Q4 2020 Newtek Business Services Corp Earnings Call
Ladies and gentlemen, thank you for your patience I'm pleased to see interest standby and new Tech business Services Corp. Full year 2020 earnings conference call will begin in approximately two minutes. Thank you for your patience and please continue on standby.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the <unk> business Services Corp for years 2020 earnings Conference call.
At this time, all participants on a listen only mode.
The speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press Star then one of your telephone please be advised that today's call is being recorded.
If you require assistance press Star then zero switched on operator.
I'd like to hand, the call over to Barry Sloane, President and CEO of New Tech business Services Corp. Please go ahead.
Thank you operator and wanted to welcome everyone to our full year 2020 financial results conference call on.
I'd first like to also welcome to the call Nick Ledger.
Nick as our new Chief Accounting Officer, and Nick I'd like to thank you on your entire team.
Particularly at least Chamberlain for helping US obviously get this 10-K out the door in helping us close out or a year, we had a pretty quick transition in February but we're thrilled to have you in this position on your joining me for the call. Today. I think also this is a good demonstration of new tech being.
Nimble and having a deep bench of talent, which we've always been able to have in being able to promote people and be ready right on the spot. We're very proud of our results today are for the calendar year of 2020, plus your forecast going forward.
Today's results are a reflection of the 420 employees that worked for new Tech.
They've done a great job on the one thing I could say, particularly given the current environment that we're in the reason why we've been able to do as well as we have been able to perform in 2020 and our forecasts going forward is because we care we care about our clients we care about our alliance partners.
And we work really hard to achieve great results every single day I'd like to position everybody to the Powerpoint presentation that.
That has hung on our website in the Investor Relations section.
You can follow along with the presentation.
In the IR section from the Powerpoint and.
We could take a look at the forward looking statement.
Disclaimer.
And then go forward to slide number two are always important that we try to start off with our historic performance as new Tech is a 23 year old company established publicly in September of 2000, and you could take a look at our historic financial results and these numbers are.
As reported by Bloomberg, Our 10 year return, 405% five year return, 136% three year return 45, 6% last year, obviously was a tough year for ourselves from Bdcs negative one on a half, but if you take a look at what we've been able to do so far year to date through March 22nd inning.
<unk> invested dividends, but I don't believe that dividends are actually included in that number it may or may not 33%. So we've clearly been outpacing all interest indices and our competitors once again I give credit to our to our staff moving forward to slide number three.
Really focusing on new checks business model, well 2020 was a real challenging year, we were able to shift our business model quickly.
To meet the needs and the demands of our clients in the marketplace I think new tech has proven that its systematically vital.
And its partnership with.
With the U S government to the economy. During this pandemic I think that.
Washington and really.
Everybody all across the United States realize the importance of small business and it employs 40 to 50 per cent of the workforce and we partner with the government in our SBA programs from some of the other things that we do to really help small and medium sized business as the engine of economic growth.
In calendar year 2020, we paid an annual dividend of $2.05 per.
Taxable income it was the first time, we actually had a decrease in our history of being a BDC and in light of the.
The unprecedented market conditions on a per share basis, we thought it was a fairly light decrease.
I believe in our first year of operations are we originally came out with a dividend forecast of above 53. So one of the reasons why our company and our stock has performed well as we've been able to increase our earnings over our history and subsequently our dividend.
We are currently firing on all all cylinders, we've got many many levers in the in the BDC portfolio that helped generate income and generate a dividend.
And as the U S economy.
To open.
We have a renewed focus on all of our drivers. We think we're very well positioned in 2021 with our business are companies.
Financial and business solutions, and we're really excited about it we're going to go through the presentation today and we've got forecast across several key metrics.
We'll demonstrate future growth.
Go on to Slide number four company has increased its 2021 annual dividend forecast from originally $2 to $2 50 to $2 42 hours 90 cents.
Midpoint of $2 65, which is an increase of 29% over the previously given guidance.
Adjusted NII, obviously, the first quarter comes up pretty quickly five or six weeks will be reporting.
So Nick will have some some quick work to do here.
The company anticipates achieving.
Our record adjusted net income for the first quarter, we don't know what that is yet obviously, we're still closing out the quarter, but we clearly think it'll be north of 1% adjusted NII.
A lot of that is based upon the renewed.
Our focus on seven day lending as the economy opens up.
Help from our portfolio companies as well as our success in the PPP program.
We are looking at a full year of 2020 178 loan fundings we.
We stated at $600 million I'd like to make that a range of $5 80 to 600 million in SBA firewall for fundings.
We are forecasting around $35 million to $40 million for the first quarter of 2021, and approximately $125 million of firewall for fundings for the full year and we'll talk about what we did last year as 2020 and firewall for fundings, which are beginning these are one of the cylinders were talking about the ex helps.
It helps the core business continues to grow and round out the breadth of our offerings to clients as well as the basis of our earnings and dividends for our shareholders.
We're also excited about our non conforming conventional loan program when the process of negotiating two new JV agreements, they're actually done we're in the documentation phase hoping to finalize them shortly and start our non conforming conventional loan program. Another one of those important cylinders in PPP lending, we anticipate funding between 300.
<unk> 50, and $400 million of PPP loans by March 31.
Congress extends the PPP program through June 30 of which has passed the house and is anticipated to pass the Senate.
You take small business finance it believes can ultimately fund about $500 million I will point out.
That the loan size for this particular draw much more than the first draw. So some of the metrics that you saw relative to the fee income probably will be skewed to the higher side.
To clarify that that's on a fee per loan basis, there's a lot on our loans for smaller and fall into the into the smaller bucket on.
On slide number five focusing on full year 2020 financial highlights net investment income of $32 million or up about 51 a share.
Huge increase obviously based upon the PPP.
Income coming through important to note that the P. P. N. P income is viewed as sort of a GAAP based income for a BDC or gain on sale that.
And that we get from seven day upsell on the government guaranteed piece.
Is qualified income, but it's not considered part of NII. So therefore, you've got different disparities. This will make for different comparisons as we go forward, but I just think it's important to note that all of this income is good income qualifies for the dividend.
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We're proud to be able to shift their business and there's many levers in our organization to be able to provide on.
