NewtekOne, Inc. Q2 FY2020 Earnings Call

Thank you for standing by, and welcome to the Newtek Business Services Corp. Q2 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Barry Sloane. Thank you, sir. Please go ahead.

Thank you very much, and welcome, everyone, to our second quarter 2020 financial results conference call. Joining me on today’s presentation is Chris Towers, our Executive Vice President and Chief Accounting Officer. Also, for those of you that would like to follow along with the conference call’s presentation, you can go to our website, newtekone.com, your business solutions company. You can go to the Investor Relations section and click on 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 1 and then move forward to Page number 2. Our second-quarter 2020 financial highlights. Newtek reported record financial results across several key metrics for the three and six months ended June 30, 2020. This was a great quarter for us. We’re extremely proud of the way our company adapted due to the pandemic. We had to immediately change our business model to accommodate the altered economic landscape. We essentially ceased our forward movement on our pipeline of SBA 7(a) loans, which has been our steady business for over 17 years, and positioned ourselves to participate in the SBA and Treasury’s federally sponsored PPP program. Our performance is a testament to a company that can excel under adverse circumstances. As we go through this presentation, please note that we have a bright second half of the year ahead. We also encourage our shareholders to view Newtek from a long-term perspective. We look forward to providing a forecast for 2021 that will be somewhat more normalized than the lumpy results we expect in this calendar year. We have already declared a dividend for the third quarter, which we’ll discuss. We believe we’ll have solid dividend distributions for the remainder of 2020. We are releasing a forecast, which we had pulled back at the end of Q1 for adjusted NII in the range of $1.80 to $2.30. While it’s a fairly wide range, we want to be fair and honest with our shareholders and all stakeholders in the investment community. This range is based on the additional PPP program and other developments that will occur moving forward. We feel comfortable with this range. There are various probabilities to consider here. I feel confident about the lower end; however, it’s conceivable that we could reach the upper end depending on future legislation. Looking at our success with the PPP program economically for the second quarter, we’ll discuss the next program, its likelihood, where it stands, etc. The company is in strong shape from a long-term perspective regarding income generation and portfolio quality, which we will explore further. Moving to Slide number 3 to expedite this discussion. Our total investment income has seen a 230% increase quarter-over-quarter this year compared to last. Net investment income changed from $1.42 to a $0.06 loss. NII typically excludes capital gains. Income from the PPP was classified as regular income, which is why we have this anomaly in NII and adjusted NII. Adjusted NII recorded a 140% increase to $1.37 per share, a record for the three months ended June 30. Net asset value also increased to $15.66, a nice gain over the prior quarter. We’re very pleased with our debt-to-equity ratio of 1.2. We aim to maintain a low debt-to-equity ratio by the end of the third quarter. We have ample capacity to leverage the balance sheet. We can discuss our risks and why we believe we can sustain higher levels of debt than some competitors in the BDC space that may have hidden leverage issues related to asset quality. The total investment portfolio increased by 13%. Over the six months, total investment income grew by 123% compared to the same period last year. Net investment income improved from $1.42 to a loss of $0.11. Adjusted NII rose to $1.58 from $1.01. I should highlight that we have declared a $0.58 dividend for the third quarter, and we feel optimistic about our ability to uphold dividend payments, in line with our dividend policy. Moving to Slide number 5, the Paycheck Protection Program. Most of our investors are quite familiar with the PPP program, and we’ve discussed it significantly, so I won’t delve too deeply into the details. However, it’s important to remind the investment community that, in addition to earning fee income, the CARES Act provided for principal and interest payments on our current portfolio of SBA loans. To reiterate, this is not a deferment; it is actual cash payments made by the SBA and Treasury directly to us, relieving our borrowers of that obligation. It’s as though they received a capital infusion during this period, which is invaluable given the challenging economic climate. Important to note is that there is currently bipartisan support in Congress for extending the PPP program. It seems there’s a consensus among Democrats, Republicans, and President Trump regarding its renewal. Additionally, there remains about $130 billion in leftover funds, so no new appropriation is necessary; however, there may be a topping off with an additional $16 million for other SBA-type programs. In the original CARES Act, $17 billion was set aside for the payment of principal and interest, and there's still money available for that. If the program is renewed, there is a distinct possibility our investor base could receive another three to six months' worth of P&I payments, which does not require further appropriation, minimizing future legislative friction. Moving to Slide