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Edited Transcript of NEWT earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Newtek Business Services Corp Earnings Call

New York Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Newtek Business Services Corp earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry Scott Sloane

Newtek Business Services Corp. - Chairman, President & CEO

* Christopher Towers

Newtek Business Services Corp. - Executive VP & CAO

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Conference Call Participants

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* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst

* Frederick Lloyd Cannon

Keefe, Bruyette, & Woods, Inc., Research Division - Global Director of Research, Chief Equity Strategist and EVP

* Harold Elish; UBS;Financial Advisor

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Scott Sullivan;Raymond James;Senior Vice President

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. And welcome to the Newtek Business Services Q3 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker, Barry Sloane President, CEO and Founder. Please go ahead, sir.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [2]

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Thank you very much, operator. And Good morning everyone. I'm Barry Sloane. Welcome to our third quarter 2019 financial results conference call.

I would like to call your attention to the PowerPoint presentation that you have on our website. Go to newtekone.com Investor Relations section. You can see a copy of the PowerPoint presentation. That will also be archived with the audio part of our presentation today.

Here with me today is Chris Towers, our Chief Accounting Officer. And he will help me through the presentation. Wanted to thank everyone for their interest and investment in the Newtek Business Service Corp., stock symbol NEWT.

Let's go forward to Slide #2. We always like to show our historic equity performance. We've consistently outperformed the S&P 500, Russell 2000 and all BDC indices. As of September 30, 2019, our 5-year return 210%; our 3-year return, 108%; our 1-year return year-to-date 18.3%, which does not include the Q4 dividend, which is upcoming to shareholders of record.

Slide #3. A representation of where we sit versus other BDCs on a sector evaluation comparison. We are currently trading below market capital, sort of I refer to it as magic 500 million which sort of brings you into small cap land, out of micro cap or nano cap. BDCs with a market cap below 500 million traded at median price income of 0.85. Most of the BDCs obviously are externally managed and trade at around par or a discount, and provide median current yield of 10.6%.

Internally managed BDCs, we're in that bucket, traded a medium price of NAV of 1.22 and a core yield of 7.8%. Our current market cap, about $4.36 million (sic) [$436 million]. That does not include shares that were done in the current quarter.

I would say we're somewhere between, as of today, $435 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's as of November 4.

We look forward to continuing to grow the business, which clearly is our goal, and getting into that magic $500 million market cap space.

Going to Slide #4, third quarter financial 2019 highlights. Net investment loss, NII, improved by 62.5%. As the GAAP measure of income for BDCs does not include the gain on sale that we received in the SBA 7(a) business regularly since 2003. It was quite an improvement over 3 months. We have a slide to talk about why that's improving and why that's important.

Adjusted NII, which includes our capital gains, for the 3 months ended September 30, an 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, a 1.5% increase.

Debt-to-equity of 133%. We always create a pro forma analysis which we'll show in 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 the quarter, liquidating into a broker receivable.

Slide #5 I 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 as a 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 #6. Looking at a quick 9-month review similar to the 3-month review in the quarter. We had really nice gains. Once again, NII, a 58.8% improvement 9 months of this year versus 9 months of last year. Adjusted NII, including reoccurring event of capital gains, an increase of 20.4% over adjusted NII from the year prior ended September 30, 2018.

On Slide #7. The importance of NIIs, obviously one of our goals is to create a reoccurring income on a regular basis. NIIs in most BDCs is reflective of that because most BDCs sort of portfolio as of loans, they lever them, they clip coupons. And the income is fairly stable. It's 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 3 and 9 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, it's continued to decline. We recently issued a, I'll prefer to it as a baby bond. The coupon on the baby bond was 5.75. That baby bond trades NEWTI, NEWTL in the capital markets, trades on NASDAQ. And that's trading somewhere at a yield of around 5.5%. We have a slide to discuss that as well.