All of the solutions, both financial and business to our large audience of 30 million businesses in the United States.
Adjusted NII of $43 4 million and $2.05 per share that was a decline of 12% on a per share basis.
We paid out basically what we earned which we're proud to do total investment income of $92 million for the 12 months, an increase of 55 per cent over total investment income of $59 3 million for December 31, 2019 debt to equity of about 1.35 at December 31. This will be vacillating threat, you are up and down but that's a very reasonable manageable number for us.
To to to.
To adhere to total investment portfolio increased by one 8% to 671 billion at 31 2020.
Our net asset value.
Declined on a year over year basis, we still believe that there is pandemic effects that a reduced valuation. Although we also believe that the stimulus that we're having and the economy is certainly.
Improving all asset values and we do hope that we can anticipate seeing that NAV rises.
<unk> again in the future I will comment that NAV on.
Up significantly from the end of the first quarter, where we really reduced a lot of asset valuations I think we're about 15 eight.
Eight in Q1 of 2020, so we had an increase.
From Q1, an increase sequentially also from Q3, which we'll talk about on the call.
Slide number six.
Chatted about.
NII being driven by in $2021 $2 billion of PPP loans.
And for the 12 months adjusted NII was <unk>.
The decline primarily based upon.
Reduced 7% funding.
We actually suspended all lending activities from at the beginning of March.
Which hurt the first quarter portfolio.
We did not.
Build a pipeline in the second quarter. So it's almost as if we didn't lend for six months out of the year.
We think that was prudent we think that was the right thing to do we had limited visibility on the pandemic.
Government officials as you could see changing there.
Predictions may ask no mask shut down no shut down they had problems figuring out what to do as well we paused, we do that for the long term to company Thats been in business over 23 years, and we always look to do the prudent thing for all of our stakeholders and obviously that includes our shareholders slide number seven talks about the payment protection program.
I won't spend much time on that we've done that in prior calls.
I'd number eight.
As we discussed we did $1 $2 billion of PPP loans.
In calendar year 2020.
Picked up about 10500, new borrowers.
Don't want it on.
On a on a comparative basis, we did a lot of units last year and a lot of loans.
If you add up seven day.
PPP.
And non conforming and.
Five or four you probably got to about one $5 billion a lot of activity a lot of people working really really hard.
Work evenings, working six or seven days a week really.
We did a great job and I'm very very pleased and proud of the work that our staff put into service our community, which is the business clientele across the United States.
In addition to funding the loans, we estimate that 130000 borrowers employees were retained.
We funded about two years' worth of loan production on about six months of time.
We were able to go into our own portfolio and offer all of our borrowers the PPP loan and we partnered with a lot of.
Financial institutions that had been alliance partners from many years to sell 100% participations.
On the third round of PPP, we anticipate which right in the middle of funding between $3 50 to 400 by March 31, and we hope that Congress extended the program, there's a little bit more time to put some more loans through we get to the $500 million Mark.
And the seven day space I.
I would say this was an underperformance, but I also would point out.
The resources are spread across different businesses.
In lending.
We obviously had a shifting of our resources.
A lot shift that obviously into the PPP program.
Also and looking to close transactions in Q4, you've got appraisals moving around leans popping up with borrowers that are unexpected due to the pandemic.
Economies it looked like they're open and then they are getting shot such as things that occurred in California.
New York and Illinois.
On that basis, you might have a loan that might look good when you took it in because you think things are opening up and then you get to the table on boom all of a sudden some some lean show up some liquidity damages and it makes sense not to not to do that kind of alone.
Such as the volatility in lending and forecasting but once again as a company that's been doing this for over 23 years Publix in September of 2000.
We're proud to have historically been able to deliver what we put out into the market, even if <unk> got up.
We have different levers going up some leverage going down it just.
It's a diversified model that works very very well.
Slide number 10, we talk about some more lending highlights we talked about our firewall for business and we closed $87 2 million of 504 loans.
We're forecasting approximately 35 to 40 million from the first quarter, we're looking at a full year of $125 million.
We renewed our $75 million line of credit with capital one for five O. Four loans, we also announced yesterday, we closed on a new $100 million facility with Deutsche Bank. Obviously, we believe very strongly that business is going to be growing and we're happy to say that NPL contributed $1 6 million of dividend income in the fourth quarter of 2020, we hope that trend continues.
That would give us five or $6 million dividend potentially for this calendar year. That's an engine. We historically have not been able to have on a regular basis and relied upon on <unk>.
Slide number 11 I.
I talked about our dividend payouts and stuff we've already covered.
Most important aspect here once again is an increase in our expectation of a mid point of the dividend range of $2 65.
But once again the company has historically paid its distributions in the form of dividends out of taxable income on <unk>.
Slide number 12.
Something that's forward looking.
Obviously COVID-19 was a problem, but there are certain positive things that have come out of Covid. One we've demonstrated to ourselves and our staff that we're able to work remotely and really do not need that very large real estate footprint, we've had leases.
Net have expired about to expire or should expire within the next 12 months to 18 months in San Antonio Milwaukee Irvine.
All of those offices are now gone.
New York City lease that we believe.
Well.
Be sublet without a loss at the end of this month.
Next our office lease was combined with <unk>.
Shrunk.
Our footprint.
And we've maintained our office space in our data center aligned data center saved us quite a bit of money in Indiana. We have two leases that will expire coming up and we'll probably have that staff work remotely. So this is one of the positive aspects of Covid, obviously relating to being able to cut money spent.
On on real estate in addition.
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We've employed certain tools.
Like time tracker to work with our staff time track or as a tool that will enable us to observe worker productivity and most importantly reward them for their benefits so workers that are.
On the phone, making outbound calls speaking to customers and day, noting what they do within network day will be rewarded for their efforts we've seen.
Tremendous results for that in 2020, and we think this is going to continue throughout 2021, we.
We also believe that.
With new Tech and its portfolio companies employees, clearly benefited from not having to commute.
A mutation time, we don't think is well served we don't think it's healthy.
On putting even the pandemic aside and to give somebody an extra.
Five hours to 10 hours of ability to work from home, we think is valuable.
Obviously, a lot of discussion and debate going on.
