Newtek Business Services Corp. (NEWT) Q3 2022 Earnings Call Transcript

Newtek Business Services Corp. (NASDAQ:NEWT) Q3 2022 Earnings Conference Call November 8, 2022 8:30 AM ET

Company Participants

Barry Sloane – Chairman, President and Chief Executive Officer

Nicholas Leger – Executive Vice President and Chief Accounting Officer

John McCaffery – SVP of Accounting and Finance

Conference Call Participants

Jim Collins – Excelsior Capital Partners

Paul Johnson – Keefe, Bruyette & Woods, Inc.

Operator

Good day and thank you for standing by, and welcome to the Newtek Business Services Corp. Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, President and CEO and Founder, Barry Sloane.

Barry Sloane

Good morning, everyone, and appreciate you all attending our third quarter 2022 financial results conference call. First, I’d like to welcome John McCaffery to the call. Today. John, is our SVP of Accounting and Finance and John was hired with our intent that subject to regulatory approval, John will become the Chief Financial Officer of Newtek Bank. In addition to John being on the call today is Nicholas Leger. Nick is Chief accounting Officer of our publicly traded company Newtek Business Service Corp. and he’ll be doing the financial part of the presentation towards the end of the call. And the voice you hear today is Barry Sloane, President CEO and Founder of Newtek business services Corp.

We have many new people that are attending today’s call. Just a little bit of background. Newtek was founded in 1998 [indiscernible] in a New York City apartment, 120 West 18th Street apartment 4B. We reverse merger into a publicly traded company in September of 2000.

I say that because as I do a little bit of counting on my fingers and toes, we’ve probably done about 88 to 89 of these quarterly earnings reports and conference calls. As they say, not our first rodeo. We’ve been through up markets, down markets, up credit cycles, down credit cycles, up rates, down rates. We’ve seen it all and you’ve got a very experienced management team and Board that has been able to manage through all these turbulent times and turbulent waters.

We also like to welcome the analyst community that has followed us, KBW, Raymond James, Ladenburg Thalmann and Compass Point. We appreciate the work that you do in our company, and the reports that you put out. For those of you looking to follow along on the conference call, the presentation is located on our Web site, newtekone.com, newtekone.com in the Investor Relations section. You’ll be able to follow along with the PowerPoint, or you can go to the webcast and the PowerPoint is available there as well.

We think that today’s call will help demonstrate that we’ve had through the first 9 months of this year tremendous operating performance. We’re very excited about telling our story. And obviously we’re seeing very turbulent times in the capital market. And there’s somewhat of a disconnect, we think between capital markets and what’s actually going on within the company. We hope to clear up some of that and depict a very strong, 9 months recent quarter and operating history of the company.

I’d like to roll forward to Slide #2. Obviously, for those that have been following the company, many of you are aware we’re going through a potential and likely transformation to acquire National Bank of New York City and to become a publicly traded bank holding company. On August 2, we entered into a stock purchase agreement to acquire National Bank of New York City for approximately 100% of book value.

We’re excited about that potential acquisition that is subject to government regulatory approval from the Federal Reserve to approve us to the bank holding company and the OCC to approve the acquisition of the bank. We’ve been working on that for over a year and believe we’re very, very close.

On June 1, at a special meeting of the shareholders where the company issued a proxy previously. We got 89% of the votes cast at that special meeting in favor of withdrawing our election as a business development company and giving the Board the authorization to withdraw that election, which potentially would free the way for us to acquire the bank and then use leverage to grow the bank and our business going forward.

As described in the May 2 proxy that we put out, the rationale for us, transforming Newtek Business Service Corp., potentially from the BDC into a bank holding company is laid out very well in the proxy. But it’s important to restate the rationale. Way back when we announced the deal, and obviously the decision to potentially pursue the bank and transform the company was made prior to that. We did think that rates might rise. We did think that quality spreads might rise. We also believe that as a growth company, the better financial structure to be in would be a bank holding company, owning a bank.

But I want to make it very clear, as you’ll see in our presentation, not in the traditional way that most of the 9,000 financial institutions exist today. I say that credit unions, banks et cetera. We will be positioned as a bank of the future, a technology enabled bank and a bank that offers real value to its clients which you’ll see through our discussion of our technology The Newtek Advantage, and many of the assets that we talked about in this particular presentation.

So when you look at the highlights of the proxy statement: number one, BDCs are limited to leverage. It can’t grow more than 2 to 1. And typically, most BDCs kind of hover between 1 to 1 and 1 and 1.5 to 1. Number two, that cap basically means if you’re growing, which we have historically grown, look at our dividend earnings payout over the course of our BDC life in 8 years. You could see it grew tremendously, particularly from 2014, 2015, when we became a BDC to last year, tremendous growth in earnings and dividends.

You always have to continue to sell shares of stock. We believe that we’ll be able to use the bank’s balance sheet, and the appropriate leverage risk per reward in a banking structure to take advantage of the fact that we will not have to dilute shareholders as much and also we’ll be able to use more cost effective debt through core deposits versus expensive BDC debt.

We view that as the low hanging transform — transformative fruit in the transaction. Also, importantly, leveraging the company’s patented technologies, NewTracker, the Dashboard, The Newtek Advantage, some patents that are existing, some that have patents that are applied and patents pending, we are very, very excited about this opportunity. And we’ll be discussing it throughout the presentation.

On Slide #3, and we talk about unlocking the value of our homegrown technology, once again, addressing the history of the company. We’ve been in business for over two decades. And we’ve grown our business without the use of brokers, branches, bankers, or BDOs. We use technology to acquire clients, we use strategic alliance relationships, we’ve created The Newtek Advantage, which will be a dashboard for business clients, which we’ll talk a lot about today.

And we look at organizations like Live Oak who we applaud, and things that they’ve done with nCino. And we believe that we can follow in their footsteps and unlock the technology that we’ve created much better in being a bank holding company, owning a bank, and also spinning out some of that technology and offering it to other players in the space than just being in our current position as a BDC.

