Good day. Thank you for standing by, and welcome to the Newtek Business Services Corporation Q2 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your speaker today, Barry Sloane. Thank you.
Please go ahead.
Thank you very much, operator, and welcome everybody to the Newtek Business Services Corp. 2nd quarter financial results conference call. I would also like to announce and welcome Nick Legere, our EVP and Chief Accounting Officer, Who will share the presentation with me today. I'd like to point out to all listeners that they can follow the presentation by going to Our website, newtekone.com, go to the Investor Relations section. And there actually are 2 decks as part of the presentation.
Deck number 1 will be the Q2 2021 financial results conference call. Deck number 2 will be the 2nd addendum to the investor presentation dated August 3rd with the current date of August So we'll be using both of those decks today. We're excited to report our First half earnings as well as our forward look for the second half of the year. Our company is doing really, really well. We have a bright future.
Company and business extremely Well positioned. We have also addressed some slides to talk about talent pool that we've recently added. And obviously, a lot of people are intently focused on the results that we put out last night through the first half and the second half, As well as the recent announcement of a contract to acquire National Bank of New York City. Before I get into our focus today, which obviously will be focusing on the company's performance as well as the acquisition, I do want to point out that there clearly has been more activity and questions coming into the company relative to the acquisition. Broadly speaking, because we'll get into this a little bit deeper.
We've got the same business. Newtek was the same business a month ago. It will be the same business a month Forward. We basically given fact the transaction goes through and we expect that it will, Which is why we move forward on the transaction and we'll be recommending it most likely to shareholders. It's the same business in a different structure.
I think that's what's real, real important. This business has been built over a long period of time. We do most of the things that banks currently do. We were excited about converting to a BDC In November of 2014 when that made the most sense for the company and its shareholders and we're excited about the potential Conclusion of the transaction subject to regulatory approval and shareholder vote. So we look forward today to discussing Our earnings, 1st 6 months of the year, recent quarter, projections going forward and the real strong performance that we've had.
I'd like to call everyone's attention to Slide number 2 Of the conference call review earnings deck. And on Slide number 2, we talk about proven shareholder value creation and track record Successful growth. Important to note, Newtek has always been a growth company. When I say growth company, growth in revenue and growth in earnings. So When you take a look at our stock price year to date through August 5, 2021, up 42% for the year.
10 year return 7 54 percent 5 year, 2 22 percent 3 years, 71% And 1 year over the last 12 months from that particular date, 50%. I think it's once again important to note that the reason why we're able to generate these And these include dividends plus share appreciation is the company is a growth company. It's always been a growth company. And we believe that despite the fact that the Business Development Corp. Has been a great vehicle, our ability to grow the business, grow the cash flows Are better suited from a total rate of return basis in a bank holding company.
So we believe that The transaction that we have announced and hope to proceed forward with is a great transaction for all shareholders. I have to point out that if you would have earned a 10% dividend with no appreciation over a 10 year period of time, that's a 200% return. Obviously, there are dividend oriented shareholders that are somewhat concerned about not getting that regular cash flow. Well, if you've got share appreciation, You could just get that cash flow by periodically selling off pieces of your shares. At the end of the day, Newtek Business Services Corp.
In its form will continue to be going forward and has always been a growth company growing its cash flows. We're excited about reporting our 3rd quarter results, our first quarter our first half results and projections. Let's go to Slide number 3. Important adaptability of Newtek Business Model. Well, nobody expected a pandemic to really wreak havoc on our health and business in 202021.
So clearly these were extremely challenging years in our 2023 operating history. We were able to demonstrate the ability to shift our business model And I think that's really important being able to transform to current market conditions and position yourself so you could provide Good results for all of our stakeholders. We've also proven that Newtek in its current form It's vital to the economy and essentially you could look at what we have done particularly with respect to Our SBA activity, we partnered with the government and for all of us to can see going forward, particularly in the foreseeable future, Government keeps getting larger and larger, partnering with the government is not a bad position to be in. And I think the financial results that we've been able to deliver For a tough 2020 2021 have demonstrated that. We believe the company is firing on all cylinders.
What does that mean? As the economy opens up, we believe that we'll be able to grow our payments business, our tech solutions business, Insurance Agency payroll and shift the lending focus from PPP, which is a product that effectively sunsetted, With the exception of forgiveness, which we're working on with our customers and shift the lending focus Back to 7a, 504 nonconforming and secured line of credit. We think Newtek is extremely well positioned to capture those market opportunities. And for those investors that aren't totally familiar with our model and there are many new investors that are attending today's call, When we go out to the marketplace, we have a big funnel. Businesses come to us not for a PPP loan or a 7 loan or they come to us for financing.
And we'll talk about the amount of referrals that we get. The referrals come in the funnel. We use technology to parse that funnel out to get Borrowers prequalify quickly and then figure out what the right product is. So for months, the shifting of PPP to 7.8 to 504 to secured line of credit are nonconforming. That's just what we do.
It's what we've always done. This is not a big issue for us and we're excited about being able to continue The success and the profits and the capability that we've demonstrated over the last 1 year, 2 year and actually 10 years over the course of time. We will provide forecasts across several key metrics for 2021 and really reflect the growth Of our many, many faceted earnings stream, whether it's from payments, tech, whether it's gain on sale income, whether it's servicing income or spread income. We're very excited about what we are doing and what we're positioned going forward. We're also indicating that on a going forward basis, Given the potential change to a bank holding company, our forecast in 2022 will be limited to quarterly basis.
So approximately 30 to 45 days, we hope to give some additional transparency and forecast a dividend for Q1, 2022. Going to Slide number 4, 2021 key metrics. We've clearly positioned ourselves for a Midpoint dividend of $3.15 for the year, that will be a 53% increase over the year prior. Our SBA 7 Loan forecast for the year, dollars 550,000,000 to $600,000,000 we dropped the lower end, from $580,000,000 to $550,000,000 From our perspective, there's been tremendous receptivity for price appreciation, which we'll talk about. So our gain on sale metrics can easily be met Within this new footprint or I should say forecast of a range, this isn't necessarily indicative Of anything of a slowdown or the change in growth, as a matter of fact, we outperformed in the second quarter our PPP fundings, Well, we funded $722,000,000 worth of loans instead of a previously forecast, an analyst review of $600,000,000 worth of those loans.
So This is just a little bit of a shifting around and we feel very comfortable with these changes. Our 504 business, we're forecasting 125 $50,000,000 that's up from a previous forecast of $125,000,000 and we'll talk also a lot about our nonconforming conventional loan business going forward. Clearly a growth engine, particularly in 2022 and beyond. Let's go to Slide number 5. So on August 10, our company's Board declared a 3rd quarter dividend of $0.90 a share.
That's a 55% increase over the same quarter last year of $0.58 And with the payment of the 3rd quarter dividend, We've paid out $202.10 over the 1st 3 quarters of 2021, that will be a 32% increase. And if our forecast is accurate, the 4th quarter should deliver $1.05 dividend or 123% increase over the Q4 of the prior year. So we're prior year and prior quarter. Once again, we're reaffirming our dividend forecast range with a midpoint of $3.15 and we look forward to Continuing to hit on all cylinders as we go through the Q3 and Q4. Moving to Slide number 6, the 2nd quarter financial highlights.
