Good day, ladies and gentlemen. And welcome to the Newtek Business Services Third Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I’d now like to turn the call over to your host, Barry Sloane. Please go ahead.

Good afternoon, everyone. And welcome to the third quarter 2014 financial results conference call. I am Barry Sloane, Founder, President and CEO of Newtek Business Services Corp., a NASDAQ company and I have here with me today that will help me on the presentation, Jenny Eddelson, our Chief Accounting Officer and Treasurer. We certainly appreciate the opportunity to present today. This particular presentation was delayed a couple of days past, our typical earnings release, due to the fact that we just closed a capital raise a couple of days ago. I do want to point out before we go into the Safe Harbor statement that today’s presentation will primarily reflect, obviously our third quarter results. There will be some forward leading statements. However, I think that we are basically positioning ourselves today for our third quarter as a C Corp, which is want we were and going forward, we recently converted to a business development corp. So the format of our presentation will clearly change in quarters going forward down the road. Today we are going to give some forward statements and forecast based on what we look like as a BDC, but also what we have done in the third quarter as a C Corp and there will be some follow through on fourth annual results as a C Corp. With that, I would like to ask Jenny Eddelson to go over the Safe Harbor statement.

The following discussion of our financial condition and results of operations is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the company, together with its subsidiaries. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes contained in the company’s quarterly report on Form 10-Q for the period ending September 30, 2014. The statements contain herein may contain forward-looking statements relating to such matters as anticipated future financial performance, business prospects, legislative developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements. In order to compile with the terms of the Safe Harbor, we note that the variety of factors could cause our actual results to differ materially from the anticipated results expressed in the forward-looking statements, such as intensified competition and/or operating problems in its operating business projects and their impacts on revenues and profit margins, or additional factors as described in the company’s annual report on Form 10-K and other filings with the SEC.

Thank you, Jenny. I would like to call everyone’s attention that we’d like to follow along on the presentation to our website thesba.com and to the Investor Relations section. This PowerPoint is present there as well. Looking at our Q3 2014 financial highlights, Newtek recently affected a 1 for 5 reverse stock split on October 22nd. All the share data that we will be talking about today has been adjusted to reflect the reverse stock split, as well as the increased numbers of shares based on the recent reverse stock split in the BDO transaction, the business development corp transaction. Closing stock price as of 11/08/14 yesterday was $13.12, today we closed at $13.40. Pretax income for the quarter was $4.5 million, an increase of 132%. Net income attributable to Newtek Business Services Inc. was $2.6 million, a 45% increase over the prior quarter -- over the same quarter in the prior year. Diluted EPS was $0.34 a share, an increase of 41% that, obviously, was an increase over Q3 2013, operating revenue was $30.2 million, an increase of 9.8% over Q3 2013, adjusted EBITDA $6.7 million, an increase of 52% over Q3 2013. And for the nine months ended [September 30, 2019] [ph], diluted EPS $0.86, an increase of 26.5% over the same nine months last year 2013 quarter ended September 30, 2013. And for the nine months ended September 30, 2014, GAAP diluted EPS was $0.71, an increase of 4.4% over GAAP EPS of $0.68 for the nine months ended September 30, 2013. Our Small Business Finance segment pretax was $4.2 million, an increase of 145% over Q3 2013 and Small Business Finance revenue was $10.9 million, an increase of 44.5% over Q3 2013. Our operational highlights on page #3, we originated $48.7 million worth of loan to…

