NewtekOne Inc (NEWT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Corp. Q1 2015 earnings 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 follow at that time. (Operator Instructions).

I would now like to turn the conference call to Mr. Barry Sloane. You may begin, Sir.

Thank you very much, operator, and welcome, everyone, to our first-quarter 2015 financial results conference call. This is our first conference call with a full quarter as a business development corporation. Jenny Eddelson, our Executive Vice President and Chief Accounting Officer, is here with me today and she will be presenting. And for those of you that would like to follow the PowerPoint presentation, you can go to our website, THESBA.com, go to the Investor Relations section, and in Presentations, you'll be able to see a PowerPoint presentation.

Jenny, do you want to read the forward-looking statement this morning? Okay.

Sure. This presentation contains certain forward-looking statements. Words such as believes, expects, plans, anticipates, forecasts, and future, or similar expressions, are intended to identify forward-looking statements. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements.

Such risks and uncertainties include, among others, intensified competition, operating problems and their impact on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative development and similar matters. Risk factors, cautionary statements and other conditions, which could cause Newtek's actual results to differ from management's current expectations, are contained in Newtek's filings with the Securities and Exchange Commission, and available through SEC.gov.

Thank you, Jenny. I'd like to turn everyone's attention to the second page of the presentation, where we will go over our first-quarter financial highlights. As I mentioned before, this is our first full quarter reporting as a BDC.

We're proud to report that the net asset value equaled $169.6 million, or $16.61 a share, up from $16.31 a share, a 1.9% increase for the quarter. So if you straight-line this, we get close to about an 8% total increase in NAV for the entire year.

The adjusted net income was $5.2 million or $0.51 a share. We pay our cash dividends primarily out of the adjusted net income. We want to do that, obviously, because we want to pay our cash dividend out of earnings. Our adjusted net income includes short-term capital gains from loan sales of the government-guaranteed SBA portions, which we have shown historically is a reoccurring event.

Our total investment income for the quarter was $4.8 million. We expect Newtek to fund between $240 million and $280 million of 7(a) loans for the year, which will be about a 29% increase over 2014. Our loan servicing portfolio through servicing our own loans, as well as through third-party servicing, which is done out of small business lending core, a wholly-owned portfolio company, is in excess of $1 billion as of this date.

We are proud and happy to announce that JMP Securities initiated research coverage on Newtek Business Service Corp. on February 23rd; Ladenburg Thalmann initiated research coverage on April 22nd; and Cingular has done research coverage, and Lisa Springer is our analyst on that.

Dividend distributions. On April 13, we paid our first quarterly dividend as a BDC, $0.39 in cash. That was $0.01 higher than previously forecasted, and it represents about 76.5% of the Q1 adjusted net investment income. So, therefore, if this continued, we obviously would have a catch-up. Typically, BDCs have to pay out between 90% to 98% of their adjusted net income, and that would be a $0.51 number; it would be about $0.47. We paid out $0.39. So if we continued at this pace, there clearly would be a catch-up.

We are increasing our 2015 annual cash dividend forecast to be $1.82. That's one penny higher than previously forecasted. And today, we are forecasting a second-quarter dividend, cash dividend, of $0.47 a share. This will ultimately have to be approved as declared by the Board; this is just a forecast at this point in time. And a 20% increase over the cash dividend of $0.39, which was paid in Q1 2015. We also plan to declare and pay a special one-time dividend during 2015. This is a distribution of retained earnings from our legacy business as a C Corp, which we need to do and must do as we have taken RIC status.

That dividend can be paid in the form of a stock or cash, and that will be a special dividend we anticipate that will be a qualified dividend. When we did the capital raise, that was estimated in June of last year. So we have not refreshed the number. I'll repeat, we have not refreshed the number. But when that number was estimated about a year ago, and this was forecasting what the retained earnings was, it came in about $47 million of $48 million.

That number could vary. It could change. It's going to be based upon what our taxes ultimately come out to, which we should probably have a better handle on by the end of June.

Looking at our consolidated balance sheet, we are real pleased with how our balance sheet came out at the end of the quarter. You can see we are not highly levered company. Our net asset value of $16.61; total liquidity as of March 31, 2015, about $26.6 million. That is a GAAP number for BDCs. Given our business model, we look at adjusted total liquidity, which adds back the amount of government-guaranteed certificates that are funded with cash, not on their leverage line, of $5.6 million, plus $5.5 million of cash sitting in our portfolio of companies to get to $37.7 million on March 31, 2015.

As we mentioned on our prior call, we are in the process of repositioning and restructuring our lending, as it needs to be able to get more leverage out of our assets. Our capital and bank line has been restructured at this point. It is subject to SBA's approval as a $50 million line, which will be restructured to be holding-company-only guarantee, and obviously be able to distribute dividends as a BDC, which we are required to do.