We believe that the technologies that we have, the ability to unlock further shareholder value, which is not currently apparent in our market to our investor base, as well as The Newtek Advantage is really going to give our clients a very important asset and a major advantage to doing business with us versus doing business with traditional banking relationships.

On Slide #4, we talk about The Newtek Difference. It’s really important to be different and be different good. Obviously, that is our goal. That’s our aim, as we’ve demonstrated over 20 plus years in business. We believe we’re a differentiator, we believe we’re a disrupter. And what is that Newtek Difference? We’re going to wind up giving our clients personal banking relationships, and we’ll talk about that.

Analytics in The Newtek Advantage, software and transactional capabilities that other banks simply do not have. A snapshot or screenshot of the dashboard is on Slide #5. We refer to this as The Newtek Advantage. When you look down one side of the page of the screenshot, those are the relationships. You will get upon opening up an account and licensed insurance agents that you can click on, get them on camera, a deposit specialist click on them, get them on camera, a lending specialist click on it getting on camera, a payroll health and benefits specialist, click on get on camera.

A technology solution specialist what does that mean? Whether it’s managing their IT remotely, disaster recovery, whatever it might be in the technological realm, we can help a customer with that. Merchant accounts or payment processing, they’ll get a specialist to help them take these images discover American Express or ACH, they will have the five to six relationships with the Newtek Bank that they simply do not with the other competitors in the marketplace. If they’re lucky, they may know a banker somewhere. And at the end of the day, the bankers got to bring in all these other resources. And in most cases, the resources are not present in the bank. If in fact, the bank does offer payroll, workmen’s comp, a payment processing solution, whatever it might be, the dashboard will be a very important growth mechanism and vehicle to provide a better solution and asset to our business clients.

Slide #6 and further discussions about the Newtek Advantage. We talk about giving our business client a management asset. We believe it’s unique and not that easy to replicate because we’ve been in all these businesses for over 10 plus years. That’s payroll health and benefits. This is a licensed insurance agency, tech solutions, company, payment processor, lending et cetera. These are businesses that we have people, process and software that exists that are all getting pushed up into one common interface, The Newtek Advantage, which will be integrated into a core.

We are very, very excited about the opportunity to push the Advantage out in the market to give business clients what they really want. Multiple relationships with an organization with real live human beings. It’s not just a piece of software. And potentially we do think that our clients want to have their deposits, their payroll and their payments integrated into an accounting shield. That is something that is out there in the future subject to regulatory approval. And we’ll be pushing that to get that in place.

On Slide #7, the big question I’m asked about 15 times a day, what’s the status of regulatory approvals and timing? That’s the million dollar question. It’s actually more than a million dollars, but that is the big question. So we think the acquisition is pending approvals of the Office of the Comptroller of the Currency, the acquisition of the bank, and the Board of Governors, the Federal Reserve as well as the Small Business Administration approving our capital plan, which historically they’ve done, and all the entities that we’ve been in.

We anticipate remaining our status as a BDC through December 31, and that obviously is up to the Board of Newtek, a obviously receiving regulatory approval to transform into a bank holding company owning a bank, and be electing that rich status. But we — our best guess is that status, probably we will be maintained through December 31, 2022. And obviously, the final decision, and the timing of the company’s discontinuous from regulation as a BDC, and the withdrawal of our election as a BDC. And the risk status will be determined by the Board of Directors as the authority and authorization granted by the shareholders.

Slide #8 eight. This is an important slide for me. And I wanted to note that the efforts of our staff in operating our businesses and fully servicing our clients with all their needs, while simultaneously preparing for the openings of Newtek Bank and getting regulatory approval, no small task. I want to point out because people have said to me, gee, you don’t know what it’s like being a bank. You don’t know what the regulation is like, you don’t have enough people to do this, who you’re going to hire? Well, we’re ready.

We’ve been positioned, and we brought people in that have helped Newtek as a BDC throughout the course of the year, and are positioned and ready to go when we’re ready to open up the bank. John McCaffery, who’s joining me on this call was one of those people who will be Chief Financial Officer of the bank, subject to regulatory approval. John has been with our organization, I believe around 6 months.

Nick Young has been with our organization as Chief Risk Officer, the BDC for over a year. Subject to approval, Nick will become the President and Chief Operating Officer of the Newtek Bank. Kelvin Lui has been with us, I believe, around 9 months. Kelvin is Chief Digital Officer, and has helped us with our technology solutions.

John Vivona. John joined us about 3 months ago as Chief Compliance Officer. [Indiscernible], who recently joined us in the last couple of weeks as SVP of Loan Administration. So these are five individuals just to give you an idea that have already been added to the payroll. Obviously, those are headwinds on our numbers this year, but preparing us for growing next year.

In addition to the fact, the legal expenses, the accounting expenses, the advisory expenses, these have all been somewhat of a drag on our dollar performance, but positioning us for the future. A tremendous investment that we are very confident will bear real good fruit for our shareholders and organizations going forward in the future.

We’ll also talk about in this call, the lack of $50 million of fee income from PPP in 2022 versus 2021 comparison, as well as a change currently for the first 9 months of this year for gain on sale margins to come in about three points less than they were in 2022. When you add all these things up, it’s pretty incredible. It’s almost $2.50 to $2.70 of earnings that existed in 2022. That didn’t exist this year. Yet, we still hope and intend to finally distribute and dividend out an expected $2.75 with the forecast for the fourth quarter at $0.70

I just want to note, this company has had a real, real strong year. I am very, very thankful to the associates, to the Board for everything that you’ve done during the course of this particular calendar year in the first 9 months as we report here today.

Slide #9, we put out a press release recently. I think there’s some more language in the press release that will be helpful for people to go back and take a look at. The rebranding of Newtek Business Service Corp. to NewtekOne. Renaming the public company NewtekOne really important.

We’re the one company for all your business needs. We’re the one company that makes you successful. We’re the one company that can help position you with analytics, with relationships and with transactional capability that will make your business better. It’s all about being number one.

