NewtekOne, Inc. Q3 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Newtek Business Services Corp. Third Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, I would now like to hand the conference over to the speaker today, Mr. Barry Sloane, President and CEO of Newtek Business Services Corp. Sir, please go ahead.

Thank you, operator. Good morning, everybody, and welcome to our third quarter '21 financial results conference call. I would also like everyone to welcome Nick Leger, our Chief Accounting Officer, who will assist me in the presentation today. I would like to point everybody to our PowerPoint presentations that are all on our website. Newtek One, newtekone.com, goes to the Investor Relations section, events and presentations. There are PowerPoint presentations for today, which is the third quarter 2021 financial results conference call. We also have a presentation introducing the Newtek One dashboard, which we'll talk about. I'd also like to point out that we may have some new investor groups on the conference call that have an interest in banks. We obviously announced over 90 days ago the acquisition subject to a proxy vote and regulatory approval of the National Bank of New York City. We might have some new investors on the call. If those investors are interested in seeing information previously distributed to the investment community on what the bank might look like, there are presentations on the website for mortgage second, fifth, and tenth. We're proud to announce our results today. We think we had a terrific quarter. A lot of the results that you're going to be seeing are representative of the Company's ability to apply technology to financial and business services solutions. We've got some terrific key performance indicators and metrics that are dedicated to demonstrate that our business is growing, is well-positioned for the fourth quarter and beyond into 2022. I'd now like to bring everyone's attention to the PowerPoint presentation that is on our Investor Relations section regarding today's particular call. On Slide number 1, please note the forward-looking statement disclaimer that is there. We appreciate everyone taking the opportunity to read and review that. Moving forward to Slide Number 2, we have historically proven shareholder value creation, with a track record of growth and returns. Using Friday's close, we had a year-to-date return of 73.3% through November 5 from January 1; the 1-year return is 105%, 3-year is 124%, 5-year is 264%, and 10-year is over 1162%. Obviously, we've historically been able to, in addition to paying dividends while we were BDC, generate tremendous capital gains for the marketplace. That's been based upon our ability to grow revenues and earnings. I believe that we feel very good about the third quarter, good about the fourth quarter coming up, as well as the projected dividend for Q1 of 2022, which we'll chat about today. Once again, it’s important to note, we do believe and anticipate that we’ll be able to continue this type of performance. Whether we’re in a BDC form, or another form, we do believe that value will be distributed to shareholders through dividends and stock price appreciation if we continue to perform as well as we have historically. Slide number 3, important to note that companies all across the globe and the U.S. are coming through the pandemic. A lot of our comparisons are a little murky with respect to pre-pandemic results versus pandemic results, versus post-pandemic, which we think we're in the period now or hope we're in that period now. We've clearly emerged from the pandemic firing on all cylinders using many levers for the business model, whether that's gain on sale from the government guaranteed portions of 7(a), servicing income, spread income, or from the SBA 7(a) portfolio which was at a record net interest income for the quarter, which we're excited about. We have many various income streams, including payment processing and tech solutions. We have many levers in Newtek Business Service Corp. to provide dividends and earnings to our shareholders. In addition, throughout the calendar year we've continued to invest in our business model with technology and human labor. We've increased our lending portfolio and NSBF, Newtek Small Business Finance headcount by 52 individuals, a 27.5% increase. We believe once again, we’re extremely well-positioned. We want to give some cautionary notes to various comparisons. We went to great lengths in this particular document and discussion today, particularly when looking at lending to go back to 2019. 2019 is pre-pandemic. 2019 won't have the noise of the PPP income or loan originations. We also believe that what we've done in the pandemic is indicative of what the Company is capable of doing when unexpected situations arise, whether negative or positive. We were able to shift quickly, hire new people, implement new technology, and put new processes and procedures in place, which enabled us to process PPP loans for our partner, the SBA, and the business community that we serve every day. Slide number 4 discusses some of the SBA 7(a) lending highlights. When we talk about core lending, we're referring to SBA 7(a), 504, and our non-conforming business away from PPP, which, at this point in time, is behind us from an income generation standpoint. We’re obviously still servicing PPP loans to attain forgiveness for our clients. However, it’s crucial to focus on the core lending business, and its trajectory. Looking at the second bullet on Slide Number 4, Newtek Small Business Finance funded $163 million of 7(a) loans for the 3 months ended September 30, 2021. This is a 43% increase over the $114 million of 7(a) loans funded for the same period in 2019, pre-pandemic. When looking at the 9-month number, it’s $362 million in loans versus $334 million, reflecting an 8.3% increase. Notably, in October, we had a record $102 million of SBA 7(a) loans, which is unusual for us since we typically fund most of our loans and close them in the second and third months of a quarter. We had a fantastic October. When we refer to approved pending closings, it means