a little bit more normalised in the one before cast that we will what was it won't be results. It will have in this calendar year 2020.
We have already declared a dividend for the third quarter, which will talk about we believe will have solid dividend distributions for the remainder of 2020.
And we are releasing a forecast, which we had pulled back at the end of two one for adjusted and I I in the range of $1.80 230, I know, what's a fairly wide range, we really want to be fair and honest to our shareholders all stakeholders in the investment community in that range is.
Predicated on.
An additional P. P P program.
And other things that are gonna be occurring going forward, we'll get into that we get deeper into the presentation, but we feel comfortable with this range. There's a variety of different probabilities here I feel very comfortable on the lower end, it's conceivable, we could actually take out the upper and depending upon what.
[noise] legislated.
And obviously you could take a look at the success that we had in the P. P. P program.
Economically for the second quarter.
We'll talk about the next program the likelihood of it happening where it stands et cetera.
Company is in real good shape from a long term perspective, both with respect to income generation in quality to portfolio, which will go into whoopi dislike number three to go through this fairly quickly.
Total investment income, 230% increase quarter over quarter of this year versus last <unk>.
[noise] investment income a change of $1.42 six cent lost NII typically excludes capital gains the income from P. P. P was considered regular income therefore hit the N F. I number which is why we have a bit of an anomaly and NII and adjusted NII third bullet adjusted.
<unk>, 140% increased $1.37 per share a record for three months and the June 30th.
That I said value.
So increased to $15.66, a nice cane over the prior quarter.
We're very happy with our debt to equity ratio at 1.2, we aspire to keep that equity ratio low even at the end of the third quarter. So we've got.
Plenty of the ability to love or the balance sheet in here, we could talk about a risk and why we think we are capable of holding higher levels of that there's some of my other competitors and the BDC space that hidden leveraging their acid quality.
Total investment portfolio increased by 13 per se.
Looking at six months, 123% total investment income game.
Six months this year six months last year that investment income about 42 verses the loss of 11 cents just it in a I $1.58 versus a dollar one I should point out that we have declared a 58 cent dividends for the third quarter. So <unk>.
<unk>, we feel pretty good about where we are with respect to paying dividends and paying them out of income which is.
I I didn't policy.
And the slide number five paycheck protection program most of our industrious listening and are very familiar with the P. P. P program, we've been talking about it significantly so I'm not gonna get too deep into the weeds and explaining what it is there's information obviously and this Powerpoint and then previous press releases.
I think it's important to referenced and remind.
The investment community that in addition to earning the income.
The cares that also provide that for the payment of principle in interest on that card portfolio SBA loans to repeat that this is not a deferment. This is actual cash payment made by the S. P. A treasury directly to us sharp borrowers.
I'd been relieved of that.
Duty, it's almost like they got a capital infusion. During this period of time, which is valuable, particularly given a difficult economic climate that we have I think as we finish it.
Off on this slide number five important to note. There's currently bipartisan support in Congress for the extension of the P. P. P program.
This is a pretty much agreed to between the Democrats or Republicans and President Trump there's been dialogue that they pretty much have an agreement terms of what this will look like also important to note that there's about 130 billion I believe in leftover money. So it doesn't require a new appropriation, but they're going maybe going to top it off.
With an additional $60 million, which will be used for other.
S P a type programs, which we could talk about.
Also to note that in the original cares Act. It was 17 billion put aside for payment a principal and interest they're still money left available for that so if the program does get renewed there was a possibility that are investor baseball receive another three to six months worth of P&I, that's important to know that doesn't eat.
The appropriate it so clearly that creates less friction going forward legislatively.
Going to slide number six <unk>.
Performance and P. P. P loans 34, 7634 7 million fees ending June 32020, we believe by the clothes well by the close of business on August 4th.
We funded 115 billion the P. P. P O I once we still have a few left to fun. We anticipate by August 8th at approximately be 10200, new borrowers we received.
I believe over 100000 requests for P. P. P loans from from different participants, adding to our enormous database of customers.
We're proud to to report that we wanted two year's worth of blown production in slightly over four months time. It realistically most of that was done within four weeks. So are extremely proud of the staff the team the software and the methodology to basically utilized technology to process loans in a very quick fan.
<unk>.
<unk> with policies and procedures set forth by the S. P. A.
We partnered with our our alliance partners to sell 100% participations in P. P P loans, which left us.
With no balance sheet me I'm, a very small balance sheet P. P. P lunch and it gets about five or $6 million worth, but everything else was stolen at 100 per cent.
Basically I think it's important to note that well we didn't P. P. P really dictates the power of the new Tech model no branches no brokers no BDO is still bankers, we <unk> very well in the confines of the market today, where you're basically driving referrals back to.
Professionals that are providing solutions whether there.
Lending solutions payment processing solutions insurance solutions technology solutions or payroll health benefit solution to remote locations. That's the model the works really well and.
Where queally demonstrating that we're able to to perform and execute on it.