Thank you, Barry. On a consolidated GAAP basis for Newtek Business Services, Inc. our third quarter results were as follows. We had operating revenue of $38.2 million, a 9.8% increase over the third quarter of 2013. Pretax income was $4.5 million, 132% increase compared with the year ago quarter. Net income increased by 45.3% to $0.6 million and our diluted EPS were $0.34 per share, up $0.10 or 41.7% from the third quarter of 2013. Slide 22 represents the summary of our third quarter 2014 revenue and pretax income or loss and adjusted EBITDA by segment compared with the year ago period. Electronic Payment Processing segment revenue increased by 3% to $22.7 million from $22.2 million. Processing revenue less processing cost or margin increased from 14.6% in Q3 2013 to 16.1% in the current quarter due to the implementation of a monthly noncompliance fee in the third quarter of 2014. Pretax income was $2.2 million, an increase of 18% from $1.9 million a year ago and primarily due to the increase in margin dollars. The Small Business Finance segment had a 45% improvement in total revenue increasing by $3.4 million to $10.9 million for the third quarter of 2014. The majority of this increase is in servicing fee income, which increased to $2.6 million for our combined portfolios. Our aggregate servicing portfolio grew to approximately $1.1 billion, an increase of $469 million or 74% quarter-over-quarter. Interest income increased by 36% to $1.7 million, as a result of the average outstanding performing loan portfolio increasing by 39% quarter-over-quarter. The third quarter 2014 average net premium on the sale of the guarantee portions of our loans was 13.19% as compared to 10.74% in the third quarter of 2013. Total expenses for the lending segment increased by $791,000, the majority of the increase…

Thank you, Jenny. Operator we would love to open up the call to any questions.

[Operator Instructions] Our first question comes from Chris York with JMP Securities. Your line is open.

Good afternoon, guys. And thanks for taking my questions. Barry, I just wanted to see that you have historically been able to cross sell about one in eight borrowers to other business services on the Newtek platform. With the strong origination outlook that you just gave us, how are you thinking about the ability to further cross sell into other businesses?

Sure, Chris. I think that the lending clientele from a client count is the smallest. When we do work with borrowers, we obviously look at their payroll accounts, their processing account, their insurance policies, effectively as part of the collateral package because a business owner that has the right workmen’s comp, has the right payroll solution, has the right payment solution, that makes their business better or for that matter, think about a dentist that’s got all their data on a server. If ultimately you got a liquidation event, you really want all the data on the server to be able to resell the business. And in addition, a dentist that has its server sitting in a closet is at risk for a HIPAA compliant violation. So that’s obviously one way that we've been able to cross-sell and cross-market. But we clearly don't force clients to take our services but it is part of the collateral package. And it will help improve their likelihood of getting approval when it goes into credit underwriting committee. In the other particular areas, the business must do, fit together. So when you think about ecommerce, the hosting of the site, the taking of the payment, the gateway and web design will go together or for that matter on the benefit side, payroll, Workmen’s comp, health and benefits particularly today, it goes together. Going forward, we are going to do a better more aggressive job particularly with capital raise, putting more dollars in the marketing to making sure we do a better job of cross-selling and cross-marketing, going forward and drilling into the database. I think it’s important to note if an existing business comes to us, which is the preferred customer opportunity versus totally new company. It’s pretty hard to change all the providers up front. So which I hope to do is close one opportunity. We messaged them regularly. I think we put out close to $90,000, excuse me -- 90,000 new letters a month to our customer base with about 15% over rate. Cross-selling, cross-marketing is important to us. They have to be overall synergies. We look forward to being able to put out better and more impressive statistics financial bottom line. There is lot of upside in that in our particular portfolio.

Got it. That makes sense. And then switching gears just a little bit, so again thanks for the update on this $75 million loan expectation in Q4 and great job on the $25 million in October. So is this origination loan pace sustainable in 2015? And if so, how are you thinking, well or what point would you potentially need more equity capital as the balance sheet leverage would probably start to approach the debt net equity level at one time?

Sure. I think that we are thinking for 2015, given the dividend that we have projected. We are looking at about $280 million worth of 7(a) loans. And obviously we’ll be doing securitizations throughout the year. I think our goal would be to access the market at some point I time 2015. Most likely it will be -- I’ll say the third quarter plus or minus a quarter, we prefer it to be later than sooner. But that remains to be seen. I think we have a lot of flexibility in our business model particularly relative to leverage cap. We’re currently very under levered in certain aspects of our business particularly the business service side, which has got effectively $10 million of debt. And right now, Chris that debt actually fits up as the holding company. We may need to make an adjustment where that debt comes down to the portfolio of companies and that gives us more room on the BDC cap. So as we move into the BDC world, we are happy and proud to say we’ve got, more glad to read that’s probably the top accounting firm in this area and so the one on legal side is advising us. So we’ve got real good counsel and we have to figure this out strategically as we go along. But we’re pretty comfortable where we are. We don't see us rushing back into the market any time in the near future, not necessary.