Previously, that line was collateralized by effectively all of our Other Businesses and previous subsidiaries, merchant processing, managed tech, insurance agency, payroll, et cetera. There is existing debt of about [$8.8 million], we believe we'll be able to get additional leverage out of those businesses and are working towards that. And hopefully, we'll have something positive to report in the next quarter.

Looking at Newtek's small business finance, for those of you that are new to our Company and our story, we are currently the largest non-bank US SBA, US Small Business Administration, non-bank government guaranteed lender. We have one of the rare 14 non-bank lending licenses. These licenses have not been issued, I think, in over 20 years. We're the ninth largest SBA lender, if you include banks.

Our ROI in this business is in excess of 30%. And that's based upon creating loans, selling them and financing them, getting our cash back, and redeploying the dollars. We are a national lender; we lend in all 50 states. We have an 11-year history in this business. I think this is important. Obviously, non-bank lending has become a very hot topic and hot industry as of late. There are many newcomers.

Lending in the last -- lending in all environment is challenging, but lending in the last couple of years hasn't been that challenging. Lending over an 11-year period of time, having an 11-year history of loan default frequency and severity, extremely valuable. We are not new to the lending business. People who have run this business for us have over 30 years worth of experience and have been through all kinds of markets.

We've issued five S&P rated securities. They're rated both A and AA. None of them have been downgraded; they are all performing very well. When you look at our portfolio of loans, the average loan size is about $175,000. That's correct, $175,000 compared to other BDCs, much, much, much more diverse. This is the uninsured loan participations of SBA government-guaranteed loans.

I think also important, the borrowers in our financings, we believe, get a good deal. Their interest rate is 6%, so it's not double-digit. They have long amortization schedules of 7 to 25 years. And the loans on our books are floating rate, so obviously, they will be sensitive to rises in rates. This has been a market that's been around for 61 years, and we've done a good job, obviously, in our 11-year history in this particular space, making loans for small businesses and having success in generating profits for the Company.

Looking at our actual and forecasted loan fundings, first-quarter 2015, $48.3 million. That, frankly, was an underperformance. We expected to do more than that for the rest of the year. We are forecasting $60 million in Q2, $70 million in Q3, $80 million in Q4, to maintain our overall midpoint range of $260 million and wide range of $240 million to $280 million of SBA 7(a) loans.

We have a very significant pipeline, which you can take a look at on slide number 8. At the end of the quarter, our [331] prequalified [40 million] loans underwriting [40 million] pending closing [29 million]. Quite a few open referrals. To accommodate the additional capital we raised and position ourselves for greater loan originations and fundings, we have repositioned our lending business; we are doing all of our closings in-house at this point in time.

We have a new head of underwriting. People are newly positioned to run our closing department. And we are very happy with the progress that we've made. And we think we're going to pick up steam in terms of pulling these loans through the pipeline between now and the end of the year.

To be frank with you, I really wish we would be a little further along in this process, but importantly, we are meeting our expectations in terms of revenue and credit quality to the marketplace and to our own financials. So we are very satisfied with the performance in that particular area.

Slide number 9 is a slide that those who have been with our Company and listen to these calls are quite familiar with, as long as -- as well as slide number 10. That's our classic SBA 7(a) loan transaction slide. One, on slide number 9 talks about the cash created on $1 million worth of loans; slide number 10 talks about the revenue that's created, so on.

From a cash creation standpoint, we make a 7(a) loan, we'll sell off the government-guaranteed piece at a 12.5 point premium, that's 75% of the loan. So in $1 million example, the $750,000 government-guaranteed participation certificate receives a premium of $93,000. We are left with an uninsured but not subordinated -- extremely important -- that is not a subordinated participation certificate that sits on our books. So it's participation certificates are put into a trust and bonds are sold off them. Those are all floating rate.

Those participation certificates sit on our books; they're small balances. We talked about $175,000 average balance. They're very diverse, diverse states, diverse geographies. And when we securitize them at a 70% advanced rate, which we have done recently, we create cash. Approximately $21,000 above the $1 million at face. So the reason why we are able to generate high returns on equity in excess of 30% is because we put those loans out and securitize the uninsured piece, we get our cash back.

On slide number 10, I think it's important to note that when we create the 7(a) loan and we sell the government-guaranteed piece, we also write the uninsured participation down by approximately 5 points at origination. So we take a 5 point loss, which is unrealized, and produces our NAV every time we make a loan. Why do we do that? We think it's appropriate.