Slide number seven.
[noise] about the cares act a little bit in a little bit more detail. We're hopeful the <unk> Congress will authorize the S. P. A.
To extend.
Additional P&I payments, we chatted about that.
In addition to be able to earning additional fee income. There's also once again I want to get too much into the weeds here, but there is upside portions of the Bill Senator Rubio has a piece that would provide longterm funding.
Insignificant fee income to lenders like yourself. There is a bill that has gone recent support by young and Bennett in the Senate that would basically called the restart program that would also provide hundred per cent guaranteed financing through the seven day program. So.
As a lender in this space, we believe we're in a good spot.
Through Corona and also obviously, having the government as your partner in many instances as helpful. Obviously, they want our portfolio to be current they want a borrowers.
To be in good shape or borrowers.
Employee of significant portion of the citizens of the United States I think Americans are more and more familiar with the importance of small business. This is our market. This is our space. We think this is our time to shine moving forward to slide number eight beazer. Some additional highlights we had some.
Residual funding seven eight loans, which we funded.
During the three months ended June 30th 17.4 million, we've announced that we're starting a seven a business extremely selective we're looking for companies with an operating history hard collateral plenty of liquidity strong guarantors paying attention to geography and.
There's plenty of businesses to provide funding to.
Pick out a couple of categories.
R V parks arenas, both dealers pest control company staffing company sprayed companies. These are all businesses that actually are doing.
Well no we don't want to learn to overheated segments of the market. So we gotta be careful that are underwrite I think it's important to note. The worst of times is the best of times to make these types of loans and we're looking forward to opening up in the second half of the year, where indicating $150 million of funding in Q3 two four.
Just a that most likely coming in here for as we rebuild their pipeline and we anticipate having a robust 2021 getting back to 2019 origination levels.
We also restarting our five O four loan program. So we're looking forward to getting.
Some fundings there in Q3 as well as rebuilding the pipeline.
And a conventional lending J V right now was on hold.
We are looking to start that up in the future, we'll talk about the performance of that portfolio, which has been stellar.
And we're looking to grow that business, we think that's a significant contributor to our business Center business model down the road on slide number nine we talk about dividends for 2020, we just paid a cute too dividend a 56 cents to shareholders record of July 15th 21% increase over the second quarter, 29th teen cash dividend.
And we declared a third quarter cash dividend payable on Sept, 21, sheltered shareholders a record all the way out the chef 21 get a 58 cent dividends.
So with the payment of the third quarter dividend will have paid a buck 58 for sure for the first three quarters, which would be nine seven per cent increase.
We obviously I'm looking at the second half of the year with a lot of potential variables relative to PPP seven a M.
And the portfolio and that's why we have to come up with such a wide quite disparity.
Obviously I think many of you were aware new tickets are business development Corporation, it's an entirely manage BDC, what we earn we pay out.
Second quarter of 2020, Nabbed discussion, we chatted about.
An increase in Nabb $15.66.
2000 2020.
The last night clothes, we clearly traded a nice premium to the market.
And we have historically done that through and November will be six years outstanding most of their most of their history.
So I number 11.
[noise] talking about future opportunities and challenging markets.
Seen tremendous changes in our economy based upon Cove, It and I think code is done several things number one it's pushed a lot of businesses that we're on the cusp in a week already.
To an accelerated.
Salt number two it's forced a lot of the trends that we'd seen in the market. So when you see E. Commerce further cello rating entities like social media Giants Facebook.
Google.
Et cetera.
Those mediums to reach people.
Through social meet any commerce, obviously, becoming more and more important.
And to note, we've got to pay attention to that as well when you look at what we do an I T. We provide.
Small medium sized businesses the ability to work Mobily securely and remotely lettuce manager I T.
Health benefits area, clearly major changes in shifts, particularly with health care.
We are able to give businesses the ability throw a cloud based payroll solution in health benefits solution to shift over to us as far less expensive.
Manners and far more efficient then they're legacy.
Sales oriented paychecks and AVP model, obviously, an insurance tremendous changes in policies were able to work with them remotely just as geico does tell small medium sized businesses look at their insurance risks.
And then obviously and the payment space tremendous shift to the E commerce landscape, where else to help businesses with contact was payments and you take payment systems, which will talk about two P. O S. On cloud, we're really very well positioned to help businesses meat.
Challenge is in a post cold with world.
So I'd number 12 talks about sort of our pedigree.
And the seven day landscape, we're still the second.
Largest SBA 70 lender as of June 30th, including banks largest non-bank lender 10 year history of raided Securitisations, both double eight and sing away Everything's F. L rating, many other lenders and a small business space are experiencing tremendous stress, we are not probably put up some data.
And the near future talking about how well our securitisations with held up once again important to note. The average loan slice of the portfolio is a beautiful 179000.
Per uninsured peace and the portfolio that gives us great diversification with geography in risk you can see how important.
Risk.
Diversification is when it comes to geography, and it comes to industry type.
