Earnings Call Transcript - NEWT Q3 2020

Operator, Operator

Good morning, everyone, and welcome to the Newtek Business Services Corp. Q3 2020 Earnings Conference Call. I will now hand over the call to your host today, Mr. Barry Sloane, CEO and President of Newtek Business Services Corp.

Barry R. Sloane, CEO and President

Thank you very much, operator, and good morning. I'm Barry Sloane, President and CEO of Newtek Business Service Corp., stock symbol NEWT on the NASDAQ. With me today is Chris Towers, Executive Vice President and Chief Accounting Officer. For those of you that would like to follow along on our presentation, I'd like to suggest that you go to our website, newtekone.com, N-E-W-T-E-K-O-N-E.com. Go to the Investor Relations section, where we have a PowerPoint presentation for all of you to follow along. And once again, welcome to our third quarter 2020 financial results conference call. I would like to point all of you to the note on our forward-looking statements on Slide #1 and move everybody over to Slide #2, where we could talk about our third quarter 2020 financial highlights. Net investment income for the quarter was $1.7 million or $0.08 a share. That was an overperformance versus a $0.03 a share loss for the three months ended September 30, 2019. Adjusted net investment income came in at $0.04 a share for the three months ended September 30, 2020, compared to $12.2 million or $0.63 for the same period last year. This was an underperformance based upon us ceasing lending activities at the end of the first quarter, which we've now started up, but it was a beat on the street relative to consensus of negative $0.015. So the $0.04 that came in beat the consensus analyst of negative $0.015. Net asset value came in at $324 million or $15.13 a share versus NAV of $15.70. A lot of that was due to the redistribution of cash that was earned in the second quarter performance; that distribution of the cash versus the earnings drove NAV down. We do expect NAV to normalize. Historically, we've been able to grow our net asset value over time. We believe that a reduction in NAV, which we did in the first quarter of this year in the loan portfolio, was appropriate given the uncertainty relating to the pandemic activities. But we feel very good about our valuation of our loan portfolio and our other assets and believe going forward that not only will we hope to stabilize this but hope to grow NAV and dividends, which we've been able to do over our history of being a BDC dating back to November 11, 2014. Our debt-to-equity ratio is 1.21x, which is fairly low for our organization. Once again, we have restarted lending activities as of June 30, so that should pick up both debt-to-equity as well as the generation from 7(a) lending beginning in the fourth quarter of this year. Let's move to Slide #3. Slide #3 is a little bit of a repeat of what I discussed in Slide #2 relative to the shifting metrics in the business. In the first quarter, looking at the three months ended September 30, 2020, net investment income increased significantly. Much of that was due to the PPP financing, both in the third quarter and that change could also be seen in the second quarter. PPP lending is an above-the-line form of income, and we reduced our gain on sale, which affected adjusted NII in the same quarter. We always point to what we do over the course of the year, that we pay our dividends out of earnings, which we've always been able to do; it's part of our dividend policy. And we are very, very pleased with the guidance that we have for the remainder of 2020 as well as going into 2021. Looking at Slide #4, you've also got a repeat of those shifting metrics that I talked about. Net investment income of $31 million or $1.49 a share is obviously an outperformance versus an investment loss of $2.6 million, once again, based upon PPP versus the curtailment of the 7(a) lending activity. We look forward to always paying our investors a reliable dividend, growing the dividend and a stable to growing NAV. Moving to Slide #5. For those investors that follow the company, I think you're fairly familiar with the Paycheck Protection Program. Obviously, we performed very well in 2020 due to that. We had some significant, but I'll call it, residual income in the third quarter that came in from PPP. And we are hopeful that there will be a third round of PPP funding, which we believe could provide the company with an opportunity to generate additional income from additional PPP loans. There's no guarantee Congress will approve a new stimulus package. However, clearly, the rhetoric coming from the Senate, the House, and the Administration has been positive about further stimulus. I think we've got to get the politics of the election out of the way, but even Mitch McConnell made a comment yesterday about providing additional stimulus to the economy. Should a third round of PPP funding get approved, we've provided some guidance that we will discuss shortly. This guidance does not include any additional PPP funding. If it were to come in, we would likely consider it a special dividend, which could occur in the fourth quarter of 2020 or in 2021. Moving to Slide #6. We funded in the third quarter $82 million of PPP loans, rounded up to close to about $1.2 billion of PPP loans for the nine months ended September 30, 2020. We received a little over $3 million in fees that came in through the third quarter and picked up 10,500 new borrowers in aggregate. We believe that with these borrowers, 130,000 employees were retained during that period of time. We funded two years' worth of loan production, we say, in slightly over six months, although 90% of that work was done, frankly, within a two-month period of time. We were able to sell our PPP loans to third parties, so almost 99% or 98% of it was removed off their books where we