We believe in a diversified business model. We're talking about it today. We talked about it in the last quarter. We've 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 contribution from Newtek Conventional Lending, an entity that we'll talk about which represents the JV that we have with BlackRock TCP. Also dividends from other portfolio companies are anticipated to continue to add to this trend, not only dividends from our payment processing entity Newtek Marketing Solutions, but we've got optimism over our technology business. We'll talk about that later in the presentation. As well as the contributions from servicing income. These are all different and disparate sources of income. Some away from credit such as the servicing area and the contributions from portfolio companies that are in areas like merchant servicing, tech solutions and other particular entities.

On Slide #8 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 is no accounting gain or loss when we do that securitization. We closed our 10th and largest small business loan securitization. All of our securitizations have been rated by Standard & Poor's. They've all maintained their rating or been upgraded. We were able to issue $118 million of notes. $93.5 million of A Notes which were 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 in about 1.8%, that 1-month LIBOR. So you've got a nice 3.84% approximately cost of money.

On that securitization, our notes are at prime plus 2 3/4%. You've got a nice net interest margin on that particular portfolio. This was the largest securitization we've done with the best advanced rate and the best pricing. The deal was very well over-subscribed gathering about $451 million in orders and $118 million of notes across both classes.

We talked about our public offering of notes, NEWTL. The closing price on October 31 is above par. Par is $25. They traded at $25.80. The yield, 5.57 on our notes, which are rated A- by Egan-Jones, giving us an investment-grade rating.

One of the accomplishments of our BDC 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 to 7(a) loans. They don't conform to 504 loans. Therefore we call these loans nonconforming conventional loans. And they fit into this bucket.

The returns off 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 advanced rates that we are -- anticipate will be better. Then the warehouse advanced rates, which we've experienced also similar types of advanced rates in our 7(a) securitizations.

We get servicing off of these assets. We get approximately 100 basis points of servicing. That is not part of the venture. That 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 5-year treasury. These loans are typically fixed for 5 years. And then adjust at 5-year spreads to the 5-year treasury with long amortization schedules.

We also earn loan origination fees. Unlike the 7(a) program where we get no origination fees, we're earning approximately 2% net origination fees on these loans. If you take a look at our documentation on the JV, the documentation shows that BlackRock and Newtek's participation in the joint venture earns a 10% preferred return. 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 nonconventional conforming loans that we create are marked at a premium. If you look at our scheduled investments when our Q comes out, we've cut the current portfolio mark at around 105.60, based on a discounted cash flow analysis that we've used also on our 7(a) loans, assuming that we'll have a 20% severity -- excuse me -- a 20% default rate, 40% severity for the cumulative life of the portfolio with the coupon and the spread using discounted cash flow analysis. At a spread, the way the securitized market is coming out, we feel very comfortable with that particular mark.

On Slide #11 we talked about total loan servicing activities across the Newtek Business Services Corp., as well as portfolio companies. So obviously in Newtek Business Services Corp. we have the servicing asset on our books. When we do an SBA 7(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 that 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 our servicing income on the 7(a) portfolio continues to grow. Out of Small Business Lending, which is one of our portfolio companies, we service loans for 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 #12, talking about our focus on dividends. We paid the third quarter 2019 cash dividend to $0.58 a share. We reported a $0.63 adjusted NII for the particular quarter ended on September 30, 2019. We also -- the Board has declared on October 10 of fourth quarter 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 the 2018 annual cash dividend of $1.80.

Important to note, please do not straight-line that dividend. I'll repeat that 2 more times. Please do not straight-line that dividend. Our dividends do fluctuate quarter-to-quarter. I use the word, there's a seasonality to it, because it typically happens in the second half of the year. It's 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 do we like being different? It's been very positive to our shareholders. Historically we have made every single dividend payment out of earnings. And that's a 5-year track record, important to note. We have never missed paying dividends out of earnings. And that's a 5-year track record that we are proud of.

When you go to Slide #13, toward 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 the way up to $2.15 for 2019. Including the current forecast for 2020, which is $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 4- to 5-year term. The operational aspects of Newtek's 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 still somewhat confusing, particularly when you show up in algorithms that show up in earnings releases where did we meet it, did we beat it, did we not beat it. Those headlines that show up, our algorithms don't tend to always be accurate in my opinion.