Obviously, I really wouldn't Wanna have a lot of.
All luncheonettes in Manhattan today that would be.
Fairly fairly devastating for for that matter gymnasiums in New Jersey, So the diversification.
We have an a portfolio is fantastic. This is why you could do it.
Extremely valuable and it's worth well for a portfolio matrix, which you'll see.
Moving to slide number 13 growth in lone referrals.
For this calendar year, we're gonna be using units versus dollars dollars or a little bit skewed based upon PPP issues, but you could see we've been overwhelmed with loan referrals.
We have received in excess of 100000 units for six months 80000 came in second quarter.
Really really.
Thrilled about a model.
This is great for customer acquisition, our database of customer opportunities is very deep well over $1 million.
S M b as in our database to be able to market too and cross cell. We look at our company versus other fintech companies like on the capital Cabbage Lindsey Oh on Dec recently wound up merging into another public company for about $90 million I think their portfolios rapidly approaching a 40 per cent delinquency right.
I've got to save it.
If they're getting a 90 million dollar valuation for technology I I'm very proud of what we built here new tech as well as our ability to manage credit for over 17 years, particularly did it during the O eight O nine cycle when the current cycle.
All of these providers got interesting technologies on the front end, but they really do not do a credit analysis. They don't do credit work like our technology still were real 50 state lender and we're able to do this across multiple different business silos slide number 14 premium trends.
Animal seven a environment are important to us we talked about the slowing of prepayments and the potential increase and prices, which we were constructive on.
Looking out in the third quarter, we're seeing prices.
For 10 year paper.
North of North of 111.
And we're looking at prices of the longer data 25 year paper.
North of 117.
The splits or between 111 112 on larger pools hit a bit of a discount but the premium transfer government guaranteed sales real strong slide number 15 talks about the seasoning of our portfolio.
32 six months.
We've shared an S. P analysis on seasoning portfolios and the issue with business as being able to.
Survived that default curve and how it really flattens out after 40 months.
We're very comfortable with the mark on the portfolio, which will talk about as well as our ability to.
Liquidate loans.
Be able to earn a great dividend for our shareholders going forward.
Slide number 16 shows are delinquency rates and trends as of 12 31 to 331.
We actually improved.
Our currency right almost to 94% even through the period of March.
Dealing with the concern about.
<unk>, which really began in February and March obviously with the payments from the government.
I'm Gonna go up to 99% current we feel pretty good about our customers.
We are speaking.
Reaching out.
Gradually from a servicing standpoint, all of them were preparing them.
For October when these payments Macy's, we're working with them, we got dialogue going with respect to them.
<unk>, we're need to expanding where they need to working on cost control. We are a very active aggressive servicer.
I can tell you that historically one of the things that the Fintech typically don't do is they don't service. We do we work with clients, we make sure on a going forward basis that they're doing what's best for their business to be able to meet their responsibility to us and the U S government.
Slide number 17 is it's an example, which we do tend to give about liquidation.
We use a 40% severity, which is our historic severity on los on the portfolio, including cost to collect an interest.
This was a client that.
Went bad.
And August of 2017 actually that's that's what we provided them.
The funding.
It was a national digital Billboard company been around for 20 years. They ran into trouble, we were able to sell all of the assets and get all of our all of our money back 100% covered.
Slide number 18 is a slight we've used for <unk>.
[noise] closest 17 years it shows in a cache created on a seven a loan.
Sledger 19 shows the income treatment moving into a portfolio company review as we get back into the five O. Four business, we wanted to demonstrate to newbies toy story about.
The way of five O four alone works, how did you get a first conventional.
Second lean provided by the government, which gets taken out by by the government.
A great product for borrowers he get a 90%.
We're going to value against commercial real estate with extremely low interest rates I think the second debenture by the government has got a to handle I think it's like 275 with a 20 year term on it.
Typically land fixed five at a higher rate, but the blended rate is close to 4% with a long am scheduled such a great loan for a borrower.
We like this business capital one bank has a facility with us to be able to warehouses.
And the SBA takes out the second we typically sell the conventional first slide number 22 shows to return on equity for that that type of business.
Slide number 23 talks about a conventional learning portfolio and our joint venture with Blackrock TCP.
We have a portfolio in the in the JV as well as on a balance sheet approximately $92 million 100 per cent current as of June 30th 2020.
This is an attractive portfolio.
It's get loans and different markets.
Stress does the personal guarantors liquidity of the personal guarantors.
Personal guarantors multiple businesses very well heeled has kept this portfolio performing.
<unk> actually got one restaurant and the portfolio that is in New York City has been closed won't probably open until April but.
They have enough liquidity to continue to keep us current throughout the whole process and that's the the value proposition of our underwriting to make sure. We learned to really good businesses I think it's important to note.
When you look at the current economic crisis that in this as a crisis is caused by a pandemic and it's basically been caused by the government shutting down businesses and restricting commerce.
Clearly the initial shut down.
