NEWTI - NASDAQ

Ladies and gentlemen, thank you for standing by. And welcome to the Newtek Business Services Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions].I would now like to hand the conference over to you speaker, Barry Sloane, President, CEO and Founder. Please go ahead sir.

Thank you very much, operator and good morning everybody. I'm Barry Sloane. Welcome to our third quarter 2019 financial results conference call. I would like to call your attention to PowerPoint presentation that we have on our website. Go to newtekone.com. That's a relation section. You could see a copy of the PowerPoint presentation. That will also be archive with the audio part of our presentation today.Here with today is Chris Towers, our Chief Accounting Officer and he will help me through the presentation. I want to thank everyone for their interest and investment in Newtek Business Service Corp. stock symbol NEWT.Let's go forward to slide number two. We would like to show our historical equity performance. We've consistently outperformed the S&P 500, Russell 2000 and OBC Indices. As of September 30, 2019, our five-year return 210%, our three-year return 108%, our one-year return year to-date 18.3%, which does not include the Q4 dividend which is coming out to shareholders of record.Slide number three, representation of where we sit versus other BDCs on a sector evaluation comparison. We are currently trading below market capital sort of I refer is the magic $500 million which sort of brings you into small-cap land out of microcap or nanocap.BDCs with the market low $500 million created a median price income of 0.85. Most of the BPCs obviously are externally manage and trade at around par or discount and provide median current yield of 10.6%.Internally managed BDC's were in that bucket, trade at a median price of NAV 1.22 and a core yield of 7.8%, our current market cap of $4.36 million that does not include shares that was done in the current quarter.I would say, we're somewhere between as of today $235 million to $440 million in market cap including those shares. We're trading at a price to NAV of around 1.46 and a yield of 9.6% and that as of November 4. We look forward to continuing to grow the business which clearly is our goal in getting into that magic $500 million market cap space.Going to slide number four, third quarter financial 2019 highlights net investment loss NII improved by 62.5%. As a GAAP measure of income for BDCs does not include the gain on sale that we've received in the SBA 7(a) business regularly since 2003. It was quite an improvement over three months. We have a slide talk about why that's improving and why that's important.Adjusted NII which includes our capital gains for the three months ended September 30 and improvement over 26% over the prior year's quarter, net asset value continues to grow $15.41 a share, that's up from $15.19 a share on December 31, 1.5% increase, debt-to-equity of 133%. We always create pro forma analysis which we'll show on the next page because our balance sheet tends to get inflated at the end of the quarter.That inflation is typically a 10-day event where it takes us to settle our government guaranteed loan sales over the end of a quarter liquidating into a broker receivable. Slide number five illustrates our pro forma debt-to-equity at September 30. Once again I view it although it's not GAAP, I think it's important to note that, I think short-term liability as we're selling the government guaranteed pieces of our SBA loans and are typically self liquidating within 10 days.On slide number six; looking at a quick nine-month review similar to the three-month review in a quarter, we have really nice gains. Once again, NII, a 58.8% improvement on nine months of this year versus nine months of last year, adjusted NII including the reoccurring of net of capital gains, an increase of 20.4% over adjusted NII from your prior ended September 30, 2018.On slide number seven, the importance of NII. So obviously one of our goals is to create reoccurring income on a regular basis, NII is in most BDCs reflective of that because most BDCs sort of keep portfolio as of loans, they lever them, they clip coupons and the income is fairly stable, fairly stable over years, it’s fairly stable over quarters, in many instances it doesn't change much at all.Our NII improved by 62.5%, and 58.8% on a per share basis for three and nine months. And that's occurring for the following reasons. Number one, our securitization costs are becoming better and better. We have a slide to demonstrate that in the portfolio, which shows advance rates increasing and spread on selling those bonds getting lower and lower and narrowing.We talked about our cost-of-debt financing is continue to decline. We recently issued a – I would refer it as a baby bond. The coupon on the baby bond was five and three quarters. That baby bond trades NEWTI, NEWTL in the capital markets trades on NASDAQ and that's trading somewhere in the yield of around 5.5%. We have a slide to discuss that as well.We believe in a diversified business model. We're talking it about today. We're talking about them in the last call. We talked about it for years. That is a major strength of Newtek Business Service Corp, a unique and different business development Corporation.We are looking forward to future dividend contributions from Newtek Conventional Lending. In the end we will talk about which represents JV that we have with BlackRock TCP, also dividends from other portfolio companies are anticipated, continue to add to this trend not only dividends from our payment processing into the Newtek Merchant Solutions, but we've got optimism over a technology business. We'll talk about that later in the presentation, as well as contributions from servicing income.These are all different and disparate sources of income. Some away from credit such as the servicing area and contributions from portfolio companies are in areas like Merchant Servicing, Tech solutions and other particular entities.On slide number eight, we talk about our securitization. The Newtek securitization securitizing our uninsured portions of our SBA 7(a) loans. I need to note those securitizations are treated as a financing. There's no accounting gain or loss. We did that securitization.We closed our tenth and largest small business loan securitization. All of their securitizations have been rated by Standard & Poor's. They will maintain their rating or been upgraded.We're able to issue 118 million of notes, 93.5 million of A notes which are rated single A. 25 million of B notes rated BBB, the combined weighted average spread over LIBOR, 183 basis points over LIBOR across both classes, LIBOR recently clocked at about 1.8% at one month LIBOR, so you got a nice 3.84% approximately cost of money.On that securitization our notes are a prime plus two and three quarters you've got a nice net interest margin on that particular portfolio. This is the largest securitization we've done with the best advance rate and the best pricing. The deal was very well oversubscribed gathering about $451 million orders on a $118 million of notes across both classes.We talked about public offering of notes, NEWTL, the closing price on October 31 was above par, ours is $25, they traded 25.80, at a yield 5.57% on our notes, which are rated A minus by Egan Jones giving us an investment grade rating.One of the accomplishments of RBC this year was the creation of Newtek Conventional Lending which represents a joint venture with BlackRock TCP to originate loans in the Newtek Lending Ecosystem which we'll talk about. That do not conform with the government programs. They don't conform the 7(a) loans. They don't conform to 504 loans. Therefore we hold these loans nonconforming conventional loans and they fit into this pocket.The returns of this business come from leverage in the warehouse. As we make a loan we put it in our Deutsche Bank warehouse facility. We also get leverage on future securitizations, which will be done at advance rates that we are anticipate will be better.Then the warehouse advance rates which we'd experienced also similar types of advance rates in our 7(a) securitizations. We get servicing. Offer these assets. We get approximately 100 basis points of servicing. That is not part of the venture. That's 100 basis points of servicing accrues to the BDC in its entirety.We obviously get a net spread on loan coupon. Our portfolio typically will throw off a net coupon to the venture of around 7.5 on average given the current level of the five-year treasury. These loans are typically fixed for five years then adjust at five years spreads to the five-year treasury with long amortization schedule.We also earn loan origination fees, unlike the 7(a) program where we get no origination fees. We were earning approximately 2% net origination fees on these loans. You should take a look at our documentation on the JV. Documentation shows that the BlackRock and Newtek's participation and the joint venture earns 10% preferred returns.Obviously we both believe that our returns on equity will be significantly higher than that, but we stayed at the coupon at around 10. We do anticipate higher ROEs on this particular business than 10%.The non-conventional conforming loans that we create are mark at a premium. If you look at our scheduled investments when Q comes out we had the current portfolio mark around 105.60 based on a discounted cash flow analysis that we've used also on our 7(a) loans assuming that will have a 20% severity – excuse me, a 20% the full rate 40% severity for the cumulative life of the portfolio. With the coupon and spread using discounted cash flow analysis, at a spread to where the securitized market is coming out we feel very comfortable with that particular mark.On slide number 11, we'll talk about total loan servicing activities across the Newtek Business Service Corp as well as Portfolio Companies. So obviously a Newtek Business Service Corp. we have the servicing asset on our books. When we do with SBA 7(a) seven a loan that servicing is capitalized.However, it's important to note that over the course of time that servicing income does generate A, cash flow and B, income it gets distributed up