Barry Sloane - Chairman, President & CEO Jennifer Eddelson - CAO & EVP

Leslie Vandegrift - Raymond James Alexis Huseby - D.A. Davidson Frederick Cannon - KBW Robert Maltbie - Singular Research

Good day, ladies and gentlemen and welcome to the Newtek Business Services Corp Q1 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Barry Sloane, President and CEO. Sir, the podium is yours.

Thank you very much, and good morning everyone and welcome. We're proud to host our first quarter 2018 financial results conference call. I have presenting with me today, Jenny Eddelson, our EVP and Chief Accounting Officer. I'd like to welcome everybody to follow the presentation along on a PowerPoint that is on our website newtekone.com in the Investor Relations section, and the presentation and audio portion of this call will also be archived. We have lots to cover today. Let's jump into it and move forward to Slide 2, going over our historic stock performance. Investors in Newtek over the last year, including dividends have earned 27.5%; over three years, a 102.2%; five-year return, 220%. First quarter of this year, total rate of return through March 31, 2018, negative 11 basis points, obviously a tough quarter I think for all BDCs. However, when you take a look at the 3.31% price differential versus where we are today, we think we're going to get a nice bump up here, and we look forward to better stock performance, obviously in the third quarter and second half of the year, which is somewhat typical and historical for our stock. We are typically a second half performing company in many instances where the market is used to having level-pay dividends and earnings throughout the year. We have typically indicated that 55% to 60% of our earnings and dividend comes in the second half of the year and that does benefit the stock price. Moving to Slide 3, we wanted to make a general comment, and hopefully guide investors and the analysts. So we had adjusted NII increasing 10% first quarter of 2018 versus first quarter of 2017. And we wanted to sort of give, what I think were the key metrics to that. We clearly had significant growth in loan referral volume. We will spend a lot of time talking about that today, why we have that growth, what that growth is - why that growth is important. It gives us the ability to make selection of opportunities that come to us directly from business owners without the use of brokers or BDOs, and pick the best credits available to meet what I call, managed growth or controlled growth numbers. We've also demonstrated a significant improvement in our ability to process loans using a proprietary technology. We should pay significant attention to the amount of loans in units, not just in dollars that we're looking at each and every quarter. We also had significant growth in interest income in a rising rate environment, with a floating rate loan portfolio. We had very good investment income increases in the quarter. I'd like to note that Prime has in recent years gone from 3.25% to 4.75%, very beneficial to us as we are - half of our loan portfolio has no leverage on it at all, and we'll talk about that deeper as we get into the portfolio. Historically, we've had stable government guaranteed loan pricing and an increase in government guaranteed loan sales quarter-over-quarter. You also see that going into the second quarter, we had I think $25 million to $30 million of government guaranteed that will carry over, which would give us a nice income boost as those - as that portfolio gets liquidated. And also our other portfolio company that is important to us, both at the NAV and adjusted income perspective, our payments business, always steady performance in growth. We've owned that and operated that business since 2002. Moving the Slide 4, and I think this is important and we're going to spend some time today talking about why we're different, why we're unique from other BDCs. Some people complain why don't we look like the other BDCs. I would rather be one of the few BDCs that are trading at a premium to NAV today, that's had steady dividend growth and NAV growth over our history than everybody else. I think you've only got about 4 or 5 BDCs that are actually trading at a premium to NAV. Also important to note, we are internally managed, so we don't pay ourselves that 2.20% or 4% out the window. But the other BDCs have to basically invest, in my opinion, in riskier assets to be able to generate a 9% or 10% dividend. Historically, our annual cash dividends have been paid, obviously out of 90% to 100% of taxable income. That is our goal. We always state that we anticipate that our annual dividend payout to be between 90% or 100%. So we have given the market guidance, we do it on an annual basis. We've done that. At current, at $1.70, we started off at $1.69, so we've increased to the penny. We would like the market and the analysts to interpolate that what that basically means over the course of the year, that our taxable income, which is sometimes very close and spot on to adjusted NII, will be somewhere between the $1.70 and $1.88. Sometimes we see numbers that are just way outside of the balance reason, and we kind of scratch our head and say, where did that come from. So I thought it was important to give this type of guidance to the Street analysts in the market today to sort of follow it as we go through quarter-to-quarter. We, as I said, encourage the investment community to look at us on an annualized basis, rather than quarterly. Obviously, when you look at our stock, what makes us different, when you look it on a GAAP basis, we have a negative NII. We have a negative NII, because a significant amount of our income is based on and originate and sell loan strategy, which creates gain on sale. Gain on sale is not included in the NII category. So in many cases, analysts show us up as NII is negative. So therefore, people don't look at the stock. Sometimes the headline on the news wires are Newtek loses money, but that's not very exciting either. So those people that have followed the stock, study the stock, done some work and understand it, they've been rewarded and we are hopeful that those rewards will continue. And I mentioned, one of the few publicly traded BDCs, it trades at a premium to NAV, currently about 1.21x. Speaking to investors recently, they say, gee, we'd like to buy BDCs at a discount. Just because it's the discounts from par or with NAV, it does not really mean that it's a great buy. One could argue that sometimes you have to pay a premium, which would be a discount to what the total value is. Hopefully over the course of time and discussions with investors, we can give people the impression that a company that has historically been able to increase its dividend and increased its NAV, actually might be viewed as a discount to what might wind up happening in the future. We always point to what we've been able to do over our 3.5-year tenure as a BDC. We are growing our dividend and NAV, or we're investing excess cash flow and things that don't necessarily show up in immediate results, we're investing in our technology, we're investing in human resource staff, executives that can drive the business model better, particularly in a lot of the portfolio companies. And we've clearly committed historically and more so going forward to make a significant investment increasing security, cyber security, as well as our general operations. We look at our developing portfolio companies as equity options in our overall business model, which is one that acquires business clients in all 50 states cost effectively with a growing basis. Many times people look at the smaller businesses that are controlled portfolio companies, and so you get rid of them. If you look at our values and scheduled investments, we think that they're inexpensive option values on our overall strategy, which is to acquire large amounts of customers through our new track referral system and to be able to ultimately cross-market and cross-sell into that database. And many of those referrals that are coming in create inexpensive business referrals from those business lines, give us a futuristic ability to use artificial intelligence, because we have the data as we take in applications across to be able to cross-market and cross-sell other products into the customer base. We're excited about our business model, we think we're on the right track, and we've done a very good job I think historically, in asset allocating. On Slide number 5, I think it's