Was caused to bend the curve in north eastern regions like Connecticut, New York.
And.
New York, Connecticut, and New Jersey.
Some states.
Particularly in the Sun belt, when given the opportunity to open up open that stayed open their curve peers early stages of begin to flatten.
Which makes us optimistic that eventually.
The virus.
And the government shutdowns will be less and less obviously going back to school is a key issue here.
Opening up.
The economy is a key issue and also being safe as a key issue I think the point I want to make here is this a very unique situation for lenders, where lenders typically encounter defaults because you've got a week economy without much stimulation weather either created by the government or the one in there sure of the business climate.
This is.
And economy, where the businesses are shut and can open.
And that's not 100%, it's in spotty Geography's and it's in spotty industries. So.
It's it's a market that we think is a very good chance of recovering recovering well and we are extremely constructive on our business model going forward, which will talk about and when we look at what we've done in the conventional loan portfolio. If you lend money to good businesses would good value and good guarantors and owners.
You can't come out okay.
So I'd never 24 talks about our payments business. Obviously this business has been affected.
Particularly with.
A reasonable percentage of retail restaurants, thank goodness, it's not dominated by that but it looks like we're on a run right for $1 million to $2 million of EBIT per month for the remainder of 2020, which were very very pleased about.
And going forward on slide number 25. This is good data for anybody interested just an economics in business.
The visa Mastercard and American express receipts for our clients down 23% in March 37% April 27, and May 14 in June five in July and I will say where early in August but the first five days of August are indicating things are slowing again and I think they're slow.
[noise] again, not dramatically maybe and once again. These are five days. So I wouldn't say that this is particularly valid but you've got.
Benefits that my slow down consumer spending.
You've got some PPP that might be running out.
So it is clear the government stimulus is still required to continue to bridge. This economy to win the pin demick is less of the effect and a drag on business.
We're looking for a 10% to 15% decline in the Animas EBITDA.
One of our portfolio companies mobile money has a major impact.
That company is primarily dominated by new a cab drivers traffic in Newark Airport was down 90% to 95%.
Clearly affected this business, which should throw off close to.
$1 million and free cash flow and right now that's on a run radar probably 100000, but there's obviously upside from that and we look forward to.
Air traffic recovering.
And newer cab drivers, having more opportunity slide number 26 gives a good indication of where we see the future payments.
We acquired P. O S. On cloud, we're very excited about having our own branded POF system.
The woman a short of it is R. P O S system as in all encompassing system that can process payments integrate with any commerce website in other words pull up the menu for a business.
Pull up a retail E Commerce purchase chart from a QR code.
Both D E commerce, and the store present, combined and integrate into G. L. Accounting software, we had a great with all food delivery services like overreach Grubhub door dash.
Also have time in attendance on the P O S, which integrates right into our payroll solution systems, enabling us to offer payroll workman's comp helping benefits one complete system. We can brand. This for all of our financial institutions. We're excited about rolling out and hitting on new check payment systems going forward.
Slide number 27, new tech.
Technology portfolio companies, we have three of them.
New Tech technology solutions are cloud computing managed service business in Phoenix IPM.
They said in New York and cloud nine.
They said Louisville, Kentucky.
These businesses are doing well forecast at 2020, EBITDA $3 million to $4 million that's up from.
$203000.
Forecast.
Actual number in 2019.
We are obviously excited about the opportunities in cloud services, particularly working with the small medium sized business clientele.
We talked about payroll and benefit solutions, we think we could help businesses significantly.
As we move into this Kobe.
Dominated world and we're customers and business, there's one more cloud based solutions and want to have their employees have availability to that cloud based site to take a look at their own benefit and payroll information.
Slide number 31.
Is indicative of the historical stock performance is you could see the.
The company has been a stellar performer over five years three years.
Turn 20% three returned 84% last year, 42% or 10, you return, but 800%.
Wait for about 25% per year.
So I guess, if you won't go back and you look at our history are stuck does tend to be volatile. We've had many dips like we've had this year I think we hit a low at $7.58, but the company's got a great management team.
That's kind of history of being here 510, 15 years, we stick together we figure out.
Operators and entrepreneurs.
With an ownership and Talvitie of these businesses how to make it work at overcoming adversity how to shift.
The marketplace would it needs given that point in time.
Slide number 32 is is a current event the FCC held in open meeting yesterday to vote on a roll proposal that with a meant.
Number of disclosure delivered advertising requirements for mutual funds in BDC seriously important aspect of it.
Commissioner voted on a proposal that is now after comment for 60 days that would that would allow.
Acquiring mutual funds to basically exclude da Fasd disclosure fee from their bottom line.
Alright, I noticed that sounds a little complicated I'll try to.
Simplify it.
<unk>.
And institutional investors have not been able to buy bdcs pretty much since June of 2014, when the former S. E C T.
Chairperson decided that the expense ratios for the for running the business whether it was in internally managed expense, which is ridiculous or an external thing you needed to be W. Calculated to keep mutual funds from buying other mutual funds and heading investors paying fees twice to make a long story short my interpretation.