to the BDC. I believe in calendar year 2018, Chris, I think the income was around $4 million that got distributed up from servicing and we anticipate similar or better numbers to that in 2019 as a servicing income on the 7(a) portfolio continues to grow.At a small business lending which is one of our portfolio companies, we service loans for the third parties. We have approximately $500 million worth of loans in servicing for other parties and the servicing of the BlackRock joint venture will also show up in SBL as well.Slide number 12, talking about a focus on dividends. We've paid a third quarter 2019 cash dividend of $0.58 a share. We reported $0.63 adjusted NII for the particular quarter ended on September 30, 2019. We also -- the board has declared on October 10th of fourth quarter of 2019 cash dividend of $0.71 to round out a $2.19 – excuse me, $2.15 per share dividend for the full calendar year. That will represent a 19.4% increase over 2018 annual cash dividend of $1.80.Important to note, please do not straight line that dividend. I'll repeat that two more times. Please do not straight line that dividend. Dividend do fluctuate quarter-to-quarter. I use the word, there's seasonality to it because its typically happens in the second half of the year, which just based upon the business cycles of our operating businesses.I think it's important to note, the level of year-over-year dividend growth is not typical in the BDC sector. So we answer a lot of questions and talk to a lot of people about being different. We like being different. Why we like different? It's been very positive to our shareholders.Historically, we have made every single dividend payment advanced. And that's a five-year track record important to note. We've never missed paying dividends at of our earnings and that's a five-year track record that we are proud of.When you go to slide number 13, at the bottom of the slide you could see that we have increased our dividend from $1.50 to $1.57, $1.69, $1.84 all up to $2.15 for 2019. Including the current forecast for 2020, which is a $2.19 per share dividend, which we do anticipate paying out of earnings, that's a 10% increase in dividends on an annualized basis over effectively a four to five-year term.The operational aspects of Newtek Businesses, because all these businesses are operational in nature even the lending business does create quarter to quarter fluctuations and as many times as we say this is a still somewhat confusing particularly when you show up in algorithms that show up in earnings releases where did we meet it, that we beat it, that we not beat it. Those headlines that show algorithms don't tend to always be accurate in my opinion.Slide number 14, we wanted to point out which we never done historically in a slide format the growth of NAV. As of the December 31, 2015, $14.06 per share as of September 30, 2019 full year obviously $15.41, its an increase rounding up to approximately 10% over the term, increase in NAV almost 2.5% increase in NAV per year.So we're proud of the fact that this is a unique BDC, it's a different model. We provide financing to small and medium-size businesses which would BDC supposed to do. That's it, arguably $100 million leverage loans aren't necessarily within the context. In addition, we provide services and mentoring solutions to small and medium-size businesses. That's done out of our portfolio companies.On slide number 15, we talk about lending highlights. Frankly, some of the bulleted highlights aren't necessarily highlights, that might be viewed as low-lights. I think it's important to note however, taken in aggregate we had a great quarter and we're proud of our quarter.We're proud of our diversified business model. We're proud of the fact that our shareholders can rely upon us to have a five-year track record of paying out a growing dividend, although arguably this year growing it by 19.4%, certainly was a pretty big task. We're very comfortable with what we put out there, and we look forward to forecast to delivering our fourth quarter results.Newtek's small business finance, $114.3 million of 7(a) loans that was 6.6% decline over $122 million of SBA loans for three months. We'll talk about that in the next slide. We have forecasted and lower our origination guidance of $520 million, that $520 million is hit for the end of year would represent still a 10.8% increase over SBA 7(a) loan funding for the full calendar year, I repeat, that's an increase. The industry is down over 10% for the year.Our 504 business also a revision down to approximately $60 million of loan closings for the calendar year 2019. We did talk about the Newtek Conventional Lending a 50/50 JV between Newtek Commercial Lending, as well as a wholly owned affiliate of BlackRock TCP. We have post over $55.2 million in non-conforming conventional loans for October 31, 2019. We think we might be able to get to conservatively a $75 million close number between now and the end of the year.The company recognized approximately $420,000, $430,000 of dividend income that is Newtek's portion of the JV during those particular three months. I think it's extremely important to understand the decline in the 7(a) business was one of our loan products. But if you look across the ecosystem, the lending ecosystem of Newtek which does lines of credit, 504, 7(a), nonconforming based upon full expectations.We do think we're going to come in at around $655 million to $666 million worth of loans. We'll bring your attention to slide number 16 at this point compared to $511 million worth of loan closing in 2019, 29.1% increase.So I think there are lot of investors that sort of gotten used to looking up a portion of our income and looking at it as sort of, I'll use the term P times Q, Price times Quantity. And that's nice. But we've always said we're diversified. We get income from various different segments of our business operation, many of them are creating reoccurring, regular income such as our portfolio spread, servicing income, payment processing business and income, technology business where we have like our model, our model delivers despite certain adverse consequences.I want to be clear, we didn't anticipate loan funding is coming in as low as they are in the 7(a) space. However, we did make adjustments. So some of that adjustment was anticipated as of the August September timeframe. Some of that was anticipated. And we'll go over that in a quarter.I think when you look at our lending ecosystem. We've described in recent press releases what factors affected 7(a) lending. First I want to talk about process. From a process perspective we do not use commercial bankers. We do not use brokers and we don't use BDLs. Our referral funnel which we anticipate acquiring north of $20 million worth of referrals this year clearly requires further fine-tuning.Referral volume remains robust. So we did have some problems I would say with respect pulling loans through the portfolio on a timely basis particular for the third quarter. So one might ask why is that? What is this thing about process? For most of the people on this call are financial and not necessarily operational.From an operational perspective when referrals come through the funnel business service specialists are in the position to figure out, is this is a line of credit, is it a 505, is it a 7(a), does this fit this non-conforming bucket. That takes certain skill set. In addition to that it takes a couching of the borrower to get that portal fill because these four different loan types go to four different loan committees.Some of those members on loan committees are new. Some of them are been replaced. Some of them are getting indoctrinated in terms of how we did business. I think we overestimated the transition and the strain on the system between being able to do more loans in 7(a). Needless to say, if we did more loans than we reported in third quarter for 7(a) we would've really blown these numbers away based upon the referrals that are coming to us, so the referrals haven't gone away. The product hasn't gone away.We have tightened up our underwriting guidelines a little bit, which in our opinion we can talk about that. We think is a very prudent thing to do at this point in time in the lending cycle. We've added new lending executives that are now new to our system. We have new people on the 7(a) committee.Our lending platform is supporting four different loan products. There are certain categories of loans that we believe based upon the market slowing, we're not talking recession, we're not talking depression, we're talking market slowing. In the credit business at the end of the day you don't want to be in a third standard deviation.So as the market slows, loans might be a little more marginal, we might decide to decline. That was the deciding factor in not closing some of these loans. Once again, some of them are process, some of them decided. You're ended September 30, 2019, fourth largest SBA lender in the United States including banks and we're still the largest non-bank SBA lender.And as I mentioned to you, the ecosystem is forecast to close 660 million loans in 2019 compared to 511 million loans last year. We don't think that's a bad thing or a bad performance.Slide number 17; we talk about sort of our pedigree, some of the things we talk about important to note from a risk perspective. On the uninsured portion of our 7(a) portfolio, the average loan size 177,000. Quite nice diversification as loans are typically fully guaranteed I will say not typically they wholly fully guaranteed by the borrower and they typically have got commercial real estate collateral behind them from a severity standpoint extremely important.So our competitors in the space right now that are doing leverage loans at four, five, six times, seven times EBITDA numbers light on covenant, if you don't have a 3% GDP across a wide swath of these credits you had a problem being able to repay that debt back or getting the debt refinance.Frankly, we don't have those issues. We invest in no growth to slow growth businesses. We're proud of it. We win, we had a coupon. We lose we get a haircut. So if the businesses are a growing businesses, it’s nice from a lending perspective. The