NewtekOne Inc (NEWT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Newtek Business Services corporation full year 2015 Earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would now like to introduce your host for today's conference call, Mr. Barry Sloane. You may begin.

Thank you, Operator, and thank you all for attending the full year 2015 financial results conference call. We are excited to present our 2015 results and also give future guidance going forward for 2016. Presenting with me today will be Jenny Eddelson, Executive Vice President and Chief Accounting Officer,. You can all follow our presentation at www.thesba.com. Go to the Investor Relations section and click on Presentations and there will be a full Power Point on it. Jenny, could you please read the forward-looking statements section.

Sure. This presentation contains certain forward-looking statements; words such as plan, believe, expect, plans, anticipates, forecasts, and future or similar expressions are intended to identify forward-looking statements. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions, and expectations reflected in, or suggested by the forward-looking statements. Such risks and uncertainties include among others intensified competition, operating problems and their impact on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative developments and similar matters.

Risk Factors, cautionary statements, and other conditions which could cause Newtek's actual results to differ materially from Management's current expectations are contained in Newtek's filing with the Securities and Exchange Commission and available through www.SEC.gov.

Thank you, Jenny. I would like to turn everyone's attention to page two of the PowerPoint where we talk about our full year 2015 financial highlights. Our net asset value was $204 million, or approximately $0.14 a share at December 31, 2015. That was an increase from the NAV last reported on October 1st of $13.10 when the Board declared the special dividend. The adjusted net investment income was $22.2 million, or $2.06 per share, which is approximately $0.65 per share for Q4. The debt-to-equity ratio was about 66.5% at December 31, 2015. We did a lot of capital raising in the third -- in the third and fourth quarter of last year.

We did a $36 million equity raise, we did a $40-plus million dollar securitization of our uninsured 7(a) loans, and we did an $8-plus million dollars baby bonds offering. So the Company is very well-positioned going forward in terms of cash as well as debt-to-equity ratio going forward. We also announced the stock repurchase program underway, which the Company may repurchase up to 150,000 shares. Our blackout period will lift this Friday and the window will be open until March 31st when the window will close again based upon knowledge of earnings.

We recently closed in the third -- actually -- yes third quarter of 2014 an $8.2 million baby bond deal. It was the first deal of this nature that we did. 7.5% notes to 2022. Stock symbol NEWTZ. We acquired from your payments in July of 2015 controlled portfolio company to add to our merchant processing business. We are excited about the acquisition of Premier, a Long Island-based payment processor, that combined with UPS Wisconsin, gives us a real strong foothold in the market. Premier has been experiencing in 2015 double-digit revenue and adjusted EBITDA growth year-over-year.

In small business lending highlights, we funded $242 million of 7(a) loans in 2015, an increase of 20% over 2014. That was in line with previously issued guidance. We also are today reaffirming loan funding forecasts of $320 million, which includes SBA 7(a) loans that are done out of (inaudible), and SBA 504 loans, which originated by one of Newtek's controlled-portfolio companies. We chatted about the Standard & Poor's securitization that we did, which we did which was done in September of 2015. That was a AA-rated transaction sold to investors at a net yield of 2.5%.

We have had good success so far this year in our government-guaranteed loan participation sales. Through March 4th we have had a net premium net to the Company of 112 decimal 44 and a short weighted average term of 14.8 years. A few things that we have experienced that will focus on the increased pricing that we have achieved; number one, we have been issuing smaller loans so far this year and you will see that in future slides. Number two, a negative obviously has been what has gone on in the equity markets but the debt markets have rallied, which is government-guaranteed floaters more valuable and clearly there has been a flight to quality.

So the fact that we have been selling smaller loans into the secondary market which trades better than larger loans -- and I will try to clarify that. When you are selling a $3 million government-guaranteed these into the second matter the government, the investors that assemble the government-guaranteed pieces have larger risk exposure to the one loan. So the smaller loans typically get better pricing because they can create diversified pools. You will see that there is going to be a trend in our business, as we are moving towards doing more with smaller loans, and we will explain the technology behind that and the strategy behind that later on in the presentation.

One thing that we wanted to highlight as you go to slide four of the presentation is net premium trends. So over the course of the last five years you could see you have really got about a 2% band on these government-guaranteed floaters from 2011 to 2016. We also show the weighted average term. You can see the longer the term, typically the greater the price, the longer the securities trades at greater prices; however, sometimes the offset is the longer loans which collateralize by commercial real estate tend to be larger.

For those of you that are trying to takeout your slide rule and figure out what our premiums are, I will tell you it is difficult, but the Company does a really good job of managing the referrals that come in, picking out the best credits to enable itself to meet its guidance and fulfill all of its obligations, which you will get a better feel for as we go through the rest of the presentation. When you look at the average loan balance of loans sold in 2015 it was approximately 900,000. That includes the government-guaranteed piece and the uninsured piece.

So far this year -- and this is through March -- that number will pop up a little bit because toward the end of the quarter you tend to do the larger loans. We are currently averaging around $4,000. I would say that is one of the primary reasons for the better pricing that we have received in addition to the market performing well on the government-guaranteed bond side. Smaller loans give us greater efficiencies. We are not -- I think it is really important to note -- we are not cutting credit. I say why are small loans more efficient.

SBA's requirements for documentation in the file require less work. You do not have to spread three years' worth of balance sheets, you do not have spread three years' worth of income statements. You know, differs between 15 to 20 tabs in a an Excel spreadsheet versus 3 to 5. So our efficiencies in doing the smaller loans are there. We can get the volumes out of the small loans. We can get the at this timer diversification. We can get he the better pricing without cutting into credit. Now obviously, diversified portfolio of smaller loans is better that larger loans, which I think is one of the reasons why Newtek is an attractive investment opportunity versus other BECs.

