NewtekOne Inc (NEWT) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Newtek Business Services Corporation Q3 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to our host, Barry Sloane, President and CEO. You may begin.

Good morning, everyone, and thank you for attending and welcome to our third-quarter 2016 financial results conference call. I am Barry Sloane, President and CEO of Newtek Business Services Corporation, NASDAQ stock symbol NEWT. Here with me today to present also is Jenny Eddelson, Executive Vice President and Chief Accounting Officer.

Jenny, would you read the forward-looking statement?

Sure. The matters discussed in this presentation, as well as in future oral and written statements by management of Newtek Business Services Corp. that are forward-looking statements, are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results expressed in or implied by these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, could, intends, targets, projects, contemplates, believes, estimates, predicts, potential, or continue, or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this presentation should not be regarded as a representation by us that our plans or objectives will be achieved. For more information on forward-looking statements, please refer to our complete note on slide 2 of today's PowerPoint presentation.

Thank you, Jenny. I want to point out that we recently had an Investor and Analyst Day at Newtek approximately four to six weeks ago. It was fantastic. We spent two hours with the investment community going over our business and our business model. We drilled down deep into sort of what we do as a Company and also how what we do in a BDC format changes how we look to the investor public. Some of that -- part of that presentation has now been indoctrinated into what we are going to be doing quarterly. This PowerPoint presentation is currently on our website for those of you that want to go follow along, newtekone.com -- n-e-w o-n-e .com. Go to our website, go to the Investor Relations section, you will be able to see the PowerPoint.

Going to slide number 2, Newtek's differentiated BDC model and why we think our model is better. The Company is primarily investing in senior secured loans and operating businesses, which we have owned and operated for over 10 years. We believe those are less risky investments than some of our competitors are investing in, which are typically mezzanine loans, subordinated debt with equity kickers with interest rates of 10% to 14%. They need to put levered debt instruments on their books in order to be able to pay the 2% and 20% ups. We do not pay a 4% external management fee to an external advisor or an internally managed BDC. We think that is one of our advantages.

So one of the things that we emphasized recently in the Investor Analyst Day meeting is risk for reward. We think that what you are core investing in under our BDC model is significantly less risky than what our competitors have to put into their BDCs in order to pay a similar dividend. We have not made equity investments in CDOs. We currently have no SBIC leverage. Although SBIC leverage doesn't necessarily count to the leverage tests for SEC perspectives, it still is leverage and it is still debt and it still has to be paid back.

Today, we have announced a forecasted $1.57. That is a fully diluted expected $1.57 for 2017, which would include equity raises. That is a 2.6% increase in the dividend over what we expect for 2016, which is $1.53, which we have forecasted but have not yet officially declared the fourth-quarter dividend. We are reaffirming our 2016 dividend forecast of $1.53 for the full year.

Moving on to slide number 3, we want to point out to the investment community that the Company and the management team, which I applaud for their hard work every single day, has had a very good performance from a stock price perspective. Newtek's five-year return, including dividends and this is as of December 31, 2015, we wanted to do it on a calendar year basis, 113%, so that is north of 20% a year, three-year return. 97.5% with a 30% one year return. 24.5% we hope to be able to drive that kind of return.

So, for this year, we do endeavor to declare that it is entirely up to the Board of Directors the fourth-quarter dividend to be paid within this calendar year. In the event that occurred, that would be approximately $1.93 of cash dividends that would wind up being paid in 2016. So performance investors, I think it is important to note that.

Moving to slide number 4, we talked about our forecasted 2017 dividend, a 22.6% increase.

We also want to point out that net asset value for the quarter ended September 30, 2016 is now $14.26. That is a 1.9% increase over the recent quarter of $14.11 on June 30, 2016 and a 2.2 % increase of NAV of $203 million or $14.06 a share at December 31. What we endeavor to do is hope to perform well from a financial perspective and offer increasing dividends and increasing NAV over the course of time.

I would also like to point out on slide number 4 that our debt to equity ratio at the end of the quarter was 85.3% at September 30, 2016.

Moving to slide number 5, I want to give an explanation with respect to our debt to equity ratio. It is important to note that particularly at quarter end, we tend to do a significant amount of funding of our SBA 7(a) loans, which are then levered. We wind up inflating the balance sheet at the end of the quarter.

So what we did on slide number 5 was we created sort of a pro forma debt adjustment, which will show the amount of SBA loans on the government portions, which typically settle within 10 days from trade date. That would actually -- once they settle, they would actually knock the total leverage amount down to 73.6%. There is a very full throated and quantifiable explanation of how we do tend to inflate our debt to equity ratio at the end of each quarter.

Slide number 6, we talk about additional leverage of the portfolio companies. Our current Goldman Sachs credit facility is $38 million. There is approximately $22 million drawn against that, so we have a significant amount of leverage that is available. We are currently drawing at 2.5 times trailing 12 months of EBITDA, and we have recently put in a request to Goldman to increase the size of that facility as we are currently looking at a lot of other acquisitions in the pipeline.