Slide #14. We wanted to point out, which we've never done historically in a slide format, the growth of NAV. As of December 31, 2015, $14.06 per share. As of September 30, 2019, on full year, obviously $15.41. It's 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 [agree] what a BDC is supposed to do, that's it. Arguably $100 million leverage loans aren't necessarily within that context. In addition, we provide services and mentoring solutions to small- and medium-size businesses. That's done out of our portfolio company.

On Slide #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 5-year track record of paying out of growing dividend. Although arguably this year growing it by 19.4% certainly was a pretty big task. We're very comfortable with what we've put out there. And we look forward to -- to delivering our fourth quarter results.

If you take Small Business Finance, funded $114.3 million of 7(a) loans. That was a 6.6% decline. Over $122 million of SBA loans for the 3 months. We'll talk about that in the next slide. We have forecasted and lowered our origination guidance of $520 million. That $520 million if hit for the end of year would represent still a 10.8% increase over SBA 7(a) loan fundings 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 Newtek Conventional Lending, a 50-50 JV between Newtek Commercial Lending as well as a wholly-owned affiliate of BlackRock TCP. We have closed over $55.2 million in nonconforming conventional loans through 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 3 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 our full expectations, we do think we're going to come in at around $655 million to $666 million worth of loans. I'll bring your attention to Slide #16 at this point. Compared to $511 million worth of loans closing in 2019, a 29.1% increase.

So I think that a lot of investors have sort of gotten used to looking at a proportion 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 happen to like our model, our model delivers despite certain adverse consequences.

I want to be clear. We didn't anticipate loan fundings coming in as low as they are in the 7(a) space. However, we did make an adjustment. So some of that adjustment was anticipated as of the August-September timeframe. Some of it was not 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 perceptive we do not use commercial bankers. We do not use brokers and we don't use BDOs. Our referral funnel which we anticipate acquiring north of $20 billion 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 to pulling loans through the portfolio on a timely basis, particularly for the third quarter. So one might ask, well, why is that, what is this thing about process? Well, most of the people on this call are financial and not necessarily operational. From an operational perceptive, when referrals come through the funnel, business service specialists are in the position to figure out is this a line of credit, is it a 504, is it a 7 (a), or does this fit this nonconforming bucket.

That takes a certain skill set. In addition to that, it takes a coaching of the barrower to get that portal filled because these 4 different loan types go to 4 different loan committees. Some of those members on loan committees are new. Some of them have 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 could 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 4 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. And in the credit business the end of the day you don't want to be in that third standard deviation. So as the market slows loans that might be a little bit more marginal we might decide to decline. That was the decided factor in not closing some of these loans. Once again, some of them are process, some of them decided.

Year-ended September 30, 2019, fourth largest SBA lender in the United States including banks, and we're still the largest nonbank 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 #17. We talk about sort of our pedigree. Some of the things we've talked about. Important to note from a risk perceptive, on the uninsured portion of our 7(a) portfolio the average loan size is $177,000, quite a nice diversification. Those loans are typically fully guaranteed. I will say not typically, they are 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 4, 5, 6x, 7x EBITDA numbers light on covenant, if you don't have a 3% GDP across a wide swath of these credits, you've got a problem being able to repay that debt back or getting the debt refinanced. Frankly we don't have those issues. We invest in no-growth to slow-growth businesses. We're proud of it. We win, we get a coupon; we lose, we get a haircut. So if the businesses are big growing businesses, it's nice. But from a lending perceptive the only thing we get is a coupon.

Slide #18 addresses our loan pipeline. We feel pretty good about it. We've been able to pull loans quicker through the pipeline and kill loans off that don't meet a 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 sizeable amount of 7(a), sizeable amount of NCL, 504 et cetera, et cetera.

Premium trends. For the quarter 11.49%. Pretty flat to 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 curve, between 18 and 40. So we do think that our currency rate will suffer a 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 as well as severity.

Slide #22. Important to note on this slide is currency rate. From September to June sequentially in the quarter ended pretty flattish 92.88%, 92.81%. Declined from a year earlier at a currency rate of 95.25%. So about a 2% differential.

