NewtekOne Inc (NEWT) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Newtek Business Service Corporation first-quarter 2016 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).

As a reminder, today's conference may be recorded.

I would like to introduce your host for today's conference, Mr. Barry Sloane, Founder, President, and CEO.

Sir, please go ahead.

Good morning everyone.

My name is Barry Sloane, Founder, President and CEO of Newtek Business Services Corp., stock symbol NEWT on the NASDAQ.

This morning, to help me present our first-quarter results is Jenny Eddelson, our Chief Accounting Officer.

And welcome to our call today.

Obviously, we have tons of things to discuss.

We reported last night a great first quarter with tremendous optimism for the rest of the year.

This is against the backdrop of a lot of things happening in the marketplace.

We had an announcement last night of an ADP hack.

We had announcements of some of our lending participants in On Deck Capital with earnings issues, prosper, laying people off.

Triangle, one of our BDCs, announcing that they're going to be cutting their dividend.

We have a lot of things to talk about.

We welcome calls from the -- we welcome questions from all the listeners.

Our quarter was great.

We are extremely optimistic about the future.

And with that, I'd like to turn the presentation over to Jenny to talk about our forward-looking statements.

This presentation contains certain forward-looking statements.

Words such as plan, believes, expects, plans, anticipates, forecast 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 revenue and profit margin, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative development, and similar matters.

Risk factors, cautionary statements and other conditions which could cause Newtex's actual results to differ from management's current expectations are contained in Newtex's filings with the SEC and available through www.SEC.gov.

Thank you Jenny.

And for those of you that would like to follow the presentation along today, you can go to NewtekOne.com, go to the Investor Relations section, and click on presentations and you will be able to follow the PowerPoint, which begins on Page 2.

So, looking at our first-quarter 2016 financial highlights, we are happy and proud to announce that we have increased the forecasted cash dividend to $22 million, or $1.52 a share, from previously forecasted $1.50 a share.

This is based upon the management's business outlook and improved metrics of the underlying businesses.

Our net asset value came in at $203.8 million, or $14.10 a share.

That's up from the previous quarter of $14.06 per share.

Adjusted net income was $4.9 million, or $0.34 a share.

That compares negatively to $0.51 a share from a year prior.

But we will be addressing that on the next page of the presentation in terms of why we think that's not indicative of the business metrics or what we are doing going forward.

Total investment income was a strong $6.8 million, an increase of $4.8 million from the quarter and year prior.

Total investment portfolio of $278 million on March 31 compared to $266.9 million on December 31, 2015.

Debt to equity ratio was 66% at the end of the quarter.

That will go up based upon our baby bond offering that was completed in the month of April.

The Company has also announced that it repurchased 70,000 shares of Newtek common stock, NEWT, during Q1 2016 at a weighted average price of $12.37 share.

The Company will be announcing over the next several days another share repurchase that would be -- I should say another share authorization that will be similar to the authorization that was previously announced.

We paid our first-quarter 2016 dividend of $0.35 a share and that was paid out on March 31 to shareholders of record on March 22.

On Page number 3, we wanted to just make one comment about adjusted NII for the quarter.

In 2014, in the fourth quarter, we converted from a CCORP to a BDC.

We changed our tax status with a recollection in calendar year 2015.

It was valuable to our stockholders for us to roll gain on sale income from Q4 2014, by not selling government guaranteed pieces, to Q1 2015.

We rolled over approximately $3.9 million worth of gains.

If you were to exclude those gains, the adjusted NII would have been about $0.13 a share, compared favorably with $0.34 a share.

There is a more specific detailed description of this on Slide 43 when you look at comparisons.

We feel great about Q1 2016 vis-a-vis Q1 2015.

We wanted to make sure that people aren't confused based upon this rollover that was primarily done for tax reasons.

On Page number 4, we talked about the SBA lending highlights for the first quarter.

We funded $56.1 million of loans, a 13% increase over the same period last year.

When you extend that funding period through April 30, we funded $80 million -- $80.1 million of 7A loans over $53.7 million, a 49% increase year-over-year for that same period of time.

I need to just comment to many of our investors and analysts that like to look at a ruler and look at things on a straight line we are not a straight line company.

There is seasonality to our operating businesses and our platforms, and we do manage our business on a year-to-year basis.