number 6. Performance in PPP loans totaled $34.7 million in fees by June 30, 2020. We expect that by the close of business on August 4, we will have funded $1.15 billion of PPP loans, with a few loans remaining to fund. By August 8, we anticipate approximately 10,200 new borrowers. We received over 100,000 requests for PPP loans from various participants, adding to our extensive customer database. We’re proud to report that we financed two years' worth of loan production in slightly over four months, most of which occurred within four weeks. Our staff, team, software, and methodology enabled us to process loans quickly in accordance with SBA guidelines. We partnered with our alliance partners to sell 100% participations in PPP loans, which has left us with very little balance sheet exposure. Our balance sheet currently holds approximately $5 or $6 million worth of PPP loans, while everything else was sold on a 100% basis. It's important to emphasize that what we accomplished with the PPP emphasizes the strength of the Newtek model: no branches, no brokers, no business development officers, no bankers. Our model effectively drives referrals to professionals providing lending solutions, payment processing solutions, insurance solutions, technology solutions, and payroll health and benefit solutions in remote locations. That’s our model; it works very well, and we’re successfully demonstrating its efficacy. Slide number 7 provides further detail on the CARES Act. We are optimistic that Congress will authorize the SBA to extend additional P&I payments, in addition to enabling income from fees. I don’t want to get too bogged down with details, but there are favorable aspects associated with bills recently supported by Senators Young and Bennet, which would provide 100% guaranteed financing through the 7(a) program. As a lender in this space, we believe we’re well-positioned during the pandemic, and having the government as a partner is advantageous. They're genuinely interested in maintaining the currency of our portfolio and ensuring our borrowers are in good condition. Our borrowers employ a significant portion of the U.S. workforce, and I think Americans are increasingly aware of the value of small businesses. This is our market and our opportunity. Moving on to Slide number 8, we have additional highlights. We've seen residual funding of 7(a) loans funded during the three months ending June 30 totaling $17.4 million. We’re pleased to announce we’re relaunching our 7(a) business, being extremely selective in our approach. We’re focusing on companies with strong operating histories, hard collateral, plenty of liquidity, and solid guarantors, while also being mindful of geography. There are numerous businesses we can provide funding to. For instance, we have RV parks, marinas, boat dealers, pest control companies, staffing companies, and freight companies—all sectors that are performing well. While we must be cautious in our underwriting to avoid overheated market segments, it’s crucial to emphasize that challenging times can also present the best opportunities for making loans. We're looking forward to substantial funding in the second half of the year, estimating $150 million in Q3 and Q4, with most likely coming in Q4 as we rebuild our pipeline and anticipate a robust return to 2019 origination levels in 2021. We’re also restarting our 504 loan program, and we look forward to initiating some funding in Q3 while rebuilding that pipeline. As for our conventional lending joint venture, it’s currently on hold, but we plan to resume it in the future, as it has shown stellar performance and will be a significant contributor to our business model ahead. On Slide number 9, we discuss dividends for 2020. We recently paid a Q2 dividend of $0.56 to shareholders of record on July 15, reflecting a 21% increase over the cash dividend for the second quarter of 2019. We have approved a third-quarter cash dividend payable on September 21. Therefore, shareholders of record until September 21 will receive a $0.58 dividend. With the payment of the third-quarter dividend, shareholders will have received $1.58 per share for the first three quarters, resulting in a 9.7% increase. We're analyzing the second half of the year with numerous variables regarding PPP, 7(a), and our portfolio, which justifies the wide disparity in our guidance. Clearly, most of you are aware that Newtek is a business development corporation, an internally managed BDC, and what we earn, we pay out. During our second quarter 2020 NAV discussion, we noted an increase in NAV to $15.66 as of June 30, 2020. As of last night’s close, we traded at a nice premium to the market, a trend we’ve historically maintained over the past six years. Slide number 11 highlights future opportunities amid challenging markets. We have observed extensive changes in our economy due to COVID. This pandemic has pushed many businesses teetering on the brink to accelerated defaults. Additionally, it has forced trends we've noticed previously in the market to accelerate. The growth of e-commerce and the prominence of social media platforms such as Facebook and Google have become increasingly vital. We must also focus on our IT services for small- and medium-sized businesses, facilitating mobility, security, and remote operations. Our health and benefits segment is also witnessing major shifts in healthcare dynamics. We can provide businesses with a more cost-effective and efficient cloud-based payroll solution and health benefits alternative compared to legacy sales-oriented options like Paychex and