that we’ve issued commitment letters to the borrower. They usually come in at around 90% plus or minus close rate. Closing $2 million of 7(a) loans in a month is remarkable. I commend the management team for their efforts and the technology team for providing us with these enhanced technological solutions, some of which we can discuss today, such as calendar invites from borrowers, speeding up processes from data moving to underwriting, credit memo generation, committee discussions, and closing. We've increased the lower end of our 2021 7(a) funding guidance to $560 million from a previous forecast of $550 million to $600 million for the full calendar year. Throughout 2021, we funded $1.9 billion of PPP loans. While we anticipate a record number of 7(a) loans for any given year for Newtek, we’re proud of the $1.9 billion of PPP loans we funded with 26,500 customers. We’ve been operationally efficient and are channeling those resources into core lending, which puts us on a path for great growth in the future. Slide number 5 serves as a precursor to slides moving forward, addressing our growth and strong positioning. Slide number 6 is indicative of the progress we've made. Analyzing our pipeline for the calendar year ended September 30, 2021, comparing it with 2020 and 2019 using pre-pandemic figures is vital. Notably, we had $160 million in approved pending closing at the end of September, and $100 million in October. We are optimistic about a very good fourth quarter. Importantly, we have seen significant growth in our SBA 504 business and in the non-conforming conventional business. Although we are progressing a bit slower, it is still a crucial component of our future growth story at Newtek. Slide number 7 highlights our reliance on technology, particularly the new tracker referral system. We’ve utilized this system for 18 years. This system enables us to operate as a branchless broker list and makes our processes more efficient. For the quarter, we processed 72,000 loan referrals compared to 12,600 for the same period in 2019. Looking at the 9-month run-rate, we recorded 355,000 loan referrals versus 41,000 for the same period in 2019. In terms of unit perspective, we closed 214 loan units in the recent quarter ended September 30, 2021, which is higher than the 149 units closed in 2019. Hence, we see a 30% to 35% improvement in efficiency. We possess a substantial database of existing clients and those who refer opportunities through various product areas. Toward the end of our presentation, we plan to discuss our cross-selling efforts and provide a separate PowerPoint presentation on the Newtek One Dashboard. I expect this dashboard will roll out regardless of the acquisition's outcome. However, the dashboard's product will still be rolled out whether or not we become a depository. We’re excited about the dashboard's capabilities, especially as it relates to shareholder votes and regulatory approvals for banking. This product is highly competitive and places us in a unique position, and I will elaborate on that later in the presentation. In summary, it’s important to note that we've built 18 years' worth of history in loan assembly and underwriting, utilizing our technological expertise. We believe we are leaders in small business lending, with enhanced technological assets creating operational efficiencies across the board. These efficiencies improve the client experience, allowing us to process loans better and more quickly, resulting in a more efficient employee experience and, crucially, a positive impact on bottom-line earnings. Slide number 8 addresses the status of small and medium-sized businesses in our market. The SBA defines small and medium-sized businesses as 30 million unique business owners in the U.S. From a macro perspective, this demographic and market segment was a concern as we moved into the pandemic. We're excited about the partnership we have with the SBA as a non-bank lender and a leader in all SBA lending. Our association creates a solid infrastructure that we can leverage. Notably, the SBA has announced significant funding figures for traditional lending, totaling $44.8 billion in the 2021 fiscal year, in addition to the trillion dollars in COVID-related rescue programs. The 78 program alone accounted for $36.5 billion while the SBA's 504 program funded $8.2 billion. Importantly, the SBA has tens of billions left in its Economic Injury Disaster Loan Program, known as EIDL, and over $3.8 billion have already been funded under this program; small business owners can currently apply for additional loans, increasing from initially $500,000 to now over $2 million. We’ve been actively involved in assisting our clients in utilizing these programs. Slide number 9 illustrates our lending staff. Besides growing headcount, we’ve significantly improved the quality, particularly at the managerial level, hiring, training, and bringing individuals into our organization. We focus on building businesses with employees who are not new to this sector but instead ready to embrace our technology and processes. Slide Number 10 highlights our third quarter financial metrics; we acknowledge there is some PPP noise in the numbers. It's essential for those new to the Newtek story to understand our adjusted net investment income (NII), which accounts for the gain on sale from SBA lending—a recurring event for our company for nearly two decades. Our adjusted NII came in at $0.56 per share, representing an increase of 1,300% over the same quarter last year as we progress in our 7(a) program. Our debt-to-equity ratio stands at 1.37 when excluding the broker receivable at the end of the quarter, adjusted to 1.24. Our net asset value increased to $16.23 from $15.45, though it reduced slightly as we began to distribute cash generated from prior earnings. So far, we've generated about $2.21 of adjusted NII through the first three quarters while consistently paying dividends. Sequentially, we are expecting a significant dividend payout in Q4, which may affect our NAV if everything else remains constant. Slide number 11 provides an overview of the 9-month picture, showing