[noise] of.
This <unk>.
Open meeting is that the commissioner's or putting up for comment to allow institutional investors to acquire up to 10% of their total assets in bdcs.
Number one that would increase the shareholder base number two what happened in 2014 was it excluded pdc's from being involved in the Russell in the S&P 500.
This is a potential game-changer for Bdc's and we're very excited about it we hope this happens.
It prospectively would take a market clearing yielding bdcs.
And prospectively typed it as it would significantly widen the investor base from one that is dominated by retail with some institutional investment tomorrow institutional investors.
Moving to slide number 33.
This is important to slide risk from award.
We have historically stated that we believe we have.
Less risk than the average BDC I think that's relevant because when you can look at a market clearing healed.
Main street, which is had market clear meal to six and then times.
Currently I believe.
And you've got other Bdcs Martin clearing Neil like areas at 11 or Apollo it.
Ridiculous numbers.
That is based upon the risk inherent in the portfolio I think it's once again important to note or assets not highly leveraged we don't have spic's that matter of fact, a lot of her overhang at the end of a quarter is based on government guaranteed obligations that get liquidated.
So we operated a much lower leverage we have a diversified portfolio with average credit risks in lone book.
A 179000 floating right, it's an asset class we've managed over 17 years.
And therefore, I think that when you look at what's the right more to clear meal for new Tech. We think it's important to take into consideration what the risk is inherent in the portfolio for that market clearing yield.
And when you look at a portfolio of assets there based upon leverage loans that require 5456 times.
EBIT attorneys means those businesses must grow they must grow.
<unk> environment for growth, even if you get a rebound it's a tough environment for growth. So we understand the discount that's applied to others relative to us we're in a low growth.
To know growth type lending environment, that's we look at.
Obviously businesses that are growing we don't penalize them, we just don't give them excessive leverage on the advance right, but I also obviously look at our portfolio and people believe and it is accurate that these businesses or less liquid they have less access to capital the counterbalanced to that is.
Look at what the <unk>.
Treasury in the SBA in Congress has done to provide P&I payments to provide PPP money to provide another round. The P. P P money.
We think where I'm pretty good shape here and we think that the historic.
Risk view of a portfolio like hours is somewhat overstate now would you want to comment.
Our portfolio of Orange is very different than a typical.
Fintech lender cause that makes it a loan and 48 hours.
We do 20 page credit write ups, we take all available collateral we have multiple guarantors of the business owners anybody over 20%, we take liens on personal assets corporate assets and where typically looking at operators that had been around for a coupla years versus startups entirely different we'd like you to take a close look at new tech as a <unk>.
17 year manager of risk and it's portfolio.
Moving to slide number 24 once again, it's just a quick invest in summary, now I'd like to turn the.
Presentation over to Chris towers.
Thank you bearing good morning, everyone. You can find a summary of our second quarter of 2020 results on slide 36, as well as a reconciliation reconciliation are are adjusted and that investment income or adjusted NII on slides 38 39.
For the second quarter of 2020, we had net investment income of 29 $7 million or $1 42 per share.
As compared.
One $1 million or <unk> for sure and the second quarter of 2019.
Please note that income related to the PPP is included in invest in 2020.
Just it NII, which is defined on slide 37 was 28 $5 million or $1 37 per share and the second quarter of 2020 as compared to $11 million or 57 per share for the second quarter of 2019, so 140% increase on a per share basis.
Focusing on second quarter to 2020 highlights we recognized 46 $7 million in total investment income.
230% increase over the second quarter of 2019.
Interesting come related to fees from the PPP was the primary driver for the increase.
Recognize 34 $7 million of income related to the origination of Pvp loans on one $1 billion of PPP originations during the quarter.
Surfacing income increased by 10, 9% two $8 million in the second quarter of 2020 versus two $5 million in the same quarter last year, which is attributable to the average servicing portfolio growing from one $1 billion at June 30th 2019 to one $3 billion at June 30th 2020.
Distributions from portfolio companies for a quarter included $165 million from NMS $75000 from IPM $250000 from Sitko and $293000 from Neutec conventional lending, which is a joint venture.
Total expenses increased by one $7 million quarter over quarter, or 11, 3%, mainly driven by increases in professional fees compensation related costs and other loan administrations expenses.
Realized gains recognized for the sale of the guarantee portions of SBA loans sold during the second quarter totaled one $7 million as compared to 13 million during the same quarter in 2019.
And the second quarter of 2020, and SBF sold 18 loans for one $7 million at an average premium of 7%.
As compared to 170 loans sold during the second quarter of 2019 $96 million at an average premium of 11, 52%.
Decrease was attributed to our shift PPP originations during the second quarter of 2020.
As I mentioned earlier income related to the PPP is included in investment income not and realized gains.
Realized losses on SBA, not affiliate investments to the second quarter of 2020, where to $9 million.
971000 during the second quarter of 2019.