We think that these loans should not be on our books at par. We think those loans should be on our books at [95]. As we run them through our discounted cash flow analysis, we think our expected default frequency and severity statistics that we have been in this business for over 11 years, and have good visibility and have a good handle on, these loans will yield 5.35% based upon our discounted cash flow analysis, and that's risk-adjusted. Okay?

So assuming default 25% severity, 30% prepayments, approximately 8 CPP, that portfolio yields 5.35%, which is approximately 435 basis points typically above over a bank's cost of funds risk-adjusted. We feel very comfortable with how these loans are on our books today.

Slide number 11 talks about -- and Jenny will go into this a little deeper in her presentation -- net realized and unrealized gains. We reported on December 2014, we had approximately $28 million of guaranteed loans. And we had approximately $3.4 million of unrealized gains in the sale of those loans that we carried over into the first quarter.

During Q1 2015, $24.4 million of those loans were sold. It generated $3.4 million in realized gains. And we also retained $13 million of guaranteed loans, which generated a $1.7 million unrealized gain at the end of the quarter. So, essentially, we still have carryover on government-guaranteed pieces going into second, third and fourth quarters.

In Q1 2015, we had recognized total realized gains of $7.7 million. This is a reoccurring event. We have five years worth of history on this. And these are the dollars and numbers that actually go into our adjusted NII.

For the three months ended March 31, 2015, the sales of government-guaranteed loans came in at [112.44], net to the Company. If you go to slide number 12, you can see how the prices compared with the first quarter of 2015 with last year. Last year we averaged [112.49]; first quarter, [112.44]. As you can see, there's difference between short-term loans, which have 10-year maturities, and long-term loans, which have 25-year maturities.

Our P&L is sensitive to the creation of short-term loans versus long-term loans. Short-term SBA government-guaranteed 7(a) loans have no prepay penalties, so they typically trade at lower dollar prices on the government-guaranteed piece. The 25-year loans are longer-term amortized loans, which could be 15 years on, have [531] prepay penalties in the first three years, which is why they trade at higher dollar prices.

These trade to investors, our pool assembles in the secondary market at approximately LIBOR plus 65 to LIBOR plus 70. So the mix of 10 years to 25 years, and the volumes will determine a lot of these prices, as well as the size of the loans as well.

Looking at the quality of our portfolio on slide number 13, you can see that we continue to hold up very few concentrations. Restaurant concentration still low as our biggest concentration, under 10%, and the Florida concentration went from 21.6% down to 10%. Also average loan balance, $175,000. We like that; gives us good diversification.

On slide number 14, we talked about our history in this business, being in the business for 11 years, having small balances and a lot of diversification in the portfolio. We talked about our discount on the performing loans, currently at a 5 point discount. We wanted to make sure market participants can take a look at the quality of the portfolio.

In Q1 of 2015, we had a realized loss of $47,000 against our total loan portfolio, that was actually a liquidation. And the cumulative unrealized losses on this portfolio, about $3.8 million. So what does that mean? These are loans that have been marked to the market. These are nonperformers. They're on our books at $3.8 million. And, as these are liquidated over the course of the next two years, these losses will be realized over time.

One of our important portfolio companies that we are optimistic about from a standpoint of growth is Newtek business credit. Legal name is CES. We announced recently that Gary Taylor has been appointed President and Chief Operating Officer. And Harold Gartner, who previously was President, has moved into a Sales, Marketing and Business Development capacity at the Holding Company, and we look forward to Harold helping us grow our business, particularly in the production of these types of assets.

The Company recently signed a letter of intent for a $50 million warehouse line of credit, which is an increase of $15 million from the prior warehouse facility. In addition to the bigger site, this facility will now be -- it will be used not only against Accounts Receivable, but also against inventory and healthcare receivables, and SBA 504 loans. So we are clearly broadening our opportunity to do different types of loans in this particular portfolio company.

Spending a little bit more time on SBA 504 loans, and this becoming a new and more important focus for Newtek with the leverage line. I want to describe what a 504 loan is. I think it's important that when you look at us as a BDC, and you look at us as an investment vehicle, it's important to note we are not coupon-clippers. Most of our competitors in this space have debt or loans, they lever them, and they are clipping the coupon in the arm. Interest income versus interest expense.

In 504 loans, these are loans that are made to owner-occupied businesses, so we are lending to the business. And primarily the primary use is to purchase commercial real estate. The business owner can actually get a 90% loan-to-value, which is financed with a 50% conventional first, which is what we wind up keeping, and a 40% second, which is funded by an entity known as a CDC, Community Development Corporation.