partnered with banks to sell 100% participation certificates, which enabled us to record the full income from the PPP activity. On Slide #7, we talked about restarting our 7(a) loan business. Once again, this is pretty much from a dead start of June 29, 2020, to build a portfolio. We funded $13 million of 7(a) loans during the three months and we anticipate funding approximately $135 million of 7(a) loans in the fourth quarter of 2020 to get our normalized business back up and running again now that we've got more visibility going forward. We're also excited about our referral pipeline growing in a robust manner. Our business model is working on all cylinders, and we're very excited about our future going forward. We would like to reiterate that in the second quarter of 2020, we renewed our existing $150 million line of credit facility for 7(a) lending with Capital One Bank for a period of three years. Moving to Slide #8. Newtek Business Lending, our wholly owned portfolio company that originates 504 loans, closed approximately $50 million worth of loans through October 31. This is clearly an outperformance versus where this business activity has been in the past. We're anticipating fundings or closings of about $100 million for the year. That would enable us to have a fairly nice contribution from NBL that could be between $1 million and $3 million in dividend income into the company in 2020, primarily based upon SBA 504 lending in the third and fourth quarters of this calendar year. We are closing on the renewal, subject to documentation, for our existing $75 million facility line of credit with Capital One Bank for 504 lending, which will be for a three-year period of time. We're proud of the fact that we've been able to renew all our bank lines of credit during a difficult period. We're also negotiating a new term sheet with a funder for an additional $75 million of SBA 504 financing. The 504 financing market is extremely attractive due to the funding that the government provides with a 40% second debenture and now 50% conventional first, high LTV loans. We don't absorb that type of high LTV risk as the government provides the 40% second. The debentures on that program have a 2.5% handle, which has made this a very attractive investment vehicle for borrowers looking to acquire, refinance, or rehabilitate real estate. Moving to Slide #9. Our company paid a third quarter 2020 cash dividend of $0.58 a share. The company has paid a total of $1.58 in cash dividends for the first three quarters of 2020. That compares to $1.44 in dividends for the first three quarters and nine months of 2019, which is almost a 9.7% increase. We are going to give guidance for the rest of the year. So we have actually been an outperformer in paying dividends to our shareholders. We realize that our investment community, as well as management, enjoys the benefit of receiving dividends on a regular basis as our interests are very much aligned. We're proud of the fact that we've been able to grow the dividend through the first nine months of the year. As we restart our business, we have revised our 2020 annual dividend forecast. We've revised it and narrowed it. It was previously $1.80 to $2.30. As we get more visibility, we're now at $1.90 to $2.20. We've tightened that up a little bit. The company paid a 2019 annual cash dividend of $2.15 a share. Given how difficult a year this has been, particularly for most financial institutions and businesses in general, we're proud of the fact that we hope to get close to, beat, or be equivalent to the prior dividend that we paid in the 2019 year period. The company does anticipate that its Board will declare its fourth quarter dividend somewhere around Thanksgiving. That would be payable before December 31, 2020. We are also forecasting an annual cash dividend between $2 and $2.50 per share in 2021 to resume our activity and hopefully grow our dividend regularly. By the way, these dividend forecasts, both for 2020 and 2021, do not include the potential benefit of an additional PPP program, which was very significant, obviously, in 2020 for the company. If we did get an additional PPP program, we would probably pay that out in the form of a special dividend, which could occur in the fourth quarter of 2020 or in 2021. Moving to Slide #10. As we look at our business holistically, we as an organization and the management team have historically been able to emphasize that we are adaptable and flexible in our business model. We've been able to provide a seamless transaction working remotely. The company still has approximately 90% of its staff working remotely at this point in time. The 10% going into the offices is voluntary. It is not an easy transition back into an office environment, particularly with infection rates running high and federal suggestions and state laws handling the pandemic. We're very sensitive to the health and well-being of our employees and our staff, and we'll continue to maintain a model that keeps our employees health-conscious, first and foremost, in our minds. We believe our business model is ideal for the post-pandemic economy. Without the use of branches, brokers, and business development officers, our referral-based system is truly strong in this particular environment. Business owners do not prefer to go into a financial institution's branch or see a salesperson. Remote business is the future of these business solution markets going forward. We also like what we refer to as the five silos. We have lending solutions that are just great for customers. Our IT portfolio of companies is very valuable, particularly concerning shifting to remote work. We have tremendously relevant products to offer independent business owners. Our insurance agency stands ready to help independent business owners. Our payment processing business is very well positioned