Slide #23. Looking at the category of sub and nonperforming 7(a) loans. That number did increase. Once again not totally unexpected given the seasoning of the portfolio of the 10.23%. A sequential adjustment over the quarter of 0.008%, year-over-year 1.5%. I think it's important to note that the rate reductions we've had this year, 75 basis points, should help some of these NPLs or nonperformers, come back into a performing status.

Now, that's sort of a novel concept amongst many people in the lending business. But it is not a novel concept for small- or medium-size business that personally guarantee the loans with multiple guarantors and pledge their personal assets, home, marketable securities, they put everything on the line. So we put these examples recently in our analysis.

So here is a loan, on Slide #24, $365,000 loan, was stated as an NPL, almost transferred for liquidation, loan paid in full. Here is a loan NSBF 908XX, loan funded for $1,050,000. Loan defaulted. Transferred to liquidation. And $1 million out of it.

Slide #25. $5 million, came across 60 days past due. Borrower continued to make partial payments, worked on a resolution. Borrower sells commercial real estate, loan pays in full. I think that 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 a track record and history on our credit guidelines and methodology as well as severity which would include lost interest and cost to collect.

So if you look at our charge offs on Slide #26, fairly, 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 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 the not-performing or sub-performing, we take a balance sheet, write down immediately. And those loans do get marked off over time.

Slide #27, loan recovery and severity trends. 7(a) loans that were transferred into the nonperforming category in the third quarter from the performing category were marked down based upon the collateral and cash flow to the business by only 21%. We're still using 40% overall analysis in our forecaster and marking our portfolio. One quarter it 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 collection on severity. And the value of real estate collateral and the business over the last 5 years has also increased and improved.

These are the things that reduced severity. Important to note, we collect personal guarantees, we sell businesses, we sell assets, we [hold] 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 #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 off the 7(a) business. Same thing with our 504 for business, which will show you how that works.

Moving forward to Slide #34. Important to note, when you look at Slide #34, this is typical of the type of income that we get. We get a gain on sale. We sell the conventional loan off. We get points on the 40% second and the 50% first. We get spread income. It's a good business. That's struggled this year. We could talk about that in Q&A if you like. But at the end of the day, it's accretive, it's beneficial, and it's a great product for our borrowers.

Slide #35. We 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 Ks and Qs on it. It's of the 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.

Portfolio is marked at 7 -- the business is marked at about 7.6x 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 marked the portfolio companies up. Well, 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 #36, 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 a calendar year last year we sold off a portfolio of accounts to Elavon. That 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 $1 million a year. Yet, when you look at our EBITDA numbers on this portfolio company this year versus last year, it's increased despite losing $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 '08-'09, I must remind everybody we have 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're 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. The 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 to shareholders. We like giving income to shareholders. We like increasing our dividend over 4 or 5 year term periods of 10% a year.

Yes, we're not orthodox. Yes, we look a little different. Yes, it's hard the model. That's what you're investing in. And we certainly appreciate everyone's interest and the 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 payments 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 systems 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 systems. So what is 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.

Our depository alliance partners are going to be able to manage and operate accounts for payroll payments and distribute and seller 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 area.

Slide #38, technology portfolio companies. We have 3 of them. Important to note, we're starting to see a dramatic turnaround in Newtek Technology Systems, our 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 your 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 -- the 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 #39 talks about the opportunity in cloud services. 40 talks about our esteemed analyst through. 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.

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Christopher Towers, Newtek Business Services Corp. - Executive VP & CAO [3]

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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 defined on 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.

Posting on some third quarter 2019 highlights. We recognize $16 million of total investment income, a 29.4% increase over the third quarter of 2018. Interest, dividend 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 Citco, $100,000 for 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 control portfolio companies on January 1, 2019.

SBL is a lender service provider that effective January 1, 2019, provides NSPF with loan origination and servicing functions performed by its employees. SBL charged 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 analysis. 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, nonaffiliated 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 per share of $15.41.

Now I'd like to turn the call back to Barry.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [4]

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Thank you. Operator, we're open for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mickey Schleien with Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [2]

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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?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [3]

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And I will tell you, I don't read from a script, you could probably tell that. So my comments are typically not prepared. I will tell you that relative to the 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 in consideration, it's between 20% and 30%. So our close rates are actually done pretty well. What's the second part of your question, Mickey?