only thing we get is a coupon.Slide number 18 addresses our loan pipeline. We feel pretty good about it. We've been able to pull loans quicker through the pipelines until loans often don't meet the criteria. Importantly, growth in loan referrals continues to be robust. We are looking at what I believe will be a $20 billion – approximately $20 billion a year in referrals which will give us plenty of opportunity going forward to do growing but sizable amount of 7(a), sizable amount of NCL, 504 et cetera, et ceteraPremium trends; for the quarter 11.49 [ph] reflect the prior quarter. Important aspect of the seasoning of our loan portfolio, as you could see, September 30 2019, about 29 months we are approaching what we call the belly of the default occur between 18 and 40. So we do think that our currency rate will suffer little bit and our NPLs will also go up. It’s not unexpected. We'll talk about that in the ensuing slides.We're in the peak period of the seasoning of the 7(a) loan portfolio relative to the full frequency and as well as severity. Slide number 22, important to note on this slide is our currency rate from September to June sequentially in the quarter ended pretty flattish, a 82.88, 92.81, decline from your earlier currency rate about 95.25, so about 2% differential.Slide number 23, looking at the categories of sub and nonperforming 7(a) loans. That number did increase, but once again not totally unexpected giving the seasoning of the portfolio of the 10.23 a sequential adjustment over the quarter of [Indiscernible] to 1% year-over-year 1.5%.I think it’s important to note that the rate reductions we had this year was 75 basis points, should help some of these NPLs and non-performers come back into a performing status. Now that sort of a novel concept amongst many people in the lending business, but is not a novel concept for small and medium-size businesses that first we guarantee loans with multiple guarantors and pledged their personal assets, home, marketable securities, they put everything on the line. So we put these examples recently in our analysis.So, here's a loan on slide number 24, $365,000 loan, the status is NPL, loan transferred to liquidation, loan paid in full. Here's a loan NSBF 908XX, loan funded for $1,050,000, loan defaulted, transferred to liquidation $1 million out it.Slide number 25, $5 million loan became to a 60 days past due. Borrower continued to make partial payments work on a resolution. Borrower sells commercial real estate loan pays in a full. I think the biggest important factor that we have is we've been in this business now for 16 going on 17 years.We have a track record and history of frequency and severity. We have tracker record and history on our credit guidelines and methodology, as well as severity which would include cost interest and cost to collect. So if you look at charge-offs on slide number 26 fairly flattish.Important to note, don't look at us using bank statistics or what's an NPL, what's defaulted. We basically analyze our portfolio using securitization techniques which we think are more appropriate using static pool analysis, looking at seasoning of the portfolio, looking at actually what we are losing on loans.Important to note, our loans are mark-to-market every single quarter. So if loans go into non-performing or sub-performing we take a balance sheet write down immediately and those loans do get marked off over time.Slide number 27; loans recovery and severity trends. 7(a) loans that were transferred into the nonperforming category in the third quarter from the forming category were marked down based upon the collateral and cash flow of the business are 21%. We're still using a 40% overall analysis in our forecaster and marketing our portfolio. One quarter does not a trend make, but the rationale for this is more of our loans in recent vintages were backed by commercial real estate.We do view those as higher quality from the standpoint of election on severity and the value of real estate collateral and the business over the last five years has also increased and improved. These are the things that reduce severity. Important to note we collect personal guarantees. We sell businesses we sell assets. We work collateral. Our head of servicing has been with the company over 10 years and has done a very good job in terms of recovery.Slide number 28 and 29 I'm not going to go through because it's a reoccurring slide that many of you are familiar with, with respect to income and cash generated of the 7(a) business. Same thing with our 504 business which we'll show you how that works.Moving forward the slide number 34, important to note, when you look at slide number 34, this is typical of the type of income that we get. We get a gain on sale when we sell a conventional loan off. We get points on the 40% second and the 50% first. We get spread income to good business. That struggle this year we could talk about that in Q&A if you like. But at the end of the day it's creative, it's beneficial and it's a great product for our borrowers.Slide number 35, talk about our large portfolio company, Newtek Merchant Solutions. I use the word large, because given its size we put a lot of disclosure and information in our case and Qs on it. Is of a size from an SEC perspective and it's appropriate to get granular in the business and to be able to talk about things that are going on within the merchant services area.Portfolios marked at about seven point -- the business marked about seven point six times EBITDA. It is a growing business. You look at some of the public comps, I think that's importantly it's important. Sometimes people say, oh yes, they mark their portfolio companies up. I don't really know what we're supposed to do. When the public comps are going up and the cost of capital is going up and the cash flow keeps increasing. We don't really have a choice in that matter.When I go to slide number 36, I think it's important to note that the NMS Q3 year to-date adjusted EBITDA increased by 14.7% over the same period last year. It's also important to note that in the calendar year last year we sold off a portfolio of accounts to Elavon. The portfolio generated a cash gain in the fourth quarter of 2018 at the portfolio company level.The amount of reoccurring pure cash flow out of the portfolio was about a $1million a year. Yet when you look at our EBITDA numbers on this portfolio company this year versus last year it's increased despite losing a $1 million worth of reoccurring cash flow. We like this business. We like all of our businesses. It's one of the reasons why investors invest in Newtek Business Services.In 2008, 2009, I must remind everybody we've been a public company for 19 years. Everybody said get rid of lending. And it was the technology solutions business and the payments business that kept this company going. I had advisors so to speak, that said, "Gee, give this lending business away. Well, we were glad we didn't do it. Just like we're glad we didn't give the technology business away. Just like we're glad that we continue to work the payment processing business despite the fact that it's a competitive business. But we're doing really well in it. We're proud of it. We're appreciative of it.So we've distributed a good amount of income up from the payments business this year. That income is cash income. The cash wasn't needed at the portfolio company to run its business. It was distributed up subsequently taxed at the appropriate rate and then given shareholders. We like giving income to shareholders. We like increasing our dividend over four or five-year term periods of 10% a year. Yes. We're not out of the tax. Yes we look a little different. Yes, it's hard to model. That's what you're investing in and we certainly appreciate everyone's interest and investment that they made in the company so far.Slide 37 is sort of a futuristic important note of what we're doing in the payment space. I'm not going to spend too much time on it because I know this is a long call. POS on cloud, we acquired a 51% interest in POS on cloud. We're going to be able to provide our own branded POS system to our alliance partners. We're excited about this POS system. The POS System currently provides services to a state government and a large assisted living company.This is going to be able to be co branded either Newtek payment systems or ABC bank payment system. So what is the POS on Cloud going to be able to do? We're going to be able to give end user customers the ability to process payments, the ability to integrate with the e-commerce website, the ability to integrate with the general ledger accounting software, the ability to integrate with Newtek payroll solutions so that we could do payroll, taxes, workman's comp and health insurance as well as give the client a window into the 401-K which we don't do.A depository alliance partners are going to be able to manage and operate accounts for payroll payments and distribute and sell their own 401-K. This is a winning opportunity. We are progressive. Payments is a technological solution offering and we think we're in a good space in this particular areaSlide Number 38. Technology Portfolio Companies. We have three of them. Important to note, we're starting to see a dramatic turnaround in Newtek Technology Systems are Phoenix based cloud-computing portfolio company that provides primarily managed services. We do not compete with Amazon. We do not compete with Azure. Matter of fact, we manage workloads for our clients in Amazon, in Azure and on-prem, as well as manage our own data center.I think it's important to note, we are going to get a little bit deeper into Newtek managed tech solutions in our next earnings call. I'd like to get one more quarter under our belt. We think this business in terms of A, generating significant positive EBITDA. We'll also be able to generate income in calendar year 2020 and we'll be able to distribute up.Slide number 39, talks about the opportunity in cloud services. 40 talks about our esteemed analyst group [ph] and 41 also talks about the investment summary and rationale for taking a look at Newtek Business Services Corp.And with that I'd like to turn the presentation over to Chris Towers.