Moving to slide number 7, current investment opportunity targets. There is a fairly full pipeline. We have been very busy. Some of these things are more mature than others. I do not anticipate any closings in calendar year 2016, but I do think we will have closings in early calendar year 2017. When you look at our targeted EBITDA goals, which we have been able to meet historically with banc-serv and Premier, we typically a 4 to 6 times EBITDA type buyer that provides a 17% to 25% type unlevered free tax return. Put a little leverage, you are clearly in the 20s%. Even after tax, very accretive to current dividend, as well as being able to add these businesses to existing businesses to bolt them up to be able to get closer to public comps, which is extremely important in the payment space. We want to do that in the technology space, as well as some other sectors going forward.

On slide number 8, another important point. In 2015, approximately 35.8% of the total dividend that we paid out in 2015 was a qualified dividend. So, with our business model, we get a lot of our dividends from the portfolio companies as they earn money, pay tax and then distribute the money up to the holding company. This is a major differentiator in our business model to most other BDCs. Most people that are investors that are in a taxable account are taxed at the high end of their personal tax rate. So there is a major difference between being taxed at 39.8% versus 20%, which is the qualified rate.

I think it is important to note that this is what we saw in 2016 from a taxable standpoint. I do anticipate that this will be a similar type of a distribution in 2016. We obviously won't know that until we do our tax returns, but I think this is something that you can potentially expect and forecast.

On slide number 9, another important comparison to us to BDCs, particularly the internally managed ones, is price to NAV, which is currently 1.05, 1.04 versus our internally managed BDC competitors: Triangle, Main Street, Hercules, and KCAP. KCAP was the weakest performer at about 0.77 to NAV. The others are well above NAV. On average, about 1.35. We believe that we have a good opportunity as we continue to grow in size. To demonstrate, we just hit our two-year anniversary converting to a BDC. This shows that we do pay dividends at our projected rates on a regular basis and as people are beginning to understand our model more and more -- and what I mean by understanding our model more and more, understand that we don't record that same dividend every single quarter. It is not flat, which is why we go out and give annual guidance. We would like to get credit as a management team and a board for being willing to go out and state, we think, $1.57 fully diluted next year. That is 14 months out in the future.

So we have many, many discussions, we have a lot of deliberation and these are numbers that we are comfortable with. Please understand that. We would love to meet, beat and exceed those if we can. There is a chance we may not, but understand, management is going out 14 months ahead of time. Most BDC investors base their yield on their projection for the next quarter, and it is fairly stable. And we think, when you look at particularly externally managed BDCs, the chance for improvement in NAV is primarily based upon interest rates falling or a tightening of credit spreads. And when you look at the universe of the world, interest rates falling, particularly in the current interest rate environment, that is a tough one. And credit spreads tightening, I would say, that also might be a tough one.

Putting that aside, we like our model, and we think that our ability over the course of time to increase NAV and increase dividends, given our model is extremely competitive.

On slide number 10, approximately 60% to 65% of our dividend and earnings comes from the SBA business. We funded $85.9 million of loans in the third quarter. That is a record. That is an increase of 33% over the same period a year ago. For the nine months, our loan fundings were up approximately 30%. I think it is important to note that we finally started to get the 504 business in gear. We have got a pipeline of around $20 million of 504 loans. I believe we funded approximately $4 million or $5 million of loans so far.

The income from 504 lending does not happen until we sell a conventional piece down the road. Those will most likely all be 2017 type events. And the 504 activity is in a portfolio company at CDS.

We've also picked up some nice business in CDS in our line of credit and inventory and line of credit of receivables. We hope to report profits for that segment in the fourth quarter. We have not been able to do that historically.

On slide number 11, we talk about what I would refer as our pedigree in Newtek Small Business Finance. That is our as SBLC that does 7(a) loans. We're the largest non-bank SBA lender in the United States, according to volume statistics. We have held that position for many years, and we are proud of it, and we hope to continue to do so.

We are the seventh largest SBA 7(a) lender, including banks. We have a 13-year history at originating these loans. The SBA has been in this business for 61 years. We have issued six S&P rated securitizations. All of the ratings have been upheld. I would like to announce today that we are in the market with our seventh transaction with Deutsche Bank, and this probably will be our largest transaction ever. We look forward to reporting the results of that transaction in the very near future.

On slide number 12, you can take a look at the growth of our lending business and our pipeline. Referrals up year over year 55%. I think it is important to note closed loan units, 48% increase. Very valuable. It is showing that our operations are efficient, they are getting better, better staffed, better management, better software that is coming out of our CIO and his dev team. We are very, very excited about the opportunity to grow the lending business using technology. We use technology to require $8 billion worth of prospective lead opportunities. Going forward, we use technology to create the efficiencies and handoffs from assembly to underwriting to credit committee to pre-close to post-close.

We have also had a trend of doing more smaller loans, which are good for credit, and it is good for diversification, as well as cross-selling opportunities down the road.

Slide number 13 talks about the size of our pipeline, which obviously is prequal loans and underwriting and approved pending closing. That is up 22%. Average net premium for the first nine months of the year 112.09%. The recent quarter was a little lower. Jenny, about [111.8%]. Around there?

I believe so.

