NEWTEK BUSINESS SERVICES COR  (NASDAQ:NEWT)
Q1 2019 Earnings Call
May 02, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Q1 2019 Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Barry Sloane, President and CEO of Newtek Business Services. You may begin.

Barry Sloane -- President, Chairman and Chief Executive Officer

Good morning, everyone, and welcome to our first quarter 2019 financial results conference call. In welcoming all of you to the call this morning, I also wanted to introduce Jenny Eddelson, our Chief Accounting Officer, who will help me throughout the call today.

I'd also like to call all attendees' attention to the PowerPoint presentation that has been hung on our website newtekone.com. You can go to the Investor Relations section of our website and you'll be able to follow our presentation along this morning.

On the presentation, Slide 1 is our traditional forward-looking statement. I would love to suggest all of you to make sure that you read it and are familiar with it. Going to Slide number 2, Newtek always likes to review its historical stock performance over the last five years. You clearly can see we've done exceptionally well, almost a 100%, which would relate to a 20% annual return year-over-year despite the fact that we can all recall last year, particularly the fourth quarter, was a tough year for equities.

Our one-year return last year was 3.5%, which beat most major indices by 500 basis points to 1,000 basis points. However, the stock has rebounded very nicely and our total return including dividends year-to-date through April 26 was 22.4%, and even looking at current days, in fact, I'd appreciate, it would be higher than that. We're quite proud and always want to talk about our stock performance to the investment community.

Moving to Slide number 3, the financial data from the first quarter. Our net investment loss, and for those of you that are familiar with our Company, gain on sale, which is an important component of our income is excluded from NII, however, it's put into adjusted NII. But our net investment loss narrowed significantly, it's an important fact, which we'll talk about in the presentation, to a 66% improvement on a per share basis. Adjusted NII came in at $8.3 million or $0.44 a share, approximately flat to last year of $8.1 million, with dividend of $0.40, so as always, we move to pay the dividend out of our earnings.

Total investment income $13.8 million, a very nice gain of 24.4% illustrating the growth of the business. NAV increased sequentially over the quarter ended December 31, 2018 to March 31, 2019, a 1.7% increase per share. Debt to equity of 122.6% at March 31. We always demonstrate the pro forma debt to equity, which is on Slide number 5. And the pro forma equity is basically what our leverage would look like after approximately $40 million of the governments that's sold into street bids get liquidated. So you could see, it's a fairly significant number and actually cuts our leverage by about 15% and that's typically done within 5 days to 10 days, as that clears at the end of a quarter.

I also want to note the -- in looking at our debt to equity ratio versus other BDCs, we insist that we're difficult to compare to other BDCs. Many of them are invested in mezzanine, debt instruments, subordinated debt instruments or senior secured with typically leveraged buyouts at 5 times to 6 times leverage. To give you an idea, the debt on our payments business, which does about $15.5 million of EBITDA, we've only got about $40 million of debt on that. If we were going to do a 5 times to 6 times debt on that particular business, you'd be looking at $75 million to $90 million worth of debt. I think it's important to note, when you compare the leverage, that statistics in our BDC versus other BDCs, we believe we are not highly leveraged at all. We also have no SBIC debt. So we look at our growth and leverage as something that is not increasing or significantly increasing the risk to shareholders as extremely prudent.

Moving to Slide number 4, we want to focus on, I think an important metric in the first quarter, net investment income or as defined by net investment loss, improved by 66.7%. There was a one-time event that occurred in 2018, which was the extinguishment of debt, it was actually unamortized deferred financing fees of about $1 million. But even taking that out, taking that one-time charge out in 2018, the net improvement in net investment loss would have been 44% on a per share basis.

For investors that follow the Company, and have watched us grow over the course of four, five years, obviously we've been on a regular basis, been able to grow our business with many streams of income. And as our portfolio size continues to grow, as our securitization exits continue to perform very well and get tighter, the spread income on the portfolio, we believe will continue to grow and make a significant contribution to our business going forward adding additional revenue streams to our overall adjusted NII and subsequent dividend performance.

Moving to Slide number 6, focusing on dividends and dividend forecasts, we paid a $0.40 dividend, 2019, that was on $0.44 of adjusted NII. And the Board on May 1 declared a second quarter cash dividend of $0.46 a share, that's a 9.5% increase over the second quarter 2018 cash dividend of $0.42 a share. We're still forecasting and maintaining conservatively a dividend of $1.85 per share to $1.86 per share in 2019. It will be a 3.3% increase over the 2018 cash dividend. We've always pointed the history as a BDC, our initial dividend forecast in 2016 was a $1.50, today in 2019, we're sitting at a $1.85 to $1.86. I guess if you take a look at that plus what we think our forecast would be, it's approximately 5% to 6% increase per year over the prior year's dividends. We're very proud of that. We'd like to repeat. Historically, our annual cash dividends have been paid out of 90% to 100% of our taxable income and that is what the Company anticipates and performs on historically.