Thank you, Barry. Good morning everyone. You can find a summary of our third quarter 2019 results on Slide 43 of the presentation, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 45.For the third quarter 2019, we had a net investment loss of $0.5 million or $0.03 per share as compared to a net investment loss of $1.4 million or $0.08 per share in the third quarter of 2018 to the 62.5% improvement on a per share basis.Adjusted NII which is the finance slide 44 was $12.2 million or $0.63 per share in the third quarter of 2019 as compared to $9.3 million or $0.50 per share in the third quarter of 2018, a 26% improvement on a per share basis.Focusing on some third quarter 2019 highlights, we recognize $60 million of total investment income, a 29.4% increase over the third quarter of 2018. Interest dividends and servicing income were the primary drivers for the increase, with interest income increasing by 25.5% resulting from a higher interest rate on our SBA loan investments year-over-year and a larger performing loan portfolio.Distributions from portfolio companies for the quarter included $5.2 million from NMS, $150,000 from IPM, $250,000 from Cisco, $100,000 from Mobile Money and $428,000 from Newtek Conventional Lending, our joint venture with BlackRock TCP.Servicing income increased by 16.8% to $2.5 million for the third quarter of 2019 versus $2.2 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $997 million at September 30, 2018 to $1.2 billion at September 30, 2019.Total expenses increased by $2.7 million quarter-over-quarter or 19.7%. Salaries and benefits decreased by 34.4% primarily due to NSPF employees being hired by Small Business Lending, LLC or SBL, one of Newtek's wholly owned controlled portfolio companies on January 1st, 2019. SBL is a lender service provider that effective January 1, 2019 provides NSPF loan origination and servicing functions performed by its employees.SBL charge NSPF $2.1 million in the third quarter of 2019 for these services which is reflected on the consolidated statement of operations as origination and servicing related party. Total interest expense increased by $1.4 million in the third quarter of 2019 primarily due to higher average outstanding debt balances.Realized gains recognized from the sale of guaranteed portions of SBA loans sold during the third quarter totaled $11.7 million as compared to $11.4 million during the same quarter in 2018.In the third quarter of 2019 NSPF sold 147 loans for $89 million at an average premium of 11.49% as compared to 161 loans sold during the third quarter of 2018 for $100.7 million at an average premium of 9.29%.Realized losses on SBA non-affiliate investments for the third quarter of 2019 was $838,000 as compared to $806,000 in the third quarter of 2018. Overall our operating results for the third quarter resulted in a net increase in net assets of $10.6 million or $0.55 per share and we ended the quarter with NAV for share of $15.41.Now, let's turn the call back to Barry.