going forward. Additionally, we plan on rolling out and launching our website within the next week or two, which we'll make an announcement on. The utilization of paper currency and coin is less prevalent now. Technological solutions like tap-and-go, contactless payments, and e-commerce are very much in vogue, and we have those solutions that are well positioned for our customer bases going forward. Moving to Slide #11. Obviously, many of our historic traditional investors are familiar with our SBA lending business. We are still, at the end of the SBA's fiscal year at the end of September, the largest nonbank government-guaranteed lender. We're the sixth largest, including banks. We've been in the business for a long time. We have a 17- to 18-year track record of loan default frequency and severity statistics. We've survived the '08 and '09 financial crises. We certainly understand the stresses on our clients and the stresses of a portfolio. We've issued 10 securitizations of our uninsured pieces since 2010, and they are all performing quite well. That portfolio, I can't stress this enough, is a diversified portfolio of approximately 2,200 to 2,300 loans with an average loan size with respect to us of $180,000, which is our portion of the uninsured piece. When looking at our existing portfolio to calculate NAV, as of September 30, 2020, our 7(a) portfolio of uninsured loans that are in securitizations are sitting on the line, averaging about 35.1 months. That seasoning is exceptionally relevant. I'll add that our 7(a) portfolio is considered on our books whether it's in a securitization or not. Securitizations are considered financing. We have that portfolio marked at a 30% cumulative gross default even with the 35 months weighted average seasoning and a 40% severity, which we consider really the right price. We've seen some of our brethren in the BDC business raise their NAVs back up as the pandemic effects have appeared to be less consequential in the second and third quarters. I think we've still got another quarter or two to gather that information to be comfortable making an adjustment back up and changing some of those metrics around. We tend to be clearly less volatile. That portfolio has performed well for us. Moving to Slide #14. You can see that we have a 98.5% currency ratio on the 7(a) portfolio. The Section 1112 payments that we've received by the SBA for our borrowers has been very helpful. We are aware that there is a significant portion of those 1112 payments that still exist that haven't been utilized. The current proposals that have been made in the Senate and the House to continue PPP funding going forward for another round would potentially include those payments, which should keep this currency rate low. Slide #15 is trying to provide examples to the marketplace to demonstrate what our loans look like, and in those outlined situations where they do go bad, how we work through them. This particular credit was a non-accrued loan that wound up paying off. Once again, the differentiator between our loans is the borrower having 20% greater equity or larger and personally guaranteeing a loan. They also had their residential property guaranteeing the loan. Although the business had failed and they closed the stores, we wound up getting full repayment primarily based upon the value of their personal assets. They were able to refinance on residential real estate at the beginning of November and paid out principal, interest, late fees, miscellaneous fees, and expenses. This is a different underwriting than what you're used to with other types of lending. Moving to Slide #16. It's a slide that we produce fairly regularly. It shows the net cash created on a typical sample 7(a) transaction. Prices in the 7(a) market are firming to better. I would suggest that you can assume on a projected basis net type prices to Newtek in the fourth quarter to be around 110, 111, and 112. Slide #17 covers the income effects of an SBA 7(a) loan transaction, once again, a slide that we've had for many years in our presentations. Moving forward to Slide #19, we talk about portfolio companies and effects of dividends. In 2019, approximately 30% to 35% of our dividend and earned income came from portfolio companies. Slide #19 is a sample of a 504 loan. We want to make sure that everyone understands how these 504 loans are made. We fund the 50% first, the 40% second, that will be taken out by government debentures from a CDC, community development corporation. Slide #20 shows the return on equity from 504 lending, which is really high. 504 lending is different than 7(a) lending. After we sell the 50% first, it leaves us with no balance sheet. We make the loan, we warehouse it with our Capital One Bank line, and the 40% second gets taken out by government debentures. We typically sell the first loan into a premium bid into the secondary market. Slide #21 discusses our conventional loan portfolio. We reported to the market at the end of Q1 on our conference call that we suspended all lending of our nonconforming conventional loans. Since then, we've turned 7(a) back on. We've turned 504 back on obviously, as we've talked about our success there, and we do anticipate turning the nonconforming portfolio back on. It's a $91 million portfolio. All 19 loans are current, except for one. We expect that one loan to get turned back on as the state of California, which one particular borrower is in, has opened up their market, particularly for the movie production business. They're back open and cash-flowing, and we expect that loan to come back. From a credit standpoint, this is an unusual market. Most credit cycles are driven by weaknesses in the economy; this one is primarily driven by government shutdown due to the pandemic. So we're optimistic about states opening up and getting back to business as therapeutics