On Slide number 7, I think it's important to note that going through the first quarter of this year, we came in a little bit lighter on the expected loan funding volume and that was based upon a government shutdown, which was historically the longest government shutdown in U.S. history, I think over 35 days or third of the quarter. However, we still were able to fund $97.8 million of SBA 7(a) loans, a 7% increase over $91.4 million in the same quarter a year earlier. We're maintaining our forecast annually of $580 million to $620 million range, which should represent a 27.9% increased. I'll also note that our original guidance for the year at $1.84 and the subsequent increase of $1.85 to $1.86, well, the $1.84 was based upon a $1.09 price. I will not address the increase in the guidance that we've given to the marketplace.

On Slide number 8, factors for 2019 7(a) loan funding forecast. As we've said previously, when we've been asked what are your limitations to growth, we've got sufficient capital available, both through debt and equity, loan demand is strong, we are currently still experiencing a loan close rate intentionally of 2.5% of total referrals, cherrypicking the best credits. Comfortably, we believe that we can add between $90 million to $125 million of SBA 7(a) loan fundings while maintaining the credit quality, just by increasing the close rate to 3%, and that's been done through investments in technology and human capital investments that we'll talk about throughout the presentation.

We've hired some significant senior producers, we've grown our real estate footprint, and we have a very nice pipeline of candidates that are coming in in loan assembly, underwriting, closing, and legal staff to help us grow the overall business opportunity. I think it's important to note, as we move to the last bullet on Slide number 8, the launching of our non-conforming conventional loan program, we think will benefit the SBA 7(a) and SBA 504 programs. We're now going to be able to go out to the marketplace and our alliance partners with a much bigger net to be able to do loans up to $15 million, that's 15, with long-term amortization schedules, 10 years to 25 years, with single-digit fixed rate interest rates. So we think that the launching of this program will definitely be accretive to all opportunities.

And when we looked at referrals, in our business model, referrals come into the funnel, the business service specialists and known internally as our loan assemblers, will figure out what's the best program, is it a 7(a), is it a line of credit for accounts receivable or inventory, which we noted CDS, also known as Newtek Business Credit, is it a 504 loan and would wind up going to go NBL or is it the new non-conforming program that we'll be funding through our joint venture with BlackRock TCP. So there's four different places for the referrals to go to. So we're basically making much greater use and using the operating leverage of the business model that we've built over a long period of time, which we believe should benefit shareholders significantly.

On Slide number 9, we've always talked about the limitation to our business and our growth going forward relative to human capital. So we are proud to announce a hiring to support growth at the BDC. Brent Ciurlino has been hired as SVP of Risk and Operations. Brent served as a management consultant for the Company over the last year and a half. Brent comes to us with extensive experience in regulation compliance and risk. Brent, for many, many years, operated the position of OCRM, Office of Credit Risk Management for the U.S. Small Business Administration. He was also as Senior Executive at the FDIC and the RTC. Brent will work very closely with Peter Downs in helping manage the portfolio and risk at all the different business units.

On Slide number 10, we hired Brian Moon as Treasurer and SVP of the Corporate Development. Brian comes to us with 20 years worth of exceptional Wall Street experience. He has extensive experience with financial institutions, business services, including BDCs. Brian will be focusing on our business modeling, our forecasting, business acquisitions and the footprint and treasury functions that will help us grow our business both through debt and equity.

Al Spada, on Slide number 11, has joined us as EVP of Small Business Lending. This is the entity that provides outsourced assembly, servicing and underwriting to our own portfolio companies as well as third parties. Al has been a leader in the commercial lending industry for several decades. And more recently, he was Managing Director and Head of Asset Based Finance at Santander Bank. Prior to being at Santander Bank, he had over 13 years worth of experience at GE Commercial and was a senior executive at Citizens Business Capital and CIT.

Slide 12, Frank Bertelle joined us as Chief Operating Officer of Newtek Business Credit. Prior to joining Newtek Business Credit, which is our ABL lender, financing accounts receivables in the lines of credit

conventionally. Frank was an SVP, Market Credit Manager for TD Bank where he managed a significant team of professionals that had loan commitments of $1.6 billion and fundings of $658 million. Frank also held positions at CIT and Transamerica Bank.

We have a new hire that we hope to announce by the end of May. This professional will be Director of Credit Operations, comes to Newtek with an extensive background -- not expensive -- expensive and extensive -- credit underwriting portfolio management and lending operations. This professional will report directly to Peter Downs, our Chief Lending Officer. He will sit on credit committee, one of the four. It's important to know and understand that each of these different business units and product lines have separate credit committees. This particular professional spent 14 years at GE Commercial Finance and over a decade at other prestigious financial institutions like Bank of America and Citicorp.