Okay. Thanks for that. So how would I think about your -- or have you thought about a potential target on balance sheet leverage level? I know other BDCs tend to float out to 0.6 to 0.8 times, as being in the level they are comfortable running the business. Have you guys put out anything, or thought about what level it makes sense there for your business?

I would say, Chris, at this point in time, that’s going to be a bit of moving target. And the one thing I will tell you is we’ve just finished our roadshow and got tremendous receptivity. The primary utilization of the capital will be in the most levered side of the business and that is the 7(a) aspect. It’s also the highest rate of return and we think with the most modest in that risk. In the business services side, we are effectively we could do acquisitions and probably get, call it 15% to 20% cash-on-cash yield without leverage. Okay, that part of our business is going to buffer the FCA side of it. So as we think about targets, we’ll probably be a little bit more levered with respect to 2015 than we maybe in 2016 or 2017. Does that makes sense there?

It does, and I understand completely the complexity of it too, clearly with converting at this point, there is a lot of moving parts there so?

Yeah. I want to point out one other thing. A significant part of our leverage is in securitization. Jenny, what is it $100 million right now. I’m sorry , it’s about 100.

After this one.

Right. So kind of employing, something that might happen in the near future, we might be safe to a $100 million, right in the business models going forward. It’s important to note that, that is non-recourse financing with our cash back. Very different than most PDCs, right?

Yeah. That is a good point of differentiation. That's it for me. So thank you very much for taking my questions, Barry.

Thank you, Chris. Much appreciated.

Our next question comes from Mickey Schleien with Ladenburg. Your line is open.

Good afternoon Barry. Given that you have lent to the small business market for a decade, and you've worked through a couple of cycles at this point, could you give us an idea of how those businesses -- how the loans performed, both in terms of when the economy is expanding and contracting? And almost more importantly, because it seems the backdrop is pretty steady right now, how do they do when interest rates rise? I think there is a concern out there that small businesses will struggle if and when the Fed starts to increase interest rates?

Sure Mickey, I appreciate that. I think it’s important to note that we’ve lent over the course of 11 years and lower interest rates environment are sort of the byproduct in the last maybe four or five. Since the credit collapse in 2009 but we’ve been through higher rate cycle. The management team here has been gathering in excess of 10 years in the lending side. But Peter Downs, who is Chief Lending officer, sits on our board. He has been lending the small businesses over 25 years. I think that you would want to be real careful about anybody that tells you rising rate environment is good for anything. I don’t know unless they own an inverse bond of some kind. It’s just not true. So I won’t tell you that it’s good for us. However, in the rising rate environment, number one, our rate -- our loans are floating rate. Number two, there is a long am schedule. So yes the interest rate is an important component. But the real payment of modesty is driven by that long amortization schedule. 85% of our loans are collateralized by real estate. So in that rising rate environment, you typically have inflation. The real estate collateral becomes more valuable. And frankly if the business defaulters, based upon lower demand or higher cost to cover the debt service, the ability which is what we see all day long in our 11-year history in lending of a business owner to liquidate a house, to liquidate a piece of the commercial real estate to be able to continue to make the payments and stay in business is valuable. Frankly, in the robust economy, the enterprise value of the business in and itself is more valuable. So although I do believe we suffer, holding everything else constant as our clients do in a rising rate environment, we don’t think it’s that significant to us versus other participants. And we have observed that over the course of time. We have the default and delinquency statistics in our registration statement. We’ve got them in a private place to memorandums. Once again, using our discounted cash flow analysis, we estimate that we will survive one in four loans in our entire portfolio going back with a third severity which has been our history. That is a very extreme severity we think that we are currently originating in a much lower rate. So we feel pretty good about where we are. The reason why we’ve been able to survive 11 years of a non-bank lender when most banks required government bailout, it’s conservative accounting and real conservative loan underwriting.

Barry, what sort of I imagine that the management team is preparing the budget for next year and presenting it to the Board or maybe they have already done that. But what is sort of the base case outlook that you are using for the economy next year in terms of GDP growth, and the direction of interest rates in terms of you are looking for, in terms of -- as far as loan origination volume and more importantly, the terms that you are willing to go out with for the coming year?