an adjusted NII of $2.81 per share, a 74.5% increase this year as we focus on our 78 portfolio. We have the advantage of both PPP and 7(a), contributing significantly toward revenue, even though adjustments were made last year. As our pipeline and portfolio continue to expand, we will replace a significant portion of the PPP income, and we're excited about what lies ahead for us, forecasting growth in the Q1 dividend. Slide number 13 highlights our dividend metrics. The Company has declared annual dividends totaling $3.15, representing a 53.7% increase over those paid in 2020. We’ve also projected a first-quarter dividend in 2022 of $0.65 per share. It’s also significant to note that pre-pandemic in 2019, the first-quarter dividend was $0.40, and in 2020, it was $0.44. This demonstrates our trend of growing dividends on a consistent basis. For new investors, it’s essential to understand that our second half generally performs stronger than the first. If we project $0.65 across all four quarters, that would allocate $2.60 for the year. However, if our first half is around 40% to 45%, we could wind up close to $3.00—adjusted assuming we distribute 100% of dividends. We forecast 7(a) funding for 2021 between $560 to $600 million; for 504 funding, we expect between $125 to $150 million for the full year. We are thrilled about the growth in the 504 business and expect to see securitization of our non-conforming products in Q4. Moving to Slide number 14, we declared a Q4 dividend payable to shareholders noted in December 2021, representing a 123% increase over the prior year-end quarter. This leads us to the $0.65 forecasted dividend. I find it necessary to highlight our portfolio companies: Newtek Technology Solutions, Newtek Merchant Solutions, and Newtek Business Lending. Each has significantly generated income for the business but did not distribute income to the BDC for the first three quarters of the year—totaling $750,000. Each portfolio company made voluntary elections to refrain from distributing that income to better serve developmental funding. This cash can be repurposed for lending or could be used for repaying expensive debt or pursuing opportunities for acquisitions. I want to emphasize that the significant income generated among those businesses in the first three quarters is retained for future growth. Slide number 15 indicates our adjusted NII forecasting at $3.40 per share. I want to highlight we’ve distributed press releases forecasting adjusted NII at $3.40; there are four analysts in the community with one forecasting $3.40, another $3.36, a third at $3.36, and a fourth projecting $3.58. The $3.58 forecast is based on our projections and may be considered an outlier. It's important for the investment community to rely on our forecasts, which reflect our position now. From a dividend yielding perspective, the BDC segment has improved significantly over the past year, according to a recent KBW Research published on 11-15. It showed last 12 months trailing yields of about 8.6%, subsequently declining to 7.9%, and for internally managed BDCs, the yield is at 6.6%. Considering this information, we believe we present an attractive investment opportunity, regardless of our form as a BDC or transitioning into another structure. Slide number 17 illustrates our ongoing efforts to reduce the cost of capital. It's important to note that the Company has the ability to call existing bond debt; the notes due in 2024 have been callable since August 2021 without any form of call lockout or prepayment penalty. The notes due in 2026 are callable post-February after a made-whole provision period that diminishes throughout the year. We plan to utilize securitizations, cash on our balance sheet, and other capital market tools to refinance this expensive debt appropriately. This is vital for our future strategy, as we aim to minimize our high cost of debt regardless of whether we remain a BDC or convert to a bank holding Company. Slide number 18 features a familiar slide for many of you—once again, it's vital to note that by the end of the SBA's fiscal year in September, we ranked as the third largest SBA lender by lending volume. The average loan size on the uninsured risk-based portion of our portfolio stands at $161,000, paired with a floating rate coupon of 2.75%, currently yielding around 6%. Our net interest margins and income generated from our net portfolio company are at all-time highs through the third quarter. We are proud to emphasize our recurring income and the long-term benefits it signifies. Slide number 19 discusses our net premium trends. The fourth quarter presents a landscape where roughly half our portfolio covers 90% guaranteed loans, trading at higher dollar prices. As of September 30, we held $20.5 million of guaranteed portions on our books available for sale. Moving to Slide number 20, we provide insights into the seasoning of our portfolio. Due to recent loan volumes, we anticipate some changes, but we remain in a place we refer to as the default curve belly. Slide number 22 highlights our loan servicing metrics and functionality. We currently have 60 full-time employees servicing loans as of September 30, 2021, supporting our borrowers. We implement various solutions to enhance their circumstances across payment processing, insurance coverage, technology management, and human resources. Additionally, we've employed existing market tools to bolster our borrowers' creditworthiness. Our borrowers have experienced the Section 11112 payments from the CARES Act, recently concluded on September 27, and we’re also facilitating EIDL loans when required, as well as the employee retention credit program which can be used alongside PPP funding. Moving on to Slide numbers 23 and 24 for our new clients, showcasing the income and cash effects of SBA 7(a) lending. Next, let’s transition into our portfolio company review. Our SBA 504 program, which we take great pride in, has closed or funded around $100 million of 504 loans through the nine months of this calendar year. This reflects a 359% increase over the same period in 2020 and a 280% increase compared to the