So despite the fact it's important to report to the Street on a regular basis, how many loans we closed as of April 30 or 31st of a given month in a given quarter, we want to make sure that our loans are done correctly.

We have borrowers on the other side that have their own needs and requirements, and we pay attention to that.

The business has always been run on a long-term basis.

That's why we have been a lender for 13 years even as a public company.

We are today reaffirming our loan funding forecast of approximately $320 million of all SBA loans, which includes 7A and 504.

For the three months ended March 31, 2016, we had an average net premium, net to us, on the sale of the government guaranteed participation certificates of 12.41%.

Newtek Business Credit, which is currently involved in doing the 504 loans, is a little bit behind on its percentage, but even if it is, we feel very positive we will be able to make that up on the 7A side.

On Page number 5, we talk about the bond offering recently completed, the $35 million public bond offering of 7% notes due 2021 non-callable for a year.

We were really happy with the way this transaction was done and executed.

And we urgently went out with a $25 million note offering.

There was tremendous demand.

We increased it to $35 million, not including the Green Shoe, which is still outstanding.

The notes are trading on the NASDAQ global on NEWTL.

They're trading at a premium to the offering price.

We closed last night at $25.10.

Our previously issued note, NEWTZ, is trading at a premium as well at $25.61.

We wanted to thank our book rating managers, KBW and D.A. Davidson.

Both did a great job on the transaction, as well as comanagers, Ladenburg Thalmann and Janney, on helping us raise this amount of debt capital.

Given the debt capital that we raised here, the debt capital that we raised back in September of last year, the $36 million equity raise that we did at a premium NAV that was done in October of 2015, we are in great shape, we've got a lot of cash, and we are excited about putting it out at the current opportunities we have in the marketplace.

On Slide number 6, some of those opportunities are what we refer to as our investment pipeline.

Appropriate terms for BDC versus acquisitions.

Looking at things that we are looking to invest it in, we have four targeted companies, two with signed letters of intent, an opportunity to help us in the loan servicing space that we are looking at acquiring approximately 4.5 times EBITDA multiple.

Plus we have upside.

We think we can get significant amount of originations from the acquisition.

We also have a signed letter of intent in the technology space.

It's under $1 million of revenue, not that significant, but we do pick up some good management talent, and it's at a very attractive EBITDA multiple, which we will be more than happy to announce when it closes.

This hopefully will close within the next four weeks.

The first one I think has probably more like an eight-week window.

We are in negotiations for a payment processing company that's asking five times EBITDA.

We are also in negotiations for an insurance agency as to 1.5 times revenue.

Moving forward, we are making a few changes on our Internet-based presence as well as our marketing field.

We're in the process of repositioning our brand to more accurately reflect our business model.

The slogan and new website domain, NewtekOne, is very much in conjunction with positioning ourselves as your business solutions company, really drilling toward that independent small and medium-size business owner.

One Newtek, one brand, we can satisfy all the business needs of independent business owners across many products, all servicing from one brand.

We will be looking to drive traffic rather to the homepage but to the product pages as these solutions provide.

So in the lending space, you'll be hit with Newtek Business Finance Solutions.

When you come to Newtek for a loan, we don't fit you with an SBA loan.

We fit you with a financial solution.

It could be a term loan.

It could be a line of credit.

We do what is best for the business on a consultative basis.

Continuing that consultative approach, if you were go to our payments processing page, you will be offered Newtek Payment Solutions with a multiple range of payment solutions relating to POS, global-based POS, terminal based and eCommerce.

Newtek Technology Solutions, where we offer a variety of solutions between dedicated, shared, VPS and enterprise solutions, all based in our tier 3 secure facility in multiple locations with live-hot backup if requested.

Newtek Payroll and Benefits Solutions' market clearly is gravitating to where business owners are looking for the one solution for payroll, health insurance, and obviously the P&C side with respect to Workmen's Comp.

We can do that.

And lastly, Newtek Insurance Agency Solutions.

So on Slide 8, you can see Newtek Business Service Corp., your business solutions company, NewtekOne.com/loans, /payments, /technology, /insurancepayrollbenefits.

We will be driving people to the product pages, which we think is most effective for us to really generate more traffic, more sales, more closes.

Cross-selling, cross-marketing will take place as a process going forward.

Obviously, we heavily rely upon our technological presence.