The difference between the Q2 and the Q1 are primarily dominated by a shift in PPP revenue recognition where we had in 2020 more PPP revenue recognition in Q2 than Q1. In 2021, that was more of PPP income from the Q1 to the Q2. So So you can see there was a little bit of a shifting around. I think important to note adjusted NII for this particular recent quarter that we're reporting today Came in at $27,100,000 a $1.20 a share. Although it was a decline from the year prior, It was clearly a stronger number than consensus estimates by about $0.46 We had a $0.77 gas, a $0.65 gas and $0.81 gas Ford analyst didn't guess, but we were able to beat the numbers primarily based on the outperformance of the PPP business and the ability to actually Close and fund, I believe close to 16,000 units for the year in this particular round of PPP funding.
Net asset value also increased at June 30 from $16.38 a share To $15.45 on December 31, 2020. On Slide number 7, we're talking about PPP Resources, which are really Important. We're estimating and obviously this is subjective, about 65% to 70% of our resources in lending that were focused On PPP financing are now going to be shifted to the other four product lines. Once again, I think it's important to note and I'll go into this a little bit further in the presentation. In calendar year 2019, there was no PPP.
There was no pandemic. It was a very clean year. We're going to look to give analysts and investors somewhat of a base But we think we can project going forward taking some of the PPP noise out, but we're excited about the shift of resources. The shifting of the resources is going to give us the ability to do more business in 7a, 504 nonconforming and secured lines of credit. I should also note that given the volumes that we did, particularly with respect to units, We wound up making 46 net new hires in the calendar year of 2021 and that's not over yet, about a 25% increase in staff.
So for those of you that are trying to figure out, gee, our expenses going up, are we able to handle it? We're very comfortable As we're growing our revenue side to be able to grow our headcount, we also believe that we're getting Greater returns on our equity and our assets by doing this as we make technological changes. 1 of the technological changes that we've made Is we're pushing out fact finders to referral partners early, and we're giving referral partners the ability to set Calendar invites for our internal staff. These are all things that are expediting our ability to get loans into prequal and underwriting sooner And earlier and larger to get to these borrowers real quickly. Moving forward to Slide number 8, our 6 month comparison Ended June 30, 2021 versus June 30, 2020.
Increases of Total investment income, AN and I, I'll point out that AN and I up 43% for the year. Net investment income Actually, it was a slight decrease. I will comment that in Q1 and Q2, we did not distribute Any income coming up from the portfolio companies to the BDC to be paid out in the form of a dividend that was held back, That was a conscious decision at each particular portfolio company. That cash and earnings still resides at the portfolio company, which can be Dividended or distributed out in the future when needed. In the meantime, it's good to have that cash.
We can use that cash to lend to The BDC to make loans or provide greater returns on capital. But I think it's just important to note that, That withholding of that dividend, I do believe does provide a negative drag on net investment income. Once again, we're excited and we believe that the 6 month results give us a more accurate depiction of the company's performance, particularly due to the uneven Distribution of PPP income between Q1 and Q2. On Slide number 9 and Slide number 10, they kind of go together a little bit. There's been obviously a lot of Discussion on forecasting, we try to be conservative in that, but try to give as much transparency and ideas for the Investment community and analyst abased some of the forecast, particularly given as things are changing and potentially capital structures And legal structures are changing.
So, as I mentioned, we plan on issuing 2022 Q1 Dividend guidance in the next 30 days to 45 days to give greater transparency to the market relative to our next few quarters of operations. And I think it's important to note that in 2019, the full year NII was 2.3 And I bring that up and people have said, why are you bringing that up? Well, you've got PPP noise in 2020 and you've got PPP noise in 2021. And I see noise, that was good noise and a very good indication of how the company is able to Shift through changing conditions, changing market conditions as well as changing technology and structure. So we look at that as a good base AN and I to try to establish a projection in the future for what gross earnings can be.
I'd like to draw everyone's attention to Slide number 10. So you can take a look at the adjustment of NII and the trend in the forecast. And as I said at the beginning of the presentation, Newtek Business Service Corp. Is a growth company. It's a growth company.
It's been able to grow its earnings on a regular basis. As you could see, the trend here is clearly up. You could put some fairly high numbers when you actually calculate what the trend is over that period of time. Obviously, we were affected by the pandemic in 2020 with really primarily relying on PPP and Taking a hiatus in some aspects of our business lending with an uncertain, unquestionable view towards credit, which I think at this point in time has primarily corrected itself. But I think it's important to note that the Street estimates for 20 22 going forward as a BDC, approximately $2.29 is the average amongst the 4 different participants.
I look at the $2.29 I look at what we did in 2019, I say that's there's no growth. And frankly, I just don't see it. So whether you put a 25% number of growth a year, you put a 15% number or a 10% number or a 5% or 0% or negative, put whatever number you like on it. I think this is a good way for all of us to try to calculate what's our earnings capability going to be as we go forward. Now We want to be careful, try not to confuse the market too much relative to the transition of becoming a bank holding company versus a BDC.
So we'll do this In bite sizes, but for many of you, hopefully this will give you a good base to configure what we look like. The one thing I'm fairly I feel fairly strongly about, We are a significantly bigger, better, stronger, more efficient company in 2021 going into 2022 than we were in 2019. And I feel great about our prospects. I hope that analysis is helpful to investors And the analyst community. Going forward to Slide number 12, we talked about our PPP Results, dollars 722,000,000 of loans, 15,800 units On an aggregate basis in 2020 2021, 26,000 PPP customers that are all available for Discussion about other things that we could do for them, dollars 1,900,000,000 worth of loans.
I will point out that in excess of 99.6% Of all these loans were sold to 3rd party, so no balance sheet implications, just income and move them off the balance sheet. I think most people on this call are familiar with all the PPP information. There's information on our website Take a look at what PPP program was about, which we talked extensively about in prior calls if you need to get that data. On Slide number 13, we talk about our SBA 7a fundings, which we're transitioning back into on a very full basis. $94,000,000 of loans during the 3 months ended June, dollars 198,000,000 for the 1st 6 months, forecasted range by $50,000,000 to 600, And once again, we're shifting or redeploying of assets.
We have held over approximately $26,700,000 of guaranteed portions of SBA loans that are available for sale going forward. Slide number 14, just some information and other portfolio companies, particularly NBL Newtek Business Lending. Newtek Business Lending is our origination unit that does the 504 loans and also originates Non conforming loans for the joint venture. We funded or closed $49,000,000 of 504 loans for the 3 months ended June. There was nothing that was done in that quarter in the year prior and $72,000,000 for the 1st 6 months, that's an $18,000,000 increase over the 6 months of last year.
And we bumped our Funding is up in a range of $125,000,000 to $150,000,000 Our credit facilities of $175,000,000 With Deutsche Bank, Capital One Bank respectively are in place. On Slide number 15 is a good snapshot of our pipeline. You could see it's real strong, robust, Puts us in a great spot to be able to fund close 7 loans in Q3 and Q4 and well beyond that. We're really excited about the shift back to regular courses of business as business owners are looking forward to getting back on track And growing through the effects of the pandemic. On Slide number 16, obviously COVID-nineteen, the pandemic affected our workforce.
We were able to shrink our real estate footprint by closing down offices in Milwaukee, Irvine, San Antonio, Dallas At New York City, we've demonstrated the company has been able to manage our employees efficiently working remotely through Our time tracker program, which gives us the ability to monitor and manage remote workers with respect to Time on the phone, who they're calling, outbound calls, inbound calls, as well as knowing what customers they service within different hours of the day. And our staff has been able to benefit by not having long commutes. So we have adopted well To the remote work environment, we do believe going forward, we'll operate on some kind of a hybrid structure. We thought that go back to work might begin September 1, Given the current conditions that might get pushed back, another month or so, but we do plan on getting back into the office and develop as well as a great environment for people to work out of their house, a sense of camaraderie, coordination, communication By coming to the office a couple of days a week. Slide number 17, for those that aren't familiar with our ability as a SBA lender Under the 7 program, there's some good data on here, which really just talks about the profitability of the program, our ability to access The markets through rated securitizations with average uninsured but non subordinated participation certificates of 170,000 and fairly high attractive coupons on the uninsured of 6% floating with no caps.