same period in 2019. We have completed 31 loans totaling $92 million of overall financing. It’s also noteworthy that during this period, we’ve successfully sold $41.5 million in first liens. Slide numbers 27 and 28 illustrate the high return on equity from a 504 loan. When evaluating our returns as a BDC, it is crucial to highlight that we operate with these lending businesses under our BDC umbrella. They qualify as good BDC assets generating income that contributes positively to our returns—these activities yield higher returns on equity compared to the standard BDC loan funding methods. We take immense pride in our business and its associated model, which excludes the operating segments of the portfolio companies in payments solutions like Newtek Business Lending and the 504 business, along with Newtek Merchant Solutions, our payment processing business. Slide number 29 showcases our conventional loan portfolio. As previously mentioned, we’re anticipating a securitization in the fourth quarter with a balance of $87 million—most of which are current payments—and 15 loans are in the process of being paid off. We’ve only had 2 loans funded recently. Moving on to slide number 31, we emphasize the significance of our payment processing business, which has been operational since 2002. This enterprise boasts a value of $121 million and is inclusive of debt and excess cash. We predict an EBITDA of $14 million for this segment this year and have experienced a 14.3% increase in monthly sales volume for Q3. Recovery from the pandemic has driven this progress. We discuss our payment systems, POS on the Cloud, without going into excessive detail at this time as there are extensive resources available on our website dedicated to Newtek payment systems. It’s important to affirm that this system does more than just process a payment; it streamlines business operations, improves payroll processing, integrates with e-commerce, coordinates payment delivery services, and ties seamlessly with accounting software—all contributing to an enhanced system for businesses. We eagerly anticipate further growth in this sector of our business. In our technology portfolio area, we're pleased to report that we've revised our 2021 EBITDA forecast upward by approximately $6.5 million over 2020, indicating robust growth. Those interested in exploring what we do in this space can find additional information on our website under Newtek Technology Solutions. The businesses primarily deal with infrastructure as a service, desktop as a service, IT recovery as a service, software security as a service, alongside cloud services both public and private. This segment is crucial as we potentially roll out, subject to shareholder vote and regulatory approval, data storage solutions in a banking environment for our clients. We currently undertake similar operations across many of our businesses and have around 17,000 paying customers. To round out our offerings, we have Newtek Payroll and Benefit Solutions as well as Newtek Insurance Solutions. We are enthusiastic about both ventures and confident that they will integrate seamlessly into the Newtek One Dashboard. Let’s move to the PowerPoint on our website titled The Newtek One Dashboard. I have been asked numerous questions about the dashboard, including its uniqueness and offerings compared to other integrations. I will quickly walk through a couple of screenshots that, at this moment, are non-operational, yet we expect to operationalize the dashboard hopefully in Q2 of 2022. On Slide number 39, you'll see the primary dashboard interface which will centralize all services offered by Newtek for its customers. This “one dashboard for all your business needs” allows users to sign in, view functions, and transact, providing diverse capabilities that I will elaborate upon in the presentation conclusion. If we transition to a bank holding Company, the dashboard will provide vital information such as account balances, lending balances, merchant processing insights, and website efficiency metrics. Clients will have the ability to manage payroll, assess working conditions, manage health insurance benefits, acquire all necessary insurance coverages, and maintain vital corporate documents like tax returns and articles of incorporation—all organized in one centralized interface. We believe the utilities provided by the dashboard will not only service our existing clients but also draw new business, hence expanding small and medium-sized businesses' operational capabilities. The NewtekOne Dashboard enhances Newtek's customer experience, aiding users in monitoring and visualizing their operations in real-time within a singular platform. The dashboard will ultimately be customizable with plans to add features like tax services and digital bookkeeping functionalities. We can also integrate third-party provider information, which may include other banking accounts or business services. While I’ve heard claims that similar features exist elsewhere, I assert that ours is distinct. Unlike aggregators of data like Yodlee or Finicity, we provide proprietary solutions that offer added value to business owners, who would find it difficult to disengage from us due to the benefits we provide. Moving to Slide number 40, let’s summarize our investment outlook. We’ve consistently outperformed the Russell and the S&P over the past decade, an accomplishment not made lightly across varying markets. If you’re considering us for our lending expertise, we bring nearly 20 years of experience through two significant crises—the 2008 recession and the recent pandemic. We are non-bank lenders aligned with shareholder interests. We manage our board's ownership stake of 5.1% of outstanding shares, ensuring that our actions contribute to shareholder benefit. We have demonstrated success across diverse market conditions and aim to continue leveraging technology as a solutions provider within our industry, striving for disruption and ongoing innovation that underscores our performance. I appreciate your attention today, and I’d like to turn the financial review over to Nick Leger, Chief Accounting Officer.