We’ve had a almost three decade old philosophy that was developed way back when actually prior to the company being formed in 1998, where we recognized that providing a single set of branded and financial solutions to address the needs of independent business owners in the United States was very useful. We believe we can deliver the solutions that business owners need today.

So we’re excited about the rebranding of NewtekOne. People have said, why haven’t you done this before? When you think about businesses, their relationship with their bank, it’s extremely important. It’s direct, it’s a relationship, they typically go to 3x, 4x or 5x a week, 20x a month. And launching the Advantage at the same time is the right time to really unleash the power of what we’ve done and developed over the course of 20 years. We’re very, very excited about that.

Subject to approval, we hope to have a call similar to one we have today to talk about the actual technology of Newtek Advantage and share it even prior to the opening of the bank, prior to the opening of the bank, Newtek Advantage 1.0 will be unveiled and our clients will be able to have access to that. So we’re very, very excited about that.

We’ll be redefining — redesigning our corporate Web site at newtekone.com. So stay tuned for that. Once again, this rebranding strategy, real important, very targeted to independent business owners at the SBA. By its records indicates there’s 30 million of them in the United States.

Moving forward to Slide #10 and focusing on the third quarter — third quarter financial highlights. Record funding for Q3 7(a) loans, $223 million, which represents a 36% increase over $163 million a year prior. Also in units, very important. We’re doing more units with lower loan balances overall.

Newtek Small Business Finances funded 355 million of units, a record again up from 219 for the same period last year. Same record fundings over 9 months, $586 million versus $362 million. From January 1 to October 31, funds at a record $650 million. Because of that trend and funding track record, we bumped our guidance up to $775 million through the end of this particular calendar year. We funded $64 million of loans during October. That first month is always important.

Also important to note, that even though we have increased our fundings, we’ve done it without reducing the credit quality of our borrowers. We’ve actually tightened our credit standards. The weighted average FICO score in NSBF’s recent securitization was 725 on its guarantors, versus a weighted average FICO score on the portfolio at 12/31/2021 of 704. Once again, we talked about our premium gain on sale for the quarter, 9.4% slightly up from the prior quarter, sequentially in September — in the second quarter of 2022.

So we go to Slide #11. Obviously, we believe our growth is based upon technology. We have a frictionless way to acquire loan opportunities, our borrowers love it. They don’t have to chase down bankers, brokers or BDOs. They put a referral in, they get a fact finder, it comes back almost depending on how quickly information passes back and forth, can come back within a half an hour or an hour. If they come back with the right answers, we immediately [technical difficulty] loan appointment when they’re available. Not when we’re available, when they’re available.

We don’t tell them we’re showing up on Monday, Tuesday, Wednesday in the middle of their workday, we give them a calendar, and they’ve got the full gamut of calendar to pick to get a real live person on a camera to help them assemble their loan with our File Vault. No emails with PDFs attached, secured File Vault, it works really well, a frictionless way to get those best credits in real quick. We’re getting 1,000 to 1,500 referrals a day. That’s the big funnel. It’s important to note, those referrals could be for 7(a), 504, non-conforming and in the future subject to regulatory approval. When and if and hopefully it’s when most likely we believe [indiscernible] on a bank, conforming C&I loans and conforming CRE loans.

It’s important to note, the NewTracker system has been our system over 20 years. It’s been great for us. We have over one — actually its over $2 million — 2 million referrals that we’ve historically gotten, three NewTracker, it’s about 75,000 a quarter. And these are referrals that can basically go into any particular loan product or category.

Also important to note, we’ve made some really good changes through the pandemic, or reporting to Peter Downs who is a 22-year veteran of Newtek. Actually, no, I’m sorry, that was summer of 2003, so approaching 20-year veteranship for Peter Downs, Chief Lending Officer of the company.

Slide #12 talks about our pipeline growth. You can see the numbers real, real exciting. Both for 7(a) and the non-conforming business which we’ll talk about. [Indiscernible] kind of flattish, however, the fundings are setting records, both through October 31, which we’ll talk about and our estimation through the calendar year.

Slide #13 also talks about the full pipeline through October 31 of 17%. 14 talks about growth in loan referrals, talks about the units. The referral system, the way to acquire clients cost effectively with alliance relationships like UBS, Morgan Stanley, Raymond James [indiscernible] trade association true value. These are our referral partners that have been with us for long periods of time. We do a great job of servicing them, and helping their clients get loans, get workman’s comp insurance, get a payment processing solution, get an e-commerce solution, get a payroll health and benefits solution. That’s the core nature of our business, broker list, BDO list and branch list.

Slide #15, we talk about dividends. Obviously, a 40s Act company, we must pay out between 90% to 100% of our earnings in the form of dividends. And we have to do that as a RIC. We cannot retain any earnings. That will be an advantage to us converting into a bank holding company and a bank, less need to constantly sell shares. When stock price is high, it’s better to sell share. When stock price is low, you’d probably rather do it with debt. And you’ll also probably rather do with core deposits than expensive commercial funding as a BDC.

We have forecasted a Q4 2022 cash distribution of $0.70 a share. Important to note that in the event that we get approval, which we hope in the near-term in the quarter, we will look to distribute all of our income for the quarter as well as spillover income. So it’s important to get to that 100% mark. So for those of you that are used to seeing distributions at a lower level than the income with a gap in there, our goal is to get to that 100% mark not be under and potentially be over if we need to, just to make sure that we don’t have an issue with the RIC status.

I think it’s really important to note that, I sometimes take calls from investors and say, gee, your — you’ve distributed earnings, historically out of capital, that hasn’t happened. I don’t know where people get some of their numbers sometimes. But I get a lot of questions. Some of them are quite bizarre, but that’s what I wanted to clear up today. I also want to note that subject to the forecasts being accurate, the dividends and distributions for the full calendar year paid in cash would be estimated to be $2.75.