and vaccines begin to enter the market. Moving to Slide #22, we talk about prospective new joint ventures for a nonconforming business. We're currently negotiating term sheets with prospective joint venture partners to create up to $150 million of additional third-party capital that would, we believe, originate up to $1 billion of nonconforming conventional loans. The equity base of this particular business is about 30% with 70% exit upon securitization financing. We're excited about these new ventures. One term sheet has been signed, and the second is in investment committee. We're hopeful we can move forward with that shortly and then begin to open up our nonconforming loan business, which gives us loans up to $15 million in size. On Slide #23, we talk about the success of our 504 program. We funded or closed $21.7 million of 504 loans ending September 30. In the month of October, that number got up to $50.6 million. We hope to close or fund a total of $100 million of 504 loans during the calendar year. That could create a contribution from NBL between $1 million and $3 million in dividend income to the company depending on fundings as well as selling. A little bit more difficult to make loans in the current environment. Obviously, when dealing with a borrower, you've got to ensure that you want to have a good handle on what they did during the pandemic from a financial perspective. You want to make sure that they used the right PPP resources during that time; then considering how they could withstand another government shutdown if it happens. There are additional burdens on underwriting and compliance that make lending a bit more difficult and give us less visibility than normal, so please excuse the wider ranges. Historically, we've tended to be conservative in making these types of projections and forecasts. Slide #24 talks about our other important portfolio company, Newtek Merchant Solutions, having an equity fair value of $115 million. The enterprise value, I think, is about $115 million with about $35 million of debt. We have clearly improved our EBITDA and cash flow run rate in the third quarter of 2020 and anticipate that going forward. We are forecasting ranges of $1.1 million to $1.2 million per month in EBITDA. From a valuation perspective, the public comps of other entities that are, what I'll refer to as Super ISOs, such as i3 Verticals, EVO, and Global Payments Systems, indicate that their multiple valuations on this business are quite reasonable, still in single digits. Looking at Slide #25, we’ve definitely had a recovery month-over-month. I will say that October has slowed down a little bit. I think that's a function of stimulus running out and businesses suffering a little. Once again, we're hopeful that the government will provide one more round of bridge financing in stimulus to our clients. On the calendar year, we're forecasting that adjusted EBITDA in the Newtek Merchant Solutions space will decline by 10% to 15%. That's a general decline from about $14.5 million of EBITDA to about $12.5 million to $13 million. We've had a significant impact on one of our portfolio companies, Mobil Money, which primarily services cab drivers at Newark Airport. That's probably cost us around $1 million of cash flow. A major decline in our numbers has come from one particular demographic segment, but we do expect that to rebound. Slide #26 discusses POS on Cloud. We are aggressively moving forward in this particular area. I'd like to draw your attention to this particular product. We'll be launching our website shortly, Newtek Payment Systems. We'll put a press release out on it, which will really provide the marketplace an understanding of why our POS on Cloud software is the all-encompassing system that, working in partnership with our financial institutions, can give them great branding, great deposit-taking capability, and tremendous service to their business clientele. So POS on Cloud processes payments and integrates with e-commerce, creating websites for restaurants, retail, and other companies that mirror what's in the POS system. It integrates with all food delivery services like Uber Eats, Grubhub, DoorDash. It integrates with accounting ledgers, which is critical to reduce company expenses and create seamlessness. It also integrates with our own payroll solutions products, including time and attendance functions. The POS pushes data right into our payroll to provide payroll, workman's comp, health insurance, and a window into 401(k), all on one piece of software. So POS on Cloud acts as a real human capital management system for businesses that helps reduce their expenses and uploads all their data into the cloud securely. We look forward to working with our depository alliance partners, which will enable them to manage and operate their depository accounts for payroll, as well as e-commerce and payment processing functions. We're also aiming to help investment banking clients distribute and protect their 401(k) against predatory ADP and Paychex-type solutions in the marketplace. Moving to Slide #27, we talk about our technology segment, what we refer to as our third silo of five in the Newtek Business Service Corp. ecosystem. We continue to see a dramatic turnaround in Newtek Technology Solutions, our Phoenix-based cloud computing portfolio company that primarily focuses on providing managed services. Historically, we've had three portfolio companies in this space, including IPM and Sidco. We announce today in the fourth quarter of 2020 that we're going to merge all the portfolio technology companies together. IPM, which was acquired in 2017, and our managed tech solutions; and Sidco will be a subsidiary of Newtek Technology Solutions. We're forecasting that the combined companies will generate revenue between $45 million and $50 million in 2021 and adjusted EBITDA