important to look at BDCs from a macro perspective. And we had a major change in the BDC landscape, New Section 61(a)(2) of the Investment Company Act of 1940, has been amended by The Small Business Credit Availability Act and simply stated, our leverage, which has been limited 1:1 has now been increased 2:1. From a technical perspective, it changes asset coverage from 200% to 150%. This is a real important change. I think we had this in the slide over a year - a year ago, maybe it was six quarters ago. I was asked why we're putting that in our presentation, because it's futuristic. Why we put in there, because of the potential of that and the potential have then occurred and actually the potential of that I think surprised a lot of participants in the BDC market. This was part of the omnibus spending bill. We think it's very, very important to us and our shareholders in terms of what we plan on doing going forward. A lot of investors have recently asked me, would you - what's happening with your competitors in this space. Well, I think the competitors weren't really prepared for the change and many of them have senior debt covenants that don't allow them to put this leverage on. Some of them also have rating agency issues particularly with Standard & Poor's, which in my opinion, is strict to the 1:1 leverage to the point where, they immediately put every BDC on a downgrade for credit rates where I just don't quite get that. Now our BDCs are equal, they are different. Some of our portfolios have sub debt; some of them, our portfolios have mezzanine capital; some of them are senior secured floating rate type obligations like ours with average loan balances of $180,000 somewhat, which every single one of those loans have actually gone into securities and provided liquidity. So you can't really look at these businesses as all being the same. Egan-Jones is our rating agency and what they have said is, they're going to look at this on a case-by-case basis. I think the important thing to note and we put out a press release on this yesterday, our board voted to give management the ability to increase leverage. On that board, there is a one-year - on the director board, there's a one-year waiting period. We will go up for shareholder vote. We are optimistic and hope to obtain that vote. On getting that vote, we'll be able to use leverage pretty quickly. Important to note, given that we originate and create assets, we do, do some acquisition and that's done in the portfolio companies. But I don't expect Newtek to zoom up to 2:1, okay, it's just not going to happen. We're going to do this gradually, we're going to do this slowly, we're going to do this methodically. We've been a very good steward of leveraging it. As a matter of fact, we've been a BDC for three 5 years. Before we were BDC, we didn't have these leverage constraints. As a lender, we've been around in the business since 2003. We've been levered at grade higher multiples and we were one of the few entities that actually survived the '80, '09 credit crisis by being appropriately leveraged, managing our risk. So we believe that we're very well positioned to take on the additional leverage. And just to give you an idea, based upon the current math and ultimately getting to maximum leverage over the course of time, the next $240 million approximately, approximately, our growth capital could come from debt, instead of selling shares. We think that prospectively could be very meaningful. At some point in time in the near future, we may try to give guidance and forecast how we think this leverage might be layered in over time, how we think this possibly can affect our adjusted net investment income over time, we don't have those numbers at this moment. Without ability to project, I think it's more prudent for us to wait till after the shareholder vote to get an idea of timing and to see how it could affect us. However, for those of you that are sort of familiar with the general business model, the recent change that's occurring here is positive. I'm not going to get too much into the weeds here on the conversation of the AFFE issue. I'm just going to simply state it. The SEC Chair in 2003 changed her view, Mary Jo White at the point - at that point in time as to how to deal with this issue with respect to BDCs. What it did is, it took certain BDCs and tossed them out of the S&P Index, it tossed them out of the Russell index, which obviously not being part of all those indices in today's market, is punitive, and it makes the stocks in those areas, in my opinion, cheaper because there is less of a bid, because you can't buy them in the ETFs or index funds. In the event of the SEC Chair, under President Trump, takes a look at this particular area. It could include BDCs back into indices, it could also increase institutional investor interest, particularly for mutual funds that are having a difficult time dealing with the concept of expense ratios. As an internally managed BDC fund versus externally managed ones, our expense ratio, because we've got all of our operating expenses loaded into the fund, looked abnormally high. Once again, one of the interesting things about Newtek, we report negative earnings, we don't have a stable dividend, we have higher operating, which is the typical classical way to look at a BDC. Well, we apologize for that, but we don't apologize for our performance and our business model. The new tax law has been very beneficial to our customer base. It's been a big win. It's improved their cash flows by 15% to 30%. Some of that is absorbing the higher quest of interest expense as rates have written over the course of time. Slide 6 goes into the financial highlights for the quarter. As you could see, our net investment loss narrowed from $0.15 in 2018 to a net investment loss of $0.13. I think that might be inverted on the slide or maybe I'm having - had too much coffee this morning, but we have narrowed our loss from one year to the next, and that in my opinion, is based upon a growing business model, growing income. If you take a look at total investment income on the last portion of the slide, of $11.1 million for the three months, that was an increase of 23%. So the ability to put more loans on the books, some of them with debt, some of them unlevered, obviously, because we only can go as high as 1:1 in a floating rate portfolio, very, very beneficial. The top line item for the quarter I think most people look at is our adjusted NII which includes our gain on sale, which has been a reoccurring event for one 5 years, $0.44 a share was an increase of 10% over $0.40 last year. And I say this kind of tongue and cheek, we beat analyst estimates by $0.05 a share or some people with $0.06 a share. There are times that we didn't beat it, it's negative. So on a quarter-to-quarter basis, I don't have an opinion as to where the analysts are versus where we are. We strongly suggest, look at this on an annualized basis. NAV, net investment value year-over-year, an increase of 5.2%, $15.05 versus $14.31. Sequentially, we were down about 0.20% and a significant part of that was caused by the refinancing of the debt that we did recently. We refinanced 7% notes that were coming due. We issued a longer-term five-year note at 6.25% and that adjustment accelerated unamortized deferred financing cost by $0.06. Without that adjustment, we would actually have a slight increase in NAV. Debt-to-equity ratio of 91%. For a normal BDC that would ring alarm bells, for us it should not, as we try to pro forma the status we'll see in the next Slide 7. Most of that growth - not most of that growth, a good significant part of that additional leverages from government guaranteed loan sales, that get liquidated in the following quarters. So you can clearly see once that occurs, that ratio go down into the 80%s. Total investment portfolio increased by 31%. We are growing, getting better operating efficiencies. As I mentioned, total investment income, up significantly 23% over investment income for the three months ended March 31 , 2017. Slide 7 shows the effect of the liquidation of the government guaranteed loan sales over the end of the quarter. They typically get liquidated within 5 days to 10 days, and you could see that the broker receivable is government guaranteed, are sold into a broker bid. Those are Full Faith and Credit Government Guaranteed Obligations that are ballooning the balance sheet at that point in time. On Slide 8, we wanted to point out our leverage lines which are important. I