Overall or operating results for the second quarter resulted in a net increase in net assets of 25 $5 million or $1 $21 22 per share and we ended the quarter was nap for sure of $15.66.
I'd like to turn the call back to battery.
Thank you, Chris operator like to open it up to the questions.
Okay. Thank you if you would like to ask a question simply press star.
The one on your telephone keypad willpower, so just a moment to compel but Q&A lobster.
And your first question comes from the line of Mickey Chilean with Ladenburg.
Good morning, everyone hope everything as well on your end.
Very there was a strong rally in 78 prices and the second quarter, although I didn't see it in the slide 14.
How much of that do you think may have been to a scarcity factor and how do you see the supply demand equation unfolding as you another lenders restart your seven a M.
Sure.
There is a scarcity factor I think you're going to have a scarcity factor.
As far as the I can see.
I think that.
The other thing.
Let me take this and pieces I would say the most dominant.
For pricing is that new loans that are made are also made currently with six months, a principal and interest so that.
There's very few prepayments in the first six months, so prepayments have dramatically slowed and that's bolstered the market I think that from a supply and demand perspective.
Because of P. P P.
A lot of the assets that we're drawing them, making seven a loans are being pushed into this segment I don't really see that supply and demand changing the other thing I would point out is in the current interest rate environment, that's a very flat.
These particular bonds offer very good yields to other structured products or other investments that financial institutions have to make so I think I seek decent price stability for awhile. Now. These are in off the charts prices prices have been higher than this in the past, but I think that.
I think this is decent by the way. This also Mickey factors in the fact that there are people, who think that default rates will spike down the road too. So you kind of have you do have two dynamics in here, but I think.
Steady prices.
On a net basis.
For us.
I'm going to say 110, and 112 I think are on the horizon.
I understand thank you for that very and just one follow up question.
Commercial real estate makes up over half of your collateral I'd like to understand what the typical loan to value is.
Those loans and how concerned or what is your level of concern.
<unk> me permanently impair yeah at least some of their values such as restaurants, which is your third largest segments.
Sure.
So a couple of things one.
Focusing on restaurants as the third largest segment it's still.
A small piece of the portfolio and.
Not all restaurants are created equal I would say probably greater than.
50% of our restaurants that commercial real estate behind it and that's valuable because.
The restaurants that are thriving have their own lots.
Have.
Pick up at the curb and drive through and that's the trend going forward a matter of fact, you look at a company like Dickies barbecue their revenues are up 17% because they don't have most of the real estate for in room dining.
I think that.
Our commercial real estate sector from a collateral perspective is totally different than an income producing piece of real estate like an office building or a strip mall multi talented hours are very much tethered to the business. So the valuations haven't sword with extra.
Leverage going into Securitisations and they typically don't decline as much either.
Because they're very much tide.
Tied to the operating business. So we liquidated and there will be honest, we'd have been surprise lake.
Peter down sheep, letting officer has mentioned to me over the last four months.
That we've had these contracts on businesses commercial real estate loans and I'm going on that's not close clauses.
It is closing [laughter], it's like Wow like they're sticking to the valuations are sticking to the bed because.
There is a very significant portion.
Of.
The United States in America, that's got.
Five or six trillion dollars of liquidity sitting out there looking to put money to work. So there's money coming in the stuff money coming out of stuff. So we feel pretty good we've been able to liquidate things that very good values and the last.
Four months and you figure people would work or <unk> no not the case matter of fact.
With all this liquidity out there and we can argue who's going to pay for it down the road.
There is a good bid for things and even for some of these restaurants.
People are going to want to come in when things open up and take over the infrastructure and start up again, because the demand is there there's a ton of money and liquidity sitting for when the government.
Open things up people adhere to doing things safely and the fear of going outside is reduced so.
We know we're going to take a hit here like everybody else, but when I say that.
We've already marked the portfolio down which is a season portfolio of 32 six months to a 30% cumulative gross default from here with a 40% severity I think we are balance sheet.
Is a very very well.
Well adjusted balance sheet.
That's helpful.
Color very and make it just generally another question in my mind.
You too graphic component to your answer in other words I'm down here in South, Florida, and frankly, there was a lot of board it up.
<unk>.
Alright, and I don't know if they're ever going to be filled again.
There's a staples that's been empty for years not for.
My location.
So are you when you underwrite.
Loans that are collateralize by commercial real estate are there.
Parts of the country that you're avoiding or.
A country that you prefer.
Diversification diversification diversification, it's funny Mickey.
I couldn't predict the pandemic.
Nobody was able to predict this so we love diversification and when you look at our Geography's you look at our industries.
Pretty sure. This does vary sometimes it's a little bit over 10, but mostly everything is under 10%.
And.
We've been blessed like look up my merchant portfolio.
You think about merchant portfolio, you think about restaurants in retail those things are crushed but look at my look at my merchant portfolio. So the value to our business model getting referrals in from financial institutions not brokers not bankers.