Newtek essentially is a financial technology company that has used technology over the last 13 years to acquire business opportunities cost-effectively and to process those business opportunities in remote locations.

Essentially, what we are doing is disintermediate what I would refer to as the feet on the street sales and marketing function, although we do have some of those people in house, but it's very, very leverageable and very scalable, as well as the processing function that would normally be taken up by either a very sophisticated salesperson, or for that matter a financial institution or a banker that's making six-figure type salary.

NewTracker is a patented proprietary Web-based customer referral product similar to salesforce.com.

It's as if we put a barcode on a business service referral offering.

This provides cost-effective client acquisition strategy, once again through the disintermediation of the human function, no feet on the street.

Our alliance partners feed these referral opportunities.

We've had long-standing relationships with the retail system of UBS, Morgan Stanley, banks like Amalgamated, Iberia Bank, Near Community Bank, trade associations like Meineke Muffler, Jewish Community House, trade associations like Credit Union National Association.

We've got some nice pipeline opportunities in the pipe.

We've got existing referral partners that are growing our referral base.

We'll talk about some of that success.

We looked at $5 billion of loan referrals in 2015.

We looked at $2 billion of loan referrals in the first quarter of 2016.

Historically, we have over 570,000 businesses referrals that have come through NewTracker, businesses that are all sitting in our database that give us the ability going forward when we have instituted our cross-selling and cross-marketing and database mining strategy, which will be rolled out, to be able to cross-market and sell into that customer base.

These aren't cold calls.

These are people that have raised their hand, driven us by alliance relationships that have said I'm interested in the product and they already have an existing phone call and a communication with Newtek and the Newtek representative.

We are doing our conference call for the first time from our new Company headquarters in Lake Success, New York.

We've opened up a new office in Lake Success.

It's on the border of Queens and Long Island.

This was primarily opened up to get all of our business lines under one roof.

This is further promoting the goal of a more efficient, more effective cross-selling and cross-marketing platform.

From a locational standpoint, Newtek will be able to more easily recruit talent from all five boroughs as well as parts of Westchester and Long Island.

There's plenty of opportunity to grow the space here in Lake Success.

We took 34,000 square feet.

It's 170 workstations over 40 offices.

There are three other additional buildings to the one that we are in.

Office space is in excess of 1 million square feet.

And for the purpose of always watching our expense ratios, we have contracted to sublet the New York City office, which makes it a little bit difficult for myself and some other participants to get to work, but we appreciate the spirit in which our staff has rallied around this change.

That will reduce savings when the sublet comes into effect of about $250,000 a year annually.

We are continuing to expand our senior management team with talent.

We recently announced the hiring of Nilesh Joshi.

Nilesh Is our EVP and Chief Information Officer.

Nilesh has over 20 years' worth of experience with information technology.

We are thrilled to get an executive with this type of experience, this type of knowledge, and a great attitude to help us grow and expand our technology, which will enable us to, A, reach our customers easily, B, service our customers better, C, equip staff to be able to book, bind, and cross-sell customers, and importantly, create sales marketing and operational efficiencies within our organization.

Nilesh has experience at entities like CIGNA, obviously health and benefits are important there, Wells Fargo where we've got a tremendous amount of loan and mortgage training, and Target on their POS business card and credit card side, all very relevant experience with a tremendous IT background should make a terrific addition to our staff.

He will be working side-by-side with John Raven, our Chief Technology Officer and Chief Information Security Office, out of our Phoenix and Scottsdale-based offices.

Other recent additions to the expanding senior management team, I mentioned John Raven.

John has been with us about a year as President and CEO of Newtek Technology Solutions and also as Chief Technology, Chief Information Security Officer of Newtek Business Services Corp.

Mike Campbell came in about a year ago, Chief Credit Officer and Chief Risk Officer for the processing business.

And Jordan Stein, a 10 year veteran of Newtek who was with us for about six or seven years, left our organization and came back in the Premier Payments investment.

And Jordan is the President and COO of all of our payment processing units today.

Moving to Slide number 13, some quick metrics on Newtek's small business finance.

For those of you that aren't that familiar with Newtek, we are currently the largest non-bank government guaranteed lender in the United States.

There's only 14 of these licenses that have been issued.

Most of them are dormant.

We are the eighth largest SBA lender, including banks.

We've done six S&P rated securitizations, A and AA.

We have never had a downgrade.