Slide number 18 talks about growth in loan referrals through our patented new tracker system, which would be something that clearly would carry over To the bank and the bank holding company, once again, getting 109,000 loan referrals, many of these loan referrals would qualify for More traditional types of bank lending, C and I loans, commercial real estate loans, that we're able to fund with our lower cost Retail deposits, I think it's important to note that we don't see National Bank of New York doing car loans or consumer credit cards. We will be Focused on the things that we currently do best, which is lend money, process payments, which we do through our payment processor, Provide payroll and other cash management systems for our business clients. We'll talk about that Newtek One dashboard, which we talked about in previous Presentations. So once again, not a major change in shift in business, but important to note, we get lots of referrals. We have a database in near time of 1,500,000 customers in our database, $1,500,000 that have passed a referral to Newtek seeking a product or a solution in one particular area or another.
The cross selling efforts should be enhanced significantly through the Newtek One dashboard, which is clearly a bank product that we'll be rolling out. The one solution for all your business needs to be able to go to that dashboard, see your deposits, see your loan information, Be able to make your payroll, be able to get human HR tools right on the dashboard, to be able to have all of your important organizational documents saved and stored there. Obviously, a lot of these forward looking comments relative to the bank are subject to regulatory review and approval By our application through the Federal Reserve and the OCC. But these are the things that we are We believe and are hopeful that we'll be able to do if the regulators approve our transaction and if the shareholders vote for the conversion into a bank holding company. Our 18 year track record of loan assembly, underwriting and technological expertise Really has made it a leader in the areas of lending, and we look forward to getting through this pandemic and its finality and getting back to a more normalized business process.
Slide number 19 talks about premium trends. One of the reasons why we were able to cut back on the amount of loans we're doing is because of these higher prices that we're getting. And these higher prices should go away by September 30. I say that because due to the COVID Relief bills passed in Congress, some of the fees that were charged to borrowers and originators like ourselves were waived, which enabled us effectively to sell higher coupons. Projecting forward, I would look at the numbers from 2016 2020 maybe even part way through 2021 give us a little bit more normalized type Pricing for gain on sale, but clearly this has been helpful to us.
We've taken advantage of it and we Realize that based on our projections, we'll go back to a more normalized type of a market, which we saw as a company way back when in 2019. Slide number 20 shows the seasoning of our portfolio, real important. We have seasoned portfolio that's primarily sitting in securitized structures. That's good. We have an analysis in our deck that from Standen and Poor's that basically shows when defaults are Particularly occurring or accelerating.
So we're comfortable that obviously we're doing new loans to put on the books, but our seasoned portfolio Hopefully has experienced a good portion of the stress relative to seasonality. With that said, we're still going through the effects of the pandemic. A Lot of businesses that are coming out of the pandemic are struggling somewhat, but so far we feel pretty good about how our portfolio was performing as evidenced by our currency Analysis of our currency portfolio on Slide number 21. So we see that from threethirty onetwenty 21 to sixthirtytwenty 21, Slight deterioration, but not significant. Obviously, we've had the reduction of the 11.12 payments for a quarter.
So, we were comfortable that there wasn't a major shift in those particular metrics. Slide number 2223 are slides we've used for, Got 15 years, I believe in these calls. So for those of you that are not familiar with it, it will show how an SBA 7 loan is funded, how the government guarantees piece gets sold, how income is booked and how cash is created. Slide number 24 going into the portfolio company review. These are our controlled portfolio companies.
Our 504 loan program, we talked about how well it's done this year versus last, Particularly with growth in originations looking for $125,000,000 to $150,000,000 I do not believe we've dividended money up from NCL, I believe in the 1st or second quarter that's dollars that will go back into making additional loans that potentially can get distributed in Q3 or Q4. Slide number 26 demonstrates for those that aren't familiar with 504 lending, it gives the ability to make A 90% LTV loan to a business owner that's fully personally guaranteed. When we make the loan with respect To our underwriting guidelines, the SBA and the Community Development Corp, the CDC has already approved it. Therefore, the 40% second lien gets taken out by the government, we're left with a 50% first lien, which we typically sell into the market For gain on sale, Slide number 27 is illustrative of that. So when you look at our 7 business getting high returns on equity and assets, Our 504 business also high returns and equity and assets.
You could see why we're able to generate larger Returns, obviously, is a BDCs and other BDCs, and we do believe that that will carry over into a bank holding company and bank Structure, once again subject to regulatory review and shareholder vote. Slide number 28, we talk about our conventional loan program. We are working on at the moment on a potential small private securitization with our Partner in the first JV. We're excited about that. We think that will give us good validation.
And on Slide number 29, We signed up a 2nd joint venture partner and currently working on a 3rd. These programs do take a while to put into place with respect Getting a securitization done, getting our leverage lines in place. But we feel pretty good about the program and We expect to fund up to $50,000,000 of nonconforming conventional loans either through JVs or on our balance sheet through the second half of the year. Slide number 30, we talk about our payment processing companies that being Mobile Money and Newtek Merchant Solutions. We've come up with a total enterprise market multiple value of 8.5 times.
2021 EBITDA numbers, we feel good about that. And I also want to make a note that we also did not distribute earnings out of NMS or NTS through the first half of this year and that's something that can be done. In addition, it could also provide funding To the BDC for making loans. We've got a lot of flexibility in our business model. That's an important aspect of investing in Newtek to have Many different levers, many different diversified streams of income and we try to be as transparent as we can to our analysts and the investment community.
Slide number 31, we talked about our payments business in the prior slide. We obviously have an increase in record volume coming off of the pandemic. We anticipate continued growth in processing volumes for the remainder of 2021. Slide number 32, we talk about one of our important solutions that Very valuable, particularly in the bank holding company or bank structure, being able to provide POS software directly to a customer to enable them to do Their payroll, e commerce, integrate to their accounting GLs, integrate the e commerce and the in store, Integrate to food delivery services. We already have an existing book of business in this particular space and we're very, very excited About everything that we're doing in the payment space, particularly with our software solutions.
Slide number 33, Technology Portfolio Companies. We have a real nice turnaround at NTS. We're forecasting revenue between $40,000,000 $50,000,000 for 2021 And EBITDA of about $6,200,000 a very realistic multiple of 6.7 times, particularly for a growing tech business. This business obviously had grown, had a consolidated EBITDA in 2020 of about $4,300,000 So we're looking at $6,200,000 for this year and we're excited about what we're doing in Tech Solutions. I want to encourage Listeners and analysts, go to our website, see what we do there.
We're not just evaluated reseller. We are able to provide Great solutions to our customers manage their technology 20 fourseven. Moving to Slide 35, just as a comment, we've recently Embarked on several broker dealer initiatives as more broker dealers have RIAs and brokers working remotely To be able to give them their total solution, charge them on a per seat basis, and really enable people to work at home safely, securely with 20 fourseven Help desk to be able to do remote compute. I think once again, we see cloud services as a significant market opportunity And Newtek is very well positioned for that. Slide number 36, we talk about our payroll and insurance solutions.