That loan gets taken out approximately 90 days by the SBA through government debentures. And we are left with the 50% first. So the benefit of the SBA 504 loan to the borrower, the owner-occupied business who is using it to refinance or buy commercial real estate, gets 90% LVB. And also gives us a fixed-rate alternative, because we can offer fixed-rate with prepayment penalties on these loans.

We are then able to sell off the conventional loan to third-party investors. It's a fairly liquid market. Not quite as liquid as the government-guaranteed participation on the SBA loans, but a 50% LVB conventional first, very liquid market. We anticipate 3 to 5 point premiums. So we are happy because we will be able to make loans and then get the entire loan off our books, keep a servicing stream of income, and get gain on sale treatment, and repatriate our capital.

On slide number 17, it's a typical example of an SBA 504 loan with a $1 million purchase of a property. The borrower owner has to put up $100,000 as an equity injection, it's a $400,000 bridge loan. We fund it, it's taken out by the SBA with government debentures, and a first mortgage loan is originated by us.

On slide number 18, which will show the key variables in this 504 loan sale transaction, you can see also a very high rate of return opportunity. So, in a case where you've got a $2 million project financing, we will have $1 million first loan; there's an $800,000 junior bridge loan, that gets taken out by the SBA debentures. After a quarter, the borrower puts up $200,000 to purchase the real estate using $1.8 million of total debt.

The premium approximately 3.2%. And when you look at the income, Newtek had a 90% advance rate on the 504 loan on the conventional first and second, has to put up $180,000. The premium gain, $32,000. The net interest earned as we clip the coupon before the sale, $44,000 against interest expense of $20,000, we are able to charge the borrower origination fees of $14,000; we pick up servicing income.

The net cash created during this holding period, which should be six months, but in this example, we assumed it was a year -- $72,000. Take $72,000, divide it by the equity, that's 40% return, assuming it was a one year hold. We hope these transactions will be a six-month hold, generating the higher rates of return. And importantly, we are able to repatriate the cash and put it out to new borrowers. And we are obviously sitting with a loan during that period of time with a 50% LVB.

Not a lot of credit risk, high rate of return business. We could use our existing distribution channels, and we now are no longer $50,000 to $5 million; we are now $50,000 to $10 million.

We said we're always gaining alliance partners. We recently signed a new partner program. It's generating 30 to 50 referrals a day. That's approximately double what we've been getting in the lending business. And so far, we seem to feel that the quality is similar to what we've got from existing referral agents.

We also entered into an agreement, which we announced yesterday, with The Lending Club. And we will be agenting opportunities over to The Lending Club. This is an important partnership for us. It's going to enable us to further expand our suite of lending products, particularly being able to do business with The Lending Club as an agent. And we do believe that this is going to open up the box to do short-term, non-collateralized loans to third parties. We are excited about our opportunity to work with The Lending Club.

We've done a lot of hiring in the last quarter. We talked about Gary Taylor coming in as President and COO of Newtek Business Credit. Gary was an M.D. and COO at CIT Small Business Lending, where he managed the Underwriting and Processing and Servicing business. He was also SVP and Chief Credit Officer at Lehman Brothers Bank, similar functions; 10 years at Moody's. We're really excited about Gary coming in and working closely with Harold Gartner to help grow our business there.

In Managed Tech Solutions, we are thrilled that we have acquired John Raven to work with Rich Rebetti as Chief Operating Officer of Managed Tech Solutions. John recently joined us from LookSmart and Clickable, where he was the Chief Technology Officer and Chief Operating Officer. Prior to that, he was Chief Technology Officer and Chief Operating Officer and Consultant for IBM Global Services. And prior to that, he was President and CPO and COO for YP.com and LiveDeal.

John is housed out in our Phoenix, Arizona office. And John has spent 12 active years and 10 reserve years with the U.S. Army, and worked for the NASA Jet Propulsion Laboratory for three years. He says a lot of things I don't quite understand, but I am catching up and learning quickly.

We are also happy to announce the addition of Mike Campbell as Chief Credit Risk Officer; Chief Credit Officer and Chief Risk Officer for our Payment Processing business. Over 20 years of experience in the merchant bankcard business with an expertise in credit risk management. Mike spent five years as Head of Credit U.S., eCommerce, and U.S. at RBS Worldpay; over 10 years at Chase Payment Tech as Vice President of National and Credit Partner Risk. He was also Head of Credit for Chase Merchant Services. We are thrilled to have Mike join us.

We also added Dean Choksi as Treasurer and SVP of Newtek Business Services Corp. Newtek works very closely with Jenny, myself, Matthew Ash and Michael Schwartz, our Chief Lending Officer. Dean has been a tremendous addition to our staff. A Background in training as an equity analyst at UBS and Lehman Brothers, Particularly in the area of BDCs, asset modeling. He has been a fabulous help TO us in this particular quarter, and we expect him to play a very significant role in his Treasury and SVP of Finance function going forward.