Sure. We are looking at loan origination volume of around $280 million. That’s the number that we have used to basically drive a component of our forward estimated projection for the dividend yield. In terms of the economy, we’re looking at 2% to 2.5% GDP and we’re looking for a modest rise in interest rates at this point in time. I’d say a 0.25% to 0.5% but certainly not in the early quarter. The economy is still struggling. The federal reserve recognizes that and we do not see the federal reserve doing anything to raise short term rates in the near term.

Okay. I appreciate that. Thanks for taking my questions.

Thank you.

Next question comes from Michael Kaplinsky with UBS. Your line is open.

Hey Barry. You touched on it a little bit, but just wondered if you could kind of expand on the primary rationale of why a BDC and how this is going to benefit your Newtek shareholders?

Thanks Michael. I think the Board and management elected to bring to the shareholders of vote to convert to the BDC based upon our studying in the market and realizing that the benefit that we and our shareholders received from not having to pay corporate tax was quite useful. Jenny, in 2013, we paid about $6 million to $7 million.

Yes.

$7 million. We think we’ll pay this year if you had to guess.

Yes.

Okay. So we paid out about $7 million in corporate tax in ’13 and ’14. That is now cash flow that goes to shareholders, clearly a benefit. That cash flow effectively is reducing our cost of equity capital. When you look at our company and we had a great experience on the road show, meaning a lot of people will say, this is one fantastic company, why are you so -- why you value at this level. I won’t say we are over-value or under value you can. The reality of it is, we are small. And you ask anybody on Wall Street, $140 million equity valuation of the business is under the radar screen, prior to the stock split, we were $2, $3 stock, so now we’re split. We’re interested more people. We got over 20 institutions that bought into the deal on the road show, we’re excited about that. And our goal is to get the size of the BDC through cost effective equity raises. We’ve been able to demonstrate that we can earn higher rates of return, even with expensive capital, like the mezzanine debt that we recently paid off. But we get this thing up to $200 million, $250 million. We’re going to show up the investment screen, hello, like much big universe of investors that really wouldn’t even think twice about investment in a stock like ours and the company that has been around for 11 years and its currently paying 13.7% dividend. Matter of fact, if you compare us to the other guys, what are they have on us that they are bigger primarily, so if you think we’re going to get there and be able to bridge that gap, this is interesting. So when we look at the BDC opportunity, we said, hey, this is a good opportunity for us to be able to raise cost effective, grow the business and benefit shareholders. And then if you think that these operating businesses have great enterprise value, beyond what is on the schedule of investments. I think that’s really important, when you look at the schedule investments which create NAV. There is no value placed on the fact that our lender has gone from $3 million of earnings to this year what $14 million.

$14 million.

On the guidance, the $14 million and next year, probably a much, much higher number to be able to pay off that dividend. That doesn’t show up on the schedule of investment. The fact that, our processing business, probably, have bottomline growth this year in double digits, I mean, that growth have been show up on the schedule of investments. So if you actually get multiples on those things versus the modest valuation, we think this is a very attractive vehicle for shareholders. Without this capital raise, I would not have stand in front of the types of investors that are going to show up as holders and people that can actually make major investments, provide capital and help us grow the business. So we thought this is a great transaction and although, it certainly took a long time to get here. We are really happy that the legal department, the accounting department preserved to be able to get this thing through and I think, it’s going turn out to be a great event for our shareholders.

Okay. If I could just switch gears for a second, you talked about your selectivity and how 98 out of 100 referrals get turned down? I was just kind of curious how that -- can you maintain that selectivity and still be able to function well in those platforms, does that have -- how does that impact you ability to stay on those platforms?