between $5.5 million and $6 million. This should give us a bump in both valuation and cash flow. We're really excited about the business prospects. When we layout our technology solution offering, we will take independent business owners under our wing, helping them with software and hardware purchases, helping them architect their technology, and how to implement the technology they've made purchases for. Many businesses can't afford to manage technology on a day-to-day basis; they can't afford a CIO or CTO. We are not competing against AWS and Azure; we partner with them. We manage workloads in AWS and Azure. But for small and medium-sized independent businesses and family offices, they need the personal touch that the Googles, Amazons, and Azures can't provide. We are excited to grow this corporate segment of the business. Slide #28 speaks about cloud services. We offer clients ITaaS, infrastructure as a service; DRaaS, disaster recovery as a service; DaaS, desktop as a service; and software as a service. We give clients secure e-mail, hybrid cloud, private cloud, and public cloud; we are the cloud service provider for independent business owners. Slide #29 mentions that we are proud to have added to our staff. Sam Razon joined us this year, along with Shannon Vestal, to grow and further develop our Payroll Solution offering. It really is a human capital management system. We also added two great executives to our Property and Casualty Insurance Agency: Rick Carpenter as Director of Property and Casualty, and Kathryn Ingram, SVP, Property and Casualty. We're very excited about some additional hires we made in that particular space. I will point out that on October 28, we hosted a webinar to address the future of payroll benefits and discussed hot topics relating to changes in the market, particularly relating to the pandemic and economic landscape. I'd love to suggest that you go to our webinar. You could replay it, and it truly displays the expertise we have in this particular space. Moving to Slide #30, as we're getting close to concluding our presentation and wrap up the rationale for an investment thesis, making an investment is all about risk and reward. We firmly believe our loan portfolio and balance sheet has less leverage than our BDC peers. It's essential to note that our loans are no growth to low growth-type businesses. They don't require 4%, 5%, or 6% growth in revenue, earnings, and cash flow. We believe our businesses, which are more bread and butter and core, well-collateralized and well-supported by personal guarantees of the owners with both personal and corporate assets, will stand up well in this particular economic time. It's important to note, this isn't our first rodeo. We've been through this for over 17 years and done a good job managing during the 2008-2009 credit crisis. We're very active in working with our clients to ensure that they have the right solutions to navigate through. We speak to all those 2,200 to 2,300 clients in the portfolio. The loans are personally guaranteed and collateralized with liens on them. It's a diversified business model. So apart from lending and credit, we obviously have revenue streams growing in tech solutions, payment processing, NII, and payroll. We utilize technology to acquire clients, clearly in vogue today, where acquiring business through brokers, bankers, branches, or BDOs is quite difficult in the current environment. We think this is going to be a permanent shift in business. It's more efficient; it's better received by the customers that want you to be available on demand. We believe our shareholders can realize long-term rewards due to our unique infrastructure and business methodology. Moving to Slide #31, we look at the catalysts for investing. Renewing our 7(a) efforts should get us back into an originate-and-gain-on-sale mode. We had a really good third and fourth quarter in 504 income, and we look for that to continue in calendar year 2021. We also hope to resume our joint venture lending activity in the nonconforming conventional loan market in 2021. What we've done with respect to the combined Newtek Technology Solutions with our other technology portfolio companies, we look forward to the creation of a business in 2021 that generates between $45 million and $50 million with an adjusted EBITDA of $6 million. Those are nice increases. We're looking for a recapture of NMS as the business bounces back nicely. Newtek Merchant Solutions is expected to return to an EBITDA of around $14.5 million to $15 million. We believe that we will get another stimulus package, which will certainly help us manage our credit. Additionally, regarding the regulatory environment with respect to BDC investment, particularly with more investments from institutional investors, we are hopeful about the SEC's proposal to modify AFFE. We're rolling forward to my final slide on Slide #32. We are a differentiated and diversified BDC model. Many people are looking to invest in BDCs for the dividend and asset category. They want to make an investment in BDCs from the structure but would like to avoid investing in portfolios of leveraged loans with hidden leverage in the assets. That's us. We are an internally managed BDC. Our interests are aligned. We're not growing for growth's sake to pay ourselves a bigger management fee. We're not a new company. We've been around, established in 1998, with a long-term track record. Tremendous alignment of interest exists, and we love shareholder appreciation and dividends. We don't get management fees, owning about 6.3% of outstanding shares. We clearly have stayed away from the oil and gas industry, are not a second lien lender, and have no SBIC hidden leverage. We think we have a promising future going forward. I'd like to turn the presentation over to Chris Towers, our Chief Accounting Officer. Chris?