Amongst Ceos and companies out there as to what Theyre going to do going forward, but I think that.
We're going to work with our staff and find out what works best for them.
Number 13.
We issued the largest.
On a bond deal that we've got to date.
Any WTC trading on the on the NASDAQ $115 million offerings sold out very quickly issuers rated triple B plus by Egan Jones.
Get them out of the proceeds were used to retire the companys outstanding six on a quarter notes due 2023.
Slide number 14, as we look forward.
I think once again, we that we've demonstrated and emphasize that we are adaptable and flexible on our business model.
And being able to work remotely and we think we're going to get more and more efficiencies in economies out of that we also think that our business model is ideal for a post.
Corona virus economy without the use of branches brokers business development officers in a limited sales force, we're able to speak to end customers and provide them the solutions that they need.
You don't want a going forward basis, the branch list broker lists BDO lists.
<unk>.
Providers of financial and business solutions are going to be major winters. Most customers don't want to go into a branch.
Sales person there.
Rather do with Telefonica Lee they'd rather do it on demand.
The business model that the company has been setting in sales setting itself up for.
Over the course of 20 years and I like to say, we're an overnight success. It just took about 20 years and we believe that the market is finally, moving our way in terms of what we do on how we do it we don't just do it with the software and the technology, but we do it with staff that knows how to use the software and technology extremely important.
We look on what we're doing in the it market, providing virtual desktop remote mobile computing very valuable.
Obviously, our loan products are really catching steam right now.
SBA programs that we're very involved with is the number one non bank SBA lender in the United States third largest including banks, clearly, becoming more and more mainstream and valuable to many different businesses.
The New Tech insurance agency really re looking at People's risk out there and being able to provide different solutions, whether it's for.
For health or P&C. Many of these existing policies need to be re looked at in check due to what occurred in the pandemic. We've got some great payment processing solutions, which we'll talk about that are really designed very much for this new explosion in e-commerce, whether its share.
Billing software for commercial billing, our new Tech payment systems go take a look at our new website, new tech payment systems Dot com.
That we can white label or brand for our alliance partners, a lot of exciting products and some new hires and payments that we'll be talking about.
On slide number 15.
Talking about largest non bank SBA lender and third largest including banks.
Long history in the business, we're not new to the rodeo we've been lending for over 18 years, we've issued 10.
Rated securitizations all of them have maintained their rating or been upgraded by standard <unk> Poor's.
Love diversification will talk about that from a credit standpoint, we're not a lender that's got a lot of gas stations of restaurants, it's very diverse and diversity was really important in the pandemic I'm not being overly.
Positioned in the densely populated geographies of New York, Los Angeles, and Chicago very very helpful to us very helpful. During this pandemic.
I should point out and one of the things to talk about on the 700 <unk> area, particularly for the analysts pricing of seven eight loans really doing very very well, particularly in the first quarter. So we could talk about that in the Q&A, but I think that we have a lot of.
Good variables on metrics that are moving in our favor.
Slide number 16 growth in loan referrals in important slide.
We've received in excess of 329000 loan referrals in units for the 12 months last year almost 102000 in the fourth quarter. It's a database of customers very deep cross selling efforts are being realized we've got 18 year track record of loan assembly underwriting and technological expertise, making a lead.
<unk> in the area of lending using technology.
And we look forward to returning to <unk>.
Our lending process, it's more normalized we're not that focused on PPP and.
Really.
Expanding on our breath of lending opportunities.
People do compares to Fintech because of the success that we've had and.
Integrating technology to lending solutions. However, we really don't believe that were.
<unk> two on on deck or cabbage or lend deal.
It's more than just a piece of software you've got to have staff you've got to have credit people, you've got up servicing people these businesses need that mentoring and guidance and help.
Although we do have products, particularly at the very small balance area, where you can kind of get quick.
Quick funding on small dollar amounts.
Lending is and will always be a credit story.
On a great job of melding, our credit experience with technology.
Going to slide number 17 important aspect of seasoning.
We've talked about this previously we are moving into the belly of the default curve $35 six months weighted average seasoning on the portfolio. We believe that approximately 60% of defaults occur between 24, and 48 months and there's a nice article there from standard and Poors. It also talks about the forward curves slide number 17 point.
The currency rate of our portfolio was 95, 2% I think this will be a little challenging as we go through the pandemic, but as we've demonstrated in previous calls to those that are familiar with our business.
This is will possibly get behind or get in trouble for periods of time, but due to the multiple personal guarantees of owners with all personal and business assets pledged to alone. Many of these loans that go into quote unquote, a defaulted category actually come back and fully pay so we feel our portfolios on a real good shape, we're proud of our performance.
Our servicing team.
Headed up by Gary Golden and Al Spada.
Robert Haws have been extremely helpful in working with our borrowers mentoring them.
And doing whats required to keep those business is going and.
Pointed in a very positive direction.
Slide number 18, and 19 are slides we've historically.
Left in our deck, they talk about the cash creation and the economic loan sale without getting too much into the weeds, which we'll probably report on Q1 prices are significantly up in the seven day market.
Moving forward to slide number 22. This is what a seven day loan looks like.
For those investors that are not familiar you leave this up here for you to do your homework to explain what a seven day loan is and how it works.
I'd number 22 is obviously.
Gets to the point very high return on equity business, because when you make a seven day loan you get origination fees you get servicing income and you typically get a gain on sale and we've experienced that and you're left with no balance sheet in fiber for lending.
And the seven day business you are left with the balance sheet as the SBA requires you to keep at least 25%.
Of the uninsured piece on the books.
With the current.
Relief Act that's in place the guarantees are actually on <unk>.
90%, So we're left with a 10% piece and leaves us.
More profitable situation.
With additional leverage because you've got less equity in the deal and also a higher gain on sales because you're selling a higher premium of 90% versus 75% of it to the market.
Slide number 23.
Our final four program, which we're real happy.
Once again these things do take time.
Tony's Arris team has done a terrific job in getting us on track.
Were forecasting 35 to 40 million of fundings in Q1 at $1 $6 billion dividend contribution of $125 million of 504 loans for this calendar year, and we're really appreciative of capital one bank, providing us historic financing in this particular area as well as our new funding partner Deutsche Bank.