ADP. In the insurance sector, we've seen substantial changes in policy approaches; we can assist small- and medium-sized businesses in assessing their insurance risks remotely, similar to Geico's model. Moreover, in the payments space, there’s a significant shift toward e-commerce. Through our Newtek payment systems, we can help businesses implement contactless payment solutions, hosted on the cloud. We are exceptionally positioned to support businesses concerning the challenges presented in a post-COVID world. Slide number 12 showcases our standing in the 7(a) landscape; we remain the second-largest SBA 7(a) lender as of June 30, including banks, and the largest non-bank lender, boasting a ten-year history of rated securitizations with ratings sustained. Other small business lenders are experiencing tremendous stress; however, we are not. We will likely share data in the near future regarding the stability of our securitizations. It's critical to highlight that the average loan size in our portfolio is a favorable $179,000 per uninsured piece, which affords us great diversification regarding geography and risk. This underscores the significance of risk diversification with respect to geographic spread and various industry types. Maintaining a diverse portfolio is paramount, especially considering today's challenging conditions. Moving to Slide number 13, we discuss the growth of loan referrals. This calendar year, we will track units versus dollars, as the dollar amounts have been skewed due to PPP considerations. However, we have received an excess of 100,000 loan referral units over six months, with 80,000 received in Q2 alone. We are genuinely excited about our model, which serves as excellent customer acquisition. Our extensive customer database encompasses over 1 million small- and medium-sized businesses for potential marketing and cross-selling opportunities. We view Newtek in comparison to other fintech firms such as OnDeck Capital, Kabbage, and Lendio. OnDeck recently merged into another public company for approximately $90 million, with their portfolio nearing a 40% delinquency rate. If they can receive a $90 million valuation for their technology, I take immense pride in what we've built at Newtek over 17 years. Unlike these providers, we conduct thorough credit analysis and manage credit risk proficiently. We operate as a legitimate nationwide lender across multiple business sectors. On Slide number 14, we highlight the importance of net premium trends in a standard 7(a) environment. Although we’ve noted a slowdown in prepayments, we’re seeing potential increases in pricing, which we find encouraging. Looking to the third quarter, we observe prices for 10-year paper exceeding 1.11, and prices for longer 25-year paper exceeding 1.17. The premium trends for guaranteed sales appear robust. Slide number 15 presents the seasoning of our portfolio, now at 32.6 months. We've provided S&P analysis on portfolio seasoning, indicating businesses can survive the default curve after about 40 months. We are quite comfortable with the current market, portfolio position, and our capacity to liquidate loans to provide a healthy dividend for our shareholders moving forward. Slide number 16 exhibits our delinquency rates and trends from December 31 to March 31. We improved our current rate, nearly reaching 94% despite the onset of COVID concerns in February and March. Thanks to payments from the government, our current rate rose to 99%. We maintain solid relationships with our customers, actively communicating and preparing them for potential challenges as payments may cease in October. We are working with our clients, ensuring they adopt prudent cost-control measures and adapt their businesses where necessary. We pride ourselves on our proactive approach to servicing clients—a practice often neglected by typical fintech lenders. We ensure our clients are taking the necessary steps to fulfill their obligations promptly. Slide number 17 offers an example of our historical liquidations. We employ a 40% severity rate, reflecting our historical loss severity on the portfolio, which encompasses collection costs and interest payments. Our example involves a client who faced challenges back in August 2017. It was a national digital billboard company that had been in operation for 20 years. We were able to liquidate their assets and recover everything, achieving a full recovery. Slide number 18 showcases a 17-year benchmark illustrating the net cash generated on a 7(a) loan. Slide number 19 discusses the income treatment. In our portfolio company review as we re-enter this 504 business phase, we seek to familiarize those unfamiliar with our model regarding the 504 loan structure. This product allows borrowers to obtain a first conventional, second lien loan via government backing, making it attractive. Borrowers could secure a 90% loan-to-value ratio against commercial real estate with very low interest rates. The second debenture from the government features an interest rate below 3%, while we typically lend at a fixed rate of around 5%, resulting in a blended rate close to 4% with extended amortization. We are enthusiastic about this business. Additionally, Capital One Bank has a facility with us to warehouse it, while the SBA manages the second lien. We routinely sell the conventional first position. Slide number 22 illustrates the return on equity from this type of lending. Slide number 23 discusses our conventional lending portfolio and our joint venture with BlackRock TCP, which is appealing, with a current portfolio of approximately $92 