Looking at our portfolio of companies, we had good performance; we feel very good about our performance of payments, managed tech, Newtek business credit, payment payroll, and NIA. We feel good about our forecast. We had a good quarter for EPP. For those of you that are new to our call, our payment processing business is 15,000 customers; we anticipate $5 billion of payment processing between now and the end of the year.

Our growth story here is in mobile and POS. We do seek to acquire payment processing companies going forward, and we are excited about the opportunities that presents itself in mobile and MX.blue.

We're sticking with our 2015 forecast of $100 million in revenue and $9.8 million of EBITDA. Our Q1 adjusted EBITDA $1.9 million was a 5.6% increase. Res increased 7.9%. We had a ton of one-time expenses in the first quarter, particularly related to legal issues and one-time charge-off expenses. We expect that to dissipate. We have this business valued on our books at 4 3/4 times EBITDA at $48 million. Those are the public comparisons to the right -- Harlan payments (inaudible) 9 and 10 times respectively.

Managed Tech Solutions, the business we have owned and managed for over 10 years. We are in the Managed Tech Solutions space, cloud computing space. We are excited about the opportunity in this market. This Company, over the last two years, has been an underperformer. Sad to say that the first quarter also was an underperformance, but we have some good news to report on it.

We're implementing some cost reduction measures and new product introductions as part of our repositioning strategy. And the recent appointment of John Raven as COO, I believe, is going to significantly help this Company.

We go to slide number 27. We looked at a revenue decline of 12.2% for the quarter and adjusted EBITDA decline of 41%. I can't say anything else except this is an ugly performance. We are sticking with our revenue forecast for $17.5 million with our adjusted EBITDA of $5.1 million. Many of you might say I'm extremely overly optimistic. I could understand that, but I'm going to give you some rationale for that optimism.

From a valuation standpoint, we are still valuing at 3 3/4 times EBITDA, $21 million valuation. I will tell you that some of our competitors are valued at three, four and five times revenue. This business this year is on a run rate we think $17.5 million. We are comfortable, very comfortable with the valuations here.

Relative to subsequent events on slide number 28, we recently restructured our I/O data center lease. We will be putting out a press release shortly. This is going to allow us to realize significant cost savings over the next five years. These cost savings will result between $200,000 and $250,000 of annual cost savings based on real estate and power.

Those are cost savings net of additional space that we acquired with I/O in London, New Jersey and Phoenix, which are fully costed, none of the above cost savings, and this additional space will enable us to layer on more revenue opportunities. We have recently signed two transactions totaling $320,000 in net new annualized reoccurring revenue for term. $250,000 of this has got a 39-month term on it.

We are very, very excited about this business. We think it's the business to be in. From a competitive standpoint, our competitors do not offer solutions to business owners that are managed 24/7.

Slide number 29 looking at our other portfolio of companies, Newtek business credit we have [been] on our books at $2 million, that's our 504 and line of credit business. The Newtek insurance agency [netted] about one times revenue. This business probably will make about $900,000 this year bottom line, and do about $2.5 million to $2.8 million of revenues.

Newtek Payroll Solutions valued about $900,000; 1 times revenue. This business by the end of the year should be in a run rate to breakeven. Small business lending, which does third-party servicing, we just put on a new portfolio that we announced from Banco Popular. This business probably will generate $4 million of EBITDA on a 12-month basis. We have this valued at about $8 million, two times EBITDA multiple.

For those of you that are BDC investors, you are all aware we are internally-managed BDC. For those of you that are not familiar with these terms, and we have investors that are on both sides of the spectrum, some that are established BDC investors, others that are looking at us as an investment opportunity. Internally managed BDCs pay no base fees or incentive fees to an external manager. There's no percentage of the ops like in a hedge fund like on externally managed BDCs typically.

All of our expenses are loaded into the return, so the dividends you receive are net of our total expenses. They typically trade at a premium to NAV.

When you go to slide number 31, we are currently trading at about 1.04 NAV. Our competitors, Hercules, TakeCab, MainStreet and Triangle, about 1.3 times NAV. Looking at our competitors in the non-bank lending space. On debt capital lending club, pretty excessive valuations. BankUnited recently acquired an SBA lending unit. They paid a $20 million premium to tangible NAV.

On slide number 33, as a recap, 1.9% increase NAV for the quarter; a 47% forecasted dividend for Q2 2015, up 20% from prior. We have, we think, very modest leverage. When you look at our leverage ratios, we are nowhere near 1-to-1; we're about 75%, 76% levered. Our portfolio of companies are primarily wholly-owned and managed; we've owned them for over 10 years.