111.8%. We don't see that as any major changes or any major trends. The market is fairly stable. The thing that you have to keep an eye on for this in our opinion is supply and demand, but most importantly, prepayment expectations that would relate to a very robust economic activity, which we currently do not see.

On slide number 15, we are able to show that our gains on sale are a reoccurring event. They have been reoccurring for 13 years. I want to point out the differential in 2014 and 2015. That 2014 was the first year we converted from a C-corp to a BDC, and it made sense for us to roll our production and gain on sale and not sell it in 2014 when we were taxable and roll it into 2015 when we were free of corporate tax. So that is the big difference there. We look forward to reporting our 2016 numbers.

On slide number 16, we have a very strong credit history, a 13-year history. I would like to point out we had one fairly large loan in the recent quarter that went into a nonperforming status. I think it was in excess of $2 million. We believe the loan is very well collateralized. Our historic severity rate is approximately 30%, but we feel very good, even though we had a pickup in that particular area in the quarter.

On slide number 17, our charge-off is in very good shape, 0.74%, very much in line with industry averages in this particular area, and our business model really supports these types of charge-offs.

On slide number 18, you can see the comparative portfolio data as we have gotten better since what we refer to as the Great Recession. We do more existing loans, more loans to existing businesses, less business acquisitions, less startups, loans that are primarily secured by commercial real estate and residential real estate with good diversification in industry and in state.

Slides number 19 and 20 are slides that we have talked about for about 10 years. I am not going to go into them. We want to leave them in the presentation for those newcomers. This effectively is how we make money and create cash in the 7(a) business.

Slide number 21 talks about our 504 business. Talks about the fact that the economics of this business are extremely attractive. This particular business, when you make the loan, the first mortgage and the second mortgage essentially get sold off, or we may wind up looking at a securitization strategy on the first mortgages. In any event, the typical SBA 504 loan structure is to a business loan -- so it is a C&I loan, it is an owner occupied piece of commercial real estate that collateralizes the loan up to 90%. The government provides a 40% second, we provide a 50% first, the government takes us out on a quarterly basis with the debentures, we are left with a 50% LTB conventional first at a very high yield. The economics of the 504 business are present on slide 23, and we estimate that our returns are in the high 30s% with no balance sheet after everything is sold off.

On slide number 24, we like to point out comparative valuations to other public companies to do similar things that we do. Live Oak Bank trading at 2.48 times book. They are primarily a one bank branch that does SBA 7(a) loans. We like to point out that BankUnited, a very large bank, acquired an entity similar to ours in a non-bank lending license with a $200 million portfolio of insureds, and they paid a 10% premium on that.

Our uninsured 7(a) loans that are performing on average are sitting on our books at approximately 99% above par.

On slide number 25, we talk about the valuation of our payment processing business. We are very, very happy with the performance of our payments business. The acquisition of Premier, which has enabled us to create a consolidation of our payments business, primarily in our new Lake Success facility, is enabling us to reduce real estate risk, reduce management infrastructure, customer service deployment, as well as customer acquisition strategies are being combined to create some significant efficiencies. We feel very good about market and industry comps. There was a new public company, CardConnect, that was created by a company that is slightly larger than ours. They effectively were acquired by SPAC, trading at 14 times earnings. Very similar in size. Obviously, Vantiv Global and First Data are different but decent comps. But this particular one is closer in size to where we are, and we feel very good about our valuations. We feel good about making acquisitions in this space to be able to continue to bulk up and squeeze out a variety of different market efficiencies.

On slide number 7, we talk about our managed tech solutions business, which has been a difficult business for us over the course of time. I want to continue to point out that we are extremely constructive about the marketplace for selling cloud solutions and technology solutions to small- to medium-sized businesses. There is no question, whether you look at Gartner, Forrester, every investment bank believes technology and cloud spending is going to continue to increase, and there are estimates out there that it would be close to a double spend in three years. We have got to do a better job of executing. We have some acquisitions in the pipeline that we think will bring us to a better place in this particular market. We still feel that our comps are fairly priced. When you look at entities like GoDaddy, Endurance, Rackspace, web.com, these are all businesses that trade on multiples of 2 to 4 times revenue.

Slide 29 just gives you a general feel for the breakdown of where EBITDA comes from. So, obviously, the earnings and the dividends are primarily driven by 7(a). We do believe in the future, particularly in some of these acquisitions. We look forward to the business services businesses taking a bigger slice of that pie.

We are happy to announce some additions to the senior management team. [Tim Iofeld] also joined us. This was an open spot for about six months. Tim has joined us as Executive Vice President of Strategic Alliances. He has got a great background in managing our 11 RVP and business development professionals. We also like to announce that [Glen Weisberg] has joined us for our West Coast RVP position. We have been devoid of a West Coast RVP, almost since our inception. We have an office in Irvine. Obviously, California is an important part of the US economy, particularly for small business. Albeit, it is very competitive, California is typically 20% to 25% of GDP. And we are, frankly, light in California business activity. So we think by bulking up in California with a greater sales and marketing presence will help the overall business.