Thank you, Barry. Good morning, everyone. You can find a summary of our third quarter 2021 results on Slide 42, along with a reconciliation of our adjusted net investment income or adjusted NII on Slides 44 and 45. For Q3 2021, we had a net investment loss of $6.7 million or $0.30 per share, compared to a net investment income of $1.7 million or $0.08 per share in Q3 2020. Please note that income rates including the PPP are incorporated into investment income. Adjusted NII, as shown on Slide 43, was $12.6 million or $0.56 per share for Q3 2021, compared to $900,000 or $0.04 per share in Q3 2020. Focusing on highlights from Q3 2021, we recognized a total investment income of $12.4 million, a 16.7% decrease from $14.9 million in Q3 2020. The primary driver of this decrease was interest income related to the fees from PPP. We acknowledged $269,000 in income related to the origination of PPP loans, with $6.4 million of PPP loan originations during Q3 2021, compared with $3.1 million of income on $82.5 million of PPP loan originations during Q3 2020. In Q3 2021, our portfolio companies generated $3.5 million in income, contrasted with $2.2 million in Q3 2020. Moving to the expense side, total expenses increased by $5.8 million quarter-over-quarter, reflecting a 43.7% increase, primarily driven by higher referral fees related to SBA 7(a) loans. Realized gains from the sale of guaranteed portions of SBA loans sold during Q3 totaled $22.4 million compared to $1.6 million in the same quarter last year. In Q3 2021, we sold 205 loans for $148 million at an average premium of 13.04%, as opposed to 16 loans sold for $11.8 million with an average premium of 11.79% in Q3 2020. The increased realized gains can be attributed to both heightened SBA loan origination volumes and elevated average premium prices compared to Q3 2020. It’s essential to understand that PPP income is included in investment income and is not reflected in realized gains. Moving to realized losses, we reported $3.2 million on SBA non-affiliate investments for Q3 2021, compared to $2.4 million in Q3 2020. Summarizing our operating results for Q3 2021, we noted a net increase in net assets of $16.6 million or $0.74 per share, concluding the quarter with a NAV per share of $16.23. I would now like to turn the call back over to Barry.