One more thing that I will add; when our staff is doing the smaller loans it gives our the activate to focus more on the larger loans and make greater opportunities out of the amount of referrals that we have been calling through. We are going to spend some time on that to give the marketplace and the investors a good sense that we think we can grow our originations with the number of loans an referrals that we are get currently getting.

Slide number six, we wanted to focus on the loan sale premium income trend. It is kind of an important slide. It is important to note that the -- the gains that we get, the capital gains from selling the government-guaranteed pieces, do not show up in NII. So on a GAAP basis using BDC GAAP accounting, when you look at NII, this does not show up. You know, sometimes Reuters will pick up this GAAP number and report that we have lost money, which is why we position our avenues when we look at NII on an adjusted basis. These gains do show up in adjusted NII.

I have heard analysts basically look at these gains on sales, and investors, and say this is non-recurring. You just have to look at the facts. These are re-occurring events. We have been in this business for 13 years. We have always had gain on sale. It is part of what we do. There is a little bit of volatility in numbers; you can see that from the price chart that we previously discussed, and obviously our volumes keep increasing which we think is going to occur. We have growing volumes, fairly stable pricing.

This looks pretty good but I want to repeat, it is real important to understand our business model. We are not on a simple BDC that just has coupon debt, static portfolio of loans. There is more to understanding Newtek and in 2015 investors got rewarded for it.

Looking at our dividend payments, the Company declared $20.9 million worth of dividends -- cash dividends, the cash quarterly dividends -- which came out to $1.76 a share during 2015. That represented approximately 94% of our taxable income. Our taxable income did not exactly match the adjusted NII. It will be a little bit closer in 2016 going forward, but importantly we came in right in the middle of the range in 2015 for our cash dividends versus our taxable income. We paid a one-time special dividend. That was paid on December 31st, 2015 of $2.69, 27% of that was paid in cash, 73% in newly issued shares.

Important to note, that of the 2015 quarterly cash dividends, 35.8% were allocated to qualified dividends. That is a very valuable statistic to understand because obviously the qualified dividends are taxed at 15% to 20% rates. They get preferential tax rate versus the ordinary rate. We do believe, and we are going to forecast this, that the trends of our dividends which about 35% to 40% come from the Business Services entities which have the re-occurring revenue stream, and are taxed as portfolio companies, are going to be passed through. So a significant portion of our dividends we see going to shareholders at tax advantage rates.

Looking forward, the Company has forecasted $1.50 a share, or approximately $21.8 million in quarterly dividends. That represents a 4.3% gross increase over the $20.9 million cash dividend for 2015. The Board of Directors declared a $0.35 dividend of $5.1 million, payable on March 31 to shareholders ever record on March 22. If you were to buy the stock today, you would receive that particular dividend. To clear up some confusion, there are investors that have looked at the $0.35 for the first quarter. They straight-lined it. They come to $1.40 that is inconsistent with our $1.50.

Historically over the course of the decade, the Company as paid more and earned more in the second half the year than the first half of the year; that is based upon the payments business being seasonal to the third and the fourth quarter, as well as our loan business also having more loan closings, fundings, and gains on sale in the third and fourth quarter as well. On slide number eight, we wanted to point out some examples that might have created confusion by the one-time historic event of the special dividend which was a special dividend because of the requirement to change from a C-corp to a BDC. Because of our -- our changing for from a C-corp it a BDC, we had to distribute approximately $34 million to $35 million of retained earnings.

With that said, the special dividend that we issued, and was received on December 31st of 2015, concentrated additional shares to shareholder of record in November. I believe it was 1.8 million additional shares. There has been a lot of confusion with investors looking at what we paid in cash dividends, are expected to pay in 2016 versus 2015. We took a look at one example which we have on this chart; the regular quarterly cash dividend which was paid on a cash basis, which is how all of you performance-based investors are -- are accounted for. You got three quarterly cash dividends of $1.36 and then the cash portion of the special dividend was $0.84. So you would have received cash of $2,200 for a thousand shares.

In 2016 those shares which, if you receive the special dividend extra shares and did not sell the extra shares, you would have approximately 1,150 shares, approximately a 15% increase. You would have gotten the $1.50 cash dividend that we anticipate paying. That dividend must be declared by the Board. The only dividend that had been declared was the first-quarter dividend of $0.35, and you will receive the $0.40 cash dividend that was already paid from the prior year to come up with cash of $2,185. Pretty close. Another way to look at it, is if you just look at quarterly cash dividends versus quarterly cash dividends on 1150 shares at $1.50 that's $1,725. On a thousand shares at $1.76 that's $1,760. I have to say this is very close.

I know we are not playing horseshoes, but when I hear people say that you are dividends are cut this year I am kind of scratching my head. On slide number nine, we are going to focus on Newtek's differentiated business model from other BDCs; we are an internally-managed BDC. We do not pay any base -- 2%, 20% -- to an external manager. Everything is internal. Our controlled portfolio companies are wholly owned. Three of the four for over 10 years; the payroll business for approximately four years. 40% of our BDC's adjusted net investment income was earned from dividends generated out of our controlled portfolio company, and that keeps your preferred rate very valuable.

We have been lending for over 13 years. We are not new to the business. We do not purchase re-packaged loans, we do not use BDOs. We have a real 50-state retail business. The average un-guaranteed loan that sits on our books; this is the un-guaranteed, uninsured loan, but not subordinated, 176,000. Really offers a tremendous amount of diversification to investors. We are primarily a senior-secured first lender. I think that is real important. When we say we a re a senior secured first lender in the small business space, we are typically lending to no-growth or slow-growth businesses. Frankly, no-growth or slow-growth businesses have got collateral behind the loan, are a great opportunity for payment, frequency, in terms of good quality loans as well as not having severity. Our competitors tend to lend to modes-growth to high-growth business, which is the only way they can get compensated for that 10%, 11%, 12%, 13%, 14% interest, plus that equity kicker, which they need to charge because they are taking 2% and 20% or 4% out of the deal.