want to emphasize the fact that none of these lines have covenants that are prohibitive relative to our ability to increase leverage going forward. So the growth in utilization of these lines, particularly the Capital One Bank line for 7(a) loans could be one of our sources for increasing the leverage going forward. I will also note that we recently negotiated with Capital One and their participants a 50 basis point rate reduction that has not come into effect yet that is subject to documentation. That will take the unguaranteed cost of funding to Prime plus 25 and the guaranteed cost of funding to Prime less 75. To give you an idea, the Prime less 75 will be charged 4% rate of interest against the Full Faith and Credit U.S. Government Guaranteed floater that we might hold for longer periods of time at 7.5%. A 350 basis point spread floating rate to floating rate on a government guaranteed obligation, I think is a very, very, very, very, very attractive asset for us to grow and hold and to make greater use of that particular facility that could be a further source of positive income for the BDC going forward. One of our portfolio companies, currently CDS and the future of business entity to be formed, Newtek Business Lending, is currently involved and futuristically involved in SBA 504 lending. We announced recently that Capital One Bank has issued us a letter of intent and we've recently received first draft of documentation for a $75 million facility with an accordion feature to $150 million to originate SBA 504 loans, which will also allow us to do construction. We're excited about Tony Zara's team in Orlando working closely with Bob Rabuck's team in Boca. The Florida connection should help us grow this business significantly. Newtek Business Credit, a controlled portfolio company, which currently does the 504 lending along with line of credit financing for receivables and 504 has a $25 million line that's been increased to $40 million, subject to documentation with an accordion up to $100 million. So for the 504 business, we're looking at subject to documentation, growth in the facility from $25 million or $150 million on the bottom, with an accordion up to $250 million, I would say we are poised to do a significant amount of 504 lending business. At the portfolio company level, we're excited about that. In the inventory receivables business, Sterling Bank increased its credit facility to Newtek Business Credit from $15 million to $22.5 million. On Slide 9, you can get a glimpse of our loan originations and pipeline. For fundings, March 31, increased by 16.2%. So those that are doing like, oh my god, that's below the 20% that you're usually using. If you push that out a little bit, which you could see on a further slide through April 30 on 11, we actually had a 27% increase year-over-year. So if you push this out another month April 30 versus the 3/31, you'll go from 16.2% growth to 27% growth. Once again, that's why I try to tell people, put your slide rule away, be steady, stay with us, this is where we intend on growing. Going back to Slide 9 on the pipeline, for the three months ended 3/31/2018, pipeline up 32%. We're real happy with prequels loans and underwriting and approved pending closing, particularly using advanced technology to pull these opportunities through the pipeline quicker. On Slide 10, our 504 numbers. We closed only $3.9 million for the three months ended March 31. We are forecasting $75 million to $100 million, we will need to have as closings, not fundings. We will need to have obviously better second, third and fourth quarters. And the pipeline is ballooning. $185 million pipeline March 31, 2018, up from $40 million. We're very, very excited about this. Obviously, we've got a new team on Orlando, integrating into our policies and procedures, getting our credit lines in place. We're very excited about the opportunity here. Now we clearly understand a level of skepticism with a weak funding and closing rate for Q1, but I will point out that even with little contribution from CDS in the first quarter, our adjusted NII was up 10%. Now going forward, you throw these types of opportunities in there, these pipelines turned into closed loans and funded loans and you continue to get what you are doing in 7(a), you could get a very nice contribution from these controlled portfolio companies for optimistic about things to come. Slide 11, as I step forward and hit the second bullet, and the first bullet are ready, we're forecasting for 2018 on the third bullet approximately 23% increase. It's kind of where we want to be for 7(a) fundings and we're forecasting for 2018 loan closings, $75 million to $100 million. Difference in closings and fundings has to do with the draw on the 504 loans, which you have construction elements to them. Slide 12, dividends. We paid 40% dividend in the first quarter. That was up 11.1% over the first quarter in the year prior. We originally forecasted about $0.69, we banged it up a $0.01 to $1.70, that 3.7% dividend increase over the 2017 cash dividend of $1.64 and we go back and look at our history, with respect to dividend payouts, we've always been able to fund some throughout the year as we get deeper into the year, and our business model continues to catch on and grow. We are excited about the opportunity to potentially outperform our forecasted market expectations. Recent bond offering, we did as described on Page 13. On February 2018, we did underwritten offering $57.8 million, 6.25% Note due 2023, five-year term. We got an A minus rating from Egan-Jones, KBW, DA Davidson, BBC Capital, Compass Point, Ladenburg, always co-managers on the transaction. We redeemed $40.2 million of bonds. I will point out, we carried those bonds for a month, waiting for the notice of the call for 30 days. So we actually had duplicated interest on $40 million worth of bonds for one month in that particular quarter, which obviously is something that won't be reoccurring and we look to avoid in the future. For those people that are new to our story, we always try to give a little bit of everything to somebody on this call. Newtek Small Business Finance, the SBLC, which is effectively the BDC and consolidates. It's one of only 14 non-bank SBA government guaranteed lenders. New licenses are no longer presently being issued, although they could, but they'd have to be legislated by Congress, and I don't think anyone's been issued in over 20 years. We're the sixth largest SBA lender including all lenders, including banks, and we're the largest non-bank SBA lender with a 15-year history of loan default frequency and severity statistics. We've got eight S&P rated securitizations, all of them maintain their rating of AA or A, and so have been upgraded. The average loan size with respect to risk of the uninsured participations on their books $181,000. A lot of diversification, lot of credits, all floating-rate loans, Prime plus 2.75%, it's a real good business, great opportunity, very high return on equity between 25% and 30%, which is why we're able to grow our NAV and pay the dividend. On Page 15, we could look at loan referral growth in dollars, an 86.9% change from the first quarter in 2018. $4.7 billion of gross loan dollar referral that I have to say is, kind of eye-popping and please do not interpret that the closes or fundings will go up in the same manner. It gives us more opportunity to be selective, to be cautious. We're not selling iPhones, we're not selling [indiscernible] and these are business services. They take human beings and technology to pull them through. So we are excited about the higher referrals that allows us to be more selective and we're not going to need that kind of growth to be able to continue to be selective and maintain this. So a year from now, for not growing at these numbers, try to be a little more forgiving. When you look at the units, extremely important, Q1 2017, 4,200 units. We looked at the 17,000 units. It's technology, it's staffing, we started a broker office three years ago, brand spanking new, nobody in there, just 20 people in there. We're looking for new staff. [Indiscernible] done a terrific job hiring and training an exciting group of individuals to be able to handle this business and Dan Hendel in the IT area has created state-of-the-art technology to be able to collaboratively pass referrals from assembly to underwriting to pre-close to credit carry to post close in a secure manner and equipped manner to be able to get us to move loans through the