Couple of things. Number one, what we found in lending is if you’re professional and you get the clients quickly and you tell them, no quickly. There is no problem saying no. It’s when you sort of and by the way, in our process we don’t tell them to go home, fill out forms and come back. We do telephonic interview. So we say no fairly, quickly, based upon what I will call just a general five season credit. A couple of things we’re going to be doing. We’re going to picking up some interesting agent programs, where we’re going to do the assembly and layoff the risk to other funders that want to work with us, which we’re excited about. That’s going to broaden our menu and I don’t think its going to be a great income generator, but it’s going to help us close a lot of other business. But in addition to that, being the largest non-bank lender for a couple of years in a row. We think we’re gaining some good speed, international TV campaign. We think we have new alliance partners in the pipeline that should add to the number. So we think we’re going to continue to grow the gross numbers of referrals. We do not think, we’re going to be able to cut in the credit. Ultimately down the road, not a 2015 thing, but down the road we will have other non-SBA programs. We may do something with the SBA 504 program, which just generates great high rates of return, where all the components get sold out sooner than later. So those are the things that we’re looking to do. And we’re very well-positioned to grow the business lending segment. And very importantly versus other BDC, we’re really a direct lender. When I say that, we’re not buying packaged loans. We’re not buying loans from brokers. We actually speak to end customer directly and structure the opportunity, first of all, business owner. And we feel pretty good about where we are and the ability to grow the lending business without cutting into credit.

All right, Barry. Thank you.

Our next question comes from Frank DiLorenzo with Singular Research. Your line is open.

Thank you. Good afternoon. Switching gears, could you talk a little bit about the visibility you have going into the holiday quarter for your electronic gaming processing segment? And also related to that business, how you see yourselves going forward strategically with a lot of the changes going on in the online space from Apple Pay to Google Wallet and Amazon? How that might impact your business longer term? Thank you.

Thank you. Frank, it is fair to say that the payments business particularly over the last couple of years has got more and more competitive. And in order to be a double-digit grower, particularly on the revenue side, which is where we want to be, we’re currently a double-digit grower. On the bottomline not so much on the revenue side, you got to have the most cost effective solutions. But most importantly, they’ve got to be technologically state-of-the-art and that’s why the press release that we put out this morning with respect to Secure is really kind of a big deal. There is two, well, one particular player that’s well known sort of in the wireless area, MCX and obviously the Apple Pay. But the issue with Apple Pay is Apple Pay uses a credit card. So the great thing about Apple Pay is you’ve got the fingerprint identification on the phone, which is very, very valuable and been able to utilize the phone. But at the end of the day using a credit card because using a credit card the merchant effectively cost is in excess of interchange on the VISA and MasterCard. There is an entity in the market called MCX that is putting out a product which is consortium of all the major retailers and Home Depot target, Wal-Mart and they’re basically going to be using ACH and debit to avoid the costly interchange. So the value proposition to the merchant which is important because in order to use the mobile wallet and grow in payments, you got to make the merchant happy and you got to make the consumer happy. So on the merchant side it’ reducedcost. Apple Pay doesn’t do that, okay. Yes, that might reduce cost slightly to Wal-Mart but turnout reducing cost anybody in their market, okay. Its convenience and they’ve done that. Its security through the use of the fingerprint ID but in course they haven’t done much. The other aspect to these devices are the loyalty and the rewards in the data. So our deal was seamless and secure, using our gateway and our informational switch gives the consumer and the merchant, points programs, discount, all sorts of data information that the merchant wants from marketing. And most importantly, consumer wants discounts and breaks. We’re able to do that because we don’t have interchange, so that’s one of the growth area. The other growth area is using tablet based POS. We have a great relationship with [Rebal] [ph], one of the leading players in the space to go to a merchant and be able to give them and fit them with hardware, software and the ability to take payments using mini iPad or an iPad very, very valuable. And lower cost on the current micros to the low cost system is very value. That’s where we see ourselves in the market competing head to head and when we get good top line and bottom line growth in the business.

Okay. Appreciate that. Separate question regarding web hosting and design that has been fairly weak. Are you considering different options longer-term, whether it be spinning that off, selling some of the assets, or even partnering to see if you can turn that around and stabilize that business? Do you have options there, are you actively considering that? Thank you.