All of our (inaudible) goes directly to our shareholders. None of it is taken out in the form of a management fee. We have no direct lending exposure to oil and the gas industry. We have a few gas an convenience stores on the books. On a low debt-to-equity ratio which gives us the abilities to raise significant amounts of debt without having to go back to the Capital Markets; provided that our NAV maintains stable at $14.06.

We do not presently anticipate raising equity in the foreseeable future. We did our capital raising in the third and fourth quarters of last year. On slide 10 you can see internally managed BDCs typically trades at a premium. I would point to Hercules, Mainstream and Triangle; (inaudible) is at a discount. We are clearly currently trading at a discount.

On slide number 11 you can look at the breakout of cash flow. I am not suggesting that EBITDA is the right way to look at a lender, but you can see a significant amount of our cash flow in 2015 is coming from the portfolio companies and non-lending businesses. We anticipate that being the same in 2016. And you can see that on slide number 12.

When you look at our NAV, proportionally break out NAV, the lending business contributed approximately $110 million or so to our NAV. The other businesses are $90million to $100 million or so. Our pre-tax net income from our lending business this year was a little bit over $16 million. If you put a market multiple on that, you may come up with a different valuation for what our lending business is worth.

I think it is important to note when you look at our lending business it is a 50-state retail lender that currently focuses on SBA 7(a), 504, receivable lines of credit, and inventory lines of credit. We look to expand that in the future as we raise additional capital. On slide 13, Newtek's stock performance. We have beaten all the major indices over the course of five years. NASDAQ, S&P Russell, and the S&P Small Cap.

On slide number 14, looking at our lending operation, we have one of the rare non-bank lending licenses. There is only 14 of them. I do not believe that the SB has issued a new one in over 20 years. We are the seventh largest SBA 7(a) lender; that includes banks. We have been in this business for over 13 years. We have done six S&P rated securitizations. Our average loan size that sits on ore books and is funded by line of credit from Capital One bank and securitizations, all on-balance sheet, gives us real good diversification. So we are not overly-dominated by any one particular credit, which we think is a major differentiator between other BDCs.

Once again I want to reiterate, Newtek as a lender has a lending platform that is driven by financial technology that gives it the ability to acquire small business credits cost-effectively, process them in remote locations not in the bank environment, cost-effectively. It has been doing this for over 13 years and when we look at some of our referral numbers in the pipeline, I think you will also appreciate the optimism that I have for the business going forward.

On slide number 15, you can see what the current 2016 SBA 7(a) loan pipeline looks like. Total pipeline through March 4 of 2016; $526 million, versus a year earlier of $309 million. Our referring parties are starting to kick in. The additional RBPs that we have put into the system, as well as significant alliance relationships are giving us a lot more looks. When you look at the pipeline, we are almost at $100 million of loans pre qualified.

So this will bode well for the second quarter. Loans and underwriting -- now, loans and underwriting were higher last year, but my point here with respect to underwriting is given that we are looking at a lot of small balance which are going through the system quicker. You are not going to have loans sitting in the loans and underwriting buckets as long as you used to. They will go in and out much quicker which is extremely important to us.

We are very bullish on the pipeline. I want to move ahead if I can to slide number 19 and then I am going to come back. Slide number 19 looks at the amount of lending referrals that we have gotten. Over an 80% year-to-date increase. And right now we are on track to receive $2 billion of gross referrals in the first quarter of 2016. That is an $8 billion run-rate.

Last year we looked at $5 billion. So we are getting more referrals, our process is getting more efficient, we are able to do more with the smaller balance loans. We are going to announce the rollout of a small balance loan app here within the next 7 to 10 days, which should make us more efficient. We believe we are going to be able to have a higher conversion ratio on the number of looks, we hope and anticipate to get better diversification, which reduces our risk, as well as get better pricing. All under the cover of our financial technology lending model.

I would like to go back to slide number 16 if I can. This is the classic slide that we have in all of our presentations. Net cash created in the typical 7(a) loan with the current pricing of $112.40 net to us creates $20,000 of cash after the gain on sale of the government-guaranteed piece and the financing of the uninsured loans that sit on our books through an approximate 78% advance rate of the debt in securitization. Slide number 17 shows the accounting gain; that is up to approximately $94,000, that is a risk-adjusted.

Slide number 18 an important slide. We have had very strong loan portfolio performance. You know, we have gotten better looks in the marketplace. We are able to be more selective as more opportunities come to us. We are extremely happy with the loan performance. You know, I just need to make everybody aware this is (inaudible) so the losses that you see are actually once the loan goes all the way through liquidation and gets written off our books. When loans go the non-performing category, we mark all the collateral to market, we take a write-down, but that is an unrealized loss.

That affects our NAV. Does not affect our income. But I think this is -- should give people comfort when they are concerned about the BDC market. They are concerned about credits going bad, they are concerned about mezzanine and subordinated debt not being worth as much as it used to be, which clearly has been the case of the first two months of this year I think it is important to note, obviously we are showing really good credit numbers here, and we are looking at a 98% to 99% currency ratio on existing portfolio loans. The rest of the loans are mark to market and it s very easy to mark our loans to the market. When I say it is easy to do; you are looking at securitization exits, you are looking at government-guaranteed exits.

We run them through -- we run our uninsured (inaudible) through a discount cash flow model. We stress them out. We feel very good about the valuation of our loans. I think it is also important to note when you look at a senior-secure loan that we do, there is personal loans of the obligor 80% to 85% are backed by real estate. The senior-secured loans of other BDCs are typically backed by leverage loans. So yes, they are senior-secured, but is there really collateral behind that loan? Am I making the loan at four, five, six times EBITDA? Does that business need growth. So it is a bit of a misnomer in many cases to compare us to other BDCs. It is extremely important, if you want to be rewarded -- people were rewarded last year -- to do the work, take a look at what we are doing, and have a good understanding of what is in that BDC wrapper.