We're excited about The performance of those businesses, they have historically been slow growth. They're growing nicely this year. We'll probably have some more information at the end of the Q3. And we look for them to finally begin to contribute to earnings and dividends to the BDC. Slide number 37 in summary of our earnings report for the first half This year with our forecast in the second half as a BDC, clearly we've demonstrated a diversified business model, a proven track record An ability to take a business that consistently outperformed the Russell 2,000 and the S and P 500 for over a decade.
We have over 19 year history Through lending cycles and great depth of management, I think it's important to note that Management's interests are very much aligned with shareholders. I think that's very important. We own about 5.1 percent of the outstanding shares. We love dividends. We love share appreciation.
We are an internally managed BDC. I think that's important to note. So we're not getting paid for growth in assets. We're getting paid for performance. Very important to note, I will comment that From an individual perspective, my cash bonus for last calendar year was 0.
I did get long term compensation in form of Stock for 12, 24, and 36 months worth of work. But in Newtek, you perform, you get paid, You don't perform, you don't get paid. So we believe that what we're suggesting is not self enriching any of the executives Or people for making this decision. We believe this is in the best interest of all of our shareholders and stakeholders and that's why We've contracted to buy National Bank of New York City and look forward to Discussing that transaction a little bit further, so I'd like to turn everyone's attention to the second deck, The second addendum to the investor presentation dated August 3, 2021. I want to also relay That information regarding the proposal to withdraw Newtek's election to be treated as a business development company will be contained In the Newtek proxy statement when the document becomes available, stockholders should read the proxy statement when such document becomes available.
The proxy statement may be obtained free of charge when available from the SEC EDGAR website And the company. So with that said, I'd like to turn everyone's attention to that particular deck. I will probably read this again At the conclusion of this discussion, just to make sure everyone's heard it. So looking at the information that's in The second deck for today, the purpose of this deck is to kind of separate real important Salient facts provide some more information, why we think we make sense dropping our business Into a bank holding company and subsequently buying a bank. I've had people say, gee, why are you buying banks?
Banks are out of favor. Nobody likes banks. Well, being that banks are out of favor and being able to buy a bank at 100% of book is a good thing. Why sell out of BDC? Interest rates are low.
People are buying yield. Well, that may not last forever. And particularly as we're looking at Current market conditions and rates rising, we just think that this is given our current business model, which is a growth business model, We're better situated in a financial structure to be able to benefit from a better growth structure than a BDC, which is really not situated Typically as a growth structure. Let's go to Slide number 3. So if we go to Slide number 3, It's a slide that talks about the actual transaction to acquire National Bank in New York City, basically $20,000,000 cash price For book, intensified at 100 percent of book and we believe that what we can add to National Bank of New York City It is a great digital platform to be able to provide financing and digital solutions.
We believe we can Transform our combined entities into a technology enabled bank. We believe that we don't need nor do we want or desire a large real estate footprint nor do we need or want or desire commercial bankers All over the United States. We are a technology enabled bank, utilizing technology to provide the best product services and solutions to our customers. And I think it's important to note Newtek's got approximately 450 employees. So we're not short of human beings that can work with clients Digitally or telephonically to be able to provide the solutions that they need for loan assembly, for payment processing, for tech solutions, For insurance or payroll.
I'd like to go forward to Slide number 4. And this is an anticipated well capitalized institution that being Newtek Bank and Trust, the banking subsidiary and the potential holding company. You could see looking at these ratios and once again this is Illustrative of what our current capital base looks like plus the projection or an estimate what the bank will look like on a going forward basis. You've got when we say the other day, this is a well capitalized bank, some people call it's 10, that's 11, that's 12. No, we have a lot of Capital going into this particular institution.
So the holding company and the bank will prospectively On a guess on an educated assumption, StartUp is a well educated institution. Slide number 5, once again, Our potential profitability targets for the bank holding company, for those people that invest in banks, A bank with strong ROA, 1.5%, maybe some at 2%. Why are we able to achieve these? Well, we've got a business model that is a growth oriented model. We are the business model that we've managed over the course of time And been able to perfect it where others have not really done that well in SBA 7 lending or 504 lending or Payment processing or payroll solutions and be able to put those into this structure.
Obviously, diversifying our cost of funds, Continuing to use some commercial sources of funding and use core retail deposits, which tend to be more sticky and a lower cost, Clearly beneficial. You could see that by increasing those deposits, we'll be able to generate higher rates of return. You could see these profitability targets on an after tax basis, we believe keeps us in the game with respect to potential market multiples on similar Institutions and product categories, which all of you can make those assessments yourself. Even in the stress case where deposit costs Higher than we currently estimate, we're still able to generate very exciting ROAs and returns on average tangible common equity. Let's go to Slide number 6.
Profitability targets. Well, a lot of bank holding companies and banks today, they love Get that other income versus spread income. So most banks are primarily driven by interest income less the cost of deposits. It's fairly stable, not very exciting. That's why banks typically trade at book and it's typically why they can't grow very much.
However, we're seeing that the world is changing and the market is changing and tech enabled banks such as Live Oak Bank, Square, SoFi And other institutions like LendingClub are positioning themselves in the market To be able to safely and conservatively grow the book and grow earnings and revenue over time. So when you look at on Slide number 6, the pretax income other business lines, you got payments, you got tech, you got payroll, you got you have all these other Incomes that are coming in, you got gain on sale, you got servicing income and you could see that we do believe and would target obviously This particular bank holding company and bank to be a growth vehicle. Going to Slide number 7, these are Benchmarking illustrations of where we'd like to take the institution. Obviously, if you look at ROAs Significantly higher than traditional banks that are not tech enabled, same thing for return on average tangible common equity. And obviously, we start off with High percentage ratios of tangible common equity are significantly higher than Most other institutions in the space.
So when we hear about comparisons to NAV and tangible book, that's fine. There are others that make compares to that and there are some that may not. There are some that might just look at growth of earnings over time, which we're Anticipating and potentially projecting, and all of that will show up in the, proxy prospectus. I think it's also to note the price multiples of some of our competitors in the market, whether it's tech enabled bank or Commercial Finance Companies, we look we do believe we look more like them than the traditional bank That's making car loans or credit card loans to consumers. I'd like to move everyone's attention to Slide number 8.
I think the important aspect of Once again, this slide is to give an illustration of what we think the bank holding company, BHC or FHC Financial Holding Company, Which is an elective under the bank holding company act that we may decide to take. Once again, very well capitalized. I do want to point out, We have a note at the bottom of the slide talking about the $173,000,000 of goodwill. Now I think it's important to know where does that come from. So In the BDC, we've got our payments business, which has got a very healthy plus $100,000,000 valuation, our tech solutions business, Other portfolio companies that I believe the total value of those businesses around $250,000,000 Net of debt gets down to 173 Well, in a BDC, you've got to purge your earnings.
So those assets are on our books at 0. When they get transferred to the bank Using purchase accounting, I do want to point out these statements are not audited and can't be relied upon nor any of my forward leaning comments here. I really enjoy making those statements by the way, I want you to know that. But relative to that particular $173,000,000 number, We've had people look at and go, well, gee, that's just your typical basic grandmother or grandfather's goodwill where I bought $100,000,000 of assets and I paid $110,000,000 $120,000,000 because I like to have the whole thing fit together, because I'm paying a premium above book Or it's on the books. Well, it's the same principle and most likely this will be GAAP based goodwill.
But understand these are assets And I'm throwing off $14,500,000 to $6,000,000 of EBITDA, dollars 20,000,000 $25,000,000 of cash flow. And That's a different kind of goodwill than just paying a premium above book value of assets. So what I'm telling you isn't GAAP, But it's an important thing to note when you try to figure out what the tangible book value of this business is And you don't necessarily include that because those will prospectively be cash flowing earning assets. Slide number 9, one of the comments I heard is, gee, you're going to need to add all these People are going to have all these expense. We have the mother of all advisory teams, From legal to individual advisors to prospective bank boards, I've got the biggest consulting team I could ever imagine.