On page 32, in summary, I do want to point out that we are real excited about our performance this quarter, as well as looking into 2017. We are excited that management feels comfortable indicating $1.57 on a fully diluted basis for our dividend next year. That is approximately 2.6% increase. We are excited that we've been able to reevaluate and move our NAV up approximately a 2.2% increase over the end of last year, 1.9% sequentially quarter to quarter. This is a company with a proven track record. You are investing in a management team that has been together over 10-plus years, particularly in the lending unit. We have a 13-year lending history with default delinquency statistics.

One of the important things is this is a company that has been able to access the capital markets on a going forward basis at lower and lower cost of capital and is able to deploy that capital in businesses that are getting significantly higher returns than the average BDC without the risk. That is an extremely important thing to note. We are very, very proud of what we are doing.

In addition, shareholders should be comforted in the fact that management's interests are very much aligned with the shareholder base. We are not externally managed. We are internally managed. Management, board, employees run about 15% of the outstanding shares.

With that, I would like to turn the presentation over to Jenny to give us a financial review.

I would like to start with some financial highlights from our third-quarter 2016 consolidated statement of operations. Please turn to slide 34.

In total, we had investment income of $7.9 million, an 11.6% increase over $7 million in Q3 2015. The majority of this increase was from the growth in income from interest, servicing and other income on our non-affiliate investments period over period. Dividend income for the third quarter of 2016 was $2.9 million versus $3.1 million in 2015. The 2015 period included a one-time $1 million dividend from Exponential Business Development Corp. For the 2016 period, our dividend income consisted primarily of $1.7 million from Newtek Merchant Solutions, $450,000 from Premier Payments, $200,000 from small business lending, $330,000 from Newtek Technology Solutions, and a $240,000 dividend from banc-serv Partners, a new controlled investment that we added to our portfolio this past June.

Our total expenses for the quarter ended September 30, 2016, increased by $1.4 million over the prior year quarter, primarily due to a $477,000 increase in interest expense, of which $972,000 is attributable to the notes due 2022 and notes due 2021, which closed in September 2015 and April 2016, respectively. Offsetting this was a $442,000 decrease in interest expense on related party notes payable.

Other G&A increased approximately $830,000 quarter over quarter and was primarily due to an increase in referral fees and loan processing costs of approximately $527,000, which was commensurate with the increase in loan fundings quarter over quarter. Overall, we had a net investment loss of $2.1 million as compared to a net investment loss of $1.5 million period over period.

Our net realized and unrealized gains totaled a positive $12.2 million and primarily represents gain on the sale of the guaranteed portions of SBA loans sold during the period. In the third quarter of 2016, we originated 96 loans, totaling $85.9 million, and sold 98 loans for $66.5 million, generating $9.5 million in realized gains. These gains were offset by realized losses of $777,000 during the quarter. The average sale price as a percentage of the principal balance was 111.84%.

During the third quarter of 2015, we originated 75 loans totaling $64.2 million and sold 76 loans for $50.2 million, generating $6.8 million in realized gains at an average sale price of 111.34%.

The Q3 2015 realized gains were offset by realized losses of $228,000 for the quarter. The net unrealized depreciation on our controlled investment was $4.6 million for the quarter, which included $5.9 million and $750,000 in unrealized depreciation on our investments in Newtek Merchant Solutions and Premier Payments, respectively, offset by unrealized depreciation of $1.3 million and $700,000 on our investments in Newtek Technology Solutions, and CDS business services, both based on weaker than projected financial results.

We also had unrealized depreciation on SBA unguaranteed non-affiliate investments of $1.4 million for the quarter versus a $531,000 unrealized loss in the prior period. This increase was attributable to a reduction in the discount rate used to value the performing and nonperforming SBA loan portfolios period over period. Overall, our operating results for the third quarter of 2016 resulted in an increase in net assets of $10 million or $0.69 per share, and we ended the period with NAV of $208.2 million or $14.26 per share.

With that, I would like to turn the call back to Barry.

Thank you, Jenny. Appreciate that rundown, and operator, we would like to open up the call to questions.

(Operator Instructions) Mickey Schleien, Ladenburg.

Just a quick question. I saw that pricing for 10-year 7(a) loans was somewhat weak toward the end of the previous quarter. I would like to ask you how the market is trading this quarter, particularly following the relatively strong US GDP number, and then more importantly, how are you managing your mix between tenors and borrowers in this environment, considering it looks like the Fed is just itching to raise rates after the election.

Sure. Well, Mickey, we feel strongly that it is not the increase in rate that has the I am going to say tremendous change in prices because these are floating rates. The increase in rate may be the tail wagging the dog in that the rate increase is based upon the fact that maybe the Fed or the economy thinks it is going to pick up significantly and be more robust. But when we feel it here and you look at the Fed funds futures, you're looking at prospectively no rate increase in November prior to the election and maybe a quarter of a point, which is expected in December and not much thereafter in terms of a wait and see. It is a pretty fragile economy.

The 10-year sector that you look at is much more sensitive to the prepays than the longer dated because the 10-year loans have no prepayment protection under 7(a) and sometimes that 10-year sector may wind up sagging a little bit if in particular the 10-year loan is a larger loan.

