Good day, ladies and gentlemen, and welcome to the Newtek Business Services Q1 2019 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Barry Sloane, President and CEO of Newtek Business Services. You may begin.

Good morning, everyone, and welcome to our first quarter 2019 financial results conference call. In welcoming all you to the call this morning I also wanted to introduce Jenny Eddelson, our Chief Accounting Officer, who will help me throughout the call today. I would also like to call all attendees’ attention to PowerPoint presentation that has been hung on our website, newtekone.com. You can go to the Investor Relations section of our website and you'll be able to follow our presentation along this morning. On the presentation slide one is our traditional forward-looking statement. I would love to suggest and want you to make sure that you read it and are familiar with it. Going to slide number two. Newtek always likes to review its historical stock performance over the last five years. Clearly, you see, we've done exceptionally well, almost 100%, which would relate to a 20% annual return year-over-year, despite the fact that we can all recall, last year, particularly the fourth quarter was a tough year for equities. Our one year return last year was 3.5%, which beat most major indices by 500 to a 1,000 basis points. However, the stock has rebounded very nicely, and our total return including dividends year-to-date through April 26 was 22.4%. And even looking at current base and stock has appreciated, it would be higher than that. We're quite proud and always want to talk about our stock performance to the investment community. Moving to slide number three, the financial data from the first quarter. Our net investment loss, and for those of you that are familiar with our Company, gain on sale, which is an important component of our income, is excluded from NII. However, it’s put into adjusted NII. Our net investment loss narrowed significantly. It's an important fact, which we’ll talk about in the presentation, to a 66% improvement on a per-share basis. Adjusted NII came in at $8.3 million or $0.44 a share, approximately flat to last year of $8.1 million. We dividend $0.40, so as always, we moved to pay the dividend out of our earnings. Total investment income, $13.8 million, a very nice gain of 24.4%, illustrating the growth of the business. NAV increased sequentially over the quarter ended December 31, 2018 to March 31, 2019, a 1.7% increase per share. Debt-to-equity of 122.6% at March 31; we always demonstrate the performance debt-to-equity, which is on slide number five. And the pro forma equity is basically what our leverage would look like after approximately $40 million of the governments that sold industry bids get liquidated. So, you can see, it’s a fairly significant number and actually cuts our leverage by about 15%, that’s typically done within 5 to 10 days as that clears at the end of the quarter. I also want to note looking at our debt-to-equity ratio versus other BDCs, we insist that we’re difficult to compare the other BDCs. Many of them invest in mezzanine, debt instruments, subordinated debt instruments or senior secured with the typically leveraged buyouts at 5 to 6 times leverage. To give you an idea, debt on our payments business, which does about $15.5 million of EBITDA, believe we’ve only got about $40 million of debt on that. If we were going to do a 5 to 6 times debt on that particular business, you would be looking at $75 million to $90 million worth of debt. I think, it's important to note when you compare the leverage that's -- statistics in our BDCs versus other BDCs, we believe we are not highly leveraged at all. We also have no SBIC debt. So, we look at our growth and leverage as something that is not increasing or significantly increasing the risk to shareholders as extremely prudent. Moving to slide number four, we want to focus on I think an important metric in the first quarter, net investment income or as defined by net investment loss, improved by 66.7%. It was a one-time event and occurred in 2018, which was the extinguishment of debt; it was actually unamortized deferred financing fees about $1 million. But, even taking that out take that one-time charge out in 2018, the net improvement and net investment loss would have been 44% on a per-share basis. Investors that follow the Company and have watched us grow over the course of four or five years, obviously we’ve been on a regular basis been able to grow our business with many streams of income as our portfolio size continues to grow, as our securitizations exits continue to perform very well and get tighter, the spread income on the portfolio we believe will continue to grow and make a significant contribution for business going forward, adding additional revenue streams to our overall adjusted NII and subsequent dividend performance. Moving to slide number six, focusing on dividends and dividend forecasts. We paid $0.40 dividend 2019 that was on $0.44 of adjusted NII. And the Board on May 1st, declared a second quarter cash dividend of $0.46 a share, that’s a 9.5% increase over the second quarter 2018 cash dividend of $0.42 a share. We're still forecasting and maintaining conservatively a dividend of $1.85 to $1.86 per share in 2019; that will be 3.3% increase over the 2018 cash dividend. We point at the history as a BDC, our initial dividend forecast in 2016 was $1.50; today, in 2019, were sitting at a $1.85 to $1.86. I guess, if you take a look at that plus what we think our forecast would be, it’s approximately a 5% to 6% increase per year over the prior year's dividends. We're very proud of that. We would like to repeat historically our annual cash dividends, have been paid out of 90 to 100% of our taxable income, and that is what the Company anticipates and performs on historically. On slide number nine. I think, it's important to note that going through the first quarter of this year, we came in a little bit lighter on the expected loan funding volume, and that was based upon government shutdown, which was historically longest government shutdown in U.S. history, I think over 35 days or a third of the quarter. However, we still were able to fund $97.8 million of SBA 7(a) loan, a 7% increase over $91.4 million in the same quarter a year earlier. We're maintaining our forecast annually to $580 million to $620 million range, which would represent a 27.9% increase. I will also note that our original guidance for the year was $1.84 and a subsequent increase of $1.85 to $1.86. Well, $1.84 was based upon 109 price. I will not address the increase in the guidance that we’ve given to the marketplace. On slide number eight, factors for 2019 7(a) loan funding forecasts. As we’ve said previously, when we’ve been asked what are your limitations to growth, we’ve got sufficient capital available both through debt and equity, loan demand is strong, we're currently still experiencing a low close rate potentially of 2.5% of total referrals cherry picking the best credits. Comfortably, we believe that we can add between $90 million to $125 million of SBA 7(a) loan fundings while maintaining the credit just by increasing the close rate of 3%, and that’s been through investments in technology and human capital investments that we’ll talk about throughout the presentation. We’ve hired some significant senior producers, we've grown our real estate footprint, and we have a very nice pipeline of candidates that are coming in, in loan assembly, underwriting, closing and legal staff to help us grow the overall business opportunity. I think, it’s important to note, as we move to the last point on slide number eight. Launching of our nonconforming conventional loan program we think will benefit the SBA 7(a) and 504 programs. We're now going to be able to go out to the marketplace and our alliance partners with a much bigger net and be able to do loans up to $15 million, that's one five, with long-term amortization schedules, 10 to 25 years with single digit fixed rate interest rates. So, we think that the launching of this program will definitely be accretive for all our opportunities. And when we look at referrals in our business model, referrals come into the funnel, the business service specialists and known internally as our loan assemblers, will figure out what's the best program, is it 7(a), is it a line of credit or accounts receivable or inventory which we build at CDS, also known as Newtek Business Credit, is it a 504 loan, and