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [4]

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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?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [5]

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That's exactly correct. Yes. 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. If we would have came in at the former forecast or a portion of that delta, okay, we just would have had bigger numbers. We would have distributed more income, didn't happen.

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. 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 are certain credits within the universe of credits that we see that we probably wouldn't do in a weaker economy.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [6]

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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?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [7]

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It's a good question. I think that where at the beginning of this year we forecasted around 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. Once again, there's an ecosystem which we think is very valuable. In this ecosystem when you reduce the amount of 7(a) and you go into 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, dividing earnings up in a fairly high manner. So with times, listen one thing about our company and 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 as 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.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [8]

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I understand. 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.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [9]

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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 our gain on sale income, third quarter this year to third quarter last year was up a little bit, also 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 end of the curve with a 75% decline. And the curve I believe eventually steepening out, we do anticipate that there will 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 5-year or 6-year average, all the prices, we're like 111.5 and the average I think over that time frame is like 111.7. 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 hypertechnical basis there is 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 hypertechnical coupon stripping. I personally don't believe that that's a long-term trend. And I think from a market standpoint, if you model us between 110.5 to 111.5, I think that's a fairly safe bet. Once again, we give you 5 or 6 years' worth of history where these things have traded at that actually traded at significantly higher levels. We tend to haircut those prices because, as you know the business, you can't miss.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [10]

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

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Operator [11]

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Our next question comes from Harold Elish with UBS.

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Harold Elish; UBS;Financial Advisor, [12]

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Going back to the 7(a) sector, you've 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?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [13]

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So Harold, I appreciate that. I think that the important aspect to note is when you look at our business, we disintermediate 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 nonbank lenders. So what we do is we create borrowers. If you sample the portfolio of 20,000 small businesses and you said, Gee, do you know how to get an SBA loan or do you know what it is? I bet a very small percentage of them would know what it is or know where to go. And we typically originated -- I say typically, I don't think we've cut our rate in 7 or 8 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 SBA space. What I mean by that is, we're a 10- to 25-year amortizing lender, fully amortizing lender, [no balloon].

So when the borrower comes to us, that's we talked about. We talked 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 here. 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 and a process of splitting up the function that a broker typically does who works for the highest commission and goes to the lender that'll give him the most generous credit profile. That's the 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.

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Operator [14]

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

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Frederick Lloyd Cannon, Keefe, Bruyette, & Woods, Inc., Research Division - Global Director of Research, Chief Equity Strategist and EVP [15]

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So just 2 questions. One on the referral volumes on Slide 19. You have a -- your growth in the 9 months. But 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 seeing a sign of a slowdown in loan referrals.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [16]

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Frederick, I don't see that. I checked with our back office this morning. And the fourth quarter is coming in pretty good. So sometimes a trend doesn't necessarily happen in a quarter. Maybe we lost 1 or 2 players. We're constantly -- the portfolio is constantly we're finding people coming in and coming out. So the answer to 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 did happen. So we report it and just track it on a regular basis. And I don't see that as a trend.

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Frederick Lloyd Cannon, Keefe, Bruyette, & Woods, Inc., Research Division - Global Director of Research, Chief Equity Strategist and EVP [17]

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And then one other question on the -- and this was just my kind of confusion. On the BlackRock deal, 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 you're 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.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [18]

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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 -- 5-year treasuries plus say 800. So arguably you got like an 8.65 coupon. SBL services for 100 basis points. It gets 100 basis points, period, end the story. And the JV gets 7.65. So the equity in the JV is getting a 7.65 coupon. That gets warehoused in the Deutsche Bank facility. It would be close to 3.6%, 3.7%. Then it goes into a securitization. So you get that spread income there.

But the servicing income is 100% average. So theoretically, let's say we got to a portfolio of -- I use a round 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 got a lot of expense against it. And that is reoccurring income over time.

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Frederick Lloyd Cannon, Keefe, Bruyette, & Woods, Inc., Research Division - Global Director of Research, Chief Equity Strategist and EVP [19]

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So that 400,000 that you show earning from the NCL this quarter, that's servicing income. And then any kind of net interest income?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [20]

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No, there is 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 in the example I got versus my Deutsche Bank cost of funding. And that's the income.

