NewtekOne Inc (NEWT) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by and welcome to the Newtek Business Services Corporation Q3 2022 Earnings Conference Call. (Operator Instructions) Please be advised 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.

Good morning, everyone, and I 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 Nick 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're here today is Barry Sloane, President and 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, the (inaudible) in the New York City apartment, 120 West 18th Street Apartment 4B. We reversed merged 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 I 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 on 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 website 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, a 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 the 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. I 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 has laid out very well in the proxy, but it's important to restate the rationale.

Way back when, 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 the 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. You can't grow more than 2:1. And typically, most BDCs kind of hover between 1 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 and 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 for award 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 the as the low-hanging transformative fruit in the transaction.

Also importantly, leveraging the company's patented technology is NewTracker, the dashboard, the Newtek Advantage, some have patents that are existing, some of that have patents that are applied in patent pending. We are very, very excited about this opportunity, and we'll be discussing it throughout the presentation.

On Slide #3, when 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 2 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 reliance relationships, and we've created the new tech 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 Encino, 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 to 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 new tech 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 that we've demonstrated over 20-plus years in business. We believe we're a differentiator. We believe we're a disruptor. And what is that new tech 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 new tech 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 specialists click on them, get them on camera, a lending special 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, does as the recovery, whatever it might be in the technological realm, we can help the customer with that. Merchant accounts or payment processing. They'll get a specialist to help them take Visa Master Discover, American Express or ACH. They will have the 5 to 6 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, workman's comp, a payment processing solution ever 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 clients 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 parallel and benefits, 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 view and 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 gel. 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 a million dollar question. It's actually more than a million dollar, but that is the big question. So we state the acquisition is pending approval of the offset of controller, the currency for the acquisition of the bank. And the Board of Governors the Federal Reserve as well as the small business administration, improving our capital plan, which historically they've done at all the entities that we've been in. We anticipate remaining our status of the 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, owing a bank; and B, electing that RIC status. But we -- our best guess is that, that status probably we will be maintained through December 31, 2022. And obviously, the final decision and the timing of the company is discontinuous regulation as a BDC and the withdrawal of our election as a BDC and the RIC status will be determined by the Board of Directors as the authority and authorization granted by the shareholders.

Slide #8. 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 are you going to hire? Well, we're ready. We have been positioned and we brought people in that have helped Newtek as a BDC throughout the course of the year and our position that are ready to go when we're ready to open up the bank. John McCaffery, who is joining me on this call is one of those such people who will be Chief Financial Officer of the bank, subject to regulatory approval. John's been with our organization, I believe, around 6 months. Nick Young has been with our organization as Chief Risk Officer of 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 a Chief Digital Officer and has helped us with our technology solutions. John Vivona, John joined us about 3 months ago as Chief Compliance Officer. [Tom Suse], who recently joined us in the last couple of weeks as SVP of Loan Administration. So these are 5 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 of 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 3 points less than they were in 2022. When you add all these things up, it's pretty incredible with 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 and expected $2.75 with the forecast of 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 and the first 9 months as we reported here today.

Slide #9, we put out a press release recently. I think there's some more language in the press release that would 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 #1.

We've had almost 3 decade old philosophy that was developed way back when actually prior to the company being formed in 1998 where we recognize 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 that typically go to 3, 4, 5 times a week, 20 times 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 cold 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 refining -- redesigning our corporate website at newtekone.com, so stay tuned for that. Once again, this rebranding strategy, real important, very targeted to independent business owners and the SPA by its record indicates there's 30 million of them in the United States.

Moving forward to Slide #10 and focusing on the third quarter financial highlights. Record funding for Q3 7(a) loans $223 million, which represents a 36% increase of $163 million a year prior. Also in units, very important, we're doing more units with lower loan balances overall. Newtek small business finance has 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, funded 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. The 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 and NSBF 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 and 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 upon how quickly the information passes back and forth can come back within half an hour, an hour. If they come back with the right answers, we immediately a loan appointment when they're available. None were available when they're available. We don't tell them we're showing up on Monday, Tuesday, Wednesday in the middle of the 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 goal. No e-mails with PDF attached, secure 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, nonconforming and in the future, subject to regulatory approval, when and if and hopefully it's when, most likely, we believe it will be on a bank, conforming C&I loans and conforming CRE loans.

Important to note, the NewTracker system has been our system over 20 years. It's been great for us. We have over -- actually, it's over 2 million referrals that we've historically gotten for a 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, all 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 veteran ship for Peter Downs, Chief Lending Officer of the company.

Slide #12 talks about our pipeline growth. You could see the numbers really, really exciting, both for 7(a) and the nonconforming business, which we'll talk about. 504 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 talked about the full pipeline through October 31, up 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 workmen's comp insurance, get a payment processing solution, get an e-commerce solution, get a payroll health and benefit solution, that's the core nature of our business, brokerless, bedeoles and branchless.