Slide number 24.
What we refer to as new tech conventional lending NCL, which is our joint venture portfolio with Blackrock.
<unk> on that particular joint venture was.
Suspended during the pandemic, we have not turned it back on yet.
Our portfolio performed very well, there's only one.
Alone I believe that is behind and that particular portfolio.
It's really done very well.
Fully guarantee.
Borrower guaranteed portfolio.
65% owner occupied commercial real estate.
And that will most likely wind up getting contributed to a securitization down the road on.
On slide number 26 prospective joint ventures, we've got two institutional partners.
Finalizing the documents on we're excited about that we're excited about relaunching, our conventional lending business through jv's.
Slide number 27 talking about our payment processing business.
We have a fair equity fair value of $111 million on that Theres some comparisons in the market of other payments.
Payment processors.
Very constructive obviously about this particular segment on slide number 28 looking at.
Points to consider.
As to why 2020 was a tough area for us.
In the payment space, we do have a reasonable amount of customers that were in the New York area, We're starting to see recovery there as that market is opening up.
We're also seeing recovery as is tremendously increasing consumer spending at local and state economies, particularly with the.
Consumer checks going out from Covid relief bills, we anticipate seeing good growth in 2021, we've added senior talent to the management team, which we'll chat about shortly.
We also have a portfolio of <unk>.
Taxi drivers that were severely impacted that's about $1 $3 million of cash flow, which amounts for a good chunk of the decline. So we look forward to the airlines opening back up air travel picking up and being able to recoup.
Some of the income from that particular segment.
Slide number 29, we announced yesterday.
The hiring of David Simon Chief operating officer of NMS, David is going to be supporting our president Mike Campbell and his efforts to grow the business and directly reporting to the CEO of that unit.
Im very excited about David's higher David 25 Years' experience senior jobs.
<unk> Citigroup, where he was basically responsible for the small business segment customer experience.
<unk> had a very senior job at Onewest Bank, which is now Citibank.
David brings us.
A class talent, a class managerial experience and it's going to be really working to improve all aspects of the operational side of our payments business. David will also be sitting on our management committee at the BDC.
And helping us grow BDC activities over the course of time.
Andrew Janet's another hire we announced great experienced SVP product development came to US from Bank of America is going to make sure that our products with best of breed show on <unk> SVP business development. A recent hire he is going to make sure that they get distributed.
To our channel partners and our very large customer base that we have in the portfolio with over 2 million entities in the database and.
Probably 900000 to maybe close to $1 million in the new tracker system at this point in time.
And probably close to.
100000 paying customers. So we're really excited about Sean Andrew and David referred to them as a class of 'twenty, one and we think theyre going to give a payments business a tremendous lift slide number 30, we talked about our payment processing.
P O S a solution.
Do take payment systems really welcome people on the call to go to the website and new Tech payment systems Dot com. So all encompassing system can process payments integrates with ecommerce and are grateful to all food delivery services integrates with three major software accounting Gl's.
Zero Quickbooks and Sage.
Also integrates with our payroll solution, so automatically time and attendance function fully populate their payroll. So he can provide you payroll workmen's comp health and benefits one full solution Depository Alliance partners are going to be able to manage and operate accounts for payroll and payments distribute it to run 401, K and partnering.
With our software.
Slide number 30, our technology portfolio companies were excited about our turnaround in MTS.
Phoenix based cloud computing portfolio company that provides managed services.
We have recently announced that we've merged all of our tech units into one particular unit. We've had some tremendous cost savings. We are performed with a $4 3 million of adjusted EBITDA in 2020.
And we are forecasting.
2021 to come in somewhere between $5 million to $6 million of EBITDA. We're excited about our tech business when people say well Gee what is it look we provide solutions that independent business owners, who can't afford a CIO can't afford a CTO they come to us we manage their hardware.
In software 27 through virtual desktop storage through disaster recovery.
All their key operating systems can be managed in our cloud. We can also manage workloads in azure.
Ws, Google we can manage workloads on Prem we're here to help businesses manage their technology with more safety security and a lower cost you could wrap that all up into cloud services or cloud computing, we have a slide to talk about that on slide 33.
I'm also equally excited about.
Our payroll benefits solutions that our insurance agency, we've really.
Added some great talent repositioned ourselves, adding Samantha reason to the payroll unit.
Adding Rick Carpenter, Catherine Ingram on the insurance side.
We've recently done a nice webinar on talking to independent business owners about the future of payroll and benefits and how we could help them. We're very excited about these businesses. We think that they are going to be able to provide.
Contribution to our full bundle we're excited about our lineup. We're excited about our staff positions. We think these two units are going to make a nice contribution to our company in calendar year 2021, moving to slide number 34, 35 and 36 in conclusion.
When we look at new Tech and obviously these calls are primarily meant to address analysts on the investor community and we look at risk and reward we compare ourselves to other bdcs, we compare ourselves to other.
Investments look at that history of performance for our stock.
The amount of leverage that we have which we do not think is significant at all look at the quality of the portfolio.
Diversified business model allows for alternative streams of different forms of income we've got technological solutions that are really important and in vogue for business as going forward and we believe shareholders can realize long term rewards do our unique infrastructure and business methodology, we've historically been able to grow our dividend on a red.
Basis, we've got diversified forms of income.
And we're really doing a lot of things that are helping us from an operational perspective with respect of cost reduction utilizing technology and improving the client experience.
In comparison to us to other Bdcs, where one of the few of the trades at a significant premium to NAV or one of the few that's been able to grow the dividend.
We clearly have a different business model is clearly do.
Different looking BDC, but if you actually look up the definition of a BDC. It is providing financing to small and medium sized businesses and mentoring and that's what we do.
I think people are investing in new tech as a BDC clearly is diversification from other bdcs, taking advantage of the tax benefit that we get.
A lot of the other bdcs are overly concentrated clearly in leverage loans mezz debt things that path.
Hidden inherent risk in the asset quality, we believe our assets.
Quite have that risk and we don't have that leverage inherent in addition to that we're able to generate high returns on equity due to our lending business, having velocity being able to make loans and sell them off for gain.
As well as the portfolio company is kicking in and growing over the course of their history on.
On slide number 36, if you look at catalysts for going forward [noise] renewed.