On Slide number 14, we're happy to talk about and finally announce that we will be launching our Newtek Conventional Lending joint venture, which is a 50-50 joint venture between Newtek Commercial Lending, which is a wholly-owned subsidiary of Newtek and BlackRock TCP. Newtek and BlackRock will commit an equal amount of equity funding, anticipated to be about $100 million each over time and will have equal voting rights on all material matters. The intended purpose of the JV is to originate business loans to middle market and SMB businesses all over the United States utilizing the extensive referral systems at Newtek Business Services Corp., using the loan assemblers, underwriters, pre-closing, post-closing and legal staff and leveraging Newtek Business Services Corp.'s opportunity. So the venture will be 50-50 owned. This will be a venture that will show up on our schedule of investments.

On April 29, we announced that Newtek Conventional Lending closed a $100 million senior secured credit facility with Deutsche Bank that has an accordion feature of $200 million. It is estimated that our equity, that is the venture's equity with the lending line, one-third equity, two-thirds leverage will be used to create the structure that will enable the venture to issue securitizations and potentially from time-to-time, sell loans out of the venture. We estimate, that being Newtek Business Services Corp., that of the $18.7 billion that it took in loan referrals in 2018 and there is growth in this quarter, which we'll talk about shortly, that could be between 1% and 2% that could qualify for this non-conforming conventional loan programs.

We haven't announced the program yet to our referral partners, that will probably be done some time next week in a formal press release. We are not giving any guidance on the contribution nor have we included any dividends or earnings from the joint venture in our $1.85 to $1.86 dividend forecast. I think that a lot of people are looking for information on this. We'll try to be as transparent as we can without overstepping the line of what might lend us towards more speculation.

But I think most of you can ascertain that for the two joint venture partners that are both BDCs, the projected equity would be accretive to the dividend, otherwise it wouldn't make sense for us to do it, and that's obviously with leverage. So all of you could start to begin to build your models, but we look at this as additive, and to quote the item in our press release, JV plans to use the leverage facility to grow the business and we believe this new initiative will have a positive impact on the results going forward. However, at this point in time, none of the benefit of this joint venture has been factored into our annual dividend forecast.

On Slide number 15, we always refer to our pedigree in the 7(a) business. We are now the fourth largest 7(a) lender in the United States, doing more SBA 7(a) loans than JPMorgan, Bank of America and many other financial institutions, and the largest non-bank government-guaranteed lender. All of our securitization -- all of the loans on the uninsured pieces get exited out of via securitizations. We've done nine of them since 2010. These are on balance sheet. You could see all the loans sitting in our Ks and Qs, they are all mark-to-market, both performers, the sub-performers and the non-performers on a quarterly basis. The execution on these deals has gotten better and better. We're quite proud of that. And the securitizations are long-term, non-recourse, asset liability matched. Although they do count as leverage, but I also will note, they're non-recourse to the BDC, I think that's also important to note, when you calculate our leverage ratio.

Slide number 16 shows our pipeline. A 14% pipeline increase year-over-year versus March 31, 2018. We had a good quarter in loan referrals in dollar volume up to $5.3 billion in the first quarter. So obviously a $20 billion run rate. And we are hopeful and believe that the launch of the non-conforming program, which will give us funding up to $15 million will be beneficial. For those of you, non-SBA aficionados, SBA 7(a) business caps at $5 million. The 504 business goes up to $10 million. By being able to expand our big fishing net up to $15 million, we think we're going to get a lot of good opportunities.

Some of the loans in the non-conforming conventional venture program will be within a $5 million size. For borrowers that are looking for fixed rate alternative versus the floating SBA 7(a), for those that only occupy 49.99% of the real estate, so it doesn't fit a 7(a) program. For those that already have used their $5 million max cap on 7(a), this program will be very useful. So you'll see loans that are greater than $5 million in the pool and under $5 million that for some reason can't fit the 7(a) bucket.

On Slide number 18, this is the graph showing the growth of our referral business over the course of time. Obviously, people sometimes want to look at the 2007-2008 cohort data, which we do share with the marketplace. But the reality is, a company that's originating $20 billion worth of loans a year is different than one that's originating $2 billion worth of loans a year.

Slide number 19 talks about premiums on gains on sale of the government-guaranteed 7(a) pieces. For the quarter, we netted 11.09%. We're moving back up toward the average. We believe that this move back up is primarily a function of constant prepayment rates. These are government-guaranteed floaters without a cap, so there is no interest rate reason or rationale. Obviously prepayment rates are a function of a stronger economy and rising rates as well. But it's the stronger economy that raises rates and basically we've had these levels of rates for a period of time. I think at some point in time, the better loans and the better borrowers do refi quickly, that doesn't mean that the ones that are remaining can make their payments, but they may not have a refi option.