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Frederick Lloyd Cannon, Keefe, Bruyette, & Woods, Inc., Research Division - Global Director of Research, Chief Equity Strategist and EVP [21]

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Okay, so SBL earns these...

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [22]

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And other -- the other income -- right. So the other income is earned by SBL separately. That's 100 basis points. It's a 100% earned by a portfolio company that Newtek owns a 100% of. So there is no servicing income in the joint venture, none.

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Frederick Lloyd Cannon, Keefe, Bruyette, & Woods, Inc., Research Division - Global Director of Research, Chief Equity Strategist and EVP [23]

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Got it. Okay I need to get my head around it, Barry. But that's helpful. I just need to walk through at my own length.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [24]

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I think, Chris, maybe you can help me on this, the JV document is in public filings?

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Christopher Towers, Newtek Business Services Corp. - Executive VP & CAO [25]

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

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Operator [26]

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And our next question comes from the line of Scott Sullivan with Raymond James.

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Scott Sullivan;Raymond James;Senior Vice President, [27]

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I've got a couple of questions. One you partially answered. I'm always amazed at some of the secret sauce you guys have in lending. I think that lot of banks would kill for the 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?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [28]

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Sure. So I think that -- and I hate to say it is what it is. But there's been a lot of focus -- and I'll keep using the term P times Q. And that's a 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 equities. Matter of fact, our return on equity I believe is better than Main's over the last 5 years and better than Hercules'. I got to go back and checked that. But 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 believe the trick in the trade or the trend in cloud, we have failed to bring in the right management team in several iterations. We brought on a guy who has made a tremendous turnaround and improvement in the business along with some board help over the last 6 months. So that's going to be a contributor as well. Now you segue into Newtek Conventional Lending with BlackRock. And we take the operational leverage of the Newtek tech ecosystem. What is that? That's $20 million worth of referrals. That's a servicing operation. That's loan assembly operation with the requisite technologies. That's a underwriting team that puts credit memos together rapidly by using technology. That's going to require separate 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 created. From 2010 to current we've done 10 securitizations with the rating agencies with an investor base that's 10, 12, 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 it was actually -- I mean, that's -- this is what we talk about. However, I will tell you that a lot of people look at us P times Q, P times Q, P times Q. We always say diversification. And we have a lot of diversified income streams and a lot of levers to outperform.

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Scott Sullivan;Raymond James;Senior Vice President, [29]

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

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [30]

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My chief legal officer tells me it's cloudy every day. So I will guess on that. But here is 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, that market is 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 to 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 do bigger loans in this nonconforming segment.

So we feel pretty good about it. It's -- we're going to take this quarter by quarter. And we feel good about our dividend forecast for next year, 220. We feel good about approaching $0.5 billion market cap. Thank you. 219. What did I say?

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Christopher Towers, Newtek Business Services Corp. - Executive VP & CAO [31]

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220.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [32]

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Okay, sorry, Chris. 219. So yes, I think we're well setup for 2020.

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Scott Sullivan;Raymond James;Senior Vice President, [33]

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One last question. Could you speak to the NAV?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [34]

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Look, I think that BDCs have a difficult time increasing NAV because it's 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 that's clearly based on a 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 how 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 and leverage loans, because I got to pay themselves 1.5% to 2% in order to be able to get to an equivalent dividend that we give to in the market.

So what is our NAV increase? Well we got a very large portfolio company that's 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 from the day that it's created. So that's going to be a needle mover to NAV.

We also have some of the portfolio companies that will talk about further, like Managed Tech Solutions that also I think will 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 president is Elizabeth Warren or it's Donald Trump or it's [Booty Gang], I don't know. I think the uncertainty, no matter who it is, putting politics aside, is going to slow things down. But 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 -- our -- we're investing in operating companies, okay? These operating companies continue to grow. They have greater valuations. So even though the income from our lending business has grown significantly, there is no valuation in NAV on that. The loans are just valued at the market value of the loans. Despite the fact, we got a 17-year track record, we have securitization expertise, we have -- I mean there is 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 argued with analysts over the concept of valuation in NAV. And people put these magical ceilings like (inaudible) 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 MBA in 1984.