So how do we manage that? We have the opportunity looking at we think the fourth quarter could be $2.5 billion to $3 billion of referrals on a going forward basis to pick and choose the best credits that we have with the best pricing results and using obviously the operating staff that we have to make sure we could hit our performance numbers, both in volume and price and deliver that to the capital markets. The secret sauce of Newtek as a small business lender is its ability to look at large amounts of opportunities, improve its operating efficiencies to be able to figure out which loans it can do, to be able to, A), provide a public service to the SBA -- put loans out to small businesses, and, B), made our projections in the marketplace.

So, to be frank with you, it is a little early in the quarter to give you a feel for what pricing is, but we see no major changes in pricing. As a matter of fact, what I have heard from my group is we are a little bit higher, although we have not done much selling so far in the quarter. We want to try to avoid the last couple of weeks of the year, which is important. And maybe that is why you will see some differentiators in the $0.43 in the third quarter and the $0.40 in the fourth quarter.

We really watch what we are doing, and we are extremely transparent with the marketplace with the exception of giving you totally exact numbers on all the granularity in terms of the overall number.

So, hopefully, we have answered your question. I appreciate it because it gave me the opportunity to sort of expand upon why things look the way they look. We are not your average BDC that has $0.50 dividend in NII every quarter, period, end of story. It is a leverage and coupon clipping exercise. However, we are to able to deliver growing dividends, growing adjusted NII, and growing NAV because the model works, and it all relates to what we do very, very well. We acquire large opportunities with small- to medium-size business customers using the NewTracker system and our technology, and we are using technologies to advance the methodology of how to make small business C&I loans more cost-effectively outside of a banking environment.

Barry, what do you mean by avoiding the last two weeks of the year? I am not clear on that.

Sure. Well, when you are funding and/or selling into the last two weeks of a quarter calendar year and the investment community knows you need to make your quarterly earnings, they tend to bid you back. You know how Wall Street can be.

Of course.

So what we try to do more recently, given that we have improved our operations with management talent, with technology and fundings is to avoid certain periods of the year. So, for example, this year, particularly given the size of our pipeline, we think we're going to be able to clearly make our goals without having to force a lot of fundings in the last two weeks of the year or, for that matter, a lots of sales where the Street does not want to have balance sheet.

So if you were to say to me, would Wall Street rather have balance sheet from December 15 to December 31 or January 15 through January 31, the answer is the 15 through the 31.

Got it. And reading between the lines, it sounds like you are skewing sort of toward 20- and 25-year papers. Would you agree with that?

Well, let me say this and it is a great question. Holding everything else constant, would I rather make a 25-year loan fully secured by commercial real estate with 30% to 40% equity? Yes. Gets me the highest price. However, we are in the business to service small businesses. We are in the business to service our Alliance Partners, and we like 10-year loans, too, and we will continue to do them. They provide good risk reward. They are underwritten well. We are holding everything else constant. I would prefer to create a product with the same unit of labor that nets me 114 or 115 than 110 or 111 or 112. So the answer is yes. But we are not intentionally avoiding that, nor do we avoid smaller loans because we make more money on bigger loans than smaller loans. But smaller loans also form the basis of a farm team to be able to go back and make more loans as the business grows. So recently we always said $50,000 to $5 million. Now we are $10,000 to $10 million. And we are doing a lot more smaller loans. Even though, technically, we make less money on smaller loans, and it costs us about the same amount of money.

I understand it. I appreciate your time this morning. Thank you.

Arren Cyganovich, Davidson.

Just want to hear your thoughts about where you think the SBA lending or funding would go into 2017, considering you had such strong growth recently? Do you expect that to slow down, or just from law of large numbers, it is going to be a little harder to grow at the pace that you have been growing it?

Sure. Appreciate the question. So I think that we will give guidance at this point that on the 7(a) side, we are looking to do around $360 million to $355 million of 7(a) loans. That is our 14-month forecast. And obviously, there is more risk in a 14-month forecast. We feel pretty good about it. That is probably a slower growth rate than we had the year before. We would certainly like to meet that or beat it or exceed it.

Putting that aside, we are going to be doing more 504 loans, we are going to be doing more inventory lines of credit and receivable lines of credit than we did the year before, and we are also working on ancillary programs with external and internal funding sources to grow the full menu because we are a financial solutions provider to small business. So we are not an SBA lender. We don't position ourselves as an SBA lender in the marketplace with the exception to the financial community.

So when businesses come to us, we give them a financial solution, and in many cases, historically, we have used the 7(a) product. But the menu will expand for profitability, diversification, but we certainly would like to keep our very high growth rates on 7(a) lending.

Thanks. And I guess getting to your dividend forecast for 2017, how does that compare to your expectations for earnings? Because if you are having SBA fundings that are going to be north of that dividend growth forecast, are you expecting a slowdown in dividend income from your controlled positions or rising expenses to something to offset the strong growth (multiple speakers) lending?

Sure. Yes. Well, we clearly hope and anticipate to put out a significant amount of dollars in our business services business for investments and acquisitions and business opportunities. So I think you can see a decent rise in that. We actually talked about an increase in our Goldman Sachs line as well. So I think you can anticipate better growth there, both from our acquisitions and organic. I think you're also going to get much greater leverage out of the entire business. At $210 million NAV company, we would like to get to that NAV up and total asset size up, and we think we can get tremendous operating efficiencies and leverage off of that as well.