So as we go into looking at things like delinquencies and charge-offs and the average seasoning on the portfolio, these are important trends that come into our analysis as we work with credits and we look at and analyze data. CPRs in the first quarter have slowed. CPRs came in at 13% and 14% in the last couple of months, that's down from like high-16% and 18% in the fourth quarter of last year.

On Slide number 20, we are now beginning to track weighted average seasoning of the portfolio. You could see from 2017 to 2019, we're moving out on the default curve. The maximum amount of defaults typically occur in these portfolios within months 24 to 36 months. Slide number 21, we show our portfolio currency and delinquency trending analysis. 93.5% of our portfolio is current.

Slide number 22 is a new slide for us. We felt it was important to break out what used to be known as a total gross category of NPLs into sub-performing and non-performing. Important to note, when loans go 60 days past due, we put them in one of these two categories. Now, sub-performing loans are loans that are currently cash flowing. So you can have a loan that didn't pay for 60 days or 90 days, you can have a loan that's been current pay that went into bankruptcy, but we still consider that in the broader category and take it out of performing loans. All these loans, important to note, are mark-to-market on a quarterly basis to the balance sheet. So you've got a real-time marking on the balance sheet of what the loans and the assets are worth.

Sub-performing loans, however, we believe are loans that are cash flowing and that the business is in a position to repay the balance of the loan. A non-performing loan is defined as one that is in liquidation and it's the liquidation of the collateral that will wind off paying the remaining principal balance. In both cases, a very serious review by the management and the Board is made of all of our loans to mark them to the market. And our sub-performing and non-performing portfolio came in about 8.8% for the year.

On Slide number 23, we have the realized losses or the charge-offs as loans were liquidated. As you could see, only through the last four quarters, there appears to be a little bit of a leveling off of these numbers. I think, once again, it's important to note, based upon where the portfolio sits on the lowest curve, these will change from time to time. Many of you could recall on prior calls, when these numbers were 25 basis points and 35 basis points, I discussed with the investment community that this is not where our level of charge-offs should be and that you will get higher numbers and the wind up balancing add some kind of an equilibrium number that can clearly support our business. We've been in these businesses for 16 years, we've seen up rates, we've seen down rates, we've seen 2008-2009 credit cycles, we feel very good about the credit worthiness and the quality of our portfolio.

Slide number 24 is a depiction of how the portfolio continues to improve. You could see that the amount of commercial real estate as primary collateral, almost 2007-2018 has improved, reduced dependency on residential, real estate, as well as machinery and equipment. I also think it is important to note that just because the commercial real estate is primary, it doesn't mean this couldn't have machinery and equipment, but we have secondary liens on commercial real estate collateral, which would not be seen on Slide number 24.

On Slide number 25, we talk about loan purposes, existing businesses, 83% up from 34%, business acquisitions, down 33% to 12%, little bit of a riskier category, and start-up businesses down significantly, and I think most of the 4% is a residue of loans done many, many years ago. From a geographic standpoint, you could see we are starting, as the portfolio gets bigger, moving toward the footprint of what I call GDP in the U.S. economy. Although when you add up Florida, Texas, California, New York, which is probably two-thirds of the U.S. GDP, we're still half of that and we hope to continue to have diversification as an important thesis. With respect to diversification, many of you are aware, the average size of the uninsured loans on our books is about $180,000.

Slide 27 is a slide that you're all familiar with for those that have followed the Company, but I always like to include this for newcomers, that represents cash created on a 7(a) loan after the government-guaranteed piece is sold, post cash created on securitization $41,000, gain on sale $85,000, risk adjusted, and then quickly moving into the portfolio review.

SBA 504 loans, little bit of a description of what those loans look like. It's important to note, we have not changed our forecast for 504 loans of about $135 million of closings and $100 million of fundings. The first quarter was very difficult because of the government shutdown. So unlike the 7(a) program, we were able to move forward expeditiously on 7(a) loans and we see a shifting of loan fundings from Q1 to Q2.

In order to do a 504 loan, you need a CDC and an SBA approval on the second lien. So the shutdown, number one, created a big backlog and, number two, pretty much kept us out of this business. So I have to say that we were disappointed that we had no fundings in SBA 504 loans in Q1. However, we believe that where our pipeline currently sits with $32 million in approved, pending closing, we think we will close $30 million to $35 million in Q2 and fund $25 million and we are maintaining our guidance and we are comfortable with it. 33 and 34 explains some of the economics and what a 504 loan looks like.