The renewed seven day efforts.
Growth in this five O four business resumed joint venture lending activity in a conventional loan market.
These are all things that are really attractive catalysts.
The return to growth of our processing business looking at a $14 $5 million adjusted EBITDA target and lastly, we're still hopeful that.
The <unk>.
Proposal that will allow.
Financial institutions are better access to buying bdcs without the expense ratio messing up their portfolios.
I do think that is.
As important I will also add that one of our catalyst as piercing the $500 million.
Market cap.
Level, which was done recently.
And over $500 million, obviously, a lot of institutions. They can't buy under $500 million are now able to take a look at us.
Go on to slide number 37.
Once again differentiate diversified BDC model internally managed our interest very much aligned with shareholders in everything we do is in the BDC there is no external.
Fees getting paid out.
We're not new to this business.
Experienced team.
<unk> lending officer been in the company over 10 years Peter.
Peter Downs going on is 18th year.
Lot of AR.
And working together to put this team together interest very much aligned with shareholders six per cent of the outstanding shares are owned by management. Once again, no derivative securities in BDC SBA leverage, we don't invest cdos or loans with equity Kickers.
I'd like to turn this remaining portion of the portfolio over the Nick Ledger Nick.
Thank you Bobby and good morning, everyone. You can find a summary of our fourth quarter 2020 results on slide 39, as well as a reconciliation of our adjusted net investment income or adjusted NII on slide 41.
For the fourth quarter of 2020, we had net investment income of $850000 or <unk> <unk> per share as compared to a net investment loss of $3 million or <unk> 15 per share in the fourth quarter 2019, 126, 7% increase on a per share basis, adjusted NII, which is defined on slide 40.
Was $9 6 million or.
Or <unk> 44 per share from the fourth quarter 2020, as compared to $13 5 million or <unk> 68 per share for the fourth quarter 2019.
Focusing on fourth quarter 2020 highlights we recognized $14 8 million in total investment income of three 9% decrease over the fourth quarter of 2019.
The decrease was driven by a decrease in interest income, which was attributed to the decrease in the prime rate and a decrease in other income which is attributed to the decrease in fourth quarter loan origination volume year over year.
Servicing income increased by seven 7% to $2 $8 million in fourth quarter $2022 $6 million on the same quarter last year.
Distributions from portfolio companies for the quarter included $2, three 5 million from NMS $1 6 million from NBL, our fiber flow of business.
75000 from IP, EM 150000 from Cisco and 393000 from new Tech conventional lending joint venture with Blackrock TCP.
Total expenses decreased by $4 $5 million quarter over quarter, or 24, 5%, mainly driven by a decrease in interest expense loan referral fees and other G&A expenses such as advertising.
Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the fourth quarter totaled $11 4 million as compared to $17 3 million during the same quarter in 2019, and the fourth quarter of 2020, we sold 123 loans were $85 1 million at an average premium of 11 four two per.
As compared to 199 loans sold during the fourth quarter of 2019 per $135 $1 million on an average premium of 10, 73% decrease is attributed to lower loan origination volume in the fourth quarter of 2020 offset by higher average premium prices when comparing to the prior year fourth quarter.
Realized losses on SBA non affiliate investments for the fourth quarter of 2020 was $2 $7 million as compared to $1 $7 million in the fourth quarter of 2019.
Overall, our operating results for the fourth quarter resulted in net increase and net assets of $16 9 million or <unk> 73 per share and we ended the quarter with NAV per share of $15 45.
I would now like to turn the call back to Barry.
Thank you Nick.
Operator, we'd like to open up the call to any questions.
As a reminder to ask a question. Please press Star then one.
If your question has an interest and you'd like to leave yourself in the queue price.
Funky again, Thats star one to ask a question.
Our first question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys and.
Congrats Barry on you and your team getting to a very tricky yeah.
Some questions on multiple elements of blending on PPP.
I can.
Given the fee structure.
Now where it can be above 5%. It's alone small enough effectively do you expect your blended fee rate on those loans to be to be north of 5%. I mean, you you said in your comments.
You expected the loans to be on the smaller side.
Yeah, I I think that.
Robert is a better way to think about it without having everything is signed sealed and delivered at this point I think we were about three 2% in 2020 on a on a weighted average.
I wouldn't skew it north of the five but.
I'd say somewhere between the four and five is probably not a bad are weighted to guess at this point.
Got it. Thank you on that on the on the seven day side I mean multiple goodbye.
<unk> is the reactivation.
The PPP program in Q1 is should we expect a seven day originations to be a little bit more muted in Q1, and maybe more back end loaded given last time PPP kind of took away from from.
On the ability to because of just number of hours on the day to originate seven days or is it going to be a more normal seven AE.
On top of the PPP.
I think that's it.
It's an important question because number one we typically do have a back ended seven eight year anyway.
And.
I mean, the reality of PPP as it uses a lot of resources and this was no different than prior years.
Or 2020, where the forms changed the rules change the calculation changed so.
I do think that you will have.
Traditional back end the emphasis.
But we've also made some changes to process, we've tried to hire and staff up that's all so not an easy thing to do on the current market I think that your overall thought process that it's more back ended.
Is accurate I think its very fair and very accurate.
Anticipate that there'll be less PPP activity in the second half of the year will still be servicing.
It will probably start to trail off in May we hope.
Maybe June but it's definitely the seven day story will be more back ended.
I appreciate it.
The the tough question that to your point about it I mean pricing in <unk> on the premium today is.
Extremely.
Hey, Todd.
I mean, what's your view on on how that could go I mean, there's a lot of moving parts as we go through the year, but any any idea on how that's going to shake out.
Sure. So a couple of factors, Robert and I know you've developed.
So a nice model in this particular area on <unk>.
Number one think about the.
Between the 75 and 90.
But all for the whole calendar year, you're going to get 90% through September and then you probably go back to 75. The second item was some of the pricing issues are based upon the fact that some of the fees that are normally charged.
By the government to borrowers have gone by the wayside so that it creates a higher coupon.
The third item is the.
C P prepayments.
Prepayment speed expectations, which works.
Which were muted.
In 2020.
As per.