We are internally-managed BDC. Management interest very much aligned with shareholders. Between myself, the other founders and the Board, we own about 20% of the outstanding stock. To get the yields that you are seeing, there's no derivative securities in the BDC. There's no second lien or mezz financings like other BDCs, and there's no direct lending exposure from the oil and gas industry.

You're getting great returns because our business services operating businesses generate those types of returns. And we are in a lending business that makes loans and gets its money back, and puts it on its balance sheet, which is very different than our coupon-clipping arbitrage-based competitors in the space.

I'd like to turn the financial review over to Jenny Eddelson.

Thank you, Barry. Good afternoon, everyone, and thank you for joining the call. I'd like to start with some highlights from our first-quarter 2015 consolidated statement of operations. As Barry mentioned earlier, this our first full quarter reporting as a BDC, so there's no comparable prior period consolidated BDC financial statements to refer to.

Please turn to slide 35. We had investment income of $4.8 million, which included approximately $2.2 million of interest income. Substantially all interest income for the three months ended March 31, 2015 and 2014 was derived from our SBA loan portfolio, which generated $2.1 million and $1.5 million of interest income, respectively. The increase in interest income can be attributed to the average outstanding performing loan portfolio increasing from $94.2 million to $125 million quarter-over-quarter as a result of new loan originations over the 12-month period.

Servicing fee income, which we earn on the guaranteed portions of loans that have been sold in the secondary market, increased $211,000 for the three months ended March 31, 2015 compared to the same period in 2014. The increase was attributable to the growth in the size of the total SBA loan portfolio for which we earned servicing income.

Dividend income was approximately $1.1 million for the three months ended March 31, 2015, and represents dividends declared from our controlled portfolio of companies. Our expenses for the quarter totaled approximately $7.2 million, and includes salaries, interest expense and other SG&A, such as rent, marketing and referral fees. As an internally-managed BDC, we do not pay any incentive or base fees to an external manager.

Our net realized and unrealized gains for the period totaled $12.5 million of net gains. The components consisted of $7.7 million in realized gains, which were generated from the sale of the government-guaranteed loan participations; $1.7 million in net unrealized losses from the net valuation change in our loans held for sale, which I will discuss in more detail when I review slide 36.

We also had $666,000 of unrealized depreciation on our unguaranteed SBA 7(a) loan portfolio, which represents the valuation adjustment we immediately recorded on loans originated during the quarter as a result of running them through our discounted cash flow model. The $7.5 million appreciation on affiliate investments was the result of an increase in the valuation of our electronic payment processing portfolio company, and an increase in the valuation of Small Business Lending, Inc., which obtained a significant third-party servicing contract during the first quarter.

And finally, we have $356,000 in depreciation on servicing asset, which effectively represents amortization on the asset. Overall, our net increase in net assets from operations was $10 million, and our net increase in net assets per share was $0.98.

Please turn now to slide 36, which is an analysis of changes in NAV and NAV per share for the quarter. We started the year off with NAV of $16.31 per share, and had a net investment loss of $0.24 and realize gains of $0.75, both of which are included in our adjusted net investment income calculation, giving us adjusted NII per share of a positive $0.51.

Our NAV decreased by $0.34 from a reversal of the unrealized gain on loans that were held for sale at December 31 in mark-to-market. The majority of those loans were sold in the first quarter, and resulted in realized gains, which are reflected in the $7.7 million realized gain, or $0.75 per share mentioned earlier. The $1.7 million of unrealized gains recorded for the quarter represents the loans that were held for sale at the end of Q1. This amount will ultimately be realized once those loans are sold and the unrealized gain will be reversed simultaneously.

We had a $0.73 increase in NAV per share as a result of the unrealized appreciation on our affiliate investments and a $0.10 decrease in NAV generated by the unrealized losses for the quarter on our SBA performing loan portfolio and servicing asset. Overall, the above accounted for a 6% or $0.98 increase in NAV before the dividend and deferred tax asset adjustments.

Our NAV decreased by $0.39 due to the dividend declared for the quarter, and also declined by $0.28 for the adjustments in the deferred tax asset, which was adjusted through opening equity as a result of the Company's conversion to a RIC in 2014. Overall, our NAV per share increased by $0.30 or 1.9% for the quarter.

And with that, I would like to turn the call back to Barry.

Thank you Jenny. Operator, we will take questions now.

(Operator Instructions). Chris York, JMP Securities.