Comparative loan portfolio on statistics you can see on slide 20. We opened up 504 loans; we funded our first loan in November. We anticipate reporting a sale this quarter. We will have further information on that on our next quarterly call but there is a nice sample 504 loan that shows you the types of profit that can be earned on a 504 loan where you make a loan backed by commercial real estate. You sell off a 50% LTV first. The government buys the 40% second debenture. You are left with no exposure on the balance sheet, a gain on sale, and a servicing asset.

In comparing our lending operation to other businesses, which is not easy, we look at LIBOR bank trading a at a little over two times book; Bank United recently acquired [Sertas] small business finance units. That was a non-bank lender. They paid a 10% premium over the loan portfolio and Sertas had not made a loan in, I believe over a year or two, and actually was out of capital compliance. So a lot of good comparisons to what our small business lender is worth.

Looking at our portfolio companies on slide 25, our payment processing business doing real well. We came in revenue up approximately 9.1% over the prior year adjusted EBITDA of $10.9 million. That was a significant increase over the prior year. Looking forward, particularly with the acquisition of Premier Payments, we are prospectively looking at an EBITDA number in 2016 of our payments business of $13.1 million. You are looking at approximately $5.5 billion worth of processing volume across 16,500 counts.

Now, has business starts to get bigger, the valuation should move towards the public of a Heartland, Vantiv, or First Data; which are all trading at multiples in the double-digits. We look at payment processing opportunities adding additional alliance partners. American Express's Blue program, tablet and mobile-based opportunities in the marketplace, and EMV-compliant solutions. Our managed tech solutions, we believe is about to reverse its downward trends. We do not hide the fact this has been a struggling business for us, but we are optimistic with new management changes and restructurings, the valuation of 1.6 times last 12 months trailing revenue and 1.5 times expected going forward.

We are very comfortable with the business. We have been in it for over 10 years, and we look at the independent business owners migration to the cloud as being a valuable positioning opportunity in our portfolio. Businesses looking at 24/7 outsourced managed services in our data center, hot backup; as well as doctors, dentists, and other medical practitioners needing HIPAA-complaint soultions.

So we are excited about the future for managed tech and hope to report some good numbers in the first quarter of 2016. We are also moving to a new location in Lake Success, New York. It is on the Queens/Long Island border. 34,000 square feet facility. We anticipate putting four of our businesses with presence in that location. That is going to help us data mine, cross-sell, and develop an aggressive outbound call and telemarketing strategy into our existing and alliance partners client base. We are very excited about the opportunity to finally put all of our businesses on one flat full floor and give us presence.

In summary, we are a real interesting opportunity in the BDC space being internally managed, looking at approximately $11.00 to $12.00 stock price, $1.50 forecasted cash dividend, not a lot of leverage, we finished the year at .66 so we have the ability to borrow, to grow in the near-term. Management's interest very much aligned with shareholders.

The founder, myself, management, Board, we believe control in excess of 15% of the outstanding shares. Our interests are very aligned. We do not have, you know, traunched residual credits to get these yields, we are not lending at 10% to 14% with equity kickers with average will on businesses that must and need to grow. We have no direct lending exposure through oil and gas industry, and we are very pleased to report our first year as a BDC, and I would like Jenny to do a financial review of our numbers for 2015.

Thanks Barry. Good morning everyone, and thank you for joining today's call. I would like it start with some financial highlights from our 2015 consolidated statement of operations. Please keep in mind since this is our first full year reporting a BDC, there are no consolidated BDC financial statements to compare for the prior year.

Please turn to slide 32. We had investment income of $26.1 million, which included approximately $9.2 million of interest income. Substantially, all interest income is derived from our SBA loan portfolio which generated $8.9 million and $6.7 million of interest income for the years ended December 31st, 2015 and 2014 respectively. This 31% increase in interest income year-over-year can be attributed to the growth in t he average outstanding performing portfolio of SBA loans year-over-year.

Servicing income, which is recurring C revenue that we earn from servicing the guaranteed portions of loans originated and sold by NSCF, increased approximately $940,000 for the year, as compared to 2014. The increase was attributable to the growth and the size of the total SBA loan portfolio, for which we earned servicing income of approximately $100 million year-over-year. Dividend income was approximately $10.2 million dollars for the year and represents dividends from our controlled-portfolio companies which included $6.6 million from Newtek Merchant Solutions, $600,000 from Premier Payments, approximately $350,000 from Small Business Lending, $308,000 from Newtek Technology Solutions, and approximately $2.3 million in non-recurring dividends from other controlled-portfolio companies during the year.

Full year 2015 expenses totaled approximately $32.3 million and include salaries, interest expense, and other G&A; such as rents, loan processing expenses, professional fees, and marketing. Overall we had net investment loss of $6.2 million dollars, before taking into account any adjustment for recurring gains we recognized on the sale of our guaranteed SBA loans.

Our net realized and unrealized gains for the period totaled a positive $41.9 million and primarily gain on sale of the guaranteed portion of SBA loans we sell during the period. In 2015 we originated 292 loans totaling $242.5 million and sold 304 loans for $211.1 million, generating $29.6 million in realized gains. The average sale price net to NSCF for the year as a percentage of the principal balance was 111.72%.

In 2014 the Company originated 193 loans, totaling $202.3 million; and sold 163 loans for $130.4 million, generating $19.5 million in premium income or realized gains. The average sale price in 2014 net to NSBF was 112.49%. As a reminder, we originate SBA 7(a) loans and are able to sell the guaranteed portion which are typically 75% of the loan balance for the premium. This premium income is recognized as a realized gain to loans sold during the period and an un-realized gain for loans held at quarter-end. In addition, we recognized $5.5 million in realized gains from two of our portfolio companies that paid distributions in excess of current year earnings and (inaudible).