million, boasting 100% performance as of June 30, 2020. Our robust portfolio comprises loans across various markets, backed by solid personal guarantors with liquidity. One restaurant in the portfolio remains closed in New York City but possesses sufficient liquidity to maintain its current status throughout the duration. The value proposition lies in our prudent underwriting practices, ensuring we lend to sound businesses. Notably, we acknowledge the current economic crisis as one instigated by a pandemic that resulted from government-enforced shutdowns. The initial shutdown aimed to control the spread of the virus in areas like Connecticut, New York, and New Jersey. In contrast, areas in the Sun Belt that were permitted to open have remained operational, with their case rates beginning to stabilize, fostering optimism about gradual economic recovery as constraints lessen. Successful school reopenings and cautious re-engagement in economic activities are crucial. This situation offers lenders a distinct paradigm; typically, defaults arise in weak economies lacking material stimulus, but we are witnessing a situation where closures, not poor performance, lead to defaults. We remain optimistic regarding recovery potential, as we believe strongly in our business model moving forward, which we will elaborate on. Our conventional loan portfolio has demonstrated that by lending to strong businesses with solid value, guarantors, and owners, we can achieve favorable outcomes. Slide number 24 addresses our payments business, which has been impacted, particularly by the significant downturn in retail restaurants. Thankfully, this segment does not dominate our business. Nonetheless, we are optimistic about a run rate of $1 million to $2 million in EBITDA per month for the remainder of 2020. Regarding Slide number 25, here’s some data pertinent to economists and business analysts. Visa, MasterCard, and American Express receipts for our clients have shown a 23% decrease in March, 37% in April, 27% in May, 14% in June, and a mere 5% in July. We are still early in August; however, the initial days indicate a potential slowdown again, though not drastically. This slowdown correlates with diminished unemployment benefits, which may impact consumer spending, and the expiration of certain PPP-related support. We expect a 10% to 15% decline in NMS EBITDA. One of our portfolio companies, Mobil Money, is heavily influenced by newer cab drivers, especially given that traffic at Newark Airport has decreased by 90% to 95%. This downturn has severely affected this business, which typically yields close to $1 million in free cash flow; however, it is presently running at approximately $100,000. Nonetheless, we perceive upside potential, anticipating a recovery in air traffic and more opportunities for these drivers ahead. Slide number 26 provides insight into the future of payments. Our acquisition of POS on Cloud has us excited about establishing a proprietary branded POS system. Our POS system is comprehensive; it manages payments, integrates with e-commerce sites to display menus or retail items, and synchronizes with general ledger accounting software. It also incorporates food delivery services like Uber Eats, Grubhub, and DoorDash while featuring time and attendance functionalities tied to our payroll systems, constituting a one-stop solution. We are enthusiastic about rolling this out through Newtek payment systems in the future. Slide number 27 introduces our technology portfolio companies—Newtek Technology Solutions, Phoenix, IPM based out of New York, and Cloud Nine from Louisville, Kentucky— all performing well. We forecast 2020 EBITDA in this segment at $3 million to $4 million, significantly rising from actual figures of $203,000 in 2019. We remain highly optimistic about cloud services opportunities, specifically catering to small- and medium-sized business clientele. Our discussions on payroll and benefit solutions underscore our commitment to assisting businesses during this COVID-19 era, as demand for cloud-based solutions and remote access to benefits and payroll information grows. Slide number 31 reflects our historical stock performance. As displayed, our company has achieved stellar returns over five years: a 200% return in five years, 88.4% over three years, and 42% last year. Our 10-year return is approximately 800%, averaging around 25% annually. While our stock has been volatile, including dips like this year, we attribute our resilience to our capable management team, some of whom have been with us for 5, 10, or 15 years. We work cohesively to navigate challenges, adapt, and provide the market with what it needs at any given time. Slide number 32 covers current events. The SEC held an open meeting yesterday to vote on a rule proposal aimed at amending several disclosure and advertising requirements for mutual funds and BDCs. The key component here is that commissioners are now allowing mutual funds to exclude the AFFE disclosure fee from their bottom line. I know this sounds complex; let me simplify it. Institutional investors largely refrained from investing in BDCs since June of 2014, following a decision by a former SEC chairperson regarding expense ratios relating to internally and externally managed expenses. To summarize, this open meeting can potentially change the game for BDCs by enabling institutional investors to acquire up to 10% of their total assets in BDCs. This shift could broaden the shareholder base and potentially tighten the market clearing yield in BDCs, which is an opportunity we are very excited about.