Our portfolio company Newtek Merchant Solutions is a early sizable portfolio company, and based upon its materiality, we do give more information on this portfolio company versus little to no information on a lot of the others based upon size and materiality. We have been in this business for over 10 years with processing over $6 billion of payments in 2018. We have a 7.5 times EBITDA valuation on the business compared to the public comps, which you could see on this particular slide. Important to note, we're still projecting a 13.2% EBITDA increase over last year after taking out $1 million of reoccurring revenue on an Elavon portfolio that we sold at the end of the year. I think important to note that we've taken out $1 million of cash flow and we still think we're going to be able to grow the business. There is still a pre-tax gain sitting at the portfolio company of about $4 million that the Board of Newtek Merchant Solutions decides on a regular basis whether to distribute that are not based upon opportunities that it has in its market to make investments in portfolios, staff, acquisitions, software, or potentially to distribute those dividends and earnings back up to the BDC. Valuation on our technology units, $10.8 million, net of debt as of the end of the quarter. We are still very bullish and positive on our ability to participate and be a winner in the cloud services space.

On Slide number 38, this is a summary of why people should look at Newtek as an investment opportunity. I always point to Slide 2, which is our track record. We are an internally managed BDC, so we don't pay ourselves a management fee. Most of these companies are portfolio companies we've owned and managed over 10 years. We continue to have a track record of paying dividends and increasing NIM out of earnings. We have a proven track record as a lender over 16 years through multiple lending and credit cycles. Average balance on loans that sit on our books is about $181,000 of risk. These are floating rate loans without a cap, tied to Prime and a quarterly adjust. Management's interests very much aligned with shareholders. Management and the Board own 6.8% of the outstanding shares, and we are very insistent that we are less levered than most of our competitors in this particular space.

Now I'd like to turn the rest of the presentation over to Jenny Eddelson.

Jennifer C. Eddelson -- Executive Vice President and Chief Accounting Officer

Thank you, Barry, and good morning, everyone. You can find a summary of our first quarter 2019 results on Slide 40 as well as the reconciliation of our adjusted net investment income or adjusted NII on Slide 42.

For the first quarter of 2019, we had a net investment loss of $986,000 or $0.05 per share as compared to net investment loss of $2.8 million or $0.15 per share in the first quarter of 2018, a 67% improvement on a per share basis. Adjusted NII, which is defined on Slide 41 was $8.3 million or $0.44 per share in the first quarter of 2019 as compared to $8.1 million or $0.44 per share for the first quarter of 2018, unchanged on a per share basis.

Focusing on some of the first quarter 2019 highlights, we recognized $13.8 million in total investment income, a 24.4% increase over the first quarter of 2018. Both interest and dividend income were the primary drivers for the increase, with interest income increasing by 36% resulting from a higher interest rate on our SBA loan investments year-over-year as well as an increase of 21.2% in dividend income quarter-over-quarter from our controlled portfolio companies. Our dividend income in the first quarter of 2019 included $2.9 million from NMF, $150,000 from Citco, and $100,000 from Mobile Money.

Servicing income increased by 17.6% to $2.4 million in the first quarter of 2019 versus $2.1 million in the same quarter of last year, which was attributable to the average NSBF originated portfolio earning servicing income, growing from $909 million at March 31, 2018 to $1.1 billion at March 31, 2019.

Total expenses increased by $909,000 quarter-over-quarter or 6.6%. Salaries and benefits decreased by 26.4%, primarily due to NSBF employees being hired by Small Business Lending LLC or SBL, one of Newtek's wholly-owned controlled portfolio companies on January 1, 2019. Small Business Lending is a lender service provider that, effective on January 1, 2019, provides NSBF with loan origination and servicing functions performed by its employees. SBL charged NSBF $2.2 million in the first quarter for these services, which expense is reflected on the consolidated statement of operations as origination and servicing related party.

Total interest expense increased by $1.2 million in the first quarter of 2019, primarily due to higher average outstanding debt balances. In addition, and as Barry discussed earlier, the first quarter of 2018 included a $1.1 million loss on extinguishment of debt expense resulting from the redemption of the notes due in 2021. Realized gains recognized in the sale of the guaranteed portions of SBA loans sold during the first quarter totaled $9.7 million as compared to $10.3 million during the same quarter in 2018. In the first quarter of 2019, NSBF sold 117 loans for $74.1 million at an average sale price of 111.09% as compared to 114 loans sold during the first quarter of 2018 for $73.2 million at a weighted average sale price of 111.82%. Realized losses on SBA non-affiliate investments for the first quarter of 2019 was $402,000 as compared to $394,000 in the first quarter of 2018.

Overall, our operating results for the first quarter resulted in a net increase in net assets of $9.1 million or $0.48 per share and we ended the year with NAV per share of $15.31.

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Questions and Answers:

 

Operator

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

Leslie Vandegrift -- Raymond James -- Analyst

Hi, good morning.

Barry Sloane -- President, Chairman and Chief Executive Officer

Good morning, Leslie.

Leslie Vandegrift -- Raymond James -- Analyst

Hey. So my first question is on the SBA loan funding for the quarter, you talked about the government shutdown had an impact there. Back in March, we didn't think it would be much of an effect. So was the end of March just a little bit slower as well or what changed between that and the end of the quarter?