People didn't think that there would be a lot of prepays, we actually saw some decent prepayments believe it or not it's a.
In a strange scenario.
Unfortunately, we all get clued into the TV set and it's like Oh, My God. The world is coming to it in a lot of people have a lot of cash in the bank.
Because of government programs and I'll just leave.
I'll leave it at that and I do expect speeds to.
To increase and that could depress prices I do not expect these prices to continue at this level and Robert that could be the first time, you've ever heard me say that.
Usually I tend to be a bit of a pricing bull, but no. There. There is reason to think that prices will not hold the levels that they will in the first quarter and we will we will disclose what those levels are obviously in our upcoming call in five or six weeks.
Got it I appreciate it and one more on lending if I can share on the pie.
The cost side.
I mean, yeah, 888, 7 million closed in 2020 target is obviously from that.
Well.
Can you reconcile for me, though.
The 87.
On a million close that Jan NBL generated a $1.6 million dividend.
You said in your prepared remarks, it targets <unk> hundred 25 for this year, but the dividend could be in five to five to six range. Obviously, that's a much greater increase in dividend isn't closings is that related to you know obviously these wounds have to season in certain ways as it.
Is it related to that or is it just that you know.
The dividend is going to increase because now you've kind of covered that.
Now if you will a and B L.
Yeah. So the income stream comes from.
Origination fees, which you get on the first and the second at the time on the loan closing whether it.
There's some construction in there or not so that that's earned upfront then you've got the carried interest which now with additional warehousing lines and a bigger portfolio will be able to.
Carry those carry those assets and then you've got the third aspect, which is the amount of seasoning. So soon on the loans are fully funded seasoned up typically within a quarter.
Then the debentures takeout the second loan.
That's it's basically government funding and then we sell the first loan and there is an insatiable appetite right now.
50% LTV.
Multiple guarantor, one two debt service coverage or greater once we've been able to sell those at net prices.
104 to 104 and a half.
Got it got it yes, there's a bunch of attractive markets that lighten up on those loans.
Alright, thank you.
Thank you Robert.
Our next question comes from Harold Elish with UBS. Your line is open.
Good morning, Barry Congratulations.
Thank you Harry.
Question sort of in a bigger picture sense I mean.
New Tech has had extraordinary success in joint venturing and partnering with its various.
Thanks.
On the financial institutions in order to generate the leads that it's been successful and then closing.
And I guess the question is as the financial World on <unk>.
Changes and there are more online vendors I mean are there still potential new partners that you could add to the platform that you think would be accretive or sort of has all the low hanging fruit been picked and it's a question that he is generating leads out of the existing relationships.
Yeah, Harry I think that.
We like to look at ourselves as somebody that's not just come to the party lately and put up some software and say Hey, we can do this stuff and it's.
It's making alone is it's an algorithm.
People that lend based on.
Interest in algorithms they they got hurt in 2020.
Many of them wound up getting sold emerged like on deck.
There was another lender to I can't remember, which one it was so I think that there's plenty of growth opportunity for us in this space because number one it's constantly evolving.
And.
Yeah.
The other important aspect of what we do is it's not just software.
And it's easier to make a PPP loan that doesn't have a credit aspect to it.
What we do in five or four and seven day and in non conforming also if you look at the network of referrals that we have those are not referrals that are coming from key words are paid for search that stuff that just coming to us reputation. So I think we're very well positioned for growth and.
Then you put the other solutions on top of it which historically, we havent done the best job in monetizing, but that's clearly on the plate and some of the people that will bring into the organization and hiring this is gonna be our year to make major investments in.
Talent to be able to reinvest back into the into the business environment. So no I'm not concerned about the competition at all a matter of fact, I, particularly don't think the competition performed that well.
And the big financial institutions.
Ah realizing it's much easier to partner with or look at the asset creation that we have and try to starting from scratch.
Right.
I appreciate it take care.
Thank you Sir.
As a reminder to ask a question. Please press Star then one on.
Our next question comes from Paul Johnson with K B W. Your line is open.
Yeah.
Hey, good morning, guys. Thanks for taking my questions.
Just had a few I was wondering.
You can just kind of broadly comment on TPP this time around versus.
The first round last year.
And how that's gone on.
Any of the changes that have been made to the qualifying borrowing base if thats.
On increased demand this time around or any.
Any changes you'd like to talk about there.
Yeah, Paul it's been a year.
You'd like to think that.
<unk>.
It's gotten significantly better second time around and there were parts of it that did get better and there are parts of it that.
I think the the government and lenders like ourselves still struggle with I think.
That got significantly better was the fact that we were able to pretty much automate at the <unk>.
Inception of the program.
To be able to get certain customers into the system that didnt have complicated structures.
A lot of these.
Independent business owners have got multiple llc's with multiple tax Ids and they use their social security code in different places and what it did was it put.
From a software perspective to get the guarantee number very difficult in a lot of error messages popped up and it was hard it was kind of harder to get people qualified this time than last time on the other hand last time, we had to stand this program up from a dead head start. So we had a lot of things already built so that the client.
<unk> filling out an app and filling up a file vault.
And having our closers trained and staff trained to use the software and know what it takes to get this thing through was much much much better so.
So I think that the the ability to.
Get the dollars and put them out much better the changing landscape.
For example, independent contractors and sole proprietors, the changing rules being able to go from one set of funding guidelines to a much higher valuation and midstream.
Thing today's the Forum and then 45 days later changing the form so.
In most aspects as you know once again I think it will be.
On a successful opportunity for us I I did believe and predicted that this would not be as and it's not I mean from a funding standpoint in dollars out the door.
Much less there would be much fewer dollars out the door in what they call funding program. Three then in finding program wanted to that's just a fact.
Why is that.
[laughter] why these businesses are okay, they're doing fine I mean, they are in regions that didn't shut down they are in.
Certain industries that are doing well so.
It'll be interesting I, we look forward to reporting our numbers in the first quarter.
On a little bit of a light on exactly what happened in the breakdown a lot of smaller borrowers came in this time that did not participate in round, one and <unk>.
On one two a lot of bigger borrowers did not participate because they couldnt qualify for the revenue decline.
Okay. Thanks, I appreciate that.
And then just you partly touched on this in your answer to Roberts question, but I'd just like to get your thoughts around.