Christopher Towers, Chief Accounting Officer

Thank you, Barry. Good morning, everyone. You can find a summary of our third quarter 2020 results on Slide 34, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slides 36 and 37. For the third quarter 2020, we had net investment income of $1.7 million or $0.08 per share as compared to a net investment loss of $500,000 or $0.03 per share in the third quarter of 2019. Note that income related to the PPP is included in investment income. Adjusted NII, as defined on Slide 35, was $950,000 or $0.04 per share in the third quarter of 2020 as compared to $12.2 million or $0.63 per share for the third quarter of 2019. Focusing on third quarter 2020 highlights, we recognized $14.9 million of total investment income, a 6.9% decrease from the third quarter of 2020. This decrease was driven primarily by a drop in interest income attributed to the decrease in the Prime rate and a decrease in dividend income from portfolio companies, mainly NMS. These decreases were offset by the recognition of $3.1 million of income related to the origination of $82.5 million of PPP loans during the quarter. Servicing income increased 11.8% to $2.9 million in the third quarter of 2020 versus $2.5 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $1.04 billion at September 30, 2019, to $1.1 billion at September 30, 2020. Distributions from portfolio companies for the quarter included $1.7 million from NMS, $125,000 from IPM, $175,000 from Sidco, and $240,000 from Newtek Conventional Lending, our joint venture with BlackRock TCP. Total expenses decreased by $3.3 million quarter-over-quarter or 19.9%, mainly driven by a decrease in interest expense, referral fees, and other G&A costs such as advertising. Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the quarter totaled $1.6 million compared to $11.7 million during the same quarter in 2019. In the third quarter of 2020, we sold 16 loans for $11.8 million at an average premium of 11.79% as compared to 147 loans sold during the third quarter of 2019 for $89 million at an average premium of 11.49%. This decrease was attributed to our continued focus on PPP originations during the third quarter of 2020. As I mentioned earlier, income related to the PPP is included in investment income. Realized losses on SBA non-affiliate investments for the third quarter of 2020 were $2.4 million compared to $838,000 during the third quarter of 2019. Overall, our operating results for the third quarter resulted in a net decrease in net assets of $500,000 or $0.02 per share, and we ended the quarter with NAV per share of $15.13. I would now like to turn the call back over to Barry.

Barry R. Sloane, CEO and President

Thank you, Chris. Operator, I'd like to open up a question-and-answer session.

Operator, Operator

Your first question comes from Mickey Schleien from Ladenburg.

Mickey Schleien, Analyst

Barry, I just wanted to touch on trends in SBA 7(a) prices, which were quite strong in the third quarter, and ask you who would you say are the main players bidding up those prices. And what do you think the outlook is finishing this year and going into next year?

Barry R. Sloane, CEO and President

Looking at the government-guaranteed bid for 7(a) loans, a couple of things have occurred. Prepayment rates have slowed significantly in this calendar year, and we expect them to continue to be slow. The lending environment for particularly most bank lenders is on a more cautious note. So you're not getting banks refinancing small and medium-sized business borrowers with low-interest rate loans. So prepayment speeds clearly drive the market. Supply and demand drives the market. There hasn’t been a plethora of originations, and I don’t see that at this point yet in the fourth quarter. The demand for government-guaranteed assets with no risk-based capital is insatiable. Banks are flush with deposits. The stimulus has put a lot of money into the banking system, and they need to put that money to work. At a LIBOR floater plus 65 basis points at zero risk-based capital is attractive. My view is to beware of the change of prepayment speeds.

Mickey Schleien, Analyst

I understand. And that's just due to the cadence of the 7(a) business, right?

Barry R. Sloane, CEO and President

Yes, in other words, just building up enough critical mass. We probably have around $60 million that we've mostly funded with equity at this point in time. We're not using our line, and our lines are very low across the board. That’s good as it shows that we have good liquidity in the system.

Mickey Schleien, Analyst

I understand. And you kind of hit the nail on the head. We don't know when the markets will be open or not. But I’d be interested in understanding, just broadly speaking, what's your thesis on the economy for next year that ultimately supports your dividend forecast?