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Leslie Vandegrift -- Raymond James -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Leslie Vandegrift -- Raymond James -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Leslie Vandegrift -- Raymond James -- Analyst

Got it. Okay, thank you.

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Leslie Vandegrift -- Raymond James -- Analyst

Okay, all right. Thank you. And then the JV, you talked about last year about a 1% to 2% of referrals you saw, the $18.7 billion would have qualified as non-conforming for that.

Barry Sloane -- President, Chairman and Chief Executive Officer

Right.

Leslie Vandegrift -- Raymond James -- Analyst

Now, despite the qualification, how much of that would have been in a year in which you had the JV ramping? What would be the actual anticipated close rate? I know it's an estimation, but just somewhere in that range.

Barry Sloane -- President, Chairman and Chief Executive Officer

Yeah, I've got eight people telling me not to answer this question. Yeah, but of course I appreciate the question. So let me see if I could be somewhat helpful. Number one, I think it's really important, we haven't announced this yet to our alliance partners.

Even on the initial announcement, I don't expect a tsunami, but I do expect to get a lot of opportunity. So let's use a $20 billion number, right. We believe that even though we have historically funded only 2.5%, it's not like 97.5% aren't creditworthy, we just didn't have a program for it. The 7(a) program caps at $5 million. So this program will enable us if borrowers need $6 million, $7 million, $8 million or they've used $5 million of their 7(a) and need more, we can do this program for them as well. If you look at the 1% or 2% and you laid it over the $20 billion, you certainly can come up with a number. But also when we announce it, I think that the growth in this particular segment, as I said, in the press release can be important, can be significant, and can be material.

I've just been advised by all my advisors as well as other constituents to sit tight, look at it again at the end of the second quarter, we'll be able to tell you what we funded, what the pipeline looks like. But right now, this is just upside and gravy. I also tried to give you a little bit of a sense indicating that it wouldn't make sense for us to do a venture like this unless we believe that the equity was accretive in some way, shape or form.

Leslie Vandegrift -- Raymond James -- Analyst

Okay. Thank you for that color.

Barry Sloane -- President, Chairman and Chief Executive Officer

I know that's not much help right now, but it gives you enough ability to start tracking us as you do very well.

Leslie Vandegrift -- Raymond James -- Analyst

Thank you.

Barry Sloane -- President, Chairman and Chief Executive Officer

Thanks, Leslie.

Leslie Vandegrift -- Raymond James -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Leslie Vandegrift -- Raymond James -- Analyst

Okay. All right. And then I guess just the last question kind of on top of that. You have the slide in there about non-performing loans and you've always had been in there. But this quarter you've added a bit about sub-performing where it's a non-performing, but it's still paying interest and so cash flow. That rate jumped -- I mean, it ticked up materially, it looks like from fourth quarter to first quarter. Is there a particular industry in which you're seeing those issues in the market? Do you see another sector -- I mean, we had retail couple of years ago that had all those issues, energy right before that. Are you seeing a specific sector hurting or a broad general just a slight weakening in credit?

Barry Sloane -- President, Chairman and Chief Executive Officer

We don't see a weakening of the credit and the reason why we addressed the seasoning of the uninsured portfolio, which is the portion of the portfolio that would relate to delinquencies and defaults. So when we say that there is a seasoning shift, let's say, 28 months to 29 months, we're into the belly of the default curve. The other thing that happens is, we all look at averages, but the issues always are at the extremes. So at the extremes, you've got very good credits that have taken the loan for a year or two, business has improved and they can now refinance with the bank at 5.5% or 6% where what sticks in the portfolio are borrowers that have to live with the higher rate, because they can't refinance out. So as the portfolio of our nature seasons, you're going to get higher -- on a weighted average basis, higher levels of delinquencies and you're going to get higher levels of charge-offs. On a positive side, we can clearly support that because what you're seeing is the gross size of the portfolio growing, as we had new loans with higher coupons. So you have a sort of a barbell shaped on the portfolio.

You have a lot of newer loans and you have a lot of older ones, but once the borrower tends to get through 36 months or more of seasoning, they've gotten through the important humps of being able to support the debt, are able to manage their business and then these numbers should taper off and decline. But as I've said previously, we've had charge-off years of 25 basis points and 35 basis points, and I made it a point to say that's not this portfolio. It's not. As a matter of fact, when we do our analysis, we use a 20% gross cumulative default and a 40% severity and our business model can stay in that and support that. So we think what is occurring, which are higher than previously forecasted numbers in these categories are totally supportable and sustainable at the income that comes off of our business model.

Leslie Vandegrift -- Raymond James -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Leslie Vandegrift -- Raymond James -- Analyst

Okay, all right. Well, thank you for answering my questions.