And with that said, we have expensed this bank going forward. We have factored that. And so when we come out with projections In the proxy prospectus, in addition to that, these are people who currently work for the company. I don't think people realize we do Most things that banks do today. And when you look at a resume of a Brian Schulman, who was EVP, Chief Credit Officer, Al Spada, who ran the ABL business at Banco Santander Brian Lawn, who is SVP of Peoples Bank's Commercial Real Estate Business, Mike Ovis.
It goes on and on and on, including Peter Downs, our Chief Lending officers got 20 years of experience in banks and Nick Young will be the President. We've got the talent. So please don't underestimate Newtek. With respect to doing under the Newtek, you can go to Slide 10. Slide 10, a little bit of an unusual slide.
I want to comment that past Stock performance and circumstances are not indicative of anything that one could estimate going forward. But this is a very good Example of our history, particularly as a BDC, when we completed the conversion on November 12 And we did a REIT IPO transaction. I think there's $12.50 stock price, not including the feet of the banks. And that was fairly transformative. A lot of people ask the same questions that are being asked today, but in reverse.
Why are you going to a BDC? Like, it doesn't make any sense. No one's going to understand you. And we believe at that point in time that, That particular capital structure would work for us. We could make it work.
Although we don't look like any other BDC, we're not even close. We were able to make it work and that structure fit us well. We're able to raise more equity. We're able to raise more debt. We're a much larger company today.
We're much better capitalized today. And as we look forward, we see continued growth in our future. And the structure that enables us to grow past A 2 to 1 cap that we have in the BDC that enables us to retain earnings so that when we grow, we could potentially grow a portion of our business With bank depository money instead of having to sell a dollar's worth of stock and $1.03 or $1.04 of debt every time, which is very dilutive from a share count. So with that said, this is an indicative slide that one could look at and draw their own conclusions from. Moving to Slide number 11.
In summary, We have a diversified business model, providing multiple streams of income, gain on sale, Servicing income, payments, tech, mind you a lot of these businesses will be sitting up at the bank holding company and We certainly appreciate that diversified stream of income. This is our first rodeo. We've been a publicly traded company since September of 2000. We've consistently outperformed the Russell and the S and P. We do believe that the bank holding company will be in the best long term interest of the company and all its stakeholders.
It's the same company, just dropped into a different structure. You're not going to be seeing us sell toasters and making car loans. I do believe we're going to round out our product offering by being able to offer the new TechOne dashboard to clients and be able to resell that to other financial To me, that's extremely exciting. Our interests are very much aligned with shareholders. I mean, I don't know anybody can say they're not aligned.
So if you think the dividend is going to get cut, we're cutting our own dividend to ourselves. And we believe in this particular Transformation, just like we believed in that transformation a long time ago in November of 2014 into a BDC. We also think that shareholders can gain from stock appreciation, which they've done in a big way, as well as prospectively subject to regulatory review and earnings received and Board declaration, a bank dividend. We believe by changing our corporate structure, we're going to broaden and enhance our access to finance its growth and actually reduce the risk of the overall company. We also believe we're going to be in a structure That's more readily accepted by a bigger pool of investors.
And I'll also relate back to 2014 where we did a reverse split. And people said 9 out of 10 business do reverse split, the stock was down, 19 out of 20, 99 out of 100. Well, it actually worked for us. And we did that to be able to broaden the base of people that could buy the stock. Well, we're doing that now.
This will be a structure That doesn't alienate existing shareholders that have gained from historic capital gains and dividends. And We can't talk about the magnitude at this point in time, but we plan on continuing our business model, which is to grow That business and grow the cash flow over the course of time. We're excited about the new Tech 1 dashboard. We'll be able to talk about that more and more as that further develops. And certainly appreciate everyone's paying attention.
And we covered a lot of information today. I'd now like to pass the presentation to Nick Leger. One other thing I want to repeat. Information regarding the proposal to withdraw Newtek's election to be treated as a bank of business development company Will contain the Newtek's proxy statement when such document becomes available. Stockholders should read the proxy statement when such document becomes available.
The proxy statement may be obtained free of charge and available from the SEC and your website in the company. Go ahead, Nick. Nick? Operator?
Yes, sir.
Okay. Nick Squall got trapped and he's dialing back in. Okay.
Okay.
Operator, any chance you could You could try to give them a call.
Hey, Barry. Hey, Barry.
Okay. Go ahead, Nick. You're up.
Thank you, Barry. Good morning, everyone. If you can find a summary of our Q2 2021 results on Slide number 39 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slides number 4142. For Q2 of 2021, we had a net investment income of $15,500,000 or $0.69 per share as compared to a net investment income of $29,700,000 or $1.42 per share in the Q2 of 2020. Please note that income related to the PPP is included in investment income.
Adjusted NII, which is defined on Slide number 40, was $27,000,000 or $1.20 per share in the Q2 of 2021 as compared to 28,500,000 or $1.37 per share for the Q2 of 2020. Focusing on Q2 2021 highlights, We recognized $36,600,000 in total investment income, a 21.6% decrease over the Q2 of 2020 total investment income of $46,700,000 Interest income related to the fees from the PPP was the primary driver for the decrease. We recognized $25,500,000 of income related to the origination of PPP loans on $297,600,000 of PPP loan originations During the Q2 of 2021 as compared to $34,700,000 of income related in the Q2 of 2020 On $1,100,000,000 of PPP loan origination. Moving on, there were no material distributions from portfolio companies for the Q2 of 2021 as compared to $2,300,000 in the Q2 of 2020. Total expenses increased by $4,100,000 quarter over quarter or 24.2 percent mainly driven by an increase in SBA 7 loan referral fees due to the higher loan origination volume.
Also, compensation related costs and other loan administrative expenses. Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during 2nd quarter totaled $14,100,000 as compared to $1,700,000 during the same quarter in 2020. In the Q2 of 2021, NSBF sold 142 loans for $87,400,000 at an average premium of 14% as compared to 20 loans sold during the Q2 of 2020 for $19,100,000 at an average premium of 7 The increase in realized gain was attributed to higher SBA 7 loan origination volume in the Q2 of 2021, combined with higher average premium prices when comparing to the Q2 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 Q2 of 2021 was $2,700,000 as compared to $2,900,000 in the Q2 of 2020. Overall, our operating results for the Q2 of 2021 resulted in a net increase in net assets of $17,400,000 or $0.77 per share and we ended the quarter with NAV per share of $16.38 I'd like to turn the call back over to Barry.
Thank you, Nick. Operator, we'll take questions now.
We will pause for just a moment to compile the Q and A roster. And your first question comes from the line of Mickey Schleieni from Ladenburg.
Yes. Good morning, Barry. Hope you're well. Barry, a high level question about the conversion to a bank holding company. My understanding is part of the Rationale for that is to lower your cost of capital by collecting deposits.
So could you describe to us how Newtek will compete for those deposits. For example, do you see yourself competing with online banks who tend to pay more for those deposits than brick and mortar banks?