pipeline quicker. Good loans get done quickly, bad loans linger. We want to move fast. This ability to look at larger quantities of loans helps us with diversification, helps us control costs and allows us to grow loan growth prudently without cutting credit. On Page 16, you've got some graphical depictions of what our business looked like and I thought this was useful. We had an investor come to us recently just to talk about what's different between 2007 and 2017. Obviously, looking at loan referrals, that's a major difference. So why are we a better lender today than a decade ago, larger quantities of opportunities. And we think, this is just the beginning. On Slide 17, this show growth of alliance partners. So in addition to unit growth, our alliance partner has a number of sources. And I would not need to comment on this. Alliance partners do churn in and out. Some of them give you good stuff, some of them give not so good stuff, some of them give you not so good stuff, eventually it'll cost, it's not a benefit. So they do come and go. This also is not going to be in a straight line, but I think this has enabled us to on a quality basis, on a managed basis, and on a controlled basis grow our business without hurting credit. Slide 18, net premium trends, you could see they are fairly stable. And I want everybody to be wary of prices of the government, everything above $1.10 gets split 50-50. Speeds have begun to pick up in recent months or quarters. Pricing issues for us, frankly, in the fourth quarter, down a little bit, but a lot of that was based upon shorter weighted average maturity loans. 10-year loans typically traded $1.11, $1.12, $1.13. 25-year loan typically traded $1.15, $1.16, and $1.17. So our prices are a function of the bonds trading, which are government guaranteed floaters without a cap and the weighted average maturity. The 10-year loans have no call protection. So they can be paid off at any time. The 25-year loans actually aim longer than one 5 years as a 5%, 3%, 1% prepayment penalty. So those do tend to trade better and pay slower. I think it's just important to note that we feel good about the stability of this pricing. We do believe that in the event that we had weaker prices going forward, which could be demonstrated by our hard commercial real estate collateral market, where borrowers decide to sell their commercial real estate or refinance it into a fixed-rate loan or sell their business, our forecasts are based on lower than market prices and we watch that fairly judiciously. On Slide 19, we're always proud to demonstrate our credit performance, 50 basis points of charge-offs on a rolling 12 months and 4% of the portfolio is viewed as non-performing. On Slide 20, we also wanted to go back and look at our origination cohort at 2007 versus 2017. Important to note that in 2007, 36% of our loans were primarily collateralized by machinery and equipment and this doesn't talk about second - tertiary levels of collateral, but the primary level of collateral was 36.7%. Today it's 13%. It's relevant because, we certainly prefer to be collateralized by commercial real estate to machinery and equipment, particularly given liquidation and the salvage value. Commercial real estate collateralization has gone from 29% to 50% and residential 25% down to 9%. When you add all that up, that equals about 70%. The other types of collateral, accounts receivable, inventory, personal assets which could be marketable securities by borrowers, positive development shows higher quality loans, shows higher referral fees, diversification, all positive. Third bullets is most loans and should be all loans have a personal guarantee. And in many cases it's multiple personal guarantees. Our underwriting guidelines anybody owning 20% to 25% greater the equity, was personally guaranteed loan. Slide 21, looking at quality again, 2007 cohort originations versus a decade later, existing business is 87%. That's the [indiscernible]. Look at that versus startup businesses in 2007 of 31%. If I say there is one important difference, it's the existing businesses versus the startups. Business acquisitions and startups tend to be slightly weaker in credit, particularly with startups. I wouldn't say slighter, I would say significantly weaker credits. So by being able to look at more opportunities, we're able to do more and better business. In geography, '07 to 2017, if you look at Florida, which was 22% of originations. In 2007 that was down to about 8%. And you could see the mix of the states in 2017, California is significant, it was insignificant in '07 and '08. And obviously, we do quite a bit in Texas and New York before big states for GDP or economic growth, Texas, New York, Florida and California. But this gives us an ability to continue to do more business and diversify particularly in areas like Texas and California. Slide 23 and 24 are classic slides and we will go into that. Newbies can study that. Looking at briefly at portfolio company review, let me go forward to - slide 28 shows the benefit of a 504 loan, which currently has not had any kind of a meaningful impact and at the portfolio company level. But you can see the return on equity in this business is high. The reason why it's so high is, eventually when the second is taken out by the community development corp with government debentures of 40% second, then the first is sold into the market. This typically can happen within 6 months to 18 months depending upon whether you've got construction or no construction. You have no balance sheet. Everything is originated for sale, it's our current strategy in this business. Some say that might change down the road, but you get a high return on equity by being able to sell all the components out in the 504 business. Once again as a BDC, the benefits from originating loans, capital gains, good income, interest income is good income, we benefit from originating sell strategy versus originate lever and hold and club coupons demonstrating to us now the BDCs. Slide 29, a business that we've been in since 2002, a significant business. We are in the payment processing business, 6.1 billion of volume. You could see our comps versus the public comps. There is a fairly big gap between that, also in size and obviously them being public and that's not a tech business. Has a asset value of 22.3%, so that's close to a little under 10% of our total now. So when you start to look at the businesses, 10% of our NAV from Newtek, it will take rounding 25% to 30% EPP and then the rest is the lending business. I would point out that the lending business, when you take the asset value net of debt, you're looking at $130 million, $140 million of probably net asset value. And you take a look at that business, that's generating $26 million, $27 million, $28 million, $29 million of pretax income growing at 20%. In a different format that business might have a different valuation. We continue to be excited about growing that business and providing benefit to our shareholders. On Slide 31, this is our rationale for why we think we are an interesting investment opportunity. Clearly a differentiated business model, we are internally managed. So when our assets are generating 9% to 10% dividend yield, it's based upon the fact that we don't take 4% and burn it, that's after full expenses. We believe that the assets that we invest in are inherently less risky because we don't have to burn the 4%. It's fully loaded. Most of the businesses that we're in, we've owned and operated for over 10 years. We talked about $1.70 forecasted dividend per share in 2018. The company was established in '98, has been public since September of 2000. We've been in the lending business for over one, 5 years. We've seen up-cycles, down-cycles and rates and credit. Average balance size is $181,000, very valuable. There's no other BDC that can compare in terms of diversification of credit exposure. Management interest very much in line, management board owning 6.6% of the outstanding shares. We don't have any derivative securities. There's no SBIC leverage. We don't invest in CDO equity, but we don't do loans with equity kickers, and we've no direct lending exposure to oil and gas. We certainly appreciate our investor base, which has a very nice book of institutional investors, as well as retail, somewhat uncommon for BDCs. For our investor base, it's taking the time to learn our story. With that, I'd like to turn the rest of the presentation over to Jenny Eddelson, our Chief Accounting Officer.