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Operator [35]

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And our next question comes from Rich Kendrick with Stifel. (Operator Instruction] Our next question comes from Casey Alexander with Compass Point.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [36]

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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.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [37]

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No problem.

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Christopher Towers, Newtek Business Services Corp. - Executive VP & CAO [38]

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We're fine.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [39]

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We're always prepared for you. I always put on my flak jacket, so go on.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [40]

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

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [41]

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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.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [42]

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

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [43]

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Yes, that's -- we went into that whole explanation, we call them non-confirming conventional loans, correct.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [44]

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All 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, it doesn't have a government in relation to it, that marks 105.6 as soon as it goes on the books. Can you give me some more color on how that process works?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [45]

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Sure. The way the process would work, Casey, and it's the same way that we mark our 7(a) loans. You see, Casey, you look at our Ks and Qs every quarter, right, for the last 5 years? And when you look at our uninsured portions of our loans, Casey, those are nonguaranteed loans, right? Is that a yes?

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [46]

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Yes.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [47]

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Okay. We use the same methodology to mark these loans as those loans. In 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 A trade, BBB- trade, BBs, and we spread the market clearing yield to the value of 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, you know discounted cash flow.

And it's nothing that we haven't done in the uninsured portion of the 7(a) portfolio. So it's risks. 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 is nothing different to it.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [48]

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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 $185 million of fundings in the fourth quarter to hit your $520 million target. Somehow that increase kind of doesn't foot with your comments regarding process and tightening the credit box. Can you give us some color on that, please?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [49]

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Yes. I mean, I think that -- I think last year, 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, hey, Casey, guaranteed, it's going to happen. I think what I said in the call was that we're working things out with respect to the process and that we think it will take a quarter or 2.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [50]

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Okay. That's fair. The dividend of $4.5 million during the quarter, and I appreciate the breakdown, I didn't get a chance to write it 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 -- 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.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [51]

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Well, Casey, I think in the past we've 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, you know what's great about portfolio income, Casey? It's tax. But when its flows through to the investor, they get it at 20% tax rate instead of their ordinary tax rate. So as a receiver of dividend, I love portfolio income.

For the percentage, I haven't done it. Maybe Chris could do some math while we go through the rest of your questions. But I think that from an, what I'll refer to as an ordinary income number, I think that the game was only -- and I say only about $1.5 million. But I think it's also important to note, when I went to that slide, which I'll try to pullout, 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.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [52]

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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?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [53]

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So I'm -- what -- 23, got it. So…

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [54]

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I'm just wondering how much manpower you have for the work out team?

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [55]

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I'm just looking at your statement (inaudible) doubling, Casey has 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 that somebody like you tells me about and I got to look into them. So I'm just looking for the double.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [56]

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Hang on. I got to scroll back through your slides, but…

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [57]

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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 [speech] that we've had on the performance portfolio (inaudible) pretty quickly. I believe, Casey, we have approximately 65 or 70 people in our servicing area. We are an S&P rated servicer in 2 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, or contractor. We service for the credit union regulator, NCUA. We have a servicing portfolio that I believe for others exceeds $500 million.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [58]

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Yes. The slide I referred to in the doubling is Slide 22, where loans delinquent over 91 days, if you look at those 2 columns, add up to $12.8 million versus the previous quarter's $5.9 million in those 2 columns.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [59]

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Right. So I think it's important -- couple of things. It's important to note, your -- 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. I mean, that's why we do these calls. So we -- people get the right information. And what we've been able to demonstrate in Slide #24 and in Slide #25 is we have loans that are 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 -- it's our servicing category which I just described to you. So I appreciate the question and welcome you out to Long Island, come visit our people, meet Gary Golden, meet his team. We brought in Brent Ciurlino from OCRM, the Office of Credit Risk Management over at the SBA. He is supervising all policies and procedures which include servicing. We love to have you come in and spend some time with us.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [60]

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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 know.

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [61]

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

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Operator [62]

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

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Barry Scott Sloane, Newtek Business Services Corp. - Chairman, President & CEO [63]

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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.

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Operator [64]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.