Thanks for the question. My employees that work in that segment love that question because I manage that on regular basis but the reality because it is and I said this on other calls, we’ve been down that road with lending. Lending looked like it was the arbitrage for the year in 2009 and 2010. And we managed to ride the cycle out, turn it around and grow it. When you look at the gardener in the forest or surveys, relative to cloud computing and you look at small business owners that have towers under the desk and service in advantage. This is a growth business. So the reality of it is we will do a much better job of executing on the strategy, getting the message out there to the customer base and we don’t have any intension of discarding this business at this point in time. With that said, they also say to my employees, my staff and everybody else, we’re all good for year and after that you’re on your own, myself included. So we got to perform. We got to turn this ship around but there is tremendous value in the business. We been in the business 11 years and by the way that business historically, it carried this company and did a great job. We got great employees. We gave great staff. They are extremely hard working, very loyal and we’ll get that fix just a matter of time.

Thanks for your time.

Thank you.

Our next question comes from Casey Alexander with Gilford Securities. Your line is open.

Good afternoon. Thanks for taking my question, and congratulations on your capital raise. The pro forma post offering NAV, did that -- were you including the Greenshoe in with that calculation?

Yeah. Sure.

Okay, great. How -- clearly -- I am not sure, this is not your traditional BDC. When you look at the small business finance side of the business, how volume -- can you give me some color as to how volume sensitive the earnings of the business are, and your feeling about its degree of economic sensitivity as well?

Sure. I think that we are more sensitive to volume, than we are to, having a 1% GDP or 0.5%percent GDP versus a 2% to 2.5%. I feel very good about underwriting, when you look at the risk share, where losses occur pro rata across the government guaranteed participation certificate, which is the governments risk and our interpretation certificate, we have a pretty good balance there. So I'm not overly concern that with a slightly weaker economy. We are going to blow this 25% cumulative default rate that we have in our model which is really the risk on the balance sheet it’s the uninsured loan participation right. Now relative to the concept of the volume, historically before this capital raises $31 million gross dollars, we really had to manage the capital, manage our borrower relationships and it’s little like the air traffic controller of LaGuardia Airport lining-up your loan fundings. This give us more access to capital the ability to do larger more frequent securitizations and presumably and our expectation is a lower cost. The first securitization I think we cleared it like 5.75% yield I think the last one was approximately 3.5% we think we are going to get better in the next transaction in our future. So I know I am not overly concerned about the increase in volume, and the ability to use some of these dollars to grow our marketing presence and expand our position as a small business authority. I will tell you that there have been non-bank lenders in the history of the 7(a) market that have done a $1 billion worth of loans. So that’s not out of our realm. I don’t expect that to happen anytime soon, but clearly there is growth potential for us in the marketplace.

Okay. That's great. Thank you. When you talk about -- with your customers that you talk to them directly and you structure the opportunity, can you explain to me what you mean by structure the opportunity? Because it also sounds like every deal comes out with the flowing rate 6% coupon, floating rate off of prime. What is the structuring element of the opportunity?

Great. Let me explain what we do differently versus what number one, other non-bank lenders do or what banks do? So what other non-bank lenders do is they have 5, 10 underwriters and they wait for what’s known as a BDO or Business Development Officer to bring them a fully packaged 7(a) loan. That fully packaged 7(a) loan that BDO knows the exact underwriting guidelines, knows the box, skews the financial projections, tells the borrower to hide the assets amongst the kids and in trust, and make sure that one of the two spouses is judgment proof. And gets two to three points to do that transaction, that’s what our competitors do. So what do we do? Most independent business owners, they just know they need money. They don’t know whether they need a revolver or they don’t know whether they need a term loan. We do have accounts receivable line of credit and factoring business. So we do provide revolvers collateralized by receivables at real nice haircuts. It’s a great business us. And going forward, we will be able to expand the menu. Most likely, we will layoff other types of credits to third parties. But the reality of it is we’ll assemble that loan. When I use the term restructure, we speak to the borrower, we use real projections, we know where all the personal assets are, the multiple guarantors are. When I say restructure the loan, we put the loan together and don’t allow the borrower to structure against us from a credit perspective. Does that make any sense?

Okay. I have to forgive me, as somebody who is more proficient in a traditional BDC, we are used to seeing assets that are valued with the help of third parties. And you had some of these OPCOs that you have, you are showing valuations that appear to be extremely modest compared to the comps. Who helped you set those valuations for establishing NAV? Was that set by an approval process by the Board, or was there a third-party valuation firm that came in and helped you set appropriate valuations? How did you go about that process?