Barry R. Sloane, CEO and President

Our thesis is that the economy has a lot of momentum behind it, irrespective of whether you've got Trump in the White House or Biden, which is on everyone's mind. I think the concept of additional stimulus is out there. I'm not overly concerned about a tax hike with either executive in. I must comment, people think the Republicans have the Senate. That's not clear, especially if you get two Georgia runoffs, which is possible. But I think there’s a ton of liquidity in the system. There's a lot of momentum. New business formation, believe it or not, is growing rapidly. Many parts of the economy are growing on all cylinders, and there’s lots of liquidity in the system from an aggregate standpoint, so I'm bullish. Now the flip side is you've got certain businesses at the extreme that require no social distancing or indoor activity. Those are businesses that are going to have a hard time. But we're happy that we have a diversified portfolio, both geographically and within Sidco, to combat that.

Mickey Schleien, Analyst

Those are all my questions, Barry. I appreciate your time this morning.

Barry R. Sloane, CEO and President

Thanks, Mickey. Thank you very much. I am generally optimistic about economic growth in 2021.

Operator, Operator

Your next question comes from Scott Sullivan of Raymond James.

Scott Sullivan, Analyst

First of all, a comment. I do appreciate sort of the management's flexibility and acuity in terms of adorning the Warren Gretsky school of thought; skating to where the puck is going rather than where it is. Congrats on that.

Barry R. Sloane, CEO and President

Thank you.

Scott Sullivan, Analyst

From a high level, where do you see the most growth, obviously, in a more normal economic scenario? Where is the best CAGR in all the different silos other than lending?

Barry R. Sloane, CEO and President

I think it's a good question because part of it relates to where we are in our product cycle, and then there's near term, medium term, and long term. I think I’m optimistic about the turn in Tech Solutions. From a marketing perspective, we're probably less built out there than we are in Payment Processing, which is a larger business. However, the menu of solutions we have to offer independent business owners is broad. This is a growth area for many years, and there's much work to be done. Frankly, there’s not a lot of competition in the space, in my opinion. In the merchant space, there is a lot of competition, but I think we have superior solutions. For example, we can create a Raymond James Payment Solutions. We can give a financial institution their payment solution, which builds branding for them, and that’s what we’re looking to do. There are many businesses that we can provide services for. If you switch over to payroll, health, and benefits, the landscape of all the changes in payroll is vast. Changes in health care relative to the pandemic are significant. Independent business owners need expertise, and they’re not going to just go online and input data; they need to talk to someone. We’re well positioned with our solutions. In 2021 versus 2020, larger growth is expected from tech and a rebound in payments. These are the two areas to keep an eye on. Also, lending will be more prominent in 504, and we hope to get the nonconforming business going again. We have a lot of growth engines for 2021 that were nearly zero in 2020. The 504 business is probably helpful in the fourth quarter, and the nonconforming business is anticipated to ramp back up. The growth lift in payments and tech provides a strong foundation for good dividends for our shareholders in 2021. By the way, you didn't hear me mention PPP, right? If PPP comes in, we saw what a nice job PPP did for us, so we'll see what happens.

Operator, Operator

Your next question comes from Brian Stauffer from Compass Point.

Brian Stauffer, Analyst

Barry, congrats on the quarter. I have one question answered about the 7(a) loan market and the strength you're seeing there, but you did mention the work-from-home dynamic. Do you see any opportunity to rationalize Newtek's real estate footprint moving forward, perhaps saving on OpEx down the road as leases come up for renewal?

Barry R. Sloane, CEO and President

No question, the pandemic changed my viewpoint on our real estate footprint and staffing. Many staff members are working remotely and doing great. We will not renew our lease in Irvine, California. Similarly, in Milwaukee, staff is remote and doing well. We’ve taken a little more space in Lake Success, but we have one parcel that we'll likely sublet. Our Orlando business is doing well, and we will see more cost savings here. We've put tools in place for staff to monitor their activity relative to talk time, inbound calls, outbound calls, and timesheets. Although there have been many negative aspects of the pandemic, one positive is getting people to work more efficiently from home.

Operator, Operator

Your next question comes from Matt Tjaden from Raymond James.

Matthew Tjaden, Analyst

Barry, first one, if I can, on 7(a) originations. Any color you can give on what you're seeing a month into the quarter? I know $135 million is the expectation for Q4. Any expect or any color you can give on what you're seeing a month in?