Okay. But I guess just the relationship between the earnings potential versus dividend, are you being somewhat short of a new dividend?

I think we are always conservative in whenever we do because we want to make sure that we meet our market expectations. Particularly doing a 14-month forecast, listen, the last thing I want to do is not eat my numbers.

Now, if you look at our stock price performance over the course of five years, we have had that kind of performance, not because we have missed our numbers, but because we have given good guidance, and we have tended to outperform the market.

So my view of this is -- and obviously I appreciate the question -- but we want investors to have the confidence that we hopefully will have performance over the next five years like we had the last five years. The way we've been able to create that is by being very comfortable with numbers and guidance and tell people really what we believe in most scenarios. And, look, I can't predict who is going to win the election. I can't predict what the Fed is going to do. I can't predict whether we are going to get into a war. Given all those things that are out there, both -- things I have control over and not control over, we feel very comfortable with that number. And I think you need to -- obviously, you are fairly new to the Company and the stories. I appreciate the question. But I would suggest that you look at our track record which tends to be making sure we do what we say we are going to do, which is why we are able to get increasing warehouse lines, do seven securitizations and tighter spreads. We anticipate and hope to be able to report some really nice capital markets initiatives with respect to more dollars, better terms, ability to grow, ability to deploy money, and I think over the course of time, you will get that comfort. And I will say this. From a BDC perspective, the ability to increase the dividend nicely on a 14-month forecast, increase the NAV when my competitors are going the other way, pay a very healthy dividend in a market where yields are very low, I mean, I have got competitors that trade deep discounts to NAV and may have higher yields, but the issue is the market is looking at the quality of what they are involved in. (inaudible) debt, sub debt with equity, CDOs, oil and gas exposure, so it is properly price. We feel when you look at what we are doing, there is really good value there. So, hopefully, I have answered your question without giving you the answer that, yes, this is really low bold guidance and we are fine because I'm not going to say that.

Thanks. And then, on credit quality, what are you seeing there? Is there quarterly seasonality to your nonaccrual numbers, and what are you seeing just underlying trends of the loans in your portfolio currently?

They look great. Collateral values are great. We have got -- look at the credit trends over the course of five years. They have just really gotten significantly better.

So, from a seasonality perspective, borrowers decide themselves based upon their own business conditions when to pay and when not to pay. So there is really not a seasonal aspect to it.

Okay. Thank you.

(Operator Instructions) Jefferson Harralson, KBW.

I was going to ask you about the M&A outlook, and you did have a slide in there that talked about various different businesses. But can you just talk about the pitch that you go in with, and can you talk about the -- your likelihood of getting something meaningful early next year?

Jefferson, can you repeat that a little bit?

Part of it, I just wanted -- as you go in and talk to these companies and you are trying to bring them into the fold, what is your pitch to them when you want them to join the Newtek team? And, two, you kind of mentioned this somewhat, but can you talk about your likelihood of bringing in something meaningful early in the year?

Sure. Thanks, Jefferson. To add a little humor to this, I told them Jenny is very nice and I am very mean. But, no, what we try to do is we look for -- and this is not easy. First of all, we are not bidding at auctions. So I am not going to be bidding on private equity disposing of a company, and I am bidding with 12 other bidders.

We are typically dealing with business owners that have worked really hard, built their business up over 10 or 12 years, for example, like Kerri Agee from banc-serv. That has done a lot. Has 40 great employees, operator, but importantly, not done with what they want to do professionally. And that business was a great add-on to what we do at Newtek. She is a lender service provider. We are able to acquire that a little bit over core EBITDA multiple. And in doing that, what she does with the same types of institutions that we want to do our business with, she has 350, she has an agent that settles, underwrites and services loans.

So now she is able to look at the clients -- and I just came back from a NAGGL conference -- National Association of Government Guaranteed Lenders -- with Kerri. Met a lot of her clients. Met SBA officials. Met the Industry Trade Association. And we were able to say, hey, listen, you can put the loan on your books, but the ones you do not want to do, now, Kerri has a funding alternative for those. Why may they not want to do it? They are banked in Nebraska, and they have got a borrower that is in Iowa and has an Iowa loan inside a footprint. Or they have a $2 million loan cap and they want to do a $4 million loan. Or maybe they don't like drycleaners or they don't like gas stations and we are okay with those categories.

So, from the acquisition standpoint, she looks at it and goes, okay, I want to take some money off the table, but more importantly, many of these operators, they don't want to manage 100 people or 150 people. They are happy with where they are, which is kind of what happened with Premier. But, in certain cases, the operator want to continue, wants to continue to be involved, doesn't want to retire. Those are the best fits for us.

In terms of meaningful, we are currently looking at some VARs in what I will refer to as MSPs -- VARs, value-added resellers; MSPs, managed service providers -- that are real good on the front end, dealing with independent business owners and larger companies in devising and architecting technological solutions. That is a great fit to our backend, which is managed tech solutions in Phoenix that is there 24/7; those tickets; it's very involved in the cloud; plays in the [Newtanics] space that we made an investment ourselves in Newtanics; desktop as a service with Citrix. Those are the kind of fits where the operator goes, wow, you're giving me something at a backend that I don't have. So those are the things we are looking at.