We use a third-party evaluation for that. Although I am not allowed to say their name, it is top three largest recognized valuation firm in the BDC market, that’s number one. And we actually recently used them to update before we did this transaction. The Board determines those valuations in conjunction with help by management, but the Board signs off on these valuations and does in every single quarter and meet religiously and goes through a very extensive analysis, which looks at public comps as well as discounted cash flow analysis and forward projections. On the lending side, let’s talk about the beauty of these uninsured loan participations that are averaging a $150,000 .So we do securitizations. They cleared the market at yield spread with credit enhancement and it’s the same structure. So how do we value our uninsured participations? We jack the fault rate up to a very high rate. We use the normal severity rate, and then we spread it at about 175 to 180 basis points above where the securitized transactions are done so.

All right.

The point being, if I went to a bank today and I said, I got a portfolio of $100 million worth of loans, and one in four loans are going to go bad and you are going to over the term and you are going to lose 30% every loan that goes bad, and it’s still going to yield you 430 basis points over your cost of funds floating rate without a cap. Do you think that would clear the market?

Yeah.

We do. And the realty of it is, the valuation on that versus figuring out what a $15 million or $30 million loan that’s got -- it’s a cash flow loan based upon financials and projections. I got to tell you, I like our valuations and our valuation method which is based upon real capital markets execution, diversification, lower of large numbers and structured better.

All right. Great. Thank you very much for taking my questions. I appreciate it.

All right. Thank you for the questions. Good ones.

[Operator instructions] Our next question comes from Chris Doucet with Doucet Asset Management. Your line is open.

Hey Barry. Congratulations to you and your team on an excellent quarter.

Thank you, Chris.

Just a couple of questions. Most of my questions have been answered by previous callers. Just out of curious -- I was going to ask you this question offline, but I will ask you online. Were you happy with the capital raise, given the fact that you had to do it at such a large discount to the net asset value?

Sometimes you’ve got to get a little pain to move to the next step and the realty of it is yeah, I think we would have certainly preferred to at a higher price. I think there is no shareholder that doesn’t want to hear that. On the other hand, the distribution that we got particularly from institutions was fantastic. And we had to unfortunately cut people back, not being able to give people everything that they wanted in the deal by a significant amount. And we realized to a certain degree, this is our coming out party as a BDC. And one of the things that, I am 55 years old and I have been in the finance business for over 30 years. One thing I have always learned is you’ve got to get people a good deal than you can keep coming back. So, I think that giving people a good deal with a discount to NAV and a high yield, and a special dividend on top is going to wind up paying dividends. We are looking at how our stock is trading. It’s up about a point since the transaction. It's really just trading very well. So we are very happy with the way the stock has performed and we think that JMP and Ladenberg did a real good job in the transaction and we just appreciated. We had over 40 institutions that met with us in a period of five days and we had great retail participation and we are real happy with how this has worked out.

Would you be amenable to doing future capital raises at a discount to the net asset value?

Chris, that is one of my favorite questions. Would we be amenable? To answer that question, we do not like selling shares below NAV, nobody does. I think what we have to do is to look at our business and determine whether or not the capital would be accretive to all our shareholders. And I am amazed that the misused term of dilution that has occurred from time-to-time again about dilution, dilution, dilution look. First of all, if I’m diluting anybody, I’m diluting myself, that’s with the T not a D. So I strongly prefer not to dilute myself. And the other thing to is, just from an alignment of interest standpoint, personally I don’t really make my money on just getting bigger or by giving myself a bigger base and bonus. My money is very much in line with the shareholders. It’s made by stock share appreciation and increase dividends. That’s really where my head is at. So from my perspective, we’re going to do what makes sense. I think the market is going to recognize that we’re delivering and we’re looking forward to that discount evaporating. However, the reality is we -- the other internally managed BDCs are 1.5 times -- it’s just my opinion and it’s biased, not just because they are a better company than we are, they are just bigger. So getting bigger requires that we take a little bit more pain. Well, we’re going to have to look at that when it comes, but that’s the answer to your question hopefully.

Okay. And Barry, another question. If you did $75 million in SBA 7 loans in the fourth quarter, can you kind of walk me through or give me an idea of what your balance sheet will look like at the end of the quarter, and how much availability you might have remaining on your warehouse line?