<unk>.
<unk> is the greatest we're not we're not that smart to be able to predict that governor Murphy is going to say you can't go in a gym.
And a cuomo is going to say.
Can't go in a restaurant Broadway's not opening who would have ever predicted the New York City would be shut down from world travelers. So based upon that we live and die based upon diversification, we have diversified portfolio, we diversify a risk and that enables us to stay in the game.
And we've got loans in many states in many jurisdictions and thank God we're.
We're pretty spread out.
And also the importantly.
We're not dominated.
Our portfolio is not in urban portfolio, that's not to say that I don't have some things.
In.
And some of the urban areas, but most of these loans or not in.
And obviously familiar with Miami in New York City for sure but.
We do not have concentrations there.
Understood. That's helpful. I appreciate your time this morning. Thank you.
Thanks Picky.
And your next question comes from the line of Kennon with K E. W.
Oh, Barry Thanks for taking my question.
First of all I'm glad to hear things are going well during this difficult time I wanted to talk if you could talk a little bit about the outlook for further P. P. P lending we had tremendous take up with the first round then when Congress extended it slowed down curious what you're thinking isn't this next bill but would be necessary to kind of.
Kickstart real volume growth back into the P. P P program.
Sure.
So the good news for it is.
I have.
C O I spend in in order to an amount of time reading every single article I can find on the internet and watching all mediums on T V. So I read this I look at and I tried to gather a consensus.
It is apparent to me.
From Mitch Mcconnell Pillow C <unk>.
<unk> and the president.
This program, although it has flaws is deemed to be a success.
And they realize that this is the quickest way to get the money in the hands of the SNB market and they realize how vital it is and yes I heard Ron Johnson on T. V. This morning talk about there's plenty of people that I've got the money and they haven't spent it which is.
True.
But.
It definitely liquefied.
Part of the economy, which according to the small business administration is 50% of Nonfarm J D pig.
Set a carton Senator Rubio, who chair small business in the Senate very much for the program.
<unk> Velasquez in the house positive. This is part of the Heroes Act, it's part of the Senate Bill.
Under the assumption something is going to get done, which I have to say is more likely than that despite the posturing I I can't fathom.
Both parties not getting some things done despite the fact, both seem to be dug in with that said I think you wind up with 190 billion program. It gives business is the second bite of the Apple if their revenues are down, 50%, which I think a large amount of them can do I think if there were four to 5000 lenders the first time around.
There are only going to be 60% of the lenders. This time around I think some lenders won't participate again, which is probably good for us I can't see this being as.
I'll say this attractive because the universe is smaller fees have been cut but it'll still provide.
[noise] good return.
An equity for the work that we have to put in because of the 17 year investment that new Tech has invested in its infrastructure and technology and staffing.
We do on the money here this is not not a gift.
There was.
10 weeks, where 180 people will work in seven days, a week and 14 16 hours a day, but.
I think that this is.
More likely than not we've had to give fairly wide range of guidance here.
And we do move 100% of the assets off the books.
I guess just as part of that what do you think if there is 190 billion.
Needs to be part of the package.
Feeling it actually gets land.
Oh, probably fan.
Yeah, Great question here is the key.
Instead of a 50% reduction make it 25% that's the best and by the way the House Bill says 10, I think the Rubios got it.
50, so if they weren't able to get that down from 50 that money is going to get put into the market.
Okay. That's very helpful. Because that's something to watch out for bearing.
Yeah, the only kind of another big question it looked like it that's going to keep.
Right down for an indefinite period week next coupla years.
Including the long into the current which is floating around 50 basis points. If we have this.
Structure of the yield curve for the next.
Through 2022.
Feel that affects your business.
Okay.
So so spread I am the contrarian [laughter] and I hate to say it but.
I know, what the fed governor, saying I might be the only person in the world that actually thanks.
Rates are primarily driven by market participants I realized that the fed can push things around.
What.
The amount of borrowing it needs to be done.
First of all I don't think rates are going to skyrocket, but I think you're going to get.
Listen we've seen fed chairman change rates quickly changes my quickly and a period of a quarter it too.
Going from tightening these it so let me say that.
Yeah, we've been around for 17 years, there's certain things that work better with rates rising with reach rising I get higher interest income I don't have a lot of leverage that's a good thing because I don't have to that.
Prospectively, if the economy gets heated speeds pick up like unless of again on sale.
And mainly servicing income comes down.
With a better economy, maybe I get less default higher liquidation value.
It doesn't to be honest with you and we've been through cycles up and down we're pretty well matched it doesn't mean, one way or another fries I do believe that.
Okay. So you feel like it in some ways you're somewhat hedged in terms of what goes that goes down if we have rates.
No no question about it and if you've got inflation might be oriented businesses do better too.
Alright.
Alright, well helpful Barry and.
Like going forward with the the next round.
Thank you Fred we appreciate your interest in new correct. Thank you.