Thank you, Barry, and good morning, everyone. You can find a summary of our second quarter 2020 results on Slide 36, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slides 38 and 39. For the second quarter of 2020, we had net investment income of $29.7 million or $1.42 per share as compared to NII of $1.1 million or $0.06 per share in the second quarter of 2019. Please note that income related to the PPP is included in investment income for 2020. Adjusted NII, which is defined on Slide 37, was $28.5 million or $1.37 per share in the second quarter of 2020, contrasting with $11 million or $0.57 per share for the second quarter of 2019, marking a 140% increase on a per-share basis. Now, let's focus on the highlights from the second quarter of 2020: we recognized $46.7 million in total investment income, representing a 230% increase year-over-year. The increase is primarily attributable to interest income from fees generated through the PPP. Specifically, we recognized $34.7 million from PPP loan originations of $1.1 billion during the quarter. Servicing income also saw a growth of 10.9% to $2.8 million for the second quarter of 2020, up from $2.5 million during the same quarter last year—this is due to our average servicing portfolio expanding from $1.1 million at June 30, 2019, to $1.3 billion at June 30, 2020. Furthermore, distributions from our portfolio companies for this quarter included $1.65 million from NMS, $75,000 from IPM, $250,000 from SIDCO, and $293,000 from Newtek Conventional Lending, our joint venture. Total expenses this quarter rose by $1.7 million, or 11.3%, primarily driven by increases in professional fees, compensation-related costs, and other administrative expenses. During the second quarter, realized gains amounted to $1.7 million from the sale of the guaranteed portions of SBA loans, a decrease from $13 million during the same quarter in 2019. In Q2 2020, NSBF sold 18 loans for $1.7 million at an average premium of 7%, compared to 170 loans sold during the second quarter of 2019 for $96 million at an average premium of 11.52%. This decrease in realized gains reflects our pivot to PPP loan originations during the quarter. As I mentioned earlier, income related to the PPP is included in investment income, not in the realized gains section. Realized losses on SBA non-affiliate investments for Q2 2020 came to $2.9 million, up from $971,000 in Q2 2019. Overall, our operating results for the second quarter led to a net increase in net assets of $25.5 million, or $1.22 per share, ending the quarter with a NAV per share of $15.66.