We also reported net unrealized depreciation on our controls investments of approximately $12.3 million, primarily from appreciation in our investments in the small business lending and electronic payment processing controlled-portfolio companies. Overall our operating results for 2015 resulting -- resulted in an increase in net assets of $35.7 million or $3.32 per share, and we ended the year with NAV of $203.9 million or $14.06 per share. On the liquidity front we ended the year strong, including $4.3 million of cash and $27 million available under our credit facilities. I would now like to turn the call back to Barry.

Thank you, Jenny. Operator, I would like to open it up to Q&A.

(Operator Instructions). Our first question comes from Jefferson Harralson with KBW.

Hey. Thanks, guys. Good morning. Nice quarter. I want to start out by asking you, on the referrals the $8 million run-rate versus the $5 billion run-rate, could you break that down between new referral partners or increases in your existing ones? What referral partners are driving this -- this significant increase?

Sure. Jefferson, I appreciate the question. My competitors would probably like to know that, too, but I would tell you that they are pretty much coming in from a diverse collection of different parties, and importantly we are seeing a good amount of small balance and historically we had not really focused a lot on the small balance. We have really tuned up our operation. We have done a lot of restructuring last year and it is starting to pay dividends; both in the regional Vice President area, where we are out with a variety of different alliance partners getting different referrals. These contracts do tend to take a little more than I would like. Connecting our technologies to other participants' technology.

So I would tell you that last year we only had one alliance partner, that was a little under 10% of our total fundings. We do not anticipate a change in that this year. So our goal would be keep no one feeder greater than 10%. So a diversification is really important to us both in terms of loan size, credit, geography, and industry. I would like to tell you I can, you know, forecast oil prices, or the price of poultry, or things of that -- I just can not. So we always looked at a 50-state, what I call retail model.

Our alliance partners do not package loans. They do not submit projections. They just give us a (inaudible.) And we believe we are doing a much better job between technology, training, adding new staff in the right places; to have a higher close rate and opportunity, but it only needs to be marginally higher, and to pick the best credits and the best selection of credits that will perform and provide capital to small business, and earn the types of fees that we need to meet an exceed our earnings forecast.

On the loans fundings they were up about 18% quarter to quarter if I am backing into that correctly, but the realized gains was relatively flat, so should I read into it that you sold less loans or there was a less gain on sale percentage quarter to quarter?

Are you looking at Q4?

Yes. I am trying to look at Q3 versus Q4.

Sure. Q4 -- Q4 clearly we had an issue with pricing in larger loans; particularly at the end of the year, although we always try to avoid doing business in the last couple of weeks of the year. Magically, it just always happens and the last couple of weeks of the year in a fixed-income markets were fairly (inaudible), and I think that our counter parties were resistant to adding balance sheets. So we are going to try to avoid that next year. Even with it, we were still able to importantly make our numbers, make our projections, and deliver the dividend yield and the earnings to investors that we said we were going to do.

All right. Great. I will step down maybe get back in the queue later.

Thank you.

Our next question comes from Leslie Vandegrift with Raymond James.

Hi. Good morning, guys. Just a quick question on the dividend income and then the realized gain. Last quarter, we had some of the dividend income from the (inaudible) company as well; just trying to get some color and where it came from this quarter, and how can you expect that going forward since this company is kind of sitting at zero on fair value and where we can kind of see that coming through.

Sure. Leslie, I appreciate the question. I think, you know, one of the things that is unique about our organization, and I appreciate the analyst coverage, and we try to be as transparent as we can and work with you guys. These are operating business he and unlike most BDCs which is coupon debt and totally predictable and straight-line, and you just tilt the ruler a little bit one way or another. These are operating businesses that we have the ability to earn money and hold that money down or dividend it back up. Our goal is to make sure that we meet or beat expectations that are in the market. I think we have done a pretty good job of that so far.

I think what you can look at in a forecast when we forecasted the $1.50 for next year, 35% to 40% of our -- our earnings should come from dividends from the portfolio companies and we hope to be able to meet or exceed the expectations from the lending business. The portfolio companies, obviously it is from organic growth we -- you know, in terms of acquisition I think this is an important thing to talk about. We are going to be opportunistic in looking at acquisitions. Currently we only have a real small one in the pipeline. We had a bigger one which fell out of bed.

So I think what you can anticipate from us is majority of the income that is earned at the portfolio companies being dividended up, nothing less, nothing more. It is fairly stable. You can take a look at the range of prices that we have put into the -- into the marketplace for 7(a). You can look at our loan volumes. I can you can forecast out pretty much where earnings are going to come from.

Okay. And then on the realized gain side kind of the same question where that came from and how we can expect that going forward.

Well, I think that when you go back and you look at five years and the last five years, you know, the range of net premiums has been, I would say fairly stable within a two point range, from our gain on sale perspective. You can see that we have an ability because of our technology to grow volumes because we are becoming more prominent. Frankly, I would not be surprised with if we lose certain online players in this space, you know, based upon their difficulty in the marketplace. We are not seeing that difficulty. I mean you can look at our charge up, you can look at our currency rates. You know, the ability to lock at $8 billion worth of loans prospectively and pick the better credits is a big win for us and not pay upfront for those referrals.

So we are not buying keywords. It is coming to us from 10 years' worth of work with the entities that are listed in our 10-Ks and -Qs, the Hartfords, the IGs, the UBSs, the Morgan Stanley. The (inaudible) endorsed by the Credit Union National Association, the Lending Tree; all of these entities are really appreciative of how well we handle the clients. The NewTracker system gives full transparency into our back-office, so people who give us leads are never left out, and if we give a quick note they are happy with it and we do that quite frequently.

Okay. I appreciate that, but on the -- I guess what I -- rather than the gain on sale, I was more referring to the smaller realized gain on the portfolio rather than the one that was specific -- not associated with the gain on sale. The other realized gain. --

Oh, oh okay.

Sorry about that.

Sure. You are referring to the NAV increase?

Yes. Well, the $5 million. The realized gain.

Okay. So you want to answer that.