we wind up going to NBL or is it the new nonconforming program that will be funding through our joint venture with BlackRock TCP. So, there is four different places for the referrals to go to. So, we're basically making much greater use and using operating leverage of the business model that we’ve built over a long period of time which we believe should benefit shareholders significantly. On slide number nine, we’ve always talked about the limitation to our business and our growth going forward, relative to human capital. So, we're proud to announce hiring to support growth at the BDC. Brent Ciurlino has been hired as SVP of Risk and Operations. Brent served as a management consultant for the Company over the last year and a half. Brent comes to us with extensive experience in regulation compliance and risk. Brent for many, many years operated the position of OCRM, Office of Credit Risk Management for the U.S. Small Business Administration. He was also a senior executive at the FDIC and the RTC. Brent will work very closely with Peter Downs in helping manage the portfolio and risk at all the different businesses units. On slide number 10, we hired Brian Moon as Treasurer and SVP of Corporate Development. Brian comes to us with 20 years worth of exceptional Wall Street experience. He has extensive experience with financial institutions, business services, including BDCs. Brian will be focusing on our business modeling, our forecasting, business acquisitions and the footprint and treasury functions that will help us grow our business, both debt and equity. Al Spada, on slide number 11, has joined us as EVP of Small Business Lending. This is the entity that provides outsourced assembly, servicing and underwriting to our own portfolio companies as well as third parties. Al’s been a leader in the commercial lending industry for several decades. And more recently he was Managing Director and Head of Asset Based Finance at Santander Bank. Prior to being at Santander Bank, he has 13 worth of experience at GE Commercial as a and was a senior executive at Citizens Business Capital and CIT. Slide 12 Frank Bertelle joined us as Chief Operating Officer of Newtek Business Credit. Prior to joining Newtek Business Credit, which is our ABL lender, financing, accounts receivables, and lines of credit conventionally. Frank was an SVP, Market Credit Manager for TD Bank, where he managed a significant team of professionals that had loan commitments of $1.6 billion and funding of $658 million. Frank also held positions at CIT and Transamerica Bank. We have a new hire that we hope to announce by the end of May. This professional will be Director of Credit Operations, comes to Newtek with an expensive -- extensive background, not expensive, expensive and extensive credit underwriting, portfolio management, lending operations. This professional will report directly to Peter Downs, our Chief Lending Officer. He will sit on credit committee, one of the four. It’s important to know and understand that each of these business different units and product lines have separate credit committees. This particular professional spent 14 years at GE Commercial, Finance and over a decade at other prestigious financial institutions, like Bank of America and Citicorp. On slide number 14, we’re happy to talk about and finally announce that we will be launching our Newtek Conventional Lending joint venture which is 50-50 joint venture between Newtek Commercial Lending, which is a wholly-owned subsidiary of Newtek and BlackRock TCP. Newtek and BlackRock will commit equal amount of equity funding, anticipated to be about $100 million each over time and will equal voting rights on all material matters. The intended purpose of the JV is to originate business loans to middle market and SMB businesses all over the United States, utilizing the extensive referral system at Newtek Business Service Corp., using the loan assemblers, underwriters, pre-closing, post-closing and legal staff and leveraging Newtek Business Service Corp.’s opportunity. So, the venture will be 50-50 owned. This will be a venture that will show up on our schedule of investments. On April 29th, we announced that Newtek Conventional Lending closed $100 million, senior secured credit facility with Deutsche Bank that has an accordion feature of $200 million. It is estimated that our equity that is the venture’s equity with the lending line, one-third equity, two-thirds leverage, will be used to create the structure that will enable the venture to issue securitizations and potentially from time to time, sell loans out of the venture. We estimate that being Newtek Business Service Corp. out of $18.7 billion that we took in loan referrals in 2018, and there is growth in this quarter, which we’ll talk about shortly, it could be between 1% and 2% that could qualify as non-conforming conventional loan program. We haven’t announced the program yet to our referral partners; that will probably be done sometime next week in a formal press release. We are not giving any guidance on the contribution, nor have we included any dividends or earnings from the joint venture in our $1.85 to $1.86 dividend forecast. I think that a lot of people are looking for information on this. We’ll try to be as transparent as we can without overstepping the line of what might land us towards more speculation. I think most of you can ascertain that for the two joint venture partners and both BDCs, the projected equity would be accretive to the dividend. Otherwise, it wouldn’t make sense for us to do it, and that’s obviously with leverage. So, all you could start to begin to build your models, but we look at this as additive and to quote the item in our press release, JV plans to use the leverage facility to grow the business and we believe this new initiative will have a positive impact on the results going forward. However, at this point in time, none of the benefit of this joint venture has been factored into our annual dividend forecast. On slide number 15, we always refer to our pedigree in the 7(a) business. We're now the fourth largest 7(a) lender in the United States doing more SBA 7(a) loans than JPMorgan, Bank of America and many other financial institutions, and the largest non-bank government-guaranteed lender. All of the loans and the uninsured pieces get exited out of via securitizations; we have nine of them since 2010. These are on balance sheet. You could see all the loans sitting in our Ks and Qs, they’re all mark to market both performer, the sub-performers and the nonperformers on a quarterly basis. The execution on these deals has gotten better and better. We’re quite proud of that. And the securitizations are long-term, nonrecourse, asset liability matched. Although they do count as leverage, but I also will note that nonrecourse to the BDC, I think that’s also important to note when you calculate our leverage ratio. Slide number 16 shows our pipeline, a 14% pipeline increase year-over-year versus March 31, 2018. We had a good quarter in loan referrals and dollar volume, up to $5.3 billion in the first quarter. So, obviously a $20 billion run rate. And we are hopeful and believe that the launch of the non-conforming program, which will give us funding up to $15 million will be beneficial. For those of you non-SBA aficionados, SBA 7(a) business caps at $5 million, a 504 business goes up to $10 million. Being able to expand our big fishing net up to $15 million, we think we're going to get a lot of good opportunities. Some of the loans in the nonconforming conventional venture program will be within a $5 million size for borrowers that are looking for a fixed rate alternative versus the floating SBA 7(a) or those that only occupy 49.99% of the real state, so it doesn’t fit a 7(a) program. For those that already have used their $5 million max cap on 7(a), this program will be very useful. So, you will loans that are greater than $5 million in the pool and under $5 million, for some reason can't fit the 7(a) bucket. On slide number 18, this is the graph showing the growth of our referral business over the course of time. Obviously, people sometimes want to look at the ‘07 or ‘08 cohort data, which we do share with the marketplace. But the reality is, a company that’s originating $20 billion worth of loans a year is different than one that’s originating $2 billion worth of loans a year. Slide number 19 talks about premiums on gains on sale of the government-guaranteed 7(a) pieces. For the quarter, we netted one 