Sure. I think that, first of all, Maggie, there's such a, I'll call it delta between currently financing growth with $1 of equity through a share issuance And $1,300,000 of debt where our baby bonds are 5% or 6% To being able to raise money at core retail deposits, whether they're at 1% or 1.5% or even 2%, Right, because it's debt and using the capital base and the leverage, right? Yes. So How we go after that, we've got 100,000 referrals a quarter, $400,000 a year. And when you look at that Newtek One dashboard, which is an aggregating tool For our business, it's the single sign on, deposits, loans, payroll, Google Analytics, Visa, Mastercard this day this year, this day last year, this quarter this year, this quarter I mean, we're going to have the tools that others are imagining.
By the way, all this stuff is in place. It's just a function easy for me to say my development guys are probably going to shoot me for this. They just have to put it together, make it work And present it. So with that said, that's currently being worked on. It's not a fantasy.
It's not a dream. And these are tools that we currently use today. We talk about unlocking shareholder value. This is going to unlock shareholder value That you can't see in a BDC. Most BDC investors don't see us as an operating business.
I understand, Barry. So if I I want to make sure I have your Thesis, correct. Are you going to go after the small business borrowers that are your Target market in terms of their cash management or are you also going to go after the owners of these businesses in terms of their personal Cash as
well. Yes. So it's a good question, Mickey. We're not intending And it's a great question actually. We're not intending to be a, well call it a consumer bank.
However, A majority of the deposit money in this country is from business owners of banks That have their commercial account and maybe a personal account in the bank. So, we might do an accommodation loan here or there, but we're We want the business banking relationship. We want to provide those business solutions. We're not going to be In the securities business at all, that's not what we do. We're going to stick to the core things that we do today, Lending, payments, insurance, payroll health and benefits, HR solutions, things of that nature.
So not from that perspective, not that much of a change.
That's helpful. So if we think about all those borrowers that are Already existing customers of Newtek, you've underwritten their loans. You have a sense of well, more than a sense, you know their balance sheets. Any Scope of how much cash is on all those balance sheets that you might be able to capture at least partially their deposits?
It's I mean, I can't speculate a number, but it's unfathomable. I mean, And we want to be careful not to step on our alliance partners and we won't do that. But I mean, I've got 25,000 PPP loans. I've got 100,000 referrals a quarter. I mean, it's just big, big numbers.
And we also have a lot of borrowers Today, they come into us directly. I mean, we've developed a quite a significant Viral marketing plan because of what we're doing. So I mean the concept of At least in today's world, getting $300,000,000 $400,000,000 $500,000,000 of deposits, that's currently within my imagination. That shouldn't be Big deal over a fairly short period of time.
Okay. That's helpful. I understand. I'm going to just switch gears a little bit toward the 7 Market, as we know, the federal government temporarily suspended the 55 basis point guarantee fee And increase the guarantee to 90%. If I'm not mistaken, that expires next month.
That's helped drive up the secondary market prices. So I realized that the question I'm going to ask is difficult to answer. But when you think about your given your experience, when we think about the 7 day market next year With the economy doing well, but without those two catalysts, along with the potential for interest rates to climb, Yes. How do you see 7 pricing developing next year? And how do you see 7 volumes next year versus This year, which is going to be a phenomenal growth year for the economy.
Sure. So I mean, I'll give you a fairly wide range, Mickey, which hopefully, I mean, I Probably won't help you that much. But I mean, if you go back and you look at the history, it's 110.5 to 112 type market and it depends upon whether you're doing the The 10 year paper, the 25 year paper and the mix. Plus, from our standpoint, we look to enjoy The benefit of expanding our loan products. So those referrals, they don't come to us for 7 loans, they come to us for loans.
And many of those clients Would qualify for bank loans. And with lower cost of deposits, you can put that business on and make good money off of it. So We're not I think it's important to note, we're still going to focus on obviously The attractive business that we've been in, in 7a and 504 and non conforming, but great growth opportunity for us. And I think the market Next year, I mean one thing that I don't think we need to be afraid of, well, who knows, I'm not an economist, but People are talking on CNBC this morning about 5% GDP, 9%, I mean big numbers. And you put all this Government spending and stimulus out there.
So then you got the question of rates rising, which by the way, that's good for banks. So that's one reason why you want to buy the out of favor bank, because the out of favor bank didn't really look good When rates were flat, nobody wanted to buy banks and people say banks are highly regulated. I would like to point out that The OCC put out a bill in just last week on SBA and small business lending, which we read that they want Banks to do this profitably and have the right risk measures in it, but it also indicates that they want Financial Institutions to provide funds to this important segment of the market.
Thanks for that, Barry. That's helpful. My last question just sort of looking at next year versus 2019, which as you You pointed out in your prepared remarks was sort of the base here we can think about. How would you compare the time and resources it takes to underwrite A PPP loan versus your non PPP loans, the ones you've done historically. And how much unit volume do you think The company can now support with its current headcount, but more employees working remotely compared to 2019.
So it's a good question because PPP loans to assemble and fund, I would say It's probably 30% to 50% of the labor. Now the back end, however, which is the credit memo, the committee And the funding, because you got to take liens and do a lot of other stuff. It's not just the amount of labor, it's The fallout rate from a PPP loan, once you have it aggregated, is not very high. So you'll have a greater fallout rate. So but When you talk about how we've improved our capacity to do more business And that's why I go back to that 2019 adjusted NII to current dates, particularly in this construct That will enable us to grow more.
These are all very powerful additives That put us in a position for the future that we want to have the best corporate structure to take advantage of it. So I'm going to tell you that, I'll put it this way. Let's say the 25,000 units, I'll just cut the number and this is not a number that you should rely upon. But let's say it's equivalent to 5,000 units. I mean The ability to do significantly more loans has been enhanced and these loans are bigger sizes as well.
I The average loan size of non conforming is $5,000,000 The average loan size, I think of a PPP was like $50,000 The average loan size of our 7 business is about 8 So, I'm not suggesting that we're going to do $5,000,000,000 of 7 loans, but you can see that With the advancements that we've made in technology, in management changes, we've grown the business significantly and I believe in the right direction And are well positioned for growth in the future.
I appreciate your time, Barry. That's it for me this morning. Thank you for taking my questions.
Thank you, Mickey.
And your next question comes from the line of Paul Johnson from KBW.
Good morning, Barry. Thanks for taking my questions. Congrats on a good quarter and obviously being an important Facilitator of a critical program for the U. S. Economy.
But as you approach, I guess, the closing date or The proposed kind of closing date of the merger or the acquisition of the bank, do you expect to make any changes to your capital structure along the way in anticipation of the conversion?
No, I don't. I don't expect to see changes in the capital structure. I do not.
Okay. What about
loan originations? Is it pretty much business As usual, or do you expect to make any kind of changes to, I don't know, the type of yields that you're putting into the book or the type of loans that Your underwriting, any changes to your underwriting practices?
Yes. Obviously, we're a little bit more selective relative to Credits coming to us, that we think are pandemic or COVID problematic, things like gyms and Hair Salons, for example, which we wouldn't have thought twice about, now we do. So We're a little bit more selective in certain categories and other categories we like a little bit more. So I think it's still a very big diversification box With respect to the mix, no, I think we gave pretty good guidance on what we think the 7 book will look like, the 504 book, the NCO book. No, I think it's This business is and I think it's a good question because once again I want to repeat this.
This is the same business that's going to be dropped into a different structure. And we're going to add a few product lines to it, but it's going to be we're going to be positioned in a different light. Newtek Bank and Trust and Newtek, the bank holding company will be looked at entirely different by customers Then Newtek, the BDC, particularly with the dashboard.
Sure. That's understandable. And then switching over to the salary expense for the quarter, it's Understandable that that's obviously higher quarter over quarter. I know you noted that you had increased headcount by about 25% or so. I Do you expect salary expense to be kind of running around these levels sort of up into the acquisition or Do you expect them to moderate at all kind of post PPP?