Barry R. Sloane, CEO and President

We put that number out there; it’s difficult for us to peg that with precision. Commitments are made, and we then go into underwriting. However, some issues can pop up at the last minute, which complicates forecasting. We communicated that there is volatility, but we're comfortable with the guidance we've shared. We expressed that our investors should feel good about the range we’re anticipating. So while it’s tough to forecast specific loan funding, we're firing on many cylinders right now. The 504 business gave a good outlook as does our tech business.

Matthew Tjaden, Analyst

Yes, one follow-up, if I can. The guidance for 2021 seems to be between $2 and $2.50. Based on your dividend payout ratio, we can back into an earnings number there. Can you give maybe not the specific number, but what's the expectation for 7(a) origination activity during 2021?

Barry R. Sloane, CEO and President

I'd say we should be between $580 million and $600 million for 2021 for 7(a).

Matthew Tjaden, Analyst

Just to confirm, NBL did not pay a dividend in Q1, Q2, or Q3, so that $1 million to $3 million dividend will all come in the fourth quarter?

Barry R. Sloane, CEO and President

Yes, it's accurate. There was no dividend from NBL in those quarters.

Operator, Operator

Your next question comes from Adam Morton of RBC.

Adam Morton, Analyst

Congrats on a good quarter. A couple of questions regarding this pandemic. Given it looks like a Biden administration with a Republican Senate, are there any geographic pockets or sectors where you see lending opportunities?

Barry R. Sloane, CEO and President

What you can't ignore are the demographics of businesses and customers moving to the Sunshine states and Rust Belt states, such as Arizona, Texas, South Carolina, North Carolina, Florida. While we are looking at all geographies and businesses, it’s particularly hard for lenders to make a strong presence in New York City today.

Adam Morton, Analyst

That being said, there will be survivors in New York City.

Barry R. Sloane, CEO and President

Absolutely, we are currently having discussions with several restaurateurs who are revitalizing remarkable brands and pursuing SBA loans to facilitate their rebuilding efforts.

Operator, Operator

Your next question comes from John Sefiati from Santander Bank.

Unknown Analyst, Analyst

I have a question on Slide 8, focusing on the 504 loan program. It was mentioned that growth was slow in the first half of the year because of COVID, but it looks like about $51 million of loans have been funded through 10/31. How were those loans funded? Was there a capital injection from Newtek to fund those loans?

Barry R. Sloane, CEO and President

For the most part, the companies I mentioned earlier, Merchant Services and Tech, don’t require capital. However, lending out of NBL does require capital in addition to our lending partners like Capital One Bank that provide leverage. We position capital into Newtek Business Lending to enable these loans.

Unknown Analyst, Analyst

Do you know approximately how much capital was contributed during the quarter?

Barry R. Sloane, CEO and President

I do not know offhand.

Unknown Analyst, Analyst

Going forward, do you see any change in strategy related to targeting underlying customers due to the pandemic?

Barry R. Sloane, CEO and President

We are indeed very big on diversification, which makes us smarter. I could say we are not going to make a hotel loan or a restaurant loan, but it might turn out those are actually good loans to make today. It’s essential to be very selective about which businesses get funded and ensure they can survive future uncertainties.

Unknown Analyst, Analyst

That’s very much appreciated. Just one more follow-up. I saw financial results were in the press release and lending presentation. Do you know when we could expect to see the full Q for September 30?

Barry R. Sloane, CEO and President

That usually gets filed within a week or so of this call, so that's a good anticipation.

Operator, Operator

Your last question comes from Harold Elish from UBS.

Harold Elish, Analyst

It seems that fintech is a winner in this pandemic. Are you thinking of pursuing online relationships that appeal to millennials and active traders?

Barry R. Sloane, CEO and President

I appreciate you pointing out the value-add of technology in the pandemic. Many fintech companies such as OnDeck Capital were acquired more for their technology than their performance. We believe that how we've structured our business to create remote effectiveness is being valued at the marketplace, and we are continually adapting our acquisition methods. I hope that investors will begin to appreciate the inner value of our organization, but our priority is still to execute our business well.

Operator, Operator

I'm showing no further questions at this time. I would like to turn the conference back to Mr. Sloane.

Barry R. Sloane, CEO and President

Thank you, operator. I’d like to thank everybody who participated in the call, the analysts' Q&A, and investors in our company. After 20 years of being a publicly traded company, we genuinely appreciate the faith and investment you have made in us. We will continue to work hard to meet or beat our expectations. Thank you very much. Have a great day, and stay safe.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.