11.09%. [Ph] We’re moving back up for the average. We believe that this move back up is primarily a function of constant prepayment rates. These are government-guaranteed floaters without a cap. So, there is no interest rate reason or rationale. Obviously, prepayment rates are a function of a stronger economy and rising rates as well, but it’s a stronger economy that raises rates. And basically, we’ve had these levels of rates for a period of time. I think at some point in time the better loans and the better borrowers do refi quickly. That doesn’t mean that the ones that are remaining can’t make their payments but they may not have a refi option. So, as we go into looking at things like delinquencies and charge-offs and the average seasoning on the portfolio, these are important trends that come into our analysis as we work with credits and we look at and analyze data. CPRs in the first quarter have slowed. CPRs came in at 13%, 14% in the last couple months; it’s down from like high 16s and 18s in the fourth quarter of last year. On slide number 20 we’re now track weighted average seasoning of the portfolio. You could see from ‘17 to ‘19, we're moving out on the default curve. The maximum amounts of defaults typically occur in these portfolios within months 24 to 36 months. Slide number 21, we show our portfolio currency and delinquency trending analysis. 93.5% of our portfolio is current. Slide number 22 is a new slide for us. We felt it was important to break out what used to be known as total gross category of MPLs into sub-performing and nonperforming. Important to note, when loans go 60 days past due, we put them in one of these two categories. Now, sub-performing loans are loans that are currently cash flowing. So, you can have a loan that didn’t pay for 60 or 90 days, you could have a loan that’s been current paid and went into bankruptcy. We still consider that in the broader category and take it out of performing loans. All these loans, important to note, are mark-to-market on a quarterly basis to the balance sheet. So, you’ve got a real-time marking on the balance sheet of what the loans and the assets are worth. Sub-performing loans however, we believe are loans that are cash flowing and as a business is in a position to repay the balance of the loan. A nonperforming loan is defined as one that is in liquidation and it’s the liquidation of the collateral that will wind of paying the remaining principal balance. In both cases, a very serious review by the management and the Board is made of all the loans to mark them to the market, and our sub-performing and nonperforming portfolio came in about 8.8% for the year. On slide number 23 we have the realized losses or the charge-offs as loans are liquidated. As you could see going through the last four quarters, it appears to be a little bit of a leveling off of these numbers. I think once again, it's important to note, based upon where the portfolio sits on the loss curve, this will change from time to time. Many of you could recall on prior calls when these numbers were 25 and 35 basis points and discussed with the investment community that this is not where our level of charge-offs should be and that you will get higher numbers and then wind up balancing at some kind of an equilibrium number that can clearly support our business. We’ve been in these businesses for 16 years, we’ve seen up rates, we’ve seen down rates, we’ve ‘08, ‘09 credit cycles. We feel very good about the creditworthiness and the quality of our portfolio. Slide number 24 is a depiction of how the portfolio continues to improve. You could see that the amount of commercial real estate as primary collateral from ‘07 to ‘18 has improved, reduced dependency on residential real estate as well as machinery and equipment. I also think it is important to note, just because commercial real estate is primary it doesn't mean this couldn’t have machinery and equipment, but we have secondary liens on commercial real estate collateral, which could not be seen on slide number 24. On slide number 25, we talk about loan purposes, existing business is up 83% up from 34%; business acquisitions down from 33% to 12%, little bit of a riskier category; start-up business down significantly, and I think most of the 4% is a residue of loans done many, many years ago. From a geographic standpoint, you could see we are starting, as the portfolio gets bigger, moving toward the footprint of what I call GDP in the U.S. economy. Although when you add up Florida, Texas, California, and New York, which is probably two thirds of U.S. GDP, we're still half of that and we hope to continue to have diversification as an important thesis. With respect to diversification, many of you are aware, the average size of the uninsured loans on our books is about 180,000. Slide 27 is a slide that you're familiar with, for those that have followed the Company, but I always like to include this for newcomers. That represents cash created on a 7(a) loan after the government-guaranteed piece is sold; post cash created on securitization, $41,000. Gain on sale 85,000, risk-adjusted, and then quickly moving into the portfolio review. SBA 504 loans, bit of a description of what those loans look like. It's important to note, we have not changed our forecast for 504 loans without $135 million of closings and $100 million of fundings. The first quarter was very difficult because of the government shutdown. So unlike the 7(a) program, we were able to move forward expeditiously on 7(a) loans and we see a shifting of loan findings from Q1 to Q2. In order to do a 504 loan, you need a CDC and an SBA approval on the second lien. So the shutdown, number one, created a big backlog; and number two, pretty much kept us off this business. So, I have to say that we were disappointed that we had no fundings in SBA 504 loans in Q1. However, we believe that where our pipeline currently sits with $32 million in approved pending closing, we think we’ll close 30 to $35 million in Q2 and fund $25 million, and we're maintaining our guidance, and we are comfortable with it. 33 and 34 explain some of the economics and what a 504 loan looks like. Our portfolio company Newtek Merchant Solutions is a fairly sizable portfolio company. And based upon its materiality we do give more information on this portfolio company versus little to no information on a lot of the others, based upon size and materiality. We have been in this business for over 10 years. We’re processing over $6 billion of payments in 2018. We have a 7.5 times EBITDA valuation on the business, compared to the public comps, which you could see on this particular slide. Important to note, we're still projecting a 13.2 EBITDA increase over last year, that’s what taking out a $1 million of reoccurring revenue on an Elavon portfolio that we sold at the end of the year. I think it's important to note that we’ve taken out $1 million of cash flow and we still think we're going to be able to grow the business. There is still a pretax gain sitting at the portfolio company of about $4 million that the Board of Newtek Merchant Solutions decide on a regular basis whether to distribute that or not, based upon opportunities that it has in its markets to make investments in portfolios and acquisitions, software or potentially to distribute those dividends and earnings back up to the BDC. Valuation on our technology units, $10.8 million net of debt as of the end of quarter. We are still very bullish and positive on our ability to participate and be aware in the cloud services space. On slide number 38, this is a summary of why people should look at Newtek as an investment opportunity. I would point to slide two which is our track record. We're internally managed BDC, so we don’t pay ourselves management fee. Most of these companies are portfolio companies we’ve owned and managed over 10 years. We continue to have a track record of paying dividends and increasing them out of earnings. We have a proven track record as a lender over 16 years to multiple lending and credit cycles. Average balance on loans that sit on our books is about $181,000 of risk. These are floating rate loans without a cap, tied to Prime and a quarterly adjust. Management’s interests very much align with shareholders. Management and the Board own 6.8% of the outstanding shares. And we are very insistent that we are less levered than most of our competitors in this particular space. Now, I’d like to turn the rest of the presentation over to Jenny Eddelson.