The average loan size in our portfolio, which is the risk that one would be interested, in is $173,000.

That's tremendous and it adds to the diversification.

I have to add 100% of our loan portfolio is floating quarterly adjusted to prime.

An increase in interest rates would increase the dividend, holding everything else constant.

The loan is an attractive loan to a business owner.

That's important.

We are not looking to do credit card surrogate consolidated loans that a lot of the online lenders or peer-to-peer lenders are doing.

We are not doing merchant cash advance at 30% to 60% effective rates to the borrower.

We are doing a loan that's a real good long-term capital loan to borrowers with real underwriting.

Given the mechanics of our SBA business, once we sell the government guaranteed participation certificate offer again and we finance the uninsured through a 70% advanced rate in securitizations, we get all our capital back.

And because of that, we are able to get returns on equity that are in excess of 30% risk-adjusted on the SBA 7A lending business.

Looking at the growth in this particular market on Slide number 14, you can see that the $2 billion of lending referrals, and that's $2 billion of dollar volume, was approximately or close to an 80% increase year-over-year from the first quarter and almost 40% of all the referrals we did last year.

This gives us the ability -- this is really important.

People say what are you doing with your underwriting guidelines?

This gives us the ability to be more selective, to pick the best opportunities, the best credits, the ones with the most collateral, the highest coverage, the most experience, the most successful opportunities.

This is why we have been able to lend in the small business space with real underwriting using technology for 13 years.

We don't promise people are going to get a loan in two hours.

This isn't like getting a car wash.

This is getting a business loan.

It's a pretty serious endeavor for a business and for us to be able to provide that capital.

So we believe we've actually created the real bridge for FinTech and online based lending.

And we've been doing this for a long period of time and we are very excited, not alone about our real historic performance as well as our future going forward.

On Slide 15, you can take a look at funding opportunities, a 50% increase looking at April 30 of this year through April 30 of last year.

The total pipeline is up approximately 74.6%, and the total pipeline would be open referrals, prequaled loans, loans in underwriting and approved pending closing.

You can see those statistics on Slide number 16.

Slide number 17, you take a look at our premium trends on pricing for governments.

It's very much driven by things like size of the loan, are you selling a long loan versus a short loan, and is the loan a $500,000 government guaranteed piece or a $3 million government guaranteed piece.

We manage our pipeline and our picks to be able to do great credits and great pricing and are quite judicious over our capital.

When you look at the loan sale premium income trend, have a lot of investors and analysts, they gain on sale.

This isn't regular.

You can't count on it.

We've been -- it's been pretty regular for us for about 13 years.

Take a look at our Ks and Qs.

You can look at the trends.

They are all constructive, I would not be so bold as to call this reoccurring income, but I would certainly call the origination of 7A loans and the sale of the government guaranteed piece a reoccurring event.

And we've been very good at it and have maintained success in originating 7A loans in a growing space, in a growing market with greater demand from business owners and greater need.

And technology is enabling us to have better, larger reach and more effective communication with small business owners in all 50 states on a pure direct model to the customer without brokers in the middle.

You can see our average loan size is coming down significantly.

We've made some technological adjustments in the 7A business which allows us to do smaller balance loans faster, quicker without cutting into the underwriting guidelines.

We are excited about this because this gives us greater diversification, better pricing without cutting into credit.

So, you can see, particularly in the first quarter, we averaged close to $600,000 versus in 2015 about $900,000.

That $600,000 is for the whole loan.

That's a government guaranteed piece and the uninsured loan participation certificates.

On Slide 20, you can see how our portfolio we believe has improved.

We say that, we've improved our weighted average mean FICO guarantee score.

Usually there's multiple guarantors.

We've improved by reducing diversification and industry classifications as well as state concentrations.

I do want to point out, in the restaurant space, those are typically not franchises that don't have real estate collateral behind them.

A restaurant that has been in business three to 10 years has got commercial real estate behind it.

We think it's a great credit.

Typically.

There's other factors that are involved, but I just don't want the market to think that we are doing a lot of see-throughs or start up restaurants.

Our strong loan portfolio performance has been measured over the course of 13 years.

Looking at it recently, looking at charge-offs as a percentage of the average outstanding loan balance, 0.8% in March 31, 2015.

A year later it's 0.73%.

We do like the trend.