Sure. I mean that did not go into our adjusted net income. That realized gain came from two portfolio companies. One portfolio company that paid distributions in excess of its current year earnings (inaudible), so that was treated as capital gains and that was about $4.9 million; and then we had another $600,000 in realized gains from a portfolio company that sold some assets and distributed that money up to the BDC, and a piece of that was recorded as capital gains because it was in excess of the portfolio company's current year earnings and profits.

Okay. So then I guess my final question on that is, I know that they are non-recurring but we seem to be seeing them in some way, shape, or form each quarter so how can we kind of -- is there where they are marked at? How does that tell us about what -- (Multiple Speakers).

I think what you -- I think what you need to do is take for face value that we are basically saying that the earnings in 2016 are going to come from the lending business and the cash flow that we have forecasted on payments, managed tax -- the other businesses are fairly -- they are smaller. Maybe on the next call we can -- and they are really not that material or significant at this point in time, but I think that is how you can forecast it. And what you are looking at, as Jenny said, it is not re-occurring so it should not affect it.

Okay. Alright. Well, thank you guys. Appreciate it.

Thank you.

Our next question comes from Mickey Schlein with Ladenburg.

Good morning, Barry and Jenny, and congratulations on a good quarter and finishing your first year as a BDC. I wanted to ask you what organic growth rate you are anticipating in the payments processing business and how the integration of Premier is progressing.

Thanks, Michey. Appreciate that. Well, I -- to be frank, I wish I would have been in our Long Island space a little bit sooner, but the fire marshal has us out for the time being. The contract has got to clear for a violation, but I think the integration of Premier and UPS Wis is moving along. We have named Jordan Stein as President, Chief Operating Officer of both units. We are seeing better unit growth in its underlying business. We are getting better leverage out of their ability to utilize technology into the UPS Wisconsin distribution channel. So we think that we are probably going to look at, you know, modest double-digit bottom line growth. I will point out that Premier -- Premier's revenue is really recorded net basis, net of interchange. UPS is gross revenue. So I think you are going to be looking at somewhere in the neighborhood of 8% to 10% type growth rates from an organic perspective top and bottom line. That' is a very early guess, that is with a months and a half's worth of data in at this point.

Okay. Thank you for that, Barry. A couple more questions. We have seen nice firming in the 7(a) loan pricing so far this year. I think you -- I was trying to, you know, scribble as you were talking. But can you go back and comment again on why you think those prices have firmed up so far in the first quarter?

Sure. I think there is -- for uses two primary -- well, let me say this. There are three primary factors for pricing. One factor which is the biggest is loan size. So a $4 million -- a $3.5 million government-guaranteed loan with similar characteristics to say a $300,000 or a $500,000 government-guaranteed loan could trade at 1 to 1.5 point discount, because when the pool assemblers buy it, it unwinds the undiversification in their pool. So that is one item. So smaller loans bode for higher prices. The other factor which actually worked against us so far is the weighted average maturity.

The longer loans typically trade at 2 to 2.5 points higher on-net pricing to us. So we actually expect to see our WAM go out longer. So if everything else held constant and we were just doing longer dated stuff, which if you look at our averages I do not think we have been 14 years -- I would have to go back and dig through them for the presentation -- in awhile so that -- that is a factor.

And then you have got where the government's bond market is. So which right now appears to be in pretty good shape unless we have got a big rally in the equity market which there is really not anybody anticipating or concerned over the Fed raising rates, which I do not think is out there so I think we' are in pretty good shape on pricing. You would have to go back to -- I am looking at the chart now, of 2011 where we had a 15.9 year WAM. Our best pricing years were in 2013 and 2014 with respect to the WAM, and our first quarter the WAM was around 14. So I think we are in pretty good shape on pricing.

Okay. I understand. Thank you for that. Just a couple of -- well, one question about leverage and one housekeeping question. The press release indicates that you -- at least right now you do not anticipate issuing equity, but if I am doing the math right, if you were to originate loans at the high end of your guidance, you would be approaching the regulatory limit for BDC. So I am trying to understand what is sort of the maximum leverage you are willing to run the balance sheet at your current level of net assets?

Yes. There is no way that calculation is correct. You know, first of all we just raised equity cash capital so we are in pretty good cash position as we sit here today, and then we could say if we -- if we needed to, we could raise another $60 million of (inaudible). I mean, we do not use -- to do this amount of loan origination it does not require anywhere near $60 million worth of debt raising. So if we did not do any acquisitions and stuck to our knitting and just clip coupons I think we are in pretty good shape.

Okay. My last question; I do not understand the tables at the bottom of the press release. Maybe you can walk us through that. The very bottom there is one table that talks about electronic pin processing, 2015, 2014, and that appears to include Premier; and then there is a table with premier by itself for 2015, and then there is another table that says December 2016. That must be a typo, right?

No. Mickey, these tables are put in here just to support any adjusted EBITDA numbers that we discuss in the press release. So if you look at the first table for Electronic Payment Processing, the 2015 table does include Premier Payments which was acquired in July, 2015. So that is for Merchant Solutions and Premier Payments combined in 2015.

Okay.

And then the 2014 table would just be Newtek Merchants Solutions, since we did not own Premier in 2014. Then Premier Payments -- the reason that we have this table in here for Premier Payments, is Barry does mention or one of our bulletins does talk about Premier Payments by itself. Its adjusted EBITDA. So we have got a table reconciling those numbers. And then the last table is our forecast for the Electronic Payment Processing forecast portfolio companies and that includes Newtek Merchants Solutions.

Okay so I just want to confirm that is a forecast. I understand now. I appreciate your time this morning and thank you very much.

Thanks, Mickey.

Thank you.

Our next question comes from Rob Brock with West Family Investments.

Thanks for taking my call. Hi Barry, hi Jenny. Great quarter. Excellent year. Two questions for you. One general, one a little more specific. Could you talk a little bit about the 504 program and like what are the key variables in growth? It is obviously very profitable business and you have a forecast on the $20 million to $40 million. Is that a function of being able to underwrite more or seeing more leads and how is that business originated? And the second question I had has to do with your excellent, I think you had 80 basis points in net charge-offs, I think versus 1.83%.