Thank you, Barry, and good morning, everyone. You can find a summary of our first quarter 2019 results on slide 40 as well as the reconciliation of our adjusted net investment income or adjusted NII on slide 42. For the first quarter of 2019, we had a net investment loss of $986,000 or $0.05 per share as compared to net investment loss of $2.8 million or $0.15 per share in the first quarter of 2018, a 67% improvement on a per share basis. Adjusted NII, which is defined on slide 41, was $8.3 million or $0.44 per share in the first quarter of 2019 as compared to $8.1 million or $0.44 per share for the first quarter of 2018, unchanged on a per share basis. Focusing on some of the first quarter 2019 highlights, we recognized $13.8 million in total investment income, a 24.4% increase over the first quarter of 2018. Both interest and dividend income were the primary drivers to the increase with interest income increasing by 36%, resulting from a higher interest rate on our SBA loan investments year-over-year as well as an increase of 21.2% in dividend income quarter-over-quarter from our controlled portfolio companies. Our dividend income in the first quarter of 2019 included $2.9 million from NMS, $150,000 from Sidco and $100,000 from mobile money. Servicing income increased by 17.6% to $2.4 million in the first quarter of 2019, versus $2.1 million in the same quarter last year, which was attributable to the average NSBF originated portfolio earnings servicing income growing from $909 million at March 31, 2019 to $1.1 billion at March 31, 2019. Total expenses increased by $909,000 quarter-over-quarter or 6.6%. Salaries and benefits decreased by 26.4%, primarily due to NSBF employees being hired by Small Business Lending LLC or SBL, one of Newtek’s wholly-owned controlled portfolio companies on January 1, 2019. Small business lending is a lender service provider that effective on January 1, 2019 provides NSBF with loan origination and servicing functions performed by its employees. SBL charged NSBF $2.2 million in the first quarter for these services, which expense is reflected on the consolidated statement of operations as origination and servicing related party. Total interest expense increased by $1.2 million in the first quarter of 2019, primarily due to higher average outstanding debt balances. In addition and as Barry discussed earlier, the first quarter of 2018 included a $1.1 million loss on extinguishment of debt expense, resulting from the redemption of note due in 2021. Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the first quarter totaled $9.7 million, as compared to $10.3 million during the same quarter in 2018. In the first quarter of 2019, NSBF sold 117 loans for $74.1 million at an average sale price of one 11.09%, [ph] as compared to 114 loans sold during the first quarter of 2018 for $73.2 million at a weighted average sale price of one 11.82% [ph]. Realized losses on SBA non-affiliate investments in the first quarter of 2019 was $402,000 as compared to $394, 000 in the first quarter of 2018. Overall, our operating results for the first quarter resulted in a net increase in net assets of $9.1 million or $0.48 per share, and we ended this year with NAV per share of $15.31. I would now like to turn the call back to Barry.