Thank you, Chris. Operator, I’d like to open it up to questions.

And your first question comes from the line of Mickey Schleien with Ladenburg.

I hope everything is well on your end. Barry, there was a strong rally in 7(a) prices in the second quarter, although I didn’t see it in Slide 14. How much of that do you think is due to a scarcity factor? And how do you see the supply-demand equation unfolding as you and other lenders restart your 7(a) originations?

Sure. Mickey, there is a scarcity factor. I think we're going to have a scarcity factor for the foreseeable future. Let me break this down. I believe the primary driver for pricing right now is that new loans currently made include six months of principal and interest payments, resulting in very few prepayments during the first six months. Thus, prepayments have dramatically slowed, bolstering the market. From a supply and demand perspective, due to the PPP, many assets that were typically earmarked for 7(a) loans are now shifted into this new segment. I don't foresee that supply-and-demand dynamic changing. Additionally, in the current interest rate environment—which is quite flat—these bonds offer attractive yields compared to other structured products or investments financial institutions typically pursue. Therefore, I anticipate stable prices for some time. While these prices aren’t unprecedented, they are decent. Do keep in mind, there are also concerns that default rates might spike down the line, adding another layer to the situation.

I understand. 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 ratio is on those loans, and how concerned are you about the potential permanent impairment of some of their values, such as restaurants, which is your third-largest segment?

Sure. To start with restaurants as the third largest segment, that’s still a relatively small component of our portfolio. Not all restaurants are created equal, and I would point out that over 50% of our restaurant clients possess commercial real estate. This is advantageous because thriving establishments typically have their own properties, enabling them to offer curbside service and drive-through options, which are the trends moving forward. For example, Dickey’s Barbecue has seen a 17% increase in revenue primarily due to their lack of reliance on in-room dining. In terms of collateral from the commercial real estate segment, it’s distinct from income-generating real estate like office buildings or retail centers. Our loans are closely tied to the operating business. Consequently, the valuations remain stable. We've managed to liquidate assets effectively, overcoming initial predictions of potential fallout. It's worth noting that there is significant liquidity available out there, with a substantial portion—$5 trillion to $6 trillion—looking for investment opportunities. This situation creates favorable conditions for continued valuations. Even for struggling restaurants, we expect new operators will seize opportunities once restrictions are lifted, given the underlying demand. While we recognize we will take some hits, we have already adjusted our portfolio accordingly, forecasting a cumulative gross default rate of 30% with a 40% severity. Overall, our balance sheet is very well-positioned.

That’s helpful color, Barry. And this just raises another question in my mind. Is there a geographic component to your answer? I’m based here in South Florida, and frankly, I’ve noticed a number of boarded-up stores. I’m concerned they may never reopen. Are there certain areas you’re avoiding or favoring when underwriting loans secured by commercial real estate?

Diversification is key, Mickey. I couldn’t have predicted this pandemic, and we deeply value our diversification strategy. Our portfolio spans various geographies and industries. Typically, no more than 10% is concentrated in any one area. We are fortunate, considering the market dynamics; for example, we have a healthy merchant portfolio amidst challenges faced by restaurants and retailers. This portfolio has remained robust, demonstrating the strength of our model in securing referrals from financial institutions and not relying on brokers or bankers. We entered this crisis with a diversified portfolio. Importantly, our portfolio isn’t primarily urban. While we do have some assets in urban centers, the majority are not concentrated there. That said, we are happy with our geographical distribution.

And your next question comes from the line of Fred Cannon with KBW.

Barry, first of all, I'm glad to hear things are going well during this tough time. I wanted to talk about the outlook for further PPP lending. We saw substantial interest with the first round, but it seems to have slowed down following Congress's extension. What are your thoughts on what might be necessary to drive real volume growth in the PPP program with the next bill?

Certainly, Fred. Speaking as the CEO, I devote considerable time to reading every article I can find online and keeping track of the news. It’s quite clear from the discussions among Mitch McConnell, Pelosi, Mnuchin, and the President that this program, despite its flaws, has been successful, and they recognize how essential it is to getting funds to the SMB market swiftly. While some individuals have noted that not everyone has spent the money they received, it remains a crucial liquidity source for approximately 50% of non-farm GDP, highlighting its significance. Senators Cardin and Rubio, who chair small business committees, strongly support the program. This is part of the Heroes Act and the Senate Bill. My assumption is that something will get finalized, as I find it hard to believe both sides won’t reach an agreement despite their existing positions. Assuming everything unfolds as it should, I anticipate a $190 billion program, granting businesses a second opportunity to apply if their revenues have decreased by 50%, which many can substantiate. Initially, there were around 4,000 to 5,000 lenders participating; this number may shrink to only around 60% of that due to some lenders opting out, which could benefit us. While the program might not be as attractive due to a smaller lender pool and reduced fees, it will still yield a good return on equity for us because we've spent 17 years building our infrastructure, technology, and workforce to facilitate this work.