Barry Sloane -- President, Chairman and Chief Executive Officer

But it's not -- yeah, it's more collateral-driven and refi-driven if you can get a lower rate than real estate, because our rates are higher than bank rates, and we substitute what banks don't do. That's the nature of it. And by the way, I think I wanted to say one other thing, it's really important. A lot of times, from an analysis standpoint, if you're looking at these delinquencies and charge-offs, not you in particular, but some of our analysts or bank analysts, they're looking at credit card portfolios and car loans. When a car loan goes 60 or 90, it's dead. You could write it off and you are liquidating the car. On a credit card, it's gone, you're not recovering anything, but pennies. On these loans, you've got multiple personal guarantees from business owners with personal assets pledged and business assets pledged. So sometimes these businesses can have a tough quarter or tough two quarters, but all of a sudden they come back, that's where the sub-performing category is important.

We've got loans that haven't missed a payment, but the borrower has declared bankruptcy. By the way, I'm not saying that's a good thing. We do write the loan down, but still cash flowing and they haven't made the payment. Why do they go into bankruptcy? Maybe there is an issue with the divorce, maybe there is an issue where they're trying to negotiate a real estate lease, which we've had. But we believe based upon the collateral on the cash flow of the business and the fact that we've got everything tied up, we're going to pay the loan off.

Leslie Vandegrift -- Raymond James -- Analyst

Perfect. Thank you for the color and taking all my questions this morning.

Barry Sloane -- President, Chairman and Chief Executive Officer

Thank you. Great questions. Thank you.

Operator

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

Casey Alexander -- Compass Point -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

Casey, that's a good question, which lays into the nature of our business model. Because we don't use brokerage or brokered loans and we're dealing directly with borrowers and we don't go around the borrowers and say, we are the 7(a) lender. We're a small and medium size business lender. We have not cut out rate once since 2009. We've been a max prime plus 2.75 lender since 2009. Now, if you go to look at our scheduled investments, you might see some rate differentials, those are typically loans that have been defaulted or bought out of pool. So save me the question for the next quarter, because you are very astute and you do a great job in our financials. But because we're dealing directly with the borrower and not dealing with a broker, we're not in competition, and the minute the borrower comes in and gets through the underwriting point, we get the SBA guaranteed, we're locked in, they can't get an SBA loan anywhere else.

So from our standpoint, number one, we want to know that the borrower can afford prime plus 2.75, that's really important. We're not making prime plus 2.75 and hope the borrower goes bad, that's not what we've done over 16 years. Number two, we charge a full rate, we're better than our competitors, we close quicker, the experience is better, and when we don't think it works, we tell them quickly no, and they can go, get the rate where they can. So the prime plus 2.75 rate issue of good quality versus bad quality, it doesn't apply to us. It does apply when you've got brokers coaching the borrower and shopping the loan package with three or four SBA people at the same time and say jump ball and it becomes a jump ball, not just on rate, but on credit quality. Because of our model, which is a real retail model where we can pick and choose between $20 billion worth of opportunities, we're able to get the max rate. Look, maybe this is a bad analogy, Casey. If you are coming into my car dealership, I could probably sell you the car at dealer cost, I could probably sell you the car at issue. My job is to get the highest price I can for the car and give you great service and put you into the car. And by the way, mentor the business on a lot of other things that I could do to help them grow the business, which we do as well.

Casey Alexander -- Compass Point -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Casey Alexander -- Compass Point -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

Yeah, it wouldn't be a BDC leverage ratio, it would be 4 to 1, and I couldn't do it. And by the way, we've been in the business for over 20 years and been a non-bank lender and we've operated at much higher leverage ratios and I will add that we didn't get a government bailout in 2008-2009 and managed our banking relationships and our defaults very, very well. So we are totally under-levered based on our ability to do this business and manage the risk. The problem that I have is that in many cases, the Street looks at the number and they don't count SBIC debt, they don't count a leverage that's inherent in each of these business assets, they don't count the fact that I've under-levered one of my biggest assets, my payment processor, but if I do a loan, that's an LBO loan at 5 times or 6 times EBITDA, that's, as long as it's senior, it's fine. If they don't have any PGs, they don't have any collateral behind it, that's fine. If I do mezzanine debt, which has inherent leverage in it, that's fine. If I do CDO equity, that's fine.

We are unique and we've worked with each other for many years analyzing it, it can't just look at that absolute number. However, what I try to do is not stick my head in the sand and try to be very respectful to the analyst community and investors that do like to look at a single number and we work pretty hard at trying to make our story as simple as it possibly can. And we are proud of the fact that we trade at a 40% premium to NAV and people have understood that our dividend is in straight line across the four quarters, some people get it, some people don't. But I'll trade our business model into 95% of the other BDCs that are all trading at NAV or below and have SBIC debt and a bunch of other things going on and they're getting -- they're not getting the kind of returns that we get to our shareholders. So we are unique, and we are different. The fact that I have a government-guaranteed floater with a take out from a broker dealer that clears in 5 days or 10 days, I don't consider that leverage.