Thanks, Barry. Good morning everyone, and thank you for joining today's call. I'd like to start with some financial highlights from our first quarter 2018 consolidated statement of operations. Please turn to Slide 33. In total, we had investment income for the quarter ended March 31, 2018 of $11.1 million, a 23.1% increase over $9 million in the first quarter of 2017. The majority of this change was from an increase in interest income. The increase in interest income was attributable to the average outstanding performing portfolio of SBA loans increasing to $267 million from $207.4 million for the three months ended March 31, 2018 and 2017 respectively, as well as Prime rate increases throughout the period. Servicing income increased by 25.5% quarter-over-quarter from $1.6 million in Q1 2017 to $2.1 million in the same quarter of 2018, which was the result of the SBA loan portfolio for which we earned servicing income, increasing from $727.3 million to $909.1 million quarter-over-quarter. Other income, which relates primarily to legal, packaging and other loan-related fee revenue, increased by approximately $390,000 in the first quarter of 2018 as compared to Q1 of 2017, primarily as a result of an increase in loan origination volumes year-over-year. Dividend income in the first quarter of 2018 increased by $325,000 to $2.6 million from $2.3 million in 2017. For the quarter ended March 31, 2018, our dividend income included approximately $1.75 million from Newtek Merchant Solutions, $400,000 from Premier Payments, $250,000 from Sidco and $225,000 from United Capital Source. Total expenses increased by $2.8 million quarter-over-quarter or 24.8%. Included in total expense this quarter is a $1.1 million, a loss on extinguishment of debt, which was related to the redemption of the company's notes due 2021 and represents the remaining unamortized deferred financing costs related to those notes. The $227,000 net increase in salaries and benefits was the result of an increase of $547,000 in payroll resulting from an increase in headcount at NSBF, offset by decrease in stock-based compensation expense of $320,000 period-over-period. The additional headcount related primarily to employees performing loan processing, loan closing or loan servicing functions as a result of an increase in the loan origination. The increase in interest expense of $982,000 period-over-period is primarily related to interest from the notes payable securitization trust, note due 2023 and notes payable related parties. The increase in notes payable securitization trust was the result of an additional securitization transaction completed in December, 2017. The company recognized $410,000 of interest expense for the three months ended March 31, 2018 attributable to the 2023 notes issued in February 2018 of which a portion of the proceeds was used to redeem 100% of the 2021 notes. Effectively, the company carried an additional $290,000 of interest expense during the first quarter of 2018 for the time period between closing the notes due 2023 and the redemption of the notes due 2021, which occurred on March 23. Origination and servicing expenses increased by $221,000 in the first quarter of 2018, as compared to the first quarter of 2017, due to higher referral fee expense, which resulted from increase in loan originations period-over-period. Overall, we had a net investment loss of $2.8 million as compared to a net investment loss of $2.1 million quarter-over-quarter. As previously discussed, the Q1 2018 net investment loss included a $1.1 million loss on extinguishment of debt. Adjusted NII for the three months ended March 31, 2018 was $8.1 million or $0.44 per share as compared to $6.5 million or $0.40 per share for the first quarter of 2017. A reconciliation of adjusted NII for the quarter can be found on Slide 35. Net realized and unrealized gains totaled a positive $10.9 million, an increase of 36.1% for the three months ended March 31, 2018 versus the same period last year and primarily represents realized gains on the sale of the guaranteed portions of SBA loans sold during the quarter. In the first quarter of 2018, NSBF originated 125 loans totaling $91.4 million and sold 114 loans for $73.2 million, generating $10.3 million in realized gains at an average sale price of 111.82%. During the first quarter of 2017, NSBF originated 98 loans totaling $78.6 million and sold 84 loans for $59.8 million, generating $8.7 million in realized gains at an average sale price of 112.03%. Overall, the company had a net increase in net assets resulting from operations of $8.1 million or $0.44 per share for the quarter ended March 31, 2018 as compared to $5.9 million or $0.36 per share for the quarter ended March 31, 2017, an increase of 22.2% on a per share basis quarter-over-quarter. I would now like to turn the call back to Barry.