Thank you, Jenny. Operator, we’re ready to take any questions.

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

Hi. Good morning. So, my first question is on the SBA loan funding for the quarter. You talked about the government shutdown has an impact there. Back in March, we didn’t think it would be much of an effect. So, was the end of March just little a bit lower as well or what changed between that and the end of the quarter.

Yes. And I definitely appreciate the question. And sometimes we get into the specifics. We were adamant that based upon our annual guidance, which we are -- we have a [indiscernible] that there would be no effect and we still take that position. We indicated that the government shutdown could be problematic but you have a shifting of funding between the first quarter and the second quarter, and that's what we have. So, we stick to our position that there -- the effect has been a reporting effect of what happened in Q1 versus Q2, which is why we haven’t changed our annual guidance. So, for those people that might be focusing on quarterly results and take out the slide, which is what we all do, there was an effect but there was no effect on our annual guidance, our dividend guidance. As a matter of fact, I think we met the guidance of most of the Street analysts. And then, we gave dividend guidance for Q2, that’s up 9.5% quarter-over-quarter. So, we feel very good about our original statements relative to the government shutdown.

Okay. Thank you. And then, just on the -- I guess just the accounting, make sure of the salary and benefits now. You mentioned it or you read it in the statement about the breakout of SBL now and how those employees are doing that. Is that the origination and servicing related party, and then is there an outlook for that on balance sheet, salaries and benefits for the year?.

I think that the way to think about it and look it is SBL is an entity that performs third-party service, both to the BDC and other portfolio companies. And we do believe that SBL is an investment on a schedule of investments. And we feel very constructive about that business on a going forward basis. I think, it’s important to note it will be accounted for, it’s a real expense, and it will receive revenues both from third parties, it currently has over 100 third-party financial institutions as clients, as well as the BDC as a client.

Okay. But, all the new big hires that you went through, those are going to be on-balance sheet for salaries and benefits expense. Correct?

So, the answer is mostly yes. The new person will be at the BDC level, Brent Ciurlino at the BDC level; Frank Bertelle is at CDS Newtek Business Services Corp.; and Mr. and Mrs. X will be at the BDC level.

Got it. Okay. Thank you.

Now, Leslie, one other thing. Some of these hires replaced other people and some of them are new hires. But, we're very comfortable that we have fully loaded all of these expenses into our projections for earnings and dividends.

Okay. All right. Thank you. And then, then JV, you talked about last year, about 1% to 2% of referrals, you saw the $18.7 billion would have qualified as not informing for that. Now, despite the qualification, how much of that would you have that have been a year and what you have the JV ramping? What would be the actual anticipated close rate? And I know it’s an estimation, but just somewhere in that range.