Casey Alexander -- Compass Point -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

No, because you will right appear before to me and I don't want that to happen. I'm extremely respectful.

Casey Alexander -- Compass Point -- Analyst

I guess that means 1.9 is the number.

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Casey Alexander -- Compass Point -- Analyst

All right. Thank you very much.

Barry Sloane -- President, Chairman and Chief Executive Officer

Thanks, Casey. Appreciate your help.

Operator

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

Frederick Cannon -- KBW -- Analyst

Hey, Barry, good morning.

Barry Sloane -- President, Chairman and Chief Executive Officer

Good morning, Fred.

Frederick Cannon -- Global Director of Research and Chief Equity Strategist

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Frederick Cannon -- Global Director of Research and Chief Equity Strategist

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

Barry Sloane -- President, Chairman and Chief Executive Officer

So to answer the second question first, it is a JV, therefore the JV doesn't consolidate. The only thing you'll be seeing is the equity investment in the JV. We'll try to give the market a general feel for how that JV can do, but we're pretty restricted in doing so, because you don't want that being consolidated onto our balance sheet. So we do give limited disclosure for the portfolio companies, which is based upon SEC and accounting regs.

What was your first question, Fred?

Frederick Cannon -- KBW -- Analyst

I think you've got out at, Barry. I was really kind of getting at -- yeah, I am just trying to understand this since it's a JV between two BDCs about does it go on your -- do the loans go on your balance sheet or they stay in some kind of third-party off-balance sheet entity, which it sounds like they stay in this JV third party off-balance sheet entity. And then secondly --

Barry Sloane -- President, Chairman and Chief Executive Officer

And it is non-recourse financing, which is important. So there is no recourse back to the BDC and it's funded out of a special purpose vehicle.

Frederick Cannon -- KBW -- Analyst

Right, okay. Okay. I mean, so with -- from our purposes for new tax then, it's just going to be another portfolio company and we'll get very limited disclosure?

Barry Sloane -- President, Chairman and Chief Executive Officer

Still limited disclosure, but we'll try to be helpful as time goes on and hopefully this gets to be material and size and then when it is, we'll give more disclosure on it, just like we do with the payments business.

Frederick Cannon -- KBW -- Analyst

All right. Thanks, Barry.

Barry Sloane -- President, Chairman and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Our next question comes from Jeff Sullivan of Raymond James. Your line is open.

Scott Sullivan -- Raymond James -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

Thank you, Scott. Appreciate it.

Scott Sullivan -- Raymond James -- Analyst

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

Barry Sloane -- President, Chairman and Chief Executive Officer

Sure. I think that the non-conforming program, 50-50 joint venture dollar of equity from BlackRock TCP, dollar of equity from us, that's $2. Yet, $4 of debt financing from Deutsche Bank loans will sit in the leverage facility in the special purpose vehicle until it gets critical mass and do securitizations out of that. So basically the returns that ultimately will flow up to the BDC will be based upon income that comes out of the special purpose vehicle, which could be effectively, in its initial intent, this could change, but it's really spread income.

So if you're looking at the coupon on the loans, that's the coupon on the leverage vehicle, plus the coupon that's ultimately sold on the bonds, and we try to give without putting a number on it. Obviously, if we didn't think this would be accretive and BlackRock TCP didn't think it would be accretive, based on that portion of the business, we wouldn't do it. So we think from a size standpoint, there is a big appetite for these types of loans in the market. These are much bigger loans in size, our average 7(a) loans, $700,000, $800,000, these could be significantly larger. So just dealing with bigger numbers going forward. Although the recurrent equity might not be as high as 7(a) business, this should be beneficial because effectively, it's going to be giving us at reoccurring income. Although it's not going to show up in that format on the BDC, but you're going to get that reoccurring spread income based upon our interest in the joint venture.

Scott Sullivan -- Raymond James -- Analyst

That's helpful, thanks. And I know you hesitate to give guidance obviously, but is there any kind of blue sky, gray sky guesstimates on what kind of spread margins you might be looking at, ballpark, goals?

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Scott Sullivan -- Raymond James -- Analyst

Okay, thanks very much.

Barry Sloane -- President, Chairman and Chief Executive Officer

Thank you, Scott.

Operator

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

Barry Sloane -- President, Chairman and Chief Executive Officer

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

Operator

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

Duration: 66 minutes

Call participants:

Barry Sloane -- President, Chairman and Chief Executive Officer

Jennifer C. Eddelson -- Executive Vice President and Chief Accounting Officer

Leslie Vandegrift -- Raymond James -- Analyst

Casey Alexander -- Compass Point -- Analyst

Frederick Cannon -- KBW -- Analyst

Frederick Cannon -- Global Director of Research and Chief Equity Strategist

Scott Sullivan -- Raymond James -- Analyst

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