Thank you, Nick. Operator, we’d like to open up the call to Q&A.

Thank you, sir. At this time, I would like to take any questions you might have for us today. Our first question is from the line of Richard Molinsky from Max Ventures. Your line is now open.

Congratulations on continuing to execute. I have a couple of quick questions. Is there any plan for any distribution of dividends from the portfolio companies? This is part one. For the second part, what’s the earliest time that this acquisition with the National Bank of New York City might go through—what’s the earliest, and what’s the latest date? I believe that would be a significant advantage given your track record of getting that deal done.

Richard, regarding the second question, we originally indicated back in August a timeline of 6 to 12 months. Given the current environment, we anticipate being closer to the 12-month mark, but that's just a guess based on the integration of proxy votes and regulatory discussions. There's a lot of fluctuation in the Federal Reserve and the OCC presently. My best guess is that the third quarter would be the earliest estimate.

All right. So, that sounds good.

As for dividends, portfolio companies make a decision at the end of each quarter regarding the best utilization of dividend income for cash on hand. The projection for our key entities, NMS, is $14 million and $6.5 million for NTS, while Newtek Business Lending is projected between $4 million and $5 million. These figures represent EBITDA, but the cash generated can be used effectively for lending, debt paydowns, or acquisitions. I should note for the first three quarters that we have had substantial earnings amassed from those companies held, which will be discussed in detail later in the presentation. The cash generated can also be distributed at any point; they don't disappear.

Yes, you certainly have. Thank you, Barry.

Thank you, Rich.

Our next question is from the line of Mickey Schleien with Ladenburg. Please go ahead.

Good morning, Barry. I hope everyone there is doing well. Barry, many lenders have experienced favorable trends, including an improved economy and low default rates. However, I believe next year might pose greater challenges due to forecasts for slower growth and the Fed ending quantitative easing. I would like to clarify how you view those risks in terms of managing the Newtek balance sheet next year.

That's a critical question. We’re observing mixed indicators across the country regarding loan growth. Our pipeline maintained strong figures in October, so there's sustained optimism amongst businesses with accumulated cash reserves. We have not seen a decline in loan demand. Regarding interest rates and potential shifts, we decided to hedge the 504 and non-conforming parts of our portfolio, which has worked effectively, even considering the recent high PPI numbers while rates remain lower due to continued government bond purchases.

Barry, do you consider your loan demand as a leading indicator, indicating that the market might be undervaluing the robust economic outlook for the upcoming year?

The market may indeed underestimate economic strength, especially with the current liquidity and government stimulus affecting spending. The financial environment is unexplored territory with significant capital accessible to the market, which supports activities in commercial lending.

Thanks, Barry. I have a couple more queries. You mentioned retained earnings at controlled portfolio companies, specifically concerning the Q1 2022 guidance as a BDC. Which capital retention assumptions have you made for those companies?

I appreciate the question, but I can't provide that breakdown at the moment.

Okay. One last question regarding restricted cash on the balance sheet related to PPP. Where will that cash be directed, and what’s the timeline for its utilization?

The restricted cash primarily pertains to PPP loans forgiven by the government, which gets distributed to participation certificate holders. That cash will effectively allocate off our balance sheet over time.

Understood. Thank you for your insights.

Thank you, Mickey.