Could you repeat that, Paul? I'm sorry. I'm not sure I gathered that.
Sure. Yes. I'm just asking about the salary expense. Do you That will be running higher salary or even just higher overall G and A, kind of heading into the acquisition at all?
Yes, I think you've already got it embedded. So what you've seen through Q1 and Q2, I think you've got it. I think it's already there.
Okay. And then lastly Yes,
I mean, I think it's Important to note, Paul, we've been adding to staff for growth and whatever the structure we wind up in, We've added to the staff to do PPP. So no, I don't see any Major change. I mean, frankly, I could tell you expenses that will get reduced from being in the bank holding company and the bank structure than being in a BDC A lot of these entities are going to wind up going into the banks. You don't need tax returns. You don't need independent SOC 1s.
We've got this well calculated. So no, we don't see expenses going crazy in here.
Do you think that you would have to make any additional hires for prior to closing for the bank?
Maybe 1 or 2, but I think the hiring of Nick Young, also I mentioned in the second addendum deck some of the in house talent that we have That have 20, 30 years experience in the bank environment can fill some of these things in. Obviously, We're very well advised. We're very well schooled across the board from our advisory team. So we know what we need to do, what we need to put in place. We we're doing what we need to do to position ourselves.
And obviously, a lot of that will also come out based upon our discussion with The regulators as we go forward. But no, I think we're I think we've got good estimates out there of the business in whatever form we wind up in.
That makes sense. Thanks for that. And lastly, my question, either for you or Nick, if You can answer this, but I realize you chose to retain income down at the control income or the control company level for this quarter. We haven't seen the filings yet. You would expect to see that be showing up obviously in slightly higher marks maybe for the This quarter, is there anything in particular that was driving that depreciation?
Nick, can you answer that one?
Yes, I think that was just when we took a look at some
of the Run rates on some of the portfolio companies, just making sure that the multiples are in line with the forecast, nothing out of you.
Got you. Okay. Thanks. That's all for me.
Thank you, Paul.
And your next question comes from the line of Scott Sullivan from Raymond James.
Good morning and congrats on a good quarter.
Thanks,
Ken. Was
You're kind of breaking some interesting barriers in the FinTech space here. Only the only one in theory to be serving the middle market business. Pro form a, how do you compare Newtek versus LendingClub, SoFi, Square or even Live Oak?
They're kind of interesting comparisons, Scott, in that LendingClub, SoFi were non bank lenders that wound up Merging into or acquiring a bank. Live Oak, I believe started off as a bank with a technology Bend to it, so they're all a little bit different. LendingClub and SoFi consumer lenders, Live Oak is probably the closest thing to us relative to a fairly significant footprint in Government guaranteed loan programs as well as only having one branch. Their expense ratios are Entirely different than ours, which we're proud of ours versus theirs. So I think that They're all very decent comparisons, particularly when the market looks at them and doesn't value them At multiples of tangible book because they all traded 2, 3, 4 times tangible book, not too dissimilar from how we traded at A multiple to our BDC NAV and at the end of the day, stocks trade based upon I mentioned it's the old As we learned in school, it's future earnings stream.
And the reason why banks typically traded at low multiples of book was because they couldn't really Grow the business much because they did very few things and in a competitive environment. By the way, no different from a BDC. So the fact that we were different than every other BDC is what enabled us to get that stock price appreciation as people became Okay. I've begun to become more comfortable with us and familiar with the model. So those that got in early, when we made that transformation did well.
And What we're trying to do here is to educate people in as best way as we can with being transparent And give us much information without going too far ahead of ourselves. But I think those are decent Comparisons for us because in all cases, those are organizations that felt that a banking structure and a banking environment reduces risk and improves their ability to grow and diversifies their funding sources.
Fantastic. Thank you. And I don't want to put words in your mouth, but I believe I heard you say CapEx is not going to be materially higher. Can you speak to any development costs with the dashboard or any other technology enhancements
You see before you.
Yes. Obviously, we've begun discussions And I should say we will be beginning discussions, I don't know if they've actually taken place yet with the core platform provider To begin to integrate what they have into the dashboard. Obviously, The payroll software we've got, the insurance agency software we've got, the Vault we've got, The new tracker system we already have, we have the capability to project all of that other data that I talked about, The Visa, Mastercard block so these are all pieces that we have. It's really a function of our internal development team putting that product We've actually got some time to do it before opening day, which we forecasted 6 to 9 months 6 to 12 months out. So, we have some work to do, but we've
always been
a bootstrap company. We've been able to develop Real good technology without spending crazy dollars on it.
That's terrific. Thank you and congratulations. Good luck.
Thank you, Scott.
And your next question comes from the line of Robert Dodd from Raymond James.
Hi, Gary. Sorry. Sorry.
One of This slide, I mean, you said in 30 days, 45 days, you'll give some preliminary guidance for the Q1 2022 dividend. And the footnote obviously says, presuming you're still a BDC. If things go according to your Expected timescale, which I recognize is tricky. Would you actually expect to still be A BDC in the Q1, I mean, you've said it could take 6 to 12 months to get approval for the bank purchase and would you leave The DBBC election potentially to presuming is approved to the very end or would you anticipate doing that Earlier in the cycle.
I think it's Without getting into the precise timing of what transpires, I do think it's more likely than not, So as a probability, so I'm saying it could go either way, but more likely than not, we'll probably be paying a BDC dividend in the Q1.
Understood. Thank you for that. On one of the questions, kind of follow-up to Paul's question. When Would you anticipate I mean, the BDC baby bonds you have outstanding, I mean, to your point that they're quite expensive Well, a lot of Staten, certainly compared to deposit. When would you anticipate potentially refinancing those out?
Or do you currently
So Thanks for the question, Robert. By the way, that's a great question from a transparency standpoint. So my belief Is that the covenants in those bonds are really leverage covenants. So that Theoretically, as long as we don't violate that leverage covenant on a consolidated basis, they can remain outstanding. And One of the bonds is fully callable.
The other one, I think, is callable after February with some kind of a make whole provision for a 12 month window. I think that we will wind up working through that with bondholders and we've got a lot of options on that. So Not a that isn't a concern. We probably have, and we've had conversations with several of our bank lenders. So, we're going to need to make some adjustments on that here and there, but not a big major I'm not overly concerned about the baby bonds or where we're situated with some of our other lenders at this point in time.
I appreciate that, Harry. And the covenants are exactly what I was getting at. So understood on that front. And then just last one, if I can, Follow-up to Mickey's question.
Lee, your questions are good. They actually helped me.
Thank you. On the Yes. Most business deposits in the U. S, I mean, there's a lot of them, but they're not typically in time locked CDs, etcetera. Would you anticipate that your deposit targeting sourcing and cost of funds, Is that anticipated to more be short term callable deposits?
Or do you expect CDs to play a material Role in that and if so, where are you going to get the CDs sourced from because they're typically not going
to be, I wouldn't think,
Business deposits aren't typically locked up like that.
Sure. I think the answer really, Robert, is a little bit of both. Once again, I go back to the dashboard, the relationship that we have with borrowers And the ability to offer them more than just a rate. So no, I see us with having developed Both core retail deposits and in some cases, Which you've described, which some of the other FinTech lenders have tapped into like Square, for example. I believe the entity they acquired was an Industrial Loan Corp.
I can't say for sure, but most ILCs are limited And they can't take demand deposits. So those have got to be Retail related and brokered, so to speak. So I think that we'll have a mix of both, but I don't think we're going to I do believe we're going to be able to bring in With our REACH core retail deposits as well as a full mixture of funding.