Slide #15, we talk about dividends. Obviously, as a indiscernible 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 share sales here. When stock price is low, you'd probably rather do it with debt. And you 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 to 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, 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 forecast 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, $0.01 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 KBW report from 88, Raymond James report from 88 company's reports from 8.11. Adjusted NII, KBW 88 report $0.54 for the quarter. Raymond James, 65, Compass 57. As I calculate that, that average is 58%. To me, that's a beat. NII, negative $0.01 or KBW, negative $0.01 Raymond James, negative $0.13 Compass Point. We averaged that up at negative $0.05 also a beat. 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 license and continue the mission as an SBA lender, which was to put this money out the businesses, of 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 or 26,000 customers. However, that income had 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 $2 a share.

The other thing I want to point out, which we'll do in pricing shortly is the gain on sale margin of 3 points. So I'll try to draw the comparisons. I think the important part to note is we have made a tremendous change over in 2022, preparing to acquire a bank, comparing 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, nonconforming lending, getting those lending agreements back in place as well as having this tremendous headwind of no PPP fee income and a 3-point differentiator on if you rounded to $800 million, that will 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 imagination that like the 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 call of the investment community.

Slide 18 is the 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 nonrecourse securitizations at Newtek small business finance or they're sitting in our capital on line.

When we go to Slide #20. This is what I was referring to on the net premium trend. So this slide goes back to 2018, but if you really look for sort of an equilibrium probably over the course of 10 years, the equilibrium price on these prime cost floaters are somewhere between one ten and a half and may be one 12. Maybe it averages 1 10.5%, 1 11%, maybe a little shade above that. But obviously, for the first 9 months of this year, we've been averaging indiscernible last year at 13.05%, that’s 3 points. On an $800 million a year, and I'm rounding up from our $775 million guidance, that $600 million of government guarantees, 3 points, that's $18 million of pretax 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 talk 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.

In 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. And we basically acknowledge that we've been tightening our underwriting criteria as we anticipated that the Goldilocks scenario of aggressive monetary and fiscal policy would some point come to an end. So how do you combat that? Higher FICO and NSBF scores; two, underwriting with stress tested higher levels of interest rates and starting points. Loans that you're putting on the books today are being stressed up 2% to 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 businesses have got a very substantial amount of excess liquidity in the event that the 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. It's a C&I loan. And if the business cannot show that it can make payments and service the 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 in climate. Like I said, we've been doing this for 20 years, up cycles, down cycles, up credit, down credit, up rates down rate, 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 forecast. 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 2 decades. We know how this works. It's not a indiscernible . 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). Slide #27, the SBA 504 loan program. Important to note, through October 31, we closed $101 million of SBA 504 loan, a record. We're forecasting $150 million of loan 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 like 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 NCL 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 controlled portfolio companies. However, we thought it was important to demonstrate to the market out of 388 million loans that have originated since 2017 and $132.5 million that originated in 2019. We have not experienced any default to charge-offs to date in excess of $500 million worth of loans, not 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 old, and it will have to get updated, but it's all based on old data of where we think the bank might look at, at that point in time for ROAA and ROTCE high numbers, go take a look at that.

Slide #31, talking about our nonconforming conventional lending program. Well, we've been in the business since 2019. We're in this business because it's 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 nonconforming, we're referring to it nonconforming to a 7(a) or 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 could take a look at how that portfolio is performing. Not defaults, no delinquencies. It's doing really, really well. And this was our first example of a real good exit in a financing and a good ROE.

Slide #32, we talk 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. The joint venture is funded by a $15 billion asset management company to provide up to $100 million of equity capital. We will max that equity capital. We have -- and we're prepared to close on a $150 million leverage facility from a well-known investment bank. We believe that we can grow that facility to create our numbers as well.

And we do believe, as we move forward to Slide #33 and the rationale for growing this nonconforming 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, $1 billion in 2024, once we and the expectation of the funded through joint ventures, helped the bank holding company. This will give us additional origination fees, additional servicing income. The ability to asset liability match the loans while we're in the credit warehouse facility through hedging that we've done historically as well as once they go into securitization totally match funded.

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 it was about $14.5 million of all of our payments business last year. We've got some 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 in 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 and Phoenix-based cloud computing business. We're forecasting $4 million of EBITDA. Between that and the NMS business is 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 to Square and others to be able to provide this attractive software.