Slide #16. Once again, focusing on the third quarter financial highlights. Total investment income $23.6 million versus $12.4 million in the quarter year prior, 90% increase. Net investment income penny a share. That’s an increase of a loss of $0.30, or 103% increase. Adjusted NII $15 million versus $12.3 million, also an increase a little higher debt to equity ratio when you get the broker receivable out, as it should clear within a week to 10 days. That number gets knocked down to 1.26.

Total investment portfolio increased. NAV down a little bit, $16.04, not really alarming considering the cost of capital increases that we’ve experienced in Q3. I think it’s important to note for comparisons versus the consensus. These are the numbers that we have based upon an RB — KBW report from [indiscernible], Raymond James report from [indiscernible] Compass report from A-11.

Adjusted NII, KBW [indiscernible] report $0.54 for the quarter. Raymond James $0.65, Compass $0.57. As I calculate that that average is $0.58. To me, that’s a B. NII negative a penny KBW, negative a penny Raymond James, negative 0.13 Compass Point. We average that up as negative point 0.05 also B. That’s my calculation based upon those reports.

Slide #17. Financial highlights 9 months ended September 30. These were all fairly ugly comparisons. I think the important issue here relative to the ugly comparisons is the $50 million of fee income from PPP. PPP was a tremendous opportunity and benefit.

People could argue whether or not this was a useful tool for government spending, that’s not my job, our job is to do our job, participate in the licensing, continue the mission as an SBA letter, which was to put this money out the businesses, which 65% of the funds needed to go to employees for payroll in order to get loan forgiveness. And we did that. We did that to about the tune of $2 billion with 26,000 customers.

However, that income has to be shifted back to our core business. So $50 million of income, if you take that out of the equation, at the current share count, that’s about two bucks a share. The other thing I want to point out, which we’ll do in pricing shortly, is the gain on sale margin of three points. So I’ll try to draw the comparisons.

I think the important point to note is, we have made a tremendous change over in 2022. Preparing to acquire a bank, to pay to become a bank holding company, getting staff in place, getting software in place, potentially for a bank opening, repositioning the company to get back to its core operating business of 7(a), 504, non-conforming lending. Getting those lending agreements back in place as well as having this tremendous headwind of no PPP fee income and a three point differentiator on if you round it to 800 million, there’ll be 600 million of gain on sale, that’s almost $18 million of profits, or about $0.72 a share.

Major difference, and this is what I was talking about at the beginning of the conversation. We’re very excited about how our company has performed in this calendar year. We’re very well-positioned for the future. And eventually, growth stocks are people with an imagination that like to buy low and sell high might look at Newtek as an opportunity. But obviously, that choice will be up to the people listening on the quality investment community.

Slide 18 is a common slide we have in the pro forma debt to equity reconciliation. Slide #19 also a common slide. Please note that the average loan size of the uninsured loan participations on our balance sheet keeps declining, $150,000. We like small loans, we like diversification. Important to note, most of those loans are sitting in non-recourse securitizations, and Newtek Small Business Finance where they’re sitting in our Capital One line.

We’re going to Slide #20. This is what I was referring to on the net premium trends. So this slide goes back to 2018. But it really look for sort of an equilibrium, probably over the course of 10 years. The equilibrium price on the Prime plus floaters is somewhere between 110.5 and maybe 112. Maybe it averages, 110.5, 111, maybe a little shade above that. But obviously for the first 9 months of this year, we’ve been averaging 10.02, last year 13.05 and three points.

On an $800 million a year and I’m rounding up from $75 million guidance, that $600 million of government-guarantees three points, that’s $80 million of pre-tax profit. It’s almost $0.70 a share. Well, that has to be made up somewhere. So we’re very proud of the performance that we’ve had.

In addition, on Slide #21, another headwind that we’ve had is the fact that Prime has been lagging the treasury market. And it’s been lagging short-term rates as well, which we’ve been basically been financing historically over LIBOR. So our NSBF net interest trend even though the gross interest keeps growing as rates rise, which we’re happy about, but our cost of funds, which is adjusting monthly is hitting us where the quarterly adjusts on the loans are lagging. Next year will be the year for catch up.

And I think it’s important to note as we talked about in our press release, and in parts of this discussion, we’re looking at probably in the first quarter of next year, our portfolio having a coupon of 10% to 10.5%. If you go to bank rate, which is typically where the higher cost of bank deposit money is going to, you’re looking at 3.5%, 3.25%, 3%, 4%, that’s a pretty good NIM, particularly given that 75% of the loans in the 7(a) business have a big premium for gain on sale. We like our business. We like our model. We’ve been in this for over 20 years. We manage it well. The trend should bode well for us in 2023.

2022, I get asked this question a lot. How do you protect yourself in the current environment? Meaning rates rising and there’s some level of credit deterioration. We basically acknowledged that we’ve been tightening our underwriting criteria as we anticipated that the Goldilocks scenario of aggressive monetary and fiscal policy with some point come to an end. So how do you combat that? Higher FICO and SBSS scores. Two, underwriting with stress tests and higher levels of interest rate starting points.

Loans that you’re putting on the books today are being stressed of 2% 3% at the current levels of rates. The newer loans, frankly, in these climates tend to be better performing loans than the older loans. I think it’s important to note, when we make these loans, we want to make sure that the business has got a very substantial amount of excess liquidity in the event that historic and the future projections are missed.

It’s important to note SBA loans are loans that are made to businesses. It’s a business loan. If they see an ILO and if the business cannot show that it can make payments and service to debt, either on historic performance, or projections, that loan does not get made. So we look to lend to businesses that can liquidate collateral, have unencumbered borrowing power to survive unknown circumstances, things that just don’t work out as well as they had planned so they can get through the tough economic time and climate. Like I said, we’ve been doing this for 20 years, up cycles, down cycles, up credit, down credit, up rates, down rates, not our first rodeo.