I think historically you have been taken a 5% mark on all these guaranteed loans. Did you move the to, into to 2.5% after the good performance? And if so is that going to be ongoing, and how did you pick that number et cetera, if you could talk about that. Thanks.

Thank you, Rob. Appreciate it. Working backwards, we run our loans through discounted cash flow model, which gets obviously reviewed by management, reviewed by the Chief Lending Officer, and reviewed by a Board of Directors (inaudible), and given the loss rates, the recovery rates, the health of collateral, currency rate in our portfolio; we do this every single quarter. The -- the model and our understanding of where these loans in a -- in an aggregate sale could be sold at an arm's length transaction came out to 97.5 versus the 95.

So that was an unrealized gain. That does not go through the income statement, but it does increase our NAV. And the primary justification for that was a change in the gross cumulative default and a few other variables that went into the model. What was the other question, Jenny? Rob, what was your other question? I am sorry.

It was on the 504s. What are the key variables driving the growth and obviously it does not -- you do not need a lot of capital so you do not want to go out of these. What kind of underwriting standards do you have, and how do you see the pipeline going forward in 2016 and 2017.

Sure. Appreciate that. So we do have a leverage line for these loans with Sterling Bank and Bank United and gives us good leverage while we hold them in the warehouse. Once we -- the SBA issues debentures every 90 days, so you typically have to wait for their debentures to be issued for them to buy the second half and then we sell the first -- the first loan which is a conventional first to a plethora of third-party buyers.

Some of the -- some of the -- actually it is a very good question because some of the traditional lines create the 504 opportunities. There tend to be other intermediaries traffic in the space although we do see opportunities. This is -- these are business loans where the owner wants to buy a piece of real estate, or has a piece of real estate, and you can offer them a 90% LTV.

So I think we are modest in building the pipeline. You can do a $5 million or $10 million 504 loan, so we come out with modest projections. Obviously the goal here is to perform and to -- there are not too many people that understand what a 504 loan is. Many people do not come in asking for 504 loans, and frankly a lot of people do not come in asking for 7(a) loans. That's not typically the party that we're looking for. We're looking for business owners that want to finance their business.

I think that channel will build over time. It takes awhile to get into that market; to people that are in the business to know that we provide that type of funding and can -- and can do the -- the bridge to the SBA as well as the senior first. I think it will take a little time, but it is very profitable. You can charge 1 to 2 points in origination fee. You typically can sell the government the conventional first for anywhere between 3 and 5points in the market and of you have no capital investment except for the servicing. So it is a good business for us to be in. High return on equity.

Thank you.

Our next question comes from Lisa Springer with Singular Research.

Good morning. I wanted to ask about the 504 business as well. What would you consider the size of the overall opportunity and could that at some point [potentially rival in size the SBA 7(a) business?

Lisa, that is a good question. I mean I think that -- I do not think we will do more 504s than 7(a); given that we have been in the 7(a) business a long time, we do tend to be methodical. However, I think that we will get into the 504 business quicker and faster than the 7(a) business. I could see our 7(a)business, there have been non-bank 7(a) lenders that have done $1 billion worth of 7(a) loans and that was during times where the largest loan was $2 million. So that can give you an idea of where a non-bank lender can go to.

I mean if you -- if I have to make a guess, I would think that we will always be somewhere in the neighborhood of a third to a quarter of what the 7(a) business to the 504 business. I mean it is not inconceivable that we could do $50 million of 504 loans this year, or maybe more, or maybe $100 million. But we will see if that happens. It really is a function of us on the marketing side getting the word out. we have the capital, we have got technology, market is there. We just have to really push ourselves a little bit. I would like to have the ratio to be at least a third of 7(a).

Okay. Great. Thank you.

Our next question comes from Marc Silk with Silk Investment Advisors.

Barry, great year. Thanks for taking my calls. So you kind of went over this a little bit so I just maybe want a little more color and this is really for your opinion, but why are BDCs trading at such a discount and where is the opportunity to invest?

Well, Marc, I think you have got BDCs some of them that are down greater than 40%, 50% in NAV. You got the internally -- three primary internally managed ones are trading at a premium to NAV, and we would like to get back there. We were at a premium to NAV and then we did our capital rates. I think that when you look at the opportunity, investors got a look at primarily two things. One is what are these assets worth, can you really figure out what is in that cookie jar, and with us we have got loans that have gone into six securitizations (inaudible) gets cleaned out every single time, they are small balances, the loans are fairly homogenous and they can trade on a pooled basis, and are fairly easy to figure out.

And from a dividend perspective, I will not say that we do not have -- we have zero volatility in our earnings stream because there is some volatility on the sale, but it is not huge volatility. It is not like I have a $50 million or $100 million loan to an energy company, or I have got a leverage loan to a business that, I did it at and for or five times EBITDA all of a sudden their business has turned South.

So I think that the discounts that we are seeing with other BDCs is not based upon the fact that the mezz -- mezz capital and the sub-debt market has gotten crushed properly so because people are questioning what the global growth is going to be, which a lot of these loans are based upon. If you do not have growth, really high growth, these borrowers in mezz, capital, and sub debts; they can not make their payments. And I think that is why you're seeing a discounts in the NAV, and then people are saying hey, can they actually sustain that dividend. We really do have an entirely different model and when we finance the uninsured pieces of our loans we get a large cash back on a non-recourse basis.

So we clearly would want the market which it has in the past to look at us differently, to take a little time, listen to the calls; we really appreciate the analyst participation today. I am not sure that the discounts in the BDC market is not something that does not make sense. I am a little perplexed but also understand that it takes more to understand our Company than the other guys, and I think we -- we just felt -- fell into a tough window here being a smaller BDC and that is why we (inaudible) but I think that can reverse itself.