Obviously, we are getting more referrals, greater opportunity to be more selective, greater opportunity to get more collateral.

I also will say we have an improving economy, which always helps.

And the improving economy that's most important to us relates to the collateral value.

When home residences are rising, when commercial real estate values are rising, when there is more liquidity for businesses that are available, that makes our loan portfolio perform much better.

But I also think the areas that are in our control, which is really important, outside of economic consequences, are the ability to reach and ferret through large amounts of small to medium-size business opportunities that want loans.

Obviously, we use the same system for payments, health insurance, Workmen's Comp., payroll and tech solutions.

Those referrals all come through the NewTracker system.

On Slide number 22 and 23, I won't spend too much time on this.

Many people that are very familiar with the Company have seen this slide over the course of many, many years.

We've been a public company since December of 2000.

But you can see the cash created when we do a typical $1 million loan on slide number 22.

On Slide number 23 is the accounting gain.

And we say it's risk-adjusted, because all of our uninsured loan participation certificates are on our books at fair value and mark to market.

And after a 20% cumulative gross default rate with a 35% severity rate, that portfolio yields 5.35%.

That is after losses.

That's an attractive loan portfolio for any financial institution in the United States, I would think.

SBA 504 loans, for expediency, we are growing into this market.

This could add significant volume and upside.

These loans are typically larger.

Getting our distribution channel in place will be helpful and we think some of the business investments that we are looking for service providers should help in this particular space.

Company comparables, Live Oak Bank is probably the closest pure-play for 7A lending alone.

It's trading at about 2.72 times book value.

Bank United acquired services on a non-bank license.

They paid a 10% premium over the size of the portfolio.

Those types of prices let alone would be almost the whole value of where Newtek is today, not including any of the portfolio companies.

Let me tell you it's very tough to accomplish.

We are a unique company.

We have a unique model.

As the founder and President of the Company, our goal was to build a business and an enterprise.

And we think our time for the stock price and people understanding what we do is coming.

People are beginning to more and more understand who we are, what we do, and what our reach into the marketplace is.

Looking at the important portfolio companies, which represents approximately 35% to 40% of our dividend income, as earnings are taxed at the portfolio company and then distributed and dividended up, we think that there are clearly discounts which you can see on Slide number 28 for the payments business between how we have our private business, which is smaller than some of these public comps, and I will let the marketplace decide whether those -- from their perspective how those discounts look.

We feel that we're obviously marked at fair value and we think this is an attractive investment opportunity and we grow our business, as we increase our growth rate and as we get bigger, to being able to prospectively get other valuations from these particular companies.

In the payment space, we like the sector.

Clients want security.

They want eCommerce with live hot backup.

They want robust reporting.

They want mobile applications.

They want EOD compliant.

They want one provider that can do it all.

We own our own gateway, we host, we are the processor, and we design the website.

Moving to Slide number 30, our Tech Solutions business, which has had a bumpy road along the way, we are very optimistic about it.

Businesses are going to flock to the cloud.

Doctors, dentists, lawyers.

The government is going to be very difficult on businesses in the future that do not protect their data.

They are going to need to go to participants that have a balance sheet, that could offer reps and warrants, that could offer insurance products or warranties along with the service so they don't have to think about it.

That's Newtek Technology Solutions.

Back in 2008, 2009, I can't tell you how many people out of 100 would tell me you've got to get out of the lending business, and look at where we are today.

I say the same thing about the Technology Solutions business.

It is uncontested that all of the major forecasters, the Gartners, the Forresters, are predicting significant expenditure in these markets and these areas.

The amount of hacks and security issues are growing by leaps and bounds.

The government is getting more involved.

Business owners are going to need to put their hardware and software in a tier 3 facility.

We will get this right.

Slide number 32, that's a pie chart sometimes I chafe over.

You don't necessarily want to evaluate the whole Company on EBITDA, but it's just, again, we want a shot of how the breakdowns of cash are coming in.

When you try to comp this versus internally and externally managed, those internal manageds are trading at a premium to NAV.

We are currently at a discount to NAV.

My portion of the presentation concludes with looking at Newtek, a company where the portfolio companies have been owned, operated, and managed for over 10 years, paying a cash dividend, a forecasted cash dividend, of $1.52.

The Board's next step will be to declare a second-quarter dividend, so our $1.52 is a forecast only.

You are investing in a business that's creating great cash flows without a lot of leverage.