Thank you operator. We're open for questions now.

Thank you. [Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Yes. Good morning Barry. I wanted to follow-up on some of your prepared comments. So if I recall correctly going into this year one of your main goals was to increase the close rate using existing staffing. So clearly there has been some disappointment on that metric despite having a good solid year. How do you -- what are you anticipating in terms of operating leverage going into 2020 to meet your goals?

Thank you, Mickey. And I will tell you I don't read from a script. You could probably tell that's. So we're typically not prepared. I will tell you that relative that a close rate and this is just focusing on 7(a) only. Our 7(a) close rate is anticipated to still be up 9% or 10% for the year. And if you take all loans into consideration it's between 20% and 30%. So our close rates actually done pretty well. What's the second part of your question Mickey?

Well, I guess I'm not quite following because it sounded like you were disappointed in loan volume and you were attributing that to not being able to close as much as you would like. So even though -- are you saying that even though close rates went up they didn't go up as much as you would have liked?

That's exactly correct. Yes.

Okay.

Look, the math is, the 7(a) business was up 10% and to be transparent as we always are. The delta between what we think we're going to do for the year which is $520 million versus our former forecast was below. As we were came in at the forward forecast or a portion of that delta, okay? We just would have had bigger numbers. We would have distributed more income, didn't happened. I think that is based upon an inflection point in the business relative to process and personnel. We got the appropriate amount of referrals from the ecosystem, the right product came to us, but we didn't execute. I do think these are bugs that may take another quarter to get worked out, but I think we'll be back on our feet in the near term. And I think it's also important to note that we think the economy has changed and there's certain credits within the universe of credits that we see that we probably wouldn't do in a weaker economy.

I understand. And the second part of my question was what are you sort of assuming for close rate improvement if any going into next year?

Good question. I think that we're at the beginning of this year we forecasted around the call it 25% growth in the 7(a) business. I think we're probably more in the range of between 10% to 20% going forward. First -- and it's important to note that's for 7(a) only.

Yes.

Once again there is an ecosystem which we think is very valuable in this ecosystem when you reduce the amount of 7(a) and you go in to 504, you now get fee income, you now get different kind of gain on sale, you get no balance sheet. In nonconforming you've got much bigger loans. You're doing securitizations out of them. And you're getting reoccurring income off of the spread that's based upon the joint venture giving earnings up in a fairly high manner. So at times this is the one thing about our company in life no matter what you do there's always someone else, so what about this or what about that.So the reliance upon the 7(a) gain on sale or what I refer to is P times Q. Hopefully in the future will be a smaller portion of what we do as we grow this business model, grow the ecosystem and diversify into the company that we have said we're going to be on conference call after conference call.

I understand that that's helpful, Barry. One more question, my last question. So looking at SBA 7(a) prices, there was some moderate weakness in the 25-year tenure in the third quarter. But the shorter terms were stable. I'd like to understand your view on how the market is thinking about 7(a) pricing in general longer versus shorter and in particular given some clearer signs that the economy is slowing?

Sure. So, one important to note, our pricing from Q2 to Q3 was essentially flat. And our pricing from Q3 this year to Q3 last year was a significant increase. And again on sale income third quarter this year to third quarter last year was up a little bit, I'll say practically flat for all intents and purposes. We believe the big determinant about pricing relates to number one, volatility and refinancing. And with interest rates softening a little bit particularly on the short and the curve with a 75% decline, and the curve, I believe eventually steepening out, we do anticipate that there'll be some burnout in the ability of the borrowers to be able to go get another fixed rate conventional loan.The market I think has shown that. So when you look at one of our slides which has sort of like a five-year or six-year average over prices, we're like 11.5 [ph] and the average I think over that timeframe is like a 11.7 [ph]. So it's kind of near equilibrium. Now the shorter term paper, Mickey, in my opinion has increased in price and the longer term paper has come down sort of on a hyper technical basis there is a pool assemblers they strip out an IO coupon which is very sensitive to prepayments. That's why the longer term paper has come down because of that hyper technical coupon stripping. I personally don't believe that that's a long term trend. I think from a market standpoint if you model us between one ten and a half to one eleven and a half I think that's a fairly safe, that's once again we give you five or six years worth of history where these things have traded at, they've actually trading at significantly higher levels. We tend to haircut those prices because as you know the business you can't miss.