Thank you. Operator, we'll open for questions.

[Operator Instructions]. Our first question comes from the line of Leslie Vandegrift from Raymond James.

Sorry, Jennifer I just missed at the very end there, what was the loan sale number for the quarter, thought I would just write something down?

The loan sale?

Yes.

The loan sales were $73.2 million.

Okay, and then I know you had the bit held over in the brokers receivable at the end of the quarter, which increased leverage, but post first quarter, how much has been sold or I guess what's your leverage as of today?

Like as of this day?

Or as of after that sale? Or as after that sale. I want to get that brokers receivable?

Approximately 83%, 84%. I think you'd see that demonstrated on Slide 7.

Okay, perfect. And then I appreciate all the color around the new leverage rules, and I know you received board permission asking shareholders in July. And if you get the shareholder permission to use immediately or if you just have the board permission to use any here, what are the plans for that extra leverage to use it for 7(a) program, 504, so what is the mix going to be there?

I think that we would use the additional leverage judiciously to fund growth in originations. I would say - and these are just rough approximations. Let's say in the second half of the year, we were going to sell [indiscernible] $25 million, $35 million of equity and that's probably a little high, instead of it, we might use debt. Now these are all supposition, these are all hypothetical things. But when you think of, say, $25 million or $35 million debt, you're only moving your leverage ratio by 10%. It's not a big deal one way or another. So I don't think you're going to see us zooming up with leverage. However, we'll use it methodically and judiciously to fund loan growth. But we found an interesting acquisition we could use it for that. However, I would tell you the pipeline is - it's basically a 0, we have a couple of really tiny ones that we might announce that are a couple million dollars here and there. But I don't see us - I think what you'll see from us, Leslie, I appreciate the question, is a methodic judicious utilization of the additional leverage. I also want to point out to you and callers, typical non-bank lenders who would go to a bank and get leverage with a restrictive covenant 4x, 2:1 is very, very vanilla. Banks are 8x leverage, 10x leverage, which makes sense that NSBF insured deposits. But for us from a risk perspective, to go to 1:1 and 2:1, not hard to manage.

Okay. And then on those originations, do you mean just 7(a) or mix of 7(a) and 504?

Well, so when looking at 504 for example, and it's a healthy question. In 504, we're forecasting say, $75 million the $100 million of closings, maybe that represents $15 million in fundings. The haircut on those lines are between 80% to 90% of pace and that's because you get the CDC take out upfront. So we're not talking about a ton of equity that will go from the BDC down into the portfolio company to be able to fund that.

Okay. And then on, I know you said you are not going to zoom up, but you talked about traditional non-bank lenders using up to 4 to 1. What do you feel is kind of an appropriate cap to get to in the long run, again not necessarily in 2 quarters, et cetera, but how much of that 2:1 do you think it's an appropriate to target?

Well, if I have like a lot of government guaranteed floaters on my books that were earning 3.5% that I get liquidate in an afternoon and get my money back in 5 days, I think that's a smart thing to utilize. I'm probably going to avoid answering your question, because we're so unique, we're not like any other BDC. But buying a portfolio of sub-debt and mez capital and somebody that told me that, hey I got to liquidate this in 30 days or 60 days, I'll be sweating. I'll be sweating a lot, that is not us. I mean, we are just different. So - but one of the issues we all being different is, typical BDCs that bump up against these leverage amounts, everyone gets nerves because if you've got a movement in now one way or another, you can't liquidate the portfolio. Our assets are very liquid, like every one of our loans has gone into a securitization. So we feel pretty good about the utilization of leverage and we use it judiciously and we will respect the other factors, despite the fact, I told you I just made a statement. I know a lot of people don't believe it. So we still pay attention to these ratios and try to stay within the balance. But I mean, you won't see us zooming up to 2:1, but there is no problem, no problem. With an entity like ours and our business model, with the liquidity in the assets that we have using more on leverage. Remember the - you know like merchant account business, which has got $100 million NAV, those merchant account is still liquid, very liquid. If you held an auction, there would be 5 buyers or 10 buyers that could line up to take those assets in 60 days or 90 days. They're on bank platforms, they're on [indiscernible] platforms, very liquid. So I think it's important - this important question relative to the leverage. If you've got liquid assets, and once again 2:1 is not a leverage, if you have liquid assets, you shouldn't be that worried about the leverage.