Hi, Dan if you would like to ask a question is complete Crestar then the number one on your telephone keypad. Your next question comes from the line of Matt Jaden with Raymond James.
Okay very good morning, and thanks for taking my questions first question on the the 180 to 230 adjusted NII range I know you said that embedded.
Some level of a P. P. P renewal does that also and better renewal of the six months P&I coverage by the FBI.
Not really I say that Matt from the standpoint that.
If we didn't get additional P&I coverage.
The businesses would be would be on their own.
And I don't think it would affect.
2020 numbers at all it may effect.
2021, I shouldn't so you may probably will.
But it wouldn't affect 2020.
Great I think then kind of a follow up to that if that's six month P&I coverage isn't extended is there.
Any color you can give on kind of how we would expect delinquencies to shakeout would that be immediate spike right. After the the extension runs out or or kind of a gradual build up.
Yeah Man I want to change my answer the first question is I thought about it.
Once again it all depends on the variability vaccine no vaccine, it's really hard to guests, but it could affect it could slightly effect interest income and could slightly effect servicing income.
Would you go from.
99%.
Currency right to a lower number it's just I don't see it.
Making an immediate adjustment, but I kind of want to try to be factual on that now what was the second question again.
Just specifically on the on the delinquency fries, if that <unk> coverage as an extended kind of how would we expect that shake out.
I wanted to thank goodness.
I think it would see.
Well, there's two ways to think about it.
I tell us to people and I don't think it absorbs but that's okay.
A business that's gotten six months of principle in interest Okay. That's taken care of.
It's like a capital infusion, they're getting the principal paid they're getting your interest paid for six months.
We have spoken to our clients they are managing.
This situation the entrepreneurial ones first of all they are all personally guaranteed to loans and multiple ways.
And many of them have downsides their business they produce their expenses so that.
A lot of them were getting rid of excess of things that they were using for growth.
Which is frankly the reason why most of these entities don't make it is because they overextend themselves the position themselves for growth that isn't there I think that what you would see as a gradual.
Reduction of the currency right over the course of time.
This would not affect our balance sheet.
And over the course of multiple years, it prospectively would have some weight.
On charge offs, but frankly, we looked at this <unk> modeled it.
It doesn't.
We think we haven't I think the big issue is.
We've taken it on the bank, we think we've taken the right measure on the balance sheet.
Relative to affecting income overtime, we think that.
Our business will be able to grow through it even even if.
There is no more P. P P.
Okay and then just last question for me on the $150 million and SBA seven eight loans any color you can give on how you arrived at that number and kind of what underlying economic and government stimulus assumptions are embedded within that.
So first I'll make a joke Pete Townshend I took out a coin and flipped it in the or no.
I hate to say that it's let me tell ya.
I've been doing this for.
20 years.
[noise] company forecasting today in this environment, it's almost impossible I don't know is New York Open clothes is New Jersey Open closed is California open or closed it's just it's almost impossible to determine so.
We looked at the pipeline.
We looked at what we think is going to close this quarter, there's plenty of demand that's not a problem.
I'm very comfortable with the $150 million I hope I don't regret that I've said that because we got to pick and choose by the way.
We're going to be sitting here in December.
November ready to closed loans and all of a sudden they got an appraisal on a business it's different.
Or something popped up from the customer that they didn't relate to watch because of what's happened in Cove. It you know what I'm, saying, so really hard to tell I think when we looked at the 150 million.
It's half of what we did last year now we've also arguably started a little bit later.
I think it's the number we're comfortable and that's that's how he came to a number that we were comfortable doing without having to stretch were credits or make loans in segments that we don't particularly like which I mean, we had a pipeline in March we just decided we're not going to.
We're not going to close those and some of those loans were not closing.
I mean loans that we were prepared to move forward with in March.
Some of them, they're not they're not happening.
There in bed geography's, there in bed businesses, but more importantly, the business owners have not showing the entrepreneurial instincts to be able to manage the environment and that's what we look forward.
That's it for me Barry I appreciate the time.
Thank you ma'am I appreciate your your interests. Thank you.
And again, if you would like to ask a question. So please crestar then the number one your telephone keypad.
And at this time there are no further onto your questions are there any closing remarks.
None whatsoever I.
I clearly wanted to thank everybody, particularly.
The analysts for the questions they are great.
We certainly appreciate the interest and the company in the stock. This was a tough time, we're going to talk market.
We are dealing with a.
A business segment and sector that does.
It has.
Received an acquired government help I think that'll happen.
I think that we are positive.
On things going forward, because we believe.
That.
The economy being properly bridged.
Will come out of this.
With.
Minimal amounts of damage and actually wind up moving forward because we're transitioning into.
A more efficient economy and this is forest businesses to change the way they do things to get rid of nonproductive processes software's technologies and assets and be leaner for the going forward.
Let's just hope we can grow through this pay off the debt and.
Move on to happier times.
Stay healthy everyone. Thank you operator.
And thank you.
Today's conference call. Thank you for your participation you may know disconnect.
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