Thanks for taking my questions. I'll lead by congratulating you on the progress you've made in your hiring initiatives and the recent partnership with The Lending Club. And then now the new expansion into 504 loans. So on the new alliance partnership, can you help me understand how you guys think about that opportunity for the small business loan product on Newtek's platform? And then maybe the volume levels that you think are realistic in 2016.

Hey, Chris. I think that in looking at Newtek, we believe we are unique in the lending business, in that if you look at an OnDeck, they're primarily very focused on smaller merchants, short-term amortization, tying it to a merchant processing account. Some of our other competitors are very much wedded to higher coupon loans and stuff that's just not bankable.

We want to be positioned as a company that when a business comes to us, we want to be able to fill them. So from my perspective, for the most part, we are a principal player. We are a principal player in a line of credit if it's backed by an account receivable; a healthcare receivable, which is great for doctors, dentists, lawyers, or all medical practitioners; or inventory. We are a term financer in the 7(a) program, in the 504 program now, and eventually down the road, we will have a conventional term product as well.

So we want to be able to satisfy customers of all sizes and shapes. We are not typically an unsecured funder. When I say typically, we just don't do it. It's just not what we do. I should add that our $130 million -- Jenny, of participations --?

$130 million? Yes.

$130 million -- are senior secured participation certificates. So from a quality standpoint, they're not mezz, they're not second, they're senior secured participation certificates. So looking at us in the marketplace, I want to be able to look at opportunities where they may want an unsecured loan, and they'd be willing to pay a double-digit rate or a rate in the 20%, and lay it off to a third-party.

So where we looked at in 2014, $5 billion worth of fundings -- $5 billion worth of referrals -- and basically funded $200 million of 7(a) loans, we probably funded -- $12 million -- $10 million to $12 million of monthly purchases in the line of credit business. Now we are planning on growing our staff, looking at more opportunities, and closing more opportunities with borrowers, if that's a good explanation.

We want to widen the funnel and widen our close rates, and we want to be able to be very consultative to borrowers that are independent business owners that need to get funded. Unlike walking into a bank and you're a business owner, you've got one specialist that's credit cards, and one specialist that may do a conventional loan, it's really hard to find a participant that can help you.

Our business service specialists -- and we currently have 10 of them and that will be growing -- really are very consultative. And their goal is to take in the information and to fit the customer with the best available solution. Whether it's on our books as a principal or we give it to a third-party as an agent, because that's what they want and if that's something we are interested in.

That's great. The color is helpful. No, and then talking a little bit about competition in the 7(a) business. Last quarter you talked that some banks started to incrementally pick up volume a little bit. Did you see that throughout the quarter? And then can you talk a little bit maybe about competition thus far in the quarter to date?

Yes, I mean, I don't think that that's intensified. I think that's sort of status quo. And I don't think it should impede what we're doing. I think that our biggest impediment is improving our process; getting more familiar with each other, we've changed the process. We have a lot of new people in the organization. And I think that working hard at our ops and our process flow is going to improve our ability to fund more.

I do not have any concerns over the competitive nature. Putting that aside, in our current volumes, does it hurt if somebody comes in and you lose $10 million or $15 million worth of loans or opportunities in the quarter? The answer is yes. But from a long-term perspective, which is always how we've run the business, I don't have any concerns that we are not going to be able to be a $260 million funder this year, and grow 15%, 20%, 25%.

We want to grow in a controlled, normalized, fair fashion. We've done this for 11 years. We want to do it for another 11 years. My -- just my view only, the kiss of death for somebody in the finance business is to grow exponentially.

Sure. Helpful. Let's see, switching gears just a little bit, maybe on the expense side, you talked about building out the platform, making new hires. And I think many investors can appreciate you being internally managed. So I know your lease expires in October. So have you had any thoughts about maybe moving or renewing that lease?

Chris, you've never been to our palatial headquarters in New York City; maybe some of the people on the call have. We actually did reroll that loan over -- our New York City space at which we only have about 30 people. Most of our staff is in much lower-cost locations. Gee, what are we at, $30 a square foot, Jenny? But -- yes. So we are at $30 a square foot, I think, for another a year-and-a-half. And then it bumps to like $40 for a year after. It's not very expensive.

Putting that aside, one thing that's important, all the new hires that we had and we opened up in Boca, we also opened up a small office in Dallas -- all of those numbers are baked into our projections. So, everything you've seen -- I've had a couple people say you're hiring a lot of people, the expense projections, they are all pretty well baked in. And we are going to need additional space in a variety of different locations to handle our growth.

Got it. Okay. And then lastly, so being a BDC and distributing essentially all your income out to shareholders, have you guys thought about putting in place a dividend reinvestment program?