And then you said in the past before, obviously you are a BDC that you were able to use that higher leverage, kind of what level did you set at then?

When we were C-Corp, we were limited to 401. We managed it beautifully and we managed it beautifully during the credit crisis. So when the world sort of disrupted, Hank Paulson didn't offer us a government payout of TARP money. We made it through that crisis. So we're being a little arrogant here today, but we are good managers, I am, knocking on wood right now. We've been able to manage through good markets and bad markets clearly with higher leverage and not as well-heeled as we are today. Back then the market cap was $60 million, we got a much bigger market cap, much more resources. So we - so management team, it's been together for over a decade. We feel very good about our ability to manage this leverage.

Okay. And then you mentioned it in your remarks that the new reliability structure, so either the new credit facility or any other debt out there have covenants. Is that don't allow you to go 2:1 at this or are they all open?

Well, for example and I don't know this, because I'm not insider prospect, but prospect said they were going to use the leverage and next day they came out and said no, not really. So I'm assuming that they've got senior debt lines with a lot of banks, they're a big player. I mean it's not just one bank, it's many. And the banks kind of through - wait a minute, you got to talk to us first. And some of the bigger BDCs with their covenants and their bond issues, so we do not - so we have that flexibility, we appreciated the relationship that we had with our lenders and our borrowers, they know us we're prudent, we're not new to this. We've been in these businesses for over a decade and most importantly, we don't buy other people's assets, we create them.

Of course, and just so - a last little wrap-up question. You mentioned again the reason the premium was down a bit this quarter was because the mix of the 10-year versus the 25-year loans you were doing. Is there time when that might shift more to 10-year or 25-year cyclically or are you having more of mix of 10 years now, just as your targets?

No, it's kind of random. And let me just take a look at that slide, because is if you look at the slide, I mean, look at - in 2014, we had 12.49% and in 2015 we had 11.72% then it trended back up. So I mean there is no - there is somewhat of a random nature, and by the way this is within a given quarter. So let me give you an example. Let's say, we had 2, $5 million 10-year loans that were large. The larger loans tend to depress price than 10-year loans. So if all of sudden I push that out in the market and their settling at $1.10 that could change the whole quarterly mix. So at the moment prices are stable. I am making a statement which I haven't made for 3 years on these calls and talking about rates rising and is this problematic, and I would always talk to analysts and investors and say look, if things got quite hot and values were escalating, business values were escalating, you will have greater refinance activity. Well I'm saying that although we don't currently see that, that's a possibility. So I want to freak everybody out, we've got - in our model we've got haircut at price valuations. But I'm just making a statement, things don't always last forever. One last thing Leslie. Price changes can easily be made up with loan volume, not forced loan volume, but loan volume, which is why it's extremely important that we continue to grow our infrastructure, core technology. We're taking more real estate space in our Boca. We're going from 3,000 square feet to 8,000 square feet. We just opened up an Orlando office. I think it can seat 20, I've our got room in Irvine for 10 more people. So we have room to be able to expand and opportunities to be able to expand to offset changes in the market.

And our next question comes from line of Peter Heckmann from D.A. Davidson.

It's Alexis on for Pete. So we are seeing calculations for publicly traded merchant suppliers moving higher and given the move up in valuation, does that make you feel at all like you are being too conservative in your current valuation of your investment portfolio?

We'd say possibly. We're obviously putting private valuations on these businesses. I will tell you is, we tend to look at the businesses very prudently, appropriately and aggressive quarter-to-quarter. So I would say that we are going to continue to look at this business, look at the metrics, see how it's performing, see out it's tracking to see if we should take further price increases, but it's a fair comment. We look at these things every quarter.

And then as a follow-up on that merchant acquiring piece, so even though you noted that the company is a lot smaller than some of the top players, according to our research at least Newtek Merchant Solutions is still a Top 50 merchant acquirer in the U.S. So given some of the strong growth from players such as Square, do you believe you can maintain the Top 50 and also continue to take share from some of the smaller providers? And then also, can you comment at all on some of the trends in the business and whether the company is growing at the same rate or faster than the overall market?

It's a good question. I think we are, to be fair, on average. We're a little bit above average. And to be honest with you, we're not happy with that. We're not in the business to be average in anything. We have some new initiatives that we're going to be pushing out 0-course payment processing, we think is a big trend and really pushing more into the space of making sure that we've got technological solutions that are fitting customers, which is much more important than, just hey, I can save you money on your payment processing because - that ship has sailed. Square is somewhat unique in that they've done a good job in putting out their technology, but we have like technologies, but I think Square has done for growth however, is that they put out a tremendous amount of financing in conjunction with payments and personally, I am not a fan of their financing, because I think their financing weak credits. And think I'm a stock analyst because I probably would have been crushed on the price of Square, which has done nothing but gone up. But what I've seen in a lot of lending models particularly ones where there is only 1 year, 2 years or three years' worth of lending history with growth that sometimes ends in not so great story. So I think that our goal is to compete in eCommerce, POS and we think there is a big trend in - what would I refer to 0-request processing, which is pushing the cost of processing on to the consumer away from the merchant, because the merchant needed 3% savings, we're currently looking at a small acquisition with some talent that will get us there. So we think we can continue to be competitive in the space by the way, that the markets think is very valuable. I mean the value of customers in the payment space it's been very strong, it continues to be strong, and it continues to be consolidation there. So that's a good thing for us.

Our next question comes from the line of Frederick Cannon from KBW.

Barry, it was a little confusing press release as you know the story about the organization to 504 business, NBL versus NBC, could you kind of just update us how - how you see the 504 business organized at Newtek?