0.66 of debt to equity, and we don't have any SBIC non-counting debt, that is real debt.

So when you comp us to other BDCs, we say, hey, we are really not comparable.

We are increasing our dividend, not cutting it.

We are increasing our NAV, not cutting it.

We are not a lender in the mezz cap or high-yield market like other guys are.

We are a real senior secured lender, not senior secured into LBO deals that are done four, five, six times churn rates.

You've got good credits, good assets, good cash flow.

You have alignment of interest.

There's no external fees being charged.

There's no [2 and 20].

The CEO and original founder, executives, Board own at least 15% of the outstanding shares.

There's no derivative securities in the BDC and no directed lending exposure to the oil and gas industry.

With that, I'll pass the call over to Jenny Eddelson.

Thank you.

Good morning, everyone, and thank you for joining today's call.

I'd like to start with some financial highlights from our first-quarter 2016 consolidated statement of operations on Slide 36.

In total, we had investment income of $6.8 million, a 43% increase over $4.8 million in Q1 2015.

Interest income increased by 14.5% period-over-period, and was attributable to the average outstanding performing portfolio of SBA nonaffiliated investments increasing to $158.1 million from $125 million period-over-period.

The increase in the average outstanding performing portfolio resulted from the origination of new SBA loans period-over-period.

We had a $1.2 million increase in dividend income for the first quarter of 2016 versus the first quarter of 2015.

Specifically, we earn dividends from Premier payments of $450,000, $1.3 million from universal processing services, $330,000 from Newtek Technology Solutions, and $200,000 from small business lending.

Overall, our dividend income from our controlled investments was $2.3 million for the three months ended March 31, 2016 versus $1.1 million for the same period last year.

Servicing income, which is recurring fee revenue that we earn from servicing the guaranteed portions of loans originated and sold by Newtek small business finance, increased by $328,000 or 31% period-over-period.

The increase was attributable to the growth in the size of the total SBA loan portfolio for which we earned servicing income of approximately $107 million year-over-year.

Our total expenses for the period increased by $948,000, which was primarily driven by increases in loan related costs and salaries and benefits, both of which increased as a result of an increase in loan originations and servicing activities.

Overall, we had a net investment loss of $1.4 million as compared to a net investment loss of $2.5 million period-over-period.

Our net realized and unrealized gains totaled a positive $7 million and primarily represents gain on the sale of the guaranteed portion of SBA loans sold during the period.

In the first quarter of 2016, we originated 102 loans totaling $56.1 million, and sold 99 loans for $42.5 million, generating $6.3 million in realize gains.

The average price as a percentage of the principal balance was 112.41%.

During the first quarter of 2015, the Company originated 61 loans totaling $49.6 million and sold 58 loans for $52.3 million, generating $7.7 million in realized gains at an average price of 112.44%.

Our realized gains in the first quarter of 2015 were higher because we had approximately $28 million in loans held for sale at December 31, 2014 that were subsequently sold in the first quarter of 2015 for a gain of $3.9 million.

The net unrealized depreciation on our controlled investments is $3.7 million for the period, which included $2.8 million in unrealized gains in universal processing services and a $988,000 unrealized gain on our investment in Premier payments.

Overall, our operating results for the first quarter of 2016 resulted in an increase in net assets of $5.6 million, or $0.39 per share, and we ended the period with NAV of $203.8 million, or $14.10 per share.

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

Thank you Jenny, appreciate that.

Operator, we'd like to open up the call to questions.

(Operator Instructions).

[Aaron Signovich], D.A. Davidson.

In terms of the referrals that you are growing at a very high pace, could you tell me a little bit about how you get into the partners, if you have the sales force that gets in front of the individuals that are actually making the referrals?

I'd just like to better understand that process.

Sure.

I appreciate the question.

I think that one of the important aspects of what you've mentioned, I think the market doesn't realize that this takes a lot of work and a long time.

So we have been in the lending business since 2003, so that's taken visits, conferences, presentations, meetings for senior management, and a staff that's led by our EVP of Strategic Alliances, Tom Stier, who has approximately nine or 10 people in his sales force that manage these relationships.

So those are the only feet on the street people that we have.

I would say the 80/20 rule is relevant in sales and marketing, unfortunately.

I've been a sales manager in my life and my career.