We do have a DRIP program. It is available to shareholders for the second quarter. And I'd have to check, but they should -- our shareholders should have been noticed or should be getting notices. Probably the next time we declare a dividend, when the Board declares a dividend, I think a notice probably will go out.

Great. That's it for me.

There will be a DRIP plan in place.

Okay. Thanks, Barry.

Thank you.

Stanley Grossman, private investor.

Thank you for taking my call. I wanted to know if you had any estimates on the $48 million that you had reserved for the special dividend, how much of that would -- how much per share would that be?

Appreciate it, Stanley. My Chief Accounting Officer is frowning at me. I'm being facetious. You know, that's the number that we had put out in our offering document. We get asked that number quite frequently. There's a lot of interest in the special dividend for obvious reasons.

As I said earlier on the call, we have not updated that number. It's going to be based upon our tax return. And in terms of estimating it per share, it would require knowing what the shares outstanding are at the time. The only thing I can point you to is the offering document that was circulated in November, and there is information on that.

You can back into some of your own numbers based upon the estimate of last June, and you look at 10.2 million shares, you could probably come up with your own number. But -- and that will be in cash and stock. And we've talked about that as well.

Thank you very much.

Thank you.

Michael Kitlinski, UBS.

Hey, Barry, congratulations on your first quarter as a BDC. Question for you. So you were talking about your one of 14 non-bank SBA government-guaranteed lender licenses, a license that is no longer issued. I was kind of curious, so with the non-bank space growing so much without them, what kind of status does that have? Is that a mark that kind of differentiates you? Is that something that just sort of flags you as someone who's been around a while? What kind of value does that add if I am a lender and I'm looking at Newtek business for a small business loan?

I think one way to look at it is, number one, people just can't come into the states from a competitive perspective. We believe that our 11 years worth of history and relationship and performance are valuable and important. Mind you, if you have one of these licenses, you are in a shared risk relationship with the government.

So the government -- I mean, you can have a lot of capital, and they wouldn't necessarily give you a license or transfer the license to you just because you have a lot of capital. They want to make sure that you've got the expertise and the experience, particularly in this area of the policy and procedure manual for the SBA is -- I think it's in excess of 1,000 pages. So it really requires a specialized assembler, specialized underwriter, specialized servicing staff.

A lot of the banks that do this business don't wind up doing it well because they wind up using people that are familiar with conventional assembly underwriting and servicing, and it doesn't work out well. Because they wind up in violation. So I think it should be viewed by the marketplace as not only a valuable asset, but one that we are operating well, and generates high rates of returns that I don't think easily get arbitraged away by competition.

Okay. And do you know if most of your competitors, like some of the comparable companies you mentioned, like OnDeck and Lending Club, do they have these? Are they operating without them, or --?

No, they don't have -- they don't do what we do.

Okay. All right, Barry. Thank you.

Thank you.

(Operator Instructions). Adam Morton, RBC Capital Markets.

Great quarter, congrats. Bit of my favorite stump from one of the previous questions about The Lending Club. So I totally get the agent relationship, and I think that's a great way to make sure you guys are sort of all things to everyone coming in. My question really, though, is, is that an arrangement have the ability for some reciprocity from The Lending Club to come back into you guys and sort of cross-pollinate referrals into your core businesses?

We -- the answer is yes, that is the anticipation. We expect to have an agreement in place between us where they can cross-refer opportunities back into our business. But The Lending Club is a little misunderstood by some; it's really a marketplace that brings funders and borrowers together.

We should be viewed as a funder. So we do envision that we will be working with The Lending Club and they will be referring borrowers to us for our loans. So the answer is yes. We think that could be extremely helpful. It took -- given the way that we want to do -- enter into this relationship with them, obviously, that is a very busy company. And we appreciate their partnership with us, and we put a lot of work into this relationship. This was done over a long period of time.

Okay. And then, lastly, are there other bank opportunities out there where you might see relationships with banks that I know you have some affiliates, I believe locally, that are referring agents. Are there more opportunities like that as you guys continue to grow here? Thanks.

Yes, very much so. The office that we just opened up in Boca on May 1st has 21 seats. There's seven people filled in it. We are going to need to -- we do expect to significantly grow our referral count, and we're going to need to have people that can process, on a consultative basis, the opportunity with the kind of business owners that want to borrow.

And we need to be able to suit them with the best program and product for them. So, we have quite a few others in the pipeline, and we are working existing relationships. You know, UBS's, the Morgan Stanley's, and we are looking for a lot of others to help grow the overall opportunity.

Fantastic, thanks. And a great quarter, guys. Congrats.

Thank you.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

Okay. Everyone, thank you very much for your participation. We were very happy with our first-quarter results, and looking forward to reporting great results in the second-quarter as well. Thank you so much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.