I understand, Barry. That's really helpful. I appreciate your time today. That's it for me.

Thank you, Mickey.

Thank you. Our next question comes from Harold Elish with UBS. Your line is open.

Good morning Barry. Going back to the 7(a) sector you had some growth in a sector where it appears that the economy is slowing down a little bit and that originations overall are down. Do you have a sense from whom you're taking market share at this point? I mean where is that coming from as it gravitates towards Newtek?

Yes, Harry, I appreciate that. I think that the important aspect to note is when you look at our business we disintermediation the broker or the BDO. The broker or the BDO is typically in the SBA 7(a) business the one that brings business to banks and non-bank lenders. So what we do is we create borrowers. If you sample the portfolio of 20,000 small businesses and you said, Gee, how to get an SBA loan and what it is? I bet you a very small percentage of them would know what it is or know where to go. And we typically originate. I say, typically I don't think we've cut a rate in seven or eight years.So we're not in competition, but what we do is we sell payment and we sell payment whether we're in the conventional space or whether we are in the -- or whether in the SBA space. What I mean by that is, we're at ten to 25-year amortizing lender, fully amortizing lender, no balloon [ph]. So when the borrower comes to us that's we talk about. We talk about 10 to 25-year amortizing loans. We talk about single digit interest rates. And borrowers care about payment. So that's where we're getting market share.We're educating business owners how to apply for a business loan using our file vault, using technology. So they're not sending e-mails with PDFs, they're not meeting with brokers that are misguiding them. That's where we're getting market share. We're using technology in a process of splitting up the function that a broker typically does who works for the highest commission and goes to the lender that will given the most generous credit profile. That's the differential. That's a differentiator. And there's such a universe of business owners that don't know where to go to get these kinds of loans. That's what we're benefiting from them.

I appreciate, Barry. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Fred Cannon with KBW. Your line is open.

Thanks. Thanks Barry and good morning. So I have just two questions. One on the referral volumes on slide 19. You have a year over year growth in the nine months, what we calculated that this quarter the third quarter was down quarter-on-quarter and down year-on-year and I was wondering if we're at least seen a sign of a slowdown in loan referrals?

Fred, I don't see that. I'll check with our back office this morning and the fourth quarters coming in pretty good. So sometimes a trend doesn't necessarily happen in a quarter. Maybe we lost one or two players. We're constantly – portfolio is constantly – we're finding people coming in and coming out. So answer that would be no. Similar that we don't think that there should be a take away and a trend that our recovery rates have gone from 60 to 80, but it did happen, so we report it and just track it on a regular basis. And so I don't see that as a trend.

Okay. Thanks. And then one other question on the -- and this just my kind of confusion. On the BlackRock deal that the nonconforming loan piece of the business. On Slide 11, you have -- you say that you're the servicer and you get 100 basis points of servicing on that portfolio. At the same time I believe your receiving interest income on that too. I'm just wondering how you get servicing and interest income at the same time. I'm just not quite clear on the accounting?

Appreciate the question. So let's say we've got an A credit, a B credit and a C credit and let's say the B credit is treasuries plus five-year treasuries plus A 800. So, arguably, got like an 8.65 coupon, SBL services for 100 basis points. It gets a 100 basis points period end of story and the J.V. gets 7.65. So the equity in the JV is getting a 7.65 coupon, it gets warehoused and the Deutsche Bank facility would be close to 3.6%, 3.7%, then it goes into a securitization to get that spread income there.But the servicing income is a 100% ours. So theoretically let's say we get to a portfolio of use around number, $1 billion worth of loans. We would get $10 million worth of income, which gets laid onto our infrastructure in SBL, that's able to service those loans and had a lot of expense against it. And that is reoccurring income over time.

So that $400,000 that you show earning from the NCL this quarter, that servicing income and then any kind of net interest income?

No servicing income in there. The servicing income is earned by SBL. That income is origination fees and that income is spread income on the 7.65 and the example I got versus my Deutsche Bank cost of funding and that's the income.

Okay. So SBL earns these…

The other income, right, so the other income is earned by SBL separately, that's 100 basis points is a 100% earned by a portfolio company and Newtek owns 100% of.

Got it.

So there's no servicing income in the joint venture, none.

Got it. Okay. I need to get my head around it, Barry. But that's helpful. I just need to walk through it my own mind. I think Chris maybe you can help me on this. The JV document is in public filings?

The JV results and balance sheet will be in the 10-Qs and 10-K.

Okay, great. I'll be able to work through that then. Thanks Barry.

Thank you, Fred.

Thank you. And our next question comes from the line of Scott Sullivan with Raymond James. Your line is open.

Thanks for taking my call and congratulations on a great quarter.

Thank you, Scott.

I got a couple of questions. One partially answered. I'm always amazed at sort of the secret sauce you guys have in lending. I think the lot of banks would kill for the sort of loan growth that you have. You did go over that pretty well. So, I'll pivot over to could you speak to the diversification of your income sort of away from the SBA side?