It’s interesting question. Well, one thing I think that’s important, let’s just assume, this is just a guess. Let assume we do a securitization sometime in the quarter just as an example. We will then clean out the warehouse line, okay, get cleaned out. Then, let’s assume that happens I hope in two weeks. So let’s look a one month of December, I got 25 million in governments that creates 8 million of uninsured approximately, right.

25% of 25.

Yeah, about 8 million of uninsured. So if I hold the governments because now I’ve got the cash, right. So I might as well hold the governments and not sell them, right. Now, I know I’ve got that, sitting on the cash, so I might as well put the cash into the government 6% floating rate, right. So right now, my Capital One Bank without line is at zero.

Okay.

When we do our securitization historically we've cleaned out everything. So there's no loan that we have that’s not in the securitization. By the way, that’s the good evidence I think the quality of our loans.

And so your non-recourse debt would go from $100 million to $108 million, is that how it works?

It’s about a $100 million. I think you’re looking at that at the end of September, is that right?

Yes.

So let’s assume, well, the reality of it is, let’s just go back to that securitization again, let me just think for a second. No, I think.

I can ask you the question offline, Barry.

Yeah. It’s kind of technical because you’re creating -- if you did a securitization, you’re creating more securitization, right. And you’re cleaning out the Capital One Bank line. So the Capital One Bank line basically goes down to zero. And then your plug question is, in this fantasy example, how much is your next securitization which I couldn’t talk about anyway.

Okay. Switching gears just second and somebody touched on this question a little earlier in the call. Would there be a third-party evaluation firm evaluating the various OPCOs every single quarter, or just once a year for NAV purposes? Or do they just give you a metric and you just apply your EBITDA to it every quarter and come up with your NAV? How is that going to work?

I think right now given that we just did one, I think you can think about us maybe within the next six months doing it again.

Okay. All right. Thanks, Barry. I will step back in the quarter -- in the call. Thanks.

Thank you.

The next question comes from Mickey Schleien with Ladenburg. Your line is open.

Barry, can you hear me okay?

Yeah, I can hear you loud and clear, sure.

So just a follow-up. In listening to your presentation, I am just curious with this large 7(a) distribution channel that you have, you must end up with borrowers who have a pretty good degree of success and grow, and eventually could get to the size where a more traditional SBIC, SBA guaranteed debenture program would work for them. Is that something that you are considering doing?

It certainly is Mickey. It is in the registration statement. You would probably know what the current debenture rate is, but I would think it somewhere around 2.5%, maybe interest only for 10 years. Does that sound right?

Well, all-in with the fees, it is a little closer to 4%, but it's still quite cheap. It is fixed rate 10 year money.

Okay. So the current structural all in loaded in is 4%. So I think what’s important Mickey is if we do go that route, we’re not -- we don’t want to buy syndicated loans on private equity deals or leveraged buyouts from Wall Street. That’s not our thing. However, we see a lot of business opportunities not only from businesses in the existing portfolio. We are tapped out on the SBA loan at $5 million. We see a lot of business opportunities in excess of that $7 million, $10 million, $12 million. That’s where we may look to utilize the SBIC funding and put that type of money to work. And as you know that doesn’t count towards your leverage test. So it’s really nice, raising a nice enhancer down the road.

Are you actively working on that process, or at this point it’s just a consideration for something down the road?

When I said we started, we had internal discussions. We made a decision that we want to proceed on it. We are known to the SBA. In our history, we fund over a 130 equity and debt investments to private companies. So we think we are qualified, but we are at the very early stages. And I wouldn’t say it’s something we would see in 2015, but you may see it in 2016.

Okay. I understand. Fair enough. Thanks for that.

Thank you. This closes are Q&A session for today. I’ll turn it back to management for closing remarks.

Thank you, Operator. And I really wanted to thank everybody. We put this call together quite late trying to figure out when the closing was going to happen and timing the earnings and everything. So I really appreciate lots of people attending and the great questions certainly made this an interesting call for everybody. So thank you very much. Have a good evening.

Ladies and gentlemen, thanks for participating in today’s program. This concludes the program. You may all disconnect.