But with that said, the UBS retail sales force, Morgan Stanley retail sales force, the New York community banks, the Iberia Banks, we've got to go out and get into the branches, get into the lending officers, and develop those referrals.

That takes a lot of work.

We also recently developed relationships with electronic providers that are driving tons of referrals to us as well.

Now, I think it's important to note we don't pay for these referrals, so they are all effectively free.

However, we put a lot of money into going to conferences, meeting with people, etc., that are generating this, so we are excited about sort of the fruits of our labor.

I don't think we are going to continue to grow with the 40% a year in referrals.

But there's going to be big growth, and we have a tremendous selection opportunity.

If we didn't pick those credits in the first quarter, it's conceivable we could have picked other credits that still would've been credit good, if you know what I mean.

So we have -- what's very unique about our model is we have large pools of opportunities to pick really good credit.

Now, we are scaling this business.

We are moving our headquarters.

If you look at our lending staff, we have added four or five management professionals in Peter Downs, our Chief Lending officer's infrastructure that are bringing in teams and talents to really grow this business.

We are I think at the early point of scaling an operational methodology that will drive significant loan growth.

And the unusual part about this is we're going to drive significant loan growth without cutting credit quality.

That's quite rare in the marketplace.

That's very helpful.

Thank you.

And then you mentioned there obviously can be seasonality aspects to loan fundings, etc., but there seemed to be a pretty big jump in April versus the first three months of the year.

Was there anything specific that was driving that kind of large year-over-year increase in loan fundings?

I put my loan staff in the basement and I waterboarded all of them on April 1. I'm just kidding.

That's a bad April Fool's joke.

Sometimes it just happens.

And this is a business where you're dealing with borrowers, human intervention, but we put a lot of things in place that are finally happening.

We have been evangelistic about not funding loans in week 11 or 12 of a quarter, not funding loans in the third month of a three-month quarterly cycle.

And to be honest with you, we really cranked in April.

And my expectations are that we will do very well in May and do very well in June.

This could be the first quarter where we have actually had an even distribution of fundings across the quarter.

The reasons for that are management, technology and an evangelistic approach to really improving our process using staff, using technology, as well as really lining up borrowers.

I can't tell you how many times -- for those of you that are lenders on the phone, you've got X amount of loans, you think you're going to close, and at the last minute, the appraisal comes in and it 25% of what the owner said it would be, or it's 30%.

You've got a problem; you can't close that loan.

That means that loan has got to come out, another loan has got to come in.

So if you think you're going to fund $75 million worth of loans in a quarter, you better be prepared to fund $90 million or $100 million.

Now, when you've got more referral opportunities, better staff, better technology, it makes this process a lot easier.

I could sleep on the night of the 29th or the 30th going into a quarterly end so I don't have to come onto a call and worry about a miss.

But that's the answer.

And frankly, unless you're in the business operationally and you see these things happen, it's hard to portray it.

But I would say I really appreciate the question.

Thank you.

I appreciate it.

Nick Grant, KBW.

I didn't see this in the presentation and I'm not sure if it's a Q item or -- so with 504 production, can you give kind of some color on what your breakout was, and what percentage of that $320 million forecast is 504?

And just really kind of your pipeline and what you guys are seeing in that business?

Zero for Q1.

We funded no new 504 loans in the first quarter.

And disappointed.

We've got to do a better job.

My sales team has got to do a better job.

My management team has got to do a better job.

My channel partners have to do a better job.

But we are not concerned about it.

We think that 504 is additive and gravy and hopefully one day I'll be able to get on here and blow a funding number away.

The good news is I don't meet my numbers or blow funding numbers away jamming stuff through the pipeline.

I've got enough stuff (inaudible).

So unfortunately, and I know this might sound unusual, but I use these public forums to speak to my staff.

My staff is on these calls; they listens to these calls.

We are very transparent.

That's how we manage the Company.

We've got a doughnut on new 504 loans in the first quarter.

Okay.

It seems like that space takes a little more time to get going as well.

So, moving to the buyback, I like seeing the 70,000 shares repurchased in the quarter and the new authorization that sounds like it's on the way.

So how do you think about buybacks moving forward?

Is it really just anywhere trading below NAV, or what's kind of your methodology in terms of the buyback?

I think, number one, we've got to justify the stock price's value, which obviously we demonstrated that by buying 70,000 shares at that price.