Yes. I’ve got eight people telling me not to answer this question. First of all, I appreciate the questions. So, let me see if I could be somewhat helpful. Number one, I think, it’s really important. We haven't announced this yet to our alliance partners. Even on the initial announcement, I don’t expect a tsunami but I do expect to get a lot of opportunity. So, let's use a $20 billion number, right? We believe that even though we’ve historically funded only 2.5%, it’s not like 97.5% aren’t creditworthy, we just didn’t have a program for it. 7(a) program taps at $5 million. So, this program will enable us if borrowers need 6, 7, 8 or they have used $5 million of their 7(a) and need more, we can do this program for them as well. If you look at the 1% or 2% and you lay it over the $20 billion, you certainly can come up with a number. But also, when we announced it, I think that the growth in this particular segment, as I said in the press release, can be important, can be significant and can be material. I’ve just been advised by all my advisors, as well as other constituents to sit tight, look at it again the end of the second quarter. We will be able to tell you what we funded, what the pipeline looks like. But, right now, this just upside in grade. [Ph] I also tried to give you a little bit of a scent indicating that it wouldn’t make sense for us to do a venture like us, unless we believe that the equity was accretive in some way, shape or form.

Okay. Thank you for that color...

I know it’s not much help right now, but it gives you an ability to start tracking as you do very well.

Thank you. Okay. And then, on the portfolio seasoning, you started tracking that and you actually had a slightly older portfolio over the last years whereas the rest of the SBA 7(a) market talked about increasing prepayment rates, earlier repayments, and that was kind of the impact on the gain on sale, the premium at the end of the year for the market. So, what makes your portfolio different, how were you guys able to age it up a bit when the rest of the market...

Yes. So, also a good insightful question. In that the portfolio that we're referring is the uninsured portfolio that gets seasoned. The government-guaranteed piece is we pretty much sell off routinely as new. So, the seasoning of the uninsured really relates more into portfolio management, risk management and managing what the expected charge-offs might be which affects income and write-downs, which affects the balance sheet.

Okay. And then, I guess, just the last question. You have the slide in there about non-performing loans, you always have been in there. But this quarter, you’ve added a bit about self sub-performing versus the nonperforming but it’s still paying interest, it’s still cash flow. So, that rate jumped. I mean, it picked up materially it looks from fourth quarter to first quarter. Is there a particular industry in which you're seeing those issues in the market? Is this -- do you see another sector. I mean, we had retail couple of years ago that had all those issues, and if you may before that, are you seeing a specific sector hurting or a broad, general, just slight weakening in credit?

We don’t see a weakening of the credit, and the reason why we addressed the seasoning of the uninsured portfolio which is the portion of the portfolio that would relate to delinquencies and defaults. So, when we say that there is a seasoning shift, let’s say 28 months to 29 months, we're into the valley of the default curve. The other thing that happens is we all look at averages but the issues always are the streams. So, at the streams you’ve got very good credits that have taken no loan for a year or two, business has improved, and they can now refinance with a bank at 5.5% or 6% where 6 in the portfolio are borrowers that have to limit the higher rate because they can't refinance out. There was a portfolio of our nature seasons, you are going to get higher or weighted average basis higher levels of delinquencies and you're going to get higher levels of charge-offs. On a positive side, we can clearly support that because what you’re seeing is the gross size of the portfolio growing as we had new loans with higher coupons. So, you have a sort of a barbell shape on the portfolio. And a lot of newer loans, we have a lot of older, and once the borrower tends to get through 36 months or more of seasoning, they’ve gotten through the important humps of being able to support the debt or able to manage their business and then these number should pay for often decline. But as I said previously, we’ve had charge-off years of 25 and 35 basis points. I made it a point to say that’s not just portfolio, it’s not. As a matter of fact when we do our analysis, we use a 20% gross cumulative default and 40% severity, and our business model can stand that and support that. So, we think what is occurring, which are higher than previously forecasted numbers in these categories are totally supportable and sustainable of the income that comes off of our business model.

Okay. So, then, I guess, my question would be on the market side of that then, what is there in industry you're saying that is being aged stronger? So, is there one you’re seeing that’s having trouble? So, it’s not necessarily the credit overall, but the ones that you are seeing that are staying longer, is there a concentration in the industry?

No. It wouldn’t be an industry. So, a couple of things. When you look at the -- what causes a loan to prepay, it’s easier to prepay loan backed commercial real estate because of the commercial real estate appreciates and the prices are still available for cash flow, you could refi into a commercial banking loan with a two to three to five-year paybacks, amortizing principal faster, but you get a lower rate. So that’s the trade off in the loan. If you don’t have the commercial real estate behind it, you’ve got effective a 10-year loan that’s fully amortizing and the borrowers are just going to keep paying.

Okay. All right. Thank you for answering…

It’s not -- yes, it’s more collateral-driven and refi driven; if you can get a lower rate, then real estate; if our rates are higher, the bank [ph] rates. These substitutes what banks don’t do. That’s the nature of it. And by the way, I want to say one other thing, it’s really important. A lot of times from an analysis standpoint, looking at these delinquencies and charge-offs, not you in particular but some of our analysts are bank analysts, looking at credit card portfolios and car loans. When a car loan goes 60 or 90, it’s dead; you could write it off and you’re liquidating the car. On a credit card, it's gone, you are now recovering any pennies. On these loans, you’ve got multiple personal guarantees from business owners with personal assets pledged and business assets pledged. So, sometimes these businesses can have a tough quarter or tough two quarters but all of a sudden they come back. That’s where the sub-performing category is important. We’ve got loans that haven’t missed a payment but the borrower has declared bankruptcy. But the way, I’m not saying that’s a good thing. We do write the loan down that’s still cash flowing and they haven’t done the payment, why they don’t go into bankruptcy? Maybe there is an issue with the divorce, maybe there is an issue where they’re trying to negotiate a real estate lease which we’ve had. But we believe based upon the collateral, on the cash flow of the business and the fact that we’ve got everything tied up, they are going to pay the loan off.