I would like to believe we will hopefully conclude -- we are looking at about three of them right now some meaningful business service acquisitions in the tech space, which I would define more as evaluated resellers or MSPs.

All right. Somewhat of a follow-up. You talked about the menu expanding on the small business side. You went into it a little bit. But can you talk about the products that you are thinking about adding to the menu?

Sure. We are looking at things like staffing companies, and they are interesting, particularly if you are look at staffing companies in technology staffing, which is a growing business or healthcare. All of a sudden, your place is staffing that individual decision-maker, and they could also drive business to us.

Payroll is really interesting to us. Insurance agency is interesting to us. We are looking at PEOs, but we are looking at it cautiously because there is major risk associated with PEOs. And we have some reservations about the PEO business model being the model going forward. But in the services space there, if I found anything that was in tax, that would be very interesting to us as well and, clearly, things that we have already done. So we found another LSP, that would be interesting. Those are the kinds of things we are looking at.

All right. And I appreciate that. I will actually ask that from a different angle, which is the ancillary programs you are talking about on the lending side.

Oh. Well, on the ancillary programs, although we have announced 504, we haven't made a big splash in it. However, we manage several professionals, particularly on the front end of the business that are active in 504. We have made a lot of recent inroads at NAGGL. I mean, it is not inconceivable we could have -- I will try to be as conservative as I can -- a $25 million to $50 million 504 a year in the near future, and maybe one year out, it could be $100 million to $200 million. Not inconceivable at all.

We would like to look at, provided that we acquire the right expertise, construction financing for 7(a) and 504, which would be very additive to our end loan business and very helpful to the front end business. We are looking at a program that might be nonconforming SBA that wouldn't conform to an SBA program, but use the SBA credit box to do that. I won't go much deeper into it because it is kind of proprietary, but there is a big growth opportunity.

So your question is great. What do I want to do for Newtek, and what does management and the board want to do? We want to take advantage of the fact that we get $8 billion worth of books, and a lot of the deals we don't do isn't necessarily because they are not credit worthy. We just don't have a full menu of products. So we are working on it, and we are working on figuring out whether that goes on balance sheet, off-balance-sheet, and side-by-side funds. We have a great future ahead of us because we have built an outstanding company with a great customer acquisition strategy, which is the secret sauce to small business, and it keeps growing and expanding. I would hope in the next three days to make some major announcements on Alliance Partners and stay tuned.

All right. And just one more on that (inaudible) and I know we will see it in the Q that comes out, but can you talk about how long that credit had been in place? Has it been b- was it a mature credit, the $2 million that moved to NPA?

Yes, it was a mature credit.

Great. Thank you.

Scott Sullivan, Merrill Lynch.

Congratulations on a great quarter. You gave us some nice granularity on the secret sauce and deal flow, et cetera. Wondering if you could give us a little bit more color on the -- since June of synergies and other aspects of the banc-serv deal?

Thank you. Well, as I mentioned, I was just out at what I refer to as the NAGGL conference. NAGGL standing for National Association of Government Guaranteed Lenders. And I spent a lot of time with the banc-serv people, and that is banc-serv powered by Newtek. We have kept the brand. We like the brand. So Newtek had had a booth. banc-serv had a booth. And at our next conference, hopefully the booths will be right next to each other. They were a little bit apart, but not too far. And to give you an example, we met with a $200 million bank in a particular market, and this bank has their own internal operation, but they give their overflow to banc-serv. Their overflow is overflow loans that they want to put on their books. The President and CEO told me he had $50 million worth of loans that he believed were SBA eligible that he did not want to do because they were out of his footprint and gave them to other people. Now that he knows banc-serv can provide those to us through NewTracker, he is going to give them to us.

Now, this banker said to me, Barry, I do three things. I take deposits, I make commercial loans, and I make consumer loans. He goes, that is all I do. I don't want to do anymore. If you could show me easily how I can get ancillary income through your other products and services without costing me expense, I would look at that. So I will go out and visit that President who is a very nice gentleman, with Tim Iofeld, who is my EVP of Strategic Alliances that just joined us and a local representative in the market representative -- it was Arizona based -- to go visit that banker and show him how our button suite works so that his commercial bankers and branch people can easily pass us a referral on payroll, insurance, or merchant services. And he has no additional cost, and he gets a revenue share. He satisfies the customer and that customer will not go down the street -- I was going to say to Wells Fargo, but (inaudible) street, Wells Fargo is just not going to offer him anything. I say that I can't believe that they are in that position today, frankly. I think it is crazy. I've seen some of their ads. But for an entity not to say they don't want to make solicitations and offer things is kind of crazy, particularly given you are from Merrill Lynch. You are in the market to solicit people. We are in the market to solicit people. We think we are going to have a tremendous advantage over financial institutions if this constant regulation stays in place. And Wells Fargo is going to be -- their issues are going to be put on every other major bank. So, as a non-bank participant, having a lot more freedom to deal with clients, we are in good shape. A lot of synergies between banc-serv and us. That is one example of one client. There is another 349 to go. But we have already funded, I think, three transactions from them this year that is added to our volumes.