We also have to look at what are our alternatives for the cash, not just for the immediate term, but for five or 10 years?

Because that's how we run the business.

We don't run the business quarter-to-quarter.

So I think, number one, it's important to demonstrate to the market that you like the stock so they like the stock.

It's very expensive and arduous to go out into the market, particularly as a BDC, particularly in the current market environment for BDCs, and raise equity.

So we are fairly judicious.

And you buy the stock, you get a pop, and then what are you going to do?

So, from my perspective, my greater return is to take that capital and deploy it into my business than just buying the shares back.

Now, I know this is one of these things where, if you took a poll, you're going to get a lot of market participants that love stock buybacks.

I'm just making a general comment.

If I could buy a business that's accretive and is going to keep providing exponential returns time and time again, I would certainly prefer that than doing a stock buyback.

Putting that aside, we went to demonstrate to the market we like our stock, we think these are very good prices, and the authorization that will be announced within the next couple of days will be similar in size and scope to the prior authorization.

I've been told by my lawyers I can't say any more than that.

Okay, great.

And then one more quick question on the referral partners.

The pipeline there is obviously really strong, and I know, in the past, you guys have seen pretty level growth across a lot of your different alliance partners.

Are there any that are really shining through and providing a lot of this growth, or are they all still pretty balanced?

It's a good question.

One thing -- and I'm glad you asked that.

One side of this equation is the referring partners; the other side is the closes.

So some of these referral partners are fairly new to picking up opportunities versus closes.

So, I would say that our traditional -- the electronic partners are giving us quite a bit of opportunity right now, and maybe that's sort of a function of some of my other electronic compatriots kind of falling by the wayside.

When people go to some of my other electronic players, and they are shown really high rates where they get an answer into three hours and it's not the answer they want, because the reality is, I don't care what they say, unless they are really credit scoring and showing electronic cash movements that are really constructive, they don't get a loan.

So we are seeing good flow across the full gamut.

I've got a lot of new ones in the pipeline because we are developing good notoriety, good brand recognition.

I think everything is coming together.

But I wouldn't say -- I think this is really important.

We don't want any one alliance partner dominating our business.

And on the closes, that is not the case.

Okay.

Great.

Thanks for taking my questions.

(Operator Instructions).

Lisa Springer, Singular Research.

Good morning.

My question concerns acquisitions.

I'm wondering if there are business service areas of interest to the Company that you are not in currently that you might consider, or if all of the acquisitions are going to pretty much focus in the areas you are already in.

So I think your question is would we consider expanding outside of the current footprint.

Is that the question?

Yes, essentially yes.

Yes, I appreciate it.

I think the answer is yes, but with reservations.

So I really prefer not to go wider, and I'm looking out over, say, the next three quarters, just because I really have a strong desire to -- in addition to the two engines that are doing real well, like the payments and lending, to get lift from managed tech, insurance, and payroll.

And I think those businesses are an easier lift than bringing in digital tax, digital bookkeeping, business formation, etc.

But if something came our way that was significant in those particular areas and gave us good customer account and the cash flows were attractively priced, we would look at it.

But in the pecking order, I would rather get a greater lift from the three I'll use the term modest performing sectors of the proposition.

When I say modest performing, it's really just when you look at growth and growth in the business -- and businesses tell me I'm having a hard time growing my business and they are growing one business, I kind of laugh and say we're trying to grow five at the same time.

So I think that we would look outside of the footprint, but it's not the primary objective.

Okay.

And in terms of size acquisitions, what would you say would be a maximum level for you for one acquisition?

$50 million.

Okay, thank you.

We could do $50 million with about 50% debt, 50% equity.

I would think that that would be more likely in a robust equity market than not, but I think we can do $50 million.

Okay, great.

Thank you.

I'm showing no further questions at this time.

I would like to turn the conference back over to Mr. Barry Sloane for any further remarks.

Thank you very much operator.

I really appreciate the attendance today.

We had a ton of people on the call.

The questions were great.

We feel real good about what we are doing in the marketplace.

We are delivering increasing dividends, increasing NAV, good credit story, good business model, good underlying metrics.

We look forward to reporting our second quarter and just being consistent and delivering a great product to our clients and a great performance in terms of dividends and stock price to shareholders.

So thank you very much for attending today.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program and you may all disconnect.

Everyone have a great day.