Your next question comes from Casey Alexander of Compass Point. Your line is now open.

First of all, let me ask kind of a strategic question. How come you only bucket prime plus 2.75% SBA 7(a) loans? I mean, is that actually keeping you out of some -- for instance a better quality guy might be able to get a lower rate that that somewhere else but you could -- there are SBA 7(a) loan percentages available. So, why just that one narrow slice and not have a broader menu of SBA 7(a) loan spreads that would allow you to cater to higher and other type quality customers?

Casey, that’s a good question, which lays into the nature of our business model, because we don’t use brokers or brokered loans, and we're dealing directly with borrowers and we don’t go around the borrowers and say we're the 7(a) lender. We're a small, medium sized business lender. We have not cut out rate once since 2009. We’ve been a max prime plus 2.75% lender since 2009. If you go to look at our schedule investments, you might see some differentials, those are typically loans that have been defaulted or bought out pool. So, I’ll save you the question for the next quarter because you're very astute and you do a good job on our financials. But, because we're dealing directly with the borrower and not dealing with the broker, we’re not in competition. And the minute borrower comes in and gets through the underwriting point, we get the SBA guarantee, we're locked. They take an SBA loan anywhere else. So, from our standpoint, number one, we want to know that the borrower can afford prime plus 2.75%; that’s really important. When [Technical Difficulty] prime plus 2.75% and hope the borrowers goes bad, that’s not what we’ve done over 16 years. Number two, we charge a full rate. We’re better than our competitors. We close quicker. The experience is better. And when we don’t think it works, we quickly know and they can go with the rate where they ca. So the prime plus 2.75% rate issue of good quality versus bad quality, it doesn't apply to us. It does apply when you got brokers coaching the borrower and shopping the loan package with three or four SBA people at the same time. It’s a jumbo [ph] and it becomes a jumbo [ph] not just on rate but on credit quality. Because of our model, which is a real retail model where we can fit in shoes between $20 billion worth of opportunities, we're able to get the max rate -- look, I -- maybe an analogy, Casey. If you’re coming into my car dealership, I could probably sell you the car at dealer cost, I could probably sell you a car at issue. My job is to get the highest price I can for the car and give you great service and put you into the car. And by the way, mentor the business and a lot of other things that I could do to help them grow the business which we do as well.

Okay. Thank you for that. Secondly, would you be willing to share with us what a sort of a target range for your leverage ratio that you believe is appropriate for the business? And secondly, and this is one that has always been sort of [indiscernible] to me. If the rollover of loan sales happens every single quarter, then why shouldn’t we just consider 122 your actual leverage ratio?

Actually, I think you should consider 110 as the actual leverage ratio. But that’s just my opinion.

Do you have a target leverage ratio that you think is appropriate for the business?

Yes. It wouldn’t be a BDC leverage ratio before the one and I couldn’t do it. And by the way, we’ve been in the business for over 20 years and been a nonbank lender and we’ve operated at much higher leverage ratios. And I will add that we didn't get a government bailout in ‘08, ‘09 and managed our banking relationships and our defaults very, very well. So, we’re totally underlevered, based on our ability to do this business and manage the risk. The problem that I have is that in many cases the Street looks at the number and they don’t count SBIC debt, they don’t count the leverage that’s inherent in each of these business assets, they don’t count the fact that I under levered one of my bigger assets, my payment processor. But if I do a loan that’s an LBL loan, it’s 5 or 6 times EBITDA, that’s the loan as senior, it’s fine. They have EPGs [ph], they have collateral behind it, but that’s fine. If I do mezzanine debt which has inherent leverage in it, that’s fine. I use CDL equity, that’s fine. We’re unique and we work with each other for many years analyzing it. You can't just look at that absolute number. However what I try to do is not stick my head in the sand, try to be very respectful to the analyst community and investors that do like to look at a single number. And we work pretty hard at trying to make our story as simple as it possibly can. And we're proud of the fact that we traded at 40% premium to NAV and people have understood that. Our dividend is in straight line across four quarters, some people get it, some people don’t. But I will trade our business model into 95% of the other BDCs that are all trading at NAV or below and have SBIC debt and a bunch of other things going on and they are getting -- they are not getting the kind of returns that we get through our shareholders. So, we are unique and we are different. The fact that I have a government-guaranteed floater with a take out from brokered dealer, and that clears in 5 or 10 days, I don’t consider that leverage.

Okay. I don’t think you answered my question. Okay. I understand your fluency about your business model. But the only point at which you addressed my question is that you would run this at 4 to 1 leverage ratio. So, does that mean that you will be willing to take this model right up to the 2 to 1 limit which currently exists at the regulatory level?

Not, because you’ll [indiscernible] at me. And I don’t want that to happen. I’m extremely respectful…

I guess that means 1.9 is the number.