Possible extension of the higher guarantee rate for the seven day loans as well as the <unk>.
Support for challenged borrowers P&I payments, if that's possible or if you expect that to.
Revert back.
Back to the normal levels that schedule.
I would say and this is a total guess on my part it's speculation, but most people that know me I never having a hard time, making a speculative guess I just want to emphasize it's just a guess.
I think that.
We're gonna returned to normal levels post.
At the end of September.
I think we see a very robust economy, we see an economy that is unbelievably stimulated with more to come with infrastructure. So.
I think that there'll be tensions.
On on the right versus left to.
Further provide financing in this area and then let me do on the other hand, there are certain businesses and categories that have gotten hurt pretty bad and you.
You kind of can't deny that the restaurants dry cleaners gymnasiums may.
Maybe theres some special carve out the one positive thing I could say.
Relative to.
Our demographic that we serve it's probably the only.
Area in Washington, where there's bipartisan support.
Democrats and Republicans love small business, they typically get along well together on the committees.
And they're typically both in favor of doing things to help out independent business owners. So that's something that we came from but I do not think past September 30th will be at 90, nor do I think.
On my part could go either way I mean, if you would've asked me would there be another PPP program with the first one I might've no. So.
I think we'll go back to a more normalized environment and that's what we're preparing for but we're also expecting the unexpected as always.
Sure sure I appreciate that as well and the two more if I may.
On that point for some of the more challenged borrowers like restaurants, you know any sort of entertainment company or hotels.
Just curious you know it would be any kind of like high level comments on the on.
You're lying performance.
Of those borrowers and those sort of challenged COVID-19 impacted sectors.
And what you are saying well yeah. I mean look we were very aggressive in conversations with our clientele and.
So we've got a pretty good feel for it I think that.
A lot of the.
The restaurants in particular.
Entrepreneurs, where they could do outdoor dining they did it and it got them through a lot of them received a lot of aid.
There is actually a very large grant program.
That will be administered by the SBA for restaurants and hospitality.
And category because they called shuttered venues so that that was legislated in the last Covid Bill I believe so that theres still a lot of financial aid available to those seriously affected industries in the PPP program actually gave a little bit of a higher advance rate to restaurants and hospitality.
<unk> I think that what these what these businesses did they worked out deals with the landlord.
They reduced.
All the expenses that they could to survive and get to the other side.
In our world, we look on our lending and our lending criteria.
It is important that the the guarantors have got additional liquidity additional resources of personal assets, which are pledged.
Effectively to the loan through the guarantee in some cases, they're secured by a lien to be able to get them through the tough time. We're happy about is it does appear that most of these markets are open. We're also happy that we have.
Our moertel portfolio I think in the seven day is less than 2%.
Our convenience store and gas station I think is less than 2%.
We're probably bigger in restaurants, but at our restaurants tend to be not franchise, but secured by real estate. So we've got that behind it.
I think we'll get there.
What's going on what's gonna happen, everyone. I think has surprised at how resilient. The economy has been how quickly it's bounce back and that's kind of what we've seen in our portfolio.
Not to say that we won't see adverse effects throughout calendar year 2021, but it's not going to be as bad as we once thought.
Sure Thanks for that.
Obviously positive to hear for that sector, specifically and the last one.
Kind of a broader question, but.
Just curious kind of where on the small business owner kind of stands today in terms of like investments in technology solutions.
Obviously, you had a rapid acceleration of tech adoption, you know pretty much over every facet of the business today due to COVID-19.
And small.
Small business is that probably were not already making these investments before COVID-19 might have a harder time doing so today I'm just curious does the opportunity still exist and perhaps where it doesn't exist.
Offer these kind of solutions to your borrowers today and have you seen increased demand from business owners for.
These types of business services that you guys provided.
Yeah, I think that.
<unk>.
Capital always has a cost in it and it's scarce I think that when you think about the tech solutions, what we offer in tech solutions is the ability for them to basically.
Manage their hardware and software over the course of time, rather than have the CTO CIO buying servers.
<unk> Pcs, having somebody in house.
Software into computers and try to protect themselves with.
The software from a security standpoint versus.
Paying us on a monthly basis to do it.
In the payment space.
These point of sales.
Solutions have become more and more prevalent through what.
What you see like a square.
Have those solutions as well.
We think that our solutions are more robust and they provide human talent. In addition to having a great software or hardware on someone's desk. So I think what youre going to wind up seeing from these independent business owners is that theyre going to have to.
Innovate theyre going to have to have e-commerce sites for example.
I can't tell you how many businesses in 2019, and say Gee I don't want to spend three or $4000 for an e-commerce site for food delivery or pick up at the curb and how how badly they wished they would've done that so in our case the ability to for credit worthy entities to finance that over the course of.
Time to get them back onto the feed.
If you're a restaurant today and youre, not delivering food or having picked up at the curb you Youre nuts.
You get a much higher return on capital on it.
Versus having somebody come in your real estate and sit down.
And dying.
It's just it's night and day that that's your higher return on equity business right. There you can make a great quality product and you can deliver to have somebody come and pick it up.
That's that's that's where youre growing so that's really where we fit in as a solutions provider.
Sure Okay.
Appreciate your answers and it's only after day thanks.
Paul Thanks for joining us I appreciate your coverage. Thank you.
There are no further questions on the phone.
Operator, I've got one more analyst Mickey Schlein from Ladenburg wasn't able to make the call. So I'm just going to read off his questions quickly and try to answer them.
Each line's first question how does the potential for workers to remain working at home beyond the pandemic.
Permanently affect your outlook for credit quality for those borrowers dependent upon their demand for example, dry cleaner restaurant focused on lunch.
Those are challenged businesses I'd be honest with you the dry cleaner thing is a tough one that I've thought about and examined because.
At the end of the day people just in that dressing up.
They werent sweat per inch T shirts jeans re.
Restaurant on the other hand as I, just discussed with Paul Theyre going to have the ability to adapt and and do something differently, but those restaurants that lived off of.
On the lunch and crowd.
And in New York City warrant.
Born in Chicago, there Theyre going to have a challenge because we don't see the size of the commuter base coming back into those offices in the near term.