Slide #38, 2 other important portfolio companies that we believe will really experience tremendous growth based upon their positioning in the Newtek Advantage, Newtek Payroll Benefit Solutions and Newtek Insurance Agencies. These are businesses that will consolidate in our financials going forward if, in fact, we get regulatory approval to become a bank holding company on a bank. Important to note, everything will consolidate. So all the accounting will change over from 40 accounting to 33 accounting. We plan on being very transparent. So it will be financings 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 on some of things before I turn the call over to Nick Leger. Important to note, and I really want to emphasize this. We've been publicly traded since 2000, and the company was established in 1998 on 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 is 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 it. We are no longer going to be distributing 90% to 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 happen to be a major beneficiary and I've 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 created 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 when we look at going forward, if we get the regulatory approvals, which we hopeful are imminent, but anything can happen. As I've said to many people, this isn't horseshoes close is nothing until you get the letter. You never know you're there.

So once that occurs, we will try to turn around and provide earnings forecast 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 things labels 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 will 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 getting regulatory approval.

We're also hopeful that our sell-side analysts will transfer coverage for BDC analysts to bank analyst. 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 legs in prime. So lots of headwinds.

With that said, I hope we have 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.

Thank you, Barry. Good morning, everyone. You can find a summary of our third quarter 2022 results on Slide #41 as well as a 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 a 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 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 for mobile 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, an increase in SBA 7(a) loan referral fees due to higher loan origination volume and loan origination and processing costs.

Realized gains recognized on the sale of the guaranteed portion of the SBA loans 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 lower 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 included in 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.

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

(Operator Instructions) And our first question comes from Scott Sullivan from Raymond James.

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 high rate hikes and the questions of the possible recession next year. And obviously, you talked about preparing for nonperforming loans, which help is 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?

Sure. I think it's -- when people talk about loan demand, they always think about it in the aggregate. And when you think about Bank of America, a big bank, I mean they have to say they're 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 at 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 credits.

So plenty of loan demand, plenty of opportunity to make money. So the 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 commercial enterprises and consumers. So commercial enterprises and consumers and their balance sheets unlike '08, '09, we're actually in pretty good shape. It's a government that's got all the debt at the Fed level and potentially budget deficits at the state level. So our customers are actually in pretty good shape from a balance sheet perspective.

The question is, will consumers continue to spend. There's still a lot of liquidity out there. So no, we feel good about there being enough great credits to make good loans with better terms.

Great. That's very helpful. And if you could sort of have your wishlist in terms of loan mix, would you prefer to have the same level of SBA versus non-SBA? And how would you going forward?

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 nonconforming book, which diversifies us. Now when we say nonconforming, 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 nonconforming. 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.

That's terrific.

And our next question comes from Jim Collins from [indiscernible] Capital Partners.

A question on -- a little bit of a geeky question, sorry, but on the dividend. 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 -- so then that would be -- 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?

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

Okay.

So in the event that the board declares that dividend and then declares that is going to withdraw as 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 in doing but hasn't fully wrapped up yet.

Okay.

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

Exactly. And then that figure is the one that you would be including in the 10-K, which obviously will take you too much to follow. I'm just wondering if 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.

That's the -- that would most likely be the intention, yes.

Okay. That helps. That clarifies a lot.

(Operator Instructions) And our next question comes from Paul Johnson from KBW.

Hopefully, you can hear me okay. 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 I just wanted to clarify?

Do you have an August base report?

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

Okay. Well, we did it off the August base report, and that's where we are -- that's your nor there. But that's why I went over this morning.

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 of 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 new type tracker system, more, I would say, rigid sort of disciplined changes that you've made to the underwriting system at Newtek. Or are these more just kind of discretionary manual sort of tightening standards that you're making across the company.

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

Yes.

The answer would be the latter. So we still believe at this point that it's important that we use human credit committee. 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 deals when they come in, has quickened based upon our technology. So our data is showing us that the technological things that we 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.

Got it. And I'm just curious, I mean, so does that mean as you're tightening these standards, I assume 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 are they still coming in around what you've historically originated at the 275 or 300 basis point spread.

No, we haven't cut our rate, and that's because we don't use brokers or bankers at auction loans off and 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 ultimately discuss payment and proceeds and that's what we went on.

Got it. Appreciate it. And then it's a little bit difficult to know if the small business economy is 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 them, 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?

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 your TV in 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, 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 will be interesting to see what happens with Christmas spending could feel 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 due even to people's excess liquidity and savings.

Got it. 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 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 that be healthy.

Well, first of all, I think that the SBA changed its regs. So we will be out at and are currently added prime plus 3 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.

Got it. Yes, I appreciate it. I was actually referring to the yield on your retained debt portfolio. So on the...

In January, I realize that's pointed out where your head is there right now. But in January, it's going to be north of 10%. But it gets a little complicated because whatever is 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 9.25.

Got it. That's helpful. Those are all my questions.

I appreciate your help. I realize it's -- we haven't made that easy with all of this transition and noise. So I appreciate all the work that you've done.

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

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 who joined and ask questions. We appreciate it. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.