We are paying attention. I actually had -- no, it's not 1.9 and we stated that we take leverage up on a very low methodical basis. And we're also pretty good at using ATMs, which we’ve done successfully; we have been good at not tipping the Street off of what we're doing, both at the debt and equity side. And right now it’s working well for us. But, no, I -- Casey, your questions are totally spot on. It’s the questions I get from some of my investors, not all. So, it’s differently appreciated. But no, we're not going to zoom up there, not going to zoom up there. Because although I tell people to be looking at this differently, I’m not sure I got a 100% of the audience.

Our next question comes from Fred KBW. Your line is now open.

Just a couple of questions. One is the timing relative to the sale of loans because of the government shutdown. I was wondering, did the gain on sale margin affected on? In other words, was there the buildup of either supply or demand on the SBA loans during that kind of period when there wasn’t lot coming through and then there was affect to gain on sale, should we see some volatility on that as a result, between the quarters?

It’s a good question. I don’t believe that the supply and demand imbalance was affected by the 35 days. Because, those participants that had governments pay, they were able to sell them before the end of the quarter. I think that right now the most important issue that’s affecting prices is CPR and CPRs have slowed. Now, it’s funny, if you turn on CNBC, half the world -- maybe not half, I think a quarter of the world thinks rates are going to go higher, 40% thinks they are going to go lower and then you got the rest of the world in the middle. Federal Reserve Chairman, Powell says rates are steady as of this week, it’s probably the best indicator that he doesn't see things heating up much more and he is in a wait and see attitude. So, I think CPRs will remain fairly consistent at 13%, 14%, 15% throughout the course of this year and that prices will migrate to where we currently are or equilibrium.

Only other question was on this new JV that you're doing with the nonconforming loans. Two kind of questions. One is, are those loans going to come on to your balance sheet? And then, number two is, to the extent that -- what kind of disclosure are we going to get? Are we going to get the kind of disclosure we have on the SBA 7(a) loans where we see all of those loans in your disclosures or is it going to be kind of part of a subsidiary where we don’t see the loan breakout?

So, to answer the second question first, it is a JV. Therefore, the JV doesn’t consolidate. The only thing you will be seeing is the equity investment in the JV. We will try to give the market a general feel for how that JV can do. But we're pretty restrictive in doing so because you don’t want that being consolidated onto our balance sheet. So, we do give limited disclosure for the portfolio companies, which is based upon SEC and accounting legs. What was your first question, Fred?

I think, you’ve got out it, Barry. I was really kind of getting at -- I’m just trying to understand that this is a JV between two BDCs about -- does it go on your -- do the loans go on your balance sheet or do they stay in some kind of third-party off balance sheet entity, which it sounds like they say in this JV third-party off balance sheet entity? And then second..

And it is not nonrecourse financing, which is important. So, there is no recourse back to the BDC and it’s funded out of a special purpose vehicle.

Right Okay. And then, for our proposes, for Newtek then it’s just going to be another portfolio company and we will get very limited disclosure?

You’ll get limited disclosure but we will try to be helpful as time goes on and hopefully this get's to be material in size. And then, when it is, we will give more disclosure on it, just like we do in the payments business.

[Operator instructions] Our next question comes from Jeff Sullivan of Raymond James. Your line is now open.

This is Scott. I think that was for me. Congratulations on a great quarter, especially in light of the government shutdown.

Thank you, Scott. I appreciate it.

Question, if you could please drill down a little bit further on the JV, not from a -- I understand, you can’t give guidance, but from a process perspective. Trying to understand how the net interest might bubble up through dividends in terms of -- would you be able to just give us the process and securitizations et cetera that way in terms of the cash flow.

Sure. I think that the nonconforming program 50-50 joint venture dollar of equity from BlackRock TCP, dollar of equity from us that’s $2 get $4 of debt financing from Deutsche Bank, the loans will sit in the leverage facility in the special purpose vehicle, so you get to critical mass and view securitization out of that. So, basically, the recurrence that ultimately will follow up to BDC will be based upon income that comes out of special purpose vehicle. This could be effectively -- in its initial intent this could change which really spread income if you’re looking at the coupon on the loans, that’s the coupon on the leverage vehicle plus the coupon that’s ultimately sold on the bonds. And we try to give, without putting a number on it, no, obviously if we didn’t think this would be accretive, TCP and BlackRock TCP didn’t think it would be accretive, based on that portion of the business, we wouldn’t do it. So, we think from a size standpoint, there is a big appetite for these types of loans in the market. These are much bigger loans in size. Our average, 7(a) loans, 7(a) 100,000 use to be significantly larger, so just dealing with bigger numbers going forward, although the return on equity might not be high to 7(a) business. This should be beneficial because effectively it's going to be giving us reoccurring income, although it’s not going to show up in that format on the BDC, but you're going to get that recurring spread income based upon our interest in the joint venture.

That’s helpful. Thanks. And I got you’re hesitant to give guidance, obviously. But, is there any kind of blue sky, gray sky guesstimates on what kind of spread margins you might be looking at, ballpark goals?

Can’t do -- I appreciate the question, would love to give you our fullest, but can't do at it this point in time.

There are no further questions. I would like to turn the call back to Barry Sloane for any closing remarks.

All right. Well, everyone, thank you so much for attending. And I appreciate your continued interest and investment in the Company. We look forward to reporting great results for the rest of the year and work real hard for all of you. So, thanks very much for your attendance today.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.