Slide #23. You could see our currency rate on our accrual portfolio still remains very high. I have to say we don’t expect it to remain this high. I said that in the last quarter, you’re going to start to see some deterioration here as rates and inflation creeps into it. We do think we’ll have higher charge-offs that we’ve experienced over the last 2 years, that’s clearly factored into our forecasts. We’ve seen this before, we do not believe this is ’08, ’09.

We think it is a lesser issue with respect to that. Our clients still have a reasonable amount of liquidity, and the economy is still on a pretty good footing. But once again, we just want to be careful that we have a very good feel for these markets. We’ve been in them for over two decades. We know how this works. It’s not our first rodeo. We have very experienced people making these decisions.

Slide #24 and 25 are illustrations that we’ve existed for those 88 conference calls, and really demonstrate the economics of the 7(a) loan. Slide #27, the SBA 504 loan program. Important to note, through October 31, we closed $101 million of SBA 504 loans, a record. We’re forecasting $150 million of loans closings for the full year, that would also be a record.

We have plenty of credit availability on our lines as we sit here today to be able to grow this business. We liked the 504 business quite a bit. It’s a loan that’s made for most people that are familiar with it. It’s a 90% LTV with a 40% second taken out by government debentures, so we’re left with a 50% LTV against commercial real estate first, and [indiscernible] personal guarantees and good positive debt service coverage ratios.

On Slide #28. Newtek Business Lending is the entity that originates the 504 loans and the NCL loans. So these are the non-7(a) loans. Historically, we don’t really report this portfolio, because they’re done out of control portfolio companies. However, we thought it was important to demonstrate to the market at a $388 million loans that have originated since 2017 and $132.5 that originated since 2019. We’ve not experienced any defaults or charge-offs to date. And that’s just a $500 million worth of loans, no defaults, no charge-offs. We’re very proud of our portfolio performance in this particular category.

Slide #29 depicts what a 504 loan looks like. Slide #30 talks about the return on equity in this business, which is very high as well as the 7(a) business which is why as a bank, holding company owning a bank, we believe we can generate really high ROAAs and really high ROTCEs. We’re excited about how we would look as a bank.

For those of you that are familiar with our company, on the Investor Relations section, there’s an old illustration I’ll point out, it’ll have to get updated. But it’s all based on old data of where we think the bank might look at that point in time for ROAA and ROTCE high numbers, go take a look at that.

Slide #31. Talking about a non-conforming conventional lending program. Well, we’ve been in the business since 2019. We’re in this business because very accretive. We get tremendous operating leverage out of being able to do loans that don’t fit the SBA box. So when we use the term non-conforming, we’re referring to it non-conforming to a 7(a) or a 504 or government programs.

So we did a securitization in January. $81 million worth of loans. It was 16 units, rated by DBRS. They’re in a trust, you can take a look at how that portfolio is performing. No defaults, no delinquencies, it’s doing really, really well. And this was our first example of a real good exit and a financing and a good ROA.

Slide #32. We talked about expanding this program. I want to note that we’ve made some tremendous headway in this calendar year in a tough market. Obviously, not that easy to attract capital. Things are moving along quite quickly. But we have a transaction with a joint venture partner. Joint venture is funded by a $15 billion asset management company to provide up to $100 million of equity capital. We will match that equity capital. We have and we’re prepared to close on $150 million leveraged facility from a well-known investment bank. We believe that we can grow that facility to greater numbers as well.

And we do believe as we move forward to Slide #33, and the rationale for growing this non-conforming conventional loan business, which will be done at the BDC level, through controlled portfolio companies or in a bank holding company out of the bank. We are looking to originate about $600 million of these loans in 2023, a $1 billion in 2024. Once the [indiscernible] expectation of the funded through joint ventures help the bank holding company. This will give us additional origination fees, additional servicing income, the ability to asset liability, match the loans while they’re in the credit warehouse facility through hedging that we’ve done historically, as well as once they go into securitization totally match funding.

So Slide #34, we continue to talk about the securitization that we did on January 28 2022. Slide #35, we go to another one of our successful controlled portfolio companies that was established in 2002, our merchant processing business. We generated EBITDA of a little over $14 million, I think that was about $14.5 million of all of our payments business last year. But that’s a nice growth this year, up to $16 million of EBITDA.

We have a very reasonable multiple on that business. And that’s an important part of our ecosystem and being able to offer value to our customers to help them move money, bill, invoice, use POS systems and all state-of-the-art e-commerce to be able to take payments, and use the payment processing system. Very important function of a bank.

Slide #36, Newtek Technology Solutions in Phoenix-based cloud computing business. We’re forecasting $4 million of EBITDA. Between that and the NMS business, about $20 million of EBITDA. Both businesses will be held up at the bank holding company.

Slide #37. Many people aren’t aware of the fact that we own 60%, of an organization that provides a POS to our customers that can be white-labeled for our alliance partners. And we’re really excited about the growth and the opportunity in competing against [indiscernible], Square and others to be able to provide this attractive software.

Slide #38. Two other important portfolio companies that we believe really experienced tremendous growth based upon their positioning in The Newtek Advantage. Newtek Payroll Benefits Solutions and Newtek Insurance agencies. These are businesses that will consolidate in our financials going forward, if in fact, we get regulatory approval become a bank holding company on a bank.

Important to note, everything will consolidate. So all the accounting will change over from 40s Act accounting to 33 Act accounting. We plan on being very transparent. So there’ll be financials on the bank, financials on insurance, financials on payroll, and everyone will be able to do their in depth evaluation.

Going to Slide #39, from an investment summary perspective and some of things where I turn the call over to Nick Leger. Important to note, and I really wanted to emphasize this. We’ve been publicly traded since 2000 and the company was established in 1998. I’m one of the original founders. Important to note, the insiders of Newtek own approximately 6% of the outstanding shares. So our interests are very much in line with shareholders.

As we’ve talked about, we believe very strongly that the best opportunity for Newtek Business Service Corp. future NewtekOne will be to unlock the value of its technology that’s built over 19 years, which will be much easier to do and display as a bank holding company and offer much greater rewards to its current customer base.