Got it. Thank you. Thank you.
Thank you, Robert.
And your next question comes from the line of Rob Brock from Pompont Partners.
Congrats on a great quarter and congrats on your decision to change your corporate structure. I think it's going to be a create a lot of value for your investors. My question this morning for you Barry has to do with the operating businesses, Like your cloud business and your payroll business, how might these change or benefit as part of a bank holding company?
So I think that all of The portfolio companies are projected to be part of the bank holding company. So Merchant Solutions, payroll, insurance, tech solutions will be part of the bank holding company. And obviously, we We'll be having discussions with the regulators. We feel pretty good at this point that what we have will Fade into a bank holding company or a financial holding company structure. It's conceivable, it may not.
We'll have to deal with that if that occurs. But We think that going to your financial institution and being able to have All of your organizational documents, your operating agreement, your secretary certificates, your leases, Your insurance policies, employment agreements, all your core documents stored there, which is what we do today In our secure FileVault, we take in loans or we take in data using the FileVault through the other services or solutions that we have It's a great value add for a customer. So that's where we see that fitting in. So Remote work, remote computing, mobile computing, whether it's through a smartphone or a laptop today, Really important. And businesses that are 5 to 50 employees, they can't afford a CTO or a CIO.
And those entities really, They can't go to Azure or AWS. They need somebody that can help them. They'll pick up the phone, answer the questions. That's what we do And Managed Tech Solutions. And it's been a it always hasn't been a bed of roses, but it's been pretty good lately, as you could see by The pickup in these businesses, tech businesses typically traded really good multiples and derived cash flow and provide Other storms of recurring income rather than spread income that you get from a bank on coupon versus deposit expense.
So We're pretty excited about putting these solutions together and we think we're going to get a lot of traction. We think that there's good reason to be doing this.
Great. Thanks, Barry. Good luck.
Thank you, Rob.
And your next question comes from the line of Arham Khan from Arham Khan and Partners.
Hi, good morning. This is Colin. How are you doing?
Good morning, sir.
Hi, how's everything? Just wanted to start with some high level questions for you. Let me ask you about diversification as we move out of COVID. We're still kind of in this Area where we're vaccinated, but we're not fully protected, and we're still learning. So I wanted to know If there's opportunities that you're looking at now that you might not have looked at 12 months ago, that are starting to become attractive.
Is that from a lending perspective or a business?
Yes, it's from a lending perspective.
I would say we're cautious because of the Delta variant. And although, speculatively, I think the Delta variant Will come and go quickly because of the level of vaccination. It's still all over the news. This morning Southwest, for example, reported that they've got a lot of cancellations on flights in near terms, which is indicative of the fact that Consumers are being concerned in changing some of their behavioral patterns. So, I just think that no, we have not We still have a bit of a caution flag for things like travel and entertainment and I think businesses of that nature.
So no, we're not and as a lender, if we get a coupon, we win. If the business goes bad, you get a haircut. So it's not so we try to be cautious from a lending standpoint.
Okay. And then just to follow-up on that regarding geographic diversification, are there any regions that you're looking at, Anything that's shaken up over the last couple of years or the last year that you're seeing maybe there's regions that you want to diversify into that you don't have a presence in, People are moving or any demographic shifts?
Yes. That's by the way, diversification Has been a great asset to Newtek, as we don't have. I think we've got one state that's at 11 And then everything else was below double digit. So when you take the top 4 states, Texas, New York, Florida, In California, that probably represents about 65% of GDP and we're probably half of that when you add up all those states for us. So You really didn't want to have too much in New York City or too much in LA and who would have ever believed we were going to have a pandemic.
Some of
the things we're saying or seeing is like who would ever believe that would ever happen, But it did, which is why diversification is really good. So no, we're not looking to undiversify. We're not looking to concentrate in a Texas Florida, where there's growth, we like diversification. We think that's the best way to manage your risk. Okay,
okay. Got it. And then a follow-up on somebody else's question that I've actually spent some time on, not particularly because I'm interested into it, but because you just can't avoid it at this point. And it's about the LendingClub and many other of these The FinTech lending platform, some of which are nothing more than simply just aggregators, some of them do more as you see some of them are acquiring banks. But I think they all tell different things.
Some of them have predicted modeling, underwriting, different things like that. But at the end of the day, What I believe they're really disrupting is just enabling some technology that certain banks in the past, a lot of them had not embraced. But you're coming in from a BDC structure, but you're already new tech where you have technology enabled Infrastructure for your clients. Where do you stand in incorporating that kind of technology? Because they are taking some market share away from certain banking institutions, but they're doing that through what I believe is either Coming down on the spreads between, for example, credit cards versus personal loans or just enabling technology.
How do you come in and make sure that doesn't happen?
I mean, one could take the position that a credit card, a consolidation loan from the LendingClub is a termed out Credit card that gives the borrower a benefit because they've got term, reduces their payment And they're able to utilize technology to come to the same credit decision as they did in the credit card. That's not Newtek. We do full A loan over $350,000 government and uninsured piece, we're doing a full underwriting, 20 to 25 page credit review. So we use technology to expedite some of the processes that banks have used. For example, we don't need branches And we don't need 200 or 2000 commercial bankers because of our utilization of technology.
However, People that can put credit memos together, lawyers in house that know how to gather the documents and close the deal and make sure we get all available liens, Closures, we don't that's not something that we skimp on. So we think that we've actually got the technological solutions that not only Our bank can use, but other banks can use to be able to reduce losses. Now, When you look at some of these other FinTechs, the credit review from a personal standpoint, it's really not much more different than a consumer loan. So I guess my point being is, I don't know once that activity gets sort of filled where they go with it. And They are taking advantage of that low hanging fruit.
We are too or would as well. But we do have a much more longer term vision With respect to utilizing technology to acquire clients, to get 100,000 referrals, To be able to fill up a file vault securely so that the borrower can connect their lawyer, their internal controller, their tax return preparer. Those are the things that improve a customer experience, but don't cut on being able to underwrite and put a fully Funded packaged together. That's a major difference between us and them at this point in time. We've used our technology.
We don't have a black box. There's no algorithm. It's Basically 5 Cs of credit, which can be converted into some of that, but it's still a full underwriting.
Okay, got it. Okay, that goes to all my questions. Thank you very much. Best of luck to you and congratulations on the recent announcements.
Thank you for your interest. I appreciate it. Operator, anymore?
Yes, sir. Your last question comes from the line of Mickey Sheindlin from Ladenburg. Sure.
Barry, just a quick follow-up. Do you think the federal regulators are going to require Newtek to appoint a CFO to meet their regulatory requirements?
Yes, we will most likely have a CFO at the bank level for sure.
And is that Do you have candidates inside the organization that you can think can take on that role?
I do. I will say that I think from our perspective that the candidate Our candidates need to have extensive experience dealing with bank regulation, compliance. I think the forms of the 13/13 forms are making sure that all the ratios are intact. So Yes. I mean, we have a pretty good pool of applicants internal and external To the company at this point in time to be ready, if that event does take place.
I understand. That's it. Thank you for the Update.
Thank you.
And there are no further questions at this time.
Okay. Well, I want to thank everyone for joining the call. Greatly appreciate the interest. I know this was a long one, But very worthwhile and gave us a good opportunity to disseminate a lot of information under fair disclosure to all the investors and analysts out there. So thank you very much.
Look forward to reporting the Q3. Have a good day.
This does conclude today's conference call. Thank you for your participation. You may now disconnect.