Our next question is from the line of Matt Jaden with Raymond James. Please go ahead.

Hey, Barry, good morning. I appreciate you taking my questions. First, regarding the bank holding Company conversion timing, is it reasonable to conclude that the Q2 and Q3 dividends next year will be based on the BDC structure?

Yes, I believe Q1 and Q2 dividends are highly likely to be BDC-related. If the conversion occurs in July, August, or September, it’s uncertain how dividends before the conversion would play out.

Got it. That’s helpful. One closing thought regarding portfolio company dividends—do you foresee any distributions prior to the conversion, or will capital continue to be retained?

Certainly, that will depend on ongoing operational requirements. I believe it might be more beneficial to maintain those as retained earnings for potential funding of growth.

Understood. Finally, to touch on the 78 funding levels, while it may be early; could you offer any insight into potential funding levels for 2022 in comparison to 2019 or 2021?

We forecast that for 2022, the lower threshold will likely settle at around $700 million. We haven't finalized that yet, but I’m comfortable using the $700 million estimate as our lower boundary.

Thank you for being accommodating. That wraps up my queries.

Thank you.

Thank you. We have our next question from the line of Paul Johnson with KBW. Your line is now open.

Good morning, everyone. Thank you for taking my questions. I appreciate your insights regarding the merger timing and updates. However, I would like to know if you have any other updates regarding ongoing conversations and meetings with regulators—alluding to merger progress. Can you share any insights?

I wish I could offer specifics, but I must refrain from divulging our discussions. Overall, I can confirm that all meetings are on track, and no changes are forecasted based on our recent conversations within public markets.

Understood. Appreciate your guidance. Shift the focus to the NewtekOne Dashboard—how does its product readiness align with the merger closing timeline? Will it be ready alongside or experience further investment for operation?

The dashboard will indeed be operational upon merger closing; however, we anticipate having it functional before that time. The goal is to utilize the dashboard regardless of our BDC or bank status, but the banking aspect enhances its relevance, considering how businesses interact with their banks fundamentally.

Thanks for clarity. One additional inquiry on expenses—salaries and benefits costs were noticeably lower than prior quarters. Given all the recent staff hires, should we consider this an outlier quarter, or are you forecasting salaries heading toward a $4-$5 million range similar to earlier quarters?

It’s suitable to consider this a singular instance. We expect to see those expenses stabilize moving forward.

Thank you for the information. Moving to another aspect, can you share your preferred leverage ratio aimed at balance? Currently, pro forma, you seem to be around 1.2. With active SBA originations expected in Q4, will these affect your leverage considerations?

We're acutely aware of market perceptions of risk. Historically, we’ve managed leverage above 4. The inclination is always to balance perceptions with responsible management. Although we might operate with slightly more leverage during Q4, we may swap debt instruments, ensuring no significant risk to our origination capacity.

So there shouldn't be hindrances to originations for the quarter?

No, not at all.

Lastly, do you foresee any government infrastructure bills or programs benefiting SBA lending? I appreciate your time.

Based on what I've heard, suggestions have emerged, yet specifics evolve daily in varying drafts. I gained insight into an intention for the Build Back Better and potentially raising SBA funding from 75% to 90%, alongside waiving certain fees and helping create higher advances. All of this indicates governmental support for small-medium business and those involved in SBA lending. However, predicting its enactment is speculative at best.

Thank you for your insights today.

Thank you.

We have our next question from the line of Adam Morgan with RBC.

Hey Barry, how are you? Hope all is well. I had some inquiries regarding the transition to a bank structure. Are there lending opportunities you foresee expanding into or diversifying into areas you've not historically covered?|

I need to tread carefully while discussing the bank to comply with regulations. Nonetheless, the capacity to diversify our lending programs with a reduced capital cost presents strategic advantages that would help meet our desired returns on equity while helping spread out risk over various programs.

Of course, I cannot press you on that matter. Thank you very much.

Thank you, Adam. I appreciate it.

Thank you. There are no further questions at this time. Mr. Sloane, please continue.

I appreciate everyone’s attendance and investment in Newtek. We look forward to reporting Q4 and continuing our successful record. Thank you very much.

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