Fantastic. And wondering if you wouldn't mind speaking to -- obviously, you have a wonderful window into the small business community and wondering if you wouldn't mind giving us your read of the temperature of the small business currently and, hopefully, a little bit better after the election.

Well, I think that small businesses like certainty. The uncertainty is always bothersome to them. I think the capital markets have opened up to them a little bit because they have got more equity in their home. The credit scores are better. So, generally, they are feeling better.

What they are concerned about is, obviously, the government regulation side of it. Most of them do not know how to fill out the Affordable Care Act forms. You have got Department of Labor issues right now with taking people that are hourly wages and bundling them up to a base because of the exempt-nonexempt issue that is coming out of the DOL. I have got business owners that are telling me they have got to take people that are eating lunch at their desk and forcing them to leave the premises because the Department of Labor feels -- so, if that is where the small business owner is like shaking their head and saying, really, this is America?

Away from that, they are very much looking for technological solutions that will reduce their cost of business and make them more efficient, instead of trying to grow the revenue base. Because in a low growth to no growth economy, it is really hard to grow the revenue base, which is why we have been in as an organization very well, particularly in the business service side. So we are trying to make them more efficient in their payroll, in their HR, in insurance choices, in better technological solutions, off-prem versus on-prem, in designing a website that has no vulnerabilities and is more effective from a marketing tool and giving them a better way to finance themselves than going to a bank more likely than not getting turned down, but if they happen to get graced with a bank loans, it is due in two, three, or four -- two, three or five years straight line amp.

So that is really what we are seeing from our client base. They are happy. We are there to serve them, and it is working well. And I think the small business environment, particularly with immigration, which I don't see ending, despite whether Donald Trump gets in and builds a wall, they will figure out how to get around it. Immigration is going to continue, small business growth is going to continue, and generally speaking, away from excessive government regulation, they are pretty healthy and they feel pretty good.

Thanks a lot and congratulations.

Lisa Springer, Singular Research.

I wonder if you could give us a little bit more color around the surge in lending referrals, and what would have to happen to maintain that kind of momentum going into 2017?

I think that we have added better RBPs to our group that are able to do outreach with small and large size institutions. We are going to have several announcements in the next 30 days about new alliance partners. In addition, not giving away any trade secrets, we have several partners that have really increased their referrals. Some of that is based upon better operational efficiencies, higher close rates, higher level of what I will call intermediary satisfaction, the addition of (inaudible) in helping to further build out that unit, the hiring of Glen Weisberg on the West Coast. So we will be not ignoring California as much as we have historically.

All of that, in addition to -- look, I mean, banc-serv was not a big impact this year. If banc-serv gives us $25 million to $50 million of loans next year, that will be terrific. So we are in a great place relative to referrals and closings with a lot of things converging on the growth of the lending business.

Now, most people -- I would say this grow in lending because they are cutting credit or they are in a cyclical wave. That is not our case. We are growing because of our unique distribution model to acquire businesses cost effectively, which we have patiently built over the course of time. And, in many of our earlier days, we took losses in this business model because instead of looking for quick gains and quick gains on sale, we tied out dollars back into staffing, management, research, and this model, which is very hard to build. The average person wants to go to the BDO or the broker to get the loan. That is easy.

Frankly, I will say this because my salespeople are listening, they want to do that. I don't want them doing that. I want them signing up alliance relationships, getting referrals in the door, and we want to deal directly with the business owner. And being dogmatic and staying true to what our core is, I mean, you can probably go back and listen to conference calls from seven, eight, nine years ago, things are a little bit different, but for the most part, you hear the same message.

Okay. Thank you.

Jefferson Harralson, KBW.

I am back. I have one more follow-up. You have talked about Wells Fargo. I know they are dominant in the SBA space. They had some trust issues out there with the scandal, and I was kind of traveling through the Carolinas, and it seemed like some of the banks down there anyway were getting some business from them because of it. Are you seeing any impact in your SBA business of a Wells Fargo -- from Wells Fargo maybe getting some -- taking some market share from them?

You know, Jefferson, I think that will occur. I would not view that as anything that is going to move my numbers 5% or 10%. But I do believe what has occurred with Wells is going to occur with other banks.

So I think that -- I don't know if I would call it the Wells effect, but I think I would certainly call it -- look, I think Wells did $1 billion plus or minus, but I don't see that changing a whole heck of a lot. However, banks are going to be really reining in what they do, particularly with outbound solicitation.

All right. Makes sense. Thanks for letting me come back on.

I am showing no further questions at this time. I would like to turn the conference back over to you, Mr. Sloane.

Well, we certainly appreciate the thoughtful questions, the attendance. We appreciate our analysts that cover the stock. It has been fantastic and certainly appreciate many of them making the trip to Lake Success to see our new facility and get a better understanding of our business model. We look forward to reporting our annual results and executing on our plan. We will have a lot of announcements over the next 30 days. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.