Obviously BDC dividend investors have been rewarded with high dividends during this window of time. But realistically, they’ve had fairly perfect information with respect that we are no longer going to be distributing 90% or 100% of our income out. And many of our BDC investors are retail and they want the dividend and really don’t want to hear about anything else. We appreciate that. We understand that. I have to be a shareholder and I haven’t to be a major beneficiary and enjoyed those dividends.

However, the new structure will allow for increased total participation. Number one, BDCs are excluded from the S&P 500 and the Russell 2000. I think it’s important to note, we’ve had estimates from researchers that indicate that, there could be about 2 million shares of Newtek buying, just going into the Russell 2000 alone. I wouldn’t rely upon that statement, do your own research. But however, going into the Russell without market cap, cleared a lot of institutional buying.

In addition, institutional investors really have a hard time buying BDCs, because of the AFFE issue. A lot of people don’t know about this, they don’t understand it, they don’t know what it means. Well, I don’t want to get too much into the weeds here. But we’re an internally managed BDC, not externally managed BDC, which is an advantage by the way. So we don’t further our nest as management participants taking fees out of the entity. Our dividends are after those fees.

With that said, because we’re internally managed, it’s the SG&A that hit this number. It makes it very difficult for institutional investors to actually own Newtek or other BDCs. So we do believe that this is going to open up the box to a lot of additional investors to Newtek. We are looking forward to declaring which we have not yet, but we have forecasted a $0.70 cash distribution for the fourth quarter. And obviously, that’s coming up rather quickly, because we’re already in November. So the return on that cash return is pretty high.

So we look at going forward, if we get the regulatory approvals which we hopeful or imminent, but anything can happen. As I said, to many people, this isn’t [indiscernible], close is nothing to get the letter. You never know you there. So once that occurs, we will try to turn around and provide earnings forecasts for 2023 and 2024. We’ve given some idea what that could generally look at by the August 2 Or 3 discussion, if you go to the Investor Relations section. I think the thing is labeled August 4 presentation, when that’s when it’s been put up. But anyway, so look for that August 2, 3 or 4 date, you’ll get a feel. But I think importantly, we put that out, there’ll be some nice guidance for the market. We haven’t been able to do that at this point in time, because we want to know what the final structure is subject to regulatory approval.

We’re also hopeful that our sell-side analysts will transfer coverage for BDC analysts to bank analysts. We don’t have a lot of guidance out there. It’s been very difficult. Also, earnings multiples are depressed for both BDCs and bank stocks currently. And obviously, we talked about gain on sales margins being depressed, and lags in [indiscernible] headwinds.

With that said, I hope we’ve been able to illuminate the quarter and the performance year-to-date, and how excited we are about our future, despite the fact that it’s a tough news channel half there, but we still feel pretty good about it. And we’re very optimistic about our future. I would now like to turn the financial review over to Nick Leger, our Chief Accounting Officer.

Nicholas Leger

Thank you, Barry. Good morning, everyone. You can find a summary of our third quarter 2022 results on Slide #41, as well as the reconciliation of our adjusted net investment income, or adjusted NII on Slide #43 and 44.

For the third quarter 2022, we had a net investment income of $205,000, or $0.01 per share, as compared to a net investment loss of $6.7 million, or $0.30 per share in the third quarter of 2021. That’s 103% increase on a per share basis. Please note that income related to the PPP of $269,000 is included in the third quarter 2021 investment income. Adjusted NII, which is defined on Slide #42 was $15 million, or $0.62 per share in the third quarter of 2022 as compared to $12.6 million or $0.56 per share for the third quarter of 2021.

Focusing on third quarter 2022 highlights, we recognized $23.6 million in total investment income, which is a 90.3% increase over the third quarter of 2021, total investment income of $12.4 million. The primary driver of the increase in total investment income was primarily due to the $7.2 million of dividends from the portfolio companies in the third quarter of 2022.

In addition, interest income increased by $1.7 million, resulting from a year-over-year increase in the accrual loan portfolio. Other income increased by $1.8 million in the third quarter of 2022 compared to Q3 2021, resulting mainly from a year-over-year increase in SBA 7(a) loan origination volume.

Servicing income increased by 28 — 20.4% to $3.6 million in the third quarter of 2022 versus $2.8 million in the same quarter of 2021. Distributions from portfolio companies for the third quarter of 2022 totaled $7.2 million, which included $4.35 million from NMS, $1.65 million from NBL our 504 business, $360,000 from NCL, our conventional joint venture, $720,000 from AMS, and $150,000 from Mobil Money, and that is compared to the third quarter of 2021, where there were no distributions from portfolio companies.

Focusing on expenses. Total expenses for the third quarter of 2022 increased by $4.3 million compared to Q3 2021, mainly driven by higher interest related costs and increase in SBA 7(a) loan referral fees due to higher loan origination volume and loan origination processing costs. Realized gains recognized from the sale of the guaranteed portions of the SBA loan sold during the third quarter of 2022 totaled $19.6 million as compared to $22.4 million during the same quarter in 2021.

In the third quarter of 2022, NSBF sold 321 loans for $172.4 million at an average premium of 9.45% as compared to 205 loans sold during the third quarter of 2021 for $148 million at an average premium of 13.04%. The decrease in realized gain was attributed to low average premium prices in the secondary market when comparing to the third quarter of 2021. NSBF sold 56.5% more units in the third quarter of 2022 as compared to the third quarter of 2021. As I mentioned earlier, income related to the PPP is including investment income, not unrealized gains.

Realized losses on SBA non-affiliate investments for the third quarter of 2022 was $4.9 million, as compared to $3.2 million in the third quarter of 2021. Overall, our operating results for the third quarter of 2022 resulted in a net increase in net assets of $11.4 million, or $0.47 per share. And we ended the quarter with NAV per share of $16.04.

I would now like to turn the call back to Barry.

Barry Sloane

Thank you, Nick. Operator, we’ll open it up for Q&A now.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Scott [indiscernible] from Raymond James. Your line is now open.