So currently CDS, which is a portfolio company, houses all conventional loan opportunities of which I do consider 504 lending, despite the fact there is a government aspect to it. It technically is a conventional loan that we made in the first. And on a going forward basis with our growth and the acquisition of Tony Zara's team in Orlando office, we will be separating our 504 lending into what Anthony called NBL, Newtek Business lending, so that we got to move over some of the lines of credit, both businesses will be portfolio companies. The will have separate staffs, separate management, separate loan committees and things of that nature. But on a going forward basis, I can't put a data and confirm - negotiating with lenders that takes time, you will see the 504 business primarily separated and segregated in the NBL. Right now on a good note, and I realize, we don't make it easy for you analysts, I'm sorry for that. The numbers are not that significant that it's going to make a change in one way, shape or form the next quarter or so. Fourth quarter there could be some decent numbers in there, but right now, I think CDS is the entity that you would look at for lines of credit business and 504 business.

That's helpful because I was just a little confused on NBL. That's helpful. Secondly, in anticipation of the board meeting, can we assume that there won't be any further share issuance on a go-forward basis until you kind of figure out how you're going to address the leverage issue?

My Chief Legal Officer is listening, Fred and he is going to spank me if I can't answer that. Let me, say this. So we put up the press release last night and the board did vote to expand. Now without a shareholder vote, we'd have to wait a year. So I would speculate that we will continue to use the ATM when appropriate for equity until that board comes in.

But I mean in theory though, you could let your leverage move up from that 83% level towards that 100% level in anticipation of that board meeting just in theory?

I could, but Leslie wouldn't like that. Yes, I mean I've got people like Oh, my god. Yes, I could put it this way, I could get a little closer to the precipice but we are thrilled secretly, but we're not that thrilling.

One other, Jennifer had mentioned the referral cost going up and I note that your referrals are really moving up rapidly and your fundings are moving up significantly, but not as rapidly as the referrals. Could you talk a little bit about the economics of that, I mean is it, because it would appear that your pull-through on your referrals is declining as you're getting more referrals. Does economics work well in terms of those referral cost going up relative to the number of loan growth?

It does. A couple of things. Number one, we're bringing on new people and the market price for our referral fees is much higher than what we pay, and we tell people to come to us and ask us for these higher fee like two business with somebody else, but they still wind up doing business for lower fees because we're quick, we get quick yes or no's and good loans trade very quickly, it's just a fact of life. So we're competing against banks, the fact that we're fast enables us to get loans at lower cost. Now as our portfolio grows and we're able to do more business with the existing portfolio, you get some of those deals are come in, there is no fee, and you get no fee from other companies in the portfolio that come to us for financing. I do think that our current fee paid has been steady like 70 basis points to 75 basis points, gross fees are going to continue to go higher, because we are doing more loans. But I think the average is fairly steady at this point.

And our next question comes from line of Robert Maltbie from Singular Research.

A couple of questions. So regarding your net income line moving ahead in the next year too, how important this your non-lending and lending servicing business relative to the big picture as a contribution to net income? And as a percentage where do you kind of see that going in a year to from now?

Robert, that business kept us in business in '08, '09. And we're not nostalgic or romantic but we also recognized that recurring revenue business that's not tied to credit is valuable to the overall organization. Approximately 33% of our dividends, I think in 2017, came from that side of the business. I would like it to be a bigger percentage, but right now, there is a pretty big tailwind on the lending side of the business. So that may shrink, but long term, I would like to see that side of the business to be frank with you, closer to 40% or 45%. I like the diversification of non-fee-oriented businesses, they also trade at greater multiples which is super for the NAV. So we'd like that to be more, but it's not in the cards at the moment.

And do you expect interest rate increases to impact premiums earned on the sales of your guaranteed portion of your SBA loan sales?

So, one of things I did is, I looked at Prime over the last couple of years. Prime has gone from 3.25% to 4.75%. So up 150 basis points. And the government guaranteed bonds, which are floating rate bonds without a cap, haven't moved in price and they haven't moved in price because it's not the level of rate that changes the price. It's the expectation of the loans underneath those bonds prepay, which are caused by the borrower flipping the business, which is going to happen if the prices are higher. These are not - this isn't base book. These are your basic stable bread and butter or American businesses. It's your diner, it's your dry cleaner, it's your bowling alley, it's your doctor's office, et cetera. So what drives prepayment are significant increases in owner-occupied real estate, when the real estate is behind or the business owner just says, hey I got a higher price in business, done really great, I am going to sell it. So without inflation relative to the real estate - so think of your business owner. You bought a diner, you bought a piece of real estate five years ago, the real estate is worth $1.25 million more than when you bought it. It's okay. I'm going to get down. I'm done. I'd rather just sell the real estate and work in the diner. We haven't seen that yet. I mean, owner-occupied real estate does not go up like office building, multi-family, other income producing our CRE base or investor real estate. And you're not seeing this business sector being over financed, which doesn't goose valuations of the business. When and if that happens, you will have more refinancing. I'll give you one more quick example. Let's say I did a loan five years ago. Five years ago, a person brought a group of doctors, they bought an office building for $1 million. That building is now worth $2 million and they're paying a higher rate. They can go to community bank, get a lower fixed-rate at a lower LTV. They can't get the long AMC schedule and I am going to get 20, 2five years, but they make - that they might have extra principal to pay the loan down and they'll take the lower rate. That's when you get a refinance. But my point here is, and I don't want to over-exaggerate this, it is currently not in the cards. Could it be in the cards couple of quarters from now, maybe. First quarter GDP was not indicative of white hot on fire economy of real estate market at this moment.

And I'm kind of seeing no further questions. And I would like to turn the call back to Mr. Barry Sloane for any closing remarks.

All right. I appreciate everyone's attendance. I know we had a lot of material today, but I thought it was important to get out a lot of new things to talk about. And certainly appreciate your attendance and investment. So we look forward to reporting in the second quarter, very soon. I know Jenny's excited about it. Thanks everybody.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes this program and you may all disconnect. Everyone have a great day.