Sure. So, I think that – I'd like to say it is what it is, but there's been a lot of focus on and I'll keep using the term P times Q. And that's the gain on sale that we've profited from over 16 or 17 years which relates to us making a loan, selling a government guaranteed piece and getting a gain on sale, which gives us very high velocity and very high return on equity. As a matter of fact our return on equity I believe is better than Main's over the last five years and better than Hercules. I got to go back and check that. I think that's the case.Aside from that we get 100 basis points to service an SBA 7(a) loan, that's another stream of income. We get dividend income from the Merchant Solutions business. We get dividend income from SBL for servicing third party loans. The other portfolio companies I think in particular Newtek Technology Solutions, although we haven't talked about it for a while. One of my investors likes to affectionately refer to me as Jeff Bezos as a joke because this has been a tough business for us for a long period of time.However we believed in the trade, trend in cloud we have failed to bring in the right management team in several iterations. We've brought in a guy who's made a tremendous turnaround and improvement in the business along with some more to help over the last six months. So that's going to be a contributor as well. Now your segway into Newtek Conventional Lending with BlackRock and we take the operational leverage of the new tech ecosystem. What is that? That's $20 million worth of referrals. That's a servicing operation. That's a loan assembly operation with the requisite technologies. That's an underwriting team that puts credit memos together rapidly by using technology that's going to require several loan committee. It requires a beautiful joint venture with BlackRock TCP to give us additional capital.So we're not forcing equity into the market and disrupting the movement of our stock price. And those loans, we get fee income which we don't get in 7(a). We get net interest margin in the warehouse and we're going to take advantage of the securitization technology that we've created from 2010 to current we've been 10 securitizations with the rating agencies with an investor base at 10 12 or 13 of some of the biggest institutions in the world to piggyback this. So that's going to generate out of the JV distributions which will come up, which is based upon spread income which should have a nice reoccurring aspect to it that we believe is accretive to the dividend.So I know your question was short, but actually I mean that this is what we talk about. However, I will tell you that a lot of people look at us P times. Q, P time Q, P times Q. We always say, diversification and we have a lot of diversified income streams and a lot of levers to outperform.

What would you say is the blue sky scenario for the JV?

My Chief Legal Officer tells me it's cloudy every day. So I will answer on that, but here's what I can tell you and I appreciate the question. The ability to provide 10 to 25-year amortizing loans at a single digit interest rate to businesses and markets wide open. That is not a bank market. Banks won't -- banks will not do those long-end loans. Banks will not do loans with frankly little or no covenants and banks won't do the over advance. All I'm describing is the credit criteria in 7(a). And we've just moved over to two bigger loans in this nonconforming segment.So we feel pretty good about it. We're going to take this quarter by quarter. And we feel good about our dividend forecast for next year to 2020. We feel good about approaching half a billion dollar market cap. Thank you 2019. What I say, okay, Chris. 2019, so yes, I think we're well set up for 2020.

Thanks. That's very helpful. One last question, could you speak to the net and to the NAV?

Look, I think that BDCs have a difficult time increasing NAV, because it's a static portfolio loans. I mean, you kind of can't get around that. So I mean, if you have a fixed income portfolio what's going to move the NAV on that portfolio. Okay. What's going to move the NAV? It could be equity kickers which it's clearly based on active, private equity market, IPO market et cetera, could be based on a reduction in rates. I don't know about that because we're pretty low. Could be based upon spreads tightening and we're at all time spreads. So when you look at the portfolio or NAV improvements, okay, given our other BDCs operate it's almost impossible to move NAV which is why most of them traded a discount to NAV for a variety of reasons. And a lot of our invest in leveraged loans because they've got to pay themselves 1.5% to 2% in order to be able to get to an equivalent dividend that we get to in the market.So what is our NAV increase? Well, we've got a very large portfolio company has done very well and is attractive versus public comps. We also now have the JV with BlackRock which we're creating assets that have valuation for the thing that it's created. So that's going to be a needle mover to now. We also have some of the portfolio companies that we'll talk about further like Managed Tech Solutions and also I think we'll be moving in the right direction. So look, I mean at the end of the day people typically buy BDCs for the coupon and next year for us it might be a coupon market. I don't know. It depends. I don't know if our Presidents Elizabeth Warren or its Donald Trump or its big Booty Gang [ph]. I don't know. I think the uncertainty no matter who it is putting politics aside is going to slow things down, because people like to know certainty.But I think that when you look at our business model and here's the important aspect, Scott, we're in -- we're investing in operating companies. These operating companies continue to grow. They have greater valuations. So even though the income from our lending business has grown significantly there's no valuation in NAV on that. The loans are just valued at the market value with the loans despite the fact we've got a 17-year track record. We have a securitization expertise. We have a so -- I mean there's a lot of value in our SBA business that isn't reflected in NAV. It's one of the reasons why I think we trade at a premium than NAV. But I don't think we're fully versed on that. And I've argued with analysts over the concept of valuation, the NAV and people put these magical ceilings like you won't trade above 1.6. If this dividend keeps increasing, investors will bid the stock up to get the reoccurring income. That's just -- I learned that from my MBA in 1984.

Thanks so much and congrats again.

Thank you.

Thank you. And our next question comes from Rich Kendrick with Stifel. Your line is open.

Rich?

Rich, if your line is on mute please unmute. If your phone is on speaker please lift your handset. We see no response. I will remove you from the podium. Our next question comes from Casey Alexander with Compass Point. Your line is open.

Hi. Good morning Barry.

Casey, good morning. How you're doing today?

I'm fine. Thank you. And forgive me if I -- I'm not trying to sound like a loaded gun, but I am going to ask a little about what about this, what about that questions.

No problem. Casey, we are always prepared for you. I always put on my flak jacket. So please go on.

The $55 million loan portfolio at NCL, how many borrowers does that encompass?

Typically we don't get into the granularity of the portfolio companies, Casey for a variety of reasons. But for you I think it's around 10 give or take.

Okay. And those are not -- in no way those are not SBA guaranteed loans. Those are outside the SBA program?

Yes. That's – we were at a whole explanation. We call them nonconforming conventional loans, correct.

Right. So, I'm kind of unfamiliar with the process of a DCF analysis on a loan that creates a mark as soon as the loan is made that doesn't have a government guaranteed relation to it that marks at 105.6 as soon as it goes on the books. Can you give me some more color on how that process works?