Is there a specific amount within that $190 billion package that you believe is necessary for it to be effective and get actually loaned?

Yes, the key is reducing the 50% revenue drop requirement to 25%. The House Bill suggests 10%, while Rubio's bill stands at 50%. Ultimately, if that threshold is lowered, many more businesses will take advantage of the program.

That's very insightful, Barry. Another question regarding the Fed: it appears they will keep rates down for the foreseeable future, possibly through 2022. With this yield curve structure in place, how do you think that affects your business?

Well, Fred, I consider myself a contrarian in this discussion. I recognize what the Fed is advocating, but I believe market participants primarily drive interest rates. While the Fed can influence trends, the necessity for borrowing will ultimately play a pivotal role. I don’t foresee rates skyrocketing; however, I do believe that we can expect fluctuations. We've witnessed Federal Reserve chairpersons change rates quickly after just one or two quarters of adjustments. In our case, we’ve been around for 17 years. Rising rates improve our interest income, and our lack of leverage is a good thing in this situation. If the economy picks up, we may see declines in gains on sales and service income may fluctuate with a more thriving economy. Through numerous cycles, we’ve been comfortable in both rising and falling rate environments. This is unbiased based on our experience, as we’ve worked through both circumstances.

First question on the adjusted NII range of $1.80 to $2.30. I'm aware this includes some projections on potential PPP renewals. Does this range also account for a continuation of the six-month P&I coverage from the SBA?

Not really, Matt. I say this because if there's no further P&I coverage, our businesses would remain unaffected in 2020, though indeed, it would likely impact 2021 numbers.

If this six-month P&I coverage isn’t renewed, what expectations can you provide about delinquencies? Will we see a sharp spike immediately post-renewal, or something more gradual?

You’d likely observe two scenarios here. First, consider that businesses enjoying six months of principal and interest coverage could experience an effective capital infusion through these payments. They've received assistance for six months with no obligation. Engaging with our clients, we've noted that many have adapted their operations, either resizing or streamlining expenses. The entrepreneurs we've contracted with generally avoid over-expansion and are managing effectively. What we anticipate is a gradual decline in our current rate over time. This will not direct impact our balance sheet, and we project that over multiple years, it might lead to some charge-offs. However, our thorough modeling suggests we’re adequately prepared to navigate these challenges.

Last question on the $150 million in SBA 7(a) loans. Can you offer insights into how you developed that figure? What economic and stimulus assumptions are embedded within it?

It’s a great question. To make light of it, Pete Downs and I flipped a coin to arrive at that number. In all seriousness, the unpredictability of today’s landscape renders forecasting incredibly challenging. What’s happening in various regions—New York, New Jersey, California—is changing rapidly. We assessed our pipeline and anticipated what should close this quarter, considering the availability of robust demand. I feel confident in the $150 million projection, though I hope I don’t regret it later. We must select our opportunities wisely, particularly as we've encountered some delays associated with appraisals or other issues arising from COVID. While I’d say the $150 million figure reflects what we think is achievable, it is only half of what we accomplished last year. We've started later than expected, but I am inclined to believe this is an attainable objective without having to stretch for questionable credits or pursue loans in areas we generally avoid—our pipeline has changed since March, with unsuitable opportunities on hold.

And at this time, there are no further audio questions. Are there any closing remarks?

None, whatsoever. I want to thank everyone, particularly the analysts for their excellent questions. We genuinely appreciate your interest in our company and stock. This is a challenging time in a demanding market. We're managing a business segment that has benefited from government assistance, and I believe this support will continue. We are cautiously optimistic about the future; we anticipate the economy to rebound with minimal damage, ultimately leading to growth as businesses adapt and refine their operations, discarding non-essential processes for a more efficient model moving forward. Let's hope we can thrive during this phase, repay debt, and enjoy brighter days ahead. Stay healthy, everyone. Thank you, operator.

Thank you. This concludes today’s conference call. Thank you for your participation. You may now disconnect.