Unidentified Analyst

Thanks very much. Congrats on a great quarter.

Barry Sloane

Thank you, Scott.

Unidentified Analyst

I am wondering if you could give us some color on loan demand. The growth has been clearly outstanding, especially in light of current situations we’re dealing with here. Massive hike — rate hikes, and the questions of the possible recessions next year. And, obviously, we talked about preparing for non-performing loans, which help — was certainly helpful. But I’m very curious in terms of your conversations with current customers or future customers, both in SBA and non-SBA, more conventional bank lending. What kind of appetite are you seeing on the horizon for your loan book? Thanks.

Barry Sloane

Sure. Thank you. I think it’s when people talk about loan demand, they always think about it in the aggregate. And when you think about, like Bank of America, big bank, I mean, they actually — they are almost the market because they’re that big. We have the opportunity, given how we’re set up using technology to pick and choose what we think are the best credits.

So even though the market is softer, number one, you’re able to get much better terms from the borrower. Number two, people that might not have thought about borrowing, now come into the borrowing realm. And those are clients that are typically stronger borrowers. They have more assets. They have more commercial real estate, they have more unencumbered things that they can pledge and have better businesses. So the goal is to continue to be selective, pay attention to the things that we talked about.

But we are fortunate that we’re not struggling to get opportunities. So we’re able to pour through those opportunities and get the best opportunities. In addition, these are times where you’ve got the bank lenders that were tripping over themselves to do loans, a 2.5% to 3% rates, or 3.5%, all of a sudden, they’re like, risk off, they don’t want — they don’t really want to put money out there. And I think that in economies that are declining or declining, or not increasing at a faster rate or declining at a slow rate, there’s still really good credits out there. And that’s what we excel in, making sure we pick those best credit.

So plenty of loan demand, plenty of opportunity to make money. So charge-offs may not be 50 basis points. Maybe they’re 75, maybe they go up to 1, maybe they’re a little higher on an annual basis. But when you look at the coupons that we can charge, which is what we’ve experienced over 20 years, and really paying attention and realizing that, in our best guess at this point in time, we are not, ’08, ’09. This is nothing close to ’08, 09.

I mean, unfortunately, the risk has been shifted to the government, or for commercial enterprises and consumers. So commercial enterprises and consumers and their balance sheets unlike ’08, 09 are actually in pretty good shape. It’s the government that’s got all the debt at the Fed level, in potentially budget deficits at the state level. So our customers are actually in pretty good shape from balance sheet prospective. Question is, will consumers continue to spend? There’s still a lot of liquidity out there. So, we feel good about there being enough great credits to make good loans with better terms.

Unidentified Analyst

Great. That’s very helpful. And if you could sort of have your wish list in terms of the loan mix, would you prefer to have the same level of SBA versus non-SBA? And how would you [multiple speakers] going forward?

Barry Sloane

I think that — yes, I think that we’re going to have a real good year. And we’re trying to finish nailing down a few funding commitments, which we think we’ll do here in the next couple of weeks for the non-conforming book, which diversifies us now. When we say non-conforming, those are typically borrowers that want bigger loans, have stronger personal guarantees, have more liquidity than the SBA book.

So we would like to clearly continue to grow as we’ve grown in 7(a), but use the operating leverage that we’ve got existing in the company to put on more 504, more non-conforming, and if we are blessed with the regulatory approval, put on conforming C&I and CRE in the bank. So really have a very diverse portfolio and now you’ve covered almost all angles of the lending spectrum. So you’ve got businesses at different maturation points, that you continue to lend to them, as they get better and better and grow and get bigger.

Unidentified Analyst

That’s terrific. Thanks so much.

Operator

Thank you. And one moment for our next question. And our next question comes from Jim Collins from Excelsior Capital Partners. Your line is now open.

Jim Collins

Thank you. Good morning, Barry.

Barry Sloane

Good morning, Jim.

Jim Collins

Question on the — question on a little bit of a geeky question, sorry, but on the dividends, so this is Slide 16. So if this transaction — if everything is approved, as planned, essentially, as I understand that you basically have to sort of push all the retained earnings back out. And so my question is …

Barry Sloane

That’s correct.

Jim Collins

… so then that would be as of September 30, correct? Because then those that distribution would have been made by 12/31. So then for your full year ’22 earnings, it wouldn’t be included or am I misunderstanding that process?

Barry Sloane

Let me lay this out and then tell me if I’ve answered the question. The $0.70 forecast that we have made. It’s a forecast, it’s not a declaration yet for a distribution for Q4. It’s an estimate of Q4 earnings plus any spillover to get to the 100% mark through December 31, 2022.

Jim Collins

Okay.

Barry Sloane

So in the event that the Board declares that dividend, and then declares that it’s going to withdraw its election as a BDC, the goal would be to distribute every dollar of income, including anything that’s been retained historically, which does require work and an estimate that the company has been at work and doing, but hasn’t fully wrapped up yet.

Jim Collins

Okay. So that’s …

Barry Sloane

So when and if the derricking [ph] occurs, all that income is paid to the shareholders. So look, you think about it, 2021 was a banner year, and our shareholders participated in that by getting the benefit of the earnings because there’s a BDC, paid all out. But some of it modest amounts were retained from that year and years prior, et cetera, et cetera, by like, that’s kind of the way the market likes it. Don’t give it all out, but give most of it out. And you’ll get between 90% and 100%. However, to conclude, you want to pay 100% to 101% to 102% out just to make sure that you don’t miss.

Jim Collins

Exactly. And then that that figure is the one that you would be including in the 10-K, which obviously will take you a few months to follow. I’m just wondering if …

Barry Sloane

Yes.

Jim Collins

… it’s all done by 12/31, then there’s no like catch up, if you want to call it that in 1Q ’23. You really will have it all out.

Barry Sloane

That’s the — that would most likely be the intention, yes.

Jim Collins

Okay, that helps. That clarifies a lot. Thank you very much, Barry.