Sure. The way the process would work Casey and it's the same way that we mark their 7(a) loans. You see Casey you look at our case and Qs every quarter, right, for the last five years. And when you look at our uninsured portions of our loans, Casey, those are not guaranteed loans, right? Is that yes?

Yes.

Okay. We use the same methodology to mark these loans as those loans. Other words, they have no guarantee on it. They are effectively conventional loans in nature because they're not guaranteed. We take a 100% of the risk on that uninsured portion of the loan portfolio. So what we do is we're unique in that we use the securitization market. We know where single A is trade, BBB minus is trade, BBs and we spread a market clearing yield to the value with the loans based upon what we believe will be a 20% cumulative gross default, a 40% severity which is what we've experienced in the 7(a) world over 17 years.Although, we do believe the quality of these loans will be higher to come up with a price based upon discounted cash flow. That's how you do it. I mean discounted cash flow. It's nothing that we haven't done in the uninsured portion of the 7(a) portfolio. So it's risk. It's the same credit box. It's just the loans are larger. It's the same ecosystem. It's the same referring parties. There's nothing different doing.

Okay. Secondly, based upon your reported fundings in the SBA 7(a) business, I understand what you say about process providing some impediment, tightening your credit box, providing some impediment. So I totally understand those. Then based upon your fundings of SBA 7(a) in the third quarter it would presume hundred and eighty eight eighty five million of fundings in the fourth quarter to hit your $520 million target. Somehow that increase kind of doesn't fit with your comments regarding process and tightening the credit box. Can you give us some color on that please?

Yes. I mean I think that -- I think last year in the fourth quarter we closed about 150 million I think. And I wish I had a 100% crystal ball in terms of what's going to happen over the next 45 days because I could say, Casey, guaranteed it's going to happen. I think what I said on the call was that we're working things out with respect to the process and that we think it'll take a quarter or two.

Okay. That's fair. The dividend of $4.5 million during the quarter and I appreciate the breakdown. I did get a chance right all down so I'm going to have to go back to the transcript to get it. But what percentage of portfolio company net income, the cumulative net income of the portfolio companies of the quarter. What percentage was that 4.5 million? In other words was the portfolio -- the cumulative portfolio company net income 5 million, 6 million. I'm trying to get to what sort of dividend payout ratio of the portfolio companies that represents?

Well, Casey I think in the past we talked about this that approximately we've had years where 35% of our dividend income is paid at a portfolio company income. By the way what's great about portfolio income, Casey? It's taxable. But when it flows through to the investor they get it at 20% tax rate instead of their ordinary tax rate. So as a receiver of dividends I love portfolio income. As a percentage I haven't done it maybe Chris to do some math, while we go through the rest of your questions.But I think that from what I would refer to as an ordinary income number, I think that the game was only and I say only about a million and a half, but I think it's also important to note when I went to that slide which I'll try to pull out. Our ordinary income for the year is growing and it grew a lot over the third quarter even with the sale. So I'm not really sure where you're going with the question. But the point is if I create an asset and I sell it for a gain, right, so I monetize it. And that takes that reoccurring stream out of it. And I'm still able to get a more reoccurring, a higher reoccurring stream of income even after the gain, I think that's a great thing. And what's even greater is I get to give it to my shareholders at a lower tax rate.

Okay. Thank you for that answer. One last one. The loan delinquency over 91 days that more than doubled quarter-over-quarter and you have 175 loans in liquidation, I understand you're in the belly of the curve of the seasoning of your loan portfolio. I just wonder what type of manpower does it take to manage the increase in loans that you're liquidating collateral on. And has that had any impact on your ability to underwrite?

So what – 20 [ph] -- Got it. So I'm just wondering how much manpower you have for the work out team?

Doubbling Casey has my ears, my ears perked up. Could you show me where there's a double? I don't see a double. By the way, sometimes I don't see things then somebody like you tells me about and I got to look into them. So I'm just looking for the double.

Hang on. I got to scroll back to your slides.

Okay. Well, I'll help you. There's no doubling. But I will tell you that the size of our portfolio has increased significantly over the last year and continues to grow. I will also tell you that the prepayment speeds [ph] that we've had on the performing portfolio have been pretty quickly. I believe Casey we have approximately 65 or 70 people in our servicing area. We are an S&P rated servicer in two different units which is not hard. It's not easy to get. You've got to go through a rigorous process to get that rating. We also service for the FDIC, we're contractor, we service for the credit union regulator, NCUA. We have a servicing portfolio that I believe for others exceeds $500 million.

Yes. The slide I'm referred to in the doubling is slide 22 where loans delinquent over 91 days, if you look at those two columns, add up to $12.8 million versus the previous quarters $5.9 million in those two columns.

Right. So, I think it's important to -- a couple of things important to note. It's I think misleading to look at a bucket as things slid down in the bucket. I mean, the whole portfolio is growing. So when you have a growing portfolio you're going to have a growing number. That's why we do these calls so people get the right information. And what we've been able to demonstrate in slide number 24 and in slide number 25 is we have loans that are a 120 days, 180 days past due and they pay in full.However, the question really was what resources do you have to service those loans? So the resources that we have and we've had over --as our servicing pedigree which I just described to you. So I appreciate the question and welcome me out to Long Island. Come visit our people. Meet Gary Golden and meet his team. We brought in Brent Ciurlino from OCRM the Office of Credit Risk Management over the SBA. He's supervising all policies procedures which include servicing. We'd love to have you come in and spend some time with us.

Well listen I apologize for the lack of sophistication of my questions. I simply just try to ask questions to get to understand things that I don't.

No. I think your questions are precise. I just didn't understand doubling. But there's no doubling of defaults or delinquencies in our portfolio. There's a particular bucket where loans moved from one bucket to the next. So I just don't want to be misleading to listeners. That's all. Just like you don't want…

I understand and I appreciate you taking my questions.

Thank you, Casey.

Thank you. And I'm showing no further questions at this time. I will now turn the call back to our speakers for closing remarks.

Thank you everyone. Appreciate the Q&A. Appreciate the interest in investing in Newtek. And I thank you very much. Have a great day and a great quarter. Thanks for stocks up nicely too. Thank you.