Okay. So I guess my theory is not necessarily a BDC but when you basically -- when you did a capital raise, and then you gave that big dividend and then another dividend in the middle of January, you know, parts of my skepticism is that maybe people just took that big chunk of change and then locked in a gain, you know, percentage-wise and just left, but you probably know more than me. And then with your BDC comment, maybe -- it seems to me it is the baby under the bath water because my point is this, that you basically said that you really have -- and you cab confirm this no exposure to the energy sector, no defaults, but then on the other side of the equation there is still the issue why of the banks unwillingness to lend to small businesses so you figure that is where your sweet spot is and so make you can kind of talk to that as well.

Well, I -- I appreciate the comment. I mean what we are supposed to do is raise capital and put it out. We raise capital the right time in the market, both debt and equity; now I got plenty of cash, I got low leverage on my balance sheet in a market where frankly, my competitors are hurting. That is -- I think where we are supposed to be. So we like our position in the marketplace today. We, you know, have the ability to buy back some shares.

The trading window will open and I think we are in a pretty good position right now with a lot of cash on the balance sheet, a lot of my on bank lending so-called competitors and they are in a different market. But the fact of the matter is there are people that probably borrow money at those high rates that could qualify. I am not saying most of them would. We do not want that real weird weak stuff, but this is going to help us from a long-term perspective.

We have a 13-year viable lending business model. We have been in the payment space for 10 years. We have owned and operated these business for 10 years. We have managed their risk. We have been through down cycles in the market. So, you know, if you look at the definition of a BDC, it lends money to small business and provides business services and mentoring services to small businesses. It is a $50 million participation in a leverage buyout loan lending money to small business. I will let somebody else answer that question, but I know we lend money to small businesses.

All right so -- sorry.

And we have a very good business model that is diversified risk, managed risk, and earns -- good returns for shareholders without a lot of leverage. So, sorry.

That is okay. I mean you have a proven track record where others might not, so you mention the stock buyback, so watching how your stock has acted over the last year and as you know I am a long-term player, it seems that after X dividend your stock goes down usually more than the dividend. So I think strategically you should take advantage of that in the buy back, instead of just coming in just automatically and buying shares back because, again, the cheaper you buy it the better it is for the shareholders.

And on that note also, you know, I do not know the mentality of a normal BDC investor, but let us say your stock, you know, again, it was down from where it closed at the end of this year last year to getting down to the low $9.00s, you know, obviously you wish you took advantage of being able to retire stock down there. Could a BDC investor be aggravated if -- you always talk about returning money to shareholders and in the form of buybacks and dividends.

What if you said, you know, we are going to take $2 million of that dividend and we are going to keep that in maybe escrow and that way if the stock ever dipped below let us say $10 a again and you have a set 10(b)51 plan; then you take that money and you basically retire shares at a ridiculously low level, because you talked about long-term and maybe in the short-term that dividend might not be as much in let us say 2016 yet, going forward buying shares at so low price is going to turn out to be a net-net positive. I just wanted to know your thoughts on that as well. And then also set up maybe a price where you can keen buy through a blackout period just based on price alone.

You know, to be honest with you, Marc, the buyback is -- it is a tool to take advantage of it. The window in a calendar year is so small and so it is there, but our time is best spent focusing on the -- on the business lines, growing the business, and if we do a good job, the stock is going to go up so we -- we do not want to spend a lot of time, you know, with these different plans, but I appreciate the idea. I mean we will take advantage of the markets if we can, but in the meantime we have got a lot of capital to deploy and I think we are -- we are well-positioned for 2016, the first two months from a stock-price perspective have been pretty rough, but the business has been beautiful so.

You can clearly see. Okay. My last question is this. Last conference call you talked about maybe selling some of the non-guaranteed loans and I know you kind of have some information I do not know if you covered that. But how is that progressing, what does the market look like? I know it is a very thinly traded market but, I just wanted to hear what you have been discovering.

Thinly traded market for what, Marc? I am sorry.

The non-guaranteed part of your loan portfolio.

You know, I think that all these markets take a while to develop and we -- we are working on that right now. At the moment, we have got cash to invest so keeping the coupon is something that we are good with; and we will continue to work on that, because it is a form, effectively, of equity capital to be able to sell off the uninsured loan participation. So still in process, but right now we are looking to held onto what we have got versus sitting at cash at zero.

Got it thanks, Barry. Continued success.

Thank you, Mark.

Our next question comes from Andy Ellner with JMP Securities.

Hi. Just two questions for me this morning, the first is on expenses. Could you help us understand how you are thinking about operating expenses going forward, specifically in salaries and benefits in G&A; because these line items have hopped around a bit throughout 2015, and we know there was some investment in the business during the year. And secondly do you have an expectation for the filing of the 10-K?

Yes. A couple of things. You know, when we are looking at -- and I am looking at my K right now which -- well, this is on the press release. Got it. Yes. That is BDC. I am going to let -- I am going to defer to Jenny on that. But what I will tell you, Andy, I do have an appreciation for the fact that as an internally-managed BDC, you know, our expense ratios are different than most other entities. Always, please note that we do not take out (inaudible); this Company has been around for a long time. We run it very lean. So maybe Jenny can shed some light on what you are looking at with respect to expenses and hopping around. I do not -- that is not something I am familiar with so, Jenny, you want to pick that one up.

Yes. We expect our expenses in 2016 to stay, you know, in terms of salaries, interest and other G&A to stay pretty -- pretty stable. You will see in 2016, we will have some increases for some noncash items related to moving from our West Texas base into Lake Success. We are going to have to take a one-time charge that you will see most likely in the first or the second quarter of 2016. But other than that, you know, of course we have got some increases in salaries and benefits year-over-year, but they should stay and remain, you know, fairly stable year-over-year.

Great. Thank you.

And I am not showing any further questions at this time.

Okay, Operator. Thank you very much and I want to thank everybody for joining the call and participating. We look forward to reporting our results in the very near future. Thank you.

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