Barry Sloane

Thank you, Jim. We appreciate [indiscernible].

Operator

[Operator Instructions] And our next question comes from Paul Johnson from KBW. Your line is now open.

Paul Johnson

Yes, good morning, guys. I hope you can hear me okay. Thanks for taking my question. Just one quick clarification. I just wanted to let you know my estimate, the $0.63 versus the $0.54 that you mentioned, so I’m not quite sure what if there’s some stale information that you’re looking at, but just wanted to clarify?

Barry Sloane

Do you have an August 8 report, Paul?

Paul Johnson

Yes, I — well, I don’t know, sometime in September, I believe I may have updated the estimates.

Barry Sloane

Okay. Well, we did it off the August 8 report and that’s where we are. But that’s [indiscernible]. But that’s I went over this morning.

Paul Johnson

Got you. Okay. All right. Well, one thing I just kind of wanted to ask on, I mean, as far as the approval rating for the loans in your portfolio, I mean, the tightening standards that you started to make, I guess, for the underwriting practices. I mean, are these systematic changes that you’ve made to the system for everything in terms of the Newtek Tracker System, more, I would say, rigid, sort of discipline changes that you’ve made to the underwriting system at Newtek, or these more of just kind of discretionary manual sort of tightening standards that you’re making across the company.

Barry Sloane

I think your question is, do you use a computer generated algorithm? Or is there individual discretion by human beings at a loan committee level?

Paul Johnson

Yes.

Barry Sloane

The answer would be the latter. So we still believe at this point, that it’s important that we use human credit committees .As a matter of fact, our regulators require that whether that’s the SBA or in the future as a bank, and we believe historically that looking at things at the moment, from a human perspective, does work. And with that said, our FICO scores have improved. Our average loan size has gone down from a diversification perspective, are trying to close a deal when they come in, has quickened based upon our technology. So our data is showing us that the technological things that we’ve put in place are working. But important to note, there is still a human committee that ultimately makes loan decisions whether to approve or not.

Paul Johnson

Got it. I mean, so does that mean, as you’re tightening these standards, I’ve seen a lot of lenders in the market are doing the same thing kind of in this environment. Does that mean you’re also giving up on spread and pricing for the loans that you’re originating? Or they still coming in around what historically originated at the 275 or 300 basis point spread?

Barry Sloane

No, we haven’t cut our rate. And that’s because we don’t use brokers or bankers at auction loans often put us in competition. We offer our customers 10 to 25 year [indiscernible] schedules, no covenants. They must personally guarantee the loan, they must pledge all personal and business assets. That’s our program. It goes into the hopper. We don’t really discuss rate with them. We openly discuss payment and proceeds. And that’s what we went on.

Paul Johnson

Yes, appreciate it. And then, it’s a little bit difficult to know if the small business economy has really feeling a slowdown or not at the moment. I’m just curious how much interaction you do have with borrowers, in terms of information that you get from the projections, potentially, how frequently do you get that sort of information? And are we at the point where companies are reducing expenses, reducing headcount, are these trends that you’re noticing at all for your borrowers?

Barry Sloane

So I think that up until September 30, we really didn’t see much movement. I do believe that we’ve seen changes in October and November, I have to say, part of it is, when you turn on your TV and the midterm elections, how could you be positive? When you turn the TV on and we’re all inundated through all various forms of media, about how bad things are, it definitely turns you negative, and also the economic data of rising rates and inflation and things of that nature. So we do believe that we’ll finally begin to see the slowdown.

We’ve seen a little bit of that in the payment space, but not dramatically. So consumer spending is still pretty strong. It’ll be interesting to see what happens with Christmas spending, because a little too early to tell. But we’ve definitely seen October and November is different than September, obviously, with the seasonal adjustments factored in. So we’re starting to see a slowdown as these rate hikes and inflation issues do eat into people’s excess liquidity and savings.

Paul Johnson

Got it. Thanks, guys. That’s great color. We’ll be all watching closely, of course. And my last question was just on the portfolio yield for next quarter. Actually, in the fourth quarter I saw in the press release where you gave some guidance next year for 10%, 10.5% yields on the debt, the debt portfolio this coming quarter. I was wondering if you could potentially provide any sort of guidance. I don’t think it should be quite in that 10% range, but any sort of estimation there would be helpful.

Barry Sloane

Well, first of all, I think that the SBA changed its regs. So we will be out at and are currently added Prime plus three, on our loans. So we’re going to pick up another 25 basis points. And it’s really hard to determine what pricing is going to be particularly going into the end of the year, particularly with another December price hike, et cetera, et cetera. So we’re kind of trying to figure out what that gain on sale might be. I think somewhere between 109 and 110.5 might — as a range might be useful, but it’s hard to forecast at this point in time.

Paul Johnson

Got it. I appreciate it. I was actually referring to the yield on your just retained debt portfolio. So [multiple speakers] …

Barry Sloane

Oh, well that in January, I really just point out where your [indiscernible]. But in January, it’s going to be north of 10. But it gets all complicated because whatever’s on the books does not get the 75 basis point rate hike until January 1. So, on that basis, it’s whatever Prime was at the end of September. So I’m going to think you’re probably around 9 in a quarter.

Paul Johnson

Got it. Yes, that’s helpful. Those are all my questions and thanks for having me today.

Barry Sloane

Paul, thanks. I appreciate your help. I realize it’s we haven’t made it that easy with all of this transition and noise. So I appreciate all the work that you’ve done. Thank you.

Operator

And thank you. And I’m showing no further questions. I would now like to turn the call back over to Barry Sloane for closing remarks.

Barry Sloane

Great. Well, I appreciate everyone attending. We look forward to making some more progress on our transaction. And hopefully that will really give investors a clear view as to what we see as being a really constructive future for Newtek Business Service Corp. and all its stakeholders. So I want to thank everyone for attending, particularly those that joined and ask questions. We appreciate it. Thank you.

Operator

This concludes today’s conference call. Thanks for participating You may now disconnect.