How do you expect to manage credit risk in the gasoline station segment very carefully. Thank God. This is segment I haven't loved for 10 years, because I do believe in the growth of the electronic car.
Electronic vehicle.
We have very little exposure.
And we only typically look at these stations to the ones that are the best of breed that's the.
The biggest quality, so very difficult to manage not a fan of credit to gas stations. How do you expect seven day and filed for price we can find to behave once the fed begins to raise rates.
I think that the.
Seven day, and we talked about this with Robert could come under pressure, if the economy picks up and the speeds pick up which may reduce the prepayment expert may increase the prepayment expectation and at these prices.
Oh for pricing I think is going to be really strong that's going to be a great demand for borrowers because you get fixed rate borrowing rates that are very low.
But I think right now the banks they've got to put money out and there is an insatiable appetite from banks or insurance companies.
The double B high yield bond spread is like two 5%. So there's a huge demand for loans on our loans are great.
Great risk reward and we're happy about that what cause that'd be on dividend to be higher than the anticipated whats the outlook for 2021, we did chat about that on the call.
Basically it's on.
It's called the execution.
Getting the borrower getting a loan closed working with the SBA.
To get them to approve it and the CDC. So it was really execution.
And we.
We look forward to.
Tony's team Tony's Arris team continuing to execute and bring us these loans and what underpins the higher dividend 2021 forecast what changed from your previous guidance I think the biggest.
Issue there obviously is.
Firing on all cylinders and the contribution from PPP.
And what level do you anticipate that the equity be in 2021.
Last question.
We will be hovering around the one three to 135 number it may blip up in a quarter and it might be lower we have we did some capital raising in the first quarter that should help.
And the income coming from PPP in Q1 versus the 50 cent dividend.
Should also help as well, but we're not overly concerned about leverage we manage it well I mean, we are a BDC. So we're always going to adhere to to to leverage issues, but if we were in a BDC an entity like ours would probably be levered.
Two to three or four or five times than it is today with comfortably comfortable.
Comforted comfort in doing so we can't do it we're not going to do it but if we were able to do it.
So we're not we're not concerned about.
13515, where we're not concerned about it at all.
Operator, if there's no more questions I think we can we can on the call then.
We actually have a question from Scott Sullivan with Raymond James Your line is open. Please go.
Congratulations on the call and thanks for taking my question.
Thank you Scott.
No you don't really can't give guidance out over a year.
How can we think about business.
And 'twenty, two possibly without PPP and to that what areas of your business there is showing.
On the best growth potential from your perch.
Great.
Look Scott I think that.
Right now we were on a good good spot, particularly for 2021, we've got this new guidance out there.
We'll be updating that guidance on a regular basis as we go through the year.
My focus right now is actually on 2022.
And I say that from the standpoint that I feel real good about 2021 and what we have on the pipe and what we have out there, particularly given all the range is very very very very comfortable with it.
Going out in 2022, I've got to make sure that we are more efficient in seven day that we're more efficient and viable for that we launch NCL that we get.
The payments business back on the growth track that are cloud computing and.
<unk> managed tech solutions business gets on a growth path.
That we can get the payroll and the insurance agency to be contributors.
We certainly have a lot of customers.
Two to 300000.
Charles last year, there are a lot of people to talk to a lot of conversations.
If the staff.
Does what they need to do and they contribute which is what we've experienced over 20 years.
They're going to build new tech into a much bigger and better company not for only <unk> shareholders, but for themselves because they're going to participate in that and for our customers that will also participate in our ability to fund them. So they can grow and hire more people.
It's a good story, if you think about what we do.
But we are definitely focused on 2022 right now.
That's great can you give us any color on what percentage of your customers use more than one product on the lungs.
Scott I would probably say, it's still at a low level, maybe 5% 10 per cent I think that we have got to develop the ability to.
Outbound calling communicate.
And that's easier said than done.
You could do a digitally you could do with video.
But at the end of the day.
In my opinion.
People don't buy stuff off of an email.
Now they might buy it off a video on call you back on.
Or if you are contacting them digitally they might come to you when they need it but at the end of the day, we have got to talk to clients and they know US we're connected where there that that's the biggest thing that needs to improve and by the way.
You and I, probably said it to our kids I don't know if you've got anything but it's like Hey did you know.
Do you need to send that person how about talking to them.
I still think that and maybe I'm, a little old school, but I still think our business owners want to have a conversation I don't think and I say this to my insurance agency.
People arent buying insurance policies, just by sending him an email.
They want to talk to you. So that's something we've got to work on and I think if we get there.
I think the Sky is limit because we battle with a lot of relationships right now that we can capitalize on we're just scratching the surface.
That's great and could you put some flesh on the bones on the JV comments.
Yeah, I mean, I'm I'm excited about them.
There are two major.
Institutional players, we may never be able to at least and I'm not sure about that but.
Significant capital contributions in.
We're just finishing up the JV documents piece.
People have a tremendous appetite right now as you can imagine for assets and we can make them.
And not only can we make them, but the risk reward and the returns are great as evidenced by what we've done.
From a stock price perspective on the purpose of the J visas.
Never taking capital for granted as I, certainly look at our stock trading pattern over the last year because of the pandemic.
This gives us the ability to partner with great institutions share in the benefits of the systems and the and the team that we've put up over 20 years in share on their returns. So that's the purpose of these of these ventures to go work with people that have got unlimited amounts of capital that need to put it up and they also they also give US you know.
Different these are real smart people, they give us different ideas and thought process and it helps grow the business. So we're excited about that.
Hope these.
I hope, we can announce somewhere in the second quarter that were open for business and up to $15 million of loans with $10 million minimum amortization schedules up to 25 years.
No financial covenants.
Obviously, we charge healthy rates for those benefits, but we're comfortable with it.
That's terrific. Thanks.
Again congrats.
Thank you. Thank you Scott.
Operator, or anybody else no further questions.
Well operator, thank you Nick Thank you and your team.
And I want to thank all of our analysts and investors that listened in today and followed us and we certainly appreciate your loyalty.
And your investment we look forward to being.
Being right back here in five to six weeks and giving you. Good reported for Q1. Thank you very much.
Ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.
Yeah.
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Yeah.
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